India - Rajasthan Water Supply and Sewerage Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 9266 PROJECT PERFORMANCE AUDIT REPORT INDIA RAJASTHAN WATER SUPPLY AND SEWERAGE PROJECT (CREDIT 1046-IN) DECEMBER 31, 1990 Operations Evaluation Department This document has a restricted distribution and may be use4 by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Country Exchange Rates (Yearly Averages) Currency and (Abbreviations) Rupee (Rp) Year Rupees/US$ 1978 8.19 1979 8.13 1980 (Project Approved and 7.86 Effective) 1981 8.66 1982 9.45 1983 10.10 1984 11.36 1985 12.37 1986 12.61 1987 12.96 1988 (Project Closed) 14.60 Government of India Fiscal Year April 1 - March 31 Acronyms GOI - Government of India GOR - Government of Rajasthan PCR - Project Completion Report PKED Public Health Engineering Department RWSSB - Rajasthan Water Supply and Sewerage Management Board SAR - Staff Appraisal Report ROR - Rate of Return ICB - International Competitive Bidding FOR OFFICIAL USE ONLY THE WORLD 8ANk. Wds1ngon. D.C. 20433 U.S A Office of Dixeste-General operates avaluattes December 31, 1990 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Performance Audit Report on India Rajasthan Water Supply and Sewerage Project (Credit 1046-IN) Attached, for information, is a copy of a report entitled "Project Performance Audit Report on India - Rajasthan Water Supply and Sewerage Project (Credit 1046-IN)" prepared by the Operations Evaluation Department. Attachment This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. FOR OFFICIAL USE ONLY PROJECT PERFORMANCE AUDIT REPORT INDIA RAJASTHAN WATER SUPPLY AND SEWERAGE PROJECT (CREDIT 1046-IN) TABLE OF CONTENTS Page No. PREFACE ...........................................................i BASIC DATA SHEET .................................................. EVALUATION SUMMARY .................................................ii PROJECT PERFORMANCE AUDIT REPORT A. Background ..............................................1 B. The Project and Its Objectives .......................... 3 C. Implementation .......................................... 3 D. Institutional Aspects ................................. 6 E. Financial Aspects ................................ 7 F. The Role of the Bank .................................... 9 G. Conclusions and Lessons ................................. 9 ANNEX 1 Comments from the Borrower ................. .............. 11 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. i PROJECT PERFORMANCE AUDIT REPORT INDIA RAJASTHAN WATER SUPPLY AND SEWERAGE PROJECT (CREDIT 1046-IN) PREFACE This report represents the results of the performance audit of the Rajasthan Water Supply and Sewerage Project for which an IDA Credit of US$80.00 million was approved on J: a 19, 1980. The Borrower, India, was to onlend the proceeds of the Credit to the State of Rajasthan "in accordance with the Borrower's standard arrangements for development assistance to the States of India" (Development Credit Agreement, Section 3.01 (b)). Rajasthan, in turn, was to relend the funds to the Rajasthan Water Supply and Sewerage Board (RWSSB) for the purposes of Parts B and C of the project (urban water supply and sewerage) on terms of 25 years including 5 years grace period and interest rate of 6.5% per ai-um. Funds for Parts A and D (rural water supply and technical assistance) were to be provided to RWSSB in grant form (Project Agreement Section 3.03 (b) (vi)). The Credit Agreement was signed on June 25, 1980 and the Credit became effective on August 5, 1980. The original closing date of the Credit was December 31, 1985, but after three extensions the Credit was, eventually, closed. on December 31, 1988. The last disbursement was made on March 31, 1989 at which time the Credit was fully disbursed. The Project Performance Audit Report (PPAR) was prepared by the Operations Evaluation Department (OED). The PCR, of which Parts I and III were prepared by the Asia Regional Office and Part II by RWSSB, was submitted to the Executive Directors, under OED's delinking process, on September 27, 1989 (OED Report No. 8090). OED has reviewed the PCR. the Staff Appraisal and President's Reports, the legal documents and Bank files, and the transcript of the meeting of the Executive Directors at which the Credit was approved, and discussed the project with relevant Bank staff. An OED mission visited India in March 1990 and discussed the project experience with central and state government and RWSSB officials and visited several facilities constructed under the project. The Audit finds that the PCR adequately and frankly descril a the project experience and draws appropriate conclusions. The PPAR further analyzes various aspects of the PCR's findings and also provides independent conclusions and comments on the more important aspects of the project. Copies of the PPAR were sent to the Government and the implementing agency for comments. The comments received have been incorporated in the report, as appropriate, and reproduced as an Annex to this report. ii PROJECT PERFORMANCE AUi)IT REPORT INDIA RAJASTHAN WATER SUPPLY AND SEWERAGE PROJECT (CREDIT 1046-IN) BASIC DATA SHEET KEY PROJECT DATA Item Appraisal Actual Total Project Cost (Rs million) 1,376.8 1,604.95 Credit Amount (US$ million) 80.0 79.6 Date of Physical Completion 3/85 12/31/88 Institutional Performance: Poor CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS FY81 FY82 FY83 FY84 FY85 FY86 FY87 FY88 FY89 Appraisat Estimate 5.7 16.5 28.9 54.9 77.3 80.0 Actual 2.7 9.5 17.2 29.5 40.5 47.6 54.4 57.1 80.0 Actual as % of Appraisal (M) 49 58 60 54 52 60 68 71 100 Date of FinaL Disbursements: 03/31/89 STAFF INFUTS (Staff Weeks) FY78 FY79 FY80 FY81 FY82 FY83 FY84 FY85 FY86 FY87 FY88 TOTAL Preappraisal 6.0 6.2 11.4 23.6 Appraisal 38.5 38.5 Negotiation 13.0 13.0 Supervision 1.5 16.3 12.7 15.3 18.5 14.6 20.8 14.9 10.2 124.8 Other 1.0 .2 2.4 .3 .4 .4 4.7 Total 6.0 6.2 65.4 16.6 15.1 15.6 18.9 15.0 20.8 14.9 10.2 204.6 OTHER PROJECT DATA Planned Actual Identification 11/77 11/77 Preparation 1978 3-6/79 Appraisal 10/79 12/79 Negotiations 04/80 05/80 Board Approval - 6/19/80 Effectiveness 8/5/80 iii PROJECT PERFORMANCE AUDIT REPORT INDIA RAJASTHAN WATER SUPPLY AND SEWERAGE PROJECT (CREDIT 1046-IN) EVALUATION SUMMARY Background 1. The provision of water supply and waste disposal services in India is the responsibility of the individual states, under the policy direction and financial assistance of the Government of India (GOI). The rapidly growing population coupled with limited investmints resulted in average national service levels which were, in 1975, below t .a average of all developing countries (PPAR, paras. 