FINANCIAL ANALYSIS I. INTRODUCTION AND METHODOLOGY

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1 West Bengl Drinking Wter Sector Improvement Project (RRP IND ) FINANCIAL ANALYSIS I. INTRODUCTION AND METHODOLOGY A. Introduction 1. A finncil nlysis hs been conducted for the proposed West Bengl Drinking Wter Sector Improvement Project in ccordnce with the guidelines for the Finncil Mngement nd Anlysis of Projects of the Asin Development Bnk (ADB) Among the sttes of Indi, West Bengl is the fourth most populous nd the sixth lrgest economy. It is by fr the worst-impcted stte in Indi from rsenic nd fluoride in the drinking wter, hosting round 84% of Indi s popultion t risk from rsenic nd 10% t risk of fluoride contmintion. 2 As result, West Bengl fces significnt public helth risks nd resultnt economic impcts. Vision 2020, the sector development pln of the Government of West Bengl (GOWB), plns to shift the popultion from relince on groundwter-bsed schemes to surfce wter-bsed piped wter supply schemes, which offer greter certinty in wter security in the long term. 3 ADB will support the GOWB in finncing the proposed project to ensure drinking wter security. The project ims to provide sfe, sustinble, nd inclusive drinking wter to bout 1.65 million people in Bnkur (fluoride ffected), North 24 Prgns (rsenic ffected), nd Purb Medinipur (slinity ffected) districts, with the following outputs: (i) climte-resilient drinking wter infrstructure constructed; nd (ii) institutions nd cpcity of stkeholders for drinking wter service delivery strengthened. 4 B. Methodology 3. The finncil nlysis ssesses the bility of the project to meet its costs, including cpitl expenditure nd opertion nd mintennce (O&M), out of its revenue strems. The res covered under the project currently do not hve piped wter supply. 5 The new wter user chrge structure to be estblished by the 66 project grm pnchyts (governing bodies working t the villge level) under the greed sset mngement nd service delivery frmework (AMSDF) is not premised on full cost recovery. The GOWB issued government order on 9 November 2017 on the AMSDF defining the roles nd responsibilities of the Public Helth Engineering Deprtment (PHED) of the GOWB (the bulk supplier nd regultor of services) nd the project grm pnchyts (the distribution service mngers) under the project. The proposed wter user chrge structure under the AMDSF will include levy of monthly fltwter user chrge equivlent to 75 per connection, with n increse of 10% every 5 yers. All connections will be provided free of chrge to consumers under the project. Upon completion of the project, the PHED will hnd over the distribution networks to the project grm pnchyts for O&M. The PHED will operte nd mintin bulk wter systems to the project grm pnchyts, which, in turn, will mintin the distribution network within their premises to supply wter to the households nd registered wter users. The AMDSF hs been included in lon documents. The GOWB greed to seek ADB s greement if the AMSDF were to be revised. 1 ADB Finncil Mngement nd Anlysis of Projects. Mnil. 2 Government of Indi, Ministry of Home Affirs, Office of the Registrr Generl nd Census Commissioner Census of Indi. New Delhi; nd Government of Indi, Ministry of Drinking Wter nd Snittion. Integrted Mngement Informtion System. Dt vlid s of 17 My Government of West Bengl, Public Helth Engineering Deprtment Vision 2020: To provide Sfe, Sustinble, nd Adequte Wter Supply to All Humns nd Livestock in West Bengl by Kolkt. 4 One neighboring block in South 24 Prgns district (rsenic ffected) is lso included in the project. 5 As of November 2017, the GOWB did not levy wter user chrges.

2 2 4. With this bckground, the finncil nlysis focused on the csh flow of the project grm pnchyts to determine their overll finncil helth nd bility to bsorb the incrementl O&M costs of the ssets estblished under the project. The finncil nlysis included (i) review of the project grm pnchyts historicl finncil performnce; nd (ii) finncil forecst, ment to determine whether the project grm pnchyts will hve the finncil strength to continue to mintin nd operte the newly developed ssets fter the completion of the project. C. Smple for Finncil Anlysis 5. The detiled engineering designs of ll subprojects for the project grm pnchyts hd not been completed s of November The three smple grm pnchyts for which detiled engineering designs were finlized Chltberi, Kshblnd, nd Sonpukur Snkrpur were selected to serve s smples for the finncil nlysis. II. FINANCIAL ANALYSIS OF SAMPLE GRAM PANCHAYATS A. Wter User Chrge 6. The wter user chrge policy in Indi is to recover O&M costs nd deprecition, nd grdully recover full costs including interest nd resonble rte of return. The PHED is responsible for rurl wter supply in West Bengl but currently does not implement wter user chrges. Under the project, the GOWB hs greed to implement the AMSDF, which will llow the project grm pnchyts to collect monthly chrge for potble piped wter supplied to consumer premises. Monthly flt-wter user chrges re proposed t 75 per connection with regulr increse of 10% every 5 yers. The project will provide free connections to households. B. Affordbility Anlysis 7. An ffordbility nd willingness-to-py survey ws conducted in the smple grm pnchyts s prt of the project preprtory work. Given the proposed user chrge structure in 2021 (the first yer of opertions), the monthly wter chrges re estimted to be 1.5% 2.5% of the verge monthly household income (Tble 1). This demonstrtes tht the cost of wter user chrges for ll income ctegories in the project grm pnchyts is ffordble, considering the generlly ccepted ceiling of 5.0% of household income in Indi. According to the ffordbility nd willingness-to-py survey, 78% of respondents greed to py more thn 91 per month, 12% greed to py 61 90, 8% greed to py 41 60, nd 2% did not respond. The proposed wter user chrge of 75 is within the rnge tht consumers re willing to py since 90% of the respondents re willing to py bove the rnge of per month. Tble 1: Wter Chrges, Usge, nd Averge Household Income Proposed (2021) Averge household monthly consumption (kiloliter) b 9.6 Wter supply rte ( /kiloliter) 7.8 Wter supply monthly bill ( /household) 75.0 Averge monthly household income: low-income group c ( ) 3,000 Wter bill s shre of income: low-income group (%) 2.5 Averge monthly household income: ll ctegories c ( ) 5,000 Wter bill s shre of income: ll ctegories (%) 1.5 Opertions in the three smple grm pnchyts (governing bodies working t the villge level) will strt in b Averge household consumption of 9.6 kiloliters = 4.6 persons per household x 70 liters per cpit per dy x 30 dys/1,000. c Bsed on the findings of the ffordbility nd willingness-to-py survey conducted in July 2017 by Asin Development Bnk project preprtory consultnts. Source: Asin Development Bnk estimtes.

