Document of The World Bank

FOR OFFICIAL USE ONLY

Report No: 31392-IN

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED LOAN

IN THE AMOUNT OF US$300 MILLION

TO THE

REPUBLIC OF INDIA

FOR

ANDHRA PRADESH MUNICIPAL DEVELOPMENT PROJECT

October 8, 2009

Sustainable Development Unit India Country Management Unit South Asia Regional Office

This document has a restricted distribution and may be used by recipients only for the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS Currency Unit = Indian Rupee (Rs)

Rs 47.73 = US$1.00 (As of September 30, 2009)

FISCAL YEAR

April 1 – March 31

ABBREVIATIONS AND ACRONYMS APUIF Andhra Pradesh Urban Infrastructure Fund MoA Memorandum of Agreement APUFIDC Andhra Pradesh Urban Finance and

Infrastructure Development Corporation MoUD Ministry of Urban Development

APMDP Andhra Pradesh Municipal Development Project

MRAP Municipal Reform Action Plan

APUSP Andhra Pradesh Urban Services for the Poor Project

MSU Municipal Strengthening Unit

CAS Country Assistance Strategy MUHPA Ministry of Urban Housing and Poverty Alleviation

CDMA Commissioner and Director of Municipal Administration

NURM National Urban Renewal Mission

CEC Capacity Enhancement Cell OM Operations Manual CIP Capital Investment Plan O&M Operation and Maintenance Cr Crore = ten million PAC Project Appraisal Committee DMA Directorate of Municipal Administration PBR Performance Benchmark Report DPR Detailed Project Report PCBP Procurement Capacity Building Program DTCP Department of Town and Country Planning PDAF Project Development and Advisory Facility EC Empowered Committee PHED Public Health Engineering Department EMP Environmental Management Plans PIP Project Implementation Plan ERR Economic Rate of Return PMM Project Manager’s Manual FMR Financial Monitoring Report PPP Public Private Partnership FOP Financial and Operating Plan PUM Professionalization of Urban Management GOAP Government of Andhra Pradesh QPR Quarterly Progress Report GOI Government of India RAP Resettlement Action Plan GSDP Gross State Domestic Product R&R Resettlement and Rehabilitation ICS Information and Communication Strategy SEA Social and Environmental Assessment IDAP Institutional Development Action Plan SECAP Social & Environmental Capacity Building

Action Plan IHSDP Integrated Housing and Slum Development

Program SEAMF Social and Environmental Assessment and

Management Framework IRR Internal Rate of Return SHG Self Help Group JNNURM Jawaharlal Nehru National Urban Renewal

Mission = NURM UIDSSMT Urban Infrastructure Development Scheme

for Small and Medium Towns MAUD Municipal Administration and Urban

Development Department ULB Urban Local Body

M&E Monitoring and Evaluation ULCA Urban Land Ceilings (and Regulation) Acty MDG Millennium Development Goal URIF Urban Reform Incentive Fund MEPMA Mission to Eliminate Poverty in Municipal

Areas (A registered Society set up by GoAP)

Vice President: Isabel M. Guerrero

Country Manager/Director: N. Roberto Zagha Sector Manager/Director: Junaid K. Ahmad/John Henry Stein

Task Team Leader: Songsu Choi & Raghu Kesavan

FOR OFFICIAL USE ONLY

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.

ii

INDIA: ANDHRA PRADESH MUNICIPAL DEVELOPMENT PROJECT

CONTENTS

A. STRATEGIC CONTEXT AND RATIONALE .................................................................................. 1 1. Country and Sector Issues ................................................................................................................. 1 2. Rationale for Bank Involvement ....................................................................................................... 3 3. Higher level objectives to which the project contributes ................................................................ 4 B. PROJECT DESCRIPTION ................................................................................................................. 4 1. Lending Instrument ........................................................................................................................... 4 2. Project development objective and key indicators .......................................................................... 5 3. Project Components ........................................................................................................................... 6 4. Lessons learned and reflected in Project design .............................................................................. 8 5. Alternatives considered and reasons for rejection .......................................................................... 8 C. IMPLEMENTATION .......................................................................................................................... 9 1. Institutional and implementation arrangements ............................................................................. 9 2. Monitoring and evaluation of outcomes/results ............................................................................ 10 3. Sustainability .................................................................................................................................... 11 4. Critical risks and possible controversial aspects ........................................................................... 11 5. Loan conditions and covenants ....................................................................................................... 12 D. APPRAISAL SUMMARY ................................................................................................................. 12 1. Financial, economic and fiscal ......................................................................................................... 12 2. Technical ........................................................................................................................................... 13 3. Fiduciary ........................................................................................................................................... 13 4. Environmental and Social ............................................................................................................... 14 5. Safeguard Policies ............................................................................................................................ 15 6. Key Safeguard Policy Issues ............................................................................................................ 15 7. Policy Exceptions and Readiness .................................................................................................... 16 Annex 1: Country and Sector Background ............................................................................................ 17 Annex 2: Major Related Projects Financed by the Bank and/or other Agencies ............................... 22 Annex 3: Results Framework and Monitoring ....................................................................................... 23 Annex 4: Detailed Project Description .................................................................................................... 28 Annex 5: Detailed Project Costs .............................................................................................................. 36 Annex 6: Implementation Arrangements ............................................................................................... 37 Annex 7: Governance and Accountability Action Plan ......................................................................... 39 Annex 8. Financial Management and Disbursement Arrangements .................................................. 45 Annex 9: Procurement .............................................................................................................................. 53 Annex 11: Safeguard Policy Issues .......................................................................................................... 70 Annex 12: Project Preparation and Supervision.................................................................................... 75 Annex 14: Statement of Loans and Credits ............................................................................................ 80 Annex 15: Country at a Glance ............................................................................................................... 84

MAP IBRD 34182: Districts and Major Cities of Andhra Pradesh, India

iii

INDIA ANDHRA PRADESH MUNICIPAL DEVELOPMENT PROJECT

PROJECT APPRAISAL DOCUMENT

SASSD

Date: October 8, 2009 Team Leader: Songsu Choi, Raghu Kesavan. Country Director: N. Roberto Zagha Sector Manager/Director: Junaid K. Ahmad/John Henry Stein

Sectors: Subnational government administration (50%), General water, sanitation and flood protection (30%), General transportation (20%) Themes: Municipal governance and institution building (P); Access to urban services for the poor (S); Municipal finance (S)

Project ID: P071250 Environmental screening category: Full Assessment

Lending Instrument: Specific Investment Loan

Safeguard screening category: Significant impact

Project Financing Data [X] Loan [ ] Credit [ ] Grant [ ] Guarantee [ ] Other: For Loans/Credits/Others: Total Bank financing (US$ m.): 300.0 Proposed terms: IBRD Flexible Loan with variable spread repayable in 28.5 years with 6.5 years grace.

Financing Plan (US$m) Source Local Foreign Total

Government of Andhra Pradesh (GoAP) 19.4 19.4 International Bank For Reconstruction And Development 222.0 78.0 300.0 Urban Local Bodies 30.6 30.6 Total: 272.0 78.0 350.0 Borrower: India

Responsible Agency: Municipal Administration and Urban Development Department, Government of Andhra Pradesh

Estimated disbursements (Bank FY/US$m) FY FY10 FY11 FY12 FY13 FY14 FY15 FY16 Annual 20 42 52 64 53 42 27Cumulative 20 62 114 178 231 273 300Project implementation period: 01/28/2010 –7/31/2015 Expected effectiveness date: 02/15/2010 Expected closing date: 12/31/2015 Does the project depart from the CS in content or other significant respects? Ref. PAD A.3

[ ]Yes [x] No

Does the project require any exceptions from Bank policies? Ref. PAD D.7 Have these been approved by Bank management? Is approval for any policy exception sought from the Board?

[]Yes [x] No

[]Yes [] No []Yes [x] No

Does the project include any critical risks rated “substantial” or “high”? Ref. PAD C.5

[x] Yes [] No

Does the project meet the Regional criteria for readiness for implementation? Ref. PAD D.7

[x]Yes [] No

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Project development objective Ref. PAD B.2, Technical Annex 3 a) improve urban governance through the implementation of an agreed reform agenda at State and local levels based, in part, on Government of India’s National Urban Renewal Mission (NURM);

b) enhance the capacity of State, local, and community groups to manage urban affairs through a demand driven capacity enhancement program; and

c) support the rehabilitation and creation of sustainable urban services with economic and social benefits at community and city-wide levels

Project description [one-sentence summary of each component] Ref. PAD B.3.a, Annex 4 A. State level policy and institutional development support to enhance policy frameworks for urban

management B. Municipal capacity enhancement, including professionalization of city managers C. Urban infrastructure investment for those urban local bodies meeting eligibility criteria D. Project management support to ensure quality and monitoring of project implementation

Which safeguard policies are triggered, if any? Ref. PAD D.6, Technical Annex 10 OP/BP/GP4.01 Environmental assessment; OP/BP/GP 4.12 Involuntary settlement; OP/BP/GB 4.20 Indigenous peoples Significant, non-standard conditions, if any, for:(Ref. PAD C.6) GoAP to carry out studies of urban finance and planning systems, exchange views with the Bank, and implement recommended modifications it finds acceptable. Board Presentation: None Loan / Credit Effectiveness: None Covenants applicable to project implementation: None that are non-standard

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A. STRATEGIC CONTEXT AND RATIONALE 1. Country and Sector Issues 1. Over the past decade and half the context of urban development has changed greatly in India. Structural and institutional reforms have accelerated the economic growth, especially of industries and services, which now account for about 80% of the gross national product. India’s urban centers, which serve as the primary production base for industry and services, have consequently grown in size and importance. Urban development investments and management, however, have not kept pace with the fast increasing demand for urban facilities and services, significantly weighing down businesses and quality of life, especially for the poor. Main causes of the low levels of urban investment and services include restrictive regulations, weak institutional and fiscal capacity, and ineffective planning. 2. In view of these issues, the Government of India (GOI) has increased its attention on urban development. The Tenth Plan (2002-07) highlighted urban infrastructure and management as a key national development priority for the first time, and this emphasis has continued in the Eleventh Plan (2007-2012). In 2005 GOI rolled out the Jawaharlal Nehru National Urban Renewal Mission (JNNURM), which provides grants for urban infrastructure and housing while requiring state and local reforms including the relaxation of restrictive regulations on land and housing, reduction of transaction taxes, increasing public participation, and enhancing municipal revenues and financial management. This program targets 63 key cities – those with populations of over a million and other regional centers. For other cities, GOI consolidated various national schemes into the Integrated Housing and Slum Development Program (IHSDP) and the Urban Infrastructure Development Scheme for Small and Medium Towns (UIDSSMT), operating under the same framework as JNNURM. 3. Andhra Pradesh (AP), with a 2001 population of 76 million, is the fifth most populous state of India. Its various socio-economic indicators – such as per capita income, economic growth rate, urbanization level, and human development index – used to be slightly below the national average but its urban poverty incidence was far higher than the national average. People below the poverty line numbered 40% of the population in AP cities, compared with the national average of 33% in 1993/94; and 25% of the AP urban population lived in slums in 2001 compared with the national average of 15%. Over the last decade, however, AP has moved up in all these measures. Its economic growth from 1999 to 2006 outpaced the national average, and it is now the third largest exporter of software services among Indian states. The urban poverty headcount declined by 12% in the decade since 1993/94, whereas the national average declined by 2%. These successes owe greatly to various reforms undertaken by the Government of Andhra Pradesh (GoAP) to improve fiscal discipline and encourage private initiatives of both investors and self-help groups. 4. AP’s urban population of around 21 million in 2001 made up about 27% of the state’s total, with over 70% living in 44 cities of more than 100,000 residents. Urban growth has accelerated alongside the rapid economic growth; and the number of urban local bodies (ULB) has increased from 117 in 2001 to 133 in 2007, now 126 after mergers of several ULBs. Provision of urban services such as roads, water and sanitation has, however, been falling behind the growing demand. For example, the piped water coverage ratio declined by over 10% in cities of AP between 1991 and 2001, and municipal sewerage systems serve less than 20% of residents. These service deficiencies are partly due to AP’s natural conditions such as low

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rainfall, but mainly due to inadequate local financial and managerial capacity, common across India. 5. Own-source revenues of typical ULBs in AP, while better than the national average, represent less than 1% of estimated local value added. Even with state grants, they could invest only about Rs.260 per capita in 2006/07, far short of keeping up with the growing demand, let alone reducing service deficiencies. Further, local fiscal revenues grew by only 3.4% per year from 2003 to 2007, a rate lower than that of inflation. The fiscal weakness of ULBs in AP reflects the high level of fiscal centralization as well as weak local revenue efforts. Although the 74th Constitutional Amendment of 1993 mandated increased decentralization, progress has been slow, and the authority and resources of ULBs remain limited. 6. Instead, urban development investments have been financed mainly by the central and state governments, but severely eclipsed by the strong policy emphasis on rural issues. GoAP in 2008 provided about Rs.1250 crore (ten million) for water supply and sanitation, but more than two thirds were for rural areas and much of the rest was required to meet the state’s contribution to the JNNURM-supported investments in the largest cites. Other sources of urban investment funding include borrowing from public or commercial lenders. However, due to fiscal weaknesses, combined with poor track records in project preparation and implementation, borrowing remains insignificant and typically is channeled through state level institutions, secured by annual state grants to ULBs. 7. Weak technical and management capacity of ULBs, and their restricted autonomy, represent major constraints to effective service delivery. Under the current system of centralized capital financing, most ULBs other than the largest exercise little authority or flexibility in choosing and designing investments. For example, the state Public Health Engineering Department (PHED) plans, designs, and implements water supply systems and hands over the completed facilities to ULBs for operation and maintenance (O&M). This reduces ULB accountability as well as the incentives for efficiency of investments or for developing in-house technical expertise to plan and manage the facilities, leading to inadequacies in O&M, efficiency and sustainability of the investments. 8. The largest source of financing for urban infrastructure investment now is the JNNURM. Midway through FY 2008-09, 215 projects had been sanctioned for AP under JNNURM, totaling Rs 9,244 crore of GOI funding for large-scale projects in the three largest urban areas, Hyderabad, Visakhapatnam, and Vijayawada. While AP has secured funding for smaller cities under the UIDSSMT and IHSDP, these programs involve much smaller funding for only modest projects. The result has been a great increase in investments in the three largest cities but little change in others. For example, Hyderabad Municipal Corporation was able to invest over Rs. 1000 per capita in 2006/07, about 7 times a typical ULB, from large GOI grants as well as its own large economic base. 9. Urban investments by the private sector are hampered by inadequate public infrastructure and also by restrictive regulations and taxes, most of which are controlled by the state or even national government. These include restrictive development controls, complex permit and oversight procedures, the Urban Land Ceiling Act and the Rent Control Act that severely curtail land and housing markets, and the high rate of stamp duty or transaction tax. Moreover, urban development plans are generally unrealistic and ineffective, thereby representing an inefficient regulatory constraint, rather than providing an effective framework for guiding development.

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10. Reform Initiatives. In recognition of these urban management issues, GOI has required state and local governments to reform policies and strengthen institutions as conditions for accessing JNNURM, IHSDP and UIDSSMT grants. GoAP has been most successful in securing JNNURM financing on the strength of its leadership in undertaking various urban reforms and institutional strengthening, including the following: • Repeal of the Urban Land Ceiling Act. • Establishing Metropolitan and District Planning Committees. • Reducing the Stamp Duty from 12.5% and 13.5% to 9.5% from August 2005. • Enacting Public Disclosure and Community Participations laws. • Revising and streamlining building regulations. • Computerizing property and vital records in all ULBs. • Converting ULB accounts to double-entry accounts. • Establishing the framework for public-private partnership schemes for infrastructure • Increasing the authority of ULBs by transferring functions for: economic and social

development planning, assistance for the poor, promotion of culture and education • Establishing the Mission for Elimination of Poverty in Municipal Areas (MEPMA), an

organization set up as a registered Society, to integrate various pro-poor programs and increase the focus on livelihood and self-help.

2. Rationale for Bank Involvement 11. The preceding discussion illustrates severe weaknesses in urban services, infrastructure investments, and ULB capacity and autonomy. These weaknesses feed into each other and form a vicious circle that needs to be tackled comprehensively. Through JNNURM, GOI has chosen to do so first for the largest cities, which have stronger capacities. It has facilitated GoAP’s on-going reform of state level policies and regulations, providing a good framework applicable to smaller ULBs as well. With a $150 million grant from the U.K. Department for International Development (DFID), GoAP recently completed an AP Urban Services for the Poor Project (APUSP), to improve infrastructure in slums as well as to enhance ULB capacity and community participation in 42 large cities. Lessons learned under this project are relevant to Indian cities in general, and the achievements deserve to be extended. A program to supplement and enhance the JNNURM as well as the APUSP would therefore be highly timely and productive. 12. The weaknesses in local capacity, state institutions, urban infrastructure and services are closely interlinked and need to be strengthened in coordination. Experiences across the world have shown that investments are sustainable only with adequate capacity and accountability. On the other hand, technical assistance (TA) or policy reform alone often fails to raise capacity or improve services on the ground. An effective support would require a combination of substantial financing, capacity enhancement, and modification of policy framework in a sustained and integrated program. The Bank is uniquely positioned to provide such support, building on its well-established engagement with GoAP, and drawing on its experience in providing the technical, institutional and financial expertise required to support integrated programs

13. The Bank has been supporting GoAP’s reform and development with a broad assistance program focused on removing infrastructure bottlenecks in AP, and strengthening the performance of existing institutions and systems towards achieving improved outcomes. The

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program currently includes four projects that are being implemented successfully – the Economic Reform DPL III, Community Tank Management, Rural Poverty Reduction, and Community Forestry; and five projects under preparation to help improve State Roads, Municipal Development, Irrigation, Rural Water Supply, and Rural Roads, for about $1.3 billion of total Bank Group financing. The APMDP represents a vital element of the Bank’s assistance to AP, by addressing an important gap – weaknesses in urban services and institutions, weaknesses which are growing in significance with rapid industrialization. The Bank has an active dialogue with GOAP to create linkages between the different sectors, thereby moving towards a more integrated development program with mutually reinforcing instruments, and strengthened fiscal and fiduciary oversight capability. 14. An earlier form of the project was negotiated in July 2005; but a condition for Board presentation, repeal of the Urban Land Ceiling Act by the state legislature, was delayed until March 2008. The project design has since been updated to take account of subsequent developments, including the JNNURM, AP’s recent development, completion of the APUSP, and the Bank’s increased emphasis on governance and accountability. The main modifications are described in paragraphs 29 and 30 below. 3. Higher level objectives to which the project contributes 15. In line with India’s 11th Plan (2007-2011) goal of inclusive growth and service delivery, the Bank’s Country Strategy(CS) for 2009-2012 aims at helping India meet the challenges of (i) achieving rapid and inclusive growth, (ii) ensuring the sustainability of development, and (iii) increasing the effectiveness of public service delivery. The project would directly contribute to the first and third CS aims. It is well recognized that infrastructure is a critical bottleneck to India’s economic growth. Urban infrastructure is a major but complex part of the challenge, involving a multitude of local authorities. While poor services are not unique to urban areas, they impose particularly serious economic costs, including rapid, further deterioration of physical assets under accelerating urbanization. The project addresses these issues as an essential part of the Bank’s substantial assistance to AP focused on the development of institutions and infrastructure. 16. The shift of the rural poor from farming to industries or services, and from villages to towns, or transformation of villages to towns is a major element of poverty alleviation in all countries. India’s urbanization has been slow in recent decades, mainly due to the slow growth of non-farm jobs, which is in turn partly due to poor urban services. By enhancing the delivery of sustainable services, the project would contribute not only to economic growth, but also to greater inclusiveness of, and accountability to, communities in decision-making and implementation of service priorities. Further, the project would include components that would directly help improve the livelihood of the poor and the delivery of services to them. While environmental sustainability is not a core project objective, the project would contribute to a broad improvement in the sustainability the requirement of proper safeguard practices in municipal investments and the provision of sewerage systems.. B. PROJECT DESCRIPTION 1. Lending Instrument 17. The project aims at achieving improvements at three different levels: state, ULB, and

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subprojects. A Development Policy Loan could have been a suitable instrument to support the reform of state policies and institutions, which exert substantial influence on urban performance. Clear analysis and consensus about the essential and feasible state-level reforms are, however, yet to be developed. The project focuses more on improvements at lower levels. Reform and capacity building at ULBs require TA and local policy actions, whose design and implementation need sustained support. Financing of urban investments would not only alleviate urban service deficiencies but also provide an incentive and a concrete platform for local capacity building – an approach that will require detailed monitoring and support. The project aims, including building capacity, delivering enhanced services, and providing extensive support, as well as the continuing requirement to define state-level reforms, indicate that a Specific Investment Loan is the most appropriate instrument at this juncture. 18. The project’s financial support, conditioned on addressing institutional strengthening requirements, is similar to JNNURM. However, there are some significant differences such as the broader scope and variety of local programs supported under the project, as well as the more stringent criteria for access to funds that the project has introduced. The project design is most akin to that of “municipal development projects” (MDPs) which the Bank has supported frequently and successfully in similar situations around the world. MDPs, of which the Bank has now accumulated substantial experience, aim at broad municipal improvements and reform, rather than at more narrowly determined, specific service improvements such as slum upgrading. The capacity improvement targets range from a relatively limited focus on areas such as local financial capacity, to much broader considerations of governance and management. Many of the MDPs, especially in recent years, have been anchored in apex financial intermediaries with an aim of enhancing the municipalities’ access to capital markets. The effectiveness of such instruments has been limited, however, mainly due to the inability of the municipalities to access the funds managed by the intermediaries as a result of weaknesses in the municipalities’ capacities and in the enabling frameworks within which they operate. In view of this experience, the project will emphasize support for broad municipal capacity building, anchored within the state’s municipal administration system. 2. Project development objective and key indicators

19. The project objective is to help improve urban services in AP, and the capacity of ULBs of AP to sustain and expand urban services. The urban service improvements will be chosen in a demand-driven manner and implemented by ULBs subject to several access and performance criteria and with necessary technical support. The project will support improvements in the financial, technical, and management capacities of all ULBs of AP through TA and as a condition for infrastructure financing. The project will also support improvements in the state-level framework that defines ULBs’ autonomy, accountability, and incentives for performance, as well as GoAP’s capacity to monitor ULBs’ performances and to provide policy and technical support for their development. 20. Key outcome indicators include: • Increase in residents’ satisfaction with municipal services in participating cities. • Subproject-specific outcomes such as the increase in hours of water supply per day, or

volume of liquid or solid waste collected and sanitarily disposed of, water and sewer connections, the number of people receiving significant such benefits.

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• Increase in ULB revenues • Number and quality of ULB service (assessment and plan) reports, signifying improvements

in staff capacity and systems. 21. Key output indicators include: • Expansion of water supply or sewerage capacity and network • Increase in improved road surface • Number of staff and councilors trained in municipal management • Number of the poor completing job training • Formal discussion or adoption of revised state frameworks for urban finance and planning • Adoption of revised general town plans.

3. Project Components (See Annex 4 for detailed description and Annex 5 for detailed costs) 22. The project consists of three technical assistance and one investment components.

A. State Level Policy and Institutional Development Support (cost US$ 9.2 million, Bank financing US$8.8 million) aims at improving the state’s policy and institutional framework to support service delivery and capacity building by ULBs, and will include:

• Studies and TA to help evaluate and design options to improve AP’s systems of urban finance, including that of fiscal transfers and borrowing, to enhance accountability and incentives for ULB’s performances, and to strengthen the efficiency and equity of public expenditures in the state as a whole

• Studies and TA to help draft and implement streamlined town planning procedures • Establishment of a Geographic Information System (GIS) to support monitoring and

planning of urban development at the state level, and to support the establishment of similar systems at ULBs.

• Establishment of an AP Urban Academy for monitoring and analysis of urban development, management and finance, and for training of state and ULB officers.

• Preparation of a detailed program for the MEPMA. B. Municipal Capacity Enhancement (cost US$ 14 million, Bank financing US$12.7 million) aims at enhancing the financial and technical capacity and operating systems of all ULBs (currently 126), and includes:

• Training of ULB staff in finance, management, planning, procurement, and engineering, - as well as councilors and executive officers and a limited number of state-level urban specialists - including professional certification programs.

• Technical assistance and goods procurement for preparation and implementation of improvement of systems - institutional, financial, information, and operational - tailored to individual ULBs

• Preparation of GIS maps and General Towns Plans for about 30 ULBs

C. Urban Infrastructure Investment (cost US$306 million, Bank financing US$259.7 million) to finance sustainable, high-priority investments identified by ULBs to improve urban

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services or operational efficiency. To be eligible, ULBs need adequate financial capacity to sustainably finance and operate the facilities and an adequate and feasible plan to improve their financial and management capacity. At present, over 80 ULBs are judged to meet the financial eligibility criteria. In practice, various ULB and subproject eligibility requirements may limit this component to around 50 ULBs. The criteria and guidelines for selection, design, and implementation of subprojects are specified in the Operations Manual (OM) for the project, of which some key features are listed in Annex 4 and summarized below. D. Project Management Technical Assistance (cost US20.0 million, Bank financing US$18.1 million) aims at ensuring the quality of subproject preparation, implementation, and monitoring, and includes:

• Preparation and implementation of urban infrastructure sub-projects through consultant pools managed by the Municipal Strengthening Unit (MSU) under the Commissioner and Director of Municipal Administration (CDMA) to assist ULBs, or through consultants hired and managed directly by ULBs which can and want to do so. This will include assistance to prepare and manage public-private partnership (PPP) schemes.

• To support the MSU, CDMA, and the Andhra Pradesh Urban Infrastructure Fund (APUIF) for subproject appraisal, monitoring and quality control, as well as monitoring and support for implementation of reform and the Governance and Accountability Action Plan (GAAP).

23. Conditions for Urban Infrastructure Investment Subprojects. The project will finance works or goods to build, upgrade, or improve efficiency of a full range of municipal facilities for which ULBs are responsible, including: city roads, sewerage, water supply, sanitation, solid waste management, street lighting; community centers, etc. ULBs will be required to finance 10% of subproject costs, and will receive sub grants and sub loans, repayable over 15 years at an interest rate equal to the state’s borrowing cost plus 1% per annum, as follows, in line with the financing structure under JNNURM and UIDSSMT:

ULB/Subsector Self financing Sub loan Sub grantTransportation 30% 50% 20% Other Subprojects 10% 20% 70% “ in three largest cities 10% 40% 50%

24. Each subproject would have an estimated cost of Rs.5 crore or more, in principle, since such lumpy investments better match the Bank’s loan terms and implementation arrangements. The exceptions would be: solid waste management facilities, community centers, subprojects agreed upon by 2005 for initial implementation, and investments for efficiency improvement. The subproject should fit within the general town plan or the city-wide sector master plan, and be accompanied with an adequate and realistic financial and technical O&M plan as well as satisfactory environmental and social safeguards assessments and mitigation plans. 25. ULB eligibility criteria would include: an operating budget surplus, reflected in current audited accounts, equal to or more than 15% of the subproject cost; and a satisfactory Municipal Reform Action Plan (MRAP) that has been formally adopted by the municipal council and that includes a set of specific actions to increase the operating surplus and to enhance technical and management capacity. The MRAP should include a specific plan to raise user charges sufficient to cover O&M costs of new facilities developed under the project. The MRAP will be part of the

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sub-loan and sub-grant contract to be signed between APUIF and the borrowing ULB.

Table 1: Summary Project Costs (US$ millions)

Component Cost %

Total Bank Share

% Loan

AP Share

A State Level Policy and Institutional Development 9.2 2.6% 8.8 95% 0.3B Municipal Capacity Enhancement 14.0 4.0% 12.7 90% 1.3C Urban Infrastructure Investment 306.0 87.4% 259.7 85% 46.4D Project Management Support 20.0 5.7% 18.0 90% 2.0 Front End Fee 0.8 0.3% 0.8 100% 0.0 TOTAL 350.0 300.0 50.0

(Totals may not add up due to rounding) 4. Lessons learned and reflected in Project design 26. Evaluations of Bank operations around the world have highlighted the importance of local ownership of investment and TA operations - essential to ensuring a match between the needs and the proposed program, and hence to securing commitment to meeting project objectives. Studies and projects on local development in India have also shown the importance of establishing state policies and institutions that support effective and sustained improvements in performance at the local level. Another important lesson learned from various initiatives including Bank-financed urban development projects in India is the difficulty ULBs have in borrowing on the capital markets, except for the largest municipalities with their significantly stronger financial and management capacities. 27. The recently completed APUSP has provided many lessons directly relevant to the proposed project. One is the value of the “challenge fund” mechanism that offers investment funding conditioned upon institutional development and reform. The ex post review, however, found substantial gaps between reform goals and actual outcomes. Initial analysis suggests that the reform targets were overly ambitious while there was insufficient technical support and attention to policy issues. Another important lesson from the project was that inadequate trunk infrastructure capacity severely limits improvements of neighborhood-level services.

