Document of The World Bank

FOR OFFICIAL USE ONLY Public Disclosure Authorized Report No: 3 1142-IN

PROJECT APPRAISAL DOCUMENT

ON A

Public Disclosure Authorized PROPOSED CREDIT

IN THE AMOUNT OF SDR 96.5 MILLION (US$141.83 MILLION EQUIVALENT)

TO THE

GOVERNMENT OF INDIA

FOR IMPROVING HEALTH OUTCOMES THROUGH THE KARNATAKA HEALTH SYSTEM DEVELOPMENT AND REFORM PROJECT Public Disclosure Authorized July 15,2006

Human Development Sector India Country Management Unit South Asia Region

This document has a restricted distribution and may be used by recipients only in the performance oftheir Public Disclosure Authorized official duties. Its contents mav not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS

(Exchange Rate Effective July 20,2006) Currency Unit = Indian Rupee (Rs.) US$l.OO = Rs. 46.80 US$0.021362 = Rs.1.00 US$1.46997 = SDR 1

ABBREVIATIONS AND ACRONYMS

AEE Assistant Executive Engineer ANM Auxiliary Nurse Midwife ARI Acute Respiratory Infection BPL Below Poverty Line CAAA Controller Aid Accounts and Audit C&AG Comptroller and Auditor General of India CAS Country Assistance Strategy CFO Chief Finance Officer CHPD Center for Health Policy and Development CHC Community Health Centre cs Central Schemes css Centrally Sponsored Schemes DGS&D Directorate General of Supplies and Disposals DIR Detailed Implementation Review DHO District Health Officer DHS Directorate of Health Services DO Development Objective DoHFW Department of Health and Family Welfare DPA Deputy Project Administrators DPIO District Project Implementation Officer DPMU District Project Management Unit EA Environmental Assessment EMP Environmental Management Plan FM Financial Management FMM Financial Management Manual FMR Financial Monitoring Reports FY Fiscal Year Go1 Government of India GoK Government of Karnataka GP Gram Panchayat GSDP Gross State Domestic Product HC Health Commissioner HMIS Health Management Information System IBRD International Bank for Reconstruction and Development IDA International Development Agency IMR Infant Mortality Rate FOR OFFICIAL USE ONLY IP Inpatient KHSDP Karnataka Health System Development Project KHSDRP Karnataka Health System Development and Reform Project KSIHP Karnataka State Integrated Health Policy KSDL&WS Karnataka State Drug Logistics and Warehouse Society MCH Maternal and Child Health M&E Monitoring and Evaluation MDG Millennium Development Goals NCB National Competitive Bidding NFHS National Family Health Survey NGO Non Government Organization OD Organizational Development OOP Out-of-pocket OP Outpatient ORS Oral Rehydration Solution PA Project Administrator PGB Project Governing Board PEHFW Public Expenditure on Health and Family Welfare PHC Primary Health Centers PHU Primary Health Unit PHCF Public Health Care Competitive Fund PPP Private Public Partnership PRIS Panchayat Raj Institutions RCH-I1 Reproductive and Child Health Program-I1 Rs . Rupees SA Service Agreement SECAL Sector-specific Adjustment Loan sc Scheduled Caste SGEHFW State Government Expenditure on Health and Family Welfare SHG Self Help Groups SICF Service Improvement Challenge Fund SIL Specific Investment Loan SIP Service Improvement Plan SPHRU Strategic Planning and Health Reform Unit SPMU State Project Management Unit ST Scheduled Tribe THOs Taluk Health Officer TGEHFW Total Government Expenditure on Health and Family Welfare USMR Under-5 Mortality Rate UHIS Universal Health Insurance Scheme vcm Vulnerable Communities Health Plan WB World Bank ZP Zilla Panchayat

Vice President: Prahl C. Pate1 Country Director: Michael F. Carter Sector Director: Julian F. Schweitzer Sector Manager: Anabela Abreu Task Team Leader Paolo C. Belli

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.

INDIA Karnataka Health System Development and Reform Project

TABLE OF CONTENTS Page A . STRATEGIC CONTEXT AND RATIONALE ...... 4 1. Country and Sector Issues...... 4 2 . Rationale for Bank Involvement ...... 7 3 . Higher Level Objectives to which the Project Contributes ...... -7 B. PROJECT DESCRIPTION ...... 8 1. Lending Instrument ...... -8 2 . Project Development Objective (PDO) and Key Indicators ...... 8 3 . Project Components ...... 9 4 . Lessons Learned and Reflected in Project Design...... 13 5 . Alternatives Considered and Reasons for Rejection...... 14 C . IMPLEMENTATION ...... 14 1. Institutional and Implementation Arrangements ...... 14 2 . Monitoring and Evaluation ...... -14 3 . Sustainability ...... 16 4 . Critical Risks and Possible Controversial Aspects ...... 16 5 . Loadcredit Conditions and Covenants ...... 18 D. APPRAISAL SUMMARY ...... 18 1. Economic and Financial Analysis (see Annex 9 for a more detailed discussion) ...... 18 2 . Technical., ...... 19 3 . Fiduciary ...... 19 4 . Social ...... 21 5 . Environment ...... 22 6 . Policy Exceptions and Readiness...... -23 Annex 1: Country and Sector Background ...... 24 Annex 2: Major Related Projects Financed by the Bank and/or other Agencies in the Health or Health-Related Sectors ...... 28 Annex 3-A: Results Framework and Monitoring ...... 30 Annex 3-B: Quantitative Targets for the Health Sector Relative to the Time of the Project ...... 34 Annex 4: Detailed Project Description ...... 43 Annex 5: Project Costs...... 59 Annex 6: Institutional Arrangements ...... 60 Annex 7: Financial Management and Disbursement Arrangements ...... 64 Annex 8: Procurement ...... 77 Annex 9: Economic and Financial Analysis ...... 93 Annex 10: Safeguard Policy Issues ...... 109 Annex 11 : Project Preparation and Supervision ...... 113 Annex 12: Documents in the Project File ...... 115 Annex 13: Statement of Loans and Credits ...... 118 Annex 14: Country at a Glance., ...... 122 Annex 15: Map of Karnataka ...... 124

iii Tables: Table 1: Key Development and Health Outcomes Indicators ...... 4 Table 2: Progress in Health in Karnataka since Independence ...... -24 Table 3 : Variation in key health system performance indicators ...... -25 Table 4: Comparative Health Service Coverage and Access Indicators ...... 25 Table 5: Karnataka, Leading Conditions Treated in Hospitals and Dispensaries, 1999 ...... 26 Table 6: Health targets: Karnataka Vision 2020 ...... 27 Table 7: Major project financed by the Bank in India in the health or health related sectors ...... 28 Table 8: Details of Externally assisted health projects during the decade ofthe 1990s...... 29 Table 9: PDO key Indicators ...... 31 Table 10: Milestones for Component 1 ...... 33 Table 1 1: Quantitative targets for priority performance indicators ...... -35 Table 12: Priority health outcomes: ...... 36 Table 13: Proposed strategies to improve local governments’ financial management ...... -65 Table 14: Main risks and proposed mitigation measures ...... 66 Table 15: Breakdown of Programmatic Support component ...... 68 Table 16: Existing Heads of Account to be monitored for determining disbursements ...... 71 Table 17: New Heads of Account for Financial monitoring ...... 71 Table 18: Audit Reports to be monitored as part of FM of KHSDRP ...... 73 Table 19: Total financing under the programmatic subcomponent ...... 75 Table 20: Disbursement Schedule ...... 75 Table 2 1: Budget estimates, revised estimates, and actual expenditures ...... 96 Table 22: Proportion of state government health expenditure on different inputs ...... 97 Table 23: Distribution of episodes ofhospitalization and ambulatory care by type of facility ...... 98 Table 24: Evolution of Total Government Expenditure on Health and Family Welfare ...... 101 Table 25: SGEHFW, state of Karnataka (1995-96 to 2002-03; Rs . Crore) ...... 104 Table 26: MTFP Projection for Expenditure on Health and Family Welfare (Rs . Crore) ...... 105 Table 27: Projected Financial Flows, SGEHFW and KHSDRP, Rs . Million...... 107

Figures: Figure 1: The structure of KHSDRP ...... 43 Figure 2: Institutional Framework for the Project ...... 60 Figure 3: Organization Chart ...... 63 Figure 4: Funds Flow ...... 68 Figure 5: Total health Expenditure by levels of care (percentages) ...... 94 Figure 6: Per Capita Health Expenditure in constant prices in 9 Districts ...... 95 Figure 7: Medical Officers in PHC: availability and attendance (Facility survey, 2004) ...... 97 Figure 8: Total Out-of-pocket Expenditure in Public and Private Facilities ...... 100 Figure 9: Evolution of Total Government Expenditure on Health and Family Welfare ...... -101 Figure 10: Evolution of Total Government Expenditure on Health and Family Welfare ...... 102 Figure 11: External Assistance to Health Sector, 1997-98 to 2003-04 (Rs . Crore) ...... 103 Figure 12: Trends in Major Heads ofAccount within Government Expenditure, ...... 105

iv KARNATAKA HEALTH SYSTEM DEVELOPMENT AND REFORM PROJECT

PROJECT APPRAISAL DOCUMENT

SOUTH ASIA

SASHD

Date: July 28, 2006 Team Leader: Paolo Carlo Belli Country Director: Michael F. Carter Sectors: Health (1 00%) Sector Director: Julian F. Schweitzer Themes: Health system performance (P);Child Sector Manager: Anabela Abreu health (S);Other communicable diseases (S) Project ID: PO71 160 Environmental screening category: Partial Assessment Lending Instrument: Specific Investment Loan Safeguard screening category: B

[ ] Loan [XI Credit [ ] Grant [ ] Guarantee [ ] Other:

For Loans/Credits/Others: Total Bank financing: US$141.83 m. Proposed terms: maturity of 3 5 years, including a grace period of 10 years.

AS SOCIATION Total basic costs: 206.09 0.39 206.48

Borrower: Department of Economic Affairs, Ministry of Finance, Government of India North Block, New Delhi, 110 00 1 India. Contact Person: Mr. Anirudh Tewari Tel: 91-11-23094413 anirudh@,finance.nic. in

Responsible Agency: Government of Karnataka, Department of Health and Family Welfare Vikasa Soudha, Bangalore Karnataka, India Contact Person: Mr. Ani1 Kumar Jha Tel: 01 1+91 80 22277391 khsdrpk2eth.net

1 Does the project depart from the CAS in content or other significant respects? Ref; [ ]Yes [XINO PAD A. 3 Does the project require any exceptions from Bank policies? [ ]Yes [XINO Have these been approved by Bank management? [ ]Yes [IN0 Is approval for any policy exception sought from the Board? [ ]Yes [XINO Does the project include any critical risks rated “substantial” or “high”? [XIYes [ ]No Ref; PAD C.4 Does the project meet the Regional criteria for readiness for implementation? Ref; [XIYes [ ]No PAD D. 6

Project Development 0 bj ec tive The PDO is to increase utilization ofessential health services (curative, preventive and public health), particularly in underserved areas and among vulnerable groups, to accelerate achievement ofthe health- related Millennium Development Goals. Ref; PAD B.2, TechnicalAnnex 3 Project description [one-sentence summary of each component] The KHSDR project will have three components. Component 1 will implement an organizational development plan, and will contribute to expand coverage ofexisting government programs in primary care and public health through increased spending and better performance. Component 2 will introduce innovations in service delivery and health financing along four different dimensions ofservice: infrastructure development and maintenance, delivery ofpriority curative services, planning and delivery ofpublic health services, and accessibility to safe delivery and hospital inpatient services. Component 3 consists ofall project management and support, monitoring and evaluation activities. Ref; PAD B.3, TechnicalAnnex 4 Which safeguard policies are triggered, if any? Environmental Assessment Pest Management Vulnerable Communities Ref; PAD 0.4, TechnicalAnnex 10 Significant, non-standard conditions, if any, for: Board presentation: N/A Board presentation: N/A Loadcredit effectiveness: N/A

Covenants applicable to project implementation: (i)Financial Management will be carried out in accordance with Manual ofFinancial Management; Specifically, GoK will ensure that (a) financial records are maintained, (b) quarterly Financial Monitoring Reports (FMRs) are delivered within 60 days ofclose ofthe quarter, (c) the Audit Report is delivered within six months after the end ofGoK’s fiscal year, and (d) GoK will provide evidence on progress on agreed milestones annually, and progress reports on each project component biannually, and undertake

2 evaluation studies agreed and listed in the PAD; (ii)GoK will provide the Annual Procurement Plan, implement the agreed Health Sector Procurement Reform Action Plan, provide a written report on progress achieved in the implementationof the HSPRAP, the first report dated December 3 1,2006 and thereafter once every six months; the World Bank reserves the option of post review of contracts, in consultation with Go1 and GoK; (iii)GoK agrees that the HSPRAP may be amended from time to time, as agreed between GoK and the Bank; provided further, that GoK agrees to further strengthen the HSPRAP as necessary based on the risks identified and the recommendations of the Detailed Implementation Review, the procurement review and the report on the quality and quantity of pharmaceuticals and medical goods; (iv) GoK will implement the Vulnerable Communities Health Plan; it will also ensure that there would be no involuntary resettlement. (v) GoK will ensure that the key staffing of the State Project Management Unit and the District Project Management Units, as well as the personnel required to ensure functionality of the key project committees, are maintained at all times. Effort will also be made to ensure stability of tenure of staff as listed in the PAD, Annex 6.

3 A. STRATEGIC CONTEXT AND RATIONALE

1. Country and Sector Issues'

1. Over the last decade, Karnataka has been one of the fastest growing states in India', and the increase in per capita income has led to better standards of living and improvements in priority health outcomes. Priority health outcomes are those prioritized in the health-related Millennium Development Goals (MDGs), that is infant and child mortality, maternal mortality, and control of communicable diseases (see Annex 3). Key indicators relative to these priority health outcomes significantly improved during the 1990s, as indicated in Table 1. For example, between 1990 and 1996 Infant Mortality Rate (IMR)2decreased by 3.8 to 4.6 percent per annum according to different data sources (from 65.4 to 51.5 or from 75 to 56.6 per 1,000 live births), in line with the rate of change necessary to achieve the health- related MDGse3Recent data indicate that Karnataka's health and health system performance are above average in India, second to only the best performing states (see Annex 1).

Table 1: Key Development and Health Outcomes Indicators

Maharashtra I 27,755 (8,507)l 24.2 (9.5)1 43.8 (50.5)l 58.1 (70.3)l 336) 39.9 (48.5) Kerala I 23,324 (5,687)l 9.9 (8.2)l 16.3 (23.8)l 18.8 (32)l 871 21.9 (27.4) TamilNadu I 23,805 (6,262)l 19.8 (12.5)l 48.2 (67.7)l 63.3 (86.5)l 3761 29.4 Karnataka I 22,612 (5,600)l 25.1 (8.1)l 51.5 (65.4)] 69.8 (87.3)l 450 I 36.6 (47.6) Andhra Pradesh I 19,528 (5,371)( 21.7 (4.5)1 65.8 (70.4)l 85.5 (91.2)l 4361 38.6 Source: State GSDP: Reserve Bank of India; Poverty count: Deaton-Dreze, 2002, IMR, U5M, % children stunted: NFHS-1, 1992-93 and NFHS-2, 1998-99; MMR, The progress of Indian states, UNICEF, 1995

2. During the decade of the 1990s there was also significant progress in coverage of essential services6 (see Annex l),with the exception of outpatient services such as treatment of acute respiratory infection (AM) or diarrhea in children', as Table 3 in Annex 1 indicates.

3. However, the performance of the state health system still leaves many gaps to be filled:

(a) for children: according to the NFHS-11, in the mid 1990s approximately one in fourteen children still died before reaching 5 years of age.8 In the 1990s, immunization services improved significantlyg, but a fair number of children still "dropped out" before completing the full course of treatment." Malnutrition in children was reduced, but at the end of the decade it was still extremely high, with almost half of the children underweight, and one in five acutely malnourished (wasted)." Given that neonatal mortality12 constitutes almost three quarters oftotal infant mortality, further reductions in IMR would require greater coverage and better quality of services before, during, and after delivery.

All notes can be found at the end ofthe document.

4 (b) For women: in 1998, on average 51 percent of deliveries took place in institutions (approximately half of them in the public sector and half in the private sector). l3This percentage was much lower in rural areas (38 percent), in the poorest districts (31 percent), and among illiterate (32 percent) and SC-ST women (34 percent). Among those who delivered at home, on average less than one in five was assisted by a doctor or a trained health professional, and another 30 percent by a traditional birth assistant. Over the decade of the 1990s coverage of antenatal care improved, and a majority of pregnant women received some antenatal care service. However, according to the RCH-I1 survey, in 2003 still less than one in three pregnant women received full antenatal care14, and for women belonging to underprivileged groups coverage was modest.

4. Disparities in health outcomes across different socio-economic groups and geographical areas were not addressed and in fact widened over the decade of the 1990s (see Annex 1):

(a) In 1998 the Under-5 Mortality Rate (USMR) for children of illiterate mothers was more than twice that for children of mothers who had completed high-school (76 compared to 30 per 1,000 live births). Similarly, for households with a low standard of living, USMR was more than twice that in wealthy households (1 18 compared to SO per 1,000). Inequalities in health system performance also remained stark: for example, in 1998, 77 percent ofchildren whose mothers had completed at least high school and 78.5 percent of those living in wealthy households were fully vaccinated, compared to only 47 percent of children of illiterate mothers and 50 percent of those living in poor households. (b) Widening urbadrural differences during the decade of the 1990s can be captured in all health indicators: for example, according to the two NFHS rounds (NFHS I, 1992-93, and NFHS, 11, 1998-99) the reduction in USMR was twice as fast in urban areas as in rural areas (see Annex 1). While urban Karnataka has started experiencing the epidemiological transition, with greater incidence of non-communicable diseases, rural Karnataka is still disproportionately burdened by maternal and child mortality, and communicable diseases. Another major disparity remained between the Northern and Southern districts: according to RCH-I1 survey data, in 2002-03, institutional deliveries were equal to 58 percent in the state, but they were only 20.7 percent in Koppal and 22.5 in Raichur districts, while they were 91.6 percent in Bangalore. The five districts of Hyderabad Karnataka l5and the two districts of Bombay Karnataka region in the North16 continued to severely lag behind the rest of the state according to every health and health system performance indicator.

5. The main intervention by the Government of Karnataka (GoK) in the health sector has been the establishment, maintenance and staffing of an extensive network of health facilities at the primary, secondary and tertiary level. While these investments made a tangible difference to physical infrastructure and delivery capacity, the outcomes in terms ofactual improvement in services have not been as obvious.

6. In fact, the performance of this extensive delivery system continues to raise serious concerns about effectiveness, access, and targeting the most vulnerable. Four systemic weaknesses seem to thwart the health sector’s ability to provide a more equitable and effective response to priority health needs and demand^:'^

(a) poor institutional capacity, management, and accountability for results in government health care services. Decisions concerning new infrastructure investments and allocation of other resources (personnel, medicines, etc.) are made according to rigid norms and on the basis of preexisting inputs and historical expenditure, rather than based on need, cost-effectiveness or performance. Resources (human and material) do not always reach the intended destinatiodbeneficiaries, and a lack of focus on results permeates the whole sector. Some administrators, doctors and other

5 personnel at all levels perform their tasks judiciously and with professionalism, while others are frequently absent.18 However, the good performance ofthe former group is not re~arded’~,or the lack of performance of the latter group is not generally penalized, thus reducing motivation and prompting some conscientious personnel to exit from the government system. (b) Insufficient attention to essential health services, and particularly public health activities.20 The government’s focus and expenditure have increasingly been biased in favor oftertiary care, which produces a regressive pattern (see Annex 9). By contrast, essential ambulatory services and public health activities such as disease prevention and health promotion have not received enough attention. The neglect of primary care and public health creates a situation where the risk of epidemic outbreaks is high and exposure to health risk factors is endemic, where the quality of primary care services rendered to the population is unsatisfactory, and where as a result even simple acute health problems are dealt with at the secondary and tertiary care levels, which in turn imposes a huge additional cost on the health system. (c) Inadequate health financing strategies reflected in insufficient and misallocated public spending, and insufficient use of organized financing to provide better financial risk protection and to drive health service performance: (i)GoK’s expenditure on Health and Family Welfare is low by any international standard (it was equal to Rs. 202.18 per capita-approx. US$4.2- in FY 2002-03), and it has been decreasing over time as a share oftotal state expenditure (the trend has been reversed only in fiscal year 2005-06); (ii)majority of government expenditure is allocated for salaries, whilst operations, drugs, and maintenance items are severely underfinanced; (iii)health risk management and insurance schemes are in their initial stage of development; 21 (iv) users’ out-of- pocket (OOP) payments have become the major source of financing for health care services. Private and government facilities an be extremely expensive for inpatient services, preventing utilization of services, or contributing to lead patients and their households into poverty to meet their health care expenditure (see Annex 9). (d) Widespread market failures22: the private sector has grown immensely during the last twenty years, to the point where the majority of ambulatory services are now provided privately.23 However, this growth has taken place without any mechanism to progressively upgrade standards of care. No self-regulatory mechanisms exist for quality or price of services charged by private providers. Anecdotal evidence suggests that supply-induced demand phenomena are common. In the rural areas, unqualified or semi-qualified providers continue to be the first contact for the majority ofpoor households.

7. In 2001 GoK created an independent Task Force on Health to comprehensively review the state’s health system and suggest appropriate policies and strategies for improving service delivery, strengthen the stewardship role of the government, and empower users. The Task Force produced a comprehensive report on how to reform the Department of Health and Family Welfare (DoHFW) to improve equity and efficiency of government health care services. It also specified a series of quantitative targets to be achieved by the year 2020 (“Vision 20207’), substantially in line with the health-related MDGs. GoK accepted the report of the Task Force and initiated actions to implement its recommendations.

8. At the same time, GoK endorsed the emphasis on human development targets, and specifically on reduction of maternal and child mortality rates, set in the Tenth Plan (2002-2007), the National Population Policy (2000), and the National Health Policy (2001). Based on these documents, the DoHFW drafted a policy document outlining its key strategies in the health sector, called the “Karnataka State Integrated Health Policy (KSIHP) 2004”. The KSIHP document articulates the state’s long-term vision for the health sector, and states that the mission of the DoHFW is to “provide quality health care with equity, which is responsive to the needs of the people, and it is guided by principles of transparency, accountability and community participation (KSIHP, 2004, p. 5)”. In the Medium Term Fiscal Plan

6 9. (MTFP) GoK committed to significantly increase the amount ofresources allocated to health and family welfare services in the next few years. The 2005/06 budget respected the commitments set in the MTFP, and announced an 18% increase in the health budget.

2. Rationale for Bank Involvement

10. There are several compelling reasons for the World Bank to support the Karnataka health sector. First, the proposed project can allow the government to further develop and sustain its current reform program in a more continuous, and sustainable manner. The World Bank can contribute to fund the innovations being proposed, and at the same time provide sound technical assistance, drawing on extensive experience on health reforms worldwide and on the lessons learned in more than two decades of assistance through central and state projects in India and in Karnataka24(see Annex 2).

11. Second, the proposed project can contribute to bring together other externally assisted initiatives focused on achieving the health-related MDGs, and thus enhance their potential impact and their coordination. External donors are providing assistance to GoK through several vertical programs (among others, Integrated Disease Surveillance, Woman and Child Development, TB, and HIV/AIDS), channeled through Government of India (Central Schemes 4s- and Centrally Sponsored Schemes -CSS). The German Government is also supporting a project for the Upgrading of Secondary Level Health Care Facilities (from June 2004 to 2008). There is a need to draw all these contributions together, and progressively develop a program2, which is led by GoK, is coherent with the strategies described by the Task Force Report, and specifies the strategies and investments which GoK will implement over the next few years to achieve the maternal and child health and control of communicable disease targets specified in the KSIHP and the Vision 2020 documents.

12. The World Bank’s important support role for GoK in developing a comprehensive program to achieve the health-related MDGs has already been reflected in the process ofpreparation ofthe proposed project. In January 2004 DoHFW, with the support ofthe Bank under a PHRD Grant, formed three “Core Teams” to technically assist the government in specifying concrete plans to step up the coverage and quality ofessential services, focusing on three different areas:

(a) improvement of performance of the public sector, particularly at the primary care level, through selective infrastructure upgrading, expansion of public health and disease prevention activities, and through enhanced human resource management and better incentives for performance. (b) Involvement ofthe private sector in the delivery ofessential services. (c) Development of new health financing strategies, including experimenting with health insurance schemes.

13. The three Core Teams led a wide consultative process, and produced three Reports outlining their detailed proposal^.^^ Subsequently and with World Bank assistance, the DoHFW further specified these three original proposals, and articulated a final Project Implementation Plan.

3. Higher Level Objectives to which the Project Contributes

14. The proposed project aims to contribute to essential health outcomes by reducing maternal, child mortality, and communicable diseases. With the benefit of the experience of the ‘first generation’ of health projects, the project incorporates a results-based approach as a key feature in its design.

* “Program” means the overall health sector program of Karnataka to achieve the maternal and child health and control of communicable disease targets The KHSDR Project aims to contribute to developing and implementing this wider program.

7 15. The project is consistent with the strategic principles and the priorities identified by the Country Assistance Strategy (CAS), September 2004 in: (a) focusing on outcomes as a means to improve governance and service delivery; (b) being selective in support of activities that have greatest impact on the poor; and (c) envisaging a strengthened role ofthe Bank as knowledge provider and generator.

B. PROJECT DESCRIPTION

1. Lending Instrument

16. The proposed lending instrument would be a Specific Investment Loan (SIL). A part of the Bank’s funding will be disbursed in the form of programmatic support, whereby the Bank will disburse against increases in actual expenditures incurred on a broad array of ongoing government programs and activities, with continuing funding contingent on the achievement of certain milestones (see Annex 3). The remainder of the Bank’s funding would be disbursed in a conventional manner, against actual expenditures on certain new initiatives, which aim to foster a results-based orientation in the Department and test certain new approaches to service delivery and health financing.

2. Project Development Objective (PDO) and Key Indicators

17. The project’s main objective is to increase utilization of essential health services (curative, preventive and public health), particularly in underserved areas and among vulnerable groups, to accelerate achievement ofthe health-related MDGs (see Annex 3).

18. Essential services are broadly those which are relevant to producing improvements in maternal and child health outcomes and reduction of communicable diseases, prioritized in the health-related Millennium Development Goals. They include non curative public health services, immunization, safe- deliveries, pre and post-partum care, prevention and treatment of diarrhea, Acute Respiratory Infections (AMs), and prevention and treatment ofmajor communicable diseases.

19. Underserved areas are where at present by and large essential services are not available, and vulnerable groups are those who are more at risk of morbidity and mortality, such as mothers and small children.

20. Key indicators of improvement would include:

(a) Increased coverage and utilization of these essential services, particularly in rural areas, in the poorer districts and for the vulnerable groups. (b) Decreased prevalence and incidence ofcommunicable diseases such as TB and malaria. (c) Increased, more predictable, and more evenly distributed across the state real government spending on essential services.

21. To evaluate the impact of the project in increasing utilization of services by those who are currently underserved, utilization indicators will be collected and analyzed by geographical area and by vulnerability (gender, age, education, caste, BPL/non BPL, etc.). Annex 3 presents a list of “tracer” indicators that have been chosen to review progress towards achievement of the PDO and the composite Service Level Index developed on their basis.

8 3. Project Components

22. The Karnataka Health System Development and Reform Project (KHSDRP) will consist of three components, with a total estimated cost of approximately US$206.5 million (GoK’s contribution equal to US$64.7 million, and World Bank contribution equal to US$141.8 million). Component 1 includes a first subcomponent which consists of activities towards the Organization Development of the DoHFW, the local governments, the private sector (not for profit and for profit), and the other stake- holders in the health sector, and a second subcomponent with a broad list of the programs and activities that the DoHFW already implements in the delivery of essential public health and curative care services. Component 1 will contribute to increase spending on these essential services, and introduce a new results- based management system. Component 2 consists of three main innovations in service delivery and health financing, the Service Improvement Challenge Fund, the Public Health Competitive Fund and a health insurance pilot. These are meant to: (a) introduce more competition in the allocation of resources; (b) identify objectively verifiable outputs and outcomes to monitor, and progressively link incremental financing to improvements in performance, thus strengthening accountability; (c) shift the responsibility of planning and progressively implementing health programs to the local governments, NGOs and other local bodies; (d) establish stronger partnerships with the private sector; and (e) contribute to increase accessibility to essential hospital care for the poor. Component 3 will include all monitoring and evaluation (M&E) activities, including the development of an integrated health management system at the primary and secondary care level. All project components are briefly described in the following paragraphs (for more details, please refer to Annex 4).

Component I:Strengthening Existing Government Health Programs Towards the Achievement of More Effective and Equitable Delivery of Services [base cost=US$115.07 million]

Subcomponent 1A: Organizational Development [base cost = US$5.07 million]

23. The organizational development (OD) plan is the process envisaged to strengthen the stewardship role of government in the health sector and to further move the DoHFW towards a results-based approach. OD means not only the acquisition of new skills and knowledge, which requires external technical assistance and internal capacity building activities, but also the adoption of ‘new ways of doing things’ and learning by doing. An organization is not developed simply by staff being sent on training, and new practices being promulgated. Achieving a change of culture (of doing things differently) can only be accomplished by ‘winning hearts and minds’ of key officials who can lead all other staff by setting an example.

24. The change in culture in the DoHFW can only be obtained after a long period of sustained effort throughout the project and beyond - and this is one ofthe reasons for proposing a gradual introduction of plans to improve services at the district level, described below. It also requires leadership qualities and perseverance on the part of key officials at the state, district and taluk levels, who need to be supported in the process. The transition is heavily dependent on accelerating learning ofthese key officials so that they develop new ways of working.

25. In order to move towards a results-based approach, a process of service improvement planning and implementation will be introduced. Under this process, District Health Officers (DHOS)~~and their staff in consultation with the local governments will review their performance, identify bottlenecks that prevent better service delivery, and articulate Service Improvement Plans (SIPs) to improve services in each district. The SIPs will propose specific investment priorities in each district, and detail how these will result in actual increases in services, as measured by the 9 key output indicators that form the Service Level Index (see Annex 3).

9 26. These investments will initially be supported by the Service Improvement Challenge Fund (see description of Component 11, hereafter), but they can potentially also be supported by increased investments by GoK, with part of the additional financing provided through Subcomponent 1b of the project.

27. The DHOs would need to detail the staffing available to achieve the service improvements in the SIP. It would be essential that the estimates are realistic: for instance, doctors are actually available at all times. If there are issues preventing the achievement of the planned levels of service improvement, such as high rates of absenteeism, which the DHO feels shehe cannot change, these need to be openly specified in the SIPs, and discussed and resolved at the appropriate level.

28. The Organization Development Plan will also accompany and facilitate a process of internal reorganization in the Department of Health and Family Welfare. Specifically, two important developments are expected: (a) a Health Planning Unit will be established. At state level, the Planning Unit will guide and assist districts in the process of formulating and implementing the SIPs. It will also inform policy-makers on strategic issues in the health sector by analyzing data collected through a strengthened and integrated Health Management Information System (HMIS, see section C.2). At the district and taluk levels the HPU will support DHOs to finalize the SIPs, monitor their execution, and will undertake other operational and policy-related tasks; and (b) the institutional capacity ofthe Department to organize public health services will progressively be strengthened, on the basis of the proposals originally put forth by the Task Force on Health.

29. Finally, under this OD subcomponent, the project envisages a series of capacity building activities to enhance the ability of the government and the private sector to design and enforce accreditation processes for health facilities, and to work together under service agreements. These OD activities will contribute to create the basis for a new cooperation between the public and the private health systems, and unable them to interact in such a way that all parts and particularly the most vulnerable parts of society have access to affordable good-quality essential services.

