ASIAN DEVELOPMENT BANK RRP:BHU 32288

REPORT AND RECOMMENDATION

OF THE

PRESIDENT

TO THE

BOARD OF DIRECTORS

ON A

PROPOSED LOAN

TO THE

KINGDOM OF BHUTAN

FOR THE

ROAD IMPROVEMENT PROJECT

September 2000
 CURRENCY EQUIVALENTS
(as of 15 August 2000)

Currency Unit – Ngultrum (Nu)

Nu1.00 = $0.023
$1.00 = Nu44.20

In this report, an exchange rate of $1.00 = Rs43 is used.

ABBREVIATIONS

ADB – Asian Development Bank

DBST – double bituminous surface treatment
DOR – Department of Roads
EIRR – economic internal rate of return
ESA – equivalent standard axle
GDP – gross domestic product
GNP – gross national product
GVW – gross vehicle weight
HDM – Highway Design and Maintenance Model
IBRO – Indian Border Roads Organization
IEE – initial environmental examination
MOC – Ministry of Communications
PMO – Project Management Office
NPV – net present value
PPMS – Project Performance Monitoring System
SDR – Special Drawing Rights
TA – technical assistance
VOC – vehicle operating cost

NOTES

(i) The fiscal year (FY) of the Government ends on 30 June. FY before a
calendar year denotes the year in which the fiscal year ends. For
example, FY1998 begins on 1 July 1997 and ends on 30 June 1998.

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

 CONTENTS

Page

LOAN AND PROJECT SUMMARY ii

MAP vi

I. THE PROPOSAL 1

II. INTRODUCTION 1

III. BACKGROUND 1

A. The Road Sector 2

B. Government Policies and Plans 5
C. External Assistance to the Sector 5
D. Lessons Learned 6
E. ADB’s Sector Strategy 7
F. Policy Dialogue 7

IV. THE PROPOSED PROJECT 8

A. Rationale 8
B. Objectives and Scope 8
C. Cost Estimates 9
D. Financing Plan 9
E. The Executing Agency 10
F. Implementation Arrangements 10
G. Environmental and Social Measures 13

V. PROJECT JUSTIFICATION 14

A. Economic Analysis 14
B. Social Dimensions 15
C. Impact on Poverty Reduction 17
D. Risks 18

VI. ASSURANCES 18

A. Specific Assurances 18
B. Condition for Award of Contract 19

VII. RECOMMENDATION 19

APPENDIXES 20
 LOAN AND PROJECT SUMMARY

Borrower Kingdom of Bhutan

Project Description The Project will undertake improvements on the East-West

Highway, including resurfacing, construction of line drainage, and
slope protection works. Because the project road is the only east-
west link, the country will benefit from accessibility of improved
transport, savings in road maintenance costs, and reduction in
vehicle operating costs (VOCs).

Classification Primary objective: Economic growth

Secondary objective: Poverty reduction

Environmental Category B
Assessment
An initial environmental examination was undertaken and the
summary is a core appendix.

Rationale The social and economic well-being of Bhutan is related to an

effective and sustainable road transport network as no other
modes of transport are available for the movement of people and
goods. The extreme geographic conditions and mountainous
terrain pose challenges to the provision of transport links and to its
necessary maintenance. The existing national road network is in
need of improvement and protection as the deteriorated road
surface makes journeys longer and more difficult. Frequent
landslides also block the roads and cause major delays in
movement by vehicle or on foot. Heavy snow cover in winter also
hinders movement. The East-West Highway, the project road, is
occasionally blocked by landslides, sometimes for more than a
week at a time. Constructed to a single-lane standard by the
Indian Border Roads Organization during 1965-1985, the highway
connects Thimphu in the west to Trashigang in the east. The road
is of strategic importance to Bhutan since it is the only means of
transport between the two important cities. The highway also links
a number of other urban centers along the route, including
Wangdue-Phodrang, Trongsa, Jakar, and Mongar, and acts as the
only collector of traffic from the urban centers north and south of
the route.

The Project will address the following aspects of the Asian

Development Bank’s (ADB) sector strategy and policy dialogue: (i)
integrate the domestic market; (ii) enhance access to local,
regional, and international markets; (iii) increase employment
opportunities and incomes, especially in rural areas, to reduce
poverty; (iv) stimulate private sector activity, especially in rural
areas; (v) develop public/private partnerships for planning,
managing, and implementing construction and maintenance of the
national road network; (vi) improve road safety; and (vii) develop
the domestic consulting profession. The Road Planning and
 iii

Management Strengthening Project technical assistance (TA),

which will be implemented concurrently with the Project, will
improve governance by strengthening the Department of Roads
(DOR).

Objectives and Scope The objectives of the Project are to (i) promote private sector
participation and assist in developing the domestic contracting and
consulting industries by introducing a pilot contractor and
equipment leasing scheme; (ii) reduce poverty by enhancing
employment opportunities for the poor and improving access to
health, education, and other social services; and (iii) improve
governance by providing institutional support to DOR. The Project
will undertake improvements on the East-West Highway, including
resurfacing, construction of line drainage, and slope protection
works. Because the project road is the only east-west link, the
country will benefit from improved transport accessibility, savings
in road maintenance costs, and reduction in VOCs. The Project’s
objectives are consistent with the Government’s priorities for road
sector development under the Eighth Five-Year Plan (FY1997-
FY2002).

The Project will consist of the following components: (i)

resurfacing of about 380 kilometers (km) on the East-West
Highway, using mechanized techniques in an environmentally
sound manner and incorporating all related drainage works; (ii)
improving slope stability to preserve the existing national highway
network; (iii) implementing a pilot contractor and equipment
leasing scheme for domestic contractors to participate in the
Project; and (iv) providing consulting services for design and
supervision of civil works and for institutional support.

Cost Estimates The total cost of the Project is estimated at $12.8 million
equivalent. The foreign exchange cost is $8.7 million and the local
currency cost is $4.1 million equivalent, or 32 percent of the total
project cost.

Financing Plan
($ million)

Foreign Local Total

Source Exchange Currency Cost Percent

ADB 8.7 0.9 9.6 75

Government 0.0 3.2 3.2 25

Total 8.7 4.1 12.8 100

ADB = Asian Development Bank.
 iv

Loan Amount and

Terms The equivalent in various currencies of SDR7,310,000 ($9.6
million equivalent) from ADB’s Special Funds resources, with a
term of 32 years, including a grace period of 8 years, and interest
charge of 1 percent per annum during the grace period and 1.5
percent per annum thereafter.

Period of Utilization Until 30 June 2005

Executing Agency Department of Roads

Implementation
Arrangements The Project will be implemented by a separate project
management office within DOR.

Procurement All civil works contract packages will be procured following local
competitive bidding procedures among prequalified contractors
according to the Government’s standard procurement procedures
acceptable to ADB. Equipment will be procured in accordance
with ADB’s Guidelines for Procurement.

Consulting Services International and domestic consultants will be required for design,
supervision, and institutional support. The consultants will be
recruited in accordance with ADB’s Guidelines on the Use of
Consultants and other arrangements satisfactory to ADB for the
engagement of domestic consultants.

Estimated Project 31 December 2004

Completion Date

Project Benefits and

Beneficiaries The Project will contribute to the more rapid economic growth of
the project area by expanding economic opportunities, particularly
in agriculture, cottage industry, and tourism. Furthermore, the
Project will improve the overall quality of life of rural people and
reduce poverty by creating employment and economic
opportunities for the poor, and improving access to schools,
health, and other social and government services. Road
improvement works under the Project will require mostly unskilled
labor and will generate direct income-earning opportunities,
particularly for the poor and women.

The Project will directly benefit approximately 60,000 people.

Although a poverty line for Bhutan is yet to be established, the
feasibility report that gives the poverty profile of the population
affected by the Project shows that more than one third of the
Project’s beneficiaries are estimated to fall below the poverty
level. The beneficiaries will be (i) the poor who will achieve more
mobility in seeking employment and income-generating
opportunities; (ii) entrepreneurs and petty traders who will be able
 v

to set up enterprises along the road; (iii) agricultural enterprises

that will benefit from faster, cheaper, and reliable access to large
markets and export opportunities; (iv) neighboring countries that
can utilize the route for improved access to Thimphu, thereby
promoting regional cooperation; (v) passenger traffic along the
Thimpu - Wangdue-Phodrang – Bumthang – Mongar - Trashigang
routes, and (vi) exporters and importers who will benefit from
reduced transportation cost for freight using the shorter project
route.

Improving the road conditions on the East-West Highway will also

produce road user benefits, such as savings in VOCs and time.
For the analysis, road user benefits were restricted to savings in
VOCs arising from changes in surface roughness. Additionally,
since transport costs are relatively high and improvements offer
significant transport cost savings that will stimulate the local
economy, there will also be an increase in the quantity and quality
of agricultural production in the project area, tourism, and
industrial development. The Project is expected to have a positive
social impact. The documented stakeholder consultations confirm
widespread support for the Project.
vi
 I. THE PROPOSAL

1. I submit for your approval the following Report and Recommendation on a proposed
loan to the Kingdom of Bhutan for the Road Improvement Project.

II. INTRODUCTION

2. The social and economic well-being of Bhutan is related to an effective and sustainable
road transport network as there are no other modes of transport available for the movement of
people and goods. The extreme geographic conditions and mountainous terrain pose
challenges to the provision of transport links and to its necessary maintenance. As the
Government has invested in the steady development of the road network and gradually
assumed responsibility for its maintenance, the network has remained serviceable but requires
significant investment in periodic and routine maintenance. To enhance the contribution of the
road network to the social and economic development in the country, during the 1997 Country
Programming Mission to Bhutan, the Government requested Asian Development Bank (ADB)
financing for the Road Improvement Project. The ADB Fact-Finding Mission1 visited Bhutan on
8-23 March 2000 to formulate the Project on the basis of discussions with the Government,
other agencies active in the road sector, beneficiaries, and the project feasibility report.2 The
Appraisal Mission completed the review and analysis of all aspects of the Project and the sector
on 21 May-1 June 2000. Loan negotiations with representatives of the Government were held in
Manila on 11-14 August 2000. The project framework is shown in Appendix 1.

III. BACKGROUND

3. Bhutan experienced modest growth in output in fiscal year (FY) 1999, with real gross
domestic product (GDP) growth estimated at 6 percent compared with 5.1 percent per annum
the previous year. Agricultural growth picked up after a slowdown the year before. Currently,
major hydropower and industrial projects have continued to expand construction activities.
Higher industrial growth, particularly in electricity, is expected after the projects are
commissioned. Because of the exchange rate peg with the Indian rupee and the porous border
with India, prices in Bhutan can be expected to parallel price development in India. The pegging
arrangement has promoted confidence in the ngultrum along with the free circulation of Indian
rupees in the country. This arrangement has also facilitated stability in the trade of goods and
services with India, which amounts to almost 80 percent of total trade. Inflation in FY1999
increased slightly beyond 9 percent from the previous year due to the rises in food prices in
India. Money supply growth slowed from the highest of more than 40 percent in FY1998 to 21
percent in FY1999. This represents a slower increase of net foreign assets from inflows of
foreign aid and continued decline in domestic credit, particularly to the Government, although
credit to the private sector slightly increased.

4. The Government continues to conduct a prudent fiscal policy, with current revenues
exceeding current expenditures for the past four years. Inflows of foreign grants were not
sufficient to cover development expenditures, and an overall budget deficit of 2.3 percent of
GDP occurred in FY1999, compared with 0.9 percent surplus in the previous year. This
apparent deterioration in the country’s fiscal resources was due mainly to a major increase in
capital expenditures for the hydropower projects. As these investments are all financed by aid

1
The project processing team comprised M. Minc, Project Economist/Mission Leader; R. Rinker, Project Engineer;
S. Handayani, Social Development Specialist; and S. Nanwani, Senior Counsel.
2
TA 3107-BHU: Road Transport Network Development, for $650,000, approved on 3 December 1998.
 2

funds in concessional terms, the small fiscal deficit represents no major risks to the
macroeconomic imbalance in the medium term before these projects are commissioned.

A. The Road Sector

5. From a very few kilometers (km) in the 1950s, Bhutan’s road network today has grown to
3,375 km of national highways, which make up 47 percent of the total network (1,586 km).
During Bhutan’s first three development plans (FY1962-FY1976), three north-south roads from
the Indian border to the interior of the country were built. An east-west artery from Thimphu to
Trashigang was also begun during that period and completed in 1985. The construction of
district and feeder roads began during the Fourth Plan and has continued until present times.
The Seventh Five-Year Plan (FY1991-FY1996) and the current Eighth Five-Year Plan (FY1997-
FY2002, however, emphasized upgrading and maintenance of existing road assets rather than
the construction of new ones. The continued development of the road network has been driven
by economic development priorities and by a steady growth in Bhutan’s vehicle fleet and traffic
volume. From 700 vehicles in 1980, the fleet has grown to 18,288, of which 43 percent are two-
wheelers, 41 percent are classified as light vehicles, and 16 percent are heavy vehicles. Traffic
levels are highest in the west and much lower in the east and the south. In relative terms, traffic
levels in Bhutan remain low. Basic data for the road sector is presented in Appendix 2.

6. In the past 30 years, the Indian Border Roads Organization (IBRO) has undertaken the
vast majority of the construction and maintenance works on Bhutan’s road network through the
DANTAK project.3 Over the last decade, however, responsibility for the national road network
has gradually shifted to the Royal Government of Bhutan. Now, IBRO still maintains 478 km of
the national highway system. It is expected that the Government will eventually assume
responsibility for those sections as well. The Government agency responsible for maintaining
and managing the national road network is the Department of Roads (DOR) of the Ministry of
Communications (MOC), originally created as the Public Works Division. As the Government
invested in the steady development of the national road network and gradually assumed
responsibility for its maintenance, the network has remained serviceable but requires significant
investment in periodic and routine maintenance.

1. Road Transport Industry

7. Three bus operators– Bhutan Post, Dawa Transport, and Leksol Buses–currently
operate passenger services along the East-West Highway. Passenger bus fares are regulated
by MOC through the Road Safety and Transport Authority and reviewed quarterly. The average
fares these operators charge for a selection of routes tend to be in the range Nu0.35-0.55 per
km. For trucks, average freight rates are not regulated and depend on the type of cargo, size,
and ownership of the operator, availability of back-haul rates, and time of year. Freight rates are
generally higher in the monsoon period, partly due to increased demand coinciding with the
harvest season for many crops and partly due to the increased likelihood of trucks being
delayed due to landslides. Information collected from operators from a number of origins and
destinations in Bhutan indicates that, assuming an average payload of 8 tons, the average
freight rate is Nu2.5-3.5 per ton-km.

3
DANTAK is the IBRO project that constructed the national highways in Bhutan.
 3

2. Planning and Administration

8. The planning process in Bhutan begins with the development of the five-year plan. The
Planning Commission is responsible for developing the plan. The Policy and Planning Division
of MOC prepares a national plan for the transport and human settlement sector in accordance
with planning guidelines set forth in the five-year plan. This plan also has a five-year horizon,
providing orientation to each of the operating units of MOC for the development of its annual
operating plan. DOR has six operating entities: (i) Roads Division, (ii) Survey and Design
Division, (iii) Bridge Division, (iv) Mechanical Division, (v) Stores Unit, and (vi) World Food
Program Coordination. The annual investment plan for the Roads Maintenance Sections is
developed at the headquarters level from plans for each section submitted by the executive
engineers. The investment plan includes proposed capital investments in road construction and
periodic maintenance, and emergency works such as slope protection or repair of damaged
pavement.

3. Budgeting Process

9. Annual budgets for road maintenance include two components, the investment budget
and the routine maintenance budget. The investment budget is prepared by estimating the cost
of the annual investment plan. The cost of patching potholes, especially when required prior to
periodic maintenance interventions, is included in the investment budget. The proposed
improvements in the annual investment plan are prioritized at an annual meeting organized by
DOR headquarters, chaired by the director of roads and attended by senior staff representing
the roads maintenance sections. The projects selected are based on expected budgetary
allocations and on mutual agreement between the parties. Routine maintenance budgets are
allocated on the basis of the number of kilometers in each maintenance section. In FY1999 the
amounts allocated and spent were Nu30,000 ($698) per km for national highways, Nu26,266
($611) per km for district roads, and Nu11,800 ($274) per km for feeder roads.

10. The proposed budget is submitted to the Department of Budget and Accounts of the
Ministry of Finance where, after consideration of expected revenue and budgetary requirements
for all other Government agencies, a budgetary allocation is made to DOR. Due to budgetary
constraints, the allocation is generally less than the initial request. When this happens,
allocations for routine maintenance are not reduced; rather, the investment plan is adjusted by
removing projects. During the year, DOR generally requests supplementary budgetary
allocations to meet emergency needs or to fund priority road improvements. If the request is
approved and supplementary funds are available, the Ministry of Finance may provide them.

4. Budget Allocations

11. Road sector budgetary allocations have increased by an average of 23 percent per
annum between FY1993 and FY1999. Funds allocated for resurfacing works increased by an
average of 57 percent per annum over the period, while maintenance expenditure increased by
only 12 percent per annum. Future plans for road sector expenditure as laid out in the Eighth
Five-Year Plan for Bhutan allocates about Nu3.0 billion to the roads sector over the five-year
planning period. This represents a significant increase in the level of funding to the sector and
confirms the overall government objective to concentrate expenditure on social sectors including
health and education, and transport.
 4

5. User Charges and Expenditures

12. The Government levies a range of user taxes and fees on the road transport sector. The
main taxes are the fuel sales tax, motor vehicle taxes, retail sales taxes of vehicle components,
import duties, and weighbridge fees. The total revenues collected have increased sharply in
recent years, mainly the result of increased revenue from the sales tax on petroleum products.
Expenditures have far outweighed the revenues collected within the sector. In FY1998, road
sector revenues accounted for only 25 percent of total government expenditure on road sector
activities. However, there is clearly potential for increasing the revenues collected from road
users. Appropriate cost recovery mechanisms for Bhutan will be assessed during the
implementation of the advisory technical assistance (TA)4 for the Road Planning and
Management Strengthening Project.

6. Regulatory Framework

13. Over the years, the Government has addressed important legal issues affecting the road
sector and transport industry through the various acts, rules, regulations, and guidelines issued
by various government agencies: (i) the Rules and Regulations for construction of temporary,
semipermanent, and permanent houses on either side of a road issued by the Ministry of Home
Affairs in 1993; (ii) the Road Safety and Transport Act 1999 issued by MOC; (iii) the Field
Manual of Road Maintenance issued by DOR in 1989; (iv) the bioengineering techniques for
slope protection and stabilization issued by DOR in 1999; (v) the Environmental Code of
Practices for Highways and Roads issued by DOR in September 1999; (vi) the Municipal Act of
1999 issued by MOC; (vii) the Mines and Minerals Management Act 1995 issued by the
Department of Geology; (viii) the Land Act (second edition 1998) issued by the Ministry of Home
Affairs; and (ix) the environmental guidelines on roads and highways issued by the National
Environment Commission in 1999.

14. A review of the many interrelated legislation reveals no coordinated and focused
approach through a single piece of legislation covering roads and road transport in the country.
Also, the agencies responsible for particular sectors are primarily concerned with safeguarding
their respective interests, resulting in conflicting rules and regulations. Further, the enforcement
mechanisms are varied and uncoordinated. The Government recognizes that coordinated
legislation is needed, as the national road network is the predominant means of transport within
the country and as the number of road users and vehicles is increasing. Also, there needs to be
a clear delineation of authority and responsibility for enforcement.