1 and 2). 2. The project, the eval,ation of which is presented in this report, was carried out in the State of Rajasthan. This large, desert and semi-desert state had a 1979 population of about 32 million, 80% of which resided in some 33,000 rural villages. The primarily agricultural state generated per capita income in 1978 of Rs 925, some 20% below the national average. Development expenditures and public health standards were also below average -ith high incidence of water borne diseases (PPAR, paras. 3 and 4). 3. Rajasthan's water resources are extremely limited. There are no perennial rivers in the western desert, the eastern river network has highly variable dry/wet weather flows and the limited ground water resources are mostly of poor quality. Security of long term water supplies will have to rely on water imported from long distances. The development and operation of these resources, as well as the dispisal of waste waters is the responsibility of the Public Health Engineering Department (PHED). In 1980, the Rajasthan Water Supply and Sewerage Management Board (RWSSB) was created which, essentially, is only a managing unit of PHED (PPAR, paras. 5 and 6). 4. At the time of appraisal (1980), rural water supply service levels were a low 24% with no organized waste disposal. By contrast all 175 towns in the state had piped water supply and the four major towns, Jaipur, Jodhpur, Kota and Bikaner, reportedly, served 100% of their combined two million population, 67% by house connections. However, the quality of the service was low. Only Jaipur and Jodhpur had a piped sewer system serving about 20% of the population. 5. Due to the scarcity of available water sources, water supply investments in the state were relatively high absorbing 10% of the development budget. The highest priority was rural water supply, the ratio of investments, at the time of appraisal, were established at: rural water - 64%; urban water - 30%; and sewerage - 6%. Financing of sector investments was generally on grant basis from central and state government funds. Cost recovery was inadequate with none of the water supply services covering operation and maintenance. No charges were levied for sewerage (PPAR, paras. 7 and 8). iv The Project and its Obiectives 6. The objectives of the project were to improve water supplies in rural areas, in particular the designated "problem villages", increase water production and distribution in the four major cities, provide new sewerage services in Bikaner and improve existing ones in Jaipur and Jodhpur. 7. The project, as appraised, consisted of the construction of rural water schemes in 2,000 villages, water production, treatment, transmission and distribution facilities in four cities, extension of sewage collection and disposal works in three cities and engineering services and training. IDA Credit 1046-IN for US$80.0 million was approved on June 19, 1980 and closed, after three extensions, on December 31, 1988, at which time the credit was fully disbursed. The total estimated cost of the project was US$164 million equivalent and the USS84 million counterpart funds were to be provided by the Government of Rajasthan (GOR). It should be noted that the proposed project investments were equal to the total sector investments in the state during the period 1951-80 (PPAR, paras. 9-11). Implementation 8. Project preparation was weak. The standard, prototype, designs for the simple village schemes were adequate but the feasibility level designs for transmission and storage and for the more elaborate urban schemes were insufficient for proper appraisal. Some of the latter contained major structures (dam, 80 km pipeline, treatment works) which should have been designed in full during preparation (PPAR, para. 12). 9. The project made a good start, particularly on the rural schemes but the performance soon deteriorated. By the end of 1981 local funding constraints and the overload on PHED, caused by the size of the project, began to take its toll. Procurement, in particular, slowed down and most bid validities expired before the award was made. In addition, particularly heavy impact was made by the persistent drought which necessitated the acceleration of the rural program and also began to affect ground water levels and virtually eliminated the small surface water sources. 10. The increased scope of the rural program required the reallocation of resources and the project was significantly restructured. Several major components of the urban works were deferred such as a water treatment plant in Jaipur, storage reservoirs in Jaipur, Kota and Bikaner, various lengths of transmission mains and, practically, the entire Bikaner sewage treatment plant. The number of sewer connections in Bikaner was also reduced. 11. In addition to formal deferment, general progress also slowed down further and some large works still remain incomplete. Most notable among these are the Jodhpur water treatment plant where the main pump house stands complete but unequipped and the filter plant has barely been started and the main raw water storage tank in Bikaner. Work on these sites is, at present, suspended due to contractual disputes. The postponed and/or delayed components of the urban works reduced or delayed some of the benefits projected, particularly for the waste disposal in Bikaner. Although the number of water connections have increased, service generally did not improve due to the scarcity of water in all cities except Kota which has adequate sources. The delay in the Jodhpur water treatment V plant is more of an economic than operational loss since no water can be supplied to the plant. Jodhpur, at present has only two hours of water supply on alternate days. 12. The success story of the project is the rural component. Over 4,200 "problem villages" received supply, more than twice the target. The simple designs are effective and, under the circumstances, adequate. However, since many villages have to be supplied by long pipelines (ground water not available), pumping and maintenance costs are high and the exposed pipelines are vulnerable. Nevertheless, the execution of these works which has certainly averted major human suffering deserves high credit (PPAR, paras. 13-17). 