Tamil Nadu Urban Flagship Investment Program RRP IND 49107-003

FRAMEWORK FINANCING AGREEMENT

TAMIL NADU URBAN FLAGSHIP INVESTMENT PROGRAM

Parties This Framework Financing Agreement (FFA) dated 20 July 2018 between India, acting by its President (“INDIA”), and the Asian Development Bank (ADB).

MFF Investment Program

India is committed to and will cause Tamil Nadu (the “state”) to implement the Tamil Nadu Urban Flagship Investment Program (“Investment Program”), an integral part of the Tamil Nadu Vision 2023 and State Annual Action Plan (2017-2020) (“Road Map”). Both the Road Map and the Investment Program are described in Schedule 1 hereto. The total cost of the investment program over the period of 2018 to 2026 is expected to be $1.268 billion equivalent. The total cost of the state’s urban infrastructure investment program under the Road Map is $42.7 billion 1 with short-term needs placed at $4.46 billion equivalent.2

Multitranche Financing Facility

The multitranche financing facility (the Facility) is intended to finance components and subprojects under the Investment Program, provided that such components and subprojects comply with the criteria set out in Schedule 4 hereto, and that understandings set out in the FFA are complied with. These may include: i. providing access to reliable and potable drinking water; ii. promoting improved operation and maintenance of urban

services; iii. improving operational efficiency of utilities through reduction of

nonrevenue water and improved energy efficiency; iv. improving access to reliable sanitation systems; v. utilizing clean energy for urban facility operations; vi. providing treated sewage for industrial reuse; vii. improving urban drainage; viii. strengthening urban climate change resilience; ix. strengthening urban governance and management; x. raising awareness of water conservation and climate change; xi. training officials to build capacity in areas of services delivery,

operational efficiency, urban governance, social, gender, pro-poor, and environmentally sustainable services; and

xii. supporting community-based initiatives to improve urban environments.

This FFA does not constitute a legal obligation on the part of ADB to commit any financing. ADB has the right to deny any financing request made by India, cancel the uncommitted portion of the Facility, and withdraw India’s right to request any financing tranche under the

1 Government of Tamil Nadu. 2012. Tamil Nadu Vision 2023. Chennai. 2 Government of Tamil Nadu. 2017. Tamil Nadu State Annual Action Plan (2017-2020). Chennai.

2

Facility. Financing tranches may be made available by ADB provided matters continue to be in accordance with the general understandings and expectations on which the Facility is based and which are laid out in this FFA. This FFA does not constitute a legal obligation on the part of India to request any financing. India has the right not to request any financing under the Facility. India also has the right at any time to cancel any uncommitted portion of the Facility. India and ADB may exercise their respective rights to cancel the Facility or any uncommitted portion thereof, and ADB may exercise its right to refuse a financing request, by giving written notice to such effect to the other parties. The written notice will provide an explanation for the cancellation or refusal and, in the case of a cancellation, specify the date on which the cancellation takes effect. ADB may cancel the facility or reject a financing request when there is a material noncompliance with ADB policies or FFA undertakings; or there are undue delays in the submission of the financing requests or the implementation of the investment program. Financing Plan The financing plan for TNUFIP is summarized below.

Financing Source Total ($ million)

Share (%) of Total

Asian Development Bank 502.0 39.6 - Ordinary Capital Resources (regular loan) 500.0

- Asian Clean Energy Fund (grant) 2.0 Government of Tamil Nadu, CMWSSB, ULBs 766.4 60.4

Total 1,268.4 100.0

Financing Terms

ADB will provide loans and administer cofinancing to finance subprojects and components under the Facility, as and when they are ready for financing, provided, India follows the understandings hereunder, and the components and subprojects are in line with those same understandings. Each loan will constitute a tranche. Each tranche may be financed under terms different from the financing terms of previous or subsequent tranches. The choice of financing terms will depend on the project, capital market conditions, and ADB’s financing policies, all prevailing on the date of signing the legal agreement for such tranche. Tranches may be provided in sequence or simultaneously, and some may overlap in time with each other.

3

Commitment charges are not payable on the Facility. They are payable only on financing actually committed by ADB as a loan. ADB rules on commitment charges, which are in effect when the legal agreements are signed for a tranche, will apply with respect to such tranche. Amount The maximum financing amount available under the Facility is five hundred and two million US dollars ($502,000,000). It will be provided in three individual tranches (Table 3–Financing Plan) from ADB’s ordinary capital resources and Asian Clean Energy Fund (grant) in the following manner: Loans: $500,000,000 Asian Clean Energy Fund: $2,000,000 A transaction technical assistance administered by ADB amounting $1.0 million will be financed on a grant basis by ADB’s Technical Assistance Special Fund (TASF-Others). Availability Period The closing date of any tranche will be on or before 30 June 2026. The last Periodic Financing Request (PFR) is expected no later than 31 December 2022. Terms and Conditions India will provide the proceeds of each tranche to the state, and cause these to be applied by the state to the financing of expenditures of the Road Map and investment program in accordance with conditions set forth in this Agreement and the legal agreements for each tranche.

Execution The executing agency for the Investment Program will be the state’s Municipal Administration and Water Supply Department (MAWS), acting through the Tamil Nadu Urban Infrastructure Financial Services Limited (TNUIFSL). The executing agency will implement the Investment Program in accordance with principles set forth in Schedule 1 to this Agreement, as supplemented with more details in the legal agreements for each tranche.

Periodic Financing Request

India may request, and ADB may agree, to provide loans or administer cofinancing under the Facility to finance the Investment Program and its related components and subprojects upon the submission of a PFR. Each PFR should be submitted by India and confirmed by ADB. India will make available to the state and through the state to the implementing agencies, the proceeds of the tranche in accordance with the related PFR, and legal agreements for the tranche. Each individual tranche will be for an amount of no less than sixty million US dollars ($60 million) or its equivalent. ADB will review the PFR(s) and, if found satisfactory, prepare the related legal agreements.

4

The components and subprojects for which financing is being requested under a PFR will be subject to the selection criteria set out in Schedule 4 hereto, satisfactory due diligence, and preparation of relevant safeguards and fiduciary frameworks and other documents. The Facility will be implemented in accordance with the general framework set out in Schedule 3 to this FFA and the Facility Administration Manual agreed between India and ADB. Until notice is otherwise given by India, the Secretary, Additional Secretary, Joint Secretary, Director, or Deputy Secretary in the Department of Economic Affairs of the Ministry of Finance of the Government of India are designated as authorized representative of India for the purposes of executing PFRs.

General Implementation Framework

The facility will be implemented in accordance with the general framework set out in Schedule 3 hereto.

Procedures The tranches to be provided under the Facility will be subject to following procedures and undertakings: (i) India will have notified ADB of forthcoming PFR at least 15

days in advance of the submission of the PFR; (ii) India will have submitted a PFR in the format agreed with ADB; (iii) ADB may in its sole discretion, with reasons provided, decline

to authorize the negotiation and execution of any legal document for a loan; and

(iv) If ADB confirms acceptance of the PFR, the legal agreements will be negotiated and executed by the parties.

PFR Information The PFR will be substantially in the form attached hereto, and will contain the following details: (i) Loan, grant, or cofinancing amount; (ii) Description of subprojects and institutional capacity development

and implementation support to be financed; (iii) Cost estimates and financing plan; (iv) Implementation arrangements specific to the subprojects and

components; (v) Confirmation of the continuing validity of and adherence to the

understanding in this Agreement; (vi) Confirmation of compliance with the provisions under previous

Loan Agreement(s) and Project Agreement(s), as appropriate; and

(vii) Other information as may be required under the Facility Administration Manual, or reasonably requested by ADB.

Safeguards3 Attached as Schedule 5 are references to the Safeguard Frameworks that will be complied with during the implementation of the Facility. ADB’s Safeguard Policies in effect as of the date of signing of legal agreements for a tranche will be applied with respect to the components and subprojects financed under such financing tranche.

3 ADB. 2009. Safeguard Policy Statement. Manila.

5

Procurement All goods and services to be financed under the Facility will be procured in accordance with ADB’s Procurement Guidelines (2015, as amended from time to time).

Consulting Services

All consulting services to be financed under the Facility will be procured in accordance with ADB’s Guidelines on the Use of Consultants (2013, as amended from time to time).

