India - Industrial Finance and Technical Assistance Project

 ndustrial finance and technical assistance project Report No: ; Type: Report/Evaluation Memorandum ; Country: India; Region: South Asia; Sector: Other Industry; Major Sector: Industry; ProjectID: P009985 The Implementation Completion Report (ICR) for the India Industrial Finance and Technical Assistance Project (Loan 2928-IN, for US$360 million, approved in FY88) was prepared by the South Asia Regional Office, with Part II contributed by the Borrower. The loan closed on December 31, 1995, two years after the original closing date. At closing US$31.6 million was canceled. The main objective of the project was to foster faster industrial growth by helping companies adjust to ongoing reforms in the regulatory environment. The chief operational target was to channel funds through two large Development Finance Institutions (DFIs). An important subsidiary target was to help the Steel Authority of India (SAIL) enhance its operating and environmental practices. The major objectives of the project were not achieved. Interest rates did not reflect market conditions and onlending terms were lower than domestic interest rates. As a result, the interest rates on funds provided by the project encouraged borrowers to expose the Government of India to underpriced foreign exchange risk. The project also targeted 14 percent of the loan to one of the world’s largest parastatal enterprises, the Steel Authority of India (SAIL). This firm was overstaffed, and its problems stemmed largely from its parastatal status and thus its inability to respond to market signals. The project provided for a study of how to restructure SAIL which was never undertaken. The ICR rates the outcome of this project as satisfactory, its impact on institutional development as partial, sustainability as likely, and Bank and Borrower performance as satisfactory. The Operations Evaluation Department (OED) agrees with the institutional development rating, but disagrees with those of outcome, sustainability and Bank performance. OED rates project outcome as unsatisfactory because it was implemented in an inhospitable policy environment, with pricing that exposed the GOI to large and underpriced foreign exchange risks. Sustainability is rated unlikely because the firms that received the subsidized credit under the project were sustained by protective foreign exchange controls, licensing of imports, and financial sector regulations. These regulations have been eliminated. More attention could have been given to the risks during project design. Bank performance is rated as unsatisfactory because of the underpriced risk exposure borne by the Government of India. The major lesson from this project is that providing credit to industrial undertakings in an environment with a highly restricted foreign exchange regime and a highly regulated financial system is risky and inefficient in both fiscal and allocative terms. The quality of the ICR is satisfactory. No audit is planned.