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Reengineering Urban Infrastructure:How the World Bank and Asian Development Bank ShapeUrban infrastructure Finance and Governance in India

Vinay Baindur and Lalitha Kamath

Bank Information Centre, South AsiaAugust 2009

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Note about the authors

Vinay Baindur is an independent researcher and activist on various urban issues. Over the last12 years he has been associated with practitioners of municipal governance. He has worked witha citizen initiative CIVIC and the Urban research collaborative CASUMM in Bangalore over thisperiod. His current research areas include the JNNURM programme and IFI projects related togovernance and infrastructure especially in Karnataka. These include the water sector, andmunicipal and urban sector reforms. Email: <yanivbin@gmail.com>

Lalitha Kamath is an urban planner and researcher who did her PhD in Urban Planning andPolicy Development from Rutgers University, NJ. Over the last 10 years she has worked on issuesof urban governance, planning and the politics of reforms, urban infrastructure, and localeconomic development. She was associated with the Urban Research Collaborative, CASUMM, inBangalore and now works independently. Email: <elkamath@gmail.com>

This research report was commissioned by the Bank Information Center (BIC) which is anindependent, non-profit, non-governmental organization that advocates for the protection ofrights, participation, transparency, and public accountability in the governance and operations ofthe World Bank, regional development banks, and the IMF.

Bank Information Center, South AsiaNew DelhiTel: +91.9871153775Email: jathialy@southasia.bicusa.orgwww.bicusa.org

Cover and layout: Joe Athialy

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Table of Contents

Acknowledgements 6

Executive Summary 7

List of Tables 10

Glossary/Abbreviations 11

Introduction 12

Part I: Building agreement in urban sector policy: What is the policy shift in government,

when did it happen and how was it brought about 15

1. Financial Reforms 16

1.1 Moving from public investment to private financing of urban infrastructure 16

1.2 Credit rating and IFI notions of “creditworthiness”: Reducing risk for the private sector? 17

1.3 The role of the state: guaranteeing cost recovery for the private sector 18

2. Governance Reforms 19

2.1 Promoting formation of institutional intermediaries dominated by bureaucrats 19

2.2 Outsourcing of government tasks to private companies through PPPs 20

2.3 Designing model policies and legislation favouring PSP in urban infrastructure 21

2.4 Enriching consultants who typically build opportunities for the private sector in the name of

capacity building 22

3. Integrating IFI Reforms through GoI, Private Sector and other Donors 23

3.1 State level interventions: The case of KUDCEMP and KMRP 24

3.2 National level interventions: The case of the JNNURM 26

3.2.1 Reforms that encourage borrowing infrastructure funds from market 28

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3.2.2 Reforms encouraging PPPs 28

3.2.3 Consultant-driven vision plans for the city that exclude citizens participation 29

3.2.4 Promotion of parallel governance structure dominated by bureaucrats 30

3.2.5 A deeply flawed programme? Resistance to the JNNURM from citizens, state and local

governments 30

3.3 IFI focus on smaller cities and towns: The wave of the future? 31

Part II: Municipal restructuring: What does it mean, who does it affect, and how 33

4. The impact of municipal restructuring on basic services 33

4.1 Targeting large infrastructure projects at the cost of basic services 334.2 Acquisition of land for large infrastructure projects 354.3 Achieving commercial viability of paramount importance 36

4.4 Erosion of local democratic powers and processes 38

4.5 Redefining accountability in urban governance 39

4.6 Controlled public participation and its effects 41

Conclusion 44

Endnotes 46

Bibliography 49

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Acknowledgements

We acknowledge the Bank Information Centre South Asia and Washington and its entire staff, inparticular, Shefali Sharma and Mishka Zaman for commissioning and supporting this research.Special thanks go to the three reviewers of the paper: Shefali Sharma, Dr Sharadini Rath and DrMichael Goldman for their helpful comments. We thank all the numerous government officials,academics, local activists and NGOs with whom we interacted and learnt from over the last fewyears. Their insights and experiences have helped us to understand and clarify our analysis ofurban infrastructure finance and governance for this paper. We especially thank all our presentand former colleagues in and out of the country: P Rajan, Dr Anant Maringanti, Asha Ghosh, MaliniRanganathan, Dr Solomon Benjamin, Valli K, Zainab Bawa, Gururaja Budhya, K T Suresh, BabuMathew, Dr Suresh Saila, Narasimha Rao, Kshitij Urs, Richard Whitell and many others whoseideas and inputs have helped guide us and our research. All the analysis and opinions representedin this paper, however, remains ours. Vinay thanks his wife Meera for her wisdom and all in hisfamily for their constant support.

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Executive Summary

Today there seems to be agreement ingovernment, policymaking and donor circlesthat the government has failed in providinginfrastructure and basic services and that thecountry’s unprecedented economic growth willsuffer because of its weak infrastructure.Reportage on the gaps in current levels ofinvestment highlight that government is notperforming adequately both due to a lack offunds as well as a lack of capacity to design anddeliver world class infrastructure. This,according to the Government of India (GoI)and donors, necessitates private sector entryinto infrastructure.

While attention is focused on infrastructureprovision in general, it is urban infrastructure inmetros and smaller cities that has capturedrecent (public and policymakers’) attention.Pot-holed roads, overflowing garbage, leakingsewage, overloaded buses and constant powercuts tell a tale of overburdened cities thatcannot cope with increases in population,economic growth and spatial expansion. Thiscomes at a time when there is growingdependence on cities for sustaining nationaland regional economic growth. Focusing on theurban sector thus becomes crucially importantfor several key players: for government toeliminate infrastructure as a bottleneck toeconomic growth; for the private sector to tapcustomers and do business in cities; and for IFIswho are keen to lend to municipalgovernments at a time when nationalgovernments are taking fewer loans, cities arebecoming the drivers of economic growth, andthere is considerable rhetoric regarding greaterdecentralisation of powers to city governments.

This agreement has fueled a policy shift ingovernment which contains two maincomponents: 1) public funds are granted mainlywith the aim of leveraging private sectorparticipation in urban infrastructure (forexample through Public Private Partnerships),and 2) the state’s role is one of promoting(typically IFI designed) reforms by makingcompliance with these reforms a condition forfund allocation. This shift, we believe, is notcoincidental but has been carefullyorchestrated over the years by IFIs andbilateral donors, key policymakers, and otherswithin government (at all levels but with a biastowards union and state governments), thecorporate sector, and sections of civil society.

The World Bank (WB) and the AsianDevelopment Bank (ADB) also referred to asIFIs, have played an especially important role inbuilding the ideological foundation for thispolicy shift. Underpinning their ideology is thenotion of decentralization as a “narrative ofcapital” which practically translates to creating‘incentives’ for cities to take loans fromfinancial markets thereby breaking thedependence of cities on higher levels ofgovernment for funds, and creating a “market-friendly” role for governments and civil societyorganizations. In such a framework,decentralisation is not about financial andfunctional devolution to the third tier ofgovernment as mandated by the 74th

Constitutional Amendment Act (74th CAA) butis about reducing the power of state agenciesto provide public infrastructure, prioritisingrevenue generation in urban services andshifting the responsibility for demanding betterservices onto local consumers. Accountabilitytoo is couched in the language of “clientpower” which, the IFIs claim, is best achievedthrough market mechanisms.

The focus on decentralisation andaccountability through market mechanismsrepresents a rescaling of governance fromnational to city level and a recasting of thedebate by IFIs from promotion of outrightprivatisation of urban services to thecommercialisation of urban service delivery.We define commercialisation in the context ofurban services as changes in institutional andfinancial management that facilitate the shiftfrom public financing to private financing andfrom public provision to private design,operations and delivery of services. This shifthas largely come about due to the intenseglobal criticism that the IFIs have faced fromscholars regarding their pro-private sectorlending patterns and tussles with activists at

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the grassroots opposing privatisation ofservices.

This paper unpacks the key mechanisms,strategies and processes the IFIs have used tobuild agreement with their policies amonggovernment, donor and corporate circles. Italso throws light on the ways in which thestate (Union and State Governments) hasaccepted and actively advanced a policyprogramme for an urban reforms agenda thatprivileges PSP in urban infrastructure and helpsrestructure state and municipal governancewith respect to the design and delivery ofurban infrastructure. Of focal importance is therole played by the Jawaharlal Nehru NationalUrban Renewal Mission (JNNURM), the UnionGovernment’s flagship urban developmentprogramme, which promotes PPPs as a meansfor financing and delivering infrastructure for63 cities across the country. The paper alsoanalyses the impacts of this restructuring ofstate and municipal governance andadministration on the provision of basicservices especially to more vulnerable poorgroups.

The paper reveals that the market modelprovides a blueprint for building infrastructurethat meets the interests of IFIs, and selectgroups inside and outside of government.Convinced of the value of this approach, thesegroups unceasingly propagate it withoutsufficient scrutiny of how this approach unfoldson the ground and the impacts on local groups.Failure to consider alternatives to this policyframework is particularly serious in view of thefact that performance on the ground (in termsof number of projects completed on time, andwith inclusive outcomes) has been far fromsatisfactory. Despite this, urban reforms andprojects continue apace with no pause forreflection or revisiting of programmaticassumptions and progress on outcomes. Wesee as imperative the need for greater andmore rigorous examination of the outcomes ofPPP projects, through studies by independentresearchers/institutes and social audits bycommunity groups. Such a groundedunderstanding could lead to sustained pressurefor greater debate and reflection on thecurrent trajectory and implications of urbanreforms.

The study also highlights the fact that there isno mechanism for accountability of IFIs andinvestors despite the enormous influencewielded by them through the design ofinfrastructure projects, policies, institutionalreforms, capacity building and knowledge

development. We highlight the need to buildmechanisms by which elected institutions atnational and local level could oversee theiraccountability.

All in all, current urban sector policy marks aclear withdrawal of the state from publicprovision of services accompanied by a moralretreat from the responsibility to ensure thatall groups in society have access to basicservices. Spending on basic services for themasses of urban poor and lower middle classseems to no longer be the preserve of stateand city governments. Instead, there is targetingof large infrastructure projects (claimed to beneeded for economic growth) that areexpensive and benefit fewer people. The focusis squarely on promoting PSP in urbaninfrastructure without putting in place thenecessary legal and regulatory framework toensure adequate performance and outcomes.In a context where the private sector isincreasingly promoted as the authority involvedin service provision and design, it is not clearwho will take responsibility when problemsrelated to service provision or access arise.Increasing inequalities (due to skews inallocations and expenditure between largeinfrastructure projects and basic services) andimplementation fractures (as projects varysubstantially in practice than on paper) havespurred a range of contestations and conflictsamong societal groups. In such a situation, weindicate the critical need for the state tocommit to establishing and enforcing servicedelivery norms and performance standards,especially to ensure affordable and qualityservices for the poor. We also argue for muchmore emphasis on provision of basic servicesto all.

The current model of reforms dilutes the rolefor local government. A profusion of parallelbureaucratic structures have been establishedto develop and manage IFI and otherinfrastructure projects. This has reduced theability of local governments to functionautonomously and provide services that aremore responsive, appropriate to local needs,and accountable. We call for reversing thistrend, instead initiating a process ofstrengthening of city governments to give themmore say in governance and local decision-making.

Finally, the paper throws light on the newcommercialised model of infrastructure thatcreates an enabling environment for IFIs,investor markets and corporations not only ininfrastructure projects but in the larger project

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of urban development and poverty alleviation.This is gradually redefining what the city is, whohas rights to it, and who produces and managesit. One of the most significant fallouts of theshifting of power to IFIs and consultants linkedto major corporations invested in large realestate and transport projects has been theundermining of urban democracy.

The paper is divided into two parts. Part Ilooks at the role IFIs are playing in shapingurban infrastructure finance and governancepolicy in India and the approaches that havebeen used to gain the ‘buy-in’ of governmentofficials in the three tiers of government. Part IIfocuses on the impact this has on municipalgovernment and basic services for the urbanpoor. The concluding section sums up theanalysis and provides some thoughts toconsider for the future.

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List of Tables

Table No Title

1 Promoting pilot projects as best practices to be emulated state-wide

2 The Role of ADB and WB in Urban Reforms under JNNURM

3 The Skew in fund approvals between UIG/Infrastructure and BSUP/Basic Services

for the Poor (Rs Million)

4 Decline in development expenditure in States post FRBM Act

5 Land acquisition, displacement and destruction of livelihoods in Karnataka

List of Figures

Figure No Title

1 IFI’s Role in JNNURM Process

2 Linkages between IFI’s State level and National level interventions

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Glossary / Abbreviations

ADB - Asian Development BankADTA - Advisory and Operations Technical AssistanceBBMP - Bruhat Bengaluru Mahanagara PalikeBSUP - Basic Services for Urban PoorCBGA - Centre for Budget and Governance AccountabilityCDP - City Development PlanCDS - City Development StrategyCMA-K - City Manager’s Association of KarnatakaCPF - Community Participation FundCPL - Community Participation LawCVTC - City Voluntary Technical CorpsCVS - Capital Value SystemCTAG - City Technical Advisory GroupDPR - Detailed Project ReportGDP & GSDP - Gross Domestic Product and Gross State Domestic ProductICRIER - Indian Council for Research in International Economic RelationsIFIs - International Financial InstitutionsJNNURM - Jawaharlal Nehru National Urban Renewal MissionKUDCEMP - Karnataka Urban Development Coastal Environment Management ProjectKMRP - Karnataka Municipal Reform ProjectKUIDP - Karnataka Urban Infrastructure Development ProjectKUWASIP - Karnataka Urban Water Sector Improvement ProjectMDGs - Millennium Development GoalsMHUPA - Ministry of Housing and Urban Poverty AlleviationMML - Model Municipal LawMTFP - Medium Term Fiscal PlanMoUD - Ministry of Urban DevelopmentNCAER - National Council for Applied Economic ResearchNKUISP - North Karnataka Urban Infrastructure Support ProjectNTAG - National Technical Advisory GroupNUIF - National Urban Infrastructure FundO & M - Operations and MaintenancePFI - Private Finance InitiativePPPs - Public Private PartnershipsPMC - Project Management ConsultantPMU and PIU - Project Monitoring Unit and Project Implementation UnitPSIF - Private Sector Infrastructure FacilityPSP - Private Sector ParticipationSFC - State Finance CommissionSPV - Special Purpose VehicleSTAG - State Technical Advisory GroupTA - Technical AssistanceTNUDF - Tamil Nadu Urban Development FundTNUDP - Tamil Nadu Urban Development ProjectUIDSSMT - Urban Infrastructure Development Scheme in Small and Medium TownsUIG - Urban Infrastructure and GovernanceULSG - Urban Local Self GovernmentUMP - Urban Management ProgrammeUNDP - United Nations Development ProgrammeURIF - Urban Reforms Incentive FundUSAID - United States Agency for International DevelopmentWB - World BankWSP - Water and Sanitation Programme

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Introduction

Today there seems to be agreement ingovernment, policymaking and donor circlesthat the government has failed in providinginfrastructure and services and that thecountry’s unprecedented economic growth willsuffer because of its weak infrastructure.Various sources, including governmentcommittees, the Planning Commission andmedia reports pinpoint the large volumes ofinvestment needed to be incurred oninfrastructure and the gap between these andcurrent levels of public investment.1 Reportageon the gaps in current levels of investmenthighlight the government’s inadequateperformance owing to a lack of funds as well asa lack of capacity to design and deliver ‘worldclass’ infrastructure. This, according toGovernment of India (GoI) and donors,necessitates private sector entry ininfrastructure.

While public and policy makers’ attention isfocused on infrastructure provision in general,it is urban infrastructure2 particularly in themetros but also in small and medium townsthat has captured greater attention. Pot-holedroads, overflowing garbage, leaking sewage,overloaded buses and constant power cuts alltell a tale of overburdened cities that cannotcope with increases in population and spatialexpansion. This comes at a time when there isgrowing dependence on cities for sustainingnational and regional economic growth.3

Focusing on the urban sector thus becomescrucially important for several key players: forgovernment to eliminate infrastructure as abottleneck to economic growth; for the privatesector to do business in cities; and for IFIs whoare keen to lend to municipal governments

(Goldman 2006; Kirk 2005) at a time whennational governments are taking fewer loans,cities are becoming the drivers of economicgrowth, and there is considerable rhetoricregarding greater decentralisation of powers tocity governments.

This agreement has fueled a policy shift ingovernment which we see as comprising twomain components: (1) public funds are nowgranted mainly with the aim of leveragingprivate sector participation (PSP)4 in urbaninfrastructure, for example through PublicPrivate Partnerships (PPPs)5, and (2) the state’srole is one of promoting (typically IFI designed)reforms by making compliance with thesereforms a condition for fund allocation. Thisshift, we believe, is not coincidental but hasbeen carefully orchestrated over the years byInternational Financial Institutions (IFIs) andbilateral donors, key policymakers and otherswithin government (all levels but with a biastowards union and state governments), thecorporate sector, and select civil societygroups.

