Karnataka Integrated and Sustainable Water Resources Management Investment Program: Feasibility Study

Technical Assistance Consultant’s Report

Project Number: TA 7954 September 2012

India: Karnataka Integrated and Sustainable Water Resources Management Investment Program

This consultant’s report does not necessarily reflect the views of ADB or the Government concerned, and ADB and the Government cannot be held liable for its contents. (For project preparatory technical assistance: All the views expressed herein may not be incorporated into the proposed project’s design.

Karnataka Integrated and Sustainable Water Resource Investment Programme

Urban Water Supply and Sanitation Component

Draft Final Report Volume 2 Strategic Investment Plan September 2012

TA 7954–IND: KISWRIP Draft Final Report: Vol. 2 – Strategic Investment Plan September 2012

Foreword

This Draft Final Report has been prepared as a deliverable of the PPTA-7954 IND: “Karnataka Integrated and Sustainable Water Resources Management Investment Programme – Urban Water and Sanitation Component”.

This, the Second Volume, sets out a Strategic Investment Plan for improved water and wastewater service in the State of Karnataka as well as in the KISWRIP pilot Tundra-Bhadra sub basin. The Plan is based upon the detailed assessment made of four ULBs in the Tundra-Bhadra River sub-basin.

During the course of the preparation of the Report, considerable advice, guidance and assistance has been provided by the Steering Committee and the staff of the KUIDFC, the local ULBs, KUWS&DB and by the engineering staff responsible for the existing on-going UWSS projects within the subject towns. This kind assistance, without which this Report could not have been produced, is herewith duly acknowledged and credited.

In particular, the assistance and advice offered by the Managing Director of the KUIDFC and our Core Nodal Officer has been essential. Many of the recommendations made in the Institutional Road Map, and upon which the Strategic investment Plan is based, are theirs. I have merely taken their suggestions, polished them and fitted them into the overall context of the Programme.

Tony Farrar

PPTA Team: Team Leader & Water Sector Specialist

Amit Basu Deputy Team Leader and Sewerage Specialist

Jagan Kommareddy Replacement for Amit, following Amit‟s retirement due to ill health

Sougata Datta Water Supply Expert

Krishnan Padmanabhan Economic and Financial Expert

Achyutha Rao Aleti Environmental Safeguard Specialist

Saswati Belliappa Social Safeguard Specialist

Arati Nandi Poverty & Social Development Specialist

Alan Nightingale Water Engineer

Fred Gould Wastewater Treatment Specialist

Prepared under the guidance of Tatiana Gallego-Lizon, Principal Urban Development Specialist SARD/ADB

TA 7954–IND: KISWRIP Draft Final Report: Vol. 2 – Strategic Investment Plan September 2012

1 KNOWLEDGE SUMMARY ...... 1 2 INTRODUCTION TO THE PROJECT ...... 7

2.1 BACKGROUND TO THE PROJECT ...... 7 2.2 PROJECT DELIVERABLES ...... 7 2.2.1 MFF Sector Road Map ...... 7 2.2.2 Feasibility Studies ...... 8 2.2.3 Program Implementation Plan and Materials ...... 8 2.3 SCOPE OF THE DRAFT FINAL REPORT ...... 8 2.4 ADB POLICY AND EXPERIENCE IN INDIA ...... 8 3 PROJECT RATIONALE ...... 10

3.1 PILOT SUB-BASIN ...... 10 3.2 DEFINITION OF SUB-SECTOR ...... 10 3.3 STAKEHOLDERS AND THEIR ROLE IN PROJECT ...... 11 3.3.1 Regulation ...... 13 4 GOVERNMENT SECTOR POLICY & INITIATIVES ...... 14

4.1 LEGAL FRAMEWORK ...... 14 4.2 NATIONAL POLICY ...... 14 4.3 STATE POLICIES FOR THE SECTOR ...... 18 4.3.1 Draft Cabinet Paper ...... 19 4.4 PUBLIC/PRIVATE PARTNERSHIPS ...... 19 5 ISSUES FACING THE SECTOR & KISWRMIP PROPOSALS ...... 20

5.1 OVERVIEW OF ISSUES ...... 20 5.2 COMPARISON OF KARNATAKA URBAN SERVICE STATUS WITH NATIONAL STANDARD AND AVERAGE ...... 20 5.3 COMPARISON OF KARNATAKA URBAN SERVICE STATUS WITH NATIONAL STANDARD AND AVERAGE ...... 28 5.4 ROAD MAP PROPOSALS ...... 36 5.5 OUTLINE OF PROPOSALS MADE IN ROAD MAP ...... 36 5.6 SUMMARY OF ISSUES AND PROPOSALS ...... 38 6 OPPORTUNITES FOR PPP AND RE-USE OF WASTEWATER FINAL EFFLUENT ...... 41

6.1 PUBLIC PRIVATE SECTOR PARTICIPATION ...... 41 6.2 RE-USE OF WASTEWATER FINAL EFFLUENT ...... 42 6.2.1 State Unit for Wastewater Re-Use ...... 43 7 FINANCIAL ASSESSMENT OF ULBS ...... 44

7.1 INTRODUCTION ...... 44 7.2 FINANCIAL STATUS OF FOUR TOWNS ...... 44 7.2.1 Summary of Financial Data of Subject ULBs ...... 44 7.2.2 Sector Operation and Maintenance ...... 46 7.2.3 Collection Efficiency ...... 47 7.2.4 Accounting Standards and Status of Auditing ...... 47 7.3 RING FENCING WSS SERVICE UNITS IN ULBS ...... 47 7.4 FINANCIAL MANAGEMENT ASSESSMENT ...... 48

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8 ECONOMIC DEVELOPMENT ...... 50

8.1 INTRODUCTION ...... 50 8.2 URBAN SECTOR ...... 50 8.3 EXISTING SITUATION ASSESSMENT ...... 50 8.4 SECTOR COMPOSITION OF GSDP ...... 51 8.5 MAJOR ECONOMIC ACTIVITIES OF KARNATAKA ...... 52 8.6 FUTURE GROWTH ...... 53 9 STATE ECONOMIC ANALYSIS ...... 55

9.1 ECONOMIC ANALYSIS ...... 55 9.1.1 Assignment of Resources to Local Bodies ...... 55 9.2 ECONOMIC ANALYSIS OF A SECTOR LOAN ...... 56 9.2.1 Rationale for Government Involvement ...... 56 9.2.2 Goals of the Programme ...... 56 9.2.3 Sector Development Plan ...... 56 9.2.4 Associated Economic Policies ...... 57 9.2.5 Government Capacity ...... 57 9.2.6 Fiscal Impact ...... 57 9.2.7 Economic Risks ...... 57 9.2.8 Government Commitment ...... 57 9.2.9 Coordination of Foreign Aid ...... 58 9.2.10 Conditions Attached to the Loan...... 58 9.3 CONCLUSION ...... 58 10 TRANCHE -1 INVESTMENTS AS PILOT INVESTMENTS ...... 59

10.1 SELECTION OF TRANCHE-1 SUBJECT TOWNS...... 59 10.2 FEASIBILITY STUDY RECOMMENDATIONS ...... 59 10.3 SUMMARY OF TRANCHE-1 INVESTMENTS ...... 60 10.4 FORECAST FOR PILOT SUB-BASIN INVESTMENT ...... 62 10.5 TECHNICAL INVESTMENT OPTIONS ...... 64 10.5.1 Water & Wastewater Treatment Options ...... 64 10.5.2 Water and Sewer Networks ...... 65 11 ASSUMPTIONS MADE IN THE FINANCIAL ANALYSIS ...... 66

11.1 INTRODUCTION ...... 66 11.2 POPULATION ...... 66 11.3 INCREASE IN WATER DEMAND ...... 67 12 FINANCE REQUIREMENTS FOR UWSS SERVICE DELIVERY ...... 68

12.1 CAPITAL EXPENDITURE ON WORKS ...... 68 12.2 STATE FISCAL ...... 69 12.3 REVENUES ...... 69 12.4 DEBT POSITION ...... 72 12.5 TRANSFER MECHANISM ...... 72 12.6 ULB REVENUE SOURCES: ...... 73

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12.7 INSTITUTIONAL ROAD MAP PROPOSALS ...... 78 13 SUMMARY OF INVESTMENT PROGRAMME ...... 79

13.1 INVESTMENT OBJECTIVES ...... 79 13.2 PHYSICAL INVESTMENTS IN EACH SUB-SECTOR ...... 79 13.3 SOURCES OF FINANCING ...... 80 14 SUB-PROJECT SELECTION CRITERIA ...... 83

14.1 PRIORITISATION OF INVESTMENTS ...... 83 14.2 OVERALL APPROACH ...... 83 14.2.1 Technical Criteria ...... 83 14.2.2 Financial Criteria ...... 84 14.2.3 Economic Criteria ...... 84 14.2.4 Social and Environmental Criteria ...... 84 14.2.5 Cost Estimate and Procurement ...... 85 14.3 SUB-PROJECT APPROVAL PROCEDURES ...... 85 14.3.1 Demonstration of Willingness ...... 85 14.3.2 Concept Approval ...... 86 14.3.3 Subproject Approval Procedure...... 86 14.4 PENALTIES ...... 87 15 IMPLEMENTATION PLAN ...... 88

15.1 TRANCHE-1 INVESTMENT ...... 88 15.2 TRANCHE-2 AND SUBSEQUENT INVESTMENT ...... 88 15.3 IMPLEMENTATION ENTITIES ...... 89 15.3.1 Steering Committee ...... 89 15.3.2 Executing Agency ...... 89 15.3.3 Implementing Agency ...... 89 15.3.4 Consultancy Services Committee ...... 89 15.3.5 Tender Evaluation Committee...... 90 15.4 IWRM PROJECT MANAGEMENT UNIT ...... 90 15.5 IMPLEMENTATION PROGRAMME ...... 90 16 DESIGN & MONITORING FRAMEWORK ...... 92 17 FINANCIAL MANAGEMENT AND PROCUREMENT CAPACITY ASSESSMENT ...... 96

17.1 INTRODUCTION ...... 96 17.2 PROGRAM MANAGEMENT UNIT (PMU) ...... 96 17.2.1 Executing Agency – PMU, KISWRMIP ...... 96 17.3 CONCLUSION AND RECOMMENDATIONS ...... 97 17.1 PROCUREMENT CAPACITY ASSESSMENT ...... 100 17.1.1 Expected Procurement ...... 100 17.1.2 Assessment of the National Procurement Environment ...... 100 17.2 WORKS CONTRACTOR AND CONSULTANCY CAPACITY ...... 101 17.2.1 Client/Contractor Partnerships ...... 101 17.2.2 Performance Guarantees ...... 101

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17.2.3 Karnataka Competency for Process Technology ...... 101 17.2.4 Operational Contracts ...... 101 17.3 SUMMARY ASSESSMENT AND RECOMMENDATIONS ...... 102 17.3.1 Strength ...... 102 17.3.2 Weakness ...... 102 18 TENDER EVALUATION AND SELECTION PROCEDURES ...... 103

18.1 CONSULTANT PROPOSAL EVALUATION PROCEDURE ...... 103 18.2 WORKS CONTRACT EVALUATION PROCEDURE ...... 103 18.3 TRANCHE-1 WORKS AND SUPERVISION CONTRACTS ...... 103 18.3.1 Design and Works Supervision Contract ...... 103 18.3.2 Plant Construction & Strategic Network ...... 104 18.3.3 Wastewater Network Construction ...... 104 18.3.4 Water Network Construction ...... 104 18.4 PERFORMANCE CONTRACTS ...... 105 18.5 CONTRACTS FOR TRANCHE-2 AND 3 INVESTMENTS ...... 105 19 CAPACITY BUILDING ...... 106

19.1 REQUIREMENT ...... 106 19.2 ESTABLISHMENT SIZE ...... 106 19.3 TRAINING BUDGET ...... 107 19.4 EQUIPMENT AND BUSINESS SYSTEMS ...... 107 20 SAFEGUARDS ...... 109

20.1 INTRODUCTION ...... 109 20.2 SOCIAL ANALYSIS ...... 109 20.3 IWRM PROJECT MANAGEMENT UNIT ...... 109 20.4 ENVIRONMENT ASSESSMENT ...... 109 20.4.1 Sludge Management ...... 110 20.5 RESETTLEMENT FRAMEWORK ...... 110 20.5.1 Scope of Land Acquisition ...... 110 20.5.2 Draft Resettlement Framework ...... 110 20.6 INDIGENOUS PEOPLES DEVELOPMENT FRAMEWORK ...... 112 20.7 CONSULTATION AND PARTICIPATION PLAN ...... 113 20.7.1 Overview ...... 113

Tables Table 1: Karnataka Water Sector Stakeholders ...... 12 Table 2: Union Government Water Policies ...... 16 Table 3: Union Government Wastewater Policies ...... 17 Table 4: Level of UWSS Service Provision ...... 21 Table 5: Service Criticality Index ...... 23 Table 6: Level of Criticality for UWSS Service ...... 26 Table 7: Level of UWSS Service Provision ...... 29 Table 8: Service Criticality Index ...... 31

TA 7954–IND: KISWRIP Draft Final Report: Vol. 2 – Strategic Investment Plan September 2012

Table 9: Level of Criticality for UWSS Service ...... 34 Table 10: Proposals to Overcome Impediments to Success ...... 39 Table 11: O&M and User Charge ...... 44 Table 12: Past Financial Performance of Subject ULBs ...... 45 Table 13: Sector O&M Costs in Subject ULBs ...... 47 Table 14: Collection Efficiency ...... 47 Table 15: Summary of Financial Management Assessment ...... 48 Table 16: Percentage Annual Growth ...... 50 Table 17: India & Karnataka GDP ...... 50 Table 18: District Share of State NSDPV ...... 52 Table 19: Karnataka Receipts and Expenditure ...... 54 Table 20: Summary of Tranche-1 Investments and Indicators ...... 61 Table 21: Summary of Total Investment ...... 62 Table 22: Forecast for Pilot Sub-Basin Investment Requirement ...... 63 Table 23: Annual Mains Rehabilitation Investment ...... 65 Table 24: Historic and Forecast Populations...... 66 Table 25: Capital Expenditure (CAPEX) in ULBs ...... 68 Table 26: UWSS Operation & Maintenance (OPEX) ...... 68 Table 27: Investment in Sub-Basin 2002-2011 ...... 69 Table 28: State Budget ...... 70 Table 29: State Debt Position...... 72 Table 30: State Interest Payments ...... 72 Table 31: Water Service Charges ...... 73 Table 32: Revenue Account for ULBs in Sub-Basin ...... 74 Table 33: Collection Efficiency ...... 76 Table 34: Current Initiatives to Increase UBL Revenue ...... 78 Table 35: Physical Investment Cost - Road Map Implementation (Rs.M) ...... 80 Table 36: Physical Investment Cost - Road Map Implementation ($.M) ...... 80 Table 37: Source of Financing - State Requirement - RsM ...... 81 Table 38: Source of Financing - State Requirement - $M ...... 81 Table 39: Source of Financing – Sub-Basin Requirement - RsM ...... 81 Table 40: Source of Financing – Sub Basin Requirement - $M ...... 82 Table 41: Source of Financing –Tranche-1 Towns - RsM ...... 82 Table 42: Source of Financing – Tranche-1 Towns - $M ...... 82 Table 43: Implementation Programme ...... 91 Table 44: Summary of PMU Assessment ...... 98 Figures Figure 1: Indicative Water Supply Investment ...... 3 Figure 2: Tundra Bhadra Sub Basin ...... 11 Figure 3: Movement in India and State GDPs ...... 51 Figure 4: Per Capita NSDP of India and Karnataka ...... 51 Figure 5: Indicative Water Supply Investment per Head ...... 62 Figure 6: Design & Monitoring Framework ...... 95 Figure 7: Consultation in Davangere ...... 113

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TA 7954–IND: KISWRIP Draft Final Report: Vol. 2 – Strategic Investment Plan September 2012

Abbreviations

Abbreviation Full term

ADB Asian Development Bank

CC City Corporation

CDTA Capacity Development Technical Assistance

CLIP City Level Investment Plan

CMC City Municipal Councils

DPR Detailed Project Report

DWSM Drinking Water Supply Mission (proposed)

EA Executing Agency

EARF Environmental Assessment & Review Procedure Framework

EARP Environmental Assessment & Review Procedure

EIA Environmental Impact Assessment

ELSR Elevated Storage Reservoir

EMP Environmental Management Plan

FR Final Report

FYP (GoI) Five Year Plan

GO Government (of Karnataka) Order

GoI Government of India

GoK Government of Karnataka

IEE Initial Environmental Examination

ID&IP Infrastructure Development & Investment Plan

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TA 7954–IND: KISWRIP Draft Final Report: Vol. 2 – Strategic Investment Plan September 2012

IPPF Indigenous Peoples Development Plan

IND India

IEE Initial Environmental Examination

IWRM Integrated Water Resource Management

Karnataka Integrated and Sustainable Water Resources Management KISWRMIP Investment Programme

KUIDFC Karnataka Urban Infrastructure Development & Finance Corporation

KUWSDB Karnataka Urban Water Supply & Drainage Board

MFF Multi-Tranche financing facility

NGO Non-Government Organisation

NKUSIP North Karnataka Urban Sector Investment Program

NRW Non-Revenue Water

O&M Operations & Maintenance

PSA Performance Service Agreement

PCU Project Co-ordination Unit

PPP Private Public Participation

(PP)TA (Project Preparation) Technical Assistance

(P)SC (Programme) Steering Committee

REA Rapid Environmental Assessment

RF Resettlement Framework

RP Resettlement Plan

SPV Special Purpose Vehicle

TA 7954–IND: KISWRIP Draft Final Report: Vol. 2 – Strategic Investment Plan September 2012

SWP State Water Policy

TMC Town Municipal Council

TP Town Panchayath

(D)TL (Deputy) Team Leader

UDD Urban Development Department

ULB Urban Local Body

UDWSP Urban Drinking Water & Sanitation Policy

WB World Bank

WRD Water Resource Department

(U)WSS (Urban)Water Supply & Sanitation

WTP (W) Water Treatment Plant (Works)

WWTP (W) Wastewater Treatment Plant (Works)

TA 7954–IND: KISWRIP Draft Final Report: Vol. 2 – Strategic Investment Plan September 2012

Technical Abbreviations

Abbreviation Full term

Kl Kilolitre

km Kilometre

l/hd/dy Litres per head per day

lps Litres per second

M Million

Mld Mega litre per day

m Metre

mm Millimetre

TA 7954–IND: KISWRIP Draft Final Report: Vol. 2 – Strategic Investment Plan September 2012

1 KNOWLEDGE SUMMARY

1. The reasons for poor Urban Water Supply and Sanitation (UWSS) sector performance are well known, and do not need to be detailed in this Knowledge Summary:

 Poor condition of UWSS assets, often beyond their reliable working life;

 Lack of overall sector coordination and control, and

 Insufficient capacity, particularly at Urban Local Body (ULB) level where there are neither sufficient operational staff members, or staff of the necessary calibre. 2. In many respects these have been due to, amongst other reasons, lack of investment and politically driven tariffs. 3. In the context of a rapidly developing area with increasing customer expectations and yet a scarcity of good quality water, the “Karnataka Integrated and Sustainable Water Resources Management Investment Programme (KISWRMIP) is being developed with the assistance of the Asian Development Bank (ADB) in order to ensure the adequacy and sustainability of water and wastewater service provision in the state of Karnataka. 4. The Programme is specifically required to take into account two cornerstones of the Government of India and the Government of Karnataka sector strategies – those of Integrated Water Resource Management (IWRM) and for the maximum use of Public Private Partnerships (PPP). 5. The Multi-Tranche Financing Facility‟s (MFF) first tranche, Tranche-1, covers operationalisation of IWRM functions and investments for four ULBs in the upper Tunga Bhadra River basin. Other ULBs in the basin and water scarce sub-basins of Karnataka are to be covered during the subsequent tranche(s). We understand that the Investment Program is for a period of 7 to 8 years and will comprise of three tranches:

 Tranche 1 - four years from 2013 to 2016;

 Tranche 2 - four years from 2015 to 2018, and

 Tranche 3 - four years from 2017 to 2020 6. Our understanding is that the total investment will be $215million, inclusive, with an ADB share of $150million; the remainder being from the Government of Karnataka. 7. Four ULBs – Davangere, Ranebennur, Harihar and Byadgi - were selected as pilot sub-project towns for assessment of the required sector investment in the sub-basin and across Karnataka, to bring the water and wastewater service provision in the state to the required level for economic development of the state and for the health and well-being of its citizens. 8. Institutional and technical issues have been addressed in the Draft Final Report: Volume 1- Institutional Road Map and in the four sub-project water and wastewater Feasibility Studies. Our “Road Map” proposals, based upon our own findings and upon past lessons learnt in India, include the need for:

TA 7954–IND: KISWRIP Draft Final Report: Vol. 2 – Strategic Investment Plan September 2012

 Water tariffs to be commensurate with customer service levels, and the reasons for tariff increases to be clearly explained to customers who should have the option to decide, collectively, upon service level1 and thus charges;  Sector coordination at state and local level;  Establishment of District based SPVs for service delivery or, within the larger ULBs, a distinct water and wastewater department with staff devoted only to the sector and with ring-fenced accounting;  Development a professional capability among ULB managerial, financial and technical staff;  Introduce means and procedures for performance and asset history data as a first step towards fuller PPP, and  A 5yr O&M phase to be included into treatment plant works contracts to assist building of an O&M capability in the ULBs. 9. Concerning the need for ownership of projects by ULBs, ULBs including mayors, councillors, and ward members should be fully involved at the early stage of project initiation and formulation and be kept fully informed during the asset creation process. 10. Customer databases need to be updated and retained as current in order to ensure that all customers receive a water service bill, and that the ULB receives all the income to which it is entitled. Insufficient data existed in the sub-project towns to make an assessment of these “commercial”2 losses. From our experience, figure between 10% and 20% of water into supply is feasible. 11. Objectives for the investments require to be focused upon the service issues facing the sector, that is to:

 Provide for full and continuous water supply within the urban areas;

 Provide for wastewater collection, where the number of people willing to connect to a sewer make the sewer economically viable;

 Treat wastewater collected to Indian standards for discharge to a water course;

 Reduce NRW to economic levels, and

 To promote the commercial re-use of wastewater. 12. It is dangerous to draw too much from the limited sample of the four pilot ULBs, but there are some conclusions that can be drawn and applied in a wider context:

 For the water supply, the $/head indicator is fairly consistent ranging from $90 to $1443. The highest figure is in Byadgi and reflects the lower population of the ULB over which fixed costs are spread. The average for the other three towns is $105/head. Most of the water service requirements are in place and the investment tends to be one to augment the existing facilities, rather than first-time service provision, and for asset replacement, and

 For the wastewater service, the required investment is more variable and is based upon the requirements in each ULB. The $/person for Byadgi is high as the wastewater collection and treatment is first-time, whereas in the other towns the requirement is much less due to the current ADB and other investments taking place. 13. The following table shows the breakdown of the proposed Tranche-1 investment

1 During the sub-project household survey, a continuous supply was not seen as essential to many people. 2 “Commercial losses” includes unknown customers, meter errors and errors due to estimating consumption where there are no meters or the meters are inoperable. 3 The indicators are based upon assessed investment requirement, not necessarily that provided in the Tarnche-1 investment

TA 7954–IND: KISWRIP Draft Final Report: Vol. 2 – Strategic Investment Plan September 2012

Figure 1: Indicative Water Supply Investment Estimated CAPEX4 Project Element $M

Davangere Water Procurement 2.08 Water Network Phase 1 16.27 2011 population Water Network Phase 2 3.95 488,410 Total Water Investment $22.30M Wastewater Collection 16.93 Wastewater Treatment - Total Wastewater Investment $16.93M TOTAL ULB Investment $39.23M Harihar Water Procurement 3.04 Water Network Phase 1 1.85 2011 population Water Network Phase 2 6.48 101,711 Total Water Investment $11.37M Wastewater Collection 1.19 Wastewater Treatment - Total Wastewater Investment $1.19M TOTAL ULB Investment $12.56M Ranebennur Water Procurement 4.32 Water Network Phase 1 2.88 2011 population Water Network Phase 2 5.96 114,580 Total Water Investment $13.26M Wastewater Collection 1.34 Wastewater Treatment 0.36 Total Wastewater Investment $1.7M TOTAL ULB Investment $14.9M Byadgi Water Procurement - Water Network Phase 1 2.77 2011 population Water Network Phase 2 1.63 30,600 Total Water Investment $4.4M Wastewater Collection 4.88 Wastewater Treatment 1.13 Total Wastewater Investment $6.01M TOTAL ULB Investment $10.41M Total of Physical Investments $77.10M Provide for Tranche-2 preliminary works1 $20.00M IWRM Project Management Unit2 $1.25M Training programme (allow)3 $0.05M Allow for plant and business systems4 $1.60M TOTAL TRANCHE 1 INVESTMENT $100.00M

Note 1: See Paragraph 27. Note 2: See Paragraph 22. Note 3: To be confirmed by HR and Development Plan. Note 4: to be confirmed based upon Institutional arrangement of ULBs for service delivery 14. As discussed in Paragraph 26, the investment in the water network is divided into two phases. The first Phase is for bulk water procurement and treatment, and the second is to provide the water distribution infrastructure for a continuous water supply to customers. The second phase

4 CAPEX is inclusive of project management costs of 10%; contingency of 15%; resettlement, compensation and land purchase costs, and for an extended 5yr operational phase for new water and wastewater treatment plants.

TA 7954–IND: KISWRIP Draft Final Report: Vol. 2 – Strategic Investment Plan September 2012

investment is predominantly for the replacement of older, leaking mains. Financial and economic benefits to be derived from mains replacement can be difficult to demonstrate and the investment included in the Tranche-1 investment for mains rehabilitation has been limited necessarily by:

 The financial/economic cost benefit analysis, and  The anticipated total Tranche-1 investment of $100M

15. The final amount allocated for mains rehabilitation will depend upon:

 The agreed Tranche-1 investment value;  Results of pipe condition surveys, sampling and destructive testing to ascertain the true extent, cost and prioritisation of mains for replacement;  Any funding provided by the ULBs, and  The contracted rates for pipe replacement.

16. Summary of physical investment cost required for Roadmap implementation is given in the following tables, in US$million. Physical Investment Cost - Road Map Implementation in $M

Tranche-1 Subject Total Sector 34 Towns Towns State Amount % to total Amount % to total Water Supply 1,094 212 19.4 108 9.9 Sewerage 844 139 16.4 38 4.6 Total 1,938 350 18.1 146 7.6

Note: 1) Base costs only - does not include contingencies, 2) 1 U S Dollar =55 17. The required investments for the 34 ULBs in the pilot sub-basin of $244m for water and $160 for wastewater compares with the $270m and $165m derived from the four subject ULB Feasibility Studies, if a 15% contingency is added to the above figures. 18. The difference for the water sector investment - $244m to $270m – is probably due to the large investment proposed now for the rehabilitation of the water networks in the towns.

