Document of

The World Bank

Report No. 13506-IN

STAFF APPRAISAL REPORT

INDIA

TAMIL NADU WATER RESOURCES CONSOLIDATION PROJECT

MAY 19, 1995

South Asia Department IIAgriculture and WaterOperations Division

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CURRENCY EOUIVALENTS

Currency Unit - Rupees (Rs.)US$1 = Rs. 32

FISCAL YEAR

Government of India, State - April 1 to March 31

WEIGHTS AND MEASURES (METRIC SYSTEM)1 /

1 meter (m) = 3.28 feet (ft)

1 kilometer (km) = 0.62 miles (mi)

1 hectare (ha) = 2.47 acres (ac)1 million cubic meters (Mm3) = 810 acre-feet (ac-ft)1 million acre-feet (MAF) = 1,235 Mm3

1 thousand million cubic feet (TMC) = 28.32 Mm3

I cubic foot per second (cfs or cusec) = 0.028 Mm3 per second (cumec)

1 cfs = 102.9 m3 /hr

1 ton = 1,000 kilograms (kg)

1/ The Metric System has been used in most cases. However, non-metricunits are used in some instances, and were also used in this report in casesin which a conversion to the metric system may confuse the reader.

ABBREVIATIONS AND ACRONYMS

AEU Agricultural Engineering Department

AMG Asset Maintenance Grant

ARAPB Annual Review, Action Plan and Budget

BER Bid Evaluation Report

CE Chief Engineer

CAC Contract Award Committee

CWC Central Water Commission

EAP Environmental Action Plan

EA Environmental Assessment

EIC Engineer-in-Chief

ERAP Economic Rehabilitation Action Plan

ERGC Economic Rehabilitation and Grievance Committee

ERR Economic Rate of Return

FAOCP Food and Agriculture Organization's Cooperative Program

PO Farmer Organization

GO Government Order

GOI Government of India

GOTN Government of Tamil Nadu

IAS Indian Administrative Service

ICB International Competitive Bidding

IDA International Development Association

IHH Institute of Hydraulics and Hydrology

IMTI Irrigation Management and Training Institute

IRDP Integrated Rural Development Program

IWS Institute of Water Studies

KWSP Krishna Water Supply Project

LAER Land Acquisition and Economic Rehabilitation

LAERAP Land Acquisition and Economic Rehabilitation Action Plan

LAERO Land Acquisition and Economic Rehabilitation Office

LDP Letter of Development Policy

M&E Monitoring and Evaluation

MIS Management Information System

MOU Memorandum of Understanding

NCB National Competitive Bidding

NHP National Hydrology Project

NGO Non-Governmental Organization

NWMP National Water Management Project

O&M Operations and Maintenance

OFD On-Farm Development

PAP Project Affected Person

POM Plan of Operations and Maintenance

PWD Public Works Department

PY Project Year

RAC Research Advisory Committee

RG Rehabilitation Grant

RGF Research Grant Fund

SOE Statement of Expenditure

TNEB Tamil Nadu Electricity Board

TWAD Tamil Nadu Water and Drainage Board

WRCRC Water Resources Control and Review Council

WRCP Water Resources Consolidation Project

WRO Water Resources Organization

WRRF Water Resources Research Fund

WSCC Water Services Charges Committee

WUA Water User Association

INDIA

TAMIL NADU WATER RESOURCES CONSOLIDATION PROJECT

Staff Appraisal Report

Table of Contents

CREDIT AND PROJECT SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . i

I. WATER RESOURCES SECTOR

Introduction . . . . . . . . . . . . . . . . . . . . . . . . 1

Water Resources in India . . . . . . . . . . . . . . . . . . 1

Development Priorities . . . . . . . . . . . . . . . . . . . 2

Tamil Nadu State ...... ... .. .. ... .. .. . . 2

Experience with Past Bank Lending . . . . . . . . . . . . . . 5

II. THE PROJECT

A. Rationale for IDA Involvement . . . . . . . . . . . . . . 6WRCP Preparation and Policy Reforms . . . . . . . . . . 7

B. Project Obiectives and DescriDtion . . . . . . . . . . . 8

Project Objectives . . . . . . . . . . . . . . . . . . 8

Project Description . . . . . . . . . . . . . . . . . . 8

C. Detailed Features . . . . . . . . . . . . . . . . . . . . 9

System Improvement and Farmer Turnover . . . . . . . . 9

Scheme Completions . . . . . . . . . . . . . . . . . . 12

Water Planning, Environmental Management and Research . 14Water Planning . . . . . . . . . . . . . . . . . 14

Environmental Management and Action Plan . . . . 14

Water Sector Research . . . . . . . . . . . . . . 15

Institutional Reforms . . . ............. . 16

Land Acquisition and Economic Rehabilitation . . . . . 17

D. Policy Reforms . . . . . . . . . . . . . . . . . . . . . 19Policy Reform Program . . . . . . . . . . . . . . . . . 19

State Water Policy . . . . . . . . . . . . . . . . . . 20

Expenditure Prioritization . . . . . . . . . . . . . . 20

Maintenance Funding . . . . . . . . . . . . . . . . . . 21

Cost Recovery . . . . . . . . . . . . . . . . . . . . . 21

Groundwater Management . . . . . . . . . . . . . . . . 22

III. COST ESTIMATES, FINANCING AND DISBURSEMENTS

Costs and Financing . . . . . . . . . . . . . . . . . . 23

Program and Project Investment Costs . . . . . . 23

Project Financing . . . . . . . . . . . . . . . . 24

Procurement . . . . . . . . . . . . . . . . . . . . . . 25Procurement Management . . . . . . . . . . . . . . . . 27

Disbursement . . . . . . . . . . . . . . . . . . . . . 29

Retroactive Financing and Special Account . . . . . . . 29

Accounts and Audit . ................. . 29

IV. PROJECT IMPLEMENTATION AND MONITORING

Organization and Management . . . . . . . . . . . . . . . . . 30

Training and Technical Assistance . . . . . . . . . . . . . . 30

Management of Farmer Organization . . . . . . . . . . . . . . 31

Management of Land Acquisition and Economic Rehabilitation . 32

Monitoring and Evaluation .... . . . .... . . . . . . . 32

Project Reviews and Reporting . . . . . . . . . . . . . . . . 33

Supervision . . . . . . . . . . . . . . . . . . . . . . . . 34

V. BENEFITS, JUSTIFICATION AND RISKS

Project Benefits . . . . . . . . . . . . . . . . . . . . . . 34

Economic Analysis . . . . . . . . . . . . . . . . . . . . . . 36

Project Risks ...... .. .. .. ... .. .. .. .. . 36

Program Objective Categories ............................... 37

VI. AGREEMENTS AND RECOMMENDATION . . . . . . . . . . . . . . . . . . . 38

MAP: IBRD No. 26167

ANNEXES

Annex 1 Policy Reform Program

Annex 2 Water Resources Organization - Institutional Reforms

Annex 3 Water Planning, Allocation and Management

Annex 4 System Improvement and Farmer Turnover

Annex 5 Scheme CompletionsAnnex 6 Tamil Nadu State Water Policy

Annex 7 Environmental Action Plan

Annex 8 Water Resources Research Fund

Annex 9 Land Acquisition and Economic Rehabilitation Plan

Annex 10 Baseline Survey Terms of Reference

Annex 11 Project Cost Tables

Annex 12 Schedule of Disbursements

Annex 13 Implementation and Supervision Plan

Annex 14 Economic AnalysisAnnex 15 Criteria for Preparation and Selection of Investment

Annex 16 Maintenance, Water Charges and Cost RecoveryAnnex 17 Water and Agriculture in Tamil Nadu's Economy

Annex 18 Criteria for NGO Selection

Annex 19 Documents Available in Project File

This report is based on the findings of an IDA/FAOCP Appraisal Mission which visited India in

March 1994. The mission comprised Messrs./Mmes.: K. Oblitas (Task Manager), A. Pai, G.

Fauss, A. Subramanian, E. Schaengold, T. Estoque, F. Grohs, S. Thangaraj, and W. Plummer

(Consultant); and S. Rajagopal, N. Sugimura, and T. Lamrock (FAOCP). Additional

contributions were made by W. Price, R. Crooks, R. Zwieg, X. Fang, S. Subramanian, N. Raman,

T. Sharma, and Consultants D. Groenfeldt, P. Rogers, B. Sunderesan, S. Lele, S. Elumalai, I.

Moorehouse and C. Wood. The Department Director is Mr H. Vergin, and Division Chief, Mr S.

Barghouti. Peer reviewers were Messrs W. Ochs and J. Simas (Bank) and Ms R. Meinzen-Dick

(IFPRI).

INDIA

TAMIL NADU WATER RESOURCES CONSOLIDATION PROJECT

I. CREDIT AND PROJECT SUMMARY

Borrower: India, Acting by its President.

Executing Agency: The State of Tamil Nadu.

Amount: IDA Credit of SDR 181.9 million

(US$ 282.9 million equivalent).

Terms: IDA: Standard with 35 years maturity.

On-Lending Terms: Government of India would make the proceeds of the

Credit available to the State of Tamil Nadu (GOTN)

under standard arrangements for developmental

assistance to the States of India. GOI would assumethe foreign exchange risk.

Project Description: The project would be a sector investment loan,

financing an agreed state-wide program to improve theproductivity and sustainability of Tamil Nadu's

irrigation sector, to introduce multi-sectoral water

planning, to integrate farmers in irrigation

management, and to strengthen the state's

institutional and technical capability in water

development, management and planning. Project

components would be: (a) Systems Improvement and

Farmer Turnover to improve productivity through

rehabilitation and modernization of the existing

irrigation systems integrated with participation of

farmers and turnover of operations and maintenance

(O&M) of improved distributaries, as well as fundingof O&M, to water user associations (55% of investment

base costs); (b) Scheme Completion Investments to

complete viable investment on existing schemes forincreased availability and reliability of water (29%

of investment costs); (c) capacity building in Water

Planning. Environmental Management and Research tointroduce multi-sectoral water planning, incorporate

environmental management in all aspects of water

planning, investment and management, and to enhance

research in the water sector (8% of investmentcosts); (d) Institutional Strengthening of Tamil

Nadu's Water Resources Organization (WRO) to

strengthen capabilities in all professional andmanagement areas (7% of investment costs); and (e)

associated Land Acauisition and Economic

Rehabilitation for project affected persons (1% ofinvestment costs). The above investments are

supported by recent issuance by GOTN of a State WaterPolicy defining its new, broader objectives in the

water sector, an institutional reorganization to

establish WRO as a specialist state water agency,

stepped up funding by GOTN of maintenance to full

required levels and reordering of state expenditure

priorities to emphasize maintenance and improved

productivity of existing systems rather than new

construction.

Project benefits: The project would enhance agricultural production on

about 0.7 million ha (50% of the state's surface

irrigated area) directly benefitting some 4 million

persons, of which 70% occupy small and marginal farms.

Irrigation would be put on a sustainable footing

through rehabilitation and modernization of the

systems linked with farmer participation and upgradedmaintenance and water management. A specialist state

water agency would be created and strengthenedincluding in water planning and environmental

management, with broad and long-term benefits stemming

from multi-sectoral water planning and management,

essential for Tamil Nadu's present and long-term

economic development and its sustainability. Farmer

participation and turnover would forge a privatesector role in management of infrastructure and

contain organizational features to fosterparticipation of women and minorities in irrigation's

management and benefits.

Project Risks: First, the fundamental change in water resources

management will require continued political will and

sustained effort to be successfully implemented. Key

features required (state water policy, institutional

reorganization, reordering of expenditure priorities,

staff training and all key project related decisions andGovernment announcements) were established by GOTN

during project preparation. The extensive reforms

already implemented provide a strong basis for projectstart-up and some confidence regarding the critically

important continuation of GOTN's commitment. Second,

the systems improvement and farmer turnover program,while based on successful piloting, is innovatory on

this scale. The project includes special monitoring and

management features and intensive consultancy, training

and NGO assistance, and provisions for adapting the

farmer turnover component as experience is gained.

Third, aeneral imDlementation capacitv constraints ofWRO have been addressed in the project's institutional

strengthening, including special arrangements forimplementation monitoring and financial management: in

other respects, WRO has proven capability and successfulexperience in undertaking the kind of physical

activities to be implemented under the project.

iiiEstimated Costs and Financina:

Local Foreign Total Local Foreign Total

Rs M -------- ------- US$ M ---------

Proiect Investment Costs

System Improvement &

Farmer Turnover 4,001 577 4,578 125.1 18.0 143.1

Scheme Completions 2,195 264 2,459 68.5 8.3 76.8

Water Planning, Environ-

mental Management and

Research 309 364 673 9.6 11.4 21.0

Institutional

Strengthening 419 146 566 13.1 4.6 17.7

Land Acquisition &

Econ. Rehabilitation 123 3 126 3.8 0.1 3.9

Total Baseline Costs 7.047 1.354 8.401 220.1 42.4 262.5

Physical Contingencies 670 99 769 20.9 3.1 24.0

Price Contingencies 1,956 308 2,263 25.9 3.2 29.1

Total Project

Investment Costs 9.673 1.760 11.433 266.9 48.7 315.6

WRO Recurrent Costs 5,372 982 6,354 148.3 27.1 175.4

Total Program Costs 1 15,045 2.742 17.787 415.2 75.8 491.0

Financina Plan:

Local Foreicn Total

----------- US$ Million -

Project Investment Costs

GOTN 32.7 0.0 32.7

IDA 234.2 48.7 282.9

WRO Recurrent Costs (GOTN) 148.3 27.1 175.4

Total Program Costs 415.2 75.8 491.0

Expected Disbursements:

IDA Fiscal Year

(US$ million) 96 97 98 99 2000 2001 2002

Annual 27.6 31.2 44.6 50.9 51.0 46.7 30.9

Cumulative 27.6 58.8 103.4 154.3 205.3 252.0 282.9

Poverty Category: Not Applicable.

Economic Rate of Return: 17%

MAP: IBRD No.26167 - INDIA: Tamil Nadu Water Resources Consolidation Project.

1 Including taxes and duties equivalent to US$34.4 million.

TAMIL NADU WATER RESOURCES CONSOLIDATION PROJECT

I. WATER RESOURCES SECTOR

Introduction

1.01 The Tamil Nadu Water Resources Consolidation Project (WRCP) would assist

Tamil Nadu state to better plan, manage and develop its water resources and to

improve the productivity of the irrigation sector. The project would fulfil a

critical need. The state is water short, severely so in some areas, and hasnearly fully developed its exploitation potential. Future economic

development will depend on the best allocation of water between sectors and

efficient use by the main sectoral users, especially agriculture. Two

principal needs are catered for under the project. First, comprehensive waterplanning on a river basin basis and across sectors is required. Second, for

the largest user of water - the agriculture sector - which consumes some 75%

of water, irrigation's productivity must be enhanced to improve agriculturalgrowth while still ensuring the growing water needs of municipalities,

industry and other uses.

