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ASIAN DEVELOPMENT BANK Operations Evaluation Department

PROJECT PERFORMANCE EVALUATION REPORT IN INDIA

In this electronic file, the report is followed by Managements response.

Performance Evaluation Report

Project Number: PPE: IND 27132 Loan Numbers: 1415-IND and 1416-IND November 2007

India: Karnataka Urban Infrastructure Development Project

Operations Evaluation Department

CURRENCY EQUIVALENTS (as of 5 August 2005 [time of field mission] and 30 October 2007) Currency Unit Re1.00 $1.00 = = Indian rupee/s (Re/Rs) 2005: $0.0231; 2007: $0.0252 2005: Rs43.37; 2007: Rs 39.70

ABBREVIATIONS ADB CDP EA EIRR FIRR HDFC IUDP KUDCEMP KUIDFC KUIDP KUWSDB MCC MUDA NGO O&M OEM PCR PIU PMU PPER PPTA RRP STP TUDA ULB Asian Development Bank Community Development Program executing agency economic internal rate of return financial internal rate of return Housing Development and Finance Corporation integrated urban development project Karnataka Urban Development and Coastal Environmental Management Project Karnataka Urban Infrastructure Development and Finance Corporation Karnataka Urban Infrastructure Development Project Karnataka Urban Water Supply and Drainage Board Mysore City Corporation Mysore Urban Development Authority nongovernment organization operation and maintenance operations evaluation mission project completion report project implementation unit project management unit project performance evaluation report project preparatory technical assistance report and recommendation of the President sewage treatment plant Tumkur Urban Development Authority urban local body WEIGHTS AND MEASURES km mld m3 kilometer million liters per day cubic meter NOTES (i) The fiscal year (FY) of the Government and its agencies ends on 31 March. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2000 ends on 31 March 2000. In this report, "$" refers to US dollars.

(ii)

Key Words asian development bank, channapatna adb project evaluation, indian integrated urban infrastructure development, indian urban development evaluation, indian urban housing lending, karnataka urban project evaluation, mysore adb project evaluation, ramanagaram adb project evaluation, tumkur adb project evaluation

Officer-in-Charge R. Adhikari, Operations Evaluation Department (OED) Director R. K. Leonard, Operations Evaluation Division 1, OED Team leader Team members W. Kolkma, Senior Evaluation Specialist, Operations Evaluation Division 1, OED A. Anabo, Senior Evaluation Officer, Operations Evaluation Division 1, OED A. Alba, Operations Evaluation Assistant, Operations Evaluation Division 1, OED V. Melo, Operations Evaluation Assistant, Operations Evaluation Division 1, OED Operations Evaluation Department, PE-706

CONTENTS Page BASIC DATA EXECUTIVE SUMMARY MAP I. INTRODUCTION A. Evaluation Purpose and Process B. Expected Results DESIGN AND IMPLEMENTATION A. Formulation B. Rationale C. Cost, Financing, and Executing Arrangements D. Procurement, Construction, and Scheduling E. Design Changes F. Outputs G. Consultants and Contractors H. Loan Covenants I. Policy Framework PERFORMANCE ASSESSMENT OTHER ASSESSMENTS A. Impact B. Asian Development Bank Performance C. Borrower Performance D. Technical Assistance ISSUES, LESSONS AND FOLLOW-UP ACTIONS A. Issues B. Lessons C. Follow-Up Actions iii v ix 1 1 2 3 3 3 3 6 7 7 15 16 16 16 21 21 23 23 23 24 24 25 26

II.

III. IV.

V.

APPENDIXES 1. Achievement of Project Outputs 2. Self Help Groups in the Karnataka Urban Infrastructure Development Project 3. Summary of Benefit Monitoring and Evaluation Indicators and Results 4. Housing Development and Finance Corporation Loan Type and Distribution 5. Financial and Economic Analyses of Karnataka Urban Infrastructure Development Projects Attachment: Management Response

27 32 36 37 39

The guidelines formally adopted by the Operations Evaluation Department (OED) on avoiding conflicts of interest in its independent evaluations were observed in the preparation of this report. Robert Merrill was the consultant. To the knowledge of the management of OED, there were no conflicts of interest of the persons preparing, reviewing or approving this report.

BASIC DATA Karnataka Urban Infrastructure Development Project (Loans 1415-IND and 1416-IND) Project Preparation/Institution Building PersonMonths 47 14 Amount ($) $600,000 $300,000 Approval Date 12 Nov 1993 14 Dec 1995

TA No. 1977 2471

TA Name Urban Infrastructure Development Project Resource Mobilization Study for Local Governments in Karnataka

Type PP AD

Key Project Data ($ million) Total Project Cost ADB Loan Amount/Utilization 1415-IND 1416-IND ADB Loan Amount/Cancellation 1415-IND 1416-IND Key Dates Appraisal Loan Negotiations 1415-IND 1416-IND ADB Board of Directors Approval Loan Signing 1415-IND 1416-IND Loan Effectiveness 1415-IND 1416-IND First Disbursement 1415-IND 1416-IND Project Completion 1415-IND 1416-IND Loan Closing 1415-IND 1416-IND Months (Effectiveness to Completion) 1415-IND 1416-IND

As per ADB Loan Documents 132.0 85.0 20.0

Actual 123.48 76.4 20.0 8.6 0.0

Expected

Actual 16 Jun5 Jul 1995 1317 Nov 1995 4 Aug4 Sep 1995 14 Dec 1995 10 May 1996 13 Dec 1996

8 Jul 1996 11 Feb 1997

8 Jul 1996 19 Dec 1996 29 Nov 1996 12 Dec 1997

31 Dec 2001 31 Dec 2001 30 Jun 2002 30 Jun 2002 65.8 64.6

30 Jun 2004 26 Jan 2001 7 Dec 2004 26 Jan 2001 95.8 49.3

iv

Borrower Executing Agencies

India Loan 1415 Karnataka Urban Infrastructure Development and Finance Corporation Loan 1416 Housing Development Finance Corporation Ltd No. of Missions 1 1 1 1 1415-IND 22 2 1 1416-IND 7 1 No. of Person-Days 95 75 40 30 1415-IND 250 14 8 1416-IND 119 4

Type of Mission Fact-Finding Appraisal Project Administration Inception Midterm Review Reviewa Project Completion Operations Evaluation

ADB = Asian Development Bank, IND = India, TA = technical assistance. a Includes two statement of expenditures review missions that were carried out in connection with Loan 1415-IND only. The seven loan review missions recorded for Loan 1416-IND were also counted under Loan 1415-IND since these missions also assessed the implementation of Loan 1415-IND.

EXECUTIVE SUMMARY The rapid expansion of Bangalores industrial and information technology activities in the early 1990s led to increased migration from rural areas of Karnataka state and elsewhere in India, intensifying the strain on Bangalores infrastructure facilities. Living conditions of residents subsequently deteriorated, leading to increased urban poverty and environmental problems. The key objectives of the Karnataka Urban Infrastructure Development Project (KUIDP) were to promote decentralization of population growth and economic activity away from Bangalore by addressing infrastructure deficiencies and related environmental issues in selected urban areas in the Bangalore region, namely Channapatna, Mysore, Ramanagaram, and Tumkur. 1 The Project also sought to build the capacity of selected urban local bodies (ULBs) and related sector institutions in order to ensure sustainability of the investments and to provide housing finance assistance to low-income groups in the Project towns at affordable interest rates. At appraisal, a project was defined requiring some $132 million, of which $85 million was borrowed from the Asian Development Bank (ADB) (Loan No.1415-IND). Due to the shortage of housing and housing finance in the region, the Government of India also requested ADB assistance to provide housing finance through the Housing Development Finance Corporation (HDFC). The total financing for the Project therefore also included a separate $20 million for housing finance (Loan no.1416-IND). The two loans to the Republic of India and HDFC were approved by the ADB Board on 14 December 1995 and became effective on 8 July 1996. Significantly, this was the first time the Government of India had borrowed from ADB for an integrated urban development project. It was also the first time ADB had made a loan for housing finance in the country. Since the nature of integrated urban development projects is multi-sectoral, the Project comprised six parts, as follows. (i) Environmental sanitation (36% of estimated base cost) including construction of facilities for water supply, solid waste management, sewerage, storm water drainage and sullage disposal. Road improvement and truck and bus terminals (13%) including (a) rehabilitation and upgrading of roads, extension of road systems, construction or widening of bridges, construction of new roads; and (b) provision of truck terminals in Mysore and Tumkur, relocation of a bus stand in Ramanagaram to improve traffic circulation and safety, and the improvement of one private bus terminal in Maddur. Poverty reduction (17%) including (a) provision of water supply, electricity, street lighting, improved sanitation and drainage, solid waste disposal and improved health facilities in selected urban slums in the Project towns; (b) low-income sanitation including provision of sanitary latrines for low-income households in the Project towns through community participation; (c) residential sites and services including development of housing sites and provision of roads, water supply, drainage and sanitation facilities for selected residential areas in the Project towns; and (d) cultural and women's training centers including establishment of a cultural and commercial center in Ramanagaram and a women's training center in Tumkur.

(ii)

(iii)

Subsequently, due to project savings, two more towns along the Bangalore-Mysore highway were included, Maddur and Mandya.

vi (iv) Development of industrial sites and services (6%) in the towns of Tumkur and Ramanagaram. Implementation assistance and institutional strengthening (8%) by providing consulting services, equipment and staffing costs for institutional support to the Karnataka Urban Infrastructure Development and Finance Corporation (KUIDFC) and relevant ULBs. Low-income housing finance (20%) by providing housing loans to primarily lowincome beneficiaries in the Project towns, as well as in the Bangalore region, at affordable interest rates without any form of external subsidy.

(v)

(vi)

Some or all of the six parts were implemented to varying degrees in each of the six towns. Given that there were 36 separate sub-components and 12 implementing agencies for the Project, implementation of the urban development component was complex, resulting in an extension of the closing date by 2 years to 30 June 2004. This can be compared with the housing finance component, which closed 17 months ahead of schedule. The early closure was primarily due to the fact that HFDC had received permission from ADB to issue cheap housing loans to middle and low-income families throughout the state and wherever families wanted a house, rather than to the future occupiers of the residential sites and services schemes to be developed under the Project as it was quickly clear that the services schemes would take years to complete. The change of approach speeded up the process but reduced the internal coherence of the Project. The operations evaluation mission (OEM) investigated each project component separately. The expanded internal road and storm drainage systems for the towns provided high quality outputs and were greatly appreciated by city officials and beneficiaries. The water supply component was also successfully implemented in the four towns scheduled for the works, although in Ramanagaram and Channapatna the long supply line of 42 kilometers (km) led to a significantly higher cost per connection. Hence, given the existing tariff structure, the project completion report (PCR) financial internal rate of return (FIRR), which was accepted by the OEM, was negative. Overall, difficulties in increasing the water and sewer tariffs sufficiently to cover operation and maintenance (O&M) remained a problem. The slum improvement and community development components provided improvements in the quality of life for the beneficiaries, although some are threatened by the inability of the Karnataka Urban Infrastructure Development and Finance Corporation (KUIDFC) or ULBs to follow up. There were mixed results particularly for the large sewerage component. Although most physical outputs were of good quality, their utilization was less than optimal due to poor maintenance in some plants and slow progress in individual houses connecting with the sewage network. (Household connections were not included in the project design as per ADB practice at the time; this is now changed.) Some sewage treatment plants also suffered from defective pumps and, in one case, a leaking oxidation pond. A continuing dispute between the contractor and the client as to who was responsible for repairs resulted in the plant being barely operational. The five residential sites and services schemes were not successful at the time of the OEM. Two such schemes were completed with plots sold but not occupied. (Due to outstanding bills of many local bodies, the electricity provider was unwilling to invest in electrification of the sites and services schemes.) Two schemes were completed but no plots sold (due to high costs and poor location) and one scheme was still under construction at the time of the OEM. Of the two planned industrial sites and services schemes, one was cancelled and the other was nearly 80% utilized. Two bus terminals constructed by the Project were

vii completed and in operation. Another was located in the wrong place and was transferred to the Karnataka State Road Transport Corporation. One truck terminal was not being used and was being converted to a residential site, while the second one was cancelled. In general, the OEM concluded that a project of this complexity required more preparation than had been allotted, i.e., a longer project preparatory technical assistance (PPTA) than was scheduled. A longer preparation would have benefited the quality of the investment components as well as the consensus building within ULBs and city populations regarding the required O&M of the assets. This may have something to do with the way ADB operates in India. ADB responds to central government requests to prepare projects in certain sectors in certain states and is generally confronted with many demands at state level, made in the expectation that the central or state government will guarantee the loan and the project will present a onetime opportunity. As a consequence, much tends to be included in the projects, some components are not optimally investigated, and some that would have to recover their O&M costs are not able to do so. The OEM has rated the Project successful, but this is in part due to the positive externalities of the Project. The Project was the first major integrated urban investment project to be implemented in several mid-sized cities in more than a decade, not only for ADB but also for the Government of India. As such, it generated substantial experience, including state and country-wide policy initiatives. It had successful components, notably in roads, and to some extent water supply and sanitation and slum development. It also helped to establish KUIDFC as a professional urban development institution. After the Project began, the World Bank developed similar projects while other agencies followed with related types of projects for the urban sector. The OEMs economic and financial analysis assessed the Project as less efficient and less sustainable. However, based on the efficacy of the Project, the relevance of gaining experience in the urban sector, and the substantial indirect impacts, as well as the highly successful community development and training components, a successful rating is justifiable. The OED identified several lessons as follows. Project Design. Project preparation and design for complicated, multisector, multi-town projects such as KUIDP should be allotted adequate time to do the necessary technical, financial, socioeconomic and institutional analysis such that ultimate project implementation and evaluation closely resembles original project objectives, outputs and financial projections. Time also needs to be taken to build consensus within ULBs regarding the importance of O&M of the assets. Furthermore, if the Project was intended to help relieve pressure on Bangalore, it would have needed to be more directly geared to job creation in the surrounding cities, which was not the case. Offering housing sites, two industrial sites and improved services in such cities is not sufficient to significantly divert business and migrants from coming to Bangalore. Bridging TA. Since project preparatory TAs do not generally include detailed design and procurement, ADB should consider to grant bridging TAs, or alternatively the approval of TA loans, such that when an investment loan becomes effective, sub-components can be tendered and civil works can start within the first year. Institutional Development and Training. Institutional development and training should be given equal priority with development of physical components. This has been done to a great extent in the Project, enabling KUIDFC to undertake the design of the North Karnataka Urban Sector Investment Program so that while ADB will do the report and recommendation of the President, the project concept and details will be supplied by KUIDFC. Capacity of Urban Local Bodies. The capabilities of municipalities as implementing agencies need to be investigated in more detail, especially in small bodies such as

viii Ramanagaram and Channapatna, so that KUIDFC (or any other project management unit) will not have to implement the work on their behalf or have the civil works turned over to a specialized state agency such as the Karnataka Urban Water Supply and Drainage Board for O&M and tariff collections. Civil Works and Equipment versus Services. The ultimate focus should be on the provision of affordable services and cost recovery, not just on the provision of civil works and equipment. Least-cost analysis should identify the type of technical solution that would provide the service at the lowest cost for the project as well as the beneficiary. Performance-based private sector participation schemes should be pursued, and service provision emphasized. Beneficiary Involvement. The ULBs and their clientele should be involved in the design of all project components, especially water, sewer and drainage components. Design and implementation according to beneficiaries felt needs generally leads to better post-project cost recovery and O&M. Involvement of nongovernment organizations (NGOs) also led to effective results, particularly in identifying needs in slum upgrading and low-cost sanitation components.

