Report and Recommendation of the President to the Board of Directors

Transcription

1 Report and Recommendation of the President to the Board of Directors Project Number: September 2013 Proposed Multitranche Financing Facility India: Kolkata Environmental Improvement Investment Program

2 CURRENCY EQUIVALENTS (as of 15 August 2013) Currency Unit Indian rupee/s (Re/Rs) Re1.00 = $ $1.00 = Rs ABBREVIATIONS ADB Asian Development Bank FFA framework financing agreement FIRR financial internal rate of return KEIP Kolkata Environmental Improvement Project KMC Kolkata Municipal Corporation PMU project management unit NOTES (i) The fiscal year (FY) of the Government of India and its agencies ends on 31 March. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2011 ends on 31 March (ii) In this report, "$" refers to US dollars. Vice-President X. Zhao, Operations 1 Director General J. Miranda, South Asia Department (SARD) Director Y. Fei, Urban Development and Water Division, SARD Team leader Team members Peer reviewers T. Gallego-Lizon, Principal Urban Development Specialist, SARD H. Ikemoto, Senior Urban Development Specialist, SARD V. S. Rekha, Principal Counsel, Office of the General Counsel R. Slangen, Urban Development Specialist (Safeguards), SARD A. Srivastava, Senior Project Officer, SARD F. Tornieri, Senior Social Development Specialist (Gender and Development), SARD J. Zheng, Urban Development Specialist (Financial), SARD D. Hill, Senior Transport Specialist, Central and West Asia Department J. Huang, Senior Urban Development Specialist, Regional and Sustainable Development Department V. Padmanabhan, Senior Urban Development Specialist, SARD In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

3 CONTENTS Page INVESTMENT PROGRAM AT A GLANCE I. THE PROPOSAL 1 II. THE INVESTMENT PROGRAM 1 A. Rationale 1 B. Impact and Outcome 4 C. Outputs 4 D. Investment and Financing Plans 5 E. Implementation Arrangements 7 III. DUE DILIGENCE 7 A. Technical 7 B. Economic and Financial 8 C. Governance 8 D. Poverty and Social 9 E. Safeguards 9 F. Risks and Mitigating Measures 9 IV. ASSURANCES AND CONDITIONS 10 V. RECOMMENDATION 10 APPENDIXES 1. Design and Monitoring Framework List of Linked Documents 14

4 INVESTMENT PROGRAM AT A GLANCE 1. Project Name: Kolkata Environmental Improvement Investment 2. Project Number: Program 3. Country: India 4. Department/Division: South Asia Department/Urban Development and Water Division 5. Sector Classification: Sectors Primary Subsectors Water supply and other municipal infrastructure and services Water supply and sanitation 6. Thematic Classification: 6a. Climate Change Impact Adaptation Mitigation Themes Primary Subthemes Environmental sustainability Urban environmental improvement Private sector development Promotion of private sector investment Capacity development Governance medium low 7. Targeting Classification: Targeted Intervention Geographic General Millennium dimensions Intervention development of inclusive goals growth MDG7 9. Project Risk Categorization: Complex Income poverty at household level 10. Safeguards Categorization for Project 1: Environment Involuntary resettlement Indigenous peoples 11. ADB Financing: 12. Cofinancing: Institutional development Economic and financial governance 6b. Gender Mainstreaming for Project 1 Gender equity theme (GEN) Effective gender mainstreaming (EGM) Some gender benefits (SGB) No gender elements (NGE) 8. Location Impact: Urban B B C High Sovereign/Nonsovereign Modality Source Amount ($ Million) Sovereign MFF-Facility Ordinary capital (Loan) resources Total No Cofinancing expected. 13. Counterpart Financing: Source Amount ($ Million) State Government of West Bengal and Kolkata Municipal Corporation Total Aid Effectiveness: Parallel project implementation unit Program-based approach No Yes Generated Date: 17-August-2013

