ASIAN DEVELOPMENT BANK PCR: IND 29051

PROGRAM COMPLETION REPORT

ON THE

MADHYA PRADESH PUBLIC RESOURCE MANAGEMENT PROGRAM

(Loan 1717-IND)

TO

INDIA

December 2004

CURRENCY EQUIVALENTS

Currency Unit –

Indian rupee/s (Re/Rs)

At Appraisal Program Completion 31 July 1998 28 February 2003

Re1.00 = $0.024 $0.021 $1.00 = Rs42.56 Rs47.86

ABBREVIATIONS

ADB – Asian Development Bank BOT – build-operate-transfer CIP – Core Investment Program DFID – Department for International Development DPE – district primary education DPEP – District Primary Education Program ECPR – Empowered Committee on Public Sector Undertaking Reform FY – fiscal year GoMP – Government of Madhya Pradesh GOI – Government of India LGB – local government body MADHYA

PRADESH – Madhya Pradesh

MPERC – Madhya Pradesh Electricity Regulatory Commission MPFC – Madhya Pradesh Financial Corporation MPHB – Madhya Pradesh Housing Board MPLandDC – Madhya Pradesh Land Development Corporation MPLeatherDC – Madhya Pradesh Leather Development Corporation MPPHC – Madhya Pradesh Police Housing Corporation MPSAIDC – Madhya Pradesh State Agro Industries Development

Corporation MPSCB – Madhya Pradesh Slum Clearance Board MPSEB – Madhya Pradesh State Electricity Board MPSExC – Madhya Pradesh State Export Corporation MPSFishDC – Madhya Pradesh State Fisheries Development Corporation MPSIC – Madhya Pradesh State Industries Corporation MPSIndDC – Madhya Pradesh State Industrial Development Corporation MPSRA – Madhya Pradesh State Reorganization Act of 2000 MPSRTC – Madhya Pradesh State Road Transport Corporation MPSTexC – Madhya Pradesh State Textile Corporation MPSTourC – Madhya Pradesh State Tourism Corporation MTFF – medium-term fiscal framework NSDP – net state domestic product O&M – operations and maintenance PCB – Pollution Control Board PRMC – Public Resource Management Committee PSU – public sector undertaking PWD – Public Works Department SBFAU – state budget and fiscal analysis unit

SDP – State Domestic Product SFC – State Financial Corporations Act SRF – State Renewal Fund SSN – social safety net TA – technical assistance TS – Technical Secretariat VAT – value-added tax VRS – voluntary retirement scheme

NOTES

(i) The fiscal year (FY) of the Government and its agencies ends on 31 March. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2005 ends on 31 March 2005.

(ii) In this report, "$" refers to US dollars.

Contents

BASIC DATA I

MAP - MADHYA PRADESH AND CHHATTISGARH IN INDIA v

I. PROGRAM DESCRIPTION 1

II. EVALUATION OF DESIGN AND IMPLEMENTATION 1 A. Relevance of Design and Formulation 1 B. Program Outputs 3 C. Program Costs 7 D. Disbursements 7 E. Program Schedule 7 F. Implementation Arrangements 8 G. Conditions and Covenants 8 H. Related Technical Assistance 9 I. Consultant Recruitment and Procurement 11 J. Performance of Consultants, Contractors, and Suppliers 11 K. Performance of the Borrower and the Executing Agency 11 L. Performance of the Asian Development Bank 12

III. EVALUATION OF PERFORMANCE 12 A. Relevance 12 B. Efficacy in Achievement of Purpose 13 C. Efficiency in Achievement of Outputs and Purpose 13 D. Preliminary Assessment of Sustainability 14 E. Environmental, Sociocultural, and Other Impacts 15

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS 15 A. Overall Assessment 15 B. Lessons Learned 15 C. Recommendations 16

APPENDIXES 1. Program Framework 18 2. Status of Program Compliance 25 3. Compliance with Major Loan and Program Agreement Covenants 57 4. Basic Fiscal Data (FY1990-1991 to FY2004-2005) 60 5. Voluntary Retirement Scheme Benefits under State Renewal Fund 64 6. Graph – Madhya Pradesh Fiscal Balances 65 7. Impact of Bifurcation 66 8. Technical Assistance Completion Report 69

BASIC DATA

A. Loan Identification 1. Country 2. Loan Number

3. Program Title

4. Borrower 5. Executing Agency

6. Amount of Loan 7. Program Completion Report Number

India 1717 Madhya Pradesh Public Resource Management Program India Finance Department, Government of Madhya Pradesh $250.0 million PCR: IND 874

B. Loan Data 1. Appraisal – Date Started – Date Completed 2. Loan Negotiations – Date Started – Date Completed 3. Date of Board Approval 4. Date of Loan Agreement 5. Date of Loan Effectiveness – In Loan Agreement – Actual – Number of Extensions 6. Closing Date – In Loan Agreement – Actual – Number of Extensions 7. Terms of Loan – Interest Rate Pool-based loan: LIBOR-based loan: Transformation Date: – Maturity (number of years) – Grace Period (number of years)

17 July 1998 30 July 1998 14 April 1999 16 April 1999 14 December 1999 14 December 1999 13 March 2000 15 December 1999 – 30 September 2002 17 March 2003 – Variable Floating 26 February 2002 15 3

8. Disbursements a. Dates Initial Disbursement

16 December 1999

Final Disbursement

17 March 2003

Time Interval

39 months

Effective Date

15 December 1999

Original Closing Date

30 September 2002

Time Interval

33.5 months

ii

b. Amount ($ million)

Category

Original Allocation

Last Revised

Allocation

Amount

Canceled

Net Amount

Available

Amount

Disbursed

Undisbursed

Balance Madhya Pradesh

250 250 0 250 250 0

Total 250 250 0 250 250 0

C. Program Data

1. Program Cost ($ million) Cost Appraisal Estimate Actual Foreign Exchange Cost 250 250 Local Currency Cost 0 0 Total 250 250

2. Financing Plan ($ million) Cost Appraisal Estimate Actual Implementation Costs Borrower-Financed ADB-Financed 250 250 Other External Financing Total 250 250 IDC Costs Borrower Financed ADB Financed Other External Financing Total ADB = Asian Development Bank, IDC = interest during construction. 3. Program Schedule Item Appraisal Estimate Actual First Tranche Release 16 December 1999 16 December 1999Second Tranche Release 30 September 2000 27 February 2002Third Tranche Release 31 March 2002 17 March 2003 4. Program Performance Report Ratings

Ratings Implementation Period

Development Objectives

Implementation Progress

From 1 January 1999 to 31 March 1999 Satisfactory Satisfactory From 1 April 1999 to 30 May 1999 Satisfactory Partly Satisfactory From 1 June 1999 to 31 March 2000 Satisfactory Satisfactory 30 April 2000 Satisfactory Partly Satisfactory From 1 May 2000 to 31 October 2001 Satisfactory Satisfactory From 1 November 2001 to 31 May 2002 Satisfactory Partly Satisfactory From 1 June 2002 to 31 March 2003 Satisfactory Satisfactory

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D. Data on Asian Development Bank Missions

Name of Mission

Date

No. of Persons

No. of Person Days

Specialization of Membersa

Reconnaissance

30 Nov–12 Dec 1997

6

61

a, b, k, p, o, t

Consultation 20Jan–4 Feb 1998 5 80 a, b, p, q Fact-Finding 23 Mar–6 Apr 1998 5 64 a, b, t, d Appraisal 17–30July 1998 6 75 a, b, c, d, n Project Specific Contact and Consultation

16–25 Feb1999 3 30 a, b, e

Review Mission 1 5–11 May 2000 3 18 b, s, a Review Mission 2 5–7 July 2000 3 12 n, f, a Review Mission 3 10–15 Sep 2000 1 6 g Review Mission 4 3–7 Dec 2000 2 10 b, j Review Mission 5 16–25 Jan 2001 7 70 g, h, c, I, j, k, l Review Mission 6 9–17 May 2001 4 36 g, m, i, j Review Mission 7 9–13 Aug 2001 4 60 g, m, i, j Review Mission 8 14–15 Mar 2002 1 2 b Review Mission 9 27–29 Jun 2002 1 3 b Review Mission 10 29 Sep–1 Oct 2002 1 3 b Program Completion Review I b 1–10 May 2004 2 16 b, r Program Completion Review II c 13–24 August

2004 1 12 b

a Specializations of mission members are as follows: a - senior economist, b - economist, c - counsel, d - social development specialist, e - project economist, f - senior capital markets specialist, g - financial economist, h - senior programs officer, i - macroeconomist, j - social economist, k - young economist, l - young professional, m - public finance specialist, n - manager, o - programs officer, p - investment officer, q - senior project engineer, r - project officer, s - resident representative, t - environmental specialist.

b During the May 2004 Program Completion Review Mission, a number of key government officials were not available for consultation, due to ongoing elections, and latest budget data was still under preparation by the Finance Department. A second mission was necessary to reflect adequately all qualitative and quantitative contributions of the Program to the development process of Madhya Pradesh.

c The program completion report was prepared by Y. Elhan-Kayalar, economist, South Asia Department.

v

MAP - MADHYA PRADESH AND

C HHATTISGARH IN INDIA

I. PROGRAM DESCRIPTION

1. On 14 December 1999, the Asian Development Bank (ADB) approved a $250 million from ADB’s ordinary capital resources for the Madhya Pradesh Public Resource Management Program. Accompanying the Program, technical assistance valued at $600,000 was provided from ADB's Technical Assistance Special Fund for Capacity Building for Public Enterprise Reform and Social Safety Net in Madhya Pradesh. The loan became effective on 15 December 1999 and was implemented over a period of 39 months, drawing to a close in March 2004. 2. The Program’s objective was to support the Government's reform efforts to foster social development and sustainable economic growth by addressing prevailing resource and implementation constraints in Madhya Pradesh, with a particular focus on (i) enhancing resource allocation to social sectors to support human development; (ii) improving public finances and fiscal capabilities and management and fostering allocative efficiency through reform of public enterprises, including corporate governance reform; and (iii) strengthening the policy, regulatory, and institutional frameworks for private sector participation in key sectors. Furthermore, the Program was to assist in strengthening environmental management and mitigate the social impact of economic development (para. 54 and Appendix 1, report and recommendation of the President).

II. EVALUATION OF DESIGN AND IMPLEMENTATION

A. Relevance of Design and Formulation

3. The Program’s design was highly relevant to national development strategies, as noted in the Country Operational Strategy,1 as well as ADB's development efforts in India. The government of Madhya Pradesh (GoMP) was closely involved in designing the Program through frequent policy dialogue, and the Program addressed priority areas for reform and development in public finance, as identified by the state. The program framework covered all major components of the sector, including taxation, expenditure management, and budget planning, as well as public sector undertakings (PSUs) and a core investment plan (CIP) to prioritize social sector expenditures. 4. Within the federal structure of India, implementation of social and economic reforms and service provision is delegated to the states. However, capacity constraints often exist, which may restrict formulation and implementation of comprehensive reforms at the state level. Cognizant of the critical role states play in implementing successful development initiatives, ADB pioneered the state-level assistance approach in India in 1996. The first project introduced under this sub-national approach was the Gujarat Public Sector Resource Management Program, for $250 million, approved on 18 December 1996. In early 1997, a state selection mission visited six states2 and proposed Madhya Pradesh for ADB support on the basis of criteria specified in the Country Operational Strategy. The commitment of GoMP to undertake structural reforms and Madhya Pradesh’s urgent need for infrastructure and social development, among others, were deciding factors. Madhya Pradesh was one of the least developed primarily agrarian states of India. Social service provision and access to these services were limited, especially for women. Limited resources and inefficient resource mobilization necessitated a more rigorous approach to public resource management.

1 STS: IND 96002: Country Operational Strategy Study, India, July 1996. 2 Andhra Pradesh, Karnataka, Kerala, Madhya Pradesh, Rajasthan, and Tamil Nadu.

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5. While earlier lessons from the design and implementation of Loan on Gujarat Public Sector Resource Management Program provided guidance on how a similar fiscal management program may be formulated in Madhya Pradesh, the Program had to prioritize areas for attention specific to Madhya Pradesh. These included (i) structural weaknesses of public finances, including inefficient resource mobilization and ineffective resource use; (ii) loss-incurring PSUs and the burden they impose on the state budget; (iii) inadequate physical infrastructure, particularly in the power, roads, and housing sectors; and (iv) insufficient social development. 6. To clearly identify areas to be prioritized and the types of interventions that would facilitate the highest development impact, technical assistance on Support for the Government of Madhya Pradesh Public Finance Reform and Institutional Strengthening and Strengthening Local Government in Madhya Pradesh were provided from 15 December 1997.3 In addition, GoMP also formulated a reform agenda to ensure medium-term fiscal sustainability but required additional assistance to implement this assistance. Drawing on the preliminary findings of the Loan on Gujarat Public Sector Resource Management Program, technical assistance on Support for the Government of Madhya Pradesh Public Finance Reform and Institutional Strengthening, and Strengthening Local Government in Madhya Pradesh (GoMP's own reform program), GoMP and ADB consultatively developed a comprehensive reform agenda for medium- to long-term fiscal management that would be supported by a loan from ADB. With the Government’s concurrence, the Program was developed with a view to strengthening Madhya Pradesh's capabilities for implementing sustainable reform at the state level; supporting human development initiatives, especially in the health and education sectors; improving resource mobilization and efficiency of resource use through structural reform of the public finances and PSUs; and implementing institutional, policy, and regulatory frameworks that would promote private sector participation. This was a horizontal, front-loaded reform agenda that targeted immediate short-term change, the benefits of which would be sustainable in the longer term. 7. Reconnaissance, consultation, and fact-finding missions for this loan were fielded between December 1997 and April 1998. Appraisal of the program loan was undertaken during 17–30 July 1998, followed by a contact mission fielded during 16–25 February 1999. The program framework is provided in Appendix 1. The outcome of the various missions is reflected in the Government’s development policy letter and policy matrix (Appendix 2 and Appendix 3). Since then, 10 review missions were undertaken, from May 2000 to September 2002. The Program was completed in March 2003, with the disbursement of its third and last tranche. Program completion reviews were conducted during 1–10 May and 13–24 August 2004. Findings from the reviews are presented in this report. 8. The implementation period was envisaged at appraisal as 3 years. The program framework was detailed with a number of time-bound deliverables and tasks that were carefully outlined taking into consideration the time and capacity development required for reform. However, due to partial sanctions exercised on India by the international community in the aftermath of nuclear testing, program approval and first tranche release were delayed by 9 months. And bifurcation of the state of Madhya Pradesh into the two smaller states of Madhya Pradesh and Chhattisgarh,4 which had been under consideration for the past two decades,

3 ADB. 1997. Support for the Government of Madhya Pradesh Public Finance Reform and Institutional Strengthening.

Manila. Approved on 15 December 1997. ADB.1997. Strengthening Local Government in Madhya Pradesh. Manila. Approved on 15 December 1997. 4 A detailed discussion of this bifurcation and its impact on the economy is presented in Appendix 7.

3

became an imminent reality. Consequently, PSU reform, envisaged under the Program as an immediate measure, had to be postponed until assets, liabilities, and personnel of the PSUs under consideration for reform were divided between the new Madhya Pradesh state and Chhattisgarh. Nevertheless, the reform agenda detailed under the Program remained highly relevant to the state's development efforts. GoMP, strongly owning the process, complied with almost all of the original program conditions and completed the Program with only 5.5-month delay. B. Program Outputs

9. At appraisal, program objectives were broadly defined as (i) enhancing resource allocation to social sectors within a medium-term framework of sustainable public finances and strengthened fiscal management, thus fostering social development and satisfying basic human needs while mitigating the social impact of development; (ii) improving corporate governance and increasing efficiency of resource use through restructuring PSUs; (iii) creating an evolving enabling environment for private sector participation in key sectors; and (iv) promoting the environmental sustainability of economic development. 10. The intended outputs of the Program are described by component in Table 1:

Table 1: Summary of Components and Intended Outputs of the Program Program Components Intended Reform Measure or Action

A. To Foster Social Development, Support Institutional Strengthening and Improve Public Finances

1. Institutional Strengthening • Establish the Public Resource Management Committee • Empowered the Committee on Public Finance Reform • Implement a management information system for the Finance Department • Create a committee for design and implementation of an SSN.

2. Adoption and Implementation of Medium-Term Fiscal Framework for FY1999– FY2003

• Reduce the primary deficit from 3.4% of NSDP in the FY1999 budget to 0.7% in the FY2002 budget

3. Improve Efficiency and Effectiveness of Resource Use Through

• Increase wage flexibility by evolving policy to unlink wage setting • Reduce budgetary subsidies • Reallocate expenditure to social services, particularly health and education • Increase the effectiveness and efficiency of the payment and audit system

through computerizing the Finance Department a. Rationalizing and Prioritizing Expenditure

• Prepare and implement the Core Investment Program • Review and implement recommendations of the study on industrial

incentives scheme • Prohibit regularization of casual- and/or/ temporary (after 1988) workers into

state government and PSUs and of PSU employees into state government b. Reallocating Expenditure to Social Services

• Provide for the clearing of the backlog of capital expenditure and shortfall of non-personnel expenditure in existing rural health facilities

• Reduce state government employment, other than technical positions, in essential services and police through attrition and abolished posts, and reallocate the resources saved to poverty reducing social services

• Provide appropriate budgetary allocation equivalent to the central Government share of 85%, to ensure the sustainability of the DPEP

• Prepare and implement an action plan, with Asian Develoment Bank technical assistance support, to ensure that social sector outlays are protected and national norms can be met in due course

c. Shifting Strategic Priority from Current to Capital Expenditure

• Raise capital expenditure to be at least 2.3% by FY2002

4. Mitigate Social Impact of • Issue notification of the operationalization of SRF and allocate appropriate

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Program Components Intended Reform Measure or Action Economic Development resources in the FY1999 and subsequent budgets

• Design and implement SSN 5. Strengthened Resource Mobilization Through

a. Rationalizing the Sales Tax System

• Widen the tax base by reducing the number of goods exempted from 93 to 39 items

• Reduce the number of sales tax slabs from six to the four main rates of 2%, 4%, 8%, and 12%

b. Phasing-in the VAT System

• Implement, through appropriate legislation, the first stage of VAT by lowering tax on manufacturing inputs, and subsequently, by June 2001, introduce VAT

c. Reforming the stamp duty system (in line with Recommendations of the 1996 and 1997 State Finance Minister’s Stamp Duty Committee)

• Reduce maximum rate on conveyances, and rationalize the stamp duty on capital market instruments

d. Improving Cost Recovery

• Raise water charges to cover at least 50% of O&M cost by June 1998 and 75% by March 2001

• Prepare a time-bound action plan and implement a system of users charges on utilities

B. Undertake Public Enterprise Reform and Improve Corporate Governance 1. Develop Policy and Institutional Mechanism for PSU Reform

• Provide policy guidelines on public sector restructuring and reform • Establish an empowered committee on PSU reform, headed by a chief

secretary • Establish a technical secretariat to assist in PSU reform

2. Improve Corporate Governance and Support Institutional Strengthening

• Have district primary education assume nodal responsibility for reform of state PSUs

• Have district primary education review candidates for appointment of all functional directors on a professional basis with due regard to PSUs’ service rules

3. Increase Operational Freedom of PSUs

• Introduce financial criteria regarding return of investment for dividend payment and establish investment limit for which PSU do not need approval from the Government

• Provide performance incentives by differentiation in remuneration linked to productivity and PSUs’ financial performance

4. Restructure and/or Divest PSUs

• Divest 49% of MPSIndDC

• Divest 49% of corporate units of MPSRTC • Divest 74% of MPSAIDC • Divest 25% of MPFC under State Financial Corporations Act (1951) (The

government of Madhya Pradesh’s shareholding further reduced to not more than 26%, contingent upon amendment to the State Financial Corporations Act)

• Sale and/or lease of the properties of MPSTourDC • VRS and re-training of employees affected by PSU restructuring 5. Close and/or Merge PSUs

• Closure of MPLDC, MPSExC, MPSFishDC, MPLandDC, MPSIC and MPSTexC

• Incorporate MPHB; subsequent divestment of 49% of the government of Madhya Pradesh’s share in MPHB; closure of MPSCB and MPPHC

6. Initiate Reform of Cooperatives Sector

• Review and assessment of constraints in cooperatives sector and recommendations to enhance their operational freedom and efficiency

C. Promote an Enabling Policy Environment for Private Participation in Key Sectors, that the Program Would Support 1. Power Sector Reform • Establish an independent MPERC that will be fully operational by March 2000

• Announce MPERC’s first revision of electricity tariffs no later than 120 days after becoming operational

2. Roads and Transport • Evolve policy for private sector participation

5

Program Components Intended Reform Measure or Action Sector Reform • Rationalize routes

• Strengthen PWD’s capacity to process private sector projects • Develop tariff setting mechanism and review existing toll rates for roads and

bridges 3. Housing Sector Reform • Provide for market-based rental increases and exempt newer properties from

provisions of the State Rent Control Act • Establish a rent tribunal

D. Promote Sustainable Development, that the Program Would Support 1. Strengthening of Environmental Management.

• Develop market-based instruments • Strengthen technical capacities of the PCB and its regional offices • Conduct training program on environmental monitoring and management for

PCB staff members and industrial associations 2. Mitigation of Social Impact of Economic Development

• Prepare policy on rehabilitation, to address social impacts of economic development

• Ensure policy framework for project intervention on a socially sustainable basis

DPEP = District Primary Education Program, FY = Fiscal Year, MPERC = Madhya Pradesh Electricity Regulatory Commission, MPFC = Madhya Pradesh Financial Corporation, MPHB = Madhya Pradesh Housing Board, MPLandDC = Madhya Pradesh Land Development Corporation, MPPHC = Madhya Pradesh Police Housing Corporation, MPSAIDC = Madhya Pradesh State Agro Industries Development Corporation, MPSCB = Madhya Pradesh Slum Clearance Board, MPSExC = Madhya Pradesh State Export Corporation, MPSFishDC = Madhya Pradesh Fisheries Development Corporation, MPSIC = Madhya Pradesh State Industries Corporation, MPSIndDC = Madhya Pradesh State Industrial Development Corporation, MPSRTC = Madhya Pradesh State Road Transport Corporation, MPSTexC = Madhya Pradesh State Textile Corporation, MPSTourDC = Madhya Pradesh State Tourism Development Corporation, NSDP = Net state domestic product, O&M = operation and maintenance, PCB = Pollution Control Board, PSU = public sector undertaking, PWD = Public Works Department, SRF = State Renewal Fund, SSN = social safety net, VAT = value added tax, VRS = voluntary retirement scheme 11. A detailed assessment of the outputs, vis-à-vis compliance with Program and Loan Agreement covenants (categorized by tranche), is provided in Appendix 2 and Appendix 3. No major modifications were made during program implementation, other than fine-tuning targeted rates for some indicators. Fine-tuning was needed to account for the impact of bifurcation. 12. A multi-tiered institutional framework, initiated with technical assistance on Support for the Government of Madhya Pradesh Public Finance Reform and Institutional Strengthening and Strengthening Local Government in Madhya Pradesh, guided program implementation. At the apex was the Public Resource Management Committee (PRMC), which was to advise and oversee state reform program implementation, acting as the steering committee for the Program as a whole.5 PRMC provided guidance to the two empowered committees on public finance and the Empowered Committee on Public Sector Undertaking Reform (ECPR). The state budget and fiscal analysis unit (SBFAU) would provide technical support to the empowered committees on public finance and ECPR.6 A cabinet subcommittee on the voluntary retirement scheme (VRS) was established in 2001 and facilitated expeditious implementation of the VRS (Appendix

5 PRMC was established under the chief minister in January 1998. PRMC was supported by and gave guidance to

two empowered committees on public finance reform and on public enterprises restructuring. Both empowered committees were headed by the chief secretary, with high-level representation from key sector departments, to systematically review and implement public finance and public enterprise reform in the state. PRMC would also guide the establishment of an enabling environment and the respective policy, institutional, and regulatory issues (para. 56 of the loan)

6 As part of the capacity-building initiatives supported by the Program, SBFAU was established on 7 June 1999, supported by technical assistance on Support for the Government of Madhya Pradesh Public Finance Reform and Institutional Strengthening. Located in the Finance Department, SBFAU staff members worked closely with the secretary and principal secretary, Finance and provided analytical inputs during the development of economic policy options.

