India - Tamil Nadu Urban Development Project

Documenit of The World Bank FOR OFFICIAL USE ONLY Report No: 17605 IMPLEMENTATION COMPLETION REPORT INDIA TAMIL NADU URBAN DEVELOPMENT PROJECT (Credit 1923-IN) March 31, 1998 Infrastructure Sector Unit South Asia Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS US$ 1.00 = Rs. 13.00 at appraisal (June 1, 1987) Rs. 1.00 = US$ 0.07692 at appraisal (June 1, 1987) US$ 1.00 = Rs. 36.18 at closure (September 30, 1997) Rs. 1.00 = US$ 0.02764 at closure (September 30, 1997) GOI/GOTN FISCAL YEAR April I - March 31 WEIGHTS AND MEASURES m - meter (39.37 iniches or 3.28 ft) m2 square meter (10.7639 square feet) km - kilometer (0.62 miles) ha - Iectare (10,000 square meters or 2.47 acres) sq. kin , square kilometer (0.386 square miles) I - liter (0.22 Imperial gallonis or 0.264 US gallons) Ipcd - liters per capita per day Rs. I lakh - Rs. 100,000 Rs. I crore - Rs. 10,000,000 ABBREVLATIONS AND ACRONYMS BUS - Bus component of TNUDP CMC - City Maniagemenit Committee DCA - Developmenit Credit Agreeinent DHRW - Department of Higliways atid Ruiral Works DEA - Department of Economic Affairs, Ministry of Finaince, GOI DMA - Directorate of Mumicipal Administration of GTN DS&M - Design, Supervision atid Matiagemeiit DTCP - Directorate of Town amid Country Plaitting of GTN EC - Etpowered Committee ERR - Economic Rate of Retunt EWS - Economically Weaker Sections FOP - Fitnancial and Operatitig Plan GF - Grant Fusid GOI - Goveminent of Itndia GTN - Govemmenit of Tasiil Nadu GUD - Guided Urbani Development Component of TNUDP HEL - Home Expansioni Loan HIG - High Income Group LAS - Ilidias Admtiiistrative Service IUD - Integrated Urban Development LAND - Land Servicing Program Componenst of TNuDP LASER - Land Shariig/Readjustinent for Private Slums LCS - Lease cum Sale Teniure Agreemeiit LIG - Low Income Group MASCOT - Municipalities of Madurai, Salem, Coimbatore and Trichy MAWS - Municipal Adininistration and Water Supply mlG - Middle Income Groups MMA - Madras Metropolitan Area MMC - Madras Municipal Corporation MMDA - Madras Metropolitan Development Authority MOMS - Madras Outer Municipalities MUDF - Municipal Urban Developinent Fund of TNUDP MUDP Madras Urban Developinerit Project (I and It) O&M - Operation and Maintenance PMG - Project Management Group of TNiUDP PTC - Pallavan Transport Corporation (Bus company of Madras) PWD Public Works Department S&S - Sites and Services SIP - Slum Improvement Program Component of TNUJDP SOE - Statement of Expenditure STOWAD - Storn Water Drainage Program SUDAR - State Urban Development Authority TATE - Technical Assistance and Training TNHB - Tamil Nadu Housing Board TNSCB - Tamil Nadu Slum Clearance Board TNiUDF - Tamil Nadu Urban Development Fund TNUDP - TN Urban Development Project TRAMP - Transport and Traffic Management Program Component of TNUDP ULCA - Urban Land Ceiling Act VETTT - Municipalities of Vellore, Erode, Tirunelveli, Tuticorin and Tirrapur WSS - Water Supply and Sanitation Vice President: Mieko Nishimizu Country Director: Edwin R. Lim Sector Manager: Frannie Humplick Task Leader: Hiroaki Suzuki  FOR OFFICIAL USE ONLY IMPLEMENTATION COMPLETION REPORT INDIA TAMIL NADU URBAN DEVELOPMENT PROJECT (CREDIT 1923-IN) Page No. PREFACE TABLE OF CONTENTS EVALUATION SUMMARY i PART I: PROJECT IMPLEMENTATION ASSESSMENT A. Project Objectives 6 B. Achievement of Project Objectives 8 C. Implementation Record and Major Factors Affecting the Project 16 D. Project Sustainability 17 E. Bank Performance 18 F. Borrower Performance 19 G. Assessment of Outcome 19 H. Future Operations 20 I. Key Lessons Learned 20 PART II: STATISTICAL ANNEXES Table 1: Summary of Assessments 22 Table 2: Related Bank Loan/Credits 23 Table 3: Project Timetable 25 Table 4: Credit Disbursements: Cumulated Estimated and Actual 26 Table 5: Key Indicators of Project Implementation 27 Table 6: Key Indicators of Project Operation 29 Table 7: Studies Included in Project 30 Table 8A: Project Costs 34 Table 8B: Project Financing 34 Table 9: Economic Costs and Benefits 35 Table 10: Status of Legal Covenants 36 Table 11: Compliance with Operational Manual Statements 39 Table 12: Bank Resources: Staff Inputs 40 Table 13: Bank Resources: Missions 41 APPEND-ICES A. Completion Mission's Aide-Memoire B. Borrower's Evaluation Map: IBRD No. 20554R This document has a restricted distnbution and may be used by recipients only in the perforrnance of their off-icial duties. Its contents may not otherwise. be disclosed without World Bank autihorization.   IMPLEMENTATION COMPLETION REPORT INDIA TAMIL NADU URBAN DEVELOPMENT PROJECT (CREDIT 1923-IN) Preface This is the Implementation Completion Report (ICR) for the Tamil Nadu Urban Development Project (TNUDP) in India, for which Credit 1923-IN in the amount of SDR216.5 million (US$300.2 million equivalent) was approved on June 15, 1988 and made effective on November 7, 1988. SDR22.0 million (US$30.5 million equivalent) and SDR10.8 million (US$15.0 million equivalent) of the Credit were canceled on December 5, 1991 and May 1, 1993 respectively. There were two one-year extensions of the original Credit closing date of September 30, 1995. On October 11, 1996, during the second extension period, the project was restructured to permit changes to the implementation arrangements of the project's Municipal Urban Development Fund (MUDF) component, providing support for a new financial intermediary called the Tamil Nadu Urban Development Fund (TNUDF). There were two partial suspensions of disbursements of the Credit, both relating to a single event, the implementation of a storm water drainage scheme in the city of Madurai. The first suspension occurred on November 4, 1994 and was lifted on September 21, 1995 when the Bank was satisfied with the action plan for the resettlement and rehabilitation of displaced persons. The second suspension occurred on November 15, 1994 and was lifted on December 16, 1994 when the Bank was satisfied with the project's SOE (Statement of Expenditure) procedures. The Credit was closed on September 30, 1997 and the final disbursement took place on February 19, 1998 at which time there was no Credit balance. The ICR was prepared by Mr. Michael Whitbread (Consultant) under the supervision of Mr. Hiroaki Suzulki (Task Leader). The ICR was reviewed by Ms. Joelle Chassard, Team Leader, SASIN, Mr. Alan G. Carroll, Sr. Urban Specialist, AFTU2, Ms. Hiroko Imamura, Sr. Counsel, LEGSA, Mr. Cecil Perera, Sr. Disbursement Officer, LOAAS and Mr. N. Raman, Sr. Procurement Officer, SACND. The preparation of this Implementation Completion Report (ICR) began during the Bank's completion mission in September 1997. The ICR is based on the mission's findings which are included as Appendix A to the ICR, material from project files and discussions with Bank officials and others involved with different stages of the project cycle. The Borrower contributed to the ICR by providing data and views on the project outcome. The Borrower's evaluation is included as Appendix B.   IMPLEMENTATION COMPLETION REPORT INDIA TAMIL NADU URBAN DEVELOPMENT PROJECT (CREDIT 1923-IN) Evaluation Summary Introduction 1. TNUDP was the last of the integrated urban development (IUD) projects in India. It built upon two earlier projects, the First and Second Madras Urban Development Projects. TNUDP consisted of a program loan which served as a line of credit to a variety of institutions undertaking urban development in the State of Tamil Nadu. It was a large, far-reaching and complex project with many innovative policy, institutional development and project management features. A number of these anticipated both current Bank policy and practice and the elements of India's 74th Constitutional Amendment' on municipal strengthening which was introduced in 1992. One of these innovations was the establishment of a Municipal Urban Development Fund to provide capital on a demand-driven and transparent basis to municipalities who up until this point were starved for investment funds. The success of the MUDF led to a two year project extension which was used to restructure and enable the further development and transformation of the MUDF into a new financial intermediary called the Tamil Nadu Urban Development Fund. The TNUDF has the participation of three private financial institutions as well as the Government of Tamil Nadu (GTN). Following a request from the Government of India (GOI) and GTN, the Bank and the Borrower are currently preparing a Second TNUDP which would further develop the TNUDF. Project Objectives 2. TNUDP objectives at appraisal were: (a) to improve Tamil Nadu's state-wide capacity for efficient management of urban and economic development; (b) to increase the supply of legal, environmentally acceptable and affordable private and public serviced land as well as to stem the absolute number of households living in slums; and (c) to strengthen the procedures and institutions for revising bus fares and enhancing the accountability of the Chennai bus company, and improve the identification and implementation of cost-effective urban road and traffic I The 74th Constitutional Amendment Act was passed in 1992 and it is currently being implemented by states. The 74th CA is concerned with municipal strengthening following decades of neglect by the states. The Amendment has three objectives: (a) to clarify functions and responsibilities; (b) to strengthen finances (including the establishment of State Finance Commissions to advise on municipal financial strengthening); and (c) to impose local democracy. For details of its implementation in Tamil Nadu, see Appendix A, Annex 7.  - ii - management schemes. The objective of the restructured project was to further continue the process of policy development and evolution by providing support for the financing of the new financial intermediary. Objectives at appraisal were to be achieved through a covenanted operational action plan containing 82 actions, and by the implementation of components covering: the creation of the MUDF; support for Urban Management, TA, Training and Equipment; provision of Shelter; and provision of Transport infrastructure and facilities. Although not formally stated in the objectives, the project reflected the Bank's concerns for urban poverty, finance and the environment, and the involvement of the private sector in the restructuring (see main text, paragraph 4). Implementation Experience and Results 3. The project contributed to major advances in urban finance in Tamil Nadu, not only through the success of the MUDF and the TNUDF but by its pursuit of cost. recovery and the self-financing of agencies, which had previously relied on subsidies (paragraphs 8-12). While the project was unable to address the problem of the weak institutional and financial capacity of municipalities, other major policy and institutional reforms were achieved (paragraph 13). The Borrower's project management arrangements could have been more effective with greater delegation of responsibility for resource allocation decisions, less frequent changes of senior staff and contracting out a number of management functions (paragraphs 14 and 15). Physical achievements were mixed: (a) the sites and services targets at appraisal were exceeded; (b) none of the experimental guided urban development schemes were implemented; (c) slum upgrading fell short of the targets and there were only two schemes on private land; (d) there were 37 major road and related transport schemes but 13 remained incomplete even after the two year extension; (e) bus targets were exceeded; (f) the MUDF greatly exceeded all expectations with over 500 sub-projects in 94 municipalities; and (g) there was extensive training and effective use of TA funds for a wide range of studies (paragraphs 16-23). In all cases the implementing agencies adhered to the sub-project design guidelines established at appraisal and benefited target groups as was intended. 4. The prospects for the TNUDF are good and there are a considerable numnber of projects currently in the pipeline (Appendix A, Part B). A second project would facilitate the growth of the Fund and encourage increased support from private sector financial institutions. 5. The only external factor of significance that affected the project was the depreciation of the Rupee, which resulted in savings that led to two cancellations of the Credit. Savings from the depreciation of the Rupee permitted continued financing during the extensSions and enabled the restructuring to occur. There were two partial Credit suspensions as a result of an isolated incident involving a storm water drainage scheme in the city of Madurai (paragraph 27). The much-needed scheme was eventually implemented under the project after the suspensions were lifted.  - 1ii - Bank Performance 6. A feature of Bank involvement was the continuity of the Task Manager and a core team of technical specialists. This continuity extended from the earlier Madras I and II projects through identification, preparation and supervision of TNUDP up until November 1994. At that time, the Bank team changed in order to reflect the new direction of the project which focused on the development of the financial intermediary and to resolve the resettlement issues pertaining to the Madurai Storm water Drainage Scheme. Bank performance has been rated satisfactory or highly satisfactory. Actual supervision time greatly exceeded appraisal expectations, but most of the increase was due to additional Bank efforts regarding the suspensions and restructuring. Borrower Performance 7. The Borrower was fully committed during preparation and appraisal and performance was highly satisfactory. Implementation performance was rated satisfactory. There were many advances, most notably with the MUDF and other financial policy reforms, as well as with physical progress on buses and sites and services. However, the Government often held up major procurement decisions for considerable periods of time, and delayed important fare revisions. The Department of Highways and Rural Works (DHRW), the implementing agency for major roads, encountered considerable delays and cost overruns (paragraph 20), and the Tamil Nadu Slum Clearance Board (TNSCB) failed to fully execute its program (paragraph 19). Assessment 8. The overall achievement of the project has been rated as satisfactory. Many aspects of this complex and far-reaching project were successful. Some of these successes were reflected in the extensions to permit further development of the TNUDF and, in particular, the proposal to design a follow-up project. These many successes, however, need to be weighed against failures and some of the more limited project achievements (paragraph 39). The project's major shortcoming was that it could not adequately address the weak institutional and financial capacity of municipalities, even though GTN began to undertake the necessary corrective measures that were in line with the 74th Constitutional Armendment a few months prior the project's closing date. Future Operations 9. A follow-up project would provide continued support for the development of the TNUDF (see Appendix A, Part B) and address the major shortcoming of the TNUDP mentioned in paragraph 8. The objective of further lending would be to increase private capital flows to urban infrastructure financing. This would be in keeping with one of the objectives of the 74th Constitutional Amendment, to strengthen municipalities, and an area in which the Government is currently undertaking extensive reforms (as explained in Appendix A, Annex 7). Participation by the Bank would enable the TNUDF to continue to attract the interest of the private sector by providing confidence, technical assistance, expertise and funds to maintain the scale of the Fund's lending momentum.  - iv - Key Lessons Learned 10. The following summarizes the lessons learned (main text Section I): (a) Simplification. Bearing in mind the constraints on the institutional capacity of GTN as well as the resources of the Bank, the project's scope should have been less ambitious and much simpler. Although TNUDP's overall performance was better than those of other Bank-financed integrated urban development projects in India, the Project Management Group and the Bank could not address the problems of non-performing components such as TRAMP (road construction) and SIP in a timely manner. The Bank needs to be highly selective about where it operates and act swiftly and decisively when political commitment disappears. The project restructuring was undertaken in order to re-focus the efforts of the GTN and the Bank on the most successful and sustainable financial intermediary component. (b) Need for Strengthening of Municipalities. Financial intermediaries such as MUDF and TNUDF can contribute to the strengthening of municipalities by imposing financial discipline on them as a condition of loan provision, and by helping them develop municipal projects. However, the financial intermediaries alone cannot address the fundamental problems of municipalities' weak institutional capacities and weak financial situations. Most of the municipalities do not have adequate financial, managerial, administrative, and technical institutional capacities, which should be strengthened by TA and the training program. The municipalities' weak financial situations are a result of institutional constraints which impinge on the effectiveness of resource mobilization (unpredictable and discretionary intra-government transfer system with weak financial accountability framework, inappropriate property tax assessment and inadequate user charge level and collection). In order to improve the financial situations of the municipalities, the Govement should undertake the reforms necessary to address these constraints. (c) Government Commitment. The project was most successful in the areas of policy reform and good practice where Government support for the objectives was strongest. For example, development of the urban financial intermediary scheme was successful and received full backing from the State's Finance Department, as well as from the Department of Municipal Administration and Water Supply. (d) Project Management. Project management would have been improved substantially if greater decision making authority for resource allocation had been delegated to the Project Management Group. Authority of this kind would have provided PMG with the means and incentives to take prompt and effective action to correct any emerging inadequacies in implementation. (e) Need for Addressing Urban Poverty. The low-income population represents about 40 percent of the urban population in Tamil Nadu. It is important to address urban poverty issues through appropriate project design and the inclusion of a specific project component, such as the Grant Fund, which finances the sub-projects targeted to the urban poor.  - v - (f) Continuity of Bank Staff. Policy continuity and a high level of personal accountability were maintained by having virtually the same core team for project preparation, appraisal and supervision, and retaining some of the team members who were involved with the earlier Madras I and II projects. The team changed after November 1994 in order to accommodate the shift in project focus to restructuring and the development of the financial intermediary and to resolve the settlement issues. The latter team continues to work on the next possible operation.   IMPLEMENTATION COMPLETION REPORT INDIA TAMIL NADU URBAN DEVELOPMENT PROJECT (CREDIT 1923-IN) PART I: PROJECT IMPLEMENTATION ASSESSMENT A. PROJECT OBJECTIVES 1. At Appraisal. The project consisted of a program loan operated as a line of credit to institutions undertaking urban development in the State of Tamil Nadu. The project built upon earlier Bank-financed urban operations including the Madras I and II Urban Development Projects. The INUDP project objectives at appraisal were: (a) to improve Tamil Nadu's state- wide capacity for the efficient management of urban and economic development; (b) to increase the supply of legal, environmentally acceptable and affordable private and public serviced land and to stem the absolute number of households living in slums; and (c) to strengthen the procedures and institutions for revising bus fares and enhance the accountability of the Chennai bus company, and to improve the identification and implementation of cost-effective urban road and traffic management schemes. 2. At Restructuring. The project was restructured during its extension period. The objective of the restructured project was to continue the process of policy development and evolution by providing support for the creation of a new financial intermediary called the Tamil Nadu Urban Development Fund (TNUDF). 3. Components. The appraised project consisted of: (a) the creation of a Municipal Urban Development Fund (MUDF) for equipment, civil works and associated technical assistance for the complete range of functions and services performed by municipalities throughout the State; (b) support for Urban Management, Technical Assistance, Training and Equipment for the high level Empowered Committee, the Project Management Group (PMG), City Management Committees (CMCs) and the project's implementing agencies; (c) provision of Shelter infrastructure in the ten largest cities of the State including schemes for sites and services, slum upgrading, and in the Chennai Metropolitan Region, guided urban development for serviced plots serving the needs of primarily low income groups and involving private 2 In September 1996 the official name for the city of Madras was changed to Chennai. In this report Chennai is used except where, for reasons of continuity (as with project names), it is appropriate to continue to use Madras.  - 7 - landowners and developers; and (d) the provision of Transport infrastructure in the ten largest cities in the State, including schemes for traffic management, signalization, road improvements and new construction. Additionally in Chennai, this included the procurement of about 1.000 buses and a related workshop, depots, terminal improvements, and equipment. These project components continued during the extension period but the justification for the extension was to enable the restructuring of the project by facilitating the evolution of the successful MUDF into the TNUDF. 4. Urban poverty, Finance and Environment. Although not formally stated in its objectives, the project focused on three Bank concerns: poverty alleviation, urban finance and environmental improvements. Poverty was addressed through: (a) sites and services schemes which included cross-subsidization of plot prices with the intention that 70% of the beneficiaries would be poor; (b) slum upgrading which, in addition to its physical improvements, included the transfer of the plot title to slum dwellers, at least 70% of whom are poor; (c) many MUDF sub- projects which benefited the poor, such as public latrine provision and drainage improvements which reduced the incidence of flooding in poor neighborhoods; and (d) a Grant Fund for projects targeted to the urban poor was established in conjunction with the TNUDF. Improvements in urban finance were addressed by the establishment the MUDF, its evolution into the TNUDF, and the introduction of innovative pricing and cost recovery policies in all other project components. Environmental improvements were anticipated in numerous sub- projects in all components, including but not limited to efficient land use arrangements in sites and services, physical up grading of slums, traffic management schemes, improved public transport provision, hygienic market facilities, public burial grounds. 5. TNUDP was the last Bank-supported Integrated Urban Development (IUD) Project in India. Prior to the TNUDP the Bank had for many years supported a substantial program of urban development projects in India. The TNUDP may be regarded as the culmination of this earlier program. Although the TNUDP's coverage was larger than Madras I and II, its performance was also better. The major difference in performance was due to the fact that the resources under the TNUDP were channeled through the MUDF to the municipalities, while in the case of Madras I and II the resources were allocated from the respective government departments. The TNUDP evolved as a state-wide IUD from earlier single-city IUD projects including those of Madras I and II. In the decade following TNUDP approval, there was no further support from the Bank for urban development in India. In the urban sector only three water supply and sanitation projects have been approved by the Board since the TNUDP was approved in 1988 (see Table 2 for details). The main reasons for the demise of India's IUD projects appear to be the Bank management's perception that the benefits did not justify the high costs of preparation and supervision resulting from their complexity, and that the Borrowers did not have adequate institutional capacity to manage IUD projects. 