Subcomponent 1B: Improving Primary and Secondary Care Services’ Effectiveness (base cost =US$110 million 27)

30. This subcomponent consists ofa broad set ofgovernment programs which deliver essential public health, primary and secondary care curative services, and uses a programmatic approach to supporting them.

3 1. The objectives of this subcomponent are to: (a) contribute to planned increased in Health and Family Welfare expenditure described in the Medium Term Fiscal Plan 2004-05 to 2007-08, focusing specifically on the peripheral health services; (b) help the DoHFW strengthen its planning, execution and monitoring processes for public health and primary health care activities; and (c) contribute to the process ofdevelopment and implementation ofa GoK-led program to achieve the health-related MDGs.

32. To achieve objective (a) above only real increases in expenditure on an agreed set of eligible heads of account will be reimbursed at 50 percent, so that there is equal shares funding ofthis additional real expenditure by GoK and the World Bank. To achieve objective (b) above, after the first year every year disbursements will be conditional on satisfactory progress towards implementation of a set of milestones agreed between GoK and the World Bank (see Annex 3). These identify: (a) some key diagnostic tools to enhance the department’s ability to monitor its own performance, (b) key process indicators in the development of GoK’s health reform program, and (c) some selected “tracer” performance indicators that would signal enhanced efficiency and equity in the delivery of essential health services.

10 33. The programmatic funding will be done in the following sequence: (a) identification of activities eligible for financing and of the heads of account in GoK’s budget that finance those activities; (b) statement of the financing mechanism or formula, linked to commitment of the government to increase real expenditure on the eligible activities, (c) reporting of expenditure; (d) Bank reimbursement of the same expenditure according to the formula (FMR-based disbursement), provided the milestones have been met; and (e) ex-post adjustment of the initial disbursements according to actual expenditures resulting from audited accounts. Annex 4 and 7 explain these steps more in detail.

Component 11: Innovations in Service Delivery and Health Financing [base cost =US$67.52 million]

Subcomponent 2A: Innovations in Service Delivery Linked to Need and Performance [base cost = US$57.27 million]

34. The KHSDRP will invest in primary care and in public health activities2* using an innovative approach. Two different funds will be created: the Service Improvement Challenge Fund, and the Public Health Competitive Fund for, respectively, curative and non-curative care activities.

35. Creation and operation of a Service Improvement Challenge Fund (SICF). This fund will select initiatives to scale up quantity and quality of curative, primary and secondary care services, including construction, upgrading and renovation of infrastructure, and innovative schemes of service delivery. Investments will be staggered in three phases and, after the first phase, further investments in any district will depend on the development of Service Improvement Plans (SIPS) and success in delivering the service improvements from the first phase of investments.

36. Approval of the investments proposed will be based on objective criteria that give priority to stepping up innovative services and services for underserved, vulnerable communities, which would produce the greatest impact on the health-related MDGs.~’The innovative service delivery strategies would include:

(a) Expansion, or rationalization and rehabilitation of existing infrastructure linked to need and improved performance; (b) Expansion of Mobile Clinic Units in underdeveloped taluks. 30 These units will also be outsourced to NGOs meeting qualifying criteria; (c) Training and posting of grass-root nurses for underserved Scheduled Castes and Scheduled Tribes (SC/ST) populations (tribal ANMs scheme and female health volunteers’ schemes). (d) Provision of incentives to physicians and paramedics working for the government, linked to their performance in improving service coverage in remote areas. (e) Strengthening Public Private Partnerships. The PPP options being considered are the following: (i) Contracting out of primary ambulatory care services to individual providers or private organizations under common Service Agreements on content, coverage and quality of the care delivered. (ii) Private sector engagement in management of service and support functions in public health facilities, and engagement of private specialist doctors in government sector (contracting in).

37. Creation and Operation of a Public Health Competitive Fund (PHCF). The PHCF will approve proposals for public health, non-curative care activities aimed at producing community-wide reductions in disease incidence. The PHCF is based on the premise that efforts at tackling community-based health issues - such as disease prevention or changing social behavior - are more likely to be effective if they are driven by community initiative. At the same time, support for community initiative must be based on

11 actual results achieved, particularly in the medium to long term. Therefore, the purpose of the PHCF is to promote community involvement in tackling public health problems, by providing continued support to initiatives that deliver measurable results. The PHCF would operate on the following principles:

The Fund will select health and health related activities other than the delivery of curative services that seek to improve the health status of communities, giving priority to poor and underserved areas. Therefore, a range of activities (e.g., communication for behavior change, sanitation, hygiene improvement, and others) for a variety of diseases (e.g., MCH, prevention of communicable and non-communicable diseases) may be supported. The PHCF will also approve proposals for activities aimed at enhancing information and transparency concerning accessibility, quality and costs of government health care services. Initial approval of any proposed activity will be provided on the basis of the assessment of the likely impact of that activity against a set of objective criteria. Subsequent support will depend on results achieved during an agreed time period, normally one year. Approval will be given for initiatives in public health proposed by any government, quasi- government, or private organization that meets the qualifying criteria. In order to reduce the likelihood of funds being ‘scattered’ across too wide a range of issues, each year the PHCF Management Committee will make available a list of public health priorities for Karnataka with district variations wherever they exist.31

The PHCF Management Committee will include representatives from various organizations, including DoHFW, Department of Women and Child Development, PRIs, NGOs and private-sector with experience in provision of public health services.

Subcomponent 2B: Innovations in Health Financing [total cost = US $ 10.25 million]

39. Innovations in health financing will contribute to reduce the financial barrier to accessing health services, thus leading in the long-run to an increase in utilization of essential hospital services for poor families. One major experiment is planned under this subcomponent: the design and implementation of a health insurance pilot. GoK with support from the Bank will examine the feasibility, costs, and benefits of designing a scheme to supplement the premiums, subsidy, and benefit package provided under the Universal Health Insurance Scheme (UHIS) currently offered under a GoI-sponsored scheme.

40. The health insurance pilot would include two major activities: (a) technical assistance for the design, implementation, monitoring and evaluation of an insurance pilot, and (b) financial support for providing additional premium subsidies (together with Go1 and GoK) and additional benefits to BPL families who decide to enroll in the scheme. The target is to have 2 million population enrolled in the scheme by year 5, covering 4 to 5 selected districts with geographical and community congruity.

41. Catastrophic health care expenses are a major cause of impoverishment for households in Karnataka (see Annex 9), and health insurance is one approach of providing protection to poor households against potentially catastrophic health risks. In recent years there has been much interest in Karnataka to develop health insurance schemes that could reach the poor. However, most of these health insurance efforts have faced both design and implementation diffi~ulties~~,and there are still many unaddressed questions concerning the design of a viable scheme, both financially as well as managerially. Therefore the first year of the project will be dedicated to addressing various technical issues. Particular attention will be devoted to analyzing the financial feasibility of the proposed scheme, managerial and institutional constraints, and to designing different distribution channels which could guarantee greater coverage of rural populations, through involvement of community based groups, such as Self Help

12 42. Groups (SHGs). Alternative strategies that have emerged in recent years in Karnataka (e.g.,, the Yeshashvini scheme33) and elsewhere in India will be explored.

43. This project component is explicitly experimental in nature. If it is to serve the purpose ofa pilot, then reliable lessons must be gleaned from it. This, in turn, means that rigorous evaluation of impact on health utilization indicators and poverty needs to be considered from the beginning in the design of the scheme. This will be achieved by phasing in the scheme progressively and by collecting baseline and follow-up data on health seeking behavior and health care expenditure of those enrolled in the scheme, and ofa control group.

Component 111: Project Management, Monitoring and Evaluation [base cost = US$15.16 million]

44. This component will support the establishment and operations of the State Project Management Unit (SPMU), District Project Management Units (DPMUs), and other project related Committees (for example, the Management Committee for the PHCF and the Engineering Cell which will supervise execution of all capital investment by the DoHFW). The activities will include: (a) consulting services to cover technical issues, as well as procurement and financial management; (b) hiring and training of project management staff; (c) provision of necessary office equipment; and (d) incremental operating costs.

45. This component will also finance data collection through baseline, mid-term, and end-of-project household and facility surveys and all other evaluation activities.

46. Finally, as part of monitoring activities, this component will support the establishment of a State Health Informatics Center and a new integrated HMIS. Monitoring and Evaluation activities are explained in section C.

4. Lessons Learned and Reflected in Project Design

47. The design of the proposed project relied on the experiences and the lessons learned from the Bank-supported central and state-level health and family welfare sector projects during the decade ofthe 1990s, especially the Karnataka Health System Development Project (KHSDP, 1996-2004). Annex 2 contains details of all these projects assisted by the Bank and other agencies. Drawing on the lessons of the KHSDP (see ICR, September 2004) and the other externally assisted projects, KHSDRP will: (a) identify a set of verifiable intermediate performance indicators to monitor continuously, by strengthening the DoHFW’s internal information system, and using reviews based on comprehensive household-level information; (b) create incentives to improve performance on these indicators by progressively linking financing to improved performance; (c) extend the responsibility ofplanning of infrastructure, innovative schemes in service delivery and public health initiatives to the local governments, NGOs and other local bodies, so that, by being involved from the beginning, they can also become more responsible in the implementation of these activities; (d) provide intensive technical assistance to strengthen the planning, implementation and monitoring capacity for health programs at the state and local levels; (e) create the capacity and strengthen the normative underpinnings to ensure more competition and transparency in procurement and financial management; (f) provide explicit incentives to increase expenditure on health and family welfare (programmatic approach to financing); and (g) emphasize the stewardship role of government, and establish stronger partnerships with the private sector for improving the access to and the quality of essential services. Contracting in and out initiatives will be expanded on the basis of successful previous experiences, such as those under the World Bank assisted India Population Project, IPP-VIII.

13 5. Alternatives Considered and Reasons for Rejection

48. The main feasible alternative would have been to support a project in primary care largely based on infrastructure investments, as originally requested by GoK in 2002. However, this approach would not have achieved the desired improvement in service delivery. As discussed earlier and in Annex 1, the factors preventing better coverage and service delivery are not mainly related to lack of infrastructure, but to systemic issues, even through some additional infrastructure investment in primary care is justified in the context ofa more general strategy to improve service delivery.

49. Alternative lending instruments considered. A sector adjustment loan (SECAL) was not considered appropriate, given the continuous attention required to support reforms and innovations. The team decided that a traditional Specific Investment Loan (SIL) would be better suited to plan, implement and test several innovations. Yet, the Bank will follow a programmatic approach in supporting the ongoing government health care activities, which reflects the intention to mainstream as much as possible the project within regular Department’s activities, reduce transaction costs and the other distortions associated with traditional investment projects, and shift more focus towards outcomes and performance.

C. IMPLEMENTATION

1. Institutional and Implementation Arrangements

50. The institutional arrangements are planned to be conducive to: (a) institutional strengthening of the DoHFW and of institutional links across departments (specifically, between the DoHFW and the Department of Rural Development and Panchayat Raj); (b) integration ofthe SPMU within the DoHFW; (c) coordination of the state and the district level functions in the sector; (d) monitoring of the link between financial flows and outputs/outcomes ofproject activities.

51. The project will be implemented through the existing DoHFW structures, provided they are adequately reorganized and strengthened. KHSDRP will be governed by a Project Governing Board, a Program Steering Committee, chaired respectively by the Chief Secretary and the Principal Secretary, DoHFW. The project will be implemented by the State Project Management Unit (SPMU), headed by the Project Administrator. This team would be responsible for: (a) planning (description of rationale, preparation of investment plan, operational manual, etc.) of all the innovative activities, (b) facilitating and monitoring district-level planning linked to the SICF, (c) initially, implementing the mobile clinics scheme, the PPP activities and the other innovative schemes until districts can take over, (d) executing central procurement, and financial management. The Organization Chart of the KHSDRP SPMU is presented in Annex 6.

52. At the district level, under the DHO’s overall leadership, the District Project Management Officer (DPMO) will provide direct oversight to the project. For technical and management functions, the DPMO will be supported by the District Project Management Unit (DPMU). Together, they will have the core responsibility for implementing KHSDRP in the districts.

2. Monitoring and Evaluation

53. GoK seeks to improve its ability to assess the effectiveness of its health care investments. Under the first health project (KHSDP), the DoHFW started to collect more systematically performance indicators at the level of secondary care facilities, and carried out repeated patients’ satisfaction surveys. KHSDRP will make every effort to move further in the direction initiated under KHSDP, by setting in place the necessary institutional and financial requirements to have a well-functioning monitoring and evaluation system, starting from the primary care level and the Bank’s supported activities, but extended

14 to the overall set ofDepartment’s activities. With the additional investments in monitoring and evaluation proposed under the KHSDRP, the DoHFW would be able to collect more timely and systematic information on outputs and outcomes at the primary and secondary care levels, and would be able to measure impact of its additional investments at the population level through general household surveys. Measurement ofperformance and impact would become regular, and inform the planning process.

54. Monitoring. A new, evidence-based approach to planning, implementation and evaluation of primary and secondary health service delivery will be progressively introduced. At present, data collection takes place in several different offices within the DoHFW, which are isolated from each other and severely under-financed. Policy-makers hardly make any use of the evidence produced on performance of different units and districts. The project will contribute to the establishment of a State Health Informatics Center and a new integrated HMIS. The Center will be part of the Strategic Planning Unit (see description of component lA), and will produce timely and reliable information of health care service delivery at all levels of care, by integrating the existing different data-set and make use of the additional investments (under component 3 ofthe project) to strengthen the quality of data collection and analysis.

55. Until that system is fully operational, though, the evaluation tools will include facility surveys that are matched to households. One such facility survey was already conducted in the year of project preparation, and its information is being used as the baseline. This facility survey examined supplies, staffing, facility condition and absenteeism, to ensure that human resources that were expected to be at the facility are, in fact, present. In the future, facility and household surveys will serve as a further measure both ofthe resources available at project-related facilities as well as offacility use by households.

56. Evaluation. Given that the project emphasizes that the DoHFW needs to be performance oriented, the first step is to create a firm baseline of measurement of outputs and outcomes34. The second step is to be able to relate the outputs to inputs, especially those that are funded by the project in such a way that the causal relations between project and other government provided inputs can be determined. Since many of the ultimate outputs are related to people’s health status and since so much of health services are done by the private sector, standard HMIS, or facility based measures cannot be used for this purpose and measurement requires household surveys. The survey work will measure health status, the likely determinants of health status (including income, water supply, sanitation, education among others), the use ofdifferent health care providers and satisfaction with public and private providers.

57. Therefore, it was agreed that regular household surveys will be done by an independent survey firm, first at the beginning of the project, second after the third year in order to assess performance and make mid-course corrections and finally at the end ofthe project in order to learn what works and inform future policy. The recently published data from the RCH-I1 2002-03 survey have been used to build the baseline data. KHSDRP will also explore the possibility of combining data collection efforts with the Multipurpose Household Survey currently underway in the Department of Rural Development and Panchayat Raj. Data must be extensive enough to be representative at district level.

58. Finally, the project will try to systematically measure changes in other factors that influence households’ health seeking behavior and welfare (extent of risk protection), such as: (a) out-of-pocket health expenditure; (b) perceived difficulties (financial and non financial) in accessing health care facilities; and (c) sources of financing for health consumption. One such household health utilization and expenditure survey was already conducted in the year ofproject preparation, and its information is being used as baseline information (see Annex 9).

15 3. Sustainability

59. Project sustainability is likely for several reasons. Two key factors are critical for sustainability: (a) political commitment and consensus on the health reform process; and (b) availability of sufficient financial resources.

60. Political Sustainability: Karnataka has a good track record of obtaining public perceptions and of creating a public voice in governance, and public pressure from local governments, civil society and the media for improved governance and better health care services is likely to further increase in the future with increasing levels of socio-economic development. However, the project’s full success will depend on the continuous commitment to the reform process in the health sector from the state political leadership.

6 1. The 73rd amendment to the Constitution, which increased local governments’ participation in planning, implementation and oversight of primary and secondary health services, can also potentially lead to positive impact on the quality of service delivery. Local governments could plan and implement programs in a way that is more responsive to local needs, and strengthen accountability mechanisms. The proposed project will support this process, by proving intensive technical assistance in planning and implementation at the state, district, taluk and Gram Panchayat levels, and by creating a more rigorous and continuous evaluation ofperformance.

62. Institutional Sustainability: In order not to overburden the existing institutional structure, a cautious phasing in of different project components has been agreed with GoK (see summary Implementation Plan, Annex 3). At the same time, the Organizational Development process will strengthen the government capacity to plan and monitor innovations at the central and local level. Also, note that the KHSDRP will work as much as possible within the existent institutional and fiduciary arrangements, in order to contribute to their strengthening, and not lead to further fragmentation.

63. Financial Sustainability: after 2004-05, each year the World Bank support through KHSDRP would contribute up to approximately 7 percent of total state government expenditure on health and family welfare (see Table 27 in Annex 9). Only a small proportion ofthe total, less than 20 percent, is for capital investments. A part of the World Bank’s support will translate in increased recurrent expenditure in the medium-long term: increased levels of service will have to be maintained, and innovative schemes proposed by KHSDRP are expected to be mainstreamed. The additional recurrent costs resulting in the process will be carefully assessed during implementation. If GoK will maintain the level of commitment to the health sector as stated in the Medium Term Fiscal Plan 2004-05-2007-08 (see Annexes 7 and 9), preliminary estimates indicate that it will be able to adequately sustain the total increase in recurrent expenditure generated by KHSDRP investments. The proposed project will also set the foundations for a stronger and more sustainable health financing system, by strengthening new sources of financing for health care services such as health insurance, and it will encourage a better use ofresources for health and thus generate cost savings, by experimenting new cost-effective delivery mechanisms.

4. Critical Risks and Possible Controversial Aspects

I Risks I Mitigation Measures I Rating 1 To Project Development Objectives Pro-poor focus may not be Each component of the project emphasizes the focus on the poor and on poor M achieved. districts. For example, the level of deprivation of each taluk is among the agreed criteria for deciding priority new infiastructure investments under the SICF (see Annex 4). Each SICF will have to implement specific schemes for vulnerable

16 communities, as envisaged in the Vulnerable Communities Health Plan. 1 Underserved communities will also be the focus of public health initiatives through the PHCF, and of the innovative schemes in service delivery such as PPPs. The subsidy planned under the health insurance experiment will specifically target BPL populations. Sustainability ofreforms and The project has been the result of a wide consultative process, which involved M innovations proposed under senior officers, DoHFW, representatives of civil society, NGOs and the private KHSDRP may not be sector. This process was also meant to foster ownership ofthe proposed activities achieved. and reforms. The project’s disbursements will be linked to ongoing progress in implementation of innovative activities, and to continuous improved output and outcome indicators. Local government ownership Each district will prepare a Service Improvement Plan in consultations with local M of KHSDRP activities may governments, as a condition for receiving additional finds under the SICF after not be generated, particularly the first phase of investments. This would generate district ownership and favor in underperforming districts community participation. GPs will be able to apply for funding through the PHCF. The project will take corrective action at mid term to make sure that underperforming local governments and districts are not left behind. To component results Institutional requirements for GoK has committed to adequately staff the SPMU, according to the S successful impiementation of Organizational Chart presented in Annex 6. Moreover, an intense Organization some of the project Development plan has been prepared, to strengthen the capacity ofthe Department subcomponents may not be to plan, execute and monitor its activities on a continuous basis. To mitigate this met risk a careful phasing in of activities has been planned, and flexibility in the reallocation of funds across innovations permitted. The health insurance The first year will be devoted to the preparation of the pilot. Significant funds for M experiment may not be preparation and for M&E have been set aside to assure a feasible and sustainable successfully carried out, or design as well as evaluation. The design process will incorporate lessons learned the experiment may be from the current health insurance efforts in Karnataka and India. terminated at the end ofthe There has been and there will continue to be regular consultations with Go1 on the project. future ofthe national scheme. Since this is an experiment, a positive outcome is not assured and, in the event of its absence, the experiment would still be useful if it provided valuable lessons for policy and implementation. Productive institutional Intense capacity building strategies at the state level have been developed to S linkages with the private increase NGOs and other private providers’ involvement in delivery of essential sector and non-governmental services. With the increased role played by local governments, the same PPP- organizations may not be related information and capacity building activities will have to be replicated at established. the local level. Pilots will be undertaken which would be expanded throughout the state according to results. During the implementation Kamataka was one of the first Indian states to enact the Kamataka Transparency S of the RCH Iproject, serious in Public Procurement Act, in 2000, and agree on a Procurement Action Plan in deficiencies were encountered 2001. In addition, a comprehensive Health Sector Procurement Reform Action in procurement including the Plan was agreed with GoK during project preparation (see Annex 8), which builds application of GMP upon the procurement improvement measures agreed with GoI. The Plan will lead certification to improved quality standards for drugs, enhanced competition and transparency in the bidding process; it will progressively centralize procurement done by the DoHFW into one single dedicated unit which would be strengthened, and establish monitoring and complaint procedures. It may be difficult to fully The project will support specific capacity building activities also focused on S hold districts accountable for financial management issues at the district level. Specific FM arrangements the programmatic support explained in Annex 7 have been agreed to address the issue of timeliness of audit they will receive reports. The project will phase in Service Improvement Plans over the first two years, and contribute to build capacity at the district level over time through the OD activities. Overall risk rating M

17 Loadcredit Conditions and Covenants

Following is a list of covenants applicable to project implementation:

Financial Management will be carried out in accordance with Manual ofFinancial Management; Specifically, GoK will ensure that (i)financial records are maintained, (ii)quarterly Financial Monitoring Reports (FMRs) are delivered within 60 days of close of the quarter, (iii)the Audit Report is delivered within six months after the end of GoK’s fiscal year, and (iv) GoK will provide evidence on progress on agreed milestones annually, and progress reports on each project component biannually, and undertake evaluation studies agreed and listed in the PAD; GoK will provide the Annual Procurement Plan, implement the agreed Health Sector Procurement Reform Action Plan, provide a written report on progress achieved in the implementation of the HSPRAP, the first report dated December 3 1, 2006 and thereafter once every six months; the World Bank reserves the option of post review of contracts, in consultation with Go1 and GoK; GoK agrees that the HSPRAP may be amended from time to time, as agreed between GoK and the Bank; provided further, that GoK agrees to further strengthen the HSPRAP as necessary based on the risks identified and the recommendations of the Detailed Implementation Review, the procurement review and the report on the quality and quantity of pharmaceuticals and medical goods; GoK will implement the Vulnerable Communities Health Plan; it will also ensure that there would be no involuntary resettlement. GoK will ensure that the key staffing of the State Project Management Unit and the District Project Management Units, as well as the personnel required to ensure functionality of the key project committees, are maintained at all times. Effort will also be made to ensure stability of tenure of staff as listed in the PAD, Annex 6.

APPRAISAL SUMMARY

Economic and Financial Analysis (see Annex 9 for a more detailed discussion)

Equity. The proposed KHSDRP will focus on maternal and child health and on communicable diseases td contribute-to the achievement of the health-related MDGs, mainly by expanding coverage of essential services in rural and underserved areas. Its focus on primary care services and rural areas will contribute to improve the redistributive impact of government health expenditure, and accelerate achievement of the health-related MDGs. Most of the activities planned under KHSDRP target the socially and demographically vulnerable on a priority basis.

66. Efficiency. To improve allocative effi~iency~~,KHSDRP will contribute to progressively move the government away from an almost exclusive focus on private goods (curative care) and towards greater emphasis on public goods, such as research and information, stewardship of the whole sector, and public health activities (disease prevention and health promotion activities). To improve productive efficiency, KHSDRP will introduce a results-based approach to planning and service delivery, and stimulate competitive allocation of resources. Only investments and activities that prove to be cost effective will continue to be supported.

67. Financial Analysis. The state government expenditure on health and family welfare as a percentage of Gross State Domestic Product (GSDP) was stagnant at approximately one percent throughout the decade of the 1990s, and declined to 0.85 percent by 2003-04. Over the period from 1998- 99 to 2002-03, the share of health and family welfare expenditure over the total state expenditure

18 decreased from 5.5 to 3.9 percent. Moreover, over the same period the state increased expenditure on tertiary care and urban services and reduced allocations for primary and secondary health care services as a percentage ofthe total (see Annex 9). If these trends continued, government health care spending would not keep on par with the increasing demands generated by population and economic growth, and at the same time would become increasingly inequitable, favoring the better off, and neglecting essential public and primary care services.

68. More recently, both Go1 and GoK indicated a renewed commitment to health services and to ensure that the right to free essential primary care services, as articulated in the Tenth Plan (Tenth Plan, 2002-2007, p. 83) is fulfilled. The 2005-06 GoK’s budget announced an 18% increase in the health budget, and GoK has agreed to a Medium Term Fiscal Plan from 2004-05 to 2007-08, which anticipates a 13 percent annual increase in state government expenditure on health and family welfare (SGEHFW). KHSDRP intends to support this renewed government financial commitment to the health care sector, and at the same time provide explicit incentives to shift priority focus towards public health and primary care services, particularly in rural areas where some of the potential health gains from additional health coverage are largest. That is the reason why the programmatic part ofthe Bank’s financing will be linked to real increases in government expenditure on public health and primary care programs.

69. Long Term Prospects. The National Health Policy (2001) proposed that in the future each state should increase SGEHFW to 3% of GSDP, and up to 7% oftotal annual state expenditure, and that each state should spend approx. 55 percent ofthe SGEHFW on primary care services. In Karnataka this target would entail a more than twofold increase in SGEHFW, and a greater emphasis on public health and primary care services.

2. Technical

70. The proposed project will support GoK in achieving the policy goals stated in the KSIHP and Vision 2020 documents. The project aims to accelerate achievement ofthe health-related MDGs, through a broad, long-term process of development and reform in the health sector, built upon the conclusions of the Task Force on Health, and articulated through an intensive dialogue between GoK and the Bank during the project preparation period. The KHSDRP design also builds upon lessons learned in previous Bank-financed projects in Karnataka, and on best practices in other Indian states and elsewhere. The guiding principles in the design of the project are the following: (a) shift the focus to improving peripheral health services in order to achieve the health-related MDGs, with emphasis on areas currently underserved and vulnerable populations; (b) move towards a results-based system; (c) extend GoK’s attention beyond public provision, to include the private sector, as a means to expand basic health coverage to the poor; (d) diversify sources of financing for health, and enhance the “value for money” spent on health care, by introducing more rational, transparent and equitable resource allocation mechanisms; and (e) improve fiduciary processes. As explained in earlier sections, preparation has been informed by extensive analytical work carried out in the past two years, which included 6 separate studies financed by a PHRD grant.

3. Fiduciary

Financial Management

71. Support under KHSDRP will follow a dual approach of ‘programmatic support’ for existing government programs in primary and secondary care (for subcomponent 1B Improving primary and secondary care services’ effectiveness) and traditional project support for the innovations that form all other project components. In case ofthe programmatic support component, a substantial part ofthe funds would be used by the Panchayat Raj Institutions (PRIs); given the current state of the decentralization

19 reforms, the Bank support in this case would be for expenditure at the Zilla (District) Panchayats and releases to the Taluk (Block) Panchayats.

72. Overall, financial management arrangements at the Department level are adequate. However, considering that a percentage of the funds under the programmatic support component will be provided to the PRIs and it has been acknowledged that the local governments suffer from relatively weak financial management/assurance arrangements, specific arrangements have been worked out to ensure adequate fiduciary assurance on this component (see Annex 7).

73. The expenditures eligible for reimbursement from the World Bank under the programmatic support will fall under specific heads of account or “budget items” in GoK’s budget. The programmatic support will be provided on an incremental basis, equally sharing with GoK increases in the DoHFW’s own real expenditure under the agreed heads of account over the baseline. For support of the innovative activities which follow the traditional “project approach”, funds will be released to the Project Administrator. A significant share of total expenditure will be made at this level; for other expenses, such as renovation of subcentres and PHCs, funds would further be transferred at the district level, to the DPMUs. In either case, funds will be released through the treasury system in the form of a budget release order.

74. Disbursements will be made based on information as presented in FMRs; these will include information on budget as well as actual expenditure separately on the programmatic support and the innovative components funded through the “traditional” project approach. For the component under the traditional project approach, the Bank will reimburse all eligible expenditure at 90%. For the programmatic support component, the bank will equally match increase in GoK’s expenditure on eligible heads of account over and above an agreed baseline (actual expenditure for FY03-04) after discounting for normal increase of 5% on account of inflation (see Annex 7).

75. The finance and accounts function at the State Project Management Unit (SPMU) level shall be handled by a Chief Finance Officer (CFO), reporting to the Project Administrator. She/he shall be responsible for the entire financial management aspects of the project, including handling of the budget, consolidation of information, claim consolidation and submission, interaction with other offices/divisions and responding to audit related issues. The CFO shall be assisted by adequate staff7Finance Consultants who shall assist in consolidation and compilation of financial information. A Financial Management Manual (FMM) has been prepared; this manual documents the accounting and financial management processes and procedures in detail.

76. The Comptroller and Auditor General of India (CAG) through its office in Karnataka will be the statutory auditor for the project. The CAG’s office will conduct annual audit of the project; both for the innovative investments as well as the programmatic support of existing government activities in primary and secondary care. Audit Reports will be received in the following manner: (a) the CAG’s office will conduct an annual audit of the operations of KHSDRP (including all innovations managed through the SPMU and the part of the programmatic support that is executed and accounted for at state level); and (b) funds for a certain portion of the programmatic support component will be transferred to the local governments (PRIs) for expenditure on the health related activities. Information on the same will be available through the ZP (district) audit reports, aggregated in a consolidated report on audits by the DoHFW. Since all expenditure at the ZP level is already audited by the CAG (Karnataka) and this includes also expenditure relating to the health sector, KHSDRP intends to rely on the existing audit mechanism whenever possible. Detailed FM arrangements are described in Annex 7.

20 Procurement

77. Procurement will be carried out in accordance with IDA guidelines “Procurement under IBRD loans and IDA Credits”, May 2004, as well as “Selection and Employment of Consultants by World Bank Borrowers”, May 2004. In respect of subcomponent lB, the procurement would be done following the provisions of the Karnataka Transparency in Public Procurements (KTPP) and Act and Rules 2000 (which is applicable for all the procurement entities of the State), and the various circulars, orders, notifications/amendments issuedheing issued under the Act in pursuance of the implementation of the Procurement Reform Action for the State as a consequence of the State Procurement Assessment Report (2001).

78. All procurement activities under the traditional investment project components (lA, 2 and 3) will be coordinated by the SPMU. The civil works component entails construction of some new primary care facilities, small scale renovations and extension to selected facilities. The renovation and strengthening of health facilities in general will include internal and external renovation.

79. Procurement of equipment and other goods, furniture, and consultancy services will be handled by the SPMU.

80. For any procurement of medicines, the list of companies with valid certificates needs to be available in the public domain. State procedures for procurement of pharmaceuticals (including medical supplies) and medical equipment have been analyzed by a Bank consultant. Agreement has been reached on a Health Sector Procurement Reform Action Plan (HSPRAP), which contains a list of recommendations to improve transparency and efficiency in procurement (see Annex 8). For the purposes of procurement of pharmaceuticals and medical equipment under the program subcomponent (Subcomponent lB), Go1 and GoK will implement the recommendation of this Health Sector Procurement Reform Action Plan, including establishment of procurement manuals and standard bidding documents, as per paragraphs. 2.1 and 3.1 of the agreed Action Plan. Expenditures on pharmaceuticals (including medical supplies) will not be eligible for IDA financing unless such arrangements are established and concerns regarding Schedule M have been addressed in a way satisfactory to the Bank. For the purposes of procurement of pharmaceuticals (including medical supplies) under other components of the project (other than subcomponent lB), Bank Guidelines will be followed.

4. Social

8 1. Opportunities, Constraints, Impact and Risks: KHSDRP offers the opportunity to improve access to health services for those who are currently underserved.

