ASIAN DEVELOPMENT BANK IND:34262

REPORT AND RECOMMENDATION

OF THE PRESIDENT

TO THE

BOARD OF DIRECTORS

ON

PROPOSED LOANS TO

INFRASTRUCTURE LEASING AND FINANCIAL SERVICES LIMITED

AND

INDUSTRIAL DEVELOPMENT BANK OF INDIA

AND

PROPOSED TECHNICAL ASSISTANCE GRANT

TO INDIA

FOR THE

PRIVATE SECTOR INFRASTRUCTURE FACILITY

AT STATE LEVEL PROJECT

November 2001

CURRENCY EQUIVALENTS(as of 1 October 2001)

Currency Unit – Rupee/s (Re/Rs)Re1.00 = $0.0209

$1.00 = Rs47.82

ABBREVIATIONS

ADB – Asian Development BankAP – Andhra PradeshBOT – build-operate-transferGDP – gross domestic productICICI – ICICI Ltd.IDFC – Infrastructure Development Finance Company Ltd.IDBI – Industrial Development Bank of IndiaIFCI – Industrial Finance Corporation of IndiaIL&FS – Infrastructure Leasing and Financial Services Ltd.KfW – Kreditanstalt für WiederaufbauLIBOR – London interbank offered rateMORTH – Ministry of Road Transport and HighwaysMW – megawattNHAI – National Highways Authority of IndiaPFI – participating financial institutionPTC – pass-through certificatePSIF II – Private Sector Infrastructure Facility at State Level ProjectRBI – Reserve Bank of IndiaSEB – state electricity boardSERC – State Electricity Regulatory CommissionSEZ – special economic zoneSPV – special purpose vehicleTA – technical assistance

NOTES

(i) The fiscal year (FY) of the Government of India, the Gujarat government, theAndhra Pradesh government, the Karnataka government, and the MadhyaPradesh government ends on 31 March. FY before a calendar year denotes theyear in which the fiscal year ends e.g., FY2002 begins on 1 April 2001 and endson 31 March 2002.

(ii) In this report, "$" refers to US dollars

CONTENTS

Page

LOAN AND PROJECT SUMMARY ii

I. THE PROPOSAL II

II. INTRODUCTION 1

III. BACKGROUND 2A. Sector Description 2B. Government Policies and Plans 10C. External Assistance to the Sector 14D. Lessons Learned 15E. ADB’s Sector Strategy 17F. Policy Dialogue 17

IV. THE PARTICIPATING FINANCIAL INSTITUTIONS 17A. Infrastructure Leasing and Financial Services Limited 18B. Industrial Development Bank of India 18

V. THE PROPOSED ASSISTANCE 19A. Proposed Financing 19B. Rationale 19C. Mechanics of the Facility 20D. Main Terms and Conditions 30E. Cofinancing 34F. Social and Environmental Aspects 35G. Risks and Safeguards 38H. Technical Assistance 39

VI. ASSURANCES 39

VII. RECOMMENDATION 40

APPENDIXES 41

LOAN AND PROJECT SUMMARY

Borrowers

Guarantor

Project Description

Infrastructure Leasing and Financial Services Ltd. (IL&FS)and Industrial Development Bank of India (IDBI).

India

The proposed Private Sector Infrastructure Facility at StateLevel (PSIF II) consists of two components (i) twoseparate loans to the participating financial institutions(PFIs) in equal amounts and on identical terms foronlending to infrastructure projects in specifiedinfrastructure sectors in four selected Indian states:Andhra Pradesh, Gujarat, Karnataka, and MadhyaPradesh; and (ii) technical assistance to the four selectedIndian states that will receive PSIF II financing, to enhanceprivate sector participation in infrastructure development intheir respective states.

Incorporated in the PSIF II design are components toaddress the key constraints of infrastructure developmentat the state level in India.

The PSIF II is focused to provide assistance only to fourselected Indian states that are generally consideredreform-oriented and that provide an environmentconducive to private investments. It aims to demonstratehow constraints at the state level may be addressed basedon the collective experiences of these four states and onbest practice. It also aims to underscore state performanceas a key factor in (i) lending and investing by financialinstitutions in India; (ii) providing a Government of Indiaguarantee to enable performance-based lending; (iii)catalyzing the flow of resources into performing states,starting with the four selected states; and consequently,(iv) establishing an appropriate incentive structure for otherIndian states to improve performance.

To address identified gaps in capacity at the state level,the PSIF II seeks to partner national PFIs with stategovernments to undertake infrastructure projects thatcould be offered for private sector participation, particularlyfor structuring, developing, and engineering the financingof projects.

To strengthen the public-private interface and facilitate theprocessing of infrastructure projects, the PSIF II supportsthe adoption of formal legislation, sector policies andregulatory frameworks that address private sectorconcerns, the organization of formal structures withstatutory mandates at the state level, and operationalmechanisms for dealing with the private sector.

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Finally, the PSIF II will provide the anchor loans, withmaturities that more appropriately fit the long gestation andpayback periods of infrastructure projects, which pose thegreatest financial risk to these projects. Parallel initiativesare to be undertaken to meet related risks in undertakingprivate investments in infrastructure projects.

Subloans The PSIF II is also targeted to support reform efforts inidentified infrastructure sectors where reforms are beingundertaken by providing financing to projects in thesesectors, including power transmission and distributionprojects for privatization and those that may be set up byprivate sponsors; modernization and upgrading of privatepower generation plants; minor ports under privateconcessions; state roads on build-own-operate, build-operate-transfer, and similar arrangements; optic fibercable connections for privately owned telecommunicationsfacilities; airports under private management; urban masstransit systems that will be privately run; water supply andsewerage services under private concession; cyberparks;and special economic zones where private sectorcompanies are to operate.

Classification Economic growth

Environmental Assessment Category B. Environmental impact assessments or initialenvironmental examinations will be undertaken forsubloans to be financed.

Rationale The anticipated demand for private infrastructureinvestments has not materialized as few infrastructureprojects are reaching financial closure. Several reasonsaccount for this: (i) reforms have not been progressing asfast as anticipated, (ii) present governance structures arenot suited for the broad participation by the private sectorin infrastructure envisaged in a liberalized environment, (iii)the public/private interface needs substantialstrengthening, and (iv) it remains difficult to disaggregateand allocate risks in the domestic capital market. Theseconstraints are particularly pronounced at the state level.

The PSIF II, in its design, attempts to help Indian statesaddress these constraints by providing a policy andoperational framework for attracting private participation ininfrastructure; establishing an appropriate incentivestructure to reward performance and penalizenonperformance; and through various initiatives,addressing risks associated with the financing ofinfrastructure projects.

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Loan Amount and Terms Two loans of $100 million each to IL&FS and IDBI will beprovided under the LIBOR-based lending facility of theAsian Development Bank (ADB). The loans will have a 20-year term, including a grace period of 5 years; an interestrate determined in accordance with ADB's LIBOR-basedlending facility; a commitment charge of 0.75 percent perannum; a front end fee of 1.0 percent; conversion optionsthat may be exercised in accordance with the terms of thedraft Loan Agreements, the Loan Regulations, and ADB'sConversion Guidelines; and such other terms andconditions set forth in the draft Loan Agreements.

Relending Terms At prevailing market rates for Indian rupees tosubborrowers. The ADB loans are to be hedged againstforeign exchange risk by the PFIs and relent in rupees.

Instrumentation The PFIs will purchase marketable securities fromsubborrowers as evidence of their loans.

Utilization of Loan Proceeds

The loan proceeds will be used to finance the direct andindirect foreign exchange costs of equipment and services,including civil works. Subject to sectoral limits, loanproceeds may be utilized to finance local currency costs ofeligible projects. To facilitate the timely implementation ofprojects, up to 10 percent of the loan proceeds may beused to finance eligible expenditures incurred 180 daysprior to the date the loans become effective.

Subloan Size 25 percent of the total project cost or the single exposurelimit of the PFI whichever is lower, but in no case toexceed a maximum absolute amount of $75 million.

Procurement For contracts for the supply and installation of equipmentvalued at $10 million or more, and for civil works of $20million or more, international competitive biddingprocedures in accordance with the ADB Guidelines forProcurement will be followed. In the case of a build-operate-transfer project and variants, the project sponsoror engineering, procurement, and construction contractor ifselected through competitive bidding among internationalentities in accordance with procedures acceptable to ADB,may apply its own procedures for procurement providedthat such procurement is for goods and works suppliedfrom, or produced by ADB member countries.

Benefits and Beneficiaries The PSIF II will benefit the state sector by promotingprivate participation in infrastructure at the state level. Byhelping to identify and resolve gaps in the policyenvironment, operating framework, and institutionalcapacity, the PSIF II aims to facilitate infrastructure projectdevelopment in the four selected states. By promotinginfrastructure development at the state level, the PSIF II isensuring that appropriate policies are in place to mitigate

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against the possible social and environmental risks ofinfrastructure development, and protect the localpopulation, particularly the affected segments of society.The PSIF II will catalyze a larger flow of resources to thefour selected states and make much needed infrastructureservices more accessible. The four states haveconsiderable potential for industrial development that canonly be realized with adequate infrastructure support; bystimulating economic growth, poverty reduction will beenhanced. By emphasizing state performance as a keyfactor for project financing, the PSIF II aims to promotestate reforms by redirecting credit flows to deserving statesand by establishing an appropriate performance basedincentive structure. The PSIF II also encourages the cross-fertilization of ideas among states. States are veryinterested in finding out how their counterparts areaddressing specific difficulties in infrastructuredevelopment. Selected states, among themselves, are nowlearning from their collective and individual experiencesand innovative approaches to developing theirinfrastructure sectors. The Government of India will alsobenefit in terms of reduced assistance needed because ofincreased private provision for infrastructure, and savingsfrom improved efficiencies arising out of structural reformsand private sector management based on commercialprinciples.

Risks Lack of commitment and cooperation on the part of theselected states could undermine the objectives of the PSIFII. However, the four selected states are acutely aware ofthe need to establish an environment conducive to privateinvestment and to compete for scarce resources, and havebeen closely watching the progress of neighboringcountries; thus, their relative advances in reforming theirrespective states and promoting infrastructuredevelopment. Furthermore, the PSIF II is designed topromote competition. States able to develop suitableinfrastructure projects for financing can access the facility.The four selected states are also aware that other Indianstates have expressed strong interest in participating in thePSIF II.

Infrastructure projects typically have long gestation andpayback periods. Project preparation is difficult in thecurrent environment due to the myriad agencies involvedand in dealing with cumbersome procedures. To facilitateproject preparation and processing, the PSIF II issupporting the development of formal structures withstatutory mandates at the state level to deal with theprivate sector, to essentially serve as one-stop facilities.Moreover, to enhance project preparation and buildownership, the PSIF II seeks to partner the PFIs with stategovernments. The PFIs could provide the project

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development and financial engineering expertise requiredto bring projects to financial closure. With close stategovernment involvement and immediate feedback onproblems, project preparation is expected to accelerate,and problems that arise, addressed more promptly. Longpayback periods, and the uncertainty associated with it,can be covered by matching long-term financing that thePSIF II will provide. Other risks could be covered throughinnovative instruments that the PFIs will design to meetthe risks of infrastructure financing. State guarantees areto be targeted more appropriately to meet noncommercialrisks and allow disaggregation of risks and proper riskallocation in the Indian environment.

Technical Assistance Technical assistance is proposed to be provided to thefour selected states to assist them in addressing specificconstraints in the development of the enablingenvironment for private sector participation in infrastructureto make the effort sustainable and to facilitate theprocessing of eligible projects within these selected statesfor PSIF II financing.

Experts will be fielded to identify priority areas in eachselected state that require assistance and provide theneeded advisory assistance to enable the selected state tomeet pre-agreed measures with ADB for broadeningprivate sector involvement in infrastructure development.

I. THE PROPOSAL

1. I submit for your approval the following Report and Recommendation on (i) twoproposed loans, one to Infrastructure Leasing & Financial Services Limited (IL&FS), and theother to Industrial Development Bank of India (IDBI), each to be guaranteed by India, for thePrivate Sector Infrastructure Facility at State Level Project (PSIF II); and (ii) proposed technicalassistance (TA) for Enhancing Private Sector Participation in Infrastructure Development atState Level.

II. INTRODUCTION

2. Ongoing reviews of the development of India’s infrastructure sectors and experiencegained under the Asian Development Bank (ADB)-funded Private Sector Infrastructure Facility(PSIF I)1, noted that the private sector was not responding as expected to earlier initiatives.Consequently, as part of an ADB TA,2 state constraints to infrastructure development andfinancing were examined and possible ADB responses considered. The state focus wasappropriate as state governments are fully responsible for reforms that are key to determiningthe nature and extent of state infrastructure development. Progress in infrastructuredevelopment appears to have stalled due to waning private sector interest as difficulties indeveloping infrastructure projects started to emerge. National policy is a critical considerationonly in the case of the national road network, railways, the major ports, andtelecommunications. Consequently, this report does not focus on these areas.

3. The PSIF I considered the supply of funds to be the main constraint, to infrastructuredevelopment given the enormous potential demand. Consequently, the PSIF I was targeted atenhancing financial intermediation and developing the domestic capital market. However, todayfew infrastructure projects are actually materializing, despite the continuing large demand forinfrastructure and relative availability of domestic funds.3

4. The February 2001 Reconnaissance Mission4 examined possible approaches to assistIndian states address emerging infrastructure bottlenecks. After consultations within India andADB, the Fact-Finding Mission5 was fielded in April 2001. During fact-finding, the measures forstrengthening the enabling environment for private sector participation in state infrastructuredevelopment; the possible partnership arrangements between the selected states andparticipating financial institutions (PFIs); and the design, scope, and mechanics of the projectfacility were defined and discussed in detail. Subsequently, the August 2001 Preappraisal

1 Loan 1480-IND: Private Sector Infrastructure Facility to ICICI Ltd. (ICICI), for $150 million, approved on 7

November 1996; and Loan 1481-IND: Private Sector Infrastructure Facility to the Industrial Finance Corporation ofIndia Ltd. (IFCI), for $100 million, approved on 7 November 1996.

2 TA5882-REG: Assessing Financial System Vulnerabilities in Selected Noncrisis Affected Economies (India, Nepal,and Viet Nam), for $600,000, approved on 20 December 1999. In connection with the formulation of a suitablefinancial sector development strategy for India and as an important aspect of India’s reform priorities, a review ofsate-level constraints to infrastructure finance and Asian Development Bank Strategy was conducted, at thesuggestion of the Government of India.

3 Banking institutions report current holdings of some $2.0 billion in excess statutory liquidity reserves. However,available debt funds in the domestic funds market are short to medium-term in character, ranging from 5 to 7 years.Maturities of 10 years and beyond are still rare.

4 The Mission comprised R. M. Limjoco, Mission Leader; and V.V. Subramanian, Investment Officer, INRM.5 The Mission comprised R. M. Limjoco, Mission Leader and Lead Financial Sector Specialist; W.McCarten, Public

Resource Management Specialist; Y. Elhan, Economist; and V. V. Subramanian, Financial Economist. F. Polman,Resident Representative, INRM; and T. Kumar, Senior Investment/Programs Officer, INRM joined the wrap-upmeeting.

2

Mission followed by the Appraisal Mission in October 2001 continued discussions and confirmedthe commitments from the selected states to undertake specified measures to strengthen theenabling environment for the private sector, agreed with the PFIs on the terms and conditions oftheir participation under the PSIF II, and secured the commitment of the Government of India(the Government) to extend its guarantee to the PFIs under the PSIF II. The project frameworkis shown in Appendix 1.

III. BACKGROUND

A. Sector Description

1. Private Sector Participation in Infrastructure Development

5. State government finances deteriorated throughout the 1990s. The combined fiscaldeficit of all states in India increased from 2.3 percent of gross domestic product (GDP) inFY1994 to 4.3 percent in FY1999, and 4.6 percent in FY2000;6 but narrowed down to 4.3percent in FY2001 due to a higher growth in receipts compared with expenditures. Theoutstanding debt of the states is estimated to exceed 23 percent of GDP in FY2001, from just18.6 percent in FY1994. In FY2001, the fiscal deficit of the national Government and the statestaken together decreased, but remained high at 9.1 percent from 9.4 percent in FY2000.7

6. This deterioration in fiscal health of state governments over the years directly contributesto inadequate public investments. Insufficient investments in both public and privateinfrastructure, on the other hand, constrain industrial growth. In particular, the failure of stategovernments to provide basic infrastructure severely undermines the long-term growth potentialof the economy as it is prevented from obtaining the full benefits of market reforms andliberalization. Moreover, with rising deficits, the states are forced to cut back not only on capitalexpenditures but on expenditures in essential social sectors, impacting on the drive to reducepoverty.

7. ADB has therefore been providing assistance for public sector resource management atthe state level.8 However, public resources are clearly inadequate for meeting infrastructureneeds. Greater private sector participation, including foreign investments, will be needed ifIndia’s targeted economic growth rate of 8-9 percent per year is to be achieved. Moreimportantly, well-regulated private management is needed to improve efficiency and productivityin the provision of infrastructure and eliminate much of the waste associated withnoncommercial operation of basic infrastructure services.

2. Limited Response in Provision of Infrastructure

8. Accounting for inflation, only about 30 percent of projected financing for infrastructurefrom private sources has actually materialized since 1994/95 based on the assessments earlier

6 Despite efforts at fiscal consolidation, the present level of the Government's fiscal deficit is 5.9 percent (7.0 percent

under the old definition that includes small savings collections passed on to the states), slightly higher than the 5.6percent registered in the previous year.

7 Reserve Bank of India. 2001. Annual Report 2000/01. Mumbai.8 Loan 1506-IND: Gujarat Public Sector Resource Management Program, for $250 million, approved on 18

December 1996; and Loan 1717-IND: Madhya Pradesh Public Resource Management Program, for $250 million,approved on 14 December 1999. The World Bank has been encouraging fiscal reform in individual states (likeAndhra Pradesh, Karnataka, Orissa, Rajasthan, and Uttar Pradesh) and is providing financial support for fiscalreform programs now in process in Andhra Pradesh and Karnataka.

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made by the Expert Group on the Commercialisation of Infrastructure Projects (the ExpertGroup).9

9. In the power sector, new generating capacity during the Eighth Five-Year Plan (1992/97)fell short of target by almost 50 percent, principally due to inadequate investments by the states.Of this, independent power, including captive power, producers contributed barely 1,430megawatt (MW) of the total 16,422 MW in additional capacity. The Ninth Plan (1997/2002),originally estimated that 40,425 MW of power would be added with about 44 percent of this tobe privately produced. This has been revised during the midterm review to 28,097 MW, andfurther, based on a more recent update, to 20,891 MW with the private sector expected to takeup 32 percent of the capacity augmentation. Under the Ninth Plan up to December 2000, a totalof 14,227 MW was completed with the private sector contributing 3,915 MW (about 27.5percent). However, in the immediately preceding year, FY1999/2000, private sectorparticipation declined sharply with only 553 MW added by private producers. Under the 10th and11th plan periods, the Central Electricity Authority projects capacity augmentation of 55,000 MWand 51,500 MW, of which the private sector is expected to take up about 40 percent.

10. Similarly, for the road sector, only $3.2 billion has been provided for state and majordistrict roads, against the requirement of $5.5 billion under the Eighth Plan. Of this, about $211million has been undertaken with private sector participation, mainly bridges and bypasses. TheExpert Group estimated the total requirements for state highways from 1996/2006 to be about$10.2 billion.10 The private sector was expected to contribute about $1.3 billion.

11. For ports, projected requirements are $5.3 billion11 to meet the expected increase indemand and cargo handling capacity to 400 million tons by 2000/01 and to 650 million tons by2005/06. However, the plan allocation during 1990/97 was only $905 million. Under the NinthPlan, an additional 122 million tons capacity is envisaged at an estimated cost of Rs175 billion(about $3.7 billion). However, only 46 percent of the requirement is expected to be met by themajor ports through borrowings and internal generation. About 11.5 percent is to be raised fromexternal sources including multilateral agencies. The balance is proposed to be met through thedevelopment of minor state ports and investments in captive facilities by user industries and theprivate sector. Thus far, port projects from private sector/captive users of about Rs39 billion($816 million) have been approved and are at various stages of construction.

12. The Airports Authority of India manages 92 airports, of which 5 are internationalgateways.12 Presently, the various airlines are operating from only 61 airports. The rest areunutilized, handling occasional aircraft. Given the volume of air traffic,13 the need for newinternational airports is not immediate, although forecasts by different organizations reflect anincrease in domestic passenger traffic of 8.5 percent and international passengers by 6.0percent annually from now until 2004/05.14 However, in 1998/99, 51 percent of airport trafficwas handled at Delhi and Mumbai. The apparent need is to reduce congestion and upgradeairport services. For this purpose, the Airport Authority proposed an expenditure of Rs34.2billion ($715 million) under the Ninth Plan for airport infrastructure. A large proportion of this isexpected to be raised from the private sector. Thus far, one airport has been inaugurated under

9 Ministry of Finance. 1996. The India Infrastructure Report. Government of India, New Delhi.10 At 1996 prices.11 1995/96 prices.12 Chennai, Delhi, Kolkata, Mumbai, and Thiruvananthapuram.13 During 1995/99, growth was not significant although cargo and international passenger traffic have increased.14 Based on a study of the Foundation for Aviation and Sustainable Tourism.

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private sector sponsorship, the Cochin International Airport Limited at Nedumbassery, with 26percent equity participation by the Kerala state government.

13. For water supply and sewerage, the Planning Commission estimates that to make up forthe huge need in the next 10 years, investments of approximately $3.2 billion per year will berequired. Under the Eighth Plan, $1.2 billion was provided. To cover the resource gap, theGovernment resorted to build-operate-transfer (BOT) schemes with the private sector for bulkwater supply. However, inefficiencies in water distribution made new investments in the watersector unviable and led to the failure of most of the private sector participation schemes. Underthe Ninth Plan, investments of $6.1 billion for urban water and $9.3 billion for rural water supplyare envisaged. Funding will be a crucial issue.

3. Reasons Behind Weak Private Sector Response

14. At the root of the difficulty is the slow development of an enabling environment for theprivate sector. More specifically, why the response by the private sector to the liberalization ofIndia’s infrastructure sectors, particularly at the state level, fell below expectations may beattributed to the confluence of several major factors: (i) the progress of reforms has been slowerthan earlier anticipated; (ii) governance structures are not suited for the broad participation bythe private sector in infrastructure in a liberalized environment, (iii) the public/private interfacerequire substantial strengthening, and (iv) inability to unbundle and allocate risk in the domesticcapital market (Appendix 2).

a. Progress of Reforms Not as Fast as Anticipated

15. Power . In the power sector, the impaired financial condition of most state electricityboards (SEBs), the major purchasers of power, has resulted in the marked slowdown of privateinvestments in power generation.15 The poor financial state of SEBs, on the other hand, is dueto several major causes: (i) revenue losses16 arising from subsidies to the agriculture sector andother domestic users, not compensated for by the state; (ii) high level of leakages,17 particularlyfrom distribution mainly due to theft, and inaccurate metering; and (iii) poor collection ofreceivables.18

16. This poor state of SEBs is also hampering privatization. When a SEB is privatized, thestate government has to bear the up-front costs of reform. If the SEB has raised loans with astate guarantee, the cost of meeting these commitments can be formidable. Other costs includeunfunded pension liabilities; contractual obligations, such as unpaid dues to suppliers; voluntaryretirement schemes for reducing excess staff to place the SEB on commercially viable terms;and environmental liabilities, if any.

15 To cover the risk of nonpayment by SEBs, financial institutions resorted to escrow arrangements appropriating

cash flows coursed through an escrow account for payment of power purchases. However, estimates show that thecurrent escrowable capacity is no longer sufficient to cover commitments under signed power purchaseagreements or awarded projects. State guarantees have also been provided. For large fast-track projects,sovereign guarantees have been given.

16 To illustrate the order of magnitude, the ratio of tariff to cost was about 74 percent in 1999/2000.17 Official estimates of transmission and distribution (T&D) losses put them at 21 to 25 percent. However, in states

starting to implement power reform, actual T&D losses are being found to be much higher. For example, in Orissa,the increase was from 23 percent to 51 percent. In Haryana, a recent World Bank study revealed that the actuallevel of T&D losses is about 47 percent instead of 36 percent. Moreover, recent analyses of power utilizationpatterns in Andhra Pradesh, Gujarat, and Haryana indicate that a substantial portion of power consumptionattributed to farmers has actually been utilized by unauthorized nonagricultural users.

18 Average receivables position of SEBs is about 30 percent of revenues.

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17. Among the states, only Orissa, with World Bank support, has separated power intogeneration, transmission, and distribution, and subsequently privatized generation anddistribution.19 Furthermore, only nine states have complied with an agreement reached fouryears ago among state chief ministers to charge a minimum tariff of Rs0.50 to the agriculturesector. This was to be raised to 50 percent of the average cost of supply within three yearsending in 1999.20 Little progress on this has apparently been made.21 Worse, many stategovernments are not compensating SEBs for the subsidies extended to agricultural anddomestic users.22 However, the implementation of more comprehensive structural reforms withassistance from bilateral and multilateral aid agencies suffered significant delays due toapprehensions by countries extending financial assistance over the uncertainty that cloudedIndia’s nuclear policy. In Gujarat, power sector reforms had to be moved back about two and ahalf years from what was originally planned; while in Andhra Pradesh (AP), power sectorreforms were initiated about one and a half to two years behind schedule.

18. In addition, of total energy generated, only about 55 percent is billed while only 41percent is actually collected, and of the unbilled accounts, theft accounts for 20 percent andcommercial losses for 4 percent. Stopping theft and improving billing and collection couldeliminate the current SEB losses. Losses from generation and high voltage transmission areestimated to be 12–13 percent while losses stemming from distribution operations are about40–45 percent.23 Consequently, serious consideration is now being given to privatizing powerdistribution, an area that has been relatively neglected.

