India - Second and Third Calcutta Urban Development Projects

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 14807 PERFORMANCE AUDIT REPORT INDIA SECOND CALCUTTA URBAN DEVELOPMENT PROJECT (CREDIT 756-IN) AND THIRD CALCUTTA URBAN DEVELOPMENT PROJECT (CREDIT 1369-IN) JUNE 30, 1995 Operations Evaluation Department 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. Currency Equivalents Currency Unit = Indian Rupees (IRs.) US$1.00 = IRs. 8.6 (November 1977, at appraisal CUDP-II) US$1.00 = IRs. 9.5 (May 1983, at appraisal CUDP-III) US$1.00 = IRs. 9.75 (August 1984, at credit closing CUDP-II) US$1.00 = IRs. 25.5 (March 1992, at credit closing CUDP-III) Abbreviations and Acronyms BDP Basic Development Plan for the Calcutta Metropolitan District, 1966-1986 BOD Biochemical Oxygen Demand (a measure of pollution in water) cfs cubic feet per second CHIP Calcutta-Howrah Investment Programs (of CUDP-III) CMACP CMA-wide Complementary Programs (of CUDP-III) CMC Calcutta Municipal Corporation CMD Calcutta Metropolitan District CMDA Calcutta Metropolitan Development Authority CMPO Calcutta Metropolitan Planning Organization CMWSA Calcutta Metropolitan Water and Sanitation Authority Cr. Credit (of the International Development Association) CUDP-I First Calcutta Urban Development Project, Cr. 427-IN, 1973-79 CUDP-I1 Second Calcutta Urban Development Project, Cr. 756-IN, 1978-84 CUDP-III Third Calcutta Urban Development Project, Cr. 1369-IN, 1983-1992 CVB Central Valuation Board (of GoWB) ERR Economic Rate of Return ha. hectare, where I ha. = 2.471 acres ICB International Competitive Bidding IDA International Development Association (of the World Bank Group) ILGUS Institute of Local Government and Urban Studies IMGD Imperial millions of gallons per day (UK) Ipcd liters per capita per day GDP gross domestic product GOI Government of India GoWB State Government of West Bengal MDP Municipal Development Program (of CUDP-III) MIS Management Information System mid million liters per day NEERI National Environmental Engineering Research Institute ODs Operational Directives of the World Bank OED Operations Evaluation Department of the World Bank O&M Operation and Maintenance PAR Performance Audit Report of the Operations Evaluation Department PCR Project Completion Report Rev. Revision SAR Staff Appraisal Report SSE Small-scale Enterprises SURAD Shelter, Urban Renewal, and Area Development TA Technical Assistance TRIP Transmunicipal Infrastructure Program (of CUDP-HII) Fiscal Year GOI/GoWB: April 1 - March 31 FOR OFFICIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A. Office of Director-General Operations Evaluation June 30, 1995 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Performance Audit Report on India Second and Third Calcutta Urban Development Projects (Credits 756-IN and 1369-IN) Attached is the Performance Audit Report on the India - Second Calcutta Urban Development Project (Credit 756-IN, approved in FY78) and Third Calcutta Urban Development Project (Credit 1369-IN, approved in FY83) prepared by the Operations Evaluation Department. The audited projects were prepared and implemented as part of the Bank's continuing response to a perceived urban crisis in Calcutta, a city which, in the 1960's, was held to be an extreme example of urban crowding and intolerable poverty. Both projects contained a broad package of initiatives in the water supply, sewerage, urban transport, and housing sub-sectors to address the metropolitan area's urban needs. Yet, insufficient examination of the urban policy framework had been done prior to the projects. The objectives of both projects emphasized the need for institutional and financial reforms, but the actual focus of Bank investment was on physical works. Appraisals of both projects were considerably over-optimistic in their assumptions regarding the effectiveness and ease of implementation of proposed project works, financial reforms, and institutional improvements. Despite notable successes, the imbalance between project objectives and design components, combined with the failure of Bank missions to focus on institutional development aspects, led to an unsatisfactory outcome for both projects. While inevitably complex, similar urban projects can be successful provided their design is informed by appropriate sector work and implementation support is directed to institutional development as well as physical progress. Rationalization of the policy environment is necessary and legislation must be harmonized. A strong basis for revenue generation for operation and maintenance of urban services should be provided. The outcome of both projects is rated as unsatisfactory given major shortfalls against stated project objectives. Their institutional development impact is rated as modest. The sustainability of project benefits is rated as unlikely within the current policy framework. These ratings confirm the prior PCR-based ratings. Commenting on the audit findings, the Borrower highlights the positive impact of project investments for vulnerable groups as well as the learning dimension of project shortcomings. A new urban policy, currently in the making, is expected to address issues of fiscal decentralization, cost sharing, cost recovery and private provision of municipal services. Attachmenc 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 Contents P reface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 Basic Data Sheet .........................................................5 Evaluation Sum m ary ......................................................9 1. Background ..................................................... 15 Macroeconomic Setting .............................................. 15 Urban Setting of Calcutta ............................................. 5 The Bank's Assistance ............................................... 16 2. The Projects: Objectives and Description ................................ 17 Second Calcutta Urban Development Project (CUDP-1I, Cr. 756-IN) ............... .17 Third Calcutta Urban Development Project (CUDP-1i1, Cr. 1369-IN7 ............... 17 Relevance of the Project Objectives ...................................... 18 3. Project Experience ................................................ 21 Project Preparation ..................................................21 Identification and Preparation Process ............................... 21 N egotiations .................................................23 Q uality at Entry ...............................................23 Project Implementation and Results ....................................... 24 Procurem ent ..................................................24 Implementation Scheduling .......................................24 Project Costs .................................................25 Performance of Consultants ...................................... 25 Physical Results and their Impact ................................... 26 Finance .....................................................28 Institutional Development Impact .................................. 29 Constraints Imposed by the Urban Policy Environment .................... 30 Project Benefits and their Sustainability .............................. 32 Economic Evaluation ........................................... 33 4. Borrower and Bank Performance ...................................... 35 Borrower Performance ............................................... 35 Bank Performance .....35 Compliance with Covenants and ODs .................................... 36 This report was prepared by Messrs. Tauno Skytta (Task Manager), and Charles G. Chandler (Consultant) who audited the project in October 1994. Mmes. Elizabeth Tweddle and Helen Watkins provided administrative support. 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 wiLhout World Bank authorization. 2 Contents 5. Conclusions and Key Findings ........................................ 37 General Conclusions ..................................................37 Ratings ..........................................................39 Key Findings/Lessons ............................................... 39 Recommendations ...................................................39 Annex A: Details of Project Preparations and Negotiations ........................... 41 Attachment: Comments from the Ministry of Urban Affairs and Employment ....................................................47 3 Preface This is a Performance Audit Report (PAR) for the Second and Third Calcutta Urban Development Projects (CUDP-II and CUDP-III) which were approved by the Board of Directors on December 13, 1977 and May 19, 1983, respectively. CUDP-II and CUDP-III were financed in part by IDA Credits 756-IN and 1369-IN of US$87.0 million equivalent and US$147.0 million equivalent, respectively. CUDP-II was fully disbursed and closed June 30, 1984 after extensions totalling three years, while CUDP-III closed on March 31, 1992, with cancellation of US$65.5 million equivalent after extensions totalling 15 months. The PAR was prepared by the Operations Evaluation Department (OED). The Project Completion report (PCR) for Credit 756-IN was prepared by the then Population, Human Resources, Urban and Water Operations Division of Asia Country Department IV (India), and was submitted to the Board as Report No. 6970, dated September 30, 1987. The PCR for Credit 1369-IN was prepared by the Infrastructure Operations Division of Country Department II (India) of the South Asia Regional Office, and was submitted to the Board as Report No. 12146, dated June 30, 1993. The PCRs provide a good account of project implementation together with a candid discussion of constraints. The PAR expands the discussion of several issues, particularly those dealing with the urban policy environment. The PAR is derived from an OED review of the PCRs, the President's Reports, project legal documents, the staff appraisal reports (SARs), review of relevant project files, and other background materials and reports. The PAR also draws on field observations and on interviews with officials of the Government of India (GOI), the Government of West Bengal State (GoWB), the Calcutta Metropolitan Development Authority (CMDA), and other organizations and individuals based on the Audit's November 1994 mission investigations. Following standard OED procedures, the draft PAR was sent to the Borrower for comments on April 24, 1995. The comments received from the Ministry of Urban Affairs and Employment of GOI are reproduced as an Attachment to the PAR.  5 Basic Data Sheet SECOND CALCUTTA URBAN DEVELOPMENT PROJECT (Credit 756-IN) Credit Position (Amount in US$ million) As of August 8, 1984 Appraisal Actuall Actual % of Estimate Reestimate Appraisal Estimate Total Project Cost 183.71 164.4 89.5 Credit Amount 87.0 87.0 100 Canceled Cumulative Estimated and Actual Disbursements Appraisal Estimate (US$M) 87.0 Actual (US$M) 87.0 Actual as % of Estimate 100 Date of Final Disbursement 08/08/84 Project Dates Original Actual Identification 03/21/75 Appraisal 11/28/76 Negotiations 10/11/77 Board Approval 12/13/77 Credit Signature 01/06/78 Credit Effectiveness 04/07/78 Credit Closing 03/31/83 06/30/84 Staff Inputs (staff weeks) FY75 FY76 FY77 FY78 FY79 FY80 Through Appraisal - 21.0 0.6 - - - Negotiations - - 3.6 - - - Supervision - - 2.2 8.2 13.4 6.2 Total - 21.0 6.4 8.2 13.4 6.2 FY81 FY83 FY84 FY85 Total Through Appraisal - - - - 21.6 Negotiations - - - - 3.6 Supervision 4.0 3.2 3.0 0.4 40.6 Total 4.0 3.2 3.0 0.4 65.8 6 Mission Data Stage of Project Performance Month/ No. of No. of Cycle year persons weeks Rating Through Appraisal 07/76 7 2.6 - 10/76 2 1.4 - 11/76 8 4 - 02/77 3 2.8 - 03/77 1 .8 - 08/77 1 .6 - Post Negotiation 12/77 4 3.6 not rated Supervision 03/78 5 2.2 not rated 10/78 10 5 not rated 02/79 3 3.2 not rated 07/79 7 3.2 not rated 10/79 1 3.6 not rated 02/80 4 3.8 not rated 03/80 1 2.8 not rated 09/80 6 2.8 not rated 12/80 1 1 not rated 02/81 4 2.4 not rated 09/81 7 2.6 not rated 03/82 4 1.4 not rated 02/83 5 3.2 not rated 11/83 7 2.4 not rated 05/84 6 0.6 not rated 12/84 6 0.4 not rated Other Project Data Borrower: Government of India Executing Agency: Calcutta Metropolitan Development Authority Follow-up Project: Third Calcutta Urban Development Project 7 Basic Data Sheet THIRD CALCUTTA URBAN DEVELOPMENT PROJECT (CREDIT 1369-IN) Credit Position (Amount in US$ million) As of March 31, 1992 Appraisal Actual Actual % of Estimate Reestimate Appraisal Estimate Total Project Cost 303.08 206.28 68 Credit Amount 147.00 81.50 55 Canceled -- 65.50 Cumulative Estimated and Actual Disbursements Appraisal Estimate (US$M) 147.0 Actual (US$M) 81.5 Actual as % of Estimate 55.0 Date of Final Disbursement 03/31/92 Project Dates Original Actual Identification 03/12/80 Preparation 08/82 Appraisal 10/82 Negotiations 04/13/82 Board Approval 05/19/83 Credit Signature 06/08/83 Credit Effectiveness 09/09/83 10/07/83 Credit Closing 03/31/89 03/31/92 Staff Inputs (staff weeks) FY80 FY81 FY82 FY83 FY84 FY85 FY86 Through appraisal 2.0 6.0 9.2 4.2 - - - Supervision - - - - 4.8 4.8 3.0 Total 2.0 6.0 9.2 4.2 4.8 4.8 3.0 FY87 FY88 FY89 FY90 FY91 FY92 Total Through Appraisal - - - - - - 21.4 Supervision 4.6 2.2 2.6 1.0 1.6 1.4 26.0 Total 4.6 2.2 2.6 1.0 1.6 1.4 47.4 8 Mission Data Stage of Project Performance Month/ No. of No. of Cycle year persons weeks Rating Through Appraisal 01/80 4 2 - 09/80 2 2.8 - 12/80 1 1 - 02/81 2 2.2 - 11/81 2 2.6 - 03/82 4 3.8 - 06/82 4 2.8 - 09/82 9 4.2 - Supervision 11/83 7 2.4 2 05/84 6 2.4 2 12/84 6 3 1 06/85 4 1.8 3 12/85 5 2.4 2 05/86 1 .6 3 11/86 7 2.6 3 05/87 5 2 2 02/88 5 2.2 2 11/88 8 1.8 2 03/89 2 0.8 2 08/89 3 1 3 11/90 3 1.6 2 02/92 3 1.4 2 Other Project Data Borrower: Government of India Executing Agency: Calcutta Metropolitan Development Authority Follow-up Project: None 9 Evaluation Summary The Projects: Objectives and Description 1. The Second and Third Calcutta Urban Development Projects (CUDP-II & CUDP-III) approved in 1977 and 1983, respectively, were part of a continuing Bank response (beginning with CUDP-I in 1973) to a perceived urban crisis in Calcutta, brought to the world's attention by the cholera epidemic of 1958. For many in the international community, Calcutta was viewed as an extreme case of urban crowding and intolerable poverty. In response, a series of initiatives were envisaged in water supply, sewerage, drainage, urban transport, and housing sub-sectors--embodied by the tenants of the Basic Development Plan (1 966)-to deal with the crisis (paras. 1.1-1. 7). 2. The objectives of CUDP-II (1977-1982) emphasized the need for institutional and financial reforms for urban service delivery. An IDA credit of US$87.0 million equivalent (47 percent of total project costs) was approved to finance the following components: residential, commercial and industrial sites and services development; redevelopment of the Howrah fish and pan market; participation in the ongoing improvement program in 420 slums in the Calcutta Metropolitan District (CMD); construction and remodeling of 400 existing schools; pilot health services for 175,000 low- income people; improved water supplies in fringe areas surrounding the Calcutta area; sewer improvements in Calcutta and Howrah; installation of 12,000 prefabricated sanitary latrines (replacing bucket latrines); traffic engineering; and technical assistance (paras. 