The World Bank (WB) and the AsianDevelopment Bank (ADB), henceforth alsoreferred to as IFIs, have played an especiallyimportant role in building an ideological basisfor the policy shift. Underpinning thisideological basis is the view of decentralisationas a “narrative of capital” and greater efficiency.In practice this means the creation of‘incentives’ for cities to take market loans,there-by ‘breaking the dependence’ of cities onhigher levels of government for funds, and amarket-friendly role for governments and civilsociety organizations. In such a framework,decentralisation is not about financial andfunctional devolution to the third tier ofgovernment as mandated by the 74th

Constitutional Amendment Act (74th CAA) butit is about curtailing the power of stateagencies to provide public infrastructure,emphasising revenue generation, and shiftingthe responsibility for demanding (and getting)better services onto local consumers (Mohanand Stokke 2000).

The framework of accountability which guidesthe World Bank’s work in service delivery hasbeen described in detail in “Making ServicesWork for Poor People”, the WorldDevelopment Report (WDR), 2004. TheReport privileges market mechanisms as ameans of embedding greater accountability inpublic agencies. The report states right in thebeginning that services fail poor peoplebecause of weaknesses in the “long” (electoral)

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and “short” (client power) routes toaccountability; it further asserts that: “…the‘government failures’ associated with the longroute may be so severe that, in some cases, themarket solution may actually leave poor peoplebetter off (World Bank 2004:15)”. Scholarscaution against equating accountability withmarket-based policies, arguing that what donoragencies fail to recognise is that “free-marketeconomics removes many decisions from thepurview of not only the state, but also thepolitical community” (Jenkins 2001: 263).Findings from fieldwork in Karnataka reinforcethis observation revealing that longer-termroutes to accountability % engagement byassociations and local leaders, and politicalpressure via councilors % are crucial for betteraccess to services especially for poorer groups.

The focus on decentralisation andaccountability through market mechanismsrepresents a recasting of the debate by the IFIsfrom promotion of outright privatisation ofurban services to the commercialisation ofurban service delivery and deployment of“client power”. We define commercialisation inthe context of urban services as changes ininstitutional and financial management thatfacilitate the shift from public financing toprivate financing (such as through user fees,municipal bonds and forms of debt) and frompublic provision to private design, operationsand delivery of services. This shift has largelycome about due to the intense global criticismthat the IFIs have faced from scholars regardingtheir pro-private sector lending patterns andconfrontations with activists at the grassrootsopposing privatisation of services.

The focus of private sector participation seemsto be the creation of high-end “world class”infrastructure. The most recent WDR (2009)“Reshaping Economic Geography” appears toreinforce this thinking with its claim thateconomic growth has and will continue to beuneven and that the key to inclusiveness is notto try and balance economic development butto encourage people to move where economicinvestment and activity are. One policyresponse endorsed by WDR 2009 is spatiallyconnective infrastructure (e.g., roads). Thisindicates that the IFI’s current emphasis onlarge infrastructure projects that promote PSPis likely to continue in India, and perhaps grow.Large infrastructure projects do not necessarilybenefit urban poor groups even though themost crucial aspect of the urban developmentprocess, as stated in the MillenniumDevelopment Goals (MDGs), is to improve thequality of life for the poor by the provision of

basic services. This will have particularlyserious consequences: the Mid-Term Review ofthe MDGs highlights the failure of countries inthe South Asia region to reach targets in watersupply, sanitation, health and education. Boththe WB and ADB link their urban sector workdirectly and indirectly with poverty reductionand MDG achievement.

The paper examines the key mechanisms,strategies and processes the IFIs have used tobuild agreement on a policy shift that favoursthe private sector in urban infrastructure. Italso sheds light on the ways in which the state(Union and State Governments) has acceptedand actively advanced a set of policy optionsfor an urban reforms agenda that privilegesPSP in urban infrastructure and helpsrestructure state and municipal administrationwith respect to the design and delivery ofurban infrastructure. An important focus is onthe role played by the Jawaharlal NehruNational Urban Renewal Mission (henceforthreferred to as JNNURM), the UnionGovernment’s flagship urban scheme, inseeking PPPs as a means for financing anddelivering infrastructure for 63 cities acrossthe country.

The paper is divided into two parts. Part I isdivided into three sections. The first twosections look at the role IFIs are playing inshaping urban finance and urban governancepolicy in India and the third section traces howIFI interventions have been integrated intoreforms by government, private sector andother donors. Part II analyses the impacts ofthis restructuring of state and municipalgovernance on the provision of basic servicesespecially to more vulnerable poor groups.Spending on basic services seems to no longerbe the preserve of state and city governments.Instead, they target expensive largeinfrastructure projects claimed to be neededfor economic growth at the cost of basicservices for poor and lower middle classes.Additionally, the focus is mainly on ensuringcost recovery in infrastructure projects torepay investors rather than enhancing qualityand coverage of services. This hurts all groups,especially the poor. Increasing inequalities (dueto skews in allocations and expendituresbetween large infrastructure projects and basicservices) and implementation fractures (asprojects vary substantially between practiceand on paper) have spurred a range ofcontestations and conflicts among societalgroups. The paper briefly touches on some ofthese. The concluding section sums up the

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analysis and provides some thoughts toconsider going forward.

The paper takes into account current and pastIFI initiatives in urban infrastructure in India,along with those planned in the years ahead.We give examples from IFI projects in variousstages of implementation wherever possible.Most examples are from Karnataka, in SouthIndia, as the state has been a frontrunner inpursuing reforms both in terms of policy /legislation and the number and variety ofprojects implemented (Sangameshwaran et al2008). By amending the Karnataka MunicipalCorporation’s rules, for instance, Karnatakabecame the first state to provide legal entry toprivate operators in urban water deliverysystems (GoK 2005). One caveat of the studyis that we do not directly focus on the role ofbilateral agencies, like the United States Agencyfor International Development (USAID) andthe Department for International Development(DFID), in advancing agreement on urbansector policy. However, we acknowledge theirimportance in funding, collaborating with, andreinforcing the projects, reforms and policies ofthe WB and the ADB.

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Part I

Building agreement on urban sector policy: Agreement onwhat and how it was brought about

Over the last 12-15 years, a distinct policy shifthas taken place in the urban sector amongpolicy makers and policy influencers (withingovernment, corporate sector, and civil society)in the union and state governments. We arguethat the role of IFIs has been crucial in bringingabout this policy shift. IFI and bilateral fundsaccount for only about 2% of governmentexpenditure on development (ProjectMemorandum 2006, WSP). Since India does nothave high aid dependency and IFIs claim tooperate only “where there is agreement withthe national government…to advance thegovernment’s policy and development goals”(WB, 2007), focusing government policy andfunds on enabling private sector entry in urbaninfrastructure requires an agreement withingovernment on the need for PSP in urbaninfrastructure. The agreement hinges on thebelief that urban infrastructure is a key driverof economic growth and requires entry of theprivate sector because it is the private sector’sefficiency that can result in building theinfrastructure needed to make India’s citiesworld class. As a result, the state’s role in directfunding and provision of infrastructure should

diminish with the state now being responsiblefor allocating public funds to leverage privatesector funds and, further, of making thesepublic funds conditional on implementation ofa common set of (often IFI designed) reforms.

Part I explains how the IFIs influenced thebuilding of agreement on the content of urbanpolicy in India through a series of prescriptivereforms, policy aids and capacity buildingmechanisms. A detailed set of WB and ADBprescriptions for financial and governancereforms have been linked to project loansgiven to state governments. To enable moreeffective and accelerated implementation ofthese reforms, the WB and ADB havenegotiated numerous Technical Assistance (TA)grants to the Union and state governmentssupporting the development of regulatorychanges and capacity building tools thatpromote PSP in urban infrastructure.Knowledge building also takes place throughIFI-sponsored training programmes andseminars and publication of policy and researchreports that emphasise the need to move away

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from public investment and delivery of servicesto private financing and delivery of services. Itis important to note the acceptance and activeadvancement of this orthodoxy by seniorbureaucrats and political leaders. Scholars(Corbridge and Harriss, 2000; Jenkins, 2001)have pointed out that the IFIs’ neo-liberalagenda has opened up new avenues foraccumulation of wealth among the politicalelite as they stand to gain substantially fromthis process. This section also highlights howfinancial and governance reforms proposed byIFIs open up new pathways for the privatesector for earning profit. As such, a coterie ofsenior bureaucrats, senior politicians andprivate companies form a strong lobby groupadvocating for the rapid implementation andscaling up of these reforms.

Part I is divided into three sections. In section1 and 2 we examine key prescriptions forfinancial and governance reforms respectively,including the regulatory, capacity building andknowledge tools that support implementationof these reforms. This is followed, in section 3,by an exploration of the process by which theIFIs have integrated reforms with initiatives ofgovernment, private sector and other donorsat state, national, and local government leveland how these have served to embed a policyshift that is favourable to PSP entry in urbaninfrastructure.

1. Financial reforms

1.1 Moving from public investment to privatefinancing of urban infrastructure

A key objective of the IFIs is to increase theproportion of funds that cities raise for urbaninfrastructure from market sources, such asmunicipal bond issues and other forms of debt.Till the time that municipalities rely onbudgetary support from state/centralgovernment for developing infrastructure, thegoal of raising funds from the market could notbe realized. Measures introduced by the IFIstherefore aim to break municipalities’ relianceon central and state budgetary allocations andsovereign guarantees for urban infrastructureand provide them with (exclusively) privatefinancing options, such as user fees, municipalbond issues and other forms of debt, forbuilding infrastructure. In this, the state hasprovided considerable support.

The advent of the Eighth Five Year Plan (1992-97) for the first time introduced a focus onbuilding cost recovery into the municipalfinance system. This was reinforced during the

Ninth Plan period (1997-2002) with asubstantial reduction in budgetary allocationsfor infrastructure development. Metropolitanand other large cities were encouraged tomake capital investments on their own inaddition to covering operational costs of theinfrastructure they developed. IFI reformprescriptions to mobilise private resourceswere integrated into the recommendations ofa Union Government committee, whichpublished the India Infrastructure Report in19966. The Committee also recommendedprivate sector participation in urbaninfrastructure development and accessingcapital markets through issuing municipalbonds. The committee’s secretariat wasoperated by the ICICI Bank Ltd. This Report isconsidered an important point of referenceeven today as it was the first GoI report tocomprehensively address the potential forcommercialisation of infrastructure.

By the late 1990s, the union Ministry of UrbanDevelopment (MoUD) launched a series ofurban development programmes7 that for thefirst time linked budgetary allocations withimplementation of specific policy reforms.Several of these reforms were proposed byIFIs, revealing the strong influence they had indesigning these programmes. Theseprogrammes all emphasized moving away fromstate subsidies and guarantees, and raisingfunds from the market and through user fees(Ghosh 2006). In 2004 the Twelfth FinanceCommission in one of its finalrecommendations stated that state or localgovernments should take future loans directlyand that national guarantees should be phasedout. All this has meant that cities were beingstarved of central government funding andcompelled to undertake development projectsthrough borrowings from the market,generating user fees and/or from IFIs.

Both WB and ADB have announced increasedreliance on municipal development funds as acrucial part of their strategy to help financelocal investment needs in Asia (WorldDevelopment Report, 1988; Joshi, 2003). In2003 the International Finance Corporation(IFC)8 introduced its municipal fund, whichoffers financial support to sub-national entitieswithout sovereign guarantees for infrastructuredevelopment. In 2006, the WB’s Sub-nationalDevelopment Program was set up to offerTechnical Assistance grants to sub-nationalentities for financial reforms followed byfinancial support (guarantees and loans) toattract private financing (WB, 2006)9. The ADBhas also launched (2007) a new Urban Services

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Initiative, which provides resources, such assub-sovereign loans, to help cities address theconstraints to investment, identified in itsManaging Asian Cities report. The goals of thefunds are to increase access to credit from themarket and make local governments morefinancially viable and creditworthy so that theycan borrow from the market. The WB and ADBargue that this would lead to an increase in theefficiency of local investment (WB, 2006).Further, they argue that it is the urban poorwho suffer the most from lack of resources forinfrastructure and the improper managementof existing resources and the capital market isthe best potential source of investment andmanagement resources to rectify this situation(USAID India Strategy 2003-2007). Thereseems to be little empirical evidence in favourof this position in India, as explained in Part II.Scholars and activists have called forcomprehensive studies examining theperformance of municipal bond issues inmunicipalities across the country especially inlight of the fact that several cities have notbeen able to fully utilize the funds raisedthrough bond issues and there are gravedoubts about the ability to pay back investorswithout compromising on routine operationsand maintenance (O&M) functions.

These funds also work in tandem with otherGoI and private sector initiatives so as toexpand their reach and effectiveness across thecountry. In October 2006, the InfrastructureLeasing and Finance Services (IL&FS)Company10 set up a Rs 30 billion fund, theUrban Infrastructure Fund, supported by aconsortium of 15 public and private banks andfinancial institutions. The technical instrumentto be employed under this fund, the PooledMunicipal Debt Obligation (PMDO), aims tosupplement government funds to sub-nationalentities for infrastructure. Under thisarrangement, loans would be provided at 9.5%interest rate (Economic Times October 14,2006). The WB, IFC and ADB have indicatedtheir interest in participating in this fund(Financial Express, October 14, 2006). IL&FS isalso in dialogue with the WB to set up aNational Urban Infrastructure Fund (NUIF) toencourage reforms in infrastructure financingand promote private sector investment andoperation in urban infrastructure. It aims to getbankable projects for financial institutions tofund on the condition that cities adhere to aset of reforms11. Participation of IFC’s municipalfund is also being envisaged in NUIF. Theproposal is awaiting approval from the PlanningCommission of India.

Besides the WB and the ADB, the bilateralUnited States Agency for InternationalDevelopment (USAID) has played a crucialrole; both in stimulating the interest of GoI andprivate financial institutions in consideringprivate financing in urban infrastructureprojects and in creating acceptance around theconcept of commercial viability in the deliveryof urban infrastructure services (USAID 2005).Through the three phases (1994-2008) of itsFinancial Institutions Reform and Expansion-Debt (FIRE- D) project, in particular, USAID isdeveloping “models for market financing” oflocal government projects. The next sectionexplains the culture of commercialisation thathas been set into motion and its implications.

1.2 Credit rating and IFI notions of “creditworthiness”: Reducing risk for the private sector?

In 1994, the Indo-US FIRE (D) project beganthe work of developing a municipal bondmarket in India. It engaged an Indian creditrating agency, Credit Rating and InformationServices of India Limited (CRISIL), to develop amethodology for conducting municipal creditratings in India. Before issuing bonds,municipalities need to receive a credit ratingsince investors’ decisions on whether to investin the bond issue depend on such a creditrating as it is meant to provide them with anindependent third-party assessment of themunicipality’s relative current and future creditstrengths and weaknesses. Following CRISIL’scredit rating of the Ahmedabad MunicipalCorporation (AMC), with the support of Fire(D) the city issued India’s first municipal bondwithout state guarantees to finance a watersupply and sewerage project in 199812. In 1999GoI decided to provide tax-free status tomunicipal bonds to boost the municipal bondmarket. The IFIs and GoI endorse this type of arating system because they are interested ingrowing the volume and types of direct privatesector-led lending to cities and towns in thefuture. Since India’s private finance communityincreasingly regards the municipal credit ratingsystem as a “solid indicator of a city’sperformance and competitiveness” (Vaidya andVaidya, 2008 p. 2), an increase in sub-nationallending/debt is possible only if smallermunicipalities go through a credit rating similarto the ones undergone by metropolitan citiessince the mid-nineties.

The Secretary, Union Ministry of UrbanDevelopment has recently announced thatULSGs can seek direct funding frommultilateral lending agencies (Economic Times,Aug 7, 2008). The government has asked credit

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rating agencies to rate ULSG’s infrastructureprojects and these ratings would be crucial forULSGs to get funds from IFIs. The Secretaryfurther argued that this would “empower”ULSGs by giving them greater autonomy todecide their funding requirements andpotential lenders (ibid) although this is aquestionable assumption given the overall poorfinancial health and capacity of ULSGs, and theheavy (financial and other) dependence onstate governments. Loans can now be given tocredit-worthy ULSGs without an insistence onState or Central Government guarantees afterthe IFI ascertains the ULSG’s financial healthbased on which it determines loan eligibilityand amount (The Hindu, July 24 2008). The ADBis currently in discussion with the MunicipalCorporations of Nagpur and Vijayawada whocould become the first in the country todirectly take a loan from the ADB. To date over100 ULSGs have either obtained a credit ratingor are in the process of obtaining one (Vaidyaand Vaidya, 2008).

To enable big and small municipalities to attractprivate financing, the IFIs along with agencieslike USAID, focused on developing theircreditworthiness13. The main objective ofcreditworthiness as seen through the emphasison various credit enhancement mechanismslike escrow14, pooled finance15 and guarantees16

seems to be to reduce risk for privateinvestors. IFI-sponsored projects typicallyinclude at least one of these creditenhancement mechanisms, sometimes morethan one as in the case of the GreaterBangalore Water and Sanitation Project(GBWASP). The GBWASP was designed toprovide piped water supply to the eight ULSGsaround Bangalore17. The project uses an escrowmechanism to lock an identified revenuestream (the property tax of the localgovernments) into a separate account toensure payback to private investors. TheGBWASP also makes use of the pooled financemechanism to enhance the credit worthinessof the 8 municipalities so that they can accessmarket funds. By themselves thesemunicipalities have small revenues and poorcredit rating but by coming together to issuebonds, the pooled revenues of all eight aresufficient to service debt obligations and get aninvestment grade rating. Additionally, in theGBWASP 35% of capital costs are beingrecovered from upfront contributions (knownas beneficiary capital contributions- BCC). Allthree mechanisms together help reduce therisk of default faced by private investors in theproject.