5. Alternatives considered and reasons for rejection 28. A DPL to help reform state-level policies and institutions was considered in view of their impact on local investments and local government performances, but a Specific Investment Loan was considered more suited to the overall challenges that need to be addressed, as discussed in paragraphs 13 and 15 above. 29. When the project was first conceived, the high urban poverty incidence was a key issue for AP, and the project emphasized upgrading of poor neighborhoods. Several developments in the meanwhile, however, have led to a reduced emphasis on this aspect. First, the number of the urban poor in AP has declined significantly. Second, APUSP has substantially improved services in poor areas in the 42 largest cities, and its evaluation highlighted the importance of city-wide infrastructure as the critical constraint. Recent JNNURM financing of trunk infrastructure in the largest cities further accentuated the demand for similar investments in smaller cities. In view of these developments and the success of rural poverty reduction projects financed by the Bank, GOAP has shifted its urban poverty alleviation focus to livelihood

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promotion. Accordingly, the project would include support for the development of: detailed programs of urban poverty alleviation, ULB capacity to carry out the new mandate of supporting the poor, and community centers primarily to host self-help groups and job training. Other than these, the choice of investments is now more broadly left to ULBs’ own priorities, subject only to general feasibility criteria, in line with the project’s emphasis on the municipal capacity and autonomy. 30. Urban development projects supported by the Bank in Tamil Nadu and Karnataka operate primarily through state-level financial intermediaries to channel investment financing as well as support capacity building efforts. This design is motivated mainly by the desire to facilitate capital market access by ULBs. Experiences under these as well as similar projects in many countries suggest, however, that commercial borrowing can be a substantial financing option only with advanced local financial and managerial capacities, as seen now in only a small number of largest cities in India. It therefore was decided to anchor the project in the CDMA and focus on local capacity and services improvement. C. IMPLEMENTATION 1. Institutional and implementation arrangements 31. ULBs will be primarily responsible for their respective parts of the project’s two largest components - capacity enhancement and urban infrastructure investment. They will identify and design the investment and TA programs, plan and manage the implementation, with support from consultants and state agencies as described below, and finance part of the investments and repay the sub loans. 32. The state Municipal Administration and Urban Development Department (MAUD) will oversee overall project administration and implementation, including the support for ULBs, mainly through the CDMA under it. To do so, GoAP established a MSU under CDMA with 42 full-time staff including 17 professional level officers. For the local infrastructure component, CDMA, through MSU, will collect sub-project proposals from the ULBs up to 18 months before project closing, carry out the appraisal, and sanction the release of funds. MSU will also be responsible for all project monitoring and reporting requirements, including those to the Bank. The MSU will take the primary responsibility for supporting ULBs to prepare and manage subprojects, drawing upon the technical expertise of PHED which also reports to MAUD. PHED has seconded several officers to MSU, and will depute more staff from its regional offices to ULBs as required. But the bulk of detailed design and supervision support for subprojects will be provided by consultants hired by MSU under component D. ULBs that wish to hire their own consultants will be given the grant proportional to the size of subproject and subject to procurement procedures and oversight applicable to the project. 33. The capacity enhancement component will be managed in a similar structure, with most of the consultant and training contracts pooled and managed under CDMA based on the training and TA needs identified by ULBs. CDMA has appointed a Capacity Enhancement Specialist dedicated to intensive support and M&E of reform actions and TA. The state-level policy and institutional development component includes various subcomponents under the direction of CDMA, the Department of Town and Country Planning (DTCP also under MAUD), MEPMA, and the AP Department of Finance. CDMA will be responsible for coordination and reporting of these activities. Funds for the studies and TA will be provided as state budgetary provisions.

10

34. These two institutional development components and the infrastructure and project management TA components will complement each other, and hence need to be managed in an integrated fashion. The former will help improve the investment subproject preparation, implementation and monitoring. The experience and lessons from the latter will strengthen the institutional capacity, and help identify areas for focus under the capacity building program. AP has nationally reputed local institutions to draw on for sustained technical and institutional assistance – Center for Good Governance, Administrative Staff College of India, as well as universities. One of the expected outcomes of the integrated management of the components is the modification of existing systems of urban investment management so that the Bank-financed projects can be implemented largely through local (country) systems. 35. CDMA will also establish a “Complaint Cell” and a Public Information Office to complement local public information and Grievance Redressal systems, and to handle the concerns of project-affected people, ULBs, and contractors. 36. The APUIF, established as a Trust in February 2005, will act as GoAP’s fiscal agent and asset manager for the portion of Bank financing allocated for infrastructure investment, under a contribution agreement. The Fund’s Board of Trustees includes the Chief Secretary of GoAP as Chairman, and Principal Secretaries of Finance, MAUD, Housing and Planning Department; the CDMA; and the Managing Director of the AP Urban Finance and Infrastructure Development Corporation (APUFIDC). The Board will also function as the Empowered Committee (EC) for the project. The APUIF will outsource as necessary to CMDA-MSU and other state level agencies some functions such as its own fiduciary appraisal of subproject proposals and ULBs, verification and disbursement, and collecting repayments. 2. Monitoring and evaluation of outcomes/results 37. MSU will be responsible for overall project monitoring and evaluation (M&E), based on reports from executing agencies and its own evaluation. The baseline and output indicators will be included in the DPR in the case of infrastructure subprojects and in the consultant reports in the case of policy and capacity development components. Eventual outcomes will be reported by responsible ULBs and departments, and evaluated by CDMA. These outcomes will be compared to the Results Monitoring Framework (detailed in Annex 3). Each implementing agency will submit quarterly progress reports to CDMA covering the progress and expenditures of their respective activities, but progress on ULB’s investment sub-projects will be reported monthly. CDMA will organize periodic meetings for ULBs to exchange their experiences. 38. CDMA will review these reports as well as output or outcome indicators, identify the issues and interventions needed, and produce quarterly project reports to MAUD and the Bank. The component D provides substantial resources for consultant assistance for M&E. The results will be used by CDMA for modification of OM and on-going TA. 39. The Bank will monitor and support implementation through the review of the reports prepared by CDMA and consultants, along with field visits at least twice a year. The team will include economic, financial, engineering, governance and procurement specialists. In the initial two years additional field visits will be made by engineering and fiduciary specialists. A mid-term review will be conducted in about October 2012 with participation of independent evaluators. By that time, a number of important parameters such as those for JNNURM and the

11

state’s fiscal alignment system are expected to have been reviewed and may be changed. 3. Sustainability 40. The project aims at improving not only the urban services of participating ULBs but also the framework within which they operate and their capacity to sustain and extend service improvements. Conditions for infrastructure financing – operating surpluses, up-to-date audits, reform and capacity building action plans, and self-financing improvement initiatives - are specified to ensure commitment and capacity. GoAP’s recent policy reforms to strengthen ULBs, its willingness to review the urban financing frameworks, to borrow for substantial TA, and to establish strong MSU provide clear evidence of its commitment to the project’s core objective. 4. Critical risks and possible controversial aspects 41. The following table summarizes important risks to the project along with the measures to mitigate the risks, discussed in more detail in Annex 7. In addition to various procedural provisions, the project will mitigate the risks with substantial TA and citizen participation. Risks from Components to achieving PDOs

Risk Rating

Risk Minimization Measure

Project Development Objective ULB capacity enhancement not sufficient or sustained due to the lack of political will for local autonomy and accountability strengthening, or due to insufficient human resources.

M Broad consultation, including citizens and political leaders, on policy analysis and reviews; GoAP is among the leading states in undertaking urban reforms; Urban Academy being established to sustain monitoring of urban issues and advocacy of improvements

Component A: State Level Policy and Institutional Development

GoAP’s interest in the state level reforms and TA weakens; consultants produce weak analyses

L Agreement has been reached on the areas of needed improvements; ToR for consultancy agreed on the majority of the subcomponents

Component B: Municipal Capacity Enhancement

Mismatch between supply and demand of Capacity Enhancement activities.

L Capacity improvement needs have been assessed, and will be adjusted or confirmed through broad consultation, as well as being continuously updated during implementation through M&E. MSU will work with local institutions of national reputation, and with a dedicated staff.

Component C: Urban Infrastructure Investment

Sub-project selection and design inappropriate due to political influence or inadequate technical capacity.

M Subprojects will be selected in a demand-driven manner, agreed in the operations manual, that involves local stakeholders; MSU will provide consultant assistance for design

ULBs’ institutional, financial and technical capacities not adequate to implement viable investment sub-projects with the required quality and manage their social and environmental impacts.

M

ULBs are required to demonstrate adequate capacity and commitment to improve capacity. Extensive support provided for preparation and implementation of subprojects, including third-party audits. CDMA-MSU has or will hire necessary qualified specialists and will ensure the existence or development of ULBs capacity and TA for proper implementation.

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Component D: Project Management Support

Lack of sufficient capacity within APUIF / CDMA to manage the project as envisioned leading to delays and quality issues in preparation, procurement, and implementation.

M MSU is almost fully staffed already; and procurement of project management advisors is in progress. Clear reporting and monitoring arrangements between ULBs and MSU, and between MAUD and CDMA-MSU will also be put in place.

Fiduciary

Financial Management Risks: Incorrect and delayed financial reporting and weak financial controls, especially by ULBs (details in Annex 8).

S Extensive FM capacity building as part of the project; minimum audit and financial management performance required as condition of Bank financing; various additional resources provided for financial monitoring, control and auditing. (details in Annex 8)

Procurement Risks: Collusion among bidders, lack of sufficient competition, and improper bid invitation and evaluation

S Adequate procurement support and supervision capacity will be in place at MSU by project start; wide publicity of bids and bid awards; performance standards for bid and contract processing, and a robust complaints and grievance handling mechanism; PCBP.

Overall Risk Rating M

5. Loan conditions and covenants 42. There are no significant, non-standard conditions for Board presentation or Loan effectiveness. 43. Key Legal / Fiduciary Covenants

a) GoAP will carry out a comprehensive technical assistance program to improve institutions, policy, and capacities of the state and ULBs for urban management and finance starting from March 31, 2010. This will include a study of the urban finance framework, selected recommendations of which would be implemented, after the review with Bank by June 30, 2011.

b) GoAP will maintain MSU with authority and staffing satisfactory to the Bank throughout the duration of the project.

c) GOAP will implement the project according to the Operations Manual, which is satisfactory to the Bank, and which specifies, among other provision, requirements for adequate financial management such as the maintenance of satisfactory accounts and engagement of qualified accountants in participating entities, adoption of NBFC norms by APUIF, auditing and reporting arrangements, criteria for ULBs and subprojects to qualify for financing.

e) A project implementation report including the financial monitoring report will be sent to the Bank within 45 days of the end of every quarter.

D. Appraisal Summary

1. Financial, economic and fiscal 44. Financial Analysis. Recent revenues and expenditures of all ULBs in AP have been reviewed at a broad level. An estimate of additional sustainable debt, set at a level whereby the new and existing debt service obligations would not exceed 40% of the current primary operating surplus, indicates an aggregate borrowing capacity of US$492 million for all the ULBs, not including Hyderabad. The ULB level investments undertaken under the project would be limited

13

within the respective ULB’s ‘borrowing cap’. In addition, the OM requires the participating ULBs to prepare a revenue enhancement plan and a detailed O&M plan to ensure sustainability of investments, and to ensure that the subprojects result in positive net gains in fiscal surplus. 45. Economic Analysis. Benefits generated by infrastructure subprojects would include savings of time and energy for water fetching, boiling, and motorized travel, reduction of environmental contamination and related diseases. Economic evaluation is required for each subproject, at least at the level of identifying benefits and assessing alternatives. Quantitative cost-benefit analysis is required for subprojects estimated to cost over Rs 15 crore, which should demonstrate an economic rate of return above the opportunity cost of capital for India, currently estimated at 12%, or cost-effectiveness.

46. Since subprojects will be identified and designed by ULBs over time, economic analysis of the whole project is not possible ex ante. The analysis of 12 subprojects comprising a representative mix of likely types of investments shows an overall ERR over 40%. One can refer to a finding of the Independent Evaluation Group of ex post ERR of 21.2% from 40 urban development projects financed by the Bank by 1992, which in aggregate supported a similar mix of components as those included under APMDP. This and another 2002 IEG review of MDPs in Latin America and the Philippines found significant policy and institutional improvements, especially in improved fiscal performance and sustainability of services. 47. Fiscal Analysis. Over the past few years, GoAP’s fiscal situation has steadily improved through responsible fiscal management, allowing the state to recover from the debt trap and to increase capital investments. The State has enacted and followed the AP Fiscal Responsibility and Budget Management Act 2005, and started generating revenue surplus from 2005-06 after more than a decade of deficits. The revenue surplus for 2006-07 reached Rs.2800 crores and GoAP capital expenditures rose by 140% between 2003-04 and 2006-07, contributing to rapid economic growth. The RBI report on state finances for the year 2008-09 ranked AP first in the country on fiscal allocation for plan, development, social sector, and capital expenditures. GoAP is likely to have little difficulty in providing the counterpart funding required for this project, even though fiscal room is likely to contract due to the global recession and the latest central mandate to increase public sector wages. 2. Technical 48. The project supports urban infrastructure improvements which are accorded high priority by ULBs and at the same time promotes improvements in the ULBs’ capability to design and maintain infrastructure. The subproject is required to follow national standards with enhancements in design through the application of improved safeguards measures. Provisions are included under the project that tie proposed investments to adequate budgeting and capacity development plans for O&M of assets. These measures have been detailed in the OM. To ensure technical quality, consultant assistance will be provided for project preparation and management. 3. Fiduciary 49. Procurement: Being new to the Bank project, procurement capacity, systems, and procedures of CDMA-MSU and ULBs need strengthening and modification. MSU has senior officers to manage the procurement and procurement support for ULBs, and is hiring consultants

14

to provide procurement assistance particularly during the initial implementation period. ULBs will be given not only extensive support and oversight especially during the initial years, but also a procurement capacity building program under the coordination of CDMA-MSU. 50. Up to $45 million of the loan will be available for retroactive financing of expenditures incurred after February 15, 2009 for goods, civil works and technical services procured according to agreed procedures. 51. Financial Management. The overall financial management (FM) system for APMDP will comprise:

a) FM arrangements for all components except the urban infrastructure investment component will be executed by the CDMA-MSU through the AP state Treasury system. Therefore all controls that are operative for state Treasury payments will be applicable to payments made on the TA components through the CDMA-MSU. A Finance Manager seconded from the state finance or treasury department to CDMA will be responsible for all FM functions for the project, including consolidating IUFRs, seeking reimbursement and coordinating internal and external audits. b) FM arrangements for the urban infrastructure investment component (Part C) comprise financial guidelines for use, accounting and auditing of funds flowing to ULBs via the APUIF; eligibility criteria for sub loans; financial reporting and audit. APUIF will also adopt financial reporting and audit standards in line with those applicable for Non-Banking Finance Companies (NBFCs) as stipulated by Reserve Bank of India. These arrangements are comprehensive and laid out in APUIF’s guidelines.

c) Adequacy of accounting of all funds flowing to the ULBs will be ensured through regular oversight by the CDMA-MSU and audit of a consolidated statement of these funds as a part of the annual APUIF audit.

52. The lack of experience with Bank financing and the weaknesses in financial reporting and assurance of most ULBs represent a significant risk to the project. This risk will be mitigated by specific FM arrangements required of borrower ULBs (such as the completion of compilation of accounts and financial audits of the previous year) which will be strengthened with a system of six-monthly concurrent auditing arrangement that will be put in place and managed by CMDA-MSU. At the same time, building FM capacity in ULBs will be pursued as a key element of the capacity enhancement component (Part B). 4. Environmental and Social 53. All potential environmental impacts have been identified as part of a Social and Environmental Assessment (SEA), including induced, cumulative and long-term impacts related to the various project components. Based on the SEA, a Social and Environmental Assessment and Management Framework (SEAMF) was prepared to address safeguard issues. The SEAMF provides environmental and social screening criteria and other guidance and has been produced also in the form of implementation manuals for ULBs. The manuals provide sector-specific model EMPs which can be translated into subproject-specific EMPs. The SEAMF further sets out screening mechanisms for sub-projects requiring detailed EAs and procedures for conducting EAs, including sample ToRs. The framework also identifies environmental monitoring protocols,

15

highlighting key indicators for different types of sub-projects. Annex 11 provides further details. 54. Social Development Opportunities, Constraints, Impacts and Risks. The project has been designed to benefit all income groups through improved access to infrastructure and services, and

there is also some specific support for the poor. Possible negative social risks and impacts related to exclusion, loss of land, property or livelihood, etc. are addressed through the SEAMF. This includes stakeholder consultations and participation in ULBs’ sub-project prioritization, preparation and implementation (including free, prior and informed consultations with tribal people, if any, potentially affected by a sub-project), building Social and Environmental (S&E) measures into the preparation of DPRs, preparation of RAPs/TDPs when required, ensuring fair and timely compensation using an entitlement matrix, and establishing grievance redressal mechanisms. The project also supports the strengthening of capacity in the ULBs and CDMA to implement the SEAMF through a Social and Environmental Capacity-building Action Plan (SECAP); an Information and Consultation Strategy (ICS); and continuous S&E impact monitoring. The agreed social safeguards monitoring mechanism includes: (i) participation of local bodies and communities; (ii) benefits to vulnerable groups, including tribal people; (iii) impacts of services in low-income settlements and tribal areas if any; and (iv) R&R of displaced people including restoration of the livelihoods of affected persons. Annex 11 provides further details. 55. Institutional Framework for S&E Management. While the 74th amendment to the constitution of India entails building ULB capacity to address urban environmental and social issues, ULBs generally have limited capacity at present. There are a few institutions in the state that could be engaged to support implementation of the SEAMF initially and to help build capacity in the ULBs. The need for institutional strengthening has been recognized and provided for by building SECAP into the project. 5. Safeguard Policies Safeguard Policies Triggered by the Project Yes No

Environmental Assessment (OP/BP/GP 4.01) [X] [ ] Natural Habitats (OP/BP 4.04) [ ] [X] Pest Management (OP 4.09) [X] [ ] Physical Cultural Resources (OP 4.11) [X] [ ] Involuntary Resettlement (OP/BP 4.12) [X] [ ] Indigenous Peoples (OP 4.10) [X] [ ] Forests (OP/BP 4.36) [X] [ ] Safety of Dams (OP/BP 4.37) [ ] [X] Projects in Disputed Areas (OP/BP/GP 7.60)* [ ] [X] Projects on International Waterways (OP/BP/GP 7.50) [ ] [X]

(a) Social Safeguard Screening Category: S1 (b) Environmental screening category: A.

6. Key Safeguard Policy Issues 56. Social: There may be a need for R&R measures for persons displaced from residences or livelihood when land is required for infrastructure such as roads, storm water drains, sewers, water supply lines, etc. There may also be a need for attention to tribal people in peri-urban areas where they retain attachments to land, dwellings, land-based occupations, cultural environments or kin networks that are important to their identities, culture and survival. If tribal people are potentially affected, free, prior and informed consultations with them would need to

16

be carried out. 57. Environment: In addition to OP 4.01 (Environmental Assessment) that is triggered by the project, other environmental safeguard policies that may be triggered are OP 4.36 on forestry (some cities in India have designated forested areas), and OPN 11.03 on cultural property (which in the urban context includes places of worship). 58. Borrower’s Capacity to Implement Safeguards. The CDMA will oversee the integration and implementation of social and environmental management in subprojects, through two professionals (one in place as of March 2009). As noted above, ULB capacity is weak but will be built during the project. Training programs for staff have been carried out and additional training events are planned for the future. 7. Policy Exceptions and Readiness 59. The project shall comply with all applicable Bank policies.

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Annex 1: Country and Sector Background INDIA: ANDHRA PRADESH MUNICIPAL DEVELOPMENT PROJECT

Urban Development in India 1. Relative to economic growth, the level and speed of India’s urbanization have been low. The urban population has grown by only 2.4% a year since 1985 and remained at 28% of total population in 2001, and estimated to have reached about 31% in 2008. Yet slums have grown fast, from about 18% to about 25% of urban housing over the last two decades. These are symptoms of the weak absorptive capacity of cities. Despite the slow increase in urban population, few cities in India provide water for more than three hours a day, and prices and crowding of housing and office spaces are among the highest in the world. The resulting high cost of living and doing business constrain the growth of industries and services, including even the fast-growing technology services. Despite the good progress in poverty alleviation in India overall, urban poverty incidence has decreased little and remains at about 25%. 2. In short, India’s urban sector has become a serious bottleneck for national economic growth and poverty alleviation, and the challenge is likely to escalate as the economic and urban growths continue. These urban issues can be attributed largely to inadequate institutional and market frameworks – inadequate taxation and service charges, the lack of local autonomy, accountability, and credible plans, and the excess of regulations and programs that constrain the market and compromise property rights – and the consequent lack of investments in real estate and infrastructure. GOI generally shares this diagnosis and set a focus of the Tenth Plan (2002-07) on improving the financial and managerial capacity of urban local governments and service providers, the real estate market, and slum upgrading programs. 3. A manifestation of this policy emphasis has been the roll-out of the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) in December 2005, a program to facilitate urban reform, capacity improvement, and infrastructure building. The program provides GOI grants of Rs. 50,000 crore (about $11 billion) over 7 years to partly finance urban infrastructure in 63 major urban areas. This program now represents the dominant funding for urban infrastructure investments. To be eligible the recipient municipalities and the state governments have to commit to a number of institutional reforms, including the establishment of metropolitan planning committee, repeal of Urban Land Ceiling Act, preparing city development plans, improving accounting, increasing the public access to information, encouraging public-private partnership, etc. For other cities, GOI has consolidated a variety of small centrally sponsored schemes into two: Urban Infrastructure Development Scheme for Small and Medium Towns (UIDSSMT) and Integrated Housing and Slum Development Programme (IHSDP), carrying similar conditions. Most of the State governments made the required commitments but the progress remains uneven. 4. The predominant policy attention of GoI’s remains on agricultural and rural development. But the emphasis on industrial and service growth is increasing, and along with it, that on infrastructure and urban development. The 11th Plan also continues the increased attention to these issues, especially the governance, services, and infrastructure.

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Overview of Andhra Pradesh and its Urban Sector

• Andhra Pradesh, a large state located on the south-eastern shore of India, is the fifth most populous state, with 2001 population of about 76 million. Its various socio-economic indicators – such as per capita income, economic growth rate, urbanization level, and human development index – used to be slightly below the national averages but its urban poverty was far worse than national average. Over the last decade, however, AP has moved up in most of these measures. Its economic growth from 1999 to 2006 exceeded the national average, and it is now the third largest exporter of software services among Indian states. This success owes greatly to various reforms undertaken by the Government of Andhra Pradesh (GoAP) to improve the fiscal discipline and encourage private initiatives including not only investors but also self-help groups. Some key indicators of AP, relative to all India indicators, are listed below:

Table 1. Andhra Pradesh at a Glance

All India Andhra Pradesh

Population 2001, Million 1,027 76 Net Domestic Product per capita 2000, Rs 15,839 15,507 Net Domestic Product per capita 2006, Rs 25,716 26,211 Growth Rate of NDP per capita, 1970-2004 2.6%/Yr 3.1%/Yr Overall Poverty Headcount, 2000 31% 22% Share of NDP from Primary Industry, 2006 21% 27% Share of Urban Population, 2001 28% 27%

Source: Population – Census 2001; Economic statistics – Reserve Bank of India; Poverty headcount estimate – World Bank (Deaton 2001)

5. About 21 million, or 27% of the total state population, lived in urban areas which numbered 173 in 2001, according to the Census definition. Of these, 110 had urban local government bodies – Municipal Corporations (7 in 2001, 15 at present), Municipalities, and Nagar Panchayats. In addition, seven independent Municipalities were part of two large metropolitan areas – Hyderabad, the state capital, and Visakhapatnam, the main port. AP’s criteria for urban incorporation are more stringent than the Census designation of urban areas and include minimum local fiscal revenues. Over 70% of the urban population lives in cities with 100,000 each. While systematic population count since 2001 does not exist, it is generally believed that the urban population growth has accelerated since then alongside the rapid economic growth. The number of urban local bodies (ULB) has increased from 117 in 2001 to 134 in 2007, now reduced to 123 after the 2007 annexation of 10 ULBs into Hyderabad, and one ULB into Visakhapatnam. Table 2 shows the number of urban areas and distribution of urban population by city size in 2001; and Table 3 the population of the largest cities.

Table 2. Number and Population of Urban Centers and ULBs in AP, 2001

Population Size (1,000)

ULBs Census Urban Areas

Number Population Number Population Large >= 100 44 13,678 39 15,440

Intermediate 50-100 49 3,294 43 2,858

Small <50 24 1,018 91 2,206

Total 117 14,476 173 20,504

Source: Census 2001

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Table 3. 10 Largest Cities of AP, 2001 Population Name ULB Urban Area

Hyderābād 3,637,483 5,742,036

Visākapatnam 982,904 1,345,938

Vijayawāda 851,282 1,039,518

Warangal 530,636 579,216

Guntūr 514,461 514,461

Nellore 378,428 404,775

Rājahmundry 315,251 413,616

Kākināda 296,329 296,329

Kukatpalli* 292,289 *

Nizāmābād 288,722 288,722

Kurnool 269,122 342,973 * Part of Hyderabad urban area; annexed in 2007

6. Urban Poverty. One of unique features of AP’s socio-economic pattern has been the urban poverty incidence higher than the rural incidence (adjusted for different cost of living). People below poverty line numbered 40% of population in AP cities in 1993/94, compared with the national average of 33%; and 25% of the AP urban population lived in slums in 2001 compared with the national average of 15%. However, the urban poverty declined rapidly over the last 15 years in AP. The urban poverty headcount declined by 12% in a decade since 1993/94 whereas the national average declined by 2%. Further the extent of urban slums has decreased significantly recently thanks APUSP which directed some $200 million to the improvement of urban infrastructure in slums of 42 large cities of AP from 2002 to 2007. 7. Urban Services. Provision of urban services in general, such as roads, water and sanitation has, however, been falling behind the growing demand. For example, piped water coverage ratio declined by over 10% in cities of AP between 1991 and 2001 censuses; at present about 60% - 80% of ULB residents are estimated to have access to piped water supply but only about half of them through direct house connections. The municipal sewerage systems serve only about 16% of residents as of 2006, compared with 27% in average Indian cities. These service deficiencies are partly due to AP’s natural conditions such as low rainfall, but mainly due to inadequate investments and O&M which in turn are caused by weak financial and technical capacity of ULBs, common across India. 8. Property Market and Development. The inadequate urban infrastructure and services have led to anemic development of land, housing, and other properties in cities of India, in the face of the rapidly growing demand fueled by rapid urban economic and demographic growth. Other major factors that hinder the land supply and property development are the unrealistic and restrictive urban plans, complex regulations, heavy taxes and legal constraints on the property market. The latter include the Urban Land Ceiling (and Regulation) Act, which subjects land in excess of 500 m2 per family in large cities to public expropriation; and high taxes on property development and transfers. The main state tax on property transfer, Stamp Duty, used to be 12.5 -13.5% of the value in AP, a severe disincentive for market exchange or correct reporting of the value. The rate has been reduced to 9% in 1985. 9. Municipal Finance. Weaknesses in municipal finance – its size and autonomy – are at the core of urban infrastructure and service inadequacies. The per capita revenues of ULBs except Hyderabad in 2006-07 amounted to only Rs. 860, including transfers from the state and

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the center, and the capital expenditures about Rs. 260 per capita. Instead, urban development investments have been financed mainly (about 80%) by the state and central governments, as a distinctly lower priority than rural investments. The slow growth of municipal revenues (3.4% per year between FY 2004 and 2007) indicates further deterioration of urban services. 10. The fiscal weakness reflects not only the low level of local revenue efforts but more importantly the high level of fiscal centralization. The state took over several local revenue sources for various economic and fiscal reasons, and the revenue sharing and urban investment systems do not provide incentives for developing strong local capacity. Under the centralized fiscal system, most ULBs other than the biggest ones exercise little authority or flexibility in choosing and designing investments. For example, the state Public Health Engineering Department (PHED) plans, designs, and implements water supply systems and turns over the completed facilities to ULBs for operation and maintenance (O&M). This reduces ULB’s accountability as well as the incentives for efficiency of investments or for developing in-house technical expertise to plan and manage the facilities, leading to inadequacies in O&M, efficiency and sustainability. Due to the weak fiscal base and quality of project preparation and implementation, borrowing remains insignificant and typically is handled as another of the centrally managed investments, secured by annual state grants to ULBs. 11. The largest source of financing for urban infrastructure investment now is the JNNURM. Midway through FY 2008-09, 215 projects had been sanctioned for AP under JNNURM, totaling Rs.9,244 crore of GOI support. The vast majority of JNNURM funding has been concentrated on large-scale projects in the three largest urban areas, metropolitan Hyderabad, Visakhapatnam, and Vijayawada. While AP has secured funding for smaller cities under the UIDSSMT and IHSDP, these programs involve much small funding for only modest projects especially for slum upgrading and a small number of city-wide investments. The result has been a great increase in investments in the largest cities but little change in others. For example, Hyderabad Municipal Corporation was able to invest over Rs. 1000 per capita in 2006/07, about 7 times a typical ULB, from large GOI grants as well as its large economic base. 12. Institutional Structure of Urban Sector. ULBs in AP have a broad responsibility which includes the following: water supply, sanitation, conservancy, and solid waste management; Slum improvement and upgrading, other support for poverty alleviation; Provision of urban amenities and facilities, such as parks, gardens, playgrounds, street

lighting, markets, parking lots, bus stops, and public conveniences Public health, Burials and burial grounds, crematoriums, Maintenance of cattle ponds, regulation of slaughter houses and tanneries Registration and collection of statistics, including registration of births and deaths; Planning for economic and social development;

13. There are also Urban Development Authorities (UDA) that are responsible for planning of five metropolitan areas and implementation of key infrastructure or land development that fall beyond municipal boundaries. The ULBs and UDA are monitored and supported by the Department of Municipal Administration and Urban Development, through the following subordinate units:

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• Commissioner and Director of Municipal Administration, responsible for overall monitoring and support of all ULBs except Hyderabad, release of state transfers to ULBs, and coordinating elections in municipal areas

• Directorate of Town and Country Planning, responsible for preparation of General Town Planning Schemes for notified areas, regulation of planning permissions;

• Public Health Engineering Department, responsible for design, planning, and implementation of water and sanitation facilities in urban AP, except in Hyderabad where Hyderabad Metropolitan Water Supply and Sewerage Board performs the similar functions.

