IN THE AMOUNT OF US$39.5 MILLION

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY PROJECT APPRAISAL DOCUMENT ON A PROPOSED LOAN IN THE AMOUNT OF US$39.5 MILLION TO THE REPUBLIC OF INDIA FOR THE KARNATAKA URBAN WATER SECTOR IMPROVEMENT PROJECT Energy & Infrastructure Sector Unit South Asia Regional Office March 12, 2004 Report No: IN This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents mav not otherwise be disclosed without World Bank authorization.

2 KUIDFC KSUWSC KUWSDB LEA M&E NGO NPV NRW oc O&M PMU PPP PSP SEMF SHP swc TA UDD CURRENCY EQUIVALENTS (Exchange Rate Effective March 09, 2004) Currency Unit = Indian Rupees (Rs.) INR1 = US$0.022 US$1 = INR45.24 FISCAL YEAR April 1 -- March 31 ABBREVIATIONS AND ACRONYMS ACA Additional Central Assistance ADB Asian Development Bank APL Adjustable Program Lending CAS Country Assistance Strategy CEEPHO Central Public Health and Environmental Engineering Organization DEA Department of Economic Affairs DffD Department for International Development DMA Department of Municipal Administration ECOP Environmental Codes of Practice EMP Environmental Management Plan FMR Financial Management Reports GO Government Order GO1 Govemment of India GoK Government of Kamataka IRR Internal Rate of Return KPTCL Kamataka Power Transmission Corporation Limited Kamataka Urban Infrastructure Development & Finance Corporation Kamataka State Urban Water Supply Council Kamataka Urban Water Supply and Drainage Board Limited Environmental Assessment Monitoring & Evaluation Non Governmental Organization Net Present Value Non Revenue Water Operator Consultant Operation and Maintenance Project Management Unit Public Private Partnership Private Sector Participation Social and Environmental Management Framework Sanitation and Hygiene Promotion State Water Council Technical Assistance Urban Development Department

3 FOR OFFICIAL USE ONLY UGD ULB US AID UWS WASIS WSS W&S WSP-SA Underground Drainage Urban Local Bodies United States Agency for International Development Urban Water Sector Water and Sanitation Information System Water Supply and Sanitation Water and Sanitation Water and Sanitation Program - South Asia Vice President: Country ManagedDirector: Sector ManagerDirector: Task Team Leader/Task Manager: Praful C. Pate1 Michael F. Carter Sonia Hammam Oscar E. Alvarado/Christophe Bosch This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.

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5 INDIA KARNATAKA URBAN WATER SECTOR IMPROVEMENT PROJECT CONTENTS A. Project Development Objective 1. Project development objective 2. Key performance indicators Page 3 3 B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 2. Main sector issues and Government strategy 3. Sector issues to be addressed by the project and strategic choices C. Project Description Summary 1. Project components 2. Key policy and institutional reforms supported by the project 3. Benefits and target population 4. Institutional and implementation arrangements D. Project Rationale 1. Project alternatives considered and reasons for rejection 2. Major related projects financed by the Bank and/or other development agencies 3. Lessons learned and reflected in the project design 4. Indications of borrower commitment and ownership 5. Value added of Bank support in this project E. Summary Project Analysis 1. Economic 2. Financial 3. Technical 4. Institutional 5. Environmental 6. Social 7. Safeguard Policies F. Sustainability and Risks 1. Sustainability 2. Critical risks 26 26

6 3. Possible controversial aspects 27 G. Main Conditions 1. Effectiveness Condition 2. Other H. Readiness for Implementation I. Compliance with Bank Policies Annexes Annex 1: Project Design Summary Annex 2: Detailed Project Description Annex 3: Estimated Project Costs Annex 4: Cost Benefit Analysis Summary Annex 5: Financial Summary for Revenue-Earning Project Entities, or Financial Summary Annex 6: (A) Procurement Arrangements (B) Financial Management and Disbursement Arrangements Annex 7: Project Processing Schedule Annex 8: Documents in the Project File Annex 9: Statement of Loans and Credits Annex 10: Country at a Glance Annex 1 1 : Photographs of existing Water and Drainage Services in Participating Cities Annex 12: Summary of Environmental Assessments Annex 13: Urban Water and Sanitation Sector Policy in Karnataka MWS) IBRD 32942: Karnataka - Location of Three Participating Urban Local Bodies.

7 INDIA Kamataka Urban Water Sector Improvement Project Project Appraisal Document South Asia Regional Office SASE1 late: March 12,2004 Sector ManagerDirector: Sonia Hammam Zountry ManagedDirector: Michael F. Carter 'roject ID: PO82510 Lending Instrument: Specific Investment Loan (SIL) Team Leader: Oscar E. Alvarado Sector(s): Water supply (95%), Sub-national government administration (5%) Theme(s): Other urban development (P), Access to urban ~rvices for the Poor (PI, Pollution management and environmental health (S), Decentralization (S), Administrative and civil service reform (S) [XI Loan [ ] Credit [ ]Grant [ ]Guarantee [ ]Other: For LoanslCreditslOthers: Loan Currency: United States Dollar Amount (US$m): $39.5 Borrower Rationale for Choice of Loan Terms Available on File: Proposed Terms (IBRD): Variable-Spread Loan (VSL) Grace period (years): 5 Commitment fee: 0.75% Yes Years to maturity: 20 Front end fee (FEF) on Bank loan: 1.00% Pavment for FEF: Catitalize from Loan Proceeds [BRD rotal:

8 1 Exdected effectiveness date: Expected closina date: I -2-

9 A. Project Development Objective 1. Project development objective: (see Annex 1) The Vision: The long-term vision for the urban water sector (UWS) in the State of Kamataka is to tum its performance into high quality and sustainable services in all its urban local bodies (ULBs). The strategy to achieve this vision is to carryout a phased program, including incremental steps towards full service coverage and high-quality service provision in an efficient and fmancially sustainable fashion. In the medium-term, the strategy envisages achieving water supply and sanitation (WSS) service provision models that would be provided by autonomous, customer responsive, and commercially-oriented utilities, including effective public-private partnerships (PPP). In the short term, a state level sector policy reform would be implemented and at the local level, demonstration cities would be selected to participate in testing such initial reforms. Project Development Objective: The main objectives of the proposed project are to: (a) launch Government of Karnataka (GoK)'s UWS reform process based on the "Urban Drinking Water and Sanitation Policy Statement of GoK" (approved by the cabinet of GoK in May 2003); and (b) improve U WS services in the participating ULBs (Hubli-Dhanvad, Belgaum, and Gulbarga) and demonstrate that sustainable, efficient, and commercially-oriented service provision can be achieved. The detailed objectives of each project component are described in section C. 2. Key performance indicators: (see Annex 1) Component A. The progress in GoK's sector reform process will be measured through the following: At the State Level: 0 Establishment and operationalization of the Kamataka State Urban Water Supply Council (KSUWSC). 0 Implementation of capacity strengthening activities to support the ULB level reform. 0 Development of the State Water and Sanitation Information System (WASIS). 0 Establishment of urban WSS sector investments and tariff frameworks. 0 Establishment of legal and regulatory framework. 0 Preparation of WSS legislation. At the ULB Level: 0 Completion of city-wide engineering feasibility studies. 0 Implementation of transition plans, including ringfencing of WSS accounts and improvements in billing and collection system. 0 Definition of the scope and scale of follow-on Private Sector Participation (PSP) and scaling-up in other ULBs. Component B. Improvement in services will be measured against the following: For each ULB: 0 Improved overall water supply availability and quality resulting from priority investments for bulk water supplies and distribution network improvements. -3-

10 Implementation of the social awareness and communication strategy. For each demonstration zone: Volumetric tariff adopted according to agreed principles in order to recover no less than 50 percent of Operation and Maintenance (O&M) costs at initial stage and no less than 80 percent by the end of the Project. Weighed average of 75 percent or higher achieved for the following eight indicators: (1) continuous (aiming at 24-hour, 7 days per week all year) supply to the zone - emergency stoppages not to exceed 12 hours and no more than one emergency stoppage per 3 months (20 percent weight); (2) water quality as per norms and monitored through testinghampling (5 percent weight); (3) supply to the zone to be metered both in respect to flow and pressure and continuous records maintained (5 percent weight); (4) physical losses within the Demonstration Zone not to exceed 10 liters per connection per hour based on average pressure within the Demonstration Zone of 10 meters, adjusted proportionately in respect to the actual average zone pressure (10 percent weight); (5) minimum pressure 6 meters (i.e. measured at the customer meter of the property connection receiving the lowest pressure in the period 6 a.m. to 10 p.m.) (10 percent weight); (6) 100 percent metering of property connections (individual and shared), standpipes and feeds to street storage tanks, adoption of volumetric tariff structure (20 percent weight); (7) billing/collection rate to exceed 70 percent (10 percent weight); and (8) high level of customer satisfaction (70 percent) measured by polls (20 percent weight). B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: : IN Date of latest CAS discussion: December 5, 2002 The proposed project is consistent with the Bank Group Country Assistance Strategy (CAS) for India, discussed by the Executive Directors on December 5,2002. The CAS lists support for PSP in the UWS as a program priority and recognizes that provision of adequate infrastructure would be critical in promoting private sector growth. The project is also consistent with India's Tenth Five Year Plan, which recognizes that infrastructure bottlenecks have become a major constraint on growth and, therefore, poverty alleviation. The Bank's plan to support the reform-minded states through programmatic interventions is also consistent with the project approach which envisages a long-term involvement in the U WS in the state of Karnataka. Sustainable access to WSS services is a high priority that is now well-recognized in the international development agenda. Access to safe water has been declared as a basic human right by the United Nations and is widely recognized to directly contribute to poverty alleviation, the main focus of the CAS. The project would also contribute to achieving the Millennium Development Goals, which emphasizes safe and sustainable drinking water and sanitation as well as their important health impacts. 2. Main sector issues and Government strategy: Key pervasive issues that affect the UWS in Karnataka are discussed below: -4-

11 Gaps in Sector Performance: The sector suffers from some chronic inefficiencies, including unreliable service quality, and limited coverage. At the technical level, problems include sub-optimal resource allocation, mismatched capacity investments, and poor (O&M) practices. These are compounded by uneconomic tariff structure/levels, poor collection efficiency, and high levels of leakage and non-revenue water. While sector information systems are deficient, service coverage with authorized connections in all three participating ULBs is estimated to be less than 50 percent. In addition, the state experienced severe drought conditions during the summer of Inadequate Institutional Framework: Urban WSS provision in the state of Karnataka is the responsibility of the ULBs, except for Bangalore, which has a water utility. However, the functions for WSS services, e.g. O&M, sewerage services, billing and collection of the tariffs, and capital development works etc. are fragmented among different departments within the ULBs and outside agencies like KUWSDB (Kamataka Urban Water Supply and Drainage Board) with little coordination. This set-up does not fully address the issues for efficient service management or proper asset maintenance. Limited Capacity and Financial Sustainability at the ULB level: Since WSS operation and accounts are not separated from other municipal services and there is limited capacity to track costs and capital expenditures accurately at the ULB level, the magnitude of deficits incurred by the water sector is difficult to assess. However, studies indicate that all ULBs show operating losses, and normally the tariffs only cover one-third or less of O&M costs. The increasing deficits encountered by the ULBs are covered by general revenues. Lack of funds also leads to deficient services (maintenance neglect, only a few hours per week of service). The amount and sources of these subsidies, which presumably come from the statehational level, have not been estimated but are likely to be significant. Weak Enabling Environment for PSP: Several factors inhibit PSP in the sector: low tariffs that lead to poor cost recovery; lack of a credible regulatory framework; and lack of a legal framework permissive to PSP. A more conducive environment requires policy and legal changes in the institutional, regulatory, and legal frameworks. Government Strategy -- Karnataka's Fiscal Reform Program and Sectoral Reforms: GoK has begun a wide-ranging reform program, combining fiscal, govemance and sectoral reforms, which have been supported by the Bank through the Second Karnataka Economic Restructuring Loadcredit during 2001/2002. Several elements of this reform program support the proposed urban water sector reforms. GoK recently released a comprehensive state water policy, which envisions adopting a river basin approach for all future water resource management in the state, restructuring government functions for more effective management, and revising water tariffs to meet O&M needs. GoK has already embarked on this process through creating the "Urban Drinking Water and Sanitation Policy Statement" that covers the key reform elements for the sector (Annex 13) and through preparing a strategy and action plan for the implementation of this policy statement. In addition, GoK has announced plans to increase PPPs in the sector and in December 2001, increased water tariffs in Bangalore by 50 percent, the first such increase in five -5-

12 years. These developments are good indications of GoK's commitment to carry out sector reform and to reduce the fiscal burden that the sector imposes on state finances. 3. Sector issues to be addressed by the project and strategic choices: The proposed project would: 0 support GoK's overall UWS reform process, which envisages the creation of sound institutional and regulatory frameworks and an enabling environment for PSP; 0 improve UWS service quality in the three participating ULBs; 0 develop reliable mechanisms to measure sector performance in terms of quantity and continuity of service delivery, efficiency improvements, tariff levels, cost recovery, as well as progress made in reform; and 0 facilitate capacity building and financial management at both the state and local level. C. Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown): The project comprises three components: (A) Sector Development and Technical Assistance; (B) Physical Investments in three ULBs to improve their water supply services and demonstrate the feasibility of continuous safe water supply in pilot areas; and (C) Project Implementation Support. A. Sector Development and Technical Assistance Al. Policy Implementation and State Level Institutional Strengthening A2. Strengthening of Service Delivery and Preparation of follow-on Project in three Participating ULBs B. Physical Investments B 1. Priority Investments B2. Works in City Distribution Networks in all three ULBs B3. Demonstration Projects C. Project Implementation Support Total Project Costs Front-end fee o Total Financing Required Component A. Sector Development and Technical Assistance The objectives of this component are to: (i) assist GoK in finalizing its policy reform agenda and to carry out initial implementation steps of staged sector reforms; and to (ii) prepare business model and PSP process for service provision in the three participating ULB and other cities in Karnataka. Al. Policy Implementation and State Level Institutional Strengthening (US%0.89 million) The following activities will be carried out to initiate the implementation of the "Urban Drinking Water and Sanitation Policy Statement of GoK". -6-

13 a Establishment and operationalization of KSUWSC: The Kamataka State Urban Water and Sanitation Council (KSUWSC) is envisaged to be established by the end of 2004, to oversee and be responsible for policy definition and implementation, planning and programming, technical assistance, development of sector information system, norms, and certain regulatory functions for the UWS in Karnataka. Urban Development Department (UDD) of GoK will manage the sector reform component through its policy/technical cell housed within KUIDFC until the KSUWSC is operational. b Strengthening of Service Delivery in ULBs: The following capacity strengthening activities will be carried out to support the ULB level reform in the state: (i) institutional options for service provision; (ii) technical assistance strategy and action plan to enable UWS reform at the ULB level; (iii) revenue collection action plan; and (iv) public awareness and communication strategy. c Development of the WASIS: This activity would assist GoK in designing a sector Management Information System (MIS) and in supporting the actual setuphnitial implementation phase, and consist of: (i) task A: development of an information system, collection of data from all ULBs, training of the primary users, and development of formats for periodic information updates; and (ii) task B: benchmarking of the service provision levels. d Water and Sanitation Sector Investment and Tariff Frameworks: This activity would assist GoK in better managing its UWS finances, and consists of: (i) task A: study to establish an integrated state UWS sector financial policy, which would look at several financial scenarios and sources of funds to help comply with the state sector goals; and (ii) task B: study to develop a framework for WSS pricing through tariffs, which would examine the WSS pricing policies, taking into account the regulatory, financial, and social aspects of service delivery. e Review and establishment of legal and regulatory framework: This activity would assist GoK in designing the regulation strategy, legal basis and action plan, and starting up of essential but basic regulatory functions, including pricing, service accounting and benchmarking. f Preparation of UWS Legislation: This study would assess the current legal framework for the sector, recommend necessary changes to the existing legislation, and prepare the corresponding legislative (or in some cases executive) proposal. A2. Strengthening of service delivery and preparation of follow-on project in the three participating ULBs (US$ 1.66 million) a City-wide Engineering Feasibility Studies: This would include a short-term service improvement plan, network mapping and modeling, master plans for longer term rehabilitatiodexpansion, and environmental and social assessment. Sanitation strategies and business plans would also be developed, including analysis of fmancial feasibility and strategic plan, and proposals for the selection of alternative institutional modalities and PPP options for each city; -7-

14 b Transition plans: This study would help assure a smooth transition from the Operator Consultant (OC) to the subsequent operator, and include ringfencing of WSS accounts, improvements in billing and collection system for WSS tariffs, and designing of new roles and functions at the ULB levels; C Other studies related to the PPP preparation: This includes asset evaluation, communication strategy, and other financial, legal environmental, and social studies. d Strategy to scale up thisproject to other cities in Karnataka: This would include engineering feasibility studies, development of business plans, and other studies required to define institutional modalities for service delivery in about four or five medium-sized cities in Karnataka. Component B. Physical Investments The objectives of this component are to: (i) improve the service provision and attain continuous service in selected demonstration zones <f the three participating ULBs; (ii) generate credibility in the overall program and learn lessons on the challenges faced in the demonstration zones for scaling up continuous service provision in the entire ULBs; and (iii) simultaneously improve the efficiency of bulk supply operations and distribution networks and attain initial improvements in water service provision to all the residents of the ULBs. B1. Priority Investments (US$ million): Priority Investments are planned to increase the bulk supply to the ULBs, and the basic works include reducing leakage from transmission mains by rehabilitationheplacement of pipes, augmenting and extending the transmission mains, feeder mains to the reservoirs, replacing pumps and provision of bulk flow meters at critical points on transmission system. This subcomponent also includes technical audits and third party inspection for the priority investments, and a R&R Impact evaluation study. B2. Works in City Distribution Networks in all three ULBs (US$5.78 million): This subcomponent would provide short term improvements to majority of the most water-stressed users in each ULB. In particular, the hours of supply per week will be increased for all or a significant part of the city population. This way, there will be no impediments to the provision of continuous water supply to the demonstration zones as the general conditions in the rest of the city will also be improved and social acceptance of the demonstration projects will be gained. B3. Demonstration Projects (US$ million): This subcomponent envisages to demonstrate that 24-hour continuous supply is achievable and to show the benefits -- health, technical, operational and commercial -- it brings. The four demonstration projects (two demo areas are in Hubli-Dhanvad) will focus on parts of the city distribution system and include works to enable the area to be isolated from rest of the system and fed from a single point; system component upgrades to permit continuous, pressurized supply; identification of supply and underground drainage bottlenecks and ad hoc low-cost system improvements. An Operator Consultant (OC) will be hired to for about three years to finalize the works, design the works, prepare the bidding documents, procure contractors, sign contracts with the contractors, and supervise the contractors work. This subcomponent supports the fees and any bonuses to be paid to the OC based on their performance, the supervision of the OC contract, and technical audits. This -8-

15 subcomponent will also facilitate: (i) awareness creation and communication between and across stakeholders within and outside the demo zone; (ii) formation of local level forums for stakeholder interactions; (iii) customer education on proper use of 24/7 supply systems and healthhygiene behavior, and (iv) participatory monitoring of outcomes in the demo zones. Component C. Project Implementation (US$1.39 million) This subcomponent will finance the project's incremental operational costs and studies related to project management and implementation, including; (i) incremental, short term consultants for KUIDFC for the duration of the project; (ii) preparation and establishment of a monitoring and evaluation system; (iii) costs related to the financial management systems within KUIDFC; (iv) training for staff of the Project Management Unit of KUIDFC; and (v) incremental operating cost at KUIDFC, including supervision costs. 2. Key policy and institutional reforms supported by the project: As described above in project description, the KSUWSC will be established to articulate all policy and institutional elements required to promote UWS reform at the State and ULB level. The KSUWSC would be responsible for sector planning, funds allocation, initial regulatory functions, and technical assistance/training to ULBs. In addition, the existing legal and regulatory framework will be reviewed and UWS legislation be prepared. With regards to sector financing, an integrated WSS sector financial policy will be established and a fi-amework for WSS tariffs will be developed. The project would also support ULB level reform through exploring institutional options for service delivery, developing action plans to improve revenue and collection performance, and implementing the public awareness and communication strategy. 3. Benefits and target population: The target beneficiaries of the sector development and technical assistance component would be the general urban population in Kamataka, totaling approximately 16.8 million (approximately 33 percent of the state population of 53 million). The general physical investment component would benefit all water consumers in the three participating ULBs, totaling 1.8 million as of 2001 (940,000 in Hubli-Dhanvad, 425,000 in Belgaum, and 430,000 in Gulbarga). The demonstration project would target the people in the demonstration zones, which correspond to 7-14 percent of the population in each city, totaling about 230,000. Immediate benefits outside the three participating ULBs will be mostly related to better fund allocation for investment and some improvement in UWS service performance. In the long term, it is envisaged that the reform measures taken under this project would be the driving force for the ULBs in Kamataka to become the real catalyst to turn around the current situation of generalized poor performance into sustainable high quality services for all. The major benefits in the three ULBs would include; increased hours (currently one to two hours supply every two days in Belgaum and Gulbarga, and one to two hours supply every three to five days in Hubli-Dhanvad) and more equitable water supply; higher water pressure which would make the current practice of pumping directly from the mains unnecessary; and customer -9-

16 satisfaction which provides incentives for the ULBs to provide sustainable service. These benefits would lead to broader access to sanitation facilities; higher standards of cleanliness, and reduced pollution. Broader access to adequate water supply on a reliable basis would also benefit industrial consumption thus support economic development. The investments in the three ULBs would have a demonstration effect and serve as a stepping stone to scaling up reform. A successful implementation of the project would open the door to widespread and quicker sector reform in Kamataka, and quite probably in other Indian states. See also cost benefits analysis in Annex Institutional and implementation arrangements: KUIDFC will be the implementation agency for this project. Other important participants include: (i) GoK, which has constituted a State-level Committee for overall steering of the project throughout its cycle; (ii) GoK s UDD which will drive and manage the sector reform component (AI) through its policy/technical cell housed within KUIDFC until the proposed KSUWSC is operational; (iii) KUWSDB, which will act as an agent of KUIDFC for the design, technical aspects of procurement, and constructiodsupervision of the priority investments (component B 1); and (iv) the ULBs which, as main beneficiaries, will follow-up, participate, and facilitate implementation of components A2, B I, B2, and B3. To carry out its responsibilities, KUIDFC has established a Project Management Unit (PMU) which will provide for project technical and financial follow-up, coordinatelcarry out all project procurement, prepare reports, coordinate all financial management tasks including audits, and in general become KUIDFC interlocutor with the ULBs, other participants in project execution, and the Bank. See detailed implementation arrangements for each component in Annex 2 table. To assure clear responsibilities and rules of the game, Guidelines for Project Implementation will be issued by GoK in the form of a Government Order (GO), specifying the roles and responsibilities of all project participants. This GO will be back-to-back with the OC s contract with KUIDFC, KUWSDB and the ULBs. The GO is a condition for project effectiveness, and detailed in section G. 1. D. Project Rationale 1. Project alternatives considered and reasons for rejection: The current project concept has evolved from previous proposed approaches to UWS reform and developments in Karnataka. The main alternatives considered are described below. Combination of Urban Management and WSS: The original project concept envisaged covering both urban management and WSS under one project. Ths approach was too complex and created confusion for GoK on the nature of policy and institutional reforms required in the sector, which requires separate dynamics. Therefore, the scope was revised to separate the two sectors and to develop two stand-alone projects. Management Contract for I3 ULBs: The stand-alone water project was initially developed to introduce PSP through a management contract for 13 ULBs selected by the GoK. Since most of -10-