Ramesh B. Adhikari Officer-in-Charge Operations Evaluation Department

I. A. Evaluation Purpose and Process

INTRODUCTION

1. This project performance evaluation report (PPER) focuses on pertinent aspects of the Karnataka Urban Infrastructure Development Project (KUIDP), including the low-income housing component, and presents the findings of the operations evaluation mission (OEM) to India from 18 July to 5 August 2005. The timing of the OEM, a year before completion of the Asian Development Bank (ADB) project completion report (PCR), was influenced by the need to assess findings on the first completed integrated urban development project (IUDP) to be conducted in India in a special evaluation study on ADBs urban sector strategy and operations. 1 The mission visited all six project towns and the sites of subprojects in each town, including a sample of the slum upgrading schemes. Before visiting the towns, interviews were conducted with relevant central government officials in (i) the Department of Economic Affairs in the Ministry of Finance, (ii) officials of Karnataka states Department of Municipal Administration and Department of Housing and Urban Development (DHUD), (iii) key implementation agencies such as the Karnataka Urban Water Supply and Drainage Board (KUWSDB), and (iv) managers and staff of the Karnataka Urban Infrastructure Development and Finance Corporation (KUIDFC), the Executing Agency (EA) of the Project. 2 In each town, meetings were held with municipal commissioners (or the city commissioner in the case of Mysore) and relevant staff, as well as with the managing directors of local urban development agencies such as Mysore Urban Development Authority (MUDA) and Tumkur Urban Development Authority (TUDA), and local KUWSDB staff. Local nongovernment organizations (NGOs) involved in community development aspects of the Project, as well as federations of self-help groups, were also visited. Upon return from the field, debriefings and wrap-up meetings were held with DHUD and KUIDFC in Bangalore and the Department of Economic Affairs in Delhi. This delayed report takes into account the results of follow-up communications with KUIDFC and ADBs resident mission in AugustOctober 2007. 2. With respect to the housing finance loan, a meeting was held with the general manager of the Housing Development and Finance Corporation (HDFC) in Bangalore. Various findings from the meeting regarding housing finance for low-income families are included in the relevant sections of this PPER. 3. The project management consultants submitted a draft PCR to KUIDFC in June 2004. This focused mostly on the completion and status of the civil works and equipment, with limited analysis of the Projects overall performance, especially its socioeconomic and policy impacts. A draft ADB PCR 3 was completed before the OEM and drew mainly on the EAs PCR to describe the civil works. Based on several missions to the field, ADBs draft rated the Project as successful, noting (i) all the works, including additional ones, were completed within the extended time frame; (ii) rather than cost overruns, savings were made despite cancellation of a $5 million loan; and (iii) requirements for social and environmental safeguards were followed. The draft observed a major improvement in environmental and sanitary conditions of the project towns, although the performance on financial and governance-related loan covenants was rated only partially satisfactory. Furthermore, the states initiatives on property tax and other reforms,
1 2

ADB. 2006. Special Evaluation Study on ADBs Urban Sector Strategy and Operations. Manila. At the time of loan approval, only four towns were included under the Project: Channapatna, Mysore, Ramanagaram and Tumkur. In November 2002, Maddur and Mandya were added to the project scope. At the time of the OEM, the PCR was in its draft final form. The final PCR was circulated to the Board of Directors on 5 July 2006 (ADB. 2006. Project Completion Report for the Karnataka Urban Infrastructure Development Project in India. Manila).

as promoted by the Project and ADB, were viewed as steps in the right direction. The PCR noted a substantial positive impact on municipal finances. ADB completed a separate PCR for the housing finance component of the Project in December 2001. This component was rated as highly successful. The PCR for the infrastructure components was finalized by July 2006. Both were posted on ADBs website. 4 B. Expected Results

4. The primary objective of the Project, as outlined in ADBs report and recommendation of the President (RRP), 5 was to promote decentralization of population growth and economic activity away from Bangalore by addressing infrastructure deficiencies and related environmental issues in selected urban areas in the Bangalore subregion, namely Channapatna, Mysore, Ramanagarm, and Tumkur. The Project, which had an estimated base cost equivalent to $80.3 million for works and $20.0 million for housing loans, also sought to (i) build the capacity of urban local bodies (ULBs) and related sector institutions in order to ensure sustainability of the investments, and (ii) provide housing finance assistance to low-income groups in the project towns at affordable interest rates. The Project had six parts as follows. 5. Part A: Environmental sanitation ($37.1 million) comprising construction of facilities for water supply, solid waste management, sewage systems and storm-water drainage and sullage disposal. 6. Part B: Road improvement and truck and bus terminals ($12.8 million) comprising (i) rehabilitation and upgrading of 190 kilometers (km) of roads, construction or widening of bridges, and construction of new roads to improve access to housing and industrial areas; and (ii) provision of truck terminals in Mysore and Tumkur, the relocation of a bus stand in Ramanagaram to improve traffic circulation and safety, and improvement of one private bus terminal in Maddur. 7. Part C: Poverty reduction ($16.6 million) comprising (i) upgrading of 31 slums including provision of water supply, electricity, street lighting, sanitation and drainage, solid waste disposal and improved health facilities in selected urban slums in the project towns; (ii) low-income sanitation including provision of 23,700 sanitary latrines for low-income households in the project towns through community participation; (iii) residential sites and services schemes including development of 7,200 housing sites and provision of roads, water supply, drainage and sanitation facilities for selected residential areas in the project towns; and (iv) establishment of a cultural and commercial center in Ramanagaram and a women's training center in Tumkur. 8. Part D: Development of industrial sites and services ($5.6 million) in the towns of Tumkur and Ramanagaram. 9. Part E: Implementation assistance and institutional strengthening ($8.2 million) through provision of consulting services, equipment and staffing costs for institutional support to KUIDFC and ULBs.

Available: http://adb.org/Documents/PCRs/IND/27132-IND-PCR.pdf; and http://adb.org/documents/pcrs/IND/In311_01.pdf. ADB. 1995. Report and Recommendation of the President to the Board of Directors on Proposed Loans and Technical Assistance to India for the Karnataka Urban Infrastructure Development Project. Manila.

10. Part F: Low-income housing finance ($20.0 million) through the provision of housing loans primarily to low-income beneficiaries in the project towns, as well as in the Bangalore subregion, at affordable interest rates and without external subsidies. II. A. Formulation DESIGN AND IMPLEMENTATION

11. The Government approached ADB in 1993 for assistance to prepare a project that would enable selected urban locations to be developed as growth areas in an effort to reduce pressures on Bangalore. The urban areas of Channapatna, Mysore, Ramanagaram and Tumkur were selected based on criteria such as location in relation to Bangalore, existing population and annual growth rates, quality of infrastructure facilities and related amenities, and definition as self-contained urban areas. (Due to project savings, two more towns along the BangaloreMysore highway, Maddur and Mandya, were included later.) At the time, Mysore, 140 km from Bangalore, was considered to be the most likely counter-magnet to Bangalore. Tumkur, which is smaller and 90 km away, was considered a potential counter-magnet. ADB approved a project preparatory technical assistance (PPTA) 6 on 12 November 1993 to investigate the feasibility of a project. The consultants submitted their report in April 1995. Based on the report, ADBs appraisal in June and July 1995 defined a project costing some $132.0 million equivalent. Because of a shortage of housing and housing finance in the region, the Government also requested ADB assistance to provide housing finance through HDFC. Thus, the total project cost included a separate loan for $20.0 million for housing finance. Loan negotiations took place during November 1995. 7 ADBs Board subsequently approved an urban development loan for $85.0 million to the Republic of India and a housing loan of $20.0 million to HDFC on 14 December 1995. The loans became effective on 8 July 1996. 8 Significantly, it was the first time the Government of India had borrowed from ADB for an IUDP and it was the first time ADB had made a loan for housing finance in the country. B. Rationale

12. Bangalore, the capital of Karnataka State, had expanded at a rapid rate mainly because of its location, favorable climate and the availability of good physical infrastructure. The city was therefore the recipient of increasing and substantial local and foreign investment from 1991, when the Government began its liberalization program. The rapid expansion of industrial and information technology activities prompted increased migration to Bangalore from rural areas of Karnataka and elsewhere in India, intensifying the strain on the citys infrastructure. Living conditions of residents subsequently deteriorated, leading to increased urban poverty and environmental problems. C. Cost, Financing, and Executing Arrangements

13. The estimated total project cost at appraisal included a foreign exchange cost of $36.0 million, which ADB was to finance, together with $69.0 million equivalent of local currency
6 7

ADB. 1993. Technical Assistance to India for the Urban Infrastructure Development Project. Manila. ADB. 1995. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to India for the Karnataka Urban Infrastructure Development Project. Manila (Loan 1415-IND, for $85.0 million, approved on 14 December). Loan negotiations for Loan 1416-IND were done in AugustSeptember 1995. ADB. 1995. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to India for the Karnataka Urban Infrastructure Development Project. Manila (Loan 1416-IND, for $20.0 million, approved on 14 December and effective on 19 December 1996).

costs ($49.0 million from the loan to India and $20.0 million equivalent from the loan to HDFC). The Government of Karnataka was to finance $19.3 million equivalent, with equity from ULBs and related institutions in kind and land amounting to another $7.7 million equivalent. Thus, ADB financing covered 79.6% of the total project costs, 64.4% of all the components except low-income housing, and 15.2% for the low-income housing component. The loan was made to the central Government from ADBs ordinary capital resources for a period of 25 years, including a grace period of 5 years, at ADBs variable interest rate. The central Government then made loans, excluding interest during construction, to the Government of Karnataka on standard terms and conditions set by the Ministry of Finance for foreign aided projects. The foreign exchange risk was borne by the central Government, but $62 million for various works was to be reissued as loans for a term of 25 years, including a grace period of 5 years, at an annual interest rate of 12%. 9 14. The actual project cost amounted to an equivalent of $114.35 million, $17.65 million less than the appraisal estimate (see Table 1). Of the $105 million loan amount, $96.38 million was utilized and $8.62 million was canceled ($5 million after the midterm review, the rest after project completion). Table 1: Project Cost ($ million)
Cost Foreign Exchange Cost Local Currency Cost Total Appraisal Estimate 36.00 96.00 132.00 Actual 33.24 81.11 114.35

Source: ADB. 2006. Project Completion Report for the Karnataka Urban Infrastructure Development Project in India. Manila.

15. While cost overruns occurred in the water supply and road improvement components (the latter due to more roads being added to the project scope), substantial savings were made in components covering sewerage and residential sites and services. The latter savings were mainly because financing for the Tumkur scheme, which was delayed by the acquisition of land, was cancelled. In addition, during project implementation, there was a substantial devaluation of the rupee against the US dollar from Rs34.6 at appraisal to about Rs46 at project completion. Another reason for savings was that costs were overestimated due to ADBs rather rigidly applied formulas to calculate contingencies. The availability of loan savings led to approval of a major change in scope, with the towns of Mandya and Maddur added to the Project ($6.0 million). These two towns had been evaluated before the project but were not included in the original scope due to funding constraints. 16. The EA for the infrastructure project was Karnatakas DHUD, through KUIDFC. The EA for the low-income housing component was HDFC. Given the large number of subprojects (36) in various sectors for each of the six towns, there was a variety of implementing agencies (see Table 2).

The $10.5 million balance of the funds for components covering drainage, road improvements, slum upgrading, low-income sanitation and institutional strengthening were to be provided to local authorities as grants through budgetary allocations.

Table 2: Implementing Agencies


Implementing Agency Karnataka Urban Water Supply and Drainage Board Karnataka Industrial Area Development Board Karnataka Slum Clearance Board Public Works Department Mysore Urban Development Authority Tumkur Urban Development Authority Mysore City Corporation Area Covered All water supply and sewage schemes All industrial sites and services All slum upgrading work All project roads Outer ring road, bus terminal and residential sites and services in Mysore Southern bypass road, truck terminal and residential sites and services in Tumkur Solid waste management, storm water drainage, road improvement and traffic management, and low-cost sanitation in Mysore Solid waste management, storm water drainage, road improvement and traffic management, lowcost sanitation and womens training center in Tumkur Solid waste management, storm water drainage, road improvement and traffic management, lowcost sanitation, residential sites and services, bus stand relocation, cultural / commercial center in Ramanagaram Solid waste management, storm water drainage, road improvement and traffic management, lowcost sanitation, residential sites and services in Channapatna Road improvement and traffic management, solid waste management, and low-cost sanitation in Mandya Road improvement and traffic management, solid waste management, low-cost sanitation, bus terminal and municipal building in Maddur Conceptual plan for Bangalore subregion and detailed plan for Bangalore urban and rural districts

Tumkur Municipality

Ramanagaram Municipality

Channapatna Municipality

Mandya Municipality

Maddur Municipality

Bangalore Metropolitan Region Development Authority

Source: Karnataka Urban Infrastructure Development and Finance Corporation.

17. KUIDFC was responsible for overall project administration and institutional strengthening. Early in the Project, it established a project management unit (PMU), headed by KUIDFCs managing director; three project implementation units (PIUs), headed by executive engineers; a community development unit; and a training and capacity building cell. Consultants were also recruited to assist KUIDFC to implement the various programs 10 while local NGOs in each town were recruited to assist with community participation and poverty reduction aspects of the Project.

10

(i) An international consulting firm, Louis Berger International Inc., to assist with project management consultants; (ii) two domestic consulting firms, Dalal Mott MacDonald and STUP Consultants to carry out design and construction supervision of the civil works; and (iii) an international consulting firm associated with domestic consultants for preparing the Bangalore subregional plan. In addition, the Project recruited a national consultant, M/s Intervention India, to conduct a benefit monitoring and evaluation study.

18. The Government of India, the borrower, represented by the Department of Economic Affairs, conducted regular tripartite meetings and reviews involving KUIDFC and ADB. KUIDFC was created in 1993 for similar domestically financed projects. 19. A major problem was the contractors bill payment mechanism, which was too complicated and involved long delays and dependence on the state treasury. Implementing agencies had to prepare and certify contractors bills for payment, which were reviewed at KUIDFC. Payment was obtained from the state and then forwarded to the implementing agency for release to the contractor. The state should probably have instituted a second project operational account at KUIDFC to speed up the payment process and reduce KUIDFCs dependence on state finances, helping it to establish authority over the implementing agencies. 20. Based largely on its experience in the Project, KUIDFC gradually evolved into an independent organization with adequate staff and authority. The basic training received by KUIDFC staff during the Project resulted in the state following up on the second ADB-assisted project, known as the Karnataka Urban Development and Coastal Environmental Management Project (KUDCEMP). 11 Significantly, for a third ADB-assisted project, KUIDFC prepared a PPTA itself 12 and the project 13 was approved in December 2006. Due to its growing institutional capacity, KUIDFC has established itself as a key agency for all externally aided projects in the state. D. Procurement, Construction, and Scheduling

21. In as far as the OEM was still able to check, KUIDFC carried out the procurement of goods and services generally in accordance with ADBs Guidelines on the Use of Consultants (as amended from time to time) and Guidelines for Procurement (as amended from time to time). From July 1997, prequalification of contractors for various works was done in stages to meet the needs of the Project. ADB approved broad criteria for qualification of small civil works programs. Standard bidding documents, work specifications and bid evaluation procedures were approved for use in the Project in July 1997 and were used for local competitive bidding for all project civil works. Standard bidding documents for procurement of goods internationally and locally were developed for use in procuring solid waste management equipment and water meters. Procurement of other items such as vehicles, office equipment and furnishings for the PMU, PIUs and consulting teams was done by KUIDFC through local purchase. Most works were completed after substantial delays. 22. The Project was due to be completed by 31 December 2001. It was completed on 30 June 2004, although the low-income housing component was completed in January 2001. However, according to KUIDFC, some spill-over works were not completed until the end of January 2005. 23. While the original plan was to complete the project in 6 years, the Project was completed in 8 years. Generally, delays were encountered in almost all stages and components, mostly
11

ADB. 1999. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to India for the Karnataka Urban Development and Coastal Environmental Management Project. Manila. (Loan 1704-IND, for $175.0 million, approved on 26 October). 12 ADB. 2004. Technical Assistance to India for Preparing the Karnataka Urban Infrastructure Development Project III. Manila. 13 ADB. 2007. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to India for the Multitranche Financing Facility: North Karnataka Urban Sector Investment Program. Manila (Loan 2312-IND, for $33 million, approved on 26 January 2007).

due to construction problems caused by contractors. However, there were major delays due to land acquisition, 14 changes in design owing to inadequate surveys and investigation by consultants, poor contract administration by the implementing agencies, lack of coordinated efforts by the implementing agencies, and late release of payments by the state. E. Design Changes

