ASIAN DEVELOPMENT BANK RRP:IND 29051

REPORT AND RECOMMENDATION

OF THE

PRESIDENT

TO THE

BOARD OF DIRECTORS

ON A

PROPOSED LOAN

AND TECHNICAL ASSISTANCE GRANT

TO

INDIA

FOR THE

MADHYA PRADESH PUBLIC RESOURCE MANAGEMENT PROGRAM

November 1999

CURRENCY EQUIVALENTS(as of 1 November 1999)

Currency Unit – Indian Rupee/s (Re/Rs)Re1.00 = $0.02305

$1.00 = Rs43.38

The exchange rate of the rupee is determined by the Reserve Bank of India under a system ofmanaged float. For the purpose of calculations in this report, a rate of $1.00 = Rs42.50 isused. This was the rate generally prevailing at the time of appraisal and subsequent contactmission.

ABBREVIATIONS

CIP - Core Investment ProgramGDP - gross domestic productGMP - government of Madhya PradeshMPEB - Madhya Pradesh Electricity BoardMPERC - Madhya Pradesh Electricity Regulatory CommissionMPFinC - Madhya Pradesh Financial CorporationMPHB - Madhya Pradesh Housing BoardMPLDC - Madhya Pradesh Leather Development CorporationMPPHC - Madhya Pradesh Police Housing CorporationMPPRMP - Madhya Pradesh Public Resource Management ProgramMPSAIDC - Madhya Pradesh State Agro Industries Development CorporationMPSCB - Madhya Pradesh Slum Clearance BoardMPSExC - Madhya Pradesh State Export CorporationMPSFishDC - Madhya Pradesh State Fisheries Development CorporationMPSIC - Madhya Pradesh State Industries CorporationMPSIndDC - Madhya Pradesh State Industrial Development CorporationMPSLandDC - Madhya Pradesh State Land Development CorporationMPSRTC - Madhya Pradesh State Road Transport CorporationMPSTexC - Madhya Pradesh State Textile CorporationMPSTourDC - Madhya Pradesh State Tourism Development CorporationMTFF - medium-term fiscal frameworkPRMC - Public Resource Management CommitteePSU - public sector undertakingSDP - state domestic product (net)TA - technical assistanceULCRA - Urban Land (Ceiling and Regulation) Act

NOTES

(i) The fiscal year (FY) of the Government ends on 31 March. FY before acalendar year denotes the year in which the fiscal year ends; for example, FY1999 begins on 1 April 1998 and ends on 31 March 1999.

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

CONTENTS

Page

LOAN AND PROGRAM SUMMARY i

I. THE PROPOSAL 1

II. INTRODUCTION 1

III. THE MACROECONOMIC CONTEXT 2

A. Recent Economic Performance and Prospects 2B. Issues in Economic Management and Sustainability of the

Development Process3

C. Reform Agenda at the State Level 3

IV. THE STATE OF MADHYA PRADESH 4

A. Background, Recent Performance, and Medium-Term Prospects 4B. Constraints and Issues 5C. External Assistance to Madhya Pradesh 15D. The Bank’s Strategy and Lessons Learned 15

V. THE PROGRAM 16

A. Rationale 16B. Objectives and Scope 18C. Policy Framework and Actions 18D. Social and Environmental Issues 29

VI. THE PROPOSED LOAN 31

A. Amount of Loan and Source of Funds 31B. Interest, Maturity, and Utilization Period 31C. Implementation Arrangements 31D. Procurement 31E. Disbursement 32F. Counterpart Funds 32G. Monitoring and Tranching 32

VII. THE PROPOSED TECHNICAL ASSISTANCE 35

VIII. PROGRAM BENEFITS AND RISKS 35

A. Benefits 35B. Risks and Safeguards 36

IX. RECOMMENDATION 37

APPENDIXES 38

LOAN AND PROGRAM SUMMARY

Borrower

The Proposal

India

A loan is proposed for Madhya Pradesh, the largest and oneof the poorest among the 25 states in India, for the PublicResource Management Program (the Program) to improvepublic resource management and increase expenditure tosocial sectors to foster human development and supporteconomic growth on a sustainable basis.

The Program

Rationale Madhya Pradesh’s population suffers from severe incomeand capability poverty and faces wide-ranging structuralproblems including weak public resource management andlack of enabling environment for private sector participation.Inefficient resource mobilization and ineffective resource useadversely affect the state’s development and preventsatisfaction of basic human needs. The state governmenthas formulated a comprehensive reform program includingexpenditure reallocation to social services to foster humandevelopment. Bank support will provide required technicaland financial assistance for the state to implement itsreforms. Although the immediate impact of Bank’s supportwill be at the state level, the Program will also enhance theadaptability and resilience of the Indian economy in general,and set an example that may accelerate the progress inother poor states.

Objectives and Scope

The Program supports the Government of MadhyaPradesh's efforts to foster social development andsustainable economic growth by addressing prevailingresource and implementation constraints in MadhyaPradesh. The Program focuses on (i) enhancing resourceallocation to social sectors through focused social sectorinterventions to support human development; (ii)implementing public sector reforms including capacitybuilding and institutional strengthening for improved fiscalcapabilities and management, and policy and operationalframeworks for restructuring of public enterprises; and (iii)promoting an enabling environment for private sectorparticipation. The Program will also assist in strengtheningenvironmental management, and mitigating the social impactof economic development.

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Classification Primary Objective: Economic GrowthSecondary Objective: Human Development

Environmental Assessment

Category CEnvironmental implications of the proposed policy andinstitutional reforms were reviewed, and appropriateenvironmental interventions have been incorporated.

The Bank Loan

Loan Amount and Terms

A loan of $250 million is proposed from the ordinary capitalresources at standard terms for program loans: anamortization period of 15 years, including a grace period of 3years; an interest rate determined in accordance with theBank’s pool-based variable lending rate system for US dollarloans; and a commitment charge of 0.75 percent per annum.

Program Period and Tranching

The Program period will be three years from March 1999 toMarch 2002. The proposed loan will be released in threetranches. The first tranche, equivalent to $100 million, willbe made available upon loan effectiveness. Thegovernment’s initial policy measures began before Boardcirculation of the proposed loan, fulfilling all the first trancheconditions. The second tranche, amounting to $75 million,will be released upon satisfactory compliance with theagreed conditions, expected by September 2000. The finaltranche of $75 million will be released upon satisfactorycompliance with the agreed conditions as reflected in thePolicy Matrix.

Procurement Contracts for eligible imports will be awarded either throughnormal commercial procurement practices and procedures ofthe private sector or the prescribed procurement proceduresof the Central Government acceptable to the Bank, and inaccordance with the provisions of the Simplification ofDisbursement Procedures and Related Requirements forProgram Loans. All goods to be financed out of the loan willbe produced and procured from member countries of theBank.

Disbursements The proceeds of the loan will be used to finance a broadrange of imports other than those specified in the negativelist. To facilitate the timely release of funds to meet theadjustment costs, the loan proceeds may be used to financeeligible expenditures incurred up to 180 days prior to thedate the loan became effective.

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Executing Agency Finance Department of the Government of Madhya Pradesh

Counterpart Funds The Borrower will transfer the rupee counterpart fundsgenerated by the loan to the Government of MadhyaPradesh for its use for identified purposes. The counterpartfunds will be treated as an addition to the transfers allocatedannually from the Government of India to the StateGovernment. The counterpart funds will finance outlays formitigating the social impact of public enterprise reform aswell as the funding for the Program's social sectorinterventions.

TechnicalAssistance

In conjunction with the proposed loan, a TA will be providedfor Capacity Building for Public Enterprise Reform andSocial Safety Net in Madhya Pradesh to complementongoing technical assistance to the state on support forsustainable economic and social development andinstitutional strengthening.

Consultants will be required for the TA and will be engagedin accordance with the Bank's Guidelines on the Use ofConsultants and other arrangements satisfactory to theBank.

Risks andSafeguards

A number of factors could affect implementation of theProgram. A potential risk is the state government’s limitedexperience and institutional capacity to implementcomprehensive reforms. Appropriate advisory technicalsupport is being provided by the Bank, including forstrengthening of institutional and procedural frameworkssuch as expenditure management and control, taxadministration, and statistical information system for rationaldecision making at state and local government levels. ATechnical Secretariat for capacity building on theapproaches and modalities of restructuring and divestmentof public sector undertakings is set up under the Program.The government has constituted Steering Committees tofacilitate coordination of ongoing technical assistance. TheSteering Committees vet the consultants' recommendations,and act as effective interface between the consultant teamsand government working groups. This will strengthen theownership of the reform agenda.

Another risk is the involvement of a large number of stategovernment agencies, departments, and public enterprises.To expedite implementation of the Program, an effective

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coordination mechanism will be essential. The governmenthas set up the Public Resource Management Committeechaired by the Chief Minister, to advise and coordinate thereform program. The Committee will be supported by anEmpowered Committee on Public Finance Reform and anEmpowered Committee on Public Enterprises Restructuring,both headed by the Chief Secretary with high-levelrepresentation from key sector departments.

The reform of the public enterprise sector and improvementin corporate governance, which the state government isimplementing, will improve the financial performance of theenterprises. Yet, as experience has shown, the pace ofdivestment of government shareholding is also dependenton prevailing market conditions. This could potentially delaydivestments. However, the government has adopted a firmpolicy of reforming public enterprises and is taking specificsteps to strengthen technical capacity to undertakerestructuring and divestment of public enterprises and toassess all approaches and modalities for increasing privatesector shareholding in these entities.

Finally, in view of the tremendous resource requirement ofthe state to alleviate poverty conditions, financial assistancefrom the international aid community is needed. Enhancedresource flow would facilitate the state government’s effortsto improve availability of social infrastructure and delivery ofsocial services. The state government and the Bank jointlyorganized a workshop on Madhya Pradesh Developmentand Aid Coordination in April 1998 to present the Bank’sProgram to the international community, and to identifyareas for possible financial and technical assistance. As atangible outcome of the aid coordination meeting, one of thebilateral donors has included Madhya Pradesh as a focalstate for future development assistance.

I. THE PROPOSAL

1. I submit for your approval the following Report and Recommendation on a proposedloan to India for the Madhya Pradesh Public Resource Management Program. The report alsodescribes proposed technical assistance (TA) for Capacity Building for Public EnterpriseReform and Social Safety Net in Madhya Pradesh, and if the proposed loan is approved by theBoard, I, acting under the authority delegated to me by the Board, shall approve such technicalassistance.

II. INTRODUCTION

2. The Constitution of India assigns significant responsibilities for delivery of socialservices and economic policymaking and regulation to the federating states. It is thereforecritical that the pace and direction of economic reforms at the state level reinforce policyinitiatives taken by the central Government. Together, efforts at the national and subnationallevels increase the systemic flexibility and adaptability of the Indian economy to a changingexternal environment.

3. While the Government has the capability of designing and sequencing reforms and canmobilize financial resources to absorb the associated costs, the states are not able to respondas actively. State governments generally lack the capacity and resources to formulate andimplement comprehensive reforms. These technical and financial constraints are morepronounced in low-income and less-developed states like Madhya Pradesh, the largest andone of the most populous states in India, with more than 40 percent of the population livingbelow poverty line. Without assistance, these states are not able to initiate structuraladjustment; this weakness not only adversely affects their own social and economicdevelopment process, but also impacts on the sustainability of reforms at the national level.As a result, the main policy challenge facing India is to accelerate states’ reforms to enhanceeconomic efficiency and provide a sound basis for economic growth and social development.

4. Taking into account the wider focus of assistance required, and the need forappropriate targeting of support within the country's federal structure, the Bank’s operationalstrategy for India in 1996 advocated increased lending and TA support at the subnational level.In implementing this strategy, in December 1996 the Bank approved a loan to assist the publicsector reform agenda of the government of Gujarat.1 In early 1997, a state selection missionvisited six states2 and proposed Madhya Pradesh for Bank support on the basis of criteriaspecified in the Country Operational Strategy,3 including the willingness and commitment of thegovernment of Madhya Pradesh (GMP) to undertake structural reforms, and the state’s sizableneeds for infrastructure and social development. Reflecting the large variations in developmentstages between Indian states, the Bank’s subnational operations focus on entities with verydifferent socioeconomic characters: unlike Gujarat, Madhya Pradesh is among the least-developed states, has wide gender gaps in access to economic resources and social services,and has still a primarily agriculture-based economy; and compared with Gujarat, MadhyaPradesh has high income poverty and a large minority population, implying the need for astronger social dimension to Bank assistance. With the Government of India’s concurrence,GMP and the Bank developed a comprehensive reform agenda to be supported by the 1 Loan No. 1506-IND: Gujarat Public Sector Resource Management Program, for $250 million, approved on 18

December 1996.2 Andhra Pradesh, Karnataka, Kerala, Madhya Pradesh, Rajasthan, and Tamil Nadu.3 STS: IND 96002: Country Operational Strategy Study, India, July 1996.

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proposed loan.4 The Program addresses critical elements for sustainable reform at the statelevel: support for human development initiatives particularly in health and education sectors;improvement in resource mobilization and efficiency of resource use through structural reformof the public finances and public enterprise restructuring; and implementation of a conduciveinstitutional, policy, and regulatory framework for private sector participation.

5. Reconnaissance, consultation, and fact-finding missions were fielded betweenDecember 1997 and April 1998. Appraisal of the program loan was undertaken 17-30 July1998, 5 followed by a contact mission fielded during 16-25 February 1999. This report is basedon the missions' findings. The program framework is shown in Appendix 1. The outcome ofthe various missions is reflected in the government’s development policy letter and attachedpolicy matrix (Appendixes 2 and 3), which also express GMP’s commitment and detail thenature and scope of the proposed reforms.

III. THE MACROECONOMIC CONTEXT

A. Recent Ec onomic Performance and Prospects

6. After growing strongly during 1991-1996, stimulated by domestic delicensing and theliberalization of the trade and external payments regimes, lower industrial activity and volatileagricultural production slowed the growth of India's economy to between 5 and 6 percent inFY1998 and FY1999. This has been accompanied by higher inflation (particularly in consumerprices) due to agricultural supply constraints, more rapid monetary expansion, and thedepreciation of the rupee in the wake of the financial crisis in the region. Notwithstanding earlysigns of a pickup in economic activity in the first half of 1999, the durability of the upturn isuncertain due to remaining structural impediments of the economy. Meanwhile, the externalcurrent account deficit remained about constant at 1.2 percent of GDP during FY1997 to FY1999 as the decline in export growth was offset by lower imports reflecting sluggish industrialactivity and a sharp decline in petroleum imports in US dollar terms. The international reservesposition remained comfortable, boosted by capital inflows from nonresident Indians andcontinued inflow of direct foreign investment, although portfolio investment declined in FY1998relative to the previous year, and turned negative during most of FY1999.

7. Following early improvement in the central Government's public finances betweenFY1991 and FY1997, the fiscal deficit has since fluctuated at around 5-6 percent of grossdomestic product. Lower than anticipated tax buoyancy, shortfalls in divestment proceeds,and expenditure pressure, particularly related to subsidies, as well as wage adjustmentsresulting from the implementation of the Fifth Pay Commission, have prevented furtherprogress on fiscal consolidation. For FY2000, the central Government is envisaging arenewed decline in the fiscal deficit from last year's 5.9 percent of GDP to 5.2 percent of GDP(using Reserve Bank of India definition), and at end-February 1999 has announced severalrevenue enhancing measures including surcharge on individual and corporate income taxrates. Lower than budgeted tax revenues and expenditure overruns so far this year, however, 4 The Bank is presently providing TA in support of Madhya Pradesh's comprehensive reform for sustainability of

the economic and social development (see Appendix 11). Ongoing TA support includes (i) TA No. 2943-IND:Support for the Government of Madhya Pradesh Public Finance Reform and Institutional Strengthening, for$780,000, approved on 15 December 1997; and (ii) TA No. 2944-IND: Strengthening Local Government inMadhya Pradesh, for $700,000, approved on 15 December 1997.

5 K. Gerhaeusser, Senior Economist/Mission Leader; V.B. Tulasidhar, Economist; T. Zhang, Economist; A.Goswami (Counsel); P. Abeygunawardena, Environment Specialist; and M. Mitra, Social Development Specialistparticipated in the fact-finding/appraisal missions.

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will make achievement of the budget target difficult. Meanwhile, the states’ fiscal situation hasremained very precarious, and continued budgetary pressures have adversely impacted on thestates’ provision of economic and social services. Predictably, the poorest states havesuffered most. Key economic and social indicators are shown in Appendix 4.

B. Issues in Economic Management and Sustainab ility of the Development Process

8. Fiscal imbalances are posing a major challenge for macroeconomic management andthe sustainability of social and economic development. Unless addressed, inadequate publicsaving will affect the public sector’s capacity to invest and to complement private sectorinvestment, both of which are crucial for achieving and sustaining high rates of growth,fostering social development, and reducing poverty. Moreover, in the absence of fiscalconsolidation, tighter monetary policy may be required to lower inflation, which could raise realinterest rates, dampen investment, and increase the Government’s debt service burden.Reversing the decline in public saving will require substantial improvement in the financialperformance of the central and state governments, as well as public enterprises.Consideration must further be given to expenditure composition and the quality of adjustmentto meet the longer term development requirements for social and physical infrastructure.

9. Although part of the states’ financing requirements are being met by central transfers,including loans and grants,6 and reliance on intergovernmental transfers may have somewhatdiscouraged states’ fiscal discipline and delayed the recognition of the need for reform,resource constraints are increasingly preventing subnational governments from providing thesocial and economic services which the Constitution assigned to them. These constraints andadverse effects are more pronounced in the low-income and less-developed states. This is notonly affecting their economic growth, but also hamper human development and prolong theexisting income and capability poverty of their population.

C. Reform Agenda at the State Level

10. The Indian Constitution gives the states considerable financial and economic autonomyto define their development priorities, and has entrusted them with the provision of economicand social services and the regulation of key infrastructure sectors. Yet, in line with thenational focus on central development planning, which had prevailed for a considerable time,the states’ development strategy was mainly directed toward strong public sector involvementin social and economic activity, investment, and pricing. A rather residual role was thereforeassigned to private sector activities, and not much emphasis was given to the importance of aconducive institutional, policy, and regulatory environment for private sector participation.

11. The availability of resources, particularly through intergovernmental transfers, enabledstates to invest in and initiate multifarious schemes without regard to expenditure priority,sustainability, or absorptive capacity. Projects were initiated but completion delayed, paymentobligations incurred without full consideration of future debt service burden, and economic and

6 States are receiving three different types of transfers from the Government: (i) statutory transfers, comprising the

devolution of tax revenues collected nationwide as well as certain grants, on the basis of Finance Commissionrecommendations; (ii) loans and grants authorized by the Planning Commission for economic and socialdevelopment expenditure; and (iii) discretionary transfers made by individual ministries out of their own planoutlays, as well as additional plan assistance for implementing externally aided projects. Bank assistance for theProgram will be treated as “additionality” and provided to Madhya Pradesh through the central Governmentbudget in addition to all other transfers.

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social services were provided without proper pricing and cost recovery. The ensuing implicitand, in some cases, explicit subsidies, coupled with a certain lack of incentive to mobilize theirown resources, worsened the states’ public finances. The growing fiscal imbalances reflecteda deteriorating quality of the deficit, as growth-inducing and socially productive investmentswere gradually replaced by nonproductive expenditures. This was compounded by a risingwage bill as a result of increased government employment and periodic wage adjustments,and higher interest obligations due to increased indebtedness at more market-determinedinterest rates. At the same time, stagnating revenues owing to low tax buoyancy and a declinein nontax revenues as a share of GDP did not provide sufficient additional resources toalleviate fiscal pressures. Consequently, the consolidated current account balance of thestates shifted from a surplus of 1 percent of net state domestic product (SDP) during 1980-1987 to a deficit of about 0.8 percent of SDP a decade later; in continuation of this trend, thedeficit is likely to exceed 1.5 percent of SDP in FY1999. In addition, the financial andinstitutional weaknesses at the subnational level are hindering the provision of states’infrastructure and social services at a time when the reform process in India depends criticallyon sustained efforts in key areas under the states’ purview.

12. For the states to adjust to the new development focus and ensure sustainableeconomic and social development, reforms need to address (i) the changing composition ofpublic expenditures by reducing the escalation of the wage bill, lowering subsidies, andcurtailing the budgetary burden of public enterprises, while raising resource allocation forsocial services to enable maintaining and expanding human development initiatives on asustainable basis, taking into account the social cost of structural adjustment; (ii) enhancingresource mobilization through widening the tax base, improving efficiency of taxation andstrengthening tax administration, and enhancing cost recovery; and (iii) the policy, regulatory,and institutional regime of key sectors to establish a conducive environment for private sectorparticipation.

IV. THE STATE OF MADHYA PRADESH

A. Backgr ound, R ecent Performance, and Medium-Term Prospects

13. Formed in 1956 and located in the center of India, Madhya Pradesh is the country’slargest state, covering 443,446 square kilometers: 13.5 percent of India’s total geographicarea. More than one third of the state’s 77 million people (1998) belong to socially andeconomically disadvantaged groups consisting of scheduled tribes and scheduled castes, thehighest proportion in India (para. 33). Madhya Pradesh is still a predominantly agricultural stateand, with a per capita annual income of Rs7,500 ($176), one of the poorest states in India.

14. The state economy has shown robust economic growth averaging 4.4 percent sinceFY1981, accelerating to about 5 percent during 1990-1996. The contribution of the primarysector to SDP has gradually declined from 56 percent in FY1981 to about 40 percent atpresent, while both industry and services sectors increased by 6 percentage points to 25percent and 33 percent, respectively. In particular, reflecting the state’s rich natural resourceendowment, industrial and mining activities are increasingly focusing on the processing ofmanganese, iron ore, and coal.7 Notwithstanding the shift in sector composition, the sectoralstructure of the workforce continues to be heavily biased toward agriculture, which maintained

7 This has resulted in serious environmental problems such as soil erosion, water pollution, degradation of forest,

and air pollution.

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its relative share of about 78 percent of total employment, while employment in the tertiarysector increased. In view of the state’s high population growth, per capita income (in constantprices) increased by only 1.8 percent per annum, about 30 percent below national average,and more than 40 percent of the population lives below poverty line. Coupled with significantincome poverty, the state has very low social indicators, which despite some improvements,particularly in education, are still far below the national average.

15. The government’s reforms focus on achieving medium-term sustainability of the publicfinances while reallocating expenditure to meet basic human needs and facilitate developmentof social and physical infrastructure. The economic prospects in the medium and longer termdepend critically on the effective and efficient implementation of the comprehensive reformssupported by the Program. Improving the allocative efficiency and establishing a conduciveenvironment for private sector activity while removing policy and regulatory impediments andstrengthening the institutional setup, is expected to stimulate economic growth, enableprovision of basic services, and foster social development.

B. Constraints and Issues

16. The main constraints on the social and economic development in Madhya Pradesh are(i) the structural weaknesses of public finances including inefficiency in resource mobilizationand ineffectiveness of resource use, and the resulting unsustainable pattern of expenditure; (ii)inefficiency of public enterprises performance; (iii) inadequacy of physical infrastructure,particularly in the power, roads, and housing sectors; and (iv) insufficient social development.

1. Structural Weaknesses of Public Finances and Sustainable Fiscal Strategy

17. Sound finances are critical for infrastructure development and the provision of socialservices that are among the state’s primary responsibilities. During the 1980s, GMP hadmaintained relatively high fiscal deficits (4-5 percent of SDP) and yet was able to contain itsdebt burden, in part because of its ability to borrow at negative real interest rates. In the wakeof financial sector reforms in India and the tightening of central bank control over overdraftfacilities, the state’s borrowing requirements were increasingly financed at market-determinedrates, which substantially raised the interest burden. Additional fiscal pressures resulted fromwage adjustments, budget support for loss-incurring public sector undertakings (PSUs), andincreasing subsidies. As tax revenues stagnated and central Government transfers to thestate declined, resource mobilization efforts were not sufficient to cover rising expenditures.This resulted in a widening current account deficit, requiring the government to borrow forcurrent (“consumptive”) expenditure rather than capital outlays. To mitigate the impact on theoverall deficit and government borrowing requirements, public investment was compressed.Recognizing these precarious fiscal trends, GMP started to implement a number of measures(including the abolition of vacant posts and a ban on recruitment of staff, consolidation of themotor vehicles tax system, and simplification of the sales tax rate schedule and taxassessment) and thereby managed to keep the fiscal deficit at about 3.5 percent of SDPthrough FY1996. After that, however, fiscal pressures mounted, reflecting one-time factors aswell as inherent structural weaknesses in the public finances, and the deficit rose above 5percent of SDP (Appendix 5, Table A5.1).

18. Stagnating resource mobilization. The state receives about 60 percent of itsrevenues from its own tax and nontax receipts, while the remaining share comes from its shareof national taxes plus central Government grants. Almost one half of GMP’s tax revenues

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accrues from sales tax, which has generally high revenue buoyancy. In Madhya Pradesh,however, sales tax revenues as a share of SDP remained stagnant owing to the narrow taxbase, complex rate schedule, and wide-ranging exemptions (particularly for industry) in thestate’s industrial incentives scheme. Meanwhile, GMP has made good progress in tapping thepotential of the state excise duty, electricity duty, and motor vehicles tax, which together haveyielded additional revenues equivalent to 1 percent of SDP since 1985. In view of the alreadyhigh tax burden compared with the national average, however, it is unlikely that additionalrevenues can be mobilized from these sources. Madhya Pradesh also relies more heavily thanother states on nontax revenues (excluding Government grants), accounting for almost 20percent of total receipts. Nontax revenues consist mainly of royalties on minerals andrevenues from forest products, and reflect the state’s natural resource endowment. As royaltyrates on major minerals are not under GMP’s purview and are mostly specific rates rather thanad valorem, and revenues from forest products are constrained by provisions in the ForestConservation Act, the state cannot rely on further resource mobilization from these sources.However, nontax revenue collection has also been adversely affected by low and decliningcost recovery on economic and social services and inadequate return on governmentinvestment particularly in PSUs; this trend needs to be reversed.