7. Proposed Road Act

15. The Government has expressed its concern about the need for coordinated legislation to
cover roads and road transport in the country. The TA will take into account the existing
legislation on road-related matters, and prepare draft legislation for the proposed Road Act,
taking into account the views of the Government, local communities, nongovernment
organizations, and other stakeholders, including road users (vehicle owners, users of public
transportation, and freight transport users). The proposed draft legislation will (i) clearly define
the responsibilities and rights of the provider (the Government), road users, and affected
communities; (ii) address the construction, rehabilitation, maintenance, and use of the road,
while safeguarding or mitigating the adverse environmental impacts on users and the
community at large; (iii) spell out the compensation to be paid in the acquisition of land,

4
TA 3470-BHU: Road Planning and Management Strengthening Project, for $954,000, approved on 20 July 2000.
 5

including right-of-way, for road construction in accordance with existing legislation; (iv)
determine the feasibility of levying user charges to recover the cost of maintaining the national
road network; (v) specify the agencies responsible for monitoring and enforcing the provisions of
the legislation; and (vi) prescribe the penalties for any statutory violation. The Government will
use the draft legislation prepared under the TA as a basis for enacting the Road Act. Within
three years after loan effectiveness, the Government will (i) consult with ADB on any major
changes made to the draft Road Act before presenting it to the Cabinet and the National
Assembly; and (ii) enact and make effective the proposed Road Act.

B. Government Policies and Plans

16. In its five-year plans, the Government has given priority to investments in essential
infrastructure, providing better access to basic services, improving the quality of life in the rural
areas, supporting community participation in development activities, and promoting private
sector involvement in project implementation. The main objectives of the current Eighth Five-
Year Plan are to develop a regionally balanced network that is safe, convenient, and
economical to use; preserve the past capital investment in roads; reduce the cost of vehicle
operation and travel time of road users; and develop road construction and maintenance
capabilities in the private sector. The main strategies include (i) developing guidelines and
practices for road design, construction, and maintenance that cause minimum adverse impact
on the environment; (ii) promoting larger private sector role in road construction and
maintenance through contracting; (iii) developing a long-term comprehensive road master plan;
(iv) developing a suitable road maintenance management system; (v) improving maintenance
systems for rural roads; (vi) improving geometric features of roads to reduce accidents; (vii)
timely resurfacing of existing roads to reduce vehicle operating costs (VOCs); (viii)
strengthening institutional capacity through further training; and (ix) utilizing locally available
materials and resources whenever possible.

C. External Assistance to the Sector

17. The main source of external financing for roads in Bhutan has been the Government of
India. Since 1959, India has provided assistance through the DANTAK for the construction and
maintenance of the main road network in Bhutan. The United Nations Capital Development
Fund has completed three projects for rural road development in the eastern region. The
Government of Japan is supporting a bridge replacement program mainly along the East-West
Highway. Helvetas of Switzerland is providing assistance to replace one bridge, also along the
East-West Highway. The World Bank recently approved the Rural Access Project for $11.6
million for the construction of feeder roads in Zhemgang, Lhuentse, and Trashi Yangtse, and
Trashigang Dzongkhag.5 It is important to note that all external interventions in the sector are
complementary and rely on each other for justification of the overall investments. Details of the
external assistance to the road sector are in Appendix 3.

18. ADB has been providing support to the road sector in Bhutan since 1983. It began with
the Multiproject6 that focused on infrastructure works. The Roadworks Mechanization Project7
was a loan program designed to increase productivity through the development of mechanized
construction and maintenance techniques. The most recent, the East-West Highway

5
A dzongkhag is a district.
6
Loan 637-BHU(SF): Multiproject, for $5.0 million, approved on 22 September 1983.
7
Loan 790-BHU(SF): Roadworks Mechanization Project, for $4.5 million, approved on 30 September 1986.
 6

Maintenance Project,8 was intended to cover the resurfacing of the highway and to support the
development of a private sector contracting industry in Bhutan. Throughout these loan periods,
ADB also funded nine TA projects in the sector for project preparation and for the institutional
strengthening of DOR. Those projects were designed in part to improve the capacity of the
Government and the private sector, as responsibility for the roads continues to be shifted from
IBRO. Most recently an ADB-funded TA9 resulted in a complete overhaul of the construction
contracting procurement process, including road works. The new framework has been included
in the Government’s Financial Manual and will bring the process in Bhutan closer to
international standards.

D. Lessons Learned

19. The Multiproject (footnote 6) was completed and a project performance audit report was
prepared. The report found that greater efforts to familiarize the executing agencies with ADB
procedures and practices would have minimized implementation delays, and that training
programs for the DOR engineers needed to be developed. The Roadworks Mechanization
Project (footnote 7) was aimed at increasing DOR’s productivity in road construction and
maintenance by providing equipment and workshop facilities, and training DOR staff in
mechanized road construction operation and equipment maintenance. With ADB approval, the
equipment procured under the loan was subsequently sold to the private sector in line with the
Government’s policy of privatization.

20. The East-West Highway Maintenance Project (footnote 8) encountered problems with
the introduction of a bituminous surface treatment technique new to Bhutan, and with the start-
up and equipping of five inexperienced contractors. During the resulting delay of almost three
years, the road continued to deteriorate, so much so that the improvements proposed during
project preparation became inadequate and obsolete. Construction supervision for the project
was provided under an ADB TA10 grant requested by the Government. Timing problems
occurred in the fielding of the consultants recruited by ADB, mainly due to the start-up of the
inexperienced contractors. A road management maintenance system (RMMS) was also
developed under an associated TA.11 The RMMS component was not successful because the
proposed system was inappropriate in the light of the institutional capacity of DOR at that time.
However, the resulting program of periodic maintenance on roughly half the project road
arrested the rapid deterioration taking place. The project also facilitated the establishment of a
privatized roads construction industry.

21. These lessons were incorporated during project preparation in the feasibility study.
Because detailed design of the Project will be undertaken immediately prior to the tendering and
award of construction contracts, very little road deterioration will occur between design and
construction. Also, the minimum resurfacing intervention proposed for the Project is a double
bituminous surface treatment (DBST), which is twice the pavement coverage of the single
bituminous surface treatment originally specified in the previous project. Therefore, the cost
estimates developed should closely represent final construction costs. Additionally, design
interventions for the Project include improvement of roadside drainage and slope protection

8
Loan 1265-BHU(SF): East-West Highway Maintenance Project, for $5.2 million, approved on 18 November
1993.
9
TA 2802-BHU: Improvement of a Regulatory Framework for Procurement and Contracting, for $400,000,
approved on 23 May 1997.
10
TA 1985-BHU: Construction Management, for $740,000, approved on 18 November 1993.
11
TA 1984-BHU: Development of a Maintenance Management System, for $390,000, approved on 18 November
1993.
 7

works. Consulting services for the Project will be carried out by a team of international and
domestic consultants and will provide design, construction supervision, and institutional support
to the project management office (PMO). The consultants will also provide several training
workshops for DOR personnel. The PMO will provide counterpart staff to monitor construction
activities and concur with the consultants regarding project progress and quantity certifications;
the arrangement will present an excellent opportunity for technology transfer. Consulting
services will be fully funded out of the loan proceeds, thus enhancing the Government’s
ownership of the Project. Details of the design approach and technical standards are presented
in Appendix 4.

E. ADB’s Sector Strategy

22. To translate ADB’s overarching goal of poverty reduction into a strategy and operational
program, it is necessary to reflect the reality of Bhutan’s development context, considering (i)
the nature and degree of poverty; (ii) the effectiveness of the Government’s economic and
social development programs in addressing basic human needs; (iii) the country’s access to
grant funds from India, other bilateral sources, and the United Nations; (iv) the country’s debt-
servicing and project implementation capacities; and (v) the likely initiatives of other aid
agencies. Reducing poverty requires continued economic growth. ADB is well positioned to
support poverty reduction by promoting economic growth and social inclusiveness, through
interventions in physical and social infrastructure, private sector development, employment
creation, and improved economic management. Given the Government’s determination to see
the private sector play the main role in the future growth of incomes and employment
opportunities, ADB addresses the following areas: (i) strengthening the capacity of government
agencies, (ii) improving the physical and social infrastructure, (iii) promoting private sector
development, (iv) improving the efficiency of public service delivery and cost recovery, and (v)
protecting the environment.

23. ADB’s strategy in the road sector is consistent with the overall areas of emphasis and
with the objectives of the current Eighth Five-Year Plan. The strategic objective is to improve
road maintenance to (i) integrate the domestic market; (ii) enhance access to local, regional,
and international markets; (iii) increase employment opportunities and incomes, especially in
rural areas, to reduce poverty; (iv) stimulate private sector activity, especially in rural areas; and
(v) develop public/private partnerships for planning, managing, and implementing construction
and maintenance of the national road network. Those issues will be addressed during
implementation of the Project and the TA. The TA will also assist in improving the planning of
new investments and management of the existing national road network, recommending
efficient budget allocations for road expenditures, and contributing to the institutional
strengthening of DOR. The TA will also assist the Government in drafting and enacting a Road
Act (para. 15). In summary, ADB’s sector strategy aims at maximizing the sustainability of the
road sector in Bhutan through (i) capacity building and clearly defining the responsibility of
DOR, (ii) introducing simple planning procedures for maintenance and improvement works, (iii)
devising adequate cost recovery mechanisms, and (iv) contracting out maintenance works to
the private sector.

F. Policy Dialogue

24. ADB’s policy dialogue with the Government in the road sector has concentrated on the
institutional strengthening of DOR to enable it to take over from IBRO the responsibility for
planning and managing the national road network. Under the East-West Highway Maintenance
Project (footnote 8), emphasis was given to (i) improving governance by institutional
 8

strengthening; (ii) allocating funds for road maintenance operations more efficiently; (iii)
developing the domestic road construction industry; (iv) establishing a framework for contracting
roadworks; and (v) improving cost recovery in the road sector through appropriate user charges.
The Project and the TA will continue to address the above policy areas, and will improve
governance by strengthening DOR to (i) develop a Road Sector Master Plan with an upgraded
road planning and management system, to facilitate efficient budget allocations for road sector
development and maintenance activities; (ii) introduce a more participatory approach for the
beneficiaries in planning and implementation to contribute to poverty reduction; (iii) improve
road safety; (iv) develop the domestic consulting profession; and (v) assist the Government in
drafting and enacting a Road Act.

IV. THE PROPOSED PROJECT

A. Rationale

25. The social and economic well-being of Bhutan is related to an effective and sustainable
road transport network as no other mode of transport is available for the movement of people
and goods. The extreme geographic conditions and mountainous terrain pose challenges to the
provision of transport links and to its necessary maintenance. The existing national road
network is in need of improvement and protection as the deteriorated road surface makes
journeys longer and more difficult. Frequent landslides also block the roads—sometimes for
more than a week at a time—causing major delays in movement by vehicle or on foot. Heavy
snow cover in winter also hinders movement. The East-West Highway, the project road, was
constructed to a single-lane standard by IBRO during 1965-1985. It connects Thimphu in the
west and Trashigang in the east. The road is of strategic importance to Bhutan since it is the
only means of transport between those two important towns. The highway also links a number
of other urban centers along the route including Wangdue-Phodrang, Trongsa, Jakar, and
Mongar and acts as the only collector of traffic from the urban centers north and south of the
route.

26. The Project will address the following aspects of ADB’s sector strategy and policy
dialogue: (i) integrate the domestic market; (ii) enhance access to local, regional, and
international markets; (iii) increase employment opportunities and incomes, especially in rural
areas, to reduce poverty; (iv) stimulate private sector activity, especially in rural areas; (v)
develop public/private partnerships for planning, managing, and implementing construction and
maintenance of the national road network; (vi) improve road safety; and (vii) develop the
domestic consulting profession. The TA, which will be implemented concurrently with the
Project, will improve governance by strengthening DOR.

B. Objectives and Scope

27. The objectives are to (i) promote private sector participation and assist in developing the
domestic contracting and consulting industries by introducing a pilot contractor and equipment
leasing scheme; (ii) reduce poverty by enhancing employment opportunities for the poor and
improving access to health, education, and other social services; and (iii) improve governance
by providing institutional support to DOR. The Project will undertake improvements on the East-
West Highway, including resurfacing, construction of line drainage, and slope protection works.
Because the project road is the only east-west link, the country will benefit from improved
transport accessibility, savings in road maintenance costs, and reduction in VOCs. The Project’s
objectives are consistent with the Government’s priorities for road sector development under the
Eighth Five-Year Plan.
 9

28. The Project will consist of the following components: (i) resurfacing about 380 km on the
East-West Highway, using mechanized techniques in an environmentally sound manner and
incorporating all related drainage works; (ii) improving slope stability to preserve the existing
national highway network; (iii) implementing a pilot contractor and equipment leasing scheme
for domestic contractors to participate in the Project; and (iv) providing consulting services for
design and supervision of civil works and for institutional support.

C. Cost Estimates

29. The total cost of the Project is estimated at $12.8 million equivalent, of which the foreign
exchange cost is estimated at $8.7 million representing 68 percent of the total cost and the local
currency cost is estimated at $4.1 million equivalent representing 32 percent of total cost. The
cost estimates are summarized in Table 1. Detailed cost estimates are in Appendix 5.

Table 1: Cost Estimates

($ million)

Item Foreign Local Total

Exchange Currency Cost

A. Base Costa
1. Civil Works 6.1 3.1 9.2
2. Equipment 0.4 - 0.4
3. Consulting Services 0.7 0.4 1.1
Subtotal (A) 7.2 3.5 10.7

B. Contingencies
1. Physicalb 0.7 0.3 1.0
2. Pricec 0.6 0.3 0.9
Subtotal (B) 1.3 0.6 1.9

C. Interest Charge 0.2 - 0.2

Total 8.7 4.1d 12.8

a
In end-1999 prices.
b
10 percent for civil works, 5 percent for equipment and consulting services.
c
2.4 percent per annum.
d
Including taxes and duties estimated at $1.6 million equivalent (13 percent of total project cost).

D. Financing Plan

30. It is proposed that ADB provide a loan of $9.6 million equivalent from its Special Funds
resources to finance the entire foreign exchange cost of the Project and about 22 percent of the
local currency cost, which represents 8 percent of total project cost. The provision for financing
of local currency costs is justified under ADB’s local currency financing policy.12 The loan will
have a term of 32 years, including a grace period of 8 years, with an interest charge of 1 percent

12
R-1-95, Review of Lending Foreign Exchange for Local Currency Expenditures on Projects, 3 January 1995.
 10

per annum during the grace period and 1.5 percent per annum thereafter. The Borrower will be
the Kingdom of Bhutan. The financing plan is shown in Table 2.

Table 2: Financing Plan

($ million)

Source Foreign Local Total Percent

Exchange Currency Cost

ADB 8.7 0.9 9.6 75.0

Government - 3.2 3.2 25.0

Total 8.7 4.1 12.8 100.0

ADB = Asian Development Bank.

E. The Executing Agency

31. The Department of Roads will be the Executing Agency for the proposed Project. DOR,
which is headed by a director under MOC, is responsible for design, construction, and
maintenance of roads and bridges. A PMO was established within DOR before loan
negotiations. The PMO will be responsible for coordinating, implementing, and monitoring the
Project. A full-time project manager heads the PMO and is supported by adequate and
competent technical and administrative personnel. The project manager will be delegated with
sufficient authority to permit effective decision making on project implementation matters. The
organization chart of the PMO is presented in Appendix 6. The Government will provide DOR
with adequate budgetary allocations for timely implementation of the Project. DOR has gained
adequate experience in project implementation through the previous ADB road projects in the
country.

F. Implementation Arrangements

1. Implementation Schedule

32. The Project will be implemented over a period of about four years. Civil works are
expected to commence around June 2001 and be completed by the end of December 2004.
Because of the harsh winter and monsoon rains in the summer, the work seasons in the project
area are limited. This schedule assumes the consultant is mobilized by January 2001. The
tentative implementation schedule is presented in Appendix 7.

2. Procurement

33. All goods and services financed under the Project will be procured in accordance with
ADB’s Guidelines for Procurement. All civil works, the largest having a value of $1.5 million, will
be awarded on the basis of local competitive bidding (LCB) according to the Government’s
standard procurement procedures acceptable to ADB. All civil works contractors will be
prequalified. As the contracts are relatively small, they are unlikely to attract significant
international interest. All bidding documents will include clauses to reflect ADB’s policy on anti-
 11

corruption. The bidding documents will also include provisions on environmental protection,
child labor, and prevention of communicable diseases, including HIV/AIDS.13

34. The use of local competitive bidding for these contracts will provide an opportunity to
strengthen the emerging domestic contracting industry whose development was initiated in part
through the East-West Highway Maintenance Project (footnote 8). The proposed pilot contractor
scheme, with small contracts for periodic maintenance and slope stability improvements,
enables contractors with less experience in road works to participate in the Project, thus
expanding the local construction industry’s capability to carry out road improvement works.

35. Equipment or materials estimated at $500,000 equivalent or less will be procured by

international shopping procedures, except that equipment or materials estimated at less than
$100,000 equivalent per item will be procured through direct purchase. Under the Project a
contract package for road improvement equipment for the Mechanical Division, estimated at
$400,000 equivalent, will be awarded through international shopping procedures. Also,
materials testing equipment, estimated at $40,000 equivalent, will be procured by direct
purchase. Indicative procurement packages are presented in Appendix 8.

3. Consulting Services

36. Detailed design, construction supervision, and institutional support for the Project will be
provided by an international consulting firm which will collaborate with domestic consultants.
The consultants will be engaged by DOR in accordance with ADB’s Guidelines on the Use of
Consultants and other arrangements satisfactory to ADB for the engagement of domestic
consultants. Staffing inputs will be about 37 person-months for international consultants and 326
for domestic consultants. The consulting services will include components to assist DOR in
strengthening its capacity in (i) road construction and maintenance, (ii) contract procurement
and administration, (iii) slope protection practices, and (iv) road safety measures. Due to the
limited availability of domestic consultants from the private sector, the international consultants
may be required to draw from DOR suitable staff to assist in project implementation. The
Government will ensure that arrangements satisfactory to ADB are made for release of DOR
staff to participate in the Project, as domestic consultants independent of DOR, together with
domestic consultants from the private sector. The overall period of service will be about 48
months. Outline terms of reference for the consulting services for design, supervision, and
institutional support are in Appendix 9.

37. To expedite the civil works and make optimum use of suitable construction weather, the
Government has obtained ADB approval of advance action on recruitment of consultants. The
Government has been informed that the advance action does not commit ADB to approve the
subsequent Project. The consultants are expected to commence work in January 2001. DOR
issued invitations for proposals in August 2000.

4. Land Acquisition and Resettlement

38. The Project does not involve any land acquisition or resettlement, as the works to be
undertaken will be confined to resurfacing within the existing right-of-way. The rules and
regulations issued by the Ministry of Home Affairs14 specifies that no one will be permitted to
construct or erect or install any kind of house or fence within 50 feet on either side of the road.

13
Human-immunodeficiency virus/acquired immunodeficiency syndrome.
14
Rules and Regulations for Construction of Semi-Permanent and Permanent Houses on Either Side of the Roads.
 12

The walkover survey along the project road found no squatters within the right-of-way. Since
there will be no land acquisition and resettlement in this Project, no land acquisition and
resettlement plan is needed.

5. Disbursements

39. Loan disbursements for the consulting services contract to be procured through
international selection will be by direct payment procedures. Disbursements for the civil works
contract packages and for incremental expenditures will be through imprest account
procedures. The Government will establish an imprest account at the Bank of Bhutan. The
imprest account will be established, managed, replenished, and liquidated in accordance with
ADB’s Loan Disbursement Handbook dated June 1996, as amended from time to time, and
detailed arrangements between the Government and ADB. The initial amount to be deposited
will be based on the estimated expenditures over six months.