24. Initially, the Project was to cover Channapatna, Mysore, Ramanagaram and Tumkur. ADB approved the inclusion of two more towns, Mandya and Maddur, in November 2002. Other project-related changes included the addition of public toilets, lake improvement in Mysore and rainwater-harvesting works, while the electrification of residential sites and service areas in all project towns was cancelled (meaning that such services would have to be acquired by the owners). The Project provided water connections in Channapatna to improve the use of new assets. In Mysore, the changes included (i) realigning the outer ring road in accordance with the recommendations of an environmental impact assessment and public consultations, (ii) canceling the truck terminal, and (iii) including water supply and sewerage interconnections to improve the impact of the bulk water supply system and sewage trunk mains and treatment plant. Since land was not available in Ramanagaram, the sewage treatment technology was changed from an oxidation pond to an aerated lagoon, and the industrial sites and services component was canceled. In addition, water and sewer connections to houses were provided in Ramanagaram to improve the use of the new assets. In Tumkur, the residential sites and services component was at a standstill due to land acquisition problems at the time of the OEM. However, KUIDFC reported in 2007 that all the sites, except corner and commercial sites, had been allotted. Corner and commercial sites were to be auctioned. F. Outputs

25. The achievement of outputs is summarized in Appendix 1. OEMs assessment of the quality of physical and institutional outputs, including shortcomings and successes, is as follows. 1. Part A: Environmental Sanitation

26. The two major components of environmental sanitation were water supply and sewerage. Water supply was a significant component in Mysore, Ramanagaram, Channapatna and Tumkur. In all cases, the civil works and equipment were found to be functioning well and to be well maintained. However, increases in water tariffs and other policy measures designed to make ULBs financially viable had not materialized to a sufficient extent, due to insufficient willingness of ULBs to collect payments and customers reluctance to pay the full cost. On the positive side, a special drive in Mysore to collect water charge arrears showed positive results, and collections in Ramanagaram and Channapatna have increased significantly after management of the system was handed to KUWSDB. Tumkur was also planning a collections drive to reduce water payments arrears as well as illegal connections. 27. The operational performance with respect to sewerage was less impressive. All of the sewage treatment plants (STPs) were operating way below capacity, usually at 20% to 25%. Given that the plants should be operating at nearly full capacity by 2011, the main question was whether the percentage of capacity was on target for 2011. While drives to increase sewer connections were conducted in each town, it was essentially up to households to pay the
14

This was in spite of the time bound land acquisition plan approved with the Government before project approval, and covenants in the loan agreement.

connection fee and subsequent consumption charges. Since all households must have had some arrangement for sewage disposal, it may have been more cost effective to offer households the choice of installing the latrines popular in low-income neighborhoods. 28. Despite the best efforts of the Project and local authorities, solid waste management remained a problem in all the towns at the time of the OEM. Designated solid waste disposal sites could not be developed (Tumkur), were open dumping sites (Ramanagaram and Channapatna) or operations had stopped due to legal problems (Mysore, where an insufficiently specified management contract probably lay at the basis of the problem). Re-use of waste through composting is still a problem in many places in India. 29. Mysore. The water supply improvement program in Mysore was the single largest investment in the Project. It comprised a new water supply system designed to supply 50 million liters per day (mld) initially, adequate to meet estimated demand until 2011 and capable of being upgraded to 150 mld to meet further demand until 2026 without additional civil works. Although a September 2004 memorandum from ADBs resident mission stated that O&M was not being carried out properly, the OEM found the water treatment plant operating well, with all meters and gauges working, the flocculator operating, records of flow measurement being kept, and the laboratory undertaking water quality tests. Mysore had about 110,000 water connections, 20,000 of which were illegally constructed (this was reduced to 10,000 by the time of the OEM). Although supply is for some 20 hours per day at about 130 liters per capita per day, about 25% remains non-revenue water. 30. Leak-detection equipment was procured for Mysore City Corporation (MCC) to be used for studies in Mysore. However, it was never used and ultimately the equipment was transferred to KUWSDB. The use of such equipment requires commitment by the water provider, cooperation from residents and special skills among staff. Due primarily to a lack of skilled manpower, the MCC could not appreciate the benefits of the equipment. 31. The sewage system program for Mysore included construction of trunk sewers and STPs for three separate drainage districts (Districts A and D, B, and C). The program also included making connections to existing laterals. All systems were designed with an initial installed capacity to meet forecast demand until 2011, allowing for easy incremental expansion of mechanical equipment and some civil works to meet ultimate design capacity until 2026. Although the STPs for Districts B and C were operating well, one was operating at only about 25% of its 30 mld capacity, while the larger one was processing an average of 25 mld, or 37% of its 67.65 mld capacity. Major problems were found at the STP for Districts A and D. The 60 mld capacity plant was operating at a peak of only 22 mld. Just three of 11 pumps were operating. Several had broken down months previously and had not been repaired by the contractor. Maintenance personnel for the STP were co-opted from KUWSDB to implement the works, but they did not seem qualified to carry out adequate maintenance. The earth berm also been leaking over about 600 meters and the contractor had merely dumped gravel and dirt on it without compacting it. Thus, some leakage was still detected. Due to a lack of pumping capacity, raw sewage was also observed in the drainage ditch. 15 In October 2007, KUIFDC reported that about 14,000 new connections had been added since 2004, so that the inflow to the STPs should have increased. It reported the STPs were working satisfactorily.

15

At the time of completion of this PPER, in 2007, ADB staff mentioned that some of the raw sewage in Mysore intended for an STP was being intercepted as nutrient for farming for the benefit of some local businessmen, and that the sewage ponds were used for growing fish.

32. Regarding solid waste management, a 200 ton per day composting plant was built under build-operate-transfer conditions. A contractor operated the plant for 3 years under a 10-year agreement with the MCC. However, as of 27 June 2005, the plant had stopped operating due to a disagreement on the payment of fees which were owed to MCC over a year. MCC was taking legal action to break the agreement and find another operator. In the meantime, it was looking for a new landfill, as the existing plant area was filled with garbage. According to the engineer who had operated the plant, the plant was efficient in segregating organic and non-organic material and processing the former to produce some 6,000 tons per month of organic compost, which had a market for farmers. Community collection bins were constructed and collection and transport vehicles purchased. By the time of issuance of this report, the plant was operated by MCC only during the day shift. KUIFDC reported that MCC was marketing the manufactured compost efficiently. 33. Tumkur. The component included (i) extension and augmentation of the existing water distribution systems, (ii) construction of new underground sewage systems and an STP, and (iii) improvement of facilities for solid waste management and development of a new disposal site. Development of the water supply system, which included improvements and upgrading of the existing water distribution system (128 km) and construction of a reservoir at the old water treatment plant site, was very well received by municipal officials. In August 2006 the town began a drive to reduce the 10,000 illegal water connections (of a total of 28,000 connections) and to increase the sewer connections from 15,000 to 30,000 over 3 months. 34. The sewerage program included construction of a new sewage system (190 km) together with an STP to serve the core area of the town and key residential areas and pump stations (24.57 mld). Although the STP was running at an average of only 6 to 7 mld, about 25% of its capacity, the plant was well run and maintained. (The plant was peaking at about 8.5 mld at the time of the OEM.) There was no leakage or seepage from the earth oxidation ponds, which were about 1.5 km from the plant. 35. The solid waste management program was to improve the operational efficiencies of the system and development of a new solid waste disposal site. A sanitary landfill site was constructed under the Project. However, the site was not being utilized due to opposition from a village a kilometer from the site. Although there were no settlements in the immediate vicinity, the villagers succeeded in stopping trucks to the site, dismantling much of the site works, and convincing several councilors that the site was a nuisance and created disease problems. Municipal officials have found an alternative landfill site at Ajjagondanahalli village, and the compound wall and approach road construction were in progress by October 2007. 36. Ramanagaram and Channapatna. A water supply scheme of 27 mld capacity for Channapatna and Ramanagaram was built under the Project. The scheme included rehabilitation of existing intake works and a raw-water pumping station on the Shimsa River. A 15 mld treatment plant, a clear-water reservoir and pump station, a 43 km clear-water raising main, two intermediate pumping stations and 85 km and 96 km of distribution networks for Channapatna and Ramanagaram respectively were built. The bulk water supply scheme was maintained by KUWSDB on behalf of the towns through a management contract with a private operating firm. At the time of the OEM, 6 mld of water was being supplied to each town, allowing water to be provided for about two to three hours a day. According to town officials, this was a very big benefit. In addition, KUIDFC installed about 16,000 connections, of which 11,000 were done before the closing date.

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37. For Ramanagaram, improvements and extensions to the existing sewer system and construction of a new STP (7.56 mld) were undertaken, including extending the sewer system works to cover a broader area. In order to encourage house owners to connect, KUIDFC made connections a part of the Project, with the cost to be recovered from property owners through 10 interest free installments. Some 6,500 connections were made up to the individual plot lines. However, only about 3,000 to 4,000 households have actually connected. Thus, the plant was receiving only about 2.0 mld in comparison with about 5.0 mld for optimal operation. The town was planning a second phase to connect 3,500 more households. At the time of completion of this PPER, in 2007, the two towns had passed a bylaw to make people connect and another few thousand households had connected. 38. Regarding solid waste, a composting plant for Ramanagaram and Channapatna was planned. However, detailed surveys completed as part of the solid waste management plan indicated there would be insufficient volume to support a viable composting operation, and a sanitary landfill site was developed instead. However, the OEM confirmed that the site was not operating properly as a sanitary landfill, but was an open dump with just one tractor spreading the waste. 2. Part B: Road Improvement and Truck and Bus Terminals

39. In the towns visited by the OEM, especially Mysore and Tumkur, where roads and drainage were major components, the improved roads and accompanying drains were found to be in good condition, sometimes 4 years after installation. In Tumkur, where road and drainage improvements covered most of the center of the town, officials said the component had completely changed the towns character. The roads observed during the OEM were invariably in good condition. The mission also observed that the southern bypass road in Tumkur and the outer ring road in Mysore were built to a good standard, and concurred with the view that they would facilitate the orderly growth of the cities. 40. Mysore. The Project has had a significant impact in improving the internal and external road system for Mysore through the (i) upgrading and improvement of city roads (48 roads for 58 km), (ii) widening and strengthening the intermediate ring road (19 km), and (iii) construction of a city bus terminal. The work could be carried out only on one bus terminal, as the land for the other could not be acquired. Two contracts for the outer ring road and truck terminal were awarded. However, during the execution the work on the truck terminal was removed from the scope as it was unlikely to be used. Instead, the western portion of the ring road (24.82 km) was taken up. Thus, in addition to the eastern portion of 7.5 km, a total of 32.3 km was constructed under the Project. However, some 9.4 km remained to be built at the time of the OEM to complete the ring road. Once this portion was completed, it was expected that truck traffic would increase substantially. In the meantime, many industries were locating along the ring road (including a training center for Infosys). MUDA was also planning almost 30,000 housing sites in various schemes, while the private sector planned 10,000. Due to the road, property values had more than doubled in residential areas and almost quadrupled in industrial areas. 41. Tumkur. The Project constructed extensive local road and drainage improvement works (18 roads for 24 km) in Tumkur. In addition, a 10.5 km southern bypass road, including a railway overpass, was built. According to local officials, the roads in the center of the town used to be dirt and would turn to mud during the monsoons. Now the town center was dry and sanitary. The southern bypass road was also being well used.

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42. To improve traffic congestion within the city by moving truck parking and transshipment of goods out of the city, the Project provided a truck terminal. However, truck operators were unwilling to shift to the new location and the district administration was not prepared to restrict entry of trucks into the city. Tumkur had received state approval to convert the site to a residential sites and services scheme by the time of the OEM. The OEM was shown the plans for the site (147 serviced sites) and the financial plan. By 2007, KUIDFC reported that all residential sites had been allotted and that corner and commercial sites were going to be auctioned. It is hoped that the conversion of the site to a housing area will allow the subproject to break even. 43. Ramanagaram and Channapatna. This component included (i) 23 km of roads and 30 km of drains in Ramanagaram, (ii) 25 km of roads and 35 km of drains in Channapatna, (iii) widening of 11 km of the Bangalore-Mysore highway from two to four lanes within the municipal limits of the towns, and (iv) construction of a 78 meter two-lane bridge across the Arkavathi River. It was well received by the population of the two towns. 44. A bus terminal for operation of private bus services was built half way between the two towns to relieve traffic jams at the existing informal stops. Since the private bus operators refused to shift their operations to the remote facility, the terminal remained unused. It was subsequently transferred to the Karnataka State Road Transport Corporation in March 2005 to be used as a bus depot. 3. Part C: Poverty Reduction

45. The OEM found the outputs of the slum upgrading schemes to be of variable quality, although they seemed to be generally well appreciated by residents. Roads and footpaths were of variable standard, and many water taps were without spigots. Many drains were constructed well but remained clogged with dirt, although some were cleaned at the time of the inspection. Low-cost sanitation (stand-alone toilets) had been built on most plots and functioned well. Several federations of self-help groups were visited, as well as the training center in Tumkur and a computer training NGO in Mysore. In all instances, women and trainees were very proud to be participating and had gained a new outlook through increased self-confidence and selfesteem. Due to its success, the self-help group approach was replicated in other ADB projects. Although the component was passed on as a grant, other ADB TAs in India (TA 3344-IND) 16 have investigated whether there might be some element of cost recovery for the small loan portion. 46. Residential Sites and Services. The Project included provision for developing a total area of about 252 hectares of land in the original four project towns with roads, water supply, storm water drainage and sanitation facilities. At least 60% of the developed sites were to be allocated to low-income groups at affordable prices and the balance to middle-income groups. Four contracts were awarded: (i) 3,800 sites for Mysore, work completed, plots sold; (ii) 1,831 sites at Tumkur, works still under construction with TUDA funds; (iii) 935 sites at Ramanagaram, work completed; and (iv) 931 sites at Channapatna, work completed. Provision of electricity to the Mysore, Ramanagaram and Channapatna sites was also scheduled to be done under separate contract packages at the time of the field visit.

16

ADB. 1999. Technical Assistance to India for the Strengthening of Microfinance Institutions for Urban and Environmental Infrastructure Finance. Manila.

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47. While all the sites in Mysore were sold, they had not been occupied by mid-2005 due to the lack of electrification, although it had been contracted at the time of the OEM. The allottees had made their deposits some years previously and had been waiting to occupy the plots. To prevent speculation, the allottee cannot sell the plot for 10 years and must build a house on it within 2 years. The Project originally envisioned that HDFC would extend housing loans to the allottees of the residential sites and services schemes. However, this did not happen, mainly because (i) the schemes were late in being completed, (ii) most allottees would not qualify financially for HDFC loans, (iii) the schemes in Ramanagaram and Channapatna proved not very attractive, and (iv) the land could not be fully acquired in Tumkur. In Ramanagaram and Channapatna, market demand did not materialize because the sites were some way out of town and plot costs were higher than the prices being offered by the private market in town (although these were provided without services). The Ramanagaram City Municipal Council planned to sell the two schemes to Rajiv Gandhi Housing Development Ltd at the time of the OEM, for resale to the Beedi Rollers Association (low-cost cigarette makers), which would buy all the smaller plots. KUIFDC reported in October 2007 that Rajiv Gandhi Housing Development had bought the residential lots in Siddlakallu in Ramanagaram to develop low-cost housing as planned. The Channapatna council planned to sell its sites to local private factories at the time of the OEM. KUIDFC reported that the Karnataka Housing Board intended to develop a layout adjoining the layout of KUIDFC at Sunnagatta in Channapatna, and take over this layout. In Tumkur, after an initial expenditure of Rs1.75 million, the work was abandoned and the contract closed as land was not available. Work had since been restarted with funds from TUDA. However, some 427 of the original allottees have withdrawn their applications, while the remaining 500 have paid in full. Given the foregoing problems in the sale and occupation of the residential sites and services schemes, it seems that (i) adequate market studies were not carried out during project design, (ii) difficulties of land acquisition were not foreseen, and (iii) coordination of works was not adequately carried out. 48. Slum Upgrading and Low-Cost Sanitation. Some 55 slum areas were selected under the Project for provision and upgrading of basic urban services including water supply, sanitation, roads, drains, solid waste disposal facilities and street lighting, plus facilities such as public toilets and community centers. All facilities included in the program were identified by the consultants, municipalities and implementing agencies with the full participation of the communities, using local NGOs and community-based organizations as key facilitators. Contracts were awarded for (i) 20 slums in Mysore, (ii) six slums in Tumkur, (iii) six slums in Ramanagaram, (iv) seven slums in Channapatna, and (v) 13 slums in Mandya and three in Maddur. Most of the households have been provided with on-site toilet units under the low-cost sanitation program (see para. 49). All the works were completed and the living environment of the residents of these areas has improved. While most slum areas are maintained by the Karnataka Slum Clearance Board, the MCC retained responsibility for Gousia Nagar, a large 70,000-person low-income area. 49. Low-Cost Sanitation. The original Project planned for some 23,700 low-cost sanitation units, mostly in the slums of the project towns. It also provided for a strong role for local NGOs to participate in beneficiary identification and community participation aspects of the program, with the help of the Projects community development officers. A particular emphasis was placed on using the NGOs to motivate and educate women on the proper use of the facilities. Individual toilet units were provided to families below the poverty line, through beneficiary participation (50% of unit cost from the Project, with 25% from the ULB upfront and 25% as a loan from the ULB to the beneficiary). The targets were revised and 16,154 low-cost sanitation units were completed in the six project towns.

