Karnataka Urban Infrastructure Development Project

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ASIAN DEVELOPMENT BANKOperations Evaluation Department

PROJECT PERFORMANCE EVALUATION REPORT

IN

INDIA

In this electronic file, the report is followed by Managements response.


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erformance Evaluation ReP port

Operations Evaluation Department

Project Number: PPE: IND 27132Loan Numbers: 1415-IND and 1416-INDNovember 2007

India: Karnataka Urban Infrastructure DevelopmentProject


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CURRENCY EQUIVALENTS(as of 5 August 2005 [time of field mission] and 30 October 2007)

Currency Unit Indian rupee/s (Re/Rs)Re1.00 = 2005: $0.0231; 2007: $0.0252

$1.00 = 2005: Rs43.37; 2007: Rs 39.70

ABBREVIATIONS

ADB Asian Development BankCDP Community Development ProgramEA executing agencyEIRR economic internal rate of returnFIRR financial internal rate of returnHDFC Housing Development and Finance CorporationIUDP integrated urban development projectKUDCEMP Karnataka Urban Development and Coastal Environmental

Management ProjectKUIDFC Karnataka Urban Infrastructure Development and Finance

CorporationKUIDP Karnataka Urban Infrastructure Development ProjectKUWSDB Karnataka Urban Water Supply and Drainage BoardMCC Mysore City CorporationMUDA Mysore Urban Development AuthorityNGO nongovernment organizationO&M operation and maintenanceOEM operations evaluation missionPCR project completion reportPIU project implementation unit

PMU project management unitPPER project performance evaluation reportPPTA project preparatory technical assistanceRRP report and recommendation of the PresidentSTP sewage treatment plantTUDA Tumkur Urban Development AuthorityULB urban local body

WEIGHTS AND MEASURES

km kilometermld million liters per day

m3

cubic meter

NOTES

(i) The fiscal year (FY) of the Government and its agencies ends on 31 March.FY before a calendar year denotes the year in which the fiscal year ends,e.g., FY2000 ends on 31 March 2000.

(ii) In this report, "$" refers to US dollars.


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Key Words

asian development bank, channapatna adb project evaluation, indian integrated urbaninfrastructure development, indian urban development evaluation, indian urban housing lending,

karnataka urban project evaluation, mysore adb project evaluation, ramanagaram adb projectevaluation, tumkur adb project evaluation

Officer-in-Charge R. Adhikari, Operations Evaluation Department (OED)Director R. K. Leonard, Operations Evaluation Division 1, OED

Team leader W. Kolkma, Senior Evaluation Specialist, Operations EvaluationDivision 1, OED

Team members A. Anabo, Senior Evaluation Officer, Operations EvaluationDivision 1, OEDA. Alba, Operations Evaluation Assistant, Operations EvaluationDivision 1, OEDV. Melo, Operations Evaluation Assistant, Operations EvaluationDivision 1, OED

Operations Evaluation Department,PE-706


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CONTENTS

Page

BASIC DATA iiiEXECUTIVE SUMMARY v

MAP ix

I. INTRODUCTION 1

A. Evaluation Purpose and Process 1B. Expected Results 2

II. DESIGN AND IMPLEMENTATION 3

A. Formulation 3B. Rationale 3C. Cost, Financing, and Executing Arrangements 3D. Procurement, Construction, and Scheduling 6E. Design Changes 7

F. Outputs 7G. Consultants and Contractors 15H. Loan Covenants 16I. Policy Framework 16

III. PERFORMANCE ASSESSMENT 16

IV. OTHER ASSESSMENTS 21

A. Impact 21B. Asian Development Bank Performance 23C. Borrower Performance 23D. Technical Assistance 23

V. ISSUES, LESSONS AND FOLLOW-UP ACTIONS 24

A. Issues 24B. Lessons 25C. Follow-Up Actions 26

APPENDIXES

1. Achievement of Project Outputs 272. Self Help Groups in the Karnataka Urban Infrastructure Development Project 323. Summary of Benefit Monitoring and Evaluation Indicators and Results 364. Housing Development and Finance Corporation Loan Type and Distribution 375. Financial and Economic Analyses of Karnataka Urban Infrastructure Development

Projects39

The guidelines formally adopted by the Operations Evaluation Department (OED) on avoidingconflicts of interest in its independent evaluations were observed in the preparation of thisreport. Robert Merrill was the consultant. To the knowledge of the management of OED, therewere no conflicts of interest of the persons preparing, reviewing or approving this report.

Attachment: Management Response


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BASIC DATAKarnataka Urban Infrastructure Development Project (Loans 1415-IND and 1416-IND)

Project Preparation/Institution Building

TA No. TA Name TypePerson-Months

Amount($)

ApprovalDate

1977 Urban InfrastructureDevelopment Project

PP 47 $600,000 12 Nov 1993

2471 Resource Mobilization Studyfor Local Governments inKarnataka

AD 14 $300,000 14 Dec 1995

Key Project Data ($ million)As per ADB

Loan Documents Actual

Total Project Cost 132.0 123.48ADB Loan Amount/Utilization

1415-IND 85.0 76.41416-IND 20.0 20.0

ADB Loan Amount/Cancellation1415-IND 8.61416-IND 0.0

Key Dates Expected Actual

Appraisal 16 Jun5 Jul 1995Loan Negotiations1415-IND 1317 Nov 19951416-IND 4 Aug4 Sep 1995

ADB Board of Directors Approval 14 Dec 1995Loan Signing1415-IND 10 May 19961416-IND 13 Dec 1996

Loan Effectiveness1415-IND 8 Jul 1996 8 Jul 19961416-IND 11 Feb 1997 19 Dec 1996

First Disbursement1415-IND 29 Nov 19961416-IND 12 Dec 1997

Project Completion1415-IND 31 Dec 2001 30 Jun 2004

1416-IND 31 Dec 2001 26 Jan 2001Loan Closing1415-IND 30 Jun 2002 7 Dec 20041416-IND 30 Jun 2002 26 Jan 2001

Months (Effectiveness to Completion)1415-IND 65.8 95.81416-IND 64.6 49.3


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Borrower IndiaExecuting Agencies Loan 1415 Karnataka Urban Infrastructure Development

and Finance CorporationLoan 1416 Housing Development Finance Corporation Ltd

Type of Mission No. of Missions No. of Person-Days

Fact-Finding 1 95Appraisal 1 75Project Administration

Inception 1 40Midterm Review 1 30

1415-IND 1416-IND 1415-IND 1416-INDReviewa 22 7 250 119Project Completion 2 1 14 4

Operations Evaluation 1 8

ADB = Asian Development Bank, IND = India, TA = technical assistance.a Includes two statement of expenditures review missions that were carried out in connection with Loan 1415-INDonly. The seven loan review missions recorded for Loan 1416-IND were also counted under Loan 1415-IND sincethese missions also assessed the implementation of Loan 1415-IND.


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EXECUTIVE SUMMARY

The rapid expansion of Bangalores industrial and information technology activities in theearly 1990s led to increased migration from rural areas of Karnataka state and elsewhere inIndia, intensifying the strain on Bangalores infrastructure facilities. Living conditions of residentssubsequently deteriorated, leading to increased urban poverty and environmental problems.

The key objectives of the Karnataka Urban Infrastructure Development Project (KUIDP) were topromote decentralization of population growth and economic activity away from Bangalore byaddressing infrastructure deficiencies and related environmental issues in selected urban areasin the Bangalore region, namely Channapatna, Mysore, Ramanagaram, and Tumkur. 1 The Project also sought to build the capacity of selected urban local bodies (ULBs) and relatedsector institutions in order to ensure sustainability of the investments and to provide housingfinance assistance to low-income groups in the Project towns at affordable interest rates.

At appraisal, a project was defined requiring some $132 million, of which $85 million wasborrowed from the Asian Development Bank (ADB) (Loan No.1415-IND). Due to the shortage ofhousing and housing finance in the region, the Government of India also requested ADBassistance to provide housing finance through the Housing Development Finance Corporation

(HDFC). The total financing for the Project therefore also included a separate $20 million forhousing finance (Loan no.1416-IND). The two loans to the Republic of India and HDFC wereapproved by the ADB Board on 14 December 1995 and became effective on 8 July 1996.Significantly, this was the first time the Government of India had borrowed from ADB for anintegrated urban development project. It was also the first time ADB had made a loan forhousing finance in the country.

Since the nature of integrated urban development projects is multi-sectoral, the Projectcomprised six parts, as follows.

(i) Environmental sanitation (36% of estimated base cost) including construction offacilities for water supply, solid waste management, sewerage, storm water drainage

and sullage disposal.

(ii) Road improvement and truck and bus terminals (13%)including (a) rehabilitationand upgrading of roads, extension of road systems, construction or widening ofbridges, construction of new roads; and (b) provision of truck terminals in Mysoreand Tumkur, relocation of a bus stand in Ramanagaram to improve traffic circulationand safety, and the improvement of one private bus terminal in Maddur.

