Completion Report

Project Number: 31588 Loan Number: 1720 December 2007

India: Urban and Environmental Infrastructure Facility Project

CURRENCY EQUIVALENTS

Currency Unit – Indian rupee/s (Re/Rs)

At Appraisal At Project Completion 15 October 1999 29 May 2006 Re1.00 = $0.023 $0.022 $1.00 = Rs43.44 Rs45.90

ABBREVIATIONS

ADB – Asian Development Bank AMC – Ahmedabad Municipal Corporation BME – benefit monitoring and evaluation CAGR – compound annual growth rate DEA – Department of Economic Affairs DFI – development finance institution FIL – financial intermediary loan HUDCO – Housing and Urban Development Corporation Limited ICICI Bank – ICICI Bank Limited ICICI Ltd. – Industrial Credit and Investment Corporation of India Limited IDFC – Industrial Development Finance Corporation KfW – Kreditanstalt fur Wiederaufbau MFI – microfinance institution MLD – million liters per day MT – metric tonne PCR – project completion review PDC – project development company PPTA – project preparatory technical assistance RBI – Reserve Bank of India RRP – report and recommendation of the President 74th CAA – Constitution (Seventy Fourth Amendment) Act, 1992 TA – technical assistance TMC – Thane Municipal Corporation UEIF – Urban and Environmental Infrastructure Facility ULB – urban local body USAID – United States Agency for International Development

NOTES

(i) The fiscal year (FY) of the ICICI Bank ends on 31 March. FY before a calendar year

denotes the year in which the fiscal year ends, e.g. FY2007 ends on 31 March 2007. (ii) In this report, “$” refers to US dollars.

Vice President L. Jin, Operations 1 Director General K. Senga, South Asia Department (SARD) Director A. Sharma, Governance, Finance and Trade Division, SARDTeam leader M. Ravi, Financial Officer, SARD Team members T. Ito, Senior Economist (Financial Sector), SARD G. Mahajan, Environment Specialist, SARD R. Pande, Associate Financial Analyst, SARD N. Saini, Administrative Assistant, SARD

CONTENTS

Page

BASIC DATA i

I. BACKGROUND 1 A. History 1 B. Scope of Operations 1 C. Relationship with ADB and Other lenders 1 D. Relevance of Design and Formulation 2 E. Related Technical Assistance 4

II. IMPLEMENTATION 4 A. Lending Policies 4 B. Characteristics of Subloans 5 C. Implementation and Internal Operation of Subprojects 7 D. Operational Performance of ICICI Bank 9 E. ICICI Bank’s Financial Performance 10 F. Financial Statements and Ratios 10 G. Covenants 11 H. Performance of the Asian Development Bank 11

III. EVALUATION 11 A. Loan Appraisal 11 B. Implementation 13

IV. ASSESSMENT AND RECOMMENDATIONS 13 A. Evaluation Criteria 13 B. Relevance 14 C. Effectiveness in Achieving Outcome 14 D. Efficiency in Achieving Outcome and Outputs 14 E. Preliminary Assessment of Sustainability 15 F. Impact 15 G. Overall Assessment 15 H. Lessons 15 I. Recommendations 16

APPENDIXES 1. Project Framework 18 2. Technical Assistance Completion Report 20 3. Overview of Subloan 23 4. Subproject Profiles 24 5. Financial Statements of ICICI Bank 29 6. Status of Compliance with Loan Covenants 33

BASIC DATA A. Loan Identification 1. Country India 2. Loan Number 1720 3. Loan Title Urban and Environmental

Infrastructure Facility 4. Borrower Industrial Credit and Investment Corporation of India Limited (ICICI Ltd.)

5. Amount of Loan $80 million 6. Project Completion Report Number 1012 B. Loan Data 1. Appraisal Date Started 28 June 1999 Date Completed 9 July 1999 2. Loan Negotiations Date Started 25 October 1999 Date Completed 28 October 1999 3. Date of Board Approval 17 December 1999 4. Date of Loan Agreement 19 May 2000 5. Date of Loan Effectiveness In Loan Agreement 22 September 2000 Number of Extensions None 6. Terminal Date for Commitments In Loan Agreement 22 September 2004

Actual 22 September 2004 Number of Extensions None 7. Closing Date In Loan Agreement 22 September 2006

Revised 29 May 2006 Number of Extensions None

8. Terms to the Borrower Interest Rate As per ADB’s market-based loan facility for

US dollar loans Maturity (number of years) 20 years Grace Period (number of years) 5 years Free Limit $5 million Repayment Terms Amortized semiannually

installments over 15 years

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9. Interest Rate for Subloans Eligible subprojects at market based interest rates, with a maximum maturity of 15 years, including 3 years grace, based on project requirements

10. Disbursements a. Dates

Initial Disbursement

5 January 2001

Final Disbursement

24 January 2006

Time Interval

5 years

Effective Date

22 September 2000

Original Closing Date

22 September 2006

Time Interval

6 years

b. Amount ($ million)

Name Last of the Original Revised Amount Amount

Borrower Category Allocation Allocation Canceled Disbursed

ICICI Ltd. Project Expenditure

80 42.20 14.848 27.352

Total 80 42.20 14.848 27.352

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C. Implementation Data 1. Number of Subloans 7 2. Sectoral Distribution of Subloans

Sector Projected Actual

Amount ($ million) % Amount

($ million) %

(i) Water supply and sanitation 0.727 2.7 (ii) Drainage and sewerage (iii) Solid waste management

More than 70%

1.265 4.6 (iv) Area development, including slum

upgrading

(v) Industrial waste management and air pollution control

25.360 92.7

(vi) Streets, bridges, transport terminals, and public transport systems

(vii) Market development (viii) Enhancement of financial and

managerial capacity of urban local bodies

Not more than $20 million

Not more than 10%

Total 80 100 27.352 100 3. Subloans Above Free Limit ($5 million)

Subloan Aggregate Number Amount approved ($ million)a

Water distribution subproject one $5.44 Industrial waste management subproject four $28.71 a Data relate to subloan amount approved. Actual disbursements were $0.727 million for water distribution

subproject and $20.469 million in the other four subprojects included here.

4. Project Performance Report Ratings

Ratings

Implementation Period Development

Objectives Implementation

Progress (i) From December 1999 to August 2002 S S (ii) From September 2002 to August 2003 PS S (iii) From September 2003 to November 2003 PS PS (iv) From December 2003 to April 2004 PS S (v) From May 2004 to June 2005 S S (vi) For July 2005 PS S (vii) From August 2005 to February 2006 PS PS (viii) From March 2006 to December 2006 PS S

PS= Partly Satisfactory, S= Satisfactory.

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D. Data on Asian Development Bank Missions

Name of Mission Date No. of Persons

No. of Person-

Days Specialization of

Membersa

TA Review Mission 27 January – 2 February 1999

1 7 b

Fact-Finding Mission 1–12 March 1999 5 60 b, d, g, h, f

Special Contact/Consultation Mission

10–17 March 1999

Pre-appraisal Mission 28 June – 9 July 1999

6 54 b, d, g, h, e, c

Loan Inception Mission 25–29 September 2000

3 15 b, g, h

Review Mission (1) 27 April 2003, 3 June 2003 and 7–8 August 2003

1 4 g

Mid-term Review Mission

4 June – 31 August 2004

2 6 g, h

Mid-term Review Mission

29 – 31 July 2004 2 6 g, h

Review Mission (2) 30 November – 3 December 2004

2 8 g, f

Review Mission (3) 19–22 September 2005

1 4 g

Review Mission (4) 24–25 November 2005

2 4 g, e

Project Completion Reviewb

6–15 June 2007 4 56 b, g, e, h

a Reference letters in the table are, a - engineer, b - financial analyst, c - counsel, d -economist, e - procurement or consultant specialist, f - control officer, g - programs officer, h - onward for other categories.

b This Project Completion Report is prepared by Mythili Ravi, Financial Officer, and assisted by Tetsu Ito, Senior Economist (Financial Sector); Girish Mahajan, Environment Specialist; Ruchira Pande, Associate Financial Analyst, Indian Resident Mission; and Neha Saini, Administrative Assistant, India Resident Mission.

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E. Related Loans

Item Loan No. Date of signing of Loan Agreement

Amount

Industrial Credit and Investment Corporation of India Limited

778-IND 2 May 1986 $100 million

Second Loan to Industrial Credit and Investment Corporation of India Limited

1072-IND 15 January 1991 $120 million

Private Sector Infrastructure Facility Project

1480-IND 14 August 1997 $150 million

Housing Finance II Project

1761-IND 18 December 2001 $80 million

IND= India.

Source: Asian Development Bank, Loan Financial Information System.

I. BACKGROUND

A. History 1. The Government of India, representatives of Indian industry, and the World Bank formed the Industrial Credit and Investment Corporation of India Limited (ICICI Ltd.) in 1955 as a development finance institution (DFI) for providing medium-term and long-term project financing to Indian businesses. In the 1990s, ICICI Ltd. broadened business scope by creating subsidiaries covering investment banking (1993), commercial banking (1994), asset management (1994), personal finance (1997), venture capital funding (l998), internet stock trading (1999), home finance (1999), and insurance (2000). As a diversified financial services provider, ICICI Ltd. and its affiliates provided a complete spectrum of wholesale banking products and services, including project finance, hybrid financing, syndication services, treasury-based financial solutions, cash-flow-based financing products, lease financing, equity financing, risk management tools, and advisory services. B. Scope of Operations 2. At the time of approval of the Urban and Environmental Infrastructure Facility (UEIF) Project, the principal business of ICICI Ltd. comprised medium and long-term project finance, corporate finance, leasing, and other types of financial and advisory services. To face the challenges of liberalization in the financial sector during the 1990s and to seize the opportunities it offered, ICICI Ltd. and its commercial banking subsidiary, ICICI Bank Limited (ICICI Bank), merged in 2002. ICICI Bank was the surviving entity, and all assets, liabilities, permits, consents, licenses, etc. were vested in ICICI Bank as the transferee company, effective 30 March 2002—the date on which the Reserve Bank of India approval of the bank became effective.1 As a result, ICICI Bank became a universal bank providing a range of services, including retail banking (lending, deposits, and money-transmission services), corporate finance, project finance, rural finance, microfinance, and fee-based services. C. Relationship with ADB and Other Lenders 3. Asian Development Bank (ADB) Operations with ICICI Bank. Besides the UEIF, ADB provided four additional loans to ICICI Ltd. for various purposes, all guaranteed by the Government of India. The first loan to ICICI Ltd., in 1986,2 was to provide foreign exchange resources to support its program of lending—mainly for modernization and expansion of private medium-sized enterprises' existing production facilities, but partly for new industrial projects designed to introduce new technology in India. The second loan, in 1990,3 was given to ICICI Ltd. for on-lending to medium-scale private sector enterprises in India—primarily for balancing, modernization, replacement, and expansion of existing production facilities. The Private Sector Infrastructure Facility, in 1996,4 was geared toward the investment needs of infrastructure

1 As a result, all ADB loans in the name of ICICI were assumed by ICICI Bank, effective on the date of the merger

and as per ADB’s approval in December 2002. 2 ADB. 1986. Report and Recommendations of the President to the Board of Directors on a Proposed Loan to the

Industrial Credit and Investment Corporation of India Limited. Manila. 3 ADB. 1990. Report and Recommendation of the President to the Board of Directors on a Proposed Second Loan to

Industrial Credit and Investment Corporation of India Limited. Manila. 4 ADB. 1996. Report and Recommendation of the President to the Board of Directors on three Proposed Loans for

the Private Sector Infrastructure Facility Project in India. Manila.