2.1-2.2). 3. The objectives of CUDP-III (1983-1988) called for improved urban management through decentralization of many functions from the Calcutta Metropolitan Development Authority (CMDA) to municipal governments in exchange for institutional and financial reforms at the local level. The intervention components were just as wide spread as in CUDP-II, but were organized around a new framework of four core programs. An IDA credit of US$147 million equivalent (representing 48 percent of the total project costs) was to finance the following components: the Municipal Development Program (MDP, including water supply, drainage, sanitation, slum improvements, parks, etc.); the Transmunicipal Infrastructure Program (TRIP, including water supply, drainage, sanitation, transportation infrastructure, area development); the Calcutta-Howrah Investment Programs (CHIP, including water supply, drainage, sanitation, slum improvement, traffic and transportation, urban renewal, etc.); and the CMA-wide Complementary Programs (CMACP, including shelter and area development, health, promotion of small scale entrepreneurship, fringe area development, technical assistance and training) (paras. 2.3-2.5). 4. Overall, project components as stated in the SARs had limited relevance to the project objectives: they predominantly funded public works and did not tackle institutional constraints. The few institutional (primarily organizational) changes that were attendant with the projects were necessary, but likely to be insufficient for the achievement of institutional effectiveness within the existing policy environment (paras. 2.6-2.7). 10 Project Experience Project Preparation and Negotiations 5. Despite significant time and resources spent in project preparation and negotiations (paras. 3.1-3.11 & Annex A), both projects emerged with inherent weaknesses: (a) there was an imbalance between project objectives (institutional and financial reforms) and funds allocated for implementation components (CUDP-1l, 98 percent public works, 2 percent TA and training; CUDP- III, 99 percent public works, I percent TA and training); (b) project preparation ignored risks in the urban policy framework (which remained distorted with respect to the pricing of services), and components which relied upon improved cost recovery directly from users (e.g., water supply and sewerage) or loan recovery from municipalities were likely to be problematic; (c) procurement packaging involved numerous small contracts, and could be expected to be overly complex and difficult to supervise; and (d) neither the Bank nor the Borrower appeared to be fully committed to the project objectives which focused on institutional and financial reforms. Project Implementation and Results 6. Project implementation faced difficulties: (a) procurement was complicated and difficult (paras. 3.12-3.15); and (b) implementation scheduling was problematic, leading to significant time overruns (paras. 3.16-3.17). The performance of consultants was satisfactory (paras. 3.19-3.20). 7. The following project outcomes have been highlighted in the report (paras. 3.21-3.30): a. In water supply, beginning with CUDP-I and continuing with other improvements under CUDP-II & -III, the projects served to return the Palta-Talla water system (which serves only the Calcutta Metropolitan Corporation) to its full capacity of 160 IMGD (or supplying about 163 Ipcd to the distribution system). CUDP-II added major tubewells in Calcutta, Howrah and other CMA areas. CUDP-III contributed to leak detection activities, and augmentation of production, treatment and distribution within additional municipalities of the CMA (paras. 3.21-3.22). b. The projects served to strengthen and rehabilitate portions of the drainage/sewerage system. CMDA reports that periods of extended flooding (waterlogging) have been reduced in many areas from about 15 flood events per year to an expected average of about six now (paras. 3.23-3.24). c. Some road and transport improvements under the project have had important impacts, although construction proceeded slower than planned. The Eastern Metropolitan By-pass (constructed under CUDP-II) is fast emerging as the axis of a new Calcutta. On the other hand, the Barrackpore/Kalyani Expressway (which was predicated upon the bi-polar growth model) remains largely a rural road, and Kalyani a small town, despite the 30 km highway leading to it, 30 years of promoting its development, and the infrastructure-rich environment provided in the town. The Howrah bus terminus provides a needed service to private bus operators and the public, yet mechanisms for cost recovery have still not been finalized (paras. 3.25- 3.26). 11 d. Land acquisition and unresolved tenant compensation issues in Calcutta led to abandonment of 12 of the 13 commercial area development schemes planned in and near Metro stops. Traffic planning under the projects led to the signaling of 18 intersections, yet their operation failed to receive the needed support from local police and pedestrians to allow them to function; their use has since been discontinued (para. 3.26). e. The impact of the Howrah Fish and Pan Market component was disappointing. At the time of the Audit's visit, the condition of the buildings was poor: the fish market was completed but is not being used because of a dispute between the fish sellers and the Howrah Development Corporation (para. 3.27). f. The solid waste component suffered from inappropriate design concepts (which held that only the purchase of vehicles and bins were required), leading to failure of the component (para. 3.28). g. In the small-scale entrepreneur (SSE) program, political expediency encouraged a lax attitude toward loans-which were forgiven by government in violation of agreements with the Bank (para. 3.30). 8. Finance for operation and maintenance of the constructed assets remains an outstanding problem (paras. 3.31). Under CUDP-I and -II, CMDA expanded into a large public works construction agency in order to implement the development program financed by the Bank-assisted projects. This trend became the focus of critical controversy during CUDP-II, and led to decentralization of some of CMDA's functions to municipalities under CUDP-III (paras. 3.32-3.39). The Institute for Local Government and Urban Services (ILGUS) was successfully utilized to carry out an innovative training component for local government officials and local government staff (para. 3.38). 9. The urban policy environment imposed the most severe constraints on project viability and sustainability (paras. 3.40-3.44). An overall assessment of the project effects requires balancing the positive aspects of achievement in several components with the growing lack of financial sustainability in urban service delivery due to a deficient policy framework and the institutional weaknesses which affect maintenance and expansion of services (paras. 3.45-3.50). 10. At appraisal of CUDP-II, the weighted economic rate-of-return (ERR) for components making up 60 percent of project costs was estimated at 20 percent. No reestimation was carried out in the PCR since several project components had not yet been completed. In CUDP-III, ERR estimates both before and after the project were carried out. The ERR estimates in the SAR were limited to water supply, sewerage and drainage, traffic and transportation, slum improvements, and area development which accounted for some 54 percent of the original project costs. This gave an original 13 percent ERR. Reestimated in the PCR, with 50 percent of actual project costs, excluding uncompleted components, gave 13.6 percent (para. 3.51-3.53). While this suggests an acceptable development impact, project outcomes are rated unsatisfactory because the major relevant objectives of the projects were not met (paras. 13-14, below). 12 Borrower and Bank Performance 11. In the case of CUDP-II and CUDP-III, the "borrower" as discussed here includes GOI, GoWB, CMDA, and some 36 (now 39) municipalities involved in the project. While the responsible agencies performed satisfactorily on the physical implementation aspects of the projects, there were underlying constraints in the policy environments which make implementation of projects of this type difficult in India (para. 4.1). 12. Bank performance was satisfactory under CUDP-II and III, although with some qualifications (paras. 4.2-4.4). Throughout CUDP II and III the Bank adopted an incremental approach to policy reform and improvements in cost recovery under the projects, rather than for policy changes up-front. Yet few policy reforms were implemented. During implementation there was little pressure from the Bank for further policy reform, as Bank staff generally equated physical works construction with overall progress, and generally reported project progress as satisfactory. This was at variance, however, with project objectives which called for institutional improvement and financial reform as a major focus. Conclusions and Key Findings General Conclusions 13. The main reason for "unsatisfactory" ratings in this Audit is that the projects did not meet their primary institutional and financial reform objectives (para. 5.1-5.5). The overall unsatisfactory ratings should not detract from the notable success found within some components (para. 5.6), nor should it lead the Bank to believe that projects of this type are necessarily too complex for successful implementation (paras. 5.7-5.9). Ratings 14. The Audit rates the outcomes of both CUDP-I1 and CUDP-III as unsatisfactory (based on the stated project objectives). The institutional development impact of each is rated as modest. The sustainability of project benefits is rated as unlikely in the current urban policy context for both projects. The PCR-based ratings were the same. Key Findings/Lessons 15. The following are the key findings and lessons of the PAR: * The imbalance between project objectives and components is an example of a failure of the Bank to spot significant risks prior to a project's entry into the portfolio (para. 2.7). * Insufficient examination of the urban policy framework had been done prior to the projects (para. 3.44). * The SARs for both projects were considerably over-optimistic in their assumptions regarding the effectiveness and ease of implementation of proposed project works, financial reforms, and institutional improvements (para. 4.2). 13 Despite some notable component successes (para. 5.6), the imbalance between project objectives and intervention components - combined with the failure of supervision missions to focus on project design flaws and institutional development issues - led predictably to an "unsatisfactory" rating for both the outcomes of projects (para. 5.5). * Despite project complexity inherent in projects of this type, the Audit considers that similar urban projects could be successful in the future, given: (a) a better match between project objectives and intervention components; (b) a modified and improved urban policy framework, and (c) concerted efforts to overcome preventable types of component failure which derive from a flawed preparation process (para. 5. 7). Recommendations 16. Rationalization of the policy environment is necessary in order to resolve conflicting provisions in existing legislation (para. 3.41), and to provide a strong basis for revenue generation for operation and maintenance of urban services. Aspects of the urban policy framework need to be reshaped at the state level before local projects for urban service delivery can expect major improvements in sustainability (para. 3.49). This should have high priority before further urban lending in India is approved, i.e. competent urban sector reviews, taking account of lessons learned, should guide project identification.  15 1. Background Macroeconomic Setting 1.1 Three goals which have guided India's economic policy since 1947 have been poverty eradication, national self-reliance and interpersonal and interregional equity. Heavy reliance was placed on the state as a planner, regulator, and as an investor/owner in sectors such as heavy industry, power, transport and finance considered as the "commanding heights" of the economy. This policy regime produced some notable successes: industrial infrastructure and production capacity, especially heavy industry, expanded rapidly; agricultural growth, propelled by irrigation investment, moved ahead of the rate of population growth; internal and external macroeconomic balance was sustained; inflation was moderate, and some reduction in internal economic disparity was achieved'. On the other hand, growth was considerably lower than necessary and investment in human resources did not match requirements. 1.2 The almost 15 year implementation period of the Second and Third Calcutta Urban Development Projects (CUDP-II and CUDP-III, 1978-1992), was a significant period in terms of policy change. While economic growth had been slow from 1950/51 through the mid-1970's averaging about 3.5 percent per annum (1.4 percent per capita), the latter half of the 1970's saw growth in real GDP, in agriculture and industrial value-added of 4.9 percent, 3.9 percent and 5.6 percent, respectively-substantially higher than historical 30-year trends. The momentum was broken by macroeconomic shock in 1979 due to a doubling of international oil prices-coupled with severe drought and construction material shortages-leading to inflationary pressures. In 1980 and 1981, the economy substantially recovered with real GDP growing by 7.9 percent and 5.2 percent, respectively. Policy since then has gradually evolved to focus more on efficiency, productivity and competitiveness, yet pervasive distortions in the price system remain, caused by administered pricing, high and dispersed levels of indirect taxes, tariffs and subsidies. Population growth in India over the decade of the 1980's averaged 2 percent, giving a total population of about 860 million persons in 1991, together with a per capita income of US$350. Urban Setting of Calcutta 1.3 To understand Calcutta today, it is necessary to understand something of its past. Calcutta's economy suffered a major setback from the partition of India and Pakistan in 1947. It lost a major part of the hinterland that had provided raw materials and markets to its prominent manufacturing industries and, at the same time, it received an influx of refugees from what is now Bangladesh (formerly East Pakistan), whose presence severely strained public services and increased unemployment. Bangladesh's war of independence from West Pakistan led to a further influx of refugees in 1971. In the late-1970's and early-1980's, Calcutta saw a significant decline in world demand for jute, one of its principal exports. Progressive silting of the Hooghly River had also gradually undermined the capacity of Calcutta's port, and its relative position among other Indian ports. Compared to Bombay, its industrial rival, Calcutta's per capita income has been lower in recent decades. Political instability during the 1960's, civil unrest, labor disputes, and the deteriorating condition of services have all combined to discourage private investment in the Calcutta metropolitan area. ' The World Bank. Trends in Developing Economies, 1991. 