6. Evolution to the TNUDF Financial Intermediary. The MUDF was established as a GTN fund. It provided municipalities in the State with long-term financing for urban investments. In order to further advance urban infrastructure finance, the M UDF was converted into the TNUDF which has the participation of private financial institutions. The TNUDF has  - 8 - been located outside Government and managed by a private fund management company called the Tamil Nadu Urban Infrastructure Financial Services, Ltd. (TNUIFS). The ultimate objectives of the TNUDF are to provide self-sustaining finance and to mobilize private savings for urban infrastructure. In requesting an extension of the project closing date, GTN and the GOI sought Bank support for the establishment of the TNUDF. A second TNUDP is currently under preparation and focuses on these TNUDF objectives as well as on the institutional development of municipalities. B. ACHIEVEMENT OF PROJECT OBJECTIVES 7. The project objectives may be broadly grouped into institutional strengthening and physical development. In both of these areas, TNUDP was a wide-ranging and complex project. The following is a summary assessment of the project's achievements under these two headings. Institutional Development Achievements 8. MUDF . The MUDF was an experimental component designed to provide municipalities with access to capital for investment purposes on a demand-driven, systematic and transparent basis. Up until this point, municipalities had relied primarily on small and unpredictable capital allocations from the State budget and were for all practical purposes, starved of investment funds. In order to gain access to the MUDF funds, the municipalities had to adhere to financial performance criteria established in a financing and operating plan (FOP) submitted to the Project Management Group (PMG) as part of the loan application. Sub-projects were designed as a second phase, once the FOP had been accepted. By the original closing date of TNUDP, the MUDF had provided support to 94 of the State's 109 municipalities and municipal corporations for over 500 sub-projects that covered a wide range of service and remunerative projects. In addition, the MUDF had considered applications from 12 other municipalities but had denied them access due to their poor credit-worthiness. For the most part, the MUDF sub-projects were modest in scale, appropriate for the circumstances of the borrowers, and focused on the needs of beneficiaries. The MUDF generated adequate profits from the satisfactory spread and high rate of loan repayment, which were the result of adherence to well-defined lending rules and procedures. GTN has gradually increased both lending rates to the MUDF and the MUDF's on-lending rates to municipalities, reflecting the increase in GTN's borrowing rate from GOI. At the time of the conversion of the MUDF into the TNUDF, these interest rates were about three percent below the market rate. 9. TNUDF . Despite its evident success, the MUDF displayed some weaknesses including lengthy procedures and the potential for political interference (fortunately this was not encountered in practice). These weaknesses were addressed when the project was restructured. The extension permitted GTN to move towards restructuring the Fund by: (a) moving it from government to corporate status; (b) providing opportunities for private financial institutions to participate in further development and by introducing new lending instruments; and (c) widening the range of potential beneficiary institutions, from municipalities exclusively, to any providers  - 9 - of urban infrastructure. The TNUDF was established in November 1996 as a Trust with the participation of ICICI, HDFC and IL&FS3. In addition to the new Fund, a Grant Fund was also established that was financed by GTN for schemes benefiting low income groups as well as for technical assistance for municipalities in project preparation and improvement of institutional capacity. 10. Since its inception, the TNUDF has appraised projects costing nearly Rs 2,000 million (US$56 million) and approved loans of over Rs 1,500 million (US$43 million) to four municipal corporations and 19 municipalities. This shows a significant increase in lend.ing performance when compared with that of the MUDF which approved about Rs 2,000 million over an eight year period. The TNUDF is profitable and its projects continue to finance important urban infrastructure ranging from storm water drains to solid waste management to commercial complexes. At closing there were projects in the pipeline amounting to nearly Rs 4,500 million (US$130 million) (for details of TNUDF's performance including its financiEal result, see Appendix A). Although the interest rates significantly declined in India in 1997/98 as a result of lower inflation and reduction of the minimum cash reserve ratio at commercial banks, both GTN and the TNUDF did not reduce their lending rates to TNUDF and the municipalities, respectively. As a consequence, both borrowing and lending rates of the TNUDF are currently close to the market rates. It is worth noting that the TNUDF's initial success ibuilt on MUDF's eight years of experience and knowledge of municipal financing and that MU-DF played a critical role in introducing term-lending into the municipal sector when the private financial institutions were not interested in this market. 11. Quality of the lending by both the MUDF and its successor, the TNU]DF, has been satisfactory. Lending procedures have been strengthened for the TNUDF which now requires an environmental and social report to address project issues. New methods such as BOOT operations, including Karur Toll Bridge, have been introduced by the TNUD'F. Additionally, the inclusion of private financial institutions has added to the TNUDF's efficiency and professional expertise. It is expected that the TNUDF will continue to generate a profit and solidify its performance. The challenge now is to strengthen this new institution so that it can tap into the domestic capital market. The Bank is currently considering support for a second TNUDP which would help the TNUDF mobilize resources from the domestic capital market in order to secure sustainable fimding resources beyond the Bank's line of credit operations. 12. Municipalities. One of the original project objectives stated in the 'SAR was "increasing municipal capacity for urban management and investment programming and raising revenues for maintenance and services". Although the MUDF and the TNUDF have to a large extent contributed to the improvement of the financial discipline and investment programming of the municipalities, the TNUDP could not fundamentally address the problem of weak institutional capacity and the weak financial position of the municipalities. Most of the niunicipalities do not have the adequate financial, managerial, administrative and technical capacity to deliver and 3 ICICI -- Industrial Credit and Investment Corporation of India Ltd.; HDFC -- Housing Development Finance Corporation; IL&FS -- Infrastructure Leasing and Financial Services Ltd.  - 10- maintain the required urban infrastructure services. The weak financial position of the municipalities has evolved due to the unpredictable and discretionary intra-government transfer system which suffers from a weak financial accountability framework, inappropriate property tax assessment and inadequate user charge levels and collection. Recognizing these shortcomings, GTN adopted, in the final stage of the project, a series of urban sector reforms including larger financial devolution from the State to the municipalities, the property tax reforms and the increase of user charges in line with the 74th Constitutional amendment. GTN also started to provide the municipalities with technical assistance for the purpose of improving their institutional capacity, using the newly established Grant Fund. The Bank intends to support GTN's reforms and institutional development program under the next operation. It is clear that the financial intermediary approach alone cannot address the problem of weak institutional capacity and the financial position of the municipalities without sound urban sector reforms and an institutional development program. 13. Operational Action Plan (OAP). There were many innovative policy, project management and institutional development aspects in the TNUDP at the time of appraisal, some of which anticipated current Bank policy and practice. Most of these innovations were included in an agreed and covenanted OAP which was attached to the Minutes of Negotiations, and included in Annex 4 of the SAR. Most OAP items were complied with the time of closing. Those items not in compliance were as follows: (i) implementation of 10% of slum upgrading schemes on private land; (ii) the TNSCB's (Tamil Nadu Slum Clearance Board) finance and operating plan to be rolled on an annual basis; (iii) preparation of proposals for monitoring air quality. The following was the experience with some of the principal reforms included in the OAP: (a) On-lending Terms. The on-lending terms and conditions from GTN to the implementing agencies were variable and moved towards higher rates in order to better reflect 4 the cost of capital on investment decisions4. The intention was to impose financial discipline on the project agencies with a view to making them self-sufficient commercial entities. These terms and conditions were adhered to by GTN during the project implementation with only minor lapses arising from the movement in rates, which were promptly rectified. (b) Cost Recovery. All the components (apart from road schemes under the Transport and Traffic Management Program /TRAMP) involved full cost recovery and the internal generation of funds by agencies. The self-generation of funds by agencies was incorporated into the project's financing plan (see Table 8B). This was a radical departure for urban institutions in India at the time when agencies survived mostly on subsidies. In the case of the Land Servicing Program (LAND) component and the Slum Improvement Program (SIP) component, revolving 4 This reflected GOI's policy of moving to market rates in its lending to the states. During the project implementation period, GOI has adjusted its lending rate to GTN during the project implementation.  - I1 - funds established under the earlier Madras II project were intended to make fiurther contributions to the project financing plan. While none of the cost recovery targets were fully achieved, contributions made by the implementing agencies in all cases were positive, and except for the Tamil Nadu Slum Clearance Board (TNSCB), substantial. (c) Bus Fare Revision. To address regulation issues, GTN agreed to maintain a permanent bus fare revision committee throughout the project period. However, GTN failed to comply for most of the project period and the committee was called to meet once only. This reflected, in part, GTN's infrequency of fare revisions with a resulting shortfall against the target in PTC's (Pallavan Transport Company) cash generation. Reinstatement of this committee took place as a condition of the first extension of the project and the new committee's first recommendation was fully adopted by GTN. (d) Prototype Scheme Designs. The TNUDP was a programmatic project. At appraisal only 5% of project cost was identified and appraised. Appraisal consisted prlimarily of establishing sub-project identification and evaluation criteria for the LAND, SIP and TRAMP schemes with model layouts and standardized and computerized feasibility studies (see Annexes 7, 8, 9, 10, 15 of the SAR). Bank procurement "no objections" depended, inter alia, on these design and project evaluation guidelines being used by the agencies throughout the project. It is difficult to assess the extent to which these procedures have led to a cultural shift at the agency level in the way they approach investment expenditure. The continuation of their project MIS and design criteria, and self-recognition of a changed approach, are all suggestive that permanent improvements have occurred in the agencies, particularly at TNHB. (e) Private Land Development Experiments. There were two small experimental sub- components in the project involving private land: (a) the Land Sharing/Readjustment for Private Slums (LASER) was a slum upgrading program for households on privately owned land in the Madras Metropolitan Area (MMA) and 10% of the SIP program was intended for this purpose. Ultimately, only two small private slum upgrading schemes involving about 1,500 households were implemented by TNSCB, and neither was a pure LASER scheme since the landowners sold to TNSCB in advance of the scheme; and (b) the Guided Urban Development (GUD) component, which was designed to encourage private landowners to undertake developments for low income groups in exchange for exemptions under the Urban Land Ceiling Act5. It was intended that about 10,000 plots would be provided under GUD. However, no schemes were negotiated with private landowners. This failure arose from the great difficulty that public officials face when negotiating land deals with the private sector, and the better returns for many, if not most, landowners as a result of undertaking illegal sub-divisions. (f) Financing and Operating Plans. All the implementing agencies (apart from DHRW) prepared FOPs for appraisal. These plans typically looked forward five years and covered 5 The ULCA limits the quantity of urban land that can be held by private parties and has been widely criticized as a constraint on development.  - 12 - income generation, operations, investments and financing. The FOPs were based on computer simulation models of the organizations and provided financial and performance projections. While the TNSCB failed to maintain and roll-over its FOP, for the other agencies and the Project Management Group, the FOPs proved to be a valuable and innovative tool. The PTC FOP was based on a particularly well structured model and greatly influenced the investment management and budget decision-making of the bus corporation. (g) Urban Policy in the State. During the preparation of the project and at several times during its implementation the Bank discussed with GTN the establishment of a State Urban Development Authority (SUDAR) which would advise the Government, undertake basic policy research in the sector, and have substantial powers over the allocation of investment resources within the franmework of the annual budget process. The PMG was considered by the Bank to be a prototype of the SUDAR which could have evolved into a permanent organization. This evolution failed to take place due to lack of interest in the concept within the Government's sectoral Departments of Housing and Municipal Administration (MAWS). Given the weakness of the PMG mentioned in the following paragraph and the risk that this kind of policy research and investment planning authority tends to add another bureaucracy, it seems that the Bank's strategy in developing the PMG as a State Urban Development Authority was not optimal, although the Bank's concern about the need for improvement of the inadequate urban policy making procedures of the Government was legitimate. In fact, a feature of implementation was that support for the objectives of the project within GTN was strongest in the Finance Department rather than the sectoral Departments, and major policy advances were made with Finance suppoit. The principal reasons for this support were: (a) the project's adherence to efficiency and cost recovery principles; (b) interest in the success of the MUDF/TNUDF for its potential to reduce and rationalize the demands by municipalities on the State budget; and (c) the scope for the project to become a direct contributor to the State budget (see Table 8B). At the later stage, the Department of Municipal Administrations and Water Supply started to extend support to the project objectives as GTN decided to shift many urban functions to the municipalities in line with the 74th Constitutional amendment. 14. Project Management Arrangements. The PMG was established as the nodal agency for the project management and reported to the Empowered Committee chaired by the Chief Secretary and consisted of Secretaries of the Departments concerned. It was staffed with senior professional officers on delegation from their parent departments. The Project Director was initially part-time but later at the Bank's insistence was posted on a full-time basis. The PMG performed coordination and monitoring tasks and administered the MUDF. However, the PMG lacked authority, ability or incentive to carry out management decisions. Ultimately the PMG performed the role of postbox rather than of manager6. One problem was the lack of continuity. Over a nine year period, there were 12 Project Directors and the PMG's senior professional officer, the Chief Planner, changed seven times. At times, appointments to this and some of the other key posts were not made on merit. The major lesson learned is that project management 6 The Borrower shared the view that the PMG was largely a postbox (see Appendix B, Borrower's Evaluation).  - 13 - cannot be effectively undertaken by an oversight unit without the necessary authority and staff continuity. 15. At the local level, the project is managed by City Management Committees (CMC). The CMC were headed by the District Collector, the Government's most senior ofFicer in each District. Collectors changed frequently and focused on law and order rather than economic development responsibilities. As with the PMG, these CMCs were not effective in assuming a role in the planning and use of project funds despite the substantial contribution of the project to each city's total capital expenditure. The same lessons learned at the PMG level are applicable to the project management at the CMC level. There was little difference in performance among the CMCs. Physical Achievements 16. The following paragraphs list component-wise achievements against the physical targets set at appraisal. On a quantitative level, performance was mixed. Numerical targets were exceeded for sites and services, buses, the MUDF and for training and TA, all of which reached their targets by the original closing date. For slum upgrading and road schemes, performance fell short of the target despite the extensions. However, in all cases the implementing agencies kept to the sub-project design guidelines established at appraisal and target groups benefited in the manner intended. 17. LAND. The appraisal sites and services target was the achievement of nearly 70,000 serviced residential and non-residential plots on 950 ha of land. Ultimately, the achievement was 88,725 plots on 1,161 ha. This accomplishment was possible because the standard and specifications for the sites and services scheme were well developed and had been agreed upon by the Bank and the TNHB. At Credit closing, four schemes remained unfinished, although all were close to completion. Virtually all plots on the completed schemes were allotted and in most cases, the demand greatly exceeded supply7. Overall however, the occupation of plots had only reached 10% at closing, with a maximum attainment of 25% on some schemes. Early occupation was mainly by the MIG and the HIG households. Occupation had been slow throughout the project period, and as a result of Bank pressure, procedures for planning and building permits were streamlined and single window processing procedures were introduced. Four explanations have been offered for the slow rate of occupation: (a) people did not wish to be first to settle a new area and buildup accelerates once started; (b) funds for house construction were inaccessible to low income groups; (c) there was speculation taking place in land against the effects of inflation; and (d) the locations of the sites were not immediately attractive, even though the expansion of transport infrastructure was planned. Home loans were provided under the project for incremental construction which suggests that reason (b) may have only partial validity, 7 An extreme example is provided by Phase III of the Ambattur S&S scheme in the MMA, which was the last scheme to be finished before closing. There were 231,000 registered applications for 1,366 plots.  - 14- although it is the case that the majority of beneficiaries can only afford the most basic form of housing. The TNHB is considering ways of increasing the rate of occupation through the widening of the home loan facilities which would be funded by housing co-operatives. In the future, the TNHB should select the sites based on a more thorough demand survey, including the need for transportation infrastructure. 18. GUD. The target at appraisal was for about 10,000 residential and non-residential plots for low income groups on about 140 ha of land. There were no GUD schemes (see paragraph 13(e)). 19. SIP. The target at appraisal was for about 94,000 households in 590 slums. The actual achievement was 76,722 households in 490 slums. The GTN was reluctant to change the classification of certain areas of land8 which limited the available stock of slums which could benefit. Additionally, the TNSCB found obtaining the agreement of 70% of the households to make the down payment before the scheme would commence difficult to achieve, especially in areas where the value of the title was low. A benefit from the SIP schemes was the transfer of title, and clearly, households occupying valuable sites had a greater incentive to participate in the slum improvement program. It was hoped that 10% of SIP would be used for LASER, however, there were only two small schemes on private land. In each of these cases, the landowner had sold the land to the TNSCB before the scheme commenced and hence they were not true LASER schemes. 20. TRAMP. The TRAMP schemes included roads, bridges, etc., under the DHRW's responsibility, and traffic management schemes undertaken by municipalities. There were very few municipal schemes and those amounted to less than Rs 1 million. While no targets for the number of the DHRW TRAMP schemes were established at appraisal, 37 schemes were approved. In order to enter the project, schemes had to meet economic feasibility criteria established at appraisal. All schemes reduced congestion, improved safety and increased accessibility. Feasibility studies for all schemes were prepared for the DHRW by consultants funded under the project. Although 24 schemes were completed, there were cost overruns for 17, and time overruns for 21. None of the remaining 13 schemes were completed within the time leading up to closing, and all had cost overruns. The State DHRW performed the least well of all the implementing agencies. Excessive delays were experienced in the award of contracts and in the execution of projects. These time overruns averaged one year and nine months on contract periods of 18 to 24 months, and were mostly due to problems with land acquisition and the movement of utilities. The explanations for cost overruns were poor initial estimations and delays in reaching agreement with the Bank on the inclusion of price escalation in contracts. 21. PTC. The appraisal target was for the provision of about 1,000 bus chassis and bodies and improvements to about seven depots, 10 terminals and a major workshop. The target for a Known as "perumboke" land consisting, for example, of irrigation tanks, rivers, forest areas and road margins. This land classification was not fully understood by the Bank at appraisal, and hence the quantity of slums capable of improvement was over-estimated.  - 15 - buses was exceeded, as 1,595 were provided. This achievement was possible 'because the PTC was familiar with the bidding procedures as it regularly purchase a large numlbers of buses. While four depots and seven terminals were provided, the workshop was not. However, fleet expansion to meet demand was delayed by financial limitations arising from the GTN's infrequent fare revisions. As a result, maximum bus ridership loading was exceeded throughout the project period. 22. MUDF/TNUDF. Due to its experimental nature, no targets were set at appraisal although it was hoped that over 40 municipalities, and possibly as many as 80, would benefit. Ultimately, the project supported over 500 individual schemes in 94 municipalities throughout the State and exceeded expectations at appraisal. The MUDF financed relatively small municipal projects such as solid waste management, storm drains, road improvement, street lighting, bus stands, and market and commercial complexes. Success with the MUDF led to the creation of the TNUDF (as discussed in 9). 