19. Roads . An immediate problem is lack of reliable demand estimates. Precise estimatesof demand are difficult particularly for new toll roads where alternative slower but toll-free routesare available. Without reliable traffic projections, determining the commercial viability of tolledroads is difficult. Moreover, the acceptable level of tolls and willingness to pay have yet to beestablished. Consequently, only small bridges and bypasses have been privately financed.

20. Furthermore, in developing a road project, particularly with a component for commercialland development, apart from the Ministry of Road Transport and Highways (MORTH)24 and itsarm, the National Highways Authority of India, numerous other agencies are involved, such asurban planning authorities, local municipalities, and zoning and state revenue authorities.25 TheDelhi-Noida toll bridge project took six years to bring to financial closure. The Vadodara-Halolroad project took four years to commission.

21. However, the governments recognize that private sector participation in roaddevelopment would provide sound project management. Furthermore, professional

19 Andhra Pradesh is in the process of privatizing its distribution companies.20 The low tariff for agriculture is cross-subsidized leading to exorbitant rates for commerce and industry. As a result,

industries are either moving to captive power generation or changing states.21 Gujarat has raised agricultural tariffs by more than 400 percent and average tariff levels for other consumer

categories by 15 percent.22 Andhra Pradesh recently reimbursed its Transmission Company for the tariff subsidy as determined by its

regulatory agency.23 From the Agenda Notes of the Conference of Chief Ministers/Prime Ministers, 3 March 2001.24 A previous key ministry, Ministry of Surface Transport, was reorganized in November 2000 into two ministries:

MORTH, and Ministry of Shipping and Ports (MOSP). MORTH's duties relate to the development and maintenanceof national highways, and policies on road transport. In addition, it coordinates state roads and issues guidelines onhighway planning, design, and construction. MOSP is responsible for major ports, inland water transport, andshipping.

25 National highways are administered by the central Government. All other roads, i.e., state highways, and districtand village roads, are within the responsibility of the state and local bodies.

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management could also contribute significantly to improving road repair and maintenance, asidefrom raising service levels, for example, for emergency assistance for accidents and stalledvehicles, as well as for road safety.

22. Ports . Amendments to the Indian Ports Act, 190826 to enable privatization, and theMajor Ports Trust Act, 196327 to facilitate corporatization have been identified but are yet to bepassed.28 The port sector is governed by a plethora of acts. In addition to the two preceding actsare the Dock Workers’ Act (1948) and the Merchant Shipping Act (1958). Investors arecompelled to examine these and other acts in detail, raising the complexity and riskiness ofdealing with port projects.

23. There is a patent need to develop an integrated plan for capacity development by thecentral and state governments to facilitate private initiatives in port development. For example,eight coastal states have announced plans to develop minor ports in their respective areas.However, these minor ports are in close proximity to each other and to some major ports.Mapping out regional growth patterns and cargo trends to forecast required investments thattake into account possible buildup of excess capacity as well as connectivity requirements andhinterland development would facilitate and mitigate risks for private sector participation in ports.

24. The labor issue needs to be addressed. Existing labor contracts and laws29 still do notpermit termination of labor except through prohibitive voluntary retirement schemes.30 The costof overstaffing is a serious deterrent to private sector involvement. Moreover, the terms ofemployment are quite rigid with wages and job classifications highly specified. Attempts to linkwages to productivity have had limited success. Consequently, ports that have been offered tothe private sector are principally new ports.

25. Ports targeted for development need associated infrastructure that the private sector, byitself, would be unable to provide, such as connecting roads, railway linkages, power facilities,container yards, and customs administration.

26. The main problem for Indian ports is low productivity leading to an average turnaroundtime of 5.9 days.31 This is due to congestion and poor multimodal interface infrastructure. Threeof the oldest ports (Chennai, Kolkata,32 and Mumbai) are located in city centers. They need tobe decongested by developing additional ports that provide needed berthing capacity and easiermodal interface access. Moreover, container-handling costs are comparatively much higherthan in other countries in the Asian region. For example, the India Infrastructure Report 200133

26 This governs the operations of 148 intermediate and minor ports that are administratively under the state

governments.27 This governs the operations of India’s 11 major ports for which responsibility rests with the central Government

through the Ministry Of Shipping and Ports.28 Existing provisions in the Major Ports Trust Act permit private sector participation in ports based on an opinion laid

down by the Ministry of Law and Justice, Department of Legal Affairs. This is to be clarified in the law.29 Dock Labour Board Act and conditions under the contract of the Port Trusts.30 Almost all major ports are believed to have excess labor. Some estimates place excess labor at Mumbai at about

35,000, at Kolkata 13,000, and at Chennai 11,000.31 Against a benchmark of two days at international ports; turnaround time in Singapore is about 6 to 8 hours.32 Formerly Calcutta.33 Raghuram. G. 2001. Integrating Coastal Shipping with the National Transport Network. In India Infrastructure

Report 2001. Edited by Sebastian Morris. New Delhi: Oxford University Press.

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notes that in Mumbai, container-handling charges can be as high as $530 per twenty- footequivalent units versus $281 in Singapore.34

27. Airports . The policy adopted in December 1997 endorsing private sector participationmust now be implemented. New private sector airports at Bangalore in Karnataka, Hyderabad inAP, and Panaji in Goa have been sanctioned. Approval has also been given to privatizingairport services at Chennai, Delhi, Kolkata, and Mumbai. However, as exemplified by theattempt to build a new airport in Bangalore, difficulties are anticipated. As part of the conditions,the private sector parties stipulated closure of the existing airport. After initial agreement andmuch wrangling, the state government refused to carry this out. The process has since beenrevived. The Karnata Government has rebid the airport project, selected a new partner; andagreed to close the existing airport to all civil aviation flights. The policy on airports must beconsidered in conjunction with the policy framework for the entire civil aviation sector. Furtherliberalization of civil aviation could have a palpable impact on air travel in India. The public hasresponded favorably to the decision to privatize Air India and Indian Airlines

28. Water Supply and Sewerage . Urban water supply and sewerage services areadministered by water supply boards in various states. Water supply is generally considered asocial obligation and is subsidized. Consequently, this approach has introduced systemicinefficiencies relating to wastage, theft, high leakage rates, and poor collection. To attractprivate sector investment, pricing will need to be rationalized. Subsidies that may be provideddue to affordability issues should be reimbursed by the state through budgetary support. Thepresent differential in tariff structures among Indian cities ranges from $0.10 to $2 per kiloliter.Local governments usually revise water tariffs every five years. The imposed price increasesare consequently large and typically are resisted by consumers. Nonetheless, certain state havehad some success in this area. The AP state government revised the water tariffs for houseservice connection recently from $0.47 US to a minimum charge of $1.00 per month. This 100percent increase was imposed after seven years. A more pragmatic approach was taken byKerala, which successfully established a program of automatic annual water tariff increases ofup to 15 percent.

29. Inefficiencies in water supply distribution need to be addressed, including high waterleakage. Water loss through distribution systems is estimated to range from 20 to 40 percent ofthe total flow. Furthermore, although most large towns have meters, in certain cases up to 50percent of all meters operate poorly. In many areas, the existing infrastructure is poor due to lowpriority usually accorded to system maintenance resulting from lack of finances; inadequatedata, designs, and survey plans; inadequate training of personnel; and lack of propermonitoring. The sewerage situation is even worse, with many cities not having seweragesystems.

b. Unsuitable Governance Structures

30. As an offshoot of past policies, the operation and development of infrastructure havebeen the responsibility of the central and state governments. Consequently, the governmentshave been the policymakers, regulators, and operators all rolled into one. Services providedwere basically considered public goods, and thus, stakeholders were rarely involved, nor didstakeholders ask to be involved if the services were provided at affordable cost, even if thequality of the service and long-term sustainability were in question. Public dialogue was seldom

34 Yet in Gujarat, ports under the Gujarat Maritime Board charge slightly less than $140 per twenty-foot unit. The

variance in cost compared with Mumbai apparently points to a difference in efficiency levels.

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held on critical economic issues or on the promulgation of formal policy. Moreover, withregulation also the responsibility of the operator, the level of accountability was low.

31. However, with liberalization and the drive to attract private sector participation ininfrastructure operation and development, past philosophies have been gradually changing.This past role is now being reexamined in the different infrastructure sectors with a view toseparating this monolithic structure into various roles to ensure predictability, instituteappropriate checks and balances, promote fair competition and more effective regulation andsupervision, and address most of the uncertainties that often discourage broader private sectorparticipation — all crucial factors for sustainable private sector engagement. More importantly,shifting infrastructure operation and development to a market orientation would promoteefficiency and productivity, both crucial to the long-term soundness and sustainability of India’sinfrastructure sectors. However, this process is still evolving.

32. Few states have adopted formal policies for private sector participation or defined therules and terms under which private sector entry and participation would be allowed and withwhat incentives. Moreover, while the Expert Group’s early recommendations considered theneed for separate autonomous regulatory agencies for the various infrastructure sectors,recognition of this need has been slow.

33. For instance, in the power sector, the Electricity Regulatory Commissions Act waspassed only in 1998 enabling states to set up their own regulatory agencies, the state electricityregulatory commissions (SERCs). This was intended to bring about power tariff rationalization inan objective manner and make government subsidy policies transparent. Of 28 states35, 15have set up SERCs, of which 12 are now functional but only 8 have issued tariff orders.

34. No separate national or state regulators exist for roads. The uncertainty for privatebidders is increased by the multiplicity of agencies that may invite tenders for the same route.With the same ministry responsible for licensing and operating road projects also regulating thesector, the possibility of the private sector not receiving fair and equal treatment vis-à-vis publicoperators remains a concern. The regulatory framework for ports also lacks clarity without aseparate dedicated regulator. For instance, no standards are in place for measuringproductivity, and tariffs are not anchored on economic costs. Prudential norms for port trusts,which manage the major ports, vary considerably. Major ports are covered by the tariffrestrictions imposed by the Tariff Authority for Major Ports, while minor ports are at liberty todetermine their tariff levels.

35. For airports, the central Government formulated a policy on airport infrastructuredevelopment in 1997 to permit up to 74 percent foreign equity participation on automaticapproval and up to 100 percent with special dispensation. It also proposed an independentregulatory board. Regulations, thus, are still to evolve. Accordingly, economic andenvironmental considerations have yet to be addressed concerning questions about locationand connectivity to urban centers, land acquisition and local resistance, pricing of services,performance norms, time and space allocations, and noise and emission standards, amongothers. Similarly for water and sewerage, regulatory bodies are needed at the state/municipallevel to facilitate private sector participation by overseeing the various concession agreementsand setting standards for quality and performance.

35 The three new states of Chhattisgarh, Jharkhand, and Uttaranchal were created only in November 2000 as a result

of the bifurcation of the existing states of Madhya Pradesh, Bihar, and Uttar Pradesh, respectively.

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c. Need to Strengthen Public-Private Interface

36. With the absence of formal or enunciated state policy on private sector participation, fewstates are organized to deal with the private sector and privatizations, as they lack appropriateinstitutional structures and processes, established systems and procedures, and capablededicated staff. Delays are common in (i) seeking approvals for projects; (ii) obtaining permitsand clearances; (iii) processing, negotiating, and finalizing contracts; and (iv) bringinginfrastructure projects to financial closure. Due to inexperience, capacity for promoting anddeveloping infrastructure projects is limited. Thus, priority areas for private sector participationare not identified early and feasible projects are not developed for bidding. Lack of adequateaccess to required data is a serious constraint. For example, developing a pipeline of bankableprojects for private sector investments in roads against a defined plan rather than dealing withprojects on an individual stand-alone basis has proved to be a more cost-effective approach.Furthermore, under its enunciated policy, the central Government, as well as the states, agreedto provide support for preparing detailed feasibility studies, identifying land for right-of-way andenroute facilities; and providing land, as well as environmental clearances including relocation ofutilities and resettlement and rehabilitation of affected people/establishments. Equally importantis the need to develop bankable projects. Lack of financial engineering expertise posesdifficulties in packaging projects that could be successfully offered for financing. Projectdevelopment is proving to be a very risky and costly exercise.

37. Invariably, infrastructure projects attract public interest litigation. Many are avoidable ifconsumers are appropriately sensitized to user charges and to the positive effects ofprivatization. The recent privatization of the Bharat Aluminium Company located in Chhattisgarhis a case in point. At the outset, the privatization met with strong labor resistance and objectionsfrom the state government. Since India is undertaking privatization in a systemic fashion, theimpacts of privatization on all affected parties need to be identified early, and ways by whichsuch impacts are to be mitigated determined. Experience shows that obtaining environmentalclearances from various national and state bodies has led to avoidable delays, arising from localresistance and cost overruns.

38. Moreover, the absence of credible mechanisms for settling disputes and well-definedbases for settling disputes also contribute to protracted debates over terms of agreements.Standard concession agreements have been prepared to guide negotiations for a fewinfrastructure sectors. Model concession agreements have been drafted recently for roads andlargely address lenders concerns. However, they have yet to be tested for bigger projects.Moreover, at the state level, the bankability of concession agreements is an issue since themodel concession agreement is not being used, rather standard construction contracts arefrequently utilized. Similarly, bidding procedures need to be streamlined and enhanced to bringthem in line with international practices. For roads, for example, the eligibility criteria forawarding projects on a BOT basis do not seem to depart significantly from regular road workscontracts. As a result, even small poorly capitalized firms can bid for contracts leading to lengthyselection processes.

d. Inability to Disaggregate and Allocate Risk

39. One of the major constraints to private infrastructure financing in India is the inability ofproject sponsors to identify separately and allocate risk of infrastructure projects. Availablesources of supplemental equity (in addition to sponsors’ funds) and long-term debt that canmatch the long gestation and payback periods of most infrastructure projects are limited, despite

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a large stock market. Thus, domestic financial institutions risk large mismatches in their booksto finance large-scale infrastructure projects, facing both liquidity as well as interest rate risks.Risk from foreign exchange exposure is also difficult to hedge due to a still relatively thin swapmarket. As recourse to available collateral is limited, innovative credit enhancementmechanisms, instruments, and arrangements need to be developed. Escrows have reached thelimits of available cash flows from SEBs, while states have restricted issuances of stateguarantees because of a Reserve Bank of India (RBI) cap on such guarantees.

40. Domestic financial institutions view the risks and costs during construction as majordeterrents. Insurance companies in India are just starting to liberalize and finance infrastructureprojects, and still do not provide insurance cover for a variety of risks such as nonperformanceon technical contracts or risks during construction. For foreign sponsors, sovereign riskparticularly at the state level remains a major consideration.

B. Government Policies and Plans

41. Recognizing the precipitous slide in the growth of infrastructure36 and the need for animmediate response, the Government constituted the Special Subject Group (Subject Group) onInfrastructure within the Prime Minister’s Council on Trade and Industry to suggest ways toenhance investments in infrastructure in the quickest way possible. The summaryrecommendations and composition of the Subject Group are given in Supplementary AppendixA.

42. In general, the recommendations follow two general principles: (i) infrastructure servicesmust be offered in the most efficient, low-cost manner to best meet community needs, and (ii)users must pay for actual costs of infrastructure services plus a reasonable return oninvestment. To accomplish these, six major common policy actions are identified for eachinfrastructure sector: (i) separate the regulator from the operator; (ii) corporatize existinggovernment operating entities to provide better autonomy to these entities and have themoperate along commercial lines; (iii) privatize, where appropriate, corporatized entities (exceptstrategic assets); (iv) promote competition in sectors that are not natural monopolies; (v)establish enabling regulations e.g., for rights-of-way and environmental clearances; and (vi)implement full cost recovery for infrastructure services, e.g., tariff for agriculture sector andresidential consumers, tariff for local calls in the telecommunications sector, and water chargesin cities.

43. Power . An electricity bill introduced in Parliament, will: (i) mandate state governments toreplace SEBs with separate generation, transmission, and distribution companies or generationand combined transmission and distribution companies with a proviso to create moredistribution companies if the state government so decides; (ii) raise the agricultural tariff to aminimum of Rs0.50 per unit, and in not more than three years, raise this again to 50 percent ofthe cost of supply of power as in earlier agreements; (iii) require states that have not set upelectricity regulatory commissions to set one up within three months; and (iv) require strictenforcement of metering equipment as stipulated by the Central Electricity Authority. The view isto consider private distribution of power as an independent economic activity rather than as alicensed operation on terms determined by the SEBs. This will help create a more predictableinvestment environment.

36 Growth in infrastructure slowed to 5 percent of GDP in FY2001, from 8 percent in FY1999.

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44. As an incentive, the Government has offered a one-time settlement of SEB dues tocentral public sector undertakings of approximately Rs260 billion ($5.4 billion) in return for atime-bound program of reforms. Memorandums of understanding between the central andconcerned state governments were signed in March 2001 to this effect. Except for the states ofPunjab and Tamil Nadu, all others agreed to charge a minimum agricultural tariff of Rs0.50 perunit. The governments also agreed that all states would achieve commercial viability of theirSEBs within two years. Each state may follow different routes, but essentially will create profitcenters with full accountability and may choose to hand over local distribution to the privatesector. A consultative group37 recently completed its study formulating a strategy for the capitalrestructuring of SEBs. Incentives for restructuring of about Rs15 billion ($314 million) to SEBsare provided in the current budget and are expected to be provided on an annual basis underthe Accelerated Power Development Programme with an enhanced allocation of power fromcentral sector power companies, along the lines agreed to by the central and various stategovernments.

45. Transmission projects, which are a government monopoly, have traditionally beenfinanced from internal accruals and state budgets. For the past decade or so, developmentfinance institutions such as the Power Finance Corporation and multilateral agencies havefinanced the sector. The Power Finance Corporation has identified transmission and distributionas a high priority sector for financing. However, funding sources have proven inadequate, moreso with the SEBs not being financially equipped to execute projects on their own. To overcomethese constraints, private participation in the sector has been invited with the amendment of theElectricity Supply Act, 1948, to enable private investment in the sector. However, so far noprivate sector enterprise has invested. Karnataka and Madhya Pradesh were among the firststates to invite private participation in the transmission sector. Karnataka formed a joint venturewith National Grid of the United Kingdom to evacuate power from two power generation projectsproposed to be set up at Mangalore. However, with both generation projects encounteringdifficulties, the transmission project has not made any progress. Madhya Pradesh also hadplans to set up over 20 private transmission projects, mainly to evacuate power from the manyindependent power producers proposed in the state. With the independent power producersembroiled in disputes on availability of escrow cover from the SEB, the transmission projectshave been delayed. Demand for private sector participation is expected to improve with theresolution of the generation issues and implementation of independent power producers.

46. In April 2001, the Power Grid Corporation of India also announced plans to tender $2.6billion in six transmission projects under international competitive bidding norms38 using a tariff-based formula intended to select the bidder with the lowest tendered tariff. These projects willbe developed on a build-own-operate-transfer basis.

47. The states of AP, Delhi, Haryana, Karnataka, Orissa, Rajasthan, and Uttar Pradeshhave enacted their respective electricity reform acts. The Madhya Pradesh legislative assemblyhas passed an electricity reform bill. A similar electricity reform bill has been drafted by Gujaratand is awaiting approval by the legislative assembly.39 Average power tariffs have increased by5 to 20 percent in several states (AP, Gujarat, Haryana, Karnataka, Madhya Pradesh,

37 Headed by M.S. Ahluwahlia, former finance secretary.38 ADB is assisting Power Grid Corporation to prepare bidding documents to invite the private sector to implement

transmission projects and to select suitable developers under TA 3380-IND: Private Sector Participation inElectricity Transmission, for $600,000, approved on 28 December 1999.

39 Loans 1803/1804-IND: Gujarat Power Sector Development Program, for $350 million, approved on 13 December2000.

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Maharashtra, and Orissa) following tariff orders by their SERCs. The states of AP, Delhi,Karnataka, and Rajasthan, are scheduled to initiate the process of privatization of distribution in2001/02, with Haryana likely to follow.

48. Roads . The Central Road Fund Ordinance, 2000 was promulgated on 1 November2000. An amount of Rs25 billion ($523 million approximately) was appropriated from the cesson diesel fuel to invest in rural connectivity, while Rs9.6 billion (about $201 million) is being setaside from the cess on diesel and petrol to develop state roads. To facilitate private sectorparticipation, model concession agreements for major projects costing more than Rs1 billionand for projects below Rs1 billion to be undertaken on a BOT basis have been finalized.

49. The total outlay for the road sector was enhanced by 93 percent to Rs87.3 billion (about$1.8 billion). The National Highway Authority is setting up wholly owned special purposevehicles for implementing certain projects on a nonrecourse or partial recourse basis, such asthe Ahmedabad-Vadodara Expressway, Moradabad Bypass, and Palset-Panagarth Roadproject. A 10-year tax holiday during the first 20 years of operation is proposed for roaddevelopment.

50. Ports . While privatizations have yet to be implemented, Ministry Of Shipping and Portshas issued guidelines for inviting private sector participation in defined areas. These include (i)lease of existing assets; (ii) construction/creation and operation of additional assets such ascontainer terminals, multipurpose and specialized cargo, berths, and container freight stationsand storage facilities; (iii) pilotage; and (iv) captive facilities for port-based industries. Somestate governments have begun formulating BOT and similar arrangements for private sectorentry and participation. States such as AP, Gujarat, Maharashtra and Orissa have issuedtenders/ awards for the development of select minor ports.

51. A 10-year tax holiday is also proposed for ports development. It can be availed of withinthe first 15 years of operation. The rates of depreciation for ships and inland water vessels havebeen increased from 20 to 25 percent per annum.

52. Airports . One of the earliest areas to be liberalized in India was civil aviation. Evenbefore a policy on airline infrastructure had been formulated, private participation in domesticairlines was already permitted. Private airlines today provide stiff competition to Indian Airlines,capturing an estimated more than 40 percent of domestic air traffic. The current policy permits40 percent ownership by foreign investors in domestic airlines.40 Fares and schedules havebeen deregulated, but domestic airlines are required to service smaller city routes under thepolicy. Cargo traffic is fully accessible in both domestic and international routes. Privatechartered planes have also been allowed to operate freely, offering services to tourists andentrepreneurs.

53. Water and Sewerage . At the national level, the Ministry of Water Resources isresponsible for laying down policy guidelines and programs for the development of the country’swater resources. The recommended strategy under the Ninth Plan for improving urban watersupply and sewerage is to decentralize water production and distribution systems by devolvingresponsibility to municipal governments including promoting inter-municipal coordination andenhancing the role of civil society associations. The strategy also seeks to promote privatizationand greater community participation in managing and maintaining services, and leveragingpublic resources and exploiting innovative ways to improve access to finance. Currently, the

40 For unclear reasons, foreign airlines are not allowed to have any ownership in these domestic airlines.

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main sources of financing for this sector are budgetary allocations from national, state, and localgovernments (about 70 percent), loans and grants from bilateral and multilateral agencies, andinstitutional lending by Life Insurance Corporation of India and the Housing and UrbanDevelopment Corporation.

54. Under the 74th Constitutional Amendment passed in 1992, service provision for waterand sewerage is to be decentralized to the various municipalities based on greater powersdelegated to local governments. However, the municipal laws required to bring them in line withthe constitutional provisions are yet to be enacted. In practice, implementing decentralizationfaces many constraints. The World Bank identified these as including, lack of standardinstitutional arrangements between the states and municipal bodies for providing water andsanitation services; lack of arrangements for the transfer of resources from the state to themunicipalities; considerable political interference in operations, decision making, and tariffsetting; weak capacity at the municipal levels; fragmentation of municipal functions, lack ofpublic service orientation; limited creditworthiness due to nontransparent financial andaccounting systems, and weak treasury management. Given the systemic nature of theseproblems, the World Bank proposes that the central Government in partnership with the statesand their cities undertake systematic institutional, fiscal, and financial reforms to developcreditworthy cities in line with urbanization and the devolution of political and economic powers.

55. Fiscal Responsibility Act . Concerned about the burgeoning fiscal imbalances and therapid buildup in public debt, the Government constituted the Committee on Fiscal Responsibilityin January 2000 to look into the various aspects of the fiscal system and to draft legislation onfiscal responsibility. This was followed by a pronouncement in the 2000/01 budget to bring thelegislative proposal forward and adopt concrete mechanisms to implement its provisions.Accordingly, the Fiscal Responsibility and Budget Management Bill 2000 was introduced inParliament in December 2000 and subsequently referred to the Parliamentary StandingCommittee.

56. The proposed law binds the Government itself to observe prudent guidelines, achievespecified targets in the conduct of fiscal policy, and thereby promote greater macroeconomicstability. The proposed Fiscal Responsibility and Budget Management Bill will provide a legaland institutional framework to reduce the fiscal deficit, contain the growth of public debt, andstabilize debt as a proportion of GDP over the medium term. It binds future governments to aprespecified path of fiscal consolidation. This covers only the finances of the centralGovernment. The matter regarding similar legislation at the state level will be pursued by therespective state governments. The bill proposes to eliminate the revenue deficit andprogressively reduce the fiscal deficit to not more than 2 percent of GDP within five yearsfollowing the promulgation of the law. It will also contain public indebtedness by specifying thatwithin 10 years, the total liabilities (including external debt at current exchange rate) will notexceed 50 percent of GDP. The Government will also cease any form of direct borrowing fromRBI after three years except in specified emergencies. The Government will also not extendguarantees to projects beyond 0.5 percent of GDP in any given financial year. Fiscal reform willhave crucial implications for the sustainability of infrastructure development in the country.