16 The Bank's Assistance 1.4 The Calcutta Urban Development Projects (CUDP-I, -II, and -I) were the Bank's response to a perceived crisis in Calcutta, and were in fulfillment of a series of initiatives planned in the 1960's. A 1958 cholera epidemic had called the attention of the world to deficiencies in sanitation, drainage, water supply, housing and transport throughout the Calcutta Metropolitan District (CMD). For many in the international community, Calcutta was viewed as an extreme case of urban crowding and intolerable poverty. As a result, the 1960's saw considerable involvement of the Ford Foundation, the World Health Organization (WHO), and local authorities in the preparation of the Basic Development Plan (BDP) for the Calcutta Metropolitan Area. 1.5 From the beginning, growing out of plans of the Calcutta Metropolitan Planning Organization (CMPO, formed in 1961), and later those of the Calcutta Metropolitan Development Authority (CMDA, formed in 1970), a series of project initiatives was envisaged in order to respond in a comprehensive way to the crisis. The first IRs. 150 crore development program (then approximately US$200 million equivalent) was funded by GOI, made available during a period of President's rule in 1970. During the 19 years from 1973-1992, the Bank financed three Calcutta Urban Development Projects (CUDP I, II & Ill-Cr. 427-IN, Cr. 756-IN, and Cr. 1369-IN, respectively), as well as the Calcutta Urban Transport Project (Cr. 1033-IN). Appraised costs were estimated individually in the four projects to total US$705.4 million, with IDA contributions totalling US$325 million equivalent. The projects were expected to have a major positive impact on the conditions of life and the functioning of the metropolis, and, particularly to benefit low income groups. Furthermore, because of the dominant role of Calcutta in eastern India, the economic benefits of the program were expected to extend far beyond the CMD. 1.6 Historically, the antecedent CUDP-1 initiated a number of firsts within the Bank, as it was the first multi-sectorial urban project, the first major urban-sector initiative in India, the first project covering a large metropolitan area, the first major intervention dealing with the process of urbanization, and (under CUDP-1I) the first slum improvement program. As such, the history of the CUDP series (I-III) holds considerable interest for the Bank, and can best be viewed as a set of interconnected and comprehensive initiatives in water supply, sewerage, drainage, urban transport, and housing sub-sectors. This series of projects (together, perhaps, with related projects in the metropolitan area) is the planned subject of a future OED impact study. 1.7 A PAR is available for CUDP-I (Report No. 4023), while PCRs are available for CUDP-II and CUDP-III (Report No. 6970 and 4310-IN, respectively). This report presents the findings of a cluster audit of the latest two projects (Cr. 756-IN and Cr. 1369-IN), based on an OED mission to Calcutta in November 1994. 17 2. The Projects: Objectives and Description Second Calcutta Urban Development Project (CUDP-II, Cr. 756-IN) 2.1 The objectives of CUDP-II (1977-1982) emphasized the need for institutional and financial reforms for urban service delivery. Specifically, the objectives2 were: (a) to improve institutions responsible for delivering, maintaining and operating urban services and systems; (b) to improve fiscal policy and management; and (c) to institute an effective system for monitoring urban investments in the Calcutta Metropolitan District (CMD). Through the project, existing municipal services would be rehabilitated by management and system reforms; prior investments would be efficiently utilizated by the construction of secondary and tertiary systems to improve access to urban services (including housing); and solutions would be developed to some of the broader problems of the urban poor, particularly in the sectors of shelter, employment and basic services. 2.2 An IDA credit of US$87.0 million equivalent, representing 47 percent of the total project cost of US$183.7 million was approved to finance the following CUDP-II components: (a) residential, industrial and commercial sites and services development involving a low-cost integrated approach to providing accommodation, community facilities and employment opportunities; (b) redevelopment of the Howrah fish and pan (betel leaf) market; (c) participation in an ongoing bustee (slum) improvement program to provide basic infrastructure services in approximately 420 slum areas covering 1400 ha.; (d) construction of 40 new primary schools and the remodeling and extension of 400 existing schools; (e) training, equipment and buildings for a pilot health program serving 175,000 low-income people; (f) assistance to approximately 4,800 very small scale businessmen in bustee and area development components of the project; (g) improved fringe area and municipal water supplies to provide 90 lpcd to over 900,000 people, improvement of tubewell supplies in the central area and additional renovation works for the Palta-Tallah water system to supply 160 IMGD (730 mid) to the Calcutta municipal area; (h) provision of sewers, including house connections to some areas of Calcutta Corporation and Howrah presently served by bucket latrines; cleaning of 650 km of partially blocked sewers in the Calcutta Municipal Corporation (CMC); improvement of storm water drains; installation of over 12,000 prefabricated sanitary latrines to replace bucket latrines; (i) rehabilitation of the system of refuse collection, street cleaning and nightsoil collection within the CMC, as well as a pilot project to develop long-term solutions to the solid wastes management problems being experienced; (j) provision of water supply, drainage and sanitation and road works in the fringe areas (anchals) of the CMD; (k) traffic engineering with emphasis on pedestrians and slow-moving vehicles, new roads and road improvements to facilitate economic development; and (1) technical assistance to GoWB, CMC and CMDA. Third Calcutta Urban Development Project (CUDP-III, Cr. 1369-IN) 2.3 The objectives of CUDP-III (1983-1988) called for improved urban management through decentralization of many functions from CMDA to municipal governments in exchange for institutional and financial reforms at the local level. Specifically, the primary objectives' were: (a) to continue and to consolidate the efforts set in motion during the 1970's and in particular to 2 CUDP-I1 SAR (Rpt. No. 1662a-IN), para. 3.01. CUDP-I1l SAR (Rpt. No. 4310-IN), para. 2.01. 18 improve urban management in the Calcutta Metropolitan Area through a comprehensive approach in which institutional and financial reforms go hand in hand with physical improvements; and (b) to increase substantially the number of direct beneficiaries, particularly in the economically weaker sections of the community. 2.4 The secondary objectives for CUDP-III listed in the SAR were: (a) to strengthen metropolitan and municipal government and other institutions responsible for urban planning, management, and finance; (b) to emphasize investments that complete or complement earlier investments so that optimum benefits are derived; (c) to rectify sectorial and spatial investment imbalances between the Metrocore (Calcutta/Howrah), and the remainder of the CMA; (d) to give high priority to the operation and maintenance of existing assets and new assets to be created, and to identify and implement ways for doing so, particularly through improved cost recovery and financial management policies; (e) to continue to emphasize investments aimed at satisfying the minimum basic needs for urban services at affordable standards; (f) to encourage the private sector to participate in development; and (g) to make greater use of institutional finance in order to make a significant impact on critical sub-sectors such as "shelter". 2.5 CUDP-III components ranged just as widely as previous CUDP efforts, but they were organized under a new framework of four core programs (MDP, TRIP, CHIP, CMACP-see below). An IDA credit of US$147 million equivalent, representing 48 percent of the total project cost of US$303.1 million was to finance: (a) the Municipal Development Program (MDP), costing US$98.9 million equivalent (including water supply, drainage, sanitation, bustee improvement, parks, playgrounds, crematoria, transportation infrastructure, markets and community halls); (b) the Transmunicipal Infrastructure Program (TRIP), costing US$42.6 million (including water supply, drainage, sanitation, transportation infrastructure, area development); (c) the Calcutta-Howrah Investment Programs (CHIP), costing US$92.3 million (including water supply, drainage, sanitation, bustee improvement, traffic and transportation, urban renewal and bus terminal); and (d) the CMA- wide Complementary Programs (CMACP), costing US$37.8 million (including shelter and area development, health, small scale entrepreneur, fringe area development, technical assistance and training). Relevance of the Project Objectives 2.6 Project objectives as stated in the SARs had limited relevance to the project components to be funded, thus from the beginning there was an imbalance between the priorities for institutional and financial reform and the funds allocated for implementation components4 (almost exclusively allocated to public works). Project objectives should have been stated more carefully and clearly, with direct and apparent linkages to the components to be funded. 2.7 From the viewpoint of an ex-post audit, to allow an imbalance between project objectives and components is to court failure since outcomes are assessed in relation to relevant goals and the right objectives (institutional strengthening) have not been matched with an appropriate intervention package, or alternatively, unrealistic objectives have been set to match the proposed package of works. The few institutional (primarily organizational) changes that were attendant with the projects were necessary, but insufficient for the achievement of institutional effectiveness within the existing 4 Also see para. 3.11. 19 policy environment. Quality projects need to have a close match of project objectives with relevant intervention activities, without which there is inadequate logic for the intervention. To fail to do so is an indication of a failure of the Bank to spot potential risks in projects prior to their entry into the portfolio. To maintain the illusion of adequate design throughout project implementation is an illustration of the failed opportunities associated with unrealistic project performance ratings (an excessive focus on inputs at the expense of institutional budget aspects) in the course of project supervision. u 21 3. Project Experience Project Preparation 3.1 A more detailed description of the events which transpired during project preparation and negotiations can be found in Annex A. The purpose of this section is to summarize the key issues which emerged. Project preparation led, in time, to inherent deficiencies in project viability upon entry into the Bank's portfolio. Significant downside project uncertainty emanating primarily from the prevailing urban policy framework remained unacknowledged and unmitigated through project preparation, appraisal, and supervision. Identification and Preparation Process 3.2 Over the years since CMPO's Basic Development Plan (BDP) of 1966, the approach to urban development in Calcutta has evolved, as first one planning concept then another gained prominence among decision makers. The broad vision of the BDP was derived from the belief that nothing less than an integrated program of interventions in a variety of sub-sectors would be required to overcome the general crisis situation in urban services within the Calcutta Metropolitan Area, particularly to address the needs of the low-income bustee dwellers, and this led to the broad scope of CUDP I, II, and III. GOI involvement grew out of the logic that the Central Government had a direct and special responsibility for the improvement of Calcutta's conditions. GOI involvement attained political urgency in 1970, due to the political unrest found in West Bengal at the time. 3.3 CUDP-II. The Bank viewed CUDP-II as a forerunner of future, poverty-oriented urban projects in South Asia'. IDA's objectives for CUDP-1l (stated in mid-1976) included: (a) improvements in CMDA management and operations; (b) a shift of emphasis from public works (as in CUDP-1) to broader urban development activities; (c) local government reorganization, and (d) improved operation of urban services by local authorities. 3.4 Following appraisal completion in February/March 1977 and the 1977 elections, the views of the newly elected State government were sought; the Bank mission's findings noted that the new Marxist government was in tune with IDA's view of the need for the project to address urban poverty issues, thus increasing the need for fringe area and bustee development activities. The new government reacted adversely, however, to the call for increases in local taxation in Calcutta Corporation and other municipalities under CUDP-II, as well as increases in water and sewer charges to achieve full cost recovery by March 31, 1982 (as proposed by the Bank). A Bank mission returning from Calcutta' noted that the reluctance of the GoWB to commit itself to any form of tax increase was "understandable" in light of the recent elections, since the new government "is anxious to be able to demonstrate early and meaningful performances to the electorate, and clearly considers the 1977-1982 CMDA program as a primary means of so doing." The Bank rationalized that despite CMDA's poor past performance, the change of Government would provide 5 File search, memo on poverty impact of CUDP-1I, South Asia Region, Sept 13, 1977. 6 Memorandum of the Appraisal Up-dating Mission, Aug. 23, 1977 22 a reason for anticipating "improved construction performance and the achievement of targets" (file search). This calls into question the Bank's commitment to policy reform and institutional development objectives stated in the SAR. It also shows the Bank's willingness to compromise on key points at the time, despite weakening project viability. 3.5 The new government was committed to solving the residual problems of those who elected it to office, and was not convinced of the viability of the shelter component; yet IDA held GoWB to the negotiated (and legally binding) agreement. The GoWB showed considerable enthusiasm for the health component, requesting an expansion in the number of beneficiaries from 175,000 to over I million; IDA refused on the basis that is was planned as a pilot program in CUDP-II. Subsequently, the health activities were expanded under CUDP-III (and has been replicated subsequently in an IDA population project) once they proved successful. GoWB was also reported to be enthusiastic for the integrated aquaculture and bio-gas generation component, and TA was agreed during the post-negotiations mission (file search). 3.6 CUDP-III. Project preparation began in 1980. The plan proposed by GoWB for CUDP-III stressed decentralization of implementation from CMDA to a large group of Calcutta metropolitan implementing agencies (including the existing 36 municipalities, which by now have increased to 39). 