• Andhra Pradesh Urban Finance & Infrastructure Development Corporation, responsible for the management of various urban investments sponsored by GOI or GoAP.

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Annex 2: Major Related Projects Financed by the Bank and other Agencies INDIA: ANDHRA PRADESH MUNICIPAL DEVELOPMENT PROJECT

Sector Issue

Project Latest Supervision

(ISR) Ratings (Bank-financed projects only)

OED Rating

Bank-financed

Implementation Progress (IP)

DevelopmentObjective

(DO)

Promotion of private sector investment in urban infrastructure

Tamil Nadu urban Development Project I (Cr. 1923-IN); Tamil Nadu Urban Development Project II (P050637); Tamil Nadu Urban Development Project III (P083789);

S

S

S

S

S

S

S

S

NA Provision of urban services

Gujarat Urban Development Project (Cr. 1643-IN); Bombay Urban Development Project (Cr. 1544-IN); Karnataka Municipal Reform Project (Ln. 4818, P079675)

S S

S

S S

S

S S

NA

Conducive infrastructure financing systems

Private Infrastructure Finance Project (P039935)

S S -

Institutional restructuring and regulatory reform

Economic Reform Technical Assistance Project (P059501)

S S -

AP economic and institutional reform

AP Economic Reform Loan (DPL) I and II

S S S

AP Economic Reform Loan (DPL III, P075273)

S S NA

AP Poverty Reduction AP Rural Poverty Reduction Project (P071272)

S HS NA

AP Rural Infrastructure AP Community Tank Management Project (P100789) AP Rural Water Supply and Sanitation Project (P101650)

S

S

S

S

NA

NA

Other development agencies

DFID Andhra Pradesh Urban Services for the Poor Project (2002-07)

NA

USAID Financial Institutions Reform and Expansion Project (2002-07)

NA

ADB Karnataka Urban Development Projects I and II (ongoing)

NA

IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory)

23

Annex 3: Results Framework and Monitoring INDIA: ANDHRA PRADESH MUNICIPAL DEVELOPMENT PROJECT

Approach to Monitoring and Evaluation

Two Types of Monitoring and Evaluation (M&E) will be carried out:

Project Implementation Monitoring of progress and quality of implementation of project components, by the implementing agencies as well as the Bank, to:

• Facilitate timely and satisfactory implementation through identification and analysis of

delays, failures or constraints; and • Ensure fiduciary accountability and progress on implementation Governance and

Accountability Action Plan (GAAP).

Outcome Monitoring, to assess outcomes against objectives of each subcomponent, would be undertaken after the subcomponent is completed, mostly after Mid Term Review. In some cases the outputs would be the primary target of monitoring.

Institutional Arrangements for M&E: CDMA-MSU will be responsible for project M&E, collecting data on its own but mainly through implementing and supporting agencies (ULB, DTCP, PHED, etc.) It would provide various regular reports to MAUD, APUIF, and the Bank in a timely manner. The necessary management information system for M&E, including formats and guidelines for data collection will be instituted within the first six months of implementation of APMDP. CDMA-MSU will engage consultants to develop the information system, augment and develop its own M&E capacity, and carry out special surveys, analysis, and evaluation. Data Collection: will be conducted mainly through the following types of instruments:

ULB level Monthly Reports of physical and financial progress on urban investment subproject implementation

Quarterly Progress Reports (QPR), compiled and submitted by CDMA, will include: - Summary and consolidation of ULB monthly reports and progress reports of

state-level components; - Quarterly FMRs required by Bank; - Select results indicators; - Identification and analysis of issues; - Revised implementation plan for the next 12 months

Concurrent audits for fiduciary purposes (FM and Procurement), carried out semi-annually by consultants hired by CDMA, will cover performance of implementing agencies with regard to procurement and FM aspects

Outcomes monitoring and evaluation will be done mostly through external consultants

engaged by CDMA, starting from the Mid-Term Review.

24

Results Framework

PDO Outcome Indicators Use of Outcome Information The project’s specific development objectives are to: Improve key urban services in selected cities; and

Local residents’ satisfaction with urban services increase by at least 15%; Subproject-specific indicators such as hours of water supply

From Yr 3: Modify OM to increase relevance or quality of subprojects

Improve the capacity of Urban Local Bodies (ULBs) to develop and manage urban services

Participating ULBs increase revenues at least by 20% on average by Yr 3; At least 30 ULBs prepare and improve municipal services status report and improvement plans.

From Yr 4: Conduct further policy dialogue and modify capacity enhancement TA

Intermediate Outcomes Intermediate Outcome Indicators Use of Intermediate Outcome Indicators

Urban Academy produces pertinent analysis of and recommendations for urban development, and trains officials

Media reports or State Assembly discussion of Urban Academy’s analyses and recommendations from Yr 4; At least 75% of officials trained report acquiring useful knowledge from Yr 4

Identify areas of weakness and direct further consultant and Bank assistance.

Improvements in the state’s urban finance policy framework

Completion of reports on ULB fiscal autonomy and urban capital financing framework by Yr 3; their review by GoAP and adoption of half or more of recommendations by Yr 5

Monitor consultant reports and policy workshops to strengthen relevance and commitment, and provide supplemental TA

Increased clarity and efficiency in procedures of urban planning

Reduction in the number of steps and files required for urban plan preparation and development approvals from Yr 4

The results fed back as recommendations for further reform

30 ULBs improve urban planning frameworks

GIS maps and revised General Town Plans completed and formally adopted by at least 24 participating ULBs by Yr 4

Identify main areas of improvement and disseminate results to other ULBs; Identify areas of dissatisfaction with revised Plans and provide assistance for further corrective work

Urban sector human resources in the state acquire improved skills

At least 75% of staff and officials trained report gaining new useful skills or knowledge; at least 50% report using it on the job

Identify areas of weakness and adjust the advisory and training programs

Progress and outputs of urban infrastructure subprojects

Physical and financial progress at ULBs; Targets for specific subprojects achieved, such as the added water supply capacity

Refinement of procedures; increase or adjustment of design and implementation assistance

ULBs carry out measures to strengthen financial and technical capacities

No. of ULBs taking specific actions to increase revenue, improve O&M and financial management, etc.; and Their aggregate effects from Yr 3

Consider project measures – such as the strengthening of subproject conditions, or additional TA - to strengthen the efforts or effects

ULBs and CDMA develop improved capacity for financial management and control, and project monitoring and management

Implementation progress and evaluation reports are submitted on time, at least 80% from Yr 2, 90% from Yr 4; At least 80% of participating ULB accounts audited on time and without qualification from Yr 3

Increase or adjust technical assistance and training if needed

25

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27

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tisf

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and

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ank

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rais

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ent

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ared

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than

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% f

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ater

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e-p

ancy

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CD

MA

, P

HE

D

28

Annex 4: Detailed Project Description INDIA: ANDHRA PRADESH MUNICIPAL DEVELOPMENT PROJECT

1. Urban programs supported by the Bank over the past several decades followed mainly three different approaches. The first approach targets a few specific services issues, such as the urban poor through slum upgrading programs. These operations “ring-fence” service delivery for the urban poor, focus in particular on improving their land-tenure and access to basic services. Municipal reform more broadly is not the goal of this type of approach. A second category of urban programs focuses on improving investment in urban infrastructure and urban services more broadly through a municipal development fund or a municipal investment fund. Broader in scope than slum upgrading programs, this second type of operations targets infrastructure improvement in areas such as water and sanitation, solid waste, local roads, and other urban services across the municipal system. Services to the poor are often embedded in this approach and, in addition, broader municipal reform, albeit selective in scope such as financial management or local tax reform, is linked to the availability of investment funds. The third approach is the most comprehensive one and is aimed at supporting overall municipal governance, institutional reform in service delivery and capacity building for municipalities. The proposed project while falling in the municipal investment fund category has the additional aim of establishing the conditions that will assist AP towards full municipal governance reform. 2. The project consists of four components: A. State level Policy and Institutional Development Support, B. Capacity Enhancement of State and Local Staff and ULB Systems Reform, and C. Urban Infrastructure Investment Support at the ULBs, and D. Project Management and Implementation Support.

Component A: State Level Policy and Institutional Development (cost US$9.2 million) will support the following main activities.

(a) AP Urban Academy (Cost US$4.5 million): to set up an urban training and knowledge centre at Hyderabad, mainly to serve as the center of sustained monitoring and analysis of urban development and management in AP and to provide training to urban sector officials in the state at both the ULB and state level, including elected representatives. It is envisaged that this academy would only have a small core staff and would depend on panel of external experts to develop the knowledge base and deliver training. This subcomponent includes an initial study and planning of the Academy, construction and initial operations. The Academy would fall under the GoAP’s MAUD for future on-going operations.

(b) Urban Policy and Finance TA (Cost US$3.3 million): will support key policy studies, workshops, training, and associated computer equipment to improve the urban planning framework, urban finance framework, monitoring, evaluation, and support of urban and ULB performance development. This will include: (i) review of existing planning rules in the state and drafting a new act to simplify land use planning processes, increased devolutions to the ULBs; (ii) review of intergovernmental fiscal structure and rules for ULB finances and recommending revisions to improve the capacity, accountability and performance incentives of ULBs; (iii) review of options to improve urban development financing including the role of market-based financing and APUFIDC, strengthening of the latter, and preparation of a Public Private Partnership (PPP) framework for urban sector; (iv) design of measures to strengthen the capacity of MAUD and especially CDMA to monitor and support ULB capacity development; and (v) Establishment of a Geographic Information System cell at DTP to support monitoring and planning of urban development.

29

(c) Preparation of Urban Poverty Alleviation Program (Cost US$1.5 million), to implement GoAP’s Mission for Elimination of Poverty in Municipal Areas (MEPMA), mainly through the support for job training, microfinance, self-help groups, and poverty alleviation support capacity building at ULBs.

Component B: Municipal Capacity Enhancement (cost US$ 14.0 million) will include:

(a) GIS Mapping and Spatial Planning (US$ 4.0 million) will prepare new GIS base mapping and General Town Plans for about 30 ULBs whose plans are lacking or badly out of date, with full participation of local authorities and residents. (b) Capacity building (US$10.0 million): will include (i) training of staff at local and state levels as well as elected representatives at ULBs, and (ii) design and management of ULB financial and institutional strengthening programs, involving improvements of procedures, information, and systems including e-governance. The subcomponent is based in part on on a ULB capacity building needs assessment in 2003, which will be updated and adjusted in consultation with all ULBs, and coordinated by the Capacity Enhancement Coordinator at MSU. In-depth TA for design and management of ULB strengthening program would be provided for select ULBs with a view to developing models building upon on-going institutional strengthening and E-governance initiatives at ULBs and applicable broadly. The training program will be delivered in various forms such as the classroom learning in training institutions, by visiting trainers and consultants, on-the-job training, and study visits within the country or abroad. The training will cover three different types of subjects and trainees:

(i) Professionalization of urban management through professional certification programs for ULB specialist staff in: financial management, public health management, municipal and environmental engineering, social development and anti-poverty support, urban planning and building regulation – provided through recognized specialist institutions; (ii) Training in Local Governance and Urban Management for elected officials and senior ULB staff (iii) Training in various operational skills and systems such as accounting, physical facility operation, public information management, etc.

Component C: Urban Infrastructure Investment (cost US$ 306 million) is described after Component D. Component D: Project Management Support (cost US$ 20 million) for the preparation and implementation of subcomponents both at the state and ULB levels, broadly grouped as follows:

(a) Project Management (cost US$ 5.0 mn) support for GoAP’s state level agencies responsible for implementing or coordinating APMDP. This includes financing a portion of the incremental operating expenses of state level agencies involved in day-to-day management of the project, primarily the CDMA-MSU and APUIF. This will also include finance consultant services and systems for monitoring and evaluation, oversight and operational management, various audits (procurement, FM, technical, etc.) and implementation of GAAP. (b) Subproject preparation and implementation (cost US$ 14.5 mn): This technical assistance facility is aimed at helping ULBs undertake high quality preparation and implementation of investment subprojects under the Urban Infrastructure Investments component (Component C). This facility will primarily finance technical, financial, economic, environmental & social

30

assessment and detailed engineering studies for preparing specific sub-projects; preparation of bid documents as well as external consultant support for management and supervision of subprojects during implementation. It will also support City Development Plans or Capital Investment Planning studies. This TA will be delivered mainly through consultant pools administered (including procurement) by the office of CDMA, but ULBs that wish to retain their own consultants will be given the grant financing proportionate to the size of subprojects, subject to consultant procurement rules applicable to the project. (c) Development of PPP framework and subprojects (cost US$0.5 m). GoAP has established an enabling legal framework for public-private partnership for infrastructure, and a PPP cell at the state level. The project would support further development and implementation of the framework through the establishment of guidelines and benchmarks for local PPPs as well as innovative pilot PPP schemes for ULBs possibly for water supply and energy conservation, some of which can be financed under the project.

Component C: Urban Infrastructure Investment (cost US$ 306 million) to ameliorate high-priority deficiencies in services and environment in a sustainable manner as determined by local residents and authorities. This will support subprojects to expand or upgrade urban infrastructure including: city roads, sewerage, water supply, sanitation, solid waste management, street lighting, energy efficiency improvement, and community centers mainly to host self-help groups and job training for the poor. The investments would be structured to complement the on-going JNNURM and UIDSSMT programs of GOI, which support a relatively small number of ULBs, and the DFID funded AP Urban Services Project (APUSP) that focused on improving slums in large cities. The investment subloans would be used as a means to support, encourage and reinforce the development of ULBs’ financial and operational capacity, as well as the city’s economic development. Accordingly, the subproject will be accepted only paired with adequate action plan to improve the ULB’s financial and operational capacities and to operate and maintain the facilities adequately. 3. A ULB will be eligible for investment support under the project in a demand-driven manner, subject to the following conditions: • Audit of municipal accounts is satisfactory and up to date;

• Formal agreement to carry out an action plan for municipal reform, financial and service performance improvement and capacity building, satisfactory to CDMA, including but not limited to capacity to operate and maintain the facilities built with the subloan;

• Operating (current account) surplus, sufficient to meet debt service obligations and O&M expenses, of more than 15% of the subproject cost(s) based on audited accounts. Such operating surplus should also be sufficient for meeting existing debt service and other operating expenditures, as evidenced with up-to-date, audited financial statements.

4. In addition, the ULB will be required to commit to a Municipal Reform Action Plan (MRAP) as part of a subproject financing agreement with APUIF and CDMA. A typical MRAP will specify a few key medium-term (3-6 years) targets for substantial increase in own revenues, for upgrading of ULB organization, and for improving major services; and specific time-bound plan of action to achieve the targets such as the increase in holdings taxes or water charges, generally to increase the fiscal surplus even after debt service and O&M costs of the subproject, and installation of financial manager at a certain qualification level. Formal commitment to MRAP and its elements through municipal council resolutions, and implementation of initial provisions may be made a condition of subproject financing.

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5. The subprojects will be lumpy investments for city-wide impacts, costing at least Rs. 5 crore (about $1.05 million) in general. The exceptions will be those for:

• solid waste management, which require relatively small investments individually but aggregate to a sizable amount state-wide and has been mandated by the 11th State Finance Commission;

• civic centers mainly for job training and SHG for the poor, as one of the initial investments to implement MEPMA;

• energy or operational efficiency improvements; and • subprojects appraised in 2005 for initial implementation, a batch of small subprojects

prepared and appraised when the project’s proposed focus was on improving conditions in poor areas. While many of the appraised subprojects have already been completed, some remain to be implemented.

6. All subproject identification, preparation and appraisal will be subject to a set of good-practice criteria, listed in the Attachment to this Annex. These will include requirement for:

• Economic evaluation, which needs to demonstrate economic rate of return of over 12% or

cost-effectiveness in cases where economic benefits are not quantifiable. • Environmental and social safeguard measures • Adequate financing and operations plan.

7. Benefits generated by the infrastructure subprojects would include savings of time and energy for water fetching and motorized travel, cost savings from more economic sources of water, improved physical health, reduction of environmental contamination and related diseases. Economic evaluation is required for each subproject, at least the identification of benefits and alternatives. Quantitative cost-benefit analysis is required for subprojects estimated to cost over Rs 15 crore, and it should demonstrate an economic rate of return above the opportunity cost of capital for India, currently estimated at 12%, or cost-effectiveness. 8. Financing Terms for the subprojects would include a blend of loan and grants as follows: Issue Terms of financing

ULB self- funding

10% of subproject cost; this will be granted by GoAP for solid waste management subprojects

State grant funding

20% of cost for transportation subprojects in all ULBs; 60% for other subprojects, in three largest Municipal Corporations; 70% in other ULBs

Sub-Loan Funding to ULBs

The balance of cost after the self-financing and grant, at an interest rate at least 1% higher than cost of borrowing by GoAP, for a tenor of 15 years with a 3-year moratorium on principal repayments (no moratorium on interest payments).

Debt servicing of Sub-Loans

Semi-annually from the ULBs to the Trust (APUIF). In the case of arrears over 12 months, APUIF shall: revise repayment schedule, with appropriate additional interest charges; and failing that, approach GoAP to clear arrears and penalties through intercepts of state devolutions to ULBs.

9. The subprojects which have been identified for initial implementation are listed in Table 1 below.

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Table 1

List of Initial Sub-Projects S. No ULB Sample of Subprojects under Review in 2008

Short Description Base Cost Rs

Crore.

City-wide Infrastructure 1 Srikakulam Construction of Storm Water Drains 4.21 2 Palasa-Kasibugga City roads in Poor Settlements(Package-I) 12.57 3 Bobbili City Roads and Storm Water drains 21.794 Parvathipuram City Roads and Storm Water drains 7.685 Tuni Construction of Storm Water Drainage System 16.73 6 Peddapuram Construction of Storm Water Drainage System 12.88 7 Nidadavole Water Supply 10.93 8 Guntur Water Supply 142.31 9 Macherla Storm Water Drainage Scheme 6.34

10 Kothagudem City Roads and Storm Water drains 27.33

11 Adilabad City roads and storm water drains 13.98 Adilabad Construction of community halls in slums 1.45

12 Mandamarri City roads and storm water drains 8.81 Mandamarri Construction of Community halls 2.8

13 Siddipet City roads and storm water drains 6.49 14 Armoor Water Supply 17.58 15 Puttur Storm water Drainage system in the town 15.01 16 Machilipatnam Water Supply 66.74

17 Pedana City roads and drains 12.38 Pedana Construction of Community halls in poor settlements 2.62

18 Sattenapalli Storm water Drainage system in the town 22.94 19 Ponnur City roads and storm water drains 39.23

20 Repalle City roads and storm water drains 16.73 Repalle Construction of Community centres 0.92

21 Chilakaluripet City roads and storm water drains 9.00 22 Tadepalligudem City roads and storm water drains 4.82 23 Mancherial City roads 28.19 24 Nagari City roads and storm water drains 12.46 25 Kavali City roads and storm water drains 7.96

SubTotal (in Rs. Crores) Rs 552.88 SubTotal (in US$) $115.18 Solid Waste Management Facilities $30.22 Small Area Infrastructure appraised in 2005 $10.65 Total, $ million $156.05

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Attachment to Annex 4: Urban Infrastructure Sub-Project Preparation and Implementation Checklist

A. General Requirements a. The Sub-projects should contribute to appreciable service improvements in the towns, along

with institutional capacity building for O&M; b. Subprojects should be identified as priority by the ULB. There shall be adequate

documentation of consultation in the ULB in this regard, along with the ULB resolution; c. Adequate consultations should be done on the project development and implementation as

part of Information and Consultation strategy of the Project. Records and plans for consultation should be documented.

d. Economic evaluation, demonstrating economic rate of return of over 12% or cost-effectiveness in cases where economic benefits are not quantifiable.

e. Evaluation of alternatives. B. Detailed Project Report Checklist The following items should be part of DPR, and will be items of subproject appraisal: a. Base service levels and the proposed improvements after the project are defined clearly –

with linkages to project output / outcome indicators; b. For water service improvement, the source should have adequate capacity to provide water

for future, allocations to drinking water are clearly documented; c. Linkages between infrastructure development and city development plans shall be indicated; d. Local service improvements proposal should show the linkage with the trunk infrastructure e. Provisions shall be included to ensure or improve performance of the systems, such as bulk

flow meters, Pressure Reducing/Control Valves; energy efficiency measures, etc; f. Either in the DPR or by providing linkages to separate reports -- Environmental and Social

Screening, Environmental and Social assessments, Compliance with Environmental mitigation measures and Resettlement Action Plans shall be indicated;

g. Plan for work execution by contractors at their cost, such as: Compliance with quality control requirements; Compliance with Environmental Management Plans; Compliance with safety standards, traffic regulations, establishment of site offices, sanitation arrangements for labor, security provisions etc.; Addressing site constraints such as removal of utilities, dewatering, works execution in hard rock/rocky strata, marshy lands or other poor sub-soil conditions, narrow lanes etc.,

h. Procurement and implementation plan: contract packaging, procurement method and schedule, responsibilities, implementation schedule,

i. Required implementation capacities shall be assessed and plans for building those capacities shall be indicated;

j. Monitoring plans shall be highlighted – who will oversee implementation progress (ULB itself / supervision consultant), environmental and social issues, works quality etc; Linkages to State level service improvement monitoring system shall be provided;

k. O&M plans specifying: preventive maintenance activities, plans to manage crises, availability of repair facilities; necessary facilities (tools, plants, machinery, vehicles, buildings, computers, laboratories, software, MIS systems etc), outsourcing plan;

l. O&M and rehabilitation costs; revenue projections if applicable along with cross subsidies and subsidies required, plans to improve revenues;

m. Required O&M capacity building plan specifying manpower and training required and how to obtain them.

34

n. Costs shall be estimated based on latest market rates; which shall include provisions for contractors’ work execution as per item (B) (h) above, as well as relevant taxes and duties, insurance provision requirements, contractors’ profit etc.

C. Bid Document Checklist a. Bid documents shall contain Bill of Quantities (BoQ) / clauses to implement Environmental

Mitigation plans; qualification criteria and contract milestones agreed. b. Specifications shall include necessary provisions for work execution by the contractors as per

item (B) (h) above; along with the relevant BoQ items. D. Requirements for Solid Waste Management (SWM) Sub-projects The SWM interventions should focus on overall service provision system in the ULBs, rather than limited interventions such as bins, tri-cycles, etc. The plan should be based on an analysis and plan for the overall system at the ULB covering: Primary Collection; Transportation; Treatment; and Disposal. Based on such an overall plan, the subproject can be identified to improve the whole or a portion of such a plan along with other financing available, or the cluster based approach followed by GoAP. The steps to be followed for preparing the SWM sub-projects are the following: a. Seek expression of interest from the ULBs for taking up comprehensive improvements under

SWM as explained above; b. For the eligible, interested ULBs, CDMA will establish the current status of SWM in ULBs

with a view to identify gaps in existing infrastructure and functional arrangements. For this purpose, CDMA jointly with the Bank will customize the information checklist present in the Operations Manual.

c. Based on gaps identified in different ULBs, detailed studies will be conducted for specific interventions to develop further analysis / implementation plans.

E. Public-Private Partnerships (PPPs) The Project will support the development of urban infrastructure PPP through the establishment of a framework and benchmarking applicable specifically to Urban PPPs, including a model Citizens charter; and preparation of pilot PPP subprojects. The latter can include revenue generating services (markets, depots, etc.) or cost-saving measures such as energy conservation. APUFIDC will take the lead in developing and promoting the framework and pilot projects, under CDMA’s support. Some of the pilot projects so developed can be financed as the urban infrastructure investment subprojects.

Investment Planning and Implementation process:

Selection and implementation of urban investments for service delivery in the ULBs requires clarity regarding the objectives, nature of investments, preparation processes, institutional responsibility, outputs, and compliance reports. A practical approach to this complex task is developed following the steps listed below. As experience dictates during project implementation, the procedures may be amended for simpler implementation. Some parallel activities proposed under the project to enhance the processes are indicated in boxes.

35

(a). ULB proposes the subproject to CDMA, through a resolution passed in the municipal council. If required, ULBs would be provided with TA for preparation / quality enhancement of Capital Investment Plan (CIP) to reflect the strategic priorities. (b). CDMA compiles all proposals received semi-annually, evaluates them based on the criteria outlined above, their level of readiness for implementation, and short-lists the sub-projects eligible for financing. In parallel CDMA provides TA support for the other ULBs to enhance their subprojects to meet the eligibility criteria. This includes further assessments and capacity building support to ULBs to enhance their knowledge / skills. (c). ULBs would then prepare two sub-project documents: i) an Action Plan for municipal reform, financial and sector operational performance improvement and capacity building, as required under the criteria above; and ii) DPR. The DPR preparation shall be preceded by a Technical Feasibility Analysis, which would analyze the feasibility of different technical alternatives, suggested alternative, financial and economic assessments, Social and Environmental Screening for the preferred alternative. The DPRs shall include, for the preferred option, detailed designs, detailed engineering drawings, bid documents, procurement and implementation plans, social and environmental assessments, economic and financial assessments, assessment of institutional options for service delivery and related capacity building measures and O&M plans. Quality of preparation of these two documents would be monitored by CDMA (with the help of PHED) as part of its pre-appraisal process and necessary TA support would be provided to the ULBs. A set of simplified guidelines is prepared (Attachment-2) for the purpose of preparation of sub-projects, comprehensively covering technical, environmental, social, financial and institutional aspects.

(d). The sub-projects prepared would then be appraised by CDMA -- both at the stage of Feasibility and DPR, and cleared for subloan processing and implementation. (e). Sub-project implementation would then start comprising procurement, implementation, monitoring and sub-project completion. Necessary capacity building measures under Component B would be implemented alongside, strategically intervening at different stages of project implementation.