(a) First, better primary care services will per se lead to an improvement of the redistributive impact of health expenditure (self-targeting of the poor in using primary care facilities: according to a recent study [Mahal and others, 200136],while 37 percent of Karnataka population was estimated to be below poverty line, only 18 percent of inpatient bed days in the public sector were by people living below poverty line. By contrast, 45 percent of outpatient visits at primary care were by people living below the poverty line. (b) Second, KHSDRP will focus its objectives and design on closing the gaps, as explained in previous sections (see sections A, B and C). Each component will target underserved areas and economically and demographically vulnerable groups on a priority basis. (c) Involvement of local bodies and communities in implementation of the SICF and PHCF will also promote a need-based approach.

21 82. The main socio-cultural/political constraint and risk KHSDRP faces are the difficulty of ensuring the delivery of health care to remote areas and poor and marginalized groups due to either inertia in the health system or a hijacking of benefits by the better-off.

83. Key Stakeholder Participation: Potential project beneficiaries (the poor, women, adolescents, tribal people, and others) have participated in project preparation through the social assessment and other community-based studies. Different cadres of health staff and officials, NGOs and other private sector representatives have also been involved in the preparatory studies and contributed to project design in various workshops. All have given their frank views, and many of these - particularly those concerning the current constraints and inefficiencies in the health system - have been taken into account in designing the project. It is expected that efforts to obtain feedback would continue throughout the project through community-based studies and surveys, participatory workshops, and so on. Primary stakeholders would be involved in project implementation through the oversight function exercised by the three-tiered Panchayat system, and more directly by being able to make proposals to the SICF and PHCF health funds to meet their needs.

84. There is no risk of adverse social impacts due to KHSDRP. A possibility of widening differentials in utilization of essential services would arise if the project failed to do what it proposes. M&E activities would indicate risks or failure, or positive impacts, by focusing the overall impact of project activities on the disadvantaged groups. The household surveys planned under component 3 of the project will examine the access to and quality of services received by the vulnerable groups. Both the actual improvement for these groups will be studied and their relative improvement vis-a-vis other, better-off groups.

85. The project intends to further strengthen public voice in governance for the health sector through the Organizational Development and the PHCF subcomponents (creating a more open climate for decision making); and the bottom-up new planning mechanisms proposed (particularly the PHCF), which will allow citizens groups, NGOs, and private practitioners to identify demand and provide services.

5. Environment

86. The project aims to improve the primary health care services in the state. Improving these services will also bring environmental benefits. Nevertheless, improper care or inadequate attention during the design, construction and operation and maintenance of PHC facilities may result in environmental issues. These issues include (a) deficient provisions and practices in relation to bio-medical waste management; (b) poor sanitation facilities; (c) lack of adequate water supply; (d) poor construction quality of building facilities and lack of adequate operation and maintenance; (e) improper positioning of PHCs; and (f) lack of personnel awareness on basic good environmental practices.

87. To study the nature and scale of these environmental issues, an Environmental Assessment (EA) was undertaken by independent environmental consultants. This included secondary information review, field visits to selected PHCs in sample districts and stakeholder consultations. To address these issues during implementation, an Environmental Management Plan (EMP) and a document specifying Minimum Design and Construction Standards for new PHC facilities were prepared. The EMP includes management measures and associated guidelines, training and capacity-building plans, communication plan, proposed stakeholder consultative processes, monitoring plan and a separate budget for implementation. The applicable national and state government policies have been taken into consideration in both the EA and EMP. To ensure effective EMP implementation, the project will have a full-time, state-level environmental officer and defined environmental responsibilities to selected officials at the district, Taluk, and PHC level. The EMP will also assist the implementation of the Environmental Quality and Infection Management Plan being done through the proposed RCH-I1 program.

22 88. For monitoring and evaluation, the EMP includes half-yearly internal and annual external monitoring of environmental performance. Adherence to the management measures and associated guidelines will be verified periodically. Based on the periodic monitoring reports, suitable follow-up action will be taken to strengthen the environmental performance.

89. GoK disclosed the draft final executive summary, EA and EMP reports in the SPMU office in Bangalore and in the District Health Offices in the various districts. The executive summary was translated in the local language - Kannada - and also disclosed along with the other documents. These reports were also disclosed at the Bank’s InfoShop in New Delhi and Washington, D.C.

6. Policy Exceptions and Readiness

90. The Government ofKarnataka completed the following tasks:

(a) Finalized and disclosed (i) Vulnerable Communities Health Plan and (ii)Environment Management Plan. (b) Finalized the Project Implementation Plan for the proposed operation and obtained internal clearances. (c) Finalized a Strategic Document for each of the project subcomponents, specifying rationale and operational strategy for implementing each subcomponent. (d) Finalized the Financial Management Manual. (e) Prepared the Procurement Plan for the project along with bidding documents for the procurements planned during the first 18 months of the project. (f) Prepared the Terms of Reference for the consultancy assignments planned during the first 18 months under the project.

23 Annex 1: Country and Sector Background

1.1 In this Annex we will briefly describe: (a) the Evolution of Government Intervention in the Primary Health Care Sector in Karnataka; (b) Health System Performance to Date; and (c) Goals for the Future.

1.2 The state of Karnataka has a long tradition of government involvement at the primary care level. Mysore state, which before independence included the Southern and the Central part ofthe current state, in 1931 was the first in the country to establish Rural Health Centres. The activities of these centers included village sanitation, investigation and control of the outbreak of epidemic diseases, immunization services, chlorination of drinking water sources and reporting ofbirths and deaths. A Bureau ofMaternal and Child Health was started as early as 1934.

1.3 In the first few decades after Independence, the national government took the lead in further developing health services in all Indian states, including the newly formed state of Karnataka. 37 Table 2 below summarizes some of the gains in priority health indicators achieved in Karnataka since Independence.

Table 2: Progress in Health in Karnataka since Independence

Source: SRS, 2002

1.4 Beginning in the early decade of the OS, the central government increasingly devolved the organization of service delivery to the state governments, although key health policies and strategies continued to be set at the national level. In primary care, state government became key players in the organization ofall aspects of service delivery, including human resources.

1.5 During the last two decades state of Karnataka has experienced an unprecedented rate of economic growth, one of the highest in the country, and this allowed it to consolidate the progress in health and health care achieved in the previous decades. As Table 3 indicates, progress in health system performance indicators has been significant. However, as Table 4 indicates, in 1998 Karnataka’s health care system performed was still not in line with the most advanced states in the South and the West.

24 Table 3: Variation in Key Health System Performance Indicators between Two Successive NFH surveys (1992-93 and 1998-99) in Karnataka

Health Output Indicators 1992 NFHSI 1998 NFHS-II kCH-II, 2003 Estimated Yearly Change During past Decade (based on NFHS 1992/93 and 1998/99) Percentage of children fully ~mmunized~~ 52.2 60 71 8 2 3%

/did not receive ORS or more fluids Source: NFHS Iand I1

Table 4: Comparative Health Service Coverage and Access Indicators in Several Indian States 1998

Percentage of Percentage of Percentage of Percentage of Percentage Percentage of Percentage of Children Pregnant Pregnant Pregnant of Instit. Births Married Receiving All Women Women . . Women Deliveries Attended by Women Using Vaccinations (1- Receiving at Receiving at Receiving Health Any 3Y) least 1 Ante- least 2 Tetanus Iron Folic Professional Contraceptive Natal Check Toxoid Acid (IFA) Method up Injections

Source: NFHS-11, 1998/99

1.6 The state seems to be still far from completing the epidemiological transition. The official data from the registered hospitals (public and private) suggest that in 1999 a large part of the serious conditions treated in hospitals was still related to communicable diseases and maternal and child services.

25 Cardiovascular diseases are also emerging as a major cause of morbidity and mortality, particularly in urban areas. Note that the information in Table 5 does not cover treatments sought from unregistered (and sometimes unqualified) rural health care providers, where maternal and child health and communicable diseases are likely to account for an even larger share ofthe total.

Table 5: Karnataka, Leading Conditions Treated in Hospitals and Dispensaries, 1999

Condition NO,OP I ’ NO.IP ~ Deaths” 3 % OP . YOlP YODeaths *: ‘

Source: Department of Health and Family Welfare, Government of Karnataka 1= Deaths from non natural causes; 2 = Tonsils and Adenoids; 3 = Bronchitis, Pneumonia, Influenza, Emphysema; 4 = the estimates are excluding abortion and normal delivery.

1.7 Striking inequalities in health outcomes and health system performance persist between rural and urban areas, and across different socio-economic groups. In fact, these inequalities seem to have widened over the last decade. For example, it is estimated that between 1990 and 1996 the rate of reduction in U5MR was 4.98 percent per year in urban areas, and only 2.79 percent per year in rural areas (NFHS-11, 1998-99), and that at the end of the decade USMR was almost two times higher in rural areas than in urban areas (95.5 vis-his 55.7 per 1,000). Striking inequalities also persist across different districts. For example, according to the RCH-I1 survey, in 2002, 92.2 percent of children received full immunization in the highest performing district (U. Kannada), but only 5 1.6 percent in Koppal, the lowest performing district.

1.8 In recent years, the state government has pledged to make improvements in human development and health outcomes a central part of its growth strategy. In 1999 GoK formed a Task Force on Health and Family Welfare (TFoHFW), entrusted with the role of assessing the state of government health care services and indicating the way forward. In April 2001 the TfoH&FW issued a final report outlining several recommendations to improve the quality and accessibility of essential health services. The Task Force emphasized the need to refocus services towards primary care, the need to improve governance and strengthen public health activities. The government endorsed the TFoHFW’s recommendations.

26 1.9 The Task Force also specified a set ofpriority health targets to be achieved by the year 2020, reported in Table 6. Some of the health targets are the same as those specified in the health-related Millennium Development Goals. However, the rate of planned improvement is slightly less ambitious than in the MDGs. As explained in the main text, in order to achieve the above targets GoK needs to close the gaps that currently exist in health service coverage, and expand accessibility and quality of essential health services particularly in the areas that are currently under-served and for the vulnerable groups.

Table 6: Health Targets: Karnataka Vision 2020

births Under-5 Mortality Rate I 87.3/1000 live I 87.3/1000 live births I 83.3/1000 live I 35/1000 live births births births Crude Birth Rate 24.7/1000 25.5/1000 20.4/1000 I 13/1000 population

Novena -Not Estimated Source: NFH Surveys - 1992-93 and 1998-99; SAR - 1996-97

27 Annex 2: Major Related Projects Financed by the Bank and/or other Agencies in the Health or Health-Related Sectors

Table 7: Major Project Financed by the Bank in India in the Health or Health-Related Sectors

Sector Project Credit Latest Supervision (ISR) and OED Number Completion Ratings Ratings Development Implementation

L. Objectives Objectives (IP) (DO) Bank- Rajasthan Health Systems Development 38670 MS MU financed Project Ongoing UP Health Systems Development Project 33380 Mu S Disease Surveillance 39520 MS MS Food & Drugs Capacity Building Project 37770 S S Tamil Nadu Health Svstems Proiect 40 180 MS MU

IPDOratings: HS (Highly Satisfactory); S (Satisfactory), U (Unsatisfactory) HU (Highly Unsatisfactory); MS (Moderately Satisfactory); MU (Moderately Unsatisfactory).

28 Table 8: Details of Externally Assisted Health Projects during the Decade of the 1990s

Name of the Period of ' Description of the Project . ' Project Value

*t Project Implementation ,a World Bank assisted Phase-1-1994-2002 Phase Iofthe project covered 0.851 Total outlay of the project India Population (in Bangalore) million urban poor in about 500 slums was Rs. 38.8 crore out of Project -1PP VI11 Phase-11-2000-2002 in Bangalore. It was an urban poor which Rs. 26.2 crore was (extended to slums based primary level intervention through the State budgets in 11 cities ) undertaken through NGOs, community workers, etc., to increase demand and supply for Family Welfare services. It made extensive use of contracted doctors and nurses. World Bank assisted 1994-2001 This was a rural primary health care The initial outlay was Rs. India Population project, to increase and improve the 122.1 crore. Actual receipts Project -1PP IX infrastructure in rural areas, and to were revised and stood at provide drugs, kits, supplies etc., and Rs. 123.8 crore. training to State personnel and community members across the State. OPEC assisted 1996-2001 The project constructed a 350- bed multi Total project size was Rs. Development of specialty Hospital in Raichur district 29.25 crore, out of which District Hospital in catering to people from Northern 90% was from OPEC as soft Raichur districts. loan Karnataka Health 1996-2004 The project focused on secondary level Total project cost was Rs. Systems care - it provided large civil 546 crore. The project was Development infrastructure investments and training. extended till September Project-I1 2004 Kreditanstalt Fur 1997-2003 The project led to the construction of a Initial project cost estimates Wiederaufbau total of 26 hospitals in Phase- 1 and 2 1 were Rs. 59crore, but it was (KfW) assisted hospitals in Phase-2 in the Northern then scaled down to Rs. Secondary level backward districts. 44.1 crore, due to sanctions Hospitals Project in imposed on account of India North Karnataka nuclear program.

World Bank assisted 1999-2003 The objective was to improve quality of The total initial project cost Reproductive and Family Welfare services with focus on was fixed at Rs. 190. Crore Child Health Project reproductive and child health. The and the spending was only project continued the investments Rs 91 crore. initiated under IPP IX

Current Situation

There were 10 externally aided projects operational in the State until last year, which are expected to continue in the next few years. State AIDS Control Project, National TB Control Program, and National Program for Blindness Control are operated through Societies and funds are directly released by GO1 to the societies, bypassing the state government budget. UNICEF has been providing project support to health related sectors such as Child Development and Nutrition, Water and Environmental sanitation, Education and Adult literacy. The second phase of the KfW assisted secondary level project in the Northern districts (Gulbarga Division) has already started implementation.

29 Annex 3-A: Results Framework and Monitoring

3.1 Measuring Service Levels and Improvements

In determining a method ofmeasuring service improvement, a number ofconsiderations have been taken into account:

1. It is not possible to devise a method that will measure every aspect of service because this would be unnecessarily time consuming and cumbersome. What is required is something that is a limited set of measures (which we call “tracer indicators”) that are representative ofthe service given. 2. The figures required in the method selected should be if at all possible routinely collected and therefore not require a completely new system of collection. There are already over 50 forms that each district returns to the DoHFW, and there is a case for rationalizing this weight of information rather than adding to it. 3. There should also be coordination and convergence between the figures collected for KHSDRP with those that will be collected as part of the proposed RCH-11, TB-I1 and other programs supported by the Union government. 4. Validating the results. Information on system’s performance needs to be validated using a plurality of mutually independent sources: management information systems, independent household surveys, facility surveys, and community reporting. 5. The health-related Millennium Development Goals - MDGs (which are outcomes indicators) should guide the choice ofoutputs indicators that are chosen. The health related MDGs are as follows:

MDG 4: Reduce by two-thirds the mortality rate amongst children under 5; MDG 5: Reduce by three quarters the maternal mortality ratio; MDG 6a: Halt the and begin the reverse the spread ofHJY/AIDS; MDG 6b: Halt and begin the reverse the incidence of malaria and other major communicable diseases.

The Karnataka Health System Development and Reform Project will contribute to achieve these goals together with other projects in the health and other sectors supported by the World Bank, including the proposed new RCH-I1 and TB-I1 projects, the Disease Surveillance Project and other projects under preparation.

As a result oftaking all the above factors into account, nine tracer indicators have been chosen as being appropriate for use. Table 9 below summarizes these nine indicators, agreed between GoK and the Bank. To better evaluate the impact ofKHSDRP in improving access to essential services particularly for those who are currently underserved, these 9 indicators will be collected and analyzed by geographical area (district and Taluk), and whenever possible by vulnerability (gender, age, BPL/non BPL, assets, education, caste, etc.). They will be reviewed regularly through the HMIS, and assessed in detail by the mid-term review (2 and 1/2 years into the project). To arrive at a composite index, using the following nine tracer indicators, it is proposed to use the following formula: Service level index= square root(((%SD)2+(%ID)2+(%PPA) z+(%,r)2+(%OP)2+(%IP)z+(%(100- API))”+(YoHIV)~+(YOTBCR)2))/(9-1)) (see Table 9) below for explanation ofacronyms). The use ofthe composite score is a useful short-hand for assessing performance, but should not be seen as ofparamount importance. What is crucial is that there is a reasonable and fair assessment ofwhether the service level in any district is increasing or decreasing.

30 tr W 0 B -0 U Q 8 8 8

m m m Annex 3-B: Quantitative Targets for the Health Sector Relative to the Time of the Project and Milestones in KHSDRP Implementation Plan For a subset of the above key output indicators described in the previous section, quantitative baseline data are available from the NFHS-I and I1 (1992-93 and 1998-99), and from the RCH surveys (1998 and 2002). For these indicators, GoK set quantitative targets for the next 15 years, reflected in the Vision 2020 document (see Annex 1). During the 5 years planned for the KHSDRP, it will be possible to monitor the evolution ofthese indicators disaggregated by geographical area and by socio-economic group.

34 rl m me, .-* > .-* 8 M-a CB 'E 8 sqE QF3 .-

m

I-

I-*

0 d 3 d N d Figure '1: The structure of KWSDKP

K tlt Component I:Strengthening Essential Government Health Programs towards the Achievement of More Effective and Equitable Delivery of Services [base cost=US$115.07 million]

SUBCOMPONENT h:ORGANIZATIONAL DEVELOPMENT [BASE COST = US$5.07 MILLION]

4.2 The Karnataka Health System Development and Reform Project, with the benefit of the experience of the ‘first generation’ of health systems projects, proposes to improve health outcomes by incorporating a results based approach as a key feature in its design. Reorganizing and changing the culture of the DoHFW to make it results oriented and developing its stewardship role are a major undertaking, which will require changing the way many staff within the public health sector function and address their roles and responsibilities.

4.3 To underpin these reforms KHSDRP will facilitate: (A) an Organizational Development strategy that will: (i)support learning activities for key officials working at state and district level in order to improve health programs’ planning, implementation and performance-based monitoring; (ii)conduct information and dissemination activities to inform all stake-holders and specifically local government representatives about the KHSDRP objectives, strategies and structure; (iii)create capacity among public and private providers to work together under Service Agreements; and (iv) initiate a quality enhancement process through accreditation for private providers. (B) A process of institutional reform within the Department of Health and Family Welfare (DoHFW).

4.4 The following paragraphs will focus on the OD strategy (point 1 above), while the internal reorganization process with the DoHFW (point 2 above) in is explained in the Project Implementation Plan, Chapters 3 and 4. This reorganization would include: (a) the creation of a Health Planning Unit, responsible for informing policy-makers on strategic issues in the health sector and for assisting districts in the development of their Service Improvement Plans, by collecting and analyzing data from a strengthened and integrated HMIS system; (b) the creation of a Public Health Directorate in the DoHFW, to strengthen institutional capacity to organize public health services.

The Organizational Development Strategy

4.5 Considerable capacity building of various types is required to implement the project. Specifically for the implementation of the results based approach, there is a need for a particular type of capacity building, which to distinguish it from other types will be called organizational development (OD). OD means not only the acquisition of new skills and knowledge, which requires external technical assistance and internal capacity building activities, but also the adoption of ‘new ways of doing things’. Changing the culture of the DoHFW will require sustained effort throughout the project and beyond. Key officials will need to be supported in the process, and the transition is heavily dependent on accelerating learning of these key officials who need to develop new ways of working and approaches to their work. These key officials identified to be the focus of the organizational development learning activities are as follows:

(a) State Health Commissioner (HC) (b) Project Administrator (c) State Director ofHealth and Family Welfare Services (DHS) (d) 27 District Health Officers (DHOs) (e) Chief Finance/Accounts Officer (f) Total 3 1 officers

4.6 The OD program will be characterized by the following types of events: meetings, workshops, conferences/seminars, study tours both within India and possibly abroad, and training.

44 4.7 It was agreed that the OD program would be managed on behalf of the Health Commissioner by a consultant agency skilled in up-to-date management practice and in facilitation. This agency will facilitate all the events listed above. The role of facilitation includes:

(a) encouragement to address key issues; (b) prompting the Team when things are being overlooked; (c) advising the Team on managerial issues; (d) dialoguing withkhallenging the Team when necessary.

Capacity Building Activities at the Local Level, to Enhance Planning, Implementation and Monitoring of Primary Health Care Programs

4.8 The KHSDRP plans to align with and to contribute to the ongoing devolution process. Its programmatic support to ongoing programs in primary care will be channeled through the existing government implementation arrangements, which are characterized by an ever increasing role for local governments in planning and execution.

4.9 The KHSDRP seeks to contribute to building capacity at the local level for planning, implementation and monitoring of health care programs by engaging local representatives in the Organizational Development activities. Building capacity at the local level is necessary to help achieve better quality standards in health care service delivery.

Capacity Building Activities to Enhance Quality of Care in the Private Sector, and Support Public- Private Partnerships

a. Strengthening the Regulatory Framework for Health Care Delivery by Developing a New Accreditation System

4.10 Quality of care will be improved by establishing a voluntary accreditation system. Accreditation seeks to encourage organizational development and continuous quality improvement. It is usually offered as an option to service providers, an option that may strengthen their market position. An accreditation system should:

(a) be based on written and published standards, (b) engage professional peers in quality assessment and assurance, and (c) be administered by an organization which is independent of both providers and the government.

4.11 As part of the process to establish modern and well functioning accreditation systems, a plan to enhance the capacity of the Department and of the private sector to set and monitor regulations and standards has been agreed. Staff of the Karnataka DoHFW and the Indian Medical Association will be sent to attend courses on health care accreditation, and will then develop seminar series in the state with participation from both the public and the private side. One such seminar sponsored by WHO took place in Kerala in October 2005.

b. Working in PPPs - The Government Side

4.12 The government has a stewardship role to play for ensuring that both the public and the private health care systems operate and interact in such a way that all parts of society, and especially the more vulnerable parts, have access to affordable good-quality health services. KHSDRP aims at enable the

45 DoHFW to increasingly enter into Service Agreements (SA) with private providers for delivering services to the people at agreed standards.

4.13 There are a number of areas where the DoHFW could enhance its capacity, such as

(a) preparation of SA, (b) negotiating with private providers, (c) monitoring the implementation of the SA, (d) correcting inadequate compliance with SA.

4.14 The DoHFW should also learn and build upon the experience in other Departments in working with the private sector. The institutional arrangements in these departments should be reviewed and compared to the current organization of the DoHFW.

4.15 Senior managers participated in an orientation and consensus building workshop at the start of the project. Each year, a learning workshop is planned, with participation of senior level managers to evaluate the experience with PPPs within the project. The workshops could also bring some experience on contracting with private sector providers from other states in India or neighboring countries.

4.16 Concerning mid-level managers, a three-day workshop/course on how to work with Service Agreements will be developed. The workshop should be held before contracting in or out is initiated, and could target the districts where the first round of PPP initiatives is planned.

c. Working in PPPs - The Private Side

4.17 For successful implementation of Private Public Partnerships there is a need to strengthen the capacity of private providers to deliver and manage services under Service Agreements. The private health care sector consists of a few larger size organizations for hospital and laboratory services, a large number of small group practices with one to a few providers (nursing homes), and then the not-for profit non-governmental organizations (NGOs), which vary in size. At present, the managerial and financial capacity of the private providers to deliver primary health care services is limited.

4.18 KHSDRP will strengthen this capacity through various activities such as training, technical support on legal and managerial matters, and interaction through professional associations on management issues.

SUBCOMPONENT IB: IMPROVING PRIMARY AND SECONDARY CARE SERVICES’ EFFECTIVENESS (BASE COST= Us%110MILLION)

4.19 Analysis of the health budget (see Annex 9), studies on utilization, and on health system performance in the state suggest that the government health care delivery system suffers from severe under funding of certain essential items relating to primary and secondary care, such as maintenance of equipments and infrastructure, medicines, medical supplies and consumables, training, travel related to outreach activities and emergency transport, incentives for personnel posted in remote areas linked to performance, etc.

4.20 KHSDRP aims to contribute to relax these supply-side bottlenecks, by providing additional financing to a broad range of programs in public health, primary and secondary care reflected in the DoHFW’s recurrent budget in order to improve the system’s performance.

46 4.21 Specifically, the objective is to contribute to the achievement of the priority human development targets set by GoK in the Karnataka State Integrated Health Policy (KSIHP) 2004 and in the Vision 2020 documents, by: (a) providing an explicit incentive to increase expenditure on the peripheral health services (primary care, public health and selected secondary care services); (b) linking additional financing to improvements in performance; (c) contributing to the ongoing process of reform of the DoHFW, initiated with the recommendations of the Task Force on Health, in particular focusing on the process of preparation, implementation and monitoring of the budget.

4.22 After the first year, in order to have access to subsequent project installments under this subcomponent, the DoHFW will have to fulfill some key agreed benchmarks/milestones (see Annex 3). These milestones identify some key diagnostic tools to enhance the department’s ability to monitor its own performance, key benchmarks in the reform process, and some priority output indicators whose improvement would signal enhanced performance of the system.

4.23 This subcomponent will follow a programmatic approach to disbursement. During project preparation, GoK and the World Bank have agreed on the following steps: (a) the total amount of this subcomponent; (b) identification of activities eligible for financing and of the heads of account in GoK’s budget that finance those activities; (c) statement of the financing mechanism or formula, linked to commitment of the government to increase real expenditure on the eligible activities; (d) reporting mechanisms for the expenditure on these eligible activities, and Bank reimbursement of the same as per the formula; and (e) adjustment of the initial disbursements according to actual expenditures resulting from audited accounts The following pages will start explaining the above steps, which will then be taken up again in Annex 7.

4.24 Amount of the Subcomponent. It is proposed to have a cumulative provision of US$55.00 million for a five-year period. It is also proposed to carry forward the un-drawn program financing, if any, in any financial year, and to have a cap of US$15 million to the total that can be disbursed in any given fiscal year for the first three years.

4.25 Identification of Activities Eligible for Financing. In order to avoid dual financing for the same progradactivities, and focus exclusively on the essential primary and secondary health care services, a negative list of budget items (heads of accounts) not eligible for financing has been drawn up, which includes items:

(a) supported by Govt. of India; (b) supported by other Externally aided projects; (c) relative to tertiary level hospitals and hospitals attached to teaching institutions.

The exclusion of the above list leaves a broad positive list of items, to which the Bank support can be linked. The heads of account eligible for World Bank financing will be part of this positive list. Note that this positive list of eligible heads of account will include assistance to local government bodies to carry out programs and schemes in primary and secondary care. Panchayat Raj Institutions (PRIs) now receive nearly about 35% of the budget for health care of the State, to administer and maintain all hospitals and other health establishments with less than 100 beds, and to carry out public health (disease prevention and health promotion) activities. In 2004, GoK has transferred as many as 56 additional programs/schemes to the PRIs. As PRI institutions have assumed a key role in service delivery at the primary level, they will also receive support from the World Bank in order to achieve the main project’s goal of expanding coverage and quality of essential health services. The financial management arrangements under the project for PRIs, agreed upon with GoK are explained in Annex 7.

47 4.26 Financing Mechanism. Financing under this subcomponent shall be governed by the following assumptions:

(a) fiscal year 2003-04 is the latest fiscal year for which actual expenditure figures were available at the time of finalization of this subcomponent (Autumn 2005), and it is therefore taken as the baseline year. Only real (nominal increases above 5 percent annually) increases in expenditure on the eligible heads ofaccount from the 2003-04 level will qualify for IDA co-financing. (b) Any additional expenditure by GoK on the eligible heads of account over and above the normal growth rate of5 percent shall be co-financed in equal shares by GoK and the World Bank. (c) Disbursement under the programmatic subcomponent will start in fiscal year 2006-07 (year t=l, from April 1, 2006 to March 30, 2007), and will continue for five years, until fiscal year 2010-1 1 (year t=5, from April 1,2010 to March 30,2011)

4.27 Reporting Mechanisms for the Expenditure. Financial statements /or Financial Monitoring Reports will form the basis for reporting of expenditure for disbursements from the Bank. In order to determine the quantum of financing from the World Bank for the programmatic approach the following funding formula will be used:

Step 1 = Determine the incremental releases (IR) for each fiscal year t under the eligible heads of account:

EF (t) = R (t)Fm - T (t)

Where, EF (t) = amount eligible for financing from the World Bank in fiscal year t. R (t) ~m = fiscal year t releases on the eligible heads of account resulting from FMRs; T (t) = threshold level ofexpenditure for fiscal year t. These thresholds -computed on the basis of Fiscal Year 2003-04 actual expenditure on the eligible heads of account- and explained in Annex 7, shall be Rs. 537.60 crores for Fiscal Year 2006-2007, shall be Rs.564.48 crores for Fiscal Year 2007-2008, shall be Rs.592.70 crores for Fiscal Year 2008-2009, shall be Rs. 622.34 crores for Fiscal Year 2009-2010, and shall be Rs.653.46 crores for Fiscal Year 2010-201 1.

Source: FMRs for the eligible budget heads of account, to be submitted within one month from end of each fiscal year.

Step 2 = Determine the Word Bank gross disbursement under the programmatic subcomponent in fiscal year t:

WBG (t) = EF (t) * 0.5

Where, WBG (t) = World Bank gross disbursements under the programmatic subcomponent for fiscal year t. EF (t) is as defined above (Step 1). 50 percent is the agreed share of co-financing by the World Bank of additional real expenditures under the programmatic subcomponent.

4.28 Adjustment of Programmatic Financing on the Basis of Actual Expenditure: total gross disbursements in each fiscal year will be corrected according to audited actual expenditures on the agreed heads of account. The following two steps will determine the adjustment to the gross disbursements:

48 Step 3 = Determine the adjustment to Word Bank disbursement under the programmatic subcomponent for year t on the basis ofthe difference between total expenditure resulting from the consolidated report on Audit ofthe expenditure on the eligible heads of account, and the total resulting from FMRs (for more detail, see Annex 7):

ADJ (t) = AE (t-1)-R(t-1)FMR

Where, ADJ (t) = Adjustment of gross disbursement under programmatic subcomponent in fiscal year t. ADJ (t) can be positive or negative. AE (t-1) = previous fiscal year (t-1) actual expenditure for the identified heads of account, as resulting from audited reports. R(t-1) FMR = fiscal year t-1 gross disbursements, according to FMRs.

Source: Actual expenditure resulting from the consolidated report on Audit of the health sector related expenditure compared to total resulting from FMR reports relative to previous fiscal year for the agreed heads ofaccount.

Step 4 = Determine the Net Word Bank Financing for fiscal year t as follows:

WBN (t)= WBG (t) + 0.5*ADJ (t)

Where, WBN = World Bank net financing for fiscal year t under programmatic subcomponent. WBG (t) and ADJ (t) are as defined above.

Component 11: Innovations in Service Delivery and Health Financing (base cost=US$67.52 million)

SUBCOMPONENT Ih: INNOVATIONS IN SERVICE DELIVERY LINKED TO NEED AND PERFORMANCE (BASEcOST=us$57.27)

Instrument 1: Service Improvement Challenge Fund (SICF)

4.29 The ‘challenge’ and the thrust of the SICF are to expand coverage of ambulatory services by experimenting innovative approaches to service delivery and infrastructure planning. Ambulatory health care services include both personal preventive services and personal treatment of acute illness without hospitalization. Essential ambulatory health care services can be provided by government and non- government providers and in fixed facilities or in outreach settings in the community.

4.30 It is envisaged that in order to move towards a results-based approach, a process of planning and implementation for service improvement will be introduced at local level, to be reflected in Service Improvement Plans (SIPs). These will detail the priority investments for service improvement in the district. Standard formats outlining a common framework for the SIPs would need to be determined at state level by the DoHFW; within this framework every district will be free to choose its own priorities to improve services.