1.02 Under the project, a formerly construction oriented Public WorksDepartment (PWD) would be refocussed and strengthened as a state water agencyresponsible for multi-use water planning and for providing irrigation,

drainage, flood control and bulk water supply services. Expenditures would berefocussed to emphasize maintenance and modernization of existing facilities,

and beneficiary participation linked with cost recovery would be integral tothe service improvements. The new approach necessarily requires substantial

institutional and policy reforms for the water sector which Tamil Nadu has

already commenced. The project would assist Government of Tamil Nadu (GOTN)

to implement these objectives including the funding of the associated physical

and institutional investments.

Water Resources in India

1.03 Water is an increasingly scarce resource in India. Its management in

terms of physical, economic and environmental needs is critical to economicdevelopment. India's water resources are distributed unevenly, both spatially

and seasonally. In many states, including Tamil Nadu, development of surface

and groundwater is reaching its physical limits. Water needs to be planned

and managed holistically: planning needs to be on a multi-sectoral basis, byriver basin, recognizing the interlinkages between surface and groundwater,

and including environmental as well as quantity considerations.

1.04 Competing Uses of Water. Irrigation is the largest user of water inIndia (about 93% of present gross water use). However, the National Water

Policy (Ministry of Water Resources, 1987) gives the first priority to the

provision of domestic water supplies for urban and rural populations and

assuring water supplies for livestock. Competing demands arise from industry,thermal and hydro-power, fisheries and navigation. In addition, minimum flows

on rivers for flushing pollutants, dilution of waste water, and other

environmental concerns limit the operation of facilities. The Central WaterCommission (CWC, 1988) estimated that community needs would double, and

industrial and power requirements would increase almost seven-fold, by 2025.

While the total water demand for community use (forecast to be 40 BCM/yr in

2

2025) is not high compared to the total water resources (930 BCM/yr in 2025),

localized and regional demand can lead to severe shortages, particularly forurban areas. Thus, in future, competing uses are likely to limit the water

available for agriculture and irrigation, particularly near major metropolises

and in dry regions. These increasing demands could also force fundamental

changes in irrigation systems, cropping patterns and water use efficiency.

1.05 Agriculture and Irrigation. Agriculture is a key sector in India's

economy, contributing about 35% of GDP and 65% of employment. Annual

agricultural growth has been modest at 2.6% p.a. over the last two decades.

India has a land area of 3.3 million km2 of which about 40% is cultivatable,

and 20% is irrigated. Irrigation has been the major source of agricultural

growth, and the pursuit of India's goal of food self-sufficiency has been

based on massive investment in irrigation. The potential of irrigation,however, has been constrained by inadequate attention to comprehensive

planning, maintenance, water management and farmer participation. Performance

of irrigation has been stagnant in the past two decades, and in some states

has deteriorated. Significant issues must be addressed if irrigation is to

maintain and surpass past contributions to agricultural growth (India

Irrigation Sector Review, 1991, Report 9518-IN).

Development Priorities

1.06 Development plans of the Government of India (GOI) and State governments

give priority to alleviating poverty and creating employment, particularly in

the rural areas. While per capita income has increased by 2% per annum to an

average of about US$310, the impact on improvement in the standard of livingof the poor or in reducing under-employment has not been significant due to

rapid population growth. Of the total population of about 900 million, anestimated 300 million live below the poverty line. About 74% of the

population live in rural areas, depending directly or indirectly on

agriculture. One-third of the agricultural labor force are women, and

agriculture is the main source of employment for women in rural areas. Thus,

the performance of agriculture and its main source of productivity growth,

irrigation, is intrinsically linked to poverty alleviation.

1.07 GOI's long-term strategy is to stimulate agricultural growth and promote

rural development through improved water and land management, enhanced

efficiency of irrigation and drainage networks, strengthened research

services, increased attention to environmental protection, and improved ruralinfrastructure. Investment programs to address these elements and to re-

establish growth are of high priority in the Eighth Five Year Plan (1992-97).

Equitable distribution of the benefits of growth and sustainability of the

resource base are also emphasized.

Tamil Nadu State

1.08 General Features. Tamil Nadu, at the southern tip of India (IBRD Map

No. 26167), has an area of 130,000 Sq. Kms and a population of 56 million ofwhich two-thirds are rural. About 40% of the population are below the poverty

line. Due to higher literacy and a successful family planning drive,

population is growing more slowly than the India average (1.5% in Tamil Naducompared with about 2.0% nationally), but population density is higher, 428

persons/sq. Km in Tamil Nadu compared with the national average of 264. Large

3

urban centers include Madras (3.8 million people), Madurai and Coimbatore

(nearly 1 million each). The state's average per capita income of US$319 isat about the national average. Relative to the rest of India, Tamil Nadu isboth land and, in particular, water short. It has 7% of the country'spopulation but only 4% of the land area and 3% of the country's surface waterresources. Water constraints in Tamil Nadu vary by basin and as influenced bythe present level of irrigation development and by urban needs. Scarcity isacute in some areas, particularly for Madras city, for which water is beingcarried in by train and road.

1.09 Water Resources. The state's average rainfall is 925 mm/annum, but ishighly variable, both year-wise and geographically. Tamil Nadu is affected bytwo monsoons, the northeast monsoon (October to December, average 440mm/annum) and the southwest monsoon (June to September, 310 mm). Theintensity of the southwest monsoon decreases from North to South. Rainfall ishighest on the coast, decreasing westwards as the impact of the northeastmonsoon diminishes. The state's estimate of water resources is 23.6 billioncubic meters of surface water and 22.3 billion cubic meters of groundwater.Utilization is estimated to be 93% for surface water and 60% for groundwater.

Groundwater utilization varies by basin. In a number of localities,especially near urban centers including around Madras, Coimbatore and Maduraiand parts of the Palar and Vaigai basins, withdrawals are causing groundwaterlevels to fall. Regulatory, pricing and other actions are needed to

counteract this.

1.10 The state comprises 17 river basins (some of these are groups of severalminor basins), all flowing eastwards from the Western Ghats and Deccanplateau. Amongst these the major rivers are the Cauvery, Palar, Vellar,Vaigai and Tambaraparani. Tamil Nadu either contains a basin in full or is adownstream riparian to another state, and does not share any international

rivers. For one river, the Cauvery, shared with upstream Karnataka, watersharing has not been agreed. While basin planning in the Cauvery would bepart of the project, the WRCP contains no plans for investment in this basin.

1.11 Agriculture and Irrigation. Agriculture contributes about 22% of statedomestic product. Cultivated area is 5.9 million ha (7.6 m. ha includingmultiple cropping) or 45% of the state's area, the rest being primarilyoccupied by forest, hill and waste land and urban development. The main crops

are paddy (2.4 m. ha), millet and sorghum (1.6 m. ha), oilseeds (1.1 m. ha),and pulses (0.6 m. ha). The remaining 1.9 m. ha are mainly in fruits andvegetables, spices, sugarcane and cotton. Annual production of foodgrains hasincreased from 5.4 million tons in the 1960s to 7.5 million tons in 1987/88.Despite this gain, production since 1970 expanded more slowly than population,and in drought years Tamil Nadu has had to import from other states. Farmsizes tend to be uniformly very small. The average holding size is 1 ha, with71% of holdings less than 1 ha, and 88% less than 2 ha.

1.12 Irrigation covers 2.4 million ha (41% of the state's net cropped area).The state's irrigation system is the product of old investment, in the case ofmany tanks going back several centuries or more. By the 1960s new investmentin canal and tank irrigation had peaked. Investment in wells continuedthrough the 1970s, but by the 1980s irrigated area from all sources ofirrigation had reached a plateau. Canal and tank irrigation supply 1.3million net ha, and wells irrigate 1.1 million ha. New investment

4

opportunities are limited by water availability, but large opportunities are

available for improving the performance of existing irrigation. Neglected and

underfunded maintenance has resulted in deterioration of most systems,

unreliable water to head-end farmers, and often no water for tailenders.

There are also opportunities to complete investments on a number of commandsin order to improve the water service and provide some extension in command

area.

1.13 Environmental Needs. Actual or potential environmental concerns in

Tamil Nadu are typical of those found in the water sector for any large state

or country. No one problem is endemic state-wide and conditions vary by

basin. Groundwater resources, though overall still under-exploited, are being

depleted in a number of localities; around Madras city, Coimbatore, Madurai,

and parts of some basins such as the Vaigai basin. In some coastal belts this

has been accompanied by saline intrusion. The opposite groundwater situation

of waterlogging is also found, in generally small localities and sometimes

with localized salinization. This is often due to poor water management

resulting in excess water at head-ends of commands. Effluents from industry

(chemicals, tanneries) cause pollution on a number of rivers affecting

riverine flora and fauna and the quality of drinking water. Tree cover of

watersheds ranges from excellent to poor; in parts of basins such asPennaiyar, Palar and Vaigai, deforestation has resulted in excessive soil

erosion and siltation problems for canals and reservoirs. While serious water

borne diseases such as Bilharzia are not present, malaria, dysentery and other

risks can be transmitted through stagnant or organically polluted water.

Tamil Nadu is also subject to cyclones and flood damage, especially in

estuaries.

1.14 Environmental management capabilities are present in Tamil Nadu's

specialized agencies - for instance, the Pollution Control Board, Public

Works, Public Health, Forestry, Agricultural, Fisheries and Wildlife

Departments, and Water and Drainage Board, together with good university and

research center capability. But coordination between them is limited. No

apparatus has existed for tackling such issues from a basin approach, and for

planning water development comprehensively incorporating environmental

management in investment decisions, including better representation from the

general public and private sectors. Within Tamil Nadu's main water agency -the Water Resources Organization, recently created from the irrigation wing of

the Public Works Department (para 1.16) - technical skills in environmental

monitoring, assessment and management also need strengthening.

1.15 Water Resources Institutions. The Public Works Department (PWD) has

been responsible for construction, maintenance and operation of the state's

irrigation and drainage systems, bulk water supply for municipalities, and

flood control. Several entities also come under the Secretary PWD and would

be important to the WRCP. The Institute of Water Studies (IWS), located in

Madras has handled water planning and research, but until recently has not had

the mandate to coordinate with other sectors. The Institute of Hydraulics andHydrology (IHH) at Poondi is PWD's hydraulic research agency. The Irrigation

Management and Training Institute (IMTI) at Trichy provides training for PWD

engineers and farmers. The two other major water agencies are the Tamil Nadu

Water and Drainage Board (TWAD), which provides water supply, drainage and

sewerage for towns and villages, and Metrowater, which provides similar

services for Madras. A strong academic and research capability exists in

5

Tamil Nadu's universities. This includes, for the water and agriculture

sectors, Anna University, Coimbatore Agriculture University, the Madras

Institute of Technology and the Madras Institute of Development Studies.However, closer coordination between the above institutions is a recognisedneed.

1.16 PWD has had a long tradition as the state's construction agency,

covering many activities from irrigation to buildings. This has given it

civil works expertise, but within irrigation less funding and staff emphasis

has been put to water management, maintenance and water planning. Over time,the organization became progressively less equipped to handle the increasingly

demanding requirements of the state's water sector. Accordingly, to meetTamil Nadu's new objectives for the water sector, and as part of its

preparation for the WRCP, Government decided to create a specialist water

resources agency. Following a detailed institutional study, PWD was

bifurcated in April 1994 to create a specialized "Water Resources

Organization" (WRO), separate from buildings and other traditional PWD

functions. WRO and its sub-entities - IWS, IHH and IMTI - will be solelyhandling the water sector in two principal capacities: as state water planner

and coordinator between sectors, and as implementor for irrigation, drainage,flood control and bulk water supply. This is being accompanied by a major

internal reorganization (para 2.24 and Annex 2). The objectives are to create

a decentralized and more functionally effective management, organized along

basin lines, specialization in functional areas such as planning, design,

construction, operations and maintenance, and establishment or strengthening

of capabilities in management information systems, programming and budgeting,

procurement, environmental management, regulatory, training, staff development

and other areas. An institutional apparatus has also been established forstate coordination of water planning and environmental management between

sectors (para 2.21). Farmer participation in irrigation management is also a

central objective, and a vigorous drive to implement this is already underway.

Experience with Past Bank Lending

1.17 Experience in India. India's agricultural development efforts have

attracted substantial support from the Bank Group. To date, 131 agricultural

projects in India have received US$10.5 billion equivalent of IBRD/IDAfinancing (81% IDA and 19% Bank), the majority of which has been for

irrigation. Projects have also included: agricultural support services

(credit, research and extension); commercial agriculture (seeds, fisheries

and agro-industry); forestry, watershed and resource conservation; livestock

development; and drought assistance. The objectives of Bank involvement inIndian agriculture have been to expand and modernize the infrastructure

supporting sectoral growth, strengthen the institutions serving agriculture,

increase the production of high value commodities, and introduce sustainable

land management systems affecting rainfed agriculture. Common problems in

agricultural projects have been: (a) delays in project mobilization and

procurement; (b) quality of civil works; (c) institutional weaknesses; and

(d) insufficient local funding.

1.18 Experience in Tamil Nadu. In the irrigation sector the Periyar Vaigai

Irrigation II Project (Cr. 1468-IN/SF16-IN) financed extension and improvementof the old Periyar Vaigai system in southern Tamil Nadu and closed on October

31, 1993. The Project Completion Report concluded that the project, while

6

slow in implementation, met its physical objectives and achieved an ERR of

25%. Sustainability was also considered satisfactory. Other positive

features included successful piloting of cultivator group participation in

water management, good construction quality, and accelerated implementation in

the last two years of the project. In other sectors related to water, the

Madras Water Supply and Sewerage Project (Cr. 1822/Ln.2846), and the Tamil

Nadu Urban Project (Cr. 1923), both ongoing, have, inter alia, encouraged

water planning initiatives. GOTN is currently preparing a Veeranam Water

Supply Project (for supply of bulk water to Madras) and a follow-on Madras

Water Supply and Sanitation Project for consideration by the Bank. Theproject with the greatest relevance to the WRCP is the National Water

Management Project ("NWMP",Credit 1770-IN), which has enabled the gaining of

field experience for the WRCP's principal component. Under NWMP, seven

commands in Tamil Nadu covering 153,000 ha have been rehabilitated andmodernized. After a hesitant start, Tamil Nadu has been implementing this

project well and with enthusiasm over the past three years, as it experiences

the yield and social benefits of improved water management. This momentum has

facilitated preparation of the WRCP's main component which has similar

engineering features to NWMP, and has also enabled commencement in the field

of WRCP pre-investment and farmer organization activities, enhancing prospects

for rapid project start-up.