17 the ULBs are scattered over more than two-thirds of Kamataka, clustering water operations to attract private operators was proposed, However, the feasibility of such a complex institutional arrangement was questioned and the scope was later narrowed to fewer ULBs and a step-wise PSP approach. Adjustable Program Loan (APL): Reviewing the nature of reforms to be undertaken and given the timeframe required for such reforms to take place, an APL was proposed to be used. However, because the GoK is at an early stage o f developing an agreed action plan to implement reform in the sector, the definition of milestones and triggers for subsequent loans was problematic, and thus this approach was rejected. Stand-alone Investment and Technical Assistance: Finally, it was decided that the first phase project will be supported through a specific investment loan that would finance urgent investments and technical support to GoK and the participating ULBs. Progress will be reviewed and evaluated during the implementation of this first phase project. Additional analysis will be undertaken, as necessary, before the subsequent phase projects are initiated. A three-phase program over 8-10 years is envisaged. 2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned). Latest Supervision Sector Issue Project (PSR) Ratings (Bank-finance wojects only) Bank-financed Improvement of state urban governance/decentralization and soundness of municipal finance and accountability Provision of water supply, sanitation and flood protection Provision of water supply and sanitation services Improvement of Urban Management Capacity and Support Basic Urban Service Investment Provision of water supply and sanitation system Promotion of Private Infrastructure Investment Provision of water supply and waste Karnataka Urban Sector Reform Project (under preparation) Andhra Pradesh Urban Reform & Municipal Services Project (under preparation) Delhi Water Supply and Sanitation Project (under preparation) Tamil Nadu Urban Development Project I (Cr " completed September 30, 1997) Hyderabad Water Supply and Sanitation Project (Cr WLn IN, completed March 31, 1998) Private Infrastructure Finance (IL&FS) Project Ln IN completed June 30,2003 Andhra Pradesh District Implementation Progress (IP) Objectiie (DO) S S S S

18 disposal systems Poverty Initiatives Project (Ln " ongoing) Provision of sewerage disposal services Bombay Sewage Disposal Project (Cr.27563lLn IN, completed December 3 1,2003) Provision of water supply and sewerage Madras Water Supply Project I1 (Ln.39074"Ln IN, ongoing) Tamil Nadu Urban Development Project I1 (Ln " ongoing) Improvement of Urban Management Capacity and Support Basic Urban Service Investment Other development agencies Asian Development Bank USAID Karnataka Urban Development Project (ongoing) Karnataka Urban Development and Coastal Environment Management Project (ongoing) Rajasthan Urban Infrastructure Development Project (ongoing) Financial Institutions Reform and Expansion Project (FIRE I) (completed) FIRE I1 (ongoing) ip/do Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), I- (Highly Unsatis ICtOry) 3. Lessons learned and reflected in the project design: The Bank has supported few urban water supply projects in the past 10 years, all of them in big cities, and since 1996 there have been no new projects in the sector. Past Bank supported projects in India's UWS have proven to have sustainability problems largely due to: (i) lack of a long-term vision and of a step-wise approach considered to tackle the complex sector; (ii) uneven improvements in the sector policy and institutional reform aspects of the project; (iii) lack of adequate beneficiary involvement in the project cycle; and (iv) predisposition of UWS institutions towards construction rather than creation of an enabling environment for improved service delivery. In addition to the lessons learned from previous Bank projects, key elements from the economic and sector work during the fiscal years 2001 through 2003, including the Bank's urban water strategy, capacity building and learning initiative, and the Bank's rules of engagement, have been incorporated in the project design. Given the project's emphasis on future private sector involvement, lessons learned from an Operations Evaluation Department review, "An evaluation of private sector participation in water supply and sanitation under projects assisted by the World Bank" have also been incorporated in the project design. Based on these lessons, the key principles of project design agreed with the client include: (i) Implementation strategy and action plan for the "Urban Drinking rater and Sanitation Policy Statement of GoK" will be carried out with a long term vision and step wise approach; Municipal-level reform, including ring-fencing of WSS operations and adoption of a (ii) - 12-

19 (iii) (iv) computerized billing and collection system, will be implemented to ensure that sufficient capacity is built at the local level to manage WSS operations in preparing for future PSP; The project will start with a small-scale demonstration project to ensure that up-front reforms are undertaken before major expansion and management transformation take place; and A communication strategy will be developed and the local-level planning processes would be participatory and include full consultation with the municipal managers, community and other stakeholders to ensure their ownership and commitment to the project. The project will take into account and draw lessons from reforms of the state-level UWS carried out in other federal countries such as Mexico and Brazil. 4. Indications of borrower commitment and ownership: GoK's commitment to reform is high, as evidenced by actions already taken. Despite the delays experienced in considering earlier concepts of the project, GoK has remained keen on working with the Bank based on the new concept. GoK has also made PSP in the urban water sector as one of its priorities and it is fully aware that a significant amount of upstream work is necessary for successful PSP schemes. Demonstrated interest and commitment to reform include issuance of the "Urban Drinking Water and Sanitation Policy Statement of GoK" and preparation of a strategy and action plan for implementation. Commitment and ownership of the participating ULBs appears to be high, as demonstrated by the active participation of all Mayors, Municipal Commissioners, and senior engineers from all the ULBs throughout project preparation. 5. Value added of Bank support in this project: Since the Bank has a long history of involvement in India's water sector, the lessons learned will be put to good use in the proposed project. In addition, the Bank can make available to the state its considerable knowledge on international experience and best practices in the sector. GO1 has requested the Bank to assist in a few select states in operationalizing sector reforms mandated under the 74th Constitutional Amendment. It believes the Bank will provide a strong demonstration effect nationwide. Furthermore, given the long-term nature of implementing institutional reform statewide and the sizeable investments required to meet the needs in this sector, the Bank is uniquely positioned to support both the reform process and the potential future investments associated with it. Other agencies active in the sector include the United States Agency for International Development (USAID), the Asian Development Bank (ADB), and the Department for International Development (Dff D). Lessons leamed from the institutional framework adopted by ADB will be incorporated into the project. E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8) 1. Economic (see Annex 4): - 13-

20 Cost benefit NPV=US$4.4 million; ERR = 16 % (see Annex 4) 0 Cost effectiveness 0 Other (specify) An economic analysis has been carried out to determine the project's economic viability. A cost-benefit framework has been applied on the project as a whole and on the main sub-projects individually. 'with' and 'without the project' scenarios have been defined to identify the project's incremental costs and benefits. Cost effectiveness criteria has also been applied to all major sub-components as part of project design. Project altematives have been screened for their economic viability, priority level, cost effectiveness, and other social and environmental criteria. Sensitivity analysis has been done on the major risks identified during project preparation. In the base scenario, the net present value of the project is Rs million (US$4.4 million). The internal rate of return is 16 percent, above the discount rate of 12 percent. The findings are detailed in the table below: I NPV IRs. Million) I IRR Belgaum Guibarga Hubli-Dhanvad Demonstration zones (coping costs approach) TOTAL % % % % % For the Investment Component, the objective was to assess the costs and benefits of the priority investments and of improving service levels in the demonstration zones from the current extremely low baseline up to continuous supply levels. To this end, the analysis has established baseline indicators wherever possible including private coping costs, costs to the utility, and externalities. Using the revealed preference approach, the analysis has attempted to estimate benefits such as reduction in private coping costs and system efficiency gains, and contrast them to the incremental investment and O&M costs required to improve service levels. Benefits have also been assessed using the stated preference approach, drawing upon the willingness-to-pay information gathered as part of the social assessment. Economic analysis will also be carried out during project implementation on the TA component. The proposed private sector contract and associated investments to improve the UWS situation on a city-wide basis will also be assessed using the data generated in the demonstration zones. The analysis will assist in setting both the performance targets (e.g., non-revenue water (NRW) reduction, energy savings) and the investment levels required to achieve the economic and financial viability of the possible follow-on project. The economic analysis will also cover issues such as tariff levels and structure, cost recovery and affordability, subsidies, fiscal impacts, cross-subsidization among users, and the economics of investing in wastewater collection and treatment. Although the Social Assessment study has provided indications of coping costs and willingness to pay, a more detailed demand assessment and analysis needs to be carried out during -14-

21 implementation, to establish a baseline against which improvements would be measured at regular intervals. The demand assessment (to be funded by the Water and Sanitation Program - South Asia) for the three ULBs will analyze the demand side perspectives, including consumer preferences and affordability aspects for 24/7 and other improvements in water supply services. The study will analyze the baseline situation including the existing coping costs and consumer satisfaction; additional services desired and the acceptable tariffs for improved levels of services. The 24/7 demonstration project will initiate a move towards metering and volumetric pricing, with tariff rationalization as an instrument for financial sustainability and demand management. As part of the project institutional component, a tariff policy for urban WSS services will be designed, including possible cross-subsidies for the poor, for the 3 ULBs and at the State level. Although the Urban Drinking Water and Sanitation Policy Statement of GoK highlights the need for Monitoring and Evaluation (M&E) as well as reporting arrangements, at present there is no customer interface and no monitoring system in place. Recognizing the need to supply urban water services in accordance to what consumers want and are willing to pay for, an M&E program for the 3 ULBs (including the non-demo zones) will be designed. The design of a M&E template will be the first step in institutionalizing customer surveys as instruments of public accountability and the information will be useful as inputs into operations and planning process, including the design of effective tariff policies. A pilot program will be carried out over a period of six months, and lessons to be incorporated for a broader roll out. Alternate institutional arrangements, including local institutions (colleges, schools etc.) could be involved in the M&E program and the dissemination of information. 2. Financial (see Annex 4 and Annex 5): NPV=US$ million; FRR = % (see Annex 4) The long term objective set by GoK through its Urban Drinking Water and Sanitation Policy Statement is to establish an appropriate cost recovery mechanism through adequate tariff to ensure that revenues cover O&M costs, debt service plus a reasonable retum on capital. In view of this, the financial health of the ULBs have been analyzed. Preliminary results show that none of the ULBs currently cover even half of their O&M costs through tariff revenues, and when depreciation and interests are taken into account, the results deteriorate significantly. The table below shows that a large portion of the deficit is covered by state subsidies, including grants, share of salaries, grants adjusted by KUWSDB and Kamataka Power Transmission Corporation Limited (KPTCL), which are categorized as revenue in the ULB accounts. GoK has recognized that in the medium term, subsidies and grants will continue to be needed, but their plan is to focus more on targeting the poor and providing sanitation

22 Table 1: Cost recovery levels in the participating ULBs: HDMC Belgaum Gulbarga A. O&M cost recovery level in % 39% 17% B. Full cost recovery level in 2001/2 16% 24% 11% C. Full cost recovery including grants in % 83% 49% Where: A. B. C. includes WSS tariff and tax revenues/o&m costs. includes WSS tariff and tax revenuedfull cost including O&M, depreciation, and interests. includes WSS tariff and tax revenues plus share of SFC salary, grants adjusted by KUWSDB loan and KPTCL/full cost including O&M, depreciation, and interests. With regards to financing of the UWS at the state level, the project envisages to assist GoK in carrying out the state sector development strategy/action plan, including detailed fiscal allocation of state resources. With regards to ULB level reform, the project envisages to assist the ULBs through the following studies: (i) Ring-fencing the WSS Operations: To improve the efficiency and accountability for the sector, the ULBs will separate their WSS accounts from rest of the municipal services using a workbook developed during project preparation. As a first step, operating revenues and expenses for the WSS activities, as well as the demo zone accounts will be recorded separately. Capacity building of 2-3 municipal staff in each ULB to perform this activity will be conducted in close coordination with a state-wide initiative undertaken by GoK, aiming at computerizing the municipal accounts. (ii) Improvement in UWS Billing and Collection: To improve the bill collection rate which has been deteriorating during the past four years, down to only 37 percent for Hubli-Dharwad, 53 percent for Belgaum, and 30 percent for Gulbarga, a computerized customer database and a billing and collection system will be developed and implemented. These systems will also separate the demonstration zone bills which will be different for each consumer depending on their consumption level, and have a more frequent billing cycle. The bill collection target by project closure is set for 70 percent in the demonstration zones. (iii) Defining the Water Tariff Structure: Using the project cost estimates, data collected from the ULBs, KUWSDB, and KPTCL and revenue and cost related assumptions, a simple analysis was done to estimate the level of tariff increase necessary to achieve cost recovery in the medium to long term. Table 2: Annual Tariff Increase Necessary to Reach Cost Recovery in Five/Ten Years: HDMC Belgaum Gulbarga O&M cost recovery by % 18% 61% O&M cost recovery by % 7 yo 25% Full cost recovery (incl. depreciation and debt ) by % 35% 80% Full cost recovery (incl. depreciation and debt) by % 12% 29% The TA component of the project will assist GoK and the ULBs to develop sound tariff policies at the municipality level and a volumetric tariff system in the demonstration zones. In summary, -16-

23 the following methodology and principles will be used for water pricing in the demonstration zones: (i) There will be careful transition to volumetric pricing by using both flat rate and volumetric billing in parallel for a few months, accompanied with social intermediatiodcommunication activities; (ii) (iii) (iv) The volumetric rate will be at least Rs.lO/m3, which corresponds to what the users are actually paying now for 30 liters per capita per day (lpcd). The detailed tariff structures in the demonstration zones will be finalized by June 30, 2005; Connection subsidy policy will also be examined; and Initial target for the tariffs will be to cover no less than 50 percent of O&M costs and progressively increases to no less than 80 percent O&M costs by the end of this project. In the rest of the ULBs, there will be a step wise tariff increase along with service improvements resulting from the priority/distribution network investments. Fiscal Impact: GoK has confirmed their intention to pass the Loan proceeds to the ULBs as grants due to the pilot nature of the project. Since the project, through its sector development components, envisages to develop and adopt state financial policies that include WSS tariffs that aim to gradually achieve cost recovery and reduce state subsidies to the sector, it is expected that there will be positive fiscal impact on the state finances in the medium to long run. 3. Technical: The project faces several technical challenges mainly in attempting to provide high quality 24-hour service in demonstration zones. The main challenges stem mostly from the unknown, but presumed very poor condition of the distribution systems, lack of proper system maps, current practice of intermittent supplies, possibility of providing sufficient water to demonstration zones without affecting the supplies to other areas, availability of bulk water, lack of metering of supplies, lack of proper sewerage systems, quality of water, and the current limited technical capacity of the ULB WSS departments. These challenges are addressed through three separate sub-components, and are discussed in the project description summary section above and in Annex 2. Under components B 1 and B2, priority investments and works in city distribution networks will be implemented to benefit the whole population in all three ULBs. This would address the potential social issues associated with the demonstration projects. Under component B3, demonstration projects will be carried out and show a programmatic improvement of distribution systems and customer connection arrangements in limited parts of the city (called demonstration zones, covering 7-14 percent of city s population). This initial process would reveal the challenges, provide scope to identify appropriate solutions, demonstrate that 24/7 water supply is achievable, and show the benefits. Ultimately, the goal is to expand the 24/7 supply regime to the whole distribution system in subsequent projects, based on the lessons learned in the current project. -17-

24 Initial Diagnostic Studies identified feasible demonstration zones in each of the three ULBs, and provided a basis (for preliminary identification of works needed and developing performance criteria etc.) for drafting the Terms of Reference for the OC. The OC develops a strategy for achieving the performance targets demanded of them, identifies works required, procures contractors, implements works and operates the zones for 2 years using ULB staff. During this operation, subsequent project would be prepared to expand the 24/7 supply to the whole of the ULBs. City Wide Engineering Feasibility Studies for the 3 participating ULBs would be carried out under Component A2 to roll-out the 24/7 water supply to the entire ULB. In the first phase, detailed network mapping and modeling, and identification of critical bottlenecks in the city-wide distribution system to be implemented as Component B2 would be taken up. In the second phase, addressing engineering issues related to scaling up the project to cover the entire ULB, development of strategy for rolling out 24/7 supply to the entire ULB and addressing waste water collection and treatment would be taken up. Similar studies would also be carried out in 2-3 additional ULBs in Kamataka under Component A2. 4. Institutional: 4.1 Executing agencies: As described above under project description summary section, overall implementation responsibility will lie with KUIDFC, a company registered under the Companies Act and fully owned by GoK. Other important participants in project implementation include: (i) The State-level Steering Committee for overall steering of the project throughout its entire cycle, comprising (inter alia) Principal Secretary, UDD; Secretary, MUDA; Managing Director, KUIDFC; Managing Director, KUWSDB; Director, Municipal Administration, and Director, GoK Project Monitoring Cell;(ii) UDD, which will drive and manage the sector reform component through its policy/technical cell housed within KUIDFC until the KSUWSC is operational; (iii) KUWSDB, which will act as an agent of the KUIDFC for the design, technical aspects of procurement, and constructiodsupervision of the priority investments; and (iv) the three ULBs, which will permanently participate as part of the State-level steering committee and through the ULB-based Project Implementation Units (PIUs), and will be consulted and informed throughout project implementation. Deep engagement and participation of the ULB staff would be important for institutional strengthening, particularly with regards to the demonstration projects for several reasons: (a) to gain ownership by the ULB, which is responsible for the service; (b) to transfer knowledge of local engineers; and (c) to use the acquired knowledge to upgrade and train other municipal staff. 4.2 Project management: To carry out its responsibilities, KUIDFC has established a PMU which will provide for the technical and financial follow-up, coordinate/carry out all project procurement, prepare reports, coordinate all financial management tasks including audits, and in general become KUIDFC interlocutor with the ULBs, other participants in project execution, and the Bank. The PMU's organization, staffing, functions, procedures, manuals and costs have all been agreed. The PMU is - 18-

25 headed by KUIDFC's Managing Director and is composed of a field-based PIU, with divisions located in each ULB, and HQ-based departments including: (i) project coordination and procurement, (ii) finance, accounts, disbursement and reporting, (iii) social and environment, (iv) legal, (v) land acquisition, and a policy/technical cell reporting to GoWUDD. Strengthening measures of the PMU are planned during project implementation, e.g. on social and environmental management, and procurement. Detailed implementation arrangements by component is described under section C, Project Description. 4.3 Procurement issues: The project would support procurement of consultancies for the Sector Development and Technical Assistance (Component A) and the Project Implementation Support (Component C), as well as the procurement of Goods, Works and Consultancies for Physical Investments (Component B). The investment component envisages selection of an OC who would be responsible for an engineering consultancy and operation of the demonstration zones for a period of about three years. For procurement of goods and works in such zones, the OC will prepare an investment plan for review and agreement with KUIDFC and the ULBs, be responsible for preparation of the bidding documents, invitation of bids, and award of contract (on behalf of KUIDFC). For the priority investments and works in city distribution networks, KUIDFC will procure the required goods and works, with the technical assistance of KUWSDB throughout the process including planning, assistance in preparation the bidding documents, follow-up the bidding process, elaboration of evaluation reports and assistance during negotiations. KUIDFC will be permanently accompanying the process and will take key decisions including call for bids, bid awards, and contract signing. All procurement of goods and works shall be in accordance with the Guidelines for procurement under IBRD Loans and IDA Credits; January 1995, Revised January and August 1996, September 1997, and January The procurement of Consultancies for the project shall be in accordance with Guidelines for Selection and Employment of Consultants by World Bank Borrowers; January 1997, Revised September 1997, January 1999, and May The capacity and capability of KUIDFC to carry out the procurement for the project as per the Bank's Guidelines was assessed during the preparation of the project and strengthening measures agreed as per details in Annex 6A. 4.4 Financial management issues: Although this will be the first Bank project to be implemented by KUIDFC, the accounting function is adequately staffed and fully computerized. The company maintains accounts project wise using the customized software 'Tally". Financial management systems and procedures that require strengthening have been addressed during project preparation. Capacity building initiatives include the adoption of a financial management manual, which will document the accounting policies and procedures of the organization. The internal control mechanisms within the organization are being strengthened by the setting up of an internal audit department in KUIDFC. A Manager Finance will be deputed to the PMU and work under the oversight of the Executive Director Finance to handle all aspects of project accounting, payments, financial reporting and -19-

26 audit. The PMU will receive funds for the project (on behalf of KUIDFC) from GoK, make project expenditures, record transactions, and maintain project accounts. It will also be the nodal agency for ordering, receiving and paying for goods. All payments to contractors will be localized in KUIDFC to avoid procedural delays and bottlenecks. Payments will be made on the basis of certified bills submitted by them as per contractual terms. In the demonstration zones, the contractors will submit their bills to the OC who will check the technical specifications, record them in the measurements book, and certify for payment. Thereafter, the bills will be routed to the PMU where they will be checked by the Manager Finance and paid. A similar process will be followed for the priority investments where contractors bills will be routed through KUWSDB. The OC and KUWSDB will assist the PMU in the preparation of works budgets for the upgradation of networks in the demonstration zones. The audit of project expenditures will be carried out by a firm of Chartered Accountants. The project will produce quarterly Financial Monitoring Reports (FMRs) in formats that will be agreed with the Bank. (further details in Annex 6B). 5. Environmental: Environmental Category: B (Partial Assessment) 5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (including consultation and disclosure) and the significant issues and their treatment emerging from this analysis. Because of the nature and the small size of the investments considered under the project, no significant environmental impacts are expected. However, a Limited Environmental Assessment (LEA) of the envisaged works was undertaken to assess the extent and significance of environmental impacts of the proposed physical investments in three ULBs. In order to mitigate adverse environmental impacts during planning and implementation of works, an Environmental Management Plan (EMP), including Environmental Codes of Practice (ECOPs), has been prepared by an independent environmental consultant, working closely with the engineerinddesign consultant. The EMP will be hlly integrated in the contract for implementation and operation of the demonstration projects and will be the responsibility of the OC implementing the works. The significant adverse environmental issues during the construction phase in the demo zones include: a. Temporary disruption of water supplies including possible flooding and leakages during the isolation of demo zones, leak detection and replacement of mains; b. Increased dust and noise levels during earth excavation activities; and c. Temporary disruption to traffic during construction. Most of the above mentioned environmental impacts during construction would be temporary and reversible, and will be addressed using the recommendations in the ECOPs and EMPs. Other construction phase impacts such as disruption to water supplies and possible flooding would be addressed by providing alternative water supply through tankers during the period of construction, and by providing alternative bypasses and leak control system (for details see the EMP). The significant adverse environmental impacts expected during the operational phase include: a. Generation of additional quantity of waste water from zones leading to possible