Advance Contracting and Retroactive Financing

Under each tranche, ADB may, subject to its policies and procedures, allow on request: (a) advance contracting of works, goods, and services, and (b) retroactive financing of eligible expenditures for works, goods, services, and incremental administration up to 20% of proposed individual loan, incurred prior to loan effectiveness but not earlier than 12 months before the date of signing of the related legal agreement. India acknowledges that any approval of advance contracting and/or retroactive financing will not constitute a commitment by ADB to finance the related project.

Disbursements The closing date of any tranche under the Facility will be on or before 30 June 2026. Disbursements will be in accordance with the ADB’s Loan Disbursement Handbook, (2017, as amended from time to time) and detailed arrangements agreed upon between India and the ADB.

Monitoring, Evaluation and Reporting Arrangements

The program management unit at the TNUIFSL will establish a program performance monitoring system (PPMS) acceptable to ADB within 3 months of the effectiveness of the first loan under the Facility and under each succeeding loan in accordance with the Investment Program and individual project performance indicators including those in the Design and Monitoring Framework (Schedule 2).

Undertakings Attached as Schedule 6 are the undertakings provided by the Government of India and the state of Tamil Nadu.

Signed in New Delhi as of the day and year first above written.

INDIA ASIAN DEVELOPMENT BANK

_________________________________ ________________________________

(Authorized Representative) (Authorized Representative)

6

SCHEDULE 1

MFF CONSTITUENTS

A. Road Map

1. India’s urbanization and economic growth. Cities are engines of economic growth in

India. While more than 30% of India’s population lives in urban areas, cities contribute more than

60% of gross domestic product (Census 2011). This is expected to rapidly increase to 40% and

75%, respectively, by 2030 with much of this growth channelled to medium-sized cities linked to

industrial hubs, ports, and capital cities. 4 Urbanization will put increased pressure on already

stretched basic urban services, especially water supply and sanitation, where access, quality,

and duration remain low. 5 Key issues confronting cities in India are as follows: (i) acute

infrastructure deficits particularly in emerging urban growth centers; (ii) worsening environmental

pollution, natural resource depletion, and climate change impacts; (iii) high urban poverty (35%);

and (iv) low institutional capacities and weak urban governance. It is estimated around $900 billion

of infrastructure investment in Indian cities is required over the next twenty years to keep up with

the country’s rapid urbanization.6

2. Urban challenges in Tamil Nadu. Tamil Nadu is the most urbanized of India’s large

states—48.5% of its population lives in urban areas, a share that is projected to increase to 67.0%

in 2030—and makes the second-largest contribution to the country’s gross domestic product.

Although Tamil Nadu is a leader in many areas of manufacturing, managing its rapid urbanization

is essential to sustain economic growth, alleviate poverty, and maintain urban livability. Key

challenges include (i) acute infrastructure deficits as a result of rapid urbanization; (ii) growth of

the slum population; (iii) pollution of waterways; (iv) weak institutional capacity to plan and

implement projects; and (v) mixed performance in key areas of governance, including local

revenue generation, financial management, and municipal administration. Water-related

disasters—such as recurring droughts (once in every 2.5 years) and catastrophic urban floods

linked to climate change—are aggravated by the high water losses associated with aging

distribution networks, and inadequate drainage systems not adapted to heavier monsoon rains.

Addressing these complex challenges requires significant investments and deeper institutional

support.

3. Low service level indicators. In Tamil Nadu, urban service levels remain low. As of 2017,

(i) 48% of households are served by piped water; (ii) 80% of cities receive less than 80 liters of

water per capita per day, vs. the national standard of 135 liters per capita per day; (iii) nonrevenue

water (NRW) is 30%–50%; (iv) 42% of households are covered by a sewerage network;

(v) wastewater treatment capacity is 43% of sewage generation, and (vi) urban drainage coverage

is 50%.7 Low service levels are primarily the result of inadequate local finances to invest in capital

expenditures and shortage of trained staff. The program will directly support improvement in these

areas.

4 Government of India, Planning Commission. 2012. Report of the Steering Committee on Urbanization, Twelfth Five

Year Plan (2012–2017). Delhi. 5 Coverage of urban water supply remains at about 70%, and of sewerage at 6%. 6 Government of India, High Powered Expert Committee. 2011. Report on Indian Urban Infrastructure and Services.

Delhi. 7 Government of Tamil Nadu. 2017. State Annual Action Plan, 2017–2020. Chennai.

7

4. Road Map. To address the challenges of rapid urbanization, the state aims to (i) provide

universal access to water and sanitation, (ii) develop “world-class” cities, (iii) establish high-

performing industrial corridors, and (iv) promote climate-resilient urban development.8 Tamil

Nadu’s strategic documents outline programs that support capacity building; enable access to

infrastructure development funds; and employ green technologies, such as solar power, to

achieve sector goals.9 Vision Tamil Nadu 2023 estimated an urban investment requirement of

$42.7 billion, including $7.5 billion for water supply and sanitation, prioritizing continuous and full

coverage of services. The State Annual Action Plan, 2017–2020 (footnote 7) identified 136

projects in 27 cities covering water supply, sewerage, and drainage infrastructure.

5. Policy framework. The Municipal Administration and Water Supply Department (MAWS)

(the state-level agency for urban development in Tamil Nadu) established the Commissionerate

of Municipal Administration (CMA) to (i) support urban local bodies (ULBs) (municipalities), in

planning infrastructure to meet national service-level standards; and (ii) advance urban reforms

set forth in India’s Constitution (Seventy-fourth Amendment) Act, 1992, focusing on the devolution

of service delivery and revenue generation to ULBs. However, to improve the financial and

governance performance of ULBs, the state needs to strengthen CMA’s capacity to support ULBs

and monitor urban reforms, particularly in areas of revenue generation, financial management,

operation and maintenance (O&M), and the introduction of innovative approaches in the sector.

6. National urban flagship programs. To help finance the large-scale investments in Tamil

Nadu, the state will take advantage of funds from the three national flagship programs under the

Ministry of Housing and Urban Affairs: (i) the Swachh Bharat (Clean India) Mission for Urban

Areas, (ii) the Atal Mission for Rejuvenation and Urban Transformation, and (iii) the Smart Cities

Mission. The programs are complementary, and each highlights the need to strengthen urban

institutions and governance. Nevertheless, these funding sources are not sufficient for the large

funding requirements of Tamil Nadu, and the state requested help from ADB to finance water

supply, sewerage, and drainage infrastructure in at least 10 cities within strategic industrial

corridors, as well as programs to develop institutional capacity, public awareness, and urban

governance.

7. Urban governance performance. While Tamil Nadu ranks high as compared to other states in reforms,10 the Government of Tamil Nadu (GOTN) identified the following areas for improvement: (i) financial management (i.e., large number of unresolved audit observations);11 (ii) revenue generation (i.e., 49% collection efficiency of user charges for sewerage); 12 (iii) administration (i.e., 18.8% vacancy in key positions); and (iv) scaling up new approaches (i.e., fecal sludge management and wastewater reuse).

8 Vision Tamil Nadu 2023 defines “world-class” cities as those that are free from garbage and open defecation and

whose infrastructure is upgraded with continuous water supply access, and efficient mass transit and sanitation

systems. (Government of Tamil Nadu. 2012. Vision Tamil Nadu 2023: Strategic Plan for Infrastructure Development

in Tamil Nadu. Chennai). Vision Tamil Nadu 2023 lists five priority industrial corridors: Chennai–Hosur, Chennai–

Tiruchirappalli, Coimbatore–Madurai, Coimbatore–Salem, and Madurai–Thoothukudi. 9 Government of Tamil Nadu. 2012. Twelfth Five Year Plan Tamil Nadu, 2012–2017. Chennai; State Annual Action

Plan, 2017–2020 (footnote 7), Vision Tamil Nadu 2023 (footnote 8), and Government of Tamil Nadu. 2014. State Action Plan on Climate Change: Towards Balanced Growth and Resilience. Chennai.

10 Under Jawaharlal Nehru National Urban Renewal Mission, Tamil Nadu ranked second in reforms; under AMRUT, Tamil Nadu ranked fourth in reforms in the year 2015 to 2016.

11 As on June 2017, more than 148,672 audit observations were pending resolution. 12 Low connection coverage is an issue with 71.1% of households connected to sewerage and water networks as

compared to the project targets.