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projects sponsored by the private sector. The Second Housing Finance Project, in 2001,5 was geared toward meeting the housing-finance needs of low-income households. 4. Funding Structure of ICICI Bank. As a DFI, ICICI Ltd. had a resource mix comprising long-term borrowings and bonds with a relatively small share of short-term deposits. Post-merger, ICICI Bank’s resources have shifted predominantly to public deposits; it also continues to raise funds through rupee and foreign-currency bond issuance, equity from global and domestic markets, and external borrowing in the international markets, including from multilateral lenders. Borrowings from multilateral and bilateral agencies have been relatively small, with a decline in recent years.6 However, in view of its commercial bank status, ICICI Bank currently has a larger share of demand deposits and short-term deposits and hence the current liability structure is weighted more in favor of short-term resources. ICICI Bank also raises equity and debt from global markets through issuance of Global Depository Receipts, American Depository Receipts, equity, and bonds. 5. Other Development Partners. ICICI Bank has partnered with multilateral and bilateral organizations such as the World Bank, the United States Agency for International Development (USAID), and Kreditanstalt fur Wiederaufbau (KfW) to implement several projects in infrastructure, energy efficiency, pollution prevention, and housing. However the share of resource support coming from such organizations has decreased in the recent years. D. Relevance of Design and Formulation 6. Project Design. As per the project framework (Appendix 1), the goal of UEIF was to (i) improve the urban environment and quality of life for India's urban residents; and (ii) enhance urban centers' competitiveness for drawing investments. The expected outcomes of UEIF were to (i) support commercialization of urban and environmental infrastructure development, financing, and operation and maintenance; (ii) support decentralization and implementation of the Constitution (Seventy Fourth Amendment) Act, 1992 (74th CAA); and (iii) enhanced access of the urban poor to improved urban environment and urban services. UEIF had two components: (a) three loans—to ICICI Ltd., to Housing and Urban Development Corporation Limited (HUDCO), and to the Infrastructure Development Finance Company Limited (IDFC);7 and (b) a technical assistance (TA)8 grant for strengthening microfinance institutions (MFIs) for urban infrastructure finance. The TA comprised three parts: (i) integrating MFIs with urban infrastructure development; (ii) building capacities of selected MFIs for financing urban infrastructure projects; and (iii) pilot projects. The outputs of the loan were subprojects in the urban infrastructure subsectors listed in para. 15. 7. Rationale for the Loan. The report and recommendation of the President (RRP) for UEIF noted that inadequate urban infrastructure and deteriorating urban environment have been 5 ADB. 2000. Report and Recommendation of the President to the Board of Directors on Proposed Loans to the

Housing and Urban Development Corporation, National Housing Bank, Housing Development Finance Corporation, and ICICI for the Housing Finance II Project in India. Manila.

6 The share of external borrowings in total borrowings and deposits declined from 16.9% to 10.6% from 2001 to 2006, while the share of borrowings from multilateral and bilateral agencies declined from 3.6% to 1.2% during the same period.

7 HUDCO and IDFC decided that the terms and conditions of the UEIF were not attractive given the downward trend in domestic interest rates, and subsequently cancelled their participation on 2 July 2001 and 9 September 2002 respectively, with no utilization.

8 ADB.1999. Technical Assistance to India for Strengthening Microfinance Institutions for Urban and Environmental Infrastructure Finance. Manila (TA 3344-IND, for $500,000). The Executing Agency was HUDCO. The TA was closed on 31 August 2003.

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deterring India's social and economic development and adversely affecting the quality of life. The RRP further noted that long-term sustainable development within the urban sector depends on the success of institutional and financial reform of local governments, and on the continued flow of long-term financial resources from the market to the sector. Recognizing these and given the limited budgetary resources to meet the urban sector's investment requirement, the Government initiated reforms in the urban sector to mobilize market resources. Furthermore, it was noted that commercialization of urban infrastructure was dependent on meeting the needs of the poor. UEIF is aimed at supporting the Government's efforts to decentralize urban development functions and responsibilities to local governments, commercialize infrastructure development, and mobilize long-term funds to match the gestation and payback periods of urban infrastructure projects. Another aim of UEIF is to support the MFls to finance urban infrastructure at the grassroots level in order to improve the environment in urban poor areas and enable equitable access to services among the urban poor. 8. Consistency with ADB’s Strategy. UEIF was consistent with ADB’s urban sector strategy,9 the objectives of which were (i) to maximize the economic efficiency of urban sector, (ii) to reduce urban poverty, (iii) to improve quality of life, and (iv) to achieve more sustainable forms of urban development. The Project continues to be consistent with ADB’s country program, which identifies infrastructure development and social development (including environmental protection) as priorities.10 9. Consistency with India’s Development Priorities. UEIF was consistent with the priorities of the Government of India at appraisal, which included, inter alia, providing safe drinking water and primary health care facilities, and ensuring the environmental sustainability of the development process.11 UEIF continues to be consistent with the strategy of Government of India at project completion, namely, high, sustainable and inclusive growth with emphasis on promotion of private sector participation in infrastructure development. 10. Adequacy of Appraisal. During the ADB annual meeting in 1997, the India Government requested ADB assistance in developing a fund to improve urban infrastructure and the urban environment by engaging the private sector to finance and implement commercially viable projects. ADB approved project preparatory technical assistance (PPTA) in December 2007 to prepare for an ADB-financed project including the following components: (i) establishment of an urban and environmental infrastructure fund for leveraging private sector and external resources for urban development and environmental improvement; and (ii) development of urban environmental and infrastructure subprojects involving public–private partnerships. The consultants’ report was prepared in January 1998 after consultations with stakeholders such as the central Government, selected state governments, urban local bodies (ULBs), DFIs, and non-government organizations. Based on findings of the TA, a project brief was prepared, which proposed solutions including (i) lines of credit to financial institutions, (ii) a project support facility for institutional strengthening and developing bankable projects for private sector participation, and (iii) a standby guarantee facility for attracting alternate long-term finance from the domestic market. 11. The fact-finding mission and the pre-appraisal mission for the UEIF were conducted during March 1999 and June-July 1999, respectively. It is noted that the project support facility and standby guarantee facility were dropped during the pre-appraisal mission. At the request of

9 ADB. 1999. Urban Sector Strategy. Manila. 10 ADB. 2003. Country Strategy and Program 2003-2006: India. Manila. 11 Planning Commission, India. 1992. Eight Five Year Plan. New Delhi.

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the Government, a TA project was included instead to support the participation of MFIs in urban infrastructure development. The pre-appraisal mission was subsequently upgraded to an appraisal mission. 12. The appraisal was inadequate considering that the key constraints identified during the early stages (PPTA and fact-finding) were not sufficiently addressed during the subsequent stages of project formulation. Early diagnosis identified the lack of ULBs’ capacity to prepare commercially viable projects as an immediate impediment to mobilizing financial resources. Institutional reforms of municipal governments were also necessary to ensure the long-term sustainability of the urban infrastructure. Besides lines of credit, project components in the initial design included a risk-sharing facility and TA to launch a project development company (PDC) to enhance municipal governments' capacity to prepare viable projects. Both of these components were subsequently dropped. The PDC did not materialize because of insufficient preparation.12 The risk-sharing facility was dropped because ADB could not offer stand-alone guarantees on unspecified municipal bonds without a companion loan. E. Related Technical Assistance 13. UEIF included a TA grant of $500,000 to ensure that the benefits of urban infrastructure projects reached the poor. The TA was designed to meet the demand of the low-income groups for improved urban services by strengthening the capacity of MFIs to prepare community-led environmental infrastructure projects for assistance by mainstream financial institutions. This TA was not part of the initial design, but was included at the request of the Government during the pre-appraisal mission. HUDCO, which had experience working with MFIs, was the Executing Agency for the TA and was expected to come up with subprojects for assistance under UEIF. Notwithstanding cancellation of the loan by HUDCO, the TA was implemented, but with little linkage with ICICI Bank. The TA was rated successful in the TA completion report (Appendix 2).13

II. IMPLEMENTATION

A. Lending Policies 14. At appraisal, ICICI Ltd., as a DFI, focused on project finance, including infrastructure finance. The share of infrastructure in total advances was 22% in 2001; this had declined to 7% by the close of the UEIF in 2006. Lending to urban infrastructure was reportedly limited to the two subprojects funded under the UEIF. During implementation, based on opportunities in the market, ICICI Bank focused its operations more on retail and commercial banking. The retail share of ICICI Bank’s portfolio increased steadily, from 3% in 2001 to 63% in 2006.14

12 The PDC did not materialize because of insufficient preparation in pooling together diverse institutional interests

and insufficient time to obtain the government grant. Though the staff recognized its importance, management was skeptical about the justification of the PDC.

13 ADB. 2003. Technical Assistance Completion Report of Strengthening Microfinance Institutions for Urban and Environmental Infrastructure Finance (India). Manila (TA 3344-IND).

14 Share of retail portfolio during 2001 refers to ICICI Ltd. For subsequent years the data relate to the merged entity.

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B. Characteristics of Subloans 15. Subloan Criteria. Subloans were to be provided to reform-oriented municipalities or ULBs15 in reform-oriented states,16 private sector sponsors and microfinance institutions. Eligible subprojects were

(i) water supply and sanitation; (ii) drainage and sewerage; (iii) solid waste management; (iv) area development, including slum upgrading; (v) industrial waste management and air pollution control; (vi) streets, bridges, transport terminals, and public transport systems; (vii) market development; and (viii) enhancement of financial and managerial capacity of ULBs.

16. The Loan Agreement stipulated that not more than 10% would be utilized for (vi)–(viii) above. In addition, the RRP expected that more than 70% of the funds would be utilized for (i)–(iii) above, which was not mentioned in the Loan Agreement. Subloans were limited to $25 million or 40 percent of the total subproject cost, whichever was lower; had a maximum maturity of 15 years, including a grace period of 3 years, with a lending rate commensurate with maturity and risk perceptions; and conformed to ADB’s guidelines on procurement, environmental safeguards, and social safeguards. 17. Loan Utilization. ICICI Bank cancelled $52.6 million and utilized $27.4 million of the $80 million loan facility.17 During project processing, ICICI Bank established an Infrastructure Group with a focus, inter alia, on funding commercial urban infrastructure projects. However, during implementation, based on market considerations, ICICI Bank moved away from commercial infrastructure projects as it shifted its focus toward retail and commercial banking; its Infrastructure Group was reorganized as a focal point for syndication and advisory services targeting commercial infrastructure projects in general. This partly explains the distribution of subloans, which differed from what was envisaged during processing. ICICI Bank could not come up with a sufficient number of eligible subprojects before the last date of commitment (22 September 2004) and the Government withdrew its guarantee for the then-uncommitted balance of $37.8 million. Subsequently, following cancellation of one committed subloan by one subborrower and prepayment by another,18 the remaining $14.8 million was also cancelled, leading to early closure of the loan.

15 For municipal governments, reform actions included (i) preparing environmental and infrastructure investment

plans with identified priority subprojects; (ii) improving local financial resources; (iii) disclosing financial performance to the public, including budget preparation and implementation, subsidies, and beneficiary groups; (iv) implementing double-entry, accrual-based accounting systems; (v) improving cost recovery and reducing subsidies for urban infrastructure projects; or (vi) adopting competitive and transparent procurement procedures.

16 For states, reform actions included: (i) organizing state finance commissions; (ii) devolving revenues to the ULBs; or (iii) implementing legal and policy reforms to improve municipal finance and management, including cost recovery for urban services, introduction of double-entry, accrual-based accounting systems, and encouraging private sector participation in urban infrastructure development and management.

17 Of the $27.4 million that was utilized, ICICI Bank’s payable to ADB under the UEIF was $25.4 million (as of 29 October 2007), while its receivable from subloans was Rs.667.86 million (equivalent to $14.6 million at the rate of Rs45.69 being the average exchange rate of ADB disbursements). The balance of about $10.8 million stands to be a revolving fund under the UEIF.

18 Thane Municipal Corporation prepaid the subloan in October 2003 to ICICI Bank, after obtaining refinance for the same from another bank at a lower interest rate (para. 17, Appendix 4).

