India - Gujarat Water Supply and Sewerage Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 15715 PERFORMANCE AUDIT REPORT INDIA GUJARAT WATER SUPPLY AND SEWERAGE PROJECT (CREDIT 1280-IN) June 10, 1996 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 US$1.00 = Rs 25.001 RS 1.00 = US$0.04 Abbreviations and Acronyms AIC Average Incremental Cost CP IBRD/WHO Cooperative Program Cr. Credit ERR Economic Rate of Return ESI Environmental Sanitation Institute, Gandhinagar GDP Gross Domestic Product GJTI Gujarat Jalseva Training Institute (of GWSSB) GOG Government of Gujarat State GOI Government of India GWSSB Gujarat Water Supply and Sewerage Board GWSSP Gujarat Water Supply and Sewerage Project IBRD International Bank for Reconstruction and Development (The World Bank) IDA International Development Association IDWSSD United Nations International Drinking Water Supply and Sanitation Decade IRR Internal Rate of Return IRs. Indian Rupees LIC Life Insurance Corporation of India MCA Municipal Corporation of Ahmadabad NGO Non-Governmental Organization O&M Operation and Maintenance ODs Operational Directives OMS Operational Manual Statement OPEC Organization of Petroleum Exporting Countries PCR Project Completion Report PHES Public Health Engineering Service (State of Gujarat) RMC Rajkot Municipal Corporation SAR Staff Appraisal Report UN United Nations UNDP United Nations Development Programme WHO World Health Organization Fiscal Year Government: April 1 - March 31 1. As per PCR, September24, 1993. As of March 13, 1996: US$1.00= Rs 34.05. FOR OFFICIAL USE ONLY The World Bank Washington, D.C. 20433 U.S.A. Office of the Director-General Operations Evaluation June 10, 1996 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Performance Audit Report on India Gujarat Water Supply and Sewerage Project (Credit 1280-IN) Attached is the Performance Audit Report (PAR) on India - Gujarat Water Supply and Sewerage project (Credit 1280-IN, approved in FY 82), prepared by the Operations Evaluation Department (OED). The project was implemented at a time (1982-1991) when India's economy was undergoing significant policy change, although generally outside the sector. This project, along with similar initiatives in other states of India in the 1970s and early 1980s, was part of the Bank's response to a large-scale need for improvements in water supply and sanitation services, and was shaped in large part by the goals of the United Nations International Drinking Water Supply and Sanitation Decade (1981- 1990). Weak funding was considered to be the primary constraint and the primary goal was to increase service coverage. The project featured a very complex array of components in rural and urban water supply, urban sewerage, low cost sanitation, and institutional strengthening across a broad expanse of Gujarat State. Overall, while most physical works were eventually completed despite long delays, little progress was made on substantive institutional and policy issues throughout the decade of implementation. Stated targets for financial and institutional performance were not fulfilled. Bank performance in project preparation and appraisal was inadequate. The project concept was unsound because it could not deliver a financially sustainable outcome under the existing policy framework. Little attempt was made to change the framework. This operation demonstrates the need for more 'up-front' actions on the part of the Borrower to demonstrate commitment and jump-start the change process when a minimum of policy reform and institutional improvement is critical to project success. If this minimum action is delayed until project implementation, the risks increase significantly that the project outcome will be unsatisfactory or that project benefits will be unsustainable. The outcome of the Gujarat Water Supply and Sewerage project is rated as marginally satisfactory. Institutional development is rated as negligible. The sustainability of benefits is rated as unlikely. Except for the project outcome (Project Completion Report (PCR) rating is unsatisfactory), these ratings agree with the ratings in the PCR. OED rates Bank performance as unsatisfactory. Attachment This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  FOR OFFICIAL USE ONLY Contents Preface............................................... .......... . 3 Basic Data Sheet.................................................... 5 Evaluation Summary ............................................... 9 1. Introduction .................................................... 15 India's Macroeconomic Setting ....................................... 15 Sectoral Context ................................................ 15 The Bank's Assistance ............................................ . 16 2. Project Development ....................... ..................... 17 Project Objectives and Components .................................... 17 Quality at Entry ................................................ 17 Identification and Project Objectives ................................... 18 Relevance of the Project Objectives to the Sector Strategy ................... 18 Project Design ........................ ........................ 19 Linkages between Project Objectives and Project Components ................. 19 3. Project Implementation and Physical Results .................. ....... 21 Procurement.................................................... 21 Implementation Scheduling......................................... 21 Project Costs and Disbursement...................................... 22 Physical Results and Their Impact..................................... 22 Outcome and Sustainability ......................................... 24 Economic Evaluation and Beneficiary Impact .......................... 25 4. Institutional Development Impact ................................... 27 Staff Development and Training ................ .................... 27 Accounting and Financial Improvements ............. ................. 28 Sector Organization .................................................. 28 5. Assessment of Performance ....................................... 29 Borrower Performance .................... ....................... 29 Compliance with Covenants and ODs .................................. 30 Bank Performance ................................................ 30 This report was prepared by Mr. Tauno Skytta (Task Manager), and Mr. Charles Chandler (Consultant) who audited the project in June 1995. Ms. Helen Watkins provided administrative support. The report was issued by the Infrastructure and Energy Division (Mr. Yves Albouy, Chief) of the Operations Evaluation Department (Mr. Francisco Aguirre-Sacasa, Director). 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 wihout World Bank authorization. 2 6. Conclusions, Ratings and Key Findings ............................. 33 General Conclusions ...................... .................. 33 Ratings ............................. ..................... 33 Key Findings and Lessons ..................................... 34 Recommendation .................................... ....... 34 Attachment Comments from the Borrower .............................. ...... 49 3 Preface This is a Performance Audit Report (PAR) on the Gujarat Water Supply and Sewerage project (GWSSP) approved by the Bank Board of Directors on July 6, 1982. The GWSSP was financed in part by an IDA Credit (1280-IN) of US$ 72.0 million equivalent. The credit was closed on December 31, 1991, after extensions totaling about 4 years. The canceled amount totaled US$17.6 million equivalent. The PAR was prepared by the Operations Evaluation Department (OED). The PAR is based on an OED review of the Project Completion Report (PCR), the President's Report, project legal documents, the Staff Appraisal Report (SAR), review of relevant project files, and other background materials and reports. The PAR also draws on field observations and on interviews with officials of the State of Gujarat, the Gujarat Water Supply and Sewerage Board (GWSSB), and other organizations and individuals met during the Audit's June 1995 mission. The PCR for Credit 1280-IN was prepared by the Infrastructure Operations Division of South Asia Country Department II (India), and was submitted to the Board as Report No. 12349, dated September 24, 1993. A draft Part II of the PCR, prepared by the Borrower, was provided to the Audit in the field. It had not been prepared in time to be included in the earlier-issued version of the PCR. The published PCR prov;des a very brief account of project implementation and results. The PAR expands the discussior of several issues, particularly those dealing with project preparation and appraisal. The draft PAR was sent to the Borrower for comments. The comments received from the Government of Gujarat are reflected in, and reproduced as an Attachment to, the PAR.  5 Basic Data Sheet INDIA GUJARAT WATER SUPPLY AND SEWERAGE (CREDIT 1280-IN) Key Project Data (amounts in SDR million) Appraisal Actual or Actual as % of estimate current estimate appraisal estimate Total project costs 1,375.4 1,991.5 145 IDA Credit amount 63.8 63.8 Date Physical components Completed N/A N/A Economic Rate of Return % - Base Core: Revenue Benefits 2.5 N/A2 - Benefits increased by 50% 9.6 N/A Institutional Performance Substantial Negligible Cancellation 11.0 Cumulative Estimated and Actual Disbursements FY83 FY84 FY85 FY86 FY87 FY88 FY89 FY90 FY91 FY92 Appraisal estimate 4.9 24.80 47.00 66.00 72.00 (US$M) Actual (US$M) .60 1.71 7.65 13.28 20.94 25.78 33.47 40.21 55.19 60.24 Actual as % of 2.9 14.5 6.1 4.9 34.3 appraisal Date of final disbursement: May 13 , 1992 Project Dates Original Actual Identification 8/80 Preparation 11/80 Preappraisal 3/81 2/81 Appraisal 5/81 6/81 Negotiations 9/81 5/82 Board Presentation 11/81 7/82 Credit Signing 11/82 Credit Effectiveness 2/83 Credit Closing 9/30/87 12/31/91 Project Completion 12/ /86 N/A3 2. No Rate of Return was calculated for the whole project in the PCR; see paras. 8.3-8.6. 3. Some sewerage components were still under implementation during the audit mission. 6 Mission Data Date No. of Staff Specializations Types of Performance Rating (month/year) persons weeks in represented Problems field Identification 7/80 2 2 San. Engr., Preparation Fin. Anlyst Preparation 11/80 1 1 San. Engr. Preappraisal 3/81 2 2 San. Engr., Fin. Anlyst. Appraisal 6/81 3 4 San. Engr., Fin. Anlyst., Training specialist Post Appraisal 2/82 1 1 Sanitary Engineer Negotiations 6/82 Effectiveness 2/83 Supervision 1 11/82 1 1 Sanitary Engineer Supervision 2 6/83 3 5 San. Engr., Fin. Anlyst Ins. Dev. Specialist Supervision 3 5/84 4 4 San. & Mun. Moderate 1. Disbursement Engr. problems 2. Management Fin.Anlyst., Econmst Supervision 4 2/85 4 4 Same as Major 1. Disbursement above problems 2. Management Supervision 5 8/85 1 1 Training Specialist Supervision 6 9/85 3 3 San.Engr.,Fin Major 1. Management .Anlyst problems 2. Disbursement, Funds Supervision 7 9/86 3 6 San.Engr., 1. Management Fin.Anlyst 2. Disbursement Supervision 8 2/87 3 6 San.Engr., Funds, DroughtManagement Fin.Anlyst Revsd. Actn. Plan 7 Date No. of Staff Specializations Types of Performance Rating (month/year) persons weeks in represented Problems field Supervision 9 10/87 3 6 San.Engr., Drought Cost Recovery Fin.Anlyst Supervision 10 2/88 4 8 San.Engr., Drought Cost Recovery (Extens./ Fin.Anlyst Statistician Restruct.) Supervision 11 7/88 1 1 Sanitary Restr.details Cost Recovery Engineer Supervision 12 2/89 2 4 San.Engr., Fin.Anlyst Supervision 13 4/90 3 5 San.Engr., Major 2. Procmt. 2. Fin. Fin .Anlyst 2. Cost Recovery Supervision 14 11/90 2 5 San. Major 2.Procmt. Engr.,Fin. 2.Finance Anlyst 2.Mgt. 2.Cost Recov. Supervision 154 9/91 4 6 San. & Mun. Major 2.Procnt. Engr., Proc. 2.Finance Spect. 2.Mgt. 2.Cost Chemst. Recov. Supervision 165 9/92 5 6 San. & Mun. Engr., Proc. Specit. Chemst. 4. Included development of Mehsana Project. 5. Last Mission following Credit Closing on 12/31/92 included lending development. 8 Other Project Data Follow-on Operations Credit No.1 Amount Board Date Loan No. (US$ M) Bombay Water Supply Project Cr. 390 55.0 5/15/73 Uttar Pradesh Water Supply Cr. 585 40.0 8/19/73 Bombay Water Supply 11 Cr. 842 196.0 7/25/78 Punjab Water Supply and Sewerage Cr. 848 38.0 9/12/78 Maharashtra Water Supply Cr. 899 48.0 5/01/79 Gujarat Water Supply Cr. 1280 72.0 7/06/82 Tamil Nadu Water Supply Cr. 1454 36.5 3/29/84 Tamil Nadu Water Supply CF 120 36.5 3/29/84 Kerala Water Supply & Sanitation Cr. 1622 41.0 7/16/85 Bombay III Water Supply Cr. 1750 145.0 12/16/86 Bombay III Water Supply Ln. 2769 40.0 12/16/86 Madras Water Supply Cr. 1822 16.0 3/17/88 Madras Water Supply Ln. 2846 53.0 6/17/87 Hyderabad Water Supply Cr. 2115 79.9 9/28/90 Hyderabad Water Supply Ln. 3181 10.0 9/28/90 Maharashtra Rural Water Supply Cr. 2234 109.9 7/31/91 Madras Water Supply II Ln. 3907 275.8 6/20/95 9 Evaluation Summary Introduction 1. The Gujarat Water Supply and Sewerage Project (Credit 1280-IN, approved in FY82), together with similar initiatives in other states of India, was part of a Bank response to the need for large-scale improvements in water supply and sanitation services in India, shaped in large part by the goals of the United Nations International Drinking Water Supply and Sanitation Decade (IDWSSD, 1981-1990). Bank lending in state-level initiatives for the water supply and sanitation sector in India has amounted to more than US$ 500 million equivalent (1975-1995) (paras. 1.1-1.8). Project Development 2. The objectives of the Gujarat Water Supply and Sewerage Project (GWSSP) were: (a) to bring water to rural areas where water is scarce or where existing water sources are unfit for human consumption; (b) to improve or extend water supply services in rapidly developing centers; (c) to extend and upgrade sewerage systems in densely populated areas in major urban communities; (d) to provide low-cost sanitation in medium-sized towns which are unable to afford water-borne sewerage; and (e) to strengthen the institutional framework of the sector and to establish training facilities for water supply and sewerage personnel at all levels within the sector (para. 2.1). 3. An IDA credit of US$ 72.0 million equivalent (44 percent of the total project cost of US$ 161.8 million equivalent) was approved to finance the following components: (a) an urban water supply component covering extensions to the systems of five large towns; (b) an urban sewerage component involving five towns; (c) a rural water supply component covering seven regional village groupings; (d) Ill individual rural water supply schemes for "no source" (or "problem") villages; (e) a low-cost sanitation component for 15 towns; and (f) a training component for all grades of water supply and sewerage personnel, as well as studies and common services. The project objectives were generally relevant, but were over-reliant on "coverage" as a measure of success in water supply and sanitation (para. 2.2-2.3). 4. The project concept grew out of the sector memorandum prepared by the World Health Organization (WHO) in 1979. Extended discussions during project preparation and negotiations revolved around institutional and financial issues, yet mitigating measures included in the project were generally weak and ineffective (paras. 