ASIAN DEVELOPMENT BANK RRP: IND 36317

REPORT AND RECOMMENDATION

OF THE

PRESIDENT

TO THE

BOARD OF DIRECTORS

ON A

PROPOSED LOAN

AND TECHNICAL ASSISTANCE GRANT

TO

INDIA

FOR THE

RAILWAY SECTOR IMPROVEMENT PROJECT

November 2002
 CURRENCY EQUIVALENTS
(as of 26 November 2002)

Currency Unit – Indian rupee/s (Re/Rs)

Re1.00 = $0.0208
$1.00 = Rs48.13

ABBREVIATIONS

ADB – Asian Development Bank

EIRR – economic internal rate of return
ha – hectare
IA – implementing agency
ICB – international competitive bidding
IEE – initial environmental examination
IR – Indian Railways
km – kilometer
kph – kilometers per hour
LCB – local competitive bidding
LIBOR – London interbank offered rate
LRDSS – Long-Range Decision-Support System
m – meter
MIS – management information system
MOF – Ministry of Finance
MOR – Ministry of Railways
NGO – nongovernment organization
PCC – project coordinating committee
PIU – project implementation unit
pkm – passenger-kilometer
PPM – project performance monitoring
PSA – poverty and social assessment
RB – Railways Board
RP – resettlement plan
RRAP – remedial resettlement action plan
SIEE – summary initial environmental examination
SPV – special purpose vehicle
TA – technical assistance
tkm – ton-kilometer
ctkm – converted ton-kilometer
WACC – weighted average cost of capital

NOTES

(i) The fiscal year (FY) of the Government ends on 31 March.

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

This report was prepared by a team consisting of: Tyrrell Duncan (Team Leader),
Thevakumar Kandiah, Natin Patel, Gerd Droesse, Albab Akanda, Hans Carlsson, Dong-Soo
Pyo, Prodyut Dutt, Sri Handayani, Dewi Utami, Man-Hwan Park, and J. Srinivasan.
 CONTENTS

Page

LOAN AND PROJECT SUMMARY iii

MAP vii

I. THE PROPOSAL 1

II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES 1

A. Performance Indicators and Analysis 1
B. Analysis of Key Problems and Opportunities 4

III. THE PROPOSED PROJECT 6

A. Objective 6
B. Components and Outputs 6
C. Special Features 10
D. Cost Estimates 11
E. Financing Plan 11
F. Implementation Arrangements 12

IV. NONLENDING ASSISTANCE 14

V. PROJECT BENEFITS, IMPACTS, AND RISKS 15

A. Financial Performance 15
B. Economic and Financial Analysis 16
C. Social Impact 17
D. Environmental Impact 19
E. Project Risks 19

VI. ASSURANCES 19
A. Specific Assurances 19
B. Conditions for Loan Effectiveness 22
C. Conditions for Disbursement 23

VI. RECOMMENDATION 23

APPENDIXES
1. Project Framework 24
2. Organization Structure of Indian Railways 26
3. Sector Analysis 27
4. Cause-Effect Tree Analysis 32
5. External Assistance to the Railways Sector 33
6. Medium-Term Framework for Asian Development Bank Support 34
to Indian Railways Reform Program, 2002–2010
7. Description and Estimated Cost of the Four Sample Subprojects 37
8. Selection Criteria and Approval Process for Subprojects 41
9. Outline Terms of Reference for Monitoring of Subproject 43
Preparation and Implementation
ii

10. Cost Estimate and Financing Plan 44

11. Implementation Arrangements 45
12. Implementation Schedule: Investment Subprojects 46
13. Indicative Contract Packages for the Four Sample Subprojects 47
14. Outline Terms of Reference for Advisory Technical Assistance: 48
Management Consulting Services to Indian Railways
15. Financial Statement of Indian Railways: Notes and Assumptions 50
16. Summary Economic and Financial Analysis 55
17. Summary Resettlement Framework 58
18. Summary Initial Environmental Examination 61

SUPPLEMENTARY APPENDIXES (available on request)

A. Timetable for Consulting Services for Design of Improved Accounting System
B. Railways Sector Investment Plan
C. Draft Terms of Reference for Project Preparatory Consulting Services
D. Economic and Financial Analysis
E. Summary Poverty Reduction and Social Strategy
F. Summary Remedial Resettlement Action Plan
G. Framework for Indigenous Peoples Development Plan
H. Summary Resettlement Plan for Pullampet Gooty Subproject
I. Summary of Short Resettlement Plan
J. Draft Terms of Reference for NGOs to Assist in Implementation of Resettlement Plans
K. Draft Terms of Reference for Monitoring of Resettlement Plan Implementation
L. Draft Terms of Reference for Strengthening Environmental Management
 iii

LOAN AND PROJECT SUMMARY

Borrower India

Project Description The Project will improve the overall performance of the railway
sector in India by supporting implementation of institutional and
policy reforms to strengthen the commercial orientation of Indian
Railways (IR), increasing private sector participation in railways
activities, and financing strategic investments in the high-density
rail network.

Classification Poverty: Other; Thematic: Economic growth, Governance

Environmental Assessment Category B

An initial environmental examination (IEE) was undertaken for

four sample subprojects, and the summary IEE is attached as
Appendix 20. A summary IEE for one of the four sample
subprojects was circulated to the Board on 19 August 1998.

Rationale Efficient transport is essential for achieving the higher levels of

economic growth needed for sustainable poverty reduction in
India. It contributes to expansion of production and employment
opportunities that can raise poor people’s incomes. To improve
the performance of railways, one of India’s main transport modes,
the Ministry of Railways (MOR) has decided to carry out a
program of institutional and policy reforms of IR. The first phase
of reforms for 2002–05 will develop the commercial orientation of
IR, including introducing an accounting separation of IR’s main
lines of business and separately identifying the main services
within these lines of business as profit/cost centers, and a first
stage of restructuring of production units and other noncore
activities. Social responsibilities will be delineated to be funded
separately. Internal business processes will be reengineered and
customer orientation improved. Private sector participation in
railway services will be increased. IR will steadily rationalize tariffs
and continue to rightsize its staffing. Its investment planning and
selection procedures will be strengthened to concentrate
investment on activities needed to improve the performance of its
core businesses. These improvements will provide the basis for
further reforms to be completed during 2006–2010. Alongside
reform, IR also requires considerable investment to overcome
capacity bottlenecks on its major freight routes, including those
between the four metropolitan cities of Delhi, Kolkata, Chennai,
and Mumbai.

Objective and Scope The objective of the Project is to improve the performance of the
railway sector by supporting (i) implementation of a program of
institutional and policy reforms to improve IR’s commercial
orientation, and (ii) expansion of core businesses by financing
priority investments to overcome railway capacity bottlenecks and
iv

improve operational efficiency and safety. The Project will also

contribute to organizational efficiency by promoting outsourcing,
award of concessions, and use of consolidated contracts for
execution of railway investment projects. It will support wide-
ranging improvements in the overall governance of IR by
strengthening accountability, transparency, and management.

The Project will establish a framework for linking Asian

Development Bank (ADB) lending for railways to the
accomplishment of successive milestones in the reform program,
and provide support for implementation of key reforms.

Using ADB’s sector lending modality, the Project will finance

priority investments in capacity augmentation recommended by
the Long-Range Decision-Support System of MOR to overcome
freight bottlenecks and improve safety. It will also support
construction of new lines expected to have high economic and
financial returns. Four sample subprojects have been prepared in
detail for capacity augmentation and new line construction in the
states of Andhra Pradesh, Orissa, and Chhattisgarh. MOR will
prepare additional subprojects during project implementation
according to subproject selection and approval procedures that
have been agreed between MOR and ADB.

Cost Estimates The total cost of the Project is estimated at $579.2 million
equivalent. The foreign exchange cost is $340.8 million, and the
local currency cost is $238.4 million equivalent.

Financing Plan ($ million)

Foreign Local Total
Source %
Exchange Currency Cost
ADB 308.2 5.4 313.6 54
Government 32.6 233.0 265.6 46
Total 340.8 238.4 579.2 100
ADB = Asian Development Bank.

Loan Amount and Terms The proposed ADB loan is $313.6 million equivalent from ADB’s
ordinary capital resources with a repayment period of 25 years,
including a grace period of 5 years, with interest determined in
accordance with ADB’s LIBOR-based lending facility. The loan
will carry a front-end fee of 1% and a commitment charge of
0.75% per annum. The Borrower will relend the proceeds of the
ADB loan to MOR in local currency.

Period of Utilization Until 30 June 2008

Executing Agency Ministry of Railways

Implementation The reform component will be implemented under the leadership

Arrangements of the chairperson, Railways Board, supported by the Planning
Directorate. The investment component will be implemented by a
special purpose vehicle established under the Companies Act
and wholly owned by the Government.
 v

and wholly owned by the Government.

Procurement All civil works contract packages will be procured in accordance

with ADB’s Guidelines for Procurement following international and
local competitive bidding procedures acceptable to ADB.

Consulting Services International and domestic consultants will be required to support

the reform and investment components of the Project. The
consultants will be engaged using ADB’s quality and cost-based
selection procedures and according to ADB’s Guidelines on the
Use of Consultants and other arrangements satisfactory to ADB
on the engagement of domestic consultants.

Estimated Project 31 December 2007

Completion Date

Project Benefits and Implementation of institutional and policy reforms of IR will

Beneficiaries improve the overall efficiency of the transport sector, contributing
to economic growth, employment creation, and income growth,
and leading to poverty reduction. These benefits will be widely
disseminated across the country. The main quantifiable benefits
of the investment component consist of (i) railway operating cost
savings; (ii) savings in rolling stock arising from improved
utilization; (iii) reduced working capital expenses due to time
savings; and (iv) additional production of minerals made possible
by improved railway services. The economic internal rates of
return of the four sample investment subprojects all exceed 12%.
The investment component will contribute to poverty reduction by
(i) contributing to national economic growth that will increase
employment and income-earning opportunities for the poor;
(ii) facilitating employment creation and income-earning
opportunities for poor people living in areas previously without
efficient transport links; and (iii) providing employment
opportunities for poor people during construction.

Technical Assistance In conjunction with the Project, technical assistance (TA) is

proposed to provide management consulting services to IR. The
total cost of the TA is estimated to be $590,000, of which ADB will
finance $500,000 on a grant basis from ADB’s TA funding
program. The consultants will be engaged using ADB’s quality
and cost-based selection procedures and according to ADB’s
Guidelines on the Use of Consultants and other arrangements
satisfactory to ADB on the engagement of domestic consultants.
The Executing Agency for the TA will be MOR.
vii
 1

I. THE PROPOSAL

1. I submit for your approval the following report and recommendation on a proposed loan to
India for the Railway Sector Improvement Project. The report also describes proposed technical
assistance (TA) for Management Consulting Services to Indian Railways (IR), 1 and if the Board
approves the proposed loan, I, acting under the authority delegated to me by the Board, will
approve the TA. The project framework is in Appendix 1.

II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES

A. Performance Indicators and Analysis

1. Introduction

2. For the past 150 years, railways have played an important role in the social, political, and
economic life of India. For most of that time railways were the leading mode of transport, in many
places the only available mode. In such a large continental country, railways have offered unique
advantages for transporting freight and passengers over long distances.

3. IR is a departmental enterprise, wholly owned by the Government. It is the largest single

organization in India, with a capital investment of about Rs479 billion ($10 billion) and a total
staffing of 1.545 million. IR operates one of the world’s largest railway networks.2 Its size, and its
mode of operation as a government department, present special challenges for the management of
railways as a commercial enterprise. They also add to the difficulty of responding to both short-
and long-term changes in transport market conditions. The organization structure of IR is in
Appendix 2.

4. In the past two decades, IR’s share of the transport market has fallen, due to increasing
competition from road transport.3 Its financial performance deteriorated and it did not generate
enough resources to finance the necessary investments in asset replacement and capacity
expansion. The existing model of railway provision needs to be modified to restore IR’s financial
position and enable the railways to achieve their potential contribution to poverty reduction through
economic growth. This will require IR to strengthen its commercial orientation and concentrate on
services it can provide at a comparative advantage, and reduce its involvement in services better
provided by others. Analysis of the railway sector is in Appendix 3.

2. Traffic

5. Along with the People’s Republic of China (PRC) and the United States (US), India is one
of the few countries in the world with annual railway traffic in excess of 500 billion converted ton-
kilometers (ctkm). The passenger share of railway traffic in India is high compared with other
countries with large railway operations. In FY2001, passenger-kilometers (pkm) represented 59%
of IR’s total ctkm, compared with 24% in the PRC and 1% in the US. 4

1
The term “Indian Railways” refers to the 15 zonal railways and 59 subsidiary divisions under the overall responsibility
of the Ministry of Railways through the Railways Board.
2
The IR network has more than 63,000 route km. There are 6,853 stations, 7,566 locomotives, and more than 260,000
wagons and coaches. These are maintained in 225 locomotive sheds, 401 passenger car and freight wagon repair
depots , and 49 workshops. IR also has six manufacturing units.
3
In view of existing and planned investments in highway improvement, this competition is set to intensify.
4
1 tkm equals 1 pkm equals 1ctkm.
2

6. Although railway freight and passenger traffic have followed a long-term trend of steady
growth, the growth of traffic on roads has been consistently higher. In FY1980–2001, the average
annual growth in rail freight ton-kilometers (tkm) was 3.4% compared with 10.2% for road, and rail
pkm grew at 4% compared with 9.6% for road. In FY1980, railways accounted for two thirds of
freight and one third of passenger traffic. By FY2001, this had fallen to less than one third of freight
and only 13% of passenger traffic.

7. IR’s freight traffic consists mainly of minerals (especially coal) and other bulk commodities.
In FY2001, coal accounted for 43% of freight traffic (tkm). Six other bulk commodities accounted
for a further 44%. The majority of passenger traffic (pkm) is in low-fare categories. In FY2001,
second class non-suburban services (ordinary and mail/express) accounted for 75% of passenger
traffic, with 19% for suburban (all classes), and 6% for upper class services.

3. Operations

8. In view of the high investment cost of railway infrastructure, the intensity of track utilization
in terms of ctkm per route km is an important dimension of productivity. IR’s track utilization
compares well against the railways of Japan and the US, although lower than the PRC. Coach and
wagon productivity are indicators of efficiency of utilization of a railway’s assets. IR’s coach
productivity compares favorably with developed countries and the PRC. Its wagon productivity is
lower than that of Japan and the PRC, although much higher than that of Bangladesh and Thailand
(Appendix 3).

9. A significant difference compared with developed countries is the very high level of staffing
that IR employs to operate its railways. As a result, IR’s staff productivity is much lower than that of
railways in developed countries, although roughly similar to that of the PRC and Thailand, and
much higher than that of Bangladesh. 5 This partly reflects the lower salary levels in India and other
developing countries, which favor more labor-intensive approaches to production. It is also an
indication that, in the past, IR’s staffing was allowed to grow too large. At about half of gross traffic
revenues, the present level of staff costs is a structural impediment to improving IR’s financial
performance and generating resources for investment. To address this problem, the Ministry of
Railways (MOR) has a policy of reducing staffing at a net rate of 2% per annum.6 As a result, IR’s
total staffing was reduced from 1.797 million in 1991 to 1.545 million in 2001. Through continued
implementation of this policy, MOR plans to steadily reduce staffing to 1.18 million by 2010.

10. One of IR’s most serious operational problems concerns the low average speeds on the
network, and lack of improvement in speeds over time. Since FY1961, the average speed of diesel
freight trains has remained at around 22 kilometers per hour (kph). The average speed for electric
traction has remained at around 24 kph. One of the main reasons for low speeds is that many of
the busiest routes have reached their designed traffic-handling capacity and have become
congested. This applies in particular to the routes of the Golden Quadrilateral and its “diagonals”
that account for two thirds of IR’s freight traffic.7

11. A further operational problem has been the high and rising level of traffic accidents. From
FY1997 to FY2001, the total number of train accidents per million train km rose from 0.57 to 0.64.

5
This section draws on a comparison of operating performance indicators for a group of six countries comprising
(i) developing countries with extensive railway networks (India and the PRC); (ii) developed countries with extensive
railway networks (Japan and the US); and (iii) developing countries with smaller railway networks (Bangladesh and
Thailand).
6
3 percent attrition less 1% new recruitment.
7
The Golden Quadrilateral refers to the Delhi-Kolkata, Kolkata-Chennai, Chennai-Mumbai, and Mumbai-Delhi routes.
The diagonals refer to the Delhi-Chennai and Kolkata-Mumbai routes.
 3

The majority of accidents were derailments. From FY1997 to FY2001, the annual number of
derailments increased from 282 to 344. Other accident types included collisions, grade crossing
(level crossing) accidents, and fires in trains. MOR statistics indicate that human error was the
cause of 86% of total train accidents in FY2001, and 7% were due to equipment failure. One of the
contributing factors leading to increasing accidents is that many of the assets, such as track and
bridges, are reaching the end of their economic life and need to be replaced. Due to weaknesses
in IR’s financial performance, including inadequate provision for depreciation, there is a backlog in
asset replacement. In the absence of replacement, assets require greater maintenance, but the
present high levels of track utilization make it difficult to take facilities out of service to perform
maintenance. In 2000, the Railway Safety Review Committee recommended investments of
Rs150 billion to improve railway safety. From October 2001, IR imposed a surcharge to improve
railway safety. The surcharge is expected to raise Rs50 billion over 6 years. MOR is also seeking
external assistance to provide additional financing of railway safety measures.

4. Tariffs

12. Since railways have been required to meet social as well as economic objectives, social
and political factors have often outweighed commercial considerations in the process of tariff
setting. As a result, there has been sustained underpricing of passenger services. In an effort to
cross-subsidize loss-incurring passenger services, there has been sustained overpricing of freight.
Compared with other countries, the ratio of India’s average passenger fares per pkm to average
freight tariffs per tkm is very low. The ratio of 0.3 for India compares with 1.2 in the PRC, 2.2 in
Japan, 0.7 in Thailand, and 0.5 in Bangladesh.

13. Sustained tariff imbalance is one of the underlying causes of the operational and financial
problems faced by IR. Passenger services now account for nearly two thirds of railway services,
but contribute only one third of revenue. In FY2001, total passenger revenues were Rs105 billion,
compared with freight earnings of Rs230 billion. MOR estimates that passenger services made a
loss of Rs49 billion that year.

14. Overpricing of freight has reduced IR’s competitiveness in its main revenue-earning
markets. This has caused traffic to divert to road and has reduced IR’s net earnings. Underpricing
of passenger services has encouraged a high volume of uneconomic passenger services. These
not only incur losses but also take up scarce capacity on the main freight routes, contributing to
congestion that further reduces IR’s competitiveness in freight markets.

5. Noncore Activities

15. IR has sought to be self-sufficient by operating its own capacity for manufacturing rolling
stock and other railway equipment, and for providing supporting services. It has six large
manufacturing units producing electric and diesel locomotives, passenger cars, freight wagons,
wheels and axles, and components.8 It also runs residential colonies, catering and other on-board
services, security services, hotels, sanitation services, printing presses, medical facilities, schools
and colleges, and research facilities. While noncore activities have made an important contribution
to the railway sector in the past, by being run as part of a government department and insulated
from competition they have had only limited incentive to be efficient, and have not kept up with
technology advances. They have been ill-equipped to provide services, such as catering, that
require a high degree of customer orientation. The existence of a l rge noncore activities also
increases the complexity of managing IR and distracts the focus of management from the core

8
As an indication of the scale of these activities, in FY2001 IR’s manufacturing units produced 120 electric locomotives,
105 diesel locomotives, 2,190 passenger cars, nearly 2,000 wagons, and more than 30,000 wheel sets.
4

business of operating railways. There is a need to reexamine the role, efficiency, and effectiveness
of IR’s noncore activities, with a view to separating remaining noncore activities from IR’s core
activities so that the noncore activities are operated according to commercial principles, and that
inputs are procured for IR’s operations on a competitive basis.

6. Financial Performance

16. Over the period FY1998–2001, IR’s financial performance deteriorated (para. 65), and in
FY2001 it had to defer part of the payment of a dividend to the Government. These financial
problems helped draw attention to the need for reform. The Government has made it clear that IR
should not rely on budgetary sources of financing, and has encouraged it to proceed with reforms
to improve its performance and enable it to attract financing from multilateral sources and the
domestic financial markets.

