Documenit of

The World Bank

FOR OFFICIAL USE ONLY

Report No: 17605

IMPLEMENTATION COMPLETION REPORT

INDIA

TAMIL NADU URBAN DEVELOPMENT PROJECT(Credit 1923-IN)

March 31, 1998

Infrastructure Sector UnitSouth Asia Region

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed withoutWorld Bank authorization.

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CURRENCY EQUIVALENTS

US$ 1.00 = Rs. 13.00 at appraisal (June 1, 1987)Rs. 1.00 = US$ 0.07692 at appraisal (June 1, 1987)

US$ 1.00 = Rs. 36.18 at closure (September 30, 1997)Rs. 1.00 = US$ 0.02764 at closure (September 30, 1997)

GOI/GOTN FISCAL YEAR

April I - March 31

WEIGHTS AND MEASURES

m - meter (39.37 iniches or 3.28 ft)m2 square meter (10.7639 square feet)km - kilometer (0.62 miles)ha - Iectare (10,000 square meters or 2.47 acres)sq. kin , square kilometer (0.386 square miles)I - liter (0.22 Imperial gallonis or 0.264 US gallons)Ipcd - liters per capita per dayRs. I lakh - Rs. 100,000Rs. I crore - Rs. 10,000,000

ABBREVLATIONS AND ACRONYMS

BUS - Bus component of TNUDPCMC - City Maniagemenit CommitteeDCA - Developmenit Credit AgreeinentDHRW - Department of Higliways atid Ruiral WorksDEA - Department of Economic Affairs, Ministry of Finaince, GOIDMA - Directorate of Mumicipal Administration of GTNDS&M - Design, Supervision atid MatiagemeiitDTCP - Directorate of Town amid Country Plaitting of GTNEC - Etpowered CommitteeERR - Economic Rate of RetuntEWS - Economically Weaker SectionsFOP - Fitnancial and Operatitig PlanGF - Grant FusidGOI - Goveminent of ItndiaGTN - Govemmenit of Tasiil NaduGUD - Guided Urbani Development Component of TNUDPHEL - Home Expansioni LoanHIG - High Income GroupLAS - Ilidias Admtiiistrative ServiceIUD - Integrated Urban DevelopmentLAND - Land Servicing Program Componenst of TNuDPLASER - Land Shariig/Readjustinent for Private SlumsLCS - Lease cum Sale Teniure AgreemeiitLIG - Low Income GroupMASCOT - Municipalities of Madurai, Salem, Coimbatore and TrichyMAWS - Municipal Adininistration and Water SupplymlG - Middle Income GroupsMMA - Madras Metropolitan AreaMMC - Madras Municipal CorporationMMDA - Madras Metropolitan Development AuthorityMOMS - Madras Outer MunicipalitiesMUDF - Municipal Urban Developinent Fund of TNUDPMUDP Madras Urban Developinerit Project (I and It)O&M - Operation and MaintenancePMG - Project Management Group of TNiUDPPTC - Pallavan Transport Corporation (Bus company of Madras)PWD Public Works DepartmentS&S - Sites and ServicesSIP - Slum Improvement Program Component of TNUJDPSOE - Statement of ExpenditureSTOWAD - Storn Water Drainage ProgramSUDAR - State Urban Development AuthorityTATE - Technical Assistance and TrainingTNHB - Tamil Nadu Housing BoardTNSCB - Tamil Nadu Slum Clearance BoardTNiUDF - Tamil Nadu Urban Development FundTNUDP - TN Urban Development ProjectTRAMP - Transport and Traffic Management Program Component of TNUDPULCA - Urban Land Ceiling ActVETTT - Municipalities of Vellore, Erode, Tirunelveli, Tuticorin and TirrapurWSS - Water Supply and Sanitation

Vice President: Mieko NishimizuCountry Director: Edwin R. LimSector Manager: Frannie HumplickTask Leader: Hiroaki Suzuki

FOR OFFICIAL USE ONLY

IMPLEMENTATION COMPLETION REPORT

INDIA

TAMIL NADU URBAN DEVELOPMENT PROJECT(CREDIT 1923-IN)

Page No.PREFACE TABLE OF CONTENTS

EVALUATION SUMMARY i

PART I: PROJECT IMPLEMENTATION ASSESSMENTA. Project Objectives 6B. Achievement of Project Objectives 8C. Implementation Record and Major Factors Affecting the Project 16D. Project Sustainability 17E. Bank Performance 18F. Borrower Performance 19G. Assessment of Outcome 19H. Future Operations 20I. Key Lessons Learned 20

PART II: STATISTICAL ANNEXESTable 1: Summary of Assessments 22Table 2: Related Bank Loan/Credits 23Table 3: Project Timetable 25Table 4: Credit Disbursements: Cumulated Estimated and Actual 26Table 5: Key Indicators of Project Implementation 27Table 6: Key Indicators of Project Operation 29Table 7: Studies Included in Project 30Table 8A: Project Costs 34Table 8B: Project Financing 34Table 9: Economic Costs and Benefits 35Table 10: Status of Legal Covenants 36Table 11: Compliance with Operational Manual Statements 39Table 12: Bank Resources: Staff Inputs 40Table 13: Bank Resources: Missions 41

APPEND-ICESA. Completion Mission's Aide-MemoireB. Borrower's EvaluationMap: IBRD No. 20554R

This document has a restricted distnbution and may be used by recipients only in theperforrnance of their off-icial duties. Its contents may not otherwise. be disclosed withoutWorld Bank autihorization.

IMPLEMENTATION COMPLETION REPORT

INDIA

TAMIL NADU URBAN DEVELOPMENT PROJECT(CREDIT 1923-IN)

Preface

This is the Implementation Completion Report (ICR) for the Tamil Nadu UrbanDevelopment Project (TNUDP) in India, for which Credit 1923-IN in the amount of SDR216.5million (US$300.2 million equivalent) was approved on June 15, 1988 and made effective onNovember 7, 1988.

SDR22.0 million (US$30.5 million equivalent) and SDR10.8 million (US$15.0 millionequivalent) of the Credit were canceled on December 5, 1991 and May 1, 1993 respectively. Therewere two one-year extensions of the original Credit closing date of September 30, 1995. OnOctober 11, 1996, during the second extension period, the project was restructured to permitchanges to the implementation arrangements of the project's Municipal Urban Development Fund(MUDF) component, providing support for a new financial intermediary called the Tamil NaduUrban Development Fund (TNUDF).

There were two partial suspensions of disbursements of the Credit, both relating to a singleevent, the implementation of a storm water drainage scheme in the city of Madurai. The firstsuspension occurred on November 4, 1994 and was lifted on September 21, 1995 when the Bankwas satisfied with the action plan for the resettlement and rehabilitation of displaced persons. Thesecond suspension occurred on November 15, 1994 and was lifted on December 16, 1994 when theBank was satisfied with the project's SOE (Statement of Expenditure) procedures.

The Credit was closed on September 30, 1997 and the final disbursement took place onFebruary 19, 1998 at which time there was no Credit balance.

The ICR was prepared by Mr. Michael Whitbread (Consultant) under the supervision of Mr.Hiroaki Suzulki (Task Leader). The ICR was reviewed by Ms. Joelle Chassard, Team Leader,SASIN, Mr. Alan G. Carroll, Sr. Urban Specialist, AFTU2, Ms. Hiroko Imamura, Sr. Counsel,LEGSA, Mr. Cecil Perera, Sr. Disbursement Officer, LOAAS and Mr. N. Raman, Sr. ProcurementOfficer, SACND.

The preparation of this Implementation Completion Report (ICR) began during the Bank'scompletion mission in September 1997. The ICR is based on the mission's findings which areincluded as Appendix A to the ICR, material from project files and discussions with Bank officialsand others involved with different stages of the project cycle. The Borrower contributed to the ICRby providing data and views on the project outcome. The Borrower's evaluation is included asAppendix B.

IMPLEMENTATION COMPLETION REPORT

INDIA

TAMIL NADU URBAN DEVELOPMENT PROJECT(CREDIT 1923-IN)

Evaluation Summary

Introduction

1. TNUDP was the last of the integrated urban development (IUD) projects in India. It builtupon two earlier projects, the First and Second Madras Urban Development Projects. TNUDPconsisted of a program loan which served as a line of credit to a variety of institutionsundertaking urban development in the State of Tamil Nadu. It was a large, far-reaching andcomplex project with many innovative policy, institutional development and project managementfeatures. A number of these anticipated both current Bank policy and practice and the elementsof India's 74th Constitutional Amendment' on municipal strengthening which was introduced in1992. One of these innovations was the establishment of a Municipal Urban Development Fundto provide capital on a demand-driven and transparent basis to municipalities who up until thispoint were starved for investment funds. The success of the MUDF led to a two year projectextension which was used to restructure and enable the further development and transformationof the MUDF into a new financial intermediary called the Tamil Nadu Urban DevelopmentFund. The TNUDF has the participation of three private financial institutions as well as theGovernment of Tamil Nadu (GTN). Following a request from the Government of India (GOI)and GTN, the Bank and the Borrower are currently preparing a Second TNUDP which wouldfurther develop the TNUDF.

Project Objectives

2. TNUDP objectives at appraisal were: (a) to improve Tamil Nadu's state-wide capacityfor efficient management of urban and economic development; (b) to increase the supply oflegal, environmentally acceptable and affordable private and public serviced land as well as tostem the absolute number of households living in slums; and (c) to strengthen the procedures andinstitutions for revising bus fares and enhancing the accountability of the Chennai bus company,and improve the identification and implementation of cost-effective urban road and traffic

I The 74th Constitutional Amendment Act was passed in 1992 and it is currently being implemented bystates. The 74th CA is concerned with municipal strengthening following decades of neglect by the states. TheAmendment has three objectives: (a) to clarify functions and responsibilities; (b) to strengthen finances (includingthe establishment of State Finance Commissions to advise on municipal financial strengthening); and (c) to imposelocal democracy. For details of its implementation in Tamil Nadu, see Appendix A, Annex 7.

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management schemes. The objective of the restructured project was to further continue theprocess of policy development and evolution by providing support for the financing of the newfinancial intermediary. Objectives at appraisal were to be achieved through a covenantedoperational action plan containing 82 actions, and by the implementation of components covering:the creation of the MUDF; support for Urban Management, TA, Training and Equipment; provisionof Shelter; and provision of Transport infrastructure and facilities. Although not formally stated inthe objectives, the project reflected the Bank's concerns for urban poverty, finance and theenvironment, and the involvement of the private sector in the restructuring (see main text,paragraph 4).

Implementation Experience and Results

3. The project contributed to major advances in urban finance in Tamil Nadu, not onlythrough the success of the MUDF and the TNUDF but by its pursuit of cost. recovery and theself-financing of agencies, which had previously relied on subsidies (paragraphs 8-12). While theproject was unable to address the problem of the weak institutional and financial capacity ofmunicipalities, other major policy and institutional reforms were achieved (paragraph 13). TheBorrower's project management arrangements could have been more effective with greaterdelegation of responsibility for resource allocation decisions, less frequent changes of senior staffand contracting out a number of management functions (paragraphs 14 and 15). Physicalachievements were mixed: (a) the sites and services targets at appraisal were exceeded; (b) noneof the experimental guided urban development schemes were implemented; (c) slum upgradingfell short of the targets and there were only two schemes on private land; (d) there were 37 majorroad and related transport schemes but 13 remained incomplete even after the two yearextension; (e) bus targets were exceeded; (f) the MUDF greatly exceeded all expectations withover 500 sub-projects in 94 municipalities; and (g) there was extensive training and effective useof TA funds for a wide range of studies (paragraphs 16-23). In all cases the implementingagencies adhered to the sub-project design guidelines established at appraisal and benefited targetgroups as was intended.

4. The prospects for the TNUDF are good and there are a considerable numnber of projectscurrently in the pipeline (Appendix A, Part B). A second project would facilitate the growth ofthe Fund and encourage increased support from private sector financial institutions.

5. The only external factor of significance that affected the project was the depreciation ofthe Rupee, which resulted in savings that led to two cancellations of the Credit. Savings from thedepreciation of the Rupee permitted continued financing during the extensSions and enabled therestructuring to occur. There were two partial Credit suspensions as a result of an isolatedincident involving a storm water drainage scheme in the city of Madurai (paragraph 27). Themuch-needed scheme was eventually implemented under the project after the suspensions werelifted.

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Bank Performance

6. A feature of Bank involvement was the continuity of the Task Manager and a core teamof technical specialists. This continuity extended from the earlier Madras I and II projectsthrough identification, preparation and supervision of TNUDP up until November 1994. At thattime, the Bank team changed in order to reflect the new direction of the project which focused onthe development of the financial intermediary and to resolve the resettlement issues pertaining tothe Madurai Storm water Drainage Scheme. Bank performance has been rated satisfactory orhighly satisfactory. Actual supervision time greatly exceeded appraisal expectations, but most ofthe increase was due to additional Bank efforts regarding the suspensions and restructuring.

Borrower Performance

7. The Borrower was fully committed during preparation and appraisal and performancewas highly satisfactory. Implementation performance was rated satisfactory. There were manyadvances, most notably with the MUDF and other financial policy reforms, as well as withphysical progress on buses and sites and services. However, the Government often held upmajor procurement decisions for considerable periods of time, and delayed important farerevisions. The Department of Highways and Rural Works (DHRW), the implementing agencyfor major roads, encountered considerable delays and cost overruns (paragraph 20), and theTamil Nadu Slum Clearance Board (TNSCB) failed to fully execute its program (paragraph 19).

Assessment

8. The overall achievement of the project has been rated as satisfactory. Many aspects ofthis complex and far-reaching project were successful. Some of these successes were reflected inthe extensions to permit further development of the TNUDF and, in particular, the proposal todesign a follow-up project. These many successes, however, need to be weighed against failuresand some of the more limited project achievements (paragraph 39). The project's majorshortcoming was that it could not adequately address the weak institutional and financialcapacity of municipalities, even though GTN began to undertake the necessary correctivemeasures that were in line with the 74th Constitutional Armendment a few months prior theproject's closing date.

Future Operations

9. A follow-up project would provide continued support for the development of the TNUDF(see Appendix A, Part B) and address the major shortcoming of the TNUDP mentioned inparagraph 8. The objective of further lending would be to increase private capital flows to urbaninfrastructure financing. This would be in keeping with one of the objectives of the 74thConstitutional Amendment, to strengthen municipalities, and an area in which the Government iscurrently undertaking extensive reforms (as explained in Appendix A, Annex 7). Participationby the Bank would enable the TNUDF to continue to attract the interest of the private sector byproviding confidence, technical assistance, expertise and funds to maintain the scale of theFund's lending momentum.

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Key Lessons Learned

10. The following summarizes the lessons learned (main text Section I):

(a) Simplification. Bearing in mind the constraints on the institutional capacity of GTN aswell as the resources of the Bank, the project's scope should have been less ambitious and muchsimpler. Although TNUDP's overall performance was better than those of other Bank-financedintegrated urban development projects in India, the Project Management Group and the Bankcould not address the problems of non-performing components such as TRAMP (roadconstruction) and SIP in a timely manner. The Bank needs to be highly selective about where itoperates and act swiftly and decisively when political commitment disappears. The projectrestructuring was undertaken in order to re-focus the efforts of the GTN and the Bank on themost successful and sustainable financial intermediary component.

(b) Need for Strengthening of Municipalities. Financial intermediaries such as MUDF andTNUDF can contribute to the strengthening of municipalities by imposing financial discipline onthem as a condition of loan provision, and by helping them develop municipal projects. However,the financial intermediaries alone cannot address the fundamental problems of municipalities' weakinstitutional capacities and weak financial situations. Most of the municipalities do not haveadequate financial, managerial, administrative, and technical institutional capacities, which shouldbe strengthened by TA and the training program. The municipalities' weak financial situations are aresult of institutional constraints which impinge on the effectiveness of resource mobilization(unpredictable and discretionary intra-government transfer system with weak financialaccountability framework, inappropriate property tax assessment and inadequate user charge leveland collection). In order to improve the financial situations of the municipalities, the Govementshould undertake the reforms necessary to address these constraints.

(c) Government Commitment. The project was most successful in the areas of policyreform and good practice where Government support for the objectives was strongest. Forexample, development of the urban financial intermediary scheme was successful and receivedfull backing from the State's Finance Department, as well as from the Department of MunicipalAdministration and Water Supply.

(d) Project Management. Project management would have been improved substantially ifgreater decision making authority for resource allocation had been delegated to the ProjectManagement Group. Authority of this kind would have provided PMG with the means andincentives to take prompt and effective action to correct any emerging inadequacies inimplementation.

(e) Need for Addressing Urban Poverty. The low-income population represents about 40percent of the urban population in Tamil Nadu. It is important to address urban poverty issuesthrough appropriate project design and the inclusion of a specific project component, such as theGrant Fund, which finances the sub-projects targeted to the urban poor.

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(f) Continuity of Bank Staff. Policy continuity and a high level of personal accountabilitywere maintained by having virtually the same core team for project preparation, appraisal andsupervision, and retaining some of the team members who were involved with the earlier MadrasI and II projects. The team changed after November 1994 in order to accommodate the shift inproject focus to restructuring and the development of the financial intermediary and to resolvethe settlement issues. The latter team continues to work on the next possible operation.

IMPLEMENTATION COMPLETION REPORT

INDIA

TAMIL NADU URBAN DEVELOPMENT PROJECT(CREDIT 1923-IN)

PART I: PROJECT IMPLEMENTATION ASSESSMENT

A. PROJECT OBJECTIVES

1. At Appraisal. The project consisted of a program loan operated as a line of credit toinstitutions undertaking urban development in the State of Tamil Nadu. The project built uponearlier Bank-financed urban operations including the Madras I and II Urban DevelopmentProjects. The INUDP project objectives at appraisal were: (a) to improve Tamil Nadu's state-wide capacity for the efficient management of urban and economic development; (b) to increasethe supply of legal, environmentally acceptable and affordable private and public serviced landand to stem the absolute number of households living in slums; and (c) to strengthen theprocedures and institutions for revising bus fares and enhance the accountability of the Chennaibus company, and to improve the identification and implementation of cost-effective urban roadand traffic management schemes.

2. At Restructuring. The project was restructured during its extension period. Theobjective of the restructured project was to continue the process of policy development andevolution by providing support for the creation of a new financial intermediary called the TamilNadu Urban Development Fund (TNUDF).

3. Components. The appraised project consisted of: (a) the creation of a MunicipalUrban Development Fund (MUDF) for equipment, civil works and associated technicalassistance for the complete range of functions and services performed by municipalitiesthroughout the State; (b) support for Urban Management, Technical Assistance, Training andEquipment for the high level Empowered Committee, the Project Management Group (PMG),City Management Committees (CMCs) and the project's implementing agencies; (c) provision ofShelter infrastructure in the ten largest cities of the State including schemes for sites andservices, slum upgrading, and in the Chennai Metropolitan Region, guided urban developmentfor serviced plots serving the needs of primarily low income groups and involving private

2 In September 1996 the official name for the city of Madras was changed to Chennai. In this report Chennai isused except where, for reasons of continuity (as with project names), it is appropriate to continue to use Madras.

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landowners and developers; and (d) the provision of Transport infrastructure in the ten largestcities in the State, including schemes for traffic management, signalization, road improvementsand new construction. Additionally in Chennai, this included the procurement of about 1.000buses and a related workshop, depots, terminal improvements, and equipment. These projectcomponents continued during the extension period but the justification for the extension was toenable the restructuring of the project by facilitating the evolution of the successful MUDF intothe TNUDF.

4. Urban poverty, Finance and Environment. Although not formally stated in itsobjectives, the project focused on three Bank concerns: poverty alleviation, urban finance andenvironmental improvements. Poverty was addressed through: (a) sites and services schemeswhich included cross-subsidization of plot prices with the intention that 70% of the beneficiarieswould be poor; (b) slum upgrading which, in addition to its physical improvements, included thetransfer of the plot title to slum dwellers, at least 70% of whom are poor; (c) many MUDF sub-projects which benefited the poor, such as public latrine provision and drainage improvementswhich reduced the incidence of flooding in poor neighborhoods; and (d) a Grant Fund forprojects targeted to the urban poor was established in conjunction with the TNUDF.Improvements in urban finance were addressed by the establishment the MUDF, its evolutioninto the TNUDF, and the introduction of innovative pricing and cost recovery policies in allother project components. Environmental improvements were anticipated in numerous sub-projects in all components, including but not limited to efficient land use arrangements in sitesand services, physical up grading of slums, traffic management schemes, improved publictransport provision, hygienic market facilities, public burial grounds.

5. TNUDP was the last Bank-supported Integrated Urban Development (IUD) Projectin India. Prior to the TNUDP the Bank had for many years supported a substantial program ofurban development projects in India. The TNUDP may be regarded as the culmination of thisearlier program. Although the TNUDP's coverage was larger than Madras I and II, itsperformance was also better. The major difference in performance was due to the fact that theresources under the TNUDP were channeled through the MUDF to the municipalities, while inthe case of Madras I and II the resources were allocated from the respective governmentdepartments. The TNUDP evolved as a state-wide IUD from earlier single-city IUD projectsincluding those of Madras I and II. In the decade following TNUDP approval, there was nofurther support from the Bank for urban development in India. In the urban sector only threewater supply and sanitation projects have been approved by the Board since the TNUDP wasapproved in 1988 (see Table 2 for details). The main reasons for the demise of India's IUDprojects appear to be the Bank management's perception that the benefits did not justify the highcosts of preparation and supervision resulting from their complexity, and that the Borrowers didnot have adequate institutional capacity to manage IUD projects.

6. Evolution to the TNUDF Financial Intermediary. The MUDF was established as aGTN fund. It provided municipalities in the State with long-term financing for urbaninvestments. In order to further advance urban infrastructure finance, the M UDF was convertedinto the TNUDF which has the participation of private financial institutions. The TNUDF has

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been located outside Government and managed by a private fund management company calledthe Tamil Nadu Urban Infrastructure Financial Services, Ltd. (TNUIFS). The ultimate objectivesof the TNUDF are to provide self-sustaining finance and to mobilize private savings for urbaninfrastructure. In requesting an extension of the project closing date, GTN and the GOI soughtBank support for the establishment of the TNUDF. A second TNUDP is currently underpreparation and focuses on these TNUDF objectives as well as on the institutional developmentof municipalities.

B. ACHIEVEMENT OF PROJECT OBJECTIVES

7. The project objectives may be broadly grouped into institutional strengthening andphysical development. In both of these areas, TNUDP was a wide-ranging and complex project.The following is a summary assessment of the project's achievements under these two headings.

Institutional Development Achievements

8. MUDF . The MUDF was an experimental component designed to provide municipalitieswith access to capital for investment purposes on a demand-driven, systematic and transparentbasis. Up until this point, municipalities had relied primarily on small and unpredictable capitalallocations from the State budget and were for all practical purposes, starved of investmentfunds. In order to gain access to the MUDF funds, the municipalities had to adhere to financialperformance criteria established in a financing and operating plan (FOP) submitted to the ProjectManagement Group (PMG) as part of the loan application. Sub-projects were designed as asecond phase, once the FOP had been accepted. By the original closing date of TNUDP, theMUDF had provided support to 94 of the State's 109 municipalities and municipal corporationsfor over 500 sub-projects that covered a wide range of service and remunerative projects. Inaddition, the MUDF had considered applications from 12 other municipalities but had deniedthem access due to their poor credit-worthiness. For the most part, the MUDF sub-projects weremodest in scale, appropriate for the circumstances of the borrowers, and focused on the needs ofbeneficiaries. The MUDF generated adequate profits from the satisfactory spread and high rate ofloan repayment, which were the result of adherence to well-defined lending rules and procedures.GTN has gradually increased both lending rates to the MUDF and the MUDF's on-lending ratesto municipalities, reflecting the increase in GTN's borrowing rate from GOI. At the time of theconversion of the MUDF into the TNUDF, these interest rates were about three percent belowthe market rate.

9. TNUDF . Despite its evident success, the MUDF displayed some weaknesses includinglengthy procedures and the potential for political interference (fortunately this was notencountered in practice). These weaknesses were addressed when the project was restructured.The extension permitted GTN to move towards restructuring the Fund by: (a) moving it fromgovernment to corporate status; (b) providing opportunities for private financial institutions toparticipate in further development and by introducing new lending instruments; and (c) wideningthe range of potential beneficiary institutions, from municipalities exclusively, to any providers

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of urban infrastructure. The TNUDF was established in November 1996 as a Trust with theparticipation of ICICI, HDFC and IL&FS3 . In addition to the new Fund, a Grant Fund was alsoestablished that was financed by GTN for schemes benefiting low income groups as well as fortechnical assistance for municipalities in project preparation and improvement of institutionalcapacity.