Source of Financing - State Requirement in $M

Centrally WB / ADB Balance funds Sector Total Sponsored State Plan Investment source to be Schemes Program identified Water 1,094 76 413 223 382 Supply Sewerage 844 14 452 234 144 Total 1,938 90 865 456 526

Note: 1) Base costs only - does not include contingencies 2) 1 U S $ = 55 Source: KUWSDB, KUIDFC, GoK and consultant estimate

Source of Financing – Sub Basin Requirement in $M

TA 7954–IND: KISWRIP Draft Final Report: Vol. 2 – Strategic Investment Plan September 2012

Centrally WB / ADB Balance funds Sector Total Sponsored State Plan Investment source to be Schemes Program identified Water Supply 212 18 79 57 57 Sewerage 139 3 65 49 22 Total 350 21 144 106 79 Note: 1) Base costs only - does not include contingencies 2) 1 U S $ = ` 55 Source: KUWSDB, KUIDFC, GoK and consultant estimate

Source of Financing – Tranche-1 Towns in $M

Centrally WB / ADB Balance funds Sector Total Sponsored State Plan Investment source to be Schemes Program identified Water Supply 108 1 0 46 62 Sewerage 38 1 1 36 1 Total 146 1 1 81 63 Note: 1) Base costs only - does not include contingencies 2) 1 U S $ = ` 55 Source: KUWSDB 19. As the basis for investment, we have found that the Government of Karnataka‟s sector development plan is economically sound. The plan involves only the normal functions of government, and its goals are reasonable. The plan is generally well designed from an economic perspective. 20. Similarly, the KUIDFC, as the project PMU, has the systems and procedures in place to manage the project. 21. The ULBs will be the owner of any assets procured and will be responsible for their operation and maintenance and for the setting of tariffs to finance the O&M. 22. Capacity building is required in the ULBs. We recommend that ULBs “associate” on a District basis to form Special Purpose Vehicles that will be large enough to attract experienced operators to work alongside ULB staff in a co-management approach. Training objectives and targets would be a specific requirement. Such contracts can only be satisfactory after asset and performance data is available for competitive bidding. An initial task in the project implementation will be to set in place the procedures for the collection and recording of the data. For that purpose, we propose the establishment, in the KUIDFC, of an IWRM Project Management Unit comprising Indian nationals to assist and guide the ULBs, supplemented as necessary by short-term National and International consultants. We recommend also that a small team is established in the Unit with responsibilities for disadvantaged peoples, social and gender water sector issues. 23. The key features of current ULB finances are:

 Own revenue hardly pays the revenue expenditure. ULB heavily depends on grants from the state government for day-to-day operations;

 Collection efficiency for property tax in three of the pilot ULBs needs improvement as it ranges from 62% in Harihar to 86% in Davangere for the financial year 2011-12; In Byadagi the collection efficiency is very good at 99%;

 Collection efficiency for water is low and ranges from 50.4% in Harihar to 81.9% in Davangere, and needs to be improved, and

TA 7954–IND: KISWRIP Draft Final Report: Vol. 2 – Strategic Investment Plan September 2012

 Revenue expenditure has grown in the range of 12% Harihar to 31.1% in Ranebennur. 24. Tariffs should be structured in a manner such as to act as a disincentive for „excessive‟ consumption and wastage of water, whilst ensuring at least a minimum „lifeline‟ supply to the poor. An appropriate cost recovery mechanism based on adequate tariffs will help ensure that revenues cover O&M costs, debt service plus a reasonable return on capital. 25. The KUIDFC has suggested that the ULBs are to show a willingness to share the responsibility to improve the supply to customers and that Tranche-2 and subsequent investments should not be made in a ULB until the ULB has demonstrated improved proficiency through the adoption of various “self-help” measures. Typical of such measures could be to install bulk metering; complete a revision of the customer database to identify unknown connections or to introduce and publish Customer Service and Operational Performance Standards. 26. To conform to the KUIDFC proposal, the proposed Tranche-1 investment has been prepared in two Phases:

 Phase I - all wastewater work requirements and water supply works necessary to ensure the availability of water at the strategic reservoirs, and

 Phase II – additional works required to provide for a continuous supply of water to be provided after the ULB has demonstrated improved proficiency 27. Lack of funding has been a major deterrent in the allowing the ULBs to deliver the improvements in service that they wish to deliver. In recognition of this lack of finance, we suggest that limited monies, $20m suggested, are made available from the Tranche-1 funding to assist ULBs to “take the first steps” to initiate the process within their towns. 28. The necessary Safeguard surveys have been prepared and included into the Draft Final Report as Annex, 5,6 and 7.

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2 INTRODUCTION TO THE PROJECT

2.1 Background to the Project 29. The Government of Karnataka (GoK) has declared the period from 2011 to 2020 as the “Irrigation Decade” for achieving water and food security. The Government envisages the introduction of an “Integrated Water Resources Management (IWRM) approach in the water resources sector to achieve the objectives which includes the integration of issues related to irrigation, agriculture, industrial, energy, drinking water and other allied demands for water. 30. In this context, the “Karnataka Integrated and Sustainable Water Resources Management Investment Programme (KISWRMIP) is being developed with the assistance of the Asian Development Bank (ADB). 31. Specifically, on 9 December 2011, ADB approved the provision of $1,200,000 for technical assistance to prepare the Programme. On 19 January 2012, the Government of India (GoI) signed the associated Technical Assistance (TA) Letter of Agreement. The TA is based on outcomes of a preceding ADB financed capacity development TA which undertook institutional analyses and consultations, and provided an IWRM roadmap covering policy, institutional, and planning framework, specific water management functions and tools to be introduced, and directions to manage challenging water sector agendas towards the future. 32. Consulting services for the Programme are provided by three separate teams of consultants; (i) Integrated Water Resources Management; (ii) Irrigation and (iii) Urban Water Supply and Sanitation (UWSS). The Irrigation consultants are responsible for overall synthesis of all outputs and preparation of a single project design. Subsequent to the interim review mission, the Government of Karnataka (GoK) and ADB approved the segregation of urban water supply and irrigation into two separate but coordinated Multi-Tranche Financing Facilities (MFF) which would be simultaneously prepared under a common IWRM umbrella. 33. The Water Resources Department (WRD) is the Executing Agency (EA) for the preparation of Integrated Water Resources Management and Irrigation components and overall coordination of the KISWRMIP. The Karnataka Urban Infrastructure Development & Finance Corporation (KUIDFC) is the Executing Agency for the UWSS component of the Programme.

2.2 Project Deliverables

2.2.1 MFF Sector Road Map 34. As the PPTA UWSS consultancy team we are tasked to prepare a Final Report that can lead to the intended sector impacts and outcome, comprising:  Sector Road Map to provide an effective basis for MFF investments. The institutional development roadmap for UWSS, in the context of IWRM, is to contain specific reform recommendations and associated actions to provide an enabling environment and progressive steps for incremental improvements. Key agendas include (i) institutional setup, skill mix, and capacities of sector agencies including opportunities for Public/Private Participation (PPP); (ii) enabling environment such as legal, regulatory and operational; (iii) asset operation & maintenance (O&M) sustainability with expenditure review of the concerned agencies; and (iv) climate change adaptation/disaster prevention planning for institutional reforms and resilience in infrastructure and O&M designs;  Strategic Sector Investment Plan to attain the set sector objectives over the medium term. The investment plan has been prepared by compiling the relevant programs financed by the Government of India, the State, and any other external financiers for IWRM and by updating

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the existing investment plan for UWSS. Within this framework, appropriate selection criteria of individual subprojects have been prepared, with prioritization of specific investment recommendations.

2.2.2 Feasibility Studies 35. Feasibility Studies have been prepared for the subject Tarnche-1 towns – Davangere, Harihar, Ranebennur and Byadgi - to cover expansion/ rehabilitation of UWSS systems and will include, amongst other aspects, (i) baseline surveys of the social, economic, poverty and other indicators; (ii) subproject designs for engineering structures and other programs, cost estimates, and implementation arrangements; (iii) economic and financial assessments; and (iv) social and environmental safeguards including impacts, risks and their mitigation measures.

2.2.3 Program Implementation Plan and Materials 36. We are required to prepare a detailed program implementation plan with the assessment of (i) detailed component design and cost estimates; (ii) procurement plans and implementation scheduling with projection of physical, financial, and other progresses; (iii) institutional arrangements for IWRM and sector specific implementation involving the concerned State and local government agencies, consultants, NGOs, and other agents, along with associated capacity development programs; (iv) implementation arrangements such as financial management and planning for consultant engagements; (v) safeguards management, (vi) monitoring and evaluation arrangements and (vii) executing and implementing agencies‟ procurement capacity assessment.

2.3 Scope of the Draft Final Report 37. The Draft Final Report comprises: Volume 1 – Institutional Road Map;

Volume 2 – Investment Plan;

Annex 1 - Davangere Feasibility Study

Annex 2 - Ranebennur Feasibility Study

Annex 3 - Harihar Feasibility Study

Annex 4 – Byadgi Feasibility Study

Annex 5 – Safeguards Report – Environmental

Annex 6 - Safeguards Report – Social Development, Poverty and Gender Analysis

Annex 7 - Safeguards Report – Social

2.4 ADB Policy and Experience in India 38. The past urban operations of ADB confirm that implementation of urban projects is complex and requires close coordination between multiple agencies. In several cases, staffing and capacity of executing and implementing agencies were inadequate, and effective project leadership was lacking. Land acquisition and other clearances take very long and implementation of safeguards is weak and cumbersome. The special evaluation study of ADB noted that where capacities are weak, this should be seen as a risk, and mitigation measures should be incorporated into the design of projects5.

5 ADB. 2006. Special Evaluation Study of OED for ADB Urban Sector Strategy and Operations. Manila.

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39. The Country Assistance Program Evaluation (CAPE) of India (2007) raises concern about sustainability due to slow implementation of financial measures for cost recovery, user charges and taxes, and weak capacity of urban service providers to operate and maintain the assets6. 40. The recommendations of CAPE to enhance sustainability include (i) innovative lending and PPPs and municipal bond market development; (ii) transfer of best practices and long-term capacity building for reforms, asset management, and project design and management, and greater consultation with stakeholders for buy-in; (iii) alignment of ADB reform agenda with JNNURM; (iv) prioritizing local governments with commitment to reforms; and (v) considering use of policy- based loans and continuation of MFF as an appropriate lending instrument. All these recommendations form important elements of ADB‟s on-going operations and continue to be pursued during Country Partnership Strategy (CPS) 2009-2012. 41. ADB‟s urban operations have been expanded to cover economically weaker states. Assessment of the effectiveness of past urban operations reaffirms the relevance and visible impact of ADB projects in Indian cities. In the past, ADB provided loans for integrated urban projects, including investments in water, sanitation, drainage, urban roads and transport to Jammu and Kashmir, Kerala, Kolkata, Madhya Pradesh, Karnataka, and Rajasthan. These were accompanied by urban reforms and capacity building directed at improving the institutional, financial, and management capacity of ULBs and other service providers. Schemes for targeted poverty reduction and “slum up-gradation” were regular component of these projects. While the projects have responded well to the Government‟s multi-pronged urban agenda and created positive synergies among sub- sectors, their design and implementation have proven to be complex. 42. ADB continues to support the Government‟s urban development agenda with dual objectives of (i) improving the quality of life of urban residents and (ii) enhancing the competitiveness of Indian cities to attract investment in a globalizing world. The key outcome of ADB‟s sector assistance is contributing to the 11th Plan‟s targets for (i) increasing access of urban population to water supply and sanitation, which is one of the MDGs, (ii) enhancing urban accessibility and mobility, and (iii) improving environment and public health of urban population. These key outcomes will be achieved through investments in water supply, sewerage, drainage, and urban roads and transport. Where feasible, investments include urban renewal and other infrastructure such as tourism to enhance the economic potential of the cities. To ensure sustainability and quality service delivery, ADB continues to pursue urban reforms.

6 ADB. 2007. Country Assistance Program Evaluation for India. Manila.

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3 PROJECT RATIONALE

3.1 Pilot Sub-Basin 43. The “Upper Tunga Bhadra Sub-Basin”, a part of the Krishna River Basin, has been selected as the pilot sub-basin for KISWRMIP. There are thirty-four Urban Local Bodies (ULBs) located in the sub-basin which is considered to be water –stressed. The total population in the sub-basin is 70lakhs, of which 22.4lakhs are urban. 44. The location of the sub-basin is shown in Figure 2, reproduced from the Report: Final Report Integrated Water Resources Management and Sustainable Services Delivery in Karnataka. (ADB TA No. 7418-IND) Component 3: Urban Water Supply and Sanitation.

3.2 Definition of Sub-sector 45. The sub-sectors to be included in are (i) potable water supply (ii) and wastewater collection and safe disposal, within urban areas. Land drainage and solid waste management are excluded from the project. 46. Rural areas are included only as much as to the extent that water can be made available to rural communities from transmission mains passing close to communities. Any supplies made available are of untreated water. Peri-urban areas are included where they included within local ULB development plans. 47. “Potable water supply” from groundwater or surface water is defined as the abstraction, conveyance, pumping, treatment, storage, distribution and delivery to domestic and non-domestic customers via piped connections or public stand posts of water needed for daily living and for fire fighting and operational purposes 48. “Wastewater” refers to the infrastructure that conveys sewage and covers the system of sewer pipes, septic tanks, pump stations, sewage treatment plants and outfall arrangements necessary to safely remove water contaminated by faecal, household or industrial wastes and thereby preserving public health. “Wastewater” does not include for rain, storm or ground water.

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Figure 2: Tundra Bhadra Sub Basin

3.3 Stakeholders and their Role in Project 49. Karnataka‟s UWSS sector is managed by multiple agencies - the Urban Development Department (UDD), the ULBs, the Karnataka Urban Water Supply and Drainage Board (KUWSDB), the Karnataka Urban Infrastructure Development and Finance Corporation (KUIDFC). Specifically:

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 The Urban Development Department of the State Government is the managing Government Department for the KUIDFC, the KUWS&DB, and for the ULBs;  The KUIDFC represents the UDD as the project funding; formulation; management, and executing agency. The UDD acts (i) as the State Government‟s interface for externally aided projects, and (ii) as nodal agency to implement Government schemes in all sector components, which among others also includes improvement and strengthening of urban components in the field of UWSS facilities.  The KUWS&DB is primarily responsible for planning, designing, and implementation of water and waste water facilities funded by the Government of Karnataka in the urban areas of Karnataka, excluding Bengaluru city. The KUWS&DB designs and implements water supply and underground drainage schemes in urban areas of the state and transfers them to respective ULBs. The KUWS&DB has two administrative regions – the North Karnataka Zone and South Karnataka.  As per the 74th constitutional amendment, the responsibility of providing municipal services including water and sanitation services vests with ULBs. In Karnataka, there are a total of 218 elected ULBs responsible for public administration divided, according to size, into City Corporations, City Municipal Councils, Town Municipal Councils, Town Panchayaths and Notified Area Committees.  The ULBs are mandated to provide basic services to the urban residents including operation and maintenance (O&M) of water and waste water facilities on a day to day basis. Once a UWSS scheme is completed, it is handed over to the concerned ULBs for O&M. The ULBs have the responsibility of fixing tariffs and collecting revenue for the services rendered. 50. Other involved agencies are:  The Water Resource Department (WRD) is mandated to harness surface water for major and medium irrigation, for industry and for drinking water. The WRD comprises three major groups of Agencies: Krishna Bhagya Jal Nigam Limited, Karnataka Nagar Nigam Limited, and Cauvery Neeravari Nigam Ltd. The Agencies are the three corporations for new irrigation projects. Component entities within the WRD are: o The Water Resources Development Organization is primarily responsible for providing technical services for developing and managing irrigation projects. The Command Area Development Authority and Water and Land Management Institute are primarily concerned with operation and maintenance of existing irrigation projects; o The IWRM Advanced Centre set up within the Water Resources Department is mandated to serve as an Overall Programme coordination unit to implement the IWRM component of the programme.  The Karnataka Rural Water Supply and Sanitation Agency is the equivalent body to the KUWS&DB for rural areas. Table 1: Karnataka Water Sector Stakeholders

Stakeholder Role Government of India National policy and law enactment Ultimate responsible entity within the state for water Government of Karnataka sector policy, strategy and implementation Management of water resources, surface and Water Resources Department groundwater, within the state for public water supply, industrial water and irrigation

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Stakeholder Role Oversees policy related to urban water supply and sanitation as well as urban planning and development, in which role the UDD supervises the function of both Urban Development Department the Karnataka Urban Water Supply and Drainage Board and of the Karnataka Urban Infrastructure Investment Development & Finance Corporation. The KUIDFC represents the UDD for infrastructure Karnataka Urban Infrastructure Investment project formulation; management, and execution, and Development and Finance Corporation for the disbursement of investment funding for infrastructure projects and related capacity building. Primarily responsible for planning, designing, and implementation of water and waste water facilities Karnataka Urban Water Supply and funded by the Government of Karnataka in the urban Drainage Board areas of Karnataka, excluding Bangalore. The Board is, at the request of a ULB, can be responsible for the O&M of some ULB water systems Responsible for local administration, mandated to provide basic services to residents including operation Urban Local Bodies and maintenance (O&M) of water and waste water facilities on a day to day basis.

3.3.1 Regulation 51. There is no water services regulator in Karnataka. Customers have no recourse for complaints other than to the ULB service provider. 52. Tariffs are set by the ULBs without out reference to customer service levels provided. The tariffs are related to political influence; not to the service provided.

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4 GOVERNMENT SECTOR POLICY & INITIATIVES

4.1 Legal Framework 53. The major enactment concerning water supply and wastewater is the 74th Constitutional Amendment Act 1973. The 12th Schedule devolves governmental functions to the ULBs, two of which are for:

 Water supply for domestic, industrial and commercial purposes; and

 Public health, sanitation conservancy and solid waste management. 54. Various other Laws specify other associated activities e.g. the Karnataka Municipal Corporations Act (1976) governs the management of municipal corporations and the Karnataka Municipalities Act (1964) governs the management of city municipal and town municipal councils. Other legislations is

 Government of Karnataka (GoK) Policy on Urban Drinking Water and Sanitation, 2002;

 GoK Water Policy (2002), and

 KUWSDB Act, 1972. 55. A critical framework governing project implementation is the 1996 Government Order (GO) regarding project financing patterns and contributions by ULBs to the project cost. GOs issued from time to time deal with project specific interventions; project financing measures, service delivery standards, etc. 56. Planning and implementation of infrastructure is governed by the appropriate GO. 57. Government Orders define the tariff structures for water supply cost recovery. For example, the funding pattern for water supply projects is governed by GO No. UDD 204 UMS 95 dated November 15, 1996, which details out loan: grant: own share mix in case of water supply projects based on a town‟s 1991 population.

4.2 National Policy 58. The Government of India has a number of policy initiatives pertaining to the water resources sector. Of most current relevance is the 12th Five Year Plan (2012-17), which is still under preparation. The National Planning Commission has issued the document “Faster, Sustainable and More Inclusive Growth: An Approach to the 12th Five Year Plan” in August 2011 that sets the objectives and priorities for the 12th Five Year Plan. The document makes a detailed assessment of water sector issues and priorities for the 12th Five Year Plan include (i) Water Resources Management; (ii) Ground Water Management; (iii) Major and Medium Irrigation; (iv) Irrigation Management; (v) Water Information Management; (vi) Water Pricing; (vii) Water Requirements of Industry and Urban Centres, and (viii) River Pollution. 59. To address the critical issues identified above, the National Planning Commission has proposed an integrated strategy to be put in place under the 12th Five Year Plan. Some of the elements of the strategy are as follows:

 Re-estimate India‟s water balance basin-wise with all aquifers being mapped over the next five years and aquifer management plans put in place;

 Incentivising irrigation reform and efficiency of water use;

 Wider profile of irrigation department staff who can bridge the gap with the users;

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 The Centre formulate and facilitate adoption of a model Water Resources Regulatory Authority Bill by States; and

 A National Water Commission is put in place to monitor compliance with conditionality imposed in clearance of important water resources projects. 60. Union water and wastewater policies are contained within the following, Table 2 and Table 3, respectively.

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Table 2: Union Government Water Policies

Government Body Plan Policy Detail Millennium Declaration of the Millennium United Nations, to which 94% urban households access drinking water by 2015 Development Plan Govt. of India is a signatory

100% urban water supply by 2012; JNNURM and UIDSSMT Programmes - top priority water supply needs towns and towns, especially those contaminated source, drought prone, water Planning Commission, GoI 11th 5 Year Plan 07-12 shortage, water quality problem; metering to be mandatory; use MIS data bases; penalties for leakage and wastage; use of low volume flush toilets, waste not taps; rain water harvesting; artificial recharge of ground water; water quality testing laboratories

Ministry of Urban Sector policy prerogative State governments; Ministry Rural Development - rural water supply; Urban Water Supply & Development (MoUD), GoI Ministry Housing - urban water supply. Central Ministries have advisory capacity only; Sanitation Programme

MoUD, GoI WS coverage 100%; Per Capita Supply 135 lpcd; NRW water 15%; metering – 10%; Handbook Service continuity of supply 24 hr; Level Benchmarking, Efficiency redress customer complaints 80%; quality of water supplied 100%; cost recovery – June 2010. 100%; revenue collection efficiency 90% MoUD, Central Public Health Manual on Water & Environmental Engineering Supply & Treatment, Sets parameters for water supply design, treatment, storage and distribution Organisation, GoI May 1999

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Table 3: Union Government Wastewater Policies

Government Body Plan Policy Detail Millennium Declaration of Millennium Development Sanitation Coverage: Have, by 2015, the proportion of people without sustainable access to the United Nations, to which Plan safe drinking water and basic sanitation; % households without sanitation by 2015 94%; Govt. of India is a signatory urban households access drinking water by 2015- 12.14% for urban area7

Eleventh Five Year Plan Coverage of urban sanitation by end of plan period (2012) Coverage of Population100%; Planning Commission, GoI (2007-2012)8 sewerage facility 70% ; low cost sanitation 30% MoUD, GoI National Urban Sanitation Allow open defecation 0%; proportion of total human excreta generation that is safely Policy, 2008 collected 100%; proportion of total black waste water generation that is treated and safely disposed off 100%; proportion of total grey waste water generation that is treated and safely disposed off 100%; proportion of total storm-water and drainage that is efficiently and safely managed 100%; preparation of State Urban Sanitation Strategy by the respective states- within two years from 2008 MoUD, GoI Handbook Of Service Targets: Coverage of toilets 100%; coverage of waste water network services 100%; Level Benchmarking collection efficiency of waste water network100%; adequacy of waste water treatment capacity 20%; quality of waste water treatment 100%; extent of reuse and recycling of waste water 80%; extent of cost recovery in waste water management 90%; efficiency in redressing customer complaints100%; efficiency in collection of sewerage related charges 90% MoUD Manual on Sewerage Technical Guideline by Wastewater collection efficiency 80% of the supplied water in general and Sewage Treatment Ministry of Urban Development Department

7 Ref: MILLENNIUM DEVELOPMENT GOKLS, INDIA COUNTRY REPORT 2009, Mid-Term Statistical Appraisal Central Statistical Organization, Ministry of Statistics and Programme Implementation, Government of India . The % with sanitation facility is linearly interpolated from this figure for 2010-11

8 Government of India, Planning Commission, Eleventh Five-Year Plan (2007-2012), Rural Drinking Water and Sanitation in the Eleventh Plan period – Excerpts

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4.3 State Policies for the Sector 61. The Government of Karnataka is taking a lead role in recognizing the demands for water resources as the State undergoes rapid urbanization which will result in competing needs for water by the various sector users including: drinking water, irrigated agriculture, industry and environment. The GoK "Vision 2020" envisages eliminating poverty in all areas and the achievement of the Millenium Development Goals by 2015. Achieving these goals will require enhancing human competencies and equitable growth for all people and regions throughout the state; institutionalizing good governance through increased transparency, accountability and participation in water resource management and utilization 62. Significant initiatives have already been introduced by the Water Resources Department, specifically the establishment of the Advanced Centre for IWRM (AC-IWRM), intended to be a centre of excellence for IWRM. The Centre is intended to provide expertise and advice to improve water resources management. It is envisaged that ADB will continue to provide support for AC- IWRM under the proposed MFF. 63. IWRM is an “adaptive process” of prioritised strengthening water resource management systems step by step. The AC-IWRM is to lead the change process and capacity and knowledge development under the guidance of a Steering Committee comprising representatives of the appropriate concerned government departments. The Committee is chaired by the Chief Secretary. 64. There are two pertinent State policies. Both were promulgated in 2002, both are current and between them they provide the enabling framework for the development and delivery of UWSS service deliver. They are:

 The State Water Policy (SWP), and

 Karnataka Urban Drinking Water and Sanitation Policy (KUDWSP). 65. The State Water Policy sets out the sector objectives and strategies for managing the water resources within the State. The Karnataka Urban Drinking Water and Sanitation Policy was formulated with the primary purpose of continuing and strengthening efforts to provide all residents of urban areas with piped water supply and sanitation services at or near their dwellings, to be provided by their ULB. 66. The State Policy adopts the principles of IWRM and sustainable service delivery. The Policy sets out the strategic goal of ensuring water resources planning, development and management is done for each hydrological unit, entire river basins or sub basin, integrating multi-sectoral objectives, addressing conjunctive management of surface and ground water resources, and incorporating quantity, quality and environmental considerations. 67. Development projects and investment proposals are to be formulated and considered within the framework of river or sub-basin plans so that the best possible combination of options can be obtained for poverty alleviation, increasing incomes and productivity, equity, reduced vulnerability to natural and economic risks and costs. Solutions to water allocation and planning issues will be found adopting a demand management approach. 68. The Water Policy identifies that there is a lack of appropriate institutional arrangements at the State level which can consider sector water demands, plans and manage water between them. Water issues are fragmented between different departments without formal mechanism to ensure co-ordination. The fragmentation of water management decision making was recognised as resulting in sub-optimal management of Karnataka‟s limited surface and ground water resources that need to be systematically developed and properly utilized to enable the overall development of the State.

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69. KISWRIP, and associated investments in UWSS improvements, will contribute to the achievement of the government‟s “Vision 2020” and implementation of IWRM and holistic water management by 2030.

4.3.1 Draft Cabinet Paper 70. The state‟s current UWSS strategy to meet the sector Policies is contained in the 2012 draft Cabinet Paper. The Paper endorses the establishment of regional coordination entities in the state, and the separation of bulk water supply from distribution of water. The following institutional proposals are made:

 Setting up of a “Drinking Water Supply Mission”

 Constituting a “Water Council”

 Restructuring the Karnataka Urban Water Supply and Drainage Board (KUWS&DB) as a bulk supply entity, and

 Adopting a “New Contracting Model” 71. Water distribution to customers and wastewater collection will continue to be a ULB responsibility. The segregated responsibility is intended to address present varying technical and managerial capabilities at that level, and also varying levels of political preparedness to accept water supply as a paid public service. ULBs will have the option of tackling this (i) either by itself or (ii) through KUWS&DB or (iii) with private sector participation. 72. We understand that the Paper, although not as yet approved, is accepted by stakeholders. The Paper is taken to be the state‟s institutional strategy and we make no proposals or suggestions that diverge from the Paper.