5 I. THE PROPOSAL 1. I submit for your approval the following report and recommendation on a proposed multitranche financing facility (MFF) to India for the Kolkata Environmental Improvement Investment Program Kolkata is the largest city in the state of West Bengal and the seventh largest in India. It has a population of 4.5 million and contributes at least 13% of West Bengal s gross domestic product. The city is and will remain the dominant commercial and financial hub in the state. Although its livability has improved, the quality of basic urban services remains below national standards. The gap is particularly noticeable in water supply and sewerage services in regard to coverage, continuity, and quality. This affects the city s ability to attract investment, facilitate trade, and create jobs, as well as its productivity, its competitiveness, and, most importantly, its quality of life and welfare. Investment and policy gaps hinder how effectively and efficiently institutions deliver services, and how well the policy framework creates an enabling environment for better service delivery and sustainability. These limitations have been manageable, but Kolkata s expanding economy and deficient investment and maintenance over the years have made narrowing the gaps more urgent. The Kolkata Municipal Corporation (KMC), created to administer the city under the KMC Act in 1980, is responsible for delivering water and sewerage services. The Asian Development Bank (ADB) has been working with KMC since 2000, but only regarding sewerage. 2 The partnership has yielded good results. KMC has a strategy, sector road map, policy framework, and investment plan to address gaps in operational efficiency, institutional effectiveness, policy, and sustainability. 3 The investment program combines physical and other investments. KMC wants ADB to continue its role as a key financing and advisory partner. II. THE INVESTMENT PROGRAM A. Rationale 3. Although water supply and sewerage service levels in Kolkata are above the national average, service provision is not uniform across the city and is increasingly strained by economic expansion. As shown in Table 1, service is better in the city center than in the periphery. This is both a problem and an opportunity. The problem derives from the number of vulnerable households that has grown rapidly in the subserviced periphery, while population has declined in the center. The opportunity arises from the KMC s ability to generate revenues from a still-large population with higher income in the center, with which to fund investment in the periphery. The city has worked hard to narrow service disparities. Efforts started with two loans provided in 2000 and 2006 for the Kolkata Environmental Improvement Project (KEIP), which financed the renovation of 564 kilometers (km) of the sewer drain network and the rehabilitation of three sewage treatment plants, raising the percentage of the population with direct sewer connection from 31% in 2001 to 43% in 2011 (footnote 2). The service coverage for water supply is higher than for sewerage, but disparities between central and peripheral areas remain, 1 The design and monitoring framework is in Appendix 1. 2 ADB Report and Recommendation of the President to the Board of Directors: Proposed Loan to India for the Calcutta Environmental Improvement Project. Manila. The project was completed on 30 June 2012; ADB Report and Recommendation of the President to the Board of Directors: Proposed Supplementary Loan to India for the Kolkata Environmental Improvement Project. Manila. 3 ADB provided project preparatory technical assistance: ADB Technical Assistance to India for Preparing the Kolkata Environmental Improvement Project II. Manila. The project will be completed on 30 June 2013.

6 2 particularly in service continuity. Unless addressed rapidly, these disparities will widen as population shifts from the center to the periphery. 4 Table 1: Water Supply and Sewerage Service Delivery in Kolkata Water Liters of Hours of Supply Water Water Nonrevenue Metered water Coverage Supply per Supply per Water connections (%) Capita Day (%) (%) Direct Sewer Connection Coverage (%) Item National targets 100 a 135 b 150 c 24 b b 70 a 100 b National average All KMC area Central area Peripheral areas = data not available, KMC = Kolkata Municipal Corporation. Note: The center has 69% of the population and the periphery 31%. a As per the Eleventh Five-Year Plan, , also applicable under the Twelfth Five-Year Plan, b Ministry of Urban Development A Handbook on Service Level Benchmarking. Delhi. c Central Public Health and Environmental Engineering Organization Manual on Water Supply and Treatment. Delhi. Source: Kolkata Municipal Corporation Kolkata Urban Sector Investment Plan. Kolkata. 4. Gaps in service delivery are caused mainly by sub-optimal infrastructure operation and inadequate investment and maintenance. 5 (i) Operational inefficiency in water supply. Operational and management approaches are outdated, especially for actively detecting leakage and effecting repairs along the 5,700 km distribution network. High water losses, at 300 million liters per day, undermine income. An ADB study in 2012 showed that 63 million liters per day, or 65% of the water supplied to a pilot zone, never reached end users (footnote 3). A new water treatment plant is planned for 2017 to address supply shortage in the periphery. The four water treatment plants now operating have sufficient design capacity to supply water to meet national targets. 6 However, for this to happen, the KMC has to cut water losses through better management. About 15% of its electromechanical equipment is years old, requiring 15% more energy than modern equipment. Operational inefficiency means high service cost, forgone income, and narrow operating margins. (ii) Low investment in sewerage. The KMC aims to provide direct sewer connection to 95% of households over the long term with phased investments in at least five additional sewage treatment plants, 17 pumping stations, and 1,300 km of sewer drain network. However, investment need greatly exceeds the KMC s financial capacity. Timely achievement requires accelerated investment. (iii) Inadequate revenue. The KMC has a dedicated account for water supply, sewerage, and drainage. In FY2009, the account revenue reached $33 million 4 Studies have predicted that inadequate sewerage coverage might result in substantial losses by 2050 from flooding caused by climate change (World Bank Climate Risks and Adaptation in Asian Coastal Megacities. Washington, DC; World Bank India - Vulnerability of Kolkata metropolitan area to increased precipitation in a changing climate. Washington D.C.). Kolkata s vulnerability arises from natural (topography), developmental (unplanned and unregulated urbanization) and climate change factors (rainfall intensity and sea level rise). Tangible risks from increased floods include (i) loss of income and personal assets; (ii) damages to buildings, industry and commerce; (iii) damage to infrastructure and losses by the public sector; and (iv) health and loss of life. The studies recommended a combination of adaptation measures comprising hard and soft infrastructure. The investment program addresses some of recommended adaptation measures by critically increasing resilience of water systems and expanding the coverage and capacity of combined sewerage and drainage networks. 5 Sector Assessment (Summary): Water Supply and Other Municipal Infrastructure and Services (accessible from the list of linked documents in Appendix 2). 6 Design capacity is 1,787 million liters per day, but current operational capacity is only 1,260 million liters per day.