6

5). The State Renewal Fund Committee was established in 1998, as part of the Program, to mitigate the adverse social impact of PSU restructuring. Supported by the Program, the corporate and financial restructuring of 14 of 31 state PSUs started, and the details are provided in Table 1 and Appendix 2. 13. Numerous additions have also been made to the legal framework, which supports all economic and social activities in Madhya Pradesh. The VRS for PSUs (1998), the Madhya Pradesh State Environment Policy (1999), the VAT Act (2002),7 and the Rehabilitation Policy of Madhya Pradesh (2002) on resettlement were all introduced either as part of program requirements or the robust reform stance acquired as a corollary of the Program. 14. During the program period, Madhya Pradesh improved its fiscal position (Appendix 4 and Appendix 6). And Madhya Pradesh 's achievements are commendable given the numerous exogenous shocks that affected the state over the last decade. Natural calamities, such as the earthquake in Jabalpur (FY1997) and drought and floods (FY1995, FY1996, FY1998, FY1999, FY2001, FY2002, and FY2003), left just as much of a mark on state finances as the Fifth Pay Commission’s directives, which ballooned wage and pension bills (FY1998 and thereafter); bifurcation (FY2001), which diminished revenue receipts of the new Madhya Pradesh state (Appendix 7); Ahluwalia bonds8 for power sector debt; and debt swap schemes (FY2003). Despite these adverse pressures on the economy and fiscal stability, Madhya Pradesh's fiscal balances improved during program implementation (as demonstrated in Appendix 4 and Appendix 6). The ratio of primary deficit to net state domestic product (NSDP) improved from -2.60% to -1.98%. Revenue balances as a ratio of NSDP improved even more, from -4.30% to -1.50%. 15. Several specific measures were introduced for improved public resource management during program implementation. Apart from identifying 60,000 posts for natural attrition (i.e., posts were abolished upon retirement of the incumbents), a medium-term fiscal framework was adopted; a PSU restructuring and reform started; and the Core Investment Program (CIP) was developed for 2001–2004 in August 2001, to prioritize capital expenditure, especially in the health and education sectors. The CIP was eventually incorporated into the development strategy of Madhya Pradesh. Capital expenditure during implementation mirrored the adverse fiscal impact of bifurcation and injections to the power sector. The budget allocation to social services, namely health and education, was protected, and universal education was promoted with the District Primary Education Program. Privatization made headway, and major arterial roads (i.e., 1,800 kilometers of state highways) were built under build-operate-transfer schemes. 16. The tax structure was revamped, and the number of items subject to sales tax exemptions was reduced from 39 in 1999 to 34 in 2003. The tax system was fully computerized. Eleven-digit trader registration numbers were assigned since July 2003, and all information thus 7 The state assembly passed the VAT Act on 7 August 2002, but the Government postponed countrywide introduction

of VAT. 8 The Government formed an expert committee on the settlement of outstanding dues of state electricity boards to

central power sector undertakings. The committee is headed by the Planning Commission member (Energy), Montek Singh Ahluwalia. The committee recommended issuing bonds to restore the financial viability of state electricity boards. The bonds would be of 15-year tenor and issued through the Reserve Bank of India at a tax-free interest rate of 8.5%. The bonds would have lock-in restrictions and could be released into the secondary market at 10.0% (of the total quantum) per annum. The bonds would enjoy a 5-year moratorium on payment of principal. The principal amount must be repaid between the sixth and 15th years. In the meantime, to improve their financial standing, the state electricity boards would accept reform-based performance milestones such as establishing a state power regulator, metering distribution feeders, and improving revenue realization. These bonds are referred to as "Ahluwalia bonds," after the name of the committee chair.

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generated was managed with a computerized system. Staff members were trained on computer use and the new tax system in 2000–2001. Even after the program period, the reform initiative continued. To widen the tax base, new taxes were introduced on 12 July 2004 on (pan masala with tobacco, imported timber, imported crude oil, and imported incense sticks). Tractors were also taxed, and a franchise fee on beer was introduced. 17. All treasuries were computerized by April 2004, to enable complete and timely generation of financial data. In addition, GoMP introduced a pro-rata system. If GoMP departments cannot meet their respective targeted revenue receipts, their capital expenditure shares from the state budget fall as well. Hence, in addition to the Finance Department, each department has become a custodian of revenue generation in Madhya Pradesh. C. Program Costs

18. Loan proceeds were used for adjustment costs related to (i) reprioritizing expenditure allocation to social sectors (e.g., education and health); (ii) reforming the tax system (e.g., revamping industrial incentives); (iii) restructuring affected PSUs (e.g., Madhya Pradesh State Road Transport Corporation and Madhya Pradesh Financial Corporation); (iv) implementing the VRS (e.g., retrenchment costs); (v) creating and annually replenishing the State Renewal Fund; (vi) implementing the social safety net program (e.g., training, and counseling); (vii) implementing pre-privatization restructuring (e.g., incorporation); and (viii) building the required capacity of staff members involved with PSU reform and public resource management. D. Disbursements

19. The Program was supported with a loan of $250 million from ADB’s ordinary capital resources. The loan was disbursed in three tranches. The first tranche of $100 million was released on 16 December 1999 when the Program was declared effective. The second and third tranches were disbursed in February 2002 and March 2003, respectively, upon compliance with corresponding tranche conditions. 20. The Government requested that the portion of the loan under the initial Loan Agreement, which was undisbursed as of 26 February 2002, be subjected to the terms and conditions of the London interbank offered rate (LIBOR)-based lending facility of ADB. Consequently, ADB and the Government agreed that as of 26 February 2002 (the transformation date), the loan would comprise (i) a pool-based loan of $100 million and (ii) a LIBOR-based loan in the amount of $150 million. The initial Loan Agreement was, therefore, amended and restated to provide for the application of different terms and conditions to the (i) portion of the loan disbursed as of the transformation date and (ii) portion of the loan that remained undisbursed as of the transformation date. E. Program Schedule

21. The program period was originally envisaged to be from March 1999 to March 2002. The loan was to be disbursed in three tranches, each to be released upon GoMP's compliance with specified conditions in the report and recommendation of the President. However, approval of the Program and, subsequently, the first tranche release was delayed by 9 months, until December 1999. The processing of the Program virtually halted in the latter part of 1998, due to state elections conducted in Madhya Pradesh and the partial sanctions imposed on India following nuclear testing. However, once the program processing resumed, following intensive discussions with the Board over a 6-month period, the Program was approved in December

8

1999, and the first tranche was released speedily. Unfortunately, the second tranche release was also affected, this time by the bifurcation of Madhya Pradesh into the two states of Madhya Pradesh and Chhattisgarh in November 2000. Beneficiaries and parties responsible for repaying the loan had to be realigned and formally recognized by ADB and the Government. In addition, the Government (the Borrower of the loan) requested to be eligible to receive the tranche under ADB’s new LIBOR-based lending facility after the loan conversion option was introduced in January 2002, which further delayed disbursement at the time.9 Regardless, the loan was closed on 17 March 2003, with merely a 5.5 month delay, from the 30 September 2002 closing date specified in the Loan Agreement. F. Implementation Arrangements

22. ADB staff members closely monitored Program implementation. The Finance Department of the Government of Madhya Pradesh acted as the Executing Agency for the Program. The Program was deemed satisfactory up to the release of the second tranche. However, for the third tranche release, program implementation fell behind schedule. This was due primarily to constraints related to public enterprise restructuring resulting from the bifurcation of the state in late 2000 and difficulties in establishing and operating the institutional support, such as a technical secretariat for divestment and restructuring of PSUs. A technical secretariat would act as the executive arm of ECPR and provide advisory and implementation support. After program implementation started, it became clear that to be effective a technical secretariat should comprise proficient consultants recruited from outside the existing staff of the Finance Department. Cost implications of this decision necessitated additional funding. At the time, the Department for International Development (DFID) was considering identifying Madhya Pradesh as one of its focal states for development assistance in India. And the issue was further discussed during the high-level Development Forum, involving ADB and other members of the development partner community and GoMP, which was held in Bhopal on 17 January 2001. Subsequent to the forum, DFID was identified as a development partner for the Program, as per joint consent of ADB, DFID, and GoMP. Thereafter, DFID proposed a grant for reform of PSUs in Madhya Pradesh, but the grant has not yet been approved for implementation. In the absence of a technical secretariat, a cabinet subcommittee on VRS was established in 2001 to forge ahead with PSU reform, and the subcommittee has fulfilled its mandate. Overall, implementation arrangements were satisfactory in delivering program outputs and achieving the program purpose. G. Conditions and Covenants

23. GoMP fully complied with 12 of 15 second tranche conditions and substantially complied with the remaining three. Of the 22 non-tranche release actions to be completed prior to the second tranche release, 19 have been fully complied with, 2 substantially complied with, and 1 partially complied with. As regards the third tranche conditions, GoMP fully complied with 9 of 13, substantially complied with 3, and partially complied with 1. GoMP also fulfilled 18 of 22 non-tranche conditions, substantially complied with 3, and partially complied with 1. As described in detail in the Board information paper on the third tranche,10 one tranche condition and five non-

9 Conversion from pool-based lending to LIBOR-based lending required a minimum of 40% of the loan amount to be

undisbursed. If the second tranche of the Program had been disbursed before LIBOR conversion became available, the Program would not have been eligible for such conversion. Hence, the Government delayed seeking tranche release from September 2001 to January 2002.

10 ADB. 2003. Madhya Pradesh Public Resource Management Program Loan Progress Report: Release of Third Tranche. Manila.

9

tranche covenants were amended in view of changed circumstances after the bifurcation of the state. 24. Five major factors appear to have contributed to a delay in meeting program conditions and targets: (i) sanctions imposed by the international aid community on India in response to the latter's nuclear testing in 1998; (ii) bifurcation of the state in late 2000, which necessitated division of assets and liabilities of some of the PSUs as well as the expenditure allocation between Madhya Pradesh and Chhattisgarh, which significantly delayed PSU reforms; (iii) change of government in 2003 that affected the pace of VRS-related reforms; (iv) non-implementation of VAT, due to lack of consensus at the national level; and (v) drought (and flooding) in various parts of the state that necessitated diversion of some of the capital expenditures for drought relief. The bifurcation of the state, which was not deemed imminent at the time of program preparation, incurred significant fiscal costs, not included in the original fiscal framework. However, adjustment costs for the Program were less than expected. These would have included (i) revenue loss from tax reform associated with the introduction of the VAT, and (ii) the costs associated with PSU restructuring. However, no tax revenue was lost with VAT when the Government postponed its implementation (Appendix 7). 25. Since completion of the Program, significant development occurred in public sector employment practices. In 1998, GoMP had taken a decision to retrench 22,000 of the 28,000 daily wage earners as an austerity measure that would support improved expenditure management. Exception was granted to those workers in public works and irrigation and public health. A majority of these workers were retrenched by 1998. However, with the advent of the BJP government in December 2003, this decision was revisited. Prior to being retrenched, most of the temporary daily wagers had been with GoMP for long periods, some even up to 20 years, on regularly renewed short-term contracts of 89 days. Hence, upon being retrenched, some of these workers applied to the High Court of Madhya Pradesh at Jabalpur, which subsequently overturned the decision to retrench these workers in 2003. Consequently, GoMP issued a government order11 on 21 January 2004. As per this order, 17,761 individuals were identified as eligible for re-employment. In September 2004, GoMP and the Government confirmed that about 11,000 daily wage earners, who were retrenched as per the 1998 government order are being re-employed, and the budget for FY2004–2005 includes a provision of Rs360 million for their remunerations. 26. Alternatively, under the initiative to contain administrative expenses, 60,000 government posts were identified for natural attrition (i.e., identified posts were eliminated once the incumbents retired) by the Government during the program period. Over the last 4 years, 23,000 of these 60,000 posts were eliminated, and another 18,000 posts are expected to be vacated over the next 3 years. H. Related Technical Assistance

27. ADB provided three technical assistance activities to complement the reform and capacity-building initiatives supported by the Program. Support for the Government of Madhya Pradesh Public Finance Reform and Institutional Strengthening was approved on 15 December 1997 for $780,000. The technical assistance focused on (i) strengthening the sales tax administration, including staff member training to facilitate transformation of the sales tax system to VAT; (ii) strengthening the Stamp Duty and Registration Directorate, establishing a

11 GO No: F-5-4/2003/1/3, Procedure for Employment of Daily Wage Employees Appointed after 31.12.1988 and

Discontinued in 1998.

10

state-level central valuation cell and district valuation cells for valuation of assets, and training staff members on the new valuation system; (iii) assessing the institutional, policy, and regulatory frameworks for improvement of social services, particularly health and education services; (iv) establishing a SBFAU and training staff members to strengthen the analytical capability for budget planning and monitoring as well as revenue and expenditure analysis and projections; and (v) training staff members from the Finance Department and key infrastructure departments on expenditure prioritization and CIP. An economic reform committee was established by GoMP to oversee the implementation of the technical assistance, with the support of two empowered committees on public finance reform and PSU restructuring. An international consulting firm provided the services of international (9 person-months) and domestic (35 person-months) consultants. The consultants' report provided a comprehensive analysis and review of Madhya Pradesh’s public finances. The consultants worked closely with GoMP, and overall performance of the consultants was satisfactory. The consultants’ activities allowed for a saving of $43,000 from the original contract, which financed the engagement of an international consultant to GoMP for the design and implementation of the VAT system. The technical assistance was adequately completed despite delayed implementation, changed consultant team members, and weak interaction between the consultants and the Executing Agency. Overall, the technical assistance was rated as successful.12 28. Strengthening Local Government in Madhya Pradesh was approved on 15 December 1997, for $697,000. To improve governance of local government bodies (LGBs) in Madhya Pradesh, the technical assistance would (i) develop resource-raising capabilities of LGBs through policy support and training; (ii) improve information gathering at the district level, to enhance rational decision making at local and state levels; and (iii) strengthen training facilities of LGBs, facilitating dissemination of best practices throughout LGB administration. The technical assistance provided equipment and capacity building on data collection and processing to various government agencies. A participatory approach was developed through a consultative mechanism that incorporated stakeholder feedback to improve governance in these institutions. Thirty-three person-months of consulting services were provided between June 1998- and December 2000. The consultant team designed, installed, and built the capacity to use a statistical package that will facilitate more efficient fiscal data management throughout Madhya Pradesh. In accordance with the recommendations generated under the technical assistance, GoMP began implementing local fiscal reforms concurrently with the Program. The technical assistance improved operational capacity at the local level, particularly in data processing and decision-making processes, and established an institutional environment conducive for implementation of the Program. Under this technical assistance, 31 district-level Directorate of Economics and Statistics offices were supported and over 100 officers were trained. Workshop participants found the training program and workshops conducted to be effective and the training materials to be useful references. Furthermore, during the rollout stage, LGBs’ training capabilities were strengthened through a training of trainers program, enabling continued capacity building after completion of the technical assistance. The technical assistance was rated as successful.13 29. Capacity Building for Public Enterprise Reform and Social Safety Net in Madhya Pradesh was approved on 14 December 1999 for $600,000. The technical assistance was

12 ADB. 2002. Technical Assistance Completion Report on Support for the Government of Madhya Pradesh Public

Finance Reform and Institutional Strengthening. Manila. The report was circulated to the Board on 25 November 2002.

13 ADB. 2001. Technical Assistance Completion Report on Strengthening Local Government in Madhya Pradesh. Manila. The report was circulated to the Board on 10 September 2001.

11

provided as an accompanying grant to the loan. The undertaking was rated partially successful. The technical assistance completion report is provided in Appendix 8. I. Consultant Recruitment and Procurement

30. Consultants were engaged only for the technical assistance attached to the Program. The consultant was recruited in accordance with ADB's Guidelines on the Use of Consultants to provide the consultancy services required for technical assistance on Capacity Building for Public Enterprise Reform and Social Safety Net in Madhya Pradesh, and consultants were fielded in July 2000. No deviations from agreed-upon procedures occurred, and no disagreements between the Executing Agency and ADB occurred regarding consultant selection. J. Performance of Consultants, Contractors, and Suppliers

31. The consultant team for technical assistance on Capacity Building for Public Enterprise Reform and Social Safety Net in Madhya Pradesh delivered the tasks identified in the terms of reference at an acceptable level of quality and timeliness. Follow-up consultations with the stakeholders in Madhya Pradesh revealed that closer consultation between the consultant team and PSU staff members being reviewed for restructuring would have been preferable. K. Performance of the Borrower and the Executing Agency

32. GoMP officials demonstrated strong ownership during program implementation. They fulfilled the conditions of the first tranche in time. Similarly, significant progress was made with respect to second and third tranche conditions. The delays were mostly due to external factors, some of which were not foreseen at appraisal. One of the major factors was the bifurcation of the state shortly after program implementation began and the related division of public sector undertakings between the two new states. As per the Madhya Pradesh State Reorganization Act of 2000, the new states of Madhya Pradesh and Chhattisgarh would mutually agree on the rates at which assets, liabilities, and personnel of various PSUs would be partitioned between them. In the event of dispute between the two states, the Government would arbitrate, ruling on the issue within 2 years after bifurcation of the states (i.e., by the end- of 2002). While division of some PSUs (e.g., Madhya Pradesh State Financial Corporation (MPSFC) was handled amicably, others (such as Madhya Pradesh State Electricity Board (MPSEB) became matters of contention between the two states. A mutually acceptable decision could not be reached by the states, and the Government provided an interim decision only on 23 May 2003. In the meantime, reforms have been deferred. Revenues were lost to respective PSUs and the states. Expeditious PSU bifurcation would have benefited all stakeholders involved. Similarly, despite the strongly enunciated need of GoMP for a technical secretariat, this was never established. A proposal was made by a bilateral development partner to finance on a grant basis the activities and staff of a technical secretariat. The proposal is under consideration by GoMP and the Government. Successful implementation of any project hinges on adequate coordination among and a shared responsibility to act in a timely manner by bureaucratic groups and political cadre. 33. At appraisal, GoMP's limited experience and institutional capacity to implement comprehensive financial reforms were highlighted as a possible risk factor that could limit the development impact of the Program. However, this risk was greatly mitigated through full use of technical assistance undertakings provided for strengthening institutional and procedural frameworks, such as expenditure management and control, tax administration, and statistical information system for rational decision-making at state and local government levels. The

12

Executing Agency for the Program has visibly developed its staff and institutional capabilities for improved resource management since the advent of the Program. Counterpart staff members in the Executing Agency have been pro-active and forthcoming during program implementation and consultations with ADB. Overall, the performance of the Borrower and the Executing Agency is rated as satisfactory. L. Performance of the Asian Development Bank

34. The performance of ADB is rated as satisfactory. Monitoring of program performance was done on regular basis, engaging counterpart staff members, both political and technical, through in-depth policy dialogue. While project officers handling the program changed twice during implementation, staff members specializing in public resource management were assigned to the Program each time. It may, however, have been desirable to have somewhat longer missions in 2002 and to have fielded a mission between October 2002- and March 2003, prior to preparation of the third tranche paper. 35. Technical assistance on Support for the Government of Madhya Pradesh Public Finance Reform and Institutional Strengthening, Strengthening Local Government in Madhya Pradesh, and Capacity Building for Public Enterprise Reform and Social Safety Net in Madhya Pradesh were provided for capacity building prior to and simultaneously with program implementation. While timely and appropriate in addressing the pressing needs of GoMP at the time, benefit monitoring during technical assistance implementation could have been done with more diligence.

III. EVALUATION OF PERFORMANCE A. Relevance

36. The Program was assessed as highly relevant.14 In the early 1990s, Madhya Pradesh was a predominantly agrarian state, with poor resource management practices and high levels of income poverty. The state’s development potential was severely constrained by low tax buoyancy, inadequate domestic resource mobilization, and inflated current expenditure (Appendix 4). Considerable scope existed for the improvement of the state’s fiscal management strategy and practices. 37. GoMP was closely involved in designing the Program through frequent policy dialogues. Program objectives were defined in accordance with the development agenda of GoMP, as outlined in 5-year development plans and ADB's country development strategy for India. Bringing forth the development needs of the state and the findings of technical assistance on Support for the Government of Madhya Pradesh Public Finance Reform and Institutional Strengthening, and Strengthening Local Government in Madhya Pradesh, the focus, scope, and components of the Program were identified jointly by ADB and GoMP. GoMP owned the Program from the design stage. The program design, which aimed at placing the economy of the Madhya Pradesh on a sustainable track and improving efficiency and performance in public service, was highly relevant in terms of the state's needs. The Program was designed to introduce a horizontal reform agenda, with focused policy actions and tranche conditions pertinent to program objectives.

14 The applicable rating categories are highly relevant, relevant, partly relevant, and irrelevant, as per ADB Guidelines

for the Preparation of Project Completion Reports.