II. THE PROJECT

A. Rationale for IDA Involvement

2.01 The project would help implement the Bank's and GOI's new strategy for

the water and irrigation sector, as defined in the recent Bank policy paperand the India Irrigation Sector Review. The Bank's new strategy ("Water

Resources Management", September 1993), proposes an agenda of policies and

institutional reforms that will utilize market forces and strengthen thecapacity of governments to carry out their essential roles in resource use andplanning. The policy paper calls for the adoption of a comprehensive

framework for analyzing policies and management options regarding water

scarcity, efficiency of service, allocation of water and environmental damage.

2.02 Specific to India, the "India Irrigation Sector Review" (Report 9518-IN,

December, 1991), prepared jointly with GOI and state governments, identified

four priority areas of action consistent with the above: (i) multisectoral

water resources policy and planning using river basins as planning units;(ii) institutional development to upgrade management capability of irrigation

departments through improved functional responsibilities, institutional

accountability and participation of farmers and the private sector; (iii)

redefined public expenditure priorities, emphasizing improved performance ofexisting schemes, enhanced operations and maintenance, completion of viable

incomplete projects and improved cost recovery linked to service improvements;

and (iv) improved technical performance of water and irrigation service

delivery including improved environmental management. The project also

supports the Bank's Country Assistance Strategy (CAS) for India of May 1995.

The CAS emphasizes investment lending operations providing comprehensive

support to policy, institutional, and expenditure reform for key sectors in

states receptive to reform. Reforms would be accompanied by investments inbasic infrastructure supporting increased productivity and better management

7

of natural resources. Better institutional and financial performance in the

public sector, complemented by devolution of responsibilities to stakeholders

and the private sector, is also emphasized.

2.03 The project would be a significant step towards implementation of Bank

and Government strategy in the water sector. In India, water development and

irrigation is planned and implemented at the state level, requiring a state-

by-state approach. WRCPs would be the main vehicle for Bank support to the

states. This project is the second WRCP (following Haryana WRCP, Cr 2592,

approved in FY94). Each provides the concerned state with the comprehensive

means to implement the new strategy. The Bank also has a strong interest in

supporting initiatives in hydrology and water management across states, as

this would lead to more rational allocation and use of water in the national

context. Such projects are also being developed by India. To implement the

new water and irrigation strategy, for both the state specific WRCPs and

multi-state projects supporting resolution of cross-state issues, a close and

continuous partnership with the states and central government is required.

The Bank is one of the few institutions that can provide the continuity and

policy support required for achieving the long-term strategic goals developed

in the sector strategy papers above. Choice of Tamil Nadu is because it is

one of India's most water constrained states and because of the interest of

the state Government in reforming its water and irrigation sector.

WRCP PreDaration and Policy Reforms

2.04 The project was prepared in the 1993-94 period. Over the past two years

Tamil Nadu has implemented a number of institutional and policy reforms in

preparation for the WRCP: (i) a fundamental decision was to create a

specialist Water Resources Organisation (WRO) from the former construction

oriented irrigation wing of PWD (para 1.16). This will handle state-wide

provision of irrigation and drainage, bulk water supply and flood control and

also be responsible for coordinating state water planning across sectors.

Within the new WRO, a staff reorganization is underway to create streamlined

and decentralized management and functionally specialized management units;

(ii) a Water Resources Control and Review Council (WRCRC) and supporting

institutional linkages have also been created to handle multi-sectoral water

planning and allocation; (iii) a State Water Policy has been formulated to

backstop Tamil Nadu's new approach to water and irrigation management; (iv)priorities for public expenditures have been overhauled, with emphasis now on

maintenance and improved water management rather than new construction; (v)

state financial allocations for maintenance have been doubled to bring them up

to Bank/WRO recommended amounts; (vi) a program to involve farmers in

irrigation investment, operations and maintenance has been prepared and

implementation commenced; (vii) WRO's institutional capability for

environmental management has been strengthened and an Environmental Action

Plan prepared; and (viii) a new structure and procedures for handling land

acquisition have been established and a Land Acquisition and Economic

Rehabilitation Action Plan prepared.

2.05 The project is ready for implementation. Start-up activities during

1994 and 1995 have been intensive, with 1994/95 expenditures proposed for

retroactive financing (para 3.15). As concerns the project's two main

components - the systems improvement and farmer turnover program, and the

scheme completions program - detailed design is complete, staff divisions have

8

been allocated by work-site, and procurement packaging encompasses 70% of

contract packages over the seven-year project period and the full needs for

the first two years of the project. Implementation starts from the strong

base of successful performance under the National Water Management Project for

the systems improvement works, and already active work-sites as regards the

scheme completions. Readiness as concerns other project components is also

satisfactory. The new institutional structure is defined and agreed, the

water planning program has been underway since mid-1993; and training,

staffing and other preparatory actions for the Environmental Action Plan and

the Land Acquisition and Economic Rehabilitation Action Plan are advanced.Most impressive has been the degree to which GOTN and its Water Resources

Organisation have emphasized early completion of all institutional and policy

decisions required for the project, including issuance of some two dozen

"Government Orders". These have formalized matters ranging from issuance of

the State Water Policy to adjusted policies for compensation in cases of land

acquisition, to the Institutional Reorganisation. WRO has also been active in

staff training in areas relevant to the WRCP.

B. Project Objectives and Description

2.06 Project Obiectives. Tamil Nadu's future economic development and

welfare require better planning and management of water across sectors,environmentally sustainable planning and management and, for irrigation, the

largest user of water, improved efficiency of public expenditures and wateruse and enhanced agricultural productivity. The project's primary objectives

would be to: (a) introduce water resources planning by river basins acrossall uses of water; (b) improve agricultural productivity through

modernization and completion of irrigation systems, upgraded water management

and farmer participation; (c) assure sustainability of water infrastructure

and the environment; and (d) improve institutional and technical capability

for managing the state's water resources.

2.07 Project Description. The project would be a sector investment loan

financing an agreed state-wide program to improve the productivity and

sustainability of Tamil Nadu's irrigation sector, to introduce multi-sectoral

water planning, to integrate farmers in irrigation management, and to

strengthen the state's institutional and technical capacity in water

development, management and planning. The project would be implemented over

seven years. Project components would be:

(a) System Improvement and Farmer Turnover (US$143.1 million, 55% of

project investment base costs).

(b) Scheme Comrpletions (US$76.8 million, 29% of investment base costs).

(c) Water Planning, Environmental Management and Research (US$21.0 million,

8% of investment base costs);

(d) Institutional Strenathenina (US$17.7 million, 7% of investment base

costs); and

(e) Land Acquisition and Economic Rehabilitation (US$3.9 million, 1% of

investment base costs).

9

C. Detailed Features

I. System ImDrovement and Farmer Turnover (US$ 143.1 million, 55% ofinvestment base cost, Annex 4)

2.08 The WRCP's largest expenditure item and field effort would be the

rehabilitation and modernization of existing irrigation, drainage and bulk

water supply facilities. This would be integrally associated with beneficiary

participation in scheme investment and management decisions and turnover of

water management and maintenance of distributaries to farmers. Most of Tamil

Nadu's water delivery and drainage systems are performing below potential dueto outdated design, inadequate maintenance and lack of farmer involvement in

the design and management of the systems. As a result, water services areincreasingly becoming unreliable and inequitable, affecting agriculturalproductivity. There is excess water in the upper reaches and tail-end farmers

do not receive adequate and timely supply of water.

2.09 Integrated ADproach. The National Water Management Project (NWMP, para

1.18) has succesfully piloted the engineering required to correct this

situation by rehabilitating and modernizing 153,000 ha in 7 commands in thestate. The WRCP incorporates the lessons learned under NWMP, but also

emphasizes the integration of infrastructural improvements with O&M funding

and farmer participation, associated with strengthened institutionalcapability. In doing so, the project also reflects the general lesson in

Indian irrigation, and indeed worldwide, that: (i) efforts at cost recovery

without service improvement are mostly unsuccessful; and (ii) infrastructure

improvements without attention to O&M and farmer participation are physically,

financially and institutionally unsustainable. Sustained improvement in

performance is emphasized under the project, recognizing that this requires

mutually reinforcing actions.

2.10 Infrastructural Improvements. System improvements would cover about

660,000 ha, constituting 50% of the State's surface irrigated area, under a

phased, two-stage investment program. The first stage is technically similar

to NWMP, but will include innovations based on consultation with NWMP farmers

and other field experiences. Stage I comprises focussed low investment

improvement to enable more equitable and reliable water supply, based on a

detailed command diagnostic (crops, yields, hydrology, current performance and

problems) followed by preparation of a "plan of operations and maintenance'

(POM) and identification and design of the infrastructure improvements to make

this work. Under stage I, priority design changes and structural

improvements would be carried out in association with farmers on about 508,000ha to ensure reliable irrigation to the tail-end sections in 10 major and

medium commands and about 40 minor schemes (98,000 ha). The central feature

of the design change would be the structuring of the system, usually at thedistributary, sometimes at the minor level. Below this level, control

structures will be provided at all offtake canals to distribute water in thedesired proportion without manual control. The costs of the rehabilitation

and modernization works under stage I will average Rs 5300/ha (US$ 166) in

1994 prices, to ensure a focus on top priorities.

10

System Improvement and Farmer Turnover

Constr./Com- Procure- O&M

mand Base Main Distribu- OFD ment DivisionsArea Cost System taries Works Others Packages Deployed

Scheme (ha) (Rs.m) (Rs. m) (Rs. m) (Rs. m) (Rs. m) (in Nos.) (in Nos.)

Stage I

Cheyyar Anicut 14,337 66.6 26.3 33.6 6.0 0.7 16 2

Chittar 9,644 43.4 10.0 31.0 1.5 0.8 8 1Manjalar 2,169 13.5 8.4 2.3 1.6 1.2 7 1Minor Schemes 97,885 468.0 146.0 250.0 72.0 0.0 30 6Palar Anicut 32,796 163.8 65.4 67.4 24.0 7.0 20 3Parambiculam 174,553 1035.0 718.5 179.5 130.0 7.0 41 9Poiney Anicut 9,350 41.6 17.8 20.0 3.0 0.8 7 1Thirukovilur &

Ellis Anicut 14,342 53.0 37.5 13.5 2.0 0.0 8 1Tholodur 14,915 105.0 31.5 28.0 0.0 45.6 6 2Vaigai Old Ayacut 54,143 368.6 60.9 307.7 0.0 0.0 28 5Other Schemes 83,974 337.0 208.0 117.0 0.0 12.0 23 5

Subtotal 508,108 2695.5 1330.3 1050.0 240.1 75.1 194 36

Stage II

Cumbum 8,099 58.5 40.8 8.2 4.7 4.8 8 2Kodayar 36,836 292.9 171.4 94.3 18.2 9.0 12 3Marudhanadhi 2,665 18.7 4.6 9.3 1.5 3.3 5 1Sathanur 18217.00 187.7 93.0 86.4 7.7 0.7 13 2Sethiathopppa 19,466 136.4 68.0 22.6 6.2 39.6 11 2Thambaraparani 45,282 279.4 116.9 143.1 11.8 7.5 17 4Other Schemes 22,384 228.8 127.0 77.5 16.8 7.5 14 2

Subtotal 152,949 1202.4 621.7 441.4 66.9 72.4 80 16

Periyar Vaigai 200.0 75.3 95.0 0.0 29.7 25 4

V.H.F. (for all

schemes) 36.0 36.0 1

IMTI, Training

& Consultant 443.9

Grand Totals 661057 4577.8 2027.3 1586.4 307.1 213.1 300 56

2.11 Under stage II, a second round of investment to further improveperformance and conveyance efficiency, especially at distributary levels,would be undertaken for commands successfully through stage I. Investmentwould be conditional on farmer commitment and would be associated atdistributary level with formal handover of O&M to farmers. In the WRCPperiod, this is expected to be primarily on the ex-NWMP commands (153,000 ha).Stage II improvements are primarily the construction of regulatory structuresand selective upgradation of canal lining, with an average cost of Rs 7900/ha.The total base costs of the stage I and II works is US$ 84.2 and 37.6 million,respectively. For all major and medium commands (85% of the program),detailed designs and procurement schedules have been prepared.

11

2.12 Farmer Organization. The participation of water users would be closely

tied to the physical improvements (Annex 4). The centerpiece of the

participation program is a progressively increased involvement of farmers,

moving from consultation to active management of O&M below the structuredlevel. A 3-tier structure of farmer organization (FO) would be developed as

part of the public-private sector partnership between farmers and WRO. At the

lowest level (about 40-50 ha) would be outlet level organizations ("sluice

committees"), federating into a "Farmers Council" at the distributary level(about 500-700 ha) where most of the formal negotiations with the WRO would

initially occur. Councils would further federate into an "Apex Committee" at

the scheme level for consultations and agreements on overall water management

and on inter-distributary issues. During stage I, farmer councils would

formally establish as registered societies and enter into a Memorandum ofUnderstanding (MOU) with WRO. The councils would also collect from their

members Rs 250/ha, placing collections in a council bank account. Interest

earned would substantially pay the council's annual cash costs (the rest being

farmer supplied labor) of maintenance below the distributary head, which would

be their responsibility. Formal turnover of O&M responsibilities to Farmer

Councils would be accompanied by intensive training and also involve an

interim period (typically 6-9 months) of "joint management". The MOU defines

the mutual responsibilities and rights of the FOs and WRO in terms of waterservices and O&M duties. A model MOU and by-laws for the FOs was formally

issued by GOTN prior to negotiations (Attachment C of Annex 4).

2.13 Distributary level improvements would be contingent upon the formation

of FOs: their participation and agreement on the nature of the works; and

their acceptance of O&M responsibilities, including financing, after the

investments are completed. Canal lining, the most expensive item of stage IIworks, would be taken up selectively and only when it is part of a jointly set

priority improvement and when farmers collect 20% of the cost of lining.Farmer contributions would be paid into council bank accounts to further

capitalize their capacity to undertake O&M and improvement works in the

future. The above arrangements (paras 2.12 to 2.13) were confirmed at

negotiations.

2.14 On-Farm DeveloDment Works. Farmer participation would extend to"OFD"

works as well, previously constructed by the Agricultural Engineering

Department (AED). OFD (sluice command works such as water courses, field

channels and field drains) provides the important link between the irrigation

system and farmer's fields, but needs to involve farmers and a lower cost

approach if investment is to be affordable and sustained. The WRCP will

support the state's program, with changes from past practice, and specialarrangements where AED is already present in a command. Under the WRCP, FOs

would decide on the need for OFD, and assistance to OFD would be extended onlyin outlets where higher level Farmer's Councils are organized and the sluicehas an active sluice committee. The WRO would undertake a topographic survey

and propose designs for the distribution channels below the outlet. After

mutual consultation and agreement with farmers, alignment structures would beconstructed by WRO and farmers would construct the watercourses and fieldchannels themselves. WRO costs would be about Rs 720/ha compared with Rs

3500/ha as per present practices with government taking full resposibility.

About 425,000 ha are targeted under the WRCP, costing Rs 307 million in total.