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Table 3: Low-Cost Sanitation Units


Item Original Target Revised Target Completed (%) Mysore 8,750 8,750 8,184 (100%) Tumkur 8,710 3,300 3,020 (92%) Ramanagaram 2,770 1,910 1,910 (100%) Channapatna 3,470 3,368 2,864 (85%) Mandya 2,000 163 163 (8%) Maddur 0 13 13 Total 25,700 17,504 16,154 (92%)

Source: Karnataka Urban Infrastructure Finance and Development Corporation.

50. Officials in each of the towns felt that the low-cost sanitation component was a great success, bringing a sense of privacy, self-esteem and ownership to the beneficiaries. All the units inspected (often marked ADB) were kept clean and often used for bathing. The component was expanded by KUIDFC to KUDCEMP (6,000 low-cost sanitation units constructed) and other projects. 51. Community participation. KUIDFC identified a set of NGOs for each town and agreements were signed with each of them. Twenty NGOs, under the supervision of KUIDFC social development officers, implemented the agreed social action programs under the three broad categories of health education, skills training and income generation, with a particular focus on women and children in the slum areas of the Project. KUIDFC also decided to integrate with the training programs of other government agencies such as the Department of Industries, Mass Education and Information Technology. In all the towns, emphasis was on creating self-help groups mainly consisting of women of low-income families residing in slums. When the approach was tested in earnest about 2 years before project completion, 722 selfhelp groups were created. This mobilized about Rs15 million in savings, resulting in the disbursement of Rs56 million in loans. This effort has since been expanded to KUDCEMP where 2,400 self-help groups have been formed with Rs32 million in savings and Rs129 million in loans until mid-2005. Membership in a self-help group has contributed to significant positive changes in the lives of an estimated 12,000 women (and their families). Of the groups formed, less than 5% disintegrated. The Projects self-help groups covered 40% of the urban poor in the short period that the Project was active (see Appendix 2). 4. Part D: Development of Industrial Sites and Services

52. Ramanagaram. Construction of the industrial site and service subproject could not be taken up due to non-availability of land and was removed from the scope of the Project. 53. Tumkur. The Karnataka Industrial Area Development Board developed 108 industrial lots on 216 acres with $1.1 million in ADB financing. Of these, 86 plots have been allocated and 15 industries were operating at the time of the OEM. Significantly, a large Indian and German joint venture has located on one of the larger sites, employing some 350 workers. After a slow start, the industrial zone seemed to be taking off, with about 20 units allocated in the 2 months before the mission. It was expected that full occupancy would be achieved by the end of 2005, thereby creating further economic growth and job opportunities in Tumkur. 5. Part E: Implementation Assistance and Institutional Strengthening

54. There was a general consensus among KUIDFC staff that the Project had provided valuable experience, which was beneficial to themselves and the EA as a whole. A large number of KUIDFC staff remained with the EA throughout the Project. Despite the transfer of

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several of the most senior staff, the experience gained during the Project by and large has been retained in KUIDFC and the former PIUs. In addition, with the exception of some of the ULB staff, the institutional memory of the Project was good in the towns. Even new municipal commissioners knew the project components well, as their engineering and financial staff had not changed. 55. Training and Capacity Building. KUIDFCs Training and Capacity Building Cell began its training courses in March 1999 and conducted training programs in the areas of quality control and implementation, public awareness and capacity building of ULBs. The latter included meetings with ULBs on implementation of their management action plans, development of computerization plans, reviews of organization and staffing, and attending council meetings to enhance awareness regarding repayment and O&M requirements under the Project. In the second phase, training on attitudinal change was imparted to all ULBs. Of the targeted 2,688 employees of the six ULBs, 1,966 employees received training during 2002. 56. Implementation of Management Action Plans. Management action plans were developed for all project ULBs by the project management consultants and approved by the state Government. However, progress was not very satisfactory. Most of the ULBs did not achieve revenue collection targets. Subsequently, KUIDFC employed a private company during 2003 to prepare updated plans with a special focus on measures required to upgrade the financial viability of the project towns. Implementation of the plans will continue beyond the project period. 57. Benefit Monitoring and Evaluation Study. According to a comprehensive report by a private firm in April 2003, awareness of the Project and the benefits gained from it was high among beneficiaries, local officials and the public at large. The study also helped the Project in making some mid-term corrections in order to capture the perceived demand and immediate needs of beneficiaries, especially in slum areas. Appendix 3 contains a summary of the impacts measured by the study, which are an indication of the degree of acceptance of the Project. 5. Part E: Low-Cost Housing Finance

58. The low-cost housing finance component was included primarily to offer housing loans to the beneficiaries of the Projects residential sites and services schemes. However, as seen above, the schemes were substantially delayed and were not occupied at the time of the visit. At the request of HDFC and the state Government, the original scope was therefore modified to include the entire state. Although HDFC committed to making loans from its own resources to low-income families once they were allotted plots, only a small percentage of families qualified for the loans due to the stringent income and employment requirements of HDFC loans. It was evident that there was no collaboration between the urban development authorities (MUDA and TUDA) and with the Karnataka Slum Clearance Board in allotting plots to families who would qualify for HDFC loans. 59. Based on ADBs PCR for the housing finance component, the total number of project beneficiaries was 7,511, including 4,885 low-income households (65%, exceeding the target of 50%). About 70% of the beneficiaries were in urban areas. Almost 85% belonged to the employed salaried class, with the remainder being housewives, pensioners, retirees and selfemployed. Most of the loans were in the range of Rs25,000 to Rs300,000, with more than 70% in the Rs100,000 to Rs300,000 range. The weighted average loan-to-cost ratio was about 53%, signifying a substantial investment by the borrowers. The households provided down payments and their own investment from savings, inheritance and contributions from all members for the

15

common purpose of owning a house. Overall, the quality of life of the beneficiaries improved substantially through the loans, with larger houses, a better locality, improved water supply and sanitation facilities, larger plot sizes and a cleaner environment. The beneficiaries were highly satisfied with house ownership. Loan repayment was 100%. Details of the beneficiaries and loan disbursements are shown in Appendix 4. 60. This PPER downgrades the rating of highly successful given in ADBs PCR for the housing finance component to successful. Although the RRP and loan agreement had not specified unequivocally that the funds were to go to poor households in the informal sector rather than the formal sector, this was the real intention as NGOs were to be employed to identify and assess suitable poor households without guaranteed income and documented earnings. HDFC claimed that it could not find NGOs capable of doing this, and that it had therefore chosen to provide the loans to low-income households in the formal sector, such as government employees in the police service and in state-owned corporations. Furthermore, the RRP had specified in its Appendix 4 that the beneficiaries of housing loans would include those who applied for one of the 4,120 plots of the five residential sites and services to be developed under the Project. However, these sites were all developed far too late for HDFC and it claimed at the time of the OEM that even if the sites had been completed in time, HDFC would not have been able to give more than 10% of these plot owners a housing loan under the conditions of the loan. Criteria for access to the sites had not been linked to criteria for housing loan eligibility. Thus, the design of the housing finance component within the total Project was not flawless. The housing finance loan nevertheless came just in time for the low-income groups in the formal sector. After the closing of the Projects housing finance facility in 2000, HDFC has had more difficulty awarding loans to low-income borrowers. The Urban Land Act was repealed in 2001, and the Government has since had to pay for land acquisition at market rates. Land prices have gone up dramatically in Bangalore and even some other towns, such as Mysore, Mangalore and Hubli. It is now virtually impossible for low-income groups to access land legally, and therefore to borrow for house construction. Lending to such groups for housing through NGOs has not prospered. HDFC so far is working with two small NGOs only, one in Bangalore and one in Mysore. G. Consultants and Contractors

61. This PPER agrees with the findings of ADBs PCR and largely concurs with its assessment of consultants and contractors. The performance of the consultants was marginally satisfactory. Drawbacks were that many consultants were changed during the Project, which delayed detailed design of the various components. This put pressure on KUIDFC staff. The consultants delay in finalizing and issuing technical drawings, frequent design changes and lack of proper pre-design investigations led to problems during construction. This was worsened by a lack of familiarity with and understanding of ADBs changing procurement procedures, guidelines and quality control requirements. However, with increasing capacity in KUIDFC, the domestic consultants improved their performance over time. 62. As noted by the PCR, contractors sometimes did not understand the requirements for quality, methodology, cash flow and management in an urban environment, which involves inconveniences to the public and coordination with various other service providers and utility departments. The contractors lacked works and financial planning, and most contracts were completed with long delays. The contractors did not always understand the contract provisions, which delayed settlement of variations and bills for payments. Toward the Projects end, the contractors performance improved.

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H.

Loan Covenants

63. At project completion, most of the loan covenants were complied with, although there was one which had not been complied with, four only partly complied with, and three still being complied with (PCR, Appendix 8). Importantly, there was only part compliance with the collection efficiency covenant. This covenant mandated the prompt collection of all revenues due to ULBs and the maintenance of a collection efficiency ratio of 90 days arrears from 1 January 1997. Only some of the project towns complied with this requirement and only for certain years. At the time of the OEM, the project towns were still encountering difficulties in meeting the stipulated collection efficiency ratio. I. Policy Framework

64. The PCR concluded that the major reason for non-compliance or late compliance with loan covenants was that it proved impractical to implement policy reforms only in the Project towns and not in the rest of Karnataka state. When the Government realized this, it began to implement the reforms in all 63 cities of the state. The same was the case for the Nirmal Nagar program, relating to application of information technology to property tax reforms. This was started through the Project but was expanded under KUDCEMP. 17 III. PERFORMANCE ASSESSMENT

65. Overall Assessment. The Project is rated successful, although at the lower end of the scale (Table 4). This is based on assessments of relevance and effectiveness of the Project, although with lower efficiency and lower likelihood of sustainability of the outcomes. Table 4: Assessment of Overall Project Performance Weight (%) Assessment Rating Value Weighted Rating 20 Relevant 2 0.4 40 Effective 2 0.8 20 Less efficient 1 0.2 20 Less likely to be 1 0.2 sustainable 100 Successful 1.6

Criterion Relevance Effectiveness Efficiency Sustainability Overall rating

Note: Weights used are different from those recommended by OEDs guidelines. More weight was given to the positive unintended impact of the Project (para.79). OEDs Guidelines for Preparing Performance Evaluation Reports for Public Sector Operations define projects as successful when their weighted rating has a value between 1.6 and 2.7. Source: Operations Evaluation Mission.

66. Relevance. The Project was in line with ADBs country strategy and the Governments Eighth Five-Year Development Plan. 18 However, the Projects objective was not realistic in aiming to achieve decentralization of population growth and economic activity in Bangalore by addressing basic infrastructure deficiencies and related environmental aspects in selected urban areas in the Bangalore sub-region. More direct support for economic activity in the towns chosen would have been needed to achieve the objective. This PPER does not assess the relevance of the Project exclusively against the specific objective, as it sees a need for
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ADB. 1999. Report and Recommendation to the President to the Board of Directors on a Proposed Loan to India for the Karnataka Urban Development and Coastal Management Project. Manila. (Loan 1704-IND, for $175 million, approved on 26 October). 18 The PCR has provided more detailed justification for this, which this PPER concurs with and does not repeat here.

17

development of the six towns independent of this, and such development would also have been in line with ADB and government strategies at the time. 67. The Project had a complex design, with physical subprojects often of a different nature, and not counting the 55 slum upgrading schemes which in themselves could be seen as mini IUDPs. If the Project was to be a true IUDP, it should have concentrated on water supply, sewerage, interior roads and drainage, solid waste management and slum upgrading, including low-cost sanitation, perhaps in fewer towns and with the clear objectives of urban development and poverty alleviation, which were policy goals of the Government and ADB at the time. In the event, the overall Project objective of relieving pressure on Bangalore became obscure. Nevertheless, this PPER assesses the Project overall as relevant. 68. Effectiveness. With the exception of the truck terminal in Tumkur and the bus terminal and the industrial site in Ramanagaram, the Project achieved the physical completion of all subcomponents. With the further exception of the residential sites and services schemes, the completed subcomponents were in use by the time of the OEM. The Project as a whole contributed to improving the living environment for the majority of the population in the Project towns. The slum improvement component along with the low-cost sanitation and community development programs, such as those supporting womens self-help groups, directly benefited the poor and vulnerable sections of society. Two benefit monitoring and evaluation surveys, one conducted in 1999 and another in 2003, documented mostly positive responses from beneficiaries in the four towns (Appendix 9 in the PCR and Appendix 4 in this PPER). When the components and subcomponents are rated individually in terms of completion schedule, work quality and utilization, the composite score, weighted by cost of the components, is satisfactory. Thus, the Project overall is assessed as effective. 69. Efficiency. From a financial and economic point of view, the water supply and outer ring road in Mysore achieved figures beyond the financial and economic threshold. Similarly, the southern bypass road in Tumkur achieved a significant economic internal rate of return (EIRR). However, due to the heavy investment for relatively small towns, the water supply in Ramanagaram and Channapatna did not achieve either the financial internal rate of return (FIRR) or the EIRR thresholds. STPs in all towns remain underutilized and it is uncertain whether they will achieve their design capacity by 2011. For these reasons, the Project is assessed as less efficient. 70. The OEM reviewed and accepted the EIRR calculations and assumptions of the PCR for the Mysore water supply (Table 5). However, given that the PCR came to substantially higher EIRRs for the Mysore outer ring road and the Tumkur bypass road than those calculated at appraisal, the OEM re-evaluated the EIRRs for these two components. Both roads opened up new areas for residential and industrial uses. In the absence of vehicle counts and operating costs, the methodology used by the PCR and the PPER was based on increases in raw land costs. However, the PCR did not distinguish between increases in land costs due to the normal outward growth of the cities and the incremental increase due to the construction of the two roads. The latter was estimated based on conversations with local officials, MUDA and TUDA engineers and local residents. The results of the re-evaluation are therefore significantly lower than those of the PCR, with an EIRR for the Mysore outer ring road of 45% and for the Tumkur bypass road of 38%.

18

Table 5: Comparison of Economic Internal Rates of Return (%)


Project Component Mysore Water supply Truck terminal Intermediate ring road Outer ring road Ramanagaram and Channapatna Water supply Community and commercial center Tumkur Southern bypass road RRP 13.6 21.5 53.1 10.3 PCR 16.4 PPER 16.4

73.0 (0.75)

45.0 Neg.

32.9

96.0

38.0

PCR = project completion report, PPER = project performance evaluation report, RRP = report and recommendation of the President. Note: Numbers in parenthesis are negative. Sources: ADB. 2006. Project Completion Report for the Karnataka Urban Infrastructure Development Project in India. Manila; ADB. 1995. Report and Recommendation of the President to the Board of Directors on Proposed Loans and Technical Assistance to India for the Karnataka Urban Infrastructure Development Project. Manila; and staff estimates.

71. Sustainability. Low water tariffs and minimal O&M remained a problem in the water and sanitation sector. Based on the loan repayment schedule prepared by KUIDFC, debt repayment obligations of the project towns ranged from 43% of the operating revenue to almost 115%. In 1997, the state Government decided that all project payments would be made to and retained by KUIDFC in order to create a revolving fund, while the state serviced the total loan. Since such an arrangement does not stimulate sustainable debt financing by the ULBs, the Project is assessed as less sustainable. 72. The overall sustainability of the Project outcomes is in doubt. Water supply and sanitation components are the critical issues. From an engineering point of view, the water supply systems in the four original towns are sustainable, provided there is adequate O&M. Similarly, assuming an increase in connections in Tumkur and Ramanagaram and Channapatna, the sewer systems will become more viable. However, before the STP for Districts A and D in Mysore can become viable, necessary repairs to the pumps must be done and more qualified O&M personnel put in place. 73. With respect to funding overall O&M for the Project, the state Government decreed in 1997 that all borrowing agencies were to make their loan repayments to KUIDFC, which would then be permitted to retain the payments in order to create a revolving fund for O&M and financing further infrastructure projects in the state. Thus, the state would make all loan repayments. Up to 30 June 2005, total repayments of principal and interest amounted to Rs463 million of a due total of Rs833.6 million. MUDA in Mysore was the only agency ahead on scheduled payments. 19 While such an arrangement runs counter to the principle of sustainable project financing, for small towns such as Channapatna, Ramanagaram, and Tumkur, more realistic debt projections should be carried out during project design based on alternative subproject packages. A final subproject affordable to the towns can then be decided.