13

B. Efficacy in Achievement of Purpose

38. The loan is assessed as efficacious.15 Intended outputs (public expenditure management, tax reform, PSU reform, and budget share protection of social sector spending), achieved the intended outcome (i.e., improve public resource mobilization to promote better provision of social services) despite a number of exogenous shocks to the Madhya Pradesh economy. The program framework effectively guided GoMP in rationalizing their public finances, improving their revenue sources (through better monitoring, additional taxes, and fewer tax exemptions granted), while introducing austerity on the expenditure side (by developing and following austerity measures in administrative expenses of GoMP and CIP, among others). Fiscal deficit was contained. Tax reforms were undertaken. Tax structure was streamlined, and capacity building was provided to staff members working in tax-related fields. PSU reform has started, and indications are strong that the initiative will continue after program completion. Given the substantial restructuring of public institutions involved, the political context, and the significant human resources constraints, the Program seemed ambitious in the number of conditions and optimistic in terms of the timeframe within which to achieve them. However, despite several adverse shocks to the state economy, fiscal balances were maintained at a relatively stable level, and balances even improved during program implementation. Tax reform gained impetus, considerable capacity building was provided to staff members working in tax-related fields, and tax revenue improved. Program achievements in reforming PSUs and consolidating gains from PSU reform were more modest, however. On the expenditure side, the Government embarked on some degree of wage-cost compression by downsizing and streamlining the civil service. However, the change in the Government resulted in moderation of these efforts in 2003. Unfortunately, capacity building vis-à-vis institutions, such as SBFAU and a technical secretariat could not attain its full potential. A technical secretariat could not be formed during implementation, and SBFAU was understaffed at times. C. Efficiency in Achievement of Outputs and Purpose 39. The Program was implemented at a robust pace, despite the adverse impact of various natural disasters and bifurcation (and changes in policy in tandem with changing governments), as well as delays in provision of supplementary technical assistance for establishing the technical secretariat. Although, some slippage occurred in the tranche release timetable of the Program, the commitment of GoMP to the reform agenda, along the lines identified in the Program, remained firm. During the period immediately following bifurcation, the pace of reforms relating to fiscal management and divestment slowed, but ADB worked closely with the state to ensure that the reform agenda was followed closely. Overall, ADB lending and counterpart funds were used efficiently and in a timely manner for their intended purposes, to attain optimum impact of these contributions to the reform process undertaken in Madhya Pradesh. ADB’s response to requests from GoMP and the Government was timely and appropriate. Organization and management of the executing and the implementing agencies has been satisfactory. The Program was rated as efficient.16

15 The applicable rating categories are highly efficacious, efficacious, less efficacious, and inefficacious, as per ADB

Guidelines for the Preparation of Project Completion Reports. 16 The applicable rating categories are highly efficient, efficient, less efficient, and inefficient, as per ADB Guidelines

for the Preparation of Project Performance Audit Reports.

14

D. Preliminary Assessment of Sustainability 40. Program sustainability was assessed as highly likely.17 Consensus among government officials was that the Program, which included public expenditure management, reform to improve tax buoyancy, PSU pruning, and capacity building in managing public resources, was in line with the reform needs of the state and, therefore, has given proper direction to the reform process. 41. The intention to pursue the reform agenda is evinced by Madhya Pradesh's memorandum of understanding with the Government. To encourage state governments to undertake fiscal consolidation and improved resource management, the Government started the Medium-Term Fiscal Reform Program in 2000. States that participate in this program sign a memorandum of understanding with the Government that details specific measures to be adopted to improve state finances, and states receive incentive funds from the Government to undertake the reforms identified. Each state is expected to achieve a minimum improvement of five percentage points in the ratio of revenue balance to total revenue receipts annually. After lengthy deliberations, GoMP and the Government agreed in 2004 that the base year for this ratio will be FY2001–2002, rather than FY2000–2001, the original reference date for the Medium-Term Fiscal Reform Program. This decision ensured that Madhya Pradesh would not be penalized for adverse fiscal impacts of bifurcation. Based on this agreement, GoMP signed the memorandum of understanding for the Madhya Pradesh Medium-Term Fiscal Reform Program on 19 July 2004 and submitted this to the Government. A number of the policy conditions of the Program are included as measures to be followed by GoMP in the memorandum of understanding, attesting to the fact that the reform initiative, which took shape under the Program, is owned by the Government and will continue. 42. Similarly, the Medium-Term Fiscal Reforms Committee was formed on 8 June 2004, with a government order. Chaired by the principal secretary (General Administration), the committee comprises principal secretaries of Finance, Commercial Tax, Commerce and Industry, Panchayat and Rural Development, and Urban Administration and Development and the economic adviser from SBFAU. This high-level committee is tasked to review the tax structure and make recommendations on how to broaden the tax base and increase non-tax revenue during its tenure of 6 months. The committee will be preparing a time-bound action plan with fiscal turn-around targets. The government order also posits that subsidies to any sector should be rationalized on the bases of equity and efficiency, not on preferential treatment. The borrowing policy of Madhya Pradesh should be driven by requirements of sustainable development, and the expenditure policy of the state should prioritize capital expenditure. 43. Madhya Pradesh availed of the Government’s debt-swap scheme, swapping its high-interest debt portfolio for low-cost market borrowings and small savings schemes. Established with the recommendations of the Eleventh Finance Commission, the debt-swap scheme allows states to lower the interest burden on their debt stock to 8%, on average, compared to previously applicable rates of 10.5–11.5%. Madhya Pradesh swapped Rs5.88 billion in FY2003 and Rs15.12 billion in FY2004. GoMP is projecting to swap another Rs18.21 billion of Madhya Pradesh’s high-cost debt in FY2005. This will allow the state to contain its revenue expenditure further and improve its fiscal balances. Hence, provided the political environment remains stable and Madhya Pradesh is not adversely affected by any other unanticipated exogenous shocks, all indicators suggest that the reform process started under the Program should continue. 17 The applicable rating categories are most likely, likely, less likely, and unlikely, as per ADB Guidelines for the

Preparation of Project Performance Audit Reports.

15

E. Environmental, Sociocultural, and Other Impacts 44. The Program was categorized as Environmental Category C. All environmental implications of the proposed policy and institutional reforms were reviewed, and appropriate environmental interventions were incorporated into program design. During program implementation, the Madhya Pradesh State Environment Policy (1999) was prepared and approved. The program design included provision of training on environmental monitoring for Pollution Control Board staff. Instead, training was provided under GoMP's program for enhanced environmental monitoring, supported by additional ADB technical assistance.18 45. Program design included training and rehabilitative services for those employees that were retrenched from PSUs. However, no provision was made for people whose livelihood would have been affected by the change in spending capacities of the retrenched workers. No indicator or evidence exists on the secondary socio-economic impact of PSU closures.

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS A. Overall Assessment 46. Overall, the Program can be rated as successful.19 It contributed to the development of fiscal prudence, tax reform, budgetary controls vis-à-vis automation of treasuries, and PSU reform. The program design was very relevant to the needs and aspirations of economic and social development in Madhya Pradesh. The program framework was quite efficient in terms of the processes laid down and the direction provided by the detailed planning of the components and roadmaps. The state has encountered unexpected political, economic, and social impacts resulting from its bifurcation into a smaller Madhya Pradesh and the new state of Chhattisgarh, which had spillover effects on the Program. Despite the disruption from bifurcation and the protracted economic and political uncertainty that ensued from delays in the central decision-making process concerning the division of various PSUs, program implementation reflects the state's commitment to the reform effort. Ultimately, the fiscal position of the state improved during program implementation, despite numerous and formidable exogenous shocks to the state economy. The reform agenda of the Program was strictly adhered to, and the most important program objectives, sounder fiscal position and protection of social sector investments, were met.20 47. However, an important distinction to be made is between the direction and the quantum of assistance. The consensus among stakeholders in Madhya Pradesh is that while the Program mobilized resources and efforts in the direction of necessary reforms effectively, the volume of assistance fell short of fully supporting the reform measures prescribed. The delays in tranche releases further limited the impact of available funds for the Program. Overall, a more flexible framework, that could respond, although within reasonable parameters, to various political and structural changes, might have had a stronger development impact. B. Lessons Learned 48. Lessons learned from previous programs were incorporated into the design of the Program, including the importance of capacity building and institutional strengthening for seamless, self-sufficient, and satisfactory implementation. Learning from Loan on Gujarat Public 18 ADB. 2000. Environmental Management at the State Level. Manila. 19 This program completion report is part of a sample of program completion reports independently reviewed by the

Operations Evaluation Department. The review validated the methodology used and the rating given. 20 The applicable rating categories are highly successful, successful, partly successful, and unsuccessful, as per ADB

Guidelines for the Preparation of Project Performance Audit Reports.

16

Sector Resource Management Program, the timeframe for implementation of reforms was extended to 3 years. Extensive dialogue between ADB and GoMP preceded program design. Unrealistic time frames, revenue projections, and tax buoyancies were avoided. And the need to ensure an appropriate regulatory and pricing framework for the power sector at an early stage of comprehensive reforms was reflected in program design (para. 48 and para. 49, report and recommendation of the President). 49. In turn, the Program demonstrated the importance of a flexible approach to modeling a reform agenda. As suggested in progress reports, a cluster framework for such a program would have allowed for a more organic approach, vis-à-vis formulating specific tranche release conditions to address unforeseen changes during program implementation without deviating from the fundamental assumptions and deliverables of the Program. Similarly, even if the probability of occurrence is slim, all possible shocks should be a part of the Program's contingency plan and, hence, design. Both feedback and spillover effects should be considered carefully and whenever possible, and incorporated in project design as appropriate. A horizontal approach to reform can still benefit from prioritization of certain sectors over others and should ensure a holistic approach to reform, as no sector functions independently from the rest of the economy. 50. A number of measures, when duly observed, enhance the developmental impact and effective implementation of a project or program. Namely, actual requirements for satisfactory program implementation need to be properly costed before project implementation. Then sources of financing should be clearly identified, and irrevocable confirmation should be secured for the commitment from sources of financing to ensure smooth project implementation. Funds must also be made available in a timely manner, and, most importantly, a sound contingency plan must be prepared, in case these funds are no longer available or are grossly delayed. 51. Finally, in addition to technical assistance on Support for the Government of Madhya Pradesh Public Finance Reform and Institutional Strengthening, and Strengthening Local Government in Madhya Pradesh (implementation of which overlapped with the Program), preparatory technical assistance might have contributed to developing the foundation for the program framework and provided some of the more urgent capacity-building activities before program implementation started. C. Recommendations

1. Program-Related 52. Future Monitoring. Institutional and human capacity of the counterpart agency should be strengthened at the program preparation stage. Moreover, counterparts in ADB and the Executing Agency should be identified, such that these individuals would be available during most of program implementation, at least to provide guidance as required if not on a full-time basis. During implementation of the loan, ADB and GoMP staff members handling the Program changed often, which eroded the institutional memory of the Program and challenged the quality and timeliness of responses to exogenous shocks and new developments. 53. Covenants. The Program contained a remarkable list of targets, most of which were met. However, considering the relatively short lead-time, perhaps easily monitored targets could have been defined within broader parameters, rather than as specific numbers. This could also have introduced a level of flexibility to address the spillover effects of exogenous shocks.

17

54. Additional Assistance. It would be useful to provide additional technical assistance for fiscal consolidation in Madhya Pradesh to supplement PSU restructuring efforts started under the Program and support the implementation of GoMP’s Medium-Term Fiscal Reform Program.

2. General 55. Implementation of such programs always needs firm commitment on the part of policy makers, bureaucratic and political cadres alike, as well as a proper appreciation of the needs of the economy for timely execution and realization of targets. Those who design and agree on a program are not necessarily the ones to implement it. Hence, proliferated public awareness programs targeting stakeholders, practitioners, and policy and decision makers should run simultaneously with program or project implementation to ensure commitment to and continuity of the reform program. Finally, prioritization, sequencing, feasibility, and plausibility of policy actions proposed under a program are essential in securing optimal developmental impact.

18 Appendix 1

PROGRAM FRAMEWORK

Design Summary Targets/Measurable Indicators Monitoring Mechanism Assumptions/ Risks

A. Goal

Assist government of Madhya Pradesh (GoMP) reform efforts to foster social development and sustainable economic growth through improving public resource management and enhancing public expenditure to social sector

Medium-term sustainability of public finances Capacity building for prudent management of public expenditure and debt and strengthening resource mobilization, including through improved tax administration Expenditure reallocation to social sector, and protection of these outlays from budgetary cuts Preparation of plan indicating how national norms on health and education could be met as state’s financial constraint eases Alleviation of social impact of development Strengthened corporate governance; and improved financial performance of public sector undertakings (PSUs) Policy, regulatory, and institutional frameworks of key sectors (power, roads and transport, and housing) Improved environmental sustainability of the reform process

Finance Department, supported by state budgeting and fiscal analysis unit (SBFAU), to prepare periodic reports on fiscal trends, expenditure allocation to social and economic services, and tax and expenditure policy measures Plan on how national norms in health and education could be achieved Committee to be established to prepare social safety net (SSN) design and submit report to the Asian Development Bank (ADB) Technical secretariat to report on progress of PSU restructuring, and the Department of Public Enterprises (DPE) to publish annual report on public enterprise sector performance GoMP to report on sector core investment program and experience with private sector involvement in social and political infrastructure Sector policies; action plan for strengthening environmental management and monitoring

Political acceptability of and commitment to fiscal consolidation and tax reforms and acceptance by PSU management of greater transparency and accountability Capacity building on expenditure management and control to prevent expenditure overrun and avoid unproductive expenditure crowding out social sector allocations Program success is contingent on stable political and external environment; exogenous shocks, including policy decisions by the central Government, could adversely affect economic development, private sector environment, and State Renewal Fund (SRF) implementation.

B. Program Objectives

Enhanced resource allocation to social sector, within a medium-term framework of sustainable public finances and strengthened fiscal management, to foster social development and satisfy basic human needs while mitigating social impact of development

Expenditure allocation for enhanced capital outlays and nonpersonnel expenditure on health, and adequate budgetary provision for sustainability of District Primary Education Program (DPEP) within framework of fiscal consolidation, reflected in reduction in state’s primary deficit from budgeted 3.4% of State Domestic Product (SDP) to about 0.7% of State Domestic Product Committee to prepare SSN design; preparation of policy on rehabilitation

Finance Department to provide budget documents; SBFAU to undertake regular monitoring, and report to be provided to ADB on compliance with the agreed policy measures; plan to ensure protection of social sector outlays from budgetary cuts Report on SSN design; ADB review of rehabilitation policy prior to finalization

Difficulty in achieving targeted improvement in public finances due to adverse (external) conditions, and inability to mobilize resources to fund increase in social sector spending Government support and commitment to SSN

Continued on next page

Appendix 1 19

Design Summary Targets/Measurable Indicators Monitoring Mechanism Assumptions/ Risks

Improving corporate governance and increased efficiency of resource use through restructuring public sector undertakings

Enhanced efficiency, improved financial performance and reduced fiscal burden of PSUs on the government budget; reduced role of the Government in commercial activities and enhanced accountability and transparency of PSU management

Technical secretariat to be established with ADB technical assistance, to oversee and advise on implementation of PSU reform; DPE to publish annual report on PSU performance, including reform progress

Absence of political and labor resistance to PSU reform and timely development of capacities of concerned agencies to implement restructuring; conducive capital market conditions and active private sector participation to ensure success of PSU divestment

Evolving enabling environment for private sector participation in key sectors Promoting environmental sustainability of economic development

Private sector participation and sustainable sector development in the power, roads and transport, and housing sectors Guidelines for market-based instruments; strengthened technical capacity of Pollution Control Board

More transparent process of investment, production, distribution of profits, and personnel decisions; reduction of subsidies and other direct financial support for PSUs Sector policies in roads and transport and housing to be implemented; utilities pricing commission and State Electricity Regulatory Commission to be established State Environment Policy to be implemented; time-bound action plan for implementation of market-based instruments

Consensus between bureaucracy and private sector, to avoid delay in the preparation and implementation of policy action plan for promoting private sector involvement Acceptance by industry of market-based instruments and enhanced environmental monitoring

C. Program Components

1. Foster social development, support institutional strengthening and improve public finances; the Program will include

Key parameters of fiscal performance (i.e. fiscal deficit, expenditure allocation) to be set as benchmarks Capacity building and institutional and procedural strengthening

Finance Department to provide Finance Bill with details on new revenue measures and expenditure reports; ready reckoners for property assessment Provision of training; preparation of studies, implementation of recommendations, and reporting of impact including feedback on required changes

Adequate strengthening of fiscal management and implementation capacity of Finance Department; increased fiscal pressure due to lower than programmed revenue growth; pressure on unproductive expenditure

a. institutional strengthening

Establishment of the Public Resource Management Committee (PRMC), headed by chief minister, and the Empowered Committee on Public Finance Reform, headed by chief secretary; management information system for Finance Department;

Establish SBFAU in the Finance Department; draft SSN design to be submitted to ADB; computerization and networking of Finance Department’s treasury operations for improved

Timely establishment of SBFAU; availability of adequately experienced staff; adequate capacity to design and implement SSN and proper

Continued on next page

20 Appendix 1

Design Summary Targets/Measurable Indicators Monitoring Mechanism Assumptions/ Risks

committee for design and implementation of SSN

expenditure management and control

monitoring

b. adoption and

implementation of medium-term fiscal framework for FY1999– FY2003

The primary deficit to be reduced from 3.4% of State Domestic Product in the FY1999 budget to 1.0% in the FY2001 budget and to 0.7% in the FY2002 budget; capital expenditure to be at least 1.6% of State Domestic Product in FY1999, 2.0% of State Domestic Product in FY2001, and 2.3% in FY2002

Finance Department to provide finance bill with details on new tax measures and expenditure reports

Exogenous factors, such as natural calamities, and slippages in expenditure control may adversely affect fiscal consolidation

c. improved efficiency and

effectiveness of resource use, through

Increased wage flexibility by evolving policy to unlink wage setting; decline in budgetary subsidies; reallocation of expenditure to social services, particularly health and education; increased effectiveness and efficiency of the payment and audit system through computerization of Finance Department

Technical assistance report on policy and regulatory framework of health and education sectors; technical assistance report on computerization and/or networking of Finance Department; wage policy

Resistance to reducing the size of government employment; line departments to resist reallocation of resources to social sectors; pressure on increase in unproductive expenditure

(i) rationalized and

prioritized expenditure

Prepared and implemented Core Investment Program (CIP); reviewed and implemented recommendations of the study on industrial incentives scheme; prohibited regularization of casual and/or temporary (after 1988) workers into state government and PSUs and of PSU employees into state government

Develop a system for monitoring implementation of CIP; evolve policy and introduce legislation on prohibition to absorb PSU employees into state government service

Adequate capacity of relevant departments to develop and implement CIP; resisting pressure for regularizing casual and/or temporary workers

(ii) reallocated

expenditure to social services

Adequate provision in the FY1999 budget and annually thereafter to clear backlog of capital expenditure and shortfall of nonpersonnel expenditure in existing rural health facilities; reduced state government employment other than technical positions in essential services and police through attrition, abolished posts, and reallocation of resources saved through attrition to poverty-reducing social services; appropriate budgetary allocation equivalent to the central Government share of 85%, to ensure sustainability of DPEP; prepared and implemented action plan, with ADB technical assistance support, to ensure that social sector outlays are protected and national norms could be met in due course

ADB technical assistance report; action plan on protection of social sector outlays; budget documents

Resistance of bureaucracy to adopting social sector -friendly policy in view of strong pressure on the overall budget Improved budget management and control to enable adequate provision for sustainability of DPEP and allow increased allocation for health and education expenditure

(iii) shifted priority from

current to capital expenditure

Capital expenditure raised from 1.6% in the FY1999 budget to at least 2.3% in the FY2002 budget

Finance bill; expenditure reports; CIP

Revenue shortfall, exogenous factors such as natural calamities, or inadequate compression of unproductive

Continued on next page

Appendix 1 21

Design Summary Targets/Measurable Indicators Monitoring Mechanism Assumptions/ Risks

expenditure may tighten resource availability for increase in capital expenditure

d. mitigated social impact of

economic development GoMP to issue notification of the operationalization of SRF and allocate appropriate resources in the FY1999 and subsequent budgets Design and implement SSN

Notification of setting up of SRF; report to be submitted to Public Resource Management Committee and ADB Establish a committee with responsibility for preparing and implementing SSN; review SSN, including socio-economic survey of affected groups

Acceptance by bureaucracy of allocation of adequate budgetary resources to SRF Full cooperation between ADB consultant team, state government, and PSU management required Weak management capacity of SSN committee in preparing guidelines for SSN

e. strengthened resource

mobilization through

(i) rationalization of sales tax system

Tax base to be widened by reducing the number of goods exempted from 93 to 39 items; and reducing the number of sales tax slabs from 6 to the 4 main rates of 2%, 4%, 8%, and 12%

Finance Department to provide new tax rate schedule; systems plan for full computerization of sales tax administration

Acceptability by the business community of the reform proposals, under which industrial concessions and tax exemptions would be reduced or eliminated

(ii) phasing-in of value-

added tax (VAT) system

Implementation, through appropriate legislation, of the first stage of VAT by lowering tax on manufacturing inputs; subsequently, by June 2001, full introduction of VAT

Legislative Bill; review of the impact of VAT

Higher than programmed revenue losses from tax reduction/input tax relief might delay improvement in fiscal position

(iii) reform of stamp duty

system in line with recommendations of the 1996 and 1997 state finance ministers committee

Reduced maximum rate on conveyances; and rationalized stamp duty on capital market instruments

New tax rate schedules to be provided; annual finance bill; establishment of central and regional valuation cells

Acceptability of new valuation of property; timely establishment of valuation cells; adequate capacity in applying new

on stamp duty valuation methodology

(iv) improved cost recovery

Water charges to cover at least 50% of operation and maintenance (O&M) cost by June 1998 and 75% by March 2001; prepared time-bound action plan and implement system of user charges on utilities

Finance Department to report on revised water tariff and progress on implementation of the action plan

Acceptability of increased utilities prices

Continued on next page

22 Appendix 1

Design Summary Targets/Measurable Indicators Monitoring Mechanism Assumptions/ Risks

2. To undertake public enterprise reform and improve corporate governance, the Program will

Operational and institutional strengthening, including approval of policy guidelines on public sector reform; setting up empowered committee and technical secretariat; establishing procedures for enhanced accountability of PSU management Restructuring 14 PSUs, including closure and/or merger of nine PSUs, sale and/or lease of assets of one PSU, full or partial divestment of four PSUs Voluntary retirement scheme (VRS), and re-training of employees affected by PSU restructuring

Transfer nodal responsibility for reform of all state PSUs from line departments to Department of Public Enterprises (DPE); technical secretariat to report on progress of implementation of PSU reform; financial criteria requiring minimum rate of return on public investment to be introduced

Appropriate technical capacity of DPE and timeliness in staff assignment and recruitment to strengthen DPE; resistance to closure of PSUs and labor retrenchment among PSU employees and society as a whole

a. develop policy and

institutional mechanism for PSU reform

GoMP to (i) approve policy guidelines on public sector restructuring and reform; (ii) set up the Empowered Committee on PSU Reform (ECPR), headed by chief secretary; and (iii) establish technical secretariat to assist in PSU reform

Technical secretariat to submit a report on restructuring and divestment of PSUs and the strengthening of PSUs’ accounting systems

Setting up technical secretariat with appropriate technical capacity to undertake PSU reform; adequate monitoring and guidance from ECPR

b. improve corporate

governance and support institutional strengthening

DPE to assume nodal responsibility for reform of state PSUs; DPE to review candidates for appointment of all functional directors on professional basis, with due regard to PSUs’ service rules

DPE to establish procedures for enhanced accountability of managing director for PSU performance and introduce appropriate monitoring mechanism

Staffing DPE with employees with appropriate qualification; decisiveness in implementation of accountability procedures and adequacy of monitoring for compliance

c. increase operational

freedom of PSUs

GoMP to introduce financial criteria regarding return of investment for dividend payment and establish investment limit for which PSUs do not need approval from government; provision of performance incentives by differentiation in remuneration linked to productivity and PSUs’ financial performance

DPE to issue and publish annual report on performance of PSUs

Adequate capacity of GoMP to enforce the new operational framework for PSUs

d. restructure and/or divest

PSUs 49% divestment of MPSIndDC 49% divestment of corporate units of MPSRTC 74% divestment of MPSAIDC 25% divestment of MPFinC under State Financial Corporations Act (SFC) 1951 (GoMP shareholding further reduced to not more than 26%, contingent upon amendment to the SFC)

