Periodic Financing Request Report Project Number: 43253-026 MFF Number: 0085 September 2019 India: Karnataka Integrated and Sustainable Water Resources Management Investment Program (Tranche 2) (Part 2) This document is being disclosed to the public in accordance with ADB’s Access to Information Policy. Appendix 14 KARNATAKA INTEGRATED AND SUSTAINABLE WATER RESOURCES MANAGEMENT INVESTMENT PROGRAM - TRANCHE 2 PROCUREMENT CAPACITY ASSESSMENT September 2019 ABBREVIATIONS ACIWRM – Advanced Centre for Integrated Water Resources Management ADB – Asian Development Bank CAD – command area development CADA – Command Area Development Authority CAG – Comptroller and Auditor General of India CE – Chief Engineer CPP – community procurement packages EA – Executing Agency EE – executive engineer EMD – earnest money deposit GFR – General Financial Rules GOK – Government of Karnataka ha – hectares ICB – international competitive bidding INR – Indian Rupees IWRM – Integrated Water Resources Management KISWRMIP – Karnataka Integrated and Sustainable Water Resources Management Investment Program KNNL – Karnataka Neeravari Nigam Limited KTPPA – Karnataka Transparency in Public Procurements Act MFF – Multi-tranche Financing Facility NA Not applicable NCB – national competitive bidding NGO – non-governmental organization PCA – procurement capacity assessment PMU – Program Management Unit P-RAMP – Procurement Risk Assessment and Management Plan PIO – Project Implementation Office PSC – Project Support Consultants SE – Superintending Engineer SBD – standard bidding documents TLBC – Tungabhadra Left Bank Canal TEC – Tender Evaluation Committee TSC – Technical Sub-Committee US$ or $ – United States Dollar VNC – Vijayanagara Channels WALMI – Water and Land Management Institute WB – World Bank WRD – Water Resources Department WUCS – Water Users Co-operative Societies TABLE OF CONTENTS Page No. EXECUTIVE SUMMARY iv I. INTRODUCTION 1 A. Description of the Investment Project 1 II. PROJECT PROCUREMENT RISK ASSESSMENT 3 A. Overview and Assessment 3 1. Legislative and Regulatory Framework 3 2. Organization and Staff Capacity 4 3. Information Management 11 4. Procurement Practices 12 5. E-Procurement 21 6. Effectiveness 22 7. Accountability Measures 22 B. Strengths 23 C. Weaknesses 23 D. Procurement Risk Assessment and Management Plan (P-RAMP) 24 III. PROJECT SPECIFIC PROCUREMENT THRESHOLDS 26 IV. PROCUREMENT PLANS 27 V. CONCLUSIONS 28 ANNEXES Annex 1: Completed PCA questionnaires of KNNL and ACIWRM. 37 Annex 2: Project Procurement Classification 56 Annex 3: Draft Procurement Plan of KISWRMIP Project 2 57 EXECUTIVE SUMMARY A. Overall assessment of Project-2 procurement risk and classification 1. Karnataka Integrated and Sustainable Water Resources Management Investment Program (KISWRMIP) – Project 2 is proposed for financing by the Asian Development Bank (ADB). A procurement capacity assessment has been undertaken for Karnataka Neeravari Nigam Ltd. (KNNL, the executing agency) and the Advanced Center for Integrated Water Resources Management (ACIWRM). The assessment was carried out following ADB’s guide on assessing Procurement Risks and Determining Project Procurement Classification. It has determined that, for Project 2, the procurement risk is moderate, and the procurement classification is category B. 2. The completed procurement capacity assessment questionnaires for KNNL and ACIWRM are presented in Annex 1 and the completed project procurement classification is at Annex 2. Based on the procurement capacity assessment carried out and the current thresholds for India, it is recommended that prior review limits and procurement thresholds for KISWRMIP Project 2 be retained as for Project 1, and this is reflected in draft Procurement Plan in Annex 3. B. Summary of identified weaknesses and risks 3. KNNL and ACIWRM have the benefit of having substantially completed Project 1 of the same investment program. However, there were substantial delays in procuring a works package and consultant selection during the startup of Project 1. 4. Faulty or delayed procurement due to lack of adequate and relevant procurement training and experience within PMU and ACIWRM is a risk. Procurement of some key packages was delayed in Project 1. There are no procurement specialists in PMU, PIO and ACIWRM. Mostly Engineering staff with little consultant support manage procurement functions which is less efficient than having full time procurement staff. All staff in PMU (except one part time consultant) and PIO comprise people seconded from government, most of them are not well versed with ADBs procurement processes. No clear separation of engineering, procurement and regulatory functions exist within PMU, PIO and ACIWRM. 