4.4 Public/Private Partnerships 73. Both the Union and the State governments encourage private sector participation in UWSS through their policy of Public/Private Partnerships (PPP). To quote the GoI 12th Plan, as just one example: “The Twelfth Plan must continue the thrust on accelerating the pace of investment in infrastructure, as this is critical for sustaining and accelerating growth. Public investment in infrastructure will have to bear a large part of the infrastructure needs in backward and remote areas to improve connectivity and expand the much needed public services. Since resource constraints will continue to limit public investment in infrastructure in other areas, PPP-based development needs to be encouraged wherever feasible. It is necessary to review the factors which may be constraining private investment, and take steps to rectify them.”

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5 ISSUES FACING THE SECTOR & KISWRMIP PROPOSALS

5.1 Overview of Issues 74. The issues associated with current service provision are well known to stakeholders. In summary these are:

 Poor condition of UWSS assets, often beyond their reliable working life;

 Lack of overall sector coordination and control, and

 Insufficient capacity, particularly at ULB level where there are neither sufficient operational staff members, or staff of the necessary calibre. 75. In many respects these have been due to:

 Lack of priority afforded to urban water supply and sanitation;

 Lack of investment, and

 Politically driven tariffs that are insufficient to fund the O&M of the assets, and their timely replacement. 76. The issues have manifested themselves in poor levels of service achieved:

 Intermittent and insufficient water supplies;

 Supplies subject to interruption due to asset failures and power cut-outs;

 High levels of leakage that aggravate water availability to customers;

 Poor levels of wastewater collection, and

 Untreated sewage being discharged to water courses and being used directly for irrigation. 77. The issues facing the sector, as found in the four subject Tranche-1 towns and considered typical of ULBs across the State are fully described in “Volume 1: Institutional Road Map”, and set out in Table 10 of this Investment Plan. 78. Our main conclusion is that at the root of the problem: centrally, there is minimal coordination and planning and locally, ULBs operate with limited accountability in terms of (i) water use; (ii) in maintaining efficient, coordinated and commercially viable systems, and (iii) in complying with quality and performance standards. 79. At the heart of the matter are issues of inadequate tariff structures to support the O&M function and so undermine the sustainability viability of UWSS investments, and the ineffective management of non-revenue water.

5.2 Comparison of Karnataka Urban Service Status with National Standard and Average 80. The following Table compares service provision the thirty-four ULBs in the pilot sub-basin with (i) that in Karnataka, (ii) the National Standard and (iii) the National Average. The four Tranche-1 sub-project ULBs are highlighted. 81. We question how some of these indicators were derived considering the general lack of both bulk and revenue metering. As such, the data must be treated with caution.

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Table 4: Level of UWSS Service Provision

Water Supply Sewerage

Hours per Metered Water Supply Non-revenue Sewerage Population Per Capita day supply connections as Coverage water Coverage with Toilets per cent of all

% l/h/d % hours % % %

National Standard 100 135 15 24 100 100 100 National Average 81 123 15 4 25 28 82 34 Town Average 52 81 40 2 0 5 na

Davangere 48 100 40 1.25 0 45 na

Ranebennur 65 113 40 1 0 30 na

Byadgi 67 67 40 1 0 0 na

Harihar 40 110 40 1 0 0 na

Channagiri na 70 40 1 0 0 na

Honnali na 23 40 1 0 0 na

Harapanahalli na 70 40 1 0 0 na

Jagalur 49 70 40 1 0 0 na

Chitradurga 51 96 40 1 0 0 na

Holalkere na 51 40 1 0 0 na

Tarikere na 135 40 1 0 0 na

Kadur 34 45 40 1 0 0 na

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Water Supply Sewerage

Hours per Metered Water Supply Non-revenue Sewerage Population Per Capita day supply connections as Coverage water Coverage with Toilets per cent of all

% l/h/d % hours % % %

Sringeri 98 135 40 2 0 0 na

Birur na 30 40 1 0 0 na

Narasimharajapura Na 135 40 1 0 0 na

Koppa Na 135 40 2 0 0 na

Bhadravati 36 135 40 20 0 25 na

Shimoga 57 124 40 1 0 0 na

Sagar 34 90 40 3 0 0 na

Shikaripura 41 70 40 2 0 0 na

Soraba 57 135 40 8 0 0 na

Thirthali 89 100 40 2 0 0 na

Shiralkoppa Na 110 40 1 0 0 na

Gadag Betageri 41 71 40 2 0 0 na

Mulagnada 53 65 40 1 0 0 na

Shirahatti Na 45 40 1 0 0 na

Lakshmeshwara Na 70 40 1 0 0 na

Hangal 56 41 40 1 0 0 na

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Water Supply Sewerage

Hours per Metered Water Supply Non-revenue Sewerage Population Per Capita day supply connections as Coverage water Coverage with Toilets per cent of all

% l/h/d % hours % % %

Hoovina-Hadagali 45 4 40 1 0 0 na

Shiggaon 42 85 40 1 0 0 na

Savanur 29 80 40 1 0 0 na

Bankapur 35 40 40 1 0 0 na

Haveri 67 65 40 2 0 66 na

Hirekerur 52 50 40 1 0 0 na

82. The Table below shows the Service Criticality Index for the thirty-four towns in the pilot sub-basin based on the ratio of the existing level of service against the relevant National Standard norm of MOUD. Table 5: Service Criticality Index

Water Supply Sewerage

Water Hours per Per Capita Number metered Sewerage Population Supply day Supply connections Coverage with Toilets Coverage supply na Davangere 0.48 0.74 0.05 0.00 0.45 na Ranebennur 0.65 0.84 0.04 0.00 0.30 na Byadgi 0.67 0.50 0.04 0.00 0.00 na Harihar 0.40 0.81 0.04 0.00 0.00

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Water Supply Sewerage

Water Hours per Per Capita Number metered Sewerage Population Supply day Supply connections Coverage with Toilets Coverage supply na Channagiri Na 0.52 0.04 0.00 0.00

Honnali Na 0.17 0.04 0.00 0.00 na

na Harapanahalli Na 0.52 0.04 0.00 0.00 na Jagalur 0.49 0.52 0.04 0.00 0.00

Chitradurga 0.51 0.71 0.04 0.00 0.00 na na Holalkere Na 0.38 0.04 0.00 0.00 na Tarikere Na 1.00 0.04 0.00 0.00

Kadur 0.34 0.33 0.04 0.00 0.00 na na Sringeri 0.98 1.00 0.08 0.00 0.00 na Birur Na 0.22 0.04 0.00 0.00

Narasimharajapura Na 1.00 0.04 0.00 0.00 na na Koppa Na 1.00 0.08 0.00 0.00 na Bhadravati 0.36 1.00 0.83 0.00 0.25 na Shimoga 0.57 0.92 0.04 0.00 0.00

Sagar 0.34 0.67 0.13 0.00 0.00 na

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Water Supply Sewerage

Water Hours per Per Capita Number metered Sewerage Population Supply day Supply connections Coverage with Toilets Coverage supply na Shikaripura 0.41 0.52 0.08 0.00 0.00

Soraba 0.57 1.00 0.33 0.00 0.00 na na Thirthali 0.89 0.74 0.08 0.00 0.00 na Shiralkoppa Na 0.81 0.04 0.00 0.00 na Gadag Betageri 0.41 0.53 0.08 0.00 0.00

Mulagnada 0.53 0.48 0.04 0.00 0.00 na na Shirahatti Na 0.33 0.04 0.00 0.00 na Lakshmeshwara Na 0.52 0.04 0.00 0.00

Hangal 0.56 0.30 0.04 0.00 0.00 na na Hoovina-Hadagali 0.45 0.03 0.04 0.00 0.00 na Shiggaon 0.42 0.63 0.04 0.00 0.00

Savanur 0.29 0.59 0.04 0.00 0.00 na na Bankapur 0.35 0.30 0.04 0.00 0.00 na Haveri 0.67 0.48 0.08 0.00 0.66 na Hirekerur 0.52 0.37 0.04 0.00 0.00

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83. The following Table shows this ratio with the index differentiated between High (HC), Moderate (MC) and Low Criticality (LC) based on HC< 0.5, 0.5

Water Supply Sewerage

Water Supply Per Capita Hours per day Number metered Population Sewerage Coverage Coverage Supply supply connections with Toilets Davangere HC MC HC HC HC NA Ranebennur MC LC HC HC HC Harihar HC LC HC HC HC NA Byadgi MC HC HC HC HC NA Channagiri HC MC HC HC HC NA Honnali HC HC HC HC HC NA Harapanahalli HC MC HC HC HC NA Jagalur HC MC HC HC HC NA Chitradurga MC MC HC HC HC NA Holalkere HC HC HC HC HC NA Tarikere HC LC HC HC HC NA Kadur HC HC HC HC HC NA Sringeri LC LC HC HC HC NA Birur HC HC HC HC HC NA Narasimharajapura HC LC HC HC HC NA Koppa HC LC HC HC HC NA Bhadravati HC LC LC HC HC NA Shimoga MC LC HC HC HC NA Sagar HC MC HC HC HC NA Shikaripura HC MC HC HC HC NA

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Water Supply Sewerage

Water Supply Per Capita Hours per day Number metered Population Sewerage Coverage Coverage Supply supply connections with Toilets Soraba MC LC HC HC HC NA Thirthali LC MC HC HC HC NA Shiralkoppa HC LC HC HC HC NA Gadag Betageri HC MC HC HC HC NA Mulagnada MC HC HC HC HC NA Shirahatti HC HC HC HC HC NA Lakshmeshwara HC MC HC HC HC NA Hangal MC HC HC HC HC NA Hoovina-Hadagali HC HC HC HC HC NA Shiggaon HC MC HC HC HC NA Savanur HC MC HC HC HC NA Bankapur HC HC HC HC HC NA Haveri MC HC HC HC MC NA Hirekerur MC HC HC HC HC NA

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84. As shown in Table 4, there is a large gap between the present status of service delivery and national standard and average. Substantial investment is required to bridge this gap. In some towns projects have been taken up under the State Plan (KUWSDB), ADB assisted NKUSIP and World Bank assisted KMRP, which are either under implementation or committed. 85. The Karnataka Urban Water Supply and Drainage Board (KUWS&DB) is responsible for providing water supply and sewerage facility in 213 urban areas of Karnataka except the areas serviced by the Bruhath Bangalaore Mahanagara Palike – which provides services in Bangalore city and surrounding areas. The KUWS&DB has implemented surface based drinking water supply schemes in 187 urban areas to provide assured safe drinking water. The Board is implementing 26 schemes for shifting the source of water from groundwater to assured surface water. 86. The issues affecting sewerage are similar to those affecting water supply except that the sewerage system issues are more serious than water supply issues. The issues are lack of Sewerage Master Plans, inadequate water supply, intermittent and unreliable power supply for sewage pump stations and treatment works, lack of investment in sewerage infrastructure, inadequate capital & O&M budget for sewerage systems, lack of specially trained sewerage management and O&M staff, a need for training in of sewerage utility management, inadequate revenue, lack of understanding of wastewater treatment chemistry and lack of wastewater laboratory facilities. 87. Presently forty-two urban areas have been provided with underground drainage facilities (UGD). In most of the urban areas, the sewerage system is covered in core areas. The new areas are yet to be provided with sewerage systems. KUWSDB has prepared a plan for Rs.169,210 million for providing UGD to all urban areas in the State in a phased manner depending upon the availability of funds. 88. Urban water supply and sewerage works are being executed, besides externally aided projects, with resources sources from financial institutions, State Government and Local Bodies in the following categories:

 Piped Water Supply Schemes;

 Urban Water Supply Schemes, and

 Underground Drainage Schemes.

5.3 Comparison of Karnataka Urban Service Status with National Standard and Average 89. The following Table compares service provision the thirty-four ULBs in the pilot sub-basin with that in Karnataka, with the National Standard and with the National Average. The four Trache-1 subject ULBs are highlighted. 90. It is questionable how some of these indicators were derived considering the general lack of both bulk and revenue metering. As such, the data must be treated with caution.

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Table 7: Level of UWSS Service Provision

Water Supply Sewerage

Hours per Metered Water Supply Non-revenue Sewerage Population Per Capita day supply connections as Coverage water Coverage with Toilets per cent of all

% l/hd/day % hours % % %

National Standard 100 135 15 24 100 100 100 National Average 81 123 15 4 25 28 82 34 Town Average 52 81 40 2 0 5 na

Davangere 48 100 40 1.25 0 45 na

Ranebennur 65 113 40 1 0 30 na

Byadgi 67 67 40 1 0 0 na

Harihar 40 110 40 1 0 0 na

Channagiri na 70 40 1 0 0 na

Honnali na 23 40 1 0 0 na

Harapanahalli na 70 40 1 0 0 na

Jagalur 49 70 40 1 0 0 na

Chitradurga 51 96 40 1 0 0 na

Holalkere na 51 40 1 0 0 na

Tarikere na 135 40 1 0 0 na

Kadur 34 45 40 1 0 0 na

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Water Supply Sewerage

Hours per Metered Water Supply Non-revenue Sewerage Population Per Capita day supply connections as Coverage water Coverage with Toilets per cent of all

% l/hd/day % hours % % %

Sringeri 98 135 40 2 0 0 na

Birur na 30 40 1 0 0 na

Narasimharajapura Na 135 40 1 0 0 na

Koppa Na 135 40 2 0 0 na

Bhadravati 36 135 40 20 0 25 na

Shimoga 57 124 40 1 0 0 na

Sagar 34 90 40 3 0 0 na

Shikaripura 41 70 40 2 0 0 na

Soraba 57 135 40 8 0 0 na

Thirthali 89 100 40 2 0 0 na

Shiralkoppa Na 110 40 1 0 0 na

Gadag Betageri 41 71 40 2 0 0 na

Mulagnada 53 65 40 1 0 0 na

Shirahatti Na 45 40 1 0 0 na

Lakshmeshwara Na 70 40 1 0 0 na

Hangal 56 41 40 1 0 0 na

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Water Supply Sewerage

Hours per Metered Water Supply Non-revenue Sewerage Population Per Capita day supply connections as Coverage water Coverage with Toilets per cent of all

% l/hd/day % hours % % %

Hoovina-Hadagali 45 4 40 1 0 0 na

Shiggaon 42 85 40 1 0 0 na

Savanur 29 80 40 1 0 0 na

Bankapur 35 40 40 1 0 0 na

Haveri 67 65 40 2 0 66 na

Hirekerur 52 50 40 1 0 0 na

91. The Table below shows the Service Criticality Index for the thirty-four towns in the pilot sub-basin based on the ratio of the existing level of service against the relevant National Standard norm of MOUD. Table 8: Service Criticality Index

Water Supply Sewerage

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Water Supply Sewerage

Water Hours per Per Capita Number metered Sewerage Population Supply day Supply connections Coverage with Toilets Coverage supply na Channagiri Na 0.52 0.04 0.00 0.00

Honnali Na 0.17 0.04 0.00 0.00 na

na Harapanahalli Na 0.52 0.04 0.00 0.00 na Jagalur 0.49 0.52 0.04 0.00 0.00

Chitradurga 0.51 0.71 0.04 0.00 0.00 na na Holalkere Na 0.38 0.04 0.00 0.00 na Tarikere Na 1.00 0.04 0.00 0.00

Kadur 0.34 0.33 0.04 0.00 0.00 na na Sringeri 0.98 1.00 0.08 0.00 0.00 na Birur Na 0.22 0.04 0.00 0.00

Narasimharajapura Na 1.00 0.04 0.00 0.00 na na Koppa Na 1.00 0.08 0.00 0.00 na Bhadravati 0.36 1.00 0.83 0.00 0.25 na Shimoga 0.57 0.92 0.04 0.00 0.00

Sagar 0.34 0.67 0.13 0.00 0.00 na

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Water Supply Sewerage

Water Hours per Per Capita Number metered Sewerage Population Supply day Supply connections Coverage with Toilets Coverage supply na Shikaripura 0.41 0.52 0.08 0.00 0.00

Soraba 0.57 1.00 0.33 0.00 0.00 na na Thirthali 0.89 0.74 0.08 0.00 0.00 na Shiralkoppa Na 0.81 0.04 0.00 0.00 na Gadag Betageri 0.41 0.53 0.08 0.00 0.00

Mulagnada 0.53 0.48 0.04 0.00 0.00 na na Shirahatti Na 0.33 0.04 0.00 0.00 na Lakshmeshwara Na 0.52 0.04 0.00 0.00

Hangal 0.56 0.30 0.04 0.00 0.00 na na Hoovina-Hadagali 0.45 0.03 0.04 0.00 0.00 na Shiggaon 0.42 0.63 0.04 0.00 0.00

Savanur 0.29 0.59 0.04 0.00 0.00 na na Bankapur 0.35 0.30 0.04 0.00 0.00 na Haveri 0.67 0.48 0.08 0.00 0.66 na Hirekerur 0.52 0.37 0.04 0.00 0.00

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92. The following Table shows this ratio with the index differentiated between High (HC), Moderate (MC) and Low Criticality (LC) based on HC< 0.5, 0.5

Water Supply Sewerage

TA 7954–IND: KISWRIP Draft Final Report: Vol. 2 – Strategic Investment Plan September 2012

Water Supply Sewerage

TA 7954–IND: KISWRIP Draft Final Report: Vol. 2 – Strategic Investment Plan September 2012

93. As shown in Table 4, there is a large gap between the present status of service delivery and national standard and average. Substantial investment is required to bridge this gap. In some towns projects have been taken up under the State Plan (KUWSDB), ADB assisted NKUSIP and World Bank assisted KMRP, which are either under implementation or committed. 94. The Karnataka Urban Water Supply and Drainage Board (KUWS&DB) is responsible for providing water supply and sewerage facility in 213 urban areas of Karnataka except the areas serviced by the Bruhath Bangalaore Mahanagara Palike – which provides services in Bangalore city and surrounding areas. The KUWS&DB has implemented surface based drinking water supply schemes in 187 urban areas to provide assured safe drinking water. The Board is implementing 26 schemes for shifting the source of water from groundwater to assured surface water. 95. The issues affecting sewerage are similar to those affecting water supply except that the sewerage system issues are more serious than water supply issues. Implementation of sewerage systems in Karnataka lags far behind the National Standard and even the National average of 28% which itself is low for India, by comparison with international standards. The issues are lack of Town Sewerage Master Plan, inadequate water supply, intermittent and unreliable power supply for sewage pump stations and treatment works, lack of investment in sewerage infrastructure, inadequate capital & O&M budget for sewerage systems, lack of specially trained sewerage management and O&M staff, need for training in of sewerage utility management, inadequate revenue, lack of understanding of wastewater treatment chemistry and lack of wastewater laboratory facilities. 96. Presently forty-two urban areas have been provided with underground drainage facilities (UGD). In most of the urban areas, the sewerage system is covered in core areas. The new areas are yet to be provided with sewerage systems. KUWSDB has prepared a plan for providing UGD to all urban areas in the State in a phased manner depending upon the availability of funds.

5.4 Road Map Proposals 97. Institutional proposals have been made to address the issues identified, as discussed in Section 5.2. All proposals require investment whether physical for service facilities and assets or non- physical, such as for training and business systems.

5.5 Outline of Proposals Made in Road Map 98. Institutional issues at state level have been addressed in the Draft Cabinet Paper. We understand that the Paper has been fully discussed and has general acceptance. We have not concerned ourselves with institutional state issues, instead concentrating at the local ULB level. 99. In our discussions with the KUIDFC, and in line with Union and State policy, the use of a private operator is seen to be beneficial and desirable. The use of a private operator would both bring experience to the service provision which, if managed correctly could enable technology transfer to the ULBs, and would provide the additional resources. 100. An objective of the project is to put in place the measures to bring the ULBs to a position whereby they are able to issue a tender for a PPP operator, should the ULBs wish. This requires data to be available to potential bidders on service performance, asset histories and operational data. Using the sub-project pilot towns as indicative, the data is not currently available for competitive bidding. There also needs to be a competency developed in the ULBs for PPP project management. 101. Whilst some of the larger ULBs do have a customer base of adequate size to interest an operator; most do not. We are suggesting that ULBs “associate” themselves on a District basis and form a Special Purposes Vehicle (SPV) company to be the service provider within their collective administrative areas i.e. a District. Such an SPV would have the requisite customer

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service base. A draft Performance Service Agreement (PSA) is provided as an Appendix to Volume 1 in which the service conditions to be met are set out in a series of Performance Indicators, based upon Customer Service Levels and Operational Standards. 102. To assist with the establishments of the SPVs, and in consultation with the KUIDFC, we recommend that an IWRM Project Management Unit be formed in the KUIDFC. The unit, which would continue through subsequent MFF Tranche investments, would comprise KUIDFC employees with appropriate skills, supplemented as required by short-term consultants, national and international. In addition to assisting the establishment of the SPVs, the Unit would also directly assist the newly formed SVPs, and water departments of larger ULBs, to prepare corporate documentation, provide “centre of excellence” guidance for the sector and assist in the data collection and eventual tender dossier preparation for PPP operator contracts. 103. The IWRM project Management Unit could evolve into the Drinking Water Supply Mission, should that become Government policy. 104. We recommend inclusion of a small team within the IWRM Project Management Unit to focus on gender, disadvantaged people and social issues applicable to UWSS service provision. The team will develop poverty reduction strategies to target meeting the Millennium Development Goals and for mitigating any disincentives to serve disadvantaged customer groups, as well as strategies to assist low-income families with the cost household water/sewer connections, e.g. through pre-financing or subsidies, as well as on such issues as improving fee collection efficiency and debt management within such groups. The sub-project household surveys have identified the cost of connections as a major disincentive to poorer people. Without widespread connection:

 The full benefits of the investments will not be realised;

 Wastewater treatment plant will operate at less than capacity with potential effect of process efficiency, and

 Sewers are at risk of silting due to lower-than-design flows. 105. In general, the UWSS sector is heavily subsidized, though the degree of subsidization varies between ULBs. Almost all the ULBs are not charging water tariffs to recover at least the entire O&M cost of water supply schemes, let alone to cover debt servicing. There are also many unauthorized consumers or households using public taps who are not required to pay any charges for their water use. 106. Tariffs should be structured in a manner such as to act as a disincentive for „excessive‟ consumption and wastage of water, whilst ensuring at least a minimum „lifeline‟ supply to the poor. An appropriate cost recovery mechanism based on adequate tariffs will help ensure that revenues cover O&M costs, debt service plus a reasonable return on capital. 107. We propose that:

 Tariffs are to be set independent of political influence and to be adequate for a financially sustainable service provision;

 Charges are volumetric based, as measured by individual customer revenue meters;

 Tariffs to be “affordable” up to an agreed consumption. Thereafter, to become increasingly punitive to encourage reduced water demand and conservation of water by such as rainwater harvesting. We suggest that the limit is the Indian design standard for domestic demand of 135litres/head/day;

 Volumetric charges are introduced for wastewater collection with additional charges for industrial customers based upon the quality of the effluent discharged to the sewer;

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 An active policy is adopted to ensure the accuracy of the customer database used for charging and that unknown connections are proactively located, and

 The adequacy of existing Debt Management procedures to be reviewed or new introduced.

5.6 Summary of Issues and Proposals 108. The issues identified and the proposals made in the Road Map, are summarised in the table below.

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Table 10: Proposals to Overcome Impediments to Success

Strategic “Impediments to Success” Proposals as “Criteria for Success” Theme 1. Lack of co-ordination among the state agencies. 2. No over-riding responsible & proficient entity for UWSS. 1. Provided for in the Draft Cabinet Paper 3. No “Centre of Excellence” for knowledge dissemination. Institutional- 4. No Water Sector Master Plan with prioritised investment State 2. Prepare a sector Master Plan with prioritised Capital Investment programme. Programme 5. Lack of previous investment. 6. Emphasis is on creation of new assets and not operability. 7. Managers not dedicated to UWSS. 3. Move towards a policy of regional service providers. 8. Insufficient staff, poorly trained and lacking business 4. Establishment of a separate ULB UWSS department or of a SPV support systems and equipment. service provider Institutional– 9. Insufficient staff with establishment posts not always filled. 5. Capacity building programme through an IWRM Project Local 10. No formal training programmes resulting in untrained staff at Management Unit all levels. 6. Further investment in business support systems such as MIS, 11. Lack of business support systems. GIS and network computer models As for Institutional – Local, plus 12. Inadequate O&M of assets resulting in their premature

failure and inefficient operations. 7. Introduce Performance Service Agreement 13. No data collection for decision making. 8. Develop service providers to a position suitable for PPP operator 14. Lack of flow metering for network management. tendering, if State/ULB policy 15. Supplies adversely affected by power failures. 9. Installation of flow metering Technical 16. High levels of NRW without the ability/resources to reduce 10. Installation of stand-by generators at critical sites to acceptable levels. 11. Determine Baseline NRW performance and move to a pro-active 17. Poor workmanship and incorrect materials used for new NRW reduction programme using specialist contractor. schemes. 12. Review of all contract documentation and Specifications. 18. Inadequate site supervision.

19. Lack of performance guarantees in tender documents.

13. Provide for a Customer Services department in service provider 20. Poor service with infrequent supplies of limited quantities. organisation structure 21. Lack of Customer Service Levels. 14. Prepare Customer Service Levels and with Operational Customer 22. No formal service agreement between “asset owner” and performance Standards incorporate into a Public Services Service “asset operator”. Agreement. 23. No effective monitoring of service levels. 15. PSA to be subject to technical audit 24. No independent recourse for customer complaints.