Technical secretariat to provide regular reports on progress made

Continued on next page

Appendix 1 23

Design Summary Targets/Measurable Indicators Monitoring Mechanism Assumptions/ Risks

Sale and/or lease of the properties of MPSTourDC

e. close and/or merge

PSUs Closure of MPLDC, MPSExC, MPSFishDC, MPLandDC, MPSIC and MPSTexC Incorporate MPHB; subsequent divestment of 49% of GoMP’s share in MPHB; closure of MPSCB and MPPHC

Government orders for closure of PSUs; approvals from Board for Individual and Financial Reconstruction and its appellate authority for closure of managed mills of MPSTexC; GoMP to report to ADB on settlement of workers’ and creditor’s dues GoMP to approve restructuring and merger proposal

Acceptability by labor unions and employees of closure of PSU; timely conclusion of legal process of PSU closure; adequacy of resource availability for voluntary retirement scheme Synergies from merger do not materialize; adequacy in settlement of workers’ dues

f. initiate reform of

cooperatives sector Review and assessment of constraints in cooperatives sector and recommendations to enhance their operational freedom and efficiency

Report on the financial performance of cooperatives sector (with ADB technical assistance support)

Full cooperation from cooperatives sector

3. To promote enabling

policy environment for private participation in key sectors, the Program will support

GoMP to introduce legal and regulatory frameworks for key sectors; setting up of independent electricity regulatory authority, utilities pricing committee, and rent tribunal Rationalization of routes; guidelines and procedure for private sector participation Institutional strengthening of Public Works Department (PWD) Improve policy framework for private sector investment in housing sector by amending the State Rent Control Act

GoMP to prepare power system master plan and sector CIPs; adjustment in tariffs in the power and roads and transport sectors; report on impact of amendment to Rent Control Act State Roads Policy; State Transport Policy; report on experience with private sector projects A private sector cell to be established and operationalized, which will provide report to ADB Amendment to State Rent Control Act to be enacted

Development of outstanding issues at the central Government level on sector policies regarding private sector participation; political and public acceptability of increasing power tariff, toll charges, and rents Adequate capacity for developing effective framework for private sector participation Availability of required expertise and experience by PWD staff Timely approval of the amendment

a. power sector reform

GoMP to (i) establish an independent Madhya Pradesh Electricity Regulatory Commission (MPERC); (ii) make MPERC fully operational by March 2000; and (iii) have MPERC announce its first revision of electricity tariffs no later than 120 days after becoming operational

GoMP to include in the finance minister’s 1998/99 budget speech detailed explanation indicating full amount of subsidy on account of electricity consumption to agriculture sector; notification for establishment of MPERC; written directions to MPERC on minimum level of tariffs for agriculture

Timely operationalizing of MPERC; acceptance by agricultural and domestic consumers of increase in electricity tariffs

Continued on next page

24 Appendix 1

Design Summary Targets/Measurable Indicators Monitoring Mechanism Assumptions/ Risks

b. roads and transport sector reform

(i) creating policy for private sector participation; (ii) rationalizing routes; (iii) strengthening PWD’s capacity to process private sector projects; and (iv) developing tariff setting mechanism and reviewing existing toll rates for roads and bridges

State Transport Policy and State Roads Policy to be announced A private sector cell to be established and operationalized within PWD GoMP to prepare a plan for establishing a utilities pricing commission

Appropriate implementation of the denationalization of routes; adequate strengthening of PWD; consensus between PWD and private sponsors on the contractual arrangements for private sector projects

c. housing sector reform Providing for market-based rental

increases and exempting newer properties from provisions of State Rent Control Act; setting up of rent tribunal

Enact amendment to State Rent Control Act; report on impact of the amendment on the level of rents and on sector investment

Timely approval of the amendment; resistance to rent increases

4. To promote sustainable

development, the Program will support

a. strengthened

environmental management

Developed market-based instruments; strengthened technical capacities of the Pollution Control Board (PCB) and its regional offices; training program to PCB staff and industrial associations on environmental monitoring and management

A state environment policy to be prepared and announced; time-bound action plan for implementation of appropriate policies, including market-based instruments for environmental management to be prepared

Adequate capacity of state agencies to formulate and implement the action plan, and effectiveness in environmental monitoring and management

b. mitigation of social

impact of economic development

Preparation of policy on rehabilitation to address social impacts of economic development and ensure policy framework for project intervention on socially sustainable basis

Submit draft rehabilitation policy to ADB for review

Timely preparation of rehabilitation policy; adequacy of guidelines for resettlement issues associated with project implementation

Appendix 2 25

Continued on next page

STATUS OF PROGRAM COMPLIANCE

A. Tranche Release Conditions

Condition Status at Tranche Release Current Status I. Second Tranche

A. Social Development, Institutional Strengthening, and Public Finance Reform (A.1) The primary deficit to be below 1.0%a of SDP in the FY2001 budget, and capital expenditure is to be at least 2% of SDP by September 2000.

Substantially complied with. The revised budget estimates for FY2001 indicated a primary deficit of 1.6% of NSDP and capital expenditures of 1.5% of NSDP. As the state was bifurcated on 1 November 2000, this revised estimate refers to 7 months of the prebifurcated state and 5 months of the postbifurcated state. The bifurcation, which was not envisioned at the time of program preparation, incurred significant fiscal costs not included in the original fiscal framework. GoMP and ADB estimated that the fiscal costs of bifurcation were 0.82% of FY2001 NSDP. This cost includes a revenue loss of 0.67% of NSDP based predominately on a loss in electricity duties (0.43% of NSDP), due to higher-than-proportional high-priced consumer capacity in Chhattisgarh, and a loss in own nontax revenue (0.19%), due to higher than proportional mineral and forestry resources in Chhattisgarh. This revenue loss can be considered a permanent loss. On the expenditure side, GoMP incurred 0.15% of NSDP higher expenditures, which have permanent and transitory components. The permanent component is based on a higher-than-proportional government salary bill (0.07% of NSDP) for class III and IV staff members who were not moved to Chhattisgarh. The transitory component (0.08%) was due to expenditures to

In July 2004, GoMP submitted an MOU to the Government under the State Fiscal Reforms Facility (SFRF). The MOU is currently being deliberated by the Government for signing. The monitoring indicator used in the MOU is the ratio of revenue balance to revenue receipt.

a The target is adjusted for any shortfall in the devolution of central taxes to the state, calculated as the difference between the amount of central tax transfer assumed in the medium-

term fiscal framework (Appendix 5, Table A5.2) and the actual amount of tax devolution from the central government. The target is also adjusted for outlays in natural calamities in excess of the programmed outlays of 0.1% of SDP, if applicable.

26 Appendix 2

Condition Status at Tranche Release Current Status set up the capital at Raipur, salary advances,

and travel grants for those staff members required to move and higher-than-proportional expenditures on unbifurcated organizations. Therefore, the fiscal costs of bifurcation account for three quarters of the 1.10% of NSDP shortfall between program targets and FY2001 revised estimates. Without bifurcation, GoMP could have achieved the primary deficit of 1.0% of NSDP and capital expenditure of 1.72% of NSDP, falling short of the targets by only 0.28% of NSDP. Other factors, not associated with bifurcation, have led to a higher fiscal deficit in FY2001 than originally envisioned under the Program. The general power tariff award increase, which was originally envisioned to be made within 90 days of the establishment of the Madhya Pradesh Electricity Regulatory Commission (MPERC), did not materialize until recently. There has also been slower-than-expected improvement in systems for tax and nontax revenue enhancement.

(A.2) Introduce the legislation on prohibition to absorb state PSU employees into state government service.

Fully complied with. Legislation passed by Parliament on 12 December 2000 prevents the wholesale absorption of state PSU employees into government service. The legislation requires that any candidate for a government service post must be recruited on a competitive basis, with due consideration for experience, qualifications, and merit.

Condition satisfied.

(A.3) Review technical assistance recommendations, prepare and implement a plan to ensure that the present levels of social sector outlays are protected from budgetary cuts, integrate such plan in the overall CIP, and indicate how the national norms on health and education could be met as the state’s financial position eases over time and as additional external assistance becomes available.

Fully complied with. The plan to protect the level of social sector outlays was implemented through the first 3 years of the Program. Since the time of program appraisal in July 1998 (FY1998) through the FY2001 budget, total social expenditures increased by 11.4% in real terms, broken into total education expenditures, which increased by 6.2%, and total health expenditures, which increased by 28%.

Condition satisfied.

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Appendix 2 27

Condition Status at Tranche Release Current Status

Taking into account the bifurcation of the state, the protection of social expenditures is also sustained as a share of NSDP. Between FY1998 and FY2001, total social expenditures as a share of NSDP increased from 3.75% to 4.01%, total education expenditures increased from 2.88% to 2.94%, and total health expenditures from 0.87% to 1.07%. To account for yearly fluctuation and the bifurcation of the state, 3-year average expenditures for FY1998–2000, normalized for the impact of bifurcation, are compared with FY2001 expenditures. This comparison reveals that yearly social expenditures increased by 3.6% between FY1998–2000 and FY2001. Education expenditures remained constant in real terms, while health expenditures increased by 19%. The investment component of the action plan is being protected for 2001–2004 by incorporation into the statewide CIP, formalized under the Program. The state CIP will be included in the November 2001 supplementary budget documentation and will be an official component of the FY2003 budget. The plan to meet national norms in health and education has been a input-based indicator in use for the past few decades. Under the Program, the plan to meet national norms has been formalized, and the first few years of the plan have been integrated into the CIP, emphasizing the need to allocate more resources as the state’s financial position eases over time and additional resources become available. For example, under current financial conditions, the national norms will likely take around 10 years to meet, but could be met earlier with additional resources.

Continued on next page

28 Appendix 2

Condition Status at Tranche Release Current Status (A.4) (not in RRP) Provide sufficient provision in the FY2001state budget to reduce the backlog of capital expenditures and shortfall of nonpersonnel expenditures in existing rural health facilities

Fully complied with. Outlays are being made to meet this objective. The Appraisal Mission estimated that a total of Rs2.5 billion over 5 years was needed to eliminate the backlog. Based on bifurcation of the state, in FY2001 the number of rural health centers under the control of GoMP was three quarters of the original. Therefore, the amount to be allocated was Rs1.875 billion in FY2001, for an average of Rs375 million per year. In FY2001, the amount of additional capital expenditure allocated to rural health was Rs323 million, falling slightly below the average expected. GoMP committed to recoup this Rs52 million by increasing the average outlay to Rs388 million for the next 4 years and formalizing this commitment in the state CIP.

Condition satisfied.

(A.5) During the Program period, state government employment other than technical positions in essential social services and police to be reduced through natural attrition, and such posts abolished. Resources saved through natural attrition to be reallocated to poverty-reducing social services.

Fully complied with. A government order was issued on 8 January 2000 to reduce government employment by 30% as a medium-term goal. As a result, no increase in staff has occurred since the start of the Program, and posts in pre-bifurcated Madhya Pradesh were identified (accounting for 12% of government employment) which could be abolished over the 5-year period FY2000–2004. A total 19,448 vacant posts were abolished immediately. The remaining 37,000 posts were identified as superfluous and have been ordered to be abolished on the date the incumbent retires. All departments were asked to retrench daily wage employees appointed after 31 December 1998. As a result, various departments have retrenched approximately 22,000 daily workers. In addition, the Government introduced contracts for the education department in place of permanent government staff to allow for flexibility and increase incentives. During FY2002, total government salaries for the state have decreased for the first time (comparing bifurcated Madhya Pradesh in FY2002 with hypothetically bifurcated Madhya Pradesh in FY2001).

Condition satisfied.

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Appendix 2 29

Condition Status at Tranche Release Current Status (A.6) Use SRF funds for restructuring and/or closure of PSUs; replenish SRF through required further allocation in the FY2001 budget.

Fully complied with. GoMP made a Rs1.5 billion provision for the SRF in the FY2001 budget, and the SRF was activated in September 2000. Rs20 million was disbursed in FY2001 for voluntary retirement schemes (VRSs). Rs1.5 billion was allocated in the FY2002 budget and Rs570 million was disbursed. An addition 1 billion will be allocated to the SRF in a supplemental budget to enable disbursement of a VRS for the Madhya Pradesh State Road Transport Corporation (MPSRTC) (estimated at Rs1.9 billion). The SRF committee was reconstituted as the cabinet sub-committee, and schemes and/or guidelines were extended for the next 3 years.

Condition satisfied.

(A.7) Establish a committee to design and prepare the SSN and submit the draft SSN design to ADB.

Fully complied with. The committee was established in January 2000. The draft SSN was submitted to ADB in January 2001. The Mission provided comments, and a redraft of the SSN has been prepared. The draft report proposed retraining of displaced employees using existing industrial training institutes, training centers, and other institutions. The SSN also identified a counseling service to help former PSU employees use the cash compensation received from the voluntary retirement scheme (VRS) payment for investment and entrepreneurship. Monitoring of displaced employees, and placement services are also envisioned in the plan. Implementation of the SSN will occur through the technical secretariat being established under the Program.

Condition satisfied.

B. Public Enterprise Reform and Corporate Governance (B.1) DPE must assume nodal responsibility for reform of all state PSUs.

Fully complied with. A government order designating the Department of Public Enterprises (DPE) as the responsible department for PSU reform was issued on 1 March 2000. DPE has led the current effort to close and restructure nonviable PSUs covered by the Program and has been responsible for introducing governance and performance-based

Condition satisfied.

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30 Appendix 2

Condition Status at Tranche Release Current Status enhancements to the management of PSUs remaining under state ownership. In particular, DPE is charged with formulating and monitoring, on a quarterly basis, memoranda of understanding with 34 large PSUs and 16 smaller PSUs and cooperatives. DPE is also a member of the committee to vet and select functional directors for PSUs, establishing financially based criteria for dividends and instructing PSU to link pay scales with profitability.

(B.2) Implement restructuring of MPSRTC, including through formation of four corporate units with operational autonomy, and introduce efficiency enhancing measures.

Substantially complied with. GoMP decided on 18 April 2001 to restructure MPSRTC by dissolving the corporation and forming four geographically based corporate units under the Companies Act of 1956. By transforming the company from a state transport corporation to four companies, the units will each be more manageable, will achieve greater autonomy to make further efficiency enhancements, and will be easier to divest. GoMP issued the order to form the four companies on 26 August 2001. Assets and liabilities are being divided among the new units pending the bifurcation of the company, necessary to split the balance sheet between Madhya Pradesh and the new state of Chhattisgarh according to Section 58 (3) of the Madhya Pradesh State Reorganization Act of 2000 (MPSRA). In the meantime, GoMP has taken actions in advance of bifurcation to introduce efficiency measures by (i) allowing the company to adjust tariffs up to 7.5% per year; (ii) introducing commercial principles, including the elimination of new guarantees, government appointments, and bus tickets for special groups; and (iii) offering a VRS to 5,800 workers. Disbursement of the VRS for the 5,800 workers is awaiting (i) Rs1 billion additional allocation to the SRF requested for a supplemental budget; (ii) a council of ministers decision on restructuring the transport sector; and (iii) bifurcation of the company, to ensure that the VRS is not

• Currently, the ratio of buses to employees in MPSRTC is 1:12; most of the fleet is in need of repair or replacement.

• With a Cabinet Order, 4,453 workers have opted for voluntary retirement scheme (VRS). An additional 4,500 can be given VRS as well, at a total cost of Rs2.1 billion (about $44 million). But MPSRTC does not have the resources to fund the scheme and the labor unions oppose VRS to maintain their political power.

• Since 1999, while the price of petrol has doubled, the fares have not been adjusted accordingly. On average, MPSRTC is not able to pay more than 70% of basic wages of its employees.

• High overhead costs and inefficient management of the organization persist.

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Appendix 2 31

Condition Status at Tranche Release Current Status disbursed for workers who will ultimately work in Chhattisgarh. Based on the technical assistance consultant’s technical review of the company, which engendered doubt regarding its future viability, GoMP is considering a more significant restructuring of the state transport sector that could involve a much more significant downsizing of the company.

(B.3) Undertake financial and organizational restructuring of MPFinC including classifying nonperforming assets and fully provision as per applicable norms on basis of March 1999 accounts, discharging overdue obligations, and re-capitalizing MPFinC to ensure compliance with capital adequacy requirements.

Substantially complied with. The classification of assets has been completed according to Reserve Bank of India norms, provisions have been applied accordingly, and the accounts are subject to annual audit. The company has paid its major overdue obligations as of 31 March 1999, but has negative equity of Rs1 billion on the reclassification. Given that the classification has revealed that more than 30% of its assets are nonperforming and its core clientele represents a risky sector of the borrowing community, MPFC, finds its viability in question. Under these conditions, GoMP has prudently ruled out recapitalization through injection of new budgetary funds. Due to the high level of contingent liabilities in the balance sheet of MPFC, immediate liquidation has also been ruled out. Instead, GoMP has instructed the corporation to downsize and cut costs to reduce losses and limit GoMP's exposure. The company prepared a performance-based action plan in August 2001 for operational restructuring. The restructuring plan strategy has at its core (i) performance indicators that will be monitored and verified by a third party, (ii) branch closure and early retirement to reduce noninterest operational costs, (iii) refinancing of its funding sources to reduce interest costs, and (iv) a cap of guaranteed funding at current levels to prevent additional GoMP exposure to the company. Bifurcation of the company is necessary prior to implementation of the downsizing plan, as the result of the MPSRA 2000. The bifurcation scheme was prepared by

• Currently, nonperforming assets of MPSFC is 45%. It has been trying to clean its portfolio by restructuring its own debt and providing one-time-settlement schemes to its customers that defaulted on their loans earlier.

• Retirement age has been reduced from 60 to 58, and financially unviable branch offices (4 of the total 13) have been closed, which reduced MPSFC's administrative expenses by 23%. They are ready to offer VRS to a number of their employees, but have no resources to finance the scheme.

• Their organizational restructuring efforts are ongoing.

Continued on next page

32 Appendix 2

Condition Status at Tranche Release Current Status the board of MPFC, was approved by its general body and is awaiting orders to be issued by the Government of according to the MPSRA.

(B.4) Close the four corporations and the wholly owned units of MPSIC; report on settlement of workers’ and creditors’ dues.

Fully complied with. Operational closure is based on (i) the order for closure; (ii) operations having been ceased; and (iii) a VRS offered to all but core employees needed for wind up. All companies have been closed by order, and a VRS has been offered to all employees of the 5 companies and one additional company (slated for third tranche release). Disbursement of the VRS took place for 82% of the scheduled 3,200 employees from the five companies. In addition, as a proactive measure, GoMP advanced closure for Madhya Pradesh State Textile Corporation (scheduled for third tranche), disbursed VRS for 68% of the staff (the balance is delayed by individual court disputes over VRS amount), closed the managed and owned mills, and retrenched almost 5000 workers under the Industrial Disputes Act (IDA). Madhya Pradesh Fisheries Development Corporation The closure order was issued on 17 March 1998, and the corporation was subsequently merged with the Fisheries Federation (an apex body of the Fisheries Cooperative Union) on 31 August 1999. As the operations of the PSU are no longer under the jurisdiction of GoMP, wages for 500 employees are no longer a state obligation. Madhya Pradesh Land Development Corporation. The closure order was issued on 7 June 2001, and operations ceased on 30 June 2001. The issue of “interim relief” for workers, which prevented earlier disbursement of VRS payments, was resolved. The VRS scheme for 567 people was offered, and 552 workers accepted it. The SRF approved the VRS payment, and disbursement of Rs174 million took place on 10 September 2001. Madhya Pradesh Leather Development Corporation. The closure order was issued on 4 June 1998 and operations ceased in August

Condition satisfied.

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Appendix 2 33

Condition Status at Tranche Release Current Status 2000. The VRS and statutory dues amounting to Rs113 million were disbursed to all 132 employees, apart from a core staff of 13, on 31 October 2000. Madhya Pradesh Export Development Corporation. The final order to close was issued on 25 July 2001. Operations, apart from winding up on the order, ceased in May 2001. Following receipt of the chief minister’s closure order, the VRS was offered to all remaining 63 employees. The SRF will approve for payment of the VRS is set by end November 2001 with disbursement to take place by end 2001. Madhya Pradesh State Industries Corporation. The company has closed 19 units in four phases. In phase one, four units were ordered closed on 3 July 1999, and disbursement of the VRS for 212 employees (Rs48 million) was made on 2 February 2001. In phase two, two sugar mills were ordered to close on 28 August 2000 and disbursement for 1,261 employees (Rs163 million) was made on 10 September 2001. In phase three, 11 units were ordered closed on 12 September 2001, and the VRS was offered to the remaining 315 workers on 27 September 2001. Disbursement is scheduled to take place by 31 March 2002. In phase four, two units currently under management contracts with private parties will be closed after the contracts expire in March 2002. Madhya Pradesh State Textile Corporation. The corporation was scheduled for closure before the third tranche but has been closed earlier than planned. The company closed two managed mills and one owned mill and a total of 4,780 workers were retrenched under the Industrial Disputes Act. The Madhya Pradesh State Textile Corporation headquarters was ordered closed on 3 July 1998. VRS was disbursed to 369 (Rs140 million) of the 539 headquarters workers on 23 March 2001.

Continued on next page

34 Appendix 2

Condition Status at Tranche Release Current Status C. Enabling Environment for Private Sector Involvement (C.1) Make MPERC fully operational by (i) establishment and incorporation of the MPERC in accordance with Chapter IV of the ERC Act; and (ii) finalization of the rules of the MPERC in accordance with Sections 57 and 59 of the ERC Act

Fully complied with. MPERC was established in June 2000 and made fully operational in accordance with Chapter IV of the ERC act. Since then, GoMP has implemented power reform far beyond the stage envisioned by the Program. The Madhya Pradesh Vidyut Sudhar Adhiniyim, 2000, approved by the Madhya Pradesh legislative assembly in November 2000 and made effective in July 2001, is the most progressive power sector reform act in India to date. In addition to subsuming and expanding the powers of MPERC through the creation of the Madhya Pradesh State Electricity Regulatory Commission (MPSERC), it includes provision for (i) restructuring of the Madhya Pradesh State Electricity Board (MPSEB), (ii) metering of all consumers, (iii) rationalization of tariff so that all classes of consumers will pay at least 75% of cost of supply over 5 years, (iv) budget provision for MPERC for the next 5 years, and (v) arbitration with the Central Electricity Regulatory Commission. Rules of the MPERC were developed and notarized under the ERC act. Under the Madhya Pradesh Vidyut Sudhar Adhiniyim the MPSERC subsumed the MPERC and the powers have been expanded. Therefore additional rules for MSPERC are needed to reflect the expanded powers. These rules are current being drafted by MSPERC with the assistance of technical assistance provided in preparation for the Madhya Pradesh Power Sector Development Program.

Condition satisfied.

(C.2) Announce the State Roads Policy. Fully complied with. PWD has framed various road development programs under national highways, central road funds, bond roads, normal plan roads, and nonplan works. These programs were included in the roads sector CIP and integrated in to the overall state CIP.

Condition satisfied.

(C.3) Announce the State Environment Policy and a time-bound action plan for implementation of

Fully complied with. The environmental policy was declared and adopted on 16 March 1999.

Condition satisfied.