8

8. Linking state-level economic corridors to urbanization. Vision 2023 envisioned accelerating manufacturing as a primary growth strategy to increase the share of manufacturing from 19% to 22% of its state GDP by 2023. One of the main thrusts of this strategy, as outlined in the Vision, is developing five economic corridors in the state: Chennai–Hosur Industrial Corridor, Chennai–Tiruchirappalli Industrial Corridor (CTIC), Coimbatore–Madurai Industrial Corridor, Coimbatore–Salem Industrial Corridor, and Madurai–Thoothukudi Industrial Corridor (MTIC). The CTIC and MTIC fall under the influence area of the Chennai Kanyakumari Industrial Corridor (CKIC), the southern leg of the East Coast Economic Corridor (ECEC) being implemented by the Government of India in partnership with ADB. Extending from Kolkata in West Bengal to Kanyakumari in Tamil Nadu, ECEC is conceptualized as India’s first coastal economic corridor and is closely aligned with the government’s Sagarmala initiative to promote port-based economic development. The CKIC is the second phase of ECEC.13 The TNUFIP will dovetail the corridor strategy by deliberately targeting cities within these strategic corridors (7 of 10 identified cities are in CKIC influence area with remaining in other corridors), including key ‘anchor cities.’14 and other urban growth centers, and providing critical urban and environmental infrastructure to support these areas attract labor and investment. The TNUFIP investments will also be linked to industrial reuse of tertiary treated water, such as in Tirunelveli and Coimbatore.15

9. Need for innovative approaches. A shift in focus is required in the urban sector to energy efficient urban service delivery systems, promoting clean energy, reuse of treated wastewater, implementing smart water management for operational efficiency, reducing nonrevenue water (NRW), upgrading sewage treatment plants to meet effluent discharge standards, and incentivizing such practices through performance-based urban governance and management and sustainable O&M of new facilities. 10. Objective of the facility. The program will develop priority water supply, sewerage, and drainage infrastructure in at least 10 cities located within strategic industrial corridors of Tamil Nadu.16 It will support innovative pilot projects, including India's first solar-powered sewage treatment plant (STP) to offset greenhouse gas emissions and enhance operational efficiency; strengthen urban governance; and build capacity of state and local institutions to enhance services delivery, environmental sustainability, and climate resilience. 17 11. The investment program is aligned with the following impacts: (i) universal access to basic water and sanitation services achieved; (ii) “world-class” cities and industrial corridors across the state developed; and (iii) water security, reduced vulnerability to climate change in urban areas, and enhanced share of renewable energy achieved.18 The investment program will have the following outcome: livability and climate resilience in at least 10 cities in priority industrial corridors enhanced.

13 Phase I: Vizag Chennai Industrial Corridor; Phase III: Orissa–Vizag Industrial Corridor. 14 Anchor cities are large cities with high-quality urban amenities, such as airports, and mostly identified as Smart Cities

under the Government of India national flagship program, and prioritized for investment by the GOTN. 15 Under CDIA TA supported study on industrial reuse study. 16 The ten cities are Ambur, Chennai, Coimbatore, Cuddalore, Rajapalayam, Thoothukudi, Tiruppur, Tiruchirappalli,

Tirunelveli, and Vellore. Other cities eligible for support under the program subject to compliance with selection criteria outlined in Schedule 4.

17 ADB. 2015. Technical Assistance to India for State-Level Support for National Flagship Urban Programs. Manila. 18 The design and monitoring framework for the Investment Program is in Appendix 1.

9

B. Strategic Context

12. ADB’s Country Partnership Strategy (CPS), 2018–2022. TNUFIP is closely aligned with the CPS. The CPS focuses on three pillars of growth linked to India’s urban transformation, namely: (i) boosting competitiveness to create better jobs, comprising of economic corridor trunk infrastructure and competitive cities; (ii) inclusive provision of infrastructure and services, comprising inclusive urbanization; and (iii) addressing climate change and increase climate resilience, including climate change mitigation, and climate and disaster resilience. Key elements of TNUFIP’s development strategy for the urban sector include: (i) rapidly expanding growth enabling and inclusive infrastructure in urban areas; (ii) enhancing governance and building institutional capacities and systems; and (iii) addressing rising environmental challenges and climate change concerns. TNUFIP supports the use of clean energy through the piloting of innovative approaches such as solar energy powered sewage treatment plant. In terms of adaptation, TNUFIP will improve the urban environment and build resilience in project cities, and to sustain water resources use by promoting operational efficiency, reducing water losses, and raising public awareness of water conservation. The TNUFIP will dovetail findings of the ongoing CDTA-912919 to incorporate principles of climate change into project designs, as well as findings of RETA-904820 promoting non-revenue water reduction and operational efficiency. 13. Economic corridors and competitive cities. Under Pillar 1, TNUFIP will dovetail the strategic planning studies to develop economic corridors and coastal economic zones, such as East Coast Economic Corridor (ECEC), to drive the economic transformation. In line with Vision 2023, TNFUIP will support urban investments in strategic corridors to make the cities clean liveable environments and thereby supporting competitiveness. Major share of investment is planned in cities and towns that falls within the influence area of planned economic corridors. 14. Inclusive urbanization. Under Pillar 2, TNUFIP will contribute to inclusive growth by supporting poor areas with investments in municipal infrastructure (water supply, sanitation, drainage). ADB programs will also adopt innovations, such as 24x7 pressurized water supply, smart metering and operation to reduce nonrevenue water, faecal sludge management, and wastewater reuse and recycling initiatives. Inclusiveness will be further pursued through targeted poverty reduction (such as in urban slums) and gender action plan (GAP) mainstreaming components. The program will also introduce participatory approach in managing urban water supply and sanitation through ward level water sanitation committees with equal participation for women. 15. Climate change mitigation and adaptation. Under Pillar 3, TNUFIP will actively support the government in implementing its commitment to increase the proportion of renewable energy consumption.21 Assistance will cover solar photovoltaic power generation for operation of a sewage treatment plant in Coimbatore. Special attention will be paid to increasing urban climate change resilience by dovetailing findings of ongoing TA-9129 (footnote 19) particularly in environmentally sensitive states and cities that require unique and customized approaches. Under TNUFIP, support will be provided to incorporate appropriate resilience measures, including structural and non-structural instruments, into project designs. The investment program

19 ADB. 2016. Technical Assistance to India for Strengthening Smart Water Management and Urban Climate Change

Resilience in Tamil Nadu. Manila (TA-9129). 20 ADB. 2015. Technical Assistance for Promoting Smart Drinking Water Management in South Asia Cities. Manila (TA-

9048). 21 The government also aims to enhance renewable energy capacity from 40GW in 2017 to 175GW by 2022, of which

100GW will be provided from solar photovoltaic by 2020.

10

indicatively includes integrated water management in two most climate change vulnerable cities (Thoothukudi and Cuddalore) and also a storm water management project in Chennai. C. Policy Framework

16. The Municipal Administration and Water Supply Department (MAWS) is the focal state-level department for urban development in Tamil Nadu and established the Commissionerate of Municipal Administration (CMA) under MAWS to (i) support urban local bodies (ULBs) (municipalities) plan infrastructure to meet national service-level standards, and (ii) advance urban reforms set forth by India’s 74th Constitution Amendment Act focusing on devolution of services delivery and revenue generation functions to ULBs. While Tamil Nadu performed well in past national reforms programs, 22 the state wishes to further improve ULB financial and governance performance. To achieve this, the state recognizes the need to strengthen CMA’s capacity to fulfil its mandate for supporting ULBs and monitoring urban reforms, particularly in areas of cost recovery, financial management, operation and maintenance (O&M), and the application of innovative approaches in the sector. 17. The MAWS Policy Note (2016-2017) describes the state’s ambitions to lead India in addressing the challenges of rapid urbanization and transform its cities into modern, clean, and livable places. It highlights principles of good governance, environmental sustainability, and pro-poor and gender friendly services. Key policy priorities of the state’s urban sector include (i) providing universal access to basic water and sanitation services (Vision 2023); (ii) developing world-class cities as nodes of growth across the state (Vision 2023); (iii) developing urban-industrial linkages (Vision 2023); (iv) employing new, relevant, and green technologies (MAWS Policy Note, 2016-2017); (v) strengthening capacity of ULBs to raise own revenues (taxes, user fees, etc) for investment; (vi) achieving water security in the state to meet future demands (Tamil Nadu Sustainable Water Security Mission, 2015); and (vii) reducing vulnerability to climate change in urban areas and enhancing share of renewable energy (Tamil Nadu State Action Plan on Climate Change, 2014). The TNUFIP is designed to support the state in achieving its policy objectives. 18. Through its Twelfth Five-Year Plan (2012–2017), Tamil Nadu Vision 2023, the State Annual Action Plan for urban development (SAAP, 2017), and the State Action Plan on Climate Change (2014), the state outlines how it expects to achieve its policy goals with clear investment plans. Vision 2023 estimates $42.7 billion in urban investment, including $7.5 billion for water supply and sanitation prioritizing continuous and full coverage of services. The SAAP identified a shelf of 136 projects in 27 cities covering water supply, sewerage, and drainage infrastructure and promoted principles of cost recovery, operational efficiency, and citizen participation, amongst others. 19. Interventions under TNUFIP to support these policies and strategic investments focus on: (i) including connections into works contracts to ensure services are effectively delivered, including to urban poor and poor women headed households; (ii) introducing innovative approaches including clean energy technology for utilities; (iii) improving urban governance including financial management and revenue generation through incentivised reforms; (iv) capacity building of municipal staff through systematic training programs; (v) promoting water conservation, introducing smart monitoring systems to reduce water losses; (vi) streamlining the process of urban data collection and for enhanced policy making; (vii) integrating climate

