Report and Recommendation of the President to the Board of Directors

Project Number: 38254 November 2006

Proposed Multitranche Financing Facility India: North Karnataka Urban Sector Investment Program

CURRENCY EQUIVALENTS (as of 3 November 2006)

Currency Unit – Indian rupee/s (Re/Rs)

Re1.00 = $0.0223 $1.00 = Rs44.89

ABBREVIATIONS

ADB – Asian Development Bank CLIP – city-level infrastructure plan CSP – country strategy and program DMA – Directorate of Municipal Administration FFA – framework financing agreement FY – fiscal year GoK – government of Karnataka HPC – High Power Committee ICB – international competitive bidding IEE – initial environmental examination KUDCEMP – Karnataka Urban Development and Coastal Environmental

Management Project KUIDFC – Karnataka Urban Infrastructure Development and Finance

Corporation KUIDP – Karnataka Urban Infrastructure Development Project KUWASIP – Karnataka Urban Water Sector Improvement Project MFF – multitranche financing facility NCB – national competitive bidding NGO – nongovernment organization NNP – Nirmala Nagar Program OCR – ordinary capital resources O&M – operation and maintenance PBDPS – performance-based deferred payment structure PBMC – performance-based management contract PPMS – program performance monitoring system PFR – periodic financing request PMU – program management unit PSP – private sector participation TA – technical assistance ULB – urban local body

GLOSSARY

Crore – 10 millions

NOTES

(i) The fiscal year (FY) of the Government of India ends on 31 March. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2005 ends on 31 March 2005.

(ii) In this report, "$" refers to US dollars.

Vice President L. Jin, Operations Group 1 Director General K. Senga, South Asia Department (SARD) Director H. Kim, Urban Development Division, SARD Team leader K. Tamaki, Senior Urban Development Specialist, SARD Team members V. S. Rekha, Senior Counsel, Office of the General Counsel D. Dole, Senior Economist, PRC Resident Mission H. Kobayashi, Procurement Specialist, Central Operations Services M. Otsuka, Economist, SARD

CONTENTS Page

FACILITY AND INVESTMENT PROGRAM SUMMARY iiiMAP ix I. THE PROPOSAL 1 II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES 1 A. Performance Indicators and Analysis 1 B. Issues and Opportunities 1 III. THE PROPOSED INVESTMENT PROGRAM 5 A. Impact and Outcome 5 B. Outputs 5 C. Special Features 7 D. Cost Estimates 8 E. Financing Plan 8 F. Implementation Arrangements 9 IV. PROGRAM BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS 15 A. Benefits and Impacts 15 B. Risks 18 V. ASSURANCES 19 VI. RECOMMENDATION 20 APPENDIXES 1. Design and Monitoring Framework 212. Sector Analysis and External Assistance to the Urban Sector in India 253. Subproject Selection Criteria and Approval Procedure 334. Key Features and Outline Terms of Reference for Performance-Based Deferred Payment Structure Contracts

37

5. Key Features and Outline Terms of Reference for Performance-Based Management Contracts

42

6. Detailed Cost Estimates and Financing Plan 457. Organizational Arrangements for Implementation of Investment Program 468. Implementation Schedule 479. Procurement Plan and Indicative Contract Packaging 4810. Summary Poverty Reduction and Social Strategy 5111. Gender Action Plan 5312. Summary Resettlement Framework 5713. Summary Initial Environmental Examination 67

SUPPLEMENTARY APPENDIXES (available on request) A. Financial Analysis of the Karnataka Urban Infrastructure Development and Finance

Corporation, the Government of Karnataka and the Investment Program ULBs B. City-Level Infrastructure Plans C. Outline Terms of Reference for the Bridging Technical Assistance D. Report on the Performance-Based Deferred Payment Structure E. Lessons from Private Sector Participation Approaches Drawn from Global and National

Experiences and Proceedings of the Private Sector Workshop F. Economic Analysis G. Financial Analysis H. Participation Strategy I. Gender Strategy J. Short Resettlement Plans K. Resettlement Framework L Indigenous Peoples Development Framework M. Initial Environmental Examinations N. Environmental Assessment O. Draft Resolution for the Nirmala Nagar Program by the Investment Program Urban Local Bodies P. Outline Terms of Reference for Program Consultants

FACILITY AND INVESTMENT PROGRAM SUMMARY

Borrower India Classification Sector: Multisector

Subsectors: Water supply, sanitation, and waste management; Transport and communications Themes: Inclusive social development, capacity development, and sustainable economic growth Subthemes: Human development, institutional development, and urban development Targeting Classification: Targeted intervention

Environment Assessment Category: B. An overall initial environmental examination and three

sample initial environmental examinations were undertaken. An environmental assessment and review procedure was prepared to guide the environmental assessment of subprojects during implementation.

Sector Investment Program In October 2000, the Government of Karnataka (GoK) appointed the High Power Committee (HPC) to study regional imbalances within the state and to advise GoK on remedial measures to redress such imbalances. Following a detailed analysis, the High Power Committee Report for Redressal of Regional Imbalances proposed an investment plan of Rs11,527 crores ($2,652 million) for north Karnataka. The investment plan covers many sectors, including agriculture, rural development, irrigation, energy, industry and mining, transport, science and technology, financial services, and social services. Urban development and tourism, included in the social services sector, are given an allocation of about 33% ($862 million) of the total investment plan and are recognized as priorities. Based on the HPC report’s recommendation, GoK has initially selected 25 ULBs for assistance and requested the Asian Development Bank (ADB) to help these urban local bodies (ULBs) in north Karnataka improve their delivery of basic urban services. Each selected ULB prepared a city-level infrastructure plan to articulate its needs in the form of investment projects in five areas (sanitation infrastructure, water supply infrastructure, urban transport infrastructure, slum improvement, and nonmunicipal infrastructure). The financing plan for the overall program in the HPC report includes state government funds, central Government funds, and funds from ULBs, the National Bank for Agriculture and Rural Development, the Housing and Urban Development Corporation, ADB, the World Bank, and bilateral development agencies.

The North Karnataka Urban Sector Investment Program will help GoK rehabilitate existing urban infrastructure facilities and construct new ones in ULBs of north Karnataka. The Investment Program will assist GoK in meeting its urban sector investment plan and providing water supply systems, sewerage systems, drainage, and urban road resurfacing and junction improvements. The living environment in slums will be improved with the provision of basic services. Firefighting capacity improvements, tourism infrastructure, and lake rehabilitation are also included. The Investment Program will introduce private sector participation (PSP) in selected subsectors in selected ULBs and support ongoing institutional reforms and training for ULB staff currently being conducted by GoK under the Nirmala Nagar Program.

iv

Multitranche Financing Facility

The Government of India (the Government) has requested ADB to extend financing for the sector through a multitranche financing facility (MFF). The requested MFF amounts to $270 million over an 8-year period to finance the infrastructure investments and the institutional development of the selected Investment Program ULBs.

Rationale The HPC report indicates that while some diversification has taken

place in north Karnataka, agriculture remains the primary economic driver in most districts. The economy has, therefore, remained susceptible to weather patterns, and the current economic growth is not shared across the state on an equitable basis. One of the reasons for the limited diversification in north Karnataka is the lack of adequate urban infrastructure and services in the ULBs. The Investment Program supports the investment plan for ULBs recommended by the HPC report with their municipal functions, i.e., the provision of basic urban infrastructure and services as mandated by the 74th Amendment Act to the Constitution of India. The Investment Program would be a logical progression of previous ADB assistance to the state in the southern and coastal areas and would specifically address the imbalance in the level of urban infrastructure and services in ULBs in north Karnataka. Furthermore, the Investment Program would provide an opportunity to further develop the ongoing relationship between ADB and the Karnataka Urban Infrastructure Development and Finance Corporation (the KUIDFC) to both build up state-level capability and to promote involvement by the private sector in designing, constructing, and operating and maintaining infrastructure facilities for the efficient and equitable provision of basic urban infrastructure and services. Under the Karnataka Municipalities Act (1964) and the Municipality Corporations Act (1976), ULBs are responsible for urban service delivery and operation and maintenance. To fulfill this responsibility with the additional infrastructure to be created under the Investment Program, the Investment Program ULBs need to maintain sound financial management and employ adequate, capable human resources.

Impact and Outcome The impact of the Investment Program is improved urban infrastructure and services resulting in overall improvement of quality of life in the Investment Program ULBs, related increase in economic opportunities and growth in north Karnataka, and reduced imbalances between north Karnataka and the rest of the state. The Investment Program will (i) improve urban services for at least the 4.3 million people living in the initially identified 25 Investment Program ULBs; (ii) improve and sustain infrastructure services within Investment Program ULBs, which will in turn benefit the agriculture, industry, and tourism sectors; and (iii) promote PSP in selected subsectors with the aim of bringing in a proper incentive framework for efficient and equitable service provision and of linking the private sector’s financial liquidity with the large investment requirements in the urban sector.

Cost Estimates The HPC report’s investment plan amounts to $862 million, out of

which the identified Investment Program is estimated to cost $440 million.

v

Financing Plan

Source

Identified Investment

Program ($ million)

Percentage of Total

Asian Development Bank 270 61 Government of Karnataka and

other agencies

170

39

Total 440 100 Source: Asian Development Bank estimates.

Facility Amount and Terms An MFF of $270 million from the ordinary capital resources of ADB will be provided to the Government. Final terms and conditions will be determined in the context of each loan and will be based on ADB’s prevailing policies. Financing made available under each loan will be provided under ADB’s London interbank offered rate (LIBOR)-based facility. The Government has the option to choose between eligible currencies and the interest rate regime most suitable for each loan. ADB also provides flexibility in terms of repayment and interest swaps during the financing period. Repayment schedules can be structured for each loan to match the needs of each batch of subprojects with their cost-recovery and sustainability profiles.

The Government will onlend the amount to GoK on the same terms and conditions as the ADB loans under the MFF. GoK will pass on the proceeds of the loans to the implementing agencies in a mix of loan and grants based on agreed arrangements for the subsectors. GoK will assume the foreign exchange risks for the loans under the MFF.

Period of Utilization Estimated Program Completion Date

30 June 2016 (the last periodic financing request submission by 31 December 2013). 31 December 2015.

Executing Agency Karnataka Urban Infrastructure Development and Finance Corporation Implementation Arrangements

The head office of the KUIDFC, in coordination with the regional office based in Dharwad, shall constitute the Program Management Unit (PMU) for the Investment Program. The PMU will consist of a team of technical, administrative, social, environmental, and financial experts and officials that will assist with and monitor the Investment Program’s implementation activities. The implementing agencies will be the Investment Program ULBs; the Karnataka Urban Slum Clearance Board; the Directorate of Municipal Administration; the Department of Information, Tourism, and Youth Services; Karnataka State Fire and Emergency Services; the Lake Development Authority; the Karnataka Urban Water Supply and Drainage Board; and the KUIDFC.

Procurement Procurement of all goods and services under the Investment Program

will be undertaken in accordance with ADB’s Procurement Guidelines, as amended from time to time. To the extent possible, goods to be procured will be grouped into packages larger than $1 million to be suitable for international competitive bidding procedures. Miscellaneous goods that cannot be grouped into larger contracts and are estimated to cost less than $1 million per contract will be procured

vi

through limited international bidding or national competitive bidding procedures. Off-the-shelf items and standard products costing less than $100,000 will be procured following ADB’s shopping procedures. Civil works contracts estimated to cost $10 million or more will be procured through international competitive bidding. Civil works contracts estimated to cost less than $10 million will be procured through national competitive bidding procedures. Subprojects under the PSP modalities (i.e., performance-based deferred payment structure [PBDPS] and performance-based management contract [PBMC]) will be procured, in principle, through performance-based procurement procedures consistent with ADB’s Procurement Guidelines. PBDPS contracts account for the capital investment segment for initial civil works and the 10-year operation and maintenance segment. Thus the international competitive bidding and national competitive bidding threshold of $10 million will be applied to the estimated capital investment cost segment.

Consulting Services Consultants will be selected and engaged using quality- and cost-based selection procedures and/or least cost selection procedures in accordance with ADB’s Guidelines on the Use of Consultants. A total of about 1,700 person-months of consulting services will be required. Four national firms will be engaged as the program consultants to assist the PMU with overall project management and implementation and the implementing agencies with design, monitoring, and supervision of subprojects. The PMU will also engage one national firm as the program performance monitoring system consultant to monitor and assess the impacts of the Investment Program. Performance-based contract may be used as agreed by ADB for consultancy packages.

Benefits and Beneficiaries The Investment Program will potentially benefit at least 4.3 million people living in the initially identified 25 ULBs by providing them with improved water supply, cleaner environmental conditions, safer and faster urban transportation, and other public facilities. These physical improvements will enhance their living conditions and equip the selected ULBs with infrastructure assets to provide services of a reasonable quality for their residents, and thereby address the current imbalance between north Karnataka and the rest of the state.

The institutional development component of the Investment Program will support the selected ULBs’ efforts to increase property tax and tariff revenues; make the transition to a fund-based accounting system, which is compatible with international standards (i.e., double-entry, accrual-based accounting), as opposed to the current, antiquated, single-entry, cash-based system; and build the technical and managerial capacity of the staff to maintain better-quality basic urban services. Through the PBDPS and PBMC modalities, the Investment Program will mobilize private resources, including capital, technical, and managerial skills and other human resources, to improve service delivery and minimize the costs incurred by GoK.

Risks and Assumptions The main risks include (i) Investment Program ULBs failing to manage and maintain the newly acquired and/or created assets properly and being tempted to minimize costs through inappropriate operations; (ii) lack of acceptance of the required changes in water tariffs needed to achieve cost recovery within a reasonable time frame; (iii) lack of

vii

private sector interest in the PBDPS and PBMC procurement modalities; (iv) conflicting upstream demands for water sources; and (v) delays in land acquisition that prevent construction activities. Based on lessons from global experience with similar contracting approaches, identifiable risks inherent in PSP arrangements, including those identified during the preliminary sounding out of potential private contractors, will be mitigated through careful design of the PSP contracts and of the underlying legal and regulatory regime. The remaining risks will be allocated, to the extent possible, to those parties best able to bear them. This principle will be adopted in developing PSP contracts and associated bidding documents.

B a y o fB e n g a l

A r a b i a nS e a

A r a b i a n S e a

I N D I A N O C E A N

Gulf ofCambay

Delhi

Bangalore

Bangalore

Davangere

Shimoga Bhadravati

Hubli

Haveri

Bijapur

Gadag-Betageri

Dharwad

HassanMangalore

Mysore

Bellary

Chitradurg

Mercara Mandya

Tumkur

Kolar

Gulbarga

Shahabad

Bidar

Belgaum

Raichur

Sirsi

Gangavathi

Kadur

Udupi

Chamarajnagar

Charmapatna

Sagar

Ranebennur

Sindhanoor

Ilkal

Basavakalyan

Nippani

Gokak

Jamkhandi

Rabkavi-Banhatti

Supa

Hunsur Srirangapatnam

Chikmagalur Harnahalli

Bantyal

Hosdurga

Koppal

Hospet

Badami

Yadgir

Chikballanpur

BIDAR

RAICHUR

GULBARGA

BELGAUM

DHARWAD

UTTARAKANNDA BELLARY

CHITRADURGSHIMOGA

DAVANGERE

HAVERI

TUMKUR

HASSANDASHINAKANNADA

CHIKMAGALUR

UDUPI

KODAGU

MYSORECHAAMRAJNAGAR

KOLAR

BIJAPUR

BAGALKOT

KOPPAL

GADAG

BANGALOREMANDYA

RAJASTHAN

GUJARATMADHYA PRADESH

CHHATTISGARH

UTTARPRADESH

BIHAR

WESTBENGAL

JHARKHAND

SIKKIM

A S S A M

MEGHALAYA

ARUNCHALPRADESH

MIZORAM

TRIPURA

O R I S S A

MAHARASHTRA

ANDHRAPRADESH

KARNATAKA

TAMILNADU

KERALA

GOA

HARYANA

UTTARANCHAL

TAMIL NADU

ANDHRA PRADESH

MAHARASTHRA

G OA

KERALA

Project District

Project Urban Local Body

National Capital

State Capital

Urban Local Body

National Road

Other Road

Railway

River

District Boundary

State Boundary

International Boundary

Boundaries are not necessarily authoritative.

INDIA

NORTH KARNATAKAURBAN SECTOR INVESTMENT PROGRAM

0 25 50 75 100

Kilometers

N

06-3574 HR

85 00'Eo

85 00'Eo

75 00'Eo

75 00'Eo

10 00'No10 00'No

25 00'No25 00'No

18 00'No

18 00'No

12 00'No

12 00'No

78 00'Eo

78 00'Eo

74 00'Eo

74 00'Eo

I. THE PROPOSAL

1. I submit for your approval the following report and recommendation on a proposed multitranche financing facility to India for the North Karnataka Urban Sector Investment Program.1

II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES A. Performance Indicators and Analysis

2. Rapid urbanization and underinvestment in infrastructure have resulted in serious environmental and health problems in India’s cities. Most urban households, particularly poor households, have limited access to potable water, sanitation, and drainage facilities and services. The Government’s2 successive five-year plans stressed rural development, and it was not until the eighth five-year plan for fiscal year (FY) 1992–1997 that the Government specifically recognized the role and importance of the urban sector. This change in emphasis, together with India’s focus on economic liberalization; financial sector reform; and passage of the 74th Constitutional Amendment Act in 1992, which laid out the basis for decentralization in the urban sector, has brought about some improvements, but large inefficiencies in service delivery, inadequate investment to expand service coverage, and lack of maintenance persist.

3. This is the case throughout the state of Karnataka, but is more pronounced in the urban local bodies (ULBs) in north Karnataka. Water supply in the vast majority of ULBs in north Karnataka is intermittent, and is often as infrequent as once every 3 days to once a week. Only a few ULBs receive piped water for 1 to 2 hours every day, and the water quality is usually poor. Service coverage is limited and, on average, houses with water supply connections account for only 67% of those registered for property taxes. Where sewerage systems have been constructed, coverage is limited, and generally only the older, or more affluent, sections of the ULBs are served. Only a few sewage treatment plants exist, and many of these do not function well, if at all. Storm water drainage facilities are inadequate, poorly maintained, and frequently misused for solid waste disposal. Roads are generally unpaved and junctions inefficient. Slums exist in most ULBs in north Karnataka and are served by only the most basic water supply and sanitation services. Each public standpost (public tap) serves up to about 300 people, and sanitation is limited to poorly constructed latrines. Details of the existing levels of urban infrastructure and services in each of the Investment Program ULBs are presented in Appendix 2.

4. The financial performance of ULBs in north Karnataka is poor, and current tariffs and charges cover barely 20% of the operation and maintenance (O&M) costs of urban services. These ULBs rely heavily on state subsidies to pay electric bills and other operating costs. Because of a long-term freeze on staff recruitment, the ULBs do not currently have the institutional capacity or skills required to properly manage, operate, and maintain existing urban infrastructure facilities and services.

B. Issues and Opportunities 5. In October 2000, the Government of Karnataka (GoK) appointed the High Power Committee (HPC) to study regional imbalances within the state and to advise GoK on remedial measures to redress the imbalances. Based on detailed analysis, the High Power Committee Report for Redressal of Regional Imbalances 3 proposed an investment plan of Rs11,527 crores ($2,652 million) in north Karnataka. The investment plan covers many sectors, including agriculture, rural development, irrigation, energy, industry and mining, transport, science and technology, financial services, and social services. Urban development and tourism, which are included in social services, are given an allocation of about 33% ($862 million) of the total investment plan and are recognized as priorities. The financing plan for the overall program in the HPC report includes state government funds, central Government funds, funds from the ULBs, the National Bank for Agriculture and Rural Development, the Housing and Urban Development Corporation, the Asian Development Bank (ADB), the World Bank, and bilateral development agencies.

1 The design and monitoring framework for the Investment Program is presented in Appendix 1. 2 “Government” refers to the Government of India. 3 Government of Karnataka. 2002. High Power Committee Report for Redressal of Regional Imbalances. Bangalore.

2

6. The HPC report indicates that while some diversification has taken place in north Karnataka, agriculture remains the primary economic driver in most districts. The economy has, therefore, remained susceptible to weather patterns, and the current economic growth is not shared throughout the state on an equitable basis. The key reason for the limited diversification in north Karnataka is the lack of adequate urban infrastructure and services in the ULBs. The goal of the investment plan proposed by the HPC report is to increase economic growth in backward clusters of ULBs (known as taluks) and to reduce imbalances between north Karnataka and the rest of the state.

7. Based on the HPC report’s recommendation, GoK asked ADB to help selected ULBs in north Karnataka improve their delivery of basic urban services. The Investment Program supports the investment plan recommended by the HPC report.

8. The Investment Program has initially identified 25 ULBs located in north Karnataka to be assisted with their municipal functions, i.e., delivery of basic urban services as mandated by the 74th Constitutional Amendment Act of India. The assumption is that improvements in the urban sector will effectively stimulate economic growth, as economic activities in urban areas contribute disproportionately to the region’s overall economy. Each Investment Program ULB has prepared a city-level infrastructure plan (CLIP) for improving its urban environment based on its needs for basic urban infrastructure and services. As each ULB proposed many subprojects, ADB proposed a sector loan approach to allow flexibility in selecting subprojects and to enable investment that is linked to reforms by means of subproject selection criteria.

9. The Investment Program will support that part of the investment plan proposed by the HPC report that focuses on urban infrastructure development. The Investment Program will initially focus on investments in priority components, namely, water supply, sanitation, and slum improvement. Institutional development and nonmunicipal infrastructure components will also be implemented during the first phase. Upon successful progress in relation to the foregoing activities, the Investment Program will then start investments in urban transport infrastructure. Appendix 3 presents subproject selection criteria agreed on between GoK and ADB for the Investment Program.

10. The sector loan approach is based on the following context: (i) GoK has analyzed regional imbalances within the state in a systematic manner and

has made recommendations that include urban development as one of the key investment priorities in order to reduce the imbalances. Furthermore, GoK has already started implementing some of the recommendations from the HPC report using its own resources.

(ii) The executing agency is the Karnataka Urban Infrastructure Development and Finance Corporation (the KUIDFC), which has proven that it is capable of implementing urban development components in the Investment Program ULBs as part of the HPC investment plan. The KUIDFC has already implemented two ADB-assisted projects, as well as other externally-funded and domestically-funded projects, in the urban sector. Supplementary Appendix A presents a detailed analysis of the KUIDFC’s capabilities as an executing agency.

(iii) Policies to support the CLIPs, including municipal reforms and tariff reforms, are ongoing, and GoK has already initiated reform activities and the studies required to implement these policies.

11. The development of urban infrastructure in the southern and coastal areas of Karnataka has continued with the assistance of ADB funding, which began in 1993. The Karnataka Urban Infrastructure Development Project (the KUIDP) 4 provided total assistance of $105 million for formulating an integrated urban development strategy for the Bangalore subregion. The KUIDP provided an opportunity to develop “counter magnet” urban locations, or growth centers, to reduce congestion in Bangalore by including a component directed toward improving infrastructure in the 4 ADB. 1995. Report and Recommendation of the President to the Board of Directors on Proposed Loans to India for the

Karnataka Urban Infrastructure Development Project. Manila (Loan 1415-IND and Loan 1416-IND, for $85 million and $20 million, respectively, approved on 14 December 1995).

3

four ULBs of Channapatna, Mysore, Ramanagaram, and Tumkur. The ULBs of Maddur and Mandya were subsequently added. The Karnataka Urban Development and Coastal Environmental Management Project (KUDCEMP) 5 provided assistance of $145 million to support urban infrastructure development in 10 coastal ULBs6 and to facilitate policy reforms to strengthen urban management. The objectives of KUDCEMP included (i) strengthening the capacity of local governments in relation to resource generation and cost recovery to achieve sustainability in the O&M of the investments; and (ii) establishing appropriate environmental planning, management, and monitoring mechanisms to address the potential environmental impacts associated with urban and industrial growth in the region. KUDCEMP initially experienced implementation delays, but is currently rated as satisfactory by the ADB’s project performance monitoring system. Appendix 2 presents details of external assistance to the urban sector in India.

12. The executing agency for both these previous projects was the KUIDFC, which was incorporated in 1993 under the Companies Act (1956) and is wholly owned by GoK. The KUIDFC has the following functions: (i) formulating and appraising urban infrastructure projects, (ii) providing financial and technical assistance to municipalities and development agencies, (iii) mobilizing funds from various sources, (iv) implementing and monitoring projects, (v) formulating and implementing capacity-building programs for the effective delivery of urban services, and (vi) assisting with municipal sector reforms. Following its experience with implementing the KUIDP, KUDCEMP, and other externally-funded and domestically-funded projects, the KUIDFC has now evolved into an agency capable of managing large projects for GoK.

13. The Investment Program, which will include urban infrastructure development in ULBs in north Karnataka, would be a logical progression of previous ADB assistance to the state in the southern and coastal areas and would specifically address the imbalance in the level of basic urban infrastructure and services in the ULBs in north Karnataka. Furthermore, the Investment Program would provide an opportunity to further develop the ongoing relationship between ADB and the KUIDFC and build up state-level capability, as well as to promote involvement by the private sector in the design, construction, and O&M of infrastructure facilities for efficient and equitable provision of basic urban infrastructure and services. Urban service delivery and O&M are the responsibility of ULBs under the Karnataka Municipalities Act (1964) and Municipality Corporations Act (1976). Even though some Investment Program ULBs adopting the performance-based deferred payment structure (PBDPS) and performance-based management contract (PBMC) modalities, which are elaborated in Paras. 54 through 57, will delegate asset creation and O&M responsibilities to private contractors, the ultimate responsibility for tariff setting, billing, and revenue collection will still remain with the Investment Program ULBs. To fulfill this responsibility for the additional infrastructure to be created under the Investment Program, the Investment Program ULBs need to maintain sound financial management and employ sufficient, capable human resources. As the initial step of the reform, the monthly tariffs for unmetered domestic water use have been increased from Rs45 (previously the uniform tariff across the state) to at least Rs55 per month in all 25 ULBs that have been identified as initial Investment Program ULBs.7

14. The Investment Program is compatible with the Government’s 10th five-year plan (FY2002–FY2007), which targets economic growth of 8% per year and focuses on four basic themes: (i) high growth, (ii) equitable growth, (iii) human development, and (iv) reforms. With 80% of planned budget allocations targeting social expenditures, the 10th five-year plan aims to reduce poverty by ensuring access to education, health care, potable water, and sanitation. The 10th five-year plan also focuses on good governance as a cross-cutting theme and identifies the declining role of government in the provision of services. The plan emphasizes the development of private sector participation (PSP) in service delivery and the provision of an improved regulatory environment.