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Appendix 2 35

Condition Status at Tranche Release Current Status appropriate policies, including MBIs for environmental management.

An environmental status report was prepared by the Environmental Planning and Coordination Organization. An implementation action plan was prepared and submitted in June 2001. Implementation of the action plan, including market-based instruments, will take place with the assistance of ADB technical assistance, scheduled to begin in the fourth quarter of 2001.

(C.4) Preparation of a draft policy on rehabilitation to address social impacts of economic development.

Fully complied with. The draft policy was submitted to ADB on 15 October 2000. The cabinet discussed the draft policy in July 2001 and requested it to be strengthened to provide more compensation to resettled persons. A review of the reformulated policy took place on 21 August 2001. Following further revision, the policy will be resubmitted to the cabinet for approval. GoMP is well advanced toward finalization of the policy, which is a third tranche condition.

Condition satisfied.

II. Third Tranche

A. Social Development, Institutional Strengthening, and Public Finance Reform (A.1) Make progress in fiscal consolidation, with primary deficit to be below 0.7%e of SDP in the FY2002 budget;d and capital expenditure to be at least 2.3% of SDP.

Overall: Substantially complied with. (a) Fully complied with for primary deficit target. The policy matrix makes provision for adjusting the fiscal consolidation targets for the primary deficit, expressed as a percentage of NSDP, by any shortfall in the devolution of central taxes to the state relative to the amount assumed in the medium-term fiscal framework. For FY2002 this shortfall has been estimated to be equivalent to approximately 0.6% of NSDP. Accordingly, the adjusted program targets for primary deficit in FY2002 becomes 1.3% of NSDP. The actual outturn was 0.97% of NSDP placing it well below this limit. (b) Substantially complied with for capital expenditure floor. The measured result for capital expenditure was 1.83% of NSDP in FY2002 compared to the Program

Overall, the fiscal balances of Madhya Pradesh improved during Program implementation period. Capital expenditure, especially for health and education, was also protected.

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36 Appendix 2

Condition Status at Tranche Release Current Status target of 2.3% of NSDP, thus reflecting a shortfall of 0.47% of NSDP. However, the state's bifurcation has caused significant costs of fiscal adjustment that are additional to the shortfall in central tax devolutions from the Government not included in the original fiscal framework. The government of Madhya Pradesh and ADB estimate that the fiscal costs of bifurcation amounted to 0.82% of FY2001 NSDP and that the fiscal costs remained in excess of 0.6% of NSDP in FY2002. FY2002 has also been a year of drought in Madhya Pradesh leading to an unforeseen need for substantial drought relief expenditures on the current account. Because capital expenditures are treated as residual item of discretionary expenditure for Indian states, the unforeseen fiscal cost arising from bifurcation has absorbed financial resources in excess of the shortfall on capital expenditure.

(A.2) Introduction of VAT.

Fully complied with. Madhya Pradesh Assembly passed the VAT legislation on 7 August 2002 making it one of the first states to legally prepare for VAT. GoMP has undertaken a detailed training program for revenue department officers for VAT. Ongoing technical assistance on VAT funded by ADB is providing additional assistance to GoMP (as well as other states) on auditing procedures and VAT administration. Based on the decision of the Interstate Empowered Committee for VAT and the Government of India. VAT will commence in Madhya Pradesh and other major Indian states on 1 April 2003.

Condition satisfied. Considerable effort and resources have been dedicated to ensuring Madhya Pradesh would be technically and capacity-wise ready to introduce the VAT by 2001. They have undertaken the necessary measures, however, the Government deferred introduction of VAT across India indefinitely, citing lack of capacity in most states. There has been no training for last year and a half since VAT and all related procedures are put on hold by the Government.

(A.3) Adjust water charges to cover at least 75% of O&M expenditure.

Fully complied with. As of the beginning of FY2002, approximately 70% of O&M expenditure was covered by water charges. A cabinet order, passed on 31 July 2002, has raised O&M charges by a further 5% for FY2002 and stipulated additional increases of 5% annually for the subsequent 5 years.

Condition satisfied. Recovery of 100% O&M is targeted by order of GoMP. Also a water sector restructuring loan from the World Bank is being developed for $400 million—expected to go to WB Board in July 2004. This loan (1) has

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Appendix 2 37

Condition Status at Tranche Release Current Status similar conditionality for cost recovery, (2) targets reclaiming capacity created but not used, viz. 50% of capacity, and (3) institutional restructuring.

(A.4) Adopt flexible wage policy enabling local governments to have separate service conditions and salary scales for their employees from state government.

Fully complied with. Salaries of local governments were del inked from general government by Government Order 4-886/98/10-1 dated 11 September 1998. This decision has been implemented making local government wage structures flexible and reflective of prevailing local 'labor market conditions. Local recruitment of teachers under the District Primary Education Program (DPEP) program and of paramedical workers has permitted substantial expansion of social services at greatly reduced unit cost relative to staffing under state level pay scales and through centralized administrative procedures.

Condition satisfied. Government orders were issued for government employees; that there would be no new hiring and natural attrition would continue. Flexible wage policy has not delivered drastic change.

(A.5) Include appropriate additional budgetary allocation equivalent to the Central Government share to ensure sustainability of the District Primary Education Program after termination of externally funded Central Government assistance.

Fully complied with. A new centrally-sponsored scheme supported by the Government of India and GoMP, known as Sarva Shiksha Abhiyan will cover all the districts including the original districts covered under DPEP I and II. Programs for increased coverage of primary education facilities to disadvantaged districts will continue after the DPEP’s termination on 30 June 2003 under this centrally-sponsored scheme. Funding for this scheme is shared in the proportion 75% central and 25% state funding. For the 5-year duration of the new 10th Plan GoMP has identified funding consisting of a central share of Rs21 billion and an GoMP share of Rs7 billion. The costs of funding 11,000 teachers, now covered under the DPEP, has been integrated into state budget planning.

Condition satisfied. World Bank continued after the EC sponsored DPEP, as well as GoMP. Program rolled out to even more districts. A program exists for hiring teachers on a 2-year contractual basis—trying to alleviate the burden on the budget vis-à-vis their salaries, benefit packages, and ultimate pension payments.

(A.6) Review the SSN including socioeconomic survey of affected groups, make recommendations for changes to SSN as required, and submit such SSN review to ADB.

Substantially complied with. GoMP has reviewed the main features of the SSN for workers affected by retrenchment, the impact of the program, problems encountered under the implementation of the SSN, and recommendations for improvement. A small survey conducted under technical assistance has identified workers' concerns and perceived

GoMP has taken a decision in 2002 not to undertake SSN. They were and/or are of the opinion that this would set an example for all public and private bodies wanting to downsize and would have cascading cost implications.

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38 Appendix 2

Condition Status at Tranche Release Current Status needs with respect to the SSN. In the next phase of public sector undertaking (PSU) reform, GoMP, with technical assistance funded by Department for International Development (DFID), will study in detail the affected groups and the socioeconomic impacts of PSU reform.

B. Public Enterprise Reform and Corporate Governance (B.1) The technical secretariat will submit a report on the experience gained from reform of PSUs and the progress in improvement in corporate governance, together with recommendations for changes, if any, to the policy and institutional framework for PSU reform.

Substantially complied with. In the absence of a technical secretariat, yet to be established, GoMP's Department of Finance, in consultation with the Department of Public Enterprises, has prepared a note on progress in improving corporate governance. The Madhya Pradesh Department of Public Enterprises has set up performance management systems for public enterprises, and the backlog of un-audited accounts has been reduced. GoMP has placed a cap on MPFC guarantees, has limited its financial guarantees on borrowings of PSUs and has frozen recruitments of PSUs. GoMP intends to establish the technical secretariat and has entered into an agreement with DFID for a grant to be used to staff the secretariat with contract staff.

A technical secretariat was not established. A £1 million technical assistance proposal submitted to the Government, DEA in May 2003. But technical assistance was still not approved. In its absence a Cabinet Sub-Committee on VRS was established and oversaw PSU reform so far, and approved about 160 crores for VRS to date. Principal secretaries for Finance and Industry indicated that scope still exists for a technical secretariat. Discussions with Department for International Development (DFID) are ongoing to establish a technical secretariat, supported by a DFID grant.

(B.2) Establish procedures for enhanced accountability of managing directors for PSU performance and introduce appropriate monitoring mechanisms.

Fully complied with. PSU performance is being monitored on the basis of Memorandum of Understanding (MO) signed annually between public sector undertakings (PSUs) and GoMP. A performance review committee, chaired by the Department of Finance, undertakes regular quarterly reviews. Activity-specific targets are laid down along with percentile rankings of each activity and serve as a scorecard of the performance of PSUs and their managing directors. The performance review committee can also recommend action against managing directors in case of noncompliance with targets.

An MOU mechanism exists, such that each PSU signs an MOU with relevant line ministry. The process is facilitated by DPE. In the MOU, qualitative and quantitative targets are supposed to be identified each year, and the CS is supposed to review whether these targets have been met at the end of each fiscal year. And "action" is supposed to be taken against Managing Directors that do not meet their targets. However, a principal-agent problem exists—last year's MOU was just signed when the Mission was in the field.

(B.3) Incorporate MPHB. In view of changed circumstances due to bifurcation, the policy condition is proposed to be amended to: “Take a cabinet decision to

MPPHC was given VRS, since MPHB could not absorb the massive human resources of MPPHC.

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Appendix 2 39

Condition Status at Tranche Release Current Status incorporate MPHB.” The Madhya Pradesh cabinet decided to incorporate MPHB on 27 August 2002. However, implementation of this decision is awaiting the division of assets and/or liabilities between Madhya Pradesh and Chhattisgarh. If the policy condition is amended as proposed, the condition is fully complied with.

C. Enabling Environment for Private Sector Involvement (C.1) Establish a utilities pricing commission for road and transport tariff setting and making operational the commission.

Partially complied with. GoMP has designated the Madhya Pradesh State Bridge Development Corporation, a subsidiary of the Public Works Department, as the nodal agency for design and implementation of build-operate-transfer (BOT) and other public private partnerships for construction and operation of toll roads. GoMP amended the India Tolls (Madhya Pradesh) Act in 1999 to facilitate private sector participation in road projects. GoMP has not established a utilities pricing commission to date. The concession agreements for BOT with toll rates defined for the full contract period have already been announced for the first batch of BOT contracts. Consequently, the state authorities were concerned that potential BOT bidders would be confused by the alternative governance of a utility pricing commission, if such a commission were implemented in 2002. Under the Madhya Pradesh State Road Sector Development Program, technical assistance for institutional strengthening and capacity building for the road sector will be provided, and BOT' operations will be evaluated. GoMP has not yet established a utilities pricing commission pending the outcome of the technical assistance for the reorganization of the Public Works Department, although it has requested ADB for advice on legal and financial aspects of model concession agreements.

Only MPERC was established—no other utility pricing or commissions exist. However, several GoMP officials noted that after ensuring "one utility" can be priced effectively and without too many political resistance, other utilities could be considered "in the future".

(C.2) Implement the time-bound action plan for improved environmental monitoring and management.

Fully complied with. An environmental policy was adopted and promulgated by GoMP in 1999. Assistance for implementation of

Condition satisfied.

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40 Appendix 2

Condition Status at Tranche Release Current Status environmental policy, including improved environmental monitoring and management, has been provided under ADB technical assistance for environment management. In addition, under a centrally sponsored program, environmental data collection and pollution monitoring capabilities are being upgraded through an externally funded multi-state Government program.

(C.3) Finalization of policy on rehabilitation. Fully complied with. The Madhya Pradesh cabinet approved the rehabilitation policy on 17 August 2002.

Condition satisfied.

B. Post-Loan Approval Non Tranche Release Covenants

Condition Status at Tranche Release Current Status A. Covenants to be Achieved by the Release of the Second Tranche (A.1) Set up by March 2000 a state budgeting and fiscal analysis unit in the Finance Department to strengthen the analytical and technical capacity for development and analysis of economic policy options and strengthen the debt management capability.

Fully complied with. The unit was established on 7 June 1999 in the Finance Department under the economic adviser. The duties of SBFAU are to prepare various reports on state finances for the Government, prepare the background paper for memoranda of understanding with Government, and undertake analytical and technical work to assist in budget preparation.

SBFAU currently has only one staff member. The Economic Policy Analysis Unit, under the Institutional Finance Department, currently handles most of SBFAU's tasks.

(A.2) Computerize sales tax administration, including monitoring and accounting systems, and a system for registration of traders and cross-checking taxpayer information on the basis of the systems plan being prepared with ADB technical assistance.

Fully complied with. The Commercial Tax Department has initiated a three-pronged approach to computerizing the sales tax and/or value-added tax (VAT) administration, auditing, and trader registration: (i) Systems study and software development contract for software application was awarded to Computer Maintenance Corporation Ltd.; the software is being modified to incorporate the VAT design adopted in August 2001, (ii) The networking architecture was approved and procurement of hardware and networking equipment for 73 circle offices of the sales tax administration is at an advanced stage. Following hardware procurement, acceptance testing will begin in January 2002, (iii) Training of staff is ongoing

Covenant fulfilled.

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Appendix 2 41

Condition Status at Tranche Release Current Status with Computer Maintenance Corporation Ltd. support.

(A.3) Complete training for all tax commissioners and tax officers on commercial taxes and taxation policy to strengthen tax assessment and enforcement capacity.

Fully complied with. Covenant fulfilled.

(A.4) Review and assess the fiscal impact of the first stage of VAT introduction and make recommendation, if any, for further strengthening of tax administration.

Fully complied with. The government of Madhya Pradesh was one of the first states to develop an action plan to transform its antiquated tax system into a VAT, and preparation for the VAT is well advanced, but implementation must await preparation by other states and Government of India harmonization. The following actions have been taken: (i) reduced rates; (ii) not offering new incentives and withdrew new incentives effective 1 January 2000 while grandfathering old incentives; (iii) reduced the list of tax free goods; (iv) created a State level VAT cell and five working groups; (v) prepared draft VAT legislation which is publicly available; (vi) drafted rules and procedures; (vii) publicized the VAT through workshops; (viii) training of VAT officers; and (ix) begun computerization work. GoMP has carried out some calculations under alternative scenarios assuming the VAT would be in place by 1 April 2002. Estimates of the fiscal impact were made revealing the first phase of VAT–reducing rates from 4% to 2%, the revenue loss would have been around Rs1.65 billion per annum.

Covenant fulfilled.

(A.5) Establish central and regional valuation cells and introduce methodology to assess properties for levy of property tax and stamp duty, taking into consideration technical assistance recommendations.

Fully complied with. Order to set up the valuation cells was issued in April 2001. The state set formal guidelines intended to bring recorded values into greater conformity with market values. As of 1 April 2000, three tiers of a valuation cell were operating, and associated oversight functions were operational at the three levels of administration responsible for overseeing the recording of property titles and transfer transactions. The function of the valuation cells is to prepare procedural guidelines for valuation and statistical information, collecting information on market

Covenant fulfilled.

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42 Appendix 2

Condition Status at Tranche Release Current Status valuation by use and geographic zone, notification of rates after public hearings to deal with objections, and periodic revisions of benchmarked property rates.

(A.6) Prepare time-bound action plan and implement system of user charges on utilities for enhanced sustainability taking into consideration technical assistance recommendations.

Fully complied with. User charges have been raised for most services. Irrigation charges were raised threefold (on a weighted average basis) in 1999–2000. Urban local bodies have been given full freedom to fix water charges and are raising water fees to cover a rising proportion of operation and maintenance. Road used charges have been raised. Tolls have been introduced on numerous highways and toll roads are being expanded through a recently introduced build-operate-transfer scheme. A power tariff award of 47% increase was proposed by the Madhya Pradesh State Electricity Board (MPSEB). The regulator is expected to make an award later in 2001.

Covenant fulfilled.

(A.7) Rationalize and prioritize expenditure and strengthen expenditure management including: (i) preparation of CIP, and (ii) system for monitoring implementation of CIP and for periodic review of project performance.

Fully complied with. The Government has introduced and is updating a “top down” Medium Term Fiscal Framework (MTFF) while simultaneously introducing the corresponding “bottom up” CIP. The MTTF plays an important role in steering expenditure patterns toward the medium-term goals, particularly in the social sector, while integrating current and capital expenditure decisions. The CIP is encouraging line departments and the Planning Department to identify wasteful projects while protecting priority investments from ad hoc budgetary cuts. The state CIP, which identifies 30–35% of total capital outlays as “core,” has been approved by the line departments and the Finance Department and will be incorporated in GoMP’s budgetary process. The system for monitoring implementation of the CIP and periodic review of project performance has been introduced, including quarterly review by an interdepartmental committee. The committee will review performance targets and funds flows, year-end assessments, and coordinate revisions on a 3-year rolling basis.

Covenant fulfilled.

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Condition Status at Tranche Release Current Status (A.8) Strengthen and extend the activities of the MCDD from 11,000 to 40,000 villages through local bodies.

Fully complied with. The activities of MCDD were extended beyond the 40,000 target to 51,000 villages. As 20,000 villages now reside in Chhattisgarh, the third tranche condition has also been met. The mission has since been wound up.

Covenant fulfilled.

(A.9) Make operational the technical secretariat for assisting in implementing PSU reform.

Substantially complied with. The decision to set up the technical secretariat was taken in October 2000. Based on the heavy program of divestment anticipated for the next 3 years, GoMP accepted ADB consultant recommendations to recruit international staff for the technical secretariat using DFID proposed funding for 3 years. Government order to establish the technical secretariat will be issued when funding from the United Kingdom Department for International Development (DFID) for 3 years. The Government order to establish the technical secretariat will be issued when funding becomes available, now estimated for November 2001. The technical secretariat will become fully operational following recruitment of consultants, estimated for January 2002. As an interim measure, DFID has agreed to extend the contract of the ADB consultants on a temporary basis to play the role of the technical secretariat.

Discussions with DFID are continuing.

(A.10) Assign to the DPE the responsibility for reviewing candidates, on the basis of appropriate screening procedures, for the appointment of all functional directors to ensure that these appointments are made on a professional basis with due regard to the PSUs’ service rules.

Fully complied with. The committee for reviewing candidates was set up under the chairmanship of retired Chief Secretary Shri RN. Chopra. Other members of the committee include the principal secretary, DPE; principle secretary, Commerce & industry; principle secretary of finance; and the principal secretary of the concerned department. The committee screens candidates and recommends appointments for higher level positions.

Covenant fulfilled.

(A.11) Introduce the financial criteria on return on investment for dividend payment; and establish and introduce investment limit for which PSUs do not need approval from the government to increase PSUs’ operational freedom.

Fully complied with. The financial criteria introduced by order on 7 July 1998, which requires PSU dividends to be linked to 12% of net profits.

Covenant fulfilled.

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Condition Status at Tranche Release Current Status (A.12) Review the existing practice of uniform pay scale for PSUs, and authorize the setting of enterprise-specific salary scales, including differentiation in remuneration linked to productivity and the financial performance of individual state public enterprises.

Fully complied with. PSUs no longer have the uniform pay scale. The order introduced on 3 October 1998 requires PSUs to link pay to company profits.

Covenant fulfilled.

(A.13) Initiate organizational and financial restructuring of MPSIndDC.

Partially complied with. The restructuring plan developed to introduce a strategic partner was accepted by Infrastructure Leasing and Financial Services, Ltd., which agreed to restructure the company with 15% ownership, but the board of MPSIndDC rejected the offer. The company downsized by 40% in 1998. The company is contemplating its options to reduce GoMP's shareholding through a strategic partner and a private dominated board of directors.

No new developments since last review.

(A.14) Advertise by March 2000 for a joint sector partner in a large agricultural farm owned by MPSAIDC.

Fully complied with. The advertisement for a buyer of the agricultural farm was issued twice. The first did not bring enough bidders. The second led to two offers received on 28 May 2001. The offers have been presented to the chief minister with a cabinet note. Upon approval by the chief minister, the cabinet will decide on which of the offers to accept. The company, originally operating with 1,400 staff, is now utilizing only 800 positions, of which 17% will be allocated to Chhattisgarh and 50% will receive voluntary retirement scheme (VRS) compensation. The company is therefore operating with 50% of the original workforce.

Covenant fulfilled.

(A.15) GoMP approval for the restructuring plan; close MPPHC and MPSCB; and transfer MPSCB’s core activities to MPHB as per the plan.

Fully complied with. The restructuring plan is being incorporated through an amendment to the Housing Board Act, enabling the Housing Board to enter into public-private partnerships. The Housing Board is introducing (i) employee incentive schemes, (ii) management information system (MIS) automation for accounts and accepted the VRS, with 115 choosing not to exercise the option. Of those choosing not to exercise their option, 22 remain as core staff to wind up the company, and the rest will be retrenched under the Industrial Development

Covenant fulfilled.

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Appendix 2 45

Condition Status at Tranche Release Current Status Act. Funds for VRS payments of Rs315 million covering 110 workers were disbursed on 10 September 2001. The order for closure of MPSCB was issued by the Urban Development Department, and the company dissolved on 31 March 2001; all 112 officers have been shifted to vacancies in urban local bodies.

(A.16) Prepare plans for organizational restructuring of MPSTourDC, focusing on promotional activities, and advertise the sale and/or lease of its properties.

Fully complied with. Tenders were invited and 70 offers were received, of which 22 were found to be eligible. As the company did not receive offers from hotels, it decided to reject the offers. The company sought advice from the Confederation of Indian Industry (CII), which arranged detailed discussions with a big hotel chain. The hotel chain indicated interest, but only when infrastructure facilities are provided. MPSTourDC decided to wait until a roads improvement project is completed and will then invite tenders for its hotel properties. Concurrently, MPSTourDC has undergone organizational restructuring to focus activities on ecotourism with the advice of CII.

Covenant fulfilled.

(A.17) Prepare report on the financial performance of cooperatives sector with assistance from ADB technical assistance.

Fully complied with. The report was prepared with the assistance of technical assistance consultants in July 2001.

Covenant fulfilled.

(A.18) Ensure that the MPERC budget provided to GoMP in accordance with Section 33 of the ERC Act is charged upon the Madhya Pradesh state budget.

Fully complied with. The budget for the newly created Madhya Pradesh State Electricity Regulatory Commission (MPSERC) is charged in the consolidated funds of GoMP. Under the new legislation Madhya Pradesh Vidhyut Sandharan Adhiniyim 2000, Section 8 (3) provides that the MPSERC will be charged in the consolidated fund of the State.

Covenant fulfilled.

(A.19) Prepare roads sector CIP on the basis of PWD’s strategic options study for inclusion in the overall state CIP.

Fully complied with. PWD has framed various road development programs under national highways, central road funds, bond roads, normal plan roads, and nonplan works. These programs were included in the roads sector CIP and integrated in to the overall state CIP.

Covenant fulfilled.

(A.20) Establish by March 2000 a private sector cell in PWD and make it fully operational.

Fully complied with. The Private Sector Cell was established as orders were issued and postings made. The Private Sector Cell now operates with five officers.

Covenant fulfilled.

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Condition Status at Tranche Release Current Status (A.21) Analyze options for distance-based toll rates and prepare a plan for establishing a utilities pricing commission.

Fully complied with. Distance based tolls have been introduced and are being expanded throughout the state under the program for 14 build-operate-transfer roads being developed with private participation. A utility pricing commission is not considered feasible at this time because in the concession agreement with entrepreneurs and/or firms, final toll rates have to be specified for whole agreement period.