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Strategic “Impediments to Success” Proposals as “Criteria for Success” Theme 16. Segregate UWSS finances from other ULB activities. 17. Remove tariff setting from politics 25. Inadequate service charges that were insufficient to fund 18. Ensure adequacy of tariffs with a tariff setting mechanism that sustainable O&M budget and required staff establishment. includes a “demand management” element 26. Tariffs influenced by political pressures. 19. Install revenue meters on supplies Financial 27. Absence of revenue meters preventing accurate income 20. Training in billing & income skills with modern billing systems determination and customer demand management. 21. Introduce volumetric charge for wastewater service 28. Some poor collection efficiency 22. Household survey to locate “unknown” connections 23. Introduce Debt Management 24. Improve collection efficiency within capacity building programme

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6 OPPORTUNITES FOR PPP AND RE-USE OF WASTEWATER FINAL EFFLUENT

6.1 Public Private Sector Participation 109. There is a clear Government – Union and State - driven incentive to consider all options for PPP. 110. One of the major issues related to lack of the implementation of the PPP model in the WSS sector, is that the sector is still regarded as a State “sphere of interest”, with minimal local involvement in strategy formation. Historically, there has been little incentive to provide for improved service through initiatives such as PPP. 111. Issues to be overcome before there is a wide acceptance and suitability for the PPP model are:

 Acceptance of the higher water and wastewater service charges necessary for sustained service;

 Feasibility of the PPP model for water and wastewater service provision i.e. mitigation of the financial risk to potential operators;

 Political interference;

 Lack of accountability on the part of the ULBs;

 Perceived threat by the ULBs to their roles and authorities;

 Lack of private sectors operators with proven experience in Indian conditions, and

 Available information for competitive bidding. 112. A major issue is the absence of well-designed contract and contracting procedures with:

 Clearly defined responsibilities of the Government and private sector partners; and

 A performance linked system of payments and penalties. 113. The Infrastructure Development Department of the Government of Karnataka has taken an initiative to explore the possibility of the PPP model for UWSS and Storm Water Drainage for six towns - Raichur, Hospet, Davangere, Gadag, and Ilkal. The pre-feasibility Report suggested specific measures that need to be taken for each of the towns, while opting for the PPP model. The model would provide opportunity for:

 Increased efficiency of service through structured O&M of the assets;

 Application of the latest technology;

 OPEX reduction, including NRW reduction;

 Improvement in water quality;

 Timely and effective grievance redress, and

 Increased consumer satisfaction. 114. In the Road Map, we have looked at opportunities for PPP, such as:

 Works construction projects – as proposed for all construction works;

 O&M of the assets – new and existing – through opportunities for outsourcing non-core business activities and in an extended O&M period for works construction contracts;

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 Specialist network management skills - such as NRW reduction, and

 ULB capacity building and improved UWSS service delivery through PPP management and/or concession type contracts. 115. Before the operation and maintenance of the facilities can be successfully introduced, four elements must be in place:

 A sufficient number of experienced and competent operators to ensure a viable tendering process;

 A customer service base of sufficient size to attract competent operators;

 A competency in the client ULBs to be able to manage the contracts, and

 Adequate data available to the bidding operators to enable them to assess the risk and make a viable bid without passing undue risk cost through to the client ULB. 116. We would respectfully suggest that perhaps only the first of these is currently present in Karnataka. In our opinion, with some limitation as discussed later, full scale operation of the water and wastewater systems by a contractor is a medium-term objective, and not for immediate introduction. 117. An objective of the project will be to put in place the measures to bring the ULBs to a position to be able to issue a tender for a PPP operator should they wish i.e. to ensure that there will be available to bidders the data that they will require to be able to make a competitive bid, such as NRW performance and asset histories. 118. Where we do consider that there is an immediate opportunity for active private sector participation is in the design, construction and operation of the water and wastewater treatment plants proposed. Design and Build contracts are in common practice in Karnataka and an accepted form of PPP. 119. We are suggesting that the contracts include for a 5year extended O&M phase as a first step to bring private sector participation into the operation of the water sector facilities. 120. Further, we propose that treatment plant contracts to include for the rehabilitation and construction of the strategic transmission network, and of the strategic water storage facilities. There are three reasons for the proposal:

 It will introduce the private sector into the operation and maintenance of the strategic elements of the system where risk should be minimised for security of supply;

 Physical losses in the strategic network should be maintained at an acceptable level of around 2% and in so doing the required 24x7 quantity of water will be delivered to the strategic reservoirs - the key points for distribution of water to customers, and

 As a separate contract will be let for the distribution system, it will enable the requirement of the KUIDFC to be met whereby the investment in the distribution network to ensure a continuous supply will be made only after the ULB has demonstrated a competency i.e. the distribution contract will be let only when the competency has been demonstrated.

6.2 Re-Use of Wastewater Final Effluent 121. A corner-stone of IWRM is to seek opportunities for the re-use of wastewater effluent in order to reduce the demand on scare water resources. Opportunities for re-use exist in:

 Irrigation and agriculture;

 Industry, and

 Landscaping and development of “green” areas in towns.

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122. Currently, in the sub-basin area wastewater is effectively re-used, with or without treatment, by farmers for irrigation. As untreated, the wastewater acts as a good fertiliser especially as in most cases there is an absence of heavy metals. 123. In many locations, the diversion of wastewater effluent to industry would merely take from one application, to give to another. Without a significant increase in irrigation efficiency, the loss of wastewater for irrigation would mean that farmers would have to rely more upon depleted groundwater sources or take surface waters the water previously taken by industry. 124. Where the water is re-used for industrial water:

 There needs to be a market for the re-used water;

 The supply of re-used water must be reliable and compliant with the required standard;

 There must be adequate wastewater available/collected for treatment; and

 The sale price to industry must be competitive with the industry‟s cost for raw water procurement. 125. Given the costs of (i) wastewater treatment to a standard for re-use and (ii) distributing the treated wastewater, if the sale of municipal wastewater to industry is to be financially viable, the charge levied to industry for a “normal” potable water industrial supply must be at a cost to encourage industry to re-use water. 126. Using treated wastewater for irrigation purposes would both be a re-use of wastewater and would be safer than the current practice of using untreated sewage. However:

 There would be a cost of the additional treatment to be met, and it is unlikely that the farmers would be prepared to pay the charge;

 The treated wastewater would need to be distributed to suitable irrigation nodal points, and

 There would be a need of policing to ensure that the untreated wastewater was not “stolen” from sewers and manholes. 127. In conclusion, whilst there are undeniable reasons for the re-use of final effluent from wastewater treatment plants, this has to be dealt with in an integrated management framework to ensure:

 Increased irrigation efficiency to make up the deficit for wastewater being diverted from agriculture to industry;

 Farmers and industrialists are charged a realistic “abstraction” charge to encourage the re- use of wastewater final effluent, and

 Potable water service tariffs encourage industry to treat on-site and to re-use its own produced effluent in preference to discharging to the public sewer.

6.2.1 State Unit for Wastewater Re-Use 128. There is a requirement for consistency in approach across the state to the re-use of effluent with regard to quality standards, charging policy, performance quality and quantity guarantees, and the inter-face between the ULB responsibility and that of the recipient industry. 129. There is also a requirement to “market” the re-use of effluent and to “sell” the concept to a probable sceptical public. There are possible cultural issues. 130. Our recommendation is for a central unit to be established in an appropriate government agency to pursue opportunities for wastewater re-use on a state-wide basis, albeit that the local plants might be operated by the local service provider, or industry on their behalf.

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7 FINANCIAL ASSESSMENT OF ULBS

7.1 Introduction 131. The ULBs will be the owner of any assets arising from this or other investment. The ULBs will also be the entity ultimately responsible for the service provided to the people within their administrative area whether the service provider is the ULB, a SPV as recommended in the Road Map or a concessionaire. It is important that the ULBs are able to competently discharge these responsibilities. 132. The various issues facing the ULBs have been discussed in the previous Section. 133. Institutional and technical issues are addressed either in “Volume 1: Institutional Road Map” or within the sub-project Feasibility Studies. As a part of the project, we have assessed the financial performance of the four subject Tranche-1 towns as indicators of the probable issues to be resolved in all ULBs across the state.

7.2 Financial Status of Four Towns 134. Urban local bodies (ULB) will create urban service infrastructure by creating project implementation units as either a new cell and/or augmenting the existing cells, and by engaging the KUIDFC. The state government has expressed its view that the assets are created and contractual operations and maintenance period is over, these assets will be handed over to ULB. Table 11: O&M and User Charge

Operations and Collection of user charges maintenance Water supply ULB ULB (monthly user charge) ULB (no user charges but a part of Sewerage ULB property tax)

135. In order to bring accountability in urban service delivery, it is desirable that a ULB collects the user charges and uses them exclusively, i.e. “ring-fenced”, for the specific services for which the user charges are levied. The section examines the current status of ULB finances to assess to how the cost of operations and maintenance is financed.

7.2.1 Summary of Financial Data of Subject ULBs 136. The key features of current ULB finances in the sub-project towns are:

 Own revenue hardly pays the revenue expenditure. ULB heavily depends on grants from the state government for day-to-day operations;

 Collection efficiency for property tax in three ULBs needs improvement as it ranges from 62% in Harihar to 86% in Davangere for the financial year 2011-12; In Byadagi the collection efficiency is very good at 99%;

 Collection efficiency for water is low and ranges from 50% in Harihar to 82% in Davangere, and needs to be improved, and

 Revenue expenditure has grown in the range of 12% in Harihar to 31% in Ranebennur.

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137. Past financial performance for the last four years of the ULBs is shown in the following table. Figures are Rsmillion. Table 12: Past Financial Performance of Subject ULBs

2007-08 2008-09 2009-10 CAGR Davangere Actual Actual Actual %

Revenue Income

Income from Taxes 60.0 61.2 52.2 6.7%

Non Tax Income 39.6 40.5 45.7 7.4%

Total Own Revenue Income 99.6 101.7 97.9 0.9%

Government Grants 260.9 298.4 357.3 17.0%

Other Income 1.3 1.2 1.9 20.4%

Total Income 361.9 401.3 457.2 12.4%

Expenditure

Revenue Expenditure 182.1 306.4 261.2 19.8%

Revenue Surplus / (Deficit) 179.8 94.9 196.0 4.4%

2006-07 2007-08 2008-09 2009-10 2010-11 CAGR Ranebennur Actual Actual Actual Actual Actual

Revenue Income

Income from Taxes 6.5 6.6 9.7 11.1 13.8 20.9%

Non Tax Income 18.5 27.8 39.6 38.1 66.5 37.6%

Total Own Revenue Income 25.0 34.4 49.3 49.2 80.3 33.9%

Government Grants 37.1 83.6 94.0 127.3 91.2 25.3%

Other Income 1.9 3.2 3.6 4.2 0.9 18.3%

Total Income 64.0 121.2 146.9 180.6 172.4 28.1%

Expenditure

Revenue Expenditure 23.3 27.9 49.9 62.7 68.8 31.1%

Total Expenditure 23.3 27.9 49.9 62.7 68.8

Revenue Surplus / (Deficit) 40.7 93.3 97.0 117.9 103.6 26.3%

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2008-09 2009-10 2010-11 2011-12 CAGR Harihar Actual Actual Actual Actual

Revenue Income

Income from Taxes 5.4 5.6 6.1 7.3 10.8% Non Tax Income 9.7 11.7 13.8 12.5 8.9% Total Own Revenue 15.1 17.3 19.9 19.8 9.6% Government Grants 77.7 87.3 70.3 82.3 1.8% Other Income 2.0 1.0 2.5 1.4 11.9% Total Income 94.8 105.6 92.7 103.5 3.0% Expenditure

Revenue Expenditure 50.0 60.2 71.3 70.4 12.0% Total Expenditure 50.0 60.2 71.3 70.4

Revenue Surplus / (Deficit) 44.8 45.4 21.4 33.1 -9.5%

2007-08 2008-09 2009-10 2010-11 CAGR Byadagi MC Actual Actual Actual Actual

Revenue Income

Income from Taxes 2.1 2.2 2.2 3.7 20.8% Non Tax Income 4.5 4.2 6.6 4.9 2.9% Total Own Revenue 6.6 6.4 8.8 8.6 9.2% Income Government Grants 35.0 46.4 33.8 21.7 -14.8% Other Income 0.4 0.6 0.6 5.8 143.9% Total Income 42.0 53.2 43.2 36.1 -5.0% Expenditure

Revenue Expenditure 15.2 24.4 32.3 33.2 29.8% Total Expenditure 15.2 24.4 32.3 33.2

Revenue Surplus / 26.8 28.8 10.9 2.9 -52.5% (Deficit) Source – MC accounts and budget

7.2.2 Sector Operation and Maintenance 138. Operation and maintenance of water and wastewater services is with the ULB. Details of the annual O&M costs as per the accounts of the ULB are given in the following table. At present cost recovery is to the extent of 24% in Davangere; 57.5% in Ranebennur; 34% in Harihar and 24% in Byadagi. 139. Water sector O&M costs, Rs Million, in each of the four subject ULBs is shown in the following table.

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Table 13: Sector O&M Costs in Subject ULBs

Particulars Byadgi Davangere Harihar Ranebennur 2011-12 2010-11 2011-12 2011-12 Staff costs 1.65 11.15 4.13 4.67 Power 4.90 62.89 8.64 12.52 Consumables 0.97 14.70 0.17 1.63 Repair & Maintenance 1.11 3.68 1.80 0.47 Others 6.51 1.98 Total 8.63 98.93 16.72 19.29 Source: ULB accounts section

7.2.3 Collection Efficiency 140. Following table gives the collection efficiency of four towns in the financial year 2011-12 in respect of property tax and water charges. Figures are Rs Million. Table 14: Collection Efficiency

Arrear Current Total Towns Collection Efficiency % Demand Demand Demand Property Tax

Davangere 9.8 100.0 109.8 94.8 86.3 Ranebennur 15.2 14.1 29.3 22.8 77.9 Harihar 6.0 7.3 13.3 8.3 62.0 Byadagi 0.1 3.2 3.3 3.2 99.0 Water charge

Davangere 23.8 19.5 81.9

Ranebennur 13.8 11.1 24.9 12.6 50.8 Harihara 4.3 5.6 9.9 5.0 50.4 Byadagi 0.7 2.1 2.7 2.1 75.9

7.2.4 Accounting Standards and Status of Auditing 141. Accrual based accounting system is being followed in all the four ULBs. Audit status of the municipal accounts is as follows:

 Davangere: Completed for financial year 2009-10;

 Ranebennur: Completed for financial year 2009-10;

 Harihar: Completed for financial year 2010-11, and

 Byadagi: Completed for financial year 2010-11. 142. All ULBs are preparing their accounts as per the E Governance software developed under Karnataka Municipal Reforms Project (KMRP). Initially Chartered Accountants firms were engaged to build the capacity of ULBs in preparing the financial statements under the new system. ULB accounts section compiles the accounts and prepare financial statements under the new system.

7.3 Ring Fencing WSS Service Units in ULBs 143. Ring-fencing includes: the separation of financial accounts; the consolidation of financial accounts across different products and services within the ring-fenced unit; the physical and

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procedural internal divisions to contain certain information and activities; the protocols for the disclosure and exchange of information between internal entities, and the consistent application of rules for cost/revenue attribution and for an appropriate allocation of common or joint costs, including overhead costs. 144. The receipts and expenditures of a ULB should be kept under separate heads of accounts, such as those for: (i) water-supply, drainage and sewerage, (ii) solid waste management, (iii) road development and maintenance, (iv) slum services, (v) commercial projects and (vi) other account heads as may be specified and the general account head in order to facilitate the imposition of user charges and preparation of any subsidy report. 145. While following the fund-based accounts, service-specific accounts against the specific funds can be maintained. As proposed each of these specific funds would prepare separate financial statements showing accumulated funds, retained earnings receivables, payables, investments and unutilized balance in the form of cash and equivalents.

7.4 Financial Management Assessment 146. Five Major findings common to four ULBs are presented in following table. Table 15: Summary of Financial Management Assessment

Particulars Findings Solution / Action Accounting Accrual based accounting system; System All four ULBs have implemented the new accounting system developed under KMRP. Harihar has prepared the Annual Performance Report for FY 2011-12, Byadgi – FY 2009-10 (FY 2010-11 final corrections); Ranebennur FY2010-11 and Davangere FY 2009-10. Staffing Inadequate Staff9; Byadagi will be creating a new PIU Lacks training cell for IWRM project In other ULBs where either NKUSIP ULBs have created PIUs for NKUSIP and or KMRP cell is in operation as PIU, KMRP project implementation one additional First Divisional Assistant (FDA) with 10 year experience needs to be posted. Auditing Audit status: State auditors have initiated audits Davanagere – FY 2009-10 for FY2010-11 in both Davangere Ranebennur – FY 2009-10 and Ranebennur recently. Harihara – FY 2010-11 and Byadagi – FY 2010-11 Weak Percentage of own source income to total Upon full implementation of the new Financial revenue income: water and sewerage tariff as per the th Situation Davanagere – 24% GoK GO dated 20 July 2011 and Ranebennur – 29% improving the collection efficiency the ULBs aim to improve their Harihara – 22% and financial situation. Byadagi – 31%

9 Number of staff in accounts department to be strengthened for accrual based accounting system

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Particulars Findings Solution / Action

ULBs dependent on GoK grants and Sewerage charge has yet to be supports to meet its operation expenses. introduced in line with GO dated 20th July 2011. Safeguards Insufficient safeguards Asset module has been developed over Assets No insurance of assets; under KMRP. Once implemented, and Database No physical verification fixed assets records will be kept uptodate; physical verification and

reconciliation of assets done.

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8 ECONOMIC DEVELOPMENT

8.1 Introduction 147. Karnataka is the fourth most urbanized state among the major states in India, with 39% of 61.1 million people living in urban areas. The state is also one of the top ten states by GDP and experienced a compound annual growth rate of over 8% per annual since FY2004-2005. 148. The state‟s rapid growth in economic activities, in particular, in the tertiary sector has centred on Bangalore in the Southern part of Karnataka and resulted in uneven economic development within the state. North Karnataka lags behind in economic growth, urban infrastructure development, and poverty reduction. Recognizing the importance of urbanization to economic growth, the Government of Karnataka (GoK) has emphasized on urban development in Karnataka through various national as well foreign aided programs.

8.2 Urban Sector 149. Karnataka accounts for about 5.83% of the total geographical area of the country with a 2011 census population of 61.1 million, equivalent to 5.05% of the total population of India. Urban population constituted about 38.6% of total population and percentage of urban population increased by 3.1% between 2001 and 2011. The population density increased between 2001 and 2011 from 276 to 319 persons per sq. km. compared with a population density for the whole of India of 382.

8.3 Existing Situation Assessment 150. As a result of measures taken up by GoK, in 2011-12 the total GSDP in Karnataka, at 2004-5 constant prices, was estimated to be in excess of Rs.2,980billion, yielding a per capita income of Rs 69,493 (US$1,264). 151. For total GSDP, at constant 2004-05 prices, this implied a growth in excess of 6% over the year 2011-12, Table 16. Table 16: Percentage Annual Growth

Year Growth 2005/6 10.5% 2006/7 10.0% 2007/8 12.6% 2008/9 7.1% 2010/11 5.2% 2011/12 6.4% (Karnataka Economic Survey 2011-12).

152. The following shows the movement of India and State GDPs, in Rs. 100Billions Table 17: India & Karnataka GDP

Year India GDP Karnataka GDP 2004-05 297.1 16.6 2005-06 325.4 18.4 2006-07 356.6 20.3 2007-08 389.9 22.8 2008-09 416.3 24.4

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2009-10 449.4 25.7 2010-11 487.9 28.0 2011-12 522.2 29.8 Source: Directorate of Economics & Statistics of respective State Governments, and for All-India -- Central Statistical Organisation

600 500 400 300 India GDP 200 Karnataka GDP 100 0 04-05 05-06 06-07 07-08 08-09 09-10 10-11 11-12

Figure 3: Movement in India and State GDPs

153. Karnataka has a per capita income of $1,264 a year, over 14% more than India's average of $1,10910.

India Per Capita Income Karnataka Per Capita Income

Figure 4: Per Capita NSDP of India and Karnataka

154. 19% of the state population lives below the poverty line, against India's average of 22.15%.

8.4 Sector Composition of GSDP 155. The sector composition of State Income, at current prices, in 2010-1111 indicates that the share of primary sector, secondary sector and service sector were 16.9%, 28.6% and 54.5%. 156. The sector contribution of the State Income has undergone considerable changes between 1960-61 and 2010-11. The primary sector share has declined steadily from 60% to 16.9%; the share of secondary sector has increased from 15.2% to 28.6% while service sector has increased from 24.8 to 54.5%, during the same period.

10 Economic Survey 2011-12, India 11 Economic Survey 2011-12, Karnataka

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8.5 Major Economic Activities of Karnataka 157. Government data on economic activity is available on a district-wide basis; not town specific. The following table presents relevant data for the thirty districts of Karnataka. The seven districts where the selected thirty-four Tranche-1 subject towns are located are shown first. In 2009-10 the seven districts accounted for over 14.5% of NSDP12 (at constant price). Table 18: District Share of State NSDPV

2009-10 NSDP at 2004-2005 constant prices - Rs. Millions % to District Primary Secondary Tertiary Total Total Seven Districts Bellary 23,110 15,690 38,940 77,730 3.4 Chickmagalur 14,270 5,390 18,690 38,350 1.7 Chitradurga 12,000 7,570 22,240 41,810 1.8 Davangere 15,760 11,070 27,700 54,520 2.4 Gadag 5,070 5,590 14,900 25,560 1.1 Haveri 10,900 6,320 16,220 33,440 1.5 Shimoga 14,740 15,140 29,880 59,750 2.6 Remaining ULBs Bagalkote 14,160 9,550 21,360 45,070 2.0 Bangalore Urban 8,680 230,300 527,320 766,390 33.9 Bangalore Rural 6,340 15,760 26,610 48,710 2.2 Belgaum 34,810 31,300 60,770 126,880 5.6 Bidar 7,030 6,310 15,510 28,850 1.3 Bijapur 13,440 8,990 19,940 42,360 1.9 Chamrajnagar 10,670 3,530 9,170 23,380 1.0 Chickballapur 8,830 6,060 12,740 27,630 1.2 Dakshina Kannada 11,950 29,800 82,320 124,080 5.5 Dharwad 7,720 18,240 53,480 79,450 3.5 Gulbarga 9,640 12,020 26,450 48,100 2.1 Hassan 17,680 9,210 26,760 53,650 2.4 Kodagu 11,370 3,130 14,650 29,160 1.3 Kolar 16,320 11,390 22,200 49,910 2.2 Koppal 10,370 6,830 12,640 29,850 1.3 Mandya 14,610 7,900 17,920 40,440 1.8 Mysore 17,830 24,780 58,770 101,380 4.5 Raichur 10,940 7,520 17,900 36,360 1.6 Ramnagara 9,410 7,150 21,620 38,190 1.7 Tumkur 23,200 17,340 33,370 73,920 3.3 Udupi 9,480 14,330 29,650 53,460 2.4 Uttara Kannada 7,510 9,990 24,690 42,180 1.9 Yadagiri 4,870 6,360 11,090 22,330 1.0 KARNATAKA 382,730 564,540 1,315,510 2,262,780

12 Economic Survey 2011-12, Karnataka

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8.6 Future Growth 158. The State‟s fiscal consolidation efforts have continued to be effective with all the fiscal indicators having been contained within the stipulated limits of the Karnataka Fiscal Responsibility Act, 2002 (KFRA). 159. The State has managed its expenditure well while also enhancing its revenues. The State‟s fiscal deficit has declined to 2.88% of GSDP in 2011-12 while the capital outlay has grown to 121% of Gross Fiscal Deficit. The State‟s revenue receipts have increased to 15.27% of GSDP. 160. Revenue receipts have grown primarily due to growth of tax revenue with the State having an overall revenue surplus. The State‟s expenditure on social services as a share of GSDP has grown while the non-tax revenues continue to remain at low levels. Education and Water resources development are significant components of the State‟s development expenditure. A gradual increase is seen in the planned expenditure of the State with district plan size at about 15% of the State‟s plan size.

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Table 19: Karnataka Receipts and Expenditure

Items/ Years 2010-11 2011-12 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 Rs Million (RE) (BE) Revenue receipts 265,697 303,521 375,869 411,511 432,907 491,557 577,846 663,133 Revenue expenditure 249,319 280,409 334,354 373,748 416,593 475,369 561,892 650,343 Capital receipts 75,038 44,015 64,448 60,297 92,852 129,427 135,468 146,500 Capital disbursements 91,320 66,831 104,166 99,480 113,649 143,107 149,460 156,342 Capital Outlay (net) 46,737 58,219 85,426 84,032 96,893 120,669 118,174 117,544 Percent to GSDP Revenue receipts 15.97 15.53 16.55 15.23 14.07 14.28 14.49 15.27 Revenue expenditure 14.99 14.34 14.72 13.83 13.54 13.79 14.09 14.98 Capital Receipts 4.51 2.25 2.84 2.23 3.02 3.76 3.40 3.37 Capital Outlay (net) 2.81 2.98 3.76 3.11 3.15 3.50 2.96 2.71 Capital Disbursements 5.49 3.42 4.59 3.68 3.69 4.15 3.75 3.60 Source: Government of Karnataka, Accounts Recknoner, 2002-12

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9 STATE ECONOMIC ANALYSIS

9.1 Economic Analysis

9.1.1 Assignment of Resources to Local Bodies 161. Assignment of resources to ULBs is made in accordance with the recommendations of the State Finance Commission (SFC). SFC grants are usually given under three different heads as given below:

 Salary for staff;

 Pension contribution;

 Electricity charges;

 Untied grants (in creation or replacement of an asset) 162. Third SFC‟s principal recommendation, as regards devolution of funds, was a) delinking of salary while working out the total share of PRIs and ULBs; b) 33% of Net Own Revenue Receipts of state should be distributed to PRIs and ULBs; and c) the relative shares of PRIs and ULBs would be in the ratio 70:30 out of 33% of Net Own Revenue Receipts of the state. In other words, 23% of Net Own Revenue Receipts of the state is the share PRIs and 10% of Net Own Revenue Receipts of the state is the share of ULBs. 163. The 13th Finance Commission (13th FC) observed that there was severe lack of funds with the ULBs to provide adequate levels of even basic services such as drinking water, sewerage, solid waste management and street lighting to their citizens. This problem is intensified by the increasing pace of urbanisation as well as the rising cost of providing such services in rural areas. 164. The transfer of funds, functions and functionaries to local bodies consistent with the XI and XII Schedules of the Constitution has met with limited success so far. In recent times the local bodies have been entrusted with funds, often directly through Centrally Sponsored Schemes (CSS) such as the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) and National Rural Employment Guarantee Scheme (NREGS), which have stretched their already limited planning implementation and accounting capacities. 165. While the issue of providing additional funding support to local bodies is significant, the 13th FC highlights following points with regard to the structure & functioning of the ULBs, (i) entrusting local bodies with implementation and expenditure responsibilities consistent with their mandate; (ii) enhancing their capacity to meet these obligations through assigning necessary revenue raising powers as well as providing adequate transfers; (iii) making them accountable for their performance, including delivery of services as per previously notified standards; (iv) strengthening the functioning of the State Finance Commissions; and (v) providing focused support to the scheduled and excluded areas. 166. The 13th FC has adopted a platform-based incentive approach to determine the volume of local body grants to be provided to each state. Following previous Commissions, the 13th FC will continue to provide for a grant to all the states for meeting the needs of the local bodies for the period 2010-15. In addition, the 13th FC have sought to incentivise devolution and performance through the introduction of a performance-based component which will be available only to those states which meet the stipulations related to the issues identified above by 2011-12. The year 2010-11 will be available for states to meet these stipulations. States which are unable to do so, but meet these stipulations in subsequent years, will be eligible for grants prospectively.

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9.2 Economic Analysis of a Sector Loan 167. This Section analyses the government‟s sector development plan which consists of investment plans in the 34 Program urban local bodies (ULBs) in the following sub-sectors: water supply and sewerage and sanitation. The investment plans articulate the investment requirements over the next 8 years up to 2020 in Program ULB, which amount to about $ 215 million in base cost. In addition to the infrastructure investment requirements, reform and capacity building requirements are also assessed for the Program ULBs to deliver the adequate, efficient and responsive urban services in a sustainable manner. 168. The following economic analysis covers rationale for government involvement, goals of the program, sector development plan, government capacity, fiscal impact, and economic risks.

9.2.1 Rationale for Government Involvement 169. The government intervention under the Programme is limited to basic urban services where (i) there is natural monopoly in the sector; (ii) the services provided are public good; and (iii) integrated and coordinated management by the government is required due to externality and interdependence of these sectors. Where technically and commercially feasible, private sector participation will be promoted. The government involvement in basic urban services is also in line with the urban sector development plans and programs that the government is pursuing. The program aims to improve water supply and sanitation infrastructure in 34 ULBs in the state.