The Letter of Development Policy (Annex 1) affirms that the new model for OFD

would be used henceforth throughout the state by both WRO and AED and that

12

AED's activities in WRCP commands would be limited to the five commands where

it is already active (Lower Bhavani, Periyar Vaigai, PAP, Sathanur andSethiathope). In these five commands, WRO and AED would both handle OFD

works, but activities would be phased with WRO's work on main and distributarysystems, and AED's program would be coordinated with the WRO executive

engineer for the command concerned. Arrangements would be reviewed annuallybetween WRO and AED for their implementation effectiveness.

2.15 Organization. Training and Eauipment. Under WRO's reorganisation, O&M

will become a specialist activity under the new post of CE O&M, with deputies

in the areas of operations, maintenance and farmer organization (Annex 2).Staff reorientation and skill building needs are substantial. Accordingly,

WRO's Irrigation Management and Training Institute's (IMTI) program has beenrefocussed to place emphasis in particular on farmer organization, and also ontechnical aspects of systems improvement and O&M. Farmer organization teamson each command will also be reinforced by community organizers recruited from

practical NGOS, backstopped by experienced consultants (para 4.04).Management features for the systems improvement and farmer turnover program

incorporate intensive management and monitoring features, including a detailedreview by consultants in PY2 to enable early adjustments as experience is

gained (para 4.05). Adjustments are especially likely as regards the support

measures and approach for farmer participation and turnover. The project

would finance strengthening of IMTI (technical assistance, training andequipment amounting to US$ 1.4 million) and equipment, training and

consultancies for farmer turnover (US$ 1.6 million). For operations and

maintenance, a one-time investment, aggregating to US$ 10.9 million base

costs, would be made in heavy equipment, surveying equipment and workshops

(US$ 6.3 million), vehicles (US$ 2.6 million), wireless communication (US$ 1.4

million) and remote sensing consultancy (US$ 0.6 million), to bring WRO to

full capability. GOTN would fully finance annual maintenance. Following its

undertaking to this effect at the beginning of project preparation, GOTN hasalready brought funding levels up to estimated annual requirements (para

2.34).

II. Scheme Completions (US$ 76.8 million, 29% of investment base cost,

Annex 5).

2.16 The second largest investment expenditure under WRO's program would be

scheme completion investments to improve the reliability and availability of

agricultural and domestic water supply on nine existing schemes, plus a

contingency for future investment needs (para 2.17). The nine schemecompletions, all underway and in five cases with substantial investment

incurred, typically involve small impoundments and improvement of the existingirrigation and drainage networks, including domestic water supply to local

communities. The principal impact would be in stabilization of the command's

water supply to existing irrigated areas, plus some expansion of irrigated

area. Benefits are primarily from higher yields, and increased irrigation

intensity, with unquantified likely benefits from diversification to higher

value-more water sensitive crops, and potential longer-term water diversion

for industrial use. The nine schemes were selected on the basis of an earlier

candidate list of 20 schemes, and detailed analysis by FAOCP and WRO of a

short-list of 13 schemes. The analysis included an operational hydrologyassessment of water supply reliability, as well as engineering, agriculture

and environmental impact features and economic viability (Annex 5). In the

13

process, outdated existing unit cost rates have been augmented, andimplementation schedules extended, both on the basis of past experience.Final selection was made at appraisal and included the requirement of aneconomic rate of return of 12% or more (para 5.06), corresponding to theestimated opportunity cost of capital in India. The preparation exercise hasserved to inject additional analytical rigor into WRO's investmentpreparation, particularly in the areas of hydrological, environmental andeconomic analysis. As described below, WRO intends to apply the analyticalprocedures developed with FAOCP and the Bank in its future investmentformulation work.

Stabilize Gap New Base Cost Estimated Econ. ValueScheme (acres) (acres) (acres) Rs. Completion of incr. prod.

million Year Rs. Million

Poigayar 477 140 500 94.6 1996 13.1

Nambiyar 911 458 375 120.6 1996 16.6

Sothuparai 1825 67 1040 304.2 1998 36.1

Mordhana 6388 704 0 467.6 1999 75.6

Rajathopekanar 545 0 0 26.7 1995 3.8

Kodumudiyar 1954 1925 0 210.4 1997 78.9

VadakkuPachchayar 7536 1147 0 306.1 2000 54.6

Adavinainarkoil 3859 1523 243 614.9 2000 79.3

Gridhammal II 2329 798 0 34.9 1995 22.1

Add'l. Schemes 278.9 2000and Consultants

Total 25824 6762 2158 2458.9 380.1

2.17 As water planning is further established under the WRCP, perceivedmedium and long-term needs will evolve, and the growing needs of urban centersare likely to increasingly dominate investment choice. The urgent bulk watersupply needs of Madras would be catered for by the proposed Second MadrasWater Supply Project (from Veeranam tank providing 3tmc) primarily underMetrowater/TWAD responsibility, and by Government's Krishna Water Supplyproject (KWSP), under WRO responsibility, which will supply 15 tmc of waterunder an agreement with Andhra Pradesh. Tamil Nadu's part of KWSP isvirtually fully complete (completion expected in 1995) and is thus notincluded in WRO's program above. Other bulk water supply needs are likely,however, to arise. An amount of US$6.8 million, equivalent to 10% of thecombined base costs of the nine scheme completions above, has thus beenallocated for disbursement against as yet unidentified needs, urban oragricultural, as determined by water planning and governed by rigorousanalytical and selection criteria. At negotiations, the preparation andselection criteria outlined at Annex 15 ("Criteria for Preparation andSelection of Investment") were agreed with GOTN. IDA's approval would be

14

required prior to selection of any such new proposal and would be based on the

investment satisfying the criteria at Annex 15. These include preparation in

the context of a river basin plan, satisfactory environmental assessment,

socioeconomic survey and, as needed, land acquisition and economicrehabilitation plan, and a rate of return not less than 12%.

III. Water Planning, Environmental Management and Research (US$21.1 million,

8% of investment base cost, Annexes 3, 7 and 8))

Water Planning (Annex 3)

2.18 GOTN established the institutional apparatus for water planning during

WRCP preparation. At the apex is a "Water Resources Control and Review

Council" (WRCRC) established in September 1993 as the state's most senior bodyfor water allocation and planning decisions. Chaired by the Chief Minister

and with the three key Ministers involved (PWD, Water Resources and Energy;

Urban Development; and Rural Development) as Vice Chairmen, the Council

contains representation of all departments concerned with usage and

environmental management of water. At basin level, WRO's basin managers will

head "basin water planning and allocation committees" comprising the local

parties involved including private sector representatives. WRO's "Institute

of Water Studies" (IWS) has been appointed as Secretariat to the WRCRC and as

Tamil Nadu's nodal agency for preparation of basin and state water plans. In

collaboration with the basin committees and coordination officers from each

state government department, IWS has been charged with preparation and

periodic adjustment of basin plans and a state water plan. An environmental

sub-committee of WRCRC and an environmental unit in IWS has also beenestablished to provide special focus on integrating environmental management

in water planning (para 2.20). WRO's capabilities in hydrological data

measurement and collation are also to be upgraded, with assistance from Tamil

Nadu's component of the proposed National Hydrology Project (NHP). For this

purpose, a State Water Resources Data Center has been established in WRO.

2.19 Basin and state water planning will be progressively upgraded during the

WRCP. The first task, commenced in 1993, has been preparation of rapid basin

assessments on 16 of Tamil Nadu's basins/sub-basins, with completion of the

remaining basin expected by end 1995. A Tamil Nadu state "Framework Water

Resources Plan" will then be prepared on the basis of the basin plans and

state development objectives (by December 31, 1995). Detailed River Basin

Plans will subsequently be prepared, followed by a State Water Plan by March

31, 1998. Thereafter, the basin plans and the State Water Plan will be

periodically improved and updated. This effort will require substantial

technical support and strengthening of IWS, a process already commenced withconsultant assistance. WRCP funding covers international and local

consultancy assistance for IWS, training for IWS staff, and computer and otherequipment. The latter includes establishment of remote sensing interpretation

and geographic information systems capability. The above arrangements and

timetable are affirmed in the Letter of Development Policy (Annex 1).

Environmental Management and Action Plan (Annex 7)

2.20 Based on the recommendations of a Category A Sectoral Environmental

Assessment (EA), conducted by PWD/WRO and HR Wallingford consultants,environmental management has been integrated in all aspects of the WRCP, from

15

institutional and policy aspects to specific sub-components. The EA provided

a detailed review of water related environmental issues in the state, assessedthe investment components of the project and also reviewed state and in

particular WRO capacity to handle environmental issues. The investment

components themselves were not found to pose particular issues. The improved

water management resulting from the project's rehabilitation, modernization

and scheme completion investment was assessed to mitigate against problems

such as waterlogging, salinization, depletion of groundwater levels anddisease risks caused by sources of stagnant water. The EA did, however,

recommend a comprehensive set of actions to improve WRO's environmental

capability to monitor, plan, develop and manage the state's water resources.These measures, which incorporate institutional and procedural improvements,

major strengthening of technical capabilities, and field actions and studies,

have been incorporated in an Environmental Action Plan (EAP) to be funded

under the project.

2.21 The EAP includes the following actions (Annex 7): (a) establishment of

environmental units in IWS and the Project Formulation directorate,

respectively handling environmental concerns in state water planning and

allocation, and environmental assessment during preparation of specific sub-

projects. These would be supported through small cells at the level of each

basin manager; (b) establishment of a unit in WRO charged with groundwaterregulation; (c) consolidation of WRO's water data collection activities

including water quality under a state Water Resources Data Center (to be

funded under the proposed NHP, para 2.18); (d) preparation of a Groundwater

Act for regulation of groundwater usage; (e) establishment and usage of a

construction code of practice incorporating environmental safeguards; (f)

funding of a program for eco-restoration of catchments with depleted

vegetative cover and resultant soil erosion and siltation; and (g) special

studies, monitoring and demonstrations in groundwater utilisation, catchmentinterlinkages, soil conservation planning, pesticide impacts, sedimentation,

reservoir environmental quality, wastewater reuse, pollution and health

hazards. The EAP would be supported with funding of consultancies, training

and equipment (US$3.6 million) and funds for the largest field component,

catchment management (US$1.9 million). As environmental management expertise

is limited in WRO and the water user community, training and technical

assistance to upgrade skills are extensive. Training would cover not only the

specialist needs of the staff in WRO's environmental units, but also awareness

building for WRO engineers and the general public.

Water Sector Research (Annex 8)

2.22 The new challenges to be embarked upon under the WRCP will require

significant innovation, problem solving and technology transfer for WRO and

related institutions. Creating this will be important, in part for the

immediate WRCP needs, but also as an investment for the future. Mechanisms

for harnessing Tamil Nadu based expertise in the university and non-Government

sector are needed. For WRO, other government agencies and Tamil Nadu's

universities and research institutes, linkages with technology, expertise and

ideas abroad and elsewhere in India are also important. As discussed inGOTN's letter of Development Policy, a "Water Resources Research Fund" (WRRF)

has been set up by WRO under the WRCP to support these objectives. Funds

would be provided by WRO on a grant basis to research proposals approved on

the basis of their relevance to Tamil Nadu water sector issues. IDA would

16

reimburse WRO against eligible WRO expenditures for such research contracts

(US$ 3 million of IDA funding is estimated required during the WRCP period).

Priority would be given to: cross-sectoral issues in water management and

planning; engineering and hydrology; environmental issues; basin planning

and modelling; water markets and prices; groundwater regulation and pricing;

farmer and other user participation; roles of women, marginal farmers andother target groups; and water efficient irrigation and new technologies

(Annex 8, para 9). All research proposals would require some participation

from a Tamil Nadu located institution, but the WRRF would encourage and

actively favor collaboration with other Indian or overseas institutions.

2.23 The WRRF would be administered and funded through WRO, but would beguided by a six member Research Advisory Committee (RAC). This would comprise

five senior experts, not in active Government service, with experience in

water resource engineering, agriculture, environmental science, economics and

social sciences, and with at least one member with experience in the urban and

industrial sector, and the EIC or his delegate as member-secretary. The RAC

would be responsible for reviewing proposals, and would also be proactive in

organizing workshops of relevance, identifying problems and research needs and

advertising the existence of WRRF. It would also undertake annual review of

WRO's own research related activities. To enable progressive establishment ofa permanent fund, GOTN would contribute quarterly to an interest earning

account in the name of WRRF an amount equal to one-third of IDA disbursements

to WRO on fund related activities in the previous quarter. IDA would thus not

directly finance the fund - disbursements would be made against eligible

contracts under the WRRF program - but GOTN's contributions would

progressively build up the fund. The program would be reviewed by IDA

annually, on the basis of an annual report prepared by the RAC. The above

arrangements were confirmed at negotiations.

IV. Institutional Reforms (US$17.7 million, 7% of investment base cost,

Annex 2)

2.24 Based on an Institutional Study undertaken by PWD with consultant

assistance during WRCP preparation, and review by GOTN and the Bank, PWD is

undergoing major reorganization to create a specialist state water agency.

This and the associated institutional strengthening to be funded under the

WRCP will be fundamental to the sustained drive to improve water sector

performance under the WRCP and beyond, and important to the success of all

project components. In March 1994, GOTN announced by Government Order the

bifurcation of PWD to create a "Water Resources Organisation" (WRO), divested

of all non-water sector related activities. It was also announced that the

WRO would involve an internal reorganization to create functionally

specialized sub-units and decentralization of line management along river

basin lines. Reorganisation has already commenced for several of WROs

management units, including creation in March 1995 of an Engineer-in-Chief(EIC) position to head the WRO (the former post of CE Irrigation and General

needed to be upgraded so that the authority of the head of WRO was clearly

established).

2.25 The detailed changes agreed with the new WRO have the following

principal effects: (a) a single head of the WRO at EIC level; (b) reduction

to a manageable number of sub-units reporting to the EIC; (c) decentralized

management of field activities through four Chief Engineer (CE) level "basin

17

managers" with boundaries corresponding to boundaries of river basins or

groups of basins; (d) reorganization at headquarters around the followingfunctionally specialized units, each headed by a Chief Engineer: plan

formulation; design, construction and research; operations and maintenance;

and state water resources data center; plus water planning under IWS (para

2.18) and training support through IMTI (para 2.15); (e) creation of

management support units for: programming and budgeting, and monitoring and

evaluation, and strengthening of administration; and, (f) creation of a

groundwater regulatory directorate (para 2.38) and a special office for land

acquisition and economic rehabilitation (para 2.28). Descriptions of the new

functions and organigrams are at Annex 2. Reorganization along the abovelines is currently underway and is being assisted by a visiting consultant.

The ensuing strengthening in all capability areas of the new WRO will require

sustained effort by WRO over a number of years, and substantial training and

consultancy support (para 4.02). The WRCP provides funding in support of

these objectives for consultancy, training, study tours, equipment and

vehicles. At negotiations, the organizational charts and details at Annex 2

were reviewed and confirmed.