15. The proposed Investment Program is highly relevant to ADB’s country strategy and program (CSP) for India, which rests on the three pillars of (i) pro-poor growth for reducing income poverty,

5 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 $145 million, approved on 26 October 1999).

6 Ankola, Bhatkal, Dandeli, Kandapura, Karwar, Mangalore, Puttur, Sirsi, Udupi, and Ullal. 7 There is no longer a single statewide uniform tariff. The new monthly tariffs for unmetered domestic water use for the

25 ULBs now range from Rs55 to Rs90.

4

(ii) social development for reducing human poverty, and (iii) good governance for leveraging and maximizing the impact of development. As stated in the CSP, the private sector accounts for three fourths of both gross domestic product and investments in India, and even though the private sector has grown considerably during the last two decades, the CSP notes that poor infrastructure has constrained this growth. The development of improved infrastructure is, therefore, the backbone of the CSP and accounts for 80% of ADB’s 2005–2007 lending program. The CSP expresses a strong desire to use ADB funding to leverage increased PSP in the urban sector. The sheer scale of the requirements for urban infrastructure investment in India indicates that public financing through the government budget together with multilateral and bilateral agency financing will be insufficient to achieve the desired improvements. Thus the Investment Program intends to establish a viable PSP business model that will link existing financial liquidity in the private sector with the large investment requirements in the urban sector, in particular, the water supply and sanitation and urban transport subsectors.

16. GoK is currently implementing comprehensive reforms in line with the 10th five-year plan and, through the Directorate of Municipal Administration (DMA), is implementing the Nirmala Nagar Program (NNP). The latter is a six-module program funded, among others, by ADB under KUDCEMP that is addressing the key issues of (i) property taxes, (ii) accounting, (iii) thrift and credit institutions, (iv) public toilets, (v) rainwater harvesting, and (vi) solid waste management. The NNP is being supported by a well-prepared human resources policy designed to abolish obsolete or redundant positions and recruit well-qualified professionals, such as accountants and environmental engineers, through competitive selection procedures. Improving the poor rates of property assessment and registration for tax purposes and of property tax collection has been a key objective, as only about 75% of the properties in the state are assessed and registered, and of these, only 50% actually pay property taxes. The unrealized additional tax revenues are on the order of $70 million annually, and the DMA is currently 70% of the way through an ambitious program to survey 3 million properties in the 63 ULBs initially targeted under the reforms. The NNP is being supported by well-designed management information and geographic information systems that were developed by the eGovernments Foundation. The software packages being used are highly advanced.

17. Under the KUIDP, GoK developed the fund-based accounting system, which is compatible with international standards (i.e., double-entry, accrual-based accounting), using Bangalore and Tumkur as pilot cases. The system has been working reasonably well, and the DMA upgraded it as part of the ongoing sector reforms before rolling it out to the 63 ULBs targeted for the first phase of reforms. As of April 2006, the fund-based accounting system was already being implemented in all 63 ULBs. These 63 ULBs include all 25 of the initially identified Investment Program ULBs. The Investment Program will support the ULBs’ efforts to increase property tax revenues and tariff revenues; make the transition from the current, antiquated, single-entry, cash-based system to the fund-based accounting system; and build the technical and managerial capacity of the staff to maintain better quality urban services by complementing the ongoing NNP urban reform initiatives. In particular, policy dialogues have been conducted between the KUIDFC and ADB and an agreement has been reached on overall water supply and sewerage tariff reforms, which started out with an increase in the current monthly flat-rate water tariffs for unmetered water and will be followed by careful adoption of a volumetric tariff schedule for metered water.

18. In parallel with the NNP, the Urban Development Department of GoK, through the KUIDFC, is conducting the Karnataka Urban Water Sector Improvement Project (KUWASIP) with assistance from the World Bank. Activities already undertaken include (i) the water supply demonstration schemes in selected zones in the ULBs of Belgaum, Gulbarga, and Hubli-Dharwad that provide water for 24 hours a day, 7 days a week; (ii) an implementation of rapid social assessment and preparation of communication strategy; and (iii) an implementation of environmental impact assessment. Studies currently being carried out under KUWASIP include (i) the establishment and operationalization of the Karnataka State Urban Water Supply Council, (ii) the creation of information on water supply and sanitation and the benchmarking of service provision, (iii) the strengthening of urban water supply and sanitation service delivery in ULBs, and (iv) the investment in the water and sanitation sector and tariff reforms. A key component of KUWASIP is a contract involving the KUIDFC: the ULBs of Belgaum, Gulbarga, and Hubli-Dharwad; and a private contractor to run the water supply demonstration schemes in selected zones of the three ULBs to show how well a water supply system can be run when a capable and experienced management unit is put in place. This relates not only to the quantity and quality of water supplied, but also to the

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improved efficiency in meter reading, system maintenance, and response to customers’ problems and complaints.

19. Stakeholder consultations conducted in the initially identified 25 Investment Program ULBs indicate a strong desire for improved urban infrastructure and services. Water supply was given the highest priority in 18 of the 25 selected ULBs, while sanitation was ranked second and drainage was ranked third. Urban transport was given the lowest priority in 11 of the 25 ULBs. In the slum areas, preference for water supply was overwhelming, followed by sanitation. Drainage and urban transport were not ranked as highly, reflecting a desperate need for the most basic urban infrastructure.

III. THE PROPOSED INVESTMENT PROGRAM A. Impact and Outcome 20. The impact of the Investment Program is improved urban infrastructure and services resulting in overall improvement of quality of life in the Investment Program ULBs, related increase in economic opportunities and growth in north Karnataka, and reduced imbalances between north Karnataka and the rest of the state. To achieve this impact, the Investment Program will help the participating ULBs rehabilitate existing urban infrastructure facilities and construct new ones, including water supply systems, sewerage systems, and drainage, along with urban transport improvements. The living environment of urban slums will be improved with the provision of basic services. The Investment Program also includes firefighting capacity improvements, tourism infrastructure improvements, and lake rehabilitation. The Investment Program will support the institutional reforms and training for ULB staff currently being conducted under the ongoing NNP. The Investment Program is expected to (i) improve urban services for at least the 4.3 million people living in the initially identified 25 ULBs; (ii) improve and sustain infrastructure services within the participating ULBs, which will in turn benefit the agriculture, industry, and tourism sectors; and (iii) introduce PSP in selected subsectors with the aim of introducing a proper incentive framework for efficient and equitable service provision and linking the private sector’s financial liquidity with the large requirements for investment in the urban sector. B. Outputs 21. The outputs of the Investment Program will be derived from the following components:8

(i) component A: sanitation infrastructure, (ii) component B: water supply infrastructure, (iii) component C: slum improvement, (iv) component D: nonmunicipal infrastructure, (v) component E: urban transport infrastructure, (vi) component F: institutional development, and (vii) component G: Investment Program assistance facility.

22. Components A, B, C, and E are designed to address the basic urban sector needs of the Investment Program ULBs; component D is designed to incorporate tourism and disaster management services for the Investment Program ULBs; component F is designed to assist with capacity-building initiatives and staff training requirements in the Investment Program ULBs; and component G is designed to assist with implementation of the Investment Program. Except for the three ULBs—Belgaum, Gulbarga, and Hubli-Dharwad—currently being assisted under the World Bank-funded KUWASIP and, therefore, not expecting any financing for component B under the Investment Program, most Investment Program ULBs have subprojects under components A and B, i.e., most of the investments are focused on the provision of water supply and sanitation infrastructure.

23. All the initially identified 25 Investment Program ULBs are covered by the ongoing NNP. The reforms being implemented under the NNP will support the institutional framework under which the ULBs are designing, constructing, operating, and maintaining basic urban infrastructure and services. These reforms may still be ongoing at the time of effectiveness of the first loan and the

8 Solid waste collection and disposal facilities and sports facilities are integral parts of GoK’s investment plan; however,

GoK has decided to finance these facilities using its own funds.

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Investment Program may have to be implemented in parallel with the reforms. Hence, the implementation of reform measures (i.e., property tax reform and revenue mobilization measures) will be closely monitored throughout the Investment Program.

1. Component A: Sanitation Infrastructure 24. This component comprises (i) sewerage and sanitation, which includes rehabilitation and/or expansion of existing systems (sewer networks, sewage pumping stations, and sewage treatment plants), and construction of new systems; and (ii) urban drainage, which includes improvements to primary and secondary drains.

2. Component B: Water Supply Infrastructure 25. This component comprises (i) the rehabilitation of existing systems, that is, of intakes, treatment plants, transmission mains, and distribution networks (including mains and reservoirs); and (ii) the provision of new infrastructure, including expansions of the distribution network and the provision of additional house connections in both the existing and expanded service areas in the Investment Program ULBs.

3. Component C: Slum Improvement 26. This component will address the poor environmental conditions in low-income settlements. The Investment Program aims to build on the successful experiences of the KUIDP and KUDCEMP with the help of nongovernment organizations. The subprojects include community development programs, such as the initiation of self-help groups, the launching of health and sanitation awareness campaigns, and the provision of low-cost sanitation facilities to improve the environment in these settlements.

4. Component D: Nonmunicipal Infrastructure 27. This component focuses on such nonmunicipal infrastructure as firefighting and emergency services, tourism, and lake rehabilitation in selected ULBs.

5. Component E: Urban Transport Infrastructure 28. This component comprises improvements to the urban roads of the public works departments of the ULBs and the state. It involves improving and strengthening critical road links, road safety measures, and traffic management measures. Urban transport improvement will be undertaken in Investment Program ULBs based on their progress with regard to implementing components A, B, and C under the Investment Program.

6. Component F: Institutional Development 29. This component will support the DMA’s current institutional reform efforts under the NNP. It will be managed by the DMA, and will consist of capacity building within Investment Program ULBs through

(i) introducing computerization, property tax assessment, and utility line mapping using a geographic information system;

(ii) facilitating the transition of ULB accounting functions to the fund-based accounting system; and

(iii) providing training for ULB and state line department staff in relation to project implementation and urban management.

30. The training will include courses and sessions on urban management to be conducted by institutes like the Indian Institute of Management and the Indian Institute of Science. All seminars, conferences, and city visits to learn from best practices to be funded under the Investment Program shall take place in India.

7. Component G: Investment Program Assistance Facility 31. This component comprises consulting services for Investment Program implementation support, financing for the Program Management Unit (PMU), and incremental administration costs for the KUIDFC and other agencies involved in implementing the Investment Program. Civil works for the KUIDFC office building in Bangalore are also provided under this component.

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C. Special Features 32. Private Sector Participation Schemes. In addition to ADB’s conventional procurement modalities, an alternative PSP procurement modality referred to as the PBDPS will be used for selected subprojects in selected ULBs to increase the extent of PSP. This modality requires private contractors to provide some of the bridge financing for the construction and subsequent O&M costs of the subprojects in exchange for annuity-like payments over a 10-year period that consist of base fees and bonuses linked to predetermined key performance indicators. The PBDPS is expected to help (i) introduce private investment into the sector, thereby facilitating greater leverage of public funds; and (ii) achieve higher accountability on the part of contractors by combining construction and actual service delivery during the operational phase into a single contract package.

33. As the PBDPS is still at an early stage of development, the level of contractor interest is not yet clear. Should the risk-sharing aspects of the PBDPS be unpalatable to the private sector, an alternative PSP modality, the PBMC, will be used instead. Under the PBMC modality, civil works are procured through conventional procurement modalities and the managing contractor is responsible for overall management of the provision of services and the O&M of the facilities, typically over a 5- to 6-year period. The management contractor will be also reimbursed by means of base fees and bonuses linked to predetermined key performance indicators. The best procurement modality will be chosen following consultations with and surveys of potential contractors. Lessons from the PBDPS and PBMC modalities based on global experience with similar contracting approaches by other multilateral and bilateral development agencies and their application in India’s urban sector have been assessed and are presented in Supplementary Appendix E. These lessons and the results of the consultations and surveys will be incorporated in the contract documents.

34. The intent of the proposed PSP schemes is to provide optimal risk-sharing arrangements between ULBs and private contractors and to create an incentive framework to promote private sector efficiency through performance-based and/or output-based service provision for the subprojects. Appendixes 4 and 5 present the key features and outline terms of reference for the PBDPS contracts and the PBMC contracts, respectively, and Supplementary Appendix D presents a more detailed description of the PBDPS contracts.

35. Multitranche Financing Facility. The Investment Program will use ADB’s MFF. The MFF modality is particularly well suited for the Investment Program because (i) the aim of the Investment Program is to support the GoK’s long-term objectives as stated in the HPC report; (ii) the performance of previous loans can guide the provision of subsequent loans, thereby offering proper incentives in relation to implementation; (iii) the implementation period for urban development projects is generally longer than projects for other sectors, including the initial detailed design and engineering period; (iv) the MFF can allow the flexibility required for the Investment Program to support participating 25 ULBs with different needs and absorptive capacities; and (v) the proposed performance-based contract schemes require contract periods that are longer than the conventional contract modality.

36. The subprojects and components under the first loan with an estimated cost of $51.4 million (ADB financing of $33 million and a GoK contribution of $18.4 million) were fully appraised and included in the first periodic financing request (PFR). The first loan covers sanitation and water supply infrastructure in 3 ULBs, firefighting equipment in 23 ULBs, tourism infrastructure in 6 ULBs, geographic information systems and other hardware in 21 ULBs, 5 consultancy packages, incremental administration costs, and the KUIDFC building. No PSP contracts will be financed under the first loan, as further preparation for PSP contracts is required under the bridging technical assistance (TA). Each individual loan will finance mutually exclusive distinctive packages, subprojects, and/or components.

37. Bridging Technical Assistance. The $400,000 in grant-funding for the bridging TA will be made available under the TA Cluster for Project Processing and Capacity Development9 to support 9 ADB. 2006. Technical Assistance Cluster to India for Project Processing and Capacity Development. Manila. (TA 4814-

IND, approved on 30 June 2006).

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initial implementation of the Investment Program. This bridging TA will support GoK with Investment Program preparation, including (i) preparing contract documents for the PBDPS, the PBMC, and conventional civil work contracts and associated preparatory work needed to introduce PSP schemes, including formulating post-PBDPS operations strategy and human resources strategy for existing ULB employees who will be affected by the introduction of PBDPS contracts; (ii) preparing a business plan and operational procedures for the KUIDFC and operations manuals for the Investment Program ULBs; and (iii) undertaking analysis and making recommendations on appropriate water and sewerage tariffs for the Investment Program ULBs. Outline terms of reference for this TA are in Supplementary Appendix C.

D. Cost Estimates 38. The total cost of the Investment Program from 2006 to 2015 is $862 million out of which the identified investment requirements under the MFF are estimated to cost $440 million (Table 1). Appendix 6 presents indicative cost estimates for the MFF (estimated total costs of $440 million).

Table 1: Cost Estimates for the Investment Program ($ million)

Component

Total Investment Requirements

($ million)

Identified Investments under Asian

Development Bank Loans ($ million) Share (%)

A Sanitation Infrastructure 360 163 37 B Water Supply Infrastructure 200 92 21 C Slum Improvement 27 12 3 D Nonmunicipal Infrastructure 67 31 7 E Urban Transport Infrastructure 199 91 21 F Institutional Development 9 4 1 G Investment Program Assistance

Facilitya

0

47

10 Total Investment Program 862 440 100

a For total investment requirements, the cost of component G is distributed among components A–F. Source: Asian Development Bank estimates; High Power Committee Report for Redressal of Regional Imbalances.

E. Financing Plan

39. The Government has requested financing up to $270 million equivalent from ADB’s ordinary capital resources to help finance the Investment Program. The financing will be provided under the MFF in accordance with ADB policy.10 The MFF will extend multiple loans to finance a range of subprojects and components under the Investment Program, subject to the submission of a related PFR by the Government and the execution of the related Loan Agreement and Project Agreement(s). The Government has entered into an FFA with ADB and is required to comply with the agreement’s requirements. Pursuant to the FFA, the Government has submitted the first PFR in an amount of $33 million to ADB. The loans under the MFF will finance civil works, equipment, consulting services, training, and incremental administration costs. The minimum amount of subsequent PFRs will be $50 million. All provisions of ordinary operations loan regulations applicable to ADB’s London interbank offered rate (LIBOR)-based loans11 will apply to each loan, subject to modifications, if any, that may be included under any loan and project agreement. The Government has the option to choose between eligible currencies and the interest rate regime for each loan. The specific terms of each loan will be based on the related PFR, with interest to be determined in accordance with ADB’s LIBOR-based lending facility. The Government has provided ADB with (i) the reasons for its decision to borrow under ADB’s LIBOR-based lending facility, and

10 ADB. 2005. Pilot Financing Instruments and Modalities. Manila (R194-05, 4 August). 11 ADB. 2001. Ordinary Operations Loan Regulations Applicable to LIBOR-Based Loans Made from ADB’s Ordinary

Capital Resources. Manila.

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(ii) an undertaking that these choices were its own independent decision and not made in reliance on any communication or advice from ADB.

40. Although no cofinancing is envisaged at this time, if needed, cofinancing from commercial sources may be mobilized in the future to complement ADB financing for the MFF. Such cofinancing may benefit from ADB credit enhancements, including ADB guarantee instruments, and will be presented separately for Board consideration as and when the need arises.

41. The Government will onlend the proceeds of the loans under the MFF to GoK on the same terms and conditions as the ADB loans. The financing plan for the Investment Program is presented in Table 2 and the details are presented in Appendix 6.

Table 2: Financing Plan of the Investment Program ($ million)

Source

Identified Investments under Asian Development

Bank Loans

($ million) Share (%) Asian Development Bank 270 61 GoK and other agencies 170 39

Total 440 100 GoK = Government of Karnataka. Source: Asian Development Bank estimates.

42. GoK will pass on the proceeds of the loans to the implementing agencies in a mix of loans and grants based on the agreed arrangements for the subsectors. The loans will be provided for the water supply subprojects, and have a term of 25 years, including a grace period of 5 years, and the interest rate will be determined in accordance with the incentive scheme adopted by GoK to encourage the ULBs to implement reforms. The implementing agencies will make required contributions either from their own resources or from the State Finance Commission’s allocations for the respective implementing agencies. GoK will assume the foreign exchange risks on the ADB loans.

F. Implementation Arrangements

1. Investment Program Management 43. The executing agency for the Investment Program will be GoK acting through the KUIDFC. The KUIDFC is a fully state-owned company that was incorporated in 1993 under the Companies Act (1956). As a nodal agency for urban infrastructure projects financed by GoK, the KUIDFC has already successfully implemented the first ADB-assisted project, the KUIDP, and is now implementing the second ADB-assisted project, KUDCEMP. In addition to being the project manager, the KUIDFC will act as a conduit of funds between GoK, which will disburse the ADB loan funds to the ULBs via the KUIDFC, and the ULBs which will repay agreed portions of the ADB loan funds to GoK via the KUIDFC. Supplementary Appendix A provides detailed information on the roles, the capabilities, and a financial assessment of the KUIDFC, GoK, and the Investment Program ULBs.

44. The head office of the KUIDFC, in coordination with its regional office based in Dharwad, will constitute the PMU for the Investment Program. The PMU will be headed by the managing director of the KUIDFC as the program director at the head office and by the executive program director12 at the regional office who reports to the program director. The program director will be responsible for overall implementation and management of the Investment Program and for coordination with and reporting to the state-level empowered committee for the Investment Program, which is made up of

12 The executive program director will be an officer from the Indian Administrative Service.

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representatives of GoK, the Government, and ADB, while the executive program director will be responsible for day-to-day implementation activities for the Investment Program. The PMU’s regional office will be staffed with properly qualified and sufficiently experienced experts and officials and will include divisions related to engineering, community development, accounting and finance, land acquisition, and administration. 45. Four divisional PMU offices will be established in Belgaum, Bellary, Dharwad, and Gulbarga to supervise the implementing agencies in each geographical area.13 Each divisional office will be headed by a divisional program director14 who will report to the executive program director. The divisional offices, assisted by the respective program consultant teams, will be responsible for project planning, preparation of subprojects and cost estimates, coordination, technical guidance and supervision, financial control, training, and overall subproject monitoring; and will also assist the ULBs in this regard for the respective components. 46. The implementing agencies under the Investment Program will be as follows: (i) for components A, B, and E: the respective ULBs15 reporting to the respective divisional program director, except for bulk water supply schemes of component B, for which the implementing agency will be the Karnataka Urban Water Supply and Drainage Board (KUWSDB), on behalf of the respective ULBs, reporting to the respective divisional program director;16 (ii) for component C: the Karnataka Slum Clearance Board reporting to the executive program director; (iii) for component D: the Department of Information, Tourism and Youth Services, the Karnataka State Fire and Emergency Services, the Lake Development Authority, and relevant ULBs reporting to the executive program director; (iv) for component F: the DMA and/or the KUIDFC reporting to the program director; and (v) for component G: the KUIDFC reporting to the program director. ULBs intending to delegate the implementation responsibilities of bulk water supply schemes to the KUWSDB are required to pass relevant resolutions. Tender evaluation committees to evaluate tenders and provide recommendations on issues related to all works that will subsequently be forwarded for approval to the ULB commissioner will be set up. Each tender evaluation committee will consist of a ULB engineer, a representative of the KUIDFC, and a member of the program consultant team with relevant expertise. 47. A state-level empowered committee has been formed to oversee the Investment Program. Committee members include the additional chief secretary (the committee chair), the principal secretary of the Urban Development Department, the principal secretary of the Planning 13 Coverage by the four divisional offices will be as follows: (i) Belgaum: Badami, Ilkal, Jamkhandi, and Rabkavi-Banhatti

(Bagalkot District), and Belgaum, Gokak, and Nippani (Belgaum District); (ii) Bellary: Bellary and Hospet (Bellary District), Gangavathi and Koppal (Koppal District), and Raichur and Sindhanoor (Raichur District); (iii) Dharwad: Chamarajnagar (Chamarajnagar District), Davangere (Davangere District), Hubli-Dharwad (Dharwad District), Gadag-Betageri (Gadag-Betageri District), and Haveri and Ranebennur (Haveri District); (iv) Gulbarga: Basavakalyan and Bidar (Bidar District); Bijapur (Bijapur District), and Gulbarga, Shahabad and Yadgir (Gulbarga District). The divisional office in Dharwad will be attached to the PMU’s regional office. The program consultant for Dharwad will therefore will perform some additional functions relative to the other three program consultants.

14 The divisional program directors will be officers from the Karnataka Administrative Service or the Karnataka Municipal Administrative Service.

15 The initially selected Investment Program ULBs are (i) 4 city corporations (Belgaum, Bellary, Gulbarga, and Hubli-Dharwad); (ii) 14 city municipality councils (Bidar, Bijapur, Chamarajnagar, Davangere, Gadag-Betageri, Gangavathi, Gokak, Haveri, Hospet, Koppal, Nippani, Rabkavi-Banhatti, Raichur, and Ranebennur); (iii) 6 town municipalities (Basavakalyan, Ilkal, Jamkhandi, Shahabad, Sindhanoor, and Yadgir;) and (iv) 1 town panchayat, which is the smallest ULB category of the four (Badami).

16 Even though the provision of basic urban infrastructure and services, including water supply, became a mandate of the ULBs under the 74th Amendment Act to the Constitution of India, most ULBs in north Karnataka have yet to develop sufficient capacity to carry out this mandate. In Karnataka, expertise in this sector has been accumulated primarily within the KUWSDB because, under the act that established it, this agency had monopoly power in relation to the planning, preparation, and execution of all water supply and sewerage asset creation schemes above a certain value. In addition, bulk water supply schemes under the Investment Program cross ULB boundaries. Considering these factors, it was agreed between GoK and ADB to include the KUWSDB as an implementing agency for bulk water supply schemes on behalf of concerned ULBs. From a contractual viewpoint, contracts for bulk water supply schemes will be signed between the KUWSDB and the contractor, while ones for water supply distribution schemes and sewerage schemes will be signed between individual ULBs and the contractor. In addition, for PSP schemes, tripartite contracts will be signed by the ULB, the contractor, and the KUIDFC.

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Department, the secretary for Municipalities and Urban Development Authorities of the Urban Development Department, the secretary for expenditure of the Finance Department, the director of the Directorate of Municipal Administration, and the managing director of the KUIDFC (the committee secretary). The empowered committee will meet every quarter to review the performance of the Investment Program and decide on major issues, such as counterpart funding, implementation bottlenecks, land disputes, and special procurement. Furthermore, district-level program steering committees have been formed in each of the 13 districts to monitor the implementation of subprojects and institutional reforms in the Investment Program ULBs, as well as to coordinate between various agencies regarding approvals and clearances. Each district-level program steering committee, which reports to the executive program director, is made up of deputy commissioner of the district (who serves as the chair), divisional program director from the concerned divisional office, municipal commissioners or chief officers of the Investment Program ULBs, and presidents or chairs of the Investment Program ULBs. Appendix 7 shows the organizational arrangements for implementation of the Investment Program.

2. Subproject Appraisal and Approval

48. Identification, appraisal, and approval of subprojects under the Investment Program will follow the steps outlined in the following paragraphs. 49. Subproject Identification and Selection. Twenty-five ULBs have been initially selected for the Investment Program. With the assistance of the KUIDFC, each of these ULBs has prepared a CLIP that identifies the gaps between current and target levels of urban infrastructure, estimates the interventions required to fill the gaps, and proposes subprojects in components A–E to be funded under the Investment Program. The 25 Investment Program ULBs sent the CLIPs through the KUIDFC to the empowered committee, which subsequently approved them. ADB then reviewed the CLIPs. Any additional ULB that wishes to be included in the Investment Program will have to follow the same procedures. All the subprojects proposed for funding should meet the subproject selection criteria (Appendix 3). ADB will also review the CLIPs of additional ULBs to ensure their compliance with the provisions of the framework financing agreement. 50. Subproject Appraisal and Approval and Submission of PFRs. The KUIDFC will be responsible for detailed appraisal of the subprojects with the assistance of the program consultants. The KUIDFC will prepare a summary subproject appraisal report based on the CLIPs that will include the rationale for each subproject, the scope and components, a technical description and analysis, the cost estimates and financing plan, an environmental assessment, a resettlement plan, an indigenous peoples development plan, and the implementation arrangements along with financial, economic, and institutional analyses. All the summary subproject appraisal reports will be sent to ADB for review and approval in a format agreed on by GoK and ADB. If necessary, ADB may advise the KUIDFC to modify the subproject appraisal reports. Following ADB approval, and subject to any modifications and measures required by ADB, the KUIDFC and GoK will prepare PFRs for ADB financing. PFRs will be formally submitted to ADB for further processing through the Government.