9.2.2 Goals of the Programme 170. The goals of the Programme are to increase economic growth potential by making investment in water supply and sewerage infrastructure in the selected Program ULBs. Promoting urban development with a view to stimulating economic growth potential is a common strategy in India, as spearheaded under the Government of India (GOI)‟s urban development schemes such as Jawaharlal Nehru Urban Renewal Mission (JNNRUM) and Urban Infrastructure Development Scheme for Small and Medium Towns (UIDSSMT). Urban growth is expected to drive the economic growth since non-agriculture sectors with future growth potentials concentrate in the urban areas and productivity in the urban areas is estimated to be 3.5 times as high as that in the rural areas. Moreover, urban growth can spread its economic benefits to rural areas by providing markets for agricultural products from the surrounding rural areas. 171. Till December 2010, under JNNRURM, projects worth Rs 3,558 million have been sanctioned by GOI for which detailed reports for projects have been prepared for GOI‟s approval or under preparation. Under UIDSSMT projects worth Rs.2,078 million have been sanctioned by GOI, for which detailed reports for projects have been prepared or are under preparation for GOI‟s approval. Hence, urban development is given priority as a vehicle to achieve higher economic growth in both the state. Under the Program, selection of 34 ULBs is strategically made to maximize the Program‟s contribution to economic growth potential, keeping a regional balance in mind. 172. The goals for each sector of urban services are set in a respective plan of sector development. The sector goals are easily measurable and specific for water supply and, sewerage.

9.2.3 Sector Development Plan 173. The sector development programme will cover part of the 10-year period financing requirements in the selected 34 Program ULBs to undertake short-term and medium-term activities in a respective sector investment plan. Subprojects under the Program are also expected to serve as a model for infrastructure development in the ULBs which are not covered under the Program by demonstrating how the policy is translated to specific projects. In general,

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sector goals are set by GOI‟s or GoA‟s policy and/or guidelines; however, they are adjusted to reflect a size, geography, environmental condition and capacity of each Program ULB as appropriate. 174. The expectations arising from the 74th amendment have not been fully met. While water, sewerage and solid waste management has been transferred to ULBs, inadequate capacities at local government level have hindered effective service delivery.

9.2.4 Associated Economic Policies 175. Promoting urban development is a national policy of India, as spearheaded by Jawaharlal Nehru Urban Renewal Mission (JNNRUM) and Urban Infrastructure Development Scheme for Small and Medium Towns (UIDSSMT). The state has already taken up initiatives under State Urban Agenda for Karnataka (SUARAJ) to advance priority projects and governance reforms. Tariff and user charge reform is part of the Investment Program. The state has also issued Government Order No. NAE o7 UWS 2011, Bangalore dated 21st July 2011, to provide guidance on implementing volumetric water tariff and flat sewer tariff by the ULBs. This is a critical step towards financial sustainability.

9.2.5 Government Capacity 176. The state government, through its nodal agency KUIDFC acting as the executing agency, is fully capable of executing the Program. KUIDFC has implemented and is still handling several externally aided projects, such as two ADB-assisted projects and two World Bank-assisted projects in urban development in addition to centrally sponsored schemes. 177. KUIDFC has developed adequate capacity in managing projects, having learned from experiences in implementing Karnataka Urban Infrastructure Development Project, Karnataka Urban Development and Coastal Environment Management Project and North Karnataka Urban Sector Investment Program (NKUSIP).

9.2.6 Fiscal Impact 178. The state has committed itself to a fiscally sustainable adjustment path by eliminating the revenue deficit and lowering the overall deficit as enacted in the Financial Responsibility and Budget Management Act. While the state, intends to decrease the revenue deficit, it is also laying stress on increasing capital expenditure, doubling it over the last three years. Given the fiscal challenge, it is important for the state to secure the ADB loans to augment its capital expenditures, a crucial requirement for restoring economic growth. The state‟s budget allocation confirms its emphasis on the social sectors, water supply and sanitation and urban development - sectors which were relatively neglected.

9.2.7 Economic Risks 179. One of the identified risks is associated with financial sustainability of the Program, as the required tariff and tax revisions are likely to be met with resistance from politicians and public alike. Even though a financial reform action plan was prepared for that purpose, implementation of reform would require the government‟s commitment and political wills, capacity building at the relevant institutions and consultation with and awareness of the general public. The Program will provide assistance in capacity building and public awareness campaign/consultation to mitigate this risk.

9.2.8 Government Commitment 180. The government commitment to support urban development is firm, as demonstrated by increased budgetary allocation to the sector. From FY2008-09 to FY2010-11, state development

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expenditures on water, sanitation and urban development have more than doubled. When combined, water and urban development comprised almost 5% of total development expenditures of the state for FY2010-11, rising from 2.9% in FY2008-09.

9.2.9 Coordination of Foreign Aid 181. The ADB, WB and JICA are currently the only major agencies involved in urban development sector in Karnataka. Coordination of foreign aid is relatively easy at the state level, and is done at Urban Development Department (UDD) of the state. The selection criteria of the Project also ensure that there is no overlapping between the Project and the other urban development schemes.

9.2.10 Conditions Attached to the Loan. 182. Conditions attached to the loan mainly assure that the institutional and financial arrangements to sustain the urban services assisted under the Program are put in place in a timely manner. They include tariff and user charge reform to gradually achieve full recovery of O&M costs for water and sewerage sectors, implementation of capacity development programs for the ULBs

9.3 Conclusion 183. The government‟s sector development plan is economically sound. The plan involves only the normal functions of government, and its goals are reasonable. The plan is generally well designed from an economic perspective.

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10 TRANCHE -1 INVESTMENTS AS PILOT INVESTMENTS

10.1 Selection of Tranche-1 Subject Towns 184. The first stage in the preparation of the Feasibility Studies was the selection of the Subject Tranche-1 towns from the thirty four ULBs located within the sub-basin 185. Our intention behind the selection was to ensure that the sub-projects covered as diverse a representation of ULBs as possible. In this way, all possible options for service provision; asset creation/rehabilitation and institutional frameworks have been explored. A wide diversity will ensure that the recommendations for the sector will have been piloted over most water resource and WSS planning circumstances to be found within the state. 186. The overriding factor within the selection process has been that clear benefits and outputs will be derived from the pilot studies which can be applied across Karnataka. Critically, the selection has been based upon the ability to test the principles of IWRM and the opportunities for PPP, as much as the priority need for investment. 187. Towns identified as the most suitable subject ULBs were Davangere, Ranebennur, Byadagi and Harihar. The selection methodology is outlined in “Volume 1: Institutional Road Map.” Subsequently endorsed by the project Steering Committee.

10.2 Feasibility Study Recommendations 188. Following selection of the sub-project towns, Feasibility Studies were prepared for both water and wastewater service delivery. 189. The investments are to provide adequate water procurement and treatment facilities to enable a continuous water supply to be made available to 95% of people within each ULB, and for the collection and safe disposal of 80% of the water delivered to customers. The assumption was made that 80% of all citizens would choose to be connected to the central sewer network. In summary, the works proposed in the four towns are:

 Water Procurement: o Raw water catchment, pumping and transmission mains; o Water treatment facilities; o High lift pumps into supply; o Bulk flow meters;

 Water Network Phase 1: o Strategic network and reservoirs;

 Water Network Phase 2:

o Distribution network and storage reservoirs;

o Customer revenue meters;

o District metering;

 Wastewater collection sewer network

 Wastewater treatment plant, and

 Sludge management facilities.

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190. Water Network Phase 1 works entailed those works necessary to bring adequate water supplies to central distribution points in each town, normally a strategic reservoir. Phase 2 works are those required to distribute the water to customers. The division was made in line with the proposal by the KUIDFC – see Section 14.2. 191. The proposed works comprised a mixture of new assets; replacement/rehabilitation and existing capacity enhancement. 192. Generally, the works were designed for the 2031 demands except that, in consideration of the lack of accurate data considering existing flows etc., the treatment facilities were phased such that those proposed under the Tranche-1 investments were adequate to around 2025. The main question about future demands in assessing require treatment capacity will be:

 The rate at which domestic demand increases to, and perhaps beyond, the Indian design standard of 135litres/head/day,

 The rate at which service coverage is increased, and

 When, if ever, the design standard of 15% for non-revenue water is ever achieved. 193. Domestic demand and increased coverage will also influence the required wastewater treatment capacity. As mentioned earlier, the willingness of people to pay for a sewer connection charge will be critical.

10.3 Summary of Tranche-1 Investments 194. A summary of Tranche-1 investments unit indicators are contained in the following table:

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Table 20: Summary of Tranche-1 Investments and Indicators

Estimated Cost13 $/2011 Project Element $m population

Davangere Water Procurement 2.08 Water Network Phase 1 16.27 2011 Water Network Phase 2 3.95 population $46 488,410 Total Water Investment $22.30M ($90 for total requirement) Wastewater Collection 16.93 Wastewater Treatment - Total Wastewater Investment $16.93M TOTAL ULB Investment $39.23M Harihar Water Procurement 3.04 Water Network Phase 1 1.85 2011 Water Network Phase 2 6.48 population 101,711 Total Water Investment $11.37M $112 Wastewater Collection 1.19 Wastewater Treatment - Total Wastewater Investment $1.19M $12 TOTAL ULB Investment $12.56M $123 Ranebennur Water Procurement 4.32 Water Network Phase 1 2.88 2011 Water Network Phase 2 5.96 population 114,580 Total Water Investment $13.26M $115 Wastewater Collection 1.34 Wastewater Treatment 0.36 Total Wastewater Investment $1.7M $15 TOTAL ULB Investment $14.9M $130 Byadgi Water Procurement - Water Network Phase 1 2.77 2011 Water Network Phase 2 1.63 population 30,600 Total Water Investment $4.4M $144 Wastewater Collection 4.88 Wastewater Treatment 1.13 Total Wastewater Investment $6.01M $196 TOTAL ULB Investment $10.41M $340 Total of Physical Investment $77.10M $105

13 CAPEX is inclusive of project management costs of 10%; contingency of 15%; resettlement, compensation and land purchase costs, and for an extended 5yr operational phase for new water and wastewater treatment plants.

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195. The total required investment is forecast to be: Table 21: Summary of Total Investment

Estimated CAPEX Project Element $M Total of Physical Investments $77.10M Provide for Tranche-2 preliminary works1 $20.00M IWRM Project Management Unit2 $1.25M Training programme (allow)3 $0.05M Allow for plant and business systems4 $1.60M TOTAL TRANCHE 1 INVESTMENT $100.00M

Note 1: See Section 14.3. Note 2: See Section15.4. Note 3: To be confirmed by HR and Development Plan. Note 4: to be confirmed based upon Institutional arrangement of ULBs for service delivery

10.4 Forecast for Pilot Sub-Basin Investment 196. It is dangerous to draw too much from such a limited sample of ULB requirements, but there are some conclusions that can be drawn:

 For the water supply, the $/head indicator is fairly consistent ranging from $90 to $144. The highest figure is in Byadgi and reflects the lower population of the ULB. Most of the water service requirements are in place and the investment tends to be one to augment the existing facilities, rather than first-time service provision, and for asset replacement, and

 For the wastewater service, the required investment is more variable and is based upon the requirements in each ULB. From the above, the $/person for Byadgi is high as the wastewater collection and treatment is first-time, whereas in Ranebennur and Harihar the requirement is much less due to the current investments taking place. 197. An indicator graph for the required water supply investment in a ULB as $/head against ULB population is provided below. Above a population of 500,000, an investment of around $85/head is probable. The graph can be fine-tuned as the requirement in more towns becomes known.

150

140

130

120

110

100

80 0 100,000 200,000 300,000 400,000 500,000 600,000

Figure 5: Indicative Water Supply Investment per Head

198. For the pilot sub-basin, and considering the ULBs in groups relating to the sizes of the four subject towns, the following total required investment can be determined.

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Table 22: Forecast for Pilot Sub-Basin Investment Requirement

Group Group Group 2011 water Wastewater Town 2011 Population investment Investment Population $m $m Sringeri 5,475

Koppa 6,614

Soraba 9,570

Narasimharajapura 9,617

Shiralkoppa 18,685

Holalkere 18,779

Jagalur 18,998

Thirthali 19,080

Honnali 20,059

Hirekerur 20,451

Shirahatti 20,884

Mulagnada 23,319

Channagiri 23,853

Bankapur 26,187

Birur 29,252

Hoovina-Hadagali 30,169

Shiggaon 31,345

Hangal 32,224

Byadagi 33,067

Kadur 39,704

Shikaripura 40,608

Lakshmeshwara 43,058

Tarikere 43,894

Savanur 45,823

Harapanahalli 53,997

Sagar 64,594 729,306 $105m $143m Haveri 72,044

Harihara 94,121

Ranebennur 115,473

Chitradurga 156,961

Gadag Betageri 199,694 638,293 $72m $8m Bhadravati 207,013

Shimoga 353,503

Davangere 469,688 1,030,204 $93m $14m Total 2,399,814 $270m $165m

$435m

199. Extrapolating these unit indicator costs beyond the sub-basin to the state level would be erroneous over the pro-rata increase in population from 2.4m to around 53m for the state population, excluding Bangalore and does not reflect the considerable investment that has been made already in the major cities e.g. Mysore, Hubli and Dharwad.

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10.5 Technical Investment Options

10.5.1 Water & Wastewater Treatment Options

10.5.1.1 Water Procurement 200. We have discussed in the Road Map, the danger associated with the assumption of 15% physical losses. Such a level is well below current levels of around 40%; will be difficult and expensive to achieve, and will result in an under-assessment of required treatment capacity. As service moves towards a continuous supply, leakage can be expected to increase significantly without major NRW reduction management. Levels of 50 to 60% are not unrealistic. 201. The consequence will be that plants will require further investment for capacity augmentation at an earlier than expected date.

10.5.1.2 Water Treatment 202. For water treatment plants, there is no reason to move from the current practice of sedimentation and filtration. Various sub-options are possible and these can be ascertained for each location depending on water quality, ULB existing treatment works and preferences. 203. An issue identified in the Feasibility Studies is the possible need to provide additional treatment for pesticides. Historic river water analysis has not shown this to be a problem and samples taken for the Feasibility Studies showed no traces. The samples taken cannot be said to be representative. A year-long study of sampling and analysis is required to cover for all agricultural seasons and river flows. 204. The other concern raised by the Studies is the security risk associated with direct abstraction from the river source. The ULBs drawing directly from the river are at risk of pollution in the river and of low flows affecting the quantity of water available. The latter is being considered by the IWRM PPTA. Our recommendation would be for some form of bankside storage to be provided. Such storage is expensive due to the land requirements but we recommend should be considered as a long-term option, possibly making use of the historic tanks previously used for water storage. 205. Chlorination remains the best option for water sterilisation and has been incorporated into the Tranche-1 sub-project investments. Where the treatment plants are located close to housing, or there is some other risk associated with the storage and handling of gas chlorine, on-site production should be considered.

10.5.1.3 Wastewater Treatment 206. Traditionally, stabilisation ponds have been the preferred treatment process for small to middle sized towns. The process is environmentally and CAPEX and OPEX efficient. The disadvantage is the large acreage required with the ensuing difficulties of finding adequate land, and the cost. The problem was encountered in Byadgi and is likely to become an increasingly more common. 207. The alternative processes based upon aeration require less land but are more expensive to construct, use considerably more power and require a more skilled workforce. 208. The preferred option will need to be decided site-by-site, based totally on land availability/cost.

10.5.1.4 Sludge Strategy 209. As wastewater treatment plants are brought into service using other than stabilisation pond technology, sludge will be increasingly produced.

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210. We strongly suggest that, before the problem becomes critical, the sector develops a sludge management strategy and that adequate investment funding is provided in wastewater treatment plant projects for safe and environmentally friendly disposal of sludge.

10.5.1.5 Karnataka Hi-Tech Proficiency 211. We have made a suggestion in the Road Map that Karnataka builds upon its IT capability to develop a proficiency in high-tech wastewater treatment plant process control and monitoring as an exportable income earning stream.

10.5.2 Water and Sewer Networks 212. We have addressed in the Road Map issues with the quality of main laying, identified from our site visits. 213. The major investment issue to be addressed is the need for timely replacement of assets networks and M&E. 214. For M&E plant, the need can be determined from asset history records that we have recommended be made in an Asset Management. From the histories, expected replacement schedules can be produced and investment included into capital investment programmes. 215. For water and sewer networks, replacement programmes can be based upon asset histories, specific pipe condition surveys and pipe sampling techniques. These are all developed internationally, and the experience is available to the sector in Karnataka. 216. The investment requirement is to ensure that an adequate annual provision is made for renewals within a annual “rolling” capital programme allocation. The following table demonstrates the principle behind a methodology that we suggest could be adopted. The numbers and costs are indicative, only to show the methodology. A similar exercise can be applied to sewers. The “assessed remaining life” would be based upon the asset histories, pipe sampling etc. Table 23: Annual Mains Rehabilitation Investment

Length by Unit Assessed Weighted average Pipe Percentage Size cost Cost $m Remaining Life remaining life Size of Network km $/m years (years) of network DN90 25% 63 30 1.88 10 DN100 30% 75 50 3.75 15 DN150 20% 50 65 3.25 15 DN200 10% 25 80 2.00 20 13.2 DN250 7% 18 100 1.75 20 DN300 4% 10 130 1.30 25 DN400 3% 8 210 1.58 35 DN600 1% 3 400 1.00 50 Total 250km $16.50m Required Annual investment $1.25m

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11 ASSUMPTIONS MADE IN THE FINANCIAL ANALYSIS

11.1 Introduction 217. We have made a number of basic assumptions in our analysis. In line with Indian Standards and Norms, a domestic per capita demand of 135litres/head/day has been assumed, as has a non-revenue water level of 15% from the water distribution network. 218. In our analysis of future demands and required treatment capacities, we have assumed a gradual build up to these levels. Even then, we do question the low level of non-revenue water used, as the “standard”. To us, a level of 15 or 20% would be safer.

11.2 Population 219. Table 24 shows, for the thirty-four ULBs in the sub-basin, the past population by town in 2001 and projections for 2020, 2030 and 2040, as per the KUWSDB estimates. Table 24: Historic and Forecast Populations

2001 Town 2011 2020 2030 2040 (Census) Bankapur 20,324 26,187 32,898 42,389 54,618 Bhadravati 160,662 207,013 260,060 335,087 431,760 Birur 22,702 29,252 36,747 47,349 61,009 Byadagi 25,663 33,067 41,540 53,524 68,966 Channagiri 18,512 23,853 29,965 38,610 49,749 Chitradurga 121,817 156,961 197,182 254,070 327,369 Davangere 364,523 469,688 590,045 760,273 979,612 Gadag Betageri 154,982 199,694 250,866 323,241 416,496 Hangal 25,009 32,224 40,482 52,160 67,209 Harapanahalli 41,907 53,997 67,834 87,404 112,620 Harihara 73,047 94,121 118,240 152,352 196,305 Haveri 55,913 72,044 90,505 116,616 150,260 Hirekerur 15,872 20,451 25,692 33,104 42,654 Holalkere 14,574 18,779 23,591 30,397 39,166 Honnali 15,568 20,059 25,200 32,470 41,837 Hoovina-Hadagali 23,414 30,169 37,900 48,834 62,922 Jagalur 14,744 18,998 23,866 30,751 39,623 Kadur 30,814 39,704 49,878 64,268 82,809 Koppa 5,133 6,614 8,309 10,706 13,794 Lakshmeshwara 33,417 43,058 54,091 69,697 89,804 Mulagnada 18,098 23,319 29,295 37,746 48,636 Narasimharajapura 7,464 9,617 12,082 15,567 20,059 Ranebennur 89,618 115,473 145,063 186,913 240,838 Sagar 50,131 64,594 81,146 104,557 134,721

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2001 Town 2011 2020 2030 2040 (Census) Savanur 35,563 45,823 57,565 74,173 95,571 Shiggaon 24,327 31,345 39,378 50,738 65,376 Shikaripura 31,516 40,608 51,014 65,732 84,696 Shimoga 274,352 353,503 444,087 572,207 737,288 Shirahatti 16,208 20,884 26,236 33,804 43,557 Shiralkoppa 14,501 18,685 23,472 30,244 38,970 Soraba 7,427 9,570 12,022 15,490 19,959 Sringeri 4,249 5,475 6,878 8,862 11,419 Tarikere 34,066 43,894 55,142 71,050 91,548 Thirthali 14,808 19,080 23,969 30,885 39,795

220. Questionably, all towns show a uniform total increase of 109% over the period 2011 to 2040, and equally divided across the periods: 26% from 2011 to 2020 and then 29% for the two subsequent periods. 221. Applied to the State, the population increase will be from 61m in 2011 to over 66m by 2040.

11.3 Increase in Water Demand 222. The Draft Cabinet Paper refers to an anticipated increase in water demand for drinking purposes from a current 70TMC to just over 200TMC by 2050. The demand is well within the considered economically available raw water in the State of 1,695TMC. The increase does help to demonstrate the long-term need for continuing investment in water supply facilities, and the advantages to be gained by adopting IWRM principles including, in particular, reducing physical water losses to an economic level. 223. The increase in potable water demand is matched by a similar volume of wastewater to be collected and treated. The required investment in wastewater is much greater due to the current low level service coverage and treatment. 224. Knowledge of the future demand for water will be essential to water resource planning. We would suggest that there is an urgent need for a State Water Master Plan. The Plan would address issues such as realistic non-revenue water levels and domestic and non-domestic consumption based upon historic data and relevant to the differing socio-economic groups - a move away from rigid “Norms” and “Standards”.

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12 FINANCE REQUIREMENTS FOR UWSS SERVICE DELIVERY

12.1 Capital Expenditure on Works 225. Current and past expenditure across the state is shown in the following table. Table 25: Capital Expenditure (CAPEX) in ULBs

Costs are Rs. Million 2011-12 2010-11 2009-10 2008-09 2007-08 2006-07 34 Towns Water Supply 300.2 102.0 476.4 432.8 608.9 276.1 Sewerage 272.0 134.5 95.5 98.8 54.7 11.1 Four Investment Program Towns Water Supply 31.9 0.0 0.9 0.9 0.9 0.9 Sewerage 30.7 30.7 30.7 32.6 0.8 0.8 NA – Not Available Source: Data provided by ULBs Table 26: UWSS Operation & Maintenance (OPEX)

2011-12 2010-11 2009-10 2008-09 2007-08 2006-07 Four Investment Program Towns Water Supply 143.5 146.2 112.9 74.6 50.0 na Sewerage 0.0 0.0 0.0 0.0 0.0 0.0 Na – Not available Source: Data provided by KUWSDB, KUIDFC, ULBs 226. The Urban Development Department‟s (UDD) budget depends on the allocation it receives from the State and is not reflective of the actual investment needs of the ULBs. 227. ULBs plan their investment schemes, as well as for operation and maintenance, and send their request for funds to the UDD. 228. Investment data for past ten years has been collected from the thirty four towns and presented in below for water supply and sewerage. 229. KUIDFC is the executing agency for all the externally aided projects, ongoing and planned, under ADB assisted NKUSIP and World Bank assisted KMRP. 230. KUSWDB carries out construction of water supply, sewerage and drainage systems on behalf of ULBs and receives money from ULBs. 231. Tables of investment data shows a pattern that investment in urban infrastructure development has mostly happened from 2005-06 onwards. ULBs depend on the funds from UDD for carrying out capital investment schemes as their own revenues are inadequate to meet even the operational expenses. Capital schemes have lagged behind due to restricted fund allocation from the UDD whose budget is once again is decided by the allocation at GoK level.

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Table 27: Investment in Sub-Basin 2002-2011

Name of the Town Project 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Water Supply 1 Thirthali PWSS 5.0 9.6 5.6 2 Davengere UWSS and 0.9 0.9 0.9 0.9 31.9 UIDSSMT ADB 3 Bhadravati UWSS 35.8 4.8 18.4 4 Shimoga UWSS 33.6 49.3 83.1 133.5 20.0 84.7 5 Sringeri UWSS 6 Shikaripura UWSS 0.0 43.1 104.4 -60.2 39.3 7 Hangal UWSS 46.6 8 Narasimharajapura AUWSP 15.5 20.1 15.2 9 Harihara 10 Ranebennur ADB 11 Gadag Betageri ADB 12 Hoovina-Hadagali PWSS 2.1 13 Lakshmeshwara 14 Honnali PWSS 8.8 2.4 12.8 0.0 15 Shiggaon UIDSSMT 5.8 38.4 38.4 38.4 38.4 16 Savanur 17 Tarikere PWSS 1.1 18 Kadur UWSS 0.0 19 Byadagi UWSS 20 Birur UIDSSMT 3.4 3.4 21 Bankapur 22 Channagiri PWSS 0.1 23 Mulagnada 24 Shirahatti UIDSSMT 6.5 63.3 63.3 63.3 63.3 25 Jagalur AUWSS 135.0 4.4 8.7 3.9 26 Holalkere AUWSS 31.8 14.7 30.4 27 Shiralkoppa AUWSS / PWSS 31.7 12.7 10.3 5.3 28 Soraba 29 Haveri ADB 30 Hirekerur UIDSSMT 4.0 4.0 38.4 38.4 38.4 38.4 31 Chitradurga UWSS 423.3 65.5 50.0 32 Harapanahalli 2.1 0.4 33 Sagar UWSS 3.5 34 Koppa PWSS 0.1 4.7 Total 0.0 0.0 0.0 0.0 276.1 608.9 432.8 476.4 102.0 300.2 Four towns total 0.9 0.9 0.9 0.9 0.0 31.9 12.2 State Fiscal 232. The 2011-12 state budget had the advantage of general economic recovery particularly in the service sector, which significantly guides the overall growth of the State‟s economy. The State has maintained revenue surplus throughout the eleventh plan period although the revenue surplus has declined from the high of 1.4% of the GSDP during the year 2007-08 to around 0.3% in 2011- 12. 233. Over the last few years, the fiscal deficit has been maintained within 3% of GSDP as mandated by the KFRA except in 2009-10 when it was 3.2%, as a result of additional expenditure for economic stimulation as prompted by the Government of India.

12.3 Revenues 234. The State‟s revenue resources are showing signs of recovery. Revenue receipts, as a percentage of GSDP, are expected to increase to 15.27% in 2011-12 from 14.5% in 2010-11. The State‟s tax revenues increased from Rs.259,870 million in 2007-08 to Rs 438,170million during 2011-12, at a CAGR of 14.0%. Summarized table of GoK financial performance is given below.

