World Bank to provide $ 350 m loan for Karnataka Highway Improvement Project

New Delhi, May 30, 2011

The Government of India and the World Bank today signed a $ 350 million loan agreement to accelerate the development of Karnataka’s core road network through the Second Karnataka State Highway Improvement Project (KSHIP II).

The agreements in this regard were signed by Mr. Venu Rajamony, Joint Secretary, Department of Economic Affairs, Ministry of Finance, on behalf of the Government of India; Dr Subhash Chandra Khuntia, Principal Secretary, Public Works, Ports and Inland Water Transport Department, on behalf of the Karnataka Government; and Mr. Hubert Nove-Josserand, Operations Adviser for India on behalf of the World Bank.

Karnataka Chief Minister B S Yeddyurappa and Public Works Minister C M Udasi were amongst those present on the occasion.

"The Government of Karnataka has identified about 25,000 km of the most important traffic corridors and designated them as the state’s core road network. Accelerating the development of this network is critical for Karnataka’s economic growth and for ensuring a balanced development throughout the state," Mr Yeddyurappa said.

According to the latest road condition survey, 39 percent of the core road network in Karnataka requires improvement to bring it into good or fair condition. At the same time, vehicular traffic has been rapidly growing at the rate of 10 to 15 percent per year over the last decade, the survey says.

Relatively larger number of road accidents in India occurs in Karnataka and the number of fatalities has increased by 55 per cent since 2000 to reach a rate of 140 per 100,000 vehicles in 2009, compared with rates like nine in the United Kingdom, 15 in the United States and 70 in Brazil and China. The high fatality rate in Karnataka is attributed to a lack of effective road safety management and enforcement system.

"Improving infrastructure, including road transport, is key to sustaining growth and bridging regional disparities. This loan from the World Bank, introduces an important innovation by helping the Government of Karnataka leverage private sector financing through economically viable Public Private Partnerships (PPP) and thereby accelerating the development of state highways," Mr Rajamony said.

A World Bank press release said KSHIP II would help upgrade 1,231 km of roads into two-lane highways designed to facilitate better movement of people and goods; support the Government of Karnataka diversify its financing base by leveraging this loan to attract private sector funds through the PPP mode and through co-financing with domestic banks and financial institutions; and improve road safety design, management and enforcement to reduce road fatalities and major injuries, consistent with the main thrust of the 2007 Sundar Committee report.

In fact, road safety is a particular focus of the project and the multi-donor Global Road Safety Facility is helping the Karnataka Public Works Department (PWD) carry out safety audits on two highway corridors through the International Road Assessment Program (iRAP), to identify the engineering and other measures required to improve safety on KSHIP II roads.

"While Karnataka has made impressive economic progress, the Government of Karnataka recognizes the need for improving infrastructure, particularly road infrastructure, to make growth more inclusive. In fact, a recent survey highlights the positive socio-economic impact of building roads that can help reduce poverty," Mr Nove-Josserand said.

"The acceleration of the road development programme and attention to road safety as envisaged in this project will help the state realize faster social and economic benefits and spur more investments, " he added.

KSHIP II follows the $ 360 million KSHIP I implemented from 2001 to 2007 which helped improve and maintain 2,385 km of State Highways and major district roads. Under this project, the share of state highways under good condition has increased from 5 per cent to 35 per cent and the travel time on key road corridors has decreased by 37 per cent, the release said.

Currently, road construction in Karnataka faces challenging financing framework, which is often cited as one of the main reasons for slow improvement in Karnataka’s roads. State roads are funded out of current state government taxes and revenues, and Central government transfers. A recent study done by the Government of Karnataka recommends (i) attracting private sector investment for high-traffic roads; (ii) developing different PPP structures (iii) introducing market borrowing from domestic financial institutions and capital markets; and (iv) introducing additional road-user charges, and securitizing these revenues for servicing domestic debt and supporting PPP concessions.

The study also recommends channeling some of the toll and other transport charges into a dedicated road fund.

"Accelerating the development of Karnataka’s core road network will, therefore, require a shift in the financing framework within which roads are developed and maintained. It requires a transition from traditional `pay-as-you-go’ financing from the Consolidated Fund to ring-fencing road-user charges that can be used for long-term road development through PPP and borrowing from financial institutions," said Binyam Reja, Project Team Leader, World Bank.

The loan, from the International Bank for Reconstruction and Development (IBRD), has a 5-year grace period, and a maturity of 18 years.

NNN