23. TATE. The project supported several hundred training initiatives including short and long courses and study tours. In addition, project TA supported all the TRAMP feasibility and other important developmental studies. Also included were some major studies which made wider contributions to urban policy and development. These included: (a) a very effective drainage master plan for the Madras Metropolitan Area (MMA) which was used in the preparation of the proposed Third Chennai Water Supply and Environmental Sanitation Project; and (b) a comprehensive land use and transport study for Chennai as part of the revision of the city Master Plan, which provided valuable insights and involved extensive computer modeling of the urban system for the first time in India. In addition to assistance in the development of the FOP (Financial Operating Plan) and sub-project preparation of the MUDF, the TATE component did not extend adequate technical assistance to the municipalities to improve their financial, managerial, administrative and technical capacity. Overall Assessment of the Achievement of Project Objectives 24. With such a complex and varied project it is difficult to sum up the extent of the achievements but overall it has been rated as "successful". The main achievements were: (a) the introduction and implementation of the new urban policy, in particular, cost recovery of urban investment; (b) the project changed the culture and approach to planning and execution of many of its main implementing agencies; (c) the MUDF/TNUDF was a major institutional success which would be solidified by continued support from the Bank in a follow-up project; (d) the physical achievement of the project exceeded appraisal expectations in most components except for SIP and GUD; and (e) as intended, all project components mainly benefited the largely neglected lower income segments of the urban population. The major shortcoming is that the project could not adequately address the weak institutional and financial capacity of the municipalities, although the GTN started to undertake corrective measures in line with the 74th Constitutional Amendment at the final stage of the project implementation.  - 16- C. IMPLEMENTATION RECORD AND MAJOR FACTORS AFFECTING THE PROJECT 25. There was substantial depreciation of the Rupee which resulted in savings. Otherwise, no major external factors beyond the control of the Borrower affected the project. As a result of the savings, there were two Credit cancellations during the course of the project and additionally, savings were used to continue the lending program during the extension. 26. Borrower Performance. Although the PMG management and staff carried out their project coordination and monitoring activities with due diligence, the PMG's overall management performance was weak and ineffective due to its structural problems described in paragraph 14 and sporadic support from the high level Empowered Committee. The City Management Committees were also largely ineffective. The implementing agencies mostly performed their tasks to a satisfactory standard with the main exception being the DHRW whose procurement performance was severely hampered by interference from the State Government in normal procurement procedures which greatly added to the length of time taken to award contracts. 27. Credit Suspensions. Two suspensions arose from problems associated with a single event, the Madurai STOWAD scheme. This event caused the Bank and the Borrower considerable distress (see Appendix B for the Borrower's views). The initial problem arose from a typhoon which hit the city in 1993 causing major flooding, several deaths and serious loss of property. During a regular supervision mission in September 1994 the Bank discovered that, in the climate of popular opinion following the disaster, illegal encroachers from the city's drain margins had been moved by the municipal authorities since they had contributed substantially to the flooding. The plan for the resettlement and rehabilitation of the displaced persons had not been approved by the Bank, contrary to project agreements, and suspensions followed. The GTN withdrew from the special account the costs of the STOWAD scheme which has not been approved by the Bank. For this reason, the Bank suspended the disbursements against SOEs until the Bank had reviewed and was satisfied that the accounting, control and audit system under the project was adequate. The first suspension was lifted after nine months when the Bank was satisfied with the R&R action plan, and the second after one month following inspection of the project's record keeping arrangements. The much-needed scheme for storm water drainage was eventually implemented successfully under the project. Most of the project affected people have been resettled on the sites provided by the GTN free of charge, and the income generation activities are ongoing with support of NGOs financed by the GTN.  - 17 - Assessment of Project Risks 28. Four risks were identified at appraisal, all of which were "internal" to the project: (a) doubts over the capacity of the PMG and the CMCs to maintain adequate standards of review and management -- this risk was partially justified by events and affected the performance of the SIP and TRAMP components; (b) fear that cost recovery targets by implementing agencies would not be rnet and that the projections of resources from cash generation, which were made at appraisal, would not materialize -- this risk was partially justified by events. All agencies/components failed to achieve their cost recovery targets in full, although shortfalls were modest; (c) unforeseen legal and other obstacles could constrain implementation of the 'experimental' initiatives, particularly the GUD and the MUDF -- the outcome was that there were no GUD schemes, largely as a result of lack of private landowner interest (see paragraph 13(e)), but the MUDF proved to be a highly successful initiative; (d) delays in land acquisition, particularly for the LAND program, would limit the execution of schemes -- few land acquisition problems arose as at least 67% of the land required for LAND was secured before effectiveness. However, the DHRW was held up in 19 schemes by difficulties in acquiring land or negotiating the relocation of public utility infrastructure. 29. Another risk that could have been identified at appraisal was that political interference in procurement would hold up progress of major schemes, particularly roads. D. PROJECT SUSTAINABILITY 30. Assets created by the project have become the responsibility of the respective implementing agencies, or of municipalities in cases where the assets have been handed over. These assets are absorbed into the overall functions of the agencies and municipalities. Therefore, the sustainability issues are the generation of funds to ensure that operations and maintenance take place to satisfactory standards, and that the managerial and technical capacity of the municipality enables it to undertake the necessary operation and maintenance work. Although the financial position of the municipalities was very weak, it is expected that the municipalities would have more resources as a result of the reforms (financial devolution and property tax reform) which are occurring under the 74th Constitutional Amend.ment. Regardless, the municipalities' institutional capacity should be significantly strengthened. A major problem area is where there is slow occupation of sites and services schemes which have been handed over to local bodies where there appears to be reluctance to devote resources to maintenance. Similarly, the SIP schemes are also showing signs of low levels of maintenance by municipalities (see Appendix A, Annex 4). It would be required that the GTN, municipalities, the TNHB and the TNSCB should jointly develop the operation and maintenance plans for those assets under the sites and services scheme and the SIP. The assets of the PTC have in the plast been properly maintained and operated which is likely to continue.  - 18- 31. The extent to which project initiatives will continue in some of the agencies is uncertain. The TNUDF appears, on the basis of its pipeline of projects and financial projections, to have good prospects for sustainability which would be considerably enhanced by continuing Bank support in the form of a second follow-up project. Cultural changes seem to have occurred at the TNHB which appear to have led to permanent improvements in procedures and are sustainable, but this seems less likely at the TNSCB and the DHRW. 32. The MUDF and the TNUDF have demonstrated their success as financial intermediaries. The TNUDF is generating a profit with adequate spread and high debt service recovery. The TNUDF's current borrowing and lending interest rates are close to the market rates. The GTN requested the Bank's continuing support of the TNUDF. The Bank's continuing support is justifiable as the TNUDF is still in very early stage of its development and cannot generate the long-term funds in the capital market in India. In the next proposed operation, the Bank intends to assist the TNUDF in raising the funds from the domestic capital market with the appropriate credit enhancing mechanism to secure sustainable funding resources for the TNUDF. 33. The GTN has just started to address the fundamental problem of weak institutional and financial capacity of municipalities in line with the 74th Constitutional Amendment. This is the underlying problem that the project was unable to adequately address. The proposed second project would include a comprehensive institutional development component which would support the GTN's efforts in this area. E. BANK PERFORMANCE 34. Identification and Preparation. The TNUDP built upon the previous implementation of MUDP I and II. While the Bank's performance has been rated as highly satisfactory, the project identification and preparation required substantial resources, given its complex design and ambitious scope. 35. Appraisal. This has been rated as satisfactory. All Bank procedures were successfully completed in a timely fashion. The appraisal of the project was undertaken by the same Bank team who had identified and prepared the project and had earlier supervised the MUDF II. However, the appraisal underestimated the effort that would be required to supervise this complex and far-reaching project, and failed to establish sufficiently clear incentives for the Borrower to take on the full management and supervision responsibilities. 36. Supervision. The Bank regularly and comprehensively supervised the project (see Table 13). Bank missions in the period from project identification up until November 1994 consisted of a small core of experts under a single Task Manager. The Bank team changed thereafter in line with the new direction of the project, which focused on the development of the financial intermediary and on the resolution of resettlement issues pertaining to the Madurai Storm Water Drainage Scheme. The SAR recorded the expectation that supervision would require 120 s/w, however, the actual supervision time was 294 s/w (see Table 12). About 35 s/w are attributable to the additional efforts associated with the suspension of the Credit over the Madurai STOWAD  - 19 - Scheme. The two extensions which enabled the evolution of the MUDF into the TNUDF added about 70 s/w. Accordingly, the like-with-like comparison with the appraisal estimate of 120 s/w is about 190 s/w of actual staff and consultant time. This difference is accounted for by the failure of the PMG to take on the increased supervision responsibilities as the project progressed, and the resulting need for the Bank to maintain its supervision efforts. During the extensions the composition of Bank missions changed to reflect the new focus on restructuring. F. BORROWER PERFORMANCE 37. Identification/Preparation/Appraisal. Senior officials of the GTN were committed to the project and ensured that professional officers of good quality were assigned to the preparation tasks. The Borrower performance has been rated highly satisfactory. 38. Implementation. The PMG lacked authority, and the rapid turnover of Project Directors and other key staff (see paragraph 13), as well as the limited interest of the Empowered Committee, weakened project management overall. Some of the implementing agencies, notably the DHRW and the TNSCB, were slow in to execute and did not perform well in utilizing appropriate management information systems to implement their components. The PTC performed well but was held back by financial constraints resulting from the GTN's infrequent fare revisions. Some experimental aspects of the project were not successful, such as the GUD and the LASER, although this was not due to lack of effort by the Borrower. The PMG functioned efficiently as the fund manager of the MUDF, and the GTN has been dynamic and proactive in pursuing its evolution into the TNUDF. The GTN and the PMG could not address the weak institutional and financial capacity of the municipalities, even though the GTN started to take corrective measures in the final stage of the project. Although there were lapses in covenant compliance during implementation, at the time of the original and final closing dates 9 the Borrower was in compliance9. Overall, implementation by the Borrower has been rated as satisfactory. G. ASSESSMENT OF OUTCOME 39. The overall achievement has been rated as satisfactory. Many aspects of this complex and far-reaching project were highly successful. The successes were reflected in the extensions to enable further development of the TNUDF and in particular, the proposal to design a second project. But these many successes need to be weighed against failures and some of the more limited achievements, including: (a) slow performance by some of the agencies, notably the DHRW and the TNSCB; (b) absence of any of the GUD schemes and only two of the LASER; (c) the limitations of the PMG and lack of interest of the CMCs; and (d) the failure of the project to address the weak institutional capacity and financial position of the municipalities. Without diminishing its evident success, the MUDF had important limitations, for example, its slow and conservative procedures which would have prevented it from fulfilling its role as a provider of 9 The only exception was the late audit of the Special Account at the time of final closing. This is a GOI responsibility.  - 20 - urban infrastructure finance. These limitations were addressed in the restructuring and creation of the TNUDF. 40. The Economic Rate of Return (ERR) was calculated at appraisal for the LAND to be about 20% and the actual LAND returns were comparable to those at appraisal. The return on the prototype TRAMP schemes at appraisal averaged 12%. Data were not available to compute actual ERRs on TRAMP schemes during the final supervision mission. At appraisal separate calculations were performed for the replacement and augmentation aspects of the PTC bus procurement. The replacement calculation was based on the discounted cost savings over its life of a new versus old vehicle. It was recognized, however, that the operations and maintenance data in these cases were of doubtful quality. The augmentation calculation was based on the benefits minus the costs of an addition to the fleet. The PTC bus procurement ERR was about 15%, lower than the 21% at appraisal, reflecting the resistance by the GTN to permit timely fare revisions. H. FUTURE OPERATIONS 41. A follow-up project would provide continued support for the development of the TNUDF (see Appendix A, Part B for details). The objectives of further lending would be to support the GTN's urban sector reforms through the institutional development component and to continue to strengthen the TNUDF in order to make it a sustainable financial intermediary. Participation by the Bank would enable the TNUDF to continue to attract the interest of the private sector by providing confidence, technical assistance, expertise and funds to maintain the scale of the Fund's lending momentum. I. KEY LESSONS LEARNED 42. Simplification. Bearing in mind the constraints on the institutional capacity of the GTN, as well as the resources of the Bank, the project scope should have been less ambitious and greatly simplified. Although the TNUDP's overall performance was better than that of other Bank-financed integrated urban development projects in India, the Project Management Group and the Bank could not address the problems of non-performing components such as the TRAMP (road construction) and the SIP in a timely manner. The Bank needs to be highly selective about where it operates and act swiftly and decisively when political commitment disappears. The project restructuring was undertaken to re-focus the effort of the GTN and the Bank on the most successful and sustainable financial intermediary component. 43. Need for Strengthening Municipalities. The financial intermediaries such as the MUDF and the TNUDF can contribute to the strengthening of municipalities by imposing financial discipline on them as a condition of loan provision, and by helping them to develop municipal projects. However, the financial intermediaries alone cannot address the fundamental problems of the municipalities' weak institutional capacities and weak financial situations. Most of the municipalities do not have adequate financial, managerial, administrative, and technical institutional capacity, which should be strengthened by TA and training programs. The  - 21 - municipalities' weak financial situations have been created by the regulatory constraints which impinge on the effectiveness of resource mobilization (unpredictable and discretionary intra- government transfer system with weak financial accountability framework, inappropriate property tax assessment and inadequate user charge levels and collection). The Government should undertake the reforms necessary to address these regulatory constraints. 44. Government Commitment. The project was most successful in the aspects of policy reform and good practice where the Government support for the objectives was greatest. For example, development of the urban financial intermediary scheme was successful and received the full support of the State's Finance Department, as well as from the Department of Municipal Administration and Water Supply. 45. Project Management. Project management would have been enhanced substantially by the greater delegation of decision making authority for resource allocation lto the Project Management Group. Authority of this kind would have provided the PMG with the means and the incentives to take prompt and effective action to correct any emerging inadequacies of implementation. 46. Need for Addressing Urban Poverty. The low-income population represents more than 30 percent of the urban population in Tamil Nadu. It is important to address urban poverty issues through appropriate project design and the inclusion of a specific project component, such as the Grant Fund, which finances the sub-projects targeted to the urban poor. 47. Continuity of Bank Staff. Policy continuity and a high level of personal accountability were maintained by having virtually the same core team for project preparation, appraisal and supervision, and by retaining some of the team members who had been involved with the earlier Madras I and II projects. After November 1994, the team changed in order to re-focus the project on restructuring and the development of the financial intermediary, which occurred after the initial closing date and to resolve the resettlement issues pertaining to the Madurai Storm Water Drainage Scheme. The latter team continued to work on the design of the proposed second project.  - 22 - PART II: STATISTICAL ANNEXES Table 1: Summary of Assessments _ :~11~Aflt,Af. Macro policies / Sector policies Financial objectives V Institutional development V Physical objectives / Poverty reduction - Gender Issues / Other social objectives V Environmental objectives / Public sector management V Private sector development Identification Preparation assistance v Appraisal Supervision V Preparation V Implementation / Covenant compliance V Operation (if app]licable)  - 23 - Table 2: Related Bank Loans/Credits Loan/credit title Purpose Year of approval Status Preceding operations 1. Second Calcutta UD Single city integrated urban development (IUD) 1978 Closed Project (Cr.0756-IN) project to extend and rehabilitate city's urban service systems, and upgrade capacity of local bodies. 2. Second Bombay WSS Construction of water supply and distribution 1979 Closed Project (Cr.0842-IN) works and sewerage improvements, slum sanitation provision, water conservation, TA. 3. Second Madras UD Single city IUD project including: development 1981 Closed Project (Cr. 1082-IN) of plots; slum improvements; provision of buses; municipal services; and, TA. 4. Kanpur UD Project Project focused mainly on sites and services and 1982 Closed (Cr. 1185-IN) slum upgrading; also included infrastructure and municipal services improvements and TA. 5. Third Calcutta UD Single city IUD project, involving the spreading 1983 Closed Project (Cr. 1369-IN) of infrastructure and service improvements outside of metrocore. 6. Madhya Pradesh UD Project mainly focused on shelter and sanitation 1983 Closed Project (Ln.2329-IN) improvements, in 10 cities. 7. Bombay UD Project Single city IUD project including: land 1985 Closed (Cr. 1544-iN) infrastructure servicing; slum upgrading; local govemment finance and administration, and services; and TA. 8. Gujarat UD Project Appraised as a state-wide multi-city IUD project 1986 Closed (Cr.1643-IN) with emphasis on: shelter; infrastructure; slum upgrading; solid waste; and, institutional strengthening. Restructured with large rural WS component. 9. Third Bombay WSS Project involved expansion of WS and sewerage 1987 Closed Project facilities in the city; sanitation for urban poor; (Cr. 1750/Ln2769-lN) and, improvements to implementation capacity. 10. Uttar Pradesh UD State-wide multi-city IUD project with all main 1987 Closed Project sectors included: institutional improvements; (Cr. 1780/Ln.2797-IN) municipal services; shelter; traffic and transport; water supply and sanitation. Also support to Ganga Action Program. Emergency earthquake reconstruction component added. 1l. First Madras WSS Ground water supply, distribution and waste 1987 Closed Project (Cr. 1 822/Ln.2846- water improvements in city with small LCS IN) component and institutional improvements.  - 24 - Following operations 1. Hyderabad WSS Project Expansion of WS to city, rehabilitation and 1990 SPN-Active (Cr.2115/Ln.3181-IN) strengthening of existing WSS systems, with LCS component and institutional strengthening. 2. Second Madras WS Project includes: major scheme to bring 1995 SPN-Active Project (Ln.3907-0/6 IN) additional water to city; distribution and conservation improvements within city; and, TA. 3. Bombay Sewage Project included: construction of 2 outfall 1996 SPN-Active Disposal Project sewers; pumping facilities; sewage treatment; (Cr.2763/Ln.3923-IN) sewerage system improvements and rehabilitation; and, slum sanitation. Table 2 lists all urban development and urban water supply and sanitation (WSS) projects in India for the 10 years of preceding, and the years following, TNUDP approval. Year of approval is Bank fiscal year. Under Status: SPN-Active indicates that the project is being implemented and is under active supervision.  -25 - Table 3: Project Timetable Steps in Project Cycle Date Planned Date Actual/ Latest Estimate Identification Nov-85 Concept Review 28-Jan-86 Pre-Appraisal July-87 01-Jul-87 Appraisal Oct-87 01-Oct-87 |_Negotiations Apr-88 19-Apr-88 Board Presentation Jun-88 15-Jun-88 Signing 116-Sep-88 Effectiveness 07-Nov-88 Mid-term Review none none First Extension from 01-Oct-95 Second Extension from 01-Oct-96 Credit Closing 30-Sep-95 30-Sep-97  - 26 - Table 4: Credit Disbursement: Cumulative Estimated and Actual (US$ million) FY 1989 i 1990 1991 4 1992 1993 1994 1995 1996 1997 1998 Appraisal 18.0 62.9 118.9 179.5 241.1 281.2 297.2 300.2 300.2 300.2 Estimate 19.56 36.75 56.41 69.13 91.19 113.56 131.43 146.35 171.52 183.7 1.3142 1.4227 1.4304 1.375 1.3736 1.4599 1.4865 1.438 1.365 1.365 Actual 25.7 52.3 80.7 95.1 125.3 165.8 195.4 210.5 234.1 250.8 Actual as Percentage 142.8 83.1 67.9 53.0 52.0 59.0 65.7 70.1 78.0 83.5 of Estimate:  - 27 - Table 5: Key Indicators for Project Implementation I. Key Implementation Indicators in SAR/ President's Report Estimated Actual 1. Expenditure against project (SAR) targets A. Institutional (i) MUDF Rs. 1,786 million Rs. 2,205 million (ii) Technical Assistance and Training Rs. 137 million Rs. 191 million B. Shelter (i) Land Rs. 2,387 million Rs. 3,179 million (ii) GUD Rs. 143 million nil (iii) SIP Rs. 459 million Rs. 324 million C. Transport (i) TRAMP Rs. 967 million Rs. 1,862 million (ii) PTC Rs. 584 million Rs. 929 million 2. Physical progress against project (SAR) targets: A. Institutional (i) MUDF Finance primarily 80 municipalities in 94 municipalities throughout the State the 10 largest urban agglomerations. have accessed the Fund. (ii) Technical Assistance and Training Studies in over 27 areas. Training Studies completed in 51 areas. program not defined in detail. Extensive training completed. B. Shelter (i) Land About 950 ha. of land for about 1,161 ha. of land and 88,725 plots. 