10. Since its inception, the TNUDF has appraised projects costing nearly Rs 2,000 million(US$56 million) and approved loans of over Rs 1,500 million (US$43 million) to four municipalcorporations and 19 municipalities. This shows a significant increase in lend.ing performancewhen compared with that of the MUDF which approved about Rs 2,000 million over an eightyear period. The TNUDF is profitable and its projects continue to finance important urbaninfrastructure ranging from storm water drains to solid waste management to commercialcomplexes. At closing there were projects in the pipeline amounting to nearly Rs 4,500 million(US$130 million) (for details of TNUDF's performance including its financiEal result, seeAppendix A). Although the interest rates significantly declined in India in 1997/98 as a result oflower inflation and reduction of the minimum cash reserve ratio at commercial banks, both GTNand the TNUDF did not reduce their lending rates to TNUDF and the municipalities,respectively. As a consequence, both borrowing and lending rates of the TNUDF are currentlyclose to the market rates. It is worth noting that the TNUDF's initial success ibuilt on MUDF'seight years of experience and knowledge of municipal financing and that MU-DF played a criticalrole in introducing term-lending into the municipal sector when the private financial institutionswere not interested in this market.

11. Quality of the lending by both the MUDF and its successor, the TNU]DF, has beensatisfactory. Lending procedures have been strengthened for the TNUDF which now requires anenvironmental and social report to address project issues. New methods such as BOOToperations, including Karur Toll Bridge, have been introduced by the TNUD'F. Additionally, theinclusion of private financial institutions has added to the TNUDF's efficiency and professionalexpertise. It is expected that the TNUDF will continue to generate a profit and solidify itsperformance. The challenge now is to strengthen this new institution so that it can tap into thedomestic capital market. The Bank is currently considering support for a second TNUDP whichwould help the TNUDF mobilize resources from the domestic capital market in order to securesustainable fimding resources beyond the Bank's line of credit operations.

12. Municipalities. One of the original project objectives stated in the 'SAR was "increasingmunicipal capacity for urban management and investment programming and raising revenues formaintenance and services". Although the MUDF and the TNUDF have to a large extentcontributed to the improvement of the financial discipline and investment programming of themunicipalities, the TNUDP could not fundamentally address the problem of weak institutionalcapacity and the weak financial position of the municipalities. Most of the niunicipalities do nothave the adequate financial, managerial, administrative and technical capacity to deliver and

3 ICICI -- Industrial Credit and Investment Corporation of India Ltd.; HDFC -- Housing Development FinanceCorporation; IL&FS -- Infrastructure Leasing and Financial Services Ltd.

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maintain the required urban infrastructure services. The weak financial position of themunicipalities has evolved due to the unpredictable and discretionary intra-government transfersystem which suffers from a weak financial accountability framework, inappropriate property taxassessment and inadequate user charge levels and collection. Recognizing these shortcomings,GTN adopted, in the final stage of the project, a series of urban sector reforms including largerfinancial devolution from the State to the municipalities, the property tax reforms and theincrease of user charges in line with the 74th Constitutional amendment. GTN also started toprovide the municipalities with technical assistance for the purpose of improving theirinstitutional capacity, using the newly established Grant Fund. The Bank intends to supportGTN's reforms and institutional development program under the next operation. It is clear thatthe financial intermediary approach alone cannot address the problem of weak institutionalcapacity and the financial position of the municipalities without sound urban sector reforms andan institutional development program.

13. Operational Action Plan (OAP). There were many innovative policy, projectmanagement and institutional development aspects in the TNUDP at the time of appraisal, someof which anticipated current Bank policy and practice. Most of these innovations were includedin an agreed and covenanted OAP which was attached to the Minutes of Negotiations, andincluded in Annex 4 of the SAR. Most OAP items were complied with the time of closing.Those items not in compliance were as follows: (i) implementation of 10% of slum upgradingschemes on private land; (ii) the TNSCB's (Tamil Nadu Slum Clearance Board) finance andoperating plan to be rolled on an annual basis; (iii) preparation of proposals for monitoring airquality. The following was the experience with some of the principal reforms included in theOAP:

(a) On-lending Terms. The on-lending terms and conditions from GTN to theimplementing agencies were variable and moved towards higher rates in order to better reflect

4the cost of capital on investment decisions4. The intention was to impose financial discipline onthe project agencies with a view to making them self-sufficient commercial entities. These termsand conditions were adhered to by GTN during the project implementation with only minorlapses arising from the movement in rates, which were promptly rectified.

(b) Cost Recovery. All the components (apart from road schemes under the Transport andTraffic Management Program /TRAMP) involved full cost recovery and the internal generationof funds by agencies. The self-generation of funds by agencies was incorporated into theproject's financing plan (see Table 8B). This was a radical departure for urban institutions inIndia at the time when agencies survived mostly on subsidies. In the case of the Land ServicingProgram (LAND) component and the Slum Improvement Program (SIP) component, revolving

4 This reflected GOI's policy of moving to market rates in its lending to the states. During the projectimplementation period, GOI has adjusted its lending rate to GTN during the project implementation.

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funds established under the earlier Madras II project were intended to make fiurther contributionsto the project financing plan. While none of the cost recovery targets were fully achieved,contributions made by the implementing agencies in all cases were positive, and except for theTamil Nadu Slum Clearance Board (TNSCB), substantial.

(c) Bus Fare Revision. To address regulation issues, GTN agreed to maintain a permanentbus fare revision committee throughout the project period. However, GTN failed to comply formost of the project period and the committee was called to meet once only. This reflected, inpart, GTN's infrequency of fare revisions with a resulting shortfall against the target in PTC's(Pallavan Transport Company) cash generation. Reinstatement of this committee took place as acondition of the first extension of the project and the new committee's first recommendation wasfully adopted by GTN.

(d) Prototype Scheme Designs. The TNUDP was a programmatic project. At appraisalonly 5% of project cost was identified and appraised. Appraisal consisted prlimarily ofestablishing sub-project identification and evaluation criteria for the LAND, SIP and TRAMPschemes with model layouts and standardized and computerized feasibility studies (see Annexes7, 8, 9, 10, 15 of the SAR). Bank procurement "no objections" depended, inter alia, on thesedesign and project evaluation guidelines being used by the agencies throughout the project. It isdifficult to assess the extent to which these procedures have led to a cultural shift at the agencylevel in the way they approach investment expenditure. The continuation of their project MISand design criteria, and self-recognition of a changed approach, are all suggestive that permanentimprovements have occurred in the agencies, particularly at TNHB.

(e) Private Land Development Experiments. There were two small experimental sub-components in the project involving private land: (a) the Land Sharing/Readjustment for PrivateSlums (LASER) was a slum upgrading program for households on privately owned land in theMadras Metropolitan Area (MMA) and 10% of the SIP program was intended for this purpose.Ultimately, only two small private slum upgrading schemes involving about 1,500 householdswere implemented by TNSCB, and neither was a pure LASER scheme since the landowners soldto TNSCB in advance of the scheme; and (b) the Guided Urban Development (GUD)component, which was designed to encourage private landowners to undertake developments forlow income groups in exchange for exemptions under the Urban Land Ceiling Act5 . It wasintended that about 10,000 plots would be provided under GUD. However, no schemes werenegotiated with private landowners. This failure arose from the great difficulty that publicofficials face when negotiating land deals with the private sector, and the better returns for many,if not most, landowners as a result of undertaking illegal sub-divisions.

(f) Financing and Operating Plans. All the implementing agencies (apart from DHRW)prepared FOPs for appraisal. These plans typically looked forward five years and covered

5 The ULCA limits the quantity of urban land that can be held by private parties and has been widely criticizedas a constraint on development.

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income generation, operations, investments and financing. The FOPs were based on computersimulation models of the organizations and provided financial and performance projections.While the TNSCB failed to maintain and roll-over its FOP, for the other agencies and the ProjectManagement Group, the FOPs proved to be a valuable and innovative tool. The PTC FOP wasbased on a particularly well structured model and greatly influenced the investment managementand budget decision-making of the bus corporation.

(g) Urban Policy in the State. During the preparation of the project and at several timesduring its implementation the Bank discussed with GTN the establishment of a State UrbanDevelopment Authority (SUDAR) which would advise the Government, undertake basic policyresearch in the sector, and have substantial powers over the allocation of investment resourceswithin the franmework of the annual budget process. The PMG was considered by the Bank to bea prototype of the SUDAR which could have evolved into a permanent organization. Thisevolution failed to take place due to lack of interest in the concept within the Government'ssectoral Departments of Housing and Municipal Administration (MAWS). Given the weaknessof the PMG mentioned in the following paragraph and the risk that this kind of policy researchand investment planning authority tends to add another bureaucracy, it seems that the Bank'sstrategy in developing the PMG as a State Urban Development Authority was not optimal,although the Bank's concern about the need for improvement of the inadequate urban policymaking procedures of the Government was legitimate. In fact, a feature of implementation wasthat support for the objectives of the project within GTN was strongest in the FinanceDepartment rather than the sectoral Departments, and major policy advances were made withFinance suppoit. The principal reasons for this support were: (a) the project's adherence toefficiency and cost recovery principles; (b) interest in the success of the MUDF/TNUDF for itspotential to reduce and rationalize the demands by municipalities on the State budget; and (c) thescope for the project to become a direct contributor to the State budget (see Table 8B). At thelater stage, the Department of Municipal Administrations and Water Supply started to extendsupport to the project objectives as GTN decided to shift many urban functions to themunicipalities in line with the 74th Constitutional amendment.

14. Project Management Arrangements. The PMG was established as the nodal agencyfor the project management and reported to the Empowered Committee chaired by the ChiefSecretary and consisted of Secretaries of the Departments concerned. It was staffed with seniorprofessional officers on delegation from their parent departments. The Project Director wasinitially part-time but later at the Bank's insistence was posted on a full-time basis. The PMGperformed coordination and monitoring tasks and administered the MUDF. However, the PMGlacked authority, ability or incentive to carry out management decisions. Ultimately the PMGperformed the role of postbox rather than of manager6 . One problem was the lack of continuity.Over a nine year period, there were 12 Project Directors and the PMG's senior professionalofficer, the Chief Planner, changed seven times. At times, appointments to this and some of theother key posts were not made on merit. The major lesson learned is that project management

6 The Borrower shared the view that the PMG was largely a postbox (see Appendix B, Borrower's Evaluation).

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cannot be effectively undertaken by an oversight unit without the necessary authority and staffcontinuity.

15. At the local level, the project is managed by City Management Committees (CMC). TheCMC were headed by the District Collector, the Government's most senior ofFicer in eachDistrict. Collectors changed frequently and focused on law and order rather than economicdevelopment responsibilities. As with the PMG, these CMCs were not effective in assuming arole in the planning and use of project funds despite the substantial contribution of the project toeach city's total capital expenditure. The same lessons learned at the PMG level are applicable tothe project management at the CMC level. There was little difference in performance among theCMCs.

Physical Achievements

16. The following paragraphs list component-wise achievements against the physical targetsset at appraisal. On a quantitative level, performance was mixed. Numerical targets wereexceeded for sites and services, buses, the MUDF and for training and TA, all of which reachedtheir targets by the original closing date. For slum upgrading and road schemes, performance fellshort of the target despite the extensions. However, in all cases the implementing agencies keptto the sub-project design guidelines established at appraisal and target groups benefited in themanner intended.

17. LAND. The appraisal sites and services target was the achievement of nearly 70,000serviced residential and non-residential plots on 950 ha of land. Ultimately, the achievement was88,725 plots on 1,161 ha. This accomplishment was possible because the standard andspecifications for the sites and services scheme were well developed and had been agreed uponby the Bank and the TNHB. At Credit closing, four schemes remained unfinished, although allwere close to completion. Virtually all plots on the completed schemes were allotted and in mostcases, the demand greatly exceeded supply 7 . Overall however, the occupation of plots had onlyreached 10% at closing, with a maximum attainment of 25% on some schemes. Early occupationwas mainly by the MIG and the HIG households. Occupation had been slow throughout theproject period, and as a result of Bank pressure, procedures for planning and building permitswere streamlined and single window processing procedures were introduced. Four explanationshave been offered for the slow rate of occupation: (a) people did not wish to be first to settle anew area and buildup accelerates once started; (b) funds for house construction were inaccessibleto low income groups; (c) there was speculation taking place in land against the effects ofinflation; and (d) the locations of the sites were not immediately attractive, even though theexpansion of transport infrastructure was planned. Home loans were provided under the projectfor incremental construction which suggests that reason (b) may have only partial validity,

7 An extreme example is provided by Phase III of the Ambattur S&S scheme in the MMA, which was the lastscheme to be finished before closing. There were 231,000 registered applications for 1,366 plots.

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although it is the case that the majority of beneficiaries can only afford the most basic form ofhousing. The TNHB is considering ways of increasing the rate of occupation through thewidening of the home loan facilities which would be funded by housing co-operatives. In thefuture, the TNHB should select the sites based on a more thorough demand survey, including theneed for transportation infrastructure.

18. GUD. The target at appraisal was for about 10,000 residential and non-residential plotsfor low income groups on about 140 ha of land. There were no GUD schemes (see paragraph13(e)).

19. SIP. The target at appraisal was for about 94,000 households in 590 slums. The actualachievement was 76,722 households in 490 slums. The GTN was reluctant to change theclassification of certain areas of land8 which limited the available stock of slums which couldbenefit. Additionally, the TNSCB found obtaining the agreement of 70% of the households tomake the down payment before the scheme would commence difficult to achieve, especially inareas where the value of the title was low. A benefit from the SIP schemes was the transfer oftitle, and clearly, households occupying valuable sites had a greater incentive to participate in theslum improvement program. It was hoped that 10% of SIP would be used for LASER, however,there were only two small schemes on private land. In each of these cases, the landowner hadsold the land to the TNSCB before the scheme commenced and hence they were not true LASERschemes.

20. TRAMP. The TRAMP schemes included roads, bridges, etc., under the DHRW'sresponsibility, and traffic management schemes undertaken by municipalities. There were veryfew municipal schemes and those amounted to less than Rs 1 million. While no targets for thenumber of the DHRW TRAMP schemes were established at appraisal, 37 schemes wereapproved. In order to enter the project, schemes had to meet economic feasibility criteriaestablished at appraisal. All schemes reduced congestion, improved safety and increasedaccessibility. Feasibility studies for all schemes were prepared for the DHRW by consultantsfunded under the project. Although 24 schemes were completed, there were cost overruns for 17,and time overruns for 21. None of the remaining 13 schemes were completed within the timeleading up to closing, and all had cost overruns. The State DHRW performed the least well of allthe implementing agencies. Excessive delays were experienced in the award of contracts and inthe execution of projects. These time overruns averaged one year and nine months on contractperiods of 18 to 24 months, and were mostly due to problems with land acquisition and themovement of utilities. The explanations for cost overruns were poor initial estimations anddelays in reaching agreement with the Bank on the inclusion of price escalation in contracts.

21. PTC. The appraisal target was for the provision of about 1,000 bus chassis and bodiesand improvements to about seven depots, 10 terminals and a major workshop. The target for

a Known as "perumboke" land consisting, for example, of irrigation tanks, rivers, forest areas and road margins.This land classification was not fully understood by the Bank at appraisal, and hence the quantity of slums capableof improvement was over-estimated.

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buses was exceeded, as 1,595 were provided. This achievement was possible 'because the PTCwas familiar with the bidding procedures as it regularly purchase a large numlbers of buses.While four depots and seven terminals were provided, the workshop was not. However, fleetexpansion to meet demand was delayed by financial limitations arising from the GTN'sinfrequent fare revisions. As a result, maximum bus ridership loading was exceeded throughoutthe project period.

22. MUDF/TNUDF. Due to its experimental nature, no targets were set at appraisalalthough it was hoped that over 40 municipalities, and possibly as many as 80, would benefit.Ultimately, the project supported over 500 individual schemes in 94 municipalities throughoutthe State and exceeded expectations at appraisal. The MUDF financed relatively small municipalprojects such as solid waste management, storm drains, road improvement, street lighting, busstands, and market and commercial complexes. Success with the MUDF led to the creation of theTNUDF (as discussed in 9).

23. TATE. The project supported several hundred training initiatives including short andlong courses and study tours. In addition, project TA supported all the TRAMP feasibility andother important developmental studies. Also included were some major studies which madewider contributions to urban policy and development. These included: (a) a very effectivedrainage master plan for the Madras Metropolitan Area (MMA) which was used in thepreparation of the proposed Third Chennai Water Supply and Environmental Sanitation Project;and (b) a comprehensive land use and transport study for Chennai as part of the revision of thecity Master Plan, which provided valuable insights and involved extensive computer modeling ofthe urban system for the first time in India. In addition to assistance in the development of theFOP (Financial Operating Plan) and sub-project preparation of the MUDF, the TATE componentdid not extend adequate technical assistance to the municipalities to improve their financial,managerial, administrative and technical capacity.

Overall Assessment of the Achievement of Project Objectives

24. With such a complex and varied project it is difficult to sum up the extent of theachievements but overall it has been rated as "successful". The main achievements were: (a) theintroduction and implementation of the new urban policy, in particular, cost recovery of urbaninvestment; (b) the project changed the culture and approach to planning and execution of manyof its main implementing agencies; (c) the MUDF/TNUDF was a major institutional successwhich would be solidified by continued support from the Bank in a follow-up project; (d) thephysical achievement of the project exceeded appraisal expectations in most components exceptfor SIP and GUD; and (e) as intended, all project components mainly benefited the largelyneglected lower income segments of the urban population. The major shortcoming is that theproject could not adequately address the weak institutional and financial capacity of themunicipalities, although the GTN started to undertake corrective measures in line with the 74thConstitutional Amendment at the final stage of the project implementation.

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C. IMPLEMENTATION RECORD AND MAJOR FACTORS AFFECTINGTHE PROJECT

25. There was substantial depreciation of the Rupee which resulted in savings. Otherwise, nomajor external factors beyond the control of the Borrower affected the project. As a result of thesavings, there were two Credit cancellations during the course of the project and additionally,savings were used to continue the lending program during the extension.

26. Borrower Performance. Although the PMG management and staff carried out theirproject coordination and monitoring activities with due diligence, the PMG's overallmanagement performance was weak and ineffective due to its structural problems described inparagraph 14 and sporadic support from the high level Empowered Committee. The CityManagement Committees were also largely ineffective. The implementing agencies mostlyperformed their tasks to a satisfactory standard with the main exception being the DHRW whoseprocurement performance was severely hampered by interference from the State Government innormal procurement procedures which greatly added to the length of time taken to awardcontracts.

27. Credit Suspensions. Two suspensions arose from problems associated with a singleevent, the Madurai STOWAD scheme. This event caused the Bank and the Borrowerconsiderable distress (see Appendix B for the Borrower's views). The initial problem arose froma typhoon which hit the city in 1993 causing major flooding, several deaths and serious loss ofproperty. During a regular supervision mission in September 1994 the Bank discovered that, inthe climate of popular opinion following the disaster, illegal encroachers from the city's drainmargins had been moved by the municipal authorities since they had contributed substantially tothe flooding. The plan for the resettlement and rehabilitation of the displaced persons had notbeen approved by the Bank, contrary to project agreements, and suspensions followed. The GTNwithdrew from the special account the costs of the STOWAD scheme which has not beenapproved by the Bank. For this reason, the Bank suspended the disbursements against SOEs untilthe Bank had reviewed and was satisfied that the accounting, control and audit system under theproject was adequate. The first suspension was lifted after nine months when the Bank wassatisfied with the R&R action plan, and the second after one month following inspection of theproject's record keeping arrangements. The much-needed scheme for storm water drainage waseventually implemented successfully under the project. Most of the project affected people havebeen resettled on the sites provided by the GTN free of charge, and the income generationactivities are ongoing with support of NGOs financed by the GTN.

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Assessment of Project Risks

28. Four risks were identified at appraisal, all of which were "internal" to the project:

(a) doubts over the capacity of the PMG and the CMCs to maintain adequate standards ofreview and management -- this risk was partially justified by events and affected the performanceof the SIP and TRAMP components;

(b) fear that cost recovery targets by implementing agencies would not be rnet and that theprojections of resources from cash generation, which were made at appraisal, would notmaterialize -- this risk was partially justified by events. All agencies/components failed toachieve their cost recovery targets in full, although shortfalls were modest;

(c) unforeseen legal and other obstacles could constrain implementation of the'experimental' initiatives, particularly the GUD and the MUDF -- the outcome was that therewere no GUD schemes, largely as a result of lack of private landowner interest (see paragraph13(e)), but the MUDF proved to be a highly successful initiative;

(d) delays in land acquisition, particularly for the LAND program, would limit the executionof schemes -- few land acquisition problems arose as at least 67% of the land required for LANDwas secured before effectiveness. However, the DHRW was held up in 19 schemes bydifficulties in acquiring land or negotiating the relocation of public utility infrastructure.

29. Another risk that could have been identified at appraisal was that political interference inprocurement would hold up progress of major schemes, particularly roads.

D. PROJECT SUSTAINABILITY

30. Assets created by the project have become the responsibility of the respectiveimplementing agencies, or of municipalities in cases where the assets have been handed over.These assets are absorbed into the overall functions of the agencies and municipalities.Therefore, the sustainability issues are the generation of funds to ensure that operations andmaintenance take place to satisfactory standards, and that the managerial and technical capacityof the municipality enables it to undertake the necessary operation and maintenance work.Although the financial position of the municipalities was very weak, it is expected that themunicipalities would have more resources as a result of the reforms (financial devolution andproperty tax reform) which are occurring under the 74th Constitutional Amend.ment. Regardless,the municipalities' institutional capacity should be significantly strengthened. A major problemarea is where there is slow occupation of sites and services schemes which have been handedover to local bodies where there appears to be reluctance to devote resources to maintenance.Similarly, the SIP schemes are also showing signs of low levels of maintenance by municipalities(see Appendix A, Annex 4). It would be required that the GTN, municipalities, the TNHB andthe TNSCB should jointly develop the operation and maintenance plans for those assets underthe sites and services scheme and the SIP. The assets of the PTC have in the plast been properlymaintained and operated which is likely to continue.

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31. The extent to which project initiatives will continue in some of the agencies is uncertain.The TNUDF appears, on the basis of its pipeline of projects and financial projections, to havegood prospects for sustainability which would be considerably enhanced by continuing Banksupport in the form of a second follow-up project. Cultural changes seem to have occurred at theTNHB which appear to have led to permanent improvements in procedures and are sustainable,but this seems less likely at the TNSCB and the DHRW.

32. The MUDF and the TNUDF have demonstrated their success as financial intermediaries.The TNUDF is generating a profit with adequate spread and high debt service recovery. TheTNUDF's current borrowing and lending interest rates are close to the market rates. The GTNrequested the Bank's continuing support of the TNUDF. The Bank's continuing support isjustifiable as the TNUDF is still in very early stage of its development and cannot generate thelong-term funds in the capital market in India. In the next proposed operation, the Bank intendsto assist the TNUDF in raising the funds from the domestic capital market with the appropriatecredit enhancing mechanism to secure sustainable funding resources for the TNUDF.

33. The GTN has just started to address the fundamental problem of weak institutional andfinancial capacity of municipalities in line with the 74th Constitutional Amendment. This is theunderlying problem that the project was unable to adequately address. The proposed secondproject would include a comprehensive institutional development component which wouldsupport the GTN's efforts in this area.

E. BANK PERFORMANCE

34. Identification and Preparation. The TNUDP built upon the previous implementationof MUDP I and II. While the Bank's performance has been rated as highly satisfactory, theproject identification and preparation required substantial resources, given its complex designand ambitious scope.

35. Appraisal. This has been rated as satisfactory. All Bank procedures were successfullycompleted in a timely fashion. The appraisal of the project was undertaken by the same Bankteam who had identified and prepared the project and had earlier supervised the MUDF II.However, the appraisal underestimated the effort that would be required to supervise thiscomplex and far-reaching project, and failed to establish sufficiently clear incentives for theBorrower to take on the full management and supervision responsibilities.

36. Supervision. The Bank regularly and comprehensively supervised the project (see Table13). Bank missions in the period from project identification up until November 1994 consistedof a small core of experts under a single Task Manager. The Bank team changed thereafter in linewith the new direction of the project, which focused on the development of the financialintermediary and on the resolution of resettlement issues pertaining to the Madurai Storm WaterDrainage Scheme. The SAR recorded the expectation that supervision would require 120 s/w,however, the actual supervision time was 294 s/w (see Table 12). About 35 s/w are attributableto the additional efforts associated with the suspension of the Credit over the Madurai STOWAD

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Scheme. The two extensions which enabled the evolution of the MUDF into the TNUDF addedabout 70 s/w. Accordingly, the like-with-like comparison with the appraisal estimate of 120 s/wis about 190 s/w of actual staff and consultant time. This difference is accounted for by thefailure of the PMG to take on the increased supervision responsibilities as the project progressed,and the resulting need for the Bank to maintain its supervision efforts. During the extensions thecomposition of Bank missions changed to reflect the new focus on restructuring.

F. BORROWER PERFORMANCE

37. Identification/Preparation/Appraisal. Senior officials of the GTN were committed tothe project and ensured that professional officers of good quality were assigned to the preparationtasks. The Borrower performance has been rated highly satisfactory.