19

In October 2007, KUIFDC reported that the Karnataka Industrial Areas Development Board had fully repaid the loan and MUDA was still regular in its repayments. Among the other ULBs, TUDA and MCC had made some partial repayments. The Government of Karnataka was readjusting a part of the State Finance Commission grants. The repayments were to contribute to an Urban Infrastructure Development Fund.

19

74. On the positive side, ownership of project components from the bottom up (i.e., by the people for the low-cost sanitation units and slum-upgrading schemes; by the ULBs for the water supply, sewerage, roads and drainage components; and by the commitment of the Project and the state Government to remain involved in order to assure the operational and financial success of the Project) is highly relevant to project sustainability. In addition, components such as the low-cost sanitation and slum upgrading were wholly integrated with the socio-cultural setting of the beneficiaries. 75. The financial calculations and assumptions of the PCR were reviewed and accepted by the OEM. Table 6 compares the FIRRs contained in the RRP, the PCR and recalculated as necessary for the PPER. During project preparation, FIRRs were calculated for seven components as well as the two planned industrial sites and all six residential sites and services schemes. During project implementation, several components were (i) dropped from the Project, such as the Mysore truck terminal and the Ramanagaram industrial site; (ii) not completed or occupied, such as all the residential sites and services schemes; or (iii) operating at a loss, such as the Ramanagaram community commercial center. Hence, the ADB PCR only calculated FIRRs for the two water supply projects in Mysore and Ramanagaram. 20 It can be seen from Table 5 that the FIRRs for the water projects have decreased substantially from appraisal. Although the FIRR for the Mysore water supply dropped from 15.5% to 4.3%, it is still considered financially viable since the FIRR is above the 2.1% weighted average cost of capital. However, the FIRR for the Channapatna and Ramanagaram water supply turned from 7.6% to negative. The main reasons for this were the very high cost of the works (42 km of pipe from the well head) and the fact that none of the assumptions were realized. These assumptions included (i) water tariffs increasing annually at an average of 13%, (ii) the ULBs introducing a sewerage cess of 30% in 1999, and (iii) non-revenue water decreasing from 30% in 1995 to 20% by 2001. In addition, the percentage of illegal water connections in Channapatna and Ramanagaram was estimated at some 40% to 45% of total connections, while many meters were not working and, until recently, percentage tariff collections were very low. As mentioned above, handing back the water supply maintenance and collections to KUWSDB (which was still the relevant entity in 2007) may have resolved some of these problems. KUIDFC reported in October 2007 that water tariffs had been raised after the water supply service had improved in the towns.

20

Appendix 5 contains the detailed analysis and tables of the FIRR and EIRR calculations, as well as the reevaluated EIRRs calculated by the OEM.

20

Table 6: Comparison of Financial Internal Rates of Return (%)


Project Component Mysore Water supply Truck terminal Intermediate ring road Outer ring road Ramanagaram and Channapatna Water supply Community and commercial center Tumkur Southern bypass road Four project towns Industrial sites and services Residential sites and services RRP 15.5 14.1 PCR 4.3 PPER 4.3

7.6 2.6

(5.1)

(5.1)

16.0 14.8

PCR = project completion report, PPER = project performance evaluation report, RRP = report and recommendation of the President. Note: Numbers in parenthesis are negative. Sources: ADB. 2006. Project Completion Report for the Karnataka Urban Infrastructure Development Project in India. Manila; ADB. 1995. Report and Recommendation of the President to the Board of Directors on Proposed Loans and Technical Assistance to India for the Karnataka Urban Infrastructure Development Project. Manila; and staff estimates.

76. The Project envisioned the basic operating entities as the ULBs for all the components. The smaller municipalities were charged with implementing road improvement, drainage traffic management, solid waste management, low-cost sanitation, residential sites and services, bus stand relocation and the cultural and commercial center. KUWSDB had responsibility to implement the water supply and sewerage works and hand these over to the municipalities. Thus, the basic operating entities for the completed works were the project towns. However, in the case of water supply and sewerage, it was soon seen that the smaller ULBs did not have the capacity to maintain the works or to levy viable tariffs. In the case of Ramanagaram and Channapatna, the works were therefore handed back to KUWSDB, and collections as a percentage of monthly demand jumped from some 60% in March 2005 to 96% in May 2005. Since KUWSDB was not a political entity, it could raise tariffs to recover costs, and disconnect customers who refused to pay. A similar story occurred in Tumkur, where the council refused to approve a tariff increase. The municipality was therefore petitioning the state to hand back the works to KUWSDB. Mysore would have liked to return the water and sewerage works to KUWSDB, but does not feel it can due to the under the 74th Constitutional Amendment. As mentioned above, solid waste management is another component that is not being properly utilized and maintained by the project towns. 77. In an effort to determine the financial sustainability of the project investments, the ADB PCR undertook a financial sustainability analysis based on the projected financial positions of KUIDP towns. A comparison of the projected financial positions made during project appraisal with the actual performance of the original four project towns from 1999 to 2005 showed wide variations in the estimates (Table 7) Since the projections made during appraisal were unrealistically high, the differences largely explain the fiscal difficulty of most of these towns to service the project debts. Almost all of these policy measures had not been implemented during the 1995 to 2004 period. Thus, more attention should be given to developing realistic ULB financial projections during future project preparation.

21

Table 7: Comparison of Financial Projections and Actual Performance of KUIDP Towns


Municipal Financial Profile Tax receipts Water charges Operating revenue (Excluding fiscal transfers) Operating expenditure Net cash flow (Revenue and capital) Debt servicing capacity Debt servicing as % of operating revenue KUIDP-related Debt servicing and over dues 20032004 Appraisal Actual Appraisal Actual Appraisal Actual Appraisal Actual Appraisal Actual MMC 571.25 122.30 179.07 a 107.20 843.08 343.12 485.22 564.65 9.63 (23.46) TMC 107.11 51.33 8.57 4.07 146.33 66.70 84.52 87.69 3.51 (15.14) CMC 23.57 5.83 3.20 0.84 72.37 29.03 41.52 19.83 (21.05) 8.96 RMC 16.58 5.59 2.47 1.68 44.63 25.00 24.54 6.72 (38.47) 16.40

20032004 20042005

43% 390

58% 104

68% 61

115% 86

CMC = Channapatna Municipal Council, KUIDP = Karnataka Urban Infrastructure Development Project, MMC = Mysore Municipal Corporation, RMC = Ramanagaram Municipal Council, TMC = Tumkur Municipal Corporation. a The estimate includes both incremental water charges and truck terminal revenue. Note: Numbers in parenthesis are negative. Source: Karnataka Urban Infrastructure Development and Finance Corporation.

IV. A. Impact

OTHER ASSESSMENTS

78. Given the robust development of KUIDFC to manage more projects in addition to KUIDP, as well as the likely impact on non-income poverty reduction through the slum improvement schemes, the low-cost sanitation units and expansion of the self-help groups, the Project has had a significant impact on institutional development as well as unintended benefits. The Projects institutional development and other impacts are therefore assessed as substantial. 1. Impact on Institutions and Policy

79. In the opinion of state and national officials as well as the OEM, the Project has had a significant impact on government institutions and policy. Based largely on the experience in the Project, KUIDFC has graduated into an independent organization with adequate staff and authority and has established itself as a key agency for all externally aided projects in Karnataka (para. 20). Follow-on ADB projects such as KUDCEMP (footnote 17) and the North Karnataka Urban Sector Investment Program (footnote 13) have been modeled on KUIDP and have learned from its experience as well as other IUDPs, such as the Rajasthan Urban Infrastructure Development Project 21 and others in Madhya Pradesh and Kolkata.

21

ADB. 1998. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to India for the Rajasthan Urban Infrastructure Development Project. Manila.

22

2.

Socioeconomic Impact

80. The socioeconomic impact of the Project has been significant. The physical improvements in water supply, sanitation through water-borne sewerage and low-cost sanitation units in low-income areas, better storm water drainage and some internal roads, and improved solid waste collection and disposal have had an effect on all or almost all of the inhabitants of the project towns. Certain components have had an additional and very important impact on the lives of poor women, most of whom resided in slums. Under the Projects poverty alleviation component, the community development program empowered low-income communities by enabling them to extend the reach of the existing services, thereby making the Project more useful and effective. The objectives of the community development program were to (i) increase awareness among below the poverty line about issues related to health and education etc., (ii) increase community participation in the execution and sustainability of project components, and (iii) increase opportunities for self-employment through the provision of skill-based training and financial assistance from formal and non-formal financial institutions. Under the poverty alleviation component, KUIDP covered 23,324 families below the poverty line. Due to the popularity of the low-cost sanitation compost toilets, they are now being included in follow-on projects. Slum upgrading schemes have imparted increased wealth to low-income land owners in the form of higher land prices. 81. The initiation of federations of self-help groups in slums through the help of NGOs has been a considerable benefit to poor women living in slums (Table 8). They were able to save some money, obtain small loans from the group for income-generating activities, improve their life style and become more independent. The impact of the Projects self-help groups was expanded under the follow-on KUDCEMP. Table 8: Comparison of Self-Help Groups in Two Projects
Description Number of families benefited Number of womens self-help groups formed Savings made by self-help group members Amount disbursed among members as internal lending Low-cost sanitation units constructed Number of young people provided with skill training Number of young people provided with computer skills Number of young people covered under livelihood advancement training Number of trained young people provided with job opportunities Project Cost KUIDP 23,000 722 Rs15 million Rs56 million 16,154 2,830 2,050 520 127 $0.5 million KUDCEMP (ongoing) 28,000 2,400 Rs32 million Rs129 million 6,000 3,403 1,200 530 184 $1.09 million

Source: Karnataka Urban Infrastructure Development and Finance Corporation.

3.

Environmental Impact

82. The Project was categorized under environmental category B. According to the benefit monitoring and evaluation report, there were definite perceived improvements in water supply in terms of quality, quantity and reliability of supply. The sewerage, drainage and low-cost sanitation components have significantly improved sanitary conditions in the towns, particularly in the project slum areas. Although all the landfill sites, the composting plant, and the STPs obtained the requisite permission from the State Pollution Control Board, their operation, which

23

has been sub-optimal, required a second stage of approvals from the Pollution Control Board, which were not obtained at the time of the OEM. KUIFDC reported in October 2007 that the required approvals had since been obtained. 83. Since the original plan of the outer ring road abutted a lake, an initial environmental examination was carried out and identified the requirement for an environmental impact assessment. Subsequently, the impact assessment established substantial environmental impacts and recommended a change of alignment to bypass the lake. The alignment of the road was therefore changed, requiring additional land acquisition of about 4 km. 84. Land was acquired following government land acquisition procedures and ADB guidelines. A resettlement plan was prepared and approved by ADB. According to the sociocultural and environmental assessment report, inquiries with the Project Authorities and project affected persons revealed that the whole process of acquiring land and paying compensation took very little time. The affected people were happy that they got the compensation within a very short period unlike other projects. Vulnerable groups such as scheduled castes, scheduled tribes and women-headed households were treated the same as others and this did not seem to cause problems. B. Asian Development Bank Performance

85. The loan was declared effective in July 1996. ADB regularly undertook review missions and closely monitored the progress of the Project, providing useful advice in several areas. It facilitated discussions with KUIDFC and the state Government to assist in faster disbursements. ADB delegated project administration to the resident mission in January 1996. In addition to regular ADB review missions, the Project was reviewed at bilateral review meetings at ADB as well as at tripartite portfolio review meetings of the Ministry of Finance in which ADB, the Department of Economic Affairs and KUIDFC participated. KUIDFC and the Department of Economic Affairs found the bilateral and tripartite review meetings very useful in addressing constraints. EA staff participated in various training courses and workshops organized by ADB. Overall the performance of ADB was satisfactory. C. Borrower Performance

86. India, the borrower represented by the Department of Economic Affairs, conducted regular tripartite meetings and reviews involving KUIDFC and ADB. These reviews helped to identify bottlenecks and were used to monitor the Projects progress in relation to the targets for disbursement and contract awards. KUIDFC was designated as the agency to implement the works. KUIDFC established an effective field-level monitoring and implementing mechanism by establishing independent PIUs in all the project towns. This helped in interagency coordination, monitoring and progress reporting from the field. KUIDFC has now established itself as a key agency for all externally aided projects in the state, with active support and continuous engagement by ADB. The overall performance of KUIDFC can therefore be rated satisfactory. D. Technical Assistance

87. The PPTA was of too short a duration and, as a consequence, did not sufficiently gauge demands for the many components it proposed. It also identified several demands that made the project unnecessarily complex. However, the problem lies not with the consultants but rather with the nature of ADBs identification of projects in India, which is discussed below (para. 89).

24

V. A. Issues

ISSUES, LESSONS AND FOLLOW-UP ACTIONS

88. Project Complexity. The inherent complexity of IUDPs must be kept in mind when drafting TA papers, during PPTA missions, and in determining project duration. When designing IUDPs in India, it must be remembered that the construction sector remains largely labor intensive, continues to use outdated equipment and methods, is often under-financed, is unfamiliar with urban development projects, and rarely brings a project in on time. 89. Operation and Maintenance. Effective O&M, along with adequate financing, is essential for project sustainability. O&M in the Project varied depending on the component and the size of the town. The fact that water and sewage systems had been handed back to KUWSDB in Ramanagaram and Channapatna and were to be handed back in Tumkur should improve O&M and tariff collections in those towns. Adequate funds and trained personnel must therefore be provided for O&M during project design such that, if necessary, it can be outsourced to private companies. Where this was done in KUIDP, O&M operations were highly effective; where it was not done, the lack of proper O&M was obvious. Given the precarious nature of ULB finances, funding for O&M cannot be left to projected increases in their finances. 90. Sustainable Cost Recovery. Increases in local tariffs and initiation of charges for sewerage are politically charged. This should be taken into account in the financial design of future projects. Most ULBs are not capable of increasing tariffs (e.g., 13% per year in the Project) to service subproject debt, even though the 74th Constitutional Amendment provides for financial decentralization to ULBs. This is no excuse for absolving them of repayment or allowing them to remain in arrears. The Karnataka Department of Municipal Administration was introducing a fund-based accounting system, comprising double entry accounting, for all ULBs in the state. This, along with property tax reforms introduced in the state in 2002, should significantly improve the finances of most of the project towns. Hence, future projects should plan for more disciplined cost recovery from ULBs, including penalties for arrears, and not assume the state will repay the difference, or even the total loan, as in the Project. 91. IUDP versus Housing Finance. Another complexity of the Project was the addition of a $20 million loan for housing finance. Originally meant for occupants of the residential sites and services schemes, the housing loans had to be reprogrammed because the schemes were not finished on time, and were still not occupied at the time of the OEM. In the event, loans were made to households in low-income groups (50%) and middle-income groups (50%) throughout the state by the HDFC Bangalore branch office. Hence, there was no link between the two loans as originally planned. However, even if the schemes had been allocated and occupied, the occupants would still have needed to meet HDFC criteria to receive loans. The HDFC branch manager estimated that not more than 10% of the occupants would have qualified. It seems that the lesson in trying to combine a single sector finance loan with a multi-sector investment loan has been learned, since this has not been tried in subsequent projects. 92. Project Objective versus Design. The counter magnet concept was not realistic at the time. If such an objective were to be achieved, project components such as major transportation and communication links, perhaps limited to Mysore and Tumkur, would have been necessary. Hence, for future IUDPs, project objectives should be consistent with actual project design, such as improving the overall quality of life of urban households, with a focus on the urban poor.

25

B.