7 3 but still fell short of operating cost. A state government subsidy of $24 million helped to make ends meet. 7 However, rising user charges and property taxes have been the biggest contributors to revenue. 8 Accordingly, an operating surplus of $13 million was recorded in that fiscal year. This surplus and savings from the KMC s main account helped fund $27 million in critical capital investments over the period but was insufficient to replace and modernize water supply and sewerage facilities. 5. KEIP performance. The KMC has the capacity to manage large infrastructure investments and ensure adequate fiduciary oversight. Although the KEIP (footnote 2) suffered start-up delays, the KMC remarkably advanced progress from 2006, with more than $30 million a year in disbursement from 2007 to 2012 reflecting its capacity and commitment. 9 KEIP was physically closed on 30 June 2013, after disbursing more than 90% of the cumulative value of the loans KMC has also proved its capacity to implement complex projects. The KEIP was classified category B sensitive for environment and category A for involuntary resettlement. 11 The KMC ably managed the process, conducting environmental assessments prior to the start of any works and incorporating environmental and resettlement mitigation measures in bidding documents. About 2,900 families had been resettled by mid-2012 in accordance with the resettlement plan. 7. Past ADB loans to the KMC targeted sewerage service but also required the KMC to introduce some reforms to water supply. Few covenanted reforms that could not be met in full were the introduction of domestic water meters and water tariffs. 12 As part of a phased approach, the KMC took steps to gradually roll out domestic metering with the initial installation of about 260 water meters for bulk users and in January 2012, the delivery of another 150 bulk water meters. This will help monitor and reduce water losses in the trunk mains and increase water availability and continuous flow of water to end users, which domestic water meters need to function properly. Domestic water meters will be systematically installed in priority KMC areas as part of the new investment program. After surveying willingness to pay and affordability, the KMC has introduced volumetric water tariffs and sewer surcharges for bulk domestic, institutional, commercial, and industrial users. It has drawn up a blueprint for introducing broad user charges toward full cost recovery, and in 2011, the KMC adopted a new policy on operational sustainability that stipulates the KMC gradually adopting meters for domestic users and a tariff from FY Road map, investment program, and lending modality. The KMC has defined a road 7 The subsidy paid the salaries of staff deputed from the state government to the KMC. 8 The KMC levies user charges on institutional, commercial, and industrial connections but not on domestic connections. Instead, in the past it has aimed to recover operating cost through the property tax, in accordance with the KMC Act. 9 The details of the lessons from the experience and how they were incorporated in the design of the investment program, as well as detailed capacity assessment, are in appendixes 1 and 2 of the Facility Administration Manual (accessible from the list of linked documents in Appendix 2). 10 Details are in the Summary of Project Performance (accessible from the list of linked documents in Appendix 2). 11 The KEIP was categorized B sensitive in 2006 to reflect additional flow of sewage into the East Kolkata Wetland. This decision was taken following detailed nutrient absorption capacity studies. The wetland was listed in 2002 under the Ramsar Convention of 1971, recognizing it as a wetland of international importance for its approach to treating Kolkata s sewage, efficiently recovering nutrients from the sewage for fish farming and agriculture. 12 Regarding revised user charges for domestic connections, the KMC could not demonstrate immediate need, as it was able to meet operating cost from user charges, property taxes, and state government subsidies.

