PROJECT INFORMATION DOCUMENT (PID)

APPRAISAL STAGE

Report No.: AB1038

Project Name

/ ANDHRA PRADESH URBAN REFORM & MUNICIPAL
Region / SOUTH ASIA
Sector / General water, sanitation and flood protection sector (50%);Solid waste management (30%);Roads and highways (20%)
Project ID / P071250
Borrower(s) / GOVERNMENT OF INDIA
Implementing Agency
Environment Category / [X] A [ ] B [ ] C [ ] FI [ ] TBD (to be determined)
Safeguard Classification / [X] S1 [ ] S2 [ ] S3 [ ] SF [ ] TBD (to be determined)
Date PID Prepared / July 28, 2004
Date of Appraisal Authorization / December 1, 2004
Date of Board Approval / May 19, 2005

1.  Country and Sector Background

Over the past decade, the context of urban development has changed significantly in India. The country’s focus on economic liberalization, financial sector reform, and a new emphasis on decentralization continue to affect urban growth, the economic role of cities, the needs of the urban population, and their demand for services. Despite large inefficiencies, new opportunities have emerged in the last few years and the country’s thrust on democratic decentralization under the 74th Constitutional Amendment Act has led to a new emphasis on improved urban governance and management. These new opportunities, and a renewed interest of the Government of India (GOI) and some state governments in increasing the cities’ efficiency and reducing urban poverty, provide the global setting for the proposed project.

In line with global experience, the urban sector in India has increasingly become an important driver of economic growth. Today, urban centers contribute a significant share (more than 50%) of the country’s Gross Domestic Product (GDP) highlighting their importance in achieving national economic growth targets. The country needs to reach an economic growth rate of at least 8% in the GoI’s Tenth Plan (2002-07) in order to significantly reduce the incidence of poverty and provide a better quality of life to all its citizens. For the first time, the Tenth Plan emphasizes urban infrastructure and reform as critical to growth and poverty alleviation and specifically identifies strengthening decentralized urban local governments and their capacity to deliver services as a priority.

Recognizing that widespread reform in governance and service delivery arrangements of Indian cities is required to position them as engines of national growth and development, the Ministry of Urban Development and Poverty Alleviation (MUDPA) has designed a comprehensive Urban Development Strategy focusing on fiscal, financial, and institutional changes addressing key sector issues. As a cornerstone of the urban strategy, the MUDPA introduced the Urban Reform Incentive Fund (URIF) in 2002. Through financial incentives from this centrally funded scheme, GOI encourages State level reforms. The first round of reforms supported by URIF is directed at promoting the improved functioning of urban land markets and the simplification of the regulatory environment governing urban development in general, and the financial health of urban local bodies. The reform agenda includes abolishing the Urban Land Ceiling Act 1976 and revising rent control and stamp duty legislation, increasing municipal revenue and strengthening financial management by introducing accrual accounting, increasing user charges, and better property tax collection.

As of September 2004, the Government of Andhra Pradesh (GoAP) had made good progress in a number of reform areas under the URIF program as well under its own list of priority actions. Progress made by the Municipal Administration and Urban Development Department (MAUD) prior to project appraisal under URIF was substantial. Reforms relating to computerization of land document registration, property tax reform (collection up to 85% of demand) and the introduction of accrual accounting and levying reasonable users charges are well advanced. Reforms relating to abolition of the Urban Land Ceiling Act, reform of Rent Control laws, and revision of Stamp Duties will be carried out in accordance with a time bound action plan confirmed during project appraisal.

In addition to the above, the State is working on a number of other important reforms that are outside the scope of URIF initiative. These include increasing transparency in the operations of Urban Local Bodies (ULBs) and more computerization of municipal functions.

2.  Objectives

The overarching goal of the APURMSP is to create economically productive, efficient and equitable urban centers in Andhra Pradesh with increased capacity to reduce urban poverty. City productivity however cannot be improved solely through service delivery investments. A comprehensive program for addressing the challenges faced by cities is needed which focuses on reforms to institutions and practices in addition to service investments.