B. Analysis of Key Problems and Opportunities

1. Challenges

17. The weaknesses in railway sector performance are manifested in declining market share,
adverse operating indicators, and reduced revenue generation. Their underlying causes are to be
found in the policy, institutional, and organizational arrangements for railways, which are
themselves based on the idea of running railways as a social and economic arm of government
rather than as a business. A cause-effect tree analysis is in Appendix 4.

18. Although the present railway sector arrangements served India well for many years, they
are no longer adequate for railways in a transport market characterized by increasing modal
competition and customer choice. The future performance of the railway sector will depend on how
effectively it can adapt its services to its changing market position. The fundamental challenges for
IR are therefore to establish a commercial orientation, with a view to (i) arresting the decline in its
share of its main markets, (ii) improving the profitability of railways operations, and (iii) generating
sufficient income to finance necessary investments in asset replacement, improvement, and safety.
This will involve IR (i) running railways services along business lines, including expanding activities
that offer favorable commercial returns and reducing activities that do not; (ii) concentrating on the
core business of operating railway services; (iii) progressively hiving off noncore businesses, and
making increased use of outsourcing on the basis of competition; (iv) adopting objective systems
for selecting investments on the basis of expected financial and economic returns, with a view to
improving operational performance and capacity in its major markets (notably on freight services in
the Golden Quadrilateral); and (v) rationalizing tariffs to correct for past overpricing of freight rates
and underpricing of passenger fares, and to adapt individual freight and passenger tariff
categories to improve competitiveness and increase returns. To enable IR to introduce these
changes the Government will have to relieve IR of the financial burden of continuing to operate
loss-incurring services that are required for social reasons. For this purpose, the Government will
need to establish a mechanism for compensating IR for losses on these services.

2. External Assistance

19. The railway sector has received considerable external support over an extended period.
Historically, the World Bank was the leading source of external assistance, having provided more
than $2.1 billion of loans for 18 projects of IR between 1959 and 1988. From 1988 onward, the
World Bank stopped providing support for IR, but in 2002 it approved a project to develop a
separate urban railway venture serving Mumbai. ADB provided loans to assist IR in 1987 and 1991
with a combined value of $415 million. The leading bilateral funding agencies have been Germany
 5

and Japan, which financed six projects each since the early 1980s. Germany’s support was mainly
for supply of equipment to IR and strengthening its production units. Japan’s support was mainly
for urban railway systems, mos t recently for construction of the Delhi metro system. Other bilateral
funding agencies have included France, Saudi Arabia, Switzerland, and United Kingdom. In overall
terms, until the early 1990s external assistance to IR financed a variety of railway investments with
varying success. After that time, external assistance was reduced as funding agencies became
concerned that investments would not achieve their potential impacts until MOR implemented
institutional and policy reforms to address key obstacles to sector performance. A summary of past
external assistance to the railway sector is in Appendix 5.

20. ADB’s two previous railway projects financed investments in additional capacity. The
Railways Project9 experienced initial delays of several years when the Government decided to
refine parts of the project scope. Implementation then proceeded smoothly, except that a
technology transfer component took longer than originally expected. 10 In the Second Railways
Project,11 each of the components met their objectives and were economically viable, but
implementation of one component took several years longer than scheduled. The delays were
mainly due to weaknesses in project management and MOR’s cumbersome procurement
procedures. MOR also did not fully comply with the financial covenants and progress reporting
requirements.12

21. The overall lesson arising from external assistance to the railway sector is that substantive
reforms are needed to improve sector performance and ensure that investments achieve their
potential returns. This is addressed in the proposed Project by making reform its main focus. The
immediate lesson arising from the previous ADB support is the need for streamlined
implementation arrangements, including for project management and procurement. This is
addressed in the design of the proposed Project. A further lesson is the need to incorporate
mechanisms to encourage compliance with project covenants. The proposed Project addresses
this by linking financing of future projects to accomplishment of reform implementation milestones,
including financial covenants, based on a medium-term framework for reform.

3. Asian Development Bank Sector Strategy

22. Improvement of transport, including roads, inland waterways, and railways, is one of the
main elements of ADB's country strategy for India. In view of the poor state of the country’s
transport infrastructure and services, better transport is essential for achieving the higher levels of
economic growth needed for sustainable poverty reduction. More efficient railway services will
facilitate economic growth. This will raise incomes and create employment, and thereby reduce
poverty. Improved financial performance by IR will also reduce the need to finance railway
investments from budgetary sources. ADB’s sector strategy aims to bring about overall
improvements in sector performance by supporting institutional and policy reforms, strengthening
private sector participation, and financing strategic investments in the high-density rail network.
Working in close coordination with the World Bank and other external funding agencies, ADB has
taken a lead role in dialogue with the Government over railway sector reform and in formulating a
basis for resuming external assistance, linked to government commitment to a credible medium-
term framework for reform.

9
Loan 857-IND: Railways Project, for $190 million, approved on 16 December 1987.
10
The project was completed in 2002.
11
Loan 1140-IND: Second Railways Project, for $225 million, approved on 5 December 1991.
12
ADB. 2000. Project Completion Report on the Second Railway Project in India. Manila.
6

4. Policy Dialogue

23. In 1997, a long-term strategic assessment for IR was conducted under ADB-financed TA. 13
This drew attention to the need to restore IR’s financial sustainability, and proposed options for
improvement, including increasing IR’s commercial orientation, cost-reduction measures,
strengthening governance, tariff rationalization, private sector participation, strengthening financial
systems, and training. Drawing on these proposals, in 1998 and 1999 ADB undertook initial
preparatory work for the formulation of a project to support reform of IR and finance priority
investment. This included fielding loan fact-finding and appraisal missions. Further processing was
then deferred to allow the Government time to finalize its program for railway reform. Between
1999 and 2002, MOR carried out studies and consultations to formulate a reform program.14 This
helped in establishing a new consensus within MOR both over the need for reform and the main
elements of reforms required.

24. In May 2002, the Minister of Railways submitted a status paper on IR to Parliament. This
paper drew attention to the need for reform, and presented some of the major issues and options
for public debate. These included (i) the need to address deterioration in the finances of IR; (ii) the
case for social projects to be funded through a public service obligation mechanism; (iii) the need
for overdue investment in IR core business activities, especially capacity improvement in the
Golden Quadrilateral and its diagonals; (iv) improving customer orientation to win back freight
traffic; (v) the need for lowering freight rates; and (vi) removal of IR cross subsidy of passenger
tariff, with any subsidy to be met through a public service obligation mechanism. In 2002, MOR
began a process of tariff rationalization by implementing passenger tariff increases well above the
rate of inflation, and freight tariff increases well below. In May 2002, ADB’s 2002 country strategy
and program mission reviewed progress toward finalizing the reform program, and agreed to
initiate formulation of a project that would link resumption of ADB support for railways to
implementation of a medium-term program of reforms.

III. THE PROPOSED PROJECT

A. Objective

25. The objective of the Project is to improve the performance of the railway sector by
supporting (i) implementation of a program of institutional and policy reforms to improve IR’s
commercial orientation, and (ii) the expansion of core businesses by financing priority investments
to overcome railway capacity bottlenecks and improve operational efficiency and safety. The
Project will also contribute to organizational efficiency by promoting outsourcing, award of
concessions, and use of consolidated contracts for execution of railway investment projects.

B. Components and Outputs

1. Reform Program

26. MOR has formulated a reform program to transform IR into a commercially oriented
organization in stages over the period 2002–2010. It envisages three phases of reform, with
Phase 1 in 2002–05, Phase 2 in 2006–07, and Phase 3 in 2008–10. Phase 1 will entail
(i) establishing an improved accounting system for IR that is capable of meeting government and

13
TA 2721-IND: Railway Sector Improvement, for $900,000, approved on 19 December 1996.
14
In 1999, the Minister of Railways commissioned a Railway Expert Group to examine the financing requirements,
sources of funding, models of structure and ownership, and regulatory arrangements for railways. The report of the
Expert Group, released in August 2001, provided a detailed analysis of past problems, and made a series of
recommendations to operate IR on commercial lines.
 7

commercial accounting requirements; (ii) operating IR as a business, with social responsibilities to

be delineated and separately funded by the Government; (iii) a first stage of restructuring noncore
activities; (iv) various measures to improve customer orientation, with IR to concentrate on
operating rail services and the private sector to take increasing responsibility for customer
interface; (v) continued rightsizing of staff strength; (vi) continued tariff rationalization; and
(vii) strengthening investment planning to concentrate on investments needed to improve business
performance. In Phase 2, the improved accounting system will support a deepening of reforms
through (i) restructuring core businesses as independent profit/cost centers, and (ii) completing
noncore restructuring. Phase 3, which will be intended to see through the implementation of
reforms, has not yet been defined in detail.

27. The Project will establish a medium-term framework for ADB support for MOR’s reform
program, and will provide support for implementation of Phase 1. It will build on past ADB support
for policy and institutional reform in the railway sector, and provide sustained support and
encouragement for MOR to bring to a conclusion each of the main reform activities. The extended
time frame, and the approach of implementing reforms gradually and in stages, reflect the need for
(i) MOR to retain full ownership of all aspects of the reform program, (ii) many of the reforms to
evolve through trial and experience, (iii) capacity to be built up to support new institutional
arrangements, and (iv) railway services to continue to perform their important role throughout the
period of reform implementation. The medium-term framework is summarized in Appendix 6.

28. Accounting and Management Information. MOR has decided to design and implement
improvements in its accounting system and management information system (MIS) to provide the
financial, operating, and management information needed to increase efficiency, meet emerging
business needs, and improve commercial orientation. A modern, fully computerized accounting
system will be established throughout IR. This will support existing government reporting
requirements and provide activity-based revenue and cost data. It will also be capable of providing
both government accounts and commercial accounts, with breakdowns by main lines of business
and by main services within these lines of business. Support for the MIS will cover development of
MIS applications and implementation of MIS initially in all divisions of two zonal railways and
subsequently throughout IR, together with development and implementation of MIS applications for
senior managers of zonal railways and at the Railways Board.

29. Core Business Restructuring. With support from the improved accounting system and
MIS, MOR will implement an accounting separation of the main lines of business, separately
identifying the main services within these lines of business as independent profit/cost centers. The
lines of business are expected to consist of freight transport, passenger transport, suburban
transport, fixed infrastructure, and other infrastructure. The availability of accounting and
management information for each line of business and profit/cost center will provide an important
input for improving the financial performance of the businesses and profit/cost centers, and
developing IR’s commercial orientation. After establishing a first level of commercial orientation
through accounting separation during Phase 1, in Phase 2 MOR will evaluate the structure of its
management and operations and identify options for improvement, and prepare an action plan
based on the identified options. By the end of Phase 2, MOR will begin implementation of the
restructuring of its core business, with a view to completing this during Phase 3.

30. Restructuring and Hiving Off Noncore Activities. In Phase 1 MOR has decided to
implement an accounting separation of noncore activities and establish each noncore activity as a
separate profit/cost center. Annual reviews of the business performance of each noncore activity
will be instituted, with a view to determining appropriate strategies for restructuring and hiving off
8

noncore activities,15 based on business performance and potential. MOR will create “focused
business organizations”16 and prepare and launch action plans to restructure its production units
and other noncore activities. Implementation of the action plans will be completed in Phase 2.

31. Increasing Private Sector Participation. In an effort to develop innovative solutions to the
problem of loss-incurring branch lines, MOR has decided to award concessions to private
companies to operate five of these lines in Phase 1. Private sector operation will offer economies
through flexibility over staffing levels and streamlining of service operation, and is expected to
improve revenue collection. After review of the performance of these concessions, MOR will
prepare and launch an expanded program of awarding concessions.17

32. Reengineering Business Processes. MOR has identified the need to redesign its internal
business processes and simplify its interface with customers. Many processes involve numerous
lengthy manual steps that can be reduced to a single, often instantaneous step using modern
information technology. In Phase 1 support will be provided to assist MOR to develop and
introduce redesigned processes on a pilot basis in one zone. These will be implemented
throughout IR in Phase 2.

33. Tariff Rationalization. MOR has decided to implement a sustained rationalization of tariffs
for passenger and freight services to correct past imbalances between and within its passenger
and freight tariffs, with a view to improving the profitability and competitiveness of its passenger
and freight services. This will be undertaken in accordance with the established processes and
procedures for setting railway tariffs in India. Passenger fares and freight tariffs are decided as part
of the annual railway budget, which is prepared in consultation with other government
functionaries, and are subject to the approval of Parliament. Tariff rationalization was initiated in
2002/03 when Parliament approved an average passenger fare increase of 12% and an average
freight tariff increase of 2.7%.

34. Delineating Social and Commercial Objectives. An interministerial committee will be

established to formulate a transparent public service obligation mechanism to reduce the burden of
MOR being required to provide uneconomic services for social reasons. The mechanism will then
be introduced throughout IR. This will be facilitated by the improvements in the accounting system,
which will provide improved information on the financial performance of profit/cost centers within
the various lines of business.

35. Rightsizing. MOR will continue its policy of reducing its overall staffing through natural
attrition at a net rate of 2% per annum.

36. Core Business Investment Planning and Selection. MOR has decided to prepare and
implement changes in its investment project selection processes and procedures to institutionalize
the use of its Long-Range Decision-Support System and related systems for investment selection
on the basis of expected returns. By the end of Phase 1, MOR will have adopted this system for
selecting all line capacity investment projects and prepared a medium-term investment plan
identifying the priority investments to be implemented over the next 5 years.

15
MOR uses “hiving off” to describe options ranging from separation to divestiture.
16
MOR uses "focus ed business organization" to refer to organizations such as the Container Corporation of India, the
RailTel Corporation of India, and the Indian Railway Catering and Tourism Corporation, that were previously part of
mainstream IR activities and have been established as independent entities within IR or as companies owned by the
Government to afford them sufficient autonomy to perform their activities effectively.
17
Other ongoing MOR private sector participation initiatives include establishing private-public partnerships to develop
new rail lines, and inviting private sector freight forwarders and freight terminals to provide services for railways traffic.
 9

37. Consulting services will be provided to support implementation of the reform program
during Phase 1. Aspects of the reform program identified in advance as requiring such support
include improving the accounting system and MIS, reengineering business processes, and
improving investment planning and selection. A timetable for undertaking the accounting system
consulting services is in Supplementary Appendix A. Additional support requirements for both
implementation and monitoring of the reform program will be identified by MOR during project
implementation, with the terms of reference for ADB-financed consulting services being subject to
ADB approval. The Project will also finance capacity building and training to disseminate and
institutionalize the main reform activities.

2. Investment Subprojects

38. The Project will finance priority investments to strengthen IR core business activities.
Investment subprojects will concentrate on capacity augmentation recommended by the Long-
Range Decision-Support System to overcome freight bottlenecks and safety improvements. These
will principally be in the Golden Quadrilateral and its diagonals, which together account for about
two thirds of MOR’s freight traffic. There will also be provision for construction of new railway lines
expected to have high economic and financial returns.

39. The investments will be part of the Government’s medium-term railway sector investment
plan, known as National Rail Vikas Yojana, to be implemented over a period of 5 years during
FY2003–2007. The overall objective of the plan is to address capacity bottlenecks on the main
freight routes and to enable faster growth in railway traffic. Of the total estimated cost of
Rs153 billion ($3.2 billion equivalent), capacity augmentation on the Golden Quadrilateral and its
diagonals will account for Rs80 billion ($1.7 billion equivalent). 18 Other components will include
development of port connectivity and multimodal corridors, and construction of major bridges.
Details of the sector investment plan are in Supplementary Appendix B.

40. The investment component will follow ADB’s sector lending modality. This is considered
justified since (i) MOR has a well-defined investment plan to address the priority capacity
expansion requirements and safety improvements of the railway sector; (ii) as one of India’s
leading institutions with extensive experience in project implementation, MOR has the institutional
capacity to implement the investment plan; and (iii) through the reform component of the Project,
MOR will implement an institutional and policy reform program to improve the overall sustainability
of investment in the railway sector.

41. The sector lending modality requires the borrower to prepare a group of sample subprojects
prior to loan approval, and then prepare additional subprojects during project implementation
according to agreed criteria and procedures. Four sample subprojects were prepared for Board
consideration. These were (i) Tomka-Keonjhar new railway line (96 km); (ii) double tracking of the
Pullampet-Gooty route (151 km); (iii) adding a third track on the Bhatapara-Urkura line (60 km);
and (iv) construction of Mahanadi River second bridge (2.1 km). For each sample subproject, MOR
prepared feasibility studies to examine the technical, economic, and financial feasibility, as well as
identify environmental and social impacts and determine any mitigation measures required.
Descriptions and cost estimates of the four sample subprojects are in Appendix 7.

18
Golden Quadrilateral investments will cover (i) replacement and improvement of existing track to enable freight trains
to run at 100 kph, compared with a maximum speed of 75 kph for loaded trains at present; (ii) doubling of the single
line on the Mumbai-Chennai route; (iii) provision of third and fourth lines, and electrification of lines, on routes
identified by the Long-Range Decision-Support System analysis of capacity bottlenecks; (iv) provision of additional
signaling to support higher train speeds; (v) safety enhancement works at grade crossings; and (vi) upgrading of
rolling stock to run at higher speeds.
10

42. Preparation and approval of additional subprojects will be undertaken during project
implementation in accordance with the selection criteria and approval procedures given in
Appendix 8. The selection criteria refer to (i) the type and size of subprojects, and (ii) their
preparedness in terms of technical and economic feasibility and design, and their social,
resettlement, and environmental aspects. After completing the remaining tasks for the preparatory
studies for sample subprojects, MOR will proceed with identifying and preparing additional
subprojects of estimated value sufficient to utilize the balance of project financing available for the
investment component. MOR will initially submit sketches of proposed additional subprojects to
ADB for review of compliance with the selection criteria. For each proposed subproject approved
for further preparation by ADB, MOR will then undertake preparatory studies to be submitted to
ADB for approval. MOR will then prepare procurement documents for each approved subproject
and submit these to ADB for approval. It is intended that the preparation tasks for all of the
additional subprojects will be carried out about 6 months after the respective tasks are completed
for the sample subprojects.

43. MOR-financed consultants will assist MOR (i) to conduct preparatory studies required by
ADB for investment subprojects to be included in the Project, and (ii) to prepare tender documents
and provide precontract services up to award of contract. These will include at least one consultant
with extensive experience of ADB policies and procedures for project preparation, procurement,
and administration. Draft terms of reference for these services are in Supplementary Appendix C.
Loan-financed consulting services will monitor the implementation of the investment subprojects at
intervals of 6 months. Outline terms of reference for these services are in Appendix 9.

C. Special Features

44. The Project will establish the basis for ADB to support railway reform through a series of
proposed loans linked to a medium-term framework for ADB support to the reform program
(Appendix 6). In addition to the Project, the India country program tentatively envisages further
loans for railway improvement in 2005 and 2007. Processing and approval of each loan will be
contingent on successive accomplishment of milestones in MOR’s reform program. Based on the
reform program drawn up by MOR, the framework and milestones were agreed with MOR as part
of the policy dialogue during project formulation, and are considered both realistic and achievable.
The selection of reform implementation milestones focused on identifying a small number of critical
outcomes of the reform program at intervals of 2–3 years to be achieved and verified in advance of
ADB approving each successive loan. The linking of further ADB financing to accomplishing of
milestones will provide MOR with encouragement to implement its reform program in full and on
schedule. The milestones up to processing and approval of the proposed loan tentatively
scheduled for 2005 are included as dated covenants in the Loan Agreement for the Project (para.
99–Specific Assurances ). Proposed milestones to be included under phases 2 and 3 of the reform
program, and covenanted under proposed ADB loans tentatively scheduled for 2005 and 2007, are
in Appendix 6. The medium-term framework and the reform implementation milestones for phases
2 and 3 will be refined as part of processing the future projects.

45. By confirming MOR’s commitment to a credible reform program, the Project is expected to
serve as catalyst for other multilateral and bilateral agencies to resume financing operations for the
railway sector, and improve MOR’s standing for purposes of domestic market borrowing and
obtaining export credit financing. This will assist MOR to address the large backlog of investments,
and contribute toward the Government’s objective of reducing MOR’s reliance on budgetary
financing and encouraging it to draw upon multilateral, bilateral, and commercial sources of
financing.
 11

46. The reform component will support wide-ranging improvements in the overall governance of
IR. Establishing an improved accounting system will strengthen financial accountability and
transparency by providing on-line financial information for each of IR’s main lines of business and
profit/cost centers. This will also provide the basis for overall improvements in the management of
IR, by providing a means for making lines of business and profit/cost centers more accountable for
their business performance. This is expected to lead, during later phases of the reform program, to
a review of the structure of IR management and operations, and identification and implementation
of options for restructuring. The proposed delineation of commercial and social responsibilities will
remove a problem of conflicting objectives that has hampered the governance of railways in the
past. Measures to increase IR’s commercial orientation will help make it more accountable to its
customers.