19. Rise in revenue expenditure and shift in expenditure composition. Currentexpenditures have steadily increased due to (i) a rise in the wage bill reflecting cost-of-livingadjustment and increase in public sector employment; (ii) the more than doubling in interestpayment as a share of SDP; and (iii) rise in losses of PSUs including conversion of loans toequity through capital grants, and write-off of debt to cancel arrears on subsidy payment. Dueto resource constraints, the increase in expenditures resulted in a change in expenditurecomposition: public investment was compressed and outlays for operation and maintenancesqueezed, affecting both the expansion and maintenance of infrastructure and other capitalassets; and resource availability for allocation to social services was limited, which otherwisecould have facilitated progress in the state’s social development. The expenditure pressureswere exacerbated by weak budgeting procedures and insufficient budgetary control, resultingin expenditure overruns and lower expenditure efficiency. Two additional factors havecontributed to the recent surge in public expenditures and the rise in the level of outstandingdebt: (i) payment of accrued wage and pension obligations resulting from GMP’s acceptance inearly 1998 of recommendations of the Fifth Pay Commission; and (ii) outlays for therehabilitation of Jabalpur, which was hit by an earthquake in 1997.

20. Issues for a sustainable fiscal strategy. To formulate a sustainable fiscal strategy, thefollowing main issues will need to be addressed: (i) reallocating resources toward social andphysical infrastructure to foster human development and economic growth on a sustainablebasis; (ii) rationalizing the tax system and strengthening the institutional and proceduralframework to improve resource mobilization and allocative efficiency; (iii) adjusting prices ofservices to enhance cost recovery and reduce budgetary subsidies, and implementingmechanisms to de-politicize price setting and improve governance; and (iv) reducing thebudgetary burden of public enterprises and improving their operational efficiency.

2. Inefficiency of Public Enterprises Performance

21. Madhya Pradesh has 31 PSUs, set up under various legal frameworks, to achieve amultiplicity of developmental, promotional, and commercial objectives. The PSUs employabout 134,000 people, or 10 percent of the state’s total public sector work force (Appendix 6).The government’s total investment in PSUs amounted to Rs33 billion ($775 million) or 5.4

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percent of SDP, with GMP holding 100 percent of equity in most of the enterprises. Theoperational and financial performance of the PSUs has been extremely weak: in FY1998, thepublic enterprises sector (excluding the State Electricity Board [MPEB]) as a whole incurredafter-tax losses of Rs570 million or 0.1 percent of SDP, and has accumulated losses of morethan Rs5 billion (about 0.9 percent of SDP). Dividend payments amounted to Rs47 million inFY1998, equivalent to only about 0.5 percent of the GMP’s share in total paid-up capital. Incontrast, the state budget bears a heavy burden as it underwrites losses of PSUs throughbudgetary support for loans, grants or write-off of debt service payment, as well as equityinjection in PSUs and funding of their investment plans.8 Further budgetary implications mayresult from providing loans without adequate evaluation of associated credit risks, as well ascontingent liabilities on account of GMP guarantees for PSUs’ borrowing from financialinstitutions. The reliance on budgetary support has shielded PSUs from changing marketconditions, and perpetuated their lack of commercialization and susceptibility to politicalinterference and inadequate management decision, information, and control systems.

22. In the absence of a policy on restructuring and divestment, the state governmentapproached public enterprises reform on a case-by-case basis: GMP closed one enterprise(Madhya Pradesh Film Development Corporation); transferred a unit of the Madhya PradeshState Industries Corporation to the private sector under management contract; and privatizedone of Madhya Pradesh State Textile Corporation’s small processing mills. Public enterprisesreform was further constrained by (i) lack of an effective institutional mechanism for developingand implementing a PSU restructuring program; (ii) lack of focus on corporate governanceissues; (iii) restrictive labor legislation that, as in other states, acted as barrier to restructuringby preventing downsizing of PSUs; and (iv) pressure on the public finances, which limited theavailability of funds for financial and organizational restructuring of public enterprises and theprovision of an adequate social safety net.

3. Inadequate Development of Physical Infrastructure

23. In Madhya Pradesh, as in other states, infrastructure development and services havegenerally been provided by the public sector because of their positive externalities, theelement of monopoly built into them, and their usually high up-front costs and longamortization periods.9 The lack of long-term financing, as well as investment risks fromuncertainty about the regulatory framework including pricing policies for infrastructure services,has also made it more difficult for private firms to enter the sector. However, in the context ofgrowing fiscal imbalances, the lack of adequate maintenance of public investment and theinability to expand the infrastructure network are hindering further economic development.Moreover, Madhya Pradesh’s strategic location in the center of the country implies thatstrengthening the state’s basic infrastructure would have beneficial effects on the infrastructureof the national economy.

24. The state’s infrastructure base is underdeveloped and well below the national averageas reflected in key infrastructure indicators as well as the composite Relative InfrastructureDevelopment Index (Appendix 4, Table A4.1). Compared with all-India level of 100 in FY1994and the levels in more advanced states like Punjab (191), Tamil Nadu (144), and Gujarat(122), the index for Madhya Pradesh was 75: the lowest among the 17 larger states. Although

8 For example, budgetary support exceeded Rs4 billion in FY1995, while an additional Rs15 billion were provided

in FY1997 for debt write-off and debt-equity conversion for MPEB.9 Formulation and implementation of state’s infrastructure development policy is assigned to respective sector

agencies/institutions such as the Department of Transport and Public Works Department.

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the index value increased from 62 to 75 between FY1981 and FY1994, with Madhya Pradeshbeing one of only three states (the others are Orissa and Rajasthan) showing relativeimprovement, the index neither reflects the deteriorating quality of the state’s existinginfrastructure nor the widening gap between infrastructure requirement and availability. Closingthe identified gaps in the power, roads, and urban sectors alone, would require additionalinvestments in Madhya Pradesh of about Rs270 billion ($6.4 billion) or 44 percent of SDP,more than 20 times actual annual capital outlays, which far exceeds the public sector’sresource availability. GMP is therefore actively seeking private sector participation ininfrastructure development, but needs to redirect its focus from case-by-case interventions toevolving a policy, institutional, and regulatory environment characterized by transparency, legalassurance, and political noninterference, and that will ensure a level playing field for privateenterprises.

a. Power

25. The state's power sector is managed and regulated by MPEB, the monopoly supplier ofelectricity. Total installed capacity of thermal and hydroelectric power as of March 1998 was3,814 megawatts (MW), with additional allocation of 1,773 MW from central sector powerstations. The gap between electricity demand and available generation capacity is widening,and the present peak demand-supply gap is estimated to be about 1,300 MW. MadhyaPradesh has an extensive transmission and distribution network; however, the state’s largesize and its population density make the cost per consumer of expanding the network amongthe highest in India.

26. The financial performance of MPEB has rapidly deteriorated, and the entity isincreasingly relying on budgetary subsidies to achieve the 3 percent minimum rate of return onnet fixed assets stipulated in the Indian Electricity Supply Act. The financial problems aremainly due to low tariffs for agriculture and domestic sectors, which together raise 11 percentof revenue while consuming almost 50 percent of the energy. MPEB incurs annual losses ofmore than Rs15 billion ($350 million) on account of sale of subsidized electricity to agriculturalconsumers alone, of which it receives a subsidy of about Rs4 billion ($95 million) from GMPand the rest through cross-subsidization, particularly high tariffs on industrial customers.However, the subsidy from GMP has not always been given as cash and on time: in 1996,GMP adjusted Rs7.9 billion by writing off of its loans to MPEB and converted another Rs7billion of its loans to equity in addition to a provision of Rs3.7 billion for subsidies in theFY1998 budget to clear the backlog of subsidy payment from the state budget to MPEB. Inthe context of worsening performance of the states’ electricity boards, the Indian Parliamentpassed legislation in July 1998 to enable states to set up tariff and regulatory authorities.Moreover, to reduce pressure on the budget and lower cross-subsidization in the interim, witheffect from 1 March 1999 power tariffs were raised by an average 18 percent, including onagricultural and domestic consumers, in addition to a substantial rise in fuel surcharge.

27. MPEB’s poor financial condition has adversely affected maintenance of existing assetsand limited the resources availability for investment. To supplement its own addition togeneration capacity, the state entered into memoranda of understanding with independentpower producers through noncompetitive negotiation. Power purchase agreements weresigned with 16 independent power producers, of which 13 projects with total capacity of 5,356MW have so far received Central Electricity Authority techno-economic clearance. However, inview of MPEB’s financial situation, banks have assessed a maximum generation capacity ofonly 2,561 MW as escrowable. Moreover, due to legal and financial difficulties in finalizing the

9

agreements with independent power producers, it is likely that not even that amount of newgeneration capacity will come on stream. There is thus an urgent need for a fundamentalrestructuring of the power sector to improve operational performance, restore the sector'sfinancial viability, and enable private sector participation to ensure adequate and reliablepower supply.

b. Roads and Road Transport

28. Madhya Pradesh’s large size and strategic location makes the development of anadequate road network critical for the overall quality of its infrastructure. Despite a road lengthof about 100,000 kilometers (km), the state’s road density is very low and less than half thenational average. Budgetary provisions are insufficient for proper maintenance of existingroads, leaving very little for expansion. Guided by its overall development plan and the 1997Strategic Options Study, the government plans to expand and upgrade the high-density statehighway system, improve major district roads, and develop link roads to improve access toindustrial and mining centers and promote spatial development. In view of the severity ofresource limitations and the crucial importance of an adequate road network, the governmenthas embarked on a program to privatize road maintenance and to undertake road and bridgeconstruction under build-operate-transfer schemes. The legal framework is already in place toallow the private sector to levy tolls. The Public Works Department has identified 37 roads formaintenance under build-operate-transfer and so far invited tenders for 16 road stretches; acontract for the improvement and maintenance of a state highway section has been awardedon the basis of highest premium payment.10 In addition, during the last two years, 10 smallbridges (total cost of Rs50 million) were built by private sector, and several other bridgeprojects are under consideration. Total annual revenue from toll tax/premium has reachedRs250 million, about 10 percent of annual budget allocation for operation and maintenance,and is being used to maintain hitherto neglected stretches of the state's highway system.Notwithstanding, a general enabling framework for private sector participation in the roadssector is still lacking.

29. Increasing industrial development, the inadequacy of alternative modes oftransportation (particularly limited railway connections) and the large geographic spread of thestate combined with low population density, place heavy demands on road transport services.While freight transport is mostly undertaken by the private sector, the State Road TransportCorporation (MPSRTC) is mostly involved in intercity and interstate travel. MPSRTC has anaging fleet of about 2,450 buses, of which only 1,650 are operational; consequently actualoperations cover only about two thirds of MPSRTCs 1,318 authorized routes, which constituteabout 20 percent of total routes. The private sector, which can obtain permits to operate on allroutes within the state’s total road network except on nationalized routes, runs more than 90percent of all commercial passenger transport vehicles, 75 percent of all buses, and 100percent of motor taxis and mini buses. Although MPSRTC's fare has increased more thanfourfold since the 1980s, inefficient operations and declining competitiveness has made theMPSRTC nonviable under present circumstances.

c. Housing

10 Earlier, in 1992, the Rau-Pithampur road in Madhya Pradesh became the first privately financed and constructed

toll road in India. However, Infrastructure Leasing & Financial Services Ltd. was preselected to undertakeconstruction in collaboration with the Madhya Pradesh State Industrial Development Corporation.

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30. The state’s population of 77 million is spread in about 71,000 villages and 465 towns.Although still one of the least urbanized states in the country, Madhya Pradesh is undergoing astructural transformation from a predominantly rural to a more urbanized society. While totalpopulation doubled between 1961 and 1991, the size of the urban population increased almostfourfold from 4.6 million to 15.3 million, raising the proportion of urban population to totalpopulation in the state from 14 percent to more than 23 percent (1991 census). However,given severe resource constraints and a continuous decline in capital outlays, the state’s urbaninfrastructure is completely inadequate even to meet the present requirements. In addition, therapid population growth, poverty, and relatively low investment in housing development haveworsened the shelter problem, resulting in steady growth of slums and informal settlements.This has been exacerbated by provisions of the Rent Control Act, which have distorted thehousing rental market, and by problems of land acquisition under India’s Land Acquisition Actand its Urban Land (Ceiling and Regulation) Act (ULCRA), which impose limits on ownership ofvacant land within cities, regulate transfer of land, assign the power of acquisition of excessland to state governments, and prescribe maximum payment for land acquisition.

31. As in other states, in Madhya Pradesh the implementation of the ULCRA has failed tofacilitate the acquisition of vacant urban lands and their transfer for urban developmentincluding housing. Since enactment of the ULCRA in 1976, 7,000 hectares (ha) of land wasdeclared surplus and about 5,100 ha was taken over by the state government, but in part dueto protracted litigation only about 240 ha of surplus land was allotted for the prescribedobjectives. The increase in demand for housing and the relatively slow supply response haswidened the demand-supply gap, estimated at 1.1 million housing units in urban areas aloneby 1995. If the projected additional demand for 770,000 new units during 1995-2001 becomesreality, the total housing backlog could reach 1.9 million units by 2001. About 75 percent ofthe housing would be required for economically weaker section and low-income grouphouseholds.11 Only about 25,000-30,000 units are added to the housing stock annually,mainly due to the paucity of financial resources of government and semigovernmentalinstitutions, but also reflecting the ineffectiveness of the institutional setup for the delivery ofservices.

4. Insufficient Social Development

32. Demographic trends. Madhya Pradesh, the largest and sixth most populous state inIndia, has low population density, with more than three fourths of the population living in ruralareas. Along with other poor states such as Bihar, Rajasthan, and Uttar Pradesh (also knownas the BIMARU ["perpetually sickly"] states), Madhya Pradesh ranks very low in all indicatorsreflected in the Human Development Index, such as per capita SDP, life expectancy, literacy,average years of schooling, and infant mortality rates.12

33. The state has a large concentration of socially and economically disadvantaged groupsconsisting of scheduled tribes and scheduled castes, comprising 23 percent and 15 percent,respectively, of the state’s population compared with 8 percent and 17 percent, respectively,for India as a whole. Although scheduled tribes are present in all 45 districts13 of the state, 11 According to Government classification, economically weaker section are households with monthly

incomes below Rs2,500 ($59) and low-income group households those with monthly incomes between Rs2,500and Rs5,500 ($129).

12 Madhya Pradesh was the first subnational entity in the world to prepare a Human Development Report in1995 as basis for increased focus on social development. The second report was released in January 1999.

13 In mid-1998, GMP approved the formation of 16 more districts to reduce their average size and strengthendecentralized government.

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they are mainly concentrated in the eastern, southeastern, and southwestern parts; in six ofthe districts, more than half of the population are tribal. The literacy rates of scheduled castesand scheduled tribes are substantially below the statewide level, averaging 35 percent and 22percent respectively, and indicating large gender disparities of 21-32 percent (Appendix 4,Table A4.7), as well as significant disparity among different tribal groups.14

34. Gender. Gender analysis shows that women systematically lack access to basicsocial services, income and employment, physical security and safety, and participation inpolitical and civil life. The gender ratio in the state reached 931 females per 1000 males in1991 (gender ratios among tribal communities are more even) reflecting systematic genderbias at all levels of society, in infant and child mortality, maternal health and mortality, lifeexpectancy, access to the means of production, employment, livelihoods, and incomes.15 Poorphysical access to health and education facilities compounds gender disadvantage in theseareas. Women and girl children tend to get marginalized due to their low visibility for theservice providers and due to prevailing gender bias in the family and community. Scheduledtribe/caste women suffer from an additional source of disadvantage, that of belonging toclearly demarcated disadvantaged social groups, which further limits their access to socialservices and development opportunities. However, there are indications of a growingconsciousness amongst women particularly of their role in the political process. With theimplementation of the 73rd and 74th constitutional amendments, which provided constitutionalstatus to village councils and urban local bodies as the basis for decentralized administration,representation of women increased to about 184,000 members, more than the one thirdstipulated in the amendments. 16

35. Poverty. In Madhya Pradesh, more than 40 percent of the population is below thepoverty line. Low education and health standards adversely affect their potential contributionto economic activity. Unless addressed, these material and physical deficiencies will not onlyaffect the current population’s ability to generate income, but also severely hamper the state’sdevelopment process and thus the population’s welfare in the future. Efforts will need to bestrengthened to improve provision of and access to social services and facilities, particularly inrural areas.

a. Education

36. Although considerable progress (albeit from a very low starting point) has been made suchas doubling of the literacy rate among males and more than trebling among females during 1961-1991, 55 percent of the state’s population are still illiterate, with significant regional and genderdifferences. Among the scheduled castes and scheduled tribes, 65 percent and 78 percent,

14 In view of the high proportion of economically and socially weaker sections of population, GMP puts strong

emphasis on their specific needs. In the state’s annual and five-year plans, funds are earmarked (in proportion totheir respective share in state’s total population) and placed at the disposal of specialized governmentdepartments to identify schemes/programs most suited for the welfare of these groups, and to allocate outlaysaccordingly.

15 Yet, the state's female work participation rate is higher than the national average (32.7 percent in 1991compared with 22.3 percent nationwide). In rural areas, the rate exceeds 40 percent, and is even higher in tribalareas.

16 Madhya Pradesh was the first state in India to hold elections for local self-government after implementation ofthese constitutional amendments. While this has led to increased representation of women, it remains importantto translate this into effective capacity through training and conscientization.

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respectively, still remain illiterate. Net enrollment ratios17 of 60-75 percent for primary and middleschool and a low transition rate from primary to secondary level, estimated at less than two thirdsfor children enrolled in Grade I, are reflected in low mean years of schooling and point to very loweducational development in the state. Moreover, about 40 percent of the teachers in primaryeducation and one third in secondary school are untrained. Inadequate facilities and poor quality ofteaching are important causes of the state’s low enrollment and high dropout rates.

37. Government spending on education amounted to about Rs27 billion in FY1999, equivalentto 19 percent of GMP’s total expenditures and reflecting an average annual increase of more than5 percent in real terms since 1980, raising the expenditure ratio by one half to about 4 percent ofSDP. An increasing share in education outlays is directed toward primary education (almost 50percent), while a further 15 percent is allocated for secondary education, and about 10 percent forhigher education. The remaining allocation is provided to the education sector as part of tribalwelfare, mainly for basic schooling. Almost 95 percent of total 18 recurring expenditures on schooleducation in the state is spent on salaries of teachers and other staff; the remainder is used for allother items including scholarships, materials, and teacher training. Reflecting the constitutionallyassigned division of responsibility for education, GMP is financing more than 90 percent of alleducation-related outlays. In view of resource constraints, GMP is encouraging the establishment ofprivate higher education institutions, particularly in technical/professional fields and medicaleducation, and on increasing cost recovery in higher education. Steps have already been initiatedto improve cost recovery: the government decided to transfer technical education institutionsand medical colleges to autonomous nonprofit trusts, while permitting them to raise usercharges that can be utilized to fund the institutions’ own improvements.19 Still, budgetaryallocation and financing from other sources are insufficient to cover minimum requirements: forexample, the normative requirement for elementary education has been assessed at Rs20 billion,almost absorbing the allocation for the whole education sector. The resource gap would furtherwiden from FY2002 onward, when external assistance for the District Primary Education Program(DPEP), a multi-state project, ceases and GMP counterpart funding equivalent to the centralGovernment share, i.e., 85 percent of the annual project cost, is required to sustain the program.

38. To achieve the goal of universal primary education, GMP created the Rajiv GandhiEducation Mission, which successfully mobilized external assistance to implement the DPEP in34 educationally deficient districts in Madhya Pradesh. The DPEP comprises improvement inexisting school facilities, teacher training, development of locally relevant curricula, andexpansion of facilities. The DPEP is being implemented through village councils to promoteaccountability and minimize leakage. It has created 11,000 new primary schools, 6,100 clusterresource centers (one for every 10-12 primary schools) to improve the quality of education inexisting primary schools, and 369 block resource centers to provide academic support toteachers. As part of the Rajiv Gandhi Education Mission, in 1996 a mass contact program wasundertaken to count the number of children not going to school, the facilities available atprimary school level, and the need for new schools. The mass contact program revealed that

17 While gross enrollment ratios, i.e., proportion of total number of children enrolled in the relevant level of

education to the total number of children in the relevant age group, are not age specific, net enrollment ratios areadjusted for the enrolled children of over- and under-age groups.

18 Total recurrent expenditure comprises state government expenditures, expenditures incurred by local bodies,expenditures financed by contribution from fees, endowments, etc.

19 Fees in Government engineering colleges were increased in 1997 from Rs162 to Rs2,000 per annum, and added to adevelopment fee of Rs7,500 per student per year. Fees for medical colleges were raised from Rs600 to Rs12,000, andthe private sector is encouraged to open medical colleges, which may use medical facilities available in governmenthospitals for clinical training on payment of a fee of Rs20,000 per student.

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official enrollment rates were grossly overstated and that numerous habitations in areas withpredominant scheduled tribes and scheduled castes had no access to primary schools.

39. On the basis of these findings, the government decided that, as first step to achievinguniversal primary education, it needed to focus on access. To this end, the Rajiv GandhiEducation Mission implemented the Education Guarantee Scheme,20 under which the localcommunity provides suitable facilities and identifies a local resident with prescribed minimumeducational qualification as teacher. The state government provides funding for training andteacher’s salary, and guarantees their availability within 90 days of a request from a communitywithout a primary school, within a radius of 1 km, and with at least 40 pupils (in nontribal areas)or 25 pupils (in tribal areas). The schools are managed entirely by the local communities. Thescheme evoked an overwhelming response, and about 16,000 new primary schools werestarted in the state during the first year of its operation. Reflecting the high level of communityinvolvement, 88 percent of the new schools have been established in buildings provided by thelocal communities. Through this initiative, GMP is achieving universalized access to primaryeducation.

b. Health

40. High mortality and morbidity conditions continue to prevail in Madhya Pradesh. Despiteprogress in improving the health status of its population, the state has still extremely low healthindicators: highest crude death rate, the second highest infant mortality rate, and among thehighest morbidity prevalence rates of all states in the country (Appendix 4, Table A4.4).Substantial differences between rural and urban areas and among socioeconomic groups alsosuggest comparative underdevelopment and underutilization of rural health facilities as well asgender-based discrepancies in the accessibility of existing facilities.21 The poor health statusof the population co-exists with abject poverty, high illiteracy rates especially among femalesand tribal people, and weak infrastructure for health care service delivery.

41. In rural areas, the public health care system is governed by central Governmentguidelines suggesting a three-tiered structure consisting of sub health center, primary healthcenter, and community health center as primary health care delivery institutions and firstreferral units. District hospitals and hospitals attached to medical colleges located in urbanareas are the secondary and tertiary health care delivery institutions for providing referral andmanagerial support to the primary institutions, while also providing primary health care for theurban community. The guidelines prescribe norms for the coverage, equipment, and staffingof rural health facilities, although similar norms have not yet been issued for the urban healthinfrastructure. Following promulgation of the National Health Policy in 1983, and in an attemptto reverse the earlier bias in allocation toward higher level health care facilities, all states madeefforts to expand the primary health care infrastructure under a central Government-fundednational minimum needs program. In Madhya Pradesh, the number of community healthcenters increased from 26 to 172 units, primary health centers from 465 to 1,181 units, and

20 The central Government budget for FY2000 is proposing to implement such a scheme nationwide, following the

successful initiative of the Madhya Pradesh government.21 Gender disparity is most obvious in child mortality risk: while the neonatal mortality risk of girls is 22 percent

lower than for boys, the relative mortality risk by age five is more than 20 percent higher. Also, the relativemortality risk in rural areas is almost twice the risk in urban areas, and is further increasing based on theeducational background of the mothers. Similarly, there is gender inequality in the treatment-seeking behavior,as women have 25 percent less propensity to get inpatient treatment. In view of the extremely low rate ofhospitalization (4 percent of treated cases) in Madhya Pradesh, women are generally confined to ambulatorycare.

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sub health centers from 5,486 to 11,910 units during the 1980s, although the number of higherlevel health care delivery institutions (e.g., medical colleges and district hospitals) remainedunchanged.22 While making progress toward the national norms and covering the entire ruralpopulation, the state government has given inadequate consideration to the availability ofbasic minimum facilities and staff. Government statistics reveal that 50-70 percent of allprimary health care facilities is still without a building, and that many of the remaininginstitutions are in dilapidated condition. Because of rudimentary infrastructure and facilitiesand inadequate staffing, the health care system remains grossly underutilized.23

42. Total public and private per capita spending on medical care in the state amounted toabout Rs230 in 1993, 30 percent below the national average. About one fourth of total healthspending is covered by the public sector, mostly for preventive and promotive care. Theremainder is borne by private households for curative primary care (46 percent) and secondaryand tertiary facilities (27 percent). Given their high morbidity rate, private health expendituresdisproportionately burden the poor.24 Efforts to expand access of health facilities for the poorand increased investment for preventive health care, supply of clean drinking water andimproved sanitation could yield considerable welfare gains. At a time when demands on thepublic health system are increasing, health sector expenditures have been under pressure. Inthe 1990s, public spending for health grew by more than 4 percent in real terms per annum,above population growth, but somewhat below real SDP growth. Resource allocation for ruralhealth facilities remained at about 34 percent of total health expenditures, after increasing from18 percent in FY1981 to more than 31 percent by FY1991. Yet, most of the additionalspending was used to meet wage payments, accounting now for 80 percent of total healthexpenditure, while capital outlays account for only 3 percent of the total. A substantialacceleration of health care spending is thus needed to improve allocative efficiency, providebetter service quality, and move toward minimum national standards of facility availability inthis sector.

43. Madhya Pradesh has been providing economic and social services without proper costrecovery. As a result, the recovery rate for health services declined from 4 percent in FY1986to less than 2 percent a decade later. This in part reflects the lack of incentive for hospitals togenerate internal revenues as, under the present budgeting system, additional funds accrue tothe state budget rather than being used directly by the health institution for improving thequantity and quality of services. To alleviate the budgetary constraint, the government in 1997transferred medical colleges and tertiary hospitals to autonomous nonprofit trusts and formallydelinked them from government budgeting process, thereby increasing their operationalfreedom. GMP also permitted the formation of patient welfare societies to enable improvedcost recovery of secondary hospitals by allowing them to use the resources raised locally fortheir service improvement.25

22 In 1990-1998, the number of community health and sub health centers increased by 25 and 28 units,

respectively, while the number of primary health centers increased by 633 units, from 1,181 to 1,814 PHCs.23 The inadequacy of the health care system is also reflected in the low utilization of maternity and child health

services. For example, only 30 percent of all deliveries are conducted under the supervision of trained medicalpersonnel, and prenatal and postnatal care is far below all-India average, contributing to the state’s higher infantmortality and lower female life expectancy rates.