3 3 C. Anlysis of Opertion nd Mintennce Costs Recovery 8. The csh flows of the wter supply systems in the smple grm pnchyts re projected for 20 yers of opertions, considering the forecst wter user chrge revenue nd O&M expenditure. 6 The generl ssumptions followed to clculte the csh flow of the smple grm pnchyts re s follows: (i) ll costs re expressed in 2017 constnt prices nd converted t $1 = 65; (ii) the projections were crried from July 2018 to June 2041, including 3 yers of construction nd 20 yers of life spn for ssets estblished fter construction; (iii) the 20 yers of O&M consist of 3 yers under design build operte pckges of the project nd 17 yers of O&M by the grm pnchyts; (iv) the O&M costs include personnel, mintennce, dministrtive, chemicls, nd power, nd they exclude deprecition expenditure, which is noncsh item; (v) monthly user chrge is ssumed to be 75 with n increse of 10% every 5 yers; nd (vi) user chrge collection efficiency of 95% ws ssumed. 9. The csh flow projection shows tht wter supply subprojects in the smple grm pnchyts will recover full O&M costs from the opertion strt yer of This underlines the sustinbility of the wter supply subprojects to be estblished under the project. Tble 2: Opertion nd Mintennce Recovery Anlysis for Smple Grm Pnchyts ($ million) Sonpukur Snkrpur Kshblnd Chltberi Income from user chrges O&M expenses Surplus Operting rtio O&M = opertion nd mintennce. A grm pnchyt is governing body working t the villge level. Source: Asin Development Bnk estimtes. III. FINANCIAL PERFORMANCE AND PROJECTION OF SAMPLE GRAM PANCHAYATS A. Finncil Performnce of Smple Grm Pnchyts 10. In cse of delys in implementing the proposed wter user chrge structure, nonrecovery, or lck of regulr revisions, the grm pnchyts will need to cover the O&M costs of the ssets estblished under the project from their own revenue sources. The csh flow nlysis of the smple grm pnchyts ws conducted by reviewing their historicl finncil performnce nd forecsting their finncil strength to continue O&M of the ssets estblished under the project. 6 While the government order (pr. 3) requires the grm pnchyts to dopt volumetric wter user chrges dequte to cover their full opertionl costs, ssessments of nd consulttions with smple grm pnchyts nd government deprtments indicted tht strting with flt monthly wter user chrge during the erly opertionl period, when systems re being set up nd the workforce trined, would be more prcticl. The government order will be implemented grdully s systems nd stff cpcity strengthen. Bsed on the willingness to py survey crried out in the smple grm pnchyts nd bsed on the costs to cover O&M, flt monthly wter user chrgeis expected to be minimum 75.