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Table 28: State Budget

2011-12 2010-11 Particulars 2009-10 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 (BE) (RE) Revenue Account 1. Tax Revenues 438,171 380,487 305,786 276,456 259,867 233,008 186,313 160,721 125,701 2. Non Tax 36,748 35,195 33,338 31,590 33,577 40,984 38,747 44,723 29,584 revenues 3. State's own 474,919 415,682 339,124 308,046 293,444 273,992 225,060 205,444 155,285 revenues (1+2) 4. Transfer of 104,190 93,101 73,600 71,539 67,793 53,746 42,137 38,787 32,448 central taxes 5. Grants from 84,024 69,063 78,833 53,323 50,275 48,132 36,324 21,466 19,866 centre 6. Total transfer 188,214 162,164 152,433 124,862 118,068 101,878 78,461 60,253 52,314 from centre (4+5) 7. Total revenue 663,133 577,846 491,557 432,908 411,512 375,870 303,521 265,697 207,599 receipts (3+6) Growth (%) 14.8% 17.6% 13.5% 5.2% 9.5% 23.8% 14.2% 28.0%

Revenue Expenditure 1. Social Services 248,788 230,341 191,189 158,730 131,237 109,367 88,988 77,228 69,650 2. Economic 172,995 158,564 131,817 111,366 114,533 104,402 79,473 65,105 46,517 Services 3. General Services 185,129 146,136 127,623 122,756 108,718 104,194 100,358 99,002 90,391 4. Grants in Aid and 43,434 26,851 24,740 23,741 19,260 16,391 11,590 7,983 6,289 Contribution 5. Total Revenue 650,346 561,892 475,369 416,593 373,748 334,354 280,409 249,318 212,847 Expenditure Capital Account

1. Loans from Gov 17,388 15,387 6,809 5,962 8,060 6,545 6,687 15,558 19,570 of India

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2011-12 2010-11 Particulars 2009-10 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 (BE) (RE) 2. Other Loans 128,495 118,486 117,064 86,323 51,716 57,303 36,092 59,011 62,519 3. Recoveries of 617 1,595 5,554 567 521 600 1,236 469 643 loans and advances Total Capital 146,500 135,468 129,427 92,852 60,297 64,448 44,015 75,038 82,732 Receipts Capital Expenditure 1. Capital outlay 117,544 118,174 120,669 96,892 84,032 85,426 58,219 46,737 30,294 2. Repayment of 5,905 5,349 4,705 4,614 4,486 7,370 4,175 34,076 31,610 Central Loans 3. Repayment of 12,214 9,563 7,918 4,830 3,396 7,798 1,441 4,393 6,044 Market Loans 4. Disbursement of 20,679 16,374 9,816 7,313 7,567 3,572 2,996 6,114 10,112 loans & advances Total Capital 156,342 149,460 143,108 113,649 99,481 104,166 66,831 91,320 78,060 Expenditure Revenue Deficit (-) / 12,787 15,954 16,188 16,315 37,764 41,516 23,112 16,379 (5,248) Surplus (+) Fiscal deficit (-) / 2,945 1,962 2,507 (4,482) (1,420) 1,798 296 97 (576) Surplus (+) Revenue deficit as a % of Revenue 1.9% 2.8% 3.3% 3.8% 9.2% 11.0% 7.6% 6.2% -2.5% Receipts Fiscal deficit as a % 0.1% 0.1% 0.1% -0.2% -0.1% 0.1% 0.0% 0.0% 0.0% of GSDP GSDP 2,979,640 2,799,320 2,571,250 2,444,210 2,282,020 2,026,600 1,842,770 1,667,470 1,309,900 Source: Department of Finance, GoK

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12.4 Debt Position 235. The standard criteria for determining the debt sustainability of the States are acceptable level of the debt-GSDP ratio, and the ratio of interest payment to total revenue receipts. 236. Twelfth Finance Commission recommended 28% and 15% as the acceptable levels of debt- GSDP ratio and ratio of interest payments to total revenue receipts respectively. The debt position of the State during the last five years is shown below.

Table 29: State Debt Position

Composition of Debt Stock of the Government of Karnataka Rs. Million Institutional Debt State Market Loans Central stock as Year Provident Total Loan including Loans a % of Fund NSSF loans GSDP 2007-08 2,875 7,226 8,060 41,616 59,776 2.62% 2008-09 65,834 5,791 5,962 14,698 92,286 3.78% 2009-10 49,538 13,101 6,809 54,426 123,874 4.82% 2010-11 10,282 36,050 15,387 72,154 133,872 4.78% 2011-12 81,998 27,650 17,388 18,848 145,883 4.90% Source: Economic Survey 2011-12, GoK

237. The position of interest payment to total revenue receipts in terms of percentage is indicated in the table below. Table 30: State Interest Payments

Total Revenue Interest Interest Payment to Year Receipts Payment Revenue Receipts (%) 2007-08 411,512 45,058 10.9% 2008-09 432,908 45,320 10.5% 2009-10 491,557 52,129 10.6% 2010-11 577,846 55,424 9.6% 2011-12 663,133 69,500 10.5% Source: Department of Finance, GoK

12.5 Transfer Mechanism 238. UDD allots funds to ULBs based on approved budgets in respect of Plan and Non-Plan expenditure heads. Under Plan allotments money for roads, drains, e-governance, land acquisition, water supply, public welfare, administrative buildings, twelfth finance commission, low cost sanitation, fixed allowance to ULB‟s representatives, UIDSSMT, JNNURM, IHSDP, SJSRY, 239. Housing Board rehabilitation and detailed project report preparation is provided to ULBs. 240. Under Non-Plan allotments money for matching grants, twelfth finance commission and ULB salary is provided to ULBs. SFC grants are usually given under three different heads as given below:

 Salary for staff;

 Pension contribution;

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 Electricity charges, and

 Untied grants in creation or replacement of an asset .

12.6 ULB Revenue Sources: 241. Following are the revenue sources of ULBs:

 Property Tax  Rental income from municipal properties;  License fees;  Fees and charges under municipal act and rules; and  Others 242. At present, monthly water charges are levied per connection. GoK order of 20th July 2011 enables the ULBs to levy water charges on volumetric basis – see Table below. The Order enables a levy for sewerage services, as well. In addition, revenues from house tax, rental income, etc. are used to meet the cost of urban services like sanitation, drainage and other non- revenue generating activities of ULBs. Table 31: Water Service Charges

Volumetric Tariff for metered connections per month Tariff Slab Tariff Rate Consumer Category Minimum Minimum Maximum Rs. / KL Charges (Rs.) KL KL 0 8 7.00 56 8 15 9.00 56 Domestic Consumer 15 25 11.00 56 Above 25 13.00 56 0 8 14.00 112 8 15 18.00 112 Non Domestic 15 25 22.00 112 Above 25 26.00 112 Source: GoK Order of 20th July 2011

243. Own income to total revenue comprised only 22.7%, with the balance of 77.3% being government grants received from UDD, GoK, on average across the thirty-four towns. Revenue expenditure in ULBs is very high at 241% of the own revenue income, on average. This is quite high and implies that ULBs are dependent on GoK and other grants for meeting its operational expenses. 244. Summary of revenue account for the year as indicated in the thirty-four towns is given below.

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Table 32: Revenue Account for ULBs in Sub-Basin

Summary of revenue account - 34 towns Rs. Million Revenue Income Income Total Own Revenue Non Tax Government Other Total Revenue Cities /Towns Year from Revenue Surplus / Income Grants Income Income Expenditure Taxes Income (Deficit) Davengere 2009-10 52.2 45.7 97.9 357.3 1.9 457.1 261.2 195.9

Thirthalli 2009-10 2.8 3.8 6.6 28.5 0.3 35.4 15 20.4

Bhadravati 2010-11 12.8 18.5 31.3 128 0.3 159.6 122.9 36.7

Shimoga 2009-10 62.3 83.1 145.4 315.5 9.8 470.7 203.5 267.2

Sringeri 2010-11 0.8 2.6 3.4 15.8 0.2 19.4 8.5 10.9

Shikaripura 2009-10 2.8 9.6 12.4 45.7 0.9 59 30.1 28.9

Hangal 2010-11 1.2 5.7 6.9 38.6 0.1 45.6 25.9 19.7

Narasimharajapura 2010-11 0.7 1.7 2.4 7.2 0.2 9.8 6.4 3.4

Harihara 2011-12 7.3 12.5 19.8 82.3 1.4 103.5 70.4 33.1

Ranebennur 2010-11 13.80 66.5 80.3 91.2 0.9 172.4 68.8 103.6

Gadag Betageri 2009-10 15 23.2 38.2 177.5 0.8 216.5 146.8 69.7

Hoovina-Hadagali 2010-11 2.8 4.3 7.1 27.9 0.6 35.6 16.3 19.3

Lakshmeshwara 2010-11 3.3 7.9 11.2 16.4 1.6 29.2 26.3 2.9

Honnali 2009-10 1.4 4.8 6.2 7.2 0 13.4 14 -0.6

Shiggaon 2010-11 1.9 4.4 6.3 35.2 0.8 42.3 24.5 17.8

Savanur 2008-09 1.3 3 4.3 34.1 0.3 38.7 28.7 10

Tarikere 2010-11 3.1 7.8 10.9 40.6 0.1 51.6 39.4 12.2

Kadur 2008-09 1.8 4.2 6 33.7 0.7 40.4 20.7 19.7

Byadagi 2010-11 3.7 4.9 8.6 21.7 5.8 36.1 33.2 2.9

Birur 2010-11 1.7 5 6.7 37.9 0.4 45 33.3 11.7

Bankapur 2010-11 0.5 2.2 2.7 27.9 0.1 30.7 35.2 -4.5

Channagiri 2009-10 0.7 5 5.7 34.3 0.3 40.3 40.3 0

Mulagnada 2010-11 0.9 2.5 3.4 23.8 0.5 27.7 20 7.7

Shirahatti 2010-11 0 0.7 0.7 36.1 0.2 37 11.6 25.4

Jagalur 2009-10 1.2 3.2 4.4 28.3 0.1 32.8 15.7 17.1

Holalkere 2009-10 1 2.2 3.2 32.8 0.2 36.2 17.6 18.6

Shiralkoppa 2009-10 0.8 2.7 3.5 22.7 0 26.2 12.4 13.8

Soraba 2010-11 0.8 2.1 2.9 37.4 0.3 40.6 9.6 31

Haveri 2010-11 8.5 15.8 24.3 206.4 3.1 233.8 71.4 162.4

Hirekerur 2009-10 1.7 4.7 6.4 28.7 0.2 35.3 18.3 17

Chitradurga 2009-10 22.3 25 47.3 199.7 2.1 249.1 111.2 137.9

Harapanahalli 2010-11 3.5 5.3 8.8 25.7 0.2 34.7 53 -18.3

Sagar 2007-08 6.2 14.2 20.4 57 1 78.4 26.8 51.6

Koppa 2010-11 0.04 1.4 1.44 17.7 0.6 19.74 10.2 9.54 Source: Data from ULBs

245. There are multiple factors contributing to the inability of ULBs to raise their operational revenues. Enabling provisions are prevalent in the Municipal Act. Poor financial management is another reason.

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246. Collection efficiency is quite low – an average of 66% across the thirty-four sub-basin towns of Karnataka. The collection efficiency of property tax and water charges across the same thirty- four towns is given below.

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Table 33: Collection Efficiency

Collection Efficiency Year Property Tax Water Cities /Towns Demand Collection Efficiency Demand Collection Efficiency Rs.Million % Rs.Million % Davengere 2011-12 109.8 94.8 86.3% 23.8 19.5 81.9% Harihar 2011-12 13.3 8.3 62.4% 9.9 5 50.5% Ranebennur 2011-12 29.3 22.8 77.8% 24.9 12.6 50.6% Byadgi 2011-12 3.3 3.2 97.0% 2.7 2.1 77.8% Thirthalli 2009-10 97.2% 84.8%

Bhadravati 2010-11 66.4% 32.0%

Shimoga 2009-10 NA NA

Sringeri 2010-11 65.8% 87.6%

Shikaripura 2009-10 37.0% 44.0%

Hangal 2010-11 61.3% 60.8%

Narasimharajapura NA NA

Gadag Betageri 2009-10 23.8 22 92.4% 58.3%

Hoovina-Hadagali 90.5% NA

Lakshmeshwara NA NA

Honnali NA NA

Shiggaon 2010-11 15.2% NA

Savanur 2008-09 20.0% 11.0%

Tarikere NA NA

Kadur 2008-09 85.0% 87.3%

Birur NA NA

Bankapur 2010-11 20.3 12.3 60.6% 3.5 2.2 62.9% Channagiri NA NA

Mulagnada 2010-11 58.5% NA

Shirahatti NA NA

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Collection Efficiency Year Property Tax Water Cities /Towns Demand Collection Efficiency Demand Collection Efficiency Rs.Million % Rs.Million % Jagalur 2009-10 45.4% 27.4%

Holalkere NA NA

Shiralkoppa NA NA

Soraba 2007-08 63.0% 57.4%

Haveri 2010-11 80.8% 58.6%

Hirekerur 2009-10 69.2% 89.7%

Chitradurga 2009-10 60.3 37.3 61.9% 23 17.3 75.2% Harapanahalli NA NA

Sagar 2007-08 61.5% 52.5%

Koppa NA NA

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247. The current activities and progress in mobilizing more revenue is shown in Table below. Table 34: Current Initiatives to Increase UBL Revenue

What are the Why do ULBs have to What are What is the current intended undertake the the progress against the outputs of the activities? MOU, Activities intended output? activities? government order, law? Improving Collection collection Present collection efficiency Implementation of the Improvement efficiency to 85 is averaging around 66% financial and property tax of demand. reforms as part of th Introduce new JnNURM/ UIDSSMT/ 13 Augment user charge / Finance Commission own Action at ULB level Increase covenants revenues existing tax rate

12.7 Institutional Road Map Proposals 248. Our “Road Map” proposals, based upon our own findings and upon past lessons learnt in India, includes the need for:

 Ownership of and commitment to projects by ULBs through the adoption of a “bottom-up” approach to project initiation;  Public awareness campaigns to educate people on the benefits of centralised water supply and wastewater collection i.e. to promote a “willingness” to pay connection charges, supported by “customer friendly” financial assistance with the connection charges;  Water tariffs to be commensurate with customer service levels, and the reasons for tariff increases to be clearly explained to customers who should have the option to decide, collectively, upon service level14 and thus charges;  Sector coordination at state and local level;  Establishment of District based SPVs for service delivery or, within the larger ULBs, a distinct water and wastewater department with staff devoted only to the sector and with ring-fenced accounting;  Development a professional capability among ULB managerial, financial and technical staff;  Introduce means and procedures for performance and asset history data as a first step towards fuller PPP, and  A 5yr O&M phase to be included into treatment plant works contracts to assist building of an O&M capability in the ULBs. 249. Concerning the need for ownership of projects by ULBs, ULBs including mayors, councillors, and ward members should be fully involved at the early stage of project initiation and formulation and be kept fully informed during the asset creation process. 250. Customer databases need to be updated and retained as current in order to ensure that all customers receive a water service bill, and that the ULB receives all the income to which it is entitled. Insufficient data existed in the sub-project towns to make an assessment of these “commercial”15 losses. From our experience, figure between 10% and 20% of water into supply is feasible.

14 During the sub-project household survey, a continuous supply was not seen as essential to many people. 15 “Commercial losses” includes unknown customers, meter errors and errors due to estimating consumption where there are no meters or the meters are inoperable.

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13 SUMMARY OF INVESTMENT PROGRAMME

13.1 Investment Objectives 251. Objectives for the succeeding investments require to be focused upon the issues facing the sector, that is to:

 Provide for full and continuous water supply within the urban areas;

 Provide for wastewater collection, where the number of people willing to connect to a sewer make the sewer economically viable;

 Treat wastewater collected to Indian standards for discharge to a water course, and

 Reduce NRW to economic levels, and

 To promote the commercial re-use of wastewater. 252. In order to meet the objectives, the investments are to provide for:

 Augmentation of existing potable water treatment capacity to provide adequate capacity for the foreseeable future;

 Rehabilitation of existing water treatment facilities to improve the efficiency and reliability of the existing plants;

 Construction of strategic transmission networks and water storage facilities to be able to transfer the water from the treatment works, and to store adequate quantities to (i) meet customer peak demands and (ii) safeguard against supply failure;

 Expansion of the distribution network to cater for increased development of the towns and for increased customer per capita demand, which is assumed as 135litres per had per day in accordance with Indian standards;

 Rehabilitation of the existing water distribution network to ensure its continued availability for service provision;

 Formalising any unregulated connections and making new within the developing areas;

 Installing customer revenue meters to enable service charges to be volume based;

 Laying of new sewers to connect properties where financially viable;

 Construction of new wastewater treatment plants and/or rehabilitation of the existing to match volumes of “water into supply” with wastewater treatment capacity, and

 Miscellaneous associated works such as provision of SCADA, stand-by generators and laboratory facilities.

13.2 Physical Investments in Each Sub-Sector 253. Summary of physical investment cost required for roadmap implementation is given in the following tables in million Indian rupees and United States dollar. 254. The investment shown is basis on the investment cost as estimated for water supply in 213 towns in the City Level Investment Plan (CLIPs), duly adjusted for cost escalation. 255. In respect of the four investment program towns, the physical investment cost as estimated by the PPTA consultant has been considered.

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Table 35: Physical Investment Cost - Road Map Implementation (Rs.M)

Tranche-1 Subject Total 34 Towns Sector Towns State Amount % to total Amount % to total Water Supply 60,150 11,642 19.4 5,933 9.9 Sewerage 46,421 7,624 16.4 2,115 4.6 Total 106,571 19,267 18.1 8,047 7.6 Note: Base costs only - does not include contingencies

Table 36: Physical Investment Cost - Road Map Implementation ($.M)

Tranche-1 Subject Total 34 Towns Sector Towns State Amount % to total Amount % to total Water Supply 1,094 212 19.4 108 9.9 Sewerage 844 139 16.4 38 4.6 Total 1,938 350 18.1 146 7.6

Note: 1) Base costs only - does not include contingencies, 2) 1 U S Dollar =55

256. The required investments for the 34 ULBs in the pilot sub-basin of $244m for water and $160 for wastewater compares with the $270m and $165m derived from the four subject ULB Feasibility Studies, if a 15% contingency is added to the above figures. 257. The difference for the water sector investment - $244m to $270m – is probably due to the large investment proposed now for the rehabilitation of the water networks in the towns.

13.3 Sources of Financing 258. We have analysed capital investment programming data to assess the total investment requirement across the state. The task has been made difficult by the project management systems used. Perhaps the information is available and the wrong questions asked, but we have been unable to ascertain current expenditure on projects against the original budgets. Further, the basis for the forecasting of the total investment is the CLIPs which are not to a common time base and have not been systematically updated. 259. For active projects where there has been disbursement of funds, there would appear to be no direct correlation of the disbursement and the CLIP. The analysis has been complicated by the different funding agencies and that the funds have been disbursed through the KUIDFC, the KUWS&DB and by the ULBs. 260. We also understand that the contract scopes change depending upon the prices received, and so the investment might not always relate to the original proposal. 261. The following assessments are the best possible that we have been able to achieve within these constraints.

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Table 37: Source of Financing - State Requirement - RsM

Centrally WB / ADB Balance funds State Sector Total Sponsored Investment source to be Plan Schemes Program identified Water 60,150 4,181 22,72816 12,24617 20,995 Supply Sewerage 46,421 781 24,85118 12,85219 7,937 Total 106,571 4,962 47,579 25,098 28,932

Source: KUWSDB, KUIDFC, GoK and consultant estimate`

Table 38: Source of Financing - State Requirement - $M

Note: 1) Base costs only - does not include contingencies 2) 1 U S $ = 55 Source: KUWSDB, KUIDFC, GoK and consultant estimate

Table 39: Source of Financing – Sub-Basin Requirement - RsM

Centrally WB / ADB Balance funds Sector Total Sponsored State Plan Investment source to be Schemes Program identified Water Supply 11,642 988 4,367 3,126 3,161 Sewerage 7,624 165 3,561 2,698 1,200 Total 19,267 1,153 7,928 5,824 4,361 Source: KUWSDB, KUIDFC, GoK and consultant estimate

16 Out of this expenditure till 31st March 2012 is Rs. 10,146 million. 17 Includes ADB assisted KUDCEMP – Rs. 2,897 million, ADB assisted NKUSIP – Rs. 5,262, proposed ADB assisted KISWRMIP – Rs. 2,271 Million, World Bank assisted KWASIP – Rs. 1,192 million and World Bank assisted KMRP – Rs. 158 Million 18 Out of this expenditure till 31st March 2012 is Rs. 4,427 million. 19 Includes ADB assisted KUDCEMP – Rs. 3,227 million, ADB assisted NKUSIP – Rs. 7,431, proposed ADB assisted KISWRMIP – Rs. 1,090 Million, World Bank assisted KMRP – Rs. 1,104 Million

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Table 40: Source of Financing – Sub Basin Requirement - $M

Table 41: Source of Financing –Tranche-1 Towns - RsM

Centrally WB / ADB Balance funds Sector Total Sponsored State Plan Investment source to be Schemes Program identified Water Supply 5,933 36 0 2,514 3,383 Sewerage 2,115 34 52 1,955 75 Total 8,047 70 52 4,469 3,459 Source: KUWSDB, KUIDFC, GoK and consultant estimate

Table 42: Source of Financing – Tranche-1 Towns - $M

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14 SUB-PROJECT SELECTION CRITERIA

14.1 Prioritisation of Investments 262. There is a clear need to prioritise investments both between ULBs and between water and wastewater service provision. In line with the principles of IWRM, we recommend that priority be given to providing a wastewater service in those towns which most seriously contaminate the main rivers, i.e. those on the banks of the rivers. 263. Generally, as water supply issues are associated as much with physical losses as inadequate treatment capacity, whilst adequacy of capacity must be provided, the emphasis should be upon reduction of physical losses through performance based NRW-reduction contracts and mains replacement/rehabilitation. 264. In proposing selection criteria for Tranch-2 and subsequent investments, criteria such as those based upon current service levels; the benefits to be derived and the cost/beneficiary can be proposed. Such criteria can be hard to evaluate without adequate data and are always open to debate and influence. 265. The investments chosen this way are also top down; not necessarily customer or ULB driven which is a requirement of IWRM.

14.2 Overall Approach 266. The KUIDFC Executing Agency will determine eligibility of a subproject for MFF based on the various technical, financial and economic criteria, taking due regard of the above prioritisation process and provided that the subject ULB has itself shown a willingness to share the responsibility to improve the supply to customers. 267. By consultative agreement with stakeholders and funders, a subproject may be financed on a stand-alone basis, and/or in parallel to other financing sources provided that ADB‟s guidelines, and safeguard policies are fully met. 268. When the EA confirms eligibility, the IA will assess subproject feasibility in a form of a subproject appraisal report to demonstrate compliance against the subproject selection criteria listed below. 269. A function of the proposed IWRM Project Management Unit will be to assist ULBs to make application for sub-project investment funding.

14.2.1 Technical Criteria 270. Prior to agreement for investment the following technical criteria are to be demonstrated, the sub-project will:

 Achieve the customer determined service level standards;

 Be designed in accordance with Indian Standards and technical Codes of Practice;

 Adopt accepted best international practice appropriate for Karnataka, and incorporate least cost optioneering based upon a “whole life cost” financial analysis;

 First rehabilitate the existing usable assets to achieve optimum utilization, and then create new assets, and

 Be gender neutral and take into consideration disadvantaged peoples.

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271. The town local body will have identified all lands, visually confirmed the locations, and verified the ownership in writing. Further, the land owner is ready to have the land transferred. 272. In addition, for a water supply subproject, there is known raw water availability with minimum of 30 years of sustainability.

14.2.2 Financial Criteria 273. The subproject will support:

 Design and implementation of user charges which have special consideration to vulnerable and/or women-headed households;

 Creation of service specific accounts following the accrual-based double entry accounting system;

 Preparation of water sector service specific financial management, budgeting and monitoring statements; 274. Further:

 A financial projection of the service operations will have been prepared for 25 years;

 Service user charges proposed which will fully recover the O&M expenditure of the both existing and new assets, and accumulate internal reserves for asset rehabilitation and replacement, and

 The ULB IA, as the asset owner, will have adequate financial management capacity.

14.2.3 Economic Criteria 275. The following economic criteria will be met:

 The result of a willingness-to-pay survey shows a willingness to pay what amount of user charges;

 An affordability analysis shows that the sum of user charges for water supply and wastewater service provision is below the affordability limit;

 The rationale of the subproject is the failure of either (a) market to adequately provide what society wants, or (b) public institutions to deliver public goods or services, and

 The subproject demonstrates an economic internal rate of returns at a value higher than the economic opportunity cost of capital, with sensitivity analysis.

14.2.4 Social and Environmental Criteria 276. The sub-project submission shall show that:

 The subproject follows social and environmental selection guidelines in an Environmental Assessment and Review Framework.

 The subproject has required safeguard planning documents - environment assessment and involuntary resettlement - and indigenous peoples plan, following the Environmental Assessment and Review Framework, the Resettlement Framework and the Indigenous Peoples Framework;

 The subproject‟s outcome, outputs and activities are consistent with the Gender Action Plan, and

 There is a record of consultation and participation with stakeholders during the preparation of the Feasibility Study, in line with the Consultation and Participation Plan.

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14.2.5 Cost Estimate and Procurement 277. To be compliant, the following shall be demonstrated:

 Cost estimates reflect the current market rate, and shows the unit costs, inputs and the annual distribution of the inputs throughout the implementation period;

 There is no provision for a charge to be levied by the IA or other specialized agencies.

 The subproject has a procurement plan, and

 The subproject will procure works, goods and services, including consultancy services, in accordance with the ADB‟s then current Procurement Guidelines.

14.3 Sub-Project Approval Procedures 278. The KUIDFC has suggested that the ULBs are to show a willingness to share the responsibility to improve the supply to customers and that Tranche-2 and subsequent investments should not be made in a ULB until the ULB has demonstrated improved proficiency through the adoption of various “self-help” measures. 279. Typical of such measures could be:

 Installation of bulk meters on all treatment works outlets and a preliminary water audit;

 Metering of transmission mains and leak detection and repair to bring physical losses to the Indian design criteria of 2%;

 Repairs and improvements in treatment works to reduce water used in the treatment process to the Indian design criteria of 4%;

 Bring water service charge collection efficiency to 90%;

 Complete a customer household survey to find illegal connections;

 Completing a 100% GIS record;

 Install measuring devices and conduct an energy audit at all treatment works and pumping stations;

 Fit meters and automatic shut-off valves to all standpipes;

 Remedial works at all storage facilities to ensure site security and water quality, and

 Set out and publish customer service levels. 280. Lack of funding has been a major deterrent in the allowing the ULBs to deliver the improvements in service that they wish to deliver. In recognition of this lack of finance, we suggest that limited monies, $20m suggested, are made available from the Tranche-1 funding to assist ULBs to implement such as the measures suggested above, initiating the sub-project selection process within their towns. A limit would be applied on the maximum amount allowable to any ULB, say $0.5m. 281. The approval process will be a two-stage process:

 Demonstration of Willingness;

 Concept approval, and

 Sub-Project Approval.