47. The investment component will be implemented by a special purpose vehicle (SPV) that will
be established under the Companies Act for the purposes of implementing major investment
projects on behalf of MOR. The SPV will have delegated authority for procurement and staff
recruitment (para. 53). By establishing a dedicated project management and supervision capacity
under the SPV, assisted where necessary by consulting services, the Project will streamline
arrangements for execution of large investment projects by MOR. By implementing the investment
component through consolidated contracts using international competitive bidding (ICB), it will
assist MOR to introduce more efficient approaches to contract packaging, and reduce the scope
for implementation delays associated with having to coordinate numerous small contracts.

D. Cost Estimates

48. The total cost of the Project is estimated at $579.2 million equivalent inclusive of taxes,
duties, and interest and other charges on the loan during construction. The foreign exchange cost
is estimated at $340.8 million (59%). The local currency cost (including taxes and duties) is
estimated at $238.4 million equivalent (41%). The estimated cost of the Project is shown in Table
1. Further details are in Appendix 10.

Table 1: Cost Estimate

($ million)

Foreign Local Total

Item Exchange Currency Cost

a
Investment Subprojects 299.2 226.6 525.8
Consulting Services, Training, and Management Information System 9.0 11.8 20.8
Front -End Fee 3.1 0.0 3.1
Interest During Construction 29.5 0.0 29.5
b
Total 340.8 238.4 579.2
a
In mid-2002 prices.
b
Including taxes and duties.

E. Financing Plan

49. It is proposed that ADB will provide a loan of $313.6 million from its ordinary capital
resources, which will represent 54% of the total cost of the Project. The loan will finance the foreign
exchange cost, excluding interest and other charges on the loan during construction, and
$5.4 million of the local currency cost.
12

50. The justification for financing a small portion of local currency cost is that this will provide for
ADB involvement in reviewing the terms of reference, recruitment, and execution of consulting
services that are of strategic importance to the reform component.

51. The proposed ADB loan will have an amortization period of 25 years, including a grace
period of 5 years, with interest determined in accordance with ADB’s LIBOR-based lending rate
system. The Government has provided ADB with (i) the reasons for its decision to borrow under
ADB’s LIBOR-based lending facility on the basis of these terms and conditions, and (ii) an
undertaking that these choices were its own independent decision and not made in reliance on any
communication or advice from ADB. The Borrower will be India, which will pass on the proceeds of
the loan to MOR in local currency in accordance with the Government’s policies in this regard,
through a budget line additional to MOR’s budget allocation under the 10th Five-Year Plan. MOR
will issue a sanctioning order each year allotting funds to the zonal railways where the investment
subprojects are to be undertaken, and authorize the respective zonal railways to transfer these
funds to the SPV for implementation of the subprojects. The financing plan for the Project is in
Table 2.

Table 2: Financing Plan

($ million)

Source Foreign Exchange Local Currency Total Percent

Asian Development Bank 308.2 5.4 313.6 54

a a
Government 32.6 233.0 265.6 46
Total 340.8 238.4 579.2 100
a
Including taxes and duties.

F. Implementation Arrangements

1. Project Management

52. The Executing Agency (EA) for the Project will be MOR. The chairperson, Railways Board,
will provide overall leadership for the reform program, reporting to the Minister of Railways. The
additional member planning, reporting to the chairperson, Railways Board, has been designated
project director for the reform component, to be supported by an executive director, a director, and
sufficient suitably qualified staff in the Planning Directorate. MOR will establish a standing
committee to monitor implementation of the reform program.

53. MOR will establish an SPV under the Companies Act to implement its proposed investment
program for augmenting capacity on the Golden Quadrilateral (para. 39). This SPV will be the
implementing agency (IA) for the investment component of the Project. Both the SPV and the
railway facilities to be developed through the investment component will be owned by the
Government acting through MOR. MOR will conclude a memorandum of understanding with the
SPV setting out the financial and administrative arrangements regarding the implementation of the
Project. The SPV will be delegated sufficient administrative authority for effective and timely
decision making on project implementation matters, including authority for recruitment of suitably
qualified staff for management and supervision of investment projects, and for award of tenders up
to Rs2,000 million ($41 million equivalent). The managing director of the SPV will be the project
director for the investment component, supported by an especially established project
implementation unit within the SPV. The unit will be staffed with experienced personnel at the
management level at the SPV’s headquarters and at the subproject sites. For each subproject, a
subproject coordinating committee will be established to coordinate implementation activities of the
 13

SPV, the respective zonal railway, relevant government agencies, and major customers.
Implementation arrangements are shown in Appendix 11.

2. Period of Implementation

54. The Project will be implemented over a period of 66 months, inclusive of preconstruction
activities. The scheduled completion date for civil works and equipment installation is December
2007. This takes into account MOR-financed domestic consulting services to support advance
procurement action for the sample subprojects and to start drawing up preparatory studies for the
additional subprojects. The proposed implementation schedule is in Appendix 12.

3. Procurement

55. Procurement to be financed from the ADB loan will be carried out in accordance with ADB’s
Guidelines for Procurement. Civil works contracts over $3 million will be procured through ICB, and
those below $3 million will be procured through local competitive bidding. Procurement of civil
works under ICB and local competitive bidding will be carried out among prequalified bidders.
Procurement of equipment will use ICB for contracts with an estimated value of at least $500,000,
international shopping for contracts with an estimated value of $100,000–500,000, and direct
purchase arrangement for contracts of less than $100,000. Indicative contract packages for the
four sample subprojects are in Appendix 13. Contract packages for additional subprojects will be
decided during project implementation, based on the approach used for the sample subprojects,
and contract packages for equipment supply will be based on technical requirements. ADB
approved advance procurement action for procurement of civil works and equipment on the
understanding that such approval would not commit ADB to finance the Project.

4. Consulting Services

56. International and domestic consulting services will assist MO R to implement the reform and
investment components. The terms of reference for all loan-financed consulting services will be
subject to prior ADB approval. The consultants will be engaged using ADB’s quality and cost-
based selection procedures and according to ADB’s Guidelines on the Use of Consultants and
other arrangements satisfactory to ADB on the engagement of domestic consultants.

5. Accounts, Audit, and Reports

57. MOR will monitor the implementation of the Project in accordance with the implementation
schedule and the time-bound reform implementation milestones, and will keep ADB informed of
any significant deviations that could result in the schedule and milestones not being met. For this
purpose, MOR will prepare and submit to ADB quarterly progress reports on the reform and
investment components in such form and detail as ADB may reasonably require. Within 6 months
of all investment subprojects being open for traffic, MOR will furnish to ADB a project completion
report providing details of project implementation costs and benefit monitoring and evaluation
activities for the investment component, and reform implementation performance in relation to the
medium-term framework for the reform program.

58. MOR will provide ADB with a copy of the IR annual report and accounts not later than 12
months after the end of the related fiscal year, and a copy of IR’s preliminary financial statements
not later than 9 months after the end of that fiscal year. From FY2006 onward, within 9 months of
the end of the fiscal year, MOR will also provide ADB with audited consolidated accounts and
financial statements prepared on the basis of commercial accounting standards. MOR will ensure
that the IA for the investment subcomponent will maintain computerized commercial accounts, and
14

maintain separate records and accounts adequate to identify the financing resources received, and
expenditures made, on the Project, including the goods, works, and services financed either by
ADB or out of local funds. The accounts-related financial statements for the IA and the Project will
be audited annually by independent statutory private auditors appointed by the Comptroller and
Auditor General of India, and in accordance with the Companies Act. MOR will provide ADB with
the audited reports and related financial statements for the IA not later than 6 months after the end
of its fiscal year.

6. Project Performance Monitoring and Evaluation

59. The EA will establish a capability for systematic project performance monitoring and
analysis throughout the life of the Project, which will be integrated with its MIS and, initially, which
will develop and conduct a “quick and easy” rapid sample survey to establish a baseline for
subsequent performance monitoring. Thereafter, surveys will be conducted annually. The scope of
the survey, quantity and quality of data, and frequency for collection will be guided primarily by the
project management’s need for progressive rapid feedback on implementation status, as well as
early warning of impending situations that might jeopardize attainment of the development
objectives. The key indicators and assumptions outlined at the output and development objective
(i.e., purpose and goal) levels in the project framework (Appendix 1), will form the basis for most of
the data required for rapid assessment.

7. Project Review

60. A project coordinating committee comprising representatives of MOR, Ministry of Finance

(MOF), and ADB will monitor progress in implementation of the reform program, and agree on
actions needed to overcome any shortcomings in reform implementation. The committee will be
chaired by the chairperson, Railways Board. During the first 2 years of implementation, the
committee will meet at intervals of 6 months. The interval in subsequent years will be decided by
the midterm review.

61. In addition to regular reviews by ADB staff, the Loan Agreement will include a requirement
that there be a detailed midterm review of the Project. Based on the project schedule, this will be
carried out around June 2005. Two months prior to the midterm review the Government will submit
to ADB a detailed progress report on the implementation and achievements of the reform program,
and accomplishment of the reform implementation milestones. Terms of reference for the midterm
review will be included in the project administration memorandum to be prepared by ADB’s
inception mission for the Project.

IV. NONLENDING ASSISTANCE

62. An advisory TA for $500,000 will be provided for Management Consulting Services to
Indian Railways. The TA will cover (i) study of business development and business opportunities,
(ii) study of progress of implementation of reform program and reform implementation milestones at
periodic intervals, and (iii) advice on management- and business-related issues to be identified
during implementation of the reform program. Outline terms of reference are in Appendix 14.

63. The TA will be attached to the Project, and financed on a grant basis by ADB’s TA funding
program. The TA will be carried out by a firm of domestic management consultants. An
international expert or experts may be brought in to work with the domestic consulting firm where
such expertise in specific areas is considered necessary. The consulting firm will be engaged using
ADB’s quality and cost-based selection procedures and according to ADB’s Guidelines on the Use
 15

of Consultants and other arrangements satisfactory to ADB on the engagement of domestic

consultants.

V. PROJECT BENEFITS, IM PACTS, AND RISKS

A. Financial Performance

64. IR is required to maintain its accounting records in accordance with government

appropriation accounting regulations and its financial system as part of the consolidated fund of the
Government. The Government’s budgetary contribution to IR is reflected in IR’s balance sheet as
“Capital-at-Charge” under liabilities and IR is liable to pay a predetermined dividend on this
contribution from its surplus revenue, and thus is equivalent to shareholders’ equity. The financial
statements of IR have several accounts that are different from generally accepted accounting
principles. For example, IR adopts a unique method for fixed asset accounting as it maintains the
acquisition values of fixed assets, rather than depreciating them. Instead, IR appropriates a certain
amount in the “Depreciation Reserve Fund”, which is credited when IR replaces its fixed assets. In
addition, IR’s pension accounting method, based on a non-accrual basis, tends to understate the
pension liability and accordingly overstate IR’s net assets.

65. In the past, IR’s financial performance has generally been satisfactory. In FY1993–1997 its
operating ratio 19 was around 75%. However, over the 4 most recent years (FY1998–2001), the
operating ratio deteriorated to 87–93%. This reflected the impact of the Fifth Pay Commission,
which approved an overall average salary increase of around 33% for IR staff, together with slower
revenue growth caused by the Asian financial crisis. The deterioration of financial performance was
also reflected in other financial ratios. The return on capital employed, which had generally been in
the range of 9–14% before FY1997, declined to 2–6% in FY1998–2001. Similarly, the return on
fixed assets was generally in the range of 10–16% before FY1997, but declined to 2–7% in
FY1998-2001.

66. From FY2002, however, the increase of labor cost will be well contained since IR is
committed to achieving its target of reducing staff strength by 2% every year, and the effect of the
Fifth Pay Commission is fully reflected in previous years. Further, with the restructuring of tariffs
targeted to eliminate cross subsidies between freight and passenger traffic, IR will capture a
substantial part of nationwide freight traffic that is growing at a brisk rate after the financial crisis,
and accordingly its revenue growth is expected to regain its strength from FY2003. Taking into
account these factors, it is expected that IR’s financial performance will turn around in FY2003 with
an improved operating ratio of 90%. The operating ratio is forecast to continue improving
thereafter, to 86% in FY 2007.

67. A summary of IR’s past and projected financial performance is shown in Table 3. The
assumptions and calculations for the past and projected financial statements are in Appendix 15.

19
Operating expenses excluding depreciation as a percentage of operating revenue.
16

Table 3: Summary of Indian Railways Financial Performance

(Rs million)

Actual Forecast
1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07
Income Statement Items
Operating Revenue 296,190 329,390 348,804 378,380 406,456 441,268 470,485 506,564 546,364
Operating Expenses 278,380 309,100 347,000 362,930 384,140 410,364 433,849 463,670 496,137
(Depreciation) 11,550 16,700 23,010 20,000 19,000 20,000 21,000 23,000 25,000
Operating Income 17,810 20,290 1,804 15,450 22,316 30,904 36,636 42,894 50,227

Balance Sheet Items

Current Assets 30,190 42,275 37,544 40,738 38,252 46,211 49,270 53,049 57,216
Fixed Assets 392,810 430,274 464,483 478,841 510,233 542,103 585,283 632,607 695,931
Capital-At-Charge 257,800 296,553 326,619 341,619 356,619 371,619 386,619 401,619 416,619
Retained Earnings 183,179 174,795 173,579 181,205 192,662 218,273 249,548 286,116 338,640

Financial Ratios
Operating Ratio (%) 90 89 93 91 90 88 88 87 86
ROCE (%) 9 6 2 5 6 7 8 8 9
Return on Fixed Assets (%) 7 7 2 5 6 8 8 9 9
ROCE = return on capital employed.

B. Economic and Financial Analysis

1. Economic Internal Rate of Return

68. The economic internal rate of return (EIRR) was calculated by comparing the with-project
and without-project scenarios. The existing available rail network has reached capacity and will be
unable to carry additional goods traffic without the Project. With the Project, the capacity of the rail
network in the project corridors will be increased and the network will be able to carry more goods
traffic. The increased capacity of the rail network in the project corridors will allow for the
exploitation of mineral resources present in these areas, e.g., iron ore, coal, and dolomite, and
products such as cement, which, as bulk commodities, are best transported by rail rather than
road.

69. The Project’s economic costs include the resource costs for construction, rolling stock
acquisition costs, operation and maintenance costs, and the social costs arising from land
acquisition and resettlement compensation. The main economic benefits generated by the Project
were quantified in terms of (i) railway operating cost savings arising from shorter distances and
faster travel times, (ii) savings in rolling stock arising from better utilization of rolling stock with the
elimination of rail detention times, (iii) time savings resulting in reduction in working capital
expenses for the goods transported, and (iv) net additional economic benefits arising from the
increase in production of mineral resources that would only be implemented because of the
increase in rail capacity delivered by the Project. Benefits accruing to passengers have not been
taken into account in the economic evaluation, thus making this analysis conservative.

70. The estimated overall EIRR for the sample subprojects is 16.8%. The individual EIRRs for
the four sample subprojects range from 14.6% to 17.4%. Sensitivity analysis shows that the overall
Project, as well as the individual subprojects, will be economically viable under adverse scenarios,
including increased costs, decreased benefits, and implementation delays.

2. Financial Internal Rate of Return

71. The financial internal rate of return (FIRR) for the sample subprojects was estimated on the
basis of the annual streams of incremental costs and revenues. The estimated overall FIRR is
 17

15.4%. The individual FIRRs of the four sample subprojects range from 9.8% to 22.3%. In each
case, the estimated FIRRs exceed the estimates of the weighted average cost of capital for the
individual subprojects, which range from 5.4% to 7.6%.

3. Sensitivity Tests

72. Sensitivity analysis was undertaken to examine economic and financial viability under
adverse scenarios, including increased costs, decreased benefits, and implementation delays. The
analysis found that both for the individual sample subprojects and overall, the EIRR estimates
remained above the threshold level of 12%, and the FIRR estimates remained above the weighted
average cost of capital. A summary of the economic and financial analysis is in Appendix 16.
Further details are in Supplementary Appendix D.

C. Social Impact

1. Poverty and Social Dimensions

73. A poverty and social assessment was undertaken in the influence areas of the sample
subprojects in the states of Chhattisgarh and Orissa. The two states have higher poverty rates than
the national average. According to the most recent national study of poverty, they had poverty
headcount rates of 37% and 47%, respectively, in 1999/2000, compared with a national average of
26%.20 Poverty was associated with lack of economic opportunity, with the latter being linked to
inaccessibility. The poverty and social assessment found that the districts where the sample
subprojects are located had much higher poverty headcount rates than the statewide averages. In
these districts, problems of inaccessibility are often severe.

74. The sample subprojects in Chhattisgarh and Orissa will benefit 5.5 million people living in
the areas of influence, of whom about 40% are poor. The poverty and social assessment estimated
that the Project will lead to significant expansion of mining, manufacturing, tourism, and agriculture,
which will provide the basis for poverty reduction through increases in income and employment.
The expansion of mining and steel production due to the Tomka-Keohjhar subproject alone is
expected to create 70,000 jobs. The Project will support pro-poor economic growth by providing
more remote areas with better access to economic opportunities, in part through fostering stronger
domestic and international trade links. The construction of the subprojects will also generate
substantial employment in the areas of influence.

75. Poverty and social dimensions, including considerations of gender and stakeholder
participation, have been incorporated into the design of the sample subprojects. The Loan
Agreement includes assurances to require contractors to comply with labor laws, protect
construction workers against health risks, and not to differentiate between men’s and women’s
wages for work of equal value. A summary poverty reduction and social strategy is presented in
Supplementary Appendix E.

2. Resettlement

76. The EA carried out social impact assessments of the four sample subprojects. The
assessments identified potential negative impacts of the subprojects and recommended measures
to mitigate such impacts. MOR prepared draft resettlement plans (RPs) to establish the basis for
mitigation.

20
Government of India. 2001. Poverty Estimates for 1999-2000. Press information Bureau. February.
18

77. Land acquisition for the Tomka-Keonjhar subproject began in 1984 and most compensation
was paid before ADB involvement and before ADB established policies on involuntary resettlement
in 1995 and on indigenous peoples in 1998. The social impact assessment included an audit of the
previous resettlement and compensation activities. This identified some shortcomings, including
cases of people not having received compensation, lack of compensation for lost structures, the
need for restoration of facilities and services affected by construction, and the need for income
rehabilitation and livelihood programs. To address these shortcomings, MOR has prepared a draft
remedial resettlement action plan (RRAP). A summary RRAP is in Supplementary Appendix F.

78. Although an indigenous peoples development plan (IPDP) is not required for the Tomka-
Keonjhar subproject, since 47% of affected persons are categorized as scheduled tribes, and they
have higher poverty levels than the state average, 21 ADB considered it appropriate to prepare a
livelihood program for indigenous peoples in the influence area of the subproject, to be developed
in parallel with the Project. This program will seek to improve the livelihood of tribal communities by
empowering them to develop income-generating activities in the market economy, drawing upon
the comparative advantages provided by their culture and social capital. 22 Additionally, to guide
mitigation measures for any additional subprojects with impacts on scheduled tribes, an IPDP
framework is provided in Supplementary Appendix G.

79. The Pullampet-Gooty subproject will require 22 hectares (ha) of land and affect 98
households and small enterprises. MOR has prepared a draft resettlement plan. A summary
resettlement plan is in Supplementary Appendix H.

80. The Mahanadi River second bridge and Bhatapara-Urkura subprojects will not involve
significant land acquisition and resettlement. Railway land is available for these subprojects;
additional land does not need to be acquired. The subproject sites are free of encroachments and
no agricultural activities are being carried out there. A summary of a short RP is presented in
Supplementary Appendix I.

81. In accordance with ADB’s policy on involuntary resettlement, the SPV will appoint
nongovernment organizations (NGOs) to assist in the implementation of the RPs and RRAPs, and
a consultant to conduct independent monitoring and verification of implementation of RPs and
RRAPs. Outline terms of reference for the NGOs and monitoring services are in Supplementary
Appendixes J and K.