4.3 1 The SICF will operate under the following principles:

(a) SIPs, detailing proposals to be selected under the SICF will be driven by local initiative, whereby proposals are initiated by local teams under the leadership of Taluk Health Officers, assisted by the District Project Management Unit at district level. SIPs will be drafted by integrating

49 proposals received from each Taluk, in consultation with the senior DoHFW’s Program Officers under the leadership of the District Health Officer. (b) The Health Commissioner, Project Administrator, the Director of Health Services, and the District Health Officers and their respective support staff will be key officials involved in the operational planning and implementation of the SICF. Each District Health Officer is responsible for sending the SIP to the Health Commissioner and the Project Administrator for approval within the agreed time frame. (c) Approval to investments proposed in district Service Improvement Plans will be given based on objective criteria that give priority to improving primary care services in underserved areas. (d) The operation of the Service Improvement Challenge Fund will be consistent with the current relationship between government health services and the Panchayat Raj Institutions (PRIs), particularly the Gram Panchayat (GPs) and the Zilla Panchayat (ZPs), and these institutions will be fully involved and consulted throughout the preparation of the SIPS. (e) There will be a biannual process of planning with rigorous monitoring of progress in improving the primary care service delivery, and timely corrective action when there is failure to improve services. The SIPS will also have to translate in annual action plans, and progressively be mainstreamed in the current budgetary processes according to which the DoHFW and local governments plan and implement health care sector activities. (f) Further investments in any district will depend on the success of delivering primary care service improvements planned for the first phase of investments in that district. (g) The Service Improvement Challenge Fund will be used for improving assets and asset management, for supporting innovative schemes in service delivery, and for providing performance-based incentives to staff.

4.32 As far as infrastructure for primary care is concerned, the SICF will be used for select investments in the following facilities:

(a) new Primary Health Centers (PHCs) complexes; (b) refurbishment of existing PHCs; (c) new subcentres; (d) refurbishment of existing subcentres; (e) refurbishment of existing Community Health Centers (CHCs); (f) other facilities to provide primary care facilities (including Primary Health Units, etc.); (g) selected First referral Unit (Taluk hospitals and District hospitals) investments.

4.33 The SICF will also select innovative initiatives in service delivery. The menu of innovative strategies available for increasing access and quality for essential ambulatory health care services will be large and diverse. However, two strategies will be the primary focus of this component: (a) engaging private providers to enhance the delivery of essential services (under public-private partnerships or PPPs) and (b) innovative strategies to strengthen services’ outreach to remote rural and tribal populations.

4.34 The PPP activities under this component will include contracting out to private providers (not-for profit and others) the operation of health facilities or mobile units in poorly served areas or underperforming units, and contracting in of clinical and non-clinical services. The contracting out activities will build on GoK’s previous efforts to offer contracts to outside organizations to operate PHCs in areas where the government was not successful.40 Two main modifications will be proposed to the current contracts for service delivery. First, KHSDRP will offer additional funding to increase the government’s offer to the non-government sector for PHC operation. Second, KHSDRP will develop new contracts incorporating performance based provider payment, with rigorous monitoring of performance.

50 4.35 The PPP is meant to be a scheme to increase the "value for money" that the government receives from its own scarce resources. It is not at all meant to relieve the government from its key responsibilities, and it is thus not a form of privatization. It will be successful if and only if it will lead to an increased level of services and greater cost-effectiveness in the delivery ofprimary care services.

4.36 The contracting in activity under this component will include both clinical and non-clinical service providers. Medical staff would include general practitioners to serve in PHCs and CHCs, and full and part-time specialists primarily to serve in CHCs and referral units, including obstetricians/gynecologists and anesthetists who at present are in short supply in government services. Ancillary services, such as diagnostic testing, will also be contracted in.

4.37 GoK has been trying to recruit and hire under temporary contract generalist and specialist medical staff for rural health facilities for some years. The rates offered were typically less than government salaries for equivalent staff and there were an insufficient number of takers. Strategies to improve the contracting in experiment include increasing payment levels and alternative payment methods rewarding performance; other pecuniary and non-pecuniary incentives; part-time service; etc. Alternative contract offer designs will be monitored for yield, length of time remaining in service, and appropriate output measures such as physical presence, volume ofservice delivery, staff satisfaction, etc.

4.38 At the same time, contracting in ofsupport services, such as cleaning and maintenance, which has successfully been in place for some time in Karnataka, supported by the World Bank in secondary care facilities under the first Karnataka health project (1996-2004), will be expanded to PHCs and sub-centers, including the financing ofan assistant to the auxiliary nurse midwife who staffs the sub-center level.

4.39 The innovative activities to extend health services to populations who have not been successfully reached in the past also include the extension ofmobile clinics to remote areas, especially those inhabited by Scheduled Tribes and Scheduled Castes, and the recruitment, training and posting of Tribal ANMs in areas with high ST concentrations. Both these activities are based on suggestions received during the Social Assessment carried out with SC/ST people during project preparation. They comprise the main activities in the "Vulnerable Communities Health Plan". The mobile clinics and ANMs will be equipped to deal with the health problems that are especially important in these populations/areas, and for which modern medical assistance is not usually available or sought. Poor women and children are the key target groups - both within and beyond the SC and ST populations in these backward areas. The progress of these activities will be monitored by the 'inputs' of number of clinics held and Tribal ANMs trained and posted, and the 'outputs' of number of patients treated, number of deliveries attended, etc. Their success will be judged on the basis of several outcome indicators (listed in Annex 3) disaggregated by SC/STs and poor/rural/tribal areas. The operation of mobile clinics will also be contracted out to NGOs under Service Agreements specifying the expected levels of service and performance.

4.40 It is appreciated that the development of a results based approach is a substantial change for the DoHFW. Taking this into consideration, it proposed that the SICF will comprise of three phases during the lifetime ofthe project. SIPSwill be introduced only from phase two.

51 Is‘Phase Description

4.41 The lstphase will be characterized as follows:

(a) The phase will tentatively comprise of the building of maximum 50 new PHCs and 108 sub- centers, the contracting out of at least 10 PHCs, a first phase of renovation of selected facilities, the launch of the mobile clinic scheme (with Service Agreements for NGOs to run them), and of the tribal ANM scheme.

(0 For infrastructure, each and every district41 has been asked to submit proposals for new buildings and for refurbishment of existing buildings. A maximum of two new PHCs, sanctioned by ZPs, and four sub-centers is planned in each district. Seven specific criteria (four preconditions and three conditions) have been agreed to assess these proposals, namely: (1) land is available and in the ownership of government (yes or no); (2) local authorities have given written assurance that the water and other services, and road access are available or will be made available before the start of building (yes or no); (3) the site has no encumbrances (yes or no); (4) the Zilla Panchayat has been consulted about the proposal and has given its approval (yes of no); (5) the PHC is within the boundary of the village in the desired locality (Le. it is within easy access ofthe population it will serve). If yes score ‘5’, if no score ‘0’; (6) the site is suitable (at least two acres) for building work to start (Le. it is flat and needs no preparatory work), score 5 for ‘yes’ and score zero for ‘no’; (7) the level of poverty of the Taluk in which the PHC is situated, most backward score 10, more backward score 8, backward score 6, and for others score 4.42

(ii) For the innovative schemes (PPPs, mobile clinics, tribal ANMs, etc.), a first phase of investments will be launched in a few selected districts. For contracting out, the new performance-based Service Agreement (contract) provisions and payment method have been defined. In the first months of the project, a three-day workshophourse on how to work with PPPs is planned for DoHFW officers and private sector representatives in the districts where some PHCs will be contracted out. The course will explain the objectives of the PPPs, the rationale and structure of the Service Agreements, and how performance will be monitored. For contracting in, stakeholder meetings with non-government clinicians and professional associations will be organized to try to identify positive strategies to increase the effectiveness of contracting in. The tribal ANMs and the mobile clinic scheme will be launched in the second half of year one.

(b) Draft Service Improvement Plans and performance targets will be determined whilst building work and the other innovative schemes are underway

4.42 Preparation for the lstphase is already underway. DHOs have been sensitized to the objectives and activities planned under KHSDRF’. The Health Commissioner and the Project Administrator formally requested DHOs to submit proposals initially limited to infrastructure investment (point i above), and at present expanded to include PHCs proposed for the contracting out scheme. For new infrastructure, the request from the HC and PA has been accompanied by a statement of the 7 criteria to be applied to possible proposals. DHOs have scored all the possible proposals for new PHCs and for new sub-centers and have submitted their proposals to the ZP for consideration. Both the decision of the ZP and the complete scoring of all the possible proposals have been submitted to the Health Commissioner/Director of Health Services. A plan for an initial list of priority renovations has also been submitted.

52 4.43 In the meantime, collection of baseline information on current levels of service for the nine key output indicators (see Annex 3) is underway. During the first phase of investments under the SICF, supported by capacity building activities, the DHO in agreement with the state level will assign service improvement targets to the new proposals being prepared.

2"dPhase Description

4.44 This phase will be characterized by the following:

(a) All the districts will need to submit Service Improvement Plans. These will comprise of a mixture of proposals concerning upgrading infrastructure (new buildings, refurbishment of the existing buildings, provision of equipment and furniture), as well as innovative schemes in service delivery (PPP, mobile units, incentives for providers, etc.; see above). The SIPs also need to contain a commitment to achieve a certain level of service improvement (measured by the 9 key output indicators listed in Annex 3), together with a clear description of how these improvements are going to be measured. (b) If a district does not cooperate and does not submit its SIP, then the district will not be eligible for continuation of funding until the situation is corrected. Only if a district performance during the 1st phase is judged as satisfactory, then the same district would be eligible for the same type of investments proposed in the first phase during phase two. Otherwise, the DHO would need to indicate what she/he will do differently during phase two, to be considered and funded. (c) The DoHFW (Health Commissioner) will formally request all DHOs to submit proposals (SIPs) during the second quarter of the second year of the project. Proposals will be submitted in a simple plan format showing the service improvement to be achieved through proposals for infrastructure and other investments.

4.45 Proposals would be judged on the basis of their potential to achieve improvements in the 9 key output indicators listed in Annex 3, and additional criteria for infrastructure will remain the same as for the first round of proposals.

3rdPhase Description

4.46 The 31d phase will follow the same pattern as the second except that in this phase districts will be required to submit a full Service Improvement Plan (SIP) which will cover all the actions the district proposes to take in improving the services to be delivered to local people, and not just limited to the funds provided under KHSDRP. Only districts, whose performance has been satisfactory during the first two phases, will have their proposals considered. For the others, SIPs will not be supported until corrective action is taken which would guarantee the removal of all the obstacles that thwarted service improvement during the first two phases.

4.47 It is crucial that the key officials in the DoHFW exercise adequate stewardship on districts so that the infrastructure part does not take the lion-share of the proposals contained in the SIPs. The SIPs need to suggest strategies to cover the gaps, in terms of personnel, drugs, and assets, which prevent a more effective delivery of services, but they should also focus their attention on alternative and more cost- effective ways of delivering services at the grass-root level. The OD activities, described under component lA, are meant to progressively build capacity and thus support the process of development and implementation of the SIPs among this group of key senior officials.

53 Instrument 2: Public Health Competitive Fund

4.48 The Public Health Competitive Fund (PHCF) will select public health initiatives that have community involvement and are results oriented. Four key principles will guide the implementation of the PHCF:

(a) The Fund will support health and health-related activities other than the delivery of curative services, which seek to improve the health status of a community, particularly where the community is poor or disadvantaged. These activities could include communication for behavior change, hygiene improvement, vector control, sanitation and others, and could be scaled to a block, district or even the entire state. (b) Initial support will be provided on the basis of how a proposed activity is assessed against a set of objective criteria, specified in an Operational Manual produced as part of project preparation. Continuation of any activity will depend on results achieved during an agreed time period. (c) The PHCF is open to any organization that meets qualifying criteria. The organization may be a local government (GPs), NGOs or a for-profit corporate body. (d) The management of the PHCF will reflect its purpose of community involvement for results: representatives from various organizations, including DoHFW, other concerned Departments and the private sector will contribute to decide how support is given, in what amount and to whom.

4.49 Based on these principles, the PHCF will be managed by a Management Committee that will, at the outset, finalize the priority public health issues facing the state of Karnataka and obtain consensus on the qualifying criteria that will make an organization eligible to bid, specified in the PHCF Operational Manual. The criteria would range from mere authorization by a Head of Department (in the case of a government department) to registration under the Societies or Companies Act and submission of audited accounts (in the case of an NGO or private company). The Management Committee would also set the process of submitting proposals, and the criteria for assessing proposals submitted by organizations meeting the qualifying criteria. These criteria will change as activities move from the phase of initial proposal to a later phase when an application for continued funding is made and results are measurable. An Operational Manual has been prepared, describing all these processes and criteria. This Manual will be posted on the web in the next few months so that maximal transparency is assured.

4.50 For the first phase, criteria for assessing proposals would include (a) appropriateness -the extent to which the proposal addresses an important public health issue affecting the poor, including priorities identified by the Management Committee; (b) technical content - the extent to which there is demonstrable evidence that technical issues are recognized, understood and provided for in the proposal; (c) implementation potential - the extent to which there is evidence that the applicants have the capacity to execute the proposal in terms of staff/volunteers/partners, management systems and prior experience; (d) control systems - the extent to which the applicants appear to have the capacity to manage money effectively and efficiently; and (e) measurability of results - the extent to which the proposal presents, or recognizes the need for baseline data, monitoring systems and measurement of results. Applications for continued funding will be assessed on the results achieved, the lessons learned and the extent to which the proposal for continued hnding reflects improvement in scope, strategy and/or implementation mechanisms.

4.5 1 Experience with similar funds elsewhere has shown that the extent of awareness created about the PHCF, the clarity of criteria and the transparency in selection will be crucial to determining its success. Appropriate attention will be paid to these factors. Prior to the launch of the PHCF, an information campaign is planned to sensitize key staff in the DoHFW, local governments, NGOs, and private sector

54 representatives about the objectives, scope and design of the PHCF, and on the procedures to draft proposals and bid for the PHCF.

SUBCOMPONENT IIB: INNOVATIONS IN HEALTH FINANCING (TOTAL COST = US$10.25 MILLION)

4.52 Recent evidence from several studies in India confirms the high level of financial burden on households for health care, as evidenced in very significant levels of household out of pocket spending. Data from the NSS 52ndRound and the Public Expenditure Review carried out in preparation of KHSDW confirm this situation in Karnataka. In addition, several recent studies show that high levels ofhousehold health spending are a frequent cause ofhouseholds being thrown into poverty.

4.53 To date, most efforts to provide health insurance have faced difficulties in both design and implementation. Many small scale schemes are unable to provide adequate risk protection because of the small pool of members. Often the poor are unable or unwilling to take up health insurance because of its cost, even when it is highly subsidized. Organizing and administering health insurance, especially in rural areas, is also difficult.

4.54 In 2003, the Government of India created a “Universal Health Insurance Scheme” (UHIS) to provide coverage for hospitalization and associated work loss. The scheme is offered by the four state-run insurance companies which work in different parts of India. The scheme has gone through several revisions as the government seeks to attract low income households to join through various levels of premium subsidy to individuals, families, and groups. Despite these efforts, the uptake of the scheme is very low after almost two years, approximately 20,000 poor households nationwide.

4.55 The Government of Karnataka also launched several health insurance schemes. The largest is Ye~hashvini~~,which currently reaches over two million members and is expected to expand further in the coming years. Yeshashvini enrolls primarily members in rural cooperative societies and covers mainly surgeries done in accredited, mostly private, hospitals. Thus, it provides only partial financial risk protection and doesn’t reach many below-poverty-line households. Technically it is a prepayment scheme run by a non-profit society, rather than a legally-defined health insurance. It receives a significant subsidy from GoK’s Department of Cooperatives. Several other smaller schemes involving NGOs, special societies, and private hospitals have emerged in Karnataka with varying degrees of coverage and viability. In addition, during the 2005-06 budget year, the DoHFW has launched a new scheme to expand uptake of the UHIS in the state. Implementation of this scheme has just started in August 2005 and will be monitored carefully by the task team.

4.56 GoK is also poised to significantly further expand its health insurance efforts. There is significant interest in trying to reach the rural population and the poor with insurance schemes. Bank assistance was requested for this expansion.

4. 57 However, during project preparation it was determined that there remain important questions about how to design and implement health insurance for rural populations in ways that could reach the poor, be financially viable, achieve significant uptake, and be sustainable. It was agreed that the project could make an important contribution only through a well-designed and evaluated pilot. This component ofthe project will provide this contribution through a significant health insurance experiment to fill major knowledge gaps and provide valuable experience in how to develop and implement health insurance.

4.58 The general objective of this proposed health insurance pilot is to improve the health status and financial security ofpoor rural families in Karnataka. Specific objectives include:

55 (a) to design and implement a health insurance experiment intended to provide a significant package of financial protection against health expenditures related to hospitalization to approximately two million people in selected rural areas of Karnataka over a period of five years; (b) to develop and test several different models of insurance design and implementation, including variations in benefit package, household contributions and subsidies, and scheme administration. (c) to thoroughly document the technical analysis and implementation process steps and lessons learned in developing a rural health insurance program in India; (d) to rigorously evaluate the schemes in terms of impact on health indicators, poverty, and labor force effects through a combination of appropriate implementation design, periodic surveys, and routine monitoring; (e) to use the resulting documentation and analysis to strengthen health financing policy in Karnataka, India, and the wider internationalhealth community.

4.59 The exact design of the experiment will be developed in the first year of the project. Several alternatives have been examined, and it has been decided that one promising strategy would be to incorporate and supplement GoI’s UHIS, allowing GoK to access the national government’s subsidy for the poor enrolling in UHIS (currently equal to Rs. 200 for a Rs. 365 per annum premium for individual members), but also experimenting with several different benefit packages and scheme designs. A three part design for the experiment would include: UHIS “as is”; UHIS combined with a supplementary policy that would cover pre-existing conditions and provide a higher ceiling on total hospitalization benefits; and UHIS plus the supplementary policy on hospitalization combined with a primary care coverage scheme using community-based risk funds. Improving the marketing, distribution, and administration of insurance would be essential for any scheme design.

4.60 The evaluation will also include a control group and will measure results in terms of financial risk protection, health outcomes, and labor force supply effects. With sound measurement of costs and benefits, this experiment will help GoK decide on the future importance it might give to health insurance. This experiment will also provide valuable evidence for India as a whole, an important public good contribution. The Ministry of Finance, GoI, has already expressed its support for this type of experimentation and the view that this will assist the national government to develop its own strategies for health insurance.

4.61 The first year of implementation under this component is earmarked for addressing the knowledge gaps and to working out a feasible design for the insurance program and its evaluation. In fact, this process has begun during the project preparation period and is being supported by GoK funds in advance of project launch. A senior staff member of the KHSDRP SPMU has been appointed to lead work on this component and is already working full-time on it. A long-term consultant with technical insurance expertise has also been recruited. A short-list of districts for the experiment has already been identified. A formative survey of community needs, knowledge and awareness, and willingness to pay/participatehas already been designed and pilot tested and a TOR prepared.

4.62 In terms of implementation arrangements, it has been agreed that the KHSDRP SPMU will make extensive use of contracted technical expertise both from within India and internationally and will be closely supported in this effort by Bank staff and, as requested, supplementary Bank-provided technical assistance, using Trust Fund support. The Bank’s Operations Evaluation Department has also offered technical and financial support for the evaluation activities proposed.

56 4.63 Some of the issues to be addressed in the first year include:

(a) Benefit level and structure. For example, the UHIS does not include maternity benefits and the ceiling may be too low to provide adequate risk protection in the event of serious illness. At present there is no link to non-hospitalization services. Yeshashvini only covers inpatient surgeries. What types of coverage would provide more significant and widely distributed financial risk protection? (b) Subsidy design. We anticipate increasing Go1 subsidy to below-poverty-line members, but have no empirical basis for knowing the response to different levels of subsidy. As currently designed, the scheme may be actuarially beneficial, but if it is not affordable there will still be no uptake. (c) Enrollment and collections. Should the scheme be offered to individual households and groups on the same terms? Should the scheme be offered to groups who achieve a high level of participation on better terms to reduce adverse selection? What is the feasibility of making mandatory whole community participation in the scheme? What are the possibilities for linking the scheme to other rural finance initiatives such as micro-credit to women self-help groups or crop and livestock insurance? Would a tie-up with cooperative societies and the Yeshashvini scheme be advantageous? What mechanisms should be used for enrollment and collections in rural areas? (d) Financial viability. What are the programmed revenues and expenditures under different versions of the scheme? How do they play out in reality? (e) How should benefits be managed? UHIS and Yeshashvini strive to be “cashless” schemes, making payment directly to providers. Is this feasible in rural areas? What is needed to assure sufficient numbers of providers of adequate quality? How can they be paid and monitored? (f) What is the role of state and local governments in supervising such as scheme? What roles can be played by insurance companies, third party administrators, NGOs, and community groups?

4.64 It is expected that the experiment will cover a population of about 2 million persons in three or four districts when it reaches full implementation. It is also expected that it will be operated by organizations outside the DoHFW.

Component 111: Project Management, Monitoring and Evaluation (base cost = US%15.16 million)

4.65 This component will support the establishment and operations of the State Project Management Unit (SPMU), District Project Management Units (DPMUs), and all other institutional bodies needed to manage project activities (for example, the Management Committee for the PHCF). It will finance: (a) consulting services to cover technical issues as well as procurement, financial management, and disbursement; (b) hiring and training of project management staff; (c) provision of necessary office equipment and incremental operating costs; and (d) purchase of software and hardware as part of the HMIS system strengthening plan (called ISSP plan).

4.66 This component will also finance data collection, validation and analysis through baseline, mid- term, and end-of-household and facility surveys. These will be carried out by independent consultants.

4.67 As part of monitoring activities, it was decided to support the establishment of a State Health Informatics Center and a new Health Management Information System (HMIS), particularly focused on public health, primary and secondary care services. A strengthened HMIS will allow evidence-based policy formulation and performance-based management, by constant monitoring and evaluation of all the programs and activities implemented by the Department, and would enable a better utilization of scarce public resources. 4.68 The new HMIS shall focus on the requirements of Primary Health Centers (PHC) as a crucial level for information management at the primary healthcare level, as most health data originates and enters the information system at this level. It is the level at which all health programs, including all vertical programs, meet for both healthcare delivery and data collection. The present systems are manual, fragmented and time consuming, and decision-makers feel constrained because of lack of quality and validation of the data submitted. Data storage and retrieval processes are not well established, and data is not used for health management. The proposed new HMIS will serve as a basis for developing a referral system between primary, secondary and tertiary levels of care, and will cater to the needs of national programs, all externally aided projects, as well as district-based primary and secondary health care programs. It will build upon and integrate the current disease specific monitoring systems and the hospital HMIS developed as part ofKHDP-11.

4.69 The new HMIS will be implemented in phases, with regular review ofthe results achieved before subsequent investments are implemented. A pilot investment will be implemented in some select districts in year one, before the proposed systems are replicated and rolled out in the entire state. In addition, this subcomponent will be implemented in collaboration with the ongoing Diseases Surveillance Project, and other projects investing in IT, to avoid duplication and maximize impact.

58 Annex 5: Project Costs

US %million 115.07

I5.07 I 1.B: Improving primary and secondary care services' effectiveness I 2. Innovations in service delivery and health financing I 67.52 I 2.A Innovations in service delivery linked to need and performance 57.27 2.B Innovations in health financing 10.25 3. Project management, M&E 15.16 Total Baseline Cost 197.75 Physical Contingencies Price Contingencies 4.78 Total Proiect Costs' 206.48 I I Interest during construction I I

I Front-end Fee III Total Financing Required I 206.48 I

Note that cost of activities under subcomponent 1.B above will be equally shared by GoK and the Bank. For the rest of the Project, the agreed financing sharing rates are 90 percent from the World Bank and 10 percent from GoK.

59 Annex 6: Institutional Arrangements

6.1. The Karnataka Health Systems and Reform Project is an instrument of support to the larger health sector program of the Government of Karnataka (see main text, section A2). The activities supported by the project are developed as part of the larger program and are intended to strengthen the larger health sector program overall, as well as specific elements ofthat program.

6.2. GoK’s health sector program is implemented through a wide range of institutions, including units ofthe state government operating at various levels and through different departments, as well as through organizations of local government and communities. KHSDRP will help strengthen various elements of this program. Its primary focus will be on strengthening elements implemented by the organization ofthe state’s Department of Health and Family Welfare in collaboration with local government bodies and communities.

6.3 Implementation of the project will be managed within the Department of Health and Family Welfare; and will build on the positive experience with similar arrangements in earlier Bank-funded State Health Systems Development Project 11, but at the same time ensure that project activities are well integrated with the Department’s overall health sector program and that no parallel structures duplicating the same functions performed within the DoHFW are created through the project. The project will be headed by the Project Administrator, who will work in close coordination with the Commissioner, DoHFW. Figure 2 below describes the overall institutional framework for managing the KHSDRP and assuring its coordination with the DoHFW and with the broader health sector program.

Figure 2: Institutional Framework for the Project

Project Governing Board, to be headed by Chief Secretary, GoK

Program Steering Committee, to be headed by Principal Secretary, GoK A4

State Project Management Unit, to be headed by Project Administrator I \ I 1 District Project Management Unit, to be headed by District Health Officer I I

Taluk Health Office, to be headed by Taluk Health Officer

PHCs headed by Doctor / Medical Officer I/P,,,,,\ 1 I

60 Proiect Governing Board (PGB): the PGB will be at the top of the management structure, headed by the Chief Secretary. Members of the PGB will be represented from all relevant heads of the Departments of the State Government such as Planning, Finance, Health and Family Welfare, Women and Child Development, Rural Development and Panchayat Raj and Education. The PGB shall be fully empowered to make major policy decisions and develop the policy framework for the project, approve the annual budget, authorize major project revisions as necessary, ratify decisions made by the Program Steering Committee, formulate rules and regulations for innovative schemes such as Health Insurance, extent of subsidy for the needy, taking decisions on high-value procurement contracts, review and monitor implementation of the project and the program. Adequate powers would be delegated by the PGB to the Program Steering Committee so that the latter can execute functions as the nodal body for project and program implementation.

Program Steering Committee (PSC): the PSC will be headed by the Principal Secretary, Department of Health and Family Welfare, GoK. It will report to the PGB and will supervise and monitor program implementation, undertake planning activities and facilitate program management activities. The PSC would delegate adequate powers to the SPMU and DPMU for effective functioning. The Health Commissioner and the Project Administrator both will be the Members of the PSC, so that effective co- ordination between the project and the DoHFW is ensured by the Program Steering Committee.

State Proiect ManaPement Unit (SPMU): the SPMU would be headed by the Project Administrator. The SPMU will have the primary responsibility for management and implementation of project activities, facilitating coordination with DPMUs, monitoring progress indicators, impact evaluation and technical guidance, accounts management, procurement, disbursement, etc. The SPMU will have liaison with the Bank for routine procurement, disbursement and implementationissues.

District Proiect Manapement Unit IDPMU): the DPMUs at the district level will be headed by District Project Management Officer of Deputy Director Cadre of the DoHFW and will report to the District Health Officer (DHO) of the respective districts. The DPMU will be responsible for overall implementationand monitoring of the project activities in their jurisdiction.

6.4 Programmatic Support Provided by KHSDRP. The project is expected to provide financing through subcomponent 1.B, which will support the budget for public health, primary care and selective secondary care activities of the DoHFW. The agreed heads of account for support by this component include grants to local government institutions as currently provided through the health budget. All activities of the programmatic part will be implemented through the existing government system as per agreed procedures. KHSDRP intends to support the State and the local governments’ health budget in order to strengthen the existing service delivery of the system on an incremental basis, based on fulfillment of the agreed benchmarks / milestones (see Annex 3).

6.5 Collaboration with Local Government Bodies and Communities. GoK has been pursuing a policy of strengthening local government bodies, community organizations, and increasing their roles in financing and management of health programs. While KHSDRP will be managed through the Department of Health and Family Welfare, the latter will assure that project activities will be designed and managed to be consistent with GoK’s policy for increased local government roles. Procedures for coordination with and involvement of local government bodies in project management and implementation have been agreed upon with GoK.

6.6 Assuring Integration of KHSDRP Activities with the Overall Health Program. Karnataka state government has full authority and responsibility for all the services relating to health and family welfare and this responsibility is currently shared between the DoHFW and other departments at state level and local government bodies. The Minister of the cabinet rank heads the State Ministry of Health

61 and Family Welfare. There is a separate Medical Education Department headed by a Minister of cabinet rank. The State Health Secretariat is the official organ of the Ministry and is headed by the Principal Secretary. Shehe is assisted by a technical wing called the Directorate of Health and Family Welfare Services. In recent years, to integrate all the activities and to enhance functional efficiency in the DoHFW, a Health Commissioner of LAS cadre has been brought in. She/he coordinates all the DoHFW’s activities, and provides a link with the state government.

6.7 The overall health program of the DoHFW relates to various levels of the health care delivery system: tertiary, secondary, and primary. Project inputs are expected to overall strengthen this program, specifically at the primary care level, but also include some innovative activities which are most closely associated with achieving priority health outcomes. GoK will also be participating in certain initiatives emerging from the Government of India, including the National Rural Health Mission. It is anticipated that these initiatives will be formulating Implementation Plans at state and district level. KHSDRP’s activities and inputs will integrate with these initiatives.

6.8 The proposed Program Steering Committee is the vehicle for assuring such integration. The PSC will have the Principal Secretary as its Head and other senior officers of different units of the DoHFW as members. The PSC is the main body that will ensure that the project functions in co-ordination with the other implementing agencies of the Department. The objective will be to see that the project does not function as a stand-alone entity, and gets finally completely integrated within the DoHFW.

6.9 Proposed Organization of the Project Management. For functional efficiency, the Project Administrator will be assisted by two Deputy Project Administrators (DPA) of senior Deputy Director rank, each looking into specific areas or components of the project, as detailed in the chart (Figure 3) below. Responsibility for each of the various functions or project components under the Deputy Project Administrator will be entrusted to a Joint Director or a Deputy Director, to maintain a simple but efficient line of authority and responsibility. For ensuring synergy in the various functions of each DPA, two major divisions in their job description have been proposed:

(a) The ones focusing on strengthening the functioning of the Department, its organization and its capacities. These include the activities for Organizational Development, Information Systems, Procurement, and strengthening Strategic Planning. These three activities have been put under one DPA. (b) The ones focusing on implementation of innovative service delivery and health financing activities at state, district, and lower levels. These include the innovative health insurance pilot, the Service Improvement Challenge Fund, and the Public Health Competitive Fund. These activities have been clustered together under the other DPA.

6.10 A Chief Finance Controller and a Chief Administration Officer, both reporting to the Program Administrator, will look into the routine Finance and Administration issues. The overall implementation arrangements for the project are described in the following figure:

62 Figure 3: Organization Chart at the State level for the Karnataka Health System Development and Reform Project

Principal Secretary, Health and Family Welfare

~ Commissioner, Health and Project Administrator, Family Welfare Karnataka HSDRP I -I + I I .I I I Director, Deputy Project Chief Engineer Deputy Project Chief Finance Health and Administrator Administrator Strategic Planning Officer Family I I I Welfare

I I Joint Director, Deputy Joint Director M&E, Info lslcpl Director, Director, Deputy Director, Systems Procurement I I Health 1 Communication 1 Insurance

The Joint Directors and Deputy Directors will be assisted by a team of more junior staff comprising of necessary skills

63 Annex 7: Financial Management and Disbursement Arrangements

7.1 Financial Management for the KHSDRP

The proposed lending instrument would be a Specific Investment Loan (SIL). However, Bank assistance under KHSDRP will follow a dual approach, of programmatic approach to support existing government activities and programs, and a project approach to supporting innovations. Overall, financial management arrangements at the Department level are adequate. However, considering that a substantial percentage of the funds under the programmatic support subcomponent will be provided at the grass-root level through local governments (because these are at present the executing agencies for the vast majority of public primary health care programs), and it has been acknowledged that these suffer from relatively weak financial managemendassurance arrangements, specific arrangements have been worked out to ensure adequate fiduciary assurance on this component. These include review of performance based on agreed annual milestones (refer Annex 3 ofthe PAD), stricter adherence to requirements for monitoring reports, and review of ZP Audit Reports. Details of the same are provided in subsequent sections ofthe Annex.