14.3.1 Demonstration of Willingness 282. ULBs will be invited to make an application for Preliminary Works Funding to show:

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 How the ULB is prepared to be proactive in bringing about improvement;

 An outline of the sub-project objectives and deliverables;

 The works for which the preliminary investment is required, such as those suggested in Section 14.3;

 Benefits to be derived from the investment with Performance Indicators and milestones, and

 Required investment for Preliminary Works with the contribution that the ULB is prepared to make. 283. If suitable, funding will made available; the Preliminary Works implemented and ULB performance monitored against proposed Performance Indicators. 284. Alternatively, the “Demonstration of Willingness” can be demonstrated by a ULB without external Preliminary Works funding. 285. As an interim measure to conform to the KUIDFC proposal, the proposed Tranche-1 investment has been prepared in two Phases:

 Phase I - all wastewater work requirements and water supply works necessary to ensure the availability of water at the strategic reservoirs, and

 Phase II – additional works required to provide for a continuous supply of water to be provided after the ULB has demonstrated improved proficiency.

14.3.2 Concept Approval 286. Once a ULB has demonstrated a willingness to itself improve the sector service, with or without Preliminary Works funding, a PIU established in the town will prepare a water sector Master Plan and a Sub-project Concept Paper. 287. The Concept Paper will be brief and contain:

 The baseline and targets for the intended improvement in service provision, operational performance and efficiency and environmental issues.

 Reasons for current non-compliance and consequences, with targets and outline remedial measures;

 CAPEX and OPEX estimates;

 Initial assessment on Safeguard requirements;

 An indicative per capita cost of operations, and

 Proposed tariff adjustments. 288. The PIU will have extensive consultation with the stakeholders and will add the summary minutes of each consultation meeting in the Concept Paper. 289. The PIU will submit the Concept Paper to the KUIDFC for approval; the KUIDFC will forward to the ADB in order to assess the proposed sub-project based on ADB‟s operational and safeguard policies. 290. Upon receipt of a positive feedback from the ADB, the PMU will submit the Concept Paper to the KISWRIP Steering Committee for “in-principle” approval of the sub-project.

14.3.3 Subproject Approval Procedure. 291. When the Steering Committee has approved the Concept Paper, the PIU will engage a consultant to prepare, or prepare itself, a sub-project Feasibility Study, and present the Study to the PMU.

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292. The Feasibility Study will be based on quantitative data, and will include sub-project rationale and description; assessment of alternative design options; selection of least “whole-life-cost” design; project CAPEX and OPEX estimates; implementation arrangements; O&M and Procurement Plans; financial and economic analysis, and Safeguards assessment. Any requirement for capacity building and institutional strengthening shall be discussed. 293. The PMU will appraise the sub-project, in the light of ADB‟s operational and safeguards policies, together with ADB‟s relevant guidelines and handbooks. If the PMU concludes that the sub-project fully meets ADB‟s operational and safeguards policies, it will endorse the Study and submit it to ADB. ADB may request for site visits and PMU‟s clarifications or may ask for reconsideration of the sub-project design and analysis. 294. The PIU and PMU will improve the Feasibility Study based on the ADB‟s recommendations, and will submit to the ULB for council concurrence. Once concurred, the PMU will seek approval from the Steering Committee.

14.4 Penalties 295. After receipt of a grant, should a ULB fail to deliver the required service improvements against determined Performance Indicators, the KUIDFC will convert progressively the grant to a loan, upon which interest payments will be due. The interest payments being, effectively, a fine for non- performance. 296. In the absence of a regulatory regime for utility service delivery, a third party – e.g. the KUWS&DB - could act as the Technical Auditor for ULB performance, or the KUIDFC could appoint external consultants.

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15 IMPLEMENTATION PLAN

15.1 Tranche-1 Investment 297. Work subsequent to the submission of the Final Report for Tranche-1 investment comprises:

Group Activity By Whom Duration

GoK, KUIDFC and other Review and comment stakeholders 1 month Draft Final Report ADB

Incorporate into Final Report PPTA Phase I 1 month

ADB with local ADB Fact Finding Mission 2 months stakeholders Loan Agree and finalise loan terms GoI, GoK and ADB 3 months

IWRM Project Established and staff appointed KUIDFC 6 months Management Unit

PMU & PIUs Establish or develop existing KUIDFC 1 month

Draft contract for Design & Supervisory consultants, 1 months KUIDFC with ADB support including for DPR preparation through PPTA Phase II Appoint consultants 4 months Works & Supervision Prepare DPRs and Works contracts Consultants to KUIDFC 6 months Contracts

Consortium of Tranche-1 Appoint Works contractors ULBs advised by 4 months KUIDFC/PPTA Phase II

Establish Drinking Water Supply Mission and Water Sector stakeholders led by Sector Council Department for Urban On going Reorganisation Development/KUIDFC Establish SPVs and separate UWSS departments in ULBs

15.2 Tranche-2 and Subsequent Investment 298. Upon the establishment of the KUIDFC PMU and the IWRM project Management Unit, the implementation process for the Tranche-1 and subsequent investments can commence.

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15.3 Implementation Entities 299. The following Committees, Agencies and entities are proposed.

15.3.1 Steering Committee 300. The established IWRMP Steering Committee whose members include Additional Chief Secretary (Committee Chair), MD of KUIDFC (Committee Secretary), Principal Secretary of the Urban Development Department, Principal Secretary of Planning Department, Secretary for municipalities and urban development authorities of Urban Development Department, secretary for expenditure of the finance department and director of Directorate of Municipal Administration, will continue.

15.3.2 Executing Agency 301. The KUIDFC will continue as the nodal executing agency (EA) responsible for implementing NKUSIP. Investment Programme implementation activities will be monitored by KUIDFC through a separate Programme Management Unit (PMU), which will be set-up within KUIDFC. The Managing Director of the KUIDFC will head the PMU and will be assisted by an Executive Director at the Regional office of KUIDFC at Dharwad to oversee the Investment Program progress. 302. A team of senior technical, administrative and financial officials will assist the Executive Director in controlling and monitoring Investment Program implementation activities. 303. We suggest that the Executive Director be supported by a new Divisional Office established at Davangere. The consultant team will be under the Divisional Programme Director and will be involved in project planning, preparation of subproject and cost estimates, co-ordination, technical guidance and supervision, financial control, training and overall subproject management. 304. All Investment Program decisions will be made by the Executive Director who shall operate from the PMU, Dharwad; only interactions with GoK, GoI and ADB shall be conducted through the KUIDFC office at Bangalore. 305. As previously discussed, an IWRM Project Management Unit is proposed to assist in the execution of the Programme, including for the selection of Tranche-2 and subsequent towns.

15.3.3 Implementing Agency 306. Implementation Agencies (IA) in each of the Tranche-1 ULBs will oversee sub-project component implementation at the sub-project towns, where the Investment Program ULB will implement sub-project components. 307. A Programme Implementation Unit (PIU) is to be established in each ULB unless one or more of the ULBs decide to form a single PIU. 308. Other than the above institutional setup, District Level Programme Steering Committee will be set up in each district to monitor implementation of subprojects and institutional reforms. The District Level Programme Steering Committee shall consist of Deputy Commissioner of District, Divisional Program Director from concerned divisional office, Municipal Commissioners‟ / Chief Officers of Investment programme ULB and President / Chair of investment programme ULB. The District Level Programme Steering Committee will report to the PMU Executive Director: Dharwad.

15.3.4 Consultancy Services Committee 309. The KUIDFC will set up a Consultant Selection Committee to evaluate the request for consultant services and consultancy contract negotiations etc. The recommendations of Committee will be submitted to the Steering Committee for approval.

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15.3.5 Tender Evaluation Committee 310. The KUIDFC will set up a Tender Evaluation Committee to evaluate tenders and prapre evaluation reports for submission to the Steering Committee for approval.

15.4 IWRM Project Management Unit 311. In Section 5.4, we have proposed an IWRM Project Management unit be established in the KUIDFC to assist with the implementation of the Tranche-1 investments, the selection of Tranche- 2 and subsequent investments, and with the introduction of the proposed SPVs as service providers. 312. We recommend inclusion of a small team within the IWRM Project Management Unit to focus on gender and social issues applicable to UWSS service provision. 313. As discussed in the Section, the Unit will comprise full-time KUIDFC employees, contract employees and, as required, short-term national and international consultants. The main input can be expected to be in the first five years of the project, then reducing. 314. A suggested scope for the Unit is provided as Annex 2 to “Volume 1: Institutional Road Map”. An indicative establishment would around 10 people, comprising:

 Team leader;

 Institutional/Human resource expert;

 Water & wastewater operational experts;

 Hydraulic and process designers;

 NRW reduction experts;

 Social and gender experts, and

 Economist/financial expert 315. Based upon the above, an indicative cost would be INR14m ($0.25m) per year, or $1.25m over a four year period.

15.5 Implementation Programme 316. We understand that the Investment Program is for a period of 7 to 8 years and will comprise of three tranches:

 Tranche 1 - four years from 2013 to 2016;

 Tranche 2 - four years from 2015 to 2018, and

 Tranche 3 - four years from 2017 to 2020 317. Our understanding is that the total investment will be $215million, inclusive, with an ADB share of $150million; the remainder being from the Government of Karnataka.

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Table 43: Implementation Programme

2012 2013 2014 2015 2016/20

Q Q Q Q Q Q Q Q Q Q2 Q3 Q4 Q1 Q2 Q3 Q4 2016 2017 2018 2019 2020 1 2 3 4 1 2 3 4 1 Preliminary Activities

Submit Final Report

ADB Fact Finding Mission and Approve

loan etc Establish PMU and PIUs

Establish IWRM Project Management Unit Draft contract for Design and Supervision

Contract Appoint D&S consultant when loan

approved Implementation Phase TRANCHE 1 INVESTMENT

Prepare DPRs and works contracts

Appoint contractors

Treatment Plant & Strategic network 2 year construction period construction O&M Phase 5yr extended O&M phase

Wastewater networks 2 year construction period

Period in which ULBs meet performance

criteria Potable water network enhancements and rehab. Start date dependent upon ULB 2 year construction period.

meeting performance criteria TRANCHE-2 INVESTMENTS

Tranche-2 ULB Preliminary Feasibiluty Studies and Construction Works Works Tendering TRANCHE-3 INVESTMENTS

Tranche-3 ULB Preliminary F Studies & Construction

Works Tendering Works

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16 DESIGN & MONITORING FRAMEWORK

318. A Design and Monitoring Framework matrix is provided below.

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Cases of waterborne diseases 1 in a year – based on Cases 33 11 36 13 Around a 50% reduction can be expected household survey

Primary sector income in a 2 Rs Not recorded on household survey year

Measuring of Outcome As at end of 2017

Population with improved 100% access to service, but assume 95% water and 80% sewer take-up rate access to water supply (at GoI 1 people 214,352 65,000 32,500 14,380 Standard) – taken to be a ULB 437,000 99,000 90,000 26,000 652,000 95% water supply Population with improved access to Sanitation – taken to 2 people 180,507 39,083 27,482 0 368,000 83,000 76,000 10,000 537,000 80% be connected to a public sewer Population with improved 3 people Not applicable to Investment access to SWM Operating ratio in ULB and 4 state agencies for service unit 24% 57% 34% 24% Target 90% with tariff increase deliveries Frequency of publishing 5 acceptable audited accounts unit Annual Annual Annual Annual Annual Annual Annual Annual Annual Annual on time Planning, designing and 6 monitoring of urban services Unit 0 0 0 0 100% 100% 100% 100% 100% 100% using database Measuring the outputs As at end of 2017

Number of WTP and/or tube Bulk 7 Unit 3 1 1 3 1 1 1 6 As required wells supply Volume of water production – 8 measured as “water into Mld 39.2 5.1 4.8 1.3 81.2 15.0 15.0 3.3 114.5 For 135lphd supply” i.e. excluding process water

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Target Values as a result of: Measuring Items Base-line Ref Units Tranche 1 Investment Road Map Numerical relationship Davangere Ranebennur Harihar Byadgi Davangere Ranebennur Harihar Byadgi All

Water supply pipes – as 485 78 55 77 537 151 129 93 910 9 Km For 95% owned by ULB As best able to assess from available data Including rehabilitation of existing coverage 10 Number of households served h/h 42,870 9,282 6,527 3,154 87,473 19,791 18,079 5,128 130,471 11 Level of un/accounted-for % 47% 23% 36% 23% Long-term (2031) target is 16% Increasewater in the volume of 12 Mld -- - - - 0 0 0 4.6 4.6 sewage treatment facilities Capacity for 13 Sewer networks installed Km Current length not accurately known 0 +270 +11 +13 +52 +346 80% coverage Numbers of household in MFF towns 14 connected to septic h/h 36,101 7,817 5,496 0 73,661 16,666 15,224 2,051 107,602 tanks/sewers Increase in numbers and 15 Tonnes Not applicable capacity of sanitary landfills Number of major collection 16 Unit equipment Currently plant hired through contractors. Some equipment to be purchased in current on-going projects. Number of transportation Plant “actually” purchased through current on-going investments to be assessed and requirements assessed in Phase 2 of project 17 Unit equipment / vehicle Number of household 23 captured by a sex- Unit 0 0 0 0 MFF plan to achieve Indian Utilities target of 7 staff per 1000 connection-utility optimum disaggregated GIS database Number of O&M staff /1000 Negligible connections – taken as full Long term target to be 1 staff member per 1,000 customers, with an operational to 25 Unit use 0.8 2.5 2.7 time equivalents as staff not administrative staff ratio of 5:1. Contractors full time for UWSS Number of ULB staff trained 26 Unit 0 0 0 0 15 8 8 5 36 Pro rata on project planning and design Number of ULB staff trained 27 Unit 0 0 0 0 Included in above as Asset Management department on project implementation Number of ULB staff trained 28 staff 0 0 0 0 200 83 83 55 421 Pro rata on O&M Rs Rs. 80/ 29 Water tariff billing rate Rs/Kl Rs.175/M Rs 120/M Rs.10/Kl Rs.10/Kl Rs. 7/Kl Rs. 7/Kl - 120/M M

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Target Values as a result of: Measuring Items Base-line Ref Units Tranche 1 Investment Road Map Numerical relationship Davangere Ranebennur Harihar Byadgi Davangere Ranebennur Harihar Byadgi All Rs./month 30 Sewerage tariff billing rate 0 15 – 60 0 0 60 90 105 120 - Per hh Waste management tariff 31 Rs/unit Not applicable, currently 0% billing rate % of Property tax billing rates - Self 32 Rateable 15-20% 15-20% 15-20% 15-20% To be re-assessed for improved service provision assessment system in place value 85% 85% 85% 85% 85% 85% 33 Water tariff collection rate % 82 51 50 76

85% 85% 85% 85% 85% 85% 34 Sewerage tariff collection rate % NA NA NA NA

Water management tariff 35 % Not applicable, currently 0% collection rate 36 Property tax collection rate % 86% 78% 62% 99% 85% 85% 85% 85% 85% 85%

ULBs implementing accrual based accounting - 40 Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Assumed “yes” Fund based accounting system under KMRP

ULB publishing the financial 41 ULB Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes statement

Number of PPP project developed & Contractors used for minor works such as mains and sewer Proposal for ULBs to associate in SPV service provider with PPP Co-Management contract. Various 42 Project implemented. repairs, buildings maintenance. other PPP specialist contracts e.g. NRW reduction

Figure 6: Design & Monitoring Framework

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17 FINANCIAL MANAGEMENT AND PROCUREMENT CAPACITY ASSESSMENT

17.1 Introduction 319. Financial Management Assessment (FMA) is an attempt to determine the capacity of the executing and implementing agencies to effectively manage their financial resources. Such a capacity is critical for the success of the programme. FMA involves a review of the accounting system, reporting, auditing, internal controls, cash disbursement and cash flow disbursement arrangements. 320. The proposed IWRM Project Management Unit, Section 5.2, is concerned with the delivery of the institutional and technical aspects of the project and, as such, has no involvement with the loan, its disbursement, or associated financial matters except for the overall improvement of the ULB financial management.

17.2 Program Management Unit (PMU)

17.2.1 Executing Agency – PMU, KISWRMIP 321. UDD department of the Government of Karnataka looks after the urban development. As for other ADB assisted and other externally aided projects, the KUIDFC will be the PMU for this Program.

17.2.1.1 Funds Flow Arrangements 322. Funds received from ADB or any other donor agency will be received through Government of Karnataka, which in turn will receive funds from Government of India (GoI). 323. The borrower will be State Government and the KUIDFC will house the Programme Management Unit.

17.2.1.2 Staffing and Organization 324. KUIDFC (PMU) financial functions are under the responsibility of a General Manager (Finance) who is assisted by support staff. Finance staff is trained inter alia in ADB procedures.

17.2.1.3 Accounting Policies and Procedure 325. KUIDFC (PMU) program accounts are prepared as per the accepted government accounting standards which are generally compatible with international accounting standards duly disclosing the generally accepted accounting policies. 326. Important program documents are retained on a permanent basis and are preserved for several years as per the GoK rules.

17.2.1.4 Segregation of Duties 327. Separate responsibilities for budget, payment, recording, reporting and audit are assigned to separate groups of officers and staff.

17.2.1.5 Budgeting System 328. KUIDFC (PMU) prepares the budget once in a year according to financial year (April-March) following an assessment of funds requirement for various activities in terms of physical and

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financial targets. General Manager (Finance) with support of the PIUs prepares the budget for approval by the Empowered Committee. 329. Actual expenditure is compared with budget on a regular basis. PMU also prepares monthly financial reports for comparing actual against budget figures and monthly progress reports on program execution to monitor physical and financial progress of program execution. The budget variances are reportedly discussed in monthly meetings. A revised budget is prepared whenever necessary.

17.2.1.6 Payments 330. Invoice-processing and payroll preparation procedures follow the GoK procedures.

17.2.1.7 Policies Procedures 331. Accrual basis, recognizing significant items of income and expenditure following the Indian Accounting Standard as adapted by the Institute of Chartered Accountants of India will be adopted for program accounts.

17.2.1.8 Cash at Bank 332. Program Director of PMU is the Authorized signatory of cheque payments.

17.2.1.9 Safeguard over Assets 333. There are adequate safeguard over assets under the GoK rules. Annual physical verification of assets will be introduced and assets insured depending upon the nature and cost of assets.

17.2.1.10 Other Office and Implementing Entities 334. For each of the sub-project towns there will be a separate sub-project implementation unit (PIU), headed by a Program Manager reporting to PMU. Flows of funds to PIU and its town units will be through the PMU. PIUs are the first layer of accounting with consolidation of accounts done at the PMU. In addition to the financial statements, monthly and quarterly internal financial reports which are useful to the management for decision making purpose will be prepared.

17.2.1.11 Internal and External Audit 335. Internal audit system will be extended by KUIDFC (PMU) to this Program as well. 336. The Annual Statutory Audit is conducted by Comptroller and Auditor General of India (CAG). Program accounts will be audited by an external firm of Chartered Accountants empanelled with the CAG.

17.3 Conclusion and Recommendations 337. KUIDFC (PMU) thus has the systems and procedures in place to manage the proposed investment.

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Table 44: Summary of PMU Assessment

Area of Assessment Findings

 The EA is the Karnataka Urban Infrastructure Development Finance Corporation (KUIDFC). KUIDFC is staffed by drawing personnel from Executing Agency (EA) the state finance department, line agencies and contract employees as and Implementing required. Agency (IA)  The IAs are the ULBs of state government under Section 4 of the Karnataka Municipalities Act (KMA). The financial assessment has been done for sample ULBs, including Davangere, Ranebennur, Harihar and Byadgi.  KUIDFC has managed two ADB financed projects, Karnataka Urban Infrastructure Development Project (KUIDP) and Karnataka Urban Major Experiences of Development and Coastal Environment Management Project EA and IA in Managing (KUDCEMP), in addition to NKUSIP. ADB Financed Projects  KUIDFC is implementing Project 1 and Project 2 under NKUSIP. The average annual loan utilizations are $3.4 million for loan 2312 and $15 million for loan 2638.  Loan proceeds under Programme will follow the existing fund flow arrangement for loan 2312 and loan 2638.  ADB disburses the loan proceeds to the Government of India (Government) account in the Reserve Bank of India (RBI).  Government shall forward lend the loan proceeds on back to back basis to Government of Karnataka (GoK). GoK provides funds through Fund Flow budgetary support in advance. Arrangements  KUIDFC, as a state nodal agency, will manage loan proceeds through direct payment procedures, statement of expenditure procedures, and reimbursement procedures. The Investment Program ULBs, being the project implementation units (PIU), will receive funds from KUIDFC. Expenditures are consolidated monthly by KUIDFC and reimbursement claims are then preferred to ADB through Controller of Aid, Accounts and Audit (CAAA), Department of Economic Affairs (DEA), Ministry of Finance, New Delhi. Organization and  There are staff at KUIDFC solely designated for KISWRMP, among Staffing of EA and IAs them, are finance officers / analysts with relevant experience and qualifications.  KUIDFC accounts are maintained on ERP platform of TALLY 9 accounting software based in Indian accounting standards which compare well with international standards. The accounting system is Accounting Policy and maintained as per Companies Act, 1956. KUIDFC‟s information system Procedure and is computerized with the accounting system being maintained in Information System “TALLY” accounting software.  There are established procedures for recording the transactions, record keeping and reports, and cost accounting (including cost control and analysis) at KUIDFC and the ULBs.  Authorization to execute a transaction, recording of the transaction; and Segregation of Duties custody of assets involved in transaction are performed by different in EA persons.  The functions of ordering, receiving, accounting for, and paying for goods and services are segregated.

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Area of Assessment Findings

 KUIDFC prepares the budget once in a year according to financial year following an assessment of funds requirement for various activities – in terms of physical and financial targets for the financial year. Finance manager prepares the Budget which is approved by Managing Director. Actual expenditure is compared with budget on regular basis. KUIDFC Budgeting System in also prepares monthly financial reports comparing actual against EA and IA budget figures and explanations are required for significant variations from the budget. Monthly progress reports provide information about stage of project execution.  ULBs prepare budgets once a year according to financial year. The Accounts Section prepares the budget which is then approved by Municipal Commissioners and Municipal Councils. Actual expenditures are compared to budget for significant variations.

Payments in EA  All bills and invoices are stamped PAID.

 Two authorized signatories from the Managing Director and the General Manager are required for issuance of all check payments at KUIDFC.  Single authorized signatory from the Municipal Commissioner is Cash at Bank in EA required for issuance of all check payments at the ULBs.  KUIDFC and the ULBs maintain adequate, up-to-date cashbooks, recording receipts and payments. Bank and cash are reconciled on monthly basis.  The fixed assets register exists, following the laws and rules. Safeguard over Assets  KUIDFC assets are covered under insurance depending upon the by EA and IAs nature and cost of assets.  Except for vehicles, ULBs do not insure for other assets.  KUIDFC has established controls and procedures for flow of funds, Other Offices of EA financial information, accountability, and audits in relation to its Regional Office and Divisional offices.  Internal audit of KUIDFC is outsourced to an Indian firm of Chartered Accountants. The professional firm for internal audit reports Managing Director.  Local fund auditor based in the ULB does the pre-audit of all receipts Internal Audit in EA and payments. A professional firm of Chartered Accounts engaged by KUIDFC will complement the Regional Office Assistant General Manager Finance (AGM) to conduct in-house internal audit of the ULBs.  Local fund auditor reports to Municipal Commissioner; AGM reports to Executive Director.  The Annual Statutory Audit is conducted by a firm of Chartered Accountants different from the firm conducting internal audit and is appointed by Comptroller and Auditor General (CAG) of India under the Companies Act 1956. In addition to the Annual Statutory Audit, CAG also conducts audit on the base of the Statutory Audit Report. The CAG External Audit in EA will also conduct expenditure Audit, Performance Audit from time to time. The audit report issued by CAG is presented before the state legislature. Detailed audit guidelines are provided by the CAG.  All external audits are outsourced to professional firms by the ULBs.  There are no major audit recommendations that need to be implemented.

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Area of Assessment Findings

 Financial Statements of the ULBs are prepared in accordance with Indian accounting standards (IAS), as issued by the Institute of Chartered Accountants of India and in the format as prescribed by the Companies Act, 1956 and under generally accepted accounting principles. Financial statements are prepared implementing unit wise, Reporting and funding source wise and project wise. Project wise financial statements Monitoring in IA are submitted to KUIDFC on a monthly basis.  In addition to the financial statements, monthly and quarterly internal financial reports which are useful to the management for decision making purpose are also prepared.  Financial reports are prepared on the excel spreadsheet on the basis of the accounting report generated through automated accounting system.

17.1 Procurement Capacity Assessment 338. As discussed above, the KUIDFC is mandated to execute new works and to make improvements to existing water sector and other works in Karnataka. The role for the water sector is partly performed also by the KUWS&DB.

17.1.1 Expected Procurement 339. Under first tranche of the investment programme, procurement will primarily consist of:

 One international competitive bidding works contract for water and wastewater treatment plants and, we recommend, for the strategic water network, to be implemented on design, built and operation basis with a 5year O&M period;

 Two national contracts for wastewater and water distribution network contracts on a build only, and a design supervision consultancy contract.

 Design and construction supervision consultants to support the KUIDFC in implementation and management of the projects, and supervision of the works. The consultants will be recruited following ADB‟s QCBS selection method. 340. We have also proposed an IWRM Project Management Unit in the KUIDFC primarily to assist the KUIDFC and the ULBs implement the institutional changes. The Unit will be available to assist in the planning aspects of the contracts implementation, should the KUIDFC wish. 341. As discussed above the KUIDFC is well experienced and competent for the role now envisaged.

17.1.2 Assessment of the National Procurement Environment 342. The proposed project is a state-level project and state rules and regulation will govern its implementation. The procedures followed and bid documents used by the KUIDFC are comparable to that of foreign assisted projects. 343. However, the Government of Karnataka will (i) use ADB‟s standard bid documents and procedures for procurement of works contracts; and (ii) recruit consultants using ADB‟s consultant selection procedures. 344. The KUIDFC advertise procurement information in the leading newspapers of the State and India, and also on its website and will follow ADB‟s policy and the guidelines for disclosure of procurement information.

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17.2 Works Contractor and Consultancy Capacity 345. The works proposed are common in Karnataka, and in India. With the exception of mains rehabilitation, no special techniques are envisaged and we would not expect any problems arising from insufficient contractors and consultants wishing to tender, and so not provide for fair and competitive bidding. 346. From our site visits, we would comment that we do have concerns about the quality of workmanship especially for smaller diameter water mains. Indeed, one of the reasons for the current investments is due to poor quality workmanship resulting in mains being replaced well before the end of their expected asset life. The issue is due as much to poor supervision as to poor workmanship. Both will need special attention if the full benefits of the investment are to be obtained. 347. Mains rehabilitation by “no-dig” technology is available in India, but has had limited use in Karnataka. Arguably, in the expected sub-project towns there may be no financial benefit by bringing the required expensive plant to the state. The advantages and disadvantages can only be considered sub-project by sub-project in consultation with the contractor.

17.2.1 Client/Contractor Partnerships 348. One of the reasons we are suggesting that the treatment plant design and build contracts are extended to the strategic network is in order to make best use of the contractor‟s experience and knowledge about optimum on-site techniques such as no-dig. 349. We do strongly suggest that the KUIDFC considers the benefits to be derived from “partnership” type contracts which are common now throughout the developed world and within which “risk” is more equitably shared between client and contractor.

17.2.2 Performance Guarantees 350. We would suggest that strong, enforceable OPEX and process Performance Guarantees are used in the contracts, and exercised.