3.7 Many institutional and policy issues remained unresolved from CUDP-II. On the policy front, the Bank noted that earlier investments were financed before a supporting financial reform was in place, thus CUDP-III would focus on the need to strengthen the finance, operation, and maintenance of the system. The Bank's CUDP-11 identification team noted three primary issues of concern, all related to institutional and policy reform: (a) the need for further development in municipal, fiscal and administrative reforms already being undertaken by the GoWB; (b) a clarification and definition of CMDA's role, planning capacity, financial objectives and management, and (c) a review of institutional staffing and financial arrangements to address the problems of operation and maintenance. GoWB called for a two tier approach to reform in which: (a) CMDA would be restructured, while its coordinating, policy planning, monitoring and evaluating functions would be reinforced; and (b) other institutions and agencies participating in the development process within the CMD would be strengthened, and CMDA would act as a major instrument in the achievement of that goal. 3.8 In water supply, the CUDP-IIl SAR expected tariff increases (from IRs. 5 to 11 per thousand gallons) by November 1, 1983, and projected significant improvement in the financial position of Calcutta Metropolitan Water and Sanitation Authority (CMWSA) after the project. A provision of CUDP-Ill was that GoWB was responsible for payment of any bulk water bills to CMWSA which remained unpaid by municipalities for more than 30 days, a factor which may have reduced the incentive for CMWSA collection efficiency. Expected project benefits from the reorganization of the engineering department of CMC were to lead to improved productivity and cost savings in the delivery of services. MDP funds were to be provided to municipalities as a 70:30 loan:grant mix, while an innovative health services component offered a large number of services to every family in the slums, and sought to recover 22 percent of total recurrent costs over the five year program. The MDP sought to strengthen local government capabilities through local execution and sub-project loans, yet success depended upon the technical and financial base of individual municipalities-which were quite weak. 23 Negotiations 3.9 Among the requirements agreed at negotiations of CUDP-ll (in October 1977) were the following: (a) reorganization of the CMDA; (b) appointment of a new top management team for CMDA; (c) adoption of new project budgeting, appraisal, monitoring and MIS by CMDA; (d) creation of a new Central Valuation Board to carry out a revaluation of all properties in the CMD; (e) reorganization of West Bengal's Dept. of Municipal Services; (f) expansion of the system of metering water connections in parts of the CMD; (g) revision of the system for awarding grants from GoWB to local authorities in the CMD; (h) enforcement of revenue collection targets for the CMC; and (i) establishment of required revenue/expenditure ratios for local bodies in the CMD. As agreed at negotiations, maintenance of bustee infrastructure improvements was to rely upon assurances from GoWB that plans for such maintenance (together with appropriate funding) would be implemented from April 1, 19797. As a follow-up to negotiations, CMDA declined to supervise the small-scale enterprise component in order to avoid setting a precedent for supervision of other "soft" components. 3.10 Negotiations for CUDP-l1l were held in April 1983. The agreed minutes of the meetings indicate that the following issues were resolved: (a) a time table for completion of land acquisition for area development schemes in various locations in the metropolitan area, (b) audit requirements, (c) water rate increases to be implemented as a condition of effectiveness; (d) assurances that commercial banks would make loan funds available for the small-scale entrepreneurs program; (e) agreements to transfer assets completed up to March 1982 to municipalities and other operating entities by April 1, 1984; and (f) agreements on a number of other minor issues. Quality at Entry 3.11 Despite a significant amount of time spent in project preparation and negotiations, both projects emerged from preparation with inherent weaknesses: (a) there was an imbalance between project objectives (institutional and financial reforms) and funds allocated for implementation components (CUDP-II, 98 percent public works, 2 percent TA and training; CUDP-III, 99 percent public works, I percent TA and training); (b) project preparation ignored risks in the urban policy framework (which remained highly distorted with respect to the pricing of services), and components which relied upon improved cost recovery directly from users (e.g., water supply and sewerage) or loan recovery from municipalities were likely to be problematic; (c) procurement packaging involved numerous small contracts', and could be expected to be overly complex and difficult to supervise; and (d) neither the Bank nor the Borrower appeared to be fully committed to the project objectives which focused on institutional and financial reforms'. The CUDP-I1 PCR reported that CMC began maintaining the bustees effective 4/1/83. See para. 3.13 below. The Borrower appeared to be interested primarily in the package of works, and was unconcerned about the need for improvements in direct cost recovery (e.g.. water supply and sewerage). 24 Project Implementation and Results Procurement 3.12 Procurement and disbursement under CUDP-II could have been predicted to be a difficult exercise from a quick reading of the SAR. The total value of civil works under the project was estimated at US$85.5 million equivalent, net of contingencies, and excluding in many instances the cost of heavy construction equipment to be issued by CMDA to the contractors. The major part of these works, distributed over 11 sectors, was to be widely dispersed over area and time. Based on a program prepared by CMDA, it was estimated that over 1,350 works would require about 1,750 contracts even after suitable grouping, leading to unnecessary complexity in procurement and in construction supervision. In bustee improvement alone, there were to be about 1,000 contracts in about 420 bustees; in water supply, sewerage and drainage, and municipal and anchal development, works were to be executed in traffic-congested areas, necessitating (according to CMDA) splitting of works into small contracts. Similar procurement complexity was present under CUDP-III. In both projects, procurement could have been simplified and quality improved by grouping contracts in larger packages and enforcing strict pre-qualification of contractors. 3.13 Although procurement could have been simplified by lumping the works in larger packages, the Audit notes that almost all of the construction works were completed (some of which were complex). The CUDP-III PCR noted that CMDA had a staff exceeding 4,000o and a capacity to execute an investment program of around IRs. 60-80 crores per year (US$24-32 million). 3.14 The organization of CUDP-II into four large components made project procurement difficult to understand and coordinate (MDP - US$98.9 million, TRIP - US$42.6 million, CHIP - US$92.3 million, and CMACP - 37.8 million). Few details are provided in the SAR about component specifics, for instance, the water supply (US$58.91), drainage (US$29.03), or sanitation (US$57.94) components which are funded under the project. Inputs for water supply, drainage, and sanitation are split among the four listed components, almost guaranteeing that supervision would be a difficult exercise. 3.15 CMDA management complained that procurement should not face rigid guidelines such as those provided by the Bank; CMDA noted that it used a large number of local contractors in order to give a better project result and contribute to local employment. CMDA cited its sufficient technical and management capacity to carry out the job well. The Bank did not acquiesce; the Audit believes that the Bank was simply following its standard procedures and could not single out CMDA for unusual treatment. Implementation Scheduling 3.16 Time overruns in both CUDP-1l and III were caused by several factors: (a) over-optimistic scheduling compared to cumbersome implementation procedures; (b) the difficulties inherent in the execution of a large number of small contracts by a multiplicity of agencies; (c) difficult land acquisition procedures (and court challenges) which made time schedules of dependent components io The CUDP-1 PAR reported that CMDA had 5,000 employees in 1982 (many on secondment from other agencies). The Audit requested from CMDA the total number of current staff (and staffing profile) near the end of the October 1994 mission, but it was not made available. 25 impossible to predict; and (d) the additional time required for the completion of residual work under CUDP-II, resulting in the delay in the start of some portions of CUDP-III by nearly two years. Time-over-run to completion of CUDP-II (March 1985) was 62.5 percent (further delayed because of material shortages precipitated by the 1979 Arab oil embargo); this is three years beyond the appraisal estimate of March 1982. The costs of the project also rose during the period of implementation, necessitating restructuring. The CUDP-1I1 PCR noted other specific problems: (a) delays in detailed project preparation and appointment of consultants; (b) delays by CMDA/CMC in selection and appointment of consultants for the Tullah/Auckland water conveyance pipeline; (c) poor procurement efficiency, especially for ICB tenders; (d) under-estimation of budget costs of major components (e.g., Tullah/Auckland pipeline); and (e) lack of experience in program management and contract scheduling for major multi-contract schemes(e.g., Baranagar-Kamarthati treatment/primary grid scheme). 3.17 Overall, CUDP-III extensions totaling three years were sanctioned by the Bank, most of which were due to procurement delays. Implementation overall had been stalled by three years due to delays in preparation of detailed engineering, land acquisition and procurement. By credit closing, the sub-components had been reduced from 53 to 40 and a few components that remained incomplete were to require two or three additional years, when full benefits were to be realized. Most of these have by now been completed. Project Costs 3.18 CUDP-II and CUDP-III followed the standard Bank procedure in India of financing one-half of project costs, net of taxes (and items under reserved procurement), involving IDA credits of US$87 million and US$147 million, respectively. At appraisal the total project costs of CUDP-II and CUDP-III were placed at US$183.7 million and US$303.1 million equivalent, respectively. Total actual costs at credit closing were US$164.4 million and US$108.5 million equivalent, respectively, after project revisions and cancellation of the remaining portion of the proceeds (US$65.5 million equivalent) under CUDP-III. Actual project costs under CUPD-III were low compared with the original cost in US Dollars, primarily because of reductions in the value of the Indian Rupee over the period, as the exchange rate went from IRs. 9.5 for US$1.00 in 1977, to IRs. 25.5 for US$1.00 in 1992. Performance of Consultants 3.19 CUDP-II's TA component was designed to improve the following: (a) management performance in CMDA and CMC, (b) the fiscal base of CMD by assisting the proposed Central Valuation Board (CVB) and the GoWB Department of Municipal Services (DMS), (c) traffic engineering techniques; and (d) solid wastes collection and disposal methods; and to assist in forward planning and feasibility studies for future projects. Over 2 thousand man-months of external assistance was proposed (1,965 local, 73 foreign), at a cost of US$2.3 million. Extensive staff training in the key implementing agencies was also expected. A sum of US$0.87 million for training was to be channelled and administered through CMDA in order that the authority could monitor and coordinate training activities. 3.20 Consultants under the CUDP-II carried out (a) water network analysis, (b) O&M improvement study, and (c) tariff study. An expatriate firm carried out the first, while local consultant teams accomplished the remainder. Performance was satisfactory on all, according to 26 CMDA, and the Audit has no reason to disagree. There were no major consultant assignments under CUDP-III, other than continued training activities carried out by the Institute for Local Government and Urban Services (ILGUS) under local contract. The remainder of the work was carried out either by CMDA, local authorities or construction contractors. In general, consultant performance was apparently satisfactory under CUDP-II & III, although the full impact of these activities on CMDA operations has not been documented. Physical Results and their Impact 3.21 Water Supply. Beginning with CUDP-I, and continuing with other improvements under CUDP-II & -III, the projects served to return the Palta-Talla water system (which serves only the Calcutta Metropolitan Corporation) to its full capacity of 160 IMGD (or supplying about 163 lpcd to the distribution system). CUDP-II added major tubewells in Calcutta, Howrah and other CMA areas. CUDP-I highlighted leak detection activities, and augmentation of production, treatment and distribution within additional municipalities of the CMA. In lieu of metering, water and sewer charges for domestic consumers in Calcutta are based on connection (ferrule) size and included in the property tax. For industrial and commercial consumers, however, some 7,000 meters have been installed, yet this approach has been challenged in the courts since the Bengal Municipalities Act (1993) indicates that water charges are included in the property tax (and therefore should not be charged twice, by one logic). In the absence of metering of domestic consumers, there continues to be little incentive for individuals to reduce their consumption. Physical leakage in Calcutta's primary and secondary distribution system has been roughly estimated at 30-35 percent by the National Environmental Engineering Research Institute (NEERI). 3.22 The Bank's decision not to finance water supply improvements associated with the use of new water available from the Farakkah barrage (due to its international water implications) has resulted in under-funding of the CMA's growing needs. Yet in the absence of water rights adjudication between India and Bangladesh it is clear that the Bank cannot justify the funding of additional water supply system improvements. 3.23 Sewerage/Drainage. The projects served to strengthen and rehabilitate portions of the sewerage/drainage system. Calcutta's unusual sewerage/drainage system has developed over the years based upon the fact that natural overbank flooding of the Hooghly River in the delta areas near Calcutta has built steep banks and resulted in a drainage pattern which leads away from the river. Calcutta has a combined sewerage and stormwater drainage system, but no domestic sewage treatment plants. The wastewater of Calcutta is drained 40 km to the east in a lined brick channel, built in 1938. Mechanical cleaning of the channel takes place from time to time. Irrigation and fish culture are being carried out along the route to the discharge point in the KuldiGong (saline), and from there to the Bay of Bengal; BOD levels are reduced in the process. 