27 contamination of surfacehub surface water source; and b. Possible flooding of low lying areas due to overflow of storm water drains It is expected that the increased water supply (and per capita consumption) in all the demo zones (and wards) will be primarily due to reduced leakages from the distributiodtransmission lines and wastages from the public stand posts. The demonstration project does not propose to strengthen the existing sanitation facility, and would use the existing sewerage system in the three cities for disposal of additional quantity of waste water, which is not likely to create major problems such as flooding or overflow. However, the issue of sewage collection and disposal including a feasibility study to analyze various alternative solutions will be considered and costed as a significant priority during the subsequent phases of this project. The significant positive environmental impacts during the operational phase include: a. Possible improvement in water quality and, improved health and hygiene due to reduction in leakages and cross contamination with sewer lines; and b. Better control and management of environmental issues due to improved monitoring. The LEA has pointed out interesting findings on water quality at supply end and consumer end. The report finds high bacteriological contamination (or microbiological pathogen number (MPN) count) in water samples collected for each demo zone. It is assessed that the water quality problems at the consumer end may be largely due to ingress of contaminated water to the system, which the low residual chlorine levels cannot deal with. The project is likely to result in improved water quality and health and hygiene in the demo zone. (See Additional Annex 12 for details on the results of the LEA). 5.2 What are the main features of the EMP and are they adequate? For each expected environmental impacts, the EMP outlines the mitigative measures to manage impacts arising out of proposed activities during the construction and operational phase of the project. It also assigns responsible agencies for coordinating respective mitigative measures. The EMP also includes the that uses the Central Public Health and Environmental Engineering Organization (CEEPHO) manual as the basis. The ECOPs is expected to be a useful guidance tool to OC and design engineers for integrating environmental aspects in planning, design, construction, operation and management of water supply sub-projects. The ECOPs may be helpful to mainstream environmental aspects and broadly covers the recommendations on: a) Project Planning - environmental screening and scoping; b) Design Phase: basic design considerations, quality standards, selection of source, development of source, transmission of water, treatment of water, distribution system; c) Construction: source development and intake works, conveyance and transmission mains, pumping stations/booster stations, treatment plant, storage reservoirs, distribution network; and d) O&M: source and intake works, transmission main, pumping/booster stations, treatment plant, storage reservoirs, distribution network. Overall environmental implementation supervision would be the responsibility of KUIDFC, the -21 -

28 implementing agency. However, KUIDFC will coordinate with designated local engineers at the ULBs in Hubli-Dhanvad, Belgaum and Gulbarga for planning and ensuring effective implementation of EMPs. The implementation arrangement for the EMP and ECOP requires an engineer to be designated at each ULB, who will be responsible for ensuring the implementation of the requirements. The OC implementing the project would have an environmental specialist on the team who will prepare a plan to operationalize the EMPs and will be responsible for ensuring that contractors strictly adhere to EMP and ECOPs provisions. 5.3 For Category A and B projects, timeline and status of EA: Date of receipt of final draft: August 1 1,2003 The project EA was completed and thereafter disclosed at the Bank Infoshop, by GoK at KUIDFC's web site, and in public libraries in the three participating ULBs. 5.4 How have stakeholders been consulted at the stage of (a) environmental screening and (b) draft EA report on the environmental impacts and proposed environment management plan? Describe mechanisms of consultation that were used and which groups were consulted? As part of the Environmental Assessment (EA) and in coordination with the social intermediation activities (see section 6 below), public consultations were held in the ULBs to identify environmental issues seen by communities and stakeholders. Project beneficiaries and local NGOs were consulted about the project's environmental aspects during project preparation and will be consulted again during implementation. LEA and EMP reports are made publicly available in Karnataka Urban Department and public library. 5.5 What mechanisms have been established to monitor and evaluate the impact of the project on the environment? Do the indicators reflect the objectives and results of the EMP? Environmental performance indicators have been identified as part of the overall project indicators, to monitor and evaluate the impact of the project on the environment. The plan prepared to be prepared by the consultant operator will include, a program, indicators, estimated budget and institutional measures necessary to monitor and evaluate project's impacts on the environment. 6. Social: 6.1 Summarize key social issues relevant to the project objectives, and specify the project's social development outcomes. The desired social development outcomes expected out of project interventions are: (i) Substantial positive effect on women (time and effort) and better health for the entire family through assured supply of safe water in adequate quantities made available to all households; (ii) Improved and equitable coverage of un-served and under served poor house holds at reasonable cost; and (iii) Empower users through mechanisms for voice and choice (redress of complaints, easier methods for tariff payment, etc.). A participatory Social Assessment has been undertaken as part of the project preparation activities. Findings from the Social Assessment and interactions and observations of Bank missions during the field visits to the three selected towns indicate:

29 Oualitv of service: Water supply service is poor in terms of quality, quantity, and reliability. The intermittent supply combined with unsanitary conditions around water supply points ensure contamination o f the water supply. In households with private connections (between 70 to 90 percent of the population in each city), water collection engages the entire family during the unreliable hours of supply. Given the low pressure in the system, most households have built pits in front of their houses to tap the water at a lower level. This results in unsanitary conditions at the water collection point. Households compete with each other by using powered pumps connected to the supply line. There are visible (time spent, water purchased from tankers) and not so visible costs (cost of electricity for pumping water fiom supply line and from primary collection point to elevated reservoirs, loss of productivity and expenses for medical treatment and investment in subsidiary sources) incurred by households. Substantial private investments (drilling of bore wells) are taking place each year in extension areas, causing undesirable environmental effects. However, even such households in extension areas are willing to switch to public supply if quality of service delivery could be assured. There is an alarming amount of waste of water from public stand posts. Poor households: Locations of vulnerable groups (slums and resettlement colonies of slum dwellers) are un-served or often grossly under-served. Poor households, which depend on stand posts, waste time and effort in collecting water, often under unsanitary conditions, with women being the main sufferers. Tariff collections: Tariff collection from registered connections lag from six months to two years. Often the arrears is not due to unwillingness to pay current tariffs but rather a lack of follow-up by the ULB and/or additional effort needed from the customer to pay the bill. Substantial number of unregistered users draw water from the system without having to pay either the connection charges or the monthly tariff. In the absence of political will to take penal action, the errant households continue to draw water. Willinmess to pay: Prima facie, consumers are willing to pay a higher tariff for a better service level. Even stand post users and slum dwellers were willing to pay tariff for a better level of service, though they may want to negotiate the tariff. However, this willingness to pay is adversely affected by crisis of ULB credibility in the mind of consumers. The ULB s willingness to charge seems to be a major hurdle, more than willingness to pay (by consumers). Crisis of institutional credibility Consumers have little or no say on the timings and fiequency of water supply. While the service levels at the 3 ULBs are varied, in general, people have very little faith in the ULBs to deliver reliable and quality supply. They seem to be happy to get regular supply (even once in two days) and perceive 24/7 supply as a hypothetical dream. Awareness of health issues: While the communities keep their indoors clean and their water vessels sparkling, there is little awareness among communities on adverse health impact of the present intermittent supply. The findings from the Social Assessment indicate that a comprehensive set of interventions are needed. In addition to institutional, technical and managerial interventions, substantial social

30 intermediation and communication efforts are needed supported through actual demonstration of the feasibility (technical, economic, institutional and managerial) of high quality services. 6.2 Participatory Approach: How are key stakeholders participating in the project? Getting stakeholders together and building consensus is one of the biggest challenges of the project. The thrust of the proposed approach i s to keep stakeholders informed of sector reform and its benefits, consulted in developing plans and implementation arrangements, and enlisted in the reform process to ensure their proactive and beneficial engagement. Lessons from successful (or otherwise) results of past reform efforts that have been incorporated include: clear public understanding of reform measures and their benefits, transparency, building consensus and support for reform, addressing stakeholder concerns, and a credible and coordinated communication and consultation process. With this in view, the preparation efforts have focused on carrying out a detailed stakeholder analysis, public consultations with all key stakeholders, focus group discussions with identified groups (women, poor households, elected representatives etc.). A communication strategy has been prepared and this strategy, in turn, has been presented and discussed in stakeholder forums in each of the three participating ULBs before finalization. The communication strategy emphasizes stake holder participation and outlines a strategy for their continued participation at all stages of the project and thereafter (including institutional arrangements to facilitate the process) during post-implementation. 6.3 How does the project involve consultations or collaboration with NGOs or other civil society organizations? NGOs and civil society organizations have been associated with the preparation of the project. The Bank preparation teams have been regularly meeting with many of these organizations during missions, and the response received has been very encouraging. NGO services would continue to be utilized for community consultations and social intermediation efforts. Local community-based and professional organizations have volunteered to assist in creating awareness and monitoring implementation processes. 6.4 What institutional arrangements have been provided to ensure the project achieves its social development outcomes? A Social Assessment has been undertaken as part of project preparation to design the project processes and institutions. Some important features of the exercise include emphasis placed on: (i) stakeholder analysis; (ii) communication strategy; (iii) extensive stakeholder consultations; (iv) continuation of the Social Assessment in the form of social intermediation efforts in the demonstration zones; (v) putting in place an institutional framework for continued stakeholder involvement consistent with the 74th constitutional amendment; (vi) specific measures for inclusion, transparency, and accountability of key stakeholders; (vii) 24/7 customer complaint centers for grievance redressal; and (viii) participatory monitoring systems. 6.5 How will the project monitor performance in terms of social development outcomes?

31 As part of the Social Assessment, baseline data for the demonstration zones has been collected and monitoring indicators developed on a participatory basis. The proposed institutional arrangement at the ward level, (leading ultimately to the ULB level as the project is scaled up during subsequent phases) will enable communities to monitor performance. Norms have been laid out for service standards and the OC would be held accountable for performance against norms. The proposed 24/7 customer complaint centers will provide continuous access to local communities to voice their grievances and seek remedial action. 7. Safeguard Policies: 7.1 Are any of the following safeguard policies triggered by the project? 7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies. Environmental Assessment: OP on environmental assessment is triggered. Because of the nature and the small size of the investments considered under the project, no significant environmental impacts are expected. The LEA of the envisaged works, and an EMP including ECOPs will be fully integrated in the contract for implementation and operation of priority works and demonstration projects and will be the responsibility of the consulting firm implementing the works. Indigenous Peoples: The project will not cause any adverse impact to indigenous people. The Social Assessment has examined the applicability or otherwise of the Bank's Operational Directive on Indigenous Peoples (OD 4.20), taking into account the key characteristics of identifying such groups as defined in the Operational Directive. Findings from the Social Assessment (based on surveys of the demonstration zones, consultations with scheduled tribes (STs) and other potential groups and discussions with knowledgeable professionals and academia) indicate that OD 4.20 is not triggered. Cultural Property: The LEA noted that there are no cultural properties along the right of way of the proposed investment activities in the demo zones. However, the possibility of a chance find can not be ruled out. Therefore, procedures for addressing a chance find of cultural properties are included in the EMP and the environmental codes of practice. A contract clause would be inserted in the agreement for construction activities in the demo zones. Involuntary Resettlement: The project envisages to optimize the bulk supply pipeline routes to

32 derive maximum benefits to the end users. Some of these benefits are increased technical soundness of the project, reduced leakages, cost savings (due to reduced length of pipelines and lengths of service roads to be built) and uninterrupted supply for 24/7 to demonstration zones and improvement in water supply tb rest of the city in the selected ULBs. Land acquisition under the current project is likely to be minor and impact on individual farmers is not expected to be substantial. No resettlement is contemplated as no structures would be acquired or demolished. Social assessment has also indicated that share cropping is not practiced in the project areas. In view of land acquisition involved, OP 4.12 on involuntary resettlement is treated as triggered. In this context, a land acquisition framework has been prepared to apply for any minor land acquisition that may take place under KUWASSIP I. The project will make every effort to minimize land acquisition and also attempt to minimize temporary adverse impacts and compensate affected persondfamilies for such temporary effects. The project will also ensure that affected persons are consulted well ahead and are involved in planning remedial actions. The project will adopt transparent procedures for determination of compensation based on market prices and a resettlement action plan would be prepared consistent with this frame work. Vulnerable groups will receive additional support to ensure that their livelihood is not affected adversely. Investments under future potential follow-on projects may warrant land acquisition depending on the nature of investments proposed and a more comprehensive resettlement and rehabilitation policy would be developed, if needed, during the implementation of the current project. Other safeguard policies such as OP 4.04 Natural Habitat and OP 4.36 Forestry are not triggered by the proposed project and this has been confirmed in the LEA. F. Sustainability and Risks 1. Sustainability: Because of the project's demonstration nature and phased approach, its overall sustainability will be gauged by the depth of sector reform and maintenance of service provision in the three participating ULBs. It is crucial that key sector reforms-legal, institutional and regulatory frameworks-be hlly implemented to reinforce the enabling environment to improve financial, managerial, administrative and technical performance of participating ULBs, ultimately leading to better modes of service provision. The adoption of a qualified OC to manage the demonstration zones and the training of ULB personnel for such functions will help sustain the services over the long term. Also, the demonstration projects will test elements of the sustainability of a subsequent larger project. 2. Critical Risks (reflecting the failure of critical assumptions found in the fourth column of Annex 1): Risk From Outputs to Objective Risk Rating Risk Mitigation Measure M Counterparts have been nominated for each project componentkpecialty, and strengthening needs identified. Consultants can be engaged to supplement KUIDFC staff where required

33 Lack of commitment and ownership of the project. ULBs' lack of willingness to achieve proposed levels o f cost recovery. Administrative and procurement difficulties and delays to procure goods and works necessary to implement the priority works and demo projects by the Operating Consultant. ULBs/GoK will not accept private operator (follow-on project). From Components to Outputs State water sector reform advances slowly. Resistance from ULBs to advance in service level reform. Resistance of ULBs to PSP. Overall Risk Rating iisk Rating - H (High Risk), S (Substantial Ri! M S M M S M S S, M (Modest Risk), Proper implementation and supervision mangements made for the project. Communication strategy established to increase project awareness at ULB level. Communication strategy. A selection criteria for the demo areas would be the stated willingness of the beneficiaries to pay a higher tariff in return for substantially improved levels of service. As a condition of further support beyond the first phase, tariffs would be restructured and increased to a level that covers high percentage of O&M costs. The contract will clearly indicate that procurement of goods, works, and services under the contract are the responsibility of the Operating Consultant. Communication strategy, continuous involvement of ULBs in initial project's preparatiodimplementation process. Sector development component. Permanent dialogue and close follow-up. Permanent dialogue, awareness campaign and workshops. Participation in implementation. Permanent dialogue, dissemination of advantages o f PSP, support from state policy. Negligible or Low Risk) 3. Possible Controversial Aspects: None identified. G. Main Loan Conditions 1. Effectiveness Condition The following events are specified as additional conditions to the effectiveness of this Agreement within the meaning of Section (c) of the General Conditions: a. The Project Agreement has been duly authorized or ratified by Kamataka, and is legally bindmg upon Karnataka in accordance with its terms. b. Guidelines for project implementation has been issued by GoK in the form of a GO, specifying roles and responsibilities of project participants c. The Project Implementation Plan has been adopted

34 2. Other [classify according to covenant types used in the Legal Agreements.] Financial Covenants In addition to the standard financial covenants, the following apply: a. KUIDFC shall submit FMRs to the Bank showing actual versus budgeted expenditures, forecasts of cash requirements, physical and financial progress and procurement contract management information within 45 days of the close of every quarter beginning with the first quarter after project effectiveness in the format agreed with the Bank. b. KUIDFC shall submit an audit report of the continuing entity to the Bank within 6 months of the close of each financial year including the period of retroactive financing agreed with the Bank. The first audit report shall be submitted to the Bank in the six months following the year of project effectiveness. c. KUIDFC shall submit to the Bank an audit report on project expenditures no later than six months of the close of the financial year starting with the year of loan effectiveness. Other Covenants GoK shall ensure that, no later than June 30,2005: a. a proposal for the creation of the KSUWSC shall have been presented to the competent authority for adoption; and b. an investment framework and tariff policy for the urban WSS sector of Karnataka shall have been adopted. H. Readiness for Implementation 1. a) The engineering design documents for the first year's activities are complete and ready for the start of project implementation. c] 1. b) Not applicable. E 2. The procurement documents for the first year's activities are complete and ready for the start of project implementation. Ed 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactory quality The following items are lacking and are discussed under loan conditions (Section G):

35 I. Compliance with Bank Policies 1.: I. This project complies with all applicable Bank policies, ir. 2 The following exceptions to Bank policies are recommended for approval. The project complies with all other applicable Bank policies. Team keader Sector ManagerlDirector Country ManagerlDirector

36 Annex 1: Project Design Summary INDIA Karnataka Urban Water Sector Improvement Project jector-related CAS Goal: 'overty alleviation through mproved and sustainable irovision of water supply and anitation (WSS) services in he urban local bodies (ULBs) if Kamataka. Sector Indicators: 1. Urban water sector reform implemented by the Government of Kamataka (GoK) and the participating ULBs. 2. Improved urban water service delivery in the participating ULBs. Sector/ country reports: Status reports of Department of Economic Affairs (DEA) and municipal statistics produced by GoK. from Goal to Bank Mission) nplementation of state and xal level reforms will ontribute to improved erformance of urban water ector and its long term ustainability. 'roject Development lbjective:. Launch GoKs urban water ector reform process based in the state urban water )olicy.!. Improve urban water upply and sanitation services n participating ULBs and lemonstrate that sustainable, :fficient, and commercially riented service provision can )e achieved. Outcome I Impact Indicators: 1.1, The reform base is established and initial reform activities are camed out. 1.2 The ground for Private Sector Participation (PSP) is prepared as a realistic option for water and sanitation provision. 1.3 An enabling legal, regulatory, and financing frameworks are established for the sector. 2.1 Possibility of continuous water supply is demonstrated. 2.2 Priority bottlenecks to improve quantity of water supply are solved. 2.3 Increased consumer awareness, commitment, and ownership for reform are Project reports: 1.1 Progress reports from implementing agencies, mid-term-review evaluation, Implementation Completion Report (ICR), Operations and Evaluations Department (OED) end of project evaluation. 2.1 Progress reports from implementing agencies, mid-term review evaluation, ICR, OED end of project evaluation. 2.2 Customer satisfaction surveys. From Objective to Goal). GoK, State line agencies nd ULBs maintain ommitment to urban water ector reforms.,. No major natural disaster lr political disturbance would lccur during the mplementation period

37 lutput from each Zomponent: :omponent Al: State water iolicy implementation is nitiated. :omponent A2: krengthening of Service Ielivery and Preparation of :ollow-on Project in the 3 'articipating ULBs 2omponent B 1 : Priority nvestments are completed. 2omponent B2: Distribution ietworks are improved. :omponent B3: lemonstration projects are ompleted. Output Indicators: A1 (i) Establishment and operationalization of the Kamataka State Urban Water Supply Council (KSUWSC). (ii) Establishment of a policy framework for allocation of funds and investment and pricing of WSS services. (iii) Establishment of a State Water and Sanitation Information System. A2 (i) Implementation of financial management pilots in the participating ULBs, including separation of WSS accounts and computerized billing and collection systems. (ii) Definition of the scope and scale of follow-on private sector participation and scaling up in other ULBs. B 1 Improved overall water supply availability and quality in the three ULBs. Satisfactory technical audit and third party inspection of priority investments. B2 Improved overall water supply availability and quality in the three ULBs. B3 (i) Volumetric tariff adopted according to agreed principles in order to recover no less than 50% of O&M costs initially and no less than 80% by project closure in the demo zones. (ii) Substantial improvement of water supply services in the demo areas, characterized by combined weighted average (at least 75%) of the following indicators: a. Continuous supply to zone-emergency stoppages no to exceed 12 hours and no more than one emergency stoppage per 3 months (20% weight); 'reject reports: iok progress reports. 'rogress reports from ULBs nd KUIDFC. 'rogress reports from GoK.nd KUIDFC. 'roject reports and audit eports. 'rogress reports from ULBs.nd KUIDFC. 'rogress reports from LJLBs md KUIDFC. from Outputs to Objective). Timely completion of,olicy studies.!. Adequate capacity at all evels. 1. Strong commitment and iwnership of the project at the state and local level. 4. Willingness of ULBs to mprove their performance. 5. No unexpected delay I ssues with engineering Horks

38 2omponent C: Smooth project mplementation b. Water quality as per noms and monitored through testinghampling (5% weight); c. Supply to zone to be metered both in respect to flow and pressure and continues records maintained (5% weight); d. Physical losses within the demo zone not to exceed 10 liters per connection per hour based on average pressure within the demo zone of 10 meters, adjusted proportionately in respect to the actual average zone pressure (10% weight); e. Maximum pressure within the demo zone 15 meters and minimum pressure 8 meters (1 0% weight); f. 100% metering of property connections, standpipes, and feeds to street storage tanks, adoption of volumetric tariff structure (20% weight); g. Billing and collection rate to exceed 70% (10% weight); and h. High level of customer satisfaction (70%) measured by polls (20% weight). C. Project implementation according to the schedule. 'roject reports

39 Kev Performance Project Components I Sub-components: A. Sector Development and Technical Assistance: 1.Policy Implementation and State Level Institutional Strengthening 2. Strengthening of Service Delivery and Preparation of Follow-on Project in the 3 Participating ULBs B. Physical Investments 1, Priority Investments 2. Works in City Distribution Networks 3. Demonstration Projects C. Project Implementation nputs: (budget for each :omponent),255 million i47.20 million ; 1.39 million 'roject reports:, Project reports. :. Project reports. I. Project reports [from Components to Outputs) 1. Ownership and commitmeiit at the state level to implement the strategic plan for the state urban water and sanitation policy. 2. Ownership and commitment at ULB level to improve their WSS service delivery performance. 3. Ownership and commitment at implementing agency level to perform their duties without delay

40 Annex 2: Detailed Project Description INDIA: Karnataka Urban Water Sector Improvement Project The project comprises of three components: (1) sector development and technical assistance (TA); (2) investments in three ULBs to improve their water supply services and demonstrate the feasibility of continuous safe water supply in pilot areas; and (3) project implementation support. By Component: Project Component A. Sector Development and Technical Assistance - US$2.55 million This component aims at supporting Government of Karnataka (GoK) to carry out its urban water sector (UWS) reform agenda and help prepare the possible follow-on investment project. It has two subcomponents as described below: A1 Policy Implementation and State Level Institutional Strengthening (US% 0.89 million) The objective of this subcomponent Al. is to assist GoK in finalizing its policy reform agenda and to cany out initial implementation steps of staged sector reforms. These reforms are based on the new Urban Drinking Water and Sanitation Policy Statement of GoK (presented in annex 13 ), approved by the State Cabinet, GoK in May The Urban Development Department (UDD), GoK and Karnataka Urban Infrastructure Development and Finance Corporation (KUIDFC) carried out a policy strategy and implementation plan study, which identified specific activities to operationalize the policy statement, some of which have been included in this subcomponent. They include the following technical assistance and training activities. (a) Establishment and operationalization of Karnataka State Urban Water Supply Council (KSUWSC): GoK plans to establish a KSUWSC, whose responsibilities would policy definition and implementation, planning and programming, technical assistance, development of sector information system, norms, and certain regulatory functions in the UWS. This activity would include: (i) carrying out the concept and detailed design of the KSUWSC, including its location within the institutional framework, charter and documents required for its legal creation, main functions and responsibilities, organizational structure and staffing, and start-up plan; (ii) actual approval process and creation of the KSUWSC; and (iii) preparation of the first two years of work program and capacity strengthening plan, including training, equipment, systems, and strategic action plan. The objective of this activity is to have the KSUWSC up and running according to its designed role by year The intermediate goal is complete the establishment of the KSUWSC by the end of (b) Strengthening of Service Delivery in ULBs: As per the policy vision, the KSUWSC will be responsible for sector strengthening via provision of technical assistance and other means. Meanwhile the following capacity strengthening activities will be carried out: (i) Institutional Options for Sewice Provision. Urban water service is scattered among several departments and institutions, making it a recognized inefficient mode, as it lacks accountability and transparency. To improve this situation, several institutional service delivery

