India - Andhra Pradesh First Referral Health System Project

Document of The World Bank Report No. 13402-IN STAFF APPRAISAL REPORT INDIA ANDHRA PRADESH FIRST REFERRAL HEALTH SYSTEM PROJECT NOVEMBER 2, 1994 South Asia Country Department II (India) Population and Human Resources Operations Division  CURRENCY EOUIVALENTS (As of June 1994) Currency Unit = Rupee Rupee 32.6 = US$1.00 Rupee 1.0 = US$0.03 METRIC EOUIVALENTS 1 Meter (m) = 3.28 Feet (ft) 1 Kilometer = 0.62 Miles FISCAL YEAR April 1 - March 31  i ABBREVIATIONS AND ACRONYMS AIDS Acquired Immunodeficiency Syndrome AP Andhra Pradesh APHMHIDC AP Health & Medical Housing Infrastructure Development Corporation APVVP Andhra Pradesh Vaidya Vidhana Parishad ASCI Administrative Staff College of India CHC Community Health Center CSSM Child Survival & Safe Motherhood Project DALY Disability Adjusted Life Years EMTC Equipment Maintenance and Training Center FW Family Welfare GDP Gross Domestic Product GOAP Government of Andhra Pradesh GOI Government of India HIV Human Immunodeficiency Virus HMIS Health Management Information System ICB International Competitive Bidding ICDS I First Integrated Child Development Services Project IDA International Development Association IEC Information, Education and Communication IPP 6 Sixth India Population Project IPP 8 Eight India Population Project ISHA Indian Society of Health Administrators LCB Local Competitive Bidding MCH Maternal and Child Health MIS Management Information System MOHFW Ministry of Health and Family Welfare, GOI NGO Non-Governmental Organization NHP National Health Policy NSS National Sample Survey PAR Performance Audit Report PCR Project Completion Report PHC Primary Health Center PHN Population, Health and Nutrition PHR Population & Human Resources PWD Public Works Department SC Scheduled Castes SOE Statement of Expenditure ST Scheduled Tribes STD Sexually Transmitted Disease SUBC Subcenter TB Tuberculosis UIP Universal Immunization Program WDR World Development Report WHO World Health Organization   ii INDIA ANDHRA PRADESH FIRST REFERRAL HEALTH SYSTEM PROJECT Table of Contents Page No. CREDIT & PROJECT SUMMARY ......................... v I. STATE/SECTOR BACKGROUND A. Health Sector in India. 1 B. The State of Andhra Pradesh. 2 C. Health Sector Issues. 7 D. Lessons from Experience. 9 E. Linkages with other PHN Projects in Andhra Pradesh .11 F. Country Assistance Strategy and Rationale for IDA Involvement .13 II. THE PROJECT A. Project Objectives ........................ 15 B. Approach ........................ 16 C. The Reform Program ................................. 16 D. Project Description ........................ 20 III. PROJECT COST. FINANCING. IMPLEMENTATION AND DISBURSEMENTS A. Project Costs ........................ 24 B. Financing Plan ..................................... 27 C. Procurement Arrangements ......................... 28 D. Disbursement Profile .31 E. Status of Project Preparation .32 F. Implementation Plan .33 G. Recurrent Cost and Sustainability .34 H. Indigenous Populations .35 I. Environmental Aspects .36 J. Land Acquisition .36 K. Accounting and Auditing .36 This report is based on an appraisal mission that visited India in May 1994. The mission comprised Tawhid Nawaz (Senior Economist and mission leader), Indra Pathmanathan (Public Health Specialist), Christopher Potter and Pradeep Kakkar (Management Consultants and IEC Specialists), David Porter (Equipment and Support Services Consultant), Sajitha Bashir (Economist Consultant), Shreelata Rao-Seshadri (Social Issues Consultant), Eid Dib (Procurement Specialist and Architect Consultant), Subash Chakravarthy (Architect Consultant) and Anthony Measham (Advisor). Salim Habayeb (Senior Public Health Physician) and Dean Jamison (Director, University of California, Los Angeles, Center for Pacific Rim Studies) contributed during project preparation. Kevin Casey (Procurement Specialist and Architect) contributed on procurement aspects. Nischint Bhatnagar assisted in the preparation of this document. The peer reviewers were Willy De Geyndt (ASTHR) and Jagadish Upadhyay (EA2HR). The Project is endorsed by Richard Skolnik, Chief, Population and Human Resources Operations Division, and Heinz Vergin, Director, India Country Department.  iii Page No. IV. PROJECT BENEFITS A. Benefits ......................................... 37 B. Program Objective Categories.37 C. Risks ........................................... 38 V. AGREEMENTS REACHED AND RECOMMENDATION .............. 39  iv Page No. TABLES 1.1 Lessons Applied From IDA Experience in PHN Lending to the Proposed Project .............................. 10 2.1 Linkages with Other PHN Projects in AP ................... 12 3.1 Cost By Component ................................ 25 3.2 Cost By Categories of Expenditure ....................... 26 3.3 Procurement Arrangements ........................... 29 3.4 Estimated Expenditures and Disbursements .................. 31 ANNEXES Annex 1 Project Costs .................................... 42 Annex 2 Health Sector Development Policy Program in Andhra Pradesh .... . 50 Annex 3 Public Expenditures on the Health Sector in Andhra Pradesh ...... . 55 Annex 4 Cost Recovery ................ ................... 64 Annex 5 Organization and Management System of APVVP .. ....... . . . . 71 Annex 6 Workforce Issues ................ .................. 85 Annex 7 Clinical and Diagnostic Service Norms at APVVP Hospitals ..... . . 111 Annex 8 Clinical Training: Improving Quality and Effectiveness ....... . . . 124 Annex 9 Equipment Norms for APVVP Hospitals .... .......... . . . . . 131 Annex 10 Equipment Maintenance and Training Services at APVVP Hospitals . . 137 Annex 11 Strengthening Referral and Support for Primary Care ........ . . . 149 Annex 12 Quality Assurance Program in APVVP Hospitals . . ......... . . . 155 Annex 13 Information, Education and Communication Strategy . . . . . . . . . . . . 160 Annex 14 Tribal Strategy ................................... 164 Annex 15 Summary of Construction Program ..170 Annex 16 Procurement Arrangements ..187 Annex 17 Implementation Plan ..198 Annex 18 Performance Indicators ..208 Annex 19 Supervision Plan .................................. 232 Annex 20 Forecast of Expenditures and Disbursements . .236 Annex 21 Documents Available in Project File ..237   v INDIA ANDHRA PRADESH FIRST REFERRAL HEALTH SYSTEM PROJECT CREDIT AND PROJECT SUMMARY Borrower: India, acting by its President Beneficiarv: State of Andhra Pradesh Amount: IDA Credit SDR 90.7 million (US$133.0 million equivalent) Poveriy: One of the main objectives of the Project is to provide better quality and greater access to health care services to improve the health status of poor and underserved people including women, scheduled tribes and scheduled castes. The project contains specific strategies for interventions targeted for these groups. Terms: IDA Standard with 35 years maturity On-lending terms: The Government of India would make the proceeds of the Credit available to the State of Andhra Pradesh (AP) under standard arrangements for development assistance to the States of India. GOI would assume foreign exchange risk. Description: The ultimate goal of the project would be to improve the health status of the people of AP, especially the poor and the underserved, by reducing mortality and morbidity. The objectives of the project would be to assist the Government of AP (GOAP) to: (i) improve efficiency in the allocation and use of health resources through policy and institutional development; and (ii) improve system performance of health care through improvements in quality, effectiveness and coverage of health services at the first referral or secondary level to better serve the neediest sections of society. The project would include three components: Institutional Strengthening through Policy Reform and the Development of Implementation Capacity. (i) Improving the institutional framework by: strengthening sectoral capacity for development of policy; implementing cost recovery mechanisms; and improving sectoral resource allocation. (ii) Strengthening institutions and their implementation capacity at Andhra Pradesh Vaidya Vidhana Parishad (APVVP) and communitv. area, and district hospitals by: improving capacity for project implementation through the strengthening of  vi management capacity and structure and through the provision of training; enhancing capacity for equipment management and maintenance, and procurement of goods and services; strengthening monitoring and evaluation capacity including improvement of the hospital management information system and improving supervision of civil works; Improving Quality, Access and Effectiveness of Services at District Hospitals. (i) Renovating 21 district hospitals. (ii) Upgrading clinical effectiveness and quality at district hospitals by: updating and applying norms and standards for clinical, technical and support services; instituting quality assessment mechanisms; enhancing staff skills in clinical and technical areas; providing updated equipment and material; and expanding capacity of support services. Improving Quality, Access and Effectiveness of Services at Area and Community Hospitals. (i) Renovating/extending 49 area hospitals and 80 community hospitals. (ii) Upgrading clinical effectiveness and guality at area and community hospitals by: updating and applying norms and standards for clinical, technical and support services; instituting quality assessment mechanisms; enhancing staff skills in clinical and technical areas; providing updated equipment and material; and expanding capacity of support services. (iii) Improving functioning of referral by: improving linkages and referral between different levels and with the private sector; strengthening management of the referral system; implementing referral and clinical management protocols; and establishing an incentive system for users and staff. The project would finance civil works, equipment and furniture, vehicles, medical/laboratory and other supplies, medicines, professional services, training, studies and evaluations, and incremental salaries and costs on a declining basis. Benefits: First, the policy reforms envisaged under the project would improve the efficiency and effectiveness of health care services. The strengthening of AP's first referral health system would optimize resource use, avoid duplication and waste and reduce overcrowding at tertiary facilities. Second, improvements in the health status of the people of AP would ultimately increase the potential earning capacity of the poor by reducing mortality, morbidity and disability. Third, strengthening first referral hospitals and making them more client-friendly would also encourage patients to seek timely care resulting in higher cure rates at lower costs. Fourth, the project would help regulate and reduce patient flow to the tertiary hospitals, where treatment per patient is more expensive. Fifth, the strengthening and upgrading of the secondary level would lend vital support and credibility to the primary health care system for implementing the various national and vertical health programs, and for providing basic  vii health care in rural areas. Finally, an adequately functioning first referral health system would strengthen linkages with private health care through improved functioning of referral mechanisms. Risks: Institutional: Since this would be the first project to reorient the health system of a state in India, the capacity of existing institutions to undertake systemic improvements and establish a more rational health delivery system has not been tested in India. The institutional strengthening aspects that are in-built in the project would reduce this risk. These institutional aspects include: strengthening the strategic planning capacity in the Department of Health, Medical and Family Welfare; enhancing APVVP's implementation capacity through strengthening its management structure, systems and procedures, culture of service delivery, resources and training; and enhancing the capacity of the Infrastructure Development Corporation to undertake supervision monitoring of the construction program. Financial: Potential hurdles to instituting user charges may be faced by the state government because of the politically sensitive nature of the issue. The state government has reiterated its commitment through a letter on Health Sector Policy that it would institute user charges while protecting those who cannot afford to pay. The on-going study on the burden of disease and cost-effectiveness would provide an empirical basis to determine appropriate user charges giving the government greater flexibility and better information for charging user fees. The overall financial status of the state is a risk in terms of the adequacy of funds allocated to the health sector, especially allocations to the secondary level of health care. The government of AP, through a Health Sector Policy letter, has committed to providing sufficient resources to meet the financial needs generated by the project.  viii Estimated Project Cost: Component Local Foreign Total -------------------US$ Million------------------- Institutional Strengthening 3.8 0.3 4.1 Improve Quality, Access and Effectiveness 46.5 8.5 55.0 at District Hospitals Improve Quality, Access and Effectiveness 63.5 14.5 78.0 at Area and Community Hospitals TOTAL BASELINE COSTS 113.8 23.3 137.1 Physical Contingencies 9.9 2.3 12.2 Price Contingencies 7.8 1.9 9.7 TOTAL PROJECT COSTS 131.5 27.5 159.0 ' Including taxes and duties estimated at US$ 8.8 million equivalent Financing Plan: Local Foreign Total -------------------US$ Million------------------- GOAP 26.0 0 26.0 IDA 105.5 27.5 133.0 Total 131.5 27.5 159.0 Estimated Disbursements: IDA Fiscal year --------------------------------US $ Million--------------------------------- FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 Annual 4.0 9.3 15.8 21.4 21.2 21.2 31.9 8.2 Cumulative 4.0 13.3 29.1 50.5 71.7 92.9 124.8 133.0 Economic Rate of Return: Not Applicable.  INDIA ANDHRA PRADESH FIRST REFERRAL HEALTH SYSTEM PROJECT I. STATE/SECTOR BACKGROUND A. Health Sector in India 1.1 Introduction. Health is a critical investment for improving the level of human resource development and economic growth. While life expectancy at birth in India has increased from about 44 to 60 years during the past thirty years, key health indicators show that the health status of its people is low. Birth and death rates are still high at 29.3 and 9.8 respectively, as is the infant mortality rate of 80 per thousand live births; communicable diseases including tuberculosis (TB), malaria and leprosy continue to be major public health problems; Human Immunodeficiency Virus (HIV) infection is rising; maternal mortality is high; acute respiratory and diarrheal diseases continue to be the major causes of child mortality; and preventable mortality and morbidity, especially among the poor, extract a high toll on the society. Moreover, with the changing age composition of the population towards an increasing fraction of older people, India is moving into an epidemiological transition with the double burden of significant communicable diseases and increasing non-communicable conditions such as cardiovascular diseases, cancer, diabetes and cataract blindness. Thus, improving the health status of its 846 million people (1991 census), and meeting the health needs of a population that is increasing by 17 million annually presents a major challenge for India. 1.2 Health Policy. India's public policy for health has been based on an implicit assumption that primary health care is a basic right to which people should not be denied access due to inability to pay or for other socio-economic reasons. A major thrust of the Government's health policy in the late 1970s and 1980s was the development of publicly financed and managed universal basic health service infrastructure. The Government's long term strategy as enunciated in the National Health Policy (NHP) of 1983 is to give high priority to the control of fertility, infectious diseases of public health importance, and preventable causes of maternal and childhood mortality and morbidity. It includes quantified targets for the 1990s and the year 2000. With the exception of childhood immunization, current achievements already lag behind these targets. The NHP emphasizes the role of the state in providing basic universal health care through the development of publicly run health facilities and draws attention to the strengthening of cooperation between the public and private sectors. The Eighth Plan (1992-1997) has identified health as one of the six priority areas, and public investments in health are therefore critical for human resource development and poverty alleviation in India.  