3.24 The Audit noted that Calcutta's sewage appears diluted, reportedly because of large amounts of ground and surface water which infiltrate to the drainage system. A recent (about 2 year old) video of the sewer system, taken by CMDA, shows some deterioration of the system, particularly those portions over 75 years old. Moreover, silt deposits have reduced the capacity of the sewers over the years. Beginning in the British colonial period, the storm drainage system in Calcutta had been designed to handle only relatively small storms without waterlogging (0.25-0.50 inches per hour); project improvements primarily extended this level of protection to areas of the metropolitan district which had no working drainage system, and as such it was successful. CMDA reports that 27 periods of extended flooding (waterlogging) have been reduced in many areas from about 15 flood events per year to an expected average of about six now. Because of the level nature of the terrain and the fact that the natural slope leads away from the Hooghly River, all water has to be pumped to one of several collector channels which remove the storm water and sewage from the city. 3.25 Roads and Transport. Some road and transport improvements under the project have had important impacts, although construction proceeded slower than planned. The Eastern Metropolitan By-pass (constructed under CUDP-ll) is fast emerging as the axis of a new Calcutta. Recently, apart from a five-star hotel, world trade center, permanent trade fair center, and the relocated Calcutta Stock Exchange, three modem hospitals and a host of other complexes are being built in the area. On the other hand, the Barrackpore/Kalyani Expressway of CUDP-II (predicated upon the bi-polar growth model) remains largely a rural road, and Kalyani a small town, despite the 30 km highway leading to it, 30 years of promoting its development, and the infrastructure rich environment provided in the town. The Howrah bus terminus (completed in the mid-1980's under CUDP-II) provides a needed service to private bus operators and the public, yet mechanisms for cost recovery (to pay for operation and maintenance) have still not been finalized. 3.26 A few difficult issues surfaced in traffic and transport components. In Calcutta, land acquisition and unresolved tenant compensation issues led to abandonment of twelve of the 13 commercial area development schemes planned in and near Metro stops". Traffic planning under the projects led to the signaling of 18 intersections, yet their operation failed to receive the needed support from local police and pedestrians to allow them to function; their use has since been discontinued. Over the years, a traffic cell in CMDA has made many suggestions, but only a few have been taken up by the traffic police (institutional conflicts may lie under the surface). Nor has road work always been properly planned and implemented. In one case, a Bank mission reported that the Calcutta Corporation undertook an ambitious road surfacing program under CUDP-I in the absence of improvements to road foundations and adjustments/repairs to curbs and gutters (1978, file search). 3.27 Howrah Fish and Pan Market. The impact of the Howrah Fish and Pan Market component is disappointing. At the time of the Audit's visit, the condition of the buildings was poor: the fish market was completed but not being used (and the stalls were locked) because of a dispute between the fish sellers and the Howrah Development Corporation (e.g., stalls too small, etc.). Apparently only the licensed sellers of fish were to receive space in the market, and other unlicensed sellers protested. The pan market was operating, although the building appeared to be unfinished, only partially occupied, inefficiently organized, and without city services. The unsanitary conditions of the old markets have not been remedied by the new construction, as had been predicted in the CUDP-II SAR. 3.28 Solid Waste. The solid waste component suffered from inappropriate design concepts, which apparently led to failure of the component. Under the CUDP projects, only trucks and containers were procured. There were to be 100 ward depots constructed, but only 27 sites could be acquired. In the end the community did not want the transfer stations in the crowded residential areas, and these were converted into stores and offices. Thereafter, 600 containers were obtained, some of which have been poorly sited, and now partially block the roads. In principle there was to be no 11 Only seed money was provided in the project for these efforts, and this was apparently inadequate to overcome the prevailing problems. 28 open collection points, and garbage would be handled only once. Now the city is experimenting with a house-to-house collection system. Again the policy framework seems weak when local officials explain: "Now we are not charging for this service, but in the future we will have to charge." This expresses a belief that once people have received the services, only then will they be willing to pay. Yet true demand cannot be gauged unless charges are commensurate with services from the start. 3.29 Sanitation. CUDP-II's sanitation activities were to continue CUDP-I's bucket latrine replacement activities outside the bustee areas (another 12,300, where 10,000 had been provided earlier). Additional latrines were included under CUDP-III, although it is not clear how many were constructed. While apparently constructed in great number, the sustainability and impact of these facilities needs to be investigated further. 3.30 Small-Scale Entrepreneur Program. In the small-scale entrepreneur (SSE) program, political expediency may have encouraged a lax attitude toward loans-which were forgiven by government in violation of agreements with the Bank. Subsequently, this component was eliminated from the IDA credit under CUDP-III. Under another component, cattle resettlement was to have shifted 5000 cattle outside the city to 4 sites under Dutch co-financing, and biogas was to be generated from the cattle dung. However, difficulties materialized, and many cattle owners resisted. In the end, some were reportedly shifted, but the results of the cattle resettlement component remain uncertain (and the Audit was unable to investigate this component in detail).12 Finance 3.31 Following the investments of CUDP I & II, the most critical issue was a revenue issue, or how to pay for O&M of the infrastructure investments. Within CMDA, the IDA vs. non-IDA works apparently led to institutional schizophrenia, with two sets of rules for fiscal and administrative controls, and different standards for construction management and scheduling, often for complementary investments (e.g., the Garden Reach Water Treatment Plant), thus creating some distortions in priorities. Calcutta has a separate tax structure for water and sewer services to high- rise buildings, and the level of the taxes is not adequate to fully recover costs of these services (as it is not based on metered usage). In the absence of expanded metering, there continues to be no direct relationship between water consumption and revenue generation, and there is no incentive for consumers to reduce wastage and leakage. Elsewhere, the State Finance Commission is considering other options for improving revenue sources for municipalities, and their report is expected in April 1995. It seems an indication of early neglect of the policy context that the CUDP-III PCR called for a review of the institutional setting, a factor that had received only ad hoc attention in the past by both the Bank and the Borrower (CUDP-III PCR, para. 12). 12 Reference is made to "Evaluation of the Netherlands Development Program with India, 1980-1992; Evaluation Report 1994." This report covers all Dutch funded projects during the above period. The cattle resettlement is not, however, mentioned; complete records of projects exist only after 1986. 29 Institutional Development Impact 3.32 The CUDP series of projects represented a bold effort by the CMDA and the GoWB, and the Bank to make an impact in Calcutta through a large and varied program. The success of the initiatives naturally relied upon the capabilities of the implementing agencies. It is apparent that CMDA's management and implementation capacity was stretched severely under CUDP II. The project proved to be difficult to execute; some of the more complex components may have required skills and knowledge beyond the experience of CMDA's staff (PCR CUDP-II). During CUDP-II, management within the evolving institutional framework of metropolitan Calcutta remained strongest with CMDA. It was not until CUDP-III that the drive toward the broader goals of institutional, financial and sector policy planning began to be felt, consistent with GoWB's new emphasis in a policy to strengthen local government (CUDP-Ill SAR, para. 2.05). 3.33 CMDA. Beginning with 40 employees in 1970, CMDA grew to 5,000 by 1982-emerging as a large public works construction empire and absorbing staff from other agencies under CUDP-1 and CUDP-II in the process (largely under secondment) in order to implement its expanding program. As such, CMDA became the focus of critical controversy; in 1981 public officials urged a further revision in its structure and a modification of its powers. The Bank's role in this discussion seemed to be largely passive. 3.34 Under CUDP-I CMDA developed its capacity to monitor project execution with a well- established Management Information System (MIS), although it may not have been used effectively for project management (CUDP-II PCR, para. 9). Under the IDA-financed projects CMDA has functioned in a number of diverse roles, including that of financial intermediary for the MDP, planning and capital budgeting agency, design and implementing agency and monitoring unit. While CMDA has many competent staff, it remains administratively lethargic in its performance, probably due to complex rules and procedures which derive from existing legislation. CMWSA, responsible for transmunicipal water and sewerage services, is generally reported to be ineffective in management due to fragmented institutional responsibilities, although the Audit did not form a strong opinion on this issue. Supervision missions reported lax management performance in CMDA from time to time in the early 1980's. Performance was reported to be less than satisfactory due to a reluctance of management to delegate responsibility combined with inadequate staffing in key areas. CMDA suffered for much of the implementation period with a shortage of qualified technical and professional staff, since a court decision arising out of an injunction prevented CMDA from recruiting its authorized complement of these key staff (CUDP-II PCR, para 4.03, 4.07). 3.35 CMDA emerges as an organization that for a time in the late-1970's and early 1980's, did not always welcome outside advice, and may not have always acted in an evenhanded manner with consultants/contractors. Two instances can be cited from the files. Under CUDP-II, an external consulting firm designed an accrual accounting system for CMDA, completing it by April 1979, but Bank staff reported that there was reluctance of the CMDA accounting staff and their managers to use the system (file search). This no longer appears to be the case, as the CMDA accounting staff now describe their enthusiastic acceptance of the accrual accounting system developed earlier. Later, a Bank mission reported in 1982 that CMDA had continuing disagreements with some consultants/contractors because of delays on the part of CMDA in finalizing contracts; some consultants refused to do further work. As there have been no recent instances of the use of outside 30 consultants in CMDA that have come to the attention of the Audit, it is difficult to judge whether or not the situation has changed. Very little information was made available to the Audit regarding the range of studies actually carried out under the projects and the impact of the results. 3.36 After CUDP-III, CMDA has found new responsibility under the Town and Country Planning Act (for which it is the primary implementing agency in the metropolitan area) and the GOI- sponsored Mega-City Program. CMDA, as well as local municipalities, is involved in the Gunga Action Plan-attempting to reduce pollution and improve water quality locally in the Hooghly River (a distributary of the Ganges River). Despite these new found responsibilities, CMDA remains somewhat insular-remaining supply (budget) driven rather than demand (consumer) driven-and does not publish an Annual Report or try to use public information resources to build support for its planning initiatives and programs. 3.37 Municipalities. Devolution of planning and implementation responsibilities to municipalities under the MDP component was reported to have positive impacts (CUDP-III PCR, para. 8), and the Audit confirms evidence of this from limited field visits. However, it is also true that the financial health and institutional capacity of municipalities have not improved commensurate with provision of physical facilities. Municipal revenues are woefully inadequate for operation and maintenance, and no municipality appears to be ready to repay the loans provided under MDP (PCR para. 5.09). Since inception, CMDA handed over few assets to the respective local bodies or operating agencies. This is a symptom of a defective urban policy framework, which had not been fully examined prior to project appraisal or since. 3.38 Under the Projects, the Institute for Local Government and Urban Services (ILGUS) was successfully utilized to carry out an innovative training component for local government officials and local government staff. A number of training modules were developed for municipalities, and many local government staff were trained (although exact numbers were unavailable). A new building is being completed for ILGUS (to be opened in January 1995), at least partially financed under the project(s). 3.39 Central Valuation Board. In the early 1980's, supervision missions reported that progress at the Central Valuation Board (CVB) was impressive on the reevaluation of properties in all the municipalities (file search). The CVB, an agency of GoWB, slowly increased municipal evaluations in those areas where they were working (only about 16 percent over 5 years, while inflation during the same period outpaced these gains). For the latest 5-year period, property evaluations have increased 2 to 3 times above what they had been earlier, but property evaluations have yet to be completed in many parts of the metropolitan area. Although many of the municipalities took help from CVB, few could implement their recommendations in full, mainly due to the property owners taking legal protection by appealing in the courts against the proposed increases, thereby delaying the proceedings for years. Constraints Imposed by the Urban Policy Environment 3.40 The urban policy environment imposed the most severe constraints on project viability and sustainability. Many government officials (and consumers) view the property tax as unreformable because any increase quickly becomes an issue to be manipulated by political opposition groups. A historical framework in which most taxes have come from industry makes cross-subsidy schemes the norm, and a prevalent view in India is that the supply of basic urban services (including water 31 supply, sewerage/sanitation, drainage, solid waste collection, roads, electricity) is the duty of government, the costs for which should be generally subsidized for the low income groups. Since caps on the property tax are essentially in place (due to existing legislation which enforce rent control, land ceilings, etc.), inflation over the period guarantees that the tax base of municipalities is being eroded with inflation. Thus there have been legislative and cultural impediments to implementing the cost recovery improvements assumed under the projects. 