Institution of a process leading to reducing therisk of default faced by private investors hashelped deflect attention away from theunprecedented nature of financing capital costsof a project through BCC, a form of financingwhich turns people who have a right to waterinto speculators or investors but without anyguarantees of receiving water or of theirentitlements in this new “client” relationshipwith the service provider. Given that only a tinypercent of Bangalore’s population getsguaranteed water from the public system, it isnot clear why people should have faith in thisproject, and put money up front, if the state hasup till now failed in providing water18.

Pooled finance projects were pioneered inTamil Nadu by the WB and USAID. Thebenchmarks defining the success of theseinterventions seem to be purely financial(Vijayabaskar and Wyatt, 2005). So far there hasbeen no assessment of their functioning by anindependent third party. Despite this, theGovernment of India has introduced a centralPooled Finance Development Fund (PFDF)based on the “success” of the pooled financeprojects in Tamil Nadu and Karnataka.Launched in November 2006 with Rs 25 billionfunding PFDF will support small- and medium-sized ULSGs to access capital markets (Vaidyaand Vaidya 2008).

1.3 The role of the state: guaranteeing costrecovery for the private sector?

The State in a Changing World (WDR 1997) gavenotice of a changing attitude towards the statefrom a policy of ignoring or bypassing it to onethat acknowledged that the state is of crucialrelevance to facilitating institutional reformsand steering market-led growth. Significantly,the WDR addresses questions of state policyand capacity purely in relation to theirimplications for private investment (Coelho etal 2009). The implications of this shift for urbaninfrastructure provision in India are immense.While state budgetary allocations andsovereign guarantees to ULSGs forinfrastructure development are considered tolead to public sector service inefficiencies (WB,2006), state guarantees to reduce risk forprivate investors are seen as bridging the gapbetween availability of funds and project costsfor commercially viable projects (ADB, 2001).This ‘gap funding’ ensures cost recovery for theprivate sector in case of the ULSG’s inability topay. Importantly, an increasing trend is for thestate to confine offering guarantees to“creditworthy” ULSGs that agree to acceptand implement reforms in infrastructure

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projects, such as instituting PPPs and charginguser fees.The central and state governments provideguarantees in several ways. For instance GoIcreated a “viability gap fund” (VGF), whichgrants a government off-budget subsidy of upto 20% of total project cost with the intentionof making PPP projects bankable. A PPP projectthat delivers an infrastructure service with userfees is eligible to access funds under VGF. Acompany that has 51% subscribed and paid upequity owned and controlled by a private entitycan provide the services19. The ADB has statedit will offer viability gap funding in a bigger waythan it has done in the past (ADB 2008). TheGoI has also set up the India InfrastructureFinance Company Limited (IIFCL) a limitedliability company to provide long term debt forfinancing infrastructure. IIFCL will lend topublic sector companies but overriding prioritywill be given to PPP projects for direct lending.IIFCL will raise funds through the domestic andexternal market on the strength of governmentguarantees20. The ADB is providing India $500million for IIFCL to help catalyze private-sectorinvestments in infrastructure of up to $3.5billion. IIFCL has been designed to promotepublic-private partnerships between thegovernment and private sector in order toincrease investment in infrastructure.

This section has focused on several crucialfinancial reforms prescribed by the IFIs tousher in private sector involvement in urbaninfrastructure. However, governance reformsare also necessary to implement andinstitutionalize these financial reforms within(state and local) government apparatus.

2. Governance reforms

2.1 Promoting formation of institutionalintermediaries dominated by bureaucrats

A key objective of governance reformsprescribed by the IFIs is to depoliticise andcommercialise the functioning of institutions ofgovernance. These are justified in the name ofavoiding political “interference” and promotinggreater efficiency. This has meant thatbureaucrats, rather than elected officials, workclosely with IFIs and dominate differentgovernment structures administering thereforms. Indeed, a particular condition of theIFIs has been to prescribe setting up specialpurpose vehicles (SPVs), purely administrativeand regulatory bodies, which would makeproject decisions, channel funds, monitorproject and reform progress, and be in overallcharge of the project. Senior bureaucrats

typically dominate these SPVs that have nolocal elected representatives on their Boards.Although SPVs operate in the jurisdiction oflocal governments, they bypass local electedcouncils and report directly to the stategovernment. SPVs are justified by governmentand donors as necessary to avoid the political“interference” from elected representativesand increase the speed and effectiveness ofproject implementation. They also meet thedemands of IFIs for providing a single point ofsupervision and contact. SPVs, however, comewith their own set of problems as describedbelow.

In 1993, the state of Karnataka established onesuch SPV called the Karnataka UrbanInfrastructure Development and FinanceCorporation (KUIDFC) for projects with afocus on urban and municipal reforms. Allurban IFI projects are now routed throughKUIDFC. KUIDFC does not entertain ULSGsapproaching it directly; the DistrictCommissioner (DC) typically links the ULSGand KUIDFC. This means that in KUIDFC(including IFI) projects no direct link existsbetween the ULSGs and the contractors hiredto do the work in the ULSG’s jurisdiction.Contractors have to be approached throughKUIDFC making monitoring and accountabilityto local government and local residentsdifficult. Frequent changes in the officials andengineers at KUIDFC compound the difficultyof doing follow up work. Interviews with localelected representatives reveal that ULSGs havenot been consulted on decisions regardingtenders, selection of consultants, orperformance benchmarks. KUIDFC usuallytakes such decisions along with consultantsand senior bureaucrats. This has reduced localparticipation in the project and localaccountability since the ULSG has no controlover funds, project decisions orimplementation. Moreover, since the KUIDFCis created by mandate of the state governmentand reports to it, state level bureaucrats andstate elected leaders retain strong control overfunds (Ghosh 2006). Not only does this refuteclaims that SPVs increase the effectiveness ofproject implementation and avoid political“interference” from elected representativesbut by seeming to concentrate political powerat the state level it contradicts the principles ofadministrative and fiscal decentralisationembodied in the 74th CAA.

Despite these concerns, IFI projects continueto be routed through SPVs. Further, the ADBPrivate Sector Infrastructure Facility (PSIF) IITA has given recommendations to four states

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on how to strengthen capacity and capability ofexisting SPVs to promote PPPs in urbaninfrastructure, either through better legislationor expanded financial / human resources.

2.2 Outsourcing government tasks to privatecompanies through PPPs

While financial reforms help to attract privateinvestors into urban infrastructure, aninstitutional framework that is conducive isalso necessary. PPPs have become one of themost visible means of achieving this change ininstitutional management. However, the lack ofPPP projects on the ground, a recent articleargues, is because states do not have the time,money or expertise to do the preparation ofdetailed project reports (DPRs) for PPPs andthe private sector does not want to do DPRsbecause of lack of assurance that they will beawarded the project after spending the timeand money on preparing DPRs (Mint, July 27,2007). Helping structure PPP projectstherefore becomes necessary if more PPPs areto get off the ground. This is a task that the WBand ADB have increasingly taken uponthemselves. They have established a wide rangeof institutional arrangements to achieve this.

In 1996 and 2001, the ADB approved twoproject loans, Private Sector InfrastructureFacility at State Level Project (PSIF) I and PSIFII respectively. PSIF II had a piggy-back TA(Enhancing Private Sector Participation inInfrastructure Development at the State Level)which was completed in 2005 through aconsultant contract. This was part of themandate ADB had identified for itself of playinga key role in project identification for PPPs,structuring projects to attract private capital,and supporting other aspects of PPPs such asassisting in attracting international firms tosupplement the domestic firms wheredomestic ones fail to meet the demand forconstruction. PSIF II TA concluded that statelevel agencies need to incur an expenditure ofRs 30-60 million on developing a bankable PPPproject to the point where private investorsare willing to come in. The TA proposed thatthis could be achieved through the creation ofa Private Finance Initiative (PFI)21 for each state% located in the State Finance Ministry % thatwould accelerate the design andimplementation of PPP in urban infrastructure.In Jan 2008, the Union Committee onInfrastructure revealed plans for launchingsomething very similar % a company forproviding advisory services to Central andState Governments for structuring PPP

projects to jumpstart infrastructure projectsunder the PPP route22.

The significant transaction costs of designingand implementing PPPs make it critical to firstevaluate whether and in what situations PPPscould be viable rather than automaticallypromoting them as more efficient (IMF, 2006)23.PSIF I and II seem to exclude non-PPP optionsthat might be less expensive while attainingservice efficiency. Evidence from the UK seemsto indicate that PFI is extremely expensive forits citizens. Ray (2007) argues that on average itcosts 30% more to build and run servicesunder PFI in the UK rather than keep servicesin-house. Local activists, NGOs and politicalgroups maintain that “not only is PFI a sly wayto reduce the size of the public sector, but thatit represents one of the largest ongoing rip-offsof public money by private concerns of the lastcentury and serves the current government’songoing attempt to hide massive levels of debt”(ibid).

PSIF II TA also introduces other measures thatpromote public support of private initiatives. Ifgovernment insists on providing subsidies totargeted groups (below poverty line groups,for e.g.), the report states, then governmentcan subsidise these users through paying theprivate operator upfront, providing tax waivers,or buying the service from the privateoperator at a fixed price and then passing itonto targeted consumers at a lower price. Thiswould ensure reduction in private operators’risks so that they do not lose out on profits.

Following PSIF II, several state and unionministries and departments of the governmenthave made significant efforts to mainstreampublic-private partnerships by taking loans andgrants from the ADB. In 2006, ADB provided$3 million in technical assistance (TA) to theGovernment of India to set up PPP cells in 14states. The ADB assistance will help theseministries develop the capacity to prepare,evaluate and appraise PPPs in infrastructureand improve monitoring of progress of thepartnerships through comprehensive databases.The assistance will also integrate best practicesgarnered from such partnerships. New urbanprojects are being implemented in severalstates of the country such as Madhya Pradesh,Uttaranchal, and Jammu and Kashmir, wherethe loan conditions stipulate introduction ofPSP in provision of basic services. The ADBaims to double its financial spending in urbanprojects with the aim of promoting PPPs overthe next 5 years (MoUD Secretary speech, Jun2007). One such project is the $2 million TA

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grant to help the GoI increase cooperationbetween the public and private sectors ininfrastructure development (ADB website,November 2007). The ADB has also proposeda new Advisory and Operations TechnicalAssistance (ADTA)24 for $1million in 2008promoting PSP in urban basic services andinfrastructure. The proposed ADTA willcomplement the ongoing ADB TA formainstreaming PPPs at the state level (via theestablishment of PPP cells as mentioned above)by its specific focus on promoting PPPs at thelocal level25.

Government policy relating to PPPs in urbaninfrastructure seems to be secure in the beliefthat PPPs can address the infrastructure deficitin the country for all groups, including the poor.The 12th Finance Commission recommendsthat at least 50% of grants provided to statesfor ULSGs should be earmarked for solidwaste management through PPPs26. Whetherthis has been implemented is not known sincethere is no process identified for assessment.Chapter 11 of the Eleventh Five Year Plan (July2008) recommends full cost recovery for PSPin water and other sectors.

Several economists have problematised GoI’sapproach to PPPs. Ranade (Public meeting Aug21 2009, Press Club Mumbai) argues that toexpect private funds to support thedevelopment of public goods like roads seemsto fundamentally contradict the theory ofpublic goods. This is because public goods bydefinition are used by all and cannot be easilylimited to a few but in the interest ofgenerating profits for private investors, publicroads are being limited to use by a few throughpayment of tolls. This casts doubt on the abilityof privately developed and financedinfrastructure to address the needs of allgroups, especially the poor. Mukhopadhyay(2008 p. 2) states that the current focus is onusing PPPs to get commercial revenue via userfees rather than improving services oraccountability. He goes on to explain:“Infrastructure is not where you raise revenue;that is a function for taxes. Infrastructure iswhere you spend those taxes…” Additionally,weak regulation in this sector means thatgovernment has not put in place minimumperformance standards for private operatorsor established penalties for defaulting onperformance standards. PPPs therefore fail to beevaluated according to the quality and coverage ofservices they provide. Given the focus ongenerating commercial revenues, it is urbanpoor groups who tend to be hardest hit when

PPPs are established, as Part II analyses in moredetail.

Several activists have also criticised GoI’suncritical approach to PPPs. In many PPPs, theyargue, it is government who typically bears thelion’s share of project responsibilities, risks,funds, and accountability and yet the privatesector seems to benefit from adisproportionate share in profits. The PPPbetween Jusco and the Mysore CityCorporation is a case in point. Under theJNNURM a water supply project for Mysorecity was sanctioned for Rs 1940 million. In Dec2008, JUSCO a private company was awardedthe project contract for rehabilitating thewater supply system (leakage detection, layingof new pipes etc) and converting it into a 24x7system. Many protests were staged by localresidents who argued that not only was Jusconot investing a single rupee in the project butMysore City Corporation was to pay thecompany an annual fee of Rs 162 million for aperiod of 6 years in addition to deputing (andpaying salaries of) Corporation staff for thisproject. Several city corporators went on astudy tour to Jamshedpur and came backconvinced that JUSCO had insufficientexperience to handle the larger volume ofcustomers that a water supply services projectin Mysore entailed27.

Despite policies favourable to PPPs, whengovernments change, policy often changes withthem. This is one of the big frustrations of IFIsand they work to dispel this throughinterventions aimed at making these ‘transient’policies more permanent, as the next sectiondescribes.

2.3 Designing model policies and legislationfavouring PSP in urban infrastructure

In addition to helping design specific PPPprojects, the IFIs have worked with GoI tosystemize this practice by facilitating legislationand policies that promote PPPs. The ADB(2005) has expressed the intention ofdeveloping written policies supporting PSP andusing these policies as basis for legislation. Inthe PSIF II TA draft policies were prepared byconsultants in the key sectors of roads, urbanmass transit, and water and sanitation, in closeconsultation with ministries of finance,infrastructure and urban development of thestates of Gujarat, Andhra Pradesh, Karnatakaand Madhya Pradesh. Further, the TA hasdrafted general legislation for PSP ininfrastructure for Karnataka and MadhyaPradesh and provided the drafts for

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consideration by the state government. In 2007however the GoK opted to roll out aninfrastructure policy with a strong focus onPPP and not a legislation as the former has aless rigorous procedure, with less politicalscrutiny, in order to be sanctioned28 than thelatter.

A key strategy of the TA is to comparelegislation and policies in different states withrespect to advancing PSP in infrastructure andrecommend why and how certain legislationcan serve as a model. For instance, the PSIF IITA suggests that the Andhra PradeshInfrastructure Development Enabling Act(IDEA) 2001 can serve as a model for otherstates as it includes many incentives that wouldbe provided to private developers asprovisions of the Act itself. It also defines tentypes of concession agreements covered bythe Act, and makes provision for a ConciliationBoard and an Infrastructure Fund that couldfunction as a separate body with borrowingpowers. The TA also points out areas withinexisting legislation, which need to be amended.For instance, it (unfavourably) compares theGujarat Infrastructure Development Act of1999, which limits government support for PSPprojects to a maximum of 15%, to MadhyaPradesh which does not have legislation with arestrictive ceiling on subsidy contribution bygovernment and has given as much as 63%subsidy to the private developer of a roadproject.

The WB has pursued similar policyprescriptions and even amendments tolegislation in the Karnataka Water and UrbanManagement Project in Karnataka. In an earlieravatar (Project ID No. INPE67502 % 1999-2000) this was to be a combined urban andwater sector project, introducing newmethods and performance indicators forservice delivery based on private sectorcontracts to water utility operators. An initialProject Information Document (PID) preparedin 2000 (Report No. PID7899) by the WBidentified a “weak” enabling environment forPSP in the provision of urban services andsuggested that GoK and some of the ULSGsselected for investment undertake some“upfront preparatory work” to rectify this. Tillthis occurred the project was to be shelved.The following changes to encourage an“enabling” environment were introduced inquick succession by GoK via the creation andamendment of several policies/legislations29.These encourage PSP in some aspects ofservice provision, for instance, by 100 percentmetering and pricing that permit full cost

recovery (GoK Urban Drinking Water andSanitation Policy May 2003), and giving PSPoperator consultants the powers to disconnectpublic taps to reduce non-revenue water (GoKMunicipal Corporation Water Supply(Amendment) Rules Jan 2005). Further, theyconcentrate regulatory, supervisory andplanning powers within the State government(GoK Urban Drinking Water and SanitationPolicy May 2003).

Seemingly satisfied that an “enabling”environment had been created through thesepolicy and institutional reforms, the projectwas split into two viz., Karnataka Urban WaterSector Improvement Project (KUWASIP) andKarnataka Municipal Reform Project (KMRP)which were signed in 2005 and 2006respectively by WB and GoK. Under KUWASIPa series of six studies have been prepared byconsultants. They include proposals forestablishment of a State Water and SanitationCouncil, developing water and sanitation sectorinvestment and tariff frameworks, and a legaland regulatory framework. Despite this havingthe potential to critically shape the institutional,regulatory, financial and legal frameworks forurban water and sanitation in the entire stateof Karnataka, neither the draft nor final reportsof these studies have been made public. Allthese legislative and policy reforms reveal agrowing convergence among the IFIs andpolicymakers, particularly in reform states, thatlocal governments must outsource manyservice delivery functions to the private sector.

