World Bank Approves $350 Million to Accelerate Highway Development in Karnataka, India

March 24, 2011

WASHINGTON, DC, March 24, 2011: The World Bank today approved $350 million loan to India to accelerate the development of Karnataka’s core road network through the Second Karnataka State Highway Improvement Project (KSHIP II).

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 at a time when road development in Karnataka is lagging behind the state’s economic growth and does not adequately meet either the current or the projected transport demand.

According to the latest road condition survey, 39 percent of the core road network requires improvement to bring it into good or fair condition. At the same time, vehicular traffic in the state has been rapidly growing at the rate of 10 to 15 percent per year in the last decade, the survey says. Karnataka also accounts for 10 percent of the total road accident cases in India. The number of fatalities has increased by 55 percent since 2000 to reach a rate of 140 per 100,000 vehicles in 2009 compared with rates like nine in the UK, 15 in USA 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.

“For the government, improving infrastructure, including road transport, is key to sustaining growth and bridging regional disparities. This loan from the World Bank, we hope, will help the Government of Karnataka leverage private sector financing through economically viable Public Private Partnerships (PPP) in accelerating the development of their state highways,” said Venu Rajamony, Joint Secretary, Department of Economic Affairs.

The Second Karnataka State Highway Improvement Project (KSHIP II) will finance improvements in 1,231 km of roads into two lanes, designed to facilitate better movement for people and businesses; support the Government of Karnataka diversify its financing base by leveraging this loan to attract private sector financing through the PPP mode and 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 thrusts of the 2007 Sundar Committee report. In fact, the Global Road Safety Facility (a multi-donor fund) is helping the Public Works Department (PWD) carry out safety audits on two selected highway corridors through the International Road Assessment Program (iRAP), which will help determine 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,” said Roberto Zagha, World Bank Country Director in India. “The acceleration of the road development program 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.

This Project follows the first $360 million Karnataka State Highway Improvement Project (KSHIP I) implemented from 2001 to 2007 which has improved and maintained 2,385 km of State Highways and Major District Roads. Under this Project, while the share of state highways which are under good condition has increased from 5 percent to 35 percent, the travel time in key road corridors has decreased by 37 percent.

Currently, Karnataka’s road network seems to be functioning under a 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. However, a recent study done by the Government of Karnataka through a grant from the Public Private Infrastructure Advisory Facility-Sub-National Technical Assistance (PPIAF-SNTA) program recommends (i) attracting private sector investment for high-traffic roads; (ii) developing different PPP structures (such as annuity payment concessions) that are more suited for low-traffic state highways; (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 PPIAF-SNTA 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 of 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 and Senior Urban Transport Specialist, 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.

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