24 Although per person expenditure on short-term morbidity are relatively constant across income groups, the highermorbidity prevalence among the poor and the differences in per capita income leads to higher cost incidence forthe poor. By reducing the morbidity risk, e.g., through improved water supply/sanitation, pressure on the healthcare delivery system could be alleviated.

25 In 1996, the first year, Rs20 million (0.2 percent of health sector expenditure) was raised, of which 42percent was through donations. Expenditures included construction/maintenance of buildings (41 percent) andpurchase of equipment and medicines (38 percent).

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C. External Assistance to Madhya Pradesh

44. Total external assistance to India averaged $3.5 billion annually during the last decade,of which two thirds was provided for national-level projects, a further 5 percent for multi-stateprojects, and the remainder to individual states (Appendix 7). Six states (Andhra Pradesh,Gujarat, Karnataka, Maharashtra, Tamil Nadu, and Uttar Pradesh) received the bulk of externalfunding for state-level projects. Since the early 1990s, the central Government has treatedexternal assistance to states as “additionality” over the plan allocations (footnote 6), andencouraged them to secure assistance on the basis of their performance and absorptivecapacity. The external assistance is channeled to larger states on the basis of a 70:30loan/grant ratio at a fixed interest rate. The foreign exchange risk is borne by the centralGovernment. Reflecting the shifting focus of external assistance to subnational governments,the share to individual states and for multistate projects has increased from 30 to 40 percentand from 5 to 10 percent, respectively, during 1995-1997.

45. Madhya Pradesh, although accounting for 13.5 percent of the geographic area, 8percent of the population, and more than 5 percent of states’ domestic product, has receivedcomparatively low levels of external assistance, averaging less than 0.5 percent of the total aidto India and about 1.5 percent of the external assistance support for projects in states. During1986-1998, total commitments received by the state amounted to about $825 million, of whichthe World Bank provided $400 million mainly for water management and social development.26

In view of the state’s investment requirements for improved physical and social infrastructuredevelopment, the low share of external assistance directed to the state in the past haswidened the gap between resource requirements and availability. However, the reformprocess at the national level and in few states has heightened GMP’s awareness and led to areassessment of the role of external assistance in the state’s development strategy. GMP isnow taking a more proactive approach through participation in aid coordination meetings,investment forums, and international trips to attract both official and private sector capital. Toimprove its capacity to absorb external aid, GMP set up a high-powered committee headed bythe chief secretary, and a project monitoring unit in the Finance Department’s InstitutionalFinance Division for effective coordination and project implementation. Madhya Pradesh wasselected by the central Government as one of the first two states for implementation of theBank/World Bank-assisted Foreign Aid Management Information System.

D. The Bank’s Strategy and Lessons Learned

46. The overall strategic objectives of Bank operations in India are to assist in achievingincreased economic efficiency and higher levels of sustainable economic growth to fosterproductive employment and reduce poverty. To realize these objectives, the Bank’s programfor India focuses on alleviating infrastructure constraints by supporting the development of aneffective policy, regulatory, and institutional environment, and by improving infrastructureavailability and quality of service; promoting upgrading and protection of the environment andresource base across sectors; and targeting social interventions to ensure sustainability of thedevelopment process.

47. In view of the crucial role that Indian states play in the provision of infrastructure andeconomic and social services, the Bank’s strategy advocates a shift toward more interventionsat the subnational level. The main focus of the strategy will be to support and encourage 26 Other multilateral and bilateral sources included the OECF, Overseas Development Agency, Organization

of Petroleum Exporting Countries, European Union, and Danish International Development Assistance.

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states’ efforts to improve public resources management; and to establish an enablingenvironment for enhanced efficiency of public sector operations and increased privateinvestment in the economy. The intervention at the subnational level will also enable acatalytic impact on social development. Bank support at the state level will assist in (i)fostering development of social and physical infrastructure; (ii) broadening and deepeningreforms that have lagged behind in areas under the purview of state governments; and (iii)maximizing synergy of the Bank’s economic and sector policy dialogue and projectinterventions. The strategy takes into account lessons learned from past operations in India,particularly the importance of sound development management and appropriate policy,regulatory and institutional environments for interventions to be successful.

48. In formulating this Program, specific attention was given to incorporating lessonslearned from past, albeit limited,27 experience with interventions at the subnational level. Thelessons indicate that capacity building and institutional strengthening are important for asmooth and timely implementation as well as for sustaining the impact of policy reforms. Theyalso point to the need for a more realistic time frame for implementation of reforms, particularlyfor restructuring of PSUs. One measure adopted in the Program is TA support forstrengthening the institutional setup and for capacity building at both the state and local levels,prior to program implementation and with continued support during the early implementationstage. Another aspect of the Program is its emphasis on implementation of strong policymeasures at the initial stage of reforms with clear focus on the key reform components, tobroad-base the reform process and to reflect government's commitment. In addition, theadjustment program is formulated for implementation over a three-year program period in acomprehensive but phased manner, allowing monitoring of milestone events and drawinglessons from implementation in the initial stage to improve subsequent actions.

49. Experience from the Bank’s intervention in Gujarat (footnote 1) also highlights thecrucial linkage between reform of public finances and power sector reform, particularly tariffrevision. In view of the need to ensure an appropriate regulatory and pricing framework for thepower sector at an early stage of comprehensive reforms, the Program envisages theestablishment of an independent electricity regulatory commission and includes specificprovisions for tariff review. Moreover, given the low socioeconomic status of Madhya Pradesh,the Program specifically addresses policy interventions in social sector, social safety net, andreforms of cooperative institutions that have a bearing particularly on the rural economy andthe population living in rural areas. The Bank’s intervention in Gujarat also points to theimportance of regular monitoring and close interaction between the government and the Bankto assess progress in program implementation and to allow early identification of possibleslippage in compliance. Regular reporting and review missions will be scheduled to follow upon the progress of reforms in Madhya Pradesh.

V. THE PROGRAM

A. Rationale

50. India achieved unprecedented strong economic growth as a result of thecomprehensive stabilization and structural adjustment program implemented since the early1990s. Immediate beneficiaries of this rapid growth have been millions of inhabitants earning 27 The World Bank has provided state-level support mainly for power sector reform, but in June 1998 provided

several sector loans as part of an economic restructuring program for Andhra Pradesh, a state with significantlylower poverty incidence and about one third higher per capita SDP than Madhya Pradesh.

17

on average less than a dollar a day. Underlying this performance are important structuraltransformations: liberalization and opening up of the economy both to private sector andinternational competition; institutional and regulatory reforms in the financial and capitalmarkets; and reforms of the tax system. The Government’s Ninth Plan (1997-2002) reflectsIndia’s main development objective of achieving and sustaining high rates of economic growthand ensuring that growth benefits the poor. The development strategy will focus ongovernment’s role as facilitator of economic and social development and as a promoter ofenabling policy, institutional, and regulatory environments; it will also provide overall directionfor further broadening and deepening of the reform process. Greater freedom will be given tostates not only to determine their own development priorities, but also to decide on modalitiesof government intervention and the provision of economic and social services.

51. The increasing autonomy and responsibility of the states contrast sharply with theirability to undertake reforms. Although states play an important role in the development of thecountry and account for the bulk of expenditure on economic and social services, they lagbehind in the reform process. Thus, state-level reforms need to be made to complement andreinforce Government policy initiatives and to strengthen states’ technical and financialcapabilities to address development challenges. Among the key areas for state-level reformsare social services including education and public health and sanitation; consolidation of thepublic finances; and infrastructure policies. The states’ fiscal situation has been underincreasing pressure due to their weak revenue base and a shift from growth-inducing andsocially productive investments toward nonproductive spending such as interest obligationsand the budgetary burden of inefficient public enterprises. Declining developmentexpenditures have also adversely affected the existing infrastructure, which increasinglyhinders further development. In the context of limited public sector resources and competingdemands on resource allocation, the impetus for improvement will lie in greater induction ofprivate investment, necessitating an appropriate policy, institutional, and regulatory framework.

52. The Bank’s operational strategy focus and its emphasis on state-level reform providethe general direction and parameters for Bank support. Gujarat, one of the more progressivestates with a strong industrial basis, was identified as the first state for such Bank assistance.The Program seeks to extend and deepen structural reforms at the subnational level, and topromote economic and social development. However, large variations in development stagesbetween Indian states require the Bank’s subnational operations to focus on entities with verydifferent socioeconomic characters: unlike Gujarat, Madhya Pradesh is one of the least-developed states in India, has wide gender gaps in access to economic resources and socialservices, and still has a primarily agriculture-based economy; and compared with Gujarat,Madhya Pradesh has high income poverty and a relatively large minority population, implyingthe need for a stronger social dimension to Bank assistance.

53. Limited resources and implementation capabilities hinder the development process andheighten the challenge faced by GMP. Given the existing poverty in terms of both materialwealth and capabilities, delay in addressing and overcoming these development challengeswill have an adverse impact on the state’s future economic growth and social development. Itmay also prevent the state from responding to central Government policy initiatives and limitthe benefit the country could otherwise derive from mutually supportive reforms. GMP hasalready initiated reforms on a selective basis, including private sector participation in road andtransport sectors and in tax reform, and has taken innovative initiatives for humandevelopment. The state is off to a good start, which indicates GMP’s commitment to face the

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development challenges. Bank support will facilitate implementation of GMP’s reform programand provide a strong example for other struggling, but reform-oriented states.

B. Objectives and Scope

54. The objective of the Bank’s program is to support the government's reform efforts tofoster social development and sustainable economic growth by addressing prevailing resourceand implementation constraints in Madhya Pradesh, focusing on (i) enhancing resourceallocation to social sectors to support human development; (ii) improving public finances andfiscal capabilities and management, and fostering allocative efficiency through reform of publicenterprises including corporate governance reform; and (iii) strengthening the policy,regulatory, and institutional frameworks for private sector participation in key sectors. TheProgram will also assist in strengthening environmental management, and mitigate the socialimpact of economic development.

C. Policy Framework and Actions

55. To address resource and implementation constraints and to improve resourcemanagement for sustainable social and economic development, the Program will assist inimplementing public sector reforms, including capacity building and institutional strengtheningfor improved fiscal management; strengthening revenue mobilization, curtailing nonproductiveexpenditure, and reallocating resources to social services, particularly health and education;improving allocative efficiency through reform of PSUs; and establishing transparentorganizational and incentive structures for enhanced private sector participation.

1. Capacity Building and Institutional Strengthening for Improved FiscalManagement and Sustainable Public Finances

56. In accordance with the Program, in January 1998 the Government set up a PublicResource Management Committee (PRMC) under the chief minister to advise and overseeimplementation of the state’s reform program. The PRMC is supported by empoweredcommittees on public finance reform and on public enterprises restructuring, both headed bythe chief secretary with high-level representation from key sector departments, tosystematically review and implement public finance and public enterprise reform in the state.The PRMC will also guide the establishment of an enabling environment and the respectivepolicy, institutional, and regulatory issues.

57. Corrective measures need to be taken to address both the revenue as well as theexpenditure side of public finance within a medium-term fiscal reform program. Some of therevenue measures are expected to lead to short-term losses but yield significant benefits in themedium term. The Program therefore advocates properly sequenced policies supplementedby compensatory measures to offset adverse fiscal impacts to the extent possible. The reformof public finances will focus on restructuring of the state’s tax system to improve its efficiencyand equity; rationalizing and prioritizing expenditure; supporting the reallocation of resources tosocial services, particularly health and education; enhancing the economic managementcapacity; and strengthening the institutional framework.

58. In line with the Program, the government's fiscal strategy reflected in the medium-termfiscal framework (MTFF) aims to (i) attenuate the accumulation of public debt during thetransition period so as to stabilize the debt-SDP ratio over the medium term; (ii) consolidate the

19

public finances by reducing nonproductive expenditure while reallocating resources to socialservices and for public investment; and (iii) improve the “quality” of the fiscal balance byfocusing on the composition of fiscal adjustment. To this end, the MTFF envisages a reductionin the primary fiscal deficit (defined as current revenue minus total expenditure net of interestexpenditure) from estimated 2.6 percent (budgeted 3.4 percent, including supplementarybudget) of SDP in FY1999 to 0.2 percent by FY2003 (Appendix 5, Table A5.2). Theprogrammed reduction will help contain current expenditure by reducing nonproductiveexpenditure, particularly subsidies. It will also ease pressure on the wage bill throughemployment policy measures such as limiting state government employment, shifting posts toessential social services, and evolving a more flexible wage policy, particularly for local bodiesthat need to be strengthened for more effective decentralization. The fiscal program will alsoreverse the compression of capital outlays and support an expansion of public investment.Increased resource mobilization will result over the medium term through improvement inbuoyancy of the value-added tax, stamp duty, and property tax; 28 strengthening of taxadministration; and improvement in cost recovery. The fiscal program will fully absorb theimpact of the substantive adjustment costs associated with structural reforms of the taxsystem, the restructuring of the public enterprises, and outlays to mitigate social impact of theadjustment program (para. 94). To provide institutional support to the implementation of theMTFF, a state budgeting and fiscal analysis unit will be established in the Finance Departmentfor improved budget planning, monitoring, and economic policy analysis.

a. Tax and Nontax Revenue Measures

59. Madhya Pradesh has made progress in its reform of the sales tax system: the numberof rate categories was cut from 17 to six, and a self-assessment system for small dealers wasput in place to reduce the administrative burden of tax audit. Nonetheless, financial andtechnical limitations prevented implementation of comprehensive tax reforms, and distortionssuch as the cascading effect of input taxation, narrow tax base, complex multiple tax ratestructure, and weak tax administration remain. Cognizant of these constraints, the governmentwill (i) further rationalize the sales tax structure, (ii) widen the tax base by reducing taxexemptions and limiting the coverage of the industrial incentives scheme, and (iii) introduce ina phased manner value-added tax. Strengthening tax administration and improvingmanagement information systems will provide institutional backup for these reforms. Theremoval of input taxation will lead in the transition period to revenue losses anticipated atabout $170 million equivalent (para. 94). However, the widening of the tax base andenhanced tax compliance fostered by strengthened tax administration will improve revenuebuoyancy in the medium term.

60. In line with recommendations of the 1996 and 1997 committees of state financeministers, the government plans to reform the stamp duty and property tax systems bylowering the stamp duty rate, particularly on conveyances, rationalizing and standardizing ratesof financial and capital markets instruments including mortgages and transactions relating tosecuritization,29 modernizing stamp duty administration, and setting up valuation cells. Thereduction in duty rates is expected to reduce initial revenues by about $16 million equivalent.Through strengthening of the institutional and operational framework, particularly the

28 These taxes mobilize the bulk of the state’s tax revenues (sales tax and stamp duty alone raise more than one

half of state's tax revenues), while property tax accounts for about 30 percent of urban local bodies’ revenuebase.

29 The lowering of stamp duty on instruments relating to securitization will directly benefit the Program’sintervention and objective in the housing sector (para. 93).

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establishment of central and regional valuation cells and revision of valuation methodology andguidelines, the revenue buoyancy of these taxes will be raised and additional resourcesmobilized. Given that property tax is an important source of revenue for urban local bodies,the introduction of simple, transparent, and criteria-based system of property assessment willalso help strengthen the fiscal position of local governments and enable them to improve theirdelivery of social and economic services.

61. Nontax revenue enhancement will be supported under the Program inter alia throughbetter cost recovery in economic and social services, establishment of tariff regulatoryframeworks including the setting up of a State Electricity Regulatory Commission and a utilitiespricing commission, and higher return on state's investment in public enterprises.

b. Expenditure Management

62. In parallel with structural revenue measures, the government plans to rationalize andprioritize expenditure and to strengthen expenditure management and control systems. In thecontext of the MTFF (para. 58), a change in composition of expenditure and containment ofoverall expenditures are envisaged. Particular emphasis will be on reallocation of resources toimprove delivery of social services, augment social infrastructure, and ensure sustainability ofongoing government initiatives. The Program’s support for improved resource management bysuch means will foster social development in the state.

63. The recent recommendations of the Fifth Pay Commission have raised significantly thefiscal burden and will substantially worsen the medium-term outlook of states’ public finances,unless decisively addressed. GMP therefore puts high priority on containing currentexpenditures, for example by cutting nonproductive outlays and limiting state governmentemployment. Specific measures will include (i) prohibiting absorption of PSU employees intogovernment service and prohibiting regularization of temporary workers into public service andPSUs; (ii) allowing different wage scales to prevail at the state and local levels and in PSUs;and (iii) establishing a regulatory framework for electricity tariff adjustment, including atimeframe for announcement of the first general tariff revision. The government is alsocontemplating reducing staff (other than technical positions in essential social services andpolice) through natural attrition, and reallocating the resources to social services. Thesemeasures will directly reduce revenue expenditures. Making wages more flexible will alsostrengthen financial sustainability, particularly of local bodies and of public enterprises, by de-linking wage setting.30

64. Enabling private sector participation, investment by the public sector, and improvementin the basic social and physical infrastructure necessitates increased capital outlays. Underthe Program’s MTFF, improved resource mobilization is expected to make this possible.Furthermore, the government is preparing a core investment program (CIP) to prioritize the useof its overall development expenditures. The CIP will protect the high-priority projects from adhoc budgetary cuts, which should enable more timely project implementation and avoid costoverrun and thin spreading of scarce budgetary resources. Developing the CIP will involve a

30 As the states follow central Government pay scale adjustment, and PSUs as well as local bodies generally follow

the state governments, all salary scales are de facto linked to one another. In view of the declining capacity forown resource mobilization at lower levels, pressure on the sustainability of their financial situation increases and,in the absence of offsetting transfers, will erode profitability (in the case of PSUs) or service delivery (in the caseof local governments). Declining quality in service delivery would adversely and disproportionately affect thepoorer section of the population, particularly in rural areas.

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comprehensive review of the project pipeline of all sectors, closure of nonperforming projects,transfer to private sector if projects could be implemented there more efficiently, and greateremphasis on projects under external assistance.

65. The structural improvement in expenditures can only be sustained if expendituremanagement and control systems are improved. To this end, the Program will support thegovernment’s effort to strengthen the Finance Department’s treasury operations, increaseeffectiveness and efficiency of the payment and audit systems, and develop a managementinformation system to provide updated and adequate information on all relevant budgetvariables. This will enable the Finance Department and concerned decision-making authoritiesto regularly assess the status of budget implementation and compliance with the fiscalconsolidation efforts under the MTFF, allow early identification of possible expenditureoverruns as well as redirection of funds toward nonpriority areas, and facilitate thegovernment’s cash management. Better liquidity management, coupled with the strengtheningof the Finance Department’s debt management capability, will enable GMP to reduce itsinterest obligations at the margin and, more importantly, could help smooth interest fluctuationsin the short-term money and financial markets. Moreover, setting up a state budgeting andfiscal analysis unit will reduce the government’s reliance on supplementary budgets, increasetransparency of the annual budgeting exercise, and strengthen the role of the budget as aninstrument for rational economic policy making.

2. Reallocation of Expenditures to Social Services

66. GMP is committed to reallocating resources to social sectors, especially health andeducation. Under the Program, GMP will also prepare and implement a plan to ensure that thepresent social sector outlays are protected from budgetary cuts, and indicate how the state’scurrent status in social indicators well below national norms could be redressed over time.

a. Education Sector

67. Policy priorities in the education sector include (i) universalization of primary educationand improvement in the quality of teaching; (ii) strengthening other levels of the educationsystem within given budget constraints; and (iii) increasing local government involvement in theeducation system through financial and management decentralization, particularly for primaryeducation. GMP is committed to reviewing the policy, institutional, and regulatory frameworksof the education sector; to setting up nonprofit autonomous institutions; and to furtheranalyzing possibilities for strengthening the resource base through enhanced cost recovery,especially at the postsecondary level. Under the Program, the government will prepareprioritized investment plans for the education sector, which are to be fully integrated into thestate’s CIP. An action plan will also be formulated outlining feasible steps to move toward thenational norms in expenditure on educational facilities, training, material, etc. In the meantime,the Government will protect outlays for education from ad hoc budgetary cuts while raisingresource allocation within the medium-term fiscal framework.

68. As noted in para. 37, Madhya Pradesh is availing itself of assistance under theexternally funded DPEP. The government is committed to ensuring continuation of thisprogram after external funding support ceases. From FY2002 onward, GMP will assume fullfinancing responsibility by making budgetary provisions equivalent to the present centralGovernment share, i.e., 85 percent of the annual recurrent project cost. This will ensure

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funding availability for continuation of DPEP and promote sustainability of ongoing efforts toimprove primary education in the state.

b. Health Sector

69. GMP will strengthen the state’s health care system by increasing allocation for primaryhealth care delivery institutions, and by enhancing the capacity and efficiency of districthospitals through increased recovery of cost of services. It will also promote communityinvolvement in health care through the village councils. To improve health care in rural areas,under the Program the annual budget provision will be increased to eliminate the investmentbacklog on existing rural health facilities, estimated at Rs2.5 billion, over the medium term.GMP is committed to raising allocation for nonpersonnel inputs (e.g., drugs and equipment) tocover the shortfall in recurrent spending on existing facilities.31 Improvement in the quality ofhealth service delivery will also require increased staffing of primary health facilities. In view ofthe overall budget constraint and the disproportionate share of funding going for wages andsalaries, the Program focus will be on reassigning posts already in government departments tosocial services. In particular, during the program period, government staff other than those intechnical positions in essential social services and police will be reduced through naturalattrition, and the resources associated with these posts shifted to social services.

70. GMP will extend its rural sanitation program focusing on the control of diarrhealdiseases, so far launched in 11,000 problem villages, to all 71,000 villages of the state. Thefocus on sanitation education, promotion of water testing kits, and distribution of oralrehydration salts, is expected to reduce fatalities from waterborne diseases, which are a majorcause of the state’s high infant mortality rate. As poor people are more affected by short-termmorbidity and spend a relatively large share of their income on treatment, this measure willalso have a beneficial poverty-reducing effect.

71. Further, GMP is preparing an action plan with Bank TA for protecting social sectoroutlays from ad hoc budgetary cuts, ensuring that investment spending is fully integrated intothe overall CIP, and for moving toward national norms on health infrastructure and healthservice delivery. The government plans to strengthen the legal arrangements for the autonomyof secondary and tertiary institutions, to foster public-private partnership, and particularly toenable these independent trusts to price their services accurately and determine the feestructure considering varying abilities to pay. The costing of services and health budgeting willbe analyzed as part of the action plan.

3. Public Enterprise Reform

72. The Program supports reform of public enterprises in two distinct, albeit interrelated,dimensions: restructuring/divestment of individual PSUs, and enhanced transparency andaccountability within the public enterprises sector. The reform process is guided by GMP’sPolicy on Public Sector Reform and Restructuring, which evolved from the Bank’s policydialogue with the government, and was approved in January 1998. On the basis of the policyguidelines, GMP will strengthen those PSUs where continued government ownership isrequired to fulfill a public purpose; close chronically sick and loss-incurring enterprises; andrestructure and divest remaining enterprises to achieve greater efficiency in their operations,increase market discipline, and allow wider dispersion of ownership. The government has 31 Interventions could include establishing a dispenser for essential drugs at the village level that would be

maintained by local bodies, training for community health workers, etc.

23

already established the institutional mechanism for effective implementation of the reform,consisting of an Empowered Committee on Public Enterprises Restructuring, headed by thechief secretary with high-level representation from key sector departments; and a technicalsecretariat as an advisory body to undertake the preparatory and technical analysis of PSUsincluding valuation, and to provide assistance on technical aspects of restructuring anddivestment. In implementing public enterprise reform, nodal responsibility for state PSUs willbe transferred from line departments to the Department of Public Enterprise to facilitatecoordination and reduce possible conflict of interest.

73. The reform agenda supported by the Program will focus on corporate and financialrestructuring of 14 of the 31 state PSUs. 32 The enterprises targeted under the Program havea total of 37,000 employees, and account for four fifths of total paid-up capital and represent85 percent of GMP shareholding in PSUs (excluding MP Electricity Board). The PSU reformcovers the whole gamut of enterprises, ranging in size from large entities such as the MPSRTCwith some 22,000 employees to the smallest with a workforce of 75; strategic PSUs involved inagro-industry; key financial intermediaries; and enterprises with overlapping developmentaland social functions. Moreover, the reform program comprises nonviable entities; entities forwhich the original objectives for their establishment are no longer valid; and entities that arestrategic but do not require full government ownership.

a. Restructuring/Divestment

74. GMP will undertake organizational and financial restructuring of the Madhya PradeshState Industrial Development Corporation (MPSIndDC) while reducing governmentshareholding through induction of a strategic partner. This will be supplemented by corporategovernance reform including a change in the composition of the company’s Board byappointing the chairman and a majority of directors from outside the government.Restructuring of the Madhya Pradesh State Agro Industries Development Corporation(MPSAIDC) will focus initially on hiving off its large agricultural farm, the core strategic functionof the corporation, in view of the provisions of the Madhya Pradesh Agricultural Land CeilingsAct, which limits the size of agricultural land under private ownership. Subsequent reform ofMPSAIDC will include divestment to not more than 26 percent of government shareholding byDecember 2001.

75. Due to its inefficient operations, MPSRTC has become a major burden on the budget.Under the Program, the company will be restructured into four corporate units with fulloperational autonomy, the workforce reduced by about 5,000 workers (or 23 percent), andmeasures to improve operational efficiency, reduce cost, and increase future profitabilityintroduced. Partial divestment will be undertaken by December 2001.

76. Financial and organizational restructuring of the Madhya Pradesh Financial Corporation(MPFinC), the key state financial intermediary, will include (i) classification of nonperformingassets and full provisioning as per applicable norms; and (ii) recapitalization to ensurecompliance with capital adequacy requirements after setting off accumulated losses againstthe corporation’s equity and reserves. Government shareholding will be reduced by 25percent as permissible under the State Financial Corporations Act 1951 (contingent uponamendment to the Act, GMP shareholding will be further reduced to not more than 26 percent).

32 Restructuring of MPEB will be addressed in the context of power sector reform; the Program focuses particularly

on establishing a tariff regulatory framework to improve MPEB’s internal resource mobilization and reducereliance on the state budget.