6. Midterm Review

40. The Government and ADB will conduct regular reviews during project implementation. In
addition, they will jointly carry out a midterm review of the Project during the second year of civil
works implementation. The results of the midterm review will be discussed by the parties and, if
required, appropriate corrective measures will be carried out to ensure successful project
implementation and achievement of the objectives.

7. Reporting Requirements

41. The supervision consultant will prepare brief monthly progress reports to be submitted to
the Ministries of Finance and Communications, DOR, and ADB. The reports will provide details
of the Project, including events or activities not progressing satisfactorily, and remedial actions
recommended by the consultants and DOR to resolve problems. The format of the reports will
be agreed upon during contract negotiations for consulting services. DOR will also prepare and
submit quarterly progress reports to ADB. Once the works are complete, DOR will arrange for
the consultants to prepare and submit a project completion report within three months of
physical completion of the Project.

8. Records, Accounts, and Audit

42. DOR will maintain separate records and accounts adequate to (i) identify the goods and
services financed from the loan proceeds and from counterpart funding; (ii) identify the use of
these goods and services to the Project; (iii) record the progress of the Project, including its
cost; and (iv) reflect, in accordance with consistently maintained sound accounting principles,
the Project’s operational and financial condition. The project accounts and related financial
statements will be audited annually by auditors acceptable to ADB. The audited reports and
related financial statements, to be prepared in English, will be submitted to ADB not later than
nine months after the end of the fiscal year to which they relate.

9. Project Performance Monitoring System

43. During project implementation, DOR, with the assistance of the consultants, will carry
out project performance monitoring system (PPMS) activities under arrangements satisfactory
to ADB to ensure efficient management of project activities and maximization of project benefits.
The Government and ADB have agreed on the performance indicators (Appendix 10) for
 13

carrying out these PPMS activities. The findings and supporting data will be incorporated into
the project performance monitoring and evaluation report for the completed Project. Community-
based organizations in the geog,15 in association with the DOR, will verify the effectiveness of
project activities and outputs, as well as the reactions of the intended beneficiaries. A sociologist
on the consulting team will assist DOR with that task. The project performance and monitoring
evaluation will allow postevaluation of the Project, and also improve planning for future road
improvement projects.

G. Environmental and Social Measures

1. Environmental Impacts

44. Consultants for the project feasibility study conducted an initial environmental
examination (IEE) of the Project, following ADB’s Environmental Guidelines for Selected
Infrastructure Projects (Highways and Roads). The summary IEE is presented in Appendix 11.
The IEE indicated no significant environmental problems associated with the Project, which will
involve only improvements consisting of periodic maintenance of existing roads, line drainage,
and slope protection works along the existing alignments. The Project will reduce the
environmental impact of the without-project scenario, especially in relation to siting and
operation of quarries, slope failure caused by inadequate drainage, and use of firewood for
heating bitumen. DOR will ensure that the environmental impacts of the Project are minimized
by carrying out the recommendations specified in the IEE and as agreed upon with ADB. The
Project includes the following enhancement measures:

(i) Slope stabilization. For continuous access, slope stabilization is the most important
enhancement measure. Pavement and drainage works are only part of the answer
to ensuring continued road operation. Additional and improved slope stabilization
works are required in many areas. Implementing an appropriate slope-related
program will maximize the effectiveness of the funds available to DOR. A 13-point
action plan covering a range of slope stability issues, in order of priority, is
presented in the Slope Stabilization Manual.16 In addition, it is strongly
recommended that DOR consider more extensive use of bioengineering measures.

(ii) Water management. The Project offers an opportunity to assist some communities
with irrigation water supply and to solve problems of uncontrolled irrigation water
disposal. The Project will assist both the Ministry of Agriculture and DOR to install
dual-purpose roadside water management structures where needed.

(iii) Road safety. The Project provides an opportunity to improve road safety by
incorporating various engineering measures in the program of works.

2. Social Measures

45. As part of project preparation, a social assessment was carried out using participatory as
well as survey methodologies in the project area. The assessment consisted of socioeconomic
surveys, and focus group discussions with key stakeholders such as the Planning Commission
Secretariat and the Health and Education ministries, government officials in the dzongkhag
(footnote 5) social sector administrators in nine dzongkhag in the project area, Road Safety and

15
A geog is a cluster of villages.
16
The Slope Stabilization Manual was prepared under TA 3107-BHU (footnote 2).
 14

Transport Authority, Bhutan Development and Finance Corporation, Royal Bhutan Women
Association, and Bhutan Chamber of Commerce and Industry. During the Fact-Finding Mission,
rapid rural appraisal was conducted for road workers and beneficiaries in several project areas
to assess the potential employment opportunity as well as beneficiaries’ needs and constraints.

46. The Project is expected to have a positive social impact. The documented stakeholder
consultations confirm widespread support for the Project. The Project will contribute to more
rapid economic growth of the project area by expanding economic opportunities, particularly in
agriculture, cottage industry, and tourism. Furthermore, the Project will improve the overall
quality of life for rural people and reduce poverty by creating employment opportunities for the
poor through project construction and maintenance activities; and improving access to
economic and social opportunities, schools, health services, and other social as well as
government services. Construction and maintenance works under the Project will require mostly
unskilled labor and will generate direct income-earning opportunities, particularly for the poor
and women.

V. PROJECT JUSTIFICATION

A. Economic Analysis

47. Improving the road conditions on the East-West Highway will produce mainly road user
benefits, such as savings in VOCs and travel time. For the analysis, road user benefits were
restricted to savings in VOCs arising from changes in surface roughness. Additionally, since
transport costs are relatively high and improvements offer significant transport cost savings,
which will stimulate the local economy, there will also be development benefits that include an
increase in the quantity and quality of agricultural production in the project area, tourism, and
small-scale industrial development. These benefits can be measured in terms of net value of
generated output directly attributable to road rehabilitation or in terms of the transport cost
benefits accruing generated traffic.17 However, it is essential that the two approaches be
pursued separately to avoid double counting. The methodology concentrated on road user
benefits and adopted the approach of measuring economic development benefits in terms of the
benefits gained by generated traffic.

48. Economic evaluation was carried out by comparing the costs and benefits for the with-
and without-project scenarios. Benefits based on VOC savings, in economic prices, were
calculated for normal and generated traffic. These benefits were compared with the road
improvement and maintenance costs to calculate the economic internal rate of return (EIRR).
Benefit streams were calculated for a period of 20 years starting in 2001. Costs and benefits
were estimated net of duties and taxes, and were expressed in constant end-1999 prices. The
base EIRR for the Project is 32 percent.

49. The sensitivity of the EIRRs to changes in the underlying cost and benefit parameters
was analyzed. The results show that the adverse assumption of a 15 percent increase in project
cost would decrease the EIRR to 27 percent. If benefits materialized to only 85 percent of the
original estimates, the EIRR would decrease to 27 percent. In a more adverse situation of a
simultaneous increase in project cost by 15 percent and a reduction of benefits by 15 percent,

17
As mentioned in para. 7, freight rates are determined by the market and passenger fares are regulated but
periodically reviewed. During the economic evaluation, the estimated VOCs showed similarities with the rates
and fares actually charged in the market. This increases the confidence that VOC savings will be passed on to
the users.
 15

the overall EIRR will be 22 percent. The switching value18 for cost was determined to be 100
percent, and switching value for benefits 49 percent. If project implementation is delayed by two
years, the EIRR will be reduced to 20 percent. Also, if only benefits due to VOC savings of
normal traffic are considered, the EIRR will decrease to 25 percent. The economic analysis is
given in Appendix 12.

B. Social Dimensions

50. The social impact assessment (Appendix 13) served to inform the communities about
the Project and its implications, and elicited their suggestions, views on mitigation measures,
and the role they could play. The local community, particularly the poor, will be informed and
encouraged to engage in road construction and maintenance activities. It is important to
maximize the participation of the local community in road construction, slope protection, and
maintenance activities.

1. Project Beneficiaries

51. The Project will directly benefit approximately 60,000 people. Based on the feasibility
report on the poverty profile of the population affected by the Project, 38 percent of households
are below the estimated poverty line level of Bhutan.19 The beneficiaries of the Project will be (i)
the poor who will achieve more mobility in seeking employment and income-generating
opportunities; (ii) entrepreneurs and small traders who will be able to set up enterprises along
the road; (iii) agricultural enterprises that will benefit from faster, cheaper, and reliable access to
large markets and export opportunities; (iv) neighboring countries that can utilize the route for
improved access to Thimphu, thereby promoting regional cooperation; (v) passenger traffic
along the Thimphu-Wangdue Phodrang-Bumthang-Mongar-Trashigang routes; and (vi)
exporters and importers who will benefit from reduced transportation cost for freight using the
shorter project route. Road construction and slope protection, which requires mostly unskilled
labor, will generate direct income-earning opportunities, particularly for the poor. Over four
years, the Project will provide approximately 300,000 person-days of unskilled employment
opportunities, particularly for the poor and women.

2. Impact on Indigenous People and Cultural Properties

52. Data from the social assessment and other available documents show no separate
disadvantaged groups who are likely to be adversely affected by the Project. Accordingly, there
is no need to prepare an indigenous people development plan. Also, the Project will not
adversely affect any cultural property. In fact, the Project will facilitate access to some of the
highly revered spiritual centers in Bhutan.

18
The switching value shows the percentage increase in a cost variable (or decline in a benefit variable) required
for the net present value (NPV) to become zero, which is the same as the EIRR reducing to the cut-off level of 12
percent.
19
Since no documented information on the poverty line of Bhutan is available, its assessment was based on the
same yardstick (primarily daily calorie intake food of 2,200 calorie per person per day) as that followed in India,
adjusted to consider nuances relevant to Bhutan, such as expenditure on transport, shelter, clothing, fuel, etc.
This is estimated to be around Nu504 per person per month or $144 per capita per year (December 1998 price
level).
 16

3. Gender Impact

53. The Project has sought opportunities to address gender concerns in road construction-
related activities. Women will benefit from the Project through their participation in roadwork
opportunities, particularly in road construction, slope protection, and maintenance works. Since
women in Bhutan are active producers and marketers of food, reducing the transport burden of
rural women would release their time and energy for more productive and socially beneficial
activities. The Project is expected to facilitate access to existing health, social services, and
schools, making it possible for teachers, of which the majority are women, to commute from
towns to village schools; and will enable dzongdag or district administrators to establish new
schools and recruit more teachers. As a result, the enrollment rates are expected to increase for
both boys and girls, but the rate for girls, which had been much lower than for boys, could
increase more.

4. Participatory Approach

54. The participatory approach was conducted during feasibility (footnote 2), fact-finding and
appraisal to assess poverty from the perspective of a range of stakeholders and to involve them
in the planning for follow-up action. Furthermore, the social assessment aims to inform the
affected people about the Project and its implications and elicit their views on mitigation
measures, suggestions, and role they could play. The local community, particularly the poor, will
be informed and encouraged to engage in road improvement and maintenance activities. It is
important to maximize the participation of local community in road improvement and
maintenance activities.

55. As part of project preparation an assessment of the well being of women road workers
was conducted.20 The participatory gender assessment of the road workers covered different
parts of the country and provided a sound base for planning programs for improving the
conditions and well-being of road workers in general, and women and children in particular. A
survey was carried out along the East-West Highway. Primary data generated through field visit,
interview, and questionnaire formed the baseline information to determine gender ratio, working
conditions, effectiveness of the World Food Program, social and welfare facilities available; and
identify constraints and opportunities. This was supplemented by the analysis of policies on the
national workforce, secondary information on the role of private contractors and Government
agencies, and consultations with relevant authorities.

5. Local Labor

56. The Government encourages private construction companies to employ local labor
instead of imported labor from India and Nepal for road construction. Any negative impact on
groups and individuals will be identified and remedied. For example, the use of child labor in
construction activities is not allowed. Close monitoring during supervision will pay attention to
the specific contractual clauses incorporated in the sample bidding documents.

6. Communicable Diseases

57. In addition to the provisions included in each civil works contract, the Government is
currently taking necessary measures to promote awareness and to prevent the spread of

20
Under TA 5889-REG: Gender and Development Initiatives, for $850,000, approved on 13 December 1999.
 17

communicable diseases, including sexually transmitted diseases (STD) and HIV/AIDS. ADB is
also supporting Government’s efforts under the proposed Health Care Reform Program.

C. Impact on Poverty Reduction

58. Under ADB’s current project classification system, the Project’s primary objective is
economic growth and the secondary objective poverty reduction as it targets the poorer areas of
the country. Under the new project classification effective 2001, the Project would be classified
as pro-poor growth. The overall project strategy of poverty reduction was formulated in terms of
three approaches: (i) pro-poor growth; (ii) improved quality of life; and (iii) employment
opportunities for the poorest population of the country.

1. Pro-Poor growth

59. More rapid economic development is expected to lead to a significant reduction in

poverty in the hinterland and eastern regions. Existing poverty is rooted in the lack of economic
opportunity and the associated lack of sufficient employment opportunity and livelihood
activities. Survey data on occupational distribution suggests that many of the poor in the project
area are in agriculture (as casual laborers), cottage industries, and construction, or are
unemployed. The expected diversification of agriculture and expansion of potentially better paid
employment in small industries and tourism are therefore likely to have especially significant
poverty reduction impacts.

60. For farmers in general, an improved transport network can also ease the introduction of
improved farming practices and the transition from subsistence farming to cash crops and a
market economy. Improved access to transportation also lowers the costs of inputs such as
fertilizer. Reliable access, e.g., all-weather possibilities to input and output markets, can
stimulate higher cash-crop farming production and more stable incomes, and enable the poor to
improve their management of risks. The Project will benefit the urban population as well. For
example, food prices for the urban poor could be reduced.

2. Improved Quality of Life

61. The Project will have direct impacts on the quality of life of all income groups.
Improvements of the East-West Highway will not only provide people with more convenient
access to a broad range of socioeconomic opportunities, but also have strong income effects by
lowering transport costs, and hence, the prices of consumer goods and services. In these ways,
the Project will contribute to improved personal welfare. Lack of affordable access deprives the
poor of the ability to take advantage of job opportunities and even of very basic social services.
Reliable access to schools and health services contributes directly to the poor’s accumulation of
human capital, which is a key factor in sustainable poverty reduction.

3. Employment Opportunities for the Poor

62. The Project will generate demand for mostly unskilled labor and provide income-earning
opportunities for the poor and women. It will provide local communities with employment
opportunities offered by the privatized road construction companies. This could be of particular
value to households with very small plots and/or few animals and who have to sharecrop other
farmers’ land, or who have available time. These tend to be the poorest families. Since the
Project will generate jobs for the poor who are otherwise unemployed or underemployed, it will
contribute to poverty reduction. Moreover, the Project will directly benefit the road workers. In
 18

the project area, there are 2,748 road workers of whom 40 percent are women who work on the
roads and are paid by DOR. Road workers are among the neediest and poorest groups in the
country. Illiteracy and insufficient land have forced them to leave their villages to join the
workforce. By working in the private construction companies for this Project, they will get 40
percent more income than working with DOR. Therefore, the Project will improve their income-
earning opportunity.

D. Risks

63. The project risks mainly relate to the implementation arrangements. Due to possible
inclement weather conditions, it will be important to adhere to the implementation schedule.
Domestic contractors have learned from experience under the previous ADB Project (footnote
8) about the engineering requirements of the different resurfacing treatments. In addition, there
will be international consulting services for design and supervision and institutional support to
DOR. It will be important that DOR establish a properly staffed PMO with qualified counterpart
personnel, for the duration of the Project, both in its Thimphu headquarters and in the field
where the improvement works will take place.

VI. ASSURANCES

A. Specific Assurances

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

(i) The Government will provide DOR with adequate budgetary allocations for timely
implementation of the Project.

(ii) Within two years after loan effectiveness, the Government will plan its road sector
investments and asset management activities based on the Road Sector Master Plan,
which will be developed under the TA for Road Planning and Management Strengthening
Project and agreed upon with ADB.

(iii) Within one year after loan effectiveness, DOR, with the assistance of the consultants, will
implement a pilot contractor and equipment leasing scheme, under arrangements
satisfactory to ADB, for domestic contractors to participate in the Project by (a) providing
assistance in civil works contract management; and (b) leasing equipment owned by
DOR’s Mechanical Division to domestic contractors.

(iv) Based on the outcome of the TA study (footnote 4), the Government will, within three
years after loan effectiveness, and in consultation with ADB, levy user charges to recover
the costs incurred in maintaining the national road network.

(v) Within three years after loan effectiveness, the Government will (a) consult with ADB on
any major changes made to the draft legislation on the proposed Road Act before
presenting it to the Cabinet and the National Assembly; and (b) enact and make effective
the proposed Road Act.

(vi) The Government will ensure that arrangements satisfactory to ADB are made for release
of DOR staff to participate in the Project as domestic consultants independent of DOR,
together with domestic consultants from the private sector.
 19

(vii) Upon completion of the Project, the Government will ensure that all periodic maintenance
works on the national highway network are tendered out to the private sector.

(viii) During and after project implementation, the Government will prepare annual plans on the
national road network taking into account physical measurements, maintenance
standards, and traffic volumes. Based on these annual plans, the Government will (a)
provide appropriate maintenance of the national road network; and (b) ensure that
adequate and timely allocation of resources are made available for the maintenance of the
national road network.

B. Condition for Award of Contract

65. DOR will not award any civil works contract under the Project until after it has obtained
from the National Environment Commission the necessary environmental clearance related to
that contract.

VII. RECOMMENDATION

66. I am satisfied that the proposed loan would comply with the Articles of Agreement of
ADB and recommend that the Board approve the loan in various currencies equivalent to
Special Drawing Rights 7,310,000 to the Kingdom of Bhutan for the Road Improvement Project,
with a term of 32 years, including a grace period of 8 years, and with an interest charge at the
rate of 1 percent per annum during the grace period and 1.5 percent per annum thereafter, and
such other terms and conditions as are substantially in accordance with those set forth in the
draft Loan Agreement presented to the Board.

TADAO CHINO
President

04 September 2000
 20

APPENDIXES

Cited on
Number Title Page (page, para.)

1 Project Framework 21 1,2

2 Road Sector Data 24 2,5

3 External Assistance to the Road Sector 26 5,17

4 Summary of Design Approach and Technical 27 7,21

Standards

5 Summary Cost Estimates 31 9,29

6 Project Management Office Organization 32 10,31

Chart

7 Implementation Schedule 33 10,32

8 Proposed Procurement Packages 34 11,35

9 Outline Terms of Reference: Consulting 35 11,36

Services for Design, Supervision, and
Institutional Support

10 Proposed Project Performance Monitoring 44 12,43

System

11 Summary Initial Environmental Examination 46 13,44

12 Economic Evaluation 53 15,49

13 Summary Poverty and Social Assessment 61 15,50

 PROJECT FRAMEWORK

Design Summary Project Target/Indicators of Monitoring Mechanisms Assumptions

Achievement
Goal
A well-planned, accessible, safe, and reliable The satisfaction of highway users with Road user satisfaction surveys Bhutan's road network
road network that is designed, built, and the road network improves as a result of contributes to socioeconomic
maintained in a technically correct, better and safer roads. development and improved
environment-friendly, and cost-effective quality of life.
manner Road user costs on the road network Road user cost surveys
decrease annually.

Road condition-related accidents Road accident statistics

decrease on road network annually.