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18. Loan and Subloan Terms. The loan was guaranteed by the Government of India and was made out of ADB's market-based US dollar lending window with a maturity of 20 years, including a grace period of 5 years, and a floating rate adjusted semiannually. One of the seven subloans was in foreign currency for import of technology and equipment. Five subloans were rupee term loans and one was rupee lease finance (Appendix 3 for an overview of subloan terms). The rates of interest were market determined and the facility tenure ranged from 5.5 to 10 years including grace period. The share of ADB funding in total subproject cost ranged from 4% to 40%, with an average of 23%, based on the latest available subproject costs.19 Thus the loan is estimated to have resulted in a leverage of more than four times. 19. Sector and Subsector Distribution of Subloans. ICICI Bank utilized $27.4 million towards seven subprojects—two subprojects in urban infrastructure, including water, and solid waste management and five in industrial waste management and air pollution control; three out of these five involved solid waste management, namely management of sugarcane waste (bagasse) and fly ash of a power plant. It was expected that about 70% of the funds would be earmarked for urban infrastructure (i–iii above); the actual figure was only 7%. The balance (93%) went towards industrial subprojects (v above). No subprojects were approved in drainage and sewerage; area development; streets, bridges, transport terminals, and public transport systems; market development; or enhancement of the financial and managerial capacity of ULBs. There were no MFIs among the subborrowers. 20. Geographical Distribution of Subloans. The seven subprojects were located in five states, including, Chhattisgarh (earlier, part of Madhya Pradesh), Gujarat, Karnataka, Maharashtra, and Uttar Pradesh, which were assessed to be reform-oriented. The PCR Mission supported this observation based on these states' compliance with the reform actions stipulated under the Loan Agreement (outlined in footnote 16).20 21. Purpose of Subprojects. The water distribution subproject by Thane Municipal Corporation (TMC) was aimed at augmenting the infrastructure for water supply to meet the needs of a growing population. The solid waste management project implemented by Ahmedabad Municipal Corporation (AMC) was triggered by the need to upgrade the waste collection system while reducing the number of open waste storage sites. Three of the five industrial subprojects dealt with solid waste management; all of them led to a healthier environment by reducing pollutant emissions. 22. The immediate trigger for each of these five subprojects21 was market forces. Two industrial subprojects, SP1 and SP2 (sugar producers) used bagasse (solid waste from the manufacturing process) to generate power as a renewable resource, thus dealing with solid waste management in a financially sustainable manner. SP3 (a cement manufacturer) utilized the loan proceeds to expand its clinker (powdered cement) production capacity as a response to increase its market share. It also dealt with the issue of solid waste management by setting up a new unit using fly ash generated from a nearby National Thermal Power Corporation (NTPC) power plant for manufacturing cement. Subproject SP4 (a sponge-iron manufacturer with power generation capabilities) was triggered by the need to improve productivity through adoption of better sponge-iron manufacturing technology by setting-up a mini blast furnace to reduce

19 Data on the actual subproject cost was not available; hence, the actual share of ADB assistance in each subproject

could not be ascertained. 20 All the states had constituted the state finance commissions. 21 This project completion report uses code names for all of the private sector subborrowers.

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energy consumption levels. Yet another subproject, SP5 (manufacturer of urea, complex fertilizers, and industrial chemicals) was triggered by the need to increase capacity utilization (thereby improving productivity) by upgrading an old nitric acid plant. C. Implementation and Internal Operation of Subprojects 23. Execution, Costs and Schedule. All the seven subprojects were reportedly implemented with little or no delay, and within the budgeted costs. Triggered by commercial considerations, the industrial subprojects did not experience any significant technical or procurement problems. All of the subprojects adopted and fully absorbed proven technologies, as indicated by interviews with the subproject companies. 24. Operations. The industrial subprojects generate sufficient revenue to meet all of their capital and operating costs; the AMC facility is in operation, and is able to mobilize sufficient revenues from tax collections to service the debt regularly and meet operational costs. TMC informed the PCR Mission that facilities installed thus far are operational, and that TMC generates adequate revenues to meet operational costs and meet its debt obligations; however, in the absence of supporting data the mission could not independently verify this. 25. Reforms. The PCR Mission confirmed that all seven subprojects were located in states that were reform-oriented, as defined in the Loan Agreement (footnote 16). However, the identified reform actions were designed to enable core urban infrastructure projects related to civic services and did not affect or trigger industrial subprojects. TMC has undertaken some of the reform measures, such as introduction of double-entry accounting, and is currently preparing to take advantage of central Government assistance under the Jawaharlal Nehru National Urban Renewal Mission. The Maharashtra and Gujarat governments have taken steps to implement some of the key actions under the 74th CAA. 26. Financial Viability and Repayment Performance. All five industrial subprojects fulfilled the subproject criteria of being financially viable at approval; based on the satisfactory repayment performance, it has been concluded that they are financially viable now, though the PCR Mission did not receive data on revised financial internal rates of return. In the absence of a direct levy of ad valorem user charges linked to the service, the water distribution and solid waste management subprojects were structured to ensure an adequate debt service cover through an escrow mechanism that captured predefined revenues of AMC and TMC, respectively. Out of the five industrial subprojects, one (SP3) has fully prepaid the subloan while the other four are regular in meeting their debt-servicing obligations. TMC has fully prepaid the loan, while AMC is reported to be regular in its lease payment obligations. 27. Environmental Safeguards. Six subprojects reported compliance with the applicable national standards and had approval for their operations by the relevant government agencies that monitor environmental compliance.22 In the absence of specific confirmation, the environmental sustainability of these subprojects is inconclusive and is dependent upon effective implementation of the regulations by the relevant authorities. TMC made some progress during the project period in meeting national environmental standards for sewage treatment; it plans to invest in additional upgrades to sewage treatment plants to improve compliance.

22 ADB received copies of valid certificates issued by the authorities for all the subprojects at subloan approval.

However, the PCR Mission did not receive copies of the renewed certificates for four out of the five industrial subprojects.

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28. Social Aspects. Only two subprojects involved land acquisition, and neither of them were found to have resettlement issues. Data on the actual number of jobs created was not available. 29. Subproject Achievements. Details are provided in Appendix 4, while a summary is given below.

(i) AMC. AMC’s solid waste management facilities were upgraded with a fully mechanized transportation system and the introduction of closed containers, which facilitated the speedy collection and transport of solid waste, thereby contributing to economic efficiency. AMC commissioned the compost plant through a build–own–operate arrangement (Appendix 4, para. 3). Based on this experience, AMC has contracted secondary waste transportation out to two private sector operators, thus demonstrating the success of commercialization in urban infrastructure development, financing, and operations and maintenance. A component of the original scope (the incineration plant) was subsequently excluded from the subproject and was contracted to a private operator. AMC’s financial position has improved over the years. In this way, the subproject demonstrated the success of commercialization in urban infrastructure development and operation and maintenance.

(ii) TMC. TMC undertook a project for augmenting its water distribution network in

two phases to meet the increased demand from 280 million liters per day (MLD) in 2001 to the projected demand of 366 MLD in 2011. The first phase, implemented in 2003, comprised a water main, pure water sump, pumping facilities, storage reservoirs, and distribution lines for 17 out of the 44 water districts; the second phase, scheduled for completion in 2008, covers the remaining 27 water districts (augmentation and strengthening of the distribution system, including construction of elevated storage tanks). Augmentation of water supply is a clear outcome of the work accomplished so far by TMC. Increased distribution capacity, augmented supply, reduced leakages, and reduced operational costs have been reported, though they could not be quantified. TMC enjoys growing revenues and has started implementing reforms such as double-entry accounting and a phased increase of user charges. The government of Maharashtra has implemented some of the decentralization steps envisaged under the 74th CAA, thus empowering TMC to undertake some small development projects independently. Thus the subproject contributed to the achievement of one of the project outcomes, namely, decentralization and implementation of the 74th CAA.

(iii) Industrial Waste Management Subprojects. ICICI Bank reported that all five

subprojects were implemented as per the original scope and schedule and that they were operating satisfactorily. Three out of the five subprojects dealt with solid waste management in a commercially viable manner; both ADB and ICICI Bank considered these to be environmental infrastructure projects, thus contributing to the achievement of the first outcome, namely commercialization of environmental infrastructure projects. However, the RRP gives priority23 to water

23 Page iii of “Loan and Project Summary” in the RRP states “High priority will be given to subprojects that address

basic human needs such as water supply and sanitation, and slum upgrading.”

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supply, sanitation, and slum upgrading, and neither of the industrial management subprojects fell into these categories. Hence, the subprojects did not contribute to the project outcomes, although they did contribute to one of the targeted project impacts namely, cleaner urban environment (Appendix1). PCR Mission field interviews confirmed these observations. However, in the absence of specific quantitative information, it is not possible to assess the extent of achievement of the impact.

D. Operational Performance of ICICI Bank 1. Organization, Management, and Staffing 30. ICICI Bank is a private sector bank listed on the stock exchange. ICICI Bank is owned by a wide cross-section of shareholders, namely, foreign institutional investors (46.18%), American Depository Trust (24.95%), government-controlled institutional investors (12.11%), private institutional investors (4.59%), Indian corporates (5.62%) and the general public (6.55%).24 A professionally managed bank, it has an independent Board of Directors comprising 12 independent directors, one government nominee, and five full-time directors. The organizational structure corresponds to its business strategies, which are constantly changing to take advantage of the changes in the operating environment. ICICI Bank currently has five arms of business, namely, retail banking, corporate banking, international banking, rural and government banking, and corporate centre. 2. Personnel Administration 31. In order to stay competitive, ICICI Bank has consistently built up a growing pool of experienced professional staff with expertise in credit evaluation, risk management, retail products, treasury technology, and marketing. Its staff strength, currently at 33,321 persons, has grown in tandem with its operations.25 ICICI Bank offers competitive compensation packages to its employees, balanced among performance bonuses, stock options, and fixed pay. ICICI Bank trains its staff at regular intervals to develop functional and behavioral skills. 3. Lending Operations 32. With a long track record in project finance, ICICI Bank has developed a robust policy and operational framework that takes account of risk assessment and diversification, commercial returns, and national development priorities. ICICI Bank carries out detailed project appraisals comprising evaluation of technical, financial, commercial, environmental, and management aspects. In the sphere of retail operations, it has established a robust system for loan origination, operation, risk management, oversight, and monitoring, with an effective system of checks and balances in place. It has laid down a set of prudential guidelines aimed at portfolio diversification, and applies a minimum threshold on contribution from sponsors, debt service cover, a maximum debt–equity ratio, maximum single industry exposure, and single company or group exposure limits.

24 ICICI. 2007. ICICI Prospectus. Mumbai (public issue document). 25 From 7,700 persons in 2002, it increased to 10,600 in 2003, 13,609 in 2004, 18,000 in 2005, and 25,384 in 2006.

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4. Other Operations

33. With its diversified financial operations, ICICI Bank offers several products and services. In the sphere of retail operations its products include, deposits, credit cards, depository share accounts, distribution of third-party financial products, fee-based services, mortgage loans, and other forms of personal loans. Under its project finance, corporate finance, and wholesale banking arms, it provides fund-based rupee and foreign currency loans; non-fund assistance such as guarantees, letters of credit, and derivative products; and fee-based services such as loan syndication and advisory services. E. ICICI Bank’s Financial Performance 34. ICICI Bank’s operations have grown significantly during the project period, driven by its retail focus. Its advances increased from Rs493 billion in the fiscal year ending 2001 to Rs1,981 billon in 2007. Retail advances constituted 65% of total advances in 2007, compared with 3% in 2001. Its asset quality has steadily improved, with a consistent decrease in the net nonperforming asset ratio from 4.7% in 2002 to 0.7% in 2006 (although it increased back up to 1% in 2007). ICICI Bank follows prudential norms prescribed by the Reserve Bank of India for income recognition, asset classification, and loan loss provisioning. F. Financial Statements and Ratios 35. Balance Sheets. ICICI Bank’s asset size grew significantly from Rs734 billion in 2001 to Rs2,514 billion in 2006, representing a compound annual growth rate (CAGR) of 28% during this period. This growth was funded primarily by a significant increase in retail deposits (CAGR of 51%) and a matching increase in equity through a public offer in April 2004 and a combination of public offer with an American Depository Shares (ADS) issue in December 2005. The asset growth was driven by opportunities in retail lending, which registered a CAGR of 86% (Appendix 5, Table A5.1). 36. Income Statements. ICICI Bank’s after-tax profit increased consistently, registering a CAGR of 59% during 2002–2006. This growth was partly aided by increased interest income (CAGR of 59%), but had even more to do with increased income from fee-based activity (CAGR of 90%). The net interest margin declined during 2001–2003, (from 3.6% to 1.4%), but increased thereafter every year and touched 2.4% by 2005, which was maintained in 2006 (Appendix 5, Table A5.2). 37. Cash-Flow Statements. Net cash generated from profits increased consistently from Rs3 billion in 2002 to Rs22 billion in 2006. Liabilities raised through commercial banking operations, primarily in the form of public deposits, increased significantly, leaving a consistent surplus, albeit with a declining trend. Cash flow from issue of share capital was more than matched by investment in securities, primarily for meeting statutory liquidity ratio of 25% as prescribed by RBI (Appendix 5, Table A5.3). 38. Key Ratios. ICICI Bank consistently enjoyed a capital adequacy ratio above the regulatory minimum of 9% during 2001-2006, with a capital adequacy ratio of 13.35% in 2006. Its return on average assets was in the range of 1.1%–1.4% during 2001-2006, and was 1.3% for 2006. Return on equity increased from 13% in 2001 to 21.8% in 2004, but dropped to 10.4% in 2006 on an expanded equity base, following the public offers. ICICI Bank’s debt–equity ratio was satisfactory at 3.76 for 2006 (Appendix 5, Table 5.4).

