India - Uttar Pradesh Water Supply and Sewerage Project

Docuimnt of The World Bank FOR OFFICIAL USE ONLY Report No. 6242 PROJECT COMPLETION REPORT INDIA UTTAR PRADESH WATER SUPPLY AND SEWERAGE PROJECT CREDIT 585-IN June 5, 1986 Urban and Water Supply Division South Asia Projects Department This document has a restrictcd distribution and may be used by recipients only in the performance of their official duties. Its cononts may not otherwise be disclosed without World Bank authorization.  FOR OMCAL USE ONLY THE WORLD BANK Washington. DC. 20433 U.S.A. Oif.e. of Diottwcef4^41 OEm'.* flDvece- C.vra June 5, 1986 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on India - Uttar Pradesh Water Supply and Sewerage Project (Credit 585-IN) Attached, for information, is a copy of a report entitled 'Project Completion Re: art on India - Uttar Pradesh Water Supply and Sewerage Project (Loan 585-IN)" prepared by the South Asia Regional Office. Further evalu- ation of this project by the Operations Evaluation Department has not been made. Attachment This docutment has a restricted distribution and may be used by recipients only in the perfonnance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  FOR OFFICIL USE ONLY CURRENCY EQUIVALENT$ Currency Unit - Rupee (Rs) US$1.00 i Rs 8.0 (at appraisal, July 1975) US$1.00 - Rs 9.7 (at credit closing, December 1982) Rs 1 lakh = Rs 100,000 Rs 1 crore = Rs 10,000,000 MEASURES AND EQUIVALENTS 1 millimeter (mm) 0.04 inches (in) 1 meter (m) n 3.28 feet (ft) 1 kilometer (km) 3 0.62 miles (mi) 1 square meter (m2) = 10.8 square feet (sq ft) 1 hectare (ha) = 10,000 square meters or 2.47 acres (ac) 1 square kilometer (km2) * 0.386 square miles (sq mi) 1 liter (1) a 0.26 US gallons (gal) 1 liter per capita per day (1/cd) = 0.26 US gallons per cap.ta per day (gcd) 1 cubic meter (m3) 35.3 cubic feet (cu ft) 1 cubic meter per second (m3/sec) - 31.5 million cubic meters per year or 22.8 million US gallons per day or (mgd) 35.4 cubic feet per second (cusecs) or 86.4 million liters per day 1 million liters per day (mld) 0.01 cubic meters per second (m3/sec) ABBREVIATIONS AllD ACRONYMS GOI Government of India UP = State of Uttar Pradesh GUP State Government of Uttar Pradesh LIC Life Insurance Corporation of India Nigam Jal Nigam, or the Uttar Pradesh State Water Supply and Sewerage Development Corporation KAVAL towns The five major cities of Uttar Pradesh - Kanpur, Agra, Varanasi, Allahabad and Luckow Jal Sansthan - Water Authority RJS = Regional Jal Sansthan LSCED - Local Self-Government Engineering Department of Uttar Pradesh (from June 1975 merged in the Nigam) WHO/PIP = World Health Organization/Preinvestment Planning Unit of the Division of Environmental Health FISCAL YEAR tpril 1 - March 31 Thbs document has rtriktd disibution and may be usd by cipents only in the peformance of thir offiW dutes. Its content may not otherwise be disclosd without World Dank authourazton.  INDIA PROJECT COMPLETION REPORT CREDIT 585-IN UTTAR PRADESH WATER SUPPLY AND SEWERAGE PROJECT TABLE OF CONTENTS Page No. PREFACE ......oo*oeeeoo.*ooOoeo*o..oeo*o*oooe*ooeoo**Ooeooo*.. . BASIC DATA SHEET ............................. ii-iv EXECUTIVE SUMMARY 00000000*04 *o@o@.***.*o............................ v-vii I. INTRODUCTION .1...... ..............................0.... 1 A. Project Origin ...... 1 B. Sector Context Io..... ..00000......0.......... 1 C. Sector Development Objectives ..... ...................... 2 D. Project Objectives .....oo...... .................. ......... 2 E. Theme and Structure of the PCR 3 II. INSTITUTIONAL DEVELOPMENT ... ***...... o ....*.*......o...o. oo 4 Decision Making Process ..oo .oo.. oo.. oe.......o 5 Institutional Transformation o4.....oo..o..o......oo.o... 5 Interagency Relationships uo..oooo.o..o.o.o.o.**.o 5 Conflict with Existing Administrative Practices ...... 6 III. FINANCIAL PERFORMANCE 7.......o ... *...o........ ......0*o 7 Nigam - a Development Finance Agency .................... 7 Conflict of Interest ...... ............................. 8 Capital Budget vs. Recurrent Budget ..................... . Resource Mobilization 9 IV. PHYSICAL IMPLEMENTATION 0... ....010 The Appraisal Process 10 Project Costs and the Construction Program .............. 10 "Underdisbursement" and Credit Cancellation ............. 10 Scale and Diversity of the Project ...................... 10 V. OPERATIONAL IMPROVEMENTS .................... 11 Construction vs. Maintenance 11 Systems vs. People 11 Metering and Leak Detection 12 VI. BANK'S PERFORMANCE 12 VII. OPTIONS FOR FUTURE PROJECTS .............13 Annexes 1 - 3 15-21 ATTACHMENT A - Comments from the Borrower ............ .22  -1- PRRJECT COMPLETION REPORT CREDIT 585-IN UTTAR PRADESH WATER SUPPLY AND SEWERAGE PROJECT PREFACE The Uttar Pradesh Water Supply and Sewerage Project (the Project) was the Bank Group's first statewide operation in the water supply and sewerage sector in India. During the long implementation period of this Project (September 1975 - June 1984), there have been many adjustments in the approach, objectivess design, institutional and financial arrangements in GOI's sector investment strategy. These adjustments have also been reflected in the evolution of the Bauk Group's policies and priorities for development assistance to the sector. This ProjAct Completion Report (PCR) focuses on the environment in which the Project was conceived end the impact of that environment an implementation. This focus is intended to place this Project in the contest of an evolving and dynamic sector development strategy in India and to iden- tify certain key lessons. The PCR has been prepared by the staff of the Urban and Water Supply Division of the South Asia Projects Department, in conjunction with a broader study of financial and institutional performance of all &ink financed water supply and sewerage projects in India, 1/ under- taken during 1983-1984. The analysis included in this PCR draws upon and supports the conclusions of the above study. Data, analyses and conclusions included in this PCR have been discussed with the relevant project agencies in Uttar Pradesh. In accordance with revised procedures for project performance audit reporting, this PCR was read by the Operations Evaluation Department (ORD), but the project was not audited by OlD staff. Following standard procedures, ORD sent copies of the draft PCR to the Government and the Borrower for comments. Conmmuets were received from the Borrower and these are reproduced as Attachment A to the report. 1/ A draft Report, "Water Supply and Sewerage Projects Financed by the World Bank in India: Financial and Institutional Performance", was issued in May 1985 and is the subject of ongoing discussion with COX and various State Government officials.  -ii- INDIA PROJECT COMPLETION REPORT BASIC DATA SHEET CREDIT 585-IN UTTAR PRADESH WATER SUPPLY AND SEWERAGE PROJECT (UPWSSP) KEY PROJECT DATA Key Appraisal Actual Total Project Cost (US$ M) 15.0 94.0 Overrun (t) - 25X 1/ Credit Amount (US$ 4) 40.0 40.0 Disbursed - 31.6 Cancelled 8.4 Repaid to September 1985 - 0.2 Outstanding to September 1985 40.0 31.4 Outstanding with Exchauige Adjustment 39.8 31.4 Exchange Adjustment - Date of Physical Completion 9/79 6/84 2/ Time Overrun (X) - 95 Financial Performance Not satisfactory Institutional Performance Not satisfactory Physical Performance Satisfactory I/ Due to significant savings in procurements of local materials, the cost overrun does not bear direct relationship to time overrun. 2/ Project was about 93X physically completed when the credit was closed, and the balance of US$8.4 million was cancelled, in July 1983.  -iii- INDIA PROJECT COMPLETION REPORT CREDIT 585-IN UTTAR PRADESH WATER SUPPLY AND SEWERAGE PROJECT (UPWSSP) BASIC DATA SHEET (CONTVD) CUMULATIVE DISBURSEMENTS (US$'000) IDA Fiscal Year Appraisal Estimates Actual 1976 3,300 - 1977 15,900 550 1978 30,000 4,800 1979 38,200 11,800 1980 40,000 19,700 1981 26,300 1982 27,600 1983 31,500 1984 31,600 1/ OTHER PROJECT DATA Appraisal Item Estimates Revisions Actual First Mentioned in Operations Timetable - - 8/21/74 Government's Application - - 6/30/74 Negotiations - - 6/30/75 Board Presentation - - 8/19/75 Credit Agreement Date - - 9/25/75 Effective Date - - 2/ 6/76 Closing Date 6/30/80 12/31/82 12/31/82 Borrower Government of India Executing Agency U.P. Jal Nigam Fiscal Year of Borrower 3 April 1 - M?krch 31 Follow-on Project None 2/ 1/ US$8.4 million was cancelled on July 19, 1983. 2/ A credit of US$25 million for an urban development project in Kanpur, one of the UPNISP project towns, was signed on February 4, 1982. The Kanpur project included investments in water supply and sewerage as part of an urban package. A "statewide" urban development project is under preparation. It will include also investments in water supply and sewerage. All UPWSSP towns are expected to be included in the proposed project.  -iv- INDIA PROJECT COMPLETION REPORT CREDIT 585-IN UTTAR PRADESH WATER SUPPLY AND SEWERAGE PROJECT (UPWSSP) BASIC DATA SHEET (CONT'D) MISSION DATA No. of No. of Man-Weeks Date of Item Month/Year Weeks Persons (Field only) Report Reconnaissance 12/71 0.6 2 1.2 1/17/72 Reconnaissance 8/73 1.4 2 2.8 9/24/73 Pre-appraisal 4/74 3.4 2 6.8 6/ 7/74 Appraisal 9/74 4.0 5 14.0 11/ 7174 Post Appraisal 1/75 5.0 1 5.0 3/17/75 Pre-Negotiations 6/75 0.6 2 1.2 6/30/75 Total 15.0 31.0 Supervision I 9/75 1.6 3 4.8 10/ 6/75 It II 11/75 1.2 2 2.4 1/26/76 III 2/76 0.6 2 1.2 3/17/76 it IV 4/76 0.8 1 0.8 5/18/76 it V 10/76 0.6 2 1.2 10/29/76 It VI 12/76 1.0 1 1.0 1/26/77 'VII 6/77 1.6 3 4.8 7/ 7/77 to VIII 3/78 2.0 3 6.0 4/13/78 to IX 9/78 1.0 2 2.0 11/20/78 It x 10/78 0.6 1 0.6 1/10/79 XI 3/79 0.6 2 1.2 3/15/79 XII 9/79 3.6 3 10.8 11/ 5/79 XIII 2/81 2.0 3 6.0 3/25/81 XIV 3/82 '.0 2 2.0 6/ 7/82 Completion 4/83 0.6 1 0.6 6/30/83 Total 18.8 45.4 Name of Currency Rupee (Rs) Year: Appraisal Year Average Exchange Rate: US$13Rs 8.09 Intervening Years Average US$1Rs 8.67 Completion Year Average US$1-Rs10.69  INDIA PROJECT COMPLETION REPORT CREDIT 585-IN UTTAR PRADESH WATER SUPPLY AND SEWERAGE PROJECT EXECUTIVE SUMMARY 1. The Uttar Pradesh Water Supply and Sewerage Project was ambitious in its scope, institutional expectations and financial objectives. The Project has been largely successful in its physical implementation, although it took nearly 9 years to complete (September 1975 - June 1984). Institutional and financial performance, however, has not been fully satisfactory. This PCR explores the various underlying reasons for this unsatisfactory performance. Project implementation has produced several key lessons for the future. 't should be noted that the Project was a new venture for both Bank and the Government of India. 2. The major characteristics of the Project are summarized below: (a) It was the first state-wide water supply and sewerage project in India, located in India's largest state; (b) It was the first project in India to include major water supply components for rural areas; (c) It was intended to replace relatively weak institutions with a completely new institutional framework in the sector - The Jal Nigam as a financing and implementing agency at the state level, five KAVAL 1/ Jal Sansthans for operation and maintenance in the larger towns, and three regional Jal Sansthans for operation and maintenance in smaller towns and rural areas; (d) It was expected to achieve ambitious physical, institutional and financial performance targets, through a single project within the span of only a few years and with strong interdependence among the targets; achievement as well as measurement of improved financial performance was to be dependent on the prior establishment of the new entities. Staff were to be transferred from municipal governments to the semi-autonomous Jal Sansthans. 3. The following paragraphs summarize the key lessons that emerged from implementation of the Project. Many of these findings have been and are being incorporated in the design and implementation of later generations of water supply and sewerage projects in the region. 1/ Kanpur, Allabad, Varanasi, Agra', Lucknow.  -vti- A. Institutional Development (i) The Bank should help the implementing agencies to develop a climate for change, including satisfied consumers, recognizing that the ultimate decision making authority is political (para. 2.04). (ii) The scale and pace of institutional reforms, should be more realisti- cally established, especially when dealing with entities with a long history and radically different operating environment; and broad reforms should be implemented as a series of discrete, politically and administratively feasible actions (para 2.05). (iii) The principal actors in the sector should subscribe to project objec- tives; broad participation in the planning, design, execution and operating phases of a project should be obtained (para 2.06). (iv) Efforts to undertake major reorganizations of institutions should address the underlying constraints of existing administrative, personnel management, renumeration and career movement practices, and should resolve the anomalies which may exist between the existing and proposed practices (para 2.07). B. Financial Performance {i) Attempts to establish viable financial intermediaries or financial instruments for long term financing of sector investments should be preceeded by ensuring sound financial health of relevant agencies and development of a clearly defined fiscal relationship between the intermediaries and operating agencies (para 3.03). (ii) A greater degree of financial accountability should be introduced in the system of funds flow among agencies to avoid any perception of conflict of interest between the construction and the operating agency (para 3.04). (iii) Investment programs should be designed in such a way that they can be sustained (properly operated and maintained) by the revenue budget of the operating agencies; realistic cost recovery measures should be required in order to justify investments (para 3.05). (iv) A broader view of overall municipal resource mobilization should be taken in view of the inheren. linkages between the revenue base for water supply and sewerage and for general municipal taxes (e.g. property tax) (para 3.06). C. Physical Implementation (i) The "self-appraisal" of individual schemes (subprojects) by the implementing agency should be recognized as entailing a learning process,  -Vii- especially for newly created agencies, which takes time and thus the implementation timetable should provide for the additional time required (para 4.02). (ii) The physical scale, complexity and diversity of projects should not exceed the executing agency's managerial and operational capacity to imple- ment, especially if such an agency is new and undergoing major institutional restructuring (para 4.05). D. Operational Improvements (i) Greater emphasis should be placed on increasing the Borrowers' aware- ness of the importance of operations and maintenance, and projects should be effectively used to "elevate" the institutional role of operations and main- tenance (para 5.02). (ii) The importance of better management use of information from improved systems and procedures should be emphasized during project preparation and supervision (para 5.03). (35i) Alternative options to total domestic metering should be carefully examined in terms of practical management problems and long term economic implications (para 5.04). e. Role of the Bank (i) The Bank's role during supervision should be oriented more toward forming an early working partnership and heightening official and political awareness of the fundamental project objectives (paras 6.05(a)(b)). (ii) Supervision missions should play a more constructive role (as opposed to an '"audit" role) in assisting project agencies with identifying detailed action programs which together serve to achieve overall project objectives (para 6.05(c)).  -1- INDIA PROJEZCT COMPLETION REPORT CREDIT 585-IN UTTAR PRADESH WATER SUPPLY AND SEWERAGE PROJECT I. INTRODUCTION A. Project Origin 1.01 Following a 1972 GOI request for IDA assistance in financing water supply and sewerage investments in Uttar Pradesh (U.P.) a WHO/PIP mission, under the IBRD/WHO cooperative program, conducted a sector survey for U.P. in 1973. The major findings of the survey, reaffirmed by an IDA preappraisal mission in late 1974, confirmed the urgent need to improve service levels in water supply and sanitation both in the major urban centers of U.P. and in selected rural areas facing a critical scarcity of water. It was recognized that to respond effectively to the scale of such needs, major changes were necessary in the institutional framework for planning, design, execution, operation and maintenance. The Project was appraised in mid-1975. 1.02 To implement the necessary institutional reforms, Government of Uttar Pradesh (GUP) first attempted to establish a State Water Board in 1973. But this move was found to be politically unacceptable. Finally, in 1975, an ordinance was passed which provided for the development, maintenance and regulation of the sector, and indicated steps towards a major sector reorganization. This sector reorganization consisted of the formation and development of the Jal Nigam and Jal Sansthans. The 'al Nigam (the "Nigam") was to be the development finance agency for the water supply and sewerage sector, responsible fi,.: planning, monitoring, and regulating the sector throughout the state. In its role as the planning and regulatory agency, the Nigam was to advise CUP on all policy matters in the sector. The Nigam was also to plan, design and construct all projects in the sector. Local water authorities, the Jal Sansthans, were established .s operate and maintain water supply and sewerage facilities for both the urban and rural populations. The Nigam thus became the key executing agency for the Projeor and, in a larger context, the intermediary between the Bank and the local water authorities in U.P. B. Sector Context 1.03 The population of UP is about 110 million. About 86Z of the population live in or around 112,000 villages; the rest of the population resides in 293 towns. The population of the towns ranges from 5000 to almost 2 million (Kanpur). The economy of the state is predominantly agricultural; 78% of the workers are engaged in agriculture. The average annual per capita. income is $80 (ranging from $60 in the poorest rural area to $120 in the KAVAL towns). 1.04 At the time of appraisal, only 30% of the population had access to a safe water supply with the rest having polluted or inadequate supplies. In rural areas, only 5000 villages had piped systems, with the others relying on polluted systems. Over 32,000 villages were in drought-prone or rocky areas or classified as hardship areas. Of the 293 towns with piped water  -2- supply, 112 did not have a safe system and 86 required many improvements to safeguard the existing systems. Forty towns had limited sewerage systems; no systems existed in rural areas. The urban systems had been built in the late 19th century. During 1900 to about 1950, the systems had been generally adequate and properly maintained. But in the following 30 years, high population growth rate, failure of the local bodies to adopt appropriate financial policies, and poor operations and maintenance led to the systems being incapable of meeting demand, and the local bodies being financially dependent on CUP for operating the systems. C. Sector Development Objectives 1.05 In the urban areas, CUP's sector development goals were to (a) increase coverage and improve service level standards, (b) improve financial performance of urban water undertakings so that sufficient funds could be generated for their own expansion and for support of poorer and less viable systems in the sector, (c) provide the needed investments to upgrade and expand the systems, and (d) develop and train the needed manpower to operate and maintain the systems, including financial and managerial personnel. The third five year plan (1961-66) was the first to contain a significant program of rural water supply. However, the responsible local bodies were unable to employ the necessary technical and financial expertise to operate and maintain them. Systems oft.en broke down and were unreliable, and financial systems were never developed (e.g. villagers were never charged). CUP's sector development goals for rural water supply were to provide the needed investments to upgrade the existing systems as well as expand the number of rural systems, and to develop the needed organization, manpower and systems for proper operation, maintenance and financial management. 