22 Tamil Nadu ranked 2nd nationally under the Jawaharlal Nehru National Urban Renewal Mission and 4th under

AMRUT.

11

resilience principals based on vulnerability risk assessments into project design; and (viii) ensuring inclusiveness and gender equality in provision of urban services. 20. Urban governance is targeted to be made more accountable through interventions in reducing audit objections and settling pending audit paras. The TNUFIP promotes focussed efforts in increasing urban revenue by incentivising better financial performance related to clearing payment dues, increasing property and professional tax assessments, increasing number of service connections in water supply and sewerage and increasing revenue collection from sewerage. Improvement in municipal administration will be sought through recognizing efforts in filling up vacant positions by the ULBs. Enhancing capacity in planning and delivering urban services efficiently shall be a key activity. The program shall identify the gap in capacities both at the project ULBs and at the state level administrative body the CMA, and proceed to introducing a structured capacity building program. Ensuring efficiency in project planning and implementation shall be major thrust areas of the institutional capacity building program by establishing well-structured project management and design units with trained staff using state-of-art software and processes. ULBs ensuring timely completion of projects shall be suitably rewarded. Ensuring real time data availability is the key to better governance, resource allocation, and policy making. The program shall seek to ensure energy efficiency in operation of urban services, promote reuse of waste water and support utilities from shifting from conventional to non-conventional energy sources in operations. D. Investment Program

21. The total cost of the investment program over the period of 2018 to 2026 (Table 1) is expected to be $1.268 billion equivalent. The total cost of the state’s urban infrastructure investment program under the Road Map is $42.7 billion equivalent, with short-term needs in water supply and sanitation placed at 4.46 billion equivalent (Tables 2a and 2b). Of the total fund required for investments in urban and environmental infrastructure as a part of TNUFIP, ADB has committed to fund $502 million and GOTN has committed to fund $766.4 million. With the exception of 10% ULB share, the remaining 90% of the government counterpart share is from central and state government grant funds under AMRUT. While the state increased its budget allocation for urban infrastructure ($1.98 billion equivalent, 6.0% of total) and water supply and sanitation ($1.77 billion equivalent, 5.4% of total budget) in its Twelfth Five-Year Plan (2012-2017) to meet growing urban sector demands, a large gap in urban infrastructure funding exists.

Table 1: Investment Program for Tamil Nadu Urban Flagship Investment Program

($ million)

Item

Amounta

Tranche 1 Tranche 2 Tranche 3 Total

A. Base Cost b

1. Climate-resilient sewage collection and treatment,

and drainage systems developed in at least eight

cities

361.9 306.9 74.9 743.7

2. Water supply systems in at least five cities

improved with smart features

28.6 209.8 28.2 266.6

3. Institutional capacity, public awareness, and urban

governance strengthened

28.7 42.2 3.5 74.4

Subtotal (A) 419.2 558.9 106.6 1,084.7

B. Contingenciesc 44.1 80.4 17.8 142.3

C. Financing Chargesd 14.2 21.4 5.8 41.4

Total (A+B+C) 477.5 660.7 130.2 1,268.4

12

a In early-2018 prices; exchange rate of US$1 = ₹64.3 is used. b Includes taxes and duties of $102.4 million to be financed from government resources by cash contribution. c Physical contingencies are computed at 5.0% for civil works and equipment. Price contingencies are computed at

1.5%-1.6% on foreign exchange costs and 4.5%-4.6% on local currency costs; includes provision for potential

exchange rate fluctuation under the assumption of a purchasing power parity exchange rate.

d Includes interest and commitment charges. Interest during construction for the ADB loan has been computed at the

5-year United States dollar fixed-swap rate plus a spread of 0.5% and a maturity premium of 0.2%. Commitment

charges for an ADB loan are 0.15% per year to be charged on the undisbursed loan amount.

Table 2a: Summary of Investments Required (Tamil Nadu Urban Sector Road Map)

Sl. No. Facilities

Amount

INR Crore

(₹) $ million

1 Chennai city development Providing 24x7 water supply, sanitation facilities including tertiary treatment of sewage, and solid waste management projects to ensure open defecation free and garbage free environment

50,000 7,780

2 Transforming ten cities into world class 1,00,000 15,559

3 Urban development for other cities 50,000 7,780

4 Housing (including housing for economically weaker sections) 2.5 million houses over the next 11 years

75,000 11,670

5 Total investment 2,75,000 42,788 Source: Tamil Nadu Vision 2023.

Table 2b: Summary of Investments Required (Tamil Nadu Identified Shelf of Projects)

Sl. No.

Facilities

Amount

INR Crore

(₹) $ million

1 Water Supply 17,086 2,660 2 Sewerage & Septage Management 11,594 1,804

Total 28,680 4,464 Source: State Annual Action Plan (SAAP 2017-2020).

E. Financing Plan

22. The government has requested an MFF in an amount of up $500.0 million equivalent from

ADB’s ordinary capital resources to help finance a part of the investment program. The MFF will

consist of three tranches, subject to the government’s submission of related periodic financing

requests, execution of the related loan and project agreements for each tranche, and fulfillment

of the terms and conditions and undertakings set forth in the framework financing

agreement(FFA).1 Cofinancing on a collaborative basis will be explored.2 The first tranche of the

MFF will comprise a regular loan of $169.0 million with a 25-year term, including a grace period

of 5 years, an annual interest rate determined in accordance with the ADB’s LIBOR-based lending

facility, a commitment charge of 0.15% per year, and such other terms and conditions set forth in

the draft loan and project agreements; and $2.0 million is proposed to be financed on a grant

basis from ADB administered ACEF.3 Based on the annuity repayment method, the average

1 Framework Financing Agreement (accessible from the list of linked documents in Appendix 2). 2 During MFF preparation, ADB initiated constructive discussions with JICA, KfW, and World Bank who are currently implementing urban projects in similar areas of Tamil Nadu. ADB will explore in future tranches parallel collaborative cofinancing to capture the indicative project amounts ($194 million, $100 million, and $197 million, respectively).

3 The Asian Clean Energy Fund will be approved outside the MFF but provided concurrently with Tranche 1.

13

maturity is 18.31 years, and the maturity premium payable to ADB is 0.20% per year. The Asian

Clean Energy Fund4 under the Clean Energy Financing Partnership Facility will provide grant

cofinancing equivalent to $2 million, to be administered by ADB. The Tamil Nadu state

government, Chennai Metropolitan Water Supply and Sewerage Board (CMWSSB), and project

urban local bodies (ULBs) will contribute $766.4 million to finance taxes and duties, road

restoration, land acquisition and resettlement, incremental administration cost, contingencies,

financing charges during implementation, and part of the civil works and equipment. The financing

plan of the program is in Table 3.

Table 3: Financing Plan

Source

Tranche (estimated year of PFR submission) Share of

Total (%) 1 (2018) 2 (2019) 3 (2022) Total

Asian Development Bank

Ordinary capital resources (regular loan) 169.0 253.0 78.0 500.0 39.4

Asian Clean Energy Funda 2.0 - - 2.0 0.2

Government of Tamil Nadu, CMWSSB, ULBs 306.5 407.7 52.2 766.4 60.4

Total 477.5 660.7 130.2 1,268.4 100.0 PFR = periodic financing request, CMWSSB = Chennai Metropolitan Water Supply and Sewerage Board, ULB = urban

local body. a Established by Government of Japan and administered by the Asian Development Bank (approval on 21 May 2018).