Covenant fulfilled.

(A.22) Enact the amendment to the State Rent Control Act upon approval by the Government.

Substantially complied with. The amendment to liberalize revisions of rents and the standard rent formula was reviewed by the legislature’s select committee. Following the select committee’s recommendations, the amendment was revised and sent to the Law Department on 6 August 2001. Final discussion on the draft amendment took place on 13 August 2001 in a meeting between the Law Department and the Housing and Environment Department. The amendment was submitted for passage during the 20 August–15 September 2001 legislative session.

The Rent Control Act was drafted, including a Rent Tribunal, and it was submitted to the Legislature in 2000, where it was referred to a select committee in 2001. There have been no new developments since then.

(A.23) Implement the measures to strengthen the monitoring capacities of the PCB and its regional offices.

Fully complied with. Environmental Capacity Building Project for the state PCB is being implemented by the Ministry of Environment and Forest and the Central Pollution Control Board. In addition, monitoring has been implemented through a program of e-governance and computerization. The e-governance program operate through a website for PCB which was developed and regularly updated. Polluting units are put on a list and are continuously monitored. The public can make complaints to PCB regarding polluting units through electronic mail. Some units have already been prosecuted, and a distillery has been shut down under the new system.

Covenant fulfilled.

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Condition Status at Tranche Release Current Status B. Covenants to be Achieved before Release of the Third Tranche (B.1) Computerize and network FD’s treasury operations for effective payment and audit systems; complete management information system for improved expenditure control.

Substantially complied with. Networking of treasury operations and computerization of payment and audit systems is being undertaken. Software requirement specification for this purpose has been completed. Expenditure control systems have been upgraded.

• Empowered Committee on Public Finance Reform has not met since covenant was met; activity ceased after Medium Term Fiscal framework was signed.

• SBFAU is not delivering as per its mandate.

• All treasuries networked and gone online, as of 1 April 2004.

• Using treasuries as monitoring mechanism for all expenditures and/or receipts; expenditures and receipts are rationalized on a monthly basis.

(B.2) Make progress in fiscal consolidation, with primary deficit to be below 0.7%e of SDP in the FY2002 budget;d and capital expenditure to be at least 2.3% of SDP.

Overall: Substantially complied with. (a) Fully complied with for primary deficit target. The policy matrix makes provision for adjusting the fiscal consolidation targets for the primary deficit, expressed as a percentage of NSDP, by any shortfall in the devolution of central taxes to the state relative to the amount assumed in the medium-term fiscal framework. For FY2002 this shortfall has been estimated to be equivalent to approximately 0.6% of NSDP. Accordingly, the adjusted program targets for primary deficit in FY2002 becomes 1.3% of NSDP. The actual outturn was 0.97% of NSDP placing it well below this limit. (b) Substantially complied with for capital expenditure floor. The measured result for capital expenditure was 1.83% of NSDP in FY2002 compared to the Program target of 2.3% of NSDP, thus reflecting a shortfall of 0.47% of NSDP. However, the state's bifurcation has caused significant costs of fiscal adjustment that are additional to the shortfall in central tax devolutions from the Government not included in the original fiscal framework. GoMP and ADB estimate that the fiscal costs of bifurcation amounted to 0.82% of FY2001 NSDP and that the fiscal costs

Covenant fulfilled, after adjustments for bifurcation are made.

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Condition Status at Tranche Release Current Status remained in excess of 0.6% of NSDP in FY2002. FY2002 has also been a year of drought in Madhya Pradesh leading to an unforeseen need for substantial drought relief expenditures on the current account. Because capital expenditures are treated as residual item of discretionary expenditure for Indian states, the unforeseen fiscal cost arising from bifurcation has absorbed financial resources in excess of the shortfall on capital expenditure.

(B.3) Implement by December 2000, in consultation with the local bodies, property tax reform including preparation of ready reckons for tax assessment; strengthen the public finances of local bodies taking into consideration findings of ADB technical assistance.

Fully complied with. Ready reckoners were prepared with assistance from the technical assistance, and implemented in municipal corporations and large municipalities. Local governments have also taken additional steps to strengthen their public finances, including through computerization.

Covenants have been fully met, capacity building at the local government level is ongoing (about 50% of them, and mostly larger local government bodies have done it); not all local government units have computerized their operations, neither are they networked to each other and to Bhopal.

(B.4) (From para.117, report and recommendation of the President) Sufficient provision in the FY2002 state budget to further reduce the backlog of capital expenditure and shortfall of nonpersonnel expenditure In existing rural health facilities.

Fully complied with. Nonpersonnel expenditure in rural health was Rs460 million in FY2001 and Rs350 million in FY2002, and has been increased substantially to Rs890 million in FY2003 through allocations under a supplementary budget. GoMP is also expanding health services in rural areas under the Rajiv Gandhi Health Mission that has a separate budget category.

Covenant fulfilled.

(B.5) Review and implement the recommendations of the study on industrial incentives scheme; and complete system of expenditure management and control.

Fully complied with. No fiscal incentives have been provided for new industrial units following a decision by all Indian states to discontinue the granting of sales tax concessions as industrial incentives on 1 January 2000. GoMP is also phasing out power sector subsidies under the Madhya Pradesh Power Sector Development Program. GoMP has developed a medium-term fiscal framework (MTFF) to guide future budget formulation in anticipation of completing an agreement with the Government of India under the States’ Fiscal Reforms Facility. This MTFF advances GoMP’s system of public expenditure management.

No new incentives and/or exemptions granted since the third quarter of 2003; tax breaks that have been granted previously are grandfathered. However, number of items granted exemptions were decreased to 39 in 1999, and further decreased to 34 in 2003.

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Condition Status at Tranche Release Current Status (B.6) Extend the activities of the MCDD to all 71,000 villages in the state; monitor and evaluate the impact of the program and prepare recommendation for follow-up policy interventions.

Fully complied with. The activities of the MCDD, dedicated to reducing the incidence of diarrheal disease in children, were extended to all villages in the post bifurcation state and recommendations for follow-up policy interventions were prepared.

Covenant fulfilled.

(B.7) Abolish the posts, other than technical positions in essential social services and police, vacated through natural attrition during that tranche period, and reassign the resources to poverty-reducing social services.

Fully complied with. The decision of GoMP not to fill the posts in nonessential services vacated through natural attrition has been implemented.

• Natural attrition is adhered to. • However, two conflicting measures

are being undertaken in Madhya Pradesh at the moment

1. As a cost-saving measures, each

department was tasked to identify 30% of the posts in their unit that could be abolished. 60,000 posts have been identified, 23,000 of which have already been abolished the last 4 years.

2. In 1998, GoMP had taken a decision

to retrench 22,000 of the 28,000 daily wage earners—exception being those workers in public works, irrigation, public health. And majority of these workers were retrenched. However with the advent of the BJP government in December 2003, this decision was revisited. High Court of Jabalpur overturned the decision to retrench in 2003.

• A Government Order (GO) was issued on 21 January 2004, titled "Procedure for Employment of Daily Wage Employees Discontinued after 31.12. 1988". Rehiring have begun; a total of 11,000 people are expected to be hired and a budget provision of Rs360 million (about $7.5 million equivalent) has been made in FY2005 for their remunerations.

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Condition Status at Tranche Release Current Status (B.8) Implementation of SRF to be reviewed by Technical Secretariat and report to be submitted to PRMC and ADB.

Substantially complied with. In the absence of a Technical Secretariat, the technical assistance consultants appointed to assist in the work of public enterprise reform reviewed the implementation of the State Renewal Fund and provided their findings in reports submitted to the PRMC and ADB.

SRF has been dwindling, despite ample scope for its use, e.g. for VRS in MPSFC. Its allocation dropped from Rs230 million in FY2004 to Rs50 million in FY2005. GoMP looks to international aid agencies or the Government for replenishment of SRF.

(B.9) The DPE will issue and publish annual report on the performance of PSUs.

Fully complied with. The Department of Public Enterprises has issued annual reports starting in FY2000. This report provides details on PSU performance, contains information on most recently completed audited accounts, and summarizes general issues of governance, including procedures for appointment of managing directors.

This is not done in a timely manner. PSU targets are published after actualization, often with 1-year lag.

(B.10) The PSUs will set strategic targets on the basis of guidelines given by GoMP. The PSU boards will set qualitative and quantitative targets as basis for performance-related incentives for PSU management.

Fully complied with. Strategic targets are specified in the Memorandum of Understanding, signed annually between PSUs and GoMP. Activity-specific targets are laid down along with percentile rankings of each activity, which serve as a scorecard of the performance of PSUs and their l1anaging directors. A committee may also suggest actions in cases of noncompliance with targets.

MOU system does not work as originally foreseen. (please see note for B.9)

(B.11) The managing directors of PSUs will be appointed on professional basis (with particular emphasis on experience and performance) and for a minimum 3-year term; and the practice of combining the post of managing director with other posts in the government will be discontinued.

Fully complied with. A formal appointment committee, comprising three members, appoints all new managing directors through transparent procedures. Average tenure of all managing directors now exceeds 2 years and a general managerial policy exists to lengthen their tenure positions to a minimum of 3 years. On 6 June 2002 the cabinet decided that approval of the chief minister would be required in the case of transfer of an official who has not completed 2 years in a post.. Hiring of professionals as managing director has begun. The practice of combining managing director posts with other government posts has been discontinued.

PSUs are still losing money; there still is no accountability or quality control mechanism by and of managing directors.

Continued on next page

Appendix 2 51

Condition Status at Tranche Release Current Status (B.12) Reduce GoMP’s 100% shareholdings in MPSIndDC to 51% by inducting a strategic partner, and appoint the chair as well as a majority of directors on the Board from private and/or nongovernment sector.

In view of changed circumstances with respect to bifurcation (footnote a) the policy condition is proposed to be amended to: “Take a cabinet decision to sell 51% of the assets of MPSIndDC, if possible, and to restructure the enterprise through downsizing.” A consultancy firm has been appointed to prepare a business plan for restructuring MPSIndDC and its report has been sent to GoMP. In addition, the MPSIndDC has developed several initiatives for restructuring, including downsizing, with approximately 80 employees accepting voluntary retirement scheme and the accounting policy of the Reserve Bank of India (RBI) has been adopted. If the policy condition is amended as proposed, the condition is fully met.

MPSIDC manages land for big industries, but started lending to SMEs under the name of "inter corporate deposits" and accumulated considerable NPAs. MPSIDC has negative net worth now (in debt for about Rs7.5 billion). Its mandate was realigned to include only promotional activities and stopped lending in 1995, but MPSIDC is still not privatized. Reliance made a strong bid for it initially, but since it wanted to take over MPSIDC fully in 3 years, GoMP refused Reliance's offer.

(B.13) Hive off to joint sector holding large agricultural farm; reduce GoMP’s shareholding in MPSAIDC to not more than 26% in a transparent manner, contingent upon a buy back of shares from Government of India.

Overall: Substantially complied with. (i) Partially complied with. Tenders were invited for Babai Agricultural Farm on three occasions—December 1997, July 1998, and April 2001. Tenders were received and negotiations held with the bidders in 1998, but due to the withdrawal of the first-ranked bidder, the deal could not be completed. On a subsequent tendering the Cabinet rejected the bids as too low. On 1August, 2002 the Cabinet directed the Agricultural Department to develop new proposals for the future of Babai Farm.(ii) Fully complied with. In view of changed circumstances with respect to bifurcation (footnote a) the policy condition is proposed to be amended to: “The Board of Directors of MPSAIDC will approve a resolution to reduce the share of GoMP ownership to 26%.” Board of Directors of MPSAIDC has approved a reduction in share of GoMP’s shareholding to 26%. Approval of Government for buy-back of shares is being negotiated by GoMP. The Cabinet Sub-Committee on Economic Affairs has directed that a core group be formed to suggest additional organizational reforms. If the policy condition is amended as proposed, the

• Babai farm, the biggest entity under MPSAIDC, is still not hived off. "No takers" is the feedback given to the Mission.

• GoMP has not sanctioned a buy-back of shares either.

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52 Appendix 2

Condition Status at Tranche Release Current Status condition is fully met.

(B.14) Divest 49% of MPSRTC’s shareholding in the four incorporated units; further rationalize routes.

In view of changed circumstances with respect to bifurcation" the policy condition is I proposed to be amended to: "Take a cabinet decision to reorganize MPSRTC into four incorporated units." GoMP decided through a cabinet decision on 18 April 2001 to restructure MPSRTC by dissolving the corporation and forming four corporate units under the Companies Act of 1956 and in a manner consistent with the Program. The order to form the new companies was issued on 26 August 2001. GoMP has also introduced efficiency measures for MPSRTC by (i) allowing the company to adjust tariffs up to 7.5% per year as of 13 February 2000; (ii) introducing commercial principles, including not offering new guarantees, and elimination of free services for special groups; (iii) substantially raising fees for bus passes; and (iv) offering voluntary retirement scheme to a large number of workers. If the policy condition is amended as proposed, the condition is fully met.

• MPSRTC is in dire financial condition.

• Adam Smith Institute, technical assistance consultants, proposed that it should be closed. Cabinet did not accept this proposal.

• The State Government has decided to denationalize 147 routes.

(B.15) Reduce GoMP’s shareholding in MPFinC by 25% through public issue as permissible under the State Financial Corporations Act of 1951; contingent upon amendment to the Act, reduce GoMP’s shareholding further to not more than 26%.

In view of changed circumstances with respect to bifurcation (footnote a) the policy condition is proposed to be amended to: “Take a cabinet decision to restructure MPFC through reduction in staffing levels and actions to minimize the future contingent liabilities of GoMP.” The bifurcation scheme was prepared by the board of MPFC general body, endorsed by GoMP and approved on 17 July 2001. The scheme is now under consideration by the government of Chhattisgarh and GoMP. The classification of the assets of MPFC revealed that more than 30% of assets were nonperforming and the company had negative equity of RS1 billion. Due to the high level of liabilities, immediate liquidation was not possible. Therefore, GoMP has decided on downsizing and loss reduction rather than recapitalization. The company prepared an action plan in 2001 to close branches and reduce GoMP exposure. If the

• MPSFC has 45% NPA for accounts dating back to 1970s—on principal alone. They are trying to cut their losses and downsize. Ongoing effort at the moment.

• They are tackling their problem in two major ways: (1) restructure debt with their lenders (e.g. discussions with SIDBI to write-off some of their principal and all of their interest payment due), (2) restructure lending portfolio to SMEs (viz. through a new program that does not charge interest for more than 2 years on funds borrowed. Hence if someone hasn't paid back his loan since 1988, he is no longer responsible for interest accrued since 1990, provided he pays the principal and 2 years of interest on that principal).

Continued on next page

Appendix 2 53

Condition Status at Tranche Release Current Status policy condition is amended as proposed, the condition is fully met.

• Too early in the process to see results yet.

(B.16) Divest 49% of GoMP’s share in MPHB following its incorporation.

In view of changed circumstances with respect to bifurcation (footnote a), the policy condition is proposed to be amended to: “Take a cabinet decision to change all Acts, rules, and existing orders to permit private sector participation in MPHB.” MPHB has a low rate of recovery on loans particularly for low-income housing. By a cabinet decision dated 27 August 2002, the Housing and Environment Department has been directed to make changes to acts, rules, and existing orders as needed to permit private sector participation in MPHB. If the policy condition is amended as proposed, the condition is fully met.

• MPPHC was given VRS, since MPHB could not absorb the massive human resources of MPPHC.

• MPHB still has negative net worth and could not be sold off.

• Mission was told "0% divestment to date".

(B.17) Sell or close the remaining units of MPSIC, and closure of the corporation.

Fully complied with. All 19 units of Madhya Pradesh State Industries Corporation have been closed. Two units have been sold to the private sector.

• The cited entities have taken full VRS, and they haven't been active since 2002.

• Under the Company's Act, for the company to be closed, all its assets and liabilities would have to be cleared. However, with the exception of MPSLandDC, which sold Rs2-3 million worth of its assets, assets have not been sold yet (since assets are outdated, out of order etc.)

• Also, the Government guarantees their debt to lenders. If they are sold, banks will ask for payment, hence GoMP is not too keen on expediting the closing of these companies.

(B.18) Complete restructuring of MPSTourDC, including lease and/or sale of its properties; and close the MPSTexC.

Substantially complied with. Madhya Pradesh State Textile Corporation has been closed. Madhya Pradesh State Tourism Development Corporation offered properties for long-term lease on 2002 but did not receive any suitable bids. As lack of infrastructure and/or road access has been a main factor behind lack of positive response to bid process, six unprofitable units have been closed and 44 staff redeployed.

• The Government (Archeological Sites of India) has been injecting money to Tourism Corporation for last 4 years (about Rs50 crores) as well as the 11th Finance Commission, so most of the properties are in good condition.

• MPSTourDC has not been too successful in lease and/or sale of its properties. Although three World

Continued on next page

54 Appendix 2

Condition Status at Tranche Release Current Status Heritage Sites are located in Madhya Pradesh, lack of infrastructure makes it undesirable for the private sector to invest in these areas.

• The Oberoi Group was interested in a number of palaces, including Rajgar Palace, but an agreement hasn't been reached yet.

(B.19) Review existing arrangements in cooperative societies and develop options and recommendations to enhance the operational freedom of cooperatives, while taking into consideration relevant proposals in other states.

Fully complied with. GoMP has enacted enabling provisions for cooperative societies based on the model multi purpose Cooperative Act of the Government and relevant acts in other states. Under this act, all previous GoMP control and restrictions have been removed. Cooperatives have been given full operational freedom in their business. New cooperatives, not receiving loan or share capital from GoMP or government guarantees, can register under this act and existing cooperatives can apply for conversion to this act.

Condition was complied with.

(B.20) Prepare power sector CIP on the basis of a power sector master plan.

Fully complied with. A power sector investment plan has been prepared and is being implemented as part of the Madhya Pradesh Power Sector Development Program Loan.

• MPSERC was formed and granted two tariff awards twice so far, in October 2001 and in November 2002.

• Total debt of MPSEB is Rs12,900 crores—all public debt, which is about 85% of total revenue receipts of Madhya Pradesh.

• Industry still cross-subsidizes agriculture. However, this is only anecdotal information from various government officials, actual figures have been requested by Mission.

• Financial Restructuring Plan of MPSEB was accepted by Finance department, the Chief Secretary and the Chief Minister.

• GoMP prepared FRP for restructuring of MPSEB, to be formally approved by the State Cabinet. GoMP has taken over the liabilities of MPSEB relating to

Continued on next page

Appendix 2 55

Condition Status at Tranche Release Current Status Central Public Sector Undertakings to the tune of Rs28,100 million, and towards the Rural Electrification Corproration of Rs17,000 million in October 2004, thus opening a line of credit for improvement of the infrastructure in rural areas.

• During the course of 2004-2005, the new Government settled the defaults of MPSEB to the tune of Rs5 billion towards Banks and Financial Institutions on account of Statutory Liquidity Ratio Bonds.

(B.21) Prepare report on PWD experience with roads and/or bridges construction and maintenance under BOT or similar arrangements, including recommendations for changes, if any, to the policy and regulatory framework for private sector road development, tender procedure, and PWD’s organizational structure.

Fully complied with. In the context of the preparation of the Madhya Pradesh State Road Sector Development Program, technical assistance for institutional strengthening and capacity building for the road sector of Madhya Pradesh is being provided. This technical assistance will strengthen the capacity of the PWD in transport planning, project finance, and investment management and assist PWD with implementation. The program aims to support the formation of a restructured PWD with a consisted organizational structure and clearly defined responsibilities. The responsibility for implementation of road projects involving private sector participation, such as BOT, has been assigned to the Madhya Pradesh State Bridge Development Corporation, a statutory corporation under the PWD. The role of the corporation as a BOT coordinator will be evaluated under the technical assistance.

Covenant was fulfilled.

(B.22) Establish a rent tribunal to exercise the powers of appeals authority; review the initial impact of the Amendment to the Rent Control Act on the level of rents and on investment in the housing sector.

Partially complied with. The proposed amendment to establish the rent tribunal was submitted for passage during the 20 August-15 September 2001 legislative session. The assembly returned the legislative proposal to the select committee and the select committee referred it back to GoMP for reconsideration of the structure of the rent tribunal and associated financial implications. The matter remains under consideration with GoMP. Establishment of the

No new developments to date. The mission was informed that political resistance to the rent Control Act exists, with the perception that this resistance would hinder private sector involvement in the residential construction sector.

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56 Appendix 2

Condition Status at Tranche Release Current Status rent tribunal and other subsequent actions are contingent on passing of the legislation.

(B.23) Implement integrated training program for PCB staff and industrial associations on environmental monitoring and environmental management.

Fully complied with. Environmental monitoring training for technical staff of Pollution Control Board is occurring under the Government’s program for enhanced environmental monitoring.

Covenant fulfilled.

AAIFR = Appellate Authority for Industrial and Financial Reconstruction; BIFR = Board for Industrial and Financial Reconstruction; CIP = Core Investment Program; DPE = Department of Public Enterprise; DPEP = District Primary Education Program; FD = Finance Department; GoMP = Government of Madhya Pradesh; MPERC = Madhya Pradesh Electricity Regulatory Commission; MPFinC = Madhya Pradesh Financial Corporation; MPHB = Madhya Pradesh Housing Board; MPLDC = Madhya Pradesh Leather Development Corporation; MPPHC = Madhya Pradesh Police Housing Corporation; MPPRMP = Madhya Pradesh Public Resource Management Program; MPSAIDC = Madhya Pradesh State Agro Industries Development Corporation; MPSCB = Madhya Pradesh Slum Clearance Board; MPSExC = Madhya Pradesh State Export Corporation; MPSFishDC = Madhya Pradesh State Fisheries Development Corporation; MPSIC = Madhya Pradesh State Industries Corporation; MPSIndDC = Madhya Pradesh State Industrial Development Corporation; MPSLandDC = Madhya Pradesh State Land Development Corporation; MPSRTC = Madhya Pradesh State Road Transport Corporation; MPSTexC = Madhya Pradesh State Textile Corporation; MPSTourDC = Madhya Pradesh State Tourism Development Corporation; MBI = Market Based Instruments; MCDD = Mission on Control of Diarrheal Diseases; PRMC = Public Resource Management Committee; PCB = Pollution Control Board; SDP = state domestic product (net); SSN = social safety net; SRF = State Renewal Fund.

Appendix 3 57

COMPLIANCE WITH MAJOR LOAN AND PROGRAM AGREEMENT COVENANTS

Covenant Reference to Loan

Agreement / Project Agreement

Status

Except as the Borrower and the Asian Development Bank (ADB) may otherwise agree, the Borrower shall cause (a) the State to be responsible for coordination and implementation of the Program with various concerned ministries, agencies and public enterprises of the State; (b) the State to ensure that the program Executing Agency is: (i) responsible for the effective implementation, coordination and monitoring of the Program, (ii) supported by the following bodies: (A) PRMC under the chairmanship of the Chief Minister of the State to advise and oversee implementation of the reforms; (B) Empowered Committees on Public Finance Reform and on Public Enterprises Restructuring, both headed by the Chief Secretary of the State, with high-level representation, including Finance, Commercial Taxes and Public Enterprises Department; and (C) Technical Secretariat for guidance on all technical aspects of the restructuring and divestment process of public enterprises reform.