(iii) Poverty reduction (17%) including (a) provision of water supply, electricity, streetlighting, improved sanitation and drainage, solid waste disposal and improved healthfacilities in selected urban slums in the Project towns; (b) low-income sanitationincluding provision of sanitary latrines for low-income households in the Project

towns through community participation; (c) residential sites and services includingdevelopment of housing sites and provision of roads, water supply, drainage andsanitation facilities for selected residential areas in the Project towns; and (d) culturaland women's training centers including establishment of a cultural and commercialcenter in Ramanagaram and a women's training center in Tumkur.

1Subsequently, due to project savings, two more towns along the Bangalore-Mysore highway were included,Maddur and Mandya.


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(iv) Development of industrial sites and services (6%) in the towns of Tumkur andRamanagaram.

(v) Implementation assistance and institutional strengthening (8%) by providingconsulting services, equipment and staffing costs for institutional support to theKarnataka Urban Infrastructure Development and Finance Corporation (KUIDFC)

and relevant ULBs.

(vi) Low-income housing finance (20%) by providing housing loans to primarily low-income beneficiaries in the Project towns, as well as in the Bangalore region, ataffordable interest rates without any form of external subsidy.

Some or all of the six parts were implemented to varying degrees in each of thesix towns. Given that there were 36 separate sub-components and 12 implementing agenciesfor the Project, implementation of the urban development component was complex, resulting inan extension of the closing date by 2 years to 30 June 2004. This can be compared with thehousing finance component, which closed 17 months ahead of schedule. The early closure wasprimarily due to the fact that HFDC had received permission from ADB to issue cheap housing

loans to middle and low-income families throughout the state and wherever families wanted ahouse, rather than to the future occupiers of the residential sites and services schemes to bedeveloped under the Project as it was quickly clear that the services schemes would take yearsto complete. The change of approach speeded up the process but reduced the internalcoherence of the Project.

The operations evaluation mission (OEM) investigated each project componentseparately. The expanded internal road and storm drainage systems for the towns provided highquality outputs and were greatly appreciated by city officials and beneficiaries. The water supplycomponent was also successfully implemented in the four towns scheduled for the works,although in Ramanagaram and Channapatna the long supply line of 42 kilometers (km) led to asignificantly higher cost per connection. Hence, given the existing tariff structure, the project

completion report (PCR) financial internal rate of return (FIRR), which was accepted by theOEM, was negative. Overall, difficulties in increasing the water and sewer tariffs sufficiently tocover operation and maintenance (O&M) remained a problem. The slum improvement andcommunity development components provided improvements in the quality of life for thebeneficiaries, although some are threatened by the inability of the Karnataka UrbanInfrastructure Development and Finance Corporation (KUIDFC) or ULBs to follow up.

There were mixed results particularly for the large sewerage component. Although mostphysical outputs were of good quality, their utilization was less than optimal due to poormaintenance in some plants and slow progress in individual houses connecting with the sewagenetwork. (Household connections were not included in the project design as per ADB practice atthe time; this is now changed.) Some sewage treatment plants also suffered from defective

pumps and, in one case, a leaking oxidation pond. A continuing dispute between the contractorand the client as to who was responsible for repairs resulted in the plant being barelyoperational. The five residential sites and services schemes were not successful at the time ofthe OEM. Two such schemes were completed with plots sold but not occupied. (Due tooutstanding bills of many local bodies, the electricity provider was unwilling to invest inelectrification of the sites and services schemes.) Two schemes were completed but no plotssold (due to high costs and poor location) and one scheme was still under construction at thetime of the OEM. Of the two planned industrial sites and services schemes, one was cancelledand the other was nearly 80% utilized. Two bus terminals constructed by the Project were


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completed and in operation. Another was located in the wrong place and was transferred to theKarnataka State Road Transport Corporation. One truck terminal was not being used and wasbeing converted to a residential site, while the second one was cancelled.

In general, the OEM concluded that a project of this complexity required morepreparation than had been allotted, i.e., a longer project preparatory technical assistance (PPTA)

than was scheduled. A longer preparation would have benefited the quality of the investmentcomponents as well as the consensus building within ULBs and city populations regarding therequired O&M of the assets. This may have something to do with the way ADB operates in India.ADB responds to central government requests to prepare projects in certain sectors in certainstates and is generally confronted with many demands at state level, made in the expectationthat the central or state government will guarantee the loan and the project will present a one-time opportunity. As a consequence, much tends to be included in the projects, somecomponents are not optimally investigated, and some that would have to recover their O&Mcosts are not able to do so. The OEM has rated the Project successful, but this is in part dueto the positive externalities of the Project. The Project was the first major integrated urbaninvestment project to be implemented in several mid-sized cities in more than a decade, notonly for ADB but also for the Government of India. As such, it generated substantial experience,

including state and country-wide policy initiatives. It had successful components, notably inroads, and to some extent water supply and sanitation and slum development. It also helped toestablish KUIDFC as a professional urban development institution. After the Project began, theWorld Bank developed similar projects while other agencies followed with related types ofprojects for the urban sector. The OEMs economic and financial analysis assessed the Projectas less efficient and less sustainable. However, based on the efficacy of the Project, therelevance of gaining experience in the urban sector, and the substantial indirect impacts, as wellas the highly successful community development and training components, a successful ratingis justifiable. The OED identified several lessons as follows.

Project Design.Project preparation and design for complicated, multisector, multi-townprojects such as KUIDP should be allotted adequate time to do the necessary technical,

financial, socioeconomic and institutional analysis such that ultimate project implementation andevaluation closely resembles original project objectives, outputs and financial projections. Timealso needs to be taken to build consensus within ULBs regarding the importance of O&M of theassets. Furthermore, if the Project was intended to help relieve pressure on Bangalore, it wouldhave needed to be more directly geared to job creation in the surrounding cities, which was notthe case. Offering housing sites, two industrial sites and improved services in such cities is notsufficient to significantly divert business and migrants from coming to Bangalore.

Bridging TA. Since project preparatory TAs do not generally include detailed designand procurement, ADB should consider to grant bridging TAs, or alternatively the approval of TAloans, such that when an investment loan becomes effective, sub-components can be tenderedand civil works can start within the first year.

Institutional Development and Training.Institutional development and training shouldbe given equal priority with development of physical components. This has been done to a greatextent in the Project, enabling KUIDFC to undertake the design of the North Karnataka UrbanSector Investment Program so that while ADB will do the report and recommendation of thePresident, the project concept and details will be supplied by KUIDFC.

Capacity of Urban Local Bodies. The capabilities of municipalities as implementingagencies need to be investigated in more detail, especially in small bodies such as


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Ramanagaram and Channapatna, so that KUIDFC (or any other project management unit) willnot have to implement the work on their behalf or have the civil works turned over to aspecialized state agency such as the Karnataka Urban Water Supply and Drainage Board forO&M and tariff collections.

Civil Works and Equipment versus Services. The ultimate focus should be on the

provision of affordable services and cost recovery, not just on the provision of civil works andequipment. Least-cost analysis should identify the type of technical solution that would providethe service at the lowest cost for the project as well as the beneficiary. Performance-basedprivate sector participation schemes should be pursued, and service provision emphasized.

Beneficiary Involvement. The ULBs and their clientele should be involved in the designof all project components, especially water, sewer and drainage components. Design andimplementation according to beneficiaries felt needs generally leads to better post-project costrecovery and O&M. Involvement of nongovernment organizations (NGOs) also led to effectiveresults, particularly in identifying needs in slum upgrading and low-cost sanitation components.

Ramesh B. AdhikariOfficer-in-ChargeOperations Evaluation Department


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I. INTRODUCTION

A. Evaluation Purpose and Process

1. This project performance evaluation report (PPER) focuses on pertinent aspects of theKarnataka Urban Infrastructure Development Project (KUIDP), including the low-income

housing component, and presents the findings of the operations evaluation mission (OEM) toIndia from 18 July to 5 August 2005. The timing of the OEM, a year before completion of theAsian Development Bank (ADB) project completion report (PCR), was influenced by the need toassess findings on the first completed integrated urban development project (IUDP) to beconducted in India in a special evaluation study on ADBs urban sector strategy andoperations.1 The mission visited all six project towns and the sites of subprojects in each town,including a sample of the slum upgrading schemes. Before visiting the towns, interviews wereconducted with relevant central government officials in (i) the Department of Economic Affairs inthe Ministry of Finance, (ii) officials of Karnataka states Department of Municipal Administrationand Department of Housing and Urban Development (DHUD), (iii) key implementation agenciessuch as the Karnataka Urban Water Supply and Drainage Board (KUWSDB), and (iv) managersand staff of the Karnataka Urban Infrastructure Development and Finance Corporation

(KUIDFC), the Executing Agency (EA) of the Project.2

In each town, meetings were held withmunicipal commissioners (or the city commissioner in the case of Mysore) and relevant staff, aswell as with the managing directors of local urban development agencies such as Mysore UrbanDevelopment Authority (MUDA) and Tumkur Urban Development Authority (TUDA), and localKUWSDB staff. Local nongovernment organizations (NGOs) involved in communitydevelopment aspects of the Project, as well as federations of self-help groups, were also visited.Upon return from the field, debriefings and wrap-up meetings were held with DHUD andKUIDFC in Bangalore and the Department of Economic Affairs in Delhi. This delayed reporttakes into account the results of follow-up communications with KUIDFC and ADBs residentmission in AugustOctober 2007.