Source: Asian Development Bank estimates.

4 Established by the Government of Japan. ADB secured approval for the Asian Clean Energy Fund grant amount

outside the MFF but will disburse funding concurrently with tranche 1.

14

SCHEDULE 2

DESIGN AND MONITORING FRAMEWORK FOR THE INVESTMENT PROGRAM Impacts the Investment Program is Aligned with Universal access to basic water and sanitation services achieved (Vision Tamil Nadu 2023)a “World-class” cities and industrial corridors across the state developed (Vision Tamil Nadu 2023)a Water security, reduced vulnerability to climate change in urban areas, and enhanced share of renewable energy achieved (Tamil Nadu Sustainable Water Security Mission, State Action Plan on Climate Change)b

Results Chain Performance Indicators with Targets and Baselines

Data Sources and Reporting Mechanisms Risks

Outcome

Livability and climate resilience in at least 10 cities in priority industrial corridors enhancedc

By 2027

a. Collection and treatment of sewage in program coverage areas of eight cities increased to 100% of householdsd (2017 baseline: sewage collected from 7.6% of households in coverage areas) b. Flood risk reduced in 100% of flood-prone areas covered by new drainage systems adapted to climate change in three cities (2017 baseline: 0) c. Frequency and duration of water supply improved to at least 6 hours/day provided to 100% of households in coverage areas in four cities (2017 baseline: water provided on average 1–2 hours/day, once in 1–2 days, 48% piped water coverage). d. NRW in coverage areas in four cities reduced to 20% (2017 baseline: on average 30%) e. At least 3,400 tons of carbon dioxide equivalent per year in greenhouse gas emissions avoided (2017 baseline: 0) f. At least 52,000 cubic meters/day of treated wastewater reused for industrial purposes in three cities (2017 baseline: 32,000 cubic meters/day of treated wastewater reused in Chennai) g. Collection efficiency of sewerage user fees in eight cities with piped sewerage systems increased by at least 15% (2017 baseline: 49% collection efficiency)

a–f. MAWS annual policy note, program quarterly progress reports g. ULB annual reports on revenue data, State Finance Commission reports and recommendations (once every 5 years)

Water shortages from intensified droughts linked to climate change which exceed projections lead to the poor performance of water and sewerage facilities

Political pressure prevents regular revisions or collection of water and sewerage tariffs constraining the sustainability of services

Outputs

1. Climate-resilient sewage collection and treatment, and drainage

By June 2026 1a. Three STPs with combined capacity of 155 MLD rehabilitated and seven new STPs with combined capacity of 187 MLD added (2017 baseline: 0 rehabilitated and new) 1b. One solar photovoltaic-powered (clean energy) STP with 2-megawatt solar capacity piloted and commissioned (2017 baseline: 0)

1a–e. Periodic ULB records, program quarterly progress reports

Construction delays from heavy monsoons that exceed projections and sudden price surges

15

Results Chain Performance Indicators with Targets and Baselines

Data Sources and Reporting Mechanisms Risks

systems developed in at least eight citiese

1c. 2,810 km of new sewage collection pipelines commissioned and connected to 426,600 households, including 100% poorf and women-headed households in the coverage area (2017 baseline: 0) 1d. 173 sewage pump stations with combined capacity of 6,390 kilowatts added (2017 baseline: 0) 1e. 250 km of new tertiary and 50 km of primary and secondary stormwater drains constructed and improved with climate-resilient designs (2017 baseline: 0) 1f. 20 all-female community-based organizations trained as water and sanitation committees and 100% participants reporting improved knowledge of benefits of sewage collection systems and household connections (2017 baseline: 0)

1f. Post-training surveys

of materials result in cost overruns and delays in the work completion.

2. Water supply systems in at least five cities improved with smart featuresg

By June 2026 2a. 1,520 km new water distribution pipelines commissioned within 110 new DMAs and metered connections provided to 171,000 households (100% households including poor and women-headed households in coverage area) (2017 baseline: 0) 2b. 30 new pump stations with combined capacity of 1,530 kilowatts installed, and 120 km of new transmission mains constructed (2017 baseline: 0) 2c. 40 new reservoirs with combined capacity of 70 million liters constructed (2017 baseline: 0) 2d. At least 80% technical staff from each implementing agency in four cities reported improved knowledge and/or skills in NRW reduction as a result of training, with 75% participation of women technical staff (2017 baseline: 0)

2a–d. ULB records and program quarterly progress reports

3. Institutional capacity, public awareness, and urban governance strengthened

3a. By 2026, 1,000 school students, teachers, and administrators (at least 50% women); and 30 women SHGs reported improved awareness on water conservation and hygiene (2017 baseline: 0) 3b. By 2023, PDMC established in CMA (2017 baseline: not established) 3c. By 2020,h at least 80% of technical staff in PDMC (75% participation of female technical staff) trained in the design and implementation of urban infrastructure projects reported improved knowledge and/or skills (2017 baseline: 0) 3d. By 2020, project design and implementation manuals for urban service delivery, with applicable standards for PDMC, developed (2017 baseline: 0)

3a. Post-awareness campaign sample survey 3b–f. MAWS Annual Policy Note, program quarterly progress reports

Competing priorities within ULBs and staff turnover hinder participation in capacity building

16

Results Chain Performance Indicators with Targets and Baselines

Data Sources and Reporting Mechanisms Risks

3e. By 2023, new database for at least 10 project cities established at urban data and governance improvement cell, with sex-disaggregated data where applicable (2017 baseline: 0) 3f. By 2026, 10 CMA and 100 ULB staff (including 100% of eligible women staff) reported knowledge on approaches to integrating gender and social inclusion in urban governance, implementing gender action plans, and monitoring and reporting on gender equality results (2017 baseline: 0)

Key Activities with Milestones 1. Climate-resilient sewage collection and treatment, and drainage systems developed in at least eight

cities 1.1 Award all sewerage contracts in Tranche 1 by December 2018, complete all civil works in Tranche 1 by April

2023, and conduct user satisfaction surveys in April 2023 1.2 Award all sewerage contracts in Tranche 2 in April 2019, complete all civil works in Tranches 2 and 3 by April

2026, and conduct user satisfaction surveys in April 2026 1.3 Award all sewerage contracts in Tranche 3 in April 2022 2. Water supply systems in at least five cities improved with smart features 2.1 Award all water supply contracts in Tranche 1 by December 2018, complete all civil works in Tranche 1 by

April 2023, and conduct user satisfaction surveys in April 2023 2.2 Award all water supply contracts in Tranche 2 in April 2019, complete all civil works in Tranches 2 and 3 by

April 2026, and conduct user satisfaction surveys in April 2026 2.3 Award all water supply contracts in Tranche 3 in April 2022 3. Institutional capacity, public awareness, and urban governance strengthened 3.1 Mobilize urban governance and awareness consultants by December 2018 3.2 Evaluate reform indicators and decide on incentives annually through September 2026

Inputs Asian Development Bank: $500 million (regular OCR loan) $1 million (technical assistance) Asian Clean Energy Fund under the Clean Energy Financing Partnership Facility: $2 million (grant) Government: $766.4 million CMA = Commissionerate of Municipal Administration, DMA = district metered area, km = kilometer, MAWS = Municipal Administration and Water Supply Department, MLD = million liters per day, NRW = nonrevenue water, OCR = ordinary capital resources, PDMC = project design and management center, SHG = self-help group, STP = sewage treatment plant, ULB = urban local body. a Government of Tamil Nadu. 2012. Vision Tamil Nadu 2023: Strategic Plan for Infrastructure Development in Tamil Nadu.