57. Labor Reform. Labor concern is one of the major constraints to privatization andgreater private sector participation in infrastructure and industry in India, but is being givenserious attention apparently only now. The finance minister, in a recent speech, noted thatlabor market rigidity needs to be addressed in order to promote industrial investments.Consequently, the scope for permitting termination of workers is to be expanded by allowing

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employers of specified industrial establishments with 1,000 or more employees, instead of theearlier 100, to lay off, retrench, or effect business closure following a prescribed proceduresubject to prior Government approval. In parallel, the separation compensation is to beincreased from 15 days to 45 days for every completed year of service. Furthermore, use ofcontract labor is being liberalized by allowing unrestricted outsourcing of activities. Inexchange, protection will be extended to workers by defining compensation for health, safety,welfare, and social security, including larger compensation for retrenchment based on lastdrawn wages for every year of service. In March 2001, the Prime Minister stated that, althoughdifficult, the Government will push for the proposed labor reforms in the Union Budget as themajority of the people desire it. The proposed amendments to the labor laws are expected tobe introduced in Parliament. Labor market reforms have favorable implications for increasedprivate sector activity and expansion.

C. External Assistance to the Sector

58. India is the World Bank’s single largest borrower. The World Bank’s cumulative lendingto India as of June 2000 was over $47 billion in market-based loans from the International Bankfor Reconstruction and Development and development credits from the InternationalDevelopment Association. Of its existing portfolio of 79 ongoing projects amounting to $11.5billion, infrastructure, including energy, projects comprise 20 percent.

59. Japan and Germany are the other major contributors in the sector. Official developmentassistance loan commitments by Japan have steadily increased since 1990. Japan hasemerged as the largest source of bilateral assistance to India. However, due to economicmeasures in place since May 1998, only one new loan has been committed for the BakreswarThermal Power Station Unit–3 Extension Project, an extension of the ongoing project. As ofMarch 2000, a total of 143 official development assistance loans had been committed by theJapan Bank for International Cooperation for a total of Y1,642 billion (about $13.7 billion).41

Infrastructure support comprises about 61 percent of total commitment, with power and gas asthe main beneficiaries.

60. The Kreditanstalt für Wiederaufbau (KfW) has extended DM14 billion (about $6.5billion)42 to India; India has become the largest partner for German financial cooperation funds.KfW’s investments in infrastructure include assistance to SEBs for power sector reforms, IndianRailways, and minor irrigation schemes. Lending to the power sector totals DM1,383 million(about $631 million). For the environment, KfW has assisted the Indian Renewable EnergyDevelopment Agency Ltd. with financing of renewable energy projects.

61. The United Kingdom's. Department for International Development is cofinancing theWorld Bank’s Economic Restructuring Program in AP and is looking at ADB’s Public ResourceManagement Program in Madhya Pradesh for possible cofinancing. Sweden’s assistance toinfrastructure is through a combination of grants and loans comprising $70 million for onehydropower project and $100 million for a transmission line project. Dutch developmentassistance in infrastructure has been mainly for port development, water supply and sanitation,pollution, and sewerage treatment facilities. Currently, assistance is being provided to threestates in India: AP, Gujarat, and Kerala.

41 $1=¥ 119.74 as of 1 October 2001.42 $1=DM2.1486 as 1 October 2001.

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62. The United States Agency for International Development's Financial institutions Reformand Expansion Project includes an element to enhance debt markets for municipal finance and,in this regard, provided TA for the issuance of municipal bonds to some municipal governments.The International Finance Corporation recently issued a guarantee for the local currencyborrowings of the privatized distribution companies in Orissa.

D. Lessons Learned

63. The PSIF I was ADB's first facility established for private sector infrastructure financingand development through Indian financial institutions.43 Much of the analyses and findings inthis report were gathered from feedback and dialogue with the participating and other financialinstitutions in India engaged in infrastructure financing.

64. Through this intervention, financial intermediaries involved were anticipated to developcapacity to undertake the financing of infrastructure projects, help mobilize resources forinfrastructure development, develop innovative instruments and mechanisms for mitigating risksin infrastructure financing, and thereby facilitate private sector participation in infrastructureprojects in India.

65. Among Indian financial institutions, the two financial institutions involved under the PSIFI, ICICI and IFCI, together with the Industrial Development Bank of India (IDBI) emerged as thelargest financiers of infrastructure in India since 1994, with the most rapid growth occurringbetween 1996 and 1998. Total disbursements during 1994/99 were approximately Rs206 billion(about $4.3 billion), of which power projects accounted for 65 percent, roads and ports for 20percent, and telecommunications projects for 15 percent.44

66. The PSIF I has been 96 percent committed for eight ICICI projects (three in power, threein telecommunications, one in ports and one in roads) and for five IFCI projects (four in powerand one in ports). Of the projects financed by ICICI, five have been completed, while three arein progress. For IFCI, three have been commissioned, while two are under implementation.

67. As required under the PSIF I, both ICICI and IFCI have set up separate dedicated unitsfor infrastructure. The one for ICICI was set up in 1996 and focuses on projects in power,telecommunications, transport, and urban infrastructure. It has about 33 professionals in thesesectors now undertaking various functions.

68. Today, these infrastructure groups provide a complete range of financial services, fromproject identification to the structuring of complex project finance transactions. Aside fromlending, they help arrange and provide advice to infrastructure projects. They conduct duediligence over projects to be financed, and help identify and mitigate project risks. Beyondproject financing, they carry out policy dialogue with the central and state governmentsregarding issues affecting the various infrastructure sectors. ICICI,45 in particular, was

43 The World Bank also provided a credit line under its Private Infrastructure Finance (IL&FS) Project for $200 million

in March 1996 for financing private urban infrastructure (water supply and sanitation and roads) projects. Out of thetotal line, only $30 million was reportedly disbursed. A number of reasons appear to account for this: (i) the limitednumber of eligible infrastructure sectors; (ii) more difficult environment for water supply and sanitation and the latereforms in roads, particularly the difficulty with land acquisition and long gestation period involved; and (iii) the morerigid structure of the credit line, as it can only be used as a loan, and all loans were subject to prior World Bankapproval including requests for proposals.

44 World Bank. 2000. Report on India Financial Market Assessment for Private Infrastructure Investments.45 ICICI was one of the members of the original Expert Group.

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instrumental in drafting the model National Highway Authority concession agreement for roadprojects. It is also assisting several state governments undertake the privatization of their powerdistribution companies. ICICI was actively involved in preparing the NationalTelecommunications Policy 1999. ICICI also set up special purpose vehicles in Kerala and WestBengal to help develop infrastructure projects in partnership with the state governments but withunfavorable results.46

69. The PSIF I was to be used to finance debentures issued by infrastructure projects toencourage the development of an active secondary market for infrastructure securities. Allfinanced eligible projects under the PSIF I have issued debentures. However, a market for thesesecurities cannot be created until the infrastructure projects attain stable commercial operations.The underlying securities of start-up infrastructure projects have to undergo “seasoning” prior tomarket distribution. The existing secondary market in debt securities in India are primarily forAAA or at least AA+ rated securities at this time (a rating these infrastructure securities are notlikely to obtain at this stage as they are still perceived to be high risk). Furthermore, unratedpapers are required to carry a 20 percent additional spread in the market in accordance with thestipulation of the Fixed Income Money Market and Derivatives Association based on theirvaluation guidelines. Nonetheless, ICICI has been able to sell the debentures of some assistedinfrastructure projects47 utilizing pass-through certificates (PTCs) issued by a special purposevehicle configured as a trust, typically used in securitization arrangements. Nonetheless, astipulation is included in ICICI and IFCI’s loan agreements requiring infrastructure projectsfinanced to list their debentures at the stock exchanges within two to three years from the startof regular commercial operations.

70. ICICI is today active in the corporate debt market. It has a trading desk with anaggregate turnover of Rs37 billion from April 2000–March 2001 and average outstanding ofRs4.6 billion. It has been engaged in constructive dialogue with various government agenciesand has provided representation in various committees dealing with issues on capital marketdevelopment.

71. However, India’s long-term debt market remains underdeveloped and suffers from anumber of impediments. It is still characterized by a small number of players, with very limitedparticipation by long-term market participants such as provident funds and insurancecompanies;48 weak secondary market,49 hence relatively illiquid market; absence of abenchmark yield curve; and inadequate support infrastructure.

72. Given current market imperfections, weak capacity and lack of the regulatory andinstitutional structures, and standardized systems and processes at the state level, a project-to-project approach to infrastructure development is not likely to advance private sectorparticipation significantly, certainly not to the extent that present Government plans envision.

46 Many believe this outcome was the result of poor choice of states. Both Kerala and West Bengal had, at that time,

communist-led governments with probably the least conducive environments for private sector investments.47 Jindal Tractabel Power Company Ltd., for Rs650 million and for Nandi Highway Developers Ltd., two issues for

Rs324 million and Rs100 million.48 ADB is providing TA for development of provident funds and insurance systems under TA 3367-IND: Reform of

the Private Pension and Provident Funds System and the Employees’ Provident Fund Organization, for$1,000,000, approved on 26 December 1999; and TA 3460-IND: Policy and Operational Support and CapacityBuilding for the Insurance Regulatory and Development Authority, for $800,000, approved on 22 June 2000.

49 A study is also being undertaken by ADB under TA 3473-IND: Development of Secondary Debt Market, for$600,000, approved on 28 July 2000.

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E. ADB’s Sector Strategy

73. India’s economic success over the medium term will depend in large part on theGovernment’s ability to address structural weaknesses, particularly in the infrastructure sectorand in public finances. In key areas of the economy, particularly in power, roads, and transport,investments have failed to keep pace with economic need and their apparent lack is impedingthe transition to a more sustainable and poverty reducing growth path. Given the considerableresource requirement in infrastructure and the significant recurring drain on public finances ofinefficient public structures in various infrastructure sectors, the central and state governmentswill need to (i) promote greater private sector involvement and encourage commercialization byevolving the long-term framework and policy incentive mechanism for private initiatives andinvestment, (ii) strengthen policy coordination among government agencies, and (iii) enhancethe availability of long-term domestic funding. The objectives and design of the PSIF II areconsistent with ADB’s sector strategy. ADB assistance in infrastructure to India is shown inAppendix 3.

F. Policy Dialogue

74. Policy dialogue has been active in all areas of infrastructure sector involvement by ADB,both at the national and state levels. This is carried out by various missions and ADB’s IndiaResident Mission. State operations have allowed ADB to interact closely with state governmentsin pursuing reforms and in bringing ADB’s cross-cutting concerns to the forefront. Periodicreviews have been carried out under PSIF I and the results of these missions have beendiscussed with the financial institutions involved and the Government. Concerns by ICICI andIFCI relating to policy and public-private interface issues discussed with ADB arising out of theirinfrastructure operations and capital market activities have been relayed to and discussed withthe Government.

75. In particular, ADB’s role in capital market development has led to its close involvement inimportant areas of capital market operations, such as provident funds reform and insurancesector liberalization; in the recent past, these were highly protected areas.

76. The PSIF II was closely coordinated with various donor agencies engaged ininfrastructure financing in India, particularly the World Bank that has been cooperating with ADBon state level interventions. Based on these consultations, there appeared to be a high level ofsupport for ADB assistance to private infrastructure in India. ADB has been a major provider ofdevelopment assistance for promoting private sector participation in infrastructure development.

IV. THE PARTICIPATING FINANCIAL INSTITUTIONS

77. Two national financial institutions will be the Borrowers for the PSIF II: IL&FS and IDBI.Both institutions have solid backgrounds in infrastructure financing. The two PFIs can easilyabsorb the loans being provided. IDBI has a long history of dealings with ADB, while IL&FS, inparticular, is specifically mandated to promote infrastructure projects in India on a commercialbasis. During PSIF II effectiveness, both PFIs will comply with prudential norms to ensure theircontinued sound operation. These prudential norms will include (i) a capital adequacy ratio of 9percent based on guidelines, as amended from time to time, established by the RBI; (ii) a debtservice coverage ratio of not less than 1.1 times; and (iii) compliance with the prudentialguidelines of RBI, and those laid down from time to time, in particular, regarding the recognitionof income, classification of assets, and debt provisioning.

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A. Infrastructure Leasing and Financial Services Limited

78. IL&FS has been quite active at the state level and has existing memorandums ofagreement with various state governments to implement specific projects: in AP, in partnershipwith the AP Industrial Infrastructure Corporation, the nodal agency for dealing with the privatesector; in Gujarat, under a technical collaboration with the Gujarat Industrial InvestmentCorporation and agreements to undertake various toll road projects; in Madhya Pradesh, toundertake various toll road and water supply projects (the Rau-Pithampur road In MadhyaPradesh was one of the first projects to be undertaken by IL&FS). It has existing arrangementsin Bihar, Orissa, Rajasthan, Tamil Nadu, and Uttar Pradesh for various projects. It has (i) takena number of new intiatives to facilitate the financing of infrastructure, among them, the setting upof a project development fund in May 2000 to assist with project development; (ii) partnered withthe states using a strategic alliance format it calls project development and promotionpartnership; and (iii) pioneered the use of new instruments for raising financing for infrastructureprojects such as deep discount bonds and cumulative convertible preference shares. Among itsshareholders are the International Finance Corporation, ORIX Corporation of Japan, and CreditCommercial de France. IL&FS had total assets of Rs33.6 billion (about $703 million) in FY2001,an increase from about Rs15.4 billion (about $322 million) in FY1996. Net worth rose fromRs3.7 billion (about $77 million) to Rs6.4 billion (about $134 million) during the same period.Capital adequacy stood at 16.3 percent as of 31 March 2001. More detailed background onIL&FS is given in Supplementary Appendix B.

B. Industrial Development Bank of India

79. IDBI is a statutory organization operating under its own act. In 1994, IDBI was permittedto float its shares in the market and as of June 2000, the central Government decreased itsshareholdings to 58.0 percent; the rest were held by the public as IDBI is publicly listed. It is oneof the largest infrastructure financiers in India. It has approved 51 independent power projectswith a total capacity of 20,049 MW. In telecommunications, it has provided financial support to11 cellular operators and four basic operators. It has financed private road and port projects inAP, Gujarat, Karnataka, Maharashtra, Orissa, Rajasthan, Tamil Nadu, and Uttar Pradesh.However, unlike IL&FS, it is less actively engaged in direct initiatives at the state level oninfrastructure financing and development. Nonetheless, it has agreed to work closely with IL&FSand the selected states participating under the PSIF II. At the national level, it organizesworkshops on infrastructure issues constraining the flow of investments to infrastructure sectors.IDBI has been the premier long-term financing institution in India for several decades. Many ofthe key officers of other financial institutions in India were trained at IDBI. It has sponsored theorganization of a number of major institutions in the financial markets; it played a key role informing the Securities and Exchange Board of India (the capital market regulator), NationalStock Exchange, National Securities Depository Ltd., the OTC Exchange of India, etc. It is alsoone of the promoters of IDFC. IDBI is undergoing restructuring and is positioning itself tobecome a universal bank to improve its future competitiveness, both by enhancing its ability toaccess lower cost deposit funds and expanding its products, services, and network. IDBI hasretained the services of Boston consulting group to prepare a detailed plan for organization andbusiness restructuring to transform it into a globally competitive universal bank. IDBI has alsoretained the services of Arthur Andersen, as consultants, to advise it on asset-liabilitymanagement policies and procedures based on international best practices. ADB's associationwith IDBI dates to November 1987 when the first ADB loan of $100 million was sanctioned foronlending to small-and medium-sized industries. In December 1994, ADB approved a secondline for $150 million to improve the energy efficiency of selected industries in India by upgrading

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and modernizing technology. Both projects have been satisfactorily implemented. IDBI had totalassets of approximately Rs718 billion (about $15 billion) as of 31 March 2001 compared withRs444 billion (about $9 billion) in FY1996. Net worth increased from Rs65 billion (about $1.4billion) to Rs92 billion (about $2 billion) in FY2001. However, in view of the current economicdownturn, net profit declined to Rs6.9 billion (about $144 million) from Rs9.5 billion (about $200million) in the previous year, partly due to a rising level of nonperforming assets that rose as apercentage of total assets at 14.8 percent as of 3 March 2001. Capital adequacy nonethelessremains satisfactory at 15.8 percent. (Supplementary Appendix C provides more details)

V. THE PROPOSED ASSISTANCE

A. Proposed Financing

80. The PSIF II comprises two separate loans of $100 million each to IL&FS and IDBI. EachPFI will use the funds to finance infrastructure projects, that are 51 percent majority owned bythe private sector, in specified sectors in four selected states (see paras.103-105) at marketrates corresponding to rupee loans. Each PFI is required to hedge the foreign currencyproceeds of the PSIF II to cover the foreign exchange risk, and provide financing toinfrastructure projects in local currency.

81. Furthermore, due to difficult market conditions and the need to tailor-fit financialpackages to suit individual projects and to meet varying risk requirements, the PSIF II may beutilized flexibly to finance different types of debt instruments (marketable securities) other thanequity shares, such as subordinated and convertible debentures50 and deep discount bonds.The PFIs have effectively utilized such hybrid instruments. The proceeds from the sale orredemption of long-term securities issued by infrastructure projects financed through subloansunder the PSIF II will be used to purchase other long-term securities of eligible infrastructureprojects within the terms of the facility. However, during the interim period prior to reinvestmentof proceeds, such proceeds may be temporarily reinvested in government securities, reserve-eligible securities, prime commercial banks, or AAA-rated51 securities. If the PFI is unable toreinvest such proceeds in any eligible infrastructure project within 24 months, the loan will beprepaid to ADB subject to the terms of ADB's Libor-based lending facility.

B. Rationale

82. Until purely market-based solutions become feasible in India, a proactive approachwithin an integrated framework to create an enabling environment for private sector participationin infrastructure development will be required based on public-private partnerships involving noless than the state governments, and state and national financial institutions.

83. Furthermore, attempts to resolve the constraints to infrastructure development on anational scale in India would be unrealistic. Instead, the PSIF II proposes to demonstrate howthese constraints may be addressed at the state level based on the experiences of selected,more progressive Indian states in infrastructure development and on best practice. By focusingassistance to a few selected states, the PSIF II could help institutionalize state performance asa key factor in credit evaluation by Indian financial institutions, in the credit rating ofinfrastructure and industrial projects (particularly, those backed by state guarantees), in the

50 The conversion of a debenture issue into equity will be treated as a sale under the facility and an equal amount of

funds will be allocated to finance other qualified infrastructure projects.51 Indicating highest investment grade and safety.

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provision of central Government guarantees for state obligations, and consequently, incatalyzing the flow of resources to progressive, performing states, and in helping establish anappropriate incentive structure for other Indian states to improve performance, and hopefully,pursue required reforms. The PSIF II also promotes the cross-fertilization of ideas among Indianstates for each state to benefit from the experiences and innovative approaches that haveproved effective in developing the infrastructure sectors of progressive states. It also helpsthese states rationalize incentives. Competing on the basis of nonperformance-based taxincentives, for example, has only led to losses in tax revenues without any significant gains inadditional investments for certain states. ADB assistance has also been targeted to supportgreater private sector involvement in infrastructure sectors where reforms are being undertaken.

C. Mechanics of the Facility

84. The market for long-term debt securities and the market for hedging foreign exchangerisk are at the early stages of development. Nonetheless, a number of alternative approachesare open to the PFIs for meeting ADB's requirement of applying the PSIF II proceeds topurchase marketable securities issued by, and hedging the foreign exchange exposure of,infrastructure projects. These would, however, necessarily involve flexible arrangements.

1. Mechanisms for Issuing Marketable Securities

85. Option 1 . The PFI swaps the PSIF II foreign exchange proceeds into rupees with anavailable counterparty and uses the rupees to purchase an equivalent amount of marketablesecurities from infrastructure projects. These securities will be denominated in local rupees andpriced according to market rates for rupee securities. This would require repricing or refinancingof the securities every seven years or so, as swaps do not stretch beyond these periods in thecurrent swap market in India. This is the procedure illustrated in Figure 1.

86. Option 2 . The PFI provides the PSIF II foreign exchange proceeds to the infrastructureproject as a loan.52 To comply with the ADB requirement, a parallel issue of rupee securities(managed by the PFI) is made for an amount equivalent to the PSIF loan. Such rupee securitiescan be made mainly from the local debt component of the total financing requirement of theinfrastructure project. Since most projects would have a significant local debt component, thisoption would not pose an implementation problem. The only constraint would be the creditexposure limit of the PFI to single borrowers if the PFI is unable to sell the securities in thesecondary market and ends up holding the securities itself. Under this option, in the event thatthe rupee securities are redeemed within three years from the date of issue, the PFI is obligatedto redeploy the proceeds of the redemption to purchase other long-term securities from eligibleinfrastructure projects.

52 The infrastructure project may arrange its own foreign exchange swap or a suitable foreign exchange cover itself at

a later date.

Government

AsianDevelopment

Bank

Participating Financial Institutions

SwapCounterparty

Infrastructure Project

Investor

Guarantee

PSIF Loan Proceeds

PSIF Repayment

RsInvestment

RsMarketableSecurities

In Rs

PSIF Loan Proceeds

In Rs

Guarantee Fee

Indicative Cost Structure (%)Six-Month LIBOR 2. 64*ADB Spread 0 .60Font-End fee 0.10 3.34GovernmentGuarantee Fee 0.60 3.94

PFI Spread 3.00 6.94

Swap Rate 6.00 (long-run estimate)Total 12.94

ADB = Asian Development BankLIBOR = London interbank offered ratePFI = participating financial institutionsPSIF II = Private Sector Infrastructure Facility at State LevelRs = Indian Rupee

* as of 1 October 2001.

Figure 1: Mechanics of the PSIFII

Marketable Securities

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22

87. Option 3 . The PFI lends the PSIF II foreign exchange proceeds to infrastructureprojects, against which the infrastructure projects issue rupee securities. Foreign exchange riskwill be borne by the infrastructure projects.53 Any difference arising from exchange fluctuations(on principal and interest) between the foreign currency-denominated loan and the rupeesecurities will be repaid by the infrastructure project to the PFI separately at every due date. ThePFI can price the rupee securities on the basis of discounts against the rate on the foreigncurrency-denominated loan in the secondary market.

88. Option 4 . The PFI provides a foreign exchange or rupee loan to an infrastructure projectto finance project construction, but the project may be relatively unknown in the market andwould be unable to obtain an acceptable credit rating for its securities issue during this period.The PFI may trade the securities on the secondary market on a with-recourse basis (i.e.,against the guarantee of the PFI), or the PFI may securitize the loan after the project achievesnormal operation and is able to obtain an acceptable rating.

89. Option 5 . The PFIs can sell the debentures of assisted infrastructure projects utilizingPTCs issued by a special purpose vehicle configured as a trust, typically used in securitizationarrangements. PTCs are issued to investors in return for revocable contributions made by themto the special purpose vehicle. The PTCs are essentially in the form of zero coupon instrumentsand are issued at a discount to face value and redeemed at par. The PTCs represent beneficialinterest by the investors in the cash flows arising from the debentures. Nonetheless, astipulation will be included in the loan agreements that would require infrastructure projectsfinanced to list their debentures at the stock exchanges within two to three years from the startof regular commercial operations.

2. Hedging Mechanisms

90. Option A . Obtain a forward cover. Large commercial banks provide forward covers,limited as to amount and tenor.

91. Option B . Swap the foreign exchange liability. India has a nascent market for thisproduct, with a great deal of interest in such structures. Pricing is still on a negotiated basis inthe absence of dealers or market-makers. Nevertheless, a bidding process normally ensuresfine pricing. Counterparties are confined to highly rated entities. The existing swap market islimited to seven years, which means the interest rate will have to be reset every seven years orthe period of each swap. Nonetheless, most projects envisaged would have income streamsthat would adjust with inflation. Hence, interest rate resetting may be offset over time and shouldnot pose considerable risk.

92. Option C . Use an Internal swap. The PFI will switch the use of the foreign exchangeproceeds to clients requiring foreign exchange with available hedges (i.e., exporters) andprovide a matching loan in rupees to the infrastructure project.

93. Option D . In some cases, a combination may be required.

94. On the secondary market, the securities can be sold to various investors under a varietyof terms that can meet diverse requirements, such as (i) on agreements to repurchase forinvestors that may wish to have the securities redeemed and funds available at some future

53 Until a foreign exchange swap or cover is arranged. In most cases, contractual arrangements by subloans allow

recovery of reasonable costs arising from currency devaluation.

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date to meet temporary liquidity needs; (ii) on a with-recourse basis, to substitute the PFIs creditfor the credit of the underlying infrastructure project if investors are unfamiliar with theinfrastructure project; and (iii) on straight-to-maturity, without-recourse basis to mutual funds,insurance companies, and other financial institutions that have the capacity for holding thesesecurities on a long-term basis. Under prevailing requirements, debt securities with more than18 months maturity publicly offered in India's capital market require a credit rating.54 This wouldadd to the safety of these instruments to be floated on the secondary market. The PFI may alsoissue its own negotiable long-term promissory notes or bonds or other form of securities on thecapital market to refinance outstanding securities of infrastructure subloans depending upon itscapital adequacy ratio. As has been done, PTCs may be utilized through special purposevehicles for tapping domestic funds (para. 69)

3. The Incentive Structure

95. Performance-based criteria are incorporated in the design of the PSIF II: (i) eligibilitycriteria were formulated (Appendix 4) to select the four specific states, (ii) Access Criteria to thePSIF II were identified for the selected states to ensure commitment to sustained support forprivate sector participation and development of the enabling environment (Appendix 5), and (iii)Continued Access Criteria to the PSIF II benchmark progress of state policy reforms indeveloping the enabling environment for private sector participation (Appendix 6). These criteriawill form the basis of ADB policy dialogue with the selected states to promote infrastructuredevelopment, increase private sector participation, and ensure that infrastructure projectsmaterialize that will allow the PSIF II to be effectively utilized.