2.4 Enriching consultants who typically buildopportunities for the private sector in the name ofcapacity building

The emphasis on PSP in urban infrastructureand services has driven a number of IFI-sponsored projects focused on building localgovernment capacity in certain aspects, such asproperty tax reform, measures for costrecovery, accounting systems, PPP structuringand implementation, and enforcement of PPPcontracts. All of these create opportunities forthe private sector in urban infrastructure. Forinstance, the WB (2004) urges computerizationof the accounting system and the introductionof a double entry accrual book keeping systemostensibly to introduce greater transparency inULSGs. However, a closer reading of themeaning of “transparency” indicates that theWB has directed this reform at making theasset structure and the revenue streams ofULSGs more transparent to investors so theycan get credit ratings and subsequently raise

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funds from the market (Vijayabaskar and Wyatt2005; Ghosh 2006).

In most, if not all, cases, contract consultantsare engaged to provide the above-mentionedservices raising the question of whether andhow they actually strengthen andinstitutionalize capacities within localgovernments, and whether the consultantproduct matches the needs of localgovernment officials. In the KUDCEMP,inadequate understanding of the localtopography by foreign consultants led toproblems with the underground drainagesystem. Often, the same consultants areappointed by the central and stategovernments to prepare loan and tenderdocuments, policies and legislation, as well assector strategies. For example, PriceWaterhouse Coopers prepared Chhattisgarh’sInfrastructure Development Plan, a Vision 2020Plan for Karnataka (including sector plans) aswell as the tender document for the KUWASIP.This raises concerns about possible “cut andpaste” from one consultant product to another,regardless of local context or needs.

IFIs promote decision making by the same setof big, often international, consultants as thesetend to agree upon and advance a certainpackage of policy prescriptions30. In turn,MoUD, GoI empanels these consultants, whichprivileges them at the expense of smaller, oftenlocal, consultants. Sangameshwaran et al (2008)note that the current form of private sectorparticipation in the water sector differs fromearlier, both in terms of the nature of contractsand the kind of contractors involved.Increasingly, they argue, a whole package offunctions is contracted out instead ofpiecemeal functions as done earlier. Further,large transnational companies (often with localoffices) are being selected for such packages offunctions. Paying huge fees to internationalconsultants has been a particularly seriousconsequence of this trend. In the Delhi WaterBoard (DJB) case local groups protested highfees to be paid to PWC – the internationalconsultants for the proposed WB aided project,one of the main grounds on which theymanaged to stall the project. Whereinternational consultants do not provideexpertise that local experts cannot (eg. thetransfer of technology), activists argue againsttheir employment, as in the KUWASIP projectin North Karnataka31.

Besides relying on consultants, capacity buildingis also outsourced to a number of select Indianinstitutions several of which have been initiated

with funding from the IFIs. This raises questionsof potential conflicts of interest. Theseinstitutions include the Strengthening UrbanManagement Programme (SUM) of theAdministrative Staff College of India (ASCI) setup in partnership with the World BankInstitute, City Manager’s Association of Indiaand its state level chapters (funded by USAID),and the Centre for Good Governance,Hyderabad set up with WB funding.

3. Integrating IFI reforms through GoI,the Private Sector and other Donors

Since the early nineties, the IFIs have realisedthe importance of embedding urban reformswithin the apparatus of national, state and localgovernments. This is also reflected in the GoI’sapproach to JNNURM later on. Suchembedding was meant to enable greatersustainability of the reforms. It has also helpedthe IFIs to renegotiate the earlier image of anexternal agent infringing on nationalsovereignty by imposing conditions fromoutside (Vijayabaskar and Wyatt 2005; Mooij2005), albeit with only partial success. Criticalto the embedding process is the need to getpowerful policymakers and policy influencersto not only validate the reform agenda but alsoassume ownership of the reform effort. IFIinterventions have, therefore, been developedwith an active role for senior bureaucrats (atall tiers of government) in both design andimplementation. These roles come with a slewof incentives like new avenues for mobility,travel and higher incomes (e.g., working withthe WB during service and after retirement). Inaddition, the burgeoning private sector,following the liberalisation of the economy, hascontributed complementary interventions tothe pro-private sector reforms advocated bythe IFIs.

The IFIs overall strategy for building policyagreement includes interventions at differentlevels of government. We discern three maintypes of interventions at different tiers ofgovernment. The first is national levelinterventions. These are of importance becausethe Union Government plays a large role inplanning for economic growth % identifyingsectors, detailing policy prescriptions, and to alarge extent being in primary control ofallocating the financial and other resources toimplement its policies. While the states havepolicies of their own, they tend to follow thelead set by the Union Government. The secondis state level interventions, typically bydeveloping a pilot project in a state and thenscaling it up, over a period of 5-10 years, across

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the state. State level interventions are oftenpioneered in certain states that are known fortheir reform orientation, like Karnataka, andthen emulated in other states over a period oftime. The first two approaches are the oldestand have worked in tandem to do the“preparatory work” for putting in place PSP inurban infrastructure. Several examples of theseare found in Sections 1 and 2 of this paper.

Recently, national level interventions haveentered a new stage in their evolution with thelaunch of a systemic and comprehensivemission for implementing urban reformsnationally. Called the Jawaharlal NehruNational Urban Renewal Mission (JNNURM),the JNNURM is a national programme of theGoI that has been designed and implementedwith support from IFIs, bilateral donors and theprivate sector.

The third type of intervention focuses on citiesthemselves, including smaller cities, andencourages local lobby groups and pro-reformbureaucrats to compete with each other(much of it using their own initiative) toundertake reforms in their cities. While onlybeginning to happen, we speculate this will be afocus area of the IFIs in the future.

Below we describe via two cases how statelevel (KUDCEMP and KMRP) and national(JNNURM) interventions have served toembed a policy shift that favours PSP ininfrastructure and the key players that animatethe debates and practices in each one. Perhapsmore crucially, we explain through the use of adiagram the processes by which IFI’s state levelinterventions are linked with national levelinterventions using cases from Karnataka. Weend this section by briefly touching upon thepossible focus of IFI strategy and projectattention in the future % at the local level.

3.1 State level interventions: the case ofKUDCEMP and KMRP

The growing fiscal strength of stategovernments and their responsibility foreconomic growth and urban reforms haveprompted the IFIs to increasingly focusattention on building agreement for theirpolicies at the regional level. IFIs give particularimportance to initiating pilot projects at thestate level, constructing these pilots as bestpractices, and creating agreement within theState regarding the need to scale them upthrough workshops, training, and field trips(both domestic and international). This move

to State level extends the reach of reforms tothe regional level.

The Karnataka Urban Development andCoastal Environment Management Project(KUDCEMP) was launched in early 2001 with aloan from the ADB32. The loan supportedimprovement of basic services and essentialinfrastructure (especially water services, roads,and drainage) in ten coastal towns in WestKarnataka. A set of institutional and financialreforms were made a condition of the loan,and these reforms were committed to by allthree tiers of government. Importantassurances given by GoI and GoK forKUDCEMP included a commitment to executethe policy, institutional, and financial reformmeasures in accordance with the agreed upontimetable, and to execute the revenueimprovement actions and devolution ofintergovernmental resources for the projecttowns33. Besides a number of taxation relatedmeasures to enhance revenue34 in projecttowns, GoI and GoK committed to (a)reducing non-revenue water to no more than25 percent by no later than July 2005, throughmeasures such as improvement of collectionefficiencies to 85 percent and implementationof a water supply disconnection policy forthose who do not pay; and (b) increasing watertariffs by an average of 50 percent for allconsumer categories by April 2001 and 100percent on the then prevailing rates by April2005. The state also committed to ensure thatthe proposed increased water tariffs included adrainage surcharge to cover O&M costs of thesewerage systems in all project towns. Whilethe targets for reducing non-revenue waterand implementation of a water disconnectionpolicy were not achieved (in large part due tolocal resistance), a drainage surcharge waslevied and GoK has increased tariffs inMangalore by nearly a hundred percent sinceSeptember 200735. The state’s role was clearlyone of facilitating financial and other reformsso as to improve the financial sustainability ofthe project. It is noteworthy that through theimplementation of KUDCEMP locally, the ADBsought to leverage reforms at the Central andstate government level.

In Coastal Karnataka, particularly in theMunicipal Corporation of Mangalore,KUDCEMP had to confront a highly literateand aware citizenry and councilors who wereunhappy with several aspects of the project.The NGO Forum in Mangalore, a coalition ofCSOs, formed a smaller NGO Task Force tocounter the arguments of ADB and campaignfor reducing project costs including interest

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and dollar rate fluctuation. Mangalore Cityspends almost 50 percent of water supplycosts recovered from consumers on repayingthe ADB loan (Down to Earth Sept 30, 2008).The NGO Task Force held regular weeklymeetings and met with officials from KUIDFC,councilors of the Mangalore City Corporationand others to convey their views. In 2002-03councilors raised the issue of high cost of theproject loan in the Mangalore City Council andurged that alternative and less expensive meansof funding, such as from nationalized banksmust be examined. Ignoring these complaints,the project continued and was even scaled up.

Deciding that municipal reforms requiredexpansion to other municipalities in the state,the Nirmala Nagara project was launched bythe Directorate of Municipal Administration(DMA) in Karnataka. It aimed at bringing aboutmunicipal reforms in 57 ULSGs in 2001-2002.With funding from ADB through KUDCEMP, aMunicipal Reforms Cell was set up to track,monitor, and encourage the progress ofreforms in smaller towns as part of the NirmalaNagara project. Subsequently, officials from theKUIDFC, the DMA and the WB startednegotiating for the Karnataka MunicipalReforms Project (KMRP) that would furtherscale up the impact of KUDCEMP and NirmalaNagara project with funding through a loanfrom the WB. While the WB was mostinterested in pushing the municipal reformcomponent in Karnataka, the GoK was moreinterested in support for municipal investment(Interview KUIDFC official). Through KMRP, theWB tied municipal reform to municipalinvestment support. The project has three maincomponents: 1) Institutional developmentwhich entails carrying out reforms in 169towns 2) Municipal investment support in 32towns with the focus on raising funds from themarket for infrastructure, accounting and taxrelated reforms, and 3) Bangalore Developmentwhich includes construction of roads,underground drainage and pro-poor sanitationin the Greater Bangalore area. The IFC andprivate sector components, though present inthe initial project design, were later droppeddue to local opposition.

Further, under KMRP, two crucial TAs wereprepared by external consultants that willsignificantly impact financial and landmanagement policies in urban areas across thestate. One of these is an Urban FinanceFramework and Design prepared by CRISILwhich again proposes a series of reforms for allurban areas in the state of Karnataka, exceptfor Bangalore (Aug 2008). The proposed new

urban finance framework promotesprivatisation of basic municipal services andaims to create more opportunities for marketborrowings that progressively reduce the“dependence” on funding from state andcentral governments. It even recommends theconversion of state grants into loans if certainsuggested performance criteria and ratingmechanisms are not met with (Final Report -Executive Summary Aug 2008). Of concern isthat this framework outlines a set of criteriafor the State Finance Commission’s (SFC)allocations to ULSGs that seems biasedtowards larger corporations / towns andreduces the importance given to‘backwardness’ by the 1st and 2nd SFCallocations. For instance, the 5 criteriaidentified as a basis for transferring SFCallocations include population (40% weightage),area (15% weightage), illiteracy (10%weightage), road length (15% weightage), andthe extent to which property tax covers thenormative O&M of ULSGs (20% weightage).The weightage given to illiteracy has beenconsiderably reduced from 33% in the previousSFC recommendation to just 10%. Such aformula seems weighted in favour of larger,more populated, and less backward towns36.This framework is yet to be approved by theconstitutional body the 3rd State FinanceCommission and the UDD, and there areindications that it is not going to be approvedor discussed by the State Legislative Assemblyor any City Council. The second TA sponsoredby KMRP, the State Urban Land ManagementFramework, proposes reforms and policies forland management across the State. It isprepared by STEM consultants. While a draftreport was shared with State Government inmid- 2008, it has so far not been made public.

While investment support through KMRP isonly for 32 towns, institutional reforms cover169 towns and other reforms (such as landmanagement and financial reforms) cover allurban areas of the state falling under thejurisdiction of the DMA (i.e. around 210 smalltowns). The spread of reforms will befacilitated by expanding the Municipal ReformsCell. The Municipal Reforms Cell is currentlycomposed of KUIDFC officials who report tothe DMA and Urban DevelopmentDepartment (UDD). Besides developingbenchmarks for and indicators of progress inreforms, the Reforms Cell also houses acomprehensive database relating to budgets,audits, and accounts related information. Itcompletely centralises management in amanner that opposes the concept ofdecentralisation as spelt out in the 74th CAA.

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Decisions in this Cell are brokered andimplemented by a few bureaucrats, projectconsultants and WB officials and it does notlend itself to public scrutiny. KMRP also entersinto an MoA signed by the concerned ULSG,UDD and KUIDFC, and the concerned waterand sewerage Boards as evidence of theULSG’s commitment to undergo reforms.

As the case study illustrates, the aim of theseprojects seems to be to give loans to localgovernments for improvement ofinfrastructure so that the services can becontracted out during construction and ULSGscan ultimately move towards privatisation ofservices, especially where there is no localopposition to this37. Project loans are madeconditional on implementation of municipaland state level reforms. Project details aretypically guided and prepared throughnumerous TAs and consultancies which arechanging the legal and regulatory face of notonly the project towns but also the rest of thestate. A clear beneficiary of such infrastructureprojects are corporate groups which get thelucrative contracts, and provide the materialsand support services for such projects. InKUDCEMP it was Dalal Consultants and theengineering and construction firm of Binnie,Black and Veatch.

We trace an emerging pattern of convergenceof ideas and agendas in the race for reforminglocal governments in the country. While suchprocesses are clearly wedded to sustaining ahigh rate of GDP growth, they also emphasisean increased share for the private sector in the

field of municipal services. Indeed,commercialisation of municipal administration,including the outsourcing of auditing, planning,accounting, and environmental engineeringtasks, has already increased. Therefore, severalyears after the construction of new watersupply and sewerage systems underKUDCEMP, local and global private sectorwater supply companies are lobbying for aproposal for a ‘cluster city’ approach todelegated management contracts foroperations and maintenance (O&M) of thesefacilities. Currently GoK is scaling up reformsbegun under KUDCEMP and KMRP to 146non-IFI funded towns — it has awardedpackages of towns to consultants to preparecity level investment plans (CLIP) foridentifying infrastructure needs. This will befunded by UDD, GoK through KUIDFC. Nineother states have initiated similar projects; fiveare supported by the ADB and four by theWB38.

The table identifies KUDCEMP and KMRP, thepilot best practice they represent and detailson their scaling up at the state and nationallevel. While these interventions are focused atthe State level, the scaling up has in some casesextended to the national level.

3.2 National level interventions: The case of theJNNURM

The launch of the JNNURM in December 2005marks a watershed in municipal infrastructureprovision. Prior to the JNNURM, institutionaland legislative reforms were often brought in

Table No. 1 Promoting pilot projects as best practices to be emulated state-wide Name of IFI project and

location

Purpose of pilot

Scaled up to state level Upscaled to national level

KUDCEMP (ADB) Karnataka

- State and ULSG level urban sector reforms

- Nirmala Nagara and Municipal Reforms Cell

- Cluster city development model

KMRP (WB) Karnataka

- Municipal reforms - Urban Finance framework

- Karnataka Urban Finance framework -Karnataka Urban Development Strategy1

- India Urban Strategy 2025 - Mega Cities Strategy2

Source: Own compilation 1 Price Waterhouse Coopers (PWC) consultants prepared the Vision 2020 plan for Karnataka and also drafted an Urban Development Strategy. 2 Funding for a National Urban and Mega Cities strategy 2025 has been routed through the Planning Commission from WB, Cities Alliance, WSP and USAID.

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The diagram below (see fig no 1) outlines the role of the IFIs in the JNNURM process usingthe example of Karnataka.

