IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-47300) ON A LOAN IN THE AMOUNT OF US$ 39.5 MILLION TO THE GOVERNMENT OF INDIA FOR THE

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank Report No: ICR IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-47300) ON A LOAN IN THE AMOUNT OF US$ 39.5 MILLION TO THE GOVERNMENT OF INDIA FOR THE Karnataka Urban Water Sector Improvement Project November 30, 2011 Sustainable Development Department Urban, Water and Disaster Risk Management Unit, India Country Management Unit South Asia Region

2 CURRENCY EQUIVALENTS (Exchange Rate Effective October 31, 2011) Currency Unit = Indian Rupees (INR) US$ 1.00 =INR FISCAL YEAR ABBREVIATIONS AND ACRONYMS DBO Design, Build, Operate KUIDFC Karnataka Urban Infrastructure Development Finance Corporation DEA Department of Economic Affairs M&E Monitoring and Evaluation DIP Draft Investment Program MTR Mid Term Review EA Environmental Assessment MLD Million litres per day ERR Economic Rate of Return NGO Non Government Organization EMP Environmental Management Plan O&M Operations and Maintenance FGD Focused Group Discussions PAD Project Appraisal Document FIP Final Investment Program PDO Project Development Objective FMR Financial Monitoring Report PIU Project Implementing Unit GO Government Order PMU Project Management Unit GoI Government of India PPP Public Private Partnership GoK Government of Karnataka PSP Private Sector Participation HH Household/s QAG Quality Assurance Group IBRD International Bank of RAP Resettlement Action Plans Reconstruction Development ICRR Implementation Completion Results TF Trust Fund Report IEC Information, Education and UDD Urban Development Department Communication JNNURM Jawahar Lal Nehru National Urban ULBs Urban Local Bodies Renewal Mission KTP Karnataka Transparency Act UWS Urban Water Supply KUIDFC Karnataka Urban Infrastructure UWSS Urban Water Supply Sanitation Development Finance Corporation KUWASIP Karnataka Urban Water Sector Improvement Project WASIS Water and Sanitation Information System KUWS&DB Karnataka Urban Water Supply and WSP Water Sanitation Program Drainage Board KUWSDP Karnataka Urban Water and Sanitation Development Program KSUWSC Karnataka State Urban Water Supply Council Vice President: Isabel M. Guerrero Country Director: Roberto Zagha Sector Manager: Ming Zhang Project Team Leader: Raghava Neti ICR Team Leader: Srinivasa Rao Podipireddy i

3 India Karnataka Urban Water Sector Improvement Project CONTENTS Data Sheet A. Basic Information B. Key Dates C. Ratings Summary D. Sector and Theme Codes E. Bank Staff F. Results Framework Analysis G. Ratings of Project Performance in ISRs H. Restructuring I. Disbursement Graph 1. Project Context, Development Objectives and Design Key Factors Affecting Implementation and Outcomes Assessment of Outcomes Assessment of Risk to Development Outcome Assessment of Bank and Borrower Performance Lessons Learned Comments on Issues Raised by Borrower/Implementing Agencies/Partners Annex 1. Project Costs and Financing Annex 2. Outputs by Component Annex 3. Economic and Financial Analysis Annex 4. Bank Lending and Implementation Support/Supervision Processes Annex 5. Beneficiary Survey Results Annex 6. Stakeholder Workshop Report and Results Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders Annex 9. Performance Indicators Annex 10. List of Supporting Documents MAP IBRD32942 ii

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5 DATA SHEET A. Basic Information Country: India Project Name: Karnataka Urban Water Sector Improvement Project Project ID: P L/C/TF Number(s): IBRD ICR Date: 12/02/2011 ICR Type: Core ICR Lending Instrument: SIL Borrower: Original Total Commitment: Revised Amount: USD 36.49M Environmental Category: B GOVERNMENT OF INDIA USD 39.50M Disbursed Amount: USD 36.49M Implementing Agencies: Karnataka Urban Infrastructure Development & Finance Corporation (KUIDFC) Cofinanciers and Other External Partners: B. Key Dates Process Date Process Original Date Revised / Actual Date(s) Concept Review: 02/13/2003 Effectiveness: 05/18/ /18/2005 Appraisal: 10/13/2003 Restructuring(s): Approval: 04/08/2004 Mid-term Review: 03/21/ /07/2007 Closing: 12/31/ /31/2011 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Risk to Development Outcome: Bank Performance: Borrower Performance: Satisfactory Moderate Satisfactory Satisfactory C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Quality at Entry: Satisfactory Government: Satisfactory Quality of Supervision: Satisfactory Implementing Agency/Agencies: Satisfactory Overall Bank Performance: Satisfactory Overall Borrower Performance: iii Satisfactory