96. To encourage the selected states to accelerate reforms, the PSIF II will be madeavailable as a two-tranche facility. The first tranche will be made available upon fulfillment of theAccess Criteria and will be a preallocated amount of $20 million dedicated for the financing ofqualified infrastructure projects in each of the four selected states comprising 40 percent of thefacility (para. 125). A midterm review on or about two years from the date of loan effectivenesswill be undertaken by ADB with the participation of the selected states and PFIs concerning theprogress in fulfilling the Continued Access Criteria and continuing pipeline of bankable projectsin each state. Any uncommitted portion of the preallocated amounts in the first tranche after themidterm review will revert back to the funds facility pool comprising the balance of the loans toeach PFI. These funds will become available to other selected states. The second tranche willbe unallocated and will be provided on a competitive basis upon satisfactory review by ADB ofsubstantial progress by selected states in meeting the Continued Access Criteria. The proposedADB TA (see paras.160-162) will provide expert support to help each selected state pursuepolicy and operational changes envisaged under the Continued Access Criteria.

97. However, as the PSIF II is a project facility, release of the second tranche will beaccelerated if projects materialize more quickly than expected. The operation of private sector-led projects should take priority as they are of considerable value in demonstrating theeffectiveness of commercially run operations in improving sector efficiency and in advancing thepublic-private interface. If, on the other hand, funds remain unutilized and market feedbackindicates the PFIs and selected states are making no progress in bringing infrastructure projectsto financial closure, ADB can accelerate the midterm review and take corrective steps of eitherexpanding the number of selected states and/or increasing the sectoral scope of the facility. Onthe other hand, during the midterm review, if ADB’s review reveals that the Continued Access

54 India has three credit-rating agencies: Credit Rating and Information Services of India Ltd., in which the ADB has

an equity investment; Investment Information and Credit Rating Agency of India Ltd.; and Credit and Research Ltd.

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Criteria have not been substantially met and/or sectoral policy reforms55 have been reversed orsubstantially diluted, then in consultation with the PFIs, ADB may, after the midterm review,admit other Indian state(s) to participate under the PSIF II if they meet the eligibility criteria, fulfillthe Access Criteria, and commit to undertake the Continued Access Criteria or substitute anyselected state with such other eligible state(s). If necessary, ADB may also expand the scope ofthe eligible sectors for financing after the midterm review. This is also designed to provideflexibility to the facility and address concerns by the PFIs that continue to pay commitment feeson their loans, should infrastructure projects in selected states prove slow in materializing.Appendix 7 provides the design of the incentive structure of the PSIF II.

98. Accordingly, funds under the PSIF II allocated under the first tranche will be madeavailable for two years for commitment and for five years for disbursement for each state fromthe date of loan effectiveness and any uncommitted balance under the first tranche will bereallocated to the funds project facility pool after the lapse of two years. The second tranche,whose use may be accelerated depending upon the speed with which the PFIs and selectedstates are able to execute private infrastructure projects, will have a term not exceeding fouryears for commitment and five years for disbursement from the date of loan effectiveness.

99. The PSIF II will concentrate on only four states because (i) resources of the PFIs underthe PSIF II are limited and increasing the number of states would spread their resources toothinly; (ii) other states apparently at a low state of readiness are to accommodate the criteriaspecified under the PSIF II; (iii) the size of the facility is limited relative to state financingrequirements to make it attractive for states to participate; and (iv) effective supervision of thePSIF II must be ensured.

100. To improve the public-private interface and facilitate project processing, each state hasidentified formal structures56 mandated to deal with the private sector and act as one-stopfacilities that could provide clearances for, approve, license, and grant incentives toinfrastructure projects in coordination with line ministries. The same entity would interface withproject developers and sponsors by (i) identifying priority sectors and specific projects fordevelopment, (ii) conducting bidding, and (iii) awarding projects.

101. The PSIF II will be coursed through two national level financial institutions, IL&FS andIDBI (see paras. 77-79 and supplementary appendixes B and C provide descriptions of theiroperations).57 IL&FS and IDBI were not participating financial institutions under PSIF I. Theirparticipation in the PSIF II will hopefully help spread the benefits of ADB assistance. The choiceof national financial institutions rather than state financial institutions to implement the projectfacility was prompted by (i) the need to mobilize resources on a larger and wider scale to meetlarge infrastructure development requirements and (ii) by their greater absorptive capacities.Under the PSIF II, the PFIs are asked to seek an active partnership with state governments inundertaking infrastructure projects. In particular, to provide support for the structuring,development, and financial engineering of infrastructure projects. Often the problem is not lackof projects (the shelf of projects for development is substantial) but lack of bankable projectsthat financial institutions are prepared to finance or invest in, and that private sponsors find

55 Essentially as defined in policy reform programs with ADB and the World Bank.56 The Gujarat Infrastructure Development Board, which carries out these functions in Gujarat was established with

ADB assistance under TA 2716-IND: Institutional Strengthening of the Gujarat Infrastructure Development Board,for $850,000, approved on 18 December 1996.

57 The Infrastructure Development Finance Company also considered participating but could not justify additionalborrowings even of longer maturity, at this time as it has excess funds (estimated at about $300 million).

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attractive from a risk-return standpoint. This will help accelerate the transfer of technology dueto the low level of capacity of state institutions to undertake project development.

102. Funding for project development is a major constraint. IL&FS has established a projectdevelopment fund that operates like a venture capital fund and asked ADB to considerparticipating. Other initiatives are being undertaken to fill identified financing gaps. In Gujarat,IDFC together with the AIG Group of the United States and the Gujarat Industrial InvestmentCorporation Ltd. have formed an asset management company that is now in the process ofsetting up equity and debt funds to invest in and finance infrastructure projects58 that will be setup in Gujarat. To cover identified market risks, IDFC in discussions with ADB indicated it wouldlike to pursue the setting up of a guarantee fund with ADB dedicated to infrastructure projects59

(Supplementary Appendix D provides the proposed structure for promoting private sectorparticipation at the state level under the PSIF II).

4. Scope of the Facility

103. The choice of Infrastructure sectors to be financed aims to support reforms and reflectsthe projected infrastructure demand at the state level to facilitate loan utilization:

(i) in the power sector, power distribution and transmission projects for privatizationand privately sponsored projects, including the modernization and upgrading ofexisting privately owned power projects including generation;

(ii) state roads on build, own, operate (BOO); BOT; and similar arrangements withidentified provision for maintenance;

(iii) privately run urban mass transit systems;(iv) minor ports under private concession where connectivity is clear;(v) optic fiber cable connections that are privately funded but not private

telecommunication projects where commercial financing is readily available;(vi) airports, with services under private management or for privatization;(vii) privatized water supply and sanitation services or services that are under private

concessions;(viii) cyberparks for private companies; and(ix) special economic zones.

104. Included within the scope of the PSIF II for financing are infrastructure andinfrastructure-related projects considered priorities by the selected states. These include urbanmass transit systems, optic fiber cable connections, cyberparks, and special economic zones(SEZs). India has 23 metropolitan cities and the number is likely to increase to 40. Citywidestudies were carried out on how to relieve congestion and improve efficiency of transport inAhmedabad, Bangalore, Bhubaneswar, Chennai, Cuttack, Delhi, Hyderabad, Jaipur, Jammu,Kolkata, Lucknow, Mumbai, Nagpur, Surat, and Vijayawada. Private investment in mass rapidtransit systems is being sought. Due to the prohibitive cost of such systems and affordabilityissues, planned systems are rail-based using existing rail right-of-way based on electricalpower. AP, Gujarat, and Karnataka are pursuing initiatives to set up these mass transit systems

58 ADB was also asked to participate. International Finance Corporation indicated interest in considering equity funds

at the state level.59 In terms of disaggregating project risks, this vehicle was suggested by ADB to be worth exploring to cover the risk

of infrastructure projects during the period of preparation and construction, typically the first five years, thatfinancial institutions were reluctant to take. Financial institutions were willing to take the commercial risks once theproject becomes operational.

26

in their capital cities at Ahmedabad, Bangalore, and Hyderabad. Optic fiber connections bylaying undersea cables are being contemplated in AP to connect to Malaysia and will bespearheaded by Malaysian strategic partners. Traffic between India and the West is substantial,but traffic to the East is still not as developed. The development of cyberparks is part of theinformation technology policy of AP and Karnataka. As software leaders in India, morecyberparks are being contemplated where infrastructure development would be substantial. Inthe same vein, SEZs are being set up in AP, Gujarat, Karnataka, and Madhya Pradesh with therelated private infrastructure. In May 2000, the Government has announced a new policyframework for SEZs designed to compete for benefits from foreign investments. Studies havebeen conducted on SEZs operating successfully in other countries, the People’s Republic ofChina, in particular. These SEZs are also being established in concert with port developmentplans. Supplementary Appendix G provides the pipeline project likely to be available forfinancing under the PSIF II during 2001-03.

5. Selected States

105. The four selected states for the PSIF II are AP, Gujarat, Karnataka, and MadhyaPradesh. Selection was based on: (i) the feedback received by ADB missions from varioussectors, including credit-rating agencies and PFIs; (ii) ADB missions' own assessments andinternal consultations; (iii) findings of a World Bank survey60 being undertaken with theConfederation of Indian Industry on State Investment Climate; and (iv) results of a recent survey— The Best States to Invest In—undertaken by the Business Times of India61 .

106. Gujarat and Maharashtra62 are considered to be the "best" states. However, many feltthat reforms have been faltering in Maharashtra. The Enron Dhabol Power Project dispute hasbeen cited as a factor. Business Times cited the deterioration of Maharashtra’s revenue, whichis now in deficit of Rs80 billion vis-à-vis a revenue surplus in 1994/95. The next best statescomprise AP, Karnataka, and Tamil Nadu (in the World Bank survey) plus Kerala andPondicherry63 (in the Business Times survey). Kerala is a focal state for ADB, but reforms haveyet to progress and the scope is limited for private infrastructure investments at this time. TamilNadu,64 on the other hand, was one of two states that refused to revise the power tariff for itsagriculture sector.

107. Madhya Pradesh's experience in program implementation is regarded as veryinnovative. Mainly due to the initiatives of its chief minister, the state has implemented

60 Initial findings were discussed by David Dollar (World Bank) in his presentation on Trade, Growth and Poverty for

the Asia and Pacific Forum on Poverty, Asian Development Bank. February 2001. The World Bank survey covers asample size of 1,032 firms, with 300 more to be added. It contains 152 questions but generally asks which the bestand worst states are for investment and what the cost advantages and disadvantages are for moving into the bestand worst states. It also seeks to clarify perception versus reality by measuring actual investments and undertakingtotal factor productivity studies. The final draft is targeted for the last quarter of 2001.

61 The Business Times-Gallup survey started in 1995 is based on the responses of chief executive officers (CEOs) ofmanufacturing and service companies. The survey has two objectives: (i) identify and rank the parametersemployed by corporations to determine which state to locate their projects in, and (ii) to use these parameters torank Indian states regarding their investment attractiveness. In 1997, Business Times expanded the methodologyby including objective data that now includes fiscal performance and degree of financial development in the state.Data for five broad categories are collected (i) physical infrastructure, (ii) governance, (iii) labor, (iv) financialinfrastructure, and (v) social infrastructure.

62 Also Goa in the Business Times-Gallup survey, but the state has limited scope for infrastructure.63 Pondicherry was not considered in any of the discussions.64 Tamil Nadu expressed interest in participating in the PSIF II and did not out rule future reforms in its infrastructure

sectors.

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numerous innovations in its delivery of poverty-oriented services and the state's developmentmodel is a subject of worldwide study. ADB has an ongoing program to strengthen publicresource management.65 A brief overview of the enabling environment for private sectorparticipation in infrastructure development and satisfaction of the Access Criteria in eachselected state are presented in Appendix 8, Matrix on Enabling Environment for Private SectorParticipation in Infrastructure Development in Andhra Pradesh, Gujarat, Karnataka, and MadhyaPradesh.

108. Andhra Pradesh. The Andhra Pradesh Government has an ambitious vision for theeconomic and social development of the state, and identified construction and infrastructure asthe growth engines for their role in employment creation and in catalyzing other productiveinvestments. For this purpose, the government developed a comprehensive economic plan,Vision 2020, that aims to improve the quality of life in AP by accelerating economic growth,increasing social spending, adopting good governance practices, and achieving fiscalsustainability. AP has identified 31 mega projects for implementation by the private sector underits Vision 2020. Projects of about $1.73 billion have been identified for implementation by theprivate sector by 2003.

109. On 20 September 2001, this was supplemented by enactment of the InfrastructureDevelopment Enabling Act, as well as with sector policies for private sector participation ininfrastructure projects. Under the act, an infrastructure authority is to be created to handleregulation and dispute resolution. Procurement processes and authority levels to negotiate andaward contracts necessary for a transparent and conducive investment climate for private sectorparticipation in infrastructure projects are defined. AP Industrial Infrastructure Corporation(APIIC), on the other hand, will undertake privatization and project development in collaborationwith different experts in the field such as IL&FS. It is also setting up an infrastructure funddesigned to meet project development expenses with the state government initially contributingRs50 million. However, other funding has yet to materialize.

110. AP launched a comprehensive program of economic and structural reforms with WorldBank support.66 The AP Electricity Reforms Act (October 1998) took effect in February 1999.Two months later, an independent regulatory authority was established and tariff orders wereissued. The first tariff order was for a 16 percent average tariff increase, which is for full costrecovery and beyond what the state transmission company had sought. AP has also alreadyseparated generation from transmission and distribution of its SEB. Four wholly owneddistribution companies have been formed and joint venture partners are now being sought.Privatization is expected to be completed by next year. Model concession agreement is beingprocessed for ports, and proposed for roads, information technology, and SEZs. The Rights toInformation Act provides for right of access to information to the citizens of the state to promoteopenness, transparency, and accountability in administration; while the Right to TransparencyAct provides for transparency in public procurement of goods and services. SupplementaryAppendix E provides a more detailed economic profile.

65 Loan 1717-IND: Madhya Pradesh Public Resource Management Program, for $250 million approved on 14

December 1999. Madhya Pradesh has satisfied the conditions of the program supported by the ADB loan andrelease of second tranche is being recommended.

66 The World Bank supported power sector reforms under its adjustable program lending. In addition, it is alsosupporting AP's Public Enterprise Reform and Fiscal Reform Program through its Economic Restructuring Project.

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111. Gujarat. One of India's most industrialized states, Gujarat maintains a variety ofindustries, contributes almost 11 percent of India’s industrial output, and accounts for 10 percentof its private consumption.

112. Gujarat was the first state chosen for ADB’s state-level operations and a loan supportinga public resource management program was approved in 1996.67 ADB assistance so far hasfocused on improving public resource management, reforming the power sector, andestablishing the Gujarat Infrastructure Development Board as the first infrastructure projectdevelopment facility of its kind in India. Prior to the January 2001 earthquake,68 the state wasdeemed to be a possible candidate for self-sustaining development in the near future.

113. Gujarat has taken significant steps to attract private sector participation in itsinfrastructure sectors. Gujarat has enacted the Gujarat Infrastructure Development Act (GujaratAct No. 11 of 1999). The act was designed to provide a framework for participation in thefinancing, construction, maintenance, and operation of infrastructure projects. The act describeswho can participate in the projects, what their participation will be and the procedure forconcession agreements. In parallel, the Gujarat Infrastructure Development Board wasestablished to promote private participation in projects, to advise the state government on policymatters, to interface with national and international financial institutions, and to coordinateprojects undertaken by the state. The board has prepared a master plan for infrastructuredevelopment, the Gujarat Infrastructure Development Agenda 2010, identifying 383 projects invarious sectors with a projected required investment of Rs1,170 billion (approximately $24.5billion) over 10 years, the first Indian state to do so.

114. In the power sector, Gujarat already has an operational electricity regulatorycommission, set up under earlier ADB program assistance. It is pursuing power sector reformsunder the Power Sector Development Program69 assisted by ADB. It also has formulated roadsand ports policies, and identified projects for development. It has developed a model concessionagreement for private sector participation in roads, the first among Indian states, as well as forports. Gujarat has initiated actions for establishing regulatory frameworks for water supply,urban infrastructure, ports, SEZs, and roads. Gujarat has also set up a task force to examinethe requirements for setting up a dispute resolution authority. Gujarat Industrial InvestmentCorporation, with the AIG Group, and IDFC, have set up an asset management company andare now in the process of establishing equity and debt funds. Gujarat has been pressing forADB assistance for its infrastructure sectors after undertaking the reforms specified under itspolicy reform program with ADB. Supplementary Appendix E provides a more detailedeconomic profile of the state.

115. Karnataka . The Karnataka government has initiated measures to strengtheninfrastructure facilities and create an atmosphere for rapid industrial development in the state,thereby creating additional employment opportunities and enabling rapid economicdevelopment.

116. Cognizant of the crucial role power has in facilitating unhindered growth and povertyreduction, the state government committed to time-bound reform and restructuring of the sector

67 Loan 1506-IND: Gujarat Public Sector Resource Management Program, for $250,000,000, approved on 18

December 1996.68 Loan 1826-IND: Gujarat Earthquake Rehabilitation & Reconstruction, for $500,000,000, approved on 26 March

2001.69 Loan 1804-IND: Gujarat Power Sector Program Loan, for 150,000,000, approved on 13 December 2000.

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with World Bank assistance, the Karnataka Power Sector Reform and Restructuring Program.The Electricity Reforms Act was passed in 1999, and the Karnataka Electricity Board wassubsequently corporatized. The Karnataka Electricity Regulatory Commission has also beenconstituted and passed its first tariff order raising the average tariff by 26 percent. The stategovernment also signed a memorandum of agreement with the national Ministry of Power,committing to a time-bound reform and restructuring program for its power sector, undertakingto separate transmission and distribution, and privatize distribution. It targets to accomplish thisby June 2002.

117. Karnataka has an infrastructure policy contained in a Government order. This issupported by formal policies in various infrastructure sectors. It also has procedures establishedfor transparent tendering of projects. It has designated the Infrastructure DevelopmentDepartment of the Ministry of Industry and Commerce to serve as a single window for privateinvestors in infrastructure projects. It has also formed a partnership with IDFC called i-Deck[Infrastructure Development Corporation (Karnataka) Ltd.] to establish priorities in infrastructuredevelopment, conceptualize and develop commercially viable infrastructure projects, andprepare model concession agreements. The state government will contribute Rs2 billion to thiseffort. Karnataka has projects in the pipeline that could be implemented by 2003 of about $520million in roads, ports, airport, and urban mass transit system.

118. Roads are the dominant mode of transport, and Karnataka has a model concessionagreement for the road sector. The state is a preferred destination for information technologyindustries, and proposes to soon have the biggest information technology incubation center inIndia. The industry has not shown signs of any negative effects from the global economicslowdown thus far, and most of the companies continue to show about 50–80 percent growth.Supplementary Appendix E provides a more detailed economic profile.

119. Madhya Pradesh . The Madhya Pradesh government has initiated steps to improve theenabling environment for private sector investment in the state. Assisted by the ADB programloan, the state developed private sector-oriented policies for roads,70 housing, and power,keeping in mind environmental concerns and raising awareness for the social and economicimpacts of projects on displaced persons.

120. The state government recently introduced a power sector reform package that hasalready brought into force a regulatory framework for the power sector and has institutedseveral key reforms.71 The MP Vidjut Sudhar Vidheyak, 2000, approved by the MP legislativeassembly in November 2000, in addition to subsuming and expanding the powers of theMadhya Pradesh Electricity Regulatory Commission, provides for (i) restructuring of the MadhyaPradesh Electricity Board, (ii) metering of all consumers, (iii) rationalization of tariffs so allclasses of consumers will pay at least 75 percent of cost of supply, (iv) a budget for MadhyaPradesh State Electricity Regulatory Commission (MPSERC) for the next five years, and (v)arbitration with the Central Electricity Regulatory Commission. The MPSERC issued its first tarifforder on 26 September 2001.

121. The state has an economic development policy in place that stresses infrastructuredevelopment through public-private sector participation. While certain departments, such asenergy and urban administration already have clear policies regarding participation of the

70 Reform of state roads sector is envisioned under a proposed State Roads Project scheduled for 2002.71 The proposed Madhya Pradesh Power Sector Development Program, scheduled for Board consideration in

December 2001 will support comprehensive restructuring of the power sector.

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private sector in infrastructure development, action has been initiated to develop similar policiesfor other infrastructure departments. The state's Economic Development Board is headed by thechief minister, and gives clearances for large infrastructure projects. In addition, the Committeeof Senior Secretaries, headed by the principal secretary (finance), provides clearances forconcessions to be granted on a project to project basis. The infrastructure projects aregenerated by the respective line departments and are evaluated by the Madhya Pradesh StateIndustrial Development Corporation (MPSIDC) for eventual clearance from the EconomicDevelopment Board. To facilitate the preparation of projects, the state proposes to have anInfrastructure Initiative Fund to be set up as a revolving fund for preparation of projects. Thestate's Right to Information Act and Act for Investment in Infrastructure Projects providetransparency in all bidding and awarding of contracts. Besides the pipeline projects in powergeneration, the state is planning projects for about $625 million for road development throughBOT, water supply, cyberparks and special economic zones implemented by 2003.

122. A new state road policy was developed, which seeks to encourage private participationin infrastructure investment. The first private sector toll road in India was implemented in thestate through the funding and technical support from the Madhya Pradesh State IndustrialDevelopment Corporation Ltd. (MPSIDC) and IL&FS. The state has already implemented tollingon approximately 1,000 kilometers of state-maintained roads to finance operation andmaintenance. The state has also undertaken an ambitious road construction program toimprove connectivity in rural and urban areas. The state government has directed the MadhyaPradesh State Bridge Corporation to develop 14 projects on a BOT basis with private sectorparticipation. The corporation has begun preparatory work for seven of these projects.72 Thestate has developed a standard concession agreement for roads and is in the process ofdeveloping draft standard concession agreements for other sectors. An environmental policywas adopted in 1999 and the state is actively engaged in implementing an action plan forenvironmental protection with the support of ADB TA.73 A comprehensive draft policy to dealwith resettlement issues has been reviewed by the cabinet. Please see SupplementaryAppendix E for a more detailed economic profile.

D. Main Terms and Conditions

1. The Loans

123. PSIF II will comprise two loans of $100 million each to IL&FS and IDBI for relending toinfrastructure projects in the specified sectors (para. 103) in the four selected states. Each loanwill be guaranteed separately by India.

124. Each loan will be documented on the basis of a separate loan agreement between ADBand the concerned PFI, including ADB's standard terms and conditions for such lending andsuch other provisions, including financial covenants, as are set out in more detail in thisReport.74

72 Madhya Pradesh Government: Policy Thrust for Economic Development of Madhya Pradesh. Report of the

Infrastructure/Road Chapter. Feedback Strategy.73TA 3423-IND (Cluster): Environmental Management at the State Level, for $3,620,000, approved on 1 March 2000.74 Unless otherwise stated, the specific loan terms and conditions set out in this report will apply to each PFI under

the two separate loan agreements.

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a. Tranching

125. For the first tranche, the PFIs will allocate $20 million to each selected state for use withqualified private infrastructure projects in the specified sectors that they may sanction tooperate. However, should infrastructure projects materialize faster than anticipated, the secondtranche can be accelerated. After two years, ADB will conduct a review and assess progress ofimplementation against the Continued Access Criteria, in coordination with the PFIs andselected states. Uncommitted funds for the first tranche will automatically be made available forthe second tranche. No preallocation of funds will be made for the second tranche, and fundscan be accessed on a purely competitive basis (paras. 95-98).

b. Main Terms and Conditions

126. The PFIs have requested a loan of $100 million each from ADB's ordinary capitalresources under the PSIF II. The loans will each have a 20-year term, including a grace periodof 5 years; an interest rate determined in accordance with ADB's LIBOR-based loan facility; acommitment charge of 0.75 percent per annum; a front-end fee of 1.0 percent; conversionoptions that may be exercised in accordance with the terms of the Loan Agreement, the LoanRegulations, and ADB's Conversion Guidelines, and such other terms and conditions set forth inthe Loan Agreement. The Government of India has provided ADB with (i) the reasons for thePFIs' decision to borrow under ADB's LIBOR-based loan facility on the basis of these terms andconditions, and (ii) an undertaking that these choices were the PFIs' own independent decisionand not made in reliance on any communication or advice from ADB.

c. Period of Utilization

127. The loans will be available for four years for commitment and five years fordisbursements. For the first tranche, funds allocated will be made available for commitment foreach state for two years and for disbursement for five years from the date of loan effectiveness.However, should projects materialize more quickly than anticipated, release of the secondtranche may be accelerated to support private sector initiatives. Consequently, the secondtranche would be available for commitment for four years and for disbursement for five yearsfrom the date of loan effectiveness.

d. Maximum Subloan Size and Free Limit

128. The maximum size of subloans allowed under the PSIF II will be 25 percent of theproject cost or $75 million,75 whichever is lower. The PFIs may, however, finance subloans on ajoint basis provided such financing in the aggregate does not exceed the foregoing limitation forindividual projects. No total project size limitation has been stipulated to provide sufficientflexibility in utilizing the funds due to the limited number of projects being finalized and the weakresponse by investors. ADB support will help catalyze the flow of funds even for large projects.The maturity of each subloan will be for a minimum of 10 years. Each PFI will be required tofinance at least two infrastructure projects, each in different subsectors and each in a differentselected state, to disperse the benefits of the facility and to diversify the PFI's portfolio andexperience in infrastructure financing. To develop know-how and experience in state-levelfinancing, prior ADB approval is required for subloans under the PSIF II.

