$ Report No: RES00355 RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF IN Karnataka Urban Water Supply Modernization Project APPROVED ON 31-Mar-2016 TO India Water South Asia Regional Vice President: Martin Raiser Regional Director: Dina Umali-Deininger Country Director: Auguste Tano Kouame Practice Manager: Sumila Gulyani Task Team Leader(s): Upneet Singh, Rajesh K. Advani The World Bank IN Karnataka Urban Water Supply Modernization Project (P130544) ABBREVIATIONS AND ACRONYMS DEA Department of Economic Affairs JPY Japanese Yen PDO Project Development Objective USD United States Dollars The World Bank IN Karnataka Urban Water Supply Modernization Project (P130544) @#&OPS~Doctype~OPS^dynamics@restrhybridbasicdata#doctemplate BASIC DATA Product Information Operation ID Operation Name IN Karnataka Urban Water Supply Modernization P130544 Project Product/Financing Instrument Geographical Identifier Investment Project Financing (IPF) India Approval Date Current Closing Date 31-Mar-2016 30-Jun-2026 Original EA Category Partial Assessment (B) (PAD Approval Package-11 Aug 2017) Organizations Borrower Responsible Agency Karnataka Urban Infrastructure Development & Finance India Corporation (KUIDFC) @#&OPS~Doctype~OPS^dynamics@restrhybridoperationstatus#doctemplate OPERATION STATUS Project Development Objective (DO) Current Development Objective

The Project Development Objective is to provide city-wide access to a continuous piped water supply in the eligible cities in the state of Karnataka, and to strengthen service delivery arrangements at the city level.

Disbursement Summary (in USD million) Source of Funds Net Commitment Disbursed Undisbursed % Disbursed IBRD 250.00 81.62 168.40 32.64 i The World Bank IN Karnataka Urban Water Supply Modernization Project (P130544) IDA -- -- -- 0 Grants -- -- -- 0 Policy Waivers Does this restructuring trigger the need for any policy waiver(s)? No @#&OPS~Doctype~OPS^dynamics@restrhybridmpa#doctemplate @#&OPS~Doctype~OPS^dynamics@restrhybridmpa#doctemplate ii The World Bank IN Karnataka Urban Water Supply Modernization Project (P130544) TABLE OF CONTENTS I. PROJECT STATUS AND RATIONALE FOR RESTRUCTURING ........................................................................................1 II. DESCRIPTION OF PROPOSED CHANGES ....................................................................................................................2 III. PROPOSED CHANGES ................................................................................................................................................3 IV. DETAILED CHANGE(S) ...............................................................................................................................................3 The World Bank IN Karnataka Urban Water Supply Modernization Project (P130544) I. PROJECT STATUS AND RATIONALE FOR RESTRUCTURING A. Project Status 1. The Project Development Objective (PDO) rating has been assessed as Moderately Unsatisfactory since November 2023 as the goal of providing city-wide access to continuous piped water supply will not be achieved by the original Project’s closing date of November 22, 2024. This is due to slow progress on the Capital investment Component because of complexities of converting from intermittent to continuous water supply. Since this Component constitutes 95 percent of the original Loan amount, Implementation Progress has also been assessed as Moderately Unsatisfactory since November 2023. Disbursement stands at US$71.6 million (71.6 percent) of the original Loan. There is progress in implementing water supply civil works across the three cities, especially on bulk works. At the end of September 2024, physical progress on bulk works is 62 percent in Belagavi, 59 percent in Hubbali-Dharwad, and 45 percent in Kalaburagi. Physical progress on distribution continues to lag and is less than 20 percent in all three cities. 