Lessons

93. Project Design. Project preparation and design for complicated, multisector, multi-town projects such as KUIDP should be allotted adequate time to do the necessary technical, financial, socioeconomic and institutional analysis so that ultimate project implementation and evaluation closely resemble original project objectives, outputs and financial projections. Time needs also to be taken to build consensus within ULBs on the importance of O&M of assets. This is especially the case when a central government decides on the allocation of foreign loans to states, and where the intra-state demand for a particular loan-based project or for some preconceived components may not be strong at the start of the PPTA. 94. Bridging TA. Since PPTAs in situations such as those occurring in India need to do much identification work, and are not generally given the time and resources to include detailed design and procurement, ADB should consider granting bridging TAs, or alternatively approving TA loans, so that when an investment loan becomes effective, subcomponents can be tendered and civil works can start within the first year. 95. Implementation Support. Given the numerous problems with consultants and contractors, partly due to procurement and safeguard arrangements promoted by ADB that are very different to government requirements, there is a need for much hands-on support in a project that involves many agencies and small towns that have not previously been involved with ADB. Since KUIFDC was being set up at the same time, constant ADB project administration support is required. 96. Institutional Development and Training. Institutional development and training should be given equal priority with development of physical components. This has been done to a great extent in the Project, enabling KUIDFC itself to undertake the design of the North Karnataka Urban Sector Investment Program, with KUIDFC supplying the project concept and details while ADB prepares only the RRP. 97. ULB Capabilities. The capabilities of ULBs acting as implementing agencies need to be investigated in more detail, especially in small ULBs such as Ramanagaram and Channapatna, so that KUIDFC (or any other PMU) will not have to implement the work on their behalf or turn the civil works over to a specialized agency such as KUWSDB for O&M and tariff collections. An extensive program of capacity development needs to precede and accompany physical investments in small towns, especially when these are expected to be operated on a cost recovery basis. 98. Civil Works and Equipment versus Services. The ultimate focus should be on the provision of affordable services and the cost recovery thereof, not just the provision of civil works and equipment. Least-cost analysis should identify the type of technical solution that would provide the service at the lowest cost for the project as well as the beneficiary. Performance-based private sector participation schemes should be pursued, and service provision emphasized. It can be questioned whether expensive water-borne sewerage (versus the proven double vault compost low-cost sanitation units) was necessary in small towns such as Ramanagaram and Channapatna. 99. Beneficiary Involvement. The ULBs and their clienteles should be involved in the design of all project components, especially water, sewer and drainage components. Design and implementation according to beneficiaries felt needs generally leads to better post-project

26

cost recovery. Involvement of NGOs leads to good results, particularly in identifying needs regarding slum upgrading and low-cost sanitation components. 100. Replicability. Components should be designed so that they can be replicated in other IUDPs. The Project has been successful in this with regard to water supply, internal roads and drainage, slum upgrading and low-cost sanitation. It has been less successful in STPs, truck terminals, municipal buildings, and residential sites and services schemes. C. Follow-Up Actions

101. Since the loan account is closed, all disbursements have been made and civil works are completed, major follow-up actions include (i) ensuring effective O&M for all project facilities, especially the STPs; and (ii) monitoring the implementation of the ULB management action plans so that the project ULBs become more financially self-sustaining.

Appendix 1

27

ACHIEVEMENT OF PROJECT OUTPUTS A. Part A: Environmental Sanitation: Water Supply, Sewerage, Solid Waste Management and Storm Water Drainage 1. Mysore

1. The environmental sanitation program in Mysore included (i) a water supply covering a new intake, a water treatment plant, water supply mains and extensions to the distribution system; (ii) sewerage systems covering construction of three treatment plants with accompanying trunk sewer systems, coupled with an expanded collection system to intercept flows from the existing sewer systems; (iii) solid waste management covering community bins and a composting plant; (iv) improvements to the storm water drainage system; (v) ancillary works for providing electricity to the water and sewerage facilities; and (vi) improvement and rehabilitation of two urban lakes. 2. The water supply improvement program comprised a new water supply system that is designed for an initial supply of 50 million liters (mld) a day, adequate to meet estimated demand up to 2011 and capable of being upgraded to 150 mld to meet estimated demand in 2026 without additional civil works. The augmentation works were divided into four main and a few small contract packages. 3. The sewage system programs included construction of trunk sewers and sewage treatment plants (STPs) for three drainage districts (Districts A and D, B, and C) and included making connections to existing lateral sewers that drained into the trunk sewer systems. This work was augmented by further extensions of the collection system to pick up existing outfalls into the storm drainage system. All systems were designed with an initial installed capacity to meet forecast demand up to 2011. They were intended to be expanded easily to meet the ultimate design capacity for 2026 through incremental expansions of the mechanical equipment and some of the civil works. The works were divided into seven main contract packages and a few small packages and have since been completed. 4. The solid waste management program was divided into two packages. The contract for construction of 211 community bins was completed, including an extension to provide additional bins in response to public demand. The contract for construction of a 200 ton per day composting plant under build-operate transfer conditions was commissioned but was no longer in operation at the time of the evaluation mission due to a dispute between the company and the Mysore City Corporation (MCC). Two years later, the Karnataka Urban Infrastructure Development and Finance Corporation (KUIDFC) reported that MCC had taken over operation of the plant, although it ran only during the day. 5. Under the storm water drainage program, drainage master plans were prepared and priority drainage improvement works were identified. Based on the recommendations of the drainage master plan, one contract for drainage system improvements and upgrading was awarded and work completed. 2. Tumkur

6. This component covered (i) water supply and extension and augmentation of existing distribution systems; (ii) sewerage, construction of new underground sewage systems and STPs; and (iii) improved facilities for solid waste management and development of a new disposal site.

28

Appendix 1

Storm water drainage improvements, based on drainage master plans prepared under the Project, were combined with the upgrading of municipal roads. 7. Development of the water supply system included improvements and upgrading of the existing water distribution system of 128 kilometers (km), and construction of a reservoir at the old water treatment plant site. A single contract was awarded and work was completed. 8. The sewerage program includes construction of a new sewage system together with an STP to serve the core area of the town and key residential areas. The work was divided into four contract packages covering (i) construction of a sewer system for Districts 5 and 6B (65 km); (ii) construction of a sewer system for Districts 6A, 7 and 9 (85 km); (iii) construction of a sewer system for District 10 and outfall (40 km); and (iv) construction of an STP and pump stations (24.57 mld). Work was completed. 9. The solid waste management program comprised improvements to the operational efficiencies and development of a new solid waste disposal site. A single contract was awarded for construction of the disposal site and the work was completed. 3. Ramanagaram and Channapatna

10. This component included (i) water supply covering development of a new water treatment plant, supply system and reservoirs to serve Ramanagaram and Channapatna, plus extensions to the existing water distribution systems; (ii) sewage systems covering construction of a new sewer system and treatment plant for Ramanagaram; (iii) improvements to the solid waste management facilities and development of a new disposal system for each town; and (iv) ancillary works for providing electricity to the water and sewer facilities. All the works have been completed. However, the STP has not yet been commissioned due to the absence of a flow of sewage. A separate program for providing sewer line connections and water connections, including fixing water meters, was launched in the final quarter of 2003. The work was not completed at the time of the Operations Evaluation Mission (OEM). However, KUIDFC and the Government have promised to continue the work and ensure flow to the STP and commissioning of the same. 11. A new combined water supply system was designed to service Ramanagaram and Channapatna with an initial supply of 15 mld, which is adequate to meet projected demand up to 2011, and capable of being upgraded to 25 mld to meet expected demand in 2026 without additional civil works. The works were divided into five contract packages and these have since been completed, as follows: (i) construction of intake works and a water treatment plant (15 mld); (ii) construction of a clear-water supply main (45 km); (iii) construction of intermediate pump stations and reservoirs; (iv) construction of the Channapatna distribution system (66.6 km); and (v) construction of the Ramanagaram distribution system (63 km, under a single contract with the sewer system). 12. For Ramanagaram, improvements and extensions to the existing sewer system and construction of a new STP were undertaken, including extending the sewer system works to cover a broader area within the town. The work for Ramanagaram was divided into two contract packages that included (i) construction of the Ramanagaram sewer system (51 km, under a single contract with the water system works); and (ii) construction of an STP and pump stations for Ramanagaram (7.56 mld). The action for providing house connections was also initiated and work was in progress at the time of the OEM.

Appendix 1

29

13. The solid waste management programs for Channapatna and Ramanagaram comprised improvements to the operational efficiencies in both towns, and development of new disposal sites. A single contract was awarded for construction of a joint disposal site, which has been completed. 4. Karnataka Urban Infrastructure Development and Finance Corporation

14. Because of the similar needs in each of the Project towns, KUIDFC acted as the coordinating agency for procuring the solid waste management equipment. Four contracts were awarded under international competitive bidding procedures for major equipment, including garbage collection vehicles, dumper placer hoists and containers, loader backhoes and tractors and trailers. One local purchase contract was awarded for procurement of locally manufactured equipment such as tricycles and hand pushcarts. All supply is complete, and the equipment has been delivered to each municipality as follows. (i) Six-ton dumper placer vehicles with hydraulic hoists and containers: (a) Mysore has six trucks and 36 containers; (b) Ramanagaram has one truck and 10 containers; (c) Channapatna has one truck and 10 containers; and (d) Tumkur has one truck and 10 containers. Three-ton tipper trucks: Mysore has eight and Ramanagaram and Channapatna have one each. Tractors and trailers: Mysore has nine sets of tractor/trailers plus one tractor with a levelling attachment while Ramanagaram has one tractor with a levelling attachment. Loader backhoes: Mysore and Tumkur have one each. Minor solid waste management equipment was distributed to all four towns. Additional equipment for the composting plant at Mysore was procured under a separate equipment procurement package.

(ii) (iii)

(iv) (v) (vi)

B.

Part B: Roads, Bridges, Truck Terminals and Bus Stands 1. Mysore

15. This component included six contracts covering (i) upgrading and improvement of Mysore city roads (48 roads for 58 km), (ii) widening and strengthening of the Mysore intermediate ring road (19 km), and (iii) construction of two city bus terminals. The work was carried out only on one bus terminal as the land for the other could not be acquired. Two contracts for the outer ring road and truck terminal were awarded, but during execution the work on the truck terminal was removed from the scope because it was found that the potential for the truck terminal to be used was insufficient. In lieu of this, a western portion of the ring road was taken up. The work has since been completed. One contract for construction of an underpass on the outer ring road was awarded by the Ministry of Railways. The work on three of four underpasses is complete, while work continues on one underpass. 2. Tumkur

16. This component originally included four contracts covering (i) construction of municipal roads and drains (18 roads for 24 km), (ii) construction of the southern bypass road (10.5 km), (iii) construction of the Tumkur truck terminal (22 acres); and (iv) construction of a railway crossing for the southern bypass. An additional package for the improvement of road works was

30

Appendix 1

envisaged and awarded. The start of this package was delayed by about 4 months due to intervention by the High Court as the awarding of work was challenged by one of the bidders. 3. Ramanagaram and Channapatna

17. This component included five contracts covering (i) improvement of municipal roads and drains for Ramanagaram (23 km), (ii) widening and strengthening of the Bangalore-Mysore highway 17 at Ramanagaram and Channapatna (9 km), (iii) construction of a new two-lane bridge on highway 17 at Ramanagaram, (iv) construction of a new bus terminal at Ramanagaram (2.11 acres), and (v) improvement of municipal roads and drains for Channapatna (29 km). An additional package for the improvement of road works was envisaged and awarded. The start of this package was delayed by about 4 months due to intervention by the High Court as the awarding of work was challenged by one of the bidders. Consequently the work is continuing. 4. Mandya and Maddur

18. This component included three contracts covering (i) improvement of municipal roads and allied works in Mandya (30 km), (ii) improvement of municipal roads and allied works in Maddur (12 km), and (iii) improvement of storm water drains in Mandya. All the works have been completed. C. Part C: Poverty Reduction: Slum Upgrading, Low-cost Sanitation, Residential Sites and Services, Cultural Center and Womens Training Center 1. Slum Upgrading

19. Slum areas were taken up for provision and upgrading of basic urban services such as water supply, sanitation, roads, drains, solid waste disposal facilities and street lighting, as well as social facilities such as public toilets, community centers and anganwadis (social welfare workers), where applicable. All facilities included in the programs were identified by the consultants, municipalities and implementing agencies with the full participation of the communities, using local nongovernment organizations (NGOs) and community-based organizations as key facilitators. Six contracts were awarded for (i) work in seven Channapatna slum areas, (ii) two slum areas in Tumkur, (iii) eight slum areas in Mysore under Phase I, (iv) four slum areas in Tumkur, (v) six slum areas in Ramanagaram, (vi) a slum improvement contract covering six slums in Mysore for Phase II, and (vii) slum improvement works at Mandya and Maddur. Additionally, two contracts were awarded for improvement of a low-income area, Gousianagar, in Mysore. Work on all these packages has been completed. 2. Low-Cost Sanitation

20. The project included a provision for about 23,700 low-cost sanitation units for lowincome houses in the four project towns and provided for a strong role for local NGOs to participate in the beneficiary identification and community participation aspects of the program. A particular emphasis was placed on using NGOs to motivate and educate women beneficiaries in the proper use of the facilities.

Appendix 1

31

3.

Residential Sites and Services

21. The Project included provision for developing a total area of about 252 hectares of land for residential purposes with roads, water supply, drainage and sanitation facilities in the four project towns. At least 60% of the developed sites were to be allocated to low-income groups at affordable prices and the balance to middle-income groups. Four contracts were awarded including (i) 3,800 sites at Mysore, with work completed and plots sold; (ii) 1,831 sites at Tumkur, with work abandoned and the contract closed because land was not available after an initial expenditure of Rs1.75 million; (iii) 935 sites at Ramanagaram, with work was completed; and (iv) 931 sites at Channapatna, with work was completed. Ancillary works for providing electricity to Mysore, Ramanagaram and Channapatna sites were also scheduled to be taken up under separate contract packages. Of these, only one package for Mysore was tendered, but this had to be terminated as the contractor did not mobilize. In Ramanagaram and Channapatna, it was decided to drop the works from the Project. The electrical services for Tumkur residential sites and services were also included under the original scope of the Project. However, following decisions by the High Court and the Empowered Committee of the Project, this contract was excluded from the Project. 4. Cultural and Commercial Center, Womens Training Center and Municipal Building

22. A cultural and commercial center was constructed at Ramanagaram and a womens training centre was constructed at Tumkur. Both works are complete and have been handed over to the municipalities. Subsequently, a contract for construction of a municipal building at Maddur was also awarded and works were completed. D. Part D: Development of Industrial Sites and Services

23. Ramanagaram and Tumkur. A total of 80 hectares of land was taken up for the industrial sites and services at Tumkur. Work has been completed on this component. A similar program for an industrial sites and services complex for Ramanagaram was cancelled and dropped from the Project due to unavailability of land.

32

Appendix 2

SELF-HELP GROUPS IN THE KARNATAKA URBAN INFRASTRUCTURE DEVELOPMENT PROJECT 1. This appendix evaluates the self-help groups and their federations, as facilitated under the Project. It is based on a case study report that relied on field visits by a consultant to the project towns in Karnataka during August and September 2005. 1 2. The concept of self-help groups has operated in India over the past two decades, predominantly applied in rural areas. Initiatives by nongovernment organizations (NGOs), policy decisions of the Government, attention from donor agencies and support from the National Agricultural Bank for Rural Development assisted the self-help group movement to take off. This study assesses that the credit for introducing the concept in urban slums of Karnataka goes to the Karnataka Urban Infrastructure Development Project (KUIDP). The Project began helping to form self-help groups from October 1999 to December 2000, and greatly expanded its efforts in a second phase from July 2002. Unfortunately, the second phase lasted only 18 months, as the project closed by mid-2004. Nevertheless, within these two short periods, 722 self-help groups were initiated and supported by the Project. The number had risen to 836 by the end of June 2005, when the case study started. This was a considerable achievement given the short time that the Project had pursued the formation of such groups. 3. The self-help group program covered 23,324 families living below the poverty line. This constituted 40% of all families below the poverty line in urban areas of the Project. Establishment of the groups was envisaged under the womens development and empowerment component of the Projects community development program. This would be the instrument to provide women with collective access to services of different governmental programs and schemes that were hitherto usually denied them as individuals. Although self-help groups were originally viewed as a minor component of the community development program, they gained so much momentum that they were eventually used to launch many of the awareness and skills training programs under the community development program. The groups presented forums that were highly effective in reaching the overall communities. However, they were unfortunately not involved in the slum improvement program because of certain limitations within the Project structure. Integrating community development activities with infrastructure provision effectively proved difficult. 4. The self-help groups were given an option of accessing credit through (i) internal lending from within the groups, (ii) the formal banking system, and (iii) financial agencies other than banks, such as NGOs, federations or microfinance agencies set up by NGOs. Half of the groups formed under the Project obtained loans from banks. An indication of the quantity of collective funds being transacted is that a well-functioning self-help group with 15 women members would have a sum of Rs50,000 at its disposal within 3 years. NGOs often played the role of a bank by providing credit to the women. Some NGOs handed over the groups to lending agencies after some time. However, this study does not consider such handovers as beneficial. In the long run, it may disadvantage poor women and lead to disempowerment of the groups. Many banks, outside of the program initiatives that are run by different individuals and NGOs, were luring self-help groups with easy money for a variety of purposes, which have had the effect of breaking up some of the groups formed under the Project.
1

This appendix is largely a copy of the executive summary in: Sitaram, S. 2005. Promoting Urban Social Development through Self Help Groups in Karnataka. A report to the Operations Evaluation Department, ADB. Mysore. Available: http://www.adb.org/Documents/Evaluation/PPER/Karnataka-Urban-Infrastructure-Development Project/default.asp.