75 Conforms to the increase in maximum size of subloans under ADB's private sector window.

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e. Utilization of Loan Proceeds

129. The loan proceeds loans will be used by infrastructure projects to finance the cost, andinsurance and freight costs, of imported materials and equipment, as well as the indirect foreignexchange cost of locally manufactured equipment, including civil works. In addition, due toserious limitations in the availability of matching long-term funds, to facilitate disbursement, aportion of the loan proceeds is earmarked to finance the local currency costs of goods, services,and civil works of eligible projects; this is estimated at (i) 20 percent of ADB financing for anyeligible subloan in power; and (ii) 70 percent of ADB financing for any eligible project for roads,water supply, urban mass transit, or ports where costs are predominantly for local goods andservices. Nevertheless, such local currency cost financing may not be used for payment oftaxes and duties, cost of land acquisition and payment for right-of-way, working capital, andinterest expenses and financial charges. Furthermore, to facilitate the timely implementation ofprojects, retroactive financing for eligible expenditures incurred 180 days prior to the date ofloan effectiveness will be allowed. The amount of retroactive financing may not exceed 10percent of the ADB loan to each PFI.

130. Prior to requesting withdrawals, the PFI concerned will submit an application forapproval of any subloan. Such application will include the following: (i) the terms and conditionsof the proposed subloan; (ii) a detailed appraisal and financial analysis for the proposedinfrastructure project to which each subloan relates, including assessment of economic viability;technical feasibility; financial profitability; management capability; operational efficiency, andprojected economic and financial rates of return; (iii) a detailed description of the procurementterms, conditions, and procedures to be applied; (iv) a detailed analysis and assessment of allapplicable environmental and social considerations in accordance with the terms, conditions,and procedures required by applicable environmental regulations and legislation in India, ADB'senvironmental procedures and ADB's involuntary resettlement policy;76 (v) a detailed proposedfinancing package, including identification of all financing sources, in accordance with thesubloan financing criteria; (vi) detailed estimates of projected expenditures to be incurred by theproposed infrastructure project; and (vii) other information that ADB may reasonably request.

f. Procurement

131. In accordance with ADB’s Guidelines for Procurement (para. 3.09), ADB will encouragethe PFIs to require their subborrowers to adopt international competitive bidding procedureswhen the amount of the investment is unusually large and economy and efficiency can begained by following such procedures. Nonetheless, for contracts totaling $10 million or more forthe supply and installation of equipment, and $20 million or more for civil works, internationalcompetitive bidding procedures following ADB’s Guidelines for Procurement will be required.For goods and services procured below this threshold, the PFI will satisfy itself that procurementprocedures are appropriate in the circumstances, that goods and services obtained are suitablefor the subloan, that the price paid is reasonable, and that fair canvasing has been done inselecting suppliers. It should also consider other relevant factors such as eligibility, promptdelivery, conformity with specified standards for quality, and availability of spare parts andsupport facilities; and in the case of services, the reliability and competence of party or partiesrendering the service. For BOT project and variants, if the project sponsor or engineering,procurement, and construction contractor is selected through competitive bidding amonginternational entities in accordance with procedures acceptable to ADB, such project sponsor orcontractor may apply its own procedures for procurement provided that such procurement is for

76 ADB. 1998. The Bankl's Policy on Involuntary, Resettlement. In Handbook on Resettlement. Appendix 1. Manila.

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goods and works supplied from, or produced in, member countries of ADB. Moreover, suchproject sponsors or contractors must only be nationals of ADB member countries.

2. Implementation Arrangements

a. State Level Coordination

132. Each selected state will be asked to submit an undertaking committing to fulfill theContinued Access Criteria agreed to with ADB contained in a Letter of Intent and to providenecessary assistance to ADB consultants. Each state has designated an executing and/orimplementing agency77 to coordinate with ADB and the PFIs, and to be the focal points forefforts to meet the Continued Access Criteria under the PSIF II. Each selected state, through itsexecuting and/or implementing agency, will submit to ADB prior to its review of the PSIF II,about three months before the end of the second year of implementation of the project facility, areport concerning the implementation progress of developing an enabling environment forprivate sector participation in each selected state and sector policy reforms in the coveredinfrastructure sectors.

b. Reporting Requirements

133. Each PFI will have its accounts and financial statements audited annually, in accordancewith generally accepted accounting and auditing standards, by independent external auditorsacceptable to ADB. Immediately after completion of the audit, but not later than six months afterthe close of the fiscal year, each PFI will furnish to ADB copies of its audited financialstatements, and certification by the auditors of the status of PFI compliance with prudentialnorms specified in para. 77. In addition, the PFI will submit to ADB, on or before 15 Decemberof each year, a schedule indicating the projected disbursement of the PSIF II proceeds for eachquarter of the succeeding calendar year; and within six months after the end of each fiscal year,a financial projection of its operations and capital expenditure program detailing effects on itsincome statement, balance sheet, and cash flow for the next three years. On a semiannualbasis, not later than three months from the end of each fiscal semiannual period, each PFI willfurnish ADB its unaudited financial statements; performance and results of operations; progressof PSIF II implementation, until the PSIF II is fully disbursed or withdrawal from the PSIF II isclosed; trading of marketable securities generated from the PSIF II; reapplication of fundsgenerated from the initial sale of marketable securities from subloans; and developments in thedomestic debt market, in particular, policy issues that may arise, including problemsencountered and steps being taken to remedy these problems. Each PFI will enable ADB todiscuss the PFI's financial statements and financial affairs with its auditors, if needed, andprovide data or information it may require to conduct due diligence under the PSIF II.

134. For individual projects, the PFI will enable ADB or its authorized representative toinspect any project, the goods financed out of the proceeds of the PSIF II, and any relevantrecords and documents maintained by the PFI. Within six months after the completion of aninfrastructure project, the PFI will prepare and provide ADB with a completion report, in suchform and detail as ADB may reasonably request, including the utilization of PSIF II proceeds,the execution of the project, costs, and any other relevant matters. After the closing of

77 The Executing Agencies will be the Infrastructure Authority for AP, ministry of finance for Gujarat, and the finance

departments for Karnataka and Madhya Pradesh. The Implementing Agencies will be the APIIC for AP, the GujaratInfrastructure Development Board for Gujarat, the line departments for Karnataka, and MPSIDC for MadhyaPradesh.

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withdrawals from the PSIF II, each PFI will promptly, not later than six months from the closingdate, provide ADB with a report on the utilization of the PSIF II portion administered by the PFI,the execution and performance of projects, the performance of the PFI under the PSIF II, andaccomplishment of the PSIF II purposes. The report will include the consolidation of individualreports furnished earlier to ADB. After the closing of withdrawals, each PFI will provide ADB, ona semiannual basis, with a report on the payment performance of each project, and will reportany problems, financial or operational, that may have arisen in the meantime and the stepsbeing taken to resolve them. Further, on an annual basis, within 90 days from the end of eachfiscal year, the PFI will inform ADB of the status and performance of each project in an agreedupon format. Each PFI will furnish ADB, as it may reasonably request, all such reports andinformation concerning (i) the PSIF II and its utilization; (ii) the projects; (iii) the marketablesecurities; (iv) reapplication of proceeds from resale of the marketable securities; (v) themanagement, operation, and financial condition of the PFI; and (vi) matters relating to the PSIFII purposes. All reports and statements will be in English.

c. Periodic Reviews

135. ADB will, at its discretion, conduct reviews of the management, financial, and operationalperformance of the PFIs and infrastructure projects financed under the PSIF II, initially after theclosing of withdrawals. The review will include procurement procedures utilized by all PSIF IIfinanced infrastructure projects. Such reviews will be conducted at five-year intervals, unlessearlier reviews are indicated, until the maturity of the PSIF II. A final review will be carried outwith the Government and the PFIs after the maturity of the PSIF II, and include assessment ofthe impact of the PSIF II, whether the PSIF II objectives have been achieved, and lessonslearned from the implementation of the project facility.

d. Benefit Monitoring and Evaluation

136. Each PFI will monitor and evaluate the benefits of subloans financed after theircompletion and in accordance with a schedule to be mutually agreed upon with ADB. Suchbenefit monitoring and evaluation procedures will be in accordance with ADB's projectperformance and monitoring system. For this purpose, the PFIs can utilize the computerizedsystem for collecting and analyzing benefits data developed by ADB for financial intermediaries.ADB, if deemed necessary, may provide staff training to the concerned PFI on operation of thesystem.

E. Cofinancing

137. KfW representatives joined the ADB Preappraisal and Appraisal Missions. KfW has, inprinciple, agreed to cofinance the PSIF II up to EUR162 million (about $147 million)78

comprising concessional funds of EUR25.5 million (about $23 million), market borrowingsguaranteed by the German Government of EUR103.5 million (about $94 million), andunguaranteed market borrowing of EUR33 million (about $30 million). In addition, KfW isconsidering a grant of EUR2.25 million (about $2 million) to be used for project developmentpurposes. This is subject to the formal approval of the German Government as well as theoutcome of the Indo-German governments' negotiations scheduled for the last quarter of 2001.Based on current market rates, the average interest rate for the KfW financing will be about 4.4percent. If the KfW cofinancing is approved, the KfW loans will provide a preallocated amount of10 percent of the KfW facility to each selected state equivalent to EUR16.2 million (about $15

78 $1=EUR1.10 as of 1 October 2001.

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million) per state. Drawdowns from the ADB and KfW loans will be made on pro rata basis bythe PFIs for infrastructure projects. KfW has agreed to adhere to ADB's procurement guidelinesand in its loan agreement for the PSIF II, include a cross-default provision with the ADB loans.

F. Social and Environmental Aspects

138. Each PFI will ensure that the impact of any subloan on vulnerable groups will beadequately considered. Sensitive social issues that may arise in the course of projectpreparation will be brought to the attention of ADB at an early stage. Each state has beenrequired to adopt formal policies on resettlement. Consultants for the proposed ADB TA willassist each state government to adopt appropriate policies.

139. Furthermore, each PFI will be required to ensure compliance of subloans with therequirements of social and environmental legislation and regulations of the country at nationaland state levels; and each PFI and the subloans should conform with ADB's social andenvironmental procedures and resettlement requirements, including its Involuntary ResettlementPolicy. The subloans financed under the PSIF II are expected to require social andenvironmental assessments. Such assessments will be submitted to ADB for review andclearance before approval of any subloan by the PFI.

1. Poverty Impact

140. Inadequate Infrastructure is a key constraint to industrial development and more rapideconomic growth in India. Evidence suggests that growth is an essential ingredient for sustainedpoverty reduction. In India particularly, the gains to the rural poor since the 1970s have beenclearly demonstrated during times of economic prosperity.

141. Private sector participation in infrastructure in India thus assumes greater significance asfiscal sustainability of infrastructure investments is in question. Aside from facilitating growth byremoving impediments to infrastructure development, the poverty impact of private sectorinvestments in infrastructure may be assessed from two other perspectives: (i) in terms ofopportunity cost of government expenditure (freed for investment in social sectors), and (ii)direct and indirect effects of infrastructure investment on poverty reduction.79

142. Investment in infrastructure will directly generate employment and improve incomes.Investment in power generates employment in the building, operation, and maintenance of suchsystems and supports industrial development, and thus results in significant employment.Investments in transport, particularly road construction, lead to substantial job creation forsemiskilled and unskilled workers particularly in rural areas. SEZs enhance marketability ofexports that employ large numbers of low and semiskilled workers.

143. Indirect effects, would largely be via improved cost efficiencies and quality of servicethrough the private operation of infrastructure and provision of infrastructure services to theextent that these translate to cost reduction that benefit the poor, such as by reducing prices ofessential commodities, reducing time spent for travel, mitigating congestion, reducing pollutionand accidents, helping develop poorer areas, and improving quality of life. The urban poorbenefit most from improved access to good infrastructure because the poor are typicallysituated in settlements with unsanitary conditions, open to hazardous emissions, and prone to

79 These are being reviewed in more detail in two sectors under ADB TA 5947-REG: Assessing the Impact of

Transport and Energy Infrastructure on Poverty Reduction, for $800,000, approved on 25 October 2000.

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accidental risks.80 Even facilities like airports that primarily benefit the well-to-do have indirecteffects on the poor by increasing tourism where the rate of employment is high. Thedevelopment of power and roads also have an indirect impact on the expansion of the nonfarmsector, which could have a considerable upward impact on wages in the agriculture sector,where a large part of the poor reside.81

144. On the other hand, improved regulatory and supervisory capacity of the centralGovernment and state governments and the conduct of public policy, as their role as regulatorrather than direct operators of infrastructure projects assumes greater importance, will be criticalto ensure that the negative impacts on the poor, even in the short term, of the private provisionof infrastructure services, arising from, job losses, increased costs from higher tariffs, etc., areproperly mitigated. The summary poverty impact assessment is in Appendix 9.

2. Environment

145. The state governments involved, the PFIs, and the infrastructure projects financed willbe required to comply with the relevant environmental laws and regulations of India at thenational and state levels, particularly the Water (Prevention and Control of Pollution) Act, 1974;the Air (Prevention and Control of Pollution) Act, 1982; the Environment (Protection) Act, 1986;the Notification on Environmental Impact Assessment of Development Projects, 1994; andForest (Conservation) Act, 1980. They will also be required to comply with ADB’s environmentalrequirements. Each state has been requested to adopt formal policies and guidelines on theenvironment based legislation and regulations of the country. The expert(s) under the proposedADB TA will assist each state government in this regard.

146. IL&FS has a satisfactory organizational setup and appropriate environmental policy andprocedures. The institutional capacity of IDBI, on the other hand, to currently deal withenvironmental issues and concerns under the PSIF II is deemed to be still inadequate. Toaddress such inadequacy, the following steps are required for IDBI (i) IDBI will adoptappropriate environmental policies and guidelines, that particularly address the environmentalissues and requirements relating to the PSIF II; and (ii) during project implementation, theinstitutional capacity of IDBI to effectively deal with the related environmental issues will bestrengthened. IDBI will consider establishing an environmental unit within its organization,and/or retain the services of a reputable local environmental consulting firm(s) acceptable toADB. The officials involved in infrastructure projects will be regularly trained under acomprehensive training program on environmental impact assessment procedures andenvironmental management systems.

147. For each subloan under the PSIF II, the two PFIs will submit to ADB an initialenvironmental examination report for their respective subloans for ADB clearance. Dependingon the findings and conclusions, an environmental impact assessment report for the subloanswith significant environmental impacts will be submitted to ADB for review and clearance. Thereports will follow, as closely as possible, ADB's annotated formats.

148. The environmental monitoring for the subloans will be conducted by the PFIs or theirdesignated environmental expert(s) on a semiannual basis during project implementation toensure the subloans do not cause any significant adverse environmental impacts. The PFIs will

80 World Bank. 1994. World Development Report.81 Sharif, Abusalleh. 2001. Role of Rural Nonfarm Employment in Poverty Alleviation. Presented at the Poverty

Round Table Conference at NCAER, New Delhi. 30 April.

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submit to ADB an environmental monitoring report as part of its semiannual reporting (para.133).

149. On the basis of current practice, for projects less than Rs500 million, environmentalclearance is sought from the state government, while projects equal to or more than Rs500million must seek environmental clearance from the central Government. In seekingenvironmental clearance for a project, an environmental impact assessment report and anenvironmental management plan will be prepared by an inspector in the district office close tothe project site and submitted to the ministry of environment and forests. After review of thedocuments and a public hearing, and if the project is deemed in compliance with the existingguidelines, a consent for establishment (for choice of location) and a consent for operation aregranted. These consents may take anywhere from 13 days to 8 months to be issued (dependingon the nature of the industry, and whether issued at state or national level). The consent foroperation is time-bound and needs to be renewed periodically, although the time frame for therenewal is determined by each state. For instance, in Karnataka, the renewal period for theconsent for operation is based on the nature of the industry in question (e.g., green versushazardous industries), whereas in AP, the consent needs to be renewed every three years forany project. During implementation, the project owner(s) are also required to submit semiannualstatus reports to the district offices about the project and its environmental impact. The districtofficers review the reports and conduct on-site reviews of the projects, if and when necessary.

3. Resettlement and Rehabilitation

150. The PSIF II will finance subloans that may require land acquisition and resettlement.One such subloan has been identified and a resettlement plan prepared. The summary plan(Appendix 10) provides a sample for all subloans involving land acquisition and resettlement. Aresettlement policy framework was also prepared as a guide for resettlement planning,implementation, and monitoring for all future subloans that will be financed under the PSIF II.The summary framework is in Appendix 11.

151. The sample resettlement plan for the Ahmedabad-Mehsana Toll Road Project in Gujaratwas prepared by IL&FS with World Bank assistance and meets ADB's involuntary resettlementpolicy requirements. The project involves construction of a 52-kilometer two-lane road andacquisition of a 60-meter right-of-way encompassing an area of 12 hectares of predominantlyprivate agricultural land. A total of 79 families will be affected; the majority (75 percent) will loseless than 15 percent of their landholding; 13 encroaching residential structures and 4 residentialsquatters will also be affected. All will be provided with compensation and rehabilitationassistance. The 13 vulnerable families will receive special income restoration assistance.

152. The resettlement policy framework was been prepared by IL&FS and will apply to allPSIF II subloans with land acquisition and resettlement. The framework is based on the IL&FSEnvironmental and Social Safeguard Policy, developed in 1995 with World Bank guidance.IL&FS is among the first financial institutions in India to recognize the importance ofenvironmental and social safeguards in the development of infrastructure projects. Toimplement the Environmental and Social Safeguard Policy, IL&FS has a well-establishedEnvironmental and Social Management Group staffed with well-qualified environmental andsocial specialists, complemented by a cadre of consultant specialists. IDBI has agreed toconsider establishing a similar environmental and social unit and developing in-house capacityand to apply the resettlement policy framework to all of their subloans involving land acquisition.

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153. As part of their overall project coordination and financing responsibility, each PFI willoversee subloan preparation and implementation of resettlement plans by the special purposevehicles. The PFIs will forward the subloan resettlement plans to ADB for approval. Theapproved resettlement plan for a subloan will be implemented before award of contract for thatparticular subloan. (Supplementary Appendix F, Capacity Assessment of PFIs).

154. With a view to improving and streamlining the land acquisition process, the fourparticipating states of AP, Gujarat, Karnataka, and Madhya Pradesh have each agreed toconsider a formal state resettlement and rehabilitation policy at international standards. Thegovernments of AP, Karnataka, and Madhya Pradesh have already drafted such policies inresponse to their respective state's requirements; the policies are expected to be formalizedshortly. The proposed ADB TA will assist each state to draft and finalize state R&R policiessatisfactory to ADB. ADB support has also been sought by the PFIs for training anddevelopment of PFI social staff.

G. Risks and Safeguards

155. Lack of commitment on the part of selected states could undermine the objectives of thePSIF II. However, each state has and is pursuing reform programs either with ADB or WorldBank, and central Government support. They have also demonstrated through past efforts astrong desire to advance their economic agenda based on a program of liberalization andincreased private sector participation in the domestic economy, particularly, infrastructuredevelopment. They have formalized these intentions in legislation and state policies, and haveorganized for dealing with the private sector. More importantly, they have established formalprograms and plans that identify the specific sectors and projects for development.

156. Moreover, these efforts are reinforced under the PSIF II by a system of incentives (bymarking selected states as progressive states, earmarking funds only for the four selectedstates, catalyzing the flow of resources to each state82) and penalties (by withholding accessshould reform criteria not be achieved, losing investors should they fail, and losing out to othereligible states), and through competitive pressure.

157. Infrastructure projects are difficult to develop and administer owing to their long gestationand payback periods. Project preparation could be a daunting task. To facilitate projectpreparation and processing, the PSIF II is supporting the establishment of formal structures withstatutory mandates at the state-level to deal with the private sector and facilitate approval,licensing, and clearances. To enhance bankability of developed projects, the PSIF II ispromoting partnerships between state governments and the PFIs to provide the neededfinancial engineering expertise and ability to mobilize resources on a large-scale forinfrastructure projects.

158. Moreover, TA is being provided to address specific processing issues concerningbidding procedures and the awarding of contracts, drafting of model concession agreements,and adoption of policies concerning environmental protection and resettlement, among others.These are critical issues that often constrain infrastructure development and private sectorparticipation.

82 Based on a 25 percent loan limit, the PSIF II, excluding cofinancing, should help raise at least $800 million in

resources for the four selected states.

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159. Finally, private sector initiatives are being encouraged to address different risks posedby infrastructure investments and the development of innovative instruments to mitigate varioustypes of risks.

H. Technical Assistance

160. The proposed TA is being provided to the four selected states to (i) help the individualselected states address specific constraints in the enabling environment for the private sector tomake the effort sustainable, and (ii) to facilitate the processing of infrastructure projects that arepriority projects of the individual states eligible for PSIF II financing.

161. The total cost of the TA is estimated at $1,875,000 equivalent, comprising $1,260,000 inforeign exchange costs and $615,000 equivalent in local currency costs. ADB will provide$1,500,000 equivalent to cover the foreign exchange costs and $240,000 equivalent of the localcurrency costs. The TA will be financed by ADB on a grant basis from the ADB-funded TAprogram. The balance of the local currency costs will be provided by the Government of India.The Executing Agencies for the TA will be the Infrastructure Authority in AP, ministry of financein Gujarat, and the finance departments for Karnataka and Madhya Pradesh. The implementingagencies will be the Andhra Pradesh Industrial Infrastructure Corporation in AP, the GujaratInfrastructure Development Board in Gujarat, the line departments concerned in Karnataka, andthe Madhya Pradesh State Industrial Development Corporation Ltd. in Madhya Pradesh.

162. International and domestic consultants will be engaged to form a team to implement theTA. The consultants will be selected in accordance with ADB’s Guidelines on the Use ofConsultants and other arrangements satisfactory to ADB for the engagement of domesticconsultants. An estimated total of 59 person-months of consulting services will be required,including 43 person-months of international and 16 person-months of domestic consultingservices. TA implementation is expected to commence in March 2002 and be completed byNovember 2002. The TA is described in detail in Appendix 12.

VI. ASSURANCES

163. Each PFI has given the following assurances, in addition to the standard assurances,which have been incorporated in the legal documents:

(i) to keep a capital adequacy ratio of 9 percent, and as amended from time to time,according to RBI guidelines;

(ii) to maintain a debt service coverage ratio of at least 1.1 times;(iii) to comply with prudential regulations laid down by RBI regarding the recognition

of income, classification of assets, and debt provisioning;(iv) to meet eligibility criteria for subloans to be financed, which include 51 percent

private sector ownership, economic justification, financial capability of sponsors,compliance with federal and state environmental guidelines and procedures,satisfactory underlying infrastructural concessions and license agreements;

(v) to relend the PSIF II proceeds in local currency by hedging the foreign exchangerisk of subloans;

(vi) to utilize the PSIF II to finance the issuance of marketable securities;(vii) to observe subloan financing criteria that include a subloan limit not exceeding 25

percent of total project cost of the infrastructure project or the PFIs' single creditexposure limit, whichever is lower, subject to a maximum amount of $75 million;

40

(viii) to allow periodic review by ADB of the financial, operational, and managerialperformance of each PFI and the individual projects, including detailedexamination of the project's procurement procedures;

(ix) to prepare and submit to ADB for review and approval, a resettlement plansatisfactory to ADB for subloans for approval and in accordance with the IL&FSResettlement and Rehabilitation Action Plan for the Ahmedabad-Mehsana TollRoad Project, where applicable, the resettlement policy framework to be appliedto all subloans that involve land acquisition and resettlement in accordance withADB's Involuntary Resettlement policy and ADB's Handbook on Resettlement,1998 as amended from time to time; and

(x) that it will satisfy itself that the infrastructure project financed does not proceedwith the awarding of a civil works contract for a subloan unless (a) the ADB-approved resettlement plan has been implemented satisfactorily, particularly withrespect to compensation and relocation, and rehabilitation measures that are tobe put in place; and (b) possession of the land has been obtained under the LandAcquisition Act.

VII. RECOMMENDATION

164. I am satisfied that the proposed loans and technical assistance would comply with theArticles of Agreement of ADB and acting in the absence of the President, under the provisionsof Article 35.1 of the Articles of Agreement of ADB, I recommend that the Board approve:

(i) the loan of $100 million to the Infrastructure Leasing and Financial ServicesLimited and the loan of $100 million to the Industrial Development Bank of India,for the Private Sector Infrastructure Facility at State Level Project, from ADB'sordinary capital resources, to be guaranteed by India, with interest to bedetermined in accordance with ADB's LIBOR-based loan facility, an amortizationperiod of 20 years, including a grace period of 5 years, and such other terms andconditions as are substantially in accordance with those set forth in the draftLoan and Guarantee Agreements presented to the Board; and

(ii) the provision of grant technical assistance to India in an amount not exceedingthe equivalent of $1.5 million for Enhancing Private Sector Participation inInfrastructure Development at State Level.

MYOUNG-HO SHINVice President

19 November 2001

41

APPENDIXES

Number Title Page Cited on(page, para.)