82. The impacts of the additional subprojects will be mitigated in accordance with government
laws and regulations, and ADB policies and safeguard requirements. Such mitigation will be
reflected in the entitlement matrix derived from the framework of the sample subprojects. The
framework, RPs, and approach to implementation and monitoring of the sample subprojects will be
used as models for preparation of additional subprojects under the sector loan. The framework for
additional subprojects is in Appendix 17. 23

21
Orissa contains about 13 of the 62 scheduled tribes recognized by the Government, and about 10% of the tribal
population of India. About 95% of these scheduled tribes live in rural areas, many close to forests. They are mostly
engaged in land-based activities such as agriculture (as cultivators and farm labor) and forestry (forest produce
collection and labor). The poverty headcount rate among scheduled tribes is much higher the state average. In 1991
more than two thirds of tribal people living in rural areas of Orissa were below the poverty line. Source: Mahapatra,
L.K. 1994. “Parameters of Forest Policy for Tribal Development” in Social Action, 44:91–104.
22
A proposal has been submitted to the United Kingdom Cooperation Fund (Poverty Focused) for Technical Assistance.
23
For projects with significant impacts (defined as 200 or more affected persons), a full RP/RRAP has to be prepared.
Short RPs are sufficient for projects with insignificant impacts (under 200 persons).
 19

D. Environmental Impact

83. The proposed investment component of the Project is categorized as a “B” project in
accordance with ADB’s Environmental Assessment Requirements .24 An initial environmental
examination (IEE) was prepared for the sample subprojects. The IEE shows that the environmental
impacts associated with establishment of double and triple tracks, including bridge construction,
are negligible. The project areas of influence are topographically flat, and no environmentally
sensitive areas will be affected. The establishment of new track will generate significant impacts
associated with the formation of embankment. However, manageable mitigation measures will be
implemented as part of the construction works.25 Furthermore, adequate environmental
requirements are also being incorporated into the bidding documents to ensure that all construction
materials (sand and gravel) will be taken or mined in an environmentally sound manner. The
environmental management plan as part of the IEE has been prepared in sufficient detail to be
enforced by IR. The summary IEE is in Appendix 18.

84. MOR will conduct a training program to strengthen IR’s capacity in addressing
environmental concerns associated with its activities, including supervising implementation of the
environmental management plan covered in the IEE report, integrating environmental concerns
into the planning program of expansion of railway facilities, and handling environmental problems
associated with maintenance workshops, railway stations, and diesel filling stations. An
environmental training manual will also be prepared. Outline terms of reference are in
Supplementary Appendix L.

E. Project Risks

85. The most significant project risk is that the reform program will not be implemented in full
and therefore that improvements in sector performance will be less than expected. This risk has
been mitigated in the design of the Project by establishing a series of reform implementation
milestones to be met before further ADB financing is provided. This will provide MOR with
encouragement to implement its reform program in full and on schedule.

86. The main risk for the investment component is that implementation will be delayed. This risk
has been addressed by the establishment of an SPV to act as the IA. The SPV will have authority
to take decisions on implementation, including procurement, and have sufficient suitably qualified
staff to manage implementation effectively.

87. The economic analysis of the investment component suggests that there are no significant
economic risks. The criteria for selection of subprojects limit the choice of subprojects to priority
capacity-expansion investments expected to have high economic and financial returns, and
stipulate careful prior screening and analysis of each subproject.

VI. ASSURANCES

A. Specific Assurances

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

24
The investment component is not subject to the Government’s environmental impact assessment regulation.
25
For example, establis hment of slope stabilization, culverts, and diversion of small streams.
20

1. Implementing Agency

89. MOR and the SPV will not assign, abrogate or waive the memorandum of understanding
between MOR and the SPV without agreement of ADB, and will advise ADB of any changes to the
equity, functions, and staffing of the SPV. In cases where in the view of ADB such changes may
affect the ability of the SPV to perform its functions as an IA, ADB may take action pursuant to the
Loan Regulation Applicable to LIBOR-Based Loans Made from ADB’s Ordinary Capital Resources,
dated 1 July 2001, to cancel or suspend the loan or accelerate maturities.

2. Financial

90. Except as ADB will otherwise agree, IR will maintain a ratio of total operating expenses
excluding depreciation to total operating revenue not higher than 90% for the fiscal years from
2002/03 onwards. Three months before the end of each of these fiscal years, MOR will, on the
basis of forecasts which shall be satisfactory to ADB, review whether IR is expected to meet these
requirements in respect of such year and the following fiscal year, and will furnish ADB the results
of such review. If any such review shows that IR is not expected to meet the requirements, MOR
will promptly take all necessary measures in order to meet such requirements.

91. Subject to approval by Parliament, MOR will take all necessary action to rationalize tariffs to
improve the profitability and competitiveness of its passenger and freight services.

3. Resettlement

92. Assurances pertinent to resettlement are as follows:

(i) For each subproject, MOR through the SPV will ensure that relocation, resettlement,
and compensation for all persons who are adversely affected by the Project or who
will be relocated as a consequence of the Project (project-affected persons) will be
promptly and efficiently carried out in accordance with the RP and the IPDP
framework agreed between the Government and ADB, ADB’s policy on involuntary
resettlement, and ADB’s Handbook on Resettlement, and other safeguard policies,
such that project-affected persons will improve or at least maintain their preproject
standard of living. Project-affected persons without formal title to land will be entitled
to resettlement assistance and benefits in accordance with the IPDP framework.

(ii) Through the SPV, MOR will recruit consulting services to conduct independent
monitoring and evaluation of implementation of the RPs and RRAP.

(iii) Through the SPV, MOR will ensure that for each subproject a full census of affected
persons and inventories of lost assets will be undertaken.

(iv) The Government will cause MOR and the SPV to ensure that compensation of land
and all other benefits will generally be paid to project-affected persons at least 2
months prior to the dislocation of the project-affected persons from the acquired
lands, properties, and other immovable assets.

(v) The SPV will appoint an NGO to assist in the implementation of the RPs and RRAP.
The implementation of the RPs and RRAP for the sample subprojects will be
reviewed and if required, additional mitigation measures will be instituted, prior to
approval of additional subprojects.
 21

4. Environmental Issues

93. MOR will adhere to ADB’s environmental guidelines in carrying out the Project, and will
ensure that the environmental soundness of all subprojects and that all environmental mitigation
measures recommended in the IEE and SIEE and agreed to by MOR and ADB are incorporated
into the project design and followed during construction, operation, and maintenance of the project
facilities, irrespective of contractual and financing arrangements. MOR will ensure that the Project
is undertaken and that all project facilities are operated and maintained in compliance with all
applicable laws, rules, and regulations, and the environmental assessment requirements and
environmental guidelines of ADB. Appropriate provisions will be built into all contracts with civil
works contractors to ensure that negative environmental and social impacts are mitigated during
construction.

5. Indigenous Peoples

94. MOR and the SPV will ensure that, to the extent that any indigenous peoples are likely to
be affected significantly under any subproject, the measures set forth in the IPDP and the
Framework will be carried out for each subproject in accordance with the IPDP and the Framework,
applicable laws and regulations of the Borrower, and ADB's policy on indigenous peoples.

95. MOR and the SPV will coordinate implementation of the IPDP and the Framework for all
subprojects and ensure that appropriate resources are provided for the preparation and
implementation of the IPDP.

6. Social Issues

96. MOR will ensure that the civil works contractors comply with all applicable labor laws, do
not employ child labor for construction and maintenance activities, provide appropriate facilities for
children in construction campsites, and disseminate information at worksites on the risks of
sexually transmitted diseases and HIV/AIDS as part of the health and safety measures for those
employed during construction.

97. MOR will require contractors not to differentiate between men’s and women’s wages for
work of equal value. MOR will ensure that the bidding documents for any contracts for the project
facilities include specific clauses on these undertakings, and that compliance will be strictly
monitored during project implementation.

7. Implementation of Reform Agenda

98. Consistent with MOR’s reform program and the medium-term framework for ADB support
for the reform program, the following milestones will be met by the Borrower and MOR:

(i) Within 14 months of loan effectiveness (June 2004)

(a) MOR will have awarded concessions to private operators to take over
operation of loss-incurring branch lines on a pilot basis. Any such
concessions will be awarded through open, competitive, and transparent
bidding procedures; and

(b) MOR will have completed design and implementation of improvements to its
accounting system to establish a fully computerized system for IR capable of
providing both government accounts and commercial accounts consistent
22

with generally accepted accounting standards for its core and noncore
activities, with breakdowns by main lines of business and by main services
within these lines of business, and will have obtained all necessary approvals
for establishing such a system throughout IR.

(ii) Within 24 months of loan effectiveness (April 2005)

(a) MOR will have implemented an action plan for the outsourcing part of its
noncore activities;

(b) consistent with the medium-term framework for ADB support to the reform
program, MOR will have adopted a time-bound action plan to create focused
business organizations from its noncore activities and completed
implementation of the action plan; and

(c) MOR and MOF will have taken a decision on a public service obligation
mechanism to compensate MOR for being required to continue operation of
non-remunerative services, and will have commenced implementation of this
decision throughout IR.

(iii) Within 30 months of loan effectiveness (October 2005), MOR will have

(a) implemented throughout IR a fully computerized accounting system capable

of providing both government accounts and commercial accounts for its core
and noncore activities, with breakdowns by main lines of business and by
main services within these lines of business; and implemented an accounting
separation of its main lines of business for its core and noncore activities,
separately identifying the main services within these lines of business as
independent profit/cost centers;

(b) reviewed the pilot cases where concessions for the operation of loss-
incurring branch lines were awarded, and prepared and approved a program
for award of further such concessions;

(c) prepared and approved action plans for restructuring its production units;

(d) approved proposals for reengineering its internal business processes and
customer interface, implemented these on a pilot basis in one zone, and
commenced implementation throughout IR;

(e) published a medium-term investment plan that prioritizes investments on the

basis of expected financial returns;

(f) evaluated, with MOF, the performance of the railway sector and prepared a
detailed assessment of the status of implementation of the reform program,
and conveyed their findings to ADB; and

(g) reduced the total staff of IR to not more than 1.41 million persons.

B. Conditions for Loan Effectiveness

99. Conditions for loan effectiveness are that

 23

(i) the SPV will have been incorporated under the Companies Act, and MOR will have
concluded a memorandum of understanding with the SPV that sets out (a) the
financial and administrative arrangements regarding the implementation of the
Project and will have forwarded to ADB a copy of that memorandum of
understanding; and (b) all necessary information on the equity, assets, management
structure, and personnel employed by or assigned to the SPV;

(ii) the Project Agreement between ADB and the SPV will have become effective;

(iii) taking into account ADB’s comments and suggestions, MOR will have approved an
action plan for outsourcing part of its noncore activities;

(iv) MOR will have evaluated the bids for the consulting services to design an improved
accounting system, and submitted to ADB for approval its recommendation for
tender award and the draft contract;

(v) MOR will have submitted evidence satisfactory to ADB that all necessary action has
been taken to adequately compensate people affected by the Tomka-Keonjhar
subproject in accordance with the RRAP; and

(vi) MOR will have, in a manner satisfactory to ADB, publicly disclosed the RPs and
RRAP for sample subprojects and made the information available to the affected
people and communities.

C. Conditions for Disbursement

100. No civil works or equipment supply contracts will be awarded for subprojects until MOR has
provided ADB with evidence, satisfactory to ADB, that for the project facilities of that subproject,
rights in land and other rights and privileges for the Project have been acquired, the acquired land
is free of any encumbrances, and any necessary resettlement activities have been carried out in
accordance with the Borrower's laws and regulations and ADB's policy on involuntary resettlement
and other safeguard policies.

VII. RECOMMENDATION

101. I am satisfied that the proposed loan would comply with the Articles of Agreement of ADB
and recommend that the Board approve the loan of $313,600,000 to India for the Railway Sector
Improvement Project from ADB’s ordinary capital resources with interest to be determined in
accordance with ADB’s LIBOR-based lending facility; a term of 25 years, including a grace period
of 5 years; and such other terms and conditions as are substantially in accordance with those set
forth in the draft Loan and Project Implementing Agreements presented to the Board.

TADAO CHINO
President
26 November 2002

Design Summary
Goal
Promote economic growth and poverty
reduction by improving the
performance of the railways sector
Purpose
1. Implement a program of
institutional and policy reforms to
improve the commercial
orientation of Indian Railways (IR)
2. Invest in expansion of core
railway businesses offering high
financial and economic returns
Components/Outputs
1. Reform program, Phase 1
1.1 Upgrade cost accounting system
1.2 Restructure core business
1.3 Restructure and hive off non-core
activities
1.4 Increase private sector
participation
1.5 Reengineer business processes
and customer interface
1.6 Delineate social and commercial
objectives
1.7 Tariff rationalization
1.9 Rightsize staff strength
1.10 Institutionalize improved
investment planning and selection
2. Investment component
2.1 Sample investment subprojects
2.2 Additional subprojects to be
selected during implementation
PROJECT FRAMEWORK
24
Project Targets Project Monitoring Mechanisms Risks/Assumptions
Appendix 1
- Increase in gross domestic product - National/regional economic data - Other factors affecting
- Improved social indicators and statistics the environment for
economic and social
development are in place
- Approval of reform program by the Ministry of - Tripartite review of reform - Reforms coordinated
Railways (MOR) program implementation throughout IR and
- Establishment of standing committee to oversee - Records of quarterly meetings implemented in full
reform of standing committee - Sustained growth in
- Achievement of reform implementation milestones - Reporting of IR performance market for freight and
- Improved financial and operational performance indicators passenger transport
of IR, with operating ratio to be not more than - Transport sector statistics
90% from FY2003 onwards - Project completion report
- Improved services and increased bus iness on
remunerative routes
- In accordance with MOR’s reform program and - Tripartite review of reform - Reforms coordinated
agreed medium -term framework for Asian program implementation throughout IR and
Development Bank support to the reform program - Records of quarterly meetings implemented in full
- Design and introduce computerized accounting of standing committee - Private sector interest in
system capable of providing government accounts - Inspection by review missions greater participation
and commercial accounts by 2004, and complete - Quarterly progress reports , IR - Government can meet
training and adaptation by 2006 annual reports, and financial cost of compensating for
- For core business, accounting separation of statements services continued for
principal lines of business as cost/profit centers, - Approved compensation social reasons
with breakdowns for individual services by 2005 mechanism and record of - Timely award of civil
- Accounting separation and establishing of non- compensation payments works contracts
core activities as cost/profit centers by 2005 - Commercial accounts and
- Agree action plans to restructure production units business reports by line of
and initiate implementation by 2005 business and main service
- Introduce concessions for operating loss-incurring - Staff payroll records
lines and private sector terminal services and - Published tariffs
competition in rail container services by 2004 - Published medium -term
- Complete design and piloting of reengineered investment plan
business processes for customer interface and - Project completion report
services, and start full implementation by 2005
Design Summary
Activities/Inputs
1. Reform program, Phase 1
2.1 Procurement
2.2 Construction
2.3 Construction supervision
Inputs
1. Land, civil works, and equipment
2. Consulting services, training, and
management information system
3. Interest during construction and
front-end fee
4. Project financing
Project Targets Project Monitoring Mechanisms Risks/Assumptions
- Implement decision on public service obligation
mechanism to compensate IR for having to
operate loss-incurring services by 2005
- From FY2003 to FY2007 MOR to implement tariff
rationalization to improve the profitability and
competitiveness of its passenger and freight
services
- Net staff reduction of 2% per annum in 2002–
2010, leading to staff strength of 1.41 million in
2005 and 1.18 million in 2010
- Prepare medium -term investment plan for
determining annual investment program by 2004
- Sample subprojects for (i) Tomka-Keonjhar new
line, (ii) Pullampet-Gooty second track,
(iii) Bhatapara-Urkura third line, and (iv) Mahanadi
River second bridge
- Additional subprojects to be selected for (i) priority
track expansions to address freight bottlenecks ,
(ii) new lines with high economic and financial
returns , and (iii) efficiency improvements on
congested routes
- Start April 2002. Complete November 2005 - Quarterly progress reports - Advance action enables
- Start November 2002. Complete February 2004 timely commencement of
- Start September 2003. Complete December 2007 implementation
- Start September 2003. Complete December 2007 - Contractors have
capacity to carry out
works on time
- $525.8 million - Quarterly progress reports - Local counterpart funds
- $20.8 million - Subproject preparatory studies available on time
- Periodic review missions
- $32.6 million
Appendix 1
- Ordinary capital resources loan of $313.6 million
and government financing of $265.6 million
equivalent
25
26 Appendix 2

ORGANIZATION STRUCTURE OF INDIAN RAILWAYS

Minister of Railways

Ministers of State for Railways

Members Railway Board

Chairperson
Railway Board

Member Member Member Member Member Financial

Electrical Staff Engineering Mechanical Traffic Commissioner

Director Establishment Admin.

General Director Matters Matters Planning
Railway Health General, Directorate
Services RPF Secretary

Zonal Railways New Zones Production Units Other Units Public Sector
Undertakings

General Managers OSDs General Managers General Managers

IRCON
Central East Coast Chittaranjan NF Railway
Locomotive Works Construction RITES
Eastern North Central
Diesel Locomotive Metro Railway Calcutta CRIS
Northern North Western Works
Central Organization for CONCOR
North Eastern South Western Integral Coach Factory Railway Electrification
IRFC
Northeast Southeast Central Rail Coach Factory Director General/RDSO
RAILTEL
Frontier Wheel and Axle Plant Railway Staff College
KRC
Southern Chief Administrative Chief Administrative
Officer (Railways) Officer (Railways) IRCTC
South Central
Diesel Component Central Organization for
South Eastern Works Modernization of
Workshop
Western

East Central

West Central

IRCON = Ircon International, RITES = Rail India Technical and Economic Services, CRIS = Centre for Railway Information Systems, CONCOR
26
= Container Corporation of India, IRFC = Indian Railway Finance Corporation, RAILTEL = Railtel Corporation of India, KRC = Konkan Railway
Corporation, IRCTC = Indian Railway Catering and Tourism Corporation.
 Appendix 3 27

SECTOR ANALYSIS

A. Introduction

1. For the past 150 years railways have played an important role in the social, political, and
economic life of India. For most of that time railways were the leading mode of transport, in
many places the only available mode. In such a large continental country, railways have offered
unique advantages for transporting freight and passengers over long distances.

2. Privately owned regional railways were built in colonial times to support commerce and
trade. 1 As the regional railways spread across the country they created the basis for a national
railway network. In 1922 the Government established a Railways Board (RB) to act as the
country’s central railway authority. Over the next two decades, the Government gradually took
over the management and operation of the regional railways. The process of nationalization of
railways was completed in 1944. Thereafter Indian Railways (IR)2 was organized as a
departmental enterprise, wholly owned by the Government, on the basis of 15 zonal railways
under the overall control of the RB.

3. IR is India’s largest single organization and largest employer. 3 Its railway network of
more than 63,000 route kilometers (km) is one of the largest in the world. To operate this
network IR has 6,853 stations, 7,566 locomotives, and more than 260,000 wagons and
coaches. These are maintained in 225 locomotive sheds, 401 passenger car and freight wagon
repair depots, and 49 workshops. IR also has six manufacturing units. Its size, and its mode of
operation as a government department, present special challenges for management of railways
as a commercial enterprise. They also add to the difficulty of responding to both short- and long-
term changes in transport market conditions.

4. In the past 10–20 years, increasing competition from other modes, particularly road
transport,4 has reduced IR’s market share. As a result, its financial performance has
deteriorated, and it has not generated enough resources to finance necessary investments in
asset replacement and capacity expansion. In order for railways to make their potential
contribution to economic growth, the present model of railway provision needs to be modified
with a view to restoring IR’s financial sustainability. This will require IR to strengthen its
commercial orientation, to concentrate on services it can provide at a comparative advantage,
and to reduce its involvement in services that can now be better provided by others.

B. Sector Performance

1. Traffic

5. Railway freight measured in ton-km (tkm), and passenger traffic measured in passenger-
km (pkm), each increased at an average annual rate of around 4% over the past 50 years. The
rate of passenger traffic growth remained fairly constant over the period. Freight traffic growth
declined slightly, from an average annual rate of 4.5% for FY1951–80 to 3.4% for FY1980–
2001.