6 C.3 Quality at Entry and Implementation Performance Indicators Implementation QAG Assessments Indicators Performance (if any) Potential Problem Project Yes at any time (Yes/No): Problem Project at any time (Yes/No): DO rating before Closing/Inactive status: Yes Satisfactory Quality at Entry (QEA): Quality of Supervision (QSA): None None Rating D. Sector and Theme Codes Original Actual Sector Code (as % of total Bank financing) Sub-national government administration 5 5 Water supply Theme Code (as % of total Bank financing) Administrative and civil service reform Decentralization Other urban development Pollution management and environmental health Urban services and housing for the poor E. Bank Staff Positions At ICR At Approval Vice President: Isabel M. Guerrero Praful C. Patel Country Director: Roberto Zagha Michael F. Carter Sector Manager: Ming Zhang Sonia Hammam Project Team Leader: Raghava Neti Oscar E. Alvarado ICR Team Leader: ICR Primary Author: Srinivasa Rao Podipireddy Srinivasa Rao Podipireddy iv

7 F. Results Framework Analysis Project Development Objectives (from Project Appraisal Document) The objectives of the project are to; (i) launch Government of Karnataka's urban water sector reform process based on the "Urban Drinking Water and Sanitation Policy Statement of GOK", and (ii) improve urban water supply services in the participating urban local bodies (Hubli-Dharwad, Belgaum, and Gulbarga) and demonstrate that sustainable, efficient, and commercially-oriented service provision can be achieved. Revised Project Development Objectives (as approved by original approving authority) The PDO was not revised. (a) PDO Indicator(s) Indicator Indicator 1 : Value quantitative or Qualitative) Baseline Value Original Target Values (from approval documents) Formally Revised Target Values Actual Value Achieved at Completion or Target Years 1.1 The reform base is established and initial reform activities are carried out Water Council established and reform studies are completed and implementation commenced. Proposal to establish the Water Council is under Finance Department review. The Urban Technical Cell is active in its place as required. Five out of six studies were completed and implementation is ongoing. Date achieved 12/31/ /31/2011 Comments (incl. % achievement) Indicator 2 : Value quantitative or Qualitative) 1.2 The ground for private sector participation is prepared as a realistic option for water and sanitation provision Project exceeded Project target. Both urban demonstrated the and rural water need for PPPs in sectors are using the sector. PPPs extensively in several programs, v

8 building on the experience gained under this project. Date achieved 12/31/ /31/2011 Comments (incl. % achievement) Indicator 3 : 1.3 Enabling legal, regulatory and financing frameworks are established for the sector Value quantitative or Qualitative) Legal, regulatory and financing frameworks are established. vi Financing framework was established. Work continues on establishing legal and regulatory frameworks Date achieved 12/31/ /31/2011 Comments (incl. % achievement) Indicator 4 : Value quantitative or Qualitative) 2.1 Feasibility of Continuous water supply is demonstrated One to two hours every two days in Belgaum and Gulbarga, and one to two 24X7 water supply hours supply every three demonstrated to five days in Hubli- Dharwad 24X7water is fully achieved and proved sustainable and commercially viable. Date achieved 04/08/ /31/ /31/2011 Comments (incl. % achievement) Indicator 5 : Value quantitative or Qualitative) 2.2 Priority bottlenecks to improve quantity of water supply are solved Improve bulk water in the three ULBs: Belgaum 10 MLD; Gulbarga 22 MLD; Hubli- Dharwar 11 MLD Increase in the bulk supply in Belgaum 27 MLD; Gulbarga 30 MLD and Hubli- Dharwar 11MLD 24X7supplies in demonstration zones. Date achieved 12/31/ /31/2011 Comments (incl. % achievement) Indicator 6 : 2.3 Increased consumer awareness, commitment, and ownership for reform are attained Value Awareness in Consumers are

9 quantitative or Qualitative) consumers created and consumers are committed; have ownership on reforms vii fully aware of reforms implemented (based on the 2010 consumer survey), and are paying bills regularly, and conserving water Date achieved 12/31/ /31/2011 Comments (incl. % achievement) Indicator 7 : 2.4 Capacity, Institutional structures, and accountability for water and sanitation operations of the participating ULBs are improved Value quantitative or Qualitative) Capacity, institutional structure, accountability for water supply operations demonstrated in the three ULBs ULBs appointed an operator, introduced volumetric tariffs, and are supporting scaling up of operations. ULBs, through the operator, are accountable for water supply service. Date achieved 12/31/ /31/2011 Comments (incl. % achievement) (b) Intermediate Outcome Indicator(s) Indicator Indicator 1 : Value (quantitative or Qualitative) Baseline Value Original Target Values (from approval documents) Formally Revised Target Values State Urban Water Council proposal ready for presentation to cabinet No policy/ regulation Council body for urban water in established and the state. Proposal for operational creation of State Urban covenant complied Water Council to be with when note is presented for adoption to presented to competent authorities cabinet Actual Value Achieved at Completion or Target Years Proposal to establish the State Urban Water Council presented to the Government. Date achieved 04/08/ /31/ /31/2011 Comments (incl. % achievement)