1.06 It was recognized early that State Plan allocations for the sector would not be large enough to make a significant impact, given that estimates of the required development program for the next 15 years were of the order of Rs 1,000 crores. CUP decided that the central framework of its sector development strategy would be to mobilize potential resources within the sector by commencing a major reorganisation of the sector, introducing fiscal discipline, and improving the efficiency of operations and maintenance. One of the motivations for this decision was that Life Insurance Corporation of India (LIC), one of the principal institutional lenders, had been reluctant to participate in financing of rural water supply schemes due to the poor financial conditions of these schemes. In 1974 LIC threatened to cease lending for urban water supply and sewerage schemes as well due largely to poor debt service performance of UP local bodies. D. Project Objectives 1.07 To support CUP's sector development goals, the overall project objectives were to:  -3- (a) assist in the reorganization of the water supply and sewerage sector in the state, (b) construct new piped water supply schemes in rural areas suffering from water scarcity and hardship, (c) improve and augment the water supply and sewerage system in the five KAVAL cities in the state (Kanpur, Agra, Varanasi, Allahbad and Lucknow), (d) implement the necessary systems and procedural reforms in order to achieve better fiscal discipline and to strengthen operations and maintenance, and (e) develop human resource skills in the sector through technical assistance and training - particularly in management and finance. 1.08 A series of financial, institutional and operational covenants were established in order to ensure that the above project objectives would be met. Compliance with these covenants under the Project was one of several examples cited in a broader study entitled "Operational Policy Review: Compliance With Loan Covenants", undertaken by OED. 1/ The OED report suggested that while the underlying sector and project objectives remain worthwhile targets to aim for, there were doubts about the realism and appropriateness of several covenants and suggested that the time frame set for attaining the financial objectives were too short and to that extent unrealistic. The report also indicated that there appeared to be a general misinterpretation of the purpose and implication of the financial covenants '. the executing agencies. The financial covenants were perceived more as sedsures to ensure servicing of the IDA credit, rather than tools for achieving financial self-sufficiency. It also appeared that the potential institutional, administrative and political difficulties in project implementation were underestimated at appraisal. Notwithstanding the reasonableness or importance of the project objectives, the report suggests that most of these were not fully achieved, largely due to an unrealistic time frame and a lack of clearly defined actions required to achieve these objectives. E. Theme and Structure of the PCR 1.09 The analyses undertaken for this PCR support the overall conclusions of the OED Report. During the preparation of the PCR, it became evident that during project implementation relatively more emphasis was placed by the 1/ Report No. 4090, September, 1982.  -4- Nigam on the physical construction aspects of the Project - with little or no emphasis on the institutional reforms or financial performance of the sector as a whole (which include both the Nigam and Jal Sansthans). Consequently, there has been minimal reliable or relevant financial information available to permit a meaningful quantitative analysis of the status of Project finances. Nonetheless it may be assumed that the financial objectives and the financial targets (especially at the Jal Sansthans' level) were not achieved. 1.10 This PCR is designed to highlight the underlying reasons and implications of why some of the project objectives were not achieved. In terms of long term sector development strategy, an analysis of the structural and qualitative dimensions of project design and implementation is most relevant at this stage. The PCR highlights certain central themes related to each of the key project objectives. II. INSTITUTIONAL DEVELOPMENT 2.01 Two major objectives were to be pursued by reorganizing the sector through the creation of the Nigam and the Jal Sansthans. The Nigam was designated as the key sector agency. It was assigned a multiplicity of responsibilities, including planning, monitoring and regulating investments in the sector; advising GUP on all sectoral policy matters; appraising, implementing and supervising construction of specific schemes; and providing development finance. The Jal Sansthans, on the other hand, were given responsibility for properly operating and maintaining local water supply and sewerage facilities and for generating adequate internal financial resource through tariffs and taxes. 2.02 Undoubtedly, developing the Nigam was an ambitious undertaking, especially considering the fact that the Nigam was to be "converted" from a State Public Health Engineering Department (PHED) into an autonomous sector policy, construction, monitoring and finance agency. Transition from the "engineering and construction" orientation of the PHED into a much broader "sector management" orientation proved to be difficult for the Nigam, especially within the timeframe envisioned under the Project. The Jal Sansthans found it difficult to relate to their revised role under the Project particularly because of their minimal upstream involvement in sector reorganization and project formulation, and their lack of appreciation of the fact that ultimate financial and operating responsibilities of the schemes were, in effect, theirs. 2.03 The institutional objectives of the Project, though not totally achieved, nonetheless have played a positive role in increasing awareness of the need for (a) better planning and sector management practices, (b) greater financial self-sufficiency, and (c) proper operations and maintenance. In  -5- the case of Nigam, there have been demonstrated improvements in techniques of project appraisal, adoption of realistic service level standards, materials management practices, construction management and procurement practices, etc. The Nigam, however, continues to be weak in planning investments, monitoring project performance, accounting, and providing technical assistance to the Jal Sansthans in engineering, finance and management. The Jal Sansthans have achieved some improvements in the areas of routine management (e.g., billing and collection, metering and accounting systems), but generally their operations continue to be unsatisfactory. Inability to raise adequate resources through tariffs and taxes, inefficient operations (large wastage/leakage, poor meter management, etc.), and inadequate operation and maintenance of facilities, threaten their viability. The following are some of the underlying causes for not having achieved fully the project's institutional objectives. 