V. Land Acquisition and Economic Rehabilitation (US$3.9 million, 1% of

investment base cost, Annex 9)

2.26 The project's Land Acquisition and Economic Rehabilitation Action Plan

(LAERAP) described at Annex 9, provides a comprehensive program, to be funded

under the project, to enable all project affected persons (PAPs) to maintainor improve their incomes and welfare on a sustainable basis. The Action Plan

comprises: (i) establishment of an organisational structure to handle water

sector LAER; (ii) adjustments in policies and procedures for LAER to enable

compensation and economic rehabilitation to be fully responsive to the needs

of PAPs; (iii) improved entitlements for PAPs; and (iv) site specific

implementation programs on the basis of sub-project LAERAPs withimplementation assisted by NGOs. The comprehensive measures on the

institutional, policy and procedural front have been designed to establish

permanent capability for future LAER in Tamil Nadu's water sector, thus

enabling benefits beyond the specific needs of the WRCP investment program

itself.

2.27 A baseline consultant's survey has found that the WRCP investment

program would involve, statewide, acquisition of some 570 ha of farmed land

involving about 1460 project affected persons (PAPs) (approximately 710

households). No village residential sites are being relocated, although

(statewide) 12 dwellings would be affected. The needs of all PAPs would becatered for under the WRCP, based on completed detailed socio-economic surveys

and Land Acquisition and Economic Rehabilitation Action Plans (LAERAPs)undertaken by consultants and WRO, with PAP participation, for each of the

scheme completion sites where LAER is involved. The project's LAER componentwould remedy several past weaknesses in Tamil Nadu. The measures comprise:

(a) strengthening of the institutional capacity to expedite LAER throughestablishment of a special cell for LAER within the WRO and district level

negotiations and economic rehabilitation and grievance committees and field-

based officers (para. 2.28); (b) provision of entitlements to economic

rehabilitation and maintenance grants for specific categories of project

affected persons (PAPs) (para. 2.29); (c) assistance to PAPs provided by NGOs

for purchase of productive assets for self employment or for other income-

18

generating activities, to restore PAPs to their original economic status or

better (para. 2.29); and (d) facilitating access, through NGO's assistance,

to existing government poverty alleviation programs and income generatingschemes (para. 2.29).

2.28 To implement the WRCP's LAER program and to establish permanent

capability for future state needs in the water sector, a LAER Office has beenestablished in WRO headed by a senior Indian Administrative Service (IAS)officer. The LAERO will be directly responsible for implementation and

monitoring of the Land Acquisition and Economic Rehabilitation Action Plan andits scheme-level LAERAPs, and is also be the secretariat of a state levelCoordinating Committee comprising the Secretaries WRO (Chairman), Land

Administration, Finance, Rural Development, WRO EIC and the District

Collectors where LAER is involved. At district levels, Negotiation Committeesand Economic Rehabilitation and Grievance Committees would be established toensure district level coordination. For each LAER site, an NGO will be

contracted by LAERO to undertake primary responsibility for implementing the

economic rehabilitation program and to represent the interests of PAPs (rightsand entitlements), organize community participation and handle women's needs,

and facilitate access to ongoing Government development schemes (criteria for

NGO selection are at Annex 18). A full-time WRO official has also been

delegated at each site to provide hands-on WRO assistance (Implementation

Schedule and Organization Chart at Annex 9, Attachments 2 and 3).

2.29 Agreed criteria for eligibility and specific details for compensation

and rehabilitation packages are described at Annex 9. They include definitionof PAPs to include landless PAPs (encroachers, sharecroppers and tenant

farmers), and the use of negotiated purchase. This provides PAPs (personally

or through an NGO representing the PAP's interest) the option to request

negotiated settlement with a Negotiation Committee, a procedure widely used in

India and found to provide higher remuneration than the rates determined by

assessed market value. Particular emphasis will be placed under the LAERAPs

on economic rehabilitation. A first option available to marginal farmers with

incomes below the poverty line would be provision of productively comparable

land-for-land with assistance by the NGO. The land would be identified by the

PAPs within a well-defined geographic area near the village or in the command

area within a specific time frame. The terms of replacement would be on an

equal basis of one acre of dryland lost to one acre of replacement dryland, or

one-half acre of replacement irrigated land. Compensation paid for the land

lost would be applied to the cost of the replacement land and the differencewould be borne by GOTN. As a second option, a farmer may elect to receive,

in addition to compensation for land acquisition, Rs.14,000/ha of dryland lost(or Rs.28,000/ha for irrigated land lost) as rehabilitation grant fund (RGF)

up to a maximum of six acres of unirrigated or three acres of irrigated land

lost. The amount would be deposited by the NGO in a joint bank account with

withdrawal against signature of the PAP, the NGO and the LAERO. Withdrawals

would be linked to purchase of productive assets such as farm animals,

implements, items for self-employment, or other income-generating activities.Both the land-for-land option and the rehabilitation grant fund (RGF) option

would be supplemented by the provision of an asset maintenance grant (AMG) of

Rs. 500/month/family applied from date of takeover of land by WRO when the

landowner loses his right to cultivate the land and ends with either

possession of replacement land or one year after establishment of the joint

bank account. The AMG would be to ensure that the PAPs have assured income

19

and are not obliged to sell existing family assets pending restoration ofearning ability. Finally, additional to the above, through the districteconomic rehabilitation committees and facilitated by the NGOs, existing ruraldevelopment programs (many programs exist, eg IRDP, the sericulture program,NABARD credit, horticulture, Training of Women in Agriculture, dairycooperative development) would be specifically targeted to land acquisitionsites. One additional innovatory program -- fisheries culture by PAPs on thesmall reservoirs created - would be specifically funded (equipment, trainingand consultancy totalling US$0.2 million) under the WRCP (Annex 9, Attachment6). The other government programs are existing and simply need targeting byGOTN to the PAPs. The objective of the LAER program together with itssupplementary rural development activities would be to create a record oftangible gain in welfare and earning capability for PAPs.

2.30 The LAER Action Plan would be supported by IDA funding of equipment,vehicles, training, consultancies and incremental staff and operating costs ofthe LAERO. IDA funding would also finance the NGO contracts with LAERO,including, within the contracts, the NGO's management of the rehabilitationgrants for purchase of productive assets. GOTN would finance all landpurchase and other compensation and the asset maintenance grant fund. LAERmonitoring and special auditing provisions (para 4.08) would apply to ensurethe RGF and AMG were used for creation of productive assets (RGF) andsafeguarding of existing welfare and assets (AMG). The consultancy assistancewould include an annual review by an independent consultant of the status ofPAPs at all sites. Prior to negotiations GOTN: (i) completed throughGovernment Orders the remaining announcements on the features of the LAERprogram: (a) expanded definition of PAPs to include encroachers,sharecroppers, and tenant farmers; (b) the option for PAPs to use negotiatedpurchase procedures; (c) land-for-land provisions for marginal farmers or theoption for alternative assets funded through the RGF; (d) provision to allPAPs of the AMG; (e) the institutional structure for LAER; (f) use of NGOsto assist implementation for economic rehabilitation, management of the RGFand AMG and assistance to PAPs in negotiated purchase procedures; and (g)targeting of rural development programs including the fisheries program; (ii)announced through Government Order the head of the LAER cell with a suitablyqualified IAS officer; and (iii) completed the site-specific socio-economicsurveys and action plans. At negotiations an assurance was provided that landacquisition and economic rehabilitation would be implemented in accordancewith a plan satisfactory to IDA. Implementation details for the LAER ActionPlan (paras 2.26 through 2.30 and Annex 9) were agreed, including details andtiming for implementation of the scheme-level LAERAPs.

D. Policy Reforms

Policv Reform Program

2.31 During project preparation, GOTN implemented a number of key actions toprovide the necessary institutional and policy framework to achieve theproject's objectives (paras 2.04 and 2.05). These included: (i) announcementand commenced implementation of the institutional reforms comprising aseparate specialized Water Resources Organisation and creation of the statewater planning apparatus; (ii) preparation of a state water policy; (iii)agreement on refocussed expenditure priorities; (iv) full funding ofmaintenance; (v) establishment of new approaches for environmental

20

management; (vi) agreement on revised policies and procedures for land

acquisition and establishment of the institutional structure for itsimplementation; and (vii) forging of a new farmer integrated approach for

irrigation investment, O&M and cost recovery. These measures will be followed

up in the implementation of the WRCP, as described in the project componentsabove and other features presented below. The package of policy and

institutional strengthening measures to be implemented under the WRCP was

affirmed at negotiations through submission by GOTN of a Policy Reform Program

under a Letter of Development Policy (attached as Annex 1).

State Water Policy

2.32 An early product from the WRCRC has been preparation of a State Water

Policy for Tamil Nadu (Annex 6), consistent with GOI's National Water Policy(1987), and with the overall objectives of the Bank's policy paper, Water

Resources Management (1993) and the India Irrigation Sector Review (Report

9518-IN, 1991). The document, prepared on the basis of a state workshop

organised by IWS in 1993 and issued by GOTN in July 1994, places Tamil Nadu asthe first of India's states to have issued a state water policy. In its

policy statement Tamil Nadu highlights water scarcity and the need for its

management as a unitary resource; by river basin, conjunctively for both

surface and groundwater, integrating environmental management, planningholistically for all uses of water, and carefully prioritizing waterallocation to maximise productivity, with first priority to householdconsumption needs. Actions highlighted include: establishment, with the new

WRCRC and IWS as principal coordinators, of a state institutional apparatus

for planning and allocating water between sectors; introduction of

legislation for regulating groundwater; improving the efficiency and

productivity of existing water infrastructure; monitoring and regulatory

measures to enhance water quality and protect against overextraction of

groundwater; preparation of flood control, drainage and drought management

plans; cost recovery based on users paying for services and periodic

adjustment of water rates; and strong emphasis on beneficiary participation

including turning over of maintenance and management of distribution systems

to users as the systems are upgraded.

Expenditure Prioritization

2.33 In line with Tamil Nadu's State Water Policy and the recommendations in

the India Irrigation Sector Review and the India, Public Expenditure Review,

the project would forge a fundamental reprioritization of public expenditures.The new emphasis would be on intensified use and sustainability of existing

infrastructure and improved institutional performance. In its Letter of

Development Policy GOTN proposes to allocate public expenditures in thefollowing priority order: (i) activities supporting the reorganization and

technical strengthening of WRO; (ii) O&M of existing facilities (para 2.34);

(iii) the system improvement and farmer turnover program; and (iv) viable

scheme completions. This reordering would enable turning around the pastsituation where diversion of funds to new construction left insufficient funds

for maintenance and the large benefits from modernization, and would alsoenable financial support to the project's institutional strengthening, water

planning and environmental management objectives. Inclusive of several small

and separately financed ongoing or expected activities of WRO (Tamil Nadu'scomponents under the Bank financed Dam Safety project, Cr 2241/Ln 3325, and

21

the proposed National Hydrology project, and the EEC financed Tanks project),the agreed WRCP program would represent the entire state expenditure programof WRO and would serve as an instrument to sustain the turnaround in effortand expenditures of WRO, corresponding to the priority needs of the state. AnAnnual Review process (para 4.11) and strengthened programming and budgeting,monitoring, and investment selection criteria (Annex 15), confirmed duringnegotiations, would ensure consistency with these priorities while enablingprogram flexibility as sectoral needs evolve and water planning becomesfurther established. The WRCP would serve to institutionalize the new watersector expenditure priorities by creating the analytical and proceduralmechanisms required and progressively strengthening the staff andinstitutional capability to implement them. Additionally, for the powersector, GOTN provided an assurance at negotiations that it would implement aprogram satisfactory to IDA for reducing subsidies provided to the Tamil NaduElectricity Board (TNEB) and cause TNEB to implement a program satisfactory tothe Association for improving its cost recovery and maintaining a soundfinancial status.

Maintenance Funding

2.34 GOTN is committed to ensuring that the WRCP's investment in systemsimprovement is accompanied by completely revamped management of operations andmaintenance and full funding of the state's future maintenance needs (Letterof Development Policy). Funding for maintenance has been progressivelystepped up. From a state-wide average including staffing of Rs 120/ha in1992/93, GOTN increased PWD's allowance to Rs 200/ha in 1993/94 and to Rs265/ha in 1994/95. The 1994/95 allocation comprised an allocation to the newWRO of Rs 150/ha in a separate budget account exclusively for worksexpenditures, with the balance Rs 115/ha for staff costs. Similar procedureswere followed for GOTN's 1995/96 budget. The works expenditure allocation inboth 1994/95 and 1995/96 corresponds to WRO and Bank estimates of worksexpenditure needs in the respective years, thus starting the project with full

Government expenditure on this key need (inadequate past funding for O&M hadbeen primarily absorbed by salaries leaving little for actual field works).To ensure the continued priority funding of maintenance in the future, anassurance was provided at negotiations that: (a) GOTN would provide annually,and make available in a timely manner during each fiscal year, starting April1, 1995, to WRO the funds required for satisfactory maintenance of all WRO'sinfrastructure, in order to sustain the infrastructure in full operatingorder; (b) funds would continue to be allocated to a separate maintenanceworks budget exempt from withdrawals for salaries and wages; and (c) WROwould prepare and submit its annual maintenance budget estimates to GOTN andIDA, based on detailed command-by-command estimates following an agreedreporting, programming and budgeting and monitoring and evaluation process.

Cost Recovery (Annex 16)

2.35 Water charges to farmers (basic irrigation rate plus irrigation cesses)amount to about Rs 200-210/ha, amongst the highest water charges in India.This exceeds the Bank/WRO recommended expenditures on maintenance works (1994prices) of about Rs 150/ha, and covers about 80% of all recurrent costs of WROincluding establishment. GOTN is currently reviewing water rates through its"Water Rates Rationalization Committee", and this is expected to simplifyagricultural rates (presently unwieldy involving over 100 assessment

22

categories depending on crop, soils and quality of service), to less than 20

rates under a new rating structure. GOTN intends to follow-up on these

initiatives through creation of a permanent annual review apparatus for

examining water charges, including charges for non-agricultural use. This is

an important need as the absence of such an apparatus has meant that Indian

states seldom examine water rates, resulting in stagnation of rates, for over

a decade in some instances. Second, and most fundamentally, the objective

over time in the agricultural sector will be to internalize revenues

collection and O&M responsibilities at the level of water user associations,

and to link service fees to the quality of service. Universally in India,

farmers have resisted changes in water charges where the service is poor. An

improved service through the systems improvement component allows for change

in both farmer responsibilities and service fees accompanying the improved

performance of the service.