3.41 The local municipalities and CMDA continue to function in an institutional setting characterized by administratively difficult rules and procedures, and constraining legislative policies. The plethora of existing legislation controls many aspects of the existing policy framework. Some of the legislation controlling land development/redevelopment, for instance, include: (a) the Land Acquisition Act (1937); (b) the Land Ceiling Act; (c) the Bengal Municipal Act (1922, rev. 1993) (re: water charges, etc.); (d) the Town & Country Planning Act (1979); (e) the Slum Clearance Act (1971); and (f) the Thika & Tenancy Act (1984). Many conflicting provisions can be found in the legislation, making rationalization of the policy environment of high priority. CUDP-I1 and -III did not address these issues. It is likely that the state governments would need to implement an improved legislative policy framework before sustainability can be expected in urban service delivery. 3.42 There appears to be a preoccupation in Government with shifting population and industry away from central Calcutta to the suburbs, under the still prevalent view that government can and should determine growth patterns. Government's role in the housing sector seems to have been preemptive; this coupled with a restrictive legislative framework and low access to credit by individuals has resulted in little private land development thus far. 3.43 In the current policy environment, municipalities are preoccupied with the development of income generating projects (e.g., commercial market complexes to generate rental income, etc.); despite this, they are grateful for the delivery of project benefits and they have progressed from simply trying to meet their staff costs to trying to maintain the new assets. Under CUDP-III, April '84 was to be the first transfer of assets from CMDA to the local authorities, and thereafter all completions on April 1 would be handed over. Unfortunately, the earlier loans to municipalities under CUDP-II were converted by GoWB to grants in 1984/85, and those made under MDP remain unrecovered. Very few assets have been handed over from CMDA to the municipalities, because of the reluctance of the municipalities to accept the maintenance cost burden (and the fact that GoWB has been obligated to pick up any deficits). 3.44 The policy context is also the central issue of municipal finance in Calcutta. CMDA and local municipalities cannot meet a test of institutional effectiveness when faced with a policy environment characterized by (a) sub-marginal pricing of existing urban services, and (b) low revenue generation by municipalities in areas where good infrastructure services are available. These distortions, although politically popular in the short-term, result in inadequate linkage between services delivered and revenues generated, and inexorably lead to an unsustainable situation requiring ever-growing cross-subsidies from other sources. Insufficient examination of the urban policy framework had been done prior to the project(s). 32 Project Benefits and their Sustainability 3.45 A 1981 evaluation of CMDA's past investments" noted that: (a) the investment cost per capita and delivery of services to the target population varied significantly across the Calcutta Metropolitan District, (b) the assets created would require a substantial increase in funding for operation and maintenance over present revenue collections, and (c) benefits were not being realized due to deficiencies in secondary systems and connections (e.g., water supply, sewerage, and drainage sectors). While the first two conclusions (items a & b) generally continue to hold true, with time, the benefits (noted earlier as unrealized in item c) have generally been delivered despite slow completion. 3.46 The Calcutta planning model broke new ground as a comprehensive planning framework that had not been seen elsewhere. This was particularly true of the pragmatic approach to bustee development in the absence of resources to undertake massive rehousing, thus lending it to replication in other projects. Among other components there were successes and there were failures, providing magnets for optimism and for criticism in the interplay of forces that constitute contemporary Calcutta. 3.47 It is easy to imagine that the local situation would now be worse without the BDP, the CMDA and the resulting CUDP projects. Significant improvements in the availability of services in the bustees have been reported, and the Audit can confirm this based on limited observation. Because of the addition of paved footpaths, sanitation, drainage, lighting, and roads, quality of life is probably much better today than previously. Reported health related effects due to project activities in the bustees include the following: reduction in the incidence of various diseases; decrease in the birth and death rates; improvement in the value of slum housing stock after infrastructure improvements; social stigma on bustees removed; economic and education standards of slum people improved; and increase in health consciousness. There is a view among the middle-classes of Calcutta that the bustee dwellers are now pampered, while the middle-class have limited access to adequate health care and other services (e.g., education for their children). These reported effects can only be verified through a full impact evaluation. A baseline health survey was conducted in the early stages of the projects, and should be a useful source of comparison data if impact evaluation is undertaken. 3.48 Despite improvements under the projects, examples of recent urban deterioration in Calcutta are not difficult for residents to find, as reported in the press. Examples often cited include: crowded buses (with the incomplete subway system taking only a small part of the load thus far); crowded and poor roads, and chaotic intersections; air pollution; low revenue income from services; dissatisfaction of middle and upper income groups with services; and little communication from public agencies to the public at large. 3.49 The existing weak policy framework would argue against the sustainability and replicability of several project components, particularly those which aim for cost recovery. Following the investments of the CUDP projects, the most critical issue continues to be a revenue one, or how to pay for the operation and maintenance of the infrastructure investments; and remains the main obstacle to consolidation of gains under the CUDP projects. This is a symptom of a more 13 Mentioned in CUDP-1l supervision mission's back-to-office report (form 590), dated May 5, 1981 (file search). 33 fundamental underlying problem, as aspects of the policy framework need to be reshaped at the national and state levels before local projects can expect major improvements in sustainability. 3.50 An overall assessment of the project effects requires balancing the positive aspects of achievement in several components with the growing lack of financial sustainability due to a deficient policy framework and the institutional weaknesses which affect maintenance and expansion of services. Economic Evaluation 3.51 At appraisal of CUDP-II, the weighted economic rate-of-return (ERR) for components making up 60 percent of project costs was estimated at 20 percent. No reestimation was carried out in the PCR since several project components had not yet been completed. 3.52 In CUDP-III, ERR estimates both before and after the project were carried out. The ERR estimates in the SAR were limited to water supply, sewerage and drainage, traffic and transportation, bustee improvements, and area development which accounted for some 54 percent4 of the original project costs. This gave an original 13 percent ERR. Reestimated in the PCR, with 50 percent of actual project costs, excluding uncompleted components, gave 13.6 percent (CUDP-Ill PCR, para. 6.03). 3.53 There are likely to be other economic benefits which have not been measured in the analysis, as indirect economic benefits were not estimated. These could be substantial under plausible assumptions, including: (a) the boost available to the metropolitan economy directly through employment generation, increasing CMA-wide employment opportunities by about 3.5 percent; (b) increased business efficiency and lower transactional costs as a result of reductions in water logging, improvements in health, lower freight trucking costs, and increases in accessibility within the municipalities and anchals; and (c) strengthening of metropolitan and municipal management systems (CUDP-1ll SAR, para. 6.04). The extent that project components have contributed to these factors is unknown, although a future impact evaluation may consider this. 14 If all benefits from these components are assumed to be directed to the economy as a whole, how will adequate revenue be captured for sustainability of completed works and construction of future works? The main question here seems to be a financial one rather an economic one.  35 4. Borrower and Bank Performance Borrower Performance 4.1 In the case of CUDP-I1 and CUDP-III, the "borrower" as discussed here includes GOI, GoWB, CMDA, and some 36 (now 39) municipalities involved in the project. While the responsible agencies performed satisfactorily on the projects, it should be mentioned that there are underlying constraints in the physical situation and in the policy environments which make implementation of projects of this type difficult, although not impossible. The physical and administrative situation in Calcutta imposes certain limitations which handicapped CMDA and the municipalities, including: (a) a short working season of 6-8 months (as no digging can generally take place from June 15-Oct 30 each year due to the monsoon season); (b) cumbersome land acquisition procedures (often delayed by court challenges, make completion timings impossible to predict); and (c) a poor mapping data base for existing services in the ground (leading to more exploratory digging than necessary). Materials shortages also became an impediment in the early 1980's, and from time to time thereafter, in the administered system of materials procurement and price controls that prevailed for certain goods (e.g., cement, steel reinforcing rods, fuel). The policy environment imposed the most severe constraints on project viability and sustainability (see paras. 3.40-3.43, above). CMDA continues to view its planning capabilities as self-sufficient, not requiring the help of any external agency, and yet it does not focus on the basic institutional constraints which hinder efficient urban management. Bank Performance 4.2 Bank performance was satisfactory under CUDP-II and III, although with some qualifications. Perhaps the greatest failing was that the appraisal process overlooked evident risks in the sector and country contexts by incorporating overly-optimistic assumptions regarding the effectiveness and ease of implementation of proposed financial reforms and institutional improvements. The Audit notes that there are significant, unacknowledged structural problems imbedded within the urban policy framework which were not mentioned in the SARs. CUDP-1l risks mentioned in the SAR included: (a) the need for critical management and systems reforms to overcome the problems experienced under CUDP-I, (b) about half the land for area development had not yet been acquired, and (c) the fact that area development, small-scale enterprise support, solid wastes management and traffic engineering are new to the CMDA program (SAR, CUDP-II, paras. 3.08-3.09). CUDP-III risks that were highlighted included: (a) the risk that the program would prove too complex to administer and manage; and (b) weakening of political commitment (SAR, CUDP-III, para. 6.09). Many of the risks mentioned in the SARs did create problems during implementation, and in that sense the risk assessment was predictive. Overall, however, the risk assessment was inadequate because it highlighted primarily the technical dimension of implementation by government agencies and largely ignored the prevailing urban policy framework-where distortions abounded, and powerful political incentives were present to block the pricing reforms assumed under the projects (see Annex A, para. 10, below). 4.3 Throughout CUDP II and III the Bank adopted an incremental approach to policy reform and improvements in cost recovery under the projects, rather than for policy changes up-front. Yet few policy reforms were implemented. The financial improvements promised under the project did not represent the commitments of individual agencies nor the political commitment to carry it out, 36 despite the existence of legal agreements (CUDP-III PCR, para. 4.01). During implementation there was little pressure from the Bank for further policy reform, as Bank staff generally equated physical works construction with overall progress, and generally reported project progress as satisfactory. This was at variance, however, with project objectives which called for institutional improvement and reform as a major focus. 4.4 From the borrower's view point, the Bank generally needed to take local factors and constraints more fully into account; after all, "the municipality is not a profit-making body," commented one official. Both sides of an issue should be highlighted by the Bank, was a frequent complaint, including the difficulties to be found in the local context. There appeared to be little local ownership of cost recovery goals found in some components, a situation which was largely ascertainable from the start. Compliance with Covenants and ODs 4.5 During preparation of CUDP-III, less stringent covenants were introduced, thus a returning field mission was able to claim in a 1985 Back-to-Office report' that the covenants of CUDP-II had been "substantially complied with" after taking into account revisions introduced through CUDP-I. The PCRs for both CUDP-I1 and CUDP-1II contain a detailed examination of compliance with individual covenants. Of those covenants for which compliance was not achieved, the Audit offers the following update: a. water supply and sewerage taxes were never de-linked from consolidated property taxes (although covenanted under CUDP-ll); b. as of November 1994, CMDA's audited accounts are available only up to the year 1990 (or about 4 years after end of the fiscal year, although covenanted to be available no later than nine months after the end of the fiscal year in CUDP-III); c. very few assets have been transferred to operating agencies (despite covenant in Project Agreement, CUDP-Ill); d. water charges were not revised to recover costs for O&M (despite covenant in W. Bengal Agreement of CUDP-III); and e. CMC has not reduced its reliance on GoWB subventions nor achieved agreed cash collections of current property tax (despite covenants in W. Bengal Agreement, CUDP-I11). 