70,000 serviced residential and non- residential plots to be provided. Not less than 55% for households at or 92% of plots allocated were to below poverty line. economically weaker sections (EWS) and Low Income Groups (LIG). (ii) GUD About 140 ha. land for about 10,000 nil residential and non-residential plots for low income groups. (iii) SIP About 94,000 households in 590 76,722 households in 490 slums. slums. C. Transport (i) TRAMP none l (ii) PTC Provide about 1,000 bus chassis and 1,595 buses, 4 depots and 7 terminals bus bodies. Improve about 7 depots. A provided. major workshop at Perambur. About 10 terminals  - 28 - 3. Resource Mobilization, Pricing and Affordability A. Institutional (i) MUDF Municipalities to become credit About 10% default rate on worthy. repayments. Only one serious defaulter out of 94 borrowers. (ii) Technical Assistance and Training B. Shelter (i) Land Down payments from residential plots 50% financed. and proceeds of outright sale would finance 40-50% of the chargeable cost of LAND. (ii) GUD (iii) SIP Down-payments ranging from 10 to At least 70% of households made 20% for different size plots would down-payments in all schemes. fund about 15% of component cost. C. Transport (i) TRAMP (ii) PTC In excess of 20% of the PTC About 11% funded. investment program would be funded from internal generation. 11. Indicators at Project Restructuring 1. First Extension Suspension of STOWAD Take remedial action satisfactory to Completed IDA on resettlement and rehabilitation of project affected persons and lifl suspension of STOWAD. New Intermediary Clarify the legal issues on the Completed commercialized fund. Environmental issues Submit a resettlement policy and Completed implementation framework. Submit draft TORs and Short Lists of Completed consultants for the following services. (i) a survey on the past land acquisition practice and resettlement (ii) preparation of appraisal and operation guidelines on R&R issue (iii) preparation of Environmental Assessment Operation Guideline.  - 29 - Table 6: Key Indicators of Project Operation None  - 30 - Table 7: Studies Included in Project Purpose as Defined Stud:y at Appraisal/Redefined Status Impact of Study LAND Study on Settlement Status Assist project implementation Completed Assisted with housing in S&S scheme in MMA policies and allocations Study on Shelter Strategy ditto Completed -- for 3 towns Study on Co-operative Assess potential of social housing Completed None Housing sector Consumer Preferences Assist project implementation Completed Important input to project design Occupancy of plots in S&S ditto Completed Assisted with policy scheme in TN Long term land acquisition Strengthen institutional capacity Completed For future developments programs following utilization of public lands. Shelter strategies in TN Develop institutional strategy on Completed Assisted with housing shelter policies. Management information Strengthen institutional capacity Completed Assisted project planning systems for civil works and execution. contract GUD and LASER Survey on illegal Assist project identification and Completed None subdivisions implementation SIP Study on Relocation of Not defined at appraisal Completed Project planning and slum dwellers on Cochrane feasibility Basin Bridge Study on pavement Assist with project planning Completed ditto dwellers Documentary on slums Not defined at appraisal Completed Useful background Slum survey ditto Completed Essential inputs to the project planning  - 31 - TRAMP 31 feasibility and Assist project implementation Completed Essential inputs Preparation studies Objective check on Not defined at appraisal Completed Part of project monitoring TRAMP compliance Updating of TRAMP ditto Completed Additional project Scheme feasibility at time of project extension Comprehensive traffic and For preparation of medium-term Not done except (see General Studies transportation studies for investment strategies for Madras below) project cities BUS Exclusive Bus way on Not defined at appraisal Completed Feasibility study. Did not Anna Salai Corridor proceed to execution due to cost and environmental concerns. Bus joumey time study Assist PTC operation Completed Improved bus efficiency FOP for PTC Prepare financial and operation Completed Essential input to project plan for PTC planning and monitoring Bus life-cycle replacement Efficient bus replacement Not done None costs decision-making policy FOP for other TN bus Not done None companies Traffic Equipment Study Assist PTC operation Completed Feasibility Study Software Development for Prepare software for PTC Completed Helped reduce staff nos. PTC operation and increase decentralization. Wage contract system Strengthen institutional capability Not done None of PTC Regional Re-organization ditto Completed Bus company was study bifurcated in 1994. Transport users' opinion Assist project implementation Completed Important market and market survey research study. Assisted with pricing strategy. MUDF/TNUDF Municipal FOPs (94 in Strengthen capacity of Completed Essential inputs to Fund total) municipalities and corporations decision-taking  -32 - Municipal projects Design work for projects approved Completed ditto feasibility studies for funding (numerous) Environmental and Social Not defined at appraisal Completed Assist implementation of Report New Financial Intermediary at time of restructuring Financial Management ditto Completed ditto Studies Audit Consultancy ditto Completed ditto Legal Consultancy ditto Completed ditto Grant Fund Guidelines ditto Completed ditto Study STOWAD 3 Master Plans Assist project implementation Completed Important preparation and feasibility studies in 3 major towns PMG MIS Assist PMG operation Completed Essential for successful management of this wide- ranging project. General Studies Pilot Study on Historical Not defined at appraisal Completed town Feasibility Study for the Not defined at appraisal Completed Implementation will be Chennai Mofussil Bus taken forward by CMDA Terminal at Koyambedu Environmental Impact Not defined at appraisal Completed Important study to Assessment for identify scope for Pallikarannai Area development of swamp area in S. Chennai. Housing & Land Assist with State U.D. policy for Completed Provided important Development Program formulation background data Municipal Solid Waste Not defined at appraisal Completed Feasibility study-project Management Study proposed for Third Chennai Water Supply and Enviromnental Sanitation Project  - 33 - Study on Direct and Not defined at appraisal Completed Background data for Indirect employment policy-making Water supply and sewer Not defined at appraisal Completed None design Effective demand for Assist with State U.D. policy for Completed Background data for housing formulation policy-making Comprehensive traffic and Not defined at appraisal Completed Assisted with Master Plan transportation study for update for Chennai Met. Madras Reg. Aerial surveys for major Input to computerized mapping Completed Maps produced and in towns use by Dept. of Town and Country Planning and Consultants. Improvements to road Not defined at appraisal Completed Assist planning of a new around Koyambedu commercial center in Chennai Community awareness Not defined at appraisal Completed Study was input into environment and health preparation of proposed education study for MMA Third Chennai Water Supply and Environmental Sanitation Project. Study of fiscal and Assist U.D. policy formulation. Not done None investment factors impacting on when economic development in TN Development of set of ditto Not done None indicators for economic activity in project areas Study to determine how to ditto Not done None hold income distribution in project cities Note: General Studies were undertaken for urban policy improvements in the State, or to assist with issues that arose during the project implementation. They were not linked to specific project components.  - 34 - Table 8A: Project Costs Component Rs million US$ million Appraisal Actual Appraisal Actual LAND 2,387.0 3,179.4 167.3 117.4 GUD 143.0 -- 9.1 -- SIP 458.7 324.2 31.7 13.7 TRAMP 967.1 1,861.6 68.3 71.4 PTC 583.5 929.2 40.4 37.0 MUDF/TNUDF 1,786.1 2,204.6 127.0 74.8 TATE(PMG/MMDA) (*) 190.8 (*) 7.0 PMG/CMC (*) 122.5 (*) 3.4 Total 6,325.5 8,812.3 443.7 324.7 (*) These items were allocated over all others at appraisal Table 8B: Project Financing (US$ million) Sources Appraisal Actual US$ million | US$ million % IDA 300.2 67.0 250.8 78.3 GTN 4.2 1.6 -28.8 -9.0 LAND Revolving Fund 17.3 3.9 31.6 9.9 SIP Revolving Fund 3.3 0.7 0.0 0.0 LAND Internal Generation 78.7 17.7 16.8 5.2 SIP Internal Generation 4.9 1.1 1.5 0.5 PTC Internal Generation 8.2 1.8 4.4 1.4 MUDF/TNUDF Generation 27.0 6.1 23.0 7.2 HUDCO -- -- 21.1 6.6 Total 443.7 100.0T 320.3 1100.0 The possibility of HUDCO participation in the financing of the project was discussed at negotiations. It was agreed that HUDCO would participate on the same terms and conditions as IDA funds if internal cash generation in the LAND component fell short of expectations. This was intended to cushion the State budget. HUDCO financing commenced from March 31, 1989. In fact, the combination of HUDCO finance and increases in the disbursement percentages introduced by the Bank following the Gulf War turned the State budget into a project net beneficiary.  - 35 - Table 9: Economic Costs and Benefits Actual returns for LAND schemes were comparable to those calculated for prototype schemes at appraisal since the implementation conditions were almost identical to those appraised. These returns were about 20%. A similar economic analysis was performed as was conducted at appraisal (SAR Annex 24) on the decisions to augment and replace the bus fleet. The replacement calculation was based on the discounted cost savings over its life of a new versus old vehicle; it was recognized, however, that the operations and maintenance data in these cases was of uncertain quality. The augmentation calculation was based on the benefits minus costs of an addition to the fleet. The methodology relied on the fare levels as a measure of benefits. PTC bus procurement ERR was about 15%, lower than the 21% at appraisal reflecting the resistance by GTN to permit timely fare revisions. Data limitations precluded the calculation of returns on the major road schemes. The Bank has requested DHRW to perform the calculations for completed schemes.  - 36 - Table 10: Status of Legal Covenants Agreement Section Covenant Present Original Revised Description of Comments type status fulfillment fulfillment covenant date date DCA 4.01 (a)(i) I C Borrower to maintain Suspension on 15-Nov- records and accounts in 1994 for quality of record accordance with sound keeping was lifted on 16- accounting practice Dec- 1994 following inspection finding all in order 4.01(a)(ii) I C All records on expenditure to be retained at least one year. 4.01(a)(iii) 9 C Enable IDA representatives to examine such records. 4.01(b)(i) I C Records and accounts to be audited for each fiscal year in accordance with appropriate principles acceptable to IDA. 4.01(b)(ii) I C 31-Dec-95 Furnish IDA auditors report every fiscal year, including separate audit opinion. 4.01(b)(iii) I C Furnish IDA other information concerning records, accounts and the audit, as IDA shall request. 4.02 1 CD 30-Apr-95 Special Account for each fiscal year to be audited with sound accounting practices. PA 2.01(a) 5 C The Project to be carried out with due diligence and financial and engineering practices. Facilities and services to be provided as needed. 2.01(b)(i) 5 CD The project to be carried There was a lag in out in accordance with the implementation compared Implementation Program. with the program. 2.01(b)(ii) 10 C To substantially implement 79 of 82 agreed actions in an agreed Operational OAP were complied with. Action Plan (OAP) Borrowers failed to: implement 10% SIP on private land; revise and roll over annually TNSCB's FOP; prepare proposals for monitoring air quality. In the Madurai STOWAD component, OAP. 1.12 l_____ requiring the project  - 37 - implementing agency to make survey and to make formal arrangements for offering compensation to households in the form of serviced plots in project sites and services scheme., was not complied. This in compliance has led to the project partial suspension in November, 1994. This condition was met nine month after the suspension. 2.01(c) 4 C Make available to the Some lapses occurred but Implementing Agencies were corrected. E.g. GTN funds on terms and did not lend to PTC as conditions satisfactory to agreed early years. IDA. 2.02 3 C Procurement financed by IDA to be governed by the provisions of Schedule 1. 3.01(i) 5 C Implementing Agencies to Improvements were made conduct their operations throughout the Project. according to sound administrative financial and engineering practices under supervision of qualified management. 3.01(ii) 5 CD Maintain their assets and Missions applied pressure make all necessary repairs to agencies, especially and renewals in accordance TNHB, TNSCB and with sound engineering DHRW, to maintain assets. and financial practices. 4.01(b)(i) I C TNHB, TNSCB, PTC, Madras, Coimbatore, Madurai, Salem and Trichy to have project accounts audited for each fiscal year. 4.01(b)(ii) I C 31-Dec-95 Furnish to IDA every fiscal In few cases there were year certified copies of delays in submission of audited financial audits statements and auditors report. 4.01(b)(iii) I C Furnish to IDA other information on records, accounts, financial statements and the audit as per IDA request. 4.02 2 C PTC operation costs Due to persistent delays by (including depreciation, GTN in implementing fare but excluding interest and revisions this covenant other debt charges) not to was not in compliance in exceed 98% of operating | specific years, although  -38 - revenues. overall was in compliance. 4.03 4 C Reimburse PTC at rate of GTN increased 70% for losses on student reimbursement rate to riders in 2 installments 100% during the Project. every year. 4.04(a) 2 C PTC to produce funds from In some cases, in order to internal sources equivalent avoid failing in this to not less than 20%b of covenant. PTC held back annual average of capital on its procurement expenditures. program. Schedule2(1) 3 C Rules and procedures of MUDF and terms and conditions for its loans and grants to be satisfactory to IDA. Schedule2(2) 10 C LAND scheme to be implemented only on sites selected in accordance with criteria satisfactory to IDA. Schedule2(3) 10 C Scope and regulations in LAND, GUD and SIP schemes to be satisfactory to IDA. Schedule2(4) 2 CP In LAND, GUD and SIP LAND scheme recoveries schemes, GTN to recover sometimes slipped due to all chargeable costs from absence of building beneficiaries. Terms and certificates, later corrected. conditions of loans and SIP recoveries were poor. leases, and beneficiary selection criteria to be satisfactory to IDA. Schedule2(5) 5 C GTN to maintain the Empowered Committee, PMG and CMC. Covenant types: 1. = Accounts/audits 8. = Indigenous people 2. = Financial performance/revenue generation from 9. = Monitoring, review, and reporting beneficiaries 10. = Project implementation not covered by categories 1-9 3. = Flow and utilization of project funds 11. = Sectoral or cross-sectoral budgetary or other resource 4. = Counterpart funding allocation 5. = Management aspects of the project or executing 12. = Sectoral or cross-sectoral policy/ agency regulatory/institutional action 6. = Environmental covenants 13. = Other 7. = Involuntary resettlement Present Status: C = covenant complied with CD = complied with after delay CP = complied with partially NC = not complied with  - 39 - Table 11: Compliance with Operational Manual Statements No significant lack of compliance apart from the case of the Madurai STO WAD scheme referred to in the text.  - 40 - Table 12: Bank Resources: Staff Inputs Stage of Planned Revised Actual Project Cycle I Weeks US$ Weeks US$ Weeks US$ Through Appraisal n/a n/a n/a n/a 68.7 125.9 Appraisal-Board n/a n/a n/a n/a 39.9 70.0 Supervision n/a n/a n/a n/a 294.5 592.2 Completion n/a n/a n/a n/a 19.0 57.4 TOTAL n/a n/a n/a n/a 422.1 845.5 1. The table indicates n/a where information is not available from the Bank's MIS. 2. Completion Actuals are final estimates 3. Approximately $70,000 and 35 s/w of supervision inputs were attributable to additional actions taken by the Bank relating to the Credit suspensions over the STOWAD scheme in Madurai. 4. Approximately $130,000 and 70 s/w of supervision inputs were attributable to supervision during the two extensions of the Credit closing date the tasks associated with project restructuring during this period.  - 41 - Table 13: Bank Resources: Missions Performance Rating Number Specialized Implemen- Develop- Stage of Month/ of Days in StaffSkills tation ment Types of Project Cycle Year Persons Field Represented Status Objectives Problems Through Appraisal Nov-85 2 14 EC, ME - - Oct-86 3 15 EC, FA, Trans - - Feb-87 6 18 EC(2), SE, FA, - - Trans, Plan Jul-87 4 14 EC, SE, ME, FA _ - Appraisal through Oct-87 5 21 EC, ME, Trans, - - Board Approval FA, Plan Supervision Jul-88 2 14 EC, FA I Aug-88 1 3 Trans Land acquisition problems in road projects. Apr-89 5 6 EC, Trans, FA, I I SIP: Component is in seriously Plan, ME difficulties. MUDF: Initial sanctioning of loans has taken more time than expected. Consultants' preparation of financial and operating plans need strengthening. Aug-89 5 10 EC, Plan, FA, I I MUDF: Initial sanctioning of Trans, ME loans has taken more time than expected. Mar-90 1 4 FA Jul-90 4 21 EC, FA, Plan, SA I I MUDF: Problems in appraising municipal FOP and Fund management and allocations. BUS: Some of operating targets are not satisfied. Nov-90 6 12 EC, Trans(2), 2 2 GUD: Nothing implemented. FA, ME, SA MUDF: inadequate fund allocation. Problems in appraisal causing low quality and quantity of loans. BUS: Worsening operating status. TRAMP: Delay in procurement procedures.  - 42 - Apr-91 4 9 EC, Trans, FA, 2 2 MUDF: Inadequate fund ME allocation. BUS: No fare revision and negative cash flow. Deviations from the covenants in SIP, GUD and BUS. Sep-91 3 11 EC, FA, Trans 2 2 Jan-92 4 17 EC, SE, Trans(2) 2 2 GUD: Nothing implemented. MUDF: Deviation from Fund basic objectives. TRAMP: Delays in studies and scheme preparation. Some deviations from Covenants. Aug-92 3 8 EC, SE, Trans 2 2 Mar-93 3 9 EC, MF, Trans 2 I TRAMP: Delays in studies and scheme preparation. Dec-93 3 7 EC, ME, Trans 2 Jun-94 4 14 EC, FA, ME, S S Trans Sep-94 4 19 EC, FA, ME, S S TRAMP: Procurement Trans problems. Jan-95 7 20 EC(2), FA, U S GUD: No implementation. No R&R(2), ME, interest of private sector. Env TRAMP: Weak implementation capacity. STOWAD: Suspended Jul- 95 2 13 EC, Env U S GUD: No progress. No interest of private sector. TRAMP: Weak capacity Nov-95 2 3 EC, Env S S MUDF: Commercialization issues under review. Mar-96 3 4 EC, L, Bank S S May-96 3 7 EC. L, Bank S S Project Restructuring Nov-96 4 7 FA, Env(2), S S R&R Feb-97 1 13 S S Closing soon. Promote FA disbursement. July-97 1 I I S S Credit Status I_FA Completion Sep-97 6 14 EC, FA, Plan, _ _ Bank, Env, ME L- - -=  - 43 - Key to Specialized staff skills: EC - Economist; FA - Financial Analyst; Plan - Urban Planner; ME - Municipal Engineer; SE - Sanitary Engineer; L - Lawyer; SA - Systems Analyst; Env - Environmental Specialist; R&R - Relocation and Rehabilitation Specialist; Bank - Banking Specialist Note: A pre-Identification mission, involving EC and ME, took place in Jul-85 in conjunction with a supervision mission for the Second Madras Urban Development Project. The Completion mission for TNUDP in Sep-97 was also a pre-Identification mission for TNUDP-II.  APPENDIX A The World Bank INDIA: T.AMIIL NADU URBAN DEVELOPMENT PROJECT (TNUDP) (Cr.1923-IN) Completion iMission and Discussions of a Possible Follow-On Urban Development Operation In Tamil Nadu (9/15-30, 1997) AIDE-NIMIIOIRE I. Backgyround 1. The mission. A World Bank mission visited Tamil Nadu between September 15 and 30, 1997. The mission members were: Messrs. / Mime. Hiroaki Suzuki (Task Manager and mission leader); Michael Whitbread (consultant, responsible for drafting the project Implementation Completion Report (ICR)); Kim Cuenco (Urban Planner); Illangovan (Environmental Engineer); Michael Wills (consultant, Financial Analyst); and. Ed McBean (consultant. Municipal Engineer). This was the final TNUDP mission as the Credit closed on September 30, 1997. The mission objectives were: (a) to initiate the preparation of the ICR; and (b) to hold discussions on a possible follow-on urban development operation in Tamil Nadu. including continuing support to the Tamil Nadu Urban Development Fund (TINUDF) which was established under the TNUDP. 2. iMvission tasks. To achieve these objectives, the mission held discussions with officials (ANNEX I provides a list of key persons met), collected data for analysis and evaluation from GOTN, the project executing agencies and the municipalities (ANNEX 2 lists the key documents), and undertook field visits to 39 sub-projects and schemes in the towns of Chennai (Madras), Madurai, Palani, Coimbatore, Tirrupur and Erode (ANNEX 3 lists the sites visited bv the mission). The issues arising from the mission's field visits and associated discussions are shown in ANNEX 4. All mission members wish to record their appreciation for the courtesy extended to them and for the assistance and cooperation of all the agencies and individuals concerned. The findinigs and conclusions of the mission were discussed at a State-level wrap-up meeting in Chennai on September 30, 1997 and at the final wrap-up meeting in Delhi on October 7 in Delhi with GOI (DEA of the iMinistry of Finance, the Ministrv of Urban Affairs and Employment), GOTN, TINUIFS and the participating financial institutions (FIs). The following summarizes the findings and conclusions of the mission. Part A and Part B are related to "the closing of TYNUDP', and "the NINUDF and a Possible Follow-On Urban Development Operation in Tamil Nadu."  - 2- Part A: Closing of TNUDP II. Summarv Status of TNUDP at Credit Closing 3. Phvsical status. The mission judged the achievement of the physical target of the project to have been adequate, though some of the sub-projects have problems in their design and construction quality. Civil works, purchases of equipment and execution of technical assistance, training and studies approved by the Bank were all completed, with the following two exceptions: (a) 13 road and bridge schemnes which are the responsibility of the Department of Roads and Rural Works (DHRW) under the Transport and Traffic Management Program (TRAMP) component remained unfinished with a spillover value of Rs 411 million (US$11 .5 million); and, (b) some minor works in four sites and services schemes under the Land Service Program (LAND) component, which are the responsibility of the TN Housing Board (TNHB). The TRAMP schemes will be completed with State Government funds, and sites and services will be completed with TNHB funds. Compared with the appraised project, physical targets were achieved or exceeded for: sites and services under LAND; equipment and civil works under Pallavan Transport Corporation (PTC/bus company in Madras); bridges and highways under TRAMP; municipal projects under the Municipal Urban Development Fund (MlJDF); and, TA and training under TA., Training and Equipment (TATE). Physical achievement fell short of the appraisal targets for: slum improvement on public lands under the Slum Improvement Program (SIP) by about 20%; the program for improvements to private slums under Land Sharing/Realignment (LASER), where there were only 2 small schemes implemented; and, guided urban development (GUD) under LAND, which was canceled. LASER and GUD were small and somewhat experimental components of the appraised project. 