13. Little information could be located regarding the performance of the consultants and contractors employed under the project. Certain visible design problems (poorly designed pipe anchor blocks etc.) and some relatively poor construction workmanship seem to indicate that neither of these were of the highest caliber (PPAR, para. 18). Institutional Aspects 14. While the PCR notes that the internal efficiency of PHED has improved considerably in several areas such as better planning and contract management, accounting and billing practices, there were no significant changes in the sector organization as a whole. The creation of RWSSB does not seem to have any significance as it is, basically, only a managing unit within PHED and, with the latter, it is under total government control. The entire organization, as it is, is geared to the implementation of projects with secondary interest in operation and maintenance and hardly any incentive for revenue generation. Within these constraints/shortcomings and considering the extreme shortage of both financial and natural resources RWSSb does a creditable job. It is subject to strong local political influences and functions in relative isolation from the rest of India and the world. It could well do with considerable assistance (PPAR, para. 20). Financial Performance 15. The financial projections of the appraisal were unrealistic and had little relation to the local conditions and policies. Although RWSSB had made great strides in improving its financial practices, installed commercial accounting and developed an efficient (urban) collection system, it has no control over its tariffs and revenue generation is not high on its agenda. The concept of subsidized water supply is firmly entrenched in both the leaders and the people of Rajasthan. With this background, the over precise and optimistic forecasts of the appraisal report of achieving a 9% rate of return on net fixed assets in the urban and large revenue collection in the rural areas (at Rs 1.0 per person per month) could never materialize. The rural charges were abandoned as uncollectible and, in the urban areas, operating costs exceeded revenues in every year of the project. The FRR calculated for the years 1985 to 1989, ranged from negative 11.4% to negative 20.9%. 16. The Audit believes that the official attitude of GOR that water supply is largely a social servl-e is likely to prevail for some time to come. On the other hand, the cost of providing water, under the conditions of Rajasthan, is going to continue to increase and it is unlikely that the degree of subsidization currently provided by GOR can be maintained in the long run. At present , not vt only are the water tariffs inadequate but RWSSB is loosing substantial amounts of revenue as the number of industrial connections (payitg the highest but still subsidised tariffs) steadily declines as many of these firms are drilling their own wells and aband-ning the municipal supplies. This may partly be due to the unreliable piped supplies but there is little doubt that the cost of water is a major factor. As RWSSB has no control over private well drilling, it not only faces the loss of revenue but also the potential overexploitation of its already limited ground water resources. 17. In the future, one of COR's (and RWSSB's) primary concern ought to be to devise an appropriate sector financing policy and mechanism, possibly relaying on a combination direct charges and taxation. This system is used in a number of countries (also in Bombay) and it can be a satisfactory method, provided that wasteful use of water is controlled and it does not subsidize the wrong income group. There is little information on unaccounted for water (UFW), partly because of the intermittent supplies and because this matter has received scant attention. Leak detection equipment were only obtained by RWSSB in January, 1990 (PPAR, paras. 21-24). The Role of the Bank 18. Bank participation was, initially, well received and the project started with good relationship. As the implementation performance deteriorated and the Bank aggressively pursued compliance with the uncer.stic financial covenants, the relationship soured. The subsequent collective effort to restructure and salvage the project reestablished the good will, to the extent that it was termed "excellent" by the borrower. Conclusions and Lessons 19. The project was overambitious and less than adequately prepared. Nevertheless, its achievements were substantial in the rural areas and helped to improve the efficiency of RWSSB in project execution and accounting. It failed to achieve the necessary sector organizational and financial improvements and, due to the reallocation of funds fell short of the targets in the urban areas. A major omission of the project planning was not recognizirg the paramount need for effective water resource management and planning which, considering the scarcity of water in Rajasthan as a whole, ought to have been obvious. An obvious lesson from the project is the need, for the Bank, to tailor financial targets and policies to the local political and economic environment. PRO,-9CT PERFORMANCE AUDIT REPORT INDIA RAJASTHAN WATER SUPPLY AD SEWERAGE PROJECT (CREDIT 1046-IN) A. Background 1. In India the responsibility for water supply and waste disposal services rest with the individual states, although, the Government of India (GO0) exercises considerable influence over the sector through the provision of financing and general policy direction. The states exercise these functions through various government departments but, in many cases the responsibility is delegated to major municipalities. 2. The efforts to meet the rising demand for water supply and waste disposal services were constrained, over the years, by the limited resources and the rapidly increasing population. In 1975, the World Health Organization (WHO) estimated that only 31% of the population had access to safe water supply and 20% had acceptable waste disposal facilities. At that time, these figur ;were lower than the average for all developing countries for which the corresponding figures were reported as 38% and 33%. 3. The project under review was carried out in the State of Rajasthan, located in the northwestern part of India. It is the second largest state in the country, covering about 10% of India's total land area. The westorn part of the state is the Thar desert, the eastern part is a hilly semi desert. The state's population, in 1979, was estimated about 32 million, of which 80% lived in rural areas (33,000 villages) and 20% in some 175 cities and towns. 4. The economy of the state is based, primarily, on agriculture providing a per capita income, in 1978 of Rs 925, about 20% below the national average. Development expenditures in 1979 were about Rs 95 per capita which was about 45% below the national average. Public health standards were also lower with infant mortality rates about 10% above the all-India figure. High incidence of most forms of water borne diseases were prevalent including skeletal fluorosis due to the high level of fluoride content in the ground water. 