7.2 Financial Management at PRI Level

Similar to all other Indian states, Karnataka has a three tier rural local government system. PRIs in Karnataka include 27 Zilla Panchayats (ZPs, district level), 174 Taluk Panchayats (TPs, block level) and approx. 5,700 Gram Panchayats (GPs, village level). The PRIs are local governments that report to their own elected representatives. India’s constitution mandates several functions to be transferred from the state government to the PRIs. Practically, their role is still evolving: in the health care sector, planning and implementation responsibilities are still largely limited to ZPs (districts) and to some extent TPs, while GPs’ role is still extremely limited.

Karnataka has moved ahead of most other states, and is leading the decentralization process. GoK has chosen to focus on the PRIs towards the objective of a more effective implementation of its programs across all the departments, and this choice has been emphasized through fresh directives issued in October 2004, further transferring responsibility for implementation ofa substantial number ofactivities/ funds to the PRIs, including management of all health and health related programs at the primary care level (all health facilities under 100 beds).

The focus of KHSDRP is on preventive and primary care, with the objective of strengthening the peripheral health services and to contribute to the achievement ofthe priority human development targets set by GoK. The KHSDRP plans to align with the ongoing devolution process, and to channel its programmatic support to ongoing programs in primary care through the existing government implementation arrangements, which are characterized by an ever increasing role for local governments in planning and execution. Hence, the PRIs are integral to effective delivery of the proposed project, and subcomponent 1B “Improving primary and secondary care services effectiveness” would be implemented mainly by the ZPs and the TPs.

In this context, the operation is faced with the following challenges, which reflect existing weaknesses in financial management ofgovernment programs managed at the local level:

(a) Budgets have specific heads relating to expenditure of each department including the DoHFW, but information is not presented in a consolidated format by sector, therefore expenditure relating to a particular sector is not readily available from the financial statements.

64 (b) Accounting and reporting - Quality of accounting and financial reporting is not entirely satisfactory. Finalization of financial statements is substantially delayed. Reliability of amounts is another issue since the systems do not adhere yet to fully standardized accounting practices. (c) Audit - Audit of ZPs and TPs are carried out by the Comptroller and Auditor General of India (CAG). Follow-up and response on audit is not yet completely satisfactory; internal audit system is weak.

GoK is trying to address the above weaknesses, and has taken many initiatives to improve financial management at the PRI level. These include computerization of the ZP accounting and initiating of computerization at the TP level, which would bring in standardization and discipline, rigorous follow-up on timely submission of audit reports at all levels etc.

The Bank has been engaged with GoK on various fronts and many of these have focused on aspects relating to financial management. These are reflected in the Karnataka Public Financial Management and Accountability Study (KPFMAS), and the (proposed) Karnataka Panchayat Raj Service Delivery Project.

The KPFMA Study was carried out by the Bank in 2004. The study concluded that Karnataka has the foundations for a satisfactory basic PFMA system, built on centralized, detailed, input based controls. This system is working reasonably well from the perspective of transaction level controls. Its strengths include: (a) well established and sound legal framework, establishing the central role of the State Legislature over public finances; (b) regular compilation and timely preparation of monthly accounts and presentation of annual financial statements (usually within six months after close of accounts); (c) detailed budget preparation process with tight controls over departmental spending; and (d) the constitutionally guaranteed independence and broad mandate of the Comptroller & Auditor General (C&AG). Nevertheless, several challenges remain if the public financial accountability system is to be effective and to support the objective of GoK medium-term fiscal and governance reform program. The specific actions plan with respect to PRIs agreed as part of the KPFMAS is illustrated in Table 9 below:

Table 13: Proposed Strategies to Improve Local Governments’ Financial Management

titutions (PRIS) Completed Actions Next Steps - I Date I Indicators Monitoring mechanism Continue monitoring of accounts I Ongoing I Up-to-date accounts andaudits for backlog of accounts and audit backlog. accounts and ensure and audit established 2003-04 and audit. regularity and and backlog reduced. Stipulate preparation of TP timeliness of accounts/audits at TP, not ZP level; accounts and audit, make necessary amendments to PRI and satisfactory Act follow-up on audit reports.

65 ZP and TP Complete ZP/TP accounting 2003-04 modernization computerization computerization (linked to 2003-04 agenda for PRIs underway; Treasury); Government Order GP account strengthening: (i) 2004-05 I (GO) for scheme finalize GP accounting rules; (ii) rationalization issued. initiate pilots of financial audits of Ongoing GP accounting rules GPs by Chartered Accountants drafted (under supervision of KSAD); (iii) RTI training for PRIs initiate GP computerization underway and rules for on basis of computerized database, PRIs issued. Scheme rationalization for PRIs as per GO (GO under modification) Operationalize RTI at local level (incl. public boards with works/beneficiary/financial info.)

In light of the above facts, certain risks to the project remain. The same have been documented in Table 10 below; along with the proposed mitigation measures.

Table 14: Main Risks and Proposed Mitigation Measures

Availability of I DoHFW to review Zilla (District) Panchayat audit reports information on issued by the CAG with special attention to observations effective use of relating to the health sector. Corrective action as per a specific (Health and Family framework. Welfare) funds at the PRI level

Timely (interim) Compilation/ review of health sector expenditure (including S information on amounts spent at PRI level) in form of Monthly Monitoring health expenditure Reports (MMR) for review/ monitoring by DoHFW. This would be implementation of the existing GoK guidelines.

Delay in submission Review information on status of backlog of ZP accounts/ audit H of audit reports for reports as received from the SPMU (in accordance with the PRI sector recommendations of KERL and KPFMA Study) Monitor progress made by GoK in computerizationof accounts at level of ZP/ TP

7.3 Country Issues

The following Country Issues will apply:

(a) Availability of funds on a timely basis is an issue to the extent that this is a state sector project and they are generally more vulnerable to this problem. However, GoK has demonstrated a high level of commitment to KHSDRP, and has assured the Bank that counterpart funding for the project will be accorded the highest priority. During Negotiations, specific commitment will be sought from GoK for release of funds to the project on a timely basis.

66 (b) At the country level, delays in submitting withdrawal applications/ FMRs have been an area of concern. However, the FM System that has been designed (using mainstream GoK accounting/ Treasury system) for the project would enable GOK to submit FMRs on a timely basis. The earlier KHSDP implemented by the same Department ofHealth and Family Welfare did not face any such delay problems.

7.4 Strengths and Weaknesses

Strenpths A Financial Management Manual (FMM) has been prepared; this details the accounting policies, procedures & processes, operation of the project financial management system, reporting arrangements, etc.

Weaknesses Information ofthe expenditure made at the PRI level may not be readily available. In order to overcome this weakness, the Department’s monthly monitoring system will be strengthened to include information regarding the expenditure made at the PRI level. This information will form the basis for the regular internal review by the Department ofits own performance

7.5 Implementing Entities

The institutional arrangements are planned in such a way as to be conducive to: (a) institutional strengthening of the DoHFW; (b) accurate monitoring of the link between financial flows and outputs/outcomes of project activities; and (c) integration of the state and the local governments’ functions in the sector.

The KHSDRP would be governed by a Project Governing Board, a Program Steering Committee, and a State Project Management Unit (SPMU), chaired respectively by the Chief Secretary, the Principal Secretary, DoHFW, and the Project Administrator (see Annex 6). The Project Management Unit would be responsible for: (a) designing the framework (rationale, operational manual, etc.) for the development of all the planned innovative project activities (to start, the SPMU drafted a separate core document for each of the project subcomponents), (b) facilitating and monitoring district-level planning linked to the SICF, (c) initially, implementing the mobile clinics scheme, the PPP activities and the other innovative schemes until districts can take over, (c) executing central procurement, and financial management. The Organization Chart ofthe SPMU is presented in Annex 6.

At the district level, under the DHO’s overall leadership, the District Project Implementation Officer (DPIO) will provide direct oversight to the project. For technical and project management functions, s/he will be supported by the District Project Management Unit (DPMU). Together, they will have the core responsibility for implementing the project.

67 Figure 4: Funds Flow

Karnataka Health Systems Development and Reform Project

Finance D-1 * I poFH/Project Administrator-KHSd I b DPMUs (27 nos.) DHOs (27 nos.)

Project approach xk ’-Programmatic approach - Incremental support to financing as per agreed % activities of GoK financed by the Bank for earmarked activities -Existing activities through government Budget -New activities if agreed upon Milestones to be met for Bank financing

7.6 FM Arrangements

“Traditional” uroiect components: The funds will be budgeted in GoK budget as identifiable heads of account each year under the Department of Health & Family Welfare (DoHFW). Funds for the same will be released to the Project Administrator. Certain expenditure will be made at this level; for other expenses, funds will further be transferred at the district level, to the DPMUs. In either case, funds will be released through the treasury system in the form of a budget release order.

Programmatic suuuort subcomuonent (1B): the World Bank will provide support to certain existing lines of GoK budget covering expenditure on existing activities at the state as well as the PRI level. This support will be provided on an incremental basis, funding increase in GoK’s own expenditure as per a pre-defined formula (see below). As per forecast based on analysis of expenditure for FY 03-04, US$ 33.33 Million (24.24%) will be spent at the ZP level and US$13.42 Million (9.76%) at the TP level. Details are provided in Table 11 below.

Table 15: Breakdown of Programmatic Support component

I I I. In US$ Million Project Cost (KHSDRP-World Bank contribution) 141.83 out of which programmatic support 55 Programmatic support as TOof total World Bank contribution 3 8.78%

68 Breakdown of Programmatic Support on the Basis of Actual Expenditure of FY 2003-04

Specific arrangements with respect to each ofthe project components are given below.

Organizational Development: managerial training/ capacity building of DoHFW Staff to ensure operation of a results-based system (includes workshops, seminars, study tours, information and communication activities, and payment to consultants). Will result in preparation of District Service Improvement Plans (SIPs) These payments will be made directly by DoHFW either at the state level of through the DPMUs.

Service Improvement Challenge Fund (SICF): for innovative initiatives and for infrastructure to expand coverage of curative care services, including PPPs, mobile clinics, tribal ANMs' scheme, and financial incentives for health employees that serve in remote areas linked to performance. These proposed investments will be articulated in Service Improvement Plans (SIPs) by the sub-district and the District Health Officers, and would then be evaluated and selected by the SPMU. Expenditure will be made for civil works, furniture and fittings, goods and equipment, consultant services, etc. Though the SICF will have its own framework and criteria for selection, separate institutional arrangements for the same are not envisaged. Existing government arrangements will be used for flow of funds and to obtain fiduciary assurance.

Public Health Competitive Fund (PHCF): This is to encourage public health activities, namely activities with population-level benefits, and focus on prevention ofdisease across the state. Proposals for the same will be received by NGOs, private agencies and PRIs, and would then be evaluated and selected on a competitive basis. Though the PHCF will have its own framework and criteria for selection, which includes a limited resource envelope (Fund), separate institutional arrangements for the same are not envisaged as of now. Existing government arrangements will be used for flow of funds and to obtain fiduciary assurance.

Innovations in Health Financing: pilot for learning how to manage insurance in few districts of the state. It may include reimbursement of GoK's subsidy on insurance premium for poor people, marketing/ administration charges of the scheme. This will be done on a pilot basis in up to 6 districts of the state. The scheme will be promoted by an administering agency responsible for mobilizing customers by creating awareness and collection of premium from them. Upon submission ofthe documentary proof of enrolment, the agreed part of the premium (subsidy) will be paid to the insurance company. Bank financing may also include payment offee ofthe administering agency.

Project Management and Monitoring and Evaluation: This will include monitoring and evaluation of performance of the Department in primary care and implementation ofa Health Management Information System. This will also include evaluation of the project activities and milestones through household surveys, facility surveys, other studies etc.

69 7.7 Staffing

The finance and accounts function at the SPMU level shall be handled by a Chief Finance Officer (CFO) reporting to the Project Administrator. She/he shall be assisted by one Accounts Officer, two Accounts Superintendents and adequate clerical staff. They shall be responsible for the entire financial management aspects of the project including handling of the budget, consolidation of information, claim consolidation and submission, interaction with other offices/ divisions and responding to audit related issues. The CFO shall be assisted by Finance Consultants who shall assist in consolidation and compilation of financial information.

At the district level, staff shall consist of one divisional accountant assisted by clerical staff. They shall be responsible for day-to-day accounting of the project and submission of the information on the expenses incurred. They shall discharge these duties in addition to their regular responsibilities of maintaining the accounting records of the existing activities of department.

7.8 Accounting Policies and Procedure

A Financial Management Manual (FMM) has been prepared; the same documents the budget formulation, accounting, financial management and auditing processes and procedures.

The KHSDRP will be implemented by DoHFW and it is envisaged that the mainstream Government Accounting Systems will be used for the purposes of budgeting and recording/ reporting of expenditure. The project components will be embedded in GoK’s Accounting and Treasury Systems. Specific and unique heads of account will be created for each of the project components to ensure that information on project budget and progress against the same is available from the Accounting System. For the SICF and the PHCF, it is envisaged that some of the non-financial information, essential for effective administration of the project, may not be available from the Treasury System; KHSDRP therefore plans to implement a Management Information System for this purpose.

Books of accounts for KHSDRP will be maintained using existing government procedures (cash book, classification register, etc.) and guidelines. Since project activities will have unique budget heads, information on the same will be available separately in case of the innovative activities. For the programmatic support subcomponent, expenditure in the identified budget heads of account will be considered for the purposes of Bank support. The books of accounts will be maintained initially44on a manual basis at all locations i.e. state and PRI level.

For the programmatic support subcomponent, at the state level, the operations will provide support to specific heads of account of GoK (DoHFW) budget. These are listed in Table 12 below:

70 Table 16: Existing Heads of Account to be Monitored for Determining Disbursements under Programmatic Support-State Sector

bead of Account. articulars 6. 1 2210-01-104-0-01 Medical Stores Depot 22210-01-1 10-2-40 Telemedicine Project 3 22 10-03- 110-0-0 1 Hospitals & Dispensaries 42210-06-00 1-0-0 1 Direction & Administration 5 22 10-06-10 1- 1-02 National Anti-Malaria Programme (Rural) 6 2210-06-101-8-03 Control of Blindness (State Plan) 7 2210-06-104-0-01 Drug Controller 18 p210-06- 107-0-0 1 public Health Institute

In addition, for the programmatic support subcomponent, KHSDRP will provide support to the health related expenditure (under Major Head “ZP and TP grants’, code 2210 as per CAG classification) carried out by ZPs and TPs.

The above heads of account may need to change over the project duration due to creation of new heads, merging/ discontinuation of old heads. In such cases GoK may (with agreement of the Bank) revise the ‘budget heads’ to be used for the purposes of reporting and subsequent disbursement from the Bank. Also, in the future GPs may be entrusted with implementation of the primary care and public health activities included in the KHSDRP, and may therefore be included as implementing agencies for the project, after an additional assessment of their institutional, financial management and procurement arrangements.

Overall for KHSDRP, the new proposed heads of account to be used are the following. These would be the basis for preparation of the Financial Monitoring Reports (FMRs) which would be used by the Bank for disbursement:

Table 17: New Heads of Account for Financial Monitoring

S. No Code (suggested) Nomenclature 1 I 2210-06-800-0-12-xxx I KHSDRP- Org. Development I 2 4210-03-101-1-02-xxx KHSDRP-SICF-CivilWorks I 3 22 10-06-800-0- 13-xxx KHSDRP-SICF-Recurrent expenditure 4 2210-06-800-0-14-xxx KHSDRP-PHCF I 5 22 10-06-800-0-15-xxx KHSDRP-Health Financing KHSDRP-ProjectMgt. -1SSP 6 2210-06-800-0-16-xxx +Evaluation 7 22 10-06-800-0-17-xxx KHSDRP-ProjectMgt. -Staff Costs

various (as listed in 8 previous table) KHSDRP Program Support- State Sector 9 2210- KHSDRP Program Support-PRI Sector

71 7.9 Audit

The Comptroller and Auditor General of India (CAG) through its office in Karnataka will be the statutory auditor for the project. The CAG’s office will conduct annual audit of the project. Audit Reports will be received in the following manner:

The CAG’s office will conduct an annual audit of the operations of KHSDRP, including state level institutions covered under the programmatic support subcomponent. The audit report will be submitted to the World Bank within six months of the close of each financial year. Terms of Reference for the audit have been prepared in agreement with the Bank, included in the Financial Management Manual, and will be sent to the CAG for their approval. The format of annual financial statements will be prepared by GoK and will be sent to the CAG for approval. Funds for a certain portion of the programmatic support component will be transferred to the PRI Sector for expenditure on the health related activities. Information on the same will be available through the ZP (district) audit reports. Since all expenditure at the ZP level is already audited by the CAG and this also includes expenditure relating to the health sector; KHSDRP intends to rely on the existing audit mechanism whenever possible. Therefore, the DoHFW will provide the World Bank with a consolidated report on Audit of the Health Sector related expenditure by ZPs. This report will provide (district-wise) information on the expenditure incurred by ZPs on health care services. Individual ZP audit reports will be available upon request. Releases to TP will be considered as expenditure. This is on account of the relatively low share of funds being spent at the TP level (as per Table 11 ‘Breakdown of Programmatic Support Component’ above).

Timeliness of Audit. In the past, timeliness of audit reports relating to the PRI Sector has been an issue. As per government guidelines the due date for submission of audit reports is six months from close of the financial year, but there have been significant delays in their submission. For the recently concluded FY 03-04, out of the 27 ZPs, no one submitted their report by Sept. 04, 19 by Dec. 04, and 24 by Mar 05 on a cumulative basis. There are some 2-3 ZPs where delay is a chronic problem and has not been resolved. Nonetheless, there has been a significant improvement since 12-18 months ago, when the average backlog was in the range of 1-2 years. This is on account of the actions taken by GoK as a result of the Karnataka Public Financial Management and Accountability Study (KPFMAS). In synthesis, though GoK’s efforts are continuing, there is an understanding that there will be some instances of delay in the short term. It was agreed that in case of exceptional circumstances, in agreement with the Bank, and to ensure timely submission of the Consolidated Report on Audit (see point (b) above), the GoK may get audit of specific ZPs conducted by a private chartered accountant firm empanelled with office of the Comptroller and Auditor General (CAG), and appointed under terms of reference acceptable to the Bank. In such instances the chartered accountant audit would be limited to expenditure related to the health sector at the ZP and this would be considered as the final audit report for purposes of preparation of the Consolidated Report on Audit and reconciliation with the disbursement made on the basis of FMRs. As and when the regular AG audit report is received, GOK would inform the Bank of the same.

Expenditure at the TP Level. Certain portion of the finds provided to the ZP will be further transferred to the TP for incurring of expenditure; these are recorded as ‘transfers’ in the ZP audited financial statements. Though it will be possible to extract information on actual ‘expenditure’ against these transfers from 174 separate TP Audit Reports; in accordance with the block grant approach, the project plans to derive alternative assurance on these funds on the following basis.

Review performance of the entire project based on the monitoring of annual milestones. These are presented in Annex 3 of the PAD.

72 (b) Since funds released will be against specific heads of the budget, possible misuse of the same is restricted. (c) Performance on the ground will be regularly monitored under Component I11 of the project i.e. ‘Project Management, Monitoring and Evaluation’

The following audit reports will be monitored in the Audit Reports Compliance System (ARCS):

Table 18: Audit Reports to be Monitored as Part of FM of KHSDRP

Implementing Agency Audit - * *$ ,, State PMU, KHSDRP Audit of all project components Comptroller and Auditor and subcomponents, with the General (CAG) of India, exception of funds disbursed to Karnataka

Report of CAG consolidated level by the DoHFW (or, in case of excessive delays by certain ZPs, by private chartered accountant firm empanelled with office of the Comptroller and Auditor General) Department of Economic Special Account Comptroller and Auditor AffairdGOI General of India. New Delhi

7.10 Reporting and Monitoring

As explained under the section on Accounting Policies and Procedure, mainstream Government Accounting Systems will be used and the project activities will be embedded as specific ‘heads of account’ in GoK’s accountingltreasury systems. Information from the Treasury System will be used as the basis for generation of quarterly FMRs. These will report on the budget, actual expenditure and variances for activities of the entire project. FMRs will also include appropriate formats for purposes of reporting physical and procurement progress, to be submitted once a year. FMRs will be submitted to the Bank within 60 days of close of the quarter. FMR formats have been prepared and agreed during Negotiations.

Information Systems

The DoHFW has planned a phased computerization of the financial management function of the entire Department. This would involve some 2,000 DDOs of the department in the state. Considering the large number of accounting locations, the DoHFW plans to follow a step-by-step approach for the initiatives; starting with pilot implementation in 2 -3 districts and the Head Office, followed by a roll-out in the entire state. The pilot will be implemented during the project duration; lessons from the same will assist in preparation of a detailed plan for roll-out.

Disbursement Arrangements

Disbursements from IDA will be made based on information as presented in FMRs; these will include information on budget as well as actual expenditure separately on the programmatic support and the innovative components funded through the “traditional” project approach.

73 Bank financing will be on the following lines:

(a) For the component under the traditional project approach, the Bank will reimburse all eligible expenditure @ 90%. (b) For the programmatic support component, the bank will equally match increase in GoK’s expenditure on eligible heads of account (to be reviewed at a consolidated level) over and above an agreed baseline (actual expenditure for FY 03 - 04) after discounting for normal increase of 5% on account of inflation. This will have an overall cap during the project duration of US$55 million and an annual cap of US$15 million for the first three years. Also disbursement will be dependant on the Bank’s acceptance of the DoHFW having met the annual milestones as laid down in Annex 3 ofthe PAD.

Programmatic Support: For the items identified for the programmatic support, the baseline has been worked out to be Rs. 464 crore. GoK has forecast an average rate ofgrowth for the entire health sector for the project duration of 13.45% annually as per the information in the Medium Term Fiscal Plan. It is estimated that GoK will be able to draw the entire sum ofUS$55 million based on a conservative estimate ofgrowth rate of 8.1 1%. The same is presented in the table below.

74 Table 19: Total Financing Under the Programmatic Subcomponent Under the Assumption of an 8.11 Percent annual Growth on the Selected Budget Items (Base Year: FY 2003-04; Amount in Crores)

Particulars Ye of FY2003- 2004-05. 12005-Q6z BW7' 2007-08 pOOS-09 200P10 2010-11 Total Growth 04 " (Estimated (Estimated (Required (Required (Required :Required (Required (2006/07 Accounts Expendi- Expendi- Budget) Budget) Budget) Budget) Budget) - %re) ture) 2OlO/ll) Projected Budget- 5% Grokh at 464.40 487.62 5 12.00 537.60 564.48 592.70 622.34 653.46 2,970.58 Projected Budget 8.1 1% Growth at 464.40 502.06 542.78 586.80 634.39 685.84 741.46 801.59 3,450.08 Additional expenditure Eligible for programmatic 49.20 69.91 93.14 119.12 148.13 479.50 financing GoK share (50% of above) 24.60 34.95 46.57 59.56 74.07 239.75 World Bank share (50% of above) 24.60 34.95 46.57 59.56 74.07 239.75 US$ in Million 5.66 8.04 10.71 13.70 17.03 55.14

Assumptions: 1 2003-04 base year 2 Reimbursement fiom 2006-07 3 Growth rate 8.1 1% 4 Exchange rate: US$1 = Rs, 43.48

Based on the table above, Rs. 239.75 crore, at a conversion rate of Rs. 43.48 per US$1, adds up to more than US$55 million.

Disbursement will be made quarterly for the traditional project components: expenditure during April - June will be reported as per the FMRs due in August, and disbursement against the same will be made in September.

Disbursement will be made annually for the programmatic support component. This will be based on the information as provided by the quarterly FMRs to be consolidated in the FMR for the last quarter of the fiscal year. Based on the FMR due date of May, disbursement will be made in June of each year. Disbursement in a particular year will be as per the following schedule:

Table 20: Disbursement Schedule

Component Expenditure period FMR due Disbursement Audit Due Project- -0ct. 2005 to March Nov. 2006 Dec. 2006 -Dec. 2006 Retroactive period 06 -April 2006 to Sept. 06 -Sept. 2007

Project Q3 Oct. 2006 to Dec. 2006 Feb. 2007 March 2007 Sept. 2007 Project Q4 Jan. 2007 to March May 2007 June 2007 Sept. 2007 2007 Program Apr. 2006 to March May 2007 June 2007 Sept. 07 20073 * GoK will indicate the expenditure in the retroactive period under the program component separately

75 The following points highlight the key disbursement arrangements:

(a) to facilitate project implementation and make funds readily available to meet eligible expenditures incurred by GoK, a Special Account (with an authorized allocation of US$25 million) will be opened at the Reserve Bank of India. At credit effectiveness, the Borrower may request the Bank to deposit an advance of US$25 million or a number of advances which would total to the authorized allocation of US$25 million. Expenditure as reported through FMRs will be regularly documented/ reconciled against the advance.

(b) Expenditure as reported in the FMRs will be reconciled with expenditure as reported in Audit Reports (see Annex 4, explanation of financing mechanism under the programmatic component).3 When audit reports indicate higher levels of eligible expenditures when compared to the FMRs for the same period, the excess will be added to the next disbursement; and when audit reports indicate lower levels of eligible expenditures against the relevant FMRs, an adjustment will be made to the next disbursement by reduction.

(c) Since the Audit Reports are required to consolidate information relating to 27 ZPs, and past experience has shown that the audit process in a few ZPs may be delayed due to reasons beyond the control of DoHFW, it has been agreed that the consolidated Audit Reports shall include information relating to all the ZPs available as on that date.

7.11 Retroactive financing

Expenditure incurred on eligible project expenditure after October 2005 will be eligible for retroactive financing. The estimated eligible expenditure during the retroactive period is estimated to be approximately equal to US$15 million.

7.12 Supervision Plan

From a financial management perspective, the project will need intensive review, considering that it includes investment project as well as programmatic financing. Supervision will focus on timeliness of reporting, internal controls and building capacity of staff at the state and at the district level. Special attention will be given to review of expenditure made through the PRIs and timeliness of reporting & audit.

Regular review missions are planned in the initial phases (year one of implementation); subsequently, World Bank FM staff will conduct regular visits on a six-monthly basis to review progress on FM arrangements as part of regular review missions will be assured. Strict adherence to the agreement contained in the PAD and the Financial Management Manual for KHSDRP will be monitored on a continuous basis. Supervision of the FM aspects of this project will be closely linked to supervision of other projects in Karnataka and the Bank's continuing engagement with GoK on overall FM issues.

While due date for receipt of Audit Reports is 6 months from close ofthe fmancial year, the Bank may provide a further 4 months as per the Bank's Operational Policies/ Bank Procedures (OP/ BP 10.02)

76 Annex 8: Procurement

Procurement for the proposed KHSDRP would be carried out in accordance with World Bank “Guidelines: Procurement under IDRD Loans and IDA Credits” of May 2004; and “Guidelines: Selection and Employment of Consultants by World Bank Borrowers” of May 2004 and the provisions stipulated in the Legal Agreement. In respect of subcomponent lB, the procurement would be done following the provisions of the Karnataka Transparency in Public Procurements (KTPP) and Act and Rules 2000 (which is applicable for all the procurement entities of the State), and the various circulars, orders, notifications/amendments issuedbeing issued in pursuance of the implementation of the Procurement Reform Action for the State as a consequence of the State Procurement Assessment Report (2001).

8.1 Procurement of Works

All the 27 districts in the State would participate under KHSDRP. No major civil works are envisaged. The civil works under the project would include:

(a) construction of new PHCs (about 148), Sub-centres (about 300) under Service Improvement Challenge Fund (SICF); (b) renovation (internal and external) and extensions of existing CHCs, PHCs, PHUs (about 2600) and few selected First Referral Units. Works will include seepage and water proofing, providing proper flooring, refurbishing of toilets, internal electricity and water supply systems, repairs of approach roads, boundary wall, gates, surface drainage, external water supply and electricity supply systems, and others; (c) healthcare Waste Management works such as storage and disposal facilities for hospital waste, safe water and sewerage systems; (d) construction of Annex Building for the Directorate of Health Services at Bangalore to house the new units (for example the Strategic Planning Unit) being created under the proposed project; and (e) construction of appropriate annex in districts, where needed, to house additional staff.

The above works are small and scattered and would be spread out in the project period. The bid packages are independent packages and would be bid for separately. The packages have been decided on geographical basis, as it is likely to increase competition. No single contractor will be interested or able to manage numerous contracts of small value spread over a large area, which will have no economies of scale, unlike a slice and package in a highway where the packages would be contiguous. In the past when such contract packaging was attempted, there was less competition resulting in higher costs, and the contractors tended to sub contract the smaller packages to local contractors leading to delays, poor quality etc. A number of packages could be included in a single IFB. The bidders can either bid for one package or more and could be awarded more than one package if they satisfy the aggregate qualification criteria including their bid capacity. The largest of the contracts is not expected be more than the equivalent of $300,000 and would not be of interest to the foreign bidders. However the foreign bidders would not be precluded from bidding.

The works would be procured and executed through a combination of the following procedures:

(a) award the whole or part of the work to qualified contractors after inviting competitive tenders National Competitive Bidding -NCB (for individual contract value of more than $50,000); (b) award the whole or part of the work (for individual contract value less than $50,000) by soliciting quotations (Shopping) from at least three qualified contractors;

77 (c) award the whole or part of the works (of contract value less than $50,000) on direct contract to community organizations, or NGOs; or (d) as a last resort execute the whole or part of the work by Force Account with prior approval of the Bank.

NCB contracts are not expected to be more than 200 in number. The balance of the contracts would be through shopping and other methods.

8.2 Procurement of Goods

Goods to be procured under the project would include hospital equipment and accessories, hospital furniture, laboratory equipment, hospital supplies, vehicles, office and other equipment including computers and networking equipment.

The above goods would be procured through a combination of the following procedures:

(a) International Competitive Bidding (ICB) for contract value more than $500,000 or for equipment not manufactured in the country; (b) National competitive Bidding (NCB) for contracts of value more than $50,000 but less than $500,000; and (c) Shopping for contracts of value less than $50,000;

NCB contracts are not expected to exceed 50. The balance would be shopping and direct contracting, etc.

8.3 NCB Provisions

All NCB contracts (Works and Goods) shall be awarded in accordance with the provisions of Paragraphs 3.3 and 3.4 of the Guidelines for Procurement under IBRD Loans and IDA Credits May 2004. In this regard all NCB contracts to be financed from the proceeds of the Credit shall follow the following procedures:

(a) only the model bidding documents for NCB agreed with the Government of India Task Force (and as amended from time to time) shall be used for bidding; (b) invitations to bid shall be advertised in at least one widely circulated national daily newspaper, at least 30 days prior to the deadline for the submission of the tenders; (c) no special preference will be accorded to any bidder, either for price or for any other terms and conditions, when competing with foreign bidders, state owned enterprises, small scale enterprises or enterprises from any given state; (d) except with the prior concurrence of IDA, there shall be no negotiations of price with the bidders, even with the lowest evaluated bidder; (e) extension of bid validity shall not be allowed without the prior concurrence of IDA: (f) for the first request for extension if it is longer than four weeks; and (g) for all subsequent requests for extension irrespective of the period (such concurrence will be considered by IDA only in cases of Force Majeure and circumstances beyond the control of the Purchaser or Employer); (h) rebidding shall not be carried out without the prior concurrence of IDA. The system of rejecting tenders outside a pre-determined margin or ‘bracket’ of prices shall not be used; (i) rate contracts entered into by DGS&D will not be acceptable as a substitute for NCB procedures. Such contracts will be acceptable for any procurement under National Shopping procedures; and (i) the two-or-three envelope system will not be used.

