Document of
                                          The World Bank

                                      FOR OFFICIAL USEONLY

                                                                              ReportNo: 27180-IN




                                 PROJECTAPPRAISAL DOCUMENT

                                                ONA

                                          PROPOSEDLOAN

                               INTHEAMOUNT OFUS$39.5MILLION

                                               TO THE

                                         REPUBLIC OF INDIA

                                               FORTHE

               KARNATAKAURBANWATER SECTORIMPROVEMENT PROJECT

                                            March 12, 2004




Energy & Infrastructure Sector Unit
South Asia Regional Office

This document has arestricted distributionandmay be usedby recipients only inthe performance of their
official duties. Its contents mav not otherwisebe disclosedwithout WorldBank authorization.

                                CURRENCYEQUIVALENTS
                          (Exchange Rate Effective March 09, 2004)

                                Currency Unit = Indian Rupees (Rs.)
                                       INR1 = US$0.022
                                       US$1 = INR45.24

                                       FISCAL YEAR
                                      April 1 -- March31

                            ABBREVIATIONS AND ACRONYMS

A C A      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 o f Economic Affairs
DffD       Department for InternationalDevelopment
DMA        Department o fMunicipal Administration
ECOP       Environmental Codes o f Practice
EMP        Environmental Management Plan
FMR        Financial Management Reports
GO         Government Order
GO1        Govemment o f India
GoK        Government o f Kamataka
IRR        Internal Rate o f Return
KPTCLKamataka Power Transmission CorporationLimited
KUIDFC     Kamataka Urban InfrastructureDevelopment & Finance Corporation
KSUWSC     Kamataka State Urban Water Supply Council
KUWSDB     Kamataka UrbanWater Supply and Drainage Board
LEA        Limited EnvironmentalAssessment
M&E        Monitoring & Evaluation
NGO        Non Governmental Organization
NPV        Net Present Value
NRW        NonRevenue Water
oc         Operator Consultant
O&M        Operation and Maintenance
P M U      Project ManagementUnit
PPP        Public Private Partnership
PSP        Private Sector Participation
SEMF       Social and EnvironmentalManagement Framework
SHP        Sanitation and Hygiene Promotion
swc        State Water Council
TA         Technical Assistance
UDD        Urban Development Department

                                                          FOROFFICIAL USEONLY




   UGD       Underground Drainage
   ULB       Urban Local Bodies
   U SAID    United States Agency for InternationalDevelopment
   U W S     UrbanWater Sector
   WASIS     Water and Sanitation Information System
   WSS       Water Supply and Sanitation
   W&S       Water and Sanitation
   WSP-SA    Water and SanitationProgram South Asia
                                           -




                               Vice President:     Praful C. Pate1
                   Country ManagedDirector:        Michael F.Carter
                    Sector ManagerDirector:        Sonia Hammam
             Task Team Leader/Task Manager:        Oscar E.Alvarado/Christophe Bosch




This documenthas a restricteddistributionandmay be used by recipients only in
the performance of their official duties. I t s contents may not be otherwise disclosed
without World Bank authorization.


                                                 INDIA
             KARNATAKA URBANWATER SECTORIMPROVEMENT PROJECT


                                              CONTENTS




A. ProjectDevelopment Objective                                                        Page

   1. Project development objective                                                      3
   2. Key performance indicators                                                         3

B. Strategic Context

   1. Sector-related Country Assistance Strategy (CAS) goal supported bythe project      4
   2. Main sector issues and Government strategy                                         4
   3. Sector issues to be addressed by the project and strategic choices                 6

C. Project Description Summary

   1. Project components                                                                 6
   2. Key policy and institutionalreforms supported by the project                        9
   3. Benefits and target population                                                      9
   4. Institutional and implementation arrangements                                      10

D.ProjectRationale

   1. Project alternatives considered andreasons for rejection                           10
   2. Major relatedprojects financed by the Bank and/or other development agencies       11
   3. Lessons learned and reflected inthe project design                                 12
   4. Indications o fborrower commitment and ownership                                   13
   5. Value added o f Bank support inthis project                                        13

E. Summary Project Analysis

   1. Economic                                                                           13
   2. Financial                                                                          15
   3. Technical                                                                          17
   4. Institutional                                                                      18
   5. Environmental                                                                      20
   6. Social                                                                             22
   7. Safeguard Policies                                                                 25

F.Sustainabilityand Risks

   1. Sustainability                                                                     26
   2. Critical risks                                                                     26

  3. Possible controversial aspects                                                      27


G. Main Conditions

  1. Effectiveness Condition                                                             27
  2. Other                                                                               28

H. Readinessfor Implementation                                                           28

I.CompliancewithBankPolicies                                                             29



Annexes

Annex 1: Project Design Summary                                                          30
Annex 2: DetailedProject Description                                                     34
Annex 3: EstimatedProject Costs                                                          45
Annex 4: Cost Benefit Analysis Summary                                                   46
Annex 5: Financial Summary for Revenue-Earning Project Entities, or Financial Summary    52
Annex 6: (A) Procurement Arrangements                                                    65
          (B) FinancialManagement andDisbursementArrangements                            74
Annex 7: ProjectProcessing Schedule                                                      83
Annex 8: Documents inthe Project File                                                    84
Annex 9: Statement of Loans and Credits                                                  85
Annex 10: Country at a Glance                                                            89
Annex 11: Photographs of existingWater andDrainage Services inParticipatingCities        91
Annex 12: Summary o f EnvironmentalAssessments                                           92
Annex 13: Urban Water and Sanitation Sector Policy inKarnataka                           103




MWS)
IBRD32942: Karnataka- Location ofThree ParticipatingUrbanLocalBodies.

                                                    INDIA
                                Kamataka UrbanWater Sector Improvement Project
                                     ProjectAppraisalDocument
                                          SouthAsia Regional Office
                                                    SASE1

late: March 12,2004                                    Team Leader: Oscar E.Alvarado
Sector ManagerDirector: Sonia Hammam                   Sector(s): Water supply (95%), Sub-national government
Zountry ManagedDirector: Michael F. Carter             administration (5%)
'roject ID: PO82510                                    Theme(s): Other urban development (P), Access to urban
Lending Instrument: Specific Investment Loan (SIL)     ~ r v i c e Sfor 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
BorrowerRationalefor Choice of Loan Terms Available on File:            Yes
ProposedTerms (IBRD): Variable-Spread Loan (VSL)
Grace period (years): 5                              Years to maturity:20
Commitment fee: 0.75%                                Front end fee (FEF) on Bank loan: 1.00%
                                                     Pavmentfor FEF: Catitalize from Loan Proceeds



[BRD                                                                       35.41               4.09          39.50
rotal:                                                                     47.44               4.09          51.53

1Exdected effectiveness date: 0513112004 Expected closina date: 1213112008    I




                                                  - 2 -

A. Project Development Objective

1. Projectdevelopment objective: (see Annex 1)
The Vision: The long-term vision for the urban water sector (UWS) inthe State o f Kamataka is
to tum its performance into highquality and sustainable services inall its urban localbodies
(ULBs).The strategy to achieve this vision is to carryout aphasedprogram, including incremental
steps towards full service coverage andhigh-quality service provision inan efficient and
fmancially sustainable fashion.

Inthe medium-term, the strategy envisagesachievingwater 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). Inthe short
term, a state level sector policy reformwould be implementedand at the local level,
demonstration cities would be selected to participate intesting such initial reforms.

Project Development Objective: The main objectives o f the proposedproject are to: (a) launch
Government o f Karnataka (GoK)'s UWSreformprocess based on the "Urban Drinking Water
and SanitationPolicy Statement of GoK" (approved by the cabinet o f GoK inMay 2003); and (b)
improve U W S services inthe participatingULBs(Hubli-Dhanvad, Belgaum, and Gulbarga) and
demonstrate that sustainable, efficient, and commercially-oriented service provision can be
achieved. The detailed objectives o f each project component are described insection C.

2. Key performance indicators: (see Annex 1)
Component A. The progress inGoK's sector reformprocess will be measured through the
following:
At the State Level:
0   Establishment and operationalization o f the Kamataka State UrbanWater SupplyCouncil
    (KSUWSC).
0   Implementationo f capacity strengthening activities to support the ULB level reform.
0   Development o f the State Water and SanitationInformation System (WASIS).
0   Establishment o f urban WSS sector investments and tariff frameworks.
0   Establishment o f legal and regulatory framework.
0   Preparation o f WSS legislation.
At the ULBLevel:
0   Completionof city-wide engineering feasibility studies.
0   Implementation o f transition plans, including ringfencing o f WSS accounts and improvements
    inbillingandcollectionsystem.
0   Definition o f the scope and scale of follow-on Private Sector Participation (PSP) and
    scaling-up inother ULBs.

Component B.Improvement inservices will be measured against the following:
For each ULB:
0   Improved overall water supply availability and quality resulting from priority investments for
    bulkwater supplies anddistribution network improvements.



                                                 - 3 -

0   Implementation o f the social awarenessand communication strategy.
For each demonstration zone:
0   Volumetric tariff adopted accordingto agreedprinciples inorder to recover no less than 50
    percent o f Operation and Maintenance (O&M) costs at initial stage and no less than 80
    percent by the end o f the Project.
0   Weighed average o f 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 monitoredthrough testinghampling (5 percent weight);
(3) supply to the zone to be metered both inrespect to flow and pressure and continuous records
    maintained (5 percent weight);
(4) physical losses within the DemonstrationZone not to exceed 10 liters per connection per hour
    based on average pressure within the Demonstration Zone o f 10 meters, adjusted
    proportionately inrespect to the actual average zone pressure (10 percent weight);
(5) minimumpressure 6 meters (i.e. measured at the customer meter of the property connection
    receiving the lowest pressure inthe period 6 a.m. to 10p.m.) (10 percent weight);
(6) 100percent metering o f property connections (individual and shared), standpipes and feeds to
    street storage tanks, adoption o f volumetric tariff structure (20 percent weight);
(7) billing/collection rate to exceed 70 percent (10 percent weight); and
(8) high level o f 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: : 25057-IN Date of latest CAS discussion: December 5, 2002

The proposedproject i s 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
inthe UWSas aprogrampriority andrecognizes that provision ofadequateinfrastructure would
be critical inpromoting private sector growth. The project is also consistent with India's Tenth
Five Year Plan, which recognizes that infrastructure bottleneckshave become a major constraint
on growth and, therefore, poverty alleviation. The Bank's plan to support the reform-minded
states through programmatic interventions i s also consistent with the project approach which
envisages a long-term involvement inthe U W S inthe state o f Karnataka.

Sustainable access to WSS services i s a highpriority that is now well-recognized inthe
international development agenda. Access to safe water has been declared as a basic human right
by the UnitedNations and is widely recognizedto directly contribute to poverty alleviation, the
main focus o f the CAS. The project would also contribute to achieving the Millennium
Development Goals, which emphasizes safe and sustainable drinkingwater and sanitation as well
as their important health impacts.

2. Main sector issues and Government strategy:
Key pervasive issues that affect the UWS inKarnataka are discussed below:



                                                 - 4 -

Gaps in Sector Performance: The sector suffers from some chronic inefficiencies, including
unreliable service quality, and limitedcoverage. At the technical level, problems include
sub-optimal resource allocation, mismatchedcapacity investments, and poor (O&M) practices.
These are compounded by uneconomic tariff structure/levels, poor collection efficiency, and high
levels o f leakage and non-revenue water. While sector information systems are deficient, service
coverage with authorizedconnections inall three participating ULBs is estimated to be less than
50 percent. Inaddition, the state experienced severe drought conditions duringthe summer o f
2002.

Inadequate Institutional Framework: UrbanWSS provision inthe state o f Karnataka is the
responsibility o f 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 o f the tariffs, and
capital development works etc. are fragmented among different departments withinthe ULBs and
outside agencies like KUWSDB (Kamataka UrbanWater 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 separatedfrom other municipal services and there i s limitedcapacity to track
costs and capital expenditures accurately at the ULB level, the magnitude o f deficits incurredby
the water sector i s difficult to assess. However, studies indicate that all ULBs show operating
losses, and normally the tariffs only cover one-third or less o f O&M costs. The increasingdeficits
encountered by the ULBs are coveredby general revenues. Lack o f funds also leads to deficient
services (maintenance neglect, only a few hours per week o f service). The amount and sources o f
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 inhibitPSP inthe sector: low tariffs that
lead to poor cost recovery; lack o f a credible regulatory framework; and lack o f a legal
framework permissive to PSP. A more conducive environment requires policy and legal changes
inthe institutional, regulatory, andlegalframeworks.

Government Strategy       -- Karnataka's   Fiscal Reform Program and Sectoral Reforms: GoK
has begun a wide-ranging reformprogram, 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 o f 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 inthe state,
restructuring government functions for more effective management, and revising water tariffs to
meet O&M needs. GoK has already embarkedon this process through creating the "Urban
Drinking Water and SanitationPolicy Statement" that covers the key reform elements for the
sector (Annex 13) and through preparing a strategy and action plan for the implementationo f this
policy statement. Inaddition, GoK has announced plans to increase PPPs inthe sector and in
December 2001, increased water tariffs inBangalore by 50 percent, the first such increase infive



                                                  - 5 -

years. These developments are good indications o f GoK's commitment to carry out sector reform
and to reduce the fiscal burdenthat the sector imposes on state finances.

3. Sector issues to be addressed by the project and strategic choices:
The proposedproject would:
   0    support GoK's overall U W S reform process, which envisages the creation o f sound
        institutional and regulatory frameworks and an enabling environment for PSP;
   0    improve U W S service quality inthe three participating ULBs;
   0    develop reliable mechanisms to measure sector performance interms o f quantity and
        continuity o f service delivery, efficiency improvements, tariff levels, cost recovery, as well
        as progress made inreform; and
   0    facilitate capacity buildingand financial management at boththe state and local level.

C. Project DescriptionSummary
1. Projectcomponents (see Annex 2 for adetaileddescriptionandAnnex 3 for adetailedcostbreakdown):
The project comprises three components: (A) Sector Development and Technical Assistance; (B)
Physical Investmentsinthree ULBsto improve their water supply services and demonstrate the
feasibility o f continuous safe water supply inpilot areas; and (C) Project Implementation Support.




 A. SectorDevelopmentandTechnical Assistance                                   0.0                     0.0
 Al. Policy Implementationand StateLevel Institutional           0.89          1.7        0.80         2.0
 Strengthening
 A2. Strengthening of Service Delivery andPreparationof          1.66          3.2        1.50         3.8
 follow-on Project inthree ParticipatingULBs
 B.PhysicalInvestments                                                         0.0                     0.0
 B1. Priority Investments                                       27.63         53.6       19.53       49.4
 B2. Works inCity Distribution Networks inall three ULBs         5.77         11.2        4.62        11.7
 B3. DemonstrationProjects                                       13.79        26.8       11.61       29.4
 C. ProjectImplementationSupport                                 1.39          2.7        1.04         2.6
                                         Total Project Costs    51.13         99.2       39.10       99.0
                                                Front-endfee     0.40          0.8        0.40         1.o
                                  Total Financing Required      51.53       100.0        39.50      100.0

ComponentA. Sector Development and TechnicalAssistance
The objectives of this component are to: (i) GoK infinalizing its policy reformagenda and
                                               assist
to carry out initial implementation steps of staged sector reforms; and to (ii)  prepare business
model and PSP process for service provision inthe three participating ULB and other cities in
Karnataka.

Al. Policy Implementationand State Level InstitutionalStrengthening (US%0.89million)
The following activities will be carried out to initiate the implementationo fthe "Urban Drinking
Water and SanitationPolicy Statement of GoK".


                                                   - 6 -

a       Establishment and operationalizationof KSUWSC: The Kamataka State UrbanWater
and Sanitation Council (KSUWSC) is envisaged to be established by the end o f 2004, to oversee
and be responsible for policy definition andimplementation, planning andprogramming, technical
assistance, development o f sector information system, norms, and certain regulatory functions for
the UWS inKarnataka. Urban Development Department (UDD) o f GoK will manage the sector
reformcomponent through its policy/technical cell housed within KUIDFC untilthe KSUWSC is
operational.

b       Strengtheningof ServiceDelivery in ULBs: The following capacity strengthening activities
will be carried out to support the ULBlevel reforminthe state: (i)    institutional options for service
provision; (ii)technical assistance strategy and action plan to enable UWS reformat the ULB
level; (iii)revenue collection action plan; and (iv) public awarenessand communicationstrategy.

c       Developmentof the WASIS: This activity would assist GoK indesigning a sector
ManagementInformation System (MIS) and insupporting the actual setuphnitial implementation
phase, and consist of: (i)task A: development o f an information system, collection of data from all
ULBs,training ofthe 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 Investmentand Tariff Frameworks: This activity would
assist GoK inbetter 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 o f 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 pricingpolicies,
taking into account the regulatory, financial, and social aspects o f service delivery.

e       Review and establishment of legal and regulatoryframework: This activity would
assist GoK indesigning the regulation strategy, legal basis and action plan, and starting up o f
essential but basic regulatory functions, including pricing, service accounting and benchmarking.

f       Preparation of UWSLegislation: This study would assess the current legal framework
for the sector, recommendnecessary changes to the existing legislation, and prepare the
corresponding legislative (or insome cases executive) proposal.

A2. Strengtheningof service delivery and preparation of follow-on project inthe three
participating ULBs (US$ 1.66 million)

a       City-wideEngineering 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
businessplans would also be developed, including analysis o f fmancial feasibility and strategic
plan, and proposals for the selection o f alternative institutional modalities and PPP options for
each city;




                                                  - 7 -

b        Transitionplans: This study would help assure a smooth transition from the Operator
Consultant (OC) to the subsequent operator, and include ringfencing o f WSS accounts,
improvements inbilling and collection system for WSS tariffs, and designingo f new roles and
functions at the ULB levels;


C        Other studies related to thePPPpreparation: 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 businessplans, and other studies required to define
institutionalmodalities for service delivery inabout four or five medium-sized cities inKarnataka.

ComponentB. PhysicalInvestments
The objectives o f this component are to: (i) the service provision and attain continuous
                                               improve
service inselected demonstration zones <f the three participatingULBs; (ii)    generate credibility in
the overall program and learnlessons on the challenges faced inthe demonstrationzones for
scaling up continuous service provision inthe entire ULBs;and (iii)   simultaneously improve the
efficiency o f bulk supply operations and distributionnetworks and attain initial improvements in
water service provision to all the residents o f the ULBs.

B1. PriorityInvestments (US$ 27.63 million): PriorityInvestments are plannedto increase the
bulksupplyto the ULBs,andthe basic works include reducing leakage from transmission mains
by rehabilitationheplacement ofpipes, augmenting and extendingthe transmission mains, feeder
mains to the reservoirs, replacingpumps and provision o f bulkflow meters at critical points on
transmission system. This subcomponent also includes technical audits and thirdparty inspection
for the priority investments, and a R&R Impact evaluation study.

B2. Works in City DistributionNetworksin all three ULBs (US$5.78 million): This
subcomponent would provide short term improvements to majority o f the most water-stressed
users ineach ULB.Inparticular, the hours o f 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 inthe rest o f the
city will also be improved and social acceptanceof the demonstration projects will be gained.


that 24-hour continuous supply i s achievable and to show the benefits -- health, technical,
B3. DemonstrationProjects (US$ 13.79 million): This subcomponent envisages to demonstrate

operational and commercial -- it brings. The four demonstrationprojects (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 o f the system and fed from a single point; system component
upgrades to permit continuous, pressurizedsupply; identificationo f supply and underground
drainage "bottlenecks" and ad hoc low-cost systemimprovements. An Operator Consultant (OC)
will be hiredto for about three years to finalize the works, designthe 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 ontheir performance, the supervision o f the OC contract, and technical audits. This



                                                  - 8 -

subcomponent will also facilitate: (i)    awareness creation and communicationbetween and across
stakeholders within and outside the demo zone; (ii)      formation of local level forums for
stakeholder interactions; (iii)  customer education on proper use o f 24/7 supply systems and
healthhygiene behavior, and (iv) participatory monitoring of outcomes inthe demo zones.

Component C.ProjectImplementation(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
KUIDFCfor the durationo fthe project; (ii)        preparationand establishment of a monitoring and
evaluation system; (iii)   costs related to the financial management systems within KUIDFC; (iv)
training for staff o f the Project Management Unit o f KUIDFC; and (v) incremental operating cost
at KUIDFC, including supervision costs.

2. Key policy andinstitutionalreformssupported by the project:
As described above inproject description, the KSUWSC will be established to articulate all policy
and institutional elements requiredto 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.Inaddition, the existing legal and regulatory framework
will be reviewed and UWSlegislationbe prepared. With regards to sector financing, an integrated
WSS sector financial policy will be established anda fi-amework for WSS tariffs will be
developed.

The project would also support ULB level reformthrough exploring institutional options for
service delivery, developing action plans to improve revenue and collection performance, and
implementing the public awarenessand communication strategy.

3. Benefitsandtarget population:
The target beneficiaries o fthe sector development and technical assistancecomponent would be
the general urbanpopulation inKamataka, totaling approximately 16.8 million (approximately 33
percent o f the state population o f 53 million). The general physical investment componentwould
benefit all water consumers inthe three participatingULBs,totaling 1.8 million as o f 2001
(940,000 inHubli-Dhanvad, 425,000 inBelgaum, and 430,000 inGulbarga). The demonstration
project would target the people inthe demonstration zones, which correspond to 7 - 14 percent o f
the population ineach city, totaling about 230,000.

Immediatebenefits outside the three participating ULBswill be mostly relatedto better fund
allocation for investmentand some improvement inUWS service performance. Inthe long term, it
i s envisaged that the reform measures taken under this project would be the driving force for the
ULBsinKamataka to become the real catalyst to turnaroundthe current situation ofgeneralized
poor performance into sustainable highquality services for all.

The major benefits inthe three ULBswould include; increasedhours (currently one to two hours
supply every two days inBelgaum and Gulbarga, and one to two hours supply every three to five
days inHubli-Dhanvad) and more equitable water supply; higher water pressure which would
make the current practice o fpumpingdirectly from the mains unnecessary; and customer


                                                    - 9 -

satisfaction which provides incentives for the ULBsto provide sustainable service. These benefits
would leadto broader access to sanitation facilities; higher standards o f cleanliness, and reduced
pollution. Broader access to adequatewater supply on a reliable basis would also benefit
industrial consumption thus support economic development. The investments inthe three ULBs
would have a demonstration effect and serve as a stepping stone to scalingup reform. A
successful implementation o f the project would open the door to widespread and quicker sector
reform inKamataka, and quite probably inother Indianstates. See also cost benefits analysis in
Annex 4.

4. Institutional and implementation arrangements:
KUIDFC will be the implementation agency for this project. Other important participants include:
(i) whichhasconstitutedaState-levelCommitteeforoverallsteeringoftheproject
   GoK,
throughout its cycle; (ii)  GoK's UDDwhich will drive and manage the sector reform component
(AI) through its policy/technical cell housedwithin KUIDFC untilthe proposedKSUWSCis
operational; (iii)KUWSDB, which will act as an agent ofKUIDFCfor the design, technical
aspects o f procurement, and constructiodsupervision of the priority investments (component B1);
and (iv) the ULBswhich, as mainbeneficiaries, will follow-up, participate, and facilitate
implementationo f components A2, BI,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 inproject execution, and
the Bank. See detailed implementationarrangements for each component inAnnex 2 table.

To assure clear responsibilities and rules o f the game, "Guidelines for Project Implementation"
will be issuedby GoK inthe form o f a Government Order (GO), specifyingthe roles and
responsibilities o f all project participants. This GO will be back-to-back with the OC's contract
with KUIDFC, KUWSDBand the ULBs.The GO is a condition for project effectiveness, and
detailed insection G.1.

D. Project Rationale
1. Projectalternatives considered andreasons for rejection:
The current project concept has evolved from previous proposedapproaches to UWS reform and
developments inKarnataka. The main alternatives considered are described below.

Combination of Urban Management and WSS: The original project concept envisaged covering
bothurbanmanagement and WSS under one project. Ths approach was too complex and
created confusion for GoK on the nature o f policy and institutional reforms required inthe sector,
which requires separate dynamics. Therefore, the scope was revisedto separate the two sectors
and to develop two stand-alone projects.

Management Contractfor I 3 ULBs: The stand-alone water project was initially developedto
introduce PSP through a management contract for 13 ULBsselected by the GoK. Since most o f



                                                   -10-

the ULBs are scattered over more than two-thirds o f Kamataka, clustering water operations to
attract private operators was proposed, However, the feasibility o f such a complex institutional
arrangement was questionedand the scope was later narrowedto fewer ULBs and a step-wise
PSP approach.

Adjustable Program Loan (APL): Reviewing the nature o freforms 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 i s at an early stage o f developing an agreed action plan to implement
reform inthe sector, the definition o f milestones and triggers for subsequent loans was
problematic, and thus this approach was rejected.

Stand-aloneInvestment and TechnicalAssistance: Finally, it was decidedthat 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 duringthe implementation o f 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 i s envisaged.