2. An Additional Financing in the amount of JPY 24.06 billion was signed on July 31, 2024 and is expected to be made effective by November 22, 2024, when the original Loan will close. This Additional Financing provides an additional 19 months of implementation, until June 30, 2026, to achieve the PDO. The proposed restructuring will: (i) reallocate funds across disbursement categories of the original Loan, helping unlock pending disbursements; and (ii) include a partial cancellation of the Additional Financing amount on account of exchange rate gains. There are no overdue audits. B. Rationale for Restructuring 3. Reallocation of disbursement categories in the original Loan: The Loan has three disbursement categories – Civil works, Operator Fee, and Goods and Others. Table 1 shows the original allocation, proposed reallocation, and claims to date. Category 1: Civil Works has funds available, while Category 2: Operator Fee is overdrawn1 and Category 3: Goods and Others may encounter a nominal shortfall. The Department of Economic Affairs (DEA), Ministry of Finance, Government of India, through its email dated September 3, 2024, forwarded a request from the Government of Karnataka to reallocate US$10.85 million from Category 1 to Category 2 and US$0.5 million from Category 1 to Category 3. 4. Partial cancellation of the Additional Financing: This partial cancellation is requested on account of exchange rate gains. The DEA, through its letter dated August 6, 2024, forwarded a request from the Government to cancel US$25 million. Since the Loan currency was changed from USD to JPY per the DEA’s request in July 2024, on August 12, 2024, the DEA informed the Bank via e-mail that the amount to be canceled is JPY 4.01 billion (US$25 million equivalent as of the value date of exchange, July 28, 2024). 1The Operator fees need to be topped up since the original Loan and Operator fees were allocated to only one city (Hubbali-Dharwad). The Project was restructured to include two additional cities (Belgaum, Kalaburagi) without changing the amount allocated. Hence, the need for a top-up in Operator Fee. Page 1 The World Bank IN Karnataka Urban Water Supply Modernization Project (P130544) II. DESCRIPTION OF PROPOSED CHANGES 5. The proposed changes in the component-wise allocation in the original Loan are as follows: Table 1: Proposed Changes in Category-wise Allocation of the original KUWSMP Loan (US$ million) Category Original Re-allocation Amount after Disbursements Loan Balance Amount Proposed Re-allocation to date Category 1 - Civil Works 89.75 -11.35 78.40 60.16 18.24 Category 2 - Operator Fee 7.50 10.85 18.35 8.95 9.40 Category 3 - Goods and Services 2.50 0.5 3.00 2.32 0.68 Front end fee 0.25 0 0.25 0.25 0 100 0 100 71.68 28.32 6. The Additional Financing amount is proposed to be reduced from JPY 24.06 billion to JPY 20.05 billion through a partial cancellation of JPY 4.01 billion (refer Table 2) including a reallocation of JPY 1.118 billion to CAT 4 – Operators Fee. The proposed changes in the category-wise allocation of the Additional Financing was confirmed by the DEA through their email dated October 6, 2024. Table 2: Proposed Changes in Category-wise Allocation of the KUWSMP Additional Financing (JPY) Current Proposed Partial Proposed Revised Allocation Cancellation Allocation CAT1 Works Hubballi 9,916,760,527 2,191,766,527 7,724,994,000 CAT2 Works Belagavi 6,081,634,870 1,344,140,870 4,737,494,000 CAT3 Works Kalaburagi 6,546,984,240 1,446,990,240 5,099,994,000 CAT4 Operator fees 876,140,538 1,118,443,4622 1,994,584,000 CAT5 Goods, non-consulting services, and 491,826,145 137,150,145 354,676,000 consulting services, Incremental Operating Costs and Training CAT6 Goods, Consultancy, non- Consultancy 96,279,180 0 96,279,180 Incremental Operating Costs and Training CAT7 CERC 0 0 0 CAT8 Front end fee 60,174,500 10,028,930 50,145,570 CAT9 Interest rate cap/collar premium 0 0 0 Total 24,069,800,000 4,011,633,250 20,058,166,750 Note3 @#&OPS~Doctype~OPS^dynamics@restrhybridsummarychanges#doctemplate Summary changes 2The rationale for increase in Operator Fee is that this is required to be paid for additional time beyond the original contract Design-Build phase due to execution delays on account of COVID-19 and other implementation issues. 