41 models, both public and private will be explored, and a strategy for a new institutional framework for the state would be proposed. Pilot case study proposals will be offered, including agglomeration economics in the WSS. (ii) Technical Assistance Strategy and Action Plan to enable WSS sector reform at the ULB level. This study would be based on the recommendations of the institutional options for service provision. (iii) Revenue Collection Action Plan. This study will set up a strategy to improve the existing commercial systems in pilot ULBs. (iv) Public Awareness and Communication Strategy. The above strategies, reform proposals and action plans need be duly communicated to inform the public and to gain their support. A communications strategy for the State is under preparation by grant funds. Building upon such a strategy, this subcomponent will assist with actual communications and awareness campaigns. (c) Development of the State Water and Sanitation Information System (WASIS): The WSS sector lacks a credible information system, which is key to all planning exercises regarding investing for improving physical systems and service provision, and to develop and apply fund allocation mechanisms, criteria, and technical assistance programs. The objective of this activity is to assist GoK in financing the design (conceptual and physical) of a sector Management Information Systems (MIS) and in assisting with the actual setup / initial implementation phase. This activity would include purchase of equipment (as per consultants estimated requirements), training, and advice in the initial setup. It entails two main tasks: Task A: To develop an information system, collect data from all ULBs, provide training of the primary users, and develop formats for periodic information updates. Task B: Benchmarking of the service provision levels. The possibility of establishing a benchmarking system, recognized as a powerful tool to help self-regulate service providers, will stem from the WSS information system established under Task A. There is also a larger benchmarking initiative through Water and Sanitation Program (WSP) that would set the framework for India and would look at several pilots, including Kamataka. The proposed activity would follow the two related activities described above and establish the first benchmarking process in the state. (4 Water and Sanitation Sector Investment and Tariff Frameworks This activity consists of the following two tasks: Task A. Resource allocation through programs is perhaps the most powerful instrument the state has to provide incentives for reform in the ULBs, since most investments are originated and fimded by the state. The new water policy calls for a trend towards cost recovery and efficiency. This proposed activity would assist the state in establishing an integrated state WSS sector financial policy. The study would also look at several financial scenarios and sources of hnds to

42 help comply with the state sector goals. Task B. Framework for WSS pricing - tariffs. This study would examine the WSS pricing policies, taking into account the regulatory, financial, and social aspects of service delivery. The study would then develop tariff guidelines and general good practice elements at the state level. The study would also propose ways for the state (KSUWSC) to strengthen its capacity to provide assistance to ULBs in setting appropriate tariffs for their WSS service. The three' participating ULBs would be the pilots for this effort. (e) Review and establishment of legal and regulatory framework: The idea is to provide the first steps in establishing a regulatory framework for the WSS sector. Following this initial setup, full regulatory functions at the state level, including economic regulation and quality of service, contracts, and long term endeavors, will evolve as needed. The state regulatory function would be primarily housed in the KSUWSC. This activity would assist GoK in designing the regulation strategy, legal basis and action plan, and starting up of essential but basic regulatory functions, including pricing, service accounting and Preparation of WSS Legislation: This study would assess the current legal framework for the sector, recommend necessary changes to the existing legislation, and prepare the corresponding legislative (or in some cases executive) proposal. Based on these, a framework for regulatory regime would be established and detailed design of the regulatory function at the state level, including definition of its contents and scope, legal support, organizational needs, implementation strategy, and phasing would be defined. A2 Strengthening of service delivery and preparation of follow-on project in the 3 participating ULBs (US$ 1.66 million) The demonstration projects in Belgaum, Gulbarga and Hubli-Dharwad will provide a temporary institutional arrangement, namely a partnership with the Operator Consultant (OC), a private operator in selected demonstration zones. Areas outside of the demonstration zones will continue to receive services under the existing arrangements, from KUWSDB in Hubli-Duarwad, and from the ULB water departments in Belgaum and Gulbarga. At the end of the temporary arrangement in the demonstration zones with the OC, it is envisaged that the service will be transferred to an operator who would be responsible for providing the service for a substantially longer term to the entire urban areas of the three participating cities. This subcomponent will assist GoK's medium term vision by: (i) carrying out studies to define the institutional setup; (ii) bidding and contracting the future management contract; (iii) assisting in the transition phase; and (iv) carrying out studies to scale up in other cities. This subcomponent comprises of the following studies: (i) City-wide Engineering Feasibility Studies, including a short-term service improvement plan, network mapping and modeling, and master plans for longer term rehab/expansion, and environmental and social assessment, for both water supply and underground drainage. Business plans including analysis of altemative institutional modalities for service delivery, fmancial feasibility analysis and strategic plan, and the proposals for the selection of a modality of public-private partnership for each city, although a combined administration for the three would

43 be an alternative to consider. Preparation and assistance in bidding and contracting the PPP operator; (ii) Transition plans including the identification of activities prior to the selection of the service operation scheme. The objective is to help assure a smooth transition from the OC to the subsequent operator. This includes: (i) basic improvements to WSS operations in the three cities in key areas (ring-fencing of the WSS accounts, better commercial systems to make them more compatible with those to be used in the demonstration zones, basic training and dissemination of lessons from the demo zones operation, and design new role and fimctions at the ULB levels; (iii) Carrying out other studies related to the preparation of the PPP, including asset evaluation, communication strategy, and other financial, legal environmental, and social studies. including the design of the institutional reorganization and transition plan at the ULB level to respond to its new role of contract supervisor; and (iv) Strategy to scale up this project to other cities in Kamataka. This includes engineering feasibility studies, development of business plans, and other studies required to define institutional modalities for service delivery in about four or five medium-sized cities in Kamataka. Project Component 8. Physical Investments - US$47.19 million As described in Section E3, the project faces many challenges to demonstrate the benefits of 24/7 supply. These challenges are addressed through selected investments in each of the three ULBs and through carrying out relevant studies. The various subcomponents are described below: B1: Priority Investments (US$ million) The primary objective of Priority Investments are explained in Section Cl. At the time of project appraisal, Kamataka Urban Water Supply & Drainage Board (KUWSDB) is already implementing certain works to enhance the bulk supply system capacity and efficiency. The Priority Investments proposed under the project would complement the works taken up by KUWSDB. Energy Audits have been carried out on the bulk supply systems of each of the ULBs, whose recommendations are taken care of either through KUWSDB works or through Priority Investments. A phased approach is followed in implementing Priority Investments. After these investments are made, the bulk system would meet 2001 demands in Hubli-Dharwad, and demands in Belgaum and Gulbarga. Specific objectives and works in each of the ULBs are as follows: In Belgaum, the priority investments are targeted at replacing and rehabilitating bulk supply infrastructure, which will significantly reduce leakages from the transmission system and remove supply bottlenecks. Proposed works include: (i) replacement of the transmission mains; (ii) installment of suitable capacity pumps at Pump House 1 (PH1); and (iii) capacity expansion of feeder mains to some of the reservoirs within the system. Once these measures are taken, the existing bulk supply infrastructure would have sufficient capacity to satisfy the city's present demands

44 In Gulbarga, Priority Investments aim at increasing supply and rehabilitating the water sources of supply -- Bheema river, Bennithora river and Bhosga Tank. The Priority Investments for Bheema would fix the leakages and increase the supply capacity (additional 50 Mld). The city receives supplies from Bheema through a PSC main, which is in a very weak state. It is proposed to replace this pipe with an MS pipe of higher capacity (55 Mld - for half of demand), upgrade the pumping station at the headworks and an intermediate pumping station, and construct additional filter beds (15 Mld) at Shor Gumbaz treatment plant which treats part of the water from this source. The Priority Investments for Bennithora source relate to rehabilitation of only the transmission main, achieving significant leakage reduction and resulting in a saving of about 1.8 Mld. The Bhosga tank is unreliable, and hence will not be used in future for regular supplies. In Hubli-Dharwad, Priority Investments seek to achieve significant increase in water supplied to Hubli (which requires 2/3 of total supplies) from 38 Mld presently to 49 Mld, by laying the "Dharwad by-pass main". This main is of 1076 mm diameter MS pipe of 23 km long fiom Ameenbavi near Dhanvad to Nrupatungabetta in Hubli, by-passing an existing reservoir on a hillock in Dhanvad. This arrangement would ensure significant reduction in power consumption, and remove the bottleneck in transmission to Hubli caused by the use of an existing pipeline with a smaller diameter. Under Priority Investments, pumps would also be installed at Ameenbavi and feeder mains to reservoirs are laid within the city. Of the two sources in Hubli-Dharwad - Malaprabha and Neersagar, the former is more reliable. Hence Priority Investments are planned to make the bulk water system depend more on Malaprabha, and depend on Neersagar only to the extent of 50% of its nominal yield based on past 38 years of data. In all the ULBs, bulk flow meters are proposed to be installed on the transmission mains at strategic locations, to facilitate water audit. The locations of bulk flow meters along with maps are available in the summary reports prepared by KUWSDB. This sub-component also includes: Technical Audit and Third Party Inspection of Priority Investments. KUWSDB would act as an agent of KUIDFC for design, procurement assistance, and construction supervision for the Priority Investments. The fee charged by KUWSDB would be financed by GoK's own funds. The following additional services required for Priority Investments would be supported under this subcomponent: (i) third party technical audit consultant; and (ii) third party inspection agent. Similarly, the strategy and plans prepared by the OC will be critically reviewed by a third party technical audit consultant. R&R Impact evaluation study. B2: Works in city distribution networks in all 3 ULBs (US$5.78 million)

45 The main objective of this subcomponent is to provide short term improvements to majority of the most water-stressed users in each ULB. In particular, the hours of supply per week (and proportionate increase in the total water received by customers of the service) by all, or a significant part, of each of the cities will be improved. In implementing this subcomponent, it will be ensured that there are no impediments to the provision of continuous water supply to the demonstration zones, especially with regards to the quantity and quality of service in the distribution systems outside of the demonstration zone boundaries. Another important objective of this subcomponent is to improve the general conditions in the rest of the city to gain social acceptance of the demonstration projects. This component would entail procurement of the civil works and supervision of their construction. The selection of the civil works would be based on the City-wide Engineering Feasibility Studies (activity under component A2) which assess the situation and identify critical bottlenecks and constraints, including those related to sufficient provision of water to the demo zones, and formulate the most cost-effective solutions according to preset criteria, and design of the selected solutions. The work entailed in identifying and implementing improvements to the distribution networks would be based on the data acquired through the following activities identified under this subcomponent: i. Analysis of the system and end-user data in order to determine per capita supply for each scheduled area with the intention of identifying areas with exceptionally high per capita usage, which could indicate high loss or wastage that need to be addressed. ii. Development of a separate hydraulic model of the complete distribution system for each of the 4 cities. iii. Identification of bottlenecks limiting the supply reaching the scheduled areas through consultation with operational staff and use of the models. iv. Devising of solutions for the problem areas and testing of their efficacy - and possible effects on adjacent supply areas - using the models. v. Design of those interventions graded highest and within the preset budget as agreed with KUIDFC and the ULBs. vi. Procurement of the contractors to implement the works. Typical works would include those related to elimination of sections of pipelines imposing unnecessary throttles on supply, pipe replacement where physical losses are excessively high, network sectorization, augmentation of the capacity of tanks and reservoirs and/or construction of new ones, rehabilitation or replacement o f pumps, and improvements to water quality caused by infiltration of contaminated groundwater, and major bottlenecks in underground drainage etc

46 Selection criteria for Proposed Interventions The proposed interventions would need to: a) Be derived from a comprehensive analysis of the entire city network and are consistent with a long-term strategy for a network solution; b) Have the least cost per unit savings in physical losses; (note: this would take care of the economic evaluation); c) Be implemented in less than two years; d) Show a maximum value per intervention; e) Contribute to equalize distribution to all of the scheduled supply areas; and f) Demonstrate that operation capacity is assured for operation and maintenance. In addition: 0 Works regarding bulk supply are eligible but should also be part of a long-term solution, and should not overlap with the proposed priority investments. Bulk water supply should also come along with associated improvements in the network. 0 There would be a total preset value for the interventions for each city (to be defined after corresponding studies have been finalized) - including both bulk supply and distribution network interventions. 0 Expansion to new users are not eligible. 0 Commencement of the work in each of the cities is strictly contingent upon the existence of up to date plans of the distribution network serving the whole city and a database of the city s properties and their individual connection status to the distribution network. These records are being prepared under a separate contract being taken up by GOK. B3: Demonstration Projects (US$13.79 million) This subcomponent comprises of studies, works, and management for the demonstration zones in the three cities: Belgaum, Gulbarga and Hubli-Dhanvad. The proposed demonstration projects will only benefit the populatiodproperties within the demonstration zones, constituting between 7-14 percent of the cities total population. The main objectives of the Demonstration Projects are: to demonstrate to all stakeholders, by concentrating on a small Demonstration Zone within each ULB supply area, that 24-hour7 continuous water supply is achievable and to monitor the tangible benefits - health, technical, operational and commercial - to be derived from this type of supply; to establish, within the chosen Demonstration Zone, a customer billing, collection and support service, and to provide an improved, continuous (Le. 24 hours per day, 7 days a week throughout the year) water supply service for a period of 2 years; and to monitor the situations within the small zones pre- and post-investment, in order to quantify the social, economic, and other benefits resulting from the demonstration projects e.g. reduction in water-related disease; leakage reduction; improved basis for billing usage. -40-

47 One operator (Operation-Consultant) will be hired to manage the demonstration projects in all three participating ULBs. This subcomponent comprise of the works required for the above demo zones and for guaranteeing bulk water supply in sufficient quantity and quality to the demonstration zones. Typical works would include pipeline connections and chlorination devises. This subcomponent also includes: a 0 a Operator consultant fees. With regard to the demonstration zones, the OC will be responsible for finalizing the works, designing the works, preparing the bidding documents, procuring contractors, signing contracts with the contractors, and supervising the contractors' work. Hence: (i) the fee for the OC; and (ii) any bonuses to be paid to the OC based on their performance will be supported under this sub-component. Technical Audit of Demonstration Proiects. The strategy and plans prepared by the OC will be critically reviewed by a third party technical audit consultant. Communication strategy and social intermediation (both within and outside the demo zones). This subcomponent will supplement the designed communication strategy and social intermediation process in order to create an enabling environment for reforms. Specifically, the subcomponent will facilitate: (i) awareness creation and communication between and across stakeholders within and outside the demo zone; (ii) formation of local level and ULB level institutions/forums for stakeholder interactions; (iii) carry out customer education on proper use of 24/7 supply systems and healthhygiene behavior; and (iv) participatory monitoring of outcomes in the demo zones. These objectives have been spelt out as part of the communication strategy developed during project preparation. This subcomponent will finance social intermediation and communication service activities such as: (i) spreading project awareness among demo zone households in the initial period; (ii) formation of inclusive water user associations in the ward level (under 74th amendment) and enabling them to become effective forums for two way information exchange and monitoring; (iii) dissemination of reliable information on project related developments on an ongoing basis; (iv) identification of critical social issues and concerns as these emerge and bringing them to the attention of implementing agencies; (v) conduct of Sanitation and Hygiene Promotion (SHP) campaigns in the demo zones; (vi) awareness campaigns on proper use and conservation of water under 24/7 supply conditions; (vii) awareness campaigns and seminars on the logic and necessity of proposed tariffs; (viii) dissemination of outcomes fiom demo zone area to wider range of stakeholders in the ULB (through seminars/workshops, cross visits, media coverage etc); and (ix) monitor sector related developments, gauge stake holder perception and disseminate suitable information for acceptance of reforms by key stakeholders. Project Component C. Project Implementation - US$ 1.39 million KUIDFC, as the agency responsible for project implementation, will strengthen its capacity to face the implementation requirements. This entails establishing and operationalizing a project monitoring cell exclusively for the project. This subcomponent will finance the project's incremental operational costs and studies related to project management and implementation, establishment of monitoring system, financial management system training, and consultancies -41 -

48 related to the project. In particular this sub-component supports: (i) Incremental, short term consultants for KUIDFCLJDD, for the duration of the project; (ii) Preparation and establishment of a monitoring and evaluation system, and costs related to financial management systems within KUIDFCLJDD; (iii) Training for staff of monitoring cell of KUIDFC and municipal reforms cell of UDD; and (iv) Incremental operating cost at KUIDFC, including supervision costs

49 Detailed implementation arrangements by component are described in the table below: Component Overall project and sector reform Component A1 (Policy Implementation and State Level Institutional Strengthening) Component A2 (Strengthening o f Service Delivery, and Preparation of follow-on projects in ULBs) Component B 1 (Priority Investments) Component B2 (Works in city distribution networks in all three ULB s) Implementation GoK has constituted a State-level Committee for overall steering of the project throughout its entire cycle, comprising: (i) Principal Secretary, UDD; (ii) Secretary, Mt.JDA; (iii) MD, KUIDFC; (iv) MD, KUWSDB; (v) Director, Municipal Administration, and (vi) Director, GoK Project Monitoring Cell; For the implementation of this component, GoK has created a policy/technical cell within KUIDFC, consisting of a few core sector experts and calling upon consultants as needed, that will function as a technical secretariat reporting to UDD. This arrangement would facilitate coordination as well as speed up hiring and administrative matters. KUIDFC will be responsible for procurement of various studies and activities under this component, and signing the contracts. The responsibilities and activities of this team will be taken over by the Kamataka State Urban Water Supply Council (KSUWSC), as soon as it is established under the project and.. becomes operational. This component will be managed by the KUIDFC PMU, assisted by the PIUs located in the h Bs, in close consultation with UDD, the Department of Municipal Administration (DMA), the KUWSDB, and the ULBs. The DMA which deals with sub-state (municipal) aspects o f urban sector reform is being strengthened under the proposed and parallel Bankfunded Municipal Reform Project. The KUWSDB will act as an agent of the KUIDFC for the design, technical aspects o f procurement, and constructiodsupervision of the priority investments. KUWS&DB will participate in evaluation o f bids, and KUIDFC s Tender Committee will award the contracts. An independent Third Party Technical Audit consultant will be appointed to audit the works in close collaboration with KUWSDB. A Third Party Inspection agent will test pipes and equipment. All Contractors payments will be released by KUIDFC with the certification of KUWSDB to pay. KUWSDB has established a small central unit, including engineering and procurement capacity, and will establish separate units in each of the ULB for works supervision. Further details on KUWSDB s implementation arrangements are given in Project Implementation Plan (PIP). The ULBs will be the owners o f completed works, KUWSDB will operate them on their behalf (as per the current agreements between the ULBs and KUWSDB), with the exception of Belgaum where the ULB itself will be operating part of them. This component will be identified through an initial study and mapping of the cities distribution networks, under the first phase o f City-wide Engineering feasibility Studies (under Component 1B). The identzj?ed works would be contracted by KUIDFC and OC will supervise and monitor implementation. -43-

50 Component B3 (Demonstration Projects) The Demonstration Projects will be implemented by KUIDFC by procuring an Operator-Consultant (OC). There will be a single OC contract for all the three ULBs. The OC will study the Demonstration Zones in each o f the ULB, prepares a strategy for achieving the performance targets demanded of them, estimates the cost o f works, and prepares procurement and implementation plans. The strategy, plans and costs would be critically reviewed by the Third Party Technical Audit consultant (who would also audit Priority Investments -- see para above). Based on the agreed strategy by KUIDFC in consultation with the ULBs, OC will prepare the bidding documents, which would be again reviewed by the Third Party Technical Audit consultant. The works would be tendered out by the OC, who will also sign the contracts. The payments to the contractors would be vetted and certified by the OC and passed on to KUIDFC for payment. KUIDFC releases payments expeditiously through a Special Account, with a balance o f Rs. 50 million all the times in its commercial bank, similar to the arrangement currently in place under ADB-funded projects. Further details on Financial Management arrangements will be elaborated in FM Manual. Monitoring Impacts of Continuous Supply would be done by KUIDFC, through establishing a monitoring system, information campaigns, workshops and surveys etc

51 Annex 3: Estimated Project Costs INDIA Karnataka Urban Water Sector Improvement Project 1. SECTOR DEVELOPMENT AND TECHNICAL ASSISTANCE 2. PHYSICAL INVESTMENTS 3. PROJECT IMPLEMENTATION Total Baseline Cost Physical Contingencies Price Continaencies Total Project Costs Front-end fee Total Financina Reauired Works Goods Services (including Training) IOC 1 Total Project Costs Front-end fee Total Financing Required I Identifiable taxes and duties are 0 (USSm) and the total project cost, net of taxes, is (USSm). Therefore, the project cost sharing ratio is 76.65% of total project cost net of taxes

52 Annex 4: Cost Benefit Analysis Summary INDIA Karnataka Urban Water Sector Improvement Project Summary of Benefits and Costs: This Annex describes variables and assumptions used to calculate the project s economic rate of return, and refers to the economic model available in the project s electronic files. A cost-benefit framework is used to assess the financial and economic viability, of the investment component of the project. With and without project scenarios are defined in order to identify the incremental costs and benefits of the project, and evaluate the principal economic indicators of the project, that is, the net present value (NPV) and the internal rate of return (IRR). Due to the relative openness of India s economy, no macroeconomic conversion factors have been used to convert financial to economic flows -- the Standard Conversion Factor has been conservatively set at 1.0. However, a sectoral conversion factor has been applied for power costs, because prevailing prices do not reflect the hll cost of energy. The analysis is modeled over ). The cash flows are discounted using a discount rate of 12 percent which is assumed to be a proxy of the opportunity cost of capital in India and which is also the Bank s typical hurdle rate for water and sanitation projects. Project costs are detailed in Annex 2 above. Consistent with good practice, the analysis assesses the incremental costs and benefits of the sub-projects individually. Key sub-components have also been subjected to the least-cost test as part of engineering designs, including a review of alternatives In the base scenario, the net present value of the project is Rs millions. The internal rate of return is 16%, above the discount rate. Because economic benefits have not been fully quantified, notably health benefits and increases in property value, this rate is probably an underestimate, therefore demonstrating the economic viability of the project. NPV (Rs. Million) Priority investments Belgaum 8.3 Gulbarga 54.7 Hubli-Dhanvad Demonstration zones (coping costs 25.7 approach) TOTAL IRR 13% 16% 21% 14% % -46-