2. Major relatedprojectsfinanced by the Bankand/orother development agencies(completed,
ongoingandplanned).
                                                                            Latest Supervision
              Sector Issue                           Project                   (PSR) Ratings
                                                                        (Bank-finance wojects only)
                                                                        Implementation
 Bank-financed                                                           Progress (IP)  Objectiie (DO)

 Improvement o f state urban            Karnataka Urban Sector
 governance/decentralizationand         Reform Project (under
 soundness o f municipal finance and    preparation)
 accountability
 Provisiono f water supply, sanitation  Andhra PradeshUrbanReform
 andfloodprotection                     &MunicipalServicesProject
                                        (underpreparation)
 Provisiono f water supply and          DelhiWater Supplyand
 sanitation services                    Sanitation Project (under
                                        preparation)
 Improvement of UrbanManagement         TamilNaduUrban                                       S
 Capacity and Support Basic Urban       Development Project I(Cr.
 Service Investment                     18234" completed September
                                        30, 1997)
 Provisiono f water supply and          Hyderabad Water Supply and                           S
 sanitation system                      Sanitation Project (Cr.
                                        2115-WLn. 3181-IN,
                                        completed March 31, 1998)
 Promotiono fPrivate Infrastructure     Private Infrastructure Finance                       S
 Investment                             (IL&FS) Project Ln.3992-IN
                                        completed June 30,2003
 Provisiono f water supply andwaste     Andhra PradeshDistrict                               S


                                                 - 11-

 disposal systems                          PovertyInitiatives Project (Ln.
                                           33324" ongoing)
 Provisionof sewerage disposal services BombaySewage Disposal
                                           Project (Cr.27563lLn. 3923-IN,
                                           completedDecember31,2003)
 Provision of water supply and sewerage Madras Water Supply ProjectI1
                                           (Ln.39074"Ln. 39076-IN,
                                           ongoing)
 Improvementof UrbanManagement             Tamil NaduUrban
 Capacity and Support Basic Urban          DevelopmentProjectI1(Ln.
 Service Investment                        44784" ongoing)
Other development agencies
 AsianDevelopmentBank                      Karnataka Urban Development
                                           Project (ongoing)
                                           Karnataka Urban Development
                                           andCoastal Environment
                                           ManagementProject(ongoing)
                                           RajasthanUrban Infrastructure
                                           Development Project(ongoing)
 USAID                                     FinancialInstitutionsReform
                                            andExpansionProject(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 urbanwater supply projects inthe past 10 years, all o f them inbig
cities, and since 1996there have beenno new projects inthe sector. Past Bank supported projects
inIndia's UWShave provento have sustainability problemslargely dueto: (i) ofalong-term     lack
vision and of a step-wise approach considered to tackle the complex sector; (ii)             uneven
improvements inthe sector policy and institutional reformaspects o f the project; (iii) of         lack
adequate beneficiary involvement inthe project cycle; and (iv) predisposition o f UWS institutions
towards construction rather than creationo f an enabling environment for improved service
delivery.Inaddition to the lessons learned from previous Bank projects, key elements from the
economic and sector work duringthe fiscal years 2001 through 2003, including the Bank's urban
water strategy, capacity buildingand learning initiative, and the Bank's rules o f engagement, have
been incorporated inthe project design. Given the project's emphasis on future private sector
involvement ,lessons learned from an Operations Evaluation Departmentreview, "Anevaluation
o f private sector participation inwater supply and sanitationunder projects assisted by the World
Bank" have also been incorporated inthe project design. Basedon these lessons, the key
principles o f project design agreedwith 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;
(ii)    Municipal-level reform, including ring-fencing o f WSS operations and adoption o f a


                                                      -12-

         computerizedbilling and collection system, will be implementedto ensure that sufficient
         capacity is built at the local level to manage WSS operations inpreparingfor future PSP;
(iii)    The project will start with a small-scale demonstration project to ensure that up-front
         reforms are undertakenbefore major expansion and management transformation take
         place; and
(iv)     A communication strategy will be developed andthe local-level planningprocesseswould
         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 inother federal countries such as Mexico and Brazil.

4. Indicationsof borrower commitmentand ownership:
GoK's commitment to reformis high, as evidenced by actions already taken. Despite the delays
experienced inconsideringearlier concepts o f the project, GoK has remained keen on working
with the Bank based on the new concept. GoK has also made PSP inthe urbanwater sector as
one o f its priorities and it i s fully aware that a significant amount o f upstream work i s necessary
for successful PSP schemes. Demonstratedinterest and commitment to reform include issuance of
 the "Urban Drinking Water and Sanitation Policy Statement of GoK" and preparationo f a
strategy and action plan for implementation. Commitment and ownership o f the participating
ULBsappearsto behigh, as demonstratedbythe activeparticipationofall Mayors, Municipal
Commissioners, and senior engineers from all the ULBsthroughout project preparation.

5. Value added of Banksupport inthis project:
Since the Bank has a long history o f involvement in India's water sector, the lessons learned will
be put to good use inthe proposedproject. Inaddition, the Bank can make available to the state
its considerable knowledge on international experience and best practices inthe sector.

GO1has requested the Bank to assist ina few select states inoperationalizing sector reforms
mandated under the 74th Constitutional Amendment. Itbelieves the Bank will provide a strong
demonstration effect nationwide. Furthermore, given the long-term nature o f implementing
institutional reform statewide and the sizeable investments required to meet the needs inthis
sector, the Bank i s uniquely positioned to support boththe reformprocess and the potential future
investments associatedwith it.

Other agencies active inthe sector include the United States Agency for International
Development (USAID),the Asian DevelopmentBank (ADB), and the Department for
International Development (DffD). Lessons leamed from the institutional framework adopted by
ADB will be incorporated into the project.

E. Summary ProjectAnalysis (Detailed assessments are inthe projectfile, see Annex 8)
1. Economic(see Annex 4):




                                                     - 13-

   Cost benefit       NPV=US$4.4million;ERR= 16 % (see Annex 4)
0 Costeffectiveness
0 Other(specify)
An economic analysis has beencarriedout 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
incrementalcosts and benefits. Cost effectiveness criteria has also been applied to all major
sub-components as part o f 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 duringproject preparation.

Inthe base scenario, the net present value ofthe project is Rs.202.7 million (US$4.4 million).
The internal rate o f return i s 16 percent, above the discount rate o f 12percent. The findings are
detailed inthe table below:

                                                    I NPV  IRs.Million)   I   IRR

    Belgaum                                                            8.3   1           13%
    Guibarga                                                          54.7               16%
    Hubli-Dhanvad                                                    114.0               21%
 Demonstration zones (coping costs approach)                          25.7               14%
 TOTAL                                                               202.7               16%



For the Investment Component, the objective was to assess the costs and benefits of the priority
investments and o f improving service levels inthe demonstration zones from the current
extremely low baseline up to continuous supply levels. To this end, the analysis has established
baseline indicators wherever possible includingprivate coping costs, costs to the utility, and
externalities. Usingthe revealed preference approach, the analysis has attemptedto estimate
benefits such as reduction inprivate coping costs and system efficiency gains, and contrast them
to the incremental investment and O&M costs requiredto improve service levels. Benefits have
also been assessedusingthe stated preference approach, drawing uponthe willingness-to-pay
information gathered as part o f the social assessment.

Economic analysis will also be carried out duringproject implementation on the TA component.
The proposedprivate sector contract and associated investmentsto improve the UWS situation
on a city-wide basis will also be assessedusing the data generated inthe demonstrationzones.
The analysis will assist in setting boththe performancetargets (e.g., non-revenue water (NRW)
reduction, energy savings) and the investment levels requiredto achieve the economic and
financial viability o f 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 o f investing inwastewater collection and
treatment.

Although the Social Assessment study has provided indications o f coping costs andwillingness to
pay, a more detaileddemand assessment and analysis needs to be carried out during


                                                  -14-

implementation, to establish a baseline against which improvements would be measured at regular
intervals. The demand assessment (to be funded by the Water and SanitationProgram- South
Asia) for the three ULBs will analyze the `demandside 'perspectives, including consumer
preferences and affordability aspects for 24/7 and other improvements inwater 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
o f 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" highlightsthe
need for Monitoring and Evaluation (M&E) as well as reporting arrangements, at present there is
no customer interface and no monitoring system inplace. Recognizing the need to supply urban
water services inaccordance 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 o f a M&E
template will be the first step ininstitutionalizingcustomer surveys as instruments of public
accountability and the information will be useful as inputs into operations and planning process,
including the design o f effective tariff policies. A pilot program will be carried out over a period
o f six months, and lessonsto be incorporatedfor a broader roll out. Alternate institutional
arrangements, including local institutions (colleges, schools etc.) could be involved inthe 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 "UrbanDrinking Water and Sanitation Policy
Statement" is to "establish an appropriate cost recovery mechanismthrough adequatetariff to
ensure that revenues cover O&M costs, debt service plus a reasonable retum on capital". Inview
o f this, the financial health o f the ULBshave been analyzed. Preliminary results show that none o f
the ULBscurrently cover even halfof 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 portiono f the deficit i s coveredby state subsidies, including grants,
share o f salaries, grants adjusted by KUWSDB and Kamataka Power Transmission Corporation
Limited (KPTCL), which are categorized as revenue inthe ULB accounts. GoK has recognized
that inthe mediumterm, subsidies andgrants will continue to be needed, but their plan i s to focus
more on targeting the poor and providing sanitation.




                                                   -15-

Table 1: Cost recovery levels inthe participating ULBs:
                                                          HDMC         Belgaum        Gulbarga
A. O&M cost recovery level in200112                          19%           39%             17%
B.Fullcost recoverylevel in2001/2                            16%           24%             11%
C. Fullcost recovery including grants in200112               87%           83%             49%

Where:
A.      includes WSS tariff and tax revenues/O&M costs.
B.      includes WSS tariff and tax revenuedfull cost including O&M, depreciation, and interests.
C.      includes WSS tariff and tax revenues plus share o f SFC salary, grants adjusted by KUWSDB loan and
        KPTCL/full cost including O&M, depreciation, and interests.

With regards to financing o f 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
o f state resources. With regards to ULB levelreform, the project envisages to assist the ULBs
through the following studies:

(i)Ring-fencingtheWSSOperations:Toimprovetheefficiencyandaccountabilityforthe
sector, the ULBswill separate their WSS accounts from rest o f the municipal services using a
workbook developed duringproject 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
buildingof2-3 municipal staff ineachULBto performthis activity will be conducted inclose
coordination with a state-wide initiative undertaken by GoK, aiming at computerizing the
municipal accounts.

(ii)ImprovementinUWSBillingandCollection: Toimprovethebillcollectionratewhichhas
beendeteriorating duringthe 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 andimplemented.These systems will also separate
the demonstration zone bills which will be different for each consumer depending on their
consumptionlevel, and have a more frequent billing cycle. The billcollection target by project
closure i s set for 70 percent inthe demonstrationzones.

(iii)DefiningtheWater TariffStructure: Usingtheprojectcostestimates,datacollectedfrom
the ULBs,KUWSDB, and KPTCL and revenue andcost relatedassumptions, a simple analysis
was done to estimate the level o f tariff increase necessaryto achieve cost recovery inthe medium
to long term.

Table 2: Annual Tariff IncreaseNecessaryto ReachCost Recovery inFive/Ten Years:
                                                                    HDMC          Belgaum     Gulbarga
O&M cost recovery by 2007                                              52%            18%        61%
O&M cost recovery by 2012                                              25%              7yo      25%
Fullcost recovery (incl. depreciation anddebt ) by2007                 28%            35%         80%
Fullcost recovery (incl. depreciation and debt) by 2012                26%            12%        29%

The TA component o f the project will assist GoK and the ULBs to develop sound tariff policies
at the municipality level and a volumetric tariff system inthe demonstration zones. Insummary,



                                                      - 1 6 -

the following methodology and principles will be used for water pricing inthe demonstration
zones:
(i)     There will be careful transition to volumetric pricing by usingboth flat rate and volumetric
        billing inparallel for a few months, accompaniedwith social
        intermediatiodcommunicationactivities;
(ii)    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 detailedtariff 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 percent o f O&M costs and
        progressively increasesto no less than 80 percent O&M costs by the end o f this project.

Inthe rest ofthe ULBs,there willbea step wisetariffincrease along with service improvements
resultingfrom the priority/distribution network investments.

Fiscal Impact:
GoK has confirmed their intention to pass the Loanproceeds to the ULBs as grants due to the
pilot nature o f 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 andreduce state subsidies to the sector, it is expected that there
will be positive fiscal impact on the state finances inthe medium to long run.

3. Technical:
The project faces several technical challenges mainly inattempting to provide highquality 24-hour
service indemonstration zones. The main challenges stem mostly from the unknown, but
presumed very poor condition of the distribution systems, lack o f proper system maps, current
practice o f intermittent supplies, possibility o f providing sufficient water to demonstrationzones
without affecting the supplies to other areas, availability o f bulk water, lack o f metering of
supplies, lack o fproper sewerage systems, quality o f water, andthe current limitedtechnical
capacity o f the ULB WSS departments. These challenges are addressed through three separate
sub-components, and are discussed inthe project description summary section above andin
Annex 2.

Under components B1andB2, priority investments andworks incity distribution networks will
be implemented to benefit the whole population inall three ULBs.This would address the
potential social issues associated with the demonstrationprojects.

Under component B3, demonstrationprojects will be carriedout and show aprogrammatic
improvement o f distribution systems and customer connection arrangements inlimitedparts of the
city (called demonstrationzones, covering 7-14percent o f city's population). This initialprocess
would reveal the challenges, provide scope to identify appropriate solutions, demonstrate that
24/7 water supply i s achievable, and show the benefits. Ultimately, the goal i s to expand the 24/7
supply regime to the whole distribution systeminsubsequentprojects, basedon the lessons
learned inthe current project.




                                                    -17-

Initial Diagnostic Studies identified feasible demonstration zones ineach o f the three ULBs, and
provided a basis (for preliminary identification of works neededand developing performance
criteria etc.) for drafting the Terms o f Reference for the OC. The OC develops a strategy for
achieving the performance targets demanded o f them, identifies works required, procures
contractors, implements works and operates the zones for 2 years usingULB staff. Duringthis
operation, subsequent project would be prepared to expandthe 24/7 supply to the whole o f the
ULBs.

City Wide EngineeringFeasibility Studies for the 3 participating ULBswould be carried out under
Component A2 to roll-out the 24/7 water supply to the entire ULB.Inthe first phase, detailed
network mapping and modeling, and identification of critical bottlenecks inthe city-wide
distribution system to be implemented as Component B2 would be taken up. Inthe second phase,
addressing engineering issues relatedto scaling up the project to cover the entire ULB,
development o f 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 in2-3
additional ULBs inKamataka under Component A2.

4. Institutional:


4.1 Executingagencies:
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 inproject implementation include: (i)      The
State-level Steering Committee for overall steering o f the project throughout its entire cycle,
comprising (inter alia) Principal Secretary, UDD; Secretary, MUDA; Managing Director,
KUIDFC; Managing Director, KUWSDB; Director, MunicipalAdministration, and Director,
GoK Project MonitoringCell;(ii) UDD, which will drive andmanage the sector reform
component through its policy/technicalcell housed within KUIDFC until the KSUWSC i s
operational; (iii) KUWSDB,which will act as anagent o fthe KUIDFCfor the design, technical
aspects o f procurement, and constructiodsupervision o f the priority investments; and (iv) the
three ULBs, which will permanently participate as part o f 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 o f 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 o f
local engineers; and (c) to use the acquired knowledge to upgrade and train other municipal staff.
4.2 Projectmanagement:
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 ingeneral become KUIDFC
interlocutor with the ULBs, other participants inproject execution, and the Bank. The PMU's
organization, staffing, functions, procedures, manuals and costs have all been agreed. The P M U i s


                                                 - 18-

headed by KUIDFC's Managing Director and i s composed o f a field-based PIU, with divisions
located ineach ULB, and HQ-baseddepartments including: (i)        project coordination and
procurement, (ii) finance, accounts, disbursementand reporting, (iii) and environment, (iv)
                                                                       social
legal, (v) land acquisition, and a policy/technicalcell reporting to GoWUDD. Strengthening
measures o f the P M U are plannedduringproject implementation, e.g. on social and environmental
management, andprocurement. Detailed implementation arrangements by component is described
under section C, Project Description.
4.3 Procurement issues:
The project would support procurement o f 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 PhysicalInvestments
(Component B).

The investment component envisages selection of an OC who would be responsible for an
engineering consultancy and operation of the demonstrationzones for a period o f about three
years. For procurement o f goods and works insuch zones, the OC will prepare an investment plan
for review and agreement with KUIDFC and the ULBs, be responsible for preparation of the
biddingdocuments, invitationo fbids, and awardo f contract (on behalf of KUIDFC). For the
priority investments and works incity distribution networks, KUIDFC will procure the required
goods and works, with the technical assistance o f KUWSDB throughout the process including
planning, assistance inpreparationthe bidding documents, follow-up the biddingprocess,
elaboration o f evaluation reports and assistanceduringnegotiations. KUIDFC will be permanently
accompanying the process and will take key decisions including call for bids, bid awards, and
contract signing.

All procurementof goods andworks shall be inaccordance with the Guidelines for procurement
under IBRDLoans and IDA Credits; January 1995, RevisedJanuary and August 1996,
September 1997, and January 1999. The procuremento f Consultancies for the project shall be in
accordance with Guidelines for Selection and Employment o f Consultants by World Bank
Borrowers; January 1997, RevisedSeptember 1997, January 1999, and May 2002. The capacity
and capability o f KUIDFC to carry out the procurement for the project as per the Bank's
Guidelines was assessed duringthe preparationo f the project and strengtheningmeasures agreed
as per details inAnnex 6A.
4.4 Financialmanagement issues:
Although this will be the first Bank project to be implemented by KUIDFC, the accounting
function i s adequately staffed and fully computerized. The company maintains accounts project
wise usingthe customized software 'Tally". Financial management systems and procedures that
require strengthening have beenaddressedduringproject preparation. Capacity buildinginitiatives
include the adoption o f a financial management manual, which will document the accounting
policies and procedures o f the organization. The internal control mechanisms within the
organization are being strengthened by the setting up o f an internal audit department inKUIDFC.

A Manager Finance will be deputed to the PMUand work under the oversight o fthe Executive
Director Finance to handle all aspects o f project accounting, payments, financial reporting and


                                                 -19-

audit. The P M Uwill receive funds for the project (on behalf o f KUIDFC) from GoK, make
project expenditures, recordtransactions, and maintain project accounts. I t will also be the nodal
agency for ordering, receiving andpaying for goods. All payments to contractors will be localized
inKUIDFCto avoidproceduraldelays andbottlenecks. Payments willbemadeonthe basis of
certified bills submitted by them as per contractual terms. Inthe demonstration zones, the
contractors will submit their bills to the OC who will check the technical specifications, record
theminthe measurements book, and certify for payment.Thereafter, the bills will be routedto the
P M Uwhere they will be checked bythe Manager Finance andpaid. A similar process will be
followed for the priority investments where contractors' bills will be routedthrough KUWSDB.
The OC and KUWSDBwill assist the PMU inthe preparationo f works budgets for the
upgradation o f networks inthe demonstration zones.

The audit o f project expenditures will be carried out by a firm o f Chartered Accountants. The
project will produce quarterly Financial MonitoringReports (FMRs) informats that will be agreed
with the Bank. (furtherdetails inAnnex 6B).
5. Environmental:                       EnvironmentalCategory: B (Partial Assessment)
5.1 Summarize the steps undertaken for environmental assessment and EMPpreparation(including
consultationand disclosure) andthe significant issues andtheir treatment emerging from this analysis.
Because o f the nature and the small size o f the investments considered under the project, no
significant environmental impacts are expected. However, a Limited Environmental Assessment
(LEA) ofthe envisaged works was undertaken to assessthe extent and significance of
environmental impacts o f the proposedphysical investments inthree ULBs. Inorder to mitigate
adverse environmental impacts duringplanning and implementation of works, an Environmental
Management Plan (EMP), including Environmental Codes o f Practice (ECOPs), has been
prepared by an independent environmental consultant, working closely with the
engineerinddesignconsultant. The EMP will be hlly integrated inthe 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 duringthe constructionphase inthe demo zones
include:
    a. Temporary disruption o f water supplies including possible flooding and leakages during
        the isolation o f demo zones, leak detection and replacement o f mains;
    b. Increased dust andnoise levels duringearth excavation activities; and
    c. Temporary disruption to traffic during construction.

Most o f the above mentionedenvironmental impacts duringconstruction would be temporary and
reversible, andwill be addressedusingthe recommendations inthe ECOPs and EMPs. Other
construction phase impacts such as disruption to water supplies and possible flooding would be
addressedby providing alternative water supply through tankers duringthe periodo f

EMP).
construction, and by providingalternative bypasses and leak control system (for details see the


The significant adverse environmental impacts expected duringthe operationalphase include:
    a. Generationo f additional quantity o f waste water from zones leading to possible


                                                  - 20 -

        contamination o f surfacehub surface water source; and
    b. Possible flooding oflow lyingareas due to overflow of storm water drains

It is expected that the increased water supply (and per capita consumption) inall the demo zones
(and wards) will be primarily due to reduced leakages from the distributiodtransmissionlines 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 inthe three cities for
disposal o f additional quantity o f waste water, which i s 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 duringthe subsequent phases o f this project.

The significantpositive environmental impacts duringthe operational phase include:
    a. Possible improvement inwater quality and, improved health andhygiene due to reduction
        inleakagesandcrosscontaminationwithsewerlines; and
    b. Better control andmanagement 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 highbacteriological contamination (or microbiological pathogennumber (MPN)
count) inwater samples collected for each demo zone. It i s assessedthat the water quality
problems at the consumer endmay be largely due to ingress o f contaminated water to the system,
which the low residual chlorine levels cannot deal with. The project i s likely to result inimproved
water quality and health and hygiene inthe demo zone. (See Additional Annex 12 for details on
the results o f 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 o f 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 i s expected to be a useful guidance tool
to OC and design engineers for integrating environmental aspects inplanning, design,
construction, operation and management o f water supply sub-projects. The ECOPs may be
helpfulto mainstream environmental aspects and broadly covers the recommendations on:

    a) Project Planning - environmental screening and scoping;
    b) DesignPhase: 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, treatmentplant, 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 o f KUIDFC, the



                                                 -21 -

implementing agency. However, KUIDFC will coordinate with designated localengineers at the
ULBsinHubli-Dhanvad, Belgaumand Gulbarga for planningandensuring effective
implementation o f 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
o f the requirements. The OC implementing the project would have an environmental specialist on
the team who will prepare a planto operationalize the EMPs andwill 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:
                    Dateof receipt of final draft: August 11,2003

The project EA was completed and thereafter disclosed at the Bank Infoshop, by GoK at
KUIDFC'sweb site, andinpublic libraries inthe three participatingULBs.

5.4 How have stakeholders beenconsultedat the stage of (a) environmentalscreening and (b) draft EA
report onthe environmentalimpactsandproposedenvironment managementplan? Describemechanisms
of consultationthat were used andwhich groups were consulted?
As part o fthe Environmental Assessment (EA) andincoordinationwith the social intermediation
activities (see section 6 below), public consultations were held inthe ULBs to identify
environmental issues seen by communities and stakeholders. Project beneficiaries and local NGOs
were consulted about the project's environmental aspects duringproject preparation and will be
consulted again duringimplementation. LEA and EMP reports are made publicly available in
KarnatakaUrbanDepartment and public library.
5.5 What mechanisms have beenestablishedto monitor andevaluatethe impact of the projecton the
environment? Do the indicatorsreflect the objectives andresults of the EMP?
Environmentalperformance indicators have been identified as part of the overall project
indicators, to monitor and evaluate the impact o f 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 necessaryto monitor and evaluate project's impacts on the
environment.
6. Social:
6.1 Summarize key social issues relevant to the project objectives, andspecify the project's social
development outcomes.
The desired social development outcomes expected out o fproject interventions are: (i)
Substantial positive effect on women (time and effort) and better health for the entire family
through assured supply o f safe water inadequate quantities made available to all households; (ii)
Improved and equitable coverage o f un-served and under served poor house holds at reasonable
cost; and (iii)Empower users through mechanisms for voice and choice (redress o f complaints,
easier methods for tariff payment, etc.).

A participatory Social Assessment has beenundertakenas part o f the project preparation
activities. Findingsfrom the Social Assessment and interactions and observations o f Bank
missions duringthe field visits to the three selected towns indicate:




                                                   - 22 -

Oualitv o f service: Water supply service i s poor interms of quality, quantity, and reliability. The
intermittent supply combined with unsanitary conditions around water supply points ensure
contamination o f the water supply. Inhouseholds with private connections (between 70 to 90
percent o f the population ineach city), water collection engages the entire family duringthe
unreliable hours o f supply. Given the low pressure inthe system, most households have built pits
infront oftheir housesto tap the water at a lower level. Thisresults inunsanitaryconditions at
the water collection point. Households compete with each other by usingpoweredpumps
connected to the supply line. There are visible (time spent, water purchased from tankers) and
not so visible costs (cost of electricity for pumpingwater fiom supply line and from primary
collection point to elevated reservoirs, loss o f productivity and expenses for medical treatment
and investment insubsidiary sources) incurredby households. Substantial private investments
(drillingofbore wells) are takingplace eachyear inextension areas, causing undesirable
environmental effects. However, even such households inextension areas are willing to switch to
public supply if quality o f service delivery could be assured. There i s an alarming amount o f
waste o f water from public stand posts.

Poor households: Locations o f vulnerable groups (slums andresettlement colonies o f slum
dwellers) are un-served or often grossly under-served. Poor households, which dependon stand
posts, waste time and effort incollecting 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 butrather a lack o f follow-up
by the ULBand/or additional effort neededfrom the customer to pay the bill. Substantial number
o f unregisteredusers draw water from the system without having to pay either the connection
charges or the monthly tariff. Inthe absence o f political will to take penal action, the errant
households continue to draw water.

Willinmess to pay: Primafacie, consumers are willing to pay a higher tarifffor a better service
level. Evenstand 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 i s
adversely affected by crisis o f ULB credibility inthe mindo f consumers. The ULB's"willingness
to charge" seems to be a major hurdle, more than willingness to pay (by consumers).

Crisis o f institutionalcredibility Consumers have little or no say on the timings and fiequency o f
water supply. While the service levels at the 3 ULBs are varied, ingeneral, people have very little
faith inthe ULBsto deliver reliable and quality supply. They seem to be happy to get regular
supply (even once intwo days) and perceive 24/7 supply as a hypotheticaldream.

Awareness o f health issues: While the communities keep their indoors `clean" and their water
vessels sparkling, there i s little awareness among communities on adverse health impact o f the
present intermittent supply.

The findings from the Social Assessment indicate that a comprehensive set o f interventions are
needed. Inaddition to institutional, technical and managerial interventions, substantial social


                                                  - 23 -

intermediationand communication efforts are neededsupported through actual demonstration of
the feasibility (technical, economic, institutional andmanagerial) ofhighquality services.


6.2 ParticipatoryApproach: How are key stakeholdersparticipating inthe project?
Getting stakeholders together and buildingconsensus i s one of the biggest challenges o f the
project. The thrust o f the proposedapproach i s to keep stakeholders informed o f sector reform
and its benefits, consultedindevelopingplans and implementationarrangements, and enlisted in
the reformprocess to ensure their proactive andbeneficial engagement. Lessons from successful
(or otherwise) results o f past reformefforts that have been incorporated include: clear public
understandingo freform measures and their benefits, transparency, buildingconsensus and
support for reform, addressing stakeholder concerns, and a credible and coordinated
communication and consultationprocess.