Chennai. Vision Tamil Nadu 2023 defines “world-class” cities as those that are free from garbage and open defecation and whose infrastructure is upgraded with continuous (24/7) water supply access, and efficient mass transit and sanitation systems.

b Government of Tamil Nadu. 2015. Tamil Nadu Sustainable Water Security Mission. Chennai; and Government of Tamil Nadu. 2014. State Action Plan on Climate Change: Towards Balanced Growth and Resilience. Chennai.

c The city corporations and municipalities (collectively referred to as cities) are Ambur, Chennai, Coimbatore, Cuddalore, Rajapalayam, Thoothukudi, Tiruchirappalli, Tirunelveli, Tiruppur, and Vellore. Other cities eligible for support under the MFF are subject to compliance with selection criteria outlined in the Framework Financing Agreement (accessible from the list of linked documents in Appendix 2 of the report and recommendation of the President).

d Based on output target 1c, 100% of households is 426,600. e The eight cities are Ambur, Chennai, Coimbatore, Rajapalayam, Tiruppur, Tiruchirappalli, Tirunelveli, and Vellore. Drainage

systems will be developed in Chennai, Cuddalore, and Thoothukudi. f “Poor” is defined as those households classified by the state as below the poverty line (BPL). g The five cities are Chennai, Coimbatore (bulk water), Cuddalore, Tiruppur, and Thoothukudi. h Activities for completion by December 2020 are linked to the attached technical assistance. Source: Asian Development Bank.

17

SCHEDULE 3

IMPLEMENTATION FRAMEWORK

1. Unless otherwise stipulated in the loan or project agreements under the Facility, the Facility shall be implemented as follows: A. Implementation Arrangements 2. The Municipal and Water Supply Department (MAWS) acting through TNUIFSL will be the

executing agency. A program steering committee, headed by Principal Secretary, MAWS, GOTN,

will provide overall guidance and strategic directions to the program. A program management unit

(PMU) for TNUFIP, headed by the Managing Director, TNUIFSL acting as Program Director will

be established within TNUIFSL for overall management, planning, implementing, monitoring,

reporting, and coordinating TNUFIP. The Commissioner of Municipal Administration will act as

the Deputy Program Director in the PMU. The project urban local bodies (ULBs), represented by

respective Municipal Commissioners, will be the implementing agencies for works in cities/ towns

and will establish program implementing units (PIUs) headed by a municipal engineer as full-time

Project Manager. PIUs will comprise of dedicated staff responsible for overseeing implementation

of projects on a day-to-day basis. The PIUs will be supported by a contract management and

supervision consultant (CMSC) recruited by TNUIFSL. ULBs under the program with less project

implementation experience may utilize implementation support from the Tamil Nadu Water and

Drainage Board (TWAD) to strengthen implementation capacity.1 In such cases, TWAD will

establish a PIU and the ULB will appoint counterpart staff to coordinate implementation activities.

For sewerage and water supply works in Chennai, CMWSSB, represented by its Managing

Director, will be the implementing agency and establish a PIU headed by a superintending

engineer as full-time Project Manager. For the institutional capacity, public awareness, and urban

governance component, CMA acting through its Commissioner, will establish a PIU and appoint

a governance improvement and awareness consultant (GIAC) responsible for supporting these

activities.

3. The PMU staff will be mostly drawn from TNUIFSL, CMA, and Municipal Services, and, if

required, will also be seconded from the other government departments such as TWAD, on

deputation. The PIU staff will be drawn from the engineering units of the participating ULBs and

augmented from the same government departments mentioned above as required. The CMSC

will assist the PIUs implement, manage, and monitor works of TNUFIP. TNUIFSL will recruit a

project design consultant (PDC) to prepare projects in consultation with ULBs for subsequent

investment programs. With the help of PMU, PIUs will design infrastructure, manage procurement

processes, supervise construction, assure technical quality of designs and construction, and

provide support on capacity building, governance improvement, and awareness building. The

implementing agencies will procure contractors and manage construction and commissioning

activities.2 For social and environmental safeguards, the PMU and PIUs will appoint staff to

oversee safeguards monitoring and compliance.

1 These include Rajapalayam (Tranche 1), Coimbatore (Tranche 1), Ambur (Tranche 2), and Cuddalore (Tranche 3). 2 In the case of TWAD supported projects, TWAD will do procurement while ULBs will make payments.

18

B. Performance Monitoring and Evaluation 4. The PMU will ensure that an investment program performance monitoring system (PPMS) satisfactory to ADB is established within three months of the effectiveness of the first loan under the Facility. The PPMS will monitor and evaluate the performance of the investment program as well as that of the projects and sub-projects under each loan, including key impact and outcome indicators and associated assumptions with corresponding target dates. C. Review 5. Based on a review of quarterly progress reports, the ADB and state/ PMU 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 sub-projects and components and of the overall investment program. In addition to regular reviews, including a midterm review for each loan, a detailed midterm review of the Facility will be undertaken within a certain period of the effective date as agreed under the first loan agreement by ADB, India and the State. The midterm review will include a detailed evaluation of the scope of the Facility, implementation arrangements, any Draft outstanding issues, environment, resettlement and other safeguard issues, achievement of scheduled targets, contract management progress, and other issues, as appropriate. D. Accounts, Auditing, and Reporting 6. The PMU and PIUs will maintain, or cause to be maintained, separate books and records by funding source for all expenditures incurred on the project following relevant standards provided in the loan agreements. For their respective components, the PMU and PIUs will prepare the project financial statements in accordance with the accounting laws and regulations of the Government of India which are consistent with international accounting principles and practices. acceptable to ADB. Each project’s financial statements will adhere to the generally accepted accounting principles followed in India, and the cash basis accounting standards followed by the Government of India. The PIUs will prepare accounts as per entity accounting systems. 7. The PMU, in cooperation with the implementing agencies, will cause the detailed project financial statements to be audited in accordance with the government’s audit regulations, as supplemented by the terms of reference agreed between the Asian Development Bank (ADB), the Department of Economic Affairs (DEA), and the Comptroller and Auditor General (CAG) India in September 2013, by a firm of chartered accountants acceptable to the ADB. The audited project financial statements, together with the auditor’s opinion, will be presented in English to the ADB within six months from the end of the fiscal year by the executing agency. The audited entity’s financial statements of the TNUIFSL together with the auditor’s report and management letter, will be submitted in English to ADB within a month after their approval by the relevant authority. The entity level audit shall be done by firms of chartered accountants for TNUIFSL. 8. The audit report for the project financial statements will include a management letter and auditor’s opinions, which cover: (i) whether the project financial statements present an accurate and fair view or are presented fairly, in all material respects, in accordance with the applicable financial reporting standards; (ii) whether the proceeds of the loan and grant were used only for the purpose(s) of the project; and (iii) whether India and/or the State/ TNUIFSL/implementing agencies was in compliance with the financial covenants contained in the legal agreements (where applicable).

19

9. Compliance with financial reporting and auditing requirements will be monitored by review missions and during normal program supervision, and followed up regularly with all concerned, including the external auditor. 10. India and the state/ TNUIFSL have been made aware of the ADB’s approach to delayed submission, and the requirements for satisfactory and acceptable quality of the audited project financial statements. The ADB reserves the right to require a change in the auditor (in a manner consistent with the constitution of India), or for additional support to be provided to the auditor, if the audits required are not conducted in a manner satisfactory to the ADB or if the audits are substantially delayed. The ADB reserves the right to verify the project's financial accounts to confirm that the share of the ADB’s financing is used in accordance with its policies and procedures. 11. After its review, the ADB will disclose the audited project financial statements and the opinion of the auditors on the project financial statements no later than 14 days of the ADB’s confirmation of their acceptability by posting them on the ADB’s website. The management letter, additional auditor’s opinions, and Public disclosure of the audited project financial statements, including the auditor’s opinion on the project financial statements, will be guided by the ADB’s Public Communications Policy (2011). Audited entity financial statements will not be disclosed.

20

SCHEDULE 4

SELECTION CRITERIA FOR SUBPROJECT SELECTION AND APPROVAL PROCESS FOR TRANCHE 2

1. The Tamil Nadu Urban Flagship Investment Program (TNUFIP) supports investment measures to achieve the objectives of the state’s urban sector strategy and is aligned with the Ministry of Urban Development (MOUD) urban flagship programs. A. Selection of Cities

i. Atal Mission for Rejuvenation and Urban Transformation and Smart Cities to extent

possible ii. Population size >100,000 (unless vulnerable to climate change – e.g., coastal cities,

or city identified as having economic growth potential by state) iii. Preferably located in economic corridor or industrial nodes:

a. Chennai - Kanyakumari Industrial Corridor b. Madurai-Tuticorin Industrial Corridor c. Coimbatore-Salem Corridor d. Chennai-Bengaluru corridor e. Chennai-Kanyakumari Industrial Corridor

iv. Cities vulnerable to climate change impacts (flood, drought): E.g., Chennai, Cuddalore, Nagapattinam, Velankanni, Tuticorin, Vedaranyam, Ramanathapuram, Rameshwaram, amongst others to be considered based on vulnerability assessment.

v. Minimal overlap with cities and components funded from other development partners (e.g., World Bank, JICA, KFW, AFD, etc.). ADB may consider taking up unfinished works/components where appropriate.