2. With respect to the housing finance loan, a meeting was held with the general manager

of the Housing Development and Finance Corporation (HDFC) in Bangalore. Various findingsfrom the meeting regarding housing finance for low-income families are included in the relevantsections of this PPER.

3. The project management consultants submitted a draft PCR to KUIDFC in June 2004.This focused mostly on the completion and status of the civil works and equipment, with limitedanalysis of the Projects overall performance, especially its socioeconomic and policy impacts.A draft ADB PCR 3 was completed before the OEM and drew mainly on the EAs PCR todescribe the civil works. Based on several missions to the field, ADBs draft rated the Project assuccessful, noting (i) all the works, including additional ones, were completed within theextended time frame; (ii) rather than cost overruns, savings were made despite cancellation of a$5 million loan; and (iii) requirements for social and environmental safeguards were followed.

The draft observed a major improvement in environmental and sanitary conditions of the projecttowns, although the performance on financial and governance-related loan covenants was ratedonly partially satisfactory. Furthermore, the states initiatives on property tax and other reforms,

1ADB. 2006. Special Evaluation Study on ADBs Urban Sector Strategy and Operations. Manila.

2At the time of loan approval, only four towns were included under the Project: Channapatna, Mysore,Ramanagaram and Tumkur. In November 2002, Maddur and Mandya were added to the project scope.

3At the time of the OEM, the PCR was in its draft final form. The final PCR was circulated to the Board of Directorson 5 July 2006 (ADB. 2006. Project Completion Report for the Karnataka Urban Infrastructure Development Projectin India. Manila).


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as promoted by the Project and ADB, were viewed as steps in the right direction. The PCRnoted a substantial positive impact on municipal finances. ADB completed a separate PCR forthe housing finance component of the Project in December 2001. This component was rated ashighly successful. The PCR for the infrastructure components was finalized by July 2006. Bothwere posted on ADBs website.4

B. Expected Results

4. The primary objective of the Project, as outlined in ADBs report and recommendation ofthe President (RRP), 5 was to promote decentralization of population growth and economicactivity away from Bangalore by addressing infrastructure deficiencies and relatedenvironmental issues in selected urban areas in the Bangalore subregion, namely Channapatna,Mysore, Ramanagarm, and Tumkur. The Project, which had an estimated base cost equivalentto $80.3 million for works and $20.0 million for housing loans, also sought to (i) build thecapacity of urban local bodies (ULBs) and related sector institutions in order to ensuresustainability of the investments, and (ii) provide housing finance assistance to low-incomegroups in the project towns at affordable interest rates. The Project had six parts as follows.

5. Part A: Environmental sanitation ($37.1 million) comprising construction of facilities forwater supply, solid waste management, sewage systems and storm-water drainage and sullagedisposal.

6. Part B: Road improvement and truck and bus terminals ($12.8 million) comprising(i) rehabilitation and upgrading of 190 kilometers (km) of roads, construction or widening ofbridges, and construction of new roads to improve access to housing and industrial areas; and(ii) provision of truck terminals in Mysore and Tumkur, the relocation of a bus stand inRamanagaram to improve traffic circulation and safety, and improvement of one private busterminal in Maddur.

7. Part C: Poverty reduction ($16.6 million) comprising (i) upgrading of 31 slums including

provision of water supply, electricity, street lighting, sanitation and drainage, solid wastedisposal and improved health facilities in selected urban slums in the project towns;(ii) low-income sanitation including provision of 23,700 sanitary latrines for low-incomehouseholds in the project towns through community participation; (iii) residential sites andservices schemes including development of 7,200 housing sites and provision of roads, watersupply, drainage and sanitation facilities for selected residential areas in the project towns; and(iv) establishment of a cultural and commercial center in Ramanagaram and a women's trainingcenter in Tumkur.

8. Part D: Development of industrial sites and services ($5.6 million) in the towns ofTumkur and Ramanagaram.

9. Part E: Implementation assistance and institutional strengthening ($8.2 million)through provision of consulting services, equipment and staffing costs for institutional support toKUIDFC and ULBs.

4Available: http://adb.org/Documents/PCRs/IND/27132-IND-PCR.pdf; andhttp://adb.org/documents/pcrs/IND/In311_01.pdf.

5ADB. 1995. Report and Recommendation of the President to the Board of Directors on Proposed Loans andTechnical Assistance to India for the Karnataka Urban Infrastructure Development Project. Manila.


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10. Part F: Low-income housing finance ($20.0 million) through the provision of housingloans primarily to low-income beneficiaries in the project towns, as well as in the Bangaloresubregion, at affordable interest rates and without external subsidies.

II. DESIGN AND IMPLEMENTATION

A. Formulation

11. The Government approached ADB in 1993 for assistance to prepare a project that wouldenable selected urban locations to be developed as growth areas in an effort to reducepressures on Bangalore. The urban areas of Channapatna, Mysore, Ramanagaram and Tumkurwere selected based on criteria such as location in relation to Bangalore, existing populationand annual growth rates, quality of infrastructure facilities and related amenities, and definitionas self-contained urban areas. (Due to project savings, two more towns along the Bangalore-Mysore highway, Maddur and Mandya, were included later.) At the time, Mysore, 140 km fromBangalore, was considered to be the most likely counter-magnet to Bangalore. Tumkur, which issmaller and 90 km away, was considered a potential counter-magnet. ADB approved a projectpreparatory technical assistance (PPTA)6 on 12 November 1993 to investigate the feasibility of

a project. The consultants submitted their report in April 1995. Based on the report, ADBsappraisal in June and July 1995 defined a project costing some $132.0 million equivalent.Because of a shortage of housing and housing finance in the region, the Government alsorequested ADB assistance to provide housing finance through HDFC. Thus, the total projectcost included a separateloan for $20.0 million for housing finance. Loan negotiations took placeduring November 1995.7 ADBs Board subsequently approved an urban development loan for$85.0 million to the Republic of India and a housing loan of $20.0 million to HDFC on14 December 1995. The loans became effective on 8 July 1996.8 Significantly, it was the firsttime the Government of India had borrowed from ADB for an IUDP and it was the first time ADBhad made a loan for housing finance in the country.

B. Rationale

12. Bangalore, the capital of Karnataka State, had expanded at a rapid rate mainly becauseof its location, favorable climate and the availability of good physical infrastructure. The city wastherefore the recipient of increasing and substantial local and foreign investment from 1991,when the Government began its liberalization program. The rapid expansion of industrial andinformation technology activities prompted increased migration to Bangalore from rural areas ofKarnataka and elsewhere in India, intensifying the strain on the citys infrastructure. Livingconditions of residents subsequently deteriorated, leading to increased urban poverty andenvironmental problems.

C. Cost, Financing, and Executing Arrangements

13. The estimated total project cost at appraisal included a foreign exchange cost of$36.0 million, which ADB was to finance, together with $69.0 million equivalent of local currency

6ADB. 1993. Technical Assistance to India for the Urban Infrastructure Development Project. Manila.

7ADB. 1995. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to Indiafor the Karnataka Urban Infrastructure Development Project. Manila (Loan 1415-IND, for $85.0 million, approvedon 14 December). Loan negotiations for Loan 1416-IND were done in AugustSeptember 1995.

8ADB. 1995. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to Indiafor the Karnataka Urban Infrastructure Development Project. Manila (Loan 1416-IND, for $20.0 million, approvedon 14 December and effective on 19 December 1996).


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costs ($49.0 million from the loan to India and $20.0 million equivalent from the loan to HDFC).The Government of Karnataka was to finance $19.3 million equivalent, with equity from ULBsand related institutions in kind and land amounting to another $7.7 million equivalent. Thus,ADB financing covered 79.6% of the total project costs, 64.4% of all the components exceptlow-income housing, and 15.2% for the low-income housing component. The loan was made tothe central Government from ADBs ordinary capital resources for a period of 25 years,

including a grace period of 5 years, at ADBs variable interest rate. The central Governmentthen made loans, excluding interest during construction, to the Government of Karnataka onstandard terms and conditions set by the Ministry of Finance for foreign aided projects.The foreign exchange risk was borne by the central Government, but $62 million for variousworks was to be reissued as loans for a term of 25 years, including a grace period of 5 years, atan annual interest rate of 12%.9

14. The actual project cost amounted to an equivalent of $114.35 million, $17.65 million lessthan the appraisal estimate (see Table 1). Of the $105 million loan amount, $96.38 million wasutilized and $8.62 million was canceled ($5 million after the midterm review, the rest afterproject completion).