2 1.3 Health Care Delivery in India. In 1991, total health spending in India accounted for about 6 percent of GDP, or about US$13 per capita per year. Of this, government contribution including center, states and municipalities accounts for about 1.3% of Gross Domestic Product (GDP) or about US$2.7 per capita (22 percent of total health spending). Within the government spending category, states spend about 87 percent and the center spends about 10 percent, excluding external assistance; and municipalities and external assistance account for the remaining 3 percent. While India spends about an equal percent of its income on health as other Asian countries at similar levels of per capita income, the percentage of government spending on health is actually lower in India than in those Asian countries. Furthermore, a large component of public spending on health is directed towards tertiary care and medical education, and on public health interventions that are not the highest priority. Therefore, the total amount of resources, both public and private, available for high priority, cost-effective health services, is small. B. The State of Andhra Pradesh 1.4 General Features. AP is situated in South India and extends from the east coast to the Deccan plateau. The state has 23 districts spread across three distinct geographical regions: Coastal Andhra, which is the most developed region in the state, consists of large coastal plains and fertile deltas; Rayalseema, which is the most drought prone; and Telengana in the interior, which is the least developed region in terms of social development. In 1991, AP's population was 66.3 million. It is the fifth most populous state in India. A majority of the state's population live in the rural areas (73 %), while the urban population (27%) resides in 250 urban towns and cities. About 16% of the state's population belong to scheduled castes (SC) and 6.3 % to scheduled tribes (ST); the scheduled tribe population is high in the three districts of Adilabad (17%) and Visakhapatnam and Warangal (14%). According to the 1991 population census, the literacy rate among the population aged seven years and above was about 45 percent (56 percent for males and 34 percent for females). The percentage of population living below the GOI poverty line was estimated to be 38 percent. 1.5 Health Status and Epidemiology. AP is a representative Indian state and is about the national average in terms of health status and epidemiological profile. The birth rate at 28, death rate at 8.7 and the infant mortality rate at 80 per thousand live births, are similar to the national averages. State level hospital data in AP show that about 70% of the causes of death in 1990 were attributable to: disorders in the nervous and circulatory systems (20%), respiratory disorders (16%), maternity and infancy related causes (11%), accidents and injuries (10%), digestive disorders (mainly diarrhea, 7 %) and various types of fevers (6%). A recent analysis of patient registers at primary health centers (PHCs) shows that the common diseases for which treatment was sought by tribal adults were respiratory infections, malaria, alimentary diseases and aches and pains. For tribal children, the common ailments were gastro-enteritis, respiratory infection, malaria, scabies and skin infections.  3 1.6 Organization of the Public Health Care System. The public health system in AP consists of three tiers. At the bottom are primary health care facilities where basic health services are provided, with emphasis on preventive and promotive aspects such as family planning, maternal and child health (MCH), treatment of minor ailments, malarial treatment and spraying, sanitation, and public health education. The management of this level of health care is under the Directorate of Health Services, except for family planning and MCH services which are under the Directorate of Family Welfare. In the middle are the first line referral hospitals or secondary level hospitals, consisting of hospitals of various bed strengths, ranging between 30 and 350 beds, at the community, area and district levels.' These secondary hospitals provide inpatient and outpatient care with diagnostic and treatment facilities not available at the primary level. They are managed by the APVVP which was established through a legislative enactment in 1986 to improve the functioning of secondary level facilities. APVVP's objectives are to provide access to adequate patient care in rural areas, reduce pressures on the overstretched tertiary hospitals and mobilize resources from the market as a supplement to state budgetary allocations to improve, upgrade and maintain secondary level institutions. APVVP is a Government agency reporting to the Government through the Secretary, Department of Health, Medical and Family Welfare. While APVVP functions in effect like a Directorate within the Department of Health, Medical and Family Welfare, the use of a corporate vehicle provides significant potential for improved efficiency in contracting, disbursement and management matters as well as in providing increased non-governmental participation in the health sector. The flexible organizational structure of APVVP has not been adequately utilized in the past. The proposed project would make it possible to fully use the organizational flexibility assigned to APVVP through investments in first referral or secondary hospitals. At the top of the health structure are the tertiary, including teaching hospitals, which are staffed and equipped to provide more specialized treatments and generally having a capacity exceeding 500- 600 beds. They are managed by the Directorate of Medical Education. 1.7 In addition to the three major Directorates mentioned above, five smaller Directorates report to the Department of Health, Medical and Family Welfare. These include those that manage the AIDS program, Preventive Medicine, Employees State Insurance, Indian System of Medicine and Drug Control. These Directorates have smaller budgets, resources and staff compared to the three major Directorates and APVVP. 1.8 Availability of Health Services. In 1994, the AP Government has the following facilities. At the primary level, there are: 10,555 subcenters (SUBCs), 1,306 primary health centers (PHCs), 175 community health centers (CHCs) and 45 mobile units. At the secondary or first referral level, there are 150 community, area and district First referral or secondary hospitals consist of community hospitals that have a bed strength of about 30-50 beds, area hospitals that have about 75-100 beds and district hospitals that have about 250-350 beds. The level of services offered increase from community to area to districts hospitals. The services that will be offered at each level are shown in Annex 7.  4 hospitals and 22 dispensaries. The community hospitals are located in rural and remote areas of the state, the area hospitals in smaller towns, the district hospitals mostly at district headquarters and urban centers and the dispensaries are located in urban areas. At the tertiary level there are 38 tertiary hospitals attached to 9 medical colleges, and 2 super specialized hospitals. In addition, there are in the state 23 district TB centers, 25 TB clinics, and 194 leprosy control units which straddle the primary and secondary levels. The main shortcoming in the provision of services is at the secondary level, which cannot provide the critical support needed at the primary level because of technical and other weaknesses discussed below. The number of beds at secondary hospitals in the public sector is inadequate relative to the size of the state's population. Indian Planning Commission norms based on demographic factors suggest that 70% of all public hospital beds should be at secondary level facilities. Secondary hospitals in AP in fact account for only 32% of the total number of beds at public facilities. In 1994, there are 9,651 beds at secondary hospitals (0.15 beds per 1,000 population) out of a total of 30,624 beds in the public sector (0.46 beds per 1,000 population). If the Indian Planning Commission norms were to be complied with then there would need to be a sizeable increase in bed strength at secondary level facilities, some of this at the cost of beds at tertiary facilities. 1.9 In addition, there has been a significant growth of private sector facilities in recent years. It is estimated that there are over 2,100 private hospitals providing about 42,000 beds (0.63 beds per 1,000 population). There are an estimated 1,100 practitioners of Indian system of medicine providing health care services to about 2-3% of the population. The private sector therefore comprises wide range of health providers, ranging from the household doctors in the villages to the corporate sector in the cities and charitable hospitals and dispensaries. However, many of these providers are unqualified, licensing is weak or non-existent, quality is varied and the services offered do not cover communicable diseases which afflict the poor, and they cost far in excess of those provided by the public sector. 1.10 In terms of the total number of beds that would be required to service the state's population, the Indian Planning Commission's demographic criterion of 0.67 hospital beds per population of 1,000 people in the public sector would suggest that there is a shortage of about 12,000 beds. It is, however, more relevant to use a criteria based on the epidemiological profile or burden of disease in AP in considering the total number of hospital beds required to service the state's population. Project preparation estimated the total number of beds required for AP on the basis of burden of disease and illness episode criteria. The analysis provided evidence that a shift in bed strength towards non- communicable diseases as indicated by recent data on the Survey of Causes of Death was needed. This analysis, using the burden of disease approach, estimated that about 90,000 beds would be required to provide adequate level of clinical services for the population of AP. Given that there are about 42,000 beds at private hospitals and about 30,624 beds at public hospitals in AP, there is still a sizeable deficit of about 17,000 beds overall. The private sector would be able to fill some of the gap, but private facilities are not available everywhere and some of the critical services dealing with communicable  5 diseases which, disproportionately affect the poor, are not provided by private facilities. The increase in bed strength at public facilities under the project will fill some of the gaps left by the non-availability of private services. 1.11 Utilization of Health Services. The national sample survey (NSS) utilization data from the 42nd round show that an overwhelming majority of households utilized the allopathic system of medicine both for hospitalization (98%) as well as for ambulatory care (96%). The preference for allopathic system was universal and not influenced by household characteristics such as income, social class or literacy. With regard to preference for type of hospital, the usage of public health facilities does not appear to be very high despite the presence of a fairly extensive public health infrastructure. This is true both for hospitalization, where public facilities accounted for 37% of utilization in rural and 47% in urban areas as well as for ambulatory care where public facilities accounted for 16% of utilization in rural and 19% in urban areas. The use of private hospitals was more common for hospitalization (55 % for rural and 47 % for urban areas), while the use of private doctors was more common for ambulatory care (47% in rural and 38% in urban areas). Among ST households, utilization of public hospitals were much higher (62%) compared to other groups (55%); however, ST households choose private practitioners much less (36%) compared to other household groups. The relatively low level of utilization of public facilities among the general population is largely because of poor access to public facilities, poor quality of services provided and unavailability of staff, drugs and essential supplies. 1.12 Of the 40% who used government hospitals, about two-thirds belonged to the lower four strata of the decile groups. Government facilities were used mainly for treatment of communicable diseases. About 98% of government services were free (although there were indirect costs to the individual) compared to only 7% of services in the private sector. Of the kinds of ailment treated by the private sector, preliminary analysis suggest that 35% of cases treated were related to childbirth, 30-40% were fevers and injuries and 20-30% were for surgery. 1.13 Public Health Expenditure. The public health care component of the budget in AP at Rs. 5 billion represents about 5.6% of the total state revenue budget and 5.1 % of the total state revenue and capital budget. The share of health in the revenue budget declined from 5.8% to 5.6% between FY92 and FY95. The Government provided the rationale that the relatively low share of public expenditures for the health sector in AP is that, because of historical reasons, a large share of public expenditure has been absorbed by the irrigation and drainage sectors. Although this share has declined in recent years, the power sector now absorbs a large share of current allocations. Annual public health expenditure is only 1.3% of the state's Net Domestic Product, which is about the average for India as a whole (Annex 3). 1.14 In FY92, a large share of public health expenditures in AP was allocated to the provision of primary health care services, the largest component of which included  6 expenditures on Family Welfare (20%) and programs for the prevention and eradication of communicable diseases (17%). Analysis of the composition of public expenditures on health during the last decade highlights the budgetary emphasis on primary health care. The share of primary services steadily increased from 46% in FY81 to a peak of 56% in FY86, after which it declined to about 49% in FY90. 1.15 Hospital services exhibited a consistent and significant reduction in their share of expenditures from about 41 % in FY81 to about 34% in FY90. This analysis of subsectoral allocations highlights some important issues. First, the allocation of expenditures for hospital services is relatively low in AP, compared to other low income countries. Only 4 countries in the 29 countries reviewed by Barnum and Kutzin (1993) spent less than 40% of their health budget on hospital services. Second, allocations to hospital services in AP have been adversely affected even in years when the overall health budget has grown, whereas allocations to primary health care services were vulnerable to reductions only in years when the overall health budget was constrained. Third, resource allocations within the hospital sector are skewed in favor of tertiary level hospitals. During the last decade, the allocation of total public resources for the hospital sector between secondary and tertiary level hospitals has been in the ratio of 51:49 respectively. The norms recommended by the Indian Planning Commission is a ratio of 67:33 in favor of secondary level hospitals. Moreover, the tertiary sector received two- thirds of plan resources allocated to the hospital sector and claimed a greater share of incremental resources. 1.16 The budgetary allocation to APVVP reflects almost all of the government's funding support to secondary hospitals. Currently almost the entire expenditure of APVVP is financed by grants-in-aid provided by the state government. These grants amounted to Rs. 390 million in FY92, Rs. 450 million in FY93 and Rs. 480 million in FY94. The projected grant for FY95 is Rs. 460 million. Of the total non-plan budget for the health sector of Rs 2.6 billion in FY92, APVVP received only 15%; this share fell to 13% in FY94 and to about 12% in the budget estimates of FY95. Plan funds for APVVP have been negligible -- Rs. 9 million in FY92 and Rs. 11 million in FY93 and FY94. However, the non-salary recurrent cost budget has been shrinking and the share of salaries in APVVP has increased from about 67% in FY92 to about 75% in FY95 (Annex 3, Table 5). With a rising share of salaries and total grants remaining constant, the norms for expenditure on drugs, supplies and other consumables have been held constant in nominal terms. Since price inflation for these commodities have been greater than average, real expenditures on critical inputs other than personnel has declined substantially in recent years. During the last two years, even nominal expenditures per bed for drugs and consumables have declined. APVVP management has tried to protect expenditures on essential drugs with the result that expenditures on supplies, diet and maintenance activities have also suffered during this period. 1.17 Hence, the main conclusion is that the low level of funding for secondary hospitals is due to three factors: the small share of health as a percentage of overall  7 public spending; the small share of hospital spending as a percentage of health spending; and a skewed distribution of funds within the hospital sector in favor of the tertiary hospitals (Annex 3). As a result of this weak support to the secondary or first referral level, the secondary system up to the district hospital level has been unable to provide adequate support to the primary health care system. C. Health Sector Issues 1.18 Allocation of Resources. As discussed above, public resources allocated to the health sector are inadequate to meet basic health care needs, and these resources at 1.3 % of state Net Domestic Product are low when compared to several Asian countries with similar levels of per capita income. Moreover, within the health sector, secondary hospitals have been continuously neglected at the expense of tertiary care and underfunding has resulted in shortage of drugs and essential supplies, lack of maintenance of equipment, shortage of doctors and medical personnel. 