Objectives
Bring project roads surfaces and features to International Roughness Indicator (IRI) Road feature condition inventories and Sufficient revenues are
an acceptable condition standard using value on all project roads is < 5.0. surveys generated and funds allocated
construction techniques that ensure for continued road construction

21
acceptable condition levels for at least six Management and operational reports of and maintenance.
years DOR
Private sector road contractor
Improve governance by strengthening the Road user costs are reduced by 25% and consulting engineering
Department of Road's (DOR) capacity to after project completion. industries continue to develop
manage road improvement contracts and modernize.
Passenger fares and freight rates are
reduced. The Government continues to
seek new avenues for road
Strengthen private sector road contractors' Ongoing periodic maintenance contracts sector funding and to
capacity to carry out periodic maintenance are defined, tendered, and completed on implement modern road
works according to international quality time, within budget and implemented by management techniques and
standards the private sector. technologies.

Reduce poverty by providing employment The Government is making

opportunities for the poor and improving better road investment
access to health, education, and other social decisions as a result of
services improved planning information
from DOR.

Appendix 1, page 1
Design Summary Project Target/Indicators of Monitoring Mechanisms Assumptions
Achievement
Components/Outputs

Final design and bidding documents for 1st Design and contract documents for 1st Design and contract documentation Civil works packages and
tranche periodic maintenance work on the tranche packages are completed by loan interventions were correctly
East-West Highway effectiveness Contractor and DOR work completion defined.
reports
180 km of 1st tranche periodic maintenance 1st tranche periodic maintenance Civil works are completed
work completed on the East-West Highway contracts awarded, with work Consultant work supervision reports according to specified
commencing by month 8 of project period standards.
and completed by month 26.

Final design and bidding documents for 200 Design and contract documents for Consultant project reports (inception, The Government is able to
km of remaining periodic maintenance work additional slope stability improvement quarterly, final) retain qualified personnel in
on East-West Highway contract packages are completed by DOR and/or finance the use of
month 12 of project period. Loan disbursement reports qualified domestic consultants.
Additional slope stability works completed on
the East-West Highway and the north-south Design and contract documents for 2nd Tripartite meetings between Private sector contractors
routes tranche of periodic maintenance contract Government, Asian Development Bank make the required investment
packages are completed by month 18 of (ADB), and consultants in equipment and human
200 km of remaining periodic maintenance project period. resources to become and to

22
work completed on the East-West Highway Project completion report remain viable road
2nd tranche of periodic maintenance construction businesses.
Functional, sustainable plant hire operation contracts are awarded and work
in place commenced by month 24 of project
period and completed by month 44.
DOR personnel familiar with modern road
construction design, contracting, and Plant available for hire by new
supervision techniques contractors by month 12 of project
period.
Main road contractors familiar with modern
contracting procedures and fully mechanized
techniques for periodic road maintenance
work

New road contractors familiar with road

maintenance contracting and operations

Appendix 1, page 2
Design Summary Project Target/Indicators of Monitoring Mechanisms Assumptions
Achievement
Inputs

9 periodic maintenance civil works contract Design and supervision consulting Loan documentation Effective management of
packages and additional slope stability services terms of reference as defined in inputs by ADB and the
improvement contract packages loan project documentation ADB policies and practices for loan consultants
projects
Road design and construction supervision Civil works packages as specified in loan DOR is committed to
consulting services to supervise or fast-track documentation improving and is open to new
contracts, design, support the tendering of methods and technologies.
and provide supervision for remaining civil Total external financing of $9.6 million
works contracts, and provide direct technical Government provides qualified
support to and supervise pilot contractors Counterpart Government funding of $3.2 junior staff to support
million construction supervision,
Equipment and materials for plant hire required data, and support
cheme facilities including all required
soils laboratory testing.
Pilot contractor development package

23
Appendix 1, page 3
 24

Appendix 2, page 1

ROAD SECTOR DATA

Table A2.1: Existing Road Network,

by Type and Category

Classification Road Length (km) Total

Paved Gravel Earthen
National highway 1,562 24 - 1,586
District 293 122 - 415
Feeder 368 828 178 1374
Total 2,223 974 178 3,375

Source: Department of Roads.

Table A2.2: Vehicle Fleet Size in Bhutana

Year Two-Wheelers Light Taxis Heavy Total

1980 299 213 23 165 700

1981 455 371 39 347 1,212
1982 707 618 55 460 1,840
1983 946 806 60 533 2,345
1984 1,200 1,125 78 719 3,122
1985 1,513 1,458 117 892 3,980
1986 11,883 1,802 153 1,043 4,881
1987 2,281 2,043 213 1,184 5,721
1988 2,882 2,411 250 1,459 7,002
1989 3,222 2,518 291 1,633 7,664
1990 4,100 4,372 385 3,059 11,916
1991 4,681 4,857 447 3,259 13,244
1992 5,028 5,282 534 3,424 14,268
1993 4,046 3,082 289 1,557 8,974
1994 3,001 2,246 172 655 6,074
1995 - - - - -
1996 - - - - -
1997 5,834 4,368 557 2,140 12,899
b
1998 6,628 5,942 2,369 14,939
b
1999 7,095 6,647 2,613 16,135

a
Data for 1995 and 1996 not available.
b
Included in Light category

Source: Central Statistical Organization.

 25

Appendix 2, page 2

Table A2.3: Road Sector Expenditure1

(Nu million)

Item FY1994 FY1995 FY1996 FY1997 FY1998

Administration 20.2 23.8 24 30.7 56.8

Maintenance 24.0 34.6 71.6 40.1 42.1
Capital expenditure 135.3 180.7 185.2 345.7 290.4

Total 179.5 239.1 280.8 416.5 389.3

1 Excluding Mechanical Cell

Source: Ministry of Finance.

Table A2.4: Road Sector Revenues

(Nu million)

Item FY1993 FY1994 FY1995 FY1996 FY1997 FY1998

Motor vehicle tax 22.79 20.56 20.27 21.53 26.26 31.68

Sales tax on petroleum products 2.15 4.36 5.8 13.51 31.02 42.25
3
Sales tax on vehicles 2.73 1.29 5.63 3.80 1.05
Sales tax on spare parts and tires1 15.25
Customs duty on motor vehicles 0.16 7.95 11.13 7.79 9.55
Customs duty on spare parts2 4.71
BIT on vehicles 3.47 2.97 3.31 3.91 2.79
Driving license fees 0.67 0.89 1.03 1.13 0.79
Weighbridge fees 0.61 0.98 0.76 0.71 0.76 1.31
Vehicle hire charges 0.46 0.42 0.91 0.83 1.25
Royalty on bus transporters 0.67 0.11 1.38 0.46 0.27

Total 29.57 39.81 49.74 52.97 75.2 98.78

Notes:
1. Includes depot surcharge on petroleum products
2. Included under motor vehicle tax.
3. Specific details not available.

Source: Department of Revenue and Customs.

 26 Appendix 3

EXTERNAL ASSISTANCE TO THE ROAD SECTOR

Table A.3.1: Asian Development Bank Loan Projects

Loan No. Project Name Amount Approval

($ million) Date

637-BHU(SF) Multiproject 5.00 1983

790-BHU(SF) Road Works Mechanization 4.50 1986
1265-BHU(SF) East-West Highway Maintenance 5.20 1993

Table A3.2: Asian Development Bank Technical Assistance Projects

TA No. Project Name Amount Approval Type of

($) Date Assistance

540-BHU Multiproject 145,000 22 Sep 83 A&O

687-BHU Road Construction and Training 75,000 24 Jun 85 PP
799-BHU Institutional Strengthening of the 350,000 30 Sep 86 A&O
Public Works Department
809-BHU Bridge Construction 150,000 28 Oct 86 PP
1559-BHU Institutional Strengthening of the 530,000 6 Sep 91 A&O
Department of Road
1682-BHU Road Project 250,000 30 Mar 92 PP
1984-BHU Development of a Maintenance 390,000 18 Nov 93 A&O
Management System
1985-BHU Construction Management 740,000 18 Nov 93 A&O
3107-BHU Road Transport Network Development 650,000 3 Dec 98 PP
A&O = Advisory and operational; PP = project/program preparatory.

Table A3.3: Assistance from Other Sources

Source Project Name Amount Opening Type of

(million) Year Assistance

World Bank Rural Access Road 11.6 1999 Loan

Government of Eastern Feeder Roads 1999-2001 Grant

India Improvement of Thimphu-Puntsholing Highway 2001 Grant
Bridges on Trongsa-Gelephu-Sarpang Highway 1999-2002 Grant

UNCDF Eastern Feeder Roads 1998-2002 Grant

Government of Bridge on Thimphu-Paro Highway 1993 Grant

Japan

Helvetas of Bridges on East-West Highway 2002 Grant

Switzerland
UNCDF = United Nations Capital Development Fund.
 27
Appendix 4, page 1

SUMMARY OF DESIGN APPROACH AND TECHNICAL STANDARDS

A. Background

1. The objective of the proposed Project is to undertake road improvements on the East-
West Highway in Bhutan. The RIP will involve (i) design of periodic maintenance interventions,
(ii) slope protection and drainage improvements, and (iii) consulting services and institutional
support.

2. The terms of reference for the Road Network Study,1 under which the Project was
prepared, required the technical assistance (TA) consultant to prepare a prioritized road
improvement program for the project roads that will facilitate the social and economic
development of Bhutan. The study included three roads totaling 941 kilometers (km). The
priority link in Bhutan is the East-West Highway, 546 km long, between Trashigang and
Simtokha. Two other north-south routes, between Wangdue-Phodrang and Sarpang and
Trongsa and Gelephu, were also studied.

3. The Asian Development Bank (ADB)–assisted East-West Highway Maintenance Project,2

completed in 1998, made periodic maintenance interventions along portions of the project road
and assisted in developing a private sector contracting industry in Bhutan. Most of the
interventions remain in good condition, with only occasional and minor routine maintenance
repairs necessary. However, some portions have not performed up to expectations and require
further intervention. The previous project introduced new construction methods to nascent
private contractors. Inexperience with mechanized paving methods in the past contributed to the
early deterioration of some roadway improvements. The Project will benefit from the previous
experience and apply the lessons learned in its implementation.

B. Lessons Learned

4. The original design for roadway improvements under the East-West Highway
Maintenance Project called for resurfacing using single bituminous surface treatment (SBST).
The road deteriorated faster than anticipated and, because of severe delays in initial
implementation required a more significant resurfacing intervention–double bituminous surface
treatment (DBST)–once construction began. This markedly increased the resurfacing cost per
km. To remain within the project budget, lengths of roadway improvement originally planned had
to be dropped from the project. Also, the previous design interventions did not include
improvement of roadside drainage or slope protection works. Insufficient water drainage and
inadequate slope protection along a roadway contribute significantly to road deterioration.

5. The detailed design for the Project will be made immediately before the tendering and
award of construction contracts. As such, very little road deterioration is expected to occur
between design and construction, and no significant increase in improvements should be
required once construction starts. The minimum resurfacing intervention proposed is DBST,
which is twice the pavement coverage of the SBST specified in the previous project.
Consequently, upgrades in design are less likely to be necessary, and the cost estimates
developed in the final design should closely represent the final construction costs.

1
TA 3107-BHU: Road Transport Network Development, for $650,000, approved on 3 December 1998.
2
Loan 1265-BHU (SF): East-West Highway Maintenance Project, for $5.2 million, approved on 18 November
1993.
 28
Appendix 4, page 2

6. As noted, some sections improved under the previous project did not meet performance
expectations. Due to unfamiliarity with mechanized methods as well as equipment breakdowns,
portions of the road were resurfaced using manual placement methods. This, in addition to the
insufficient drainage that existed, undoubtedly contributed to the poor performance of the
roadway. To prevent the problem from recurring, all resurfacing will utilize mechanized
operations. Further, the Project Management Office (PMO) will procure new paving equipment
as part of the plant hire scheme. It should be noted that several domestic contractors in the
previous project did gain experience in the mechanized placement of road resurfacing. These
contractors have maintained their equipment plant and complement of trained personnel and
stand ready to participate in the Project.

7. Construction supervision in the previous project also proved inappropriate and

inadequate. With ADB funding from a TA grant, two independent international consultants were
fielded to provide construction supervision support. This arrangement was not successful, as
evidenced in part by early deterioration of some road resurfacing improvements, and services
were terminated earlier than originally planned. Working with a grant, the Department of Roads
(DOR) did not assume significant ownership of construction supervision. Further, no counterpart
staff was assigned to assist with construction monitoring. The geographic distance and time
required traveling between construction sites further hampered proper supervision.

8. For the Project, a joint team of international and domestic experts will provide design,
construction supervision and institutional support to the PMO. The consultant will also conduct
several training workshops for the benefit of DOR personnel. The consultancy team will be
composed of resident engineers and site supervisors. Each construction contract package will
be continuously monitored. The PMO will provide counterpart staff to monitor construction
activities and concur with the consultant team regarding project progress and quantity
certifications; this provides excellent opportunity for technology transfer. The consulting services
will be fully funded out of the loan proceeds and not through a TA grant, thus enhancing
Government ownership.

C. Road Analysis Approach

9. The existing pavements on the East-West Highway typically have a base course
composed of waterbound macadam (WBM) with an average thickness of 320 millimeters (mm).
A 20-mm bituminous overlay forms the pavement surface. The typical roadway cross-section
consists of a single motorized traffic lane 3.5 meters (m) wide with 1.5 m wide shoulders. The
maximum design vehicle speed is 80 km per hour (kph). Minimum speeds of 20 kph for light
vehicles and 15 kph for trucks are applied to avoid unrealistically low journey speeds.

10. A road roughness survey was conducted using a vehicle-mounted bump integrator and
counter to measure the unevenness of the road. A calibrated odometer was used to measure
distance along the road. The bump integrator produced roughness values and equivalent
International Roughness Indexes (IRI) for all sections of the road studied. The need for other
exogenous interventions in areas with unlined drains, nonfunctioning culverts, insufficient slope
protection, and destroyed pavements was also identified during the survey.

11. The physical surveys and reference data collection identified homogeneous sections
along the road on the basis of traffic volumes, road roughness measurements, altitude, and
road gradient. These sections were used in a modified version of the Highway Design and
Maintenance (HDM) model to prioritize the need for intervention.
 29
Appendix 4, page 3

12. The HDM program prioritizes road data input to calculate vehicle operating costs. The
program was adapted to conditions specific to Bhutan and the East-West Highway. For
example, a higher likelihood for crack progression was input into the model, due to the poor soil
types and the freeze-thaw cycles prevalent at the higher elevations. A lower rate of rutting
progression was used due to the low traffic values. Other relevant inputs were modified
according to Bhutan’s environmental and climatic conditions. The adaptations specialized the
model to give more accurate results for the East-West Highway analysis. Considering other
costs, such as maintenance, fuel, lubricant, tires, and license fees, the study recommended the
need for periodic maintenance of about 350 km of roads, roughly 63 percent of the total length.
That figure was used to develop indicative packages for design interventions.

D. Design Philosophy

13. The study first identified four periodic maintenance interventions, which consider local
contractor capabilities, DOR experience, and engineering best practices:

Option 1: DBST chip seal applied every 6 years.

Option 2: DBST chip seal applied when roughness IRI is 6.5 m/km.
Option 3: 100 mm WBM base course with double surface treatment chip seal.
Option 4: 40 mm hot mix overlay.

14. The most appropriate rehabilitations for routine and periodic maintenance are option 1
and option 3. On sections where the existing pavement surface is in fair condition, a DBST
overlay will be applied to provide a smoother, more uniform riding surface and to protect the
existing pavement, thus extending the serviceable life of the road. Road sections in more
deteriorated condition will first be strengthened with the WBM base course before receiving the
DBST overlay. Road sections now severely eroded or destroyed will be reconstructed as part of
the exogenous interventions before road surfacing.

15. The pavements will be designed in accordance with Indian Standards for a 10-year life,
with provision for overlays every 7 years to extend the road’s life up to 15-20 years. The designs
will be based on traffic counts and traffic projections (for capacity), axle load surveys, deflection
tests and projections (for structural capacity). With the WBM base course in option 3, the
pavement structure will consist of an improved, well-compacted subgrade, with WBM subbase
and base courses, which consist of 20-50 mm sizes gravels and 20-25 mm bituminous wearing
course. The roughness values for the existing roads are between IRI6 and 12. The target
roughness values after periodic maintenance is 5.

16. Other exogenous construction works will also be provided to ensure that periodic
maintenance interventions achieve or exceed their intended design life and that the reduction in
vehicle costs achieves the expected levels. These interventions include slope protection through
retaining walls or revetments, construction of new culverts and repair of existing ones, and
construction of new lined drains.

17. The indicative construction packages proposed for the Project are based on the feasibility
analysis and preliminary designs. The packages as presented may be revised by the consultant
on the basis of final designs, which will be completed immediately before tendering the works
for construction.
 30
Appendix 4, page 4

E. Technical Standards

18. The principal international standards for detailed design are the following:

(i) highways: recommendations of Indian Standard (IS), Indian Road Congress (IRC)
and Transport Research Laboratory (TRL), as in Overseas Road Note 6, TRRL,
United Kingdom;

(ii) culverts and other drainage structures: IS; and

(iii) pavements testing and design: IS, IRC, and TRL Road Note 31.

19. The IS and IRC will be used to design all exogenous interventions. DOR standard designs
for retaining walls will be used whenever practical.
 31 Appendix 5

SUMMARY COST ESTIMATES a

Asian Development Bank Government

Item FX LC Total $ million Percent $ million Percent

Periodic Maintenance Works

Base 5.7 2.8 8.6 6.0 0.70 2.6 0.30
Physical 0.6 0.3 0.9 0.6 0.70 0.3 0.30
Price 0.5 0.2 0.7 0.5 0.70 0.2 0.30
Total 6.8 3.3 10.1 7.1 0.70 3.0 0.30

Slope Protection Works

Base 0.4 0.3 0.7 0.5 0.75 0.2 0.25
Physical 0.0 0.0 0.1 0.1 0.75 0.0 0.25
Price 0.0 0.0 0.1 0.0 0.75 0.0 0.25
Total 0.4 0.4 0.8 0.6 0.75 0.2 0.25

Consulting Services
Base 0.7 0.4 1.1 1.1 1.00 - 0.00
Physical 0.0 0.0 0.1 0.1 1.00 - 0.00
Price 0.0 0.0 0.1 0.1 1.00 - 0.00
Total 0.8 0.4 1.2 1.2 1.00 - 0.00

Equipment
Base 0.4 0.0 0.4 0.4 1.00 - 0.00
Physical 0.0 0.0 0.0 0.0 1.00 - 0.00
Price 0.0 0.0 0.0 0.0 1.00 - 0.00
Total 0.5 0.0 0.5 0.5 1.00 - 0.00

Total Cost
Base 7.3 3.5 10.8 8.1 0.75 2.7 0.25
Physical 0.7 0.3 1.0 0.7 0.73 0.3 0.27
Price 0.6 0.3 0.8 0.6 0.73 0.2 0.27
Total 8.5 4.1 12.6 9.4 0.74 3.2 0.26

Interest Charges 0.2 0.0 0.2 0.2 1.00 0.00

Total Cost 8.7 4.1 12.8 9.6 0.75 3.2 0.25

68% 32%

ADB-Financing
All Categories 8.7 0.9 9.6 0.75 3.2 0.25
100% 22%

Civil Works 7.2 0.5 7.7 0.70 3.2 0.30

66% 4%

FX = foreign exchange; LC = local currency.

a Discrepancies in subtotal values are attributed to round-off truncation.
 PROJECT MANAGEMENT OFFICE

Director

Project
Manager

32
Assistant Design & Executive
Project Supervision Engineers Stores Unit
Manager Consultants (8)

Assistant Assistant Assistant Assistant

Engineer Engineer Engineer Engineer

Project Office Drivers Junior Junior Junior

Accountant Secretary (2) Engineers Engineers Engineers
(3) (3) (3)

Appendix 6
 IMPLEMENTATION SCHEDULE

Advance
Project Implementation Schedule
Recruitment
Position
2000 2001 2002 2003 2004
J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D

Design and Supervision

Advance Recruitment
Design
Construction Supervision

Equipment Procurement
Equipment for the Mechanical Cell
Material Testing Equipment

33
Civil Works
Prequalification, Bidding,
Evaluation and Contract Award
Periodic Maintenance Contracts
Package 1
Package 2
Package 3
Package 4
Package 5
Package 6
Package 7
Package 8

Appendix 7
Package 9

Additional Slope Protection Works

 34
Appendix 8

PROPOSED PROCUREMENT PACKAGES

Base Planned
Package Description Length Amount Procurement Completion
No. (km) ($ million) Method Date

PM -1 Km 11 to Km 40 29.0 0.48 LCB Aug 2002

PM-2 Km 40 to Km 94 54.0 1.48 LCB Sep 2004

PM-3 Km 181 to Km 225 44.0 1.35 LCB Sep 2004

PM-4 Km 225 to Km 257 32.0 0.91 LCB Jan 2003

PM-5 Km 319 to Km 376 57.0 1.12 LCB Jan 2004

PM-6 Km 376 to Km 427.7 43.7 1.34 LCB Jul 2004

PM-7 Km 434.5 to Km 482.5 48.0 0.93 LCB Jan 2003

PM-8 Km 482.5 to Km 525 42.5 0.65 LCB Oct 2002

PM-9 Km 525 to Km 546 21.0 0.29 LCB Aug 2002

SP-1,2 Additional Slope 0.68 LCB Mar 2004

Protection Works

Equipment

E-1 Equipment for 0.40 IS Dec 2001

Mechanical Cell
E-2 Laboratory Testing 0.04 DP May 2001
Equipment

Consulting Services 1.10 IR Oct 2004

DP = direct purchase, IR = international recruitment, IS = international shopping; LCB = local competitive bidding.
 35
Appendix 9, page 1

OUTLINE TERMS OF REFERENCE

CONSULTING SERVICES FOR
DESIGN, SUPERVISION, AND INSTITUTIONAL SUPPORT

A. Background

1. Bhutan’s road network is presently about 3,375 kilometers (km), of which 47 percent are
classified as national highways. The network is still relatively limited but adequate to serve the
country’s economic development and social needs. Therefore the policy of the Royal
Government of Bhutan is to focus on maintaining the existing road network rather than
expanding it during the current Eighth Five-Year Plan.