Appendix 2

33

5. Membership of the groups has contributed to significant changes in the lives of women in the six towns. The most important has been the escape from a reliance on moneylenders who were charging exorbitant rates of interest. The interests on loans have reduced from 120% per annum to 24%. Due to exposure to programs of entrepreneurial development and availability of credit facilities, many of the women and their families have now ventured into pursuing income generation activities. This has allowed for an increase in the household income which has resulted in changing the consumption pattern, thereby improving the quality of life. Families are able to address their basic needs better than before. 6. Participation in the self-help group movement is judged to have been an empowering and liberating experience for many of the poor women. The strongest impact has been in terms of self-esteem and increased social mobility as many women of urban slums had never been involved in such a program before. Interactions with other women have resulted in building congenial relationships and have reduced conflicts. It also had the effect of spreading the selfhelp group movement. Since women are exposed to more programs, such as health programs, their level of awareness has increased. Changes in decision-making patterns are setting in, although the program is not a panacea: most women continue to be excluded from many major decisions that concern their households and their lives. 7. The common belief was that participation in a self-help group would build leadership qualities among women, thereby building their capacities to participate in larger political bodies such as local governments. However, severe constraints on poor womens participation in local bodies persist, such as lack of family support. There were exceptions: one NGO in Mysore fielded many successful candidates to the local body elections. The reason for their success may lie in the NGOs long-term intervention in urban slums and emphasis on advocacy. 8. Even though the self-help groups are not operating in the political arena, many create pressure on urban local bodies (ULBs), for instance to ensure drinking water supply, clean roads and drainage systems, installation of community taps, and the removal of liquor shops located in the slums. 9. With the completion of the Project, most of the groups have continued but a few have disintegrated. There have been no comprehensive evaluations of the self-help groups (this case study only met a selection of the groups). Attempts by the NGOs and by the Karnataka Urban Infrastructure Development and Finance Corporation (KUIDFC) looked only at the financial status of the groups. The criteria used have varied and data recording and presentation have not been systematic. A. Federation of Self-Help Groups

10. Most of the self-help groups were only recently created when KUIDFC decided to federate the various groups in March 2004, in order to increase their chances of survival in the long run. A three-tiered structure of federations was envisaged with 15 to 20 groups of an area forming the cluster level federation and these in turn forming a town level federation. NGO representatives contacted for the evaluation are of the opinion that the time given for selfhelp groups to mature before federating them has been insufficient. The NGOs feel that the federation concept was not fully appropriate. They would have preferred to draw on their own experiences and processes.

34

Appendix 2

11. The results of the federation of the self-help groups have been mixed across the six towns. The problem seems to be one of internalizing the concept which is new, and of mobilizing resources. A few of the experiments have resulted in disintegration as groups resented handing over a revolving fund of Rs5,000 to the kitty of the federation. 12. The question is whether the self-help groups will survive the absence of support by the Project in the longer run. The Project has attempted to hand over the responsibility for the groups to the Directorate of Municipal Administration, as the operational cost of maintaining groups was high. But local authorities claimed they were not equipped to take charge of the groups. KUIDFC in practice covered all the families below the poverty line, even those who were not listed in the survey conducted by the Directorate of Municipal Administration. The Directorate may not agree to extend support to groups with families that are not on the list. 13. Although local governments and various departments of the state of Karnataka implement programs for the urban poor and assist existing self-help groups in various ways, there are several constraints to the progress of these programs. Inputs for group solidarity, group affinity and the like have been very limited. Urban poverty alleviation programs such as the Urban Stree Sakthi and the Swarna Jayanthi Shahari Rojagar Yogana emphasize womens development and empowerment by forming self-help groups, but suffer from delays, slow release of funds and slow pace of work. Furthermore, they form such groups only with the aim of addressing the needs specified by the schemes and not with the concept of sustaining the groups or strengthening the community. With the spurt of Urban Stree Sakthi groups, a few of the groups formed under the Project have disintegrated due to frictions within the small community of a slum. This is unfortunate: there should have been convergence between the different self-help groups instead of conflicting interests. Lastly, the role of elected representatives has been mixed. They may help NGOs in establishing rapport with the community. However, their focus has been on getting political mileage from being visible during the functions and meetings of the groups. There have even been some instances where the local administration has obstructed self-help groups. B. Impact

14. The Project looked at self-help groups as a tool that would achieve the twin objectives of poverty alleviation and womens empowerment. Unfortunately, the post-project evaluation efforts did not conduct a survey to establish whether the women of the groups and their families have moved out of poverty. Neither did the project performance evaluation report for which this case study was conducted. Whether poor women can exit poverty only by participating in microfinance programs is debatable. Undoubtedly, self-help groups have not enabled many poor women and families to move out of poverty, especially in an urban area where all daily commodities need to be purchased and the effects of inflation are felt more acutely. 15. It was found that access to microfinance did not always lead to womens control over the funds obtained. Women members of self-help groups often accessed loans to invest in family business that was usually run by a male member of the family. This fits the Indian ethos of family being the main social unit. In future programs, gender concepts should be absorbed so that women are not overtly burdened. A few cases were heard where the male member of a family had a tendency to withdraw his contribution to the household when there was an increase in the womans income. Slowly, credit facilities of self-help groups seem to have become a source of borrowing for men. The amounts are invested in businesses by men who do not always share the information on profits and losses with the women. A change in attitude needs to be fostered; otherwise womens would have less opportunity to learn.

Appendix 2

35

16. One way of reducing the excessive burden of women inside and outside the household would be to start self-help groups for men. However, the practice so far is to avoid forming such groups. Their non-cohesiveness, and difference in work timings, are put forth to explain this. However, as part of an experiment conducted by the Project, the NGO at Maddur facilitated the formation of three groups for men. This had increased to 10 by the time of the case study. The self-help groups of men even became a part of the (female-dominated) federation at Maddur. 17. With the closure of the Project in 2004, the NGOs and the self-help groups have suffered a setback. The groups that were started during the second phase of the Project were barely 2 years old. A few of the NGOs continue to support the groups but in a minimal way, in order to ensure that their earlier efforts are not lost. In effect, the federations of self-help groups should have performed these roles, but the federations did not take off in all the towns. 18. The self-help group movement has brought certain changes in the lives of the women. It has allowed poor women to move from their earlier position of silence to one of gaining voice, reduced their fatalism, improved their living standards, and increased their collective bargaining powers. However, self-help groups cannot be taken as the answer to solve all the problems related to poverty alleviation. 19. Self-help groups provide women with abilities to survive in the worst situations. Whether they can become sustainable institutions depends not only on their ability to survive, but also on the ability to grow with the changing context. An increase in income without any subsequent increase in access and control of resources, status and quality of life would restrict the process of empowerment of women. Although microfinance programs often target women and although women use microfinance, there has been nothing specific that was designed to address genderspecific aspects of the use of financial services. No concrete ways were devised that could meet the distinct demands of poor women for savings services. Nevertheless, for the 12,000 women in the slums, this development is judged to have been a boon.

36

Appendix 3

SUMMARY OF BENEFIT MONITORING AND EVALUATION INDICATORS AND RESULTS


Mysore Item General (in % unless indicated) Awareness about the project Project is beneficial Improvements in neighborhood Water Supply Access to piped water supply Poor pressure in water supply Acceptable water quality Distribution from public water point (meters) Sewerage Satisfaction with sewage disposal system Storm Water Drainage SW drains regularly maintained Adequate drainage in vicinity Solid Waste Management Distance to nearest bin (meters) Improvements as a result of project Roads Improvements Improvements in roads from project Has road improvement been beneficial Slum Improvement Works Rating for water supply Rating for access to toilets Rating for waste disposal Rating for internal roads Rating for storm water drainage Rating for community buildings 18.79 16.67 16.55 16.87 16.87 13.98 61.60 52.43 47.05 52.56 48.79 40.38 24.13 15.88 19.88 19.77 21.98 16.74 44.26 26.76 35.22 37.08 39.35 36.24 19.62 16.38 18.87 18.18 18.69 15.30 49.95 40.50 45.10 47.46 48.58 40.35 25.80 19.22 21.38 24.96 20.88 20.96 57.56 46.46 45.04 48.46 48.16 54.20 18.97 19.15 47.51 39.88 6.67 8.23 75.22 63.18 7.55 06.13 70.86 60.56 2.33 3.91 26.72 25.65 122 11.22 79 42.47 14 0.54 32 68.54 98 7.54 29 1.19 62 0.22 18 18.59 46.70 60.41 42.87 55.70 15.98 37.22 78.88 62.65 12.21 30.58 73.30 42.76 21.21 30.60 67.83 90.71 86.42 90.01 07.63 68.75 05.22 90.49 08.81 56.58 63.05 6.86 90.02 128.21 87.45 4.07 98.38 109.04 17.44 44.93 57.91 91.79 56.72 12.99 87.01 26.58 24.87 33.72 71.15 91.01 44.33 4.67 98.44 28.52 35.00 14.10 83.15 77.11 61.66 3.48 92.90 28.01 04.98 79.85 50.50 68.62 96.19 49.28 3.76 88.47 03.76 74.69 79.21 74.52 4.55 87.10 3.15 72.77 85.85 71.20 5.18 85.44 4.29 26.18 79.86 21.63 1999 2003 Channapatna 1999 2003 Ramanagaram 1999 2003 Tumkur 1999 2003

SW = Storm water. Source: Intervention. 2003. Final Survey BME Programme of KUIDP. Report and Summary of Findings. Bangalore.

Appendix 4

37

HOUSING DEVELOPMENT AND FINANCE CORPORATION LOAN TYPE AND DISTRIBUTION Table A4.1: Loans by Location
Area Rural Urban Total Number 2,858 4,653 7,511 Amount (Rs million) 233.95 567.00 790.95

Source: Housing Development and Finance Corporation, Bangalore.

Table A4.2: Loans by Employment and Status of Beneficiaries


Status Employed Housewife Pensioner Retired Self-employed Unemployed Others Total Number 6,368 364 20 33 137 11 578 7,511 Amount (Rs million) 637.62 35.40 3.63 4.56 24.11 1.04 84.59 790.95

Source: Housing Development and Finance Corporation, Bangalore.

Table A4.3: Distribution of Low-Income Group Loans by Income Ceiling and Period
Period December 1996December 1997 JanuaryDecember 1998 JanuaryDecember 1999 JanuaryDecember 2000 Total Income Level 4,500 4,950 5,700 5,800 No. of Beneficiaries 2,340 1,181 802 562 4,885

Source: Housing Development and Finance Corporation, Bangalore.

Table A4.4: Loans by Period


Period (Months) 060 6184 85120 121156 Above 157 Total No. of Beneficiaries 328 475 1,529 1,479 3,700 7,511 Amount (Rs million) 44.24 47.91 162.14 148.53 388.13 790.95

Source: Housing Development and Finance Corporation, Bangalore.

Table A4.5: Individual Loans by Amount


Amount (Rs) 125,000 25,001100,000 100,001200,000 200,001300,000 300,001500,000 500,0011,000,000 Over 1,000,000 Total Number 15 1,858 4,039 1,254 223 115 7 7,511 Amount (Rs million) 0.38 101.60 403.51 189.14 53.36 41.83 1.13 790.95

Source: Housing Development and Finance Corporation, Bangalore.

38

Appendix 4

Table A4.6: Rate of Interest of Loans


Interest Rate (%) Up to 12.50 12.5113.50 13.5114.50 14.5115.50 15.5116.50 16.5117.50 17.5118.50 Total Number 235 1,508 1,165 2,533 1,649 392 29 7,511 Amount (Rs million) 27.48 159.92 110.13 275.97 167.56 44.53 5.38 790.95

Source: Housing Development and Finance Corporation, Bangalore.

Appendix 5

39

FINANCIAL AND ECONOMIC ANALYSES OF KARNATAKA URBAN INFRASTRUCTURE DEVELOPMENT PROJECTS A. Analytical Scope

1. The scope of the financial and economic analysis is focused on the financial sustainability of urban investments in terms of the financial and economic benefits generated from the projects as well as the financial and fiscal capacity of the urban local bodies (ULBs) to service the project debts and ensure the sustainable provision of urban services. The financial analysis is limited to those revenue-generating projects that were appraised during the project preparation, such as water supply, residential sites and services and truck terminals. Economic analysis of new road projects is done based on the incremental increase in land value and resource savings generated by the investments. The economic and financial analysis was based on ADB Guidelines for Economic Analysis of Projects (1997), Guidelines for the Economic Analysis of Water Projects (1998) and Financial Management and Governance Guidelines for Investments by ADB. 2. During project preparation, analysis was done of (i) the financial viability of the water supply projects in Mysore, Channapatna and Ramanagaram; (ii) the truck terminal in Mysore; (iii) the residential and industrial sites and services in Channapatna, Ramanagaram and Tumkur; and (iv) the cultural and community center in Ramanagaram. They were reported to be financially viable. The estimates on financial internal rates of return (FIRR) vary from 15.5% in the case of the Mysore water supply project to 2.6% in the case of the cultural and community center in Ramanagaram. However, at the time of the project completion report (PCR) and project performance evaluation report (PPER), the truck terminal in Tumkur had not been occupied and was being converted to residential sites and services, while all the residential sites and services projects were either sold and not occupied (Mysore), completed but not sold (Channapatna and Ramanagaram), or were not completed. These subprojects are therefore not included in the financial analysis. Since the shops of the cultural and commercial center have also not been occupied, the financial analysis of this investment has not been undertaken. Hence, financial analysis for the PCR was carried out only for the water supply schemes in Channapatna, Mysore and Ramanagaram. B. Financial Analysis

3. The financial cash-flow statements include all base costs, including price and physical contingencies, interest during construction, and operation and maintenance (O&M) costs which include personnel, administrative overheads, electricity, chemicals and miscellaneous expenses. In the absence of project-specific O&M accounting, a nominal rate of 4% of capital cost was used to account for O&M. Since the project investments were completed by 2004, no physical contingencies and price fluctuations were included. Financial projections were done at 2005 constant prices over a period of 25 years with no salvage value assumed thereafter. 4. Incremental capital cost and operating expenses were used to estimate the cost stream. Incremental revenue from the subproject was estimated based on the water sold as per incremental and non-incremental water demand from existing and new consumers and connection charges. Since the Channapatna, Mysore and Ramanagaram water generation and main trunk transmission systems were designed for a larger capacity, it was assumed that the incremental demand for water up to 2011 would be met by these subprojects. As part of institutional reform, the Mysore Municipal Corporation revised the water tariff with effect from 1 January 2005 and initiated auditing and regularization of illegal connections. In addition, water

40

Appendix 5

distribution and revenue collection of the Channapatna and Ramanagaram water supply subproject was handed over to the Karnataka Urban Water Supply and Drainage Board in 2005. Water tariffs were revised by the two local governments from Rs45 to Rs100 per month per connection with effect from 2003. 5. While the report and recommendation of the President included the FIRR estimates of the subprojects, no estimates of the weighted average cost of capital were made. As a result, it is difficult to determine the cost of capital for discounting the net benefit streams as well as to compare the FIRRs to determine the financial viability of the subprojects. The financing plan (Table A5.1) shows that the weighted average cost of capital is 2.1% in real terms. Actual capital expenditure is some $8.62 million short of the estimated base cost, which is mainly attributed to the valuation of foreign exchange, delays in project implementation, and rescheduling of some of the investments. Table A5.1: Project Financing ($ million)
Local Currency Component FX Cost Cost Bank Loan to Government of India 32.08 44.3 Bank Loan to HDFC 20.00 Government of Karnataka 27.00 Contribution in Kind and Cash Total 32.08 91.3 a Weighted Average Cost of Capital (WACC) in Real Terms Total 76.38 20.00 27.00 123.38 % 61.91 16.21 21.88 100.00 Cost of Capital 4.90 8.40 8.40 6.20% 2.1%

GoI = Government of India, HDFC = Housing Development and Finance Corporation. a WACC = {(1+0.62)/(1+0.04)}-1, where the inflation rate is assumed as 4%. Sources: ADB. 2006. Project Completion Report for the Karnataka Urban Infrastructure Development Project in India. Manila; and ADB estimates.