10 Indicator 2 : Value (quantitative or Qualitative) Demonstration zones in the three participating ULBs achieve proposed service standards In demonstration zones, there are 8 water supply service indicators Deficient water service indicators; water provided for a few hours every 2-5 days; no tariffs with weights. Weighted average should exceed 75%. Volumetric tariffs to be adopted All the service indicators achieved and weighted average almost 100%. Volumetric tariffs adopted. Date achieved 04/08/ /31/ /31/2011 Comments (incl. % achievement) G. Ratings of Project Performance in ISRs No. Date ISR Archived DO IP Actual Disbursements (USD millions) 1 06/29/2004 Satisfactory Satisfactory /29/2004 Satisfactory Satisfactory /23/2005 Moderately Satisfactory Satisfactory /13/2005 Moderately Satisfactory Satisfactory /29/2006 Moderately Satisfactory Satisfactory /28/2006 Moderately Satisfactory Satisfactory /30/2007 Moderately Satisfactory Satisfactory /20/2007 Moderately Satisfactory Satisfactory /07/2008 Moderately Satisfactory Satisfactory /23/2008 Moderately Satisfactory Moderately Satisfactory /29/2009 Moderately Satisfactory Moderately Satisfactory /29/2009 Moderately Satisfactory Moderately Satisfactory /26/2010 Satisfactory Satisfactory /11/2010 Satisfactory Satisfactory H. Restructuring (if any) Not Applicable viii

11 I. Disbursement Profile ix

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13 1. Project Context, Development Objectives and Design 1.1 Context at Appraisal The state of Karnataka encompasses 27 districts and has a population of 52,850,562 (2001 census). The state includes 218 Urban Local Bodies (ULBs) in addition to Bangalore city, the capital. The total urban population is million (34%). At the time of appraisal, the quality of water supply services in most of Karnataka s urban areas was poor, characterized by intermittent supplies. A large portion of the population relied on public stand posts for their water. Most towns in northern Karnataka provided their residents with water for between 2 hours every two days to 2 hours once a week Both the Borrower and the Bank acknowledged that any reforms in the water sector would need to address six interrelated factors which accounted for this low level of service. They included: (a) diffused sector responsibility; (b) lack of accountability; (c) user charges that did not cover operational costs, stemming from the prevailing view that water should be a free good; (d) chronic lack of sector investment; (e) a non-transparent and complicated system of subsidies; and (f) lack of a regulatory framework On the basis of the above factors, the Borrower with Bank assistance designed a project that blended the needed sector reforms with complementary investments to improve water service levels in three ULBs in Northern Karnataka: Hubli Dharwad, Belgaum, and Gulbarga. It was also decided to demonstrate the feasibility of providing a continuous water supply (24X7) to consumers, which would be the first time such a service level would be provided to any town in India. To that end, the GoK selected five zones in the three project towns to pilot the 24X7 urban water supply (UWS). To sustain this level of service, the project also would aim to deliver broader water sector improvements. Thus, while upgrading service levels in the five zones (hereafter referred to as demonstration or demo zones), the project would address the chronically low levels of cost recovery by introducing better commercial practices. In a Government Order dated May 3, 2003, the GoK announced its decision to support the Karnataka Urban Water Sector Improvement Project (KUWASIP). 1.2 Original Project Development Objectives (PDO) and Key Indicators (as approved) The original project development objectives (PDO) were to: (a) launch Government of Karnataka's urban water sector reform process based on the Urban Drinking Water and Sanitation Policy Statement of GoK," and (b) improve urban water supply services in the participating urban local bodies (Hubli-Dharwad, Belgaum, and Gulbarga) and demonstrate that sustainable, efficient, and commercially-oriented service provision can be achieved. As defined in the PAD, the original seven key outcome indicators included: The reform base is established and initial reform activities are carried out. The ground for private sector participation is prepared as a realistic option for water and sanitation provision. Enabling legal, regulatory, and financing frameworks are established for the sector. Possibility of continuous water supply is demonstrated. Priority bottlenecks to improving quantity of water supply are solved. 1