2.04 Decision-Making Process. Although the U.P. Jal Nigam Act provides the Nigam with a wide range of powers extending from investment program formulation to setting tariff policies, in practice the Nigam can exercise these powers only in an advisory capacity to CUP. All final decisions, especially those which are politically sensitive - such as tariff setting - are made by the political process within CUP. The Nigam, despite its stated role as the key sector agency has no power to enforce its decisions or to impose its priorities on the Jal Sansthans. Consequently, those development objectives which did not receive political support, were difficult to achieve. The Nigam's role as a regulatory agency establishing investment priorities on the basis of Jal Sansthan's ability to operate and maintain the assets, and the Jal Sansthans financial viability through the collection of tariffs and taxes, continue to be politically sensitive subjects. One aspect of this issue is the need for the Nigam and the Jal Sansthans to demonstrate improved efficiency and better service to the public before political support can be expected. 2.05 Institutional Transformation. Although the objective of institutional reform remains valid, careful consideration must be given to the scale and pace for achieving such reforms. The reforms under the Project were ambitious, within the expected timeframe, given that the Nigam was created out of the PHED and the Jal Sansthans were created out of the local authorities' water supply departments - both with long and varied histories of operations and distinctive management environments. The process of institutional transformation was not accompanied by carefully designed changes in all aspects of the entities, such as personnel management practices, managerial accountability, procedural changes in administrative, operating and financial policies. In retrospect, it appears that not enough detail was built into project design to address these "building blocks" of institutional changes. Detailed action plans outlining the sequence of steps to achieve the ultimate objectives would have been useful. 2.06 Interagency Relationships. The Project was developed around and in consultation with the Jal Nigam, with little or no participation by the Jal Sansthans - the agencies ultimately responsible for repaying the loans on  -6- these investments and for operating and maintaining the assets. Although in principle each Jal Sansthan gave their approval to the Nigam to proceed with construction this lack of upstream participation nonetheless produced two major difficulties. First, the Jal Sansthans did not perceive the need or the urgency to prepare themselves institutionally or financially to take responsibilities for these investments. Second, the Jal Sansthans felt little or no compulsion to take on the financial and operating responsibilities for these projects. The Jal Sansthans had no substantive input into the nature, size or implementation of their respective projects (all of which were basically done by the Nigam). Consequently, upon commissioning, the process of "handing over" these projects by the Nigam to the Jal Sansthans proved to be difficult. This reluctance was reinforced by the fact that the Jal Sansthan, in instances, did not have the necessary financial or technical resources to undertake this additional responsibility. Many of them perceived these projects as the Nigam's "products", with which they had had little to do. Even now, many schemes continue to be operated and maintained by the Nigam because of refusal by the Jal Sansthans to take them over. This situation clearly demonstrates that there must be an explicit commitment to a project, by all agencies concerned - and particularly by those ultimately responsible for financing and operating them - in order to ensure that project objectives are met. 2.07 Conflict with Existing Administrative Practices. The reforms under the Project in institutional responsibilities and financial practices for both the Nigam and the Jal Sanathans, in instances, ran contrary to the prevailing practices of the predecessor agencies as well as GUP. For instance, administrative costs (particularly wages) were originally estimated based on historical levels at PHED for the Nigam and at local authorities for the Jal Sansthans. However, formation of the Nigam and Jal Sansthans (parastatal and semi-autonomous authorities) required GUP to adopt different salary structures in order to provide "parity" with similar institutions. CUP estimates that this institutional transformation resulted in a nearly 20% increase in the salary budgets for these agencies. More importantly, clear seniority, promotion, and other personnel management policies were not established for the new agencies. The staff of the newly created Nigam, for a long time following its creation (from 1975 to about 1981), continued to be on deputation from their parent organization PHED - a U.P. State Government cadre. The staff of the Jal Sansthans still are on deputation from the State's Local Government Service. GUP continues to be responsible for promotion, transfer, recruitment of staff of the Nigam and the Jal Sansthans. Lack of appreciation for and resolution of such administrative issues, which are inherent in any institutional restructuring, often defeated the underlying objective of creating independent agencies. Lack of institutional "allegiance" on part of the employees resulted in a lack of commitment toward reform.  -7- III. FINANCIAL PERFORNANCE 3.01 The overriding financial objectives of the Project were as follows: (a) The Nigam was designated to be the sector's development finance agency; whereby the Nigam, after its initial capitalization by CUP, would borrow from the capital market (guaranteed by GUP) to finance long-term sector construction activities; (b) the Nigam was to finance its own recurrent budget (administrative and overhead costs) through a variety of fees and charges from its clients - the Jal Sansthans; (c) the Jal Sansthans - the agencies ultimately responsible for financing and operating the systems - would be financially viable, and the Jal Sansthans would repay the debt against the investments to CUP "through" the Nigam; and (d) CUP and the Nigam were to ensure that the financial viability of the Jal Sansthans was achieved by "causing" the Jal Sansthans to make necessary adjustments to tariffs and taxes such that either a degree of cash coverage (in case of rural Jal Sansthans) or a rate of return (for KAVAL Jal Sansthans) was achieved. 3.02 Reliable operating or financial information was not received either from the Nigam or any of the Jal Sansthans throughout the implementation of the Project. 