78 8.4 Procurement of Services

The implementation of KHSDRP involves procurement of a number of consultancy contracts some of which are given below:

(a) consultant for managing the OD activities skilled in up to date management practices and in facilitation; (b) consultant for development and implementation of computer-based Health-care Management Information System; (c) consultant to design, develop IT systems to address: operational and service delivery requirements at PHCs; financial and Administration System; disease surveillance system in association with Diseases Surveillance Project for monitoring epidemics; (d) consultant to develop a DoHFW's website for internal and external use; (e) consultant for strengthening the legal and regulatory framework for public health; (0 consultant to assist in the development of an accreditation system; (g) consultant to support implementation of Service Agreements (SA) to contract out to private service providers including NGOs delivery ofhealth care services to underserved people in remote areas under PPP; (h) consultant to support implementation of Service Agreements to contract out to service providers operations of mobile clinics to under served people in remote areas; (i) consultant to support development and implementation of contracts with individuals and/or organizations to deliver clinical services in PHCs and CHCs, and full and part time specialists primarily to serve in CHCs; 0) consultant to support development and implementation of contracts for ancillary services such as diagnostic testing, facility support services such as cleaning and maintenance, in First Referral Units, CHCs, PHCs and subcentres; (k) consultant to prepare an Operation Manual describing the various processes and eligibility and qualification criteria for approval of proposals by Management Committee for availing PHCF; (1) consultant for conducting large scale household surveys for many indicators; (m) consultant to develop the product design of the health insurance pilot; (n) consultant to manage the claims and all the other administrative tasks associated with the health insurance pilot; (0) consultant to evaluate the impact of the health insurance pilot; and (p) consultant to assist in the finalization of Standard Bidding Documents and preparation of Manuals for procurement of pharmaceutical and medical equipment.

Consultants would be selected following Quality Based Selection (QBS); Quality and Cost Based Selection (QCBS); Single Source Selection (SSS); Selection Based on Consultant Qualification (CQ); Least Cost Selection (LCS); Fixed Budget Selection (FBS) methods as appropriate for the assignment. Where appropriate, Individual Consultants would also be hired as per procedures laid down in the Consultancy Guidelines.

In respect of Service Agreements - varying in value from $5000 to $200,000- to be funded under SICF and PHCF, expression of interest would be invited from interested Private firms/NGOs/Self Help GroupsPRI Institutions. Selection among the competing proposals would be based on scrutiny and evaluation of proposals by an expert group. The proposals above the cut off score would be ranked and service agreements would be signed with the organizations in the descending order of ranking subject to the need and availability of funds.

79 8.5 Training and Workshops

The Organizational Development Process is designed to create a results-based culture in the DoHFW, to improve management at all levels and to strengthen in government the ability to exercise its stewardship role over the whole sector, for ensuring both the public and private health systems operate and interact in such a way that all parts of the society and particularly the most vulnerable parts of the society have access to affordable good quality essential services. To achieve these goals, KHSDRP envisages a series of learning or capacity building activities. Some ofthe training activities are:

(a) procurement training for those involved in procurement of works, goods and services; (b) exposure of the evidence and discussion of strategic issues with policy-makers in the health sector internally as well as with the support of consultants; (c) workshops and seminars at the district and taluk level to support DHOs to finalize the SIPS, and monitor their execution; (d) state and district level workshop to strengthen the institutional framework for contracting and working with private service providers; (e) seminar series on accreditation and certification; (f) formal training course for senior and middle level managers in legal aspects ofworking with contracted providers, an orientation and consensus building workshop followed by learning workshops each year; (g) training to enhance the capacity ofthe government in the following areas: (h) preparation of effective service agreements; (i) negotiating with private providers; (j) monitoring and evaluation ofthe agreements; and (k) providing feedback and correcting inadequate compliance with agreements; (1) training and posting of grass root nurses to serve under served populations; (m) management training; (n) training in the use of the new HMIS system; (0) equipment management and maintenance training; (p) rational use of drugs training; (9) referral system training; (r) information and communication strategies training; (s) health insurance training; and (t) impact evaluation of project outcomes training.

8.6 Goods, Works and Services Under Subcomponent 1B of KHSDRP

Goods and services under component l.B of the project would be procured following the provisions of the Karnataka Transparency in Public Procurements (KTPP) and Act and Rules 2000 (which is applicable for all the procurement entities of the State), and the various circulars, orders, notifications/amendments issuedbeing issued in pursuance of the implementation of the Procurement Reform Action for the State as a consequence of the State Procurement Assessment Report (2001). As envisaged in the Agreed Health Sector Procurement Reform Action Plan, specific Procurement Manual and Standard Bidding Documents for equipment and drugs will be developed and adopted for use. In the case of International Competitive Bidding, Bank procedures would be followed. Expenditures on pharmaceuticals (including medical supplies) and medical equipment will not be eligible for IDA financing unless such Manual and SBD are established, and concerns regarding Schedule M have been addressed in a way satisfactory to the Bank. Subject to the implementation of the agreed Health Sector Procurement Reform Action Plan discussed below, the existing procurement legal framework would be generally acceptable for procurement under subcomponent 1B of the project.

80 8.7 Review of the Current Procedures and Assessment of the Capacity of the Agencies Responsible for Procurement

8.7.1 Procurement Assessment Report for Karnataka State

The World Bank conducted Procurement Assessment Report of Karnataka State as a part of Country Procurement Assessment Report for India. The report was submitted in July 200 1. GoK accepted most of the Conclusions and Recommendation and a mutually agreed Action Plan for implementation of Procurement Reforms was prepared. GoK started implementation of the Action Plan in May 2002 with the assistance of Bank hired Procurement Consultant. Most of the orders in compliance of recommendations have been issued. Consultants have been hired for the revision of Codes and Manuals. GoK is in the process of issuing Standard Tender Documents for Works, Goods and Services. These documents are based on Go1 Task Force documents agreed with the World Bank.

An IDF Grant of US$487,700 has recently been approved for Procurement Capacity Development Program for Karnataka. The Grant would support the following activities:

(a) the conduct of a capacity needs assessment; (b) the elaboration of a comprehensive training program addressing the identified needs; (c) the design and preparation of training materials; (d) the identification and creation of a suitable certification system; (e) the identification of suitable State Level Training Institutions; (f) the training of trainers; (g) the elaboration of a benchmarking system to test results; (h) the conduct of a series ofpilot training programs to evaluate trainers and training materials; and (i)the improvement ofthe program and establishment of a long term action plan for sustained training.

The program would be implemented in three phases from September 2006 through 2009.

8.7.2 Procurement Assessment Report for Health Sector

A review of the current procurement procedures and an assessment of the capacity of the implementing agencies to implement procurement actions specifically for the health sector were carried out between November-December 2004. The assessment reviewed the procurement capacity of the institutions involved in Health Sector Development and Reform Project as well as the procurement procedures especially for hospital equipment and drugs. Among other recommendations (see Action Plan below), the Report proposed the following important recommendations in respect of organizational development:

(a) establish an Equipment and Hospital Accessories Procurement Wing with adequate trained staff in the Karnataka State Drug Logistics and Warehouse Society (KSDL&WS) to procure centrally for all requirements of Health and Family Welfare, Medical Education, Drug Control Departments and other public organizations running health care units in the State; (b) make KSDL&WS a fully autonomous entity with adequate trained staff, responsible for procurement ofpharmaceuticals and medical equipment; and (c) strengthen Drug Controller’s organization and drug testing laboratory to effectively enforce the provisions of the Drugs and Cosmetics Act 1940 and the Rules issued there under.

The Report also made many recommendations on how to improve the drug procurement procedures, and operation and management of the pharmaceuticals’ warehouses. The Bank discussed the conclusions and recommendations of the Procurement Assessment Report specific to the health sector with the DoHFW’s

81 senior officers, and they have generally agreed to them. The Action Plan for implementation of the recommendations (attached to this Annex) has been agreed to by the Principal Secretary, Project Administrator and Commissioner of Health and Family Welfare Department.

8.8 Procurement Arrangements for KHSDRP

Procurement activities for KHSDRP would be carried out under the overall coordination of the Project Administrator. A nominated officer of the SPMU, designated as the Procurement Officer, shall be responsible for procurement of consultancy services under the direct control of the Project Administrator. The Equipment Procurement Wing would procure the goods and equipment for KHSDRP.

The Zilla Panchayats would procure and implement small civil works (below $ 50,000) at the district level. The staff handling procurement would be trained in World Bank Procurement procedures, which would be slightly different from the State Procurement procedures. All other civil works would be handled at the SPMU level.

The Karnataka State Drugs Logistics and Warehousing Society (KSDL&WS) Bangalore under the DoHFW is the Central Organization of Karnataka Government for the procurement of drugs, pharmaceuticals and medical supplies. It is responsible for procuring the requirements of all government hospitals (partially those of hospitals under Medical Education Department) and other government organizations engaged in health care (save those under the local bodies). An Additional Director under the administrative control of Department of Health and Family Welfare heads the Society. The Society is guided by an Executive Committee chaired by Principal Secretary Health and a Governing Council chaired by Commissioner of Health and Family Welfare. The Society has established 14 warehouses one for two districts, which are electronically linked to each other for better management.

The procurement of equipment, which is currently fragmented in various units within the Department of Health and Family Welfare (under various Bank assisted projects) would be centralized (except for those of AIDS project, which is managed by another Society) and brought under the control of KSDL&WS, by creation of an Equipment Procurement Wing under the Society. This wing would procure the equipment for the whole Department, as well as those required by the KHSDRP.

8.9 Procurement Risks

The main issues are those of fraud and corruption, collusion among bidders, false performance certificates, weak complaint monitoring systems, and lack of public disclosure of information on procurement actions. Most of these issuedrisks concerning procurement under KHSDRP and specifically the programmatic subcomponent of the project have been identified and addressed in the Health Sector Procurement Reform Action Plan. With the strengthening of the Drug Controller’s inspectorate, quality drug testing laboratories, issue of drugs only after tests by designated laboratories, issuing GMP certificate for procurement of drugs, issue of Standard Tender Document for drugs, and adoption of the other recommendations included in the Action Plan, the risk associated with drug procurement will be significantly reduced. Centralization of Equipment Procurement by Procurement Wing, rationalization of specifications will drastically reduce the risks for equipment and hospital accessories. Training of the Zilla Panchayat Engineers in State Procurement Procedures in general and World Bank Procurement procedures in particular will go a long way in improving the procurement regime and reduce risks.

82 8.10 Procurement Plan

The project authorities have developed a consolidated procurement plan for project implementation, which will provide the basis for procurement methods for the first 18 months of the project. Since the infrastructure development after Phase 1 will depend on the proposals received for Service Improvement Challenge Fund (SICF), 18-month Procurement Plans shall be prepared at the beginning of each of the three phases of the SICF to reflect the actual project implementation needs needed for that phase.

8.1 1 Procurement Information

Procurement information will be collected and recorded as follows:

(a) prompt reporting of contract award information by KHSDRP; (b) comprehensive periodic reports indicating: (i)revised cost estimates for individual contracts and total costs; (ii)revised timing of procurement actions, including advertising, bidding, contracts award and completion time for individual contracts; and (iii)compliance with aggregate limits on the specified methods of procurement;and (c) GoK’s completion report to be received by the Bank within three months of the Loan closing date. a. Publication of Awards

Contract Awards for ICB and LCB: (paragraph 2.60 and 2.65 of the Procurement Guidelines): within two weeks of receiving the Bank’s “no objection” to the recommendation of contract award, the Project Authorities shall publish in UNDB on-line and in dgMarket the results identifying the bid and lot numbers and the following information:

(a) name of each bidder who submitted a bid; (b) bid prices as read out at bid opening; (c) name and evaluated prices of each bid that was evaluated; (d) name of bidders whose bids were rejected and the reasons for their rejection; and (e) name of winning bidder, and the price it offered, as well as the duration and summary scope of the contract awarded.

In the publication of Contract Award referred to in paragraph 2.60, the Project authorities shall specify that any bidder who wishes to ascertain the grounds on which its bid was not selected, should request an explanation from them. The Project Authorities shall promptly provide an explanation of why such bid was not selected, either in writing and/or in a debriefing meeting, at their option. The requesting bidder shall bear all the costs of attending such a debriefing.

If, after publication of the results of evaluation, the Project Authorities receive protest or complaints from bidders, a copy of the complaint and a copy of their response shall be sent to the Bank for information. If as a result of the analysis of a protest, the Project Authorities change their contract award recommendation, the reasons for such decision and a revised evaluation report shall be submitted to the Bank for no objection. The Project Authorities shall provide a republication of the contract award in the format of paragraph 2.60 of these Guidelines.

Contract awards for National Competitive Bidding [paragraph 3.4 of the procurement Guidelines]: publication of results of evaluation and of the award of contract consists of the same information as mentioned above for ICB and LIB.

83 Contract Awards for Direct Contracting (paragraph 3.7 of the Procurement Guidelines): after the contract signature, the Project Authorities shall publish in WDBon-line and in dgMarket the:

(a) name of the contractor; (b) price; (c) duration; and (d) summary scope of the contract.

This publication may be done quarterly and in the format of a summarized table covering the previous period.

Contract Awards for Consultancies (paragraph 2.28 of Consultancy Guidelines): after the award of contract, the Project Authorities shall publish in WDB on-line and in dgMarket the following information:

(a) the names of all consultants who submitted proposals; (b) the technical points assigned to each consultant; (c) the evaluated prices of each consultant; (d) the final point ranking of the consultants; and (e) the name of the winning consultant and the price, duration, and summary scope ofthe contract.

The same information shall be sent to all consultants who have submitted proposals.

Contract Awards for Selection Based on the Consultants’ Qualifications (CQS) and Single Source Selection [SSS] (paragraph 3.8 and 3.13 of the Consultancy Guidelines): the Project Authorities shall publish in WDBon-line and in dgMarket the:

(a) name of the consultant to which the contract was awarded, (b) the price; (c) duration; and (d) scope ofthe contract.

This publication may be done quarterly and in the format of a summarized table covering the previous period.

8.12 Frequency of Procurement Supervision

In addition to the prior review supervision to be carried out from Bank offices, the capacity assessment of the Implementing Agency indicates the need for 2 supervisions per year to visit the field to carry out post review of procurement actions.

Ex-post review: KHSDW provides for an audit to be conducted by independent auditors to be hired by the SPMU for expenditures incurred, as well as asset verification and technical audit of works executed by ZPs and DHOs. In addition to the review of audit reports and the random ex-post reviews conducted by firms and individuals engaged by the Region for post award reviews on the India portfolio as a whole, Bank staff would conduct post award review during supervision missions. Procurement Audit for the so- called program component (component 1B) would be carried out as a part of the Financial Audit and the TOR has been accordingly prepared.

84 8.13 Procurement Method and Review Threshold

8.13.1 Works and Goods

Prior Review Thresholds: Procurement decisions subject to Prior Review by Bank as stated in Appendix 1 to the Guidelines for Procurement:

> $ 10000000 - Works 2 >$50,000 and <$500,000- Goods NCB >$50000 and <$10000000 - Works 4 <$50,000 Shopping 5 <$10,000 Direct Contracting 6 Force Account All

8.13.2 Selection of Consultants

Prior Review Threshold: selection decisions subject to Prior Review by the Bank as stated in Appendix 1 to the Guidelines: Selection and Employment of Consultants:

2 QBS $200,000 3 Fixed Budget $200,000 4 Least Cost $200,000 5 Consultants’ Qualification $200,000 6 Single Source (Firms) $200000 7 Individual Consultants $50,000 8 Single Source (Individuals) $50,000

A short List Comprising Entirely of National Consultants: shortlist of consultants for services, estimated to cost less than $500,000 equivalent per contract, may comprise entirely of National consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines.

85 ACTION PLAN FOR PROCUREMENT REFORMS IN HEALTH SECTOR July 15,2006

Department of Health and Family Welfare, Government of Karnataka Health Sector Procurement Reform Action Plan for Karnataka’s Health and Family Welfare Programs

Introduction

The Department of Health and Family Welfare (DoHFW) is fully committed to ensure better competition, transparency and efficiency in procurement and supply of health sector goods and services required for delivery ofquality services in all its programs.

Scope and Purpose

The DoHFW has developed this HSPRAP in consultation with the Bank to address critical operational concerns relating to procurement ofhealth sector goods and services in Bank financed programs. The key issues, actions to address these concerns and responsibility for implementation for each action are included in the matrix below.

GoK will implement the agreed Health Sector Procurement Reform Action Plan (HSPRAP), and provide a written report on progress achieved, the first report dated December 3 1, 2006 and thereafter once every six months. GoK agrees that the HSPRAP may be amended from time to time, as agreed between GoK and the Bank; provided further, that GoK agrees to further strengthen the HSPRAP as necessary based on the risks identified and the recommendations ofthe Detailed Implementation Review, the procurement review and the report on the quality and quantity ofpharmaceuticals and medical goods.

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Annex 9: Economic and Financial Analysis

ECONOMIC ANALYSIS

9.1 In Karnataka the private sector is prevalent both in health financing (OOPS being the main source of revenue for health care services), as well as service provision (see main text, section A). Recognizing the role of the private sector would change the perspective according to which priorities need to be defined in the public sector, and also the economic evaluation of any public investment, such as KHSDRP. As Hammer (1997, p. 48) wrote: "Government investment, like any other government intervention, should be justified in terms of the social benefit the project will have over and above that which would occur without public sector involvement. For any investment opportunity, the focus of analysis should be on the difference between social and private benefits- not on the costs and expected returns to private goods themselves".

9.2 Hence, in the following economic analysis we need to address three questions:

(a) Is the current government health expenditure pro-poor, or geared towards achieving the Health- related MDGs? (b) Is it able to respond to existing market failures?45 (c) Can KHSDRP contribute to reorient government expenditure towards the poor, and/or enable the DoHFW to more effectively address market failures?

9.3 Equity: is Government Expenditure Pro-poor in Karnataka? As we indicated in Annex 1, over the last fifty years Go1 and GoK progressively developed a large and dispersed public health care delivery system intended to provide a comprehensive range of services to the whole population in principle almost free of charge. In spite of this prolonged effort, the evidence indicates that significant segments of the poorer populations are not yet reached by even essential services, that the majority uses private providers who charge for services, and that wide disparities persist in health outcomes and health system performance across geographical areas and socio-economic groups. We have reviewed some of the evidence on the health system performance in Annex 1. Let us now take a closer look at the evidence on the distributive impact of government expenditure on health and family welfare, its effectiveness and the quality ofservices. Following are some ofthe key facts.

9.4 There is no recent study that has investigated the redistributive impact ofgovernment expenditure on health and family welfare in Karnataka. A benefit incidence by Mahal and others, 20014' based on evidence from the NSS study, 1995-96, indicates that on average in Karnataka for each Rupee spent by government on health and family welfare which benefits individuals belonging to the poorest 20 percent of the population, 2.08 Rupees benefit individuals belonging to the wealthiest 20 percent of the population, close to the Indian average of 2. 14.48The regressive distributive impact of government health expenditure is driven by the regressivity of hospital inpatient services: by measuring the cumulative benefits of different services for different socio-economic groups using a Lorenz curve, the study found that 36.6 percent of the population was below the poverty line in 1995-96 in Karnataka, but that they utilized only 17.2 percent of the total number of inpatient bed-days. By contrast, the study found that expenditure on primary care (subcentres, PHCs, CHCs and PHUs) was pro poor, because 45 percent of outpatient visits at primary care were by people living below the poverty line.

9.5 Note that over the last ten years, the share of government expenditure going to primary care services decreased, while the proportion going to tertiary care increased significantly (see figure 5). This

93 eE! 41 0 3 c d 21 Figure 6: Per Capita Health ~~~~n~~it~rein ~~~~t~ntPrices in 9 Districts

As a rcsuit, both the? public atid the formal pri I present seein to be focused tonards t aiid levels of ewe, narneiy, c ices in urban areas at tiiic secondary and tcrtiar? st po~~~~~ialinzpact on the ‘t ~e~l~l~-r~~~~~~~iMDGs , or rural basic a~~~~~lato~fiealeft services in remote areas are lar o~~~~n~~i~~of fiumair arid other 1 fiave limited access to pubttc

95 sector services in subcentres or Primary Health Centres (PHCs), and have to rely on services offered by quacks, Rural Medical Practitioners, and other private providers.

Productive Efficiency”: there is no rigorous information on activity levels in the public and the private sectors. Thus, it is impossible to compute unit or average costs of service delivery, and draw any firm conclusion on the level of efficiency or inefficiency in service provision. However, the symptoms of low levels ofefficiency in government health services manifest themselves in several aspects:

(a) The current line item approach to allocating funds for health care (there are more than 3,000 line items under which the budget is allocated to the health sector in the state) is extremely rigid, offering little flexibility to find more cost-effective ways ofdelivering the same services. (b) Budget execution is also problematic. In the period from 1998-99 to 2003-04, on average, the actual government expenditure on health and family welfare fell 10.8 percent short of the allocated budget, as shown in Table 21 It is unclear whether this is a reflection of poor “spending” capacity, because of lack of careful planning and execution (see next point), or whether it is the consequence of lack ofpredictability and delays in the releases offunds from the Department ofFinance.

Table 21: Budget Estimates, Revised Estimates, and Actual Expenditures 1998-2004 (million, Rs.)

I 1998-99 1 1999-00 I 2000-01 I 2001-02 12002-03 12003-04 1 Budget Estimate 9,026.70 10,599.30 11,126.30 12,605.30 11,604.30 10,956.80 Revised Estimate 9,500.80 10,228.80 11,002.20 11,811.30 11,235.10 10,689.80 Actual 8,188.10 9,775.00 10,053.30 10,875.60 10,041 .OO 10,689.8(RE) Difference between actual and estimated budget -9.3 0% -7.80% -9.60% - 13.70% - 13.5 0% as a percentage of estimated budget

(c) Convoluted authorizing procedures and poor execution persist making it cumbersome and difficult to get even simple things (such as repairing a leaking roof) done. (d) There is no mechanism to track the linkages between the received funds and the consequent performance at all levels. (e) A high proportion ofthe state government expenditure on health and family welfare (SGEHFW) is on salaries (approximately 70 percent), whiles other key inputs or components of service delivery are severely under-funded, as illustrated by Table 22. Moreover, poor attendance in primary and secondary care rural facilities is common, as Figure 7 illustrates. Hence, at least a part ofthe labor inputs and salary costs do not translate into any additional service delivery.

96 STAFFING- MEDECAL OFFICER/ DOCTOR

At least One Available AHenda nce

Hyderabad Karnataka Murnbai Karnataka 9.10 Quality. Simple evidence of poor quality in government facilities is provided by the fact that most people seek care from the private sector for services which are principle (but not in practice, see above) available for free in government facilities. People’s choice suggests that the quality difference between the public and private sectors is perceived as significant. Factors such as the non-availability of adequate government services (for example, lack of essential drugs, or inconvenient hours of operation) and high hidden costs to households of using them (informal payments, or payments for medicines, or travel costs) are important. A household study done in preparation ofKHSDRP found that more than 56.6 percent ofthe time in case ofhospitalization cases and more than 63.6 percent ofthe times for ambulatory cases patients sought care from private providers.

Table 23: Distribution of Episodes of Hospitalizationand Ambulatory Care by Type of Facility

HH sirvey in preparation of &-SDRP HOSP, according to Rural 40% 60% NSS 2004 Urban 28.9% 71.1% HOSP, according to Rural 45.8% 54.2% NSS 1995-96 Urban 29.8% 70.2% # ofepisodes 1164 2028 AMBULATORY (3 6.4%) (63.6%) Care- HH survey in preparation of KHSDRP AMB. according to NSS 2004

Urban 18.7% 81.3 1 NSS 1995

9.1 1 Will the Proposed Project Contribute to Enhance Equity, Efficiency and Quality of Services? The proposed KHSDRP’s approach and structure have been described in detail in the PAD. We will not repeat the same analysis here, but underscore again its guiding principles:

(a) The project plans to plan and implement new strategies to accelerate the achievement of the Health-related MDGs. Its focus is on improving health outcomes (specifically maternal and child health and reduction of communicable diseases) for the vulnerable groups, by increasing their utilization ofessential health care services provided by public as well as private providers. (b) In order to achieve the above goal, the KHSDRP intends to tackle the four key performance and financial constraints, which at present limit access to essential services (see section A of the PAD). Increasing government expenditure on essential services, and adding to the existing

98 delivery system is one leg of the strategy. The other is a proposed major shift in the way public health sector staff assumes its roles and responsibilities. The following table summarizes the way forward proposed by KHSDRP:

financial

Need to introduce a less rigid approach to planning Create capacity at the local level. Progressively introduce Need to create capacity at the local level so that bottom-up planning and monitoring, and grant authority for decentralization translates into improvements in implementation. service delivery

Need to introduce transparent procedures for Stimulate competition for resources implementation; Need to improve procurement Increase efficiency and transparency in procurement mechanisms through the implementation ofthe Action Plan to improve procurement agreed with DoHFW leadership.

Need to make better use ofthe non government Establish stronger partnerships with the private sector, by sector for delivering essential services, and to giving incentives to provide priority services to the poor. improve standards of service delivery by private Facilitate a process of accreditation for private providers sector Need to further improve incentives and Incentives for medical staff who serves in remote areas. accountability for manpower Intensify monitoring and supervision ofstaff. Progressive introduction ofmerit-based promotion criteria.

Need to fill positions and decrease absenteeism in Give incentives linked to performance; introduce need-basec grass-root health facilities in rural areas posting criteria.

Need to improve financial protection against Contribute to increase risk protection and utilization of catastrophic expenditures during illness. essential services, by piloting a new insurance scheme

99 FINANCIAL ANALYSIS

9.1 1 This section will provide the following information:

(a) overview oftotal health spending, government health expenditure, its sources, and its breakdown into major budget headings and programs; (b) estimate ofthe contribution to the health sector from foreign assistance over the last few years; (c) outline the fiscal and economic situation in the state of Karnataka; and (d) projected financial contribution under KHSDRP.

9.13 Total Health Care Spending. It is difficult to arrive at an accurate figure of total expenditure on health and health-related services in Karnataka5’ as private spending is not well documented. The most significant source of funding for health services is out-of-pocket (OOP) payments by households. In 1995196, according to the NSS data, per capita OOP health expenditure in Karnataka was Rs.145.7, which was around 58 percent of the total. In the same year, Total Government Expenditure on Health and Family Welfare (TGEHFW) was approximately equal to Rs.104 per capita. Thus, in 1995/96 the total health expenditure can be estimated to have been equal to Rs. 250, or 2.2 percent of the Gross State Domestic Product (GSDP). More recent estimates, based on the 1999-2000 NSS survey, found that the share of households’ OOP expenditure on health care services over their total consumption expenditure was equal to approximately 6.1 percent. This finding is in line with that of a recent household health utilization and expenditure study done in preparation of the project, and would indicate that the total OOP health expenditure is currently at approximately three to four times the level estimated in 1995-96.

Figure 8: Total Out-of-pocket Expenditure in Public and Private Facilities in Various Indian States, 1995-96-RsPersonNear

KAR NATAKA

TAMIL NADU

WEST BENGAL

ALL INDIA

ANDHRA PRADESH

MAHARASHTRA

HARYANA

0 100 200 300 400 500

Source: IHSG, 2003 (Based on NSS 1995-96)

100 9.14 Note that some of the above OOP are paid to government facilitiess2. Only a small part of these charges are official user-fees imposed on services in government secondary and tertiary facilities, while most of the payments for services in public facilities are informal and not recorded. In 2002-03 the total revenue from official user-fees was equal to Rs. 38.27 million, or only 0.77 percent of the budget spent on secondarykertiary hospitals. Insurance premium collection for the Yeshashvini scheme contributed another 58.5 million in 2002-03.

9.15 Total Government Expenditure on Health and Family Welfare (TGEHFW). Figure 9 indicates that over the last few years TGEHFW increased at a rate of approximately 9.8 percent per year in nominal terms, from Rs. 714 crore in 1997-98 to Rs. 1,033 crore in 2002-03. In real terms the increase has been modest.

Figure 9: Evolution of Total Government Expenditure on Health and Family Welfare Karnataka (Rs. 1 Crore=lO million)

1500 E 1000 2D -E I 500

n 1 1997-98 I 1998-99 I 1999-00 I 2000-01 1 2001-02 I 2002-03 1 II, - I +Current prices 713 826 987 1016 1105 1023 +Constant prices 525 570 665 683 728 656

Note: constant prices are referred to year 1993-94. Source: Public Expenditure Review, Health Sector, 2004

9.16 Resource Flows to State Health Sector in Karnataka. Table 24 and Figure 10 present data on the evolution of TGEHFW over the period from 1997-98 to 2002-03, by sources of funding. The main public sources of revenue for health care services include central government, GoK and external assistance.

Table 24: Evolution of Total Government Expenditure on Health and Family Welfare by Sources of Funding, Karnataka (Rs. 1 Crore=lO million)

Year Central State Fusds ; External Total Funds Assistance Resources 1997-98 97.60 530.14 85.71 713.45 1998-99 71.30 620.55 133.65 825.50 1999-00 245.59 596.07 145.74 987.40 2000-01mnn-ni I 156.74 I 7116.59706.59 152.89 1,016.22 2001-02 197.77 696.57 210.65 1,104.99 2002-03 205.4121-15.41 I 694.34 122.95 1,022.70 Source: Public Expenditure Review, Health Sector, 2004

Note the extremely erratic dynamics of Central Funds, which increased by 244% in 1999-2000, and fell by more than one fourth vis-a-vis the previous year in the preceding and the following fiscal years. State funds partially compensate this variability, but have been declining starting from 2000.

101 Figure 10: Evolution of Total Government Expenditure on Health and Family Welfare by Sources of Funding, Karnataka (Rs. 1 Crore=lO million)

I 80

0, 60

40

a$ 20

0 I 1997-98 I 1998-99 I 1999-00 I 2000-01 2001-02 2002-03

Years

Source: Public Expenditure Review, Health Sector, 2004

9.17 External assistance, central, and state funds reach the health care services through the following different financing channels:

(a) External Assistance (EA) External assistance is in part channeled though the central schemes sponsored by GoI, and in part is directly given to the state government. On average, in the period 1998-2004, External Assistance contributed to approximately 12 percent of the TGEHFW. External assistance started declining in 2001- 02, as the World Bank KHSDP progressively reduced its annual disbursements (the project came to an end in March 2004).

102 Figure 11: External Assistance to Health Sector, 1997-98 to 2003-04 (Rs. Crore)

250

200 -f! E 0 150 .--C u)Q 100

a 50

O 1997-98 I 19z-99 I 99-lboo 2000-01 2001-02 1 200?-03 200?-04 /+KHSDP 1 60.57 I 95.18 1 121.40 1 102.08 I 116.50 I 80.07 I 15.94 1 I+ KFW I 0.50 1 0.64 1 1.58 1 4.27 I 15.14 I 12.88 / 9.06 I OPEC 4.17 14.45 7.15 3.48 0.00 0.00 0.00 -x-- IPP Vlll 0.00 0.00 0.00 10.00 16.26 0.00 0.00 +I+ IPP IX 20.47 23.30 14.65 27.01 36.46 0.00 0.00 -C RCH 0.00 0.08 0.96 6.05 24.30 30.00 30.00 +Total Ext. Funds 85.71 133.65 145.74 152.89 210.65 122.95 55.02

Source: Public Expenditure Review, Health Sector, 2004

(b) Central Funds Support from the Government of India is channeled through:

(a) Central Plan Schemes (CPS), which are implemented through 100 percent central grants (total CPS in 2002-03 was Rs. 3.37 crore); (b) Centrally Sponsored Schemes (CSS), also called Tied Grants, which require matching state contributions in some proportions -either 50:50 or otherwise. These also include a small component which is routed to the state societies through the state government (total CSS in 2002- 03 was Rs. 183 crore) (c) Central Government Schemes (CGS) - under CGS, the funds flow directly to the state level societies bypassing the state budget (non budgetary transfers) (total CGS in 2002-03 was equal to Rs. 19 crore)

In the period 1998-2004, schemes i, ii, and iii together on average contributed to approximately 20 percent ofthe TGEHFW.