5. There are no perennial rivers in the arid, western, part of the state, the only surface water source being the Rajasthan irrigation canal system which traverses the north/west edge of the state. The river network of the eastern parts have highly variable dry-wet season flows. Ground water sources are also limited and of poor quality. In the desert areas these are mainly brackish and are at a considerable depth (below 200 m). Overall the provision of water supplies, even at basic needs level, is difficult and costly, often requiring the development of sources remote from the inhabited areas. 6. The planning and construction of water and sewerage facilities as well as the operation and maintenance of the water supply facilities (in both urban and rural areas) has been the responsibility of the Public Health Engineering Department (PHED) of the State Government. Operation of the waste disposal systems was a local responsibility. In 1980, the State Government instituted 2 changes in the sector organizations. However, from the descriptions provided in the SAR, the project files and the PCR , the audit still finds it difficult to obtain a clear picture of these changes. According to data, in January 1980, the Rajasthan Water Supply and Sewerage Corporation was established to take over responsibility for the sector. Subsequently it was found that "...the transfer of PHED staff to the Corporation would by disruptive and administratively complex..." and the establishment of the Corporation was withdrawn. In its place, the Rajasthan Water Supply and Sewerage Management Board (RWSSB) was created to operate under a government "Committee of Direction". None of the documents referred to above provide a clear picture of RWSSB's composition, statutes or rights and obligations. The best picture that can be formed is that RWSSB is a sector policy forming and managing body, without own staff, but using PHED as its executing arm. 7. At the time of appraisal the reported service levels in the State present a mixed picture. Rural coverage of water supply was low at 24% with r no organized waste disposal systems. By contrast, all 175 towns of the state had piped water supply systems of varying standards. The four major cities, Jaipur, Jodhpur, Kota and Bikaner, containing two million pc' ,le (some 32% of the total urban population) served 67% of their combined population by house connection and another 23% by public standpipes. However, these impressive figures have to be discounted due to the generally low quality and unreliability of the service. Piped sewerage services were only available in Jaipur and Jodhpur serving 20% of these cities' pGpulation giving a very low 5% coverage for the urban population as a whole. The low rural service levels were mainly due to the scarcity of suitable sources of water and some 24,000 villages were classified as problem areas on the basis of availability and quality of water. 8. Development of the water supply/sewerage sector received relatively high priority with 10% of the state's development budget allocated to the sector. At the time of appraisal, the priorities between rural water - urban water - sewerage were established in the ratio of 64:30:6. The SAR offers no comment on the appropriateness of these skewed proportions. Financing of sector developments were, essentially, from central and state government funds, generally as grants. Future policies called for continued grant financing for rural investments and, for urban areas, on the somewhat ambiguous terms of "... make funds available on terms and conditions which would be commensurate with the sector's capacity to service debt." Municipalities also borrowed, occasionally, from the Life Insurance Corporation of India but self generated funds were negligible. Cost recovery policies and practices were indifferent with none of the water supply services covering the cost of operations. No charges were levied for sewerage. The resulting deficits were covered by government budget allocations. 9. This was the environment in which the Bank's first intervention in the water supply sector in the State commenced in 1978 and which resulted in the approval of Credit 1046-IN on June 19, 1980 for US$ 80.0 million. It is, perhaps, worth noting that the proposed investments under the project were equal to the total sector investments made by the State during the period 1951 to 1980. 3 B. The Project qnd its Objectives 10. The project's objectives were straight forward and appropriate, targeting improved water supply services in "problem villages" (see definition in para. 7 above), increased water production capacities and expanded distribution to provide 100% service coverage in the four main cities and the expansion of the sewerage system in Jaipur, Jodhpur and Bikaner to serve 34% of the combined population, establish satisfactory operation and maintenance practices, the introduction of proper billing and collection systems and setting of water charges which would provide for financial self-sufficiency. 11. In support of these objectives the project, as appraised, consisted of the following main components: (i) rural water supply schemes in 2000 villages; (ii) extension of water production (intakes, treatment plants, tube wells), transmission, storage and distribution facilities in four cities; (iii) extension of sewage collection systems and treatment/disposal works in three cities and (iv) engineering services, studies and training. A detailed description of the project is given in paragraph 5 of the PCR. The total estimated cost of the project, at appraisal, was US$164.0 million equivalent with a relatively low US$22.0 million estimated foreign cost. The financing plan for the project consisted of the provision of US$80.0 million IDA credit and a Government of Rajasthan (GOR) budgetary allocation of US$84.0 million equivalent. The project was appraised in December 1979, approved by the Executive Directors on June 19, 1980 and became effective on August 5, 1980. The original closing date was set as December 31, 1985 but, after three extension it was, eventually, closed on December 31, 1988. The last disbursement was made on March 31, 1989 at which tiiue the credit was fully disbursed. C. Implementation 12. The degree to which the technical preparation of the project was completed at the time of approval is not easy to establish. The description of this, in the SAR. is, to say the least, ambiguous but, in piecing the somewhat conflicting statements together, it appears that the appraisal of the rural components was based on sample standard designs and that of the urban components on feasibility studies and preliminary design. While the former could be acceptable for estimating purposes, due to the nature and individual scale of the proposed works, for the urban works, some of which included the construction of dams, a long (80 km), large diameter pipeline, and several water and sewage treatment plants, the preparation was clearly inadequate. As all detailed design was to be carried out during the implementation period, both the original implementation schedule and the corresponding disbursement schedule, naturally, proved to be unrealistic. 