53 1. Sector Development and TA (Components A. 1 and 2) The net benefits of this component are difficult to quantify but are expected to be positive. Sector development activities, if successfully implemented, will provide the necessary foundation and support for sector reform at both the State and the ULB level, which should ultimately translate into more sustainable investments and better water supply & sanitation services. Tangible economic benefits should results from the implementation of sector reform by leveraging capital investments. This component has not been included in the cost-benefit analysis, which implies that incremental benefits are expected to equal incremental costs. 2. Prioritv investments (Component Bl.) The two main economic benefits derived from the priority investments are:. An increase in the bulk supply of water to all 4 of the cities involved, resulting in higher per capita availability; and - Power savings resulting from more efficient pumping and network redesign. For all ULBs, the value of water is estimated at Rs. 10/m3 (USD 0.22/m3), which is derived from the current low price of Rs. 50 per connection per month and the current water consumption level (about 5 m3 per month per connection). It should be noted that, according to the household survey, more than two-thirds of households are supplementing their water needs with the purchase of tankered water at a cost of Rs /m3, which reveals a high willingness-to-pay for basic water needs (on the left of the demand curve). While no demand curve could be constructed due to lack of data, the above information shows that it is likely that the use of the current effective price (Rs. 10/m3) as a proxy of the value of water is an underestimate. A more detailed assessment, to be conducted during implementation and measuring users' response to expected improvements, should provide an improved assessment and understanding of the demand for water services. This would be key to a better design of the follow-on project. la. Belgaum In Belgaum, investments will include the replacement of 28.4 km of leaking pipelines for the Rakkasakoppa and Hidkal schemes, 1.8 km of feeder mains, and the erection of centrifugal Pumps. The expected benefits from the project are an additional 10 Mld supplied to Belgaum due to the reduction of leakages, bottlenecks and more efficient pumping. Incremental pumping costs are not assumed to be significant as increased pumping would be offset by efficient gains in terms of energy use per volume of water (due to the replacement of pumps) and unit of water delivered per unit of water produced (due to the replacement of pumps). With total investment costs of Rs million (base cost), and the value of water delivered in Belgaum at Rs. 10 / m3 (see details above), the NPV would be Rs. 8.3 million, and the IRR 13%

54 lb. Gulbarga In Gulbarga, investments will focus on the Bhima scheme which is the only perennial, secure supply of water. The Bhosga source of water to the city has proved extremely unreliable and it has not been possible to source any water from it for the last 3 years. The Bennithora scheme has limited potential for further extension. Investments will include the rehabilitation of the Bennithora transmission main (10.5 km), resulting in a saving of about 3 Mld, and the construction of a second pumping main for the Bhima scheme (19.2 km), which will upgrade its capacity from 12.5 Mld to 50 Mld, and reduce the risk for Gulbarga to rely on this dilapidated main for a large proportion of its supply. For the Bhima scheme, new pumps will also be commissioned, and additional filter units will be constructed at the treatment plant to increase capacity. The expected benefits of the project are an additional 12 Mld supplied to Gulbarga due to the reduction of leakages. More benefits are expected from the additional capacity but the analysis conservatively estimates that out of the total 37.5 Mld available only 10 Mld will be put to use. With total investment costs of Rs million (base cost), and the value of water delivered in Gulbarga at Rs. 10 / m3 (see details above), the NPV would be Rs million, and the IRR 16%. IC. Hubli-Dharwad Both Hubli and Dhanvad are suffering far worse restrictions on their water supply than either Belgaum or Gulbarga, once in 7 days compared with once in 2 days for the latter two cities. The main element of the project consists of the construction of a separate main (23 km) which will by-pass the city of Dhanvad, avoid an existing length of main from Dharwad to Hubli which currently acts as a throttle on the amount of water that can be passed to the city, thus increasing the water supplied to Hubli from the present 38 Mld to 49 Mld. At present this flow is pumped to a high level reservoir in Dhanvad and then gravitated down to Hubli - this unnecessary pumping head resulting in excess power. The by-pass main will save on the power needed to pump the water to Hubli - estimated to amount to an annual saving of 3.8 million KWh, or Rs. 19 million annually (assuming an economic cost of bulk energy of Rs. 5 / KWh). In addition, the project will include the construction of 5 feeder mains within Hubli to overcome bottlenecks on the system feeding the distribution networks from the new transmission main. With total investment costs of Rs million (base cost), the value of the additional 1 1 Mld delivered in Hubli at Rs. 10 / m3 (this water would be used immediately, given the severe scarcity conditions in Hubli), and total energy savings of Rs. 19 million, the NPV would be Rs

55 million, and the IRR 21%. 3. Works in citv distribution networks in all 3 ULBs (Component B2.) The main objective of this subcomponent is to provide short term improvements to majority of the water-stressed users outside the demonstration zones, particularly the hours of supply per week. Because the exact nature of these investments has not yet been defined, it is not possible to derive an ex-ante rate of return for this subcomponent. However, the identification of these small-scale investments which will start as a matter of priority and will result from network surveys and modelling, mainly to locate the major bottlenecks. Given the limited budget available for these immediate works in the city networks, before more substantial interventions can be designed and implemented in a follow-on project, their selection and prioritization will be done according to a set criteria (see details in Annex 2 above). The selection criteria will include both cost-effectiveness (have the least cost per unit savings in physical losses) and cost-benefit criteria (show a positive net benefit based on the increased volume of water distributed). If this economic criteria is used, investments under this subcomponent are expected to have at least a positive NPV. It is therefore assumed that works in city distribution networks will at the minimum have a neutral impact on the overall economic rate of return of the project. 4. Demonstration areas (Component B3.) The benefits from converting to continuous, fully pressurized systems ( 24/7 supply ) are well established. They include: considerable risk to health substantially reduced operational techniques can be used to influence water supply and demand * distribution system is not subjected to unnecessary stress. improvement of the household economy. much less customer inconvenience Investment and operation costs were estimated on the basis of Scenario 2 in the engineering study, which includes: (i) base costs to establish the demo zone; (ii) replacement of 50% of service connections; (iii) replacement of 40% of the existing distribution network; and (iv) new meters installed at 100% of the connections. The total number of beneficiaries (based on existing connections) is about households. Two different methods were used to assess the economic benefits of this subcomponent: (i) the stated preference approach, using the stated incremental willingness-to-pay for the level of service (24/7) proposed as a proxy of the net benefits, and (ii) the revealed preference approach, using the value of the coping costs that are expected to be offset by the introduction of 24/7 as a measure of the net benefits. j i) Willingness-to-pay (WTP) approach. The household survey carried out for the social assessment indicates that on average households would be willing to pay an extra Rs. 125 per connection per month for 24/7 service. The NPV for all the zones would be minus Rs

56 million and the IRR 2%. (ii) Coping costs approach. The household survey revealed that on average households spend Rs. 250 per month in coping costs, mainly to supplement their water needs with water from tankers, water vendors and other sources (e.g. tubewells and pumps), and spend significant amount of time fetching water. About a third of households have made substantial investments in building sumps and roof tanks, while most of the remaining 2/3 have invested in drums and vessels. Other coping costs that were not fully assessed in the household survey include health costs, loss of amenity reflected in lower property values, etc. These would be studied in more detail through the demand assessment/monitoring which will be carried out during project implementation. They are not included in the present analysis because of the difficulty in carrying out an ex-ante analysis and predicting impacts with a sufficient degree of confidence. Assuming that coping costs to supplement water needs will be fully offset by the introduction of 24/7 service, the NPV would be Rs million and the IRR 14%. The significant differences found in the use of either method are not entirely surprising. Indeed, willingness-to-pay is stated on the basis of incomplete information on the real coping costs incurred, and a certain skepticism as to whether the promised level of service (that would reduce or even offset certain coping costs) will materialize. This is actually why the Government of Karnataka selected this gradual approach, starting with a pilot limited to about 10% of the population -- to demonstrate and convince the majority that a move to world-class service is indeed feasible, and generate support -- including for higher user charges -- for a scaled-up project, in the rest of the ULBs and elsewhere in the State. In addition, a substantially lower rate of return would be expected for a demonstration project compared to the future, scaled-up citywide phase. The main reason is that the Operator-Consultant fixed costs (mainly expatriate staff) are disproportionately high for a demo project -- it doesn't take much more expatriate inputs to run an entire system with connections that a demo zone almost 10 times smaller

57 Main Assumptions: The key assumptions have been included in the above text describing the analysis: Sensitivity analysis / Switching values of critical items: Sensitivity tests have been carried out on the critical variables. The values of these variables will be monitored during supervision as better quality information becomes available. The results, presented in the table below, indicate a relative robustness of the rate of return. Some key project risks, however, are of commitment to reform / political nature and cannot be adequately measured in a conventional cost-benefit analysis. Base scenario Investments costs increase bv 20% (mioritv investments) Coping costs 50% smaller than expected (demo zones) Energy savings reduced by 50% (priority investments) NPV IRFt % % IInvestments/O&M costs increase bv 50% fdemo zones) I %1 I Investments costs increase bv 20% (orioritv) and 50% (demo) I OA I Value of water is reduced bv 20% (mioritv investments) I % % %

58 Overview Annex 5: Financial Summary INDIA: Karnataka Urban Water Sector Improvement Project One of the development objectives of the Project is to improve urban WSS services in the participating ULBs and demonstrate that sustainable, efficient, and commercially-oriented service provision can be achieved. Financial sustainability is one of the key factors that would contribute to such a goal, and requires significant attention, as the historical /current financial performance of the sector has been very poor. According to the Urban Drinking Water and Sanitation Policy Statement of GoK, Given that potable piped water is expensive, it is necessary for natural resource sustainability and commercial viability of operations to recover from the users the cost of providing this service. The longer term objective is to establish an appropriate cost recovery mechanism through adequate tariff to ensure that revenues cover operation and maintenance (O&M) costs, debt service plus a reasonable return on capital. However, reaching such full cost recovery level even in the long term can be an enormous challenge for the ULBs of Kamataka, as they currently cover only a small portion of their O&M expenses through tariff revenues. Subsidies and grants for the service providers will therefore continue to be needed in the medium term, but the focus should be more on targeting the poor and providing sanitation. In keeping the long term full cost recovery goal in mind, a step-wise approach would need to be taken to facilitate the reform process and address the numerous issues along the way. With regards to financing of the sector at the state level, the Project envisages to assist GoK in carrying out among other studies, the state sector development strategy/action plan, including detailed fiscal allocation of state. With regards to ULB level reform, the Project envisages to assist the participating ULBs through the following studies: Ring-fencing the WSS Operations: Assistance will be given to the ULBs separate their WSS accounts from rest of the municipal services using the workbook developed during project preparation. As a first step, record keeping of the operating revenues and expenses will be done separately for the WSS activities. WSS accounts for the demo zones will be recorded separately as well. Capacity building of 2-3 municipal staff in each ULB on basic accounting of WSS services will be also conducted. Improvement in WSS Billing and Collection: Assistance will be given to the ULBs to improve their billing and collection system. A computerized customer database system will be created and ways to improve the ULBs billing and collection performance will be suggested and implemented. This will be done in coordination with the computerization project undertaken by GoK, through KUIDFC. Billing and collection information for the demo zones will be recorded separately from rest of the zones as well, as they would adopt a volumetric pricing system based on metered consumption. Defining the WSS Tariff Structure: An additional task will be included in the proposed

59 study, Water and Sanitation Sector Investment and Tariff Frameworks. In the context of formulating the state tariff policy/structure/guidelines, an appropriate tariff structure, including the volumetric tariff structure and rates in the demo zones will be developed for each participating ULB. Attention will be given to target cost recovery levels, subsidy policy, awareness creation of the new tariff structure, and willingness to pay by the poor, etc. Ring-fencing the WSS Operations Currently, a typical municipality operates the water supply services through its water department which invests, operates, and maintains the water related assets, while the health department covers sanitation services and the revenue department bills and collects the WSS related tariffs and taxes. In many cases, KUWSDB is also involved not only with regards to assets creation, but also in performing O&M activities, due to the poor capacity of the municipal water departments. This arrangement of recording the WSS related revenues and expenses in various departments within and outside of the municipality makes it difficult to provide a clear overview of the financial situation of their WSS operation. The cost recovery data and the level of subsidies flowing into the WSS sector in Karnataka are also very difficult to measure, as there are many recorded and unrecorded subsidies in the accounts, and the ULBs are not accustomed to separating the WSS accounts from rest of the municipal services. The cash-based, single-entry accounting system widely used in the state does not provide sufficient information for constructing balance sheets and income statements. Moreover, the little information obtained from the existing accounts indicates that there is no information on the existing municipal assets, and the recorded financial data is often inconsistent and unreliable. In order to find out the historical and current cost recovery levels for WSS sector, a workbook has been developed during project preparation to ring-fence the WSS accounts from rest of the municipal services. Using the methodology outlined in the workbook, WSS financial statements for the past three years have been constructed by an independent accountant using the existing data obtained from the municipalities, KUWSDB, and KPTCL (attached at the end of this section). As mentioned above, construction of the balance sheet, income statement, and cash flow statement is very difficult due to lack of key information on assets etc. However, this effort is envisaged to continue during project implementation by building the capacity of the municipal managers to systematically record WSS related transactions in a separate format. Currently, there is a state wide project undertaken by GoK to computerize the municipal accounts of Kamataka. The modules that include the following: (i) registration of births & deaths; (ii) trade license; (iii) water supply billing & collection; (iv) property tax; and (v) municipal accounting, have been developed and feedback from the municipalities are being incorporated. To change the municipal accounting system, computerize it, and build municipal capacity to use them effectively would be a challenging task which may take a long time. Therefore, the Project plans to initiate the separation of accounts by only recording the WSS activities in a simple spreadsheet, so that the data can later be merged into GoK s computer project once it is in effect. This activity will fall under the sub-component A2 of the sector development component and be implemented in

60 close coordination with GoK's project to maintain consistency of the accounting programs in the state. Two to three staff in each municipality will be trained to reconstruct the financial statements for the WSS operations by separating the accounts related to WSS for the past years following the double entry accounting system. The staff who have leamed to separate WSS accounts will be assigned to continue the recording of the WSS transactions on a daily basis to develop separate financial statements for the WSS operation in a computerized system. Such strengthening of the financial management system would enable the municipalities and GoK to accurately estimate the sector budget, maintain transparency of WSS-related revenues and costs, and monitor the project performance indicators. Improvement in WSS Billing and Collection Another key activity to be included in the sector development component of the Project is the improvement of WSS billing and collection performance for the three participating ULBs. As indicated in the table below, the bill collection rate in the past four years has been deteriorating for Hubli-Dhanvad, from 80% in FY98/99 to 37% in FY01/02, while it has remained in the range of 49-59% for Belgaum, and 28-35% for Gulbarga. The Project envisages to improve the collection performance through introducing a computerized system (as described below) and by creating incentives for the OC, who will be managing the demonstration projects. The bill collection target set for all the demonstration zones is 70% and this performance target has been given a 20% weight for determining the overall success of the demonstration zone. The weighted average of the indicators (details under section A2, Key Performance Indicators) would need to reach 75% or higher for being success. Table: Historical Bill Collection Rates Hubli-Dharwad Belgaum Gulbarga % 56% 41% % 49% 32% % 51% 28% % 59% 35% % 53% 30% The GoK funded computerization project described in the previous section includes an Oracle-based billing and collection system. An early introduction of this computerized billing and collection system would facilitate monitoring of the WSS bills of the customers and their payment records. As a first step, an electronic customer database will be created in each ULB by putting the existing manually recorded customer information in the computers. Consultants will be hired to assist the ULBs in finalizing this database and to implement electronic recording of hture bills and payments. Initially, the bills for all domestic customers will be identical, as the ULBs charge them the same flat rate. However, once the continuous water supply is achieved and metering is completed, volumetric tariffs will be adopted in the demonstration zones. The computerized

61 billing and collection system will enable recording of the demo-zone bills which will be different for each consumer depending on their consumption level, and have a more frequent billing cycle. It is also expected that the billing and collection system will be linked electronically to various collection centers as well as the ULBs' ring-fenced accounting system for WSS operations. In addition to the introduction of the computerized billing and collection system, the Project envisages to develop various measures for improving the bill collection performance in each ULB. The exact methodologies will be selected by the municipal managers and the consultants, but they could include: (i) efforts to remind the customers of their dues, including advertisement in newspapers and microphone announcements of customers with accumulated arrears; (ii) performance incentive system for the municipal staff in charge of billing and collection; and (iii) enforcement of disconnection of the accounts. Defining the WSS Tariff Structure In 1996, Hubli-Dhanvad had introduced a volumetric tariff system that sets rates for each cubic meter of water used, depending on the consumption level and consumer class. However, this system has not been implemented for many years due to the severe drought and inefficient service, resulting in non-functioning of meters. Therefore, all three ULBs are currently applying fixed tariff rates for the various groups of consumers. Hubli-Dharwad and Gulbarga charge annual rates of Rs. 540 for domestic consumers, Rs. 1,080 for non-domestic, and Rs. 2,160 for commercial customers. Belgaum has increased its tariff in FY 02/03 by 78% for domestic to Rs. 800, and tripled the rates for non-domestic and commercial consumers, to Rs. 9,000 and Rs. 15,000 respectively. If it is assumed that an average household consumes 15 liter per month, the per liter rate for domestic customers would correspond to Rs 3 ($0.06) for Hubli-Dhanvad and Gulbarga, and Rs 4.4 ($0.09). Table: Annual Tariffs Charged in FY01/02 (Rs) Domestic Non-domestic Commercial Hubli-Dhanvad Belgaum (New Tariff Gulbarga effective FY02103) (800) 540 1,080 3,000 (9,000) 1,080 2,160 5,000 (15,000) 2,160 The Sector Development component of the Project will assist GoK and the ULBs to develop sound tariff policies at the municipality level and a volumetric tariff system in the demonstration zones. In addition to following the long run marginal cost method set by GoK policy, the new volumetric tariff structure will be incorporating: (i) the cost recovery target, based on the financial analysis; and (ii) the needs of the poor and low income groups of the population, based on the social assessment and willingness to pay studies. Charging the consumers for the quantity of water they have consumed would not only introduce fairness to the tariff structure, but also facilitates the monitoring and planning of the water production, as they can be derived from the true demand and consumption. To facilitate the transition and to gain support from the sector stakeholders, implementation of the new volumetric structure will be adopted only after the continuous water supply has been achieved, accompanied with communication campaigns and

62 social awareness work. In summary, the following methodology and principles will be used for water pricing in the demonstration zones: (i) There will be carefid transition to volumetric pricing by using both flat rate and volumetric billing in parallel for a few months, accompanied with social intermediatiodcommunication activities; (ii) The volumetric rate will be at least Rs. 10/m3, which corresponds to what the users are actually paying now for 30 lpcd. The detailed tariff structures in the demonstration zones will be finalized by June 30,2005; (iii) Connection subsidy policy will also be examined; and (iv) Initial target for the tariffs will be to cover no less than 50% of O&M costs and progressively increases to no less than 80% O&M costs by the end of this project. In the rest of the ULBs, there will be a step wise tariff increase along with service improvements resulting from the priority/distribution network investments. Financial Summary of the three ULBs WSS Operations During project preparation, data has been collected to get an overview of the financial health of the participating ULBs, as well as their WSS operations. Currently, the municipalities follow the procedures contained in the Karnataka Municipal Accounts code and maintain records of transactions entered and compile the monthly abstract of receipts and expenses from these records. Effective control is exercised in ensuring that all expenses are within the budget approved (historical financial statements for the three ULBs are attached at the end of this section). Preliminary cost recovery analysis has been conducted by estimating the revenues and expenses for the WSS operations. The total WSS related revenues include water sales revenues, other water and sewerage charges that include taxes, and a deduction of an estimate of 2% loss on receivables. The O&M costs for the WSS operations include: (i) power and chemicals which normally amount to 27% - 28% of total O&M expenses for Belgaum and Gulbarga, and 34% for Hubli-Dhanvad; (ii) salaries and wages, which are calculated by estimating the number of municipal staff and their time spent on WSS operations; (iii) repair and maintenance, which could be underestimated given the poor capacity at the municipal level to maintain their assets properly; (iv) supply of bulk water charges from KUWSDB; and (v) other costs. Total costs would include estimated depreciation of 5% and interests on loan and bulk water supply. O&M cost recovery is calculated by dividing the total revenue with O&M costs. Full cost recovery is calculated by dividing the total revenue with total WSS related costs, including O&M, depreciation, and debt service. Results of the analysis show that the total WSS related revenue cover 87% of the related expenses for Hubli-Dhanvad, 83% for Belgaum, and 48% for Gulbarga. However, these cost recovery indicators are misleading, as the numerators include all forms of grants from the state, including SFC grants, share of salaries, grants adjusted by KUWSDB and KPTCL, which are categorized as revenue in their accounts. If these grants and subsidies are excluded from the revenue figures, the O&M cost recovery from WSS related revenues (tariffs and water & sanitation tax) declines to

63 19% for Hubli-Dhanvad, 39% for Belgaum, and 17% for Gulbarga. If debt service and depreciation costs are taken into account, these figures further worsen to 16% in Hubli-Dhanvad, 24% in Belgaum, and 11% in Gulbarga. Given that the municipal staff lack sufficient skills and capacity to perform proper repair and maintenance of the WSS assets, even these cost recovery figures could be concluded to be underestimated. Table: Cost Recovery Levels for the WSS Operations in FY01/02 HDMC Belgaum Gulbarga A. O&M cost recovery level in % 39% 17% B. Full cost recovery level in % 24% 11% C. Full cost recovery including grants in % 83% 49% Note: A. WSS tariff and tax revenues / O&M costs B. WSS tariff and tax revenues / full cost including O&M, depreciation, and interests C. WSS tariff and tax revenues plus share of SFC salary, grants adjusted by KUWSDB loan and KPTCL / full cost including O&M, depreciation, and interests The low tariff levels, poor collection performance, and rising expenses have contributed to widening of the gap between the revenues and costs for all ULBs over the years. In addition, sewerage charges are either non-existent or covered under the property tax and difficult to estimate. Increasing the tariff has been challenging, as any such proposal fiom the municipalities has to go through a process of approval by the municipal counsels. However, preliminary consumer interviews and surveys conducted in the region (details in section E6 on social aspects) suggest that customers are willing to pay significantly more for better services. Using the project cost estimates, data collected from the ULBs, KUWSDB, and KPTCL and revenue and cost related assumptions, a simple and preliminary financial model has been constructed to do a back of an envelope calculation to estimate the level of tariff increase necessary to achieve cost recovery in the medium to long term (projected income statements for the three ULBs are attached at the end of this section). Although the analysis is based on data that could lack reliability and consistency, and a number of rough assumptions have been used, the preliminary results indicate that two of the ULBs will remain in deep financial trouble at least for the next ten years. Table: Annual Tariff Increase Necessary to Reach Cost Recovery in Five/Ten Years: HDMC Belgaum Gulbarga O&M cost recovery by % 18% 61% O&M cost recovery by % 7% 25% Full cost recovery (incl. depreciation and debt ) by % 35% 80% Full cost recovery (incl. depreciation and debt) by % 12% 29%