Table No 2 The Role of ADB and WB in Urban Reforms under JNNURM

IFI recommended state and local reform options

JNNURM (2005-12)

Repeal of Urban Land Ceiling Regulation Act Repeal of Urban Land Ceiling and Regulation Act Rationalise stamp duties and reduce rates in a phased way

Rationalise stamp duty in phases to bring it down to no more than 5% by end of JNNURM

Phase out rent control laws; Indexing rents of Municipal properties to market rents

Reform of rent control laws; Introduction of computerised processes of land registration

Unbundling municipal services to create user charge revenue streams for each service

Different depts. handling diff services, separate accts maintained for each

Enabling a shift to Capital value based system of property tax; Improve collection efficiency, link property taxes with market prices

Reform of property tax so that it may become a major source of revenue of urban local bodies, target set collection efficiency reaches at least 85% by the end of 11th Plan period

Improve cost recovery of local utilities- reduction of non- revenue water to 25% and increase in tariffs by 50% by 2001 and 100% by 2005 in KUDCEMP; link taxes and charges with services provided

Levy of ‘reasonable’ user charges, with objective of full cost of operation & maintenance collected by end of the 11th FY Plan (i.e. 2012)

Introduction of double entry accrual accounting (WB 2004)

Introduction of double entry system of accounting in urban local bodies / parastatals

Community Support fund & community infrastructure guarantee facility (WB 2002)

Community Participation law and community participation fund

City Development strategy and City Level Investment plan

City development plan

Source: Compilation from WB, 2004; WB, 2002; ADB, 1999; ADB, 2001; JNNURM Guidelines

 

IFI’s role in JNNURM Process

GOK GOI

IFIs

MoUDMoFMoHUPA

UDD Finance Dept

KUIDFC(state level

nodal agency)

JNNURM Secretariat

(ADB supported)

Consultancy/TA, Salaries, Toolkits, Guidelines, Mission statement, Pro-poor policy, Capac bldg

Project loans, Business plans, Capac bldg, Consultancy/TA, Pro-poor policy

Fig No. 1

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as project conditions or as TAs linked to loansand grants. But now, the JNNURM has broughtin a set of urban reforms to be appliedsystematically across 63 cities in the country.Subsuming many existing government schemes,it makes the allocation of grants conditional onadhering to a set of financial and governancereforms at the state and city level and createsa more enabling framework for private sectorin investment and delivery of urban services(ADB JNNURM TA 2006). A programme withsimilar reforms called the Urban InfrastructureDevelopment Scheme for Small and MediumTowns (UIDSSMT) has been put in place for allother small and medium towns.

Continuing the approach set in place by theIFIs, the JNNURM as a programme has a‘project’ focus with typically no relation withpast projects or ongoing projects in othersectors (Interview urban planner, April 2008). Itprivileges infrastructure creation overmaintenance related issues and adherence tospecified reforms over performanceaccountability in service delivery. The ADB andWB are particularly involved in strengtheningand expediting the urban reforms process ofthe JNNURM by providing technical assistancesupport to states and cities to undertake thereforms, and by supporting mechanisms formonitoring and evaluating progress of reforms.As the table below reveals, most of thefinancial and governance reform andmanagement prescriptions mandated by theJNNURM are similar to those promoted bythe IFIs (described in sections 1 and 2). Assuch, we argue that the IFIs have significantlyinfluenced the design of the JNNURM.

The diagram (see fig no 1) outlines the role ofthe IFIs in the JNNURM process using theexample of Karnataka.

3.2.1 Reforms that encourage borrowinginfrastructure funds from the market

The JNNURM aims to encourage entry ofprivate capital into urban infrastructure bypart-grant financing for JNNURM projects bythe GoI, a move that is intended to increaseproject bankability. Similar to corporatefinancing, under JNNURM, central and statefunding is viewed as government equity and notas grants39. The gap which arises from thepartial financing impels city governments toleverage funds from market sources. InJNNURM, funds are routed from centralgovernment to the UDD at the state level,from there to the designated state level nodalagency, and finally to the JNNURM cities. While

no funding comes to state governments, theyare required to commit to certain reforms as acondition for receiving central funds. ThusJNNURM is structured by GoI to leverage reformsfrom state governments in a domain (i.e, the urbansector) which the Constitution does not placeunder central government control without in anyway funding the state government.

There is also an apparent split between thetwo sub-missions of the JNNURM: UrbanInfrastructure and Governance (UIG) and BasicServices for the Urban Poor (BSUP). Theyinvolve separate ministries, mandates anddiffering levels of IFI involvement. This splitpossibly ensures that the higher risk BSUPcomponent is kept apart from the morelucrative and less risky UIG so that it can easilyattract private investment.

3.2.2 Reforms encouraging PPPs

The JNNURM strongly emphasises using PPPsin urban infrastructure and several toolkitshave been created to guide cities in complyingwith this goal. The IFIs and USAID have played acritical role in helping in the design of policyguidance notes for the JNNURM. Cities, forinstance, need to submit detailed projectreports (DPRs) for each project submitted forJNNURM funding approval. The DPR toolkitmakes detailed recommendations on PSPoptions in line with WB and ADB policyprescriptions (www.jnnurm.nic.in). Theseinclude 1) the formation of a separate legalentity or SPV to run the project and 2)management arrangements for the privateentity. All the management arrangementssuggested involve the formation of PPPs andpayment to the private entity for constructionand O&M costs. Payment could include theprivate party directly recovering costs throughuser charges for a specified long term duration(15-25 years) or the private party being paid afixed annuity (or fixed rate per unit of servicedelivery) for its services over the specifiedterm duration. In the latter form, the ULSG candirectly recover user charges or retain theoption of contracting out billing and collectionto a different private entity.

There are several reasons cited in the DPRtoolkit for favouring PPPs. Market financingwould purportedly support a larger number/scale of infrastructure projects by the citygovernment; provide (an additional) projectappraisal by the funding agency and hencecontribute to risk reduction for investors andimproved project structuring; and creategreater project management discipline for the

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ULSG, especially in the context of O&Mmanagement. However, market financing hasnot panned out on the ground in the way itwas intended by the JNNURM. Out of the first240 DPRs approved until August 2007 therewas declaration of intention of exploring PPPoption in less than 6% of cases (Discussionwith R Joshi, Independent Analyst October2007). The drive towards market financing hasclearly not been followed by city governmentsexploring PPP infrastructure projects in asubstantial way.Private players claim that there are insufficientfinancial incentives (like tax concessions) forthem to enter urban infrastructure and lack ofa proper legal framework to facilitate thedesign and implementation of PPPs. Only a fewStates like Gujarat, Andhra Pradesh,Maharashtra and Karnataka have passedInfrastructure Acts under which PPPs areincluded, and confirmatory changes in theMunicipal Acts have not taken place even inthese States. Additionally, the private sector ismotivated by profit concerns and, with theexception of real estate projects, the returnsfrom urban infrastructure are much lower thanopportunities provided by the booming privatesector. The huge resistance to large scale landacquisition in recent months has alsodiminished the interest of private players toundertake large infrastructure projects thatinclude real estate components. Private players’lack of interest in urban infrastructure projectsseems to indicate that PPPs in urbaninfrastructure is more hype than substance andthat GoI’s intention of leveraging funds fromthe market under the JNNURM is fraught withproblems.

3.2.3 Consultant-driven vision/project plans forthe city that exclude citizens participation

The TA40 for JNNURM funded by ADB (2006)provides $2 million for the formation of amission secretariat housed within the MoUD.The secretariat is manned by seniorconsultants of Price Waterhouse Coopers Co.and since mid- 2006 has been closely involvedin preparing/revising guidelines and toolkits forJNNURM. These have subsequently been rolledout through pilot projects such as 24x7 watersupply schemes (in Mysore) and water supplyprivatisation or public rail transit schemes suchas the Hyderabad Metro.

The WB over the years has lent considerablesupport to the formulation of what it termscity development strategies41 which areblueprints that outline a vision for thedevelopment of cities backed by capital

investment plans. These city developmentstrategies (CDSs) are supposed to be informedby a multi-stakeholder vision, including civilsociety groups, urban poor groups and privatecompanies. In practice, however, we find theprivate sector’s voice has been the loudestgiven the emphasis on forming capitalinvestment plans and the practice ofoutsourcing CDSs’ to private consultants.These CDSs’ have in many cases beenconverted into city development plans (CDPs)and submitted to fulfill the mandate of theJNNURM Scheme. The Hyderabad CDS wasprepared in 2003 by Administrative StaffCollege of India (ASCI)42, Hyderabad, amanagement training institute, with fundingfrom the Urban Management Programme ofUNDP/ UNCHS. It was submitted with veryfew changes as Hyderabad’s CDP underJNNURM. This actually meant that almost twoyears later (early 2006) no fresh inputs weresought or incorporated from the public for acity which was to expand into the GreaterHyderabad Corporation just one year later.Despite the lack of public consultations,Hyderabad was one of the first cities to getprojects sanctioned under JNNURM in March2006.

The ADB has also been heavily involved in theJNNURM CDP process as a local plannerdescribes in the case of Chennai (Raman,2009). The ADB’s Cities Initiative for Asiaapproached GoI requesting to support a newplan making process which would produce realinvestment plans for cities. GoI agreed andselected Chennai as a model city for thisprocess. The ADB then approached theChennai City Corporation, and they togethercontracted two consultants to carry out theChennai CDP review – GHK and DHV.Interestingly, funds for this purpose wererouted directly from the ADB to the consultingagencies.

The preparation of CDPs or DPRs has notcontained any explicit role for citizens’participation in violation of the guidelinesprovided under the JNNURM (Narayanan2008; Roy 2007; CASUMM 2007). In somecases, donors like the Water and SanitationProgram of the WB have prepared the CDPsthemselves (as for Lucknow); at other timesconsultants like CRISIL have been supportedby IFIs and other donors to develop theseCDPs. CRISIL, for example, was hired asconsultant for the preparation of the PuneMunicipal Corporation’s (PMC’s) CityDevelopment Plan in Dec 2005. A journalistand resident of Pune maintains that the CDP

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preparation was offered to CRISIL without anytransparent tender process and the process fordrafting the CDP was a façade (Barse 2006).No information on the consultant’s TOR or feewas made available although she sought thisinformation under the Right to Information(RTI) Act in early 2006.

The JNNURM has also created a NationalTechnical Advisory Group (NTAG), andrecommended that state governments createState Technical Advisory Groups (STAGs) andCity Voluntary Technical Cells (CVTCs)purportedly to provide a range of technicalcapacities at different tiers and to enablegreater citizens’ participation in urbangovernance. In most cities, these intermediariesare absent or not functional and there aremany complaints from citizens regarding theirnon-involvement in formulating JNNURMCDPs. Additionally, the basis for selection ofthese members and their mandate, especiallyvis-à-vis local governments, is not clear. TheNTAG for instance was not given a clear andfixed mandate when they started off with theresult that they appeared to create their ownmandate as they went along after negotiatingwith Union Ministries as to what they could doand how they could get it done with Ministrysupport. Typically there is a high degree ofrepresentation from the private sector(especially with regard to urban infrastructure)and members have a close working relationshipwith IFIs. For example, NTAG arrived at adecision to ask USAID’s FIRE (D) to prepareeight JNNURM reform primers (Minutes ofNTAG Meeting www.jnnurm.nic.in). This raisesserious questions of accountability as thesemeetings are not open to public participation.It also raises issues of conflict of interest giventhe private sector and IFI’s financial stakes inurban infrastructure.

3.2.4 Promoting a parallel governancestructure dominated by bureaucrats

Similar to the IFI model of creatingintermediary institutions and concentratingpowers of decision making within them, theJNNURM mandates the creation/nomination ofa state level nodal agency (SLNA) by the stategovernment to route JNNURM funds to citiesand be responsible for overall projectmonitoring. It also creates a CentralSanctioning and Monitoring Committee(CSMC), which has the power to accept/rejectprojects or send them back for revision. Thisincreases central and state governmentcontrols over the selection and design of localprojects. Thus local governments do not focus

on designing projects based on the needs ofthe electorate but along the criteria andpriorities articulated by the JNNURM Mission(Interview with urban planner in BangaloreApril 15 2008). The JNNURM also advises theestablishment of project management units(PMUs) and project implementation units(PIUs) to build the capacity of cities formanagement and implementation of JNNURMprojects and reforms. In addition to these, theJNNURM also specifies the creation/nomination of National and State level SteeringCommittees and several appraisal institutionsto review CDPs43. This has had the effect ofsetting up an extremely bureaucratic andparallel governance structure which has a verylimited role for elected governments at bothstate and local levels.

Further, financial support to PMUs and PIUsfrom GoI is available only for fees for expertsand travel related expenses. An easy course ofaction for cities therefore seems to be hiringconsultants to perform this function. Going bypast experience, it is likely there will be littleinternal capacity building of ULSGs. PMUs/PIUsare supposed to be a temporary measure to filla capacity void in local governments. Over thenext few years they are supposed to hand overtheir functions to staff in ULSGs. However, ifthere is no money for or importance placed onbuilding capacities within local governmentsover time, this possibility seems remote.

3.2.5 A deeply flawed programme? Resistanceto JNNURM from citizens, state and localgovernments

Over the last three years since the JNNURM’slaunch, there have been numerous protestsfrom local groups. While those by citizen andactivist groups are better documented, internalprotests from within the State and localGovernments have been less visible. Protestsfrom civil society groups have addressed whatthey see as fundamental flaws in the design ofthe programme, such as lack of role for stateor local government and citizens, as well aspoor project implementation on the ground.For instance, a Rs 6.55 billion cost escalationhas taken place in JNNURM road developmentprojects within the Pune MunicipalCorporation due to earlier mis-estimation onthe part of a consultant panel while preparingthe project. This indicates that private sectorinvolvement does not automatically lead togreater efficiency, especially where specificperformance criteria are missing and privatecontractors are operating in a weak regulatoryframework.

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Protests internal to government have also dealtwith structural design issues as well asimplementation issues. One of the biggestcomplaints from state governments is that theMission was launched without politicalconsultations and consensus formation amongstate Governments. The need to de-link the(mandatory and optional) reform agenda fromGoI funding has also been expressed byStates44. Underpinning this concern is therequirement for greater flexibility rather than aone-size fits all approach, and the need for(untied) Central support in specific arenas. TheChief Minister of Kerala State in a speech givenat the National Development Council in Dec2006 explained that the JNNURM is causing afiscal loss to the state of more than Rs 70billion over the 7- year programme period onaccount of being forced to reduce stamp duty;this is in order to receive the Central grantamount sanctioned for JNNURM cities, whichamounts to only Rs 45 billion45. ReceivingJNNURM grants forces the Kerala Governmentboth to implement controversial reforms likelevy of user charges and reduction of stampduties and incur fiscal losses which reduce thestate’s ability to fund social sector expenditure(ibid).

The lack of prior consultations with stategovernments on the design and implementationof JNNURM has meant that these issues couldnot be raised collectively by States with theCentre prior to its launch or resolved tomutual satisfaction. Government servants,analysts and activists fault the JNNURM forbeing a supply-side programme where GoI hasdecided what reforms need to be undertakenand under what conditions, and which technicalassistance and capacity building inputs, such astoolkits and concession agreements, areneeded. There has been no local debate ordemands from local governments regardingwhat projects and funds they need. Evenidentifying the cities selected for JNNURM wasdone at the central level. This extremecentralisation has pushed ULSGs even furtheraway from the 74th CAA’s ideal ofdecentralising administration and planning sothat they can be based on local needs andrealities.

While it is important to understand how IFI’sstate and national level interventions haveserved to embed a policy shift that favours PSPin infrastructure, what is perhaps even morecrucial is to understand the processes by whichthe two are linked. Figure no. 2 illustrates theselinkages (see Fig No. 2).

The institutionalisation of a set of reforms hasproceeded at the country level through theJNNURM. While this programme has had theeffect of spurring the urban reforms agendaonward, it has remained somewhat confined tothe larger cities and the more pro-reformstates. Given the higher population growthrates and economic growth potential ofsmaller towns, IFIs are keen to encourage theembedding of reforms in such cities. This seemsto be an IFI focus area of the future and astrategy that we speculate will be developedand implemented over the next several years.

3.3 IFI focus on smaller cities and towns: thewave of the future?

The search for promising new markets hasspurred IFI interest in increasing direct lendingto cities and smaller towns in the futurebecause cities are major contributors toeconomic growth. According to a recentnewspaper article (Economic Times, Aug 8 2008),based on a National Centre for AppliedEconomic Research (NCAER) study, the toptwenty ‘boom’ cities in India are projected togrow their household income at 10% annuallyover the next eight years, and they alreadyaccount for 60% of the surplus income(income minus expenditure) generated atpresent. Targeting infrastructure lending(particularly to cities) would “maintain itsrelevance in the changing economic scenario inthe region,” says an expert groupcommissioned to chart out a vision for theADB (ADB, 2007)46.

City governments too are beginning to showmore interest in vying for IFI grants. One factorhas been the JNNURM which has spurredgreater competition among cities to get fundssanctioned and to leverage funds to fill the gapcaused by part-grant funding from GoI. TheVijaywada Municipal Corporation for instancehas signaled agreement to take a loan of Rs 2billion from the ADB to complete its JNNURMprojects. For various reasons, including thetime gap between project design andimplementation, Vijaywada officials say therehave been escalations in project costs (TheHindu, July 24 2008). Since JNNURM has noprovisions for addressing these escalations,cities are forced to look towards IFIs to do so.

A second reason is due to contradictions ingovernment policy. To begin with the JNNURMhad no stipulations as to which type of projectsit would fund and the majority of projectssubmitted for funding were road construction

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projects (as high as 60% of CDP costs in somecities). Subsequently, there was pressure on theJNNURM to not approve city road projects asthis went against the MoUD’s April 2006National Urban Transport Policy’s (NUTP)stated intention to promote public and non-motorised transport. Once JNNURMannounced withdrawing support for roadprojects (post July 07), cities had to lookelsewhere to fund these projects. As a seniorfinance official from the BBMP explained, muchtime and money had already been spent onpreparing the project DPRs and city roadsurgently needed upgrading. IFI project loansnow seemed to be the obvious choice of fundsfor city road projects.