2. To support these objectives, the Asian Development Bank (ADB) financed technical
assistance (TA)1 to help the Department of Roads (DOR) develop a sustainable road transport
network to provide access and economic development. This TA was carried out during 1999
and, among other things, resulted in the preparation of a prioritized road network improvement
program to facilitate the social and economic development of Bhutan.

B. Objectives

3. The primary objective of this ADB Project is to undertake a road improvement project
that will address the majority of the periodic maintenance needs on the Simtokha-Trashigang
Highway (the East-West Highway). Another objective is to improve slope stability along portions
of the East-West Highway as well as the Wangdue-Sarpang Highway and the Trongsa-Gelephu
Highway. Approximately nine individual contract packages for resurfacing of the roadway are
envisaged, with about half to be prepared on a fast-track schedule for an early start of
construction activities. Smaller contract packages for slope stability improvement works on other
sections of the roadway not receiving periodic maintenance will also be developed throughout
the project for less experienced or petty contractors.

4. The Project includes consulting services and institutional support in specific areas where
existing capacities or resources are limited. It will involve (i) designing of periodic maintenance
interventions including patching, pavement strengthening or leveling course as required, surface
treatment, minor drainage and slope protection works; (ii) assisting DOR in contractor
prequalification, preparation of bid documents, bid evaluation, contract negotiations, and
securing necessary approvals, (iii) developing a slope stability program for DOR (para. 5); (iv)
supervising the periodic maintenance contracts; (v) assisting DOR in procuring, through
international shopping, road construction and materials lab testing equipment; and (vi) training
and building the capacity of DOR personnel in road maintenance and contract management. All
these activities will be coordinated through the project management office (PMO).

5. Although the prime purpose of the Project is to improve the existing road pavement and
associated drainage, it is recognized that slope instability, road blockages and landslides are
major causes of traffic disruption, pavement damage, and environmental degradation.
Accordingly, some slope protection will be required, both within and outside the identified
periodic maintenance contract packages. Due to cost constraints, only a limited portion of the
slope instability affecting each periodic maintenance contract package will be addressed. The
consultant will be required to prioritize the individual sites, in consultation with the PMO, to

1
TA 3107-BHU: Road Transport Network Development, for $650,000, approved on 3 December 1998.
 36
Appendix 9, page 2

arrive at the most cost-effective solution overall. The consultant will also assist DOR in
integrating slope stability measures into routine and periodic maintenance operations
nationwide.

C. The Consultant

6. The consultant must be an international consultant from a member country of ADB, who
may associate with other similarly eligible international consultants, and who is obliged to
associate with domestic consultants. An international consultant must lead the association.

D. Scope of Work

7. The TA consultants produced samples of prequalification documents, bid documents

(Instructions to Bidders, Conditions of Contract, Technical Specifications, specimen Bills of
Quantities, Schedules of Supplementary Information, and appropriate forms), and bid evaluation
documents based on the Government’s Ministry of Finance Financial Manual, Chapter 17,
updated in July 1998. The documents are substantially based on standard Sample Bidding
Documents produced by ADB.

8. The contract packages proposed by the TA consultants are in the table. These are
indicative packages that may be modified according to the detailed design.

Package Kilometer Length

Number From To (km)
PM-1a 11 40 29.0
PM-2 40 94 54.0
PM-3 181 225 44.0
PM-4 a 225 257 32.0
PM-5 319 376 57.0
PM-6 376 427.7 43.7
PM-7a 434.5 482.5 48.0
PM-8a 482.5 525 42.5
PM-9a 525 546 21.0

Total 371.2
a Proposed fast-track packages.

9. During detailed design of the contract packages, the consultants will

(i) evaluate the pavement strength including, as necessary, Benkelman beam

deflection testing, trial pitting, laboratory testing of the pavement layers and
subgrade DCP (dynamic cone penetrometer) tests. In particular, carry out
pavement strength testing on a damaged road section at a high mountain pass
subject to freeze/thaw and determine appropriate remedial measures;

(ii) assess the requirement for localized patching, leveling; and reconstruction;

(iii) review the proposals for new culverts or culvert replacement/rehabilitation

(including erosion protection measures) on the road lengths identified for
improvements;
 37
Appendix 9, page 3

(iv) check the condition and performance of the roadside drains and, where they
require rehabilitation or upgrading, propose appropriate measures. Where road
side drains are used for irrigation purposes, design appropriate structures to
permit excess water to pass through the existing culverts;

(v) evaluate the requirement for slope protection measures adjacent to the road.
Where these are relatively minor (e.g., limited-height breast or retaining walls,
slope trimming or bioengineering), prioritize individual locations in order of risk of
blockage or damage to the road and draw up a schedule of protection measures
for each road section;

(vi) identify appropriate periodic maintenance and/or slope stability contract

packages within the competence of the less experienced contractors and attract
a good level of competition for the work;

(vii) assess the sources of natural construction materials (e.g., quarry sites), carry out
suitability tests, and prepare a materials report for the contractors’ information;

(viii) locate suitable areas for disposing of surplus spoil;

(ix) assist DOR in determining what additional construction equipment should be

procured as part of the plant hire scheme;

(x) review the available material testing equipment and recommend additional
materials lab testing equipment to be procured for use on the Project;

(xi) carry out the final design for resurfacing, roadside drainage improvement, and
culvert rehabilitation or replacement, utilizing pavement courses and other
construction methods within the capability of local contractors;

(xii) expedite detailed design of the fast-track packages, with an intent to award for
construction approximately eight months after the start of the project;

(xiii) calculate quantities and analyze unit rates for all items of work to be carried out,
prepare detailed estimates of construction costs for each road section;

(xiv) prepare in consultation with DOR the final bid documentation for periodic
maintenance and slope stability contract packages. Develop technical
specifications, drawings, bills of quantities, and cost estimates. Ensure that
appropriate construction methods, utilization of local labor forces whenever
possible, provisions for health care and education for labor forces are detailed in
the contract documents. Include in each contract package a provision that
subcontracts a minimum 5 percent of the contract price to petty contractors.
Ensure environmental mitigation measures conform to the requirements of the
Government; and

(xv) prepare a project prospectus with an environmental management plan for

submission by DOR to the National Environment Commission, and respond to
queries from the Commission.
 38
Appendix 9, page 4

10. Prior to bid submission for the civil works contract packages, the consultants will

(i) review and confirm with DOR the proposed implementation program so as to bid
the fast-track periodic maintenance works as quickly as possible and maximize
contractor competition;

(ii) assist DOR with procurement of road construction and materials lab equipment in
accordance with ADB’s Guidelines for Procurement;

(iii) develop and agree with DOR on the contractor prequalification documents and
scoring system and, after approval by ADB, issue them to interested contractors;

(iv) conduct prequalification workshops to explain to contractors how the bid

documents should be completed;

(v) evaluate completed prequalification documents and recommend contractor

shortlists to DOR;

(vi) agree on a bid evaluation scoring system for both experienced and less
experienced contractors and assist DOR with obtaining approval from ADB; and

(vii) issue approved bid documents to prequalified contractors, assist DOR in the pre-
bid meetings, answer contractor queries, and issue bid addenda.

11. Following submission of bids, the consultants will

(i) undertake bid clarifications with contractors, evaluate the bids, and recommend
to DOR the award of contracts;

(ii) assist DOR in contract negotiations, preparation, and signing of final contract
documents with successful bidders, and issuing Notices to Proceed; and

(iii) assist DOR in obtaining necessary approvals from ADB and other agencies.

12. For construction supervision of all sections, the consultant will carry out the duties of the
engineer as described in Chapter 17 (Procurement) of The Government’s Ministry of Finance
Financial Manual 1988 (revised 1st July 1998), Conditions of Contract for Civil Works, Local
Competitive Bidding. The tasks will be performed in coordination with DOR executive engineers
assigned to the Project. The duties of the consultant will include, but will not necessarily be
limited to,

(i) giving construction management advice to the contractors;

(ii) monitoring the setting out of the works of each contractor;

(iii) checking and supervising, for DOR approval, all working and as-built drawings
prepared by each contractor;

(iv) reviewing the quality control programs of the contractors;

 39
Appendix 9, page 5

(v) inspecting and testing all materials and works to ensure compliance with
specifications and giving immediate notice to the contractor in the event that such
materials and works fail to comply with the specifications. Special provision
should be made for testing the bitumen or bitumen emulsion provided by the
contractor, including verification of supply sources;

(vi) accepting or rejecting any part or parts of the completed works. All resurfacing,
leveling, and patching works constructed with unapproved bitumen or emulsion
will be rejected;

(vii) advising DOR on changes in drawings or specifications that may prove

necessary or desirable during construction, together with the preparation of
revised drawings or specifications for DOR and ADB approval;

(viii) measuring the quantities of approved and accepted works and materials, and
checking and certifying each contractor’s monthly invoices. Records should be
maintained in the formats prescribed in the Government’s Financial Manual. This
activity will be coordinated with the DOR executive engineer or his
representative;

(ix) assisting DOR in preparing withdrawal applications for contractor payments;

(x) periodically checking the remaining quantities, and undertaking constant

monitoring of each contract’s costs;

(xi) reviewing and recommending to DOR variation orders, extensions of time,

claims, and other matters that may come from each contractor;

(xii) negotiating with each contractor and recommending to DOR the rates for any
unscheduled items of work that may arise;

(xiii) preparing monthly reports on each contract for DOR and ADB;

(xiv) assisting DOR in preparing quarterly progress reports to be submitted to ADB;

(xv) inspecting works completed under each contract and certifying to DOR the date
of commencement of the defects liability period;

(xvi) preparing a project completion report, combining all contracts;

(xvii) undertaking benefit monitoring and evaluation in the course of the Project and
preparing a benefit monitoring and evaluation report, taking into account the
socioeconomic and traffic baseline data prepared during the TA; and

(xviii) providing guidance to DOR on future maintenance of the road and associated
works, and identifying potential problem areas that will require regular inspection
and/or attention.

13. One aim of the Project is to train and build the capacity of DOR in road maintenance and
construction project management. To support this goal, the consultant will
 40
Appendix 9, page 6

(i) propose and operate formal training programs for DOR personnel and affected
stakeholders to take place in Bhutan during the course of the project. The
programs will include

(a) biannual project review workshops;

(b) road construction and maintenance practice;
(c) contractor prequalification, bidding, and evaluation;
(d) slope protection practices in road maintenance;
(e) road safety measures and improvement;
(f) the role of the engineer/supervisor and employer in contract
management; and

(ii) conduct on-the-job training for domestic local consultant design and supervision
staff and DOR site engineers during the course of the project.

E. Reports

14. The consultant will submit reports in seven copies to DOR and three copies to ADB. All
draft reports will be submitted four weeks in advance of their final due date (to be determined
during contract negotiations) to allow the Government and ADB to review the reports and submit
their comments. The required reports are

(i) an inception report, giving initial findings and the work program for the balance of
the assignment, to be submitted one month after services commence;

(ii) monthly progress reports, giving brief details of the work carried out during the
previous month, the problems encountered or anticipated, together with the steps
taken or recommendations for their correction, and financial and physical
progress to date, by the 10th day of each month following the inception report;

(iii) a draft and final design report, complete with drawings, schedules, technical
specifications, bills of quantities, and cost estimates for each periodic
maintenance package;

(iv) a materials report giving details of suitable material sources;

(v) final contractor prequalification documents for both less experienced and more
experienced contractors;

(vi) final bid documents for each contract package;

(vii) final bid evaluation document for each contract package;

(viii) a project prospectus for each contract package for submission to the National
Environment Commission;

(ix) annual financial reports, in coordination with DOR, as per ADB’s auditing
requirements. Reports should be submitted to the Royal Audit Authority for
preparation of an audited financial statement to be forwarded to ADB.

(x) a project completion report, combining all construction contract packages; and
 41
Appendix 9, page 7

(xi) a benefit monitoring and evaluation report for the completed Project.

F. Staffing

15. One of the aims of the Project is to encourage the development of the local consulting
profession. International consultants are therefore required to associate with domestic
consultants on all phases of the project. The following staffing pattern is suggested. The period
of engagement, in person-months, is in parentheses.

1. International Consultants

(i) a team leader/highway engineer with wide experience in road

maintenance, contract documentation, and construction supervision
acquired in developing countries, with experience in applying surface
dressing using emulsion and straight run bitumen (29);

(ii) a pavement engineer with experience in the design and specification of

road pavements, Benkelman beam testing, road drainage in developing
countries (4); and

(iii) a geotechnical engineer/engineering geologist with extensive experience

in slope instability and stabilization/protection measures (4).

2. Domestic Consultants

(i) a civil/highway engineer with experience in pavement design,

construction supervision, and project management, to serve as deputy
team leader (44);

(ii) a civil/pavement engineer with experience in road pavement design and

materials testing (7);

(iii) a civil/geotechnical engineer with experience in geotechnical

investigations and design of retaining structures (16);

(iv) a civil engineer/hydrologist with experience in design of minor drainage

structures (6);

(v) an environmentalist with experience in environmental mitigation

measures for road works and bio-engineering techniques, particularly in
respect of slope protection (3);

(vi) a sociologist, with experience in project benefit monitoring (5);

(vii) a materials engineer with site experience in materials testing (39);

(viii) resident engineers, with experience in site construction management,

approximately one for every two periodic maintenance contract packages
(88);
 42
Appendix 9, page 8

(ix) site inspectors, with experience in construction monitoring, approximately

one for every periodic maintenance contract package (142); and

(x) additional support staff including a draftsman, secretaries, and laboratory

technicians, as required.

G. Services, Accommodation, Vehicles and Equipment

16. The Government will provide the consultant with the following:

(i) all available studies, reports, and data relevant to the project, including the TA
final report, maps, previous traffic counts;

(ii) suitable office space in the DOR office in Thimphu;

(iii) office equipment and monthly operating allowances, including telephone,

computer and printer, photocopier, digital camera, handheld global positioning
system (GPS), Road Management Data Acquisition System (ROMDAS);

(iv) one 4WD twin-cab diesel engine pickup vehicle. The cost of vehicle operation,
maintenance, and drivers will also be included under this provision; and

(v) basic laboratory and measurement facilities at three locations along the project.
Laboratory equipment will include, at minimum, aggregate sieves, Atterberg Limit
apparatus, Dynamic Cone Penetrometer, sand cone density test apparatus,
aggregate crushing value, water absorption, Los Angeles abrasion and
Benkelman beam. Compression testing, as well as bitumen and emulsion testing,
will be possible in at least one central materials testing lab.

17. The consultant is required to detail what additional facilities he requires in the
performance of his work on this Project, and specify their cost in his financial proposal. All
vehicles and equipment procured by the consultant for the performance of his services will
remain the property of the Government. Any equipment temporarily imported for the proposed
services during the duration of the project and then reexported will be exempted from import
duties or taxes. This will also apply to the personal effects of the consultant’s personnel.

18. Each contractor awarded a periodic maintenance contract package will provide the
following facilities to the consultant at the project site:

(i) suitable office space including maintenance and supply of office consumables
and communication;

(ii) office equipment and monthly operating allowances, including a telephone,

computer and printer, and photocopier;

(iii) one 4WD twin-cab diesel engine pickup vehicle for use by the resident engineers
and site inspectors. The cost of vehicle operation, maintenance, and drivers will
be borne by the contractor; and

(iv) support personnel to include office assistants and drivers.

 43
Appendix 9, page 9

H. Schedule

19. It is estimated that the consultants will commence their duties in January 2001 and that
the Notice to Proceed for all fast-track contract packages will be issued by June 2001. It is
expected that detailed design for the remaining contract packages will be completed by
September 2002. Award of all detailed-design contract packages is anticipated by January 2003
and all are expected to be finished, excluding the Defects Liability Period of one year, by the
end of September 2004.
 44
Appendix 10, page 1

PROPOSED PROJECT PERFORMANCE MONITORING SYSTEM

1. The project performance monitoring system (PPMS) aims to ensure that the road
improvement project is benefiting the target groups. The PPMS will (i) monitor the
project implementation performance mainly, the timely realization of the physical and
other components; (ii) monitor operations performance, mainly in terms of area and
population benefited by the Project, operation and maintenance performance, and level
of cost recovery achieved; and (iii) evaluate performance during and after project
implementation. Ultimately the result of the PPMS program will be incorporated into an
evaluation exercise, which will be undertaken after an extended period of operation of
the facilities.

2. The baseline conditions will be established at the time of project inception. Data
will be updated annually and at project completion. The PPMS will be designed,
developed, and commissioned with the assistance of the consultants for design
supervision and institutional support, but its maintenance will be the responsibility of the
project management office.