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Annex 5: Detailed Project Costs INDIA: ANDHRA PRADESH MUNICIPAL DEVELOPMENT PROJECT

Component Total

Cost ($ m)

IBRD Loan GoAP Financing

% (US$m) % (US$m)

State Level Policy and Institutional Development

-Urban Finance related studies (including for APUFIDC) 2.4 100% 2.4 0% 0.0

-Urban Academy: studies and training 2.0 100% 2.0 0% 0.0

" " : works 2.5 85% 2.1 15% 0.4

-Study for modernization of planning legislation 0.2 100% 0.2 0% 0.0

-Studies for preparation of Urban Poor Program 1.5 100% 1.5 0% 0.0

-Study for preparation of a Urban PPP framework 0.6 100% 0.6 0% 0.0

Sub-Total 9.2 8.8 0.4

Municipal Capacity enhancement - Capacity Building for urban management and operations, including capacity for pro-poor services 6.0 90% 5.4 10% 0.6-TA for Systems Improvements at ULBs, including e-governance 4.0 90% 3.6 10% 0.4

-GIS Mapping for select ULBs + support cell at DTP 4.0 90% 3.6 10% 0.4

Sub-Total 14.0 12.7 1.3

Urban Infrastructure Investment -Sub-loans and Sub-Grants to ULBs for urban infrastructure including community centers

306.0 85% 259.7 15% 46.4

Sub-Total 306.0 259.7 46.4

Project Management Support -Support to CDMA & APUIF for project management and monitoring (incremental operating costs, technical assistance, audits, etc.) 5.0 90% 4.5 10% 0.5-Sub-project preparation and implementation support to ULBs (under CDMA) 15.0 90% 13.6 10% 1.4Sub-Total 20.0 18.1 1.9

Front-end Fee 0.75 0.75 0.0Grand Total 350.0 300.0 50.0

Disbursement Schedule (US$ million) FY10 FY11 FY12 FY13 FY14 FY15 FY16

Annual 20 42 52 64 53 42 27

Cumulative 20 62 114 178 231 273 300

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Annex 6: Implementation Arrangements INDIA: ANDHRA PRADESH MUNICIPAL DEVELOPMENT PROJECT

1. At the highest level, the project will be directed by an Empowered Committee (EC), while will provide approvals and policy decisions of GoAP related to the project. It is chaired by Chief Secretary, and includes Principal Secretaries of Finance, MAUD, Housing, and Planning Department; the CDMA and the MD of AP Urban Finance and Infrastructure Development Corporation. Secretary of MAUD heads the steering committee of the EC and as such assumes the principal responsibility for providing policy-level direction, coordination, and monitoring of the project in cooperation with other departments especially the Finance Department. The MAUD designated the DMA, headed by CDMA, as the nodal agency for the project to manage the overall project. CDMA will also be directly responsible for several TA components including the support for ULB capacity building, and managing the state-level Public Information Office, and the Grievance Redressal and Dispute Resolution System for the project to handle concerns of project affected people, as well as disputes between ULBs and contractors. 2. GoAP established the MSU under CDMA to carry out most of the day-to-day management of project preparation, implementation, and monitoring. It will directly manage the implementation of most of the technical assistance components, monitor and assist the implementation of TA components carried out by other departments (see below), and the urban infrastructure subprojects (implemented by ULBs). The MSU will also be responsible for all reporting requirements, including those to the Bank. The MSU is headed by a Director and staffed with 17 officers and professionals in finance, procurement, technical, capacity enhancement, and information technology as well as 25 other technical and support personnel. The Director and staff are attached to this Unit through deputation of Government officials or through open recruitment under GO MS. No. 39 of February 15, 2005 and GO Ms 61 of March 14, 2005. It will also draw upon the project preparation and management support component under this project to hire more specialist consultants. 3. The ULBs will be responsible for the local level reform and capacity building action plans as well as the urban infrastructure subprojects under their jurisdictions, including the identification, preparation, implementation, financing, and repayment. Consistent with the project’s main goal to strengthen ULB capacities, ULBs will be given responsibility as well as assistance to develop their capacity to manage the development and operation of infrastructure. For example, since few ULBs have a full contingent of engineers at present, the PHED will depute staff engineers to assist the ULBs, and MSU will hire a team of consultants to help ULBs prepare technical competent project proposals and designs, and another team to help supervise the contractors. These engineers and consultants will also assist ULBs to carry out the bid invitation and evaluation processes at least during the first two years of the project. ULBs will be responsible for public disclosure and consultation as well as addressing complaints and grievances related to their institutional actions and subprojects. 4. The CDMA will determine the eligibility of ULBs for the project support. The eligibility criteria include financial capacity as well as the MRAP - municipal reform and capacity development programs. The MSU will collect sub-project proposals from the eligible ULBs, conduct preliminary screening of their feasibility, help develop the full feasibility and designs through a pool of consultants whom it will hire and ULBs can draw upon. The MSU and CDMA will appraise the final proposals and pass them on for financing by APUIF. A PAC will be to undertake all sub-project appraisals. MSU will draw on the expertise and organization of the PHED for technical aspects of the subproject preparation and implementation. During subproject implementation, MSU will provide a pool of engineers to help the ULBs supervise the subproject

38

implementation, will monitor the financial and physical progress of subprojects, contract management, and the adequacy of public disclosure, consultation, and grievance redressal by ULBs. Third Party Quality Supervision consultants would be hired for all investments to help monitor and supervise the quality and progress of subprojects. Quality Certification from the ULB/Supervision consultant would be necessary before releasing the payments to contractors. 5. The DMA/MSU will be responsible for helping ULBs that are not eligible for project financing, to strengthen their financial and management capacities to reach the eligibility, as part of the municipal capacity enhancement component. 6. The APUIF was set up as a Trust under the Indian Trust Act of 1882 under GO Ms 72 on February 18, 2005 and has a board with the same membership as EC. It will be the asset and fund manager on behalf of the State, for the funds allocated to this project. As such APUIF will enter into sub-loan and sub-grant contracts with ULBs. As it takes the credit risks of the sub-loans, it will appraise the financial soundness of the ULBs and their subprojects, after they were recommended for financing by CDMA. During the subproject implementation, it will disburse the sub-grant and sub-loan in step with physical and financial progress of the subproject, upon verification and recommendation by the MSU. While APUIF will rely on MSU’s appraisal and monitoring for these financial transactions, it will take independent measures to ensure the veracity of the information it receives through DMA and provide feedback to MSU for possible improvement of MSU systems. It will take the sub-loan repayment installments from the ULBs while reserving the right to intercept the state’s allocation of various funds in the absence of timely repayment. To carry out the appraisal, disbursement and repayment activities, it will retain qualified fiscal agents or specialists. 7. The Andhra Pradesh Urban Finance and Infrastructure Development Corporation (APUFIDC) is a quasi-statal corporation charged with managing the State’s operations to finance various urban infrastructure investments. Currently its major responsibility is acting as the nodal agency for the JNNURM projects in the state. Under the project, APUFIDC will be responsible for developing and helping ULBs implement innovative PPP projects in urban infrastructure, which can be financed under the project if they meet other eligibility criteria. Accordingly, it will manage a TA subcomponent to support this activity. The project’s TA component to review and strengthen the state’s urban financing systems would include that for APUFIDC. Depending upon the results of the TA and the GoAP’s action, APUFIDC’s role in the project may expand at the time of the mid-term review of the project. 8. The DTCP will be responsible for implementing the TA component to reform the legal framework for urban planning, and develop or upgrade mapping and development plans for selected towns and the state-level geographical information system for urban areas. 9. The PHED will play a supportive role in the design and implementation of sub-projects. At the state level, it will help manage the engineering aspects of MSU functions – technical appraisal and supervision of subprojects, and management of engineering consultants. To do so, it has deputed a senior officer along with support staff to MSU. At the local level, PHED will provide the project preparation and supervision support through its regional offices, and for larger subprojects implemented by ULBs without sufficient engineering staff, by deputation of qualified engineers to the ULBs.

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Annex 7: Governance and Accountability Action Plan INDIA: ANDHRA PRADESH MUNICIPAL DEVELOPMENT PROJECT

I. The Project Context

The Project aims at improving urban services and the ULBs’ capacity to expand and sustain the services. Hence its aim overlaps largely with the aims of improving the governance and accountability related to local public services. The Project will be implemented in the context of important urban sector reforms that AP has already instituted, including the following that mainly address various governance and accountability elements:

• Citizen Charters being implemented by all ULBs; they specify service standards for operation of basic public services delivery

• Most of the ULBs have Citizen Information Centers to provide a One-Stop-Shop for the services provided to the public

• An Online Grievance Redressal Tracking Systems is being implemented by selected ULBs and is being expanded to all ULBs

• The Right to Information Act 2005, enacted by Government of India and implemented by AP, mandates public authorities to disclose information regarding public schemes, how they are organized, status, list of beneficiaries, etc.

• Community Participation Law and Public Disclosure Policy have been enacted by the State Government, as required under the 74th Constitutional Amendment

• AP Anti-Corruption program. The project will support the following components:

• State-level Policy and Institutional Development (including formulation of laws, plans, financial management framework, programs benefiting the poor and public-private partnerships)

• Municipal capacity enhancement (including staffing, training, knowledge transfer, skill development-cum-placement programs for the poor)

• Urban infrastructure investment (especially in poor areas and increased capacity of ULBs to manage and implement sub-projects)

• Project management arrangements (including management of fund flows to ULBs and project implementation performance according to agreed business standards)

The project thus supports measures that are directly aimed at improving the governance and accountability, but it also contains measures, especially the urban infrastructure component, that are exposed to the risk of the currently weak governance and accountability. II. Purpose of the GAAP The GAAP explicitly specifies a set of specific measures to ensure good governance and accountability, by improving the effectiveness of the project activities, increasing transparency and managing risks of fraud and corruption. It includes measures to:

• Ensure effective implementation of project elements directly relevant to improving governance and accountability,

• Guard against and reduce fiduciary risks, especially those of fraud and corruption,

40

• Enable beneficiary and general citizen to receive and provide information about the project transactions and performance,

• Safeguard the credibility of implementing agencies. Bank-financed projects that implemented a GAAP have reported dramatic rise in project performance after introducing measures such as monitoring by independent observers and beneficiaries and means to hold implementing agencies to account for intended project outcomes. The Rajasthan District Poverty Initiatives Project (2000 – 2007) was a case in point. III. Development of the APMDP GAAP The development of GAAP for APMDP involved the following:

• Frank consultations with civil society organizations and beneficiaries, proposed project implementing agencies, government officials at all levels, contractors and industry experts to identify, assess and prioritize risks of fraud and corruption which could dilute the intended outcomes of investments;

• Review of lessons learnt from recent sector experience, in particular, the DFID-supported Andhra Pradesh Urban Services for the Poor (APUSP), 2000-2006, which prescribed:

- mandatory quality assurance and overview of asset creation and maintenance and project implementation at ULB level by third parties, including citizens, NGO and knowledgeable and interest groups.

- rigorous review of financial and procurement processes and insistence of clear procedures to reduce opportunities for mismanagement, fraud and corruption;

- assignment of specific accountabilities for GAAP implementation, including clear terms of reference, training and budgets for implementation, as consistently described in all project documents (appraisal report, financial, procurement and operational manuals);

- systematic and independent procedures to check compliance and implementation of mitigation measures as needed;

- application of positive and negative incentives for compliance, deterrence and management of risks of fraud and corruption.

- Development of a Supervision and Monitoring Plan to get reasonable assurance of the proper working of GAAP and project controls.

These consultation and reviews were led the Center for Good Governance, Hyderabad. The Bank has supplemented the GAAP thus developed with several additional measures based on Bank-wide review of experiences and good practices.

41

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mit

men

t, e

xis

tin

g fi

nan

cial

ca

pac

ity,

aud

it c

om

pli

ance

CD

MA

to

ap

ply

th

e cr

iter

ia a

nd

Ban

k te

am t

o r

evie

w a

ll s

elec

tio

ns

Th

e cr

iter

ia c

lear

ly a

gre

ed

and

docu

men

ted

by

neg

oti

atio

ns

2. D

esig

n sp

ecif

icat

ion

s ta

ilor

ed

to b

enef

it p

arti

cula

r co

nst

itu

ents

o

r co

ntr

acto

rs

Hir

e co

mp

eten

t in

dep

end

ent

cons

ult

ants

, sup

erv

ised

by

MS

U,

to p

rep

are

Det

aile

d P

roje

ct

Rep

orts

(D

PR

s)

($7

.8 m

illi

on

) D

etai

led

tec

hnic

al a

ppr

aisa

l o

f sp

ecif

icat

ion

s b

y th

e E

ngin

eer-

in-

Ch

ief

Co

nsu

ltan

ts h

ired

for

ind

epen

den

t re

vie

w

($1

.2 m

illi

on

) P

ubli

c d

iscl

osu

re o

f D

PR

s

Th

e B

ank

wil

l re

vie

w a

t le

ast

50%

o

f D

PR

s at

lea

st f

or t

he

firs

t tw

o ye

ars

Th

e co

nsu

ltan

ts a

nd p

ub

lic

dis

clo

sure

to

be

in p

lace

fro

m

the

pro

ject

sta

rt

C.

Pro

cure

men

t

1.

Co

llu

sion

am

on

g b

idd

ers

to

seek

hig

her

pri

ces,

e.g

. bid

s si

gn

ific

antl

y h

igh

er t

han

th

e E

CE

; s

imil

ar n

ames

an

d

addr

esse

s of

dif

fere

nt

bid

der

s;

bid

s re

ceiv

ed f

rom

‘sh

ell’

co

mp

anie

s w

hic

h t

hen

ou

tsou

rce

wor

k to

lo

cal

con

trac

tors

(M

oder

ate)

Wid

e pu

bli

city

is

giv

en i

n

new

spap

ers

T

end

er n

oti

ces

pub

lish

ed i

n

dif

fere

nt

offi

ces

Init

iall

y h

ire

con

sult

ants

to

hel

p

man

age

the

pro

cure

men

t p

roce

ss

($45

0,00

0);

T

rain

UL

B, P

HE

D,

and

MS

U s

taff

to

man

age

proc

ure

men

t, d

etec

t ev

iden

ce o

f co

llu

sion

an

d co

erci

on

by

bid

der

s as

par

t o

f th

e C

apac

ity

Enh

ance

men

t co

mp

on

ent

Tra

inin

g o

f k

ey M

SU

sta

ff

by

effe

ctiv

enes

s;

Bro

ad U

LB

, PH

ED

, an

d

MS

U s

taff

tra

inin

g t

o b

e im

ple

men

ted

fro

m y

ear

1

42

Issu

e R

isk

an

d R

atin

g M

itig

ati

ng

Act

ion

s A

lrea

dy

T

ak

en o

r In

clu

ded

(a

nd

Est

imat

ed C

ost

*)

Ad

dit

ion

al

Mit

iga

tion

Act

ion

s P

rop

ose

d, R

esp

on

sib

le A

gen

cy

(an

d E

stim

ated

Co

st*)

Sch

edu

le a

nd

Mil

esto

nes

of

GA

AP

Act

ion

s*

Pac

kag

e co

ntr

acts

to

att

ract

n

atio

nal

(h

igh

er)

lev

el b

idde

rs;

Pro

vid

e o

ver

sig

ht

by

repu

tab

le

tech

nic

al p

anel

;

Pub

lish

bid

aw

ard

s an

d t

rend

s;

Use

of

deb

arm

ent

pro

vis

ion

s 2

. Lac

k of

co

mp

etit

ion

; co

erci

on

to p

rev

ent

pote

nti

al b

idd

ers

pur

chas

ing

bid

din

g d

ocu

men

ts

(Hig

h)

Adv

erti

sin

g i

n b

road

ly c

ircu

late

d

new

spap

ers

Add

itio

nal

bid

der

wo

rksh

op

s to

p

ubli

cize

th

e op

port

unit

ies

and

p

roce

dur

es

Mo

dif

y qu

alif

icat

ion

cri

teri

a in

b

id d

oc;

Est

abli

sh r

egis

ter

of

po

ten

tial

bid

der

s an

d se

nd

bid

n

oti

ces;

($9

0,00

0)

Mak

e b

idd

ing

do

cum

ents

av

aila

ble

on

the

web

site

; S

tud

y th

e co

ntr

acti

ng

ind

ust

ry

($12

0,00

0)

e-P

rocu

rem

ent

as s

oon

as

the

Ban

k-re

com

men

ded

mo

dif

icat

ion

s ar

e m

ade;

Enh

ance

use

of

Co

mp

lain

ts l

ine

Th

e p

roce

dur

es t

o b

e es

tab

lish

ed a

nd

prov

ided

to

d

esig

n c

onsu

ltan

ts f

rom

yea

r 1 M

ake

bid

do

cum

ents

av

aila

ble

on

web

site

s fr

om

th

e st

art

Co

ntr

acti

ng I

ndu

stry

Stu

dy

Yr

1-2

3. F

ram

ing

of

spec

ific

atio

ns a

nd

sele

ctio

n c

rite

ria

to f

avo

r p

arti

cula

r su

ppli

ers

(Mod

erat

e)

Des

ign

ers

aler

ted

to

such

ris

ks;

R

evie

w b

y M

SU

, PH

ED

, and

B

ank

Tra

in d

esig

ner

s in

min

imiz

ing

ri

sks

R

evie

w b

y th

ird

par

ty s

pec

iali

sts

($1

.2 M

in

cl.

in #

1)

Sta

rtin

g fr

om

Yr

1

4. D

elay

ed, i

nad

equ

ate

or

imp

rop

er b

id e

val

uat

ion

to

fa

vor

par

ticu

lar

supp

lier

s (M

oder

ate)

Det

aile

d e

val

uati

on

pro

ced

ures

are

in

pla

ce

Bid

rec

ord

s ar

e m

ain

tain

ed,

incl

ud

ing

eval

uat

ion

reco

rds

Incl

ud

e co

nsu

ltan

ts a

nd

rep

uta

ble

C

SO

rep

rese

nta

tiv

es a

s ev

alua

tors

; T

rain

ing

of

UL

B a

nd P

HE

D

eng

inee

rs t

o h

elp

in

ev

alua

tion

; U

se o

f co

nsu

ltan

ts t

o h

elp

ev

alu

atio

n (

$20

0,00

0)

Det

aile

d b

id r

eco

rds

wil

l b

e re

quir

ed f

or C

DM

A c

lear

ance

and

p

roje

ct f

inan

cin

g

Tra

inin

g s

tart

ed u

sing

th

e n

atio

nal

-lev

el t

rain

ing

in

stit

ute

in

Hyd

erab

ad a

s w

ell

as B

ank

sp

ecia

list

s In

Yr

1 a

nd

2 co

nsu

ltan

ts

wil

l b

e u

tili

zed

hea

vil

y

5. D

elay

or

refu

sal

of

UL

Bs

to

awar

d c

ontr

acts

to

su

cces

sfu

l b

idd

ers

(Low

)

Pro

cedu

res

spec

ify

tim

e li

mit

s fo

r co

ntr

act

awar

d E

nfo

rce

per

form

ance

sta

ndar

ds

on

tim

elin

ess

of c

on

trac

t pr

oce

ssin

g,

at t

he

pen

alty

of

refu

sal

to f

inan

ce

Th

e p

roce

dur

es w

ill

be

arti

cula

ted

as

part

of

sub

loan

co

ntr

acts

fro

m p

roje

ct s

tart

D

. Sup

erv

isio

n an

d

man

agem

ent

of

con

trac

ts

1. D

elib

erat

e de

lays

in

pay

men

ts

to c

ontr

acto

rs, l

ead

ing

to

corr

upti

on a

nd

/or

inad

equ

ate

UL

Bs

auth

ori

zed

to

pro

cess

p

arti

al p

aym

ents

whe

n po

rtio

ns

of

the

wor

k is

don

e; M

SU

scr

uti

niz

es

Ind

epen

den

t in

spec

tors

mat

ch

pro

gre

ss a

nd p

aym

ents

($1

.2 M

);

Imp

lem

ent

a tr

ansp

aren

t d

ispu

te

Ind

epen

den

t in

spec

tors

sta

rt

wor

k fr

om

th

e st

art

of f

irst

su

bpro

ject

; G

riev

ance

43

Issu

e R

isk

an

d R

atin

g M

itig

ati

ng

Act

ion

s A

lrea

dy

T

ak

en o

r In

clu

ded

(a

nd

Est

imat

ed C

ost

*)

Ad

dit

ion

al

Mit

iga

tion

Act

ion

s P

rop

ose

d, R

esp

on

sib

le A

gen

cy

(an

d E

stim

ated

Co

st*)

Sch

edu

le a

nd

Mil

esto

nes

of

GA

AP

Act

ion

s*

con

trac

t p

erfo

rman

ce

(Mod

erat

e)

and

mat

ch m

on

thly

ph

ysic

al a

nd

fin

anci

al p

rog

ress

rep

ort

s re

solu

tio

n sy

stem

at

CD

MA

upo

n

gri

evan

ces

file

d b

y co

ntr

acto

rs

Red

ress

al m

ech

anis

m t

o b

e o

per

atio

nal

in

Yr

1.

2. U

nju

stif

ied

pay

men

ts m

ade

for

inco

mp

lete

an

d/o

r su

b-

stan

dar

d w

ork,

or

sub-

stan

dar

d qu

alit

y o

f go

od

s d

eliv

ered

(M

oder

ate)

Qu

alif

ied

an

d ex

per

ien

ced

en

gin

eers

wil

l b

e p

rov

ided

and

h

eld

to

str

ict

rule

s th

at t

hey

ens

ure

th

at p

aym

ents

mat

ch q

ual

ity

of

wor

k do

ne,

or

pro

du

cts

purc

hase

d

Res

pon

sib

ilit

ies

of P

HE

D

(eng

inee

rs o

n d

epu

tati

on)

and

co

nsu

ltan

ts (

for

insp

ecti

on)

wil

l b

e ti

ghtl

y d

efin

ed a

nd

enfo

rced

;

Th

ird

par

ty c

onsu

ltan

ts w

ill

be

eng

aged

for

qua

lity

ass

ura

nce

($

1.2

M)

Co

nsu

ltan

ts a

nd t

hir

d-p

arty

in

spec

tors

wil

l b

e h

ired

as

a p

ool

at M

SU

fro

m t

he

pro

ject

st

art

E.

Fin

anci

al

Man

agem

ent

Sys

tem

an

d

Inte

rnal

C

on

tro

ls

1. D

elay

ed a

nd i

nco

mp

lete

re

port

ing

of

exp

end

itur

es b

y m

ult

iple

im

ple

men

tin

g

agen

cies

, le

adin

g to

po

or

pla

nnin

g a

nd

con

tro

l (H

igh)

Mo

nth

ly

repo

rtin

g

syst

em

is

man

dat

ed a

t th

e U

LB

lev

el

Clo

ser

foll

ow-u

p an

d m

on

itor

ing

fr

om

CD

MA

(p

rin

cip

al

imp

lem

enti

ng

ag

ency

);

Sup

erv

isio

n c

onsu

ltan

ts t

o h

elp

re

port

; su

spen

sion

of

dis

burs

emen

t w

hen

re

port

s ov

erdu

e

Th

is p

roce

dur

e w

ill

be

mad

e a

par

t of

sub

loan

co

ntr

acts

fr

om

pro

ject

sta

rt

2. E

xte

rnal

aud

ito

rs (

CA

G)

pro

vid

e an

aud

it c

erti

fica

te b

ut

do

not

pro

vid

e in

dep

end

ent

aud

it o

pin

ion

no

r id

enti

fy

inte

rnal

con

tro

l is

sues

as

par

t o

f th

e ce

rtif

icat

ion

ex

erci

se

(Hig

h)

Th

is i

s a

syst

emat

ic i

ssu

e fo

r th

e co

untr

y as

a w

ho

le a

nd i

ts

reso

luti

on

wil

l co

nti

nue

be

sou

ght

at t

he

nat

ion

al l

evel

Pri

vat

e au

dit

ors

wil

l b

e h

ired

for

U

LB

au

dit

s (a

ppr

ox.

$50

0,0

00);

m

anag

emen

t co

nsu

ltan

ts h

ired

u

nder

th

e C

apac

ity

En

han

cem

ent

com

po

nen

ts w

ill

be

ask

ed t

o

pro

vid

e ob

serv

atio

ns

and

re

com

men

dat

ion

s on

con

tro

l is

sues

($3

M)

Pri

vat

e au

dit

ors

alr

ead

y

bei

ng h

ired

. T

he

TA

to

sta

rt i

n y

ear

1

3. D

elay

ed U

LB

aud

its

and

the

n

egle

ct o

f k

ey a

ud

it

ob

serv

atio

ns (

Hig

h)

On

ly t

hose

UL

Bs

that

hav

e up

-to

-d

ate

aud

its

wit

h k

ey a

udit

o

bse

rvat

ions

ad

dres

sed

wil

l be

el

igib

le t

o p

arti

cip

ate

in t

he

pro

ject

and

rec

eiv

e su

blo

ans

and

gra

nts

CD

MA

to

hel

p h

irin

g an

d

man

agem

ent

of C

A f

irm

s ($

500,

00)

Th

is h

as b

een

ag

reed

and

is

bei

ng a

pp

lied

.

4. F

ailu

re o

f p

roje

ct p

rog

ress

re

port

s to

mat

ch f

inan

cial

d

isbu

rsem

ents

wit

h p

hys

ical

p

rog

ress

(M

ode

rate

)

In

tern

al a

ud

itor

s o

r th

ird

par

ty

insp

ecto

rs w

ill

cert

ify

con

curr

entl

y th

e ex

pen

dit

ure

incu

rred

by

the

UL

Bs

and

ver

ify

ph

ysic

al p

rogr

ess.

(pa

rt o

f $1

.2

M).

UL

Bs

wil

l ad

dres

s au

dit

fi

ndin

gs

pro

mp

tly,

or

risk

Th

ird

par

ty i

nsp

ecto

rs w

ill

be

hir

ed u

pon

sta

rt o

f pr

ojec

t.

44

Issu

e R

isk

an

d R

atin

g M

itig

ati

ng

Act

ion

s A

lrea

dy

T

ak

en o

r In

clu

ded

(a

nd

Est

imat

ed C

ost

*)

Ad

dit

ion

al

Mit

iga

tion

Act

ion

s P

rop

ose

d, R

esp

on

sib

le A

gen

cy

(an

d E

stim

ated

Co

st*)

Sch

edu

le a

nd

Mil

esto

nes

of

GA

AP

Act

ion

s*

susp

ensi

on.

F.

Co

mp

lian

ce w

ith

E

nvir

onm

enta

l an

d S

oci

al

Saf

egu

ards

Non

-co

mp

lian

ce w

ith

en

vir

onm

enta

l an

d so

cial

fr

amew

ork

saf

egu

ard

s, c

ausi

ng

adv

erse

im

pac

ts a

nd n

on-

sust

ain

abil

ity

of

the

sub-

proj

ects

(M

oder

ate)

So

cial

and

env

iron

men

tal

safe

guar

d fr

amew

ork

to

be

dis

trib

ute

d t

o i

mp

lem

enta

tio

n

agen

cies

and

des

ign

con

sult

ants

Saf

egu

ard

spec

iali

sts

at M

SU

. C

apac

ity

bu

ild

ing

for

the

UL

B /

M

SU

sta

ff o

n e

nv

iron

men

tal

and

soci

al s

afeg

uar

ds;

E

nvir

onm

enta

l an

d s

oci

al a

udit

s to

id

enti

fy r

emed

ial

mea

sure

s;

Str

ict

mo

nit

ori

ng

by

MS

U a

nd

ind

epen

den

t in

spec

tors

;

Inv

ite

citi

zen

par

tici

pat

ion

in

p

ubli

c co

nsu

ltat

ion

an

d G

riev

ance

R

edre

ssal

Sys

tem

Saf

egu

ard

spec

iali

sts

to b

e o

n bo

ard

by

neg

oti

atio

ns;

GR

MS

sys

tem

to

bec

om

e o

per

atio

nal

in

Yr

1.

Bro

ad c

apac

ity

buil

din

g t

o be

p

art

of

Cap

acit

y E

nhan

cem

ent

TA

G.