The search for new urban locations forindustrial investment and new markets has alsomeant that business groups in urban centresbecome powerful lobbies demanding betterinfrastructure. Business groups reinforce callsfor minimizing the role of government andenlarging that of the private sector. Forexample, Infosys, one of India’s largest ITcompanies set up its Global Training Facility inMysore and the completion of the privatelybuilt Bangalore Mysore Infrastructure Corridor,a six-lane super-highway, will benefit themenormously. Infrastructure is one of the mostcommon currencies by which Stategovernments woo the private sector to investin their State. This sets up a dynamic ofcompetition, the need to act fast to buildinfrastructure (privately if necessary) or loseout in the race to attract private investmentand accelerate economic growth.

However, it is also at the local governmentlevel where there is growing opposition tourban reforms as these measures directlyimpact voters and local councilors. The latestoutburst of indignation from people inMangalore has resulted in repression by thepolice (Deccan Herald, Aug 5, 2008). Theprotestors were against outsourcing of watersupply bill collection by the MangaloreMunicipal Corporation and the doubling oftariffs. The tariff hike is a direct result of ADBconditions set down for the KUDCEMP. As thepace of urban reforms gather, protests fromgroups of different stripes – middle and lowerclass groups, political parties, councilors andpublic sector employee unions, among others –will likely increase and delay and subvert

implementation in various ways. Theproponents of urban reforms have typically nottaken this into account. This is largely becausethere is no understanding of the (intended andunintended) impacts these reforms are havingon the ground. Part II elaborates in greaterdetail the implications of the reform agenda forlocal governments and local residents, with aparticular focus on urban poor groups.

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Part II

Municipal restructuring: What does it mean, who does itaffect and how

Private services are introduced in urban publicsector systems based on the rationale ofefficiency in service provision. The focus of theurban reforms agenda at the local level is thedismantling of the public sector “monopoly” inmunicipal services and the entry of privatesector to improve these services. There areseveral institutional and decision makingchanges required for the introduction ofprivate sector participation in urbaninfrastructure. These range from changes infinance and regulatory frameworks to policiesand legislation, and the IFIs have played a keyrole in structuring and promoting them, as wehave seen from Part I. These changes have hada significant impact on the structure andfunctioning of municipal governments and thedelivery of basic services, particularly for theurban poor.

While the most visible aspects of thisrestructuring (and the target for resistance bylocal groups) include tariff hikes and removal ofpublic stand posts that provide free watersupply to the urban poor, there are otherserious impacts often not registered. Some ofthe more important of these are thetransformation of decision making processesand structures, the creation of financial models

to ensure private investors are paid back first,and the erosion of regional and localdemocratic processes. The following sectionsanalyze these in detail.

4 The impact of municipalrestructuring on basic services

4.1 Targeting large infrastructure projects at thecost of basic services

At the local level, ULSGs are being promotedas purchasers of services (from the privatesector) and not service providers and thefocus of municipal government seems to benot on providing basic services for all but oncommercially viable urban infrastructureprojects like those submitted under the UIGcomponent of JNNURM. The table belowreveals the skew in project approvals andallocations between Basic Services for theUrban Poor (BSUP) and Urban Infrastructureand Governance (UIG) projects in severalJNNURM cities.

In all these cities, much less than one-third ofthe funds were applied for/allocated for BSUPcompared to UIG. This is despite the fact thatthe JNNURM encourages internal earmarking

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of 20% of city level budgetary allocations(rising to 25% by 2012) for urban poor groups.There are several concerns with regard to thePoor Budget, as this allocation is known. Thesecentre on whether this target allocation will bemet, how cities will be monitored andencouraged for spending this amount, and theactual outcome of this expenditure. InBangalore, for instance, the city governmenthas difficulties in spending the 18% of itsbudget that is required to be spent on thewelfare of SC/STs 47 and this allocated amountoften remains unspent. Further, the continuingdeprived condition of many SC/ST householdsin the city (Kamath et al, 2008) casts doubts onthe efficacy of the programs on which thesefunds are utilized. It is likely that withoutproper oversight this will be the case for thePoor Budget as well.

Despite claims by IFIs that PSP in urbaninfrastructure will increase the urban poor’saccess to infrastructure this has not beensubstantiated empirically. The Tamil NaduUrban Development Fund (TNUDF) set upwith USAID and WB funds is the first public-private financial intermediary in India devotedto provide finance for infrastructuredevelopment to ULSGs in Tamil Nadu withoutany guarantees from the state government.Vijayabaskar and Wyatt (2005) state that whilethe TNUDF Annual Report 2004-05 refers tobridging basic infrastructure deficiencies likedrinking water, sanitation and stormwaterdrains, the bulk of the funds have been spenton roads, bridges, bus stations and markets thatdo not necessarily benefit poorer groups.Moreover, of the 13 ULSGs that received funds,nine are close to Chennai Corporation and the

remaining are larger ULSGs. This could well bebecause smaller ULSGs are less creditworthy(and pose more risk to investors) than largerULSGs. This has only deepened existingregional disparities between larger ULSGs withgreater access to revenue sources and smallerULSGs with much less scope to raise revenue(ibid).

The dearth of programme funding for basicservices delivery has been worsened by thepassage of the Union Government’s FiscalResponsibility and Budget Management Act(FRBM Act) in 2003. The aim of the FRBM Actwas to rein in fiscal deficit both throughreducing expenditure and by raising resources.Policymakers in government, encouraged bythe IMF and WB, believed this was the key toachieving sustainable economic growth andmanaging inflation. Since 1991, the IMF and theWB have been making reductions in the fiscaldeficit a condition of loan agreements toIndia48. Subsequently many states followed suitand implemented their own FRBM Acts. Thishas had the impact of reducing developmentexpenditure by Central and State governments(CBGA 2008). GoI’s development expenditureas a proportion of GDP declined in the postFRBM era from 7.5% in 2002-03 to 6.4 in2005-06 (ibid). In almost all sectors there hasbeen a decline in development expenditure inthe States (see table below).

This decline in spending on basic servicescorresponds with a tremendous backlog ofbasic service delivery in cities across thecountry. As of March 2007, the Union Ministryof Housing and Urban Poverty Alleviation(MHUPA) Housing and Habitat Policy 2007

Table No 3 The Skew in fund approvals between UIG/Infrastructure and BSUP/Basic

Services for the Poor (Rs Million)

City BSUP/Poor UIG/Infrastructure % BSUP to UIG fund approvals

Chandigarh 12.5 11,740 0.1 Kolkata 1,610 70,000 2.3 Jaipur 2,000 44,000 4.5 Ludhiana 1,666.4 20,530 8.1 Chennai 38,870 344,920 11.2 Ahmedabad 9,940 76,200 13 Bangalore 20,000 80,000 25 Hyderabad 50,000 200,000 25 Pune 1,5900 63,490 25

Source: JNNURM CDPs from www.jnnurm.nic.in Aug 2007; Compilation from Narayanan 2008

35

reported a 99% shortage (24.7 million units) inEconomically Weaker Section (EWS) & LowIncome Group (LIG) housing. The Mid-TermReview of the Millennium Development Goals(MDGs) conducted by the Wada Na TodoAbhiyan49 Campaign reports that the GoI hasnot been able to achieve significant targets inpoverty alleviation. Using data from GoIsurveys, the report states that over 55.5 % ofthe urban population lived in slums at the timeof the 2001 census, only 33 % of the populationhas access to improved sanitation in 2005-06,and only 17.3 % of women enjoy wageemployment in the non-agricultural sector.Many of the critical universal coverage targetsfor basic services, like water supply andsanitation, have been pushed back to the end ofthe 11th Five Year Plan at the central level andin states like Karnataka proposed to beachieved only by 2017 (end of 12th Five YearPlan). This is while the GoI is intending toincrease infrastructure expenditure from thecurrent 5% per year to 9% per year of GDP bythe end of 2012.

At all three tiers of government, strong signalsare being sent regarding the dilution of stateresponsibility to ensure the supply of basicamenities to all; simultaneously, resources aregradually being diverted to attracting PSP andmaking infrastructure projects commerciallyviable. The development of a Model MunicipalLaw (MML) by GoI indicates the UnionGovernment’s intention to advancecommercialization of infrastructure operationsand bring in PPPs at the municipal level.Through the MML, the USAID, supported bythe IFIs and private consultants, proposed amarket- oriented legislative framework toformally introduce the private sector inmunicipal operations. Key features include: 1)Involvement of private sector, NGOs andCBOs in the provision of services; 2)Involvement of private sector, NGOs andCBOs in the collection of user charges; and 3)User/service charges to reflect O & M and

capital costs. States such as Nagaland, Sikkim,West Bengal, Kerala and Bihar have preparedand passed legislation on this basis. Karnataka’sUrban Drinking Water and Sanitation Policy(2003) is an important indicator of support forsuch an agenda at the state level. The policyargues for full cost pricing of water and theintroduction of PSP in the longer term, andencourages “preparatory work” for PSP in theshorter term. At the municipal level, minimalincreases in spending on basic services and areduction in service subsidies signals retreat ofthe local state from ensuring the supply ofbasic amenities to all.

4.2 Acquisition of land for large infrastructureprojects displaces poor groups

One of the most serious consequences ofpromoting large infrastructure is thedisplacement of urban and rural poor whenland is acquired in and around cities for suchprojects. The state is heavily implicated in suchland acquisition as its contribution to IFIfunded and other infrastructure projects isoften equity in the form of land. Parastatalagencies equipped with state powers ofeminent domain and backed by draconianlegislation are the ones who typically acquirefarmers’ lands and village common lands forthese projects. Grabbing land from poorergroups for large infrastructure that usuallydoes not service them both displaces them andhas severe consequences for their livelihoods.The table below reveals the extent of landacquisition for various large infrastructureprojects from villages in and around Bangalorein the last few years. Land was acquired by thestate agency, the Karnataka Industrial AreaDevelopment Board (KIADB), using the powerof eminent domain.

Table 4 Decline in development expenditure in States post FRBM Act

Sector 2002-03 (% OF GDP) 2005-06 (% OF GDP) Education 2.50 < 2.20 Health 0.60 0.49 Agriculture 0.67 0.58 Overall social sector 4.5 4.1

Source: Centre for Budget and Governance Accountability 2008

36

While land acquisition for Special EconomicZones (SEZs) has attracted much visibility dueto recent protests in Nandigram and otherplaces, land acquisition and slum evictions forurban infrastructure has received much lessattention. In many large cities, infrastructureprojects, particularly road and transportationprojects, are receiving increasing investmentsfrom the state, due to which pressure is beinggenerated for clearing existing slum pockets.Local activists in Chennai argue that the WB,through its numerous loans to Chennai CityCorporation, has been consistently guiding thecity’s development trajectory. In Chennai, morethan 1 lakh people have been resettled on theperipheries of the city by the Tamil NaduGovernment in the last eight years (ChennaiField Study Report P. Rajan et al, 2008)50. While

the Tamil Nadu Government claims thatresettlement will result in a city without slumsand access to basic services for slum dwellers,in reality slum evictions from central areasrelease valuable land for public-privatedevelopment, such as metro rail, waterfrontdevelopment and commercial development.Resettlement locations also typically have lessaccess to basic facilities and result in reducedlivelihood opportunities due to their locationsfar away from core city areas (ibid).

Acquiring land for infrastructure developmentis especially problematic in light of the minimalpublic consultations and non-transparency ofthese projects. Lack of local awareness andbroader public participation in design andimplementation of infrastructure projectsseems to be less important than ensuring theircommercial viability as the next sectiondescribes.

4.3 Achieving commercial viability of paramountimportance

The numerous reforms, policies, and financialand technical support for enabling PSP in urbaninfrastructure, as described in Part I, have ledto an almost exclusive focus on achievingcommercial viability of infrastructure projectsat the expense of enhanced quality andcoverage of services (especially for vulnerablegroups). Commercial viability is achievedthrough a variety of measures: the introductionof user charges based services, tariff hikes,unbundling of urban services and elimination ofcross-subsidies, property tax reform, and creditenhancement mechanisms. What are theimplications of these measures for urban poorgroups?

There is an intense drive to ensure projectcost recovery and raise project revenues byhiking tariffs and, in some cases, making userspay even for capital cost recovery, as in theGBWASP. This hits the urban poor hardest asthey have to confront increases in tariffs anduser fees when they already pay more on a unitbasis for services than the middle classes. BothWB and ADB have been promoting costrecovery through 100% rational user chargesbecause “without improved cost recovery, thequality of utility services will not improve andopportunities for engaging the private sector inthese utilities will be limited” (WB, 2004).Taking the IFI argument further, Mathur (2005)argues that underpricing of basic services hascaused immense damage to both consumersand service providers and led to poor services,financial strain on the service provider, anddifficulty in attracting private investment. Whilemany people would agree on the need toincrease tariffs for the subsidized middleclasses, there are, however, serious concerns

Table No 5 Land acquisition, displacement and destruction of livelihoods in Karnataka

No. of villages

Projects No. of farmers / labourers displaced

Land acquired (acres)

111 Creation of Greater Bangalore

6,30,496 2,00,000

136 Development of 5 townships + Ring Road

84,430 18,000

45,450

Not identified KIADB Not known 25,000 Source: Compiled from www.bmrda.kar.nic.in January 2007

37

about whether higher tariffs and user feesactually result in service improvements acrossthe board, and especially for urban poorgroups. In the case of the GBWASP, analysisreveals that many poor groups have paid thecapital cost contribution (some as far back as2005) but are yet to receive water(Ranganathan et al, 2009); moreover, eventhough households living in less than 600 sfthave been made exempt from this capitalcontribution, many of them have beencompelled to pay this amount with noinformation on whether or how they will bereimbursed (ibid).

Besides increasing tariffs, IFIs also urge whatthey call the rationalization of tariffs. Thisinvolves eliminating non-revenue water (i.e.,unaccounted for “leakages” including all un-metered water such as free water provided viapublic standposts) and eliminating cross-subsidies (i.e., higher commercial tariffs cross-subsidizing poor groups usage). For instance, inBangalore, the Water Board (BWSSB) startedcharging Rs 3000/ kl (as per their tariffnotification 2/2005) for water from public tapsto curtail the use of free water to poor groupsin a bid to ensure cost recovery. This iscontrasted with its charge of Rs 6/kl (for thelowest slab of consumption) for a householdconnection. Due to this extortionist rate, thecity corporation stopped financing this subsidyand public taps are being dismantled orreceiving negligible water supply. This hasforced poor groups to find alternative, morecostly, sources of water.

The rationale behind eliminating subsidies forpoor groups seems to be to force them to gethousehold connections as this would expandthe user base of consumers. Combined withhigher tariffs and user contributions to recover(capital and operating) costs, water supplyservices then become a lucrative business51. IFIsargue that the poor gain by getting householdconnections as then they too will benefit fromthe subsidies that the middle classes arecurrently enjoying. However, with increasedprivate contracting of services there is noguarantee that tariffs will rise at ratesconsonant with affordability. Most contractualagreements are weak on monitoring andevaluation of performance, and there is often noinclusion of benchmarks specifying affordabilityand quality criteria for the urban poor. Thus whileimproved cost recovery does not guaranteeservice improvements, there is no doubt that itenhances opportunities for engaging theprivate sector in service delivery.

The IFI’s drive to foreground commercialviability also shapes service parameters andbenchmarks. A prime example is the case ofthe water sector. The IFIs and city planners areselling/shaping a demand discourse that a stateagency must promote improved integrity ofpiped water systems through provision of 24x7water. While everyone would agree thatleakage control is desirable it is also importantfor water services to be accessible andaffordable and it is by no means clear that24x7 fulfills the latter two criteria. Blindly using24x7 norms of water usage raises the dangerthat if the state should be in the position ofsupplying voluminous amounts of water tothose who can pay, water might never reachthose people who cannot pay for 24x7 water.Additionally, the increased investments for24x7 projects lead to tariffs that areunaffordable by many.

This bias towards financial considerations andcommercial viability at the expense ofenhanced coverage and quality of services isreflected in the JNNURM as well. In theJNNURM, an increase in the amount of privatecapital invested in urban infrastructure and thenumber of private sector operators in urbanservice delivery is viewed as an indicator ofbetter performance and efficiency (ADBJNNURM TA, 2006). This is without regard forwhere the capital is going, the nature ofprojects and outcomes, and equity, access andenvironmental concerns. In the BSUPcomponent, which is to be largely administeredand run by government agencies, there are noclear indicators measuring performance norare there clear criteria by which BSUP projectsmust be designed, implemented orbenchmarked such that access and quality ofservices to poor are enhanced52. Except for theJNNURM’s Poor Budget, which only specifies atargeted allocation for urban poor groups,there are no concrete poverty alleviation orsocial sector indicators for measuringperformance.

