September 21, 2006

PROGRAM INFORMATION DOCUMENT (PID)

Report No.: AB2528AB2569

Project Name / Third Andhra Pradesh Economic Reform Credit /Loan
Region / South Asia Region
Sector / Poverty Reduction and Economic Management
Project ID / P075174
Borrower(s) / Government of India
Implementing Agency / Government of Andhra Pradesh
Date Updated PID Prepared / September 21, 2006
Date of Appraisal Authorization / September 14, 2006
Estimated Date of Board Approval / January 7, 2007

1.  Key development issues and rationale for Bank involvement

Located on India’s south east coast, Andhra Pradesh (AP), accounts for (i) 8.3 percent of India’s land mass; (ii) 7.3 percent of the country’s population (around 80 million people in 2004-05); (iii) 7.1 percent of India’s GDP (an economy of US$ 45 billion in 2004-05); and (iv) over 7.5 percent of the country’s poor.

The current government, which came to power in May 2004, has built on the economic and social reforms initiated by the previous government. Along with continuing the key reform initiatives of the past—fiscal discipline, improving state’s investment climate, governance reforms, restructuring of public enterprises—the new government has added emphasis on agriculture and irrigation to improve the welfare of the rural poor. The reform program has been extended to new areas including liberalization of agricultural markets, increasing access of poor to land and credit, shifting public expenditure to build rural infrastructure. All in all, the reform momentum in AP continues to gather pace and the state remains one of India's leading reforming states.

The World Bank has been a long-term development partner in AP’s reform efforts in general, and in its policy and institutional reforms in particular. In support of the state’s ongoing reform program, a structural adjustment loan—the Andhra Pradesh Economic Reform Loan 1 (APERL 1)—was approved in March, 2002, with a credit/loan amount of $250 million (plus an additional $100 million from DFID, UK). In recognition of further reform progress, a second loan/credit (APERL 2) was approved in February 2004 for $220 million (plus an additional $100 million from DFID, UK). In addition, there are three single-state Bank-financed investment projects currently under implementation in the state for a net commitment value of about $369 million. AP also has a significant share of various national and multi-state projects that the Bank is supporting. Looking ahead, there are about six projects in the pipeline for a cumulative net financial commitment of about US$ 1 billion. AP has also been a major recipient of the Bank’s technical assistance and analytical and advisory activities. The proposed loan/credit is the third budget support operation to AP.[1]

The India Country Assistance Strategy approved by the Board in August 2004, highlights support for poor and reforming states as one of the major thrusts of the Bank’s assistance in India. Despite its recent development success, AP remains a middle income Indian state, with pockets of heavy concentration of poverty and deprivation, especially the rural areas in the Telengana region. AP is also a leading reforming state in the country. Thus on both these accounts, AP continues to be an appropriate candidate for continued Bank assistance.

2. Proposed objective

The main objective of the proposed third Andhra Pradesh Economic Reform Credit / Loan (APERL 3) is to support the continued implementation of the government’s program of fiscal, administrative and service delivery reforms needed to boost economic growth and achieve rapid poverty reduction over the medium term. The easing of fiscal constraints, improved budgetary and financial management practices, better governance and improvement in the delivery systems will, among other things, enable Andhra Pradesh to effectively utilize additional project assistance in key sectors in future years.

3. Description

In just over a decade, AP has emerged from an economically and socially backward state of India to one where the positive impact of its sustainable reforms is well documented on both economic and social fronts. The state has made significant progress in improving the living standards of its citizens. Its decade long reform program has yielded encouraging results and it has begun to bridge the development gap. More specifically, among the Indian states, AP now has (a) the best managed power sector, (b) third highest credit rating, (c) third best investment climate and (d) fourth lowest corruption level.[2] Specific reform actions of the Government of Andhra Pradesh (GoAP) supported by this project include:

§  In consultation with the main line departments, the Consolidated Action Plan for Poverty Reduction is finalized and is operational.

§  The state’s investment climate is improved by introducing legislation that (a) amends the “Andhra Pradesh (Agricultural Produce and Livestock) Market Act,” which will bring about greater liberalization of agricultural wholesale markets, and (b) implements the “Special Enclave Service Condition and Dispute Resolution Act of 2003,” which will expedite the resolution of industrial disputes.

§  Deficit targets and expenditure composition targets are attained annually in accordance with the Medium-Term Fiscal Framework (MTFF), and legislation is introduced for the annual presentation of the MTFF along with the Budget.

§  The reforms in public expenditure and financial management as identified in the State Financial Accountability Assessment are continued including: (i) all pending audit paragraphs for 2001-02 and 2002-03 replied to the Accountant General; (ii) maintenance of timely resource releases; and (iii) internal audit unit established and functioning.

§  Phase II of the Public Enterprise Reform program is implemented and program targets for 2003-04 and 2004-05 are achieved.

§  An anti-corruption action plan is implemented with good progress (on the basis of agreed milestones) in expanding the independence, capacity and effectiveness of the anticorruption agencies. Legislation is introduced in the Assembly to strengthen public procurement, and the e-procurement program is implemented consistent with existing milestones.

§  Class-to-class transition rates are increased at the elementary level, leading to improved achievement in mathematics and languages at Grades 3 and 5, and student and teacher attendance is raised over a mutually agreed upon baseline. Assessment of transition rates, achievement levels in mathematics and language, student and teacher attendance is done on a sample basis by an independent agency.

4. Environmental Aspects

The main environmental challenges facing AP are: (i) nearly 70 percent of the state’s population relies on agriculture which is very vulnerable to drought and rainfall variability, particularly in rain-fed areas. These areas also happen to be the poorest areas in the state, (ii) rapid industrialization and economic diversification in the state has been accompanied by opportunities for growth and employment as well as environmental pressures. GoAP has a strong track record on promoting sustainable development. The state environmental authorities--the Department of Environment, Forests, Science and Technology, and the Andhra Pradesh Pollution Control Board (APPCB)--have improved environmental management and enforcement, and generally have created greater environmental awareness among stakeholders. While having the lowest number of staff per 100 units requiring environmental consent/inspection, the APPCB is among the most efficient, competent and well- performing environmental enforcement institutions in the country. The Bank has provided extensive support to APPCB via the national Industrial Pollution Control Project, Industrial Pollution Prevention Project and the Environmental Management Capacity Building Project.

Overall, the environmental impacts of APERL 3 operation are not likely to be significant.

5. Tentative financing

Total / $ 200 million
Note: IBRD & IDA mix to be determined in consultation with the Government of India (at the time of Loan/Credit Negotiations).

6. Contact points

Mr. Vinaya Swaroop
Lead Economist
World Bank Office in Dhaka
Tel: (8802) 815-9015 / Mr. Deepak Mishra
Senior Economist
1818 H Street
Washington DC 20433
Tel: (202) 473 4331

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[1] The previous term Structural Adjustment Loan (SAL) has been renamed as Development Policy Loan (DPL).

[2] The respective sources are: (a) State Power Sector Performance Ratings, Report prepared for Ministry of Power, June 2006; (b) CRISIL State Ratings, October 2005; (c) World Bank Investment Climate Report, 2004; and (d) India Corruption Study, Transparency International India, June 2005.