13. Nevertheless, the start of the works was promising. Early procurement issues were handled effectively and good progress was made on rural works. However, this situation soon deteriorated and by the end of 1981 the Bank's "supervision letters" were markedly less laudatory. Three major factors were coming into play which seriously affected project progress throughout its life. The first of this was that the availability of local funds was getting more and more constrained. The magnitude of annual project expenditures, as 4 forecast at appraisal, was so much greater than any previously recorded that it is hard to see on what basis these projections were made. The second factor was that, notwithstanding PHED's previous experience in design and construction of water/sewerage works, the scale of the project soon began to overwhelm the staff. The earliest signs of this were the ever increasing delays in procurement. The vast number of construction contracts (the Audit was informed that many were split so that "if one contractor runs away there is still one left") to be dealt with resulted in backlogs in the bid evaluation process and most bid validity dates expired before award was made. A second, perhaps more serious, effect of this overload on PHED staff was the growing evidence of neglected operation and maintenance of existing facilities. Both these effects ought to have been and, in fact, were foreseen during project preparation and identified as potential risks in the SAR. Unfortunately there were no provisions made to counter these risks beyond placing faith in the GOR to provide the funds and preparing a training program to increase PHED's capacity. The third major factor, which could not be foreseen was the persistent and severe draught that affected the already water scarce state in the early 1980s. The direct consequences for the project were the reallocation of resources to accelerate the provision of water supply in severely affected villages and the need to redesign some subprojects where the drought reduced the availability of ground water or, in some cases, completely dried up minor reservoirs. 14. The combined effect of these factors, coupled with existing institutional weaknesses significantly slowed down project progress and reduced the initially exhibited efficiency of RWSSB. Procurement problems multiplied and substantial amount of Bank supervision efforts were devoted to their resolution. A particular problem was RWSSB's practice of repeatedly attempting to negotiate down the bid price with the lowest evaluated bidder. As this is practice would represent the violation of the Bank's procurement guidelines, considerable friction developed and the application of the "misprocurement" rule loomed frequently. However, the audit wishes to note that in the case of Rajasthan, there has never been even a hint of anything but the desire to obtain the cheapest price influencing bid evaluation. The Audit found that this practice is still prevalent and is accepted as normal by local contractors. 15. The effect of the drought and the shortage of local funds, eventually, necessitated a major restructuring of the project. Available funds were shifted to both accelerate the delivery and increase the scope of the rural works and, -correspondingly, reduce the scope of the proposed urban facilities. In terms of the original allocations, these changes represented a full 50% shift of funds from urban to rural. The PCR provides scant information on the facilities actually constructed beyond that 4,329 villages benefitted from the project as against the original target of 2000. The actual works carried out in the four cities are not reported in the PCR. The Audit found that several components were deferred from the appraised project the major ones being: one water treatment plant in Jaipur, two storage reservoirs in Jaipur, two in Bikaner and three in Kota and various lengths of transmission and distribution piping. These deferments limited the targeted improvements in service levels and reduced the operational flexibility of each system which is a major handicap under the drought conditions. On the sewerage side most of the 5 Bikaner treatment facilities were postponed and the number of sewer connections were drastically reduced (by about 67%). The sewer outfall in Jaipur was shortened and, as a result, raw sewage is discharged into a drainage ditch, well within the city, creating considerable nuisance and health hazard. A number of the facilities started under the project are still not complete, most important being the main raw water storage reservoir in Bikaner and the water treatment plant at Jodhpur. The latter, visited by the Audit, is particularly disturbing as it is appears to have been abandoned by the contractor. The structure of the pumping station has been complete for some years but it contains no equipmer. of any kind and, while the clear water reservoir is complete, the filters have barely been started. The Audit believes that the lack of urgency on these works is largely due to the acute shortage of water which, in Jodhpur, will not be solved until the presently planned major water transfer project is completed and this is likely to take many years. In the meantime, the city of Jodhpur receives only some two hours of water supply on alternate days. ] . Due to the slow progress and the changes described above, disbursements lagged far behind appraisal estimates and, at the time of the original closing date (12/31/85) only 51% of the credit was disbursed. In order to allow completion of the project, the credit closing date was extended three times, eventually, to December 31, 1988 and still some important components remained incomplete as described above. 