14 Increased consumer awareness, commitment, and ownership for reform are attained. Capacity, institutional structures, and accountability for water and sanitation operations of the participating ULBs are improved. 1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and reasons/justification The PDOs and key indicators were not revised. 1.4 Main Beneficiaries The main beneficiaries of the sector reforms (Component A) would be the general urban population throughout the state of Karnataka totaling approximately 16.8 million (about 33% of the total population). The project s support for the sector reform program also would benefit the institutions involved in UWS delivery such as Karnataka Urban Water Supply and Drainage Board (KUWS&DB), Karnataka Urban Infrastructure Development Finance Corporation (KUIDFC), and Urban Local Bodies (ULBs) The investments in improved water supply services (Component B) were expected to benefit all water consumers in the 3 participating ULBs, totaling 1.8 million (2001 census). They included 940,000 people in Hubli-Dharwad, 425,000 in Belgaum, and 430,000 in Gulbarga. Among them, 7 to 14 percent or about 230,000 people living the in the 5 demonstration zones would benefit from the investment in the 24X7 water supply. 1.5 Original Components The project had three main components (see Annex 2 for more details) Component A: Sector Development and Technical Assistance. The objectives of this component were to: (a) assist GoK in finalizing its policy reform agenda and to carry out initial implementation of staged sector reforms; and (b) prepare a business model and PSP process for service provision in the three participating ULBs and other cities in Karnataka. The component included two main sub-components: Al. Policy Implementation and State Level Institutional Strengthening (US$0.89 million). This subcomponent would initiate implementation of the "Urban Drinking Water and Sanitation Policy Statement of GoK," and involve: (a) establishing and operationalizing the Karnataka State Urban Water and Sanitation Council (KSUWSC), (b) strengthening service delivery in ULBs, (c) developing the state water and sanitation information system (WASIS), (d) establishing water and sanitation sector investment and tariff frameworks, (e) reviewing and establishing legal and regulatory frameworks, and (f) preparing UWS Legislation. A2. Strengthening of Service Delivery and Preparation of Follow-on Project in the Three Participating ULBs (US$ 1.66 million). This subcomponent would finance: (a) citywide engineering feasibility studies, (b) transition plans, (c) other studies related to PPP preparation, and (d) a strategy to scale up this project to other cities in Karnataka Component B: Physical Investments. This component aimed to: (a) improve service provision and attain continuous water supply service in selected demonstration zones in three participating ULBs; (b) generate credibility in the overall program and learn lessons on the challenges faced in the demonstration zones for scaling up 2

15 continuous service provision in the entire ULBs; and (c) 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$27.63 million): This subcomponent would finance priority investments to increase the bulk water supply to the ULBs. B2. Works in the City Distribution Networks in all three ULBs (US$5.78 million): This subcomponent would finance short term improvements for most water-stressed users in each ULB. B3. Demonstration Projects (US$13.79 million): This subcomponent would demonstrate that a 24-hour continuous supply of water is achievable, and that this level of service has health, technical, operational, and commercial benefits Component C: Project Implementation (US$1.39 million). This component would finance incremental operational costs and studies related to project management and implementation, including short-term consultants for KUIDFC, preparation and establishment of a monitoring and evaluation system, financial management, PMU staff training, and project supervision. 1.6 Revised Components The components were not revised. 1.7 Other significant changes At the end of the project period, there was a reallocation of funds (US$6.3 million) from the works category to the goods, consultant services, and operating costs categories. The funds for the works were not needed because there were substantial cost savings achieved as a result of: (a) the delivery of the required service improvements without the need for any additional expenditures, and (b) the operator using cost effective HDPE pipes in the demo zones instead of the conventional more expensive pipes (combination of cast iron and PVC). In addition, unspent funds from the consultant services category 3(b) (US$150,000) and the front end fee (US$197,500) were reallocated to the operating costs category to cover the additional expenditures resulting from the loan extension The project closing date was extended 3 times due largely to the initial 13-month delay in effectiveness caused by delays in obtaining clearances, creating a special account, and meeting other start-up requirements, and the 17 month delay implementing the works in the demonstration zones. Table 1 summarizes the length and reasons for extension in each case. In addition, the grace period for claims of eligible expenses was extended from July 31, 2011 to September 30,

16 Table 1: Extensions of Closing Date and Reasons Description Time Period Reasons cited for extension Project Extension Request 1 Project Extension Request 2 Project Extension Request 3 Grace period Extension Request Loan closing date extended 6 months - from December 31, 2008 to June 30, Bank agreed to extend to December 2009 if legal covenants were met during this period. Loan closing date extended 9 months - from June 30, 2009 to March 31, Loan closing date extended 1 year - from March 31, 2010 to March 31, 2011 Two month extension of grace period from July 31, 2011 to September 30, 2011 To meet both legal covenants To compensate for loss of time due to delayed effectiveness (13 months) To compensate for 17 month delay implementing demo zone works To allow operator to manage the demo zones for the full 2-year period of operations in accordance with the performance- based contract To complete construction of a pipeline needed to improve the water supply in Gulbarga. To implement legal covenants related to establishment of Water Council and tariff frame work To complete civil works cited in the earlier request for extension and procurement and installation of bulk meters To scale up plans in the three towns To complete scaling up proposals/plans To implement WASIS; tariff framework; etc To complete Gulbarga pipe line work and bulk meters purchase and installation To complete additional two small works in Belgaum (feeder pipeline and dedicated power line) To complete payments for eligible expenses 2. Key Factors Affecting Implementation and Outcomes 2.1 Project Preparation, Design and Quality at Entry Strong Commitment. From the start of project preparation, there was strong political commitment to the project. Both the GoK and the institutions involved proceeded with a project design that would demonstrate the feasibility of a dramatic change in the water supply service, from an intermittent to continuous (24X7) supply. This level of service had never been tried before in India in a systematic manner Project Development Objective and Key Project Indicators. Although the wording of the PDO could have been better articulated, it had the correct focus on outcomes. The intention to launch the sector reform process was appropriate because it reflects moderate expectations for achieving sector reform. The focus on improving water supply services and demonstrating the commercial viability of providing a 24X7 water supply service also was appropriate because this level of service represented an innovative and much needed approach for India. However, some outcome indicators were not realistic (for example, establishing a new legal and regulatory framework) Project Components. The project components were well designed and aligned with the objectives. The institutional studies in component A, to be carried out in parallel with the investment implementation, covered the main reform issues in the State. Component B and its sub components were well planned, although the detailed means by 4