With this inview, 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, inturn, has been presented and discussed in stakeholder forums
ineachofthe three participatingULBsbeforefinalization. The communicationstrategy
emphasizes stake holder participation and outlines a strategy for their continued participation at
all stages o f the project and thereafter (including institutional arrangements to facilitate the
process) duringpost-implementation.


6.3 How does the project involve consultations or collaborationwith NGOs or other civil society
organizations?
NGOs and civil society organizations have been associatedwith the preparation o f the project.
The Bank preparationteams have beenregularly meetingwith many o f these organizations during
missions, and the response receivedhas been very encouraging. NGO services would continue to
be utilized for community consultations and social intermediation efforts. Local community-based
and professionalorganizations have volunteered to assist increating awareness and monitoring
implementation processes.


6.4 What institutional arrangementshavebeenprovidedto ensure the project achieves its social
development outcomes?
A SocialAssessment has beenundertakenas part ofproject preparationto designthe project
processes and institutions. Some important features o f the exercise include emphasis placed on:
(i)stakeholder analysis; (ii) communication strategy; (iii)   extensive stakeholder consultations; (iv)
continuation o f the Social Assessment inthe form of social intermediationefforts inthe
demonstration zones; (v) putting inplace an institutional framework for continued stakeholder
involvement consistent with the 74thconstitutional amendment; (vi) specific measures for
inclusion, transparency, and accountability o f key stakeholders; (vii) 24/7 customer complaint
centers for grievance redressal; and (viii) participatory monitoring systems.


6.5 How will the projectmonitor performanceinterms of socialdevelopment outcomes?


                                                  - 24 -

As part o f the SocialAssessment, baseline data for the demonstrationzones has beencollected
and monitoringindicators developed on a participatory basis. The proposedinstitutional
arrangement at the ward level, (leading ultimately to the ULB level as the project i s scaled up
duringsubsequent 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 proposed24/7 customer complaint centers will provide continuous access to local
communities to voice their grievances and seek remedial action.

7. SafeguardPolicies:
7.1 Are any of the following safeguardpoliciestriggeredby the project?




7.2 Describe provisionsmade by the projectto ensure compliancewith applicable safeguardpolicies.
EnvironmentalAssessment: OP 4.01on environmental assessment is triggered. Because of the
nature and the small size o fthe investments considered under the project, no significant
environmental impacts are expected. The LEA o f the envisaged works, and an EMP including
ECOPs will be fully integratedinthe contract for implementation and operation o f priority works
and demonstration projects and will be the responsibility o f the consulting firm implementing the
works.

Indigenous Peoples: The project will not cause any adverse impact to indigenouspeople. The
Social Assessment has examined the applicability or otherwise of the Bank's OperationalDirective
on Indigenous Peoples (OD 4.20), takinginto account the key characteristics of identifying such
groups as defined inthe OperationalDirective. Findings from the Social Assessment (based on
surveys o f the demonstrationzones, consultations with scheduled tribes (STs) and other potential
groups and discussions with knowledgeableprofessionals and academia) indicate that OD 4.20 i s
not triggered.

CulturalProperty: The LEAnotedthat there are no cultural properties along the rightof way
o f the proposedinvestment activities inthe demo zones. However, the possibility o f a chance find
can not be ruled out. Therefore, procedures for addressing a chance find o f cultural properties are
included inthe EMP and the environmental codes o f practice. A contract clause would be inserted
inthe agreement for construction activities inthe demo zones.

InvoluntaryResettlement: The project envisages to optimize the bulk supply pipeline routes to



                                                 - 25 -

derive maximum benefits to the endusers. Some of these benefits are increased technical
soundness o f the project, reduced leakages, cost savings (due to reducedlengtho f pipelines and
lengths o f service roads to be built) and uninterruptedsupply for 24/7 to demonstrationzones and
improvement inwater supply tb rest o f the city inthe selectedULBs.Landacquisitionunder the
current project i s likely to be minor and impact on individual farmers i s not expected to be
substantial. No resettlement i s contemplated as no structures would be acquired or demolished.
Social assessmenthas also indicated that share cropping i s not practiced inthe project areas. In
view o f land acquisition involved, OP 4.12 on involuntary resettlement i s treated as triggered. In
this context, a land acquisition framework has been prepared to apply for any minor land
acquisitionthat may take place under KUWASSIP I. project will make every effort to
                                                            The
minimizelandacquisition andalso attempt to minimize temporary adverse impacts and
compensate affected persondfamilies for such temporary effects. The project will also ensure that
affectedpersons are consulted well ahead andare involved inplanningremedial 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 livelihoodi s not affected
adversely. Investments under future potential follow-on projects may warrant land acquisition
depending on the nature o f investments proposed and a more comprehensive resettlement and
rehabilitationpolicy would be developed, ifneeded, duringthe implementation o f the current
project.

Other safeguardpolicies such as OP 4.04 Natural Habitat and OP 4.36 Forestry are not triggered
bythe proposed project andthis has been confirmed inthe LEA.

F. Sustainabilityand Risks
1. Sustainability:
Because of the project's demonstration nature andphased approach, its overall sustainability will
be gaugedby the deptho f sector reform and maintenance of service provision inthe three
participating ULBs. It i s crucial that key sector reforms-legal, institutional and regulatory
frameworks-be hlly implementedto reinforce the enabling environment to improve financial,
managerial, administrative andtechnical performance o f participatingULBs,ultimately leadingto
better modes o f service provision. The adoption o f a qualified OC to manage the demonstration
zones and the training o f ULBpersonnel for such functions will help sustain the services over the
long term. Also, the demonstration projects will test elements o f the sustainability o f a
subsequent larger project.


2. Critical Risks (reflecting the failure of critical assumptions found inthe fourth column o f Annex 1):
                    Risk                          Risk Rating                Risk Mitigation Measure
From Outputs to Objective

                                                        M          Counterpartshavebeennominatedfor each
                                                                   project componentkpecialty,and strengthening
                                                                   needs identified.Consultants can be engagedto
                                                                   supplement KUIDFC staff where required.


                                                      - 26 -

Lack o f commitment and ownership o f the              M          Proper implementation and supervision
project.                                                          mangements made for the project.
                                                                  Communication strategy established to increase
                                                                  project awareness at ULB level.
ULBs'lack o fwillingness to achieve                     S          Communication strategy. A selection criteria for
proposed levels o f cost recovery.                                 the demo areas would be the stated willingness
                                                                   o f the beneficiaries to pay a higher tariff in
                                                                  return for substantially improved levels o f
                                                                  service. As a condition o f further support
                                                                   beyond the first phase, tariffs would be
                                                                   restructuredand increased to a level that covers
                                                                  highpercentage of O&M costs.
Administrative and procurement                         M           The contract will clearly indicate that
difficulties and delays to procure goods                           procurement o f goods, works, and services
and works necessary to implement the                               under the contract are the responsibility o f the
priority works anddemo projects by the                             Operating Consultant.
Operating Consultant.
ULBs/GoK will not accept private                       M           Communication strategy, continuous
operator (follow-on project).                                      involvement o f ULBs ininitial project's
                                                                   preparatiodimplementationprocess.
From Components to Outputs
State water sector reform advances                      S          Sector development component. Permanent
slowly.                                                            dialogue and close follow-up.
Resistance from ULBs to advance in                      M          Permanent dialogue, awareness campaign and
service level reform.                                              workshops. Participation in implementation.
Resistance o f ULBs to PSP.                             S          Permanent dialogue, dissemination o f
                                                                   advantages o f PSP, support from state policy.
Overall Risk Rating                                     S
iisk Rating - H (High Risk), S (Substantial Ri! , M (Modest Risk), Negligible or Low Risk)


3. Possible ControversialAspects:
None identified.

G. Main Loan Conditions
1. EffectivenessCondition
The following events are specified as additional conditions to the effectiveness o f this Agreement within the
meaning o f Section 12.01(c) o f the General Conditions:

a. The Project Agreement has been duly authorized or ratifiedby Kamataka, and is legally bindmgupon
     Karnataka inaccordance with its terms.
b. Guidelines for project implementation has beenissuedby GoK inthe form o f a GO, specifying roles
     and responsibilities o f project participants
c.   The Project Implementation Plan has been adopted.




                                                      - 27 -

2. Other [classify accordingto covenanttypes used in the LegalAgreements.]


Financial Covenants

Inadditionto the standard financial covenants, the following apply:
a. KUIDFC shall submit FMRs to the Bank showing actual versus budgeted expenditures,
    forecasts o f cash requirements, physical and financial progress andprocurement contract
   management information within 45 days of the close o f every quarter beginningwith the first
    quarter after project effectiveness inthe format agreed with the Bank.
b. KUIDFC shall submit anaudit report ofthe continuing entityto the Bank within 6 monthsof
   the close o f each financial year including the period o f retroactive financing agreed with the
   Bank. The first audit report shall be submittedto the Bank inthe six months following the
   year o f project effectiveness.
c. KUIDFC shall submit to the Bank an audit report onproject expenditures no later than six
   months o f the close o f the financial year starting with the year o f loan effectiveness.

Other Covenants

GoK shall ensure that, no later than June 30,2005:
a. a proposal for the creation o f the KSUWSC shall have been presented to the competent
   authority for adoption; and
b. an investment framework and tariffpolicy for the urbanWSS sector ofKarnataka shallhave
   been adopted.

H. Readiness for Implementation
   1. a) The engineeringdesigndocuments for the first year's activities are complete andready for the start
         ofproject implementation.
c] 1.b) Not applicable.

E2. Theprocurementdocumentsfor the first year'sactivitiesarecompleteandreadyforthestartof
      projectimplementation.
Ed 3. The ProjectImplementationPlanhas beenappraisedandfoundto be realistic andof satisfactory
      quality.
17 4. The followingitemsare lackingandare discussedunderloanconditions (SectionG):




                                                 - 28 -

I. Compliance with Bank Policies
1.:
ir.I.Thisprojectcomplieswithallapplicable Bankpolicies,
   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




                                                 - 29 -

                                   Annex 1: Project Design Summary
                      INDIA Karnataka Urban Water Sector Improvement Project



jector-related CAS Goal:      Sector Indicators:               Sector/ country reports:      from Goal to Bank Mission)
'overty alleviation through   1. Urban water sector reform     Status reports o f Department nplementation o f state and
mproved and sustainable       implemented by the               o f Economic Affairs (DEA)    x a l level reforms will
irovisiono f water supply and Government o f Kamataka          and municipal statistics      ontribute to improved
anitation (WSS) services in (GoK) and the participating       producedby GoK.                 erformance o f urban water
he urban local bodies (ULBs) ULBs.                                                           ector and its long term
ifKamataka.                                                                                  ustainability.
                              2. Improved urban water
                              service delivery inthe
                              participating ULBs.


'roject Development           Outcome I Impact                 Project reports:              FromObjective to Goal)
lbjective:                    Indicators:
 . Launch GoKs urban water 1.1, The reformbasei       s        1.1 Progress reports from      .GoK, State line agencies
ector reform process based    established and initial reform implementing agencies,           ndULBsmaintain
inthe stateurbanwater         activities are camed out.        mid-term-review evaluation,    ommitment to urban water
)olicy.                       1.2The ground for Private        ImplementationCompletion      ector reforms.
                              Sector Participation (PSP) is    Report (ICR), Operations and   ,.No major natural disaster
                              prepared as a realistic option   Evaluations Department        lr political disturbance would
                              for water and sanitation         (OED) end o f project         lccur during the
                              provision.                       evaluation.                   mplementation period.
                              1.3 An enabling legal,
                              regulatory, and financing
                              frameworks are established
                              for the sector.
!. Improve urban water        2.1 Possibility o f continuous   2.1 Progress reports from
upplyand sanitation services water supply is demonstrated. implementing agencies,
nparticipatingULBs and        2.2 Priority bottlenecks to      mid-term review evaluation,
lemonstrate that sustainable, improve quantity o f water       ICR, OED end o f project
:fficient, and commercially   supply are solved.               evaluation.
riented service provision can 2.3 Increased consumer           2.2 Customer satisfaction
)eachieved.                   awareness, commitment, and       surveys.
                              ownership for reform are




                                                          - 30 -

lutput from each            Output Indicators:                'reject reports:            from Outputs to Objective)
Zomponent:
:omponent Al: State water   A1 (i) Establishment and          ioK progress reports.        .Timely completion of
iolicy implementationis     operationalization o f the                                    ,olicy studies.
nitiated.                   Kamataka State Urban Water
                            SupplyCouncil (KSUWSC).
                            (ii)Establishment o f a policy
                            framework for allocation o f
                            funds and investment and
                            pricing o f WSS services.
                            (iii)Establishment o f a State
                            Water and Sanitation
                            Information System.
:omponent A2:               A2 (i)Implementationo f           'rogress reports from ULBs  !. Adequate capacity at all
krengthening o f Service    financial management pilots       ndKUIDFC.                   evels.
Ielivery and Preparation of inthe participatingULBs,
:ollow-on Project inthe 3   including separation o f WSS
'articipating ULBs          accounts and computerized
                            billing and collection systems.
                            (ii)Definition o f the scope
                            and scale o f follow-on private
                            sector participation and
                            scaling up in other ULBs.
2omponent B1: Priority      B1 Improvedoverall water          'rogress reports from GoK    1. Strong commitment and
nvestments are completed.   supplyavailability and quality    .ndKUIDFC.                  iwnership o f the project at the
                            inthe three ULBs.                                             state and local level.
                            Satisfactory technical audit      'roject reports and audit
                            and third party inspection o f    eports.
                            priority investments.
2omponent B2: Distribution  B2 Improvedoverall water          'rogress reports from ULBs   4. Willingness o f ULBs to
ietworks are improved.      supply availability and quality   .ndKUIDFC.                   mprove their performance.
                            inthe three ULBs.
:omponent B3:               B3 (i) Volumetric tariff          'rogress reports from LJLBs  5. No unexpected delay I
lemonstrationprojects are   adopted according to agreed       md KUIDFC.                   ssues with engineering
ompleted.                   principles in order to recover                                Horks.
                            no less than 50% o f O&M
                            costs initially and no less than
                            80% by project closure inthe
                            demo zones.
                            (ii) Substantial improvement
                            of water supply services in the
                            demo areas, characterizedby
                            combined weighted average
                            (at least 75%) o f the following
                            indicators:
                            a. Continuous supply to
                            zone-emergency stoppages no
                            to exceed 12hours and no
                            more than one emergency
                            stoppage per 3 months (20%
                            weight);


                                                         - 31 -

                           b. Water quality as per noms
                           and monitored through
                           testinghampling (5% weight);
                           c. Supply to zone to be
                           meteredboth inrespectto
                           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
                           basedon averagepressure
                           within the demo zone of 10
                           meters, adjusted
                           proportionately in respect to
                           the actual average zone
                           pressure (10% weight);
                           e. Maximumpressure within
                           the demozone 15 meters and
                           minimumpressure 8 meters
                           (10% weight);
                           f. 100%meteringofproperty
                           connections, standpipes, and
                           feeds to street storage tanks,
                           adoption of volumetric tariff
                           structure (20% weight);
                          g. Billing and collection rate
                           to exceed70% (10% weight);
                           and
                           h. High level of customer
                          satisfaction (70%) measured
                          by polls (20% weight).
2omponent C: Smoothproject C. Project implementation         'roject reports.
mplementation             according to the schedule.




                                                       - 32 -

                                  Kev Performance

Project ComponentsI           nputs: (budgetfor each   'roject reports:      [fromComponents to
Sub-components:               :omponent)                                     Outputs)
A. Sector Developmentand      ,255 million              ,Project reports.    1. Ownership and
TechnicalAssistance:                                                         commitmeiit at the state level
1.Policy Implementationand                                                   to implementthe strategic
State Level Institutional                                                    plan for the state urban water
Strengthening                                                                and sanitation policy.
2. Strengthening o f Service
Delivery and Preparation of
Follow-on Project inthe 3
Participating ULBs
B. PhysicalInvestments        i47.20 million           :.Project reports.    2. Ownership and
1, Priority Investments                                                      commitment at ULB level to
2. Works in City Distribution                                                improve their WSS service
Networks                                                                     delivery performance.
3. Demonstration Projects
C. ProjectImplementation      ;1.39million             I.Project reports     3. Ownership and
                                                                             commitment at implementing
                                                                             agency level to perform their
                                                                             duties without delay.




                                                    - 33 -

                              Annex 2: Detailed ProjectDescription
                   INDIA: KarnatakaUrbanWater Sector ImprovementProject

The project comprises o f three components: (1) sector development and technical assistance
(TA); (2) investmentsinthree ULBsto improve their water supply services and demonstrate the
feasibility o f continuous safe water supply inpilot 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 urbanwater
sector (UWS) reformagenda and help prepare the possible follow-on investmentproject. I t has
two subcomponents as described below:

A1 Policy Implementationand State LevelInstitutionalStrengthening (US%0.89 million)

The objective o f this subcomponent Al. i s to assist GoK infinalizing its policy reform agenda and
to cany out initial implementation steps o f staged sector reforms. These reforms are basedon the
new "Urban DrinkingWater and SanitationPolicy Statement of GoK' (presented inannex 13 ),
approved by the State Cabinet, GoK inMay 2003. The UrbanDevelopmentDepartment (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 o f which have been included inthis subcomponent.
They include the following technical assistanceandtraining activities.

(a)     Establishmentand operationalizationof KarnatakaState Urban Water Supply Council
(KSUWSC): GoK plans to establish a KSUWSC, whose responsibilities would policy definition
and implementation, planning and programming, technical assistance, development o f sector
information system, norms, and certain regulatory functions inthe UWS. This activity would
include: (i)carrying out the concept and detaileddesign o f the KSUWSC, including its location
withinthe institutional framework, charter and documents required for its legal creation, main
functions andresponsibilities, organizational structure and staffing, and start-up plan; (ii)   actual
approval process and creation o f the KSUWSC; and (iii)        preparationo f the first two years of
work program and capacity strengthening plan, including training, equipment, systems, and
strategic action plan. The objective o f this activity i s to have the KSUWSC up and running
according to its designedrole by year 2005. The intermediate goal i s complete the establishment
of the KSUWSC by the end o f 2004.

(b)     Strengtheningof ServiceDelivery in ULBs: As per the policy vision, the KSUWSC will
be responsible for sector strengthening via provision of technical assistanceand other means.
Meanwhile the following capacity strengthening activities will be carried out:

(i)     Institutional Optionsfor Sewice Provision. Urban water service i s scattered among
several departments and institutions, making it a recognizedinefficient mode, as it lacks
accountability and transparency. To improve this situation, several institutional service delivery



                                                  - 34 -

models, bothpublic andprivate 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 inthe WSS.

(ii)    TechnicalAssistance Strategy and Action Plan to enable WSSsector reform at the ULB
level. This study would be based on the recommendations o f the institutional options for service
provision.

(iii)   Revenue CollectionAction Plan. This study will set up a strategy to improve the existing
commercial systems inpilot ULBs.

(iv)    Public Awareness and Communication Strategy. The above strategies, reformproposals
and action plans need be duly communicated to inform the public and to gain their support. A
communications strategy for the State i s under preparationby grant funds. Buildingupon such a
strategy, this subcomponent will assist with actual communications and awareness campaigns.

(c)     Developmentof theState Water and Sanitation Information System (WASIS): The
WSS sector lacks a credible information system, which is key to all planning exercises regarding
investing for improvingphysical systems and service provision, and to develop and apply fund
allocation mechanisms, criteria, and technical assistanceprograms. The objective o f this activity i s
to assist GoK infinancing the design(conceptual and physical) o f a sector Management
Information Systems (MIS)and inassisting with the actual setup / initial implementationphase.
This activity would include purchase o f equipment (as per consultants estimated requirements),
training, and advice inthe 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 informationupdates.

Task B: Benchmarking o f the service provision levels. The possibility o f establishing a
benchmarking system, recognizedas a powerful tool to help self-regulate service providers, will
stem from the WSS information system established under Task A. There i s also a larger
benchmarking initiative through Water and SanitationProgram (WSP) that would set the
framework for India and would look at several pilots, including Kamataka. The proposedactivity
would follow the two related activities described above and establish the first benchmarking
process inthe state.

(4       Water and Sanitation SectorInvestment and Tariff Frameworks

This activity consists o fthe following two tasks:

Task A. Resource allocation through programs i s perhaps the most powerful instrument the state
has to provide incentives for reform inthe 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 inestablishing an integrated state WSS sector
financial policy. The study would also look at several financial scenarios and sources o f hnds to


                                                  - 35 -

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 aspectso f service delivery. The
study would then develop tariff guidelines and general good practiceelements at the state level.
The study would also propose ways for the state (KSUWSC) to strengthen its capacity to
provide assistanceto ULBs insetting appropriate tariffs for their WSS service. The three'
participating ULBswould be the pilots for this effort.

(e)     Review and establishment of legal and regulatoryframework: The idea is to provide
the first steps inestablishing a regulatory framework for the WSS sector. Followingthis 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 primarilyhoused inthe KSUWSC. This activity would assist GoK indesigning the
regulation strategy, legal basis and action plan, and starting up o f essential but basic regulatory
functions, including pricing, service accounting and benchmarking.

@       Preparation of WSSLegislation: This study would assess the current legal framework
for the sector, recommend necessary changes to the existing legislation, and prepare the
correspondinglegislative (or insome cases executive) proposal. Based on these, a framework for
regulatory regime would be established anddetailed design o f the regulatory function at the state
level, including definition of its contents and scope, legal support, organizationalneeds,
implementation strategy, and phasingwould be defined.

A2 Strengthening of service delivery and preparation of follow-on project inthe 3
participating ULBs (US$ 1.66 million)

The demonstrationprojects inBelgaum, Gulbarga and Hubli-Dharwad will provide a temporary
institutional arrangement, namely a partnership with the Operator Consultant (OC), a private
operator inselected demonstration zones. Areas outside o f the demonstration zones will continue
to receive services under the existing arrangements, from KUWSDB inHubli-Duarwad, and from
the ULB water departments inBelgaum and Gulbarga. At the end o f the temporary arrangement
inthe demonstrationzoneswith the OC, itis envisagedthat the service will betransferred to an
operator who would be responsible for providingthe service for a substantially longer term to the
entire urban areas o f the three participatingcities. This subcomponent will assist GoK's medium
term vision by: (i) carrying out studies to define the institutional setup; (ii) and contracting
                                                                                bidding
the future management contract; (iii)   assisting inthe transition phase; and (iv) carrying out studies
to scale up inother cities. This subcomponent comprises o f 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 bothwater supply and undergrounddrainage. Business
plans including analysis of altemative institutional modalities for service delivery, fmancial
feasibility analysis and strategic plan, and the proposals for the selection o f a modality o f
public-private partnership for each city, although a combined administration for the three would


                                                  - 36 -

be an alternative to consider. Preparation and assistanceinbiddingand contracting the PPP
operator;

(ii)Transitionplans including the identificationo f activities prior to the selection o f the service
operation scheme. The objective is to help assure a smooth transition from the OC to the
subsequent operator. This includes: (i) improvements to WSS operations inthe three cities
                                          basic
inkey areas (ring-fencing ofthe WSS accounts, better commercial systemsto makethemmore
compatible with those to be usedinthe 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 relatedto the preparationo f the PPP, including asset evaluation,
communication strategy, and other financial, legal environmental, and social studies. including the
design o fthe institutional reorganizationandtransition plan at the ULB levelto respondto its
new role o f contract supervisor; and

(iv) Strategy to scale up this project to other cities inKamataka. This includes engineering
feasibility studies, development of business plans, and other studies requiredto define institutional
modalities for service delivery inabout four or five medium-sizedcities inKamataka.

Project Component 8. Physical Investments   - US$47.19  million

As described inSectionE3, the project faces many challenges to demonstrate the benefitsof 24/7
supply. These challenges are addressedthrough selectedinvestments ineach o f the three ULBs
and through carrying out relevant studies. The various subcomponents are described below:

B1: PriorityInvestments(US$ 27.63 million)

The primary objective of PriorityInvestments are explainedinSection Cl. At the time ofproject
appraisal, Kamataka UrbanWater Supply & Drainage Board (KUWSDB) i s already implementing
certainworks to enhance the bulk supply systemcapacity andefficiency. 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 o f each o f the ULBs,whose recommendations
are taken care o f either through KUWSDBworks or through Priority Investments. A phased
approach is followed inimplementing Priority Investments. After these investments are made, the
bulksystem would meet 2001 demands inHubli-Dharwad, and2011demands inBelgaumand
Gulbarga.

Specific objectives andworks ineach o f the ULBsare as follows:

    InBelgaum,the priority investments aretargetedat replacingandrehabilitating bulksupply
    infrastructure, which will significantly reduce leakages from the transmission system and
    remove supply bottlenecks. Proposed works include: (i)     replacement o f the transmission
    mains; (ii) installment o f suitable capacity pumpsat Pump House 1(PH1); and (iii)        capacity
    expansion o f feeder mains to some o f the reservoirs within the system. Once these measures
    are taken, the existing bulk supply infrastructurewould have sufficient capacity to satisfy the
    city's present demands.


                                                   - 37 -

    InGulbarga, Priority Investments aimat increasing supplyandrehabilitatingthe water
    sources o f 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 ina very
    weak state. It i s proposed to replace this pipewith an MSpipe o f higher capacity (55 Mld-
    for halfo f 2031demand), upgrade the pumpingstation at the headworks and an intermediate
    pumpingstation, and construct additional filter beds (15 Mld) at Shor Gumbaz treatment plant
    which treats part o f the water from this source. The Priority Investments for Bennithora
    source relate to rehabilitation of only the transmission main, achieving significant leakage
    reductionand resultingina saving of about 1.8 Mld. The Bhosgatank is unreliable, and
    hence will not be usedinfuture for regular supplies.