One of the JNNURM’s conditions is thatproperty tax assessment /collection shouldcover 85 percent of city properties. The newproperty tax assessment method promoted bythe WB and reinforced by the JNNURM, theCapital Value System (CVS % unit area valuemethod), has been introduced to keepproperty tax revenues buoyant therebybolstering the ability of cities to generaterevenues. CVS proposes indexing property taxrates to increasing land values (as opposed torental values in the prevailing Annual RateableValue (ARV) system of property tax) and will

38

serve to increase property taxes especially inareas where land values are high. This createsincentives for commercialisation of land. Thismeans that residents might be forced tovacate/or be evicted to realize higher(commercial) values of land. There is no doubtthat raising revenues is a critical need forULSGs as this could enable them to design andprovide services based on local needs withoutrelying on unpredictable and meagre grantsfrom State governments. However, a seriousattempt needs to be made to examine theimpacts of such increases in property tax onfixed salary earners or poor groups. This isespecially since high land values resulting inhigh property taxes are often the outcome ofspeculation. The WB (2004b p. 18 Vol I) arguesthat the increase in property tax as a result ofCVS “may not impose undue burdens on low-income families” although it does not explainhow it has reached this conclusion.

The WB (ibid) also recommends removingdifferential rates of tax levied in the ARVsystem between residential and non-residentialproperties and between owner-occupied andrented properties in order to improvecollection efficiency. While there is noguarantee that such a move would result inimproved collection, there is no doubt that itwould eliminate cross-subsidisation (i.e.commercial properties cross-subsidizingresidential properties) inherent in currentproperty tax collection systems anddisproportionately benefit the private sector,particularly large commercial developers/owners.

While the CVS system was introduced in theGreater Bangalore area in 2008 there was somuch opposition from residents that itsimplementation has been stayed until a morethorough review can be done of its impacts ondifferent socio-economic groups. Clearly somefinancial reforms like tariff reform and propertytax reform have preceded others, like thecreation of independent regulators andombudsmen, although the latter serve the vitalfunctions of regulation, complaint redressal andconflict resolution. These all point to theconclusion that reforms are being implementedto provide reasonable profits and hedge risks forprivate investors.

4.4 Erosion of local democratic powers andprocesses

IFI projects are typically channeled via SPVs orparastatal agencies bypassing local electedrepresentatives and the practice of debate by

the elected councilors. Decision making byparastatal agencies and state level “empoweredcommittees” consisting of senior bureaucratshelps to break the democratic accountabilitystructure as they are not accountable to theelectorate. In the JNNURM we see furtherstrengthening of the powers of state levelbureaucrats over ULSGs via formation ofPMUs and PIUs (www.jnnurm.nic.in). Thisfollows precedents set by IFI projects inestablishing PMUs to manage and coordinateprojects. Overall reporting of the PMU teamleader is to the CEO of the SLNA and not tolocal elected representatives. The PMU teamleader also reports periodically to theJNNURM Mission Directorate (i.e., MoUD) onthe status of projects and reforms in UIG citiesin the state and presents clearrecommendations on next steps. Thefunctioning of the PIU is to be closelymonitored by the concerned ULSG, Stategovernment and MoUD. This reinforcescentralisation of powers and the control ofstate and MoUD over JNNURM projects.When elected ULSGs are not in control ofproviding and delivering infrastructure andbasic services, accountability to local residentsis compromised. Importantly, it is poor groupswho are most harmed by this as they makeclaims on city resources through electedrepresentatives and their bargaining powercomes, in large part, from their vote (Benjamin2000).

Non-inclusion of political actors and processesin project planning has several consequencesfor the success of projects/plans and for thenature of projects being developed. One of themost serious is the likelihood of indebtednessof ULSGs. The commercial and political risks ofPPPs in urban infrastructure are high as theprojects are dependent on other cash flows ofULSGs besides user fees and tariffs, likeproperty taxes. Donors and policymakerstherefore pay great attention to property taxreform, tariff hikes and user fees as a means togenerate revenues. These are politically verydifficult decisions however that tend to damagethe political stock of elected representativesand the ruling party as they are resisted by alluser groups. The intrinsically political nature ofthese decisions is commonly neglected by IFIs,private consultants and lobby groups indesigning financial models of largeinfrastructure projects.

The WB and ADB tend to design financialmodels for projects that represent security forinvestors; irrespective of who defaults,investors get their money back from State or

39

Central Government guarantees or throughcredit enhancement mechanisms. Aconversation with an Indian consultant onfinancial management (Interview, April 24 2008)elicited that ADB consultants can end upmaking irrational projections because they haveless incentive to care if the financial model andstructuring isn’t done properly at the city level,they don’t have to live through therepercussions. In the case of the KUIDP, ADBand KUIDFC made a case for ULSG paybackbased on a projected 251% increase in monthlywater and sewerage bill (in real terms)between 1996 and 2005 and a projected 123%rise in property tax collections from 2000 to2004, projections that were completelyunrealistic (Celestine, 2006). When it cametime to pay, local councilors and engineers saidthey could only realize a small increase inproperty tax collections and tariffs both due topolitical as well as affordability considerations.These four towns are now in a situation ofbeing unable to pay back, leaving this debtburden to fall on the State Government. This isa clear case of a decision to go ahead with aparticular PPP based on parastatal andconsultant notions of financial feasibility leadingto financial failure due to lack of involvement ofelected representatives and ‘messy’ democraticpolitics.

Private investors are typically interested inlarge projects because returns are higher(Kundu 2000). Parallel agencies through whichIFI projects are typically routed also have astrong incentive in promoting large projects asthis inflates its annual budget as well as thepowers accruing to the agency throughdisbursing of multiple consultant contracts. TheMumbai Metropolitan Regional DevelopmentAuthority (MMRDA) for instance recorded anincrease in its annual budget from Rs 4460million in 2001-02 to Rs 53800 million in 2007-08. This in part explains IFIs preference fordesigning and launching large infrastructureprojects in ULSGs even when ULSGs cannotabsorb these funds. Across the country ULSGshave high levels of dependence on staterevenue support; CRISIL calculates that onaverage 53% of total ULSG revenues aretransfers from State Government. This highlevel of dependence is generally not factored inwhen designing IFI projects. A recent CRISILpresentation (SR Ramanujam, 2005) reveals atypical grant component to only be 30% ofproject costs. This does not match extent ofULSG dependency on the State, leaving a gap of23%. Even if capital investments are providedby the State through the grant component,O&M costs which almost equal annual debt

maintenance costs are not able to be met byULSGs whose existing sources of funding andrevenue improvement potential are too small.They end up defaulting and the state ends uppaying. This is a situation that could potentially beavoided if city governments played a role in projectdesign and decision making and were not onlyresponsible for paying back project loans. Further,since cities are not themselves doinginvestment planning and are often not evenimplementing projects, they have less incentiveto care about outcomes. The client-serviceprovider relationship evaporates and so doesthe local self government-citizen relationship.

4.5 Redefining accountability in urbangovernance

Increasingly, the definition of accountability inurban governance is being conflated with whatthe WB (2004) calls “social accountability” of“front line” service delivery units to clients. Thechange in language used is significant: here clientsas per their right as consumers and not citizensdemand accountability from service delivery units,not the local government whom they have elected.This dimension of accountability receives themost attention and funding from IFIs despitethe WB (2004) recording two otherdimensions of accountability: 1) politicalaccountability of politicians to citizens as wellas businesses and organized interests; and 2)internal accountability of government agenciesto politicians in their role of policy makers andaccountability of lower levels of government tohigher levels.

Achieving social accountability has come tomean putting into place such reforms as citizenreport cards, “one-stop” shops (servicecentres) providing services like birthcertificates, score cards for ULSGs to promotecompetition and monitor performance, andonline grievance redressal. They do notprioritise encouragement of larger and moreinformed political debate within electedcouncils and the floor of State Assemblies. Norare genuine attempts made at publicconsultations that would entail a shift awayfrom the present trend of consultant-generated city development plans. Further,these accountability mechanisms tend to bebiased towards the wealthier that are bettereducated and have access to the internet(Kamath et al, 2008).

Being a consumer is closely linked with paying(higher) taxes and service tariffs and in turnreceiving (better quality) services (WB 2004).Since profits (revenue generation) are the

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bottom line for the private provider, there is amove to provide enhanced quality of servicesfor consumers/taxpayers and lower (it is notclear how much lower) levels for those whocannot afford to pay. This serves to createservice distinctions between those who areperceived as ‘deserving taxpayers’ and thosewho are not (i.e. poor groups), particularly withrespect to quality of services, accountabilityand local provider response. An illustration ofservice distinctions between middle and upperclass “consumers” and poor “non-consumers”is revealed by examination of how e-governance reforms, which are touted by theIFIs to streamline public sector administrationand build accountability between citizens andgovernment, work in Bangalore.

E-governance (i.e, computerised) mechanismsfor complaint management were institutedunder the Nirmala Nagara Programme inKarnataka in 2003 with funding from the WBand ADB. To date, they have only been partiallyimplemented in many ULSGs. Our field workrevealed that many local officials did notunderstand how the system works or itsrationale. While all complaints made togovernment offices should be entered in thecomputer and then rectified within a specifiedperiod, this has happened mainly for email andtelephone complaints. In person complaintsmade in the field to councilors or field officialsare often not recorded in the system. This isdespite them typically accounting for a highvolume of complaints made, and being the mainmode of complaint for poor residents. Thismeans that many service complaints by poorgroups are not recorded, not followed up forrectification, and not included when localoffices are evaluated for performance ingrievance redressal. Computerised complaintmanagement systems are clearly much moresuited to middle and upper class needs and notto poor groups. Currently, the way the systemis being implemented in several Karnatakatowns, does not fit with the ways in whichpoor groups get access to services or makecomplaints. This means it does not build onexisting relationships between poor residentsand local leaders, associations, and electedcouncilors, which are the main channelsthrough which poor groups obtain services andservice upgrading. Despite mostly failing towork for the poor, e-governance reforms havebeen made a condition of the JNNURM andcities across the country are being required toimplement them.

Although considerable attention has been paidto investor protection in urban infrastructure,

to date there has been almost no emphasis laidon building IFI or investor accountability. This isdespite the fact that many IFI projects havebeen seriously attacked by local groups forfailures in design, implementation andoutcomes. This is also in spite of the fact thatPPPs are functioning in weak regulatoryenvironments where governments have lowcapacities to enforce regulations. In such asituation, there is clear need for IFI funded TAson the types of regulations and regulatorsnecessary to hold private investors andcontractors accountable for delivering publicservices that are benchmarked according tocertain prior determined criteria.

4.6 Controlled public participation and its effects

Redefining accountability is closely linked withredefining participation. Facilitating publicdebate on what infrastructure is needed, howit should be delivered, the benefits and costs ofproviding infrastructure, and whom theyaccrue to urgently needs attention. Increasingly,however, WB and ADB prescriptions forparticipation have become equated withmonetary contributions or user fees. While weargue that this undermines the agenda formeaningful and democratic debate in decision-making, IFIs argue that (a) it instills in projectbeneficiaries a sense of ownership over assets,(b) enables them to take a larger role in themanagement of the assets leading to improvedservice delivery, (c) mobilizes scarce finances,allowing the entry of non-state actors intowhat can be commercially viable servicedelivery, and (d) forces providers to be moreresponsive and accountable to contributors(WSP 2007). But these justifications assumethat if beneficiaries are treated as consumers,service providers will necessarily respond asefficient businesses with timely and high qualityservice. In reality, accountability andresponsiveness is not so easily built. Severalasymmetries of information and power persist,making for spotty performance.

Further, participation is increasingly managedthrough intermediaries. Typically, theseintermediaries are select NGOs whose role isto obtain project “buy-in” from communitygroups, which often translates into overcomingsuspicion of the private contractor andpersuading beneficiaries to pay for services. Inthe GBWASP, people could participate onlythrough an NGO called Janaagraha using aMemorandum of Agreement (MoA) calledPLACE, which seemed to be essentially acampaign to persuade beneficiaries to“participate” or pay for capital expenditure.

42

This version of structured participationattempted to de-politicise a highly chargedissue like access to water supply by confiningpeople’s participation purely to one of financialcontribution. In Chennai, the Centre requestedthe Chennai City Corporation to revise theJNNURM CDP mainly due to large-scalecomplaints about the lack of publicparticipation in the process of the CDP. Theconsultant GHK International won thecontract for revising the CDP but subsequentlysubcontracted the citizen consultationcomponent to an NGO, Sustain, prompting thequestion of how it won the contract if it didnot have the capacity to do the job in the firstplace.

The new discourse on social accountabilitygives a prominent role to civil societyorganizations (CSOs) in demanding betterservices from local providers. This is adiscourse, however, in which only selectedplayers tend to participate. These privilegedplayers typically include “local stakeholders likethe Bangalore Agenda Task Force (BATF) orBombay First” (WB 2004b). Both the BATF andBombay First are loose coalitions of (largely)corporate members established to improveinfrastructure and city governance although theBATF was set up by the KarnatakaGovernment and Bombay First was acorporate initiative. That both these entitieswere not accountable to, nor representative of,the rest of the city, is indication of the kind oflocal stakeholders who find greatestrepresentation in public consultations andthose who get left out. In the JNNURM,beyond city and state TAGs, which are notrepresentative of the city, there is no organizedsystem of citizen oversight53. It is noteworthythat to date, no participation mechanisms existthat effectively include the urban majority %the 50-70% of most Indian cities thatcomprises diverse constituencies includingpoor, ‘unauthorised’ or illegal groups, the largenumbers who use buses, cycles and foot andnot highways, and who do not /have neverreceived housing or sanitation facilities fromthe state.

While pro-poor policies are meant to outlineexplicit policy measures in a particularsector(s) to ensure service to and coverage ofthe poor, there are serious problems with theway in which they are prepared andimplemented. The case of the KUWASIPprovides an illuminating example in thisrespect. The process of preparation of theKUWASIP pro-poor policy by selectpolicymakers, IFIs and private consultants is

problematic since it does not include the verypeople whom it is supposed to be benefiting. Ahalf page summary of key features on thewebsite of the KUIDFC is the only glimpselocal communities could have had of the GoK’sKUWASIP pro-poor policy.

Based on evidence from the field, we argue thatthe KUWASIP pro-poor policy emphasiseswillingness to pay, reduction of subsidies, andthe necessity for tariff hikes over actualimprovements of services for the urban poor. Itpromotes a monopoly piped water system thatservices only people who can pay for watersupply since all connections will be metered.The aim is to bring poor groups into themainstream water supply network where theywill pay according to usage (a volumetric raterather than the flat rate they were payingearlier) although they are offered a waiver ofthe connection charge and are promised alifeline supply of water at a concessional rate. Adecision on how much lifeline water supplywould cost poor groups was made by a tariffrevision committee of Commissioners fromthe three Municipal Corporations (in whichKUWASIP was launched) as there was noelected council in office at the time. This ratedoes not guarantee affordability of poor groupsand could be revised at any time. The lack of anelected council also made it difficult for poorgroups to channel their complaints, if any, vialocal corporators.

The KUWASIP pro-poor policy also proposesto supply water free of charge through NGOs/CBOs to the homeless poor and othersthrough public kiosks/standposts. An officialfrom KUIDFC working on KUWASIP explainedthat NGOs and CBOs went around the pilotwards to make sure that all residents movedon to the metered network. Because theNGOs and CBOs could not find any residentwho needed the provision of free waterthrough public standposts in these wards, thesesubsidized services for the poor were not evenstarted in KUWASIP. It is not clear whatcriteria informed the conclusion that no poorresident needed free water from standposts.Additionally, the pilot wards are notrepresentative of the variety and numbers ofpoor people inhabiting the city. If and when theproject is scaled up to the entire city theimplementation of the policy will affect howthe poorest benefit.

The emphasis on legality at the policy level hasserved to bifurcate the poor into the legal(more deserving) poor, who are awardedexplicit concessions by the state, such as those

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in the pro-poor policy, and the illegal(undeserving) poor, whose interests are left tobe determined at the local level through aseries of circuitous negotiations(Sangameshwaran et al, 2008). In theory,Sangameshwaran et al explain, the poor withillegal connections who fail to regularize theirconnections would not receive any water onceKUWASIP was operationalised. In practice,disconnecting poor groups with illegalconnections from the distribution network wasnot considered politically desirable (ibid).Moreover, the Karnataka Urban Water Supplyand Drainage Board (KUWSDB), the parastatalin charge of urban water and sanitation in thecity was keen on increasing its user andrevenue base. So, just before commissioning thenew scheme, it legalised illegal connections bycollecting nominal fees of Rs 30. This revealsthe gulf that exists between decisions taken toensure financial feasibility of the project (i.e.,everyone needs to have a legal connection orface discontinuation of water supply) andpolitical realities on the ground.

We have chronicled several problems inherentin the controlled version of participation thatIFIs promote. However, permitting controlledparticipation often helps to divert attentionaway from issues of structural reform,particularly those that question the ability oflocal governments to respond to thesepressures because they lack the powers,functionaries and funds to do so. A recentpaper (CASUMM 2006) argues that promotingcitizen participation at the local level fails to beuseful when local governments do not have thepower to make crucial project investment andimplementation decisions.

Part II has analyzed the implications formunicipalities and urban poor groups ofconcretizing and grounding a pro-privatesector urban reform agenda. While there havebeen several protests from local groups whichhave stalled a few projects, this has notsucceeded in derailing the juggernaut of urbanreforms. The final section of the paper sums upthe arguments made thus far and providessome concluding thoughts.