24

77. In accordance with the state’s tourism policy, the government is refocusing its role aspromoter of tourism rather than operator and supplier of facilities. To this end, GMP isenvisaging the sale/lease of the properties of the Madhya Pradesh State TourismDevelopment Corporation (MPSTourDC), and transfer of staff to private sector owners/lesseesto the extent possible. The corporation's focus will then be redirected to promotional andregulatory activities, undertaken earlier by the state tourism department prior to itsabolishment.

b. Closure and/or Merger

78. Based on GMP’s policy guidelines to close loss-incurring enterprises, as well asunviable corporations that no longer fulfill their intended objectives, the Program supportsclosure of the MP State Land Development Corporation (MPSLandDC), the MP LeatherDevelopment Corporation (MPLDC), the MP State Fisheries Development Corporation(MPSFishC), the MP State Industries Corporation (MPSIC), the MP State Export Corporation(MPSExC), as well as MP State Textile Corporation (MPSTexC). Only MPSTexC will requireapprovals from the Board for Industrial and Financial Reconstruction and its appellateauthority; the government has initiated the request for approval to close the two mills undertheir purview.

79. The multiplicity of government agencies involved in housing construction and relatedactivities has led to inefficient operations and inadequate financial performance. To rationalizeoperations and improve their efficiency, the government is planning to merge the MadhyaPradesh Slum Clearance Board (MPSCB) with the Madhya Pradesh Housing Board (MPHB),corporatize MPHB, and close the Madhya Pradesh Police Housing Corporation (MPPHC).

80. Overall, about 10,000 workers are likely to be directly affected by the closure andmerger of these entities. The government has already set up the State Renewal Fund, madebudgetary allocation to enable settlement of workers’ dues, and is designing a social safety neton the basis of a poverty impact assessment.

c. Improved Corporate Governance

81. Public enterprises are expected to meet social and other noncommercial objectives, inaddition to financial objectives; however, in pursuing these objectives, PSU managementgenerally has limited discretion over fundamental decisions. Faced by multifarious objectives,limited decision-making autonomy, and few incentives, PSU management will often postponeor avoid necessary decisions. This is reinforced by the existing system of performancemonitoring, accountability, and appointment procedures.

82. The Program will support measures for improving corporate governance andstrengthening the implementation framework, comprising (i) institutional and managementaspects, including assigning nodal responsibility for PSU reform to the Department of PublicEnterprise; establishing procedures for screening prospective board members and managingdirectors to ensure appointment on a professional basis and with due regard to the PSUs’service rules; introducing procedures for enhanced accountability as well as associatedperformance-related incentives for PSU management; and ensuring longer tenure formanaging directors while discontinuing the practice of combining that post with othergovernment positions; and (ii) financial aspects, including formulating criteria on return on

25

investment for dividend payment from PSUs to GMP, establishing investment limits up to whichPSUs do not need government approval, reviewing the existing practice of uniform pay scalesfor PSUs, and authorizing the linking of salary scales to the productivity and the financialperformance of individual PSUs. TA will also be provided to improve the accounting andfinancial systems of the public enterprises.

d. Mitigating Social Impact through Social Safety Net

83. The organizational restructuring is expected to lead overall to the retrenchment of morethan 16,500 workers. To ameliorate the social impact, GMP is formulating a social safety netmechanism and set up a State Renewal Fund, which will provide funds to voluntary retirementschemes with monetary compensation packages for the affected workers.33 The StateRenewal Fund will also assist in the economic rehabilitation through re-training and re-deployment of employees. To ensure timely access to voluntary retirement scheme funds,Rs1.5 billion ($35 million) were already allocated in the FY1999 and FY2000 budgets, and willbe replenished through further budgetary allocation as agreed under the Program.

4. Evolving Enabling Framework 84. The Program supports GMP in improving the allocation and efficiency of the publicsector, and evolving the institutional, regulatory, and policy environment for private sectorparticipation in supporting infrastructure. It will facilitate the formation and establishment oftransparent organizational and incentive structures to ensure access by interested privateparties. This will require transparency in decision making, de-politicizing existing tariff-settingprocedures, and establishing appropriate regulatory and pricing mechanisms, as well asstructural changes in public sector entities to induce commercialization and phasing-out of theirreliance on budgetary resources.

85. In line with the Program, GMP envisages fundamental reform of the power sector.Overall objectives of the reform include (i) achieving commercial efficiency and improvingviability of the sector; (ii) increasing operational efficiency through enhanced competition,managerial autonomy, and higher accountability; and (iii) creating an enabling environment forprivate sector participation. GMP plans to open up power generation to the private sector,including for co-generation plants and captive generating units, and envisages new publicgenerating stations in competition with private sector generators. Power distribution may bedecentralized into manageable zones that operate as independent profit centers, and would beopen for private sector interest through a transparent, competitive bidding process. Althoughprivate sector involvement is envisaged, reform of transmission will focus on commercializationof operations in addition to upgrading and strengthening the existing substation structure.

86. The Program will support the establishment of a statutory, independent regulatoryauthority, the Madhya Pradesh Electricity Regulatory Commission (MPERC), with responsibilityfor determining electricity tariffs and for promoting competition, efficiency, and economy in theactivities of the electricity industry. The MPERC will be fully operational by March 2000, andtariff revision is to take place within 120 days following commencement of its operations.Rationalization of the tariff structure will allow the power sector to recover operational costs,meet its statutory financial obligations, generate funds to finance part of its investmentprogram, and relieve the industrial and commercial consumers from being overly burdened 33 A poverty impact assessment was conducted and socioeconomic profile of the workforce of PSUs prepared to

provide a benchmark for the design and implementation of the social safety net.

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with cross-subsidies. The policy measures supported by the Program are to initiate reform ofthe power sector and contribute to sustainability of the public finances. Further Bankinvolvement, including through separate Bank intervention in support of comprehensive powersector restructuring, will build on the establishment of the regulatory framework and reform ofpower tariffs under the Madhya Pradesh Public Resource Management Program.

87. The opening up of the power sector to private sector generation and the introduction ofseveral implementing agencies will increase the need for improved long-term planning andcoordination at the state level to optimize investments. To facilitate this, an integrated plan forthe sector’s development including least-cost program for expansion of the power system isneeded. The Program will support development of a power system master plan and its use asbasis for preparation of a sector CIP, which will be integrated into Madhya Pradesh’s overallCIP and follow the priorities set for GMP’s public sector investments.

88. To establish a conducive and transparent framework for private sector operations, GMPis preparing a roads sector policy, which aims to provide an efficient roads system, includingconnections to all larger villages to meet the needs of the various sectors in the economyeffectively through an appropriate inter-modal transport mix. The policy will encourage privatesector participation in the roads sector including under built-operate-transfer arrangements inroad construction and maintenance. In line with current practice, the private sector needs toadopt prevailing construction standards and comply with all safety and environmentalregulations. The design and implementation of private sector projects will be coordinated andfacilitated by a private sector cell, to be set up within Public Works Department, which will alsomonitor compliance with these agreed upon standards. For the systematic development of theroads network including private sector projects, the Department will prepare a sector CIPbased on its strategic options study, which is to be fully integrated into the overall CIP. Highestpriority will be assigned to improving high-density state highway corridors. External assistanceis being contemplated to finance part of the high-priority road network extension.

89. Two other venues for private sector involvement in the state’s roads sector are beingimplemented and expected to benefit from the transparency of the enabling framework. First,GMP is permitting private industry to construct and upgrade link roads between villages andindustrial growth centers. It will reimburse industry for the costs either through deduction fromtheir tax liabilities or, in the case of resource-based industry, by reducing royalty payment dueto government. Second, to facilitate private sector participation, Infrastructure Leasing &Financial Services Ltd. and GMP (through the MPSIndDC) formed a joint venture, the MP TollsLtd. Incorporated in January 1996, the company will (i) participate in any scheme promoted bythe government or domestic or foreign private sector parties to build and operate roads,develop transport facilities, and collect tolls or charges for such activities; and (ii) attractinstitutional financing for toll road construction.

90. Under the Program, the government will formulate a plan for and establish a utilitiespricing commission by the end of 2000. Tolls may be based on the mode of financing,projected traffic flows, government’s contribution to land costs and access to land near theroad project, the cost of road maintenance, and an adequate return to investment. In theinterim, GMP will review the existing toll rates for roads and bridges and assess the feasibilityand practicality of distance-based toll rates.

91. To improve the enabling framework for road transportation, GMP will issue a transportpolicy including guidelines for private sector participation and for rationalizing the operations of

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MPSRTC. The policy will aim to improve the efficiency of the public transportation system,decentralize and simplify the present permit system by delegating powers to district level, andfacilitate transport tariff setting. Although the Motor Vehicles Act enables GMP to set tariffs forgoods and passenger traffic, the government does not regulate goods fares. However,passenger fares (except for luxury buses) are fixed by the government through Cabinetdecision. Tariffs will be more flexible and linked to changes in operational costs such aswages, diesel fuel, and taxes. In view of the higher efficiency of private sector operators,demand for transport licenses is expected to increase, thus enhancing competition andgenerating funds for improving transport services. Given the large size of the state, betterservice quality and improved interconnectivity will benefit particularly the more remote, ruralareas and their link to urban centers.

92. The cities in Madhya Pradesh, as in other states, are facing problems relating tounauthorized housing construction and growth of slums, and the existing legal provisions aregenerally inadequate to mitigate them. In the recent past, progress has been made particularlyby the central Government in reforming laws and regulations governing housing developmentand housing finance. The main legislative obstacles to expansion of urban housingdevelopment have been the ULCRA at the national level, and the rent control acts at the statelevel. In March 1999, the Parliament approved the repeal of the ULCRA, which is expected toincrease the availability of urban land and accelerate land, infrastructure, and housingdevelopment in urban areas. During the program period, GMP will prepare and enact anamendment to the state Rent Control Act, which balances the interests of tenant and landlordby requiring market-related pricing of rental property. In particular, the amendment will includeprovisions to exempt a portion of the rental housing markets from provisions of the Act, permitrent revisions based on market trends, and expedite the judicial process for dispute resolution.The Program envisages establishment of rent tribunals to exercise the powers of appealsauthority in the state.

93. The Program contains measures to mobilize resources for the housing sector andincrease the efficiency of service delivery, including lowering stamp duty to promotesecuritization of loans by movable and immovable properties (para. 60), and eliminatingoverlapping operations of various state government bodies and restructuring, corporatization,and subsequent phased divestment of the MP Housing Board (para. 79). The policy measuresunder the Program are not only expected to directly attract private capital into the housingsector, but also to indirectly enhance resource availability for the sector by ensuring that thestate has access to housing finance channeled through the National Housing Bank, Housingand Urban Development Corporation, and Housing Development Finance Corporation underthe Bank’s recent Housing Finance Project.34

5. Financial Implications of the Reform Program

94. In addition to enhancing resource allocations to social sectors, the implementation ofthe comprehensive reform program will involve substantial adjustment costs estimated at about$600 million during the period 1999-2002, as shown in Table 1. Nonpersonnel outlays of thePSU reform accounts for about half of the total cost. A further $120 million (20 percent) is

34 Under Loan Nos. 1549, 1550, and 1551, Housing Finance Project, for $300 million, approved on 25 September

1997, access to funds is limited to states undertaking reforms, particularly as regards rent control and stampduty. The reform agenda of the Madhya Pradesh Program thus helps deepen the reform initiated under Bank'snational-level intervention, strengthen synergy effects, and thereby enhance the development impact.

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required to cover the cost of voluntary retirement scheme and social safety net. Further costdetails are given in Appendix 8.

Table 1: Financial Implications of the Reform Program($ million)

________________________________________________ Item Cost________________________________________________

A. Revenue Losses of Tax Measures 184.9

1. Sales Tax/Value-added Tax (input tax credit) 168.72. Stamp Duty Reform (lowering of tax rates) 16.2

B. Cost of Public Enterprise Reform a 295.9

1. Liabilities to government of Madhya Pradesh 111.82. Liabilities to Others 184.1

C. Cost of Voluntary Retirement Scheme and Social Safety Net 120.4

Total 601.2 ________________________________________________

a Excluding outlays on account of voluntary retirement scheme. Source: Mission calculations on basis of information provided bygovernment of Madhya Pradesh and individual PSUs.

95. These costs, particularly of tax reform measures, are likely to be partly offset in themedium term by increased revenue from widening of the tax base, improved propertyvaluation, and strengthened tax administration. Further resources could be mobilized throughhigher dividend payment of the remaining PSUs; reduced reliance of PSUs on the budget;proceeds from divestment as well as from asset sale (in case of companies to be closed); andimproved cost recovery including adjustment in transport and in power tariffs, totaling about$70 million annually. Also, the liabilities to GMP ($112 million), which are costs associated withclosure and restructuring of PSUs, will not directly affect budgetary cash outflows, but will havean impact on the financing of the fiscal deficit. Repayment of these liabilities to thegovernment constitute a source of financing that, if written off, would require additional marketborrowing at prevailing interest rates.

96. The counterpart funds generated from the Bank's disbursements will be used to coveroutlays for mitigating the social impact of public enterprise reform as well as the funding for theProgram's social sector interventions. These social cost and expenditures for humandevelopment comprise inter alia outlays amounting to the equivalent of $250 million forvoluntary retirement scheme and social safety net (about Rs5.2 billion); rural health facilities(about Rs2.5 billion); increased nonpersonnel health expenditures (about Rs2 billion);increased primary education expenditures (about Rs1.1 billion); and expansion of ruralsanitation program (about Rs0.2 billion).

D. Social and Environmental Issues

1. Social Impact

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97. Madhya Pradesh is facing severe resource and implementation constraints that, if notaddressed, will hamper its economic prospects, prevent improvement in social development(which is already far below the national average), and adversely affect the state’s overalldevelopment process. While the immediate social issues associated with the Program willarise through the restructuring of public enterprises, the medium-term issues will come out ofthe fiscal consolidation process and include shifts in government expenditure and their impacton the availability of social services and infrastructure as well as investment in humandevelopment (Appendix 9).

98. The Program’s macroeconomic and sector reforms are expected to improve resourcemobilization, and lead to reallocation and prioritization of expenditure, which will stimulatesaving and investment. Coupled with dynamic gains through enhanced economic efficiency, inthe medium to long term the reform program will stimulate economic and social development,generate employment, and reduce poverty. The reduction in nonproductive expenditure andreallocation to social services and infrastructure will improve access to such services. Anadditional synergy effect will be derived from the shift of resources to the health and educationsectors, which will contribute to human development. Certain program elements may, intransition, adversely affect the economically weaker sections of society, mainly in theadjustment in utility tariffs and rationalization of the sales tax rate schedule through withdrawalof tax exemptions. Yet, fiscal consolidation coupled with a positive supply response of thereform program will generate more incomes and thereby mitigate the possibly adverse impactof realigned prices. Moreover, the formulation of a CIP will be supplemented by thepreparation and implementation of a policy on resettlement and rehabilitation, to ensure thatthe social impact on people displaced as a result of such projects will be fully taken intoaccount and minimized.

99. The public enterprise reform program will involve the restructuring, merger, and closureof PSUs, which may lead to the retirement of more than 16,500 workers. A poverty impactassessment was conducted to gauge effects of the public sector reform on the poor.35 Theassessment provided a benchmark for the preparation of a comprehensive social safety netthat would include (i) a voluntary retirement scheme as part of the State Renewal Fund36

consisting of a monetary compensation package for retrenched workers; (ii) measures topromote access to social services such as housing, water and sanitation, health and nutrition,particularly of vulnerable groups, and measures to ensure continued access to education forchildren whose education may be negatively affected as a result of loss of employment ofdisplaced workers; (iii) training and self-employment or income-generating programs based ona training needs assessment for the workers and their family members that is currently underway; and (iv) counseling services and investment guidance to the affected groups on a need-based approach, e.g., investment options for the voluntary retirement scheme cashcompensation, promoting awareness of and access to credit programs for productive activities.GMP is also creating a committee to oversee the preparation and implementation of the socialsafety net. The committee will be responsible for benefit monitoring of the assistance provided.

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This has involved discussion with stakeholders including nongovernmental organizations and trade unionrepresentatives. Dissemination of best practices, public information campaign, and stakeholder participation arealso integral aspects of the TA being provided to Madhya Pradesh (footnote 4).

36 The Fund will be administered by an empowered committee chaired by the finance minister, with participation ofthe ministers of Labor, Public Enterprises, and Commerce & Industries; secretary of Institutional Finance; and thedirector of the Technical Secretariat.

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2. Environmental Impact

100. The Program is anticipated to have overall a significant positive effect on theenvironment, and includes specific policy measures to mitigate possible adverse environmentalimpacts associated with economic growth. Environmental problems in Madhya Pradeshinclude deforestation, soil erosion, air and water pollution, and encroachment of agricultureand subsistence forestry. Urban and industrial pollution is a mounting problem, while GMP’scapacity for efficient environmental management and monitoring is limited. The Program is notdirectly related to these challenges. However, it is part of a larger strategy of Bank operations,focusing on higher growth and sustainable economic development. The establishment of theMadhya Pradesh Electricity Regulatory Commission under the Program is expected tointroduce rational pricing of energy, particularly for the agriculture sector. Pricing of power willreduce wasteful use of two scarce resources: water and energy. In addition, rationalization ofwater pricing also will have environmental benefits by promoting judicious water usage.

101. Fiscal consolidation, reduction in subsidies, and improved cost recovery are expectedto facilitate more prudent management of natural resources. Growth-induced incomegeneration is likely to reduce the necessity for people to encroach on fragile land. Improvededucation can help raise awareness of the longer term benefits of properly managing scarcenatural resources. This awareness may raise the relative priority given to environmentallysound projects and thus may be reflected in the state’s CIP. Further favorable impact isanticipated from the improvement in efficiency and reduction in resource use as part of thePSU restructuring program. The Technical Secretariat will help assess the environmentalimpact of PSU reforms.

102. Public finance reform and PSU restructuring are expected to have an indirect positiveimpact on the environment, but the Program also comprises specific measures to support theenvironmental sustainability of economic growth and industrial development, for example,efficiency gains in natural resource utilization, and reduction of pollution and waste in severalsectors (industries, water, transport, and mining). Furthermore, the adoption of a stateenvironment policy will make Madhya Pradesh the first state in the country to adopt anenvironmental policy consistent with the overall national agenda for sustainable development.The policy will actively promote market-based instruments for natural resource andenvironmental management and it will require the formulation of a time-bound action plan fortheir implementation. Concurrently, the State Pollution Control Board will be strengthenedthrough capacity building (for which Bank TA is envisaged) in key environmental areas such ashazardous, industrial, and solid waste management; environmental monitoring; and integratedtraining of industrial associations on pollution control.

VI. THE PROPOSED LOAN

A. Amount of Loan and Source of Funds

103. A loan of $250 million to India is proposed from the Bank’s ordinary capital resourcesfor the proposed Program. The loan will be utilized to cover the cost of structural adjustmentof public enterprise reform including outlays associated with the social safety net, as well asfunding for the social sector interventions under the Program.

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B. Interest, Maturity, and Utilization Period

104. The loan will carry standard terms and conditions for loans from ordinary capitalresources, with an amortization period of 15 years including a grace period of 3 years. It willcarry an interest rate determined in accordance with the Bank’s pool-based variable lendingrate system for US dollar loans, and a commitment charge of 0.75 percent per annum. Theloan proceeds will be utilized over a three-year period from loan effectiveness to financeeligible expenditures, including those incurred within 180 days prior to loan effectiveness.

C. Implementation Arrangements

105. The Finance Department of GMP will be the Executing Agency for coordinating andmonitoring the Program, and administering the loan proceeds. The Finance Department will besupported by:

(i) the PRMC chaired by the chief minister to advise and oversee implementationof the reforms (empowered committees on public finance reform and on publicenterprises restructuring, both headed by the chief secretary, with high-levelrepresentation from the Finance, Commercial Taxes, and Public EnterprisesDepartment will support and report regularly to the PRMC), and

(ii) the Technical Secretariat for guidance on technical aspects of therestructuring/divestment process of public enterprises reform.

106. Capacity building and institutional strengthening are integral components of theProgram, and are addressed in ongoing and proposed TA.

D. Procurement

107. The proceeds of the loan will be utilized to finance the foreign exchange costs(excluding local duties and taxes) of items produced in, and procured from, the Bank’s membercountries (other than those items specified as ineligible [Appendix 10]). Contracts for eligibleimports will be awarded either through normal commercial procurement practices andprocedures of the private sector or the prescribed procurement procedures of the Governmentacceptable to the Bank.

E. Disbursement

108. In accordance with the provisions of the Simplification of Disbursement Procedures andRelated Requirements for Program Loans,37 the proceeds of the program loan will bedisbursed to the Borrower. No supporting import documentation will be required, if during eachyear in which the proceeds of the loan are expected to be disbursed, the value of India’s totalimports minus imports from nonmember countries, ineligible imports, and imports financedunder other official development assistance are equal to or greater than the amount of the loan

37 Board Paper R50-98. The Appraisal Mission verified the applicability of the formula for India.

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expected to be disbursed during such year. The Borrower will, however, certify with eachwithdrawal request its compliance with this formula. Otherwise, import documentation underexisting procedures will be required.

109. Loan proceeds may be used for financing eligible imports for which expenditures wereincurred 180 days prior to the date the loan becomes effective. Retroactive financing isjustified to ensure timely release of counterpart funds to the state government that has alreadyincurred a part of the cost of structural adjustment because of prior fulfillment of the conditionsof the program loan on tax reform. The central Government as the Borrower and the GMP willmaintain separate accounts and records for the loan in accordance with sound accountingprinciples, and will have such accounts audited annually in accordance with standardsacceptable to the Bank.

F. Counterpart Funds

110. The rupee counterpart funds to be generated out of the loan proceeds will betransferred by the Borrower to GMP. The counterpart proceeds will be treated as an addition tothe transfers allocated annually from the Borrower to GMP. The counterpart funds will financeoutlays for mitigating the social impact of public enterprise reform as well as funding for theProgram's social sector interventions.

G. Monitoring and Tranching

111. The Program will be implemented over a three-year period from loan effectiveness.The loan will be disbursed in three tranches to enable close monitoring of implementation. Thefirst tranche, equivalent to $100 million, will become available following compliance with theloan conditions and after loan effectiveness.

112. The second tranche, equivalent to $75 million, may be released around September2000, approximately 18 months after the release of the first tranche or earlier, upon thecontinued compliance with previous tranche conditions and on compliance with the conditionsand actions described in paras. 113-115.

113. Social development, institutional strengthening, and public finance reform. Theseconditions will include:

(i) reduction of the primary deficit (namely revenue receipts minus current (“revenue”)expenditure net of interest payment minus capital disbursement) to below 1.0 percentof SDP in the state budget for FY2001 (including supplementary budget, if applicable),with adjustment for any shortfall in central Government tax devolution to the state, ifapplicable, and adjustment for outlays in natural calamities in excess of programmedoutlays, if applicable; and increase of capital expenditures to at least 2.0 percent ofSDP in the state budget for FY2001 (including supplementary budget, if applicable);

(ii) introduction of legislation to prohibit absorption of state PSU employees into stategovernment service;

(iii) preparation of a plan to ensure that current levels of health and education expenditureare protected from budgetary cuts, integration of the plan into the state’s CIP, andspecification and implementation of an action plan to meet national norms on healthand education expenditure, taking into account (a) improvements in the state’s financialposition; (b) availability of external assistance; and (c) recommendations of TA;

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(iv) reduction in GMP employment, other than technical positions in essential socialservices and police through natural attrition, abolition of such posts, and reallocation ofbudgetary resources to poverty-reducing social services;

(v) replenishment of State Renewal Fund resources used for restructuring and closure ofPSUs through allocations in the FY2001 state budget;

(vi) establishment of a committee to design and prepare the social safety net (SSN) andsubmit the draft SSN design to the Bank; and

(vii) sufficient provision in the FY2001 state budget to reduce the backlog of capitalexpenditure and shortfall of nonpersonnel expenditure in existing rural health facilities.

114. Public enterprise reform and corporate governance. Conditions will include:

(i) assumption by the Department of Public Enterprises of nodal responsibility for all statePSU reforms;

(ii) implementation of the restructuring of MPSRTC, including through formation of fourcorporate units with operational autonomy, and introduction of efficiency enhancingmeasures;

(iii) implementation of restructuring of MPFinC, including through (a) classification ofnonperforming assets and full provisioning in accordance with applicable norms on thebasis of the March 1999 accounts; (b) discharging overdue obligations; and (c)recapitalization of MPFinC in accordance with capital adequacy requirements; and

(iv) closure of MPLDC, MPSExC, MPSFishDC, MPSLandDC, and all wholly owned units ofMPSIC, and preparation of a GMP report on settlement of workers’ and creditors’ dues.

115. Enabling environment for private sector involvement. Among these conditions are:

(i) operationalization of MPERC by (a) establishment and incorporation of MPERC inaccordance with Chapter IV of the Electricity Regulatory Commission Act; and (b)finalization of the rules of MPERC in accordance with Sections 57 and 59 of the Act;

(ii) announcement by GMP of the State Roads Policy as official policy of the GMPpursuant to its passage by Cabinet, and such Roads Policy shall includeencouragement to private sector participation in the roads sector;

(iii) announcement by GMP of the State Environment Policy pursuant to its passage byCabinet; and of a time-bound action plan for implementation of appropriate policies,including market-based instruments for environmental management; and

(iv) preparation of a draft policy on rehabilitation to address social impacts of economicdevelopment.

116. The third and final tranche, equivalent to $75 million, will be released upon GMP’smaintaining compliance with previous tranche conditions and compliance with further specificconditions and actions to be implemented during 2000 and 2001, as described in paras. 117-119.

117. Social development, institutional strengthening, and public finance reform.Conditions will entail:

(i) reduction of the primary deficit to below 0.7 percent of SDP in the state budget forFY2002 (including supplementary budget, if applicable), with adjustment for anyshortfall in central Government tax devolution to the state, if applicable, and adjustmentfor outlays in natural calamities in excess of programmed outlays, if applicable; and

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increase in capital expenditure to at least 2.3 percent of SDP in the state budget forFY2002 (including supplementary budget, if applicable);

(ii) introduction of value-added tax by GMP through appropriate state legislation;(iii) adjustment in water charges to cover at least 75 percent of O&M expenditure;(iv) adoption of flexible wage policy enabling local governments to have separate service

conditions and salary scales for their employees from GMP;(v) allocation of appropriate additional state budgetary resources equivalent to the central

Government share (i.e., 85 percent of annual project cost) to ensure sustainability ofthe DPEP after termination of externally funded central Government assistance;

(vi) review of the social safety net, including a socioeconomic survey of affected groups forbenefit monitoring, and submission of such SSN review to the Bank; and

(vii) sufficient provision in the FY2002 state budget to further reduce the backlog of capitalexpenditure and shortfall of nonpersonnel expenditure in existing rural health facilities.