3. Implementation Period 51. The Investment Program will be implemented over a period of 8 years from 2006 to 2015 (Appendix 8). Advance contracting for first loan will be undertaken before the effectiveness of the first loan. Civil works and equipment purchases included under the first loan, in particular, civil works for fully appraised subprojects for three ULBs (Haveri, Hospet, and Raichur) are expected to commence immediately on effectiveness of the first loan by taking advantage of advance contracting and retroactive financing.

4. Procurement 52. Procurement of all goods and services under the Investment Program will be undertaken in accordance with ADB’s Procurement Guidelines as amended from time to time. Contracts for civil works estimated to cost $10 million or more will be procured using international competitive bidding (ICB) procedures. Contracts estimated to cost less than $10 million will be procured under national competitive bidding (NCB) procedures acceptable to ADB. To the extent possible, the procurement of goods will be grouped into packages larger than $1 million to be suitable for ICB procedures. Miscellaneous goods that cannot be grouped into larger contracts and cost less than $1 million per

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contract will be procured through limited international bidding or NCB procedures. Minor items that cost less than the equivalent of $100,000 per contract may be purchased through shopping procedures. Appendix 9 shows the procurement plan and indicative procurement packaging. The Appraisal Mission, with the KUIDFC, reviewed GoK’s standard bidding documents and procurement procedures that were used for NCB (civil works and goods) and limited international bidding (goods) under ADB’s previous loan and found them to be consistent with ADB requirements. The KUIDFC will furnish further modifications it requires, together with justifications, to ADB for its no objection. Necessary provisions and detailed procedures for the Investment Program will be incorporated in the facility administration memorandum.17 53. The KUIDFC has proposed carrying out the tendering for the subprojects under the Investment Program electronically, as permitted under the Information Technology Act of India (2000). A demonstration was conducted during the Appraisal Mission, and the proposed system was found to be generally acceptable to ADB (http://www.tenderwizard.com). E-tendering for the Investment Program will follow ADB’s Procurement Guidelines and E-bidding Requirements for MDB [Multilateral Development Banks] Loans, Grants, and Credits. The program consultants will develop specifics of e-tendering to be adopted with required customization, which will be submitted to ADB for its no objection. E-tendering should start with simple contracts that are easy to define and specify, for example, water meter procurement, to be expanded further in consultation with ADB. 54. Subprojects under the PSP modality (the PBDPS and PBMCs) will be procured, in principle, through performance-based procurement procedures consistent with ADB’s Procurement Guidelines. The Use of a two-stage bidding procedure to be preceded by prequalification is proposed for recruiting private contractors under these modalities. For tendering PBDPS contracts, the first stage will involve an evaluation of technical proposals, which, if necessary, will be revised to fit specified requirements by means of clarification between the employer and the bidders. The first-stage technical proposal clarification is to be followed by the issuance of amended bidding documents and the submission of final technical proposals and priced bids in the second stage. The selection of the contractor will be based on the minimum annuity payment, which also reflects the lifetime cost approach. More details of the proposed procedures are shown in Appendix 4. 55. PBDPS contracts account for the capital investment segment for initial civil works and the 10 years’ O&M segment. Thus the ICB and NCB threshold of $10 million will be applied to the estimated capital investment cost component. Notwithstanding this arrangement, the KUIDFC will start procurement of the first PBDPS contract for the water supply and sewerage component under ICB procedures regardless of the estimated cost for the capital investment segment. All PBDPS contracts are subject to prior approval by ADB for subprojects and a full procurement review process regardless of the estimated costs of their capital investment segments and whether ICB or NCB procedures are adopted. 56. For PBDPS contracts, payment can be in local currency. Payment in local currency is sensible, because revenues for these subprojects will be in local currency and the contracts are substantially longer than ordinary civil works contracts. Furthermore, private contractors, including internationally affiliated companies, present at the PSP workshop conducted during the Appraisal Mission did not object to this proposal,. This possibility should be clearly emphasized in the bidding documents. 57. The recruitment of management contractors will be carried out under ADB's Guidelines on the Use of Consultants as amended from time to time. Like PBDPS contracts, PBMCs for subprojects are required to have ADB’s prior approval and to undergo a full procurement review process. For the recruitment of management contractors, ADB’s quality- and cost-based selection procedures will generally be followed with suitable modifications. A two-stage procedure is proposed. The first stage will be for the preparation of a shortlist of well-qualified potential bidders among those who submitted expressions of interest in response to an advertisement. The shortlisted companies or consortia will then be invited to submit second-stage proposals containing detailed technical plans for the improvements to and operation of the water supply and sewerage 17 In particular, the facility administration memorandum will incorporate provisions for smoothly and expeditiously

completing the balance of works in the case of failure of initial civil works contracts.

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systems together with financial proposals in line with the request for proposals documents. More details of the proposed procedures are shown in Appendix 5. With ADB assistance, the bridging TA consultants (footnote 8) will develop respective sets of requests for proposals and draft contract documents for the PBDPS and PBMC modalities based on lessons from global experiences with similar contracting approaches. The bridging TA consultants will be recruited under TA 4814–IND.

5. Consulting Services 58. Consultants will be selected and engaged using ADB’s quality- and cost-based selection procedures and/or least cost selection procedures in accordance with ADB’s Guidelines on the Use of Consultants. Consulting services will be provided in five packages. Four national firms will be engaged as the program consultants, corresponding to the four divisional offices under the PMU. The program consultants will assist the respective PMU offices with overall project management and implementation and will help the implementing agencies carry out detailed engineering design, procurement, and quality control. The program consultants for the divisional office based in Dharwad will serve both the PMU regional office and the divisional office. Thus this program consultant team will include a transaction adviser (or advisers) (6 person-months) with both Indian and international experience in PSP to facilitate the recruitment of PBDPS and PBMC contractors, particularly in the water supply and sewerage subsectors, for the entire Investment Program. The estimated staffing requirement for the four program consultant packages is about 1,700 person-months. A full technical proposal will be required for firms bidding for the program consultant packages. The KUIDFC has proposed the use of a single shortlist for the four program consultant packages. Any one firm on the shortlist will be allowed to submit bids for a maximum of any two of the four program consultant packages and may be awarded a maximum of two packages based on the evaluation of its bids. This selection mechanism is almost the same as that used under the two previous ADB-assisted projects. For this selection arrangement, a shortlist of six firms is deemed appropriate to ensure sufficient competition for each of the four packages. Performance-based contract is used for the program consultants and hence payments to the program consultants are linked to clearly defined deliverables as shown in Supplementary Appendix P. 59. One national firm will be engaged as the program performance monitoring system (PPMS) consultant to help the PMU generate baseline data, provide midcourse corrections, and track the Investment Program’s benefits. The estimated staffing requirement for the PPMS will be 80 person-months (national). A biodata proposal will be used for selecting the consultants for the PPMS. Outline terms of reference for consulting packages are in Supplementary Appendix P.

6. Advance Contracting and Retroactive Financing

60. ADB management has approved (i) the use of advance action to recruit consultants and to procure goods and civil works; and (ii) the request to seek the approval of ADB’s Board for retroactive financing for each of the individual loans under the MFF. Advance action is necessary to expedite start-up of the Investment Program and its continuous, smooth implementation, and retroactive financing will ease GoK’s budgetary constraints, especially during the start-up period. Retroactive financing covers up to 20% of each individual loan amount for eligible expenditures incurred during the 12 months before the signing of the corresponding loan agreement.18 The Government and GoK have been advised that ADB’s approval of advance contracting and retroactive financing does not constitute a commitment to finance the relevant expenditures under the Investment Program.

7. Disbursement Arrangements 61. Each PFR will result in a separate loan agreement, which will describe the detailed disbursement arrangements agreed between the Government and ADB. Loan disbursements will be in accordance with ADB’s Loan Disbursement Handbook and Interim Guidelines for Disbursement Operations, LIBOR-Based Loan Product, as updated from time to time. Each loan will have its own imprest account. GoK will also establish a second-generation imprest account for each loan, if necessary or required, in a non interest-bearing current account with a commercial

18 This is in accordance with ADB. 2005. Cost Sharing and Eligibility of Expenditures for Asian Development Bank

Financing: A New Approach. Manila.

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bank. The amount at any given time in the imprest account and the second-generation imprest account shall be equivalent to 6 months of estimated expenditures or 10% of the related loan amount, whichever is lower. The imprest account and the second-generation imprest account will be established, managed, and liquidated in accordance with ADB's Loan Disbursement Handbook as updated from time to time. The statement of expenditures will be used to reimburse any individual payments not exceeding a certain amount to be determined for each loan.

8. Accounting, Auditing, and Reporting 62. The KUIDFC has a satisfactory financial management and accounting system. Its Finance Division has adequate resources, including a financial management manual that clearly documents its financial and accounting policies and procedures. The KUIDFC follows an accrual-based, double-entry bookkeeping system, and its accounting standards are those promulgated by the Institute of Chartered Accountants of India. Its account books are computerized and are maintained by project and by funding agency. The audit of accounting of he GoK and KUIDFC are carried out by the Comptroller and Auditor General of India. The Internal Audit Division of the KUIDFC coordinates its annual statutory audit of financial statements to be carried out by chartered accountants appointed by the Comptroller and Auditor General of India as prescribed under Article 619 of the Companies Act (1956). More details on the KUIDFC’s accounting and auditing procedures are presented in Supplementary Appendix A. 63. For the Investment Program, the PMU and the implementing agencies will establish and maintain separate accounts and records adequate to identify the goods and services financed from the loan proceeds, the expenditures incurred from the Investment Program components and their subprojects under each individual project, and the use of local funds under each individual project. Independent auditors will audit these accounts and related financial statements annually in accordance with international auditing standards. Within 9 months of the end of each fiscal year, GoK will submit consolidated annual audited reports and related financial statements for each individual project to ADB. The auditors’ opinion of that part of the examination relating to the imprest accounts and statements of expenditure should be separately set out in the auditors’ opinion. 64. The PMU is responsible for providing ADB with quarterly progress reports on the implementation of each individual project within 45 days of the end of each quarter. The progress reports will cover progress made during the period of review; changes to the implementation schedule, if any; problems or difficulties encountered and remedial actions taken; and work to be undertaken and subprojects and/or components to be proposed for financing in the coming quarter. The reports will also include a summary financial account for each implementing agency, expenditures to date, and a report on benefit monitoring. Based on the quarterly progress reports, ADB will prepare annual implementation progress reports to be submitted to the Board each December. The PMU will submit to ADB a project completion report within 3 months of physical completion of the subprojects financed under each loan and an MFF completion report within 3 months of physical completion of the subprojects under the MFF. These reports will describe the details of implementation, costs, monitoring and evaluation results, problems encountered and actions taken, and other relevant information that ADB may request.

9. Anticorruption Policy and Governance Measures 65. ADB’s anticorruption policy was explained to and discussed with the KUIDFC. Consistent with its commitment to good governance, accountability, and transparency, ADB reserves the right to investigate, directly or through its agents, any alleged corrupt, fraudulent, collusive, or coercive practices relating to the Investment Program. To support these efforts, relevant provisions of ADB’s anticorruption policy are included in the loan regulations and the bidding documents for the Investment Program. In particular, all contracts financed by ADB in connection with the Investment Program shall include provisions specifying ADB’s right to audit and examine the records and accounts of the KUIDFC and all contractors, suppliers, consultants, and other service providers as they relate to the Investment Program. 66. The KUIDFC's strong financial management capacity that it gained through the implementation of two earlier ADB projects is expected to mitigate the risks of corruption under the Investment Program. The adoption of the PSP modality, which would bring in competent private parties who will be held accountable for clearly identified outputs in a comprehensive manner, is expected to further mitigate the risks of corruption. Furthermore, all the PSP contracts will be

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subject to technical auditing by independent auditors. GoK’s NNP, which is to be supported under the Investment Program, is designed to improve governance at the ULB level, in particular, by introducing transparent accounting systems and publishing municipal information on ULBs’ web sites.19 The ULB web sites provide access to the public grievance redress system, which can be used for handling grievances related to the Investment Program. GoK will disclose various information about the Investment Program on the KUIDFC web site and the respective ULB web sites as appropriate, including procurement-related information, financial statements, and physical progress. With regard to procurement, the web sites will disclose lists of participating bidders, names of winning bidders, basic details of the bidding procedures adopted, contract values, and lists of goods and services procured. In addition, the e-tendering proposed for selected procurement is expected to enhance fair, transparent, and efficient bidding procedures.

10. Program Performance Monitoring System 67. The PMU will ensure that a PPMS satisfactory to ADB is established within 3 months of the effectiveness of the first loan under the MFF. The PPMS will monitor and evaluate the performance of the Investment Program, as well as of subprojects under each loan, including key impact and outcome indicators and associated assumptions with corresponding target dates. For subprojects under the PBPDS and PBMC modalities, key performance indicators satisfactory to ADB will be developed during the preparation of requests for proposals and draft contract documents for each subproject. To monitor the key performance indicators, for each PDBPS contract and PBMC, the KUIDFC will propose three program consultant teams not directly involved in the geographical area concerned as independent auditor candidates. The private contractor concerned will be allowed to select a preferred candidate from the list of the three that will be employed by the KUIDFC.

11. Investment Program Review 68. Based on a review of quarterly progress reports, ADB and GoK representatives will meet as required to discuss the progress of the Investment Program under each loan, any changes to implementation arrangements, or remedial measures required to be undertaken to achieve the overall objectives of specific subprojects and components and of the overall Investment Program. 69. In addition to regular reviews, including a midterm review for each loan, a detailed midterm review of the Investment Program will be undertaken within a certain period of the effective date as agreed under the first loan agreement by ADB and the Government. The midterm review will include a detailed evaluation of the scope of the Investment Program, implementation arrangements, any outstanding issues, environment, resettlement and other safeguard issues, achievement of scheduled targets, progress with PSP contracts, and other issues, as appropriate.

IV. PROGRAM BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS

A. Benefits and Impacts

1. Economic Analysis 70. The economic analysis reviewed the following 10 areas for the Investment Program: (i) the rationale for government involvement; (ii) the goals of the HPC report’s investment plan; (iii) the sector development plan; (iv) the associated economic policies; (v) the economic risks; (vi) GoK’s capacity; (vii) the fiscal impacts; (viii) GoK’s commitment; (ix) the coordination of foreign aid; and (x) the conditions attached to the loans. Supplementary Appendix F presents the detailed economic analysis. The economic rationale for government intervention is sound, as the Investment Program supports only the ULBs’ constitutionally mandated functions, which are related to basic public services characterized by monopolistic conditions, externality management, and protection of public goods. The goals of accelerating economic growth in north Karnataka and reducing regional imbalances within the state are well conceived as the state’s priority through wide consultation. The Investment Program is the least-cost approach to realizing that goal by focusing investments in the urban sector, as urban areas drive the region’s economic growth by attracting private investment and industry. The economic viability of subprojects is ensured by applying economic selection criteria developed for the Investment Program. The Investment Program fits in well with and 19 Each ULB’s web site is operational with the support of the eGovernments Foundation.

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complements the Government’s efforts to promote performance- and reform-linked urban infrastructure development in India, as embodied in its 10th five-year plan, in the Jawarharlal Nehru National Urban Renewal Mission, and in the Urban Infrastructure Development in Small and Medium Towns. The Investment Program seeks financing from different sources, including central Government fund, state funds, and World Bank loans. In particular, the World Bank’s Karnataka Municipal Reform Project supports the urban development plans of ULBs that are not covered under the ADB financing in a modality consistent with the Investment Program. As a nodal agency for urban infrastructure projects financed by GoK, the KUIDFC is capable of coordinating multiple projects at the state level to make efficient use of available resources.

2. Financial Analysis 71. The financial operating plans for all 25 initially identified Investment Program ULBs examine whether the ULBs can absorb the respective subprojects in relation to equity contributions, O&M costs, and debt-service repayments. According to the financial operating plans, 13 of the 25 ULBs have demonstrated that their municipal cash flows would be sufficient to meet the additional expenditures resulting from the Investment Program, as their projected closing balances are positive. The other 12 should propose a financial improvement action plan for sustaining the improved urban services resulting from the Investment Program before they can start implementing the respective subprojects. The financial analysis is presented in Supplementary Appendix G. 72. Financial projections were also undertaken for revenue-generating subprojects in three representative ULBs to examine the financial viability of individual subprojects. Tariff levels are currently low, but raising tariffs substantially before realizing actual improvements in urban services is difficult. Hence the financial internal rates of return for water supply and sewerage subprojects are estimated to be lower than the weighted average cost of capital of 2.5% for all three ULBs. GoK is, however, committed to restructuring water tariffs and introducing sewerage tariffs, and has already initiated the necessary studies and surveys. In particular, ADB will help GoK develop sewerage tariffs for the Investment Program ULBs under the bridging TA. The financial sustainability of subprojects in each ULB is expected to rely on ULBs’ general revenue mobilization efforts, especially property tax increases, which will be assisted by the Investment Program.

3. Poverty Reduction and Social Development 73. The Investment Program will result in wider access to and sustainable improved quality of urban infrastructure and services in Investment Program ULBs. The resulting benefits are upgraded provision of basic needs, enhanced living conditions, and improved public health. Baseline surveys indicate that the poor suffer more than the average population from poor-quality urban infrastructure and services in north Karnataka.20 Benefits from the sanitation component are expected to accrue to households connected to the sewerage network. Networks will be provided in densely built-up core and unserved or underserved areas. Sewerage networks will reach the boundaries of slum areas, which will enable connection by a large number of households and provide sewered, low-cost toilets. The benefits to poor households from the urban transport component will be derived from employment generation and access. Water supply will benefit all Investment Program ULB populations. The Investment Program will also result in broader benefits to the poor, including economic growth and employment generation. In addition, the slum improvement component will result in community development in poor areas. The summary poverty reduction and social strategy is in Appendix 10. 74. Community development is a key objective of the slum improvement component. Community development programs in poor communities, to be implemented through nongovernment organizations, will focus on health and sanitation awareness, low-cost sanitation infrastructure, and self-help groups for women. The programs are hinged on community 20 Fewer than 30% of households in north Karnataka have access to water connections, and in slum areas, the figure is

less than 10%. More than 75% of slum dwellers in north Karnataka ULBs such as Bellary, Gagad-Betageri, Gulbarga, Koppal, and Rabkavi-Banhatti and 45% to 60% in Badami, Basavakalyan, Davangere, Gokak, Raichur, and Yadgir depend on standposts. The slum populations also receive lower water pressure delivered less frequently and for shorter durations compared with the general population. More than 85% of slum households completely lack access to safe sanitation. Slum households in 16 of the 25 Investment Program ULBs reported a lack of access to underground drainage connections. Surveys also show that more than 60% of slum dwellers in the Investment Program ULBs report poor access to roads.

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participation. A participation strategy is provided in Supplementary Appendix H. Self-help groups for women will bring positive benefits to poor women in poor areas, where the percentage of female-headed households is disproportionately larger compared with the overall average. The gender strategy presented in Supplementary Appendix I focuses on women’s participation to maximize the Investment Program’s beneficial impacts on women. Appendix 11 presents a gender action plan. The Investment Program’s benefits for women are expected to include a reduction of the burden entailed in collecting water, health benefits, and employment opportunities.

4. Social and Environmental Safeguards 75. Social. The KUIDFC prepared short resettlement plans for sample subprojects in three Investment Program ULBs (Haveri, Hospet, and Raichur) following ADB’s policy on involuntary resettlement, the resettlement framework for the Investment Program, and applicable policies and laws of the Government and GoK. Draft short resettlement plans are in Supplementary Appendixes J1 to J3. Subprojects are not expected to result in significant land acquisition and resettlement. Careful subproject site and alignment selection will minimize the amount of land acquisition required, and GoK land will be used to the extent possible. The draft short resettlement plans show that 13, 12, and 14 hectares, respectively, will be permanently acquired for the Haveri, Hospet, and Raichur sewage treatment plants. This acquisition will affect a total of 29 households in the three ULBs. No permanent land acquisition is required for water supply subprojects, which will be undertaken in existing facilities, or for urban road improvements, which will be confined to improvements to the riding surface. While temporary land acquisition is not expected for any of the subprojects, this will be re-examined during detailed engineering design of water supply and sewerage network components. To ensure compliance with the policies and requirements on resettlement of the Government, GoK and ADB, the KUIDFC has formulated a resettlement framework to guide the implementation of future subprojects. A summary of the resettlement framework is in Appendix 12 and the resettlement framework is in Supplementary Appendix K. 76. The Investment Program provides social benefits through improvements of and expanded access to urban infrastructure and services and enhances the potential for investments and economic growth in poorer districts of north Karnataka. Social assessments undertaken for sample subprojects do not indicate any adverse impacts on vulnerable groups, including indigenous peoples. The KUIDFC has formulated an indigenous peoples development framework to ensure that appropriate indigenous peoples development plans or specific actions will be undertaken that enable equal sharing of Investment Program benefits should a future subproject affect indigenous peoples (Supplementary Appendix L). 77. Environmental. The KUIDFC has prepared initial environmental examinations (IEEs) for three sample subprojects in the Investment Program ULBs of Haveri, Hospet, and Raichur in line with ADB’s environment policy. The IEEs show that subprojects will result in net environmental benefits, including (i) improved quality of drinking water from water supply investments; (ii) improved surface and groundwater quality; (iii) improved public health as a result of sanitation and drainage investments; (iv) reduced flooding as a result of drainage investments; (v) reduced volume of suspended particulates in the air as a result of improved roads; and (vi) increased social benefits from community participation, slum improvement, and nonmunicipal infrastructure investments. The salient points of the IEEs are summarized in Appendix 13 (the actual IEEs are in Supplementary Appendixes M1 to M3). 78. The Investment Program will not generate any significant adverse environmental impacts. Potential adverse environmental impacts are largely temporary and localized and can be addressed through subproject design and mitigation measures. The IEEs contain environmental monitoring plans that identify monitoring parameters and the agencies responsible for ensuring that mitigation measures are undertaken. The IEEs conclude that no further assessment of environmental impacts is required for sample subprojects. To ensure compliance with the environmental guidelines and requirements of the Government, GoK and ADB, the KUIDFC has formulated environmental assessment and review procedures to guide the implementation of future subprojects. Should a category A or B (sensitive) subproject be prepared, a Summary Environmental Impact Assessment or Summary Initial Environmental Examination will be prepared and made available to the public 120 days in advance of subproject approval in line with ADB’s implementation procedures for sector loans. The environmental assessment of sector impacts, summary IEEs for sample subprojects,

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environmental criteria for subproject selection, and environmental assessment and review procedures are in Supplementary Appendix N. B. Risks 79. The effectiveness of the infrastructure to be developed under the Investment Program depends on the level of ownership of and commitment by the Investment Program ULBs. The ULBs must be committed to institutional change and financial reforms, especially the NNP. Offering ULBs more favorable loan conditions based on the number of core reforms adopted will mitigate some risks, but at the same time, the ULBs must continue to demonstrate the political will to increase tariffs to achieve full cost recovery within a reasonable time frame. A key risk is that Investment Program ULBs may fail to manage and maintain the newly acquired assets properly and may be tempted to minimize costs through inappropriate operations. GoK is mitigating this risk by launching a well-prepared human resources policy designed to abolish redundant and/or antiquated positions and appoint well-qualified staff through competitive selection procedures. 80. Long-term contractual relationships, such as the PBDPS and PBMC modalities, involve risks. Each of these risks carries with it a cost to the contracting parties, and these costs are ultimately borne by Investment Program beneficiaries in the form of tariffs or taxes. As such, careful attention to risk mitigation measures can help ensure that PSP arrangements result in improved service delivery at the lowest possible cost to Investment Program beneficiaries. The allocation of risk for a subproject will depend on specific subproject conditions, including the type and location of the subproject, the services to be provided, and the negotiating positions of the parties involved. At preliminary consultations with prospective private contractors at a workshop held during the Appraisal Mission on 12 September 2005 (Supplementary Appendix E), the private contractors identified the risks that need to be addressed in the design of PSP subprojects as follows:

(i) force majeure risks; (ii) revenue risks, in particular, the need for escalation clauses that would allow the

private contractors’ remuneration to be adjusted for inflation and the need to ensure payments to the private contractors from the ULBs;

(iii) political risks, in particular, assurances that GoK is strongly committed to its stated policies;

(iv) construction risks, in particular, delays caused by the failure to complete land acquisition prior to the onset of construction;

(v) financial risks, in particular, with regard to foreign currency exposure; and (vi) operating risks, specifically, the reliability of water sources in the case of water and

sewerage projects.

81. Based on lessons from global experiences with similar contracting approaches (Supplementary Appendix E), identifiable risks inherent in PSP arrangements, including those outlined above, will be mitigated through careful design of both types of contracts and the underlying legal and regulatory regime. The remaining risks will be allocated, to the extent possible, to those parties best able to bear them. This principle will be adopted in developing PSP contracts and associated bidding documents. 82. A number of Investment Program ULBs will continue to depend on water sources which are not under their control but from which sufficient quantities of water must be made available for them. Thus one risk is the impact of potential conflicting upstream demands on water sources and another is upstream pollution. The success of the Investment Program also depends on the successful rehabilitation of existing water treatment, transmission, and distribution systems and of existing sewerage systems. As these assets continue to deteriorate with age, the level of investment required to achieve the stated objectives may increase. The risk of underinvestment is increased as a result of the current limited knowledge of the systems because of the lack of original plans, as-built drawings and operational data. Improving the level of system understanding will be a key task for the program consultants. In addition, delays in land acquisition, where undertaken, could result in implementation delays.

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V. ASSURANCES

83. In addition to the standard assurances, the Government and GoK have given the following assurances, which have been incorporated in the framework financing agreement, and will be incorporated in the individual loan agreements as applicable, subject to any amendments to be mutually agreed by the Government and ADB.

(i) GoK will ensure that sufficient counterpart funds are made available from its budget for each fiscal year in a timely manner to cover (a) its contribution, and (b) those of the implementing agencies for the subprojects under components A, B, C, D, and E.