44

Conclusion

This paper has chronicled the important roleplayed by the WB and the ADB in buildingideological agreement on the need torestructure the financing and governance ofurban infrastructure in ways that privilege theprivate sector. This agreement has precipitateda public policy shift characterised by two mainfeatures. Public funds are used to leverageprivate sector participation in urbaninfrastructure. Public funds are also allocatedon condition of acceptance of a package ofurban reforms, typically designed with IFIsupport. The results of this policy shift havebeen revealed to be greater promotion ofprivate financing and design/operation ofinfrastructure, prioritising commercial viabilityof projects and achievement of reforms. Theconsequent greater interest in developing largeinfrastructure projects rather than basicservices because they’re more commerciallyviable has hurt both poor and middle classgroups in cities across the country.

In Part I we trace the strategies, reforms andprojects IFIs have used to engineer this shift.Prime among these are financial andgovernance reforms supporting the entry andstructuring of PPP projects in urbaninfrastructure, promoting supportive policiesand model legislation, pioneering financialmodels like pooled finance and escrow tomitigate private sector risk, and institutionalframeworks that concentrate decision makingin a few hands while pushing a controlled andlimited version of public participation. Thelatter section of Part I goes on to examinehow these strategies and schemes areaccepted and actively promoted by differentactors in national, state and local level

government such that they find their way intopublic policies and programmes.Implementation of these policies andprogrammes has been enabled by creating buy-in from those who are benefiting from theimpacts of this restructuring. We pay particularattention to unpacking the characteristics andimpacts of the flagship urban infrastructureproject, the JNNURM, launched by GoI in Dec2005. Acknowledging that the process ofbuilding agreement on urban sector policy is alengthy one and there is a need to go back 12-17 years to trace the genesis of present full-fledged programmes like the JNNURM, thissection includes a brief analysis of past IFIurban sector strategies and schemes (since1990) and how they lead into current andfuture ones.

Part II of the paper concentrates on theimpacts of this reshaping of urbaninfrastructure finance and governance for localgovernments and for vulnerable groups. Weplace particular emphasis on examining thoseimpacts of the restructuring that are not sovisible or comprehensible, such as the erosionof local democratic processes, financial modelsthat focus on commercial viability, targetinglarge infrastructure projects at the cost ofbasic services, and concentrating decisionmaking powers in the hands of a few individualsand organizations.

The paper reveals that the market modelprovides a blueprint for building infrastructurethat meets the interests of IFIs, and selectgroups inside and outside of government.Convinced of the value of this approach, thesegroups unceasingly propagate it withoutsufficient scrutiny of how this approach unfoldson the ground and the impacts on local groups.Failure to consider alternatives to this policyframework is particularly serious in view of thefact that performance on the ground (in termsof number of projects completed on time, andwith inclusive outcomes) has been far fromsatisfactory. Several examples in this paper ofJNNURM and IFI projects have made thisevident. Despite this, urban reforms andprojects continue apace with no pause forreflection or revisiting of programmaticassumptions and progress on outcomes. Wesee as imperative the need for greater andmore rigorous examination of the outcomes ofPPP projects, through studies by independentresearchers/institutes and social audits bycommunity groups. Such a groundedunderstanding could lead to sustained pressurefor greater debate and reflection on the

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current trajectory and implications of urbanreforms.

All in all, current urban sector policy marks aclear withdrawal of the state from publicprovision of services accompanied by a moralretreat from the responsibility to ensure thatall groups in society have access to basicservices. The focus is squarely on promotingPSP in urban infrastructure without putting inplace the necessary legal and regulatoryframework to ensure adequate performanceand outcomes. In a context where the privatesector is increasingly promoted as theauthority involved in service provision anddesign, it is not clear who will take (moral andother) responsibility when problems related toservice provision or access arise. In such asituation, we indicate the critical need for thestate to commit to establishing and enforcingservice delivery norms and performancestandards, especially to ensure affordable andquality services for the poor. This could helpreorient the present flawed policy towardinfrastructure by reducing the emphasis oncommercial viability and user fee revenues andinstead focusing on providing cost-effective,higher quality services to residents. We alsoargue for much more emphasis on provision ofbasic services to all. This would see coverage ofplan targets and country MDG targets for allsections of the population, especially for poorgroups. The 18% reservation of city budgetaryallocations for the welfare of the mostmarginalised and poor groups (SC/ST groups)could be a good starting point. Callingattention to this policy as a regional and localpriority could result in more appropriatedesign and more effective implementation.

This study highlights the fact that there is nomechanism for accountability of IFIs andinvestors despite the enormous influencewielded by IFIs in urban infrastructure throughthe design of projects, policies, institutionalreforms, capacity building and knowledgedevelopment. Given their role and its far-reaching consequences for human lives andproductivity, we argue that it is only fair tobuild mechanisms by which elected institutionsat national and local level could oversee theiraccountability. We could learn from the case ofBrazil. In August 1998 the Brazilian Congressestablished a Commission called theCommission on Financial Oversight & Controlwhich held a hearing to examine thefunctioning of the IFIs. The Commissionconsidered establishing permanent oversight ofBrazil’s relations with them, something which

no other borrowing government’s Congress orParliament has done.

The current model of reforms dilutes the rolefor local government. A profusion of parallelbureaucratic structures that bypass localelected governments have been established todevelop and manage IFI and otherinfrastructure projects. This has reduced theability of local governments to functionautonomously and provide services that aremore responsive, appropriate to local needs,and accountable. We call for reversing thistrend, instead initiating a process ofstrengthening of city governments to give themmore say in governance and local decision-making. This is an agenda that requiresconcerted action and agreement from all levelsof government and civil society, no less fromIFIs who play an important role in shapingurban sector policy and implementation. Unionand state governments could take a lead inmeeting current (largely unfulfilled) devolutiontargets and going beyond them to achieve 40%devolution to local governments. IFIs couldmake interaction with and working throughlocal government part of their India urbansector policy, rather than bypassing ULSGs andoperating via SPVs. In turn, local governmentscould focus on utilising these funds for fulfillingbasic service needs on a priority basis, alongwith higher-end infrastructure targets. Citizengroups play a vital role here in communicatingtheir basic service needs to their electedrepresentatives and demanding accountabilityand responsiveness from them.

Finally, and most crucially, this paper throwslight on the new commercialised model ofinfrastructure that creates an enablingenvironment for IFIs, investor markets andcorporations not only in infrastructureprojects but in the larger project of urbandevelopment and poverty alleviation. This isgradually redefining what the city is, who hasrights to it, and who produces and manages it.One of the most significant fallouts of theshifting of power to IFIs and consultants linkedto major corporations invested in large realestate and transport projects has been theundermining of urban democracy. The dynamicbetween city dwellers and the state is not justone about service provision, we argue. Urbaninfrastructure projects should be constructedfrom local people’s needs and not according tothe imperatives of international markets. Thiscould usher in a new and much-neededbalance of power and authority over our cities.

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Endnotes

1 One such estimate is $475 billion by 2012 with a gap of $123 billion (11th Five Year Plan).2In this study, we focus on urban infrastructure and define it to include water and sanitation, solidwaste management, transport and energy services.3 The economic contribution from Indian cities is estimated to grow to 65 % of GDP by 2011from the present 55-60 % (M Rajamani 2004). Further, the 11th Five Year Plan of theGovernment of India (GoI) plans to maintain a growth rate of 9 % per annum during 2007-12with a bigger role for the service sector. This growth will be achieved largely in urban areas wherethe service sector is predominantly located.4 We use the term private sector participation (PSP) in a general sense to refer to participation ofthe private sector in the investment and/or operation of infrastructure projects and services.5 We use the term public-private partnership (PPP) to describe a public good or service that isfunded and/or operated and delivered through a partnership of government and one or moreprivate companies. At the local level, reliance on the PPP approach is partly due to resourceconstraints as it uses public resources to leverage private funds. Ideological factors are also atwork. They include the belief that the private sector is more flexible and efficient thangovernment and, therefore, better positioned to address urban problems (Squires 1993); andthe recognition that no single local actor possesses the capacities to deal with urban problemsthat cut across different sectors (McQuaid 2000).6 The India Infrastructure Report: Policy Imperatives for Growth and Welfare (1996), Ministry of Finance,Government of India, New Delhi. The India Infrastructure report also included other IFI reformprescriptions such as a full cost recovery system for infrastructure development and decreasinggovernment subsidies to the urban poor. It arrived at estimates of Rs 250,000 million requiredper year for the next ten years to make up the urban infrastructure deficit. However most of thisfunding did not come through as envisaged.7 These included the Mega Cities Loan, the Urban Reforms Incentive Fund (URIF) and the CityChallenge Fund (CCF).8 The IFC is the private sector arm of the World Bank Group and promotes private sectordevelopment in borrowing countries.9 The Sub-national Development Program is a pilot proposal for 3 years- FY07-FY09. It involvesfinancial commitments of USD 800 million and technical assistance from IFC worth USD 6 million(WB 2006).10 To gain private sector confidence, the GoI helped establish semi-public agencies and institutionslike the I L&FS that would test out the model of privately financing urban infrastructure projects (Ghosh, 2006).11 These reforms are the same as those mandated in the Jawaharlal Nehru National UrbanRenewal Mission scheme launched by GoI in December 2005. See page 15 for more information.12 Indo- US Fire (D) support took the form of assisting in the preparation of risk assessments andCorporate Plan, and sponsoring and facilitating training and study tours of AMC staff and electedrepresentatives to build their capacity to undertake and sustain reforms (Vaidya and Vaidya 2008).13 The World Bank (2004) defines the basic requirements for creditworthiness to be: 1) stable,predictable and adequate revenues to support borrowing; 2) managerial and financial capacity touse debt responsibly and do strategic planning for investment; and 3) track record of timelypayment of principal and interest.14 This involves locking an identified revenue stream into a separate escrow account to ensurepayback. This could come from the ULSG’s own resources (eg. property tax) or from stategovernment grants.15 Pool financing is used to enhance credit worthiness of small and medium towns so that theycan access the market. By themselves they have small revenues and poor credit rating. So anumber of them come together to issue bonds. The pooled revenues of these ULSGs aresufficient to service debt obligations and get an investment grade rating (CASUMM 2007).16 Guarantees are given by entities having a higher credit rating than the ULSG taking the loan,most commonly by the central / state government (CASUMM 2007).17 These 8 municipalities are now merged into the Bruhat Bengaluru Mahanagara Palike (BBMP).Phase II of the project includes a sanitation component which is to be funded through the KMRP-see section on KMRP.18 In most Indian cities water has never been fully supplied by city agencies. Water provisioninghas always been much more decentralized and partially provided outside of public and

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commodified markets than is commonly written about, such as from lakes, waterways, privatewells, etc.19 If necessary, GoI can give additional assistance, not exceeding a further 20% of total projectcosts.20 In the first year of operation (2005-06), a guarantee limit of Rs 100000 million has beenspecified.21 The PFI was pioneered in the UK by the Conservatives in 1992 to overhaul public services. Itinvolves the state signing long term contracts with the private sector to provide or upgradeservices, in effect, the state taking out mortgages or renting services from PFI companies (Ray, 2007).22 Their role covers development of bid documents including the concession agreement, projectstructuring, financial modeling, and advice on bidding process. 30 per cent of the aggregate investment, viz., Rs 6, 115, 910 million is to be sourced from the private sector during the11th Plan period. This is intended to increase the accountability of private consultants, improvequality of advice on projects and consequent project structure. Salient features of the proposalinclude a one-time grant by the Central government, equity contribution of shareholders andrevenues generated from the advisory services (PPP in India website).23 This could be achieved via a ‘public sector comparator’ that indicates the cost of publicprovision and is used as a benchmark for determining whether the best private sector bid for aPPP contract offers better value for money for the government.24 An ADTA is given as a grant to advise during project implementation. A Technical Assistance(TA) grant is given to design a project prior to its launch.25 This will be via the provision of PPPs in utility services and the development of (managerial andfinancial) capacity to manage local borrowing.26 6 Mega cities are not eligible to receive these grants for SWM as they are capable of raisingfunds on their own.27 Jusco’s experience of an operational water supply service is limited to Jamshedpur with an average customer base of about 15000 households.28 A policy needs the approval of Cabinet but is not raised in the State Assembly for discussionunlike legislation.29 The ADB was also involved in this process. It funded the PSIF II TA that developed a modelurban drinking water and sanitation legislation for Karnataka which very closely resembles GoK’sUrban Drinking Water and Sanitation Policy May 2003.30 A new report by the WB on Public Financial Management and Accountability (PFMA, Jan 08) forlocal governments promotes electronic procurement as well as an improvement in the quality oftechnical specifications. This reinforces the bias towards hiring large international consultants whofulfill these criteria while seeming to keep out smaller, domestic firms.31 In the KUWASIP, grassroots activists maintain that Rs 260 million has been paid to the privatecontractor, CGE/Veolia, for distributing water. This is a high amount considering that thegovernment has provided the entire infrastructure, including bulk water and thewater distribution project does not involve the transfer of any special technology.32 KUDCEMP is the second ADB-funded project in Karnataka and represents a scaling up fromthe first project, KUIDP, which supported infrastructure improvements in 4 towns.33 Report and Recommendations of the President to the Board of Directors Sept 199934 These included (a) comprehensive reassessment of properties and the levy of taxes on suchproperties; and (b) indexing rents of municipal properties with market rents.35 There have been protests from various groups in response to the tariff hike. Due to theseprotests, the BJP ruling party decided to marginally reduce domestic water tariffs at an all politicalparty meeting in June 2008. This marginal reduction is now being protested by political partieswho are demanding that water tariffs be lowered to pre-September 2007 levels.36 As per the recommendations of the State Urban Finance Framework Design (2008) 213 smallerULSGs in the state receive 64% of SFC allocations for untied grants in 2008-09. The 9 municipalcorporations receive 36% of SFC allocations, with the Greater Bangalore City Corporationreceiving an overwhelming 54% of the proportion for municipal corporations.37 The 32 towns covered by KMRP’s municipal investment support component are all smallertowns with lower literacy levels, which might indicate less resistance to the project.38 The five states supported by the ADB are Bihar, Rajasthan, Uttaranchal, Kerala, andJammu and Kashmir. The four other states funded by WB are Tamil Nadu, Andhra Pradesh,Gujarat and Madhya Pradesh.

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39 Interview on television with K P Krishnan, Joint Secretary Dept of Expenditure, Ministry ofFinance40 The outcomes of the TA are to: (i) identify and address legal, policy and regulator barriers toPPP at selected state and city-levels; (ii) build capacity of local government officials to strategizeand plan for private sector involvement in urban sectors (water supply, sanitation, solid waste, andurban transport), which includes PPP structuring, transparent and competitive procurement,implementation, and enforcement of PPP contracts; and (iii) ensure 3 to 4 well structured urbanPPPs incorporating private sector efficiencies and capital are brought to financial closure, servingas replicable PPP models for other Indian cities (ADB JNNURM TA).41 City Development Strategies were spearheaded by the Cities Alliance, a coalition of donorinstitutions including the WB, UNDP, and DFID.42 ASCI has recently signed a Memorandum of Agreement with India PPP Capacity-Building Trust(ICAP) to develop the capabilities of various government and non-governmental organizations forimplementing infrastructure projects via PPPs. ICAP has been set up by the InfrastructureDevelopment Finance Company Ltd. (IDFC).43 Some of the appraisal institutions selected by the MoUD are the National Institute of UrbanAffairs (NIUA), the National Institute of Public Finance and Policy (NIPFP), and ASCII. In manycases, appraisal is subcontracted further to independent consultants.44 Punjab Government website, www.punjabgovt.nic.in/government/Localgovt/ote_on_NURM.doc45 http://www.keralacm.gov.in/pdf/speeches/Speech_Nationl_Devp_Council_09-12-06.pdf46 The expert group has, as one of its members, Dr Isher Ahluwalia, Chairperson ICRIER. She isalso Chairperson of the recently constituted Planning Commission High Powered Group onInfrastructure Planning and Investment.47 For more information see BMP budget documents from 2001-07 collected by Dalit BahujanaSangha (DBS) and disseminated at a public meeting on Jan 6, 2008 at the Jnanabharati BangaloreUniversity Campus. The DBS argues that the amount allocated is left unspent, unspent amountsare not carried over as is mandated by law, and there are major irregularities in how allocationsare utilized.48 In late 2004 the World Bank released its report on fiscal reforms in Indian states just before asimilar document was due to be released by the Union Government in order to make an earlycontribution to the debate and help set the agenda for reform.49 Don’t break your Promise campaign- a coalition of 3000 mass based and citizens’ advocacyorganizations.50 Moreover, a list of nearly 74,000 slum households who would need to be evicted since theyhave encroached on a variety of lands such as government lands, river banks, roadsides /pavements, and corner plots of land has been identified by the Tamil Nadu Government. This listof households now also features in the recently approved Chennai Master Plan 2026.51 This is especially considering that “the recovery from water sales has risen at a faster rate inrecent years compared to expenditure on water provision” (Mathur 2005).52 In the ADB TA on JNNURM, no criteria of measurement is given for how they will measuredecreased urban poverty except for a generalised statement saying, “significant benefits frominfrastructure improvements [will be] realized by urban poor in participant cities”.53 There have been several demands for social audits in the JNNURM but no steps have beentaken by government towards making this a reality.

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