17 which the utility would switch from an intermittent to continuous water supply were not fully clarified by project appraisal Quality at Entry. The World Bank and KUIDFC designed this innovative project in consultation with all key stakeholders, including the ULBs and KUWS&DB. The project also employed high quality consultants to investigate the main strategic investment interventions that would be required for a continuous water supply in the demonstration zones. The design, which included city wide bulk water supply improvement programs, gave the local decision makers and communities the needed initial confidence in the project. Community consultation and social mediation was another important factor paving the way for ensuring public ownership and acceptance of new tariff requirements to ensure the successful implementation of Component B investments. The main weaknesses in the project design relate to use of key outcome indicators that were not realistic for measuring progress in meeting the first PDO Institutional Arrangements. The responsibility for project implementation was assigned to the KUIFDC which had extensive experience implementing externally financed urban projects. Other important state institutions such as KUWS&DB and the ULBs were also involved Safeguards and Project Risks. The project design was consistent with the Bank s safeguard policies. In terms of environmental impact, the project was classified as Category B (Partial Assessment). The project also triggered the policy on involuntary resettlement because some minor land acquisition was likely given the nature of the investment. The risk assessment at appraisal was highly relevant. The appropriate mitigation measures were put in place to address the high probability risks relating to sustainability, cost recovery, procurement difficulties, project ownership, and acceptance of a private operator. 2.2 Implementation Overall Project Implementation. The US$39.5 million loan for the KUWASIP was approved by the World Bank Board on April 4, 2004 and became effective on May 18, The project closed on March 31, 2011 with disbursement of US$36.49 million or 92%. Although it took almost a year for the GoI to meet all conditions for project effectiveness, the PMU in KUIDFC was fully prepared after project approval to start project implementatio and completed the procurement of consultants for Component A and an operator for Component B (demo zone). Overall, the implementation arrangements matched the project management needs and there were no major issues either in funding or procurement The infrastructure investments and measures to ensure sustainable operations were implemented as planned; all parties and heads of state remained committed to a 24X7 water supply. However, as is the case in many countries, sector reform is complex, and producing the multiple outputs from Component A was constrained by political instability in the state of Karnataka. During the project period, the Chief Minister (head of the state) changed five times and there were three different ruling parties. The Secretaries of the Urban and Finance ministries also changed. This was the most important factor responsible for delays in moving forward with reforms, and by the end of the project; the State had not authorized the KSUWSC or adopted the proposed legal and regulatory framework. Nonetheless, the team of experts on the ground, which 5

18 substituted for the KSUWSC, was successful in: (a) implementing the most urgently needed reforms such as the new tariffs and financing framework, and (b) engaging with the World Bank-supported Water and Sanitation Program India (WSP World Bank) in drafting a comprehensive road map for the sector reform building on the studies carried out under this project Under Component B, implementation of priority infrastructure did not face any challenges except procurement and routine construction related problems resulting in the delayed commissioning of continuous water supply in five demo-zones (the reason for seeking the project first extension). However, achieving the 24X7 water supplies under Component B3 (Demonstration Projects) faced several challenges: Enhanced bulk supply to improve water supply in towns and demo-zones was essential to demonstrate service level improvements, but delays in completing priority infrastructure works caused serious concerns. The complete distribution network in demo-zones needed to be replaced because the old pipes could not withstand the high pressures, and the operator initially faced resistance from KUWS&DB in accepting HDPE pipes for network. Due to public concerns relating to tariffs, especially in the demonstration zones, the ULBs delayed adopting volumetric tariffs endorsed by the state government. Volumetric billing and use of water meters caused tensions for the public and politicians. To respond, the ULBs used flat tariffs for six months while producing dummy volumetric billing so that the consumer can moderate their consumption, thus demonstrating that they are not insensitive to the poor. Regularizing unauthorized connections, issuing new connections to every slum dweller based on states pro-poor policy, and removing redundant public stand posts required extensive efforts to generate local political support. Social intermediation and communication had to be deployed strategically to drive the right messages at the right time Finally, with strong primary stakeholders and ULB participation, the project demonstrated the commercial viability of operations using a private operator. Also as result of the project, a new model for drawing on the skills of the private operators has been accepted as a necessary condition for all subsequent 24X7 projects in the state as well as the rest of the country, thus marking a major policy shift for the water supply sector Mid-Term Review. The mid-term review was carried out through several missions covering the period April to June The review noted the delays in commissioning the 24X7 water supply systems in four zones due to water shortages during the summer months. The review also highlighted that the Urban Development Department (UDD) still needed to meet important legal covenants to the adopt the investment framework and tariff policy as well as present a proposal to the state cabinet to establish the Water Council. However, at the time of the MTR, tariff plans had been finalized for the demo-zones and the State had announced its pro-poor policies in support of this project. The M&E system also had been designed and was about to be launched. 6