(ii) GoK will ensure that adequate funds for the O&M of project facilities created under individual subprojects will be provided for appropriate implementing agencies during and after subproject completion through budgetary allocations or other means.

(iii) The Government will make available to GoK the proceeds of the financing provided by ADB. GoK commits to bearing the foreign exchange risk of such proceeds.

(iv) GoK will relend the loan proceeds to the implementing agencies through the KUIDFC under appropriate relending arrangements acceptable to ADB.

(v) GoK will ensure that contractual documents under the PBDPS and/or PBMC arrangements are provided for ADB for prior review and approval before their use for individual subprojects.

(vi) GoK will ensure that necessary provisions are made for each PSP contractor to meet the contractual obligations of GoK and of the pertinent Investment Program ULB. GoK will ensure that the PSP fund that has been established is operationalized and that sufficient funds are provided to and maintained in the fund to mitigate nonpayment risks for PSP contractors.

(vii) GoK will ensure that all land and rights-of-way required for any of the subprojects are made available in a timely manner; that compensation at replacement value is provided prior to the award of relevant civil works contracts; and that involuntary resettlement, including relocation, is carried out in accordance with the resettlement framework and resettlement plans agreed upon between GoK and ADB, the Government’s national policy on resettlement and rehabilitation, and ADB’s policy on Involuntary Resettlement. A resettlement plan will be prepared for every subproject involving land acquisition or resettlement, including relocation, and will be submitted to ADB for review and approval prior to the award of any related civil works contracts. For sample subprojects, updated resettlement plans will be provided to ADB for review and approval following detailed engineering design and prior to the award of civil works contracts. Similarly, revised resettlement plans based on detailed designs for all subprojects will also be provided for ADB approval prior to the award of related civil works contracts.

(viii) GoK will ensure that subprojects will, as far as possible, have a minimal impact on indigenous peoples. If an impact is anticipated, GoK will ensure that the subprojects are carried out in accordance with the indigenous peoples development framework agreed upon between GoK and ADB and will comply with ADB’s policy on Indigenous Peoples.

(ix) GoK will ensure that subprojects will be carried out in accordance with the gender action plan (Appendix 11) and ADB’s policy on gender and development.

(x) GoK will ensure that the design, construction, operation, and implementation of all subproject facilities is carried out in accordance with the environmental assessment and review procedures and IEEs for sample subprojects agreed upon between GoK and ADB and complies with the environmental laws and regulations of the Government and GoK, and ADB’s Environment Policy. Any adverse environmental impacts arising from the construction, operation, and implementation of subproject facilities will be minimized by implementing the environmental mitigation and management measures and other recommendations specified in environmental assessment reports (e.g., Initial Environmental Examinations, and Environmental Impact Assessments). GoK will ensure that environmental requirements are incorporated in bidding documents and civil works contracts.

(xi) GoK will conduct surveys under the bridging TA referred to in paragraph 37, to determine the real volumetric water tariff by measuring the actual amounts of water supplied to 3 ULBs to be selected by the KUIDFC.

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(xii) GoK will ensure that for each of the Investment Program ULBs receiving funds under the loan, the (nominal) base volumetric water tariff will be increased to the real current volumetric tariff per m3 and that the tariff schedule will be changed zone by zone or for the related town, as feasible, upon completion of the related water supply subproject, from the (un-metered) monthly flat-rate to volumetric metered tariff with the lifeline block set at 8 m3 for which the rate shall not be less than the flat-rate. Upon completion of the studies currently being carried out by consultants under the World Bank-supported Karnataka Urban Water Sector Improvement Project (KUWASIP), and by the bridging TA consultants, the water tariffs of the Investment Program ULBs will be reviewed and revised based on recommendations of these studies. Recommendations to the Investment Program ULBs will be firmed up by the mid-term review of the Investment Program.

(xiii) For subprojects consisting of sewerage provision, sewerage tariffs will be introduced by GoK. The appropriate levels of sewerage tariffs for the Investment Program ULBs will be agreed between GoK and ADB upon completion of studies currently being carried out by consultants under the World Bank-supported KUWASIP, and subsequently upon completion of studies by the bridging TA consultants. Such sewerage tariffs will take effect upon related subproject’s completion.

(xiv) GoK will ensure that measures are taken to improve bill collection efficiency including the enforcement of existing provisions for service cut-off due to non-payment. The appropriate levels of bill collection efficiency improvement targets for the Investment Program ULBs will be agreed between GoK and ADB upon completion of the studies currently being carried out by consultants under the World Bank-supported KUWASIP project, and the studies by the bridging TA consultants.

(xv) GoK will ensure that the Investment Program ULBs will by not later than 31 December 2011, (a) take measures to significantly improve bill collection efficiency including the enforcement of existing provisions for service cut-off due to non payment, and (b) introduce self assessment system or capital value system for property tax.

(xvi) For each PSP contract, the KUIDFC will propose three program consultant teams not directly involved in the geographical area concerned as candidates for independent auditor. The PSP contractor concerned will be allowed to select a preferred candidate for independent auditor—to be employed by the KUIDFC—from the list of the three.

(xvii) GoK will, in sofar as it relates to the related projects, promptly notify ADB of any proposal to amend, cancel, or repeal any of the provisions of the KUIDFC’s memorandum of association or articles of incorporation and will give ADB an adequate opportunity to comment on such proposals before taking any action.

(xviii) GoK will ensure that the necessary resolutions shall have been passed by the relevant ULBs prior to allowing the KUWSDB to implement bulk water supply schemes under component B of the Investment Program on behalf of a ULB.

(xix) GoK will ensure that all subprojects meet, to the satisfaction of ADB, the criteria described in Schedule 4 to the Framework Financing Agreement.

VI. RECOMMENDATION

84. I am satisfied that the proposed multitranche financing facility would comply with the Articles of Agreement of the ADB and, acting in the absence of the President, under the provisions of Article 35.1 of the Articles of Agreement of ADB, I recommend that the Board approve the provision of loans under the multitranche financing facility in an aggregate principal amount not exceeding $270,000,000 equivalent to India for the North Karnataka Urban Sector Investment Program from ADB’s ordinary capital resources, with interest to be determined in accordance with ADB’s LIBOR-based lending facility, and such other terms and conditions as are substantially in accordance with those set forth in the Framework Financing Agreement presented to the Board.

Liqun Jin Vice President

14 November 2006

Appendix 1

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DESIGN AND MONITORING FRAMEWORK

Design Summary Performance Targets/Indicators

Data Sources/Reporting

Mechanisms

Assumptions and Risks

Impact Improvement of Urban Infrastructure and services resulting in overall improvement in quality of life in project ULBs; and related increase in economic opportunities and growth in north Karnataka and reduced imbalances between north Karnataka and the rest of the state

By the end of the Investment Program implementation period (2016): reduction in the gaps

between per capita real income in assisted districts and the state average;

increase in the share of employment in nonprimary sectors in north Karnataka.

Census data (next due in 2011).

Annual economic survey of Karnataka by the Directorate of Economics and Statistics.

Assumptions Parallel development will occur in other key sectors including transportation, power, industry, education, and financial.

Political support for development in north Karnataka will continue.

Risks Acceptance and implementation of the required reforms in tariffs, taxes and user charges are limited.

General perception of north Karnataka as a potential development zone in comparison to rest of Karnataka, remains poor despite infrastructure improvements.

Outcome Improved basic urban services for at least the 4.3 million people living in the initially identified 25 Investment Program ULBs Improved and sustainable infrastructure services within Investment Program ULBs that will in turn benefit the agriculture, industry and tourism sectors PBDPS and/or PBMC modalities implemented and interest generated in other Indian states

With respect to sanitation, by mid-2013: sewerage coverage is

expanded to match the coverage of water supply;

the volume of wastewater discharged to storm drains is reduced;

wastewater treatment is practiced in all Investment Program ULBs;

the frequency of flooding is reduced;

With respect to water supply, by early 2012: the supply system is

improved and expanded to enhance both access to potable water services and the volume of water delivered;

the number of household connections is increased and less reliance is placed on public standposts;

domestic customers receive, on average, 90 liters per capita per day;

With respect to slum improvement, by early 2012: the slum population with

access to basic water supply and sanitation services is increased.

With respect to nonmunicipal

Census data (next due in 2011)

Municipal corporation annual reports

ULBs’ financial records

Program performance monitoring system reports

Program Management Unit reports

ADB review mission reports

Resettlement and environmental external monitoring reports

Nongovernment organization reports

Water-related disease statistics

Socioeconomic surveys

Assumptions The state and Investment Program ULBs are committed to implementing the institutional and financial reforms required to improve service delivery.

Nirmala Nagar Program reforms are implemented on schedule.

Investment Program ULBs are fully staffed and have the requisite capacity to sustain the improved services.

Tariffs for services are set at appropriate levels and collected efficiently.

Beneficiaries are willing to pay for proper management and O&M of infrastructure facilities.

The private sector is interested in the PBDPS and/or PBMC procurement modalities.

Risks Water resources may deteriorate because of upstream activities and/or pollution.

Investment Program ULBs do not fulfill their obligations under the PBDPS and/or PBMC procurement modalities.

Investment Program ULBs may be tempted to minimize operational costs through inappropriate operation of the facilities provided.

Appendix 1 22

Design Summary Performance Targets/Indicators

Data Sources/Reporting

Mechanisms

Assumptions and Risks

infrastructure, by the end of 2013: emergency services, and

tourism services are improved;

lakes are rehabilitated; With respect to urban transport infrastructure, by early 2013: about 60,000 households

are benefiting from improved access;

traffic flow within the Investment Program ULBs has improved.

With respect to improved institutional capacity, by early 2011: Investment Program ULBs

are capable of implementing, operating and maintaining urban services on an efficient, equitable and sustainable basis;

financial management practices based on cost-recovery principles are implemented.

Outputs Implemented investment program for sanitation Implemented investment program for water supply

By mid-2013: about 180,000 additional

household sewerage connections are constructed;

existing sewers have been rehabilitated and new sewers laid in 20 Investment Program ULBs to increase service coverage to 60% of Investment Program ULB households;

interceptor sewers are constructed and connected to the sewerage system;

treatment plants are constructed and commissioned and appropriate O&M systems are in place;

existing storm drains are rehabilitated and new storm drains are constructed.

By early 2012: water sources are secured

by rehabilitation work and intake system upgrading;

treatment plants are rehabilitated, outputs are optimized and water quality is improved;

transmission mains are

Quarterly progress reports

Disbursement and reimbursement records

Program performance monitoring system reports

Annual work plans

ADB review mission reports

Resettlement and environmental external monitoring reports

Subproject completion and commissioning certificates

Assumptions Investment Program ULB staffs are committed to implementation of the Investment Program.

Counterpart funds are provided in a timely fashion.

Beneficiaries are willing to connect to water supply and sewerage networks.

Program Consultants are recruited in a timely fashion.

Land acquisition and compensation for those affected are agreed on and completed before scheduled construction.

Environmental clearances are completed before scheduled construction.

Sewerage systems are only constructed in areas where the level of water supply is sufficient to support a waterborne sewerage system.

Risks

Further deterioration in the water supply and sewerage systems prior to or during implementation may affect the scope of subprojects and increase budgetary requirements.

Limited knowledge of existing distribution systems may result in investments in water

Appendix 1

23

Design Summary Performance Targets/Indicators

Data Sources/Reporting

Mechanisms

Assumptions and Risks

Implemented investment program for slum improvement in Investment Program ULB slums Implemented investment program for nonmunicipal infrastructure Implemented investment program for urban transport improvement Improved institutional capacity

rehabilitated or replaced; bulk water meters are

installed; existing distribution systems

are rehabilitated and unaccounted-for water is reduced to a reasonable level in each Investment Program ULB;

new distribution pipelines are constructed in 14 Investment Program ULBs to increase coverage to 60% of all households in the Investment Program ULBs;

about 100,000 additional households are connected;

all household connections are fitted with water meters.

By early 2012: basic water supply and

sanitation services are provided to about 30,000 households in the slums of 15 Investment Program ULBs;

the use of public standposts is being minimized in favor of house connections.

By end 2013: firefighting services are

constructed; civil works related to tourism

are constructed; lake improvement measures

are implemented; district information centers

are constructed. By early 2013: key roads (identified during

the midterm review) are resurfaced;

associated road junction alignments and markings are improved to agreed standards.

By the end of 2011: Nirmala Nagar Program

reforms are implemented in Investment Program ULBs;

computerized systems, including management information systems, are installed;

new accounting procedures are in place;

Investment Program ULB staff are trained to undertake the management and O&M of urban infrastructure;

billing and collection systems are in place.

supply rehabilitation not achieving the projected improvements.

Limited knowledge of existing household wastewater disposal systems may lead to increased workloads and investment requirements.

Appendix 1 24

Design Summary Performance Targets/Indicators

Data Sources/Reporting

Mechanisms

Assumptions and Risks

By the end of 2014: PBDPS contracts and/or

PBMCs are under implementation for subprojects in the water supply, sewerage, and urban transport subsectors;

private sector liquidity is successfully tapped.

Activities with Milestones Inputs ($ million) 1. Investment Program Preparation 1.1 Program Management Unit to be fully operational by April 2007 1.2 Program Consultants to be appointed by April 2007 1.3 Institutional reforms in Investment Program ULBs to be completed by the end of 2011 1.4 Land acquisition to be completed as agreed under each individual project 1.5 Engineering design to be completed as agreed under each individual project 2. Subproject Implementation – (dates to will be finalized under the Facility Administration Memorandum) 2.1 Rehabilitation of existing sewers and system expansion 2.2 Rehabilitation of existing sewage treatment plants and construction of new facilities 2.3 Rehabilitation of drainage channels 2.4 Commence procurement and installation of water meters 2.5 Complete installation of water meters 2.6 Rehabilitation of existing water treatment plants and construction of new facilities 2.7 Rehabilitation of existing water distribution systems and construction of new facilities 2.8 Improvement of existing urban transport and junction upgrading 2.9 Slum improvement scheme implementation 2.10 Construction of civil works for firefighting services civil works 2.11 Construction of civil works for heritage sites 2.12 Construction of civil works for district information centers 2.13 Implementation of lake improvement measures 3. Institutional Development 3.1 Procurement of computers by January 2009 3.2 Assistance with accounting and MIS reforms completed by December 2011

ADB 270 Government of Karnataka and other agencies 170

ADB = Asian Development Bank, O&M = operations and maintenance, PBDPS = performance-based deferred payment structure, PBMC = performance-based management contract, ULB = urban local body.

Appendix 2

25

SECTOR ANALYSIS AND EXTERNAL ASSISTANCE TO THE URBAN SECTOR IN INDIA

A. General 1. The scale and rate of urban growth in India has led to serious deficiencies in the availability of basic urban infrastructure and the delivery of basic urban services. Most cities must deal with a lack of reliable and safe water supplies, inadequate wastewater systems, poorly maintained streets, and growing slum areas. The resultant negative social, economic, and environmental impacts are significant, with the urban poor being most directly affected. The Government's passage of the 74th Constitutional Amendment Act in 1992 marked the beginning of a new and committed approach to addressing the problems facing India's growing urban areas. The act provides for the progressive devolution of authority and responsibility for urban affairs from the states to urban local bodies (ULBs). Essential to this provision is the need to undertake significant policy reforms aimed at improving urban management, finance, and governance at the local level. The Government has also formulated an urban sector strategy and plan for the most urbanized states in the country. B. Urban Sector

1. National 2. India faces a formidable challenge in responding to the increasing demand for urban infrastructure, urban services, and housing in the country's rapidly expanding urban areas. With an urban population of around 285 million in 2001, the inadequacy of existing urban infrastructure and services, coupled with a severe shortage of affordable housing, poses serious constraints to sustained economic growth and productivity. While India's cities are home to less than 30% of the population, they currently account for about 50% of gross domestic product and more than 90% of all Government revenues. However, the continued productivity of India's cities is contingent upon significant investments to upgrade and maintain urban infrastructure and to provide adequate levels of urban services. With India's urban population expected to grow to 405 million by 2011 and 550 million by 2021, the challenge lies in accommodating an average of more than 11 million new urban residents per year. 3. In addition to being a major constraint to economic growth and productivity, the lack of adequate investments in urban infrastructure, urban services, and housing has social ramifications, especially for the urban poor. According to some estimates, as much as 30% of the urban population lives below the official poverty line. In the larger cities, estimates indicate that approximately 28% of people live in slums. India's slum population increased from about 28 million in 1981 to some 51 million in 1991 and is expected to have exceeded 100 million by 2000. The health and environmental implications of sprawling slums and households’ lack of access to potable water, sewerage, drainage, sanitation, and waste disposal facilities are staggering.

2. Karnataka 4. Karnataka is one of India’s most urbanized states, with an urban population of 17.9 million in 2001, accounting for 34% of the state's total population. About one third of the state's urban population lives below the poverty line. The state capital of Bangalore is one of the fastest growing metropolitan areas in the country and constitutes the center of India's high-technology industries, such as aerospace, telecommunications, and computer hardware and software development. The rapid expansion of industrial activities and the increased migration of people from rural areas and other parts of the country to Bangalore are placing considerable strains on the city’s infrastructure and services. Living conditions are deteriorating rapidly, urban poverty is rampant, and environmental problems are on the rise. 5. Although Bangalore has been Karnataka's center of urban and industrial growth for the past two decades, the state has recognized that the social and economic development potential of other principal urban centers has not been realized, mainly because of the absence of adequate levels of investment in basic urban infrastructure and services. In particular, the state has identified the coastal region, with Mangalore constituting the primary urban center, as a priority area for investment. Despite this region's rich resource base and strategic location, poor infrastructure conditions have directly contributed to a deterioration in living standards and served as a major constraint to economic growth.

Appendix 2

26

6. The state has recently recognized that north Karnataka is also lagging behind the rest of the state. Indeed, the High Power Committee Report for Redressal of Regional Imbalances1 noted that the economy of north Karnataka has been worse off than that of other parts of the state for more than four decades. The economy is primarily based on agriculture, with more than 36% of the workforce employed in this sector. Average per capita incomes in all districts in north Karnataka are lower than the state average. Of the 78 clusters of ULBs defined as suffering from abject poverty (more than 40% of the population below the poverty line), 48 are located in north Karnataka. 7. The level of urban services in north Karnataka is poor. The water supply is intermittent in all towns and is often as infrequent as once every 3 days to once a week. Only a few towns receive water for 1 to 2 hours each day and the water quality is poor. Service coverage is limited, and on average, houses with water supply connections account for only 67% of properties registered to pay property taxes. Where sewer systems have been constructed, coverage is limited and they generally serve only the older sections of each ULB. Only a few sewage treatment plants exist, and these do not function well, if at all. Storm water drainage facilities are inadequate and frequently misused for solid waste disposal. Roads are generally unpaved and junctions are inefficient. Slums exist in most towns and their levels of urban infrastructure and services are extremely low, with some public standposts serving up to about 300 people and only the most basic level of sanitation available. Details of the existing service levels in each of the proposed Investment Program ULBs are presented in Table A2.1 at the end of this appendix. C. Government Policies

1. National 8. India’s 10th five-year plan (fiscal year 2002–fiscal year 2007) proposes 8% annual growth for the economy and focuses on four basic themes: high growth, equitable growth, human development, and reforms. With 80% of plan allocations targeting social expenditures, the 10th five-year plan aims to reduce poverty through access to education, health care, potable water, and sanitation. The plan also focuses on good governance as a cross-cutting issue, notes the declining role of government in the provision of services, and emphasizes the development of private sector participation and the provision of an improved regulatory environment. 9. The Government has stressed its resolve to energetically pursue the goals of poverty reduction through shared growth and of inclusive social development as encapsulated in the National Common Minimum Program. This program seeks to ensure that economic reforms are oriented primarily toward spreading and deepening rural prosperity, improving the quality and delivery of public services, and bringing about a visible and tangible difference in the quality of life of ordinary citizens. Overall, the program emphasizes the Government’s commitment to undertake economic reforms “with a human face.” Its main goals relevant to the urban infrastructure sector are to

(i) increase investments in the development and expansion of physical infrastructure such as roads including highways, ports, power, railways, water supply, sewage treatment, and sanitation;

(ii) raise public spending on education from 4.1% to 6% of gross domestic product, with at least half to be spent on primary and secondary education;

(iii) raise public spending on health from less than 1% to at least 2% to 3% of gross domestic product over the next 5 years, focusing mainly on primary health care;

(iv) eliminate the federal Government’s revenue deficit by 2009 to release more resources for investments in social and physical infrastructure; and

(v) strengthen social security, health insurance, and other schemes to improve the lives of informal sector workers.

2. Karnataka

10. The government of Karnataka is currently implementing comprehensive reforms in line with the 10th five-year plan through the Directorate of Municipal Administration’s (DMA’s) Nirmala Nagar Program. This is a six-module program that is addressing the key issues of property taxes, accounting, thrift and credit, public toilets, rainwater harvesting, and solid waste management. The

1 Government of Karnataka. 2002. High Power Committee for Redressal of Regional Imbalances. Bangalore.

Appendix 2

27

Nirmala Nagar Program is being supported by a well-prepared human resources policy designed to abolish obsolete and redundant positions and appoint well-qualified professionals, such as accountants and environmental engineers, through competitive selection procedures. 11. Improving the poor rates of property registration (for tax purposes) and assessment and of property tax collection have been key objectives, as only about 75% of properties in Karnataka are assessed and registered, and of these only 50% actually pay property taxes. The unrealized tax income is in the order of $70 million. The DMA is currently 70% through an ambitious program to survey 3 million properties in the 63 ULBs initially targeted under the reforms. The program is being supported by well-designed management information and geographic information systems that were developed by the eGovernments Foundation. The software packages being produced are highly advanced. 12. Under the Karnataka Urban Infrastructure Development Project, the government of Karnataka developed the fund-based accounting system using the town of Tumkur and the city of Bangalore as pilot cases. The system has been working well, and the DMA is currently upgrading it as part of the ongoing sector reforms before rolling it out to the same 63 ULBs targeted for the first phase of reforms. D. Lessons 13. The Asian Development Bank (ADB) has derived numerous lessons from its experience with integrated urban development projects. For example, such projects must (i) be well defined in terms of their scope and scale; (ii) take into account both absorptive and implementation capacity when assessing the number of subsectors and towns to be included; (iii) limit the number of executing agencies so as not to complicate decisionmaking and the management process; (iv) ensure that the selection of towns for inclusion in the project is demand driven and based on the towns’ commitment and ability to implement policy reforms, strengthen institutional capacities, and support community participation; and (v) have clear implementation arrangements, especially when projects involve a multiplicity of institutions with overlapping responsibilities. Of particular concern is land acquisition, which is normally the primary cause of delay in implementing urban infrastructure projects. Advance actions and the strengthening of institutions responsible for project implementation are needed to avoid such delays. Experience also shows that project ownership by the community should be established at an early stage of project design to achieve satisfactory operation and maintenance as well as improved cost recovery. Finally, the emphasis on introducing market discipline into project design must be greater than observed in the past experiences in an effort to identify options for recovering costs and achieving financial sustainability. Table A2.2 lists the externally assisted projects in the urban sector in India at the end of this appendix. E. ADB’s Sector Strategy 14. In India, ADB's overall strategic thrust has been to help the Government promote efficient and sustainable economic growth to improve employment opportunities and reduce poverty. By supporting the development of urban infrastructure, providing long-term funds for housing finance, and developing sustainable mechanisms for the delivery of social services, ADB is increasingly integrating social welfare concerns into its strategy. Through its technical assistance and lending programs, ADB is also promoting policy reform measures to address the legal, institutional, and financial problems confronting India's urban sector. These reform measures are aimed at liberalizing India's land and housing markets to attract more private investment into the sector. ADB's urban sector assistance emphasizes capacity-building and institutional strengthening initiatives aimed at promoting sustainable urban management. 15. Over the medium term, ADB's urban sector strategy for India calls for continued support for integrated urban development projects in an effort to improve the urban environment and living conditions, especially of the urban poor, and to strengthen the capacity of ULBs to implement projects and deliver services. Furthermore, urban projects in India are demand-driven, with key criteria being ULBs' willingness to initiate policy reform measures as part of ADB-financed projects. The overall design of integrated urban development projects takes ULBs’ absorptive capacity into account. The strategy also emphasizes the importance of using projects as a way to gain valuable local experience for improving project implementation and operation and maintenance capabilities. Thus, to the extent possible, project execution should be through existing institutions, particularly

Appendix 2

28

ULBs. Integrated urban development projects funded by ADB are also used to introduce and implement various cost-recovery mechanisms and privatization measures, especially for water supply subprojects, to ensure financial sustainability. ADB's sector strategy emphasizes the incorporation of appropriately designed community awareness and participation programs. ADB recognizes that innovative approaches to participation by communities and beneficiaries, particularly low-income households, are essential for overall project sustainability and replicability. In addition, ADB’s focus on the urban poor goes beyond infrastructure: it prescribes a holistic approach to meeting their needs and empowering them to improve their own living conditions, including the use of self-help schemes and the careful application of cross-subsidies.