1
Construction of the Great Indian Peninsula Railway from Mumbai to Kalyan began in 1851.
2
The term “Indian Railways” refers to the 15 zonal railways and 59 subsidiary divisions under the overall
responsibility of the Ministry of Railways through the Railways Board.
3
IR has a capital investment of about Rs 479 billion ($10 billion) and employs 1.545 million staff.
4
In view of existing and planned investments in highway improvement, this competition is set to intensify.
28 Appendix 3

6. Growth in railway traffic has been much lower than growth in total transport demand.
During FY1980–2001 total freight traffic grew at an average annual rate of 6.8% and passenger
traffic at 8.5%. Over this period the traffic carried by road increased at an average annual rate of
10.2% for freight and 9.6% for passengers.

7. IR’s share of total freight and passenger traffic has steadily declined. Fifty years ago IR
carried more than two thirds of both freight and passenger traffic. Twenty years ago it still
accounted for two thirds of freight, but its passenger share had fallen to one third. By FY2001,
IR’s share of freight traffic had fallen to less than one third, and its passenger traffic share was
only 13%. Trends in road and rail traffic shares are in Table A3.1.

Table A3.1: Trends in Road and Rail Traffic Shares, 1950/51–2000/01

Freight Passenger
Railway Road Total Railway Road Total
FY tkm billion % of total tkm billion% of total tkm billion pkm billion % of total pkm billion % of total pkm billion
1951 44 88 6 12 50 67 68 31 32 98
1960 82 85 15 15 97 74 51 71 49 145
1970 128 71 52 29 180 113 37 189 63 302
1980 156 65 84 35 240 199 32 421 68 620
1990 237 47 263 53 499 281 21 1,029 79 1,310
1991 243 46 283 54 526 296 22 1,079 78 1,375
1996 274 40 410 60 684 342 20 1,368 80 1,710
2001 312 32 650 68 962 457 13 3,000 a 87 3,457
a
Estimate
Source: Ministry of Railways, Planning Commission.

8. IR’s freight traffic consists mainly of coal, minerals and other bulk commodities. In
FY2001 coal accounted for 43% of freight traffic (tkm). Six other bulk commodities accounted for
a further 44%. The majority of passenger traffic (pkm) is in low fare categories. In FY2001
second class non-suburban services (ordinary and mail/express) accounted for 75% of
passenger traffic, with 19% for suburban (all classes), and 6% for upper class services.

2. Operations

9. Along with the People’s Republic of China (PRC) and the United States (US), India is
one of the few countries in the world with annual railway traffic in excess of 500 billion converted
ton-km (ctkm).5 The passenger share of railway traffic in India is high compared with other
countries with large railway operations. In FY2001 passenger-km represented 59% of IR’s total
ctkm, compared with 24% in the PRC and 1% in the US.6

10. In view of the high investment cost of railway infrastructure, the intensity of track
utilization in terms of ctkm per route km is an important dimension of productivity. IR’s track
utilization compares well against the railways of Japan and the US, although lower than the
PRC. Coach and wagon productivity are indicators of efficiency of utilization of a railway’s
assets. IR’s coach productivity compares favorably with developed countries and the PRC. Its

5
1 tkm equals 1 pkm equals 1ctkm.
6
This section draws upon a comparison of operating performance indicators for a group of six countries comprising
(i) developing countries with extensive railway networks (India and the PRC); (ii) developed countries with
extensive railway networks (Japan and the US); and (iii) developing countries with smaller railways (Bangladesh
and Thailand).
 Appendix 3 29

wagon productivity is lower than Japan and the PRC, although much higher than Bangladesh
and Thailand. Comparative operating performance indicators are in Table A3.2.

11. A significant difference with developed countries is the very high level of staffing IR
employs to operate its railway. As a result IR’s staff productivity is much lower than for railways
in developed countries, although roughly similar to the PRC and Thailand, and much higher
than Bangladesh. This partly reflects the lower salary levels in India and other developing
countries which favor more labor-intensive approaches to production. It is also an indication that
in the past IR’s staffing was allowed to grow too large. At about half of gross traffic revenues,
the present level of staff costs is a structural impediment to improving IR’s financial performance
and generating resources for investment. To address this problem the Ministry of Railways
(MOR) has a policy of reducing staffing at a net rate of 2% per annum.7 As a result, IR’s total
staffing was reduced from 1.797 million in 1991 to 1.545 million in 2001. Through continued
implementation of this policy MOR plans to steadily reduce staffing to 1.18 million by 2010.

Table A3.2: Comparative Operating Performance Indicators

Indicator a Basis b India PRC US Japan Thailand Bangladesh

Total Traffic ctkm billion 769 1,662 1,999 263 13 4
Passenger Traffic Share pkm per ctkm 59 24 1 92 77 83
Track Utilization ctkm million per route km 12 25 10 14 3 2
Staff Productivity ctkm million per staff 500 530 8,700 1,500 550 100
Coach Productivity pkm million per coach 11 12 — 10 8 3
Wagon Productivity tkm million per wagon 1.4 2.8 — 2.4 0.3 0.1
— = not available, ctkm = converted ton-kilometer, km = kilometer, pkm = passenger-kilometer, PRC = People’s Republic
of China, tkm = ton-kilometer , US = United States
a
Indicators for India are for 2000/01, indicators for other countries are for 1999.
Source: ADB Draft Working Papers for Preparation of Transport Policy.

12. While some aspects of IR’s track utilization and productivity compare favorably with
other countries, it faces serious operational problems due to low average speeds on the
network, and lack of improvement in speeds over time. Since FY1961 the average speed of
diesel freight trains has remained around 22 kilometers per hour (kph). The average speed for
electric traction has remained around 24 kph. One of the main reasons for low speeds is that
many of the busiest routes have reached their designed traffic handling capacity and become
congested. This applies in particular to the Golden Quadrilateral routes that account for two
thirds of IR’s freight traffic.

13. A further operational problem has been the high and rising level of traffic accidents.
From FY1997 to FY2001 the total number of train accidents per million train km rose from 0.57
to 0.64. The majority of accidents were derailments. From FY1997 to FY2001 the number of
derailments annually increased from 282 to 344. Other accident types included collisions, grade
crossing accidents, and fires in trains. MOR statistics indicate that human error was the cause
of 86% of total train accidents in FY2001, and 7% were due to equipment failure. One of the
contributing factors leading to increasing accidents is that many of the assets, such as track and
bridges, are reaching the end of their economic life and need to be replaced. Due to
weaknesses in IR’s financial performance, including inadequate provision for depreciation, there
is a backlog in asset replacement. In the absence of replacement, assets require greater
maintenance, but the present high levels of track utilization make it difficult to take facilities out
of service to perform maintenance. In 2000 the Railway Safety Review Committee

7
3% attrition less 1% new recruitment.
30 Appendix 3

recommended investments of Rs150 billion to improve railway safety. From October 2001 IR
imposed a surcharge to improve railway safety. The surcharge is expected to raise Rs50 billion
over 6 years. MOR is also seeking external assistance to provide additional financing of railway
safety measures.

3. Tariffs

14. For many years railways have been required to meet social as well as economic
objectives. These objectives have been reflected in the process of tariff setting, with commercial
considerations often being outweighed by social and political factors. As a result there has been
sustained underpricing of passenger services. To cross-subsidize the loss-incurring passenger
services, there has been sustained overpricing of freight services.

15. The ratio of IR’s average passenger fares per pkm to average freight tariffs per tkm is
very low compared with other countries. The ratio of 0.3 for India compares with 1.2 in the PRC,
2.2 in Japan, 0.7 in Thailand, and 0.5 in Bangladesh.

16. Sustained tariff imbalance is one of the underlying causes of the operational and
financial problems faced by IR. Passenger services now account for nearly two thirds of railway
services, but contribute only one third of revenue. In FY2001 total passenger revenues were
Rs105 billion, compared with freight earnings of Rs230 billion. MOR estimates that its
passenger services incurred a loss of Rs49 billion in that year.

17. Overpricing of freight has reduced IR’s competitiveness in its main revenue-earning
markets, causing traffic to divert to road and reducing net earnings. Underpricing of passenger
services has led to a high volume of uneconomic passenger services. These not only incur
losses but also take up scare capacity on high-density routes, contributing to congestion that
further reduces IR’s competitiveness in freight markets.

4. Non-Core Activities

18. For many years IR pursued the objective of self-sufficiency by having its own capacity
for manufacturing rolling stock and other railway equipment, and for providing supporting
services. It has six large manufacturing units producing electric locomotives, diesel locomotives,
passenger cars, freight wagons, wheel axles, and components.8 It also operates residential
colonies, catering, other on-board services, security, hotels, sanitation, printing presses, medical
facilities, schools and colleges, and research facilities. While non-core activities have made an
important contribution to the railways sector in the past, by being run as part of a government
department and insulated from competition, they have had only limited incentive to be efficient,
and have not kept up with technology advances. They have been particularly ill-equipped to
provide services, such as catering, that require a high degree of customer orientation. The
existence of large non-core activities also increases the complexity of managing IR and dilutes
the focus of management on the core business of operating railways. There is a need to
reexamine the role, efficiency, and effectiveness non-core activities, with a view to increasingly
obtaining inputs of goods and services on the basis of competition, and to separating remaining

8
As an indication of the scale of these activities, in FY2001 IR’s manufacturing units produced 120 electric
locomotives, 105 diesel locomotives, 2,190 passenger cars, nearly 2,000 wagons, and more than 30,000 wheel
sets.
 Appendix 3 31

non-core activities from IR’s core activities so that they operate according to commercial
principles.9

5. Financial Performance

19. Over the period FY1998–2001 IR’s financial performance deteriorated. Its operating ratio
increased from 87 to 93%, and in FY2001 it had to defer part of the payment of a dividend to the
Government. Although the adverse financial position in these years was partly due to the short-
term factors including the inflationary adjustment of salaries awarded by the Fifth Pay
Commission, IR’s financial decline helped draw attention to the need for reform. The
Government made it clear that IR should not rely on budgetary sources of financing, and
encouraged IR to proceed with reforms to improve its performance and enable it to attract
financing from multilateral sources and the domestic financial markets. IR’s past and projected
financial performance are presented in Appendix 15.

C. Challenges

20. While the weaknesses in railway sector performance are manifested in declining market
share, adverse operating indicators and reduced revenue generation, their underlying causes
are to be found in the policy, institutional, and organizational arrangements for railways, which
are themselves based on the idea of running railways as a social and economic arm of
government rather than as a business. A cause-effect analysis is in Appendix 4.

21. Although the present railway sector arrangements served India well for many years, they
are no longer adequate for railways in a transport market characterized by increasing modal
competition and customer choice. The future performance of the railways sector will depend on
how effectively it can adapt its services to its changing market position. The fundamental
challenge for IR is therefore to establish a commercial orientation. This will involve IR (i) running
railways services along business lines, including expanding activities that offer favorable
commercial returns and reducing activities that do not; (ii) concentrating on the core business of
operating railway services; (iii) progressively hiving off non-core businesses, and making
increased use of outsourcing on the basis of competition; (iv) adopting objective systems for
selecting investments on the basis expected financial and economic returns, with a view to
improving operational performance and capacity in its major markets, notably freight services in
the Golden Quadrilateral; and (v) rationalizing tariffs to correct for past overpricing of freight and
underpricing of passenger fares, and to adapt individual freight and passenger fare categories
to improve competitiveness and increase returns. To enable IR to introduce these changes the
Government will have to relieve IR of the burden of continuing to operate loss-incurring services
that are required for social reasons. For this purpose the Government will need to establish a
mechanism for compensating IR for losses on services it would otherwise curtail.

9
IR opted to create subsidiary companies under the Company Act to afford certain non-core activities greater
autonomy to operate in a commercial manner. These have included Rail India Technical and Economic Services
(RITES), a consulting services company; the Container Corporation of India (CONCOR), a rail container services
operator; the Indian Railway Finance Corporation (IRFC), which arranges financing for procurement of railway
assets; IRCON, a construction company; Konkan Railway, a special-purpose construction and railway-operating
company; the Centre for Railway Information Systems (CRIS), an information technology company; Indian Railway
Catering and Tourism Corporation (IRCTC), a hotel and tourism operator; and RailTel Corporation, a railway
telecommunications company. While this has improved performance of these activities, in many cases the
subsidiaries remain monopoly service providers, and there is scope for further efficiency gains through introducing
greater competition with private sector suppliers.
 32 Appendix 4

CAUSE-EFFECT TREE ANALYSIS

Effect

Reduced Railway Contribution to Poverty Reduction

Reduced Railway Contribution to GDP

Immediate
causes
Service Loss of Investment
inefficiency market share backlog

Centralized decision making

Lack of customer orientation
Overstaffing
Uneven quality of investments
Capacity constraints on high density routes
Use of outdated technologies
Low productivity growth
Safety hazards
Some core services running at a loss
Some non-core activities running at a loss
Surplus capacity in non-core units
Declining financial performance

Underlying
causes

Distorted pricing Railway not Proliferation Lack of objective

with freight run on of non-core system for
subsidizing business lines activities selecting
passengers investments

No separation of social and economic roles

Lack of competition from other modes until recently
Fundamental
causes

Lack of commercial orientation

 Appendix 5 33

EXTERNAL ASSISTANCE TO THE RAILWAYS SECTOR

Year of Amount
Agency Project Approval Currency (million) Status

Bank:
ADB Loan No. 857-IND: Railways 1987 US Dollar 190 Complete
Loan No. 1140-IND: Second Railways 1991 US Dollar 225 Complete
Subtotal US Dollar 415

World Bank:
IBRD Loans Railway 1959 US Dollar 34 Complete
Second Railway 1957 US Dollar 90 Complete
Third Railway 1958 US Dollar 85 Complete
Fourth Railway 1959 US Dollar 50 Complete
Fifth Railway 1960 US Dollar 70 Complete
Sixth Railway 1961 US Dollar 50 Complete
Second Rail Modernization 1982 US Dollar 200 Complete
Railway Electrification 1984 US Dollar 281 Complete
Third Railway Modernization 1988 US Dollar 245 Complete
a
Mumbai Urban Transport Project 2002 US Dollar 358 Ongoing
Subtotal US Dollar 1,463

IDA Credits Seventh Railway 1963 US Dollar 81 Complete

Eighth Railway 1964 US Dollar 75 Complete
Ninth Railway 1966 US Dollar 82 Complete
Tenth Railway 1969 US Dollar 66 Complete
Eleventh Railway 1972 US Dollar 80 Complete
Twelfth Railway 1973 US Dollar 80 Complete
Thirteenth Railway 1975 US Dollar 110 Complete
Railway Modernization and Maintenance 1978 US Dollar 190 Complete
2nd Railway Modernization and Maintenance 1982 US Dollar 254 Complete
Subtotal US Dollar 1,018

OPEC Railway Modernization 1983 US Dollar 23 Complete

Japan:
OECF loans Railway Development 1982 Yen 2,556 Complete
Bombay Suburban Modernization 1982 Yen 1,748 Complete
Calcutta Metro Railway 1983 Yen 4,662 Complete
Delhi Mass Rapid Transit System I 1997 Yen 14,760 Complete
Delhi Mass Rapid Transit System II 2001 Yen 6,732 Ongoing
Delhi Mass Rapid Transit System III 2002 Yen 28,659 Ongoing
Subtotal Yen 59,117

EXIM Bank Railway Project (co-financing for 857-IND) 1988 Yen 1,179 Complete

Germany: Accident Relief Cranes 1984 DM 8 Complete

Heavy Breakdown Crane 1987 DM 28 Complete
Rail Coach Factory, Kapurthal 1989 DM 7 Complete
Rail Spring Factory, Sithouli 1989 DM 21 Complete
Railway Investment Programme 1991 DM 21 Complete
Modernization of Signalling Ghaziabad-Kanpur 1997 DM 185 Ongoing
Subtotal DM 270

Other:
UK ODA Railway Sector Grant 1983 UK Sterling 31 Complete
Indian Railway Project 1990 UK Sterling 32 Complete
Saudi Fund Koraput-Rayagada New Line 1983 Saudi Riyals 73 Complete
Switzerland Swiss Mixed Credit 1991 Swiss Francs 7 Complete
France Metro Railway, Calcutta 1988 French Francs 56 Complete

a
Approximately two thirds of the loan amount was for the railway component.
Source: Ministry of Railways
 34
MEDIUM-TERM FRAMEWORK FOR ASIAN DEVELOPMENT BANK SUPPORT TO INDIAN RAILWAYS REFORM PROGRAM, 2002-2010

Milestone for a
Schedule for Loan Processing and Approval, and Reform Implementation
Loan

Appendix 6
Processing & Phase 1 Phase 2 Phase 3
Project/Reform Activity Approval 2002 2003 2004 2005 2006 2007 2008 2009 2010

A. Scheduling of Proposed Asian Development Bank Loans

Railway Sector Improvement Project (RSIP) - 2002 loan

Railway Sector Improvement Project II (RSIP2) - 2005 loan
Railway Sector Improvement Project III (RSIP3) - 2007 loan

B. Reform Program Activities and Outcomes

1. Upgrade Accounting System

a. Develop and implement improved accounting system
1. Prepare terms of reference and recruit consulting services RSIP
2. Develop and implement system throughout IR RSIP2
3 Training and system adaptation RSIP2
b. Computerization of revenue and cost accounting

2. Restructure Core Business

a. Accounting separation
b
1. Accounting separation of main lines of business RSIP2
2. Establish main passenger services as independent profit/cost centers RSIP2
b. Restructuring
1. Evaluate structure of mgt and operations and identify restructuring options RSIP2
2. Approve action plan based on evaluation and identified options RSIP2
3. Implement action plan RSIP3
c. Strengthening of commercial orientation of zonal railways
1. Decentralization of authority
2. Improving customer orientation

3. Restructure and Hive Off Non-Core Activitiesc

a. Accounting separation
1. Accounting separation of each non-core activity RSIP2
2. Establish each non-core activity as separate cost/profit center RSIP2
b. Outsourcing
1. Identify outsourcing opportunities and prepare action plan RSIP
2. Implement action plan RSIP2
d
c. Creating focused business organizations (FBOs)
1. Identify activities to create as FBOs
2. Prepare and approve action plan for creating FBOs
3. Implement action plan for creating FBOs RSIP2
 dix 6
MEDIUM-TERM FRAMEWORK FOR ASIAN DEVELOPMENT BANK SUPPORT TO INDIAN RAILWAYS REFORM PROGRAM, 2002-2010

Milestone for a
Schedule for Loan Processing and Approval, and Reform Implementation
Loan
Processing & Phase 1 Phase 2 Phase 3
Project/Reform Activity Approval 2002 2003 2004 2005 2006 2007 2008 2009 2010

d. Restructuring production units

1. Prepare and approve action plans for restructuring production units RSIP2
2. Implement action plan for restructuring production units RSIP3
e. Restructuring other non-core activities
1. Decide on restructuring of other non-core activities
2. Implement decisions on restructuring of other non-core activities

4. Increase Private Sector Participation

a. Private sector terminal services
1. Identify locations for freight terminals and call for expressions of interest
2. Identify locations for warehouses and call for expressions of interest
3. Select private firms to provide freight terminals and warehousing
4. Commencement of private sector participation
b. Concessioning of loss-incurring branch lines to private operators
1. Conduct studies and select five branch lines as pilot cases
2. Prepare bid documents
3. Invite bids
4. Evaluate bids and award concessions RSIP2
5. Review pilot cases and implement expanded concessioning program RSIP2
c. Introduce competition in rail container services
e
d. Further private sector participation initiatives (e.g., SPVs, joint ventures)

5. Reengineer Internal Business Processes and Customer Interface

a. Consulting services to redesign and simplify processes
b. Approve proposed process changes
c. Implement on pilot basis in one zone RSIP2
d. Establish throughout IR RSIP2, RSIP3

6. Delineate Social and Commercial Objectives

a. Initiate public debate about delineating social and commercial objectives
b. Formulate transparent public service obligation (PSO) mechanism
1. Establish interministerial committee to formulate PSO mechanism RSIP

Appendix 6
2. Decision by MOR/MOF on recommendation of committee
3. MOF approval of method and procedures for compensation
c. Implement PSO mechanism throughout IR RSIP3

7. Tariff Rationalization
a. Announce policy decision and commence tariff rationalization
b. Implement tariff rationalization RSIP2, RSIP3

35
8. Evaluate Need for Regulation RSIP3
 36
ix 6
MEDIUM-TERM FRAMEWORK FOR ASIAN DEVELOPMENT BANK SUPPORT TO INDIAN RAILWAYS REFORM PROGRAM, 2002-2010

Milestone for a
Schedule for Loan Processing and Approval, and Reform Implementation

Appendix 6
Loan
Processing & Phase 1 Phase 2 Phase 3
Project/Reform Activity Approval 2002 2003 2004 2005 2006 2007 2008 2009 2010

9. Rightsize Staff Strength

a. Reduce to 1.41 million by end of FY2004/05 RSIP2
b. Reduce to 1.35 million by end of FY2006/07 RSIP3
c. Reduce to 1.18 million by end of FY2009/10

10. Institutionalize Improved Investment Planning and Selection

a. Consulting services to strengthen investment planning tools
b. Institutionalize use of LRDSS and investment planning tools
c. Prepare medium-term investment plan using improved planning tools

11. Evaluate Sector Performance and Reform Program Implementation RSIP2, RSIP3

FBO = focussed business organization, FY = fiscal year, IR = Indian Railways, LRDSS = Long Range Decision-Support System, MOF = Ministry of Finance, MOR = Ministry of Railways,
PSO = public service obligation, SPV = special purpose vehicle, RSIP = Railway Sector Improvement Project. Processing
a
The reform program will be reviewed, updated, and extended at the time of processing RSIP2 in 2005. Approval
b
Freight transport, passenger transport, suburban transport, fixed infrastructure, and other infrastructure. Implementation
c
MOR uses the term “hive off” to describe options ranging from separation to divestiture. Milestone for processing/approval of next loan
d
MOR uses the term "focussed business organization" to refer to organizations such as the Container Corporation of India,
the RailTel Corporation of India, and the Indian Railway Catering and Tourism Corporation, that were previously part of
mainstream IR activities and have been established as independent entities within IR or as companies owned by the
Government to afford them sufficient autonomy to perform their activities effectively.
e
To be formulated at the time of processing PSIP2 in 2005.
 Appendix 7 37

DESCRIPTION AND ESTIMATED COST OF THE FOUR SAMPLE SUBPROJECTS

A. Summary Subproject Descriptions

1. Keonjhar-Tomka New Rail Link

1. This new broad gauge (BG) line is part of a larger project to construct a new 155-
kilometer (km) line from Banspani to Tomka. The object of this larger project is to provide iron
ore originating in the Banspani area with a more direct route to port and to two new steel plants
in the Duburi/Sukinda area, and to serve additional iron ore mines along the new route.