38. Implementation. The PMG lacked authority, and the rapid turnover of Project Directorsand other key staff (see paragraph 13), as well as the limited interest of the EmpoweredCommittee, weakened project management overall. Some of the implementing agencies, notablythe DHRW and the TNSCB, were slow in to execute and did not perform well in utilizingappropriate management information systems to implement their components. The PTCperformed well but was held back by financial constraints resulting from the GTN's infrequentfare revisions. Some experimental aspects of the project were not successful, such as the GUDand the LASER, although this was not due to lack of effort by the Borrower. The PMGfunctioned efficiently as the fund manager of the MUDF, and the GTN has been dynamic andproactive in pursuing its evolution into the TNUDF. The GTN and the PMG could not addressthe weak institutional and financial capacity of the municipalities, even though the GTN startedto take corrective measures in the final stage of the project. Although there were lapses incovenant compliance during implementation, at the time of the original and final closing dates

9the Borrower was in compliance9. Overall, implementation by the Borrower has been rated assatisfactory.

G. ASSESSMENT OF OUTCOME

39. The overall achievement has been rated as satisfactory. Many aspects of this complexand far-reaching project were highly successful. The successes were reflected in the extensionsto enable further development of the TNUDF and in particular, the proposal to design a secondproject. But these many successes need to be weighed against failures and some of the morelimited achievements, including: (a) slow performance by some of the agencies, notably theDHRW and the TNSCB; (b) absence of any of the GUD schemes and only two of the LASER;(c) the limitations of the PMG and lack of interest of the CMCs; and (d) the failure of the projectto address the weak institutional capacity and financial position of the municipalities. Withoutdiminishing its evident success, the MUDF had important limitations, for example, its slow andconservative procedures which would have prevented it from fulfilling its role as a provider of

9 The only exception was the late audit of the Special Account at the time of final closing. This is a GOIresponsibility.

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urban infrastructure finance. These limitations were addressed in the restructuring and creation ofthe TNUDF.

40. The Economic Rate of Return (ERR) was calculated at appraisal for the LAND to beabout 20% and the actual LAND returns were comparable to those at appraisal. The return on theprototype TRAMP schemes at appraisal averaged 12%. Data were not available to computeactual ERRs on TRAMP schemes during the final supervision mission. At appraisal separatecalculations were performed for the replacement and augmentation aspects of the PTC busprocurement. The replacement calculation was based on the discounted cost savings over its lifeof a new versus old vehicle. It was recognized, however, that the operations and maintenancedata in these cases were of doubtful quality. The augmentation calculation was based on thebenefits minus the costs of an addition to the fleet. The PTC bus procurement ERR was about15%, lower than the 21% at appraisal, reflecting the resistance by the GTN to permit timely farerevisions.

H. FUTURE OPERATIONS

41. A follow-up project would provide continued support for the development of the TNUDF(see Appendix A, Part B for details). The objectives of further lending would be to support theGTN's urban sector reforms through the institutional development component and to continue tostrengthen the TNUDF in order to make it a sustainable financial intermediary. Participation bythe Bank would enable the TNUDF to continue to attract the interest of the private sector byproviding confidence, technical assistance, expertise and funds to maintain the scale of theFund's lending momentum.

I. KEY LESSONS LEARNED

42. Simplification. Bearing in mind the constraints on the institutional capacity of the GTN,as well as the resources of the Bank, the project scope should have been less ambitious andgreatly simplified. Although the TNUDP's overall performance was better than that of otherBank-financed integrated urban development projects in India, the Project Management Groupand the Bank could not address the problems of non-performing components such as theTRAMP (road construction) and the SIP in a timely manner. The Bank needs to be highlyselective about where it operates and act swiftly and decisively when political commitmentdisappears. The project restructuring was undertaken to re-focus the effort of the GTN and theBank on the most successful and sustainable financial intermediary component.

43. Need for Strengthening Municipalities. The financial intermediaries such as the MUDFand the TNUDF can contribute to the strengthening of municipalities by imposing financialdiscipline on them as a condition of loan provision, and by helping them to develop municipalprojects. However, the financial intermediaries alone cannot address the fundamental problems ofthe municipalities' weak institutional capacities and weak financial situations. Most of themunicipalities do not have adequate financial, managerial, administrative, and technicalinstitutional capacity, which should be strengthened by TA and training programs. The

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municipalities' weak financial situations have been created by the regulatory constraints whichimpinge on the effectiveness of resource mobilization (unpredictable and discretionary intra-government transfer system with weak financial accountability framework, inappropriate propertytax assessment and inadequate user charge levels and collection). The Government shouldundertake the reforms necessary to address these regulatory constraints.

44. Government Commitment. The project was most successful in the aspects of policyreform and good practice where the Government support for the objectives was greatest. Forexample, development of the urban financial intermediary scheme was successful and receivedthe full support of the State's Finance Department, as well as from the Department of MunicipalAdministration and Water Supply.

45. Project Management. Project management would have been enhanced substantially bythe greater delegation of decision making authority for resource allocation lto the ProjectManagement Group. Authority of this kind would have provided the PMG with the means andthe incentives to take prompt and effective action to correct any emerging inadequacies ofimplementation.

46. Need for Addressing Urban Poverty. The low-income population represents more than30 percent of the urban population in Tamil Nadu. It is important to address urban poverty issuesthrough appropriate project design and the inclusion of a specific project component, such as theGrant Fund, which finances the sub-projects targeted to the urban poor.

47. Continuity of Bank Staff. Policy continuity and a high level of personal accountabilitywere maintained by having virtually the same core team for project preparation, appraisal andsupervision, and by retaining some of the team members who had been involved with the earlierMadras I and II projects. After November 1994, the team changed in order to re-focus the projecton restructuring and the development of the financial intermediary, which occurred after theinitial closing date and to resolve the resettlement issues pertaining to the Madurai Storm WaterDrainage Scheme. The latter team continued to work on the design of the proposed secondproject.

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PART II: STATISTICAL ANNEXES

Table 1: Summary of Assessments

_ :~11~Aflt,Af.

Macro policies /Sector policiesFinancial objectives VInstitutional development VPhysical objectives /Poverty reduction -Gender Issues /Other social objectives VEnvironmental objectives /Public sector management VPrivate sector development

Identification

Preparation assistance vAppraisal Supervision V

Preparation VImplementation /Covenant compliance VOperation (if app]licable)

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Table 2: Related Bank Loans/Credits

Loan/credit title Purpose Year of approval Status

Preceding operations

1. Second Calcutta UD Single city integrated urban development (IUD) 1978 ClosedProject (Cr.0756-IN) project to extend and rehabilitate city's urban

service systems, and upgrade capacity of localbodies.

2. Second Bombay WSS Construction of water supply and distribution 1979 ClosedProject (Cr.0842-IN) works and sewerage improvements, slum

sanitation provision, water conservation, TA.

3. Second Madras UD Single city IUD project including: development 1981 ClosedProject (Cr. 1082-IN) of plots; slum improvements; provision of buses;

municipal services; and, TA.

4. Kanpur UD Project Project focused mainly on sites and services and 1982 Closed(Cr. 1185-IN) slum upgrading; also included infrastructure and

municipal services improvements and TA.

5. Third Calcutta UD Single city IUD project, involving the spreading 1983 ClosedProject (Cr. 1369-IN) of infrastructure and service improvements

outside of metrocore.

6. Madhya Pradesh UD Project mainly focused on shelter and sanitation 1983 ClosedProject (Ln.2329-IN) improvements, in 10 cities.

7. Bombay UD Project Single city IUD project including: land 1985 Closed(Cr. 1544-iN) infrastructure servicing; slum upgrading; local

govemment finance and administration, andservices; and TA.

8. Gujarat UD Project Appraised as a state-wide multi-city IUD project 1986 Closed(Cr.1643-IN) with emphasis on: shelter; infrastructure; slum

upgrading; solid waste; and, institutionalstrengthening. Restructured with large rural WScomponent.

9. Third Bombay WSS Project involved expansion of WS and sewerage 1987 ClosedProject facilities in the city; sanitation for urban poor;(Cr. 1750/Ln2769-lN) and, improvements to implementation capacity.

10. Uttar Pradesh UD State-wide multi-city IUD project with all main 1987 ClosedProject sectors included: institutional improvements;(Cr. 1780/Ln.2797-IN) municipal services; shelter; traffic and transport;

water supply and sanitation. Also support toGanga Action Program. Emergency earthquakereconstruction component added.

1l. First Madras WSS Ground water supply, distribution and waste 1987 ClosedProject (Cr. 1 822/Ln.2846- water improvements in city with small LCSIN) component and institutional improvements.

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Following operations

1. Hyderabad WSS Project Expansion of WS to city, rehabilitation and 1990 SPN-Active(Cr.2115/Ln.3181-IN) strengthening of existing WSS systems, with

LCS component and institutional strengthening.

2. Second Madras WS Project includes: major scheme to bring 1995 SPN-ActiveProject (Ln.3907-0/6 IN) additional water to city; distribution and

conservation improvements within city; and, TA.

3. Bombay Sewage Project included: construction of 2 outfall 1996 SPN-ActiveDisposal Project sewers; pumping facilities; sewage treatment;(Cr.2763/Ln.3923-IN) sewerage system improvements and

rehabilitation; and, slum sanitation.

Table 2 lists all urban development and urban water supply and sanitation (WSS) projects in India for the 10 yearsof preceding, and the years following, TNUDP approval.

Year of approval is Bank fiscal year.

Under Status: SPN-Active indicates that the project is being implemented and is under active supervision.

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Table 3: Project Timetable

Steps in Project Cycle Date Planned Date Actual/Latest Estimate

Identification Nov-85

Concept Review 28-Jan-86

Pre-Appraisal July-87 01-Jul-87

Appraisal Oct-87 01-Oct-87

|_Negotiations Apr-88 19-Apr-88

Board Presentation Jun-88 15-Jun-88

Signing 116-Sep-88

Effectiveness 07-Nov-88

Mid-term Review none none

First Extension from 01-Oct-95

Second Extension from 01-Oct-96

Credit Closing 30-Sep-95 30-Sep-97

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Table 4: Credit Disbursement: Cumulative Estimated and Actual(US$ million)

FY 1989 i 1990 1991 4 1992 1993 1994 1995 1996 1997 1998

Appraisal

18.0 62.9 118.9 179.5 241.1 281.2 297.2 300.2 300.2 300.2

Estimate

19.56 36.75 56.41 69.13 91.19 113.56 131.43 146.35 171.52 183.71.3142 1.4227 1.4304 1.375 1.3736 1.4599 1.4865 1.438 1.365 1.365

Actual 25.7 52.3 80.7 95.1 125.3 165.8 195.4 210.5 234.1 250.8

Actual as

Percentage 142.8 83.1 67.9 53.0 52.0 59.0 65.7 70.1 78.0 83.5

of Estimate:

- 27 -

Table 5: Key Indicators for Project Implementation

I. Key Implementation Indicatorsin SAR/ President's Report Estimated Actual

1. Expenditure against project (SAR)targets

A. Institutional

(i) MUDF Rs. 1,786 million Rs. 2,205 million

(ii) Technical Assistance and Training Rs. 137 million Rs. 191 million

B. Shelter

(i) Land Rs. 2,387 million Rs. 3,179 million

(ii) GUD Rs. 143 million nil

(iii) SIP Rs. 459 million Rs. 324 million

C. Transport

(i) TRAMP Rs. 967 million Rs. 1,862 million

(ii) PTC Rs. 584 million Rs. 929 million

2. Physical progress against project(SAR) targets:

A. Institutional

(i) MUDF Finance primarily 80 municipalities in 94 municipalities throughout the Statethe 10 largest urban agglomerations. have accessed the Fund.

(ii) Technical Assistance and Training Studies in over 27 areas. Training Studies completed in 51 areas.program not defined in detail. Extensive training completed.

B. Shelter

(i) Land About 950 ha. of land for about 1,161 ha. of land and 88,725 plots.70,000 serviced residential and non-residential plots to be provided.

Not less than 55% for households at or 92% of plots allocated were tobelow poverty line. economically weaker sections (EWS)

and Low Income Groups (LIG).

(ii) GUD About 140 ha. land for about 10,000 nilresidential and non-residential plotsfor low income groups.

(iii) SIP About 94,000 households in 590 76,722 households in 490 slums.slums.

C. Transport

(i) TRAMP none l

(ii) PTC Provide about 1,000 bus chassis and 1,595 buses, 4 depots and 7 terminalsbus bodies. Improve about 7 depots. A provided.major workshop at Perambur. About10 terminals

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3. Resource Mobilization, Pricing andAffordability

A. Institutional

(i) MUDF Municipalities to become credit About 10% default rate onworthy. repayments. Only one serious

defaulter out of 94 borrowers.

(ii) Technical Assistance and Training

B. Shelter

(i) Land Down payments from residential plots 50% financed.and proceeds of outright sale wouldfinance 40-50% of the chargeable costof LAND.

(ii) GUD

(iii) SIP Down-payments ranging from 10 to At least 70% of households made20% for different size plots would down-payments in all schemes.fund about 15% of component cost.

C. Transport

(i) TRAMP

(ii) PTC In excess of 20% of the PTC About 11% funded.investment program would be fundedfrom internal generation.

11. Indicators at ProjectRestructuring

1. First Extension

Suspension of STOWAD Take remedial action satisfactory to CompletedIDA on resettlement and rehabilitationof project affected persons and liflsuspension of STOWAD.

New Intermediary Clarify the legal issues on the Completedcommercialized fund.

Environmental issues Submit a resettlement policy and Completedimplementation framework.

Submit draft TORs and Short Lists of Completedconsultants for the following services.(i) a survey on the past landacquisition practice and resettlement(ii) preparation of appraisal andoperation guidelines on R&R issue(iii) preparation of EnvironmentalAssessment Operation Guideline.

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Table 6: Key Indicators of Project Operation

None

- 30 -

Table 7: Studies Included in Project

Purpose as DefinedStud:y at Appraisal/Redefined Status Impact of Study

LAND

Study on Settlement Status Assist project implementation Completed Assisted with housingin S&S scheme in MMA policies and allocations

Study on Shelter Strategy ditto Completed --

for 3 towns

Study on Co-operative Assess potential of social housing Completed NoneHousing sector

Consumer Preferences Assist project implementation Completed Important input to projectdesign

Occupancy of plots in S&S ditto Completed Assisted with policyscheme in TN

Long term land acquisition Strengthen institutional capacity Completed For future developmentsprograms following utilization of

public lands.

Shelter strategies in TN Develop institutional strategy on Completed Assisted with housingshelter policies.

Management information Strengthen institutional capacity Completed Assisted project planningsystems for civil works and execution.contract

GUD and LASER

Survey on illegal Assist project identification and Completed Nonesubdivisions implementation

SIP

Study on Relocation of Not defined at appraisal Completed Project planning andslum dwellers on Cochrane feasibilityBasin Bridge

Study on pavement Assist with project planning Completed dittodwellers

Documentary on slums Not defined at appraisal Completed Useful background

Slum survey ditto Completed Essential inputs to theproject planning

- 31 -

TRAMP

31 feasibility and Assist project implementation Completed Essential inputsPreparation studies

Objective check on Not defined at appraisal Completed Part of project monitoringTRAMP compliance

Updating of TRAMP ditto Completed Additional projectScheme feasibility at time of

project extension

Comprehensive traffic and For preparation of medium-term Not done except (see General Studiestransportation studies for investment strategies for Madras below)project cities

BUS

Exclusive Bus way on Not defined at appraisal Completed Feasibility study. Did notAnna Salai Corridor proceed to execution due

to cost and environmentalconcerns.

Bus joumey time study Assist PTC operation Completed Improved bus efficiency

FOP for PTC Prepare financial and operation Completed Essential input to projectplan for PTC planning and monitoring

Bus life-cycle replacement Efficient bus replacement Not done Nonecosts decision-making policy

FOP for other TN bus Not done Nonecompanies

Traffic Equipment Study Assist PTC operation Completed Feasibility Study

Software Development for Prepare software for PTC Completed Helped reduce staff nos.PTC operation and increase

decentralization.

Wage contract system Strengthen institutional capability Not done Noneof PTC

Regional Re-organization ditto Completed Bus company wasstudy bifurcated in 1994.

Transport users' opinion Assist project implementation Completed Important marketand market survey research study. Assisted

with pricing strategy.

MUDF/TNUDF

Municipal FOPs (94 in Strengthen capacity of Completed Essential inputs to Fundtotal) municipalities and corporations decision-taking

-32 -

Municipal projects Design work for projects approved Completed dittofeasibility studies for funding(numerous)

Environmental and Social Not defined at appraisal Completed Assist implementation ofReport New Financial

Intermediary at time ofrestructuring

Financial Management ditto Completed dittoStudies

Audit Consultancy ditto Completed ditto

Legal Consultancy ditto Completed ditto

Grant Fund Guidelines ditto Completed dittoStudy

STOWAD

3 Master Plans Assist project implementation Completed Important preparation andfeasibility studies in 3major towns

PMG

MIS Assist PMG operation Completed Essential for successfulmanagement of this wide-ranging project.

General Studies

Pilot Study on Historical Not defined at appraisal Completedtown

Feasibility Study for the Not defined at appraisal Completed Implementation will beChennai Mofussil Bus taken forward by CMDATerminal at Koyambedu

Environmental Impact Not defined at appraisal Completed Important study toAssessment for identify scope forPallikarannai Area development of swamp

area in S. Chennai.

Housing & Land Assist with State U.D. policy for Completed Provided importantDevelopment Program formulation background data

Municipal Solid Waste Not defined at appraisal Completed Feasibility study-projectManagement Study proposed for Third

Chennai Water Supplyand EnviromnentalSanitation Project

- 33 -

Study on Direct and Not defined at appraisal Completed Background data forIndirect employment policy-making

Water supply and sewer Not defined at appraisal Completed Nonedesign

Effective demand for Assist with State U.D. policy for Completed Background data forhousing formulation policy-making

Comprehensive traffic and Not defined at appraisal Completed Assisted with Master Plantransportation study for update for Chennai Met.Madras Reg.

Aerial surveys for major Input to computerized mapping Completed Maps produced and intowns use by Dept. of Town and

Country Planning andConsultants.

Improvements to road Not defined at appraisal Completed Assist planning of a newaround Koyambedu commercial center in

Chennai

Community awareness Not defined at appraisal Completed Study was input intoenvironment and health preparation of proposededucation study for MMA Third Chennai Water

Supply andEnvironmental SanitationProject.

Study of fiscal and Assist U.D. policy formulation. Not done Noneinvestment factorsimpacting on wheneconomic development inTN

Development of set of ditto Not done Noneindicators for economicactivity in project areas

Study to determine how to ditto Not done Nonehold income distribution inproject cities

Note: General Studies were undertaken for urban policy improvements in the State, or to assist with issues that aroseduring the project implementation. They were not linked to specific project components.

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Table 8A: Project Costs

Component Rs million US$ million

Appraisal Actual Appraisal Actual

LAND 2,387.0 3,179.4 167.3 117.4

GUD 143.0 -- 9.1 --

SIP 458.7 324.2 31.7 13.7

TRAMP 967.1 1,861.6 68.3 71.4

PTC 583.5 929.2 40.4 37.0

MUDF/TNUDF 1,786.1 2,204.6 127.0 74.8

TATE(PMG/MMDA) (*) 190.8 (*) 7.0

PMG/CMC (*) 122.5 (*) 3.4

Total 6,325.5 8,812.3 443.7 324.7

(*) These items were allocated over all others at appraisal

Table 8B: Project Financing

(US$ million)

Sources Appraisal Actual

US$ million | US$ million %

IDA 300.2 67.0 250.8 78.3GTN 4.2 1.6 -28.8 -9.0

LAND Revolving Fund 17.3 3.9 31.6 9.9

SIP Revolving Fund 3.3 0.7 0.0 0.0

LAND Internal Generation 78.7 17.7 16.8 5.2

SIP Internal Generation 4.9 1.1 1.5 0.5

PTC Internal Generation 8.2 1.8 4.4 1.4

MUDF/TNUDF Generation 27.0 6.1 23.0 7.2

HUDCO -- -- 21.1 6.6

Total 443.7 100.0T 320.3 1100.0

The possibility of HUDCO participation in the financing of the project was discussed at negotiations. It was agreedthat HUDCO would participate on the same terms and conditions as IDA funds if internal cash generation in theLAND component fell short of expectations. This was intended to cushion the State budget. HUDCO financingcommenced from March 31, 1989. In fact, the combination of HUDCO finance and increases in the disbursementpercentages introduced by the Bank following the Gulf War turned the State budget into a project net beneficiary.

- 35 -

Table 9: Economic Costs and Benefits

Actual returns for LAND schemes were comparable to those calculated for prototype schemes atappraisal since the implementation conditions were almost identical to those appraised. Thesereturns were about 20%.

A similar economic analysis was performed as was conducted at appraisal (SAR Annex 24) onthe decisions to augment and replace the bus fleet. The replacement calculation was based on thediscounted cost savings over its life of a new versus old vehicle; it was recognized, however, thatthe operations and maintenance data in these cases was of uncertain quality. The augmentationcalculation was based on the benefits minus costs of an addition to the fleet. The methodologyrelied on the fare levels as a measure of benefits. PTC bus procurement ERR was about 15%,lower than the 21% at appraisal reflecting the resistance by GTN to permit timely fare revisions.

Data limitations precluded the calculation of returns on the major road schemes. The Bank hasrequested DHRW to perform the calculations for completed schemes.

- 36 -

Table 10: Status of Legal Covenants

Agreement Section Covenant Present Original Revised Description of Commentstype status fulfillment fulfillment covenant

date date

DCA 4.01 (a)(i) I C Borrower to maintain Suspension on 15-Nov-records and accounts in 1994 for quality of recordaccordance with sound keeping was lifted on 16-accounting practice Dec- 1994 following

inspection finding all inorder

4.01(a)(ii) I C All records on expenditureto be retained at least oneyear.

4.01(a)(iii) 9 C Enable IDA representativesto examine such records.

4.01(b)(i) I C Records and accounts to beaudited for each fiscal yearin accordance withappropriate principlesacceptable to IDA.

4.01(b)(ii) I C 31-Dec-95 Furnish IDA auditorsreport every fiscal year,including separate auditopinion.

4.01(b)(iii) I C Furnish IDA otherinformation concerningrecords, accounts and theaudit, as IDA shall request.

4.02 1 CD 30-Apr-95 Special Account for eachfiscal year to be auditedwith sound accountingpractices.

PA 2.01(a) 5 C The Project to be carriedout with due diligence andfinancial and engineeringpractices. Facilities andservices to be provided asneeded.

2.01(b)(i) 5 CD The project to be carried There was a lag inout in accordance with the implementation comparedImplementation Program. with the program.

2.01(b)(ii) 10 C To substantially implement 79 of 82 agreed actions inan agreed Operational OAP were complied with.Action Plan (OAP) Borrowers failed to:

implement 10% SIP onprivate land; revise androll over annuallyTNSCB's FOP; prepareproposals for monitoringair quality.

In the Madurai STOWADcomponent, OAP. 1.12

l_____ requiring the project

- 37 -

implementing agency tomake survey and to makeformal arrangements foroffering compensation tohouseholds in the form ofserviced plots in projectsites and services scheme.,was not complied. This incompliance has led to theproject partial suspensionin November, 1994. Thiscondition was met ninemonth after thesuspension.

2.01(c) 4 C Make available to the Some lapses occurred butImplementing Agencies were corrected. E.g. GTNfunds on terms and did not lend to PTC asconditions satisfactory to agreed early years.IDA.

2.02 3 C Procurement financed byIDA to be governed by theprovisions of Schedule 1.

3.01(i) 5 C Implementing Agencies to Improvements were madeconduct their operations throughout the Project.according to soundadministrative financialand engineering practicesunder supervision ofqualified management.

3.01(ii) 5 CD Maintain their assets and Missions applied pressuremake all necessary repairs to agencies, especiallyand renewals in accordance TNHB, TNSCB andwith sound engineering DHRW, to maintain assets.and financial practices.

4.01(b)(i) I C TNHB, TNSCB, PTC,Madras, Coimbatore,Madurai, Salem and Trichyto have project accountsaudited for each fiscal year.

4.01(b)(ii) I C 31-Dec-95 Furnish to IDA every fiscal In few cases there wereyear certified copies of delays in submission ofaudited financial auditsstatements and auditorsreport.

4.01(b)(iii) I C Furnish to IDA otherinformation on records,accounts, financialstatements and the audit asper IDA request.

4.02 2 C PTC operation costs Due to persistent delays by(including depreciation, GTN in implementing farebut excluding interest and revisions this covenantother debt charges) not to was not in compliance inexceed 98% of operating | specific years, although

-38 -

revenues. overall was in compliance.

4.03 4 C Reimburse PTC at rate of GTN increased70% for losses on student reimbursement rate toriders in 2 installments 100% during the Project.every year.

4.04(a) 2 C PTC to produce funds from In some cases, in order tointernal sources equivalent avoid failing in thisto not less than 20%b of covenant. PTC held backannual average of capital on its procurementexpenditures. program.

Schedule2(1) 3 C Rules and procedures ofMUDF and terms andconditions for its loans andgrants to be satisfactory toIDA.

Schedule2(2) 10 C LAND scheme to beimplemented only on sitesselected in accordance withcriteria satisfactory to IDA.

Schedule2(3) 10 C Scope and regulations inLAND, GUD and SIPschemes to be satisfactoryto IDA.

Schedule2(4) 2 CP In LAND, GUD and SIP LAND scheme recoveriesschemes, GTN to recover sometimes slipped due toall chargeable costs from absence of buildingbeneficiaries. Terms and certificates, later corrected.conditions of loans and SIP recoveries were poor.leases, and beneficiaryselection criteria to besatisfactory to IDA.