2.36 GOTN intends to undertake the following actions under the project

(Letter of Development Policy). First, GOTN will establish a permanent "Water

Services Charges Committee" (WSCC) comprising user as well as government

representation and reporting to the WRCRC. This would prepare an annual

status report and recommendations covering all uses of water. In the first

year, and as needed thereafter, consultant assistance would be funded under

the WRCP to prepare a state-wide computerized model for assessing service

costs and revenues of all water services by use (Annex 16). Dates advised by

GOTN at negotiations for establishing the WSCC and for preparing the

computerised model were July and December 1995 respectively. Second,

financial arrangements accompanying turnover of distributaries to farmers

after stage II improvement (para 2.12) were confirmed at negotiations.

Farmers would contribute Rs 250/ha to their farmer councils prior to agreement

with WRO for stage II investment. This would be placed in an interest earning

capitalization account. Farmers would use interest earnings or annual fees

collected by themselves to finance their cash costs for maintenance of

distributaries. For lining under stage II investments, farmers would also

contribute 20% of the costs of lining to their council bank account, further

capitalizing their capacity to finance their O&M, and providing an internal

incentive to economize for this expensive works item to reaches where lining

is assessed to have significant benefits. Third, as described in GOTN's

Letter of Development Policy, the report of the Water Rates Rationalization

Committee and/or the 1995 report of the Water Services Charges Committee would

include analysis and recommendations related to: simplifying existing rates,

providing a mechanism for adjusting rates over time in line with service

costs, recommendations for introducing volumetric charging to established

farmer councils, recommendations for providing farmer councils the option to

collect the service fees due to government including retention of part of fees

as a collection incentive, and recommendations for introducing direct

provision of collected fees to the O&M bank accounts of individual schemes.

Groundwater Manaaement

2.37 The project would also introduce planning, measurement and regulatory

mechanisms to monitor and manage the state's groundwater resources. The

WRCP's basin planning component (para 2.18) integrates conjunctive assessment

of surface and groundwater resources and would be supported by the

strengthened hydrological data collection and monitoring funded under the

proposed National Hydrology project. Under the WRCP GOTN also intends to

23

establish a groundwater regulatory mechanism and supporting legislation

(Letter of Development policy). The proposed legislation, targeted in the

Letter of Development Policy to be ready for GOTN review by December 1996, is

expected to be a modification of the India Model Law and a draft report

prepared by UNDP and GOTN, making enforcement more rigorous and increasing

penalties for violations. A system of water use licence would be used, and

new groundwater abstraction would require licensing. GOTN established byGovernment Order a nucleus Groundwater Regulatory Unit in WRO in September

1994. This is being followed up by preparation of a description of tasks tobe performed and preparation of a proposed set of measures (guidelines,

Government Orders in lieu of legislation, procedural improvements) that would

establish better control and monitoring of groundwater development and usage

pending legislation. The unit would also prepare and revise the proposed

legislation and be responsible for technical guidance and steerage of the

draft in the GOTN review process.

III. COST ESTIMATES. FINANCING AND DISBURSEMENTS

Costs and Financina

3.01 Proaram and Project Investment Costs. The total cost of WRO's program

during the project implementation period is estimated at US$491.0 million,

including physical and price contingencies, with a foreign exchange component

of US$75.8 million (15%) and taxes and duties estimated at about US$34.4

million. Program costs comprise the project investment costs of the WRCP,

which would be supported with IDA funding (para. 3.03), and WRO's recurrent

expenditures funded by GOTN. Project investment costs amount to US$315.6

million, including physical and price contingencies and US$22.0 million in

local taxes. Project investment costs cover: investment expenditures on

civil works for systems improvement and scheme completions; and, the costs of

equipment, facilities, and training/consultancies, for water planning,research, institutional development, the environmental action plan, and

economic rehabilitation costs associated with land acquisition. WRO's

recurrent expenditures comprise the costs of maintenance, staff salaries, and

overheads, and amount, including contingencies, to US$175.4 million. Physical

contingencies were applied to baseline costs at the rate of 15% for equipment,

10% for civil works and vehicles and zero for consultancies and training, and

price contingencies at the rates estimated for international and domestic

inflation prior to negotiations (Annex 11).

24

3.02 Summary project costs are provided below and detailed at Annex 11.

Tamil Nadu Water Resources Consolidation Project

Project Cost Summary

Local Foreign Total Local Foreign Total

Rs. million US$ million

Project Investment Costs

Systems Improvement & 4,001 577 4,578 125.1 18.0 143.1

Farmer Turnover

Scheme Completion Works 2,195 264 2,459 68.5 8.3 76.8

Water Planning, Environmental

Management & Research 309 364 673 9.6 11.4 21.0

Instit. Strengthening 419 146 566 13.1 4.6 17.7

Land Acquisition and

Economic Rehabilitation 123 3 126 3.8 0.1 3.9

Total Baseline Costs 7,047 1,354 8,401 220.1 42.4 262.5

Physical Contingencies 670 99 769 20.9 3.1 24.0

Price Contingencies 1,956 308 2,263 25.9 3.2 29.1

Total Project

Investment Costs 9.673 1,760 11.433 266.9 48.7 315.6

WRO Recurrent Costs (GOTN) 5,372 982 6,354 148.3 27.1 175.4

Total Program Costs 15.045 27.742 1 7.787 415.2 75.8 491.0

3.03 Project Financina. The proposed IDA Credit of US$282.9 million would

contribute to financing of the project investment costs of the WRCP. The IDA

contribution would be equivalent to 58% of the costs of WRO's program (62%

exclusive of estimated taxes and duties) or the equivalent of 100% of the

foreign exchange and 54% of local program costs net of taxes and duties.GOTN's contribution to project investment costs would be US$32.7 million

equivalent, and to WRO recurrent costs (100% financing by GOTN) would beUS$175.4 million making a total GOTN contribution to the costs of WRO's

program of US$208.1 million, as tabulated below.

25

Financing Plan

Local Foreign Total

--- US$ Million -------------

Project Investment CostsGOTN 32.7 0.0 32.7

IDA 234.2 48.7 282.9Total Project

Investment Costs 266.9 48.7 315.6

WRO Recurrent Costs (GOTN) 148.3 27.1 175.4

Total Program Costs 415.2 75.8 491.0

3.04 The Credit would be made available to GOI on standard terms andconditions and on-lent to GOTN under standard terms for developmentalassistance to the states. At negotiations an assurance was obtained that GOIand GOTN would implement a system satisfactory to IDA for channelling thefunds required for the project to the project entities. An understanding wasalso reached that GOI would release about three months anticipated projectexpenditures in advance to GOTN (in accordance with the amounts established inthe Annual Action Plans, para 4.11), and that upon receipt of funds from GOI,GOTN would transfer such funds, together with its quarterly counterpartcontributions, immediately to the project accounts of WRO. The projectcompletion date would be September 30, 2001 and the Closing Date of the Creditwould be March 31, 2002.

Procurement

3.05 Land (US$0.7 M). Land acquisition would comprise, statewide, about 570ha of private lands. GOTN would finance all land acquisition costs.

3.06 Civil Works (US$268.8 M). Civil works are scattered throughout thestate and are primarily for rehabilitating and modernizing existing irrigationand drainage networks or completion of ongoing schemes, plus a few smallbuildings (workshops, training and office space). Such works, carried outthroughout the life of the project over more than 65 locations, would notattract foreign bidders due to their dispersed nature and the small size ofthe individual contracts (works at each site would average only US$4.0million, and each site would involve individual works scattered throughout thedistribution system). Therefore, these works would be procured throughnational competitive bidding (NCB) or Force Account as follows:

(a) NCB (US$259.8 M). Works would be grouped into convenientpackages (80% over US$100,000 and above) for bidding and contractswould be awarded on the basis of standard NCB documents andfollowing procedures satisfactory to the Association. Foreigncontractors would not be precluded from participation.

(b) Force Account (US$9.0 M). Force Account would be used on small,scattered civil works valued at US$15,000 equivalent or less, up to anaggregate amount not exceeding US$9.0 M to carry out very small worksin isolated and inaccessible locations that are not suitable for

26

contracting. Force Account may also include rates and labor contracts

as appropriate. Materials required for these works valued at US$2.9 M

would be procured under national shopping.

The civil works will be executed by WRO (PWD's former irrigation wing) which

has executed, and is executing Bank-financed contracts, and is fully

conversant with Bank procurement procedures.

3.07 EauiDment, Materials and Vehicles (US$22.7 M)

(a) EpuiDment and materials (US$17.1 M) would comprise a one-time investment

in maintenance equipment, and purchases of computers, other office equipment,

and various laboratory, teaching and field equipment. Procurement wouldprimarily be through international competitive bidding (ICB), which would

apply to purchases that can be bulked and is expected to amount to US$14.9 M.

Up to US$1.1 M of materials and equipment, including maintenance equipment,

available locally and easily serviced through local facilities, in contracts

valued below US$200,000 equivalent each, would be procured through NCB.

Isolated or smaller lot purchases, including in particular, immediate

requirements of equipment and materials, would be procured following national

shopping procedures in packages below US$25,000 equivalent each, up to an

aggregate total of US$1.1 M.

(b) Vehicles (US$5.6 M) would consist of cars, four-wheel drives, vans,

trucks and motorcycles. ICB would be used for the bulk of purchases (US$4.0

M). Isolated or small lot purchases over the seven year life of the project

including immediate requirements, each contract not exceeding US$100,000,

would be procured using national shopping procedures acceptable to the Bank

(US$1.6 M).

The Bank's standard bidding documents would be used for all procurement under

ICB/NCB. For comparing foreign and local bids in ICB, the qualifying domestic

bidders would be allowed a margin of preference in accordance with the

provisions of paras. 2.55 and 2.56 of the Bank's procurement guidelines.

Under national shopping, rate contracts of the Director General, Supplies and

Disposals would be acceptable.

3.08 Technical Assistance. Training and Studies (USS22.2 M) Technical

assistance, training and studies includes local and foreign consultancies

(US$6.4 M), contracts under the Water Resources Research Fund (US$3.4 M),

contracts with NGOs for implementation assistance for the land acquisition and

economic rehabilitation component (US$1.3 M) and the farmer turnover component

(US$0.7 M), applied research and special studies by IWS, IHH, CE Plan

Formulation and Basin Managers and under the Environmental Action Plan (US$6.0

M), and costs of staff training including visits in India and overseas (US$4.4 M). Technical Assistance would be contracted on terms and conditions in

accordance with the "Guidelines for the Use of Consultants by World BankBorrowers and the World Bank as Executing Agency", published by the Bank inAugust 1981. It would comprise consultancy through a "twinning arrangement"(para 4.03) which would provide both technical assistance and access to

training arrangements (about US$5.8 M), and a smaller (about US$0.5 M)"supervision consultancy" (para 4.13) to assist GOTN's supervision committee,

and small individual consultancies in particular specialties or as needed.

Selection for the twinning arrangement would be based on an initial screening

27

and prequalification invitation exercise conducted by WRO, followed byinvitation of detailed offers from a shorter list of 3 to 5 interested

consulting groups. Other technical assistance, training, local consultancies,research grants and contracting to universities and NGOs would be arranged byWRO in accordance with Bank guidelines.

3.09 Incremental Staff and Operatina Costs for Land Acauisition and EconomicRehabilitation (USS1.2 M). The Credit would not finance operating costs,staff salaries (except LAER, see below) and maintenance which would befinanced by GOTN. To assist with build-up of the organization required for

management and implementation of the LAER program, incremental staff andoperating costs for LAER would be financed by IDA on a declining basis (US$1.0

M; para 3.13).

3.10 Review of Contracts. All contracts for civil works, goods and equipment

valued at US$200,000 and above, and all consultancy contracts valued at

US$100,000 and above (US$50,000 equivalent for individual consultants) and all

single source consultancy contracts over US$100,000 equivalent, as well as the

first five contracts under each of the works, goods and consultancy categories

irrespective of the values would be subjected to prior IDA review. All other

contracts would be subject to random post review in the field by visitingmissions. This will result in about 50% of the project procurement beingsubject to prior review. WRO is experienced with Bank procurement, both under

the ongoing NWMP project and the recently closed Periyar Vaigai project, and a

higher level of formal reviews by IDA would not have a significant impact onprocurement quality.

3.11 Procurement Manaaement. The following procedures for the WRCP's

procurement management were agreed at negotiations:

(i) except where may be specifically agreed by IDA, prequalification

procedures would not be used;

(ii) as a minimum, all bid invitations would be advertised in newspapers with

national circulation and shall contain in summary form the post-qualification

requirements. Bid documents shall be provided promptly upon request, uponpayment of the prescribed fee, and shall be sent by mail upon request;

(iii) Bids shall be evaluated, contract award approvals sought and granted

(including that of IDA, where required) and contracts signed, all within the

bid validity period, and a justification for any exceptions shall be forwarded

to IDA;

(iv) At time of bid opening, WRO would appoint (or retain) a suitably

qualified individual (the Evaluator) to prepare a signed and dated Bid

Evaluation Report (BER), following a format and content acceptable to IDA.

The BER will be prepared as expeditiously as practicable;

(v) A Contract Award Committee (CAC) for the WRCP, with constitutionacceptable to IDA, would be authorised to recommend the award of the contract

(subject where required to approval by IDA prior to award, para 3.10). The

Bid Evaluation Report shall be submitted to the CAC within seven working daysof its completion. The CAC members would sign a dated minutes of their

proceedings and decisions which would be kept on file, for possible review by

28

IDA and, where required, also furnished promptly to IDA for approval along

with the BER. (The CAC was established by Government Order in October 1994

and comprises the Secretary PWD/WRO, Secretary Finance and EIC, WRO.); and

(vi) WRO's quarterly reports (para 4.10) would contain summarized procurement

data including for each contract the dates of bid invitation, receipt,

evaluation, approval and signing, and the names of contractors bidding, offer

prices and firm awarded the contract.

3.12 The proposed procurement arrangements are summarized below:

Summary of Proposed Procurement Arrangements*

(US$ million)

Total Project

National Force Consult. Investment

ICB NCB Shopping Acc't Serv's NBF Costs

1. Land 0.7 0.7

2. Civil Works 259.8 9.0 268.8

233.8 8.1 241.9

3. Vehicles 4.0 1.6 5.6

3.2 1.3 4.5

4. Equipment and 14.9 1.1 1.1 17.1

and Materials 11.9 0.9 0.9 13.7

5. Consultancies,Studies, Training

(i) Imp. Supp't. 8.7 0.4 9.18 .7 8.7

(ii) Policy Supp't 3.3 3.3

3.3 3.3

(iii) Capacity Bldg. 9.8 9.8

9.8 9.8

6. Incremental Opera- 1.2 1.2ting Costs (LAER) 1.0 1.0

Total Project

Investment Costs* 18.9 260.9 2.7 9.0 21.8 2.3 315.6

15.1 234.7 2.2 8.1 21.8 1.0 282.9

Note: Figures in bold print are the respective amounts to be financed by IDA.

ICB: International Competitive Bidding; NCB: National Competitive Bidding;

NBF: Non-Bank financed (except as in para. 3.13 d).

* Excluding WRO recurrent costs which are funded by GOTN.