1/ Consequently, it is futile to attempt any quantitative analysis of the financial performance of either the Nigam or any of the Jal Sansthans. However, given that both the Nigam and the Jal Sanstbans continue to depend on CUP for varying degrees of operating subsidy, it is evident that the two critical financial covenants (items 3.01(c) and (d) above) of the legal agreements were not complied with. Notwithstanding the lack of reliable financial data, it is important to analyze the underlying premises of these financial objectives. 3.03 Nigam - a Development Finance Agency. The objective of creating a development finance agency to implement a long term investment program, (especially in a state as large as U.P., with resource scarcity) is clearly valid. However, there have been three key hurdles to achieving this objective. First, a true "capital market' does not exist in India. Any I/ The first and only reliable set of financial statements were received in April 1985 from the Kanpur Jal Sansthan (through supervision and technical assistance efforts, under the Kanpur Urban Development Project, Credit 1185-IN), for the year ending March 31, 1982.  -8- borrowings by the Nigam are a part of the State's overall borrowings and therefore are subject to the normal constraints of the budgetary allocation process. Consequently, financing the sector development program, by default, becomes a CUP decision. Second, for the Nigam to "think" and "operate" like a development finance company, would require a drastic shift from its "engineering and construction" orientation, inherited from its past as PHED (para 2.05). Although the project design included the establishment of accounting procedures and accounts, these measures could not guarantee that the objective would be met. Finally, the expectation that the Jal Sansthans would repay their debts in time to CUP through the Nigam has not fully materialized. Most Jal Sansthans are seriously delinquent in their debt service obligations and some have never repaid any amount. Although CUP is ultimately responsible for these debts, by implication, the Nigam's creditworthiness is questionable. 3.04 Conflict of Interest. Problems of interagency relationships between the Nigam and Jal Sansthans (para 2.06) have, in part been the cause of the above financial problems. However, this problem has been exacerbated by the fact that there is a perceived conflict of interest because of the multiple roles of the Nigam - as a project developer, construction agency and a financier. While it can not be substantiated, an argunent could be made that it is in the interest of the Nigam to design large projects and delay construction since a large portion of its revenues are generated from fixed percentage charges (about 20Z) based on the cost of works executed. Whether real or apparent, it is imperative that the appearance of such a conflict of interest be avoided. 3.05 Capital Budget vs. Recurrent Budget. The Project was designed to certain physical targets of coverage and service delivery standards. It was assumed that affordable tariffs and charges borne by all levels of consumers would generate adequate revenues at the Jal Sansthan level, to sustain these investments. Implicit in these assumptions was the view that the recurrent budgets of the Jal Sansthans would be able to "carry" their capital budgets, assuming there was adequate cost recovery through tariffs and taxes. In reality, this did not materialize, largely due to unwillingness of Jal Sansthans to adopt appropriate tariff and pricing policies. Annex 1 indicates the current levels of tariffs in effect. It is worth noting that the latest substantial tariff increase was in Kanpur Jal Sansthan in November 1979. A modest tariff increase of 28X was implemented in Kanpur in September 1985. No other Jal Sansthan has succeeded in revising its tariffs since 1978-79. Although revised tariffs were recommended and approved by the Nigam in 1984, none has yet been implemented, reflecting the Nigam's lack of enforcement power. Yet, the schemes have been built, and in the absence of adequate funds for operations and maintenance, will soon fall into disrepair and disuse. Therefore, as a safeguard, it may be more appropriate to tailor the investment program (capital budget) so that it can be sustained by a realistic revenue base (recurrent budget).  -9- 3.06 Resource Mobilization. It is evident that mainly due to a lack of (a) political will on the part of GUP and the Jal Sansthans (para 2.04); (b) committment to the Project objectives by the Jal Sansthans (para 2.06); and (c) legal enforcement authority by the Nigam in setting tariffs (para 3.05), the financial health of the Nigam as well as the Jal Sansthans continues to be poor. Several other dimensions of tariffs also need to be explored. Institutional problems initially prevented the Jal Sansthans from addressing financial issues effectively. There was significant political opposition at various levels against a substantial increase in tariffs before any benefits accrued from the Project. Water/sewer charges were in most cases linked with other municipal taxes, which made it difficult to effect rate increases. These municipal taxes, in turn, were linked to rent control legislations, which further limited the base on which these taxes could be assessed. Delays in project implementation as well as unforseen price escalation increased the cost of operations thus requiring even larger tariff increases. These problems were exacerbated by the low income levels of the people, especially in rural areas. The above factors suggest that, given the inherent linkages and interdependence between revenue resources for water supply and sewerage and the overall municipal resource base, it is important to take a much broader view of resource mobilization for water supply and sewerage. In conjunction with measures for direct cost recovery (through tariffs and specified taxes), efforts will need to be made to improve the overall municipal resource base of a city - in which water supply and sewerage are two of many other services.  -10- IV. PHYSICAL IMPLEMENTATION 4.01 Despite long i-plementation delays (952 time overrun), physical implementation of specific subprojects has been generally good. Annex 2 compares estimated versus actual works completed, by major category of works. Most of the works were carried out by the Nigam's workforce. No major procurement problems were experienced during project implementation. The following are some of the key underlying causes of both cost and time overruns. 4.02 The Appraisal Process. The project financed a program of investment. The total program envisioned nearly 1,000 individual schemes in the KAVAL towns and about 2,000 in the rural areas. The Bank appraised a selected number of sub-projects (about 40X of total project costs) in detail and established guidelines for the appraisal process. The Nigam was expected to apply this process to other subprojects (the remaining 601). This approach, in the long run, has been generally successful and beneficial to the institution building process of the Nigam. However, at early stages of the implementation process, the Nigam experienced difficulties in adapting to a different method of project evaluation, causing initial implementation delays. 