4. Financial status. The Board-approved Credit amount was SDR 216.5 rnillion, and SDR 22.0 million and SDR 10.8 million were canceled by the Bank following an extended period of Rupee depreciation in 1992 and 1994 respectively, leaving a Credit amount of SDR 183.7 million. It is anticipated that by the time of final withdrawal application, the utilization will be 100% of this Credit. Covenant compliance. Except the audit of the Special Account which is the responsibility of GO1 all standard project conditions in relation to project accounts, audits, procurement procedures etc. were in compliance at closing. In addition to standard conditions, there were some 82 items in the project's agreed Operational Action Plan (OAP) at appraisal covering procedures and policy, the "substantial implementation" of which was a project-specific covenant. Three C)AP items were not in compliance at closing. Accordingly, the mission concluded that the Borrower was in compliance. 6. Suspensions of disbursements. The mission's field visit included inspection of Madurai's storm water drainage (STOWAD). The manner of implementation of the STOWAD master plan had created problems in 1994 that had led to two suspensions of disbursements by the Bank over issues of project record keeping and R&R -- both suspensions were lifted following Bank inquiries. The mission was satisfied that: (a) the STOWAD scheme at Madurai had been properly executed and was working well; (b) there had been no re-encroachment onto the drainage margins since conmpletion of the scheme; and (c) the R&R issues were resolved according to Bank guidelines. 7. Highlights of project restructuring - transformation of MUDF into TNUDF. The project was extended twice from the original closing date of September 30, 1995. The extensions were for a period of one year each. They enabled restructuring to take place in order to transform the project's  - 3- successful Nlunicipal Urban Development Fund (MJUDF) into a legally independent financial inte-..ediarv with private sector participation. The process of creating the intermediary. Tamil Nadu Urban Development Fund (TNUDF), has been successfully completed and TNUDF is now poised for considerable irther development and expansion of its urban infrastructure lending activities (see Part B of this aide-memoire). III. Implementation Performance of TNUDP 8. Views of the Mission. This project was complex and far-reaching and contained many innovations. There was always a possibility of failure in some areas which would need to be weighed against project successes in the final assessment. The main "'failures" were: no GUD schemes were executed under LAND; inadequate coverage of slum improvement on private lands under LASER; an absence of any real improvement in road scheme appraisal capability at DHRW under TRAMP and excessive delays in planning and procurement: slow occupation of sites and services schemes under LAND (althouah the sales of plots greatly exceeded expectations); bus fare revisions by GOTN were too infrequent and procedures inadequate; and, often poor attention by the Urban Local Bodies (ULBs) to the maintenance of slum improvement and sites and services schemes. However, the "successes" were many: physical targets were exceeded for four out of five major components; poverty alleviation objecrives were significantly achieved; there have been important environmental improvements; many urban policy reforns were introduced by the project which complement those arising from the 74th. Constitutional Amendment; most agencies have experienced a cultural change leading to significant and sustained improvements in their approaches to planning and execution; and, the project has created an institution in the transition of the MUjDF to the TNUDF for increasing and sustaining the flow of capital to ULBs and urban infrastructure generally in the State. These are major advances in urban development policy and practice, and the mission's overall assessment is that the project was successful in achieving its obiectives despite some shortcomings. 9. Views of the Borrower. The Project Management Group (PMG) and GOTN are preparing the Borrower's evaluation of the project for inclusion as an Appendix to the ICR. This will be forwarded to the Bank in November 1997. Provisionally, the Borrower indicated to the mission that GOTN was very satisfied with the progress and implementation of TNUDP, particularly the restructuring of the TNUDP including the establishment of the TN`JDF and that their evaluation was likely to record a favorable outcome. Given the important roles of the FIs in the TNLTDF, DEA requested them to submit to GOL'GOTN and the Bank their own evaluation of the TNIJDF. IV. Reallocation Between the Categories of the Proceeds of the Credit 10. The Project Management Group (PMG) and the mission reviewed the status of the eligible expenditures incurred under the TNTDP before the Credit closing. The final category allocation of the proceeds of the Credit is shown in ANNEX 5. The Bank has undertaken the reallocation between the categories of the proceeds of the Credit. based on this review. V. Operational Plan and Sustainability of TNUDP 11. All of the facilities provided under the project have become, or will become in the case of unfinished works, assets of the relevant agencies -- principally the municipalities. Accordingly, there is  -4 - no formal operational plan for the project as the assets will be operated and maintained as part of the municipalities routine oblications. Sustainabilitv depends largely on the levels of maintenance and the operating procedures of the municipalities, which in turn depends upon their finances and organization. With the improvements brought about under the 74th Constitutional Amendment. the mission is of the opinion that there are good prospects for the sustainability of these assets. However, considerable reform of local govermment is required to achieve this outcome, which would be facilitated by a follow- on project as discussed below in Part B. VI. Follow-up Actions in the Post-closure Period 12. Borrower Obligations. The mission reminded the Borrower of project obligations which still remain in the post-Closure period, including those entered into under the DCA and the PA. These are: (a) GOI will submit to IDA an audit report of the Special Account of FY96/97; (b) all withdrawal applications should be submitted to the Bank for eligible expenditures incurred up to September 30, 1997 by January 31, 1998; (c) audits of SOEs. for the fiscal year 1996/97 should be submitted in accordance with the audit covenant by December 31, 1997 and those in the fiscal year 1997/98 should be submitted by December 31, 1998; (d) audits of the TNUDF and TNUIFS, for the fiscal year 1996/97 should be submitted as soon as possible, in accordance with II- 2-(c) of the Amendment of Devrelopment Credit Agreement and Project Agreement; (e) GOTIN will replenish the Grant Fund in accordance with the provision set forth in the Grant Fund Guidelines 7, in accordance with II- 3-(b) of the Amendment of Development Credit Agreement and Project Agreement; (f) semiannual reports on the progress of the TINUDF covering the period of April I- September 30, 1997 should be submitted by the end of November 1997 (the progress report of the TINUDF should also cover the preparation and transitional activities for the establishment of the TINUDF from October 1996 and March 1997), in accordance with II.-2-(c) and II- 3-(c) of the Amendment of Development Credit Agreement and Project Agreement; (g) GOTN will continue to assist with the preparation of the ICR as reasonably requested to do so by the Bank and, additionally, should prepare its own Evaluation of the project for inclusion in the ICR which should be submitted to the Bank as soon as possible, but in any event no later than December 31, 1997; and (h) in accordance with the Agreements, the Borrower is obliged to comply with covenants, as appropriate, during the period of the Credit. 13. Program for ICR Preparation. The Bank will prepare a draft of the ICR and will forward it to GOTN for comments by December 31, 1997. Following any comments received, the Bank will proceed  -5- to finalize the ICR and submit it to the Senior Management of the Bank for onward transmission to the Bank's Board. According to this timetable, the ICR should be received by the Board during February or March 1998.  - 6- Part B. Possible Follow-On Urban Development Operation in Tamil Nadu VII. Project Restructuring - TNUDF/GF/TNUIFS 14. Background. The project restructuring of TNUDP was negotiated in Juiv 1996 and approved by the Board of IDA in October 1996. The legal documents were amended in Decermber 1996 and became effective in March 1997. The major objectives of the project restructuring were tO convert the project's successful Municipal Urban Development Fund (MUDF) into an autonomous financial intermediary, the Tamil Nadu Urban Development Fund (TNUDF)/Tamil Nadu Urban Infrastructure Financial Service Ltd (TNUIFS) with the participation of private capital and management for financinz urban infrastructure projects; to set up a new Grant Fund (GF) to encourage urban infrastructure investments targeted to the urban poor; and to finance TA and resettlement and rehabilitation costs. 15. Progress. In November 1996, the Tamil Nadu Urban Development Fund (TNUDF) was established as a trust under the Indian Trusts Act 1882 with participation of GOTN (MUDF net worth as its contribution, Rs.1.2 billion -US$34 miillion. 70%), ICICI, HDFC and IL&FS (FIs' contribution Rs.510 million-US515 million. 30%). TNUDF is manazed by the Tamil Nadu Urban Infrastructure Financial Services Ltd (TNUIFS). majority-owned bv ICICI, HDFC and IL&FS ("lTlN)F means collectivelv T`NUDF/TNUIFS in this aide-memoire). The major objectives of TNUDF are to: (i) finance urban infrastructure projects which improve the living standards of the urbar. population; (ii) facilitate private sector participation in urban infrastructure financing and operation, through co-financing, joint ventures and public-private partnerships; and, (iii) operate a complementary windcw of the Grant Fund (GF), to assist in addressing the problems of the urban poor. After the completion of the legal procedures and the transfer of the MUDF's assets and liabilities, the TNTUDF started its lending operations in March 1997. GF was established in September 1996 and obtained GOTN's first contribution in April 1997. 16. Evaluation of Performance. Lending Activities of TNTJDF: Since its incorporation in iNovember 1996, TNUDF has appraised projects costing Rs. 1,973 million (US$56 million) and approved loans of Rs. 1,520 millior (US$ 43 million) to 4 Corporations and 19 municipalities. This performance is significant when it is compared with the performance of the MUDF which had approved about Rs 2,080 million over 8 years. During the same period, TNUDF disbursed Rs. 226 million (USS 6.4 million) compared to the allocated IDA credit balance of Rs.600 million (US$17 million). The major reasons for the lower disbursed amournt are: (i) the transfer of the assets and liabilities of the MUDF to the TNUDF had taken much longer than planned at the time of restructuring, due to several accounting issues (shift from cash-based to accrual-based accounting system, income recognition and loan provision for the MUDF loans, etc); (ii) IDA approval for the two large sub-loans were not given or delayed (IDA did not approve the sub-loan for PTC bus company before the credit closing date due to the delay in bus fare revision and other financial reasons. IDA delayed its approval of the sub-loan for the Madurai Toll Ring Road project for clarification of the status of the land acquisition); and (iii) the TNUDF respected the preference of borrowers to stagger loan drawdowns to minimize interest costs. The net interest eaming for the 6 months to March 31, 1997 declined bv 35% (from Rs. 78 million to Rs. 51 million) compared to the previous 6) months due largely to declining interest rates for term deposits. The projects financed varied from storrm-water drains, solid waste management to commercial complexes. TINUDF has built up the project pipeline of Rs. 4,500  -7- million (USS 13 0 million). The detailed assessment of the financial performance of TNUDF is provided in the Section 3 ofANNEX 6. Lendina Oualitv: In consultation with the Bank. the TINUDF has adopted lending policies and procedures and established a svstematic loan processing procedures, including the Environrnental and Social Report (ESR) addressing the environmental and social issues of sub-projects. The TNUDF is' following these lending policies, procedures and environrnental and social recuirements. Impact of Non-LendinQ Activities: In addition to its lending activities, the TNUDF has had a positive impact on the urban infrastructure financing and the capacity building of the municipalities. The mission's field visit revealed that the TNUDF's clients highly appreciate its stream-lined decision- ma-king and its advisorv services in developing projects, in particular for, new tvpes of urban projects such as BOOT operations. The TNUDF assisted Madurai Corporation in developing the first toll road project in Tamil Nadu. It also helped Karur Municipalitv develop the first BOOT scheme for a toll bridge project in Tamil Nadu. TNUDF has also assisted the Tamil Nadu Institute of Urban Studies in developing and implementing a training program for the municipalities which was financed by the Grant Fund. The TNUDF is also helping the municipalities in improving their accounting systems together with the provision of computer equipment and software financed under the Grant Fund. Relationships with the Government: TNUDF provides a unique framework where the Government and the private sector collaborate in urban sector development. This arrangement is beneficial for both the Government and the private sector. For the Government, TNUDF is a window for the private capital inflow and the technical transfer of expertise on infrastructure financing and management. For the private sector, the Government's support to create an enabling regulatory environment for urban financing and investment is indispensable for private participation in relatively new areas of municipal financing and urban infrastructure investment. This unique public and private partnership has led to the creation of improved regulatory framework for the urban financing. For example, during the preparation of the MNadurai Toll Road Project, TNUDF realized that the existing regulations did not allow the municipalities to enter into BOOT arrangements with private investors and requested the GOTN to amend the regulations. GOTN swiftly took action. Lending decisions are made following a transparent lending policy and procedures including specific economic, financial and technical criteria and based on the recommendations made by TNUIFS. Relationships with the Financial Institutions: The above-mentioned high performance of TNUDF would not have been possible without the strong support of ICICI, HDFC and IL&FS. From the beginning, the intention of the TNUDF was to bring into the TNUJDF not only private capital but also the efficiency and professional expertise of the private financial institutions. ICICI, HDFC and IL&FS, which are considered to be amongst the best financial institutions in India, contribute to the institutional development of TNIJDF in their areas of comparative advantage. ICICI, with ample experience of term lending and human resources has directly supported the TNUDF's operations by seconding the operational Vice President, the Operational Manager and two accounting professionals. IL&FS, considered as a front-runner of private infrastructure financing in India is providing support in developing innovative BOOT operations which are new in urban infrastructure financing, particularly at the municipal level. Although these financial institutions are market leaders in their respective fields, none of them have adequate experience in municipal financing. In exchange for their contribution, these financial institutions are gaining valuable experience in municipal financing thorough the TNUDF. It is  -8 - expected that these institutions would develop urban financing operations in other states in India, buildingi on the experience of the TNUDF. Sta':s of NMarch 3 1. 1997 Audit: l`NUIFS informed :1n mission "ha, the financial statements of March 31. 1997 were cleared bv the auditor of the TNUDF on October 6, one week after its statutorv recuirement. This delav was mainly caused by: (i) the complication arising from the conversion of the cash basis accounting system of MUDF to the accrual basis accounting method of the TNUDF; (ii)the problem of income recognition of the previous period (`UDF); and (iii) difficulty of the determination of loan provisions in the absence of confirmation of GOTN's guarantee on the past portfolio of MLUDF, transferred to TNUDF. During the mission's visit in Tamil Nadu. GOTN reconfirmed its guarantee on the NfUDF's past portfolio and took action to meet the auditor's requirement to determine the provision for bad loans. The TNUDF will submit to the Bank the audited financial statements of March 31, 1997, once the Board of Trustees of the T1NUDF approves it. Challenges for the Future: (i) Financial Management and Accounting Administration. Compared to its high performLance in lendina and non-lending advisory services, the TNUDF needs further improvernent of its own financial management and accounting administration. The T.NTJDF has not yet established an adequate financial management information system. mrie current system does not provide the management with timely enough financial information required for more efficient fund management. The TNUDF management and its shareholders, FIs, fully recognize this weakness and have taken action. A Financial Vice President cum Corporate Secretary who is CPA and a Manager of Accounting will join the TNTJDF shortly. The required expertise and technology are standard and not complicated in this area. The mission requested the FIs to extend their support to the TNUDF in developing the financial management system. The mission's observation on the accounting staff, financial information system and audit issues of the TNUDF are stated in Section 1 and 2 of ANNEX 6. (ii) Project Development and Appraisal Capacity. TNUDF has adequate project development and appraisal capacitv to deal with relatively small traditional municipal projects which had been financed under the MUDF. However, these capacities would need to be strengthened as the TJNUDF starts to finance more complicated medium-sized urban projects such as solid waste management, sanitation, toll roads, toll bridges and sewerage. These projects would require expertise on the regulatory and institutional framework as well as technical aspects. The mission recommends 1NUDF enter into an arrangement with a respected engineering firm to make their sector experts available on a retainer basis. Grant Fund: The Grant Fund (GF) was established: (i) to finance the projects which benefit low income populations in conjunction with the TNNUDF loan financing; (ii) to assist municipalities in developing projects, particularly new approaches such as BOOT; (iii) resettlement and rehabilitation costs; and (iv) technical assistance for improving the financial, administrative and managerial capacities of the municipalities. GF was established in September 1996 and becarne operational in April 1997 when GOTN- made its first contribution of Rsl56 million (USS 4.5 million). GF is managed by the TNJIFS in accordance with the Grant Fund Management Contract with CaOTN. GF disbursed Rs. 100 million (US$ 2.9 million) from April 1 to August 31, 1997. It has financed: (i) urban projects whose major beneficiaries are urban poor: (ii) project preparation costs; and (iii) technical assistance and training of municipalities. Regarding the financing of the project which benefits the economically weak urban population. density of the low income population in the project target areas is used to decide the  -9 - allocation of the Grant Fund (the larger low income population in the project. the larger grant support to the project). In any project, the grant support is limited to 3O% of the total project costs. The incentive provided by the Grant Fund has induced the municipalities to invest in urban infrastructure in low incorne areas, thus contributing to the objective of the povertv alleviation of the TNLDP. At the time of the TNTUDP project restructuring, it has been agreed that GOTN will replenish the GF bv transferring its return on TNUDF. Other possible sources for GF replenishment are the IDA reimbursement of GF expenditures to date (Rs. 100 million) and financial assistance of other developing aid agencies (in the form of either grant or concessional loans). In addition, the mission recommends that GOTN consider recovering of the project preparation costs financed bv GF by capitalizing it in the loan principal when the project materializes and the loan is approved. Both GOTN, TNUDF and municipalities share the view that GF has given to the municipalities the incentive to invest more in the areas where low-income population are living. Given this important and unique roles of GF in the poverty alleviation, the mission suggested that GOTN commission an expert team to conduct a detailed assessment of GF's influence on the investment pattern of the municipalities and its impact on the poverty alleviation. This assessment should also shed light on the question of the sustainability of the GF. This report could be used as briefing document when GOTN seeks the financial support of other donors. The separation of subsidy of GF and loan financing on commercial basis through the TNUDF (loans and grants were mixed in the MlUDF) was a major achievement of the TINUDP restructuring without which the participation of the private financial institutions in the TNLUDF was impossible. The mission's observation of the Grant Fund activities is provided in section 4 of ANNEX 6. C0nc'usion: The project restructuring of TNUJDP involving the creation of TNUDF, TNUIFS and GF has demonstrated its initial success and is achieving more than the initial expectation, in particular the project identification and appraisal and non-lending advisorY services. One year is certainly an insufnicient period to fully accomplish the objectives of the project restructuring and to assess its long- term impact; however, the mission realized that the TNUDF has enormous potential and is fully poised for considerable further development and expansion of its urban infrastructure lending activities. In India. beside the TINUDF, there are only two financial institutions, Housing Urban Development Finance Corporation (HUDCO) and IL&FS which are financing urban infrastructure investments. HUDCO, 100% GOI owned financial institution is the largest player in the urban infrastructure financing. However, the access to HUDCO's financing is limited as it requires the guarantee of the State Governments. As the repayment of HUDCO's loans are guaranteed by the State Governments, the quality of HUDCO's projects and the performance of its clients are often questioned. IL&FS which focuses on relatively large scale private urban infrastructure projects has no experience in municipal financing. In this sense. the TNUDF is the first financial institution with private management and capital participation which specializes in financing the municipalities' urban infrastructure inyvstments without Government's guarantee. The discussions with private financial institutions (ICICI, HDFC, IL&FS, and other commercial Banks) revealed that none of them is ready to start the urban lending on a large scale, although all of them conceived the urban sector lending as potential market niche. The TNIJDF is making impressive progress in this relatively new market. The initial success of TNTUDF/TiNUIFS and GF can also be demonstrated by the strong interest in these schemes indicated by other multilateral and bilateral development financial institutions. This initial success would not have been possible without the strong commitments of both GOI, GOTN and ICICI, HDFC and IL&FS and most importantly the dedicated efforts of the management and staff of TNUIFS. The real challenge ahead is to raise resources from the capital market to finance urban infrastructure. This objective cannot be achieved overnight and its success and is also dependent on the overall development of the capital  - 10- market. However, continuous strong financial, managerial, and technical performance as well as improved performances of the municipal sector are prerequisites for anv financial interrmediary to reach this goal and there are no shortcuts. VIII. Urban Sector Reforms 17. In addition to the demonstrated initial success of the TNUDF, the mission recognized that GOTN has made substantial progress in developing and implementing credible urban sector reforrns in line with the 74 th Constitutional Amendment. Basically the ongoing urban sector reform empowers urban local bodies (ULBs) in exchange for their accountabilitv for service delivery through financial and functional devolution. The ongoing reforms concern: (i) the recasting of the legislative framework to support decentralization and economic liberalization; (ii) improvement of the financial position of the municipalities through devolution of funds from state to the municipalities. p'ropertv tax reforms and increase of user charges; and (iii) improvement of urban management. The outline of the reforms undertaken or being undertaken is summarized in the table of the next page and explained in detail in ANNEX 7. 