29

Disbursement

3.13 The proceeds of the Credit would be disbursed against:

(a) 90% of expenditures on civil works;

(b) 100% of foreign expenditures or 100% of local ex-factory costs or80% of other local costs of equipment, vehicles and materials;

(c) 100% of expenditures on consultants' (including NGOs') services,training and studies; and

(d) for the land acquisition and economic rehabilitation component,90% of incremental staff salaries and allowances and operatingcosts covering the period to March 31, 1997 (to end PY2), 80%through March 31, 1998 (PY3), 60% through March 31, 1999 (PY4),40% through March 31, 2000 (PY5) and zero for PY6.

3.14 Disbursements against civil works, equipment, vehicles and materialscontracts exceeding US$200,000 equivalent and consultancy and training

contracts exceeding US$100,000 would be fully documented (for individualconsultants the limit would be US$50,000 equivalent). For all otherexpenditures, disbursement could be against Statements of Expenditures (SOEs).

Supporting documents for SOEs would not be submitted to IDA, but would beretained by GOTN and made available to IDA staff during supervision (Annex 12for Schedule of Disbursements). Disbursements against the NGO contracts forLAER would exclude the maintenance grants (para 2.30) to be funded byGovernment (US$0.4 million).

Retroactive Financing and SDecial Account

3.15 WRO has already commenced field activities related to the WRCP toexpedite project start-up. To reimburse GOTN for such expenditures,retroactive financing would be applied to all eligible expenditures incurred

from July 1, 1994 provided that procurement procedures acceptable to IDA werefollowed. Additionally, for completing the remaining (7%) balance works forthe link canal under the former Periyar Vaigai Irrigation II project, theearlier date of November 1, 1993 would be applied (up to US$1.5 million).

Since December 1993, and earlier for the link canal, WRO has used Bankprocurement guidelines. The additional guidelines at para 3.11 would applyfrom Credit signature. The total amount of retroactive financing, includingthe link canal, would amount to up to US$11 million or about 4% of the Credit.To facilitate project implementation and to reduce the volume of withdrawalapplications, a Special Account in US dollars would be established in the

Reserve Bank of India with an authorised allocation of US$10 million. Thisdeposit is based on estimates of the project's financing needs and projected

IDA disbursements (Annexes 11 and 12).

Accounts and Audit

3.16 Project accounts, maintained by WRO, would identify all projecttransactions on an ongoing basis, including contributions from GOTN, GOI andthe Credit. At negotiations, assurances were obtained from GOI and GOTN that:(i) project accounts, including the Special Account, would be maintained and

30

audited annually in accordance with sound auditing standards consistently

applied by independent and qualified auditors acceptable to IDA; and (ii)certified copies of the annual financial statements and SOEs together with theauditors report, which would comment separately on the SOEs, would besubmitted to IDA not later than nine months after the close of each GOTNfiscal year (April 1 to March 31).

IV. PROJECT IMPLEMENTATION AND MONITORING

Oraanization and Manaaement

4.01 The project would be implemented by Tamil Nadu's Water Resources

Organization (WRO). As the project and its contributing IDA and state fundsare supporting the overall program of WRO, project years, project monitoring

and physical and financial planning fit in with the GOTN fiscal year (April 1

to March 31). Project management would be the responsibility of the Engineer-

in-Chief, WRO (para 2.24) under the guidance of the Secretary PWD/WRO. WRO'snew organizational structure (para 2.25) is at Annex 2. Implementationarrangements are in the Implementation and Supervision Plan at Annex 13. This

includes an Implementation Schedule, Implementation Responsibilities, IDA

Supervision Schedule, and Development Indicators at Attachments 1, 2, 3 and 4respectively.

Training and Technical Assistance

4.02 The extensive reorganization and institutional strengthening to be

undertaken under the project would require substantial training and technical

assistance throughout the new WRO. Training and consultancy needs have been

prepared for each management unit and are detailed in their respective cost

tables. Each CE would be responsible for managing the specific training and

consultancy relevant to his management unit, but would receive administrative

support from a Training and Technical Assistance officer in the EIC's office.

Overall coordination and identification of training opportunities would be

provided by the CE, IMTI. The EIC would provide general guidance and balance

needs between WRO units. Training would focus on strengthening skills in all

engineering areas including operations and maintenance, water planning,

environmental management, design and construction, and on supporting skill

development associated with technologies or management techniques relatively

new to WRO such as financial management, programming and budgeting, criticalpath scheduling, computerization, computer aided design, remote sensing and

management information systems. For consultancies, in order that know-how is

transferred to WRO staff, consultant assistance would be linked in all casesto staff training through association of staff with consultant assignments and

interlinked formal training as practicable. National and international study

tours and temporary assignments would also be used to provide first-hand

exposure to new technologies and management techniques.

4.03 Consultancy arrangements would include small consultancies with

individuals or firms, but would be backstopped throughout the project periodwith a "twinning arrangement" with an experienced consultancy group. All

consultancy selection would follow Bank guidelines. The twinning arrangement

is expected to be a consortium of several firms or specialist institutions,combining a mix of international and local firms. The central skill areas,

31

seldom found in one firm or agency, would likely comprise all aspects ofirrigation engineering, water planning, and environmental management, andhands-on irrigation agency management, particularly in O&M, general managementtechniques and beneficiary participation. One of the firms or agencies wouldbe the lead partner and have overall responsibility for mobilizing the

consultancy and training support required. The contract would provide a basicexpertise and training input annually, including some core senior staffproviding continuity of visits, and access to other specializations and

training on an "as needed" basis. Selection would be through an initial pre-qualification of interested firms, which would advise of any intendedpartners, followed by short listing by WRO of 3 to 5 firms or groups of firmsfor submission of detailed offers. A contract over the project period wouldbe agreed at the outset, with flexibility for annual variations based on anannual review of consultancy and related training needs between WRO and theconsortium in consultation with GOTN and IDA. The above procedures wouldprovide the expertise required while limiting constraints frequently found inIndia of obtaining individual clearances, especially for consultants andtraining requiring foreign exchange. At negotiations, the above consultancyand training objectives were confirmed. Suitably qualified and experiencedNGOs would be recruited for implementation of the LAERAPs (para 4.08), and ascommunity organizers for farmer participation and turnover (para 4.04). Atnegotiations an assurance was obtained that any NGOs contracted under theproject would be selected according to criteria (Annex 18) agreed with IDA.

Manaaement of Farmer Organization (Annex 4)

4.04 Special organizational needs are posed by the farmer participationand turnover program, already being piloted but recognized by WRO as requiringa major staff focus supported by NGOs and consultants for its success on awider scale. Organization and staff and farmer training for this isintensively underway with assistance of a core team of WRO staff and aconsultant advisor. Farmer Organization (FO) would be implemented integrallywith system improvements and would come under the CE O&M for technical supportand monitoring, and under the respective basin managers and scheme levelexecutive engineers for field implementation. At both CE, O&M and basinmanager levels, a deputy CE will be charged with supervising the FO program.

The work program of IMTI has been adjusted to focus principally on trainingfor staff and farmers related to the farmer participation and systemimprovement program (Annex 4, Attachment D). All O&M staff would receive"appreciation" training, with more intensive training and consultancy supportfor specialized FO teams and for the office bearers in farmer councils. About15 FO teams would be deployed throughout the project period, each comprising 3WRO staff and two community organizers (a man and a woman) and handling about5000 ha per cycle (about 1 1/2 years per cycle typically, followed by less

intensive FO support to established water user associations). AnInstitutional Advisor would supervise 2 to 3 FO teams. A consultant SeniorInstitutional Advisor, would supervise the entire FO effort from the CE, O&M'soffice. The Community Organizers and Institutional Advisors would berecruited through local NGOs with practical field experience. The FO programincludes national and international consultancy support and provisions fornational and international training and study tours.

4.05 The farmer organization and turnover program would be intensivelymonitored and evaluated throughout the WRCP period, incorporating lessons

32

learned from experience. This would commence with a targeted survey in PYI toassess the state of affairs on specific criteria and to refine M&E criteria toensure meaningful qualitative indicators of impact (Annex 4, Attachment E). Aspecial review of the farmer oraanization and turnover prooram by independentconsultants would be undertaken at the end of PY2, sufficiently early inproject implementation to enable timely adjustment as needed. The WRCP's

annual reviews (para 4.11) would also have a special section on thiscomponent. The above arrangements were confirmed at negotiations.

Management of Land Acauisition and Economic Rehabilitation (Annex 9)

4.06 The Land Acquisition and Economic Rehabilitation (LAER) Cellreporting directly to the Secretary WRO would be responsible for planning,coordinating, monitoring and evaluating all land acquisition and economicrehabilitation of project affected persons (PAPs) under the project. It wouldalso serve as the secretariat for a state level coordinating committee forLAER under the WRCP. It would be responsible for contracting with NGOs tocarry out Economic Rehabilitation Action Plans (ERAPs) for each subproject,overseeing their work, and providing approval for the joint accounts to beestablished under the ERAPs. The LAER Cell would be provided with adequate

funding to carry out its mandate.

4.07 At the district level the LAER Cell would be supported by aNegotiations Committee and an Economic Rehabilitation and Grievance Committee(ERGC). The Negotiations Committees have been provided the authority toconduct negotiations with the landowners to establish a full and fairvaluation of land to be acquired for the project. The ERGCs would beresponsible for grievance resolutions and for monitoring the implementation ofthe ERAPs.

4.08 The LAER Cell would contract one NGO per subproject to assist inthe implementation of ERAPs. Funds for the Rehabilitation Grants would bedeposited in joint NGO/PAP accounts established by the LAER Cell. The NGOwould provide assistance to each PAP in preparing and implementing individualeconomic rehabilitation plans. The NGO would be responsible for certifyingthat the Grants had been used for the purchase of productive assets or incomegenerating schemes, and would be subject to special monitoring procedures byLAERO and annual auditing consistent with accepted standards. Approval towithdraw funds from the joint account would be on the basis of threesignatures: LAER Officer, the NGO and the PAP. These arrangements and otherfeatures at paras 2.26 to 2.30 and Annex 9 were confirmed at negotiations.

Monitoring and Evaluation

4.09 WRO's Program and Budgeting unit (P&B), reporting to the EIC,would be responsible for developing and operating a system of physical andfinancial reporting to track project progress, maintaining a computerizedManagement Information System (MIS) and coordinating preparation of annualwork programs and budgets. Each management unit would be responsible forproviding P&B with required information and estimates. A projectImplementation Schedule and Key Project Performance Indicators are provided atAnnex 13, Attachments 1 and 4. A Monitoring and Evaluation (M&E) unit,reporting to the EIC, would use P&B and other data to report on the progressand benefits of the project. Indicators monitored would include:

33

implementation of the institutional strengthening, staff training and

development, physical progress and quality/capacity improvement by all units,

delivery of water and improved services, quality of annual maintenance, farmerparticipation and turnover, cost recovery, agricultural growth and crop

diversification. The remote sensing capability to be built up under the WRCPin IWS would be one of the tools used to monitor water management and somecrop data. In addition to regular data sources from line units, M&E would use

consultant surveys as needed. This would include a Baseline Survey (TOR at

Annex 10) covering agricultural data, household income and socio-economic

data, existing irrigation performance and water use undertaken by consultantsin 1995 as a basis for future monitoring and performance evaluation. At

negotiations, the TOR for the baseline survey and implementation details,including agreement on its completion by December 31, 1995, was confirmed.Additional independent monitoring and evaluation, or assessments on specialist

aspects of project performance and impact would be available from independent

agencies funded under the project's research fund (para 2.22).

Project Reviews and Reporting

4.10 WRO would be responsible for the internal reporting requirementsof the State and GOI (Annex 13 paras 19 to 29). This would take the form of

short quarterly progress reports and a comprehensive Annual Review. ActionPlan and Budaet (ARAPB), both prepared by the P&B unit under the EIC'sguidance. The auarterlv progress reports (Attachment 6 of Annex 13) would

comprise submissions by each implementation unit in WRO which would quantify

and compare progress with the SAR and the previous ARAPB, discuss shortfalls,

and propose measures to resolve any problems. An overview with summarized

data and a listing of decisions taken or recommended, based on each unit's

submission, would be prepared by the EIC's office. This would include a

commentary on the status of decisions/actions outstanding from the last

quarterly report, and a review of outstanding decisions related to any

recommendations by GOTN, GOI or IDA. The reports would be presented to the

Secretary WRO and copied to relevant state officials, GOI and IDA.

4.11 The ARAPB would be the main vehicle for annually taking stock of

project performance and future needs, for adjusting WRO's program as needed,

for budgeting by GOTN of WRO's Plan and non-Plan expenditures, and for review

and supervision by GOTN, GOI and IDA. For WRO it would provide annual

opportunity to assess its overall program, to propose adjustments as needed

and to make a consolidated plan and justification for its forthcoming

financing needs. The ARAPB would review for each component and responsible

unit the past year's achievements in terms of expenditure and physical targets

by quarter, and include a justified work program and proposed expenditure

budget for the forthcoming year. This would include: (i) description of each

year's works, schedule of activities, staffing requirements and distribution

of responsibilities; (ii) proposed expenditures compared with previous year's

expenditures; (iii) details on major civil works contracts exceedingUS$200,000 and for ICB for goods; and (iv) financing plan and source of

funds; plus special sections covering, (v) review of implementation progress

related to the institutional strengthening and policy reforms under the

project; (vi) detailed review and proposal of maintenance needs andcorresponding non-Plan expenditure requirements (para 2.34); (vii) the farmer

participation and turnover program; and (viii) progress of state water

planning under WRCRC and IWS.

34

4.12 At negotiations, the above project review and reporting

arrangements were confirmed including specific assurances related to thefollowing: (i) a draft ARAPB for the forthcoming GOTN fiscal year would besubmitted to IDA for review and comment by December 31 each year, commencingDecember 1995. The GOTN approved ARAPB, taking account of IDA comments, would

subsequently be forwarded to IDA by March 31, and WRO would subsequentlyimplement the agreed action plan, including the timely provision of theapproved budget funds, in a manner satisfactory to IDA; and (ii) not laterthan December 31,1997, GOTN would carry out jointly with GOI and IDA, a

detailed mid-term review of project progress (and possible need foradjustments to components, implementation arrangements and policy reforms),

and thereafter implement its recommendations.

Supervision (Annex 13)

4.13 By integrating creation of management information and programming

and budgeting in the WRCP, the capabilities of WRO to program and monitor its

activities will be strengthened. The reporting arrangements above are also

designed to facilitate monitoring by GOTN, GOI and IDA, and to provide a

mechanism for integrating adjustments in quarterly and annual action programs.