Co

mm

un

icat

ion

, P

arti

cip

atio

n, a

nd

Fee

dbac

k M

ech

anis

ms

1. L

ack

of r

elev

ant

info

rmat

ion

or

thei

r li

mit

ed a

cces

sib

ilit

y li

mit

s ci

tize

ns

eng

agem

ent

and

h

ence

pro

ject

ben

efit

s,

safe

guar

ds,

and

det

erre

nce

ag

ain

st n

on-

com

pli

ance

and

co

rrup

tion

(S

ubst

anti

al)

Rig

hts

to

Info

rmat

ion

Act

, C

om

mu

nit

y P

arti

cip

atio

n L

aw,

and

Pu

bli

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45

Annex 8. Financial Management and Disbursement Arrangements INDIA: ANDHRA PRADESH MUNICIPAL DEVELOPMENT PROJECT

1. State level Financial Management Issues. The AP State Financial Accountability Assessment was conducted by the CGG, Hyderabad on behalf of the GoAP and was completed in 2004. The Assessment examined inter alia the areas of budget formulation and execution, accounting and reporting, internal controls and external auditing and identified strengths and weaknesses in the above areas and made suggestions and recommendations for improving the overall financial management and accountability systems in the state. 2. One of the key issues that emerged from the Fiduciary Risk Assessment of the SFAA was the danger of circumventing the Treasury System of the state government and the government accounting and reporting procedures. The report concluded that the state systems have built in checks and balances and bypassing them could lead to weaker financial control and accountability. The report also concluded that compliance with controls was adequate in the treasury system and in those areas in which discipline can be enforced through the treasury system (this also includes the PAO system for payment functions in respect of “works” departments). However, compliance in other departmental areas such as cash records, utilization certificates, AC/ DC bills and Personal Deposit (PD) accounts in the past has been weak. In fact successive reports of the Comptroller and Auditor General of India (the state supreme auditor) have pointed out to financial management issues and irregularities with PD accounts. All these aspects have been examined while designing the project financial management arrangements and preparing the Risk management table. I. Project Components and Implementing Entities 3. The nodal Implementing Entity for the project will be the Municipal Administration and Urban Development Department (MAUD), and specifically the Directorate of Municipal Administration (DMA) headed by the Commissioner and Director of Municipal Administration (CDMA) The DMA will be the nodal agency for the project, managing and coordinating the project preparation, implementation and monitoring The Municipal Strengthening Unit (MSU) under the CDMA will be responsible for the day to day implementation arrangements. The agreed implementation arrangements are as follows:

a) Components A [State Policy and Institutional Development], B [Municipal Capacity Enhancement], and D [Project Management Support] : The CDMA/MSU will be implement all these components and will be responsible for complying with all the financial management requirements in respect of these components, including the GoAP and Bank reporting requirements. The CDMA will receive funds through a budget allocation under the MAUD, as per regular financial and fund flow procedures of the GoAP, and will maintain accounts, procure and receive goods and services under this component. b) Component C [Urban Infrastructure Investment]: This component will be funded through the AP Urban Infrastructure Fund (APUIF), which is a Trust registered under the Indian Trust Act. The APUIF is an intermediate entity which will receive funds from the CDMA, and will fund the sub-projects at the ULB level by providing sub-loans and capital grants to them.

46

II. Detailed functions and responsibilities of implementing entities: 4. CDMA/MSU (Components A, B, D): The CDMA/ MSU will be responsible for implementation and monitoring of Components A, B and D of the project. The GoAP finance department will release funds to the PD account of the CDMA in accordance with regular financial and fund flow procedures of the GoAP. The PD account will be subject to rules as contained in the relevant Government Orders (GOs) of the GoAP and operated accordingly, and will be subject to regular oversight mechanisms of the state government. The CDMA/MSU will itself make payments for expenditures related to these components; and will be responsible for collecting and consolidating expenditure information in respect of project components and sub-components and preparing the Interim Un-audited Financial Reports (IUFRs) for seeking reimbursement. The CDMA/ MSU will follow regular GoAP procedures prescribed by the finance department and treasury, in respect of approvals, expenditure sanctions and bill payments, for these components. 5. CDMA/MSU will also determine and confirm the eligibility of ULBs to participate in the project, based on certain eligibility criteria. The eligibility criteria will be agreed between the Bank and the GoAP, and will include a requirement of completion of statutory audits for the year 2007-08. CDMA/MSU will appraise sub-project proposals received from the eligible ULBs, and accord approval to the APUIF for their financing (indicating the grant/loan mix). During subproject implementation, the CDMA/MSU will be responsible for monitoring the implementation of the sub-projects, verification of assets created, financial reporting of "actual expenditure" incurred at the ULB level, and for monitoring the recovery of the loans (the loans and the recoveries will be reflected in the financial statements of the APUIF).

6. APUIF (Component C): The APUIF will be the Implementing Agency for the largest component of the project, Urban Infrastructure Investment (with an allocation of nearly 85% of the loan). Project funds will be transferred from the Personal Deposit (PD) account of the CDMA to the designated bank account of APUIF as per procedure approved by the GoAP finance department, as reflected in the GOs related to the project. The bank account of APUIF will be operated in accordance with the relevant circulars and guidelines of the GoAP which will also detail the amounts to be released and their periodicity. The GOs and circulars related to the APUIF bank account also document the operational and payment procedures and oversight requirements. 7. The APUIF is a Trust under the Indian Trust Act and is not a Government company regulated under the Companies Act and under the supplementary audit of the CAG. In order to strengthen governance and accountability, the APUIF has agreed to adopt reporting and disclosure norms and prudential guidelines as prescribed by the Reserve Bank of India (RBI) for Non- Banking Finance Companies (NBFCs). APUIFs adoption of the NBFC norms as prescribed by the RBI will strengthen the Governance and Accountability environment under which the project funds would flow, and will help provide an enhanced level of oversight and disclosure in respect of APUIF and its operations, and on the usage of project funds. The NBFC requirements that the APUIF will adopt are additional disclosures in the Notes and Statement of Accounting Policies statement accompanying the financial statements. These relate to income recognition, income from investments and accounting for them, need for policy on demand/ call loans, asset classification, provisioning requirements and norms relating to infrastructure loans, and constitution of an audit committee. The APUIF will also make disclosures in the Balance

47

Sheet relating to bad and doubtful debts as well as the provisions for depreciation in investments. These requirements have been documented through a GO by the finance department and OM. 8. APUFIDC: APUFIDC is a state level entity set up by the GoAP to foster urban development and its main areas of focus are Public-Private Partnerships (PPPs) and urban financing, including access by ULBs to market based finance. APUFIDC is currently in significant arrears in respect of accounts and audits, and compliance with statutory requirements. In view of this, it is not involved in the financing of the Bank project, but will play an advice and technical support to the project. 9. ULBs: The overall eligibility criteria for the ULBs to participate in the Bank project have been agreed with the GoAP and documented in the PAD. One of the key FM requirements agreed as a condition for project funds to flow to ULBs is the availability of latest audited financial statements (2007-08), and the absence of significant unresolved audit issues of earlier years. The latter will be certified by the CDMA before the ULB is eligible to receive project funds. An FM assessment of ULBs was conducted by requesting ULBs expected to participate in the first stage of the project to respond to a questionnaire. It was seen that most of the ULBs were in arrears of their audits for periods ranging from 1-3 years and more. It was also seen that most of the ULBs had varying levels of capacity to account for and report on Bank funds, and will require a lot of capacity building as part of the project. III. Funds Flow, Disbursement and Retroactive financing

10. GoI will open a Designated Account (DA) in Reserve Bank of India (RBI), operated by the CAAA, to receive disbursements from the Bank. The Bank will deposit an initial advance (amount to be agreed at negotiations) into the DA. Reimbursements to the DA will be the amounts of actual expenditures incurred by the project, as reflected in the quarterly IUFRs. The “Actual Expenditure” incurred on different components will be certified by the Internal Auditors each quarter before they are recorded in the IUFRs. The entire fund requirement for the project, including counterpart contribution, will be budgeted by the GoAP as a dedicated, single head budget item annually, as the Demand for Grants of MAUD, and released to the Department through the mechanism of the state budget. This allocation will cover the fund requirements of all the project components and will be based on the annual work plans prepared by the Implementing Entities. 11. Funds for project components A, B, and D will be released by the MAUD department to the PD account of the CDMA as per regular financial practices of the GoAP. The PD account will be subject to rules as contained in the relevant Government Orders (GOs) of the GoAP and will be subject to regular oversight mechanisms of the state government. The CDMA will make payments against expenditures incurred under all the components or sub-components. Funds for project component C will be released from the PD account of the CDMA to the commercial Bank account of the APUIF, as designated by the GoAP. The Bank account of the APUIF will operated, as per the rules and procedures of the GoAP, and as documented in various GOs related to the project. 12. The CDMA/MSU will be responsible for compiling the quarterly figures of “actual expenditure” for all the project components, prepare quarterly IUFRs and send these to the Bank for disbursement. These IUFRs will be certified by the CDMA and the Financial Advisor (FA) for the project. The MSU will receive the expenditure information on Component B from the

48

APUIF (grants and loans advanced to ULBs each quarter may be treated as eligible expenditure) and consolidate it with the overall project expenditure information received for other components. 13. Retroactive financing of up to $45 million will be provided for expenditures, incurred after February 15, 2009, on contracts which follow Bank procurement guidelines and have maintained records of expenditure incurred. Retroactive financing of all expenditures, including sub-projects selected for Bank financing, would be based on a separate, stand-alone, audited IUFR which will report details of expenditures seeking to be reimbursed on contracts procured as per the Bank’s Procurement Guidelines. Under retroactive financing, the amounts sought for IBRD financing should correspond with disbursement by the project on the identified contracts. IV. FM Risk Assessment Table (M- Modest, S- Substantial, H- High)

Risks/ weaknesses Risk Rating

Remarks/ Proposed risk mitigation measures Residual risk rating*

Inherent Risk: Multiplicity of implementing agencies, CDMA, APUIF, ULBs, and very weak capacity of ULBs

H

Intense capacity building as part of the project; minimum eligibility criteria for ULBs to participate in the project. CDMA-MSU will assume overall responsibility for coordination and ensuring that FM requirements are met for all project components.

S

Control Risks: Budgeting: The GoAP is committed to adequate funding for the project but this could vary if the financial position of the state changes. Accounting: Accounting capacity at the ULBs is very weak and accounts may be consistently delayed and may not provide adequate assurance on the usage of funds. Funds flow: Risk of project not receiving adequate allocations from the finance department for the MAUD and thereon to the APUIF and MSU Internal Controls: While internal controls within regular departments of MAUD are documented and in use, controls at APUIF and ULBs are weak and less documented, increasing the risk to project funds Weak FM capacities of the ULBs An initial assessment of FM capacity of ULBs has brought out weaknesses in the areas of budgeting and

M S M H H

A commitment will be sought from the GoAP for appropriate budget allocations for the project – this is a standard legal covenant. ULB financial management capacity will be built through the TA component. An accountant/support organization will be engaged to support one or a group of ULBs to prepare accounts. A commitment will be sought from the GoAP for adequate allocations and regular/ quarterly issue of funds by GoAP to the MAUD/ APUIF – this could be a legal covenant. Internal audit of the project will be conducted quarterly by the State Finance Department or CA firms. The internal auditors will certify the actual expenditure incurred under the project and the IUFRs will reflect these amounts. They will also review the internal control systems and procedures and recommend improvements. APUIF will adopt full NBFC reporting norms to ensure greater transparency and accountability (possible disbursement condition). Only those ULBs whose audits are completed for the immediately preceding financial year (2007-08 as of now) will be eligible to receive financing under the

M S M S S

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planning, fund flow and accounting/ financial reporting, and internal controls, as well as delayed audits. The assessment has concluded that most ULBs require intense strengthening and capacity building on FM aspects.

project.. Internal auditors will be responsible for concurrent audits and for physical verification of assets created through sub-project grants and loans – this will partially mitigate the risk of funds not being used for intended purposes ULB financial management capacity will be built through the TA component An accountant/support organization will be engaged to support one or a group of ULBs

Financial reporting: Risk of delay in financial reporting due to large number of implementing units (CDMA/ MSU, APUIF, ULBs) affecting disbursements. While the state accounting system can capture expenditures for components at CDMA level, expenditures at the APUIF and ULBs will be accounted for as independent units, and consolidation of this information may take time Auditing: The overall project financial statements will be audited by the CAG/ AG, AP; APUIF audited by a CA; and the ULBs audited by LFA. Coordination of audit activity and timely availability of reports is a potential risk

H S

• The full project finance team at the MSU and the APUIF will be in place before implementation and will closely supervise and coordinate with the implementing entities (ULBs) to ensure that financial/ expenditure information is received on time

• While financial reporting systems of the MAUD and the APUIF are relied on, intense capacity building will be required of ULBs to ensure timely and correct reporting

• Project will post a gazetted finance officer from the state finance department (preferably the Directorate of works accounts) at the MSU and a Finance Manager at the APUIF (suggested disbursement condition)

The GoAP has agreed to the audit of project financial statements by the CAG, and the TORs of the statutory audit will be agreed with the CAG before project start.

S S

Overall Control Risk S S Overall Risk Rating H S

* The proposed mitigation measures have been discussed with the GoAP and they have agreed to implement the proposed mitigation measures before project effectiveness.

V. Strengths and Weaknesses 14. The CDMA, the apex body for managing ULBs in the state, has overall functional responsibility for the project. In devolving project responsibility and ownership to the CDMA, the project arrangements will try to ensure sustainability of the program beyond project life cycle and a mechanism by which to build capacity. 15. The main weaknesses of the project are due to the fact that the project will be implemented through institutions with no experience of dealing with Bank requirements and procedures. These weaknesses will be mitigated by detailed implementation arrangements that have been agreed and documented along with all the requirements and conditions for the project. In addition, the institutions responsible for project implementation are to be headed by senior officials of GoAP who will have adequate experience and expertise in dealing with municipal issues.

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VI. Accounting and Financial Reporting 16. The CDMA/MSU will maintain project accounts on a cash basis for the components that it will implement. A separate account code will be created for the project in the department’s overall accounting system. An operations process note will be prepared by the Finance Officer of the CDMA. This note will detail the applicable accounting and financial policies and procedures to enable data to be captured and classified by expenditure center, project sub-components and disbursement categories, in the prescribed accounting formats of the department. Standard books of accounts (cash and bank books, journal, ledgers etc) will be maintained by the CDMA. Records of assets created under the project will be separately maintained and will be subject to verification by internal audit. The CDMA/ MSU will be responsible for preparation of IUFRs reflecting the “Actual expenditures” under each the project components and sub-components, as per the format agreed with the Bank. Actual expenditures for components A, B and D are defined as moneys actually spent on various project components and sub-components, as evidenced by payment vouchers, and will not include advances of any kind made by the CDMA or the MSU to any entity, for any purpose. The actual expenditures as reflected in the IUFRs will be the basis of disbursement of Bank funds to the GOI. The IUFRs for the project will be submitted to the Bank within 45 days at the end of the each quarter. 17. The eligible expenditure under Component C (Urban Infrastructure Investment) will be the actual amounts released by APUIF each quarter to the ULBs as loans/ grants for sub-projects. The financial statements of the APUIF will record the grants and loans provided to the ULBs for sub-projects, and will be prepared on an accrual basis. Accounting policies to be followed and disclosures made will be in accordance with those mandated by the Indian Accounting Standards as applicable to companies (since there are no relevant separate standards for Trusts). The APUIF will prepare timely financial statements and get these audited by an auditor acceptable to the Bank. 18. Accounting for sub-projects will be done in the ULB’s overall accounts. ULB accounts shall be prepared on cash basis and these accounts will be audited by the Director of State Audit. A separate record of assets created under the sub projects will be maintained at the ULBs, and these will be physically verified by joint teams from the MSU and the APUIF. Although sub loan accounting will be done by the ULBs’ own accountants, it will be the responsibility of the Finance Manager at the APUIF and the Financial Advisor at the MSU/ CDMA to ensure that correct and up to date financial records are maintained.

VII. Staffing

19. CDMA/MSU will have the responsibility for the overall reporting, disbursement and financial management arrangements on the project. Day to day operations will be the responsibility of the Project Director who will be appointed by the state government. The finance function of the Project will be headed by a senior officer, preferably on secondment from the GoAP finance (or treasuries) department, who has prior experience in the finance function in any “works” department of the GoAP. The officer will be supported by appropriate experienced staff and will be responsible for ensuring that actual expenditure information collected and consolidated in respect of all the project components/ sub-components, and quarterly IUFRs are prepared and sent to the Bank for disbursement. The officer will also be responsible for coordinating the internal and statutory audit activity under the project and maintaining oversight over the LFAs audit of the participating ULBs. The finance officer will be in place by

51

negotiations. 20. APUIF will have an experienced professional accountant as Finance Manager to be responsible for all the financial management activities of APUIF, including compliance with statutory and reporting requirements (including NBFC norms). The Finance Manager will oversee maintenance of accounts, preparation of financial statements, and coordinating the annual audit of the APUIF. S/he will be supported by appropriate experienced staff. It will also be the responsibility of the Finance Manager to ensure that the ULBs follow appropriate accounting procedures with respect to the sub loans and grants, that all flows and balances relating to these funds are recorded suitably in their books of accounts, that ULBs submit quarterly expenditure reports, and that all ULB external audits (by the LFA) are completed in a timely manner. S/he will also review all the ULB audit reports and bring to the notice of the Project Director and the CDMA the observations and issues of significance, especially those related to the sub-projects being funded by the Bank, for their action. APUIF will prepare a consolidated statement of completion of audits and of significant observations in respect of all the ULBs, and send a report to the Bank at the end of each half-year. 21. ULB. A trained accountant will be in place in each of the sub-loan receiving ULBs to ensure proper accounting and control for project money throughout the duration of the project. VIII. Internal Audit and Control 22. A reputed and experienced CA firm or firms will be appointed as the Internal Auditor for the entire project and they will be responsible for concurrent audit of the project, as per TORs agreed with the Bank. The internal auditor will certify each quarter, the “actual expenditure” incurred by the CDMA and the APUIF on all the Components, and this information will feed into the IUFRs. As part of their duties, the internal auditors will also review the sub-loan portfolio of the APUIF and examine if the grants and lending to the ULBs comply with relevant agreements signed between the APUIF and the ULB. The auditors will also confirm that the relevant GoAP rules and procedures and applicable GOs are followed in respect of operation of all the PD accounts and Bank accounts maintained under the project. They will also review that the eligibility criteria for selection of ULBs have been fully complied with. In each audit cycle the firm will also select and visit a sample of ULBs and verify that the ULBs are utilizing the moneys as per the conditions of the sub-loan and -grant agreements, and for the purposes for which the funding is given, and conduct a physical verification of assets created through the sub-loans and Grants. They will also review and verify that the expenditures incurred under other components and sub-components of the project are in accordance with the internal financial rules and procedures of GoAP (the AP Finance Code and Delegation powers, etc). IX. Statutory (External) Audit 23. The CAG of India (through the office of the Accountant General, AP) will be responsible for statutory audit of project financial statements (PFS). TORs for the audit have been shared with CDMA, who will seek the agreement of the CAG on these TORs. APUIF will be audited by a CA firm acceptable to the Bank, while the ULBs will be audited by the State Audit Department, as required under their Act. The Bank will review the CAG’s audit report of the project financial statements and that of the APUIF. Audit reports of the individual ULBs receiving loans and grants under the project will be reviewed by the Project Director and the CDMA. The Bank will be informed of any significant observations by the ULB audits. The

52

following audit reports will be received by the Bank within six months from the close of the financial year (due date for receipt of audit reports is 30 Sept of the year) and monitored in ARCS: Implementing entity

Audit Report Audited by

APUIF Entity audit report (with detailed Schedule of usage of Project funds as sub-loans and Grants to ULBs under Component C)

Firm of Chartered Accountants acceptable to the Bank

CDMA

Audit of Project Financial Statements for the APMDP CAG/ Accountant General, AP

DEA/ GOI Special Account CAG of India

X. Financial Covenants:

a) CDMA shall maintain throughout the life of the project, a Financial Officer with qualifications and experience as agreed with the Bank. This person will be the single point of contact for the Bank on all matters relating to accounting, financial reporting, auditing, claims, disbursements, etc. for all the components of the project. b) CDMA shall produce accounts in the formats specified and acceptable to the Bank. c) APUIF shall employ during the life of the project a qualified accountant, who will be responsible for preparation of the APUIFs financial statements and for other financial matters.

XI. Supervision strategy: 24. From a financial management perspective, the project will need intensive review looking at internal controls, fund flows, auditing arrangements, and training. This will be through a combination of periodic desk reviews and field visits. Special focus will be given by the CDMA/MSU to building staff capacity and timeliness and quality of financial information.

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Annex 9: Procurement INDIA: ANDHRA PRADESH MUNICIPAL DEVELOPMENT PROJECT

Procurement under the project

1. The project objectives are to help improve urban services, and the capacities at State and local levels to sustain and expand such improvements. Procurement under the proposed project would be carried out in accordance with the World Bank’s "Guidelines: Procurement under IBRD Loans and IDA Credits" dated May 2004 (Revised October 2006); and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004 (Revised October 2006), and the provisions stipulated in the project’s Legal Agreement. Procurement arrangements for various items under different expenditure categories are described below. 2. Under the urban infrastructure component, the project will finance various sub-projects that are financially sustainable. Funds will be given to ULBs that meet financial and management capacity requirements. These sub-projects will include investments in solid waste management, drinking water supply, drainage, roads, and creation of civic and job training centers. For sub-projects that will be funded by the Bank, their minimum size (cost) would be Rs.5 crore, with a few exceptions such as the community centers. 3. The technical assistance component will cover design of urban poverty alleviation programs, establishment of a state urban academy, studies to improve the system of urban planning and finance, training of state and local staff, and technical support to design of urban infrastructure PPP framework, sub-project preparation and supervision. 4. The MAUD of GoAP has the overall responsibility for implementation of APMDP. The Directorate of Municipal Administration (DMA) under MAUD will be the nodal agency for the project. Municipal Strengthening Unit (MSU) is a cell that has been established under the DMA and is headed by a Project Director. MSU will collect sub-project proposals from ULBs, screen them to ensure that access criteria are met. DMA will be supported by the PHED for technical appraisal and monitoring of the sub-projects. Once approved and sanctioned, MSU/PHED will help the ULBs to design procurement packages based on estimates provided in the DPRs. 5. At the time of appraisal, 30 DPRs (for 30 ULBs) were available with the MSU, which are being modified to incorporate the comments made by the World Bank. Over the life of the project, it is expected that more than half of all ULBs (123 as of 2009) will be involved with various project components. The MSU has conducted initial assessment of their capacity, and concluded that the procurement capacity needs to be augmented before ULBs can conduct their own procurements. For this purpose, the project will help build procurement capacity at ULB level through a structured Procurement Capacity Building Program (PCBP). A consulting firm will be hired by MSU for this purpose and will work in close coordination will the ULBs. Once the ULBs have undergone this program, they may be allowed to conduct their own procurement subject to their capacity being satisfactorily assessed by the Bank. 6. PCBP will be piloted in the first 24 months of implementation and all ULBs receiving the project financing will undergo this program. In the interim, MSU will take the main responsibility to support or carry out the sub-project procurement, in addition to all state-level procurement required for the project. ULB’s role as the subproject owners will, however, be maintained with their close involvement through the procurement process. The measures to

54

balance the role of the ULBs as owner and MSU for quality control and support are detailed later in this Annex. Types of procurements under the project 7. The general description of various items under expenditure categories are described below. For each contract to be financed by the loan, the different procurement methods or consultant selection methods, the need for pre-qualification, estimated costs, Bank review requirements and time frame are agreed between the Borrower and the Bank project team in the Procurement Plan. This Procurement Plan will be updated at least annually or as required to reflect the project implementation status, needs and improvements in institutional capacity. 8. Procurement of Works: Works to be procured under the urban infrastructure component consist of works to be carried out by ULBs as identified in the sub-project DPRs. As per current estimates, these are categorized into water supply ($167 million), solid waste management ($70 million), civic and job training centers ($42 million) and road and drainage ($78 million). Based on an analysis of DPRs available at the time of appraisal, these will translate to approximately 60 contracts ranging from $1m to $10m. All contracts estimated above $20,000 and up to $5 million equivalent shall be procured under NCB using the model bid documents developed by the GOI Task Force and agreed with the Bank. All contracts estimated to cost more than $5 million will be procured using ICB procedures applicable to projects financed by the World Bank. 9. Procurement of Goods: There is only a limited amount of goods procurement in the project. This will comprise office equipment, furniture, remote sensing imagery and related software. Goods estimated to cost over $20,000 and up to $500,000 equivalent per contract shall be procured through NCB. For contracts below $20,000 equivalent, shopping procedures can be used. DGS&D rate contracts shall be allowed only as an alternate to shopping. Proprietary items, if any, may be procured through direct contracting but with prior agreement of the World Bank and identified in the procurement plan. Petty purchases (up to $500) can be done using direct contracting, but up to a cumulative value of $5000 during the project. 10. The agreed procedures for NCB shall be as follows: (a) Invitations to bid shall be advertised in at least one widely circulated national daily

newspaper, at least 30 days prior to the deadline for the submission of bids; (b) Only model bidding documents for NCB agreed with the GOI Task Force (and as

amended for time to time) shall be used for bidding; (c) No special preference will be accorded to any bidder either for price or for other terms

and conditions when competing with foreign bidders, state-owned enterprises, small-scale enterprises or enterprises from any given State;

(d) Except with the prior concurrence of the Bank, there shall be no negotiation of price with the bidders, not even with the lowest evaluated bidder;

(e) Extension of bid validity shall not be allowed without the prior concurrence of the Bank (i) for the first request for extension, if it is longer than eight weeks; and (ii) for all subsequent requests for extension irrespective of the period (such concurrence will be considered by the Bank only in cases of Force Majeure and circumstances beyond the control of the project authorities);

(f) Re-bidding shall not be carried out without the prior concurrence of the Bank. The system of rejecting bids outside a pre-determined margin or “bracket” of prices shall not be used

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in the project; (g) Rate contracts entered into by DGS&D will not be acceptable as a substitute for NCB

procedures. Such contracts may, however, be procured under the Shopping procedures; (h) Two or three envelope systems will not be used in which bidders simultaneously submit

technical and price bids that are opened at different times; and (i) If foreign firms wish to participate, they shall be allowed to do so. 11. Selection of Consultants: Consultant services are required under the technical assistance components. These will involve various legal and institutional reforms, municipal capacity enhancement services, procurement capacity building program for the ULBs and technical assistance for project management. Consultants shall be selected through QCBS or any other method as described in the Bank’s guidelines, as is appropriate based on the nature of the assignment, its value and as mentioned in the agreed procurement plan. Shortlists for consultancy contracts, which are estimated to cost below $500,000 equivalent and for which the Bank agrees that competition by foreign consultants is not beneficial prima facie, may comprise entirely of national consultants in accordance with the provisions of paragraph 2.7 of Bank guidelines. The nature of the shortlist will be established in the procurement plan and agreed with the Bank. 12. Retroactive financing: Soon after the project was initially appraised in negotiated in 2005, some works were procured and implemented but many of these contracts could not be completed because of the lack of funds. It has been agreed that the balance works will be procured afresh, under the revised procurement arrangements of the project. Prior to bidding for the balance work, the previous contracts will be closed and all open issues (including outstanding payments) related to the partly completed contracts will be resolved by GoAP prior to bidding in order to ensure that they do not adversely impact the performance of the balance works. Additionally, there is a need to hire consultants to prepare or review the DPRs as well as initiate the procurement capacity building activities for the ULBs. These may also be covered by retroactive funding and the same eligible criteria as applicable for the main project shall apply. Assessment of the agency’s capacity to implement procurement: 13. The procurement capacity assessment was done at two levels: MSU assessment of capacity of various ULBs, and the Bank’s assessment of MSU capacity. The former assessment was done through questionnaires sent to all ULBs, followed by a workshop attended by ULB representatives. Through this assessment, it was agreed that the capacity of most ULBs needs to be developed in a structured manner before they can conduct their own procurements in line with the Bank requirements. It has been agreed between DMA and the Bank that during the first two years of implementation, (i) a procurement capacity building program (PCBP) will be carried out as a key subcomponent of the project; (ii) MSU will build capacity to support the procurements under various sub-projects with active involvement of the ULBs; and (iii) once the contract is signed by the ULB, MSU will provide close monitoring and support to ensure effective contract management. Contract management software is being developed with the help of Center of Good Governance (CGG), Hyderabad for this purpose.

