Appropriate operations and maintenance (O&M) are critical to the longer term sustainability of the rehabilitation investments to be supported by the Maharashtra Water Sector Improvement Project (MWSIP) and the State Government of Maharashtra overall. During the concept note review for the project, Bank management raised concerns about the adequacy and quality of the Irrigation Department’s (ID’s) expenditures on O&M, especially because inadequate O&M was the main cause of rapid deterioration in existing irrigation systems. Bank management also raised concerns about the state government’s weak fiscal position and its capacity to absorb the project’s additional fiscal demands. Should project preparation move ahead if the state government lacked the capacity to meet the counterpart funding requirements? Additional questions were raised about the level of cost recovery through water fees in Maharashtra and the additional fiscal burden that inadequate cost recovery might impose on state finances. To address these concerns, the project team agreed to undertake a public expenditure review (PER) of Maharashtra’s irrigation sector.  Public Expenditure Review: The Process  The public expenditure review was a multisectoral undertaking. It drew upon and analyzed data from the Department of Finance (DoF) on economywide expenditures and data from the ID on irrigation expenditures and staffing. South Asia Procurement (SASPR) colleagues provided valuable assistance to the project team in assembling information from, and discussing information with, senior DoF officials regarding the state’s Medium Term Fiscal Restructuring Framework (MTFRF) and the fiscal implications of the project’s irrigation investments. The review also entailed working with senior ID officials to prioritize medium-term plans for irrigation capital expenditures (outside the project area) and to examine planned ID staff reductions for consistency with the MTFRF. To examine the level and quality of O&M expenditures, the project team worked closely with the ID to assemble annual scheme-wise O&M expenditure requirements (maintenance work and staff costs), actual O&M expenditures, water fee assessments, and the actual amount of water fees collected. These data provided the basis for assessing the project’s fiscal impact.  The Findings  Full recovery of O&M. Recognizing that adequate funding for O&M was integral to sustaining irrigation infrastructure, the ID had already taken steps to rationalize expenditures and improve revenue generation so that more funds would be available for O&M. To deliver irrigation services more cost effectively, the ID had adjusted water fees towards full recovery of O&M costs and had also reduced staff costs. In 1998 the state government approved a resolution governing the annual adjustment of water fees for agriculture and other users in the state.     
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