64 Belgaum, mainly due to its recent tariff increase requires the least drastic tariff increases of 7% to 18% to reach O&M cost recovery in five to ten years. However, Hubli-Dharward and Gulbarga would require significant tariff increases, ranging from 25% to 61% annually to reach O&M cost recovery in five to ten years. Hubli-Dharwad and Belgaum will continue to be in a huge financial deficit that would require state subsidies for the foreseeable future, even if minor tariff increases would take place. Through its sector development components and improvements in service delivery (investment component 2), the Project aims to strengthen the management of the WSS operations and introduce operational efficiency to improve the financial health of the ULBs. Since it is difficult and complex to monitor the financial statements of the entire ULBs WSS operations due to lack of reliable baseline data and systematic recording of the accounts performance targets have not been established for the whole geographical area served by the ULBs. However, establishment of such indicators are expected to be the conditions for any follow on operations. Project s Financial Impacts and Long Term Vision Through implementing the Project s priority investments, visible improvements in WSS service delivery is expected to be achieved, including: (i) increased hours of water supply service; (ii) more equitable supply across different areas in each participating ULB; and (iii) broader access to sanitation facilities (including in the slums). These improvements are expected to form as grounds for the ULBs to increase the WSS tariffs for all beneficiaries and thereby improve the WSS cost recovery levels. To ensure that the investments made will be sustainable in the future, it would be crucial to secure commitment from the ULBs to adopt a financially, economically, and socially sound pricing structure along with improvements in service delivery. The demonstration project that is planned to be implemented in four zones of the three ULBs envisages to demonstrate that 24-hour continuous supply is achievable and to show the benefits-health, technical, operational and commercial-it brings. Continuous supply would enable full metering of consumption, which would make the adoption of volumetric tariffs possible. This is in line with the state policy which states that in a realistic time frame of about five years, efforts will be made and ULBs encouraged to achieve 100% metering and volumetric pricing based on long run marginal costs. In the long run, GoK considers PPP to be one of the key options to help bring institutional reforms and to achieve increased operational efficiency and revenue generation. The Project envisages to introduce transparency into the WSS sector s financial statements, adopt a sound tariff level for the participating ULBs, and introduce a volumetric system for metered clients, which would create an enabling ground for better management and commercial orientation for the provision of WSS services in the ULBs. Such developments are expected to lay the grounds for successful implementation of a possible future PPP contract, which will be studies under the Project s sector development component

65 Municipal Financial Statements Comparison of Budget VS Actual: Hubli Dharwad Municipal Corporation Particulars Budget Actual Budget Actual Budget Actual Receipts Taxes Fees Miscellaneous Grants Total of Receipts Expenses Pay and Allowances Contingency Pension & Gratuitty Major Works Other Works Water Supply Health Department Electrical (Lighting Department) Interest on Repayments Miscellaneous & Other Exps Social Welfare and Weaker section Total of Expenses SurplusKleficit (438.15) (122.16) (508.29) Data extracted from Municipality Records and respective year's Budget documents The diff. Betw. the receipt and payment is due to non inclusion of opening and closing balance o f the bank

66 Comparison of Budget VS Actual: Belgaum Municipal Corporation I Particulars Receipts Taxes Fees Capital receipts Miscellaneous Receipts Grants and Contribution Total of Receipts Ludget ]Actual ]Budget ]Actual IBudget IActual I Expenses Pay and Allowances Pension and Gratuity Major Works Other Works Water Supply Helath /Hospitality Lightings Miscellaneous and Other Exps Social and Welfare exps I Total of Expenses ISurolus/Deficit SourcesBasis of Data 1. Data extracted from Municipality Records and respective year's Budget documents 2. The diff. Betw. receipt and payment is due to non inclusion of opening and closing balance o f the bank

67 Particulars Receipts Municipal Rates & Taxes Fees Miscellaneous Reciepts Grants & Contributions TOTAL OF RECEIPTS Expenses Pay and Allowances Pension & Gratuity Major Works Water supply Lightning Publi Helath Miscellaneous Scocial welfare TOTAL OF EXPENSES Budget Actual Budget Actual Budget Actual

68 Financial Projections - WSS Sector: Hubli Dharwad Municipal Corporation Base case without tariff increase Fiscal year (Rps Lakhs) Water Sales Revenues Total # of connections Rev per connection (in Rs) Water and Sewerage Sewerage tax- 10 % of Property tax Loss on Receivables % of the water revenues Total Revenues after loss on Rec , % , % , % , % , % , % , % 964 Operational Expenses Power and Chemicals Salaries and Wages Repair and Maintenance Supply of Bulk Water - KUWSSB Other expenses rotal Op Expenses before Interest 945 1,086 1, , ,801 3,087 3,405 1,437 1,652 1,900 2, ,130 1,220 1,318 1, ,761 4,157 4,601 5,097 ;ass before Depreciation Interest on Loan and Bulk water Depreciation rotal costs incl. depr and interest Loss after Interest and Depn (2,277) ,358 (2,834) (2,406) ,568 (2,887) (2,692) ,877 (3,163) (2,968) ,447 (3,655) (3,327) ,842 (4,011) (3,68 1) ,283 (4,363) (4, ,776 (4,812 ;rants, Salary,KPTCL,KUWSSB 2,387 2,000 2,000 2,000 2,000 2,000 2,000 Yet IncomeILoss 2ost of Waterper Kilo leter 2ost recovery Operational cost (447) % (887) % (1,163) % (1,655) % (2,011) % (2,363) % (2, % kll Cost Recoevery level 16% 19% 18% 18% 17% 17% 17% Sources Basis of Data: Data compiled from Municipality records, KUWS&DB, KPTCL records, BWS report Key Assumtions: Water sales revenues are based on the current flat rate tariffs and number of connections. Total number of connections are assumed to increase at 5% annually. Income from other charges is assumed to be Rs. 40 lakhs and gradually increases 10 % o f Property tax is taken for Sewerage taxes and a growth of 5% increase is presumed for every year Loss on receivables is assumed to be 20% on demand, grandually decreasing to reach 10% in five years The increase in Power charges is based on information provided by Commissioner of MC Salarires, Repairs & Maint, other charges are based on the past trend of expenditure from to Interest on Loan is extracted from KUWS&DB records Capital expenditure includes the project related investments 5% annual depreciation is assumed on the assets. Share o f Grants is assumed to be Rs.2000 lakhs based on figure and there by gradually decreasing Cost per IU is calculated taking into account total operating expenses by Net qty awailable for distribution

69 Financial Projections - WSS Sector: Belgaum Municipal Corporation Base case without tariff increase 'iscal year (Rps Lakhs) Water Sales Revenues Total # of connections Rev. per connection (in Rs) Water and Sewerage Sewerage tax- 10 % of Prop. tax Loss on Receivables % of the water revenues Total Revenues after loss on Rec , % ,798 1, % ,338 1, % ,955 1, % ,653 1, % ,435 1, % ,307 1, % 615 Operational Expenses Power and Chemicals Salaries and Wages Repair and Maintenance Supply of Bulk Water - KUWSSB Other expenses 'otal Op. Expenses before Interest ,023,oss before Depreciation Interest on Loan and Bulk water Interest on Power charges Depreciation 'otal costs incl. Depr. and interest Loss after Interest and Depn irants, Salary,KPTCL,KUWSSB Jet Incomenoss Operational cost per KL :ost recovery Operational cost (486) ,285 (979) 763 (217) % (357) ,305 (834) 700 (134) % 253 1,319 (831) 700 (131) % 253 1,346 (8 18) 700 (118) % 439 1,560 (1,012) 700 (312) % 439 1,590 (998) 700 (298) % 439 1,622 (1,007: 700 (307: % 'ull Cost Recovery level 24% 36% 37% 39% 35% 37% 38% Sources /Basis o f Data: Data compiled from Municipality records, KUWS&DB, KPTCL records, BWS report Key Assumtions: Water sales revenues are based on the current flat rate tariffs and number of connections. Total number of connections are assumed to increase at 5% annually. Income from other charges is assumed to be Rs. 130 lakhs over time. 10 % of Property tax is taken for Sewerage taxes and a growth of 5% increase is presumed for every year Loss on receivables is assumed to be 20% on demand, grandually decreasing to reach 10% in five years The increase in Power charges is based on information provided by Commissioner of MC Salarires, Repairs & Maint, other charges in are based on the past trend of expenditure from to Interest on Loan is extracted from KUWS&DB records Capital expenditure includes the project related investments 5% annual depreciation is assumed on the assets. Share of Grants is assumed to be Rs.700 lakhs based on figure. Cost per KL is calculated taking into account total operating expenses by Net qty awailable for distribution (367) 212 (367) 199 (388) 186 (387) 173 (409:

70 Financial Projections - WSS Sector: Gulbarga Municipal Corporation Base case without tariff increase 'iscal year (Rps Lakhs) Water Sales Revenues Total # of connections Rev. per connection (in Rs) Water and Sewerage Sewerage taxes- 10 % of Property tax Loss on Receivables % of the water revenues Total Revenues after loss on Rec , % , % , % , % , % , % , % 241 Operational Expenses Power and Chemicals Salaries and Wages Repair and Maintenance Other expenses 'otal Op Expenses before Interest ,045 1,128 1,218 1,317,oss before Depreciation Interest on Loan and Bulk water Depreciation 'otal costs incl. Depr. and interest Loss after Interest and Depn irants, Salary,KPTCL,KUWSSB Jet IncomefLoss Operational cost per KL lost recovery Operational cost (695) ,285 (1,146) 486 (660) 15 17% (719) ,348 (1,168) 200 (968) 16 20% (782) ,409 (1,223) 300 (923) 15 19% (841) ,477 (1,274) 500 (774) 8 19% (916) ,792 (1,580) 500 (1,080) 10 19% (987) ,874 (1,643) 500 (1,143) 11 19% (1, ,964 (1, (1, 'ill cost recovery level 11% 13% 13% 14% 12% 12% 129 Sources /Basis of Data: Data compiled from Municipality records, KUWS&DB, KPTCL records, BWS report Key Assumtions: Water sales revenues are based on the current flat rate tariffs and number of connections. Total number of connections are assumed to increase at 5% annually. Income from other charges is assumed to be Rs. 35 lakhs over time. 10 % of Property tax is taken for Sewerage taxes and a growth of 5% increase is presumed for every year Loss on receivables is assumed to be 20% on demand, grandually decreasing to reach 10% in five years The increase in Power charges is based on information provided by Commissioner of MC Salarires, Repairs & Maint, other charges are based on the past trend of expenditure from to Interest on Loan is extracted from KUWS&DB records Capital expenditure includes the project related investments 5% annual depreciation is assumed on the assets. Share of Grants is assumed to be Rs200 there by gradually increasing Cost per KI, is calculated taking into account total operating expenses by Net qty awailable for distribution

71 Annex 6(A): Procurement Arrangements INDIA: Karnataka Urban Water Sector Improvement Project Procurement A. Institutional Capacity/ Readiness: The project will be implemented by Karnataka Urban Infrastructure Development Finance Corporation (KUIDFC), a company registered under the Companies Act, and fully owned by the Government of Karnataka (GoK). KUIDFC will have the overall responsibility for handling all the Procurement under the Project. The procurement of Goods and Works under Priority Investment Component (B 1) will be handled by KUIDFC with assistance from Karnataka Urban Water Supply & Drainage Board (KUWSDB). For this component, KUWSDB will assist most of the process, including the services of design, technical aspects of procurement, preparation of bid documents, preparation of evaluation bids, participation in the evaluations committee and supervision of works. KUWSDB has experienced engineers to handle procurement including some engineers who have received procurement training from ASCI, Hyderabad. The evaluation of bids will be done by the Tender Committee of KUIDFC which also has a member from KUWSDB. The approval for award of contract will be granted by the Approval Committee which will have amongst others Secretary (M&UDAS) and Finance Secretary (GoK) as its members. Its other members will be MD, KUIDFC; MD, KUWSDB; Commissioner of the respective Urban Local Body (ULB) and the Chief Engineer, Rural Development Engineering Department. Bidding documents for the major works to be executed in the first year have been prepared and shared with Bank. Implementation of the Works in city distribution networks component (B2) will be handled directly by KUIDFC, except for those related to assuring bulk supply to the Demonstration Projects who will be handled by the Operator Consultant (OC). Because of its nature and possible relation to the works in the demonstration zones, KUIDFC will closely coordinate with the OC. Also, the procurement plan for this component will be cleared by the Bank. For implementing the Demonstration Projects component (B3), KUIDFC will select an Operator-Consultant (OC). The pre-qualification process for selection of this OC has already started and the application for pre-qualification have been received by KUIDFC and are under evaluation. The OC so selected will prepare the procurement plan for Goods and Works required for implementation of this component. This procurement plan will be cleared with KUIDFC and the Bank. The procurement of Goods and Works for this component will then be handled by the OC on behalf of the KUIDFC following the Bank Guidelines. The procurement of the Consultancy Services under all the Components of the project will be directly handled by KUIDFC. The capacity assessment of KUIDFC was carried out during the project preparation. KUIDFC is the Nodal Agency of GoK for implementation and monitoring of Urban Infrastructure Projects throughout Karnataka. It does not have any internal procurement rules and follows the State

72 Government rules for all state funded projects. In case of externally funded projects, KUIDFC follows the procurement guidelines of the funding agencies. Though it is currently executing two ADB projects, KUIDFC has not handled any World Bank funded project so far. The procurement set up in KUIDFC will be headed by Assistant General Manager who would be supported by an Assistant Engineer having 7-8 years experience in Procurement. The Assistant General Manager and the Assistant Engineer have both received training for procurement under World Bank funded projects from NIFM, Faridabad and ASCI, Hyderabad respectively. KUIDFC has already appointed one additional procurement specialist who has earlier worked in World Bank Funded Rural Water Supply Project and is, therefore, conversant with the World Bank procedures and Guidelines. KUIDFC also proposes to appoint at least two more procurement specialists who have procurement experience in the World Bank Funded projects. With these steps to strengthen its capacity, KUIDFC will be able to handle the procurement under the project. However, it will be necessary that KUIDFC imparts training to its staff handling Procurement to refresh their knowledge of the procedures under the World Bank funded procurement. B. Procurement Methods: All Goods and Works financed under the Loan shall be procured in accordance with the World Bank's Guidelines for Procurement, January 1995, revised January and August 1996, September 1997 and January Consulting services to be funded through the Bank's Loan shall be procured in accordance with the World Bank's Guidelines for the Selection and Employment of Consultants by the World Bank Borrowers, January 1997, revised September 1997, January 1999 and May All civil works, goods and services will be procured using India-specific Model Standard Pre-qualification, Biding Documents and RFPs for Bank funded projects. Specific procurement arrangements are summarized in Tables A and Al, and are briefly described below. Works (US $ million) National Competitive Bidding NCB) Works relating to "Priority Investment" will include replacementhehabilitation of existing pipe lines (two contract packages of estimated value US$4.23 million and US$2.39 million respectively) and addition to treatment plant (US$2.2 million) for Gulbarga; replacement of existing pipeline and construction of Ground Level Storage Reservoir in Belgaum (two contract packages of estimated value US$ 2.8 million and US$ 2.3 million); providing and laying pipelines and Feeder lines (in three packages of estimated value US$4.76 million, US$ 0.91 million and US$0.52 million) in Hubli-Dhanvad. These works will be awarded following NCB procedures as per para 3.3 and 3.4 of the Guidelines. The maximum value of one contract is up to US $4.76 million. NCB is considered a preferred method as the works are not likely to be of interest to foreign bidders in view of the nature & geographical spread of the works

73 Works relating to the improvement of city distribution networks typically would include those related to elimination of sections of pipelines imposing unnecessary throttles on supply, pipe replacement where physical losses are excessively high, network sectorization, augmentation of the capacity o f tanks and reservoirs andor construction of new ones, improvements to water quality caused by infiltration of contaminated groundwater, etc. Works for this component estimated to cost the equivalent of US$ 100,000 or more per contract will be awarded following NCB procedures as per para. 3.3 and 3.4 of the Guidelines. Procurement o f Small Works The works relating to "Demonstration Zone" estimated to cost the equivalent of US$ 100,000 or more per contract will also be awarded following NCB procedures as per para 3.3 and 3.4 of the Guidelines. Works relating to Demonstration Zone, and to the distribution networks estimated to cost less than US $ 100,000 per contract may: (a) be procured under lump sum price contracts awarded on the basis of quotation obtained from three (3) qualified domestic contractors in response to a written invitation. The invitation shall include a detailed description of the works including basic specifications, the required completion date, a basic form of agreement acceptable to the Bank and relevant drawings where applicable. The award shall be made to the contractor who offers the lowest price quotation for the required work and who has the experience and resources to complete the contract successfully. The exact details of these works will, however be finalized after the Operator-Consultant i s selected and he finalizes the procurement plan. Goods (US$2.91 million). International Competitive Bidding : 0 Goods for "Priority Investment" would include supply and installation of pumps and accessories for the three ULBs in two packages of estimated value US$ 1.01 million and US$ 0.46 million. These goods will be procured following ICB procedures in accordance with Section I1 of the Bank Guidelines. 0 Goods for "Demonstration Zone" with estimated US$ 500,000 and above will also be procured following ICB procedures in accordance with Section I1 of the Bank Guidelines. National Competitive Bidding : Goods estimated to cost less than US$ 500,000 equivalent per contract will be procured following NCB procedures in accordance with provisions of paragraph 3.3 and 3.4 of the Guidelines. National/lrternational Shopping: Goods like computers, printers and fax machines etc. estimated to cost US$ 50,000 equivalent and less per contract will be procured following NationaUInternational Shopping procedures in accordance with provisions of paragraph 3.5 and 3.6 of the Bank Guidelines. Consultant Services (US$ 7.82 million)

74 Consultant services will be procured as follows: Quality- and Cost-based Selection: Except as otherwise provided consultants services shall be procured under contracts awarded in accordance with the provisions of Section I1 of the Consultant Guidelines, and the provisions of paragraphs 3.13 through 3.18 thereof applicable to quality- and cost-based selection of consultants. In relation to the preceding paragraph, the short list of NGOs and consultants for services estimated to cost less than $500,000 equivalent per contract may comprise entirely national consultants in accordance with the provisions of paragraph 2.7 and footnote 8 of the Consultant Guidelines. Other Procedures for the Selection of Consultants: Individual Consultants Services for tasks that meet the requirements set forth in paragraph 5.1 of the Consultant Guidelines shall be procured under contracts awarded to individual consultants in accordance with the provisions of paragraphs 5.1 through 5.4 of the Consultant Guidelines. Selection Based on Consultants Oualifications Services for the establishment of a Karnataka State Urban Water Supply Council, development of UWS investment and tariff frameworks, and design and implementation of the legal and regulatory framework, under Part A. 1 (a), (d) and (e) of the Project, respectively, estimated to cost less than $100,000 equivalent per contract, may be procured under contracts awarded in accordance with the provisions of paragraphs 3.1 and 3.7 of the Consultant Guidelines. Single Source Selection Legal consultants services and services for third party inspection under Parts A. 1 and B. 1.of the Project, respectively, estimated to cost less than $100,000 equivalent per contract, may, with the Bank s prior agreement, be procured in accordance with the provisions of paragraphs 3.8 through 3.11 of the Consultant Guidelines. Review by the Bank of Procurement Decisions 1. Procurement Planning Prior to the issuance of any invitations to prequalify for bidding or to bid for contracts, the proposed procurement plan for the Project shall be hrnished to the Bank for its review and approval, in accordance with the provisions of paragraph 1 of Appendix 1 to the Guidelines. Procurement of all goods and works shall be undertaken in accordance with such procurement plan as shall have been approved by the Bank, and with the provisions of said paragraph 1. Annual procurement plans would be reviewed by Bank

75 2. Prior Review With respect to each contract for works and Goods estimated to cost the equivalent of US$ 500,000 or more, the procedures set forth in paragraphs 2 and 3 of Appendix 1 to the Guidelines shall apply. 3. Post Review With respect to each contract not governed by paragraph 2 of this Part, the procedures set forth in paragraph 4 of Appendix 1 to the Guidelines shall apply. Consultancy Contracts Prior review 1. With respect to each contract for employment of consulting firmshtitutions estimated to cost the equivalent of US$ 100,000 or more, the procedures set forth in paragraphs 1,2 3 and 5 of Appendix 1 to the Consultant Guidelines shall apply; and 2. With respect to each contract for the employment of individual consultants estimated to cost the equivalent of US$ 50,000 or more, the qualifications, experience, terms of reference, and terms of employment of the consultants shall be furnished to IDA for its prior review and approval. The contracts shall be awarded only after said approval shall have been given. With respect to each contract not governed by above, the procedures set forth in paragraph 4 of Appendix 1 to the Guidelines shall apply provided that the generic TORS and short lists for critical assignments have been cleared by the Bank. NCB Provisions All NCB contracts shall be awarded in accordance with the provisions of Paragraphs 3.3 and 3.4 of the Guidelines for Procurement under IBRD Loans and IDA Credits, January 1995, Revised January and August 1996, September 1997, and January In this regard all NCB contracts to be financed from the proceeds of the Loan shall follow the following procedures: Only the model bidding documents for NCB agreed with Go1 Task Force (and as amended from time to time) shall be used for bidding. Invitations to bid shall be advertised in at least one widely circulated national daily newspaper, at least 30 days prior to the deadline for the submission of bids. 0 No special preference will be accorded to any bidder either for price or for other terms and conditions when competing with foreign bidders, state owned enterprises, small scale

76 enterprises or enterprises from any given state. 0 Except with the prior concurrence of the Bank, there shall be no negotiation of price with the bidders, even with the lowest evaluated bidder. 0 Re-bidding shall not be carried out without the prior concurrence of the Bank. The system of rejecting bids outside a predetermined margin or bracket of prices shall not be used in the project. Extension of bid validity shall not be allowed without the prior concurrence of the Bank: (i) for the first request for extension if it is longer than eight weeks; and (ii) for all subsequent requests for the extension irrespective of the period (such concurrence will be considered by the Bank only in cases of Force Majeure and circumstances beyond the control of the Purchaser/Emplo yer). 0 Rate contracts entered into by Directorate General of Supplies & Disposals, will not be acceptable as a substitute for NCB procedures. Such contracts will be, however, acceptable for any procurement under National Shopping Procedures. 0 Two or three envelope system will not be used. Procurement Information Procurement information will be collected and recorded as follows: (a) (b) Prompt reporting of contract award information by KUIDFC. Comprehensive periodic reports indicating: 1. revised costs estimates for individual contracts and total cost; 2. revised timings of procurement actions including advertising, bidding, contracts award and completion time for individual contracts; and 3. compliance with aggregate limits on the specified methods of procurement, The Borrower's completion report to be received by the Bank within three months of the (c) Loan closing date

77 Procurement methods (Table A) Table A: Project Costs by Procurement Arrangements (US$ million equivalent) 1. Works () (25.72) 4.54 (3.63) 0.30 () (29.35) 2. Goods 1.88 (1.88) () 1.03 (1.03) () 2.91 (2.91) 3. Services () () 7.82 (6.84) 3.41 () (6.84) 84. Miscellaneous () () () () () 5. Front-end fee () (1 (0.40) () (0.40) Total (1.88) (25.72) (11.90) () (39.50) I' Figures in parentheses are the amounts to be financed by the Bank Loan. All costs include contingencies. Includes civil works and goods to be procured through national shopping, consulting services, services of contracted staff of the project management office, training, technical assistance services, and incremental operating costs related to (i) managing the project, and (ii) re-lending project funds to local government units. It also includes the Loan front end fee. Figures in above table do not include taxes