4.6 Regarding ODs, the Audit notes that OMS 2.25 (Cost Recovery) applied, but the projects did not achieve significant improvement in this respect. See the memo of the CUDP-II appraisal up-dating mission, Aug. 23, 1977. 16 Dated February 20, 1985. 37 5. Conclusions and Key Findings General Conclusions 5.1 Despite a significant amount of time spent in project preparation and negotiations, both projects emerged from preparation with inherent weaknesses: (a) there was an imbalance between project objectives (institutional and financial reforms) and funds allocated for implementation components (almost exclusively public works); (b) project preparation ignored risks in the urban policy framework (which remained highly distorted with respect to the pricing of services), and components which relied upon improved cost recovery directly from users or loan recovery from municipalities were likely to be problematic; (c) procurement packaging involved numerous small contracts, and could be expected to be overly complex and difficult to supervise; and (d) neither the Bank nor the Borrower appeared to be fully committed to the project objectives which focused on institutional and financial reforms. 5.2 Quality projects need to have a close match of project objectives with relevant intervention activities, without which there is inadequate logic for the intervention. To fail to do so is an indication of a failure of Bank management procedures to spot potential risks in projects prior to their entry into the portfolio. The few institutional (primarily organizational) changes that were attendant with the projects were necessary, but insufficient for the achievement of institutional effectiveness within the existing policy environment. The "unsatisfactory" project outcome ratings noted herein (para. 5.10) should not detract from the notable success found within some components, nor should it lead the Bank to the wrong conclusion regarding projects of this type (e.g., that they are too complex for successful implementation, as noted in the CUDP-III PCR). 5.3 Urban projects tend to be complex by nature, since they often subsume under one umbrella a number of initiatives in a variety of sub-sectors. The antecedent CUDP-I was the original example of this type within the Bank. The CUDP-II PCR, while noting that the project was complex, did not find that complexity had been a hinderance to implementation. The CUDP-III PCR concluded that "the project design was too complex for implementation by relatively weak agencies and for the Bank to supervise."" While procurement could have been simpler, the Audit notes that almost all of the construction works were completed (some of which were complex). A recurring theme emerged, however, which related to the significant, unacknowledged structural problems imbedded within the sector and country contexts which were not covered in project documents. Projects such as CUDP-II and CUDP-III which opt for the gradual institutional change within the project rather than for major policy change up-front are unlikely to lead to replicability and sustainability in the presence of a severely distorted policy environment which the projects did not address directly. 5.4 It is prudent to limit urban project components to those which contain sufficient incentives for implementation and sustainability within the existing country and sector contexts. Following such advice would have limited the number of components undertaken under CUDP-II and -III. If the resulting list of components is too limited when screened in this way, there is likely to be need for changes in the policy framework in order to adjust the incentives (as there was in this case). See the CUDP-1II PCR, para 7. 38 5.5 The main reason for "unsatisfactory" outcome ratings in this Audit is that the projects did not meet their primary objectives (i.e., institutional improvement and financial reform). It should be noted that the CUDP-I project received a satisfactory outcome rating because its objectives'" were considerably easier to meet, not because the project was more innovative or its components better designed than those of CUDP-l1 and CUDP-Il1. 5.6 Some notable component successes can be found in these projects: (a) 50-75 percent reduction of waterlogging in areas of Calcutta previously without drainage; (b) a health services component which carried out twice monthly home visits to every family in the targeted bustees (with reported improvements in health indicators), and has been replicated subsequently in an IDA population project; (c) the provision of basic services such as paved footpaths, sanitary latrines, lighting, water supply and drainage to bustees (significantly improving quality of life); and (e) the Eastern Metropolitan By-Pass road which now serves as a major artery for new growth. There are perhaps other successes which the Audit did not have an opportunity to investigate in detail. The Municipal Development Program, while successful in training and providing small works in a large number of municipalities, was a failure in the sense that few works have been handed over from CMDA to the municipalities for operation and maintenance, and municipalities do not appear ready to accept responsibility for repayment of loans. This is an example of a promising component in a poor policy environment. 5.7 Interesting examples of preventable component failure can be found in the CUDP-II and CUDP-III projects, including failures that are likely to be due to: (a) the absence of an open and inclusive preparation and design process, including inadequate public and technical input (e.g., the Howrah fish and pan market, the solid waste collection component, traffic signalling at 18 intersections); (b) inadequate incentives for all stakeholders to go forward with implementation (e.g., 12 out of 13 SURAD area redevelopment schemes near planned subway stops); (c) unacknowledged risks in the policy environment, or the country or sector contexts (e.g., small entrepreneur loan program; cost recovery for water supply and sewerage; land acquisition difficulties); and (d) a component based upon faulty urban growth assumptions (Barrackpore/Kalyani expressway). Cost increases which resulted in the redesign and reestimation of project costs and the deletion of some components in CUDP-II were due to the macroeconomic shock of a doubling of oil prices in 1979, and were not subject to prior prediction within the projects. These conclusions could be confirmed only with further analysis as part of a full impact evaluation. 5.8 It was often reported to the Audit both by GoWB and local government officials that the most critical issue facing future development in the Calcutta metropolitan area is the development of mechanisms for financing the cost of operation and maintenance for urban services. Yet insufficient funds availability for operation and maintenance is only a symptom of a defective urban policy framework, and is unlikely to be remedied until significant revision in the framework takes place. 18 The objectives of CUDP-I did not concentrate primarily upon institutional improvement and reform. As summarized in the PAR, CUDP- I's objectives were: (a) to improve Calcutta's physical environment; (b) to initiate a "series" of projects over time; (c) to strengthen the Calcutta Metropolitan Development Authority (CMDA) as the "single" financing and supervising agency focused on Calcutta's reconstruction; (d) to "strengthen" the planning and execution of the investment program; (e) to assist in developing measures to strengthen the operation and financing of services; (f) to support a broad "program" of public works, the components of which "are treated as elements of an urban investment program rather than as self-contained sub-projects". 39 5.9 The Audit does not consider that the project design was too complex for the implementing agencies to carry out, although better contract packaging could have made procurement and construction supervision simpler. The Audit considers that similar urban projects could be successful in the future, given: (a) a better match between project objectives and intervention components; (b) a modified and improved urban policy framework, (c) a full acknowledgement of risks, together with project measures to overcome them, and (d) concerted efforts to overcome the recognizable (and largely preventable) types of component failure (para. 5.7). Ratings 5.10 The Audit rates the outcomes of both CUDP-II and CUDP-1I1 as unsatisfactory based on the stated project objectives. The institutional development impact of each is rated as modest. The sustainability of project benefits is rated as unlikely in the current urban policy framework for both projects. The PCR-based ratings were the same. Key Findings/Lessons 5.11 The following are the key findings and lessons of the PAR: * The imbalance between project objectives and components is an example of a failure of the Bank to spot significant risks prior to a project's entry into the portfolio (para. 2.7). Insufficient examination of the urban policy framework had been done prior to the projects (para. 3.44). * The SARs for both projects were considerably over-optimistic in their assumptions regarding the effectiveness and ease of implementation of proposed project works, financial reforms, and institutional improvements (para. 4.2). * Despite some notable component successes (para. 5.6), the imbalance between project objectives and intervention components - combined with failure of supervision missions to focus on design flaws and institutional development issues - led predictably to an "unsatisfactory" rating for the outcomes of both projects (para. 5.5). - Despite project complexity inherent in projects of this type, the Audit considers that similar urban projects could be successful in the future, given: (a) a better match between project objectives and intervention components; (b) a modified and improved urban policy framework, and (c) concerted efforts to overcome preventable types of component failure which derive from a flawed preparation process (para. 5.7). Recommendations 5.12 Rationalization of the policy environment is necessary in order to resolve conflicting provisions in existing legislation (para. 3.41), and to provide a strong basis for revenue generation 40 for operation and maintenance of urban services. Aspects of the urban policy framework need to be reshaped at the state level before local projects for urban service delivery can expect major improvements in sustainability (para. 3.49). This should have high priority before further urban lending in India is approved, i.e. competent urban sector reviews, taking account of lessons learned, should guide project identification. 41 Annex A Details of Project Preparations and Negotiations Project Preparation 1. The purpose of this section is to describe and set the stage for how project preparation led, in time, to inherent deficiencies in project viability upon entry into the Bank's portfolio. Significant downside project uncertainty remained unacknowledged and unmitigated through project preparation, emanating primarily from the prevailing urban policy framework. Identification and Preparation Process 2. CUDP-I. Project preparation for CUDP-l was a protracted and difficult task for the Bank and the Borrower, as had been the case with CUDP-1. It was made all the more uncertain by impending West Bengal state elections in 1977, which took place after appraisal. 3. Over the years since CMPO's Basic Development Plan (BDP) of 1966, the approach to urban development in Calcutta has evolved, as first one planning concept then another gained prominence among decision makers. The sweeping vision of the BDP was derived from the belief that nothing less than an integrated program of interventions in a variety of sub-sectors would be required to overcome the general crisis situation in urban services within the Calcutta Metropolitan Area, particularly to address the needs of the low-income bustee dwellers, and this led to the broad scope of CUDP 1, 1I, and Ill. GOI involvement grew out of the logic that the Central Government had a direct and special responsibility for the improvement of Calcutta's conditions, a logic first voiced by a 1960 Bank economic mission (PCR, CUDP-1, para. 4.01). GOI involvement attained political urgency in 1970, due to the political unrest found in West Bengal at the time. 4. The 1960's to early 1970's was a period when many urban planners both in India and elsewhere believed that urban growth could be directed through planning mechanisms at their disposal, as evidenced by the bi-polar approach to development advocated in the BDP (with the small Kalyani municipality in the north and Calcutta in the south as growth centers for the metropolitan region). The inclusion of Kalyani was championed by the then prominent Chief Minister of West Bengal (who died in the mid-1960's). By 1976, a more politically inclusive multi- nodal approach came to be practiced, the nodes primarily represented by the existing municipalities. CMDA presented to the Bank's preparation mission a CUDP-II project proposal focused on water supply, sewerage/drainage, and urban transport. The sites and services component of CUDP-1I was to give physical expression to the new poly-centric development strategy (SAR, CUDP-II, para. 3.10). Nonetheless, it could be argued that some components of CUDP-11 were designed to support the bi-polar growth model (e.g., the Barrackpore/Kalyani expressway, and several major works in Calcutta/Howrah). Portions of the transport and road sub-components originally proposed for CUDP-II were postponed in order to give priority to drainage improvements which were thought to be important for long-term road stability (file search). 5. In water supply, CUDP-I had assigned priority to works within Calcutta Corporation, and by the time of CUDP-II preparation, these works were generally well advanced (although not complete). In early discussions on CUDP-II, CMDA proposed that the Bank finance three water 42 treatment plants to be based on the utilization of up-stream diversions from the newly completed Farakkah Barrage on the Ganges River. Yet because of tensions between India and Bangladesh over these diversions", the Bank rejected major new works which would use the contested water unless the water rights issue was settled between the two countries (file search). CMDA confirmed that the proposed plants would not be feasible unless sufficient water was released from Farakkah Barrage during the dry season. The Bank sanctioned only the financing of water supply improvements within CUDP-ll aimed at upgrading existing distribution works, and new ones which relied upon either groundwater or the existing Palta-Tallah transmission lines. CMDA's emphasis in water supply thus necessarily shifted from core works within Calcutta to the construction of water supply improvements in fringe areas of the core cities and in small municipalities where population densities were overtaking supply availability. 