1.19 Management and Planning. Overall, the health sector in AP suffers from a low level of efficiency and there are few incentives for hospitals to improve their performance. Two important reasons for this are weak management at all levels and lack of an effective planning capacity. Administrative responsibility and financial accountability are artificially separated between the related agencies. For example, while accountability for running the institutions lies with the hospital superintendents, key decisions on manpower development, procurement of drugs and essential supplies, extension of facilities, and mobilization and allocation of resources for maintenance purposes, are made at the different Directorates of the Department of Medical, Health and Family Welfare. Considerable improvements are needed in planning and management aspects with respect to first referral facilities. Moreover, there is a need to develop a strategic planning capacity to analyze the epidemiological profile and the burden of disease, cost-effective means of achieving the best use of limited resources and the medical manpower situation as well as monitor and guide the development of the private health sector. 1.20 Ouality of Services. Secondary hospitals in AP continue to face operational deficiencies and are functioning poorly due to lack of non-salary recurrent funds. Support services and infrastructure at secondary hospitals are inadequate. There are shortages of diagnostic facilities, equipment for performing laboratory procedures, safe blood supply, communications network, transport facilities, trained personnel, and repair and maintenance services for machinery and equipment. In order to provide better quality of services at existing facilities, adequate measures need to be instituted so that operational funds are available at each facility. There is also a critical need to update equipment, establish norms on a range of clinical and support services and provide in-service training in clinical, equipment, and management skills.  8 1.21 The quality of services is also affected because of the absenteeism of doctors and other medical staff in less developed areas of the state. Incentives need to be provided to doctors, nurses and other medical staff for relocating to remote and tribal areas of the state and for encouraging them to stay in their post for the duration of their assignment. These incentives could be in the form of suitable accommodations, preferential admissions for children of doctors resident in tribal areas in government-run residential schools and places for them in schools for scheduled tribes and scheduled castes, transfer to an urban area after 4-5 years of service, regular and paid home leaves, enhanced promotion or training opportunities and training scholarship after a successful tour of duty. The AP Tribal Health Service, created in 1994, already provides for doctors recruited for this service to be formalized into regular service after 4-5 years in tribal areas. 1.22 Referral System. The referral system in AP, as in the rest of India, does not function well. Institutional and technical linkages between different tiers are weak and each tier operates as an independent entity, often providing similar levels of care. As a result resource utilization is poor. It is estimated that a third of all cases which are currently treated at tertiary facilities could be adequately treated, and at lower costs, at the secondary level facilities if those facilities were properly equipped and staffed. Moreover, the lower tier institutions such as PHCs are often underutilized due to lack of support on technical matters, such as treatment and diagnosis strategies, from secondary level institutions because of technical weaknesses at those institutions. Mechanisms for improving the access of remote and disadvantaged groups to secondary and higher levels of health care by making the referral system more timely, effective and client-friendly, need to be formulated; clinical skills in secondary hospitals need to updated and upgraded; technical support for the primary level of care needs to be strengthened; and a quality assurance program in secondary level hospitals need to be provided to monitor and improve quality in technical areas. 1.23 Access. At the referral level, access to health care and service delivery is weak. To comply with the government's norms and all the needs of the people, especially the underserved population, sufficient resources are not available. However, a balanced increase in capacity, bed strength and quality of services at the secondary or first referral level would make a significant impact on the health status of the poorer population and those living in least developed areas of the state. 1.24 Disparities exist between the urban and rural parts of the state with respect to access to health facilities and service quality. The urban based secondary hospitals tend to be overcrowded, especially the outpatient facilities, and operate at near full capacity, whereas some of the remote rural facilities remain underutilized because they are unable to provide even basic services. The low demand for health care services at remote rural facilities is due to the poor quality of services. Difficulties of posting doctors, nurses and other medical professional in remote areas, unavailability of drugs and shortage of supply and difficult upkeep of medical equipment add to the problem. As a result, access is  9 unavailable to a large number of the poor who have limited means of obtaining critical health care services in city hospitals and private nursing homes. Such services, which are not provided at primary health care facilities, but should be at secondary level facilities include dental, ophthalmic, orthopedic, pediatric and surgical services. 1.25 Role of the Private Sector. The role of the private sector in delivering quality health care continues to be underdeveloped despite substantial private investment. Recent sector work shows that private sector services are of very varied quality and are provided by a wide range of qualified, less-than-qualified and unqualified practitioners (para 1.9). Many are unregistered, unlicensed and unregulated. Lack of regulations and effective legal remedies contributes to inappropriate practices. AP government's ability to monitor, regulate, register and certify private care providers is weak and needs to be strengthened. The Government should be able to assess the quality of services provided by private care practitioners and evaluate regulations relating to such improvements in service quality. Moreover, private primary care providers could be better utilized to treat many diseases that are of high priority such as TB, malaria, STDs, diarrheas, respiratory infections and high risk births. The state government could provide incentives and schemes to finance, train and integrate private providers in case-finding, referral treatment and monitoring for these priority problems. More contracting out of services to the private sector where possible, especially support services, could be done to cut costs and increase efficiency. Private voluntary organizations could also be encouraged by the government to participate in behavior changing education activities, particularly in tribal areas. D. Lessons From Experience. 1.26 This is the first project in India that involves the health system at the state level. It is more broadly based than the on-going or completed population, health and nutrition (PHN) projects in India. Even so, the experience of social sector projects in India is varied and extensive enough to provide some important lessons for the preparation and implementation of this project. 1.27 There are four completed PHN projects in India for which Project Completion Reports (PCRs) or Performance Audit Reports (PARs) are available2. These are the First, Second and Third Population projects and the First Tamil Nadu Integrated Nutrition project. In addition, the Fourth Population project has also recently been completed and a draft PCR is available. OED has also recently completed an Impact 2 India: PCR - First Population Project (Cr. 312-IN), May 19, 1981; PPAR No. 3748, December 31, 1981. India: PCR - Second Population Project (Cr. 981-IN), June 20, 1989; PPAR No. 8896, June 29, 1990. India: PCR - Tamil Nadu Integrated Nutrition Project (Cr. 1003-IN), November 26, 1989. India: PCR - Third Population Project (Cr. 1426-IN), August 25, 1993.  10 Evaluation Report of the Tamil Nadu Integrated Nutrition project which is available in draft. Overall, the projects have met an important part of their development objectives. Population I and II met most of their aims, but did not have any systemic impact on the Family Welfare program. Population III had significant outcomes in Kerala but not in Karnataka. Population IV appears to have contributed to very significant improvements in contraceptive prevalence and reduction in infant mortality. The Tamil Nadu Nutrition project has been well documented as having a major impact on improving the nutritional status of young children. 1.28 There are currently thirteen on-going PHN projects in India, and the list below shows the seven that are now on-going in AP: * Health sector: National AIDS Control, National Leprosy Elimination and the Cataract Blindness Projects; * Family Welfare (FW) sector: Population VI, Population VIII and Child Survival and the Safe Motherhood (CSSM) Projects; and * Nutrition sector: First Integrated Child Development Scheme (ICDS I) Project. 1.29 Despite many positive outcomes, the completed and ongoing projects have suffered consistently from a variety of implementation problems. These have included: late start-up, poor procurement, slow disbursement, frequent management turnover, untimely and inadequate flow of funds, poor maintenance of buildings and equipment, and inadequate attention to software and qualitative aspects. 1.30 The design of the proposed project would take account of the concerns and problem areas identified above as shown in Table 1. 1. Table 1.1: Lessons Applied From IDA Experience in PHN Lending to the Proposed Project Lessons Corresponding Action to be Taken Reference 1. Inadequate Anention to At the early state of implementation the following Para 2.11, 2.14 Management Aspects actions would be taken: adequate staffing of key Annexes 5, 6 project management personnel at APVVP; enhancement of implementation capacity at APHMHIDC; adequate staffing arrangements at district, area and community hospitals; strengthening of management procedures. In addition, a mid-term review of the management systems would be undertaken.  11 Lessons Corresponding Action to be Taken Reference 2. Slowness in Implementation Strengthen implementation capacity; detailed Para 2.10, 3.25, 3.26 and Weak Supervision implementation plan in place; regular field supervision Annexes 17, 19 by local consultants included in Supervision Plan. 3. Poor Maintenance of Building GOAP will provide adequate resources during project Policy letter, and Equipment period for operations and maintenance services; Para 2.8(c), 2.11, 3.29 capacity of Equipment Maintenance and Training Center (EMTC) to be enhanced. 4. Untimely and Inadequate Flow Assurance provided by GOAP that annual review of Para 3.8, 3.26 of Funds to Project project expenditures and resource requirements will be carried out with IDA in order to ensure timely flow of funds; assurance provided by GOI that it would release about three months of project expenditure in advance to GOAP. 5. Poor Procurement Procurement arrangements for works and services in Para 3.9, 3.22 advanced state of preparation; lists of hospitals Arnex 16, 17 prepared, use of standard bidding documents; first phase of construction plan completed; equipment lists prepared and specification lists discussed with IDA. 6. Inadequate Attention to Staffing and technical norms at district, area and Para 2.16, 2.17, 2.18, 3.23, Qualitative Aspects community hospitals agreed upon; referral system and 3.24 linkages with primary care services to be established Annexes 7, 8, 11, 12 according to agreed norms; Clinical training needs developed; management training needs developed; quality assurance program developed collaboratively with clinicians and practitioners from around the state; benchmarks and monitoring methodology developed and agreed with borrower. E. Linkages With Other PHN Projects in AP 1.31 The proposed project would complement and consolidate investments made by on-going PHN projects in AP by providing policy and implementation coordination with other health and FW projects. For example, the strengthening of the first level referral for obstetrics and child care in this project through the provision of essential clinical and diagnostic services would complement the primary level of services being provided under Population VI, Population VIII and CSSM projects. The complementary curative actions that will be strengthened under this project, which are somewhat higher level interventions than primary care services provided by the on-going projects, will also improve the health status of women and children. Table 1.2 below shows the linkages of this project with other PHN projects in AP.  12 Table 1.2: Linkages with Other PHN Proiects in AP Name of Project Primary Health Care Linkages with AP District Health Systems Project Objectives Population VI, VIII Enhance service Child Health: children identified by primary care services as and CSSM delivery for FW, and suffering from severe stages of diarrheal disease, acute respiratory s t r e n g t h e n infection and nutritional disorders will be referred to APVVP management at the hospitals for appropriate treatment. district and block Maternal Health: The CSSM program has identified by name the level, and slum areas First Referral Units (FRUs) for the state, most of which are under o f H y d e r a b a d; APVVP management. Mothers identified as having life threatening s u p p o r t C h i I d complications of pregnancy and child birth will be referred to these Survival program; FRUs for appropriate treatment. e n h a n c e S a f e Technical supervision and training: APVVP will improve the quality M o t h e r h o o d of care at the primary level through: (a) visits to PHCs by Specialists Program. from the hospitals to conduct clinics for patients who need more skilled care; and (b) training at APVVP hospitals for upgrading clinical and technical skills for PHC and SUBC staff; provide on- going training for medical and paramedical staff from PHCs and SUBCs. N a t i o n a I A I D S Involve states in AIDS Cell and Empowered Committee promote coordination between Control p r o g r a m AIDS Program and APVVP. The MIS capability and patient statistics development. gathered by APVVP are of vital use to the AIDS project. Monitor epidemic; Surveillance sites or HIV testing facilities located in APVVP Sc r e e n b I o o d; hospitals to facilitate monitoring of the AIDS epidemic. HIV logistical support. screening to be done within blood banks of APVVP hospitals: the AIDS project provides the kits, training and procedure; APVVP hospitals provide infrastructure, staffing and support services. APVVP facilities provide essential logistical support for storage of equipment, medicines, medical supplies and waste management. R a i s e p u b I i c The [EC component of the AIDS project targets staff of APVVP awareness; develop hospitals for disseminating information. Selected staff of APVVP to clinical management be trained by the AIDS project to provide counselling and medical skills in AIDS and needs of AIDS patients. STD control. National Leprosy Multidrug therapy; The health infrastructure of APVVP is a channel of treatment and Eradication disability care and drug delivery. The staff and hardware provided by the Leprosy prevention. project will function within APVVP infrastructure, providing physiotherapy facilities, operation theaters (OT) and lab facilities. Logistics and MIS. APVVP facilities provide storage and support services for the Leprosy project. MIS and statistical support are also provided. Cataract Blindness Expand service The Cataract Blindness Control Project is financing dedicated Ots and Control d e I i v e r y a n d Blindness wards in district hospitals. APVVP will provide: support i n s t i t u t i o n a I staff who will receive specialized training under the Blindness development. project; logistical support and storage facilities. The referral system in APVVP will complement and facilitate the referral of blind patients to district hospitals for specialist care. ICDS I Strengthen nutrition- The linkages between ICDS I and the AP Health project are mainly related service through their common link with the CSSM project, including delivery. registration of pregnant mothers; vaccination of children; and joint training of field workers.  