2.4-2.11). Project Implementation and Physical Results 5. The project got off to a slow start as delays in the project were mainly caused by: (i) the necessity for continued preparation of the "engineering aspects" following project approval; (ii) over-optimistic scheduling; (iii) improper procurement planning (large number of small contracts), some delays involving land acquisition; and (iv) the drought of 1985-87 which diverted the Gujarat Water Supply and Sewerage Board's (GWSSB) attention away from the project (paras. 3.1-3.3). 10 6. The project was designed with optimistic scheduling and did not conform to the standard disbursement profile for India (8.5 years). In the end, disbursement took almost ten years rather than the planned five. Slow disbursement and implementation delays generally confirmed other signs that there had been major lapses in project preparation (paras. 3.4-3.8). 7. The following project outcomes have been highlighted in the report (paras. 3.9-3.19): * in urban water supply, systems were successfully upgraded in all five towns; * an urban sewerage component was successfully undertaken in five cities and towns, although not fully completed at the time of the Audit's visit; * the project funded eight regional systems covering 455 villages. In addition, all of the Ill schemes for "no-source" villages were reported to be completed (in five districts of the State), although about 15 percent are reported to be non-functional at present due to equipment breakdowns; * by Credit closing, the low-cost sanitation component had exceeded targets for household latrines by 12 percent through NGO implementation; and, * in the training component, the Gujarat Jalseva Training Institute (GJTI) was officially opened in October 1988, and has trained a large number of persons already numbering over 15,000 in about 400 courses between 1988 and 1993. 8. From the beginning, the project was not attractive in economic terms because of the low tariff levels present, and projected, in the sector. The estimated internal rate of return for the proposed investments in eight project cities was 2.5 percent. Financial sustainability was unlikely but the Bank rationalized that gradual change in succeeding years was acceptable. The IRR was re-estimated at completion in the case of the Jamnagar water supply and Nadiad sewerage projects, showing base case IRRs of 5.9 percent and 0.3 percent, respectively (paras. 3.20-3.21). Institutional Development Impact 9. While some progress was made on key institutional and policy issues, stated targets for financial performance were not fulfilled in this project. Some of the critical shortcomings were: (i) metering of consumers continued to be limited to industrial and commercial users; (ii) accounting systems had not been properly designed to respond to financial reporting requirements; and (iii) the management of the billing and collection function continued to be inadequate. In addition, many studies were completed late, thus having only limited impact. Several fundamental problems are likely to be the root cause, e.g. the legislative and policy framework, an area of investigation which could be usefully pursued in future sector work (paras. 4.1-4.8). Assessment of Performance 10. Borrower Performance. Borrower performance is rated as satisfactory. The project included many features which the Government of Gujarat (GOG) and GWSSB requested, while policy changes and conditionalities often mandated by the Bank prior to the project were 11 conspicuously absent. However, this formula did not lead to success. Lessons indicate the need for more "up-front" activities on the Borrower's part during project preparation in order to reduce project risks. When such activities are delayed until project implementation (e.g., policy reform, institutional changes, etc.), the risks that the project outcome will be unsatisfactory or that project benefits will be unsustainable are increased significantly. The performance of GWSSB varied considerably during the project implementation period, reflecting the abilities of the management team in place at the time and, over time, the general deficiencies of an organizational framework where the design/construction functions are completely separated from the operation/maintenance functions. Despite slow implementation, project works were generally completed, and GWSSB staff gained considerable experience during the project (paras. 5.1-.5.5). 11. Compliance with Covenants and Operational Directives. Towns were in compliance with the "letter" of the cost recovery covenant (since it was to be implemented only after works completion) but were generally unable to comply with the debt service coverage covenant. Increases in the water tax charged in rural areas served by the project were complied with, yet collections remained poor for the State as a whole (at about 10 percent) (paras. 5.6-5.7). 12. Bank Performance. Bank performance is rated as unsatisfactory. It was inadequate during project appraisal and negotiations. Assurances provided by the Borrower were taken to be equal to action, despite past performance elsewhere in the sector in India. The Bank appraisal failed to understand the existing situation, and did not properly assess the risks associated with implementing complicated financial covenants in an environment in which commercial accounting principles had not yet been accepted by GWSSB and the municipalities, and where the need for such concepts was poorly understood. Even 10 years later at credit closing, GWSSB and all municipalities lacked fully functioning commercial accounting systems. Supervision missions were adequately spaced, but did not provide early warning of low development impact or effectively function to suggest solutions (paras. 5.8-5. 10). 13. Indicators of sector success were in terms of coverage alone, and project components were designed primarily to contribute physical works to achieve this end. The project concept was somewhat complex, but unsound because it could not deliver a financially sustainable project under the existing policy framework; heavy subsidies from other sources were the norm, and little attempt was made to change the framework. In addition, the project made no attempt to control demand, virtually guaranteeing that any gains between supply and demand would be short-lived. Little "up front" action on the demand-side policy issues such as tariffs, metering, and leak detection were attempted. The appraisal team did not deal openly and realistically with the sector and country contexts of Gujarat State in the SAR. The SAR described a limited set of potential project risks and minimal measures were to be taken to offset them. Significant risks of failure thus remained unmitigated in project design, including those associated with the prevailing policy framework. Urban and rural populations of Gujarat temporarily have better access to piped water supply and sanitation, but without adequate cost recovery and maintenance management these benefits will be short-lived (paras. 5.11-5.13). Conclusions, Ratings and Key Findings 14. Most of the physical works were successfully completed but institutional objectives were not met. The project concept was complex but it could not deliver a financially sustainable project under the existing policy framework (where heavy subsidies from other sources were the 12 norm) and it made no attempt to control demand or set viable prices for water. The low-cost sanitation component was successful, and likely to be sustainable, because the constructed facilities continue to be used and maintained by individual households (who own them), and all costs covered up-front. Little "up front" action on the demand-side policy issues was sought by the Bank, and none was forthcoming. Financial sustainability was unlikely in the existing policy environment but the Bank rationalized that gradual change in succeeding years was acceptable. As a result, quality at entry was low; risk of failure in the financial and institutional strategy, while acknowledged in the Project Brief, remained unmitigated in project design (paras. 6.1- 6.2). 15. The urban and rural populations of Gujarat temporarily have better access to piped water supply and sanitation, but without adequate cost recovery and maintenance management these benefits will be short-lived, and the increasing demand for such services will soon outstrip the resources for supply. Experience shows that the response to the scarcity of resources and their overstretching generally leads to a deterioration in the quality of service which negates an increasing part of the benefits that should have accrued from the investments. Hence, sustainability is unlikely (para. 6.3). 16. The Audit rates the outcome of the project as marginally satisfactory. Institutional development is rated as negligible. The sustainability of project benefits is rated as unlikely in the current policy framework for the project as a whole. The low-cost sanitation component makes an exception, however, and it is assessed as sustainable. The performance of the Borrower is rated as satisfactory because it implemented the project as designed although it failed to meet financial covenants. Bank performance is rated as unsatisfactory because of deficiencies in project preparation and appraisal. The ratings derived from the PCR were the same except for the outcome rating which was unsatisfactory because it overemphasized the importance of shortcomings in institutional development (para. 6.4). 17. The following are the key findings and lessons of the PAR (para. 6.5): * project objectives were broadly (and imprecisely) formulated, and could not be accomplished throughout Gujarat State in a single project through implementation of the stated components; * project quality at entry was low as a result of defective project preparation and appraisal - and there was high risk of failure with regard to financial sustainability; * measures of project readiness for immediate implementation were inadequate, as evidenced by the lack of advancement in detailed design, as well as generally cumbersome contract packaging and procurement design - all resulting in significant project delays; * notable success and sustainability was achieved in the low-cost sanitation component implemented by a knowledgeable and experienced NGO; and * there was a need for more policy change on the Borrower's part prior to the project in order to reduce the risk of project failure. 13 Recommendation 18. Relevant water supply and sanitation sector work is required in India, particularly focusing upon the lack of financial sustainability in the sector. One approach would be to contrast successes and failures in various states with the present legislative and policy environments. This should have high priority before further sector lending is approved, i.e., competent sector review, taking account of lessons learned, should guide project identification. Such a review should also engage Borrower agencies to the maximum extent (para. 6.6).  15 1. Introduction India's Macroeconomic Setting6 1.1 The ten-year implementation period (1982-1991) of the Gujarat Water Supply and Sewerage Project was a significant period in terms of policy change in India. Throughout the 1980s, important initiatives at the national level began to liberalize trade, industrial and financial policies, while subsidies, tax concessions, and the depreciation of the currency improved export incentives. These measures helped accelerate GDP growth to over five percent per year during the 1980s and reduce poverty more rapidly. With few exceptions, the inefficiency of public enterprises continued to be a serious issue. Sectoral Context 1.2 Institutional Setting: India's Water Supply and Sanitation Sector'. The Indian Constitution assigns the responsibility for water supply and sanitation to the states, which in turn have made these functions the responsibility of local bodies. India prohibited state and local governments from incurring long-term private debt, and investments in infrastructure are generally financed from the state budgets, grants and loans from the central government and government owned financial institutions. State and local governments are allowed to generate revenues only from user fees, licenses, and from taxes on a narrow base (retail sales, real estate, and non-motorized vehicles). Because of the disproportion between revenue capacity and obligatory functions at the local level, the central government devised a system of capital ("Plan") and recurrent ("Revenue") grants. 1.3 Disputes over the transfer of projects to local bodies following commissioning was common under this system. In a number of instances, local bodies have refused to accept responsibility for schemes or to service the corresponding debt, justifying their refusals by: (a) contesting the accuracy of project accounts on which the demand for payment was based; (b) asserting that the state board has not controlled project costs; and (c) alleging that state agencies often promoted projects that local governments could not afford when full costs (including O&M) were considered. 1.4 Sectoral Context in Gujarat State. Gujarat State is characterized by a semi-arid climate, and surface water is limited throughout much of the year. Except in the alluvial areas of northern Gujarat, groundwater is scarce and difficult to develop due to the prevalence of hard rock conditions. Groundwater is often found to contain high levels of fluoride or salinity, yielding poor water quality to wells. Recirculation of irrigation water has also had a negative impact on groundwater salinity in localized areas. Where acceptable quality groundwater is found, groundwater levels have declined in recent years due to excessive pumpage in comparison 6. World Bank, Trends in Developing Economies. 1994. Washington, D.C. 1994. 7. India -- Water Supply and Sewerage Projects financed by the World Bank: Financial and Institutional Performance, Report 6046, 1986. 16 to limited recharge from the surface, a trend which is likely to lead to further invading and upcoming of brackish groundwater. 1.5 Prior to 1979, the Public Health Engineering Service (PHES) planned, designed, and constructed all water supply and sewerage systems in Gujarat State, except those of municipal corporations. The Gujarat Water Supply and Sewerage Board (GWSSB) was established in 1979 as an autonomous body to construct and commission new works, but was not to operate and maintain them except in the event of mismanagement by local authorities, or under directions from the Government of Gujarat (GOG). The municipal corporations were to act independently, but were permitted to hire GWSSB for specific tasks if they so wished. In urban areas of Gujarat State, local governments have followed the practice of covering the major portion of the costs of water supply and sewerage operations from funds obtained through other sources of municipal revenue, primarily trade taxes. As a result, water supply and sewerage tariffs at the time of appraisal were very low and far below the level required to cover operating costs and debt servicing. 