6. The resulting FIRRs are shown in Table A5.2. The high capital investments and low service coverage are among the main reasons for the negative FIRR in Ramanagaram and Channapatna. Table A5.2: Results of Financial Internal Rates of Return Calculations (%)
Water Supply Subproject Mysore Water Supply Subproject Ramanagaram and Channapatna Water Supply Appraisal 15.5 7.6 PCR/PPER 4.3 (5.1)

( ) = negative, PCR = project completion report, PPER = project performance evaluation report. Note: Numbers in parenthesis are negative. Sources: Asian Development Bank (ADB). 2006. Project Completion Report for the Karnataka Urban Infrastructure Development Project in India. Manila; and ADB estimates.

7. The main reasons for the decrease in the FIRRs are the non-implementation of some of the important institutional and service cost-recovery measures assumed during appraisal. During appraisal, it was assumed the water tariff would increase annually at an average of 13% over the project period (251% in aggregate). The overseeing agency was expected to introduce a sewerage charge of 30% in 1999. The non-revenue water is assumed to reduce from 30% in 1995 to 20% by 2001. Almost all of these policy measures have not been implemented during the project period. In addition, some 40% to 45% of the connections in the project towns are illegal. Thus, during the latter part of 2004, the ULBs took steps to audit the illegal connections and initiated the process of regularization. Another reason for the poor financial viability of the

Appendix 5

41

Ramanagaram and Channapatna water supply project is the fixed monthly tariff structure and the low collection in relation to water demand. In comparison, the Mysore Municipal Corporation has initiated a special drive to collect water charge arrears, These efforts have recently shown positive results. The cost recovery in Ramanagaram and Channapatna has also increased after management of the system was handed to the Karnataka Urban Water Supply and Drainage Board. C. Economic Analysis

8. Economic analysis of the project components has been conducted at 2005 prices. Economic costs are calculated from the actual financial costs and include base costs but not any transfer payments such as taxes and custom duties. Economic costs are valued in domestic numeraire. Appropriate shadow pricing has been applied for tradable materials and unskilled labor to estimate their economic values. The tradable component of the capital costs and O&M costs are valued at a shadow exchange rate factor of 1.11 (0.9 of the standard conversion factor), taking into consideration no foreign exchange fluctuation. The standard conversion factor of 0.9 was used to convert financial estimates to economic terms. In the economic analysis of the water supply subprojects, the opportunity cost of water estimated during the project preparation, Rs.0.35 per cubic meter (m3), was used. The total economic cost of the Project includes economic base and O&M costs as well as the opportunity cost of water. 9. Quantifiable benefits of improved water supply include non-incremental water consumption valued at the current average supply price of water from non-piped sources of Rs.2/m3 to Rs.15/m3, and the incremental consumption valued at the demand price of water of Rs.5/m3. 1 A moderate increase in willingness to pay was assumed until the Project meets the design capacity. 10. Economic analyses of Mysores outer ring road and Tumkurs southern bypass road have been carried out based on increases in incremental land values adjacent to the road discounted for estimates of increases in land values due to the natural growth of the cities. The main purpose of the new roads is to open up the new areas for development, thereby decongesting the city centers as well as to develop the urban fringes. In both projects, the immediate impact area has been taken as 250 meters on either side of the road corridor. Conservative assumptions have been used to determine the impact area, directly benefited population and the incremental growth in land value. 11. No economic analysis was made for the investments in the rehabilitation and minor improvements to the existing road systems, mainly because no significant quantifiable incremental benefits were generated by these subprojects. Similarly, economic analysis of the solid waste management and sewerage subprojects were not carried out, as it was impossible to quantity the intangible benefits from the solid waste management and sanitation projects with limited spatial coverage. 12. Major indicators of the economic analysis, including sensitivity indicators, are summarized in Table A5.3. The Mysore water supply project, as well as the ring road projects, generate substantial economic benefits. As compared to the water supply projects, economic

The economic benefit from the incremental demand for water is based on willingness to pay analysis conducted by the project preparation team. The average willingness to pay of Rs5/m3 is used as the demand price of water. It is assumed the demand price will increase at the rate of household income growth, assumed to be 2% per year, and incremental connections will be provided until 2011.

42

Appendix 5

returns of the new road projects are not significantly affected by changes in the O&M cost and marginal changes in the land value. Table A5.3: Economic Internal Rates of Return and Sensitivity Indicators (%)
Projects Water Supply Mysore EIRR Ramanagaram/ Channapatna EIRR New Roads Mysore Ring Road EIRR Tumkur Bypass Road EIRR Discount rate Base Estimate - 10% in land value +10% in O&M Cost +10% Annual Tariff Revision

16.1

Not applicable

16.6

23.4

(0.8)

Not applicable

(0.7)

3.9

73.0 96.0 12.0

71.0 95.0

73.0 96.0

( ) = negative, EIRR = economic internal rate of return, O&M = operation and maintenance. Note: Numbers in parenthesis are negative. Source: Asian Development Bank estimates.

D.

Summary and Recalculation of EIRRs

13. Table A5.4 summarizes the FIRRs and EIRRs contained in the RRP and PCR and recalculated as necessary for the PPER. Table A5.4: Comparison of FIRRs and EIRRs
RRP Project Component Mysore Water Supply Truck Terminal Intermediate Ring Road Outer Ring Road Ramanagaram/Channapatna Water Supply FIRR 15.5 14.1 EIRR 13.6 21.5 53.1 7.6 10.3 (5.1) 0.75 Community/Commercial 2.6 Center Tumkur Southern Bypass Road 32.9 96.0 38.0 Four Project Towns Industrial Sites and 16.0 Services Residential Sites and 14.8 Services ( ) = negative, ADB = Asian Development Bank, EIRR = economic internal rate of return, FIRR = financial internal rate of return, PCR = project completion report, PPER = project performance evaluation report, RRP = report and recommendation of the President. Note: Numbers in parenthesis are negative. Sources: ADB. 2006. Project Completion Report for the Karnataka Urban Infrastructure Development Project in India. Manila; ADB. 1995. Report and Recommendation of the President to the Board of Directors on Proposed Loans and Technical Assistance to India for the Karnataka Urban Infrastructure Development Project. Manila; and ADB estimates. ADB PCR FIRR 4.3 EIRR 16.4 FIRR 4.3 PPER EIRR 16.4

73.0 (5.1)

45.0 Negative

Appendix 5

43

14. The financial calculations and assumptions of the ADB PCR were reviewed and accepted by the Operations Evaluation Mission (OEM), as well as the EIRR for the Mysore water supply. However, the OEM re-evaluated the EIRRs for the Mysore outer ring road and the Tumkur bypass road because the ADB PCR calculated substantial increases compared with the EIRRs at appraisal. Since both roads opened up new areas for residential and industrial uses, and in the absence of vehicle counts and operating costs, the methodology used by the ADB PCR and the PPER is based in increases in raw land costs. However, the ADB PCR did not distinguish between increases in land costs due to normal outward growth of the cities and the incremental increase due to the construction of the two roads. The latter was estimated based on conversations with local officials, engineers at the Mysore Urban Development Authority (MUDA) and Tumkur Urban Development Authority (TUDA), and local residents. The results of the re-evaluation are therefore significantly lower than those of the ADB PCR, with an EIRR for the Mysore outer ring road of 45% and for the Tumkur bypass road of 38%. E. Affordability and Subsidy of Water Subprojects

15. The revised water tariffs in Channapatna, Mysore and Ramanagaram are affordable to low-income households. While low-income households that consume less than 25m3 of water per month pay only 2.4% of their household income (Rs2,500 per month), households in Channapatna and Ramanagaram pay about 4% of their income. This is affordable but above the rate the households are willing to pay for assured water supply, although local governments would increase the basic rates annually if adequate and assured water was provided to the local community. While the tariff structure in Mysore Municipal Corporation (MMC) is sustainable, the same cannot be said about Channapatna and Ramanagaram. The flat rate of Rs100 per month for all households, despite almost 76% of the connections being metered, is regressive. This should be revised to ensure that all categories of households pay at least 4% to 5% of their household income on water charges. F. Fiscal and Financial Sustainability of Project Towns

16. A major part of the financial sustainability analysis is based on the projected financial positions of project towns. The debt-servicing capacity of the original four project towns is determined by the projected net cash-flow estimates derived during the project preparation process. Some of these projections are based on institutional and management reforms outlined in the loan covenants. A comparison of the projected financial positions with the actual performance of the project towns from 1999 to 2005 shows wide variations in the estimates, which explain the fiscal stress experienced by most of the towns in servicing the project debts (Table A5.5). Table A5.5: Comparison of Financial Projections and Actual Performance of Project Towns (Rs million)
Municipal Financial Profile Tax Receipts Water Charges Operating Revenue (Excluding fiscal transfers) Operating Expenditure 20032004 Appraisal Actual Appraisal Actual Appraisal Actual Appraisal Actual MMC 571.25 122.30 179.07a 107.20 843.08 343.12 485.22 564.65 TMC 107.11 51.33 8.57 4.07 146.33 66.70 84.52 87.69 CMC 23.57 5.83 3.20 0.84 72.37 29.03 41.52 19.83 RMC 16.58 5.59 2.47 1.68 44.63 25.00 24.54 6.72

44

Appendix 5

Municipal Financial Profile Net Cash Flow (Revenue + Capital) Debt Servicing Capacity Debt Servicing as % of Operating Revenue (2005) KUIDP-Related

20032004 Appraisal Actual

MMC 9.63 (23.46)

TMC 3.51 (15.14)

CMC (21.05) 8.96

RMC (38.47) 16.40

20032004 20042005

43.00 390.40

58.00 104.40

68.00 61.20

116.00 86.00

Debt Servicing + Over Dues ( ) = negative, MMC = Mysore Municipal Corporation, TMC = Tumkur Municipal Corporation, CMC = Channapatna Municipal Council, KUIDP = Karnataka Urban Infrastructure Development Project, RMC = Ramanagaram Municipal Council. a The estimate includes both incremental water charges and revenue from truck terminal. Note: Numbers in parenthesis are negative. Source: Karnataka Urban Infrastructure Development Project.

17. The property tax reforms introduced by the state of Karnataka during 2002 have significantly improved the tax receipts of most of the project towns. Although the transition from an annual ratable value to a capital value basis under a self-assessment scheme format is not easy, it has significantly improved the tax receipts of most ULBs in the state. However, the projections made during project appraisal are too high and not realistic. For example, while the projected tax receipts of MMC for 20032004 was Rs 571 million, the actual realization was only 21% of the projected estimate. That this is also true in the case of other towns means that the revenue enhancement plan proposed by the Project has not been satisfactorily implemented. 18. Based on the loan repayment schedule prepared by KUIDFC, the debt repayment obligation of the project towns ranges from 43% of operating revenue in MCC to almost 116% for the Ramanagaram Municipal Council. Since this is not sustainable given the present revenue base of the project towns, all debts will be paid by the state. This is in accord with the Karnataka State Decree of 2001, which stipulates that the state will pay all project debts, while any project revenue will accrue to KUIDFC for further investment in project-related O&M or similar state projects. While well meaning, the decree goes against the principle of sustainable debt financing.

MANAGEMENT RESPONSE TO THE PROJECT PERFORMANCE EVALUATION REPORT FOR THE KARNATAKA URBAN INFRASTRUCTURE DEVELOPMENT PROJECT IN INDIA (Loans 1415- and 1416-IND)

On 11 January 2008, the Officer-in-Charge, Operations Evaluation Department, received the following response from the Managing Director General on behalf of Management:

I.

Overall Assessment

1. We appreciate OED's evaluation of the Karnataka Urban Infrastructure Development Project and its overall satisfactory rating. We note that the recommendations of the PPER are consistent with our own findings, and the issues and lessons identified in the PPER are already being applied wherever appropriate in the implementation of the ongoing projects and the design of the new projects. 2. As the PPER observed, significant delays were common for integrated urban development projects because they are inherently complex and their implementation requires close coordination between multiple agencies, and enhanced institutional capacities and public support. The resulting time and cost overruns were found too costly, despite the proven advantage of the integrated design of urban projects. To overcome these difficulties, Government of India (GOI) and ADB undertook a comprehensive review of urban projects in 2003 2004. As a result of the review, the design of integrated urban development projects is now strengthened by incorporating advance support for upfront capacity building of implementing agencies and institutional strengthening of state line departments. II. Comments on Issues, Lessons, and Follow-up Actions

3. We agree with the PPER's observation that effective operation & maintenance (O&M), along with adequate financing, is essential for project sustainability. We are now introducing several innovative measures for effective O&M. For example, O&M will be outsourced using a performance-based publicprivate partnership (PPP) contract under the recently approved third loan to Karnataka. Under the PPP contract, the private contractor will finance, construct, and manage the project facilities. ADB loan financing also includes the O&M expenses up to 10 years. 4. On the issue of sustainable cost recovery in para. 90, experience in India, like in other DMCs in South Asia, shows a difficulty to carry on with reforms especially at the beginning of project implementation. Given the long history of getting social services below the cost of production, it is often found that consumers are reluctant to pay the full costs and local governments are unwilling to charge at the cost recovery level. Incorporating even the smallest changes in tariff structure generally takes years, therefore, there is a need for modest but more focused incremental reform. Policy changes, such as increases in water supply and sewerage tariff, are likely to be more acceptable if these are preceded by infrastructure development, improvement of services and extensive

stakeholder consultation. Public awareness campaign for demand side management is also crucial to obtain the public support for the project. In addition, the introduction of double-entry accounting system and computerization of local government functions greatly contributed to the enhanced efficiency of the government system. 5. We agree with the PPER's observation in paras. 96 and 97 that capacity building and staffing of urban local bodies (ULBs) with adequate resources to operate and maintain the completed project facilities generally received limited attention. Based on this lesson, in order to maximize sustainability of assets created under the project, a time-bound institutional and capacity development program has been adopted in the later projects. Furthermore, the number of subsectors and subprojects, the absorptive as well as implementation capacities of the ULBs have been carefully considered in designing new projects. 6. We agree with the PPER's suggestion in paras. 94 and 95 that hands-on implementation support and bridging TAs would facilitate project implementation and reduce start-up delays. GOI and ADB recently instituted several measures to address start-up delays in consultant recruitment and procurement. These measures include: (i) regular, quarterly tripartite portfolio review meeting; (ii) establishing project management and implementation units at the time of project appraisal; (iii) strengthening the managerial and institutional capabilities of such units; (iv) assist in developing tender documents, selection of consultants, and pre-qualification of contractors; and (v) familiarize project staff with ADB policies and procedures. 7. The quarterly tripartite portfolio review meeting involving oversight and line agencies of the Government and ADB at a senior level discusses implementation issues and agrees on corrective actions on each individual project. The quarterly review has become an important forum for project performance review, dissemination of best practices, and enhanced communication among GOI, executing agencies, and ADB. The frequency and intensity of review missions have also increased substantially, which helped higher performance in contract awards and loan disbursements. 8. The PPER suggests two follow-up actions, which include (i) ensuring effective O&M for all project facilities; and (ii) monitoring the implementation of the ULB management action plans so that the project ULBs become more financially self-sustaining. We fully support the follow-up actions. As explained above in this memo, these actions are already being applied in the design of new projects in the urban sector.

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