    InHubli-Dharwad, Priority Investments seekto achieve significant increaseinwater supplied
    to Hubli(which requires 2/3 of total supplies) from 38 Mldpresentlyto 49 Mld, by laying the
    "Dharwad by-pass main". This mainis o f 1076 mmdiameter MS pipe o f 23 kmlong fiom
    Ameenbavi near Dhanvadto Nrupatungabetta inHubli, by-passing an existing reservoir on a
    hillock inDhanvad. This arrangement would ensure significant reduction inpower
    consumption, and remove the bottleneck intransmission to Hublicaused by the use o f an
    existingpipeline with a smaller diameter. Under Priority Investments, pumps would also be
    installed at Ameenbavi and feeder mains to reservoirs are laidwithin the city. O f the two
    sources inHubli-Dharwad - Malaprabha and Neersagar, the former is more reliable. Hence
    Priority Investmentsare planned to make the bulk water system depend more on Malaprabha,
    and depend on Neersagar only to the extent o f 50% o f its nominal yield based on past 38
    years o f data.

Inallthe ULBs,bulkflow meters areproposedto be installedonthe transmissionmains at
strategic locations, to facilitate water audit. The locations o f bulk flow meters along with maps
are available inthe summary reports preparedby KUWSDB.

This sub-component also includes:
    Technical Audit and Third Party Inspectiono f Priority Investments. KUWSDBwould act as
    an agent o f KUIDFC for design, procurementassistance, and construction supervision for the
    Priority Investments. The fee charged by KUWSDB would be financed by GoK's own funds.
    The following additional services requiredfor Priority Investments would be supported under
    this subcomponent: (i) partytechnicalaudit consultant; and (ii) party inspection
                              third                                         third
    agent. Similarly, the strategy andplanspreparedby the OC will be critically reviewedby a
    thirdparty technical audit consultant.
    R&R Impact evaluation study.




B2: Works incity distributionnetworksin all 3 ULBs(US$5.78 million)




                                                  - 38 -

The main objective o f this subcomponent i s to provide short term improvementsto majority of the
most water-stressed users ineach ULB.Inparticular, the hours o f supply per week (and
proportionate increase inthe total water receivedby customers of the service) by all, or a
significant part, o f each of the cities will be improved. Inimplementing this subcomponent, it will
be ensured that there are no impedimentsto the provision of continuous water supply to the
demonstrationzones, especially with regards to the quantity and quality o f service in the
distribution systems outside o f the demonstration zone boundaries. Another important objective
o f this subcomponent is to improve the general conditions inthe rest of the city to gain social
acceptance o f the demonstration projects.

This component would entailprocurement o fthe civil works and supervision oftheir
construction. The selection o f the civil works would be based on the City-wide Engineering
Feasibility Studies (activity under component A2) which assess the situation and identifycritical
bottlenecks and constraints, including those related to sufficient provision o f 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 inidentifyingand implementing improvements to the distribution networks
would be based onthe data acquired through the following activities identifiedunder this
subcomponent:

i. Analysisofthesystemandend-userdatainordertodeterminepercapitasupplyforeach
     scheduled area with the intention of identifying areas with exceptionally highper capita usage,
     which could indicate highloss or wastage that need to be addressed.
ii.Developmentofaseparatehydraulicmodelofthecompletedistributionsystemforeachofthe
     4 cities.
iii.Identificationofbottleneckslimitingthesupplyreachingthescheduledareasthrough
     consultation with operational staff and use o f the models.
iv. Devising o f solutions for the problem areas andtesting oftheir efficacy -andpossible effects
     on adjacent supply areas -usingthe models.
v. Designo f those interventions gradedhighest and within the preset budget as agreed with
     KUIDFCandthe ULBs.
vi. Procurement o f the contractors to implement the works.

Typical works would include those relatedto elimination o f sections o f pipelines imposing
unnecessary throttles on supply, pipe replacement where physical losses are excessively high,
network sectorization, augmentationo f the capacity o f tanks and reservoirs and/or construction
o f new ones, rehabilitation or replacement o f pumps, and improvements to water quality caused
by infiltrationof contaminated groundwater, andmajor bottlenecks inunderground drainage etc.




                                                   - 39 -

Selection criteria for Proposed Interventions

The proposed interventions would need to:
a) Be derived from a comprehensive analysis o f the entire city network and are consistent with a
   long-term strategy for a network solution;
b) Have the least cost per unit savings inphysical losses; (note: this would take care ofthe
   economic evaluation);
c) Be implemented inless than two years;
d) Show a maximumvalue per intervention;
e) Contribute to equalize distribution to all o f the scheduled supply areas; and
f) Demonstratethat operationcapacity is assuredfor operationandmaintenance.

Inaddition:
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. Bulkwater supply should also
   come along with associated improvements inthe network.
0  There would be a total preset value for the interventions for each city (to be definedafter
    corresponding studies have been finalized) - includingbothbulk supply and distribution
    network interventions.
0   Expansionto new users are not eligible.
0   Commencement o f the work ineach of the cities is strictly contingentuponthe existence of up
    to date plans o f 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: DemonstrationProjects (US$13.79 million)

This subcomponent comprises o f studies, works, and management for the demonstrationzones in
the three cities: Belgaum, Gulbarga and Hubli-Dhanvad. The proposeddemonstrationprojects
will only benefit the populatiodpropertieswithin the demonstration zones, constituting between
7-14 percent o f the cities' total population. The main objectives o f the DemonstrationProjects
are:

    to demonstrate to all stakeholders, by concentrating on a small Demonstration Zone within

    tangible benefits - health, technical, operational and commercial - to be derived from this type
    each ULB supply area, that 24-hour7continuous water supply i s achievable and to monitor the

    o f supply;
    to establish, within the chosen DemonstrationZone, 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, inorder to quantify
    the social, economic, and other benefitsresulting from the demonstrationprojects e.g.
    reduction inwater-related disease; leakage reduction; improvedbasis for billing usage.




                                                  - 4 0 -

One operator (Operation-Consultant) will be hiredto manage the demonstrationprojects inall
three participating ULBs.This subcomponent comprise of the works required for the above demo
zones and for guaranteeing bulk water supply insufficient quantity and quality to the
demonstration zones. Typical works would include pipeline connections and chlorination devises.

This subcomponent also includes:
a   Operator consultant fees. With regardto the demonstration zones, the OC will be responsible
    for finalizing the works, designingthe works, preparingthe biddingdocuments, procuring
    contractors, signing contracts with the contractors, and supervisingthe contractors' work.
    Hence: (i)  the fee for the OC; and (ii) bonuses to be paid to the OC based on their
                                              any
    performance will be supported under this sub-component.

0   Technical Audit o f Demonstration Proiects. The strategy and plans prepared by the OC will be
    critically reviewed by a third party technical audit consultant.
a   Communication strategy and social intermediation (both within and outside the demo zones).
    This subcomponent will supplement the designed communication strategy and social
    intermediation process inorder to create an enabling environment for reforms. Specifically,
    the subcomponent will facilitate: (i)   awareness creation and communicationbetweenand
    across stakeholders within and outside the demo zone; (ii)     formation o f local level and ULB
    level institutions/forums for stakeholder interactions; (iii) out customer education on
                                                                  carry
    proper use o f 24/7 supply systems andhealthhygiene behavior; and (iv) participatory
    monitoring o f outcomes inthe demo zones. These objectives have been spelt out as part o f the
    communication strategy developed duringproject preparation. This subcomponent will
    finance social intermediation and communication service activities such as: (i)     spreading
    project awareness among demo zone households inthe initial period; (ii)       formation of
    inclusive water user associations inthe ward level (under 74th amendment) and enabling them
    to become effective forums for two way information exchange and monitoring; (iii)
    dissemination o f reliable information on project relateddevelopments on an ongoing basis; (iv)
    identification o f critical social issues and concerns as these emerge and bringingthem to the
    attention o f implementing agencies; (v) conduct o f Sanitationand Hygiene Promotion (SHP)
    campaigns inthe demo zones; (vi) awareness campaigns onproper use and conservationo f
    water under 24/7 supply conditions; (vii) awareness campaigns and seminars on the logic and
    necessity o f proposed tariffs; (viii) disseminationo f outcomes fiom demo zone area to wider
    range o f stakeholders inthe 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 systemtraining, and consultancies


                                                   -41 -

relatedto the project. Inparticular this sub-component supports:

(i)Incremental,shorttermconsultantsforKUIDFCLJDD,forthedurationoftheproject;
(ii)Preparationandestablishmentofamonitoringandevaluationsystem,andcostsrelatedto
financial management systems within KUIDFCLJDD;
(iii)Training for staff o f monitoring cell of KUIDFC and municipal reforms cell o f UDD; and
(iv) Incrementaloperatingcost at KUIDFC, including supervisioncosts.




                                                 - 42 -

Detailed implementation arrangementsby component are described inthe table below:

              Component                                         Implementation
 Overall project and sector reform    GoK has constituted a State-level Committee for overall
                                      steering o f 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, G o K Project Monitoring Cell;
 Component A1 (Policy                 For the implementation o f this component, G o K has created a
 Implementation and State Level       policy/technicalcellwithin KUIDFC, consisting o f a few core
 Institutional Strengthening)         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
                                      hiringand administrative matters. KUIDFC will be responsible
                                      for procurement o f various studies and activities under this
                                      component, and signing the contracts.
                                      The responsibilities and activities o f this team will be taken over
                                      bythe Kamataka State UrbanWater SupplyCouncil
                                      (KSUWSC), as soon as it is establishedunder the project and
                                                                                            . .
                                      becomes operational.
 Component A2 (Strengthening o f      This component will be managed by the KUIDFC PMU,
 Service Delivery, and Preparation of assisted b y the PIUs located inthe  h B s , in close consultation
 follow-on projects in ULBs)          with UDD, the DepartmentofMunicipalAdministration
                                      (DMA), the KUWSDB, andthe ULBs. The DMA which deals
                                      with sub-state (municipal) aspects o furban sector reform is
                                      being strengthened under the proposed and parallel Bank-
                                      funded Municipal Reform Project.
 Component B1 (Priority               The KUWSDB will act as an agent o f the KUIDFC for the
 Investments)                         design, technical aspects o fprocurement, and
                                      constructiodsupervision o f the priority investments.
                                      KUWS&DB will participate in evaluation o f bids, and
                                      KUIDFC's Tender Committeewill award the contracts. An
                                      independent Third Party TechnicalAudit consultantwill be
                                      appointed to audit the works in close collaboration with
                                      KUWSDB. A Third PartyInspectionagent will test pipes
                                      and equipment. All Contractors payments will be released by
                                      KUIDFCwith the certification o fKUWSDB to pay. KUWSDB
                                      has established a small central unit, including engineering and
                                      procurement capacity, and will establish separate units ineach
                                      o f the ULB for works supervision. Further details on
                                      KUWSDB's implementation arrangements are given inProject
                                      ImplementationPlan (PIP). The ULBs will be the owners o f
                                      completed works, K U W S D B will operate them on their behalf
                                      (as per the current agreements between the U L B s and
                                      KUWSDB), with the exception o f Belgaum where the ULB
                                      itselfwill be operating part o f them.
 Component B2 (Works incity           This component will be identified through an initial study and
 distribution networks inall three    mapping o f the cities' distribution networks, under the first
 ULBs)                                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-

Component B 3 (Demonstration   The DemonstrationProjects will be implemented by KUIDFC
Projects)                      by procuring an Operator-Consultant (OC). There will be a
                               single OC contract for all the three ULBs. The OC will study
                               the DemonstrationZones in each o f the ULB, prepares a
                               strategy for achieving the performance targets demanded o f
                               them, estimates the cost o f works, and prepares procurement
                               and implementationplans. The strategy, plans and costs would
                               be critically reviewed by the Third PartyTechnical Audit
                               consultant(who would also audit Priority Investments-- see
                               para above). Based on the agreed strategy by KUIDFC in
                               consultation with the ULBs, O C 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 O C 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 inits commercial bank, similar to the
                               arrangement currently inplace under ADB-funded projects.
                               Further details on Financial Management arrangements will be
                               elaborated inFMManual.

                               Monitoring Impacts o f Continuous Supply would be done by
                               KUIDFC, through establishing a monitoring system,
                               information campaigns, workshops and surveys etc.




                                            - 44 -

                                           Annex 3: Estimated Project Costs
                      INDIA Karnataka UrbanWater Sector Improvement Project



1. SECTORDEVELOPMENT AND TECHNICAL                                                                                                                   2.44
ASSISTANCE
2. PHYSICAL INVESTMENTS                                                                             38.26                    2.92                  41.18
3. PROJECTIMPLEMENTATION                                                                             1.19                    0.08                    1.27
Total Baseline Cost                                                                                 41.58                    3.31                  44.89
 Physical Contingencies                                                                              1.66                    0.07                    1.73
 Price Continaencies                                                                                 4.20                    0.3 1                   4.5 1
                                         Total ProjectCosts1                                        47.44                    3.69                  51.13
                                                                Front-endfee                                                 0.40                    0.40
                                  Total Financina Reauired                                          47.44                    4.09                  51.53




Works                                                                                                35.73                       1.25                   36.98
Goods                                                                                                   2.53                     0.38                    2.91
Services (including Training)                                                                           8.08                     2.06                   10.14
IOC                                                                                                      1.10                    0.00                    1.10
                                                          Total Project Costs1                       47.44                       3.69                   51.13
                                                                      Front-endfee                                               0.40                    0.40
                                                Total Financing Required                             47.44                       4.09                   51.53

  I
   Identifiable taxes and duties are 0 (USSm)and the total project cost, net o f taxes, is 51.53 (USSm). Therefore, the project cost sharingratio is 76.65% of
  total project cost net of taxes.




                                                                     - 45 -

                             Annex 4: Cost Benefit Analysis Summary
                   INDIA Karnataka Urban Water Sector Improvement Project



SummaryofBenefits andCosts:

This Annex describes variables and assumptions usedto calculate the project's economic rate of
return, and refers to the economic model available inthe project's electronic files.

A cost-benefit framework is usedto assess the financial and economic viability, ofthe investment
component o f the project. With andwithout project scenarios are defined inorder to identify the
incremental costs and benefits o f the project, and evaluate the principal economic indicators o f the
project, that is, the net present value (NPV) and the internal rate of return (IRR). Due to the
relative openness o f India's economy, no macroeconomic conversion factors have beenusedto
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 hllcost o f energy. The analysis is modeled over 15 years @eriod
2004-2020). The cash flows are discounted using a discount rate o f 12 percent which i s assumed
to be a proxy o f the opportunity cost of capital inIndia and which i s also the Bank's typical hurdle
rate for water and sanitation projects. Project costs are detailed inAnnex 2 above.

Consistent with good practice, the analysis assessesthe incrementalcosts and benefits o f the
sub-projects individually. Key sub-components have also been subjected to the least-cost test as
part o f engineering designs, including a review of alternatives

Inthe base scenario, the netpresent value ofthe project is Rs.202.7 millions. The internalrate of
return i s 16%, above the discount rate. Because economic benefits have not been fully quantified,
notably healthbenefits and increasesinproperty value, this rate i s probably an underestimate,
therefore demonstrating the economic viability o f the project.




                                                    NPV                   IRR
                                                    (Rs.Million)
 Priority investments
   Belgaum                                                         8.3                13%
   Gulbarga                                                      54.7                 16%
   Hubli-Dhanvad                                                114.0                 21%
 Demonstration zones (coping costs                               25.7                 14%
 approach)
 TOTAL                                                          202.7                16%




                                                 -46-

1.Sector Development and TA (ComponentsA. 1and 2)

The net benefits of this component are difficult to quantify but are expectedto be positive. Sector
development activities, if successfully implemented, will provide the necessaryfoundation and
support for sector reform at boththe 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 o f sector reformby leveraging capital
investments. This component has not been included inthe cost-benefit analysis, which implies that
incremental benefits are expected to equal incrementalcosts.

2. Prioritv investments(Component Bl.)

The two maineconomic benefits derivedfrom the priorityinvestments are:

.An increaseinthe bulk supplyofwater to all4 ofthe cities involved, resultinginhigherper
-       capita availability; and
 Power savings resulting from more efficient pumping andnetwork redesign.

For all ULBs, the value o f water i s estimated at Rs. 10/m3 (USD 0.22/m3), which i s derived from
the current low price o f Rs. 50 per connectionper month and the current water consumption level
(about 5 m3 per monthper connection). It should be noted that, according to the household
survey, more thantwo-thirds o fhouseholds are supplementing their water needs with the
purchase o f tankered water at a cost o f Rs. 50-100/m3, which reveals a highwillingness-to-pay
for basic water needs (on the left o f the demand curve). While no demand curve couldbe
constructed due to lack o f data, the above information shows that it i s likely that the use of the
current effective price (Rs. 10/m3) as a proxy of the value o f water i s an underestimate. A more
detailed assessment, to be conducted during implementation and measuring users' response to
expected improvements, should provide an improved assessment and understandingo f the
demand for water services. This would be key to a better design o f the follow-on project.

la. Belgaum

InBelgaum, investmentswillinclude the replacement of28.4 kmofleakingpipelines for the
Rakkasakoppa and Hidkal schemes, 1.8 kmo f feeder mains, and the erection o f centrifugal
Pumps.

The expected benefits from the project are an additional 10 Mld supplied to Belgaum due to the
reductiono f leakages, bottlenecks and more efficient pumping.Incrementalpumpingcosts are not
assumedto be significant as increasedpumpingwould be offset by efficient gains interms of
energy use per volume o f water (due to the replacement o f pumps) and unit o f water delivered per
unitofwater produced (due to the replacement ofpumps).

Withtotal investment costs o fRs. 227.6 million (base cost), andthe value o fwater delivered in
Belgaum at Rs. 10 / m3 (see details above), the NPV would be Rs. 8.3 million, and the IRR 13%.



                                                 - 47 -

lb. Gulbarga

InGulbarga, investments will focus onthe Bhima schemewhich is the only perennial, secure
supply o fwater. The Bhosga source of water to the city has provedextremely unreliable and it
has not beenpossible to source any water from it for the last 3 years. The Bennithora scheme has
limitedpotential for further extension.

Investments will include the rehabilitation of the Bennithoratransmission main (10.5 km),
resultingina saving o f about 3 Mld, and the constructionof a secondpumpingmain for the
Bhima scheme (19.2 km), which will upgrade its capacity from 12.5 Mldto 50 Mld, andreduce
the risk for Gulbarga to rely on this dilapidatedmainfor a large proportion o f its supply. For the
Bhima scheme, new pumpswill also be commissioned, and additional filter unitswill be
constructedat the treatment plant to increase capacity.

The expected benefits of the project are an additional 12 Mldsupplied to Gulbarga due to the
reduction o f leakages. More benefits are expected from the additional capacity but the analysis
conservatively estimates that out o f the total 37.5 Mldavailable only 10 Mldwill be put to use.

With total investment costs of Rs.326.1 million (base cost), andthe value ofwater delivered in
Gulbarga at Rs. 10/ m3 (see details above), the NPV would be Rs. 54.7 million, and the IRR
16%.

IC. Hubli-Dharwad

BothHubliand Dhanvad are suffering far worse restrictions on their water supply than either
Belgaum or Gulbarga, once in7 days compared with once in2 days for the latter two cities.

The main element o f the project consists o f the construction o f a separate main (23 km) which
will by-pass the city o f Dhanvad, avoidan existing length o fmainfrom Dharwadto Hubliwhich
currently acts as a throttle on the amount o f water that can be passedto the city, thus increasing
the water supplied to Hublifrom the present 38 Mldto 49 Mld.

At present this flow i s pumpedto a highlevelreservoir inDhanvad and then gravitated down to
Hubli-this unnecessarypumpingheadresulting inexcesspower. The by-pass mainwill save on
the power needed to pump the water to Hubli- estimated to amount to an annual saving o f 3.8
million KWh, or Rs. 19 million annually (assuming an economic cost o f bulk energy o f Rs. 5 /
KWh).

Inaddition, the projectwill includethe constructionof 5 feeder mainswithinHublito overcome
bottlenecks on the system feeding the distribution networks from the new transmission main.

With total investment costs ofRs. 270.1 million (base cost), the value ofthe additional 11Mld
delivered inHubliat Rs. 10 / m3 (this water would be used immediately, giventhe severe scarcity
conditions inHubli), and total energy savings of Rs. 19 million, the NPV would be Rs. 114.0


                                                 - 48 -

million, and the IRR21%.

3. Works incitv distributionnetworksin all 3 ULBs (Component B2.)

The main objective o f this subcomponent i s to provide short term improvementsto majority o f the
water-stressed users outside the demonstration zones, particularly the hours o f supply per week.
Because the exact nature of these investmentshas not yet been defined, it is not possible to derive
an ex-ante rate of return for this subcomponent. However, the identification o f these small-scale
investments which will start as a matter o f priority and will result from network surveys and
modelling, mainly to locate the major bottlenecks. Giventhe limitedbudget available for these
immediate works inthe city networks, before more substantial interventions can be designed and
implemented ina follow-on project, their selection and prioritization will be done accordingto a
set criteria (see details inAnnex 2 above). The selection criteria will include both
cost-effectiveness (have the least cost per unit savings inphysicallosses) and cost-benefit criteria
(show a positive net benefit based on the increased volume of water distributed). Ifthis economic
criteria i s used, investments under this subcomponent are expected to have at least a positive
NPV. It is therefore assumedthat works incity distributionnetworks will at the minimumhave a
neutral impact on the overall economic rate of return o f 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 usedto influence water supply and demand
*  distribution system i s not subjected to unnecessary stress
.improvement ofthe householdeconomy
.muchless customer inconvenience

Investment and operationcosts were estimated on the basis o f Scenario 2 inthe engineering
study, which includes: (i) costs to establish the demo zone; (ii)
                             base                                        replacement o f 50% o f
service connections; (iii)  replacement o f 40% o f the existing distribution network; and (iv) new
meters installedat 100% o f the connections. The total number o f beneficiaries (based on existing
connections) i s about 20000 households.

Two different methods were used to assess the economic benefits o f this subcomponent: (i)       the
statedpreference approach, usingthe stated incrementalwillingness-to-pay for the levelo f
service (24/7) proposed as a proxy o f the net benefits, and (ii) the revealedpreference approach,
usingthe value o f the coping costs that are expected to be offset by the introduction o f 24/7 as a
measure o f the net benefits.

j`i) Willingness-to-pay (WTP) approach. The householdsurvey carriedout for the social
assessment indicates that on average households would be willing to pay an extra Rs. 125 per
connectionper monthfor 24/7 service. The NPV for all the zones would be minusRs. 156.7


                                                 - 49 -

million and the IRR2%.

(ii) costsapproach.ThehouseholdsurveyrevealedthatonaveragehouseholdsspendRs.
    Coping
250 per month incoping 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 o f households have made substantial investments inbuildingsumps
and rooftanks, while most o f the remaining2/3 have invested indrums and vessels. Other coping
costs that were not fully assessed inthe household survey include healthcosts, loss o f amenity
reflected inlower property values, etc. These would be studied inmore detail through the demand
assessment/monitoring which will be carried out during project implementation. They are not
includedinthe present analysis because of the difficulty incarrying out an ex-ante analysis and
predicting impacts with a sufficient degree of confidence. Assumingthat coping costs to
supplement water needs will be fully offset by the introductiono f 24/7 service, the NPV would be
Rs.25.7 million andthe IRR 14%.

The significant differences found inthe use o f either method are not entirely surprising.Indeed,
willingness-to-pay i s stated on the basis o f incomplete information on the real coping costs
incurred, and a certain skepticism as to whether the promised level o f service (that would reduce
or even offset certain coping costs) will materialize. This is actually why the Government o f

population -- to demonstrate and convince the majority that a move to world-class service i s
Karnataka selected this gradual approach, starting with a pilot limitedto about 10%o f the

indeed feasible, and generate support -- including for higher user charges -- for a scaled-up
project, inthe rest o f the ULBsand elsewhere inthe State.

Inaddition, a substantiallylower rate ofreturnwouldbe expected for a demonstrationproject
compared to the future, scaled-up citywide phase. The mainreason i s that the

project -- it doesn't take much more expatriate inputsto runan entire system with 30000
Operator-Consultant fixed costs (mainly expatriate staff) are disproportionately highfor a demo

connections that a demo zone almost 10times smaller.




                                                  - 50 -

MainAssumptions:

The key assumptions have beenincluded inthe above text describing the analysis:

Sensitivityanalysis / Switchingvalues of critical items:

Sensitivity tests have been carried out on the critical variables. The values o f these variables will
be monitored during supervision as better quality informationbecomes available. The results,
presented inthe table below, indicate a relative robustness o f the rate o f return. Some key project
risks, however, are o f commitment to reform / politicalnature and cannot be adequately measured
ina conventionalcost-benefit analysis.


                                                                  NPV        IRFt
 Base scenario                                                        202.7        16%
 Investments costs increase bv 20% (mioritv investments)                54.9        13%
IInvestments/O&M costs increase bv 50% fdemo zones)                     56.31       13%1
IIValue
 Investments costs increase b v 20% (orioritv) and 50% (demo)          -91.61       11OA
       of water is reduced bv 20% (mioritv investments)           III   46.91       13%1
 Coping costs 50% smaller than expected (demo zones)                    20.3        12%
 Energy savings reduced by 50% (priority investments)                  145.9        15%




                                                       - 51 -

                                   Annex 5: Financial Summary
                 INDIA: Karnataka UrbanWater Sector Improvement Project
Overview

One o fthe development objectives o f the Project is to improve urbanWSS services inthe
participatingULBs and demonstrate that sustainable, efficient, and commercially-oriented service
provision can be achieved. Financial sustainability i s one of the key factors that would contribute
to such a goal, andrequires significant attention, as the historical /current financial performance of
the sector has beenvery poor.

According to the Urban Drinking Water and Sanitation Policy Statement of GoK,"Given that
potable pipedwater is expensive, it is necessaryfor natural resource sustainability and commercial
viability o f operations to recover from the users the cost o f providingthis service . The longer
term objective i s to establish an appropriate cost recovery mechanismthrough 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 inthe long
term can be an enormous challenge for the ULBs of Kamataka, as they currently cover only a
small portion o f their O&M expenses through tariff revenues. Subsidies and grants for the service
providers will therefore continue to be needed inthe mediumterm, but the focus should be more
on targeting the poor and providing sanitation.

Inkeepingthe longterm full cost recovery goal inmind,a step-wise approach would needto be
taken to facilitate the reformprocess and address the numerous issues along the way. With
regards to financing o f the sector at the state level, the Project envisages to assist GoK incarrying
out among other studies, the state sector development strategy/action plan, includingdetailed
fiscal allocation o f state. With regards to ULB level reform, the Project envisages to assist the
participatingULBs through the following studies:

    Ring-fencingthe WSS Operations: Assistance will be givento the ULBs separatetheir
    WSS accounts from rest o f the municipal services usingthe workbook developedduring
   project preparation. As a first step, record keeping o f 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 buildingo f 2-3 municipal staff ineach ULB on basic
   accounting of WSS services will be also conducted.