1.6 In regional rural water supply systems, the GOG limits the contribution by local authorities currently to IRs. 14 per capita per year for users of standpipe services for most of the project implementation period while an average of IRs. 60 per capita is spent on maintenance each year. As collection rates have been poor, at about ten percent, actual revenue collected has provided only a small contribution toward meeting the recurring costs of operation and maintenance. The remainder comes from the GOG budgetary subsidies. 1.7 In the early 1980s, efforts were underway in Gujarat State to attain to the extent possible the goals of the UN's International Drinking Water Supply and Sanitation Decade (1981-90) through increased coverage of the population with safe water supply and adequate sanitation. The State placed immediate emphasis on water supply in the neglected rural areas, the short-term goal being to cover all 'problem' villages, 50 percent with piped systems and 50 percent with hand pump systems. In urban areas, an attempt was to be made to improve existing systems and to keep pace with population growth. The goal was to achieve coverage targets by the end of the decade of 100 percent in urban and rural water supply throughout the State, 80 percent in urban sanitation, and 25 percent in rural sanitation. Departing from its previous objective of providing water-borne sewerage on a wide scale, the GOG instead emphasized the use of low-cost sanitation techniques, except where geological conditions made them inappropriate and, in the case of some larger towns and to some degree in smaller towns, where water-borne facilities had already been established. The Bank's Assistance 1.8 The Gujarat Water Supply and Sewerage Project, (GWSSP) along with similar initiatives in other states of India in the 1970s and early 1980s (e.g., Uttar Pradesh, 1975, Punjab, 1978, Maharashtra, 1979, and Rajasthan, 1980) was part of the Bank's response to a large-scale need in the sector. Bank lending in state-level water supply and sanitation initiatives has amounted to more than US$500 million equivalent (1975-1993). The Gujarat Urban Development Project was financed by the Bank in 1985 (Credit 1643-IN), funding urban initiatives in eight cities, including additional sewer system extensions in Ahmedabad to complement sewer system improvements under the GWSSP. 17 2. Project Development Project Objectives and Components 2.1 The objectives of the Gujarat Water Supply and Sewerage Project were: (a) to bring water to rural areas where water is scarce or where existing water sources are unfit for human consumption; (b) to improve or extend water supply services in rapidly developing centers; (c) to extend and upgrade sewerage systems in densely populated areas of major urban communities; (d) to provide low-cost sanitation in medium-sized towns which are unable to afford water-borne sewerage; and (e) to strengthen the institutional framework of the sector and to establish training facilities for water supply and sewerage personnel at all levels within the sector. These were broad (and imprecisely formulated)9 objectives, which could not be fully accomplished throughout Gujarat State with the stated project components (see para. 2.5). 2.2 An IDA credit of US$ 72.0 million equivalent, representing about 44 percent of the total project cost of US$ 161.8 million equivalent (including contingencies of US$ 36.1 million equivalent) was approved to finance the following components: (a) an urban water supply component covering extensions to the systems of five large towns; (b) an urban sewerage component involving extensions to the sewerage systems of these towns (including Ahmadabad) and the provision of completely new sewerage systems for two towns; (c) a rural water supply component covering seven regional village groupings; (d) Ill individual rural water supply schemes for "problem" villages; (e) a low-cost sanitation component for 15 sample towns identified under the U-NDP Global Sanitation Project; and (f) common services (e.g., equipment, vehicles, laboratories). The locations of various schemes are presented in Annex A. In addition, the SAR lists the following "other" items to be funded under the project (SAR, Table 4.1): hydrological investigations, engineering consultants, GWSSB and Municipal Corporation of Ahmadabad (MCA) overheads for engineering and administration, training, land acquisition, and a loan fund for house connections. Complementary consultant studies were to be funded through GOG grant assistance for the following: (a) management, organization and staffing; (b) commercial accounting and financial management information systems; and (c) development of tariff structures based on socioeconomic research (SAR, para. 4.11) Quality at Entry 2.3 A detailed account of events and issues related to project identification, project preparation, and negotiations can be found in Annex B. The purpose of this section is to summarize key issues which emerged and mitigating measures undertaken, particularly those which reflect upon project appraisal and quality at entry. These were generally not covered in the PCR. 8. SAR (Report No. 3667b-IN), para. 4.01. 9. Project objectives generally must be taken literally in order to provide precise direction to the effort (for both project implementation and evaluation). It is important that the stated objective is measurable, and is realistically achievable in the proposed time horizon through implementation of the stated components. 10. GOI categorized villages into: a) "problem villages" without a single source of potable water within 1.6 km distance or 100m uphill; and b) "no problem villages" with drinking water facilities provided by the government or by others. 18 Identification and Project Objectives 2.4 The Gujarat Water and Sewerage Project grew out of a project concept described in the World Health Organization's "Sector Memorandum on Gujarat Water Supply and Sewerage" (WHO/IBRD CP, November 1979). This report identified a wide-ranging package of interventions for urban and rural areas of the State of Gujarat (e.g., new water supply schemes for 62 towns, water supply augmentation for 50 towns, sewerage for 100 towns, etc.), yet did not provide details of the proposed schemes. 2.5 External resources were sought to fill the financing gap, hence the project submission to the Bank for financing. To support the GOG request for assistance (June 1980), feasibility studies had been prepared by local consultants retained by GWSSB, MCA and Rajkot Municipal Corporation (RMC). A Bank identification mission visited Gujarat in August 1980 for preliminary evaluation of the GOG proposals. In reviewing these studies, the Bank found them to be inadequate for project appraisal (Project Brief, para. 02). 2.6 By March 1981, the project was modified in scope from the original proposal for several reasons: (a) it was not possible for GWSSB to identify adequate sources of water supply for one municipality (Surendranagar), nor for three regional rural projects in the districts of Kodinar, Cariadhar, and Bhadar; (b) an additional component covering low-cost sanitation for 15 sample towns of a UNDP Global Study was added; (c) cost escalation was significant during the period following the OPEC 1979 oil embargo, and the total project cost including physical and price contingencies grew to IRs. 1301 million (US$ 161.8 million), an increase of 23 percent over that shown in the Project Brief (IRs. 1060 million). Relevance of the Project Objectives to the Sector Strategy 2.7 The project objectives were generally relevant to the sector strategy as described in the WHO Sector Memorandum of 1979. This document could be faulted for a strategy which measured progress primarily in terms of "coverage" of the population with safe water and adequate sanitation - an indicator which has tenuous linkage to actual results on the ground. The use of coverage as the primary indicator was especially problematic in the case of the regional rural water supply schemes, since all of the villages in question had been supplied (or "covered") through source development in the past, and the project simply served to upgrade the existing systems. How does this represent an increase in coverage?' 2.8 The strategy was characteristic of the IDWSSD, when coverage targets were to be met by building facilities alone. The watchword of the period in India (as well as in many other countries) was that donor funding was a primary limiting constraint in the sector. Project objectives neglected concerns of financial sustainability. Institutional development initiatives included in the project primarily involved staff training, studies (e.g. hydrological investigations), and consultant services for detailed design and construction supervision (SAR, para. 4.10). I1. Coverage alone is an insufficient measure of the results of rural water supply and sanitation projects in the field, since "covered" urban or rural areas may only be served by facilities which are not working, or which no one is actually using because they are not accepted by the people. In addition, financial sustainability may not be present in "covered" areas. 19 Project Design 2.9 The primary issues that arose during project preparation (and the mitigating measures incorporated in the project) were the following: (a) the limited capability of GWSSB staff to carry out project design, as it was proposed to be done in-house (the Bank mandated the hiring of local consultants); (b) insufficient capacity within the Rajkot Municipal Corporation to execute the work (the Bank made GWSSB's execution of the Rajkot component a project conditionality); (c) proposed changes to the cost recovery framework (the Bank accepted existing subsidy arrangements for water supply and sewerage, to gradually decrease in succeeding years); (d) responsibility for operation and maintenance of completed works - to local bodies or to GWSSB (the Bank sought agreement that GWSSB would operate works in the smaller municipalities for the first two years after completion); (e) staff entitlements for Public Health Engineering Services transfers (the staff of PHES were seconded to GWSSB as a first step in full absorption, and PHES was abolished); and (f) concern within the Bank about the riskiness of the institutional and financial arrangements and the complexity of covenants (the project was expected to require a larger than normal supervision effort). 2.10 Negotiations for the Gujarat project took place in May 1982 in Washington, D.C. Several additional issues were considered (and resolutions agreed) during project negotiations: (a) tariff increases, so that revenues would be increased in all project towns; (b) covenants for the reduction of cross-subsidies (all costs of O&M, plus depreciation, would be recovered from users by March 31, 1993); (c) management of private groundwater extraction (the Bank agreed to drop this provision, provided GOG furnish its assessment of the problem and proposals by June 1983); (d) inclusion of the Rajkot Sewerage Component; (e) operation and maintenance of completed schemes for villages and smaller towns (GWSSB would operate systems following completion); (f) further consideration of metering (GWSSB and MCA agreed to complete studies by December 31, 1983); (g) leak-detection program (GWSSB agreed to equip a leak- detection unit and to prepare a leak detection program for IDA review by June 1, 1983); (h) introduction of commercial accounting systems (to be made operative by April 1, 1982 for FY83); and (i) improvements in billing and collection (assurances given that accounts receivable in project cities would not exceed 30 percent of annual billings by March 31, 1986). These issues are relevant to the project's quality-at-entry and are further discussed in Chapter 5. Linkages between Project Objectives and Project Components 2.11 A close linkage existed between the listed components and their ability to contribute to the stated objectives, for those described in terms of physical achievements (e.g., to bring water to ..., to improve or extend ..., etc.). The statement of objectives could have been made more specific and monitorable through the addition of milestones. The institutional development objective (i.e., to strengthen the institutional framework of the sector ) was unlikely to be achieved through implementation of the applicable component (i.e. training, coupled with some studies funded outside the project). Project implementation also seemed problematic due to the scale of the project and the circumstances under which it was to be implemented - a large and complex project to be implemented across a broad expanse of area in Gujarat State as the first Bank-financed initiative of a new and rapidly growing institution (GWSSB).  21 3. Project Implementation and Physical Results 3.1 Credit 1280-IN was approved by the Board on July 6, 1982, and became effective on February 8, 1983. On March 1, 1989, the project was restructured to include additional water supply components to help the hardest of the drought-stricken areas of Gujarat, although no additional funding was added due to cost savings from the continuing depreciation of the Indian Rupee against the US$ (and the SDR) during project implementation. Procurement 3.2 Procurement was a difficult and time consuming exercise for the Borrower and the Bank alike. The Bank had agreed to civil works implementation utilizing a large number of small contracts, at GOG's request. During project implementation, 592 contracts were processed for works and materials, almost 300 of which were sent to Washington for review - at times slowing physical implementation. GWSSB procured materials (e.g., pipes, valves, pumps, etc.) for its normal activities on the open market through annual rate contracts, part of routine tendering procedures which invited competitive rates. The Bank did not agree that these procedures could be used under the project. GWSSB maintains that this decision resulted in a lot of additional paper work that could have been avoided.12 3.3 Consultants were generally used sparingly, and GWSSB was very reluctant to appoint them at all (preferring to use its own staff). Once hired, they apparently performed satisfactorily. GWSSB's view of the consultants performance is decidedly negative, however, and they blame them for delays, litigation, and confusion. Implementation Scheduling 3.4 The project got off to a slow start due to continued preparation of engineering aspects (final designs and procurement planning). In 1985-87, GWSSB's attention was diverted to drought alleviation efforts. Later, delays in the project were caused by: over-optimistic scheduling (considering cumbersome government organizational and implementation procedures); the difficulties due to the large number of small contracts; and land acquisition. The project was designed with optimistic scheduling (5 year disbursement profile), and did not conform to the standard disbursement profile for India (8.5 years). In the end, disbursement took almost ten years rather than the planned five; only in 1987 were disbursement targets exceeded. Extensions totaling four years and three months were authorized by the Bank. 3.5 GWSSB created a project cell during preparation to deal with project related matters at Board level, liaise with State and Union Governments, and the World Bank. Coordination between the Chief Engineers (in the field) and the World Bank cell (in Gandhinagar) was reported to be ineffective, and GWSSB staff complained that the project cell added an extra step 12. The GOG in its letter (see Attachment) commenting on the draft PAR reiterates several factors as main causes for the delay in project implementation: such factors are (i) unfamiliarity of the GWSSB and its consultants with the Bank procurement procedures, (ii) the Bank's unfamiliarity with the state (Gujarat) specific situation, and (iii) the long time taken by the Bank to review the design and bid evaluation reports. Particularly, the letter emphasizes that "had the Bank agreed to the use of the rate contract procedure, considerable time would have been saved". 