118. Public enterprises reform and corporate governance. Conditions will include:

(i) submission of a report by the Technical Secretariat on the experience gained fromreform of PSUs, the progress in improvement in corporate governance, andrecommendations for changes, if any, to the policy and institutional framework for PSUreform;

(ii) establishment of procedures for enhanced accountability of managing directors for PSUperformance and introduction of appropriate monitoring mechanisms; and

(iii) corporatization of MPHB.

119. Enabling environment for private sector involvement. Conditions will include:

(i) establishment and operationalization of a utilities pricing commission for road andtransport tariff setting;

(ii) implementation of the time-bound action plan for improved environmental monitoringand management; and

(iii) finalization of policy on rehabilitation.

120. The Bank will closely monitor the Program’s implementation and impact. GMP willsubmit to the Bank semiannual progress reports in a format and level of detail and within atime frame requested by the Bank. The reports will outline the status of each policy measureand provide appropriate documentation such as government circulars, policy documents, andtax rate schedules, indicate problems encountered and steps to be taken to resolve them, andproposed detailed activity in the succeeding period. The progress reports will also includeassessment of the impact of the Program, especially its social impact. Moreover, each year,the first report following announcement of the state’s budget will contain a detailed analysis ofthe expected economic development during the budget year and the main initiativesenvisaged; the subsequent report will contain revised estimates of fiscal trends and analysis ofdeviations from budgeted figures. The Bank will send periodic review missions to examinecompliance with the program conditions and to prepare a progress report covering both thegovernment’s compliance with the tranche conditions, and the general progress in programimplementation.

VII. THE PROPOSED TECHNICAL ASSISTANCE

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121. To complement the ongoing assistance on support for economic and socialdevelopment and institutional strengthening (footnote 4), it is proposed that the Bank provideTA for capacity building for the state's public enterprise reform and for designing andimplementing the social safety net. The TA will assist in (i) establishing effective institutionalmechanisms for PSU restructuring/divestment, and for designing and implementing the SSN;(ii) transfer of skills on implementing PSU reforms; and (iii) improving corporate governanceincluding strengthening of PSUs' accounting and information systems, thereby contributing toan effective implementation of components of sustainable public sector reform envisagedunder the Program.

122. The total cost of the TA is estimated at $750,000 equivalent, comprising foreignexchange costs of $350,000 and $400,000 equivalent in local currency costs. The Bank willfinance $600,000, on a grant basis from the Bank-funded TA program, and GMP will contributethe equivalent of $150,000 in kind for counterpart staff, office accommodation and otherfacilities, local transportation, and other services. The outline terms of reference and its costestimates are in Appendix 11.

VIII. PROGRAM BENEFITS AND RISKS

A. Benefits

123. Economic and structural reforms. An important benefit of the Program will be itscontribution to the success of the overall reform agenda. The Program is designed to assistGMP in improving and sustaining the social and economic development of the state; reformingthe public sector; and evolving a conducive environment for private sector participation. Fiscalreform will reduce the state’s budget deficit, improve expenditure prioritization includingreallocation to social services, and improve the efficiency and equity of the revenue system.As the resource requirements for human development are so large, domestic resourcemobilization will foster sustainability of social sector interventions, improve their quality, andenable expansion in their coverage. The restructuring/divestment and closure of publicenterprises will increase the productivity and efficiency of the economy, and facilitate theadoption of market-oriented business practices. Further, the development and implementationof an enabling environment for the private sector will create a level playing field and providethe necessary assurance regarding the stability and transparency of policies and regulations.This in turn will induce private investment, counter the shortages in the infrastructure sector,and thereby help remove bottlenecks to future economic expansion. Increased efficiency ofresource mobilization and improved effectiveness of resource use will facilitate redirection offunds to social services. Overall, timely and successful implementation of the reforms will setan example for other reform-oriented states to undertake such comprehensive reform program.

124. Human Development. The Program’s focus on fostering social development andeconomic growth is intended to reduce the state’s severe poverty, and to raise its skill base,and to improve on a sustainable basis the living conditions of its population. Improved accessto and delivery of social services, such as health and education, and a supporting social safetynet will directly benefit the socially and economically disadvantaged and vulnerable groups.While benefiting the current population and its ability to generate income, the positive impacton the state’s development process will also improve the population’s future income ability.The Bank’s support for human development in this state should have a catalytic effect in otherpoor states.

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125. Transparency and institutional capacity. The Program supports the establishmentand implementation of transparent policy and regulatory frameworks in infrastructure sectors tocreate a conducive environment for private sector participation and crowding-in of privateinvestment. While addressing public enterprise restructuring and divestment, the Programalso supports improvement in corporate governance, including increasing PSUs’ operationalfreedom and enhancing management accountability for public enterprise performance. TA isbeing provided to assist the government in strengthening its capacity, particularly in fiscalmanagement and expenditure control, and in restructuring and divestment of publicenterprises. Assistance is also provided for reviewing the policy and regulatory frameworks ofhealth and education sectors, assessing the potential for improved cost recovery in social andeconomic services, and preparing a time-bound plan for directing further resources to socialinfrastructure.

B. Risks and Safeguards

126. The principal underlying risks include (i) the limited experience and institutional capacityof the state government to implement comprehensive reforms; (ii) the adequacy ofcoordinating mechanisms, considering the large number of government agencies,departments, and public enterprises involved in the implementation of program activities; (iii)the potential delay of divestments due to market conditions; and (iv) the fact that continuedprogress in social development depends on financial assistance from the international aidcommunity.

127. Program design and supporting TA have been prepared with a view to mitigatingassociated risks and providing safeguards for effective implementation. The Program containssubstantial upfront conditionality to ensure early initiation of a broad-based reform agenda.Further, under the Program, longer term measures related to subsequent tranches such asPSU restructuring, are being initiated at an early stage to deepen the reform process andmake it irreversible, and technical capacity for public enterprise reform is being strengthened.Effective coordination mechanisms and appropriate implementation capacity are beingintroduced under the Program through high-level committees, Technical Secretariat, StateBudgeting and Fiscal Analysis Unit, as well as through advisory support from Bank TA.

IX. RECOMMENDATION

128. I am satisfied that the proposed loan would comply with the Articles of Agreement ofthe Bank and recommend that the Board approve the loan of $250 million from the Bank’sordinary capital resources to India for the Madhya Pradesh Public Resource ManagementProgram, with a term of 15 years, including a grace period of 3 years, and with interest to bedetermined in accordance with the Bank’s pool-based variable lending rate system for USdollar loans, and such other terms and conditions as are substantially in accordance with thoseset forth in the draft Loan and Program Agreements presented to the Board.

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TADAO CHINO President

26 October 1999

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APPENDIXES

Number Title Page Cited on(page, para.)

1 Program Framework 39 2, 5

2 Development Policy Letter 45 2, 5

3 Policy Matrix 53 2, 5

4 Economic and Social Indicators 60 3, 7

5 Fiscal Developments 66 5, 17

6 Summary of Public Sector Undertakings 68 7, 21

7 External Assistance 69 15, 44

8 Nonpersonnel Cost of Public Enterprise Reformand Cost of Voluntary Retirement Scheme

71 28, 94

9 Poverty Impact Assessment 72 29, 97

10 Ineligible Terms 77 31, 107

11 Technical Assistance 78 35, 122

SUPPLEMENTARY APPENDIXES(available on request)

A Sector Overview: Health

B Sector Overview: Education

C Profile of Public Sector Undertakings

D Socioeconomic Characteristics of Employees inPublic Enterprises Undergoing Restructuring/Closure under the Program

E Fifth Pay Commission: Recommendations andFiscal Impact

Appendix 1, page 1

PROGRAM FRAMEWORK

Design Summary Targets/Measurable Indicators Monitoring Mechanism Assumptions/ Risks

A. Goal

Assist Government of MadhyaPradesh (GMP)’s reform effortsto foster social development andsustainable economic growththrough improving publicresource management andenhancing public expenditure tosocial sector

• Medium-term sustainability of publicfinances

• Capacity building for prudentmanagement of public expenditureand debt; and strengthening resourcemobilization including throughimproved tax administration

• Expenditure reallocation to socialsector, and protection of theseoutlays from budgetary cuts

• Preparation of plan indicating hownational norms on health andeducation could be met as state’sfinancial constraint eases

• Alleviation of social impact ofdevelopment

• Strengthened corporate governance;and improved financial performanceof public sector undertakings (PSUs)

• Policy, regulatory, and institutionalframeworks of key sectors (power,roads/transport, and housing)

• Improved environmentalsustainability of the reform process

Finance Department (FD),supported by State Budgetingand Fiscal Analysis Unit(SBFAU), to prepare periodicreports on fiscal trends,expenditure allocation to socialand economic services, and taxand expenditure policymeasures

Plan on how national norms inhealth and education could beachieved

Committee to be established toprepare social safety net (SSN)design and submit report toBank

Technical Secretariat to reporton progress of PSUrestructuring, and theDepartment of PublicEnterprises (DPE) to publishannual report on publicenterprise sector performance

GMP to report on sector coreinvestment program; and onexperience with private sectorinvolvement in social andpolitical infrastructure

Sector policies; action plan forstrengthening environmentalmanagement and monitoring

Political acceptability of andcommitment to fiscalconsolidation and taxreforms; acceptance byPSU management ofgreater transparency andaccountability

Capacity building onexpenditure managementand control to preventexpenditure overrun andavoid that unproductiveexpenditure crowd outsocial sector allocations

Program success iscontingent on stable politicaland external environment;exogenous shocks includingpolicy decisions by theCentral Government couldadversely affect economicdevelopment, environmentfor private sector, andimplementation of StateRenewal Fund.

B. Program Objectives

• Enhanced resourceallocation to social sector,within a medium-termframework of sustainablepublic finances andstrengthened fiscalmanagement, to fostersocial development andsatisfying basic humanneeds while mitigatingsocial impact ofdevelopment

• Improving corporategovernance and increasedefficiency of resource usethrough restructuring publicsector undertakings

Expenditure allocation for enhancedcapital outlays and nonpersonnelexpenditure on health, and adequatebudgetary provision for sustainability ofDistrict Primary Education Program(DPEP) within framework of fiscalconsolidation, reflected in reduction instate’s primary deficit from budgeted 3.4percent of State Domestic Product (SDP)to about 0.7 percent of SDP

Committee to prepare SSN design;preparation of policy on rehabilitation

Enhanced efficiency, improved financialperformance, and reduced fiscal burden ofPSUs on the government budget; reducedrole of the government in commercialactivities, and enhanced accountabilityand transparency of PSU management

FD to provide budgetdocuments; SBFAU toundertake regular monitoring,and report to be provided toBank on compliance with theagreed policy measures; plan toensure protection of socialsector outlays from budgetarycuts

Report on SSN design; Bankreview of rehabilitation policyprior to finalization

Technical Secretariat to beestablished with Bank technicalassistance, to oversee andadvise on implementation ofPSU reform; the DPE to publishannual report on PSUperformance, including reformprogress

Difficulty in achievingtargeted improvement inpublic finances due toadverse (external)conditions, and inability tomobilize resources to fundincrease in social sectorspending

Government support andcommitment to SSN

Absence of political andlabor resistance to PSUreform, and timelydevelopment of capacitiesof concerned agencies toimplement restructuring.Conducive capital marketconditions and activeprivate sector participationto ensure success of PSUdivestment

Appendix 1, page 2

Design Summary Targets/Measurable Indicators Monitoring Mechanism Assumptions/ Risks

• Evolving enablingenvironment for privatesector participation in keysectors

• Promoting environmentalsustainability of economicdevelopment

Private sector participation andsustainable sector development in thepower, roads and transport, and housingsectors

Guidelines for market-based instruments(MBIs); strengthened technical capacityof Pollution Control Board

More transparent process ofinvestment, production,distribution of profits, andpersonnel decisions; reductionof subsidies and other directfinancial support for PSUs

Sector policies inroads/transport and housing tobe implemented; utilitiespricing commission and StateElectricity RegulatoryCommission to be established

State Environment Policy to beimplemented; time-boundaction plan for implementationof MBIs

Consensus betweenbureaucracy and privatesector, to avoid delay inthe preparation andimplementation of policyaction plan for promotingprivate sector involvement

Acceptance by industry ofMBIs and enhancedenvironmental monitoring

C. Program Components

1. Foster socialdevelopment, supportinstitutional strengtheningand improve the publicfinances. The Programwill include:

• Key parameters of fiscalperformance (i.e. fiscal deficit,expenditure allocation) to be set asbenchmarks

• Capacity building and institutionaland procedural strengthening

FD to provide Finance Bill withdetails on new revenuemeasures and expenditurereports; ready reckoners forproperty assessment

Provision of training;preparation of studies,implementation ofrecommendations, andreporting of impact includingfeedback on required changes

Adequate strengthening offiscal management andimplementation capacity ofFD; increased fiscalpressure due to lower thanprogrammed revenuegrowth; pressure onunproductive expenditure

(i) institutional strengthening Establishment of the Public ResourceManagement Committee (PRMC),headed by Chief Minister, and theEmpowered Committee on PublicFinance Reform, headed by ChiefSecretary; Management InformationSystem for FD; Committee for design andimplementation of social safety net (SSN)

Establish State Budgeting andFiscal Analysis Unit (SBFAU)in the FD; draft SSN design tobe submitted to Bank;computerization andnetworking of FD’s treasuryoperations for improvedexpenditure management andcontrol

Timely establishment ofSBFAU; availability ofadequately experiencedstaff. Adequate capacity todesign and implementSSN, and propermonitoring

(ii) adoption and

implementation ofmedium-term fiscalframework for FY1999 -FY2003

The primary deficit to be reduced from3.4 percent of SDP in the FY1999 budgetto 1.0 percent in the FY2001 budget, andto 0.7 percent in the FY2002 budget;capital expenditure to be at least 1.6percent of SDP in FY1999, 2.0 percent ofSDP in FY2001, and 2.3 percent inFY2002

FD to provide Finance Bill withdetails on new tax measuresand expenditure reports

Exogenous factors such asnatural calamities, andslippages in expenditurecontrol may adverselyaffect fiscal consolidation

(iii) improved efficiency and

effectiveness of resourceuse, through:

Increased wage flexibility by evolvingpolicy to de-link wage setting; decline inbudgetary subsidies; reallocation ofexpenditure to social services,particularly health and education;increased effectiveness and efficiency ofthe payment and audit system throughcomputerization of FD

Technical Assistance (TA)report on policy and regulatoryframework of health andeducation sectors; TA reporton computerization/ networkingof FD; wage policy

Resistance to reducing thesize of governmentemployment; linedepartments to resistreallocation of resources tosocial sectors; pressure onincrease in unproductiveexpenditure

a. rationalized andprioritized expenditure

Prepared and implemented CoreInvestment Program (CIP); reviewed andimplemented recommendations of thestudy on industrial incentives scheme;prohibited regularization ofcasual/temporary (post-1988) workersinto state government and PSUs, and ofPSU employees into state government

Develop a system formonitoring implementation ofCIP; evolve policy andintroduce legislation onprohibition to absorb PSUemployees into stategovernment service

Adequate capacity ofrelevant departments todevelop and implementCIP; resisting pressure forregularizing casual/temporary workers

Appendix 1, page 3

Design Summary Targets/Measurable Indicators Monitoring Mechanism Assumptions/ Risks

b. reallocatedexpenditure to socialservices

Adequate provision in the FY1999 budgetand annually thereafter to clear backlogof capital expenditure and shortfall ofnonpersonnel expenditure in existingrural health facilities; reduced stategovernment employment other thantechnical positions in essential servicesand police through attrition, abolishedposts, and reallocation of resourcessaved through attrition to poverty-reducing social services; appropriatebudgetary allocation equivalent to theCentral Government share of 85 percent,to ensure sustainability of District PrimaryEducation Program (DPEP); preparedand implemented action plan, with BankTA support, to ensure that social sectoroutlays are protected and national normscould be met in due course

Bank TA report; action plan onprotection of social sectoroutlays; budget documents

Resistance of bureaucracyto adopting social sector –friendly policy in view ofstrong pressure on theoverall budget

Improved budgetmanagement and controlto enable adequateprovision for sustainabilityof DPEP, and to allowincreased allocation forhealth and educationexpenditure

c. shifted priority fromcurrent to capitalexpenditure

Capital expenditure raised from 1.6percent in the FY1999 budget to at least2.3 percent in the FY2002 budget

Finance Bill; expenditurereports; CIP

Revenue shortfall,exogenous factors such asnatural calamities, orinadequate compression ofunproductive expendituremay tighten resourceavailability for increase incapital expenditure

(iv) mitigated social impact ofeconomic development

GMP to issue notification of theoperationalization of State Renewal Fund(SRF); and allocate appropriateresources in the FY1999 and subsequentbudgets

Design and implement SSN

Notification of setting up ofSRF; report to be submitted toPublic Resource ManagementCommittee and the Bank

Establish a committee withresponsibility for preparing andimplementing SSN; review theSSN including socio-economicsurvey of affected groups

Acceptance bybureaucracy of allocationof adequate budgetaryresources to SRF

Full cooperation betweenBank consultant team,state government, andPSU management required

Weak managementcapacity of the SSNcommittee in preparingguidelines for SSN

(v) strengthened resourcemobilization through:

a. rationalization of salestax system

Tax base to be widened by reducing thenumber of goods exempted from 93 to 39items; and reducing the number of salestax slabs from 6 to the 4 main rates of2%, 4%, 8%, and 12%

FD to provide new tax rateschedule; systems plan for fullcomputerization of sales taxadministration

Acceptability by thebusiness community of thereform proposals, underwhich industrialconcessions and taxexemptions would bereduced or eliminated

b. phasing-in of valueadded tax (VAT)system

Implementation, through appropriatelegislation, first stage of VAT by loweringtax on manufacturing inputs; andsubsequently by June 2001, fullintroduction of VAT

Legislative Bill; review of theimpact of VAT

Higher than programmedrevenue losses from taxreduction/input tax reliefmight delay improvementin fiscal position

c. reform of stamp dutysystem in line withrecommendations ofthe 1996 and 1997state finance minister’scommittee on stampduty

Reduced maximum rate on conveyances;and rationalized stamp duty on capitalmarket instruments

New tax rate schedules to beprovided; annual Finance Bill;establishment of central andregional valuation cells

Acceptability of newvaluation of property;timely establishment ofvaluation cells; adequatecapacity in applying newvaluation methodology

Appendix 1, page 4

Design Summary Targets/Measurable Indicators Monitoring Mechanism Assumptions/ Risks

d. improved costrecovery

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

FD to report on revised watertariff and progress onimplementation of the actionplan

Acceptability of increasedutilities prices

2. To undertake publicenterprise reform andimprove corporategovernance, the Programwill:

• Operational and institutionalstrengthening, including approval ofpolicy guidelines on public sectorreform; setting up EmpoweredCommittee and TechnicalSecretariat; and establishingprocedures for enhancedaccountability of PSU management

• Restructuring 14 PSUs, includingclosure and/or merger of 9 PSUs,sale/lease of assets of 1 PSU, fullor partial divestment of 4 PSUs

• Voluntary retirement scheme (VRS),

and re-training of employeesaffected by PSU restructuring

Transfer nodal responsibilityfor reform of all state PSUsfrom line departments toDepartment of PublicEnterprises (DPE); TechnicalSecretariat to report onprogress of implementation ofPSU reform; financial criteriarequiring minimum rate ofreturn on public investment tobe introduced

Appropriate technicalcapacity of DPE andtimeliness in staffassignment andrecruitment to strengthenDPE; resistance to closureof PSUs and laborretrenchment among PSUemployees and society atlarge

(i) develop policy andinstitutional mechanismfor PSU reform

GMP to (i) approve policy guidelines onpublic sector restructuring and reform; (ii)set up an Empowered Committee onPSU Reform (ECPR) headed by ChiefSecretary; and (iii) establish TechnicalSecretariat to assist in PSU reform

Technical Secretariat tosubmit a report on restructuringand divestment of PSUs andthe strengthening of PSUs’accounting systems

Setting up TechnicalSecretariat withappropriate technicalcapacity to undertake PSUreform; adequatemonitoring and guidancefrom ECPR

(ii) improve corporategovernance and supportinstitutional strengthening

DPE to assume nodal responsibility forreform of state PSUs; DPE to reviewcandidates for appointment of allfunctional directors on professional basiswith due regard to PSUs’ service rules

DPE to establish proceduresfor enhanced accountability ofManaging Director for PSUperformance, and to introduceappropriate monitoringmechanism

Staffing DPE withemployees withappropriate qualification;decisiveness inimplementation ofaccountability proceduresand adequacy ofmonitoring for compliance

(iii) increase operationalfreedom of PSUs

GMP to introduce financial criteriaregarding return of investment fordividend payment and establishinvestment limit for which PSU do notneed approval from government;provision of performance incentives bydifferentiation in remuneration linked toproductivity and PSUs’ financialperformance

DPE to issue and publishannual report on performanceof PSUs

Adequate capacity of GMPto enforce the newoperational framework forPSUs

(iv) restructure/ divest PSUs • 49 percent divestment ofMPSIndDC

• 49 percent divestment of corporateunits of MPSRTC

• 74 percent divestment of MPSAIDC• 25 percent divestment of MPFinC

under State Financial CorporationsAct (SFC) 1951(GMP shareholdingfurther reduced to not more than 26percent contingent uponamendment to the SFC Act)

• Sale/ lease of the properties ofMPSTourDC

Technical Secretariat toprovide regular reports onprogress made

Appendix 1, page 5

Design Summary Targets/Measurable Indicators Monitoring Mechanism Assumptions/ Risks

(v) close/ merge PSUs Closure of MPLDC, MPSExC,MPSFishDC, MPLandDC, MPSIC andMPSTexC

Corporatization of MPHB; subsequentlydivestment of 49% of GMP’s share inMPHB; closure of MPSCB and MPPHC

Government orders for closureof PSUs; Approvals from Boardfor Individual and FinancialReconstruction and itsAppelate Authority for closureof managed mills of MPSTexC;GMP to report to the Bank onsettlement of workers’ andcreditor’s dues

GMP to approve restructuringand merger proposal

Acceptability by laborunions and employees ofclosure of PSU; timelyconclusion of legal processof PSU closure; adequacyof resource availability forvoluntary retirementscheme

Synergies from merger donot materialize; adequacyin settlement of workers’dues

(vi) initiate reform ofcooperatives sector

Review and assessment of constraints incooperatives sector andrecommendations to enhance theiroperational freedom and efficiency

Report on the financialperformance of cooperativessector (with Bank TA support)

Full cooperation fromcooperatives sector

3. To promote enablingpolicy environment forprivate participation in keysectors, the Program willsupport:

• GMP to introduce legal andregulatory frameworks for keysectors; setting up of independentelectricity regulatory authority,utilities pricing committee, and RentTribunal

• Rationalization of routes; guidelines

and procedure for private sectorparticipation

• Institutional strengthening of PublicWorks Department (PWD)

• Improve policy framework for privatesector investment in housing sectorby amending the State Rent ControlAct

GMP to prepare power systemmaster plan and sector CIPs;adjustment in tariffs in thepower, and roads andtransport sectors; report onimpact of amendment to RentControl Act

State Roads Policy; StateTransport Policy; report onexperience with private sectorprojects

A private sector cell to beestablished andoperationalized, which willprovide report to Bank

Amendment to State RentControl Act to be enacted

Development ofoutstanding issues at theCentral Government levelon sector policiesregarding private sectorparticipation; political andpublic acceptability ofincreasing power tariff, tollcharges, and rents

Adequate capacity fordeveloping effectiveframework for privatesector participation

Availability of requiredexpertise and experienceby PWD staff

Timely approval of theAmendment

(i) power sector reform

GMP to (i) establish an independentMadhya Pradesh Electricity RegulatoryCommission (MPERC); (ii) MPERC to befully operationalized by March 2000; and(iii) MPERC to announce its first revisionof electricity tariffs no later than 120 daysafter operationalization

GMP to include in the financeminister’s 1998/99 budgetspeech detailed explanationindicating full amount ofsubsidy on account ofelectricity consumption toagriculture sector; notificationfor establishment of MPERC;written directions to MPERC onminimum level of tariffs foragriculture

Timely operationalizing ofthe MPERC; acceptanceby agricultural anddomestic consumers ofincrease in electricity tariffs

(ii) roads and transport sectorreform

(i) Policy for private sector participation;(ii) rationalization of routes; (iii)strengthening PWD’s capacity to processprivate sector projects; and (iv)developing tariff setting mechanism andreview existing toll rates for roads andbridges

State Transport Policy andState Roads Policy to beannounced

A private sector cell to beestablished andoperationalized within PWD

GMP to prepare a plan forestablishing a utilities pricingcommission

Appropriateimplementation of thedenationalization of routes;adequate strengthening ofPWD; consensus betweenPWD and private sponsorson the contractualarrangements for privatesector projects

Appendix 1, page 6

Design Summary Targets/Measurable Indicators Monitoring Mechanism Assumptions/ Risks

(iii) housing sector reform Providing for market-based rentalincreases and exempting newerproperties from provisions of State RentControl Act; setting up of Rent Tribunal

Enact Amendment to StateRent Control Act; report onimpact of the Amendment onthe level of rents and on sectorinvestment

Timely approval of theAmendment; resistance torent increases

4. To promote sustainabledevelopment, theProgram will support:

(i) strengthenedenvironmentalmanagement

Developed market-based instruments;strengthened technical capacities of thePollution Control Board (PCB) and itsregional offices; training program to PCBstaff and industrial associations onenvironmental monitoring andmanagement

A state environment policy tobe prepared and announced;time-bound action plan forimplementation of appropriatepolicies including MBIs forenvironmental management tobe prepared.