17. The success story of the project is the rural component. The Audit visited several villages in the desert areas of Jodhpur which were provided with water supply under the project. All the shallow wells, in these villages have dried up, due to the drought, and the villagers had absolutely no alternative water supply. The project schemes piped water from considerable distances and provided a basic but adequate standpipe service at two or three locations in each village. The Audit noted several damaged and inoperative taps (largely due to overuse rather than malicious efforts) which present maintenance and repair problems. The service provides about 40 lpcd supply but this is now being upgraded to 70 lpcd average to ensure minimum supply to livestock which, in these villages, is regarded as almost more important than meeting the human needs. Although these schemes are basic and provide minimum service, they are expensive to construct and to maintain. The transmission mains are running long distances, mostly on the surface, require frequent booster pumping and interim storage reservoirs. The efforts put into these schemes, the speed at which they were built over vast areas and the operating and maintenance programs which keep them running, deserve the highest credit. The performance of PHED, in the rural areas also presents a curious contrast with the, sometimes, indifferent performance in urban areas. The greatest danger to the sustainability of these rural schemes, which all rely on ground water, is. the uncontrolled exploitation of the meager ground water resources by the more affluent farmers who use the water for irrigation. The political 6 clout of these farmers notwithstanding, GOR must introduce effective control on ground water use if the aquifers are not to be permanently damaged.' 18. There is very little information provided on the role and performance of the local consultants who assisted RWSSB in the planning design and implementation of the project. The PCR merely reports this assistance as satisfactory. On the facilities visited by the Audit in Jaipur and Jodhpur (no other areas could be visited due to time constrains) the standard of design appeared adequate although some problems such as cracked and inadequate pipe anchor blocks (Jodhpur) and poorly designed sluice gate operating platforms (Jaipur) were noted. Similar lack of details applies to the reporting on the performance of contractors. The overall judgement is given as slow but adequate. The Audit confirms this but the works visited also confirmed that the contractors were not of the highest caliber. The Audit also learned that contractor's performance has, on occasions, been affected by the Indian practice whereby cement and reinforcing steel is provided to the contractor by the client. The reason being that the allocation of these materials is (was) controlled by the central government (due to shcrtages) and it is easier for a state government department/public authority to obtain allocations than it is for a private contractor. While this arrangement may have its virtues, it relieves the contractor of substantial responsibility and, if he runs out of cement, he just seats back and waits until he is supplied again (this issue appears to be behind the problems of the Jodhpur water treatment plant). D. Institution-I Aspects 19. The SAR reports, at length, on the then existing organizational arrangements, staffing and management practices. It also identified areas needing strengthening, recognized the potential increase in workload but, apparently, did not consider these problems exceptional. The creation of RWSSB, at the time of appraisal was regarded as "...a major step in the development of the sector" while the PCR comments (para. 9) that "...now RWSSB is little more than a label". There is every indication that the appraisal merely ascertained the facts regarding the PHED without any in-depth analysis of its capacity and accepted that the establishment of RWSSB was a "good thing". The fact that a much bolder step, the establishment of the Rajasthan Water and Sewerage Corporation (January 1980) was, almost immediately, canceled, ought to have given a warning that the GOR will not relinquish control which, in fact, it did not do. The Audit's discussions, which were curtailed by an abrupt transfer of RWSSB's two most senior staff (Technical Member and Chief Engineer) during the mission, confirmed that, in practice, the RWSSB is, indeed, little more than a title. All of the Board's staff are employed by the same government department as that of PHED, on the same terms and it is difficult to discern any advantage from the Board's existence in its present form. Government expressed reservations on controlling letislation due to "political difficulties." The Audit reconfirms its views on the necessity for such action in the longer term (see also para. 24). 7 20. The implementation history of the project indicates that beyond some, substantial, internal efficiency improvements within PHED such as better use of staff skills, more effective management and introduction of commercial accounting and use of computers, no sector wide or structural institutional development has taken place. PHED is still a government department and all funding, tariff and senior appointment decisions are taken by the government i.e. there is zero degree of autonomy in the sector. As a result RWSSB/PHED is basically a design and construction agency relying entirely on "external" funding for its investment and operating expenses and, almost by definition, not unduly concerned with internal revenue generation. The tradition and convenience of, virtually, fully subsidized operations seems to have created an atmosphere where recovery of costs from the consumer (at least the low income domestic) is regarded both as, somehow, morally wrong as well as inconvenient although, at the same time, the commercial/industrial water tariffs in the State are one of the highest in India. Since this attitude appears to have existed, already, at the time of appraisal, the wildly ambitious financial targets set by the Bank could hardly have been taken seriously. As, so far, there has been no follow up Bank project in Rajasthan (a second project is now under preliminary consideration), it remains to be seen what kind of long term effects resulted from the limited benefits achieved by the project in the institutional and financial areas. E. Financial Aspects 21. The financial appraisal of the project, on paper, was a copy book exercise. The financial chapter and related annexes of the SAR was prepared in the