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G. Covenants 39. A statement describing the status of compliance of covenants is in Appendix 6. ICICI Bank is generally in compliance with the covenants subject to the following observations. ICICI Bank did not set up a revolving fund mechanism to plough back for project purposes, surplus from prepayments of the subloan (footnote 18) as per the Loan Agreement (Section 2.08). This was due to lack of eligible subprojects. Although the covenanted financial ratios were within the stipulated threshold, ICICI Bank often delayed submission of auditors report. ICICI Bank delayed demonstrating compliance with safeguard covenants, and delayed adopting an environmental and social management system. It provided a benefit monitoring report toward the end of the project period, but could not provide accurate responses to specific financial and operational information on the subprojects at the time of preparation of the project completion report. ICICI Bank submitted a benefit monitoring and evaluation (BME) study in May 2006 but did not require the subborrowers to establish BME systems, as required. H. Performance of the Asian Development Bank 40. During implementation, ADB finalized the project administration memorandum and developed a subloan application format in a timely manner, which facilitated ICICI Bank's ability to submit the needed information on subprojects for assistance. ADB rightly acknowledged the lack of bankable subprojects, and responded by facilitating an increase in the share of industrial waste management subprojects targeted under UEIF. The PCR Mission justified this minor change in scope in light of one of the expected project impacts—improvement of the urban environment. 41. ADB applied its guidelines on procurement, disbursement, and safeguards while processing subprojects and withdrawal applications. It undertook timely follow-up actions through review missions and tri-partite and bipartite review meetings to maximize loan utilization. There were six missions post-loan approval: one inception mission, four review missions, and one midterm review mission. In addition, there were regular tripartite review meetings among the ADB, Department of Economic Affairs (DEA), and DFIs to review the performance of commitments and disbursements and to suggest steps for improved utilization. ICICI Bank considered ADB’s responses to be proactive and timely; ADB conducted adequate due diligence on covenants compliance, particularly during the latter phase of administration, when it undertook due diligence to ensure the conformity of safeguard aspects with the Loan Agreement.

III. EVALUATION

A. Loan Appraisal

1. Distribution of Subloans

42. There were differences between the intended and actual distribution of subloans. The RRP listed a long pipeline of likely subprojects in the identified priority subsectors, such as water supply, sanitation, and solid waste management. But it turned out that most of the identified subprojects did not materialize, leading to the question of credibility of the subproject pipeline outlined in the RRP. ICICI Bank found most ULBs having unacceptable credit risks; the few that were acceptable found alternate, cheaper domestic funds. The main reasons for the differences between intended and actual distribution of subloans include (i) slow pace of

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enabling institutional and policy reforms; (ii) external conditions in the financial sector that presented more attractive funding opportunities in other sectors, such as retail lending, as opposed to the more risky urban infrastructure projects for ICICI Bank; and (iii) the downward trend of domestic interest rates, which made the interest rates offered under the UEIF less attractive. 43. The UEIF aimed to support commercialization and decentralization in urban infrastructure development as well as to enhance access of the urban poor to improved services. To fulfill these multiple outcomes, a different project design might have been more suitable. Perhaps a sector development program, aimed at policy and institutional reforms and including a capacity building component, could have been more successful. 44. The actual distribution of subloans was weighted more toward industrial subprojects than was intended in the project design. This made it less likely that the project outcome would be achieved. UEIF's third objective—enhanced access to urban services for the poor—was designed to be achieved through HUDCO, which had some experience of lending through MFIs; however, its withdrawal from UEIF transferred the burden of achieving this purpose to the only remaining Borrower, ICICI Bank, which had little capacity for meeting this purpose. Furthermore, IDFC and HUDCO, which have a special mandate to focus on infrastructure, opted out of the UEIF. Their continued involvement might have facilitated better achievement of the outcome. 2. Covenants 45. ICICI Bank complied with most of the covenants (para. 39). The few areas wanting for better or more timely compliance cannot be favorably affected by any modification or waiver. 3. Quality of Appraisal 46. The PPTA analysis of the issues and constraints in the sector was appropriate. However, when the key components needed for institutional strengthening and credit enhancement proposed under the PPTA were dropped, the potential to achieve the outcomes was lost. Inclusion of a TA grant with a different scope at pre-appraisal stage for MFIs did not synchronize with the background analysis, nor did it increase the chances of realizing the UEIF outcome. There was inadequate justification for attempting to fast-track the project processing by upgrading the pre-appraisal mission to an appraisal mission. 47. Loan appraisal inadequately assessed the subproject pipeline, failed to anticipate the risk that identified borrowers would not participate in the UEIF, and ignored the absence of political economy for implementing the identified reform measures. The targeted project impact was consistent with and relevant to the country’s and ADB’s development objectives and sector strategy. However, the project outputs contributed to achieving project impact but not project outcomes. The chosen modality, while ahead of its time, was inappropriate. Effective reform actions and sector development assistance should have been front-loaded—i.e., put in place before adoption of the DFI modality. The processing team could not adequately assess the changes in the financial sector that led to falling interest rates, nor the resultant constraints these changes would place on the effective use of long-term funds.26 ICICI Bank also did not adequately assess the changing environment that eventually led to its conversion into a commercial bank. Thus the design did not adopt the correct solution for the identified problem. 26 For instance, one of the reasons for cancellation of the loans by IDFC was that the prevailing domestic interest rate

in rupees was lower than the swapped cost of foreign currency funds from ADB under the Project.

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B. Implementation 48. The weak project design hindered its successful implementation. The utilization ratio of the loan, at 35%, was rather low. A minor change in scope to allow a predominant share of industrial waste management subprojects, contributed to the achievement of the project goal but not to the achievement of project outcomes. The shift in ICICI Bank’s lending policies toward commercial opportunities in the retail markets and away from development banking hindered the successful implementation of UEIF. ICICI Bank's new lending policies made sustainable future interventions unlikely, thus it could not ensure the creation of a revolving fund (footnote17) to finance the project fulfilling the UEIF purposes. This indicates unsustainability of even the limited project outcomes. 49. ICICI Bank's periodic progress reports could have been improved in terms of precision of quantitative and qualitative information on subproject costs, construction progress, and safeguard compliance; difficulties faced by ICICI Bank in developing a robust pipeline; and progress made by ICICI Bank in adopting environmental and social management systems. 50. The UEIF envisaged the establishment of a project steering committee by the DEA within 6 months of loan effectiveness.27 While this committee was constituted and met on one occasion before the loan became effective, there is no evidence of any subsequent meetings. However, there were tripartite portfolio review meetings among ADB, the DEA, and the DFIs to review the performance of commitments and disbursements. Unfortunately, such meetings by nature rarely focus on reform, capacity building, and other fundamental issues that might have led to a more effective subproject pipeline.

IV. ASSESSMENT AND RECOMMENDATIONS A. Evaluation Criteria

51. The four core criteria and subcriteria adopted for assessment are as follows:

(i) Relevance: (a) adequacy of the assessment of problems, opportunities, and lessons at the time of approval; (b) consistency of UEIF’s impact, outcome, and outputs with the Government’s development strategy (at approval and at present), ADB’s strategy and program for the country, and ADB’s strategic objectives; and (c) appropriateness of choice of modality and instrument.

(ii) Effectiveness: (a) loan utilization and catalytic role of the loans; (b) achievement

of the following three outcomes stated in the project framework (1) support commercialization of urban and environmental infrastructure development, financing, and operation and maintenance, (2) support decentralization and

27 Comprising an officer not below the rank of joint secretary serving as the chairperson, and senior staff from

Ministry of Finance, Ministry of Urban Development, Ministry of Urban Employment and Poverty Alleviation, IDFC, ICICI Bank, HUDCO as well as ADB staff as members. The major functions of the steering committee was to coordinate the following issues among government agencies (at the national, state and local level), financial institutions, and ICICI Bank: (i) policy and regulatory issues that may arise from structuring and implementing commercially viable subprojects; (ii) social and environmental issues that may arise from subproject preparation and implementation; (iii) issues related to coordinating the Project with projects supported by other external funding agencies; and (iv) issues related to facilitating the integration of MFIs with urban infrastructure development.

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implementation of the 74th CAA, and (3) enhanced access of the urban poor to improved urban environment and urban services – assessed by increased financing to urban poor by MFIs; (c) subproject contributions and their spillover (or demonstration) effects to the above achievements.

(iii) Efficiency: (a) subloans’ repayment performance; (b) subprojects’ contributions to

productivity gains and innovations and resource conservation; and (c) subproject spillover (or demonstration) effects to improved efficiency of relevant infrastructure and industrial projects.

(iv) Sustainability: (a) appropriateness of the policy and institutional environment to maintain the achievement of the UEIF's outcomes; and (b) conditions and utilization ratio of the facilities funded under the UEIF and the financial viability of the subborrowers.

B. Relevance 52. The UEIF is rated partly relevant. The expected outcomes of UEIF were consistent with the Government’s development priority and ADB’s country strategy, therefore worth pursuing. However, the appraisal had the following inadequacies: insufficient linkage among outputs, outcome, and impact; insufficient consideration of lessons learned from ongoing urban sector projects in the country; an ambitious and unrealistic subproject pipeline; and inadequate assessment of urban sector reform process. It turned out that most ULBs were not prepared for either commercial borrowing or decentralized project execution. The project design failed to address this constraint, and the choice of DFI modality was inappropriate. C. Effectiveness in Achieving Outcome 53. The UEIF is rated ineffective. The utilization was poor at 34%, of which only two subprojects (which collectively used less than 3% of the loan amount—or 7% of the net utilized loan amount) contributed significantly to outcomes. Notwithstanding poor utilization, the loan resulted in a leverage of more than four times (para. 18). AMC demonstrated the success of commercialization, and TMC implemented some of the reform actions. As there are no other urban infrastructure projects in ICICI Bank’s portfolio, these subprojects had little spillover effect. ICICI Bank indicated that the UEIF did not influence its credit allocation. D. Efficiency in Achieving Outcome and Outputs 54. The UEIF is rated less efficient. The timely repayment of most obligations, including prepayment in some cases, indicates good repayment performance. Though the economic internal rate of return was not calculated, it is assessed that the subprojects contributed to productivity gains and efficiency. The water and solid waste subprojects led to improved service quality, while the industrial subprojects led to reduced operational costs and increased waste recycling. The lower efficiency rating is due to the fact that the share of these subprojects in the loan was small and marginal in the context of the economy. These subprojects thus had little demonstration or spillover effects.

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E. Preliminary Assessment of Sustainability 55. The UEIF is less likely to be sustainable. The subprojects themselves are financially viable, given their physical and financial performance, However, ICICI Bank has not recycled the loan funds through a revolving fund because of the lack of eligible subprojects. Thus the sustainability of UEIF remains highly questionable. F. Impact 56. All of the subprojects had positive impacts—mainly in the form of improved urban environment or augmented civic services. All of the subprojects were designed to improve the environment through waste recovery, waste management, reduction in pollutant emissions, or, in one case, augmentation of water supply. While their benefits are unquantifiable because of a lack of quantitative data, it has been concluded that the subprojects contributed to an improved environment, especially as they were implemented as per design and on schedule. The solid waste management subproject enabled better compliance with national regulations. G. Overall Assessment 57. Overall, the UEIF is rated as unsuccessful, as shown in the Table below. This overall rating reflects weighted averages of the individual ratings for four criteria: relevance (20%), effectiveness (30%), efficiency (30%), and sustainability (20%). Individual criterion ratings are in whole numbers from 0 to 3, in increasing order of project performance.