14. The Bank conducted a capacity assessment of the MSU during pre-appraisal covering the organizational structure of MSU, existing processes and persons involved in sub-project identification, preparation, financial and technical sanctions, and those responsible for procurement and contract administration. The MSU currently relies upon the PHED Engineer in

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Chief’s office for technical appraisal, procurement, and monitoring. Given that there will be many sub-projects that will be appraised during the project duration; this capacity will be added to MSU to avoid any delays in evaluating DPRs and providing procurement and technical support to the ULBs. A core procurement team is being set up under the MSU for managing the project procurement and PCBP. This team will be led by two officers at the level of superintending engineer, who will report to the project director. They are in place but the team’s staffing will be completed and training provided after the formal approval of the project. 15. One of the PHED superintending engineers deputed to MSU has been designated as Procurement Manager (Goods and Works) responsible for procurement of works for urban infrastructure sub-projects, which represent the major part of the project. Another Superintending Engineer will be responsible for hiring of consultants and monitoring the progress of the contract implementation, including the collection of monthly progress reports from the ULBs based on which funds will be released to the ULBs. S/he will also be responsible for establishing a complaint monitoring system which will capture all complaints received either by the PMU or by the ULBs. The complaint redressal will be done in coordination with the Procurement Manager or ULB commissioner as the case may be. This system will be monitored by the Project Director once every month. Three groups will be formed under the Procurement Manager, to manage procurement for approximately 20 ULBs each. Each group will consist of two people of the rank of executive engineer or deputy executive engineer.

16. During the first two years the responsibility of the procurement manager and his team will be to:

• Prepare and maintain the procurement plan. • Manage the design of the procurement packages for the approved DPRs in consultation

with the DPR design consultants and ULB (Municipal Engineer). • Initiate the procurement for various packages as per the agreed procurement procedures

(preparation of tender notice and advertisement, bidding documents, receiving bids, bid evaluation and recommendation for award).

• Lead the bid evaluation committees which will include appropriate ULB representatives. The evaluation committee will make its recommendation for award to the tender committee, which will comprise ULB chairperson or commissioner, Project Director, Chief Engineer and Superintending Engineer.

17. After the initial two year period, or sooner if it is judged that sufficient capacity for procurement has been developed, the leading role will be turned over to the ULBs and the MSU procurement team will turn to a supporting role in the above steps. From the beginning, ULBs will exercise its legal authority as the owner of the subprojects. ULB chairperson or commissioner will issue the letter of acceptance (LOA) after the contract award recommendation is approved by the tender committee, sign the contract, and issue the work order for commencement of the works. The procurement manager will monitor and ensure that the LOA and that the contract is signed within specified time limits, and the contract implementation is supervised and managed properly. 18. A key challenge during implementation will be balancing the accountability and risks in ULB procurement. The issue is likely to diminish over time, but to remain at least for some (smaller) ULBs even in advanced stages of implementation. In the steady state, MSU will be

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responsible for managerial oversight and review, and drive reforms at the ULB level. In the initial 24 months, as ULB capacity needs to be built, MSU will play a leading role with active involvement of the ULB at each stage of procurement. While MSU will retain the right for final clearance throughout the project, the roles and responsibilities of the ULBs will increase once they are trained in Bank procurement procedures and once their capacities have been assessed. Procurement capacity building program: 19. Since the objective of the project is to build ULB capacities, extensive procurement capacity building program will be implemented by the MSU to bring ULBs’ capacity to conduct its own procurement. This program will first target ULBs with subprojects to be implemented immediately after the project start, and other ULBs will be added subsequently. 20. MSU will hire a consulting firm who will design and deliver the program. The consultant will design the training modules to cater to ULB managers (Commissioners) focused on monitoring and coordination, ULB Engineers (focused on execution) and ULB Accountants. A plan for training these in all ULBs with initial subprojects will be implemented in the first two years of implementation. The consultant will report to the Project Director who will measure the effectiveness of the training, identify gaps and help prepare gap closure plans. Under the PCBP, workshops will be organized periodically for sharing best practices. After the first two years, the consultant’s training contract may be extended or the MSU core procurement team may take over the large part of the training.

Procurement monitoring and audit: 21. Given the large number of entities involved, there is a need for an effective monitoring system to ensure proper conduct of procurement. For this purpose, an initial set of seven indicators has been proposed which will be monitored on a monthly basis at the level of the CDMA and Project Director. These indicators are: number of contractors applied/participated/qualified, tender premiums (lowest bid price over estimate), bid and contract completion times vs. planned time, number of tenders rebid, number of contracts with insufficient bids, and extension of bid validity.

22. All procurement transactions under the project will be subject to procurement audit. This is planned to be included in the scope of the audit conducted by the auditor general and the revisions in the ToR are being finalized.

Review by the Bank

23. The requirements of Bank review are defined in Appendix 1 of the Procurement Guidelines and include specific requirements for prior review and ’no objection’ by the Bank, as well as post review of transactions. Contracts for goods estimated to cost above $300,000, works above $5 million and consultancies above $500,000 for firms (and $200,000 for individuals) will be subject to prior review by the Bank. In addition, the Bank may designate other contract packages for prior review during implementation depending on the procurement performance, feedback during supervision missions and post review findings. All other contracts will be subject to post review. Contracts will be identified for prior or post review in the procurement plan and agreed with the Bank.

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Project Procurement Plan

24. The MSU will prepare and update a procurement plan for the immediate future 18 months of implementation. The procurement plan will list the anticipated works procurement needs, the procurement methods and timeline, and review requirements applicable for each procurement. This plan will be agreed upon with the Bank and updated at least annually. This plan will be made available at the MSU offices and also placed in the Project’s database as well as in the Bank’s external website. Major Risks related to procurement and the Risk Mitigation Action Plan 25. Procurement risk in the project has been rated as high. The high risk is mainly due to the weak current capacity at ULBs and MSU and the involvement of multiple ULBs. The risk rating will be reviewed once the procurement capacity building program gets started and the MSU is fully staffed. The following table summarizes key procurement risks and their mitigation measures:

Risk / Risk Factors Rating Mitigation Measures Residual Risk

Rating 1. The project involves many ULBs most of whom have weak capacity to manage the procurement process in line with the project requirements.

H An extensive procurement capacity building program aimed mainly at ULBs will be carried out. During the initial two years of the project, MSU will play a leading role with active involvement of the ULB at each stage of procurement. The roles and responsibilities of the ULBs will be reviewed once they are trained in Bank procurement procedures and their capacities have been assessed adequate.

S

2. MSU currently lacks procurement capacity

H One procurement specialist has been hired by the MSU, and capacity is planned to be augmented in line with the description above to handle the procurement transactions as well as build ULB procurement capacity

S

3. Involvement of multiple entities may make overall monitoring challenging

S A set of procurement indicators have been established to allow clear and regular monitoring of procurement progress and effectiveness. These will integrate into the e-Procurement platform once the assessment by the Bank is concluded.

L

Procurement Supervision 26. Fiduciary reviews by the Bank would include the review of progress on the procurement capacity building component, progress on the procurement plan, data on monitoring indicators and MSU’s handling of procurement documents. In addition to the review of transaction documents, procurement supervision missions would join MSU staff on field missions to conduct the physical verification of goods, works and services procured through Bank financing. This physical verification would be carried out on a random basis or as required to examine a particular fiduciary issue. Once the ULBs are prepared to conduct their own procurement, the Bank will need to assess their capacity and monitor the initial contracts through MSU. Based on the risk rating, there would be at least two formal supervision missions in a year, supplemented by additional missions as required, especially during the initial two years.

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Annex 10: Economic and Financial Analysis INDIA: ANDHRA PRADESH MUNICIPAL DEVELOPMENT PROJECT

State Fiscal Analysis 1. AP has been in the forefront of fiscal adjustment, as called for in the Fiscal Responsibility and Budget Management Act and in government policy. In FY2006-07, the state ended more than a decade of revenue (operating) deficits, recording a Revenue Surplus of Rs. 2800 crore. Responsible fiscal management has allowed the state to recover from the debt trap. Interest costs declined from 23.0% of Revenue (operating) Expenditure in 2003-04 to 17.6% of Revenue Expenditure in 2006-07, opening space for greater capital investment. State government capital expenditures rose by 140% between 2003-04 and 2006-07, contributing to a rapid growth in Gross State Domestic Product (GSDP). GSDP in AP rose 10.4% in 2007-08, as compared to an annual rate of 5.5% during the decade 1995-2004. 2. Table 1 compares the fiscal targets set forth in the Fiscal Responsibility Act (FRA) with actual performance in AP. Fiscal year 2006-07 is the latest year for which final figures are available. Revised estimates for 2007-08 and budget estimates for 2008-09 reveal a slight weakening of fiscal performance, as well as vulnerability to the worldwide economic recession. As compared to table 2, the original 2008-09 budget estimate projected that the fiscal deficit would rise to 2.82% of GDSP. A mid-year revenue assessment, conducted in November 2008, found that revenues were lagging budget projections, particularly in the magnitude of public land sales, which had been budgeted at 12% of total revenue. However, the GoAP has established a track record of responsible fiscal management, and has announced mid-course adjustments to the FY 2008-09 budgets to take into account the projected revenue shortfall.

Table 1: Targets in Fiscal Responsibility Act vs. AP Performance (Rs crore)

Item Target Established By FRA

AP Actual FY 2003-04

AP Actual FY 2006-07

Revenue (operating) Account deficit 0 by FY 2008-09 -2961 +2800 Fiscal (total) deficit 3% of GDSP by FY 2008-09 4.04% 2.13% Total Borrowing Not to Exceed 35% of GSDP -- 28.5% Own-Source Revenue Growth N/A 20.1% annual growth from FY 2003/04 to

06/07 Source: State 2008-09 Budget and Finance Minister’s Budget Speech

3. AP’s position as a state with a rapidly growing economy, where total public expenditure and particularly capital expenditures are also growing rapidly, is evident in a comparison with other States’ budgets. Table 2 compares expenditure growth in AP with other selected states. The years shown are 2007-08 and 2008-09. Data for these years have not yet been compiled for the ULB universe, but it is likely that local-level revenues and expenditures also have accelerated beyond that for earlier periods. (The impact of the current worldwide recession is not yet known.) Noteworthy is the disproportionate growth in AP of “plan expenditures,” continuing the tradition of state-level planning control over investment.

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Table 2: Growth in Expenditures, Selected State Governments Total Expenditure

(1) (2) Capital Expenditure (1) (2)

Plan Expenditure (1) (2)

Andhra Pradesh 26.2% 40.9% 38.3% 30.4% 47.2% 68.1% Gujarat 17.4% 7.4% 18.2% -4.9% NA NA Karnataka 13.1% 11.5% 13.1% 11.5% 19.9% 2.5% Kerala 7.6% 29.0% -0.1% 86.5% 18.4% 47.3% Madhya Pradesh 14.7% 20.4% -10.1% 31.2% 8.0% 34.5% Maharashtra 17.3% 7.9% 7.9% 8.0% 23.0% 24.8% Rajasthan 4.0% 25.3% -3.8% 34.4% 8.7% 31.1% Note: BE: Budget Estimate RE: Revised Estimate A: Actual Column (1): Percentage growth for 2008-09 (BE) over the fiscal year 2007-08 (RE) Column (2): Percentage growth for 2007-08 (RE) over the fiscal year 2006-07 (A) Source: State Budget Documents

Overview of Urban Finance in Andhra Pradesh 4. ULBs in AP are broadly classified into 3 categories—Municipal Corporations, Municipalities (which in turn are classified into 5 sub-categories) and Nagar Panchayats. The classification is based on population, density, annual income, etc. There are presently 123 ULBs, following the recent creation of 17 new ULBs and the consolidation of 10 ULBs into Greater Hyderabad Municipal Corporation. There are four main sources of ULB revenues: local taxes, local user fees and charges, assigned revenues (specific taxes that are collected by the state government and assigned to ULBs), and grants. Local taxes account for about 30% of total revenue receipts. The largest municipal corporations also generate significant capital revenues from property sales and borrowing. 5. The composition of different revenue headings is summarized in Table 1 below. Over the past 20 years, the state took over more revenue collection responsibilities from local government, and increased its share of formerly local taxes. It also imposed new restrictions on local revenue-raising capacity. Octroi was eliminated as a local tax. Property tax initially was levied at local discretion. In 1994, the state introduced the “unit area” method of evaluating property rental values for tax purposes. Although the property tax remains a local tax, the state conducts property assessments and has imposed ceilings on property tax rates relative to assessed rental values. By law, the state is supposed to conduct a re-assessment of rental values for property tax purposes every 5 years. However, following the initial 1994 assessment, the next assessment was carried out in 2002, and the 2007 assessment is now overdue. Most of the ULBs’ “assigned revenues” correspond to taxes formerly levied at the local level, which the state has taken over. In general, assigned revenues are supposed to be returned to ULBs based on source of collection; 95% of collections are to be returned to the ULB and 5% retained by the state. An exception is distribution of the “professional tax.” This was earlier raised by ULBs. However, due to its rapid increase in revenue generation, the tax was taken over by the state government. 90% of professional tax revenues are supposed to be distributed to ULBs via the general state budget using annually determined budget criteria. 6. Summary of ULB Revenue Sources. ULBs have a large number of revenue sources, classified as follows:

(a) Local Taxes on: Property, Vacant Land, and Advertisement (b) Local Non-Tax Revenues: Water Charges, Market Fees, Trade Licenses Fees, and other charges and rentals;

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(c) Assigned Revenues (State Taxes assigned to ULBs): Entertainment Tax, Professional Tax, Stamp Duty surcharge (d) Non-Plan (Revenue) Grants: Per Capita, Motor Vehicle Tax Allocation, Octroi Compensation, Property Tax Compensation, Education (e) Plan (Capital) Grants: project or sector-specific, such as JNNURM, UIDSSMT, APUSP, the Bank project loan, etc. (f) Others: External Borrowing, Property sales

7. Table 3 shows the average ULB revenues under main headings in FY 2003-04 and FY 2006-07 (the latest year for which final data are available.) Figures in parentheses are % of total Revenue (Operating) Budget Receipts. Data are based on 106 ULBs. They exclude Hyderabad and the 10 ULBs that were added to Hyderabad to form Greater Hyderabad Municipal Corporation.

Table 3: Summary of ULB Revenue Sources (Average revenue, in Rs 100,000)

Revenue (Operating) Budget Receipts 2003-04 2006-07 Local Taxes 277 (30%) 319 (31%) Local Non-Taxes (Fees, Charges, Rentals) 194 (21%) 353 (34%) Assigned Revenues 203 (22%) 155 (15%) Non-Plan Grants 249 (27%) 205 (20%) TOTAL REVENUE (OPERATING) RECEIPTS1 923 1,031 Annual Growth Rate over Period 3.4% Capital Receipts Plan (Project or Sector-Specific) Grants 156 198 External Borrowing Property Sales

8. The overall growth in ULB revenues is difficult to pin down with precision—in part because of the creation of new ULBs and the consolidation of other ULBs into Greater Hyderabad Municipal Corporation. It is clear, however, that in recent years ULBs’ own-source revenue growth has strengthened. Growth has been especially impressive for user fees, charges, and rental income. Despite this growth, water charges (the largest component of fees and charges) are estimated to cover only 70% of O&M costs on average, leaving considerable room for improvement. Within their capital budgets, ULBs have benefited both from increasing Operating Surpluses (see discussion below) and an increase in Plan Capital Grants. Capital grants have accelerated further in the two fiscal years since 2006-07. This reflects both an emphasis at the state level on investment in basic urban infrastructure and the rapid growth in central government grant support for local investment. Central grants are passed through the state budget to ULBs. Capital Investment Policy and Financing

9. Capital investment in urban services is broadly undertaken at three levels. Smaller value capital works are undertaken by ULBs themselves through either resources generated internally or through Plan Grants received from the state and central governments for specific schemes. These include targeted grants for drainage, internal road improvements etc. Larger capital

1 Headings do not sum exactly to total because of other minor items (e.g., interest earned).

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investment programs, such as water supply schemes, are implemented by the state level PHED on behalf of ULBs. Such assets, once created, are passed on to ULBs for O&M. The three largest urban areas, Greater Hyderabad Municipal Corporation, Visakhapatnam, and Vijayawada, undertake large civil works projects on their own initiative. Capital spending by ULBs has risen rapidly in recent years. It now accounts for nearly half of total ULB expenditure. 10. Financing of Capital Investment. Capital investment by ULBs is financed by (i) carry forward of operating (Revenue) surplus, (ii) state and central grants, (iii) borrowing, and (iv) sale of land and other assets. ULBs on average carry forward roughly 40% of their Revenue (operating) receipts as operating surplus that can be applied to capital investment. ULB Operating Surpluses have increased in recent years. Nonetheless, the growth in capital investment financing has come primarily from grants. According to MA&UD data, capital grants financed approximately 80% of ULB capital spending in FY2006-07, outside of Greater Hyderabad Municipal Corporation. Most of these grants came from central government plan schemes passed through the state budget, including such programs as Basic Services for the Urban Poor, Urban Infrastructure for Development Schemes for Small and Medium Towns, and Integrated Housing and Slum Development. 11. JNNURM has become by far the largest source of capital investment in ULBs. Midway through FY 2007-08, 215 projects had been sanctioned in AP under JNNURM, totaling Rs.9, 244 crore of central support. These projects are highly focused on the three major urban areas, each having more than 1 million populations, and especially on Greater Hyderabad Municipal Corporation. Grant-supported projects in GHMC include construction of the Outer Ring Road (4000 crore), the Elevated Expressway providing airport access (600 crore), Krishna Drinking Water Supply scheme (1082 crore), as well as financial assistance for land acquisition in support of the Metro Rail PPP now estimated to have a total cost in excess of 8400 crore. Hyderabad, Visakhapatnam, and Vijayawada are three of the 63 major urban centers throughout the country targeted for priority investment under JNNURM. Future investment in these cities is likely to be constrained by the volume of viable projects rather than financing availability. 12. Borrowing constitutes a relatively modest share of ULB capital financing, except in Hyderabad, where market-based loans complement grants in the total financing package. In other ULBs, HUDCO loans raised by the APUFIDC have helped finance water supply schemes and other types of small and medium-scale investment. These loans are repaid at the state level by deducting debt service from the revenue distributions to which ULBs are entitled. State officials indicated that in numerous cases local authorities have plead poverty, and the state has covered their loan obligations through special payments to APUFIDC. The borrowing culture, in short, is weak in most ULBs. The ULBs do not decide on their own to borrow; and this decision is made for them at the state level as part of program design. They do not negotiate interest rates or loan terms; this responsibility is handled by APUFIDC in conjunction with HUDCO. ULBs do not repay loans from local budgets; rather, deductions from transfers are made on their behalf at the state level. Hyderabad is an exception to this practice. It borrows from market sources for part of its capital financing. However, as Table 4 demonstrates, capital grants also account for the bulk of Hyderabad’s rapid increase in capital spending, and have partially displaced borrowing as a source of capital finance.

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Table 4: Capital Financing Sources, Greater Hyderabad Municipal Corporation FY 2006-07 and 2007-08 (Rs. Crore)

Item FY 2006-07 (revised) FY 2007-08 (budgeted) Operating Surplus 399 502 Property Sale 25 262 Grants 427 1100 Borrowing 505 323 Total 856 2187

13. Weak demand-driven investment procedures. The fact that for most ULBs larger projects are planned, designed, and implemented by state institutions, and financed either by special government grant schemes or by loans that are negotiated without ULB participation weakens local “ownership” of projects. The practice leads to inadequate attention to cost recovery, difficulties of financial sustainability at the ULB level, and poor operational performance. Even internal road projects, initiated at the local level, are constrained by detailed state regulations prescribing the width of roads, surface materials, building setbacks and other characteristics of roadways. “Demand-driven investment” at the local level is limited because (i) capital investment is financed primarily by grants for sector-specific schemes; ULBs are not free to set their own investment priorities across sectors; (ii) the “cost” of investment to a ULB is near zero. Local co-financing requirements are low, and the cost of loans is hidden by the practice of deducting debt service payments at the state level. Nonetheless, there have been advances in demand identification at the local level. Recent grant schemes have introduced the practice of citizen identification of investment priorities for smaller projects. The ULB co-financing is now required for most state-sponsored investment projects, although at a low level. Enhancing the voice of local ULBs to make investment truly “demand-driven” is one of the objectives of the proposed program. 14. Intergovernmental fiscal system for high ULB performance. In the past, the state’s programs for intergovernmental fiscal transfers have not provided effective incentives for improved financial and managerial performance by ULBs. A number of distortions resulted: poor collection rates for property taxes and water tariffs, high levels of water loss, poor O&M of assets built by state entities and transferred to ULBs, and poor responsiveness to citizen demands. Performance targets and monitoring were addressed in the DFID-sponsored URMSP. The project succeeded in introducing an awareness of performance orientation, as participating ULBs were asked to set performance targets and monitor their achievement. However, ULBs could choose among some 30 different performance targets, making statewide comparisons of performance levels almost impossible. Many of the performance targets set by ULBs were unrealistically ambitious (e.g., 100% realization of property tax demand, 100% redressal of citizen grievances). Monitoring of results was spotty at best, relying on written reports from ULB officials. Often, the performance targets were not measurable even in principle. Finally, grant disbursements to ULBs never were tied consistently to performance levels or improvement in performance. The groundwork for incorporating performance targets into the inter-governmental framework has been established, but effective implementation of performance incentives remains a priority for future reform of the intergovernmental finance system. 15. AP retains relatively tight control at the state level over intergovernmental transfers. It is one of a handful of states that did not accept the recommendation of the State Finance Commissions to allocate ULBs a designated portion of pooled state revenues. Instead, the state distributes funds to ULBs on a tax-by-tax assigned basis, or through non-plan grants intended to

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compensate ULBs for state elimination or limitation of former local tax sources (e.g, octroi compensation grant, property tax compensation grant). Capital financing is provided by a series of plan grants, tied to specific projects or sectors, with design and construction often carried out by state agencies. The only “block grant” element in the intergovernmental transfer system is a very modest per capita grant. This has been fixed at Rs.8 (roughly US$0.16) per capita since 2000. Whether AP will move to decentralize ULB financing in the future is uncertain. On the one hand, state authorities have spoken of increasing ULB discretion over revenue sources and grant funds. On the other hand, the major financing proposal discussed as part of FY 2009-10 budget preparations has been a proposal to have the state government takes over 100% of ULB personnel costs. Financial Analysis of ULBs 16. The GoAP’s strategy under the APMDP is to encourage as many ULBs as possible to participate in the program (subject to meeting the project rules/guidelines). Given the concentration of JNNURM funding on Greater Hyderabad Municipal Corporation, the proposed project will focus on investments outside the capital region. The minimum project level of 5 crore is expected to rule out some of the smallest ULBs from participation. As part of project preparation, an assessment was carried out to examine the financial condition of the 106 ULBs outside Hyderabad, along with a preliminary financial assessment of ULB borrowing capacity. The analysis distinguishes ULBs by population class: Large (greater than 100,000 population); Intermediate (50,000-100,000); and Small (less than 50,000). 17. Loan repayment capacity, as well as capacity for local capital match, is dependent upon the size of the Revenue (operating) Budget that can be carried forward for capital investment and debt service. Table 5 shows average Operating Surplus by ULB size classification. As can be seen, Operating Surplus growth has been concentrated on larger municipalities. Small municipalities, in contrast, have seen their Operating Surplus decline.

Table 5: Financial Performance by Municipality-Class, 2003/04 and 2006/07 Average OS (Lakhs) Average OS (% of revenues) Annual OS growth

rate, 03-06 03/04 06/07 03/04 06/07 Large 738 1,119 37 45 14

Intermediate 169 161 37 42 -2

Small 137 74 46 31 -19

All ULBs 350 451 38 44 9

OS = Operating Surplus

18. Overall revenue and expenditure patterns are shown in Tables 6 and 7. The tables demonstrate the expenditure restraint that has produced growing operating surpluses. These data are prior to the wage and benefit adjustments prescribed by the Sixth Pay Commission, which only now are beginning to enter into ULB budgets. The impact of mandated pay increases on spending levels and Operating Surplus will have to be carefully monitored. Table 7 shows that large municipalities generate a greater proportion of total revenue from own sources (local taxes and local fees, charges and rentals), while intermediate and small municipalities receive a greater share of total revenue from state non-plan grants.

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Table 6: ULB Revenue and Expenditure Growth by Population Size, 2003/04 and 2006/07

Average revenues (Lakhs)

Annual revenue growth (03-06)

Average Exp (Lakhs) Annual exp growth

(03-06)

03-04 06-07 03-04 06-07

Large 2,000 2,492 6.6 1,262 1,373 1.9

Intermediate 438 379 -4.7 269 218 -6.8

Small 301 238 -7.5 163 164 0.1

All ULBs 923 1,031 3.4 573 579 0.1

Table 7: Revenue Receipts by Source and ULB Size, 2003/04 and 2006/07

Revenue Receipts by Type (% of Total)

03/04

Revenue Receipts by Type (% of Total)

06/07

Taxes Non-Taxes

Assigned Rev

Non-plan grant

Taxes Non-Taxes

Assigned Rev

Non-plan grant

Large 33 24 24 19 31 37 14 17

Intermediate 24 13 16 46 29 21 20 30

Small 23 11 15 50 33 23 18 26

All ULBs 30 21 22 27 31 34 15 20

19. As would be expected, both total revenues and own-source revenues are greatest, on a per capita basis, in large municipalities. The growth in non-tax revenues—fees and charges plus rentals—over the period is striking, for all size municipalities. Total revenue per capita in both intermediate and small cities appears to have declined over time, a source of concern for future potential financing capacity should the trend continue. Table 8: Per Capita Revenues by Size, 2003/04 and 2006/07

Per capita Rev (Rs)

Per Capita Revenues (Rs) 03/04

Per Capita Revenues (Rs) 06/07

03-04 06-07 Taxes Non-Taxes

Assign.Rev

Non-plan grant

Taxes Non-Taxes

Assign.Rev

Non-plan grant

Large 825 999 269 199 201 156 310 373 142 175

Intermediate 654 566 159 86 108 301 167 116 113 170

Small 709 561 165 80 106 358 187 126 100 148

All ULBs 773 856 233 161 170 209 264 289 131 171 Source: State Budget Documents

20. Local Borrowing Capacity. Reliable estimates of borrowing capacity require a large amount of ULB specific financial information and analysis. It is easy to misidentify prudent borrowing levels, as has been demonstrated by the worldwide performance of credit rating agencies during the recent credit crisis. A preliminary effort to gauge local borrowing capacity under the proposed project was carried out as part of the financial analysis, assuming: • Annualized debt servicing does not exceed 50% of operating surplus. It is assumed that

matching requirements for investment under the program, as well as other co-financing requirements, existing debt service and discretionary local investment, can be financed within the remaining 50% of operating surplus.

• 9% as rate of interest to ULBs • the loan period being 20 years

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• Investment Capacity has been taken at 1.25 times borrowing capacity to account for other grants and ULB own contributions towards financing of sub-project costs besides debt

• Minimum project size, per project description, is 5 crore. 21. Of necessity, the approach simplifies the elements that would go into a full assessment. Among the elements that must be considered in a full analysis are: other obligations that ULBs have for use of Operating Surplus, including (a) matching investment requirements under the project, (b) matching investment requirements for other plan grants received from state or central authorities, (c) other debt service requirements; (d) discretionary local investments either as one-time expenditures or debt service. Also necessary would be the projections of future Operating Surplus and future obligations, such as increased personnel compensation mandated by the Sixth Pay Commission (which may be financed by the State). 22. The analysis does reveal, however, a broad level of borrowing and investment capacity as follows, detailed in Table 9:

Total investment capacity (USD m) per estimate in Table 9 582

Total borrowing capacity (USD m) 466

Not eligible (# of ULBs) 44

Not eligible, share of total ULBs 33%

Table 9: Borrowing / Investment Capacity, Based on 2005/06 Financials

Crores Number Average Investment capacity (Cr)

Median Investment capacity

Share of total ULBs

CAPEX, Share of OS (median)

No borrowing capacity 6 - - 5%

<10 77 5 5 58% 0.74

10-20 24 13 12 18% 0.57

20-50 15 34 33 11% 0.45

>50 11 101 79 8% 0.75

Total Sample 133 18 8 0.68

Municipal Corporations 58 47 0.89 Note: Sustainable borrowing capacity is estimated based on the following assumptions:

23. Willingness to Pay and Perceived Capacity to Pay. To implement a project that involves loan financing and repayment by ULBs, attention must be given to the actual track record of ULBs in dealing with loan programs. Regardless of theoretical capacity to pay, ULBs in AP have a relatively poor record of loan repayment on plan schemes. Local debt service is handled through deductions of transfers at source by state authorities, not by local governments. Preferably, as part of serious fiscal decentralization, more of the responsibility for deciding to borrow and making loan repayments should be transferred to the local level. 24. Summary Budgets of Selected ULBs. Table 10 presents financial summaries for a sample of ULBs. The municipalities illustrate the variability of Operating Surplus, and thus point to the need for careful case-by-case analysis of local capacity to borrowing and willingness to repay.