13 1.32 In addition, international experience has also been considered in the design and scope of the project. The World Development Report (1993) on Investing in Health suggested that a broad sectoral approach within a supporting policy environment produces significant positive results and benefits. It also suggested that a limited package of public health measures and essential clinical interventions is a top priority for government finance. On the components of the public health package the list includes: (i) the expanded program on immunization, including micronutrient supplementation; (ii) school health programs to treat worm infection and micronutrient deficiencies and to provide health education; (iii) programs to increase public knowledge about family planning, health and nutrition; (iv) programs to reduce consumption of tobacco, alcohol and other drugs; and (v) AIDS prevention program with a strong STD component. On the components of the essential clinical services the list includes: (i) prenatal and delivery care; (ii) family planning services (these two components together constitute a Safe Motherhood Program); (iii) management of the sick child; (iv) treatment of TB; (v) case management of STDs; and (vi) treatment of minor infection and trauma otherwise known as limited care. This project, in recognizing the specific administrative, burden of disease and socio-technical issues in India, will provide a number of the services listed above that have so far not been provided in other IDA financed projects in the PHN sector. It will also set the institutional structure that can lead to the provision of some of the other services in the future. F. Country Assistance Strategy and Rationale for IDA Involvement 1.33 IDA Strategy. The Bank Group's Country Strategy for India (April 21, 1994; Report No. P-6141-IN) is to support GOI's efforts to provide an enabling environment for broad-based, efficient private sector-led growth while accelerating the development of human resources. A major aim of the strategy is to enhance access to quality of basic social services for the poor and to support well-targeted safety net programs that protect the most vulnerable groups in Indian society. IDA assistance will focus on raising nutritional levels, reducing fertility, reducing morbidity and mortality from key endemic diseases; and raising educational attainments; and special emphasis will be put upon improving access and efficiency and improving outcomes, as well as strengthening of links between the public and the private and Non-Governmental Organization (NGO) sectors. The focus will be almost exclusively on the poor, with special attention to women, Sts and Scs. 1.34 Sectoral Strategy. In the health sector, IDA's strategy is to assist India in reducing the level of morbidity and mortality through a two-pronged approach. The first is to reduce the burden of the most significant endemic diseases through national programs such as the AIDS Control, Leprosy Elimination and the Cataract Blindness projects and the proposed TB and Malaria projects. The second approach is to strengthen the performance of the health system of the states by providing more efficient and effective health care which will mostly benefit the poor segments of society who use it the most. IDA's strategy in the FW sector is complementary to this approach in that the FW projects are strengthening primary level services through program support of family planning and MCH services across India by investing in infrastructure and support services as well as by deepening support for policy change and program adjustment. The approach to strengthen the performance of the health system will become increasingly important in the coming years as the epidemiological profile evolves and the need for a dynamic health care system increases. Strengthening the health system as such will prepare the sector to deal with the evolving long term burden of disease. The two-pronged strategy thus has the  14 advantage of directly addressing the most significant endemic diseases, and at the same time strengthening and developing a comprehensive health care system. The basis of this strategy for the health sector in India is rooted in our dialogue with India, and in our sector work as reflected in three recent documents: (i) India: Health Sector Financing: Coping with Adjustment, Opportunities for Reform, (1992); (ii) India: Public Expenditure Review: Health Sector Report (1993); and (iii) India: Policy and Finance Strategies for Strengthening Primary Health Care Services (1994). 1.35 IDA investment in the project is justified for the following reasons. First, the project would strengthen and upgrade secondary health care facilities without which the primary health care system cannot implement the various national health programs and provide basic health care in rural areas. An effective secondary level of care that provides essential clinical services not provided at the primary level, is critical for providing credibility to the district based health care system as well as for providing technical support to the entire network of primary health centers. Second, IDA support is warranted because this project will consolidate the investments made by a number of other projects, such as the Child Survival and Safe Motherhood (CSSM), Population VI, Population VIII, AIDS Control and Leprosy Elimination projects and add incremental value to the overall health care system in AP. For example, the strengthening of the first level referral for obstetrics and child care in this project through the provision of essential clinical and diagnostic services would complement the primary level of care actions initiated in Population VI, Population VIII and CSSM projects. In addition, the actions of the on-going projects with regard to initiating a referral system from the community to the community hospital level, providing equipment at the first level referral for obstetrics units and defining the facilities needed for emergency obstetrics care will be further strengthened under this project. The complementary actions that will be undertaken by this project, which are somewhat higher level interventions than those provided at the primary level, will also improve the health status of women and children. Third, the project is consistent with IDA's strategy of strengthening state health systems, since it would help the state to: (i) optimize resource use, especially resources such as medical manpower and diagnostic equipment; (ii) avoid duplication and wastage; and (iii) reduce overcrowding at tertiary health care institutions. Fourth, the project is in line with the overall IDA strategy of poverty alleviation in India. The economic rationale is that since the poor cannot always afford health care that improves their productivity and well-being, public investment in the health of the poor, such as essential clinical services that will be provided by the project, can reduce poverty by increasing the earning potential of the poor. 1.36 The reason for selecting AP as the first state to develop a health systems project is its fairly representative characteristics in terms of income level, poverty, demographic indicators and epidemiological profile. It is, however, a fairly advanced state by Indian standards in terms of administrative capabilities. The commitment AP has shown in the preparation of this project and in introducing systemic strengthening of the health sector makes it likely that the project will be implemented successfully.  15 II. THE PROJECT A. Project Objectives 2.1 The objectives of the project would be to assist the Government of AP to: (i) improve efficiency in the allocation and use of health resources through policy and institutional development; and (ii) improve systems performance of health care through improvements in the quality, effectiveness and coverage of health services at the secondary level to better serve the neediest sections of society. The ultimate goal of the project would be to improve the health status of the people of AP, especially the poor and the underserved, by reducing mortality, morbidity and disability. The project would provide a first step towards the creation of a replicative state model that would subsequently be used to reorient the health systems in other states in India. 2.2 The achievement of the first objective will be evaluated on the basis of timely implementation of the policy reforms spelt out in a Health Sector Development Policy Statement of the Government in Annex 2. These include proposals for enhancing the overall size of the health budget, redressing the imbalance in public spending between secondary and tertiary levels of health care, safeguarding the operations and maintenance component of Non-Plan budget allocations for the secondary level of health care, charging of user fees for hospital services at the secondary level, contracting out of selected services, enhancing strategic planning capacity and addressing work force issues. 2.3 The achievement of the second objective will be evaluated on the basis of hospital activity and efficiency indicators as well as quality, access and effectiveness indicators as shown in Annex 18 on Performance Indicators and summarized below. 2.4 Hospital activity indicators including turnover rate, bed occupancy and average length of stay, which are derived from bed occupancy, cumulative inpatient days and admissions during a given period of time, will be measured against the baseline. Also measured will be outpatient consultations and outpatients per bed day. Hospital efficiency indicators including the following will be measured against a baseline: clinical services, such as number of major surgeries and deliveries and their percentages to admissions during a given time period; diagnostic services, such as number of imaging and electro-medical tests and their percentages to admissions during a given time period; non-clinical services such as post-mortems, percentage of post-operative case fatalities and percentage of infection acquired at the hospital; and emergency service index measures such as emergency outpatient and entry ratios. These efficiency measures will be evaluated against the baseline, and compared with the best performing facilities and against comparable international standards. 2.5 Quality, access and effectiveness indicators including the following will be measured: staffing, equipment and drug norms met at each facility; inpatient and outpatient waiting time; patient satisfaction; upgradation of clinical, management and equipment maintenance skills; awareness among target group of services offered; awareness among doctors of how the referral system is expected to function; and funds recovered from user charges. Some of these will be measured against the baseline while others will be measured against the norms that have been developed in a participatory manner and agreed upon at appraisal.  16 B. Approach 2.6 Taking into account the lessons learnt from past Bank projects in the state, the project is designed to contribute to the objectives stated in para 2.1 by helping GOAP put in place a sustainable first referral health system that will provide vital support and credibility to primary health care services and the rest of the health sector in AP. The state's capacity to implement such a program would be based on two closely related elements. First, an organizational structure of preventive and curative aspects of health care at the district level to integrate primary health care services and first referral facilities. Second, a program of health sector policy reform to provide the general framework for health sector development. Accordingly, the project would selectively implement some key sectoral policy reforms (discussed below) that are essential to developing an efficient and effective health system and direct physical investments to first referral or secondary health care facilities which are the weakest link in the system. C. The Reform Program 2.7 Reform of Institutional Structure. The Government of AP has shown considerable commitment to improving its health system by establishing a necessary framework to achieve project objectives. It is ahead of other states in terms of setting up an institutional arrangement to facilitate greater emphasis for the intensive integrated development of both curative and preventive aspects of health care, especially to rectify the institutional weaknesses at the secondary level. As mentioned in para 1.6, this has been done by establishing the APVVP though a legislative enactment to improve the functioning of the health care facilities at the first referral level. APVVP's objectives are to provide access to adequate patient care in rural areas, reduce pressures on the overstretched tertiary hospitals in the cities and mobilize resources from the market as a supplement to the state budget to improve, upgrade and maintain health care institutions. This type of an organization, which provides significant potential for improved efficiency in contracting, disbursement and management matters, is innovative in the health sector in India. In addition, the Government of AP is taking steps to strengthen the linkages at appropriate levels of the health system, through public investment and support of private initiative, to ensure that the objectives of comprehensive medical and health care can be achieved. 2.8 Policy Framework. In addition to the institutional changes mentioned above, GOAP will undertake selective health policy reforms that will address key health sector issues (outlined in paras 1.18-1.25), including resource enhancement and improvements in allocation within the health sector, improvements in management and planning capacity, enhancement of quality of services offered at the first referral level, better linkages with primary health care services, greater access to health care delivery and review of private sector role and quality improvement. These policy actions are critical to meeting the project's objectives since they will ensure the safeguard of the institutional basis and service delivery package that are at the core of efficient and effective performance of the first referral health system. Accordingly, the Government of AP has furnished a Health Sector Policy Reform matrix (Annex 2). Availability of IDA assistance for the project would be subject to implementation of actions set out in the Reform Program. Specifically, these reforms would address:  17 (a) Proposal for enhancing the overall size of the health budget. The Government of AP spends only about 1.3% of its Net Domestic Product on health care or about US$2-3 in per capita terms (para 1.13). This contribution is low when compared to several Asian countries with similar or even higher levels of income an is inadequate to meet the basic health care service needs of AP population. The World Development Report (WDR) 1993, recommends that about US$12 per capita are required in low-income developing countries to meet requirements of preventive and promotive services including a minimum package of essential public health and clinical services. The WDR's recommendation when applied to AP implies that the Government would need to increase its contribution several times to provide for an essential package of public health and clinical services. This would be very difficult under the present stringent budgetary scenario. The Government of AP would need to at least maintain the share of health sector allocation to the overall budget, which is currently at 5.6% of the state's revenue budget. Under the Reform Program, GOAP is committed to maintaining the share of health sector allocations within the overall budget at least at the FY94-95 level. (b) Redressing the imbalance in public expenditures between the secondary and tertiary health care levels. Within the health sector resource allocation is skewed in favor of tertiary care services, compared to secondary care services. Allocations of public resources between the secondary and tertiary sectors has been in the ratio of 51:49 respectively while norms recommended by the Indian Planning Commission suggest a ratio of 67:33 respectively (para 1.15). Moreover, tertiary hospitals have received about two-thirds of total Plan resources allocated for the hospital sector and claimed a greater share of incremental resources. Secondary level care has, therefore, traditionally suffered from low level of public funds. Investments at the secondary level will redress some of this imbalance during the implementation years. Under the Reform Program, and reaffirmed at negotiations, GOAP provided assurances that the share of the primary and secondary levels in the total resources (plan and non-plan) allocated for the health sector would be increased each year until the year 2000. (c) Safeguarding the operations and maintenance component of the Non-Plan allocations for the secondary health sector. The non-salary recurrent cost budget of the health sector overall has been shrinking. For example, the share of salaries in APVVP has increased from about 67% in FY92 to about 75 % in FY95 (Annex 3, Table 5). With total grants remaining more or less constant, a rising share of salaries has meant that expenditures on critical inputs other than personnel, such as drugs and essential supplies have declined in recent years. Since price inflation for these commodities have been greater than average, there has in fact been a decline in real expenditures on non-salary recurrent costs. Moreover, during the last two years, even nominal expenditures per bed for drugs and consumables have declined. At negotiations, GOAP provided assurances that it would allocate resources in accordance with agreed norms so as to ensure that adequate supplies of drugs, essential supplies and maintenance of equipment and buildings at secondary hospitals will be provided in accordance with norms set out in Annexes 7, 9 and 10. (d) (i) Charging of user fees for hospital