(c) Government of Karnataka Funds The state government manages funds for health care coming from non earmarked transfers from Go1 and locally collected revenues. In 2002-03 they accounted for 67 percent ofthe TGEHFW.

9.18 State Government Expenditure on Health and Family Welfare (SGEHFW). We define the State Government Expenditure on Health and Family Welfare (SGEHFW) as the total amount of the health and health related expenditures presented to the Karnataka Legislature and passed through the state budget formulatiodapproval process.53 As stated before, in fact SGEHFW includes some of the funds from Go1 and from External Assistance, but it excludes the extra-budgetary sources (CGS, point b-iii

103 above). Thus, it is different from TGEHFW. Table 25 presents summary information on the evolution of the SGEHFW over the last few years:

Table 25: SGEHFW, State of Karnataka (1995-96 to 2002-03; Rs. Crore)

Year State Government Exp., HFW HFW as a % of Total State . (Rev+Cap.) ' - Government Expenditure

1995-96 513.38 4 93

Source: GoK

9.19 Over the period 1998-99 to 2002-03 the total SGEHFW increased at a rate of 7.7 percent annually, approximately half the rate of growth of total state expenditure. As a result, the share of SGEHFW over the total state expenditure decreased from 5.5 percent in 1998-99 to 3.9 percent in 2002- 03. As a percentage of State Gross Domestic Product (GSDP), it was stagnant at approximately 1% throughout the decade ofthe 1990s, and declined to 0.85% by 2003-04. On a per capita basis, in 2002-03 SGEHFW was equal to Rs.202.18 (i.e., approx. US$4.2).

9.20 Composition of SGEHFW, and its Evolution Over Time. The total state budget allocation to the health sector is made under two broad categories: (a) Medical and Public Health (MPH); and (b) Family Welfare. In turn, the budget allocation for MPH is divided into seven major heads of account (urban allopathic, urban non-allopathic, rural allopathic; rural non-allopathic, public health, medical education and training, and assistance to Zilla and Taluk Panchayats), and each of these major heads are further divided into various minor and sub-minor heads. Similarly, Family Welfare budget is also divided into a number of minor (roughly, one for each vertical scheme) and sub-minor heads.

9.21 In terms of share, the budget for Family Welfare has hovered around 18 percent of SGEHFW, whilst Medical and Public Health account for the rest 82 percent. As Figure 12 indicates, in recent years expenditure on Urban Services (mainly allopathic) increased at an annual nominal rate of 13%, the highest rate among all categories within MPH, and thus increased its share over total MPH. By contrast, the share of Public Health and Medical Education and Training remained stagnant, at respectively 6-7 percent and 10 percent oftotal MPH(see Figure 12).

104 Figure 12: Trends in Major Heads of Account within Government Expenditure, Medical and Public Health, current prices (Rs. Crore)

V 200 .-c

I 1997-98 1 1998-99 I 1999-00 2000-01 2001-02 I 2002-03 12003-040/ +UrbanSenices I 175 1 251 1 305 I 325 I 327 I 328 I 335 1 -a- Rural Senices 222 242 273 285 287 293 317 Medical Education 75 83 92 112 127 126 120 --+-Public Health 40 40 50 46 45 47 64

+Capital Expenditure ~ 68 I 88 94 72 79 43 31 Years

Source: Public Expenditure Review, Health Sector, 2004

9.21 Projections for the Future. Recently both Go1 and GoK have pledged to increase government expenditure on health and family welfare. Go1 launched the Rural Health Mission in spring 2005, a program to expand coverage of essential public health and primary care services. According to GoI’s proposals, SGEHFW should increase to 3% ofthe GSDP, and as a percentage oftotal state expenditure to 7%. If implemented, in Karnataka this would entail a more than twofold increase in SGEHFW. In fact, GoK has committed to very significant increases in the allocation to the health sector in the next few years. According to its Medium Term Fiscal Plan from 2004-05 to 2007-08 the annual nominal rate of increase in SGEHFW should be equal to 13%. The 2005/06 budget surpassed these targets, by raising by more than 18 % the DoHFW’s budget compared to the previous fiscal year.

Table 26: MTFP Projection for Expenditure on Health and Family Welfare (Rs. Crore)

growth I I I I 1 Source: MTFP, Finance Department, 2004

105 9.22 By looking at the general fiscal and economic situation in Karnataka, one can conclude that the above ambitious targets of projected increase in SGEHFW over time seem feasible and sustainable.

(a) Fiscal Situation in Karnataka: there has been a strong fiscal correction in Karnataka over the last few years on the back of good revenue performance and tight expenditure controls. Karnataka's own tax revenue increased from 8.8% (of GSDP) in 2002-03 to 9.9% in 2003-04 (growth of 23% in absolute terms), partly on account of tax reforms undertaken by the state. The strong own tax revenue performance continues in the current year, on the back of good economic growth. Salaries have been controlled (no increase in dearness allowance during 2003-04) and growth in interest expenditure has started to moderate with debt stabilization and lower interest rates. A positive balance in the revenue account is budgeted for 2004-05 (after a gap of nearly eight years) and is likely to be achieved. Capital expenditure has been protected at around 3% of GSDP, which is relatively high. The state is on track with its Fiscal Responsibility Act (FRA) and Fiscal Reform Facility (FRF) targets. The hope is that the reform agenda will survive the transition to a new government with a focus on fiscal correction, improved governance, and increased outlay for agriculture, and the social sectors. On the down-side, power sector finances have worsened, and this has offset some of the fiscal correction achieved by the state. Nevertheless, fiscal adjustment having basically been achieved, the state is expected to be able to considerably up its investments in priority sectors.

(b) Economic Performance: Karnataka continues to be one of India's fastest growing states. Its GSDP growth rate picked up from 5.3% in the eighties (below the national average) to 7.3% in the nineties (the second highest), and at 8.3% in the second half of the nineties (the highest). The good growth record in the nineties was maintained into 2000/01 (with real growth of 6.7%), but slowed in 2001/02,2002/03 and 2003/04 on account of three years of drought. Growth has picked up again in 2004/05 (7.8% is the advance estimate for real growth) with better monsoons compared with the last three years, mainly driven by the services' sector. By contrast, agricultural output has been largely stagnant. However, the completion of large irrigation projects in the short to medium term (in the Krishna basin) is expected to give a boost to the rain dependent agricultural regions of the state economy. Reforms are also underway to improve investment climate in the state, with special focus on major infrastructural sectors: progress has been made, but much more remains to be done. These measures coupled with overall economic recovery and strong performance in the manufacturing, software and biotechnology sectors are expected to improve GSDP growth rate in Karnataka over the medium term, though growth will remain volatile until the share of agriculture further declines. The latest MTFP forecasts 7% real growth for 2005/06, and 7.5% for the next two years.

9.23 World Bank Support under KHSDRP. KHSDRP will be the main source of external support to the health sector over the next few years. The other source of support will come from the second phase of a project, the "Upgradation of Secondary Level Health Care Facilities Project" that was started in June 2004. The project is jointly funded by Kreditanstalt Fur Wiederaufbau (KFW), Germany and GoK, and covers 22 hospitals in 5 districts viz. Gulbarga, Raichur, Bidar, Koppal, Bellary Ofthe total project cost (Rs. 750 million). Rs. 608 million (or 14.3 million Euro i.e., 81%) is funded by KFW as grant, and the rest (Rs. 142 million Le., 19%) by GoK through the State Budget Provision. The project will close on December 2008.

Under the assumption that the yearly rate of increase of SGEHFW will continue in line with the MTFP projections after 2007-8, the World Bank support through KHSDRP would add on average approximately seven percent to the total SGEHFW each year until FY 20 10- 1 1, as Table 27 indicates.

106 Table 27: Projected Financial Flows, SGEHFW and KHSDRP, Rs. Million

I 2006-07 . I 2007-08 I 2008-09 ’ 1 2009-10 . 1 2010-11 I Total Programmatic 491.98 699.08 93 1.33 1,19 1.19 1,469.82 4,783.39

contribution to 245.99 349.54 465.66 595.59 734.91 2,391.70 programmatic

Sharing by I to 245.99 349.54 465.66 595.59 734.91 2,391.70 programmatic 1 I I I I financing: I 511.39 961.30 923 .SO 97 1.20 826.66 4,194.35 1,660.38 1,855.13 2,162.39 2,296.48 8,977.75 Total projected I budget for 14,445.00 15,284.00 17,269.00 19,512.00 19,765.00 86,275.00 HFW-total I

% WE3 support in KHSDRP +4.89 7.9 7.5 1 7.53 7.48 7.15 over total I SGEHFW I

Source: Own computations, based on MTFP Projections

9.24 Financial Sustainability of KHSDRP. There are several dimensions of sustainability that need to be taken into account (see discussion in main text). Focusing here exclusively on financial sustainability issues, it is worth pointing out that:

(a) Absorptive Capacity of Donors’ Assistance. As the above figures indicate, each year the total external assistance (including support from the other donors) to GoK will most probably remain well below 10 percent of the SGEHFW, and below the levels reached during the decade of the 1990s, described in Figure 1 1.

107 (b) Increases in Recurrent Costs after the End of the Project. Part of KHSDRP investments will translate in increased recurrent expenditure. Increased levels of service would be maintained, and innovative schemes proposed by the project would be mainstreamed in the system. Higher recurrent costs associated with KHSDRP will indicate success in implementing the innovations proposed by the project. The total additional recurrent costs resulting in the process have not yet been estimated, but will be carefully assessed during implementation. Initial estimates indicate a total increase in recurrent costs in the order of 5 percent of SGEHFW. KHSDRP will experiment new and more cost-effective delivery mechanisms, thus encouraging a better use ofresources for health, which may generate further savings, and will provide assistance to the government to build a stronger, more sustainable base for health financing by implementing the insurance pilot. If the current positive economic and fiscal outlook is consolidated, it is expected that GoK will definitely be able to absorb the additional recurrent costs due to KHSDRP.

108 Annex 10: Safeguard Policy Issues

Social.

10.1 OP4.12 on Involuntary resettlement is not triggered by the Project as the Government of Karnataka does not propose to acquire any land for construction ofhealth facilities during the Project, nor to purchase any land from ‘willing sellers’. Any land used for construction of new or extension of old facilities will already be in the possession of the Government or be obtained through voluntary donation only. Sites would be selected by or be acceptable to the concerned communities, and transparent procedures would be followed to obtain land in both rural and urban areas. The document on Voluntary Land Donation agreed with GoK is contained as an attachment to this Annex. The document emphasizes that GoK would ensure that the land does not belong to any poor or disadvantaged persons who may be adversely affected by severance of the land. GoK would also ensure that nobody is displaced from the land, including squatters and encroachers. The donated land would be registered in the name of the Governor by the Administrative Medical Officer (AMO) or District Health Officer (DHO) of the concerned health facility, and the records would be brought into the Gram Panchayat’s Revenue records to ensure clear ownership of the land in the foreseeable future. The Project would not fund construction on any land for which clear title is not available with the government. Documentation on all land obtained (including transfer documents) would be accessible to the Bank during supervision to ascertain that no displacement has taken place. The process ofobtaining the land and transfer of ownership would be covered in evaluation ofcivil works.

10.2 The AMO/DHO and Gram Panchayat would be responsible to ensure that there are no negative impacts on vulnerable groups. Any aggrieved person would have recourse to the independent authority appointed at the district level to take up the grievance with the concerned officers and assist in its resolution so that the aggrieved party does not need to resort to the courts.

10.3 O.D. 4.20 Indigenous Peoples (IPS). (a) A Social Assessment (SA) was carried out by the Indian Institute of Health Management Research, Bangalore, to develop a strategy and action plan to improve health outcomes among the poor and disadvantaged, especially Scheduled Castes (SCs) and Scheduled Tribes (STs). The assessment examined the health-seeking behaviors of these socio-economically vulnerable groups, their utilization of health services, and perceptions of the formal/ informal and publidprivate health sectors. It also examined the constraints faced by them in accessing appropriate health services, particularly for the biologically vulnerable (women, child and adolescents). The SA examined the availability of health services in poor districts and tribal areas and the quality of care. These topics were elucidated through key informant interviews, focus group discussions, case studies and other qualitative and PRA methods (such as seasonality analysis of health problems and mobility mapping, relationship diagrams and ranking to understand use of health services). On the basis of participatory workshops with tribal people and NGOs working with them, the SA team developed an Action Plan for the vulnerable groups (the ‘Vulnerable Communities’ Health Plan’, VCHP) including implementation and monitoring arrangements and a strategy for continued participation. The VCHP has been disclosed and public comments obtained for its finalization for Appraisal.

(a) The Project has no risks related to IPS. It is not expected to sever tribal lands nor affect livelihoods (other than providing some employment to tribal women as Auxiliary Nurse Midwives) or culture. It does not include measures that would directly undermine traditional medicine, though it aims to spread modern medicine to benefit tribal people who have entered mainstream society. Many tribal communities already practice and eclectic form of health care, seeking traditional treatments for certain diseases (e.g., snake and scorpion bites) and modern treatment for others (e.g., malaria). The health system in Karnataka recognizes this and seeks to

109 build on it, to provide net health benefits particularly extending care to mothers and children who have high health risks because they have not been reached by health service providers in the past. (b) The Project encompasses several ‘alternatives’ because it is a blend of measures to improve the health of Karnataka’s population generally, and specific ones focused on the vulnerable groups. For example, the general measures include: support of increased expenditure on essential items in primary and secondary health care; organizational development; infrastructure and public health funds, while the specific measures to increase vulnerable communities’ access to good quality ambulatory care services include (i)mobile health units and (ii)recruitment and training of special Tribal ANMs. (c) As mentioned above, consultations were held in several ways and at several points during the SA and after public disclosure of the VCHP to identify the problems of and strategies suited to meeting the needs of vulnerable groups. The Project’s focus on vulnerable communities is partly the result of the findings of the SA and other studies done during Project preparation which highlighted the wide differentials in health and access to health care in Karnataka; and the two specific measures proposed (c-i and ii,above) emerged from these consultations. (d) The Project is expected to provide positive impacts on the health of vulnerable communities in the long-term by improving the reach and quality of services (mobile as well as facility-based), developing a cadre of tribal ANMs, and public health measures including health education. As no adverse effects are envisaged, no mitigation measures are needed. (e) GoK has a commitment and adequate capacity to implement the VCHP. A system of monthly reporting has been planned from the taluk to the state level to monitor the implementation of the mobile clinics. The elected local bodies (Panchayats) at village and district levels will also have a role in monitoring. Similarly the recruitment and functioning of the tribal ANMs will be monitored at district and state levels. (f) The special schemes for vulnerable communities will be implemented throughout the life of the Project, and funds for them are specifically provided under Component IV of the Project. (8) The legal documents will covenant implementation of the VCHP as well as monitoring of the outcomes of the Project as a whole for vulnerable communities. (h) The implementation of the VCHP will be monitored by GoK through specific designated officers at the state and district levels. Private citizens and NGOs will also be involved in monitoring through annual review workshops and posting of updates on the Project website. Adequate resources are available in the Project to for these activities. The Bank will pay special attention to progress during supervision missions.

10.4 The following document on Voluntary Land Donation was discussed and agreed with GoK.

PROCEDURE FOR DONATIONS OF LAND TO THE GOVERNMENT OF KARNATAKA

The Government of Karnataka intends to obtain lands for service-oriented public purposes such as PHCs by voluntary donation only. The site would be selected by or be acceptable to the concerned community and transparent procedures would be followed to obtain such land in both rural and urban areas.

Normally a minimum extent of 2 to 3 acres of land would be required for the construction of PHCs in a convenient place in a village. It would be ensured that such land is voluntarily offered and does not belong to any poor or disadvantaged person(s), but from a person whose family has a minimum holding of 10 acres of land would be considered for Donation. If the land owner donates the land it would be registered in the name of the Raja Pramukh (Governor) by the Administrative Medical officer of the concerned PHC at the minimum value of stamp fees (fee existing on that day of registration). Then the same records would be brought to the Gram Panchayat & revenue records, so that the ownership of the donated land cannot be meddled with in the future. The Project would not fund construction on any land for which clear title is not available with the government. After the change of records property would be

110 considered public property and even if there is some delay in construction of the health centre none can claim the property.

In place of the Administrative Medical officer a District Health officer may also be considered to represent the Raja Pramukh at the time ofregistration.

To ensure a common procedure for the donation of land for primary care centers a separate order would be issued authorizing DHOs to represent the Raja Pramukh at the time ofregistration.

Environment

10.5 A health sector Project is bound to have positive and negative linkages with environmental issues. An environmental assessment (EA) was done to understand what these linkages are in the Project context, and to determine how to enhance the positive features and manage the negative environmental impacts.

10.6 This EA included a review of the national and state legislative requirements, a review of the Bank’s policy requirements, an overall baseline analysis with a focus on the deficiencies on the present status ofthe primary health care services and its environmental implications, an assessment ofthe impacts of the activities proposed under the Project, an analysis of alternative options in relation to particular services and public / stakeholder consultations. The main findings arising out ofthe EA are as follows: Two of the Bank’s environmental safeguard policies, OP 4.01 Environmental Assessment and OP 4.09 Pest Management are triggered. Related to the first policy, proposed activities under the Project will create minor, site-specific and reversible negative environmental impacts and an environmental management plan (EMP) is required to ensure appropriate management measures are implemented. Under this Project, the ban in the use ofDDT for other purposes will be strictly enforced.

10.7 The review ofthe Indian acts and policies revealed that the main piece of legislation relevant to this sector is the Bio-Medical Waste (Management and Handling) Rules, 2000, and its various requirements have to be met during implementation.

10.8 Improper care or inadequate attention during the design, construction and operation & maintenance ofthese primary health care facilities will result in environmental problems / issues. These issues include (a) deficient provisions and practices in relation to bio-medical waste management; (b) poor sanitation facilities; (c) lack ofadequate water supply, (d) poor construction quality ofbuilding facilities and lack of adequate operation & maintenance; (e) improper location of primary health care centredsub-centres; and (f) lack of personnel awareness on basic good environmental practices.

10.9 To ensure and maximize that the environmental benefits of the Project are realized, guidelines and best practices should be implemented during the operation of the primary health care centerdsub-centers. These include guidelines such as those for managing biomedical wastes, sharps, water supply, sewerage & sanitation, and best practices for activities such as drug redistribution and landscaping.

10.10 To address the likely environmental issues and concerns, an environmental management plan (EMP) was prepared. This plan included environmental management measures (including guidelines for design, construction and operation of primary health care facilities, and best practice information), organizational arrangements to implement the plan, traininghapacity-building requirements, communication arrangements, consultative processes/procedures, monitoring arrangements and special studies to be done during the Project implementation.

10.11 To be able to implement the EMP, the GoK’s institutional capacity requires to be strengthened. Under this Project, there will be a full-time Environmental Officer at the state level. This Environmental

111 Officer will provide technical and managerial support in relation to environmental management, for the Project as a whole. The Environmental Officer will be supported at each District Health Office by an Assistant Engineer, who will hold a part-time responsibility to manage environmental issues. In every Primary Health Centre or Sub-centre, there will be an environmental in-charge, who will be assigned a part-time responsibility, to ensure that day-to-day co-ordination pertaining to the EMP implementation is done.

10.12 As a part of the EA, public/stakeholder consultations were carried out. During the EA, a total of 32 Centres were visited in the four administrative boundaries of Karnataka - Gulbarga, Belgaum, Bangalore and Mysore - and consultations were done during these visits. In addition, stakeholder consultations were done with selected civil society organizations in Bangalore. To carry forward these consultations during the Project implementation, an explicit consultation plan has been included in the EMP.

10.13 Once the environmental safeguard reports were completed, these were disclosed and made available in the Karnataka State Health Systems Development Project (KSHDP) office in Bangalore. The executive summary has been translated in the local language - Kannada - and disclosed in all District Health Offices in the various districts. All these reports will also be disclosed at the Bank’s Info Shop in New Delhi and Washington D.C.

112 Annex 11: Project Preparation and Supervision

Appraisal 05/3 0/2005 05/30/2005 Negotiations 0 1/09/2006 01/09/2006 BoardiRVP approval 0813 1/2006 Planned date of effectiveness 1010 112006 Planned date of mid-term review 0 1/30/2009 , Planned closing date 0 1/30/2012

Key institutions responsible for preparation of the project:

Bank staff and consultants who worked on the project included:

Task Team Members

Tanuj Mathur Financial Managemend Disbursement Meera Chatterjee Social Assessment & Gender Safeguards S. Vaideeswaran and Ruma Tavorath Environmental Safeguards Vijay Rewal Infrastructure Silviu Radulescu Service Improvement Plans at district level, PHCF and PPP operational issues Shashank Ojha and Maneesha S Gupta Health Information System Venkatachalam Selvaraju Budget analysis Paolo Carlo Belli Task Team Leader

Bank funds expended to date on Project preparation: 1. Bank resources: US$553,705.56 2. Trust funds: 1 18,253.98 3. Total: US$671,979.54 Estimated Approval and Supervision costs: 1. Estimated annual supervision cost: US$150,000

113 Supervision Plan

The project will require intensive supervision in the first year, given the wide range of implementing agencies at various levels and at various capacities, as well as diverse implementation mechanisms. The first year affords a critical opportunity to ensure that these processes that formalize partnerships between sectors, between public and private sectors, and communities in a transparent and accountable manner, are sustained and integrated into the workings of the project. The focus in the first year will need to be on the following issues: monitoring and evaluation, the Organization Development plan to support the drafting of the Service Improvement Plans, first phases of implementation of the Public Health Competitive Fund, procurement and financial management, and finalization of preparation of the health insurance pilot.

During the first year of implementation, the project will have three formal supervision missions, in addition to ongoing implementation support by Bank staff in the New Delhi office. The core supervision team will consist of the following members: (a) task team leader; (b) financial management specialist who will review the project's adherence to fiduciary requirements; (c) procurement specialist who will review and advise on issues related to procurement, in particular progress on the procurement reforms Action Plan, selection of consultants and procurement of goods; (d) implementation specialist who will focus on the three main innovations (Service Improvement Challenge Fund, Public Health Competitive Fund and Health Insurance; and (e) environmental specialist to review implementation of the environment management action plan. In addition, the team will rely upon various experts for their guidance in the areas of contracting NGOs, integration with the RCH I1 and NRHM, monitoring and evaluation, surveillance, and strategic communications.

The first missions will take place in Autumn 2006. The missions will also include field visits to several districts.

114 Annex 12: Documents in the Project File

Annigeri, VB, 2003, District Health Accounts: An Empirical Investigation, Economic and Political Weekly, May 2003.

Das Gupta, M., Khaleghian, P., Sarwal, R., Governance of Communicable Diseases Control Services: a Case Study and Lessons from India.

Department of Health and Family Welfare, Government of Karnataka, 2005, The Karnataka Health System Development and Reform Project, Plan of Implementation, Bangalore, Karnataka.

Department of Health and Family Welfare, Government of Karnataka, 2002; Project Proposal for a “Karnataka Integrated Health, Nutrition & Family Welfare Services Development Project”. Bangalore

Department of Health and Family Welfare, Government of Karnataka, 2003; The Karnataka State Integrated Health Policy. Bangalore

Department of Health and Family Welfare, Government of Karnataka, 2004. Departmental Medium Term Fiscal Plan; 2004-05 to 2007-08. Bangalore.

Department of Health and Family Welfare, Government of Karnataka, 2004, Strategic Documents in preparation of the Karnataka Health Systems Development and Reform Project:

1. Public Private Parternership by Dr.V.S.Pati1 Kulkarni; 2. Re-orientation of Public Health Sector by Dr.M.V.Murugendrappa; 3. Health Financing Alternatives in Karnataka by Dr. Maathai Mathiyazhagam.

Department of Health and Family Welfare, Government of Karnataka, 2005, Vulnerable Communities Health Plan, Bangalore, Karnataka.

Department of Health and Family Welfare, Government of Karnataka, 2005, Environmental Management Plan for the Karnataka Health Systems Development and Reform Project, Bangalore, Karnataka.

Department of Health and Family Welfare, Government of Karnataka, 2005. Financial Management Manual for the Karnataka Health System Development and Reform Project, Bangalore, Karnataka.

Final Reports of PHRD Studies: 1. Social Assessment 2. Study of Causes of IMW MMR 3. Household Health Utilization Survey 4. Mapping and Survey of Health Care Providers 5. Public Expenditure Review 6. Information Systems Strategy Plan

George, A.; Iyer A.; Sen G., 2004, Maternity in Crisis: Gendered Health System Experiences from Koppal, Karnataka. Draft.

115 Government of India, 2002, National Health Policy, Delhi, India.

Government of Karnataka 2004; Detailed Estimates ofExpenditure.Volume IV; 2004-2005 Bangalore.

Government of Karnataka, 2003, ARC Report: Functional Review for Health and Family Welfare Department, Bangalore, Karnataka.,

Goyal, S., 2005, Human Development in Karnataka and Tamil Nadu: a Comparison. The World Bank, Washington, DC.

Hammer, J., 1997, Health and Education Expenditures in Karnataka. Draft, Policy Research Department, World Bank, Washington D.C.

Hammer, J. 1997. Economic analysis for health projects. The World Bank Research Observer 12(1): 47- 71

International Institute for Population Sciences and ORC Macro, 2000. National Family Health Survey India, 1998-1999. IIPS Mumbai India.

International Institute for Population Sciences, 200 1, Reproductive and Child Health project, Rapid Household Survey, 1998-99, IPPS Mumbai, India.

International Institute for Population Sciences, Population Research Center, and The Institute for Social and Economic change, 1995, National Family Health Survey Karnataka, 1992-1993 Bombay; and Bangalore.

Karuna Trust, 2003, Proceedings of National Conference on Community Health Insurance, Mysore, Karnataka.

Karuna Trust, 2003, Public Sector Voluntary Organization (NGO) Partnership for Primary Health Care Services, (Draft Report). Experience of Karuna Trust and Vivekananda Foundation in Gumballi and Thithimathi PHC, Karnataka.

Mathiyazhagan K.M. 2003, People’s Choice of Health Care Provider: Policy Options for Rural Karnataka in India, Journal of Health Management, 5, 1 New Delhi.

Mascarenhas M.; Vyasulu P.; Vijalakshmi V., 2004, Maternal Health Care and Local Self Governance in Karnataka. A Situation Analysis. Draft. Centre for Budget and Policy Studies, Bangalore Karnataka.

Mavalankar D., 2003, Policy Barriers Preventing Access to Emergency Obstetric Care in Rural India 2003; Achutha Menon Centre for Health Science Studies, Thiruvananthapuram, Kerala.

Mavalankar D., 2004, Study of Technical Top Management Capacity for Safe Motherhood Program in India. India Institute of Management, Ahmedabad.

Nanjundappa Committee, 2004, Report of the High Power Committee for Redressal of Regional Imbalances, Government of Karnataka, Bangalore.

Planning Department Government of Karnataka, 1999; Human Development in Karnataka; Bangalore

116 Planning Department Government of Karnataka and Institute for Social and Economic Change, 2001, Workshop Papers on Poverty and Human Development Monitoring System, Bangalore, Karnataka.

Public Affairs Centre, 2002, State of India’s Public Services, Benchmarks for the New Millennium, Bangalore, Karnataka

Ranson M.; Jowett M., 2003, Developing Health Insurance in India, paper presented at workshop on health insurance, Delhi.

Rao, A,, 2003, Karnataka Lokayukta, Initiatives in the Public Health Sector, A Review, The Public Affairs Centre, Bangalore.

Subramanya S.; 2004, Establishment of Health Boards in Karnataka.; draft;

Subramanya S.; 2004, Strategies For Ensuring Access to basic package of health services; draft.

Task Force on Health and Family Welfare, Government of Karnataka 2001 Karnataka Towards Equity, Quality and Integrity in Health, Final Report of the Task Force on Health and Family Welfare: Bangalore

World Bank, 20041, World Development Report: Making Services Work for Poor People, Washington DC.

World Bank, 200411, Project Appraisal Document for the Integrated Disease Surveillance Project, World Bank, Washington DC.

World Bank, 2004111. Country Assistance Strategy for India, World Bank, Washington, D.C.

World Bank, 2004IV, Attaining the Millennium Development Goals In India: How likely and What Will it Take? World Bank, Washington, DC.

World Bank, 2003, Program Document for the Third Karnataka Economic Restructuring Loadcredit, World Bank Washington DC.

World Bank, 2001, Raising the Sights: Better Health Systems for India’s Poor, World Bank, Washington DC

World Bank, State Health Systems Development Project 11.; 1999, Mid Term Report, World Bank, Washington, DC.