3. The desired project impacts and the indicators for measuring such impacts are
presented in the table.

Impact Indicator

1. Economic growth through Change in extent of land usage and crop type
greater production of (shift to commercial from subsistence) judged by
agricultural products change in area under different crops and change
in total area under cultivation

Change in commercial tonnage using road

network

Increase in value of agricultural products

Expansion of extension service activity

2. Economic growth through Expansion of community employment on the

employment opportunities road

3. Economic growth through Change in the number of tourists using the road
tourism Change in the number of hotel accommodations
Change in the number of employees in tourism
industry

4. Better health of population Incidence of specified diseases

served by road network

5. Lower poverty in the region Change in the percentage of families below

poverty line
Change in average rural household income
 45
Appendix 10, page 2

Impact Indicator

6. Reduced transport cost Change in passenger fares

Change in freight rates
Reduction in average travel time
Trend in maintenance costs per kilometer
Freight costs of large commercial users
Roughness index
Regulatory costs per vehicle

7. Improved access to social Change in traffic patterns (by type of vehicle)

service Change in origin – destination patterns
Social services – visitor origin analysis
Volume of traffic on market days

8. Safer travel Accidents by severity by cause per 1,000

registered vehicles
Reduction in road traffic congestion

9. Infrastructure improvement Kilometers of road, drainage, and slope

protection

Change in roughness index of project roads

Passability of roads (duration of road closures
due to flooding or pavement failure, etc.)

10. Institutional strengthening, Numbers trained, systems made operational,

e.g., technical training, computer installed, reduction of workforce,
pavement, or asset existence of scheduled maintenance plans,
management systems, incidence of unscheduled maintenance activities
computerization, upgrading
office facilities, enforcing
regulation, etc.
 46

Appendix 11, page 1

SUMMARY INITIAL ENVIRONMENTAL EXAMINATION

A. Introduction

1. This report summarizes the results of an initial environmental examination (IEE) of the
proposed Road Improvement Project in Bhutan. The Project was prepared under Asian
Development Bank (ADB) technical assistance (TA)1 between May and November 1999. The
IEE was carried out in three stages: (i) fieldwork along the main highway network to observe
environmental conditions and listen to the concerns of stakeholders; (ii) interaction with other
members of the project design team to ensure that environmental constraints and opportunities
were fully reflected in the project proposals; and (iii) preparation of the IEE documentation (IEE
and Summary IEE).

B. Description of the Project

2. Much of Bhutan’s main highway network was constructed during the 1960s by the Indian
Border Roads Organization (IBRO). Investment in structures—particularly retaining walls and
side drainage—has been insufficient and landslides frequently block the roads. Some stretches
of the pavement are in very poor condition, and in many locations the base courses are showing
signs of failure. The Department of Roads (DOR) under the Ministry of Communications (MOC)
is a relatively young organization, with inadequate resources for dealing with the demands of
routine, periodic, and emergency road maintenance.

3. The road contracting industry is small scale and requires strengthening; and so does the
consulting engineering profession. Bhutan’s engineers have few opportunities for continuing
professional development. To respond to these challenges, the Project has two major
components: road improvement program and road sector institutional strengthening program.2
The road improvement works will concentrate on the East-West Highway (Route No. 1)
between Simtokha near Thimphu and Trashigang (546 km). Other roads will be treated if funds
are available.

4. The periodic maintenance activities proposed in the Project fall into ADB’s screening
category B/C, projects judged to have some adverse environmental impacts, but of lesser
degree and/or significance than those for category A projects. For this category, an IEE is
required to determine whether or not significant environmental impacts warranting an
environmental impact assessment (EIA) are likely. If an EIA is not needed, the IEE is regarded
as the final environmental assessment report. Under Bhutan’s environmental screening
process, this type of project falls into category C, impacts moderate, project repetitive. Project of
this category does not require further environmental assessment, but do require formal
environmental clearance from the National Environment Commission (NEC). Impacts of
category C projects are best controlled through application of Codes of Practice.

1
TA 3107-BHU: Road Transport Network Development Project, for $650,000, approved on 3 December 1998.
2
This Program will be carried out under TA 3470-BHU: Road Planning and Management Strengthening Project,
for $954,000, approved on 20 July 2000.
 47

Appendix 11, page 2

C. Description of the Environment

1. Physical Environment

5. The project roads are situated in a mountainous environment, with elevations ranging
from 300 meters above sea level (m asl) in the Terai to about 3700 m asl at Thrumshingla.
Regional climates vary from subtropical in the south through warm temperate to cool temperate.
The climate is monsoonal, with most rain falling between June and September. Annual totals
may exceed 5,000 millimeters (mm) at Sarpang and Galephu. In rain shadow areas and at
higher elevations, annual totals may be much less, down to 1,200 mm. In the front ranges,
rainfall intensities can reach 600 mm/day, but again are much less at higher elevations and
interior valleys. In winter the highest passes are closed by snow. The region is
geomorphologically active. Most slopes are only marginally stable, and landsliding is common.
The geology is mixed, with rock types varying from hard quartzite to soft mudstone.

2. Ecological Resources

6. Bhutan is a country of extreme biodiversity. Below the tree line (approx. 4,000 m), the
vegetation is forest. Most of this is still intact, and so most of the project roads lie within
temperate or subtropical forested landscapes. Forest types crossed by the roads include fir,
blue pine, mixed conifer, upland hardwood, lowland hardwood, chir pine, and subtropical
lowland. The forests offer a full range of ecosystem services, including wildlife habitat and
watershed protection, and are important economically (both commercially and for subsistence).
Many medicinal plants are found in the forests, at all elevations. Bhutan retains an exceptional
range of wildlife that includes many endemic species. Many are nationally or internationally rare,
endangered, or threatened. Flagship mammalian species utilizing the terrain crossed by the
project roads include red panda, Himalayan and sloth bear, tiger, elephant, and golden langur.
The temperate broadleaf forests are particularly important as habitat for birds, of which 770
species have been identified to date. Birdlife International has listed Bhutan as a Priority 1
Endemic Bird Area. Habitat degradation and loss, subsistence and commercial hunting, and
poisoning have affected some wildlife populations. However, the prevailing Buddhist culture and
low population density combine to reduce the severity of the threats to wildlife, especially when
compared with that in other South and Southeast Asian states. The project road crosses one
national park and four proposed biodiversity corridors linking protected areas.

3. Human and Economic Development

7. Bhutan’s population is approximately 600,000, of whom some 85 percent are rural and
depend on agriculture for a living. Population growth is reported to be 3.1 percent per year. The
settlements connected by the project roads are very small, with district centers housing a
maximum of a few thousand people. The communications infrastructure includes the road
network, now standing at about 3,375 kilometers (km), and a new national telecommunications
system. There is no internal air service and no inland navigation. All other transport is on foot,
by horse, mule, or yak.

8. Industrial activities are very limited. The most important strategic industry is hydropower.
This is developing rapidly, with electricity sales to India seen as providing the bulk of state
income in future years. Two hydro projects are relevant to the project: (i) the ongoing Kurichhu
Project, under construction by Indian contractors on the Kurichhu, some 7 km south of the East-
 48

Appendix 11, page 3

West Highway; and the planned Mangdechhu Project, located on the Mangdechhu immediately
below Trongsa town and Dzong, which will have access to India.

9. Local administration is carried out through districts (Dzongkhag) and blocks (geog). At
the national level, environmental policy is developed and implemented by NEC. With ADB
assistance,3 Bhutan recently established a formal process for environmental assessment of all
major projects. The new system includes both sectoral guidelines for assessing road and
highway proposals and a code of practice for road construction and rehabilitation.

4. Quality-of-Life Values

10. The population of Bhutan is predominantly rural and poor. Health services are free.
Serious health problems include respiratory infections, mother/child mortality, accidents
(including traffic accidents), and vector-borne diseases such as malaria. An important constraint
on the provision of health care is physical access. Due to the remoteness of many settlements,
it is often very difficult for patients to reach appropriate facilities. Bhutan has many important
cultural heritage sites, archaeological, historical, and religious. The most spectacular are the
dzongs, but the list also includes sites of battles and sacred natural features such as pools,
mountains, and caves. Information on such sites is readily obtained from local residents.
Bhutan’s national identity centers on Buddhist values. In environmental terms, the most
important is the interdependence of all life forms. Bhutan is a very important reservoir for
traditional ecological knowledge or IK (indigenous knowledge), particularly in relation to the use
and properties of medicinal plants.

D. Screening of Potential Environmental Impacts and Mitigation Measures

1. Impacts due to Project Location

11. The Project concerns road periodic maintenance and will not involve road widening,
realignment, or new construction. This aspect of the Project will not give rise to any significant
impacts. Small-scale construction camps, contractor’s facilities, and quarries will be needed.
Subject to appropriate site-specific planning and control through Environmental Codes of
Practice, those structures will not give rise to unacceptable impacts. The project road passes
through one national park and four proposed biodiversity corridors. Appropriate responses are
to (i) ensure that wildlife is not harassed; (ii) consult with national park managers with respect to
wildlife concerns, labor force management, etc.; (iii) coordinate with national park managers
with respect to road maintenance activities and scheduling; (iv) avoid quarrying within national
parks; (v) avoid siting work or labor camps within national parks; and (vi) review siting of existing
national workforce camps.

2. Impacts due to Project Design

12. The Project is designed to carry out much-needed highway periodic maintenance and to
improve relevant domestic capacity. It will result in an overall reduction of environmental impact
compared with the without-project scenario, especially in relation to (i) siting and operation of

3
TA 2535–BHU: Strengthening EIA Capabilities & Preparation of Environmental Guidelines, for $350,000,
approved on 13 February 1996.
 49

Appendix 11, page 4

quarries, (ii) slope failure caused by inadequate drainage, and (iii) use of firewood for heating
bitumen.

3. Impacts during Construction

(i) Erosion and sedimentation. The Project will not involve earthworks.

(ii) Hydrology and Drainage. The Project will improve road drainage. No
significant impact from this activity is foreseen.

(iii) Paving and Firewood. A major part of the Project’s physical works will be
paving. At present this activity uses firewood. The Project will require
nonwood burning technologies for heating asphalt in all dzongkhags
(Thimphu, Wangdue-Phodrang, Mongar, and Trashigang).

(iv) Construction Materials. The Project will require appreciable quantities of

aggregates for paving works. Historically, stone has been collected from the
roadside or from shallow workings, with significant negative impacts. Sand
and gravel are obtained from rivers. Small aggregate may also be produced
by hand. The Project provides an opportunity to improve the system for
supply of construction materials by developing district-level plans, and
possibly centralized quarries.

(v) Traffic. It will not be possible to bypass the works, so providing continued
access for normal traffic will be a major element in construction planning.
Hazards could occur and should be minimized though appropriate signing,
lighting, flagmen, etc. Construction traffic should be subject to standard
controls on speed, vehicle loading, sheeting, etc.

(vi) Camps: The Project’s construction camps could be foci for various health
and social problems. These can be avoided or minimized through
consultation with the relevant district and geog officials, and camp
management.

(vii) Labor: Employment would be a major temporary benefit of the works.

(viii) Health and Safety. The Project provides an opportunity to improve safety
and working conditions, through training and development of relevant
contractual conditions.

4. Impacts during Road Operation

(i) Air quality. The Project will not affect Bhutan’s excellent air quality.

(ii) Severance. Severance is not a problem along the project roads, and
predicted traffic levels will not result in severance being a problem in any
of the communities served by the road.
 50

Appendix 11, page 5

(iii) Accidents. Improving the pavement is likely to result in higher vehicle

speeds. This may result in more accidents and increased severity of
accidents. A particular concern is the hazard to roadside residents,
especially children, from speeding through-traffic. Mitigation measures to
consider include engineering measures for differentiating between high-
speed rural areas and settlements, including speed bumps and rumble
strips; and incorporating safety measures in the design of the project,
specifically superelevation on bends when the pavement is reconstructed,
guardrails, provision for pedestrians, and reflective roadside markings.

(iv) Fire. The project will not alter the situation with respect to roadside fires.

(v) Induced development. Roadside development is tightly controlled by the

district administrations. The Project will not contribute to uncontrolled
development.

(vi) International trade. Road improvements to be carried out under the

Project are unlikely to have any measurable effect on international trade
considering the unsustainable use of timber, wildlife, and other forest
products.

5. Impacts of the Environment on the Project

13. The Project will be significantly affected by weather and by slope processes.

(i) Weather. The dominant climatic feature in Bhutan is the monsoon.

Routine and periodic maintenance works during this time are difficult.
Activities focus on emergency landslide clearance. It is important that no
earthworks are carried out during the monsoon. Maintenance work at high
elevations can be constrained by frost and snow.

(ii) Slopes. The roads traverse a geomorphologically active landscape in

which landsliding are the rule rather than the exception. This has many
implications for road design, construction, and maintenance: slopes must
be treated with great respect, and disturbance to them minimized.

6. Unlikely Impacts

14. The following impacts are considered unlikely to occur in this road maintenance Project

(i) involuntary displacement due to land take for the works,

(ii) unwarranted alteration of traditional lifestyles,
(iii) increased direct access to unprotected ecologically valuable resources,
(iv) increased unsustainable or illegal use of natural resources,
(v) unmanageable immigration to the project area, and
(vi) unmanageable induced and/or roadside development.
 51

Appendix 11, page 6

7. Potential Enhancement Measures

15. The Project provides an opportunity for major enhancement measures. From the point of
view of continuous access, slope stabilization is the most important:

(i) Slope Stabilization. Pavement and drainage works are only part of the answer to
ensuring continued road operation. Additional and improved slope stabilization
works are required in many areas. Implementation of an appropriate slope-
related program would maximize the effectiveness of the funds available to DOR.
A 13-point action plan covering a range of slope stability issues, in order of
priority, is presented in the Slope Stabilization Manual.4 In addition, it is strongly
recommended that DOR consider more extensive use of bioengineering.

(ii) Water Management. The Project offers an opportunity to assist some

communities with the supply of irrigation water, and to solve problems of
uncontrolled irrigation water disposal. The Project could assist both the Ministry
of Agriculture and DOR to install dual-purpose roadside water management
structures where needed.

(iii) Road Safety. As noted, the Project provides an opportunity to improve road
safety by incorporating various engineering measures in the program of works.

E. Institutional Requirements and Environmental Monitoring

1. Institutional Capacity and Requirements

16. At present DOR has limited capacity to implement and enforce the environmental
provisions for road projects, which are emerging from Bhutan’s new environmental assessment
process. Since environment-friendly techniques are central to low-cost mountain road
engineering, it is essential that DOR increase its ability to design and implement these
measures. The Project provides an opportunity for relevant training directed at road
maintenance operations. Such training will complement and amplify technical assistance being
provided to DOR relating to new feeder road construction (proposed United Nations Capital
Development Fund Feeder Roads Project BHU/98/C02) and rural access (International
Development Association /SNV Rural Access Project).

17. Environmental aspects of road maintenance where improved techniques will be of

benefit include paving, drainage, Construction Materials, slopes stabilization, earthworks, spoil
disposal, snow clearance, safety, consultation, contract documentation, contractors, and
enforcement.

2. Environmental Management

18. The Project will incorporate a number of mitigation measures to minimize impacts on
sensitive receptors. These can be dealt with through the application of the existing
Environmental Code of Practice for the Road Sector.

4
The Slope Stabilization Manual was prepared under TA 3107-BHU.
 52

Appendix 11, page 7

3. Environmental Monitoring

19. The project manager in DOR’s project management office will be responsible for
monitoring environmental compliance. At the field level, site engineers will carry out periodic
monitoring, while day-to-day monitoring is the contractors’ responsibility to fulfill the
requirements established in the contract documents. An environmental specialist on the
consulting services team for design, supervision, and institutional support will assist DOR with
environmental monitoring.

F. Findings and Recommendations

1. Evaluation of IEE

20. This IEE has identified (i) sensitive environmental receptors such as slopes, wildlife, and
habitat; (ii) important technological issues such as sourcing construction materials, and heating
bitumen; (iii) mitigating measures in case of environmentally damaging activities included in the
Project like earthworks; (iv) important enhancement opportunities such as slope stabilization,
water management, and health and safety; and (v) strengthening of environmental capability for
the key actors in road construction and maintenance, including project engineers, contractors,
engineers, and domestic consultants.

21. The authors of the IEE consider the effort involved sufficient to guide decision making on
this project.

2. Further Environmental Work Required

22. Further environmental work is required during project preparation: (i) incorporating the
IEE recommendations in the Project’s final design; and (ii) drafting a Project Prospectus for
submission by DOR to NEC to obtain formal environmental clearance.

G. Conclusions

23. The IEE concludes that the Project, as proposed, does not require an environmental
impact assessment. The road improvement activities proposed in the RIP fall into NEC’s
screening category–C Impacts moderate, project repetitive. Projects in this category do not
require further environmental assessment, but require formal environmental clearance from
NEC. To receive domestic environmental clearance, DOR needs to develop and submit to NEC
a formal Project Prospectus. Impacts of category C projects are best controlled through Codes
of Practice, in this case, through the existing Environmental Code of Practice for the Road
Sector, completed in 1999.
 53
Appendix 12, page 1

ECONOMIC EVALUATION

A. Analysis of Basic Data

1. The economic evaluation of the proposed road improvements was based on the
following basic data: (i) road condition, traffic, and axle-load surveys; (ii) analysis of road
improvement costs; and (iii) review of vehicle operating costs (VOCs).

1. Assessment of Road Condition

2. A road roughness survey was carried out using a vehicle-mounted bump integrator and
counter to measure the unevenness of the road profile, and a calibrated odometer to measure
distance along the road. The bump integrator produced roughness values and the equivalent
international roughness index (IRI) for all sections of the road being considered for
improvement. Also, a road inventory and condition survey was conducted using a standard four-
wheel drive pickup with a distance/speed sensor spliced to the vehicle speedometer cable. This
equipment was interfaced with the ROMDAS software. This allowed the location of inventory
features and their condition to be recorded. Events were recorded on the computer keyboard
as point events or continuous events. Point events are those on or adjacent to the road such as
a culvert or a pothole. Continuous events are those that apply over a section of the road such as
drains or cracking. During the inventory and condition survey, exogenous interventions such as
the construction of new drainage structures and/or slope protection works were identified.

3. Following the physical surveys on the project roads, homogeneous sections were
defined based on traffic volumes derived from the traffic analysis, roughness observed during
the surveys, and altitude and gradient of the roads. On inspection, the East-West Highway was
subdivided into 24 homogenous sections, the Sarpang-Wangdue Highway, 9 sections and the
Trongsa-Gelephu Highway, 12 sections. The resultant homogeneous sections together with the
engineering data were used in the Highway Design and Maintenance (HDM) analysis.

2. Axle-Load Surveys

4. To check on the loading characteristics of trucks, an axle-load survey was undertaken at

Lobesa, west of Wangdue. In total 68 vehicles were weighed: 45 trucks of various sizes, 12
buses, and 11 other vehicles. All lighter vehicles were discarded in assessing vehicle damage
factors. In the case of trucks, 55 percent of the vehicles had gross vehicle weight (GVW) under
12 tons and 45 percent above 12 tons. However, 70 percent of trucks had damage factors of
equivalent standard axle (ESA) below 3.0 and 30 percent above 3.0. Overall, the estimated
average damage factor for trucks was ESA 2.01. Buses were generally lighter, with all vehicles
surveyed being under 12 tons GVW. The calculated damage factor for all buses was below ESA
0.5. The estimated overall average ESA for buses was estimated 0.11. Estimated damage
factors for both trucks and buses compare reasonably well with default suggestions in the HDM
model as well as with those in previous studies. The estimates of ESAs for trucks and buses
were subsequently incorporated into the pavement deterioration analysis in HDM III.
 54
Appendix 12, page 2

3. Traffic Analysis and Projections

5. For analysis purposes traffic volumes for three types of motorized vehicles were
developed. The level of traffic on the project roads was determined by referring to recent
Department of Roads (DOR) traffic count data. This was compared with figures in recent
studies relating to the transport sector in Bhutan to check on the validity of the base information.
Traffic on the project roads is subject to a range of influences, some of which are markedly
seasonal. In particular, the extremely low temperatures in winter on the high mountain passes
make the road difficult to drive on. During the monsoon season in June-September, many road
sections become difficult to negotiate, which also reduces traffic levels. Seasonal factors were
applied to the traffic counts and base year traffic was obtained. It is evident, Table A12.1 that
traffic is much higher in the west, toward Thimphu, than in the east. Light vehicles predominate
in the traffic mix, with trucks comprising the majority of the remainder.