8 4 map for water supply and sewerage in the Kolkata Urban Sector Investment Plan, Physical investment amounts to $4 billion, and other investment in reform, management and operational improvement, and on-the-job training comes to $20 million. The concomitant policy framework aims to create an enabling environment for better operation and management efficiency and revenue mobilization. The Government of India, the state government of West Bengal, and the KMC have asked ADB to finance part of the investment plan, of which the Kolkata Environmental Improvement Investment Program is a portion, through an MFF. The MFF is justified because (i) the KMC has a clear strategy and road map that combine investments and reforms, (ii) the investments are significant but sequenced, and (iii) the MFF is better suited to help the city than a stand-alone project as it allows the KMC to apply a phased programmatic approach with a well-defined financial envelope. Assessments have been conducted upfront on policy, institution, management, and safeguards aspects. 9. Ongoing external assistance in the Kolkata urban sector. The Government of the United Kingdom, through the Department for International Development, extended a 28 million grant to the KMC for capacity building in The focus was on organizational development, e-governance, property tax reform, accounting reform, revenue mobilization from public private partnership, citizen services, and social sector development. Most outputs had been delivered by 2011, improving KMC s governance. The investment program will expand assistance to improve governance, focusing on financial management in water supply and sewerage services. 10. Strategic context. India s draft country partnership strategy, and country operations business plan, emphasize (i) support for prioritized investments covering critical economic and social urban infrastructure development and (ii) piloting new approaches to sustainable urban development. ADB s assistance program aligns with India s Twelfth Five-Year Plan, , 16 which focuses on strengthening the five enablers for urbanization (governance, planning, financing, capacity building, and innovation) and emphasizes regional planning, environmental sustainability, and inclusive growth. B. Impact and Outcome 11. The impact of the proposed investment program will be improved access to water supply and sanitation in KMC. The outcome will be improved water supply, sewerage and drainage service quality and operational sustainability in selected areas of KMC. C. Outputs 12. The investment program aligns with ADB s Water Operational Plan, , 17 and comprises the following outputs: (i) Inefficient water supply assets rehabilitated. This output aims to reduce operational inefficiencies and progressively achieve 24-hour continuous water supply from one hydraulically discrete area to another. This output will restore KMC s water production capacity to 1,478 million liters per day and rehabilitate 700 km of network. (ii) Sewerage extension to peripheral areas continued. This output will reduce geographical disparities and improve run-off in the KMC s peripheral area. It will 13 KMC Kolkata Urban Sector Investment Plan, Kolkata. The summary is in the Sector Road Map (accessible from the list of linked documents in Appendix 2). 14 ADB. Forthcoming. Country Partnership Strategy: India, Manila. 15 ADB Country Operations Business Plan: India, Manila. 16 National Planning Commission Twelfth Five-Year Plan ( ). Delhi. 17 ADB Water Operational Plan Manila.

9 5 (iii) construct three sewage treatment plants and install 170 km of sewerage network and 27,000 connections. Financial and project management capacity further developed. This output will assist the KMC establish a utility finance improvement unit to formulate a long-term subsidy policy, draft water user charges and sewerage surcharges for both volumetric and other domestic connections. The aim is to ensure full cost recovery from these fees, gradually moving towards accumulation of retained surplus in a dedicated account The investment program targets 20% of the city while Tranche 1 will support 5% of the KMC area. Tranche 1 outputs include: (i) Inefficient water supply assets rehabilitated. Tranche 1 will help the KMC restore the original production capacity of two existing water treatment plants, replace inefficient electromechanical equipment, augment transmission mains, and update the asset database for better monitoring and future planning. Water losses in the distribution network will be cut and the service will achieve 24-hour continuous water supply in one pilot area. Tranche 1 will help the KMC set up a water loss management unit in a pilot area. (ii) Sewerage extension to peripheral areas continued. Tranche 1 will help the KMC narrow the geographical disparity in sewerage service and improve runoff in the southern periphery. 19 It will install about 12 km of sewer pipes, pumping stations, and 2,300 direct sewer connections. (iii) Financial and project management capacity further developed. Tranche 1 will help the KMC establish the utility finance improvement unit, which will revise the long-term cost-recovery and subsidy plan. Tranche 1 will help the project management unit (PMU) transition into an autonomous entity capable of imparting institutional knowledge and skills, including human resource management. 14. Tranches 2 and 3 will continue supporting the delivery of all outputs, phased in different parts of the KMC area. They will support the downstream expansion of the water loss management system in the water supply network. Reduced water loss will allow the KMC to postpone major capital investments in new water production. To ensure continuity, the water loss management unit staff will acquire water loss management skills on the job. These tranches will continue supporting the installation of sewer pipes and direct connections in the eastern and western peripheries and the construction of new sewage treatment plants. 22 Expanding the areas with 24-hour water supply, reducing operational inefficiency, and raising sewer network coverage will give the KMC the necessary popular support to introduce user charges for domestic connections. D. Investment and Financing Plans 15. The investment program is estimated to cost $570 million (Table 2). 18 The utility finance management unit will also revise the unit price of bulk water supply under existing supply contracts between the KMC and adjacent municipalities to sell at prices exceeding production costs. 19 The sewer and drain systems are combined. Improvements will alleviate waterlogging. Future increases in rainfall intensity will be addressed during the detailed design to strengthen urban resilience under climate change. 22 Technology for reducing greenhouse gas emissions will be adopted to mitigate climate change impacts.