2. A summary table capturing indicative metrics for the $500 million investment component

is summarized below. ADB recommends the focus of TNUFIP should preferably be to identify

transformative projects in larger cities to maximize service delivery impact and ensure transaction

efficiencies.

Consideration Indicative Guidance for Project Portfolio

Cities selection Minimum 60% investment in cities with population > 300,000; minimum population size of 100,000 (unless vulnerable to climate change or city with economic growth potential)

Located in critical economic/industrial corridors, to extent possible.

Cities vulnerable to climate change, preferred.

Sub-sectors Minimum 70% for water supply and sewerage/septage

Maximum 30% for non-remunerative sectors/subprojects (drainage).

Project Size At least 50% investment should be in subprojects > USD 30 million

Average sub project size for investment portfolio kept above USD 15-20 million Minimum size of subproject > USD 5 million

21

B. Selection of Subprojects for Future Tranches 3. The following are criteria for selecting subprojects under TNUFIP:

(i) The subprojects shall be in line with the finance-plus criteria set forth by

Department of Economic Affairs (DEA), Government of India;

(ii) Subprojects shall be designed following sustainability principles considering but

not limited to operational efficiency, energy efficiency, climate change, and

environment benefits on an economic basis;

(iii) The feasibility studies shall assess current level of services, the needs and

preference of stakeholders, the financial and institutional capacity of the

implementing agencies, and the norms and standards prescribed by state and

central authorities. Subprojects should demonstrate an effective economic internal

rate of return calculated over 30 years above the economic opportunity cost of

capital estimated at 12%. Subprojects should demonstrate cost-effectiveness in

comparison with alternative schemes, and where relevant, these would include

assessments of the investments with and without future climate resilience

measures;

(iv) The implementing agencies shall make available encumbrance-free land for the

executing agency for implementing the works. Any land acquisition and

resettlement completed before award of related contract;

(v) Should demonstrate financial sustainability for payment of operation and

maintenance (O&M) costs and servicing debt through user fees and/or taxes (i.e.,

property taxes);

(vi) Minimal number of contract packages by taking an integrated procurement

approach. ADB prefers larger contract packages, to extent feasible. This helps in

reducing administrative and transaction costs during project implementation;

(vii) All subprojects will have prepared necessary environmental and social safeguard

documents (i.e., resettlement plans, initial environmental examinations,

indigenous people’s plans) as required, in accordance with the Investment

Program’s environmental and social safeguard frameworks;

(viii) Subproject design shall include gender and pro-poor features both in terms of

planning and design (i.e., community participation) and implementation. Examples

include improving access to services to women and urban poor, affordability, and

institutional arrangements of utility/ULB for O&M (e.g., women staff), to extent

feasible; and

(ix) Subprojects with high readiness are preferred (detailed project report [DPR]

finalized, draft bidding documents prepared, safeguard documents completed,

encumbrance free land available, technical and administrative sanctions).

4. Water supply. Water supply subprojects shall ensure source sustainability, a minimum

per capita supply level of 135 liters per capita per day (lpcd), have an agreement for fixation of an

appropriate volume-based water tariff, show willingness to pay by consumers, ensure 100%

house connections and metering, ensure coverage of urban poor and establish a ring-fenced

accounting system. Households can be required to pay for connection but cost would be covered

by the project, and recovered by the municipality either through a "cess" on the monthly utility bill

or property taxes or other special financing vehicle suitable to the municipality. NRW pilots and

city-wide projects with focus on distribution efficiencies and service level improvements in large

cities ought to be encouraged (esp. zone level 24x7 pilots in Chennai and in other large

corporations etc.). Water conservation measures to be introduced where feasible.

22

5. Sewerage and septage. Subprojects shall ensure 100% house connections funded under the project, collection, treatment, and reuse using latest technologies, consider treated effluent and by products as sources of revenue, and comply with effluent disposal standards. Households can be required to pay for connection but cost would be covered by the project, and recovered by the municipality either through a "cess" on the monthly utility bill or property taxes or other special financing vehicle suitable to the municipality. Projects can include centralized and decentralized systems (or combination of both) to ensure full coverage of households, fecal sludge management in unserved/remote/isolated areas, treated wastewater re-use and related. 6. Stormwater drainage and flood management subprojects shall focus on core economic and residential areas considering future rainfall under climate change scenarios. Projects can include waterbody restoration and interconnections with existing drainage. Focus should be on maximum impact (e.g., macro drainage to be give preference vis-àvis street drains). Technology based public safety systems for early hazard warning and communication support systems during natural disasters are also encouraged. C. ADB Safeguards

7. Category A safeguard projects (environmental or social) will not be included in the MFF. All subprojects are to comply with ADB’s Safeguards Policy and agreed safeguard frameworks. D. Implementation Arrangements

8. MAWS acting though TNUIFSL will be the executing agency for the investment program.

Specific roles of ULBs, state agencies, and TNUIFSL are clearly defined in Schedule 3.

E. Approval Procedure

9. Each implementing agency will prepare a feasibility study/detailed project report (DPR),

which may include all or any of the above services components, and will forward these to the

program management unit (PMU) for review. The PMU will review and forward eligible subproject

proposals to ADB for consideration. These shall be in the form of summary appraisal reports

following a prescribed format provided by ADB with supporting documents (safeguards, economic

and financial analysis, etc.). ADB will review the proposals and advise TNUIFSL whether the

subprojects are eligible and ready to be funded under TNUFIP. As part of ADB’s review, ADB

may conduct comprehensive due diligence including site visits to ensure the subprojects comply

with its policies.

23

SCHEDULE 5

POVERTY AND SOCIAL DIMENSIONS AND SAFEGUARD REQUIREMENTS

1. India will cause the state through Tamil Nadu Urban Financial Services Limited (TNUIFSL) to ensure that all the requirements prescribed in this Schedule, and the following social and safeguard frameworks and plans that have been prepared with respect to the Facility and the first tranche, and which are deemed incorporated herein by reference, are complied with during the processing and implementation of the sub-projects under the Facility:

(i) environmental assessment and review framework dated May 2018,

(ii) resettlement framework dated May 2018,

(iii) initial environment examination, environmental management plan,

resettlement plans dated May 2018 for all subprojects for the first

tranche,

(iv) gender action plan dated July 2018, and

(v) Community awareness and participation plan dated July 2018

2. The frameworks cover the Facility-specific information and requirements in accordance

with ADB’s safeguard policies: (a) the general anticipated impacts of the components or projects

likely to be financed under the Facility on the environment, and involuntary resettlement; (b) the

safeguard criteria that are to be used in selecting components and sub-projects; (c) the

requirements and procedure that will be followed for screening and categorization, impact

assessments, development of management plans, public consultation and information disclosure

(including the 120-day disclosure rule, if applicable), and monitoring and reporting; and (d) the

institutional arrangements (including budget and capacity requirements) and the client’s and

ADB’s responsibilities and authorities for the preparation, review and clearance of safeguard

documents. Draft

3. Before the preparation of each periodic financing request, the applicability and relevance

of each safeguard framework for environmental assessment and involuntary resettlement will be

reviewed by the state through the TNUIFSL and updated to ensure relevance and consistency

with applicable country legal frameworks and the ADB's safeguard policies, as amended from

time to time.

4. In all cases, for each new periodic financing request preparation, India will cause the state

through TNUIFSL to review the ongoing projects to check the status of compliance with the social

and safeguard framework(s) and plans, and submit the review reports to the ADB, together with

other required safeguard documents relevant to the sub-projects included in the tranche being

processed. In any case, if major non-compliance is discovered during the review of ongoing

projects, a corrective action plan will be prepared and submitted to the ADB.

24

SCHEDULE 6

UNDERTAKINGS

India shall ensure or shall cause the state through Tamil Nadu Urban Financial Services Limited

(TNUIFSL), to ensure the following:

1. The state and TNUIFSL shall remain committed to the implementation of the Investment

Program over the period of 2018-2026 as envisaged in the state’s Road Map.