78 Table AI : Consultant Selection Arrangements (optional) (US$ million equivalent) " Including contingencies Note: QCBS = Quality- and Cost-Based Selection QBS = Quality-based Selection SFB = Selection under a Fixed Budget LCS = Least-Cost Selection CQ = Selection Based on Consultants' Qualifications Other = Selection of individual consultants (per Section V of Consultants Guidelines), Commercial Practices, etc. N.B.F. = Not Bank-financed Figures in parentheses are the amounts to be financed by the Bank Loan

79 Prior review thresholds (Table 8) Table B: Thresholds for Procurement Methods and Prior Review' 1. Works Priority Investment > 100 NCB * Demonstration Zone <loo Shopping I 16.5 (>.5).. I 2. Goods >500 ICB 1.53 (>.5) <500 but >50 NCB <50 Shopping 3. ServicesFirms >loo As per Bank Guidelines 3.32 (>.l) Individual Consultants 4. Miscellaneous 5. Miscellaneous 6. Miscellaneous < 50 >.05 Total value of contracts subject to prior review: Will be clear only after the procurement plan for Demonstration Zone is finalized. Present value at US$ 8.7 million. Overall Procurement Risk Assessment: Average Frequency of procurement supervision missions proposed: One every 6 months (includes special procurement supervision for post-reviewlaudits) *The details will be finalized after Operator-Consultant prepares a procurement plan for Demonstration Zone. "Thresholds generally differ by country and project. Consult "Assessment of Agency's Capacity to Implement Procurement" and contact the Regional Procurement Adviser for guidance

80 Annex 6(B): Financial Management and Disbursement Arrangements INDIA: Karnataka Urban Water Sector Improvement Project Financial Management 1. Summary of the Financial Management Assessment KUWSIP will be implemented by Karnataka Urban Infrastructure Development and Finance Corporation (KUIDFC), a company registered under the Companies Act of India and wholly owned by the Government of Karnataka (GoK) through a Project Management Unit (PMU) set up for the purpose. Although this will be the first Bank project to be implemented by the company, it is important to note that the accounting function is adequately staffed and fully computerized. The company follows accrual double entry book keeping in accordance with the statutory guidelines applicable to company accounts. Accounts are maintained project wise and trial balances for different projects are consolidated to form the accounts of the company. Historically, KUIDFC has used interest income on idle project hnds to meet its administrative expenditure. However, a GoK order has stopped that practice with effect from Therefore, from April 1,2004, KUIDFC will meet its administrative expenses from a 1% management fee that will be levied on the cost of projects managed by it. For the purpose of KUWSIP, this will be met from the counterpart contribution of GoK. In order to clearly define accounting practices, the development of a Financial Management Manual has been initiated. In addition, all financial management systems and procedures that require strengthening have been addressed during project preparation. Capacity building initiatives include the deputation of accounting staff to the project, the initiation of the development of a financial management manual which will document the accounting policies and procedures of the organization and the setting up of an internal audit department in the company. These activities will be completed by negotiation. The PMU will implement both the TA and investment components. It will receive funds for the project (on behalf of KUIDFC) from GoK, make project expenditures, record transactions and maintain project accounts. It will also be the nodal agency for ordering, receiving and paying for goods. All payments to contractors will be localized in KUIDFC to avoid procedural delays and bottlenecks. Payments will be made on the basis of certified bills submitted by them as per contractual terms. Reporting and Monitoring KUIDFC will prepare FMRs in formats that will be specified in the Financial Management Manual. The FMRs will show actual versus budgeted expenditures, forecasts of cash requirements, physical and financial progress and procurement contract management information. The FMRs will be designed by the financial and engineering department of KUIDFC to facilitate the monitoring of physical progress juxtaposed against financial progress. All the works, goods and services will be broken down into discrete sections and assigned weights that will reflect the financial outflow on account of any one section. In this way, both the Task team and the FM group will be able to use the same set of reports for monitoring the project. FMRs will also provide a reconciliation of expenditures claimed from the Bank with expenditures incurred annually. The first FMR for the project will be submitted to the Bank within 45 days of

81 the end of the first quarter from the date of loan effectiveness. KUIDFC will prepare FMRs in formats that will be specified in the Financial Management Manual. The FMRs will show actual versus budgeted expenditures, forecasts of cash requirements, physical and financial progress and procurement contract management information. FMRs will also provide a reconciliation of expenditures claimed from the Bank with expenditures incurred annually. Funds Flow Go1 will open a special account in RBI to receive disbursements under the project from the Bank. This Special Account will be operated by the CAAA. Go1 will make funds available to GoK under the usual ACA mechanism on 70% loan and 30% grant basis periodically. The entire funds requirement for the project including counterpart funding will be budgeted in GoK budget as an identifiable single line item. There will be an initial advance of Rs. 50 million to help the project get started from the GoK. Thereafter, KUIDFC will requisition money from GoK quarterly based on forecasted expenditures. The money will be credited to the company s PD account from where it will be transferred to the company s commercial bank account. GoK will allow KUIDFC to maintain a balance of Rs. 50 million as an imprest in its commercial bank through the life of the project. The risk of delay in flow of funds to the project will be mitigated by this arrangement

82 ~~ Action TOR for Intemal and Extemal Auditors First draft of FM Manual Appointment of Intemal Auditors Appointment of Extemal Auditors First draft of FMRs formats and preparation of an Excel based dummy model for generation of FMRs Responsible person Mr. Chillal - Manager Finance KUIDFC Mr. Chillal - Manager Finance KUIDFC Mr. Chillal - Manager Finance KUIDFC Mr. Chillal - Manager Finance KUIDFC Mr. Chillal - Manager - Finance KUIDFC Date to be completed Done Done Within one quarter of.. project effectiveness- Within one quarter of project effectiveness Done

83 FM Risk Analysis Table Project Complexity Risk Flags Risk rating Mitigation Simplicity in project design and implementation arrangements is maintained by using KUIDFC as the nodal agency of execution of investments and the state's urban det"ent for TA comuonents. Funds Flow All expenditures, approvals and accounts for the project are centralized at KUIDFC. This arrangement avoids multiple payment points and simplifies project financial management arrangements. Low Low Not required Not required Disbursement Arrangements There is of delay in funds transfer to the project because of fiscal strain on the state. Borrower Staffing Project management and accounts staff have project experience but are inexperienced with Bank requirements. Accounting is considered i book keeping function with transactional control of expenditure being the main objective Medium Medium Ths risk is mitigated by the establishmen of a bank account outside the treasury system which will maintain an imprest balance of Rs. 50 million at all times. Staff capacity will be built by the : a) development and use of a financial monitoring system where accounting information will be used for decision making b) development of FM manual whch will lay down all accounting procedures clearly Accounting System Accounting practices and procedures of KUIDFC are not documented. The basis for apportionment of administration and other expenditures to projects is currently not clear causing a lack of transparency in recording High This risk will be mitigated by the development of a Financial Management Manual which will set out accounting procedures to be followed consistently across the company

84 accounting transactions. Intemal Control A weak internal control system in KUIDFC takes away from the assurance that the Bank gets from statutory audit on the use of project funds. Audit Arrangements Arrangements for statutory and project audit are adequate. past experience with timeliness and quality of audit reports with the same auditor, familiarity of auditor with Bank requirements. Overall risk rating High Medium Medium This risk will be mitigated by the strengthening of the internal control function through the setting up of an internal audit department. This department will be staffed by people drawn from the State Audit Department. Assurance on quality of audit reports will be come from the fact that auditors ToRs will be approved by the Bank. Follow up and timeliness of audit reports will be ensured by the Manager Finance who will be the single point of contact for the Bank. The FM assessment for this project has been set against the general background of the governance and control environment in Karnataka (as assessed by the Kamataka SFAA) which is stronger than in most other Indian states. However, there are areas such as cash flow management, government accounting and budgeting that are in need of reform in Kamataka which impede the smooth functioning of public financial management arrangements. To address this, and to facilitate smooth flow of funds from the state to the project, GoK will provide an initial corpus of Rs. 50 million to start the project. Thereafter, the state government will make finds available to the project in advance every quarter based on projected funds requirements presented by KUIDFC. GoK will allow KUIDFC to maintain a balance of Rs. 50 million in its commercial bank account at all times to meet project expenditures. This arrangement will be approved by the Empowered Committee of the state as a part of the project approval package. Country Issues The following issues identified as generic to India are relevant to this project: 1. The accounting system of KUIDFC concentrates mainly on book keeping and transactional control over expenditure. Financial information is not considered a tool for decision making. 2. The quality of audit reports may be an issue. To address this, model TORS for auditors have been shared with KUIDFC and it has been agreed that finalized ToRs for external auditors will be prepared by KUIDFC and cleared by the Bank prior to project implementation

85 3, Timely availability of funds for the project could be an issue given the fiscal stress in Karnataka. To circumvent this, project authorities have worked out a system whereby they will be allowed to maintain an imprest balance of Rs. 50 million in a commercial bank account outside the State Treasury system. In this way, the fiscal strain on the state exchequer will be prevented from affecting project fund flows. Country issues with respect to preparation of FMRs and installation of a computerized PFMS will not apply to the project as the accounts function is already computerized. 2. Audit Arrangements External Audit The following audit reports will be receiv financial year: d by th Bank within six months from th close of the Agency Audit Report Audited by KUIDFC Entity Auht Statutory Auditors with a separate opinion on project expenditures CAAA- Audit report of C&AG Special Special Account Account Due Date 30th September 30th September The consolidated accounts of KUIDFC are audited by a firm of Chartered Accountants appointed by the state AG. The AG of Kamataka also carries out a test audit of transactions. For the purpose of the project, the statutory auditors will provide an opinion on project expenditures as a part of their overall opinion on the accounts of KUIDFC. For this purpose, a TOR for enabling the auditors to express an opinion on project expenditures will be appended to the TOR for statutory audit of the Corporation. The Bank will receive a single audit report each year in keeping with the new audit policy. The Authorized Allocations and reimbursements from the Bank will be held by the RBI in a Special Account which will be operated by the CAAA and audited by the CAG of India. The audit reports of this Special Account will be received by the Bank within 6 months of the close of the financial year

86 Internal Audit An intemal audit function has been set up in KUIDFC. This function is headed by an officer drawn from the state audit cadre. He will carry out his duties as Internal auditor with assistance from a fm of Chartered Accountants. The internal auditors will ensure that the accounting practices followed in the organization conform with statutory and donor requirements. They will ensure that procedures set down in the company s manual for reporting of transactions, authorizations, payments and procurements are followed. All systemic issues identified by intemal auditors will be brought to the notice of project authorities and rectified immediately. TOR for the internal auditors will be agreed between KUIDFC and the Bank. 3. Disbursement Arrangements Go1 will open a Special Account with RBI to receive disbursements under this project and will make funds available to the state government under the Additional Central Assistance (ACA) mechanism on 70% loan and 30% grant basis. The state government will pass on the assets created to the ULBs as a grant. The whole funds requirement for the project including counterpart contribution will budgeted by GoK as an identifiable, single head budget item annually. Under the arrangement for KUWSIP, GoK will provide an initial corpus of Rs. 50 million to start the project. Thereafter, the state govemment will make fimds available to the project in advance every quarter based on projected funds requirements presented by KUIDFC. GoK will allow KUIDFC to maintain a balance of Rs. 50 million in its commercial bank account at all times to meet project expenditures. This arrangement will be approved by the Empowered Committee of the state as a part of the project approval package. All project payments will be made by KUIDFC using this money at its disposal

87 Allocation of loan proceeds (Table C) Table C: Allocation of Loan Proceeds 3) b) NGO services and training 4) Operating Costs Total Project Costs with Bank Financing Front-end fee % % until December 3 1,2006 and 60% thereafter local expenditures (ex-factory cost), and 80% of local expenditures for other items orocured locallv 13) a) Consultant's services I 5.90 I 90% I 0.40 Amount due under section 2.04 of this Aaeement /Total I I I Use of statements of expenditures (SOEs): Disbursements for the project will be made using the traditional method of SOE based disbursements below the prior review threshold and documented claims above the prior review limits. The prior review limits for different categories of expenditure will be as follows: Goods US$500,000; Works US$500,000; Consultancy Services US$ 100,000 for firms and US$ 50,000 for individual consultants; and For operating costs and training, under such terms and conditions as the Bank shall specify by notice to the Borrower. The FMR based method of disbursement may be opted for by the Go1 and GoK at a later date with prior intimation to the Bank. If FMR based disbursement is adopted, it must be based on formats mutually agreed between the Bank and GoK. Special account: The Special Account will be maintained in Reserve Bank of India and operated by the Department of Economic Affairs (DEA) of Government of India (GoI). The authorized allocation of the Special Account will be US$4.0 million representing about four months of disbursements from the loan. The project will submit withdrawal applications to the Controller of Aid, Accounts and Audit (CAA&A) in DEA for onward submission to the Bank for replenishment o f the Special Account for reimbursement

88 Retroactive Financing: A total amount not exceeding US$ 500,000 from categories 3A (Consultant Services) and 4 (Incremental Operating Costs) combined would be considered eligible for retroactive financing, for expenditures made after May 3 1,

89 Annex 7: Project Processing Schedule INDIA: Karnataka Urban Water Sector Improvement Project ITime taken to prepare the project (months) I 19 I 19 I ]First Bank mission (identification) I I I kppraisal mission departure I 1 Oil I I Negotiations Planned Date of Effectiveness 0 I /26/ Prepared by: Kamataka Urban Infrastructure Development Finance Corporation Preparation assistance: Project preparation was assisted financially by: Department for International Development - Private Infrastructure Advisory Facility, and the World Bank Institute. Bank staff who worked on the projec Name 0. Alvarado C. Bosch M. M h o P. Goel R. R. Mohan S. K. Bahl/S.Krishnan N. V. V. Raghava S. Srivastava M. Fernandes L. MacArthur R. Soopramanian H. BrowdM. Fowler S. Myers A. Mejia E. Ijjasz included: Speciality Team LeaderlSr. Water & Sanitation Specialist Co-Task Team LeaderlSr. Water & Sanitation Economist Sr. Financial Analyst Financial Management Specialist Sr. Social Development Specialist Sr. Procurement Specialist Municipal Engineer Environmental Specialist Program Assistant Program Assistant Sr. Counsel Disbursement officer Technical Consultant Peer Reviewer Peer reviewer

90 Annex 8: Documents in the Project File* INDIA: Karnataka Urban Water Sector Improvement Project A. Project Implementation Plan Borrower's Project Implementation Plan - Draft version, November B. Bank Staff Assessments During Project preparation Bank staff carried out various assessments regarding institutional, financial, social, and technical aspects. These are available as annexes of the preparation missions aide memoires. C. Other Technical Assessment of Water Schemes (for Hubli-Dhanvad, Belgaum & Gulbarga). By BWS, June 2003 Strategy & Implementation Plan for Urban Drinking Water and Sanitation Sector. By IDECK, December 2003 Environmental Assessment of Demonstration Projects & Priority Investments in Hubli-Dharwad, Belgaum & Gulbarga. By Wilbur Smith Associates PvT. Ltd., August 2003 Rapid Social Assessment and Communications strategy. By Samaj Vikas, December 2003 Resettlement Action Plan (for Hubli-Dhanvad). February 2004 Financial Assessment and Capacity Building of the Municipalities in Karnataka. By Parthasarathy Venketesan, January 2004 *Including electronic files

91 Annex 9: Statement of Loans and Credits INDIA: Karnataka Urban Water Sector improvement Project 16-Mar-2004 Original Amount in US$ Millions Difference between expected and actual disbursements" Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig Frm Rev'd P P P PO79865 PO72123 PO71272 PO67606 PO50649 PO76467 P PO73094 PO50647 PO72539 P P PO40610 PO74018 P PO71033 PO67216 P P PO55455 PO35173 PO55454 PO50658 PO70421 PO71244 PO10566 PO67543 PO09972 PO10505 PO35172 PO55456 PO59501 PO67330 PO49770 PO45049 PO50657 PO50667 PO50637 PO41264 PO45051 PO45050 PO50651 PO50646 PO35824 PO10561 PO10496 PO38021 PO35827 PO49385 PO MAHAR RWSS 2004 RAJASTHAN HEALTH SYSTEMS DEVELOPMEN 2004 ALLAHABAD BYPASS 2004 GEF Biosafety Project 2003 Tech/Engg Quality Improvement Project 2003 AP RURAL POV REDUCTION 2003 UP ROADS 2003 TNROADS 2003 Chatt DRPP 2003 Food 8 Drugs Capacity Building Project 2003 AP COMM FOREST MANG 2002 UmAR PRADESH WATER SECTOR RESTRUCTU 2002 KERALA STATE TRANSPORT 2002 KARNATAKA RWSS II 2002 MUMBAI URBAN TRANSPORT PROJECT 2002 RAJ WSRP 2002 Gujarat Emergency Earthquake Reconstruct 2002 MIZORAM ROADS 2002 KARN TANK MGMT 2001 KAR WSHD DEVELOPMENT 2001 RAJ POWER I 2001 MPDPIP 2001 RAJ DPEP II 2001 POWERGRID II 2001 KERALA RWSS 2001 TECHN EDUC KARNHWYS 2001 Grand Trunk Road Improvement Project 2001 GUJARAT HWYS 2001 LEPROSY II 2000 NATIONAL HIGHWAYS 111 PROJECT 2000 RAJASTHAN DPlP 2000 UP POWER SECTOR RESTRUCTURING PROJEC 2000 IN-Telecommunications Sector Reform TA 2000 IN-TA for Econ Reform Project 2000 IMMUNIZATION STRENGTHENING PROJECT 2000 REN EGY I APDPIP 2000 UP Health Systems Development Project 2000 UP DPEP Ill 1999 TN URBAN DEV II 1999 WTRSHD MGMT HILLS II ND NATL HlViAlDS CO 1999 RAJASTHAN DPEP 1999 MAHARASH HEALTH SYS 1999 UP SODIC LANDS II 1998 DIVAGRC SUPPORT 1998 NATL AGR TECHNOLOGY 1998 DRISSA HEALTH SYS 1998 DPEP 111 (BIHAR) 1998 WOMEN 8 CHILD DEVLPM 1996 AP ECON RESTRUCTURIN 1997 MALARIA CONTROL ,OO I.oo

92 Original Amount in US$ Millions Difference between expected and actual disbursements' Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig Frm Rev'd PO ENV CAPACITY BLDG TA PO TUBERCULOSIS CONTROL PO STATE HIGHWAYS I(AP) P ECODEVELOPMENT P ECODEVELOPMENT PO AP IRRIGATION PO RURAL WOMEN'S DEVELOPMENT PO REPRODUCTIVE HEALTH PO ORISSA POWER SECTOR PO ORISSA WRCP PO STATE HEALTH SYS II PO ASSAM RURAL INFRA PO MADRAS WAT SUP II PO TAMIL NADU WRCP Total: , ,

93 INDIA STATEMENT OF IFC's Held and Disbursed Portfolio Feb In Millions US Dollars Committed IFC IFC Disbursed FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 1998 TCWdCICI / TDICI-VECAUS I1 TELCO Tanflora Park Tata Electric UCAL UPL United Riceland Usha Martin Vysya Bank WIV WTI Walden-Mgt India Webdunia ATL Alok Ambuja Cement Arvind Mills Asian Electronic BILT BTVL Balrampur Basix Ltd. Bihar Sponge CCIL CEAT CESC COSMO Caim Energy Centurion Bank DQEL Dewan EEPL EXB-STG GE Capital GTF Fact GVK Global Trust Gujarat Ambuja HDFC IAAF ICICI-SPIC Fine IDFC , SO IIEL Total Portfolio:

94 FY Approval Anorovals Pending Commitment Company Loan Equity Quasi Partic APCL 0.01 BHF CGL 0.02 CIFCO 0.02 DQEL GI Wind Farms 0.01 Niko Resources 0.01 Ocean Sparkle TELCO Vysya Bank Total Pending Commitment:

95 ~ Development '' Annex I O: Country at a Glance INDIA: Karnataka Urban Water Sector ImDrovement Proiect POVERTY and SOCIAL 2002 Population, mid-year (millions) GNI per capita (Atlas method, US$) GNI (Atlas method, US$ billions) Average annual growth, Population (%) Labor force 1%) Most recent estimate (latest year available, Poverty (% of population below national poverfy linej Urban population (% of total population) Life expectancy at birth (years) Infant mortality (per 1,000 live birfhs) Child malnutrition (% of children under 5) Access to an improved water source (x ofpopulation) Illiteracy (% ofpopulation age 75+) Gross primary enrollment (% of school-age population) Male Female India 1, South Asia 1, Lowincome 2, , I diamond' Life expectancy! T ~ I GNI per capita 1 Gross primary nroilment Access to improved water source!- lndja L ow-income group I KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1982 GDP (US$ billions) Gross domestic investment/gdp 21.7 Exports of goods and services/gdp 6.1 Gross domestic savings/gdp 18.3 Gross national savings/gdp 19.2 Current account balancdgdp Interest payments/gdp Total debtlgdp Total debt service/exports Present value of debt/gdp Present value of debtkxports (average annual growth) GDP GDP Der cadita Economic ratios. - lndta Trade T Indebtedness Low-income group STRUCTURE of the ECONOMY (% of GDP) Agriculture Industry Manufacturing Services Private consumption General government consumption Imports of goods and services Growth of investment and GDP (%) ~ i2 I -GDI *GDP (average annual growth) Agriculture Industry Manufacturing Services Private consumption General aovernment consumption Gross domestic investment Imports of goods and services I ' ---Expotts *Imports

96 IDA Bilateral Short-term PRICES and GOVERNMENT FINANCE Domestic prices (% change) Consumer prices Implicit GDP deflator Government finance (% of GDP, includes current grants) Current revenue Current budget balance Overall surplusideficit TRADE (US$ millions) Total exports (fob) Marine products Ores and minerals Manufactures Total imports (cit) Food Fuel and energy Capital goods Export price index (1995=100) Import price index (1995=100) Terms of trade (1995=100) BALANCE of PAYMENTS (US$ millions) Exports of goods and services Imports of goods and services Resource balance Net income Net current transfers Current account balance Financing items (net) Changes in net reserves Memo: Reserves including gold (US$ millions) Conversion rate (DEC, /ocal/us$j EXTERNAL DEBT and RESOURCE FLOWS (US$ millions) Total debt outstanding and disbursed IBRD IDA Total debt service IBRD IDA Composition of net resource flows Official grants Official creditors Private creditors Foreign direct investment Portfolio equity World Bank program Commitments Disbursements Principal repayments Net flows Interest payments Net transfers ,490 18, ,109 14,039 16,468 24,316 1, ,957 6,100 2,662 4, ,377 23,599 18,352 27,917-5,975-4, ,423 2,510 3,852-3,800-3,889 3,101 4, ,896 9, ,546 90,264 1,395 9,326 6,983 15,438 2,054 7, , ,352 2,543 1,180 1, ,889 2,678 1,397 1, ,300 1, , I: 3.9-7'4 j -GDPdeflator +CPI I 2o01 2o02 1 Export and Import levels (US$ mill.) 1 44,915 53, ~80,000 I 1,262 1, ,370 38,353 57,618 65, ,043 2,368 2oooo 14,000 17,640 9,882 12,746 1 o vd Exports Imports o01 2o02 65,580 77,986 1 T 73,706 84,254-8,126-6,268-3,601-4,882 12,125 14, ,298 lo /1 105,210 5,141 21,642 13,042 3, Current account balance to GDP (Oh) -11,757-16i i I I I 54,106 75, ,516 7,015 20,402 9,327 1, ,569 4,741 1,951 2,190 2,089 1, ,657-1,861 3, ,523 1,465 3,196-1, ,200 I j Composition of 2002 debt (US$ mill.) F 51,061 G: 4,093 A: 5,141 IA-IBRD E ~ B ~ IC-IMF G ~ D - Other multilateral F - Private I I I