2. Work on the larger project has been progressing since the mid-1990s. The first section
of line, a length of 9.4 km between Banspani and Joruli, was opened for traffic in 2000. The
second section of line, a length of 47.3 km between Joruli and Keonjhar, is well advanced and
scheduled to open in March 2003. Work on the last 96 km between Keonjhar and Tomka was
begun in early 2000 and has progressed to the point where the roadbed is expected to be
complete by December 2003.

3. The work on this subproject remaining for financing by the Asian Development Bank
(ADB) comprises supply and installation of the track structure (except provision of ballast),
construction the railway buildings and other facilities (including electrical installations), and
supply and installation of the signaling and telecommunications equipment.

2. Second Bridge on Mahanadi River

4. The proposed construction of a second bridge across the Mahanadi River is part of the
track doubling work being performed by Indian Railways of their lines between Talcher, Cuttack,
and Paradeep. This is in the area where the Howrah-Chennai main line crosses the routes
carrying ore traffic from Talcher and Banspani to Paradeep port. The Project has several parts
intended to reduce congestion in this area by constructing second tracks and improving junction
points. The estimated cost of all the work is Rs2,433,800,000.

5. Several of the track doubling projects have been completed and others are in progress.
However, the bridge that takes the Howrah-Chennai line across the Mahanadi River is still to be
constructed and remains a bottleneck. Soil investigations and detailed design for the Project
have been completed.

6. The selected configuration for the new bridge is to use 32 through-girder steel spans
with a length of 65.8 meters (m) each. The piers for these spans will be supported on well
foundations. Both span and substructure will be designed to support 30-ton axle loads. The
bridge and the track structure on the bridge will be financed under the loan while the
approaches and connections to the adjacent stations will be constructed as separate contracts
by Indian Railways.

3. Third Line between Bhatapara and Urkura

7. The subproject to provide a third line between Bhatapara and Urkura is part of a larger
project to increase line capacity between Champa and Bhilai on the Howrah-Mumbai main line.
The area between Champa and Bhilai is developing into an industrialized zone along the
already heavily used Howrah-Mumbai main line. New coal mines in the area are being opened
and attracting other industries such as cement and steel production. The considerable
38 Appendix 7

passenger traffic (16 trains per direction per day) on the line means that the available capacity
for goods trains is often exceeded, resulting in excessive delays in operation.

8. This subproject between Bhatapara and Urkura will complete the third track from
Champa to Bhilai. The works on the other sections were approved between 1993 and 2000 and
most have been completed.

9. The scope of the work primarily consists of adding a third track on the west side of the
existing double track. The new line will be electrified and signaled to conform with the existing
line. Through stations and the loop lines and platforms on the west side of the existing lines will
have to be relocated to accommodate the third track.

4. Gooty-Pullampet Track Doubling

10. Of the existing 215 km between Gooty and Pullampet on the South Central
Railway (SCR), only three short segments, totaling 64 km of line, are laid with double track. The
remaining 151 km of single track has a planned capacity of 24 to 28 trains per day in each
direction. As there are currently eight passenger and 16 goods trains operating in each direction
daily, the single track line segments are being used near to their capacity. As such they are
unable to accommodate expected increases in traffic without experiencing congestion. The
expected additional traffic comprises 5 million tons per year of iron ore for export and 2 million
tons per year of coal for a new power plant.

11. As a consequence, SCR has elected to complete the line doubling of the entire segment
from Gooty to Pullampet. Generally, the new line will be constructed on the opposite side of the
existing track from the loop lines and will include new loops for the up or down trains as
required.

B. Key Technical Parameters

12. The key technical parameters associated with each of these capacity improvement
subprojects are summarized in Table A7.1.
 Appendix 7 39

Table A7.1: Details of Sample Subprojects

Keonjhar-Tomka Mahanadi River Bhatapara-Urkura Gooty-Pullampet

New Rail Link Second Bridge Third Line Track Doubling

Length (km) 96 2.4 60 151

Land Acquisition (ha) 1,338 0 1.7 21

Earthworks
Cut (m 3) 7,965,800 0 121,500 308,000
Fill (m 3) 3,796,250 13,060 1,104,700 3,600,000

Track Structure
Rail (kg) 60 60 60 60
Ties (sleepers ) 1,660 PSC/km steel channel 1,660 PSC/km PSC
Ballast 2,380 m 3/km open deck bridge 2,850 m 3/km 2,850 m 3/km

Bridges
Major (Qty. and Length, m) 18–1,604 1–2,107 5–256 N/A –4,329
Minor (Qty. and Length, m ) 235–922 N/A 60– N/A N/A –938
Design Loading HML HML HML HML

Road Crossings
At Grade 27 0 30 61
Bridges (over and under) 10 0 0 0

Number of Stations 9 0 7 24

Signaling MACL N/A MACL MACL

Electrification No No 25 kV No

Construction Cost ($ million)

Total Project Cost 128.8 20.4 35.4 76.7
Component for ADB Funding 37.7 18.0 30.9 66.6
ADB = Asian Development Bank, HML = heavy mineral loading, kV = kilovolts, m = meter, PSC = pre-stressed
concrete, MACL = multiaspect color light.
40 Appendix 7

C. Capacity Issues

13. All of the above subprojects have been reviewed in a general manner to assess whether
they are an efficient solution for providing the additional capacity that IR feel they require. In the
case of Keonjhar–Tomka, the issue is relatively simple as it is evident that there are mining
projects that could not go ahead without the subproject and that the reduction in haul distance
that the subproject provides for existing mines is significant.

14. In the case of the other three projects, it is clear that train densities are rising
significantly. Accommodating these numbers of trains on a single track line produces difficult
operating conditions. Even if sufficient capacity can be provided by closely spacing loop lines for
crossing trains, the delays resulting from these meets add significantly to running times and
result in increased fleet requirements and higher operating costs.

15. The track doubling and tripling projects proposed are appropriate solutions for capacity
constraints identified by IR. They fit in well with the strategy to increase the speed of goods
trains to provide overall capacity improvements.

16. In the longer term, the Indian railways may wish to consider additional strategies for
improving line capacity. Improvements can come from increasing the number of trains which
can be handled, but this requires large investments in infrastructure. These investments can be
controlled by also investing in the capacity that can be carried in each train. The technical
solutions required to achieve this objective are longer trains and higher axle loads.1 Indian
Railways have already begun to consider implementing these technical conditions, particularly
for ore trains on heavily traveled lines. Some design standards have already been prepared,
however they have yet to be implemented on a project. Implementing a demonstration project
with these new standards would be a good first step to give the railway some first-hand
experience of the results. In addition, it is suggested that Indian railways consider integrating the
heavier axle load design standards into their new infrastructure projects. For a small incremental
cost on a current project, it is possible to avoid or mitigate some large expenditures that might
be required in the future in order to accommodate the heavier trains.

1
As an example, a typical heavy goods train carries 58 wagons, each loaded with a net weight of 58 tons, resulting
in 3,364 net tons per train. Trains carrying 10,000 net tons operate in many countries. Generally, this train capacity
is achieved with 100 or more wagons at 30t axle loads. This has the potential to reduce the number of goods trains
by two-thirds which provides an enormous increase in the capacity of existing lines. It also has a large impact on
overall efficiency as the num bers of wagons required are reduced as well as the numbers of train crews.
 Appendix 8 41

SELECTION CRITERIA AND APPROVAL PROCESS FOR SUBPROJECTS

A. Subproject Selection

1. The selection of subprojects by the Ministry of Railways (MOR) will be subject to Asian
Development Bank (ADB) approval. The criteria for selection of subprojects are as follows:

(i) Subprojects will be for priority capacity expansions and safety improvements
recommended by the Long-Range Decision-Support System (LRDSS) to
overcome freight bottlenecks, principally in the Golden Quadrilateral and its
Diagonals; or for construction of new railway lines expected to have high
economic and financial returns.

(ii) The proposed scope and approach to operations is the most economically
efficient option available for providing the additional railway capacity required.

(iii) On the basis of ADB’s Guidelines for the Economic Analysis of Projects and its
Guidelines for Financial Governance and Management of Investment Projects,
the estimated economic internal rate of return is at least 12% and the estimated
financial internal rate of return is greater than the average weighted cost of
capital in real terms.

(iv) Subprojects will be socially sound, and will minimize the need for land acquisition
and resettlement, and include measures to mitigate any social impacts they will
cause.

(v) Subprojects will be environmentally sound, and no subproject will be located

within or adjacent to an environmentally sensitive area (e.g., sanctuaries,
national parks, or other areas having significant ecological functions).

(vi) An initial environmental examination report will have been prepared.

(vii) Subprojects will be technically feasible.

(viii) Sufficient government counterpart funding will be allocated to implement the

subproject as scheduled.

(ix) The estimated cost of each subproject will be at least $10 million.

(x) The average of the estimated value of the contract packages for civil works and
equipment supply will be not less than $5 million equivalent.

(xi) All necessary government and state approvals will have been obtained.

B. Approval Process for Subprojects

2. All subprojects will be required (i) to comply with ADB’s policies and guidelines, and
satisfy ADB’s procedures for project preparation, including with respect to technical, operational,
financial, economic, environmental, social, and resettlement dimensions, and (ii) to follow ADB’s
Guidelines for Procurement.
42 Appendix 8

3. MOR will prepare preliminary thumbnail sketches for candidate additional subprojects to
utilize the remainder of the loan allocation for investment subprojects. These will include short
descriptions of the scope and need for each subproject, and explanation of compliance with
each of the selection criteria set out in para. 1. The thumbnail sketches for the additional
subprojects will be prepared with a view to seeking approval for all subprojects in one tranche.

4. For each subproject approved by ADB for further preparation, MOR will conduct
subproject preparatory studies of (i) technical feasibility and cost, (ii) economic analysis, (iii)
financial analysis, (iv) environmental assessment, and (v) social analysis and resettlement
planning.

5. For each subproject approved by ADB, MOR will prepare prequalification and tender
documents based on ADB’s standard bidding documents and prequalification documents. The
approval process for subprojects is summarized in Figure A8.

FIGURE A8: APPROVAL PROCESS FOR SUBPROJECTS

IDENTIFY SUBPROJECT CANDIDATES

Submit Thumbnail Sketches to ADB

Review by ADB Resubmit Thumbnail Sketch

Technical Feasibility and
Cost

Economic
Analy sis No Amend Thumbnail Sketch
ADB Approval

Financial Yes
Analysis
SUBPROJECT PREPARATORY STUDIES
Environmental Assessment

Submit Subproject Studies to ADB

Social and Resettlement

No
ADB Approves Amend Studies

Prequalification Yes
Documents
PROCUREMENT DOCUMENTS
Tender Documents

Submit Subproject Studies to ADB

No
ADB Approves Amend Documents

Yes

PREQUALIFICATION AND BIDDING

 Appendix 9 43

OUTLINE TERMS OF REFERENCE

FOR MONITORING OF SUBPROJECT PREPARATION AND IMPLEMENTATION

1. The services will be conducted by an international consultant with extensive experience

of Asian Development Bank (ADB) project preparation, procurement, and project administration
procedures.

2. During the first 3 years of project implementation, the consultant will conduct monitoring
missions of approximately 2–3 weeks duration at 6-monthly intervals. The tasks to be performed
will include:

(i) Develop a checklist for the Special Purpose Vehicle/Ministry of Railways and
domestic consultants responsible for project preparatory consulting services to
identify each of the main elements of subproject preparatory studies and
procurement documentation required by ADB procedures.

(ii) Review draft subproject preparatory studies and provide the SPV and MOR with
comments on how to improve these in order to fulfill relevant ADB policies and
procedures, and assist them to do so.

(iii) Review draft prequalification and tender documents and provide the SPV and
MOR with comments on how to improve these in order to fulfill relevant ADB
policies and procedures, including incorporation of environmental mitigation
measures, and assist them to do so.

(iv) Conduct site visits to subprojects and hold discussions with the SPV, MOR, and
contractors to review progress in subproject implementation, including physical
progress, including implementation of environmental mitigation measures,
contractor performance, and adequacy of supervision, and provide the SPV and
MOR with comments on any improvements that may be possible.

(v) During visits provide advice to the SPV and MOR on how to address any
implementation problems identified and other matters as may be requested by
the SPV and MOR.

(vi) Prepare semiannual monitoring reports summarizing the status of subproject

implementation and identifying actions required to address any problems.
44 Appendix 10

COST ESTIMATE AND FINANCING PLAN

($ million)

FX LC Total FX (%)
FX (%)ADB Govt

A. Reform Program

a
1. Consulting Services 4.0 4.0 8.0 50 6.4 1.6
2. Management Information System 4.6 4.6 9.2 50 7.4 1.8
Subtotal (A) 8.6 8.6 17.2 50 13.8 3.4

B. Railway Investment
1. Land Acquisition and Resettlement 5.0 5.0 5.0
2. Civil Works and Equipment Supply 299.2 221.6 520.8 57 299.2 221.6
and Installation
3. Consulting Services
b
a. Project Preparation 3.0 3.0 3.0
b. Monitoring of Subprojects 0.4 0.2 0.6 60 0.6
Subtotal (B) 299.6 229.8 529.4 57 299.8 229.6

Total Baseline Costs 308.2 238.4 546.6 56 313.6 233.0

Front-End Fee 3.1 3.1 100 3.1

IDC and Commitment Fees 29.5 29.5 100 29.5
Total Project Costc 340.8 238.4 579.2 59 313.6 265.6
FX = foreign exchange, LC = local currency, ADB = Asian Development Bank, Govt = Government, IDC = interest during
construction
a
Including (i) process reengineering, (ii) investment planning and selection procedures,
and (iii) other studies to be identified during implementation of reform program.
b
Subproject preparation studies and precontract services for the Project and the proposed project in 2005.
c
Including taxes and duties.
 Appendix 11 45

IMPLEMENTATION ARRANGEMENTS

Chairman, Railways Tripartite Review (MOR,

Board and Member MOF, ADB)
Planning

Standing Additional Executive Director, Transport

Reform
Committee Member Director, Planning
Component on Reform Planning (Project Perspective
Program Director, Planning
Reform)
Director, Planning
(Special)

Executive
Director, Planning
Director,
Planning
Director, Planning
(Mechanical
Engineering)

Director, Public
Service Undertakings
Investment
Component Managing
Director, SPV
(Project Director,
Investment)

Head, Project Project Site Office, Contract

Implementation Implementation Subproject A Manager A
Unit Unit
For each subproject

(Engineer’s
Representative)

Project
Preparatory
Consulting Subproject
Services Coordinating
Committee (Site
Office, Zonal Railway,
Government Officials,
Major Customers)

MOF = Ministry of Finance, ADB = Asian Development Bank, MOR = Ministry of Railways, SPV = special purpose vehicle
 IMPLEMENTATION SCHEDULE: INVESTMENT SUBPROJECTS

46
2002 2003 2004 2005 2006 2007

Appendix 12
Project Component Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Land Acquisition

Project Preparatory Consulting Services

Preparatory Studies of Sample Subprojects

Preparatory Studies of Additional Subprojects

Procurement Documents for Sample Subprojects

Procurement Documents for Additional Subprojects

Civil Works

Prequalification of Sample Subprojects

Bidding, Approval, and Award of Sample Subprojects

Construction and Installation of Sample Subprojects

Prequalification of Additional Subprojects

Bidding, Approval, and Award of Additional Subprojects

Construction and Installation of Additional Subprojects

 INDICATIVE CONTRACT PACKAGES FOR THE FOUR SAMPLE SUBPROJECTS

Sub-
project Contract Estimated cost
No. No. Subproject/Contract ($ million) Procurement

1 Keonjhar - Tomka New Railway Line

1A Supply and Installation of Track, Signaling, and Facilities 37.70 ICB

2 Gooty - Pullampet Double Tracking

2A Roadbed and Facilities Construction 25.40 ICB
2B Supply and Installation of Track 35.00 ICB
2C Supply and Installation of Signaling 6.20 ICB

3 Bhatapara - Urkura Triple Tracking

3A Roadbed, Facilities, Track, Signaling, and Overhead Power Supply 30.90 ICB

4 Second Mahanadi Bridge

4A Bridge Construction and Track Installation 18.00 ICB

Total 153.20

ICB = international competitive bidding

Appendix 13
47
48 Appendix 14

OUTLINE TERMS OF REFERENCE FOR ADVISORY TECHNICAL ASSISTANCE:

MANAGEMENT CONSULTING SERVICES TO INDIAN RAILWAYS

A. Background

1. The Ministry of Railways (MOR) has decided to carry out a program of institutional and
policy reforms to transform Indian Railways (IR) into a commercially oriented organization in
stages over the period 2002–2010. Through the proposed Railway Sector Improvement Project
(the Project), the Asian Development Bank (ADB) is providing support for implementation of
MOR’s reform program, and has established a medium-term framework for linking future ADB
support to accomplishment of reform implementation milestones.

B. Objective

2. The objective of the consulting services is to provide MOR with advice on IR’s annual
business performance, to conduct annual monitoring of implementation of the reform program,
and to provide advice on management and business related issues identified during
implementation of the reform program.

C. Scope

3. The scope of the consulting services will include the following.

1. Study of Business Development and Business Opportunities

4. From FY2003 to FY2006 annual reviews will be conducted of IR’s business development
and business opportunities and advice will be provided on actions needed to address
opportunities and threats:

(i) Review available reports and financial and other information, and conduct
discussions with IR officials and customers;

(ii) Analyze the markets, costs and competitive position of each IR line of business
and profit/cost center;

(iii) Analyze the opportunities and threats to the IR lines of business and profit/cost
centers and overall business performance; and

(iv) Provide advice to IR on strategies for improving business performance over the
medium term (following 3 years).