Schedule2(5) 5 C GTN to maintain theEmpowered Committee,PMG and CMC.

Covenant types:

1. = Accounts/audits 8. = Indigenous people2. = Financial performance/revenue generation from 9. = Monitoring, review, and reporting

beneficiaries 10. = Project implementation not covered by categories 1-93. = Flow and utilization of project funds 11. = Sectoral or cross-sectoral budgetary or other resource4. = Counterpart funding allocation5. = Management aspects of the project or executing 12. = Sectoral or cross-sectoral policy/

agency regulatory/institutional action6. = Environmental covenants 13. = Other7. = Involuntary resettlement

Present Status:

C = covenant complied withCD = complied with after delayCP = complied with partiallyNC = not complied with

- 39 -

Table 11: Compliance with Operational Manual Statements

No significant lack of compliance apart from the case of the Madurai STO WAD scheme referredto in the text.

- 40 -

Table 12: Bank Resources: Staff Inputs

Stage of Planned Revised ActualProject Cycle I

Weeks US$ Weeks US$ Weeks US$

Through Appraisal n/a n/a n/a n/a 68.7 125.9

Appraisal-Board n/a n/a n/a n/a 39.9 70.0

Supervision n/a n/a n/a n/a 294.5 592.2

Completion n/a n/a n/a n/a 19.0 57.4

TOTAL n/a n/a n/a n/a 422.1 845.5

1. The table indicates n/a where information is not available from the Bank's MIS.

2. Completion Actuals are final estimates

3. Approximately $70,000 and 35 s/w of supervision inputs were attributable to additional actions taken bythe Bank relating to the Credit suspensions over the STOWAD scheme in Madurai.

4. Approximately $130,000 and 70 s/w of supervision inputs were attributable to supervision during the twoextensions of the Credit closing date the tasks associated with project restructuring during this period.

- 41 -

Table 13: Bank Resources: Missions

Performance Rating

Number Specialized Implemen- Develop-Stage of Month/ of Days in StaffSkills tation ment Types of

Project Cycle Year Persons Field Represented Status Objectives Problems

Through Appraisal Nov-85 2 14 EC, ME - -

Oct-86 3 15 EC, FA, Trans - -

Feb-87 6 18 EC(2), SE, FA, - -

Trans, Plan

Jul-87 4 14 EC, SE, ME, FA _ -

Appraisal through Oct-87 5 21 EC, ME, Trans, - -Board Approval FA, Plan

Supervision Jul-88 2 14 EC, FA I

Aug-88 1 3 Trans Land acquisition problems inroad projects.

Apr-89 5 6 EC, Trans, FA, I I SIP: Component is in seriouslyPlan, ME difficulties.

MUDF: Initial sanctioning ofloans has taken more time thanexpected. Consultants'preparation of financial andoperating plans needstrengthening.

Aug-89 5 10 EC, Plan, FA, I I MUDF: Initial sanctioning ofTrans, ME loans has taken more time than

expected.

Mar-90 1 4 FA

Jul-90 4 21 EC, FA, Plan, SA I I MUDF: Problems in appraisingmunicipal FOP and Fundmanagement and allocations.BUS: Some of operating targetsare not satisfied.

Nov-90 6 12 EC, Trans(2), 2 2 GUD: Nothing implemented.FA, ME, SA MUDF: inadequate fund

allocation. Problems inappraisal causing low qualityand quantity of loans.BUS: Worsening operatingstatus.TRAMP: Delay in procurementprocedures.

- 42 -

Apr-91 4 9 EC, Trans, FA, 2 2 MUDF: Inadequate fundME allocation.

BUS: No fare revision andnegative cash flow.Deviations from the covenantsin SIP, GUD and BUS.

Sep-91 3 11 EC, FA, Trans 2 2

Jan-92 4 17 EC, SE, Trans(2) 2 2 GUD: Nothing implemented.MUDF: Deviation from Fundbasic objectives.TRAMP: Delays in studies andscheme preparation.Some deviations fromCovenants.

Aug-92 3 8 EC, SE, Trans 2 2

Mar-93 3 9 EC, MF, Trans 2 I TRAMP: Delays in studies andscheme preparation.

Dec-93 3 7 EC, ME, Trans 2

Jun-94 4 14 EC, FA, ME, S STrans

Sep-94 4 19 EC, FA, ME, S S TRAMP: ProcurementTrans problems.

Jan-95 7 20 EC(2), FA, U S GUD: No implementation. NoR&R(2), ME, interest of private sector.Env TRAMP: Weak

implementation capacity.

STOWAD: Suspended

Jul- 95 2 13 EC, Env U S GUD: No progress. No interestof private sector.TRAMP: Weak capacity

Nov-95 2 3 EC, Env S S MUDF: Commercializationissues under review.

Mar-96 3 4 EC, L, Bank S S

May-96 3 7 EC. L, Bank S S Project Restructuring

Nov-96 4 7 FA, Env(2), S SR&R

Feb-97 1 13 S S Closing soon. PromoteFA disbursement.

July-97 1 I I S S Credit Status

I_FA

Completion Sep-97 6 14 EC, FA, Plan, _ _Bank, Env, ME

L- - -=

- 43 -

Key to Specialized staff skills: EC - Economist; FA - Financial Analyst; Plan - Urban Planner; ME - MunicipalEngineer; SE - Sanitary Engineer; L - Lawyer; SA - Systems Analyst; Env - Environmental Specialist; R&R -Relocation and Rehabilitation Specialist; Bank - Banking Specialist

Note: A pre-Identification mission, involving EC and ME, took place in Jul-85 in conjunction with a supervisionmission for the Second Madras Urban Development Project. The Completion mission for TNUDP in Sep-97 wasalso a pre-Identification mission for TNUDP-II.

APPENDIX A

The World Bank

INDIA: T.AMIIL NADU URBAN DEVELOPMENT PROJECT (TNUDP)(Cr.1923-IN)

Completion iMissionand

Discussions of a Possible Follow-On Urban Development Operation In Tamil Nadu(9/15-30, 1997)

AIDE-NIMIIOIRE

I. Backgyround

1. The mission. A World Bank mission visited Tamil Nadu between September 15 and 30, 1997.The mission members were: Messrs. / Mime. Hiroaki Suzuki (Task Manager and mission leader);Michael Whitbread (consultant, responsible for drafting the project Implementation Completion Report(ICR)); Kim Cuenco (Urban Planner); Illangovan (Environmental Engineer); Michael Wills (consultant,Financial Analyst); and. Ed McBean (consultant. Municipal Engineer). This was the final TNUDPmission as the Credit closed on September 30, 1997. The mission objectives were: (a) to initiate thepreparation of the ICR; and (b) to hold discussions on a possible follow-on urban developmentoperation in Tamil Nadu. including continuing support to the Tamil Nadu Urban Development Fund(TINUDF) which was established under the TNUDP.

2. iMvission tasks. To achieve these objectives, the mission held discussions with officials (ANNEXI provides a list of key persons met), collected data for analysis and evaluation from GOTN, the projectexecuting agencies and the municipalities (ANNEX 2 lists the key documents), and undertook fieldvisits to 39 sub-projects and schemes in the towns of Chennai (Madras), Madurai, Palani, Coimbatore,Tirrupur and Erode (ANNEX 3 lists the sites visited bv the mission). The issues arising from themission's field visits and associated discussions are shown in ANNEX 4. All mission members wish torecord their appreciation for the courtesy extended to them and for the assistance and cooperation of allthe agencies and individuals concerned. The findinigs and conclusions of the mission were discussed at aState-level wrap-up meeting in Chennai on September 30, 1997 and at the final wrap-up meeting inDelhi on October 7 in Delhi with GOI (DEA of the iMinistry of Finance, the Ministrv of Urban Affairsand Employment), GOTN, TINUIFS and the participating financial institutions (FIs). The followingsummarizes the findings and conclusions of the mission. Part A and Part B are related to "the closing ofTYNUDP', and "the NINUDF and a Possible Follow-On Urban Development Operation in Tamil Nadu."

- 2-

Part A: Closing of TNUDP

II. Summarv Status of TNUDP at Credit Closing

3. Phvsical status. The mission judged the achievement of the physical target of the project tohave been adequate, though some of the sub-projects have problems in their design and constructionquality. Civil works, purchases of equipment and execution of technical assistance, training and studiesapproved by the Bank were all completed, with the following two exceptions: (a) 13 road and bridgeschemnes which are the responsibility of the Department of Roads and Rural Works (DHRW) under theTransport and Traffic Management Program (TRAMP) component remained unfinished with a spillovervalue of Rs 411 million (US$11 .5 million); and, (b) some minor works in four sites and servicesschemes under the Land Service Program (LAND) component, which are the responsibility of the TNHousing Board (TNHB). The TRAMP schemes will be completed with State Government funds, andsites and services will be completed with TNHB funds. Compared with the appraised project, physicaltargets were achieved or exceeded for: sites and services under LAND; equipment and civil works underPallavan Transport Corporation (PTC/bus company in Madras); bridges and highways under TRAMP;municipal projects under the Municipal Urban Development Fund (MlJDF); and, TA and training underTA., Training and Equipment (TATE). Physical achievement fell short of the appraisal targets for: slumimprovement on public lands under the Slum Improvement Program (SIP) by about 20%; the programfor improvements to private slums under Land Sharing/Realignment (LASER), where there were only 2small schemes implemented; and, guided urban development (GUD) under LAND, which was canceled.LASER and GUD were small and somewhat experimental components of the appraised project.

4. Financial status. The Board-approved Credit amount was SDR 216.5 rnillion, and SDR 22.0million and SDR 10.8 million were canceled by the Bank following an extended period of Rupeedepreciation in 1992 and 1994 respectively, leaving a Credit amount of SDR 183.7 million. It isanticipated that by the time of final withdrawal application, the utilization will be 100% of this Credit.

Covenant compliance. Except the audit of the Special Account which is the responsibility ofGO1 all standard project conditions in relation to project accounts, audits, procurement procedures etc.were in compliance at closing. In addition to standard conditions, there were some 82 items in theproject's agreed Operational Action Plan (OAP) at appraisal covering procedures and policy, the"substantial implementation" of which was a project-specific covenant. Three C)AP items were not incompliance at closing. Accordingly, the mission concluded that the Borrower was in compliance.

6. Suspensions of disbursements. The mission's field visit included inspection of Madurai'sstorm water drainage (STOWAD). The manner of implementation of the STOWAD master plan hadcreated problems in 1994 that had led to two suspensions of disbursements by the Bank over issues ofproject record keeping and R&R -- both suspensions were lifted following Bank inquiries. The missionwas satisfied that: (a) the STOWAD scheme at Madurai had been properly executed and was workingwell; (b) there had been no re-encroachment onto the drainage margins since conmpletion of the scheme;and (c) the R&R issues were resolved according to Bank guidelines.

7. Highlights of project restructuring - transformation of MUDF into TNUDF. The projectwas extended twice from the original closing date of September 30, 1995. The extensions were for aperiod of one year each. They enabled restructuring to take place in order to transform the project's

- 3-

successful Nlunicipal Urban Development Fund (MJUDF) into a legally independent financialinte-..ediarv with private sector participation. The process of creating the intermediary. Tamil NaduUrban Development Fund (TNUDF), has been successfully completed and TNUDF is now poised forconsiderable irther development and expansion of its urban infrastructure lending activities (see Part Bof this aide-memoire).

III. Implementation Performance of TNUDP

8. Views of the Mission. This project was complex and far-reaching and contained manyinnovations. There was always a possibility of failure in some areas which would need to be weighedagainst project successes in the final assessment. The main "'failures" were: no GUD schemes wereexecuted under LAND; inadequate coverage of slum improvement on private lands under LASER; anabsence of any real improvement in road scheme appraisal capability at DHRW under TRAMP andexcessive delays in planning and procurement: slow occupation of sites and services schemes underLAND (althouah the sales of plots greatly exceeded expectations); bus fare revisions by GOTN were tooinfrequent and procedures inadequate; and, often poor attention by the Urban Local Bodies (ULBs) tothe maintenance of slum improvement and sites and services schemes. However, the "successes" weremany: physical targets were exceeded for four out of five major components; poverty alleviationobjecrives were significantly achieved; there have been important environmental improvements; manyurban policy reforns were introduced by the project which complement those arising from the 74th.Constitutional Amendment; most agencies have experienced a cultural change leading to significant andsustained improvements in their approaches to planning and execution; and, the project has created aninstitution in the transition of the MUjDF to the TNUDF for increasing and sustaining the flow of capitalto ULBs and urban infrastructure generally in the State. These are major advances in urban developmentpolicy and practice, and the mission's overall assessment is that the project was successful in achievingits obiectives despite some shortcomings.

9. Views of the Borrower. The Project Management Group (PMG) and GOTN are preparing theBorrower's evaluation of the project for inclusion as an Appendix to the ICR. This will be forwarded tothe Bank in November 1997. Provisionally, the Borrower indicated to the mission that GOTN was verysatisfied with the progress and implementation of TNUDP, particularly the restructuring of the TNUDPincluding the establishment of the TN`JDF and that their evaluation was likely to record a favorableoutcome. Given the important roles of the FIs in the TNLTDF, DEA requested them to submit toGOL'GOTN and the Bank their own evaluation of the TNIJDF.

IV. Reallocation Between the Categories of the Proceeds of the Credit

10. The Project Management Group (PMG) and the mission reviewed the status of the eligibleexpenditures incurred under the TNTDP before the Credit closing. The final category allocation of theproceeds of the Credit is shown in ANNEX 5. The Bank has undertaken the reallocation between thecategories of the proceeds of the Credit. based on this review.

V. Operational Plan and Sustainability of TNUDP

11. All of the facilities provided under the project have become, or will become in the case ofunfinished works, assets of the relevant agencies -- principally the municipalities. Accordingly, there is

-4 -

no formal operational plan for the project as the assets will be operated and maintained as part of themunicipalities routine oblications. Sustainabilitv depends largely on the levels of maintenance and theoperating procedures of the municipalities, which in turn depends upon their finances and organization.With the improvements brought about under the 74th Constitutional Amendment. the mission is of theopinion that there are good prospects for the sustainability of these assets. However, considerablereform of local govermment is required to achieve this outcome, which would be facilitated by a follow-on project as discussed below in Part B.

VI. Follow-up Actions in the Post-closure Period

12. Borrower Obligations. The mission reminded the Borrower of project obligations which stillremain in the post-Closure period, including those entered into under the DCA and the PA. These are:

(a) GOI will submit to IDA an audit report of the Special Account of FY96/97;

(b) all withdrawal applications should be submitted to the Bank for eligible expendituresincurred up to September 30, 1997 by January 31, 1998;

(c) audits of SOEs. for the fiscal year 1996/97 should be submitted in accordance with theaudit covenant by December 31, 1997 and those in the fiscal year 1997/98 should be submittedby December 31, 1998;

(d) audits of the TNUDF and TNUIFS, for the fiscal year 1996/97 should be submitted assoon as possible, in accordance with II- 2-(c) of the Amendment of Devrelopment CreditAgreement and Project Agreement;

(e) GOTIN will replenish the Grant Fund in accordance with the provision set forth in theGrant Fund Guidelines 7, in accordance with II- 3-(b) of the Amendment of Development CreditAgreement and Project Agreement;

(f) semiannual reports on the progress of the TINUDF covering the period of April I-September 30, 1997 should be submitted by the end of November 1997 (the progress report ofthe TINUDF should also cover the preparation and transitional activities for the establishment ofthe TINUDF from October 1996 and March 1997), in accordance with II.-2-(c) and II- 3-(c) of theAmendment of Development Credit Agreement and Project Agreement;

(g) GOTN will continue to assist with the preparation of the ICR as reasonably requested todo so by the Bank and, additionally, should prepare its own Evaluation of the project forinclusion in the ICR which should be submitted to the Bank as soon as possible, but in any eventno later than December 31, 1997; and

(h) in accordance with the Agreements, the Borrower is obliged to comply with covenants, asappropriate, during the period of the Credit.

13. Program for ICR Preparation. The Bank will prepare a draft of the ICR and will forward it toGOTN for comments by December 31, 1997. Following any comments received, the Bank will proceed

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to finalize the ICR and submit it to the Senior Management of the Bank for onward transmission to theBank's Board. According to this timetable, the ICR should be received by the Board during February orMarch 1998.

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Part B. Possible Follow-On Urban Development Operation in Tamil Nadu

VII. Project Restructuring - TNUDF/GF/TNUIFS

14. Background. The project restructuring of TNUDP was negotiated in Juiv 1996 and approved bythe Board of IDA in October 1996. The legal documents were amended in Decermber 1996 and becameeffective in March 1997. The major objectives of the project restructuring were tO convert the project'ssuccessful Municipal Urban Development Fund (MUDF) into an autonomous financial intermediary, theTamil Nadu Urban Development Fund (TNUDF)/Tamil Nadu Urban Infrastructure Financial ServiceLtd (TNUIFS) with the participation of private capital and management for financinz urbaninfrastructure projects; to set up a new Grant Fund (GF) to encourage urban infrastructure investmentstargeted to the urban poor; and to finance TA and resettlement and rehabilitation costs.

15. Progress. In November 1996, the Tamil Nadu Urban Development Fund (TNUDF) wasestablished as a trust under the Indian Trusts Act 1882 with participation of GOTN (MUDF net worth asits contribution, Rs.1.2 billion -US$34 miillion. 70%), ICICI, HDFC and IL&FS (FIs' contributionRs.510 million-US515 million. 30%). TNUDF is manazed by the Tamil Nadu Urban InfrastructureFinancial Services Ltd (TNUIFS). majority-owned bv ICICI, HDFC and IL&FS ("lTlN)F meanscollectivelv T`NUDF/TNUIFS in this aide-memoire). The major objectives of TNUDF are to: (i) financeurban infrastructure projects which improve the living standards of the urbar. population; (ii) facilitateprivate sector participation in urban infrastructure financing and operation, through co-financing, jointventures and public-private partnerships; and, (iii) operate a complementary windcw of the Grant Fund(GF), to assist in addressing the problems of the urban poor. After the completion of the legal proceduresand the transfer of the MUDF's assets and liabilities, the TNTUDF started its lending operations in March1997. GF was established in September 1996 and obtained GOTN's first contribution in April 1997.

16. Evaluation of Performance.

Lending Activities of TNTJDF: Since its incorporation in iNovember 1996, TNUDF has appraisedprojects costing Rs. 1,973 million (US$56 million) and approved loans of Rs. 1,520 millior (US$ 43million) to 4 Corporations and 19 municipalities. This performance is significant when it is comparedwith the performance of the MUDF which had approved about Rs 2,080 million over 8 years. During thesame period, TNUDF disbursed Rs. 226 million (USS 6.4 million) compared to the allocated IDA creditbalance of Rs.600 million (US$17 million). The major reasons for the lower disbursed amournt are: (i)the transfer of the assets and liabilities of the MUDF to the TNUDF had taken much longer than plannedat the time of restructuring, due to several accounting issues (shift from cash-based to accrual-basedaccounting system, income recognition and loan provision for the MUDF loans, etc); (ii) IDA approvalfor the two large sub-loans were not given or delayed (IDA did not approve the sub-loan for PTC buscompany before the credit closing date due to the delay in bus fare revision and other financial reasons.IDA delayed its approval of the sub-loan for the Madurai Toll Ring Road project for clarification of thestatus of the land acquisition); and (iii) the TNUDF respected the preference of borrowers to stagger loandrawdowns to minimize interest costs. The net interest eaming for the 6 months to March 31, 1997declined bv 35% (from Rs. 78 million to Rs. 51 million) compared to the previous 6) months due largelyto declining interest rates for term deposits. The projects financed varied from storrm-water drains, solidwaste management to commercial complexes. TINUDF has built up the project pipeline of Rs. 4,500

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million (USS 13 0 million). The detailed assessment of the financial performance of TNUDF is providedin the Section 3 ofANNEX 6.

Lendina Oualitv: In consultation with the Bank. the TINUDF has adopted lending policies andprocedures and established a svstematic loan processing procedures, including the Environrnental andSocial Report (ESR) addressing the environmental and social issues of sub-projects. The TNUDF is'following these lending policies, procedures and environrnental and social recuirements.

Impact of Non-LendinQ Activities: In addition to its lending activities, the TNUDF has had a positiveimpact on the urban infrastructure financing and the capacity building of the municipalities. Themission's field visit revealed that the TNUDF's clients highly appreciate its stream-lined decision-ma-king and its advisorv services in developing projects, in particular for, new tvpes of urban projectssuch as BOOT operations. The TNUDF assisted Madurai Corporation in developing the first toll roadproject in Tamil Nadu. It also helped Karur Municipalitv develop the first BOOT scheme for a tollbridge project in Tamil Nadu. TNUDF has also assisted the Tamil Nadu Institute of Urban Studies indeveloping and implementing a training program for the municipalities which was financed by the GrantFund. The TNUDF is also helping the municipalities in improving their accounting systems togetherwith the provision of computer equipment and software financed under the Grant Fund.

Relationships with the Government: TNUDF provides a unique framework where the Government andthe private sector collaborate in urban sector development. This arrangement is beneficial for both theGovernment and the private sector. For the Government, TNUDF is a window for the private capitalinflow and the technical transfer of expertise on infrastructure financing and management. For theprivate sector, the Government's support to create an enabling regulatory environment for urbanfinancing and investment is indispensable for private participation in relatively new areas of municipalfinancing and urban infrastructure investment. This unique public and private partnership has led to thecreation of improved regulatory framework for the urban financing. For example, during the preparationof the MNadurai Toll Road Project, TNUDF realized that the existing regulations did not allow themunicipalities to enter into BOOT arrangements with private investors and requested the GOTN toamend the regulations. GOTN swiftly took action. Lending decisions are made following a transparentlending policy and procedures including specific economic, financial and technical criteria and based onthe recommendations made by TNUIFS.

Relationships with the Financial Institutions: The above-mentioned high performance of TNUDF wouldnot have been possible without the strong support of ICICI, HDFC and IL&FS. From the beginning, theintention of the TNUDF was to bring into the TNUJDF not only private capital but also the efficiencyand professional expertise of the private financial institutions. ICICI, HDFC and IL&FS, which areconsidered to be amongst the best financial institutions in India, contribute to the institutionaldevelopment of TNIJDF in their areas of comparative advantage. ICICI, with ample experience of termlending and human resources has directly supported the TNUDF's operations by seconding theoperational Vice President, the Operational Manager and two accounting professionals. IL&FS,considered as a front-runner of private infrastructure financing in India is providing support indeveloping innovative BOOT operations which are new in urban infrastructure financing, particularly atthe municipal level. Although these financial institutions are market leaders in their respective fields,none of them have adequate experience in municipal financing. In exchange for their contribution, thesefinancial institutions are gaining valuable experience in municipal financing thorough the TNUDF. It is

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expected that these institutions would develop urban financing operations in other states in India,buildingi on the experience of the TNUDF.

Sta':s of NMarch 3 1. 1997 Audit: l`NUIFS informed :1n mission "ha, the financial statements of March31. 1997 were cleared bv the auditor of the TNUDF on October 6, one week after its statutorvrecuirement. This delav was mainly caused by: (i) the complication arising from the conversion of thecash basis accounting system of MUDF to the accrual basis accounting method of the TNUDF; (ii)theproblem of income recognition of the previous period (`UDF); and (iii) difficulty of the determinationof loan provisions in the absence of confirmation of GOTN's guarantee on the past portfolio of MLUDF,transferred to TNUDF. During the mission's visit in Tamil Nadu. GOTN reconfirmed its guarantee onthe NfUDF's past portfolio and took action to meet the auditor's requirement to determine the provisionfor bad loans. The TNUDF will submit to the Bank the audited financial statements of March 31, 1997,once the Board of Trustees of the T1NUDF approves it.

Challenges for the Future:(i) Financial Management and Accounting Administration. Compared to its high performLance inlendina and non-lending advisory services, the TNUDF needs further improvernent of its own financialmanagement and accounting administration. The T.NTJDF has not yet established an adequate financialmanagement information system. mrie current system does not provide the management with timelyenough financial information required for more efficient fund management. The TNUDF managementand its shareholders, FIs, fully recognize this weakness and have taken action. A Financial VicePresident cum Corporate Secretary who is CPA and a Manager of Accounting will join the TNTJDFshortly. The required expertise and technology are standard and not complicated in this area. Themission requested the FIs to extend their support to the TNUDF in developing the financial managementsystem. The mission's observation on the accounting staff, financial information system and audit issuesof the TNUDF are stated in Section 1 and 2 of ANNEX 6.

(ii) Project Development and Appraisal Capacity. TNUDF has adequate project development andappraisal capacitv to deal with relatively small traditional municipal projects which had been financedunder the MUDF. However, these capacities would need to be strengthened as the TJNUDF starts tofinance more complicated medium-sized urban projects such as solid waste management, sanitation, tollroads, toll bridges and sewerage. These projects would require expertise on the regulatory andinstitutional framework as well as technical aspects. The mission recommends 1NUDF enter into anarrangement with a respected engineering firm to make their sector experts available on a retainer basis.