The goal of the project is to support urban sector reforms and improve city management and municipal services with a view to addressing urban poverty. The project’s specific development objectives are to:

·  improve urban governance through the implementation of an agreed reform agenda at State and local levels based, in part, on Government of India’s Urban Reform Incentive Fund (URIF);

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

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

All 117 ULBs in the State are eligible to participate in the project, with only those ULBs showing measurable progress in implementing agreed urban reforms gaining access to the investment funding under the project.

3.  Rationale for Bank Involvement

One of the overarching challenges of the Bank’s Country Assistance Strategy (CAS) will be to improve the quality of life for some of the world’s poorest citizens and help India move closer to achieving the Millennium Development Goals (MDG). To achieve its goal in the urban sector, the CAS cites a long-term objective for GOI-MDG to increase the contribution of urban areas to growth and poverty reduction:

“For India, accommodating the needs of its growing urban population is now and will continue to be a strategic policy issue for many years to come. India’s cities could contribute to the country’s economic growth, and poverty reduction, if they did not suffer so severely from infrastructure bottlenecks, service deficiencies, poor local governance, and distortions in land and factor markets.”[1]

The Bank is uniquely positioned to support the Government’s urban program:

First, the program is fully consistent with the Bank’s CAS and recent sector work. The proposed operation will help support a State that is committed to creating a better enabling environment for cities and urban service providers.

Second, the Bank will leverage its experience and expertise in urban service provision to the poor. The proposed project will benefit from extensive lessons and experiences associated with the Bank’s longstanding urban development portfolio. Experience in the developing world has reinforced the importance of targeting the poor, community participation, cost-recovery, operations and maintenance, and the need to develop sustainable institutional arrangements to deliver services to the poor.

Third, the proposed Bank engagement will complement and build upon successful experiences of a number of parallel initiatives being implemented by the Government of Andhra Pradesh with international assistance. Chief among these is the DFID-funded Andhra Pradesh Urban Services for the Poor Project (APUSP).

Fourth, the proposed project is fully consistent with the GoAP’s Urban Development and Urban Poverty Reduction Strategy which supports sustainable and creditworthy institutional systems of municipal management and service delivery, especially to the urban poor. The Strategy places urban poverty reduction within the overall developmental perspective. The State government’s approach to the sector, in its efforts to operationalize its Vision 2020, is one of promoting increased transparency, accountability, and community participation in all aspects of urban management and reform. With new funding mechanisms offered by GOI, such as the Urban Reforms Incentive Fund (URIF), the proposed project would take advantage of the financial incentives to increase municipal performance in resource mobilization, financial management and land development.

Finally, the proposed project focus is consistent with the Bank’s India Urban Strategy which emphasizes selectivity and places priority on reforming States. The Bank’s urban strategy is intended to support sound financing at the local level, which would eventually enable ULBs to access capital markets and reduce their dependence on limited central and state budgetary resources for their capital investment needs.

4.  Description

The project is composed of four components:

Legal and Institutional Reform (US$12 million equivalent). This component would provide technical assistance to the Municipal Administration and Urban Development Department (MAUD) for the drafting of legal instruments (regulations, decrees, etc) and the preparation of studies, manuals, guidelines, and other materials needed to improve the legal and policy framework of the urban sector for municipal development and management. Many reforms are underway. This component would be closely coordinated with the work program of the Strategy Performance and Innovation Unit[2] established within MAUD and funded by DfID.

Municipal Capacity Enhancement (US$5.0 million equivalent). This component would ensure the mainstreaming of a process of capacity enhancement (CE) at the state and local government level; facilitate the professionalization of municipal management through certification of senior ULB staff; and provide training to elected municipal officials, members of other organizations which support the municipalities, as well as community based organizations. This component, managed by the Commissioner and Director of Municipal Administration (CDMA) through a Capacity Enhancement Coordinator, would develop a strategy and initiate its implementation to ensure sustained capacity enhancement in the municipal government system and urban public administration. In addition, the component will provide technical skills needed by municipal authorities in areas such as municipal finance and delivery of infrastructure and services. The program would be demand driven. A significant part of training would be contracted out to private and non-governmental entities. All learning modules would be developed in close coordination with the legal and institutional reform activities supported under the project.