Table 1: Project Cost($ million)

Cost Appraisal Estimate Actual

Foreign Exchange Cost 36.00 33.24Local Currency Cost 96.00 81.11

Total 132.00 114.35

Source: ADB. 2006. Project Completion Report for the Karnataka Urban Infrastructure Development ProjectinIndia. Manila.

15. While cost overruns occurred in the water supply and road improvement components(the latter due to more roads being added to the project scope), substantial savings were madein components covering sewerage and residential sites and services. The latter savings were

mainly because financing for the Tumkur scheme, which was delayed by the acquisition of land,was cancelled. In addition, during project implementation, there was a substantial devaluation ofthe rupee against the US dollar from Rs34.6 at appraisal to about Rs46 at project completion.Another reason for savings was that costs were overestimated due to ADBs rather rigidlyapplied formulas to calculate contingencies. The availability of loan savings led to approval of amajor change in scope, with the towns of Mandya and Maddur added to the Project($6.0 million). These two towns had been evaluated before the project but were not included inthe original scope due to funding constraints.

16. The EA for the infrastructure project was Karnatakas DHUD, through KUIDFC. The EAfor the low-income housing component was HDFC. Given the large number of subprojects (36)in various sectors for each of the six towns, there was a variety of implementing agencies

(see Table 2).

9The $10.5 million balance of the funds for components covering drainage, road improvements, slum upgrading,low-income sanitation and institutional strengthening were to be provided to local authorities as grants throughbudgetary allocations.


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Table 2: Implementing Agencies

Implementing Agency Area Covered

Karnataka Urban Water Supply and DrainageBoard

All water supply and sewage schemes

Karnataka Industrial Area Development Board All industrial sites and servicesKarnataka Slum Clearance Board All slum upgrading work

Public Works Department All project roadsMysore Urban Development Authority Outer ring road, bus terminal and residential sites

and services in MysoreTumkur Urban Development Authority Southern bypass road, truck terminal and

residential sites and services in TumkurMysore City Corporation Solid waste management, storm water drainage,

road improvement and traffic management, andlow-cost sanitation in Mysore

Tumkur Municipality Solid waste management, storm water drainage,road improvement and traffic management, low-cost sanitation and womens training center inTumkur

Ramanagaram Municipality Solid waste management, storm water drainage,

road improvement and traffic management, low-cost sanitation, residential sites and services, busstand relocation, cultural / commercial center inRamanagaram

Channapatna Municipality Solid waste management, storm water drainage,road improvement and traffic management, low-cost sanitation, residential sites and services inChannapatna

Mandya Municipality Road improvement and traffic management, solidwaste management, and low-cost sanitation inMandya

Maddur Municipality Road improvement and traffic management, solidwaste management, low-cost sanitation, bus

terminal and municipal building in MaddurBangalore Metropolitan Region DevelopmentAuthority

Conceptual plan for Bangalore subregion anddetailed plan for Bangalore urban and ruraldistricts

Source: Karnataka Urban Infrastructure Development and Finance Corporation.

17. KUIDFC was responsible for overall project administration and institutional strengthening.Early in the Project, it established a project management unit (PMU), headed by KUIDFCsmanaging director; three project implementation units (PIUs), headed by executive engineers; acommunity development unit; and a training and capacity building cell. Consultants were alsorecruited to assist KUIDFC to implement the various programs 10 while local NGOs in each townwere recruited to assist with community participation and poverty reduction aspects of theProject.

10(i) An international consulting firm, Louis Berger International Inc., to assist with project management consultants;(ii) two domestic consulting firms, Dalal Mott MacDonald and STUP Consultants to carry out design andconstruction supervision of the civil works; and (iii) an international consulting firm associated with domesticconsultants for preparing the Bangalore subregional plan. In addition, the Project recruited a national consultant,M/s Intervention India, to conduct a benefit monitoring and evaluation study.


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18. The Government of India, the borrower, represented by the Department of EconomicAffairs, conducted regular tripartite meetings and reviews involving KUIDFC and ADB. KUIDFCwas created in 1993 for similar domestically financed projects.

19. A major problem was the contractors bill payment mechanism, which was toocomplicated and involved long delays and dependence on the state treasury. Implementing

agencies had to prepare and certify contractors bills for payment, which were reviewed atKUIDFC. Payment was obtained from the state and then forwarded to the implementing agencyfor release to the contractor. The state should probably have instituted a second projectoperational account at KUIDFC to speed up the payment process and reduce KUIDFCsdependence on state finances, helping it to establish authority over the implementing agencies.

20. Based largely on its experience in the Project, KUIDFC gradually evolved into anindependent organization with adequate staff and authority. The basic training received byKUIDFC staff during the Project resulted in the state following up on the second ADB-assistedproject, known as the Karnataka Urban Development and Coastal Environmental ManagementProject (KUDCEMP).11 Significantly, for a third ADB-assisted project, KUIDFC prepared a PPTAitself12 and the project 13 was approved in December 2006. Due to its growing institutional

capacity, KUIDFC has established itself as a key agency for all externally aided projects in thestate.

D. Procurement, Construction, and Scheduling

21. In as far as the OEM was still able to check, KUIDFC carried out the procurement ofgoods and services generally in accordance with ADBs Guidelines on the Use of Consultants(as amended from time to time)and Guidelines for Procurement(as amended from time to time).From July 1997, prequalification of contractors for various works was done in stages to meet theneeds of the Project. ADB approved broad criteria for qualification of small civil works programs.Standard bidding documents, work specifications and bid evaluation procedures were approvedfor use in the Project in July 1997 and were used for local competitive bidding for all project civil

works. Standard bidding documents for procurement of goods internationally and locally weredeveloped for use in procuring solid waste management equipment and water meters.Procurement of other items such as vehicles, office equipment and furnishings for the PMU,PIUs and consulting teams was done by KUIDFC through local purchase. Most works werecompleted after substantial delays.

22. The Project was due to be completed by 31 December 2001. It was completed on30 June 2004, although the low-income housing component was completed in January 2001.However, according to KUIDFC, some spill-over works were not completed until the end ofJanuary 2005.

23. While the original plan was to complete the project in 6 years, the Project was completed

in 8 years. Generally, delays were encountered in almost all stages and components, mostly

11ADB. 1999. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to Indiafor the Karnataka Urban Development and Coastal Environmental Management Project. Manila. (Loan 1704-IND,for $175.0 million, approved on 26 October).

12ADB. 2004. Technical Assistance to India for Preparing the Karnataka Urban Infrastructure Development ProjectIII. Manila.

13ADB. 2007. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to Indiafor the Multitranche Financing Facility: North Karnataka Urban Sector Investment Program. Manila (Loan 2312-IND,for $33 million, approved on 26 January 2007).


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due to construction problems caused by contractors. However, there were major delays due toland acquisition, 14 changes in design owing to inadequate surveys and investigation byconsultants, poor contract administration by the implementing agencies, lack of coordinatedefforts by the implementing agencies, and late release of payments by the state.

E. Design Changes

24. Initially, the Project was to cover Channapatna, Mysore, Ramanagaram and Tumkur.ADB approved the inclusion of two more towns, Mandya and Maddur, in November 2002. Otherproject-related changes included the addition of public toilets, lake improvement in Mysore andrainwater-harvesting works, while the electrification of residential sites and service areas in allproject towns was cancelled (meaning that such services would have to be acquired by theowners). The Project provided water connections in Channapatna to improve the use of newassets. In Mysore, the changes included (i) realigning the outer ring road in accordance with therecommendations of an environmental impact assessment and public consultations,(ii) canceling the truck terminal, and (iii) including water supply and sewerage interconnectionsto improve the impact of the bulk water supply system and sewage trunk mains and treatmentplant. Since land was not available in Ramanagaram, the sewage treatment technology was

changed from an oxidation pond to an aerated lagoon, and the industrial sites and servicescomponent was canceled. In addition, water and sewer connections to houses were provided inRamanagaram to improve the use of the new assets. In Tumkur, the residential sites andservices component was at a standstill due to land acquisition problems at the time of the OEM.However, KUIDFC reported in 2007 that all the sites, except corner and commercial sites, hadbeen allotted. Corner and commercial sites were to be auctioned.

F. Outputs

25. The achievement of outputs is summarized in Appendix 1. OEMs assessment of thequality of physical and institutional outputs, including shortcomings and successes, is as follows.