5. Low thresholds of bid evaluation and contract award approval authority of Project Directors of KNNL and ACIWRM have led to many approval levels through which procurement approvals move up and down, resulting in delays in procurement decision making. There are 3 three levels of approval for large contracts in KNNL (TEC, TSC, and KNNL Board) due to which delays occur. Decisions on contract variations, processing invoices get delayed. Experienced PMU & PIO staff get transferred leading to loss of program institutional memory. 6. Below par performance of PSC related to procurement expert deployment and support to PMU, due to absence of systematic evaluation system for measuring the outputs of consultants by PMU is a risk. PSC has resorted to multiple replacements of experts. 7. No requirement exists in KTPPA for those involved in procurement to formally commit to standard statement of ethics leading to lack of accountability. C. Summary of Mitigation and Management Measures to be Adopted 8. To mitigate delayed or faulty procurement due to inadequate training and experience of staff carrying out procurement tasks, PMU needs to ensure trained and experienced (in ADB or WB projects) staff are posted to PMU, PIO and ACIWRM and are retained till substantial completion of project. Regular and tailor made procurement and contract management training of PMU, PIO and ACIWRM staff to be involved in Project 2 is be carried out. Training budget for procurement and related aspects is to be provided Project 2. Training to be provided by ADB and institutions specialized in procurement training (such as Administrative Staff College of India, Hyderabad). Increased procurement oversight and support from ADB is proposed. 9. PMU reports to KNNL Board and obtaining KNNL’s Board approval on procurement matters has taken considerable time under Tranche 1. It is recommended that the State make similar arrangements to those for other ADB-financed projects in Karnataka, such as the Karnataka State Highways Improvement Project (financed by ADB and World Bank) by issuing a government order that delegates decision making to the State IWRM Steering Committee and have the PMU report directly to the State IWRM Steering Committee. The steering committee should be responsible for taking decisions on procurement matters. This arrangement is to be in place prior to Tranche 2 effectiveness. 10. At present, the Program Director is also the Managing Director of KNNL and he has much wider responsibilities beyond Project 2. It is recommended that the Project Director role be assigned to a senior KNNL staff member on a full-time basis, to ensure speedy decisions on procurement. 11. To ensure Consultants (PSC and individuals) are delivering value, it is required to administer to PMU and ACIWRM training programs to provide specific guidance on consultant performance evaluation and discuss case studies on consultant performance evaluation. Since multiple consultants could be working simultaneously in Project 2, a dedicated person in PMU to be devoted to evaluation and monitoring of consultants. PMU has to monitor consultant performance at regular interval and ensure PSC's procurement expert is available when required by the project 12. The absence of requirement for those involved in procurement to formally commit to standard statement of ethics is mitigated by following ADB procurement and consultant selection procedures. I. INTRODUCTION 1. Project procurement capacity assessment (PCA) for the Karnataka Integrated and Sustainable Water Resources Management Investment Program (KISWRMIP) – Project 2 investment, Karnataka State, India, was prepared in accordance with Asian Development Bank's (ADB) “Guide on Assessing Procurement Risks and Determining Project Procurement Classification1”.The Asian Development Bank (ADB) financed Multi-tranche Financing Facility (MFF) for KISWRMIP for an amount of $150 million has a duration of 7 years (September 2014 to September 2021). KISWRMIP Project 1 is being implemented by Karnataka Neeravari Nigam Limited (KNNL), the executing agency (EA), and Advanced Centre for Integrated Water Resources Management (ACIWRM) the Implementing agency, from year 2014 and is scheduled for completion in March 2019. Both KNNL and ACIWRM were assessed for their procurement capacity. 2. KNNL and ACIWRM would be the executing agency and implementing agency for project 2 proposed to be implemented during 2018 to 2021. Registered under the under Indian Companies Act, KNNL established in 1999, is a wholly owned company of the Government of Karnataka (GOK) under its Water Resources Department (WRD). Established in 2012, ACIWRM is registered under Societies Registration Act, India and is anchored to the WRD of the State. 3. The PCA was undertaken during March 2018 to July 2018 during ADB’s project