19 2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization The M&E framework was developed at appraisal, but the indicators were largely qualitative and not easily monitored. Moreover, the M&E system was delayed; at the time of the MTR, the system still had not been launched. Eventually, the M&E system was used to monitor performance of the contracts and to report results from the demo zones. However, the system proved to be redundant. The operator that managed the demo-zones was responsible for reporting on results/performance indicators established for Component B3 because he was paid against the targets established. These results also were monitored and certified by an independent third party auditor who was responsible for certifying payments for investment programs and the operator s fee. 2.4 Safeguard and Fiduciary Compliance Procurement. Supervision missions routinely monitored fiduciary compliance. Throughout the project period, the PIU did not report any complaints. Day to day issues were resolved amicably and expeditiously by the project authorities. This was likely due to the training provided to the staff responsible for procurement. Thus, overall procurement was rated satisfactory throughout the project period Financial Management. The project accounting system was set up and maintained throughout the project implementation period. The system worked well because it became part of the overall entity accounting system. The internal audit practice was set up for KUIFDC during the life of the project. In addition, project accounts were brought under the purview of the internal audit system and were reviewed on a timely basis. Nonetheless, late audit report submissions were a constant issue. The PMU submitted the FMRs and audit reports after the due dates; in some cases, they required recertification The lack of qualified accounting staff was another major concern. In one instance, for example, the accounting staff did not submit some of the rejected claims due to missing documentation, even though such approvals and documentation were subsequently obtained. In addition, the project carried out overdraws in two categories by more than 20%, but did not apply for reallocation until the last month of the project period. The PMU could have responded to this issue by requesting reallocations of loan proceeds in a timely manner. These issues could have been addressed by the client during the life of the project by establishing an effective and dedicated team for accounting and reporting. Such a team also could have made a significant contribution toward streamlining the reporting requirements and other financial functions. Overall, however, the PMU was able to meet the Bank s financial management requirements, and project performance in terms of financial management was rated Moderately Satisfactory Environmental Safeguards. Environmental safeguard management was carried out according to the project s Environmental Management Plan (EMP) prepared on the basis of a Limited Environmental Assessment (LEA) study carried out by independent consultants. In addition to the LEA and EMP, an Environmental Code of Practice (ECoP) was developed through the project for water supply projects in the state. The EMP was implemented by the Operator hired under Component B and was supervised by the KUIDFC s environmental engineers. In addition, the Bank s task team closely monitored overall environmental safeguard management performance, and the performance ratings were generally satisfactory over the entire project period. 7

20 2.4.5 Social Safeguards. OP 4.12 (Involuntary Resettlement) was triggered because the project required land acquisition in two project towns. The Government prepared a land acquisition and resettlement policy framework satisfactory to the Bank, and resettlement action plans (RAPs) were prepared for Hubli-Dharwar and Gulbarga. Later, the Gulbarga RAP was modified because of a decision was made to reroute the pipe lines on unencumbered Government land, thus bringing down the number of affected families. The total land acquisition for the project involved 8.41 hectares affecting 215 families, primarily at Hubli-Dharwar and Gulberga. The RAPs were satisfactorily implemented and there were no complaints recorded. 2.5 Post-completion Operation/Next Phase Although the GoK did not establish the KSUWSC as planned, the Urban Development Department (UDD) of GoK is continuing to advance the proposed UWS reform agenda since project closure. Although the citywide engineering feasibility studies and transition plans had a delayed start, the draft reports were available in October They are now being financed by the state government and are expected to provide a solid foundation for follow up investments in the water sector. In addition, the KUWS&DB, which implemented the project s priority investments, is continuing to operate these assets which are now integrated in the town water systems; not only in the demonstration zones Studies are in progress for scaling up the private sector model in several cities in Karnataka. KUIDFC also appointed an operator at the end of the initial two year operations period for the pilot zones in order to sustain the continuous water supply operations. The operator fee is being paid by the ULBs from the revenues generated from selling water in the demo zones, thus demonstrating the sustainability and commercial viability of the 24X7 operations. The ULBs are fully involved in the schemes in all of the zones, and KUIDFC is helping to manage the operator s contract. Thus, institutional arrangements are in place to sustain the 24X7 operations. 3. Assessment of Outcomes 3.1 Relevance of Objectives, Design and Implementation The PDOs were and continue to be relevant to the country context as suggested by its consistency with the Bank s current India country strategy. Specifically, the project supports: institutional clarity, fiscal and financial viability (strengthened capacity of ULBs and viable models for O&M), and services for the poor (reforms and investments that lead to systematic improvements in the access by poor households to services and assets). The PDOs are also aligned with the Jawaharlal Nehru National Urban Renewal Mission (JNNURM), the central government s flagship urban program The project design is path breaking not only for the state of Karnataka but for India as a whole. The project results set a new benchmark to which other states and ULBs now aspire. The project preparation studies were appropriate and guided the direction in which urban water sector reforms would be directed. The findings of these studies highlighted: the need for the specific investments and a transparent tariff framework; the importance of financial and operational sustainability; and opportunities 8