services while protecting the poorest segments of society. Inadequate charging of user fees has not helped to redress the low level of funds for supplies, operations and maintenance at secondary facilities. The APVVP Act of 1986 created a provision for charging user fees so that hospitals are able to generate some additional revenues to top up government contributions. The government has confirmed that APVVP has  18 the legal authority to institute user charges and that no legal restrictions against APVVP exist that prevent it from charging user fees. APVVP's Governing Council's is responsible for taking decisions to introduce specific user charges. However, it needs Government regulation to facilitate implementation. Understanding was reached with the Government of AP and APVVP that they would ensure that while protecting the poorest segments of society, charging of user fees at secondary hospitals would be based on the principles that such charges would be to: (i) target the receipts particularly on non-salary recurrent costs of APVVP hospitals; and (ii) charge for private beds and amenities and procedures that are low in cost-effectiveness in order to pay for those interventions that are high in cost-effectiveness. Cost-effectiveness will be determined from time to time in accordance with a mechanism that is being developed through the Burden of Disease and Cost-Effectiveness study currently being undertaken by the Administrative Staff College of India. (d)(ii) In order to generate revenue and provide services for those willing to pay, district and area hospitals will provide private paying bed facilities and begin to charge for services in a phased manner after improvements in the quality of basic services and infrastructure development have been completed. GOAP's Reform Program includes a time schedule for the implementation of service improvements and subsequent introduction of user charges. At negotiations, GOAP and APVVP provided assurances that at least 20% of all beds at district and area hospitals would be dedicated as paying beds in accordance with this time schedule. Community hospitals are not being slated to introduce paying beds since such opportunities are minimal at community hospitals as they almost exclusively serve the poorest segments of the population. Other charges such as fees for diagnostic procedures and drugs would be phased in as improvements in basic services are provided also in accordance with a time schedule to be agreed. APVVP is also considering enhancing the collection of revenue through the increased sale of APVVP seals at the time of out-patient registration. In addition, APVVP would institute adequate administrative mechanisms for collecting user fees and enhance APVVP's resource generation capacity through the appointment of key staff in its Finance and Audit unit. (d)(iii) Moreover, because of the lack of appropriate management arrangements and authority to act there are few incentives for hospitals and their staff to improve hospital operation and quality of services. In order to provide incentives to hospital staff and management so that the money collected through user charges at the hospital level would be used to improve operations and maintenance at those facilities, APVVP would allow hospitals to retain a portion of fees. At negotiations, GOAP and APVVP provided assurances that a third or more of income generated at individual hospitals through user charges (e.g. paying beds) would be allowed to be retained at the point of collection, with the concerned hospital being allowed to decide in the utilization of such funds subject to the requirement that they not be applied to salaries. Understanding was reached during negotiations that APVVP would endeavor to raise the amount retained at individual facilities to about 40% of income generated from user charges. (e) Contracting-out selected services. Private contractual services are often more efficient and effective than direct labor. In view of the difficulties of employing government staff, such as slow recruitment and poor attendance, contracting-out certain services, especially support services, becomes even more attractive. However, using private contractual services is a politically sensitive issue and there is some concern regarding quality. In the past, the state  19 employed private doctors as part-time consultants, but this was stopped on the basis that it favored the doctor's reputation more than it improved the government sector's clinical services. It has been confirmed that there are no legal barriers inhibiting the use of contractual services for support functions and that the Contract Labor Regulation and Abolition Act (1970), which prohibits certain institutions from contracting-out perennial services, exempt hospitals and health care facilities. In order to cut costs and increase efficiency, the Governing Council of APVVP would therefore review and propose implementation of private contractual services, especially supporting services, in accordance with an agreed plan. (f) Enhancing capacity for strategic planning. A strategic planning cell would be set up in the Department of Health, Medical and Family Welfare to address strategic planning issues in the health sector and provide management with policy options. It would undertake operational and policy related research projects, either independently or through local consultants, and it would organize workshops and seminars. It would monitor and review the Burden of Disease and Cost-Effectiveness study initiated during preparation jointly by the Administrative Staff College of India (ASCI) and the Harvard Center for Population and Development Studies. The study is estimating Disability Adjusted Life Years (DALY) gained in AP as an extension of the analysis of the Global Burden of Disease study undertaken in the WDR (1993). An important finding of this study will be that it will provide an estimate of cost- effectiveness of 30-50 most important health interventions, which would provide important policy options for health sector planning in AP. The study would also provide a strong empirical basis to review identification of low cost-effective mechanisms for which user charges would be appropriate, on the basis of which the AP Government could determine the level and extent of user charges. In addition, the strategic planning cell would undertake analyses of a number of other equally important health issues including: monitoring the role of the private sector and reviewing the suitability of present regulations relating to the quality of private care provision; analyzing the evolving epidemiological profile in AP; and undertaking of periodic review of the health manpower supply situation and training needs in AP. At negotiations, the Government of AP and APVVP provided assurances that the Government of AP would ensure that a strategic planning cell would be set up by June 30, 1995 within the Department of Health, Medical and Family Welfare that would report directly to the Secretary of the Department. (g) Addressing workforce issues. There is currently no acute shortage of professional staff overall, but there is a shortage of some medical specialties and nurses. The first step would be to improve recruitment and prompt filling of job vacancies by improving the main procedures. Although APVVP has the legal authority to recruit staff directly, implementation of this authority has not followed because of Government's overall staffing concern. APVVP would be allowed greater flexibility for recruiting staff. Staff could be recruited either independently by APVVP as specified by the 1986 APVVP Act or by the Government through the Department of Medical, Health and Family Welfare with APVVP acting as the nodal agency for recruitment. At negotiations, GOAP provided assurances that it would implement a program acceptable to IDA for strengthening the management effectiveness of APVVP, including providing APVVP adequate authority to select, employ and transfer APVVP staff.  20 D. Project Description 2.9 In conjunction with the Program for Health Sector Development, the Government would make some specific investments that are consistent with the objectives of the project as stated in paragraph 2.1. These investments would strengthen the organizational structure of health care at the district level by linking preventive and curative health care services and establishing a policy framework for the development of a health sector program in AP. In support of this approach, the project would finance the following investments: (i) strengthening institutions for policy development and implementation capacity; (ii) improving quality, access and effectiveness of health services at district hospitals; (iii) and improving quality, access and effectiveness of health services at area and community hospitals, including referral mechanisms that will strengthen linkages with primary health services. The total number of beds at district, area and community hospitals would increase from the existing number of 9,651 beds to 14,000 beds at project completion, increasing the bed capacity at the secondary level by 45%. The corresponding increase at the district hospital level would be from 4,600 beds to 5,600 beds, an increase of about 22%; while the increase at the area and community hospitals would be from 5,051 beds to 8,400 beds, an increase of about 66%. Institutional Strengthening (US$4. 1 million. 3 % of base costs). 2.10 Improvin2 the Institutional Framework for Policy Development. Sectoral capacity for development of policy would be strengthened through the creation of a planning cell headed by a Joint Secretary who would report directly to the Secretary of Health, Medical and Family Welfare, Government of AP. The planning cell would monitor the critical issues in the health sector in AP by commissioning studies, workshops and seminars and by directly hiring consultants to facilitate these activities. As mentioned earlier, some of the issues would include monitoring the development of the private health sector and reviewing the suitability of present regulations relating to the quality of private care provision, analyzing the evolving epidemiological profile in AP, and evaluating the burden of disease and cost-effectiveness of public health interventions and reviewing medical manpower. In addition, it would review implementation of cost recovery mechanisms and sectoral resource allocation patterns. At negotiations, the Government of AP and APVVP provided assurances that GOAP would carry out by December 31, 1995, a review of the policy framework for private provision of health services in AP and thereafter discuss with the Association recommendations arising from such review. Under this sub-component the project would finance studies, workshops, local consultants, computers, operational expenses and salaries of incremental staff on a decreasing basis. 2.11 Strengthening Institutions and their Implementation Capacity. Four key areas that would be addressed include strengthening structures, systems and procedures; culture of service delivery; resources; and training. At APVVP level, the focus would be on improving management effectiveness, and at community, area and district hospitals emphasis would be on strengthening service delivery management. APVVP will be able to better manage its resources, deliver clinical services effectively, and its hospitals will be able to play a role within the district health systems by taking the following actions. These are: provide greater freedom of action for APVVP with regard to recruitment of staff and raising revenue; establish clarity of goals, objectives and procedures; improve supervision; create opportunities for contracting out services,  21 especially support services; improve medical record-keeping and management information systems; provide management training; and improve capacity for equipment management, especially state-wide maintenance services by enhancing the capacity of the equipment maintenance and training center (EMTC) and establishing 3 zonal workshops. The implementation capacity of AP Health and Medical Housing Infrastructure Development Corporation (APHMHIDC) would also be strengthened to deal with the increased supervision of civil works under the project through appointment of 2 full time architects and procurement of additional vehicles and computers. In addition, monitoring and evaluation capacity would be strengthened including improvement of the hospital management information system. At negotiations, the Government of AP provided assurances that APVVP would engage key additional headquarters personnel and APHMHIDC would engage key additional personnel to be recruited under the project by June 30, 1995. Under this sub-component the project would finance local training, MIS/IEC materials, computers, vehicles, studies, workshops, operational expenses and salaries of incremental staff on a decreasing basis. 2.12 A key component of the project is strengthening the management capacity of APVVP to adequately address its increased responsibilities. The first aspect of strengthening APVVP's management is consolidating the existing institutional and management structure, and evaluating the arrangements from time to time to see whether the management system is producing the best results. APVVP is currently managed by its Governing Council consisting of 5 members of the medical profession and Legislative Assembly nominated by the Government of AP, and 5 ex-officio members that include the Secretaries of Health and Finance Departments, Commissioner Institutional Finance, Vice Chancellor of the University of Health Sciences and the Director of Health. The Governing Council has powers to make regulations, borrow money and to levy fees for services as well as the management of the Commissionerate. The Government has powers to issue directions to the Commissionerate in matters of inspection and control, to make rules and undertake audit of APVVP's accounts. The Commissioner, who is the Chairman of the Governing Council and is the Chief Executive, is appointed by the Government from among the members of the medical profession who have administrative experience. The AP law that established APVVP provides for Government of AP combining operator and regulator functions for secondary hospitals, i.e., the key government officials entrusted with supervisory authority are also members of the Governing Council. As those officials customarily do not participate, but send Departmental representatives, in meetings of the Governing Council, they are however able to adequately regulate the Governing Council and management of APVVP. APVVP is a legal devise to improve disbursements and contracting and increase participation of non-governmental organization, but is administered by GOAP along the same lines as a Government Department. It is therefore subject to audit and supervisory arrangements applicable to government agencies. At negotiations, the Government of AP provided assurances that not later than July 1, 1997, GOAP would carry out, jointly with GOI and IDA, a detailed mid-term review of project progress including a management review of APVVP and thereafter implement its recommendations. 2.13 APVVP's organizational structure and the existing and proposed additional staff are shown in the chart in Annex 5. The second aspect of strengthening management will be achieved by the increased management training for professional cadres and on-going in-service training for clinical and technical cadres. This will facilitate the implementation of the quality improvement strategy of the project, through which new responsibilities are being allocated, and  22 it is hoped that decision making will be decentralized down to the appropriate management level. The third aspect will consist of enhancing staff strength at the Head Office to undertake increased responsibilities and perform some new functions. Headquarters staff will be increased by adding 37 posts plus 3 additional posts will be created at the equipment storage facility at King Koti hospital in Hyderabad. This will provide the required staffing to meet the increased workload and reorient the structure of APVVP to meet its new challenges. Specific areas targeted for strengthening include the training and referral unit (6), the finance and audit unit (16), the Office of the Joint Commissioner, General (12) and the Office of the Joint Commissioner, Service Delivery (3). These changes are in line with the increased responsibilities assigned to APVVP through this project. 2.14 The management information system (MIS) and the health management information system will be strengthened (HMIS). These will facilitate systems improvement, wider access and improved data collection and utilization for planning and policy making, problem solving and monitoring. In AP, at the hospital level, both information collection and management are fairly rudimentary. The project will: (i) enhance and extend the computerized system through the provision of hardware and software, and consultancy support; (ii) establish trained and equipped information cells at HQ and district levels; (iii) train all management staff in appropriate record keeping; and (iv) introduce a completely revised medical record system for Ips and diagnostic services. Improving Service Ouality. Access and Effectiveness at District Hospitals (US$55.1 million. 