Grant Fund: The Grant Fund (GF) was established: (i) to finance the projects which benefit low incomepopulations in conjunction with the TNNUDF loan financing; (ii) to assist municipalities in developingprojects, particularly new approaches such as BOOT; (iii) resettlement and rehabilitation costs; and (iv)technical assistance for improving the financial, administrative and managerial capacities of themunicipalities. GF was established in September 1996 and becarne operational in April 1997 whenGOTN- made its first contribution of Rsl56 million (USS 4.5 million). GF is managed by the TNJIFS inaccordance with the Grant Fund Management Contract with CaOTN. GF disbursed Rs. 100 million (US$2.9 million) from April 1 to August 31, 1997. It has financed: (i) urban projects whose majorbeneficiaries are urban poor: (ii) project preparation costs; and (iii) technical assistance and training ofmunicipalities. Regarding the financing of the project which benefits the economically weak urbanpopulation. density of the low income population in the project target areas is used to decide the

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allocation of the Grant Fund (the larger low income population in the project. the larger grant support tothe project). In any project, the grant support is limited to 3O% of the total project costs. The incentiveprovided by the Grant Fund has induced the municipalities to invest in urban infrastructure in lowincorne areas, thus contributing to the objective of the povertv alleviation of the TNLDP. At the time ofthe TNTUDP project restructuring, it has been agreed that GOTN will replenish the GF bv transferring itsreturn on TNUDF. Other possible sources for GF replenishment are the IDA reimbursement of GFexpenditures to date (Rs. 100 million) and financial assistance of other developing aid agencies (in theform of either grant or concessional loans). In addition, the mission recommends that GOTN considerrecovering of the project preparation costs financed bv GF by capitalizing it in the loan principal whenthe project materializes and the loan is approved. Both GOTN, TNUDF and municipalities share theview that GF has given to the municipalities the incentive to invest more in the areas where low-incomepopulation are living. Given this important and unique roles of GF in the poverty alleviation, the missionsuggested that GOTN commission an expert team to conduct a detailed assessment of GF's influence onthe investment pattern of the municipalities and its impact on the poverty alleviation. This assessmentshould also shed light on the question of the sustainability of the GF. This report could be used asbriefing document when GOTN seeks the financial support of other donors. The separation of subsidyof GF and loan financing on commercial basis through the TNUDF (loans and grants were mixed in theMlUDF) was a major achievement of the TINUDP restructuring without which the participation of theprivate financial institutions in the TNLUDF was impossible. The mission's observation of the GrantFund activities is provided in section 4 of ANNEX 6.

C0nc'usion: The project restructuring of TNUJDP involving the creation of TNUDF, TNUIFS and GFhas demonstrated its initial success and is achieving more than the initial expectation, in particular theproject identification and appraisal and non-lending advisorY services. One year is certainly aninsufnicient period to fully accomplish the objectives of the project restructuring and to assess its long-term impact; however, the mission realized that the TNUDF has enormous potential and is fully poisedfor considerable further development and expansion of its urban infrastructure lending activities. InIndia. beside the TINUDF, there are only two financial institutions, Housing Urban Development FinanceCorporation (HUDCO) and IL&FS which are financing urban infrastructure investments. HUDCO,100% GOI owned financial institution is the largest player in the urban infrastructure financing.However, the access to HUDCO's financing is limited as it requires the guarantee of the StateGovernments. As the repayment of HUDCO's loans are guaranteed by the State Governments, thequality of HUDCO's projects and the performance of its clients are often questioned. IL&FS whichfocuses on relatively large scale private urban infrastructure projects has no experience in municipalfinancing. In this sense. the TNUDF is the first financial institution with private management andcapital participation which specializes in financing the municipalities' urban infrastructure inyvstmentswithout Government's guarantee. The discussions with private financial institutions (ICICI, HDFC,IL&FS, and other commercial Banks) revealed that none of them is ready to start the urban lending on alarge scale, although all of them conceived the urban sector lending as potential market niche. TheTNIJDF is making impressive progress in this relatively new market. The initial success ofTNTUDF/TiNUIFS and GF can also be demonstrated by the strong interest in these schemes indicated byother multilateral and bilateral development financial institutions. This initial success would not havebeen possible without the strong commitments of both GOI, GOTN and ICICI, HDFC and IL&FS andmost importantly the dedicated efforts of the management and staff of TNUIFS. The real challengeahead is to raise resources from the capital market to finance urban infrastructure. This objective cannotbe achieved overnight and its success and is also dependent on the overall development of the capital

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market. However, continuous strong financial, managerial, and technical performance as well asimproved performances of the municipal sector are prerequisites for anv financial interrmediary to reachthis goal and there are no shortcuts.

VIII. Urban Sector Reforms

17. In addition to the demonstrated initial success of the TNUDF, the mission recognized thatGOTN has made substantial progress in developing and implementing credible urban sector reforrns inline with the 74 th Constitutional Amendment. Basically the ongoing urban sector reform empowersurban local bodies (ULBs) in exchange for their accountabilitv for service delivery through financial andfunctional devolution. The ongoing reforms concern: (i) the recasting of the legislative framework tosupport decentralization and economic liberalization; (ii) improvement of the financial position of themunicipalities through devolution of funds from state to the municipalities. p'ropertv tax reforms andincrease of user charges; and (iii) improvement of urban management. The outline of the reformsundertaken or being undertaken is summarized in the table of the next page and explained in detail inANNEX 7.

1 8. Financial devolution from the State to ULBs and improvement of the management of ULBswould improve the environment for the TNUDP operations. The above-mentioned reforrns willsubstantially help ULBs improve their financial performance and their creditworthiness. GOTN hasrecently taken decision to transfer annually to the municipalities 8% of the State's revenues. This is inaddition to the Central Transfer for the municipalities. In FY 97/98, GOTN has already effectuated thefinancial transfer of Rs.2.400 million to ULBs. TNUDF estimates that TNUDFs clients (Corporationsand municipalities) have now Rs 4,000 (US$114 million) annual loan borrowing capacitv over the nextfive year. In addition, it is expected that GOTN will pass bills on reforms of the properrY tax and usercharges. which will further enhance the revenue generation of municipalities, thus their credit-worthiness.

S'T'AT'IJS 01? IMPLEMEIN'I'ATION 01? URtIBAN ItRI0FRMS IN 'AMIIL NAD)UISSUES AClFIONS STATl E LOCAL4 lt8QtJIIII.I).

lcdl for Im ,,,,plement ti7cThli Stale Fillaice Commission, rpotrl subnltilicl Oct-96 nllii ajuur leProvisions adopldu I .ocatl elections iheld uWI Oit-96enabling legislalion Conkstlillional unlider (;.. 109 and I Io) daled May-9'/lor diecentrallizalion (decentiralization) ITN Urlban Local 13odies (TNULB) Bill presencie to, anid awaitinig passage in theanldi ecolnomic A,neni(linetil Slate,l.egislalive Assemiibly. Expected to received ilte President's assenit andliberalizationl passci iiitO law withiin onie year. Auienidline nis on ilie property tax relormis will be

ilnlroduLiced by Janl-98Enalblinig legislation Ordlinanice issued 1996 allowing ini principle lJLBs to ellter into l'/P arrangemeuts; Karur bridige BOOT project underlor lp)nlic-privale reduction of slanip) duties from 12% to 0. 1% preparation(1/P'I) paIItnCerslkips

Wvcak ulbaii andl Professionalize nibani TNUJI.B Ilill andcl SFC Report support capacily building; 9111 Pliu provisions io Begiiiinig of comiputerizationi of ULBtinanlcial management supl)ort capacily buildlinig programs; inicrcasedi delegationi of powers Io ULBs; fttuclionks witli assistanice tioii lNUDPm1a1nageliment of oricinalioni seminiars for local clected olficials sponsored by tlie Cenitral FiiialiceIn ball local bodies Commission; capacity blilding for ULIE oflicers through imie ITN IJst. of 11JlbatiStuidies under TINU)I'; computers supplied to ULBs unidler lTNUDPI; idelilirlcalionof lrilg nodal agenicy

Strengtlleni municipal Strengtleninig of basic accouniling practices in ULBs; accig mianiuals ready byfinianicial tnauageu,eni Dec-97capacities; proilloletransparency a111n1aIccolluntability

Improve city Greater predictability of itilergovt'l transfers & granls faciiitales planning of illfrasmiainagemilenil anid liniks invesitimenits lied to buidgetary l)rovisionsto infrastriucltre_development___

Liberalize laud itCA will be deIlinikcl froni properly taxes Coimiibatore revisedi properly tax systemumatkelsLack of ftundis for Mobilize resources to i)illtergovert'l Iralnsfers & gratlis: devolutlilio of fmuids fronil stlitc receipis on auilnltn infrrufstucture fii,aicc rcunilileritlive lixel formiula fr,o,, '97-'98 & increased shale liolit assigiled revelinues lor O&M.nccds and scrvice scihemiCes Already Ks. 2401 ciores transferred.

ii) augueliltalion of own resources: Stale (15%) andl cenitral (10%) inicentive granitsfor improved finianicial pertormance; TNlUJI Bill inicludles tax relormis (e.g.propefly taxes); revisioll of lax and no-lax souirces (e.g. tiser charges and liceniseIces); new lax assiglelicnll doomains; siricier penallies lor mon-paytiienel ol taxesItanil user charges; dlisinccilives for leIgilty courtl iligationsiii) privatization of civic services (solid waste collection & disposal, water supply, MWSSB, Exiioral, Tirrupurt

iv) private sector borrowinigs: UtIIls allowed to burirow tlhrougih debcnitmies & Coihobatore rated bul noti issucd bonid;luans front baniks anid F1Is on tlh secur ity of taxes and dJulies; crealion of 'lNUDI' Clihmenai cuiing ulp for credlit rating&'rNUIIFSlI; credlit _atiig_lilr tJlBs s_supply, c_c)

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IX. Possible Follow-On Urban Sector Operation in Tamil Nadu

19. Given the above-mentioned initial success of the T`NUDP restructuring. GOT'N has decided torecuest a new Bank loan of USS200 million for the continuous TNUDF operations. DEA and MUEAof GOI endorsed GOTN's request and submitted to the Bank an official loan recuest in November 1997.The mission discussed the above proposal with GOI (DEA and MUEA). GO1N. TNUDF and FIs.While the GOTN's proposal only focused on the Bank's continuous support to the TNUDF, GOTN andthe mission agreed that the support to the urban sector reforms through the institutional development ofthe municipalities should constitute an integral part of the next possible operation. Accordingly, the nextoperation would consist of the Institutional Development Component and the Urban InvestmentComponent through TNUDF.

20. Institutional Development Component: Financial and functional devolution should beassociated with the accountability of the municipalities. The draft Tamil Nadu Urban Local Bodies Billincludes the municipalities' obligation to deliver 10 mandatory services. The municipalities, particularlysmall ones, do not have sufficient administrative and managerial capacitv at even current levels offinancial and functional responsibilities. Substantial financial and functional devolution represents bothan opportunity and a risk for them. In order for the anticipated urban sector reforms empowering ULBsto succeed, the financial and functional devolution should be implemented gradually with strong supportto the institutional building of ULBs. Given this, GOTN and the mission agreed to add an institutionaldevelopment component to support the GOTN's urban sector reform initiatives in the next operation.GOTN and the mission agreed that the Tamil Nadu Institute of Urban Studies (TNIUS) should be thenodal agency of this institutional development component. The mission has held preliminary discussionswith TNIUS on the training part of this component. A further detailed proposal for this componentneeds to be developed by the Department of Municipal Administration and Water Supply and TNIUS.

21. Urban Investment Component (TNiUDF): The ultimate objective of the TJNUDF is toincrease private capital flows to urban infrastructure financing and to maximize investment quality,utilizing the discipline and expertise of the private sector. The restructuring of the TNUDF hasdemonstrated its initial success. The TNUDF has attracted for the first time in India private equitycapital for municipal urban financing. The TNUDF's lending activities are managed by the privatefinancial service company, TNUIFS. As mentioned above, TINUIFS has substantially improved theoperational efficiency of TNUDF compared to MUDF. The conversion of MlTTDF into TNUDF has beena significant milestone in bringing in financial discipline and cormmercial behavior in municipalfinancing.

22. The next operation would build on the initial success of TNUTDF and assist TNUDF in evolvingas a full-fledged viable financial intermediary specialized in municipal financing, which could generateresources from the capital market on its own. In this context. the Bank's continuous support to TNUDFshould play catalvtic role to assist this evolution, rather than simply replenish the fund. It is importantthat the Bank loan should not be seen as the only source of the fund. Because, such perception would notonly retard the above-mentioned TNUDF's evolution, but also crowd out possible resource mobilizationfrom the private sector. Larger private resource mobilization for the TNUDF funding and/or TNUDF-financed projects would contribute to further improvement of the financial discipline and lending qualityof the TNUDF. In the mission's view, the chance of sustainable success of the TNUDF in long termwould depends on the level of the risk sharing by the private partners in the investments made by the

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TNUDF. Accordingly, the guiding principle of the Bank's support to the TNUDF in the next operationwould be the risk sharing by the private investors as a step forwards making TNTUDF sustainable on itsown. One possible way to materialize this principle would be for the Bank loan to be routed throughGOT N/T NTDF as well as the three FIs, which mav on their own add resources that they would mobilizethemselves. Increase of unit shares of the private investors in the T1NUDF would be another way toincrease the risk sharing by the private investors. Further work would be required to identify variousoptions and assess their feasibility.

23. ULBs' Access to the Capital Market. The next operation would aim at promoting the access ofthe ULBs to the capital market in the following ways

Direct Access Through Municipal Bond Issues: It is expected that some municipalCorporations would be able to raise the funds in the capital market by issuing municipal bonds inthe near future as Ahmedabad Corporation is anticipating. The next operation would provide thetechnical assistance for the municipal bond issuance as a part of the Institutional Developmentcomponernt

Issuing Bond of TNUDF Following the Concept of the State Bond Bank in the US: Mostsmall- and medium-sized municipalities would not be able to access to the capital market directlyby issuing municipality bonds due to the high transaction cost resulting from the lack ofeconomies of scale. The TNUDF could fill this gap by issuing bonds. TNUDF's roles should beto identify, appraise and develop a large number of relatively small municipal projects and otherurban infrastructure projects, bundle them and issue the debt instruments against the revenuestreams of these loan assets for the institutional and general investors. Appropriate creditenhancing mechanisms should be developed such as intercept of the transfer of the StateGovernment to the municipalities. At least three years of consecutive performance records arerequired for the TNNUDF to be rated before undertaking any bond issue. As the current marketdoes not provide the long-maturity debt fund, some mechanism should be explored to extend thematurity of TNUDF, including the special facility such as IDFC.

24. Foreign Exchange Risk Management. In the TNTUDP, IDA credit was onlent toMUDFI/TNUDF through GOI/GOTN. Direct lending to TNTJDF is preferable, provided that it canmanage the foreign exchange risk. However, this issue should be carefully examined in the light of thelimited hedging instruments available in India and TNUDF's verv limited financing operations (most ofthe clients are the municipalities which do not have any foreign currency revenues). The Bank asked theTiNUTDF to explore this possibility.

X. Next Steps

25. Based on the discussions with GOI/GOTN/FIs, the mission will prepare a draft Project ConceptDocument (PCD) as a way to clearly indicate the basic elements of a possible involvement of the Bankin the next operation. In the meanwhile, the mission asked: (i) the Department of the Municipal

All the parties understood that the success of the issuance of the municipal bonds and TNUDF's bond dependon not only the performance of the municipalities and the TNUDF, but also the situation of the capital marketand the macro-economic condition in India

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Administration and Water Supply and TNIUS in consultation with TNUIFS to prepare a detailedproposal for the institutional development component (project implementation arrangement, sub-component, modalities-study, traininq, technical assistance-, budget requirement, etc); and (ii) TNTJDFin consultation with FIs to develop a corporate strategy and associated business plan that would reflecthow it would achieve the basic objectives laid out by the mission.

26. The following are tentative project preparation schedule and required actions:

End-November 1997:

Nomination of the Chartered Accountant by TNUDFPreparation of the preliminarv financial statements of the first half year operations (April1- Sept 31, 1997) by TNUDF.Design of the Financial Management Information System by TNUDF

End- December 1997:

Preparation of Draft Project Concept Document by the BankPreparation of Draft Project Preparation Plan (see Annex 10) bv GOTN/TNUDF and theBankPreparation of Draft TA and Training Program by GOTN/TNEUS in consultation withTlNUDFReview of lending polices and procedures and Grant Guidelines bv

GOTN/TNUDFDevelopment the corporate strategy and associated business plan by TNUDFInstallation of the Financial Management Information System by TNUDF

End Januarv 1997:Discussions on the Draft Project Concept Document, Project Preparation Plan,Corporate Strategy and Business Plan of TNLDF, Institutional Development Programamong GOTN, TNUDF, FIs, TIUS and the Bank.Review of the lending policies and procedures and Grant Guicdelines betweenGOTN/TNUDF and the BankInitiation of the feasibility studies of solid waste projects.Completion of the feasibility studies of under-ground sewerage projects.

February 1998:Finalization of Project Concept Document by Bank-Finalization of Project Preparation Plan Project Preparation Plan by GOTN, TNUDF,TIUS and the Bank

March 1998:Pre-appraisal missionComplete EA and Resettlement Action Plan (if any) for the projects of the first year

May 1998:Appraisal

Annex IPage 1 of 3

List of Kev Persons MIet

GOI

Mr. Rohit Modi. IAS Deputv Secretarv, DEADr. P. K. Mohanti Director, NfUAE

GOTN -- Based in Chennai

Mir P.V. Rajaraman, IAS Secretary, Finance.Mr A.P. Muthuswami, IAS Secretarv, Housing and Urban DevelopmentMs. S. Malathi. IAS Secretary, Municipal Administration and Water SupplyMr Ramesh Ram Mishra, IAS NMember Secretary of State Finance CommissionMr K.A. Mathevv, IAS Project Director and Secretary, Planning and DevelopmentNMr Sanwat Rarn, IAS Director Municipal AdministrationMr S. Javaraman Additional Director Municipal Administration

Metropolitan Transport Corporation (formerly PTC/DATC)

Dr M. Koteeswaran Managing DirectoriMr R. Balasubrarranian Joint M.D.Mr R. Senguttuvan Joint M.D.Mr M. Balasundaram Financial ControllerMvr P. Bhaskar Deputy Manager

Department of Highwavs and Rural Works (DHfRW)

Mr R. Jayasingh Chief Engineer (TNUDP)Mr R. Krishnan Superintending EngineerMr J. Christopher Paul Deputy Chief Engineer (TNUDP)Mr N. Santhalingam Divisional Engineer I ChennaiMr M. Xavier Divisional Engineer II ChennaiMr V. Thulasidharan Ass Chief Engineer

Tamil Nadu Housing Board (TNHB)

Nfr S. Mariappan Chief EngineerMr A. Kannan Ass Executive Engineer

Annex 1Page 2 of 3

Tamil Urban Infrastructure Financial Service Ltd (5N7ITFS'

NMr K. Ra.ivan Chief Executive OfficerMr R. Sundararajan Vice-PresidentMlr. Malmurugan Assisttnt Vice-PresidentNMr. C. K. Balasubramanium Assistant Vice-President

Tamil Nadu Institute of Urban StudiesMr. A. Ganesan DirectorMr. R. Raghunathan Deputy Director/Facutly EngineerTamil Nadu Slum Clearance Board

Mr J. Bhuvaneswaran Chief EngineeriMr E.G. Subramaniarn Superintending Engineer (Monitoring)Mr S. Santhana Krishnan Ass Executive Engineer (Planning)Mr C.V. Murali Sekar Ass Engineer (Schemes)Mr Y. Edward Superintending EngineerMr P.T. Jacob Executive Engineer

Project Management Group (PMG)

Mr K.R. Thooyavan Member, Urban PlanningM%4r R. Sivasubramanian Deputy PlannerMr A.V. Narasimhan Research OfficerMrs R.B. Huvaneswari Ass Planner

GOTN Reaional/Divisional Offices and Agencies. Municipalities and Municipal Corporaions,

Mr Kasi Viswanathan, IAS Collector, Madurai

Mr D. Chandrasekaran Regional Director of Municipal Administration, TiruppuriMr M. Sengottaiyan Regional Exec Engineer, Office of RDMA, Tiruppur

MIr Sai Kumar, IAS Municipal Commissioner, Madurai CorporationNIr Packyaraman Engineer Madurai CorporationMNtr .4Arumugarn Chief Town Planning Officer Madurai Corporation

MIr R. Krishnan Superintending Engineer, DHRW CoimbatoreMr A. Srinivasan Divisional Engineer, DHRW CoimbatoreMNIr N.T. Krishnamurthv Ass Divisional Engineer, DHRW CoimbatorevMr R. Natasan Ass Divisional Engineer, DHRW Coimbatore

Mr Kashim Superintending Engineer, TNHB, Trichy CircleMr Thangaraj Executive Engineer, TINB, Trichy Circle

Annex 1Page 3 of 3

Mr Muthukrishnan Superintending Engineer, TNSCB, Trichy Circle

Nlr S. Narayanasamy Municipal Commissioner, Palani

Sri K. SelFaraj Chairnan, Tiruppur MuniciealitvMLr B. Balachandran Municipal Commissioner, TiruppurMr D. Durairaj Municipal Health Officer, TiruppurMIr Soundrarajan Senior Town Planning Officer, Tiruppur

Sri S. Arangarasan Chairman, Erode MunicipalityMNir T. Paulchamy Municipal Conmmissioner, ErodeMr V. Subramanian Municipal Engineer, ErodeMr Thangavelu Town Planning Officer, Erode

Mr R. Ragotharnan Municipal Commnissioner, Alandur MunicipalitvMr A.S. Raganathan Municipal Engineer, AlandurM.r A. VaradharqJan Town Planning Officer, Alandur

Ms. Lalita Gupte Deputy Managing Director, ICICIMvr. Suneet K. Maheshwari Sr. Vice President, ICICIMr. Shekhar Damle Vice Presidnet, ICICINIr. Sanjeev Tamhane Asisitanct Vice President, ICICI

MIr. Nasser Munjee Executive Director, HDFCMlr. Conrad D'souza Chief, Manaaement Servicies, HDFCMfr. Hari Sankara Executive Director, Inflastructure, IL&FSMvlr. Arun Saha Corporate Secretary, IL&FS-Mr. K. Ramchand Vice President, IL&FSMs. Sangita IL&FS

OECFMNr. Yoshitaro Fuwa Chief Representative

Others

MIr K. Sai Ram S.B. Billimnora & Co., TNJDF Auditors

NMr S'hivamov Ohose Additional General Manager, National ProjectsConstruction Corporation Ltd.

NMr A. Ganesan Director, TN Instiutute of Urban Studies, Coimbatore

Nir V. Manickam M.D., V. Manickam Engineers (P) Ltd.

Annex 2Page 1 of 1

List of Documents Received and Reviewed by the Mission

Author Title/Date

TDNLDF Review of Status of Projects as on 31 -Aug- 1997

T;NJDF Abstract of Sectorwise Status of Projects as on 31 -Aug-1997

TNTJDF Abstract of Grant Proposals as on 31 -Aug- 1997

TINHB Papers relating to the Status of the S&S schemes as on 3 1 -Aug- 1997

DHRW Status Report of TNUDP (16-Sep-1997)

DHRW Statement showing time over-runs for completion

DHRW Minutes of Meeting with Mission on 16-Sep- 1997

PMG TNUDP Progress Report up to Mar-1 997

PMfG Annual Reports (various up to 1996/97)

TNSCB Year-wise capital expenditure up to 3 I-Mar-1997 and. other data

TNSCB Annual Accounts for 1993/94, 1994/95, 1995/96

TN-SCB Physical and Financial Performance

TNSCB Future Schemes

PMG Evaluation by Agencies/PMG Componentwise (reports completed byindividual implementing agencies according to PMG format)

PMtG List of consultancy studies

PN IG MLTDF - Status of Projects as of Oct-96

PMfG TNLTDP Progress Report up to Mar-1997

Madurai Corp. Financial Projections

Madurai Corp. Inner Ring Road Project Report

Tiruppur Mun. MUDF Schemes

Erode Mun. MUDF Schemes

PTC (MTC) Project Implementation Completion Report (produced by agency)

PTC (MTC) Statement showing projections at appraisal for 18 performance indicatoragainst actual performance

PTC Annual Reports and Accounts for 1994/95 and 1995/96 and Audited Acconly for 1996/97

Annex 3Page 1 of 2

List of Sites Visited by the Mission

City ComponentI Scheme

Chennai TRAMP Royapuram OverbridgeTRAMP Inner Ring Road Bridge Across Adyar RiverTRAMP Rail Over Bridge on G.S.T. Road at GuindySIP Pudhu Nagar Slum Improvement, AvadiSIP Senthamizh Nagar Slum Improvement, AvadiSIP Periyar Nagar Slum Improvement, AvadiLAND Ambattur Sites and ServicesMUDF Link Road, S. New St to A-Koil Rd, AlandurMUDF Link Road, Balaji Nagar to Vanuvampet, Alandur'MUDF Small bridge over Mothiyal Nagar, AlandurMUJDF Improvement of Burial Ground, Alundur

Madurai T RAMP Vaigai "Causeway"MUDF Road improvements (11 sites inspected)MUDF Storm water drains (6 channels inspected)LAND Anuppanadi Sites and ServicesSIP Keelavaidyanathapuram Slum ImprovementSIP Karumbalai Slum ImprovementProposal Inner Ring Road

Palani Proposal Bus Stand

Coimbatore MUDF Traffic signalsMUDF Solid Waste Management vehiclesLAND Ganapathy Sites and ServicesSIP Arivoli Nagar Slum ImprovementSIP Venkatapurarn Slum ImprovementIRAMP Rail Overbridge at Cross Cut RoadTRAMP Ukkadam Byepass

Tiruppur MUDF Bus stand improvementsMUTDF Pay and Use toiletsMUDF Road improvementsMUDF Solid Waste Management vehiclesMUDF Office complex at Kumaran Road

"Proposal" refers to schemes that might be included in the possible Second Project.