22 in an already lengthy internal approval process. The organizational structure and procedures within GWSSB thus contributed to delays in contract processing and management. In the face of delays in the implementation schedule, GWSSB gave the Chief Engineer, World Bank Circle (an organizational unit), responsibility for the entire project including implementation, an administrative change which improved implementation performance. Project Costs and Disbursement 3.6 At appraisal, total project costs were estimated to be US$161.8 million equivalent. Total actual costs at Credit closing were IRs. 1,991 million (US$ 78.1 million equivalent). Project costs expressed in U.S. dollars were much less than original estimates because of the gradual currency devaluation (from IRs. 8.5 = US$ 1.00 at appraisal in 1982, to IRs. 25.5 = US$ 1.00 at Credit closing in 1991). Overall costs expressed in Rupees, however, were nearly 50 percent greater than estimated at appraisal, due to price escalation associated with component delays. 3.7 One of the major reasons for low disbursement was the original gross under-estimation of expenditures for taxes, duties, and administrative charges, which were non-reimbursable from the Credit. This placed more pressure on local resources in the form of matching funds, and is further evidence of deficiencies in project preparation. By closing, a total of US$ 54.4 million equivalent had been disbursed, and US$ 17.6 million had been canceled from the Credit. 3.8 On March 1, 1989, the project was officially restructured to include additional water supply components to help the hardest hit of the drought-stricken areas of Gujarat. The disbursement ratio was increased from 44 percent to approximately 80 percent to assist GOI in dealing with the oil crisis at that time. Physical Results and Their Impact 3.9 Urban Water Supply. Water supply systems in all of the towns involved in the urban water supply component were physically expanded. According to information supplied by GWSSB, performance is being measured in terms of population served (with census data as a proxy for actual consumer data), number of household connections, and number of public taps. Population served grew by 12-31 percent in the towns over the 1981-91 decade; the number of house connections was increased by 46-111 percent, and the number of public taps increased in most towns (by 27-107 percent), but decreased by 16 percent in Jamnagar. Only in Jamnagar did the duration of supply hours increase marginally, while remaining the same in other towns. There is virtually no documented evidence of service improvements at the consumer level. 3.10 GWSSB reports that samples analyzed for chemical and biological contaminants indicate that the supplied water is potable. The Audit visited Bhavnagar where works had been fully completed. The system, including treatment and distribution, was functioning satisfactorily. 3.11 Urban Sewerage. At the time of Credit closing, most of the sewer lines had been laid in Ahmadabad, Anand and Nadiad, and sewage treatment plants were under construction in all three towns. In Rajkot, all sewers had been laid except a small length requiring deep excavation in a crowded urban area; the sewage treatment plant was in an advanced stage of construction. 13. The quality of civil works construction appeared to have suffered due to the uneven performance of contractors. 23 Some areas that drained by gravity to the main pumping station were connected, thus the sewer system was partially operational, although the treatment plant was not yet accepting sewage. The Savarkundla sewerage project was fully operational, except the work of house connections which was in progress. 3.12 The Audit mission visited the Ahmadabad and Rajkot sewerage systems, where following Credit closing in 1991, the work continued under other sources of financing. In Ahmadabad, the sewage treatment plants were nearing completion; in Rajkot, the treatment plant and sewer mains were being tested,'4 and a program of household connections was beginning in a systematic manner. The loan program for sewer connections in low-income areas was abandoned by local government as cumbersome, and it was reported that almost no householders applied. In conclusion, benefits from the urban sewerage component fell short of expectations in low-income areas and, in other areas, benefits are beginning to be felt only now, some four years after project completion. 3.13 Rural Water Supply. Prior to the project, villages to be served under the seven regional schemes were utilizing brackish water from previously developed sources. By Credit closing, six of the seven original schemes had been completed and were supplying potable water, while those added during restructuring remained to be commissioned. In the end, the project funded eight regional systems covering 455 villages. In addition, all of the 111 schemes for "problem" villages were reported to be completed in five districts of Gujarat State. Of these Ill schemes, 17 are reported to be non-functional at present (about 15 percent, primarily due to equipment breakdowns). GWSSB reports that in 13 cases the local body was unable to carry out adequate maintenance, and four other systems report problems with the selected source. In most systems, service levels were reported to have improved from 10-20 lpcd to 40-80 lpcd.15 3.14 Low-cost Sanitation Component. Initially GWSSB undertook implementation through its own staff; however, progress was extremely slow. In 1989, a reputed local NGO with considerable experience throughout India in low-cost sanitation (Safai Vidyalays, or the Environmental Sanitation Institute-ESI, Gandhi Ashram, Ahmedabad), was engaged to undertake the work. During restructuring in 1989, the program was expanded from the original 15 towns to 58 towns in order to generate demand among a sufficient number of households to meet project targets. The narrow lanes and crowded living conditions in many urban and peri- urban areas have made it difficult to site new latrine facilities adjacent to the houses. By Credit closing, the low-cost sanitation component had exceeded expectations, having successfully installed 29,949 latrines for a like number of households, an increase of about 12 percent. Construction cost of the individual latrines depends primarily upon the material used in the above-ground superstructure, and has varied from IRs. 1250-2250 in 1987, to about IRs. 2,850 for a concrete and ceramic tile unit in 1995.16 Beneficiary contributions have been about IRs. 1000 or equivalent, sometimes in the form of labor within the program. More details of the progress of the sanitation programs are given in Annex C. The success of this component clearly 14. The quality of the construction work was impressive, and private sector contractors were delivering excellent results in the operation and maintenance of the pumping stations and treatment plant under contract. 15. A sample survey of consumers served by the rural water supply component was carried out (as reported in GWSSB's PCR submission to the Bank), although it did not fully compare conditions before and after the project. 16. The concrete and ceramic tile units are often the pride of the household, and are well maintained by the owners. Some have water taps inside the units, although most do not. The net estimated cost of a basic concrete unit with two soak pits was Rs. 2,290 in April 1991. 24 shows the advantage of engaging local experience and the importance of beneficiary participation. 3.15 Training Component. The project contained a training component for all grades of water supply and sewerage personnel within the sector. It was assessed that, in addition to organizational and financial constraints, training at the operational level was an important missing ingredient necessary for improvement of the operation and maintenance of existing water supply and sewerage systems (SAR, para. 1.16 and a manpower forecast for GWSSB staffing, 1981-1990, SAR, Annex 10). The Gujarat Jalseva Training Institute (GJTI) was officially opened in October 1988, although some 204 persons had been trained prior to completion of the new facilities in 11 courses throughout 1986-87. Table 1 provides details of the number of courses and trainees from 1988 to 1993. Table 1. Gujarat Jalseva Training Institute: Courses and Trainees Year No. of courses conducted No. of persons trained 1988-89 16 383 1989-90 60 2776 1990-91 79 2673 1991-92 103 4569 1992-93 104 3472 Total 362 13,873 3.16 The GJTI has been recognized as a key institution under the UNDP/World Bank International Training Network. A portion of the Institute's work involves coordination and monitoring of the Rajiv Gandhi National Drinking Water Mission Programs. In addition to the output in Table I the Institute has also conducted 26 courses for other institutions, involving about 1,800 trainees. Outcome and Sustainability 3.17 While most physical works will soon be completed after long delays,17 little progress was made on substantive institutional and policy issues throughout the decade of project implementation. Unresolved issues include: (a) cost recovery; (b) financing for household connections to sewerage systems; (c) metering; (d) leak detection; and, (e) operation and maintenance, especially in rural water supply schemes and the municipal towns because of lack of funding and trained staff. 17. The sewerage component is being completed only now, four years after project completion. 25 3.18 In light of the weak cost-recovery framework wherein lending took place, compliance with financial covenants was not likely. Tariff increases were to be implemented only following completion of facilities, thus towns were in compliance with the "letter" of the cost recovery covenant despite long delays in implementation of the physical works. With their completion, it was found that greater annual increases would be required (especially in Rajkot and Savarkundla) to meet the covenants, and towns were generally unable to comply with the debt service coverage covenant. Strict interpretation of this covenant would have curtailed further borrowing. MCA collected only about 50 percent of the water and sewerage taxes levied, but would not have been in compliance even if it had collected 100 percent. AMC undertook a number of actions to improve collection performance, such as pursuing out-of-court settlements and establishing a special tax court. As projected in the SAR, the necessary resources for Ahmedabad could be mobilized through the delinking of water and sewerage bills from property tax. While GOG initiated actions designed to implement this delinking in 1993 under the Gujarat Urban Development Project (Credit 1643-IN), results have not been forthcoming - again making sustainability questionable. Economic Evaluation and Beneficiary Impact 3.19 Because of the low tariff levels present (and projected) in the sector, the estimated economic rate of return (ERR) for the proposed investments in eight project cities was 2.5 percent (SAR, para. 6.04). An immediate 50 percent increase in revenues would have been required to achieve an ERR closer to 10 percent. The ERR from rural components of the project was not estimated because they "did not lend themselves to quantification of benefits." The SAR noted the calculation of health and social benefits: in the case of rural water supply, "the high incidence of diseases in some rural areas is directly attributable to the high salt content in existing water sources", (SAR, para. 6.08). The low ERR was considered acceptable on the grounds that expected economic benefits were much greater than revenues. The ERRs were re- estimated in the PCR in the case of the Jamnagar water supply and Nadiad sewerage projects, showing base case ERRs of 5.9 percent and 0.3 percent, respectively. 3.20 GWSSB attempted to measure the impact of project components through a small survey of some 600 households which received improved water supply facilities under the project. Results of the survey indicate that: (a) the distance to water sources was reduced in rural areas (from 500-3000m to 100m or less); (b) consumers tend to spend money freely on electricity and fuel when charges are based on consumption, but respond that water should not be charged in the same way; and, (c) there may be a need for local bodies to undertake consumer education regarding the value of potable water. 3.21 Sound cost recovery policies in the sector remain elusive in Gujarat as in many other Indian states. The principle that services should be subsidized, which is both socially and economically acceptable, continue to be abused. First, too small a share of the cost is recovered even though consumers could afford to pay more.18 Second, the subsidies are not targeted enough to facilitate access to service (house connection and installation) and on poor consumers; rather they are extended to most, if not all, households and to volumes of water consumption and 18. A recent survey by the National Council of Applied Economic Research shows that 40 percent of the lowest income group own bicycles, radios, and other consumer durables which represent a multiple of their monthly income. The audit notes that the full cost of a comfortable supply of 10 cubic meters for a five person household amounts to Rs 25 to 30 or about 5 percent of a poor household income. 26 sewerage disposal that exceed basic needs. The consequences are well known: (i) an income redistribution which is inefficient and very costly as it unduly increases the fiscal burden and decreases the utility's ability to expand and improve services; and (ii) prices that are a disincentive to loss reductions, accurate metering, and rational use of water.19 The audit notes the huge progress made by Gujarat by cities like Ahmedabad in boosting revenues from octroi and property taxes and in mobilizing resources from the bond market, But the needs in the social sectors statewide are immense compared to the fiscal resources that can reasonably be raised in both the rural and urban areas. Further sector work leading to price reforms for utilities should be a high priority before additional lending. In general, Bank sector work in water supply and sanitation in India has been minimal over the last two decades despite a large lending program. On the capacity building front, the entire GJTI training program could benefit from a review in order to support efforts toward system sustainability in the field. 