97 Additional Annex 11 INDIA: Karnataka Urban Water Sector Improvement Project Existing intermittent water service in typical neighborhoods in Belgaum, Hubli-Dharwad and Gulbarga. Pictures taken in Belgaum, Hubli-Dharwad and Gulbarga, September,

98 1.0 Background Additional Annex 12: Summary of Environmental Assessment INDIA: Karnataka Urban Water Sector Improvement Project Karnataka Urban Water Sector Improvement Project (KUWSIP) is a medium term sectoral reform project initiated by the Government of Karnataka. The project envisages setting a policy, institutional and regulatory environment in urban water and sanitation sector that would enable service improvements, sustainable investments and coverage expansion. This sectoral reform process that will take place gradually and incrementally is being launched through a small-scale demonstration projects in three urban local bodies of Gulbarga, Belgaum and Hubli-Dhanvad. These initial investments comprise demonstration projects in selected zones of the project cities and priority investments to improve bulk water supplies and to demonstrate the feasibility of continuous and safe water supply. While these investments are expected to improve the environmental conditions, quality of service and develop the water and sanitation infrastructure, adverse environmental impacts are anticipated if the investments are not planned, sited, designed, constructed, operated and maintained properly. Considering these aspects, the Government of Karnataka through KUIDFC, has commissioned Wilbur Smith Associates Private Limited, Bangalore to carry out Limited Environmental Assessment of the proposed investments and for providing guidance/quality assurance in: integration of environmental aspects in the work done by the engineering consultant; planning for environmental activities to be carried out during project implementation; and drafting Environmental Code of Practice, Terms of Reference for Sectoral Environmental Assessment (SEA) and Sectoral Environmental Management Framework for the subsequent phases of KUWSIP. 2.0 Project Area Profile Hubli-Dharwad Spread over an area of 202 sq.km., the twin cities of Hubli-Dhanvad houses a population of 786,018. These cites are the major commercial, industrial and educational centers of Karnataka and ranked as the second biggest after the state capital, Bangalore. About 70 MLD of water (as against the designed capacity of 130 MLD) is supplied once in 5 to 7 days from two surface water bodies of Malaprabha and Neersagar and 70% of Hubli-Dhanvad population is provided with water supply facilities (45% through house service connections and 25% through public taps or tanker supplies). The remaining population depend on own sources such as Bore Wells, Open Wells, etc. Belgaum The city of Belgaum houses a population of about 399,600 over an area of sq.km. and is ranked as the fifth largest city of Karnataka. The city is popular for the presence o f defence

99 establishments and the major industries such as Tata Power and Indian Aluminium. About 55 MLD of water is supplied every alternate day from two surface sources of Rakaskop and Hedkal dam to the residents of the city and about 70% of the population is provided with water supply facilities. The remaining population depend on own sources such as Bore Wells, Open Wells, etc. Gulbarga Located at about 600 km from Bangalore, Gulbarga is spread over an area of about 60 sq.km. and houses a population of 427,929.The city primarily is a regional market and service center. About 30 MLD of water (against the design supply of 66 MLD) is supplied once 2 or 3 days to the residents of Gulbarga from three surface sources of Bhosaga, Bennithora and Bhima Rivers and about 50% of the population is provided with water supply facilities. The remaining population depend on own sources such as Bore Wells, Open Wells, etc. 3.0 Project Description Demonstration Zones Based on detailed diagnostic surveys in 3 to 4 zones in each of the project cities, the engineering consultants have identified the following zones for implementation and demonstration of the continuous water supply: Hubli Zone comprising wards 27,28 and parts of wards 29 and 32; Dhanvad Zone comprising wards 8,9, 10 and 11; Belgaum South Zone comprising wards 3,4,5,6 and parts of wards 7 and 8; Belgaum North Zone comprising wards 45 and 47; and Gulbarga Zone comprising wards 22,23,24,33,34,35,36,40,41,42,43,47,48 and 49. Priority Investments Further to enhance the bulk water supply levels in the project cities, specific priority investments were identified by the engineering consultants for implementation in KUWSIP. City wise these priority investments are discussed below: Hubli-Dharwad 0 laying an exclusive transmission main of 1210 mm diameter MS pipe, for a length of about 23 km from Aminbhavi treatment plant, by-passing Dhanvad and avoiding the existing 900 mm diameter transmission main from Dhanvad; 0 replacement, reinforcement and extension of feeder mains of about 18 km by CI pipes in Hubli; and 0 replacement, reinforcement and extension of feeder mains of about 15 km by CI pipes in Dharwad

100 Belgaum 0 replacement of 525 mm cast iron rising main by mild steel pipes for a length of 3.05 km from Hindalaga pumping station to treatment plant to avoid high level of joint losses and friction losses; 0 replacement of 1200 mm prestressed concrete pipe by mild steel pipe for a length of 5 km from Hidkal Dam, between Pump Houses 2 and 3; 0 replacement of old, worn out pumps in Pump House 1 by 2 No. 400HP centrifugal pumps, plus transferring one of the two 400HP stand-by pumps of Pump House 2 to Pump House 1 as a stand-by pump; 0 construction of a new reservoir at the water treatment plant; and 0 replacement and reinforcement of feeder mains within the distribution system. Gulbarga 0 replacing 900mm dia PSC &sing Main by MS pipes for a length of Kms from pump house Bheema river to B.P.Tank; 0 replacing 1200mm dia PSC Gravity Main by MS pipes for a length of 5.10Kms from B.P. Tank to IPS; 0 replacing 900mm dia RCC Rising Main by MS pipe for a length of Kms from IPS to Water Treatment Plant; 0 additional vertical pumps at Bheema river pumping station; 0 pumps for the intermediate pumping station; and 0 sand filters at WTP. 4.0 Environmental Assessment of the Project The environmental assessment of the project proposals carried out by the consultants comprised: 0 review of all applicable policies, regulations and administrative framework within which KUWSIP is to be implemented (including Operational Policies and Directives of the World Bank; 0 study of base line environmental profile of the project cities in general and demonstration zones in particular; and 0 conducting base line sample surveys of water quality and soil characteristics to assess the quality of water supplied and the potential of cross contamination. 4. I Review of Environmental Policies and Institutions Demonstration Zones The review of the environmental policies concluded that the demonstration projects in the project area will not necessitate any detailed environmental assessment studies. However project activities in Gulbarga demonstration zone, could trigger OP in the event of chance finding of Cultural Properties during excavation works for the distribution net works (the alignment of which is not known at this stage of the project)

101 Also during the construction stage the project would: require consent from the state pollution control board to operate the DG set under Air (Prevention & Control of Pollution) Act, 1981; and attract Noise Control Regulations under Environment (Protection) Act, During the operation phase of the project the excess wastewater generated if not treated to the disposal standards will attract the provisions of Environment (Protection) Act, Priority Investments All the priority investments excepting the laying and replacement and rehabilitation of pumps in Belgaum and Gulbarga will require an appropriate management plan after finalizing the exact alignment of the project. Also during construction stage the project would: require consent from the state pollution control board to operate the DG set under Air (Prevention & Control of Pollution) Act, 1981; and attract Noise Control Regulations under Environment (Protection) Act, During the operation stage, the storage and handling of chlorine for disinfecting the water will necessitate consent from the Pollution Control Board as per the provisions of Manufacture, Storage and Handling of Hazardous Chemicals Rules, Base Line Environmental Profile The detailed base line environmental profile both in the demonstration zones indicate that none of the three project cities present any sensitive environmental features that could be affected by the proposed improvements by KUWSIP. All the project cities and the demonstration zones show similar features to the other, excepting historical monuments in Gulbarga. However it is significant to note that the demonstration zones of the project cites have few nalas and surface water bodies receiving wastewater and storm water from upstream catchment areas. Water supply augmentation in these zones through the project is expected to have a negative impacts on these water bodies and provision safe wastewater disposal arrangements need to be considered in the project planning and design stages

102 4.3 Base Line Sample Surveys In order to establish the water quality issues and assess the possible impacts of the proposed continuous water supply in the selected demonstration zones, the following sample surveys were also conducted in the demonstration zones of the project cities: 0 Analysis of water quality at supply end by collecting samples at the source, treatment plant, storage reservoir and the public taps; Analysis of water quality at consumer end by analyzing water quality after 5,15 and 30 minutes of supply; and Analysis of soil characteristics in the vicinity of the distribution system to assess the potential of cross contamination. These samples surveys indicated that the quality of water at supply end in all the three cities meets the standards of IS However, at the consumer end the water supplied in the initial 10 minutes presented Coliforms in the samples, which indicates the cross contamination in the distribution system. This was further substantiated in the analysis of soil samples, wherein varied levels of bacterial count was observed. 5.0 Impacts and Environmental Management Plan No major environmental impacts are anticipated due to the project proposals in KUWSIP. The critical issues will be to ensure adequate safety and precautionary measures to minimize impacts during construction and provision of sanitation facilities in the demonstration zone to avoid contamination surfacehub-surface sources during operation. While the impacts are not very severe and permanent, care has to be taken to ensure that the ambient environmental conditions do not deteriorate. The impacts due to the priority investments are specific to the activity undertaken and cannot be generalized. Table 1 presents the summary of major impacts of the projects and recommended mitigative measures for the same

103 An Environmental Code of Practice along with the Terms of Reference for carrying out EA studies for Category A and Category B projects is also prepared and presented in the report. Project Activity Environmental Impacts s and EMP I A. Demonstration Zones I. Construction Stage 1. Temporary Disruption of Water supplies 2. Flooding and Leakage of Water in the Influence Area 3. Temporary Disruption to Traffic during construction I 4. Safety hazards to labor 5. Safety hazards to households in the Earth in the areas of operation 7. Soil Erosion of Deposited earth 8. Increased dust levels due to earth work excavation activities 9. Disturbance to other Utilities 10. Increased Noise Levels during Construction 1. Altemative Water Supply Arrangements such as Tanker Supply shall be Provided 2. Appropriate Bypass and Leak Control Arrangements shall be Ensured 3. Appropriate Traffic Diversion Plans shall be prepared and implemented during the construction 4. Adequate Safety Precautions such as helmets, safety shoes etc. shall be provided to the labor 5. Provision of temporary crossings/ bridges in the implementation area 6. Transportation and disposal of excess earth to a designated disposal site 7. Creation of Soil Barriers or mounds. 8. Immediate transport of accumulated waste or frequent watering of excavated earth 9. Scheduling activities in consultation with the other utility agencies such as telephone cables and sewer lines etc. and ensuring minimum disturbance to the utilities 10. Use of low noise generating equipment for all the activities, Respective Municipal Corporation Respective Municipal Corporation Respective Municipal Corporation and Local Traffic Police. Respective Municipal Corporation Local traffic Police Contractor Respective Municipal Corporation and I Contractor I Respective Municipal Coruoration Contractor Contractor 11. Operation Phase Continuous Supply of Water During 1. Generation of Additional Quantity of Wastewater from construction during nights 1. Provision of Adequate Respective centralizeddecentralized Municipal 97 -

104 Operation the Zones leading to contamination of surface I sub-surface sources 2. Flooding of Low Lying Areas due to overflow of storm water drains individual sanitation facilities in the demonstration zone Corporation 2. Augmentation and Respective drainage network in the Corporation 'roject Activity A. Demonstration Zones 11. Operation Phase B. Priority Investments General Environmental Impacts 3. Problems of Water Supply Allocation to non-demonstration zones 4. Improvement of health and hygiene of the communities due to improved water quality 5. Reduction of illegal connections, pit taps, etc. leading to reduction damages to infrastructure 6. Reduction in community investment on water storage, pumping and other expenditure leading to positive economic imoacts 7.Reduced Community Disputes on water supply within the zone 1. Increase in Dust Levels to due to earth work and other construction activities 2. Accumulation of Excess Earth 3. Disruption of traffic flow in the roads and during construction 4. Disruption of Utilities such Mitigative Measures 3. Minimization of leakages in the system and ensuring that current water supply levels are maintained in the other zones 1 Carrying out extensive awareness and communication campaigns to eliminate apprehensions of the people of other zones Positive Impact Positive Impact Positive Impact Positive Impact 1. Transportation of excess earth to identified disposal sites at frequent intervals and watering the spoil banks regularly 2. Disposal of unused I excess earth at an environmentally suitable disposal site 3. Provision of bypass arrangemen during construction periods and completing the works at shortest possible time 4. Preparation of utility shifting igencies Responsible lespective Municipal Zorporation Contractor KUWSDB, Contractor Traffic Police, KUWSDB, Contractor. Telecom

105 ~ as electricity, telephone and other services. 5. Temporary Disruption of Water Supply in the areas of construction plans and procuring appropriate approvals / permission in advance and completion of activities in the earliest possible time 5 Provision of Altemate Water Supply or tanker supply arrangements Authority, Electricity authority, KUWSDB, Contractor. HDMC Project Activity B. Priority Investments I. Hubli - Dharwad 1. Laying transmission main Environmental Impacts 5. Leakage and Flooding in the neighborhood during :onstruction 7. Safety of Labor 8. Safety of residents and road users in the implementation area especially in the areas around Gopan koppa cross with congested and narrow roads. 9. Increased Noise Levels in Urban Areas 1. Acquisition of Private Agricultural land for laying the transmission main 2. Temporary Disruption of natural drainage pattern at the locations of Hakilkari Halla, Chaula Halla and Kudi Halla crossings 3. Loss of Fertile Top Soil of the Agriculture Lands along the alignment 4. Damage to Villages roads at Kaulgeri, Govan koppa and Unkal. 5. Damage to standing crops Mitigative Measures 6. Appropriate Bypass and Leak Control Arrangements shall be Ensured 7. Adequate Safety Precautions such as helmets, safety shoes, gloves, etc. shall be provided to the labor. Provision of temporary crossings/ ridges to avoid accidents and other onstruction hazards 9. Using low noise generating equipment, provision of encasings around generators 1. Preparation of adequate land acquisition plans before implementation 2. Provision of appropriate by-pass arrangements for natural drainage during construction and adequate provisions in the detailed design for safe passage of storm water in the channels during operation phase 3. Xlinimizing the earth work and construction activities, refilling and replacement the exca\.ated topsoil back in the same field and provision of soil barriers with the excavated earth to avoid spillage on to the agriculture land 4. Reinstatement of Road Surface in earliest possible time 5. Adequate provisions for Agencies Responsible HDMC, KUWSDB Contractor :ontractor Contractor KUIDFC, KUWSDB KUWSDB KUWSDB, Contractor HDMC KUWSDB

106 2. Belgaum 1. Replacement of CI rising main with MS pipes from Hindalga to Laxmi Tek (3.05 during break down of the transmission main or maintenance operations 1. Acquisition of Private Agricultural land for laying the transmission main for the initial length of around 500m in Hindalgi village. compensation to the affected land owners during maintenance works 1. Preparation of adequate land acquisition plans before implementation ~ KUWSDB Project Activity B. Priority [nvestments 2. Belgaum 2. Replacement 3f PSC main from Hidakal dam to pumping stations with MS Pipe (5 w Environmental Impacts 2. Appropriate clearances from the Jail authorities for the pipeline routing. 3. Loss of vegetation in the land owned by the jail authorities. 4. Loss of Fertile Top Soil of the Agriculture Lands along the alignment 5. Damage to road surface Vijaya nagar and Rakaskopp road. 6. Damage to standing crops during break down of the transmission main or maintenance operations 1. Appropriate clearances from the road authorities for the pipeline routing 2. Disruption of natural drainage during construction due to three canal crossings between Hudali railway gate and Suldal cross, two big nallas at the Ankalgi village Mitigative Measures 2. Prior approval and clearances from relevant authorities 3, Minimization of tree cutting md detailed inventory of the number of type of trees lost due to the alignment and appropriate compensatory plantation for loss of trees 4. Minimizing the earth work and construction activities, refilling and replacement the excavated topsoil back in the same field and provision of soil barriers with the excavated earth to avoid spillage on to the agriculture land 5. Reinstatement of Road Surface in earliest possible time 6. Adequate provisions for compensation to the affected land owners during maintenance works 1. Finalization of mode and method of replacement and procuring appropriate clearances 2. Provision of appropriate by-pass arrangements for natural drainage during construction and adequate provisions in the detailed design for safe passage of storm water in the channels during Agencies Responsible KUWSDB KUWSDB, Contractor KUWSDB, Contractor City Corporation of Belgaum KUWSDB KUIDFC, KUWSDB KUWSDB, Contractor 00 -

107 causeway 1 and causeway Clearance of encroachments in the stretch passing through Ankalgi village. operation phase 3. Preparation of appropriate KUWSDB, rehabilitation plans as per WB KUIDFC guidelines Project Activity B. Priority Investments 3.Gulbarga 1. Replacement of Trunk Main from Bhima River-22.4 km 2. Installation of New Pumps at Pumping Stations Environmental Impacts 1. Acquisition of Private Agricultural land for laying the transmission main near Bhima river jack well at Sardagi village till it reaches the SH Loss of Fertile Top Soil of the Agriculture Lands along the alignment 3. Appropriate clearances from the Highway authorities for the pipeline routing since around 17 km of the pipeline is routed through the SH Loss of vegetation along the highway. 5. Damage to road at old Javergi and new Javergi road junction, SH 19 and Sardagi village junction on the Highway and roads in the residential areas starting from NGO colony up to the treatment plant. 6. Railway crossing at CIB colony and passage through main bus stand 7. Relocation of encroachments on the existing pipeline at Baratabad. 8. Possible acquisition of small temple opposite the jail along: SH Increased noise pollution during installation Mitigative Measures I. Preparation of adequate land icquisition plans before.mplementation 2. Minimizing the earth work and :onstruction activities, refilling md replacement the excavated topsoil back in the same field 3. Prior approval and clearances from relevant authorities 4. Minimization of tree cutting and detailed inventory of the number of type of trees lost due to the alignment and appropriate compensatory plantation for loss of trees 5. Reinstatement of Road Surface in earliest possible time 6. Necessary clearances from the railway authorities and transport authorities 7. Preparation of appropriate rehabilitation plans as per WB guidelines 8. Preparation of appropriate rehabilitation plans as per WB guidelines 1. Use of low noise generating equipment, provision of Personal Protective equipment, ear muffs, igencies Responsible CUWSDB KUWSDB, Eontractor KUWSDB KUWSDB City Corporation of Gulbarga KUWSDB KUWSDB KUWSDB Contractor

108 etc. for the construction labor and avoiding construction activities during nights

109 Additional Annex 13: Urban W&S Sector Policy Statement in Karnataka INDIA: Karnataka Urban Water Sector Improvement Project The policy statement below was issued by the Government of Kamataka on May 3, URBAN DRINKING WATER AND SANITATION POLICY STATEMENT OF THE GOVERNMENT OF KARNATAKA INTRODUCTION: Good quality reliable drinking water supply and sanitation are essential basic needs of every citizen. It has been the endeavor of successive Governments of Kamataka to satisfy this need for all its citizens. It is an on-going effort which aims at meeting the growing demand both in the urban and rural areas. The policy framework for rural drinking water provision is already in place. In vie of the different institutional structure, and different sets of issues involved in the delivery of the services of urban areas, it is necessary to have a separate policy statement for this sector. A detailed sector strategy paper to action plan will be issued later to carry forward the objectives outlined in this statement. Increasing urbanization has resulted in greater pressure on the existing urban water supply and sanitation systems leading to increasing demand on the one hand to augment the source and improve distribution, and on the other to increase the coverage of under ground drainage (UGD). At the same time, as stated in the State Water Policy brought out by the Department of the Water Resources, there is an urgent need to conserve the limited water resources of the State to ensure sufficient availability of water for various needs as well as for the future. The Government's efforts, therefore, have to focus on raising the levels of efficiency in the management of drinking water systems in urban areas so as to give satisfactory service to the citizens while at the same time discouraging over exploitation of resources and preventing wastage. OBJECTIVE : The Government of Karnataka in partnership with urban local bodies in the State, the Kamataka Urban Water Supply and Drainage Board (KUWSDB) and the Bangalore Water Supply and Sewerage Board (BWSSB) will continue and strengthen its efforts to provide all residents of urban areas of the State, piped water supply and sanitation services at or near their dwellings. The effort of the Government of Karnataka and its partner agencies will be to: 0 ensure universal coverage of water and sanitation services that people want and are willing to pay for; to do so in a manner that preserves the sustainability of the precious water resources of the State, protects and enhances the commercial and economic sustainability of the operations & at the same time; and ensure a minimum level of service to all citizens

110 INSTITUTIONAL ARRANGEMENTS: Government of Karnataka: The Government of Karnataka will continue to be responsible for: policy formulation; ensuring provision of the bulk of the resources required for capacity creation; regulation monitoring and evaluation of the efficiency of operations, including prescribing reporting requirements, procurement procedures, etc.; setting minimal service standards; encouraging the use of public private partnership as well as private sector participation to achieve the sector goals; promotion of the economic and commercial viability of water supply systems and the exploitation of economies of scale and scope by appropriate aggregation options; institution of necessary incentives for urban local bodies and other service providers to implement sector reforms; and ensuring coordination and collaboration among the various agencies both at the policy and operation level through the establishment of appropriate committees and agencies. Urban Local Bodies (ULBs): In accordance with the principle enshrined in Article 243(W) of the Constitution of India read with the Twelfth Schedule, ULBs will be responsible for water supply and sewerage services from water catchment to waste water treatment. The Government of Kamataka, however, will have the responsibility to monitor that ULBs, provide quality services in accordance with the standards prescribed at the State level. ULBs will have the choice of providing the services directly through public bodies or through such appropriate Private Sector Participation (PSP) arrangements. Given however, the paramount need for financial and commercial viability of the operations, the State will monitor strictly policies relating to minimal tariff operational autonomy of the municipal water operations, etc. KUWSDB and BWSSB: The Kamataka Urban Water Supply and Drainage Board will continue to be responsible for capacity creations and augmentation in all ULBs and O&M in selected ULBs for the present. Over the medium term, the KUWS&DB will be restructured and its role redefined. In the longer term, the KUWS&DB could become a publicly owned independent provider of technical assistance and management support to ULBs who do not have adequate capacity. Similarly, the appropriate rate of BWSSB will be defined in the action for the Bangalore City and surrounding areas. TARIFF: Given that piped water supply is expensive, it is necessary both for natural resource sustainability and commercial viability of operations to recover from the users of water, the full cost of providing service. The longer term objective is to establish an appropriate cost recovery mechanism through adequate tariff to ensure that revenues cover operations and maintenance costs, debt service plus a reasonable retum on capital. In the medium term, however, subsidies will continue to be needed and will be focused in areas such as pockets and communities of