   ImprovementinWSS Billingand Collection: Assistance will be given to the ULBsto
   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 incoordination with the computerization project
   undertaken by GoK, through KUIDFC. Billing and collection information for the demo zones
   will be recordedseparately from rest o f the zones as well, as they would adopt a volumetric
   pricing systembased on meteredconsumption.

   Definingthe WSS Tariff Structure: An additional task will be included inthe proposed



                                                  - 52 -

     study, "Water and Sanitation Sector Investmentand Tariff Frameworks". Inthe context of
    formulating the state tariff policy/structure/guidelines, an appropriate tariff structure, including
    the volumetric tariff structure and rates inthe demo zones will be developed for each
    participating ULB. Attention will be given to target cost recovery levels, subsidy policy,
    awareness creation o f 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 relatedassets, while the health department
covers sanitation services and the revenue department bills and collects the WSS relatedtariffs
and taxes. Inmany cases, KUWSDB is also involved not only with regards to assets creation, but
also inperforming O&M activities, due to the poor capacity o f the municipal water departments.
This arrangement of recordingthe WSS relatedrevenues and expenses invarious departments
withinandoutside of the municipality makes it difficult to provide a clear overview ofthe
financial situation of their WSS operation.

The cost recovery data and the level of subsidies flowing into the WSS sector inKarnataka are
also very difficult to measure, as there are many recorded andunrecordedsubsidies inthe
accounts, and the ULBs are not accustomed to separating the WSS accounts from rest o f the
municipal services. The cash-based, single-entry accounting system widely usedinthe state does
not provide sufficient information for constructingbalance 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 recordedfinancial data is often inconsistent
andunreliable.

Inorder to findout the historical andcurrent cost recovery levels for WSS sector, aworkbook
has been developedduringproject preparationto ring-fence the WSS accounts from rest o f the
municipal services. Usingthe methodology outlined inthe workbook, WSS financial statements
for the past three years have been constructed by an independentaccountant usingthe existing
data obtained from the municipalities, KUWSDB, and KPTCL (attached at the endo f this
section). As mentioned above, construction o f the balance sheet, income statement, and cash flow
statement i s very difficult due to lack o f key information on assets etc. However, this effort is
envisaged to continue duringproject implementationby buildingthe capacity o f the municipal
managers to systematically record WSS relatedtransactions ina separate format.

Currently, there i s a state wide project undertakenby GoK to computerize the municipal accounts
of Kamataka. The modules that include the following: (i)      registrationo f 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, andbuildmunicipal 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 ina simple spreadsheet, so that
the data can later be mergedinto GoK's computer project once it is ineffect. This activity will
fall under the sub-component A2 o f the sector development component and be implemented in



                                                   - 53 -

close coordination with GoK's project to maintain consistency of the accountingprograms inthe
state.

Two to three staff ineach municipality will be trained to reconstruct the financial statements for
the WSS operations by separating the accounts relatedto WSS for the past years following the
double entry accounting system. The staff who have leamed to separateWSS accounts will be
assigned to continue the recordingo f the WSS transactions on a daily basis to develop separate
financial statements for the WSS operation ina computerized system. Such strengthening of the
financial management systemwould enable the municipalities and GoK to accurately estimate the
sector budget, maintain transparency o f WSS-related revenues and costs, and monitor the project
performance indicators.

ImprovementinWSS Billingand Collection

Another key activity to be included inthe sector development component o f the Project i s the
improvement o f WSS billing andcollection performance for the three participating ULBs. As
indicated inthe table below, the bill collection rate inthe past four years has been deteriorating for
Hubli-Dhanvad, from 80% inFY98/99to 37% inFY01/02,while it has remained inthe range o f
49-59% for Belgaum, and28-35%for Gulbarga. The Project envisagesto 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 weightedaverage of
the indicators (details under section A2, Key Performance Indicators) would need to reach 75%
or higher for being success.

Table: HistoricalBillCollectionRates

                            Hubli-Dharwad            Belgaum                Gulbarga
        1997-1998                70%                    56%                   41%
        1998-1999                80%                    49%                   32%
        1999-2000                76%                    51%                   28%
        2000-200 1               63%                    59%                   35%
        200 1-2002               37%                    53%                   30%

The GoK funded computerization project described inthe previous section includes an
Oracle-based billingand collection system. An early introduction o f this computerizedbillingand
collection system would facilitate monitoring o f the WSS bills o f the customers and their payment
records.

As a first step, an electronic customer databasewill be created ineach ULB byputtingthe
existing manually recordedcustomer information inthe computers. Consultants will be hiredto
assist the ULBs infinalizing this databaseand to implement electronic recording o f 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 i s achieved and meteringi s
completed, volumetric tariffs will be adopted inthe demonstrationzones. The computerized


                                                  - 54 -

billing andcollection system will enablerecordingof the demo-zone billswhich will be different
for each consumer depending on their consumptionlevel, andhave a more frequent billing cycle.
It is also expected that the billingand collection systemwill be linkedelectronically to various
collection centers as well as the ULBs'ring-fenced accounting system for WSS operations.

Inadditionto the introduction ofthe computerizedbillingandcollection system, the Project
envisagesto develop various measures for improving the billcollection performance ineach ULB.
The exact methodologieswill be selectedbythe municipal managersandthe consultants, butthey
could include: (i) to remind the customers o f their dues, including advertisement in
                    efforts
newspapers and microphone announcements of customers with accumulated arrears; (ii)
performance incentive system for the municipal staff incharge o f billing and collection; and (iii)
enforcement o f disconnectiono f the accounts.

Definingthe WSS TariffStructure

In1996,Hubli-Dhanvad hadintroducedavolumetric tariff systemthat sets rates for eachcubic
meter of water used, depending on the consumption level and consumer class. However, this
systemhas not been implementedfor many years due to the severe drought andinefficient service,
resultinginnon-functioning o fmeters. Therefore, all three ULBsare currently applying fixed
tariff rates for the various groups o f consumers. Hubli-Dharwad and Gulbarga charge annual
rates o f Rs. 540 for domestic consumers, Rs. 1,080 for non-domestic, and Rs. 2,160 for
commercial customers. Belgaum has increased its tariff inFY 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. Ifit i s assumedthat an average householdconsumes 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:AnnualTariffsChargedinFY01/02(Rs)

                                 Hubli-Dhanvad    Belgaum (New Tariff          Gulbarga
                                                    effective FY02103)
 Domestic                                  540              450 (800)               540
 Non-domestic                            1,080          3,000 (9,000)             1,080
 Commercial                              2,160         5,000 (15,000)             2,160

The Sector Development component o f the Project will assist GoK and the ULBsto develop
sound tariffpolicies at the municipality level and a volumetric tariff system inthe demonstration
zones. Inaddition to following the long runmarginal cost method set by GoK policy, the new
volumetric tariff structure will be incorporating: (i) cost recovery target, based on the financial
                                                       the
analysis; and (ii) the needs o f the poor and low income groups o f the population, based on the
social assessment and willingness to pay studies. Charging the consumers for the quantity o f
water they have consumed would not only introduce fairness to the tariff structure, but also
facilitates the monitoring and planningo f 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, implementationof the new volumetric structure will be adopted only after the
continuous water supply has been achieved, accompanied with communication campaigns and


                                                 - 55 -

social awareness work.

Insummary, the followingmethodologyandprinciples will beusedfor water pricinginthe
demonstration zones:
(i)Therewillbecarefidtransitiontovolumetricpricingbyusingbothflatrateandvolumetric
    billing inparallel for a few months, accompaniedwith social intermediatiodcommunication
    activities;
(ii) volumetricratewillbeatleastRs.10/m3,whichcorrespondstowhattheusersare
    The
    actually paying now for 30 lpcd. The detailed tariff structures inthe demonstration zones will
    be finalized by June 30,2005;
(iii)
    Connection subsidypolicy will also be examined; and
(iv)Initialtarget for the tariffs will beto cover no less than 50% o f O&M costs andprogressively
    increases to no less than 80% O&M costs by the end o f this project.

Inthe rest ofthe ULBs,there will be a step wise tariff increasealong with service improvements
resultingfrom the priority/distribution network investments.

Financial Summary of the three ULBs' WSS Operations
Duringproject preparation, data has beencollectedto get an overview ofthe financial healthof
the participating ULBs, as well as their WSS operations. Currently, the municipalities follow the
procedures containedinthe KarnatakaMunicipalAccounts code andmaintainrecords o f
transactions entered and compile the monthly abstract of receipts and expenses from these
records. Effective control i s exercised inensuring that all expenses are withinthe budget approved
(historical financial statements for the three ULBs are attached at the end o f this section).

Preliminary cost recovery analysis has beenconducted by estimating the revenues and expenses
for the WSS operations. The total WSS relatedrevenues include water sales revenues, other
water and sewerage charges that include taxes, and a deduction o f an estimate o f 2% loss on
receivables. The O&M costs for the WSS operations include: (i)
normally amount to 27% - 28% o f total O&M expenses for Belgaum and Gulbarga, and 34% for
                                                                   power and chemicals which

Hubli-Dhanvad; (ii)   salaries and wages, which are calculatedby estimating the number o f
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 maintaintheir assets properly;
(iv) supply of bulkwater charges from KUWSDB; and (v) other costs. Total costs would include
estimated depreciation o f 5% and interests on loan and bulkwater supply. O&M cost recovery i s
calculated by dividingthe total revenue with O&M costs. Fullcost recovery i s calculatedby
dividingthe total revenue with total WSS relatedcosts, including O&M, depreciation, and debt
service.

Results o f the analysis show that the total WSS related revenue cover 87% o f 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 o f grants from the state, including
SFC grants, share o f salaries, grants adjusted by KUWSDB and KPTCL, which are categorized as
revenue intheir accounts. Ifthese grants and subsidies are excluded from the revenue figures, the
O&M cost recovery from WSS relatedrevenues (tariffs andwater & sanitationtax) declines to


                                                 - 56 -

19% for Hubli-Dhanvad, 39% for Belgaum, and 17% for Gulbarga. Ifdebt service and
depreciation costs are taken into account, these figures further worsen to 16% inHubli-Dhanvad,
24% inBelgaum, and 11%inGulbarga. Giventhat the municipal staff lack sufficient skills and
capacity to performproper repair and maintenance o f 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 levelin200112                            19%           39%             17%
B.Fullcost recoverylevelin200112                              16%           24%             11%
C. Full cost recovery includinggrants in 200112               87%           83%             49%

Note:
A.        WSS tariff andtax 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, grantsadjustedby KUWSDB loanand KPTCL /
full cost including        O&M, depreciation, and interests

The low tariff levels, poor collection performance, and rising expenses have contributed to
widening o f the gap betweenthe revenues and costs for all ULBs over the years. Inaddition,
sewerage charges are either non-existent or coveredunder 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 o f approval by the municipal counsels. However, preliminary
consumer interviews and surveys conducted inthe region (details insection E6 on social aspects)
suggest that customers are willing to pay significantly more for better services.

Usingthe project cost estimates, data collected from the ULBs, KUWSDB, and KPTCL and
revenue and cost relatedassumptions, a simple andpreliminary financial model has been
constructed to do a back o f an envelope calculation to estimate the level o f tariff increase
necessary to achieve cost recovery inthe mediumto long term (projected income statements for
the three ULBs are attached at the end o f this section). Although the analysis i s basedon data that
could lack reliability and consistency, and a number o f rough assumptions have beenused, the
preliminaryresults indicate that two o fthe ULBswill remain indeep 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 recoveryby 2007                                               52%             18%        61%
O&M cost recoveryby 2012                                               25%              7%        25%
Fullcost recovery (incl. depreciationand debt ) by 2007                28%             35%        80%
Fullcost recovery (incl. depreciationanddebt) by 2012                  26%             12%        29%




                                                        - 57 -

Belgaum, mainly due to its recent tariff increaserequires the least drastic tariff increases of 7% to
18% to reach O&M cost recovery infive 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 infive to ten years. Hubli-Dharwad andBelgaumwill continue to be ina huge financial
deficit that would require state subsidies for the foreseeable future, even ifminor tariff increases
would take place.

Through its sector development components and improvements inservice delivery (investment
component 2), the Project aims to strengthen the management o f the WSS operations and
introduce operational efficiency to improve the financial healtho f the ULBs.Since it i s difficult
and complex to monitor the financial statements o f the entire ULBs' WSS operations due to lack
of reliable baseline data and systematic recording o f the accounts performancetargets have not
been established for the whole geographical area served by the ULBs. However, establishment o f
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 inWSS service
delivery is expected to be achieved, including: (i)  increased hours of water supply service; (ii)
more equitable supply across different areas ineach participatingULB; and (iii) access to
                                                                                      broader
sanitation facilities (including inthe 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 inthe future, it would be
crucial to secure commitment from the ULBsto adopt a financially, economically, and socially
sound pricing structure along with improvements inservice delivery.

The demonstration project that is planned to be implemented infour zones o f the three ULBs
envisages to demonstrate that 24-hour continuous supply is achievable andto show the
benefits-health,    technical, operational and commercial-it   brings.Continuous supply would
enable full metering o f consumption, which would make the adoption o f volumetric tariffs
possible. This i s inline with the state policy which states that "in a realistic time frame o f about
five years, efforts will be made and ULBs encouraged to achieve 100%metering and volumetric
pricing based on long runmarginal costs".

Inthe longrun, GoK considers PPP to be one ofthe key options to help bringinstitutional
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 meteredclients,
which would create an enabling ground for better management and commercial orientation for the
provision o f WSS services inthe ULBs.Such developments are expected to lay the grounds for
successful implementation o f a possible future PPP contract, which will be studies under the
Project's sector development component.




                                                 - 58 -

MunicipalFinancialStatements

Comparisonof BudgetVS Actual: HubliDharwadMunicipalCorporation

Particulars                                  1999-2000                2000-2001                2001-2002
                                     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 (LightingDepartment)
Interest on Repayments
Miscellaneous & Other Exps
Social Welfare and Weaker section                0      253.15            0      245.18              0      96.89
Total of Expenses                        6003.94      4236.51      6036.65     6058.98      6588.29       4637.89
SurplusKleficit                          (438.15)     (122.16)     1523.07      107.19       164.82       (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 o f opening and closing balance o f the bank




                                                       - 59 -

 Comparison of BudgetVS Actual: BelgaumMunicipalCorporation

IParticulars                               1999-2000               2000-2001                2001-2002
                                     Ludget     ]Actual     ]Budget     ]Actual     IBudget        IActual
Receipts                                                                            I
 Taxes                                      951       546.96        937      553.26          947        545.62
 Fees                                    128.95        61.56       124.5       66.97      142.97           75
 Capital receipts                       431.25         78.14      354.87       69.91      141.08         72.59
Miscellaneous Receipts                    233.8       148.18      276.06      142.83       191.1        164.07
 Grants and Contribution                 1312.5     1862.01       1769.5    1968.66         2106         1725
 Total of Receipts                      3057.5     2696.85      3461.93    2801.63       3528.15      2582.28

Expenses
Pay and Allowances                        839.4       978.57                              1072.5
Pensionand Gratuity                                   169.95                 256.67
Major Works                                           311.51                 293.62
 Other Works                                           17.21                   13.86
Water Supply                                          715.41                 746.66
 Helath /Hospitality                      96.45        89.47                   140.1       161.7
Lightings                                             223.35                 210.94
Miscellaneous and Other Exps              201.7       102.15                   92.16       157.4
ISocialof
       and Welfare exps                   136.3       135.15                  138.59      158.02
 Total    Expenses                    2906.95                                            3359.22
ISurolus/Deficit                        150.55        -45.92       23.46       43.03      168.93
SourcesBasisof 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




                                                       - 60 -

Particulars                     1990-2000          2000-2001          2001-2002
                           Budget   Actual    Budget   Actual    Budget   Actual
Receipts
Municipal Rates & Taxes       478.71    179.46   676.79    207.52   690.50    252.37
Fees                          180.00    108.96   202.00    223.89   253.00    133.87
Miscellaneous Reciepts        190.20     39.34   263.05     54.18   205.35     54.07
Grants & Contributions       1336.50   1049.59  1451.50    934.99  1590.00   1211.82

TOTAL OF RECEIPTS            2185.41   1377.35  2593.34   1420.58  2738.85   1652.13

Expenses
Pay and Allowances            534.15    519.35   538.57    528.42  1473.31    454.58
Pension & Gratuity              0.00      0.00     0.00      0.00     0.00      0.00
Major Works                   419.00    377.14   432.00    401.30   300.00    462.55
Water supply                    0.00      0.00     0.00    109.72   100.00    288.83
Lightning                     170.00     13.43   145.00     58.64   102.00    167.91
Publi Helath                  211.90    259.67   206.50    104.49   158.05     122.07
Miscellaneous                 195.25     57.44   224.50     19.67   205.00     30.67
Scocial welfare               189.39    177.94   134.53    185.43   205.00     63.29
TOTALOF EXPENSES             1719.69   1404.97  1681.10   1407.67  2543.36   1589.90




                                      -61-

FinancialProjections WSS Sector: HubliDharwad Municipal Corporation
                             -
Base case without tariff increase

Fiscalyear                                2001-02     2002-03      2003-04   2004-05     2005-06  2006-07    2007-08
   (Rps Lakhs)
    Water Sales Revenues                        539        726         762         800        840       882      926
       Total # o f connections              90,069     121,754     127,842    34,234      140,945  147,993   155,392
        Rev per connection (inRs)               599         596        596         596        596       596      596
   Water and Sewerage                            36         40          40         45          45        50       50
   Sewerage tax- 10 % o f Propertytax            57         60          64          67         71        76       80
   Loss on Receivables                          108         145        152         120        126        88       93
       % of the water revenues                 20%         20%         20%        15%        15%       10%      10%
Total Revenues after loss on Rec.               524        681         713         792        830       920      964

   Operational Expenses
   Power and Chemicals                          945      1,086       1,249      1,437       1,652     1,900    2,185
   Salaries and Wages                           289        310         331         354        379       406      434
   Repair and Maintenance                       402        438         478         521        568       619      674
   Supply o f Bulk Water - KUWSSB               897        969       1,046      1,130       1,220     1,318    1,423
   Other expenses                               268        284         301         319        338       358      379
rotal Op Expenses before Interest             2,801      3,087       3,405      3,761       4,157     4,601    5,097

;ass before Depreciation                     (2,277)    (2,406)     (2,692)    (2,968)     (3,327)   (3,68 1) (4,133
   Interest on Loan and Bulk water               79         62          52          46         44        41       39
   Depreciation                                 478        419         419         641        641       641      641
rotal costs incl. depr and interest          3,358       3,568       3,877      4,447       4,842     5,283    5,776
Loss after Interest and Depn                 (2,834)    (2,887)     (3,163)    (3,655)     (4,011)   (4,363)  (4,812
;rants, Salary,KPTCL,KUWSSB                   2,387      2,000       2,000      2,000       2,000     2,000    2,000
Yet IncomeILoss                                (447)      (887)     (1,163)    (1,655)     (2,011)   (2,363)  (2,812
2ost of Waterper Kilo leter                   21.98      21.92       18.65       19.27      20.98     19.06    24.74
2ost recovery Operational cost                  19%        22%         21%         21%        20%       20%      19%
kllCostRecoeverylevel                           16%         19%         18%        18%        17%       17%      17%

Sources Basis o f Data: Data compiled from Municipality records, KUWS&DB, K P T C L records, B W S report

Key Assumtions:
   Water sales revenues are based on the current flat rate tariffs and number o f connections.
   Total number o f 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%infive years
   The increase in Power charges is based on information provided by Commissioner o f MC
   Salarires, Repairs & Maint, other charges are based on the past trend o f expenditure from 97-98 to 01-02
   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 2001-02 figure and there by gradually decreasing
   Cost per IUis calculated taking into account total operating expenses by Net qty awailable for distribution




                                                       - 62 -

Financial Projections - WSS Sector: Belgaum Municipal Corporation
Base case without tariff increase

'iscal year                            2001-02    2002-03      2003-04   2004-05     2005-06    2006-07    2007-08
  (Rps Lakhs)
   Water Sales Revenues                     180        386          406        426        447       469        493
      Total # o f connections            30,334     30,798       32,338    33,955      35,653    37,435     39,307
      Rev. per connection (inRs)            594       1,254       1,254     1,254        1,254     1,254      1,254
  Water and Sewerage                        131         130         130        130         130       130        130
  Sewerage tax- 10 % o f Prop. tax           31          32          34          36         37        39         41
  Loss on Receivables                        36          77          81          64         67        47        49
      % of the water revenues              20%         20%         20%         15%        15%       10%        10%
Total Revenues after loss on Rec.           306        471          488        527        547       592         615

  Operational Expenses
  Power and Chemicals                       215        226          226        238        249       262         275
  Salaries and Wages                        202        212          222        234        245        257        270
  Repair and Maintenance                    105         107         109        111         114       116        118
  Supply o f Bulk Water - KUWSSB            260         273         286        301         316       331        348
  Other expenses                             10          11           11         11         11        11         12
'otal Op. Expenses before Interest          792         828         855        894         935       978      1,023

,oss before Depreciation                   (486)      (357)        (367)      (367)      (388)     (387)      (409:
  Interest on Loan and Bulk water           237         224         212        199         186       173        160
  Interest on Power charges                   3
  Depreciation                              253         253         253        253         439       439        439
'otal costs incl. Depr. and interest      1,285       1,305       1,319     1,346        1,560     1,590      1,622
Loss after Interest and Depn               (979)      (834)        (831)      (8 18)   (1,012)     (998)     (1,007:
irants, Salary,KPTCL,KUWSSB                 763         700         700        700         700       700        700
Jet Incomenoss                             (217)      (134)        (131)      (118)      (312)     (298)      (307:
Operational cost per KL                    6.99        7.10        6.42        6.55       7.59      6.70       6.84
:ost recovery Operational cost              39%         57%         57%        59%         59%       60%        60%
'ullCost Recoverylevel                      24%         36%         37%        39%         35%       37%        38%

Sources /Basis o f Data: Data compiled from Municipality records, KUWS&DB, KPTCL records, B W S report

Key Assumtions:
  Water sales revenues are based on the current flat rate tariffs and number o f connections.
  Total number o f 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 o f 5% increase is presumed for every year
  Loss on receivables is assumed to be 20% on demand, grandually decreasing to reach 10% infive years
  The increase inPower charges is based on information provided by Commissioner o f M C
  Salarires, Repairs & Maint, other charges in are based on the past trend o f expenditure from 97-98 to 01-02
  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 2001-02 figure.
  Cost per KL is calculated taking into account total operating expenses by Net qty awailable for distribution




                                                       - 63 -

Financial Projections WSS Sector: Gulbarga Municipal Corporation
                            -
Base case without tariff increase

'iscal year                                  2001-02     2002-03    2003-04   2004-05    2005-06     2006-07    2007-08
   (Rps Lakhs)
    Water Sales Revenues                          126        167        176        185        194          204      214
       Total # o f connections                22,614      30,359     31,877    33,471      35,144      36,902    38,747
        Rev. per connection (inRs)                555        552        552        552        552          552      552
   Water and Sewerage                              28          35        35         35         35           35       35
   Sewerage taxes- 10 % o f Property tax           10          10        11         11          12          13       13
   Loss on Receivables                             25          33        35         28         29           20       21
       % of the water revenues                    20%        20%        20%        15%        15%          10%      10%
Total Revenues after loss on Rec.                 139        179        187        203        212          231      241

   Operational Expenses
   Power and Chemicals                            230        252        278        306        336          370      407
   Salaries and Wages                             114        122        131        140        150          161      172
   Repair and Maintenance                         339        370        403        439        479          522      569
   Other expenses                                 150        153        156        160        163          166      169
'otal Op Expenses before Interest                 834        898        968      1,045      1,128        1,218    1,317

,oss before Depreciation                        (695)       (719)      (782)      (841)      (916)        (987)  (1,076
   Interest on Loanand Bulkwater                 259         251        242        234        225          216      208
   Depreciation                                   192        199        199        199        439          439      439
'otal costs incl. Depr. and interest           1,285       1,348      1,409      1,477      1,792        1,874    1,964
Loss after Interest and Depn                  (1,146)     (1,168)    (1,223)    (1,274)    (1,580)      (1,643)  (1,723
irants, Salary,KPTCL,KUWSSB                      486         200        300        500        500          500      500
Jet IncomefLoss                                 (660)       (968)      (923)      (774)    (1,080)      (1,143)  (1,223
Operational cost per KL                            15          16        15           8         10          11       11
lost recovery Operational cost                    17%        20%        19%        19%        19%          19%      189
'illcostrecoverylevel                             11%        13%        13%        14%        12%          12%      129

Sources /Basis o f Data: Data compiled from Municipality records, KUWS&DB,KPTCLrecords, BWS report

Key Assumtions:
   Water sales revenues are basedon the current flat rate tariffs andnumber o f connections.
   Total number o fconnectionsare assumed to increaseat 5% annually.
   Income from other charges is assumed to be Rs. 35 lakhs over time.
   10% o fProperty tax is taken for Sewerage taxes and a growth o f 5% increase is presumedfor every year
   Loss on receivables is assumed to be 20% on demand, grandually decreasing to reach 10%infive years
   The increase inPower charges i s basedon informationprovidedby Commissioner o f M C
   Salarires, Repairs & Maint, other chargesare basedon the past trend o f expenditure from 97-98 to 01-02
   Interest on Loan is extracted from KUWS&DBrecords
   Capital expenditure includes the project related investments
   5% annual depreciation is assumedon the assets.
   Share of Grants is assumedto be Rs200there by gradually increasing
   Cost per KI,i s calculated taking into account total operating expenses by Net qty awailable for distribution




                                                        - 64 -

                            Annex 6(A): Procurement Arrangements
                 INDIA: Karnataka Urban Water Sector Improvement Project

Procurement

A.       InstitutionalCapacity/Readiness:

The project will be implementedby KarnatakaUrban InfrastructureDevelopment Finance
Corporation (KUIDFC), a company registered under the Companies Act, and fully owned by the
Government o f Karnataka(GoK). KUIDFC will have the overall responsibility for handlingall
the Procurementunder the Project. The procurement o f Goods and Works under Priority
Investment Component (B1) will be handledby KUIDFC with assistance from KarnatakaUrban
Water Supply & Drainage Board (KUWSDB). For this component, KUWSDB will assist most of
the process, including the services o f design, technical aspects o fprocurement, preparationo fbid
documents, preparationo f evaluationbids,participation inthe evaluations committee and
supervision o f works. KUWSDBhas experienced engineers to handleprocurement including
some engineers who have receivedprocurement training from ASCI, Hyderabad. The evaluation
o f bids will be done by the Tender Committee o f KUIDFCwhich 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 o f the
respective UrbanLocal Body (ULB) and the Chief Engineer, Rural Development Engineering
Department. Biddingdocuments for the major works to be executed inthe first year have been
preparedand shared with Bank.