1 Project Framework 42 2, 4

2 Cause Effect Analysis 44 4, 14

3 ADB Assistance in Infrastructure Projects 45 17, 73

4 Eligibility Criteria 47 23, 95

5 Access Criteria to PSIF II Financing 48 23, 95

6 Continued Access Criteria to PSIF II 49 23, 95

7 Incentive Structure of PSIF II 50 24, 97

8 Enabling Environment for Private Sector Participationin Infrastructure Development in Andhra Pradesh,Gujarat, Karnataka, and Madhya Pradesh

51 27, 107

9 Poverty Impact Assessment 61 36, 144

10 Resettlement Plan 64 38, 150

11 Summary Resettlement Policy Framework 68 38, 150

12 Technical Assistance for Enhancing Private SectorParticipation in Infrastructure Development at StateLevel

71 40, 162

SUPPLEMENTARY APPENDIXES(available upon request)

A Subject Group Sector Specific Recommendations On Infrastructure Development

B Infrastructure Leasing & Financial Services Ltd. (IL&FS)

C Industrial Development Bank of India (IDBI)

D Proposed Structure for Promoting Private Sector Participation atState Level Under PSIFII

E Economic Profile of the Target Selected States

F Resettlement: Capacity Assessment of PFIs

G Pipeline of Projects Likely to be Available for Financing under PSIF II during 2001-03

Appendix 1, page 1

PROJECT FRAMEWORK

DesignSummary

PerformanceIndicators/Targets

Monitoring Mechanisms Assumptionsand Risks

Goal

• Economic growth

• Poverty Reduction

• Increased investment ininfrastructure

• Mobilized financing forinfrastructure

• Promoted sectoralpolicy reforms- monitored separately

for each of the fourtarget selected states

• Generate increasedemployment ininfrastructure

• Improved access toinfrastructure services

• Government reports• Reports of Indian financial

institutions• Studies conducted by

bilateral and multilateralorganizations

• Asian Development Bankreview missions

• State government reports• Studies conducted by

bilateral and multilateralorganizations

• Macroeconomy remainsstable and economic reformsare sustained

• Government policies areoriented towards reducingthe incidence of poverty

Purpose

• Enhance private sectorparticipation ininfrastructuredevelopment in fourtarget selected states

• Increased privateinvestments ininfrastructure in the fourselected states duringthe 5 years of projectimplementation

• Additional resourcesmobilized of at least $1billion ($600 million fromADB loans plus about$400 million fromcofinancing) for assistedinfrastructure projects

• State government reports• Participating financial

institutions (PFIs) reports.• Project completion reports• ADB review missions

• Environment remainsconducive to privateinvestments

Outputs/Components

• Relending by twoparticipating financialinstitutions in four targetselected states

• Enabling environmentfor private sectorparticipation ininfrastructure developed

• Major output milestonesmonitored separately bytarget dates for each ofthe four target selectedstates

- utilization of two ADBloans of $100 millioneach

- average loan size$30-40 million

- total number of loans- types of projects in

identifiedinfrastructure sectors

• Enabling legislation andregulatory frameworksfor specified sectorsestablished

• Reports by participatingfinancial institutions

• ADB review missions• Reports of PFIs

• ADB review missions andTA Consultants reports

• Selected four statescooperate and coordinatewith participating financialinstitutions

• Reforms agenda arepursued by selected stategovernments

• Potential delay in passage oflegislation due to consensus-building process

42

Appendix 1, page 2

• Public/private interfacestrengthened

• Incentive structure forpromoting private sectorparticipation established

• Risk reductionstrategies developed

• Environmental andinvoluntary resettlementpolicies and guidelinesdeveloped

• Institution of transparentsystems and processesin dealing with theprivate sector, such asin the conduct ofinternational competitivebidding procedures anduse of modelconcession agreements,among others

• Dispute resolutionmechanism established

• Criteria for awardingBOT projectsestablished

• One-stop facility forseeking approvals,licenses established

• Impact on selectedstates in terms ofincreased privateinvestments andindication of interestfrom other Indian states

• Financial instrumentsand procedures forraising funds developed

• Procedures formitigating risksdeveloped

• ADB review missions andTA Consultants reports

• ADB review missions andTA Consultants reports

• Reports by participatingfinancial institutions

• ADB review missions• TA Consultants reports

Activities for Outputs/Componenets

• Relending to privatesector infrastructureprojects in the fourtarget selected states bytwo PFIs, namely IL&FSand IDBI.

• Schedule of majoractivities for each of theabove milestones will bemonitored separately bytarget dates for each ofthe four target selectedstates.

• Reports by PFIs• ADB review missions• TA Consultants reports

• Selected states fulfillspecified Access Criteria

• Selected states fulfill theContinued Access Criteria

• Selected states pursuesectoral policy reforms

• Selected states cooperateclosely with TA Consultants

• TA Consultantsrecommendations arepursued and internalized

• Close coordination betweenstate governments, PFIs andprivate sector infrastructureproject sponsors

43

PRIVATE SECTOR INFRASTRUCTURE FACILITY II: CAUSE– EFFECT ANALYSIS

NationalImpacts

Key SectorProblem

DeficientSectorOutputs

ConsequentImpacts

Inability tounbundle and mitigate risk

Delays inprojectapprovalsand licensing

Policies andInstitutions

Sector Inputs

- projectdevelopment

- financialengineering

Inadequatepolicy andregulatoryframework

Slow down economicgrowth

Create industrialbottlenecks

Few infrastructure projects are being developed and reaching financial closure

Afforda-bility:commer-cialrates vs.per capitaincomes

Frequentpublicinterest andotherlitigations

Progress of reforms slowerthan anticipated

Underdevelopeddomestic capitalmarket

Low capacity Public-private interface requiresstrengthening

Appen

dix 2

Lack ofstandardizedagreements andconcessions forprivate sectorparticipation

Lack oftranspa-rency

Accounta-bilityunclear

Inconsistentpolicies; noestablishedpolicy/legal/regulatoryframeworks

Affectedgroupsare noteffect-ivelyconsul-ted;lack ofowner-ship

Unsuitable governance structures

- lack of long-term funds (beyond 10 years)- inadequate equity funds at the

state level- lack of hedging mechanisms- limited products that provide risk

cover

44

Appendix 3, page 1

ADB India ADB India

A. Loan ($ million)

138 9 11,975.91 1,865.00 ADF 98 0 2,772.13 0.00 Subtotal (a) 236 9 14,748.03 1,865.00

6 3 637.00 250.00 ADF 2 0 50.00 0.00

8 3 687.00 250.00

OCR 4 1 301.00 250.00 ADF 1 0 31.50 0.00

5 1 332.50 250.00

OCR 21 4 2,116.12 977.00 ADF 7 0 418.60 0.00

28 4 2,534.74 977.00

OCR 1 0 85.00 0.00 ADF 2 0 29.00 0.00

3 0 114.00 0.00

280 17 18,416.25 3,342.00

2. Transport and Communications

OCR 8 0 430.30 0.00 ADF 12 0 165.22 0.00

20 0 595.52 0.00

OCR 43 5 1,715.35 614.60 ADF 17 0 112.98 0.00

60 5 1,823.33 614.60

OCR 15 2 1,936.40 415.00 ADF 4 0 259.00 0.00 Subtotal (c) 19 2 2,195.40 415.00

c. Railways

a. Airports and Civil Aviation

Subtotal (a)

b. Ports and Shipping

Subtotal (b)

Subtotal (d)

e. Refinery

Subtotal (e)

Subtotal (1)

Subtotal (b)

c. Fuel Minerals

Subtotal (c)

d. Natural Gas

1. Energy a. Electric Power OCR

OCR b. Energy - Others

ASIAN DEVELOPMENT BANK ASSISTANCE TO THE INFRASTRUCTURE SECTOR(as of 31 March 2001)

Number of Projects Amount Asian Development Bank Assistance

45

Appendix 3, page 2

ADB India ADB India

3. Transport and Communications

OCR 97 5 8,087.80 873.00 ADF 63 0 3,068.60 0.00 Subtotal (d) 160 5 11,156.40 873.00

OCR 15 3 1305.18 253.00 ADF 10 0 91.12 0.00 Subtotal (e) 25 3 1,396.30 253.00

284 15 17,171.96 2,155.60

B. Technical Assistance ($'000)

1. Energy Electric Power 287 20 111,282,791.00 10,334,000.00 Energy - Others 45 3 20,360,258.00 1,229,000.00 Fuel Minerals 17 3 5,920,000.00 900,000.00 Natural Gas 57 9 19,866,000.00 3,770,000.00 Refinery 1 0 450,000.00 0.00 Subtotal (1) 407 35 157,879.049.00 16,233,000.00

2. Transport and Communications Airports and Civil Aviation 23 0 8,885,000.00 0.00 Ports and Shipping 108 9 36,548,250.00 5,808,000.00 Railways 49 4 22,272,000.00 2,735,000.00 Roads and Road Transport 268 21 120,709,700.00 8,115,000.00 Telecommunications 30 5 12,129,000.00 1,425,000.00 Subtotal (2) 478 39 200,543,950.00 18,083,000.00

ADB=Asian Development Bank, ADF=Asian Development Fund, OCR=Ordinary Capital Resources.Source: Loan, TA & Equity Approvals on ADB's Lotus Notes.

d. Roads and Road Transport

e. Telecommunications

Subtotal (2)

ASSISTANCE TO THE INFRASTRUCTURE SECTOR (Cont'd)(as of 31 March 2001)

ADB Assistance Number of Projects Amount

46

Appendix 4

ELIGIBILITY CRITERIA FOR STATE SELECTION

1. Commitment to reforms

2. Capacity to undertake reforms

3. State of the enabling environment for private sector participation, i.e., the investmentclimate

4. Progress of reforms on sectoral issues (e.g., subsidy on power tariffs to the agriculturesector)

5. Economic potential

47

Appendix 5

ACCESS CRITERIA TO PSIF II FINANCING

1. Adoption of an overall development policy setting the terms and conditions forprivate sector participation in infrastructure development.

2. Establishment of an institutional framework to facilitate private sectorparticipation in infrastructure that provides a formal mandate to deal with theprivate sector on matters concerning private sector participation in infrastructure.

3. Establishment of a formal Government-supported organizational structure thatwill serve as a one-stop facility for securing approvals, licenses, and clearancesfor private infrastructure projects.

4. Promulgation of guidelines regarding Government priorities and plans forinfrastructure development and specification of private sector projects fordevelopment.

5. Enunciation of Government sector policies for individual infrastructure sectorsunder Private Sector Infrastructure Facility II financing.

6. Undertaking to assess need for regulatory frameworks in target infrastructuresectors with a view to specifying such target infrastructure sectors for whichregulatory frameworks are to be established.

7. Adoption of policy on transparency in the awarding of bids and concessions forindividual projects.

8. Commitment to draft model concession agreements that specify indicativestandard terms for granting concessions to private sector sponsors in variousinfrastructure sectors.

9. Undertaking to review existing rules and procedures for conduct of competitivebidding with a view to considering rules and procedures that meet bestinternational commercial practices and to define rules for dealing with unsolicitedbids for award of infrastructure projects.

10. Undertaking to rationalize incentive framework for private sector participation ininfrastructure projects.

11. Formal statement of plan to designate state dispute resolution mechanism, anddefinition of rules and procedures for resolving disputes.

12. Statement of intent to formally adopt state policies on environment, resettlement,and other social safeguards that arise in the implementation of infrastructureprojects.

48

Appendix 6

CONTINUED ACCESS CRITERIA TO THE PSIF II

1. Enactment of an infrastructure development policy that defines the terms andconditions for private sector participation.

2. Establishment of regulatory frameworks in specified infrastructure sectors withinthe two year period from loan effectiveness of the Private Sector InfrastructureFacility II.

3. Adoption of standard concession agreements for private sector projects indefined infrastructure sectors.

4. Adoption, satisfactory to Asian Development Bank, of competitive biddingprocedures for bidding and awarding of infrastructure projects under definedrules and procedures according to best international commercial practices.

5. Designation of a state dispute resolution mechanism for the speedy resolution ofdisputes relating to private infrastructure projects.

6. Adoption of formal state policies concerning environment, resettlement, andsocial safeguards for the implementation of infrastructure projects.

7. Review, satisfactory to ADB, of utilization of allocated line of credit to the state,and availability of infrastructure projects for financing.

49

PSIF II IN CENTIVE STR UC TU RE

Firs t T ranche Preal loca tion of Fun ds to Each of Se lec ted Sta tes(A ndh ra Pradesh , G uja rat, K arna taka , M ad hya Pradesh)

S ta te (s) w ith b an ka ble a nd re a dyp roje cts b e yon d $ 20 m il lio n1 p re -a llo cat io n th a t re a che s f in a nc ia lc losu re

S ta te (s) w ith b an ka ble a nd re a dyp roje cts b e lo w $ 20 m il lio np rea llo ca tion

A cce ss to se co nd t ran ch e fu nd s a cce le ra te d up to m axim u m o f b a la n ceo f P S IF I I le ss p rea llo ca te d am o u nts to o th e r se le cte d s ta te s.

A cce ss l im ite d to p re alloca te da m ou n t o f $2 0 m ill ion

Seco nd Tran ch e afte r rev iew by A DB , se lec ted s tates , and PFIs at en d o f 2nd year afte r lo an e ffec tiveness

S ta te (s) w ith firmp roje ct p ipe lin e a ndfu lfi ll ing C o nt in u edA cce ss C riteria

S ta te (s) w ith firm p roje ct p ipe lin e b ut n ot fu l ly fu lf il l in gC on tin ue d A cce ss C riteria

S ta te (s) w ith n o firm p ro je ctp ip e lin e bu t fu lf il l in gC on tin ue dA cce ss C riteria

P re fe rred a cce ssto 2 n d tra nch ep oo l [A D B to firs ta pp ro vesu blo an s f romth e se s ta te (s)]

U nco m m itte dp rea llo ca te d am o u ntto re ve rt t o fu nd s p o olb ut s ta te (s) to ha veco nt in u ed a cce ss to2 nd t ran ch e. Ifinf rast ructure p ro je ctsa vailab le fo r fin an c ingfro m the o th e rse le cte d s ta te (s) a ren ot su ffic ien t to fu l lyu ti lize th e P S IF II ,o th er eligib le s tatesm a y b e give n acce ssto P S IF I I inco nsu lta tion w ithP FIs.

S ta te (s) w ith n o firmp roje ct p ipe lin e a nd n o tfu lfi ll ing C o nt in u ed A cce ss C riteria

U nco m m itte d p rea llo ca te da m ou n t to reve rt to fu n dsp oo l a nd n o fu rth e ra ccess to th e P S IF II . I finf rast ructure p ro je ctsa vailab le fo r fin an c ingfro m the o th e r se le cte dsta te (s) a re n ot su ffic ien tto ful ly u ti lize th e P S IF II ,a bo ve s ta te (s) w ill b esu bst it uted w ith o th ere lig ib le s ta te (s).

C on tin ue d a ccessto 2 n d tra nch esu bje ct t o resu ltso f A D B re v iew

(Th e P S IF II w il l h ave a co m m itm e nt p erio d of fo u r ye ars an d five ye ars fo r d isb u rsem e n t.)

1 A DB po rtio n of $ 20 m il lio n pe r s tate. E xclud e s K fW p rop o sed co fin an cing .

A ppen dix 750

Enabling Environment for Private Sector Participation in Infrastructure Development in Andhra Pradesh, Gujarat, Karnataka,And Madhya Pradesh

ACCESSCRITERIA

ANDHRA PRADESH GUJARAT KARNATAKA MADHYA PRADESH

1. Adoption of anoveralldevelopmentpolicy setting theterms andconditions forprivate sectorparticipation ininfrastructuredevelopment.

Andhra Pradesh (AP) enactedthe Infrastructure DevelopmentEnabling Act (IDEA) inSeptember 2001. The actprovides for the accelerateddevelopment of infrastructure inAP; attraction of private sectorparticipation in the designing,financing, construction,operation; and maintenance ofinfrastructure projects in AP;and provides a legislativeframework for reducingadministrative and proceduraldelays, details variousincentives; and lays downprocedures for reconciliationand disputes.

Gujarat has adopted legislation onprivate sector participation ininfrastructure development throughthe Gujarat InfrastructureDevelopment Act, 1999 (GIDA). TheGIDA provides a framework forprivate sector participation in thefinancing, construction,maintenance and operation ofinfrastructure projects and for thatpurpose established the GujaratInfrastructure Development Board(GIDB).

Karnataka has issued a governmentorder for a state policy oninfrastructure. This is expected toprovide the basis for an enablingbuild-operate-transfer (BOT) act.Karnataka is studying both the GIDA(Gujarat) as well as IDEA (AP) forestablishing a state-level BOT act.Consequently, Karnataka proposes tosubmit draft legislation for a BOT actby March 2002.

Madhya Pradesh (MP) hasan economic developmentpolicy that stresses oninfrastructure developmentthrough public-privatepartnership. Individualsector policies coveredunder the economicdevelopment policy arepower, roads, urbaninfrastructure, informationtechnology, industrialestates, and specialeconomic zones. Thispolicy is proposed toprovide the basis for anenabling BOT act.Consequently, MP ispreparing to submit draftlegislation for the enablingBOT act by end of 2001.

2. Establishmentof an institutionalframework tofacilitate privatesector participationin infrastructurethat provides aformal mandate todeal with theprivate sector onmattersconcerning privatesectorparticipation.

AP has established aninstitutional framework as partof IDEA for facilitating privatesector participation. At thecenter of this framework is theInfrastructure Authority createdunder IDEA. Either theInfrastructure Authority or theconcerned line department canidentify or conceptualize anyinfrastructure project. Thegovernment agency or the linedepartment will provide allfacilities for obtaining statutoryclearances at state level.

GIDB was established with a formalmandate to deal with the privatesector. Its functions include:(i) draw up the state infrastructureagenda; (ii) identify potentialprojects, prepare feasibility reports,and conduct bidding for projects;and (iii) act as one-stop facility forapprovals, licenses and incentivesconcerning infrastructure projects.

Karnataka has designated theDepartment of Industry andCommerce as the focal state agencyto facilitate private sector participationin infrastructure. Within theDepartment of Industry andCommerce is the InfrastructureDevelopment Department thatfacilitates project development and theimplementation of infrastructureprojects. The infrastructure projectsare executed by the individual linedepartments such as the KarnatakaPower Corporation Ltd.for power,Karnataka Urban InfrastructureDevelopment Corporation for urban

Established a highpowered EconomicDevelopment Board,headed by the chiefminister, to give clearancesfor large private sectorinfrastructure projects. Theprincipal secretary (finance)heads the EconomicEmpowered Committeecomposed of seniorsecretaries to provideclearances for concessionsto be granted on a projectto project basis. Tofacilitate the preparation of

Appendix 8, page 1

51

Further constituting thisframework are:

The AP Industrial InfrastructureCorporation (APIIC), nodalagency that undertakesprivatization and thedevelopment of otherinfrastructure projects.

Project Specific SPVs that havea technical collaboration withIL&FS for project developmentand access to IL&FS ProjectDevelopment Fund.

APIIC has also entered into atechnical collaboration withFeedback Ventures, a small butwell regarded Delhi-basedventure capital company, forproject development.

The AP Infrastructure Fund, formeeting project developmentexpenses initially capitalized atRs250 million with the APGovernment contributing Rs50million. However, thus far,investments from other sourceshave yet to materialize.

The Gujarat Infrastructure Fund wascreated comprising a debt fund, anequity fund and an assetmanagement company (AMC). TheAMC is a joint venture betweenGIIC (48%), IDFC (26%), andCapital India Private Ltd, theinvestment banking and financialadvisory services arm in Asia of theAmerican International Group.

infrastructure, and Karnataka RoadDevelopment Corporation for the roadsector. The state is also studying theinstitutional framework of the otherselected states to consider whether itwould be appropriate in its case toalso organize a separate, autonomousbody for dealing with private sectorinfrastructure projects.

Infrastructure DevelopmentCorporation (Karnataka) Ltd. (iDeck)was formed to help the stategovernment establish state priorities ininfrastructure, conceptualize anddevelop commercially viableinfrastructure projects, and preparemodel contracts and agreement.IDeck is owned by the stategovernment (49%), IDFC (49.5%) andHousing Development FinanceCorporation (1.5%). The stategovernment is to extend one-timesupport by investing Rs2billion asequity and debt to be raised from theinfrastructure cess of 5 percent beinglevied under the Excise Act, Motorvehicles Taxation Act, Taxation Act,Sales Tax Act and Stamp Act..

projects for private sectorparticipation, MP proposesto have an infrastructureinitiative fund to providenoncommercial seed fundsfor project developmentprocess. Madhya PradeshState Industrial andInfrastructure DevelopmentCorporation (MPSIDC) hasbeen appointed as theimplementing andfacilitating agency forpublic-private partnershipsby the EconomicDevelopment Board. MPhas also enacted theInfrastructure InvestmentFund Board Act to raisefunds under stateguarantee to be providedas grant for leveragingprivate sector participationin the road sector.

3. Establishmentof a formalgovernmentsupportedorganizationalstructure that willserve as a one-stop facility forsecuringapprovals,licenses, andclearances forprivateinfrastructureprojects.

The Infrastructure Authority willbe composed of the ChiefSecretary, Government of APas the Chairman and othermembers not exceeding 15, ofwhich 7 have to be appointedby the Government of AP, andthe balance will be expertsdrawn from various fields. TheInfrastructure Authority will takeover the activities of the TaskForce for infrastructure projectsearlier appointed by the state.The Infrastructure Authoritypolicy activities will include,

Set up through the GIDB underGIDA. GIDB is composed of thechairman, vice-chairman, member-secretary appointed by the stategovernment and other members,not exceeding 15 appointed by theGovernment. The functions of GIDBare, to (i) promote privateparticipation in financing,construction, maintenance, andoperation of infrastructure projectsby the private sector; (ii) advise theGovernment on (i) above; (iii) laydown priorities of projects to beundertaken by the private sector in

The State Department of Industriesand Commerce has a single clearancewindow that acts as the one-stopfacility for securing approvals,licenses, and clearances for privateinfrastructure projects. A high levelcommittee chaired by the minister oflarge and medium industriesapproves all investment proposalsabove Rs500 million while the statelevel single window agency considersapproval of projects up to Rs500million.

Established through theEconomic PoweredCommittee under theEconomic DevelopmentBoard, the concerned linedepartment prepares theinfrastructure projects andMPIDC has beenmandated to evaluate theprojects and have themcleared by the EconomicDevelopment Board. MPhas in place a singleagency system with legalpowers to provide other

Appendix 8, page 2

52

among others, (i) providingenablers such as sector policiesand model concessionagreements for privatization, (ii)prescribing timelines forclearances and denialconditions, (iii) issuing andamending rules and guidelinesneeded to support the IDEA,while the transaction levelactivities would include (i)identifying sector linkages, (ii)deciding form of governmentsupport, (iii) resolving issuesrelating to project approvalprocess, and (iii) approveunsolicited proposals andrecommending modifications.

Gujarat; (iv) coordinate and monitorthe projects undertaken in the stateby the private sector; (v) to considerthe proposal for undertaking aproject; and (vi) to ensure that theclearances for projects are providedwithin specified time.

clearances from 12different departments.

4. Promulgation ofguidelinesregardingGovernmentpriorities and plansfor infrastructuredevelopment andspecification ofprivate sectorprojects fordevelopment.

The Government guidelines areprovided under GovernmentOrder 2000 as well under theState Vision 2020. Vision 2020sets challenging targets foreconomic growth that stress onreforming regulation andcreating the enablingenvironment for private sectorparticipation in infrastructureprojects. For this purpose thegovernment came out with acomprehensive infrastructurepolicy to be supplemented withsector policies and modelconcession agreements.

Provided under GujaratInfrastructure Agenda Vision 2010.The agenda vision presents thepolicy initiatives and an action planfor integrated development acrossall infrastructure sectors.

The line departments for road, port,power, information technology, andurban mass transit system haveindividual sector policies for privatesector participation.

Provided in the EconomicDevelopment Policy andmonitored by the EconomicDevelopment Board.

Under the governmentapproved infrastructure policyof Dec. 2000, 31 mega projectshave been identified for privatesector participation with a totalestimated project cost ofRs212.7 billion (about $4.4billion).

Gujarat has prepared a masterplan" Gujarat InfrastructureDevelopment Agenda-2010"identifying 383 projects withestimated investments of Rs1,170billion (about $24 billion) over aperiod of 10 years.

Karnataka submitted projects in thepipeline expected to be implementedup to 2003 of about $520 million.

Madhya Pradesh has apipeline of projects up to2003 valued at $625million.

5 Enunciation ofGovernmentsectoral policies

AP has existing sectoralpolicies for variousinfrastructure sectors. However,

Gujarat has provided a formalstatement of policies (revised) foreach infrastructure sector under the

The state has sectoral policies forpower, ports, roads, urban masstransit system, special economic

The EconomicDevelopment Policy haslaid down sectoral policies

Appendix 8, page 3

53

for individualinfrastructuresectors underPSIF II financing.

with the enactment of the IDEAon 20 September 2001 suchexisting policies will need to beupgraded and formalized.

Gujarat Infrastructure AgendaVision 2101. The existing sectorpolicies are under review to identifypolicy bottlenecks for implementingprivate sector infrastructure projectsin the state.

zone, airports, and informationtechnology. Karnataka is in theprocess of revising its sector policesthrough a new infrastructure policywhich is expected by end 2001.

for power, road, urbaninfrastructure, informationtechnology, and specialeconomic zones.

a. Roads Policy of private participation inroads was approved in 1997and guidelines issued in 1998.A.P State Motor Vehicle Acthas been amended to enableprivate parties to levy tolls andregulate traffic. Guidelines forprivate investment in roadprojects in the state have beenissued. The Roads & BuildingDepartment will implementRoad projects underprivatization. Ten projects havebeen entrusted to the privatesector on a BOT basis.

State road policy and enablinglegislation authorize BOT andBOOT with special purpose vehiclesand prescribes internationalstandards for dispute resolution andarbitration. The Gujarat Roads andBuilding Department identifiedseven projects to be undertaken bythe private sector. The GujaratState Road DevelopmentCorporation was incorporated tomanage funds and ensure efficiencyof investments. Two toll roadprojects has since beencommissioned by the private sector.The government has developed amodel concession agreement forprivate sector participation in roads.