1 8. Financial devolution from the State to ULBs and improvement of the management of ULBs would improve the environment for the TNUDP operations. The above-mentioned reforrns will substantially help ULBs improve their financial performance and their creditworthiness. GOTN has recently taken decision to transfer annually to the municipalities 8% of the State's revenues. This is in addition to the Central Transfer for the municipalities. In FY 97/98, GOTN has already effectuated the financial transfer of Rs.2.400 million to ULBs. TNUDF estimates that TNUDFs clients (Corporations and municipalities) have now Rs 4,000 (US$114 million) annual loan borrowing capacitv over the next five year. In addition, it is expected that GOTN will pass bills on reforms of the properrY tax and user charges. which will further enhance the revenue generation of municipalities, thus their credit- worthiness.  S'T'AT'IJS 01? IMPLEMEIN'I'ATION 01? URtIBAN ItRI0FRMS IN 'AMIIL NAD)U ISSUES AClFIONS STATl E LOCAL 4 lt8QtJIIII.I). lcdl for Im ,,,,plement ti7cThli Stale Fillaice Commission, rpotrl subnltilicl Oct-96 nllii ajuur leProvisions adopldu I .ocatl elections iheld uWI Oit-96 enabling legislalion Conkstlillional unlider (;.. 109 and I Io) daled May-9'/ lor diecentrallizalion (decentiralization) ITN Urlban Local 13odies (TNULB) Bill presencie to, anid awaitinig passage in the anldi ecolnomic A,neni(linetil Slate,l.egislalive Assemiibly. Expected to received ilte President's assenit and liberalizationl passci iiitO law withiin onie year. Auienidline nis on ilie property tax relormis will be ilnlroduLiced by Janl-98 Enalblinig legislation Ordlinanice issued 1996 allowing ini principle lJLBs to ellter into l'/P arrangemeuts; Karur bridige BOOT project under lor lp)nlic-privale reduction of slanip) duties from 12% to 0. 1% preparation (1/P'I) paIItnCerslkips Wvcak ulbaii andl Professionalize nibani TNUJI.B Ilill andcl SFC Report support capacily building; 9111 Pliu provisions io Begiiiinig of comiputerizationi of ULB tinanlcial management supl)ort capacily buildlinig programs; inicrcasedi delegationi of powers Io ULBs; fttuclionks witli assistanice tioii lNUDP m1a1nageliment of oricinalioni seminiars for local clected olficials sponsored by tlie Cenitral Fiiialice In ball local bodies Commission; capacity blilding for ULIE oflicers through imie ITN IJst. of 11Jlbati Stuidies under TINU)I'; computers supplied to ULBs unidler lTNUDPI; idelilirlcalion of lrilg nodal agenicy Strengtlleni municipal Strengtleninig of basic accouniling practices in ULBs; accig mianiuals ready by finianicial tnauageu,eni Dec-97 capacities; proillole transparency a111n1 aIccolluntability Improve city Greater predictability of itilergovt'l transfers & granls faciiitales planning of illfras miainagemilenil anid liniks invesitimenits lied to buidgetary l)rovisions to infrastriucltre _development___ Liberalize laud itCA will be deIlinikcl froni properly taxes Coimiibatore revisedi properly tax system umatkels Lack of ftundis for Mobilize resources to i)illtergovert'l Iralnsfers & gratlis: devolutlilio of fmuids fronil stlitc receipis on a uilnltn infrrufstucture fii,aicc rcunilileritlive lixel formiula fr,o,, '97-'98 & increased shale liolit assigiled revelinues lor O&M. nccds and scrvice scihemiCes Already Ks. 2401 ciores transferred. ii) augueliltalion of own resources: Stale (15%) andl cenitral (10%) inicentive granits for improved finianicial pertormance; TNlUJI Bill inicludles tax relormis (e.g. propefly taxes); revisioll of lax and no-lax souirces (e.g. tiser charges and licenise Ices); new lax assiglelicnll doomains; siricier penallies lor mon-paytiienel ol taxes Itanil user charges; dlisinccilives for leIgilty courtl iligations iii) privatization of civic services (solid waste collection & disposal, water supply, MWSSB, Exiioral, Tirrupurt iv) private sector borrowinigs: UtIIls allowed to burirow tlhrougih debcnitmies & Coihobatore rated bul noti issucd bonid; luans front baniks anid F1Is on tlh secur ity of taxes and dJulies; crealion of 'lNUDI' Clihmenai cuiing ulp for credlit rating &'rNUIIFSlI; credlit _atiig_lilr tJlBs s_supply, c_c)  - 12 - IX. Possible Follow-On Urban Sector Operation in Tamil Nadu 19. Given the above-mentioned initial success of the T`NUDP restructuring. GOT'N has decided to recuest a new Bank loan of USS200 million for the continuous TNUDF operations. DEA and MUEA of GOI endorsed GOTN's request and submitted to the Bank an official loan recuest in November 1997. The mission discussed the above proposal with GOI (DEA and MUEA). GO1N. TNUDF and FIs. While the GOTN's proposal only focused on the Bank's continuous support to the TNUDF, GOTN and the mission agreed that the support to the urban sector reforms through the institutional development of the municipalities should constitute an integral part of the next possible operation. Accordingly, the next operation would consist of the Institutional Development Component and the Urban Investment Component through TNUDF. 20. Institutional Development Component: Financial and functional devolution should be associated with the accountability of the municipalities. The draft Tamil Nadu Urban Local Bodies Bill includes the municipalities' obligation to deliver 10 mandatory services. The municipalities, particularly small ones, do not have sufficient administrative and managerial capacitv at even current levels of financial and functional responsibilities. Substantial financial and functional devolution represents both an opportunity and a risk for them. In order for the anticipated urban sector reforms empowering ULBs to succeed, the financial and functional devolution should be implemented gradually with strong support to the institutional building of ULBs. Given this, GOTN and the mission agreed to add an institutional development component to support the GOTN's urban sector reform initiatives in the next operation. GOTN and the mission agreed that the Tamil Nadu Institute of Urban Studies (TNIUS) should be the nodal agency of this institutional development component. The mission has held preliminary discussions with TNIUS on the training part of this component. A further detailed proposal for this component needs to be developed by the Department of Municipal Administration and Water Supply and TNIUS. 21. Urban Investment Component (TNiUDF): The ultimate objective of the TJNUDF is to increase private capital flows to urban infrastructure financing and to maximize investment quality, utilizing the discipline and expertise of the private sector. The restructuring of the TNUDF has demonstrated its initial success. The TNUDF has attracted for the first time in India private equity capital for municipal urban financing. The TNUDF's lending activities are managed by the private financial service company, TNUIFS. As mentioned above, TINUIFS has substantially improved the operational efficiency of TNUDF compared to MUDF. The conversion of MlTTDF into TNUDF has been a significant milestone in bringing in financial discipline and cormmercial behavior in municipal financing. 22. The next operation would build on the initial success of TNUTDF and assist TNUDF in evolving as a full-fledged viable financial intermediary specialized in municipal financing, which could generate resources from the capital market on its own. In this context. the Bank's continuous support to TNUDF should play catalvtic role to assist this evolution, rather than simply replenish the fund. It is important that the Bank loan should not be seen as the only source of the fund. Because, such perception would not only retard the above-mentioned TNUDF's evolution, but also crowd out possible resource mobilization from the private sector. Larger private resource mobilization for the TNUDF funding and/or TNUDF- financed projects would contribute to further improvement of the financial discipline and lending quality of the TNUDF. In the mission's view, the chance of sustainable success of the TNUDF in long term would depends on the level of the risk sharing by the private partners in the investments made by the  -13 - TNUDF. Accordingly, the guiding principle of the Bank's support to the TNUDF in the next operation would be the risk sharing by the private investors as a step forwards making TNTUDF sustainable on its own. One possible way to materialize this principle would be for the Bank loan to be routed through GOT N/T NTDF as well as the three FIs, which mav on their own add resources that they would mobilize themselves. Increase of unit shares of the private investors in the T1NUDF would be another way to increase the risk sharing by the private investors. Further work would be required to identify various options and assess their feasibility. 23. ULBs' Access to the Capital Market. The next operation would aim at promoting the access of the ULBs to the capital market in the following ways Direct Access Through Municipal Bond Issues: It is expected that some municipal Corporations would be able to raise the funds in the capital market by issuing municipal bonds in the near future as Ahmedabad Corporation is anticipating. The next operation would provide the technical assistance for the municipal bond issuance as a part of the Institutional Development componernt Issuing Bond of TNUDF Following the Concept of the State Bond Bank in the US: Most small- and medium-sized municipalities would not be able to access to the capital market directly by issuing municipality bonds due to the high transaction cost resulting from the lack of economies of scale. The TNUDF could fill this gap by issuing bonds. TNUDF's roles should be to identify, appraise and develop a large number of relatively small municipal projects and other urban infrastructure projects, bundle them and issue the debt instruments against the revenue streams of these loan assets for the institutional and general investors. Appropriate credit enhancing mechanisms should be developed such as intercept of the transfer of the State Government to the municipalities. At least three years of consecutive performance records are required for the TNNUDF to be rated before undertaking any bond issue. As the current market does not provide the long-maturity debt fund, some mechanism should be explored to extend the maturity of TNUDF, including the special facility such as IDFC. 24. Foreign Exchange Risk Management. In the TNTUDP, IDA credit was onlent to MUDFI/TNUDF through GOI/GOTN. Direct lending to TNTJDF is preferable, provided that it can manage the foreign exchange risk. However, this issue should be carefully examined in the light of the limited hedging instruments available in India and TNUDF's verv limited financing operations (most of the clients are the municipalities which do not have any foreign currency revenues). The Bank asked the TiNUTDF to explore this possibility. X. Next Steps 25. Based on the discussions with GOI/GOTN/FIs, the mission will prepare a draft Project Concept Document (PCD) as a way to clearly indicate the basic elements of a possible involvement of the Bank in the next operation. In the meanwhile, the mission asked: (i) the Department of the Municipal All the parties understood that the success of the issuance of the municipal bonds and TNUDF's bond depend on not only the performance of the municipalities and the TNUDF, but also the situation of the capital market and the macro-economic condition in India  -14- Administration and Water Supply and TNIUS in consultation with TNUIFS to prepare a detailed proposal for the institutional development component (project implementation arrangement, sub- component, modalities-study, traininq, technical assistance-, budget requirement, etc); and (ii) TNTJDF in consultation with FIs to develop a corporate strategy and associated business plan that would reflect how it would achieve the basic objectives laid out by the mission. 26. The following are tentative project preparation schedule and required actions: End-November 1997: Nomination of the Chartered Accountant by TNUDF Preparation of the preliminarv financial statements of the first half year operations (April 1- Sept 31, 1997) by TNUDF. Design of the Financial Management Information System by TNUDF End- December 1997: Preparation of Draft Project Concept Document by the Bank Preparation of Draft Project Preparation Plan (see Annex 10) bv GOTN/TNUDF and the Bank Preparation of Draft TA and Training Program by GOTN/TNEUS in consultation with TlNUDF Review of lending polices and procedures and Grant Guidelines bv GOTN/TNUDF Development the corporate strategy and associated business plan by TNUDF Installation of the Financial Management Information System by TNUDF End Januarv 1997: Discussions on the Draft Project Concept Document, Project Preparation Plan, Corporate Strategy and Business Plan of TNLDF, Institutional Development Program among GOTN, TNUDF, FIs, TIUS and the Bank. Review of the lending policies and procedures and Grant Guicdelines between GOTN/TNUDF and the Bank Initiation of the feasibility studies of solid waste projects. Completion of the feasibility studies of under-ground sewerage projects. February 1998: Finalization of Project Concept Document by Bank- Finalization of Project Preparation Plan Project Preparation Plan by GOTN, TNUDF, TIUS and the Bank March 1998: Pre-appraisal mission Complete EA and Resettlement Action Plan (if any) for the projects of the first year May 1998: Appraisal  Annex I Page 1 of 3 List of Kev Persons MIet GOI Mr. Rohit Modi. IAS Deputv Secretarv, DEA Dr. P. K. Mohanti Director, NfUAE GOTN -- Based in Chennai Mir P.V. Rajaraman, IAS Secretary, Finance .Mr A.P. Muthuswami, IAS Secretarv, Housing and Urban Development Ms. S. Malathi. IAS Secretary, Municipal Administration and Water Supply Mr Ramesh Ram Mishra, IAS NMember Secretary of State Finance Commission Mr K.A. Mathevv, IAS Project Director and Secretary, Planning and Development NMr Sanwat Rarn, IAS Director Municipal Administration Mr S. Javaraman Additional Director Municipal Administration Metropolitan Transport Corporation (formerly PTC/DATC) Dr M. Koteeswaran Managing Director iMr R. Balasubrarranian Joint M.D. Mr R. Senguttuvan Joint M.D. Mr M. Balasundaram Financial Controller Mvr P. Bhaskar Deputy Manager Department of Highwavs and Rural Works (DHfRW) Mr R. Jayasingh Chief Engineer (TNUDP) Mr R. Krishnan Superintending Engineer Mr J. Christopher Paul Deputy Chief Engineer (TNUDP) Mr N. Santhalingam Divisional Engineer I Chennai Mr M. Xavier Divisional Engineer II Chennai Mr V. Thulasidharan Ass Chief Engineer Tamil Nadu Housing Board (TNHB) Nfr S. Mariappan Chief Engineer Mr A. Kannan Ass Executive Engineer  Annex 1 Page 2 of 3 Tamil Urban Infrastructure Financial Service Ltd (5N7ITFS' NMr K. Ra.ivan Chief Executive Officer Mr R. Sundararajan Vice-President Mlr. Malmurugan Assisttnt Vice-President NMr. C. K. Balasubramanium Assistant Vice-President Tamil Nadu Institute of Urban Studies Mr. A. Ganesan Director Mr. R. Raghunathan Deputy Director/Facutly Engineer Tamil Nadu Slum Clearance Board Mr J. Bhuvaneswaran Chief Engineer iMr E.G. Subramaniarn Superintending Engineer (Monitoring) Mr S. Santhana Krishnan Ass Executive Engineer (Planning) Mr C.V. Murali Sekar Ass Engineer (Schemes) Mr Y. Edward Superintending Engineer Mr P.T. Jacob Executive Engineer Project Management Group (PMG) Mr K.R. Thooyavan Member, Urban Planning M%4r R. Sivasubramanian Deputy Planner Mr A.V. Narasimhan Research Officer Mrs R.B. Huvaneswari Ass Planner GOTN Reaional/Divisional Offices and Agencies. Municipalities and Municipal Corporaions, Mr Kasi Viswanathan, IAS Collector, Madurai Mr D. Chandrasekaran Regional Director of Municipal Administration, Tiruppur iMr M. Sengottaiyan Regional Exec Engineer, Office of RDMA, Tiruppur MIr Sai Kumar, IAS Municipal Commissioner, Madurai Corporation NIr Packyaraman Engineer Madurai Corporation MNtr .4Arumugarn Chief Town Planning Officer Madurai Corporation MIr R. Krishnan Superintending Engineer, DHRW Coimbatore Mr A. Srinivasan Divisional Engineer, DHRW Coimbatore MNIr N.T. Krishnamurthv Ass Divisional Engineer, DHRW Coimbatore vMr R. Natasan Ass Divisional Engineer, DHRW Coimbatore Mr Kashim Superintending Engineer, TNHB, Trichy Circle Mr Thangaraj Executive Engineer, TINB, Trichy Circle  Annex 1 Page 3 of 3 Mr Muthukrishnan Superintending Engineer, TNSCB, Trichy Circle Nlr S. Narayanasamy Municipal Commissioner, Palani Sri K. SelFaraj Chairnan, Tiruppur Municiealitv MLr B. Balachandran Municipal Commissioner, Tiruppur Mr D. Durairaj Municipal Health Officer, Tiruppur MIr Soundrarajan Senior Town Planning Officer, Tiruppur Sri S. Arangarasan Chairman, Erode Municipality MNir T. Paulchamy Municipal Conmmissioner, Erode Mr V. Subramanian Municipal Engineer, Erode Mr Thangavelu Town Planning Officer, Erode Mr R. Ragotharnan Municipal Commnissioner, Alandur Municipalitv Mr A.S. Raganathan Municipal Engineer, Alandur M.r A. VaradharqJan Town Planning Officer, Alandur Ms. Lalita Gupte Deputy Managing Director, ICICI Mvr. Suneet K. Maheshwari Sr. Vice President, ICICI Mr. Shekhar Damle Vice Presidnet, ICICI NIr. Sanjeev Tamhane Asisitanct Vice President, ICICI MIr. Nasser Munjee Executive Director, HDFC Mlr. Conrad D'souza Chief, Manaaement Servicies, HDFC Mfr. Hari Sankara Executive Director, Inflastructure, IL&FS Mvlr. Arun Saha Corporate Secretary, IL&FS -Mr. K. Ramchand Vice President, IL&FS Ms. Sangita IL&FS OECF MNr. Yoshitaro Fuwa Chief Representative Others MIr K. Sai Ram S.B. Billimnora & Co., TNJDF Auditors NMr S'hivamov Ohose Additional General Manager, National Projects Construction Corporation Ltd. NMr A. Ganesan Director, TN Instiutute of Urban Studies, Coimbatore Nir V. Manickam M.D., V. Manickam Engineers (P) Ltd.  Annex 2 Page 1 of 1 List of Documents Received and Reviewed by the Mission Author Title/Date TDNLDF Review of Status of Projects as on 31 -Aug- 1997 T;NJDF Abstract of Sectorwise Status of Projects as on 31 -Aug-1997 TNTJDF Abstract of Grant Proposals as on 31 -Aug- 1997 TINHB Papers relating to the Status of the S&S schemes as on 3 1 -Aug- 1997 DHRW Status Report of TNUDP (16-Sep-1997) DHRW Statement showing time over-runs for completion DHRW Minutes of Meeting with Mission on 16-Sep- 1997 PMG TNUDP Progress Report up to Mar-1 997 PMfG Annual Reports (various up to 1996/97) TNSCB Year-wise capital expenditure up to 3 I-Mar-1997 and. other data TNSCB Annual Accounts for 1993/94, 1994/95, 1995/96 TN-SCB Physical and Financial Performance TNSCB Future Schemes PMG Evaluation by Agencies/PMG Componentwise (reports completed by individual implementing agencies according to PMG format) PMtG List of consultancy studies PN IG MLTDF - Status of Projects as of Oct-96 PMfG TNLTDP Progress Report up to Mar-1997 Madurai Corp. Financial Projections Madurai Corp. Inner Ring Road Project Report Tiruppur Mun. MUDF Schemes Erode Mun. MUDF Schemes PTC (MTC) Project Implementation Completion Report (produced by agency) PTC (MTC) Statement showing projections at appraisal for 18 performance indicator against actual performance PTC Annual Reports and Accounts for 1994/95 and 1995/96 and Audited Acc only for 1996/97  Annex 3 Page 1 of 2 List of Sites Visited by the Mission City ComponentI Scheme Chennai TRAMP Royapuram Overbridge TRAMP Inner Ring Road Bridge Across Adyar River TRAMP Rail Over Bridge on G.S.T. Road at Guindy SIP Pudhu Nagar Slum Improvement, Avadi SIP Senthamizh Nagar Slum Improvement, Avadi SIP Periyar Nagar Slum Improvement, Avadi LAND Ambattur Sites and Services MUDF Link Road, S. New St to A-Koil Rd, Alandur MUDF Link Road, Balaji Nagar to Vanuvampet, Alandur 'MUDF Small bridge over Mothiyal Nagar, Alandur MUJDF Improvement of Burial Ground, Alundur Madurai T RAMP Vaigai "Causeway" MUDF Road improvements (11 sites inspected) MUDF Storm water drains (6 channels inspected) LAND Anuppanadi Sites and Services SIP Keelavaidyanathapuram Slum Improvement SIP Karumbalai Slum Improvement Proposal Inner Ring Road Palani Proposal Bus Stand Coimbatore MUDF Traffic signals MUDF Solid Waste Management vehicles LAND Ganapathy Sites and Services SIP Arivoli Nagar Slum Improvement SIP Venkatapurarn Slum Improvement IRAMP Rail Overbridge at Cross Cut Road TRAMP Ukkadam Byepass Tiruppur MUDF Bus stand improvements MUTDF Pay and Use toilets MUDF Road improvements MUDF Solid Waste Management vehicles MUDF Office complex at Kumaran Road "Proposal" refers to schemes that might be included in the possible Second Project.  Annex 3 Page 2 of 2 MUDF Shopping complex at Jaivabai Higher Secondary S Road Erode LAND Nasiyanur Road Sites and Services TRAMP Vehicular sub-way at Erode-Kan2eyam Road MUDF Market at R.V.K. Road MUDF Improvements to Town Bus Stand MUDF Burial Ground MUDF Street lighting MUDF Road construction at Veerabhadra MUDF Solid Waste Management vehicles MUDF Underground Storm Water Drain  Annex 4 Page 1 of 7 Issues Arising from the Mission's Field Visits and Associated Discussions The Mvlission visited 39 project sites in different cities which are listed in ANNEX 3. Additionally, mission members had visited manv other project schemes during the course of project supervision over several years. The following observations are made about the implementation. of the project components based on these visits, and the lengthy discussions with concerned officials. Procurement Issues Generally Procurement complied with the requirements of the Bank's guidelines. Two procedures to invite bids are currently being utilized depending on the size of civil works projects. Specificallv: (a) for very small projects -- a tender notice is posted on billboards near to the project and it is expected that interested parties will be aware of upcoming projects and participate accordinglv; and (b) for large projects -- notices of tender are published in relevant newspapers. Submitted tenders usually use three covers, as follows: (a) the first cover which details the cash bond or insurance; (b) the second cover identifies the qualification material which include working capital, financial soundness, experience on projects of similar type and size and tools and plans and manpower available to the project. The focus of the technical committee reviewing the qualification of submissions is to examine the information and also access any ;blacklisting" information available on historical performance of the parties involved in the submitted tender; and (c) assuming acceptance as a qualification, the third cover is opened which is the price bid. Each cover is opened in succession only if the individual criteria are met at that stage. The individuals involved in the procurement proceedings involve two groups: (a) the first group are members of the technical committee and include (typically) a chief engineer, a superintendent engineer and a chief accountant; (b) the second group consists of technical reviewers who are technical people available to support the technical committee in the detailed assessment of the acceptability of the submitted tenders. This committee setup is able to function effectively but the selection of members for the technical committee is of paramount importance. A failure of the technical committee to be aggressive and attentive to details means the system will fail. For example, the technical committee must specifically require that an individual project or scheme in question, be a part of an overall plan. Judging from observations obtained during the mission, this has not always been the case. The technical reviewers need to be very well versed in the subject material.  