Implementation o f the Works incity 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 o f its nature and possible
relationto the works inthe demonstrationzones, 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), KUIDFCwill select an
Operator-Consultant (OC). The pre-qualification process for selectiono f this OC has already
started and the application for pre-qualification have been receivedby KUIDFCand are under
evaluation. The OC so selected will prepare the procurement plan for Goods and Works required
for implementation o f this component. This procurementplanwill be cleared with KUIDFC and
the Bank.The procurementof Goods and Works for this component will then be handledby the
OC on behalfo f the KUIDFC following the Bank Guidelines.

The procuremento f the Consultancy Services under all the Components o f the project will be
directly handledby KUIDFC.

The capacity assessment of KUIDFCwas carried out duringthe project preparation. KUIDFC is
the Nodal Agency o f GoK for implementation andmonitoring o f Urban Infrastructure Projects
throughout Karnataka. It does not have any internal procurement rules and follows the State


                                                 - 65 -

Government rules for all state funded projects. Incase of externally funded projects, KUIDFC
follows the procurement guidelines of the fundingagencies. Though it i s currently executing two
ADB projects, KUIDFC hasnothandledany WorldBank fundedproject so far.

The procurement set up inKUIDFC will be headedby Assistant General Manager who would be
supported by an Assistant Engineerhaving 7-8 years experience inProcurement. The Assistant
General Manager and the Assistant Engineer have bothreceivedtraining for procurementunder
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 FundedRural Water Supply Project and is, therefore, conversant with the World
Bankprocedures and Guidelines. KUIDFC also proposes to appoint at least two more
procurement specialists who have procurement experience inthe World Bank Fundedprojects.

With these steps to strengthen its capacity, KUIDFC will be able to handle the procurementunder
the project. However, it will be necessarythat KUIDFC imparts training to its staff handling
Procurementto refresh their knowledge o f the procedures under the World Bank funded
procurement.

B.      ProcurementMethods:

All Goods and Works financedunderthe Loanshall beprocured inaccordance with the World
Bank's Guidelines for Procurement, January 1995, revised January andAugust 1996, September
1997 and January 1999. Consulting services to be funded through the Bank's Loan shall be
procured inaccordance with the World Bank's Guidelinesfor the Selectionand Employment o f
Consultants by the World Bank Borrowers, January 1997, revised September 1997, January 1999
and May 2002. All civil works, goods and services will be procured usingIndia-specific Model
Standard Pre-qualification, BidingDocuments and RFPs for Bankfunded projects. Specific
procurement arrangements are summarized inTables A and Al, and are briefly described below.

Works (US $ 36.69 million)

National Competitive Bidding N C B )

Works relating to "Priority Investment" will include replacementhehabilitationo f existingpipe
lines (two contract packages o f estimated value US$4.23 million and US$2.39 million
respectively) and addition to treatment plant (US$2.2 million) for Gulbarga; replacement of
existing pipeline and construction o f Ground Level Storage Reservoir inBelgaum (two contract
packages of estimated value US$ 2.8 million andUS$ 2.3 million); providing and laying pipelines
and Feeder lines (inthree packages of estimated value US$4.76 million, US$ 0.91 million and
US$0.52 million) inHubli-Dhanvad. These works will be awarded following NCB procedures as
per para 3.3 and 3.4 o fthe Guidelines. The maximumvalue o fone contract is up to U S $4.76
million. NCB is considered a preferred method as the works are not likely to be o f interest to
foreign bidders inview o f the nature & geographical spread o f the works.




                                               - 66 -

Works relating to the improvement of city distribution networks typically would include those
related to elimination o f sections of pipelines imposing unnecessarythrottles on supply, pipe
replacement where physical losses are excessively high,network sectorization, augmentation o f
the capacity o f tanks and reservoirs andor construction of new ones, improvements to water
quality caused by infiltrationo f contaminated groundwater, etc. Works for this component
estimated to cost the equivalent o f US$ 100,000 or more per contract will be awarded following
NCB procedures as per para. 3.3 and 3.4 of the Guidelines.

Procuremento f Small Works

The works relating to "Demonstration Zone" estimated to cost the equivalent o f US$ 100,000 or
more per contract will also be awarded following NCB procedures as per para 3.3 and 3.4 o f the
Guidelines. Works relating to Demonstration Zone, and to the distribution networks estimated to
cost less than U S $ 100,000 per contract may: (a) be procuredunder lump sum price contracts
awarded on the basis o f 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 o f 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 o f 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 CompetitiveBidding :
0   Goods for "Priority Investment" would include supply and installation o f pumps and
    accessories for the three ULBs intwo packages o f estimated value US$ 1.01 million and US$
    0.46 million. These goods will be procured following ICB procedures inaccordance with
    SectionI1o fthe Bank Guidelines.
0   Goods for "Demonstration Zone" with estimated cost @ US$ 500,000 and above will also be
    procured following ICB procedures inaccordance with Section I1o f the Bank Guidelines.

National CompetitiveBidding :
Goods estimated to cost less than US$ 500,000 equivalent per contract will be procured following
NCBprocedures in accordance with provisions o fparagraph 3.3 and 3.4 o fthe 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 o f paragraph 3.5 and 3.6 o f the Bank Guidelines.




Consultant Services (US$ 7.82 million).




                                                  - 67 -

Consultant services will beprocuredas follows:

Quality- and Cost-based Selection:
Except as otherwise provided consultants' services shall be procured under contracts awarded in
accordance with the provisions o f Section I1o f the Consultant Guidelines, and the provisions of
paragraphs 3.13 through 3.18 thereof applicable to quality- and cost-based selection o f
consultants.

Inrelationto the precedingparagraph, the short list ofNGOs andconsultants for services
estimated to cost less than $500,000 equivalent per contract may comprise entirely national
consultants inaccordance with the provisions o f paragraph 2.7 and footnote 8 o f the Consultant
Guidelines.

Other Proceduresfor the Selection of Consultants:

IndividualConsultants
Services for tasks that meet the requirements set forth inparagraph 5.1 of the Consultant
Guidelinesshall be procuredunder contracts awarded to individual consultants inaccordance with
the provisions o f paragraphs 5.1 through 5.4 o f the Consultant Guidelines.

Selection Based on Consultants' Oualifications
Services for the establishment o f a Karnataka State Urban Water Supply Council, development o f
UWSinvestment andtariff frameworks, and design and implementationo fthe legal and
regulatory framework, under Part A.1 (a), (d) and (e) o f the Project, respectively, estimated to
cost less than $100,000 equivalent per contract, may be procuredunder contracts awarded in
accordance with the provisions o f paragraphs 3.1 and 3.7 o f the Consultant Guidelines.

Single Source Selection
Legal consultants' services and services for thirdparty inspection under Parts A.1and 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 inaccordance with the provisions o f paragraphs 3.8 through
3.11o f the Consultant Guidelines.

Review by the Bank of Procurement Decisions

1.ProcurementPlanning

Prior to the issuance o f any invitations to prequalify for biddingor to bidfor contracts, the
proposedprocurementplan for the Project shall be hrnishedto the Bank for its review and
approval, inaccordance with the provisions o f paragraph 1o f Appendix 1 to the Guidelines.
Procurement o f all goods and works shall be undertakeninaccordance with such procurement
plan as shall have been approved by the Bank, and with the provisions o f said paragraph 1. Annual
procurement plans would be reviewed by Bank.




                                                 - 68 -

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 inparagraphs 2 and 3 o f Appendix 1to the Guidelines
shall apply.

3. Post Review

With respect to each contract not governedby paragraph 2 of this Part, the procedures set forth
inparagraph4 ofAppendix 1to the Guidelines shallapply.

Consultancy Contracts

Prior review

1.       With respect to each contract for employment of consulting firmshtitutions estimated to
cost the equivalent o f US$ 100,000 or more, the procedures set forth inparagraphs 1,2 3 and 5 o f
Appendix 1to the Consultant Guidelines shall apply; and

2.       With respect to each contract for the employment o f individualconsultants estimated to
cost the equivalent o f US$ 50,000 or more, the qualifications, experience, terms o f reference, and
terms o f 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 beengiven.

With respect to each contract not governedby above, the procedures set forth inparagraph 4 of
Appendix 1to the Guidelines shall apply providedthat the generic TORSand short lists for critical
assignmentshave been cleared by the Bank.

NCBProvisions

All NCB contracts shall be awarded inaccordance with the provisions ofParagraphs 3.3 and 3.4
o f the Guidelines for Procurement under IBRDLoans and IDA Credits, January 1995, Revised
January and August 1996, September 1997, and January 1999. Inthis regard all NCB contracts to
be financed from the proceeds o fthe Loan shall follow the following procedures:

     Onlythe model biddingdocuments for NCB agreedwith Go1Task Force (and as amended
     from time to time) shall be usedfor bidding.

     Invitations to bid shall be advertised inat least one widely circulated national daily newspaper,
     at least 30 days prior to the deadline for the submission o f bids.

0    N o 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



                                                  - 69 -

   enterprises or enterprises from any given state.

0  Except with the prior concurrence of the Bank, there shall be no negotiationof price with the
   bidders, even with the lowest evaluated bidder.

0  Re-biddingshall not be carried out without the prior concurrence of the Bank. The system of
   rejecting bids outside a predetermined marginor bracket of prices shall not be usedinthe
   project.

   Extension o f bidvalidity shall not be allowed without the prior concurrence of the Bank: (i)
   for the first request for extension ifit is longer than eight weeks; and (ii) all subsequent
                                                                              for
   requests for the extension irrespective o f the period (such concurrence will be considered by
   the Bank only incases o f Force Majeure and circumstances beyond the control of the
   Purchaser/Employer).

0  Rate contracts entered into by Directorate General o f 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)    Prompt reporting o f contract award information by KUIDFC.
(b)    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 o f procurement,
(c)    The Borrower's completion report to be received by the Bank within three months o f the
Loan closing date.




                                                 - 70 -

  Procurement methods (TableA)


                             Table A: Project Costs by Procurement Arrangements
                                              (US$ million equivalent)




1. Works                                      0.00                  32.15              4.54             0.30         36.99
                                             (0.00)                (25.72)           (3.63)            (0.00)        (29.35)
2. Goods                                      1.88                  0.00               1.03             0.00          2.91
                                             (1.88)                 (0.00)           (1.03)            (0.00)        (2.91)
3. Services                                   0.00                  0.00               7.82             3.41          11.23
                                             (0.00)                 (0.00)            (6.84)           (0.00)        (6.84)
84. Miscellaneous                             0.00                  0.00               0.00              0.00          0.00
                                             (0.00)                 (0.00)            (0.00)            (0.00)        (0.00)
5. Front-end fee                              0.00                   0.00              0.40              0.00          0.40
                                             (0.00)                 (0.001            (0.40)            (0.00)        (0.40)
    Total                                     1.88                  32.15              13.79             3.71         51.53
                                             (1.88)                (25.72)           (11.90)            (0.00)       (39.50)

  I'Figures inparentheses 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 o f
    contracted staff o f the project management office, training, technical assistance services, and incremental operating
    costs related to (i)managingthe project, and (ii)re-lending project funds to local government units. It also
    includes the Loan front end fee.
 Figures inabove table do not include taxes.




                                                          - 71 -

                      Table AI : Consultant SelectionArrangements (optional)
                                        (US$ million equivalent)




" Includingcontingencies

          Note: QCBS = Quality- and Cost-BasedSelection
                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 parenthesesare the amountsto be financed by the Bank Loan.




                                                  - 72 -

Prior review thresholds (Table 8)

                  Table B: Thresholds for Procurement Methods and Prior Review'




1.Works
*PriorityInvestment                     > 100                         NCB              I          16.5 (>.5)
  Demonstration Zone                    <loo                                                           . . I
                                                                    Shopping
2. Goods                                 >500                         ICB                         1.53 (>.5)
                                     <500 but >50                     NCB
                                         <50                        Shopping
3. ServicesFirms                        >loo                 As per BankGuidelines                3.32 (>.l)

IndividualConsultants                    < 50                                                       >.05
4. Miscellaneous
5. Miscellaneous
6. Miscellaneous

                Total value of contracts subject to prior review: Will be clear only after the procurementplan
                                                                        for Demonstration Zone is finalized. Present
                                                                       value at US$ 8.7 million.
                          Overall Procurement Risk Assessment:          Average
      Frequencyofprocurementsupervisionmissionsproposed: 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 countryandproject. Consult "Assessment of Agency's Capacity to Implement
 Procurement" and contact the RegionalProcurementAdviser for guidance.




                                                   - 73 -

             Annex 6(B): Financial Management and DisbursementArrangements
                   INDIA: Karnataka Urban Water Sector Improvement Project

FinancialManagement
1. Summaryofthe FinancialManagementAssessment

KUWSIP will be implementedby Karnataka Urban Infrastructure Development and Finance
Corporation (KUIDFC), a company registeredunder the Companies Act of India and wholly
owned by the Government o f 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 i s important to note that the accounting function is adequately staffed and fully
computerized. The company follows accrual double entry book keepinginaccordance with the
statutory guidelines applicable to company accounts. Accounts are maintainedproject wise and
trial balances for different projects are consolidated to form the accounts o f the company.
Historically, KUIDFChas usedinterest income on idle project hnds to meet its administrative
expenditure. However, a GoK order has stopped that practice with effect from 2004. Therefore,
from April 1,2004, KUIDFC will meet its administrative expenses from a 1%management fee
that will be levied on the cost o fprojects managed by it. For the purpose o f KUWSIP, this will be
met from the counterpart contribution o f GoK. Inorder to clearly define accounting practices,
the development of a FinancialManagement Manualhasbeeninitiated. Inaddition, all financial
management systems and procedures that require strengthening have been addressed during
project preparation. Capacity buildinginitiatives include the deputation o f accounting staff to the
project, the initiation o f the development of a financial management manual which will document
the accountingpolicies and procedures o f the organization and the setting up o f an internal audit
department inthe company. These activities will be completedbynegotiation.

The P M Uwill implement boththe TA and investment components. It will receive funds for the
project (on behalf o f 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 inKUIDFC to avoid procedural delays and
bottlenecks. Payments will be made on the basis o f certified bills submittedby them as per
contractual terms.

Reporting and Monitoring
KUIDFC will prepare FMRs informats that will be specified inthe Financial Management
Manual. The FMRs will show actual versus budgeted expenditures, forecasts o f cash
requirements, physical and financial progress andprocurement contract management information.
The FMRswill be designedby the financial and engineering department o f KUIDFC to facilitate
the monitoring of physical progressjuxtaposed 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 o f any one section. Inthis way, both the Task
team and the FMgroup will be able to use the same set o f reports for monitoringthe project.
FMRswill also provide a reconciliationofexpenditures claimed from the Bankwith expenditures
incurred annually. The first FMR for the project will be submitted to the Bank within 45 days of


                                                  - 74 -

the end o f the first quarter from the date o f loan effectiveness. KUIDFC will prepare FMRs in
formats that will be specified inthe Financial Management Manual. The FMRswill show actual
versus budgetedexpenditures, forecasts of cash requirements, physical and financial progress and
procurement contract management information. FMRswill also provide a reconciliation o f
expenditures claimed from the Bank with expenditures incurred annually.

FundsFlow
Go1will open a special account inRBIto receive disbursements under the project from the Bank.
This Special Account will be operated by the CAAA. Go1will make funds available to GoKunder
the usualACA mechanism on 70% loan and 30% grant basis periodically. The entire funds
requirement for the project including counterpart fundingwill be budgetedinGoKbudget 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, KUIDFCwill requisitionmoney from GoK quarterly based on forecasted
expenditures. The money will be creditedto the company's PD account from where it will be
transferred to the company's commercial bank account.

GoK will allow KUIDFC to maintaina balance ofRs. 50 millionas animprest inits commercial
bank through the life o f the project. The risk of delay inflow o f funds to the project will be
mitigatedby this arrangement.




                                                  - 75 -

                 Action                Responsible person         Dateto be completed
TORfor Intemal and Extemal Auditors  Mr.Chillal-Manager    Done
                                     Finance KUIDFC
Firstdraft o f FMManual              Mr.Chillal-Manager    Done
                                     Finance KUIDFC
Appointment o f Intemal Auditors     Mr.Chillal-Manager    Within one quarter o f .
                                                                                  project
 ~~                                                                                 .
                                     Finance KUIDFC        effectiveness-
Appointment o f Extemal Auditors     Mr.Chillal-Manager    Within one quarter o fproject
                                     Finance KUIDFC        effectiveness
Firstdraft o f FMRsformats and       Mr.Chillal-Manager
                                                      -    Done
preparation o f an Excel based dummy Finance KUIDFC
model for generation o f FMRs




                                            - 76 -

FMRiskAnalysis Table

                   RiskFlags                      Risk                  Mitigation
                                                  rating

Project Complexity

Simplicity inproject design and                    Low   Not required
implementation arrangements is maintained
byusingKUIDFC as the nodal agency o f
execution o f investments andthe state's urban
det"ent      for TA comuonents.

FundsFlow

All expenditures, approvals and accounts for       Low   Not required
the project are centralized at KUIDFC.This
arrangement avoids multiple payment points
andsimplifies project financial management
arrangements.

Disbursement Arrangements

There is o f delay infunds transfer to the        Medium Ths riskis mitigatedby the establishmen
project because o f fiscal strain on the state.          o f a bank account outside the treasury
                                                         system which will maintain an imprest
                                                         balance o f Rs. 50 million at all times.

Borrower Staffing

Project management andaccounts staff have         Medium Staff capacity will be built by the :
project experience but are inexperienced with            a)    development anduse o f a financial
Bankrequirements. Accounting is considered      i        monitoring system where accounting
book keeping function with transactional                 information willbe used for decision
control o f expenditure being the main objective         making

                                                         b)    development o f FMmanual w h c h
                                                         will lay down all accounting procedures
                                                         clearly



Accounting System

Accounting practices andprocedures o f            High   This riskwill be mitigatedbythe
KUIDFC are not documented. The basis for                 development o f a Financial Management
apportionment o f administration and other               Manual which will set out accounting
expenditures to projects is currently not clear          procedures to be followed consistently
causing a lack o f transparency inrecording              across the company.


                                                  - 77 -

accountingtransactions.

Intemal Control

A weak internal control systeminKUIDFC           High     This risk will be mitigatedbythe
takes away from the assurance that the Bank               strengtheningofthe internalcontrol
gets from statutoryaudit on the use ofproject             function throughthe settingup of an
funds.                                                    internalaudit department. This
                                                          department will be staffedby people
                                                          drawnfrom the StateAudit Department.

Audit Arrangements

Arrangements for statutoryandproject audit     Medium Assurance on quality of auditreportswill
are adequate. past experience with timeliness             be come from the fact that auditors' ToRs
andquality ofaudit reports with the same                  will be approvedby the Bank. Follow up
auditor, familiarity of auditor with Bank                  andtimeliness of audit reportswill be
requirements.                                              ensuredby the Manager Financewho will
                                                          be the single point of contact for the
                                                           Bank.
Overall riskrating                             Medium

The FMassessmentfor this project has been set against the general backgroundofthe governance
and control environment inKarnataka (as assessedby the Kamataka SFAA) which is stronger
than inmost other Indianstates. However, there are areas such as cash flow management,
government accounting and budgetingthat are inneedo f reform inKamataka which impede the
smooth functioning o fpublic financial management arrangements. To address this, and to
facilitate smooth flow o f funds from the state to the project, GoK will provide an initial corpus of
Rs. 50 millionto start the project. Thereafter, the state government will make finds available to
the project inadvance every quarter basedonprojected funds requirements presented by
KUIDFC. GoK will allow KUIDFC to maintain a balance of Rs. 50 million inits commercial
bank account at all times to meet project expenditures. This arrangement will be approvedby the
Empowered Committee of the state as a part of the project approval package.

CountryIssues

The following issues identified as generic to India are relevant to this project:

1.       The accounting system o f KUIDFC concentrates mainly onbook keeping and
transactional control over expenditure. Financial information i s not considered a tool for decision
making.

2.       The quality of audit reports may be an issue. To address this, model TORSfor auditors
have been shared with KUIDFC and it has been agreed that finalized ToRs for external auditors
will be prepared by KUIDFCand cleared by the Bankprior to project implementation.




                                                 - 78 -

3,     Timely availability o f funds for the project couldbe an issuegiven 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 ina commercial bank account outside the
State Treasury system. Inthis way, the fiscal strain on the state exchequer will be prevented from
affecting project fund flows.

Country issues with respect to preparationo f FMRs and installationof a computerized PFMS will
not apply to the project as the accounts function i s already computerized.

2. Audit Arrangements

ExternalAudit

The following audit reports will be receiv dby th Bank within six months from th close of the
financial year:

Agency         Audit Report Auditedby                      Due Date
KUIDFC         EntityAuht        StatutoryAuditors         30th September
               with aseparate
               opinionon
               project
               expenditures
CAAA-          Audit report of   C&AG                      30th September
Special        Special Account
Account

The consolidated accounts of KUIDFC are auditedby a firm o f Chartered Accountants appointed
bythe stateAG. The AG o f 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
partoftheir overall opinion onthe accounts ofKUIDFC. For this purpose, a TORfor enabling
the auditors to express an opinion on project expenditures will be appended to the TORfor
statutory audit o f 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 heldby the RBIina Special Account which will be operated by the CAAA and
audited by the CAG o f India. The audit reports of this Special Account will be received by the
Bankwithin 6 months ofthe close ofthe financial year.




                                                 - 79 -

Internal Audit

An intemal audit function has beenset up inKUIDFC. This function is headedby an officer
drawn from the state audit cadre. H e will carry out his duties as Internal auditor with assistance
from a fmo f Chartered Accountants. The internal auditors will ensure that the accounting
practices followed inthe organizationconform with statutory and donor requirements. They will
ensure that procedures set down inthe company's manual for reporting o f transactions,
authorizations, payments and procurements are followed. All systemic issues identified by intemal
auditors will be brought to the notice o f project authorities and rectified immediately. TORfor the
internal auditors will be agreed between KUIDFC andthe Bank.

3. DisbursementArrangements
Go1will open a Special Account with RBIto receive disbursementsunder this project andwill
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 budgetedby GoK as an identifiable, single head budget item
annually.

Under the arrangement for KUWSIP, GoK will provide an initial corpus o f Rs. 50 million to start
the project. Thereafter, the state govemment will make fimds available to the project inadvance
every quarter based onprojected funds requirements presented by KUIDFC. GoK will allow
KUIDFC to maintain a balance o f Rs. 50 millioninits commercial bank account at all times to
meet project expenditures. This arrangement will be approvedby the Empowered Committee of
the state as a part o f the project approvalpackage. All project payments will be made by
KUIDFC usingthis money at its disposal.




                                                 - 80 -

 Allocation of loan proceeds (Table C)

                                Table C: Allocation of Loan Proceeds




                                                                    local expenditures (ex-factory cost), and
                                                                    80% of local expenditures for other items
                                                                               orocuredlocallv
13) a) Consultant's services              I         5.90          I                   90%                    I
3) b) NGO services andtraining                      0.15                             100%
4) OperatingCosts                                  0.80              80% untilDecember 31,2006 and 60%
                                                                                   thereafter
Total Project Costs with Bank                      39.10
 Financing
                             Front-end fee          0.40             Amount due under section2.04 ofthis
                                                                                  Aaeement

/Total                                    I        39.50          I                                          I

 Use of statements of expenditures (SOEs):

Disbursements for the project will be made usingthe traditional method o f SOE based
disbursements below the prior review threshold and documented claims above the prior review
limits. The prior review limits for different categories o f 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 FMRbasedmethod o f disbursement may be opted for by the Go1and GoK at a later date
with prior intimation to the Bank. IfFMRbaseddisbursement is adopted, it mustbe basedon
formats mutually agreed betweenthe Bank and GoK.

Special account:
The Special Account will be maintainedinReserve Bank of India and operated by the Department
o f Economic Affairs (DEA) o f Government o f India (GoI). The authorized allocation o f the
Special Account will be US$4.0 million representing about four months o f disbursements from
the loan. The project will submit withdrawal applications to the Controller of Aid, Accounts and
Audit (CAA&A) inDEAfor onward submissionto the Bank for replenishment o fthe Special
Account for reimbursement.



                                                 -81 -

Retroactive Financing:

A total amount not exceeding US$500,000 from categories 3A (Consultant Services) and4
(Incremental Operating Costs) combined would be considered eligible for retroactive financing,
for expenditures made after May 31,2003.




                                           - 82 -

                              Annex 7: Project Processing Schedule
                INDIA: Karnataka Urban Water Sector Improvement Project



ITime taken to prepare the project(months)                 19                              19
]FirstBank mission (identification)                        0911912002                     0911912002
kppraisal mission departure                       III      1O i l312003           III      1011312003    III
 Negotiations                                              0I11212004                     02/26/2004
 Planned Date of Effectiveness                             0513112004

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 included:
         Name                                              Speciality
0.Alvarado                                 Team LeaderlSr. Water & Sanitation Specialist
C. Bosch                                   Co-Task Team LeaderlSr. Water & Sanitation Economist
M.M h o                                    Sr. Financial Analyst
P. Goel                                    Financial Management Specialist
R. R. Mohan                                Sr. Social Development Specialist
 S. K. Bahl/S.Krishnan                     Sr. Procurement Specialist
N.V. V. Raghava                            Municipal Engineer
 S. Srivastava                             Environmental Specialist
M.Fernandes                                Program Assistant
L.MacArthur                                Program Assistant
R. Soopramanian                            Sr. Counsel
H.BrowdM. Fowler                           Disbursement officer
 S. Myers                                  Technical Consultant
A. Mejia                                   Peer Reviewer
E.Ijjasz                                   Peer reviewer




                                                     - 83 -

                            Annex 8: Documents in the Project File*
                INDIA: Karnataka Urban Water Sector Improvement Project


A. Project ImplementationPlan
Borrower's Project ImplementationPlan - Draft version, November 2003.

B. Bank Staff Assessments
DuringProjectpreparationBank staffcarriedout various assessmentsregarding institutional,
financial, social, and technical aspects. These are available as annexes o f the preparationmissions
aide memoires.