Table 1: Overall Performance Assessment

Criteria Weight (%) Rating Value Weighted rating Relevance 20 1 0.2 Effectiveness 30 0 0.0 Efficiency 30 1 0.3 Sustainability 20 1 0.2

Overall 0.7 Source: Asian Development Bank, Project Completion Review Mission. H. Lessons 58. The PPTA highlighted the ULBs' lack of capacity to prepare commercially viable projects. Therefore, the initial project design included a component to create a project support facility. However, this component was subsequently dropped by the appraisal mission because of insufficient preparation. More in-depth and careful assessment of the PPTA outputs could have led the project appraisal team to wait to submit the UEIF to the Board for approval until the envisaged component was formulated. The evidence suggested that ADB did not adequately consider the PPTA's outputs, and perhaps was more focused on project approval than on achieving results.

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59. The absence of an enabling urban sector policy and institutional framework adversely affected the subproject pipeline. In reality, despite the amendment to the State Municipal Acts28 and the implementation of some of the provisions of 74th CAA (allowing for greater community participation, private sector participation and decentralization), municipalities were not sufficiently empowered and face several constraints. In several states, municipalities are still insufficiently involved in the decision making process. Other problems related to delays in funds transfer to municipalities and poor recovery from various tax and non-tax resources. Reforms in the urban infrastructure sector were slower than envisaged by the processing team. 60. Some urban infrastructure subsectors, such as urban transport in large metropolitan areas, could provide commercialization opportunities in the future. Commercialization of more basic urban infrastructure, such as water supply and sanitation, could potentially occur through public–private partnerships. But for this to happen, closer attention should be paid to ensuring that a suitable institutional framework is in place, strengthening ULBs' capacity, and structuring projects effectively. 61. Under the UEIF, the ADB loan to ICICI Bank was denominated in dollars. However, targeted ULBs' revenues were in rupees; therefore, six of the seven subloans were denominated in rupees. While this was not the case for the UEIF, such a currency mismatch may affect the usefulness of a credit line—depending on the availability of hedging instruments and the asset–liability management capacity of financial intermediaries. The local-currency loan product, newly introduced by ADB under the Innovation and Efficiency Initiative reforms29 would offer a solution to avoid such currency mismatches. 62. Development of a well-functioning debt market remains a challenge in India. The term money markets have insufficient depth and limited instruments to establish reliable short-term pricing benchmarks. Likewise, the government securities market lacks the liquidity to establish reliable pricing benchmarks for other long-term instruments. Moreover, development of the corporate-debt market is hampered by cumbersome procedures for public issuance of securities; a narrow investor base (this is partly due to remaining obstacles to institutional investing); and a lack of innovative debt, derivatives, and securitization instruments, among other reasons.30 ADB funds translated into higher costs than the comparable loans from domestic financial institutions available at lower interest rates, albeit for shorter durations. This was due to a lack of domestic currency hedging instruments. Thus, potential benefits of ADB’s longer-tenure loans were not fully realized by ICICI Bank and its subborrowers. I. Recommendations 63. The FIL modality should be pursued based on a thorough assessment of the enabling environment in the targeted sector or subsector. The credit market conditions and market risks should be also properly assessed during the FIL appraisal. In considering an FIL to support

28 The Constitution (74th Amendment) Act, 1992 provisions, provide a basis for the State Legislatures to guide the

state governments in the assignment of various responsibilities to municipalities and to strengthen municipal governance. Accordingly, several state governments have amended their Municipal Acts/Laws/Legislations so as to bring these in conformity with the Constitutional Provisions.

29 Launched in November 2003, the Innovation and Efficiency Initiative (IEI) is a central part of ADB’s reform agenda. Across its priority areas, the IEI aims to improve ADB’s business model, align its programs more closely with client priorities, reduce bottlenecks in processing development assistance, and expand its product offerings.

30 The World Bank. 2006. Developing India’s Corporate Bond Market. Washington, DC.

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commercialization of the urban sector, adequate assessment of ULBs—especially of their institutional and financial capacity—is necessary. Establishing credible subproject pipelines based on these at-entry assessments should be a prerequisite to processing FILs.

18 Appendix 1

PROJECT FRAMEWORK

Design Summary

Goal Improve urban environment and quality of life of India's urban residents.

Enhance competitiveness of the urban centers for investments.

Project Targets

Wider coverage of safe water supply and sanitation, cleaner urban environment, better health, more productive time, and higher income. More foreign and domestic direct investment in the urban centers; higher employment rates and incomes; more fiscal revenues for local governments.

Monitoring Mechanisms

Central, state, and local government statistics and reports; studies or reports of bilateral and multilateral agencies and nongovemment organizations. Government statistics, project completion reports.

Assumptions/ Risks

Continued overall economic growth.

Continued economic reforms and enhanced confidence of foreign and domestic investors; further improvement in legal and policy environment.

Objectives

Support commercialization of urban and environmental infrastructure development, financing, and operation and maintenance.

Support decentralization and implementation of the Constitution (Seventy Fourth Amendment) Act, 1992.

Enhanced access of the urban poor to improved urban environment and urban services.

Increased financial flows to the sector; more financial institutions entering into urban infrastructure financing; sustainable operations of financial institutions in the sector.

Improved project cost recovery, expanded financial revenues, and enhanced public monitoring in municipal governments selected under the Project.

Increased financing to the urban poor by microfinance institutions (MFIs) for improving urban environment.

Government statistics, project progress reports, project completion reports, financial statements of financial institutions.

Financial statements of the municipal governments; project completion reports.

Surveys and financial reports of the MFIs.

Overall economic stability and growth; continued improvement in legal and regulatory framework; Borrowers will be firm on commercial viability of project.

The municipal governments will have the political will and technical capabilities to continue the necessary reforms.

MFIs will be able to acquire the skills for appraising urban infrastructure projects and longer-term funds.

Components

Three bank loans: $90 million to Housing and Urban Development Corporation Limited, $80 million to ICICI limited, and $30 million to Infrastructure Development Finance Company Limited.

Technical assistance (TA) has three parts: (i) integrating MFIs with urban infrastructure development; (ii) building capacities of selected MFIs for financing urban infrastructure projects; (iii) pilot projects.

Leverage additional $300 million private or institutional funds for urban and environmental infrastructure development. Enable better matching of assets and liabilities of financial intermediaries.

Increasing the number of MFIs providing urban infrastructure finance; increasing the number of urban poor benefiting from such finance.

Financing under the bank loans will be limited to 40 percent of the total project cost, therefore obliging the borrowers to cofinance the subprojects. Financial statements of the borrowers.

Loan and TA review missions; project completion reports.

Innovative financial arrangements; state and municipal government support; appropriate hedging against foreign-exchange risks; the on-lending rate is competitive.

Competency of consultants; implementation of TA recommendations by MFIs; enlarged funding sources of MFIs.

Appendix 1 19

Design Summary Activities

Selecting and lending to municipal bodies, private project sponsors, and MFIs for eligible urban and environmental infrastructure projects.

Recruiting consultants for TA study, including capacity building for MFIs.

Conducting policy dialogue with state and local governments and recommending reforms.

Project Targets

Commercial viability of subprojects, private sector and local community participation, legal and policy reforms including cost recovery.

Transferring expertise to the MFIs.

Create enabling environment for participation by private sector and market forces.

Monitoring Mechanisms

Project progress reports, loan review missions, project completion reports.

TA and loan review missions, project completion reports.

Project progress reports, loan review missions, project completion reports.

Assumptions/ Risks

Political interference in project selection and appraisal.

Willingness of more MFIs to move into urban infrastructure finance.

Borrowers' policy advisory functions will be carried out effective.

Source: ADB. 1999. Report and Recommendation of the President to the Board of Directors on a Proposed Loan and Technical Assistance Grant for the Urban and Environmental Infrastructure Facility Project. Manila.

IN.197-03 1 September 2003

TECHNICAL ASSISTANCE COMPLETION REPORT

The following Technical Assistance Completion Report is attached for

information:

Strengthening Microfinance Institutions for Urban and Environmental Infrastructure Finance (India) (TA 3344-IND)

B O A R D O F

D I R E C T O R S A S I A N D E V E L O P M E N T B A N K

Particulars AMC TMC SP4 SP2 SP3 SP1 SP5 TotalDate of ADB subloan approval 12-Dec-00 18-Mar-02 23-Aug-02 05-Aug-03 08-Dec-03 08-Dec-03 23-Feb-04Total subloan amount approved by ADB ($ million) 1.46 5.44 8.26 4.75 9.43 5.49 5.53 40.36Total amount disbursed by ADB ($ million) 0.73 1.26 8.26 4.89 1.61 5.28 5.33 27.35Total amount disbursed by ICICI Bank to subborrowers (Rs million) 42.37 255.25 773.00 250.00 700.00 250.00 250.00 2,520.62Total amount disbursed by ICICI to subborrowers ($ million) 0.89 5.54 16.12 5.58 15.69 5.62 5.46 54.90Interest rate at approval (%) 14.55 12.75 11.97 10.20 12.73 11.90 LIBOR+2.8%Interest rate at PCR Mission (%) ─ 12.75 11.97 10.20 11.75 11.90 LIBOR+3%Maturity of the facility (including grace period), at approval of subloan 7 years 10 years 9 years 7.5 years 5 years 6.5 years 5.5 years

Form of debt Lease FinanceRupee Term

Loan Rupee Term

Loan Rupee Term

Loan Rupee Term

Loan Rupee Term

Loan Foreign Currency

Term LoanRepayment performance Prepaid Prepaid Regular Regular Prepaid Regular RegularOutstanding assistance at PCR Mission (Rs million) 30.00 0.00 200.00 91.67 0.00 156.29 189.90 667.86Project costa (Rs million) 169.90 558.90 990.00 547.77 1687.00 646.80 850.00 5,450.37Project costa ($ million) 3.59 12.12 20.64 12.23 37.82 14.51 18.55 119.47ADB share in project cost (%) 20 10 40 40 4 36 29 23Leverage of ADB loan (number of times) 4.94 9.59 2.50 2.50 23.49 2.75 3.48 4.37 ─ = not available, ADB =Asian Development Bank, AMC= Ahmedabad Municipal Corporation, Rs = rupees, SP= subproject, TMC= Thane Municipal Corporation.a Project cost is as estimated at approval except in case of TMC, which is as per progress report.Sources: Asian Development Bank Loan Financial Information Service and ICICI Bank.

OVERVIEW OF SUBLOAN

23 Appendix 3

24 Appendix 4

SUBPROJECT PROFILES A. Solid Waste Management Project of Ahmedabad Municipal Corporation 1. Company and Project Design 1. Ahmedabad Municipal Corporation (AMC) is an urban local body incorporated in 1950 engaged in providing civic services to a city with a population of 3.5 million (as of the 2001 India census). Its key activities include cleansing of streets and public places; collection, removal, treatment, and disposal of sewage; construction and maintenance of drainage works and water supply works; and other urban infrastructure services such as city roads, lighting, and markets. 2. The expected impact of the subproject was to reduce the environmental concerns and hygiene-related problems of open waste collection storage sites. The expected outcome of the subproject was to augment and upgrade AMC’s waste collection system while reducing the number of open waste storage sites, in accordance with the Municipal Solid Waste (Management and Handling) Rules 2001. This was to result in speedy collection and transportation of solid waste, thereby contributing to economic efficiency. 3. The total subproject cost was to be Rs169.9 million, comprising three components (i) equipment for secondary collection of solid waste (Rs93.9 million); (ii) an incineration plant (Rs6.0 million); and (iii) a fertilizer compost plant. The financial requirements for the first and second components were to be met by AMC’s equity (Rs30.2 million) and lease financing of Industrial Credit and Investment Corporation of India Limited (ICICI Ltd) (Rs69.7 million), while the build–own–operate arrangement was to be pursued for the fertilizer compost plant. The incineration plant component was subsequently excluded from the subproject and was contracted out to a private operator. 4. The secondary collection equipment was procured and commissioned in 2001. Equipment procured under leasing financing of ICICI Bank Limited (ICICI Bank) included 38 chassis, five dumper placers, 26 cap dumper placers, one wheel dozer, and nine skip lifters. In addition, AMC purchased more than 200 closed-body garbage containers (to replace open containers) that are placed at solid waste collection points. The compost plant was commissioned in 2000 as originally planned, while the contract for the incineration plant was finalized in 2003. AMC confirmed that there was no major cost overrun, and the subproject was implemented largely as per schedule.