Table A2.1: Summary of Population and Service Levels in Investment Program ULBs (as of 2004)

Population (‘000) Water Supply Sewerage Transport

Urban Local Body District 2004 2021

Source Supply

(liters per capita/day)

Supply Frequency

Percentage of

Population Served by

Connection

Percentage of

Population Served by

Sewers

Percentage of

Population Served by STP

Total Length

(km)

Percentage of Roads Surfaced

Badami Bagalkot 26 39 67 1 hr/2d 39 0 0 35 70

Basavakalyan Bidar 60 85 55 1 hr/3d 40 0 0 62 16

Belgaum Belgaum 447 615 139 2 hr/2d 58 67 0 653 83

Bellary Bellary 331 416 129 2 hr/2d 44 37 100 549 39

Bidar Bidar 194 330 57 1.5 hr/d 24 15 37 330 29

Bijapur Bijapur 267 400 121 2 hr/2d 70 16 36 587 77

Chamarajnagar Chamarajnagar 64 102 209 4 hr/d 67 0 0 199 10

Davangere Davangere 400 636 86 2 hr/2d 25 46 32 502 44

Gadag-Betageri Gadag 166 393 112 1.5 hr/2d 46 12 0 121 46

Gangavathi Koppal 106 159 88 2 hr/2d 18 0 0 98 26

Gokak Belgaum 70 97 64 1.5 hr/3d 64 0 0 113 42

Gulbarga Gulbarga 463 756 67 1 hr/2d 37 25 63 643 42

Haveri Haveri 59 81 97 1 hr/3d 48 0 0 53 57 Hospet Bellary 172 262 108 3 hr/d 26 54 0 99 40

Hubli-Dharwad Dharwad 842 1,137 88 1 hr/week 44 0 0 630 70

Ilkal Bagalkot 56 67 65 3—4 hr/2d 31 0 14 84 21

Jamkhandi Bagalkot 61 81 75 1 hr/3d 53 19 79 98 26

Koppal Koppal 62 89 103 2 hr/2d 23 0 0 141 11

Nippani Belgaum 62 79 68 3–4 hr/2d 73 0 0 86 59

Rabkavi-Banhatti Bagalkot 73 90 66 1.5 hr/2d 42 0 0 73 12

Raichur Raichur 227 343 200 1 hr/d 51 50 51 172 46

Ranebennur Havari 98 140 79 0.75 hr/d 50 5 0 247 33

Shahabad Gulbarga 66 84 79 2 hr/d 21 0 0 33 46

Sindhanoor Raichur 70 126 43 3—4 hr/2d 52 0 0 71 38

Yadgir Gulbarga 60 84 156 1 hr/2d 52 0 0 76 54

d = day (2d = 2 days, 3d = 3 days), hr = hour, STP = sewerage treatment plant. Source: Karnataka Urban Infrastructure Development Finance Corporation. 2005. North Karnataka Urban Infrastructure Development Project (Final Report). Bangalore.

Appendix 2 29

Appendix 2 30

Table A2.2: External Assistance to the Urban Sector, India

Year Amount

Project Approved Source ($ million)

A. Loan-Financed Investment Projects Urban City Water Supply Project 1992 Japan 62.45 Yamuna Action Plan Project 1992 Japan 134.00 Karnataka Rural Water Supply and Environmental Sanitation 1994 World Bank 92.00 Financial Institutions Reform and Expansion Program Urban Infrastructure Development 1994 USAID 125.00 Rural Water Supply Rajasthan 1994 KfW 60.84 Comprehensive Watershed Development Project 1994 Danida 14.72 Second Chennai Water Supply Project 1995 World Bank 61.00 Lake Bhopal Conservation and Management Project 1995 Japan 64.91 Chennai Sewerage Renovation and Functional Improvement Project 1995 Japan 157.30 Karnataka Urban Infrastructure Development 1995 ADB 105.00 Bangalore Water Supply and Sewerage 1995 Japan 261.76 Setting Up of a Water Treatment Plant 1996 France 6.30 Master Plan, Leakage Study, Groundwater Recharge Study 1996 France 4.20 Mumbai Sewage Disposal Project 1996 World Bank 192.00 Urban Water Supply and Sanitation Improvement Project 1996 Japan 96.00 Kerala Water Supply Project 1997 Japan 110.37 Rural Water Supply West Bengal 1997 KfW 22.53 Housing Finance 1997 ADB 300.00 Rajasthan Urban Infrastructure Development 1998 ADB 250.00 Setting Up of a Water Treatment Plant 1998 France 7.00 Karnataka Urban Development and Coastal Environmental Management Project 1999 ADB 175.00 Urban and Environment Infrastructure Facility 1999 ADB 200.00 Setting Up of Dam Fuse Gates 1999 France 4.76 Improvement of Water Supply and Network Rehabilitation 1999 France 13.72 Setting Up of a Water Treatment Plant 1999 France 4.44 Groundwater Study 1999 France 0.63 Pilot for Rehabilitation and Improvement of Calcutta Network 1999 France 5.04 Study on Impact of Mining Activities on the Catchment Area of the Subarnarekha 1999 France 2.52 Housing Finance II 2000 ADB 300.00 Rural Water Supply Maharastra 2000 KfW 21.00 Calcutta Environment Improvement 2000 ADB 250.00 Kerala Rural Water Supply and Environmental Sanitation 2000 World Bank 65.50 Gujarat Earthquake Rehabilitation and Reconstruction Project 2001 ADB 500.00 Private Sector Infrastructure Facility at State Level 2001 ADB 100.00 Second Karnataka Rural Water Supply and Sanitation Project 2001 World Bank 151.60 Gujarat Emergency Earthquake Reconstruction Project 2002 World Bank 442.80 Mumbai Urban Transport Project 2002 World Bank 542.00 Madhya Pradesh Urban Water Supply and Environmental Improvement Project 2003 ADB 244.00 Maharashta Rural Water Supply and Sanitation “Jalswarajya” Project 2003 World Bank 181.00 Karnataka Urban Water Supply Improvement Project 2004 World Bank 39.50 Madhya Pradesh Water Sector Restructuring Project 2004 World Bank 394.02 Multi-sector Project for Infrastructure Rehabilitation in Jammu and Kashmir 2004 ADB 250.00 Total 6,014.91 B. Grant-Financed Investment Projects Hyderabad Water Management Project 1995 AusAID 4.38 Keshopur Sewage Management Project 1997 AusAID 0.39 Cuttack Urban Services Improvement Project 1998 DFID 18.43

Appendix 2

31

Year Amount Project Approved Source ($ million) Calcutta Slum Improvement Project 1998 DFID 2.80 Cochin Urban Poverty Reduction Project 1998 DFID 17.31 Karnataka Watershed Development Project 1998 DFID 22.02 Urban Environmental Sanitation: Capacity Building for Municipal and National Decision Makers 1998 UNDP and World Bank 1.00 Strategic Sanitation Planning 1998 UNDP and World Bank 0.25 Strategic Planning for Solid Waste Project in Kuppam 1998 UNDP and World Bank 0.01 Participatory Learning Assessment with Dutch-Assisted Water Supply and Sanitation 1998 UNDP and World Bank 0.02 Public–Private Partnership in Water Supply and Sanitation Management in Meerut District 1998 UNDP 0.02 Community-Based Sustainable Portable Drinking Water Supply in West Bengal 1999 UNDP and World Bank 0.16 Environment and Sanitation 1999 UNICEF 15.20 Small Grants Facility to Support Initiatives in the Water and Environment Sanitation Sector 1999 UNDP 3.00 Municipal Services for Urban Poor, Hyderabad, Andhra Pradesh 1999 UNDP and World Bank 0.08 Improvement of Community-Based Environmental Infrastructure 1999 USAID 0.35 Andhra Pradesh Urban Services for the Poor 1999 DFID 177.48 UNICEF and Government of India, Child's Environment: Hygiene, Sanitation and Water Supply Program 1999 DFID 26.86 Maharastra Water and Environment Sanitation Project 1999 DFID 118.50 Translating Rural Water Supply and Sanitation Policy Reforms into Reality: A Strategy for Change 1999 UNDP and World Bank 1.39 Bangalore Water Supply and Environmental Sanitation Master Plan 2000 AusAID 3.96 Water and Environmental Sanitation Thematic Documentation 2000 UNDP 0.02 Community-Based Environmental Improvement Program 2000 USAID 0.10 Kolkata Urban Services for the Poor 2001 DFID 101.44 Japan Fund for Poverty Reduction: Sustaining Income and Basic Human Needs of the Poor in Disaster-Prone Areas of Gujarat 2002 ADB 3.40 Japan Fund for Poverty Reduction: Rainwater Harvesting and Slum Development in Rajasthan 2002 ADB 1.90 Gangtok and Shillong Urban Water Supply and Environmental Sanitation Project 2003 AusAid and World Bank 11.85 Total 532.32 C. Technical Assistance Infrastructure Development Urban Sector Profile 1993 ADB 0.60 Urban Sector Profile 1994 ADB 0.40 Capacity Building for Improved Infrastructure Development in Selected Municipalities in Karnataka State 1994 ADB 0.60 Institutional Strengthening of Karnataka Urban Infrastructure Finance Corporation 1995 ADB 0.10 Resource Mobilization Study for Local Governments in Karnataka 1995 ADB 0.30 Rajasthan Urban Infrastructure Development 1995 ADB 0.60 Housing Finance Facility Project 1996 ADB 0.10 Karnataka Coastal Environment Management and Urban Development 1997 ADB 0.80 Urban and Environmental Infrastructure Fund 1997 ADB 0.40 Strengthening Housing Finance Institutions 1997 ADB 0.60 Restructuring State-Level Housing Institutions 1998 ADB 0.50 Calcutta Environmental Improvement 1998 ADB 1.00 Strengthening Institutional Capacities for Urban Infrastructure Finance and Development 1999 ADB 0.50 Community Participation In Urban Environmental Improvement 1999 ADB 0.15 Strengthening Microfinance Institutions for Urban and Environmental Infrastructure Finance 1999 ADB 0.50 Capacity Building for Social Development 1999 ADB 0.80 Strengthening Disaster Mitigation and Management 1999 ADB 1.00 Reducing Poverty in Urban India 2000 ADB 0.30

Appendix 2 32

Year Amount Project Approved Source ($ million) Integrated Urban Development in Madhya Pradesh 2001 ADB 1.00 Support for Improvements in the Accounting System of the Kolkatta Municipal Corporation 2001 ADB 0.15 Conservation and Livelihood Improvement in the Sudarbans 2001 ADB 0.45 Northeast Region Urban Sector Profile 2002 ADB 0.15 Urban Sector Review and Strategy 2003 ADB 0.48 Kerala Sustainable Urban Development Project 2003 ADB 1.00 Capacity Building for Project Management and Community Mobilization in Madhya Pradesh 2003 ADB 0.52 Northeast Region Urban Development Project 2004 ADB 1.00 Capacity Building for Kerala Sustainable Urban Development 2004 ADB 0.50 Capacity Building for Municipal Service Delivery in Kerala 2004 ADB 0.80 Preparation of the Jammu and Kashmir Urban Infrastructure Development Project 2004 ADB 0.50 Karnataka Urban Development III 2004 ADB 0.40 Northeast Region Urban Development (Phase II) 2004 ADB 0.80 Total 17.00 ADB = Asian Development Bank, AusAID = Australian Agency for International Development, Danida = Danish International Development Assistance, DFID = Department for International Development, KfW = Kreditanstalt für Wiederaufbau, UNDP = United Nations Development Programme, UNICEF = United Nations Children’s Fund, USAID = US Agency for International Development. Source: Asian Development Bank.

Appendix 3 33

SUBPROJECT SELECTION CRITERIA AND APPROVAL PROCEDURE

A. General 1. The government of Karnataka (GoK) has developed a strategy to identify and select urban local bodies (ULBs), components, and subprojects that should be supported under the Investment Program to achieve the desired impact of increasing economic growth in backward districts of north Karnataka and reducing imbalances between north Karnataka and the rest of the state.

B. Selection of ULBs 2. The selection of ULBs should be based on their potential to engines of growth in their clusters of ULBs (taluks) and districts. The state has 175 clusters of ULBs in 27 districts. The majority of clusters of ULBs classified as “most backward” are located in north Karnataka. Hence ULBs located in north Karnataka are selected for support under the Investment Program.1 The operational selection criteria used for ULB selection are as follows:

(i) The ULB contributes no less than 10% of the related costs of the subproject. (ii) The ULB has passed the necessary council resolutions to implement the Nirmala

Nagar Program reforms. (iii) The ULB is for a town with a population larger than 50,000, unless otherwise

acceptable to the GoK and ADB. (iv) The ULB is not supported by the World Bank-assisted Karnataka Municipal Reform

Project. (v) The ULB is the district headquarters of a newly created district. (vi) The ULB is for a town that is important for tourism and has been identified as such

by the state’s tourism policy.

3. The criteria (i)-(iv) are required for all the ULBs to be selected for the Program, while the criteria (v)-(vi) are additional consideration factors applied when selecting some of the initial 25 ULBs. Based on the foregoing criteria, 25 ULBs have been initially selected for support and consist of 4 city corporations, 14 city municipality councils, 6 town municipalities, and 1 town panchayat. Other ULBs that meet the foregoing selection criteria may subsequently be included in the Investment Program if additional financial resources become available through budget savings or initially selected ULBs drop out because they fail to meet the criteria for continued support.

C. Selection of Components 4. Based on discussions and consultations at both the state and ULB levels, it was concluded by the ADB and the Government that the Investment Program should support ULBs in developing 9 of the 18 basic urban services that are their mandated municipality functions under the 12th schedule of the Constitution (included in the 74th Amendment to the Constitution in 1992), namely: (i) public health, sanitation and solid waste management; (ii) water supply for domestic, industrial, and commercial purposes; (iii) roads; (iv) public amenities, including street lighting, parking lots, bus stops, and public toilets; (v) slum improvement and upgrading; (vi) safeguarding the interests of weaker sections of society; (vii) urban poverty reduction; (viii) firefighting services; and (ix) urban forestry, protection of the environment, and promotion of ecological aspects. The basic urban services not included in the Investment Program relate to urban planning, regulation of land use, planning for economic and social development, provision of urban amenities and facilities (e.g., parks, gardens, and playgrounds), promotion of cultural, education and aesthetic aspects, burials and cremations, cattle pounds, vital statistics, and regulation of slaughter houses and tanneries. 5. The foregoing items, along with institutional development and Investment Program assistance, have been amalgamated into seven Investment Program components as follows:

(i) component A: sanitation infrastructure, (ii) component B: water supply infrastructure, (iii) component C: slum improvement, (iv) component D: nonmunicipal infrastructure,

1 One exception is Chamarajanagar, which is located in south Karnataka and is the headquarters of one of six newly

formed districts in Karnataka. All other initially identified Investment Program ULBs are located in north Karnataka.

34 Appendix 3

(v) component E: urban transport infrastructure, (vi) component F: institutional development, and (vii) component G: Investment Program assistance facility.

D. Selection of Subprojects 6. Each ULB will prepare a city-level investment plan (CLIP), which may include all or some of the five basic urban services components. The CLIP will be based on the current level of services, the needs and preference of stakeholders, the financial and institutional capacity of the ULB, and the norms and standards prescribed by GoK. In selecting subprojects in each ULB, GoK’s empowered committee should check and ensure the following:

(i) All the proposed CLIPs show reasonable financial improvements in accordance with criteria agreed between GoK and the ULBs.

(ii) All subprojects in components B and E should demonstrate an effective internal rate of return of at least 12%. Other subprojects should demonstrate cost-effectiveness in comparison with alternative schemes.

(iii) All subprojects will have prepared resettlement plans, if required, in accordance with the Investment Program’s resettlement framework.

(iv) All subprojects will meet environmental subproject selection criteria and ULBs will have prepared initial environmental examinations, including environmental monitoring plans, in accordance with the Investment Program’s environmental assessment and review procedures (Supplementary Appendix N).

(v) All subprojects will have prepared indigenous peoples development plans, if required, in accordance with the Investment Program’s indigenous peoples development framework.

7. For each component in each ULB, the subprojects selection criteria were developed further to include the following:

8. Component A: Sanitation Infrastructure (i) The ULB will introduce and make effective upon subproject completion an

appropriate sewerage tariff, as agreed between Asian Development Bank (ADB) and GoK, of no less than Rs10 per month.

(ii) Sewerage subprojects are limited to the areas where the per capita water supply is sufficient to ensure that self-cleansing velocities can be achieved on a regular basis without frequent system flushing.

(iii) Sewerage subprojects will only commence once sample surveys show that consumers are willing to connect.

(iv) Drainage subprojects are limited to areas where a tendency for flooding-related incidents has resulted in socioeconomic problems. Downstream rehabilitation and/or expansion works should also be considered for inclusion as appropriate. ULBs must prepare a comprehensive drainage master plan in advance of commencing any work.

9. Component B: Water Supply Infrastructure (i) The ULB passes a relevant council resolution for the water tariff structure proposed

under the Investment Program. (ii) Work on the water supply component will only commence once it is certain that the

raw water source can be made secure under the Investment Program. (iii) The norms for net per capita demand for water are fixed at a minimum of 90 litters

per capita per day for all the ULBs. (iv) Water supply subprojects will only commence once sample survey shows a

willingness of consumers to pay. (v) Water supply subprojects must include provision for slum areas and for the poor in

general covered by the subproject. (vi) The ULB passes a relevant council resolution, to achieve majority customer metering

within 2 years after the completion of construction work. (vii) The ULB passes a relevant council resolution to increase the base volumetric water

tariff to the real current volumetric tariff per cubic meter and to change the tariff schedule from the current unmetered monthly flat rate to a volumetric metered tariff

Appendix 3 35

with the lifeline block set at 8 cubic meters for Rs55 per month, to be effected zone by zone or for the related town, as feasible, upon completion of the related subproject.

(viii) The unmetered monthly tariff for domestic water use has been increased from Rs45 to at least Rs55 per month.

(ix) The ULB passes a relevant council resolution to set up separate accounting systems for water supply and sewerage within the ULB.

10. Component C: Slum Improvement (i) Subprojects are limited to water supply, sanitation infrastructure, formation of self-

help groups, health and environmental sanitation awareness campaigns, footpaths, and pavements within notified slums.

(ii) Subprojects in slums will be conducted in coordination with neighborhood groups and ULB-level nongovernment organizations.

11. Component D: Nonmunicipal Infrastructure

(i) Firefighting service subprojects should be in accordance with Karnataka’s accelerated fire and emergency services improvement plan.

(ii) Support for tourism infrastructure is to be provided only to those ULBs identified in the state tourism policy (i.e., a maximum of 6 ULBs out of the initially identified 25).

(iii) District information centers are to focus on attracting industrial investment and promoting tourism.

(iv) Only lakes in the ULBs that suffer from significant degradation and/or solid waste deposition will be included in cleanup programs.

12. Component E: Urban Transport Infrastructure

(i) The relevant ULB shall have progressed in completing subprojects under Component A, B and C to the satisfaction of GoK, the Karnataka Urban Infrastructure Development and Finance Corporation (KUIDFC) and ADB, so that the subprojects under this component are ready to be tendered upon approval.

(ii) Work is limited to rehabilitating existing roads and upgrading of junctions. (iii) Widening of existing roads involving land acquisition and/or resettlement is not

included under the Investment Program, except as otherwise accepted by ADB and the KUIDFC and subject to compliance requirements under ADB’s Involuntary Resettlement Policy (1995)2 and related frameworks.

(iv) Work is limited to roads within the municipal jurisdiction of related project town. E. Approval Procedures for Subprojects 13. All the subprojects will be prepared and processed as follows:

(i) With the assistance of KUIDFC, each ULB will prepare a City-level Infrastructure Plan (CLIP) which will identify the gaps between the current and target levels of urban infrastructure, estimate the required interventions required to fill the gaps, and propose subprojects in components A-E to be funded under the Investment Program. All the subprojects should meet the subproject selection criteria.

(ii) The ULBs will send their CLIPs via the KUIDFC to the empowered committee for approval and to ADB for review to ensure their compliance with provisions in the framework financing agreement.

(iii) The KUIDFC will undertake detailed appraisal of the subprojects with the assistance of the program consultants, and will prepare a summary subproject appraisal report based on the CLIPs that include the rationale for each subproject; the scope and components; a technical description and analysis; the cost estimates and financing plan; an environment assessment as required; a resettlement plan as required; an indigenous people development plan as required; the implementation arrangements; and financial, economic and institutional analyses.

2 ADB. 1995. Involuntary Resettlement. Manila.

36 Appendix 3

(iv) The KUIDFC will send all the summary appraisal reports based on the CLIPs to ADB for review and approval in a format agreed between GoK and ADB. ADB may advise the KUIDFC to modify the reports if necessary.

(v) Based on ADB’s approval, and subject to any modifications and measures required by ADB, the KUIDFC and GoK will prepare periodic financing requests for ADB financing.

(vi) Periodic financing requests will be formally submitted to ADB through the Government for further processing.

F. Monitoring during Implementation 14. The GoK, acting through the KUIDFC, will be responsible for monitoring of implementation of all subprojects.

Appendix 4 37

KEY FEATURES AND OUTLINE TERMS OF REFERENCE FOR PERFORMANCE-BASED DEFERRED PAYMENT STRUCTURE CONTRACTS

A. Rationale and Key Features 1. To date, the Government of India’s approach to capital investments in infrastructure has been by means of conventional construction or turnkey contracts on a competitive basis. These are then handed over to urban local bodies (ULBs) for operation, and the latter generally bear the risk of contractors adopting low capital cost but high maintenance cost designs. Once the assets have been handed over to the ULBs, the required operation and maintenance (O&M) tends to be ignored because of the ULBs’ insufficient finances, inadequate skills, and poor management practices, leading to deterioration of the assets and poor service performance, plus failure to achieve the objectives of projects to deliver adequate services. 2. Thus with the objective of achieving long-term sustainability of service delivery and ensuring the use of the lowest-cost designs over the entire period of a project, including construction as well as O&M, the Government has reviewed this traditional approach and decided to adopt the performance-based deferred payment structure (PBDPS) modality as an alternative for selected subprojects under the Investment Program. 3. While seeking improved accountability of contractors through performance-based service provisions, the Government, at the same time, intends to pursue another objective: mobilizing the abundant private sector liquidity for worthy public sector projects. By implementing subprojects using the PBDPS modality, the Government expects to realize the efficiencies of the private sector in relation to both construction and O&M in addition to bringing in private funding to augment scarce public funding. Government agencies will continue to be responsible for overall service provision, including the regulation of tariffs and the collection of revenues. 4. India has already implemented a few projects in the transport and municipal solid waste subsectors using the PBDPS modality. Furthermore, the Karnataka Urban Infrastructure Development and Finance Corporation (KUIDFC) is preparing a pilot project under the PDBPS modality in the city of Bijapur, one of the Investment Program ULBs, for the water supply and sewerage subsectors, using its own resources. 5. The KUIDFC undertook an initial sounding out of potential local contractors during preparation of the Investment Program, the Asian Development Bank’s (ADB’s) Fact-Finding Mission did so at the time of loan appraisal, and a comprehensive workshop was held with prospective private contractors resulting in valuable feedback. The workshop was primarily attended by local contractors.1 The consultants recruited by ADB to carry out the workshop will follow up with a detailed market research exercise in the form of a written survey to seek further feedback from private contractors not limited to those who attended the workshop. The workshop indicated that there are private contractors interested in participating in PBDPS contracts. The key concerns expressed by participants at the workshop will be taken into consideration during the contract preparation stage. These include force majeure, provisions for price escalation, security of water sources, payment guarantees, arbitration provisions, and provisions for independent auditors to monitor and assess performance benchmarks. The participants also noted that strong political commitment to the process and early resolution of land acquisition issues are paramount for the success of private sector participation (PSP) contracts. 6. The operating framework for the PBDPS modality necessitates a clear definition of services, whose delivery will be the responsibility of private contractors, rather than indicating a set of discrete activities aimed at physical improvements. The contracts will be configured in such a manner that all activities relevant to service delivery are clearly identified and included in the terms of reference for the private contractor. In cases where making the private contractor responsible for the entire range of activities is not feasible, the contractors’ specific responsibilities will be clearly delineated.

1 Twelve private contractors, including two international contractors, attended the workshop.

38 Appendix 4

7. The consultants recruited under the bridging technical assistance (TA)2 will prepare a model request for proposal, including a draft contract for water supply and sewerage subprojects, with support from international (individual) consultants recruited separately by ADB. 8. The following criteria will be used to identify the amenability to and appropriateness of subprojects adopting the PBDPS modality: (i) the ratio of the cost of operations to total life cycle cost; (ii) the risk allocation among relevant parties as envisaged under the PBDPS modality; and (iii) the size of the subproject, the willingness of urban ULBs to adopt the PBDPS modality, and the interest of the private sector. The cost of operations is the net present value of O&M expenses and debt servicing liabilities. Total life cycle is the sum of total capital investment costs (including interest during construction and financing charges) and the cost of operations. Subprojects with a cost of operations to total life cycle ratio of approximately 20% or more could be considered amenable to the PBDPS modality. Similarly, the size of a subproject is an indicator of its attractiveness to private contractors. Other factors in determining whether or not the PBDPS modality is appropriate include ULB-related concerns, such as geography and availability of human resources and physical resources. 9. The KUIDFC and the ULBs will recruit private contractors with support from the program consultants. 10. The KUIDFC will (i) act as the fund manager for the PSP fund to be established for subprojects using the PBDPS modality; (ii) act as the technical cell for developing projects, preparing draft contracts and bidding documents and requests for proposals, assisting with the recruitment of suitable private contractors, and helping with contract execution and monitoring of contractors’ performance; and (iii) assist in building the capacity of the ULBs for contract management, including monitoring contractors’ performance. 11. Each ULB will (i) provide all necessary approvals from its council for implementing identified subprojects using the PBDPS modality; (ii) award the contract and monitor contractors’ performance; (iii) enter into commitments for replenishing and ensuring the availability of funds to meet contractual obligations; (iv) ensure the timely fulfillment of project requirements, such as land acquisition and rights-of-way; and (v) assist private contractors in obtaining relevant permits and clearances and resolving any local issues as required. 12. The private contractor will be paid annuity-like payments throughout the contract period (typically 10 years), subject to adherence to the predetermined performance standards. The contract is broken into two phases: construction and operations. The payments would be made to the private contractor during the construction phase and the operations phase on achieving respective sets of predetermined milestones. Each payment will consist of a base fee and an additional incentive bonus linked to the contractor’s performance as measured by a set of key performance indicators. Contracts for subprojects using the PBDPS modality will be tripartite contracts among the relevant Investment Program ULB, the private contractor, and the KUIDFC. 13. The KUIDFC will establish the PSP fund, which will safeguard contractors in case of default by ULBs, and will ensure that sufficient funds are provided for and maintained under this facility. Considering the innovative nature of the PBDPS, such a fund is necessary to increase bidders’ confidence and attract private financing. Based on estimates that capital investments using the PBDPS (and/or performance-based management contract) modality will total $50 million and that under the payment schedule to be adopted, the maximum exposure by contractors will total approximately $10 million, the value of the fund will be approximately $10 million. The fund release mechanism will be developed by the KUIDFC with the assistance of the bridging TA consultants and will be agreed on with ADB. 14. A financial model has been prepared and a summary presented in Figure A4.1, based on a hypothetical case for the water supply and sewerage components for a typical ULB.

2 ADB. 2006. Technical Assistance Cluster to India for Project Processing and Capacity Development (TA 4814-IND,

approved on 30 June 2006). Manila.