Infrastructure Investment (US$135 million equivalent). The demand driven performance-based infrastructure investment component would provide eligible municipalities with financial resources to improve the delivery of basic urban services including the implementation of priority city wide civil works,. Basic services would include tertiary roads, drains, footpaths, water supply at neighborhood level, sanitation, solid waste collection, and street lighting. City-wide infrastructure would include primary and secondary roads and drains, storm water drainage, and solid waste disposal. Finance would not be provided under the project for power, telecommunication, rolling stocks such as buses and trams, and primary health/education. Administration of loan funds would be provided by the Andhra Pradesh Urban Finance and Infrastructure Development Corporation (APUFIDC). Once having prepared their initial financial assessment (IFA) and having been identified as having the necessary level of borrowing capacity, municipalities would prepare capital investment plans (CIP) which would identify their priority investment requirements for improving urban service delivery. Urban local bodies and beneficiary communities would contribute 15 percent of the cost of infrastructure investments

Project Management and Technical Assistance (USD9.8 million equivalent). APURMSP would finance technical assistance to support project management. Expertise will be provided to MAUD/CDMA which is expected to provide substantial sub-project development and implementation support to ULBs, as well. Technical assistance will also be provided to MAUD (and statutory bodies reporting to it) to support implementation of the urban reform agenda and municipal capacity enhancement. Assistance would be provided to APUFIDC to enable it to take on its new enhanced role as a professional fund manager. Technical assistance would be made available to ULBs to facilitate reaching the eligibility criteria for participation in the project and to those ULBs requiring consultant services to prepare and implement infrastructure sub-projects. The latter TA will be financed through a Project Development and Advisory Facility (PDAF). The purpose of PDAF is to respond to the low level of ULBs' capacity in formulation, design and implementation of projects. The PDAF will support other activities of the project cycle such as Initial Financial Assessment (IFA), preparation of Capital Investment Plans (CIP) and implementation of priority infrastructure investments.

5.  Financing

Source: / ($m.)
BORROWER / 27
INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT / 144
URBAN LOCAL BODIES / LOCAL COMMUNITIES / 20
Total / 191

6.  Implementation

The ultimate responsibility for the project lies with the Municipal Administration and Urban Development Department (MAUD) who will assume this responsibility through a Municipal Support Unit under the direction of the Commissioner and Director of Municipal Administration (C&DMA).

The Directorate of Municipal Administration (DMA) will be the nodal agency for the project and will manage the implementation and monitoring of the ULB reform process, capacity enhancement and investment components. A Municipal Strengthening Unit (MSU), established to implement the DFID-funded APUSP under the DMA, will be expanded to take on the additional responsibility of APURMSP. This cell will be headed by a Project Director. Finance, procurement, technical, and reform specialists will also be attached to this cell. DMA will be responsible for all reporting requirements, including those of the Bank. For project components to be executed by the DMA, funds will be will be budgeted in the state government’s annual budget document and will be provided through a dedicated PD account. However, for the Project Development Advisory Facility (PDAF), the DMA will be appointed Manager on behalf of the Andhra Pradesh Urban Infrastructure Trust. For the execution of PDAF activities, the DMA will receive moneys from the Trust into a commercial bank account from which project expenditures will be made.

The Andhra Pradesh Urban Finance and Infrastructure Development Corporation (APUFIDC) will manage funds for the investment component of APURMSP. Project funds will be deposited in a Revolving Trust Fund created in January 2005. The Trust will be administered by a corporate trustee, the Andhra Pradesh Urban Infrastructure Finance Company (APUIFC), a company incorporated solely for the administration of the Trust Fund. The Fund will be registered under the Indian Trust Act and will have an initial corpus of Rs. 25 crores which will be provided by GoAP. It will comprise a Board chaired by the Chief Secretary of the state. The Trust’s mandate shall be to ensure that sub loans are given as per the guidelines set out in project legal agreements, in accordance with the access criteria and to meet the development objectives envisaged by the project. APUFIDC will administer the project funds under the terms of a management agreement with APUIFC.