Table A12.1: Traffic on the East-West Highway (AADT)

Section Light Bus Truck Total

Trashigang – Mongar 33 1 35 69
Mongar – Jakar 28 1 23 52
Jakar – Trongsa 38 3 16 57
Trongsa – Wangdue 100 3 64 167
Wangdue – Lobesa 184 9 86 279
Lobesa – Simtokha 323 21 131 475
AADT – average annual daily traffic.

6. For the forecast, two types of traffic are considered: normal and generated traffic. Since
the project road passes through a remote area and, currently, access to markets and urban
centers is hampered by the relatively poor condition of the road, it seems logical that if the roads
are improved, some additional trips will be generated. The area of influence of the project roads
is concerned mainly with pastoral and subsistence farming with little or no industrial
development. In addition, the area has significant potential – but as yet unrealized - for tourism
development. Diverted traffic1 has been excluded from the analysis.

7. Predictions of generated traffic are difficult to make because they involve judgment
based on the expected response of road users to the reduced cost of road transport due to an
improved road. It is only likely to be significant in those cases where the road investment brings
about substantial reductions in transport costs. To estimate the amount of generated traffic,2 a
transport elasticity of demand of unity was adopted for all vehicle types. This means that 1
percent decrease in transport costs leads to 1 percent increase in traffic.

8. In developing traffic forecasts, it was important to take full account of the analysis of
existing traffic demand, which showed the following principal features: (i) rapid growth of all
1
Diverted traffic is traffic that would switch from another route or mode of transport if the Project is implemented,
while still traveling between the same origin and destination. The East-West highway forms part of the main
corridor that links the country. The main alternative route is to travel south to the border and subsequently
through India. That option is unlikely.
2
The United Kingdom’s Transport Research Laboratory has undertaken extensive research in this area and the
recommended approach to forecasting generated traffic is to use demand relationships. The price elasticity of
demand for transport measures the responsiveness of traffic to a change in transport costs following a road
investment. Evidence from a selection of countries indicates a range of -0.6 to -2.0 for the elasticity of demand
for transport, with an average of about -1.0.
 55
Appendix 12, page 3

motorized traffic, 20 percent annual increase over the last five years; (ii) low car ownership,
11/1,000 population with a growth of 21 percent annually since 1994; and (iii) dominance of the
road transport mode for both passengers and freight. Historic data did not seem to be consistent
for forecasting purposes. Accordingly, it was decided to use factors based on experience in
other developing countries, modified by evidence available in Bhutan. That experience shows
that, generally, freight traffic grows at a pace similar to that of the gross domestic project (GDP),
an implied elasticity of 1.0, and passenger traffic grows rather faster with a typical elasticity of
around 1.2. The elasticities adopted (Table A12.2) were disaggregated into three time periods:
1999-2006, 2007-2012, and 2013-2021. Over time, the elasticities gradually decline as is shown
by evidence from many countries. If this were not the case, the proportion of the transport
sector in relation to total GDP would continue to increase. Since the share of transport as a
proportion to total GDP rarely amounts to more than 10 percent this seems unlikely.

Table A12.2: Transport Demand Elasticities

Period Light Bus Truck

1999-2006 1.8 1.8 1.5
2007-2012 1.6 1.6 1.3
2013-2021 1.4 1.4 1.0

9. The forecast GDP growth rates were combined with the income elasticities of demand
for transport to give traffic growth projections for each vehicle type. Annual traffic growth rates
used for forecasts of future traffic and road user benefits were assumed to vary over time as
follows (Table A12.3):

Table A12.3: Traffic Growth Rates (%)

Period Light Bus Truck

1999-2006 10.5 10.5 8.7
2007-2012 7.2 7.2 5.9
2013-2021 6.3 6.3 4.5

B. Economic Evaluation

1. Road Improvement Costs and Options

10. The economic costs of implementing the Project were estimated from the financial costs
of civil works, physical contingencies and supervision. For nontradable items, a standard
conversion factor (SCF) of 0.93 was used. The estimates included physical contingencies but
excluded price escalation, price contingencies, and interests during construction. Financial
operation and maintenance (O&M) costs were also adjusted by the same approach to obtain
economic costs. Incremental O&M costs were calculated as the difference between O&M
requirement for the with- and without- project scenarios. Economic costs were estimated in
constant end-1999 prices. No salvage value was considered at the end of the project life cycle.

3
SCF based on the average level of direct taxation and the level of market distortion present in the economy.
Evidence from recent studies, most notably the World Bank-financed Rural Access Project, estimates a SCF of
0.9.
 56
Appendix 12, page 4

11. The cost estimates of the road improvement activities were derived from several sources
including DOR, Bhutanese contractors, previous studies as well as experience within the region
and elsewhere. The activities comprise the following:

(i) Routine maintenance includes the cleaning of drains and culverts, removal of debris
from the roadway including material deposited in the drains and roadway from minor
slips, cutting of vegetation as well as pothole patching. Each of these activities is
assumed to occur throughout the year.

(ii) Periodic maintenance includes activities, that are required at regular intervals to restore
the road surface to the condition of the original construction. When performed in a timely
manner, periodic maintenance activities may contribute to the strengthening of the
pavement structure, thereby accommodating increased levels of traffic. Periodic
maintenance activities may include resealing such as surface treatment with sand or
chip seals and overlay with cold or hot mix asphalt. The periodic maintenance
interventions selected for this study took into consideration local contractor and DOR
experience and engineering best practices. Several trial runs were made using the HDM,
including the single surface treatment option, after which four options were selected:
option 1, double surface treatment (DST) chip seal applied every 6 years; option 2, DST
chip seal applied when roughness is IRI 6.5 meters per kilometer (m/km); option 3, 100
millimeters (mm) water-bound macadam (WBM) base course with DST; and option 4, 40
mm hot mix asphalt-concrete (AC) overlay. Unit costs were derived for each option by
applying current unit costs for labor, equipment, and material; productivity rates were
developed by the consultant and validated with DOR..

(iii) In addition to routine and periodic maintenance, capital works are required in certain
areas to ensure that periodic maintenance interventions achieve or exceed their
intended design life and reduction in VOCs achieve expected levels. While in some
areas these interventions may be quite extensive and could not be covered under the
existing loan, other areas require only relatively minor interventions. The interventions
are (i) reconstruction of destroyed pavement, (ii) slope protection, (iii) construction of
new culverts, (iv) repair of existing culverts, and (v) construction of lined drains.

2. Least-Cost Improvement Options

12. The preliminary results of the economic analysis indicated option 4 (40 mm hot mix AC
overlay) would produce the highest returns on many sections of the project road, given the
greater reduction in road roughness offered by this alternative than by the DST options.
However, implementing option 4 will involve more sophisticated engineering expertise and
necessitate the use of expensive plant and equipment. Given the relatively low development of
the contracting industry in Bhutan at present, it is doubtful if the AC overlay solutions would be
technically feasible. Furthermore, while option 4 generates greater benefits than alternative
DST solutions, it also involves significantly greater cost. Given the circumstances, the economic
analysis was augmented by engineering practicalities that indicate the most appropriate
rehabilitation option on each section of the East-West highway. On the majority of the sections,
option 1 (DST) was identified as adequate to improve the pavement to a satisfactory condition.
On certain sections in a particularly poor condition, however, option 3 (100 mm WBM + DST)
was deemed necessary.
 57
Appendix 12, page 5

3. Vehicle Operating Costs

13. The VOC parameters for three vehicle types were developed using the World Bank’s
HDM model adjusted to local conditions. VOCs are influenced by vehicle speed, the horizontal
and vertical alignment of the road, and the physical condition of the road surface in addition to
vehicle type, price, age, and load. The model utilizes the input data to calculate VOCs based on
the relationships originally prepared for the HDM III model of the World Bank. Substantial input
data are provided as defaults of the model itself. For this analysis, however, detailed local
information was provided as much as possible to obtain results that are specific to Bhutan. The
input data was based on the end-1999 prices and is net of taxes, duties, and other charges. The
output of the model includes physical quantities of consumption and speed, and the associated
VOC per predefined unit of 1,000 vehicle-km. VOC estimates for the three vehicles types and
IRI values are shown in Table A12.4.

Table A12.4: Vehicle Operating Costs for Different IRIs by Vehicle Type
(Nu/km)

IRI (m/km) Light Bus Truck

2.0 4.9 7.8 9.4
3.0 5.1 8.0 9.8
4.0 5.3 8.3 10.2
5.0 5.6 8.6 10.7
6.0 6.0 9.0 11.3
7.0 6.4 9.4 11.9
8.0 7.0 9.8 12.7
9.0 7.9 10.4 13.5
10.0 9.0 11.0 14.5
11.0 10.8 11.7 15.7

4. Benefits

14. The improvement of the East-West Highway will produce mainly road user benefits,
which include savings in VOCs and time arising from the road rehabilitation. For this analysis,
road user benefits were restricted to savings in VOCs arising from changes in surface
roughness. Additionally, since transport costs are relatively high and improvements offer
significant transport cost savings that will stimulate the local economy, there will also be
development benefits such as increase in the quantity and quality of agricultural production in
the project area, tourism, and industrial development. These benefits can be measured in terms
of net value of generated output directly attributable to the road rehabilitation or in terms of the
transport cost benefits secured by generated traffic.4 However, it is essential that each approach
be pursued separately to avoid double counting. The present methodology concentrates on
road user benefits and adopts the approach where economic development benefits are
measured in terms of the benefits gained by generated traffic. The benefits from generated
traffic equal half of the product of the extra number of trips and the VOC saving per trip.

4
In Bhutan, freight rates are determined by the market and passenger fares are regulated but periodically
reviewed. During the economic evaluation the estimated VOCs showed similarities with the rates and fares
actually charged in the market. This increases the confidence that VOC savings would be passed on to the
users.
 58
Appendix 12, page 6

15. Road improvements will change the nature and patterns of road maintenance compared
with continuance of the without- project scenario. This has repercussions for the time stream of
net maintenance costs and there may be opportunities, depending on the nature of the initial
intervention, for net savings in resource costs. The incidence of maintenance activities and
subsequent costs are determined by the HDM model. Savings (or costs) in these were also
included in the analysis.5 Other quantifiable benefits such as travel time savings, cargo holding
time savings, and reduced agricultural cargo spoilage were also studied, but not included in the
evaluation. Nonquantifiable benefits such as social benefits and improved national integration
are described in Appendix 13.

5. Economic Rate of Return

16. The economic evaluation of the Project compared the costs and benefits for the with-
and without- project scenarios. Benefits based on VOC savings, in economic prices, were
calculated for normal and generated traffic. These benefits were compared with the road
improvement and maintenance costs to calculate the economic internal rate of return (EIRR).
Benefit streams were calculated for a period of 20 years starting in 2001. Costs and benefits
were estimated net of duties and taxes, and are expressed in constant end-1999 prices (Table
A12. 5.6 The base EIRR for the Project is 32 percent.

17. The sensitivity of the EIRRs to changes in the underlying cost and benefit parameters
was analyzed. The results (Table A12.6) show that assuming a 15 percent increase in project
costs would decrease the EIRR to 27 percent. If benefits only materialized to 85 percent of the
original estimates, the EIRR would decrease to 27 percent. In a more adverse situation of a
simultaneous 15 per cent increase in project cost and 15 percent reduction of benefits the
overall EIRR will be 22 percent. The switching value7 for cost was determined to be 100
percent, and switching value for benefits was 49 percent. If project implementation is delayed by
two years, the EIRR will be reduced to 20 percent. Also if only benefits due to VOC savings of
normal traffic are considered, the EIRR will decrease to 25 percent.

5
It is important to mention that a road for motor vehicles exists. The economic and social cost of severance of the
road would be unacceptable. Therefore, the complete loss of motorized accessibility cannot be argued as being
a realistic without-the-project case. Indeed, if it were, it would be possible to justify most infrastructure
investments merely by failing to provide for their maintenance. However, it is clear that presently the project road
is deteriorating over time. With this in mind, it has been assumed that the project road in the without-the-project
case receives minimal maintenance, but with a cap in the IRI. Furthermore, between 1999 and 2001, it is
assumed only routine maintenance is undertaken on the project roads. Following 2001, works are assumed to
include both routine maintenance and patching (80 percent of potholes).
6
As observed in Table A12.5 benefits from VOC savings diminish with time due to the natural deterioration of the
road.
7
The switching value shows the percentage increase in a cost variable (or decline in a benefit variable) required
for the net present value (NPV) to become zero, which is the same as the EIRR reducing to the cutoff level of 12
percent.
 59
Appendix 12, page 7

Table A12.5: Economic Cost and Benefit Streams

(Nu. Million)

Year Costs Benefits Net

Benefits
Normal Generated Maintenance Total
Traffic Traffic Savings
1999 0.0 0.0 0.0 0.0 0.0 0.0
2000 0.0 0.0 0.0 0.0 0.0 0.0
2001 -138.9 8.5 0.0 -4.0 4.5 -134.3
2002 -195.4 35.2 3.8 4.0 42.9 -152.5
2003 0.0 46.5 5.2 57.3 108.9 108.9
2004 0.0 62.4 7.4 56.8 126.5 126.5
2005 0.0 78.2 9.6 56.7 144.5 144.5
2006 0.0 95.9 12.1 0.6 108.6 108.6
2007 0.0 119.2 16.1 -82.0 53.3 53.3
2008 0.0 128.3 17.3 -83.8 61.8 61.8
2009 0.0 127.2 16.2 0.8 144.3 144.3
2010 0.0 120.2 14.2 0.9 135.2 135.2
2011 0.0 104.3 11.5 1.0 116.8 116.8
2012 0.0 84.1 9.0 1.0 94.2 94.2
2013 0.0 85.5 8.7 -81.6 12.6 12.6
2014 0.0 75.4 8.7 -83.5 0.7 0.7
2015 0.0 62.5 7.3 1.3 71.1 71.1
2016 0.0 51.5 6.2 1.3 59.1 59.1
2017 0.0 43.6 5.2 1.5 50.3 50.3
2018 0.0 37.6 4.2 1.6 43.4 43.4
2019 0.0 50.6 3.1 -81.0 -27.3 -27.3
2020 0.0 37.2 3.7 -82.8 -41.8 -41.8
2021 0.0 35.6 3.2 1.8 40.7 40.7

IRR (%) = 32
NPV = 231.8

IRR = internal rate of return, NPV = net present value.

 60
Appendix 12, page 8

Table A12.6: Sensitivity Analysis

Scenario EIRR NPV Switching

(%) (Nu. Million) Value (%)
Base case 32 231.8
Increased costs by 15% 27 198.3 100
Reduced benefits by 15% 27 163.5 - 49
Increased costs by 15% and 22 130.1
Reduced benefits by 15%
Delay in Project Implementation 20 105.9
by 2 years
Considering Benefits due to 25 193.3
Normal Traffic only
EIRR = economic internal rate of return, NPV – net present value.
 61
Appendix 13, page 1

SUMMARY POVERTY AND SOCIAL ASSESSMENT

A. Poverty Reduction and Social Assessment

1. Background

1. The Government, with the assistance of the Asian Development Bank (ADB), prepared a
study1 on poverty and a social assessment of the Project. The overall objective of the study was
to assess (i) the poverty profile of beneficiaries; (ii) the groups who are expected to benefit from,
and use services that are to be provided by the Project; (iii) the needs and demands of the
groups; (iv) their absorptive capacity; (v) gender issues; and (vi) possible adverse effects on
vulnerable groups and the need for measures to mitigate such effects or compensate those
adversely affected. The study was carried out in June-July 1999.

2. The main finding of the study was that the Project will lead to an improved standard of
living and reduced poverty and unemployment in its area of influence. This will be achieved by
enhancing household mobility and expanding economic opportunities in the project area,
particularly in agriculture, cottage industry, and tourism. Special efforts were also made to
involve the poor by providing employment in the process of construction and in the
institutionalized labor-based road maintenance, particularly for women through the Department
of Roads–national workforce.

3. Bhutan remained closed to the outside world until the 1960s when the third King opened
links with other countries and initiated the development of Bhutan as a modern nation. Since
Bhutan is a landlocked country, its socioeconomic development depended largely on the
construction of roads. Bhutan now has a road network of about 3,375 kilometers (km), the main
routes being the East-West Highway and the four north-south highways. These connect almost
all dzongkhags (districts) and a large proportion of the rural settlements. Establishing and
maintaining these roads have been a very difficult task because of the terrain and extreme
variations in climate: heavy snows in winter, and monsoon rains in summer.

4. A social assessment using participatory approaches and surveys in the project area was
carried out as part of project preparation. The study consisted of socioeconomic surveys (105
households, about 1 percent coverage of total households in the project area), focus group
discussions with key stakeholders such as Planning Commission and the Health and Education
ministries, Government officials in the district, social sector administrators of the nine districts in
the project area, Road Safety and Transport Authority, Bhutan Development Finance
Corporation, and National Women Association of Bhutan. During the Fact-Finding Mission, a
rapid rural appraisal was conducted for road workers and beneficiaries in several project areas
to assess the potential employment opportunity as well as beneficiaries’ needs and constraints.
In addition, an initial participatory workshop on improving the well-being of women road workers
was conducted with key stakeholders such as the private sector, aid agencies, civil society, and
government officials during the Appraisal Mission.

2. The Project Area

5. The East-West Highway is the strategic road link allowing access across the country.
Without this road, access between the steep valleys of Bhutan would be only by horse and foot.
The only alternative route is to go south into India and back up into Bhutan. The road has

1
TA 3107-BHU: Road Transport Network Development Project, for $650,000, approved on 3 December 1998.
 62
Appendix 13, page 2

therefore a major national and strategic importance, which has allowed development
opportunities into central and eastern Bhutan. It links the districts of Thimphu with Wangdue-
Phodrang, Trongsa, Bumthang, Mongar, and Trashigang and therefore directly affects the
populations in those areas.

6. The Project will influence the economic and social development of much of the central
region of Bhutan, with direct impacts on 9 of the 20 districts. Beginning in Thimphu, the capital
city on the west, the road traverses hinterland areas of the Wangdue-Phodrang, and Trongsa
districts, with access links to Bumthang, Mongar, and Trashigang districts in the east. By
improving the road condition and accessibility, the Project will indirectly influence all districts in
the country.

3. Poverty Data Availability

7. The late start in planned development and, hence lack of trained and qualified
manpower, constrained the systematic surveys on the income and expenditure patterns of
households in Bhutan. The limited surveys of land holdings and asset ownership, are not
nationally representative. Bhutan has yet to institute a comprehensive national sample survey
system that can collect, analyze, and report socioeconomic data periodically.

4. National Human Development and Government Strategy

8. With an estimated gross national product (GNP) per capita of $586 in 1998, average
Bhutanese incomes are low–some $1.30 per head per day–reflecting widespread income
poverty. However, measuring poverty by using GNP per capita often gives a partial and
distorted picture of human development. This is perhaps more true of Bhutan than of many
other countries. A large part of Bhutan’s rural economy, which is predominantly agrarian,
remains nonmonetized, with barter systems still prevalent in many parts of the country. The
Government recognized the multiple dimensions of poverty by measuring and targeting a range
of health, education, and other standards regarded as fundamental to human well-being.