4.03 Project Costs and the Construction Program. Annex 3 shows estimated versus actual project costs by each sub-project. Despite 951 time overrun, the table indicates only a 281 cost overrun - from an estimated Rs 60 crores to about Rs 75 crores. This discrepancy can be partly explained by the fact that cert in key materials used in the project, such as prestressed concrete pipes, were already in the Nigam's stock and were originally purchased at a much lower cost than estimated under the project. Approximately Rs 15 crores worth of pipes were charged to the Project at cost of acquisition, which, if procured during the project implementation period, would have cost about Rs 25 crores. This resulted in a net savings of about Rs 10 crores. 4.04 "Underdisbursement" and Credit Cancellation. Although the Bank agreed with the Nigam that it could utilize materials in stock for the Project, the disbursement percentage against this category was not adjusted during project implementation to reflect its lower historical cost. Further- more, the project cost overrun was concentrated in categories with relatively low disbursement percentages. Consequently, the Nigam was unable to draw down fully the credit amount -- resulting in a cancellation of about US$8 million of unutilized credit. 4.05 Scale and Diversity of the Project. As indicated in para 4.02, the magnitude of the physical works and the diversity of the project was large, even for an entity as large as the Nigam. The Nigam had not previously executed works on this large scale. This rapid increase in the lejvel of activity, for a newly created agency which was being simultaneously subjected  -11- to major institutional reforms, caused basic administrative and procedural bottlenecks and implementation delays. After nearly a decade of implementa- tion experience, the Nigam has largely overcome these problems. However, initially it found it necessary to respond to the situation by giving addi- tional operational responsibilities to various levels of managers who were ill prepared or trained to adequately undertake these additional functions. V. OPERATIONAL IMPROVEMENTS 5.01 ro support the institutional and financial reforms, various initia- tives were undertaken to improve the overall operating efficiency of both the Nigam and Jal Sansthans. For the Nigam, the project included improvements in such areas as accounting, materials management, and project management sys- tems. For the Jal Sansthans, efforts were made to improve billing and col- lection, accounting, metering and meter maintenance, leak detection, etc. Progress has been made (more so in the Nigam than in the Jal Sansthans), but in general actual operational. improvements have fallen far short of expecta- tions. The underlying reasons for not achieving significant improvements in operating efficiency, are governed by institutional, traditional, procedural and human resource considerations. 5.02 Construction vs. Maintenance. Traditionally, the operations and maintenance functions have taken a "back-seat" to the more glamorous con- struction activities. This stems largely from the engineering orientation of the agencies involved - the Nigam and the Jal Sansthans continue to be influenced by this philosophy. There is a lack of appreciation for the importance of operations and maintenance and an absence of an institutional coamitment toward improving operating efficiency. These factors have mitigated the potential benefits which could have been achieved through various procedural reforms. To illustrate, the Project provided eight sewer cleaning machines for use by the Jal Sansthans. Latest information suggests that none of the equipments has ever been used. 5.03 Systems vs. People. The purpose and usefulness of improved systems must be fully understood by their users and better management use made of these systems and resulting information. Improved systems by themselves cannot improve operating efficiency. Under the Project, various assignments were undertaken by corsultants in order to design, implement and train agency personnel in accounting, financial and project management systems. However, these efforts were perceived by the staff as being largely "requirements of the Bank" rather than tools for more effective and efCicient management. With some degree of exception at the Nigam no perceptible benefits have yet been derived from the design of better systems - since they have so far not been seriously used.  -12- 5.04 Metering and Leak Detection. As means to conserve water, to relate charges to consumption, and to control wastage, the Project emphasized the need for universal metering. Although some progress has been achieved in metering of consumers, production metering had not received the required attention. Consumer metering also met with some degree of public and politi- cal opposition. Moreover, the management of the metering program (including installation, meter reading, meter maintenance and repair) continues to be a major problem. These problems are not technical, but reflect fundamental attitudinal problems and managerial shortcomings related to the basic concept of metering. Although metering of high consumption users is essential, the economics and meter management problems experienced in the Project suggest that the concept of total domestic metering should be approached with more caution. Alternative options such as use of flow restriction devices, flat rate charges based on estimated consumption, or charges linked to certain physical characteristics of properties, should be explored. VI. BANK's PERFORMANCE 6.01 Discussions with the Nigam and the Jal Sansthans highlight several interesting perceptions held by these agencies with regard to their interaction with the Bank. The Project represented a new venture for both the Bank and the agencies involved. It was the first "encounter" that the Nigam and the Jal Sansthans had with the Bank. These agencies have sug- gested, in retrospect (after nearly a decade), that clearly the Bank's expec- tations in institutional and financial objectives were too high, a fact which they recognized at that time. But mainly due to unfamiliarity with the Bank and a lack of "self-confidence" on their part, it was difficult for them to assert themselves. 