2. Details of Subloan

5. In December 2000, ADB approved a subloan of $1.46 million. Subsequently, ICICI Bank reduced its assistance to the company to $0.89 million because of the subsequent exclusion of the incineration plant part, and ICICI Bank reduced the ADB reimbursement to $0.73 million. 6. The effective interest rate on the financial lease transaction was 14.55%. The lease was for a period of 7 years (with a 1-year grace period) with lease rentals payable on a monthly basis until November 2008. ICICI Bank reported that there has been no delay in repayment of the lease rental. The outstanding balance of the subloans is Rs30 million.

Appendix 4 25

3. Project Outcome and Impact 7. Presently in Ahmedabad there are 708 waste collection points, of which AMC has provided closed containers at 696 points. Moreover AMC has developed a fully mechanized transportation system that ensures “handling waste only once”, with 156 vehicles and machines deployed for transportation and handling of 2,100 tons of waste every day. This resulted in speedy collection and transportation of solid waste, thereby contributing to economic efficiency. AMC noted that Ahmedabad is one of the first cities in India to adopt such a comprehensive mechanized system of transporting solid waste. 8. To promote conversion of waste into organic manure, reduce the quantity of waste going to landfills, and help agricultural production, AMC partnered with a private company to process 500 metric tonnes (MT) of garbage daily, of which 150 MT of compost per day are processed by another company through a build–own–operate arrangement, as noted above. Based on this experience, AMC has partially privatized the secondary waste transportation system with two operators. At present, the two companies are responsible for 403 of the 708 waste collection points in Ahmedabad. In this way, the subproject has demonstrated how the commercialization of urban infrastructure development, financing, and operations and maintenance can be successful. This is a major achievement under the UEIF. 9. In line with the revised subproject plan, presently private contractors collect 1,500kg of biomedical waste (BMW) generated in 63 hospitals, clinics, and health care centers, as per the BMW rules.1 10. The observations above suggest that the subproject directly or indirectly contributed to improving the urban environment and improving the quality of life for urban residents. However, the PCR Mission could not obtain any quantitative data showing the magnitude of such contributions.

11. Based on the information provided by ICICI Bank and AMC, the Mission found no significant negative socioeconomic and environmental impacts associated with the subproject. AMC is progressively moving toward compliance with national rules and regulations for solid waste management. A planned 1,045-acre landfill site is a significant step in that direction.

12. As indicated in Table A4.1, AMC’s profitability has constantly improved over the last 6 financial years. However, the Project Completion Review (PCR) Mission could not obtain enough information to assess the subproject's contribution to this achievement.2 Also, the PCR Mission could not obtain any feedback from AMC on the financial implications of the recent decision by the Gujarat state government to abolish all octroi (tax levied by local municipal authorities on goods entering the area) across all municipal corporations in Gujarat, effective November 2007.

1 The Bio-Medical Waste (Management and Handling) Rules; 1998 are conferred by section 6, 8, 25 of the

Environment (Protection) Act, 1986 (29 of 1986). 2 The financial internal rate of return (FIRR) for this subproject was projected to be 18%; this calculation was based

on the assumption that cash flow from the conservancy tax covered only 64% of the capital investment and operating expenses; and the shortfall was to be recovered through revenues from general taxes.

26 Appendix 4

Table A4.1: Financial Performance of AMC (Rs million)

Item FY2007 FY2006 FY2005 FY2004 FY2003 FY2002Total Revenues 11,337 8,995 8,071 6,907 6,156 5,618Octroi 6,965 5,515 4,621 4,009 3,613 3,071Tax Income 2,427 2,009 1,738 1,368 1,212 1,216Other Income 1,945 1,471 1,713 1,529 1,331 1,332Total Expenses 7,123 6,224 6,056 5,626 5,819 5,595Establishment 3,105 2,658 2,467 2,453 2,377 2,352Administration and general 184 130 105 111 154 92Financial charges Grant and subsidy Others

8521,452

913

7571,3611,318

9641,3571,165

7991,243

930

9251,2671,098

7781,3241,094

Operating surplus / Deficit 4,214 2,771 2,015 1,280 338 23 Rs = rupees, FY = fiscal year. Source: ICICI Bank.

B. Augmented Water Distribution System of Thane Municipal Corporation

1. Company and Project Design

13. Thane Municipal Corporation (TMC) is an urban local body reconstituted from a municipal council to a municipal corporation in 1982. It is engaged in providing civic services to a city with a population of 1.45 million3 spread across an area of 152 square kilometers. Its activities include cleansing of streets and public places; collection, removal, treatment, and disposal of sewage; construction and maintenance of drainage works and water supply works; and other urban infrastructure services, such as city roads, lighting, and markets. In 2001 TMC decided to augment its water distribution network in two phases to meet rising demand, which was projected to increase from 280 million liters per day (MLD) to 366 MLD by 2011.

14. In 2002, ICICI Bank requested a subloan from ADB for investment in transmission mains, pure water sump, pumping facilities, storage reservoirs, and its distribution system covering the east and central zones. TMC informed the PCR Mission that the first phase of investment comprised water main, storage reservoirs, and distribution lines for 17 out of the 44 water districts; the second phase, covering the remaining 27 water districts, comprised augmentation and strengthening of the distribution system, including construction of elevated storage tanks. TMC informed the Mission that the subloan from ICICI Bank was used to fund the first phase. However, an earlier ADB review mission fielded 24–25 November 2005 had been informed that the subloan was used to finance the second phase. In this background, ICICI Bank clarified that the subloan was used to fund only the first phase, since the disbursement to TMC was made in 2002 and ADB funds were used to procure ductile iron pipe for distribution lines that were installed then.

15. The project comprised two phases: the first phase was completed in 2003 as per the planned schedule, while the second phase for strengthening the distribution system in the remaining water districts is ongoing and expected to be competed by 2008; the total cost for both phases was projected to be Rs1,480 million; the cost of the first phase was projected to be Rs662.6 million, to be funded by an ICICI Bank loan of Rs500 million and a state grant of Rs162.6 million.

3 The data is as at the subproject approval.

Appendix 4 27

2. Details of Subloan

16. In March 2002, ADB approved a subloan of $5.44 million and disbursed $1.26 million to ICICI Bank in March 2003. TMC availed Rs255 million out of the approved loan amount of Rs500 million from ICICI Bank from November 2001 to November 2002. ICICI Bank sought ADB reimbursements of Rs58 million ($1.265 million) under the Urban and Environmental Infrastructure Facility (UEIF); these were to go toward meeting the partial cost of the first phase.

17. The rupee-term loan carried an interest rate of 12.75%. Though the loan tenure was for 10 years, including a 1-year grace period, TMC prepaid the loan on 9 October 2003 to ICICI Bank, after obtaining refinance for the same from an Indian public sector bank at a lower rate of interest.

3. Project Outcome and Impact

18. TMC and ICICI Bank reported that the subproject funded by ICICI Bank was implemented on schedule and that TMC has enhanced its distribution capacity by 100 MLD from 250 MLD (before the subproject) to 380 MLD now.

Table A4.2: Actual Outcomes of AMC subproject Expected Outcomes Actual Outcomes Physical Outcome

(i) Percentage of coverage in terms of water supply – to increase from 40% to 60%

Not quantified; however, an increase in distribution capacity from 250 MLD to 380 MLD reported.

(ii) Unaccounted for water – to reduce from 32% to 28%.

Reduction in leakages from 40% to 10-18%,

(iii) Water quality – good TMC does not have quantitative data. But it is currently in the process of conducting quality audit.

(iv) Hours of water supplied each day – 3 hours

Not quantified. TMC reported improvements in some pockets of the city.

(v) Pressure of water flow Increase reported by ICICI Bank’s BME report (vi) Cost of pumping Reduction reported by ICICI Bank’s BME report (vii) Maintenance cost Reduction reported by ICICI Bank’s BME report

Reforms (viii) Accounting system – single entry

cash basis Implemented double entry accounting system, effective 1 April 2004.

(ix) Water tariff Last revised in 2002, which provided for an annual increase of 15% every year. Next revision is due shortly.

MLD= million liters per day. Source: ICICI Bank’s Benefit Monitoring and Evaluation (BME) Report, May 2006 and TMC’s statements during interview with PCR Mission. In May 2006 ICICI Bank forwarded to ADB, a report of a study undertaken by it through an independent consultant to record the outputs and outcomes of the subprojects assisted under the UEIF.

19. The above results demonstrate that the outputs and outcomes have been substantially achieved, with an increase in the water supply, an increase in water-flow pressure at the receiving end, a reduction in pumping maintenance costs, and a reduction in leakages from 40% to 10–18%. It was further reported that TMC used ductile iron pipes in its transmission system, which, because of their high strength, ductility, and impact resistance, reportedly reduced maintenance costs.

28 Appendix 4

20. TMC stated that its revenues have been increasing every year, and as a result it has been able to fund its operations and maintenance expenses, which are not funded by the commercial banking system. However, no quantitative information was provided to verify these statements. TMC has started implementing reforms, such as introduction of double-entry accounting and a phased increase of user charges. The government of Maharashtra has implemented some of the decentralization steps envisaged under the Constitution (Seventy Fourth Amendment) Act, 1992 (74th CAA), thus empowering TMC to undertake some of the small development projects. Following the announcement of the government’s Jawaharlal Nehru National Urban Renewal Mission, TMC has formulated its city development plan and has prepared six detailed project reports for water supply, sanitation, solid waste management, transport system, roads, and basic needs (comprising housing for the slum dwellers). Together these projects are projected to cost Rs6,530 million. It is expected that these steps will ensure the sustainability of the subproject outputs and outcomes.

Item 2001 2002 2003 2004 2005 2006Net Worth 83,227 65,986 72,833 83,606 129,000 225,560 Equity capital 7,848 6,130 6,127 6,164 7,368 8,898 Preference share capital 3,500 3,500 3,500 3,500 3,500 3,500 Reserves and surplus 71,879 56,355 63,207 73,942 118,132 213,162 Deposits ─ 320,851 481,693 681,086 998,188 1,650,832 Borrowings 598,350 492,187 343,024 307,402 335,445 385,219 Borrowings in India from Reserve Bank of India, other banks 497,341 419,428 284,107 229,661 198,740 169,609 and institutions, bonds and debenturesBorrowings outside India 101,008 72,759 58,917 77,741 136,705 215,610 From multilateral/bilateral credit agencies 21,473 25,214 25,418 24,404 24,949 23,821 From international banks, institutions, and consortiums 52,226 29,348 27,948 35,112 80,042 123,777 Bonds and notes 27,310 18,198 5,551 18,226 31,714 68,013 Current Liabilities and Provisions 52,561 162,076 170,569 180,195 213,962 252,279 Total Liabilities 734,137 1,041,099 1,068,120 1,252,289 1,676,594 2,513,890

Fixed Assets including Leased Assets (net) 51,104 42,393 40,607 40,564 40,380 39,807 Other Assets 3,144 41,583 75,205 78,634 87,989 126,575 Investments (net of provisions) 111,516 358,911 354,623 427,429 504,874 715,474 Government and other approved securities ─ ─ 255,830 299,780 344,820 510,740 Debentures and bonds ─ ─ 56,900 55,490 28,540 18,040 Shares ─ ─ 16,420 16,840 19,150 20,580 Others ─ ─ 25,473 55,319 112,364 166,114 Advances (net) 492,548 470,349 532,794 620,955 914,052 1,461,631 Current Assets 75,825 127,863 64,890 84,706 129,300 170,402 Cash and balances with Reserve Bank of India ─ 17,745 48,861 54,080 63,449 89,344 Balances with banks and money at call and short notice ─ 110,119 16,029 30,626 65,851 81,059 Total Assets 734,137 1,041,099 1,068,120 1,252,289 1,676,594 2,513,890 ─ = not available, Rs = rupees.Sources: ICICI Bank annual reports.