1. Part A: Environmental Sanitation

26. The two major components of environmental sanitation were water supply and sewerage.Water supply was a significant component in Mysore, Ramanagaram, Channapatna andTumkur. In all cases, the civil works and equipment were found to be functioning well and to bewell maintained. However, increases in water tariffs and other policy measures designed tomake ULBs financially viable had not materialized to a sufficient extent, due to insufficientwillingness of ULBs to collect payments and customers reluctance to pay the full cost. On thepositive side, a special drive in Mysore to collect water charge arrears showed positive results,and collections in Ramanagaram and Channapatna have increased significantly aftermanagement of the system was handed to KUWSDB. Tumkur was also planning a collectionsdrive to reduce water payments arrears as well as illegal connections.

27. The operational performance with respect to sewerage was less impressive. All of thesewage treatment plants (STPs) were operating way below capacity, usually at 20% to 25%.Given that the plants should be operating at nearly full capacity by 2011, the main question waswhether the percentage of capacity was on target for 2011. While drives to increase sewerconnections were conducted in each town, it was essentially up to households to pay the

14This was in spite of the time bound land acquisition plan approved with the Government before project approval,and covenants in the loan agreement.


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connection fee and subsequent consumption charges. Since all households must have hadsome arrangement for sewage disposal, it may have been more cost effective to offerhouseholds the choice of installing the latrines popular in low-income neighborhoods.

28. Despite the best efforts of the Project and local authorities, solid waste managementremained a problem in all the towns at the time of the OEM. Designated solid waste disposal

sites could not be developed (Tumkur), were open dumping sites (Ramanagaram andChannapatna) or operations had stopped due to legal problems (Mysore, where an insufficientlyspecified management contract probably lay at the basis of the problem). Re-use of wastethrough composting is still a problem in many places in India.

29. Mysore. The water supply improvement program in Mysore was the single largestinvestment in the Project. It comprised a new water supply system designed to supply 50 millionliters per day (mld) initially, adequate to meet estimated demand until 2011 and capable ofbeing upgraded to 150 mld to meet further demand until 2026 without additional civil works.Although a September 2004 memorandum from ADBs resident mission stated that O&M wasnot being carried out properly, the OEM found the water treatment plant operating well, with allmeters and gauges working, the flocculator operating, records of flow measurement being kept,

and the laboratory undertaking water quality tests. Mysore had about 110,000 waterconnections, 20,000 of which were illegally constructed (this was reduced to 10,000 by the timeof the OEM). Although supply is for some 20 hours per day at about 130 liters per capita perday, about 25% remains non-revenue water.

30. Leak-detection equipment was procured for Mysore City Corporation (MCC) to be usedfor studies in Mysore. However, it was never used and ultimately the equipment was transferredto KUWSDB. The use of such equipment requires commitment by the water provider,cooperation from residents and special skills among staff. Due primarily to a lack of skilledmanpower, the MCC could not appreciate the benefits of the equipment.

31. The sewage system program for Mysore included construction of trunk sewers and

STPs for three separate drainage districts (Districts A and D, B, and C). The program alsoincluded making connections to existing laterals. All systems were designed with an initialinstalled capacity to meet forecast demand until 2011, allowing for easy incremental expansionof mechanical equipment and some civil works to meet ultimate design capacity until 2026.Although the STPs for Districts B and C were operating well, one was operating at only about25% of its 30 mld capacity, while the larger one was processing an average of 25 mld, or 37%of its 67.65 mld capacity. Major problems were found at the STP for Districts A and D.The 60 mld capacity plant was operating at a peak of only 22 mld. Just three of 11 pumps wereoperating. Several had broken down months previously and had not been repaired by thecontractor. Maintenance personnel for the STP were co-opted from KUWSDB to implement theworks, but they did not seem qualified to carry out adequate maintenance. The earth berm alsobeen leaking over about 600 meters and the contractor had merely dumped gravel and dirt on it

without compacting it. Thus, some leakage was still detected. Due to a lack of pumping capacity,raw sewage was also observed in the drainage ditch. 15 In October 2007, KUIFDC reported thatabout 14,000 new connections had been added since 2004, so that the inflow to the STPsshould have increased. It reported the STPs were working satisfactorily.

15At the time of completion of this PPER, in 2007, ADB staff mentioned that some of the raw sewage in Mysoreintended for an STP was being intercepted as nutrient for farming for the benefit of some local businessmen, andthat the sewage ponds were used for growing fish.


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32. Regarding solid waste management, a 200 ton per day composting plant was built underbuild-operate-transfer conditions. A contractor operated the plant for 3 years under a 10-yearagreement with the MCC. However, as of 27 June 2005, the plant had stopped operating due toa disagreement on the payment of fees which were owed to MCC over a year. MCC was takinglegal action to break the agreement and find another operator. In the meantime, it was lookingfor a new landfill, as the existing plant area was filled with garbage. According to the engineer

who had operated the plant, the plant was efficient in segregating organic and non-organicmaterial and processing the former to produce some 6,000 tons per month of organic compost,which had a market for farmers. Community collection bins were constructed and collection andtransport vehicles purchased. By the time of issuance of this report, the plant was operated byMCC only during the day shift. KUIFDC reported that MCC was marketing the manufacturedcompost efficiently.

33. Tumkur.The component included (i) extension and augmentation of the existing waterdistribution systems, (ii) construction of new underground sewage systems and an STP, and(iii) improvement of facilities for solid waste management and development of a new disposalsite. Development of the water supply system, which included improvements and upgrading ofthe existing water distribution system (128 km) and construction of a reservoir at the old water

treatment plant site, was very well received by municipal officials. In August 2006 the townbegan a drive to reduce the 10,000 illegal water connections (of a total of 28,000 connections)and to increase the sewer connections from 15,000 to 30,000 over 3 months.

34. The sewerage program included construction of a new sewage system (190 km)together with an STP to serve the core area of the town and key residential areas and pumpstations (24.57 mld). Although the STP was running at an average of only 6 to 7 mld, about 25%of its capacity, the plant was well run and maintained. (The plant was peaking at about 8.5 mldat the time of the OEM.) There was no leakage or seepage from the earth oxidation ponds,which were about 1.5 km from the plant.

35. The solid waste management program was to improve the operational efficiencies of the

system and development of a new solid waste disposal site. A sanitary landfill site wasconstructed under the Project. However, the site was not being utilized due to opposition from avillage a kilometer from the site. Although there were no settlements in the immediate vicinity,the villagers succeeded in stopping trucks to the site, dismantling much of the site works, andconvincing several councilors that the site was a nuisance and created disease problems.Municipal officials have found an alternative landfill site at Ajjagondanahalli village, and thecompound wall and approach road construction were in progress by October 2007.

36. Ramanagaram and Channapatna. A water supply scheme of 27 mld capacity forChannapatna and Ramanagaram was built under the Project. The scheme includedrehabilitation of existing intake works and a raw-water pumping station on the Shimsa River.A 15 mld treatment plant, a clear-water reservoir and pump station, a 43 km clear-water raising

main, two intermediate pumping stations and 85 km and 96 km of distribution networks forChannapatna and Ramanagaram respectively were built. The bulk water supply scheme wasmaintained by KUWSDB on behalf of the towns through a management contract with a privateoperating firm. At the time of the OEM, 6 mld of water was being supplied to each town, allowingwater to be provided for about two to three hours a day. According to town officials, this was avery big benefit. In addition, KUIDFC installed about 16,000 connections, of which 11,000 weredone before the closing date.


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37. For Ramanagaram, improvements and extensions to the existing sewer system andconstruction of a new STP (7.56 mld) were undertaken, including extending the sewer systemworks to cover a broader area. In order to encourage house owners to connect, KUIDFC madeconnections a part of the Project, with the cost to be recovered from property owners through10 interest free installments. Some 6,500 connections were made up to the individual plot lines.However, only about 3,000 to 4,000 households have actually connected. Thus, the plant was

receiving only about 2.0 mld in comparison with about 5.0 mld for optimal operation. The townwas planning a second phase to connect 3,500 more households. At the time of completion ofthis PPER, in 2007, the two towns had passed a bylaw to make people connect and another fewthousand households had connected.

38. Regarding solid waste, a composting plant for Ramanagaram and Channapatna wasplanned. However, detailed surveys completed as part of the solid waste management planindicated there would be insufficient volume to support a viable composting operation, and asanitary landfill site was developed instead. However, the OEM confirmed that the site was notoperating properly as a sanitary landfill, but was an open dump with just one tractor spreadingthe waste.

2. Part B: Road Improvement and Truck and Bus Terminals

39. In the towns visited by the OEM, especially Mysore and Tumkur, where roads anddrainage were major components, the improved roads and accompanying drains were found tobe in good condition, sometimes 4 years after installation. In Tumkur, where road and drainageimprovements covered most of the center of the town, officials said the component hadcompletely changed the towns character. The roads observed during the OEM were invariablyin good condition. The mission also observed that the southern bypass road in Tumkur and theouter ring road in Mysore were built to a good standard, and concurred with the view that theywould facilitate the orderly growth of the cities.