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Page 2 of 2

MUDF Shopping complex at Jaivabai Higher Secondary SRoad

Erode LAND Nasiyanur Road Sites and ServicesTRAMP Vehicular sub-way at Erode-Kan2eyam RoadMUDF Market at R.V.K. RoadMUDF Improvements to Town Bus StandMUDF Burial GroundMUDF Street lightingMUDF Road construction at VeerabhadraMUDF Solid Waste Management vehiclesMUDF Underground Storm Water Drain

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Issues Arising from the Mission's Field Visits and Associated Discussions

The Mvlission visited 39 project sites in different cities which are listed in ANNEX 3.Additionally, mission members had visited manv other project schemes during the course ofproject supervision over several years. The following observations are made about theimplementation. of the project components based on these visits, and the lengthy discussions withconcerned officials.

Procurement Issues Generally

Procurement complied with the requirements of the Bank's guidelines.

Two procedures to invite bids are currently being utilized depending on the size of civil worksprojects. Specificallv: (a) for very small projects -- a tender notice is posted on billboards near tothe project and it is expected that interested parties will be aware of upcoming projects andparticipate accordinglv; and (b) for large projects -- notices of tender are published in relevantnewspapers.

Submitted tenders usually use three covers, as follows: (a) the first cover which details the cashbond or insurance; (b) the second cover identifies the qualification material which includeworking capital, financial soundness, experience on projects of similar type and size and toolsand plans and manpower available to the project. The focus of the technical committeereviewing the qualification of submissions is to examine the information and also access any;blacklisting" information available on historical performance of the parties involved in thesubmitted tender; and (c) assuming acceptance as a qualification, the third cover is opened whichis the price bid.

Each cover is opened in succession only if the individual criteria are met at that stage.

The individuals involved in the procurement proceedings involve two groups: (a) the first groupare members of the technical committee and include (typically) a chief engineer, a superintendentengineer and a chief accountant; (b) the second group consists of technical reviewers who aretechnical people available to support the technical committee in the detailed assessment of theacceptability of the submitted tenders.

This committee setup is able to function effectively but the selection of members for thetechnical committee is of paramount importance. A failure of the technical committee to beaggressive and attentive to details means the system will fail. For example, the technicalcommittee must specifically require that an individual project or scheme in question, be a part ofan overall plan. Judging from observations obtained during the mission, this has not alwaysbeen the case. The technical reviewers need to be very well versed in the subject material.

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Cost OverrunsCost overruns can enter the resolution of projects by several pathwavs. NMany projects arecompleted utilizing a unit price submission. In the event that the materials utilized exceed 125percent of that specified in the contract, overruns are reimbursed to the contractor. A lump sumcontract is a preferred option to avoid tampering. Most projects have a force majeure clause.Upon occurrence, the contract is terminated and the contractor is paid for work done to the timeof interruption (assuming that a continuation of the project is impossible).

Construction Quality and Construction Supervision Issues

In many projects it was apparent that an appropriate analysis of altematives was not considered.Selection of a particular design was undertaken (e.g. a high level bridge) without properexamination of altematives (such as a causeway). It is apparent that the technical committeecharged with the responsibilitv to consider alternatives did not serve their assigned function.

Overdesigrn of projects was readily apparent in, for example, bridge and underpass construction.

As more sophisticated projects are undertaken, particularly in relation to environmental projects,assurance of technical expertise to ensure a comprehensive and thorough evaluation of theproposed projects is essential, which means greater use of consultants.

LAND)

The Sites and Services schemes were designed according to agreed criteria established atappraisal. Execution typically followed the pattem that magor capital works were constructedfirst, well ahead of need. For example, medical facilities, schools, fire stations and similarstructures were years ahead of the population and even water towers which were well ahead ofthe availabilitv of water. This focus on heavy capital expenditure up-front darnages the financialviability of schemes and is unnecessary.

The Sites and Services schemes were initially designed with toilet superstructures for each plot.As occupation of the sites has been very slow, these superstructures have deteriorated and wereobviously providing no benefit. In later schemes they were not provided, only the basic latrine.

Occupation in all these Sites and Services schemes has been very slow despite extremely highdemand in many instances. A glaring example of this is Ambattur. This is the largest sites andservices scheme in Asia. Hardly any of the Phase I and II plots are occupied. TNHB hasrecently completed Phase III where there are 1,366 plots, and over 231,000 registeredapplications were processed. It was unclear to the mission why occupation is so slow but it hassomething to do with the reluctance of households to move to new but desolate areas. The longerthe schemes remain vacant the more desolate they become as vegetation reestablishes itself andgeneral deterioration occurs of the roads and other infrastructure. In schemes where occupationis picking up the transformation of the environment is remarkable and it is clear that the schemeswill be successful in the long run. The people taking up residence first tends to be those in the

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MIG and HIG categories. A good example of this was Anuppanadi in Madurai which is about-25% occupied. Additionally this scheme has very mature vegetation following early treeplanting which adds considerably to its appearance.

The LAND projects have been fairlv basic, involving provision of stormwater drainage,water supply, sanitary sewers, and streetlights. Since the implementation of thisinfrastructure is accomplished prior to construction of the-dwellings, the design andimplementation of the services is straightforward. However, successful operation ofsewers requires a frequent flushing action while treatment facilities are designed tofunction within specified design conditions, primarily driven by contributing populations.The absence of the contributing populations may allow major buildup of sediments in thesewers, causing blockage and a failure of the treatment system to function as designed.Storm drainage systems must be kept clear through regular maintenance but this is notoccurring and in the absence of occupants, ongoing maintenance (clearing) is an apparentproblem.

Slum Improvement Projects (SIP)

The slum upgrading schemes conform to the same basic physical provision of road and lanesurfacing, drains, water supply and street lights. In a few cases, sites had been left vacant forchildren's play areas and other amenities. These schemes seemed to fall into two categories. Insome schemes the general environment had clearlv deteriorated and lack of maintenance wasapparent and there appeared to be no "atmosphere". Others were altogether different, where thepeople looked contented, the slum had an air of improvement and there was apparent interest inthe cleanliness and repair of the public facilities as well as the houses. The explanation for thedifferences between these two types of slum is difficult to find. It appears that where communitygroups have been established and the tenants have taken action themselves to improve theirconditions, success of the scheme is more likely. There appeared to be a strong correlationbetween community spirit and elected officials who could persuade individual residents tocontribute to the general well-being.

Generally, it is apparent that the municipalities are taking little interest in the maintenance of theschemes once they have been handed over to them. Accordingly, the long term sustainability ofthe physical worcks depends critically on the actions that the slum dwellers themselves will taketo keep the facilities functioning.

The quantity of private investment into the houses in all the slums has been considerable. Manypucca houses have been built often with the assistance of house improvement loans under theproject. There is little doubt that transfer of ownership of the land to the occupants (patta) is themain benefit to the occupants to be derived from these SIP schemes.

The mission noted considerable differences between slums located in the outer areas of citiescompared with the more congested inner city locations. Implementation by TNSCB is greatlyeased in the outer schemes by the availability of land. For example, households are willing togive up land in order to permit widening and straightening of roads. The plot areas for outer

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schemes in many cases exceeded 60 m2 and sometimes a significant number were over 100 m2.%Vhile the scheme benefits are considerable for these occupants of outer area schemes, themission felt that the emphasis of the program of slum upgrading in futw-e should be on the innercirv slums where the difficulties of implementation are much greater but where the problems are-.so much greater.

The extent of the services provided is verv strongly related to the land available. For example,all slum improvement projects had boreholes for water supply and hand pumps. A few hadwater connections directly to households (these were not metered). For those where individualplots were sufficientlv large, a dug well and septic tanks were also eviden.t. The quantity andquality of the water in the dug wells were generally insufficient for potable purposes. Minormaintenance of pumps was lacking in some situations making the pump nonfunctional. Thequality of house construction in the slum improvement projects was highly variable. The roofingmaterials employed ranged from straw to clay tile. Residents in some dwellings were obviouslyquite well off since motorcycles, television antennae and concrete privacy walls were apparent;in others, the materials were poor quality brick and straw roofs.

The availability of communal water supplies and communal latrines was important since, forthose dwellings with small plots, individual sewage facilities were not present. Lack of routinemaintenance was sometimes apparent.

TRAMIP

DHRW were the executing agency for major bridges and roads. The mission visited a number ofsites and some, such as Royapuram Rail Overbridge, were still under construction. In all casesthe completed schemes were working well and the flows of vehicular traffic were smooth.

However, clear evidence existed that the many of the highway facilities are overdesigned. Theevidence included construction of enormous bridge abutments, stretching over substantialdistances. Other indications of overdesign include excessively long barrier walls, use of largevolumes of fill which must be transported over sizable distances, and deep excavations forunderpasses. Further problems with highway schemes included approach roads that areinadequate-(e.g. at Madurai). In one case, there was construction of an excessively deepvehicular underpass in Erode, where an adjacent underpass existed of adequate depth for thetraffic. A complex bicycle tunnel system was incorporated in the Rail Overbridge at Cross CutRoad in Madurai which most cyclists avoided using, when possible. -A bridge was constructed inMfadurai to improve access to a burial ground across the Vaigai River which was not extensivelyused. and the original idea of a causeway might have been adequate.

Numerous road segments were visited as part of the mission. These road segments were shortand not obviously part of an overall plan which would make an important contribution to trafficparterns. The mission was of the opinion that the roads have been constructeld in particularlocations because the land is owned by the government (e.g. as part of a tank) but without accessto the intervening land, the segment of road contributes little. Some roads are in good shape.

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Those roads in bette. shape appear to have performned well due to superior preparation of thesubgrade.

.NIUDF

This component has financed an extremely wide rance of schemes. spanning bicycle stands,marriage halls, clrains, burial grounds and much else besides. The schemes are either service orremunerative. T he mission was most impressed bv the service schemes which seemed to befocussed on local needs, and provide real benefits to the people. These service schemes weremostlv very small in nature in relation to the problems and it is evident that the expenditureneeds of the municipalities are enormous. The MlljUDF has made a real, positive contribution toinitiating the process of improvement of the towns and it is to be hoped that it will continue toexpand.

However, the mission's site visits included one very substantial service scheme involving stormnwater drainage in Erode. The justification for the scheme, which consisted of an undergrounddrain of well over 1 km. in length, often at a depth of about 40 feet in hard rock cutting, was notimmediately available but the mission felt that inadequate attention had been given to theconsideration of alternatives to this extremely costly design. In several other cases of largerschemes such as new roads and bridges there appears to be the same tendency to over-design, aswas encountered with the DHRW schemes in the TRANMP component.

MUTDF remunerative schemes were found to be mostlv unimaginative in design. Shops andoffices were provided without any attempt to improve the public spaces such as road surfaces andmargins in the nearby vicinity. The mission was also of the opinion that the municipalities hadnot maximized the commercial value of the sites in the layout designs. There seems to be a goodcase for some joint activity between the public sector. which would concentrate on publicservices and facilities, and the private sector which mnight be better at optimizing the commercialvalues.

Some unimproved bus stands visited during the mission were chaotic. The potential forimprovements in these facilities is considerable (e.g. Palani). Inadequate bus parking spaceresulted in -informal parking and excessive delays for entry and exit of buses. Investrnent inadditional space and reconfiguring of the existing space will have very substantial returnsalthough some improvements in adjacent shopping layouts would improve the overall plan.Alternatively for others, it seems not verv efficient designs are being-developed (e.g. Tiruppur)and the plan was going to incorporate substantial new areas. A possible superior procedurewould be to let the private sector undertake the design including the adjacent commercialcomplex while the municipality retains ownership.

Financial charges on the buses utilizing the bus stands are to be increased from Rs 1.5 to Rs 4 perbus, which is still far too low.

Improvements at the burial grounds represented small expenditures while creating pleasantsurroundings and functional facilities.

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Madurai STOWAD

Tne mission visited 6 major channels in the Madurai Storm Water Scheme. Impiementation ofthe scheme in 1993/94 was undertaken contrary to Bank procedures for R&:R and procurementwhich resulted in suspension of disbursements in November 1994. Suspensions were lifted onlyafter the Bank was satisfied with the implementation of the R&R action pian, and keeping ofProject records.

The mission found that the STOWAD scheme had been well executed and appeared to befunctioning properly. In a few isolated places the retaining walls had been breached and solidwaste material was being dumped into the channels. However, these breaches were not seriousand would not cause failure of the channel. The mission encountered no encroachment onto themargins of the drains subsequent to the completion of the schemes. The Municipal Corporationinformed the rnission that most of the encroachers displaced at that time had eventuaily beentraced and that the compensation owing to them had been provided.

Unfinished Works

Some projects such as the bridge and interchange over the railway at G.S.T. Road at Guindy inChennai are still under construction. There was a lack of vision as to how the traffic adjustmentswould be handled during the construction. Much of the construction at the interchange arose dueto the need for additional clearance for the railway. Given this, it should be expected that therailwav contribute to the additional cost of construction, but apparently this is not the case.

Manv of the projects visited during the mission are incremental and thus unfinished in the sensethat until the entire road is built, little segments of road are not beneficial (the Ring Road). Theentire project is needed in order to reap the benefits of lowered traffic congestion. A majorproblem is that many of the projects being constructed are on government lands. Lacking accessto the adjacent lands, makes the incremental road improvements piecemeal.

Lessons for the TNUDF operations

Reliance is being placed upon municipalities to identify projects or schemes. The municipalitydevelops the tender but concerns exist over the tender process and in particular, whether they arethe best projects and represent useful contributions as part of an overall plan. Concern also existsover the capacity to prioritize between projects.

Small-scale and large-scale categorization of projects may be useful. Conventional, small-scalemunicipal developments are envisioned as small office complexes, street lights, road upgradesand streetlighting. These simple schemes can be executed by municipalities. Large capitaldevelopment projects include toll roads, bridges, sanitation services, water supply, sewerage andsewage treatment plant and solid waste management schemes. The needs for technical review ofthe small-scale projects are very different from those needed for these large-scale projects andoutside assistance is certainly required for the large-scale projects.

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Technical review of small scale water supply and drainage projects, small commercialcomplexes, etc. is straightforward. Reference to a checklist and some general guidelines foridentifying appropriate schemes for funding can be developed. The associated costs of theseservices for these types of projects should follow a verv predictable pattern. Review ofsubmissions should be feasible by non-technical people through comparison with the checklist.Procurement procedures for these very small projects must be limited to current practices.Oversight is still needed for construction and reliance for this activity must be placed uponmunicipal engineers.

It is noted that the technical design, the preparation of contract documents, and the supervision ofthe construction for the large projects, remains a difficult issue. A great deal of resistance willbe exerted by the public sector to retain their role in the current practice. However, for theselarge projects, the abilities of the technical review commnittees to undertake a substantial project,involving consideration of the set of alternatives and having the project or scheme fit into alarger, overall plan, has not been demonstrated. The composition of the technical commnittee, andthe needs for critical and aggressive input to the selection of projects to be undertaken, is critical.

.1 : .. I . l . -1:- - ''' 1 : 1 ---- I -- !9,25-9- 997 TAMIL NADU URdAN DEVELOPMENT PROJECT - CRIEDIT IJo.1923 IN___________~~~~~~~~~~~~ I 11__I.___ I. _____ II7IZEiI ZZ ___.__I _ TABLE SI OWING TIE REFiEVISED CREDIT ALLOCATION (CATEGORYPWISE)

._________ (IN Ml LION SDRs) _

CAlEGORY DESCRIP1K)N TOTAL CREDIT DEISURSED ADJUSTMENTS TOTAL NET SEPIEMBER Jun*-97 IFFE__________ ______________ ~~~~UPTO JULY .41CFORoaveidrawal REC11EDENV1 - REUIJREMEEt 1997 Pwojec (ions

I_ CIVILWORKS _ 101.90 100.88 1.02 6.60 7.62 100.50 104.10 4.402 EQUIPMENTIMATERIALS 42.90 4 4.03 -1.13 1.98 0.85 44.08 44.90 -0.023 IIOME EXP.LOANS 5.40 5.40 0.00 0.00 _ 0.00 5.40 5.40 0.004 CONSULTlTRAINING 5.90 5.51 03_9 0. __0.05 0.44 5.95 6.00 -0.05S I'MJCMCsCOSTS 4 .50 4 .60 -0.10 0.20 0.10 4.70 4.60 0.106 I)ESIGN & SUPERVISKMN 3.60 4.00 -1.2( 3.01 1.81 6.61 5.80 0.817 SUB3LOAN PA1IT-D 13.00 1.70 11.30 -B,47 2.83 4.53 7.00 -3.278 GIIANFSPAlIT * E 5.50 1. Il) 4 41 -*3.37 1.03 2.13 4.10 -1.970_00 0.00 0.00 0.00 0.00

_ SA )0.00 1.50 -1.50 0.00 -1.50 0.00 0.00________ _ __________ __ ________ _______0.00 0.00 0.00 0.0 0.00UNAllOCATED I90 1.00 001.00 0.00 o iO 1.00 1.0 1.00 0.00________ _________________ __ _ ___________ 0.00 I 0.00 0.00 0.00

_________ TOTAL 183.70 169.52 14.18 0.00 14.18 183.70 983.70 0.00

o eH

- (Il

Annex 6

Page 1 of 7

TNUDF and GF1. Organization and MNvanagement

(i) Accounting Staff

TNTUIFSL has two accounting staff each of whom is assigned to a block of borrowers in support of

each of the Vice Presidents responsible for lending. An individual qualified as both a CharteredAccountant and Company Secretary is to join in October and the CEO is also consideringrecruiting a Manager, Accounts.

The Chartered Accountant is needed urgently and his financial responsibilities should include: thepreparation of financial statements; analysis of and reporting on operating results; taxation; cashand treasury management; and development and maintenance of the Fund's financial informationsystems. Close liaison with the financial institutions in order to draw on their experience andresources will be very helpful in fulfilling these responsibilities as quickly as possible.

While a Manager of Accounts may also be needed as the volume of business grows, it is suggestedthat the staffina and organization of the accounting group be one of the first responsibilities of thenew Chartered Accountant.

(ii) Financial Information Systems

The Fund continues to rely on an outdated data base system for its financial information. Thissystem. which was the system used by MUDF, does not support accrual accounting, is suitableonly for a single user, does not allow interim financial statements to be prepared until the previousyear's accounts are closed off and has many other limitations which are not present in modemgeneral ledger systems. It also needs frequent maintenance to keep it functioning. Partly as a resultof these deficiencies no formal financial statements have been prepared in the 5 months thatTNLUDF has been in existence. Prior to that the only formal statements that have been prepared arethe March 31, 1997 statements prepared by the new auditors at the end of September 1997 and theSeptember 30, 1996 statements prepared by the previous auditors in December 1996.

There is an urgent need for a general ledger and loan accounting system capable of supporting theFund's present and likely future needs for both accounting and financial information. Such asystem should be specified in detail before a package is selected or development undertaken; itscapabilities should include:

i. supporting-multiple users;ii. providing on-screen balances and management information to management in all departnents;iii. accounting for various types of loan and investment instruments (not only those currently in

use);

Annex 6Page 2 of 7

iv. incorporating full accrual accounting;v. providing arrears information on a daily basis;vi. generating loan repayment and other advices to be issued to borrowersvii. providing schedules of forecast cash flows to support treasury management;viii.rracking of loan applications through appraisal, sanctioning and disbursement; andix. linking loans to projects.

2. Audit Issues

At the request of the institutional shareholders, S.B. Billimoria & Co have been appointed toprepare and audit the March 31, 1997 financial statements. The new auditors replace A.F.Ferguson & Co who prepared the September 30, 1996 financial statements.

The new auditors have provided TNUDF with financial statements and resolved the followingissues before issuing an audit report:

i. Loan loss provisions - The auditors were assuming that the GOTN will provide a guarantee ofthe loan balances and outstanding interest (both regular and penal) transferred to TNUDF. Weunderstand that GOTN issued such a guarantee.

II. Income recognition of the previous period.

The mission was informed that the Auditor has cleared the March 31, 1997. T:NUFIS will submitthe audited account to the Bank once the Board of Director of the Trustees of NINUDF approve it.

3. Financial Review

Recent and comparative financial statements for TNUDF are presented in Table A and arereviewed briefly below.

Balance Sheet

Loans at March 31 stood at Rs 1.7 billion up 28% from Rs 1.4 billion a year earlier. In the 5months to August 31, 1997 the fund has approved loans of Rs 1520 million against which itdisbursed Rs 225.7 million (a ratio of 23%), compared to the allocated IDA bal]ance of Rs 600million (USS 17 million). Thus the rate of approval is running much higher thana planned but therate of disbursement is much lower than planned due, in the Fund's view, to:

i. Delays in obtaining IDA approval for large loans (those in excess of Rsl50 million requireIDA's approval), one of which (for the Pallavan Transortation Corporation) was not approvedbefor the credit closing mainly due to the delay of fare revision and one of which (the Madurairing road) raised complex resettlement and rehabilitation issues;

ii. The procurement procedures mandated by the World Bank.iii. The need for borrowers to become familiar with TNUDF's requirements; andiv. The Fund's desire to respect the preference of borrowers to stagger loan drawdowns to

minimize interest costs.

During the audit of the September 30, 1996 financial statements the auditors reviewed therepayment performance of the loan portfolio and booked loan loss provisions. Since the bulk ofloans had been made prior to the year then ended the loan loss reserve is shown in the March 31,1996 statements and carried forward to September 30 1996. No reserve is shown in the March1997 starements as the auditor is assuming that GOTN will issue a guarantee for all loanstransferred to TNUDF.

Annex6Page 3 of 7

At September 30, 1996 the loan loss reserve was determined by providing for 100% of doubtfulloans (those for which no repayments have been received for a period of 2 years after the duedace), 10% of sub-standard loans (those for which no repayments have been received for a periodof 1-2 years) And a 5 % general provision for all others. Penal interest was provided for in full;interest on doubtful and sub-standard loans was provided for to the same extent as principal. Giventhe I year payment holiday the loan loss provisioning is not affected by disbursements made in thelast vear; also payment experience is not easily monitored on a current basis because payments areonly required semi-annually, and the preparation of aging reports is delayed to the same extent asthe preparation of accounts.

Loans represent unsecured loans from GOTN in the amount of Rs 1.3 billion plus accrued interestof Rs 235 million. Interest on these loans is capitalized for the first 5 years and since the first loan(Rs 15 million) was paid in the period 1992/3, repayments have not yet become due.

Capital of Rs 1.4 billion represents GOTN's ownership in the Fund before transfers to establish theGrant Fund.

Lending guidelines restrict the amount of loans outstanding to any one borrower to 40% of theFund's net worth. 'The largest borrower is the City of Chennai to which loans at March 31, 1997totaled Rs 390 million, or 28 % of the net worth of Rs 1,400 million.

Income and expenditure

The net interest earning for the 6 months to March 31, 1997 declined by 35% (from Rs 78 millionto Rs 51 million) compared to the previous 6 months due largely to declining interest rates for termdeposits. This trend will likely continue and highlights the importance of effective cash andtreasury management to the Fund's performance.

Operating expenses of Rs 5 million relate only to the fees paid to TNLUIFSL in respect of loanssanctioned in March (charged at 1 %) and supervision and monitoring for the period November 7to March 31 (at 0.25 % of the average loan balance).

Annex 6Page 4 of 7

TNUCF Financial Statements Table ARs in millions

Unaudited (Note)3alance Sheet 31-Mar-97 30-Sep-96 31-Mar-96

Cas., in bank 598 2 254Term dePosits 691 682 520

1 259 684 774Loans 1,739 1,727 1,357Less- !can loss reserve 137 131Net loans 1 739 1590 1226

Total assets 3 028 274 2.000

Suncri creditors 17 9 10Loans from GOTN 1 565 1 002 837

1,582 1,011 847Capisai 1,401 1,017 977*Surpus 45 246 176Total liabiOitiesand surplus 3.028 2.274 2.000

Income anU Expenditure 6 months 6 months Year31-Mar-97 33-Sep-96 31 -Mar-96

Interes; on loans 72 75 150Interesz on deposits 32 48 110Totai interest 104 123 260Interes; expense 53 45__ 66Net interesz 51 78 194

Operating expenses:Manacement fees 5Consultancy 2 2 o

Total ccerating 7 2 XProvis;cn fcr loan losses - 5 115Net income 44 71 77

Nce Although unaudited, the March 31, 1997 and September 30, 1 G96financ;a' statements have been prepared by auditors on the accrual basis.The main outstanding issues with respect to the March 31, 1997starements are (i) the loan loss provision - none has been recorded on theassurnp_ tcrn that a guarantee in respect of principal, regular interest andpenal r:-erest will be provided by GOTN: and (ii) income taxes, the liability forwhicn. .s being researched.