2. In the event of any change in the Road Map, policy framework, investment program, or

financing plan, India, the State and ADB will assess the potential impact on the Investment

Program and evaluate any change in scope, amendment or continuation, as appropriate, of the

Investment Program.

3. The state through the TNUIFSL will ensure that the preparation and implementation of the

sub-projects under the Investment Program and facility are in compliance with the undertakings

and assurances concerning environmental safeguards, indigenous people’s safeguards,

involuntary resettlement safeguards, gender policy, labor standards, and prohibited investments

as set out in Schedule 5 of this FFA and the loan agreement for each tranche under the Investment

Program.

4. The state shall pass on to TNUIFSL and to the Commissionerate of Municipal

Administration the ADB loan proceeds on terms and conditions acceptable to India and ADB, and

shall:

(a) provide all counterpart funds from its budget for each fiscal year, land and facilities

in a timely manner, for the efficient implementation of the sub-projects under the

Investment Program, including, without limitation, any funds required to meet additional

costs arising from design changes, price escalation in construction costs and/or

unforeseen circumstances;

(b) provide adequate funds towards operation and maintenance of the facilities

created or rehabilitated under the sub-projects, through budgetary allocations or other

means, during and after the completion of the sub-projects;

(c) make available all necessary budgetary and human resources to (i) fully implement

the safeguard documents, including the IEE, EMP and resettlement plan as required; and

(ii) mitigate unforeseen environmental and social impacts; and

(d) through TNUIFSL, designate at least one expert each to supervise the

implementation of the EMP, and resettlement plan, if any.

5. The state, through the TNUIFSL, shall employ sufficient staff for the duration of the

investment program with adequate and relevant expertise in the field of project management,

financial management, engineering, construction supervision, procurement, equipment inspection

and testing, and environmental and social safeguards implementation; the state and the TNUIFSL

shall ensure that all subprojects are implemented in accordance with the detailed arrangements

set forth in the Facility Administration Manual (FAM), and if applicable, any Project Administration

25

Manual (PAM) that may be prepared for any portion of the Investment Program and Facility. Any

subsequent change to the FAM (or PAM) shall become effective only after approval of such

change by India and ADB. In the event of any discrepancy between the FAM/PAM and the Loan

Agreements, the provisions of the Loan Agreements will prevail.

6. Towards smooth implementation of the projects under the Facility, the state and TNUIFSL

shall ensure that grievance(s) if any from stakeholders relating to sub-project implementation or

use of funds are addressed effectively and efficiently.

7. The state through the TNUIFSL shall ensure that all sub-projects are selected and

approved in accordance with the selection criteria and approval process set out in Schedule 4 to

this FFA and all documents forming the basis for screening, selection and processing of sub-

projects are made available to the ADB upon request and are kept available for such purposes

for a minimum period of five years from the date of the relevant project completion report.

8. The state through the TNUIFSL shall ensure that works contracts will (a) follow all

applicable labor laws of India and the state and that these further include provisions to the effect

that contractors to carry out HIV/AIDS awareness programs and disseminate information at

worksites on risks of sexually transmitted diseases and HIV/AIDS as part of health and safety

measures for those employed during construction; and (b) follow and implement all statutory

provisions on labor (including not employing or using children as labor, equal pay for equal work),

health, safety, welfare, sanitation, and working conditions. Such contracts shall include clauses

for termination in case of any breach of the stated provisions by the contractors.

9. The Government of India will through the state and TNUIFSL, cause TNUIFSL, ULBs,

CMWSSB and CMA to announce the project and business opportunities associated with the

project on its website. The website will disclose the following information in relation to goods and

services procured for the project and subprojects under the Investment Program: (a): the list of

participating bidders, (b) the name of the winning bidder (c) the amount of contracts awarded and

(d) the goods and services procured in accordance with the ADB procurement guidelines the

published information for contracts will also include the bid prices as read out at bid opening, the

reasons for rejection of unsuccessful bidders and the duration of the awarded contract.

10. India, the state and the TNUIFSL shall (a) comply with the ADB’s Anticorruption Policy

(1998, as amended to date) and acknowledge that the ADB reserves the right to investigate

directly or through its agents any alleged corrupt, fraudulent, collusive or coercive practice relating

to the investment program; and (b) cooperate with any such investigation and extend all

necessary assistance for satisfactory completion of such investigation.

11. India shall cause the state through the TNUIFSL to ensure that the anti-corruption

provisions acceptable to the ADB are included in all bidding documents and contracts, including

provisions specifying the right of the ADB to audit and examine the records and accounts of the

state and the TNUIFSL and all contractors, suppliers, consultants, and other service providers

related to the projects and sub-projects under the Investment Program.

12. The state through TNUIFSL shall ensure that the preparation, design, construction,

implementation, operation and decommissioning of all projects and project facilities under the

Investment Program comply with (a) all applicable laws and regulations of India and the state

relating to environment, health, and safety; (b) the ADB’s Environmental Safeguards; and (c) all

26

measures and requirements set forth in the environmental assessment review framework, IEE,

EMP, and any corrective or preventative actions set forth in a safeguards monitoring report.

13. The state through the TNUIFSL shall establish a project monitoring system in line with the

targets and indicators set out in the DMF for the investment program. The baseline data for

outputs and outcome indicators of the investment program DMF and each tranche project DMF

shall be disaggregated by sex as well as poverty level.

14. The state through TNUIFSL shall ensure timely identification of land to be acquired if

required and initiation of land acquisition proceedings following requirements of safeguard

compliances under the SPS, resettlement framework and related resettlement plans to facilitate

timely tendering of works contracts.

15. In the event of impact on indigenous peoples during any project implementation, India

shall ensure, or cause the state through TNUIFSL to ensure, that the preparation, design,

construction, implementation and operation of the project, and all project facilities comply with (a)

all applicable laws and regulations of India and the state relating to indigenous peoples; (b) the

ADB’s Indigenous Peoples Safeguards; and (c) any corrective or preventative actions set forth in

a Safeguards Monitoring Report.

16. India shall cause the state through TNUIFSL to do the following:

(a) submit semi-annual safeguards monitoring reports to the ADB and disclose

relevant information from such reports to affected persons promptly upon submission;

(b) if any unanticipated environmental and/or social risks and impacts arise during

construction, implementation or operation of the project that were not considered in the

IEE, the respective EMP and the respective resettlement plan, inform the ADB of the

occurrence of such risks or impacts, with detailed description of the event and proposed

corrective action plan;

(c) no later than the award of related works contract, engage qualified and

experienced external expert(s) under a selection process and terms of reference

acceptable to the ADB, to verify information produced through the project monitoring

process, and facilitate the carrying out of any verification activities by such external

experts; and

(d) report any breach of compliance with the measures and requirements set forth in

the respective EMP and the respective resettlement plan, promptly after becoming aware

of the breach.

17. The state through the TNUIFSL shall ensure that no proceeds of the ADB loan under the

projects are used to finance any activity included in the list of prohibited investment activities

provided in Appendix 5 of SPS.

18. The state through TNUIFSL shall ensure that the projects are undertaken in conformity

with the communication strategy and gender equity and social inclusion activities as agreed

between the ADB, Indian and the state and as referred in the FAM.

27

19. The state through the TNUIFSL shall ensure that no works contract is awarded for a

subproject, which involves:

(a) environmental impacts, until the TNUIFSL has incorporated the relevant provisions

from the respective EMP into the works contract; and

(b) involuntary resettlement impacts, until the TNUIFSL has prepared and submitted

to the ADB the respective final resettlement plan for such sub-project based on the

subproject's detailed design, and obtained ADB's clearance of such resettlement plan.

20. As condition for award/commencement of works under sub-projects, India shall, or shall

cause the state through TNUIFSL, that no commencement of works is allowed under any works

contract under any sub-project, which involves environmental and resettlement impacts until the

TNUIFSL has (a) obtained the final clearance of the IEE from the ADB; (b) if it requires any

statutory environmental clearances, then it has obtained the environmental clearance, including

approval of the environmental assessment report, from the relevant state or national authority;

and (c) compensations and assistance has been paid to the affected persons in the section

concerned by civil works.

21. Actions to be completed as condition precedent to second Periodic Financing

Request. Before the ADB can consider a second periodic financing request under the Facility,

the state through TNUIFSL shall have completed the detailed project report[s] and all actions

relating to invitation of bids for packages for at least 30% project cost by value proposed under

Tranche 2.