40. Mysore.The Project has had a significant impact in improving the internal and external

road system for Mysore through the (i) upgrading and improvement of city roads (48 roads for58 km), (ii) widening and strengthening the intermediate ring road (19 km), and (iii) constructionof a city bus terminal. The work could be carried out only on one bus terminal, as the land forthe other could not be acquired. Two contracts for the outer ring road and truck terminal wereawarded. However, during the execution the work on the truck terminal was removed from thescope as it was unlikely to be used. Instead, the western portion of the ring road (24.82 km) wastaken up. Thus, in addition to the eastern portion of 7.5 km, a total of 32.3 km was constructedunder the Project. However, some 9.4 km remained to be built at the time of the OEM tocomplete the ring road. Once this portion was completed, it was expected that truck traffic wouldincrease substantially. In the meantime, many industries were locating along the ring road(including a training center for Infosys). MUDA was also planning almost 30,000 housing sites invarious schemes, while the private sector planned 10,000. Due to the road, property values had

more than doubled in residential areas and almost quadrupled in industrial areas.

41. Tumkur.The Project constructed extensive local road and drainage improvement works(18 roads for 24 km) in Tumkur. In addition, a 10.5 km southern bypass road, including a railwayoverpass, was built. According to local officials, the roads in the center of the town used to bedirt and would turn to mud during the monsoons. Now the town center was dry and sanitary.The southern bypass road was also being well used.


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42. To improve traffic congestion within the city by moving truck parking and transshipmentof goods out of the city, the Project provided a truck terminal. However, truck operators wereunwilling to shift to the new location and the district administration was not prepared to restrictentry of trucks into the city. Tumkur had received state approval to convert the site to aresidential sites and services scheme by the time of the OEM. The OEM was shown the plansfor the site (147 serviced sites) and the financial plan. By 2007, KUIDFC reported that all

residential sites had been allotted and that corner and commercial sites were going to beauctioned. It is hoped that the conversion of the site to a housing area will allow the subprojectto break even.

43. Ramanagaram and Channapatna. This component included (i) 23 km of roads and30 km of drains in Ramanagaram, (ii) 25 km of roads and 35 km of drains in Channapatna,(iii) widening of 11 km of the Bangalore-Mysore highway from two to four lanes within themunicipal limits of the towns, and (iv) construction of a 78 meter two-lane bridge across theArkavathi River. It was well received by the population of the two towns.

44. A bus terminal for operation of private bus services was built half way between the twotowns to relieve traffic jams at the existing informal stops. Since the private bus operators

refused to shift their operations to the remote facility, the terminal remained unused. It wassubsequently transferred to the Karnataka State Road Transport Corporation in March 2005 tobe used as a bus depot.

3. Part C: Poverty Reduction

45. The OEM found the outputs of the slum upgrading schemes to be of variable quality,although they seemed to be generally well appreciated by residents. Roads and footpaths wereof variable standard, and many water taps were without spigots. Many drains were constructedwell but remained clogged with dirt, although some were cleaned at the time of the inspection.Low-cost sanitation (stand-alone toilets) had been built on most plots and functioned well.Several federations of self-help groups were visited, as well as the training center in Tumkur

and a computer training NGO in Mysore. In all instances, women and trainees were very proudto be participating and had gained a new outlook through increased self-confidence and self-esteem. Due to its success, the self-help group approach was replicated in other ADB projects.Although the component was passed on as a grant, other ADB TAs in India (TA 3344-IND)16have investigated whether there might be some element of cost recovery for the small loanportion.

46. Residential Sites and Services. The Project included provision for developing a totalarea of about 252 hectares of land in the original four project towns with roads, water supply,storm water drainage and sanitation facilities. At least 60% of the developed sites were to beallocated to low-income groups at affordable prices and the balance to middle-income groups.Four contracts were awarded: (i) 3,800 sites for Mysore, work completed, plots sold;

(ii) 1,831 sites at Tumkur, works still under construction with TUDA funds; (iii) 935 sites atRamanagaram, work completed; and (iv) 931 sites at Channapatna, work completed. Provisionof electricity to the Mysore, Ramanagaram and Channapatna sites was also scheduled to bedone under separate contract packages at the time of the field visit.

16ADB. 1999. Technical Assistance to India for the Strengthening of Microfinance Institutions for Urban andEnvironmental Infrastructure Finance. Manila.


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47. While all the sites in Mysore were sold, they had not been occupied by mid-2005 due tothe lack of electrification, although it had been contracted at the time of the OEM. The allotteeshad made their deposits some years previously and had been waiting to occupy the plots.To prevent speculation, the allottee cannot sell the plot for 10 years and must build a house on itwithin 2 years. The Project originally envisioned that HDFC would extend housing loans to theallottees of the residential sites and services schemes. However, this did not happen, mainly

because (i) the schemes were late in being completed, (ii) most allottees would not qualifyfinancially for HDFC loans, (iii) the schemes in Ramanagaram and Channapatna proved notvery attractive, and (iv) the land could not be fully acquired in Tumkur. In Ramanagaram andChannapatna, market demand did not materialize because the sites were some way out of townand plot costs were higher than the prices being offered by the private market in town (althoughthese were provided without services). The Ramanagaram City Municipal Council planned tosell the two schemes to Rajiv Gandhi Housing Development Ltd at the time of the OEM, forresale to the Beedi Rollers Association (low-cost cigarette makers), which would buy all thesmaller plots. KUIFDC reported in October 2007 that Rajiv Gandhi Housing Development hadbought the residential lots in Siddlakallu in Ramanagaram to develop low-cost housing asplanned. The Channapatna council planned to sell its sites to local private factories at the timeof the OEM. KUIDFC reported that the Karnataka Housing Board intended to develop a layout

adjoining the layout of KUIDFC at Sunnagatta in Channapatna, and take over this layout. InTumkur, after an initial expenditure of Rs1.75 million, the work was abandoned and the contractclosed as land was not available. Work had since been restarted with funds from TUDA.However, some 427 of the original allottees have withdrawn their applications, while theremaining 500 have paid in full. Given the foregoing problems in the sale and occupation of theresidential sites and services schemes, it seems that (i) adequate market studies were notcarried out during project design, (ii) difficulties of land acquisition were not foreseen, and(iii) coordination of works was not adequately carried out.

48. Slum Upgrading and Low-Cost Sanitation.Some 55 slum areas were selected underthe Project for provision and upgrading of basic urban services including water supply,sanitation, roads, drains, solid waste disposal facilities and street lighting, plus facilities such as

public toilets and community centers. All facilities included in the program were identified by theconsultants, municipalities and implementing agencies with the full participation of thecommunities, using local NGOs and community-based organizations as key facilitators.Contracts were awarded for (i) 20 slums in Mysore, (ii) six slums in Tumkur, (iii) six slums inRamanagaram, (iv) seven slums in Channapatna, and (v) 13 slums in Mandya and three inMaddur. Most of the households have been provided with on-site toilet units under the low-costsanitation program (see para. 49). All the works were completed and the living environment ofthe residents of these areas has improved. While most slum areas are maintained by theKarnataka Slum Clearance Board, the MCC retained responsibility for Gousia Nagar, a large70,000-person low-income area.

49. Low-Cost Sanitation.The original Project planned for some 23,700 low-cost sanitation

units, mostly in the slums of the project towns. It also provided for a strong role for local NGOsto participate in beneficiary identification and community participation aspects of the program,with the help of the Projects community development officers. A particular emphasis wasplaced on using the NGOs to motivate and educate women on the proper use of the facilities.Individual toilet units were provided to families below the poverty line, through beneficiaryparticipation (50% of unit cost from the Project, with 25% from the ULB upfront and 25% as aloan from the ULB to the beneficiary). The targets were revised and 16,154 low-cost sanitationunits were completed in the six project towns.


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Table 3: Low-Cost Sanitation Units

Item Mysore Tumkur Ramanagaram Channapatna Mandya Maddur Total

OriginalTarget

8,750 8,710 2,770 3,470 2,000 0 25,700

RevisedTarget

8,750 3,300 1,910 3,368 163 13 17,504

Completed(%)

8,184(100%)

3,020(92%)

1,910(100%)

2,864(85%)

163(8%)

13 16,154(92%)

Source: Karnataka Urban Infrastructure Finance and Development Corporation.

50. Officials in each of the towns felt that the low-cost sanitation component was a greatsuccess, bringing a sense of privacy, self-esteem and ownership to the beneficiaries. All theunits inspected (often marked ADB) were kept clean and often used for bathing.The component was expanded by KUIDFC to KUDCEMP (6,000 low-cost sanitation unitsconstructed) and other projects.