Annex-6Page 5 of 7

4. Grant Fund

(i) Financial Review

The fund had a balance of Rs52.2 million at the end of August, 1997 after receiving start-up grantsof Rs 156.3 million from GOTN. Since its inception at April 1, 1997 the Grant Fund has disbursedRs l 01.1 million to local bodies and incurred Rs3.1 million in expenses. There has been no transfer inrespect of the GOTN's share of TNUDF's profit; this must await a determination of TNUDF's profitsince its inception.

The financial statement at August 31, 1997 is shown below while the breakdown of disbursementsand grant applications is shown in Table B. There has been no audit of the Fund since its inception,and nor is one required until its first year end.

Of the Rs 101 million disbursed to date, Rs32 million is in respect of applications received by thepredecessor fund, MUDF, and Rs 69 million is in respect of the new Grant Fund. 94% of totaldisbursements have been for category Im projects (those of benefit to the poor) and this categoryalso accounts for the largest part of applications received but not yet disbursed.

TNUDF - Grant FundRs in millionsFund Balance as at at August 31, 1997Grants received from GOTN (Note 1) 156Less: expenses 3

grants to local bodies (Note 2)Balance of fund

Represented by:Cash in bank (deposit account earning 5%)

Notes:1. Grants from GOTN have been received in the amountsof

Rs 90 million (April 1997) and Rs 66 million(August'97)2. Grants to local bodies are summarized in the attached

schedule

Projects sanctioned but not yet disbursed total Rs 182 inilion and exceed the fund balance of Rs 52million. In the 5 months to August 31 grant applications totaling Rs 499 million have been receivedsuggesting an annual volume of Rs1O00 million; the transfer of GOTN's annual profits fromTNUDF will account: for only Rs9O million of this amount leaving a significant shortfall (based onthe TNNUDF's results for the 6 months to March 31, 1997).

Additional sources of funds are clearly desirable and might include bilateral donors and recoveringthe cost of certain grants by including them in the value of loans to be repaid on approved projects.

Annex-6Page 6 of 7

(ii) Disposition of Grant Funds

In accordance with the agreed guidelines for the use of grant funds, grants are being disbursed forthe following categories of projects:

Category r: Strengthening of local bodies' management and svstemsCategory II: Resettlement and rehabilitation related to TNUDF projectsCategory III: Projects of benefit to urban poorCategory IV: Project preparation costs related to TNUDF projects

Included in category I are projects to computerize the records of local bodies with the objective ofimproving their ability to manage their finances. An example is a recent grant to supply 329computers to the 104 urban bodies (at a cost of Rs 27 million) and to develop and install softwareand provide training (at a total cost of Rs 4 million).

Category m grants are made in accordance with 3 criteria:

i. they must be for service (i.e. non-remunerative) schemes;ii. they cannot exceed Rs 10 million; andiii. the amount of the grant is determined by the proportion of poor people (families whose annual

income is less than Rs 12 thousand) benefiting from the project, subject to a maximumproportion of 30% and the Rs 10 million cap referred to above.

The fact that disbursement of the grant funds in the five months to August 31, 1997 has been theequivalent of US$2.8 million compared to the available IDA funding of US$5 million suggests thatthe funds are being disbursed with selectivity, as required under the fund guidelines.

Annex 6Page 7 of 7

TNUDF - Grant Fund Table BAnalysis of Grant Disbursements for the 5 months to August 31, 1SS7Rs in millionsBorrower Category (See note)

I II lil /IV TotalOfd MUDF applications

Aranthangi 7.5 7.5Gudiyatham 1.1 1.1Mannargudi 2.2 2.2Panruti 0.4 0.4Pallavaram 4.0 4.0Pudukottai 3.7 3.7Sivakasi 8.3 8.3Thiruthuraipoondi 0.4 0.4Tiruvottiyur 3.7 3.7Virudhachalam 1.7 1.7

Sub total . 32.91 32.9TNUDF Applications.Coimbatore 6.0 12.8 18.8Kumbakonam 1.9 1.9Karur 4.7 0.1 4.9Madurai 10.0 10.0Madhavaram 7.5 7.5Nagercoil 1.3 1.3Rajapalayam 19.1 19.1TiruDpur 5.5 5.5

Sub total 6.01 X 62.8 0.11 69.0

Total 6 .0 95.7 0.11 101.9% by category 5.9 94.0 0.1 100.0

Sanctioned, not yet disbursed:.t 42.41 105.71 33.41 181.5

Appraised, not yet sanctioned:l 113.71 0.51 330.81 33.71 478.7

Note:Category J: Strengthening of local bodies' management and systemsCategory II: Resettlement and rehabilitation relatedi to TNUDF projectsCategory HII: Projects of benefit to urban poorCategory IV: Project preparation costs related to TNUDF projects

Annex 7

Page 1 of 3

Report on theState of Urban Reforms in Tamil Nadu

September 27, 1997

1. The objectives of this Note are to provide an assessment of the state of progress inthe implementation of the 74th Constitutional Amendment in Tamil Nadu and to identifythe areas where the World Bank could provide assistance to further the reform processunder a follow-up urban sector operation (INUDP-II). It is based on the findings of themission to Tamil Nadu during the period September 21-30, 1997. The mission found theprogress with the implementation of the 74th Constitutional Anmendment to beimpressive, placing Tamil Nadu among the most progressive states in this regard.Moreover. the State has pioneered legislation to support public-private partnerships in thefihnncing and provision of urban services and infrastructure. Following through withthese reforms is the next critical step, and could be supported by the follow-up urbansector development operation.

2. The State of Tamil Nadu is amnong the most advanced of the States in the Union interms of implementing the provisions of the 74th Constitutional Amendment. The UrbanLocal Bodies (TNULB) Bill (1997) will replace and consolidate the separate and archaiclegislation governing municipal corporations and municipalities, and includes provisionsfor the town panchayats. The Bill will introduce major reforms in the administration ofbLBs which would be closer in line with the spirit of decentralization. EProposed changesin the Bill are supported by the recommendations of the State Finance ComrmissionReport. The Bill was presented to the State Legislative Assembly on April 1997. It isexpected to receive the President's assent and passed into law within one year. In themeantime, the State is drafting interim recommendations to the existing Acts toimplement changes to the property tax. These amendments are expected to be approvedbv January 1998. Once enacted, the Urban Local Bodies Act will represent an historicallandmark in the way urban local bodies will fanction and be administered in the country.

Main Elements of the Reform Process

3. The urban reforms initiated by the State are consistent with the recommendationsof the recent World Bank India Urban Infrastructure Services Review which identifiedkev issues facing the urban sector in India today: (a) the lack of an enabling legislativeframework to support economic liberalization and increasing decentralization; (b) weakurban and financial management, including distortionary land market policies; and (c)inadequate finance to support the infrastructure requirements of urban development.Together the State Finance Conmmission Report and the TNULB address these areas. TheState Finance Commission's recommendations on the devolution of fimds have beenenacted through two Government Orders dated May 2, 1997, while those pertaining to theauamentation of municipal own revenues, such as propertv taxes and user charges, have

Annex 7

Page 2 of 3

been incorporated in the TNULB Bill. In addition. the State issued an ordinance on July1 7. 1997 permitting ULBs in principle to enter into partnership with the private sector forthe provision of urban infrastructure. This is being implemented in the Karur Bridgeproject which is being prepared under a BOOT arrangement.

IUrban Management

4. The TNULB Bill and the SFC recommendations recognize the importance ofstrengthening the capacity of ULBs in urban service deliverv. Both documents containprovisions supported by the 9th Plan which allocated funds for this purpose. In tandemwith these reforns, the TNULB Bill has also increased the delegation of powers to ULBsin terms of the maximum threshold permitted for individual civil works that could beundertaken by ULBs without State permission, as well as the approval ceiling fordifferent categories of engineering staff: While these represent a significant increasefrom previous levels,' there remains more scope for further enhancement ofresponsibilities and spending limits over time.

5 . .Although the issue of a minimum fixed tenure for municipal commissioners(NIunicipal Corporations) and chief executives (Municipalities) has not been directlyaddressed for a variety of reasons, the constraints it poses to effective management iswidelv recognized. For example, discussions with the Deputy Director of the Departmentof Municipal Administration indicate an interest to introduce reservation for the openrecruitment of chief executive officers for smaller cities for a cadre of trainedprofessionals, and the creation of a state-level city managers association. Organizationstudies to promote intemal efficiencies of cities, such as those undertaken in Calcutta.Surat and Ahmedabad, are potential area for technical assistance. In particular, theDepartment of Municipal Administration is interested in applying this concept initially ona pilot basis for each category of ULB. It is already being attempted by the ChennaiMfunicipal Corporation for a specific department.

6. Specifically on training, initial workshops and seminars have already been heldfor local officers and elected officials with some assistance from TNUDP. It is importantthat training be "demand-driven", that is, responsive to the changing requirements of thereform process. This implies giving equal importance to technical as well as processskills (e.g. negotiation, consensus building, contracting, etc) in the training program. Anodal training institute--the TN Institute of Urban Studies--was identified and proposed tothe Bank for potential support under the next operation. The Institute is supported bycontributions from ULBs and is located in Coimbatore with a small core staff andtechnical support from the faculty of urban planning from Anna University in Chennai. Itis equally important to develop a research arm, in collaboration with existing academicfacilities, to systematically accumulate and update much needed data on ULBs to assistgovernment in policymaking. EDI can play an important role in helping develop theInstitute's training capability and in the dissemination of good practice from elsewhere inthe world.

Annex 7

Page 3 of 3

7. To promote increased transparency and political accountability, the State isstrengthening basic accounting practices in ULBs through the introduction of accountingmanuals.

8. In the area of urban land markets, the State has taken two major steps: (a)deiinking property tax assessments from the Rent Control Act and (b) dramatic reductionof stamp duties from 12% to 0.1%. Coimbatore has already introduced this new methodof property tax assessment with resulting increases in revenues. The adoption of this newmethod, combined with stricter penalties for non-payment and disincentives for lengthycourt litigations, are significant reforms. Computerization of ULBs would also facilitatethe modernization of land records and land use planning.

Urban Finance

9. Reforrns introduced in the TNULB Bill and the SFC Report address the two-foldneed to: (a) mobilize resources for service and non-remunerative schernes, and (b)strengthen municipal financial management practices. For 1997-98, the State has alreadydevolved Rs 240 crores to ULBs from State receipts on a fixed formula for O&M anddebt servicing. The State envisages a gradual increase in this allocation withcommensurate improvement in local capacities. The sustainability of this devolution willhave to be considered within the overall context of State finances. In addition, it isimportant to ensure that funds are deployed in the most cost-effective manner; this islinked, in turn, to improvements in urban management.

10. The TNULB Bill also introduces major reforms to augment the cities' ownresources. These include tax reforrns, such as revisions in tax and non-tax revenues; newtax assignrments and stricter penalties for non-payment of taxes and user charges.Disincentives have also been introduced against lengthy court litigations on property taxchallenges. Finally, ULBs have started to privatize civic services, such as solid wastecollection and disposal, and water supply (e.g. Chennai, Tirrupu). ULBs are alsopermitted to borrow money through debentures and loans from banks and financialinstitutions on the security of taxes and duties. TiNUDP and the TNUIFSL have providedlong-term financing and facilitated private capital reflows for infrastructure. Finally, amajor incentive to improving financial discipline and cost recovery in ULBs has been theintroduction of incentives at the State and Central levels. Cities can be eligible for anadditional 15% from State grants and 10% from Central grants based on their financialperformance.

Annex 8

Page 1 of 3

TNUDF: Pipeline of Sub-Project and Absorptive Capacity Of ULBs

1. Pipeline of Sub-projects

(I) TNUIFSL distinguishes its pipeline into two categories: (a) conventional small-scale municipal development projects (like improvements to water supply and stormwatermanazement, garbage collection vehicles, bus terminals, shopping complexes etc); (b)large capital development projects in municipal corporations and large ULB's (eg. tollroads and bridges, sanitation services, water supply, sewerage and sewage treatmentplants and solid waste management including sanitary landfills and transfer stations andstorm water management). In the first category, TNUIFSL has developed a pipeline ofUS $ 130 million. The latter category is recent, and the only sub-project that hassi nificantly advanced is the toll bridge project in Karur Municipality, where theselection of a private sector BOT is in process. TNUIFSL is fully aware of thepioneering role it will need to plav in this categorv, if the second project is to make anysignificant impact in the development of municipal infrastructure in the state with privatesector participation. To this end. feasibility study to prepare a detailed project report andRFP is underway for the Madurai Inner Ring Road Project. Similar studies are also to beundertaken for solid waste management in Coimbatore and Trichy and water supply andsewerage in Madurai. These are expected to be completed in the next 12 months.

(2) Solid Waste Management This as a municipal service has emerged as a highpriority for the municipal corporations (MC) and ULBs in Tamil Nadu. All the MCs haveapproached the TNUIFSL for developing a comprehensive solid waste managementprogram that involves improved collection and safe disposal of solid waste. At presentthere exists no systemic management of garbage collection and disposal. though one ortwo cities have effected some improvements in the past year. Solid waste managementcontinues to receive nearly a quarter of MC budgets, but the level of service provided isinadequate. Collected garbage is haphazardly dumped causing serious environmental andpublic health damage. TNUIFSL seeks to approach this in a two pronged manner: (a)continue to fmance the smaller and medium sized ULBs to improve their waste collectionthrough acquisition of collection equipment and assist in the transition to controlleddumps, as a first step; (b) seek private sector participation in improving garbagecollection and construction and operation of sanitarv landfills and transfer stations,beginning with two MCs. The mission highlighted the importance of primary andsecondary collection of garbage, and the need to focus beyond the construction ofsanitarv landfills. GOTN and TNUIFSL recognized the importance of a comprehensive

Available revenues for the management must be obtained from either the individual residents and/orfrom the general tax base.

Annex-8Page 2 of 3

approach and sought Bank assistance. The scope of the previously developed ToR 2forthe sanitarv landfills will be expanded to include waste collection, and the coverage willbe reduced to two MNICs (Coimbatore and Trichy). The Bank will work with TNUIFSL infinalizing the ToR. The mission was informed that GOTN has formallv made a requestto GOI/DEA to obtain funding for this study from the IDA funds of the PrivateInfrastructure Finance (IL&FS) Project. Financina alone will not improve solid wastemanagement, it will need to be backed by management reforms , capacity building ofMCs and ULBs and incremental cost recoverv.

(3) Underground Sewerage -- Municipal Corporations and large municipalities areconsidering this investment. Clearly, this approach has many desirable aspects but is veryexpensive and it should be carefully examined as to whether it will work correctly (e.g. when thewater supply is not continuous). The most reasonable approach would appear to requireincremental placement of underground works, where portions of the municipality have sewersplaced, and that the svstem be expanded over time. Concemr still exists as to the willingness topay of the residents and how to handle the needs of lower income residents.

(4) Bridges -- Several bridges could be constructed under the BOOT schermes.An incentive to build more efficient bridges and/or causeways must be pursued. The tenderingprocess encourages decreases in the structural integrity of the bridge, resulting in the need for thetechnical review committee to determine whether the changes in design are reasonable andappropriate.

(5) Sing Roads -- Construction of a ring road by BOOT is certainly a feasible engineeringassignment. The important consideration is whether the altematives, particularly as they relate tolocation of components of the road, the efficiencv of toll booths, and the long-term maintenance,are appropriately incorporated. The BOOT procedure involves preliminary design by thepromoter but the initial constraints placed on the project, will influence the nature of the designs.Assurance that the project will be efficient, properly maintained and operated, is yet to beproven.

2. Absorptive Capacity of ULBs

(1)TNTUDF is requesting an additional loan of USS200 million over a 5 year period(Rs 1.4 billion per annum at current exchange rates). Drawing on reports of the StateFinance Commission. investment requirements of corporations, municipalities andpanchayats are estimated at Rs 38 billion over the 5 vears to 2001 (Rs7.6 billion perannum) with the water and sanitation sector accounting for 64% of this requirement.

(2) A review of the surpluses for the years 1997 to 2001/02 projected by 10municipalities indicate the ability to service a maximum of Rs 21, 170 million (US$ 605million) for 5 year period (annually Rs 4,234, US $120 million). The property tax reformsenvisaged and increase of user charges would further enhance the debt service capacity of

The terms of reference need refinement. Schemes to involve elements of the local population shouldbe considered. Enhancement of recycling (e.g. plastics, metals, and glass) should be encouraged

Annex 8Page 3 of 3

the ULBs. Further information on the impact of these additional resources on ULBs andtheir likely deployment is needed before capacity can be projected with any confidence.

Annex 9.

Page 1 of 6

TNUDF: Financial Projections

Financial projections have been prepared assuming that the full US$200 million can belent over 5 years and are shown in the attached schedules. The other main assumptionsare:

i. GOTN's share of profits will be paid to the Grant Fund;ii. The institutional shareholders will leave their share of profits in the Fund (the Bank's

proposal);iii. Bad debts will reduce the inflow of loan and interest payments by 10%;iv. Loans sanctioned from the existing loan in the fiscal year ending March 31, 1998 will

be Rs 1800 million of which Rs 1500 million will be disbursed in the same year andRs 300 million in the following year;

v. Thereafter loan disbursements from the proposed new loan will be R's 1440 millionper year;

vi. Loans to ULBs will bear interest at 16.5% and repayment terms will be unchanged;vii. Funding sources in the year ended March 3 1, 1998 will be Rs 510 million in equity

from the institutional shareholders, and Rs 600 million in loans fromr GOTN; andviii.Loans from GOT'N will bear interest at 13.5% and have the same repayment terms as

the existing loans.

Under these assumptions the profits of the fund increase from Rs 251 million in 1998 toRs 446 million by 2000 and in the same period the debtlequity ratio increases from I to 2,while the financial institutions' ownership of the fund increases from 32% (by the end of1998 following their contribution of Rs 510 million) to 43%. The institutions' ownershipreaches-just over 50% by the end of 200l.The loan portfolio increases from Rs 1600million to Rs 3130 million while cash and investments increase from Rs 1242 million toRs 1804 million.

Annex 9

Page 2 of 6

TNUDF-Prnflt and Llss Sttatement

W~ar 8 m9 20 20O 2002 2Income fom OperadonsInterest an loans-TNUOF41 19.56 25.92 45.66 50.13 49.49 48.74-TNUOfIl o0.00 0.00 0.00 23.76 47.08 69.8ETotal interest recd. 19.56 25.92 45.66 73.89 96.57 118.6:

Income on investments 13.51 13.90 16.83 22.03 27.23 32.43

Less:Interest expenses 2.97 6.85 9.59 16.17 28.62 26.6--Bad debts 2.67 3.46 5.68 8.87 11.52 14.16

Net inc=me from Operations 27.43 -29.51 47.22 70.88 83.66 110.24

ExpensesAMC fees 2.38 2.22 2.59 2.92 3.24 3.55

Net profit 25.05 27.29 44.62 67.96 80.42 106.69

Annex 9

Page 3 of 6

TNUDF.Funds no6w statament12ZQ 2Mai MU 2 20

SOURCFS

Contnbution 51.00 0.00 0.00 0.00 0.00 0.00Net profit transferred to R&S 12.78 13.92 22.76 34.68 41.01 54.41Loans receiveg 60.00 144.00 144.00 144.00 144.00 144.00Repayment of loans.TNUDF-I 7.18 8.69 11.13 12f16 12.81 13.56-TNUDF-11 0.00 0.00 0.00 2.67 5.79 9.42Other liabilities- Provision forbad debts 2.67 3.46 5.68 8.87 11.52 14.16-Transferable to GF 1227 13.37 21.86 33 10 39.40 52.28- Provision for dividend to FIs 0.00 0.00 0.00 0.00 0.00 0.00Investments 0.00 0.00 0.00 0.00 0.00 0.00TOTAL 145.90 183.43 205.43 235.66 254.53 287.83

APU ICATIONSLoans disbursed-TNUOF-I 150.00 30.00 0.00 0.00 0.00 0.00-TNUOF-11 0.00 144.00 144.00 144.00 144.00 144.00Repayment of loans 1.76 3.56 5.22 14.03 21.20 23.99Investments 40.00 5.00 40.00 40.00 40.00 40.00TOTAL 191.76 182.56 189.22 198.03 205.20 207.99

Opening cash baiance 59.81 13.96 14.83 31.04 68.67 118.00Surplus/(Deficit) -45.86 0.87 16.21 37.63 49.33 79.84Closing balance 13.96 14.83 31.04 68.67 118.00 197.84

Annex 9Page 4 of 6

TNIUQF - Ralar2ee SheY8-ar jo 1 2I± ZZlfZ ZflQ:LlABILITIESCapital/ccntmbubon 125.61 176.61 176.61 176.51 176.61 17,6.61 176.61Reserves and surplus 8.00 20.78 34.69 57.45 92.11 133.12 187.53Bonowings 133.00 191.24 331.68 470.46 500.43 723.23 843.24Current liabilifies & provisions- Provision for bad debts 0.00 2.57 6.14 1 1.81 20.69 32.20 46.36- Transferable to GF 18.71 30.98 44.35 66.22 99.52 138.92 191.20- Provision for dividend to FIs 0.00 0.00 0.00 0.00 0.00 0.00 0.00TOTAL 285.32 422.28 593.47 782.55 989.35 1204.08 1444.94

ASSETSInvestments 64.43 104.43 109.43 149.43 189.43 229.43 269.43Loans and advances-TNUOF-i 160.06 302.88 324d19 313.06 300.90 288.10 274.54-TNUOF-If 0.00 0.00 144.00 288.00 429.33 567.53 702.11Cash and bank balance 59.81 13.96 14.83 31.04 68.67 118.00 197.84Omer assets 1.02 1.02 1.02 1.02 1.02 1.02 1.02TO-TAL 285.32 422.28 593.47 782.55 989.35 1204.08 1444.94

K-5a, rn-taI indtitAtrsrNet profitUTtal income 75.74% 68.52% 71.41% 70.85% 64.96% 70.53%Net proffVNetwonr 12.69% 12.91% 19.06% 25.29% 25.96% 29.30%Debt-Ecuity ratio 0.97 1.57 2.01 2.23 2.34 2.32

Annex Page 5 of 6

KEY ASSUMPTIONS

(All amounts are in Rs. crores)

For Profit and Loss Statement

AMOlC Sanction fees 1 % of sanctioned amountAMNvC Supervisory fees 0.25% of loan outstanding

The interest rate charged on lending from TNUDF-I averages to about 13%;Presently the lending rate is 16.5% per annum

The interest rate assumed for lending from TNUDF-II is 16.5% pai

Moratorium period for loans from TNUDF-I&II is 1 year

Repayment period for loans from TNUDF-I&II is 15 years

Average borrowing costs of TNUDF-I As per sanction termsAverage borrowing costs of TNUDF-11 13.5% pa

Bad debts as a % of princ. repayment and 10%interest payable

The net profit distributable to GoTN is transferred to GF whereasthe net profit distributable to Fis is ploughed back into the Fund

Annex 2Page 6 of 6

For Balance Sheet

Fresh contribution from Fis in 1998 51Loans received by Fund from GoTN in 1998 60

TNUDF-ISanctions in 1997-98 180Disbursements in 1997-98 150Disbursements in 1998-99 30

TNUDF-11To be received from IBRD as TNUDF-II

Year Amount1998-99 1441999-00 1442000-01 1442001-02 1442002-03 144

Lending from TNUDF-IlYear Amount1998-99 1441999-00 1442000-01 1442001-02 1442002-03 144

Moratorium for TNUDF-I Borrowing As per sanction termsMoratorium for TNUDF-11 assumed 5

Repayment for TNUDF-I Borrowing As per sanction termsRepayment for TNUDF-11 assumed 15

Other assets frozen at 1.02

According to sanction terms for TNUDF-I and 11, the simple interest payable on theprinciple during the moratorium period (5 yrs) is added to the initial principle andannuity is payable on this enhanced principle from Yr6 to Yr2O

Annex 10Page 1 of 2

Project Preparation Plan

A project preparation plan is normally discussed and agreed in principle with the: borrower during theidentification mission. A one-two page summary of the plan is attached to the PCD as Annex 2 (see sample developedby the LAC Region in page 2 of this annex). The plan should cover the following:

Role, responsibility and staffng of the borrower for project preparation, including designation of a project preparation team (Bankand Borrower).Bank assistance to be provided during project preparation.*Arrangements for local/foreign consultant inputs.*Outline of Project Implementation Plan (see Attachment) to be prepared by the borrower.Timetable for project preparation (including deadline for submission of the PIP).Milestones for progress review and any discussions by the Bank.Key outputs of project preparation, e.g. technical/economic feasibility studies; environmental assessments; institutional, beneficiary,and social analyses; tariff studies; financial models.Depth of analysis required for each specialist area, e.g., cost benefit analysis, skills/gap analysis.Issues to be addressed in parallel with project preparation (parallel track or likely loan conditions).Modalities of project preparation and analytical tools, e.g., beneficiary participation in project design, beneficiary surveys, use oflogical frameworkThe proposed public consultation/participation process

Items indicated above that are covered elsewhere in the main text of the PCD can be omitted from the summary butshould form part of the project preparation plan agreed with the borrower.