117 Annex 13: Statement of Loans and Credits

I I I I I I I I PO93720 I 2006 I Mid-Himalayan (HP) Watersheds I 0.00 I 60.00 I 0.00 I 0.00 I 0.00 I 56.13 I -2.64 I 0.00 I PO77977 I 2005 I RuralRoadsProject I 99.50 I 300.00 I 0.00 I 0.00 I 0.00 I 280.01 I -26.99 I 0.00 I I PO77856 I 2005 I Luchow-MuzaffarpurNationalHighway I 620.00 I 0.00 I 0.00 I 0.00 I 0.00 I 524.23 I -45.77 1 0.00 I I PO75058 I 2005 I TNHEALTHSYSTEMS 1 0.00 I 110.83 I 0.001 0.001 20.06 I 83.48 I 5.11 I 8.63 I PO945 13 2005 India Tsunami ERC 0.00 465.00 0.00 0.00 0.00 393.97 137.87 0.00 PO7365 1 2005 DISEASE SURVEILLANCE 0.00 68.00 0.00 0.00 0.00 63.03 13.07 0.00 PO73370 2005 Madhya Pradesh Water Sector 394.02 0.00 0.00 0.00 0.00 371.58 32.70 0.00 Restructurin PO84632 2005 Hydrology I1 104.98 0.00 0.00 0.00 0.00 104.46 24.32 0.02 PO84790 2005 MAHAR WSIP 325.00 0.00 0.00 0.00 0.00 293.18 -21.48 0.00 I PO84792 I 2005 I Assam Agric Competitiveness I 0.00 I 154.00 I 0.00 I 0.00 I 0.00 I 142.94 I 11.46 I 0.00 1 I PO86518 I 2005 1 M SME Financing&Development I 120.00 I 0.00 I 0.00 I 0.00 I 0.00 I 19.40 I 1.07 I 0.00 I I PO73776 I 2004 I ALLAHABADBYPASS I 240.00 I 0.00 I 0.00 I 0.00 I 0.00 I 176.04 I 94.44 I 0.00 I PO73369 2004 WARRWSS 0.00 181.00 0.00 0.00 0.00 145.18 12.64 0.00 PO78550 2004 Uttar Wtrshed 0.00 69.62 0.00 0.00 0.00 64.23 -2.33 0.00 PO55459 2004 ELEMENTARY EDUCATION 0.00 500.00 0.00 0.00 0.00 98.45 -105.68 0.00 PROJECT (SSA) PO79865 2004 GEF Biosafety Project 0.00 0.00 0.00 1.00 0.00 0.76 0.71 0.00 PO82510 2004 Karnataka UWS Improvement Proiect 39.50 0.00 0.00 0.00 0.00 29.61 16.60 0.00 PO50655 2004 RAJASTHAN HEALTH SYSTEMS 0.00 89.00 0.00 0.00 0.00 78.46 32.72 0.00 I I I DEVELOPMENT I I I I I I I I I

I PO71272 I 2003 I APRURALPOVREDUCTION I 0.00 I 150.03 I 0.00 I 0.00 I 0.00 I 54.33 I 12.27 I 0.00 I 2002 MUMBAI URBAN TRANSPORT I 463.00 I 79.00 I 0.00 I 0.00 1 0.00 I 377.90 I 150.21 I 0.00 I I I I PROJECT PO50653 2002 KARNATAKA RWSS I1 0.00 151.60 0.00 0.00 15.04 85.81 54.49 0.00 PO72539 2002 KERALA STATE TRANSPORT 255.00 0.00 0.00 0.00 0.00 138.78 29.12 0.00 PO40610 2002 RAJ WSRP 0.00 140.00 0.00 0.00 15.04 86.19 46.93 0.00 PO50647 2002 UPWSRP 0.00 149.20 0.00 0.00 40.11 103.34 102.13 0.00 PO74018 2002 Gujarat Emergency Earthquake 0.00 442.80 0.00 0.00 80.23 149.28 153.74 10.22 Reconstruct I PO69889 I 2002 I MIZORAMROADS I 0.00 I 60.00 1 0.00 I 0.00 I 0.00 I 34.60 I 10.37 I 0.00 I

118 I PO71033 I 2002 I KARNTankMgmt I 0.00 I 98.90 I 0.001 0.001 25.07 I 61.69 I 49.18 I -5.16 I I PO35173 I 2001 I POWERGRIDII I 450.00 I 0.00 I 0.00 I 0.00 I 0.00 I 43.02 I 41.29 I 6.08 I

PO38334 2001 RAJPOWERI 180.00 0.00 0.00 0.00 2.02 35.25 37.27 26.11 PO59242 2001 MPDPIP 0.00 110.10 0.00 0.00 20.06 16.35 21.70 -11.09 PO55455 2001 RAJ DPEP I1 0.00 74.40 0.00 0.00 0.00 27.42 16.99 0.00 I PO59501 I 2000 I IN-TA for Econ Reform Project I 0.00 I 45.00 I 0.00 I 0.00 I 12.03 I 19.47 I 26.72 I 0.81 I I PO50657 I 2000 I UP Health Systems DevelopmentProject I 0.00 I 110.00 I 0.00 I 0.00 I 30.09 I 38.32 I 57.77 I -0.94 I I PO49770 I 2000 I RENEGY I1 I 80.00 I 50.00 1 0.00 I 0.00 I 18.00 I 41.69 I 57.98 I 56.98 I I PO45049 I 2000 I APDPIP I 0.00 I 111.00 I 0.001 0.001 0.00 I 16.17 I 6.54 I 0.00 I PO10505 2000 RAJASTHAN DPIP 0.00 100.48 0.00 0.00 0.00 40.76 31.42 25.28 PO09972 2000 NATIONAL HIGHWAYS 111 PROJECT 516.00 0.00 0.00 0.00 0.00 168.24 168.24 54.91 PO50646 1999 UP Sodic Lands I1 0.00 194.10 0.00 0.00 0.00 9.02 5.28 -6.89 Total: 6,969.00 5,139.45 0.00 1.00 471.25 7,118.08 2,090.76 288.26

INDIA STATEMENT OF IFC’s Held and Disbursed Portfolio (in Millions of US Dollars)

Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. I 2005 I ADPCL I 40.77 I 7.00 I 0.00 I 0.00 I 0.00 I 0.00 I 0.00 I 0.00 I I 2006 I AHEL 1 0.00 I 5.08 I 0.00 I 0.00 I 0.00 I 5.08 I 0.00 I 0.00 I I 2005 I AP Paper Mills I 35.00 I 5.00 I 0.00 I 0.00 I 15.00 I 5.00 I 0.00 I 0.00 I

I 2001 I Basix Ltd. I 0.00 I 0.98 I 0.00 I 0.00 I 0.00 I 0.98 I 0.00 I 0.00 I I 2005 I Bharat Biotech I 0.00 I 0.00 I 4.50 I 0.00 I 0.00 I 0.00 I 3.30 I 0.00 I I 1984 I BiharSponge I 5.83 I 0.00 I 0.00 I 0.00 I 5.83 I 0.00 I 0.00 I 0.00 I I 2001 I CCIL I 6.00 I 0.00 I 0.00 I 5.75 I 6.00 I 0.00 I 0.00 I 5.75 I 2003 CCIL 1.50 0.00 0.00 0.00 0.59 0.00 0.00 0.00 1990 CESC 6.87 0.00 0.00 0.00 6.87 0.00 0.00 0.00

119 1992 CESC 9.82 0.00 0.00 21.89 9.82 0.00 0.00 21.89 2004 CGL 15.00 0.00 0.00 0.00 8.00 0.00 0.00 0.00 2004 CMScomputers 0.00 10.00 2.50 0.00 0.00 0.00 0.00 0.00 I 2002 I COSMO I 3.75 I 0.00 I 0.00 I 0.00 I 3.75 I 0.00 I 0.00 I 0.00 I I 2005 I COSMO I 0.00 I 3.73 I 0.00 I 0.00 I 0.00 I 3.73 I 0.00 I 0.00 I

1994 I GVK 0.00 I 5.00 I 0.00 I 0.00 I I 2003 I HDFC I 100.00 I 0.00 I 0.00 I 100.00 I 100.00 I 0 00 I 0.00 1 100.00 I I 1998 I IAAF I 0.00 1 0.47 I 0.00 I 0.00 I 0.00 I 0.30 I 0.00 I 0.00 I I 2006 I IAL I 0.00 I 9.86 I 0.00 I 0.00 I 0.00 I 7.70 I 0.00 I 0.00 I I 1998 I IDFC I 0.00 I 10.82 I 0.00 I 0.00 I 0.00 I 10.82 I 0.00 I 0.00 I I 2005 I IDFC I 50.00 I 0.00 I 0.00 I 100.00 I 0.00 I 0.00 I 0.00 I 0.00 I

Indus VC Mgt Co I 2006 I JK Paper 115.00 I 11.50 I 0.00 I 0.00 I 0.00 I 11.26 I 0.00 I 0.00 I I 2005 I K Mahindra INDIA I 22.00 I 0.00 I 0.00 I 0.00 I 22.00 I 0.00 I 0.00 I 0.00 I I 2005 I WIT 1 11.00 I 2.50 I 0.00 I 0.00 I 4.00 I 0.00 I 0.00 I 0.00 I 1 2003 I L&T I 50.00 I 0.00 I 0.00 I 0.00 I 50.00 I 0.00 I 0.00 I 0.00 I I 2002 I MMFSL I 8.69 I 0.00 I 7.76 I 0.00 I 8.69 I 0.00 I 7.76 I 0.00 I I 2003 I MSSL 1 0.00 I 2.29 I 0.00 I 0.00 I 0.00 I 2.20 I 0.00 I 0.00 I

I I Nevis I 0.00 I 4.00 I 0.00 1 0.00 I 0.00 I 4.00 I 0.00 I 0.00 I I 2003 I NewPath I 0.00 I 9.31 I 0.00 I 0.00 I 0.00 I 8.31 I 0.00 I 0.00 I I 2004 I NewPath I 0.00 I 2.79 I 0.00 I 0.00 I 0.00 I 2.49 I 0.00 I 0.00 I I 2003 I Niko Resources I 24.44 I 0.00 I 0.00 I 0.00 I 24.44 I 0.00 I 0.00 I 0.00 I

120 I 1995 I Rain Calcining I 0.00 I 2.30 I 0.00 I 0.00 I 0.00 I 2.30 I 0.00 I 0.00 I I 2004 I Rain Calcining I 10.00 I 0.00 I 0.00 I 0.00 I 10.00 I 0.00 I 0.00 I 0.00 I I 2005 I Ramky 1 3.86 I 10.61 I 0.00 I 0.00 I 0.00 I 0.00 I 0.00 1 0.00 I I 2005 I Ruchi Soya I 10.00 I 10.00 I 0.00 I 0.00 I 0.00 I 7.50 1 0.00 I 0.00 I I 2001 I SBI I 50.00 I 0.00 1 0.00 I 0.00 I 0.00 I 0.00 I 0.00 I 0.00 I

I 2000 I SundaramHome I 0 00 I 2.18 I 0.00 I 0.00 1 0.00 I 2.18 I 0.00 I 0.00 I I 2002 I SundaramHome I 7.39 I 0.00 I 0.00 I 0.00 I 7.39 I 0.00 I 0.00 I 0.00 I I 1998 I TCW/ICICI I 0.00 I 0.80 I 0.00 I 0.00 I 0.00 I 0.80 I 0.00 I 0.00 I I 2005 I TISCO I 100.00 I 0.00 I 0.00 I 300.00 I 0.00 I 0.00 I 0.00 I 0.00 I

I 1997 I Walden-Mgt India I 0.00 I 0.01 I 0.00 I -o.ooI0.00--1- 0.01 I 0.00 I 0.00 I I I Total portfolio: I 931.38 I 230.79 I 42.89 I 538.50 I 563.55 I 175.61 I 39.19 I 138.50 I

Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic. 2004 CGL 0.01 0.00 0.00 0.00 2000 APCL 0.01 0.00 0.00 0.00 2004 CIFCO 0.00 0.00 0.02 0.00 2006 IDFC B Inc 0.00 0.00 0.00 0.10 2001 Vysya Bank 0.00 0.00 0.00 0.00 2006 Federal Bank 0.01 0.00 0.00 0.00 I 2001 I GI WindFarms I 0.01 I 0.00 I 0.00 I 0.00 I I 2004 I Ocean Sparkle I 0.00 I 0.00 I 0.00 I 0.00 I I 2005 I Allain Duhangan I 0.00 I 0.00 I 0.00 I 0.00 I I 2006 I Lok Microfinance I 0.00 I 0.00 I 0.00 I 0.00 I I I Total pending commitment: I 0.04 I 0.00 I 0.02 I 0.10 I

121 India: Karnataka Health System Development and Reform Project

Annex 14: Country at a Glance

POVERTY and SOCIAL South Low- Development diamond' India Asia Income 2004 Population, mid-year (millions) 1,079.7 1,447 2,343 Life expectancy GNIpercapita (Atasmethod, US$) 630 590 5n GNI (Atlas method, US$ billions) 680.3 859 1,188 - Average annual growth, 1998-04 Population (%) 1.6 1.7 1.9 GNi Gross Labor force (%) 1.9 2.1 2.2 per primary Most recent estlmate (latest year available, 1998-04) capita enrollment P o verty (% ofpo pulatio n bel0 w natio nal PO verty line) 29 Urban population (%of to tal populatio n) 29 29 31 Life expectancyat birth (pars) 63 63 58 I Infant mortality (per 1000 live births) 62 66 79 Child malnutrition (%ofchildrenunder5) 47 49 43 Access to improvedwatersource Access to an improvedwatersource (%ofpopulation) 86 84 75 Literacy (%ofpopulation age %+) 61 81 81 Gross primaryenrollment (%of school-age population) D7 D3 DO -lndia ~ Lowincomegmup Male ill D8 D5 Female D4 97 94

KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1984 1994 2003 2004 Economlc ratlos' GDP (US$ billions) 206.5 322.6 800.7 894.7 Gross capital formationlGDP 216 23.4 27.2 30.1 Trade I Exports of goods and services/GDP 6.5 0.0 14.8 19.0 Gross domestic savings/GDP 18.8 24.8 28.9 29.1 I Gross national savings/GDP 19.4 26.0 32.0 31.4 Current account balance/GDP -14 -1.2 1.7 -1.0 Domestic Capital Interest payments/GDP 0.5 1.3 18 .4 16.8 savings formation Total debt/GDP 16.5 31.8 8.2 17.5 Total debt service/exports 18.3 26.6 P.8 7.3 Present value of debt/GDP 13.7 Present value of debtlexports 87.4 Indebtedness 1984-94 1994-04 2003 2004 2004-08 (average annualgmwih) GDP 5.4 5.8 8.3 8.5 6.9 -lndia ~ Lowincomegmup GDP percapita 3.3 4.1 6.7 7.0 5.5 Exports of goods and services 9.0 x3.3 5.8 39.3

lgE4lgg4 *Oo4 :Growth of capital and GDP (Oh) (%of GDP) Agriculture 35.2 30.4 21.0 19.8 2o Industry 26.2 27.1 26.4 27.3 M anufacturing 16.4 16.9 15.4 16.0

Services 38.7 42.5 52.5 53.2 ~ l: Household final consumption expenditure 69.0 88.2 62.9 60.7 j.,o General gov't final consumption expenditure n.8 n.7 11.2 11.3 j Imports of goods and services 7.9 n.3 18.1 21.0 !- -GCF -GDP -

1984-94 1994-04 Growth of exports and Imports (Oh) (average annualgm wih) Agriculture 3.4 2.1 n.0 0.7 50 industry 8.3 5.7 7.8 8.8 40 Manufacturing 8.2 5.5 7.1 6.1 30 Services 8.7 8.1 8.2 9.9 2o

Household final consumption expenditure 5.7 5.3 8.9 7.2 0 General gov't final consumption expenditure 4.8 8.0 2.4 9.2 88 00 01 02 03 04 Gross capital formation 5.0 6.1 15.6 12.8 -Exports -Inports Imports of goods and services 8.4 11.0 13.6 41.9

Note: 2004 data are preliminaryestimates. 2004 represents Indian Fiscal Year 2004-05, which runs from April lto March 31. 'The diamonds showfour key indicators in the country (in bold) compared with its income-group average. if data are missing, the diamond will be incomplete. 122 PRICES and GOVERNMENT FINANCE 1984 1994 2003 2004 Domestic prices (56 change) Consumer prices 4.3 7.6 3.7 4.0 Implicit GDP deflator 7.4 9.7 4.1 4.2 Government flnance (U of GDP, includes current granfs) Current revenue .. 18.0 17.9 19.6 99 00 01 02 03 Current budget balance .. -3.7 -6.4 -4.2 -GDP deflator +CPI Overall surpluddeficit .. -7.6 -9.0 -7.9

TRADE 19a4 1994 2003 2004 Export and Import levels (US$ mill.) (US$ millions) I Total exports (fob) 10,061 26,855 64,723 80,831 125,000 Tea 321 1,126 1,329 1,268 100.000 Iron 453 988 2,369 4,193 Manufactures 5,814 20,404 48,492 58,168 75,000 (tin Total imports 15,715 35,904 80,177 118,961 50,OMI Food 1,384 1,144 3,073 3,014 Fuel and energy 4,596 5,928 20,570 29,844 25,000 Capital goods 2,546 7,638 18,279 22,567 0 98 99 00 01 02 03 Export price index (2000=100) 103 115 106 107 Import price index (2000=100) 122 106 Exports w Imports 100 101 O4 Terms of trade (2000=100) 84 109 107 107 I I

BALANCE of PAYMENTS 1984 1994 2003 2004 Current account balance to GDP (Oh) (US$ miNionsJ Exports of goods and services 13,508 32,990 89,672 132,157 I Imports of goods and services 18,065 41,437 96,535 155,657 Resource balance -4,557 -8,447 -6,863 -23,500 Net income -838 -3,431 -3,972 -3,979 Net current transfers 2,496 8,093 22,833 20,459 Current account balance -2,899 -3.785 9,998 -7,020 Financing items (net) 2,516 9,526 25,560 35,143 Changes in net reserves 383 -5,741 -35,558 -28,123 Memo: Reserves including gold (US$ miNions) 5,952 25,186 111,648 140,076 Conversion rate (DEC, /oca/NS$) 11.9 31.4 46.0 44.9

EXTERNAL DEBT and RESOURCE FLOWS 1984 1994 2003 2004 (US$ millions) Total debt outstanding and disbursed 34,036 102,483 115,277 121,458 IBRD 1,688 11,244 4,126 4,865 G: 4,8,g A: 4,865 IDA 8,545 17,758 22,351 23,662 Total debt service 2,973 10,951 14,489 11,337 IBRD 257 1,641 2,079 268 IDA 109 325 771 755 Composition of net resource flows Official grants 483 416 563 589 Official creditors 1,383 970 2,231 Private creditors 1,895 1,438 8,565 Foreign direct investment (net inflows) 0 983 3,420 3,037 Portfolio equity (net inflows) 0 3,824 11,356 8,907 World Bank program Commitments 2,651 2,064 1,800 2,705 A. IBRD E - Bilateral Disbursements 1,114 1,783 1,717 1,835 B - IDA D - Other multilateral F - Private Principal repayments 129 1,062 2,468 784 C - iMF G - Short-term Net flows 985 721 -751 1,051 Interest payments 237 904 381 259 Net transfers 748 -183 -1,133 792

Development Economics 6/21/08

123 Annex 15: Map of Karnataka

124 ENDNOTES

1 Over the 1990s, average annual real growth rate was equal to 7.3 and per capita growth rate was equal to 5.4 percent, the second highest rate among major Indian states. In the second half of the 1990s, real growth rate was 8.3%, the highest in India. The Infant Mortality Rate is the number of children who die before reaching 1 year, per 1,000 live births. According to the more recent RCH-I1 estimates, in 2002 IMR would be equal to 54.7 per 1,000 live births, suggesting that the fast decreasing trend observed in the early-mid 1990s decelerated in more recent years. The MDG target would be 21.7 per 1,000 for IMR and 29.7 per 1,000 for U5 mortality by the year 2015. In order to achieve the MDGs the annual rate of reduction must be equal to 4.3 percent per annum. The human development targets set by the Tenth Plan (2002-2007) for the year 2010 are more ambitious. GoK has accepted the Tenth Plan targets, but it has postponed the final date for their achievement to 2020 (see “Vision 2020” document). In the text, we utilize the Deaton-Dreze adjusted poverty estimates, which differ from the official estimates in a number of regards (official estimates are reported in Table 1.1, Annex 1): see Angus Deaton and Jean Dreze (2002), Poverty and Inequality in India: a Reexamination, Economic and Political Weekly, September 7. 5 There is no precise data on maternal mortality. The official SRS data (2000) indicates MMR at 195 per 100,000, but all other studies including the 1995 study used as a reference in Table 1, find much higher maternal mortality estimates, particularly in poor districts. For a definition of which health services are essential, see main text. From 1992 to 1998, treatment of children under 4 for Acute respiratory Infection increased only by 4 percent (fiom 74 to 77 percent of those who had ARI in the two weeks preceding the survey), and the percentage of children with diarrhea who were not treated at all remained stagnant at 19 percent. According to the RCH-11 survey (2002), only 34 percent of children who had diarrhea were treated with ORS. 8 U5MR=IMR+CM=69.8 per 1,000 live births (NFHS-11, 1998-99). Child mortality (CM), the probability of dying between the first and the fifth birthday, was estimated at 18.3 per 1,000 live births in the mid 1990s. 9 Only 8 percent of children did not receive any immunization coverage (NFHS 11, 1998-99), approximately half of those who were completely left out six years before. IO For example, in 1998 the difference between the proportion of children who received the first and third (or full) dose was 12 percent for DPT, and 14 percent for polio. Still, 40 percent of children did not receive full immunization. According to RCH-I1 data, this percentage was reduced to 24 percent by 2002. I1 The NFHS uses three internationally recognized standards to assess children nutritional status: weight for age, height for age, and weight for height. Children who are more than two standards deviations below the median of an international reference population are considered underweight (measured in terms of weight for age), stunted (height for age), or wasted (weight-for-height). Stunting is a sign of chronic, long-term malnutrition, wasting is a sign of acute, short-term malnutrition, and underweight is a composite measure that takes into account both chronic and acute malnutrition. In 1998,44 percent of children under age 3 years were underweight, 37 percent were stunted and 20 percent were wasted. 12 Neonatal mortality is the probability of dying within the first month of life. 13 According to the RCH-I1 survey (2002), the percentage of institutional deliveries was 62 percent, split evenly between public and private sector. l4According to NFHS-11, 1998, 86 percent of women received at least one ante-natal check-up and 75 percent received at least two tetanus toxoid injections during pregnancies. According to RCH (2002) full antenatal care is defined as 3 ANC check-ups, at least one TT and 100+ IFA tablets. 15 Bidar, Koppal, Gulbarga, Raichur, and Bellary. l6Bijapur and Bagalkot. l7Note that the above systemic failures are the same as those identified by the CAS for India (2004). In discussing ways to improve government effectives, the document underlines that “the quality of spending is undermined by various problems, including: skewed composition of spending towards salaries; a regressive distribution of benefits; uneven productivity in the civil service; cases of corruption; an ineffective spread of funds across too many schemes; and duplication of services provided by the private sector (CAS for India, 2004, p. 22)”. l8A survey of government primary health care facilities (PHCs), in 2003 indicated that 43 percent of staff who were supposed to be present at PHCs were not there on a day of an unannounced visit (The World Bank: WDR, 2004,

125 ___ Chapter 2, Table 1.2b). As Figure 7 in Annex 9 illustrates, similar absenteeism was found in a PHC facility survey study done in 2004. 19 Promotion and transfer criteria are either non-transparent or exclusively seniority-based. 20 By public health activities we mean activities with a community, as opposed to an individual, main beneficiary. Note the confusion, whereby the term “public” health is used to indicate government services. In fact, curative services are not public health services, regardless of who delivers them. Core public health services include activities to (1) make living environments healthier - for example through assuring food safety and other public health regulations, vector control, sanitation and waste disposal systems; (2) encourage better personal and domestic health management; (3) reduce disease transmission through assuring the provision of prophylactic services such as immunization, and therapeutic services for highly communicable diseases such as TB and STDs. The first two sets of activities belong quintessentially to the public sector, while the third can also be provided by the private sector, subject to guidance and monitoring by the public sector. 21 It is estimated that about 8.6 percent of the total state population is covered by some form of insurance, including the Central Government Health Scheme (CGHS), Employee State Insurance Scheme (ESIS), Private Health Insurance (both employer sponsored and individual) and Others (Health Insurance for Police personnel, insurance for cooperative members - Yeshashvini-see endnote 33 below). The coverage and benefits offered differ widely from limited hospitalization expenses to only surgical benefits. Except for the publicly sponsored schemes (such as CGHS, ESIS) none of the others cover out patient care and cover maternity and child health to a very limited extent. The Universal Health Insurance Scheme (UHIS) sponsored by the Government of India (GoI) provides for only inpatient coverage, but excludes maternity and childcare. 22 Market failures are situations where the market does not achieve efficient results. In the health care sector market outcomes tend to be suboptimal, because of patients’ lack of information, the presence of services with public good characteristics (non rival and non excludible), and because of insurance market failures (due to moral hazard, cream- skimming and adverse selection). 23 See Table 23, Annex 9. As per the 52ndround of NSS (1995-96), 66% of ambulatory care in rural areas and 84% in urban areas were provided by private sources. For hospital care, the share of private providers was equal to 54.2% in rural areas and 70.2 percent in urban areas. According to the household health utilization survey done in preparation of the project, 63.6% and 56.6% of respectively OPD consultations and hospital admissions were with formal private providers. 64% of the qualified doctors in the state were practicing only privately. 24 In the last decade, Karnataka state was supported by the Bank through a State Health Systems Development project (1997-2004), focused on expanding and improving government secondary care facilities, and through the IPP-IX project, focused on strengthening infi-astructure for delivering maternal and child health services (see Annex 2). 2s Six studies were also completed, and their recommendations have been discussed and incorporated in project design. (a) Households’ Health Utilization Survey; (b) Mapping of Public and Private Providers, and Provider Survey; (c) Social assessment; (d) Health Sector Public Expenditure review; (e) Comprehensive Review of Child Health and Causes of Under Five Mortality, and Maternal Health and Causes of Maternal Mortality in Karnataka; (f) Information Systems Strategy Planning 26 District Health Officers are the most senior government officers of the DoHFW at the district level. ” The total cost indicated in brackets is the World Bank’s planned contribution to these priority projects over the next five years, which is going to be about 5 percent of their total cost. 28 See endnote 20 for a defmition of public health activities. 29 The list of criteria for assessing new infrastructure investments is described in Annex 4. 30 Careful mapping of institutional providers is being finalized as part of project preparation. This mapping will allow identifying geographic areas and population segments in which the government cannot provide access to health care services. 31 While the intention of the Fund is to encourage local initiative, local will not necessarily mean small in scale. An NGO could propose to promote safe motherhood across a whole district or a private sector agency could, conceivably, seek support for a safe drinking water campaign for the entire state. The key consideration in defining

126 ~~ ~~ ~ ~~~~~ the scope of the Fund, therefore, is how to leverage local initiative without losing the efficiency and impact that comes fiom scale and coordination. 32 Some of the reasons highlighted for low penetration include a) premium affordability, particularly for the low income households; b) lack of knowledge of the benefits of insurance, compounded by cultural factors; c) high transaction cost to administer the product, particularly for the small schemes focused on informal workers in rural areas; d) lack of interest on the part of insurers to sell health insurance due to the inherent risks associated with the product such as moral hazard and supply-induced demand (over-consumption by the insured andor over-supply by the provider of health care), and adverse selection (high risk people only opting for insurance) problems. 33 The Yeshashvini scheme was launched in June 2003 covering 1.6 million farmers in Karnataka who are primarily members of the milk cooperative societies. Since, then the scheme has expanded insuring more than 2.1 million farmers in 2004 - 05 and has set a target of 3.5 million insured for 2005 - 06. The scheme concentrates on financial protection (risk mitigation) for “surgical treatment” and only caesarean section is covered for maternity. The scheme operates as a “cashless service” to the insured with a network of 2 public hospitals and 73 private hospitals across the state. The scheme is managed by a Third Party Administrator, whose responsibilities include enrolling members, processing the claims and developing a network of providers. The maximum benefit is currently Rs 100,000 per procedure times 2 per member per year. Premium in the frst year of operation (ending May 3 1,2004) was Rs 90 per member per annum, of which Rs 60 per member was paid up fiont by the member supplemented by a Rs. 30 per member subsidy fiom the Government of Karnataka (GoK). The premium contribution by the member has been increased to Rs 120 per member per annum for the period 2005 - 06. A trust, Yeshashvini Trust, has been set up to manage the scheme. The trust monies, premiums/ contributions and investment income, are banked with the APEX Bank, which is the bankinghupervisory structure of the co-operative societies. The membership of the scheme is derived fiom active members of certain co-operative societies ((a) Milk Cooperative; b) Taluk Agriculture Co-op Marketing Societies; c) Primary Agriculture Coop Societies; d) Primary Agriculture Rural Development Banks; and e) Farmer members of Urban Coop Banks). The scheme members must have been members of the co-operative for at least six months prior to enrolment. Eligible members may enroll their spouse and dependent children - but not dependent parents. Pre-existing conditions are covered, which is presumably the reason for the six month’s membership requirement.

34 Only service utilization indicators will be used to measure progress in the achievement of the Project Development Objectives. This is because, due to its limited duration, improvements in health outcomes such as Infant Mortality may not be demonstrable until the end of the project, and they are also greatly influenced by variables different fiom the effectiveness of interventions. Nonetheless, these indicators will also be rigorously monitored (see Annex 3).

35 An allocation of resources is defined as efficient if it is not possible to fiu-ther enhance benefits for anybody without reducing benefits for others. In order to be efficient, public expenditure needs to give priority to the correction of market failures (allocative efficiency). It should also be productively efficient. Productive efficiency is measured as the units of output per unit cost of inputs. Any good or services is produced efficiently if costs are minimized. 36 Mahal, A., Yazbeck, A., Peters, D., and GNV Ramana, 2001, The Poor and Health Service Use in India. Draft. The World Bank, Washington, DC.

Annex 1 37 The first influential national health planning document was the Bhore Committee’s Report in 1946. This report emphasized the need to develop preventive care and to strengthen primary care. Subsequently, several other national government Committees (among which the Jungalwalla Committee (1969, the Kartar Singh Committee (19730 and the Shrivastava Committee (1975)) reemphasized the need to create of a system of comprehensive and integrated preventive and curative care, based at the community level (“Health of the people in the hands of the people”). The Alma Ata International Conference of 1978 on primary care re-affirmed the “health for all” objectives and the need to focus on primary care, to bring health services at the peoples’ “doorstep”. Two new reports were issued: 1. “Health for All -An Alternative Strategy” ICSSR and ICMR, 1981), and 2. Health for All by 2000 A.D.” A National Health Policy was formulated and approved in 1983 on the basis of these two reports. 38 Includes BCG, measles and three doses each of DPT and polio vaccines

127 Annex 3 39 In order to achieve the above objectives for safe delivery, it is estimated that the coverage of institutional deliveries must double by the end of the project from its 1998 value, which was equal to: a) illiterate mothers =32%; b) rural areas =38%; c) in the 7 poorest districts =3 1%.

Annex 4 40 GoK has been offering operating contracts to involve private medical colleges and other agencies, such as NGOs, Trusts, and other charitable institutions in managing primary health care centers and carrying out the normative package of government-prescribed service activities. In the past, these contracts have been offered as fixed price agreements, with the funding pegged at 7590% of the government’s budget for public sector operation of the same facility. Typically, no performance incentives were included in these contracts. The existing financial arrangements seem to discourage rather than facilitate involvement of private providers. As a result, there have been few takers for PHC contracts. 41 Two Districts have completed their PHC buildings. In the case of these two Districts they will only be required to submit proposals for the sub-centres. 42 This classification of the 176 Taluk in four groups was done by the Dr. Nanjundappa Committee in 2003 (see: Report of the High Power Committee for Redressal of Regional Imbalances, Dr. Nanjundappa Committee). 43 See endnote 33. which describes the Yeshashvini scheme.

Annex 7 44 See section in main text under monitoring and evaluation which describes the process of progressive computerization of the DoHFW, which the KHSDRP will support under the HMIS subcomponent. This process will improve accounting, compilation of accounts, and consolidation of health expenditure from the 27 ZPs and DPMUs.

Annex 9 45 For a definition of market failures in the health care sector, see endnote 22 46 Benefit-incidence studies compute the average subsidy for the different types of care (usually, primary, outpatient specialist care, inpatient care) from budgetary information and from data on service use. They estimate the subsidy going to each group from information on the distribution of utilization by income group of the different service- types. 47 Reference: see endnote 36. 48 The authors of the benefit incidence study (2001) also find stark differences across Indian states. According to their estimates, Kerala is the only state with a pro-poor record for curative services. In three other states, Maharashtra, Gujarat and Tamil Nadu, distribution of curative services is not statistically different from equality, whereas in all other states benefits’ distribution is strongly pro-rich, particularly in North and North East India (Uttar Pradesh, Bihar). 49 As a result of lack of coordination, the health care system may at present be characterized by significant overcapacity at the secondary and tertiary care levels, as the anecdotal evidence that finds majority of government and private sector facilities severely underutilized would suggest. For example, in Raichur district which is one of the poorest and least developed districts in Karnataka and in India with a population of approximately 1.5 million people, according to information from local representatives of the IMA in 2004 there were about 45 nursing homes of various sizes (22 nursing homes were counted in Raichur city itself, the capital of the district, with a population of approx. 350,000). In addition, there is a private medical college with a 350-bed hospital under construction, and a multi-speciality hospital, the Rajeev Gandhi Memorial Hospital, built with a grant from the Organization of Petrol Exporting Countries (OPEC), with a potential of 350 beds (120 fully operational at present). In the same district there are also two 50-bed and one 100-bed hospitals at taluk level, and a district hospital with 250 beds. At the time of our visit (winter 2004) all the facilities that we visited were severely underutilized. 50 See endnote 35 for a definition of efficiency. ’’ The estimate of total health expenditure is arrived at by adding a number of elements: (i)total household OOP health expenditure; (ii)government (central, state and local) health expenditure -note that this is not only channeled through DoHFW; other Ministries and Departments, such as Defense, Railways, Education, PR, and others, spend on health and health related services. (iii)Foreign assistance; (iv). The amount spent by private fmson their own facilities

128 (v) Claims paid to providers by health insurance companies; (vi) NGO financing ofhealth services.

52 In 1995-96 the total collected in public facilities was equal to Rs. 25 per capita, less than 20 percent of the total OOP expenditure (NSS, 1995-96). 53 In fact, SGEHFW includes the funds from sources (c), but also financial sources 1 and 2 from Go1 and the part of External assistance, which is directly channeled to the state. The last two sources are funds earmarked for health and family welfare.

129