Adequate capacity of stateagencies to formulate andimplement the action plan,and effectiveness inenvironmental monitoringand management

(ii) mitigation of social impactof economic development

Preparation of policy on rehabilitation toaddress social impacts of economicdevelopment, and ensure policyframework for project intervention onsocially sustainable basis

Submit draft rehabilitationpolicy to Bank for review

Timely preparation ofrehabilitation policy;adequacy of guidelines forresettlement issuesassociated with projectimplementation

MPERC = Madhya Pradesh Electricity Regulatory Commission; MPFinC = Madhya Pradesh Financial Corporation; MPHB = Madhya PradeshHousing Board; MPLDC = Madhya Pradesh Leather Development Corporation; MPPHC = Madhya Pradesh Police Housing Corporation;MPSCB = Madhya Pradesh Slum Clearance Board; MPSExC = Madhya Pradesh State Export Corporation; MPSFishDC = Madhya PradeshState Fisheries Development Corporation; MPSIC = Madhya Pradesh State Industries Corporation; MPSIndDC = Madhya Pradesh StateIndustrial Development Corporation; MPSLandDC = Madhya Pradesh State Land Development Corporation; MPSRTC = Madhya PradeshState Road Transport Corporation; MPSTexC = Madhya Pradesh State Textile Corporation; MPSTourDC = Madhya Pradesh State TourismDevelopment Corporation

POLICY MATRIX

A. Social Deve lopment, Institutional Strengthening, and Public Finance Reform

Policy Areas/Objectives

Prior Actions/ First Tranche Conditions Before BoardApproval Actions Before September 2000 a Actions Before March 2002 b

A. 1. Institutionalstrengthening

Establish the PRMC, headed by Chief Minister, tooversee implementation of state’s economic reformprogram; and Empowered Committee on Public FinanceReform, headed by Chief Secretary, to implement publicfinance reform. January 1998

Set up a State Budgeting and Fiscal AnalysisUnit in the FD to strengthen the analytical andtechnical capacity for development andanalysis of economic policy options andstrengthen the debt management capability.March 2000

Computerize and network FD’streasury operations for effectivepayment and audit systems;complete managementinformation system for improvedexpenditure control. December2000

A. 2. Medium-termfiscal framework

The primary deficitc to be below 3.4 percent of SDP in theFY1999 budget;d and capital expenditure to be at least1.6 percent of SDP. July 1998

The primary deficit to be below 1.0 percent e

of SDP in the FY2001 budget; d and capitalexpenditure to be at least 2.0 percent ofSDP. September 2000

Make progress in fiscalconsolidation, with primarydeficit to be below 0.7 percent e

of SDP in the FY2002 budget; d

and capital expenditure to be atleast 2.3 percent of SDP.September 2001

A. 3. Reform ofsales tax system

Implement reform of sales tax system by (i) widening thetax base by reducing the number of goods exempted fromtax under Schedule I of the MP Commercial Tax Act from93 to 39 items; and (ii) reducing the number of sales taxrates from six to four (2%, 4%, 8%, 12%). August 1998

Computerize sales tax administration includingmonitoring and accounting systems, andsystem for registration of traders and forcross-checking of taxpayer information on thebasis of the systems plan being prepared withBank TA. September 2000

Complete training to all taxcommissioners and tax officers oncommercial taxes and taxationpolicy to strengthen taxassessment and enforcementcapacity. January 2001

A. 4. Phasing in ofVAT system andstrengthening oftax administration

Implement, through appropriate legislation, first stage offull introduction of VAT by providing rebate of tax onmanufacturing inputs through lowering input tax from 4%to 2%. June 1998

Review and assess the fiscal impact of thefirst stage of VAT introduction and makerecommendation, if any, for furtherstrengthening of tax administration. June2000

Introduction of VAT. June 2001

a The activities in bold letters are conditions for the release of the second tranche of the loan. Tranche can be released by September 2000 or earlier on compliance with the conditions identified

in this column.b The activities in bold letters are conditions for the release of the third tranche of the loan. Tranche can be released by March 2002 or earlier on compliance with the conditions identified in this

column.c Primary deficit defined as revenue receipts minus current (“revenue”) expenditure net of interest payment minus capital disbursement. Capital disbursement is defined as the sum of capital

expenditure and loans & advances (on gross basis). The ratios are calculated using net state domestic product (SDP).d Including supplementary budget, if applicable.e 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 theprogrammed outlays of 0.1 percent of SDP, if applicable.

A. 5. Reform ofstamp duty systemand strengtheningvaluation systemfor assessment ofstamp duty andproperty tax

Reform the stamp duty system in line withrecommendations of the State Finance Minister’sCommittee on Stamp Duty 1996, including reducing themaximum rate on conveyances; rationalize, as agreed,stamp duty on capital market instruments. June 1998

Establish central and regional valuation cellsand introduce methodology to assessproperties for levy of property tax and stampduty, taking into consideration TArecommendations. March 2000

Implement, in consultation withthe local bodies, property taxreform including preparation ofready reckons for taxassessment; strengthen the publicfinances of local bodies takinginto consideration findings ofBank TA. December 2000

A. 6. Improvedcost recovery

Adjust water charges to cover at least 50% of O&Mexpenditure. June 1998

Prepare time-bound action plan andimplement system of user charges on utilitiesfor enhanced sustainability taking intoconsideration TA recommendations. March2000

Adjust water charges to coverat least 75% of O&Mexpenditure. March 2001

A.7. Rationalizationand prioritization ofexpenditure andstrengthening ofexpendituremanagement

Rationalize the industrial incentive scheme throughincreasing the negative list, and by more focused thrustsectors; initiate study for further rationalization ofscheme. August 1998

Prohibit regularization of casual/temporary (post-1988)workers into state government and PSUs. June 1998

Evolve appropriate policy and draft legislation to prohibitabsorption of employees of state public sector enterprisesinto state government service. June 1998

Rationalize and prioritize expenditure andstrengthen expenditure managementincluding: (i) preparation of CIP, and (ii)system for monitoring implementation of CIPand for periodic review of project performance.March 2000

Introduce the legislation on prohibition toabsorb State PSU employees into stategovernment service. March 2000

Review and implement therecommendations of the study onindustrial incentives scheme; andcomplete system of expendituremanagement and control.December 2000

Adopt flexible wage policyenabling local governments tohave separate serviceconditions and salary scalesfor their employees from stategovernment. December 2000

A. 8. Reallocationof expenditure tosocial services andstrengthening ofinstitutional andlegal frameworksfor enhanced costrecovery

Initiate study, supported by Bank TA, on the policy andregulatory frameworks of health and education sectors;level of user fees in social service facilities and cost ofservices; and potential for further resource reallocationtowards primary and preventive health care andelementary education. July 1998

Make adequate provision in the FY1999 budget andannually thereafter to clear the backlog of capitalexpenditure and shortfall of nonpersonnel expenditure inexisting rural health facilities over the medium term, asagreed. July 1998

Review TA recommendations; prepare andimplement a plan to ensure that thepresent levels of social sector outlays areprotected from budgetary cuts, integratesuch plan in the overall CIP and indicatehow the national norms on health andeducation could be met as the state’sfinancial position eases over time and asadditional external assistance becomesavailable. March 2000

Strengthen and extend the activities of theMCDD from 11,000 to 40,000 villages throughlocal bodies. March 2000

Include appropriate additionalbudgetary allocation equivalentto the Central Governmentshare to ensure sustainabilityof the District PrimaryEducation Program aftertermination of externallyfunded Central Governmentassistance. June 2001

Extend the activities of the MCDDto all 71,000 villages in the state;monitor and evaluate the impactof the program and preparerecommendation for follow-uppolicy interventions. September2001

During the Program period, state govern-ment employment other than technicalpositions in essential social services andpolice to be reduced through naturalattrition, and such posts abolished.Resources saved through natural attritionto be reallocated to poverty-reducing socialservices. September 2000

Abolish the posts, other thantechnical positions in essentialsocial services and police, vacatedthrough natural attrition during thattranche period, and reassign theresources to poverty-reducingsocial services. September 2001

A. 9. Mitigatesocial impact ofeconomicdevelopment,including socialsafety netmechanism forPSU reform

Set up a State Renewal Fund (SRF); issue notification forits operationalization; and include appropriate allocationfor SRF in the FY1999 budget. July 1998

Use SRF funds for restructuring/ closure ofPSUs; replenish SRF through requiredfurther allocation in the FY2001 budget.June 2000

Establish a committee to design andprepare the SSN and submit the draft SSNdesign to the Bank. March 2000

Implementation of SRF to bereviewed by Technical Secretariatand report to be submitted toPRMC and the Bank. December2001

Review the SSN including socio-economic survey of affectedgroups, make recommendationsfor changes to SSN as required,and submit such SSN review tothe Bank. December 2000

B. Public Enterprise Reform and Corporate Go vernance

B. 1. Developpolicy andinstitutionalmechanism forPSU reform

Approve policy guidelines on public sector restructuringand reform; and set up an Empowered Committeeheaded by the Chief Secretary to implement the PSUreforms. January 1998

Establish Technical Secretariat to provide expertassistance on PSU reform. August 1998

Operationalize the Technical Secretariat forassisting in implementing PSU reform. March2000

The Technical Secretariat willsubmit a report on theexperience gained from reformof PSUs and the progress inimprovement in corporategovernance, together withrecommendations for changes,if any, to the policy andinstitutional framework for PSUreform. June 2001

B. 2. Improvecorporategovernance andstrengtheninstitutions

Strengthen the DPE, headed by a minister, and staff DPEwith professionals of appropriate background andexperience. July 1998

DPE must assume nodal responsib ility forreform of all state PSUs. March 2000

Assign to the DPE the responsibility forreviewing candidates, on the basis ofappropriate screening procedures, for theappointment of all functional directors toensure that these appointments are made on aprofessional basis with due regard to thePSUs’ service rules. March 2000

The DPE will issue and publishannual report on the performanceof PSUs. December 2000

Establish procedures forenhanced accountab ility ofmanaging directors for PSUperformance and introduceappropriate monitoringmechanisms. December 2000

Determine financial criteria relating to return oninvestment for dividend payment from PSUs to GMP.June 1998

Introduce the financial criteria on return oninvestment for dividend payment; andestablish and introduce investment limit forwhich PSUs do not need approval from thegovernment to increase PSUs’ operationalfreedom. March 2000

The PSUs will set strategic targetson the basis of guidelines given byGMP. The PSU boards will setqualitative and quantitative targetsas basis for performance-relatedincentives for PSU Management.December 2000

Review the existing practice of uniform payscale for PSUs, and authorize the setting ofenterprise-specific salary scales, includingdifferentiation in remuneration linked toproductivity and the financial performance ofindividual state public enterprises. March2000

The managing directors of PSUswill be appointed on professionalbasis (with particular emphasis onexperience and performance) andfor a minimum three year term;and the practice of combining thepost of managing director withother posts in the government willbe discontinued. March 2001

B. 3. Restructureand Divest/Privatize PSUs

Prepare and submit to the Bank an approach paper forrestructuring and partial divestment of MPSIndDC. July1998

Initiate organizational and financialrestructuring of MPSIndDC. June 2000

Reduce GMP’s 100%shareholdings in MPSIndDC to51% by inducting a strategicpartner, and appoint the chair aswell as a majority of directors onthe Board from private/nongovernment sector. June 2001

Initiate discussion with Government on possible buy-backof shares in MPSAIDC. June 1998

Advertise for joint sector partner in largeagricultural farm owned by MPSAIDC. March2000

Hive off to joint sector holdinglarge agricultural farm; reduceGMP’s shareholding in MPSAIDCto not more than 26% in atransparent manner, contingentupon a buy back of shares fromGovernment of India. December2001

Prepare and submit to the Bank a draft corporaterestructuring plan of MPSRTC and MPFinC, includingdetails on measures to improve operational efficiency,and estimate of cost of restructuring arising from VRSand outstanding obligations. June 1998

Implement restructuring of MPSRTC,including through formation of fourcorporate units with operational autonomy,and introduce efficiency enhancingmeasures. June 2000

Divest 49% of MPSRTC’sshareholding in the fourcorporatized units; furtherrationalize routes. December 2001

Undertake financial and organizationalrestructuring of MPFinC includingclassifying nonperforming assets and fullyprovision as per applicable norms on basisof March 1999 accounts, dischargingoverdue obligations, and re-capitalizingMPFinC to ensure compliance with capitaladequacy requirements. March 2000

Reduce GMP’s shareholding inMPFinC by 25% through publicissue as permissible under theState Financial Corporations Act of1951; contingent upon amendmentto the Act, reduce GMP’sshareholding further to not morethan 26%. December 2001

B. 4. Merge andclose PSUs; andsell/lease ofproperties

Prepare a restructuring plan for MPHB and MPPHCincluding for corporatization of MPHB. June 1998

GMP approval for the restructuring plan; closeMPPHC and MPSCB; and transfer MPSCB’score activities to MPHB as per the plan.September 2000

Corporatize MPHB. June 2001

Divest 49% of GMP’s share inMPHB following its corporatization.December 2001

Initiate closure of MPLDC, MPSExC, MPSFishDC,MPSLandDC, and all wholly owned units of MPSIC. July1998

Close the four corporations and the whollyowned units of MPSIC; report onsettlement of workers’ and creditors’ dues.September 2000

Sell or close the remaining units ofMPSIC, and closure of thecorporation. December 2001

Seek BIFR and AAIFR approvals, as required, for closureof the two managed mills of MPSTexC. August 1998

Prepare plan for organizational restructuring ofMPSTourDC focusing on promotionalactivities, and advertise the sale/lease of itsproperties. September 2000

Complete restructuring ofMPSTourDC, including lease/saleof its properties; and close theMPSTexC. December 2001

B. 5. Initiatereform ofcooperatives sector

Prepare report on the financial performance ofcooperatives sector with assistance from BankTA. June 2000

Review existing arrangements incooperative societies and developoptions and recommendations toenhance the operational freedomof cooperatives, while taking intoconsideration relevant proposals inother states. June 2001

C. Enabling Environment for Private Sector Invol vement

C.1. Initiate powersector reform

Establish an independent MPERC through notification inthe Official Gazette in accordance with Section 17(1) ofthe ERC Act of 1998. Create a committee to select themembers of the MPERC in accordance with Section 18 ofthe ERC Act. Immediately upon notification and inaccordance with Section 39(1) of the ERC Act, providewritten directions to the MPERC that the MPERC whilesetting tariff levels with no undue preference for anyconsumer category, may allow, if the MPERC considers itnecessary, the consumers in the agriculture sector to becharged tariffs less than 50% of average cost of supply ofenergy, subject to the conditions that (i) the tariffs lessthan 50% shall not be allowed after the coping of a periodof three years from the date of the announcement of thefirst schedule of electricity tariffs by MPERC as set forthbelow; and (ii) that the tariffs shall not be less thanRs0.50/ kilowatt hour at any time during the three yearsor thereafter. Immediately upon notification and in

Fully operationalize the MPERC by (i)establishment and incorporation of theMPERC in accordance with Chapter IV ofthe ERC Act; and (ii) finalization of therules of the MPERC in accordance withSections 57 and 59 of the ERC Act. March2000

Ensure that the MPERC budget provided toGMP in accordance with Section 33 of theERC Act is charged upon the Madhya Pradeshstate budget. March 2000

Prepare power sector CIP on thebasis of a power sector masterplan. September 2001

accordance with Section 39(1) of the ERC Act, providewritten directions to the MPERC that the MPERC shallannounce its first schedule of electricity tariffs not laterthan 120 days after establishment and incorporation ofthe MPERC under Section 17 of the ERC Act. August1998

Include in the FY1999 budget speech, as part of budgetdocumentation, detailed explanation of the full amount ofthe subsidy on account of electricity consumption by theagriculture sector. June 1998

C. 2. Developpolicy andregulatory frame-work for promotingprivate sectorparticipation intransport androads sectors

Prepare a state roads policy, including enablingframework for private sector under BOT. July 1998

Announce State Transport Policy, including rationalizationof routes and guidelines for private sector participation.July 1998

Announce the State Roads Policy. March2000

Prepare roads sector CIP on the basis ofPWD’s strategic options study for inclusion inthe overall state CIP. March 2000

Prepare report on PWD experiencewith roads/bridges constructionand maintenance under BOT orsimilar arrangements, includingrecommendations for changes, ifany, to the policy and regulatoryframework for private sector roaddevelopment, tender procedure,and PWD’s organizationalstructure. June 2001

Strengthencapabilities ofPWD to processprivate sectorprojects

Initiate study for the strengthening of PWD through theestablishment of a Private Sector Cell and analyze theorganizational and staffing requirement of such cell. July1998

Establish Private Sector Cell in PWD andmake it fully operational. March 2000

Develop tariff-setting mechanism

Review existing toll rates for roads and bridges andupward adjust, as necessary, to be in line with nationallevel. July 1998

Analyze options for distance-based toll ratesand prepare a plan for establishing a utilitiespricing commission. March 2000

Establish a utilities pricingcommission for road andtransport tariff setting andoperationalize the commission.December 2000

C. 3. Improveframework forprivate investmentin housing sector

Prepare draft amendment to State Rent Control Act toprovide for market-based rental increases and exemptnewer properties. June 1998

Enact the Amendment to the State RentControl Act upon approval by Government ofIndia. March 2000

Establish a rent tribunal to exercisethe powers of appeals authority;review the initial impact of theAmendment to the Rent ControlAct on the level of rents and oninvestment in the housing sector.June 2001

C. 4. Improveenvironmentalsustainability ofeconomicdevelopment

Prepare a draft state environment policy to lay down theguidelines for environmentally sustainable developmentwhile relying on MBIs such as polluter-pays-principle.June 1998

Announce the State Environment Policyand a time-bound action plan forimplementation of appropriate policies,including MBIs for environmentalmanagement. September 2000

Implement the time-boundaction plan for improvedenvironmental monitoring andmanagement. December 2001

Strengthenenvironmentalmanagement

Identify the requirements for strengthening the technicalcapacities of the PCB and its regional offices. July 1998

Implement the measures to strengthen themonitoring capacities of the PCB and itsregional offices. September 2000

Implement integrated trainingprogram for PCB staff andindustrial associations onenvironmental monitoring andenvironmental management. June2001

C. 5. Social impactof economicdevelopment

Preparation of a draft policy onrehabilitation to addr ess social impacts ofeconomic development. March 2000

Finalization of policy onrehabilitation. March 2001

AAIFR = Appellate Authority for Industrial and Financial Reconstruction; BIFR = Board for Industrial and Financial Reconstruction; CIP = Core Investment Program; DPE = Department ofPublic Enterprise; DPEP = District Primary Education Program; FD = Finance Department; MPERC = Madhya Pradesh Electricity Regulatory Commission; MPFinC = Madhya PradeshFinancial 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 SlumClearance Board; MPSExC = Madhya Pradesh State Export Corporation; MPSFishDC = Madhya Pradesh State Fisheries Development Corporation; MPSIC = Madhya Pradesh StateIndustries Corporation; MPSIndDC = Madhya Pradesh State Industrial Development Corporation; MPSLandDC = Madhya Pradesh State Land Development Corporation; MPSRTC = MadhyaPradesh State Road Transport Corporation; MPSTexC = Madhya Pradesh State Textile Corporation; MPSTourDC = Madhya Pradesh State Tourism Development Corporation; MBI = MarketBased 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; TA = technical assistance

ECONOMIC AND SOCIAL INDICATORS

Madhya Item Year All India Pradesh Gujarat

Economic IndicatorsNet State Domestic Product at Factor Cost (at Current Prices) Rs Billion FY1997a 10,220 b 549 569

Net State Domestic Product at Factor Cost (at FY1981 Prices) Rs Billion FY1996a 2,451 129 142

Compound Growth Rates (at FY1981 Prices) % 90/91-95/96 5.1 c 4.8 5.3

Per Capita NSDP (at FY1981 Prices) Rs FY1996a 2,608 1,784 2,644

Net State Domestic Product at Factor Cost by Sectoral Share %

of which: Agriculture and Allied Activities FY1996 26.5 42.8 18.5 of which: Manufacturing FY1996 21.7 14.0 33.8

Share in Statewide Financial Assistance Disbursed by All-India Finan- cumulative 100.0 6.0 13.7 cial Institutions and IDBI % through 3/96

Infrastructure Indicators (Power) Installed Generation Capacity of Public Utility MW FY1996 83,288 3,864 5,329 of which: Thermal Capacity % FY1996 72.1 78.1 90.8

Power Generation: Compound Annual Growth Rate % 1994-1996 4.2 1.1 3.9

Power Consumption Million Kwh FY1994 238,569 18,397 22,505 of which: Consumed by Domestic Sector % FY1994 18.2 15.3 11.2 of which: Consumed by Agricultural Sector % FY1994 29.6 30.8 38.5 of which: Consumed by Industrial Sector % FY1994 39.6 43.3 42.5

Per Capita Power Consumption Kwh FY1995 319 334 599

Power Deficit(-)/Surplus (of Total Requirement) % FY1996 -9.2 -8.8 -5.9

Average Electricity Tariff Charged Paise/Kwh FY1996 132.9 d 136.5 e 141.5 e

o/w Average Electricity Tariff Charged - Agriculture Paise/Kwh FY1996 21.8 d 18.5 e 19.0 e

o/w Average Electricity Tariff Charged - Domestic Paise/Kwh FY1996 93.0 d 65.2 e 119.0 e

o/w Average Electricity Tariff Charged - Industry [High Tension] Paise/Kwh FY1996 211.6 d 266.4 e 238.0 e

Infrastructure Indicators (Others)Density of Telephone Lines per 100 People No. March 1996 1.30 0.86 2.07 Share in All-India Telephone Lines % March 1996 100.0 5.2 7.6

Railway Length per '000 km2 of Area km FY1995 19.1 13.5 27.1

Road Length per '000 km2 of Area km FY1994 662.6 468.7 550.2 Vehicle Density per km2 of Area No. FY1994 8.3 4.3 13.9 Compound Avg. Growth Rate of Registered Motor Vehicles % 85/86-93/94 9.0 10.3 8.8

Households Having Electricity % 1991 42.4 43.3 65.9 Households Having Safe Drinking Water % 1991 62.3 53.4 69.8 Households Having Toilet % 1991 23.7 15.1 30.7 Households with None of the Three Facilities % 1991 24.5 31.2 15.0

Relative Infrastructure Development Index f FY1994 100.0 75.3 122.4 a Although Government of India, Economic Survey 1998-99 , issued in February 1999, published new series containing more updated figure on base 1993/94 instead of 1980/81, these are only available from 1993/94 onward and do not contain state-level data at constant prices nor information on sectoral shares.b Net domestic product.c 1994-1996: 7.1%d 1993/94.e Average realizations.f Calculated by CMIE, using the following weights: transport facilities 26%; energy consumption 24%; irrigation facilities 20%; banking facilities 12%; communication infrastructure 6%; education institutes 6%; health facilities 6%.

February 1998; CMIE, Profile of States , March 1997; Directorate of Economics and Statistics, Government of Madhya Pradesh,

Estimates of SDP of Madhya Pradesh, 1980/81-1995/96 ; Reserve Bank of India, Report on Currency and Finance 1996-97 .

Table A4.1: Key Economic and Infrastructure Indicators

Sources: ADB, Electric Utilities Data Book , 1997; CMIE, India's Energy Sector , September 1996; CMIE, National Income Statistics,

Madhya Item Year All India Pradesh Gujarat

Demographic IndicatorsPopulation Million 1998 970.9 77.4 47.1 Population Share % of All-India 1998 100.0 8.0 4.9Annual Average Population Growth Rate % 1951/91 2.2 2.4 2.4

Area % of all-India 1991 100.0 13.5 6.0 Density Person / km2 1991 276 149 211

Population Distribution Urban % 1991 25.7 23.2 34.5 Rural % 1991 74.3 76.8 65.5

Gender Ratio females/1000 males 1991 927 931 934

Employment and Poverty IndicatorsEmployment in the Public Sector Number of Employment '000 persons FY1992 19,209 1,424 965 State's Share in All-India % FY1992 100.0 7.4 5.0 Annual Growth Rate % 1981/92 2.0 2.1 2.5

Percentage of Population in the Lowest Income Category of Rs 20,000 or Below % FY1994 58.2 76.6 52.7

Poverty Indicator (headcount index) Total 1993/94 36.1 42.5 24.2 Rural 1993/94 37.1 40.8 22.2 Urban 1993/94 33.1 48.1 28.3

Social Indicators Life Expectancy at Birth years Male 1991/96 62.8 54.7 60.9 Female 1991/96 64.2 54.7 62.7

Infant Mortality Rate per 1000 live births Total 1992 79 104 67 Rural 1992 85 109 69 Urban 1992 53 74 32

Person per Hospital Bed 1991 1,324 2,483 749

Expenditure on Medical, Health, Family Welfare FY1998 178.5 a 11.1 9.5 and Sanitation (MHFWS) Rs billionPer Capita MHFWS Expenditure Rs FY1998 187.5 a 146.6 199.9Share of MHFWS Expenditure % of total expenditure FY1998 7.5 a 7.6 6.9

Literacy Rate % of population Total 1991 52.2 44.2 61.3 Urban 1991 73.0 70.8 76.5 Rural 1991 44.5 35.9 53.1

Expenditure on Education Rs billion FY1998 396.1 a 20.6 24.9Per Capita Education Expenditure Rs FY1998 410.7 a 269.5 475.6Share of Expenditure on Education % of total expenditure FY1998 17.1 a 14.1 16.4

Human Development Index 1991/92 0.42 0.35 0.47Gender Development Index 1991/92 0.39 0.31 0.44

Environmental IndicatorsPer Capita Crop Land hectare FY1994 0.206 0.301 0.241Forest and Woodland % of reported area FY1993 22.3 32.5 10.0Per Capita Carbon Dioxide Emissions tons 1992 0.88 - -a Refers to expenditure of all states.

Report, Bhopal 1996; Government of Madhya Pradesh, Madhya Pradesh Human Development Reports 1995 and 1998 ;

Government of India, Ninth Five-Year Plan 1997-2002 .