2. Study of Progress in Implementation of Reform Program and Reform

Implementation Milestones at Periodic Intervals

5. In each of the fiscal years 2002/03 to 2005/06, an annual study will be prepared of
progress in the performance of the reform program, and the achievement of milestones in the
medium-term framework for ADB support to the IR reform program.
 Appendix 14 49

3. Studies

6. Further studies and advisory services will be conducted on aspects of improving IR’s
commercial orientation and business performance that will be identified during implementation
of the reform program, subject to approval of the terms of reference by MOR and ADB.

D. Reporting and Dissemination of Findings

7. Reports of the annual reviews and study of reform program progress will be submitted to
MOR and ADB to provide an input to meetings of the project coordinating committee for the
Project. Reports of studies will be submitted to MOR and ADB.

8. The consultants will involve officials of MOR and IR in all aspects of review, analysis,
and formulation of advice. Workshops and other consultation activities will be held to involve
relevant MOR and IR officials in preparation of each component of the services, and to promote
a sense of ownership of the outcomes. With assistance from MOR, the consultants will arrange
seminars to disseminate the findings of each component of the services upon its completion.

E. Consulting Services

9. The consulting services will be carried out by a reputable domestic management

consulting firm, to be recruited using ADB’s quality and cost-based selection procedures, and
according to ADB’s Guidelines on the Use of Consultants and other arrangements satisfactory
to ADB on the engagement of domestic consultants. International experts may be brought in to
work with the domestic consulting firm where such expertise in specific areas is considered
necessary. The consulting team will include experts in railways operations and business
management. It is estimated that 25 person-months of consulting services will be required.

10. Each year the annual business performance review and reform program monitoring will
commence within two months of the end of the fiscal year, and the consultant's reports will be
submitted within eight weeks of the commencement of these services. Time frames for other
studies will be agreed upon during implementation, subject to approval of MOR and ADB.

F. Implementation Arrangements

11. The Executing Agency for the TA will be MOR. The consultants will report to the
additional member planning. MOR will provide the consultants with suitably furnished office
accommodation, local communications, office support staff, local transport, and other necessary
equipment and facilities as required. MOR will establish a counterpart team, headed by a project
coordinator, comprising a minimum of three staff. A steering committee will be established for
the technical assistance (TA), chaired by the additional member planning, with representatives
of relevant parts of MOR and the implementing agency, and from the Department of Economic
Affairs of the Ministry of Finance and ADB. The committee will meet after receiving the inception
report, and at intervals of not more than 6 months over the period of the services, and more
often as required to provide guidance to the consultants.

G. Cost Estimate

12. The total cost of the TA is estimated to be $590,000. The Government has requested
ADB to finance $500,000 of the foreign exchange and local currency cost on a grant basis from
the Technical Assistance Special Fund. The Government’s counterpart contribution will finance
$90,000 equivalent of local currency expenditure.
50 Appendix 15

FINANCIAL STATEMENT OF INDIAN RAILWAYS: NOTES AND ASSUMPTIONS

A. Accounting Principles

1. The financial statements of Indian Railways (IR) have been adjusted in accordance with
generally accepted accounting principles (GAAP) 1 as explained below.

1. Depreciation on Fixed Assets

2. IR presents the acquisition value of its fixed assets without reducing their value through
depreciation of assets. Instead, it appropriates a certain amount of its profits to the depreciation
reserve fund (DRF). This does not conform with GAAP, which calculate depreciation based on
asset life. Considering the nature of the fixed assets in railway industry, with economic life
spans of 20–35 years, railways in other countries generally provide depreciation amounting to
2–4% of fixed assets every year. IR’s depreciation was calculated as 3% of the beginning
balance of its fixed assets. For presentation purposes, the balance of DRF either in equity or in
reserve is directly deducted from the acquisition value of the fixed assets.

2. Reserved Funds

3. Reserved funds, which are maintained by IR in its reserve and equity sections
respectively, were combined and presented as retained earnings.

3. Interest on Funds Deposited within Government

4. The interest accrued from the deposit of funds with central government were reflected as
income in the income statement.

B. Assumptions for Projection of Financial Performance

1. Assumptions for Operating Revenue

5. Operating revenue is derived from passenger, freight, and parcel and other revenue.
The amount of revenue depends on two variables: the volume measure and the unit price. The
assumptions used for each revenue source are explained below:

(i) Passenger revenue: (a) volume measure in passenger-kilometers (km): 6%

increase and (b) unit price: 1% real increase;
(ii) Freight revenue: (a) volume measure: in tonne-km: 3% increase and (b) unit
price: 0.8% real decrease for 5 years, after that constant; and
(iii) Parcel and other revenue: increase by 10% per annum.

6. During the last 4 years, passenger traffic on average grew by 6.3% per annum. A
continuing increase in passenger revenues is expected through the implementation of tariff
restructuring and reform. In the longer term, it is expected that passenger traffic on average will
grow at 6% per annum for the next 5 years, and by 5% thereafter.

7. For the past 5 years, the unit price for passenger traffic fell by 1.2% per annum in real
terms, which implies a cross subsidy between freight and passenger traffic. The tariff
restructuring being pursued by the reform initiatives will enable the unit price for passenger

1
These principles refer to the preparation of fair and comparable statements of private sector companies.
 Appendix 15 51

traffic to rise by 1% per year for the next 5 years until the cross subsidy is eliminated, and to
remain constant thereafter.

8. For freight traffic, the growth rate in terms of tonne-km was 2.4% per annum for the past
4 years. Considering the strategic objectives of the reform initiatives, boosting freight traffic and
reducing the cross subsidy from freight traffic to passenger traffic, the freight traffic growth is
expected to increase at as strong a pace as it has been doing. It is assumed that the freight
traffic will increase by 3% per annum for the next 5 years, and by 2% thereafter. For the unit
price, which is higher than international levels, it is assumed that the unit price for tonne-km will
decrease by 0.8% per annum in real terms for the next 5 years, and after that to remain
constant.

9. For parcel and other revenue, the revenue increase on average was 15.5% per annum
for the past 5 years. Given IR’s continuing efforts to improve its parcel business, it is assumed
that revenue in this category will increase on average at 10% per annum for the project period.

2. Assumptions for Expenses

(i) Labor costs: (a) number of staff: decrease by 2% per annum, and (b) average
wage: no real increase until the next pay commission is held;
(ii) Operating traffic: increase by the same rate as fixed assets;
(iii) Reserve for pension fund: increase by 20% in the first year, by 10% in the
second year, and by the rate of average wage growth thereafter; and
(iv) Depreciation: 3% of beginning balance of fixed assets.

10. It is assumed no real wage increase occurs until the next pay commission, which is
expected after FY2007. For the number of staff, it is assumed that IR will continue to reduce
staff by 2% per annum in line with its commitment.

11. For the last 2 years, 2% of total staff strength retired each year, which caused a sharp
increase in pension payments. Assuming continuing decrease in staff strength of 2% every
year, the high increase of pension payments is expected to continue for 1–2 years. However,
the pattern of yearly increase of pension payments will be normalized as long as the absolute
number of retired staff will be reduced. For the next 6 years from FY2001, it is assumed that
pension payments will increase by 20% in the first year, by 10% in the second year, and by the
rate of average wage growth thereafter.

12. In line with the general practice adopted by other international railways, the depreciation
rate has been reduced to 3%.

3. Assumptions for Other Balance Sheet Items

13. The size of current assets (cash, accounts receivable, and inventory) and current
liabilities (accounts payable) shows a close correlation with operating revenue. This correlation
is assumed to continue for projection purposes.

14. The level of contribution from the Government has been provided by IR.

15. The inflation rate is 3.5% for 5 years, and 5% thereafter.

 52
Appendix 15
Income Statement: Indian Railways
Year Ending March 31 (Rs Million)
Actual Forecast
1998/99 1999/2000 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08
Operating Revenue
Passenger 85,500 95,810 105,150 111,960 128,726 146,713 158,052 175,133 192,139 213,850
Freight 197,550 218,750 228,980 248,250 257,744 272,569 288,248 304,829 324,962 351,447
Parcel and Other 13,140 14,830 14,674 18,170 19,987 21,986 24,184 26,603 29,263 32,189
Total 296,190 329,390 348,804 378,380 406,456 441,268 470,485 506,564 546,364 597,486

Operating Expenses
Labor 124,556 124,867 140,112 141,710 144,572 146,895 149,260 151,669 154,121 158,888
Nonlabor 108,024 132,243 135,558 145,320 153,489 169,681 187,218 209,957 235,206 266,163
Pension 34,250 35,290 48,320 55,900 67,080 73,788 76,371 79,044 81,810 85,901
Depreciation 11,550 16,700 23,010 20,000 19,000 20,000 21,000 23,000 25,000 27,000
Total 278,380 309,100 347,000 362,930 384,141 410,364 433,849 463,670 496,137 537,952

Operating Income 17,810 20,290 1,804 15,450 22,315 30,904 36,636 42,894 50,227 59,534

Non-Operating Income 7,701 8,818 7,948 8,257 10,026 10,610 11,332 12,128 13,150 9,688

Net Income 25,511 29,108 9,753 23,707 32,341 41,514 47,968 55,022 63,377 69,222

Dividend Paid to Government 17,420 18,900 2,740 13,370 23,000 24,000 25,000 26,000 27,000 28,000

Net Income (Loss) for Appropriation 8,091 10,208 7,013 10,337 9,341 17,514 22,968 29,022 36,377 41,222

Operating Ratio (%) 90 89 93 91 90 88 88 87 86 86

Return on Capital Employed (%) 9 6 2 5 6 7 8 8 9 9
Return on Fixed Assets (%) 7 7 2 5 6 8 8 9 9 9
Debt Ratio (%) 14 20 22 14 14 14 14 14 13 13
 Balance Sheet: Indian Railway
Year Ending March 31 (Rs Million)
Actual Forecast
1998/99 1999/2000 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08
Assets
Current Assets
Cash in Hand 5,870 4,590 5,230 8,470 3,730 8,825 9,410 10,131 10,927 11,950
Accounts Receivable 18,670 30,630 24,550 23,860 25,490 27,579 29,405 31,660 34,148 37,343
Inventories 5,650 7,055 7,764 8,408 9,032 9,806 10,455 11,257 12,141 13,277
Total Current Assets 30,190 42,275 37,544 40,738 38,252 46,211 49,270 53,049 57,216 62,570

Fixed Assets
Fixed Assets in Operation 516,710 558,290 603,690 625,660 665,260 707,863 761,920 821,532 898,214 981,299
Less Accumulated Depreciation 126,340 131,250 142,750 150,816 159,470 170,753 182,239 195,217 209,351 224,376
Net Fixed Assets in Operation 390,370 427,040 460,940 474,844 505,790 537,110 579,681 626,315 688,862 756,923
Capital work in Progress 2,440 3,234 3,542 3,997 4,443 4,993 5,602 6,292 7,069 7,872
392,810 430,274 464,483 478,841 510,233 542,103 585,283 632,607 695,931 764,794
Other Non-Current Assets
Funds Deposited with Government 92,480 97,277 115,163 97,569 104,338 111,558 118,908 127,392 136,560 146,376
Others 11,770 14,958 18,418 14,366 15,154 16,070 16,905 17,869 18,909 20,154
104,250 112,234 133,580 111,936 119,492 127,628 135,813 145,261 155,470 166,529
Total Assets 527,250 584,783 635,606 631,515 667,977 715,941 770,366 830,917 908,617 993,894

Liabilities
Current Liabilities
Accounts Payable 23,749 16,883 23,513 34,398 40,115 42,771 46,051 49,669 54,317 65,466

Non-Current Liabilities
Deposits-Provident Fund, etc. 61,760 95,791 111,575 73,070 76,850 80,846 85,050 89,473 94,125 99,020
Reserved Pension Fund 761 761 320 1,223 1,731 2,432 3,098 4,040 4,917 6,165
Total Non-Current Liabilities 62,521 96,553 111,895 74,293 78,581 83,279 88,148 93,512 99,042 105,185

Liabilities Total 86,271 113,435 135,408 108,691 118,696 126,050 134,199 143,182 153,359 170,651

Appendix 15
Equity
Government Contribution 257,800 296,553 326,619 341,619 356,619 371,619 386,619 401,619 416,619 431,619
Retained Earnings 183,179 174,795 173,579 181,205 192,662 218,273 249,548 286,116 338,640 391,624
Equity Total 440,979 471,348 500,198 522,824 549,281 589,891 636,167 687,735 755,258 823,243
Total Liabilities and Equity 527,250 584,783 635,606 631,515 667,977 715,941 770,366 830,917 908,617 993,894

53
 54
Appendix 15
Cash-Flow Statement: Indian Railway
Year Ending March 31 (Rs Million)
Actual Forecast
1998/99 1999/2000 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08
Sources of Funds:
Funds from Operation:
Net Income 8,091 10,208 7,013 10,337 9,341 17,514 22,968 29,022 36,377 41,222
Add Dividend 17,420 18,900 2,740 13,370 23,000 24,000 25,000 26,000 27,000 28,000
Net Income before Dividend 25,511 29,108 9,753 23,707 32,341 41,514 47,968 55,022 63,377 69,222
Add: Depreciation 11,550 16,700 23,010 20,000 19,000 20,000 21,000 23,000 25,000 27,000
Total Funds from Operation 37,061 45,808 32,763 43,707 51,341 61,514 68,968 78,022 88,377 96,222
Government Contribution 4,600 38,753 30,066 15,000 15,000 15,000 15,000 15,000 15,000 15,000
Increase in Prov. Fund, etc (9,533) 34,031 15,784 (38,505) 3,780 3,996 4,204 4,423 4,653 4,895
Net Increase in Pension Fund (8,535) - (442) 903 508 701 665 942 877 1,248
Other Sources 20,446 (17,341) (6,949) (6,764) 216 8,360 8,350 7,810 16,371 11,913
Total Sources 53,930 101,252 71,222 14,341 70,845 89,572 97,187 106,197 125,278 129,278

Uses of Funds:
Increase in Fixed Assets
Purchase of Fixed Assets 45,965 42,374 45,709 22,425 40,046 43,153 54,666 60,302 77,458 83,888
Replacement of Fixed Assets 8,969 13,041 12,790 7,881 8,446 8,981 9,556 10,286 11,091 12,126
Increase in Fixed Assets 54,935 55,415 58,499 30,305 48,492 52,134 64,222 70,588 88,549 96,014
Dividend to Government 17,420 18,900 2,740 13,370 23,000 24,000 25,000 26,000 27,000 28,000
Funds Deposited to Government 7,480 4,797 17,886 (17,593) 6,768 7,221 7,350 8,484 9,168 9,815

Other Uses 4,816 23,420 (8,543) (14,981) (2,675) 1,122 31 402 (235) (5,574)
Total Uses 84,651 102,532 70,582 11,101 75,585 84,476 96,603 105,475 124,482 128,256

Increase (Decrease) in Cash (30,721) (1,280) 640 3,240 (4,740) 5,095 584 722 796 1,022

Cash at the Beginning 36,591 5,870 4,590 5,230 8,470 3,730 8,825 9,410 10,131 10,927
Cash and Bank Deposit at the End 5,870 4,590 5,230 8,470 3,730 8,825 9,410 10,131 10,927 11,950
Increase (Decrease) in Cash (30,721) (1,280) 640 3,240 (4,740) 5,095 584 722 796 1,022
 Appendix 16 55

SUMMARY ECONOMIC AND FINANCIAL ANALYSIS

A. Introduction

1. The economic and financial evaluation examined the four sample subprojects of the
investment component of the Project: Keonjhar-Tomka new broad gauge line, (ii) Bhatapara-
Urkura third line, (iii) Gooty-Pullampet track doubling, and (iv) Mahanadi River second bridge.
The without-project case represents the current situation. As capacity on all these lines is
saturated, further traffic growth will be impossible and traffic is assumed to be constant at 2002
levels. In the with-project case, the increase in rail capacity will give an impetus to increased
production of mineral resources and cement, which will form the generated traffic for the region.
In the case of the Keonjhar-Tomka new line, the current traffic, which follows a circuitous route,
will be diverted to the new line with significant savings in travel distance and travel time. The
economic internal rate of return (EIRR) compared the annual streams of economic capital and
operating costs and benefits. The financial internal rate of return (FIRR) compared the annual
streams of financial capital and operating costs and revenues. All costs, benefits, and revenues
were expressed in 2002 constant prices. The analysis period is for the construction period
followed by 20 years of operation.

B. Traffic Forecasts

2. Indian Railways statistics show that along the corridors to be served by the sample
subprojects the goods traffic increased at an annual average growth rate ranging from 6.2% to
31.6% over the last 3 years. The major commodities carried by rail on these corridors are coal,
cement, iron ore, and other minerals. This is because these corridors serve the mineral-rich
areas of Jharkhand, Orrisa, Madhya Pradesh, and Chhattisgarh states.

3. All the existing lines in the subproject corridors have already reached their capacity and
are experiencing severe detention times ranging from one hour at the Mahanadi Bridge corridor,
to 2.5 hours at the Bhatapara-Urkura corridor, to 5 hours each for the Keonjhar-Tomka and
Gooty-Pullampet corridors. It is assumed that in light of such severe congestion, there will not
be additional traffic on these lines without the Project. Indian Railways carried out extensive
discussions with existing customers and potential rail freight to estimate the increase in rail
traffic volume should rail capacity be increased. The discussions provided confirmation that, in
the with-project case, increasing rail capacity will encourage greater production of mineral
resources and cement. Rail traffic will increase at an annual average rate ranging from 3.8% to
31.2% until the year 2011/12.

C. Costs

4. The financial costs of the subprojects consist of all incremental capital expenditures but
exclude price contingency and interest and other charges during construction. The operation
and maintenance (O&M) costs of the project facilities were estimated on the basis of O&M cost
parameters developed by Indian Railways from its accumulated cost data. The Project’s
economic costs include the resource costs for construction, rolling stock acquisition costs, O&M
costs, and social costs arising from land acquisition and resettlement compensation. Economic
costs exclude price contingencies, taxes, duties, and interest during construction. A standard
conversion factor of 0.85 was applied to financial costs of nontraded inputs to calculate
economic prices. Subproject facilities are expected to have an average economic life of 30
years.
56 Appendix 16

D. Benefits and Revenues

5. The main economic benefits generated by the Project were quantified in terms of
(i) railway operating cost savings arising from shorter distances and faster travel times,
(ii) savings in rolling stock arising from better utilization of rolling stock with the elimination of rail
detention times, (iii) time savings resulting in reduction in working capital expenses for the
goods being transported, and (iv) net additional economic benefits arising from the increase in
production of mineral resources that would only be implemented because of the increase in rail
capacity delivered by this Project. Benefits accruing to passengers were not taken into account
in the economic evaluation, thus making this analysis conservative.

6. In the financial evaluation, the incremental revenue was based on freight revenue with
and without the Project. Freight tariff rates were assumed to decrease by 0.8% in real terms
annually for the first 5 years, and to remain constant thereafter.

E. Economic and Financial Internal Rates of Return

7. EIRR and FIRRs were calculated for the individual sample subprojects and for the
sample subprojects as a whole. In addition to the base cases, five sensitivity test cases were
examined: (i) construction costs increase by 10%; (ii) benefits or gross earnings are reduced by
10%; (iii) O&M costs increase by 10%; (iv) the construction period lengthens by 1 year; and
(v) the construction period lengthens by 1 year and O&M costs increase by 10%.

8. Table A16.1 below summarizes the EIRRs for the base case and sensitivity cases. The
EIRR for the sample subprojects as a whole is 16.8%, and the EIRRs for each of the individual
sample subprojects are well above the 12% threshold for economic viability. The economic
viability is quite robust as the EIRR values are generally well above 12% in the sensitivity
analysis cases for the sample subprojects as a whole and for the individual subprojects.

Table A16.1: EIRR Values for Base Case and Sensitivity Analysis Cases, %

Keonjhar- Bhatapara- Gooty- Mahanadi

Scenario Tomka Urkura Pullampet Bridge Overall

Base Cas e 16.4 17.8 17.1 15.3 16.8

Sensitivity Tests
(i) Construction Costs 10% Higher 15.6 17.4 15.8 14.6 16.1
(ii) Benefits 10% Lower 14.4 13.9 14.5 13.8 14.3
(iii) O&M Costs 10% Higher 15.9 15.9 16.3 15.1 15.9
(iv) Construction Period 1 Year Longer 13.9 13.0 14.3 13.6 13.7
(v) (iii) and (iv) Combined 13.4 11.3 13.6 13.3 12.8
O&M = operation and maintenance.