The enabling legislation for road policyand operation in the state is theMeasure Highways Act (1964) and theMeasure Highways Rules, 1965. Asmodified by the Karnataka Highways(Amendment Act) (1988). The bodylegislation covers principles, rules andprocedures for compensation forexpropriated lands, encroachmentlevying of tolls, levying of bettermentcharges and penalties. To encourageprivate participation, the stategovernment will offer projects underthree options namely, BOO, BOT, andBOOT schemes without governmentguarantee. Projects marginally viablewill have government participation asrequired, projects which are notcommercially viable would be takenup by the state government.Infrastructure policy was announcedfor private sector participation in road,bridges, and flyovers projects. TheKarnataka Road DevelopmentCorporation was established in July1999 to construct and facilitate BOTand BOOT projects. The constructionof Bangalore- Mysore Expresswayentrusted to private sector sponsors.

A new state road policy hasbeen developed toencourage privateparticipation ininfrastructure development.The state has alreadyimplemented tolls on about1000 kilometer of statemaintained roads. A privatesector cell was establishedwithin the Public WorksDepartment. Distancebased toll has beenintroduced and is beingexpanded throughout MPfor 14 BOT roads to beimplemented with privatesector participation underthe supervision of the MPState Bridge Corporation.The first private sector tollroad project on aconcession basis wasimplemented in MP by MPTolls Roads Ltd incollaboration with IL&FS.MP has a modelconcession agreement forroads. The state proposesto have a regulatoryframework soon for theroad sector. MP haspassed the InfrastructureInvestment Fund Board Actto raise funds for roadprojects. The funds will beprovided as grants tofacilitate privateparticipation in roadprojects.

Appendix 8, page 4

54

b. Power The AP Electricity Reform Actwas enacted in 1998 thatprovided for the constitution ofan electricity regulatorycommission, rationalization ofgeneration, transmission,distribution, and supply ofelectricity. The APERC was setup in March 1999. APERCissued its first tariff order for theFY 2001 providing a 16%average increase in retail tariffs.Andhra Pradesh StateElectricity Board (APSEB) wasrestructured into AP Genco andAP Transco in January 1999.Provisional disaggregation ofAP Transco into Transco and 4distribution companies(discoms) in March 2000.Discoms licenses issued byAPERC in December 2000.Discoms to be privatizedshortly. State committed formetering consumers andraising agricultural tariff underthe Accelerated PowerDevelopment Program.

State government is restructuring itspower sector with ADB assistance.The Gujarat State ElectricityCorporation was formed in April1999 while the Gujarat ElectricityRegulatory Commission becameoperational in April 1999. First tarifforder was passed in October 2000.The privatization of distribution isexpected to commence in sixmonths to one year.

The government has initiated a reformand restructuring program to make thepower sector commercially viable andfinancially sustainable. With theestablishment of the KarnatakaElectricity Regulatory Commission(KERC), and enactment of theElectricity Reforms Act , 1999, theKaranataka Electricity Board wascorporatized and the Karnataka PowerTransmission Corporation Ltd(KPTCL) and Visveswaray VidyuthNigama Ltd (generating company)were incorporated as companies inAugust 1999. The KERC passed itsfirst tariff order envisaging tariffincrease by 26% to KPTCL.Privatization of distribution isproposed by June 2002. Karnatakawas the first state to sign an MOU withthe central government under theAccelerated Power DevelopmentProgram.

The MP governmentrecently introduced aprogressive power sectorreform package. Theprogram has alreadybrought into force aregulatory framework forthe power sector. ThePower sector reform billprovides for restructuring ofthe MP State ElectricityBoard, metering of allconsumers, rationalizationof tariffs and arbitrationwith Central ElectricityRegulatory Commission.The state reserves theright, under the power billto privatize transmissionand distribution. ADBassistance underconsideration forsupporting power sectorrestructuring and reforms.

c. Ports Emphasis on greenfield portdevelopments under BOTframework. AP is currentlydrawing up a model concessionagreement for ports-three portsproposed in the private sectoras well as a liquified natural gasterminal project.

Gujarat Maritime Board establishedunder legislation in 1992 is thenodal maritime authority for thestate. BOOT Principles under PortsPolicy Annexure A (1997) definesrelative roles of government andprivate sector. Developer to begiven complete flexibility in tariffsetting. 30 year BOOT packageRegulatory authority (GMB) to dealwith unfair/ monopolistic behavior.Waterfront royalty set by theGovernment. The State's port policyof 1995 proposed 10 new locationsfor development of which six wouldbe by the private sector while theremaining four are proposed in thejoint sector.

Port policy provides for developmentof at least three minor ports atstrategic locations. Policy aims toattract private sector investment forthe development of existing minor andintermediate ports as well as ingreenfield locations. The state willendeavor to provide the required roadnetwork and railway linkages to thehinterland.

MP is landlocked andhence has no provision forports.

Appendix 8, page 5

55

The first three private ports of thecountry in operation are in Gujarat.

d. Airport Vision 2020 targets include twointernational airportss, five tosix domestic airports, and 17smaller airstrips. The stategovernment will supportdevelopment of internationalairports at Visakhapatnam andShamshabad and other localairports with privateparticipation.A pro-active privatization policyis proposed to give completefreedom to the privatedeveloper.

the state to initiate prefeasibilitystudies for airport projects atattractive locations. Based on thestudy, it is to shortlist 1-2 projectsfor development as regional hubs.Subject to viability, these proposedprojects will be offered to the privatesector for participation.

Bangalore international airport is to bedeveloped by the private sector.Existing airport will be closed andentire traffic will be transferred to thenew airport. Peripheral developmentand rail link and tolled expresswayfrom airport to city. Development offour minor, and one greenfield,airports in the state.

MP proposes to upgradethe Indore airport tointernational standards.

e. Urban MassTransit System

The proposed Hyderabadmetropolitan area mass transitwill use existing railway right-of-way and potential expansion oftrack.

GIDB has approved thecommissioning of a prefeasibilitystudy of an integrated public transitsystem for Ahmedabad Urban Area.Possibility of privatizing theintegrated project is to be explored.

Multimodal mass transit system to bedeveloped at Bangalore by the privatesector. Draft legislation submitted tostate government for enactment.Metro Bus Pilot Project has beenproposed.

f. Cyber Park/Optical Fiber.

AP has drafted an IT policy withstrategies for (i) puttingenablers in place such aspolicymaking bodies, regulatoryregime,(ii) infrastructure suchas hi-tech habitat, hi -tech city,land for IT majors, private ITparks, software technologyparks. Optical fiber backbone --the Government to facilitate andpromote the establishment ofbroadband digital networks inthe state. State has announcedits policy on right-of-way alongall state highways for thetelecommunications sector.Private sector initiatives areinvited in creating ITinfrastructure, implementing e-governance projects,developing software for e-governance projects, distance

State recently declared itsInformation Technology (IT) policy.State proposes to get connectivitythrough optical fiber up to theTaluka level.

First state to announce IT policy in1997. IT park established as a jointventure between the state, the Tatas,and a Singapore based consortium. ITparks provided with fiscal incentivesand benefits. Proposal made to set upan export promotion industrial park.Software technology park has beenset up. The state is fast becoming acenter for sophisticated IT productsand services. State proposes to set upincubation centers primarily withprivate sector initiative to provide withcomplete start- up facilities with thecomputer systems andtelecommunications links. Fiscalincentives provided for IT industries.Other concessions for IT companiesgenerating employment.

A software technology parkis being constructed atIndore. MPSIDC iscurrently involved indeveloping, operating, andmaintaining technologyparks in the state. MPproposes to develop amodel concessionagreement shortly for the ITsector. A

ppendix 8, page 656

education, healthcare, andcommunity internetinfrastructure.

g. SpecialEconomic Zones(SEZs)

Proposed SEZ is nearVisakapatnam for which centralgovernment approval hasalready been obtained fordevelopment of SEZ underpublic-private partnershipformats.

SEZs are governed by the ExportImport Policy declared by thecentral government in March 2000.The government of Gujarat intendsto convert its existing free tradezones into SEZs and potentially willestablish new ones in conjunctionwith its port development initiatives.A SEZ may be set up in the public,private, joint sector or by stategovernment as notified by theMinistry of Commerce.A SEZ at Positra being set up bythe Gujarat Positra PortInfrastructure Ltd. in the privatesector. Set up of two more SEZsare being examined.

Proposal to set up SEZ at Hassan byconverting growth center into an SEZ.

MP proposes to set up SEZat Indore shortly.

h. Water Supplyand Sewerage

Proposed water supply projectby the private sector atVishaka-patnam.

The state is in the process ofcreating a water regulatory authorityto act as a regulating bodyexercising authority and control overall water users in the state. There isa proposal to set up an SPVstructure for the planning,designing, implementation of theground water pipeline networkgradual introduction of. Aprivatization in urban water supplyis envisaged.

Karnataka Urban InfrastructureDevelopment and FinanceCorporation set up as the nodalagency for urban development andfinance and to facilitate private sectorparticipation. Private sectorparticipation proposed in urban waterand sanitation such as in Bangalore.User charges in irrigation and watermore than doubled in 2000/ 01.

The state proposes to haveits first water supply projectin the private sector atDewas. Model concessionagreement beingdeveloped.

6. Undertaking toassess need forregulatoryframeworks intargetinfrastructuresectors with a viewto specifying suchtargetinfrastructuresectors for which

To be vested with theInfrastructure Authority underthe IDEA. Phased programs forsetting up sector regulators. APis considering setting up aregulator for water supply. APto consider setting up ofregulators in areas coveredunder the PSIF II inconsultation with ADBconsultants under the proposed

Gujarat has initiated actions forestablishing regulatory frameworksfor water supply, urbaninfrastructure, port, specialeconomic zones, and roads. Theregulatory frameworks for the watersupply and port sectors areexpected to be ready by mid 2002,while a review is being conducted todetermine whether a separateregulator would be needed for the

Karnataka has a regulatory frameworkfor the power sector. The state hasdrafted a bill for regulating the watersupply sector. Regulation for othersectors will be introduced in a phasedmanner based on the extent of privatesector participation in each sector andthe review by ADB TA consultants.

MP has a regulatoryframework for the powersector. MP will soonconsider the establishmentof a regulatory frameworkfor the road sector as MPexpects more private sectorprojects in the road sector.The regulatory frameworkfor other infrastructuresectors will be based on

Appendix 8, page 7

57

regulatoryframeworks are tobe established.

TA. special economic zones. Gujarathas a regulatory framework for thepower sector.1

the extent of private sectorinvolvement in thedevelopment ofinfrastructure in thosesectors. This will bedetermined in consultationwith the ADB TAconsultants.

7. Adoption ofpolicy ontransparency inthe awarding ofbids andconcessions forindividual projects.

Provided under the IDEA. Thestate Rights to Information Actprovides for right of access toinformation to the citizens of thestate to promote openness,transparency, andaccountability in administrationwhile the Rights toTransparency Act provides fortransparency in publicprocurement of goods andservices.

The GIDA provides the proceduresfor selection through the process ofcompetitive public bidding. This wasprepared with the assistance ofADB TA 2716-InstitutionalStrengthening of GujaratInfrastructure Board.

Karnataka’s state infrastructure policyprovides for infrastructure projects tobe awarded for private participationthrough open competitive bidding. Thestate publishes projects for bidding onthe Internet accessible by anyinterested party. Consultants underthe proposed ADB TA will reviewexisting rules and procedures.Karnataka has in place the Rights toInformation Act as well asTransparency in Public ProcurementAct.

MP has prepared detailedguidelines for awardingbids and concessions forinfrastructure projects. MPhas in place the Rights toInformation Act as well asan Act for Investment inInfrastructure projects,which aims at transparencyin bidding and awarding ofcontracts.

8. Commitment todraft modelconcessionagreements thatspecify indicativestandard terms forgrantingconcessions toprivate sectorsponsors invariousinfrastructuresectors.

AP is currently drawing up amodel concession agreementfor ports. Proposed models forroad, information technology,and special economic zones.AP will make available draftmodel concession agreementsfor review by the consultantsunder the proposed ADB TA.

Gujarat has model concessionagreements for the port and roadsectors. These agreements will bereviewed by the consultants underthe proposed ADB TA. Gujaratproposes to develop modelconcession agreements for thewater supply sector.

Karnataka has a model concessionagreement for the road sector, whichwill be reviewed by the consultantsunder the proposed ADB TA. A draftconcession agreement is proposed forairports. Other sectors to be coveredwill be determined with the assistanceof ADB TA consultants.

MP has a modelconcession agreement forthe roads sector. MP is inthe process of developing adraft model concessionagreement for water supplyas well as for cyberparksand special economiczones. Other infrastructuresectors where modelconcession agreementsmay be developed will bediscussed with ADB TAconsultants.

9. Undertaking toreview existingrules andprocedures forconduct ofinternationalcompetitive

Provided under the IDEA. APwill initiate the review and withassistance from ADB TA,consultants will prepareprocedures that meet bestinternational commercialpractices.

Rules and procedures for theconduct of the competitive biddingprocess are provided under theGIDA. The consultants under theproposed ADB TA for the PSIF IIwill review the existing proceduresto ensure that the procedures are

Karnataka requires that allprocurement be made in a transparentmanner under the provisions of StateTransparency in Public ProcurementAct. Karnataka will initiate the reviewand with assistance from ADB TAconsultants draft improved rules and

Though MP has prepareddetailed guidelines forawarding of bids to privatesector infrastructureprojects, MP will initiate thereview and with assistancefrom ADB TA consultants

1 Loan 1804-IND: Gujarat Power Sector Development Project.

Appendix 8, page 8

58

bidding with a viewto consideringprocedures thatmeet bestinternationalcommercialpractices anddefined rules fordealing withunsolicited bids foraward ofinfrastructureprojects.

consistent with best internationalcommercial practices.

procedures to govern the conduct ofinternational competitive bidding thatmeet best international commercialpractices.

draft improved rules andprocedures to govern theconduct of internationalcompetitive bidding thatmeet best internationalcommercial practices.

10. Undertaking torationalizeincentiveframework forprivate sectorparticipation ininfrastructureprojects.

AP may provide a bettertargeted performance basedincentive framework for privatesector participation ininfrastructure projects takingcarefully into account lessons ofpast experience that showcompeting with other states forproviding incentives to investorshas not proven constructive.

An incentive framework is providedfor private sector infrastructureprojects under the GIDA.

The incentive framework for privatesector participation in infrastructureprojects is defined in the StateInfrastructure Policy as well as theNew State Industrial Policy 2001-06.

MP does not have aseparate incentiveframework except asprovided by the CentralGovernment forinfrastructure projects andMP for industries. This willbe considered in the light ofPSIF II requirements.

11. Formalstatement of intentto designate astate disputeresolutionmechanism anddefine rules andprocedures forresolving disputes.

Setting up a dispute resolutionauthority through a ConciliationBoard is provided under theIDEA that will have the samepowers as are vested in a civilcourt.

Gujarat has set up a task force toexamine the requirements forsetting up of a dispute resolutionauthority. The GIDA only providesfor the inclusion of an arbitrationclause under the concessionagreements.

Karnataka will make a formalstatement of intent to set up a statedispute resolution mechanism. Forthis purpose Karnataka intends toexamine the Conciliation Boardproposed by AP under its IDEA.

Presently, the policyguidelines and the relatedconcession agreements forindividual projects governthe resolution of disputesfor individual private sectorprojects. Reference is alsomade to the IndianArbitration Act, 1996. Theconsultants under theproposed ADB TA willprovide assistance forupgrading the disputeresolution policy frameworkand recommend the settingup of a formal disputeresolution mechanism.

Appendix 8, page 9

59

12. Statement ofintent to formallyadopt statepolicies onenvironment,resettlement, andother socialsafeguards thatarise whileimplementinginfrastructureprojects.

AP’s Irrigation DepartmentResettlement Policy will bereviewed by consultants underthe ADB TA for adoption byother sectors. AP’s environmentpolicy will also be reviewed. APhas agreed to adopt statewidepolicies concerningenvironmental and resettlementsafeguards in accordance withinternational best practices.

Gujarat will adopt environmentalresettlement and social safeguardsthat meet international standards inthe implementation of infrastructureprojects under the facility.

The state will initiate appropriate stepsto formally adopt state policies onenvironment, resettlement, and othersocial safeguards that arise in theimplementation of infrastructureprojects.

MP has an environmentalpolicy adopted in 1999 andis actively engaged inimplementing an actionplan for environmentalprotection, with the supportof an ADB TA under theprogram loan2, scheduledto commence in late 2001.A comprehensive draftpolicy to deal withresettlement issues hasbeen prepared and hasbeen reviewed by theCabinet. This policy is dueto be resubmitted to theCabinet once thecompensation provisionsfor affected persons havebeen strengthened. TheGovernment is welladvanced towardsfinalizing the policy.

2 Loan 1717-IND: Madhya Pradesh Public Sector Resource Management Program Loan approved on 14 December 1999 for $ 250 million.

Appendix 8, page 10

60

Appendix 9 page 1

POVERTY IMPACT ASSESSMENT

A. Current Poverty Situation

1. Continued high economic growth and a strong social orientation fostered improvement inthe socioeconomic development of India in the 1990s. However, huge development challengesremain with India’s low per capita income and a population of around 1 billion. More than 300million people live below the poverty line, and physical and social infrastructure remaininadequate.

2. The latest National Sample Survey (NSS) 2000 in India reveals a sharp decline in thepercentage of population living below the poverty line to 26 percent compared with 36 percent in1993/94. (The NSS 2000 results may not be fully comparable with earlier surveys due tomethodological changes.) This improvement is also reflected in the focal states of the AsianDevelopment Bank (ADB) (viz., Gujarat, Kerala, and Madhya Pradesh). For example, poverty inGujarat declined from 24 percent in 1993/94 to 14 percent in 1999/2000, in Kerala from 27percent to about 13 percent, and in Madhya Pradesh from 43 percent to 37 percent.

3. However, the number of poor remains high due to the continued increase in population.While the proportion of population living below the poverty line has dropped considerably, theabsolute number of poor increased to over 300 million reflecting India’s continued highpopulation growth. Substantial interstate and intrastate variations, and urban-rural disparitiescharacterize this increase. These disparities are also reflected in the limited access of the poorto social services, compounding intergenerational poverty.

4. Geographically, the poor are mainly concentrated in the eastern and central parts of thecountry, with the highest incidence in Bihar, Orissa, Uttar Pradesh, and Madhya Pradesh. Inrural areas, which account for 75 percent of the population, about 37 percent live below thepoverty line compared with about 32 percent in urban areas in 1993/94. Moreover, poverty inrural Bihar and Assam was 3-5 times as widespread (58 percent and 45 percent, respectively)as in rural Pujab (12 percent). While urban poverty is highly concentrated in a few statesincluding Andhra Pradesh, Madhya Pradesh, and Rajasthan, the incidence of urban poverty isalso high in the larger metropolitan areas such as Kolkata and Mumbai. Economic groups mostprone to poverty are rural households (mainly agricultural laborers), urban casual laborhouseholds, and the self-employed.

5. While other countries have the bulk of their poor residing in rural areas, in India largenumbers of poor live both in rural and urban areas. Twenty seven percent of the population inrural areas are poor compared with about 24 percent in urban areas.

6. Urban centers, such as Mumbai and Kolkata, face huge challenges in the future asthese megacities continue to grow. In rural areas, agricultural laborers and small-scale farmersbear the brunt of poverty. Lack of access to arable land, limited opportunities for wage labor,lack of education, shortage of capital, and poor management of natural resources, has provento be fundamental causes of poverty.

B. Government Challenges

7. The Government of India recognizes that poverty is much more than lack of income.Apart from the incidence of income poverty, limited access of the poor to social services andcontinued high levels of illiteracy (the literacy rate was 54 percent in 1997) have perpetuated.

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Appendix 9 page 2

The wider dimensions of poverty including vulnerability, powerlessness, and social exclusionare also factors affecting the poor. Increasing the ability of the poor to fully participate indecisions, which affect their lives, is being reflected in the Government supporting the increaseddevolution of authority and responsibility from the states to rural and urban local bodies.Strengthening institutional and decision-making processes involving civil society and the poorare key Government priorities.

8. These will also be reflected in the Government’s preparations of the approach to the10th Five-Year Plan (2002-2007). The High-Level Forum and Poverty Reduction PartnershipAgreement will be linked with the Government’s plan preparation and thus will ensure that thekey priorities of the country strategy and program (CSP) and ADB’s country focus are fullyconsistent with India’s developmental needs as well as ADB’s strategic emphasis on povertyreduction.

9. Achieving sustainable poverty reduction through generation of productive employmentopportunities and increased incomes resulting from faster and broad-based economic growthremains an important factor.

10. Economic growth success will depend on the Government’s ability to address thecountry’s structural weaknesses particularly in the infrastructure sector and public finances. Itwill also be essential that support for social infrastructure and human development bestrengthened to make the reform process sustainable. Investments are needed in key areas ofthe economy, particularly, power, roads, and transportation, to assist in keeping pace withdevelopments in the overall economy and to create an environment that is conducive to asustainable poverty-reducing growth plan. Given the enormous resource requirements forimprovements in infrastructure, one of the challenges will be Government efforts to promotegreater private sector investments, long-term frameworks and policy incentive mechanisms, andcoordination of different government agencies for developing and implementing majorinfrastructure programs.

11. The Government is continuing its efforts to implement its priority reform programfocusing on macroeconomic and structural reforms, including developing an enablingenvironment for private sector development, financial sector and capital market reforms, anddecentralization.

C. Measuring Impacts Under the Private Sector Infrastructure Facility at State LevelProject

12. Private sector provision for infrastructure has great potential to improve infrastructureaccess for the poor. Common features of private-public partnership arrangements includeexclusivity provisions, universal service obligations, uniform service standards, and reliance onsubsidies to cover affordability gaps. For the poor, where public infrastructure access isinadequate, and the poor have few means to quality and reliability of service, they must rely onother means of infrastructure access, for example, through small private owners of mini busesor other vehicles.

13. Taking into account the vulnerability dimension of infrastructure investment would meanlooking not only at their average impact on the poor but on their impact on the different sectorsof the poor population.

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Appendix 9 page 3

Table A9: Summary of Marcoeconomic Linkages between Increased Private SectorInvestment in Infrastructure and Poverty

Macroeconomic Effect Short-Term ExpectedImpacts on Poverty

Long-Term Effects

Economic Growth Facilitates slowing of rural-urban migration

Development of nonfarmincomes in rural areas

Over the medium to longterm, increased privateinvestment in infrastructureshould contribute to growth.

Particular mix ofinfrastructure investmentsat state level createsdemand for goods andservices.

Governance Improved regulation andenhanced competition,reduced inequality, moreequitable treatment andimproved publicaccountability

Mitigation of negativeimpacts of transition toprivate provision ofinfrastructure services

More efficient managementand equitable distribution ofresources

Labor Market Workforce often increasedafter new investments

Wages may also bestandardized or increasedas employers seek largerskill base.

Prices Reduced inflationarypressures through lowercosts of goods and servicesas a result of betterinfrastructure and improvedefficiencies

Reallocation of Governmentexpenditures

Greater commercialoptions and opportunitiesfor infrastructure provisionand frees up public sectorfunds for investments ineducation, health and otherantipoverty measures

Better mechanism forprovision and managementof infrastructure createscommercially viableopportunities

Total Net Affect Positive

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Appendix 10, page 1

SUMMARY OF RESETTLEMENT AND REHABILITATION ACTION PLANAHMEDABAD-MEHSANA TOLL ROAD PROJECT

A. Introduction and Scope

1. The Ahmedabad-Mehsana Toll Road is part of Gujarat State Highways (SH-41) which is51.6 kilometers (km) long with a two-lane highway and 60-meter (m) right of way (ROW). Theproject is proposed to upgrade and widen the road to four lanes of divided highway with servicelanes on both sides. The project scope also includes improvements and access to 11.5 km longspur road. Traffic on the main road will be tolled, while the service roads and the spur road will betoll-free.

2. As part of the detailed feasibility study of the project, a detailed social assessment wasundertaken. The assessment, with an objective to minimize the adverse social impacts and thenumber of persons affected, as the first step, also examined alternate alignments for congestedroad sections. As a result of this, a 2.08 km bypass is proposed at Sertha village.

3. Subsequently, as part of project implementation the detailed Resettlement andRehabilitation Action Plan (RRAP) was prepared based on a 100 percent census and householdlevel socioeconomic survey of affected persons and inventory of all the losses due to the project.This is a summary of that RRAP.

B. ROW Acquisition - Extent and Impacts

4. Summary Land Requirement : The existing ROW of 60 meters (m) is sufficient forconstruction and upgrading of the project road, except at Sertha village where a bypass isproposed as an alternative. The bypass passes through 72 revenue plots encompassing an area of12.1067 hectares (ha) comprising predominantly private agricultural lands. Of the 72 plots, 65 areprivate lands owned by 49 titleholders comprising of 79 families. The rest of the plots belong toSertha Grampanchayat, Gandhinagar Collectorate, and others. The land acquisition from privateparties amounts to 8.8557 ha.

5. Impacts Due to Loss of Agricultural Land : Total private agricultural land being acquireddue to this project is 8.8553 ha comprising 65 plots, affecting 79 families, the majority of whom (59)will lose less than 15 percent of their landholding. However, 39 families will be left with less thanthe minimum economic landholding (MEL)1 after land acquisition (LA).

6. Loss of Structures and Utilities : The land acquisition for the bypass will affect private andcommunity structures and utilities: three private defunct irrigation wells and one farmhouse with asmall temple, as well as a community cattle drinking water trough. In addition, 16 temples, 5roadside drinking water posts, 3 toilet blocks, and 15 bus stops in the existing ROW of the road willneed to be relocated.

8. Encroachers and Squatters : The clearing of existing ROW will affect 13 residentialstructures encroaching into the ROW and 4 residential squatters located within the ROW. TheROW clearance will render the 13 squatters homeless, necessitating relocation. However, theresidences encroaching the ROW will only be partially affected.