40% of base costs). 2.15 Renovate/extend 21 District Hospitals. Seventeen existing district hospitals would be renovated and extended, and four others which are currently area hospitals would be upgraded into district hospitals. The four area hospitals that would be upgraded into district hospitals would be in those districts that have district hospitals combined with teaching facilities, and which are not under the jurisdiction of APVVP. Under the project, there would therefore be 21 district hospitals under APVVP. There are 4,600 existing beds at district hospitals under APVVP. The clinical effectiveness and quality of services for the existing beds would be improved as described below. In addition, 1,000 new beds providing improved services would be added at the district hospitals. The total number of beds at district hospitals would total 5,600 at project completion. A limited number of staff quarters would also be built in areas where housing is a problem for staff. Under this sub-component the project would finance civil works, professional services and building maintenance. 2.16 Upgrade Clinical Effectiveness and Ouality of Services at District Hospitals. At the 21 district hospitals, updated norms and standards for clinical and support services would be applied, staffing norms conforming to the services that will be provided at each type of facilities would be adopted, a system for monitoring improvements in the quality of clinical care would be established through the adoption of a quality assurance program and the capacity of support services would be expanded. Staff skills in clinical and technical areas would be enhanced through the provision of training to improve the quality and range of services. At negotiations, the Government of AP provided assurances that APVVP would adopt within six months after upgradation of each facility, staffing and technical norms at its district hospitals as agreed at negotiations to ensure the quality of services. Under this sub-component the project would  23 finance medical and other equipment, medical laboratory and other supplies, medicines, minor civil works, professional services, vehicles, furniture, local consultants, local training, workshops, fellowships, equipment and building maintenance, operational expenses and salaries of additional staff on a decreasing basis. Improving Ouality. Access and Effectiveness at Area and Community Hospitals (US$78.0 million, 57% of base costs). 2.17 Renovate/extend 49 Area and 80 Community Hospitals. All the 49 area hospitals and 80 community hospitals would undergo renovation and extension. There are 5,051 existing beds at these area and community hospitals under APVVP. The clinical effectiveness and quality of services for the existing beds would be improved as described below. In addition, 3,349 new beds providing improved services would be added at area and community hospitals. The total number of beds at area and community beds would total 8,300 at project completion. Staff quarters would be built at a large number of these facilities, especially in the more remote and tribal areas where accommodation for staff is poor. Improved services would be provided at six community hospitals and three area hospitals located in tribal areas which have an existing bed capacity of 270 beds. These nine hospitals would be renovated and extended, and 290 new beds would be added. Because hospital utilization is low in tribal areas, a major effort would be undertaken to encourage tribal populations to make greater use of services offered at community facilities through information, education and commnunication (IEC) efforts, while concurrently improving the quality of service offered to tribal populations. Under this sub-component the project would finance civil works, professional services and building maintenance. 2.18 Upgrade Clinical Effectiveness and Quality at Area and Community Hospitals. At the 49 area and 80 community hospitals, updated norms and standards for clinical and support services would be applied, staffing norms conforming to the services that will be provided at each type of facilities would be adopted, a system for monitoring improvements in the quality of clinical care would be established through the adoption of a quality assurance program and the capacity of support services would be expanded. Staff skills in clinical and technical areas would be enhanced through the provision of training to improve the quality and range of services. At negotiations, the Government of AP provided assurances that APVVP would adopt, within six months after upgradation of each facility, staffing and technical norms at its area and community hospitals as agreed at negotiations to ensure quality of services. Under this sub- component the project would finance medical and other equipment, medical laboratory and other supplies, medicines, vehicles, furniture, local consultants, local training, workshops, fellowships, equipment and building maintenance, operational expenses and salaries of additional staff on a decreasing basis. 2.19 Improve Functioning of Referral. Conceptually a multi-tier health delivery system which combines preventive, curative and specialized care is efficient when it performs adequately. It works best when the lowest tier (the primary care level) is easily accessible to the community and provides the bulk of the preventive care as well as the first line care for common illness conditions. Patients with more complex problems are identified in a timely and systematic fashion, and referred to an appropriate higher level. Each successive level provides services that is technically more complex and therefore more expensive. In such a system the higher tier provides technical leadership and support for the lower tiers, and the community has confidence  24 in the quality of care provided at each tier and patients understand that they will be referred in accordance with their medical needs. In reality, the referral system in AP, as in the rest of India does not function well. The different tiers do not complement each other, the lower tiers are underutilized, institutional and technical linkages between the lower and the higher tiers are weak and each tier operates as an independent entity providing similar levels of care. It is estimated that a third of all cases which are currently treated at tertiary facilities could be treated, and at lower costs, at secondary facilities if those facilities were properly equipped and staffed. 2.20 In order to improve the referral system, the project would implement several measures to strengthen the referral system and improve the quality of care in the secondary hospitals. At negotiations, the Government of AP provided assurances that GOAP and APVVP shall strengthen the referral system between the primary, secondary and tertiary levels by July 1, 1995 by: (i) establishing District Referral Committees in all 23 districts in coordination with the Directorate of Health Services; (ii) issuing appropriate administrative directives to strengthen the management of the referral system; (iii) implementing referral protocols; (iv) implementing clinical management protocols; and (v) establishing an incentive system with differentiated user fees for users and non-users and allowing patients to by-pass waiting lines when they carry a referral slip. Special attention would also be given to establishing mechanisms to improve access for remote and disadvantaged groups and tribal communities. The project would establish linkages and communications between the secondary and primary health care levels. The secondary hospitals would provide clinical and technical support to the PHCs; clinical skills at secondary facilities would be updated and upgraded; technical support for the primary level of care and community hospitals would be strengthened; referral mechanisms between community, area and district hospitals would be strengthened; and mechanisms to provide greater access to secondary and higher levels of health care would be formulated by making the referral system more timely, effective and client-friendly. Under this sub-component the project would finance vehicles, MIS and IEC materials, local training, local consultants and workshops. III. PROJECT COST, FINANCING, IMPLEMENTATION AND DISBURSEMENTS A. Project Costs 3.1 The total cost of the project is estimated at about Rs.6,083.2 million or US$158.9 million equivalent including taxes and duties estimated at US$8.8 million equivalent. IDA would finance about US$133.0 million or about 88.6 percent of total project costs net of taxes; the balance would be financed by the Government of AP. The direct and indirect foreign exchange cost is estimated at US$27.5 million. The project would finance civil works, equipment and furniture, vehicles, medical and laboratory supplies, medicines, other supplies, MIS/IEC supplies, professional services, training, studies and evaluations, and incremental salaries and costs on a declining basis. Cost estimates, the financing plan, procurement arrangements and disbursements plans are attached in Annex 1. 3.2 The breakdown of project costs by component and categories of expenditure for the project is summarized in Tables 3.1 and 3.2 below.  25 Table 3.1: Cost By Component Rs. Million US$ Million % X Total Component Local Foreign Total Local Foreign Total Foreign Base Exchange Costs I Institutional Strengthening la.Improve the Policy Framework 15.93 .67 16.60 .50 .02 .52 4% 0% lb.Strengthen Implementation Capacity 104.21 8.67 112.88 3.26 .27 3.53 8% 3% Subtotal 120.13 9.35 129.48 3.75 .29 4.05 7% 3% nI Improve Service Quality, Access & Effectiveness at District Hospitals 2a.Renovate& Extend District Hospitals 781.68 141.33 923.01 24.43 4.42 28.84 15% 21% 2b.Upgrade Clinical Effectiveness 707.26 131.52 838.78 22.10 4.11 26.21 16% 19% Subtotal 1,488.94 272.85 1,761.79 46.53 8.53 55.06 15% 40% HI Improve Service Quality, Access and Effectiveness at Area & Community Hospitals 3a.Renovate& Extend Area Hospitals& 1,074.00 194.16 1,268.16 33.56 6.07 39.63 15% 29% Community Hospitals 3b.Upgrade Clinical Effectiveness 923.07 238.77 1,161.84 28.85 7.46 36.31 21% 26% 3c.Improve Functioning of Referral 35.01 29.98 64.99 1.09 .94 2.03 46% 1% Subtotal 2,032.08 462.91 2,494.99 63.50 14.47 77.97 19% 57% Toa BASELINE COSTS 3,641.15 745.11 4,386.26 113.79 23.28 137.07 17% 100% Physical Contingencies 315.13 74.30 389.43 9.85 2.32 12.17 19% 9% Price Contingencies 1,090.00 217.52 1,307.52 7.80 1.86 9.66 19% 7% Tota PROJECT COSTS' 5,046.28 1,036.93 6,083.21 131.44 27.46 158.90 17% 116% 'NOTE: Inclusive of taxes and duties estimated at US$8.8 million equivalent.  26 Table 3.2: Cost By Categories of Expenditure Rs.Million US$ Million % % total Component Local Foreign Total Local Foreign Total Foreign Base Exchange Costs Investment Costs Civil Works (Renovation& Extensions) 1,651.14 291.38 1,942.52 51.60 9.11 60.70 15% 44% Professional Services 155.40 38.85 194.25 4.86 1.21 6.07 20% 4% Fumiture 62.19 6.91 69.10 1.94 .22 2.16 10% 2% Equipment (Medical & Other) 153.86 211.40 365.26 4.80 6.51 11.42 57% 8% Vehicles 13.32 39.97 53.29 .42 1.25 1.67 75% 1% Medical Lab & Other Supplies 144.72 8.44 153.16 4.53 .26 4.77 6% 4% Medicines 98.70 98.70 197.40 3.08 3.08 6.17 50% 5% MIS/IEC Materials 22.69 7.56 30.25 .71 .24 .95 25% 1% Local Training 38.09 - 38.09 1.19 - 1.19 - 1% Local Consultants 3.70 - 3.70 .12 - .12 - Studies & Workshops 22.05 - 22.05 .69 - .69 - Fellowships(Foreign& Local) 1.35 4.19 5.53 .04 .13 .18 72% - Total Investment Costs 2,367.20 707.40 3,074.60 73.97 22.11 96.08 23% 70% Recurrent Costs - - - - - - - - Salaries of Additional Staff 934.58 - 934.58 29.21 - 29.21 - 21% Operational Expenses 168.54 18.73 187.27 5.27 .59 5.85 10% 4% Building Maintenance 52.02 5.78 57.80 1.63 .18 1.81 10% 1% Equipment Maintenance 118.81 13.20 132.01 3.71 .41 4.13 10% 3% Total Recurrent Costs 1,273.95 37.71 1,311.66 39.81 1.18 40.99 3% 30% Total BASELINE COSTS 3,641.15 745.11 4,386.26 113.79 23.28 137.07 17% 100% Physical Contingencies 315.13 74.30 389.43 9.85 2.32 12.17 19% 9% Price Contingencies 1,090.00 217.52 1,307.52 7.80 1.86 9.66 19% 7% Total PROJECT COSTS 5,046.28 1,036.93 6,083.21 131.44 27.46 158.90 17% 116% *NOTE: Inclusive of taxes and duties estimated at US$8.8 million equivalent.  27 3.3 Basis of Cost Estimates. Estimated costs for civil works are based on current unit costs for construction which vary from US$110 to US$125 per square meter of gross floor area of construction. These costs are comparable to IDA-assisted construction in India. Costs of professional services for design reflect the scale of fees established for similar services provided by local architectural consulting firms. Costs for supervision of construction reflect the standard establishment charges of the state Public Works Department (PWD). Cost estimates for furniture, medical equipment, vehicles and medical supplies are product of lists developed by APVVP, and include import duties and taxes. Costs of other supplies are based on the state estimates and reflect current prices. Estimated costs for the salaries of additional staff are based on basic pay scales including standard allowances for social and other benefits applicable in the State. 3.4 Customs duties and taxes. All imported goods are subject to customs duties and taxes. The estimated cost of the project includes import duties and taxes estimated at about US$8.8 million equivalent. 3.5 Contingency allowances. Estimated project costs include physical contingencies (US$12.2 million) estimated at 10% of all physical components and at 5% for technical assistance, training and salaries. The estimated costs of the project also include price contingencies (US$9.7 million) to cover expected price escalation at the following rates. For civil works, goods, salaries, technical assistance and operation and maintenance - foreign costs: 2.2% in FY95 through FY2002; local costs: 8.0% in FY95, 7.0% in FY96, and 6.0% in FY97 through FY2002. 3.6 Foreign exchange component. The estimated foreign exchange component of US$ 27.5 million is calculated on the basis of estimated foreign exchange proportions as follows: (a) civil works 15%; (b) professional services 20%; (c) furniture 10%; (d) equipment 60%; (e) locally manufactured vehicles 12%; (f) imported vehicles 90%; (g) medical lab supply 20%; (h) medicine 50%; (i) MIS and IEC materials 25%; (j) foreign fellowships 90%; (k) operation and maintenance, and maintenance for buildings and equipment 10%. B. Financing Plan 3.7 The estimated total project cost of US$158.9 million would be financed by an IDA Credit of US$133.0 million equivalent, which would cover about 88.6 percent of the project costs net of taxes. GOAP would finance the remaining costs of US$17.2 million plus all taxes (US$8.8 million). 3.8 The credit would be made available to GOI on standard terms and conditions and on-lent to GOAP under standard arrangements for development assistance to the states. An understanding was reached that GOI would release about three month's anticipated project expenditures in advance to GOAP (in accordance with the amounts established in the Annual Plans), and that upon receipt of funds from GOI, GOAP would  28 transfer all such funds, together with its quarterly counterpart contributions, immediately to the project accounts of APVVP. C. Procurement Arrangements 3.9 Table 3.3 summarizes the project items, their related cost estimates and proposed methods of procurement. Project-related procurement for goods, works and services would follow procedures acceptable to IDA using ICB and LCB documents acceptable to the Association. Project-financed consultants would be recruited according to Guidelines on the Use of Consultants by World Bank Borrowers. Procurement of equipment, vehicles, and medical lab supplies would be bulked to the extent possible and any individual contract exceeding US$200,000 equivalent would be procured under ICB procedures. This is also true for vehicles, except for those needed for immediate use costing up to an aggregate of US$100,000 only, which may be procured through local shopping or rate contract. Shopping under the project would include international shopping procedures, based on comparing price quotations obtained from at least three suppliers from two eligible countries, or local shopping procedures with solicitation of price quotations from at least three suppliers all in accordance with Bank guidelines. Three Section Officers, part of the Export and Purchase Committees, experienced in procurement are responsible for procurement of goods: one for furniture and other supply materials; one for drugs; and one for surgical and hospital equipment. 3.10 Civil Works (US$70.7 million). The civil works component entails no new hospital construction but does involve large and small scale renovations and extensions to 150 hospitals over the seven year life of the project. Work on 125 sites (costing US$63.59 million) will be carried out through local competitive bidding. These works average about US$500,000 and would not be of any interest to foreign bidders. The remaining works at 25 sites (costing US$4.59 million) scattered and in remote areas would be carried out through a combination of force account and soliciting quotations from at least three contractors. These works individually are estimated to cost US$15,000 or less up to an aggregate amount of US$2.12 million. 