6.02 Linked to the above perception, the agencies also suggested that there was a lack of full appreciation by the Bank of their state of prepared- ness (institutionally and politically) to undertake a project of such scale and complexity. It was also perceived, again in restropect, that perhaps a smaller, less ambitious and less complex project, supported by a "catalytic" role by the Bank would have helped to establish a more "comfortable" working relationship; and lay the foundation for a sustained, albeit slow, process of institutional reform. 6.03 The above views of the agencies, whether real or apparent, merit due consideration. The appraisal report noted that a large supervision input would be required: some 70 man-weeks per year during the first couple of years of implementation and about 40 man-weeks per year thereafter. The actual supervision input has been less than half of what was specified in the appraisal report, with relatively little field supervision during the last few years. For instance, there have been only two supervision missions since  -13- September 1979: in February 1981 and in March 1982 (the last full supervi- sion). Staff constraints, including a shortage of staff with institutional skills, precluded more intensive supervision during the early years. In later years, The Bank tended to reduce supervision even further while await- ing GOI/GOUP responses to Bank's observations on overall project performance. 6.04 Since the outset of project implementation and supervision, there have been divergent views within the Bank on project performence and on the supervision approach: (a) supervision missions usually have been critical of the institutional and financial performance of the Jal Sansthans, and over time have increasingly emphasized the lack of substantial tariff increases as the principal reason for poor financial performance; while (b) other staff have stressed the need to address in a more detailed and action-oriented manner the underlying operational and institutional performance issues that appeared to need to be resolved if improved financial performance were to be achieved over the longer term. 6.05 The role of the Bank during project preparation and implementation merits careful consideration especially when new institutions are being created with new mandates and without prior exposure to the Bank. The case of the U.P. project suggests the following: (a) a partnership with borrowers should be sought through achievement of an early and mutual understanding of objectives and constraints; (b) official and political awareness of the basic objectives of the projects should be promoted by preparation, appraisal and supervision missions; and (c) missions should be assigned a constructive and "catalytic" role in helping project agencies (especially those newly created) in identifying, structuring and implementing specific operational, managerial and financial actions that underlie the overall objectives and targets. VII. OPTIONS FOR FUTURE PROJECTS 7.01 The projects which have followed the U.P. Water Supply and Sewerage Project in India, and elsewhere in the region, have varied institutional and financial arrangements and a wide range of operational and financial perfor- mance targets. Many of the lessons learned from the U.P. Water Supply and Sewerage Project already have been incorporated in these projects. Given that the same institutional structure and financial arrangements continue in  -14- U.P., future Bank Group involvement in the sector in U.P. 1/ should consider the following options in project design. Some of the proposals below repre- sent procedural reforms, while some are more radical: (a) the detailed planning, design and execution of projects could be transferred from the Nigan: to private consulting firms, independently retained by the Jal Sansthans while maintaining the Nigam's role as the overall sector planning agency; (b) the project financing function could be revised so that the Jal Sansthans are the direct borrowers and hence their awareness and sense of ownership responsibility for the investments might be established at an early stage; (c) the roles of the Nigam might be redefined as (i) sector planning, advice and monitoring and (ii) construction in competition with private companies; (d) reconsider the relationship between the Jal Sansthans and local authorities(corporations and municipalities) recognizing the interdependenct of tax-based cost recovery mechanisms; (e) the size of the investment program and annual capital expenditures required to achieve specified operational and financial targets should be considered jointly; (f) at the Jal Sansthan or municipal level consider the establishment of a Utility Rate Commission, or equivalent in order to depoliticize tariff setting policies; and (g) use of the Nigam (a technically more competent agency) as a sub-contractor on a fee-for-service basis should be considered in instances where technical considerations preclude Jal Sansthans (or municipal water departments) from being able to operate and maintain complex plant and infrastructure. 1/ Currently a statewide U.P. Urban and Water Supply Project (FY87) is under preparation.  -15- Annex I Page 1 UTTAR PRADESH WATER SUPPLY AND SEWERAGE PROJECT CREDIT 585-IN PROJECT COMPLETION REPORT WATER SUPPLYS CAPITAL AND REVENUE EXPENDITURES (Rs IN LAKHS) TARIFFS OF JALSANTHANS Kanpur Varanasr Lucknow Cross Rate Gross Rate Gross Rate Approved Approved Approved Existing by Jal Existing by Nigam kxisting by Jal Tariff Nigam in Tariff in July Tariff Nigam in w.e.f. July 1984 w.e.f. 1984 w.e.f. Jan. 1984 Particulars 1-11-79 (Revised) 1-10-78 (Revised) 1-7-79 (Revised) 1 2 3 4 5 6 7 8 1. Water charges for metered supply (Per 1,000 liters) a. Domestic 0.65 0.50 0.75 0.50 0.75 b. Cold storage 2.15 1.50 2.50 1.50 2.50 c. Hostels, restaurant 1.65 1.50 2.50 1.50 2.50 4. Ion-Domestic, build- ing construction etc. 1.65 1.50 2.00 1.50 2.00 e. Municipal purposes 0.10 0.10 0.75 0.50 0.75 2. Meter rent per month a. 15 mm 0.62 1.50 1.50 1.00 1.50 b. 20 mm 0.94 2.00 2.00 2.00 2.00 c. 25 mm 1.56 3.00 3.00 3.00 3.00 d. 40 mm 2.19 4.00 4.00 4.00 4.00 e. 50 mm 2.50 6.00 6.00 5.00 5.00 f. 80 mm 3.75 8.00 8.00 8.00 2.00 g. 100 mm 5.00 10.00 10.00 10.00 10.00 3. Ferrule rating charges (Annual) a. 10 mm 315.00 600.00 90.00 360.00 90.00 360.00 b. 15 mm 380.00 720.00 120.00 480.00 480.00 480.00  -16- Annex 1 Page 2 1 2 3 4 5 6 7 8 4. Mininum charges per month per connection 8.00 - 7.50 12.00 7.50 12.00 5. Sewer tax 1.501 2.00S 2.001 6. Water tax 6.25% 12.50% 8.00% Note: 1. Water tax and sewer tax are calculated on the basis of rental value of buildings. 2. Rates in Kanpur Jalsansthan are revised and approved by Jal Nigam for ferrule ratings. Others rates are to be revised.  -17- Annex 1 Page 3 Carhwal Kumaon Jhansi Gross Rate Gross Rate Cross Rate Approved Approved Approved Existing by Jal Existing bv Nigam Existing by Jal Tariff Nigam in Tariff in April Tariff Nigam in w.e.f. July 1984 w.e.f. 1984 w.e.f. July 1984 Particulars 1-4-79 (Revised) 1-4-78 (Revised) 1-4-79 (Revised) 2 3 4 5 6 7 8 1. Water charges for metered supply (per 1,000 liters) A. Lou head a. Urban areas i