Annex 4 Page 2 of 7 Cost Overruns Cost overruns can enter the resolution of projects by several pathwavs. NMany projects are completed utilizing a unit price submission. In the event that the materials utilized exceed 125 percent of that specified in the contract, overruns are reimbursed to the contractor. A lump sum contract is a preferred option to avoid tampering. Most projects have a force majeure clause. Upon occurrence, the contract is terminated and the contractor is paid for work done to the time of interruption (assuming that a continuation of the project is impossible). Construction Quality and Construction Supervision Issues In many projects it was apparent that an appropriate analysis of altematives was not considered. Selection of a particular design was undertaken (e.g. a high level bridge) without proper examination of altematives (such as a causeway). It is apparent that the technical committee charged with the responsibilitv to consider alternatives did not serve their assigned function. Overdesigrn of projects was readily apparent in, for example, bridge and underpass construction. As more sophisticated projects are undertaken, particularly in relation to environmental projects, assurance of technical expertise to ensure a comprehensive and thorough evaluation of the proposed projects is essential, which means greater use of consultants. LAND) The Sites and Services schemes were designed according to agreed criteria established at appraisal. Execution typically followed the pattem that magor capital works were constructed first, well ahead of need. For example, medical facilities, schools, fire stations and similar structures were years ahead of the population and even water towers which were well ahead of the availabilitv of water. This focus on heavy capital expenditure up-front darnages the financial viability of schemes and is unnecessary. The Sites and Services schemes were initially designed with toilet superstructures for each plot. As occupation of the sites has been very slow, these superstructures have deteriorated and were obviously providing no benefit. In later schemes they were not provided, only the basic latrine. Occupation in all these Sites and Services schemes has been very slow despite extremely high demand in many instances. A glaring example of this is Ambattur. This is the largest sites and services scheme in Asia. Hardly any of the Phase I and II plots are occupied. TNHB has recently completed Phase III where there are 1,366 plots, and over 231,000 registered applications were processed. It was unclear to the mission why occupation is so slow but it has something to do with the reluctance of households to move to new but desolate areas. The longer the schemes remain vacant the more desolate they become as vegetation reestablishes itself and general deterioration occurs of the roads and other infrastructure. In schemes where occupation is picking up the transformation of the environment is remarkable and it is clear that the schemes will be successful in the long run. The people taking up residence first tends to be those in the  Annex 4 Page 3 of 7 MIG and HIG categories. A good example of this was Anuppanadi in Madurai which is about -25% occupied. Additionally this scheme has very mature vegetation following early tree planting which adds considerably to its appearance. The LAND projects have been fairlv basic, involving provision of stormwater drainage, water supply, sanitary sewers, and streetlights. Since the implementation of this infrastructure is accomplished prior to construction of the-dwellings, the design and implementation of the services is straightforward. However, successful operation of sewers requires a frequent flushing action while treatment facilities are designed to function within specified design conditions, primarily driven by contributing populations. The absence of the contributing populations may allow major buildup of sediments in the sewers, causing blockage and a failure of the treatment system to function as designed. Storm drainage systems must be kept clear through regular maintenance but this is not occurring and in the absence of occupants, ongoing maintenance (clearing) is an apparent problem. Slum Improvement Projects (SIP) The slum upgrading schemes conform to the same basic physical provision of road and lane surfacing, drains, water supply and street lights. In a few cases, sites had been left vacant for children's play areas and other amenities. These schemes seemed to fall into two categories. In some schemes the general environment had clearlv deteriorated and lack of maintenance was apparent and there appeared to be no "atmosphere". Others were altogether different, where the people looked contented, the slum had an air of improvement and there was apparent interest in the cleanliness and repair of the public facilities as well as the houses. The explanation for the differences between these two types of slum is difficult to find. It appears that where community groups have been established and the tenants have taken action themselves to improve their conditions, success of the scheme is more likely. There appeared to be a strong correlation between community spirit and elected officials who could persuade individual residents to contribute to the general well-being. Generally, it is apparent that the municipalities are taking little interest in the maintenance of the schemes once they have been handed over to them. Accordingly, the long term sustainability of the physical worcks depends critically on the actions that the slum dwellers themselves will take to keep the facilities functioning. The quantity of private investment into the houses in all the slums has been considerable. Many pucca houses have been built often with the assistance of house improvement loans under the project. There is little doubt that transfer of ownership of the land to the occupants (patta) is the main benefit to the occupants to be derived from these SIP schemes. The mission noted considerable differences between slums located in the outer areas of cities compared with the more congested inner city locations. Implementation by TNSCB is greatly eased in the outer schemes by the availability of land. For example, households are willing to give up land in order to permit widening and straightening of roads. The plot areas for outer  Annex 4 Page 4 of 7 schemes in many cases exceeded 60 m2 and sometimes a significant number were over 100 m2. %Vhile the scheme benefits are considerable for these occupants of outer area schemes, the mission felt that the emphasis of the program of slum upgrading in futw-e should be on the inner cirv slums where the difficulties of implementation are much greater but where the problems are -.so much greater. The extent of the services provided is verv strongly related to the land available. For example, all slum improvement projects had boreholes for water supply and hand pumps. A few had water connections directly to households (these were not metered). For those where individual plots were sufficientlv large, a dug well and septic tanks were also eviden.t. The quantity and quality of the water in the dug wells were generally insufficient for potable purposes. Minor maintenance of pumps was lacking in some situations making the pump nonfunctional. The quality of house construction in the slum improvement projects was highly variable. The roofing materials employed ranged from straw to clay tile. Residents in some dwellings were obviously quite well off since motorcycles, television antennae and concrete privacy walls were apparent; in others, the materials were poor quality brick and straw roofs. The availability of communal water supplies and communal latrines was important since, for those dwellings with small plots, individual sewage facilities were not present. Lack of routine maintenance was sometimes apparent. TRAMIP DHRW were the executing agency for major bridges and roads. The mission visited a number of sites and some, such as Royapuram Rail Overbridge, were still under construction. In all cases the completed schemes were working well and the flows of vehicular traffic were smooth. However, clear evidence existed that the many of the highway facilities are overdesigned. The evidence included construction of enormous bridge abutments, stretching over substantial distances. Other indications of overdesign include excessively long barrier walls, use of large volumes of fill which must be transported over sizable distances, and deep excavations for underpasses. Further problems with highway schemes included approach roads that are inadequate-(e.g. at Madurai). In one case, there was construction of an excessively deep vehicular underpass in Erode, where an adjacent underpass existed of adequate depth for the traffic. A complex bicycle tunnel system was incorporated in the Rail Overbridge at Cross Cut Road in Madurai which most cyclists avoided using, when possible. -A bridge was constructed in Mfadurai to improve access to a burial ground across the Vaigai River which was not extensively used. and the original idea of a causeway might have been adequate. Numerous road segments were visited as part of the mission. These road segments were short and not obviously part of an overall plan which would make an important contribution to traffic parterns. The mission was of the opinion that the roads have been constructeld in particular locations because the land is owned by the government (e.g. as part of a tank) but without access to the intervening land, the segment of road contributes little. Some roads are in good shape.  Annex 4 Page 5 of 7 Those roads in bette. shape appear to have performned well due to superior preparation of the subgrade. .NIUDF This component has financed an extremely wide rance of schemes. spanning bicycle stands, marriage halls, clrains, burial grounds and much else besides. The schemes are either service or remunerative. T he mission was most impressed bv the service schemes which seemed to be focussed on local needs, and provide real benefits to the people. These service schemes were mostlv very small in nature in relation to the problems and it is evident that the expenditure needs of the municipalities are enormous. The MlljUDF has made a real, positive contribution to initiating the process of improvement of the towns and it is to be hoped that it will continue to expand. However, the mission's site visits included one very substantial service scheme involving stormn water drainage in Erode. The justification for the scheme, which consisted of an underground drain of well over 1 km. in length, often at a depth of about 40 feet in hard rock cutting, was not immediately available but the mission felt that inadequate attention had been given to the consideration of alternatives to this extremely costly design. In several other cases of larger schemes such as new roads and bridges there appears to be the same tendency to over-design, as was encountered with the DHRW schemes in the TRANMP component. MUTDF remunerative schemes were found to be mostlv unimaginative in design. Shops and offices were provided without any attempt to improve the public spaces such as road surfaces and margins in the nearby vicinity. The mission was also of the opinion that the municipalities had not maximized the commercial value of the sites in the layout designs. There seems to be a good case for some joint activity between the public sector. which would concentrate on public services and facilities, and the private sector which mnight be better at optimizing the commercial values. Some unimproved bus stands visited during the mission were chaotic. The potential for improvements in these facilities is considerable (e.g. Palani). Inadequate bus parking space resulted in -informal parking and excessive delays for entry and exit of buses. Investrnent in additional space and reconfiguring of the existing space will have very substantial returns although some improvements in adjacent shopping layouts would improve the overall plan. Alternatively for others, it seems not verv efficient designs are being-developed (e.g. Tiruppur) and the plan was going to incorporate substantial new areas. A possible superior procedure would be to let the private sector undertake the design including the adjacent commercial complex while the municipality retains ownership. Financial charges on the buses utilizing the bus stands are to be increased from Rs 1.5 to Rs 4 per bus, which is still far too low. Improvements at the burial grounds represented small expenditures while creating pleasant surroundings and functional facilities.  Annex 4 Page 6 of 7 Madurai STOWAD Tne mission visited 6 major channels in the Madurai Storm Water Scheme. Impiementation of the scheme in 1993/94 was undertaken contrary to Bank procedures for R&:R and procurement which resulted in suspension of disbursements in November 1994. Suspensions were lifted only after the Bank was satisfied with the implementation of the R&R action pian, and keeping of Project records. The mission found that the STOWAD scheme had been well executed and appeared to be functioning properly. In a few isolated places the retaining walls had been breached and solid waste material was being dumped into the channels. However, these breaches were not serious and would not cause failure of the channel. The mission encountered no encroachment onto the margins of the drains subsequent to the completion of the schemes. The Municipal Corporation informed the rnission that most of the encroachers displaced at that time had eventuaily been traced and that the compensation owing to them had been provided. Unfinished Works Some projects such as the bridge and interchange over the railway at G.S.T. Road at Guindy in Chennai are still under construction. There was a lack of vision as to how the traffic adjustments would be handled during the construction. Much of the construction at the interchange arose due to the need for additional clearance for the railway. Given this, it should be expected that the railwav contribute to the additional cost of construction, but apparently this is not the case. Manv of the projects visited during the mission are incremental and thus unfinished in the sense that until the entire road is built, little segments of road are not beneficial (the Ring Road). The entire project is needed in order to reap the benefits of lowered traffic congestion. A major problem is that many of the projects being constructed are on government lands. Lacking access to the adjacent lands, makes the incremental road improvements piecemeal. Lessons for the TNUDF operations Reliance is being placed upon municipalities to identify projects or schemes. The municipality develops the tender but concerns exist over the tender process and in particular, whether they are the best projects and represent useful contributions as part of an overall plan. Concern also exists over the capacity to prioritize between projects. Small-scale and large-scale categorization of projects may be useful. Conventional, small-scale municipal developments are envisioned as small office complexes, street lights, road upgrades and streetlighting. These simple schemes can be executed by municipalities. Large capital development projects include toll roads, bridges, sanitation services, water supply, sewerage and sewage treatment plant and solid waste management schemes. The needs for technical review of the small-scale projects are very different from those needed for these large-scale projects and outside assistance is certainly required for the large-scale projects.  Annex 4 Page 7 of 7 Technical review of small scale water supply and drainage projects, small commercial complexes, etc. is straightforward. Reference to a checklist and some general guidelines for identifying appropriate schemes for funding can be developed. The associated costs of these services for these types of projects should follow a verv predictable pattern. Review of submissions should be feasible by non-technical people through comparison with the checklist. Procurement procedures for these very small projects must be limited to current practices. Oversight is still needed for construction and reliance for this activity must be placed upon municipal engineers. It is noted that the technical design, the preparation of contract documents, and the supervision of the construction for the large projects, remains a difficult issue. A great deal of resistance will be exerted by the public sector to retain their role in the current practice. However, for these large projects, the abilities of the technical review commnittees to undertake a substantial project, involving consideration of the set of alternatives and having the project or scheme fit into a larger, overall plan, has not been demonstrated. The composition of the technical commnittee, and the needs for critical and aggressive input to the selection of projects to be undertaken, is critical.  . 1 : .. I . l . -1:- - ''' 1 : 1 ---- I -- !9,25-9- 997 TAMIL NADU URdAN DEVELOPMENT PROJECT - CRIEDIT IJo.1923 IN ___________~~~~~~~~~~~~ I 11__I.___ I. _____ II7IZEiI ZZ ___.__I _ TABLE SI OWING TIE REFiEVISED CREDIT ALLOCATION (CATEGORYPWISE) ._________ (IN Ml LION SDRs) _ CAlEGORY DESCRIP1K)N TOTAL CREDIT DEISURSED ADJUSTMENTS TOTAL NET SEPIEMBER Jun*-97 IFFE __________ ______________ ~~~~UPTO JULY .41CFORoaveidrawal REC11EDENV1 - REUIJREMEEt 1997 Pwojec (ions I_ CIVILWORKS _ 101.90 100.88 1.02 6.60 7.62 100.50 104.10 4.40 2 EQUIPMENTIMATERIALS 42.90 4 4.03 -1.13 1.98 0.85 44.08 44.90 -0.02 3 IIOME EXP.LOANS 5.40 5.40 0.00 0.00 _ 0.00 5.40 5.40 0.00 4 CONSULTlTRAINING 5.90 5.51 03_9 0. __0.05 0.44 5.95 6.00 -0.05 S I'MJCMCsCOSTS 4 .50 4 .60 -0.10 0.20 0.10 4.70 4.60 0.10 6 I)ESIGN & SUPERVISKMN 3.60 4.00 -1.2( 3.01 1.81 6.61 5.80 0.81 7 SUB3LOAN PA1IT-D 13.00 1.70 11.30 -B,47 2.83 4.53 7.00 -3.27 8 GIIANFSPAlIT * E 5.50 1. Il) 4 41 -*3.37 1.03 2.13 4.10 -1.97 0_00 0.00 0.00 0.00 0.00 _ SA )0.00 1.50 -1.50 0.00 -1.50 0.00 0.00 ________ _ __________ __ ________ _______0.00 0.00 0.00 0.0 0.00 UNAllOCATED I90 1.00 001.00 0.00 o iO 1.00 1.0 1.00 0.00 ________ _________________ __ _ ___________ 0.00 I 0.00 0.00 0.00 _________ TOTAL 183.70 169.52 14.18 0.00 14.18 183.70 983.70 0.00 o eH - (Il  Annex 6 Page 1 of 7 TNUDF and GF 1. Organization and MNvanagement (i) Accounting Staff TNTUIFSL has two accounting staff each of whom is assigned to a block of borrowers in support of each of the Vice Presidents responsible for lending. An individual qualified as both a Chartered Accountant and Company Secretary is to join in October and the CEO is also considering recruiting a Manager, Accounts. The Chartered Accountant is needed urgently and his financial responsibilities should include: the preparation of financial statements; analysis of and reporting on operating results; taxation; cash and treasury management; and development and maintenance of the Fund's financial information systems. Close liaison with the financial institutions in order to draw on their experience and resources will be very helpful in fulfilling these responsibilities as quickly as possible. While a Manager of Accounts may also be needed as the volume of business grows, it is suggested that the staffina and organization of the accounting group be one of the first responsibilities of the new Chartered Accountant. (ii) Financial Information Systems The Fund continues to rely on an outdated data base system for its financial information. This system. which was the system used by MUDF, does not support accrual accounting, is suitable only for a single user, does not allow interim financial statements to be prepared until the previous year's accounts are closed off and has many other limitations which are not present in modem general ledger systems. It also needs frequent maintenance to keep it functioning. Partly as a result of these deficiencies no formal financial statements have been prepared in the 5 months that TNLUDF has been in existence. Prior to that the only formal statements that have been prepared are the March 31, 1997 statements prepared by the new auditors at the end of September 1997 and the September 30, 1996 statements prepared by the previous auditors in December 1996. There is an urgent need for a general ledger and loan accounting system capable of supporting the Fund's present and likely future needs for both accounting and financial information. Such a system should be specified in detail before a package is selected or development undertaken; its capabilities should include: i. supporting-multiple users; ii. providing on-screen balances and management information to management in all departnents; iii. accounting for various types of loan and investment instruments (not only those currently in use);  Annex 6 Page 2 of 7 iv. incorporating full accrual accounting; v. providing arrears information on a daily basis; vi. generating loan repayment and other advices to be issued to borrowers vii. providing schedules of forecast cash flows to support treasury management; viii.rracking of loan applications through appraisal, sanctioning and disbursement; and ix. linking loans to projects. 2. Audit Issues At the request of the institutional shareholders, S.B. Billimoria & Co have been appointed to prepare and audit the March 31, 1997 financial statements. The new auditors replace A.F. Ferguson & Co who prepared the September 30, 1996 financial statements. The new auditors have provided TNUDF with financial statements and resolved the following issues before issuing an audit report: i. Loan loss provisions - The auditors were assuming that the GOTN will provide a guarantee of the loan balances and outstanding interest (both regular and penal) transferred to TNUDF. We understand that GOTN issued such a guarantee. II. Income recognition of the previous period. The mission was informed that the Auditor has cleared the March 31, 1997. T:NUFIS will submit the audited account to the Bank once the Board of Director of the Trustees of NINUDF approve it. 3. Financial Review Recent and comparative financial statements for TNUDF are presented in Table A and are reviewed briefly below. Balance Sheet Loans at March 31 stood at Rs 1.7 billion up 28% from Rs 1.4 billion a year earlier. In the 5 months to August 31, 1997 the fund has approved loans of Rs 1520 million against which it disbursed Rs 225.7 million (a ratio of 23%), compared to the allocated IDA bal]ance of Rs 600 million (USS 17 million). Thus the rate of approval is running much higher thana planned but the rate of disbursement is much lower than planned due, in the Fund's view, to: i. Delays in obtaining IDA approval for large loans (those in excess of Rsl50 million require IDA's approval), one of which (for the Pallavan Transortation Corporation) was not approved befor the credit closing mainly due to the delay of fare revision and one of which (the Madurai ring road) raised complex resettlement and rehabilitation issues; ii. The procurement procedures mandated by the World Bank. iii. The need for borrowers to become familiar with TNUDF's requirements; and iv. The Fund's desire to respect the preference of borrowers to stagger loan drawdowns to minimize interest costs. During the audit of the September 30, 1996 financial statements the auditors reviewed the repayment performance of the loan portfolio and booked loan loss provisions. Since the bulk of loans had been made prior to the year then ended the loan loss reserve is shown in the March 31, 1996 statements and carried forward to September 30 1996. No reserve is shown in the March 1997 starements as the auditor is assuming that GOTN will issue a guarantee for all loans transferred to TNUDF.  Annex6 Page 3 of 7 At September 30, 1996 the loan loss reserve was determined by providing for 100% of doubtful loans (those for which no repayments have been received for a period of 2 years after the due dace), 10% of sub-standard loans (those for which no repayments have been received for a period of 1-2 years) And a 5 % general provision for all others. Penal interest was provided for in full; interest on doubtful and sub-standard loans was provided for to the same extent as principal. Given the I year payment holiday the loan loss provisioning is not affected by disbursements made in the last vear; also payment experience is not easily monitored on a current basis because payments are only required semi-annually, and the preparation of aging reports is delayed to the same extent as the preparation of accounts. Loans represent unsecured loans from GOTN in the amount of Rs 1.3 billion plus accrued interest of Rs 235 million. Interest on these loans is capitalized for the first 5 years and since the first loan (Rs 15 million) was paid in the period 1992/3, repayments have not yet become due. Capital of Rs 1.4 billion represents GOTN's ownership in the Fund before transfers to establish the Grant Fund. Lending guidelines restrict the amount of loans outstanding to any one borrower to 40% of the Fund's net worth. 