3.11 Equipment (US$13.2 million). Procurement of most of the equipment would be phased on an annual basis in accordance with the requirements of the project. Contracts valued at over US$200,000 would be procured through ICB for an amount not exceeding US$6.00 million. Contracts valued at US$200,000 or less would be procured through LCB procedures acceptable to IDA for an amount not exceeding US$4.59 million. Purchases totalling US$50,000 or less, and not exceeding in aggregate US$2.65 million equivalent, may be awarded on the basis of local and international shopping.  29 Table 3.3: Procurement Arrangements (Total Costs in US$ Million) Procurement Method International Local Competitive Competitive Bidding Bidding Other /a N.B.F. Total b/ WORKS Civil Works - 63 59 7.07 70.66 (54 05) (6.01) (60.06) GOODS Vehicles 1 82 - 010 - 1.92 (1.60) (0.08) (1.69) Furniture - 1 88 0 63 - 2 51 (1.69) (0.56) (2.26) Equipment 6.00 4.59 2.65 - 13.23 (5.28) (4 04) (2 33) (11.65) Medical Lab Supplies - 0 77 0 77 - 1.55 (0.70) (0.70) (1.39) Medicines - 5 83 1 46 - 7.29 (5 25) (I 31) (6.56) Other Supplies - 1 62 2.43 - 4.04 (I 46) (2 18) (3.64) MISAEC Materials - 0 85 0.28 - 1.13 (0 76) (0 25) (1.02) CONSULTANCIES Project Prep & Implementation Support - - 1.31 - 1.31 (Includes Local Training Services, Workshops) (1 .31) (1.31) Institutional Development (includes - - 8.00 - 8.00 Local Consultants, Studies) (8.00) (8.00) MISCELLANEOUS Fellowships - - 0.20 - 0.20 (0.20) (0.20) Salaries of Additional Staff - - 33.04 - 33.04 (24 62) (24.62) Operational Expenditures - - 6.95 - 6.95 (5.18) (5.18) Building Maintenance - - 2.18 - 2.18 (1.56) (1.56) Equipment Maintenance - - 4.90 - 4.90 (3.65) (3.65) TOTAL 7.82 79.13 71.95 - 158.90 (6.88) (67 95) (58.17) (133.00) NOTES /a "Other" methods include International Shopping, Local Shopping, Force Account, Consulting Services and such 'non-procurement" funded activities such as salaries of incremental staff covered by the project. lb Firgures in parenthesis are the respective amounts financed by IDA.  30 3.12 Vehicles (US$1.9 Million). The state Health Transport Organization is in charge of the procurement of vehicles on behalf of MOH. Vehicles would be procured during the first two years of the project through ICB for an amount not exceeding US$1.82 million. To facilitate project start-up activities procurement of vehicles up to an aggregate of US$100,000 will be undertaken under local shopping procedures or rate contracts. 3.13 Furniture (US$2.5 million), laboratory supplies (US$1.6 million), MIS/IEC materials (US$1.1 million) and other supplies (US$4.0 million) would be purchased as follows. Contracts estimated to cost less than US$50,000 equivalent up to an aggregate of US$4.16 million may be awarded on the basis of prudent shopping with solicitation of price quotations from at least three suppliers. This is again based on the fact that this amount covers purchases by 150 hospitals over a period of seven years. Contracts valued at US$50,000 equivalent or more would be awarded on the basis of LCB procedures acceptable to IDA for an amount not exceeding US$5.12 million. 3.14 Medicines (US$7.3 million) would be purchased by each of the 150 hospitals as well as by APVVP several times per year over the seven year life of the project. Bulking requirements would not always be feasible due to shelf life of the medicines. As a result the individual purchases would be small and not likely to attract foreign bidders. Accordingly, contracts valued at US$50,000 equivalent or more would be awarded on the basis of LCB procedures acceptable to IDA for an amount not exceeding US$5.83 million. Contracts estimated to cost less than US$50,000 equivalent up to an aggregate of US$1.46 million may be awarded on the basis of local and international shopping. 3.15 Consultancv Contracts (US$8.0 million) and Fellowships (US$0.2 million). Consultants required under the project will be hired following procedures prescribed in "Guidelines: Use of Consultants by World Bank Borrowers and by the World Bank as Executing Agency"; August, 1981. Documents used for inviting proposals, terms of reference for all consultancies, fellowships, and single-source contracts will be subject to prior review for all contracts valued at US$100,000 or more awarded to firms and US$50,000 or more to be awarded to individuals (See Annex 8). 3.16 Training and Workshops (US$1.3 million). This category includes expenses related to training of about 3,500 medical professionals over the life of the project in respect of seminars, workshops, travel and subsistence allowances. 3.17 Maintenance Services (US$7.1 million). Maintenance costs for vehicles, medical and other equipment items estimated to cost less than US$25,000 per contract up to an aggregate of US$4.9 million would be procured from local commercial suppliers of such services in accordance with procedures acceptable to IDA. Maintenance of buildings and building equipment (funded by the project) estimated to cost US$2.2  31 million shall be carried out by Force Account where such arrangements already exist or by obtaining three quotations from local contractors in accordance with procedures acceptable to IDA. 3.18 IDA Review. All procurement under ICB would be subject to IDA's prior review; all LCB contracts costing US$300,000 equivalent or more for civil works and US$200,000 equivalent or more for goods would be subject to prior review. All other contracts would be subject to random post review in the field by visiting missions. Other contracts for civil works and goods would be subject to IDA review after contract award. Contracts for the hiring of consulting firm costing US$100,000 equivalent or more and contracts for hiring individual consultant costing US$50,000 equivalent or more, would be subject to prior review and approval by IDA. Approximately 60% of the value of the IDA Credit would require prior review. D. Disbursement Profile 3.19 The proposed IDA credit would be disbursed over seven years, consistent with the standard profile for PHR projects in India. The project is expected to be completed on September 30, 2001 and the credit closed on March 31, 2002. The experience with other PHR projects reinforces the justification for a standard disbursement profile. Table 3.4 below shows forecasts of expenditures and disbursements. Table 3.4: Estimated Expenditures and Disbursements IDA FY FY95 FY96 FY97 FY98 FY99 FY2000 FY01 FY02 Annual 8.5 17.0 28.6 40.3 35.3 16.5 12.7 0.0 Expenditures Annual 4.0 9.3 15.8 21.4 21.2 21.2 31.9 8.2 Disbursement Cumulative 8.5 25.5 54.1 94.4 129.7 146.2 158.9 0.0 Expenditures Cumulative 4.0 13.3 29.1 50.5 71.7 92.9 124.8 133.0 Disbursement 3.20 Disbursement percentages and required documentation. The IDA credit would be disbursed against 85% of expenditures on civil works: 100% on professional services, consultants and fellowships; 100 percent of CIF and ex-factory costs or 80% of other local expenditure on furniture, equipment, vehicles, medicines and materials, MIS and IEC materials; and 75% of incremental staff salaries and other recurrent costs on a declining basis during the project period starting with 90% in the first three years, declining to 75% for the fourth and fifth year, and 60% thereafter. Disbursements for  32 civil works renovations and extensions estimated to cost below US$300,000 per contract would be made against Statements of Expenditure based on certification of satisfactory completion. The state government would maintain complete records of funds disbursed, including certificates of completion signed by the District Executive Engineer, the Managing Director of APHMHIDC and or the Commissioner of APVVP. Disbursement for procurement of goods (including equipment, furniture, laboratory supplies, medicines, MIS/IEC materials and other supplies) under contract valued at less than US$200,000 and services under contracts valued at less than US$100,000 per firm (US$50,000 per individual contract), maintenance of buildings, equipment and vehicles and incremental staff salaries would also be made against Statements of Expenditure, with supporting documentation retained by the State government for review by IDA during supervision missions. All other disbursements would be made against fully documented withdrawal applications. 3.21 Special Account and central government advance to the state. In order to accelerate disbursements in respect of IDA's share of expenditures prefinanced by the GOI and the state government, and to allow for direct payment of other eligible local and foreign expenditures, a Special Account would be maintained in the Reserve Bank of India in the amount of US$3.0 million equivalent to cover four months of estimated disbursements through the Special Account. 3.22 Retroactive financing. Retroactive financing for project preparation in the amount of US$5.5 million, about 4.1 percent of the proposed credit, is provided to cover eligible expenditures incurred in implementing appraised project activities after April 1, 1994 or a date one year prior to signing of legal agreement for the project, whichever is later. Retroactive financing in support of project preparation would support initial staff appointments for APVVP headquarters, the construction of the extension to APVVP headquarters to locate key additional, technical survey of the existing hospitals under the project and the preparation of designs pertaining to Phase I of the construction program. Procurement arrangements were reviewed and found appropriate. E. Status of Project Preparation 3.23 The Government of AP finalized a project proposal in January 1994 in consultation with several IDA missions and on the basis of a Workshop on service, facilities and equipment norms. A decision has been made to locate a strategic planning cell within the Department of Health, Medical and Family Welfare and report directly to the Secretary of the Department. A Statement of Health Sector Development Policy has been provided by the AP Government and attached as Annex 2. Management structure of APVVP, the implementing agency, is in place and a plan has been drawn up to improve its implementation capacity through management training and enhancement of staff (Annex 5). Clinical, management and equipment training components of the project have been reviewed and agreement has been reached on a strategy for nursing development. Clinical and diagnostic norns have been developed for each of the three  33 types of community, area and district hospitals in a user-responsive manner (Annex 7). Equipment norms for each type of facility have been developed (Annex 9); staffing norms for each type of facility have been developed (Annex 6); inventory of equipment at 150 facilities is complete and a plan has been drawn up for maintenance arrangements (Annex 10). All facilities for upgradation have been identified, technical surveys and designs have been completed for the first phase of construction (Annex 15). APHMHIDC, responsible for civil works construction, has finalized a detailed construction program, related cost estimates, implementation schedule and developed schedules of accommodation for each of the three types of facilities (Annex 17). Procurement packages for civil works, equipment etc. have been completed. A complete list of equipment for all 150 hospitals has been prepared and equipment specifications have been reviewed with IDA (para 3.9 and Annex 16). 3.24 In addition, the following actions have also been undertaken in refining project design, scope and approach: performance indicators which were developed collaboratively with APVVP are provided in Annex 18; findings and recommendations of the beneficiary assessment study, which surveyed a sample of the target population, have been used to refine project design and strategy; an action plan for delivery of services to tribal and remote areas has been prepared based on the sample survey mentioned above (Annex 14); an IEC plan has been developed (Annex 13); the size of the proposed workforce under the project by cadre, compared to current sanctioned workforce has been reviewed and the cost implications included in project costs; and arrangements for supervision, including audit of APVVP and adequacy of reporting and monitoring arrangements by APVVP has been reviewed with IDA (Annex 19). 3.25 An important aspect of project preparation has been the involvement of key stake-holders. Preparation of the project devoted special attention to facilitating a sense of ownership and commitment of those involved in the process. A sample of potential beneficiaries were interviewed at secondary hospitals and primary health centers during field visits. Their views and experiences were considered, and included in refining project design. Several groups of representatives, including managers and clinical care providers from the different levels of APVVP hospitals, participated actively in developing the proposed formal mechanisms for establishing systematic monitoring and progressive improvement of quality of care in the APVVP system. The Corporation responsible for supervising the design of hospital upgradation has also encouraged interaction between the user of facilities and the design architect. A forum has been set up where the views of users are being actively sought by the architects. F. Implementation Plan 3.26 The project would be implemented by GOAP and APVVP within the existing administrative structure. APVVP would play a central role in implementing the project. The Commissioner of APVVP would be the Project Coordinator. The Project Coordinator would ensure that APVVP would interact closely and coordinate its health  34 care delivery with the three major Directorates reporting to the Secretary Medical, Health and Family Welfare Department. The three Directorates are Medical Education, Health Services and the Family Welfare Program. APVVP would also coordinate with the five smaller Directorates that look after the AIDS program, Preventive Medicine, Employees State Insurance, Indian System of Medicine and Drug Control. The organizational chart of APVVP is shown in Annex 5 on Organization and Management System. As the implementing agency, APVVP would be responsible for undertaking overall management of all aspects of the project including executing, procuring works and goods, supervising and monitoring and reporting. 3.27 The initial phase of project implementation will focus on developmental activities including project launch, monitoring mechanisms and performance indicators, strengthening health MIS system, initiating in-service training of staff in clinical, management and equipment matters, strengthening the functions and appointing staff at the head office and supplying equipment to existing hospitals to improve the quality of service to existing hospital facilities. The first phase of the implementation plan for the civil works program will consist of completing the renovation and extension of APVVP headquarters and the first phase of the hospital upgradation program consisting of 25 hospitals. During the initial phase the implementation plan would be to: complete topographical site surveys and soil tests; finalize and complete all drawings including site development plans, invite bids and commence construction for 150 hospitals under the four planned phases (see Annex 17); and complete over 50 percent of phase I and phase II and about 25% of phase III and phase IV; and prepare and complete all drawings including site development plans, launch bids and sign contracts of all 150 hospitals requiring upgradation. About 30 percent of total construction is expected to be completed by the end of the second year. At negotiations, the Government of AP provided assurances that it would review with IDA annually by April 30 of each year the progress of project implementation over the preceding twelve months and prepare an annual work plan for the following twelve months acceptable to IDA. G. Recurrent Cost and Sustainabilitv 3.28 This section analyzes recurrent cost and sustainability on the basis of the following questions: (i) what will be the incremental recurrent costs of the project as a percentage of current recurrent costs of APVVP; (ii) what will be the size of the incremental recurrent costs as a percentage of the state's plan and non-plan current budget; (iii) what will be size of the incremental recurrent costs as a percentage of the state's health and FW current budget; (iv) what will be the likely share of APVVP as a percentage of the health and FW budget at project completion; and (v) how much funds can user charges reasonably generate at project completion. 3.29 Incremental recurrent costs including contingencies at project completion would be about Rs. 300 million (US$9.6 million at current exchange rates) annually. This is a 38% increase in recurrent costs from current levels. APVVP's grant receipts  35 in FY94 were about Rs. 480 million, which comprised of about Rs. 370 million for salaries and Rs. 110 million for non-salary costs (Annex 3: Public Expenditures on the Health Sector in AP). As a percentage of the state's overall current budget, these incremental recurrent costs at project completion amount to only 0.3%. As a percentage of the state's current health and FW budget, the incremental recurrent costs at project completion will be about 5.6%. In FY94, health and FW allocations comprised about 5.8% of the state's total public spending. Of the state's total health and FW budget, allocations to APVVP amounted to about 13%. Assuming current allocation pattern between the three levels of health care were to remain the same, at project completion expenditures allocated to APVVP would have to increase by 7 percentage points to about 20% of the total health and FW budget of the state. 