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Table 10: Financial Summary Sample of Municipalities

Anakapalle (Rs.million)

Sl. No. Head 01-02 03-04 04-05 05-06 06-07 1 Taxes 11 14 15 15 15

2 Non-Taxes 6 6 5 8 4

3 Assigned Revenues 7 9 13 13 8

4 Non-Plan Grants 24 20 21 23 13

5 Revenue Receipts 48 49 55 59 40

6 Revenue EXP 60 62 57 39 21

7 OS (6-7) (13) (13) (3) 21 19

8 Capital Receipts 7 5 8 13 3

9 CAPEX 2 - - 1 -

10 Net CAPEX (4) (5) (8) (12) (3)

11 Net CAPEX, Share of OS - - - - -

Guntur (Rs.million)

Sl.No. Head 01-02 03-04 04-05 05-06 06-07

1 Taxes - 132 154 171 202

2 Non-Taxes - 88 72 80 114

3 Assigned Revenues - 158 195 119 117

4 Non-Plan Grants - 4 6 58 165

5 Revenue Receipts - 382 427 429 598

6 Revenue EXP - 219 180 174 91

7 OS (6-7) - 163 247 255 255

8 Capital Receipts - 29 27 12 91

9 CAPEX - 23 170 92 94

10 Net CAPEX - (6) 143 80 4

11 Net CAPEX, Share of OS - - 0.58 0.31 0.01

Waranagal (Rs.million)

Sl.No. Head 01-02 03-04 04-05 05-06 06-07 1 Taxes - 137 179 141 98

2 Non-Taxes - 81 111 50 69

3 Assigned Revenues - 92 215 89 30

4 Non-Plan Grants - 5 12 - -

5 Revenue Receipts - 316 517 322 197

6 Revenue EXP - 272 209 181 160

7 OS (6-7) - 44 308 141 37

8 Capital Receipts - 82 16 - -

9 CAPEX - 149 164 152 58

10 Net CAPEX - 67 148 152 58

11 Net CAPEX, Share of OS - 1.53 0.48 1.08 1.56

Ramachandrapuram (Rs.million)

Sl.No. Head 01-02 03-04 04-05 05-06 06-07

1 Taxes - 8 8 7 7

2 Non-Taxes - 2 3 4 3

3 Assigned Revenues - 4 5 6 3

4 Non-Plan Grants - 16 12 12 22

5 Revenue Receipts - 31 27 28 35

6 Revenue EXP - 17 14 23 20

7 OS (6-7) - 14 13 5 16

8 Capital Receipts - 2 2 2 2

9 CAPEX - 7 8 11 (7)

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Sl.No. Head 01-02 03-04 04-05 05-06 06-07

10 Net CAPEX - 6 6 10 (8)

11 Net CAPEX, Share of OS - 0.40 0.47 1.81 -

Palacole (Rs.million)

Sl.No. Head 01-02 03-04 04-05 05-06 06-07 1 Taxes - 334 372 387 384

2 Non-Taxes - 237 243 120 333

3 Assigned Revenues - 277 288 238 260

4 Non-Plan Grants - 7 26 10 111

5 Revenue Receipts - 855 930 755 1,088

6 Revenue EXP - 646 906 581 992

7 OS (6-7) - 209 24 174 96

8 Capital Receipts - 63 23 13 11

9 CAPEX - 206 294 334 490

10 Net CAPEX - 144 271 321 479

11 Net CAPEX, Share of OS - 0.69 11.48 1.85 5.00

Eluru (Rs.million)

Sl.No. Head 01-02 03-04 04-05 05-06 06-07

1 Taxes 28 53 59 58 58

2 Non-Taxes 58 24 29 11 125

3 Assigned Revenues 15 26 28 27 18

4 Non-Plan Grants 43 47 37 25 109

5 Revenue Receipts 144 150 153 121 310

6 Revenue EXP 110 102 118 97 92

7 OS (6-7) 34 48 36 24 218

8 Capital Receipts 20 49 21 2 0

9 CAPEX 18 101 80 56 49

10 Net CAPEX (2) 53 59 54 48

11 Net CAPEX, Share of OS - 1.10 1.65 2.21 0.22

Tenali (Rs.million)

1 Taxes 20 39 33 36 31

2 Non-Taxes 12 12 14 22 18

3 Assigned Revenues 21 26 4 32 24

4 Non-Plan Grants 31 25 24 8 49

5 Revenue Receipts 83 101 74 98 122

6 Revenue EXP 75 39 51 60 65

7 OS (6-7) 8 62 23 38 56

8 Capital Receipts 17 14 8 13 52

9 CAPEX 7 77 69 33 10

10 Net CAPEX (11) 63 61 20 (42)

11 Net CAPEX, Share of OS - 1.02 2.62 0.53 -

Kakinada (Rs.million) 1 Taxes - 117 112 126 143

2 Non-Taxes - 41 45 48 50

3 Assigned Revenues - 63 75 70 63

4 Non-Plan Grants - 51 30 31 119

5 Revenue Receipts - 271 262 275 376

6 Revenue EXP - 165 183 202 154

7 OS (6-7) - 106 79 73 221

8 Capital Receipts - 21 15 9 266

9 CAPEX - 58 78 70 35

10 Net CAPEX - 37 63 61 (231)

11 Net CAPEX, Share of OS - 0.35 0.80 0.85 -

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Economic Analyses of sub-projects 25. Framework: Under APMDP, ULBs would participate as per the access criteria indicated earlier. Since sub-projects are not identified upfront, the framework for economic analyses is presented below. 26. Economic analyses would be carried out for all sub-projects. Quantitative cost/benefit analysis will be required for all sub-projects with an estimated cost of Rs 15 crore or more. Only those sub-projects whose ERR meet a minimum threshold of 12% would be taken up under APMDP. For smaller subprojects, the quantitative evaluation is recommended but not required. However, qualitative identification and evaluation of benefits and alternatives would be required for all subprojects. The sector wise approach to economic analyses is as presented below. 27. Urban Roads. The potential benefits of rehabilitating the roads are, among others, reduction of congestion and improvement of traffic speeds; reduction in damage to vehicles and vehicle operating costs; increase in vehicle and pedestrian safety; reduction of accidents. The cost benefit analyses would be primarily based on savings in vehicle operating costs.

28. Sanitation / Solid Waste. The benefits of the solid waste component are: a clean and improved urban environment through proper storage, collection, transportation and disposal methods; lower costs of refuse collection; and reduction of health risks and diseases due to reduced environment contamination, including ground water contamination. Since economic benefits are not readily quantifiable, cost effectiveness analyses would be carried out to ascertain that that overall system / technical design and engineering adopt most low cost / cost efficient solutions. 29. Water Supply. The benefits of rehabilitating water systems include: (i) reduction in water borne morbidity and infant mortality, which would contribute to higher labor productivity of the population; (ii) easier access to a reliable supply of safe water; (iii) savings on money spent on secondary water supply from vendors / coping costs; (v) reduction in managerial inefficiencies such as administrative unaccounted-for water, excessive accounts receivable and working capital, and increased productivity of employees, and (vi) reduction in physical unaccounted –for water from the rehabilitation of the water supply network. A computation of ERR would be attempted for water supply projects using mainly the benefits of improved levels of water supply services based on willingness to pay / opportunity cost of water among beneficiaries.

30. Since subprojects will be identified and designed by ULBs over time, economic analysis of the whole project cannot be carried out ex ante. The analysis carried out for a sample of 12 subprojects shows an overall ERR over 40%. A reference can be drawn from the finding of the Independent Evaluation Group of ex post ERR of 21.2% from 40 urban development projects financed by the Bank by 1992, which in aggregate supported a similar mix of components as APMDP. This and another 2002 IEG review of MDPs in Latin America and Philippines found significant benefits of the policy and institutional improvements, especially the improved fiscal performance and sustainability of services.

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Annex 11: Safeguard Policy Issues INDIA: ANDHRA PRADESH MUNICIPAL DEVELOPMENT PROJECT

Social Safeguards (a) Studies done: Social and Environmental Assessment (SEA). On the basis of this report, a Social and Environmental Assessment and Management Framework (SEAMF) were prepared in accordance with OP 4.01, OP 4.12 and OP 4.10. The SEAMF was further developed into a Project Manager’s Manual (PMM) and a Manual for Urban Local Bodies (MULB). The PMM aids project managers to understand and supervise implementation of the SEAMF, to build capacity to implement it, and to manage Information and Communications for the program. The MULB guides the key implementing agencies to implement the SEAMF. The manuals include a Social and Environmental Capacity-building Action Plan (SECAP), and an Information and Consultation Strategy and Action Plan (ICS) to ensure full information to stakeholders at all stages of sub-projects, and to obtain feedback from them on the reform measures and investment components of the project. Organizations involved in SEAMF preparation: The social and environment documentation was prepared on behalf of the GoAP by the Center for Good Governance (CGG), Hyderabad, in collaboration with the Administrative Staff College of India (ASCI) and the Center for Management and Social Research (CMSR), both also in Hyderabad, AP. (b) Safeguard related risks and measures to address them. OP 4.12: In the larger towns and even in some smaller ones, especially in congested areas including slum settlements and commercial areas, there is likely to be a need to acquire land for the construction of infrastructure such as roads, storm water drains, sewers, water supply pipelines, and so on. Thus, people may be displaced from their places of residence and/or livelihood, permanently or temporarily. This includes people with title to their land and property as well as squatters on others’ (mostly public) land and encroachers. Losses of land, dwelling, commercial premises, mobile structures or facilities may occur. Accordingly, the SEAMF includes a process to determine who is affected (by rapid household survey), what their losses would be, fair compensation to be provided, other support provisions, and the time to be allowed for different steps. It also specifies an entitlement framework, and a grievance redressal mechanism. OP 4.10: The SEAMF also provides for special attention to be paid to tribal people residing in some potential subproject areas, although most are unlikely to be affected in any way other than through involuntary resettlement, discussed above. Nevertheless, they would be identified, and care taken in the project to determine what impacts may take place on their land, livelihood, culture, support networks, etc. as tribal people even in peri-urban areas are acknowledged to be particularly poor and vulnerable. In the event of serious potential impacts, alternatives would be developed or mitigation measures instituted. OP 4.01: A significant environmental risk stems from the likelihood of large scale irreversible impact from subproject relating to disposal of municipal solid waste, particularly through land filling or the closing / capping of existing landfill sites that have been filled-up. This component is also important because of pending legal obligations of the ULBs in response to orders from the

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judiciary, as well as recent regulatory requirements from the GOI. The issues in MSWM are not only to do with the design and construction of an appropriate landfill, but also to do with the management of supply-side which to date has not worked well in Indian cities. It is envisaged that private sector participation would be sought in the management of municipal solid waste. A separate exercise (outside the project) to mitigate the risks associated with this component is already underway, with World Bank assistance. Substantive safeguard issues could also arise from potential cumulative impacts of clustering of multiple investment components in an area or municipality. For example, connecting a large number of slums to the citywide infrastructure without increasing the capacity of the citywide infrastructure could lead to the cumulative impact of excessive load on citywide infrastructure. In order to mitigate the risk of such eventuality, a “network strengthening” approach would be taken when appraising investment proposals. A significant project risk stems from the lack of capacity in AP to address social and environmental issues. Although the responsibility to address urban environmental issues has been devolved to ULBs under the 74th amendment to the Constitution of India, actually addressing environmental issues would be a new job for them. Little has been done thus far to build their capacity, and appropriate institutional mechanisms would need to be established to deal with social and environmental issues. The CDMA-MSU would have the job of overseeing the social and environmental management of sub-projects, for which capacity would be augmented. The need for institutional strengthening has been recognized in the SEA and SEAMF, and a SECAP has been developed. Training programs for staff are already under development, and it is hoped that a significant number of persons would have been trained by the time the project becomes effective. (c) Alternatives considered minimizing adverse impacts related to safeguards. Social: As the specific potential social and environmental impacts would only be known during the ULB sub-project prioritization and preparation process, alternatives would be examined at that time. As the MAPP guidelines clearly specify the involvement of all stakeholders and communities would be doing most of the planning and managing implementation, there would be opportunities for affected persons to represent themselves or be represented, for alternatives to be discussed by the communities and the ‘least harmful’ decisions made collectively, and for aggrieved persons to have their grievances redressed. Environmental: Given that the sub-projects would be identified through a community-based approach before they are subject to environmental screening/ assessment, the analysis of alternatives would focus on alternatives in the design of the sub-projects in order to minimize/avoid possible direct and indirect impacts. (d) Consultations and participation of stakeholders in project preparation and influence on project design and implementation. The key stakeholders are residents of all the municipalities that would be part of the project, elected officials of the ULBs, and municipal staff at all levels in AP. The poor, tribal people and potentially displaced people are important among these. Groups of these stakeholders were formally consulted about the project and its environmental and social aspects during preparation of the SEA and SEAMF, and again when the draft SEA and SEAMF were ready. In addition, a large household survey was carried out as part of the SEA, and consultations were held while assessing the adequacy of urban basic services in sample

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municipalities. The consultants also tested the SEAMF on ‘prototype’ sub-projects that had been carried out in these sample municipalities, and interacted with residents, affected people, and tribal people during this process. In Class I towns, stakeholders participated actively in the MAPP process under the earlier DFID-funded APUS Project. As described above, elements of this MAPP process with its integrated consultative and participatory approaches would continue to be the basis for ULB sub-project prioritization and preparation process under APMDP, giving relevant stakeholders the opportunity to participate throughout. Feedback received during the consultations helped to develop the institutional strengthening and grievance redressal mechanisms further. The SEA and SEAMF have been disclosed on the GoAP’s website. (e and f) Safeguard related impacts and mitigation plans. Social: Although the extent is currently unknown, it is expected that many sub-projects would have land acquisition requirements, or would involve severing of some land from title-holders, or removal of squatters/encroachers. It is also expected that there would be tribal people on the peripheries of some towns, particularly in AP’s tribal districts, whose land, occupations and culture may be affected. Accordingly, the SEAMF makes provisions for mitigation plans to be developed for these affected people through consultative processes. It also protects those who incur losses, in keeping with the requirements of OP 4.12 and OP 4.10. Environment. All potential environmental impacts -- including induced, cumulative and long-term impacts -- related to the investment component have been identified and generic EMPs prepared and included in the Social and Environmental Assessment (SEA) and the Management Framework (SEAMF). Implementation manuals have be developed to provide details of the process to be followed to translate the generic EMPs into site-specific EMPs for each subproject, and implement them.

The generic EMPs outline the measures to be incorporated in the planning, design, construction and operation of the different subprojects in the investment program, to mitigate the potential adverse impacts, and bring-out the positive aspects. They are complemented by a monitoring plan with key indicators of impacts on the environment/ecology and human health, such as air and water pollution, during the various stages of each subproject. It would be ensured through the Environment Management Plans (EMPs) that the project complies with OP 4.36, OP 4.09 and OPN 11.03, if they are triggered in any subproject. The generic EMPs include cross-references to contract clauses linking the mitigation measures to contract documents. They also provide guidelines for management of cultural heritage properties in case these are affected. However, they need to be converted into site-specific EMPs for each subproject, depending on the severity of potential impact and hence the need for mitigation. The SEAMF helps classify subprojects into three different categories – EA, EB, and EC, in a manner similar to the Bank's classification of projects into A, B and C category per OP 4.01. Those subprojects classified as category EA need to undergo a detailed environmental assessment, those classified as category B need to undergo a limited assessment, while category EC subprojects do not need a separate EMP. The SEAMF provides guidance on the steps to be followed for all the three categories of subprojects in order to develop site-specific EMPs.

The potential direct and indirect social and environmental impacts of various urban reforms have

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been identified in the SEA report. These would be addressed through better town planning and land management, budgets for O&M of basic infrastructure, the ability of the urban poor to pay for services, adequate capacity of the municipal bodies and CBOs to prepare and implement subprojects, etc.

(f) Capacity assessment and capacity building. A capacity assessment was carried out for social and environmental management, and capacity-building and institutional-strengthening needs identified. There is little experience of urban resettlement except in the large cities of AP and some towns, and limited capacity to work with tribal people. Hence, these capacities are to be built through training and information programs. The desired environmental outcomes against which needs were assessed included: i) identification of environmental problems/needs of the town; ii) expertise on environmental issues and decision making; iii) collection of environmental related base line data; iv) environmental screening and assessment; v) preparation and implementation of sub-project specific environmental management and monitoring plans; and, vi) public consultations. An action plan detailing the training for different target groups, including CDMA-MSU staff, ULB staff, contractors, and NGOs/CBOs has been prepared as part of the SEA. To strengthen the institutional framework, it has been agreed to have a dedicated staff member to work on S&E issues at the ULB level and create multi-stakeholder Environment and Social Management Committees. In addition, the services of consultants are to be retained to undertake some of the social and environmental screening and assessment work. (g) Funding arrangements and schedule of implementation of plans. Social: Implementation of the SEAMF and of the social management plans (RAPs, TDPs) would part of the sub-project implementation, financed within it from Bank and counterpart funds. Implementation would be on the time-table developed by the ULB. In all cases, full consultation, planning of resettlement, provision of compensation and relocation to ready and acceptable sites are expected to occur prior to the displacement of affected people in keeping with OP 4.12. Environment. All EMPs (including cultural property management plans) would be prepared in time for them to be mainstreamed into the bid documents for different investments so that the cost of the management measures during the construction stage are factored-in by contractors in their bids. The funds for the implementation of management plans at this stage would come from the project funds. The schedule of implementation would be clarified in the plans themselves which would be presented according to planning/design, implementation/construction, and operation/ maintenance stages of the subproject. For the O&M stages of certain infrastructure works the funds may need to be generated from the users/private parties. This would be clarified as part of the subproject EMPs developed after a specific environmental assessment for the subproject. (h) Legal agreements. The project’s legal documents would covenant application of the SEAMF to all sub-projects. This would include the preparation of EMPs, RAPs, and TDPs where necessary. No subproject would be cleared for implementation unless it has been screened for environmental and social issues and, if needed, an assessment undertaken, management plans prepared, and included in the bid documents where relevant.

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(i) Monitoring mechanisms. The Social Management Plan includes steps for monitoring sub-project impacts. Social monitoring would be carried out on the basis of the data gathered during sub-project preparation on participants, potentially displaced people, tribal people, etc., with a focus on the economically poor and socially disadvantaged. Attention would be paid to whether these households have been consulted, participated in sub-project planning including the choice of alternatives, received compensation for losses, etc. where due, and so on. Environmental monitoring would involve cross-checking the proposed EMPs using relevant indicators, during both the construction and operational phases of a sub-project. The proposed monitoring plan which is part of an EMP is divided into different stages of the project cycle. The primary monitoring responsibility has been assigned to ULB S&E staff, in coordination with the MSU-CDMA, with some role for the AP Pollution Control Board in the overall oversight (in the case of environment), and for social consultants hired by the project management for the social aspects. ULB S&E staff would submit monitoring reports every month during the construction stage to MSU-CDMA.

(j) Supervision arrangements. The Bank’s supervision team is expected to include both Social and Environmental Specialists in its six-monthly missions. It is likely that, at least in the initial stages of the project, due to lack of capacity in AP, these specialists would carry out interim visits to the state to provide assistance and review implementation of the SEAMF.

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Annex 12: Project Preparation and Supervision INDIA: ANDHRA PRADESH MUNICIPAL DEVELOPMENT PROJECT

Planned Actual* PCN review 12/01/2002 01/10/2003 Initial PID to PIC 12/15/2002 01/15/2004 Initial ISDS to PIC 12/15/2002 01/15/2004 Appraisal* 12/15/2004 03/14/2005 Initial Negotiations* 01/30/2005 07/04/2005 Project Design Update 10/16/2008 Re-Negotiations 10/09/2009 Board approval 12/10/2009 Planned date of effectiveness 02/15/2010 Planned date of mid-term review 10/15/2012 Planned closing date 12/31/2015

Note *: The project in an earlier form was negotiated in July 2005; but with a condition for Board presentation which was fulfilled only in March 2008. The project design has been since updated to take account of developments in the meantime, as explained in main text paragraphs 14, 29 and 30. Key institutions responsible for preparation of the project:

1 Municipal Administration and Urban Development Department (MAUD), GoAP 2 Centre for Good Governance, Hyderabad

Bank staff and consultants who worked on the project included: Name Title Unit Songsu Choi TTL, Lead Urban Economist SASDU Raghu Kesavan Co-TTL, Sr. Infrastructure Specialist SASDU Richard M. Beardmore TTL till 2005 CGP N.V.V. Raghava Sr. Infrastructure Specialist SASDU Joseph Gadek Sr. Sanitary Engineer AFTU2 Barjor Mehta Sr. Urban Specialist AFTU1 Robin Rajack Sr. Urban Dev. Specialist FEU Elisa Muzzini Economist SASDU George Peterson Finance Consultant SASDU K. Mukundan Sr. Urban Specialist SASEI Laura Vecvagare Investment Officer CSFDR Meera Chatterjee Sr. Social Dev. Specialist SASDI Sameer Akbar Sr. Environmental Specialist ENV A.S. Ramakrishna Environmental Specialist SASDI Juan Carlos Alvarez Senior Counsel LEGES Nina Eejima Senior Counsel LEGES Shellka Arora Legal Assistant LEGES Thao Le Nguyen Sr. Finance Officer CTRFC Atul B. Deshpande Sr. FM Specialist SARFM Kiran Ranjan Baral Sr. Procurement Officer SARPS Ashish Bhateja Sr. Procurement Specialist SARPS Ai Chin Wee Sr. Operations Officer MNSSD Vasudha Sarda Research Analyst SASDU Jayashree Srinivasan Program Assistant GIADB Mamata Baruah Program Assistant SASDO Michelle Lisa Chen Program Assistant SASDO

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Supervision Strategy

Supervision Challenges 1. The project’s core development objectives are: improving the urban infrastructure services and improving the capacity and framework to sustain and expand such improvements. The multiple implementing agencies at two different levels, their weak capacities, and multiple components present considerable challenges to supervision. Low level and quality of urban services, weak capacity of urban local bodies (ULBs), and state policies and institutions that do not support the growth of ULB capacities form a vicious circle. The project team was able clarify the focus – on local capacity enhancement – of the project but not able to reduce the complexity of the project structure further given the need for an integrated approach to address the vicious circle. 2. Relating to the project objectives, the remaining supervision challenges can be considered separately for:

• those to ensure policy and institutional development; • to ensure implementation of physical investments; and • to minimize the fiduciary risks. These are considered in turn.

Supporting Policy and Institutional Development 3. Having taken various measures to centralize fiscal resources and expenditure authority mainly to restore its own fiscal health, GoAP has shown a strong commitment to reverse the centralization and strengthen the ULBs, through various recent measures, partly prompted by the Jawaharlal Nehru National Urban Renewal Mission (JNNURM). This commitment also appears to be consistent with the growing voice of urban and business constituents. The continuity of related policies in two different governments in the state, and their appointment of highly-regarded officers to the position of Commissioner and Director of Municipal Administration (CDMA) provide the comfort about the sustained political commitment. 4. The commitment of the ULB leadership varies greatly among cities. Also, their ability to design and implement institutional reform and capacity building is weak even in larger ULBs, as evidenced by the low degree of success in ambitious and wide-ranging municipal reform and strengthening programs under the DFID-financed AP Urban Services for the Poor project. The project provides for extensive TA for capacity building, to be managed mainly by CDMA. Hard inducement to plan and sustain the capacity building efforts in ULBs has been built in as conditions for sub loans and grants to ULBs. The project also provides for TA for state-level policy and institutional development. 5. The main supervision challenges for these components therefore consist of two: to sustain and enhance commitment to the institutional development, and to ensure the quality of TA

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activities. For the first, the commitment and track record of the GoAP provides considerable comfort. To sustain and enhance the commitment, Bank team will have to develop strong trust and partnership and work closely with CDMA and senior secretaries of GoAP to maintain the dialogue and emphasis on the core objectives without dictating the design of the institutional and policy improvements. The Bank will also have to support their close interaction with the political leadership and civil society, by encouragement and by taking initiaves if necessary. 6. These efforts will be greatly aided if the quality of TA is high. Supervising and supporting the TA activities is, however, generally extremely labor-intensive. There are, however, a few significant mitigating factors in AP. One, GoAP has installed a Capacity Enhancement Specialist who has the experience under the APUSP, who can take the difficult responsibility of structuring and supervising various TA activities at both state and local levels. Second, there are Center for Good Governance, a GOAP undertaking, and Administrative Staff College of India, a GOI undertaking, in Hyderabad, both with strong reputation for policy and capacity development. The project team of the GoAP and the Bank will ally with and utilize these existing resources to help CDMA to design and manage the various TA components. 7. In addition, terms of reference have been prepared for a Technical Support Services consultant team to support CDMA in managing the TA activities. Terms of reference have been drafted also for three other major consultancies. Supervision requirement for TA components is therefore likely to peak in years 2 and 3 when substantial outputs need to be reviewed and discussions held with policy makers. Supervising Physical Investments 8. All 123 ULBs of AP are eligible not only for TA support but also infrastructure investment funding. In practice, however, we expect less than half, mostly larger ULBs, to carry out physical investments under the project, and less than 25 at a given time. This still is a large number, and few of them have experience in planning and managing the scale of investments that the project will support. While managing the works largely through the central entities would minimize the quality and fiduciary risks, it would be counter to the project’s core objective. 9. The project therefore will start with an initial compromise that would be reviewed as the project proceeds. The compromise consists of the following:

• ULBs will be given the authority to plan and manage their subprojects. • They will be required to report the progress on a monthly basis. • They will be given heavy support and supervision in the form of a CDMA representative

(a consultant or officer deputed from Public Health Engineering Department, PHED) to help manage consultancy for planning and implementation. The consultants will be managed as pools by CDMA office in general. While ULBs will be allowed to hire and manage their own consultants, which will increase the supervision requirements, few are expected to so in the early stage at least.

• A group of third-party quality assurance consultants will be hired and managed by CDMA. They include procurement specialists who will attend bid evaluation meetings,

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as well as engineers and financial analysts who will evaluate the quality of work of contractors as well as supervision consultants, and verify expenditures.

• Several high-level PHED officers deputed to support CDMA for this project will help manage and coordinate the activities of these specialists.

10. In addition, the project mandates active information dissemination, citizen participation, and grievance redressal systems in the hope of adding another deterrent to low-quality work or corruption. 11. In short, the project features a heavy overlay of monitoring and support, with large consultant input financed under the Project Management Support component. These arrangements would be the condition for subproject approval and fund disbursement. There is a low likelihood of significant problems of quality or corruption escaping detection altogether. However, redundant responsibilities generate a risk of unclear accountability and lack of proper reporting. The supervision of physical investments in the initial years would have to be relatively heavy to establish the supervision and monitoring standard, and to fine-tune the balance between reinforcements and accountability. It is important that issues are detected early in the stage since serious sanctions for major issues would discourage most of the local counterpart from reporting the issues. Overall Supervision Program 12. In view of these factors, it is essential that the Bank task team develop a collaborative rather than adversarial relationship with key counterpart agencies and consultants not only for TA but also for investment components. 13. The above suggests the following program of implementation support for the first three years:

• Two main implementation support missions a year, including specialists in local government, economics, finance, and fiduciary management;

• Additional two field visits by engineering and fiduciary specialists in the first year and half of implementation;

• Additional input of policy and institutional specialists in year 2 and 3; • Mid-term review in about October 2012.

14. Thanks to the large TA component of the project, the supervision is likely to cost about the average of India projects, despite the above-average complexity. The Task Team, however, does not intend to rely excessively on the reports by the government or consultants hired by it. The Bank will carry out its own monitoring through the supervision missions; and commission a team of independent monitors at least for the Mid-Term Review and more often as warranted.