51. Community participation. KUIDFC identified a set of NGOs for each town andagreements were signed with each of them. Twenty NGOs, under the supervision of KUIDFC

social development officers, implemented the agreed social action programs under thethree broad categories of health education, skills training and income generation, with aparticular focus on women and children in the slum areas of the Project. KUIDFC also decidedto integrate with the training programs of other government agencies such as the Department ofIndustries, Mass Education and Information Technology. In all the towns, emphasis was oncreating self-help groups mainly consisting of women of low-income families residing in slums.When the approach was tested in earnest about 2 years before project completion, 722 self-help groups were created. This mobilized about Rs15 million in savings, resulting in thedisbursement of Rs56 million in loans. This effort has since been expanded to KUDCEMPwhere 2,400 self-help groups have been formed with Rs32 million in savings and Rs129 millionin loans until mid-2005. Membership in a self-help group has contributed to significant positivechanges in the lives of an estimated 12,000 women (and their families). Of the groups formed,

less than 5% disintegrated. The Projects self-help groups covered 40% of the urban poor in theshort period that the Project was active (see Appendix 2).

4. Part D: Development of Industrial Sites and Services

52. Ramanagaram. Construction of the industrial site and service subproject could not betaken up due to non-availability of land and was removed from the scope of the Project.

53. Tumkur. The Karnataka Industrial Area Development Board developed 108 industriallots on 216 acres with $1.1 million in ADB financing. Of these, 86 plots have been allocated and15 industries were operating at the time of the OEM. Significantly, a large Indian and German

joint venture has located on one of the larger sites, employing some 350 workers. After a slow

start, the industrial zone seemed to be taking off, with about 20 units allocated in the 2 monthsbefore the mission. It was expected that full occupancy would be achieved by the end of 2005,thereby creating further economic growth and job opportunities in Tumkur.

5. Part E: Implementation Assistance and Institutional Strengthening

54. There was a general consensus among KUIDFC staff that the Project had providedvaluable experience, which was beneficial to themselves and the EA as a whole. A largenumber of KUIDFC staff remained with the EA throughout the Project. Despite the transfer of


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several of the most senior staff, the experience gained during the Project by and large has beenretained in KUIDFC and the former PIUs. In addition, with the exception of some of theULB staff, the institutional memory of the Project was good in the towns. Even new municipalcommissioners knew the project components well, as their engineering and financial staff hadnot changed.

55. Training and Capacity Building.KUIDFCs Training and Capacity Building Cell beganits training courses in March 1999 and conducted training programs in the areas of qualitycontrol and implementation, public awareness and capacity building of ULBs. The latter includedmeetings with ULBs on implementation of their management action plans, development ofcomputerization plans, reviews of organization and staffing, and attending council meetings toenhance awareness regarding repayment and O&M requirements under the Project. In thesecond phase, training on attitudinal change was imparted to all ULBs. Of the targeted2,688 employees of the six ULBs, 1,966 employees received training during 2002.

56. Implementation of Management Action Plans. Management action plans weredeveloped for all project ULBs by the project management consultants and approved by thestate Government. However, progress was not very satisfactory. Most of the ULBs did not

achieve revenue collection targets. Subsequently, KUIDFC employed a private company during2003 to prepare updated plans with a special focus on measures required to upgrade thefinancial viability of the project towns. Implementation of the plans will continue beyond theproject period.

57. Benefit Monitoring and Evaluation Study.According to a comprehensive report by aprivate firm in April 2003, awareness of the Project and the benefits gained from it was highamong beneficiaries, local officials and the public at large. The study also helped the Project inmaking some mid-term corrections in order to capture the perceived demand and immediateneeds of beneficiaries, especially in slum areas. Appendix 3 contains a summary of the impactsmeasured by the study, which are an indication of the degree of acceptance of the Project.

5. Part E: Low-Cost Housing Finance

58. The low-cost housing finance component was included primarily to offer housing loans tothe beneficiaries of the Projects residential sites and services schemes. However, as seenabove, the schemes were substantially delayed and were not occupied at the time of the visit.At the request of HDFC and the state Government, the original scope was therefore modified toinclude the entire state. Although HDFC committed to making loans from its own resources tolow-income families once they were allotted plots, only a small percentage of families qualifiedfor the loans due to the stringent income and employment requirements of HDFC loans. It wasevident that there was no collaboration between the urban development authorities (MUDA andTUDA) and with the Karnataka Slum Clearance Board in allotting plots to families who wouldqualify for HDFC loans.

59. Based on ADBs PCR for the housing finance component, the total number of projectbeneficiaries was 7,511, including 4,885 low-income households (65%, exceeding the target of50%). About 70% of the beneficiaries were in urban areas. Almost 85% belonged to theemployed salaried class, with the remainder being housewives, pensioners, retirees and self-employed. Most of the loans were in the range of Rs25,000 to Rs300,000, with more than 70%in the Rs100,000 to Rs300,000 range. The weighted average loan-to-cost ratio was about 53%,signifying a substantial investment by the borrowers. The households provided down paymentsand their own investment from savings, inheritance and contributions from all members for the


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common purpose of owning a house. Overall, the quality of life of the beneficiaries improvedsubstantially through the loans, with larger houses, a better locality, improved water supply andsanitation facilities, larger plot sizes and a cleaner environment. The beneficiaries were highlysatisfied with house ownership. Loan repayment was 100%. Details of the beneficiaries andloan disbursements are shown in Appendix 4.

60. This PPER downgrades the rating of highly successful given in ADBs PCR for thehousing finance component to successful. Although the RRP and loan agreement had notspecified unequivocally that the funds were to go to poor households in the informal sectorrather than the formal sector, this was the real intention as NGOs were to be employed toidentify and assess suitable poor households without guaranteed income and documentedearnings. HDFC claimed that it could not find NGOs capable of doing this, and that it hadtherefore chosen to provide the loans to low-income households in the formal sector, such asgovernment employees in the police service and in state-owned corporations. Furthermore, theRRP had specified in its Appendix 4 that the beneficiaries of housing loans would include thosewho applied for one of the 4,120 plots of the five residential sites and services to be developedunder the Project. However, these sites were all developed far too late for HDFC and it claimedat the time of the OEM that even if the sites had been completed in time, HDFC would not have

been able to give more than 10% of these plot owners a housing loan under the conditions ofthe loan. Criteria for access to the sites had not been linked to criteria for housing loan eligibility.Thus, the design of the housing finance component within the total Project was not flawless.The housing finance loan nevertheless came just in time for the low-income groups in the formalsector. After the closing of the Projects housing finance facility in 2000, HDFC has had moredifficulty awarding loans to low-income borrowers. The Urban Land Act was repealed in 2001,and the Government has since had to pay for land acquisition at market rates. Land prices havegone up dramatically in Bangalore and even some other towns, such as Mysore, Mangalore andHubli. It is now virtually impossible for low-income groups to access land legally, and thereforeto borrow for house construction. Lending to such groups for housing through NGOs has notprospered. HDFC so far is working with two small NGOs only, one in Bangalore and one inMysore.

G. Consultants and Contractors

61. This PPER agrees with the findings of ADBs PCR and largely concurs with itsassessment of consultants and contractors. The performance of the consultants was marginallysatisfactory. Drawbacks were that many consultants were changed during the Project, whichdelayed detailed design of the various components. This put pressure on KUIDFC staff.The consultants delay in finalizing and issuing technical drawings, frequent design changes andlack of proper pre-design investigations led to problems during construction. This was worsenedby a lack of familiarity with and understanding of ADBs changing procurement procedures,guidelines and quality control requirements. However, with increasing capacity in KUIDFC, thedomestic consultants improved their performance over time.

62. As noted by the PCR, contractors sometimes did not understand the requirements forquality, methodology, cash flow and management in an urban environment, which involvesinconveniences to the public and coordination with various other service providers and utilitydepartments. The contractors lacked works and financial planning, and most contracts werecompleted with long delays. The contractors did not always understand the contract provisions,which delayed settlement of variations and bills for payments. Toward the Projects end,the contractors performance improved.


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H. Loan Covenants

63. At project completion, most of the loan covenants were complied with, although therewas one which had not been complied with, four only partly complied with, and three still beingcomplied with (PCR, Appendix 8). Importantly, there was only part compliance with thecollection efficiency covenant. This covenant mandated the prompt collection of all revenues

due to ULBs and the maintenance of a collection efficiency ratio of 90 days arrears from1 January 1997. Only some of the project towns complied with this requirement and only forcertain years. At the time of the OEM, the project towns were still encountering difficulties inmeeting the stipulated collection efficiency ratio.

I. Policy Framework

64. The PCR concluded that the major reason for non-compliance or late compliance withloan covenants was that it proved impractical to implement policy reforms only in the Projecttowns and not in the rest of Karnataka state. When the Government realized this, it began toimplement the reforms in all 63 cities of the state. The same was the case for the Nirmal Nagarprogram, relating to application of information technology to property tax reforms. This was

started through the Project but was expanded under KUDCEMP.17

III. PERFORMANCE ASSESSMENT

65. Overall Assessment.The Project is rated successful,although at the lower endof thescale (Table 4). This is based on assessments of relevance and effectiveness of the Project,although with lower efficiency and lower likelihood of sustainability of the outcomes.