Loan Agreement, para 1, Schedule 5

Except for the Technical Secretariat, which is yet to be established, all items in this section have been complied with.

The Borrower shall cause the State to be responsible for the effective administration and utilization of the proceeds of the Loan.

Loan Agreement, para 2, Schedule 5

Complied with

The State shall cause the Program Executing Agency to be responsible for the effective administration and utilization of the proceeds of the Counterpart Funds.

Loan Agreement, para 3, Schedule 5

Complied with

(a) The State shall carry out the Program with due diligence and efficiency, and in conformity with sound administrative, financial, environmental, social safety net and public sector resource management practices; (b) In the carrying out of the Program and operation of the Program facilities, the State shall perform all obligations set fort in the Loan Agreement, particularly Schedule 5 thereof, to the extent that they are applicable to the State.

Program Agreement, para 2.01

Complied with

The State shall make available, promptly as needed, the facilities, services, and other resources, which are required, in addition to the proceeds of the Loan, for the carrying out of the Program.

Program Agreement, para 2.02

Complied with

In the carrying out of the Program, the State shall employ competent and qualified consultants under intimation to ADB.

Program Agreement, para 2.03

Complied with

The State shall carry out the Program in accordance with plans and programs formulated in accordance with best social safety net and public sector resource management practices. The State shall furnish, or cause to be furnished to ADB, promptly after their preparation, such plans, programs, techniques and methods, and any material modifications subsequently made therein, in such detail as ADB shall reasonably request.

Program Agreement, para 2.04

Complied with

The State shall maintain, or cause to be maintained, records and accounts adequate to identify the use of the

Program Agreement, para 2.05

Complied with

Continued on next page

58 Appendix 3

Counterpart Funds, to record the progress of the Program (including the cost thereof) and to reflect, in accordance with consistently maintained sound accounting principles, its operations and financial condition. (a) ADB and the State shall cooperate fully to ensure that the purposes of the Loan will be accomplished; (b) The State shall promptly inform ADB of any condition which interferes with, or threatens to interfere with, the progress of the Program, the performance of its obligations under the Loan Agreement and this Program Agreement, respectively, or the accomplishment of the purposes of the Loan; (c) ADB and the State shall from time to time, at the request of either party, exchange views through their representatives with regard to any matters relating to the Program, the State and the Loan.

Program Agreement, para 2.06

Complied with

(a) The State shall furnish to ADB all such reports and information as ADB shall reasonably request concerning (i) the Loan and the Counterpart Funds, (ii) the expenditures financed out of the Counterpart Funds, (iii) the Program, (iv) the administration, operations and financial condition of the State to the extent relevant to the Program, and (v) any other matters relating to the purposes of the Loan and the Program; (b) Without limiting the generality of the foregoing, the State shall furnish to ADB reports on the State’s budgetary position and its medium-term projections, and semiannual reports on implementation of the Program during the Program period. The reports shall indicate, among other things, a plan of implementation and the progress achieved to date, problems encountered during the period under review, steps taken or proposed to be taken to remedy these problems, status and progress of expenditures to be financed out of the Counterpart Funds, and proposed program of activities and expected progress during the Program period. Reports under this section shall be submitted in such form and in such detail as ADB may require; (c) Promptly after the closing date for withdrawals from the Loan Account, but in any event not later than 6 months thereafter or such later date as ADB may agree for this purpose, the State shall prepare and furnish to ADB a report, in such form and in such detail as ADB shall reasonably request, on the execution of the Program, including its cost, the performance by the State of its obligations under the Loan Agreement and this Program Agreement, respectively, and the accomplishment of the purposes of the Loan, including a comprehensive description of the impact of the reforms implemented under the Program.

Program Agreement, para 2.07

Complied with

The State shall (i) maintain separate accounts for the Program and for its overall operations; (ii) have such accounts and financial statements (balance sheet, statement of income and expenses, and related statements) audited annually, in accordance with appropriate auditing standards consistently applied, by independent auditors whose qualifications, experience and terms of reference are acceptable to ADB; and (iii) furnish to ADB, promptly after their preparation but in any event no

Program Agreement, para 2.08

Complied with

Continued on next page

Appendix 3 59

later than 12 months after the close of the fiscal year to which they relate, certified copies of such audited financial statements and the report of the auditors relating thereto all in the English language. The State shall furnish to ADB such further information concerning such accounts and financial statements and the audit thereof as ADB shall from time to time reasonably request. The State shall enable ADB’s representatives to inspect the Program, and the relevant records and documents pertaining to the use of the proceeds of the Counterpart Funds.

Program Agreement, para 2.09

Complied with

(a) The State shall, promptly as required, take all necessary actions within its power to implement and carry out the Program, (b) The State shall at all times conduct its business in accordance with sound administrative, financial and public sector resource management practices, and under the supervision of competent and experienced personnel.

Program Agreement, para 2.10

Complied with

Except as ADB may otherwise agree, the State shall apply the proceeds of the Counterpart Funds to the financing of expenditures on the Program in accordance with the provisions of the Loan Agreement and this Program Agreement, and shall ensure that all expenditures financed out of such Counterpart Funds are incurred exclusively in the carrying out of the Program

Program Agreement, para 2.11

Complied with

BASIC FISCAL DATA (Rs Lakh)

60 Appendix 4

Serial #

Item 1990–1991

Accounts

1991–1992

Accounts

1992–1993

Accounts

1993–1994

Accounts

1994–1995

Accounts

1995–1996

Accounts

1996–1997

Accounts

1997–1998

Accounts

1998–1999

Accounts

1999–2000

Accounts

2000–2001

Accounts

2001–2002

Accounts

2002–2003

Accounts

2003–2004 RE

2004–2005 BE

1 Revenue Receipts 454,474 537,699 644,260 706,979 761,828 865,347 1,001,423 1,125,711 1,134,585 1,320,368 1,283,930 1,121,108 1,339,040 1,475,818 172,5187 1.1 State Own Tax Revenuesa 175,409 211,733 233,362 267,711 287,062 351,819 410,350 456,432 510,848 579,522 563,957 467,908 618,948 663,320 779,720 1.2 Nontax Revenueb 169,221 195,955 256,026 270,237 286,323 291,491 324,898 334,000 327,909 412,068 323,021 309,270 349,711 387,846 414,512

1.2.1 Nontax (Own) 84,287 104,002 144,025 140,373 161,521 177,814 197,495 201,856 178,198 246,898 172,433 160,168 163,548 156,064 166,362 1.3 Resource from Center 194,778 221,964 266,873 298,895 313,245 335,714 393,578 467,423 445,539 493,949 547,540 493,032 556,544 656,433 779,105

1.3.1 Share in Central Taxes 109,844 130,011 154,872 169,031 188,443 222,037 266,175 335,279 295,828 328,779 396,952 343,930 370,381 424,652 530,955 1.3.2 Other Central Transfers

(grants) 84,934 91,953 112,001 129,864 124,802 113,677 127,403 132,144 149,711 165,170 150,588 149,102 186,163 231,781 248,150

2 Revenue Expenditure 474,611 542,082 615,731 751,793 780,877 913,087 1,146,205 1,172,644 1,421,764 1,613,594 1,498,522 1,436,877 1,455,980 1,996,234 1,826,115

2.1 Salary+Pension+ Interest

262,576 290,131 321,510 356,857 401,382 459,150 691,450 603,850 768,629 840,961 869,593 705,741 822,331 1,063,433 1,157,038

2.1.1 of which, Salaries and Wages

194,384 207,653 221,829 236,971 253,148 290,322 485,476 362,454 470,644 507,522 532,023 379,297 456,095 573,167 624,752

2.1.2 of which, Pensions 16,904 21,706 25,533 33,097 38,802 53,003 68,353 75,404 114,510 119,573 96,492 101,077 116,005 148,614 155,386 2.1.3 of which, Interest 51,288 60,772 74,149 86,790 109,433 115,825 137,622 165,992 183,476 213,866 241,078 225,367 250,231 341,652 376,900

2.1.3.1 of which: Interest Paid on Guaranteed Amounts

5 796 0 5 226 4,499 6,796 6,998 5,400 705 3,815 4,861 5,754 0 0

2.2 Subsidies 11,391 13,281 34,859 61,138 23,993 34,399 123,291 40,248 45,356 125,875 51,090 212,312 26,467 129,991 93,200 2.2.1 Subsidies (Food, Housing,

Transport, Industry) 1,711 3,037 2,255 2,770 2,011 2,399 2,720 2,695 4,156 10,911 11,732 12,399 19,117 14,992

2.2.2 Subsidies - Power 9,680 10,245 32,603 58,368 21,982 32,000 120,571 37,553 41,200 114,964 39,358 199,913 7,350 114,999 93,200 2.3 O&M 164,994 165,312 212,136 241,861 262,768 306,525 345,981 395,672 503,795 496,723 437,259 370,388 400,991 445,226 506,458

2.3.1 Major O&M (roads, buildings, & irrigation)

25,001 27,025 36,504 44,178 47,275 54,097 62,590 69,997 72,620 57,411 16,651 46,167 44,987 46,710 41,758

2.3.2 Other O&M (edu., health, RD, WS, agr. & forest)

139,993 138,287 175,632 197,682 215,492 252,428 283,391 325,674 431,175 439,312 420,608 324,221 356,004 398,516 464,700

2.4 Administrative Expenditure 18,412 21,722 19,438 20,319 23,837 27,611 35,968 37,356 41,448 34,381 34,504 20,319 23,837 27,611 36,982 2.5 Devolution to Local Bodies 12,061 14,767 13,459 16,152 17,045 26,539 31,921 33,544 41,583 64,784 52,850 37,290 40,616 — —

2.5.1 Devolution to ULBs (including EFC)

— — — — — — 34,217 45,758 57,078 66,497 82,336 61,518 82,291 71,199 93,067

2.5.1.1 Assistance to ULB for General Education

— — — — — — 479 523 863 1,415 2,944 2,480 2,617 2,378 3,022

2.5.2 Devolution to RLBs (including EFC)

— — — — — — 27,843 51,868 55,409 55,184 68,891 52,532 56,788 66,514 71,553

2.5.2.1 Assistance to RLB for General Education

— — — — — 0 5,550 7,370 6,788 4,082 19,345 17,013 16,362 17,692 19,230

2.5.2.2.

Assistance to RLB for Health

— — — — — 0 30 35 35 35 35 27 27 15 15

2.6 Relief on Account of Natural Calamities

2,145 3,886 4,328 4,347 7,517 6,422 8,239 20,374 6,666 4,685 9,704 12,428 37,354 18,634 20,498

2.6.1 Drought 0 0 100 173 2,332 245 0 0 1,021 77 838 1,186 24,479 0 0 2.6.2 Floods, Cyclones, etc. 0 0 506 382 1,437 1,256 2,676 3,299 1,179 250 1,064 1,401 5,883 0 0

2.7 Other Revenue Expenditure

5,177 36,869 14,329 55,466 51,851 58,864 (82,405) 61,975 20,953 50,870 53,225 90,827 141,738 329,973 32,437

3 Revenue Balance [(1)-(2)]

(20,137) (4,383) 28,529 (44,814) (19,049) (47,740) (144,782) (46,933) (287,179) (293,225) (214,592) (315,769) (116,940) (520,416) (100,928)

4 Capital Receipts 901,706 1,076,300 1,108,009 1,341,681 1,467,889 1,660,066 1,784,363 2,107,252 2,406,250 2,804,729 2,560,162 2,756,198 3,380,844 3,976,493 4,404,956 4.1 Public Debt (borrowing) 178,281 346,705 265,450 343,066 364,710 331,741 340,022 466,347 659,949 866,203 659,950 949,542 1,139,641 1,713,533 1,794,643 4.2 Nondebt Capital Receipt

(recovery of loans & 5,847 4,030 3,374 49,671 3,490 3,743 86,078 79,408 5,649 31,380 1,345 158,765 4,271 7,153 4,741

Continued on next page

Appendix 4 61

Serial #

Item 1990–1991

Accounts

1991–1992

Accounts

1992–1993

Accounts

1993–1994

Accounts

1994–1995

Accounts

1995–1996

Accounts

1996–1997

Accounts

1997–1998

Accounts

1998–1999

Accounts

1999–2000

Accounts

2000–2001

Accounts

2001–2002

Accounts

2002–2003

Accounts

2003–2004 RE

2004–2005 BE

advances) 4.3 Public Account 717,578 725,565 839,185 948,944 1,099,689 1,324,582 1,358,263 1,561,498 1,740,652 1,907,147 1,898,867 1,647,891 2,236,932 2,255,807 260,5572

5 Capital Expenditure 887,151 1,066,750 1,137,858 1,288,951 1,464,064 1,598,384 1,642,088 2,031,566 2,137,620 2,505,079 2,401,016 2,352,389 3,309,034 3,992,150 4,451,248 5.1 Public Debt (repayments) 134,414 265,107 227,903 275,042 306,547 206,949 225,512 292,334 424,259 574,926 405,419 673,610 794,073 933,564 1,164,125

5.1.1 of which, Repayment of Installments of Guarantees

23,607 66,932 71,983 188,957 28,735 43,971 347,781 382,015 135,876 13,528 82,258 42,289 52,712 — —

5.2 Loans & Advances 16,488 21,126 35,901 22,369 38,729 33,315 31,848 46,752 30,159 34,285 29,571 59,858 48,070 42,591 41,644 5.3 Public Account 665,024 703,597 790,423 910,801 1,031,388 1,272,085 1,282,655 1,524,701 1,582,221 1,800,861 1,854,975 1,471,857 2,221,392 2,270,432 2,558,586 5.4 Capital Outlay 71,226 76,921 83,632 80,739 87,400 86,034 102,072 167,780 100,982 95,007 111,051 147,064 245,500 293,016 568,349

5.4.1 Social Services 11,629 8,649 11,269 11,311 15,167 14,000 21,252 17,037 21,855 19,473 13,579 17,157 72,881 60,069 — 5.4.2 of which, Power Sector 5,927 8,738 11,927 11,822 11,306 14,928 15,111 83,454 9,977 15,481 23,870 17,278 10,694 9,005 —

6 Total Receipts (Revenue

Receipts + Non-debt Capital Receipts)

460,321 541,729 647,634 756,650 765,318 869,090 1,087,501 1,205,119 1,140,234 1,351,748 1,285,275 1,279,873 1,343,311 1,482,971 1,729,928

Total Receipts as % of GSDP

13% 14% 15% 15% 13% 13% 15% 15% 12% 13% 13% 11% 15% 15% 16%

7 Total Expenditure

(Capital Expenditure + Capital Outlay,

545,837 619,003 699,363 832,532 868,277 999,121 1,248,277 1,340,424 1,522,746 1,708,601 1,609,572 1,583,941 1,701,480 2,289,250 2,394,464

excluding Net Lending) Total Expenditure as % of GSDP

15% 16% 16% 16% 15% 15% 17% 16% 16% 17% 16% 14% 19% 23% 22%

8 Fiscal Balance (102,003) (98,400) (87,629) (98,251) (141,689) (163,346) (192,625) (182,057) (412,670) (391,138) (353,869) (363,926) (406,238) (848,870) (706,180)

9 Primary Balance (50,715) (37,628) (13,481) (11,462) (32,256) (47,521) (55,003) (16,065) (229,195) (177,272) (112,790) (138,559) (156,008) (507,218) (329,280)

Primary Balance as % of NSDP

(1.6%) (1.1%) (0.4%) (0.3%) (0.9%) (1.1%) (1.1%) (0.3%) (3.7%) (2.6%) (1.8%) (1.9%) (2.0%)

10 Debt Stock (including

WMA and other obligations)

775,909 879,253 972,799 1,077,746 1,213,726 1,387,371 1,594,806 1,797,235 2,195,863 2,594,190 2,254,409 2,647,423 3,032,749 3,800,854 4,408,272

10.1 of which WMA (outstanding)

3,090 27,428 15,418 29,809 0 25,223 0 0 19,254 17,162 40,239 0 0 — — 10.2 of which, Stock of

Guarantees 478,008 635,140 643,022 683,884 721,754 723,439 835,160 909,204 859,879 967,054 970,960 970,132 1,157,238 — —

11 Debt Service (including WMA)c

219,879 378,533 349,004 334,883 374,716 427,035 434,468 557,897 684,179 905,932 691,308 942,865 1,229,512 685,539 746,293

11.1 of which WMA (repayments)

106,864 241,490 196,899 242,180 282,102 181,225 196,349 257,052 38,033 522,069 352,971 621,443 644,711

12 Debt Amortization (Interest + Public Debt Repayment)

185,702 325,879 302,052 361,831 415,979 322,774 363,134 458,325 607,735 788,792 646,497 898,977 1,044,304 1,275,216 1,541,025

Continued on next page

62 Appendix 4

Serial

# Item 1990–

1991 Accounts

1991–1992

Accounts

1992–1993

Accounts

1993–1994

Accounts

1994–1995

Accounts

1995–1996

Accounts

1996–1997

Accounts

1997–1998

Accounts

1998–1999

Accounts

1999–2000 Accounts

2000–2001

Accounts

2001–2002

Accounts

2002–2003

Accounts

2003–2004 RE

2004–2005 BE

12.1 of which: Principal Repayment

— — — — — — — — — — — — 58,755 151,242 —

12.2 for Refinancing (e.g., Swap and Prepayment)

— — — — — — — — — — — — — — — 13 Off-Budget Borrowings — — — — — — — — — — 0 80 0 170 170 14 Interest on Off Budget

Borrowings — — — — — — — — — — — — — — —

15 Repayment of Installments of Off Budget Borrowings

— — — — — — — — — — — — — — —

16 Power Sector S/D (after Government Subsidy)d

— — 10,101 11,824 13,240 13,379 12,662 12,250 12,250 11,693 (137,130) (147,381) (15,438) — — 17 Cost of Fully Financing

Power Deficit (16-Subsidy)

9,680 10,245 22,502 46,544 8,742 18,621 107,909 25,303 28,950 103,271 176,488 347,294 22,788 — —

18 Consolidated Rev. Balance (16+Revenue Balance)

(20,137) (4,383) 38,630 (32,990) (5,809) (34,361) (132,120) (34,683) (274,929) (281,532) (351,722) (463,150) (132,378) — —

19 Consolidated Revenue Deficit (18+Interest Discharged on Guarantees)

(20,133) (3,587) 38,630 (32,985) (5,583) (29,862) (125,324) (27,685) (69,529) (280,828) (347,907) (458,289) (126,624) (61,557) (53,327)

20 Consolidated Fiscal Deficit -including Power (FD-16)

(102,003) (98,400) (97,730) (110,075) (154,929) (176,725) (205,287) (194,307) (424,920) (402,831) (216,739) (216,545) (390,800) (131,575) (131,397)

21 Consolidated Capital Expenditure (Capital Outlay + Capital Expenditure for MPSEB)

228,777 370,189 355,340 387,258 442,990 339,019 372,259 522,113 571,222 730,868 2,401,016 298,206 623,205 39,922 44,512

22 Consolidated Interest (Interest + Interest Paid by MPSEB)

51,288 60,772 74,149 86,790 109,433 115,825 137,622 165,992 183,476 213,866 241,078 225,367 250,231 341,652 316,538

26 Revenue Deficit & Revenue Receipt

(4%) (1%) (4%) (6%) (3%) (6%) (14%) (4%) (25%) (22%) (17%) (28%) (9%) (35%) (6%)

27 Interest as % of Revenue Receipts

11% 11% 12% 12% 14% 13% 14% 15% 16% 16% 19% 20% 19% 23% 22%

29 Debt Service as % of Revenue Receipts

25% 25% 24% 13% 12% 28% 24% 27% 57% 29% 26% 29% 44% 46% 43%

30 (Salary + Pension + Interest) as % of Revenue Receipts

58% 54% 50% 50% 53% 53% 69% 54% 68% 64% 68% 63% 61% 65% 63%

31 Consolidated Revenue Deficit (19) as % of Revenue Receipts

(4%) (1%) 6% (5%) (1%) (3%) (13%) (2%) (24%) (21%) (27%) (41%) (9%) (4%) (3%)

32 Revenue Deficit as % of GSDP

(1%) 0% 1% (1%) 0% (1%) (2%) (1%) (3%) (3%) (2%) (3%) (1%) (5%) (1%)

33 Fiscal Deficit as % of GSDP

(3%) (3%) (2%) (2%) (2%) (3%) (3%) (2%) (4%) (4%) (4%) (3%) (5%) (9%) (6%)

34 Primary Deficit as % of GSDP

(1%) (1%) 0% 0% (1%) (1%) (1%) 0% (2%) (2%) (1%) (2%) (2%) (5%) (3%)

Continued on next page

Appendix 4 63

Serial #

Item 1990–1991

Accounts

1991–1992

Accounts

1992–1993

Accounts

1993–1994

Accounts

1994–1995

Accounts

1995–1996

Accounts

1996–1997

Accounts

1997–1998

Accounts

1998–1999

Accounts

1999–2000 Accounts

2000–2001

Accounts

2001–2002

Accounts

2002–2003

Accounts

2003–2004 RE

2004–2005 BE

35 Debt Stock as % of GSDP

22% 23% 23% 21% 21% 21% 21% 22% 24% 25% 23% 24% 34% 39% 40%

36 Consolidated Revenue Deficit (19) as % of GSDP

(1%) 0% 1% (1%) 0% 0% (2%) 0% (3%) (3%) (4%) (4%) (1%) (1%) 0%

37 Consolidated Fiscal Deficit (20) as % of GSDP

(3%) (3%) (2%) (2%) (3%) (3%) (3%) (2%) (5%) (4%) (2%) (2%) (4%) (1%) (1%)

38 GSDPe 3,559,139 3,808,742 4,272,906 5,214,200 5,790,100 6,501,800 7,445,300 8,172,000 9,327,700 10,320,900 9,922,600 8,128,600 8,941,400 9,835,600 10,966,700 39 NSDP 3,174,913 3,334,646 3,720,330 3,393,700 3,742,700 4,209,600 4,859,000 5,314,100 6,139,100 6,894,900 6,389,000 7,159,400 7,875,287 — —

40 Budget Allocation for

Health 51,206 77,746 56,425 76,650 79,122 80,785 96,059 102,360 132,899 137,959 168,411 113,273 121,858

Budget Allocation for Health (% of total expenditure-rev + capital)

9% 13% 8% 9% 9% 8% 8% 8% 9% 8% 10% 7% 7%

Budget Allocation for Health (% of GSDP)

1% 2% 1% 1% 1% 1% 1% 1% 1% 1% 2% 1% 1%

41 Budget Allocation for Education

92,928 98,036 110,970 125,142 162,678 163,405 189,286 197,116 255,233 299,451 282,610 207,663 224,689

Budget Allocation for Education (% of total expenditure-rev + capital)

17% 16% 16% 15% 19% 16% 15% 15% 17% 18% 18% 13% 13%

Budget Allocation for Education (% of GSDP)

3% 3% 3% 2% 3% 3% 3% 2% 3% 3% 3% 2% 3%

42 Total Number of

Government Employees

— — — — 523,583 526,378 514,677 513,475 518,381 516,230 510,115 503,682 497,985 495,700

43 Total Number of Pensioners

— — — — 194,810 213,698 227,253 242,897 254,335 260,940 222,002 231,768 245,724 258,724

Notes: a Total tax revenue minus share of net proceeds assigned to states (901)

b Total Nontax Revenue(B)=(a)Fiscal Services+(b)Interest Receipts, Dividends, and Profits+(c)Other Nontax Revenue. c From finance accounts. d As provided by Finance Department, GoMP. e GSDP figure for 2000–2001 fiscal year is shown for the composite Madhya Pradesh despite the bifurcation in November 2000. If GSDP of Madhya Pradesh is imputed for 7 months of composite Madhya Pradesh state and 5 months of new Madhya Pradesh state, then it would be Rs7,316,500 lakhs.