21 for the ULBs to involve the private sector. The design and implementation methodology to be used in transitioning to 24X7 water supplies was the first in India. This approach remains relevant and is being followed by numerous initiatives across the country Project implementation demonstrated a paradigm shift in UWS delivery because it demonstrated that 24X7 water supplies could be a reality in India. The project also highlighted the importance of good governance in the urban water sector by applying volumetric tariffs, water meters for all connections, monthly billing, water auditing; and the need for pro-poor policies by providing access house connections to all residents, and introducing affordable tariffs that promote water conservation Although it was envisaged during project design that the state would lead the reforms in UWS, decentralization put the onus on ULBs. In this regard, both the GoI and Bank are now supporting this agenda by strengthening ULBs, as reflected in the Bank s country strategy. Thus, while the original reform agenda continues to be relevant, it is now expected to be led by the ULBs and supported by the state. 3.2 Achievement of Project Development Objectives The project achieved it PDOs to (a) launch the GoK s urban water sector reform process based on the Urban Drinking Water and Sanitation Policy Statement of GoK, and (b) improve urban water supply services in the participating urban local bodies (Hubli-Dharwad, Belgaum, and Gulbarga) and demonstrate that sustainable, efficient, and commercially-oriented service provision can be achieved. The achievement of the PDOs is based on the project meeting or exceeding most of the seven outcome indicators The reform base is established and initial reform activities are carried out ((Indicator 1.1). The state implemented the three most important water supply sector reform activities: (a) establishing a tariff framework for the state, (b) defining the roles and framework for setting up the KSUWSC, and (c) establishing a water and sanitation information system (WASIS). Although the state did not put into operation the KSUWSC, in accordance with the financing agreement, an ad-hoc Committee was established and is fully functional in carrying out its role. The state is also implementing the next phase of reforms based on the WSP s review of the five technical studies supported by the project under Component A. These achievements mark the completion of the first stage of reforms and thus the objective of launching the state s urban water sector reform process is considered fully achieved The ground for private sector participation is prepared as a realistic option for water and sanitation provision (Indicator 1.2). The original target for this indicator was exceeded. Not only was the groundwork established for introducing private sector participation, but a private operator model was successfully implemented, and has become the standard practice for all 24X7 efforts in the state of Karnataka and across the country. In Karnataka only, for example, the state invited bids from private agencies to develop bulk water for both urban and rural areas in Bijapur and Chitradura districts on a design, build, operate (DBO) model, and several multi-village water supply schemes are now involving the private sector Enabling legal, regulatory, and financing frameworks are established for the sector (Indicator 1.3). A government order established the financing and tariff frameworks for the water supply sector in all ULBs. However, the decentralization agenda delayed finalization of the legal and regulatory frameworks. Although the 9

22 establishment of the regulatory and legal frameworks proved to be overly ambitious, the government is currently moving forward on this agenda through a program called Karnataka Urban Water and Sanitation Development Program (KUWSDP). Within the project period, therefore, this outcome was almost but not fully achieved Feasibility of continuous water supply is demonstrated (Indicator 2.1). This indicator was fully achieved and exceeded. The investments in the demonstration zones showed that it was possible to achieve a sustainable and commercially viable 24X7 water supply in India. This was demonstrated by: The successful installation of 238 kms of water distribution network including house connections and repair of customers water meters in all 5 demo-zones covering more than 25,640 new house connections. Continuous (24X7) water supply with good pressure in all 5 demo zones; Contracts completed for demo-zone network strengthening (necessary for 24X7) and the initial two-year period of operation (4/3/2008 to 3/31/2010). The second O&M contract for two additional years was awarded for the period 4/1/2010 to 3/31/2012. Billing based on a volumetric tariff introduced in all 5 demo zones, with a cost recovery rate of over 70% by the project end, taking into account the costs for bulk water delivery, O&M, operator remuneration, technical auditor fee, and debt service. The cost recovery rate was 100% if bulk water delivery and O&M alone are considered. Therefore, this can be considered as more than fully achieved Priority bottlenecks to improve quantity of water supply are solved (Indicator 2.2). The aim of the Priority Investments subcomponent was to increase the bulk water supply. As such, KUWS&DB implemented about 11 bulk water investments resulting in significant improvements in water supply delivery in the 3 participating ULBs, all of which had experienced severe water scarcity for many years. As a result of the project, the total water supply available in the 3 towns improved substantially: 27 MLD in Belgaum, 30 MLD in Gulbarga, and 11 MLD in Hubli-Dharwad. The investments were not designed to add additional production capacity but to be rolled out in a series of efficiency measures including reduced leakages, and rehabilitation or improvement of water production, transmission, and storage systems. The priority water works also resulted in energy savings and charges (for example, in Hubli, about Rs. 10 million per annum by changing the supply arrangement) Under the City Distribution Improvements sub-component, two investments in water supply were completed in Hubli-Dharwad. These works helped to provide a more equitable supply across the towns, and in that process, guaranteed supplies to the demozones. The other two towns were found not to need these investments (Gulbarga s distribution network had been remodeled by KUWS&DB and Belgaum has a more recent network still in good condition). This outcome is therefore fully achieved Increased consumer awareness, commitment, and ownership for reform are attained (Indicator 2.3). Due to the project s dramatic success in providing the 24X7 water supplies, the population in other parts of the project towns is now demanding the same level of service, as reported in the local and national media. In addition, there is strong political support for this initiative, which in turn, places pressure on the state government to scale up the 24X7 water supply service. In addition, the population in the 10