Table A4.2: Key Social and Environmental Indicators

Sources: CMIE, Profile of States , March 1997; Environmental Planning and Coordination Organization, Third Environmental Status

Madhya District DistrictItem Year Pradesh Highest/Best Lowest

Literacy Rate % of population Total 1991 44.2 66.3 19.0 Rural 1991 35.9 51.4 13.7 Urban 1991 70.8 79.3 55.4

Gap in Male and Female Literacy % Total 1991 29.6 38.0 14.8 Rural 1991 31.3 42.9 13.7 Urban 1991 22.4 32.2 15.8

Ratio of Male to Female Literacy 1991 2.0 1.4 3.2

Gender Ratio Total Population 1991 931 1,012 816 Scheduled Castes a 1991 915 1,024 796 Scheduled Tribes a 1991 985 1,039 822 Rural Population 1991 929 1,021 813 Urban Population 1991 891 966 767

Life Expectancy - Male years 1991 - 66.0 47.5Life Expectancy - Female years 1991 - 65.3 41.4

Infant Mortality Rate per 1000 live births 1981 142 84 195

Human Development Index (based on district-wise indicators) 1991 - 0.619 0.156

Annual Average Population Growth Rate % 1981/91 2.4 1.8 4.2Ratio of Scheduled Castes to Total Population % 1991 14.5 24.7 3.1Ratio of Scheduled Tribes to Total Population % 1991 23.3 85.7 1.0

Level of Urbanization in Districts (ratio urban/total population)(%) 1991 23.2 80.9 6.5

Worker Participation Ratio - Male 1991 - 58.6 46.3Worker Participation Ratio - Female 1991 - 51.8 4.2

Quality of Housing: Pucca % of Total 1991 30.5 b 74.2 7.3 Semi-Pucca % of Total 1991 64.9 b 90.4 17.1 Kutcha % of Total 1991 4.6 b 21.3 0.2Households Having Electricity % 1991 43.3 75.6 20.8Households Having Safe Drinking Water % 1991 53.4 89.1 22.8Households Having Toilet % 1991 15.1 58.3 3.9Households with None of the Three Facilities % 1991 31.2 2.6 60.5

Density of Population in Slums per km 2 - - 1,256 112,841

Environmental IndicatorsPer Capita Forest Area hectare 1991 0.23 0.95 0.00Forest Cover % of total geographic area 1993 30.5 54.3 1.6Wasteland % of total geographic area FY1987 21.8 46.6 9.8

a Scheduled Tribes refer to such tribes or tribal communities as are declared to be scheduled tribes by the President of India by

public notification; Scheduled Castes refer to such castes, races or tribes or groups thereof as are declared to be scheduled

castes by the President.b For All-India: Pucca (41.6%); Semi-Pucca (31.0%); Kutcha (27.4%).

Report , Bhopal 1996; Government of Madhya Pradesh, Madhya Pradesh Human Development Reports 1995 and 1998 .

Table A4.3: Socioeconomic Indicators b y District

Sources: CMIE, Profile of States , March 1997; Environmental Planning and Coordination Organization, Third Environmental Status

Table A4.4: Comparative Health Indicators of States

Crude Death Rates by States Infant Mortality Rates by States

(per '000) (per 1,000 of live births)

Year 1981 1986 1991 1992 1993 1995 1981 1986 1991 1992 1993 1995

Andhra Pradesh 11.1 9.9 9.7 9.8 8.6 8.4 86 82 73 71 - 67Assam 12.6 12.6 11.5 10.4 10.2 9.6 106 109 81 76 - 77Bihar 13.9 13.8 9.8 10.9 10.6 10.5 118 101 69 73 - 73Gujarat 12.0 10.5 8.5 9.2 8.2 7.6 116 107 69 67 - 62Haryana 11.3 8.7 8.2 8.7 7.9 8.1 101 85 68 75 - 69Karnataka 9.1 8.7 9.0 8.5 8.0 7.6 69 73 77 73 - 62Kerala 6.6 6.1 6.0 6.3 6.0 6.0 37 27 16 17 - 15Madhya Pradesh 16.6 13.6 13.8 12.9 12.6 11.2 142 118 117 104 106 99Maharastra 9.6 8.4 8.2 7.9 7.3 7.5 79 63 60 59 - 55Orissa 13.1 13.0 12.8 11.7 12.2 10.8 135 123 124 115 - 103Punjab 9.4 8.2 7.8 8.2 7.9 7.3 81 68 53 56 - 54Rajastahan 14.3 11.7 10.1 10.5 9.4 9.1 108 107 79 90 - 86Tamil Nadu 11.8 9.5 8.8 8.4 8.2 8.0 91 80 57 58 - 54Uttar Pradesh 16.3 14.6 11.3 12.8 11.6 10.3 150 132 97 98 - 86West Bengal 11.0 8.8 8.3 8.4 7.4 7.9 91 71 71 65 - 58

India 12.5 11.1 9.8 10.1 9.2 9.0 110 96 80 89 74 74

FY1981 FY1986 FY1991 FY1996 FY1997 FY1998 a

A. Madhya Pradesh

Total Health Spending % 100.0 100.0 100.0 100.0 100.0 100.0Medical and Public Health % 50.2 41.2 51.2 49.0 50.2 52.1

Medical % 36.9 30.3 43.7 41.5 41.5 -Public Health % 13.3 10.8 7.4 7.4 8.7 -

Family Welfare % 9.4 13.2 10.1 10.2 10.1 12.9Water Supply and Sanitation % 40.3 45.6 38.7 40.3 39.7 35.0

Total Health Spending Rs lakh 12,181 27,529 45,937 81,214 96,060 111,239 Percent of State Domestic Product 1.74 2.28 1.73 1.65 1.72 1.82Per capita Rs lakh 23.6 47.5 70.1 112.0 129.5 146.6 Percent of Total Expenditure 7.2 9.7 8.0 7.6 7.5 7.6

18.3 17.1 31.1 34.9 33.7 - Exp. %

Receipts Rs lakh 373 1,165 1,997 1,976 1,715 1,711 Cost Recovery Rate % 3.1 4.2 4.3 2.4 1.8 1.5

Total Public Spending Rs lakh 169,956 284,611 572,967 1,062,008 1,280,128 1,462,849 State Domestic Product Rs lakh 701,244 1,209,237 2,651,537 4,911,788 5,587,234 6,101,878 Population lakh 517 580 655 725 742 759

B. All States

Total Health Spending Rs lakh 161,453 367,795 682,967 1,298,140 1,452,210 1,785,168 Percent of Gross Domestic Product 1.32 1.57 1.27 1.09 1.14 1.26Per capita Rs 23.8 48.7 81.4 141.1 155.2 187.5Percent of Total Expenditure 7.1 8.2 7.5 7.3 7.2 7.5

Total Public Spending Rs lakh 2,266,400 4,486,660 9,108,810 17,758,370 19,603,507 23,198,557 Gross Domestic Product Rs lakh 12,242,700 23,379,900 53,552,000 111,896,400 127,692,400 141,549,200 Population lakh 6,790 7,550 8,390 9,200 9,360 9,520

a Revised estimates.one lakh = 100,000.Sources: Reserve Bank of India, Finances of State Governments, 1998-1999 ; and Mission calculations.

Table A4.5: Public Expenditure on Health Sector

Item

Share of Rural Facilities in Medical

Table A4.6: Educational Levels of Population

(%)

Level Males Females a All

A. In 1981 Illiterate 60.5 80.5 -Just Literate Through Nonformal Education 1.1 0.4 - Formal Schooling 15.8 4.3 -Primary 10.7 4.4 -Middle 5.3 1.9 -Secondary 2.2 0.7 -Intermediate/Higher Secondary 2.6 0.8 -Technical Diploma < Degree 0.2 0.0 -Graduate and above 1.7 0.6 -

B. In 1992 - 1993

Illiterate 36.2 65.7 50.2Literate < Primary 19.0 13.2 16.3Primary 18.4 10.6 14.7Middle 10.3 4.5 7.5Intermediate/Higher Secondary 11.0 3.8 7.6Above Secondary 5.0 2.0 3.6Missing 0.1 0.2 0.1

Total 100.0 100.0 100.0a Total does not add to 100 due to error in print of original source.

Sources: Government of Madhya Pradesh, Madhya Pradesh Human Development Repor t, 1995; and

Tilak, J.B.G., Investment in Human Capital in India: An Inter-State Analysis of Stock and Flow

of Human Capital , UNDP, New Delhi, 1997, on basis of: International Institute of Population

Studies, National Family and Health Survey 1993 , Bombay, 1995.

Table A4.7: Disparities in Literacy and Enrollment Ratio (%)

Item Males Females All Gap a

A. Literacy, 1991All 58.4 28.9 44.2 29.6Rural 51.0 19.7 35.9 31.3Urban 81.3 58.9 70.8 22.4

Scheduled Castes 50.5 18.1 35.1 32.4Scheduled Tribes 32.2 10.7 21.5 21.4

B. Enrollment Ratio of Scheduled Tribes, 1996 - 1997

Primary 91.9 60.9 76.5Middle 44.3 24.4 34.7

a Gap between male and female literacy.

Source: Government of India, Ministry of Human Resource Development, Selected Educational

Statistics in India , 1996/97.

FY1981 FY1986 FY1991 FY1992 FY1993 FY1994 FY1995 FY1996 FY1997 FY1998a FY1999b FY1999c

Revenue Receipts 16.2 18.0 17.1 19.3 20.7 18.4 18.1 17.6 17.9 18.5 19.7 18.2

Tax Receipts 9.7 11.4 10.7 12.2 12.5 11.3 11.3 11.6 12.1 12.9 13.4 12.5 State's Own Taxes 5.4 6.7 6.6 7.6 7.5 7.0 6.8 7.2 7.3 7.5 7.7 7.7 Share in Central Taxes 4.3 4.7 4.1 4.6 5.0 4.4 4.5 4.5 4.7 5.5 5.6 4.8

Nontax Receipts 6.5 6.6 6.4 7.1 8.3 7.1 6.8 6.0 5.9 5.5 6.3 5.7 Own Nontax Receipts 3.9 4.2 3.2 3.7 4.6 3.7 3.8 3.6 3.5 3.3 3.6 2.8 Interest Receipt 0.7 0.2 0.5 0.2 1.1 0.6 0.5 0.3 0.5 0.4 0.4 0.4 Social and Community Services 0.2 0.2 0.1 0.2 0.2 0.1 0.1 0.1 0.1 0.1 0.1 0.1 Economic Services 2.8 3.5 2.0 3.1 3.1 2.7 3.0 3.1 2.8 2.6 3.0 2.1 Grants from Government 2.6 2.4 3.2 3.3 3.6 3.4 3.0 2.4 2.3 2.2 2.7 2.9

Revenue Expenditure 14.5 17.4 17.9 19.5 19.8 19.6 18.6 18.6 20.5 19.2 23.4 21.0 General Services 3.3 4.2 4.9 5.4 5.7 5.5 5.9 5.8 6.0 6.3 11.2 7.1 Interest payments 1.1 1.1 1.9 2.2 2.4 2.3 2.6 2.4 2.5 2.7 2.9 2.7 Other 2.2 3.1 3.0 3.3 3.3 3.2 3.3 3.4 3.5 3.6 8.3 4.3 Social and Community Services 5.3 7.4 7.0 7.6 7.5 7.0 7.2 6.9 7.2 7.3 7.0 8.2 Education 2.4 3.2 3.4 3.6 3.6 3.2 3.2 3.4 3.4 3.3 3.0 3.4 Health 1.7 2.2 1.6 1.8 1.8 1.8 1.8 1.6 1.7 1.6 1.6 2.1 Economic Services 5.4 5.5 5.5 5.9 6.2 6.7 5.1 5.3 6.7 5.0 4.6 5.1 Grants in Aid to Local Bodies 0.4 0.4 0.5 0.5 0.4 0.4 0.4 0.5 0.6 0.6 0.6 0.6

Current Account Balance 1.7 0.6 -0.8 -0.2 0.9 -1.2 -0.5 -1.0 -2.6 -0.8 -3.7 -2.9

Capital Disbursements 7.0 5.4 3.3 3.5 3.8 2.7 3.0 2.4 2.4 3.5 2.2 2.5 Capital Expenditure 3.7 4.1 2.7 2.8 2.7 2.1 2.1 1.8 1.8 2.8 1.7 2.0 Loans and Advances 3.3 1.3 0.6 0.8 1.2 0.6 0.9 0.7 0.6 0.8 0.4 0.5

Primary Balance -4.1 -3.7 -2.1 -1.5 -0.5 -1.6 -0.9 -1.0 -2.5 -1.6 -2.9 -2.6Overall Balance -5.3 -4.8 -4.1 -3.7 -2.9 -3.9 -3.5 -3.4 -5.0 -4.3 -5.8 -5.4a Preliminary actual.b Budget estimate.c Revised estimate.

Source: Government of Madhya Pradesh and Mission calculations.

FISCAL DEVELOPMENTS

Table A5.1: Madhya Pradesh Public Finances

Item

(% of Net State Domestic Product)

Table A5.2: Medium-term Fiscal Framework(% of net state domestic product)

Item FY1999a FY2000 FY2001 FY2002 FY2003

A. Current Receipts 18.2 18.7 18.8 19.0 19.1 1. Tax Revenues 12.5 12.7 12.7 12.8 13.1 a. State's Own Tax Revenues 7.7 7.8 7.8 7.9 8.1 b. Transfer of Central Taxes 4.8 4.8 4.9 4.9 4.9 2. Nontax Revenues 5.7 6.2 6.1 6.2 6.0 a. State's Own Nontax Revenues 2.8 3.3 3.3 3.3 3.3 b. Grants from Government 2.9 3.0 2.8 2.9 2.8

B. Total Expenditure 23.5 b 23.9 c 22.8 22.6 22.5 1. Current ("Revenue") Expenditure 21.0 21.2 20.1 19.9 19.7 2. Capital Expenditure 2.0 2.1 2.1 2.3 2.4

3. Loans and Advances 0.5 0.6 0.6 0.5 0.5

C. Primary Deficit d 2.6 2.2 0.8 0.4 0.2

D. Overall Deficit e 5.4 5.2 4.1 3.6 3.4

a Revised estimate.b Reflecting equivalent of 1.3 percent of net state domestic product of one-time expenditure.

c Reflecting equivalent of 1 percent of net state domestic product of one-time expenditure.d Defined as current revenue minus total expenditure net of interest payment.

e Defined as current revenue minus total expenditure.

SUMMARY OF PUBLIC SECTOR UNDERTAKINGS 1

(As of March 1997, unless otherwise indicated)

Paid-Up Capital Term Loan Net Fixed Profit/Loss Accum.Name of the Corporation Employees Total GMP Total Assets After Tax Profit/Loss

No. b Rs million % Rs million Rs million Rs million c Rs million c

MP Rajya Van Vikas (Forest Dev) 1,922 163 86 996 35 1 32 MP Rajya Beej Evam Farm Vikas (Seed) 643 97 43 419 36 (8) 73 MP State Agro Industries Development Corp. Ltd. 1,027 33 64 44 38 3 (8) The Provident Investment Co. Ltd. 68 5 99 - 4 2 (29) MP Urja Vikas Nigam (Energy Development) e 333 7 100 - 6 - -MP State Electronics Development Corp. Ltd. 561 219 100 - 6 1 81 MP Matsya Vikas Nigam (Fisheries) 497 15 100 7 16 12 (2) MP Laghu Udhyog Nigam (Small-scale Industry) 672 27 100 0 34 3 87 MP Rajya Pasudhan & Kukut Vikas (Poultry) 57 16 61 3 2 2 -

MP Police Housing Corp. Ltd. 254 60 100 347 7 18 (13) MP Khadi & Gramodhyog Board (Rural/Village Ind.) 408 47 90 85 36 4 (4) MP Pichhadha Varg Vitta & Vikas (Caste/clan) 15 10 100 93 1 (2) (4) MP Hastshilp Vikas Nigam (Handicraft) 459 9 2 - 32 - (4) MP Rajya Bhumi Vikas Nigam (Land Development) 577 98 67 147 12 2 (67) MP Textbook Corporation 281 - - - 23 6 -MP State Tourism Development Corp. Ltd. e 865 198 100 - 227 6 (21) MP State Industries Corporation Ltd. 2,378 151 100 151 25 (13) (73) MP Leather Development Corp. Ltd. 154 12 100 0 7 (6) (12) MP Adivasi Vitta Evam Vikas (Scheduled Tribes) 150 1 100 147 3 - -MP Financial Corporation 340 850 69 3,296 30 12 (1,437) MP State Civil Supplies Corp. 1,242 120 100 770 29 9 54 MP State Mining Corp. Ltd. 910 22 100 - 145 91 -MP State Warehousing Corp. 2,499 88 50 103 501 35 399 MP State Industrial Development Corp. Ltd. 137 811 100 626 44 34 217 MP Housing Board 3,124 78 - 1,865 102 9 175 MP Mahila Arthik Vikas Nigam (Women Dev) e 20 29 66 - 1 2 12 MP State Textile Corporation 4,935 f 69 100 494 14 (131) (433) MP State Export Corporation Ltd. 75 8 100 37 14 5 38 MP State Electricity Board g 87,487 100 100 53,754 43,270 (699) -MP State Road Transport Corp. 22,035 1,077 71 207 6,272 (664) (4,301)

Total 134,125 4,420 63,590 50,970 (1,266) (5,241)

Memo items:PSUs targeted for reform as % of all PSUs 27.6% 83.3% 11.4% 13.4% PSUs targeted for reform as % of all PSUs except 79.2% 85.2% 73.4% 88.5% MP State Electricity Boarda Excluding MP Slum Clearance Board.b About 95 percent of total employment are workers (i.e., Class III and Class IV status), while 5 percent are in the ‘officer’ category (Class I and Class II).

The share of women in the officer category is about 2.5 percent (i.e. 165 female officers out of about 6,700 Class I and II officers), while among the workers

their share is 3.8 percent. Of 3,000 employees in part-time positions or under work-charge arrangement, women account for more than 15 percent. Althoug

March 1998 information on the number of employees is available, for consistency with socio-economic data elsewhere in the report, the March 1997 figures

are included in this table.c As of March 1998.d Defined as paid-up capital plus reserves less accumulated losses.e As of 31 March 1996.f Excluding 1,460 workers (78 staff and 1,382 laborers) in the Avanti Spinning Mill.g Data on net fixed assets, and net worth as of 31 March 1995; paid-up capital increased to Rs7,100 million reflecting debt-equity swap in fiscal year 1998.

Sources : Data received from Department of Public Enterprises, Government of Madhya Pradesh; and balance sheets of various corporations.

Net Worth

Rs million c,d

230 169

15 (7) 8

411 16

117 182

22

74 -

31 (323) 261 256

85 (1)

102 (550) 188

76 486 990 351

36 (357)

46 13,978 (2,478)

14,415

s

gh

s

Table A7.1: Madhya Pradesh--Summary of Projects 1986-1998

Share of Project Name by Sector Funding Agreement Original Project

Agency Date Principal Cost ($ million) (%)

A. Agriculture/Fisheries/Forestry/Rural Development 1. Madhya Pradesh Forestry - 1. Phase IDA 11-Apr-95 68.1 87 2. Livestock Development Danida 22-Sep-95 3.8 100 3. Comprehensive Watershed Development Danida 14-Mar-97 3.7 100

4. Madhya Pradesh Sericulture Development OECF 12-Dec-97 32.5 55

B. Water 1. National Water Management IBRD Feb-91 47.1 90 2. National Hydrology IDA 22-Sep-95 13.0 89 3. Rajghat Canal OECF 25-Feb-97 124.5 85

C. Environment 1. Conservation & Management of Bhopal Lake OECF 28-Feb-95 66.9 85

D. Social Development 1. Rewa Hospital OPEC 19-Dec-88 20.8 53

2. Indore Habitat Improvement ODA 06-Jun-89 25.7 70

3. Vocational Training IDA 16-Jun-89 5.9 50

4. National Training Project (IPP VI) IBRD 11-Sep-89 18.0 71

5. Madhya Pradesh Technical Education IDA 13-Aug-90 65.8 80

6. National AIDS Prevention & Control Program (multistate) IBRD FY1992 119.0 a - 7. Integrated Child Development Project II IBRD 23-Mar-93 108.5 100

8. Madhya Pradesh Farm Woman in Agriculture Danida 19-Nov-93 2.0 100 9. Blindness Cataract Control IBRD 01-Apr-94 23.5 75 10.District Primary Education Program EC 1994/95 135.0 85

E. Others 1. Dam Safety IBRD 10-Jun-91 59.8 90

2. Bharat Bhavan OECF FY1997 0.4 100

Total 825.2 b 84

and Development; IDA - International Development Association; ODA - Overseas Development Agency; OECF - Overseas Economic Cooperation Fund; OPEC - Organization of Petroleum Exporting Countries;a For multistate project, the assistance represents the total external assistance of the project.b Excluding multistate project.

Source: Government of Madhya Pradesh

EXTERNAL ASSISTANCE

Danida - Danish International Development Assistance; EC - European Community; IBRD - International Bank for Reconstruction

Table A7.2: Disbursement of External Assistance b y State

Item FY1991 FY1992 FY1993 FY1994 FY1995 FY1996 FY1997 FY1991 FY1992 FY1993 FY1994 FY1995 FY1996 FY1997

Andhara Pradesh 1,700 3,680 7,110 5,890 4,560 4,582 5,273 2.78 3.68 7.23 5.82 4.78 5.26 5.25Assam - - - - - - - - - - - - - - Bihar 220 70 370 40 434 410 228 0.36 0.07 0.37 0.04 0.46 0.47 0.23Gujarat 2,300 2,860 4,480 1,040 654 854 4,091 3.76 2.86 4.55 1.03 0.69 0.98 4.07Haryana 230 290 90 170 453 930 1,269 0.37 0.29 0.09 0.17 0.48 1.07 1.26Himachal Pradesh 30 90 250 - 16 36 51 0.06 0.09 0.26 0.00 0.02 0.04 0.05Jammu and Kashmir - - - - - - - - - - - - - - Karnataka 1,100 2,570 2,420 2,640 2,596 1,264 1,903 1.80 2.57 2.46 2.61 2.72 1.45 1.89Kerela 360 610 610 950 1,093 242 281 0.59 0.61 0.62 0.94 1.15 0.28 0.28Madhya Pradesh 760 660 270 190 162 206 355 1.24 0.66 0.27 0.19 0.17 0.24 0.35Maharashta 2,120 3,390 4,870 5,280 6,264 8,287 10,066 3.46 3.39 4.95 5.22 6.57 9.51 10.01Orissa 570 680 900 910 1,085 1,105 2,149 0.59 0.61 0.62 0.94 1.14 1.27 2.14Punjab 70 270 450 310 729 835 1,044 0.12 0.27 0.46 0.30 0.76 0.96 1.04Rajasthan - 40 300 660 1,256 2,508 2,296 0.00 0.04 0.30 0.66 1.32 2.88 2.28Tamil Nadu 1,760 2,900 3,850 3,980 6,048 4,122 4,109 2.87 2.90 3.91 3.93 6.35 4.73 4.09Uttar Pradesh 4,620 7,670 3,760 4,390 2,089 3,076 5,961 7.54 7.66 3.83 4.34 2.19 3.53 5.93West Bengal 640 1,150 910 730 727 559 2,411 1.05 1.14 0.92 0.72 0.76 0.64 2.40

Multistates Projects 2,360 6,320 6,770 7,280 10,158 9,709 11,035 3.86 6.32 6.87 7.20 10.66 11.15 10.98Central Government 42,370 66,790 61,000 66,690 56,974 48,371 48,001 69.11 66.76 61.99 65.93 59.79 55.54 47.75

Total 61,210 100,040 98,410 101,150 95,298 87,096 100,523 100.00 100.00 100.00 100.00 100.00 100.00 100.00

(Rs million) (% share in total)

Cost of voluntary

Company Liabilities

to GMPLiabilities to Others

retirement scheme Total

A. ClosureMP State Land Development Corporation 0.9 5.2 3.7 9.8 MP State Textile Corporation 25.9 17.7 25.8 69.4 MP State Industries Corporation 4.3 5.2 12.7 22.2 MP State Fisheries Development Corporation - 0.7 2.3 3.0 MP State Leather Development Corporation 0.1 1.2 0.9 2.2 MP State Export Corporation - 2.5 0.6 3.1

Subtotal (A) 31.2 32.5 46.0 109.7

B. Restructuring andl Divestment MP State Road Transport Corporation 46.6 39.4 38.9 124.9 MP Finance Corporation a 9.3 39.3 - 48.6

MP State Industrial Development Corporation 5.0 19.3 0.9 25.2

MP State Agro Industries Development Corporation 1.6 10.4 2.8 14.8

Subtotal (B) 62.5 108.4 42.6 213.5

C. Merging/Closure MP Housing Board 12.6 32.9 b 6.4 51.9 MP Slum Clearance Board - 0.1 0.4 0.4 MP Police Housing Corporation 5.3 10.2 1.0 16.5

Subtotal (C) 17.9 43.2 7.8 68.9

D. Sale/Lease of Properties

MP State Tourism Development Corporation 0.2 - 4.0 4.2

Subtotal (D) 0.2 - 4.0 4.2

Total 111.8 184.1 100.4 396.3

a Cost of financial restructuring as per restructuring plan.b Includes only liabilities to financial institutions.

Source: Staff estimate based on information provided by Government of Madhya Pradesh and individual public

sector undertakings.

PSU reform

($ million)

NONPERSONNEL COST OF PUBLIC ENTERPRISE REFORM AND

COST OF VOLUNTARY RETIREMENT SCHEME

Nonpersonnel cost of

POVERTY IMPACT ASSESSMENT

Table A9.1: Reform of the Tax System for Enhanced Resource M obilization

Type of EffectChannel Direct Indi rect Macro Non- poorLabor Market Not applicable Not applicable • Less distortionary tax

system will improveallocative efficiency,foster economic growth,and raise demand forlabor.

Not applicable

Prices Not applicable • Withdrawal of sales taxincentives/exemptions andconsolidation of tax rates islikely to put some upwardpressure on prices, which isin part offset by reducing thecascading effect throughinput tax credit.

• Removal of cascadingeffect of sales tax systemwill reduce productioncost and alleviate cost-push effect on prices.

• Property tax reform islikely to raise tax burdenon property owners.

• Stamp duty reformreduces transactioncost, may increaseproperty values, andthereby may benefit thenon-poor.

Net PublicTransfers

• Sales tax rationalization could havea negative effect as coverage isbroadened to include basicnecessities. To the extent thatexemptions on the most basiccommodities for the poor continue,and low tax rates are imposed onother basic necessities, the overalladverse impact can be mitigated.