9. To assess financial viability the FIRR was compared with the weighted average cost of
capital (WACC). In estimating the WACC for each subproject it was assumed that (i) the ADB’s
loan proceeds will be onlent to MOR at 7% interest; (ii) the cost of capital from Government
budget will be 7%; 1 and (iii) rolling stock financing on a lease arrangement through Indian
Railways Financing Corporation will be equivalent to 13% interest per annum. To adjust the

1
The opportunity cost of government funds, measured by the coupon rate of the benchmark government bond, is
not higher than 7%.
 Appendix 16 57

WACC to real terms inflation of 3.5% was deducted. This is average the wage price index rate
for the last five years and best represents the inflation rate relevant to this project.

10. Table A16.2 below summarizes the FIRR all the cases tested. The overall FIRR for the
four subprojects is 15.4%. As the FIRRs for the sample subprojects as a whole and each of the
subprojects are above the WACC, the project is financially viable.

Table A16.2: FIRR Values for Base Case and Sensitivity Analysis Cases, %

Keonjhar- Bhatapara- Gooty- Mahanadi

Scenario Tomka Urkura Pullampet Bridge Overall

Weighted Average Cost of Capital 6.8 7.6 5.4 5.8 6.5

Base Case 9.8 22.0 11.2 22.3 15.4
Sensitivity Tests
(i) Construction Costs 10% Higher 7.4 20.0 9.6 20.7 14.1
(ii) Benefits 10% Lower 5.0 17.7 8.4 18.8 12.0
(iii) O&M Costs 10% Higher 6.3 20.0 10.0 20.5 13.7
(iv) Construction Period 1 Year Longer 7.9 19.8 10.2 20.8 14.8
(v) (iii) and (iv) Combined 6.1 21.7 9.3 19.2 13.2

11. Further details of the assumptions and calculations used for the economic and financial
analysis are in Supplementary Appendix D.
58 Appendix 17

FRAMEWORK FOR LAND ACQUISITION AND RESETTLEMENT FOR ADDITIONAL

SUBPROJECTS

A. Introduction

1. The India Railway Sector Improvement Project (RSIP) involves construction and
doubling of four subprojects in the first phase of project preparation and implementation. These
are: (i) Tomka-Keonjhar new railway line (96 km); (ii) double tracking of Pullampet-Gooty (154
km); (iii) adding a third track on Bhatapara-Urkura (60 km); and (iv) construction of the
Mahanadi River second bridge (2.1 km). The social analysis and resettlement plans for the
subprojects have been prepared following the Land Acquisition Act (1894) and the Asian
Development Bank (ADB) policy on involuntary resettlement (1995).

2. This framework has been prepared for additional subprojects as required under ADB
policy. The framework outlines the policy and procedures for preparation of subsequent
subprojects under the sector loan. The special purpose vehicle (SPV) will be responsible to
prepare social analysis and resettlement plans for additional subprojects as outlined in this
framework and submit them to ADB for review and approval.

B. Resettlement Policy and Framework

3. The current legislation governing land acquisition for public purposes is the Land
Acquisition Act of 1894. In accordance with the Act, the legal process for land acquisition is
initiated by the project-sponsors/SPV to the District Collector (DC) of the respective district.
According to the “circle rate” used by the DC, the assessed value of land is considered the
replacement value for properties. However, the Act of 1894 or state policies (where available)
do not address social and economic impacts of land acquisition and resettlement.

4. ADB policy requires (i) avoidance or minimization of impacts where possible;

(ii) consultation with affected people in project planning and implementation, including
disclosure of resettlement plan (RP) and project-related information; (iii) payment of
compensation for acquired assets at the market/replacement value; (iv) resettlement assistance
to affected people, including non-titled persons (e.g., informal dwellers/squatters, and
encroachers; (v) special attention to vulnerable people and/groups; and (vi) an income
restoration and rehabilitation program. Since compensation and rehabilitation based on the Act
of 1894 and state policies do not meet these requirements, ADB’s policy on involuntary
resettlement will be applied for additional subprojects.

5. The framework reflects the borrower’s land acquisition laws and regulations and ADB’s
policy on involuntary resettlement and other social safeguard guidelines. It stipulates eligibility
and provisions for all types of losses (land, crops/trees, structures, business/employment, and
workdays/wages). Since land for land may not be a feasible option, the affected persons will be
compensated at full replacement cost. Affected households to be compensated by the DC,
following the Act of 1894, for lost assets will receive additional cash grants and other
resettlement assistance such as a shifting allowance, and compensation for loss of
workdays/income due to dislocation. Female-headed households and other vulnerable
households will be eligible for further cash assistance for relocation and house reconstruction.
Table A17 presents a general entitlement matrix that would apply to additional subprojects,
based on specific project impacts.
 Appendix 17 59

Table A17: Entitlement Matrix

Definition Expected
Type of Loss Application of APs Entitlement Results
1. Loss of Land on the (i) Legal • Cash compensation based on “circle rate” under GOI Replacement
agricultural/ or project ROW owners; and Land Acquisition Law and state policies to be paid by of agricultural
any other type (ii) APs with DCa land or the
of land by traditional • Refund of registration cost, stamps etc. incurred for value to the
owners land rights replacement land to be paid by the project; (i) APs
replacement land must be bought within a year from
the date of DC payments; and (ii) the registration cost
to be paid will be on the amount received from DC.
2. Loss of Land on the (i) Legal • Cash compensation based on the circle rate under Replacement
homestead ROW owners of GOI Land Acquisition Law and state policies to be of homestead/
and land; (ii) APs paid by DC commercial
commercial with • Refund of registration cost, stamps etc. incurred for land
land traditional replacement land to be paid by the project; (i)
land rights replacement land must be bought within a year from
the date of DC payments; and (ii) the registration cost
to be paid will be on the amount received from DC.
3. Loss of Structure on (i) Owner(s) • Cash compensation under Government of India Land Reconstruction
residential/ the ROW of structures Acquisition/state laws to be paid by DC (a of structure
commercial identified by depreciation value is deducted based on the age of and relocation
structures by DC; (ii) the structure) to new sites
owners and owners of • The depreciated value thus deducted will be paid by
informal structure the project as additional grant to build new structure
settlers/ identified by • A lump sum transfer grant for shifting household
squatters census and assets and other belongs to relocated sites b
SES
4. Loss of Standing Owners and • Compensation to be paid by DC at the rate estimated Compensation
trees, crops, crops, trees beneficiaries by (i) the Forest Department for timber trees; (ii) State for standing
perennials on ROW of land Agriculture Extension Department for crops; and (iii) crops and
land Horticulture Department for perennial trees c trees
5. Loss of Households Head of • Cash assistance for 90 days at the local agricultural Subsistence
income and affected by households wage rate and income in
work days due ROW identified by • Additional cash assistance to vulnerable groups, post-displaced
to the DC list including female-headed households d period and
displacement and SES • Temporary employment in the project construction poverty
work to APs with particular attention to APs below reduction
poverty line by the project contractor.
6. Loss of Structures Affected • Reconstruction of community structures and Restoration of
community and other communities replacement of common property resources as community
structure and resources and groups appropriate structures and
common (e.g., land, common
property water, property
resources access to resources
social
services)
under ROW
APs = affected persons, DC = District Commissioner, ROW = right of way, SES = socioeconomic survey .
a
Loss of agricultural land by titled owners: in case of severed holding, an additional grant of 15% of the compensation will be
added.
b
Loss of residential/commercial structure: shifting allowance will be paid at Rs1,500 per households people affected will be
allowed to salvage materials from their demolished structures; the affected squatters will receive transitional allowance of
Rs2,000 per family lump sum.
c
Loss of trees, crops and perennials: compensation will be paid at market value. Sharecroppers will be paid at market value.
d
Assistance to vulnerable: grants will be paid to those below the poverty line, and the vulnerable, including women-headed
households, at the rate of Rs5,000 per eligible households. One family members from the affected household will also receive
skill training linked to employment opportunities at Rs2,000 per household by way of rehabilitation.

C. Procedures for Resettlement Plan Preparation

6. The additional subprojects RP will be prepared as follows: (i) the SPV to carry out social
impact assessment surveys for identified subprojects, based on preliminary technical designs;
(ii) if impacts are found to be significant, the SPV will prepare full RPs for each subprojects; and
60 Appendix 17

(iii) if subproject impacts are less than significant, short RPs will be sufficient for project
preparation. SPV consultants for preparatory studies will include expert resettlement specialist
familiar with ADB policy and procedures for preparation of additional subprojects RPs. The RPs
must comply with ADB’s policy on involuntary resettlement and other social safeguard
guidelines. RPs for the sample subprojects will be used as models for preparation and
implementation of additional subprojects.

D. Institutional Responsibilities

7. For subproject RPs, the SPV will have overall coordination, planning, implementation
and financing responsibilities. The SPV fully recognizes the complexity of the resettlement
element in the Project. Therefore, experienced nongovernment organizations (NGOs) will be
hired for RP to assist implementation with clearly defined tasks, including community-based
social development programs as appropriate. A senior SPV official at the rank of executive
engineer will be appointed as chief resettlement officer to supervise the implementation work.
The appointed NGO will open field offices and will involve affected persons, including women, in
the implementation process.

8. The SPV will ensure that the NGO responsible for RP preparation for subprojects is
aware of the framework and procedures for resettlement planning so that appropriate
entitlements and mitigation measures are established in the RP. The SPV will further ensure
that resettlement budgets are delivered on time to the DC office and to the implementing NGOs
for timely RP implementation.

E. Disclosure, Consultation, and Grievances

9. Each RP will be prepared and implemented in close consultation with the stakeholders
and will involve focus group discussions and meetings, particularly with the project-affected
people. This RP framework will be made available in local language(s) during focus group
discussions and meetings at the village/community level. Copies of draft RPs will be available at
the local level to stakeholders for local inputs. Complaints and grievance procedures will be
outlined in each RP and grievance redress committees (GRCs) will be established for each
subproject with representation from the SPV, APs, women/ vulnerable groups, local
government, and NGOs. The chief resettlement officer will chair the GRC. Other than disputes
relating to ownership rights under the court of law, the GRC will review grievances involving all
resettlement benefits, relocation, and other assistance. Grievances will be redressed within 2-4
weeks from the date of lodging the complaint.

F. Monitoring and Evaluation

10. The SPV will establish a quarterly monitoring system involving the SPV and
implementing NGO staff, and prepare progress reports on all aspects of land
acquisition/resettlement and social development activities. The monitoring consultants, to be
hired by the SPV in concurrence with ADB, will monitor the implementation of the RP and will
provide ADB with quarterly reports on the status of RP implementation.
 Appendix 18 61

SUMMARY INITIAL ENVIRONMENTAL EXAMINATION

A. Introduction

1. The proposed Project is categorized as a “B” project in accordance with the Asian
Development Bank (ADB) Environmental Assessment Requirements.1 An initial environmental
examination (IEE) was prepared. This summary IEE is based on the information in the IEE
reports submitted by the Ministry of Railways (MOR).

B. Description of the Project

2. The four sample subprojects of the proposed Project will involve investment to increase
the capacity of existing railways by adding second and third tracks; establish a second bridge
parallel to an existing railway bridge; and establish a new line. The location of the sample
subprojects and their scope are as follows:

No. Sample Subproject Location Scope

1 Establishment second track connecting Cuddapah and • Establish a new embankment
Pullampet-Gooty (150 km), which consists of Ananthapur districts and 24 major bridges parallel to
three sections: of Andhra Pradesh existing railway track.
Pullampet-Bhakrapat (43.4 km) state • Track linking
Cuddapah-Muddanuru (55.2 km) • Laying ties (sleepers), ballast,
Kondapurram-Rayalacheruvu (52.4 km) a and rails

2 Establish third track connecting Bhatapara- Raipur district of • Establish a new embankment
Ukura (60 km) Chattisgarh state and five major bridges parallel
to existing railway track
• Link the track
• Laying ties, ballast, and rails
• Electric work

3 Establish second bridge at Cuttack (2.1 km) on Orissa state • Establish pier (32) with well
Mahanadi River foundation and parallel to the
existing bridge
• Track linking
• Laying ties

4 Establish a new railway track connecting Jhajpur and • Establish a new embankment
Daitari-Keonjhar (96 km) 3 Keonjhar district of (at present about 70% of the
Orissa state embankment is completed)
• Track linking
• Laying ties, ballast, and rails

a
The section between Bhakrapat-Chuddapah and Muddanuru-Kondapurram is completed.

C. Description of the Environment

3. The environmental condition of the project areas of influence is briefly summarized as

follows:

(i) Pullampet-Gooty. This track is part of Madras-Raichur (north-west line) of South

Central Railway, connecting western India and Maharashtra to the southern part of
India including the states of Karnataka, Tamil Nadu, and Kerala. The area

1
The investment component is not subject of the environmental impact assessment regulation of the Government.
2
3
This new track is part of Baspani-Tomka railway track (335 km). The summary initial environmental examination of
Baspani-Tomka was circulated to the ADB’s Board of Directors on 20 August 1998.
62 Appendix 18

traversed by this railway is topographically flat. The railway alignment passes

mainly through agricultural land. The soil conditions are clay, loam, and sand with
fine distinctions. The alignment passes three rivers (Cheyyeru, Papagni, and
Chitravati). The groundwater is very limited and water yielding is very low. The
recorded maximum rainfall in the last 2 years was 482 millimeters (mm). The
project area is not located nearby or within conservation or sensitive areas. About
1,046 trees are expected to be cut for establishing the second track.

(ii) Bhatapara-Ukura. This track is an important part of Howrah-Mumbai route on the

south-eastern railway. The area is topographically flat. The ground water
availability is very poor. However, the maximum rainfall recorded is 1,162 mm and
the minimum is 743 mm. The track alignment mostly passes through agricultural
land and no settlement. The Kharun River is the only river passed by the
alignment. The project area is not located nearby or within conservation or
sensitive areas. About 1,196 trees are expected to be cut for establishing the third
track.

(iii) Cuttack Bridge on Mahanadi River. This is part of a larger project to add a
second track from Talcher to Paradeep port. The recorded annual rainfall of the
area is 2,111 mm. From November to April there is no rain and the river is dry.
From May to October, the river carries a large volume of water and the water level
rises. No economic activities rely on the river. It is not part of the inland water
transport system. The common groundwater structures are dug wells and hand-
pumps. There are no endangered aquatic species in the area. The project area is
not located nearby or within conservation or sensitive areas.

(iv) Daitari (Tomka)-Keonjhar. This track is to connect the mineral-producing belt of

Orissa with Paradeep port. It is the responsibility of the south-eastern railway. The
alignment traverses barren land, forest area, and agricultural land occupied by
large villages and numerous hamlets. The terrain mostly consists of rocky and
rugged areas, and steep hill slopes. The alignment crosses the Baitarani River, the
largest river in the area. It also crosses the Machkdana, Kalinjar, Musal, and Kusia
rivers. Almost every year in the rainy season the rivers are in flood. Forest areas
account for about 30% of the state of Orissa, and 50% of Keonjhar district. Forests
in Keonjhar district are poor in quality because of the impact of mineral prospecting
and exploration. To minimize the impact on forests, the proposed alignment is
located in the foothills of the forest area. 4 The project area is not located nearby or
within conservation or sensitive areas.

D. Screening of Potential Environmental Impacts and Mitigation Measures

4. Screening of potential impacts identified that there will be no significant environmental

impact. Three of the four sample subprojects are to add track to existing lines, and only one
subproject will introduce a new line. The new line is not located in an environmentally sensitive
area.

4
The Daitari (Tomka)-Keonjhar subproject as part of the Banspani-Tomka project, originally having a length of
155 km. On the advice of the Ministry of Forest and Environment, the line was realigned between kms 123 to 155
to avoid deep forest areas.
 Appendix 18 63

5. The earthworks, particularly the establishment of the embankment, will cause

environmental impacts associated with construction. These will include (i) disruption of the water
system due to cut and filling and other earth works; (ii) increased air pollution due to higher dust
levels; (iii) noise and vibration; (iv) potential erosion and landslides due to elevation of some part
of the embankment; and (v) impacts due to disposal of construction waste. These impacts will
only occur during the construction period. In the case of the new line, in the absence of
mitigation measures the construction work would disrupt the water system and cause serious
secondary impacts (e.g., malaria due to stagnant water becoming a breeding ground for
mosquitoes, and reduced agricultural production due to water logging).

6. The proposed mitigation measures will minimize the identified adverse impacts. These
will include:

(i) mitigation measures to minimize disruption to the water system for the second and
third track and bridge will involve: (a) providing a proper temporary diversion and
pumping out the water; and (b) no disposal of waste from workers and construction
into the water system;

(ii) mitigation measures to minimize disruption of the water system for the new railway
track will be done by: (a) providing proper diversion of canals, nullahs, and small
rivers to the nearest water course before starting any embankment works; and (b)
no disposal of waste from workers and construction into the water system;

(iii) mitigation measures to reduce dust during construction will be done by maintaining
the moisture content to at least 15%;

(iv) land stabilization will be established for any embankment with slope more than 30
degrees to minimize landslide problems;

(v) proper sanitation schemes will be adopted to deal with domestic waste generated
by temporary worker camps to minimize impacts due to disposal;

(vi) to minimize disposal of materials from construction works, a balanced approach to

cutting and filling will be adopted; and

(vii) to minimize disruption of traffic due to mobilization of construction materials and

machinery, proper road signs will be developed in consultation with the local traffic
authority. If temporary access roads are needed, the contractor will be responsible
for rehabilitating the area after finishing construction.

7. The other important impact, which is not directly related to the area of influence of the
subprojects, is the impact due to mining of sand and gravel. In this context, the contractor will be
required to ensure that the supply of construction materials is taken from a legal area and that
proper rehabilitation of the mining area is undertaken.

8. The environmental impacts associated with the operation of the sample subprojects and
required mitigation measures are (i) increased noise due to an increased number of trains will
require establishing a physical barrier for the track when it passes near schools and hospitals;
and (ii) increased use of train stations will generate more waste and expend more energy and
water resources, and will require proper sanitation to be provided at stations.
64 Appendix 18

E. Institutional Requirements and Environmental Monitoring Program

9. An environmental management and monitoring plan was prepared as part of the IEE
studies for each subproject. It was recommended that contractual documentation of the bidding
documents should clearly define environmental responsibilities and penalties for non-
compliance of the contractor. The implementation of mitigation measures during the
construction stage will be the responsibility of the contractor. MOR, supported by the project
director of its implementing agency for the investment component, will be responsible for
monitoring implementation of mitigation measures during the construction stage.5 The Project
will also hire a consultant to monitor environmental performance during project implementation.
Tree planting will be carried out by the department of forest of the respective state government,
which may request MOR to assist it in this task. MOR and the implementing agency are
responsible for implementing the overall environmental monitoring and management plan to
mitigate the environmental impacts of this Project. Training for field engineers and trainers will
be provided to strengthen the capacity of the engineers in dealing with environmental concerns.
A set of guidelines will also be developed to assist responsible staff in handling environmental
problems associated with railway operations (e.g., to minimize impacts due to overhaul of
locomotives, environmentally friendly operation of train stations, and regarding fuel storage and
fuel filling stations). These guidelines will be distributed and implemented by the field engineers
of Indian Railways and the implementing agency.

F. Finding and Recommendations

10. The IEE shows that the sample subprojects will contribute to lower traffic congestion and
reduced pollution associated with vehicle emissions. The IEE confirms that the areas affected
by the sample subprojects are not environmentally sensitive, and recommends measures to
mitigate the potential negative environmental impacts. On this basis, a full environmental impact
assessment study is not required. Assurance was obtained from MOR that all mitigation
measures will be implemented and no civil works carried out before receiving the clearance for
tree cutting from the Department of Forest. MOR agreed to undertaken periodic monitoring of
environmental impacts and mitigation measures.

G. Conclusion

11. The overall finding of the IEE is that the sample subprojects will not cause significant
environmental problems, and that the potential adverse impacts are manageable. These
impacts will not affect any environmentally sensitive areas, and therefore a full environmental
impact assessment study is not required. The environmental management and monitoring plans
are sufficiently detailed and provides enforceable actions to be undertaken by MOR for
mitigating the impacts, and maintaining environmental quality during the operational stage.

5
MOR will establish a wholly owned special-purpose vehicle under the Companies Act, which will act as the
implementing agency for the investment component of the Project.