10 6 Table 2: Investment Program ($ million) Item Amount a A. Base Cost b 1. Inefficient and outdated water supply assets rehabilitated Sewerage extension to newly developed areas continued Financial and project management capacity further developed 40 Subtotal (A) 500 B. Contingencies c 50 C. Financing Charges During Implementation d 20 Total (A+B+C) 570 a Includes taxes and duties of $57.8 million to be financed by the state government of West Bengal and Kolkata Municipal Corporation. b In mid-2013 prices. c Physical contingencies computed at 8.1% for civil works and water loss management. Price contingencies are computed at minus 3.9% 0.5% on foreign exchange costs and 6% on local currency costs, and they include provision for potential exchange rate fluctuation under the assumption of a purchasing power parity exchange rate. d Includes interest and commitment charges. Interest during construction for ADB loans has been computed at the 5- year forward London interbank offered rate plus a spread of 40 basis points and an applicable maturity premium. Commitment charges for an ADB loan are 0.15% per year, accrued on the full amount of the loan less amounts withdrawn from time to time. Source: Asian Development Bank estimates. 16. The government has requested an MFF in an amount up to $400 million equivalent from ADB s ordinary capital resources to help finance part of the investment program. The MFF will consist of three tranches, subject to the government s submission of related periodic financing requests, execution of the related loan and project agreements for each tranche, and fulfillment of the terms and conditions and undertakings set forth in the framework financing agreement (FFA). 23 The first tranche of the MFF will have a 25-year term, including a grace period of 5 years, an annual interest rate determined in accordance with ADB s London interbank offered rate (LIBOR)-based lending facility, a commitment charge of 0.15% per year, and such other terms and conditions set forth in the draft loan and project agreements. The government will make the relevant portion of the proceeds of each tranche available to the state government, promptly and on terms and conditions acceptable to ADB, for the implementation of the investment program. The financing plan is in Table 3. Table 3: Financing Plan Source Amount ($ million) Share of Total (%) Asian Development Bank State Government of West Bengal and Kolkata Municipal Corp Total Source: Asian Development Bank estimates. 17. Tranche 1 and subsequent tranches. The government has submitted the first periodic financing request in line with the FFA. 24 The cost of tranche 1 projects is estimated at $140 million equivalent, including taxes and duties of $11.9 million equivalent to be financed by the KMC. The cost includes civil works, consulting services, and the implementation of related activities. The government has requested a loan of $100 million from ADB s ordinary capital resources to cover part of the cost of tranche 1 projects. The state government and the KMC will 23 Framework Financing Agreement (accessible from the list of linked documents in Appendix 2). 24 Periodic Financing Request for Project 1 (accessible from the list of linked documents in Appendix 2).

11 7 contribute $40 million. Tranche 2 is expected in 2016 in the amount of $150 million and tranche 3 in 2018 in the amount of $150 million. E. Implementation Arrangements 18. The implementation arrangements are summarized in Table 4. Aspects Implementation period Table 4: Implementation Arrangements Arrangements September 2013 August 2023 (facility) September 2013 December 2018 (tranche 1) Estimated completion date 31 August 2023 Management (i) Oversight body Steering committee, KMC (ii) Executing agency KMC (iii) Key implementing agencies (iv) Implementation unit PMU The PMU for the KEIP will continue to implement the investment program. Its staff of 97 comprises existing subunits for contract management (35 staff), project accounts (11 staff), social development (9 staff), and project coordination (23 staff), as well as 2 new subunits, for water loss management (16 staff) and utility finance improvement (3 staff) Procurement (Tranche 1) ICB 5 contracts $88.5 million NCB 1 contract $7.4 million Consulting services (Tranche 1) QCBS 13 person-months international; 1,074 person-months national Retroactive financing and/or advance contracting Disbursement $10.2 million in 4 contracts for detailed design and supervision, project management, communication and GIS Eligible expenditures may be incurred on advance contracting for consulting services and the procurement of goods, services, and civil works, and for project management and administration, up to 12 months before the loan signing date, and not exceeding 20% of the relevant loan amount. The loan proceeds will be disbursed in accordance with ADB's Loan Disbursement Handbook (2012, as amended from time to time) and detailed arrangements agreed upon between the government and ADB. ADB = Asian Development Bank, GIS = geographic information systems, ICB = international competitive bidding, KEIP = Kolkata Environmental Improvement Project, KMC = Kolkata Municipal Corporation, NCB = national competitive bidding, PMU = project management unit, QCBS = quality- and cost-based selection. Source: Asian Development Bank estimates. 19. Specific arrangements. To ensure continuity and consistency, consulting service contracts will be carried out by the same teams throughout the investment program from 2013 to 2023 subject to favorable performance review. The initial loan will cover consulting service contracts for the first 5 years, and subsequent loans will cover the remaining period. III. DUE DILIGENCE A. Technical 20. Extensive technical due diligence undertaken in partnership with the KMC has validated its investment plan and expected outputs. A key water loss management study for a pilot area in zone 1 has shown that reducing losses depends on intensive leak detection and repairs in