19. The GOG in its letter of May 16, 1996, (see Attachment) commenting on the draft PAR argues that the Bank's requirement of full cost recovery through direct user charges was not affordable at the time, and suggests a phased program leading ultimately to direct cost recovery through a tariff system. In the meantime, and given the economic situation of the user community, a substantial part of the costs should be covered through cross subsidies from other sources like octroi, house tax, etc. 27 4. Institutional Development Impact 4.1 Since its establishment in 1979, GWSSB has become the primary implementing agency for water supply and sewerage services in Gujarat. In recent years, its annual program has amounted to about IRs 150 crores (US$50-60 million), with roughly ten percent funded by the Bank through the IDA Credit, less than five percent from Dutch bilateral sources, and the remainder from State and Federal sources. Staff Development and Training 4.2 At appraisal, GWSSB was believed to be seriously understaffed in accounting and financial management, and lacked experience in the management of very large construction contracts; consultants were to be employed to deal with these deficiencies. The institutional development plan described in the SAR projected significant staff growth within GWSSB during the project period, from 2,595 staff in 1982 to 11,950 by 1990. This implied the need for a massive training requirement (as shown in Annex 11 of the SAR). The Bank's tacit approval of this scale-up process reflected the prevalent public sector bias to sector development at the time. GWSSB currently reports about six thousand authorized staff positions, with about five thousand actually filled. Constructing and equipping a training institute, and an Organization and Management Study (funded outside the project) was to assist in this regard. Staff training was apparently viewed as the solution to a broad set of institutional problems, despite a lack of prior analysis regarding institutional constraints. 4.3 As it was the first project in Gujarat to be financed by an international lending institution, GOG and other State and local agencies had no previous experience about the management requirements of such a project. During the project preparation period, managers of GWSSB did not visit other states where similar Bank projects were underway. Instead, GWSSB personnel gained experience only when project activities were underway (also see para. 2.11). 4.4 GWSSB and AMC engaged local consultants who studied the possibility of introducing domestic metering. While the PCR explained (para. 8.2) that because of the low pressures and intermittent service, the consultants had concluded that domestic metering would not be feasible, this explanation is in contradiction to the AMC report20 on metering which recommended an expanded program of metering for the city - including domestic consumers. At present, metering continues to be prevalent only for industrial and commercial users in Gujarat State. 4.5 While most of the studies (para. 2.2) were eventually carried out, they had limited impact; only in the areas of staff training and the implementation of the commercial accounting systems (in GWSSB and some municipalities) have follow-up actions been evident. 20. Study on Metering of Water Supplies Ahmedabad Municipal Corporation. Tata Consultancy Services, Bombay (no date). 2 1. The GOG in its letter (see Attachment) commenting on the draft PAR confirms its agreement, in general, with the proposed approach to overall metering of domestic connections. It, however, points out the importance of linking the introduction of large scale metering with the construction of meter repair facilities and public campaign for consumer education. 28 Accounting and Financial Improvements 4.6 In the past, the principal purpose of government accounting systems was to limit the misapplication of funds by journalizing cash transactions. Additional ledgers were maintained to control leave and advances for employees, use of vehicles, etc. Agencies benefiting from IDA credits agreed to introduce "commercial" accounting systems, and the Credit financed consultant services to design and implement the new systems to provide four additional functions: (a) distinguishing between current expenses and capital investments; (b) costing of services; (c) assessing the efficiency of units and activities within an agency; and, (d) enabling timely follow- up of arrears. Results have been disappointing for two reasons: (i) the accounting systems proposed by consultants have not been well designed to respond to both Bank and government requirements for financial reporting; and (ii) the recruitment of qualified staff to manage the finance and accounting functions has proven to be difficult. 4.7 Covenanted targets for financial and institutional performance were not met; even in the most advanced municipalities accounting systems are not yet well enough developed to monitor the achievement of such covenanted targets. The management of the billing and collection function continues to be inadequate so that billings, receivables and bad debts cannot be reliably determined; thus the operating revenues cannot be accurately established. Methods of accounting for inventories, delays in transferring construction activities to assets in operation, and controversy over the funding of pension rights, depreciation allowances and debt repayment obscure the true cost of operations. These findings support the conclusions of the Bank sector work (1986), i.e. modifications to sector organizations in India have not been able to strengthen accountability because: (a) the improvements in accounting and management information systems were not fully implemented; (b) the introduction of new systems and procedures was not planned carefully nor implemented systematically; and, (c) institutional reforms were frustrated by prolonged delays in the transfer of staff and by difficulties in recruitment. Sector Organization 4.8 The general practice in the sector prior to the project was for the GWSSB (and its predecessor the PHES) to execute and commission projects, then hand them over to the local bodies for operation and maintenance. The local authorities were to be responsible for all recurring costs; however, this policy was modified in the case of new schemes built under the project. The Project Brief noted that the municipalities and panchayats might need GWSSB's initial assistance for operating and maintaining the works to be financed under the proposed credit, particularly where new systems are involved. The GWSSB Act provides for the agency to undertake this function only in cases of emergency, but the Gujarat Agreement declared that GWSSB would operate and maintain works being built under the project after completion of each rural water supply system. It could be argued that this initiative amounted to a weakening of the policy environment for O&M compared to what was present prior to the project, and has resulted in an increase in the financial burden on GWSSB. 29 5. Assessment of Performance Borrower Performance 5.1 Overall, Borrower performance is rated as satisfactory although as reviewed below, many important covenants were not met. The performance of GWSSB varied considerably during the project implementation period, reflecting the abilities of the management team in place at the time, and the general deficiencies of an organizational framework where the design/construction function are completely separated from the operation/maintenance function. Despite slow implementation, project works were generally completed, and GWSSB staff gained valuable experience during the project. 5.2 Funds were to flow to GWSSB from three sources to support project activities: (a) the IDA Credit to be routed through GOI and GOG based on withdrawal applications; (b) grant-in- aid from GOG for various aspects of the projects (via annual budget provision, according to norms); and (c) a local body contribution (only required in the case of urban components). The fact that the financial condition of the local bodies was generally poor did not cause implementation delays. 5.3 The project included many features which GOG and GWSSB requested, while "up- front" activities and conditionalities often mandated by the Bank were conspicuously absent. However, this formula did not lead to success. Lessons indicate the need for more "up-front" activities on the Borrower's part during project preparation in order to reduce project risk. When such activities are delayed until project implementation (e.g., policy reform, institutional changes, etc.), they increase the risk that the project outcomes will be unsatisfactory and/or unsustainable. Evidence of genuine borrower commitment should be measured primarily by the implementation of necessary policy changes ahead of the project. Borrower involvement in the Bank's sector work is a possible avenue to facilitate this dialogue. 5.4 Throughout the project, the Bank believed that many of the delays in individual components could have been avoided if consultants had been appointed on schedule, years earlier. For example, the consultant's role in detailed design did not include survey and field investigations - which were to be done by GWSSB staff. The long line of communication from the consultants to the World Bank Cell and the field offices introduced delays, and Bank supervision missions did not focus on this until 1986. 5.5 Project implementation according to schedule would have required careful planning, together with exceptional management and implementation skill, none of which were forthcoming. In some specific instances (e.g. in Ahmedabad), insufficient availability of government counterpart funds caused source implementation delay and problems developed in Rajkot when contracts were disputed. Late in implementation, but with considerable funds remaining, project restructuring was necessary in order to provide for emergency drought relief in Gujarat State. Project restructuring took a long time to resolve, apparently stemming from "turf battles" between the Ministry of Rural Development and the GOG concerning the proposed rural water supply schemes (file search). 30 Compliance with Covenants and ODs 5.6 With regard to cost recovery, OMS 2.25 applies. Towns were in compliance with the letter of the collection performance covenant (except in Godhra); they were generally unable to comply with the debt service coverage covenant and strict interpretation of this covenant would have curtailed further borrowing. Little progress was made throughout implementation in delinking water and sewerage revenues from the property tax (although specified in the SAR). 5.7 In rural water supply, GOG did not comply during project implementation with the financial covenant which required an increase in tariffs to meet operation and maintenance costs for rural water supply. Increases in the water cess (charges in rural areas served by the project) to IRs. 6 per capita per year was a covenanted requirement in Credit 1280-IN and was to be collected at least within the service area of the eight project-assisted regional water supply schemes completed between 1988 to 1991. The policy for collecting from rural water supply goes back to 1965 when the charge was IRs. 3 per capita. Over all these years, though the policy existed and the bills were sent out to Village Panchayats, the collections remained poor for the State as a whole (generally about ten percent). Frequent visitation of droughts and natural calamities, and the common belief among the rural people that water should be free ("a gift of God"), made it practically impossible to collect these charges. Further, GWSSB did not have statutory powers to collect these dues, since collection of water charges are a subject matter falling under the purview of the Local Governments in the democratic system established under the Gujarat Panchayat Act. Bank Performance 5.8 With respect to the state of project preparation necessary for loan approval, OMS 2.28 applies (October 1978). Detailed engineering for the first year's program of construction did not appear to be available at the time of loan approval (see Annex B, para. 14). 5.9 Bank performance in project preparation and negotiations was inadequate. Assurances provided by the Borrower were taken to be equal to action, despite past performance elsewhere in the sector in India. 5.10 At appraisal, the Bank was led to believe that consultants had already been employed by GWSSB and AMC (without Bank financing) to design and implement a commercial accounting and financial management system, although they had not. It did not properly assess the risks associated with implementing commercial accounting principles in GWSSB and all municipalities where the need for such concepts was poorly understood as discussed below. Supervision missions were adequately spaced, but did not provide early warning of developing 22 problems or effectively function to suggest solutions . Overall, Bank performance is assessed as unsatisfactory. 5.11 Signficant risks of failure remained unacknowledged and unmitigated in project design. The SAR described only a small set of potential project risks: (a) the project was described as a 22. The GOG in its letter (see Attachment) commenting on the draft PAR observes that the Bank supervision missions came merely to review progress rather than to provide support to various developmental issues faced during project implementation. Better, had the Bank provided this support in collaboration with the available Indian technical and financial expertise, the effectiveness of project supervision and its technical assistance impact would have been improved. 31 complex and extensive set of initiatives, the execution of which was to require a considerable amount of management and coordination input on the part of the implementing agency; and (b) GWSSB was a newly formed Board. To mitigate the enumerated risks, minimal measures were to be taken to offset these fa;tors, such as early appointment of consultants who would share in project related responsibilities (SAR, para. 6.12). No other project risks or mitigation measures were mentioned in the SAR. Missing from the discussion was any indication of additional risks associated with the prevailing policy framework utilizing evidence of the past performance of similar agencies elsewhere in India. 5.12 The identification process did not appear to be open to all potential stakeholders, but was a rather top-down administrative exercise in which the GOG, the GWSSB, and the Bank were the primary actors. Other stakeholders (including beneficiaries who must pay for the improved services at the retail level) had an unspecified role. It could be argued that this, together with the poor policy environment, largely explains why cost recovery has been difficult. 