1 MEL: Minimum economic landholding is the size of plot that enables the cultivator to maintain an economic status just

above the poverty line, where the poverty line is pegged at Rs30,000. The MEL in the project area is estimated as 1ha. of irrigated land or 2 has. of unirrigated land based on income from agriculture land.

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Appendix 10, page 2

C. Entitlement Framework and the RRAP

10. Environmental and Social Policy for Resettlement and Rehabilitation of the Ahmendabad-Mehsana Toll Road Company Limited is based on the Environmental and Social Report ofInfrastructure Leasing & Financial Services and the Private Sector Infrastructure Facility at StateLevel Project, and follows the three principles:

(i) Prevent adverse social situations.(ii) Mitigate possible adverse social impacts.(iii) Enhance the quality of life in and around the project.

11. Entitlement for Loss of Agricultural Lands. The "land for land" option for affectedfamilies having valid title or customary or usufruct right for their acquired land is considered as themost appropriate way to compensate the agricultural families. However, unavailability of surplusagricultural land in the project village makes this option difficult to implement. Also, the small plotsacquired from individual families cannot be replaced due to lack of contiguous lands to supplementthe land lost and purchase of such small plots at different places would not be economically viable.In such cases, compensating for the loss of land at replacement value is considered appropriateand is acceptable to the families. The finalized entitlement package is presented in Table A10, thesalient aspects considered while arriving at the entitlement include the

12. Replacement Value. The registered values for the lands are generally lower than theirreplacement values. Therefore, the compensation rates determined by the government based onthe registration value are also lower than the replacement value. The affected families, therefore,do not get adequate compensation to replace their lost assets. Since the lands have already beenacquired by the government and compensation paid for adequate replacement of their assets, theproject provides the difference between the replacement value and the government compensation,as rehabilitation assistance (RA). The payment of RA will however be subject to handing over thelands to the project company, free from any title litigation and court cases against the award by theLand Acquisition Officer. A final replacement value of Rs850,000/ha2, has been at arrived throughpublic information and consultations (PIC) and surveys.

13. Vulnerable Groups : The families living below the poverty line (pre as well as post LA),families headed by women and families with physically or mentally handicapped members areconsidered as vulnerable groups. They need to be provided with special guidance to use the RAeffectively to establish suitable income generation activities that bring the family above the povertyline. The incentives proposed are presented in Table A10.

2 Rs159,000 per ha. has already been paid by the government as part of the LA procedure. Therefore, the RA per ha.

worked out to Rs691,000.

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Appendix 10, page 3

Table A10 : Entitlement Package for Affected Agricultural Families

Category% Loss inSize of LandHolding

PostacquisitionLandholding

Post L.A Incomefrom all Sources Entitlement Package

>MEL >PL 3 Rehabilitation assistance in cash +technical guidance and other interventionsare visualized to increase land productivity .

>PL Rehabilitation assistance in cash +technical guidance and other interventionsare visualized to increase land4

productivity.

1 <15%

<MEL

<PL Provision of income generation activity(IGA) using part or full amount ofrehabilitation assistance (RA remainingafter providing IGA will be paid in cash) togenerate PL/4 income + maintenanceallowance for an year @ Rs350/ family permonth for an year. Also as an incentive, anamount equal to IGA and not exceedingRs10,000 will be paid in two installments inthree years if the family runs the IGAsuccessfully, earning the projected incomelevels

>2MEL >2PL Rehabilitation assistance in cash>2PL Rehabilitation assistance in cash

Between 1 to 2MEL

>1PL <2PL Provision of income generation activity(IGA) using part or full amount ofrehabilitation assistance (RA remainingafter providing IGA will be paid in cash) togenerate PL/4 income. Also as anincentive, an amount equal to cost of IGAand not exceeding Rs10,000 will be paid intwo installments in three years, if the familyruns the IGA successfully, earning theprojected income levels.

>1PL <2PL Entitlement as above2 >15%

<MEL

<PL Provision of income generation activity(IGA) using part or full amount ofRehabilitation assistance (RA remainingafter providing IGA will be paid in cash) togenerate PL/2 income + maintenanceallowance for an year @ Rs700/ family permonth for an year. Also as an incentive, anamount equal to cost of IGA and notexceeding Rs20,000 will be paid in twoinstallments in three years if the family runsthe IGA successfully, earning the projectedincome levels

3 For this project, the poverty line is pegged at Rs30,000 for a family size of 5.4 Loss of up to 15 percent of total agricultural land holding can be mitigated through specific technical interventions by

agricultural experts for increasing productivity from agriculture.

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Appendix 10, page 4

14. Entitlement for Loss of Structures: The entitlement covers the following:

i. Structures : The market value of the cost of the private structures will be paid incash and assistance in terms of human resources and material will be provided to relocatethe structures. All the community structures evaluated by engineers will be replaced withnecessary care and public participation.

ii. Commercial Squatters : The squatters prefer a self-relocation option in a nearbyplace with necessary shifting allowance, therefore a self-relocation measure will beprovided, where market value of the land occupied by the squatter will be paid in addition toa shifting allowance. The maximum assistance for self-relocation is estimated at Rs5,000. Ifthe structures are beyond the formation width of the project road and or amenable forshifting beyond the formation width of the road, the structure will be allowed to remain.

iii. Residential Squatters/Encroachers : The 13 residential structures encroachingonto the ROW will dismantle their structures and move back onto their own remaining landbehind the ROW, and will be compensated at replacement cost for the entire structures. Forthe 4 squatter residences, the affected families opted for self-relocation on payment ofcompensation for the structures currently occupied by them. The compensation for squatterfamilies will be paid once they identify structures for self-relocation.

D. Public Information and Consultation

13. Focus group meetings and informal meetings and public information and consultationmeetings with advance notices were held at different stages of the project development process toarrive at a meaningful practical and implementable RRAP. These meetings helped to identify thevulnerable families, understand people's concerns, arrive at a realistic entitlement package, set upinstitutional framework for RRAP implementation, as well as the grievance redressal mechanism.

E. Institutional Framework

14. For the purpose of implementing the RRAP an independent full time social consultant willbe appointed.

15. An external monitoring and evaluation consultant, appointed by the Ahmedabad-MehsanaToll Road Limited will review the implementation of RRAP. The consultant will review the RRAPimplementation for 90 person-days spread over two years.

F. Resettlement & Rehabilitation Budget:

16. The total budget for implementation of the RRAP is estimated at Rs12,407,385. The budgetcategories include compensation for lost private and community assets, rehabilitation assistance, afull-time social development consultant, a monitoring and evaluation consultant, an agricultural andincome generation adviser, and community development assistance in affected villages.

G. Disclosure

17. The detailed RRAP for implementation has been translated into Gujrati, the local language,and the same is placed in the project office for the reference of the affected families, as well as anyinterested groups. The availability of the translated report has been advertised in local newspapersin local languages.

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SUMMARY RESETTLEMENT POLICY FRAMEWORK

A. Introduction

1. The Resettlement Policy Framework, of which this is a summary, was prepared to beapplied to all subloans under the Private Sector Infrastructure Facility at State Level Project(PSIF II), which will involve land acquisition and resettlement. The framework is based on theEnvironmental and Social Report (ESR) of Infrastructure Leasing & Financial Services Ltd.(IL&FS). IL&FS is among the first financing institutions in India to recognize the importance ofenvironmental and social issues in development of infrastructure projects. Internalization ofenvironmental and social considerations in project development has been one of the majorachievements of IL&FS. The framework consists of a well-defined social assessmentprocess, which defines the procedural guidelines to follow as an integral part of the projectdevelopment cycle. The social assessment process also consists of a detailed framework forresettlement and rehabilitation of project affected communities. These procedures will beapplicable for all subprojects implemented by various special purpose vehicles (SPVs) for allsubloans under PSIF II.

B. Resettlement Policy Framework

2. The framework commits to (i) address the legitimate concerns of relevantstakeholders, especially persons affected by the project; (ii) avoid or minimize resettlementdue to land acquisition through appropriate technical and management measures, involvingthe affected communities; (iii) ensure protection of marginalized and vulnerable groups,including the economically and socially disadvantaged, the elderly, women, children,physically handicapped, and indigenous people; and (iv) ensure responsible resettlementand rehabilitation of affected persons through sustainable livelihood options that at leastrestore, if not improve, their standard of living.

3. The framework stipulates eligibility and entitlement for seven categories: (i) loss ofland; (ii) loss of structure; (iii) loss of livelihood, trade, occupation, (iv) loss of access tocommon resources and facilities; (v) loss of standing crops and trees; (vi) losses duringtransition of displaced persons/establishments; and (vii) losses to host communities. Theentitlements for the loss categories will be appropriately compensated in cash or kindconsidering the replacement value. The provision of necessary measures for subprojects willmitigate impacts on common resources and facilities, host communities, etc.

4. In respect of people losing land, the “land for land” option will be the first optionconsidered. However, unavailability of surplus agricultural land is one of the majorconstraints in implementing this option. Also this option will not be practical in case of linearprojects, as the small plots acquired from individual affected families cannot be replaced dueto lack of contiguous lands to supplement the land lost. Purchase of such small plots atdifferent places would not be economically viable for cultivation. Therefore, compensating forthe loss of land at replacement value will be considered as an appropriate option.

5. The lands for project development are mostly acquired by government agencies andthe compensation paid is based on registered values of the land, which is generally muchlower than the replacement value. The SPVs will, therefore, evaluate the replacement valueof the land lost for the subprojects, reach consensus with the affected families and pay thedifference in amount as rehabilitation assistance. Because of their vulnerability, families livingbelow the poverty line, families headed by women and families with physically or mentallyhandicapped members will be considered for economic rehabilitation establishing income

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generation schemes (IGS) using the RA. The IGS will also have a financial incentivemechanism for families to achieve the target income.

6. The loss of structures will be compensated either by providing alternative structuresor by cash compensation if the family prefers self-relocation. For commercial structures, therelocation options considered will ensure that the family's source of income will not beadversely affected, if need be by providing economic rehabilitation. In case of residentialstructures, the families will be provided with an alternative house, which meets minimumnational housing norms.1. The constructed area and the homestead land lost in excess ofstandards will be compensated in cash at replacement value.

7. As part of project implementation, the framework also emphasizes adoption ofmeasures that enhance social conditions in project areas and meet the objective of socialdevelopment.

C. Social Assessment Process (SAP)

8. The social assessment process requires the following for a subproject: (i) initial socialscreening, (ii) scoping of social assessment, (iii) analysis of project alternatives andminimization of social impacts, (iv) carrying out detailed social assessment and preparationof a draft resettlement and rehabilitation action plan (RRAP), (iv) preparation andimplementation of detailed RRAP after technical design and prior to implementation of theproject.

9. The social assessment process and outputs for a subproject will be audited on ayearly basis, as part of an environment and social audit. The process of social assessmentwill be integrated with the project development process by the SPVs, overseen by theparticipating financial institutions (PFIs), reviewing the outputs at each of the identified steps.Finalizing an implementable RRAP and disbursements will be subjected to approval of theAsian Development Bank (ADB).

D. Institutional Responsibilities

10. The overall project coordination and financing responsibility lie with the PFIs. As partof this responsibility, the PFIs will review the outputs prepared by the SPVs from time to timeand approve the same in compliance with social assessment process and the framework.The SPV developing and implementing the subprojects will be responsible for implementingthe agreed-upon RRAPs including (i) identifying the people affected and assets lost to thesubproject, (ii) valuing assets, (iii) identifying vulnerable groups, (iv) formulation ofentitlement packages through effective public consultations, (v) preparing implementationschedules, (vi) allocating budget for implementation of the RRAP, (vii) publicly disclosing animplementable RRAP, (viii) disbursing entitlements, and (ix) providing grievance redressal.The SPV implementing the project will submit progress reports to the relevant PFI on agreedfrequency depending on the nature of the RRAP.

11. The PFI will monitor and evaluate the progress of RRAP implementation on apreassigned frequency for a subproject. Through this mechanism, it will be made certain thatthe RRAP objectives are completely achieved. The monitoring will also ensure that theentitlements are disbursed prior to commencement of construction activities on the ground.

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1 If the policy objective of improving the socioeconomic status of the family requires, higher entitlement may beconsidered on a case-to-case basis.

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E. Consultation, Disclosure, and Grievance Redressal

12. The public participation in the form of informal meetings, focus group discussions,and public information consultation meetings, as applicable and necessary, will beinternalized at each stage of project development. The process will also identify aninstitutional mechanism where public grievance will be addressed on a responsive basis aspart of project implementation.

13. The SPV will translate the RRAP into vernacular language and place it in the projectoffice disclosing it to the affected communities and other interested parties throughadvertisements in local news papers.

F. Monitoring and Evaluation

14. The objectives of monitoring and evaluation will be to (i) ensure consistency ofimplementation with the approved RRAP and adherence to agreements; (ii) check forunforeseen social impacts, respond to public concerns, and undertake corrective measures;and (iii) review the progress of IGS and provide necessary midcourse corrections ifnecessary. Typically (i) and (ii) require short-term monitoring if these responsibilities areaccomplished during RRAP implementation, which generally takes a year, whereas, thesuccess of IGS implementation and economic rehabilitation may extend up to three years.Therefore, the overall monitoring and evaluation, if required, would extend up to three yearsfrom the start date of RRAP implementation.

15. As stated, the PFIs will monitor and evaluate the progress of RRAP implementationon a preassigned frequency for a subproject depending on the complexities of the RRAPs.The schedule and indicators for monitoring will be specified in the implementation andmonitoring plan depending on the type of project and conditions prevailing. This function alsoincludes identification of unforeseen negative impacts and taking corrective measuresimmediately. This will ensure that the project is not jeopardized due to lack of timely actionon social issues. The monitoring reports will be shared with ADB for review and approvals.

F. RRAP Budget

16. The complete cost of implementing the RRAP will form part of the subprojectsdeveloped by the SPV. The RRAP budget would consist of (i) rehabilitation assistance, (ii)incentives for successful implementation of IGS by vulnerable families, (iii) maintenanceallowances in case of delays in implementing the RRAP, (iv) compensation for loss ofstructures, (v) provision for restoration of community facilities lost to the project, (vi)budgetary costs for monitoring and evaluation and management costs, (vii) human resourcecosts for implementing the RRAP, (viii) provision for adoption of measures to enhance socialconditions in the project area, to meet the objectives of social development, and (ix)contingencies.

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TECHNICAL ASSISTANCE FOR ENHANCING PRIVATE SECTOR PARTICIPATION ININFRASTRUCTURE DEVELOPMENT AT THE STATE LEVEL

A. Objectives

1. The objective of this proposed technical assistance (TA) is to assist the four selectedstates of India address identified constraints to increased private sector participation (PSP) ininfrastructure development in their respective states and facilitate project development. Theteam of consultants will initially conduct a brief review of the current state of the enablingenvironment in each state; identify the priorities in each sector in each state, which constitutethe key constraints to increased private sector participation; review the projects requiringfinancing and determine where specific external support to bring a project to closure is required;provide the required experts to assist state governments address constraints to PSP andindividual projects; coordinate recommended measures particularly in the affected infrastructuresectors with Asian Development Bank (ADB) infrastructure divisions operating in the sector, andrecommend follow-up measures/interventions for the state governments to take and identifypossible areas for support by ADB.

2. The consultants, at the end of the assignment, will provide a report to ADB and to eachstate government reflected in a policy matrix that identifies for each sector for each state (i) theoverall list of constraints identified at the beginning of the consulting assignment and the keypriority constraints that need to be addressed during the assignment both by the consultantsand the state government, identifying inputs required from both; (ii) measures that theconsultants propose to be undertaken (as defined within the terms of reference, includingproposed changes, if any) to address the constraints, (iii) results of implementation of theseproposed measures; (iv) progress of implementation by state governments of the identifiedconstraints, particularly, those constituting the Continued Access Criteria to Private SectorInfrastructure Facility at State Level Project (PSIF II); and (v) remaining agenda of policyreforms that need to be taken, and improvements in existing structures, systems, andprocedures. More importantly, inventory of ready projects to be financed under the PSIF II.

B. Scope

3. The consulltants will, under the TA and in general, provide guidance in formulating policyand regulations, in enhancing governance structures and practices, and in implementing policyby strengthening the public-private interface, based on current weaknesses and gaps and onbest practice. Based on identified projects, recommend solutions to enable these projects to bebrought to financial closure.

4. Terms of reference for Consultants include the following.

1. International Consultants

5. The consultant team will be composed of a team leader (8 person-months), preferably,head of a board of investments in a developed or developing country with extensive backgroundin policy and practice, and record of success in attracting private sector and foreigninvestments, and engaged in developing an environment conducive to the private sector/foreigninvestors; or former chief executive officer of a multinational corporation with operations in Indiaand Asia and the Pacific, and extensive background in strategic private sector investments.Aside from leading and coordinating the team and integrating the team's report, the team leaderwill have the following responsibilities:

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(i) Review the existing policy and legislation on private sector participation ininfrastructure development of each selected state for clarity and completeness ofcoverage. The policy and/or legislation should be sufficient in form and insubstance to provide specific assurances to the private sector of the stategovernment's commitment to private sector participation. Recommendimprovements, if required. Draft proposed amendments to existing legislation inconsultation with various stakeholders, private sector and state governmentofficials concerned. Where no legislation is in place, recommend the suitability ofhaving one and provide draft legislation.

(ii) Review the existing structure and organization for dealing with privateinfrastructure projects and their effectiveness. Based on this review, recommendways to strengthen the present organization, reviewing carefully the key resultareas and capacities for delivering the organizational objectives. Determine ifoutsourcing of certain activities may be more appropriate. Determine what is anappropriate level of funding for meeting operational requirements. Recommendways to provide a sustained flow of funds for meeting operational needs.

(iii) Review current incentives offered to private investors in infrastructure.Recommend an incentive framework for private investments based on practicesthat have proven effective in other countries and provide a menu of options ofincentives for infrastructure development including tax, financing, provision ofstate guarantee, etc.; specify how state guarantees can be appropriately targetedto help allocate risks, e.g., to meet noncommercial risks such as changes inregulation, force majeure, etc.

(iv) Review special economic zones and cyberparks projects that are to be offered toinvestors and assist in facilitating the processing of these projects.

(v) Review existing mechanisms and processes for settling disputes that arise out ofprivate sector sponsored projects. Recommend a suitable mechanism(s), suchas, an authority for undertaking arbitration, define the grounds for whicharbitration may be sought and the process for speeding up of the resolution ofpossible cases, and alternative ways by which investors can seek redress forgrievances.

6. The regulatory and governance experts (24 person-months) to be identified for prioritysectors will have extensive experience and exposure in the regulation and development ofutilities in developed economies, and have a background in dealing with affordability/costrecovery issues. The experts will undertake the following:

(i) Review present governance structure and framework for infrastructure operationand development in each sector covered by the PSIF II in each state.

(ii) Based on this review and their formal assessment, the consultants will (i) assistthe selected state government draft appropriate formal policies in each sectorthat, among others, specify preparation of an integrated master plan thataddresses present constraints such as metering in power, connectivity in ports,maintenance for roads, etc.

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(iii) Develop suitable alternative structures for setting up autonomous regulatoryauthorities (e.g., having one integrated regulator or regulators for each sector).

(iv) Draft model regulatory frameworks for each sector highlighting key areas ofregulation, prudential norms and measures of performance, and sensitive areaswhere issues are likely to arise; recommend mitigating measures; and proposeamendments to existing legislation, if necessary.

(v) In coordination with the participating financial institutions (PFIs), prepare modelconcession agreements in each sector defining the parameters under whichspecific terms and conditions (such as toll or tariffs and their increase) may bedefined.

(vi) Review projects needing funding in roads, ports, and water supply andsewerage; determine feasibility; and recommend alternative ways of handlingaffordability issues to facilitate processing.

7. The privatization expert (6 person-months) with a strong background and experience inhandling privatization programs in developing countries will help guide the selected stategovernment in undertaking privatization and assist in drafting build-own-operate/build-operate-transfer (BOO/BOT) agreements with the regulatory and governance experts. The expert willundertake the following:

(i) Review existing institutional structure, legislative framework, and process forconducting privatization in the state and in the country to the extent that thisimpacts on state level privatization; and identify gaps and weaknesses.

(ii) Recommend suitable ways for organizing for and conducting privatization by thestate.

(iii) Suggest ways by which the selected state governments can sensitize consumersto user charges, deal with labor concerns, and involve stakeholders.

(iv) Review current policy and system for conducting bidding procedures forinfrastructure projects on a competitive basis, and strengthen capacity to meetinternational competitive bidding rules and procedures. Define manner of dealingwith unsolicited bids and failed bids. Ensure transparency of process.

(v) Review proposals to privatize power distribution companies and airports;determine constraints, if any; recommend appropriate mitigating measures tofacilitate processing.

8. The environmental expert (2.5 person-months) with wide knowledge, experience, andexposure to environmental protection will have the following responsibilities:

(i) Review current policies on and enforcement of environmental protection, andassess training needs of and prepare training plan for selected states and PFIs.

(ii) Assist selected state governments in formulating and adopting policies onenvironmental protection; and develop a framework and process for assessingenvironmental plans that meet ADB policies, requirements ,and best practice.

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(iii) Conduct a workshop for concerned staff of PFIs and selected state governmentson environmental policies, guidelines, and processes, and use of therecommended framework based on ADB requirements and best practice.

(iv) Review current process, procedures, and capacity of PFIs to undertakeenvironmental assessments, and recommend appropriate strengtheningmeasures.

9. The social/resettlement expert (2.5 months) with knowledge of involuntary resettlementwill

(i) Review existing resettlement and rehabilitation policies of selected states andassist selected state governments in formulating and adopting resettlement andrehabilitation policy applicable to all projects regardless of source of funding;

(ii) Assess training needs of and prepare training plan for selected states and PFIson preparation, implementation, and monitoring of resettlement plans; and

(iii) Conduct workshop for concerned staff of PFIs and selected state governmentson state resettlement and rehabilitation policies, the Resettlement PolicyFramework, and preparation, implementation, and monitoring of resettlementplans in accordance with ADB requirements and best practice.

2. Domestic consultants

10. The domestic consultants will consist of a lawyer and an economist (8 person-monthseach). The lawyer, preferably a member of a local law firm with practice in the selected states,will provide advice to the team concerning relevant legislation, legal interpretations, and legalprocesses and procedures. The economist, preferably a member of a local think-tankorganization in India, will help provide the economic underpinnings to policy and guide to localsentiment and thinking concerning various policy issues on infrastructure development,competition policy, and labor matters. Through their offices, these domestic consultants willprovide logistical support for arranging meetings and preparing reports.

C. Cost Estimates and Financing Plan

11. The total cost of the TA is estimated at $1,875,000 equivalent, comprising $1,260,000 inforeign exchange costs and $615,000 in equivalent local currency costs. ADB will provide$1,500,000 equivalent to cover the foreign exchange costs and $240,000 equivalent of the localcurrency costs. The TA will be financed by ADB on a grant basis from the ADB-funded TAprogram. The balance in local currency costs will be provided by the Government of India.

12. International and domestic consultants will be engaged to form a team to implement theTA. The consultants will be selected in accordance with ADB’s Guidelines on the Use ofConsultants and other arrangements satisfactory to ADB for the engagement of domesticconsultants. An estimated total of 59 person-months of consulting services will be required,including 43 person-months of international and 16 person-months of domestic consultingservices. TA implementation is expected to commence in March 2002 and be completed byNovember 2002.

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D. Implementation Arrangements

13. The consultants will first take an inventory of the progress of implementation by eachstate of the areas covered under the TA. This phase could be undertaken as desk work. Aninitial report will be submitted to ADB describing the status in each state of these areas togetherwith the work plan and schedule for each state, indicating the type of expert(s) that may beneeded for each area in each selected state, depending on need.

14. The consultants will provide an inception report to ADB within four weeks of thecommencement of services in the field. The report will indicate adjustments, if any, to the time-bound work plan for TA implementation and the type of expert that each state may require afterinitial discussions with the states. An interim report will be submitted within 4 months of the startof services, providing a status of the progress of TA implementation and infrastructure projectsbeing processed by the four selected states eligible for PSIF II financing and work plan for theremaining term of the TA. A tripartite meeting will be held one month before finalization of thereport with the Government and representatives of the four selected states. The final report,incorporating comments of the Government, the four selected states, and ADB, should besubmitted upon completion of the assignment. The TA is scheduled to commence by March2002 and be completed by November 2002.

15. The Executing Agencies for the TA will be: the Infrastructure Authority in AndhraPradesh, the ministry of finance in Gujarat, and the finance departments for Karnataka andMadhya Pradesh. The respective offices responsible for infrastructure development in eachstate will be the Implementing Agencies: the Andhra Pradesh Industrial InfrastructureCorporation in Andhra Pradesh, the Gujarat Infrastructure Development Board in Gujarat, theline departments concerned in Karnataka, and the Madhya Pradesh State IndustrialDevelopment Corporation in Madhya Pradesh.

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Table A12: Cost Estimates And Financing Plan($'000)

Foreign Local TotalItem Exchange Currency CostA. Asian Development Bank Financing a

1. Consultantsa. Remuneration and Per Diem

i. International Consultants 1,000 0 1,000ii. Domestic Consultants 0 180 180

b. Traveli. International Travel 45 0 45ii. Domestic Travel 0 35 35

2. Miscellaneous Administration and Support Costs

15 0 15

3. Representatives for Contract Negotiations 25 0 254. Contingencies 175 25 200

Subtotal (A) 1,260 240 1,500

B. Government Financing

1. Office Accommodation 0 100 1002. Local Counterpart Staff 0 150 1503. Utilities 0 125 125

Subtotal (B) 0 375 375

Total 1,260 615 1,875a Funded from the Asian Development Bank technical assistance program.Source: Staff estimates.

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