3Section IV of the RP regarding cancellation is not updated due to a portal glitch. At the time of finalizing this RP (October 10, 2024), the portal was not allowing to make any changes to the Datasheet. Page 2 The World Bank IN Karnataka Urban Water Supply Modernization Project (P130544) III. PROPOSED CHANGES Operation Information Proposed Changes Operation Information Proposed Changes Disbursements Estimates Yes Loan Cancellations Yes Development Objective No Reallocations Yes Safeguard Policies Triggered No Loan Closing Date Extension No ISDS No Financial Management No MFD/PCE No Procurement No Results No Institutional Arrangement No Risks No Implementation Schedule No Legal Covenants No Conditions No Implementation Modalities No Disbursements Arrangements No DDO No Clients No Appraisal Summary No Components No @#&OPS~Doctype~OPS^dynamics@restrhybriddetailedchanges-disclose#doctemplate IV. DETAILED CHANGE(S) COSTS & FINANCING Private Capital Facilitation Is this an MFD-Enabling Project (MFD-EP)? Is this project Private Capital Enabling (PCE)? LOANS Cancellations Page 3 The World Bank IN Karnataka Urban Water Supply Modernization Project (P130544) Reason Value Loan/Credit/ Current Cancellation New for Status Currency Date of Trust Fund Amount Amount Amount Cancellati Cancellation on Disbursi IBRD-86010- 100,000,000. 100,000,000.0 ng&Rep USD 0.00 001 00 0 aying BORROWE R'S IBRD-93240- Disbursi 24,069,800,0 4,011,633,25 20,058,166,75 REQUEST JPY 06-Aug-2024 001 ng 00.00 0.00 0.00 FOR COUNTRY REASONS Reallocations IBRD-86010-001 Cancellations (if any): New Allocation: Currency: USD 0.00 100,000,000.00 Financing % (Type Total) Category Expenditure Current Actuals + Proposed No. Category Allocation Committed Allocation Current Proposed 1 Civil works Part A; 78,400,000.00 62,867,442.18 78,400,000.00 75.00 75.00 2 Operator fees; 18,350,000.00 15,618,561.29 18,350,000.00 50.00 50.00 3 GDS,Non CS,CS, 3,000,000.00 2,485,154.26 3,000,000.00 20.00 20.00 TRNG, IOC; FRONT END FEE; 250,000.00 250,000.00 250,000.00 0.00 0.00 Total 100,000,000.0 100,000,000.0 0 0 IBRD-93240-001 Cancellations (if any): New Allocation: Currency: JPY 4,011,633,250.00 20,058,166,750.00 Financing % (Type Total) Category Expenditure Current Actuals + Proposed No. Category Allocation Committed Allocation Current Proposed 1 Works for Part A.1.of 9,916,760,527 0.00 7,724,994,000. 75.00 75.00 prjt (HBL DWD; .00 00 2 Works for Part A.2 of 6,081,634,870 0.00 4,737,494,000. 75.00 75.00 Prjct BLGV; .00 00 3 Wrks fr PA.3. of prjct 6,546,984,240 0.00 5,099,994,000. 75.00 75.00 Klbrgi; .00 00 Page 4 The World Bank IN Karnataka Urban Water Supply Modernization Project (P130544) 4 Operator fees; 876,140,538.0 0.00 1,994,584,000. 50.00 50.00 0 00 5 Gds,NCS,CS,IOC&Trg 491,826,145.0 0.00 354,676,000.0 20.00 20.00 PB,C&D of Prjct; 0 0 6 Gds,CS,NCS,IOC&Trg 96,279,180.00 0.00 96,769,180.00 100.00 100.00 fr PA.1(3),A.2(3; 7 Emrgncy Expndtrs un 0.00 0.00 0.00 100.00 100.00 PE of the Prjct; FRONT END FEE; 60,174,500.00 601,745.00 60,174,500.00 0.00 0.00 Total 24,069,800,00 20,068,685,68 0.00 0.00 DISBURSEMENTS Operation Dates & Projection Details Reasons to change the full Disbursement date and/or the projection Implementation Start Date Operation Closing Date 31-Mar-2016 30-Jun-2026 Projected Date for Full Disbursement 06-Oct-2022 Expected Disbursements (in US $) (Absolute) Original Estimation at Preparation Actual Year Revised Estimation (Approval Package – 11 Aug 2017) FY2016 0.00 0.00 0.00 FY2017 3,000,000.00 47,120.82 47,120.82 FY2018 37,000,000.00 1,387,446.07 1,387,446.07 FY2019 37,000,000.00 196,500.31 196,500.31 FY2020 20,000,000.00 92,488.16 92,488.16 FY2021 2,000,000.00 10,800,612.03 10,800,612.03 FY2022 1,000,000.00 17,413,039.90 17,413,039.98 FY2023 0.00 13,052,970.70 13,052,970.76 Page 5