4 4 11. A finncil performnce nlysis of the smple grm pnchyts for fiscl yer (FY) 2013 (ended 31 Mrch) to FY2015 is shown in Tble 3. The nlysis shows the following: (i) Grnts constitute significnt portion of the smple grm pnchyts revenue. 7 The proportion of grnts to totl income in the smple grm pnchyts ws recorded t 94% 99% during FY ; (ii) The revenue sttements of the smple grm pnchyts do not exhibit the exct brekdown of own-source revenue; however, the smple grm pnchyts ern revenue from property txes nd the issue of trde licenses; 8 (iii) The proportion of own-source revenue of the smple grm pnchyts to totl revenue rnges from 0.9% to 5.6%; (iv) The efficiency of the collection of property txes cnnot be evluted s ccounting is purely csh bsed nd there re no vilble tx demnd records. Nevertheless, upon discussions with grm pnchyt officils, it ws understood tht collection efficiency of txes rnges from 25% to 50%; nd (v) The operting rtio of the grm pnchyts ws below 1.0 in FY2015. Tble 3: Summrized Finncil Performnce of Smple Grm Pnchyts ($ million) Sonpukur Snkrpur Kshblnd Chltberi FY2013 FY2014 FY2015 FY2013 FY2014 FY2015 FY2013 FY2014 FY Revenue Income Tx revenue Untied funds Other funds Totl Expenditure Tx revenue Untied funds Other funds Totl Surplus or (Deficit) 0.04 (0.05) (0.02) 0.01 (0.01) ( ) = negtive, FY = fiscl yer. A grm pnchyt is governing body working t the villge level. Source: Audited finncil sttements of the three smple grm pnchyts (governing bodies working t the villge level) from FY2013 (ended 31 Mrch) to FY2015. B. Finncil Projections of Smple Grm Pnchyts: Sustinbility Anlysis 12. The following ssumptions were mde for the finncil projections of the smple grm pnchyts considering their usul opertions: (i) All costs re expressed in 2017 constnt prices nd converted t $1 = 65; (ii) Trend growth rtes from FY2013 to FY2015 were used for income nd expenditure during the projection period of FY2018 FY2041. For negtive growth rtes, minimum of 5% ws considered; (iii) The nlysis ws conducted for FY2018 FY2041, including 6-yer implementtion period for the project; nd (iv) Revenues from property nd other txes nd ll usul subsidies from the GOWB were considered for the revenue projections. 13. Finncil projections show tht the smple grm pnchyts will require the GOWB s 7 Includes revenue grnts from stte nd centrl finnce commissions, nd the GOWB s nd Government of Indi s totl trnsfers to the grm pnchyts under different schemes, lloctions, nd funds. 8 Own sources of revenue for grm pnchyts include revenue from property tx (lnd nd building), trde license fees, rentl income, nd lese income from lesing out self-owned ssets or ssets owned by others.

5 5 continuous finncil support to cover their expenditures (Tble 4). This finding underlines the need for strengthening the revenue bse of the grm pnchyts, including the improvement of collection efficiency. The project, through the AMSDF nd extensive cpcity building, will help the project grm pnchyts chieve finncil sustinbility. Tble 4: Finncil Projections of Smple Grm Pnchyts ($ '000) Sonpukur Snkrpur Kshblnd Chltberi FY2020 FY2025 FY2030 FY2020 FY2025 FY2030 FY2020 FY2025 FY Revenue Income Tx revenue Untied funds Other funds Totl , , Expenditure Out of own revenue Untied funds Other funds Totl , Surplus FY = fiscl yer. A grm pnchyt is governing body working t the villge level. Source: Asin Development Bnk estimtes; nd pst udited sttements of the smple grm pnchyts. C. Finncil Cpcity of the Government of West Bengl 14. The finncil position of the GOWB ws enhnced significntly in FY2015 (Tble 5). The government s budget lloction to the PHED incresed from $73.9 million in FY2011 to $289.1 million in FY2015. The incresed budget lloction for wter supply underlines the GOWB s commitment to the cretion nd opertion of rurl wter supply projects, including the proposed project. In cse of delys in implementing the proposed wter user chrge structure nd regulr revisions to recover O&M costs, the GOWB will continue to llocte sufficient funds for the necessry O&M of the ssets estblished under the project. The mount of public debts, lons, nd dvnces on yer-on-yer bsis declined during FY , which shows tht the GOWB s propensity to ccept public debts is declining. Similrly, the yer-on-yer repyment of public debts, lons, nd dvnces lso showed decline during FY which mens the GOWB could reduce its repyment obligtions. This underlines the GOWB s incresing revenue nd decresing dependency on borrowings. Tble 5: Finncil Performnce of the Government of West Bengl ($ million) FY2011 FY2012 FY2013 FY2014 FY Receipts Own revenue 9, , , , ,881.9 Consolidted funds 15, , , , ,195.1 Others 26, , , , ,040.5 Totl 51, , , , , Expenditures Out of own revenue 11, , , , ,281.1 Consolidted funds 16, , , , ,475.5 Others 24, , , , ,279.0 Totl 51, , , , ,035.5 Surplus or (Deficit) (147.8) (65.9) (46.7) Cpitl Receipt nd Repyment Receipt of public debts, lons 13, , , , ,425.5 Repyment of public debts, lons 8, , , , ,567.1 ( ) = negtive, FY = fiscl yer. Note: The fiscl yer (FY) of the Government of West Bengl ends on 31 Mrch. FY before clendr yer denotes the yer in which the fiscl yer ends, e.g., FY2016 ends on 31 Mrch Source: Annul finncil sttements of the Government of West Bengl.

FINANCIAL ANALYSIS I. INTRODUCTION AND METHODOLOGY

Dhk Wter Supply Network Improvement Project (RRP BAN 47254003) FINANCIAL ANALYSIS I. INTRODUCTION AND METHODOLOGY A. Introduction 1. The Asin Development Bnk (ADB) finncil nlysis of the proposed Dhk Wter