9. Indicators of human development showed that life expectancy in Bhutan had risen from
48 years in 1984 to 66 years in 1998, which was three years more than the average for South
Asia. The reported infant mortality rate was 71 per 1,000 live births in 1998. While that was
considerably higher than Sri Lanka’s 17 deaths per 1,000 live births, it was marginally lower
than the average for South Asia. Life expectancy figures are strongly influenced by the
prevailing levels of infant mortality. Many aspects of life are reflected in this one statistic–the
capability of parents, prevalence of malnutrition and disease, availability of clean water, efficacy
of health services, and, above all, the health and status of women. Furthermore, although the
adult literacy rate had quadrupled in the past 20 years, that of Bhutan was 54 percent in 1998,
among the lowest in the South Asia region. Based on these indicators above, the Human
Development Index in 1998 was estimated at 0.581 putting Bhutan in the category of medium
human development countries along with Sri Lanka and the Maldives in South Asia.2

10. Bhutan has concentrated on supporting socioeconomic growth to ensure universal

access to basic health, education, and essential social services. Thus, the abject poverty seen
in some parts of Asia as a result of low incomes is not evident, as the Government’s social
welfare policies over many years have resulted in high levels of human capital and relatively
widespread social well-being.

2
Royal Government of Bhutan, Bhutan National Human Development Report 2000.
 Appendix 13, page 3
63

5. Poverty and Socioeconomic Profile in the Project Area

11. According to the socioeconomic survey, 38 percent of the households are below the
estimated poverty level of Bhutan.3 The survey shows that the poor are more likely to have
lower education, have more children, have poorer house, lack of potable water, and have small
land.

12. The total population in the Project area is 68,437 and 85 percent live in rural areas.
Agriculture continues to be the main source of livelihood. Most of the people earn their living
through farming, raising animals, and gathering forest products. About 90 percent are farmers
while approximately 15 percent also engage in off-farm enterprises including retail activities,
handicraft, and food products.

13. Land holdings vary in size from zero for the few landless people to around 25 acres;
however, the average holding for 65 percent of the people has is 2.0 acres. From the focus
group discussion conducted during the Fact-Finding Mission, size of land holding is not a
predictor of income; depending on the mix of types of land, production and its value, the income
derived from a plot will vary. Farmers with little land of their own will often sharecrop the land
belonging to others in return for half the crop so as to generate sufficient income.

14. Employment opportunities in rural Bhutan are restricted to work as a civil servant, a
teacher, or a health worker in the basic health units in the villages or as a village headman.
Some of the landless poor run small shops in the villages as one of their survival strategies.
Occasional day labor is available for collecting and carrying firewood in some areas. During
harvest and planting seasons, often there is labor shortage in rural areas. Farming households
tend to help each other at times of greatest labor need and reciprocate to fill the gaps rather
than hire labor.

15. Other land-poor families join the Department of Road (DOR) national work force (NWF)
in constructing and maintaining roads or working for the few private road contractors. The road
workers are among the neediest and poorest groups in the country. Illiteracy and insufficient
land have forced them to leave their villages to join the workforce. They often are based in labor
camps along the road, with or without their families, and are solely there to maintain the road.

6. Gender and Poverty

16. Women in general are found to be more affected by poverty. This is largely due to the
discrepancies that remain in important areas such as literacy and school enrolment particularly
in secondary and tertiary education. On the whole, however, Bhutanese women enjoy a
relatively high status. For example, most women, inherit land, own livestock, and tend to play a
central role in the family. Bhutanese law gives equal rights to women.

17. Agriculture sector is a major employer of women, as 85 percent of the Bhutanese people
are entirely dependent on subsistence farming. Women play multiple roles in both productive
and reproductive activities. For women working in agriculture, estimates and anecdotal evidence
3
Since no documented information on the poverty line of Bhutan is available, its assessment was based on the
same yardstick (primarily daily calorie intake food of 2,200 calorie per person per day) as that followed in India,
adjusted to consider nuances relevant to Bhutan, such as expenditure on transport, shelter, clothing, fuel, etc.
This is estimated to be around Nu504 per person per month or $144 per capita per year (December 1998 price
level).
 64
Appendix 13, page 4

show that their workload is higher than men’s, largely because of their housekeeping and child
care responsibilities. In addition, the surveys indicate that 10 percent of the men have out-
migrated to join traditional religious schools, the armed forces, and other services, thus
imposing an additional burden on women in terms of work and responsibilities. The most
disadvantaged women are those who live in low-income households. Illiterate women are often
cut out of economic activities such as trading, and are a particularly vulnerable group.

B. Stakeholder-Based Assessment of the Importance of the Project

18. A stakeholder-based assessment was carried out as part of social assessment to gain
insights into the existing situation of stakeholders and to determine their expectation on the
impact of the Project. The assessment was undertaken in eight village clusters along the East-
West Highway and with other key stakeholders in Thimphu, through focus group discussions.

1. Community Perception of the Importance of the Project

19. Community members expected the Project would lead to significant improvements in
socioeconomic conditions, with many existing constraints being reduced or overcome. The most
commonly cited impacts are as follows: (i) improved transportation would allow farmers to
diversify into higher value crops, such as fruit and green vegetables; (ii) reduced journey times
would increase tourist visits, and seasonal reductions in tourism would be moderate; and (iii)
improved access to market would lead to the expansion of cottage and small industries. It was
expected that such improvements would contribute to improvements in living standards and the
quality of life.

20. There was widespread consensus that the poor standard of transportation contributed to
the existing lack of employment opportunities and access to health, education, and other social
services, and that the Project would help improve economic prospects, living conditions and the
quality of life. Examples of why stakeholders are looking forward to the project are sited here.

21. Road Users (passengers and drivers of motor vehicles). The main impact of the
Project will be shorter travel time, reduced delays, higher travel speeds, increased comfort, and
reduced vehicle operating costs (VOCs), which may translate into increased service frequency
and lower fares.

22. Access to Markets. Timely access to markets, particularly during rainy season, is vital
to the survival of the majority of households served by the East-West Highway. Cash crop sales
are the major source of income in almost all rural households, supplemented by sale of woven
handicrafts where the skills exist in the household. Loss of income from crops will lead the
household to poverty unless other sources are available.

23. Labor Force Participation and Employment Opportunity. Communities along the
East-West Highway expect that the Project will lead to investment in new industries and service
activities offering more attractive sources of employment. With improved access to markets,
they expect to have better opportunities for operating their own small and medium-scale
enterprises. Moreover, the Project will create employment opportunity for the road workers, road
supervisors, engineers, and petty road contractors.

24. Farmers and Agricultural Producers. Improvements in transportation will facilitate

access by rural people to markets in urban centers, and sellers of garden fruit and vegetables
will have more ready access to the markets. This is especially important for sellers of potatoes
 65
Appendix 13, page 5

where delay in delivery can result in the crop loss. The seasonal nature of potato sales means
that loss of the crop will ruin the household financially. Furthermore, road improvements mean
that Druk Seeds could expand its marketing activities out of its district headquarters in
Bumthang. This would provide farmers greater security of income, and reduce the risk and
efforts required–at present, to hire trucks to carry the crop to Phuentsholing themselves–and
enable them to sell to the Indian export market.

25. Extension Workers. Improved access will increase the effectiveness of extension
workers in reaching communities and promoting improved technologies and inputs. This will
have a direct impact on rural production and income. Currently there are agricultural and
forestry extension workers based in the community along the East-West Highway.

26. Health Services. Improved access can mean increased use of health and family
planning services. Health services are also better when access is easier. Road improvements
will facilitate movement of staff to the outreach clinics from the basic health units, permit timely
delivery of medical supplies, and facilitate access to the services, particularly in case of
emergencies. One of the most frequently mentioned concerns of rural villages was the difficulty
of accessing emergency care, especially in the monsoon period when landslides frequently
occur.

27. Educational Facilities. The main restraint to the expanded provision of education is
lack of trained teachers. Teachers, particularly women, are reluctant to accept postings in
remote areas where access is difficult or transport services are minimum and/or expensive.
Parents are reluctant to send children to school where the travel time is prolonged. The Project
will reduce travel times and costs for teachers and pupils, and contribute to the expansion and
take-up of education services in the project areas.

28. Tourism. Improved roads will lead to an expansion of tourism with both foreigners and
Bhutanese visitors. Bumthang, one of the main religious places of the country receives
numerous pilgrims and other visitors. Better access will lead to an increase in visitors and
expansion of related-service industries. Similarly, many Bhutanese travel to India in winter to
undertake pilgrimages in Bihar. Over 80 percent of religious pilgrims are from rural areas.
Improved access along the East-West Highway will enable more people to travel more easily for
these purposes.

29. Social Benefits. Improvements to the transportation system and network have social
benefits for families. Communications between families will be easier and they will be able to
visit each other more easily and more frequently. These are important benefits when people are
posted all over the country for work, to attend schools and colleges, and where marriages often
occur between people from different districts.

2. Business Community Perception

30. During the Fact-Finding Mission, focus group discussions to assess the general
perception of the business community in Thimphu and Wangdue-Phodrang on how the Project
would benefit private sector activities indicated strong support for the project. In general, the
private sector expects the Project to significantly improve the attractiveness of the east region
for business and private investment, and contribute to more rapid economic growth. The East-
West Highway will enable companies to make use of the region’s abundant agricultural
products, natural resources, and tourism opportunities, as well as the proximity to India. Until
now, these advantages have been outweighed by lack of an efficient transport network.
 66
Appendix 13, page 6

31. Lack of an efficient long-distance transport has been a major constraint on private
enterprise development in the east region. It was a source of multiple, mutually reinforcing
disadvantages. Businesses whose inputs and/or outputs were perishable faced unacceptable
levels of spoilage and could not attract premium prices. Lack of reliable transportation precluded
certain types of agricultural products that were subject to strict delivery schedules. The business
community expects the Project to significantly reduce these constraints.

32. The business community claims improved transportation will help increase the scale and
raise the profitability of private activities. Businesses will gain access to better priced domestic
and export markets, enjoy reduced input costs, and be able to improve productivity. Among the
main areas of private sector activities that will benefit are agriculture, tourism, cottage and small
industries, and supporting services. The private sector believes the Project will contribute to
attracting domestic and foreign investment and international tourism, not only in the project area
but also throughout Bhutan.

3. Perception of a No–Project Scenario

33. Focus group discussions with key stakeholders such as government staff, business
community, and direct beneficiaries indicate that none of the positive benefits would occur if the
works did not take place. Two main reasons are mentioned: (i) Income generation would not
increase if the road quality declines. Increased transport delay would cause rural incomes to
decline. For the majority of farm households in the project area, this would lead to a significant
increase in poverty. (ii) Increased difficulty of travel would increase reliance on the routes via
India, which will increase transportation transportation.

34. The summary of beneficiary assessments of the with- and without-project scenarios are
as follows.
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Appendix 13, page 7

Table A13: Beneficiary Perception of the Project

Consultation
Type of Beneficiary With Project Without Project Method

1. Road workers Poverty will be reduced Condition of these workers Rapid rural appraisal
due to higher salaries will not improve.
paid by private
contractors.
2. Rural farmers Better roads mean more Economic growth of rural Beneficiary group
reliable and cheaper farmers will not increase at discussions and
transportation of their the desired level. Some of surveys
products to the market, them will even fall below the
as well as better access poverty level
to markets.

3. Traders There will be more Traders will suffer as they Beneficiary group
customers and better will not get their stocks on discussion and
supply of their goods time and will have less surveys
from the market. customers.
4. Transporters Vehicle operations and Transporters will not be Beneficiary group
maintenance costs will able to provide reliable and discussion and
decrease and service timely transport. Frequency surveys
frequency will increase. of services may decrease.
Maintenance and vehicle
operating costs will
increase.
5. Rural There will be a Rural passengers will face Beneficiary group
Passengers decrease in travel time, more delays. Travel time discussion
reduced delays, more will increase and journeys
comfortable journeys, will be disrupted and
cheaper fares. uncomfortable.

6. Private The Project will build Institutional capacity of the Beneficiary group
Contractors local contractor capacity domestic contracting discussion
and increase industry will not develop as
experience. desired.

7. Extension Extension workers will Extension workers will face Focus group
workers have easier and more delays and disruptions in discussion
reliable access to rural conducting their
areas to implement development and
development schemes assistance works to the
and supply improved rural communities.
technologies and inputs.
 68
Appendix 13, page 8

Consultation
Type of Beneficiary With Project Without Project Method

8. Students Students will have Journeys and travel to Focus group

better access to educational institutions will discussion and
educational facilities. take longer. survey
School enrolment will be
higher.
9. Rural The Project will lead to Employment opportunities Focus group
communities increase employment will not increase along the discussion and
and income-generating project area. Many rural survey
opportunities; more people will be driven to
reliable transport of poverty when their crops fail
goods/produce; better to reach the export market
access to markets, on time or their perishable
health, and education products rot due to the
facilities. Cottage and delays in transportation.
small industries will Cottage and small-scale
develop. Postal services industries will not develop at
will be more reliable and the desired beneficial rate.
faster.

10. Tourism industry National and Tourism will be restricted to Focus group
international tourism will and around the capital. discussion
expand. Tourism into the other areas
of Bhutan will be restricted.

C. Project Approach to Poverty Reduction

35. Under ADB’s current project classification system, the Project’s primary objective is
economic growth and the secondary objective, poverty reduction as it targets poorer areas of
the country. Under the new project classification effective 2001, the Project would be classified
as pro-poor growth. The Project will approach poverty reduction in at least three ways: (i) pro-
poor growth, (ii) improved quality of life, and (iii) employment opportunities for the poorest
population of the country.

1. Pro-Poor Growth

36. More rapid economic development is expected to significantly reduce in poverty

hinterland and eastern regions. Existing poverty is rooted in lack of economic activities,
sufficient employment opportunities, and livelihood activities. Survey data on occupational
distribution suggests that many of the poor in the project area are engaged casual labor; or work
 69
Appendix 13, page 9

in agriculture, cottage industries, and construction; or are unemployed. The expected

diversification of agriculture and expansion of potentially better paying employment in small
industries and tourism are likely to have especially significant poverty reduction impacts.

37. For farmers in general, the improved transport network can also ease the introduction of
modern farming practices and the transition from subsistence farming to cash crops and a
market economy. Better and reliable access can also lower the costs of inputs such as fertilizer
and stimulate higher cash crop farming production and more stable incomes, enabling the poor
to improve their management of risks. The Project will benefit the urban population as well. For
example, a reduction in food prices for the urban poor can be achieved.

2. Improved Quality of Life

38. The Project will have direct impacts on the quality of life of all income groups.
Improvements on the East-West Highway not only provide people with more convenient access
to a broad range of socioeconomic opportunities, but also have a strong income effect by
lowering transport costs and hence the prices of consumer goods and services. Therefore, it will
contribute to improving personal welfare. Moreover, lack of affordable access deprives the poor
of opportunity to take advantage of jobs and even of very basic social services. Reliable access
to schools and health services will enable the poor to accumulate human capital, which is a key
factor in sustainable poverty reduction.

3. Employment Opportunities for the Poor

39. The Project will generate a demand for labor (often unskilled labor) and provide income-
earning opportunities for the poor. It will enable the privatized road contractors to provide
employment opportunities for the local community. This could be of particular value to
households with very small plots and/or few animals and who have to sharecrop other farmers’
land, or who have time available. Since the Project will generate jobs for the poor who are
otherwise unemployed or underemployed, it will contribute to poverty reduction.

40. The Project will also directly benefit the road workers. In the project area are 2,748 road
workers–40 percent are women–who are paid by DOR. They are among the neediest and
poorest groups in the country. Their average salary is Nu1,500 per month and their families live
with them. On the average, each family has four children. The Project will be implemented by
the private contractors, which will hire the bulk of the road workers. Private firms pay their road
laborers an average Nu2,700 per month, which is Nu1,200 higher than the DOR rates and will
definitely decrease poverty among the road workers.

D. Gender Impact

41. The Project will have no negative impact on gender relations. Women will benefit
through their participation in roadwork opportunities, mainly drainage and slope protection
activities. Since women in Bhutan are active producers and marketers of food, reducing the
transport impediments of rural women would release their time and energy for more productive
and socially beneficial activities. The Project will facilitate access to existing health, social
services, and schools; enable teachers, of whom the majority are women, to commute from
urban centers to village schools; and permit district administrators to establish new schools and
recruit more teachers. The enrollment rates will increase for both boys and girls, but the rate for
girls, which has been much lower than for boys might increase more.
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Appendix 13, page 10

E. Local Labor

42. For road improvements, the Government will encourage private contractors to employ
local labor instead of imported labor from India and Nepal. This will be closely monitored during
supervision, with attention to the specific contractual clauses incorporated in the sample bidding
documents. Any negative impact on groups and individuals will be identified and mitigated. For
example, the use of child labor in construction activities is not allowed. Close monitoring during
supervision will pay attention to the specific contractual clauses incorporated in the sample
bidding documents.

F. Participatory Approach

43. The participatory approach was used during the project preparatory technical
assistance, Fact-Finding and Appraisal Missions to understand poverty from the perspective of
a range of stakeholders, particularly poor women and men, and to involve them in the planning
for follow-up action. The social assessment aims to inform the affected people about the Project
and its implications, and elicit their suggestions, views on mitigation measures, and the role they
could play. The local community, particularly the poor, will be informed and encouraged to
participate in road improvement and maintenance activities where their participation will be
maximized.

44. A participatory gender assessment of the well-being of women road workers was
conducted.4 A survey was carried out along the East-West Highway. Direct generation of
primary data through participatory gender assessment and survey will produce the baseline
information to determine gender ratio, working conditions, effectiveness of the World Food
Program, social and welfare facilities available, and the constraints and opportunities to improve
their working conditions and livelihood. The analysis of policies on labor and the national
workforce, and other secondary data will supplement this participatory assessment. An initial
stakeholder survey was conducted during Appraisal Mission aimed at increasing key
stakeholders’ awareness of the importance of improving the well-being of road workers and
assessing stakeholders input on issues that need to be addressed during the assessment.

G. Land Acquisition and Resettlement

45. The Project does not involve any land acquisition or resettlement, as the works to be
undertaken will be confined to resurfacing within the existing right-of-way. The Ministry of Home
Affairs Rules and Regulations state that no one is permitted to construct or erect or install any
kind of house, fences within 50 feet on either side of the road. The walkover survey along the
East-West Highway found that there are no squatters within the right-of-way. Since there will be
no land acquisition and resettlement in this Project, a land acquisition and resettlement plan is
not needed.

4
Under TA 5889-REG: Gender and Development Initiatives, for $850,000, approved on 13 December 1999
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Appendix 13, page 11

H. Impact on Indigenous People and Cultural Properties

46. Data from the social assessment and other available documents show no separate
disadvantaged groups who are likely to be adversely affected by the Project. Accordingly, there
is no need to prepare an indigenous people development plan. Also, the Project will not
adversely affect any cultural property. In fact, the Project will facilitate access to some of the
highly revered spiritual centers in Bhutan.

I. Project Performance Monitoring System (PPMS)

47. During project implementation, DOR, with the assistance of the consultants, will carry
out project performance monitoring system (PPMS) activities under arrangements satisfactory
to ADB to ensure efficient management of project activities and maximization of project benefits.
The Government and ADB have agreed on the performance indicators (Appendix 10) for
carrying out these PPMS activities. The findings and supporting data will be incorporated into
the project performance monitoring and evaluation report for the completed Project. Community-
based organizations in the geog,5 in association with the DOR, will verify the effectiveness of
project activities and outputs, as well as the reactions of the intended beneficiaries. A sociologist
on the consulting team will assist DOR with that task. The project performance and monitoring
evaluation will allow postevaluation of the Project, and also improve planning for future road
improvement projects.

5
A geog is a cluster of villages.