12 8 discrete areas. Under each tranche, a contractor will first hydraulically segregate the pipe network in a pilot area, further breaking it up into district metered areas. In each district metered area, the contractor will install meters for all connections, supply water around the clock with proper pressure management, actively detect and repair leaks, and optimize the water pressure for daytime and nighttime service. These and other measures will cut water losses to less than 20%. To achieve these results, the KMC will engage a contractor through a performance-based payment contract. 25 This approach means that (i) the work performance will be measured as an end result, such as amount of water loss reduction in the pilot area, and (ii) the contract will provide multiple means and alternatives for achieving intended results. This approach is recognized internationally as a reliable way to reduce water losses. B. Economic and Financial 21. The economic rationale for government intervention is strong, as the investment program supports basic public services that are a natural monopoly and require the management of externalities. The calculation of the economic internal rate of return is based on scenarios with and without the investment program, incorporating least-cost design. The economic internal rate of return is estimated at 15.1% for water supply and 15.0% for sewerage, both higher than the economic opportunity cost of capital. 22. The investment program will strengthen financial sustainability by avoiding unnecessary operating cost and exploring additional revenue sources. This will enable an operating surplus with which to improve water supply and sewerage operations. The calculation of financial internal rates of return (FIRRs) is based on the revenues and expenditures accruing from all physical and other investments. The FIRR is estimated at 8.3% for water supply and 0.3% for sewerage. When the water supply and sewerage components are combined, the FIRR is 4.4%, which exceeds the weighted average cost of capital, estimated at 2.3%. 26 C. Governance 23. The KMC will continue to use the PMU formed under the KEIP. It consists of five specialized units with about 90 staff. The PMU has successfully procured and administered 122 contracts in accordance with ADB guidelines. The highest contract value was $25 million. The KEIP s 5-year average annual disbursement was the second best in the current urban sector portfolio in India. The KMC established in 2006 anticorruption and governance measures, such as (i) public disclosure of the details of physical and financial progress and the results of all tenders on the project website, (ii) public audits of project works by field-level committees in every borough, and (iii) computer-aided redress of public grievances with a requirement to respond within 24 hours of receipt. A financial management assessment conducted for the investment program did not identify any significant concerns but recommended using an imprest subaccount to accelerate disbursement. 24. ADB s Anticorruption Policy (1998, as amended to date) was explained to and discussed with the government and the KMC. Specific policy requirements and supplementary measures are described in the facility administration manual ADB supported the KMC s preparation of a performance-based water loss management contract under the TA project Preparing Kolkata Environmental Improvement Project II. 26 Each periodic financing request will reassess demand, least-cost designs, the economic internal rate of return, and the FIRR, as specified in the subproject selection criteria of the FFA. 27 Facility Administration Manual (accessible from the list of linked documents in Appendix 2).

13 9 D. Poverty and Social 25. The investment program will contribute to ongoing and future national and state poverty reduction programs by improving sewerage services for all households, poor and not. It will improve water supply duration in slums and other neighborhoods in the pilot area, enabling all to share the same quality of service. 28 Tranche 1 activities are categorized as effective gender mainstreaming. A gender action plan was prepared, outlining activities to bring equitable access to water supply and sewerage services, particularly for vulnerable households, including those headed by women. It includes concessional user charges and promotes the participation of women in project offices and among contractors and operators. Program works contracts will follow core labor standards and require contractors to carry out HIV/AIDS awareness programs for laborers. Contracts for international competitive bidding and the standard bidding documents for national competitive bidding require contractors to adequately mitigate social impact in compliance with loan and project agreements and with the principles of the International Federation of Consulting Engineers, doing so under the supervision of the executing and implementing agencies and monitored by ADB. E. Safeguards 26. Safeguard frameworks, including an environmental assessment and review framework and a resettlement framework, were prepared for the investment program. As demonstrated under the KEIP, the KMC has adequate capacity and commitment to implement them. Consistent with the safeguard frameworks, initial environmental examinations and resettlement plans were prepared for tranche 1 investments. Tranche 1 is categorized B for environment, B for involuntary resettlement, and C for indigenous peoples. Most adverse environmental impacts are associated with construction and can be mitigated. Two initial environmental examinations were prepared, including environmental management plans, in line with the environmental assessment and review framework. The acquisition of 350 square meters of land, affecting two landowners, is required under tranche 1. Both owners were consulted and are willing to sell their land. Two resettlement plans were prepared to address minor permanent and temporary impacts associated with rehabilitation and the laying of pipes for water supply, sewerage, and drainage, such as disrupted road accessibility and the loss of livelihoods for a few days during construction, following the resettlement framework. The investment program does not require an indigenous peoples planning framework as it is envisaged that all projects under all tranches will not affect scheduled tribes living in Kolkata, and none of the proposed investments will affect land belonging to scheduled tribes. Consultations were held with stakeholders, and safeguard documents (environmental and involuntary resettlement frameworks and planning documents) have been disclosed on ADB s website; summaries were disclosed in local languages to affected people and other stakeholders. A communication strategy details consultations and disclosure to be undertaken during implementation. F. Risks and Mitigating Measures 27. Major risks and mitigating measures are summarized in Table 5 and presented in the risk assessment and risk management plan Sustained access to safe water and sanitation will contain waterborne and other diseases, improving public health. An equally significant impact will be a reduction in the time women spend fetching water, disposing of waste, and caring for the sick, thus freeing them for productive activities. 29 Risk Assessment and Risk Management Plan (accessible from the list of linked documents in Appendix 2).