Appendix 4 39

Figure A4.1: Performance-Based Deferred Payment Structure Cumulative Funding Arrangement (arithmetic sum)

Rs0.00

Rs10.00

Rs20.00

Rs30.00

Rs40.00

Rs50.00

Rs60.00

Rs70.00

1 2 3 4 5 6 7 8 9 10

Year (#1 Detailed Engineering Design; #2 - #3 Construction; #4 - #10 Operation and Maintenance)

Cur

rent

Rp

cror

e

Cumulative Total Cost (arithmeticsum)Cumulative Contract Payment(arithmetic sum)of which ADB Loan-funded Portion(arithmetic sum)

ADB = Asian Development Bank, Rp = rupee. B. Outline Terms of Reference 15. Under the PBDPS, the private contractor will be a company or a consortium of companies that is responsible for design, engineering, procurement, partial financing, construction, and O&M and for the transfer of the project assets at the end of the contract period in line with the applicable contract provisions to ensure the delivery of services at predetermined standards of performance. 16. The contracts will have the following key features: (i) typically a 10-year contract with annuity-like payments, each consisting of a base fee, which will be indexed to local inflation, and an additional incentive bonus, over the contract period; (ii) design and construction standards and operational standards; (iii) key performance indicators for the delivery of services; and (iv) responsibility for distribution network rehabilitation and expansion, management of services and resources, including staff, to achieve the expected targets. Standards are minimum requirements (e.g., water quality standards), with a failure to achieve them possibly triggering financial penalties for the private contractor, while key performance indicators are for the purpose of measuring the private contractor’s performance, which will be reflected in the amount of additional incentive bonuses paid. 17. An independent auditor or engineer will review, monitor, and where contractually required, approve activities associated with design, construction, and O&M under each PBDPS contract to ensure the private contractor’s compliance with contract provisions. 18. Subprojects under the PBDPS modality will be procured under ADB’s Guidelines for Procurement. The use of a two-stage bidding procedure to be preceded by prequalification is proposed for the recruitment of private contractors under this modality. The first stage will involve the evaluation of technical proposals, which, if necessary, will be revised to meet specified requirements by discussions between the ULB and the bidders. The second stage will involve the evaluation of financial proposals, prepared based on revised technical proposals. The financial selection of the bidders will be based on the minimum annuity payment, which also reflects a lifetime cost approach.

40 Appendix 4

19. The private contractor will be responsible for managing system O&M and for delivering services, including overseeing investments on behalf of the ULB for the relevant subsector. In particular, the tasks of the private contractor will include the following:

(i) Design and build infrastructure facilities in line with specified output requirements and construction standards.

(ii) Operate the systems according to specified operational standards. (iii) Improve long-term performance and efficiency and expand service coverage in the

ULB’s service area. (iv) Continue mass meter installation and connection programs in the ULB. (v) Improve the O&M of water supply and wastewater systems through various means,

such as using staff efficiently, rehabilitating distribution networks, improving customer service, enhancing occupational safety practices, and reducing leakage.

(vi) Assist and advise the ULB in relation to network expansion planning, investment budget preparation, and tariff setting.

(vii) Improve the long-term effectiveness of the ULB’s human resources through a capacity building and skills transfer program.

(viii) Implement programs to expand water distribution networks, including bulk water metering, properly sequenced network rehabilitation, and renewal of connections.

(ix) Resolve customer complaints and measure customer satisfaction.

C. Arrangements for Personnel and Organizational Structure 20. Given the strong policy stand taken by the government of Karnataka (GoK) in freezing staff recruitment for more than a decade, most ULBs are not overstaffed. In addition to a few senior staff assigned by the state, the ULBs have their own staff to oversee operations in each subsector. For water supply and sewerage, for instance, the ULBs have between 20 and 45 permanent staff. 21. The bridging TA consultants will help GoK formulate a post-PBDPS operations strategy and a human resources strategy for existing ULB employees affected by the introduction of PBDPS contracts. 22. The implementing agencies will undertake the following preparatory measures to ensure a smooth transition and a sustainable organizational structure in relation to the private contractors during and after the PBDPS contracts:

(i) For the water supply and sewerage subsector, GoK will continue its recruitment freeze policy for the ULBs and agree to delegate their service provision responsibilities to the private contractors.

(ii) The KUIDFC and the ULBs will consult with staff in the concerned subsector(s), as well as with the Directorate of Municipal Administration and the Municipal Employees Association, to prepare the following options, which will be offered to current employees: (a) Staff may be assigned to the private contractor for a maximum period of 5

years in line with rule 2004 of the Karnataka Municipal Corporation, with a provision for extension with mutual agreement.

(b) Staff may agree to enter into the voluntary retirement scheme if offered by GoK.

(c) Staff may be reassigned to other ULB functions or departments. (iii) A comprehensive list of current employees in various categories, such as assistant

or junior engineers, work inspectors, valve workers, fitters, clerks, and bill collectors, will be prepared as part of the requests for proposal and draft contract documents for subprojects using the PBDPS. ULBs will provide the bidders with the names, ages, qualifications, and terms of employment of each of these employees.

23. As part of their proposals, the bidders will then be required to submit strategies for taking over a certain minimum percentage of the permanent employees (the percentage to be decided after consultation between the ULB and the bidders at the prebid conference for each subproject using the PBDPS). Bidders will be given incentives to take the maximum number of current employees as part of their capacity-building and skills transfer strategy. The length of their assignment to the private contractor and the strategy and arrangements for their return to the ULB will also form part of the bidders’ proposals, which will subsequently be agreed to between the ULB and the private contractor.

Appendix 4 41

24. The private contractor will have full day-to-day management responsibilities over the assigned staff from the date of their deputation. The contractor shall ensure that assigned ULB employees are entitled to wages, increments, bonuses, paid leaves of absence, and all other employee benefits and entitlements in the same manner as or better than what such employees would have been entitled to in the employment of the ULBs in the absence of such assignment. 25. During the initial 5-year period, the assigned staff will have the opportunity to assess the opportunities offered to them, such as returning to the ULB or becoming permanent employees of the private contractor. At an early stage of the contract, the ULB must provide a clear post-PBDPS operational strategy for the private contractor, in consultation with ADB, so that the contractor can either offer permanent employment to the employees or return them to the ULB. 26. After the expiry of the initial 5 years, the private contractor will not be obliged to take on any additional staff from the ULB.

42 Appendix 5

KEY FEATURES AND OUTLINE TERMS OF REFERENCE FOR PERFORMANCE-BASED MANAGEMENT CONTRACTS

A. Recruitment Procedures 1. The workshop held during the appraisal of the Investment Program revealed that while some private contractors are interested in participating in performance-based deferred payment structure (PBDPS) contracts, the level of interest may decline as more of the contractual details are determined and the full extent of private contractors’ responsibilities under the PBDPS becomes more widely known. The ADB and the Government of Karnataka (GoK) therefore considered it prudent to develop a performance-based management contract (PBMC) option as a less onerous alternative for some subprojects. Under this arrangement, the management contractor will be reimbursed through a base fee (i.e., for experts’ inputs and out-of-pocket expenditures) for management services and additional performance-based incentive bonus payments linked to its performance as measured by a set of key performance indicators. A management contract that does not require the management contractor to invest in the physical infrastructure of water supply and wastewater systems is more straightforward and less risky (for the urban local body (ULB) as well as for the private contractor) than other private sector participation modalities that require financial investments by the private sector such as the PBDPS. Recruitment of management contractors will be carried out under the Asian Development Bank’s (ADB's) Guidelines on the Use of Consultants with some adjustments. 2. The typical length of contracts under the PBMC modality will range between 3 and 6 years, with a possibility of extension. 3. The management contractor will be a company or consortium of companies that will have direct responsibility for managing the operations of a proposed subproject for the concerned ULB. The management contractor will have to bear much more risk than a typical consultant, because a substantial amount of the contractor’s total remuneration will depend on its success in improving the delivery of services currently provided by the ULB. In addition, when preparing its proposals, the management contractor will have to investigate the state of existing systems in greater depth than the typical consultant, and the costs of preparing a proposal will be therefore be higher. Because of the limited number of private contractors with the required expertise and possible limited interest because of the high costs of preparing a competitive proposal, the shortlist may not meet the requirements of ADB’s guidelines of "normally 5–7 firms." 4. To come up with a shortlist of qualified companies and/or consortia, the criteria for shortlisting will include the following:

(i) a set of criteria to identify companies and/or consortia that have the necessary practical operating experience and financial capacity to be able to execute the contract successfully; and

(ii) a summary of the experience and skills of the companies and/or consortia, together with brief responses to a list of questions that focus on how they have addressed or would address problems similar to those the ULBs would face in improving service provision in the concerned subsectors.

5. An evaluation committee would consider private contractors meeting these criteria for shortlisting based on expressions of interest received.1 The primary weight in this evaluation will be given to each contractor's corporate experience and approach to managing operational problems such as those prevalent in north Karnataka. Ensuring a reasonable geographic and country balance in the resulting shortlist of contractors may be difficult, as the expertise required for such services is not widely available. It is therefore proposed by ADB to waive the guidelines' "reasonable" geographic and country balance requirement. However, contractors are free to associate with any regional and national firms and individuals from ADB member countries to strengthen their proposals. Also contractors must demonstrate not only their in-depth technical strengths, but also the availability of high-quality backup support to ensure that they can fulfill their commitment during the period of the contract. The shortlisted contractors will then be invited to submit technical proposals containing detailed technical plans for operating 1 Interested companies and/or consortia will be given an expression of interest template to complete.

Appendix 5 43

and improving the services and systems together with financial proposals in line with the request for proposal documents. The quality- and cost-based selection method is used in accordance with the guidelines. 6. The evaluation of the technical proposals submitted will give approximately equal weight to (i) the qualifications of the individuals making up the proposed management team; (ii) the experience, expertise, and support facilities of the contractors; and (iii) the proposals for operating and improving the services and systems. The proposed management team for each contractor will be required to present its proposal to the Karnataka Urban Infrastructure Development and Finance Corporation and the pertinent ULB and to answer questions about its members’ experience and the team’s approach to addressing the problems the ULB is facing. The financial proposals will indicate the contractor’s costs for performing the services (remuneration and out-of-pocket expenditures). Under the contract, the contractor will also receive a performance-based bonus payment and details of this will be indicated in the request for proposal documents. Considering the unique and complex nature of this particular recruitment, an ADB observer may attend key evaluation committee meetings, in particular, the presentation and interview sessions. B. Outline Terms of Reference 7. The management contract will have the following key features: (i) a 3-to 6-year contract (typically), with remuneration consisting of a fixed fee and performance-based incentive payments; (ii) a limited number of easily measurable key performance indicators, whose baseline levels will be determined during the first year of operations, to which performance-based payments will be linked; and (iii) a number of service obligations as defined in the license issued by the ULB, which may include responsibility for implementing investments on behalf of the ULB. 8. ADB anticipates that the management contractor will bring in a limited number of expatriate staff and that its management team will likely include several Indian nationals. 9. The management contractor will be responsible for managing the operation and management of the systems and services, including overseeing investments on behalf of the ULB for the concerned subsector as appropriate. In particular, the tasks of the management contractor will include

(i) improving the long-term performance and efficiency of services and expanding their coverage in the ULB’s service area;

(ii) enhancing the delivery of services to the poor through a targeted program of connections and service improvements in low-income communities;

(iii) upgrading the operation and management of water and wastewater systems through various means, such as more efficient revenue collection, implementation of computerized billing and accounting, introduction of management information systems, improved customer service, improved occupational safety practices, and reduced leakage;

(iv) assisting and advising the ULB in relation to strategic planning, budget preparation, and tariff setting;

(v) improving the effectiveness of the ULB’s human resources through a coordinated capacity-building program;

(vi) managing the implementation of an investment program to improve the water distribution network, including bulk water metering, properly sequenced network rehabilitation, and renewal of connections, on behalf of the ULB;

(vii) resolving customer complaints and measuring customer satisfaction. C. Arrangements for Personnel and Organizational Structure 10. The consultants for the bridging technical assistance2 will help the ULB formulate a post-PBMC operations strategy and a human resources strategy for existing ULB employees affected by the introduction of PBMC contracts. In relation to the human resources strategy, the 2 ADB. 2006. Technical Assistance Cluster to India for Project Processing and Capacity Development (TA 4814-IND,

approved on 30 June 2006). Manila.

44 Appendix 5

ULB will adopt the same staff policies and preparatory steps as those outlined for contracts under the PBDPS (Appendix 4). As part of their technical proposal, bidders will be required to submit an assessment of the personnel requirements for the ULB needed to achieve the contract’s performance targets. The identified additional resources will form part of the bid proposal. The management contractor will have full responsibility for hiring, firing, and managing its staff and the ULB will have no obligations toward such staff during the contract period except for ensuring that ULB employees receive wages, increments, bonuses, paid leaves of absence, and all other benefits and entitlements in the same amount or better than they would have been entitled to in the employment of the ULBs in the absence of the management contract. The management contractor will be required to manage existing ULB employees working in the subsector and specifically listed in the bidding documents. As part of their bid proposals, bidders will also be required to submit strategies for capacity building of existing ULB employees.

DETAILED COST ESTIMATES AND FINANCING PLAN ($ million)

Item Total Foreign

ExchangeLocal

Currency Total % Foreign

ExchangeLocal

Currency Total %A. Base Cost

1. Civil Work 209.9 0.0 162.9 162.9 77.6 0.0 47.0 47.0 22.42. Equipment 11.2 8.3 2.9 11.2 100.0 0.0 0.0 0.0 0.03. PBDPS or PBMC 23.1 8.1 8.1 16.1 70.0 3.5 3.5 6.9 30.04. Consultant* 16.5 0.0 16.5 16.5 100.0 0.0 0.0 0.0 0.05. Training 3.0 0.0 3.0 3.0 100.0 0.0 0.0 0.0 0.06. Land 5.0 0.0 0.0 0.0 0.0 0.0 5.0 5.0 100.07. Incremental Recurrent Cost 7.4 0.0 3.7 3.7 50.0 0.0 3.7 3.7 50.08. Fund for PSP Contracts 10.0 0.0 0.0 0.0 0.0 0.0 10.0 10.0 100.0

Subtotal (A) 286.0 16.4 197.0 213.4 74.6 3.5 69.2 72.6 25.4B. Contingencies

1. Physical contingencies 14.0 0.9 10.3 11.2 80.1 0.1 2.7 2.8 19.9 2. Price contingencies 59.6 3.5 41.9 45.4 76.2 0.7 13.5 14.2 23.8

Subtotal (B) 73.6 4.3 52.3 56.6 76.9 0.8 16.2 17.0 23.1C. Financing Charges 45.9 0.0 0.0 0.0 0.0 45.9 0.0 45.9 100.0D. Taxes and Duties 34.3 0.0 0.0 0.0 0.0 0.0 34.3 34.3 100.0

Grand Total 439.9 20.7 249.3 270.0 61.4 50.1 119.7 169.8 38.6

ADB Government

ADB = Asian Development Bank, PBDPS = performance-based deferred payment structure, PBMC = performance-based management contract, PSP= private sector participation. Notes: 1. Exchange rate of Rs45=$1 has been used throughout the Investment Program period. 2. Base costs are as of June 2006. 3. Physical contingencies are estimated at 10% for consultancy; at 5% for civil work, equipment, and PBDPS/PBMC; and at 3% for incremental recurrent cost. 4. Price contingencies are estimated at 5%, 4.5%, and 4.3% from 2007 to 09, respectively, and 4.1% thereafter for domestic inflation, and at 2.8% in 2007 and 1.2% thereafter for foreign inflation. 5. Financing charges are estimated, assuming an interest rate of 4.6%, a commitment fee of 0.75%, and a front end fee of 1%. Source: Asian Development Bank estimates.

Appendix 6 45

ORGANIZATIONAL ARRANGEMENTS FOR IMPLEMENTATION OF INVESTMENT PROGRAM

Government of India

Government of Karnataka

State-level Empowered Committee (EC) -Additional Chief Secretary (Chairman) -Principal Secretary and Secretary (M&UDA) of UDD -Principal Secretary of Planning -Secretary (Expenditure) of Finance -Managing Director of KUIDFC

ADB

Program Management Unit (PMU)

KUIDFC Head Office -Managing Director/Program Director (PD) -Joint Managing Director/Joint Program Director -Task Manager/Program Manager

Regional Office at Dharwada

-Executive Program Director (EPD)

Engineering Division

-Chief Engineer -Technical Assistants -Environmental Expert -Assistant Executive Engineer

Community Development Division

-IEC and Social Mobilization Officer -Training Coordinator

Accounting and Finance Division

-Financial Analyst -Chief Accounts Officer

Land Acquisition Division

-Special Land Acquisition Officer

Administrative Division

-Administrative Manager

District-level Program Steering Committee (DPSC)

-Deputy Commissioner of the District (chair) -DPD under the District -Municipal Commissioners/Chief Officers of ULBs -Presidents/Chairpersons of ULBs

Divisional Office at Dharwada

-Divisional Program Director (DPD) -Community Development -Land Acquisition Officer -Office Accounts Officer -Data Entry Operators -Receptionist -Supporting Staff

Investment Program ULBs Chamrajnagar Hubli-Dharwad Davangere Gadag-Betageri Ranebennur Haveri TEC

Karnataka Urban Water Supply & Drainage Board

Divisional Office at Belgauma

-Divisional Program Director (DPD) -Community Development Officer -Land Acquisition Officer -Office Accounts Officer -Data Entry Operators -Receptionist -Supporting Staff

Investment Program ULBs Belgaum Rabkavi-Banhatti Gokak Jamkhandi Badami Nippani likal TEC

Karnataka Urban Water Supply & Drainage Board

Divisional Office at Gulbargaa

-Divisional Program Director (DPD) -Community Development -Land Acquisition Officer -Office Accounts Officer -Data Entry Operators -Receptionist

Investment Program ULBs Gulbarga Bijapur Bidar Yadjir Basavakalyan TEC

Karnataka Urban Water Supply & Drainage Board

Divisional Office at Bellarya

-Divisional Program Director (DPD) -Community Development -Land Acquisition Officer -Office Accounts Officer -Data Entry Operators -Receptionist

Investment Program ULBs Bellary Raichur Hospet Gangavathi Koppal Sindhanur TEC

Karnataka Urban Water Supply & Drainage Board

Dictorate of Municipal Administration

Karnataka Slum Clearance Board

Department of

Information, Tourism and Youth Service

Lake Development

Authority

Karnataka State Fire and Emergency

DPSC = district-level Program Steering Committee, EC = empowered committee, KUIDFC = Karnataka Urban Infrastructure Development & Finance Corporation, TEC = Tender Evaluation Committee, UDD = Urban Development Department, ULB = urban local body, Program Director (PD), Executive Program Director (EPD), and Divisional Program Director (DPD).

46 Appendix 7

IMPLEMENTATION SCHEDULEa

ID Task Name

1 Proj ect Preparatory Activities2 PMU(s) Staff Identifi cation and Operational3 Land T itl e Verificati on and Acquisit ion Works4 Upfront Contribution towards House Servi ce Connections5 Insti tut ional Reforms in ULBs67 Part A: Env ironmental Sanitation Infrastructure8 Rehabilitation of Existi ng Sewers & Manholes9 Expansion of Sewerage System & Road Restoration10 Rehabilitation of Sewage Treatment Plants11 Construction of Sewage Treatment Plants12 Rehabilitation of Drainage Channel s1314 Part B: Water Supply Infrastructure15 Water Source Augmentation Works16 Procurement & Installation of Flow Meters17 Rehabilitation of Ol d WTPs and Construction of New WTPs18 Rehabilitation of Existi ng Water Suppl y Mains & Reservoirs19 Expansion of Water Distri bution System2021 Part C: Urban Roads and Transport22 Desi gn Approval and Proof Checking23 Strengthening of Existi ng Roads2425 Part D: Pov erty Alleviation26 Community Development Activiti es & Infrastructure Designs27 Civil Works and Infrastructure Provisi on2829 Part E: Non-Municipal Infrastructure30 Procurement of Disaster Management Equipment31 Civil Works for Fire Services32 Civil Works for Heritage Sites -- Restoration Works33 Civil Works for District Informati on Centre34 Lake Development3536 Part F: Institutional Development37 Imagery Procurement, Map Preparation and Surveys38 Procurement of Computers, Other Hardware & Software39 Accounting & MIS Reforms, Handholding40 Conducting Training Programs4142 Part G: Proj ect Assistance Facility43 Engagement of Consultants44 Incremental Admini stration45 Construction Supervision & Quali ty Control46 Contract Documentation & Contractor Selection47 Benefi t Monitoring & Evaluation

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q12007 2008 2009 2010 2011 2012 2013 2014 2015

DPSC = district-level Program Steering Committee, EC = empowered committee, the KUIDFC = Karnataka Urban Infrastructure Development & Finance Corporation, TEC = Tender Evaluation Committee, UDD = Urban Development Department, ULB = urban local body. a Assisted by the program consultants (PC), program director (PD), executive program director (EPD), and divisional program director (DPD). Note: The schedule will be further refined and agreed between Asian Development Bank, the executing agency and the implementing agencies during the loan inception mission.

Appendix 8 47

48 Appendix 9

PROCUREMENT PLAN AND INDICATIVE CONTRACT PACKAGING

Table A9.1: Project Information Country India Name of Borrower India Project Name North Karnataka Urban Sector Investment Program Loan Reference Project Number: IND 38254 Date of Effectiveness Expected in June 2007 Amount (US$) $270 million Executing Agency GoK through Karnataka Urban Infrastructure and Development

Finance Corporation Approval Date of Original Procurement Plan

27 October 2006 (Procurement Plan agreed on loan negotiation)

Approval of most Recent Procurement Plan

N/A

Publication of Loan Advertisements Project summary updated on 24 October 2006 on the ADB website

Period Covered by This Plan The first loan under the MFF (up to June 2011) Table A9.2: Procurement Thresholds, Goods and Related Services, Works, and Supply and Install

Procurement Method Thresholds ICB Works $10 million or above ICB Goods $1 million or above NCB Works Less than $10 million NCB Goods Less than $1 million Shopping Goods Less than $100,000 Exceptional Methods Thresholds and other requirements LIB LIB may be used for goods that are estimated to cost less than $1

million. PBDPS Contract A $10 million ICB or NCB threshold will be applied to the estimated

capital investment cost component of each PBDPS contract; however, the first PBDPS contract will be procured under ICB procedures regardless of the estimated cost of its capital investment part.

Standard Bidding Documents and Procurement Procedures

With reference to paragraphs 3 and 6 of Schedule 4 of the Loan Agreement, the Appraisal Mission, with the KUIDFC, reviewed GoK’s standard bidding documents and procurement procedures that were used for NCB (civil works and goods) and limited international bidding (goods) under ADB’s previous loan and found them to be consistent with ADB requirements. The KUIDFC will furnish further modifications it requires, together with justifications, to ADB for its no objection. Necessary provisions and detailed procedures for the Investment Program will be incorporated in the facility administration memorandum.

ADB = Asian Development Bank, ICB = International Competitive Bidding, LIB = Limited International Bidding, NCB = National Competitive Bidding, PBDPS = Performance Based Deferred Payment Structure.

Table A9.3: Procurement Thresholds and Consultant Services

Procurement Method Thresholds Quality- and Cost-Based Selection $200,000 or more Consultants’ Qualifications Selection Less than $200,000 Least-Cost Selection (LCS) May be used for contract estimated to cost less than

$100,000 as agreed by ADB

Appendix 9 49

Table A9.4: Indicative Contract Packaging ($ million)

DMA = Directorate of Municipal Administration, GIS = geographical information system, ICB = international competitive bidding, KSFES = Karnataka State Fire and Emergency Services, KUIDFC = Karnataka Urban Infrastructure Development and Finance Corporation, LIB = limited international bidding, NCB = national competitive bidding, PBDPS = performance-based deferred payment structure, PBMC = performance-based management contract, PC = program consultant, PPMS = program performance monitoring system, QCBS = quality and cost-based selection, S = shopping, ULB = urban local body. Source: Asian Development Bank estimates.

Item Package Procured by Amount Procurement ($ million) Mode

A. Civil Works Multiple contracts ULBs 299.1 ICB/NCB Subtotal (A) 299.1

B. Equipment 1. Water meters KUIDFC 2.2 ICB/NCB/LIB/S 2. Water supply except meters ULBs 3.1 NCB 3. Fire fighting KSFES 3.9 ICB/NCB/LIB/S4. Computers/printers etc. KUIDFC 0.1 S5. GIS DMA 1.9 ICB/NCB/LIB/S

Subtotal (B) 11.2C. PSP Contracts

1. PBDPS Multiple contracts ULBs 22.3 ICB/NCB 2. PBMC Multiple contracts ULBs 9.6 QCBS

Subtotal (C) 31.9D. Consultant Services

1. PCs 4 packages KUIDFC KUIDFC

13.2 QCBS 2. PPMS consultant 1 package 0.4 QCBS

Subtotal (D) 13.6

Multiple contracts

50 Appendix 9

Table A9.5: Procurement Packages Under the First Periodic Financing Request

Contract Description Estimated Cost ($ million)

Procurement Method

Expected Date of Advertisement

Prior Review Y/N

Responsible Agency

A. Component A: Sanitation InfrastructureHaveri Sewerage System

1. Rehabilitation of existing sewerage system and extension 3.05 NCB fourth quarter 2008 N ULB

2. Construction of STP 0.23 NCB fourth quarter 2008 N ULBHospet Sewerage System

3. Rehabilitation of existing sewerage system and extension 6.28 NCB fourth quarter 2008 N ULB

4. Construction of STP 0.73 NCB fourth quarter 2008 N ULBRaichur Sewerage System

5. Rehabilitation of existing sewerage system and extension 4.76 NCB fourth quarter 2008 N ULB

6. Construction of STP 0.71 NCB fourth quarter 2008 N ULB7. Haveri Drainage System 0.18 NCB fourth quarter 2008 N ULB8. Hospet Drainage System 0.47 NCB fourth quarter 2008 N ULB9. Raichur Drainage System 0.80 NCB fourth quarter 2008 N ULBB. Component B: Water Supply Infrastructure

1. Bulk procurement of Water Meters (multiple packages; only total is shown) 0.04 NCB/LIB/S second quarter 2007 N KUIDFCHaveri Water System

2. Headworks, WTP and transmission main rehabilitation and strengthening 0.82 NCB fourth quarter 2008 N ULB

3. City water supply system distribution network optimization and strengthening 0.70 NCB fourth quarter 2008 N ULB

Hospet Water System

4. Headworks, WTP and transmission main rehabilitation and strengthening 0.54 NCB fourth quarter 2008 N ULB

5. City water supply system distribution network optimization and strengthening 2.11 NCB fourth quarter 2008 N ULB

Raichur Water System

6. Headworks, WTP and transmission main rehabilitation and strengthening 0.39 NCB fourth quarter 2008 N ULB

7. City water supply system distribution network optimization and strengthening 1.68 NCB fourth quarter 2008 N ULB

C. Component C: Non-Municipal Infrastructure

1. Fire-fighting service equipment (multiple packages; only total is shown) 5.25 NCB/LIB/S fourth quarter 2008 N KSFES

2. Tourism infrastructure (multiple packages; only total is shown) 3.50 NCB/LIB/S fourth quarter 2008 N

D. Component D: Institutional Development1. GIS (multiple packages) 1.75 NCB/LIB/S second quarter 2007 N DMA2. Other hardwares 0.08 S second quarter 2007 N DMAE. Component E: Investment Program Assistant Facility1. PC package 1 1.95 QCBS fourth quarter 2006 Y KUIDFC2. PC package 2 1.20 QCBS fourth quarter 2006 Y KUIDFC3. PC package 3 1.33 QCBS fourth quarter 2006 Y KUIDFC4. PC package 4 1.44 QCBS fourth quarter 2006 Y KUIDFC5. PPMS consultant package 0.37 QCBS fourth quarter 2006 Y KUIDFC6. KUIDFC office building 2.28 NCB fourth quarter 2008 N KUIDFC

7. Computers and furnitures for offices (various packages; only total is shown)

0.11 S 1st quarter 2007 N KUIDFC

DMA = directorate of municipal administration, GIS = geographical information system, KSFES = Karnataka State Fire and Emergency Services, KUIDFC = Karnataka Urban Infrastructure Development and Finance Corporation, LIB = limited international bidding, NCB = national competitive bidding, PC = program consultant, PPMS = program performance monitoring system, QCBS = quality and cost based selection, S = shopping, STP = sewerage treatment plant, ULB = urban local body, WTP = water treatment plant. Source: Asian Development Bank.