'The largest borrower is the City of Chennai to which loans at March 31, 1997 totaled Rs 390 million, or 28 % of the net worth of Rs 1,400 million. Income and expenditure The net interest earning for the 6 months to March 31, 1997 declined by 35% (from Rs 78 million to Rs 51 million) compared to the previous 6 months due largely to declining interest rates for term deposits. This trend will likely continue and highlights the importance of effective cash and treasury management to the Fund's performance. Operating expenses of Rs 5 million relate only to the fees paid to TNLUIFSL in respect of loans sanctioned in March (charged at 1 %) and supervision and monitoring for the period November 7 to March 31 (at 0.25 % of the average loan balance).  Annex 6 Page 4 of 7 TNUCF Financial Statements Table A Rs in millions Unaudited (Note) 3alance Sheet 31-Mar-97 30-Sep-96 31-Mar-96 Cas., in bank 598 2 254 Term dePosits 691 682 520 1 259 684 774 Loans 1,739 1,727 1,357 Less- !can loss reserve 137 131 Net loans 1 739 1590 1226 Total assets 3 028 274 2.000 Suncri creditors 17 9 10 Loans from GOTN 1 565 1 002 837 1,582 1,011 847 Capisai 1,401 1,017 977 *Surpus 45 246 176 Total liabiOitiesand surplus 3.028 2.274 2.000 Income anU Expenditure 6 months 6 months Year 31-Mar-97 33-Sep-96 31 -Mar-96 Interes; on loans 72 75 150 Interesz on deposits 32 48 110 Totai interest 104 123 260 Interes; expense 53 45__ 66 Net interesz 51 78 194 Operating expenses: Manacement fees 5 Consultancy 2 2 o Total ccerating 7 2 X Provis;cn fcr loan losses - 5 115 Net income 44 71 77 Nce Although unaudited, the March 31, 1997 and September 30, 1 G96 financ;a' statements have been prepared by auditors on the accrual basis. The main outstanding issues with respect to the March 31, 1997 starements are (i) the loan loss provision - none has been recorded on the assurnp_ tcrn that a guarantee in respect of principal, regular interest and penal r:-erest will be provided by GOTN: and (ii) income taxes, the liability for whicn. .s being researched.  Annex-6 Page 5 of 7 4. Grant Fund (i) Financial Review The fund had a balance of Rs52.2 million at the end of August, 1997 after receiving start-up grants of Rs 156.3 million from GOTN. Since its inception at April 1, 1997 the Grant Fund has disbursed Rs l 01.1 million to local bodies and incurred Rs3.1 million in expenses. There has been no transfer in respect of the GOTN's share of TNUDF's profit; this must await a determination of TNUDF's profit since its inception. The financial statement at August 31, 1997 is shown below while the breakdown of disbursements and grant applications is shown in Table B. There has been no audit of the Fund since its inception, and nor is one required until its first year end. Of the Rs 101 million disbursed to date, Rs32 million is in respect of applications received by the predecessor fund, MUDF, and Rs 69 million is in respect of the new Grant Fund. 94% of total disbursements have been for category Im projects (those of benefit to the poor) and this category also accounts for the largest part of applications received but not yet disbursed. TNUDF - Grant Fund Rs in millions Fund Balance as at at August 31, 1997 Grants received from GOTN (Note 1) 156 Less: expenses 3 grants to local bodies (Note 2) Balance of fund Represented by: Cash in bank (deposit account earning 5%) Notes: 1. Grants from GOTN have been received in the amounts of Rs 90 million (April 1997) and Rs 66 million (August'97) 2. Grants to local bodies are summarized in the attached schedule Projects sanctioned but not yet disbursed total Rs 182 inilion and exceed the fund balance of Rs 52 million. In the 5 months to August 31 grant applications totaling Rs 499 million have been received suggesting an annual volume of Rs1O00 million; the transfer of GOTN's annual profits from TNUDF will account: for only Rs9O million of this amount leaving a significant shortfall (based on the TNNUDF's results for the 6 months to March 31, 1997). Additional sources of funds are clearly desirable and might include bilateral donors and recovering the cost of certain grants by including them in the value of loans to be repaid on approved projects.  Annex-6 Page 6 of 7 (ii) Disposition of Grant Funds In accordance with the agreed guidelines for the use of grant funds, grants are being disbursed for the following categories of projects: Category r: Strengthening of local bodies' management and svstems Category II: Resettlement and rehabilitation related to TNUDF projects Category III: Projects of benefit to urban poor Category IV: Project preparation costs related to TNUDF projects Included in category I are projects to computerize the records of local bodies with the objective of improving their ability to manage their finances. An example is a recent grant to supply 329 computers to the 104 urban bodies (at a cost of Rs 27 million) and to develop and install software and provide training (at a total cost of Rs 4 million). Category m grants are made in accordance with 3 criteria: i. they must be for service (i.e. non-remunerative) schemes; ii. they cannot exceed Rs 10 million; and iii. the amount of the grant is determined by the proportion of poor people (families whose annual income is less than Rs 12 thousand) benefiting from the project, subject to a maximum proportion of 30% and the Rs 10 million cap referred to above. The fact that disbursement of the grant funds in the five months to August 31, 1997 has been the equivalent of US$2.8 million compared to the available IDA funding of US$5 million suggests that the funds are being disbursed with selectivity, as required under the fund guidelines.  Annex 6 Page 7 of 7 TNUDF - Grant Fund Table B Analysis of Grant Disbursements for the 5 months to August 31, 1SS7 Rs in millions Borrower Category (See note) I II lil /IV Total Ofd MUDF applications Aranthangi 7.5 7.5 Gudiyatham 1.1 1.1 Mannargudi 2.2 2.2 Panruti 0.4 0.4 Pallavaram 4.0 4.0 Pudukottai 3.7 3.7 Sivakasi 8.3 8.3 Thiruthuraipoondi 0.4 0.4 Tiruvottiyur 3.7 3.7 Virudhachalam 1.7 1.7 Sub total . 32.91 32.9 TNUDF Applications. Coimbatore 6.0 12.8 18.8 Kumbakonam 1.9 1.9 Karur 4.7 0.1 4.9 Madurai 10.0 10.0 Madhavaram 7.5 7.5 Nagercoil 1.3 1.3 Rajapalayam 19.1 19.1 TiruDpur 5.5 5.5 Sub total 6.01 X 62.8 0.11 69.0 Total 6.0 95.7 0.11 101.9 % by category 5.9 94.0 0.1 100.0 Sanctioned, not yet disbursed: . t 42.41 105.71 33.41 181.5 Appraised, not yet sanctioned: l 113.71 0.51 330.81 33.71 478.7 Note: Category J: Strengthening of local bodies' management and systems Category II: Resettlement and rehabilitation relatedi to TNUDF projects Category HII: Projects of benefit to urban poor Category IV: Project preparation costs related to TNUDF projects  Annex 7 Page 1 of 3 Report on the State of Urban Reforms in Tamil Nadu September 27, 1997 1. The objectives of this Note are to provide an assessment of the state of progress in the implementation of the 74th Constitutional Amendment in Tamil Nadu and to identify the areas where the World Bank could provide assistance to further the reform process under a follow-up urban sector operation (INUDP-II). It is based on the findings of the mission to Tamil Nadu during the period September 21-30, 1997. The mission found the progress with the implementation of the 74th Constitutional Anmendment to be impressive, placing Tamil Nadu among the most progressive states in this regard. Moreover. the State has pioneered legislation to support public-private partnerships in the fihnncing and provision of urban services and infrastructure. Following through with these reforms is the next critical step, and could be supported by the follow-up urban sector development operation. 2. The State of Tamil Nadu is amnong the most advanced of the States in the Union in terms of implementing the provisions of the 74th Constitutional Amendment. The Urban Local Bodies (TNULB) Bill (1997) will replace and consolidate the separate and archaic legislation governing municipal corporations and municipalities, and includes provisions for the town panchayats. The Bill will introduce major reforms in the administration of bLBs which would be closer in line with the spirit of decentralization. EProposed changes in the Bill are supported by the recommendations of the State Finance Comrmission Report. The Bill was presented to the State Legislative Assembly on April 1997. It is expected to receive the President's assent and passed into law within one year. In the meantime, the State is drafting interim recommendations to the existing Acts to implement changes to the property tax. These amendments are expected to be approved bv January 1998. Once enacted, the Urban Local Bodies Act will represent an historical landmark in the way urban local bodies will fanction and be administered in the country. Main Elements of the Reform Process 3. The urban reforms initiated by the State are consistent with the recommendations of the recent World Bank India Urban Infrastructure Services Review which identified kev issues facing the urban sector in India today: (a) the lack of an enabling legislative framework to support economic liberalization and increasing decentralization; (b) weak urban and financial management, including distortionary land market policies; and (c) inadequate finance to support the infrastructure requirements of urban development. Together the State Finance Conmmission Report and the TNULB address these areas. The State Finance Commission's recommendations on the devolution of fimds have been enacted through two Government Orders dated May 2, 1997, while those pertaining to the auamentation of municipal own revenues, such as propertv taxes and user charges, have  Annex 7 Page 2 of 3 been incorporated in the TNULB Bill. In addition. the State issued an ordinance on July 1 7. 1997 permitting ULBs in principle to enter into partnership with the private sector for the provision of urban infrastructure. This is being implemented in the Karur Bridge project which is being prepared under a BOOT arrangement. IUrban Management 4. The TNULB Bill and the SFC recommendations recognize the importance of strengthening the capacity of ULBs in urban service deliverv. Both documents contain provisions supported by the 9th Plan which allocated funds for this purpose. In tandem with these reforns, the TNULB Bill has also increased the delegation of powers to ULBs in terms of the maximum threshold permitted for individual civil works that could be undertaken by ULBs without State permission, as well as the approval ceiling for different categories of engineering staff: While these represent a significant increase from previous levels,' there remains more scope for further enhancement of responsibilities and spending limits over time. 5 . . Although the issue of a minimum fixed tenure for municipal commissioners (NIunicipal Corporations) and chief executives (Municipalities) has not been directly addressed for a variety of reasons, the constraints it poses to effective management is widelv recognized. For example, discussions with the Deputy Director of the Department of Municipal Administration indicate an interest to introduce reservation for the open recruitment of chief executive officers for smaller cities for a cadre of trained professionals, and the creation of a state-level city managers association. Organization studies to promote intemal efficiencies of cities, such as those undertaken in Calcutta. Surat and Ahmedabad, are potential area for technical assistance. In particular, the Department of Municipal Administration is interested in applying this concept initially on a pilot basis for each category of ULB. It is already being attempted by the Chennai Mfunicipal Corporation for a specific department. 6. Specifically on training, initial workshops and seminars have already been held for local officers and elected officials with some assistance from TNUDP. It is important that training be "demand-driven", that is, responsive to the changing requirements of the reform process. This implies giving equal importance to technical as well as process skills (e.g. negotiation, consensus building, contracting, etc) in the training program. A nodal training institute--the TN Institute of Urban Studies--was identified and proposed to the Bank for potential support under the next operation. The Institute is supported by contributions from ULBs and is located in Coimbatore with a small core staff and technical support from the faculty of urban planning from Anna University in Chennai. It is equally important to develop a research arm, in collaboration with existing academic facilities, to systematically accumulate and update much needed data on ULBs to assist government in policymaking. EDI can play an important role in helping develop the Institute's training capability and in the dissemination of good practice from elsewhere in the world.  Annex 7 Page 3 of 3 7. To promote increased transparency and political accountability, the State is strengthening basic accounting practices in ULBs through the introduction of accounting manuals. 8. In the area of urban land markets, the State has taken two major steps: (a) deiinking property tax assessments from the Rent Control Act and (b) dramatic reduction of stamp duties from 12% to 0.1%. Coimbatore has already introduced this new method of property tax assessment with resulting increases in revenues. The adoption of this new method, combined with stricter penalties for non-payment and disincentives for lengthy court litigations, are significant reforms. Computerization of ULBs would also facilitate the modernization of land records and land use planning. Urban Finance 9. Reforrns introduced in the TNULB Bill and the SFC Report address the two-fold need to: (a) mobilize resources for service and non-remunerative schernes, and (b) strengthen municipal financial management practices. For 1997-98, the State has already devolved Rs 240 crores to ULBs from State receipts on a fixed formula for O&M and debt servicing. The State envisages a gradual increase in this allocation with commensurate improvement in local capacities. The sustainability of this devolution will have to be considered within the overall context of State finances. In addition, it is important to ensure that funds are deployed in the most cost-effective manner; this is linked, in turn, to improvements in urban management. 10. The TNULB Bill also introduces major reforms to augment the cities' own resources. These include tax reforrns, such as revisions in tax and non-tax revenues; new tax assignrments and stricter penalties for non-payment of taxes and user charges. Disincentives have also been introduced against lengthy court litigations on property tax challenges. Finally, ULBs have started to privatize civic services, such as solid waste collection and disposal, and water supply (e.g. Chennai, Tirrupu). ULBs are also permitted to borrow money through debentures and loans from banks and financial institutions on the security of taxes and duties. TiNUDP and the TNUIFSL have provided long-term financing and facilitated private capital reflows for infrastructure. Finally, a major incentive to improving financial discipline and cost recovery in ULBs has been the introduction of incentives at the State and Central levels. Cities can be eligible for an additional 15% from State grants and 10% from Central grants based on their financial performance.  Annex 8 Page 1 of 3 TNUDF: Pipeline of Sub-Project and Absorptive Capacity Of ULBs 1. Pipeline of Sub-projects (I) TNUIFSL distinguishes its pipeline into two categories: (a) conventional small- scale municipal development projects (like improvements to water supply and stormwater manazement, garbage collection vehicles, bus terminals, shopping complexes etc); (b) large capital development projects in municipal corporations and large ULB's (eg. toll roads and bridges, sanitation services, water supply, sewerage and sewage treatment plants and solid waste management including sanitary landfills and transfer stations and storm water management). In the first category, TNUIFSL has developed a pipeline of US $ 130 million. The latter category is recent, and the only sub-project that has si nificantly advanced is the toll bridge project in Karur Municipality, where the selection of a private sector BOT is in process. TNUIFSL is fully aware of the pioneering role it will need to plav in this categorv, if the second project is to make any significant impact in the development of municipal infrastructure in the state with private sector participation. To this end. feasibility study to prepare a detailed project report and RFP is underway for the Madurai Inner Ring Road Project. Similar studies are also to be undertaken for solid waste management in Coimbatore and Trichy and water supply and sewerage in Madurai. These are expected to be completed in the next 12 months. (2) Solid Waste Management This as a municipal service has emerged as a high priority for the municipal corporations (MC) and ULBs in Tamil Nadu. All the MCs have approached the TNUIFSL for developing a comprehensive solid waste management program that involves improved collection and safe disposal of solid waste. At present there exists no systemic management of garbage collection and disposal. though one or two cities have effected some improvements in the past year. Solid waste management continues to receive nearly a quarter of MC budgets, but the level of service provided is inadequate. Collected garbage is haphazardly dumped causing serious environmental and public health damage. TNUIFSL seeks to approach this in a two pronged manner: (a) continue to fmance the smaller and medium sized ULBs to improve their waste collection through acquisition of collection equipment and assist in the transition to controlled dumps, as a first step; (b) seek private sector participation in improving garbage collection and construction and operation of sanitarv landfills and transfer stations, beginning with two MCs. The mission highlighted the importance of primary and secondary collection of garbage, and the need to focus beyond the construction of sanitarv landfills. GOTN and TNUIFSL recognized the importance of a comprehensive Available revenues for the management must be obtained from either the individual residents and/or from the general tax base.  Annex-8 Page 2 of 3 approach and sought Bank assistance. The scope of the previously developed ToR 2for the sanitarv landfills will be expanded to include waste collection, and the coverage will be reduced to two MNICs (Coimbatore and Trichy). The Bank will work with TNUIFSL in finalizing the ToR. The mission was informed that GOTN has formallv made a request to GOI/DEA to obtain funding for this study from the IDA funds of the Private Infrastructure Finance (IL&FS) Project. Financina alone will not improve solid waste management, it will need to be backed by management reforms , capacity building of MCs and ULBs and incremental cost recoverv. (3) Underground Sewerage -- Municipal Corporations and large municipalities are considering this investment. Clearly, this approach has many desirable aspects but is very expensive and it should be carefully examined as to whether it will work correctly (e.g. when the water supply is not continuous). The most reasonable approach would appear to require incremental placement of underground works, where portions of the municipality have sewers placed, and that the svstem be expanded over time. Concemr still exists as to the willingness to pay of the residents and how to handle the needs of lower income residents. (4) Bridges -- Several bridges could be constructed under the BOOT schermes. An incentive to build more efficient bridges and/or causeways must be pursued. The tendering process encourages decreases in the structural integrity of the bridge, resulting in the need for the technical review committee to determine whether the changes in design are reasonable and appropriate. (5) Sing Roads -- Construction of a ring road by BOOT is certainly a feasible engineering assignment. The important consideration is whether the altematives, particularly as they relate to location of components of the road, the efficiencv of toll booths, and the long-term maintenance, are appropriately incorporated. The BOOT procedure involves preliminary design by the promoter but the initial constraints placed on the project, will influence the nature of the designs. Assurance that the project will be efficient, properly maintained and operated, is yet to be proven. 2. Absorptive Capacity of ULBs (1)TNTUDF is requesting an additional loan of USS200 million over a 5 year period (Rs 1.4 billion per annum at current exchange rates). Drawing on reports of the State Finance Commission. investment requirements of corporations, municipalities and panchayats are estimated at Rs 38 billion over the 5 vears to 2001 (Rs7.6 billion per annum) with the water and sanitation sector accounting for 64% of this requirement. (2) A review of the surpluses for the years 1997 to 2001/02 projected by 10 municipalities indicate the ability to service a maximum of Rs 21, 170 million (US$ 605 million) for 5 year period (annually Rs 4,234, US $120 million). The property tax reforms envisaged and increase of user charges would further enhance the debt service capacity of The terms of reference need refinement. Schemes to involve elements of the local population should be considered. Enhancement of recycling (e.g. plastics, metals, and glass) should be encouraged  Annex 8 Page 3 of 3 the ULBs. Further information on the impact of these additional resources on ULBs and their likely deployment is needed before capacity can be projected with any confidence.  Annex 9. Page 1 of 6 TNUDF: Financial Projections Financial projections have been prepared assuming that the full US$200 million can be lent over 5 years and are shown in the attached schedules. The other main assumptions are: i. GOTN's share of profits will be paid to the Grant Fund; ii. The institutional shareholders will leave their share of profits in the Fund (the Bank's proposal); iii. Bad debts will reduce the inflow of loan and interest payments by 10%; iv. Loans sanctioned from the existing loan in the fiscal year ending March 31, 1998 will be Rs 1800 million of which Rs 1500 million will be disbursed in the same year and Rs 300 million in the following year; v. Thereafter loan disbursements from the proposed new loan will be R's 1440 million per year; vi. Loans to ULBs will bear interest at 16.5% and repayment terms will be unchanged; vii. Funding sources in the year ended March 3 1, 1998 will be Rs 510 million in equity from the institutional shareholders, and Rs 600 million in loans fromr GOTN; and viii.Loans from GOT'N will bear interest at 13.5% and have the same repayment terms as the existing loans. Under these assumptions the profits of the fund increase from Rs 251 million in 1998 to Rs 446 million by 2000 and in the same period the debtlequity ratio increases from I to 2, while the financial institutions' ownership of the fund increases from 32% (by the end of 1998 following their contribution of Rs 510 million) to 43%. The institutions' ownership reaches-just over 50% by the end of 200l.The loan portfolio increases from Rs 1600 million to Rs 3130 million while cash and investments increase from Rs 1242 million to Rs 1804 million.  Annex 9 Page 2 of 6 TNUDF-Prnflt and Llss Sttatement W~ar 8 m9 20 20O 2002 2 Income fom Operadons Interest an loans -TNUOF41 19.56 25.92 45.66 50.13 49.49 48.74 -TNUOfIl o0.00 0.00 0.00 23.76 47.08 69.8E Total interest recd. 19.56 25.92 45.66 73.89 96.57 118.6: Income on investments 13.51 13.90 16.83 22.03 27.23 32.43 Less: Interest expenses 2.97 6.85 9.59 16.17 28.62 26.6-- Bad debts 2.67 3.46 5.68 8.87 11.52 14.16 Net inc=me from Operations 27.43 -29.51 47.22 70.88 83.66 110.24 Expenses AMC fees 2.38 2.22 2.59 2.92 3.24 3.55 Net profit 25.05 27.29 44.62 67.96 80.42 106.69  Annex 9 Page 3 of 6 TNUDF.Funds no6w statament 12ZQ 2Mai MU 2 20 SOURCFS Contnbution 51.00 0.00 0.00 0.00 0.00 0.00 Net profit transferred to R&S 12.78 13.92 22.76 34.68 41.01 54.41 Loans receiveg 60.00 144.00 144.00 144.00 144.00 144.00 Repayment of loans .TNUDF-I 7.18 8.69 11.13 12f16 12.81 13.56 -TNUDF-11 0.00 0.00 0.00 2.67 5.79 9.42 Other liabilities - Provision forbad debts 2.67 3.46 5.68 8.87 11.52 14.16 - Transferable to GF 1227 13.37 21.86 33 10 39.40 52.28 - Provision for dividend to FIs 0.00 0.00 0.00 0.00 0.00 0.00 Investments 0.00 0.00 0.00 0.00 0.00 0.00 TOTAL 145.90 183.43 205.43 235.66 254.53 287.83 APU ICATIONS Loans disbursed -TNUOF-I 150.00 30.00 0.00 0.00 0.00 0.00 -TNUOF-11 0.00 144.00 144.00 144.00 144.00 144.00 Repayment of loans 1.76 3.56 5.22 14.03 21.20 23.99 Investments 40.00 5.00 40.00 40.00 40.00 40.00 TOTAL 191.76 182.56 189.22 198.03 205.20 207.99 Opening cash baiance 59.81 13.96 14.83 31.04 68.67 118.00 Surplus/(Deficit) -45.86 0.87 16.21 37.63 49.33 79.84 Closing balance 13.96 14.83 31.04 68.67 118.00 197.84  Annex 9 Page 4 of 6 TNIUQF - Ralar2ee She Y8-ar jo 1 2I