14 10 Table 5: Summary of Risks and Mitigating Measures Risks 10-year population growth and water consumption substantially deviate from the projection. Rainfall and other climate variability do not fall within projected range. Experienced staff do not stay with the PMU. Source: Asian Development Bank estimates. Mitigating Measures The projection is based on most recent data from the 2011 census, minimizing the extent of errors. The amount of rainfall is based on 10-year samples, so the specifications and design of the network will reflect current trends. Most staff joined the PMU in 2005 and are committed to their work, making them likely to stay. IV. ASSURANCES AND CONDITIONS 28. The governments of India and West Bengal and the KMC have assured ADB that implementation of the project shall conform to all applicable ADB policies including those concerning anticorruption measures, safeguards, gender, procurement, consulting services, and disbursement as described in detail in the facility administration manual and loan documents. 29. The governments of India and West Bengal and the KMC have given ADB certain undertakings for the MFF, which are set forth in the FFA. Specific covenants agreed by the governments of India and West Bengal and the KMC with respect to individual tranches under the MFF are set forth in the loan agreement and project agreement for the respective tranches. 30. The KMC will comply with the following activities before ADB considers a second periodic financing request under the facility: (i) the completion of critical actions associated with the Roadmap for Self Sustainable Water Supply System in Kolkata, 2011, 30 including the following: (a) periodic analysis of the flow from commissioning of each bulk flow meter, (b) increasing the recovery of operation and maintenance charges for water supply and sewerage from the current 50% to 65% by March 2014; and gradually to 90% by October 2015; and (c) finalizing the policy on subsidy and cost recovery by 31 July 2015; (ii) the KMC charging property tax based on the unit area assessment method starting 30 June 2014; and (iii) the timely submission of audited financial statements. V. RECOMMENDATION 31. I am satisfied that the proposed multitranche financing facility would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve the provision of loans under the multitranche financing facility in an aggregate principal amount not exceeding $400,000,000 to India for the Kolkata Environmental Improvement Investment Program, from ADB's ordinary capital resources, with interest to be determined in accordance with ADB's London interbank offered rate (LIBOR)-based lending facility, and such other terms and conditions as are substantially in accordance with those set forth in the framework financing agreement presented to the Board. 2 September 2013 Takehiko Nakao President 30 Kolkata Municipal Council Roadmap for Self Sustainable Water Supply System in Kolkata. Kolkata.

15 Appendix 1 11 Design Summary Impact Improved access to water supply and sanitation in KMC Outcome Improved water supply, sewerage, and drainage service quality and operational sustainability in selected areas of KMC Outputs 1. Inefficient water supply assets rehabilitated DESIGN AND MONITORING FRAMEWORK Performance Targets Data Sources and and Indicators with Reporting Baselines Mechanisms By 2025, coverage of water supply services sustained at 92% (baseline = 92% in 2011). By 2025, coverage of underground sewerage service through direct connection increases to 55% from 43% in By 2023, water supply hours in pilot areas are increased to 24 hours from 4 7 hours in By 2023, 100% of collected sewage continues to be treated (baseline = 100% in 2011). By 2023, incidence of flooding reduced in 98% of area (baseline = 80%). By 2023, O&M cost recovery, including state subsidies and the KMC s property tax, maintained at more than 100%. By 2023, water production capacity is restored to 1,478 mld (baseline = 1,374 mld in 2011). By 2023, leakage from 700 km of water pipes is detected and repaired through a PBC (baseline = 0 km in 2011). By 2023, water meters are installed on at least 40,000 connections in the pilot area, 15% of which are for households that are vulnerable or headed by women, and maintained KMC s customer records and population projection a KMC s customer records and population projection a Readings from meters in each district metered area Reports from monitoring of sewage treatment plant operations KMC report on incidence of flooding KMC audited financial statement of water and sewerage account PPMS and KMC reports WLM contractor s progress reports and their party s progress validation reports WLM contractor s progress reports and their party s progress validation reports a Assumptions and Risks Assumption 10-year population growth and water consumption do not substantially deviate from projections. Assumption Rainfall and other climate variability fall within the projected ranges. Assumptions The KMC receives national and state statutory clearances on time.