Appendix 10

51

SUMMARY POVERTY REDUCTION AND SOCIAL STRATEGY

A. Linkages to the Country Poverty Analysis

Is the sector identified as a national priority in country poverty analysis?

Yes

No

Is the sector identified as a national priority in country poverty partnership agreement?

Yes

No Contribution of the sector or subsector to reduce poverty in Karnataka: The north Karnataka region of India has traditionally lagged behind other regions in relation to infrastructure development.1 Baseline surveys indicate that the poor suffer more from low-quality urban infrastructure and services in north Karnataka than those who are better-off. Less than 30% of households have access to water connections, and in slum areas the figure is less than 10%. More than 75% of slum dwellers in north Karnataka towns such as Bellary, Gagad-Betageri, Gulbarga, Koppal, and Rabkavi-Banhatti and 45% to 60% in Badami, Basavakalyan, Davangere, Gokak, Raichur, and Yadgir depend on standposts (public taps). The slum populations also receive lower water pressure delivered less frequently and in shorter durations compared with the general population. In addition, more than 85% of slum households lack access to safe sanitation. Lack of access to underground drainage connections was reported by slum households in 16 of the 25 initially identified Investment Program ULBs. Surveys also show that more than 60% of slum dwellers in the Investment Program ULBs report poor access to roads. Secondary data from the Karnataka Slum Clearance Board place the slum population in Investment Program ULBs at roughly 20% of the total population. A baseline socioeconomic survey conducted in the slums of Investment Program ULBs shows that 85% of the slum population accounts for the core and intermediate poor (with a household income of less than Rs2,500 per month). The Investment Program is expected to benefit all slum households residing in recognized slums (70% of the total slum population) in Investment Program ULBs. It will also benefit poor households in nonslum areas (15% of the total urban population). The Investment Program will result in better access to urban infrastructure services. Benefits from the sanitation component are expected to accrue to households connected to the sewerage network. Networks will be provided in densely built-up core and unserved or underserved areas. Sewerage networks will reach the boundaries of slum areas, which will enable the networking of a large number of slums and provide low-cost toilets connected to sewers. Benefits to poor households from the road component will be through employment generation and access. Water supply will benefit all Investment Program urban local body populations. Broader benefits to the poor will include economic growth and employment generation. In addition, the slum improvement component will result in community development in poor areas. B. Poverty Analysis Targeting Classification: General Intervention What type of poverty analysis is needed? Poverty impact analyses undertaken in three Investment Program ULBs suggest that 30% to 50% of beneficiaries for the water supply component comprise the core and intermediate poor (the proportion varies between 25% to 40% for sewerage and 80% to 100% for drainage. Participatory analysis using a combination of qualitative and quantitative techniques will gauge post–Investment Program benefits in terms of improved access to urban infrastructure and services by the poor. The baseline survey will serve as the benchmark against which post–Investment Program impacts on the poor will be measured. Benefits to poor households, benefits to women, increased participation, and capacity building of the poor (including women) are some of the items that will be measured and monitored following implementation. C. Participation Process Is there a stakeholder analysis? Yes No Stakeholder consultations have been an important element of the Investment Program’s development and design. Consultation workshops were held with those affected, district and municipal officials, elected representatives, nongovernment organizations (NGOs), and eminent citizens. Workshops were held during the initial phase of the study and following the selection and prioritization of proposed interventions in each Investment Program town. Baseline surveys and focus group discussions held in slum and nonslum Investment Program ULBs obtained the expressed needs of communities and recorded people’s opinions. Consultations and interactions with the community helped identify and prioritize subprojects in each Investment Program ULB. Is there a participation strategy? Yes No Public participation has been a key feature of the Investment Program’s design and will continue through detailed design, planning, implementation, and operation and maintenance. The strategy for public participation focuses on partnership building between NGOs, business communities, urban local bodies, stakeholder agencies like the Karnataka Slum Clearance Board, and neighborhoods. An assessment of communities’ absorptive capacity was undertaken prior to preparing the participation strategy. Local, town-, and district-level NGOs and an apex NGO will be involved in monitoring community participation. Ongoing consultation and participatory monitoring will help ensure that the Investment Program meets communities’ needs, thereby contributing to sustainability. The participation strategy is in Supplementary Appendix H.

1 Government of Karnataka. 2002. High Power Committee Report for Redressal of Regional Imbalances. Bangalore.

Appendix 10 52

D. Gender Development Strategy to maximize impacts on women: Primary and secondary information has been analyzed to assess the status of women in Investment Program ULBs. Baseline survey information shows that the town-level proportion of female-headed households is up to 15%. The proportion is larger in slums, particularly Koppal (50%); Gokak and Ranebennur (30%); and Haveri, Nippani, and Raichur (20% to 25%). The female work participation rate in slums in Investment Program ULBs averages 10%—and notably higher in Haveri (35%), Chamarajnagar (23%), and Ilkal (19%)—compared with nonslum populations. Disparities in the educational attainment of women is evident in Investment Program ULBs for both slum and nonslum populations. The gender strategy proposed for the Investment Program focuses participation by women, which is expected to maximize beneficial impacts on women. The Investment Program proposes an increased role than currently observed in decision making by women in Investment Program design, implementation, and monitoring. The Investment Program is expected to result in benefits for women that include a reduced burden in relation to collecting water, health benefits, and employment opportunities. Monitoring and evaluation systems will generate gender-disaggregated information to enable tracking of the Investment Program’s gender impacts. Has an output been prepared? Yes No The gender strategy is in Supplementary Appendix I and a gender action plan is provided in Appendix 11. The gender action plan details goals and objectives from a gender perspective, actions to be taken, indicators and mechanisms for monitoring, and responsibilities to be assigned to various stakeholders at various stages of the Investment Program. E. Social Safeguards and Other Social Risks

Item

Significant/ Not Significant/

None Strategy to Address Issues Plan Required

Resettlement

Significant

Not significant

None

Subprojects are not anticipated to result in significant land acquisition and resettlement impacts. Short resettlement plans have been prepared for sample subprojects and a resettlement framework has been prepared to guide the implementation of future subprojects.

Full

Short

None Affordability

Significant

Not significant

None

The proposed water tariff increase will not have significant negative impacts on the poor (2% of household income). considering that 5.5% of household income is now spent on alternatives to piped water. To ensure affordability for the poor, a lifeline tariff is part of the proposed water tariff structure.

Yes

No

Labor

Significant

Not significant

None

The Investment Program will result in 450,000 person-days of employment in construction and operations. Private sector participation will not result in a loss of employment of those currently employed by the Government of Karnataka.

Yes

No

Indigenous Peoples

Significant

Not significant

None

Subprojects are not anticipated to result in any negative impacts to indigenous peoples. Sample subprojects were not found to have any impacts on indigenous peoples. However, an indigenous peoples development framework has been formulated by the Karnataka Urban Infrastructure Development and Finance Corporation to ensure that Investment Program benefits are equally shared should a future subproject affect indigenous peoples

Yes

No

Other Risks and/or Vulnerabilities

Significant

Not significant

None

No other risks or vulnerabilities have been identified.

Yes

No

GENDER ACTION PLAN

Area of Focus Objective Activities Task Target Group Indicator Verification Action by

To integrate a gender perspective into the design of the Investment Program To empower women by giving them opportunities to participate in the Investment Program from the beginning

Proactively seek women from disadvantaged families as target beneficiaries, ensuring one-third representation in NHGs Form NHGs, ward-level committees, and city-level community development societies with women members Participatory planning at Investment Program sites

Train community infrastructure volunteers, community savings volunteers, and community development officers Conduct participatory planning exercises in prioritized slums organized by community infrastructure volunteers and local NGOs Identify infrastructure priorities of neighborhood groups Formulate neighborhood-level, ward–level, and city-level plans incorporating community inputs

Women living in slums in Investment Program ULBs

Gender specialists involved from the start of Investment Program design NHGs formed by 2006 Percentage representation of disadvantaged households Regularity of meetings held Reports include record of participatory planning and women’s participation Views influence design outcomes Schemes respond to women’s needs and priorities

Investment Program design reports Progress reports Investment Program monitoring reports Random checks by apex NGO in slums by attending weekly and/or monthly meetings to gauge level of participation Assessment and training conducted at the community level Feedback from women beneficiaries

Local NGOs and apex NGO Social and community development experts, divisional offices at Dharwad and Gulbarga, program consultants Environmental engineers (program consultants)

To ensure women’s awareness of the Investment Program’s benefits and their involvement in Investment Program design

Conduct pre–Investment Program awareness campaigns on its benefits and the need to support ULB reforms

Prepare and implement communications strategy using gender-sensitive language

Town residents, targeting women

Improved collection performance by ULB Percentage of households paying connection charges at the design stage

Progress reports Review reports

Apex NGO, local PRCs or NGOs like the Inner Wheel Club that have women members

Investment Program Design

To integrate gender within ULBs the Karnataka Slum

Provide gender sensitization training for all regional-level

Prepare training materials for gender sensitization workshops

Karnataka Slum Clearance Board

Workshops conducted Number of employees trained

Workshop reports Feedback forms

Directorate of Municipal Administration, identified training

Appendix 11 53

Area of Focus Objective Activities Task Target Group Indicator Verification Action by

Clearance Board’s areas of work, with a specific focus on Investment Program design

Karnataka Slum Clearance Board employees and ULB staff

employees Feedback from employees on usefulness of training programs

Review reports institute and social and community development experts (apex NGOs and PMU)

Empowerment of women from poor families in Investment Program ULBs

Initiate thrift and credit activities

Identify community savings volunteers Formulate rules and regulations by SHGs Train women in accounting procedures, management, etc. Undertake skill training and microenterprise development and management training Create revolving funds

Women living in slums in Investment Program ULBs

SHGs formed by 2006 Size of revolving fund created Microenterprises created and managed independently by women

Feedback from women beneficiaries

Local NGOs, NHGs and SHGs

To ensure that the needs of female-headed households, widows, elderly women, and single women are addressed in resettlement planning

Collection of gender-disaggregated data during socioeconomic surveys for resettlement planning

Design a questionnaire to ensure coverage of issues such as women’s access to resources, household division of labor, women’s contribution to family income, decision making on finances and resources, expressed needs and preferences of women in relation to compensation and resettlement options Using female enumerators or trained, gender-sensitive enumerators

Female-headed households, women members of households affected by the Investment Program

Gender-disaggregated data analysis undertaken to arrive at compensation and assistance packages in RAP RAP takes note of compensation and resettlement options selected by women RAP addresses concerns of female-headed households, widows, and elderly and single women

RAP(s) Program consultants and NGO involved in RAP preparation Social and community development experts (PMU and apex NGO)

Investment Program Implementation and Monitoring

To mainstream a gender perspective in Investment

Conduct gender awareness workshops with all program

Prepare materials for the gender awareness workshop

PMU, PPMS consultants, and program consultants

Workshops for all target groups

Workshop reports Review reports

Social and community development experts (PMU,

54 Appendix 11

Area of Focus Objective Activities Task Target Group Indicator Verification Action by

Program implementation

consultants, the PMU, and the PPMS consultants

program consultants, and PPMS consultants)

To ensure women’s full awareness of and involvement in Investment Program implementation and benefits

Conduct Investment Program awareness, hygiene education, and water and waste management campaigns that specifically target women

Prepare and implement a communications strategy defining the message, the target audience, and the media using gender-sensitive language

Women living in Investment Program ULBs, including those living in slums

Of women interviewed in Investment Program cities at the end of the second year of Investment Program implementation, 30% are aware of the Investment Program and its benefits

PRC reports Progress reports (PMU, PPMS, and apex NGO) Investment Program monitoring reports

Social and community development experts (PMU, program consultants, PPMS consultants, apex NGO, and local PRCs)

To ensure that women realize benefits from the construction process

Require contractors to engage sizable number of female human resources and ensure equal wages for male and female labor for equal work

Prepare contract documents Orient contractors

Contractors Percentage of women employed by contractors (share of total workers) Women employed at equal wages for equal work

Contract invoicing Investment Program monitoring reports

Construction supervision expert, program consultants PPMS consultants

To ensure that Investment Program benefits positively affect women and that benefits are equitable

Establish a system of monitoring and evaluation that can track / report the impact of the Investment Program on women

Develop qualitative and quantitative gender-disaggregated indicators (e.g. health benefits, reduced burden on women, and employment opportunities) Develop systems for measurement, analysis, and reporting of benefits Develop mechanisms to include women in monitoring and evaluation

PMU PPMS consultants

Progress reports Reviews and impact assessments are able to report the gender impact of the Investment Program

Community monitoring reports (NHGs, community development societies) Progress reports (PMU, PPMS, and apex NGO) Investment Program Monitoring reports

PMU PPMS consultants Social and community development experts (PMU and apex NGO)

To ensure that resettlement implementation addresses

Monitor the implementation of resettlement

Develop mechanisms to include women affected by the Investment Program in monitoring the

Female-headed households, women

Percentage of compensation packages and resettlement options addressing women

Resettlement monitoring and evaluation reports

NGO and agency involved in RAP implementation

Appendix 11 55

Area of Focus Objective Activities Task Target Group Indicator Verification Action by

women’s concerns

implementation of resettlement Develop indicators to track the impact of resettlement on women

members of households affected by the Investment Program

implemented

Social and community development experts (PMU and apex NGO)

To promote gender awareness in the institutional development program

Incorporate a gender perspective in all aspects of the institutional development program

Review the institutional development program Incorporate gender aspects in all training programs for state and corporation officials

Elected officials, state and municipal officers Target training group as per the program

Changes made in institutional development program, training curricula, etc.

Institutional reform measures are gender sensitive Each training program contains a gender perspective

Directorate of Municipal Administration, identified training institute and social and community development experts (PMU, PPMS consultants and program consultants)

Institutional Development

Monitor the usefulness of the gender action plan

Tracking use of the gender action plan

Review impact of the gender action plan

Investment Program stakeholders

Gender action plan used and reported upon at regular intervals Increased number of gender mainstreaming training activities planned and completed Increased number of investment programs reflect community needs by using a participatory and gender-focused approach Strengthened capacity of stakeholder agencies to promote, design, and implement investment programs that support gender equality

Review reports Progress reports

Social and community development experts (PMU, program consultants, and PPMS consultants)

NHG = neighborhood group, PMU = Program Management Unit, PPMS = program performance monitoring system, PRC = public relations consultants, RAP = resettlement action plan, SHG = self-help group. Source: Asian Development Bank.

56 Appendix 11

Appendix 12

57

SUMMARY RESETTLEMENT FRAMEWORK A. Introduction 1. The Investment Program will facilitate economic growth in towns of north Karnataka and bring about urban development by means of equitable distribution of urban services in an environmentally sound and operationally sustainable manner. The Investment Program will help the Government of Karnataka (GoK) rehabilitate and construct urban infrastructure, including water supply systems, sewerage systems, drainage, and urban road improvements through resurfacing and junction improvements. It will have poverty reduction, institutional development, investment program assistance,1 and nonmunicipal infrastructure2 components. 2. The Investment Program is designed so as to minimize land acquisition and resettlement impacts. Subprojects involving rehabilitation will be accommodated within the premises of existing facilities and will not involve land acquisition and resettlement. Subprojects involving the construction of water supply systems, sewage treatment plants, and nonmunicipal infrastructure are proposed on Government land wherever possible. Overall impacts are to be further minimized through careful subproject siting and alignment during detailed design and subproject implementation.3 3. Short resettlement plans were prepared for sample subprojects in three Investment Program ULBs (Haveri, Hospet, and Raichur) (Supplementary Appendixes J1 to J3).4 Permanent land acquisition is required for sewage treatment plants in Haveri (13 hectares), Hospet (12 hectares), and Raichur (14 hectares). There are no structures on the proposed sewage treatment plant sites, which are currently being used for agriculture. No permanent or temporary land acquisition is anticipated for road resurfacing. The laying of water and sewer pipelines and drain improvements are proposed within existing road corridors, and only temporary land acquisition that affects hawkers and vendors is anticipated during construction. Impacts will be finalized during detailed design. A summary of resettlement impacts and key socioeconomic information is in Table A12.1.

Table A12.1: Summary of Resettlement Impacts Item Haveri Hospet Raichur Permanent Land Acquisition (hectares) 13 12 14 Number of Affected Households 4 14 11 Number of Affected People 24 150 75 Number of Affected People without Titles to Land 0 0 0 Number of Female-Headed Households 0 0 0 Number of Vulnerable Affected People 12 28 3 Number of Affected Structures 0 0 0 Number of Affected Common Property Resources 0 0 0 Average Household Annual Income (Rs) 350,000 260,000 400,000 Primary Source of Income Agriculture and

services Agriculture Agriculture

Average Household Size (number of people) 6.0 10.0 6.5 Source: Asian Development Bank.

B. Resettlement Framework and Policy 4. This summary captures the salient points of the resettlement framework presented in Supplementary Appendix K. The resettlement framework outlines the objectives, policy principles, and procedures for land acquisition (if required), compensation, and other assistance measures for those affected. The resettlement framework is based on the Land Acquisition Act (1894, amended in 1984), the national policy on resettlement and rehabilitation for Investment Program-affected persons, and the Asian Development Bank’s (ADB’s) policy on involuntary resettlement.5 The

1 Covering the construction of the Karnataka Urban Infrastructure Development and Finance Corporation building on

vacant government land. 2 Covering firefighting, lake development, tourism, and sports. 3 The total estimated land requirement for the Investment Program in 25 subproject ULBs is 512.12 hectares. Of this,

215.8 hectares are Government land. About 300 hectares will need to be acquired, of which about 120 hectares have not yet been identified.

4 Sample ULBs were selected based on their representation of the 25 project ULBs, geographic location (indicating infrastructure requirement characteristics), availability of existing infrastructure facilities, and presence of multiple subprojects.

5 ADB. 1995. Involuntary Resettlement. Manila.

Appendix 12

58

resettlement framework compares the three documents and addresses gaps. The entitlement matrix for the Investment Program, based on the foregoing, is given in Table A12.2.

Table A12.2: Entitlement Matrix

Item

Type of Loss

Application Entitled Person Compensation Policy

Implementation Issues

Responsible Agency

1 Loss of private land

Homestead land, agricultural land, or vacant plot

Owner(s) with legal title

• Replacement or market value of land; or land- for-land where feasible (including compensation for nonviable residual portions).

• Subsistence allowancea based on 3 months minimum wage rates.

• Free transport facility or shifting assistance.b

• Provision of all fees, taxes, and other charges (registration, etc.) incurred for replacement land.

• Additional compensation for vulnerablec households (Item 7).

• If land-for-land is offered, ownership will be in the name of the original landowner(s).d

• Charges will be limited to those for land purchased within a year of compensation payment and for land of equivalent size.

• Vulnerable households will be identified during the census conducted as part of the resettlement plan.

The DLVC will determine the replacement value. The ULB will confirm minimum wage rates during detailed socioeconomic surveys conducted as part of the resettlement plan, determine shifting assistance, verify all charges, and identify vulnerable households.

1-a Loss of private land

Homestead land, agricultural land, or vacant plot

Tenants and lease-holders

• Subsistence allowance based on 3 months of land rental.

• Additional compensation for vulnerable households (Item 7).

• Landowners will reimburse tenants and leaseholders for their land rental deposit or unexpired lease.

• Vulnerable households will be identified during the census conducted as a part of the resettlement plan.

The ULB will confirm land rental, ensure that tenants and leaseholders are reimbursed for land rental deposit or unexpired leases, and identify vulnerable households.

1-b Loss of private land

Homestead land, agricultural land, or vacant plot

Share- croppers • Notice to harvest standing seasonal crops.

• If notice for harvesting cannot be given, compensation for share of crops will be provided (Item 6).

• Additional compensation for vulnerable households (Item 7).

• Harvesting prior to acquisition will be accommodated to the extent possible.

• Work schedule will avoid the harvest season.

• Vulnerable households will be identified during the census conducted as a part of the resettlement plan.

The ULB will ensure provision of notice and identify vulnerable households. The DLVC will request relevant departments (Item 6) to undertake crop valuation.

1-c Loss of private land

Homestead land, agricultural land, or vacant plot

Encroachers • Sixty days advance notice to shift from encroached land.

• Additional compensation for vulnerable households (Item 7).

• Vulnerable households will be identified during the census conducted as part of the resettlement plan.

The ULB will ensure provision of notice and identify vulnerable households.

1-d Loss of private land

Homestead land, agricultural land, or vacant plot

Squatters • Sixty days advance notice to shift from occupied land.

• Additional compensation for vulnerable households (Item 7).

• Vulnerable households will be identified during the census conducted as part of the resettlement plan.

The ULB will ensure provision of notice and identify vulnerable households.

2 Loss of Government land

Homestead land, agricultural land, or vacant plot

Fixed-term leaseholder

• Subsistence allowance based on 3 months of land rental.

• Reimbursement of unexpired lease. • Additional compensation for vulnerable

households (Item 7).

• Vulnerable households will be identified during the census conducted as part of the resettlement plan.

The ULB will confirm land rental and identify vulnerable households.

2-a Loss of Government land

Homestead land, agricultural land, or

Encroachers and squatters

• Sixty days advance notice to shift from encroached land.

Additional compensation for vulnerable households (Item 7).

• Vulnerable households will be identified during the census conducted as a part of the resettlement plan.

The ULB will ensure provision of notice and identify vulnerable households.

Appendix 12 59

Item

Type of Loss

Application Entitled Person Compensation Policy

Implementation Issues

Responsible Agency

vacant plot 3 Loss of

residential structure

Residential structure and other assetse

Owner(s) of residential structures with legal title

• Replacement value of structure and other assets (or part of structure and other assets if remainder is viable).

• Free transport facility or shifting assistance.

• All fees, taxes, and other charges (registration, etc.) incurred for replacement structure.

• Rights to salvage material from structure and other assets.

• Subsistence allowance based on 3 months minimum wage rates.

• Additional compensation for vulnerable households (Item 7).

• Vulnerable households will be identified during the census conducted as part of the resettlement plan.

The DLVC will determine replacement value based on the BSR.f

The ULB will determine shifting assistance, verify all charges, confirm minimum wage rates during detailed socioeconomic surveys conducted as part of the resettlement plan, and identify vulnerable households.

3-a Loss of residential structure

Residential structure and other assets

Tenants and leaseholders

• Replacement value of structure and other assets (or part of structure and other assets if remainder is viable) constructed by the affected persons.

• Free transport facility or shifting assistance.

• All fees, taxes, and other charges (registration, etc.) incurred for replacement structure.

• Rights to salvage material from structure and other assets constructed by the affected persons.

• Subsistence allowance based on 3 months minimum wage rates.

• Additional compensation for vulnerable households (Item 7).

• Vulnerable households will be identified during the census conducted as part of the resettlement plan.

• Structure owners will reimburse tenants and leaseholders for their rental deposit or unexpired lease.

The DLVC will determine replacement value based on the BSR.

The ULB will determine shifting assistance, verify all charges, confirm minimum wage rates during detailed socioeconomic surveys conducted as part of the resettlement plan, identify vulnerable households, and ensure that tenants and leaseholders receive reimbursement for rental deposits or unexpired leases.

3-b Loss of residential structure

Residential structure and other assets

Encroachers and squatters

• Replacement value of structure and other assets (or part of structure and other assets if remainder is viable) constructed by the affected persons.

• Free transport facility or shifting assistance.

• All fees, taxes, and other charges (registration, etc.) incurred for replacement structure.

• Rights to salvage material from structure and other assets constructed by the affected persons.

• Subsistence allowance based on 3 months minimum wage rates.

• Additional compensation for vulnerable households (Item 7).

• Vulnerable households will be identified during the census conducted as part of the resettlement plan.

The DLVC will determine replacement value based on the BSR.

The ULB will determine shifting assistance, verify all charges, confirm minimum wage rates during detailed socioeconomic surveys conducted as part of the resettlement plan, and identify vulnerable households.

60 Appendix 12

Item

Type of Loss

Application Entitled Person Compensation Policy

Implementation Issues

Responsible Agency

4 Loss of commercial structure

Commercial structure and other assets

Owner(s) of commercial structure with legal title

• Replacement value of structure and other assets (or part of structure and other assets if remainder is viable).

• Free transport facility or shifting assistance.

• All fees, taxes, and other charges (registration, etc.) incurred for replacement structure.

• Rights to salvage material from structure and other assets.