C. Other

0   Technical Assessment of Water Schemes (for Hubli-Dhanvad, Belgaum & Gulbarga). By
    BWS, June 2003
0   Strategy & ImplementationPlanfor Urban DrinkingWater and Sanitation Sector. By IDECK,
    December 2003
0   Environmental Assessment o f Demonstration Projects & Priority Investments in
    Hubli-Dharwad, Belgaum & Gulbarga. By Wilbur SmithAssociates PvT. Ltd.,August 2003
0   Rapid Social Assessment and Communications strategy. By Samaj Vikas, December 2003
0   Resettlement Action Plan (for Hubli-Dhanvad). February2004
0   FinancialAssessment andCapacity Buildingo f the Municipalities inKarnataka. By
    Parthasarathy Venketesan, January 2004
*Including electronic files




                                                - 84 -

                                         Annex 9: Statement of Loans and Credits
                            INDIA: Karnataka Urban Water Sector improvement Project
                                                           16-Mar-2004
                                                                                                                   Differencebetweenexpected
                                                                                                                            and actual
                                                               Original Amount in US$ Millions                            disbursements"
ProjectID   FY   Purpose                                    IBRD        IDA        SF        GEF    Cancel. Undisb.       Orig   Frm Rev'd
P073369    2004 MAHAR RWSS                                     0.00     181.00     0.00       0.00     0.00   179.41       -6.67      0.00
P050655    2004 RAJASTHAN HEALTH SYSTEMS DEVELOPMEN            0.00     89.00      0.00       0.00     0.00   89.39         0.00      0.00
P073776    2004 ALLAHABAD BYPASS                             240.00      0.00      0.00       0.00     0.00   237.60        4.27      0.00
PO79865    2004 GEF Biosafety Project                          0.00      0.00      0.00       I.oo     0.00     0.90        0.10      0.00
PO72123    2003 Tech/Engg Quality ImprovementProject           0.00     250.00     0.00       0.00     0.00   274.66      12.85       0.00
PO71272    2003 AP RURAL POV REDUCTION                         0.00     150.03     0.00       0.00     0.00   156.47      18.67       0.00
PO67606    2003 UP ROADS                                     488.00      0.00      0.00       0.00     0.00   454.99      50.37       0.00

PO50649    2003 TNROADS                                      348.00      0.00      0.00       0.00     0.00   334.52       -6.18      0.00
PO76467    2003 Chatt DRPP                                     0.00     112.56     0.00       0.00     0.00   117.10       -4.48      0.00
P075056    2003 Food 8 Drugs Capacity Building Project         0.00     54.03      0.00       0.00     0.00    58.52        5.46      0.00

PO73094    2003 AP COMM FOREST MANG                            0.00     108,OO     0.00       0.00     0.00   109.39       -1.24      0.00
PO50647    2002 UmAR PRADESHWATER SECTOR RESTRUCTU             0.00     149.20      0.00      0.00     0.00   166.56      66.07       0.00
PO72539    2002 KERALA STATE TRANSPORT                       255.00       0.00      0.00      0.00     0.00   224.28        4.95      0.00
P050653    2002 KARNATAKA RWSS II                              0.00     151.60      0.00      0.00     0.00   167.65       27.08      0.00
P050666    2002 MUMBAI URBAN TRANSPORTPROJECT                463.00      79.00      0.00      0.00     0.00   504.29       57.60      0.00
PO40610    2002 RAJ WSRP                                       0.00     140.00      0.00      0.00     0.00   153.65       38.27      0.00
PO74018    2002 Gujarat Emergency Earthquake Reconstruct       0.00     442.80      0.00      0.00     0.00   351.70      304.57      0.00
P069889    2002 MIZORAM ROADS                                  0.00      60.00      0.00       0.00    0.00    58.48        2.51      0.00
PO71033    2002 KARNTANK MGMT                                  0.00      98.90      0.00      0.00     0.00   113.64       14.67      0.00
PO67216    2001 KAR WSHD DEVELOPMENT                           0.00     100.40      0.00      0.00     0.00   109.45       50.42      0.00

P038334    2001 RAJ POWER I                                  180.00       0.00      0.00       0.00    0.00    93.96       71.12      0.00
P059242    2001 MPDPIP                                         0.00     110.10      0.00       0.00     0.00  103.14       34.92      0.00

PO55455    2001 RAJ DPEP II                                    0.00      74.40      0.00       0.00     0.00   56.35        3.79      0.00
PO35173    2001 POWERGRIDII                                  450.00       0.00      0.00       0.00     0.00  251.02      135.69      3.71

PO55454    2001 KERALA RWSS                                    0.00      65.50      0.00       0.00     0.00   63.32       20.03      -5.37

PO50658    2001 TECHN EDUC 111                                 0.00      64.90      0.00       0.00     0.00   54.90       22.95      -0.10

PO70421    2001 KARNHWYS                                     360.00       0.00      0.00       0.00     0.00  289.78       81.45       0.00
PO71244    2001 Grand Trunk Road ImprovementProject          589.00       0.00      0.00       0.00     0.00  482.57      247.57       0.00
PO10566    2001 GUJARAT HWYS                                 381.00       0.00      0.00       0.00     0.00  274.60      164.27      19.32

PO67543    2001 LEPROSY II                                     0.00      30.00      0.00       0.00     0.00    5.61        3.57       0.00
PO09972    2000 NATIONALHIGHWAYS 111 PROJECT                 516.00       0.00      0.00       0.00     0.00  374.31      229.53       5.85

PO10505    2000 RAJASTHANDPlP                                  0.00     100.48      0.00       0.00     0.00   92.26       60.59      -3.56

PO35172    2000 UP POWER SECTOR RESTRUCTURINGPROJEC          150.00       0.00      0.00       0.00     0.00   17.30        13.97      0.00

PO55456    2000 IN-TelecommunicationsSector ReformTA          62.00       0.00      0.00       0.00    20.00   28.47       46.83       0.00

PO59501    2000 IN-TAfor Econ Reform Project                   0.00      45.00      0.00       0.00     0.00   40.54        10.73      1.48

PO67330    2000 IMMUNIZATIONSTRENGTHENINGPROJECT               0.00     142.60      0.00       0.00     0.00  104.45        16.60      0.00

PO49770    2000 REN EGY I1                                    80.00      50.00      0.00       0.00     0.00  110.12        57.83     13.72

PO45049    2000 APDPIP                                         0.00     111.00      0.00       0.00     0.00   63.80        6.37       0.00

PO50657    2000 UP Health Systems Development Project          0.00     110.00      0.00       0.00     0.00   91.93        30.37      0.00
PO50667    2000 UP DPEP Ill                                    0.00     182.40      0.00       0.00     0.00   58.65        52.29      0.00

PO50637    1999 TN URBAN DEV II                              105.00       0.00      0.00       0.00     0.00    16.96       12.39      0.00

PO41264    1999 WTRSHD MGMT HILLSII                           85.00      50.00      0.00       0.00     0.00    37.01       35.04      0.00

PO45051    1999 2ND NATL HlViAlDS CO                           0.00     191.00      0.00       0.00     0.00   66.15        44.09      0.00

PO45050    1999 RAJASTHAN DPEP                                 0.00      05.70      0.00       0.00     0.00   43.01        35.33     14.14

PO50651    1999 MAHARASH HEALTH SYS                            0.00     134.00      0.00       0.00    16.96    66.59       75.04     -5.47

PO50646    1999 UP SODIC LANDS II                              0.00     194.10      0.00       0.00     0.00    86.77       66.01      0.00

PO35824    1998 DIVAGRC SUPPORT                               79.90      50.00      0.00       0.00     0.00    18.34       20.10     19.30

PO10561    1998 NATLAGR TECHNOLOGY                            96.60     100.00      0.00       0.00     0.00    61.75       66.77      6.75

PO10496    1998 DRISSA HEALTHSYS                               0.00      76.40      0.00       0.00     0.00    56.65       46.43      0.00

PO38021    1998 DPEP 111 (BIHAR)                               0.00     152.00      0.00       0.00     0.00    86.48       78.21     -8.71

PO35827    1998 WOMEN 8 CHILD DEVLPM                           0.00     300.00      0.00       0.00     0.00  187.06      153.85       0.00
PO49385    1996 AP ECON RESTRUCTURIN                         301.30     241.90      0.00       0.00     0.00  130.17      128.09       0.00
PO10511    1997 MALARIA CONTROL                                0.00     164.60      0.00       0.00    46.50    47.49       93.65     25.00




                                                              - 85 -

                                                                                                             Difference between expected
                                                                                                                      and actual
                                                         OriginalAmount in US$ Millions                             disbursements'
Project ID  FY    Purpose                          IBRD          IDA         SF          GEF  Cancel. Undisb.         Orig  Frm Rev'd
PO43728     1997 ENV CAPACITY BLDGTA                    0.00      50.00      0.00        0.00    0.94     3.94        9.33       0.00
PO10473     1997 TUBERCULOSISCONTROL                    0.00     142.40      0.00        0.00   13.04    57.67       74.49      73.68
PO09995     1997 STATE HIGHWAYS I(AP)                  350.00      0.00      0.00        0.00    0.00    33.36       33.36    -208.64
P036062     1997 ECODEVELOPMENT                         0.00      28.00      0.00      20.00     5.86     2.19        9.64       6.55
P009584     1997 ECODEVELOPMENT                         0.00       0.00      0.00        0.00    2.34     0.10        3.75       0.00
PO35158     1997 AP IRRIGATION 111                     175.00    150.00      0.00        0.00   45.00    41.91       94.39      27.72
PO44449     1997 RURAL WOMEN'S DEVELOPMENT              0.00      19.50      0.00        0.00    6.72     5.81       13.44       2.00
PO10531     1997 REPRODUCTIVEHEALTH1                    0.00     248.30      0.00        0.00    0.00    62.87       54.95      54.99
PO35170     1996 ORISSA POWER SECTOR                   350.00      0.00      0.00        0.00   95.00    27.21      122.21      -9.03
PO10529     1996 ORISSA WRCP                            0.00     290.90      0.00        0.00    0.00    39.46       62.40      39.75
PO35825     1996 STATEHEALTH SYS II                     0.00     350.00      0.00        0.00    0.00    23.08       59.09       0.00
PO10522     1995 ASSAM RURAL INFRA                      0.00     126.00      0.00        0.00    0.00     14.78      32.00      32.00
PO10461     1995 MADRASWAT SUP II                     275.80       0.00      0.00        0.00  189.30     2.88      192.18       2.71
PO10476     1995 TAMIL NADU WRCP                        0.00     282.90      0.00        0.00   25.01    21.56       85.30      54.20

                                            Total:  6.380.80   6,680.80      0.00     21.00    466.67  7.761.24    3,651.30    161.98




                                                        - 86 -

                                            INDIA
                                    STATEMENT OF IFC's
                                  HeldandDisbursedPortfolio
                                       Feb 29   - 2004
                                     InMillions USDollars


                                                      Committed                   Disbursed
                                                    IFC                         IFC
FY Approval    Company                        Loan   Equity Quasi  Partic Loan   Equity  Quasi  Partic
1998           TCWdCICI                        0.00   3.92   0.00   0.00   0.00   3.92    0.00    0.00
1990           TDICI-VECAUSI1                  0.00   0.15   0.00   0.00   0.00   0.15    0.00    0.00
2002           TELCO                          50.00   0.00   0.00   0.00  50.00   0.00    0.00    0.00
2000           Tanflora Park                   0.00   0.51   0.00   0.00   0.00   0.00    0.00    0.00
1989           Tata Electric                  16.56   0.00   0.00   0.00  16.56   0.00    0.00    0.00
1989           UCAL                            0.00   0.03   0.00   0.00   0.00   0.03    0.00    0.00
2004           UPL                            17.50   0.00   0.00   0.00  17.50   0.00    0.00    0.00
1996           United Riceland                 9.19   0.00   0.00   0.00   9.19,  0.00    0.00    0.00
2002           UshaMartin                     21.00   3.60   0.00   0.00  21.00   3.60    0.00    0.00
2001           Vysya Bank                      0.00   3.66   0.00   0.00   0.00   3.66    0.00    0.00
1997           WIV                             0.00   2.05   0.00   0.00   0.00   2.05    0.00    0.00
1988           WTI                             0.00   0.20   0.00   0.00   0.00   0.20    0.00    0.00
1997           Walden-Mgt India                0.00   0.02   0.00   0.00   0.00   0.02    0.00    0.00
2002           Webdunia                        0.00   2.00   0.00   0.00   0.00   0.67    0.00    0.00
2002103        ATL                             2.29   0.00   0.00   0.00   1.76   0.00    0.00    0.00
2003           Alok                           17.50   0.00   0.00   0.00   0.00   0.00     0.00   0.00
1994           Ambuja Cement                   0.00   4.94   0.00   0.00   0.00   4.94     0.00   0.00
1992193        Arvind Mills                    0.00   3.33   0.00   0.00   0.00   3.33     0.00   0.00
1997           Asian Electronic                0.00   5.06   0.00   0.00   0.00   5.06     0.00   0.00
2001104        BILT                            0.00   0.00   15.00  0.00   0.00   0.00    15.00   0.00
2001           BTVL                            0.00   10.00  0.00   0.00   0.00   10.00    0.00   0.00
2003           Balrampur                      15.47   0.00   0.00   0.00   15.47  0.00     0.00   0.00
2001           BasixLtd.                       0.00   0.98   0.00   0.00   0.00   0.98     0.00   0.00
1984191        BiharSponge                     0.00   0.05   0.00   0.00   0.00   0.05     0.00   0.00
2001/03        CCIL                            2.08   0.00   0.00   0.00    1.16  0.00     0.00   0.00
1997           CEAT                           19.60   0.00   0.00   0.00   19.60  0.00     0.00   0.00
1990192        CESC                           18.00   0.00   0.00  40.13   18.00  0.00     0.00  40.13
2002           COSMO                           8.75   0.00   0.00   0.00   8.75   0.00     0.00   0.00
2004           Caim Energy                    40.00   0.00   0.00   0.00   0.00    0.00    0.00   0.00
1995           Centurion Bank                  0.00   0.77   0.00   0.00   0.00    0.77    0.00   0.00
2003           DQEL                            0.00    1.50   0.50  0.00   0.00    1S O    0.50   0.00
2003           Dewan                          12.51   0.00    0.00  0.00   12.51   0.00    0.00   0.00
1997           EEPL                            0.00   0.03    0.00  0.00   0.00    0.03    0.00   0.00
1995           EXB-STG                         0.31   0.00    0.00  0.00   0.3 1   0.00    0.00   0.00
2001           GE Capital                      0.00   4.39    0.00  0.00    0.00   4.39    0.00   0.00
1994           GTF Fact                        0.00   2.39    0.00  0.00    0.00   2.39    0.00   0.00
1994198100     GVK                             0.00   7.45    0.00  0.00    0.00   7.45    0.00   0.00
1994           GlobalTrust                     0.00   0.36    0.00  0.00    0.00   0.36    0.00   0.00
2003           Gujarat Ambuja                  0.00   4.88    0.00  0.00    0.00   4.88    0.00   0.00
1998           HDFC                          100.00   0.00    0.00 100.00 100.00   0.00    0.00  100.00
1995100        IAAF                            0.00    1.97   0.00  0.00    0.00   1.81    0.00   0.00
1998           ICICI-SPICFine                  0.00   2.79    0.00  0.00    0.00   2.79    0.00   0.00
2001           IDFC                            0.00   15.46   0.00  0.00    0.00  15.46    0.00   0.00
               IIEL                            0.00   3.16    0.00  0.00    0.00   2.06    0.00   0.00
                     Total Portfolio:        740.31  172.49  43.24 146.13 517.78  139.99   43.24 146.13




                                             - 87 -

                                               Anorovals Pending Commitment
FY Approval    Company                       Loan      Equity     Quasi    Partic
2000           APCL                           0.01       0.00      0.00     0.00
2003           BHF                            0.01       0.01      0.00     0.00
2004           CGL                            0.02       0.00      0.00     0.00
2004           CIFCO                          0.00       0.02      0.00     0.00
2003           DQEL                           0.00       0.00      0.00     0.00
2001           GIWind Farms                   0.01       0.00      0.00     0.00
2003           Niko Resources                 0.01       0.00      0.00     0.00
2004           Ocean Sparkle                  0.00       0.00      0.00     0.00
2002           TELCO1                         0.02       0.00      0.00     0.00
2001           Vysya Bank                     0.00       0.00      0.00     0.00

               Total Pending Commitment:      0.08       0.03      0.00     0.00




                                          - 88 -

                                               Annex IO: Country at a Glance
                        INDIA: Karnataka Urban Water Sector ImDrovement Proiect

POVERTYand SOCIAL                                                South   Low-
                                                          India   Asia income       Developmentdiamond'
                                                                                  ~


2002
Population,mid-year (millions)                          1,048.3  1,401   2,495                    Life expectancy
GNI percapita (Atlas method, US$)                          470    460     430     I
GNI (Atlas method, US$ billions)                        494.8     640    1,072   !                       T
Average annual growth, 1996.02
                                                                                  ~


Population (%)                                              1.7    1.8     1.9  I
Laborforce 1%)                                              2.2    2.3     2.3      GNI                                  Gross
                                                                                    per                                 primary
Most recent estimate (latest year available, 1996-021                               capita                             nroilment
Poverty (% ofpopulation below nationalpoverfy lineJ         29
Urban population (% of totalpopulation)                     28      28     30
Life expectancyat birth (years)                             63      63      59                           1
Infant mortality (per 1,000live birfhs)                     67      71      81
Child malnutrition (% of children under5)                                            -   Access to improvedwater source
Access to an improvedwater source (x ofpopulation)          84      84      76
Illiteracy(% ofpopulation age 75+)                          41      44      37
Gross primaryenrollment (% of school-agepopulation)        102      97      95    !        lndja
    Male                                                   111     108     103    I                       Low-incomegroup

    Female                                                  92      89      87

KEY ECONOMIC RATIOS and LONG-TERMTRENDS
                                                   1982   1992    2001   2002        Economicratios.
GDP (US$ billions)                                194.8  244.2   478.5   510.2
Gross domestic investment/GDP                      21.7    23.8   22.3    22.8
Exportsof goods and services/GDP                    6.1     9.0   13.5    15.2                         Trade

Gross domestic savings/GDP                         18.3    21.8   23.5    24.2
Gross national savings/GDP                         19.2    21.8   25.5    26.3                           T
Current account balancdGDP                         -2.0    -1.6    0.1     0.6
Interestpayments/GDP                                0.4     1.4    0.8     0.7
Total debtlGDP                                     14.1    37.0   20.4    20.6
Total debt service/exports                         13.6    28.0   11.7    13.9
Presentvalue of debt/GDP                                          14.2
Presentvalue of debtkxports                                       84.7                               Indebtedness
                                       1982-92  1992-02   2001    2002 2002-06
(average annualgrowth)                                                                -
GDP                                        5.6      6.0     5.2    4.6     6.2              lndta          Low-incomegroup
GDP Der caDita                             3.4      4.2     3.5    3.0     4.7

STRUCTUREof the ECONOMY
                                                   1982   1992    2001    2002     1 Growth of investment  and GDP (%)
(% of GDP)
Agriculture                                        35.9    30.9   25.0    22.7                                                  I
Industry                                           25.8    26.7   25.7    26.6
   Manufacturing                                   16.2    16.2   15.3    15.6
Services                                           38.3    42.3   49.4    50.7

Privateconsumption                                 69.9    65.8   65.9    65.0       ''
                                                                                   ~        97       98   99     00    07    i 2
Generalgovernment consumption                      10.7    11.2   12.5    12.5
Importsof goods and services                        8.4     9.8   14.1    15.6                  -GDI           *GDP




(average annual growth)
Agriculture                                         3.1     2.5    6.5
Industry                                            6.7     6.2    3.4
   Manufacturing                                    6.5     6.6    3.6
Services                                            6.8     8.2    6.8
Privateconsumption                                  5.3     5.0    6.2
                                                                               'I
Generalaovernmentconsumption                        6.1     7.1    3.0
Gross domestic investment                           5.7     7.2    1.6     9.5              ---Expotts         *Imports
Importsof goods and services                        5.7    12.0    4.0     8.1




                                                               - 89 -

PRICESand GOVERNMENT FINANCE
                                          1982        1992                     I::
Domesticprices
(% change)
Consumer prices                             6.7        12.6      3.1      4 3
ImplicitGDP deflator                        7.7         8.8      3.9
Governmentfinance
(% of GDP,includes current grants)
Current revenue                                        18.7
Current budget balance                                  -3.2                     j
Overallsurplusideficit                        ......    -7.2   -10.5   -10.9
                                                                         -7'4                  -GDPdeflator         +CPI            I
TRADE
                                          1982        1992                       1
(US$ millions)                                                 2o01    2o02           Export and Import levels (US$ mill.)          1
Total exports (fob)                       9,490      18,869   44,915  53,000     ~80,000
 Marineproducts                             377         602    1.237   1.381                                                        I
 Ores and minerals                          445         738    1,262   1,900       60000
 Manufactures                             5,109      14,039   33,370  38,353
Total imports (cit)                      16,468      24,316   57,618  65,474      40000
 Food                                     1,071         507    2,043   2,368      2oooo
 Fueland energy                           5,957       6,100   14,000  17,640
 Capitalgoods                             2,662      4,532     9,882  12,746     1           o
Export price index (1995=100)                94          95       90     101                   96 97     98     99    00     01   02

Importpriceindex (1995=100)                 125          96       93     100     1                  vd Exports          Imports
Terms of trade (1995=100)                    75          99       97     101

BALANCE of PAYMENTS
                                          1982        1992     2o01    2o02
(US$millions)                                                                       Current account balanceto GDP (Oh)
Exports of goods and services            12,377      23,599   65,580  77,986        1T
Importsof goods and services             18,352      27,917   73,706  84,254     l/1o
Resourcebalance                          -5,975      -4,318   -8,126  -6,268
Net income                                -335       -3,423   -3,601  -4,882
Net currenttransfers                      2,510       3,852   12,125  14,448
Current account balance                  -3,800      -3,889      398   3,298
Financingitems (net)                      3,101      4,692    11359   13.682
Changes in net reserves                    699        -803   -11,757 -16i980     1.2     i                                          II
Memo:                                                                            I

Reserves includinggold (US$ millions)    4,896       9,832    54,106  75,428
Conversionrate (DEC, /ocal/US$J             9.7       30.6      47.7    48.4

EXTERNAL DEBT and RESOURCE FLOWS
                                          1982        1992     2001
(US$millions)                                                                       Composition of 2002 debt (US$ mill.)
Total debt outstandingand disbursed      27,546      90,264   97,516 105,210
  IBRD                                    1,395      9,326     7,015   5,141                        G:4,093 A: 5,141                II
  IDA                                    6,983       15,438   20,402  21,642     I
Total debt service                       2,054       7,697     9,327  13,042
  IBRD                                     172       1,395     1,372   3,029
  IDA                                       72         267       569     637     j

Compositionof net resourceflows
  Officialgrants                           394         363       384    410
  Officialcreditors                      1,352       2,543       365  -3,657           F 51,061

  Privatecreditors                       1,180       1,563    -1,569  -1,861
  Foreigndirect investment                   0         313    4,741    3,611
  Portfolioequity                            0         244     1,951     944
                                                                                                                                    I
World Bank program
  Commitments                            1,889       2,678    2,190    1,523     I A - I B R D                         E Bilateral
                                                                                                                           ~
  Disbursements                          1,397       1,954    2,089    1,465       B IDA ~       D- Other multilateral F - Private
  Principalrepayments                       98         834     1,467   3,196   IC-IMF                                  G Short-term
                                                                                                                            ~

  Net flows                              1,300       1,119       622  -1,730
  Interestpayments                         146         828      474     470
  Net transfers                          1,153         292       148  -2,200




                                                            - 90 -

                                       Additional Annex 11
                INDIA: Karnataka Urban Water Sector Improvement Project

Existingintermittent water service intypical neighborhoods inBelgaum, Hubli-Dharwad andGulbarga.
Pictures taken inBelgaum, Hubli-Dharwad and Gulbarga, September, 2002.




                                                  -91 -

               Additional Annex 12: Summary of EnvironmentalAssessment
                INDIA: Karnataka UrbanWater Sector Improvement Project

1.0       Background

Karnataka UrbanWater Sector Improvement Project (KUWSIP) is a mediumterm sectoral
reformproject initiated by the Government o f Karnataka. The project envisages setting a policy,
institutional and regulatory environment inurban water and sanitation sector that would enable
service improvements, sustainable investments andcoverage expansion. This sectoral reform
process that will take place gradually andincrementally i s beinglaunched through a small-scale
demonstration projects inthree urban local bodies o f Gulbarga, Belgaum and Hubli-Dhanvad.

These initial investments comprise demonstration projects inselectedzones of the project cities
and priority investments to improve bulkwater supplies and to demonstrate the feasibility of
continuous and safe water supply.

While these investments are expected to improve the environmentalconditions, quality of service
and develop the water and sanitation infrastructure, adverse environmental impacts are anticipated
ifthe investments arenotplanned, sited, designed, constructed, operatedandmaintainedproperly.
Considering these aspects, the Government of Karnataka through KUIDFC, has commissioned
Wilbur Smith Associates Private Limited, Bangalore to carry out LimitedEnvironmental
Assessment o f the proposed investments and for providingguidance/quality assurance in:

    0   integrationo f environmental aspects inthe work done by the engineering consultant;
    55  planning for environmental activities to be carried out duringproject implementation; and
         drafting Environmental Code o f Practice, Terms of Reference for Sectoral Environmental
        Assessment (SEA) and Sectoral Environmental Management Framework for the
         subsequent phases o f KUWSIP.