finest detail, backed by 29 specific assumptions. The reader is informed that, in 1988 there will be precisely 526,564 metered connections and, to serve these and other forms of service, 332,834 million liters of water will be produced. The audit can not help feeling that the preoccupation with the precision of this exemplary academic exercise totally obscured the realities of the situation. To expect that, in one of the poorer agricultural states of India, a heavily subsidized government operating department would move in five years, in four poorly served towns, from an operating ratio of 146 to 78 and from negative to plus 9% financial rate of return on net fixed assets, required truly heroic optimism. The projections for rural services are, perhaps even more revealing. From an operating ratio of 433, at appraisal, these operations were to improve to a ratio of 86 in five years. At that time, 83% of t a revenues were to result from rural standpipe users paying Rs 1.0 per pers per month. 22. Needless to say, the realities turned out to be very different. Although RWSSB made great strides in improving its financial department, installed a commercial accounting system and computerized billing and developed an excellent (urban) collection system, it was never a master of its own destiny in terms of revenue f 'ration. The "agreed" annual tariff increases never materialized and, duLing th- extended project period, only two tariff increases were granted by the GOR .1 1985 and 1987, then largely as result of the Bank threatening to suspend disbursements (1985) and making tariff increase a condition of extendLng the closing date (1987). Sewerage charges were introduced 5 years late and the Rs 1-0 rural standpipe charge was abandoned early as uncollectible. 8 23. In fact, for evaluation purposes, there would be little point in comparing the appraisal projections with the actual financial situation on completion. At the time of the restructuring of the project, in 1985, the financial projections were also recast presenting a very sobering picture. Although the massive additional investments (outside the Bank project), made under the central government's assistance for drought relief, considerably increased water sales (and revenues) in the urban areas, operating expenses also skyrocketed, resulting in the following summary financial position over the last five years of the project (1984 - 1989), in the four cities, as obtained by the Audit: 1985 1986 1987 1988 1989 (Rs mill) Total Revenue 83.30 118.45 131.13 153.32 164.77 Direct Op.Exp. 120.03 141.47 171.70 174.19 199.85 Depreciation 8.26 9.23 10.21 11.18 16.65 Op./Net Income (44.99) (32.25) (50.79) (32.05) (51.72) Average Net Fixed Assets 214.78 237.40 260.36 280.03 451.84 Rate of Return (20.9%) (13.6%) (19.5%) (11.4%) (11.5%) With very limited number of private connections in the villages, rural revenues are negligible. It is obvious that if this trend continues, the urban and rural areas together, do and will represent a massive and ever growing demand on the GOR budget. If, for political or other reasons, GOR decides to finance the water supply/sewerage sector, wholly or in part (there are examples of dual forms of water/sewerage charges), through taxation, that is neither a unique nor necessarily a bad thing. Provided the mechanics and the policies are correct, it is just another form of collecting from the consumer. If. however, the taxes are not earmarked and, in their application encourage wasteful use of water and, as is often the case, subsidize the wrong income group, inequities will result and, ultimately, the sustainability of the sector will be in doubt.2 There is limited information available on unaccounted for water and corresponding revenue losses. This may. partly, be due to the intermittent and low pressure supplies which makes assessment of losses difficult, but, it is also clear that the issue received little attention in the past. Modern leak detection equipment was only obtained by RWSSB in January, 1990. 24. Putting aside the lack of reality in the appraisal projections and targets, GOR needs to develop clear policies and practices for the financing of the sector, bearing in mind the issues of affordability, the water scarce 2 Government's comment, in essence, reconfirms intention to wholly subsidize water supply in Rajasthan. This view needs to be borne in mind in any future Bank support for the sector. 9 nature of Rajasthan and the opportunities offered by cross subsidization. There is every indication that the cost of water in Rajasthan will continue to rise as more and more remote sources have to be developed and, with or without the Bank, GOR must put maximum priority on the efficient exploitation of all the water resources, limit wastage of water to the absolute minimum and design an institutional and financial base for the guaranteed provision of these vital services. The 1989 financial report of the RWSSB notes that the number of industrial consumers is dropping, resulting in serious loss of revenue. The reason for this is the apparently uncontrolled ability of individuals or companies to drill their own wells and, thereby, avoid paying for water at the high industrial rate. While PHED requires the approval of the Rajasthan Ground Water Department for additional ground water exploitation this, apparently, does not apply to private individuals. Consequently, revenues are lost and, more important, the scarce ground water resources are depleted by indiscriminate use. F. The Role of the Bank 25. The Bank's project files, the SAR and the PCR, including the borrower's comments, produce a curious picture of the Bank's role in the project. There is no doubt that the Bank's initial participation was welcome and that it contributed significantly to a comprehensive approach to the future development of the water sector in Rajasthan. Relationship with the borrower was good, the Bank's advice was welcome and the project, as designed, appeared to be a neat package with all important sector aspects covered. It was considerably later when it was realized that the environment for implementing the package did not exist. When, for a period, the Bank tried to insist on achieving the unrealistic goals set, the relationship soured. With the restructuring of the project good relations returned to the extent that the borrower termed them "excellent" in the PCR. In the audit's view, the Bank's basic mistake was to try to design an "ideal" project in which every aspect, technical, institutional and financial, was fully covered, solutions were prescribed to every