17.2.3 Karnataka Competency for Process Technology 351. Building upon the high level of IT competency in Karnataka and with the movement away from low-tech treatment processes such as stabilisation ponds to more technically complex processes such as Sequential Batch Reactors, we have suggested in the Road Map that the state Government promotes a competency for treatment process control and monitoring.

17.2.4 Operational Contracts 352. The KUIDFC has expressed a strong wish for PPP operational contracts to be introduced for the O&M of the sector assets. 353. Before the operation and maintenance of the facilities can be successfully introduced, four elements must be in place:

 A sufficient number of experienced and competent operators to ensure a viable tendering process;

 A customer service base of sufficient size to attract competent operators;

 A competency in the client ULBs to be able to manage the contracts, and

 Adequate data available to the bidding operators to enable them to assess the risk and make a viable bid without passing undue risk cost through to the client ULB.

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354. We would respectfully suggest that perhaps only the first of these is currently present in Karnataka. In our opinion, full scale operation of the water and wastewater systems by a contractor is a medium-term objective, and not for immediate introduction. 355. An objective of the MFF will be to put in place the measures to bring the ULBs to a position to be able to issue a tender for a PPP operator, i.e. to ensure that there will be available to bidders the data that they will require to be able to make a competitive bid and that the ULBs have the competency to project manage such contracts.

17.3 Summary Assessment and Recommendations 356. Based on the above assessments, the strengths and weaknesses of the procurement and contractor capacity can be summarised below:

17.3.1 Strength 357. The procurement procedures of the KUIDFC meet requirements. The KUIDFC is experienced and competent for the tasks that will be required of it. 358. The KUIDFC has a nucleus of qualified staff which can be supplemented if required from the pool of suitable people that is available in Karnataka. Being a corporate body, the KUIDFC enjoys the flexibility to adopt professional approach in management and administration; and this enables KUIDFC to recruit the required human resources from open market. On the other side, as a government undertaking, it comes under the oversight mechanism of the government, which are quite robust and time tested. 359. There are adequate consultancy and contractor companies in the state for the expected workload.

17.3.2 Weakness 360. The major weakness is the apparent quality of workmanship and by default the site supervision, and lack of Performance Guarantees in contracts. 361. From our discussions, the sector is traditional and shows reluctance to move away from the traditional consultant/contractor relationship. For a major long-term project, such as KISWRIP, advantages could be gained by entering into long-term partnerships with contractors and contractors.

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18 TENDER EVALUATION AND SELECTION PROCEDURES

18.1 Consultant Proposal Evaluation Procedure 362. The following is an outline of the procedure shall be followed for the appointment of consultancy services, with due attendance to ADB Procurement Rules:

 Upon approval to proceed with sub-project, the PIU will issue an Expression of Interest Notice (EoI), prepare a shortlist, finalise the Request for Proposals (RfP) and Evaluation Criteria, and submit to the Consultant Services Committee who, on approval, shall submit to the ADB;  The ADB will review and approve;  The PIU will issue Tender Dossier to shortlisted consultants who will prepare their Technical and Financial Proposals, and submit to the PIU;  Technical Proposals will be opened and evaluated by Consultancy Services Committee. Pre- bid site meetings will be held as required and tenderers questions answered;  The Technical Evaluation Report shall be submitted to the ADB for approval;  Financial Proposals will be opened in the presence of bidders and the Consultancy Services Committee will prepare their Report and submit to the ADB for approval to negotiate and let a contract;  Upon agreement with Preferred Consultant, a draft contract will be submitted to the ADB and, upon approval, the contract signed.

18.2 Works Contract Evaluation Procedure 363. The following is an outline of the procedure shall be followed for the appointment of works contractors, with due attendance to ADB Procurement Rules:

 Upon approval of a sub-project, the KUIDFC, KUWS&DB or an appointed consultant will prepare a Tender Dossier which will be submitted to the ADB for review and approval. The ADB may appoint consultants for this task;  Upon approval from the ADB, the PIU will issue a EoI Notice, prepare a shortlist of suitable works contractors, finalise the RfP and Evaluation Criteria and submit to the Technical Evaluation Committee who, on approval, shall submit to the ADB;  The ADB will review and approve;  The PIU will issue the Tender Dossier to shortlisted consultants who will prepare their Technical and Financial Proposals, and submit to the PIU;  Technical Proposals will be opened by the Technical Evaluation Committee and be evaluated by a Team appointed by the Committee. The Evaluation Team might comprise or include consultants. Pre-bid site meetings will be held as required and tenderers questions answered;  The Technical Evaluation Report, prepared by the Evaluation Team and endorsed by the Technical Evaluation Committee, shall be submitted to the ADB for approval;  Financial Proposals will be opened in the presence of bidders and the Technical Evaluation Committee, assisted by the Evaluation Team, will prepare their Report and submit to the ADB for approval to negotiate and let a contract;  Upon agreement with Preferred Contractor, a draft contract will to be submitted to ADB and, upon approval, the contract signed.

18.3 Tranche-1 Works and Supervision Contracts

18.3.1 Design and Works Supervision Contract 364. We propose that a single contract be awarded by the KUIDFC for:

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 Preparation of the DPRs;

 Preparation of the Works Construction Contracts;

 Review of Treatment Plant and strategic network proposal detailed designs prepared by the Plant Works Contractor, and

 All normal site supervisory and associated activities. 365. The contract will be prepared by the KUIDFC with the assistance of this PPTA Phase II team of national20 experts, and be entered into by the KUIDFC and the appointed contractor.

18.3.2 Plant Construction & Strategic Network 366. We propose that the procurement of all Tranche-1 water and wastewater treatment plants be in a single two-year design and construct contract with an extended five-year operational period. The contract is to include for all raw water transmission pipelines and pumping stations. 367. The purpose of the operational period will be to enable local operators to become fully familiar with the works prior to their transfer to the service provider at the end of the 5yr operational period. The extended period will also permit a full verification of the contract performance guarantees for process and for OPEX performance. 368. We propose that the contract includes for the strategic network. Our suggestion would be for the contractor to also design the strategic network elements. We agree that this may not be acceptable to stakeholders. 369. As a single contract is proposed for all four Tranche-1 ULBs, the contract will require to be entered into between a delegated representative of the four ULBs and the works contractor.

18.3.3 Wastewater Network Construction 370. In order to meet the requirement of the KUIDFC that only the IWRM components of the investment be disbursed initially, we propose a 2yr network contract for the construction of the all proposed wastewater network enhancements and rehabilitation. 371. The detailed design will be prepared by the Design and Works Supervision Contractor. 372. As a single contract is proposed for all four Tranche-1 ULBs, the contract will require to be entered into between a delegated representative of the four ULBs and the works contractor.

18.3.4 Water Network Construction 373. We propose a single works contract for the construction of the water distribution network enhancements and rehabilitation to provide for a continuous water supply. 374. The single contract will comprise a separate component for each of the four Tranche-1 towns. Each component will commence only when a ULB meets the required performance criteria. Alternatively, four smaller contracts can be prepared. 375. The detailed design will be prepared by the Design and Works Supervision Contractor. 376. If a single contract is provided for all four Tranche-1 ULBs, the contract will require to be entered into between a delegated representative of the four ULBs and the works contractor. If separate contracts are preferred, the contract will be between the appropriate ULB and the contractor appointed for that ULB. 377. Conventionally, a contract is for the construction of fixed elements, e.g. a certain length of pipes of a known diameter to be laid in a specified time. As an alternative, we are suggesting that

20 The scope of the PPTA International experts includes only for Phase 1.

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a “Schedule of Rates” contract be adopted. In such a contract, bidders enter their required prices in a matrix of pipe sizes for different locations e.g. major road, secondary or un-surfaced ground. 378. As a ULB meets the performance criteria or a section of main is assessed to need replacement, the contractor will commence the work, and be paid according to his schedule of rates. The schedule of rates principle can also be adopted for mains repairs, meter installation etc. The procedure might be innovative and an opportunity for Karnataka to lead, but a Schedule of Rates approach is common throughout the UK, for example.

18.4 Performance Contracts 379. We recommend at that all contracts are performance based, with performance to be measured by:

 Physical indicators e.g. length of mains laid and treatment process units constructed;

 Process and OPEX Performance Guarantees for the treatment works;

 Hydraulic and purity for water mains and water retaining structures;

 CCTV inspections of sewers for line, freedom from blockages etc.

18.5 Contracts for Tranche-2 and 3 Investments 380. We would recommend the same approach for Tranche-2 and 3 investments:

 A design and supervision consultant;

 A design and build works contract for treatment works and strategic network mains that includes a 5 yr operational period. The contracts to be “bundled” to include at least for all works in a ULB, preferably several ULBs on a geographical basis;

 A wastewater network contract, and

 A water distribution network contract. 381. We would suggest that the wastewater and distribution network contracts also be let for a number of ULBs on a geographical basis.

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19 CAPACITY BUILDING

19.1 Requirement 382. A need has been identified, and addressed, in the Institutional Road Map for capacity building in the ULBs as the entities responsible for service delivery. 383. The need is across all aspects of the service delivery but especially in the O&M of the service assets and in the planning and management of the service. 384. Wider, the capacity building envisaged includes GIS provision, Management Information System implementation, Human Resources, training and development, Customer Relation initiatives, Pro-Poor initiatives, Asset Inventory and Management System implementation, Financial Information System upgrade including billing for metered accounts, . 385. Capacity building requirements include:

 GIS drawings to be prepared for all ULB underground assets where not available currently, and for all new assets procured;

 Implement Management Information Systems based on electronic information technologies;

 Human Resources Development tasks to be undertaken include conducting an overall assessment of existing conditions of institutional setup and human resources management of each department; preparing and helping ULB to implement a Human Resource Management Plan, assisting with procurement and introduction of new HR software and preparation of general training plans and implementation details;

 Improve Customer Services with the publication of Customer Service levels, by explanation of service policies and tariffs and by informing customers of interruptions to supplies;

 Prepare asset inventories and asset management plans in connection with maintenance and rehabilitation/replacement of utility assets and to assist with implementation of annual AMPs;

 Introduce international best practice of maintaining above-ground and buried including for planned preventative maintenance and Emergency Response Planning;

 The acquisition and initial operation of a new computerized billing and accounting systems designed for meter accounts and to include for debt management;

 Continuous review and revision of water supply charges and billing and income collection systems to achieve full operating cost recovery;

 Modernize the financial management arrangements of the ULB with particular regard to budget setting and control, and

 Review operational practices and procedures for improved operational performance and efficiency.

19.2 Establishment Size 386. In the Road Map, we have suggested organisational structures with establishment sizes in the four Tranche-1 sub-project towns. As to be expected, the required increase in establishment is significant requiring almost a doubling of existing capacity. 387. As an indication of the establishment required for proficient water and wastewater service delivery, the World Bank: “IBNET Water Supply and Sanitation Performance Blue Book” suggests an establishment of around 1 staff member per 1,000 customers. Practice also suggests an operational to administrative staff ratio of 5:1.

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19.3 Training Budget 388. Apart from stating that a training programme will be essential, until the modality for service provision amongst the state ULBs is determined – i.e. by a single ULB, a SVP or even by contractor, and a Human Resource and Development Plan is produced, a training budget cannot be prepared. 389. Training would need to be provided primarily for managers, engineers and treatment plant operators in public health engineering, network management, water and sewage treatment plant operation and maintenance. 390. As well as specific in-house training, courses are available at training institutions such as All India Institute of Hygiene & Public Health (AIIH&PH), Institution of Public Health Engineers, Kolkata, Metro Water Training Centre, Chennai Metropolitan Water Supply, & Sewerage Board, and Municipal Corporation of Greater Mumbai, Civic Training Institute. 391. The Institute of Public Health Engineering Kolkata charges a fee of around Rs.150,000 per course, the class size (batch) being more or less 25 participants. The fee includes training materials and working lunch. The Institute does not have hostel facility. However, it will out-source board and lodging facilities for which, by a rough estimate, the cost per participant per day will be around between Rs.750 at government accommodation, inclusive of food. 392. As an indication, for the four Tranche-1 sub-project towns, the suggested establishment is 540. Assuming that of these 450 require intensive training, an indicative training cost would be around $0.05M. This is the sum included into the Tranche-1 investment. 393. Our initial thoughts would have been for ULBs to enter into a Co-Management Contract for the service provision and the training of ULB staff to be a component of that Contract. As discussed elsewhere, the four Tranche-1 sub-project towns are unable currently to provide the required performance data and asset histories for competitive bidding and so, initially, such a Contract and modality for capacity building is not possible. A similar situation can be expected to exist in the other Karnataka towns 394. In discussion with the KUIDFC, the proposal is to first establish a IWRM Project Management Unit which will be adequately resourced with experienced people, or with people who will be trained, and the Unit will act as a “centre of excellence” for the ULBs. 395. As the SPV service providers become established, data can be collected for Co- Management contract bidding and/or a Training Plan can be prepared and implemented.

19.4 Equipment and Business Systems 396. The ULBs as service providers will require both plant and equipment to be able to maintain the equipment procured under the investment and the necessary business systems for the management of the service. 397. Again, as with the training requirement the requirements cannot be finalised until the service provision is agreed by the ULBs. 398. Apart from stating that a training programme will be essential, until the modality for service provision amongst the state ULBs is determined – i.e. by a single ULB, a SVP or even by contractor, and a Human Resource and Development Plan is produced, a training budget cannot be prepared. 399. Training would need to be provided primarily for managers, engineers and treatment plant operators in public health engineering, network management, water and sewage treatment plant operation and maintenance.

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400. As well as specific in-house training, courses are available at training institutions such as All India Institute of Hygiene & Public Health (AIIH&PH), Institution of Public Health Engineers, Kolkata, Metro Water Training Centre, Chennai Metropolitan Water Supply, & Sewerage Board, and Municipal Corporation of Greater Mumbai, Civic Training Institute. 401. The Institute of Public Health Engineering Kolkata charges a fee of around Rs.150,000 per course, the class size (batch) being more or less 25 participants. The fee includes training materials and working lunch. The Institute does not have hostel facility. However, it will out-source board and lodging facilities for which, by a rough estimate, the cost per participant per day will be around between Rs.750 at government accommodation, inclusive of food.

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20 SAFEGUARDS

20.1 Introduction

402. The following is a summary of the Reports of the Safeguard‟s experts as contained in Annex 5, 6 and 7. The results and conclusions of the surveys in the four sub-project towns can be considered as being typical of those across the state. 403. Reference is to be made to the Annexes for further details of proposals and safeguard requirements to be met.

20.2 Social Analysis

404. One of the important Millennium Development Goals is to halve the number of people without sustainable access to safe drinking water and sanitation by 2015. 405. Social analysis in the sub-project towns will be performed with these broad goals in view as well as the overall program objective of improved urban services and quality of life in cities and towns of Karnataka. The rationale for conducting social analysis is to inform the project design team of this aspect in the asset creation process and so help accurately and systematically monitor and evaluate progress towards attaining targets set for project towns. 406. Data from baseline surveys defines the existing situation and starting point in quantitative terms, characterizing the present gaps, needs and preferences of households. This information helps understand household behaviour which may be deployed for policy formulation e.g. tariff setting while taking into account affordability levels and willingness to pay, customer preferred service levels, designing incentives / pro-poor policies, target-setting and defining baseline indicators against which progress-monitoring and post-intervention monitoring can be conducted. 407. Social analysis for the Tranche-1 investment is based on household surveys conducted in the four sub-project towns. Details are provided in Annex 6. Two interesting points to arise are that (i) a fully continuous water supply is not seen as essential and (ii) people are concerned about the cost of connections to the water mains and sewers. The latter, in particular, requires to be addressed if the full benefit from the investment in sewers and wastewater treatment works are to be derived.

20.3 IWRM Project Management Unit

408. As a positive move to ensure equality and fairness for all regardless of gender, social status or disability, we have recommended that a focused small team be established in the proposed IWRM Project Management unit specifically for that purpose.

20.4 Environment Assessment

409. ADB‟s Safeguard Policy Statement, 2009, requires the consideration of environmental issues in all aspects of the Bank‟s operations, and the requirements for Environmental Assessment are described in detail in ADB Environmental Assessment Guidelines, 2003. This states that ADB requires environmental assessment of all project loans, programme loans, sector loans, sector development programme loans, financial intermediary loans and private sector investment operations.

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410. The nature of the assessment required for a project depends on the significance of its environmental impacts, which are related to the type and location of the project, the sensitivity, scale, nature and magnitude of its potential impacts, and the availability of cost-effective mitigation measures. Projects are screened for their expected environmental impacts and are assigned to one of the following categories:

 Category A: Projects that could have significant environmental impacts. An Environmental Impact Assessment (EIA) is required.

 Category B: Projects that could have some adverse environmental impacts, but of less significance than those for category A. An Initial Environmental Examination (IEE) is required to determine whether significant impacts warranting an EIA are likely. If an EIA is not needed, the IEE is regarded as the final environmental assessment report.

 Category C: Projects that are unlikely to have adverse environmental impacts. No EIA or IEE is required, although environmental implications are reviewed. 411. The nature of the works to be performed are unlikely to have major environmental impact but there will be some impact for excavation, carriage of spoil, noise and general interference during construction. In service, wastewater plants can be prone to causing nuisance by smell, flies etc. but for which ample mitigating measures are available. 412. The probability is that the majority of sub-projects will fall into Category B, for which an IEE will be conducted for each subproject, with a subproject being the water supply and sewerage infrastructure improvements proposed in a subproject town.

20.4.1 Sludge Management 413. A problem that does not exist currently in Karnataka is that of safe sludge disposal. 414. With few wastewater treatment works, the sludge that is produced can be disposed to land-fill or used by agriculture. As more and more plants come on stream, there will be an increasing amount of sludge produced. 415. There is a need for a sludge management policy to be developed by the state.

20.5 Resettlement Framework

20.5.1 Scope of Land Acquisition 416. Projects are to be formulated to minimize land acquisition and resettlement impacts, ideally by the use of municipal land. 417. For the Tranche-1 sub-projects, existing facility sites have been used as much as possible so as not to require land acquisition and result in resettlement impacts. There is no reason why such an approach cannot continue to be adopted.

20.5.2 Draft Resettlement Framework 418. With its focus on provision of urban infrastructure services, the KUIDFC complements GoI‟s policies and programmes for poverty reduction. The KUIDFC is expected to have a positive impact on the poor, chiefly in terms of environmental health benefits and productive time savings. 419. Direct benefits to the poor from the proposed interventions will also be from employment to local poor – by giving them priority for unskilled jobs; while indirect benefits include empowerment as a result of participation in project related activities. 420. Special attention is to be given to the benefits/opportunities to be derived by woman.

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421. The baseline socio-economic survey included for slum areas in the sample towns. The baseline reveals the status of the urban poor in terms of basic service access and will serve as the benchmark against which post-program benefits to the poor can be measured. The primary survey in these towns provides baseline data on the levels of service access by the poor in urban areas, which will help monitor progress and post-intervention impacts on the poor. 422. The resettlement principles adopted in this framework recognize the Land Acquisition Act, Karnataka, 1894 (with Amendment Act 68 of 1984), National Resettlement and Rehabilitation Policy, Govt of India as notified in 200721 and the relevant Asian Development Bank‟s (ADB) Safeguards Policy Statement (SPS) of 2009 and Operations Manual F2 on Involuntary Resettlement (2003). 423. The objectives of the National Rehabilitation and Resettlement Policy are as to:

 Minimize displacement and to promote, as far as possible, non-displacing or least-displacing alternatives;

 Ensure adequate rehabilitation package and expeditious implementation of the rehabilitation process with the active participation of the affected families;

 Ensure that special care is taken for protecting the rights of the weaker sections of society, especially members of the Scheduled Castes and Scheduled Tribes, and to create obligations on the State for their treatment with concern and sensitivity;

 Provide a better standard of living, making concerted efforts for providing sustainable income to the affected families;

 Integrate rehabilitation concerns into the development planning and implementation process; and

 Where displacement is on account of land acquisition, to facilitate harmonious relationship between the requiring body and affected families through mutual cooperation. 424. The objectives of ADB‟s policy on Involuntary Resettlement are to

 Avoid involuntary resettlement wherever possible;

 Minimize involuntary resettlement by exploring project and design alternatives;

 Enhance, or at least restore, the livelihoods of all displaced persons in real terms relative to pre-project levels, and

 Improve the standards of living of the displaced poor and other vulnerable groups. 425. Basic principles of ADB‟s SPS where involuntary resettlement is unavoidable prescribe preparation of Resettlement Plan (RP) as an integral part of project preparation at the earliest stage of project cycle. Following principles are adhered to while preparing RP.

 Involuntary resettlement should be avoided whenever feasible;

 Where population displacement is unavoidable, it should be minimized;

 All lost assets acquired or displaced will be compensated based on the principle of replacement cost;

 Each involuntary resettlement is conceived and executed as part of a development project or program. The displaced persons (DPs) need to be provided with sufficient resources to re- establish their livelihoods and homes with time-bound action plan in synchronization with civil works;

21 Gazette of India, Extraordinary, Part 1, Section I, dated the 31st October, 2007.

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 The DPs are to be fully informed and consulted in details;

 The absence of a formal title to land is not a bar to entitlements;

 The Displaced Persons are to be identified and recorded as early as possible to establish their eligibility, through a census, which serves as a cut-off date, and prevents subsequent influx of Encroachers;

 Particular attention must be paid to Vulnerable Households including those without legal title to land or other assets; households headed by women; the elderly or disabled; and indigenous groups. Assistance must be provided to help them improve their socio-economic status, and

 The full resettlement costs are to be included in the project costs and benefits.

20.6 Indigenous Peoples Development Framework

426. Indigenous peoples (IP) are defined as those having distinct social, cultural, economic, and political traditions and institutions compared with the mainstream or dominant society. 427. Scheduled Tribes are recognized as indigenous peoples in India. The Indian Constitution (Article 342) defines Scheduled Tribes as those with special characteristics such as (i) primitive traits, (ii) distinctive culture, (iii) shyness with the public at large, (iv) geographical isolation, (v) social and economic backwardness. 428. ADB Safeguard Policy Statement (2009) defines IPs as those with the following characteristics: (i) descent from population groups present in a given area before territories were defined; (ii) maintenance of cultural and social identities separate from dominant societies and cultures; (iii) self-identification and identification by others as being part of a distinct cultural group; (iv) linguistic identity different from that of dominant society; (v) social, cultural, economic and political traditions and institutions distinct from dominant culture; (vi) economic systems oriented more toward traditional production systems rather than mainstream; and (vii) unique ties and attachments to traditional habitats and ancestral territories. 429. Scheduled Tribes identified in the Tranche-1 sub-project towns are scheduled in Annex 7 – Social Safeguards. 430. The IPF sets out policy for indigenous peoples, together with screening and planning procedures. Indigenous People Framework is a policy and procedural framework for Indigenous People Plans that are to be developed for sub-projects, to be approved during program implementation. 431. The IP Policy Framework is based on the overall national and local policies and ADB‟s Policy on Indigenous Peoples as defined in the Safeguard Policy Statement (2009). The principal objectives are to: (i) ensure that IPs affected by any sub-project will benefit from the Program; (ii) ensure IPs‟ inclusion in the entire process of preparation, implementation, and monitoring of program activities; (iii) ensure that benefits from sub-projects are available to IPs more than or at least equal to other affected groups; this may require giving preference to IPs as vulnerable groups over others on certain benefits under the Investment Program; and (iv) provide a base for IPs in the area to receive adequate development attention. 432. The IPF is intended to guide selection and preparation of sub-projects to ensure that the aspirations, needs and preferences of affected indigenous peoples in the program area are taken into consideration. In recognition of the IP community‟s marginal status, the IPF seeks to offer development options while respecting/protecting their socio-cultural distinctiveness, through Indigenous Peoples Plan. The Plan aims at strengthening the existing capacity of the affected IP community to participate and benefit from Program interventions.

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433. Steps in IPP preparation include preliminary screening, Social Impact Assessment, benefit sharing and mitigation measures and monitoring; these are defined in detail in the IPF. 434. The IPF also provides consultation, participation and information disclosure processes for IPs, institutional arrangements for IPP preparation, IPP budget and procedures for monitoring and evaluation of IPP.

20.7 Consultation and Participation Plan

20.7.1 Overview 435. Stakeholder consultation and participation is envisaged as an intrinsic part of project preparation and implementation strategy. 436. Critical for project sustainability and thus maximising investment benefits, projects must be “owned” by the end beneficiaries which can only achieved when proposals are customer driven; not imposed i.e. a bottom–up approach sought through consultation and customer participation. The first stage of which was the household survey conducted in the four sub-project towns. 437. Stakeholder participation was sought for sub-project selection and prioritization and will continue through detailed design and during planning, implementation, and post-implementation phases.

Figure 7: Consultation in Davangere

438. The idea is to ensure that stakeholder needs are addressed and there is greater awareness of the benefits and „ownership‟ of the program among stakeholders, which in turn, is expected to ensure program sustainability. The consultation process so far has solicited inputs of a wide range of stakeholders, including state and ULB level government officials, KUIDFC and KUWS&DB engineers and other staff, NGOs, elected representatives, residents of sample towns, marginalized/vulnerable beneficiary groups, program affected persons, etc. with the idea of involvement of all interested parties. 439. The Consultation and Participation Strategy is meant to ensure that information is provided and feedback on the proposed project design is sought early, right from the project preparation phase, so that the views/preferences of stakeholders including potential beneficiaries and affected people can be adequately considered in project design, and continue at each stage of project preparation, processing, and implementation. 440. At the core of the philosophy for consultation and participation is the idea of providing adequate opportunities for consultation/participation to all stakeholders with a view to strengthening demand-responsiveness of the Program/sub-projects and inclusion of poor/vulnerable/marginalized population and project-affected persons in the project process.

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Relevant information about any major changes to project scope shall also be shared with beneficiaries, affected persons, vulnerable groups and other stakeholders. The Strategy is closely linked to the other sub-project Plans and Strategies. 441. The Stakeholder Consultation and Participation Strategy envisages provision of services and opportunities to marginalized/vulnerable beneficiary groups/project affected persons and strengthening their mobilization as well as participation in social and economic development processes. It will also support NGO capacity to plan and implement beneficiary and affected community/gender-focused proposals and facilitating awareness and ownership of development initiatives by civil society. The following steps are proposed for operationalising the Strategy:

 Stakeholder analysis (state and city level, other);

 Stakeholder consultation and participation;

 Information Disclosure / IEC on websites and through consultation workshops, meetings and other means;

 Recording and incorporation of stakeholder (including poor, marginalized, vulnerable groups), concerns, views and perceptions into project design and implementation process;

 Reporting changes in project design, selection of alternatives, mitigation measures, etc. as a result of consultation on websites and through other means. 442. Stakeholders are proposed to be consulted in a variety of ways – at state-level and city-level workshops, Focus Group Discussions with communities, discussions with the nodal department at state level and municipal officials, interviews of citizens, etc. at various stages in the project cycle. Monitoring by an NGO/research institution/independent institution is envisaged, using citizen report cards as a tool. Information disclosure (web-based and through means accessible by literate and non-literate stakeholders in the local language/dialect) shall be an intrinsic element of the consultation and participation and communication process.

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