16 12 Appendix 1 Design Summary 2. Sewerage extension to peripheral areas continued 3. Financial and project management capacity further developed Performance Targets and Indicators with Baselines and read through the PBC (baseline = 0 in 2011). By 2023, three sewage treatment plants with 47 mld capacity are constructed with measures to reduce greenhouse gas emissions (baseline = 0). By 2023, 170 km of sewer drain pipes are installed (baseline = 0 km in 2011). By 2023, 27,000 direct connections are newly installed, 15% of which are for households that are vulnerable or headed by women (baseline = 0 in 2011). By 2023, operating receipts and state subsidies exceed operating expenses (baseline = N in 2011). Data Sources and Reporting Mechanisms PPMS and KMC reports PPMS and KMC reports KMC customer records and population projection a KMC audited financial statement of water and sewerage account Assumptions and Risks Assumption Experienced staffers stay with the PMU. Contract award and disbursement achieved for not fewer than 80% of the annual targets in each year during KMC signed contracts and disbursement claims By 2023, at least 90 PMU staffers (at least 30% of them women) retrained on ADB s updated policies and procedures (baseline = 0 in 2011). Training seminar attendance and completion certificates a Activities with Milestones 1. Output 1: Inefficient water supply assets rehabilitated 1.1 Rehabilitate existing water treatment plants (Q Q2 2018). 1.2 Augment the transmission main in the Garden Reach zone (Q Q2 2018). 1.3 Establish a WLM unit in the KMC with dedicated staff (Q2 Q3 2014). 1.4 Identify and repair leaks in the pilot area (Q Q2 2018). 1.5 Identify and repair leaks in the wider area (Q Q1 2020). 1.6 Give the WLM unit on-the-job training (Q Q1 2020). 1.7 Establish a database on water assets (Q Q4 2015). Inputs MFF ADB: $400 million KMC: $170 million

17 Appendix 1 13 Activities with Milestones Inputs 1.8 Make official arrangements for sharing the database (Q1 Q4 2015). 2. Output 2: Sewerage extension to peripheral areas continued 2.1 Construct a new water treatment plant (Q Q4 2018). 2.2 Construct a sewage network in borough XIV (Q Q2 2019). 2.3 Construct a sewage network in boroughs XII, XIV, and XV (Q Q1 2021). 2.4 Construct a sewage network in boroughs XI, XII, XIV, and XV. (Q Q1 2021) 2.5 Provide direct connections to sewers (Q Q1 2021). 3. Output 3: Financial and project management capacity further developed 3.1 Establish a utility finance improvement unit in the KMC (Q Q3 2014). 3.2 Revise and renegotiate existing bulk water contracts (Q Q1 2016). 3.3 Integrate energy cost in water account (by Q1 2015). 3.4 Establish a cost recovery and subsidy policy (Q Q1 2016). 3.5 Develop a domestic water tariff and sewer surcharge (Q Q1 2017). 3.6 Arrange billing collection for domestic users (Q Q1 2018). 3.7 Submit a tariff proposal to KMC (Q Q1 2018). 3.8 Establish a project performance monitoring system (Q Q4 2017). 3.9 Send PMU staff to ADB training programs (Q Q3 2022) Recruit contractors and suppliers for all activities (Q Q4 2017) Submit a proposal to KMC for the PMU s transformation into an autonomous entity, (Q Q1 2016) Prepare legal documents to effect the transformation of the PMU into an autonomous entity (Q Q1 2016) Issue notification on the establishment of an autonomous entity (Q Q1 2018) Disclose project information to the public (Q Q1 2021). ADB = Asian Development Bank, km = kilometer, KMC = Kolkata Municipal Corporation, mld = million liters per day, N = negative; O&M = operation and maintenance, PBC = performance-based contract, PMU = project and program management unit, PPMS = project performance management system, Q = quarter, WLM = water loss management. a Data to be disaggregated by sex, poverty category, and vulnerability. Source: Asian Development Bank estimates based on Kolkata Municipal Corporation Kolkata Urban Sector Investment Plan. Kolkata.

18 14 Appendix 2 LIST OF LINKED DOCUMENTS 1. Framework Financing Agreement 2. Periodic Financing Request for Project 1 3. Sector Assessment (Summary): Water Supply and Other Municipal Infrastructure and Services 4. Facility Administration Manual 5. Contribution to the ADB Results Framework 6. Development Coordination 7. Financial Analysis 8. Economic Analysis 9. Country Economic Indicators 10. Summary Poverty Reduction and Social Strategy 11. Gender Action Plan for Tranche 1 Project 12. Initial Environmental Examination 13. Environmental Assessment and Review Framework 14. Resettlement Plan 15. Resettlement Framework 16. Risk Assessment and Risk Management Plan Supplementary Documents 17. Sector Road Map 18. Summary of Project Performance 19. Communication Strategy 20. Nonrevenue Water Diagnostic Summary 21. Cost Benefit Analysis Supplementary to Economic Analysis