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Annex 13: Documents in the Project File INDIA: ANDHRA PRADESH MUNICIPAL DEVELOPMENT PROJECT

1. A Study on Simplification of Land Use Planning Including Regulatory Audit

CGG, Hyderabad, March2004

2. Capacity Enhancement Study, CGG, Hyderabad, March 2004

3. Budgeting and Accounting Reform Study, CGG, Hyderabad, March 2004

4. Urban Finance Assessment and Fiscal Framework Study, CGG Hyderabad, March 2004

5. Business Plan for APUFIDC, CGG, Hyderabad, March 2004

6. Project Implementation Plan, CGG, Hyderabad, March 2004

7. Social and Environmental Framework Study, CGG, Hyderabad, March 2004

8. World Bank, Policy Note on Urban Poverty and Access to Urban Services in Andhra Pradesh, World Bank, Washington DC March 2002 (mimeo)

9. Uma Adusunilli, Regulatory guidelines for urban Upgrading: Hyderabad, mimeo, May 2001 Experience

10. Andhra Pradesh Urban Services for the Poor (APUSP): Project Document, DFID, circa 1998

11. Operation and Maintenance Guidelines for Municipal Engineers, GHK International, December 2002

12. Revised Draft Full MAAP Guidelines, APUSP, Hyderabad, December 2002

14. World Bank, Unlocking Andhra Pradesh’s Growth Potential, Washington, DC, April 2003.

15. Economic Analysis for AP Urban Reform and Municipal Services Project, CGG, Hyderabad, April 2005

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Annex 14: Statement of Loans and Credits INDIA: ANDHRA PRADESH MUNICIPAL DEVELOPMENT PROJECT

Original Amount in US$ Millions

Difference between expected and actual

disbursements

Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev’d

P101650 2010 A. P. RWSS 0.00 150.00 0.00 0.00 0.00 153.34 0.00 0.00

P102771 2010 IIFCL - India Infras Finance Company Ltd

1,195.00 0.00 0.00 0.00 0.00 1,195.00 0.00 0.00

P110051 2010 Haryana Power System Improv Project 330.00 0.00 0.00 0.00 0.00 330.00 0.00 0.00

P116020 2010 Banking Sector Support Loan 2,000.00 0.00 0.00 0.00 0.00 2,000.00 0.00 0.00

P115566 2010 POWERGRID V 1,000.00 0.00 0.00 0.00 0.00 1,000.00 0.00 0.00

P093478 2009 Orissa Rural Livelihoods Project 0.00 82.40 0.00 0.00 0.00 76.98 0.95 0.00

P094360 2009 National VBD Control&Polio Eradication

0.00 521.00 0.00 0.00 0.00 492.61 48.98 0.00

P096023 2009 Orissa State Roads 250.00 0.00 0.00 0.00 0.00 240.98 0.86 0.00

P100101 2009 Coal-Fired Generation Rehabilitation 180.00 0.00 0.00 0.00 0.00 180.00 4.50 0.00

P100735 2009 Orissa Community Tank Management Project

56.00 56.00 0.00 0.00 0.00 105.31 -1.76 0.00

P112033 2009 UP Sodic III 0.00 197.00 0.00 0.00 0.00 198.44 0.00 0.00

P102331 2009 MPDPIP-II 0.00 100.00 0.00 0.00 0.00 100.70 0.00 0.00

P095114 2008 Rampur Hydropower Project 400.00 0.00 0.00 0.00 0.00 306.37 19.87 0.00

P105124 2008 HP DPL I 135.00 65.00 0.00 0.00 0.00 99.75 0.00 0.00

P101653 2008 Power System Development Project IV 1,000.00 0.00 0.00 0.00 0.00 524.48 -84.52 51.48

P102737 2008 Bihar DPL 150.00 75.00 0.00 0.00 0.00 111.86 111.10 0.00

P100789 2007 AP Community Tank Management Project

94.50 94.50 0.00 0.00 0.00 174.53 28.93 0.00

P096019 2007 HP State Roads Project 220.00 0.00 0.00 0.00 0.00 195.63 30.98 0.00

P099047 2007 Vocational Training India 0.00 280.00 0.00 0.00 0.00 204.54 -4.27 0.00

P102768 2007 Stren India's Rural Credit Coops 300.00 300.00 0.00 0.00 0.00 287.38 155.25 0.00

P090768 2007 TN IAM WARM 335.00 150.00 0.00 0.00 0.00 406.12 106.06 0.00

P090764 2007 Bihar Rural Livelihoods Project 0.00 63.00 0.00 0.00 0.00 59.38 1.52 0.00

P090592 2007 Punjab Rural Water Supply & Sanitation

0.00 154.00 0.00 0.00 0.00 144.63 90.41 0.00

P090585 2007 Punjab State Roads Project 250.00 0.00 0.00 0.00 0.00 139.73 -2.92 0.00

P071160 2007 Karnataka Health Systems 0.00 141.83 0.00 0.00 0.00 83.47 -8.15 0.00

P075060 2007 RCH II 0.00 360.00 0.00 0.00 0.00 204.65 69.17 0.00

P075174 2007 AP DPL III 150.00 75.00 0.00 0.00 0.00 76.02 -77.33 0.00

P078538 2007 Third National HIV/AIDS Control Project

0.00 250.00 0.00 0.00 0.00 197.47 136.73 0.00

P078539 2007 TB II 0.00 170.00 0.00 0.00 0.00 106.84 -19.90 0.00

P083187 2007 Uttaranchal RWSS 0.00 120.00 0.00 0.00 0.00 109.84 52.61 0.00

P086414 2006 Power System Development Project III 400.00 0.00 0.00 0.00 0.00 17.64 -112.36 0.00

P078832 2006 Karnataka Panchayats Strengthening Proj

0.00 120.00 0.00 0.00 0.00 69.67 -45.43 0.00

P079675 2006 Karn Municipal Reform 216.00 0.00 0.00 0.00 0.00 171.01 82.01 0.00

P079708 2006 TN Empwr & Pov Reduction 0.00 120.00 0.00 0.00 0.00 84.02 35.84 0.00

P093720 2006 Mid-Himalayan (HP) Watersheds 0.00 60.00 0.00 0.00 0.00 33.54 5.88 0.00

P083780 2006 TN Urban III 300.00 0.00 0.00 0.00 0.00 188.68 109.43 0.58

P092735 2006 NAIP 0.00 200.00 0.00 0.00 0.00 164.22 55.39 0.00

81

P073370 2005 Madhya Pradesh Water Sector Restructurin

394.02 0.00 0.00 0.00 0.00 294.74 224.58 0.00

P073651 2005 DISEASE SURVEILLANCE 0.00 68.00 0.00 0.00 0.00 50.48 42.29 0.00

P075058 2005 TN HEALTH SYSTEMS 0.00 110.83 0.00 0.00 20.06 27.68 37.86 11.97

P077856 2005 Lucknow-Muzaffarpur National Highway

620.00 0.00 0.00 0.00 0.00 199.13 109.13 0.00

P077977 2005 Rural Roads Project 99.50 300.00 0.00 0.00 0.00 99.00 69.46 0.00

P084792 2005 Assam Agric Competitiveness 0.00 154.00 0.00 0.00 0.00 69.04 48.16 0.00

P084790 2005 MAHAR WSIP 325.00 0.00 0.00 0.00 0.00 218.36 136.36 0.00

P086518 2005 SME Financing & Development 520.00 0.00 0.00 0.00 0.00 320.65 -78.35 -38.35

P084632 2005 Hydrology II 104.98 0.00 0.00 0.00 0.00 83.43 72.96 46.37

P094513 2005 India Tsunami ERC 0.00 465.00 0.00 0.00 0.00 397.49 377.68 -73.62

P078550 2004 Uttar Wtrshed 0.00 69.62 0.00 0.00 0.00 33.41 2.72 0.00

P050655 2004 RAJASTHAN HEALTH SYSTEMS DEVELOPMENT

0.00 89.00 0.00 0.00 0.00 40.02 34.42 0.00

P082510 2004 Karnataka UWS Improvement Project 39.50 0.00 0.00 0.00 0.00 7.38 7.38 0.00

P067606 2003 UP ROADS 488.00 0.00 0.00 0.00 0.00 86.01 86.01 0.00

P050649 2003 TN ROADS 348.00 0.00 0.00 0.00 0.00 41.19 41.19 0.00

P071272 2003 AP RURAL POV REDUCTION 0.00 215.03 0.00 0.00 0.00 17.96 -68.30 -3.30

P073094 2003 AP Comm Forest Mgmt 0.00 108.00 0.00 0.00 0.00 17.79 -3.19 0.00

P076467 2003 Chatt DRPP 0.00 112.56 0.00 0.00 20.06 49.94 56.09 0.00

P072539 2002 KERALA STATE TRANSPORT 255.00 0.00 0.00 0.00 0.00 87.96 87.96 0.00

P071033 2002 KARN Tank Mgmt 32.00 130.90 0.00 0.00 25.07 113.24 50.00 -6.38

P069889 2002 MIZORAM ROADS 0.00 78.00 0.00 0.00 0.00 8.08 -21.76 2.22

P040610 2002 RAJ WSRP 0.00 140.00 0.00 0.00 25.84 37.49 23.67 0.00

P050668 2002 MUMBAI URBAN TRANSPORT PROJECT

463.00 79.00 0.00 0.00 0.00 223.39 209.98 150.98

P050653 2002 KARNATAKA RWSS II 0.00 151.60 0.00 0.00 15.04 16.06 3.26 0.00

P050647 2002 UP WSRP 0.00 149.20 0.00 0.00 40.11 61.90 72.24 0.00

Total: 12,970.50 6,325.47 0.00 0.00 146.18 13,156.65 2,411.63 141.95

STATEMENT OF IFC’s Held and Disbursed Portfolio

In Millions of US Dollars

Committed Disbursed

IFC IFC

FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic.

2005 ADPCL 39.50 7.00 0.00 0.00 0.00 0.00 0.00 0.00

2006 AHEL 0.00 5.08 0.00 0.00 0.00 5.08 0.00 0.00

2005 AP Paper Mills 35.00 5.00 0.00 0.00 25.00 5.00 0.00 0.00

2005 APIDC Biotech 0.00 4.00 0.00 0.00 0.00 2.01 0.00 0.00

2002 ATL 13.81 0.00 0.00 9.36 13.81 0.00 0.00 9.36

2003 ATL 1.00 0.00 0.00 0.00 0.68 0.00 0.00 0.00

2005 ATL 9.39 0.00 0.00 0.00 0.00 0.00 0.00 0.00

2006 Atul Ltd 16.77 0.00 0.00 0.00 0.00 0.00 0.00 0.00

2003 BHF 10.30 0.00 10.30 0.00 10.30 0.00 10.30 0.00

82

2004 BILT 0.00 0.00 15.00 0.00 0.00 0.00 15.00 0.00

2001 BTVL 0.43 3.98 0.00 0.00 0.43 3.98 0.00 0.00

2003 Balrampur 10.52 0.00 0.00 0.00 10.52 0.00 0.00 0.00

2001 Basix Ltd. 0.00 0.98 0.00 0.00 0.00 0.98 0.00 0.00

2005 Bharat Biotech 0.00 0.00 4.50 0.00 0.00 0.00 3.30 0.00

1984 Bihar Sponge 5.70 0.00 0.00 0.00 5.70 0.00 0.00 0.00

2003 CCIL 1.50 0.00 0.00 0.00 0.59 0.00 0.00 0.00

2006 CCIL 7.00 2.00 0.00 12.40 7.00 2.00 0.00 12.40

1990 CESC 4.61 0.00 0.00 0.00 4.61 0.00 0.00 0.00

1992 CESC 6.55 0.00 0.00 14.59 6.55 0.00 0.00 14.59

2004 CGL 14.38 0.00 0.00 0.00 7.38 0.00 0.00 0.00

2004 CMScomputers 0.00 10.00 2.50 0.00 0.00 0.00 0.00 0.00

2002 COSMO 2.50 0.00 0.00 0.00 2.50 0.00 0.00 0.00

2005 COSMO 0.00 3.73 0.00 0.00 0.00 3.73 0.00 0.00

2006 Chennai Water 24.78 0.00 0.00 0.00 0.00 0.00 0.00 0.00

2003 DQEL 0.00 1.50 1.50 0.00 0.00 1.50 1.50 0.00

2005 DSCL 30.00 0.00 0.00 0.00 30.00 0.00 0.00 0.00

2006 DSCL 15.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

2005 Dabur 0.00 14.09 0.00 0.00 0.00 14.09 0.00 0.00

2003 Dewan 8.68 0.00 0.00 0.00 8.68 0.00 0.00 0.00

2006 Federal Bank 0.00 28.06 0.00 0.00 0.00 23.99 0.00 0.00

2001 GTF Fact 0.00 1.20 0.00 0.00 0.00 1.20 0.00 0.00

2006 GTF Fact 0.00 0.00 0.99 0.00 0.00 0.00 0.99 0.00

1994 GVK 0.00 4.83 0.00 0.00 0.00 4.83 0.00 0.00

2003 HDFC 100.00 0.00 0.00 100.00 100.00 0.00 0.00 100.00

1998 IAAF 0.00 0.47 0.00 0.00 0.00 0.30 0.00 0.00

2006 IAL 0.00 9.79 0.00 0.00 0.00 7.70 0.00 0.00

1998 IDFC 0.00 10.82 0.00 0.00 0.00 10.82 0.00 0.00

2005 IDFC 50.00 0.00 0.00 100.00 50.00 0.00 0.00 100.00

IHDC 6.94 0.00 0.00 0.00 0.00 0.00 0.00 0.00

2006 IHDC 7.90 0.00 0.00 0.00 0.00 0.00 0.00 0.00

2006 Indecomm 0.00 2.57 0.00 0.00 0.00 2.57 0.00 0.00

1996 India Direct Fnd 0.00 1.10 0.00 0.00 0.00 0.66 0.00 0.00

2001 Indian Seamless 6.00 0.00 0.00 0.00 6.00 0.00 0.00 0.00

2006 JK Paper 15.00 7.62 0.00 0.00 0.00 7.38 0.00 0.00

2005 K Mahindra INDIA 22.00 0.00 0.00 0.00 22.00 0.00 0.00 0.00

2005 KPIT 11.00 2.50 0.00 0.00 8.00 2.50 0.00 0.00

2003 L&T 50.00 0.00 0.00 0.00 50.00 0.00 0.00 0.00

2006 LGB 14.21 4.82 0.00 0.00 0.00 4.82 0.00 0.00

2006 Lok Fund 0.00 2.00 0.00 0.00 0.00 0.00 0.00 0.00

2002 MMFSL 7.89 0.00 7.51 0.00 7.89 0.00 7.51 0.00

2003 MSSL 0.00 2.29 0.00 0.00 0.00 2.20 0.00 0.00

2001 MahInfra 0.00 10.00 0.00 0.00 0.00 0.79 0.00 0.00

Montalvo 0.00 3.00 0.00 0.00 0.00 1.08 0.00 0.00

1996 Moser Baer 0.00 0.82 0.00 0.00 0.00 0.82 0.00 0.00

1999 Moser Baer 0.00 8.74 0.00 0.00 0.00 8.74 0.00 0.00

2000 Moser Baer 12.75 10.54 0.00 0.00 12.75 10.54 0.00 0.00

Nevis 0.00 4.00 0.00 0.00 0.00 4.00 0.00 0.00

2003 NewPath 0.00 9.31 0.00 0.00 0.00 8.31 0.00 0.00

83

2004 NewPath 0.00 2.79 0.00 0.00 0.00 2.49 0.00 0.00

2003 Niko Resources 24.44 0.00 0.00 0.00 24.44 0.00 0.00 0.00

2001 Orchid 0.00 0.73 0.00 0.00 0.00 0.73 0.00 0.00

1997 Owens Corning 5.92 0.00 0.00 0.00 5.92 0.00 0.00 0.00

2006 PSL Limited 15.00 4.74 0.00 0.00 0.00 4.54 0.00 0.00

2004 Powerlinks 72.98 0.00 0.00 0.00 64.16 0.00 0.00 0.00

2004 RAK India 20.00 0.00 0.00 0.00 20.00 0.00 0.00 0.00

1995 Rain Calcining 0.00 2.29 0.00 0.00 0.00 2.29 0.00 0.00

2004 Rain Calcining 10.00 0.00 0.00 0.00 10.00 0.00 0.00 0.00

2005 Ramky 3.74 10.28 0.00 0.00 0.00 0.00 0.00 0.00

2005 Ruchi Soya 0.00 9.27 0.00 0.00 0.00 6.77 0.00 0.00

2001 SBI 50.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

1997 SREI 3.21 0.00 0.00 0.00 3.21 0.00 0.00 0.00

2000 SREI 6.50 0.00 0.00 0.00 6.50 0.00 0.00 0.00

1995 Sara Fund 0.00 3.43 0.00 0.00 0.00 3.43 0.00 0.00

2004 SeaLion 4.40 0.00 0.00 0.00 4.40 0.00 0.00 0.00

2001 Spryance 0.00 1.86 0.00 0.00 0.00 1.86 0.00 0.00

2003 Spryance 0.00 0.93 0.00 0.00 0.00 0.93 0.00 0.00

2004 Sundaram Finance 42.93 0.00 0.00 0.00 42.93 0.00 0.00 0.00

2000 Sundaram Home 0.00 2.18 0.00 0.00 0.00 2.18 0.00 0.00

2002 Sundaram Home 6.71 0.00 0.00 0.00 6.71 0.00 0.00 0.00

1998 TCW/ICICI 0.00 0.80 0.00 0.00 0.00 0.80 0.00 0.00

2005 TISCO 100.00 0.00 0.00 300.00 0.00 0.00 0.00 0.00

2004 UPL 15.45 0.00 0.00 0.00 15.45 0.00 0.00 0.00

1996 United Riceland 5.63 0.00 0.00 0.00 5.63 0.00 0.00 0.00

2005 United Riceland 8.50 0.00 0.00 0.00 5.00 0.00 0.00 0.00

2002 Usha Martin 0.00 0.72 0.00 0.00 0.00 0.72 0.00 0.00

2001 Vysya Bank 0.00 3.66 0.00 0.00 0.00 3.66 0.00 0.00

2005 Vysya Bank 0.00 3.51 0.00 0.00 0.00 3.51 0.00 0.00

1997 WIV 0.00 0.37 0.00 0.00 0.00 0.37 0.00 0.00

1997 Walden-Mgt India 0.00 0.01 0.00 0.00 0.00 0.01 0.00 0.00

2006 iLabs Fund II 0.00 20.00 0.00 0.00 0.00 0.00 0.00 0.00

Total portfolio: 956.52 249.41 42.30 536.35 604.74 175.91 38.60 236.35

Approvals Pending Commitment

FY Approval Company Loan Equity Quasi Partic.

2004 CGL 0.01 0.00 0.00 0.00

2000 APCL 0.01 0.00 0.00 0.00

2006 Atul Ltd 0.00 0.01 0.00 0.00

2001 Vysya Bank 0.00 0.00 0.00 0.00

2006 Federal Bank 0.01 0.00 0.00 0.00

2001 GI Wind Farms 0.01 0.00 0.00 0.00

2004 Ocean Sparkle 0.00 0.00 0.00 0.00

2005 Allain Duhangan 0.00 0.00 0.00 0.00

Total pending commitment: 0.04 0.01 0.00 0.00

84

Annex 15: Country at a Glance INDIA: ANDHRA PRADESH MUNICIPAL DEVELOPMENT PROJECT

Lo wer-

P OVER T Y and SOC IA L So uth middle-

India A sia inco me

2007

Population, mid-year (millions) 1,123.3 1,520 3,437

GNI per capita (Atlas method, US$) 950 880 1,887

GNI (Atlas method, US$ billions) 1,069.4 1,339 6,485

A verage annual gro wth, 2001-07

Population (%) 1.4 1.6 1.1

Labor force (%) 1.8 2.1 1.5

M o st recent est imate ( latest year available, 2001-07)

Poverty (% of population below national poverty line) .. .. ..

Urban population (% of to tal population) 29 29 42

Life expectancy at birth (years) 64 64 69

Infant mortality (per 1,000 live births) 57 62 41

Child malnutrition (% of children under 5) 44 41 25

Access to an improved water source (% of population) 89 87 88

Literacy (% of population age 15+) 61 58 89

Gross primary enro llment (% of school-age population) 112 108 111

M ale 114 111 112

Female 109 104 109

KEY EC ON OM IC R A T IOS and LON G-T ER M T R EN D S

1987 1997 2006 2007

GDP (US$ billions) 276.0 410.9 916.3 1,171.0

Gross capital formation/GDP 22.0 23.9 36.0 38.2

Exports of goods and services/GDP 5.7 10.8 22.1 21.3

Gross domestic savings/GDP 20.6 22.6 33.0 35.1

Gross national savings/GDP 20.9 24.7 35.3 37.2

Current account balance/GDP -1.9 -1.4 -1.1 -2.1

Interest payments/GDP 0.7 1.1 0.7 ..

Total debt/GDP 20.1 23.0 16.7 ..

Total debt service/exports 29.7 21.6 7.5 ..

Present value of debt/GDP .. .. 12.7 ..

Present value of debt/exports .. .. 48.5 ..

1987-97 1997-07 2006 2007 2007-11

(average annual growth)GDP 5.5 6.9 9.7 9.0 8.5

GDP per capita 3.5 5.3 8.2 7.7 7.2

Exports of goods and services 11.5 15.4 18.9 7.5 13.8

ST R UC T UR E o f the EC ON OM Y

India

Lower-middle-income group

D evelo pment diamo nd*

Life expectancy

Access to improved water source

GNI

per

capita

Gross

primary

enro llment

India

Lower-middle-income group

Eco no mic rat io s*

Trade

Indebtedness

Domestic

savings

Capital

formation

1987 1997 2006 2007

(% of GDP)Agriculture 29.4 26.1 18.3 17.8

Industry 26.3 26.8 29.3 29.4

M anufacturing 16.4 16.4 16.3 16.4

Services 44.3 47.1 52.4 52.8

Household final consumption expenditure 67.1 66.0 56.7 54.8

General gov't final consumption expenditure 12.3 11.4 10.3 10.1

Imports of goods and services 7.1 12.1 25.1 24.4

1987-97 1997-07 2006 2007

(average annual growth)Agriculture 3.5 2.7 3.8 4.5

Industry 6.3 7.2 11.0 8.5

M anufacturing 6.6 6.8 12.0 8.8

Services 6.8 8.5 11.1 10.8

Household final consumption expenditure 5.5 5.8 10.3 7.3

General gov't final consumption expenditure 4.2 3.9 6.2 5.5

Gross capital formation 6.8 11.0 14.3 13.3

Imports of goods and services 12.3 14.8 24.5 7.7

Note: 2007 data are preliminary estimates.

This table was produced from the Development Economics LDB database.

* The diamonds show four key indicators in the country (in bo ld) compared with its income-group average. If data are missing, the diamond will

be incomplete.

0

10

20

30

02 03 04 05 06 07

GCF GDP

Gro wth o f capita l and GD P (%)

0

20

40

60

02 03 04 05 06 07

Exports Imports

Gro wth o f expo rts and impo rts (%)

85

B A LA N C E o f P A YM EN T S

1987 1997 2006 2007

(US$ millions)Exports o f goods and services 16,216 45,109 204,264 246,071

Imports o f goods and services 22,839 59,297 235,625 297,009

Resource balance -6,623 -14,188 -31,361 30,176

Net income -1,337 -3,521 -6,573 ..

Net current transfers 2,698 11,830 27,941 30,176

Current account balance -5,262 -5,879 -9,993 -24,408

Financing items (net) 4,526 9,772 46,599 44,282

Changes in net reserves 736 -3,893 -36,606 -19,874

M emo :Reserves including gold (US$ millions) 6,223 29,367 198,710 218,582

Conversion rate (DEC, local/US$) 13.0 37.2 45.2 40.3

EXT ER N A L D EB T and R ESOUR C E F LOWS

1987 1997 2006 2007

(US$ millions)Total debt outstanding and disbursed 55,570 94,317 153,075 ..

IBRD 4,709 8,138 6,177 7,040

IDA 11,615 17,912 24,059 26,512

Total debt service 5,686 12,413 17,879 ..

IBRD 808 1,410 597 739

IDA 166 381 841 915

Composition of net resource flows

Official grants 531 549 873 ..

Official creditors 2,498 -406 2,144 ..

Private creditors 2,877 1,089 16,097 ..

Foreign direct investment (net inflows) 212 3,577 17,453 ..

Portfo lio equity (net inflows) 0 2,556 9,549 ..

World Bank program

Commitments 3,504 2,306 1,228 3,174

Disbursements 2,212 1,372 1,787 1,905

Principal repayments 499 1,070 942 1,089

Net flows 1,714 302 845 816

Interest payments 476 721 496 566

Net transfers 1,238 -419 349 251

Note: This table was produced from the Development Economics LDB database. 9/24/08

-3

-2

-1

0

1

2

3

01 02 03 04 05 06 07

C urrent acco unt balance to GD P (%)

G: 11,971A: 6,177

D: 4,096

B:

24,059

F: 87,110

E: 19,662

A - IBRD

B - IDA

C - IM F

D - Other mult ilateral

E - Bilateral

F - Private

G - Short-term

C o mpo sit io n o f 2006 debt (US$ mill.)

India

P R IC ES and GOVER N M EN T F IN A N C E

1987 1997 2006 2007

D o mestic prices(% change)Consumer prices 7.8 7.0 6.7 5.3

Implicit GDP deflator 9.3 6.5 5.6 4.3

Go vernment f inance(% of GDP, includes current grants)Current revenue 19.4 17.4 20.6 22.4

Current budget balance -2.7 -3.5 -4.4 -1.6

Overall surplus/deficit -9.2 -8.3 -6.5 -5.6

T R A D E

1987 1997 2006 2007

(US$ millions)Total exports (fob) 12,644 35,680 128,083 146,632

M arine products 411 1,207 1,744 ..

Ores and minerals 600 1,061 7,033 ..

M anufactures 8,195 26,547 82,818 91,657

Total imports (cif) 19,812 51,187 191,254 238,296

Food 1,141 1,483 3,291 ..

Fuel and energy 3,118 8,164 57,074 ..

Capital goods 5,064 9,796 52,944 71,311

Export price index (2000=100) 113 116 .. ..

Import price index (2000=100) 116 110 .. ..

Terms of trade (2000=100) 97 106 .. ..

0

100,000

200,000

300,000

01 02 03 04 05 06 07

Exports Imports

Expo rt and impo rt levels (US$ mill.)

0

2

4

6

8

02 03 04 05 06 07

GDP def lator CPI

Inf lat io n (%)

MAP SECTION

BANGALORE

CHENNAI(MADRAS)

HYDERABAD

To Raipur

To Wardha

To Jalna

To Parbhani

To SolapurTo

Dha

rwad

To Goa

To Hassan

To Coimbatore

To Dindgul

To Wardha

To KoraputTo Jagdalpur

To Bhubaneshwar

Adilabad

Nizamabad

Karimnagar

Warangal

Sangareddi

Mahbubnagar

Nalgonda

Khammam

Guntur

Machilipatnam

Srikakulam

Vizianagaram

Vishakhapatnam

Kakinada

Eluru

Kurnool

Anantapur

Cuddapah

Ongole

Nellore

Chittoor

ADILABAD

NIZAMABAD

KARIMNAGAR

MEDAK WARANGAL

RANGAREDDYKHAMMAM

NALGONDA

SRIKAKULAM

VIZIANAGARAM

VISHAKHAPATNAM

EASTGODAVARI

WESTGODAVARI

KRISHNA

GUNTURMAHBUBNAGAR

KURNOOL

PRAKASAM

ANANTAPUR

CUDDAPAH

NELLORE

CHITTOOR

Bay ofBengal

Krishna R.Krishna R.

Godavari R.

Godavari R.

Penneru R.

Papa

gni R

.

Kandleru R.

I N D I A

ANDHRA PRADESHNATIONAL HIGHWAYS

SELECTED STATE ROADS

RAILROADS

DISTRICT CAPITALS

STATE CAPITALS

DISTRICT BOUNDARIES

STATE BOUNDARY

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KILOMETERS

This map was produced by the Map Design Unit of The World Bank.The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.

IBRD 34182

AUGUST 2005