2.0       Project Area Profile

Hubli-Dharwad
Spread over an area o f 202 sq.km., the twin cities o f Hubli-Dhanvad houses a population o f
786,018. These cites are the major commercial, industrial and educationalcenters o f Karnataka
and ranked as the second biggest after the state capital, Bangalore.

About 70 MLDof water (as against the designed capacity o f 130 MLD) i s suppliedonce in5 to 7
days from two surface water bodies o f Malaprabha andNeersagar and 70% o f Hubli-Dhanvad
population i s 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 o f Belgaumhouses a population o f about 399,600 over an area o f 83.93 sq.km. and i s
ranked as the fifth largest city o f Karnataka. The city i s popular for the presence o f defence

establishments and the major industriessuch as Tata Power and IndianAluminium.

About 55 MLD o f water i s suppliedevery alternate day from two surface sources o f Rakaskop
andHedkal dam to the residents ofthe city and about 70% ofthe population is providedwith
water supply facilities. The remainingpopulation depend on own sources such as Bore Wells,
Open Wells, etc.

Gulbarga
Located at about 600 km from Bangalore, Gulbarga i s spread over an area o f about 60 sq.km. and
houses a population o f 427,929.The city primarily i s a regional market and service center. About
30 MLDo f water (against the design supply of 66 MLD) is supplied once 2 or 3 days to the
residents o f Gulbarga from three surface sources of Bhosaga, Bennithora and Bhima Rivers and
about 50% o f the population is providedwith water supply facilities. The remaining population
depend on own sources such as Bore Wells, Open Wells, etc.

3.0       Project Description

DemonstrationZones
Based on detailed diagnostic surveys in3 to 4 zones ineach o f the project cities, the engineering
consultants have identified the following zones for implementation and demonstration of the
continuous water supply:

0       HubliZone comprising wards 27,28 andparts ofwards 29 and 32;
0       DhanvadZone comprising wards 8,9, 10 and 11;
0       Belgaum South Zone comprising wards 3,4,5,6 and parts o f wards 7 and 8;
0       Belgaum NorthZone comprising wards 45 and 47; and
0       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 inthe project cities, specific priority investments
were identified by the engineering consultants for implementation inKUWSIP. City wise these
priority investments are discussedbelow:

Hubli-Dharwad
   0    laying an exclusive transmission main o f 1210 mmdiameter MS pipe, for a length o f about
        23 kmfrom Aminbhavi treatment plant, by-passing Dhanvad and avoiding the existing 900
        mmdiameter transmission mainfrom Dhanvad;
   0    replacement, reinforcement and extension o f feeder mains of about 18 kmby C Ipipes in
        Hubli; and
   0    replacement, reinforcement and extension o f feeder mains o f about 15 kmby CIpipes in
        Dharwad.




                                               - 93 -

Belgaum
   0   replacement o f 525 mmcast ironrisingmainby mild steel pipes for a length o f 3.05 km
       from Hindalagapumpingstation to treatment plant to avoid high level o fjoint losses and
       friction losses;
   0   replacement o f 1200 mmprestressedconcrete pipeby mildsteel pipe for a lengthof 5 km
       from Hidkal Dam,between Pump Houses 2 and 3;
   0   replacement of old, worn out pumps inPump House 1by 2 No. 400HP centrifugalpumps,
       plus transferring one of the two 400HP stand-by pumps o fPump House 2 to Pump House
        1as a stand-by pump;
   0   construction o f 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 Mainby MS pipes for a length of 10.46 K m s from pump
       house Bheema river to B.P.Tank;
   0   replacing 1200mmdia PSC Gravity Mainby MS pipes for a lengthof 5.10Kms from B.P.
       Tank to IPS;
   0   replacing 900mm dia RCC Rising Mainby MS pipe for a lengtho f 6.840 K m s from IPS to
       Water Treatment Plant;
   0   additional vertical pumps at Bheema river pumpingstation;
   0   pumps for the intermediate pumpingstation; and
   0   sand filters at WTP.

4.0      EnvironmentalAssessment of the Project

The environmental assessment o f the project proposals carried out by the consultants comprised:

   0   review o f all applicable policies, regulations and administrative framework withinwhich
       KUWSIP i s to be implemented (including OperationalPolicies and Directives o fthe
       World Bank;
   0   study ofbase line environmentalprofile of the project cities ingeneral and demonstration
       zones inparticular; and
   0   conducting base line sample surveys o f water quality and soil characteristics to assess the
       quality o f water supplied and the potential o f cross contamination.

4.I      Review of Environmental Policies and Institutions

DemonstrationZones
The review o f the environmental policies concluded that the demonstrationprojects inthe project
area will not necessitate any detailed environmental assessmentstudies. However project activities
inGulbargademonstration zone, couldtrigger OP4.11inthe event ofchancefindingofCultural
Properties duringexcavation works for the distribution net works (the alignment o f which is not
known at this stage o f the project).




                                                 - 94 -

Also duringthe construction stage the project would:

        require consent from the state pollutioncontrol board to operate the DGset under Air
        (Prevention & Control o f Pollution) Act, 1981; and
        attract Noise Control Regulations under Environment (Protection) Act, 1986.

Duringthe operation phase of the project the excess wastewater generated ifnot treated to the
disposal standards will attract the provisions o f Environment (Protection) Act, 1986.

PriorityInvestments
All the priority investments excepting the laying andreplacement andrehabilitationofpumps in
Belgaum and Gulbarga will require an appropriate management plan after finalizing the exact
alignment o f the project.

Also during construction stage the project would:

        require consent from the state pollution control board to operate the DGset under Air
        (Prevention & Control o f Pollution) Act, 1981; and
        attract Noise Control Regulations under Environment (Protection) Act, 1986.

Duringthe operationstage, the storageandhandling ofchlorine for disinfecting the water will
necessitate consent from the Pollution Control Boardas per the provisions o f Manufacture,
Storage and Handling o f Hazardous Chemicals Rules, 1989.

4.2      Base Line EnvironmentalProfile

The detailed base line environmental profile both inthe demonstration zones indicate that none of
the three project cities present any sensitive environmental features that couldbe affected by the
proposed improvements by KUWSIP. All the project cities and the demonstration zones show
similar features to the other, excepting historical monuments inGulbarga.

However it i s significant to note that the demonstration zones o f the project cites have few nalas
and surface water bodies receiving wastewater and storm water from upstream catchment areas.
Water supply augmentation inthese zones through the project is expected to have a negative
impacts on these water bodies and provision safe wastewater disposal arrangements needto be
considered inthe project planning and design stages.




                                                 - 95 -

4.3       Base Line Sample Surveys

Inorder to establish the water quality issues andassess the possible impacts ofthe proposed
continuous water supply inthe selected demonstration zones, the following sample surveys were
also conducted inthe demonstration zones o f the project cities:

        Analysis o f water quality at supply end by collecting samples at the source, treatment
        plant, storage reservoir and the public taps;
        Analysis o f water quality at consumer endby analyzing water quality after 5,15 and 30
        minutes o f supply; and
   0    Analysis o f soil characteristics inthe vicinity of the distribution system to assessthe
        potential o f cross contamination.

These samples surveys indicated that the quality o f water at supply end inall the three cities meets
the standardsof I S 10500. However, at the consumer endthe water supplied inthe initial 10
minutes presented Coliforms inthe samples, which indicates the cross contamination inthe
distribution system. This was further substantiatedinthe analysis of soil samples, wherein varied
levels of bacterial count was observed.

5.0       Impactsand EnvironmentalManagementPlan

No major environmental impacts are anticipated due to the project proposals inKUWSIP. The
critical issues will be to ensure adequate safety and precautionary measures to minimize impacts
duringconstruction andprovision of sanitation facilities inthe demonstrationzone to avoid
contamination surfacehub-surface sources duringoperation.

While the impacts are not very severe andpermanent, 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 undertakenand cannot be generalized. Table 1presents the summary o f
major impacts o f the projects and recommended mitigative measures for the same.




                                                  - 96 -

An Environmental Code o f Practice along with the Terms of Reference for carrying out EA
studies for Category A and Category B projects i s also prepared andpresented inthe report.

                                                    s and EMP
  ProjectActivity      EnvironmentalImpacts

  A. Demonstration
  Zones
  I.Construction    1. Temporary Disruption o f     1. Altemative Water Supply           Respective
  Stage             Water supplies                  Arrangements such as Tanker          Municipal
                                                    Supply shall be Provided             Corporation
                    2. Flooding and Leakage o f     2. Appropriate Bypass and Leak       Respective
                    Water inthe Influence Area      Control Arrangements shall be        Municipal
                                                    Ensured                              Corporation
                    3 . Temporary Disruption to     3. Appropriate Traffic Diversion     Respective
                    Traffic during construction     Plans shall be prepared and          Municipal
                                                    implemented during the               Corporation and
                                                    construction                         Local Traffic
I                  I                                                                     Police.
                    4. Safety hazards to labor      4. Adequate Safety Precautions       Respective
                                                    such as helmets, safety shoes etc.   Municipal
                                                    shall be provided to the labor       Corporation
                    5. Safety hazards to            5. Provisiono f temporary            Local traffic Police
                    households inthe                crossings/ bridges inthe
                                                    implementationarea
                                                    6. Transportation and disposal o f Contractor
                    Earth inthe areas o f operation excess earth to a designated
                                                    disposal site
                    7. Soil Erosiono f Deposited    7. Creation o f Soil Barriers or     Respective
                    earth                           mounds.                              Municipal



                    8. Increased dust levels due to 8. Immediate transport o f         II Respective
                                                                                         Corporation and
                                                                                          Contractor

                    earth work excavation           accumulated waste or frequent        Municipal
                    activities                      watering o f excavated earth          Coruoration
                    9. Disturbance to other         9. Scheduling activities in           Contractor
                    Utilities                       consultation with the other utility
                                                    agencies such as telephone cables
                                                    and sewer lines etc. and ensuring
                                                    minimumdisturbance to the
                                                    utilities
                    10. IncreasedNoise Levels        10. Use o f low noise generating     Contractor
                    during Construction             equipment for all the activities,




                                                    construction during nights
 11. Operation
 Phase
 Continuous Supply  1. Generation o f Additional    1. Provision o f Adequate             Respective
 o f Water During   Quantity o f Wastewater from    centralizeddecentralized              Municipal



                                                    97  -

Operation         the Zones leading to              individual sanitation facilities in Corporation
                  contamination o f surface I       the demonstration zone
                  sub-surface sources
                  2. Flooding of Low Lying          2. Augmentation and                 Respective
                  Areas due to overflow o f storm
                  water drains                      drainage network inthe              Corporation



'roject Activity  Environmental Impacts             Mitigative Measures                  igencies
                                                                                         Responsible
A. Demonstration
Zones
11. Operation
Phase
                  3. Problems o f Water Supply       3. Minimizationo f leakages in      lespective
                  Allocation to                     the system and ensuring that         Municipal
                  non-demonstration zones            current water supply levels are     Zorporation
                                                    maintained inthe other zones
                                                     1    Carrying out extensive
                                                     awareness and communication
                                                     campaigns to eliminate
                                                     apprehensions o f the people o f
                                                     other zones
                  4. Improvement o fhealth and      Positive Impact
                  hygiene o f the communities
                  due to improvedwater quality
                  5. Reduction o f illegal          Positive Impact
                  connections, pit taps, etc.
                  leadingto reduction damages
                  to infrastructure
                  6. Reductionincommunity           Positive Impact
                  investment on water storage,
                  pumping and other
                  expenditure leading to positive
                  economic imoacts
                  7.ReducedCommunity                 Positive Impact
                  Disputes on water supply
                  within the zone
 B. Priority
 Investments
 General           1. Increase inDustLevels to       1. Transportation o f excess earth  Contractor
                  due to earth work and other        to identified disposal sites at
                  construction activities            frequent intervals and watering the
                                                     spoil banks regularly
                  2. Accumulation of Excess          2. Disposal o f unusedI excess      KUWSDB,
                  Earth                              earth at an environmentally         Contractor
                                                     suitable disposal site
                  3. Disruption o f traffic flow in 3. Provision o f bypass arrangemen Traffic Police,
                  the roads and during               during construction periods and     KUWSDB,
                  construction                       completing the works at shortest    Contractor.
                                                     possible time
                  4. Disruption o f Utilities such   4. Preparation o futility shifting  Telecom



                                                   - 98 -

                 as electricity, telephone and     plans and procuring appropriate           Authority,
                 other services.                   approvals / permission in advance         Electricity
                                                   and completion o f activities inthe       authority,
                                                   earliest possible time                    KUWSDB,
                                                                                             Contractor.
                 5. Temporary Disruption o f       5 Provision o f Altemate Water            HDMC
                 Water Supply inthe areas o f      Supply or tanker supply
                 construction                      arrangements



ProjectActivity   EnvironmentalImpacts              Mitigative Measures                      Agencies
                                                                                             Responsible
                                                                                            ~

B. Priority
Investments
                  5. Leakage and Flooding in        6. Appropriate Bypass and Leak           HDMC,
                  the neighborhood during           Control Arrangements shall be            KUWSDB
                  :onstruction                      Ensured
                  7. Safety o f Labor               7. Adequate Safety Precautions           Contractor
                                                    such as helmets, safety shoes,
                                                    gloves, etc. shall be provided to the
                                                    labor
                  8. Safety o f residents and       . Provision o f temporary crossings/ :ontractor
                  road users inthe                  ridges to avoid accidents and other
                  implementationarea                onstruction hazards
                  especially inthe areas around
                  Gopan koppa cross with
                  congestedand narrow roads.
                  9. IncreasedNoise Levels in       9. Usinglow noise generating             Contractor
                  Urban Areas                       equipment, provision o f encasings
                                                    around generators
I.Hubli-
Dharwad
1.Laying          1. Acquisition of Private         1. Preparation o f adequate land         KUIDFC,
transmission main Agricultural land for laying      acquisition plans before                 KUWSDB
                  the transmission main             implementation
                  2. Temporary Disruption o f       2. Provision o f appropriate by-pass KUWSDB
                  natural drainage pattern at the   arrangements for natural drainage
                  locations o f Hakilkari Halla,    during construction and adequate
                  Chaula Halla and KudiHalla        provisions in the detailed design for
                  crossings                         safe passage o f storm water in the
                                                    channels during operation phase
                  3. Loss o f Fertile Top Soil o f  3. Xlinimizing the earth work and        KUWSDB,
                  the Agriculture Lands along       construction activities, refilling and Contractor
                  the alignment                     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. Damage to Villages roads       4. Reinstatement of Road Surface         HDMC
                  at Kaulgeri, Govan koppa and      in earliest possible time
                  Unkal.
                  5. Damage to standing crops       5. Adequate provisions for               KUWSDB



                                                  - 99 -

                    during break down o f the        compensation to the affected land
                    transmission main or             owners duringmaintenance works
                    maintenance operations
2. Belgaum
1. Replacement      1. Acquisition of Private        1. Preparation o f adequate land           KUWSDB
                                                                                               ~

o f C I rising main Agricultural land for laying     acquisition plans before
with MS pipes       the transmission main for the    implementation
from Hindalgato     initial length o f around 500m
Laxmi Tek (3.05     inHindalgi village.




ProjectActivity     EnvironmentalImpacts              Mitigative Measures                       Agencies
                                                                                                Responsible
B. Priority
[nvestments
2. Belgaum
                    2. Appropriate clearances         2. Prior approval and clearances          KUWSDB
                    from the Jail authorities for     from relevant authorities
                    the pipeline routing.
                    3. Loss o f vegetation inthe      3, Minimizationo f tree cutting           KUWSDB,
                    land owned by the jail            mddetailed inventory o fthe               Contractor
                    authorities.                      number o f type o f trees lost due to
                                                      the alignment and appropriate
                                                      compensatory plantation for loss
                                                      of trees
                    4. Loss o f Fertile Top Soil o f  4. Minimizing the earth work and          KUWSDB,
                    the Agriculture Lands along       construction activities, refilling        Contractor
                    the alignment                     and replacement the excavated
                                                      topsoil back in the same field and
                                                      provision o f soil barriers with the
                                                      excavated earthto avoid spillage
                                                      on to the agriculture land
                    5. Damage to road surface         5. Reinstatement o f Road Surface         City Corporation
                    Vijaya nagar and Rakaskopp        inearliest possible time                  o f Belgaum
                    road.
                    6. Damage to standing crops       6. Adequate provisions for                KUWSDB
                    duringbreak down of the           compensation to the affected land
                    transmission main or              owners during maintenance works
                    maintenance operations
2. Replacement       1. Appropriate clearances        1. Finalization of mode and               KUIDFC,
3 f PSC main from   from the road authorities for     methodo f replacement and                 KUWSDB
Hidakal dam to      the pipeline routing              procuring appropriate clearances
pumpingstations
with M S Pipe (5
w
                    2. Disruption o f natural         2. Provision o f appropriate              KUWSDB,
                    drainage during construction      by-pass arrangements for natural          Contractor
                    due to three canal crossings      drainage during construction and
                    between Hudalirailway gate        adequate provisions inthe detailed
                    and Suldal cross, two big         design for safe passage o f storm
                    nallas at the Ankalgi village     water inthe channels during



                                                      00   -

                    causeway 1and causeway 2.        operation phase
                    3. Clearance o f                 3. Preparation o f appropriate        KUWSDB,
                    encroachments inthe stretch      rehabilitationplans as per WB         KUIDFC
                    passing through Ankalgi          guidelines
                    village.

Project Activity    EnvironmentalImpacts              MitigativeMeasures                   igencies
                                                                                           Responsible
B. Priority
Investments
3.Gulbarga
1. Replacement o f  1. Acquisition of Private         I.Preparationofadequateland          CUWSDB
Trunk Mainfrom      Agricultural land for laying      icquisition plans before
Bhima River-22.4    the transmission main near        .mplementation
km                  Bhima riverjack well at
                    Sardagi village till it reaches
                    the SH 19.
                    2. Loss o f Fertile Top Soil of   2. Minimizing the earth work and     KUWSDB,
                    the Agriculture Lands along       :onstruction activities, refilling   Eontractor
                    the alignment                     mdreplacement the excavated
                                                      topsoil back inthe same field
                    3. Appropriate clearances         3. Prior approval and clearances     KUWSDB
                    from the Highway authorities      from relevant authorities
                    for the pipeline routing since
                    around 17 kmo f the pipeline
                    is routed through the SH 19.
                    4. Loss o f vegetation along      4. Minimizationo f tree cutting      KUWSDB
                    the highway.                      and detailed inventory o fthe
                                                      number o ftype o f trees lost due to
                                                      the alignment and appropriate
                                                      compensatory plantation for loss o f
                                                      trees
                    5. Damage to road at old          5. Reinstatement o f Road Surface    City Corporation
                    Javergi and new Javergi road      inearliest possible time             o f Gulbarga
                    junction, SH 19 and Sardagi
                    village junction on the
                    Highway and roads inthe
                    residentialareas starting from
                    NGO colony up to the
                    treatment plant.
                    6. Railway crossing at CIB        6. Necessary clearances from the     KUWSDB
                    colony and passage through        railway authorities and transport
                    main bus stand                    authorities
                    7. Relocation o f                 7. Preparation o f appropriate       KUWSDB
                    encroachments on the existing     rehabilitation plans as per WB
                    pipeline at Baratabad.            guidelines
                    8. Possible acquisition o f       8. Preparation o f appropriate       KUWSDB
                    small temple opposite the jail    rehabilitationplans as per WB
                    along: SH19.                      guidelines
2. Installation o f 1.Increasednoise pollution         1. Use o f low noise generating     Contractor
New Pumps at        during installation               equipment, provision o f Personal
Pumping Stations                                      Protective equipment, ear muffs,



                                                   - 101 -

  etc. for the construction labor and
  avoiding construction activities
  during nights




- 102 -

          Additional Annex 13: Urban W&S Sector Policy Statement in Karnataka
                  INDIA: Karnataka UrbanWater Sector Improvement Project


The policy statement below was issuedby the Government of Kamataka on May 3, 2003.

          URBANDRINKING WATERAND SANITATIONPOLICYSTATEMENT OF THE
                                   GOVERNMENT OF KARNATAKA

INTRODUCTION:

Good quality reliable drinkingwater supply and sanitation are essential basic needs o f every
citizen. It has been the endeavor o f successiveGovernments o f Kamataka to satisfy this need for
all its citizens. It is an on-going effort which aims at meeting the growing demand both inthe
urban and rural areas. The policy framework for rural drinkingwater provision i s already inplace.
Invie ofthe different institutionalstructure, anddifferent sets ofissuesinvolvedinthe delivery of
the services of urban areas, it is necessary to have a separatepolicy statement for this sector. A
detailed sector strategy paper to action planwill be issued later to carry forward the objectives
outlined inthis statement.

Increasingurbanizationhas resultedingreater pressure onthe existingurban water supply and
sanitation systems leadingto increasingdemand on the one handto augment the source and
improve distribution, and on the other to increase the coverage o f under ground drainage (UGD).
At the sametime, as stated inthe State Water Policybrought out by the Department ofthe Water
Resources, there i s an urgent needto conserve the limitedwater resources o f the State to ensure
sufficient availability o f water for various needs as well as for the future. The Government's
efforts, therefore, have to focus on raising the levels o f efficiency inthe management o f drinking
water systems inurban areas so as to give satisfactory service to the citizens while at the same
time discouraging over exploitation o f resources and preventing wastage.

OBJECTIVE:

The Government o f Karnataka inpartnership with urban local bodies inthe State, the Kamataka
Urban Water Supply and Drainage Board(KUWSDB) and the Bangalore Water Supplyand
Sewerage Board(BWSSB) will continue and strengthen its efforts to provide all residents o f
urban areas o f the State, pipedwater supply and sanitation services at or near their dwellings. The
effort o f the Government o f Karnataka and its partner agencies will be to:

    0    ensure universal coverage o f water and sanitation services that people want and are
         willing to pay for;
         to do so ina manner that preserves the sustainability o f the precious water resources of
         the State, protects andenhances the commercial and economic sustainability o f the
         operations & at the same time; and
         ensure a minimumlevel o f service to all citizens.




                                                  -103-

INSTITUTIONALARRANGEMENTS:

Governmentof Karnataka: The Government of Karnatakawill continueto be responsible for:

        policy formulation;
        ensuringprovision o f the bulk o f the resources requiredfor capacity creation;
        regulation monitoring and evaluation o f the efficiency of operations, including prescribing
        reporting requirements, procurementprocedures, etc.;
        setting minimal service standards;
        encouraging the use o f public private partnership as well as private sector participation to
        achieve the sector goals;
        promotion o f the economic and commercial viability o f water supply systems and the
        exploitation o f economies o f scale and scope by appropriate aggregation options;
        institution o f necessaryincentives 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 levelthrough the establishment of appropriate committees and agencies.

UrbanLocalBodies(ULBs): Inaccordancewiththe principle enshrinedinArticle 243(W) of
the Constitution o f 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
o f Kamataka, however, will have the responsibility to monitor that ULBs,provide quality services
inaccordancewiththe standardsprescribed at the Statelevel. ULBswill have the choice of
providingthe services directly through public bodies or through such appropriate Private Sector
Participation(PSP) arrangements. Givenhowever, the paramount need for financial and
commercial viability o f the operations, the State will monitor strictly policies relating to minimal
tariff operational autonomy o f the municipal water operations, etc.

KUWSDBand BWSSB: The KamatakaUrbanWater Supply andDrainage Boardwill continue
to be responsible for capacity creations and augmentation inall ULBs and O&M inselected ULBs
for the present. Over the mediumterm, the KUWS&DBwill be restructuredand its role
redefined. Inthe longer term, the KUWS&DB could become a publicly owned independent
provider o f technical assistance and management support to ULBs who do not have adequate
capacity. Similarly, the appropriate rate of BWSSB will be defined inthe action for the Bangalore
City and surrounding areas.

TARIFF:

Giventhat piped water supply i s expensive, it i s necessaryboth for naturalresource sustainability
and commercial viability o f operations to recover from the users o f water, the full cost o f
providingservice. The longer term objective i s to establish an appropriate cost recovery
mechanismthrough adequate tariff to ensure that revenues cover operations and maintenance
costs, debt service plus a reasonable retum on capital. Inthe mediumterm, however, subsidies
will continue to be needed and will be focused inareas such as pockets and communities o f



                                                - 104-

extreme poverty and investments with large scale externalities like waste water treatment.

Tariff will be structured ina manner such as to disincentives excessive consumption and wastage
o f water, whilst ensuring at least a minimum"life line" supply to the poor. Ina realistic time frame
o f about five years, efforts will be made and ULBs encouraged to achieve 100percent metering
and volumetric pricingbasedon long runmarginal costs.

CAPITAL INVESTMENTS:

Though considerable amount o f capital expenditure has beenundertakenfor creation o f water
supply capacity, this has not beenthe result entirely of a coherent plan. The consequenceshave
been:

    a   mismatchedcapacities;
    a   no objective criterion basedprioritization;
        incremental and hence expensive capital decisions leading to duplication and avoidable
        expenditures.

To deal with all urbanwater supply investment issuesappropriate state level mechanisms will be
established. A reviseddemand drivenurban water action planbased on the principles outlined in
this statement will be prepared andthe GoK will adopt this after discussing itwith all the relevant
agencies. Future capital investments inthe sector will be inaccordance with this plan. Investments
will beguided by the principle of optimal utilization of water and water systeminfrastructureand
financial resources, and the financial as well as the social returns on investment.

PFUVATE SECTOR PARTICIPATION (PSP):

To improve efficiency inservice provision, continuously update technology and ultimately bringin
private investment into sector, the GoK will actively encourage private sector participation. Given
the current state of the sector, PSPwill necessarily have to be gradual. Preparatory work for PSP
inthe sector like fostering aculture ofcommercialization, encouraging out sourcing, building
local capacity and most importantly identifying an expediting the necessary legislative institutional
and regulatory changes that are necessaryo f PSP will be undertaken inthe meanwhile. Giventhe
very different sizes of urban areas inthe State, the GoK will allow a range o f different PSP
methods o f service provision and service providers.

NEXT STEPS:

The sector strategy and actionplanto be announced as a follow up to this policy will contain
details o f the legislative, institutional and coordinationmechanisms that are needed to be put in
place to cany forward the policy.




                                                  - 105 -

-106-

MAP SECTION