Table 4: Assessment of Overall Project PerformanceCriterion Weight (%) Assessment Rating Value Weighted RatingRelevance 20 Relevant 2 0.4Effectiveness 40 Effective 2 0.8

Efficiency 20 Less efficient 1 0.2Sustainability 20 Less likely to be

sustainable1 0.2

Overall rating 100 Successful 1.6Note: Weights used are different from those recommended by OEDs guidelines. More weight was given to the

positive unintended impact of the Project (para.79). OEDs Guidelines for Preparing Performance EvaluationReports for Public Sector Operations define projects as successful when their weighted rating has a valuebetween 1.6 and 2.7.

Source: Operations Evaluation Mission.

66. Relevance.The Project was in line with ADBs country strategy and the GovernmentsEighth Five-Year Development Plan. 18 However, the Projects objective was not realistic inaiming to achieve decentralization of population growth and economic activity in Bangalore by

addressing basic infrastructure deficiencies and related environmental aspects in selectedurban areas in the Bangalore sub-region. More direct support for economic activity in the townschosen would have been needed to achieve the objective. This PPER does not assess therelevance of the Project exclusively against the specific objective, as it sees a need for

17ADB. 1999. Report and Recommendation to the President to the Board of Directors on a Proposed Loan to Indiafor the Karnataka Urban Development and Coastal Management Project. Manila. (Loan 1704-IND, for $175 million,approved on 26 October).

18The PCR has provided more detailed justification for this, which this PPER concurs with and does not repeat here.
http://u/_ADB/OED/B/WK/PPER%20Karnataka/Re-Issue%20Aug%202008/Operationshttp://u/_ADB/OED/B/WK/PPER%20Karnataka/Re-Issue%20Aug%202008/Operations


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development of the six towns independent of this, and such development would also have beenin line with ADB and government strategies at the time.

67. The Project had a complex design, with physical subprojects often of a different nature,and not counting the 55 slum upgrading schemes which in themselves could be seen as miniIUDPs. If the Project was to be a true IUDP, it should have concentrated on water supply,

sewerage, interior roads and drainage, solid waste management and slum upgrading, includinglow-cost sanitation, perhaps in fewer towns and with the clear objectives of urban developmentand poverty alleviation, which were policy goals of the Government and ADB at the time. In theevent, the overall Project objective of relieving pressure on Bangalore became obscure.Nevertheless, this PPER assesses the Project overall as relevant.

68. Effectiveness. With the exception of the truck terminal in Tumkur and the bus terminaland the industrial site in Ramanagaram, the Project achieved the physical completion of all sub-components. With the further exception of the residential sites and services schemes, thecompleted subcomponents were in use by the time of the OEM. The Project as a wholecontributed to improving the living environment for the majority of the population in the Project

towns. The slum improvement component along with the low-cost sanitation and communitydevelopment programs, such as those supporting womens self-help groups, directly benefitedthe poor and vulnerable sections of society. Two benefit monitoring and evaluation surveys, oneconducted in 1999 and another in 2003, documented mostly positive responses frombeneficiaries in the four towns (Appendix 9 in the PCR and Appendix 4 in this PPER). When thecomponents and subcomponents are rated individually in terms of completion schedule, workquality and utilization, the composite score, weighted by cost of the components, is satisfactory.Thus, the Project overall is assessed as effective.

69. Efficiency. From a financial and economic point of view, the water supply and outer ringroad in Mysore achieved figures beyond the financial and economic threshold. Similarly, thesouthern bypass road in Tumkur achieved a significant economic internal rate of return (EIRR).

However, due to the heavy investment for relatively small towns, the water supply inRamanagaram and Channapatna did not achieve either the financial internal rate of return(FIRR) or the EIRR thresholds. STPs in all towns remain underutilized and it is uncertainwhether they will achieve their design capacity by 2011. For these reasons, the Project isassessed as less efficient.

70. The OEM reviewed and accepted the EIRR calculations and assumptions of the PCR forthe Mysore water supply (Table 5). However, given that the PCR came to substantially higherEIRRs for the Mysore outer ring road and the Tumkur bypass road than those calculated atappraisal, the OEM re-evaluated the EIRRs for these two components. Both roads opened upnew areas for residential and industrial uses. In the absence of vehicle counts and operatingcosts, the methodology used by the PCR and the PPER was based on increases in raw land

costs. However, the PCR did not distinguish between increases in land costs due to the normaloutward growth of the cities and the incremental increase due to the construction of thetwo roads. The latter was estimated based on conversations with local officials, MUDA andTUDA engineers and local residents. The results of the re-evaluation are therefore significantlylower than those of the PCR, with an EIRR for the Mysore outer ring road of 45% and for theTumkur bypass road of 38%.


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Table 5: Comparison of Economic Internal Rates of Return(%)

Project Component RRP PCR PPER

MysoreWater supply 13.6 16.4 16.4Truck terminal

Intermediate ring road 21.5Outer ring road 53.1 73.0 45.0

Ramanagaram and ChannapatnaWater supply 10.3 (0.75) Neg.Community and commercial center

TumkurSouthern bypass road 32.9 96.0 38.0

PCR = project completion report, PPER = project performance evaluation report, RRP = report andrecommendation of the President.Note: Numbers in parenthesis are negative.Sources: ADB. 2006. Project Completion Report for the Karnataka Urban Infrastructure Development Projectin

India. Manila; ADB. 1995. Report and Recommendation of the President to the Board of Directors onProposed Loans and Technical Assistance to India for the Karnataka Urban Infrastructure

Development Project. Manila;and staff estimates.

71. Sustainability. Low water tariffs and minimal O&M remained a problem in the water andsanitation sector. Based on the loan repayment schedule prepared by KUIDFC, debt repaymentobligations of the project towns ranged from 43% of the operating revenue to almost 115%. In1997, the state Government decided that all project payments would be made to and retainedby KUIDFC in order to create a revolving fund, while the state serviced the total loan. Sincesuch an arrangement does not stimulate sustainable debt financing by the ULBs, the Project isassessed as less sustainable.

72. The overall sustainability of the Project outcomes is in doubt. Water supply andsanitation components are the critical issues. From an engineering point of view, the water

supply systems in the four original towns are sustainable, provided there is adequate O&M.Similarly, assuming an increase in connections in Tumkur and Ramanagaram and Channapatna,the sewer systems will become more viable. However, before the STP for Districts A and D inMysore can become viable, necessary repairs to the pumps must be done and more qualifiedO&M personnel put in place.

73. With respect to funding overall O&M for the Project, the state Government decreed in1997 that all borrowing agencies were to make their loan repayments to KUIDFC, which wouldthen be permitted to retain the payments in order to create a revolving fund for O&M andfinancing further infrastructure projects in the state. Thus, the state would make all loanrepayments. Up to 30 June 2005, total repayments of principal and interest amounted toRs463 million of a due total of Rs833.6 million. MUDA in Mysore was the only agency ahead onscheduled payments.19 While such an arrangement runs counter to the principle of sustainableproject financing, for small towns such as Channapatna, Ramanagaram, and Tumkur, morerealistic debt projections should be carried out during project design based on alternativesubproject packages. A final subproject affordable to the towns can then be decided.

19In October 2007, KUIFDC reported that the Karnataka Industrial Areas Development Board had fully repaid theloan and MUDA was still regular in its repayments. Among the other ULBs, TUDA and MCC had made somepartial repayments. The Government of Karnataka was readjusting a part of the State Finance Commission grants.The repayments were to contribute to an Urban Infrastructure Development Fund.


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74. On the positive side, ownership of project components from the bottom up (i.e., by thepeople for the low-cost sanitation units and slum-upgrading schemes; by the ULBs for the watersupply, sewerage, roads and drainage components; and by the commitment of the Project andthe state Government to remain involved in order to assure the operational and financialsuccess of the Project) is highly relevant to project sustainability. In addition, components suchas the low-cost sanitation and slum upgrading were wholly integrated with the socio-cultural

setting of the beneficiaries.

75. The financial calculations and assumptions of the PCR were reviewed and accepted bythe OEM. Table 6 compares the FIRRs contained in the RRP, the PCR and recalculated asnecessary for the PPER. During project preparation, FIRRs were calculated for sevencomponents as well as the two planned industrial sites and all six residential sites and servicesschemes. During project implementation, several components were (i) dropped from the Project,such as the Mysore truck terminal and the Ramanagaram industrial site; (ii) not completed oroccupied, such as all the residential sites and services schemes; or (iii) operating at a loss, suchas the Ramanagaram community commercial center. Hence, the ADB PCR only calculatedFIRRs for the two water supply projects in Mysore and Ramanagaram.20 It can be seen fromTable 5 that the FIRRs for the water