23 demo-zones showed their awareness of the 24X7 water supply service, commitment, and ownership by paying their water bills promptly. As shown in Table 2, moreover, the low consumption consumers (less than 15 KL a month), which represent the poorer sections in the demo-zones, pay water bills more promptly than those in the high water consumption and higher income categories. Payments exceeding 100% mean that the poor also are paying the backlog/ arrears accrued under intermittent supply regime. Thus, this outcome was fully achieved. Consumption slab (in KL per month) Table 2. Revenue Collection Efficiency (Demo-Zones): Hubli Dharwad Belgaum (South) Belgaum (North) Gulbarga % 85% 144% 106% 75% % 93% 120% 97% 85% % 78% 105% 95% 88% % 72% 102% 92% 79% >40 44% 49% 84% 86% 94% Overall efficiency 62% 71% 94% 88% 88% (Source: Analysis of Revenues, Operator Report, Sept 2010) Capacity, institutional structures, and accountability for water and sanitation operations of the participating ULBs are improved (Indicator 2.4). In the project areas, the ULBs are now fully responsible for UWS provision, and have appointed an operator to continue to manage water supply in the demo-zones when the initial contract period ends. In consultation with KUIDFC, the ULBs contracted out the operations for a second two year term, and are closely working with KUIDFC in preparing scaled up proposals. The ULBs are also collecting the water tariffs and paying the operator. They are now more accountable for services, maintaining the 24X7 supplies in the demo-zones, and are striving to secure funds to scale up the operations. The state agencies also gained capacity from these operations. Table 3 summarizes some of the key changes as a result of the ULB s improved capacity in water supply operations. More detailed performance indicators are presented in Annex 9. Indicators Water Supply service level Quantity of water supplied in demo zones Average pressure in the network Table 3 Performance Improvements Outputs from previous intermittent supply 2 hours in 3 Outputs from 24X7 supply 11 Outcomes days Continuous water supply Water supplied through network at all times MLD MLD Broke the myth that continuous water supply needs more bulk water supply. Reduction in leakages and water conservation led to reduced demand under the 24X7 regime. Less than 0.5 m head 17.7 m head Water is now delivered to the overhead tank in the second floor of a house directly.

24 Number of public fountains in demozones Loss of water (non Revenue Water) No need to pump water, thus saving energy charges at the household level All households in the demo zones now have water connections. No more drudgery in collection of water; or loss of employment due to long waiting hours at stand posts. About 50% About 7% Efficient delivery of water more revenue water meant increased water available for the consumer thus reducing the need to treat more water. This is a climate change friendly outcome. Operator provides dependable water services and responds to customers requests and concerns Customer service Non-existent 24X7 customer care center and ongoing public awareness program established 12 (Source: Operator s Progress Report) In addition to the investments and efforts on the part of the operator to optimize hardware systems, social mediation through intensive communications, IEC activities, use of pro-poor policies, and customer satisfaction surveys was a significant factor contributing to commercially viable operations. This was unheard of before in the country The project also had a major influence on the way UWS is viewed by the population in India, thus creating demand for a 24X7 supply across all urban areas in the nation. This is visible by the sheer number of teams visiting the demo-zones from various states consisting of elected representatives like Mayors, civil society representatives, engineers, NGOs, and donors. This is regarded as an outstanding achievement, paving the way for an effective Private Sector Participation in UWS sector for operators. Further, there has been a notable change in the way government agencies are currently performing, as seen in their more professional and consumer oriented approach to UWS service delivery. 3.3 Efficiency The Economic Rate of Return (ERR) for the project investments (Component B1 and B3) estimated at project completion is higher than the estimate at appraisal (29% compared to 16%, respectively), indicating that the economic benefits of the project investments are higher than initially expected. The main economic benefits from Priority Investments (Component B1) are the increase in the bulk supply of water and power savings. At completion, the estimated ERR for the Priority Investments is 30% is substantially higher than the ERR estimated at appraisal (18%) because the investments resulted in a larger increase in bulk water supply than estimated at appraisal. The main economic benefit from the introduction of the 24X7 supply (Component B3) is the reduction in coping costs associated with intermittent water supply. At completion the ERR for 24X7 water supply in the demonstration zones is 28% compared to 14% at appraisal because the coping costs associated with intermittent water supply were found to be substantially higher than those estimated at appraisal (see Annex 3).