• Subsistence allowance based on 3 months structure rental rates.

• Additional compensation for vulnerable households (Item 7).

• Vulnerable households will be identified during the census conducted as part of the resettlement plan.

The DLVC will determine replacement value based on the BSR.

The ULB will determine shifting assistance, verify all charges, confirm structure rental rates during detailed socioeconomic surveys conducted as part of the resettlement plan, and identify vulnerable households.

4-a Loss of commercial structure

Commercial structure and other assets

Tenants and lease-holders

• Replacement value of structure and other assets (or part of structure and other assets if remainder is viable) constructed by the affected persons.

• Free transport facility or shifting assistance.

• All fees, taxes, and other charges (registration, etc.) incurred for replacement structure.

• Rights to salvage material from structure and other assets constructed by the affected persons.

• Subsistence allowance for 3 months based on structure rental rates.

• Additional compensation for vulnerable households (Item 7).

• Vulnerable households will be identified during the census conducted as a part of the resettlement plan.

The DLVC will determine replacement value based on the BSR. The ULB will determine shifting assistance, verify all charges, confirm structure rental rates during detailed socioeconomic surveys conducted as part of the resettlement plan, identify vulnerable households, and ensure that tenants and leaseholders receive reimbursement for their rental deposits or unexpired leases.

4-b Loss of commercial structure

Commercial structure and other assets

Encroachers and squatters

• Replacement value of structure and other assets (or part of structure and other assets if remainder is viable) constructed by the affected persons.

• Free transport facility or shifting assistance.

• All fees, taxes, and other charges (registration, etc.) incurred for replacement structure.

• Rights to salvage material from structure and other assets constructed by the affected persons.

• Subsistence allowance based on 3 months structure rental rates.

• Additional compensation for vulnerable households (Item 7).

• Vulnerable households will be identified during the census conducted as part of the resettlement plan.

The DLVC will determine replacement value based on the BSR.

The ULB will determine shifting assistance, verify all charges, confirm structure rental rates during detailed socioeconomic surveys conducted as part of the resettlement plan, and identify vulnerable households.

5 Loss of livelihood

Livelihood Business owner, tenant, lease-holder, employee, or agricultural worker

• Assistance for lost income based on 3 months minimum wage rates.

• Additional compensation for vulnerable households (Item 7).

• Vulnerable households will be identified during the census conducted as part of the resettlement plan.

• Larger businesses, if affected,

The ULB will confirm minimum wage rates during detailed socioeconomic surveys conducted as part of the resettlement plan, and through

Appendix 12 61

Item

Type of Loss

Application Entitled Person Compensation Policy

Implementation Issues

Responsible Agency

may be compensated on the basis of demonstrated loss of profit subject to submission of formal evidence such as income tax returns.

nongovernment organizations, will determine assistance for loss of business and will identify vulnerable households.

6 Loss of trees and crops

Standing trees and crop

Owner or farmer with legal title, tenants, lease-holders, share-croppers, encroachers or squatters

• Notice to harvest standing seasonal crops.

• If notice cannot be provided, compensation for standing crop (or share of crop for sharecroppers) at market value.

• Compensation for perennial crops and fruit-bearing trees at annual net product market value multiplied by remaining productive years.

• Compensation for nonfruit trees at market value of timber.

• Subsistence allowance for one cropping cycle in case of seasonal crops.

• Harvesting prior to acquisition will be accommodated to the extent possible

• Work schedules will avoid the harvest season.

• Market value of trees and/or crops has to be determined.

The ULB will ensure provision of notice. The DLVC will request department of agriculture, forest, and horticulture to undertake valuation of standing crops and perennial crops and trees and finalize compensation rates in consultation with affected persons.

7 Impacts on vulnerable affected persons

All impacts Vulnerable affected persons

• Land. Further to Item 1, in the case of loss of private land, land-for-land compensation if feasible and available.

• Residential Structure. Further to Item 3, in the case of loss of residential structure, subsistence allowance for 3 months based on minimum wage rates and skill training for vulnerable households.

• Commercial Structure. Further to Item 4, in the case of loss of commercial structure, subsistence allowance based on 3 months minimum wage rates and skill training for vulnerable households, plus assistance up to a maximum limit of Rs30,000 for purchase of income-generating assets.

• Livelihood. Vulnerable households will be prioritized in Investment Program employment. Skills training and subsistence allowance based on 3 months minimum wage rates to augment current livelihood. Assistance up to a maximum limit of Rs30,000 for purchase of income-generating assets.g

• Vulnerable households will be identified during the census conducted as part of the resettlement plan.

• If land-for-land is offered, ownership will be in the name of the original landowner(s).

The ULB will identify vulnerable households, confirm minimum wages, and through nongovernment organizations will determine assistance for loss of business.

8 Temporary loss of land

Land temporarily required for Investment Program activities

Owner(s) with legal title, tenants, lease-holders, share-croppers, employee, agricultural workers,

• Sixty days advance notice. • Provision of land and structure rental

value during the duration of temporary acquisition.

• Compensate for any income lost during temporary acquisition based on minimum wage rates.

The DLVC will determine rental value and the duration of lost income though surveys and consultations with affected persons. The ULB will confirm the

62 Appendix 12

Item

Type of Loss

Application Entitled Person Compensation Policy

Implementation Issues

Responsible Agency

encroachers and squatters

minimum wage.

9 Temporary disruption of livelihood

Commercial and agricultural activities

Owners, tenants, lease-holders, share-croppers, employee, agricultural workers, hawkers or vendors

• Provision of alternative sites for hawkers and vendors for continued economic activity will be part of the Investment Program’s design where possible.

• In case alternative sites cannot be provided, an allowance based on the minimum wage rate will be provided.

• Free transport facility or shifting assistance.

• Compensation for agricultural losses (Item 6).

• During construction, the ULB will identify alternative temporary sites for vendors and hawkers to continue their economic activity.

• The ULB and the Project Management Unit will ensure civil that works will be phased to minimize disruption.

The ULB will identify alternative sites for economic activity and will confirm the minimum wage.

10 Loss of and temporary impacts on common resources

Loss of or disruption to common resources

Community or local body

• Replacement or restoration of affected community facilities such as public water pumps, sanitation and drainage facilities, schools, hospitals, temples and shrines, and cultural resources.

• Enhancement of community resources through provision of access to basic urban infrastructure from the Investment Program (such as water supply) where applicable.

The ULB, the Project Management Unit, and the contractor.

11 Any other loss not identified

• Unanticipated involuntary impacts shall be documented and mitigated based on the principles provided in the Asian Development Bank’s policy on involuntary resettlement.

The ULB.

BSR = basic schedule of rates, DLVC = district-level valuation committee, ULB = urban local body. a The subsistence allowance is a transitional allowance for affected persons provided for utilization and/or consumption until an alternative source of livelihood is obtained. The

main source of livelihood in the sample subproject areas is agriculture. The allowance provided will cover one cropping season during which alternative agricultural employment is expected to be gained.

b Shifting assistance will be a one-time payment based on the amount of property to be moved and the distance. Alternatively, the ULB may provide free transport facilities. c Vulnerable households include female-headed households, households headed by a disabled person, households headed by a member of an indigenous group, and

households below the poverty line. d Joint ownership in the name of husband and wife will be offered in the case of non-female-headed households. e Other assets include, but are not limited to, walls and fences, sheds, and wells. f The BSR is rates for civil works determined by the Public Works Department of the government of Karnataka as revised on an annual basis. g The NGO will assist the ULB with identifying beneficiaries, purchasing income-generating assets etc. Examples of income-generating assets are tools for carpenters or

mechanics, sewing machines for tailors, etc., which would be specific to affected persons. Source: Asian Development Bank.

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5. Losses of land, structures, trees and crops, and other assets will be valued at replacement costs. A district-level valuation committee will be constituted, with representation by the deputy commissioner, the land acquisition officer, the accounts officer of the Collectorate, the urban local body (ULB) resettlement officer, the program management unit (PMU), affected persons, nongovernment organizations (NGOs), and community-based organizations to determine replacement values. Vulnerable households will be provided with additional assistance in the form of land-for-land replacement options, preferences for employment in subproject activities, skill and livelihood training, and income-generating assets. Short-term income restoration activities include the provision of short-term allowances such as (i) subsistence allowances (3 months), and (ii) shifting assistance.1 Medium-term income restoration activities, such as provision of income-generating assets, and longer-term training will also be provided. C. Procedure for Resettlement Plan Preparation

6. Resettlement plans for subprojects will be prepared as follows: (i) The implementing agencies, with guidance from the PMU, will undertake

socioeconomic surveys for each identified subproject based on the preliminary technical design.

(ii) If impacts are found to be significant,2 full resettlement plans will be prepared for the subproject.

(iii) If impacts are not significant, short resettlement plans will be required for project preparation.

(iv) Resettlement plans will include measures to ensure that the socioeconomic conditions, needs, and priorities of women are identified and that the process of land acquisition and resettlement does not disadvantage women.

7. The implementing agencies, the PMU, and the consultants for project preparation and implementation will include social development specialists familiar with ADB’s policy and procedures for preparing subproject resettlement plans. Resettlement plans will comply with national polices, ADB’s policy on involuntary resettlement3 and other social safeguard guidelines, and the resettlement framework. The resettlement plans for sample subprojects will be used as models for preparing and implementing other subproject resettlement plans. Approval of subproject resettlement plans by ADB and compensation prior to displacement will be conditions for contracting civil works.

8. The executing agency and implementing agencies, through the PMU, will ensure that the resettlement framework is closely followed when a resettlement plan for a subproject is formulated. The executing agency will further ensure that adequate resettlement budgets are delivered on time to the PMU and implementing agencies and that NGOs are involved sufficiently ahead of time for timely implementation of the resettlement plan. D. Institutional Arrangements

9. The Karnataka Urban Infrastructure Development and Finance Corporation (KUIDFC) is the executing agency responsible for implementing the Investment Program. The implementing agencies will be the Investment Program ULBs; the Karnataka Urban Slum Clearance Board; the Directorate of Municipal Administration; the Department of Information, Tourism, and Youth Services; Karnataka State Fire and Emergency Services; the Lake Development Authority; the Karnataka Urban Water Supply and Drainage Board; and the KUIDFC. A special land acquisition officer at the PMU and land acquisition officers at the divisional offices will coordinate land acquisition and resettlement activities. Resettlement officers at each ULB and implementing NGOs will be responsible for resettlement plan implementation. Further details on agencies responsible for resettlement plan activities are in Table A12.3.

1 Shifting assistance will be a one-time payment based on the amount of property to be moved and the distance.

Alternatively, the ULB may provide free transport facilities. 2 Resettlement is significant when 200 or more people experience major impacts. Major impacts are defined as affected

persons being physically displaced from housing and/or losing 10% or more of their productive, income-generating assets.

3 ADB. 1995. Involuntary Resettlement. Manila.

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Table A12.3: Institutional Roles and Responsibilities

Activities Agency Responsible Subproject Initiation Stage Finalization of sites and alignments for subprojects ULB, PMU, program

consultants Disclosure of proposed land acquisition and subproject details by issuing Public Notice, meetings at the community and/or household level with persons affected by subprojects,

formation of DLVC

ULB, DC, DLVC, PMU

Resettlement Plan Preparation Stage Conducting census of all affected persons ULB, PMU, program

consultants Conducting focus group discussions, meetings, and workshops during social impact

assessment surveys ULB, PMU, program consultants

Computation of replacement values of land and/or properties proposed for acquisition and for associated assets

DLVC, ULB, PMU, program consultants, deputy commissioner

Categorization of affected persons for finalizing entitlements PMU, program consultants Formulating compensation and rehabilitation measures, conducting discussions, meetings

and workshops with all affected persons and other stakeholders ULB, PMU

Fixing compensation for land and/or property with titleholders ULB, DLVC, deputy commissioner

Finalizing entitlements and rehabilitation packages PMU, program consultants Disclosure of final entitlements and rehabilitation packages ULB, PMU, program

consultants, NGO Approval of resettlement plan PMU, Asian Development

Bank Sale deed execution and payment, taking possession of land ULB Resettlement Plan Implementation Stage Implementation of proposed rehabilitation measures ULB, NGO, resettlement

officer Consultations with affected persons during rehabilitation activities ULB, NGO, resettlement

officer Redress of grievances NGO, resettlement officer,

grievance redress committee/deputy commissioner

Internal monitoring ULB, PMU External monitoring External Agency

DLVC = district-level valuation committee, NGO = nongovernment organization, PMU = Program Management Unit, ULB = urban local body. Source: Asian Development Bank.

E. Consultation, Disclosure, and Grievance Redress 10. Resettlement plans were prepared in consultation with stakeholders. Discussions and meetings were held involving stakeholders, particularly affected households, and a socioeconomic survey was conducted to determine the potential impacts of land acquisition. Information has been and continues to be disseminated to affected persons. Local language versions of the resettlement plans and resettlement framework have been made available in ULB offices and disclosed on the KUIDFC’s web site. The resettlement framework and resettlement plans for sample Investment Program ULBs have been disclosed on ADB’s web site. Finalized resettlement plans will also be disclosed on ADB’s web site, and information dissemination and consultation will continue throughout implementation of the Investment Program. 11. Grievances by affected persons will first be brought to the attention of the implementing NGO or resettlement officer. Grievances not redressed by the NGO or the resettlement officer will be brought to the grievance redress committee established in each Investment Program district. Members of the grievance redress committees will include representatives of affected persons (including vulnerable households), the ULB, the KUIDFC, NGOs, community-based organizations, and contractors. The committees will meet every 2 weeks, determine the merits of each grievance, and resolve grievances within a month of receiving the complaint, failing which the grievance will be

Appendix 12 66

addressed by the deputy commissioner. The deputy commissioners will also hear appeals against committee decisions. Grievances that remain unresolved will be referred by affected persons to appropriate courts of law. Records will be kept of all grievances, including contact details of the complainant, date that the complaint was received, nature of the grievance, agreed corrective actions and the date these were effected, and final outcome. F. Monitoring and Evaluation 12. Resettlement plan implementation will be closely monitored to provide the PMU with an effective basis for assessing the progress of resettlement and identifying potential difficulties and problems. Internal monitoring will be undertaken by the ULB to track indicators, such as the number of families affected and resettled, the assistance extended, the infrastructure facilities provided, and the financial aspects of the resettlement (such as compensation paid and grants extended). Job charts will indicate the targets to be achieved during the month and these will be given to the resettlement officer. Monthly progress reports will be prepared and submitted to the PMU reporting actual achievements against the job chart targets and reasons for shortfalls, if any. The PMU will be responsible for managing and maintaining databases on affected persons, documenting the results of the census of affected persons, and verifying asset and socioeconomic survey data that will be used as the baseline for assessing the resettlement plans’ implementation impacts. The PMU will appoint an independent agency to undertake external monitoring to document (i) the restoration of income levels; (ii) the changes and shifts in occupation patterns; (iii) the changes in affected persons’ type of housing; and (iv) the performance of NGOs, ULBs, and the PMU in resettlement implementation. The independent agency will also assess affected persons’ access to amenities such as water, electricity, and transportation. The independent agency will monitor subprojects twice a year and submit reports directly to the PMU. The PMU will submit all external monitoring reports to ADB for review.

G. Resettlement Budget

13. Detailed budget estimates for involuntary resettlement will be prepared for each resettlement plan by the KUIDFC and the implementing agencies. The estimates will be included in overall subproject estimates. The budget will include (i) detailed costs of land acquisition, relocation, and livelihood and income restoration and improvement; (ii) source of funding; (iii) arrangements for approval; and (iv) flow of funds and contingency arrangements. Overall costs are estimated at Rs278.36 million. All land acquisition funds will be provided by the KUIDFC. Land acquisition, compensation, relocation, and rehabilitation of incomes and livelihoods will be considered to be an integral component of Investment Program costs.

Appendix 13 67

SUMMARY INITIAL ENVIRONMENTAL EXAMINATION

A. Introduction and Description of the Investment Program 1. The Investment Program will facilitate economic growth in towns of north Karnataka and bring about urban development by means of equitable distribution of urban services in an environmentally sound and operationally sustainable manner. The Investment Program will help the Government of Karnataka (GoK) rehabilitate and construct urban infrastructure, including water supply systems, sewerage systems, drainage, and urban road improvements through resurfacing and junction improvements. It will have poverty reduction, institutional development, investment program assistance,1 and nonmunicipal infrastructure2 components. An initial environmental examination (IEE) (Supplementary Appendix K) and IEEs for subprojects3 in three Investment Program ULBs (Haveri, Hospet, and Raichur) (Supplementary Appendixes J1 to J3) were prepared. IEEs were based on field surveys, secondary information, and discussions with stakeholders. B. Environmental Impacts and Mitigation Measures 2. Sector Impacts. The Investment Program is designed to maximize environmental benefits. Net environmental impacts are positive and large, including (i) improved quality of drinking water from water supply investments; (ii) improved surface and groundwater quality; (iii) improved public health as a result of water supply, sanitation, and drainage investments; (iv) reduced flooding as a result of drainage investments; (v) reduced volume of suspended particulates in the air as a result of improved roads; and (vi) increased social benefits from community participation and investments in nonmunicipal infrastructure. Negative impacts of some components, notably the sewage treatment plants, will not be significant considering the scale of the Investment Program and the mitigation measures that will be incorporated in designs (Supplementary Appendix N). 3. Subproject Impacts. Subproject selection will ensure that the Investment Program will not have significant adverse environmental impacts or impacts on environmentally sensitive areas. Impacts that are potentially severe and permanent in nature have been identified, and the criteria for subproject selection will result in the rejection of subprojects with such impacts (Supplementary Appendix N). Potential adverse environmental impacts are mostly localized and temporary. These impacts can largely be avoided through proper subproject design (particularly in relation to siting) or mitigated by means of proper mitigation measures and environmental management. Potential adverse impacts and mitigation measures are summarized in Table A13.1 (details in Supplementary Appendixes M1 to M3).

Table A13.1: Potential Adverse Environmental Impacts and Mitigation Measures Category Potential Adverse Impact Severity Duration Mitigation Measures A. Sewerage Systems

Land acquisition and resettlement. M P Addressed in resettlement plan. Contamination of groundwater resources by leaching from facultative ponds

N–M P Protective impervious layer for the bottoms and walls of ponds to avoid seepage and provide smooth working surfaces for desludging. In Hospet, a soil study and groundwater mapping will provide for the proper pond depth.

Location

Loss of amenities and odor nuisance to neighbors

N–M P Physical separation and visual screen, a buffer zone (landscaping and earthworks) around sewage treatment plants, and air dispersion modeling at the detailed design stage.

Design Pollution of agricultural fields and/or groundwater because of the discharge of partially treated sewage

M P Sewage treatment plants are designed for stream discharge and impacts will be minimal. Effluent discharges will follow stream standards (Biological Oxygen Demand < 30 milligrams/liter, pH 5.5–9.0, suspended solids< 100 milligrams/liter).

1 Covering the construction of the Karnataka Urban Infrastructure Development and Finance Corporation building on

vacant government land. A rapid environmental assessment shows that the building is unlikely to have adverse environmental impacts. Environmental implications will be reviewed during detailed design.

2 Covering firefighting, lake development, tourism and sports. 3 The subprojects are (i) water supply, (ii) sewerage and sanitation, (iii) urban drainage, (iv) solid waste management, and

(v) urban transport.

68 Appendix 13

Category Potential Adverse Impact Severity Duration Mitigation Measures Nuisance caused by leakages from or overflow of sewers

N P Regular maintenance will nullify the impact.

Nuisance and diseases caused by mosquito breeding and bad odors from sewage treatment plants

N–M P Buffer zone provided. Banks of ponds kept clear of grasses, bushes, etc.

Pollution and health hazard caused by improper sludge disposal methods

M P Sludge management plan prepared, safe sludge handling methods employed, and sludge dried in drying beds before disposal.

Construction Dust, noise nuisance, road blockages when laying sewer networks, increased traffic flow from construction activities

M T Construction site management plans incorporating mitigation measures will be implemented.

Potential pollution of agricultural fields from insufficient treatment.

N P Effluent discharges will follow stream standards.

Pollution and health hazards resulting from improper sludge disposal methods

M P Sludge management plan prepared, safe sludge handling methods employed, and sludge dried in drying beds before disposal.

Mixing with nonmunicipal waste N P Wastewater from industries will not enter sewerage systems. In the case of discharges into sewers, effluent will follow Central Pollution Control Board and Karnataka State Pollution Control Board standards.

Impacts caused by illegal tapping of sewage facilities for irrigation

M P Regular maintenance and constant checks will be undertaken.

Operation and Maintenance

Nuisance and pollution of groundwater and/or surface water caused by overflowing of sewers

N–M P Regular maintenance will nullify the impact.

B. Water Supply

High noise levels from the proposed 200 horsepower pumping station for Raichur

N P The location is far from sensitive areas. Personal protection equipment provided for workers.

Design

Pollution caused by improper disposal of sludge from water treatment plants

M P Sludge management plan prepared, safe sludge handling methods employed, and sludge dried in drying beds before disposal.

Construction Dust from construction activities M T Dust suppression measures such as spraying water.

Operation and maintenance

Recurrence of blockage and leakage problems. Loss of water resources and energy

M T Leak detection and water auditing surveys to be conducted and leak fixing time to be minimized.

Pollution caused by improper disposal of sludge from water treatment plants

M T Implementation of the sludge management plan.

C. Drainage Exposure of workers to contaminated soil during de-silting and excavation

N–M T Implementation of the occupational safety plan.

Disturbance to traffic N–M T Construction material shall be stockpiled to minimize frequent deliveries.

Construction

Dust generation N–M T Dust suppression activities such as water sprinkling. Operational impacts

Silting of water courses caused by failure to clear construction work sites

N–M T Ensure site clearance before concluding work.

D. Road Upgrading

Disturbance to hawkers and vendors

N T Addressed in resettlement plan.

Noise nuisance M T Loud activities will not be carried out at night-time. Workers shall be provided with protective equipment.

Dust nuisance M T Dust suppression activities such as water sprinkling will be employed.

Construction

Public and worker safety N T Implementation of the occupational safety plan and the provision of warning signs.

M = moderate, N = negligible, P = permanent, T = temporary. Source: Asian Development Bank.

C. Institutional Requirements and Environmental Monitoring Plan 4. The Karnataka Urban Infrastructure Development and Finance Corporation (KUIDFC) is the executing agency and is responsible for implementing the Investment Program through a Program Management Unit (PMU). Four divisional offices will assist the PMU. The implementing agencies will

Appendix 13 69

be the Investment Program urban local bodies (ULBs); the Karnataka Urban Slum Clearance Board; the Directorate of Municipal Administration; the Department of Information, Tourism, and Youth Services; Karnataka State Fire and Emergency Services; the Lake Development Authority; the Karnataka Urban Water Supply and Drainage Board; and the KUIDFC. An environmental engineer in each ULB will be responsible for environmental assessment, monitoring, and management.4

5. Environmental monitoring plans in the IEEs identify environmental monitoring activities to ensure that negative environmental impacts are addressed. The IEEs also identify agencies and institutions responsible for monitoring and provide indicative monitoring costs (Supplementary Appendixes M1 to M3). The PMU will undertake monitoring during preconstruction work. The PMU will be responsible for providing technical approval for subprojects after verifying designs and incorporating mitigation measures into design and contract documents. During construction, monitoring will largely be undertaken by contractors and ULBs. The ULBs will monitor contractors’ environmental performance. During the operational stage, monitoring will continue to be the responsibility of ULBs. Third-party monitoring will be undertaken by relevant government agencies, such as pollution control boards. 6. The ULBs will prepare progress reports on all aspects of environmental assessment, management, and monitoring. Independent monitoring will be undertaken by academic or research institutions with experience in environmental assessment that the KUIDFC will engage to carry out external monitoring of the environmental assessment and management process for the entire Investment Program. External monitoring will be carried out twice a year during implementation of the Investment Program. Reports will be submitted to the KUIDFC and the Asian Development Bank (ADB) for review. During review missions, ADB will also assess environmental compliance with ADB’s Environmental Policy.5

D. Public Consultation and Disclosure

7. During preparation of the Investment Program, consultations were undertaken with various stakeholder groups, including representatives of local governments, government agencies, nongovernment organizations, urban residents, and affected persons. These consultations were conducted at various levels (Investment Program level,6 ULB level,7 and subproject level8) and took the form of workshops, individual and focus group discussions, and surveys. Community participation was ensured through a sample survey. During preparation of the resettlement plan, those affected by land acquisition for sewage treatment plants in all three ULBs were consulted and potential environmental impacts for proposed sewage treatment plants, safeguards, and impact mitigation measures were disclosed during the consultations. During detailed design, more information will be disclosed and public awareness programs will be conducted. The IEEs will be translated into the local language and presented by means of public notices at ULB offices and the mass media. They will also be posted on the KUIDFC web site. Information dissemination and consultation will continue throughout implementation of the Investment Program. E. Findings, Recommendations, and Conclusion

8. The IEEs show that subprojects in sample Investment Program ULBs will result in large net environmental benefits and will not generate significant adverse environmental impacts. Potential adverse environmental impacts are largely temporary and localized and can be addressed through subproject design and mitigation measures. No further assessment of environmental impacts is required for subprojects in sample Investment Program ULBs.

4 ULB environmental engineers have recently been recruited based on the Government’s revised Cadre and Recruitment

Policy, to ensure compliance with requirements for all urban infrastructure projects particularly solid waste management. The KUIDFC, through the PMU will provide support to the ULB environmental engineers in environmental management. Training for ULB environmental engineers will be in the form of support during subproject design and implementation from the PMU, program consultants, and the Pollution Control Board.

5 ADB. 2002. Environment Policy. Manila. 6 A consultative meeting was held on 3 January 2004. 7 Town-level workshops were held on 23 August 2004, 27 October 2004, and 18 March 2005. 8 Consultations were held in selected subproject sites on 23 May 2005, 24 May 2004, and 28 June 2005.

70 Appendix 13

9. To ensure compliance with the Government of India’s and ADB’s environmental guidelines and requirements, environmental criteria for subproject selection and environmental assessment and review procedures to guide the implementation of future subprojects have been developed (Supplementary Appendix N). The environmental assessment and review procedures focused on Government regulations requiring environmental impact assessment and clearance from the Ministry of Environment and Forests for sewage treatment plants that discharge more than 0.05 million liters per day and Government procedures for developing urban infrastructure facilities and water sources.