6. Prior to CUDP-ll, IDA summed up CMDA's prior implementation problems under CUDP-I as: (a) slow implementation and component completion; (b) lack of project monitoring, financial planning and control; (c) the need for top management changes; and (d) the need for submission of timely audit reports. The Bank believed that radical changes in top management and operational procedures were required in CMDA in order for CUDP-II to work, due to "excessive dominance of engineering staff and lack of financial control and management" (file search). 7. Various components were added into CUDP-II in order to provide broad response to Calcutta's urban problems in support of popular egalitarian goals. CUDP-II's school construction and remodeling component was driven by the goal of redressing imbalances between general state coverage (80 percent) and CMD's bustee coverage with primary education services (less than 60 percent). The provision of urban services to 60 percent of unserved bustee areas with the assistance of local NGOs (including water supply, environmental sanitation, pavement of pathways, security lighting, and drainage and sewer lines, as well as pilot-scale health and income generation programs) were added, realizing that bustee residents could not be rehoused, given resource shortages, but that they could be extended basic services20. Ideas for a small scale enterprise component were late in coming to the project, and relied upon GOI issuing instructions to four commercial banks to make IRs. 3 crores (US$3.5 million equivalent) available for small scale loans, since GOI found that it could not legally relend to commercial banks the IDA funds earmarked for small-scale enterprise (SSE, file search)21. At appraisal, CUDP-II included an agreement for licensing new private tubewells, to be renewed annually. 8. Bank staff carefully posed arguments for project approval. The Bank's decision memo to management on CUDP-II notes that the structure and size of the project were the result of individual 19 Including 40,000 cfs of water diverted to the Hooghly River, and from there to the Bay of Bengal. CMDA's five-year rolling program included some components which the Bank did not fully support, and thus did not finance within CUDP-II (e.g., major new water treatment plants using Farakkah Barrage diversions). This includes the Garden Reach and Howrah Treatment Plant facilities, completed with local financing. 20 What was perceived in India as high standards for infrastructure, earlier promoted by the BDP, had by 1974 been scaled back as a result of resource shortages, and experience under CUDP-I. 21 Despite NGO involvement in preparation of the social components, letters can be found in the files from NGOs urging more open discussion in Calcutta. 43 component analysis, and the ability of each component to satisfy standard Bank Group criteria (including adequate economic return). The CUDP-II SAR (para. 3.09) reported that the major government stakeholders considered the project to be of strategic importance to the development of the CMD, and had demonstrated "earnest concern" to improve performance through management reforms22. 9. The Bank viewed CUDP-1 as a forerunner of future, more poverty-oriented urban projects in South Asia. IDA's objectives for CUDP-1I (stated in mid-1976) included: (a) improvements in CMDA management and operations; (b) a shift of emphasis from public works (as in CUDP-I) to broader urban development activities; (c) local government reorganization, and (d) improved operation of urban services by local authorities. 10. Following appraisal and the 1977 elections, the views of the newly elected State government were sought; the Bank mission's findings noted that the new government was better in tune with IDA's view of the need for the project to address urban poverty issues, thus increasing the need for fringe area and bustee development activities. The new government reacted adversely, however, to the call for increases in local taxation in Calcutta Corporation and other municipalities under CUDP- 11, as well as increases in water and sewer charges to achieve full cost recovery by March 31, 1982 (as proposed by the Bank). A Bank mission returning from Calcutta3 noted that the reluctance of the GoWB to commit itself to any form of tax increase was "understandable" in light of the recent elections, since the new government "is anxious to be able to demonstrate early and meaningful performances to the electorate, and clearly considers the 1977-1982 CMDA program as a primary means of so doing." The Bank rationalized that despite CMDA's poor past performance, the change of Government would provide a reason for anticipating "improved construction performance and the achievement of targets" (file search). This calls into question the Bank's commitment to policy reform and institutional development objectives stated in the SAR. I1. The new Marxist government was committed to solving the residual problems of those who elected it to office, and was not convinced of the viability of the shelter component; yet IDA held GoWB to the negotiated (and legally binding) agreement. The GoWB showed considerable enthusiasm for the health component, requesting an expansion in the number of beneficiaries from 175,000 to over I million; IDA refused on the basis that is was planned as a pilot program in CUDP-1l. Subsequently, the health activities were expanded under CUDP-Ill (and a stand-alone IDA Population Project) once they proved successful. GoWB was also reported to be enthusiastic for the integrated aquaculture and bio-gas generation component, and TA was agreed during the post-negotiations mission (file search). 12. CUDP-III. Despite being a municipal project, there had been no opportunity to involve local elected leaders in preparation of CUDP-11, prior to project appraisal since under the President's rule of West Bengal at the time, all local leaders were appointed rather than elected. This situation changed dramatically with the state and local elections of 1977-78, resulting in a major shift of political power and a resulting change in the approach of CUDP-Ill; thereafter, the considerable 22 See para. 15 (below) for reforms agreed during negotiations. 23 Memorandum of the Appraisal Up-dating Mission, Aug. 23, 1977 44 involvement of elected municipal leaders in the planning and implementation of the new schemes became the norm, and a new political openness to input was evident. Project preparation began in 1980. The plan proposed by GoWB for CUDP-111 stressed decentralization of implementation from CMDA to a large group of Calcutta metropolitan implementing agencies (including the existing 36 municipalities, which by now have increased to 39). 13. Many institutional and policy issues remained unresolved from CUDP-II. On the policy front, the Bank noted that earlier investments were financed before a supporting financial reform was in place, thus the Third Project would focus on the need to strengthen the finance, operation, and maintenance of the system. The Bank's CUDP-III identification team noted three primary issues of concern, all related to institutional and policy reform: (a) the need for further development in municipal, fiscal and administrative reforms already being undertaken by the GoWB; (b) a clarification and definition of CMDA's role, planning capacity, financial objectives and management; and (c) a review of institutional staffing and financial arrangements to address the problems of operation and maintenance. GoWB called for a two tier approach to reform in which: (a) CMDA would be restructured, while its coordinating, policy planning, monitoring and evaluating functions would be reinforced; and (b) other institutions and agencies participating in the development process within the CMD would be strengthened, and CMDA would act as a major instrument in the achievement of that goal. 14. In water supply, the CUDP-1I SAR expected tariff increases (from IRs. 5 to 11 per thousand gallons) by November 1, 1983, and projected significant improvement in the financial position of CMWSA after the project. An interesting provision of CUDP-III was that GoWB was responsible for payment of any bulk water bills to CMWSA which remained unpaid by municipalities for more than 30 days, a factor which may have reduced the incentive for CMWSA collection efficiency. Expected project benefits from the reorganization of the engineering department of CMC were to lead to improved productivity and cost savings in the delivery of services. MDP funds were to be provided to municipalities as a 70:30 loan:grant mix, while an innovative health services component offered a large number of services to every family in the slums, and sought to recover 22 percent of total recurrent costs over the five year program. The MDP sought to strengthen local government capabilities through local execution and sub-project loans, yet success depended upon the technical and financial base of individual municipalities-which were quite weak. Negotiations 15. Negotiations for CUDP-II took place in October 1977, and were smoother than expected. Bank files note that the Government accepted almost all of the policy amendments without objection and demonstrated strong support for the goal of expanding the fiscal base and administrative capabilities of local authorities in the CMD. Among the requirements accepted at negotiations were the following: reorganization of the CMDA; appointment of a new top management team for CMDA; adoption of new project budgeting, appraisal, monitoring and MIS by CMDA; creation of a new Central Valuation Board to carry out a revaluation of all properties in the CMD; reorganization of West Bengal's Dept. of Municipal Services; expansion of the system of metering water connections in parts of the CMD; revision of the system for awarding grants from GoWB to local authorities in the CMD; enforcement of revenue collection targets for the CMC; and establishment of required revenue/expenditure ratios for local bodies in the CMD. As agreed at negotiations, maintenance of bustee infrastructure improvements was to rely upon assurances from GoWB that 45 plans for such maintenance (together with appropriate funding) would be implemented from April 1, 1979". Since the newly elected Marxist government was sensitive to references in the negotiation minutes made on actions to be taken for the people of Calcutta, the minutes do not fully address the substance of the discussions (file search). As a follow-up to negotiations, CMDA declined to supervise the small-scale enterprise component in order to avoid setting a precedent for supervision of other "soft" components. 16. Negotiations for CUDP-1Il were held in April 1983. The agreed minutes of the meetings indicate that the following issues were resolved: (a) a time table for completion of land acquisition for area development schemes in various locations in the metropolitan area, (b) audit requirements, (c) water rate increases to be implemented as a condition of effectiveness; (d) assurances that commercial banks would make loan funds available for the small-scale entrepreneurs program; (e) agreements to transfer assets completed up to March 1982 to municipalities and other operating entities by April 1, 1984; and (f) agreements on a number of other minor issues. 17. Despite a significant amount of time spent in project preparation and negotiations, both projects emerged from preparation with inherent weaknesses: (a) there was an imbalance between project objectives (institutional and financial reforms) and funds allocated for implementation components (CUDP-II, 98 percent public works, 2 percent TA and training; CUDP-I, 99 percent public works, I percent TA and training); (b) project preparation ignored risks in the urban policy framework (which remained highly distorted with respect to the pricing of services), and components which relied upon improved cost recovery directly from users (e.g., water supply and sewerage) or loan recovery from municipalities were likely to be problematic; (c) procurement packaging involved numerous small contracts", and could be expected to be overly complex and difficult to supervise; and (d) neither the Bank nor the Borrower appeared to be fully committed to the project objectives which focused on institutional and financial reforms26. 24 The CUDP-II PCR reported that CMC began maintaining the bustees effective 4/1/83. 25 See para. 3.13 below. 26 The Borrower appeared to be interested primarily in the package of works, and was unconcerned about the need for improvements in direct cost recovery (e.g., water supply and sewerage).  47 Attachment COMMENTS FROM THE MINISTRY OF URBAN AFFAIRS AND EMPLOYMENT M.S. Srinivasan GOVT. OF INDIA Joint Secretary MINISTRY OF URBAN AFFAIRS AND Teis: 301 2309 EMPLOYMENT q1 ftm-1-i10011, mlft 199 Dated New Dellri-10011, tire 199 D.O. No. K-14011/9/95-UD.III(M) Dated : 13.5.95 Dear Mr. Yves Albouy, Re : Second and Third Urban Development Projects (Credits 756-IN and 1369-IN) Performance Audit Report Thanks for your communication of 24.4.1995 along with Draft Performance Audit Reports (PAR) pertaining to Second & Third Calcutta Urban Development Projects. 2. The observations of Audit present a balanced picture, covering both positive achievements and noticeable deficiencies. Some of the component successes cited in the findings have, in our view, made a visible impact on the life of the vulnerable segments of the population of Calcutta and have achieved a fair measure of success, in reaching the basic services to the needy population with more precise targeting than had been the case earlier. The failures which have been listed, while they should cause concern in the short run, also help policy planners and project formulators to better focus their attention on these items in future projects - to that extent they offer valuable lessons and insight into project design and implementation. 3. Following up on the recent Constitution (74th Amendment) Act, 1992, the issue relating to strengthening the financial base of our Urban Local Bodies is being increasingly recognised as one of critical importance, more so in the context of a much wider functional domain now being entrusted to these bodies than earlier. Concepts including Cost Recovery from users for services, public-private participation in service delivery, adoption of BOO, BOOT types of project execution, etc., are slowly but steadily gaining acceptance. With this, the whole outlook on social sector projects is also expected to improve in the coming years across the board, paving the way for more investment in the urban infrastructure sector where it is badly needed. The National Urban Policy on which we are currently working, will also incorporate these concepts for adoption by State Governments and ULBs. 48 4. We look forward to receiving your final report and thank you again for your letter. With regards, Yours sincerely, (M.S. Srinivasan) Mr. Yves Albouy Chief Infrastructure and Energy Division Operation Evaluation Department The World Bank 1818 H Street, N.W. Washington, D.C. 20433 U.S.A.  [ 썹 A;: 」 && 수 ,; H L닉 r & [, · . 1 ‘二 ，꽈 ；』 7 &;& y ㅏl *, . ·긱r & A드