5.13 In summary, the project emerged from preparation and appraisal with the following characteristics: (a) while the project objectives were relevant to the sector strategy, the sector strategy itself was defective because it relied upon compliance with coverage targets as the primary objective; (b) project appraisal clearly projected a low rate of return from the project, but it went forward anyway within the Bank; (c) a realistic appraisal of the policy framework in which the project would operate was missing; and (d) preparation of the "engineering aspects" (final designs, bidding documents, procurement packaging and consultant services) and land acquisition had not been completed to a sufficient level. No "up front" action on the demand- side policy issues (tariffs, metering, and leak detection) were required.  33 6. Conclusions, Ratings and Key Findings General Conclusions 6.1 Most of the physical works were successfully completed but institutional objectives were not met. The project concept was complex but it could not deliver a financially sustainable project under the existing policy framework (where heavy subsidies from other sources were the norm) and it made no attempt to control demand or set viable prices for water. In contrast, however, the low-cost sanitation component was successful, and likely to be sustainable, because the constructed facilities continue to be used and maintained by individual households (who own them), and all costs covered up-front (albeit partly subsidized). 6.2 Little "up front" action on the demand-side policy issues was sought by the Bank, and none was forthcoming. Financial sustainability was unlikely in the existing policy environment but the Bank rationalized that gradual change in succeeding years was acceptable. As a result, quality at entry was low; risk of failure in the financial and institutional strategy, while acknowledged in the Project Brief, remained unmitigated in project design. 6.3 The urban and rural populations of Gujarat temporarily have better access to piped water supply and sanitation, but without adequate cost recovery and maintenance management these benefits will be short-lived, and the increasing demand for such services will soon outstrip the resources for supply. Experience shows that the response to the scarcity of resources and their overstretching generally leads to a deterioration in the quality of service which negates an increasing part of the benefits that should have accrued from the investments, hence the sustainability is unlikely. Ratings 6.4 The Audit rates the outcome of the project as marginally satisfactory. Institutional development impact is rated as negligible. The sustainability of project benefits is rated as unlikely in the current policy framework for the project as a whole. The low-cost sanitation component makes an exception, however, and it is assessed as sustainable. The performance of the Borrower is rated as satisfactory because it implemented the project as designed although it failed to meet financial covenants. Bank performance is rated as unsatisfactory because of deficiencies in project preparation and appraisal. The ratings derived from the PCR were the same except for the outcome rating which was unsatisfactory because it overemphasized the importance of shortcomings in institutional development. 34 Key Findings and Lessons 6.5 The following are the key findings and lessons of the PAR: * project objectives were broadly (and imprecisely) formulated, and could not be accomplished throughout Gujarat State in a single project through implementation of the stated components; * project quality at entry was low as a result of defective project preparation and appraisal - and there was high risk of failure with regard to financial sustainability; * measures of project readiness for immediate implementation were inadequate, as evidenced by the lack of advancement in detailed design, as well as generally cumbersome contract packaging and procurement design - all resulting in significant project delays; * notable success and sustainability was achieved in the low-cost sanitation component implemented by a knowledgeable and experienced NGO; and, * there was a need for more policy change on the Borrower's part prior to the project in order to reduce the risk of project failure. Recommendation 6.6 Relevant water supply and sanitation sector work is required in India, particularly focusing upon the lack of financial sustainability in the sector. One approach would be to contrast successes and failures in various states with the present legislative and policy environments. This should have high priority before further sector lending is approved, i.e., competent sector review, taking account of lessons learned, should guide project identification. Such a review should also engage Borrower agencies to the maximum extent. 23 SA2 reports that sector work is being commenced and is expected to be completed in 1997. 35 Annex A Project Components and their Implementation Locations, Gujarat Water Supply and Sewerage Project Project Urban Urban Rural Low-Cost Common Institutional Components Water Sewerage Water Sanitation Services Development Supply Supply Locations in Gujarat State: Urban Services - Ahmedabad X - Anand X X - Bhavnagar X - Godhra X - Jamnagar X - Nadiad X X -Rajkot X - Savarkundla X 255 villages in X seven regional schemes 15 middle- X sized towns Various X Locations Training X Institute, Gandhinagar  37 Annex B Details of Project Identification, Preparation and Negotiations Project Identification 1. The Gujarat Water and Sewerage Project grew out of a project concept which was described in a 1979 WHO sector memorandum identifying a wide-ranging package of interventions that were needed in urban and rural areas in the State of Gujarat to increase the coverage rate in water supply and sanitation. 2. ' The Sector Memorandum. The World Health Organization's New Delhi office issued a "Sector Memorandum on Gujarat Water Supply and Sewerage" (WHO/IBRD CP) in November 1979, outlining GOG proposals (e.g., new water supply schemes for 62 towns, supply augmentation for 50 towns, sewerage for 100 towns, etc.), yet without providing details of the proposed schemes. These proposals grew out of those of the Public Health Engineering Service (PHES) and the four largest cities in the state (BRAS: or Baroda, Rajkot, Ahmedabad, and Surat-all city corporations) to meet the medium term (ten-year) sector requirements (IRs. 4075 million in 1977). External resources were sought to fill the financing gap, hence the submission to the Bank for financing. To support the GOG request for support (June 1980), feasibility studies had been prepared by local consultants retained by GWSSB, AMC and RMC. In reviewing these studies, the Bank found them to be inadequate for project appraisal (Project Brief, para. 02) 3. The Sector Memorandum noted that the small and medium sized towns of the State were being supported according to the GOG norms for a portion of their investments (20-35 percent for water supply, 35-55 percent for sewerage of capital cost). The four largest cities (BRAS) could not rely on Government funds, but instead were forced to use their own resources in addition to considerable borrowings from Life Insurance Corporation of India (LIC) and/or commercial banks. The Sector Memorandum described municipalities as being autonomous in setting and applying tariffs, and high variation in water rates were noted (from IRs. 0.02/cu m in Ahmedabad for well water, to IRs. 75/cu m where operations were executed by PHES). 4. Identification Mission. A Bank identification mission visited Gujarat in August 1980 for a preliminary evaluation of the GOG proposals, and a Project Brief was issued in October 1980. Within the next six months or so, the project was modified in scope from the original proposal for several reasons: (a) it was not possible for GWSSB to identify adequate sources of water supply for one municipality (Surendranagar), nor for three regional rural projects in the districts of Kodinar, Cariadhar, and Bhadar; (b) an additional component covering low-cost sanitation for 15 sample towns of the UNDP Global Study had been added by March 1981; (c) cost escalation was significant during the period (following the OPEC 1979 oil embargo), and the total project cost including physical and price contingencies grew to IRs. 1301 million (US$ 162.7 million), an increase of IRs. 241 million over that shown in the Project Brief. 38 Annex B Prominent Issues During Project Preparation 5. Following the issuance of the Project Brief (October 1980), the project preparation period extended until negotiations took place in May 1982, or about 19 months. The primary issues that arose during project preparation were the following: (a) the limited capability of GWSSB staff (and some municipal staff, e.g., Rajkot) to carryout detailed design (as it was proposed to be done in-house); (b) proposed changes to the cost recovery policy; (c) allocation of the responsibility for operation and maintenance of completed works (by local bodies or by GWSSB); (d) staff entitlements for PHES transfers; and (e) concern within the Bank about project riskiness and complexity. 6. The Limited Capacity of GWSSB to Carry Out the Project. Until 1979, the Public Health Engineering Service (PHES) planned, designed, and constructed all water supply and sewerage systems, except for municipal corporations. At that time, the GWSSB was established as an autonomous body to take over these responsibilities and, in addition to finance investments. GWSSB was to commission new works but was not to operate and maintain them except in the event of mismanagement or direction from the Government of Gujarat. The municipal corporations were to act independently in conducting all of these functions but were permitted to hire GWSSB for specific tasks if they so wished. Authority to seek financing for investments was transferred from municipal corporations to GWSSB in 1980. Responsibility for operation and maintenance of systems in problem villages was assigned to GWSSB in 1982. The staff of PHES was to be transferred to GWSSB. Because of the large program of investment envisaged for the IDWSSD and increased responsibility for O&M, additional technical staff were expected to be hired. GWSSB was believed to be seriously understaffed in accounting and financial management and lacked experienced staff for the management of very large construction contracts; consultants were to be employed to deal with these deficiencies. 7. Independent Execution ofProject Works by the Rajkot Municipal Corporation. A preparation mission held discussions with officials and staff of RMC on the subject of their present organization and, in particular, their present and proposed staffing for the project implementation. The mission was not satisfied that, even with the assistance of their consultants, RMC would have the necessary capacity to execute the project efficiently. It was noted that the engineering staff employed by RMC was inadequate even for present requirements, and it was proposed that over 60 percent of the necessary staff from GWSSB be seconded to supplement the RMC project team during execution of the proposed project. The mission did not feel that this was conducive to the successful implementation of a large project, and it made strong recommendations that RMC be persuaded by GOG to make formal application to GWSSB for GWSSB to execute the project on its behalf. The IDA mission felt strongly on this issue and made it a condition of the IDA Credit that if Rajkot was to be included in the project, GWSSB would implement the work. Upon commissioning, the works were to be handed over to RMC for operation and maintenance, in accordance with the terms of the GWSSB Act. 8. Proposed Changes to the Cost Recovery Policy. The policy universally followed throughout the urban areas of Gujarat prior to the project was to subsidize the water supply and sewerage services from general taxes or revenues received in the other sectors of the municipal Governments. This subsidization often covered more than 50 percent of the costs, resulting in extremely low water supply and sewerage tariffs. IDA's policy in the project had generally been 39 Annex B to require that the users of the service in urban areas pay the costs of the service provided. The design team did not consider this philosophy realistic in the light of Gujarat's past policy and resulting present tariff structure. The tariff increases necessary to make the transition from past Gujarat practices to that normally recommended by IDA would have been, in their view, unacceptably high after commissioning of the project components. It was argued (apparently successfully) within the Bank that IDA would initially have to accept GOG's tariff policy, yet make every effort to gradually influence their approach so that the user would be required to pay directly an ever-increasing percentage of the costs of the service. 9. Information is sketchy regarding the financial justification of the project (and its eventual outcome). IRR analyses were done only for two towns in the PCR due to the lack of information on the others. Base case IRRs are shown as 5.9 percent in Jamnagar Water and 0.3 percent in Nadiad Sewerage. Additional benefits in the form of health and other tertiary benefits were expected, but were not estimated. AIC calculations at completion indicated a cost of about IRs. 3.0 per cubic meter for Jamnagar water (IRs. 0.79 in the SAR) and IRs. 3.6 per cubic meter for Nadiad sewerage project (IRs. 1.93 in the SAR). 10. O & Mby Local Bodies. The Bank sought agreement that GWSSB would operate and maintain works built for the smaller municipalities (excluding larger municipalities such as Ahmadebad and Rajkot) for at least two years after completion. Thus the Bank softened the original requirement for O&M by the smaller municipalities (which was part of GOG's policy before the project). 11. Staff Entitlements for PHES Transfers. Government guarantees were sought by the PHES staff involved for the preservation of their employment benefits on transfer from their government posts to GWSSB. The first alternative of complete absorption of staff by GWSSB appeared to be the most beneficial to the operation of GWSSB and to the execution of the project as it was permanent and irreversible. However, there existed some apprehension in the minds of many of the PHES staff about transfer to the newly formed Board.24 12. Project Risk and Complexity. In design, the Gujarat Water Supply and Sewerage Project was to follow the State-wide approach started in Uttar Pradesh, and followed in Punjab, Maharashtra and Rajasthan. It was acknowledged in the Project Brief (10/80) that this was a risky approach with respect to institutional matters and finances, but was believed to be justified because of the much larger impact it would have toward the goals of the UN Water Decade (IDWSSD) than that of a more limited project. Because of its complexity, the project was expected to require a larger than normal supervision effort. 