3.30 These increments should not be a problem for the state to provide. The AP Government would meet the incremental recurrent cost needs by increasing the size of the health budget and by reallocating incremental resources from the tertiary to the secondary level of health care. The AP Government has provided assurances that the required resources will be made available. A commitment to this effect is being sought in the statement on Health Sector Development Policy. At negotiations, the Government of AP and APVVP provided assurances that they would ensure that allocation of project funds each year for APVVP would be fully additional to that in FY95, and that APVVP shall be provided resources for recurrent expenditures on a timely basis adequate to meet its resource requirement under its annual operating plan for each year. 3.31 Analysis also shows that when 15-20% of beds are delineated as private paying wards in addition to some other user charges, APVVP would be able to recover between Rs. 45 to 55 million annually at project completion (Annex 4: Cost Recovery). This would reduce the recurrent cost burden by an estimated 15-18%. As a percentage of non-salary recurrent costs which would be financed in part by user charges, these estimates reflect a considerably greater share and would provide much needed funds for purchasing drugs and essential supplies. To this effect, the Government has reiterated that it is committed to introducing user charges while protecting the health care needs of the poorest segments of society. A commitment to introducing user charges has been included in the Letter on Health Sector Policy, as noted previously. H. Indigenous Populations 3.32 A beneficiary assessment study undertaken during project preparation has: (i) identified through informed participation the health care needs of tribal communities and constraints in provision of these needs; and (ii) recommended plans for delivering adequate and quality health care for members of these communities. An important finding is the low hospital utilization rates of tribal population. The project's tribal strategy is aimed at increasing the demand and seeking timely care by improving the quality of services and providing effective IEC to better inform tribal populations of the benefits of using first referral facilities. Tribal peoples would be a substantial project beneficiary  36 group. The number of beds at area and community hospitals located in tribal areas will be increased from 270 beds to 560 beds, reflecting a share of beds at secondary hospitals that is much more commensurate with their proportion in the overall population of AP. In addition, to increasing the bed strength in tribal hospitals, the project would: (a) strengthen linkages between primary and secondary health care services; (b) provide an incentive package to doctors and other medical staff in tribal areas to encourage them to accept assignment in these areas; (c) increase the appropriate utilization of non-tribal medical system by tribal population and reduce the cost to tribals of utilizing the system. At negotiations, the Government of AP and APVVP provided assurances that the Government of AP and APVVP would carry out the project in tribal blocks in accordance with the strategy agreed with IDA (Annex 14). Understanding was reached that children of doctors resident in tribal areas would be given preference in admission at Government-run residential schools and places in schools for scheduled tribes and scheduled castes; other incentives such as provision of housing, enhanced training opportunities and transfer to an urban area for 4-5 years of service would also be provided. The Tribal Service in AP (created in 1994) already provides for doctors recruited into this service to be formalized into regular service after 4-5 years in tribal areas. 1. Envirommental Aspects 3.33 The proposed project would not raise any environmental concerns. Much of the construction will be upgradation at existing sites and only three new construction sites have been planned for. The project would, however, improve the present status of medical waste disposal through appropriate disposal methods. J. Land Acquisition 3.34 The process of additional land, where required, for the extension of existing hospitals has been initiated and most sites have been made available. IDA has been assured that none of the sites for hospital upgradation would entail involuntary resettlement of any persons. K. Accounting and Auditing 3.35 The project would be subject to normal GOAP accounting and auditing procedures which are considered acceptable to IDA. At negotiations, the Government of AP and APVVP provided assurances that: (i) project accounts would be maintained and audited annually in accordance with sound auditing standards consistently applied by independent and qualified auditors acceptable to IDA; and (ii) certified copies of the annual SOEs together with the auditor's report, which would comment separately on the SOEs, would be submitted to IDA no later than nine months after the close of each fiscal year.  37 IV. PROJECT BENEFITS A. Benefits 4.1 The policy reforms envisaged under the project would improve the efficiency and effectiveness of health care services at the community, block and district levels. By strengthening AP's first referral health systems the project would optimize resource use, especially medical manpower and diagnostic equipment, avoid duplication and wastage, and reduce overcrowding at tertiary health care institutions. Analysis of utilization of medical services suggests that at least a third of the all cases that are currently treated at tertiary facilities could be treated, and at a lower cost, at secondary facilities when these are properly staffed and equipped. In addition, the project would provide a sustainable and replicative framework that could be subsequently used to reorient the health systems in other states of India. 4.2 In terms of investments, the project would have the following benefits. First, the proposed project would have a direct impact on improving the health status of the people in AP, especially the poor in the rural areas. It would reduce mortality, morbidity and disability and thereby increase the potential earning capacity of the poor. Second, strengthening the first line referral facilities and making them more client friendly would also encourage patients to seek timely care resulting in higher cure rates at lower costs. Third, the proposed project should also help regulate and, in substantial measure, reduce patient flow to the tertiary hospitals, where treatment per patient is more expensive. Fourth, the strengthening and upgrading of secondary level facilities would lend credibility and vital support to the primary health care system for implementing the various national and vertical health programs, and providing basic health care in rural areas. Finally, an adequately functioning health system at the block and district levels would encourage a greater participation of the private sector in health care through improved functioning of referral mechanisms. B. Program Objective Categories 4.3 Poverty Aspects. The project is directly relevant to the Bank's anti-poverty strategy. The project would provide better quality of health care services to all 23 districts in the state. Preliminary estimates suggests that the potential beneficiaries are expected to increase from its level of 9 million outpatients who were treated at APVVP hospitals during the past year to about 13 million at project completion. The number of inpatients is similarly expected to increase from its current level of 0.6 million to about 1 million at project completion. About two-thirds of the beneficiaries using APVVP services currently belong to the lower four strata of the decile groups and this proportion is expected to remain much the same. Therefore, a large proportion of the beneficiaries will be poor and underprivileged segments of the state's population. By improving the health status of poor people through reductions in mortality and morbidity, the project  38 would increase their earning potential and assist in making them more productive members of society. 4.4 Gender Issues. In general, the project would provide much greater access to women, especially rural women, for receiving health care and hospital services by increasing access to facilities in remote areas. It would also improve the quality of services that women receive at existing facilities by improving and upgrading clinical effectiveness at these facilities. More specifically, the project would reduce maternal mortality by addressing the most critical gaps for an effective safe motherhood program. Essential obstetrics care is already being provided under the CSSM project but the provision of emergency obstetrics care is lacking. This project would fill that gap by strengthening the referral system from the community to the community hospital level where emergency obstetrics care is provided. The improvements in the referral system and the strengthening of links between PHCs and community hospitals will assist in providing timely access to emergency obstetrics care, and shorten the waiting and transportation time for those most critically in need of emergency care. There will be 80 community hospitals in the state, in addition to the area and district hospitals, that will be properly staffed and equipped to deliver emergency obstetrics care. In addition, bed strength at 2 district and 3 area maternity hospitals under the APVVP system will be increased from 266 beds to 450 beds. C. Risks 4.5 The project carries several risks that are associated with PHN projects in general in India. These include basic implementation problems such as slow start-up, poor procurement, slow disbursement, frequent management turnovers, untimely and inadequate flow of funds and poor maintenance of buildings and equipment. Most of these risks can be substantially reduced through careful project design. Measures have been incorporated in the project to minimize these risks, several of which are laid out in Table 1.1. 4.6 There are two additional risks associated with this project. Institutional. Since this would be the first project to reorient the health system of a state in India, the capacity of existing institutions to undertake systemic improvements and to establish a more rational health delivery system has not been tested in India. The institutional strengthening aspects that are in-built in the project are expected to address this risk. These institutional aspects include: strengthening the strategic planning capacity in the Department of Health, Medical and Family Welfare; enhancing APVVP's implementation capacity through strengthening its organizational structure, systems and procedures, culture of service delivery, resources and training; and enhancing the Infrastructure Development Corporation's capacity to undertake supervision monitoring of the construction program. Financial: Another risk would be the potential hurdles faced by the state government to instituting user charges because of the politically sensitive nature of this issue. The AP Government has reaffirmed its commitment to institute user charges  39 while protecting those who cannot afford to pay. The on-going study on the burden of disease and cost-effectiveness would provide greater information about cost of specific public health interventions. By providing estimates of cost-effectiveness in terms of costs per DALY gained of selected public health interventions, it would provide an empirical basis to set user charges. These results could thus provide the Government with greater flexibility in charging user fees. Yet another financial risk is the overall financial status of the state. This is a risk associated with projects in all other sectors in India. The states will eventually need to adjust and reduce their fiscal deficits. The overall difficult fiscal situation of the state is a risk in terms of the adequacy of funds allocated to the health sector, especially the secondary level of health care. The Government of AP has provided assurances in a statement on Health Sector Development Policy that it will provide sufficient resources to meet the financial needs and adopt key policies that will assist APVVP generate additional funds. Specifically, the cost recovery mechanisms proposed under the project will relieve some of the recurrent cost burden faced by the AP Government. V. AGREEMENTS REACHED AND RECOMMENDATION 5.1 The Government of AP has furnished a Health Sector Development Policy Program (Annex 2). Availability of IDA assistance for the project would be subject to the implementation of actions set out in the Reform Program (para 2.8). 5.2 At negotiations, the Government of AP and APVVP provided assurances that: (a) The Government of AP shall carry out the Reform Program including: resource enhancement for the secondary and primary levels of health care; safeguard of resource allocations for operations and maintenance purposes to provide for adequate amounts of drugs and essential supplies, and maintenance of equipment and buildings at secondary hospitals under APVVP; selection, employment and transfer of staff; implementation of service improvements and user charges in accordance with an agreed program and time schedule; and retention of a third or more of user charges by collecting hospitals (para 2.8); (b) The Government of AP would ensure that a strategic planning cell would be set up by June 30, 1995 within the Department of Health, Medical and Family Welfare that would report directly to the Secretary of the Department (para 2.8(f)); (c) GOAP would carry out by December 31, 1995, a review of the policy framework for private provision of health services in AP; and thereafter  40 discuss with the Association recommendations arising from such review (para 2.10); (d) APVVP would engage key additional headquarters personnel and APHMHIDC would engage key additional personnel to be recruited under the project by June 30, 1995 (para 2.11); (e) not later than July 1, 1997, GOAP would carry out, jointly with GOI and IDA, a detailed mid-term review of project progress including a management review of APVVP and thereafter implement its recommendations (para 2.12); (f) APVVP would adopt within six months after upgradations of each facility staffing and technical norms at its district, area and community hospitals as agreed at negotiations to ensure the quality of services (paras 2.16 and 2.18); (g) GOAP and APVVP shall strengthen the referral system between the primary, secondary and tertiary levels by July 1, 1995 by: (i) establishing District Referral Committees in all 23 districts in coordination with the Directorate of Health Services; (ii) issuing appropriate administrative directives to strengthen the management of the referral system; (iii) implementing referral protocols; (iv) implementing clinical management protocols; and (v) establishing an incentive system with differentiated user fees for users and non-users and allowing patients to by-pass waiting lines when they carry a referral slip (para 2.20); (h) GOAP and APVVP would review with IDA by April 30 of each year the progress of project implementation over the preceding twelve months and prepare an annual work plan for the following twelve months acceptable to IDA (para 3.27); (i) Government of AP would ensure that allocation of project funds each year for APVVP would be fully additional to that in FY95, and that APVVP shall be provided resources for recurrent expenditures on a timely basis adequate to meet its resource requirement under its annual operating plan for each year (para 3.30); (j) Government of AP and APVVP would carry out the project in tribal blocks in accordance with the strategy agreed with IDA (para 3.32), (Annex 14) and (k) (i) a project account would be maintained and audited annually in accordance with sound auditing standards consistently applied by independent and qualified auditors acceptable to IDA; and (ii) certified copies of the annual  41 SOEs together with the auditors' report, which would comment separately on the SOEs, would be submitted to IDA no later than nine months after the close of each fiscal year (para 3.35). 5.3 With the above assurances and agreement, the proposed project would be suitable for an IDA Credit of SDR 90.7 million (US$133.0 million equivalent) on standard IDA terms with 35 years maturity.   - 42 - Annex 1 Page 1 of 8 Project Costs Cost By Component fTR_u U eAil MIIU_e S % Tam c_m r_ mm I-. TrFoui Toeu Lo Fors'm Tol Exc.m Co I 1S Iasl n_.ps n dll Pnuw 15.93 .67 16.60 5 .0 5 4% 0% Ib-Stiq_..Lm uinCAflv 1N 2 1 UZ 112.1t Li 1 Li LAl II Sub$" 120.13 935 129.48 3.3 3 40 7% 3% 11vm S_'i QWi", A_ & EffedhN DaOe,4m HPa. Ua1. A EaumiDiammHcipm 7t1.61 141.33 923.01 24.4 4.4 23.1 15% 21% is - Uu CJicI EfFawum m S _ p 7 1 1 13a.3 ZL42 UL2 L1 2 41 Z2 I" in Sb 1,4U8.94 272.93 1,761.79 46.5 8.5 55.1 15% 40S Ml Upsw ieA,I QinIMt, Am mi EIIbdhim Ft Ana & rC-In Hhspkub 3a. -sb m A Eu.Am Au C _oMuI