Lakh = 100,000; BE = budget estimate; RE = revised estimate. Sources: Finance Accounts from 1990–2003, Government of India; Madhya Pradesh State Budgets 2003–2004; Finance Department, Madhya Pradesh; National Account Statistics, Central Statistical Organization (for GSDP, NSDP) for 1991–2002.

64 Appendix 5

VOLUNTARY RETIREMENT SCHEME BENEFITS UNDER STATE RENEWAL FUND (Rs)

Department Corporation Employees

Affected Amount Sanctioned Date of Approval by

Cabinet SubcommitteeDate of Release of

Amount

Rural Industries Madhya Pradesh Leather Development Corporation

117 17,845,396 31 Oct 2000 31 Oct 2000

18 Feb 2001 30 Mar 2001 27 Jun 2002 3 Aug 2002

Commerce and Industries Madhya Pradesh State Industries Corporation

1,754 324,424,450 19 Dec 2000 Feb 2001

29 Aug 2001 10 Sep 2001 2 Feb 2002 28 Feb 2002 27 Jun 2002 Madhya Pradesh State Textile Corporation

1,948 398,388,195 18 Feb 2001 23 Mar 2001

2 Feb 2002 28 Feb 2002 27 Jun 2002 27 Jun 2002

Information Technology Optel Telecommunications Ltd. 375 171,244,676 10 Jan 2003 Agriculture Madhya Pradesh Land Development

Corporation 552 173,949,001 29 Aug 2001 10 Sep 2001

Home Madhya Pradesh Police Housing Corporation

215 31,500,000 29 Aug 2001 10 Sep 2001

Transport Madhya Pradesh State Road Transport Corporation

4,306 1,667,915,724 17 Oct 2001 28 Dec 2001 4 Jan 2002

30 Apr 2002 30 Apr 2002 20 Jun 2002

27 Jun 2002 27 Jun 2002 Fisheries Madhya Pradesh Fisheries Federation 53 11,632,058 Total 9,320 2,796,899,500

Statement of Budget Provision and Expenditure Under SRF from 2000–2001 to 2003–2004

(Rs)

Year Budget Provision Expenditure Incurred

2000–2001 1,500,000,000 200,859,601 2001–2002 2,500,000,000 1,663,191,418 2002–2003 1,500,000,000 932,848,481 2003–2004 221,718,000 0 2004–2005 50,000,000 0 (to date) Total 5,771,718,000 2,796,899,500

Appendix 5 65

Madhya Pradesh - Fiscal Balances1

-1.13%

-0.34%

-1.13%

-0.30%

-3.73%

-2.57%

-0.1%

0.8%

-1.3%

-3.0%

-0.9%

-4.7%-4.3%

-3.4%

-4.4%

-3.0%

-2.4%-2.9%

-4.0%-3.4%

-6.7%

-1.60%-1.98%

-1.94%-1.77%

-0.36%-0.86%

-1.13%

-0.6% -1.5%

-0.5%

-1.1%

-3.2%

-5.7%

-5.5%-5.1% -5.2%

-3.9%-3.8%

-8.0%

-7.0%

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03

Year

Perc

ent

Primary balance as % of NSDP

Revenue balance as % of NSDP

Fiscal balance as % of NSDP

1Fiscal balance not adjusted for external shocks (earthquake, drought, and bifurcation).

66 Appendix 7

IMPACT OF BIFURCATION 1. Division of any state gives rise to a number of financial issues relating to the division of assets and liabilities among the successor states and also issues of fiscal management. Particularly, the costs of bifurcation are prone to be unevenly shared and cannot always be identified and measured. Madhya Pradesh was bifurcated in 2000 into the new Madhya Pradesh and Chhattisgarh states. The ratio of population between Chattisgarh and Madhya Pradesh is 26.62:73.38. However, in the actual division, Madhya Pradesh has had to bear a much larger costs in terms of employees and in the case of electricity because of the uneven geographic location of generation units. 2. The bifurcation of Madhya Pradesh on 1 November 2000 was not foreseen at the time of program formulation. The new state of Chhattisgarh was carved out of 16 southeastern districts of Madhya Pradesh and accounts for 26.62% of the population of the prebifurcated state. Chhattisgarh has a population of almost 18 million people. The new state is extremely rich in natural resources, but the development indexes of the population are quite low. The population has a very high proportion of scheduled tribes and castes. Almost half of the population of Chhattisgarh falls into this category, as compared with less than a quarter for India as a whole and 37% for prebifurcated Madhya Pradesh. 3. The bifurcation did not affect the government of Madhya Pradesh (GoMP) in terms of its reform agenda or its legal obligations under the Program. In terms of continuity of government, the bifurcation did not affect Madhya Pradesh, because the bifurcation did not involve new elections for chief minister or any changes in the executive branch of government. Madhya Pradesh 's chief minister continued to serve the original elected term, and the Madhya Pradesh parliament was altered only by moving those seats that fell in what is now Chhattisgarh to the new Chhattisgarh parliament. The Madhya Pradesh governor also was not changed. 4. However, the new Madhya Pradesh State Reorganization Act of 2000, [section 50 (1)(a)], identifies the new Madhya Pradesh as the sole successor state of prebifurcated Madhya Pradesh for purposes of obligations under the Program. However, section 44(1), which governs public debt liabilities, makes this ruling less definitive, necessitating consultation among the Government, GoMP, and the government of Chhattisgarh. In a letter dated 16 February 2001, the additional chief secretary of the government of Chhattisgarh informed the central Government of the government of Chhattisgarh’s decision not to participate in the second and third tranches of the Program, This decision removed any legal constraints to new Madhya Pradesh having sole claim as the successor state for purposes of obligations and tranches of the Program. 5. The bifurcation also altered somewhat the physical and economic profile of the new Madhya Pradesh State. The impact was a reduction in the population by 26.6% and in land by 30.5%. The new state of Chhattisgarh comprises an administrative area that is poorer in relative terms than new Madhya Pradesh. The per capita income in new Madhya Pradesh was Rs11,718 in 2001-02, slightly higher than the prebifurcated state. The average real growth rate in the area that is new Madhya Pradesh was 6.4% between 1996 and 1999, compared with 4.7% for the prebifurcated Madhya Pradesh. Yet, in the new Madhya Pradesh, nearly three quarters of the population resides in rural areas, and scheduled tribes and castes form 35% of the population. 6. The bifurcation led to other disruptive and possibly costly effects. New Madhya Pradesh has lost its forest and mineral resources to Chhattisgarh, eliminating an important source of government revenue and income generation. Power generation capacity was proportionally on

Appendix 7 67

the Chhattisgarh side, so the bifurcation worsened the excess demand situation for Madhya Pradesh while providing Chhattisgarh with an excess supply for power. 7. The bifurcation has also posed great challenges to the area's reform momentum and specifically to its macroeconomic framework. In addition to the substantial disruption in the reform program and government activity brought on by the massive logistical and organizational challenges embodied in the bifurcation, new Madhya Pradesh had to absorb the major fiscal shock, which had both transitory and permanent components. The fiscal shock occurred during a period of fiscal consolidation and placed great strains on the budget. 8. GoMP and ADB estimate the fiscal impact of bifurcation on new Madhya Pradesh's budget for FY2001 at 0.82% of net state domestic product (NSDP), which comprises effects on both the revenue and expenditure sides. Owing to the lower than proportional share of mineral and forestry resources and to a loss in power duties, the budget lost tax and nontax revenues, accounting for more than three quarters of the total loss. On the expenditure side, GoMP was responsible for establishing the new Chhattisgarh capital in Raipur and was required to continue to transfer unbifurcated organizations and corporations. 9. Bifurcation resulted in a 2% increase in the share of employees, in proportion to the population percentage of Madhya Pradesh, staying in Madhya Pradesh, adding to the annual wage bill. This resulted in additional expenditure of Rs150 crores per annum. GoMP also had to keep a high number of Class III and Class IV workers on its payroll after bifurcation, since the move to Chhattisgarh for these lower level workers was not feasible. 10. In addition, complex legal aspects relating to the split of public sector enterprises posed certain complications for GoMP’s reform of public enterprises. The Madhya Pradesh Reorganization Act of 2000 (MPSRA) requirement that assets and liabilities be split according to mutual agreement between Madhya Pradesh and the new state of Chhattisgarh is taking much longer to implement than envisioned. On 30 March 2003, a government order was issued to form the R. P. Kapur Committee to arbitrate on the division of public sector undertakings (PSUs). The committee was formed on 31 July 2003 and is chaired by the previous chief secretary of the composite Madhya Pradesh state. The committee comprises chief secretaries of Madhya Pradesh and Chhattisgarh. 11. Of all the Madhya Pradesh PSUs that were mentioned in the Program, assets and liabilities of Madhya Pradesh Tourism Corporation was partitioned at the ratio of 6:94 (Chhattisgarh: Madhya Pradesh), Madhya Pradesh State Industries Corporation at the rate of 10.29:89.71, and Madhya Pradesh State Agro Industries Development Corporation at the ratio of 17:83. All of which are awaiting approval from the Government for full implementation. Madhya Pradesh Financial Corporation (MPFC) was divided at the ratio of 17.51:82.49, and the scheme was approved by the Government on 12 March 2003. Disputes are ongoing concerning some of the other PSUs, however. Particularly, for Madhya Pradesh State Electricity Board (MPSEB), the split of assets and liabilities, which was ultimately arbitrated by the Government with an interim order (dated 23 May 2003), has led to charges by GoMP that the split left Madhya Pradesh with a disproportionate share of the liabilities. In the shadow of this ongoing dispute, the interstate companies scheduled for major restructuring, such as Madhya Pradesh State Road Transport Corporation (MPSRTC), face long negotiations between the two state governments in order to agree on the asset-liability split. This exogenous shock on the reform program delayed the implementation of the restructuring of MPSRTC. 12. Long delays in enterprise restructuring threaten to strain Madhya Pradesh’s already precarious financial condition further. Both MPSRTC and MPFC are losing money. A dispute initially occurred regarding the rate of partitions for MPRTC between Chhattisgarh and Madhya Pradesh. Chhattisgarh proposed to take on only 18% of the assets and liabilities of MPRTC,

68 Appendix 7

while Madhya Pradesh state preferred a percentage share of 23.51 for Chhattisgarh. On 27 December 2002, the central Government gave a provisional bifurcation formula of 77:76:22:24 to Madhya Pradesh and Chhattisgarh, respectively, until a final decision may be reached. The issue is still under deliberation, while MPSRTC employs 19,000 people and is estimated to be losing $17 million per year. MPFC was bifurcated fairly quickly at the mutually agreed rate of 17:51:82:49. The rate was approved by the Assembly General Meeting and the central Government approved the scheme on 12 March 2003. However, MPSFC is in dire need of financial restructuring, as it is incurring massive losses both from operations and yearly provisioning against nonperforming loans. 13. As regards MPSEB, the bifurcation of the state caused severe financial difficulties that had a direct adverse impact on state finances. First, although, the share of energy consumption of the new Madhya Pradesh state is about 78% of the combined Madhya Pradesh, the generation capacity allotted to the new Madhya Pradesh was just 68%. Second, the new Madhya Pradesh has 94% of the agricultural consumers who need to be subsidized. Thus, the financial losses have increased on account of the low agricultural tariff and even lower recovery from farmers. Third, only 61% of the HT consumers remained in Madhya Pradesh, thereby adversely affecting the economics of electricity generation and cross-subsidizing agricultural and domestic consumers. Fourth, the cost of generation in the state rose to Rs1.27 per kilowatt-hour, against Rs0.77 per kilowatt-hour in Chhattisgarh (the high-cost plants are located in Madhya Pradesh). Fifth, a majority of the employees (about 78%) were allocated to MPSEB, against only 22% to CSEB. Sixth, a discrepancy exists in the division of liabilities between the two new states. Against 78% of the liabilities allocated to Madhya Pradesh, the revenues allocated are only 64%, making it even more difficult for the MPSEB to service these liabilities. 14. In addition to these negative impacts of bifurcation, the adjustment costs relating to the Program have declined only slightly, even though bifurcation left Madhya Pradesh with three quarters of the original population. According to estimates, the adjustment costs associated with the Program will fall from about $600 million to around $530 million. The loan size remains justified on the basis of adjustment costs even for the smaller new Madhya Pradesh state. 15. The adjustment costs contain two components: (i) revenue loss from tax reform associated with the introduction of the value-added tax and (ii) the costs associated with PSU restructuring. The tax revenue loss is estimated to decline from $185 million to $150 million as a result of bifurcation. The estimate is made by reducing the revenue loss from lowering input taxes and stamp duties (i.e., taxes on legal transactions) by the same proportion as manufacturing output loss (assuming inputs are used principally in manufacturing) resulting from bifurcation. The revenue loss was assumed to cover March 1999 through June 2001, with the reduction in revenue loss occurring during November 2000–June 2001. 16. With regard to the adjustment cost reduction associated with PSU reform, the only affected enterprises appear to be MPSRTC and MPFC. In the case of MPSRTC, while Madhya Pradesh is responsible for restructuring three of its four units (with the fourth under the responsibility of Chhattisgarh), it has offered a voluntary retirement scheme (VRS) to workers of the part of the company ultimately residing in Chhattisgarh. Therefore, bifurcation will reduce the restructuring costs by around $25 million for MPSRTC. In the case of MPFC, the effect of bifurcation will reduce the adjustment costs by $12 million, due to liabilities being shifted to Chhattisgarh. However, the downsizing and use of the VRS will increase the adjustment cost by $2 million. Thus, the PSU adjustment costs will decline by $35 million as a result of bifurcation and may be higher, depending on the ultimate restructuring plan implemented for MPSRTC. As the revised adjustment costs of $531 million greatly exceeds the loan size of $250 million, the same loan size for the smaller state remains justified.

69 Appendix 8

TECHNICAL ASSISTANCE COMPLETION REPORT Division: SAGF

Amount Approved: $600,000 TA No. and Name 3338-IND: Capacity Building for Public Enterprise Reform and Social Safety Net in Madhya Pradesh

Revised Amount: none

Executing Agency: Finance Department, Government of Madhya Pradesh

Source of Funding: Technical Assistance Special Fund

TA Amount Undisbursed

$29,600.88

TA Amount Utilized

$570,399.12

Date Completion Date Original: 3 April 2001 Actual: 31 October 2001

Closing Date Approval 14 Dec 1999

Signing 7 April 2000

Fielding of Consultants 3 July 2000

Original: 3 April 2001 Actual: 31 May 2003 Description 1. Asian Development Bank started providing technical assistance to the Government of Madhya Pradesh (GoMP) on public finance and governance in 1997. TA No. 2943-IND: Support for the Government of Madhya Pradesh Public Finance Reform and Institutional Strengthening was approved on 15 December 1997, for $780,000. The technical assistance supported GoMP's public finance reform including reform of tax system, expenditure prioritization and management, and institutional strengthening. And TA No. 2944-IND: Strengthening Local Government in Madhya Pradesh was approved on 15 December 1997, for $700,000. It supported GoMP's good governance through decentralization initiative, by enhancing resource mobilization capacities of urban and rural local bodies, improving financial data gathering and processing at state and local levels, and strengthening the institutional capacity of training facilities for local bodies. Overall, these two TAs focused on the policy, regulatory, and institutional aspects of provision of social and economic services to enhance development efforts of the state.

2. While implementation of TA 2943 and TA 2944 was underway, Loan 1717-IND: Madhya Pradesh Public Resource Management Program was conceptualized. Based on the preliminary findings of the two TAs and the Loan fact finding team, it became apparent that additional technical assistance for public enterprise reform would be needed to complement the coverage of the two TAs and Loan 1717. Hence, TA 3338 was attached to Loan 1717 to enable capacity building to GoMP for reforming public sector undertakings (PSU) and developing a social safety net (SSN) for workers retrenched during such reform in Madhya Pradesh. The technical assistance was approved, as part of Loan 1717, on 14 December 1999.

Objectives and Scope 3. The objectives of TA 3338 were (i) to establish effective institutional mechanisms for restructuring and divestment of PSUs, including assistance in designing and implementing the social safety net (SSN); (ii) capacity building for undertaking PSU reform; and (iii) improving corporate governance including strengthening accounting and information systems of PSUs. The scope of the technical assistance include (i) providing assistance on all aspects of restructuring and divestment including valuation, corporate and financial restructuring, tendering and bid evaluation, and labor issues; (ii) reviewing and assessing the existing arrangements for management of PSUs and corporate governance structure; (iii) suggesting measures to increase accountability and enhancing the operational autonomy; and assessing the need for improvement in PSUs’ accounting systems and reporting requirements; (iv) conducting workshop to expose policy makers, management of PSUs, and government agencies to national and international experience on approach and modalities of restructuring and/or divestment efforts to enhance their capacity, and organizing training seminars and conducting training for staff of the Department of Public Enterprise (DPE) and a technical secretariat; (v) providing assistance in the design of the social safety net and suitable mechanisms and institutional setups; and (vi) designing appropriate strategies and establishing links to local institutions for long-term sustainability.

Evaluation of Inputs 4. Technical assistance objectives, scope, and implementation arrangements had been identified during consultations between ADB and GoMP; they were duly reflected in technical assistance design. The Terms of Reference (TOR) supported the objectives of Loan 1717-IND for which fields of specialization included for restructuring, corporate governance, social development and training, valuation, accounting, companies law, cooperative law and/or organization, and merchant banking. Adam Smith International was engaged in accordance with the ADB's Guidelines on the Use of Consultants to provide the consultancy services required for TA 3338, and consultants were fielded in July 2000. A total of five contract variations were made during the period of engagement, including provision for government officials’ attendance at a Privatization Conference in Hyderabad in April 2001. By the time of technical assistance completion, and submission of Final Report in August 2001, consultants’ inputs totaled 42 person-months (31.59 domestic and 10.41 international). Technical assistance completion was delayed because of additional information required to support Consultant’s Final Statement of Eligible Expenses. ADB coordinated with the consultants and GoMP, and administered technical assistance implementation. However, technical assistance contributions could have been enhanced if monitoring by ADB staff could have been more frequent and regular, addressing stakeholder feedback on areas for immediate attention.

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5. The Government contributed 25% equivalent of local currency costs of the technical assistance, through provision of counterpart staff to work with the technical assistance consultants, domestic travel expenses, office space, secretarial and related services, and logistical support to the consultant team. It was foreseen that a technical secretariat would be formed by GoMP, as an advisory body to undertake the preparatory and technical analysis of PSUs including valuation, and to provide assistance on technical aspects of restructuring and divestment. In implementing public enterprise reform. The technical assistance consultants would be working in close collaboration with the DPE and the technical secretariat, in addition to being the resource persons during seminars and training. Due to resource constraints, formation of a technical secretariat was delayed and the consultants worked primarily with the Finance Department of GoMP (the Executing Agency) and DPE regarding PSU restructuring and SSN. Moreover, they provided assistance in defining the role of and institutional framework for setting up the technical secretariat. Performance of ADB and the Executing Agency is rated as partly satisfactory.

Evaluation of Outputs 6. Key outputs of the technical assistance included diagnostic and advisory reports on: (i) restructuring Madhya Pradesh State Road Transportation Corporation (MPSRTC); (ii) restructuring Madhya Pradesh Finance Corporation (MPFC); (iii) framework for implementing SSN program in Madhya Pradesh; (iv) Madhya Pradesh Export Corporation (MPExC); (v) implementing corporate governance in Madhya Pradesh PSUs; (vi) technical secretariat; (vii) cooperative sector; (viii) reforms in the SME sector; and (ix) valuation of assets. Consultants prepared Tender Procedures, Accounting Standards and Closure Procedures Manuals for PSUs.

7. The technical assistance also supported: (i) a workshop on social safety nets, which explored future SSN options through discussion and collaboration with public sector and private sector organizations involved in training and employment placement in Madhya Pradesh, on 7–8 December 2000; and (ii) a study tour for Assistant Director, Finance to Hyderabad, to gain insights into the process of privatization, and institutional arrangements, organization and functioning of the Implementation Secretariat and its SSN unit in November 2000.

8. Main recommendations that emanated from the technical assistance on restructuring of PSUs were reviewed by GoMP. Institutional and financial restructuring in both MPFC and MPSRTC are underway. However, the two components of social safety nets in support of the PSU reform, viz. voluntary retirement scheme (VRS) to augment downsizing in PSUs and rehabilitation of displaced workers, have not reached their full potential. The State Renewal Fund, which was established to fund VRS, has been dwindling and access ha been increasingly limited, despite continuing demand from PSUs for VRS assistance. And discretionary counseling and rehabilitation programs for displaced workers are nearly nonexistent.

Overall Assessment and Rating 9. Inputs were used efficiently and effectively; outputs originally foreseen were delivered in a timely manner, with the exception of activities related to the technical secretariat. Accordingly, 42 (instead of the projected 43) person-months of technical assistance services were delivered. The consultants incorporated feedback from consultations with major stakeholders into their reports. Implementation of technical assistance recommendations has begun. Progress has been slow in identifying additional PSUs for restructuring and the restructuring of MPSRTC and MPSFC, due to limited availability of funds to offer voluntary retirement scheme to their employees. Overall, the technical assistance is rated as partially successful.

Major Lessons Learned 10. Commitment to reform by both bureaucrats and politicians is a prerequisite for successful implementation of technical assistance. Equally important is building technical assistance design on sound assumptions about anticipated activities. In this case, the technical secretariat was expected to be operational before technical assistance implementation began. However, it was not because of political cadre's skepticism about its usefulness and lack of resources to staff and maintain such a think-tank. And activities relating to the technical secretariat that could have been carried out under this technical assistance were foregone. Fortunately, current bureaucratic cadre are supportive of forming the technical secretariat, fully aware of the valuable contributions it can make to advancing PSU reform in Madhya Pradesh, and a proposal for a one million pound technical assistance from the Department of International Development is being considered to fund the technical secretariat.

11. More interaction among ADB staff, consultant team, and concerned PSUs is recommended to foster stronger commitment, cooperation, and smooth working relationship with concerned PSUs. This would also provide flexibility in technical assistance implementation so that developments that could not have been anticipated at the technical assistance design stage could be addressed expeditiously and adequately in due course.

Recommendations and Follow-Up Actions 12. A technical secretariat should be formed and made operational. Scope still exists for technical support to DPE for expeditious PSU reform. Restructuring plans prepared to date should be reviewed by GoMP with a view to implementing them, or making revisions (if required) and implementing them as soon as possible. Additional PSUs should be considered for restructuring, as appropriate. Prepared by Yesim Elhan-Kayalar Designation Economist, SAGF