13. Only a cursory treatment of risk was given in the SAR, which noted primarily that the project was complex and extensive, and that its execution would require considerable amount of management and coordination input on the part of the implementing agency. GWSSB, as a newly formed Board staffed largely by personnel from the former PHES, was undergoing organizational development at the time. Anticipatory measures were to be undertaken to offset these factors, including the early appointment of consultants who would share in project related 24. Historically, the term "Board" has applied to institutions that were formed for project-related purposes, and implied no continuity beyond the term of the project (which was naturally a concern of the staff). 40 Annex B responsibilities. Consideration of other risks of the project were generally absent; in fact, some were deleted from the SAR. For example, in an internal memo in 1981, one staff member made the following comment: "If we do not intend doing anything about the over exploitation of groundwater by private industry in the context of this project, it may be safer to drop this reference altogether" (file search). The groundwater section was deleted from the SAR. 14. To mitigate some of the apparent risks, the SAR claimed that consultants had been appointed early to share in project related responsibilities (SAR, para. 6.12); actually appointment of consultants for both GWSSB and AMC components was delayed. While retroactive financing for consultant services was provided, it was not used because of the time taken by GOG to reach an understanding of the need for consultant assistance. The project was designed with optimistic scheduling (five years), and did not conform to the standard disbursement profile for India (8.5 years). Rural schemes were expected to be completed one year ahead of urban schemes. Project implementation according to schedule would have required exceptional planning and management. Procurement was likely to be problematic, as large number of contracts were to be subject to the Bank's prior review. Negotiations 15. Negotiations for the Gujarat project took place in May 1982 in Washington, D.C. Several matters remained to be resolved: (a) tariff increases, so that revenues would be increased in all project towns; (b) covenants for the reduction of cross-subsidies; (c) management of private groundwater extraction; (d) inclusion of the Rajkot Sewerage Component; (e) operation and maintenance of completed schemes; (f) further consideration of metering; (g) leak detection program; (h) cost recovery; (i) introduction of commercial accounting systems; and (j) improvements in billing and collection. 16. Tariff Increases. During negotiations, agreement was reached that GOG would double local water fees to IRs. 6 per capita per year, with additional funds to come from ten percent surcharge on sales taxes. GOG was to establish this practice upon completion of construction of the project's regional and individual water supply schemes. Agreement was reached that tariffs would be raised by April 1, 1983, to double the revenues collected in all project towns, including Ahmedabad and Rajkot Municipal Corporations. 17. Covenants for Reduction of Cross-Subsidies. Complicated covenants governed the reduction in cross-subsidization of systems for the future. According to the Bank, Gujarat's practice of subsidization of its urban water supply and sewerage sector from other revenue sources was not compatible with the objective of developing viable public utility entities. The Bank preferred that all funds needed for the O&M and servicing debt be obtained from users. GOG agreed to this concept but was adverse to a precipitous change from its traditional policy of subsidization without a corresponding reduction in those taxes which provide the balance of the required funds, arguing that such a tax balancing program would be difficult to implement over the short term. However, GOG was receptive to a longer scale program. During negotiations it was agreed that by March 31, 1993 (more than ten years in the future), all costs of O&M, including debt service, would be recovered from users. 41 Annex B 18. Management of Private Groundwater Extraction. The need for a system to manage the limited groundwater resources to avoid conflicts emerged from the project preparation period as an important issue (for the Bank), which without action could become critical in the future. Although industry bears the cost of development of its own supply, exploitation of ground water by private industry does deprive the community at large of a public resource. At a future date, when local reserves become critical, continued exploitation of ground water by industry was expected to force other categories of users to seek more distant and more expensive water. The Bank's position prior to negotiations was that the project should contain a covenant requiring that groundwater utilization by industrial consumers in Gujarat be controlled. During negotiations this provision was dropped, and GOG promised to furnish its assessment of this problem to the Association by June 1983, along with its intentions regarding the licensing of wells and the metering of such extractions. 19. Inclusion of the Rajkot Sewerage Component. While there were warning signs in the Rajkot sewerage component that tariffs would be high, unnamed sources of additional funding were assumed to exist (SAR, para. 5.09) which could be mobilized, as necessary, to meet the increased capital and operating costs of the new sewerage and expanded water supply systems. Based on these assurances, it was agreed during negotiations to include the component in the project. 20. Operation and Maintenance of Completed Schemes. Under GOG policy, water supply and sewerage systems completed by GWSSB were to be handed over to the respective beneficiary urban authorities for operation and maintenance. A high level committee appointed by GOG to examine rural water policy made recommendations that new systems for problem villages - both individual as well as those forming part of regional schemes - would be operated and maintained by GWSSB on a permanent basis. Problem villages, where supply systems were already in operation, would continue to operate and maintain their own systems, but their staff would be paid and supervised by GWSSB. According to the SAR (para. 10), assurances were received during negotiations that GWSSB would operate regional water supply schemes and ensure that the local operators of individual schemes were adequately trained. 21. Further Consideration of Metering. The practice of industrial and commercial metering was already established to a limited extent in Gujarat State, and was to be continued; however, due to past experience (when ten percent of domestic connections in Jamnagar and Bhavnagar were provided with meters-none remained in working order), domestic metering was to be approached with caution. GWSSB and AMC proposed to study the feasibility of introducing metering in the project area, and the findings were to form a good basis for re-examining the possibility of gradual re-introduction of domestic metering on a state-wide scale. In the meantime, the use of orificed connections to reduce waste and provide a basis for more flexible tariff structure for the low-income group was being considered as a viable immediate alternative. Both GWSSB and AMC agreed during negotiations to complete their studies for development of a policy for domestic metering in the project area by December 31, 1983. 22. Leak Detection Program. There was a danger that leakage would increase under the proposed improvements as system pressures were increased or if operating hours were extended in the absence of effective leakage control. Under the pre-project conditions of low pressure and intermittent supply, distribution losses were estimated to be about 20 percent of the flow 42 Annex B reaching the distribution system. These losses were expected to increase to about 50 percent under normal system pressures and with continuous supply, although they could be substantially reduced by proper maintenance of the systems. The SAR notes (para. 4.22) that GWSSB proposed to establish a leak-detection unit, equipped and trained under the present project, to detect and reduce unaccounted for water in the water supply systems, and would continue leakage surveys of distribution system on behalf of local authorities after transfer of the systems to local authority ownership. It was agreed during negotiations that this leak-detection unit would be fully equipped, trained, and operational by June 1, 1983. GWSSB agreed to prepare a leak detection program for review with IDA by the same date. Thereafter, the program would be implemented and its progress revised with IDA at quarterly intervals. 23. Introduction of Commercial Accounting Systems. The SAR described the introduction of a commercial accounting system as a simple matter for FY82/83, as "inputs were in place." The water supply and sewerage sector in project cities had been hindered, according to the analysis, by the absence of an accounting system which segregated financial transactions relative to its operations from those of all other sectors of municipal government. The accounting system utilized was a cash accounting system (mandated by government) which did not match revenues and expenses by accounting period or provide adequate financial information to management. Consultants were noted to have been employed to design and install a commercial accounting and financial system for GWSSB, the Project cities, and the rural areas. The system design had been completed; manuals prepared; and the bulk of the training completed (SAR, para. 5.20). The systems were to be maae operative in all project areas effective April 1, 1982, so that financial results would be available for the fiscal year 1982-1983. This schedule was reconfirmed during negotiations. 24. Improvements in Billing and Collection. At the time of appraisal, revenue billings both of usage charges and taxes were made on an annual basis, a practice which resulted in an uneven inflow of funds and made cash planning difficult in sector agencies. Project documents expected that the Project cities would keep billing and collection practices under constant supervision and would shorten the billing period to provide for more frequent bill preparation. As a measure of the adequacy of collections performance, the Project cities were expected to maintain their fiscal year and unpaid customer billing balances at an amount not exceeding 30 percent of the annual billings for the services in the same fiscal year. Assurances were obtained during negotiations that a collection program would be initiated which would ensure this level of accounts receivable by March 31, 1986. 43 Annex C Sanitation - The Gujarat Experiment by Gargi Parsai. The Hindu, Delhi, September 13, 1992, Vol. 115, No. 37 "We don't have land, why do we need a toilet?" 72-year old Puriben of Irana village, 40-km from Ahmedabad said, when asked if she would like ajajru (toilet in Gujarati) in her house. Puriben is old and infirm. Most of her day is spent in supervising - her daughter-in- law, the grandchildren and the produce from the farm. A toilet would definitely be a comfort, even a luxury. But she prefers the open fields around her village. To her it matters little that she, for years, as most of the village women, has had to attend to nature's call only at dawn and dusk, even as fear of wild beasts (earlier) and straying men looms large. The discomfort during menstruation is worse, but Puriben can imagine no other way of easing herself. That this could be a cause for pollution and disease is not an issue with her. For her the traditional method of open air defecation is hygienic as the spot is several meters away from home. But when volunteers show her colorful illustrations of the proposedjajru, she pauses to think, her eyes seek out her son from among the crowd of men standing aside and listening intently, but the young man is unmoved. The old woman gets the message: her son is not ready to spend his share of the subsidy on a facility, which he saw as essentially for the women of the household. "I'll think about it," she says lamely. .. ..-.... . .. . . .. .4 .Z " 0 ........ . r r i. ~Ws M"~r *Y This low-cost concrete waterseal toilet stands out in contrast against the mud hut in Indrad village. 44 Annex C Irana is only one village in Gujarat which totally lacks facility. There are several villages in the country where an entire village defecates in the open. According to the 44th Round of the National Sample Survey (1988/89) only a little over one-tenth of the population uses toilets. Ahah, only about two per cent has service laties. According to statistics available with WHO, more than one million children below five die because of dehydration caused by diarrhea annually. There is a high rate of occurrence of intestinal worms, particularly in West Bengal, Bihar, Rajasthan, Orissa, Andhra Pradesh, Tamil Nadu, Kerala and Maharashtra, mostly because a large number of the population do not believe that exposed defecation can harm health. Against this scenario, while finalizing the Eighth Plan, the Department of Rural Development of the Central Government, has addressed itself to the formulation of an appropriate national sanitation policy for the present decade. The Government has set a target of covering 25 per cent of the population from the mid-eighties with the setting up of technology missions. But mid last year, barely 2.8 per cent coverage was achieved. The task is massive and the approach has only improved with experience. Initially the sanitation program was taken as part of employment generation under various schemes. Those in the field point out that the program was implemented without taking into account the motivation and acceptance of the beneficiary. Even though the schemes were subsidized and implemented by the local municipal bodies, there was a large percentage of failure, lack of follow-up or monitoring further eroded the credibility of the projects. In the Eighth Plan, though the target remains more or less the same, the focus has now shifted from top bottom approach to involving grass-root voluntary agencies and NGOs in the task of sanitation, with emphasis on the community approach. The approach is now to relate sanitation not just to construction of toilets but as a packaged and integrated scheme of handling drinking water, disposal of wastewater, garbage, personal hygiene and community sanitation. Gujarat began its low-cost sanitation schemes from 1961 and has achieved 10 per cent coverage, which is by far better than the national average. Much of the State's success can be attributed to Mr. Ishwarbhai Patel, Director of the Environmental Sanitation Institute founded by the Harijan Sewak Sangh, who is in the field of rural sanitation since 1963. If anything bothers Mr. Patel it is the sight of a person carrying night soil on his or her head or in a wheelbarrow. That this should happen in Mahatma Gandhi's State bothers this 58-year-old Gandhian more. Consequently, he influenced the State Government to ban the carrying of night soil, the offense being punishable with fine and jail term. Next, he worked at conversion of dry latrines into pour flush water seal type of toilets which are being constructed now under various schemes of the World Bank, UNICEF and the Gujarat Government in the State. He has provided technical expertise and training to workers of several States. In fact, so involved is this Padmashree and Jamnalal Bajaj award winner, that his Institute, popularly known as Safai Vidyalaya, has a variety of toilets and pans on display. Of late the World Bank has sought his opinion on a fiberglass pan developed in the U.S. for marketing in India. 