FINANCIAL STATEMENTS OF ICICI BANKTable A5.1: Balance Sheet

(Rs million)

Appendix 5 29

Item 2001 2002 2003 2004 2005 2006Income 92,981 27,266 125,269 119,590 128,260 187,676 Interest Income 60,579 21,519 93,681 88,940 94,099 137,845 Investment Income (revaluation and/or sale of investments) 13,984 2,911 4,924 12,246 5,460 6,963 Non-Interest Income (commission, exchange and 7,777 2,671 8,020 12,644 22,356 34,750

brokerage, and foreign exchange transactions)Income from Subsidiary Companies and/or Joint Ventures 1,081 0 1,094 1,262 1,881 3,387 Other Income (including lease income and sale of assets) 9,560 165 17,549 4,497 4,464 4,731 Expenditure 83,233 23,727 112,428 95,197 97,085 150,472 Interest and Other Expenses on Borrowing 64,954 15,589 79,440 70,152 65,709 95,974 Operating Expenses (employee and others) 4,064 5,585 15,057 20,318 27,088 38,557 Provisions and Contingencies (excluding Taxes) 14,215 2,553 17,931 4,727 4,288 15,941 Profit before Depreciation and Tax 9,747 3,539 12,841 24,393 31,176 37,204 Depreciation 3,975 641 5,059 5,394 5,904 6,238 Profit before Tax 5,773 2,898 7,781 18,998 25,272 30,966 Provision for Tax (Income Tax and Wealth Tax) 1,224 315 (4,280) 2,627 5,220 5,565 Profit after Tax 4,548 2,583 12,062 16,371 20,052 25,401 Proposed Dividends (equity + preference) including 4,937 486 5,187 6,138 7,231 8,658

Corporate Dividend Tax ─ = not available, ( ) = negative, Rs = rupees.Sources: ICICI Bank annual reports.

Table A5.2: Profit and Loss Account (Rs million)

30 A

ppendix 5

Table A5.3: Cash Flow (Rs million)

Item 2002 2003 2004 2005 2006Cash flow from operating activitiesNet profit before taxes 2,898 7,804 19,022 25,272 30,966 Adjustments for:Depreciation and amortization 484 8,154 5,298 14,841 17,323 Provisions 2,710 14,814 4,799 (1,128) 8,174 Income from subsidiaries 0 (1,094) (1,262) (1,881) (3,387) (Profit)/ Loss on sale of fixed assets 1 65 32 21 (71) Subtotal 3,194 21,938 8,867 11,853 22,039 Adjustments for:(Increase)/ Decrease in investments (153,128) 55,305 (63,610) (43,134) (141,019) (Increase)/ Decrease in advances 23,033 (74,579) (91,993) (287,950) (552,113) Increase/ (Decrease) in borrowings (14,704) (36,520) (837) 54,169 65,476 Increase/ (Decrease) in deposits 157,069 160,842 199,393 317,102 652,644 (Increase)/ Decrease in other assets (5,071) (24,500) 2,451 (20,735) (36,704) Increase/ (Decrease) in other liabilities and provisions 10,395 3,267 14,154 43,227 13,861 Subtotal 17,595 83,815 59,559 62,679 2,145 Refund/(Payments) of direct taxes (1,275) (6,438) (8,531) (8,487) (8,620) Net cash generated from operating activities 22,412 107,119 78,917 91,317 46,529

Cash flow from investing activitiesInvestments in subsidiaries and/or joint ventures 0 (1,739) (6,415) (6,430) (8,509) Income received on such investments 0 1,094 1,262 1,881 3,387 Purchase of fixed assets (244) (4,517) (5,763) (3,795) (5,474) Proceeds from sale of fixed assets 7 102 370 263 943 (Purchase)/ Sale of held to maturity securities 0 (52,372) (2,684) (26,370) (69,286) Net cash generated from investing activities (237) (57,432) (13,230) (34,452) (78,940)

Cash flow from financing activitiesProceeds from issue of share capital (other than ESOPs) 0 0 539 31,923 79,039 Amount received on exercise of stock options 0 0 0 650 774

Net proceeds/ (repayment) of bonds (including subordinated debt) 2,285 (112,661) (41,222) (38,617) 870 Dividend and Dividend Tax paid (971) 0 (5,188) (6,227) (7,174) Net cash generated from financing activities 1,314 (112,661) (45,870) (12,271) 73,509 Cash and cash equivalents on amalgamation 68,437 0 0 0 0Effect of exchange fluctuation on translation reserve 0 0 0 4Net increase/ (decrease) in cash and cash equivalents 91,927 (62,974) 19,816 44,593 41,103 Opening cash and cash equivalents at beginning of year 0 91,927 28,953 48,769 93,362

Closing cash and cash equivalents at end of year 91,927 28,953 48,769 93,362 134,465 ─ = not available, ( ) = negative, Rs = rupees.Sources: ICICI Bank annual reports.

Appendix 5 31

Table A5.4: Key Ratios and Performance Indicators (Rs million, unless otherwise specified)

Item 2001 2002 2003 2004 2005 2006Capital Adequacy Ratio (%) 11.57 11.44 11.10 10.36 11.78 13.35Debt Equity Ratio (%) 5.73 4.28 4.28 7.50 5.35 3.76Earnings per Share (Rs) 8.13 11.61 19.68 26.66 27.60 32.50Net Interest Margin (%) 3.55 2.67 1.40 1.80 2.40 2.40Interest Spread (%) 2.90 2.20 1.30 1.90 2.30 2.20Number of Employees ─ 7,700 10,600 13,609 18,000 25,384

Growth in Advances (net) (%) ─ (5) 12 15 38 46Growth in Retail Advances (%) ─ 116 85 54 52 48Growth in Infrastructure Advances (%) ─ 28.11 (3.26) 1.60 (65.67) 5.94Share of Retail Loan Portfolio In Total Loan Portfolio (%) 3.20 9.40 22.80 31.90 60.90 62.90Share of Infrastructure Lending Portfolio in Total Loan Portfolio (%) 21.90 22.70 21.30 17.40 9.90 6.60Nonperforming Assets (NPAs)Gross NPA ─ 53.25 58.39 40.14 34.32 22.68Net NPA ─ 27.21 31.51 20.37 19.83 10.75Net Customer Assets ─ 575.26 640.51 710.02 978.94 1520.07% of Net NPA to customer assets ─ 4.73 4.92 2.87 2.03 0.71 ─ = not available, ( ) = negative, Rs = rupees.Sources: ICICI Bank annual reports.

32 Appendix 5

STATUS OF COMPLIANCE WITH LOAN COVENANTS

Covenant Reference inLoan

Agreement

Status of Compliance

1. Except as the Bank and the Borrower may otherwise agree, if a Subloan or any part thereof shall be repaid to the Borrower in advance of maturity by a Subborrower, or if a Subloan or any part thereof shall be sold, transferred, assigned or otherwise disposed of by the Borrower, the Borrower may utilize the proceeds received from the sale, transfer, assignment or other disposition to provide Subloans to Subborrowers for Subprojects on same terms and conditions provided under this Agreement.

Section 2.08 Not Complied due to lack of eligible subprojects.

2. Except as the Bank may otherwise agree, and subject to Section 3.02 (c), the proceeds of each part of the Loan shall be used only for making or facilitating a Subloan to a Subborrower in respect of which such part of the Loan was withdrawn from the Loan Account and shall be applied exclusively to, or in respect of, the cost of goods, services and civil works required to carry out the Subproject in respect of which such part of the Loan was withdrawn.

Section 3.02 (b) Complied.

3. Except as the Bank may otherwise agree, all goods, services and civil works to be financed out of, or through the use of, the proceeds of the Loan shall be procured in accordance with the provisions of Schedule 3.

Section 3.02 (c) ICICI Bank confirmed that the subborrowers procured the goods and services by following the proper procedures. Complied.

4. Each Subloan shall carry interest at an appropriate rate and shall be made on terms whereby, the Borrower shall obtain, by a written agreement with, or on behalf of, the Subborrower rights adequate to protect the interest of the Borrower.

Section 4.01 The Loan Agreement between subborrower and ICICI Bank documents the interest rate charged. Complied.

5. Without limiting the generality of Section 4.01, and in Section 4.02

33 Appendix 6

Covenant Reference in Loan

Agreement

Status of Compliance

addition to any other provisions which a prudent lender would request, each Subloan agreement shall include provisions to the effect that: (a) the Subborrower shall carry out and operate the

Subproject with due diligence and efficiency and in accordance with sound administrative, financial, technical, environmental, social and business practices, including maintenance of adequate accounts and records;

(b) the proceeds of the Loan shall be used only for, or to effect, procurement in member countries of the Bank, in accordance with procedures acceptable to the Bank, of goods produced in, and services supplied from, such countries;

(c) the goods, services and civil works to be financed out of or through the proceeds of the Loan shall be used exclusively in the carrying out of the sub-project.

(d) the Bank and the Borrower shall each have the right to inspect such goods, the Subborrower, the Subproject, and any relevant records and documents;

(e) the Subborrower shall take out and maintain with responsible insurers, insurance against such risks and in such amounts as shall be consistent with sound business practices, and, without any limitation upon the foregoing, such insurance shall cover hazards incident to the acquisition, transportation and delivery of goods financed out of the proceeds of the Loan to the place of use or installation, and for such insurance any indemnity shall be payable in a currency freely usable to replace or repair such

ICICI Bank ensures that these requirements are covered under various covenants of the loan agreement and the general conditions that form a part of the loan agreement. Complied. Complied. Complied. Complied. Complied.

34 Appendix 6

Covenant Reference in Loan

Agreement

Status of Compliance

goods; (f) the Bank and the Borrower shall each be entitled to

obtain all such information as each shall reasonably request relating to each Subloan, the goods and services financed out of or through the proceeds of the Loan, the Subproject, the Borrower and other related matters;

(g) the Borrower shall be entitled to suspend or terminate further access by the Subborrower to perform its obligations under its agreement with the Borrower;

(h) Financing arrangements to be entered into between the Subborrower and any co-financier for the purposes of the Subproject shall be on such terms and conditions satisfactory to the Borrower.

(i) The Subproject shall meet the social and environmental requirements of the Bank as well as those of the Guarantor and for Subprojects requiring significant resettlement, a resettlement plan following the Bank’s guidelines under the Handbook on Resettlement, 1998 shall be prepared and submitted to the Bank for approval prior to making a Sub loan.

Complied. Complied. Complied. Complied.

6. Notwithstanding the provisions of Section 4.03 (c) of the Loan Agreement, prior approval of the Bank shall be required for financing any Subproject classified as environmental category A, or its equivalent, as per the applicable Bank’s guidelines or any Subproject involving Significant Resettlement.

Section 4.03 (e) None of the subprojects fall under category A. Complied.

7. The Borrower shall carry out the Project with due diligence and efficiency and in conformity with sound banking, administrative, financial, technical, environmental, social

Section 5.01 (a) Complied.

35 Appendix 6

Covenant Reference in Loan

Agreement

Status of Compliance

and business practices. 8. In carrying out of the Project and in the conduct of its

business, the borrower shall perform all the obligations set forth in Schedule 4 to the extent that they are applicable to the Borrower and shall ensure similar compliance by Subborrowers under their respective Subloan agreements. These obligations are: Execution of Project; Financial Matters I Borrowers Eligibility Requirements 1. Except as the Bank may otherwise agree, the borrower shall, at all times, continue to adhere to the following criteria, to the satisfaction of the Bank, in order to allow ongoing participation by the Borrower in the Project:

(a) ensure adequate deployment of financial and manpower resources for identification, evaluation and financing of the Subprojects;

(b) compliance with all applicable prudential guidelines established by: (i) Reserve bank of India on Capital Adequacy and

supervisory practices including, but not limited to Statutory Liquidity Ratio and Capital Adequacy Ratio as amended from time to time; and

(ii) The applicable regulatory authorities regarding, inter alia, recognition of income, classification of assets and debt provisioning

(c) undertake its operations so as to ensure that the consolidated internal cash generation for debt

Section 5.01 (b) Schedule 4

Complied.