• Tax reform will improvebuoyancy and enhance thecapability of the governmentto provide direct assistance tothe poor where needed.

• Transfer of tax burdenfrom production toconsumption. Increasedtax burden on propertyowners. Effect on poorexpected to be minor.

• Broadening of sales taxcoverage to includegoods previouslyexempted is expected toincrease tax burden forthe non-poor.

Access toPublic Goodsand Servicesfor the Poor

• Tax reforms, by improving revenue collection, will strengthen thegovernment’s ability to deliver social and economic services to the poor.

• Strengthening of publicfinances will improve thesustainability of access topublic goods andservices in the economy.

• Non-poor can alsobenefit fromgovernment’s improvedability to deliver servicesdue to improvedrevenue collection.

Total NetEffects

Removal of distortions in the tax system, broadening of tax base, and shifting taxes from production to consumption is expected to increasethe overall tax burden of the non-poor, while avoiding adverse effect on the poor. Moreover, tax reform will focus on improved efficiency sothat enhanced revenues could be used to provide basic minimum social services to the poor.

Assumptions In the long run, tax reform will lead to enhanced resource mobilization through broadening of tax base and increase in tax buoyancy, andimprove allocative efficiency and economic activity.

Table A9.2: Public Expenditure Reforms and Expenditure Reallocation to Social Sectors

Type of EffectChannel Direct Indirect Macro Non-poorLabor Market • Employment freeze and

contracting out of serviceswould encourage informalsector and enhance wageflexibility. Since the informalsector employs labor fromlower wage segment,expenditure reforms may havea favorable impact on povertyreduction through direct labormarket effects.

• Core Investment Program(CIP) will protect capitaloutlays from ad hoc budgetarycuts and thereby ensuresustainable employmentduring project implementation.

• Structural changes inexpenditure and shift tocapital outlays is expected tofoster economic growth withpositive employment effect.

• Enhanced employmentopportunities will help boththe poor and non-poor.

Prices • Removal of subsidies in certainsectors may have a directimpact on price vector of thepoor. This could be offset bydirect price effects of targetedfood assistance.

• Public expenditure reform mayhave strong indirect priceeffects on certain commodities(e.g., phasing-out of electricitysubsidy for agricultural sectorincreases cost of foodproduction, which may need tobe offset by compensatingincrease in the minimumsupport price for food grains).

• Fiscal consolidation throughcontainment of expenditureand lowering of budget deficitwill contribute to easing ofinflationary pressure.

• Impact will depend onindividual householdexpenditure pattern.

Net PublicTransfers

• Increased resource availabilityparticularly for social services

• Expenditure reallocation andprioritization will help redressexisting capability poverty.

• Introduction of CIP will allowimproved targeting ofexpenditure and protectoutlays from budget squeeze

• Both the poor and non-poorwill benefit from increasednet public transfers.

Access toPublic Goodsand Servicesfor the Poor

• Increased availability of publicgoods and improved servicequality

• Budget allocation to ensuresustainability of the DistrictPrimary Education Programwill enable continued accessto primary education facilities.

• Increased capital andnonpersonnel expenditure inrural health facilities willimprove quality and availabilityof health services.

• Strengthening of statefinances through reduction ofnon-productive expenditureand expenditure reallocationwill improve availability andaccess to social andeconomic services.

• Expenditure reallocation willimprove access to publicgoods for both the poor andnon-poor.

Total NetEffects

Reallocation and prioritization of expenditure including increased outlays for social services will improve availability and quality of services to allstrata of society. The Program’s emphasis on increased outlays for rural health facilities will help especially the poor. As outlined above, the neteffect of the policy on the poor will be positive.

Assumptions Progress in fiscal consolidation will enable provision of economic and social services on a sustainable basis. Expenditure reallocation will not beabsorbed by increases in wage and salary bill, which would otherwise limit resource availability for real expansion of services.

Table A9.5: Public Enterprise Reform, Corporate Go vernance, and Social Safety Net

Type of EffectChannel Direct Indi rect Macro Non- poorLabor Market • Closure of corporations is expected

to displace about 8,500 workers;restructuring is likely to displace anadditional 8,000 workers. TheProgram includes setting up ofState Renewal Fund to providevoluntary retirement scheme(VRS), and funds for training andredeployment.

• Increased viability of publicsector undertakings (PSUs)will safeguard existingemployment opportunities.

• Budgetary resources saveddue to public sector reformcould be redeployed inother sectors, thus creatingadditional employment.

• Increased public andprivate investment andenhanced allocativeefficiency will fostereconomic growth andprovide new employmentopportunities.

• Non-poor PSUemployees are affectedby displacement, butshare with the poor theincreased employmentopportunity of economicgrowth.

Prices Not applicable • Increased operationalefficiency of PSUs isanticipated to putdownward pressure onprices.

• Increased market-orientation and enhancedallocative efficiency willprovide dynamic gains andpositive supply response,which will lower inflation.

• Both the poor and non-poor will benefit fromthe lower prices due toenhanced allocativeefficiency and growth.

Net PublicTransfers

• The restructuring of PSUs will involve substantial cost for financialand labor restructuring/downsizing. In the short term, the proceeds ofthe Program loan will alleviate the financial burden. In the medium tolong term, reduced reliance of PSUs on the budget will alleviatepressure on the public finances.

• Proceeds from the Programwill facilitate funding of therestructuring process andthus reduce pressure on thestate’s capital revenues.

• Non-poor will alsobenefit from socialsafety net, particularlyVRS payment as part ofthe State Renewal Fund.

Access toPublic Goodsand Servicesfor the Poor

• Workers displaced as a result of restructuring and divestment ofpublic enterprises may lose privileged access to some of the socialservices such as medical care, education benefit for dependents, andhousing. The Program includes a comprehensive social safety netincluding VRS payment, as well as financial assistance to maintainaccess to these social services, particularly for the more vulnerablegroups of society.

• Improvement in public sector utilities will enhance access to andquality of services including for the poor.

• Closure of inefficiententerprises, andimplementation ofmeasures to improvecorporate governance willraise the efficiency ofresource allocation andcontribute to economicgrowth and employment.

• VRS will providefinancial assistance alsoto the non-poor inaccordance with thenumber of years ofservice in the PSUs;training will be based onindividual needs andopportunities for futureemployment.

Total NetEffects

PSU restructuring including closure will lead to displacement of workers and possible loss of their privileged access to certain socialservices. The Program contains provisions to compensate through VRS and financing for retraining and redeployment. The Program alsocontains specific measures to safeguard access to social services such as health, education, and housing as part of the social safety net. Acommittee has been established as part of the Program to design and implement the social safety net and to ensure efficient administration.

Assumptions State Renewal Fund is set up timely and is adequately funded. Disbursement of VRS is efficiently administered and well targeted to ensurethat only directly affected workers receive benefits. Political commitment to designing and implementing the social safety net to ensure thataccess to social services for the affected groups is available.

Table A9.3: Enhancing Cost Recovery (Inc luding Revis ions of Power and Water Tariffs and Road Tolls)

Type of EffectChannel Direct Indi rect Macro Non- poorLabor Market Not applicable • Improved resource

availability to fundmaintenance andexpansion in economic andsocial services is expectedto have a positive impacton the demand for labor.

• In conjunction with otherprogram measures,enhanced cost recovery willcontribute to sustai-nabilityof public finances, enablehigher capital outlays,thereby fostering economicactivity and betteremployment opportunity.

Not applicable

Prices • Adjustment in tariffs will increase prices of certain goods and services,which, in the absence of targeted income compensating measures,may adversely affect the poor. However, coupled with improved costrecovery and the use of resources for maintenance and expansion,improvement in quality is also expected.

• Although prices of certaingoods and services arelikely to rise, the quality-adjusted price level isexpected to remainunchanged.

• Enhanced cost• recovery through lower

subsidies will• reduce factor price

distortions.

• Higher prices for goodsand services usedmostly by the non-poor.

Net PublicTransfers

Not applicable • Increased cost recovery willhave a positive effect onpublic transfers to the poordue to decrease inbudgetary subsidies,particularly on electricityconsumption, which willrelease funds forsocioeconomic services.

• Better burden sharing inline with capacity to pay.

• Increase in costrecovery and tariffs willraise the financialburden of the non-poor.

Access toPublicGoods andServicesfor the Poor

Not applicable • With better cost recoveryand resource mobilization,government will be able toexpand its social andpoverty reductionprograms.

Not applicable • Non-poor will havebetter access, but willneed to pay more in linewith their highercapacity to pay.

Total NetEffects

The primary aim of this policy measure is to improve burden sharing by raising the financial contribution from the better-off strata of society.This will contribute to more sustainable public finances, enhanced resource availability for maintenance and expansion, and improvement inquality of services.

Assumptions The policy and regulatory frameworks will assist in de-politicizing the tariff setting, and appropriate pricing mechanisms will be introduced.

Table A9.4: Enabling Inf rastructure P olicy Framework and Social and Environmental Sustaina bility of Development

Type of EffectChannel Direct Indi rect Macro Non- poorLabor Market • Positive effect through improved

employment opportunities due toincreased scope of infrastructuredevelopment.

• Infrastructure developmentwill raise economy's growthpotential and improveemployment opportunities.

• Rehabilitation policy willavoid disruption ofindividual's contribution tolabor market.

• Improved infrastructuredevelopment will increaseallocative efficiency, fostereconomic growth, and raiselabor demand.

• Social and environmentalsustainability will fostercontinuity in developmentprocess, reducefluctuations associated withunsustai-nable policies, andthereby prevent adverseimpact on labor demand.

• Increase in demand forlabor will help both thepoor and the non-poor.

Prices • Enhanced equity of access tobasic and social infrastructure canresult in lower prices for the poor.

• Removal of infrastructurebottlenecks could result inreduced production cost andlower prices.

• Transparent regulatoryframework will depoliticizeprice setting.

Not applicable

Net PublicTransfers

• Mobilization of private funds for infrastructure development will allowreallocation of resources to social services and improved access tosuch services by the poor.

• Enabling environment andgreater public/ privatecollaboration will easebudgetary pressure byattracting more privatecapital. This will makegovernment investmentsand programs financiallymore sustainable.

• Non-poor will benefitfrom reallocation ofresources.

Access toPublic Goodsand Servicesfor the Poor

• Enhanced access to improved basic and social infrastructure facilities.• Improved availability of basic and social infrastructure and services

will allow greater equity in access.

• Improved infrastructure willincrease quality of servicedelivery and, throughfostering economic growth,increase quantity of goodsand services available.

• Non-poor will havebetter access toimproved basic andsocial infrastructure.

Total NetEffects

The objective of the policy is to establish enabling infrastructure policy framework to attract private capital for infrastructure developmentand the provision of services, and to ensure social and environmental sustainability of development. These policies supplement gov’tfunding for infrastructure development and services; contribute to improve availability, efficiency, and quality; and safeguard achievementin development from policy reversals due to unsustainability. Thus, the net effect of the policies would be to help the poor.

Assumptions The establishment of enabling framework will crowd-in private capital, and will not be offset by reduction in government provision ofservices. Adherence to the social and environmental provisions of the enabling framework.

Appendix 10

INELIGIBLE ITEMS

1. The proceeds of the loan will be utilized to finance the foreign currency expendituresfor the reasonable cost of imported goods required during the execution of the Program.

2. Notwithstanding the provisions of paragraph 1, no withdrawals will be made for:

(i) expenditures for goods (included in the following Standard International TradingCommodity chapters or headings):

Chapter Heading Description of Items

112 Alcoholic beverages

121 Tobacco, unmanufactured; tobacco refuse

122 Tobacco, manufactured (whether or not containingtobacco substitutes)

525 Radioactive and associated materials

667 Pearls, precious and semiprecious stones, unworked orworked

897 897.3 Jewelry of gold, silver, or platinum group metals (exceptwatches and watch cases) and goldsmiths’ or silversmiths’wares (including set gems)

971 Gold, nonmonetary (excluding gold ores and concentrates)

718 718.7 Nuclear reactors, and parts thereof, fuel elements(cartridges), nonirradiated for nuclear reactors

(ii) expenditures in the currency of the Borrower or of goods supplied from the territory ofthe Borrower;

(iii) payments made for expenditures incurred more than 180 days prior to theeffectiveness date of the loan;

(iv) expenditures for goods supplied under a contract that any national or internationalfinancing institution or agency will have financed or agreed to finance, including any contractfinanced under any loans from the Bank;

(v) expenditures for goods intended for a military or paramilitary purpose or for luxuryconsumption;

(vi) expenditures for pesticides categorized as extremely hazardous or highly hazardous inClass la and lb, Classification of Pesticides by Hazard and Guidelines to Classification.

Appendix 11, page 1

TECHNICAL ASSISTANCE

A. Ongoing Bank support

1. Presently, the Bank is providing technical assistance (TA) as part of its supportfor improving good governance, strengthening public resource management, andfostering human development in Madhya Pradesh. The two ongoing TAs focus on thepolicy, regulatory, and institutional aspects of provision of social and economic services.The strengthening of institutional capacity in reallocating resources to social sectors fortargeted social interventions will support the state government's effort in formulating asustainable development strategy to increase the standard of living in Madhya Pradesh.

2. The TA support is provided to both state and local levels of government. Theobjective of one is to improve development management by supporting the GMP's publicfinance reform including reform of tax system and expenditure prioritization andmanagement, and institutional strengthening. 1 The other is providing assistance to thestate government's good governance initiative through decentralization effort, focusingon enhancing resource mobilization capacities of urban and rural local bodies, improvingand modernizing the information gathering and processing for rational decision makingat state and local levels, and strengthening the institutional capacity of the trainingfacilities for local bodies. 2

1. Capacity Building for Development Management and State PublicFinance Reform

3. At the state level, the Bank's technical assistance for sustainable economic andsocial development includes (i) structural reforms of the tax system and improvement intax administration; (ii) improvement in expenditure prioritization and expendituremanagement and control systems; (iii) enhanced transparency of the institutional,regulatory, and procedural frameworks; and (iv) institutional strengthening and capacitybuilding through training, modernization and networking of administration, andinstitutional setup for formulation and assessment of economic policy options.

4. Support for reform of the tax system and tax administration focuses on improvingpublic resource mobilization to ensure sufficient and sustainable provision of social andeconomic services. Activities include the formulation of a framework for acomprehensive value-added tax system, institutional strengthening of the sales taxadministration including staff training to facilitate transformation of the existing sales taxsystem to value-added tax; establishment of valuation cells for the organizationalimprovement of stamp duty and registration; and training of staff on the new valuationsystem.

5. Assistance for improving expenditure management and control, and expenditureprioritization including expenditure reallocation to social services and preparation of acore investment program, is an essential part of the Bank's support for a sustainabledevelopment strategy to improve basic human needs in Madhya Pradesh. TA supportincludes assessment of the institutional, policy, and regulatory frameworks for 1 TA No. 2943-IND: Support for the Government of Madhya Pradesh Public Finance Reform and

Institutional Strengthening, for $780,000, approved on 15 December 1997.2 TA No. 2944-IND: Strengthening Local Government in Madhya Pradesh, for $700,000, approved on 15

December 1997.

Appendix 11, page 2

improvement of social service provision. In particular, TA in the education sectorfocuses on prioritizing proposed education schemes, reviewing budget allocationmechanisms, proposing norms for appropriate pricing of services, and analyzing thedeterminants of the appropriate future mix between the public and private provision ofsuch services and the necessary regulatory and procedural changes. Reform of thehealth sector focuses on improvement in the regulatory and policy framework foreffective management of service delivery, criteria for prioritization of budget allocationtowards primary and preventative health care with maximum outreach of health servicesto the poor, women and girls, and tribal communities, and assessment of the potentialfor cost recovery in the sector while protecting access to health services by the poor.These efforts are complemented by institutional improvement through establishing astate budgeting and fiscal analysis unit to provide analytical and technical support forpolicy making and through suitable training programs.

6. The Bank's assistance for human development through capacity building is beingsupported by providing training of staff in the methodology of expenditure prioritizationand core investment program, strengthening the analytical capacity for budget planningand monitoring as well as revenue and expenditure analysis and projection, and intraining on effective audit, accounting, and control procedures. For long-termsustainability of capacity upgrading, close attention is being given to strengtheningtraining facilities and to institutionalizing training, through establishing links to state-levelinstitutions such as the State Academy of Administration. To promote private sector andstakeholder participation, workshops are being held to discuss topics such as servicedelivery in social sectors, pricing policy, and institutional and regulatory frameworks.

2. Institutional Strengthening of Urban and Rural Local Governments

7. The support for institutional strengthening and capacity building of urban andrural government in a decentralized democratic setup is based on internationalexperience that the benefits of public provision of social and economic services will notbe sustainable unless local capacity for resource mobilization, effective utilization, andexpenditure management is adequately enhanced. The TA therefore assists in (i)strengthening the resource mobilization capacities of local bodies; (ii) improving theinformation system at the district level to facilitate rational decision making and (iii)strengthening training facilities for substate local bodies.

8. First, capacity for management of municipal finances needs to be developed toenable effective and sustainable devolution of fiscal responsibility to local governments.To this effect, the scope and efficiency of local resource mobilization efforts are beingenhanced by reforming local taxes including property tax; appropriate pricing of serviceson the basis of established standards of service delivery, and the contracting out of localservices to the private sector. This will form the framework for the Bank's futureintervention through its urban and environmental improvement initiatives to ensuresustainability of the resource utilization and capacity building efforts of localgovernments.

9. Second, to provide direct and effective assistance to the rural sector (and inparticular the rural poor), the Bank is supporting the development of a suitableorganizational structure and regulatory framework for the transfer of minor irrigationprojects (i.e., projects up to 2,000 hectares) to local governments and their sustainableoperation and maintenance.

Appendix 11, page 3

10. Third, Bank support focuses on facilitating rational decision making by identifyingthe information requirements for effective administration and management at the locallevel, developing appropriate information systems, and upgrading the operatingprocedures of the concerned state and district statistical offices.

11. Finally, the TA is providing support to strengthen local governments'implementation capacity, including training for elected representatives andadministrators of local bodies by developing, adapting, and integrating course materialfor dissemination through distance learning, existing training institutes, and othersuitable organizations. As part of the assistance, the TA recommendations will beimplemented in selected local bodies with a view to assessing their efficacy and makingthe said local bodies an example for others.

B. Proposed Technical Assistance

1. Objectives and Scope

12. The aim of the TA is to support the government's efforts to develop andimplement a comprehensive and socially sustainable program of public enterprisereform. The objectives are to (i) establish effective institutional mechanisms forrestructuring and divestment of public sector undertakings, including assistance indesigning and implementing the social safety net; (ii) capacity building for undertakingPSU reform; and (iii) improving corporate governance including strengtheningaccounting and information systems of PSUs.

13. The scope of the TA will include (i) providing assistance on all aspects ofrestructuring and divestment including valuation, corporate and financial restructuring,tendering and bid evaluation, and labor issues; (ii) reviewing and assessing the existingarrangements for management of PSUs and corporate governance structure; suggestingmeasures to increase accountability and enhance PSUs’ operational autonomy; andassessing the need for improvement in PSUs' accounting systems and reportingrequirements; (iii) conducting workshop to expose policy makers, management of PSUs,and government agencies to national and international experience on approach andmodalities of restructuring/divestment efforts to enhance their capacity, and organizingtraining seminars and conducting training for staff of the Department of Public Enterpriseand the Technical Secretariat; and (iv) providing assistance in the design of the socialsafety net and suitable mechanisms and institutional setups; and (v) designingappropriate strategies including training and establishing links to local institutions forlong-term sustainability.

2. Cost Estimates and Financing Plan

14. The total cost of the TA is estimated at $750,000 equivalent, including $350,000in foreign exchange costs and $400,000 equivalent in local currency costs. It isproposed that the Bank provide $600,000, on a grant basis from the Bank-funded TAprogram, to cover the entire foreign currency cost and $250,000 equivalent in localcurrency costs. The government will contribute the equivalent of $150,000 in kind.Detailed cost estimates are in Table A11.1.

Appendix 11, page 4

Table A11.1: Cost Estimates and Financing Plan($)

Item ForeignExchange

LocalCurrency

TotalCost

A. Financed by the Bank

1. Consultants a. Remuneration/Per Diem i. International Consultants ii. Domestic Consultants b. International and Domestic Travel c. Communication/Reports 2. Workshop 3. Training Seminars 4. Contingency a

Subtotal (A)

B. Financed by the Government of Madhya Pradesh

1. GMP-financed Consultant and Counter- part Staff 2. Office Accommodation and Facilities

3. Local Transportation4. Workshop and Training Seminars5. Preparation of Reports

Subtotal (B)

Total

284,000

266,000

15,0003,000

20,000

46,000

350,000

350,000

199,000

182,00010,0007,0005,000

15,00031,000

250,000

94,000

20,00017,00012,0007,000

150,000

400,000

483,000

266,000182,000

25,00010,00025,00015,00077,000

600,000

94,000

20,00017,00012,0007,000

150,000

750,000a Includes provision for travel of a government representative for TA negotiations.

3. Implementation Arrangements

15. A consulting firm will be recruited to provide a team of international and domesticconsultants to execute the TA. The team will be selected and engaged in accordancewith the Bank’s Guidelines on the Use of Consultants and other arrangementssatisfactory to the Bank on the engagement of domestic consultants. The recruitment ofconsultants will be based on simplified technical proposals. It is estimated that a total of52 person-months of consultancy services will be required. The Bank will finance 10person-months for international consultancy as well as 33 person-months for domesticconsultancy services. The state government will provide the services of an expert ashead of a technical secretariat for the full duration of the public enterprise reform andrestructuring process. The TA will be implemented over a nine-month period starting inFebruary 2000. The Finance Department of the government of Madhya Pradesh will bethe Executing Agency for the TA. The state government has set up the Public ResourceManagement Committee chaired by the chief minister, which will be supported by theEmpowered Committee on Public Enterprises Restructuring, headed by the chief

Appendix 11, page 5

secretary, and by the Technical Secretariat on technical aspects of the restructuring anddivestment process.

16. The consultants will organize training seminars on all aspects of public enterprisereform to staff of the Department of Public Enterprise and the Technical Secretariat. Theconsultants will also prepare and organize, in consultation with the Executing Agency, aworkshop to expose policy makers, management of PSUs, and government agencies tonational and international experience on restructuring/divestment efforts. For theworkshop, two international and two domestic resource persons will be engaged for atotal of one person-month to share their experience in privatization, enterpriserestructuring, and issues of corporate governance. Information on public enterprisereform within the context of overall economic reform program will be disseminated to awider audience as part of the workshop.

17. The consultants will prepare an inception report within two weeks of the start oftheir services and an interim report after completing one half of their consulting services.The draft final report will be submitted two weeks before the end of consulting servicesand discussed at a tripartite meeting. The final report incorporating the comments ofgovernment of Madhya Pradesh and Bank will be prepared within a month of thetripartite meeting.

4. Outline Terms of Reference for Consulting Services (except GMP-financed consultant as head of the Technical Secretariat)

18. In addition to acting as resource persons for the training seminars, theconsultants will undertake the tasks listed in the following sections. The consultants willwork in close collaboration with the Department of Public Enterprise and the TechnicalSecretariat.

a. Consultants for Corporate Restructuring (one CorporateRestructuring Expert/Teamleader, international, 6 person-months;one Transport Sector Restructuring Expert, domestic, 2 person-months)

(i) Advise on the approaches and modalities of PSU restructuring andprepare/review corporate restructuring plans; and advise on the methodsand structure of divestment, timing, valuation, and public policy issues.

(ii) Advise on streamlining of tendering procedures; assist in the preparation

and evaluation of bids/public offering documents and advise, inconsultation with the Merchant Banking Specialist, on the use of externalmerchant banking and consultancy services.

(iii) Develop a strategy to promote the small and medium sized privateenterprises sector; and advise on changes in the sectoral policies,legislation, and rules and regulations in consultation with the legalexperts.

Appendix 11, page 6

b. Consultants for Financial Restructuring/Divestment (oneMerchant Banking Specialist, domestic, 3 person-months; oneValuation Expert/Co-Teamleader, one Valuation Expert and oneAccounting Expert, domestic, 15 person-months)

(i) Prepare an inventory of all assets and liabilities of enterprises identifiedfor restructuring/divestment, merger or closure, and prepare a list ofsecured and unsecured creditors.

(ii) Provide advice on the approaches of valuation and prepare valuationreports on the enterprises’ assets and liabilities.

.(iii) Evaluate enterprises’ accounting and financial systems, including major

divergences from international standards and develop options andrecommendations for restructuring financial/accounting systems toincrease efficiency and to present adequate information to potentialinvestors and lenders.

(iv) Review the existing financial data on cooperative sector; assess theiravailability, quality, coverage and timeliness; suggest improvement indata collection and reporting systems; and, on the basis of available data,review the financial performance of cooperatives and their budgetaryimpact.

c. Consultant for Corporate Governance (international, 2person-months)

(i) Review existing arrangements for the management of PSUs and theircorporate governance.

(ii) For the PSUs remaining under public ownership and management,

recommend measures to strengthen corporate governance,professionalize PSU management, and increase PSU operationalautonomy.

d. Legal Experts (one Companies Law Expert and oneCooperative Law and Organization Expert, domestic, 4 person-months)

(i) Provide advice on legal aspects of restructuring/divestment and assist indeveloping restructuring plan that is consistent with applicable law.

(ii) Prepare relevant legal documents and provide assistance in closing of theenterprises’ sale or initial public offering.

(iii) Review the existing arrangements in cooperative societies with a view tosuggesting reform measures to increase cooperatives' operationalfreedom.

Appendix 11, page 7

(iv) Develop options and recommendations for enhanced operational freedomof cooperatives, taking into consideration relevant proposals in otherstates.

e. Consultants for Social Development and Training Program(one international expert, 2 person-months; two domestic experts, 9person-months)

(i) Assess the social impact of public enterprise reform; and recommendappropriate mitigation measures.

(ii) Provide assistance to the Technical Secretariat on the design,preparation, and implementation of the social safety net, includingvoluntary retirement scheme.

(iii) Ensure the participation and collaboration of stakeholders in the processof designing the social safety net through workshops, seminars etc.

(iv) Assess local capacity to implement recommended strategies for socialsafety net, including the availability of training infrastructure and programsamong others.

(v) Carry out training needs analysis and facilitate training of staff of DPE andTechnical Secretariat in implementation of social safety net.