45 Annex C It was only natural then for the Central and State Government to utilize Mr. Ishwarbhai's experience in the field for virtually launching a sanitation movement in the villages of Gujarat. As consultant to the Gujarat Government and nodal agency for implementation and monitoring of various schemes, the Safai Vidyalaya has involved 60 NGOS through the State in this task. Care has been taken to choose an agency which has an area of influence. SEWA, for instance, is working in coordination with NASA, a wing of the Vidyalaya, in providing toilets to the slum dwellers in Ahmedabad city. With a target of constructing 26,000 pour flush toilets in 56 urban towns and 50,000 low-cost toilets in rural areas, the Safai Vidyalaya and its team of NGOs is set to exceed the target, Mr. Ishwarbhai said during a field visit to the villages adjoining Ahmedabad and Baroda. The model of the toilet used is the waterseal, honeycomb, leach double pit designed by Mr. Patel. It has been designed for the restricted use of water, about 2.5 liters as against 12.5 liters in normal toilets. The night soil deposit in one pit can be used as manure after six years. In Indrad village, for instance, looked after by a school teacher, Mr. Atmaram Patel, villagers have combined the toilet with a bathroom and a kitchen, in a major departure from traditional belief that toilet etc. should be yards away from home. At some other places they have been attached to the biogas plant, but this acceptance is rare. In fact, so happy are those who have the toilet that in cities they keep them locked to prevent stray animals from 'spoiling' it. In villages, almost all rural folk have tried the toilets and take pride in keeping them sparkling clean. Most people consider toilets to be some kind of a status symbol and those who do not have them suffer from a complex. Some women in Adalaj village did, however, complain of feeling claustrophobic in a concrete toilet as against an open field. But such schemes are not without drawbacks. For one, whenever a subsidy scheme is launched, it is for a short duration and restrictive. By the time the villagers get over their resistance the schemes are wrapped up. This leaves out many persons and defeats the purpose of achieving the target of complete sanitation. Mr. Patel restricts his role to playing the catalyst and motivating people. The Gujarat experiment envisages emphasis on individual toilets against community toilets as Sulabh Shauchalaya does. "Community toilets cannot be maintained, whereas individual toilets tend to become the pride of a rural family." However, NASA is beautifully maintaining a toilet-cum-bathing facility for a 3000-bed Civil Hospital in Ahmedabad, where even warm water facility is provided. Another concept that is being tried in collaboration with the UNICEF is establishing of facility parks at places where individuals cannot spare space for a toilet. The facility parks would have toilets at public places with ownership rights to individuals whose responsibility it would be to maintain their toilets. 46 Annex C The Government and some individuals have set quick targets for sanitation facilities, but the hard fact is that it would take about 21 years to cover 100 per cent the urban population (84,40,000) and 213 years to fully cover the rural population (3,29,60,000) of Gujarat alone with sanitation facilities. 47 Box 1. The Audit's Findings. ESI, the selected nodal NGO for the Gujarat Water Supply and Sewerage Project, had been involved in the sector since 1963 and had been emphasizing the construction of individual household latrines instead of community toilets. Program efficiency proved to be good, and NGO nodal agency overhead was low at less than five percent (total overhead, including GWSSB, the nodal NGO and smaller implementing NGO's was about 12 percent ). Subsidies to beneficiaries varied from about 30 percent to 55 percent, depending upon category. The project's sanitation strategy proved to be successful following enlistment of the selected NGO, and unplanned spread-effects were seen in the construction of an additional 30,000 latrines under separate funding. Bank missions reported that they were greatly impressed with the close cooperation between GWSSB and the implementing NGO, ESI. The advantage of engaging a knowledgeable and experienced NGO was amply demonstrated in this case. Household low-cost sanitation scheme Under State guidelines, a minimum of 30 percent of the low-cost sanitation program cost was to be devoted to the Harijan community. Harijan households were to receive greater subsidies for the latrines (100 percent grant - 75 percent from GOG, and the remainder from the local authority), although administering the subsidies appeared to be complicated. For non- Harijans, 50 percent GOG grant, 30 percent grant from local authority, 20 percent contribution from homeowners. For certain of the low-income groups, this 20 percent initial payment was expected to prove to be burdensome and assistance in the form of soft loan or grant was planned for such groups. Consequently, on October 6, 1991, GOG passed a further resolution making such loans available to non-Harijan beneficiaries with monthly incomes of less than IRs. 500 on the basis of six percent interest with loan and interest repayable in 24 equal monthly payments. The concept of communal latrines was abandoned as unworkable (the facilities could not be maintained) and none were reported to be constructed under the project. Only pay-and-use facilities have a successful record in the urban areas of Gujarat.  '45 COMMENTS FROM THE BORROWER ATTACHMENT No.VWS/1096/581/N. Health and Family Welfare Department Government of Gujarat Block No. 7, 9th Floor, Sachivalaya. Gandhinagar Sccretary 1 ( telik1pplV) Phones :20470, 6737 May 16, 1996. Mr. Yves Albouy ./ Chief Infrastructure and Energy Division Operations Evaluation Department The World Bank International Bank for Reconstruction & Development International Development Association 1818 H Street N.W. Washington, D.C.20433 U.S.A. FAX NO.202-522-3125. Sub: Gujarat Water Supply & Sewerage Project (Credit 1280-IN)-Draft Performance Audit Report. Dear Sir, This has reference to a letter dated 16.4.1996 from the Chief, Infrastructure & Energy Division, Operations Evaluation Department, the World Bank, Washington. The comments on the draft performance and audit report related to Credit 1280-IN are enumerated below: 1. This was the first IDA assisted programme in the drinking water sector in Gujarat and was also hardly second or third in the country at that time. Thus, both the Bank and the Borrower had little experience in dealing with this very vital and at the same time sensitive sector of development. This has been the main reason for all the delays in the project, as the Bank took time to understand and appreciate the local Indian and the State specific situation. Likewise, the borrower i.e. the Government of Gujarat and the GWSSB also took some time to understand and implement the Bank's procedure related to project implementation. 2. One of the important factors for the delays in implementation has been identified as the delays in undertaking engineering design and formulation of the bid documents. Even at the time of the project formulation and appraisal, GWSSB had made all out efforts to convince the Bank that the Bank should give due regards and attach proper importance to the ... 2/- ATTACHMENT 50 Health & Family Welfare Department Continuation Sheet (Water Supply) inhouse design and detail engineering capabilities of the Board. At that time, the Bank had a tendency to give more weightage to the engineering consultants for these works. As was apparent at that time, consultancy profession in the drinking water and sewerage sector in the country was in infant stage and the consultants had to largely depend on associates who were more or less senior retired engineers in the Government and the public sector. The consultants were also not fully aware of and exposed to the procurement and bidding procedures of the Bank. In fact, the Bank was also not able to standardize the procurement procedures and sample bid documents in that early stage. This has now been done successfully to a considerable extent. Because of such a situation and the system of having a joint working ( by distribution of mand months) between the GWSSB and the consultants, it was found difficult to draw line and fix specific job responsibilities which proved to be major reason in finalising the design reports and the bid documents. Had it been consultants alone, or even the GWSSB alone, it would perhaps had been possible to cut down the delays in this regard. 3. During the stage of project implementation, the Bank had insisted on a procedure of sending the design reports as well as the bid evaluation reports to the Washington Office of the Bank for No Objection. This was specifically stressed, as the Bank has no staff dealing with the drinking water sector in its Delhi Office. Way back in 1982-87, the communication channel were not as fast as they are today. Sending bid documents, design reports and evaluation reports to the Bank for No Ojbection involved loss of considerably long time. The cummulative effect of such time loss added up to the overall project delays. 4. On the procurement front. the GWSSB had s-trongly argued before the visiting Bank Mission that the GWSSB system of fixing rate contracts for procurement of pipes and other materials was also based on a public bidding system which was nation wide and the rates were also very competitive. In spite of this, the Bank was reluctant for major portion of the project implementation period to accept this proposal and had insisted upon for separate local competitive and international competitive bidding system. In the latest stage of the implementation period, the Bank had agreed to the rate contract system. In our opinion, this was also a major cause for the project delay. 3/- ATTACHMENT Health & Family Welfare Department 51 Continuation Sheet (Water Supply) 5. In the evaluation summary, it has been mentioned that improper procurement planning with specific reference to the large number of small contracts has been considered as the main reason for delays. As mentioned in the earlier paragraph, had the Bank agreed to the rate contract procedure, considerable time would have been saved. 6. It is an admitted fact that the entire State and the Board machinery was actively engaged in combatting the severe drought of 1985-87 which diverted the attention away from the project. 7. As regards the matter relating to water tariff, GWSSB had undertaken a detailed tariff study as advised by the Bank through Operations Research Group, Baroda who were working as consultants. The report that was produced at the end of the study elaborately dealt with the issue of tariff increase in relation to the affordability. The Bank had insisted in the form of the credit covenants that the user charges should be so levied so as to generate all the funds necessary for the operation & maintenance, debt service and d epreciation. This was not a very pragmatic and a realistic approach looking to the economic situation of the user community in the country. The system of cross subsidising these costs by diverting income from other sources like octroi, house tax etc. has been prevailing since ages in the country. These revenues are also directly collected from the people who take advantage of the infrastructural facilities in a particular town and as such, there is no v alid reason why this should not be allowed and direct cost recovery should be insisted upon. It would also be worthwhile to mention that though the policy makers in the country principally accept the theory of directly recovery to meet with the fully cost, it is a fact of life that still the required political will to accept this theory has not been developed. This is a time consuming process and has to be dealt with in phase over a longer span of time and in line with the overall social and educational development of the community. 8. Accounting system has been identified as the critical short coming in the evaluation r eport. Here again, it would not be unfair to mention that Banks over insistance in appointing consultants and over night change of the existing system which has led to the shortcomings and lacuna in the accounting system. However, the system did stablise during the later part of the project implementation period. ... 4/- * ATTACHMENT Health & Family Welfare Department 52 Continuation S cet (Water Supply) 9. Therer is a mention about the metering of the water supply. This was limited to industrial and commercial users. The GWSSB had undertaken a very detailed metering study by appointing a consultant and it was concluded that domestic metering still has some problems as regards the quality of meters and meter repair facilities and also the overall social acceptability to pay for water on a measured basis. Though ideally, this may be right approach still it requires motivation, education, good quality meters and development and setting up of meter repair facilities. 10. As regards the Bank performance, it would be worthwhile to mention that the visiting Bank Mission were fielded merely in the form of review mission. Had these Missions functioned as Project Support Missions, it would have been possible to p rovide the required technical, financial and institutional support to the p roject. This may be because both the Bank and the borrower were in the stage of infancy in the development of drinking water sector. It was also necessary for the Bank to include an Indian Technical and Financial Expert with relevant experience and exposure in the drinking water sector, as members of the visiting Missions. This would have helped the Missions in understanding and apprerciating the Indian culture, condition and more specifically the socio-economic aspects relating to the drinking water sector. 11. The Credit 1280 project as formulated stressed more on the hardware part, as the socio-economic component was practically absolute. It would have been worthwhile to concentrate on the software part like health education, awareness generation, motivation, employment generation, water conservation, etc. Had the hardware and software part taken up simultaneously, it would have been possible to properly identify the socio-economic benefit and motivate people to pay the user charges and make the project financially sustainable. With regards, Yours fait ully, (K.C. OOR)(6,5- SECRETARY(WATER UPPLY) HEALTH & FAMILY WELFARE DEPTT.   w a IMAGING Report No: 15715 Type: PPAR