problem, all to be implemented through a predetermined path. The project was to be a technical and organizational transplant with little consideration given to the particular environment of Rajasthan. However, once the realities set in and many of the ideal targets proved unachievable, the collective efforts of Bank staff and the borrower still ensured that the final achievements were substantial, in particular, in the rural areas where the projects contribution to improved water supplies, quite possibly, averted a major catastrophe for a large number of people. G. Conclusions and Lessons 26. The project was overambitious, in some respects less than adequately prepared and, above all failed to recognize (and incorporate) the political, social and physical environment of Rajasthan. For these reasons, it did not (or only partially) achieve all the objectives set out at appraisal. Most prominent among these are the institutional and financial developments both of which are affected by deep rooted political and social factors. An objective which, by hindsight, should have been paramount, but was missed, was the effective management of water resources. This critical issue is briefly flagged in paragraphs 1.05 and 1.06 of the SAR but, thereafter, was 10 essentially ignored. Even if drought conditions were not "officially" recognized at the time, the meager water resources of the State should have designated the issue the highest long term priority. The potentially very high cost of providing adequate water supplies for both the rapidly growing urban areas and the perennially marginal rural conditions must be the foundation of any future projects/programs for the physical, institutional and financial development of the sector. It has to be obvious that the financial capacity of the present and future consumers is far below what will be required for funding these developments and, in future Bank projects (if any) much more financial finesse will be required than just the traditional, repeated, tariff increases, if a satisfactory answer is to be found. 11 ANNEX 1 Page 1 of 2 COMMENTS FROM THE BORROWER TELEX FOR: SHRI P. V. BHIDE, ADVISER TO ED (INDIA) WORLD BANK, WASHINGTON, D.C. FROM: HARDEEPAK SINGH, DIRECTOR (FB) ECOFAIRS, NEW DELHI. KINDLY PASS ON THE FOLLOWING MESSAGE TO MR. JOZSEF B. BUKY, OED COMMENTS ACTING DIVISION CHIEF, OEDD2, OPERATIONS EVALUATION DEPARTMENT, WORLD BANK. QUOTE PLEASE REFER TO THE DRAFT PPAR IN RESPECT OF RAJASTHAN WATER SUPPLY AND SEWERAGE PROJECT SENT WITH WORLD BANK LETTER DATED 19/7/90 AND TO YOUR TELEX OF 1ST NOVEMBER 1990. OUR COMMENTS ON SOME OF THE PROVISIONS CONTAINED IN PPAR ARE AS FOLLOWS. (AAA) REFERENCES TO POLITICAL INVOLVEMENT. REFERENCE P,-.RA. 17 OF THE PPAR: IN THE CONTEXT OF INDIVIDUAL PROJECT EVALUATION IT WOULD BE ADVISABLE TO REFRAIN FROM REFERENCES TO POLITICAL INVOLVEMENT. AS PRESENTED IN LAST PART OF PARA. 14 OF THE PPAR IN THE CONTEXT OF PROCUREMENT DELAYS IN NEGOTIATIONS BY GOR WITH CONTRACTORS, THE OBSERVATIONS SUBQUOTE WHILE IN SEVERAL OTHER CASES WHERE SUCH NEGOTIATIONS OFTEN HAD A STRONG FLAVOR OF POLITICAL INFLUENCE AND CORRUPTION SUBUNQUOTE OED GIVES AN IMPRESSION OF EXISTENCE Reference eliminated. OF SUCH PRACTICES ELSEWHERE IN INDIA/OTHER PROJECTS. THIS MAY BE SUITABLY MODIFIED SINCE GOI HAS RESERVATION ON THIS PRESENTATION. (BBB) WHILE COMMENTING ON THE ROLE OF RAJASTHAN WATER SUPPLY AND SEWERAGE MANAGING BOARD, OED HAS OBSERVED THAT SUBQUOTE THERE WERE NO SIGNIFICANT CHANGES IN THE SECTOR ORGANIZATION AS A WHOLE AND CREATION OF RWSSMB DOES NOT SEEM TO HAVE ANY SIGNIFICANCE AS IT IS SUBUNQUOTE (PARA. 14 OF EVALUATION SUMMARY), RELATIVELY LESS CLEAR PROJECTION OF CHANGES IN SECTOR ORGANIZATION AND ROLE OF RWSSMB (PARA. 6, OF DRAFT PPAR), LACK OF ANY DISCERNABLE ADVANTAGE OF BOARD'S EXISTENCE IN ITS PRESENT FORM AND "GOR'S CONTINUING CONTROL IN THE SECTOR" (PARA. 19, PPAR), NO EFFECTIVE DEVELOPMENT OF SECTOR WIDE OR STRUCTURAL INSTITUTION (PARA. 20). THE ROLE OF RWSSMB EXTENT AND THE LIMITS OF ITS OPERATION ARE The Audit has taken ADEQUATELY BROUGHT OUT IN PARA 5.02 OF SAR. PARAS. 1.08 TO note of these 1.12 READ WITH CHAPTER V, IN PARTICULAR 5.02 OF THE SAR WOULD comments. 12 ANNEX 1 Page 2 of 2 INDICATE THAT NO MAJOR SECTOR CHANGES IN THE POLICY AREAS HAD BEEN ENVISAGED AND RWESMB WAS BASICALLY INTENDED TO BE TECHNICAL MANAGEMENT AGENCY. ALSO PARA 5.02 AND 1.10 ENVISAGES CONTROL OF MAJOR SECTOR POLICY AND TARIFF REVISION BY GOR. AS REGARDS LACK OF ANY DISCERNIBLE ADVANTAGE OF BOARD'S EXISTENCE WE WOULD LIKE TO REFER TO PARA. 2 OF PART II OF THE PCR CONTAINING GOR COMMENTS WHICH BROADLY OUTLINES THE ADVANTAGES OF A SEPARATE ENTITY IN THE DAY TO DAY FUNCTIONING IN THE SECTOR. (CCC) OED HAS HIGHLIGHTED THE NEED FOR GROUND WATER LEGISLATION BOTH IN THE CONTEXT OF CONTROL OF GROUND WATER EXPLOITATION AS See Footnote, ALSO TO COUNTER THE LOSS OF REVENUE FROM INDUSTRIAL AND para. 17 of COMMERCIAL USERS WHO HAD ABANDONED MUNICIPAL SUPPLIES BY PPAR. DRILLING THEIR OWN WELLS. THERE IS ALSO REFERENCE TO THE NEED TO CONTROL GROUND WATER EXPLOITATION BY FARMERS FOR IRRIGATION PURPOSES (PARA. 16 OF EVALUATION SUMMARY, PARA. 17 AND 24 OF THE DRAFT PPAR REFER IN THIS CONNECTION. GOR HAS EXPRESSED RESERVATION IN IMPLEMENTATION OF SUCH LEGISLATION DUE TO PRACTICAL DIFFICULTIES AND THE EXISTING SOCIO-HISTORIC USE OF WATER PRIMARILY FOR IRRIGATION PURPOSES. SINCE THE POTENTIAL OF GROUND WATER AS SOURCE FOR WATER SUPPLY AND FOR REVENUE IS LIMITED IN VIEW OF THE UNIQUE POSITION OF RAJASTHAN THIS ISSUE NEEDS TO BE APPROACHED WITH CAUTION. (DDD) COST RECOVERY AND TARIFF REVISION. THE PPAR ACKNOWLEDGES THE NON-FEASIBILITY OF THE CONCEPTS OF (ILLEGIBLE) AND THE HIGH COST INVOLVED IN TAPPING AND See Footnote, TRANSPORTING FROM DISTANT SOURCES. HOWEVER, IN THE para. 24 of CONTEXT OF FU.TURE PROJECTS IN THE SECTOR THERE IS A PPAR. REFERENCE TO RESOURCE MOBILIZATION THROUGH TAXATION FROM THE CONSUMERS AND EARMARKING THEIR APPLICATION FOR WATER SERVICES (PARA. 23). GOR AS PART OF THEIR COMMENTS ON PCR HAVE INDICATED THAT THE CONCEPTS OF DIRECT USER CHARGES EVEN TO COVER MAINTENANCE EXPENDITURES SHOULD NOT BE INSISTED (PARA 3(A) OF PART II OF PCR). IT WOULD BE INFRUCTUOUS TO CONSIDER RESOURCE MOBILIZATION TO COVER EVEN PART OF CAPITAL COST EITHER THROUGH DIRECT WATER CHARGES OR TAXATION SINCE GOR HAVE RESERVATIONS EVEN IN MOBILIZING FUNDS TO COVER MAINTENANCE EXPENDITURES. (EEE) THE ORIGINAL CLOSING DATE APPEARING IN PARAS. 11 Corrected. AND 16 OF THE DRAFT PPAR AND IN PARA. 2 OF THE PREFACE NEED TO BE MODIFIED FROM 30.9.85 TO 31.12.85 WHICH IS THE DATE STIPULATED IN PARA 2.04 OF THE DCA. REGARDS.