*Costs are reflected in the project preparation budget (see Annex 3).

Project Preparation Plan

A. Core Project Preparation Team

l...................

B. Project Preparation Activities

Feasibility Studies [Consultants: direct hire/ [Relevant agency] $100,000 Japanese draft report draft reportcompetitively selected] Grant

Environmental Assessnzent [NGOs, other agencies,.local consultants]

Analysis of Social AspectsInstitutional AnalysisProject Implemnentation Plan(PIP)

C. Specialist Tasks

s~~i~istArea Levl a ,................t.D..m.nt I..... .~ .ar....D...Tol... ....... ..... . .......

Economic Analysis Cost/benefit analysis Microeconomists Feasibility Study September 1996Indigenous Peoples Field Surveys SociologistJfluent in local Indigenous peoples plan

dialect

'fq >S S

A1~FENDLXB

TAM][L NADU URBAN DEVELOPNIENT PROJECT (TNUDP)(IDA Credit No.1923 IN)

BORROWERS EVALUATION

This Implementation Completion Report (ICR) is prepared by the ProjectManagement Group (PMG) set up by the Government of Tamil Nadu (GoTN) to manageand monitor over all project implementation. The PMG would manage exclusively theMunicipal Urban Development Fund (MUDF) Component of TNUDP. Following on thefoot steps of the successful implementation of the IDA supported Madras UrbanDevelopment Project - I (MUDP-I) and Madras Urban Development Project - II (MUDP-II) over ten years from 1977, IDA and GoTN had formulated the multisectoral multi-agency urban development schemes covering ten major urban centres in Tamil NaduState called TNUDP and the Credit Agreement for IDA support of US$ 300 Million wassigned in September 1988 and credit became effective in November 1988. The originaldate of credit closing was September 30, 1995 and there was a provision for retroactivefinancing covering the period from November 1987 to 1988. The original project costwas Rs.632.6 crores (US$ 443.7 Million), and the credit size was US$ 300 million (SDR216.5 Million). The project components include SHELTER, providing affordabledeveloped sites mainly to the economically weaker section and insitu improvement ofslums providing tenure ensuring full cost recovery and also generating shelter units withprivate sector participation under what was known as Guided Urban Development(GUD), Traffic and Transportation management (TRAMP) including bus componentand the innovative MUDF. The project has been completed in all respects deliveringmore units in quantitative terms than originally agreed quantity as per the ProjectAgreement. The credit came to a close by September 30, 1997 after two extensions.

One of the well identified appraised and implemented projects, nevertheless itshould be admitt-ed, had failed to insulate adequately against the anticipated setbacks likethe fluctuations in the exchange parity consequent of devaluation of rupee and thesuspension of the credit on the basis of an innocuous issue (though assumeddisproportionate importance in the World Bank Circle) viz. the Rehabilitation andResettlement (R&R). But the success story of implementation of complex nature of theproject had lead to the creation of a new financial intermediary continuing theperformance under the implementation of the MUDF Component of TNUDP. In contrastthe GUD component had failed to take off perhaps due to inadequate influence to rope inprivate sector participation and highly insulated institutional approach.

The project objectives mainly focused on strengthening the State Urban Financialand Functional Intermediaries, increasing the capacity of the Local Bodies for UrbanManagement and Investment Programming, increase the supply of environmentally

2

acceptable and affordable serviced shelter units and implementation of cost effectiveurban road and traffic management scheme and providing a comfortable public transportfacility for movement of people.

In retrospect. the physical objectives of the project were achieved to the highlysatisfactory level although initially the institutional preparedness of certain implementingagencies did lead to delays in design, procurement and i;nplementation. The complianceof the major covenants and also slavish adherence to the project description in the projectagreement had lead to the slow pace of absorption of the inflated credit size due todevaluation and the uncertainties in getting extensions from IDA for the credit. In spiteof the provision for retroactive financing the phase of absorption was slow due to theprocedural preparatory arrangements that are required to be organised, had causedcancellation of credit size in two transfers viz. SDR 22 Million in 1992 and SDR 10.8Million in 1994. The scheme sizing, particularly the road schemes, had given theexposure opportunity to the Department of Highways and Rural Works (DHRW) toimplement larger than their normal annual outlays. The periodical fare revisions havebenefited the Pallavan Transport Corporation which implemented the BUS sub-component to augment their self generated resource and became a viable institution totake up their capital programmes with adequate debt servicing capacity. The alleged busfare subsidy has been substantially reduced in the public transport environment. Thedependency on the state Govt., sources for urban infrastructure development programmes,has been reduced (approximately 25% to 30% of the project expenditures came frominternally generated resources). On the other hand the State Govt., had benefited by wayof Additional Central Assistance with a mix of loan and grant amounting toapproximately 80% of the cost to completion. The windfall opportunity to equip thedepartments responsible for traffic management, traffic control (Police) and providinginfrastructure facilities to attend to Accident Maintenance and Emergency MedicalServices (AMEMS) are few of the major achievement of the infrastructure development.The Urban Local Bodies (ULBs) have enthusiastically taken up capital programmes forimprovement of civic services by accessing the MUDF window which survived itscompetitive location in the field of urban financing and thereby enhanced their debtservicing capacity by revising the Property Tax which is the major resource base forthem, during the course of TNUDP implementation. The technical component (TATE)built into every major component had helped the project authorities to provide goodexposure in management techniques, project appraisal and also to take up several studiesin the urban infrastructure discipline. The Property Tax has been revised, the collectionshad improved and most Municipalities have managed to adjust their revenue accountdeficits. The devolution of resources to the State Government have helped the localbodies to a larger extent the clearance of all their arrears dues. Therefore the institutionalstrengthening that resulted from the project can be termed as satisfactory. In addition, theproject entities benefited through their increased capacities for urban planning and PMGwas able to support several towns in improving their financial management.

A factor that posed difficulties and hampered progress under the project wascomplexity of operation involving large number of sub-projects and executing agencies.

3

In the absence of any prerogative given to PMG for resource allocation for projects, theco-ordinating efforts started sagging to some extent. At the same time it should beadmitted concentration of resource allocation privilege under the project could have alsobecome counterproductive. The lack of timely response from the entities to the demandsof PMG placed a considerable burden though performed creditably mainly focusing onreports and general attention about details of project implementation, adherence to theprocurement procedure and quick mobilization, processing and filing of reimbursementfor IDA disbursement and also the follow up of the releases of ACA from GOI to GTN.It could have been concluded that the relative inexperience in handling externally aidedlarge sub projects in terms of requisite preparation and managerial expertise hadhampered time bound project execution. The procurement issues for large contracts weredecided at Washington Office which caused delays in clearances though at later stages theBank's New Delhi Office started to resolve them. One other issue affecting theperformance of project objectives which cropped up during implementation wasconstraints posed due to running parallel several programmes of the States whose termsand conditions, nature and culture were in conflict with those proposed under TNUDP.

Multisectoral concerns which involve multiple agencies by way of an integrateddevelopment approach is the lesson one has learnt in TNUDP. There is a need to resolvecertain legal issues or issues falling under statutes. The role mandate and authority of aco-ordinating body like PMG should have been strengthened with proper statutory backup to influence events on the ground.

The borrower's perforrnance can be rated highly satisfactory in terms ofpreparation, implementation and covenants compliance. The physical objectives weresubstantial.

Our view point on the suspension of the credit in November 1994, is explained indetail in the Annexure which was the fax message sent to the Regional Vice President onDecember 28, 1994. In brief it should be mentioned that IDA had resorted to suspensionof credit measure suo moto without giving adequate opportunity to the project authoritiesto explain in defense, the action pursued in regard to the R&R issue. The fax conveyingthe suspension of credit includes all incorrect information and without verification of thefacts on the ground. It was also a failure on the part of IDA to verify the fact whetherSTOWAD was implemented with or without the concurrence of IDA. IDA had chosen tosend a Mission for ensuring corrective action only after resorting to suspension of credit.On the other hand, the Mission's visit should have preceded the decision to suspend thecredit so that every one involved in the project reached good understanding of the realissues at stake. The decision to suspend the credit really made a dent on the credibility ofthe borrower. This issue had provided ample opportunities to IDA to review and reorienttheir R&R policy for posterity. This was not done. It should be mentioned here that theR&R policies of IDA may sometimes even scuttle the project implementation in terms ofcost consideration and it is a serious matter for consideration whether the developmentsare more important than the expensive (as advocated by IDA) R&R implementationwhere illegal encroachers are required to be compensated.

4

Yet another issue to be focused is that of keeping the borrowers in suspense forlong duration without giving concurrence for some of the projects for which in principleclearance was given earlier and withheld further clearance. With the result that creditbecame a vehicle in search of projects. During the course of action pursued forrestructuring the IDA credit we were having a definite understanding with the IDA to theeffect that the extension for the IDA credit would be available for three years. But theproject authorities were taken aback to see that the Credit Agreement was amendedgiving extension of credit for just one year. This kind of uncertainties was a big set backfor the smooth programming and implementation of the schemes. The extension given inpiece-meal short duration also affected the progress of work, as the agencies were notable to be provided with funds in anticipation and proceeded with tender procedures, etc.

Ratings:

A. Achievement of Obiectives:

Macro policies - substantial; Sector policies - Substantial Financial objectives -Partial; Institutional development - Partial; Physical objectives - substantial; other socialobjectives - partial; Environmental objectives - substantial; Public sector management -Partial; Private sector development - N/a.

B. Project sustainability - Likely

C. Bank performance: Identification - satisfactory; Preparation assistance -satisfactory; Appraisal - satisfactory; Supervision - deficient.

D. Borrovwers performance: Preparation - satisfactory; Implementation - highlysatisfactory; Covenant compliance - satisfactory.

E. Assessment Outcome: satisfactory.

5

(Fax dated December 28.1995 from M. Madhavan Nambiar. I.A.S., Project Director(TNUDP) to Mr. JToseph Wood. Regional Vice President, South Asia Region.

COMMENTS:

This has reference to your fax of 4th November '94 received here on 9thNovember '94. We note with regret the suo moto decision of IDA to suspenddisbursement under Credit No. 1923-IN for expenditures with respect to Storm WaterDrainage Scheme (STOWAD) in Madurai as of November 3rd 1994.

This is the first fax received by us from IDA conveying the suspension ofwithdrawals even before ascertaining from the proiect authorities the ground realities.STOWAD is an offshoot of a constancy study culminating in a program which is arelatively minor component of TNUDP costing only Rs.3 crores. Hence the threat of totalsuspension if implemented amounts to nothing but keeping the entire project costingRs.633 crores on hold. This could have serious repercussion on the implementation ofremaining programmes in this project with far reaching consequences.

First of all it is incorrect to quote that the displacement of the illegal encroacherson the STOWAD courses was undertaken in just 2 days. The IDA had failed to verifywith the Madurai Corporation which spared no efforts to convey the displaced peoplepartly to a nearby location which is hardly 2.5 kms. and partly in another location whichis 5 kms. from the city boundary and within easy reach of the city and with abundanttransport facilities. Reasonable time was given to the encroachers to facilitate them tomove out before taking up the implementation of the scheme. IDA should realise that1700 hhs could not have been moved or evicted in just 2 days time in two differentlocations without inviting a public outcry as was evident from the people's reactions inthe press reports (a sample of the press report was dispatched to you). However whiledisplacing the people the local body provided conveyance facilities for the displacedpersons for shifting their belongings and they were also provided food packets till theysettled down. The relocation sites do have adequate transportation facilities into the city.The displaced persons were provided an interim cash compensation of Rs.500 each andadequate kerosene.

Secondly it is also incorrect to state that the project authorities startedimplementation without the final approval of IDA. We request you to refer to the extractof Aide Memoires listed below:

"The following understandings were reached between the Mission, PMG andMadurai Municipal Corporation

(a) Concentrating on desilting, regarding and minor structural repairs to themajor channels (including key lengths of old PWD irrigation canals which

6

now form part of the City's drainage svstem) within the existing public rightsof way.

(b) Having the Corporation undertake the desilting and regrading works underforce account procedures as agents for PWD. The Corporation has alreadyacquired two excavators through MUDF and is using them for drain desilting.They are unable to use them efficiently due to lack of trucks (the excavatorstake 3-4 minutes to fill one truck, the truck takes more than one hour tocomplete a return trip to the disposal site). The Corporation estimates thatabout 30% of the drainage channels within the priority schemes will beinaccessible for mechanical desilting. These areas would be desilted usingcontracted labour. The silt removed would be carried to the closest point ofvehicle access for loading onto trucks which would transport the silt to theCorporation's landfill site for disposal or, if proved suitable and free ofpollutants, for sale to farmers for soil enrichment.

(c) PWD would be the implementing agency for the project, would purchase thenecessary vehicles and equipment undertake all associated civil works usingprocurement procedures acceptable to IDA.

(d) The Corporation would undertake to maintain the whole drainage systemwithin the corporation area in perpetuity. This was said to be acceptable toPWD who would assign the necessary vehicles and equiprment to them.There is adequate space and equipment for daily/weekly maintenance andcleaning in the Corporation's workshop. All other regular and preventativemaintenance and repairs are carried out by local agency garages". AideMemoire March 1993

From the above extract of Aide Memoires you may notice that the projectimplementation was taken only with the IDA's concurrence. We have also conveyed toIDA the GTN's decision on the implementation of the scheme at which point of timethere was no reaction from IDA to stop the implementation. The above statements willalso go to show that there has been no ineligible claims made on this account.Progranime implementation will have to be completed before the closure of the creditwhich is fast approaching. Rehabilitation measures of the displaced persons has to bedone with lot of imagination and care should be taken that the benefits reach the rightpeople and all measures of rehabilitation will have to be done within the legal frameworklike land ownership, physical plan approvals, land use regulations etc., Given the desirefor land, it should be recognised that certain interest groups who had sponsoredcandidates for resettlement will feel disgruntled and the project authorities shouldconsider the interest of the public at large in developmental programmes aboveeverything else. We are sure you would agree that the local implementation authoritiesmust be given due credit to have carried out the relocation of this magnitude without anypublic outcry given the significant awareness of the relocated families. It is pertinent tonote that these encroachments have been the cause of recurrent flooding of many parts of

7

the city, as per the District Collector and Chairman of the CMC. To have gone ahead, onhearsay and without verification and getting any explanation, to suspend the credit on thiscomponent on the part of IDA is certainly arbitrary. The District Collector and Chairmanof CMC has also inforned us that the encroachments have been the cause of recurrentflooding in many parts of the city. As a result of this, the Madurai District DevelopmentCouncil Meeting have been informed about the need to remove these encroachments aswell as create public awareness that encroachments on public lands would not beencouraged.

We would also like to state that while relocation and resettlement measures mustbe in conformity with agreed parametres, they should also not result in a premium to theland grabbers. Pursuant to the Mission's observations in AME March '93 we conveyedto the Bank on 1. 11 .'94 that measures have been taken for rehabilitation of theencroachers. There has been no public out cry. Civil Works are being commenced toprovide basic infrastructure facilities immediately. Further evictions have been stopped.

Considering all these aspects we request you to revoke the suspension withimmediate effect. We have no objection to receive the IDA Mission to discuss furtheraction to be pursued in this regard at a mutually convenient date.

(signed)

PROJECT DIRECTOR (TNUDP) &MEMBER SECRETARY (PMG)

Govt. of Tamil Nadu.

- Regd. Oce:2163, Backbay Reclamat:

The Industrial Credit and Investment Corporation of indla Limited - Mumbal[400 020.

Tel.: Management 2025

Suneet K. Maheshwari - -en :f;'ce:2022535. Offi-Crami:.CREDCCRP Mumi

Deputy Ge"neral Manager & -F-a- - Telex: 011:83062 ICICI 1

Head of Consulting Division -Tel. No. 2826932

3 S 2t 9 -Fax No. -2826934

February 13, 1998Shri Rohit ModiTDeputy Secretary (F8)Department of Economic AffairsMinistry of FinqnceGovemment qf IndiaNew Delhi 110 001

Dear Shri Modi,

Sub: Evaluation of TNUDF

Please refer to the meeting held in late 1997 in connection with TNUDF,when it was suggested that a note on evaluation of the TNUDF be prepared jointly bythe participating institutions. Please find the same enclosed.

TNUDF is the first state level financial intermediary for funding urbaninfrastructure projects and it has provided encouraging results in its short period ofoperation. The institutions would continue to support TNUDF and similar efforts in thearea of municipal and urban infrastructure.

With kind regards,

Yjurs sincerely,

Encl. as above

- ,zcc. . 1A~. H bco14 V$

St. °h4 0lfe- '~~ ~~

TAMILNADU URBAN DEVELOPMENT FUND (TNUDF)

(An Evaluation)

Brief Note

Tamilnadu lJrban Development Fund (TNUDF) was formed in 1996 by Governmentof Tamilnadu (GoTN) in participation with ICICI, HDFC and IL&FS with activesupport from The World Bank. TNUDF has been structured in the form a trust fundwith Tamilnadu Urban Infrastructure Trustee Company Limited (TNUITC) as its solecorporate trustee, whereas the fund is being managed by Tamilnadu UrbanInfrastructure Financial Services Limited (TNUIFSL), a fund management company.The main objective of the Fund is to finance Urban Infrastructure projects in thestate of Tamilnadu with a view to supporting urban and economic development.

TNUDF has been operating since November 1996 and has achieved encouragingresults. The World Bank is in the process of developing concept for the Phase II ofTNUDF project, under which it envisages an assistance of US $ 200 million to beutilised over a period of five years. This note outlines brief evaluation of TNUDF bythe participating financial institutions, viz. ICICI, HDFC and IL&FS.

Background

Municipal Urban Development Fund (MUDF) of US $ 80 million was a component ofthe Tamilnadu Urban Development Project (TNUDP) financed by InternationalDevelopment Association (IDA). The programme was being implemented by ProjectManagement Group (PMG), set up in 1988, by the State Government of Tamilnadu(GoTN). As on September 1996, MUDF had extended loans of about Rs 200 croresto 74 urban local bodies (ULBs). The Bank, in line with its lending strategy, waskeen to create a self-standing financial intermediary based on MUDF byrestructuring TNUDP.

The World Bank funded MUDF project was reaching its terminal date with aun-utilised balance of about US $ 27 Million in addition to its existing portfolio. TheBank felt that this money and the experience gained could be used to restructureand set up the said financial intermediary, to be run with private financial disciplineand management. The World Bank wanted this to be a pilot demonstration projectwhich could form the basis for commercialisation of urban infrastructure projects andmunicipal finance in the country. This idea was institutionalised by setting upTNUDF.

As mentioned earlier, the objectives of the Fund include, financing urbaninfrastructure projects to be taken up by ULBs either independently or with privatesector participation through joint ventures and public - private partnerships. Eligibleborrowers comprise ULBs, statutory bodies, public sector undertakings and privatecorporate sector. Eligible sectors include water supply, sanitation, solid wastemanagement, roads/bridges, transportation, sites and services and integrated area

1

development. In addition, Grant Fund owned by GoTN is ailso managed by thefund management company. Grant Fund is primarily used for project preparation byULBs and Training of personnel from these ULBs.

Performance

While it is too eady to judge the performance of the restructured fund, TNUDF hasprovided encouraging results, so much so that the Fis are encouraged to with theprospects of looking at urban infrastructure finance more actively. Since itsincorporation in November 1996, TNUDF has approved loans of about Rs 118crores and grants of Rs 18 crores to more than 17 borrowers (till September 30,1997). Projects financed so far include commercial shopping complexes, solidwaste management, roads, street lighting, parks, etc. Grants have been providedmainly as technical assistance towards computerisation of accounts of ULBs toimprove financial management capabilities as also towards computerisation ofvarious records for public needs. Grants blended with loans from the Fund havebenefited the projects (would not be normally commercially viable) which are locatedin the areas where the urban poor are living.

Private Sector Participation & Projects Development

TNUDF, with its limited human resources, has initiated steps to develop projects forprivate sector participation. TNUDF has developed the first BOT bridge in India tobe undertaken by an ULB (Karur Municipality) at an estimated cost of Rs 16 crores.TNUDF is in process of developing more than five BOT projects which are atdifferent stages. TNUDF is also developing the first toll road by an ULB, i.e. 27 kmMadurai by-pass of Rs 35 crores which would be a public private partnership project.Madurai Corporation would auction out toll collection at the end of 2 yearconstruction period. The proposed project structure allows benefits to flow directly toMadurai Corporation, without recourse to the Corporation's cash flows.

It is a well recognised fact that project development requires considerable time andefforts. On the other hand, project structuring skills available vwith ULBs are at farfrom satisfactory level. Taking into the consideration the totall human resourcesavailable with TNUDF, the results achieved in developing these two projects arecommendable. In order to increase the project development efforts TNUDF. willhave to form a core group of officials with requisite background through suitabletraining.

Organisational Structure

As mentioned earlier, TNUDF (the Fund) is managed by a separate fundmanagement company in the style of TNUIFSL. TNUIFSL is managed by the Boardof Directors from GoTN and FIs with Secretary, MAWS, being its Chairperson. Theday to day activities are co-ordinated by a lean management team of 4 professionalsand support staff led by CEO, Mr Rajivan Krishnaswamy. While the skills of thepresent team are being enhanced, certain specific professionals need to be inducted

2

(e.g. Company Secretary cum Financial Controller) at the earliest. It may beessential to strengthen the project development function preferably by creating a'dedicated team' for the purpose.

Technical evaluation of the projects/contracts developed by ULBs could beconducted with assistance of external experts (by out-sourcing the work) in the initialperiod. Eventually, as the activity builds up, in-house technical team needs to bedeveloped for such evaluations. Fis have been instrumental in providing inputs forimproving the quality of the present credit appraisal format. Capacity to manageforeign exchange risk (in case of direct lending by multilateral agency to TNUDF)needs to be built within the institution by augmenting skills over a period.Participating Fls could provide need based support in the short term in this area ofoperation.

MUDF was being managed by the PMG and continuity has been maintained afterrestructuring by deputing some of the PMG staff to TNUDF. This has helped smoothtransition.

Policy directions for the fund are provided by the board of directors of the trusteecompany, chaired by the Chief Secretary, GoTN. While both the boards havemajority of the GoTN nominees, appropriate changes could be effected as theinstitution achieves critical mass.

Role of the World Bank

The World Bank has been lending in the urban infrastructure sector in India throughvarious urban development programmes of select states (e.g.. Maharashtra &Tamilnadu). The Bank initiated steps to restructure existing urban infrastructurefund and invited private financial institution to participation. The catalytic role of theBank has helped giving fillip to this emerging sector. This effort of the Bank has ledto formation of the first intermediary in India and is being seen as a breakthrough inthe sector. The institution thus established needs to be nurtured further by theBank. The Bank had taken similar steps in the past to nurture industrialdevelopment in India.

The Bank could consider implementing similar efforts in other progressive states,which eventually give inputs for establishing national level facility. Innovativeinstitutional mechanisms could be considered while implementing further initiativesin other states.

GoTN Support

Tamilnadu being one of the progressive states in the country, GoTN took initiative inthe formation of new intermediary for funding urban infrastructure projects to beundertaken by ULBs. GoTN not only supported restructuring of existing MUDF butalso deputed some of the key staff from PMG to TNUDF. GoTN has demonstratedcommitment to this initiative by appointing its nominees on the boards of bothtrustee company and asset management company. Active participation of its

3

nominees provides guidance and direction for the newly developing organisation.GoTN has been strengthening ULBs through training and other programmes underTechnical Assistance (Grant Fund).

Role of the participating FIs

Participating Fis viz. ICICI, HDFC and IL&FS, have actively supported the formationof the TNUDF, the first intermediary of its kind. ICIC0 acts as the "lead institutionnand has been co-ordinating activities related to TNUDF with theb other participatinginstitutions. The Institutions have been closely associated with the each step in theprocess of formation of the Fund including negotiations. The institutions alsoprovided important inputs for finalising legal structure of the institution. Considerablesenior level time has been devoted for formation of TNUDF and the institutionscontinue to provide guidance through their nominees on the Boards. The leadinstitution has deputed two its officials and two support staff to TNUDF. Theinstitutions continue to provide inputs. for improving quality of appraisals of projectsbrought before the Boards for approvals. The institutions have committed to ploughback their dividends to trust fund in the first three year of operations of TNUDF. Theparticipating institutions would be willing to co-finance commercially viable urbaninfrastructure projects in future. FIs have been providing inputs to TNUDF for projectdevelopment and structuring. Participating Fis would continue their support toTNUDF.

Conclusions

The first state level financial intermediary for funding urban infrastructure projectshas been established in the form of TNUDF. TNUDF has demonstrated encouragingresults in its limited period of operation. The intermediary needs further support interms of long term funds from multilateral and bilateral institutions for it to play itsrole effectively. The institution needs to strengthen itself in the areas such as projectdevelopment and structuring, technical evaluation and forex risk management. Roleof GoTN has been supportive and its involvement and initiative has helped TNUDF.TNUDF would continue to get support from participating Fls in the future.Participating Fis would look forward to similar experiments in other states.

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