IDA support (Supervision Schedule at Annex 13, Attachment 3) would typically

comprise a main supervision mission annually at time of ARAPB review,supplemented by a shorter mid-year visit, and correspondence and clearances as

needed. In view of the institutional and technical challenges to be

undertaken under the project, GOTN intends to undertake a close monitoring and

supervision role itself, assisted by consultants. This would be through a

state-level "Supervision Committee" formed in April 1995 chaired by the

Secretary WRO and including the Finance Department, Land Development

Commissioner, State Planning Commission, two experienced invited members

(former WRO, other Government agency or business community/NGO) and the EIC.

The committee would meet at least quarterly to review WRO's quarterly reports.The committee would employ a "Supervision Consultant" through a contract with

a national consultancy firm. The supervision consultants would assist the

committee, including two visits annually, overlapping with IDA supervision

visits, and provide extra support as requested by the Committee. Costs of the

consultancy would be reimbursable under the Credit. Consultant reports would

be to the Supervision Committee, and also made available to 0OI and IDA.

These arrangements were confirmed at negotiations and an assurance provided

that the supervision committee would be maintained for the duration of the

project.

V. BENEFITS. JUSTIFICATION AND RISKS

Project Benefits

5.01 The project would generate substantial and wide reachingbenefits. These range from the project's broader impact resulting from multi-

sectoral water planning, environmental management of water resources,

institutional strengthening, beneficiary participation, and refocusing of

public expenditures (para 5.04), to the specifically quantifiable impacts of

the project's two main investment components: the improvement of the existing

irrigation schemes, and the investments in scheme completions.

35

5.02 System ImDrovement and Farmer Turnover. About 660,000 ha of

irrigated land (50% of the state's area under surface irrigation), comprising

some 0.7 million farm families (about 3.9 million persons), would benefit from

the WRCP's system improvement program. Improved reliability of water

supplies, including improved timing of delivery relative to crop needs, would

benefit most farmers, with larger benefits for tail-end farmers who to date

often receive partial or no water. About 107,000 ha of land would change from

partial to full irrigation, and an additional 34,000 ha, presently not

receiving any water, would receive irrigation. Overall, the annual value of

crop output would increase by Rs 1,040 million (US$33 million), including a

170,000 t/annum increase in food grain production. Benefits by family wouldvary depending on the existing status of irrigation in the command and their

position in the command. A typical family with one hectare presentlyreceiving unreliable irrigation would increase agricultural net income by Rs2,100/ha. For farmers currently receiving no or very incomplete irrigation,

incomes would increase by an average of Rs 9,800/ha.

5.03 Scheme ComDletions. The nine selected scheme completions would

augment the state's irrigated area by 31,000 ha and produce an incremental

agricultural output valued at Rs 380 million (US$12 million). Some 26,000

farm families would directly benefit from the investment, experiencing typicalincome improvements of Rs 12,600/ha.

5.04 Non-auantifiable Benefits. Substantial benefits would stem from

the project's institution strengthening and water planning activities, and

associated measures to create a sustainable and client oriented water service.

First, under the WRCP, Tamil Nadu will create a modern water resources agency

and supporting policy and institutional mechanisms to plan and manage water

from a multi-sectoral and environmentally-responsive perspective. Thescarcity of water resources in Tamil Nadu makes optimum water usage critical

to economic development. This cross-sectoral need is important to the

sustainability of development and the environment. Second, the project would

forge revised roles for Government and the private sector. The past

government-dominated approach would adjust to allow for active participation

of beneficiaries including progressive turnover of facility operations and

maintenance functions to farmers. The desired outcome is of a sustainable

infrastructure managed and maintained by local communities, and a client

responsive planning and investment machinery. Cost recovery would be linked

with the new client approach, internalized and collected by farmers at lower

levels in the systems, and with annual reviews related to service costsreplacing the past politically-influenced process. Third, the WRCPpreparation has enabled a complete rethink of irrigation sector expenditurepriorities and their subsequent reflection in WRO's expenditure program. Full

funding of maintenance is to be the first priority, rehabilitation and

modernization of existing infrastructure the second priority, and viable

completions of existing schemes the third. A viable state expenditureprogram, corresponding to the identified priorities, is reflected in the

project's ERR below. The institutional and financial planning measures

established under the WRCP would enable continuity of sound expenditureplanning and sub-project selection beyond the project completion date.

36

Economic Analysis

5.05 Assumvtions. Economic rates of return have been estimated for

each of the project's investment components: the system improvement and

farmer turnover component (55% of project investment costs), and the scheme

completions component (29% of costs). The following assumptions are made:

all costs and benefits are in constant March 1994 prices expressed net of

identifiable taxes; physical contingencies are as in the project cost

estimates at para 3.01; reference prices for main crops and fertilizer are

based on estimated world reference prices adjusted to Tamil Nadu farmgate

values; costs and benefits are adjusted by the standard conversion factor

used in India of 0.9; project benefit and cost streams are extended over 30years; benefits are derived from incremental crop production; the

opportunity cost of capital is 12%; and the project implementation period is

7 years. Assumptions, calculations used and detailed results are at Annex 14.

5.06 ERR and Sensitivity Analysis. The economic rate of return for the

project is calculated as the combined ERR of the two investment components

(80% of project costs) and is estimated to be 17%. The ERR for the

modernization, rehabilitation and farmer turnover component is 19%, and that

of the scheme completions component is 15%. The selection criterion forindividual sub-projects was a rate of return of not less than 12% (Annexes 14

and 15). Benefits have not been quantified for the project's water planning

and environmental action plan, nor for institutional improvement expendituresnot directly related to the two production components. If the costs of these

items (20% of project costs) are included, but without ascribing benefits, the

rate of return would be 13%.

5.07 Overall, the project is robust to significant changes in costs andbenefits: benefits would need to fall by 30% or costs increase by 43% for the

ERR to fall to 12% (i.e. with a net present value of zero). Significantdepartures from estimated costs and benefits are unlikely as costs are based

on actual field experience under PWD's construction program and the National

Water Management Project, and estimated benefits are realistic, having been

based on yield data measured by Tamil Nadu Agricultural University and FAOCP

field visits. Sensitivity tests also assess the impact of shortfalls ofvarious kinds (paras. 5.08 to 5.10). For instance: if benefits lagged by two

years as a result perhaps of insufficient monitoring of implementation

activities, the project's overall rate of return would be 13%; if resources

for maintenance were seriously deficient after project completion, the overallERR would be 13%; or, if independence of farmer organizations is

substantially below expectations, the ERR would be 14%.

Project Risks

5.08 The first risk relates to the project's objectives to implement a

fundamental change in water resources management, covering issues from policy

and institutional changes to adjustment in expenditure priorities and field

activities. WRO will be continually challenged as it implements the project

and progressively adjusts and upgrades its skills to become a specializedstate water agency. Commitment of WRO, and strong political will within Tamil

Nadu to support WRO and its objectives, will be essential for the success of

the project. Recognizing this, preparation of the project has centered oncreating before project start-up, the basic institutional and policy features

37

important to project success. GOTN has undertaken a large number of decisionsand actions to this effect during 1993 and 1994/95, and formalized these inofficial Government Orders. A number of actions, such as the preparation ofthe state water policy, the institutional reorganization and the preparationof the farmer participation component, have entailed extensive discussionwithin Tamil Nadu involving many Government agencies, NGOs and farmers. As aresult, the actions taken and consensus that has been built to achieve thoseactions will help launch the project with a sound base toward successfulimplementation. The progress to date provides confidence that the Governmentwill continue (as it must do to ensure project success) to undertake the toughbut necessary measures to deepen the reform process. While it is recognizedthat full achievement of the reforms is a desired outcome, the project wouldstill be considered a success if significant achievement (though less thancomplete) is realized. This notwithstanding, risk of shortfall has beenreduced through a variety of monitoring and incentive mechanisms specificallybuilt into the project. Over time, such project measures will be reinforcedand significantly overtaken in importance as the client orientation of theproject takes hold and users become important as operators of irrigation andas parties in state and basin water planning.

5.09 The second risk relates to the systems improvement and farmerturnover component. Technical aspects have been implemented and proven on alarge scale - 150,000 ha - under NWMP, and implementation of the WRCP's largerprogram is manageable due to the experience acquired under NWMP. The farmerorganization aspect is, however, innovatory and unique in India on this scale.The intensive preparation effort and piloting of this component during thepast two years will need a continued drive throughout the project period. Aswith the general institutional reform component above, continued levels ofcommitment during project implementation that yield significant but incompleteachievement of these institutional objectives would still represent successfulattainment of project objectives. To lessen risks of shortfall and to sustainthe efforts already being undertaken by the Government, intensive consultancyand training support have been built into this program, which will alsomobilize community organizers from local NGOs to provide the intensiveassistance required. The project also contains provisions for specialmonitoring and evaluation of the program during implementation, and a detailedreview of the farmer organization component in PY2, so as to allow for earlyadjustments as needed based on the initial experience acquired.

5.10 A third risk, relating to general implementation capacity of WRO,would be reduced by the management improvements integral to project objectivesunder the institutional strengthening of WRO. Supplemented by specialmeasures to improve procurement (para 3.11), timely implementation of theproject's two main components is expected, since WRO (as the former irrigationwing of PWD) has proven capability in management of works where procurementand financial constraints have been resolved.

5.11 Proaram Obiective Cateaories. The project is supportive of theBank's anti-poverty strategy. The project would improve the incomes andliving standards of small and marginal farmers - estimated to form some 70% ofbeneficiaries - through improved and equitable distribution of water forirrigation and domestic use. Employment opportunities for landless familieswould also be substantially enhanced as labor needs are closely linked to cropintensification and yields. For the urban poor, the project's planning

38

component would be important for future bulk water supply needs. Theproject's emphasis on beneficiary participation would help ensure that

beneficiary needs are integrated in all decisions, efficiency is improved andservice quality sustained and affordable. Women, often under-represented inirrigation management and also the primary users of domestic water, wouldreceive special client emphasis. To this effect, half of the villagecommunity organizers would be women, and farmer organization arrangementscontain special provisions for women's participation.

VI. AGREEMENTS AND RECOMMENDATION

6.01 At negotiations, GOTN submitted its detailed Policy Reform Program(which outlines actions undertaken and planned actions regarding the state's

water policy, water planning, institutional reforms, expenditureprioritization, maintenance funding, farmer participation and turnover, costrecovery, land acquisition and economic rehabilitation, the environmentalaction plan, and groundwater management) under a letter of Development Policy(para 2.31) as presented at Annex 1.

6.02 At negotiations assurances were obtained:

(a) from GOTN that any additional scheme completion investments underthe WRCP would be prepared and evaluated according to criteria agreed with IDAand would require IDA's prior review and approval before selection (para 2.17and Annex 15);

(b) from GOTN that land acquisition and economic rehabilitation wouldbe implemented in accordance with a plan agreed with IDA (para 2.30 and Annex

9);

(c) from GOTN that it would: (i) provide annually, and make availableto WRO in a timely manner during each fiscal year the funds required forsatisfactory maintenance of all WRO's infrastructure, in order to sustain theinfrastructure in full operating order; (ii) provide the maintenance funds toa separate maintenance works budget exempt from withdrawals for salaries andwages; and (iii) WRO would prepare and submit its annual budget estimate formaintenance to GOTN and IDA based on detailed command-by-command estimatesfollowing an agreed reporting, programming and budgeting, and monitoring andevaluation process (para 2.34);

(d) from GOI and GOTN that they would implement a system satisfactoryto IDA for channelling the funds required for the project to the project

entities (para 3.04);

(e) from GOI and GOTN that: (i) project accounts, including Special

Account, would be maintained and audited annually in accordance with soundaccounting and auditing standards consistently applied by independent andqualified auditors acceptable to IDA; and (ii) certified copies of the annualfinancial statements and SOEs together with the auditor's report would besubmitted to IDA no later than nine months after the close of each fiscal year

(para 3.16);

39

(f) from GOTN that it would implement a program satisfactory to IDA

for reducing subsidies provided to TNEB, and that TNEB would implement a

satisfactory program for improving its cost recovery and maintaining a sound

financial status (para 2.33);

(g) from GOTN that NGOs participating in the project would be selected

in accordance with criteria agreed with IDA (para 4.03 and Annex 18);

(h) from GOTN that a draft Annual Review, Action Plan and Budget

(ARAPB) for the forthcoming fiscal year would be prepared and submitted by WRO

to IDA for review and comment by December 31 each year, commencing December

1995; the GOTN approved ARAPB, taking account of IDA comments, would

subsequently be forwarded to IDA by March 31, and WRO would subsequently

implement the agreed action plan, including the timely provision of the

approved budget funds, in a manner satisfactory to IDA (para 4.12 and Annex

13);

(i) from GOTN that by December 31, 1997, GOTN would carry out,jointly with GOI and IDA, a detailed mid-term project review and thereafter

implement its recommendations (para 4.12); and

(j) from GOTN that the state-level committee established forsupervising the project (para 4.13) would be maintained for the duration of

the project.

6.03 At negotiations understandings were reached on the following:

(a) from GOI and GOTN that GOI would release three months anticipated

project expenditures in advance to GOTN, and that upon receipt of funds fromGOI, GOTN would transfer such funds, together with its quarterly counterpart

contributions, immediately to the project accounts of WRO (para 3.04), and

from GOTN on the administrative and financial arrangements for the WaterResources Research Fund including GOTN's percentage contributions to the WRRF

account (para 2.23);

(b) with GOTN, details of the Land Acquisition and Economic

Rehabilitation Plan (paras 2.26 to 2.30, 4.06 to 4.08 and Annex 9) were

confirmed; and

(c) with GOTN, arrangements, scheduling and procedures were confirmedfor: (i) WRO's detailed organizational features (para 2.25 and Annex 2);

(ii) farmer organization arrangements including the review in PY2 (paras 2.12,

2.13, 2.36, 4.05 and Annex 4); (iii) the arrangements for procurement

management at para 3.11; (iv) the project's technical assistance and training

(para 4.03 and Annex 13); (v) monitoring and evaluation including completion

of a baseline survey by December 31, 1995 (para 4.09 and Annexes 10 and 13);

(vi) provision and contents of quarterly and annual reporting (paras 4.10 to

4.12 and Annex 13); and (vii) supervision arrangements including the state

Supervision Committee and the supervision consultancy (para 4.13 and Annex

13).

40

6.04 With the above assurances, the project would be suitable for an

IDA Credit of SDR 181.9 million (US$ 282.9 million equivalent) on standard

terms with 35 years maturity.

May 19, 1995

Agriculture and Water Operations Division

South Asia Department 2

IBRD 26167

77' 78' 79- 80-

INDIA

TAMIL NADU WATER RESOURCESCONSOLIDATION PROJECT[- -

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RIVER BASIN BOUNDARIES 'J 13°-

. DISTRICT CAPITALS Vellore

STATE CAPITAL -j

- - - - DISTRICT BOUNDARIES

STATE BOUNDARY

v ; s 1 _ L I '~S~iogangI_/ '

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r-^ Modur 101A 1994

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77° 78- 79° 80°

AUGUST I1994