36 Appendix 6

Covenant Reference in Loan

Agreement

Status of Compliance

service for each Fiscal Year shall be at least 1.1 times the consolidated debt service requirement for that Fiscal Year.

9 II Implementation Project Management 2. The Urban Infrastructure and Transport Unit of the Borrower shall have overall responsibility for implementation of the Project. The Borrower shall provide the unit with support as necessary from its other departments that perform legal, risk management, environmental, and other social functions. The staff in charge of the urban infrastructure finance unit of the Borrower shall be responsible for coordinating Project supervision, monitoring, accounting, and reporting functions of the Borrower.

Schedule 4 ICICI Bank’s Project Finance Group is the line department for all projects including those under UEIF. The Technology Group is the PAU for UEIF, since ADB approved inclusion of a majority of industrial projects. Not complied, but with concurrence of ADB.

10. III Subloans Criteria 3. The Borrower shall provide Subloans at an appropriate rate commensurate with maturity and risk perceptions, the proceeds of the Loan to Subborrowers based on market conditions and project requirements, for Subprojects.

Schedule 4 The interest rate of each subproject is decided by the concerned business group based on the model practiced by ICICI Bank. This model evaluates many parameters including various risks for interest rate determination. Complied.

11. IV Subprojects 4. (a) The Borrower shall apply following criteria for

assessing a subproject to be an eligible Subproject for financing under a Subloan:

Schedule 4 Complied.

37 Appendix 6

Covenant Reference in Loan

Agreement

Status of Compliance

(j) Its financial internal rate of return is higher than the weighted average cost of capital of the Subborrower;

(ii) Its initial environmental examination or environmental impact assessment meet the requirements of the Guarantor and the Bank; and its potentially adverse social impacts, if any, are adequately addressed; and

(iii) In case land acquisition or Significant Resettlement is required for a Subproject, a resettlement plan following Bank’s policies on resettlement detailed in the Handbook on Resettlement, 1998 shall be required to be prepared and submitted to the Bank for approval prior to signing the Subloan agreement.

(b) The borrower shall select Subprojects and

Subborrowers where they are: (i) located in reform oriented states that have

undertaken, or are in the process of undertaking, reform measures, in one or more of the following: (1) constitute state finance commissions

and implement their recommendations to enlarge the share of municipalities in the allocation of state revenues;

(2) devolve revenues to the Urban Local Bodies;

(3) undertake legal and policy reforms to improve municipal finance and management, including cost recovery

Complied.

38 Appendix 6

Covenant Reference in Loan

Agreement

Status of Compliance

for urban services, introduce double-entry accrual-based accounting system;

(4) encourage private sector participation in urban infrastructure development and management;

(5) officially announce firm policies to undertake proposed reform measures including for financing urban infrastructure development;

(6) implement financial disclosures to public by the local governments and municipalities.

(7) Implement one or more of the following actions or similar measures: (a) mobilize capital market financial

resources for urban infrastructure development;

(b) improve municipal finance and finance disclosures, including for budget preparation and implementation;

(c) enhance Subproject development capacities;

(d) assist small municipalities in preparing commercially viable urban infrastructure projects for private participation; and

(e) enforce cost recovery for urban services, improve revenue collection, and expand revenue base;

(ii) in the case of Urban Local Bodies, that such bodies satisfy one or more of the following

39 Appendix 6

Covenant Reference in Loan

Agreement

Status of Compliance

criteria: (1) improve local financial resources: (2) disclosure to the public, financial

performance including budget preparation and implementation, subsidies and beneficiary groups;

(3) introduce double- entry, accrual based accounting systems;

(4) improve cost recovery and reduce subsidies for the urban infrastructure development Subprojects:

(5) adopt competitive and transparent procurement procedures and

(iii) in the case of cities of the Guarantor, the available environmental and infrastructure investment plans with identified priority subproject.

12. Subloan Financing Criteria 5. (a) The Borrower shall ensure that the amount of each

Subloan does not exceed a maximum of 40 percent of the total cost of the relevant subproject or $ 25 million whichever is lower.

(b) Subloans for Subprojects in the areas of streets,

bridges, transport terminals, public transport systems, market development and enhancement of financial and managerial capacity of Urban Local Bodies, shall not exceed 10 percent of the total amount of the Loan.

Schedule 4 Complied. Complied.

40 Appendix 6

Covenant Reference in Loan

Agreement

Status of Compliance

13. Subborrowers 6. The Borrower shall ensure that a Subborrower to be for an eligible Subloan fulfills the following criteria as applicable:

(a) maintains resources and financial capability to complete and operate the relevant subproject successfully;

(b) is not currently in default, individually or collectively on any prior loan;

(c) has a satisfactory financial condition, maintains a debt coverage ratio of at least 1.2 times and has not arrears in repayment of its debt obligation;

(d) is able to provide security as required by the Borrower;

(e) is able to maintain appropriate financial records of income and expenditure for the Borrower's periodic inspection

(f) complies with federal and state environmental laws and regulations and all applicable bank guidelines and procedures that require, inter alia, preparation, submission and approval by the bank of detailed environmental assessments;

(g) has entered into underlying infrastructure concessions and/or license agreements which provide for satisfactory cost adjustment and escalation and

(h) complies with all applicable bank policies and procedures, including social guidelines and considerations and resettlement guidelines in accordance with the Handbook on Resettlement, 1998, including as amended from time to time.

Schedule 4 Complied.

41 Appendix 6

Covenant Reference in Loan

Agreement

Status of Compliance

14. V. Monitoring and Evaluation 7. The Borrower shall require its Subborrowers to establish Subproject benefit monitoring and evaluation (BME) systems. The baseline information in subproject areas shall be prepared during subproject preparation and presented in the subproject financing application. The key index shall include those accordance with social economic and environmental target that the sub projects intend to achieve. The ME system design shall be based on the Bank’s BME Handbook. The Borrower shall monitor the financial and economic aspects of the Project under the established ME procedures in this regard.

Schedule 4 ICICI Bank submitted a BME study in May 2006 but did not require its Subborrowers to establish a BME system as required. Not Complied.

15. Environmental Compliance and Resettlement Issues 8. The Borrower shall demonstrate to the satisfaction of the Bank the existence of a functioning social and environmental management system within six months of Loan Effective Date. 9. The Borrower shall require and monitor that all Subprojects comply fully with the Bank’s guidelines on environmental and social assessment requirements as also on resettlement policies in accordance with the Handbook on Resettlement 1998 as amended from time to time, all applicable environmental regulations and legislation in India, including; compliance with environmental quality standards and requirements for environmental impact assessments and shall further require and monitor that adequate environmental safeguards and equipment for environmental compliance are provided in respect of each subproject.

Schedule 4 Complied. Complied

42 Appendix 6

Covenant Reference in Loan

Agreement

Status of Compliance

16. Exchange Risk. The Borrower shall at all times make adequate provision to protect itself against any loss resulting from changes in the rate of exchange between Rupees and the currency or currencies in which the Borrower’s outstanding money obligations will have to be met.

Section 5.02 (a) Complied.

17. The Borrower shall bear the foreign exchange risk through appropriate swap or other arrangements to the satisfaction of the Bank

Section 5.02 (b) Complied.

18. The Borrower shall not make a Subloan to any Subborrower unless such Subborrower has at its disposal or has made appropriate arrangements to obtain as and when required, all local currency funds and other resources which are required by such Subborrower for the carrying out of its subproject in respect of which the Subloan is to be made.

Section 5.03 Complied.

19. The Borrower shall maintain accounts and adequate records to record the progress of the Project to facilitate the assessment of the performance of each of the Subborrowers and subprojects (including the cost thereof) and to reflect in accordance with consistently maintained sound accounting principles, the operations and financial conditions of the Borrower. For the Subprojects, the Borrower shall maintain appropriate systems for monitoring, recording and reporting the progress of Subprojects and status of Subloans extended under the project. Such a system shall also provide such other information necessary for assessing the overall performance of the operations of each Subborrower under the Project. All Project – related accounts disbursement and collection records shall be subjected to annual audit. The Borrower shall submit to the Bank, within twelve

Section 5.04 Complied.

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months of close of the financial year, audited financial statements and auditor’s report. The auditors selected by the Borrower must be acceptable to the Bank.

20. Without limiting the generality of the foregoing, the Borrower shall submit to the Bank with respect to the Project (i) a semi-annual report within 45 days of the end of each semi-annum, the semi-annual report shall include a section covering physical and financial progress made in the period, projected progress in the next semi-annum, compliance with the Bank’s social and environmental guidelines, problems encountered during the review period and actions taken or proposed to be taken by the Borrower to address these problems; such reports shall be submitted in such form and in such detail and within such period as the Bank shall reasonably request.

Section 5.05 (b) Semi-annual reports were submitted; these reports needed improvement in terms of submission of precise quantitative and qualitative information on subproject costs, construction progress and safeguard compliance; difficulties faced by ICICI Bank in developing a robust pipeline; and progress made by ICICI Bank in adoption of environmental and social management system. Complied with a delay.

21. The Borrower shall have its accounts and financial statements (balance Sheet, statement of income and expenses, fund flow and related statements) audited annually, in accordance with appropriate auditing standards consistently applied by independent private auditors whose qualifications, experience and terms of reference are acceptable to the Bank; shall furnish to the bank as soon as available but in any event not later than twelve months after the close of the Fiscal year to which they relate (i) certified copies of its audited accounts and financial statements published under the Indian Companies Act 1956 and 9ii) the auditors’ long form report containing their opinion, inter alia on the use of loan proceeds on the adequacy of the Borrower’s accounting and internal control procedure on the status of compliance by the Borrower with the financial covenants set forth in subparagraphs (c) and (d) of paragraph 1 of Schedule 4

Section 5.06 (a) Complied.

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and on compliance with the bank’s Loan Disbursement handbook, 1996 including as amended from time to time, referred to in Section 3.04 related to the imprest fund account, all in the English language. The Borrower shall furnish to the bank such further information concerning such accounts and financial statements and the audit thereof as the bank shall from time to time reasonably request.

22. The Borrower shall enable the Bank, upon the Bank’s request to discuss the Borrower’s financial statements and its financial affairs from time tot time with the borrower’s auditors and shall authorize and require any representative of such auditors to participate in any such discussions requested by Bank, provided that any such discussion shall be conducted only in the presence of an authorized officer of the Borrower unless the Borrower shall otherwise agree.

Section 5.06 (b) Complied.

23. The Borrower shall, promptly as required, take all action within its powers to maintain its corporate existence, to carry on its operations and to acquire maintain and renew all heights, properties, powers, privileges and franchises which are necessary in the carrying out of the Project or in the conduct of its business.

Section 5.09 (a)

Complied.

24. The Borrower shall at all times conduct its business in accordance with sound administrative, financial, environmental, social and business practices, and under the supervision of competent and experienced management and personnel.

Section 5.09 (b) Complied.

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25. Except as the Bank and the Borrower shall otherwise agree, the Borrower shall not sell, lease or otherwise dispose of any of its assets, except in the ordinary course of its business.

Section 5.09 (c) Complied.

26. The Borrower undertakes that, except as the bank and the borrower may otherwise agree, (i) if the Borrower shall create any lien on any of its assets as security for any debt, such lien will also factor equally and ratably secure the payment of the principal of and interest an other charges on the loan and the Borrower, in creating or permitting the creation of any such lien, will make express provision to that effect and (ii) if any statutory lien shall be created on any assets of the Borrower as security for any debt, the Borrower shall grant to the bank and equivalent lien satisfactory to the Bank.

Section 5.10 (a)

Complied.

27. The provision of paragraph (a) of this Section shall not apply to (i) any lien created on property at the time of purchase thereof, solely as security for the payment of the purchase price of such property or (ii) any lien arising in the ordinary course of banking transactions and securing a debt maturing not more than one year after its date.

Section 5.10 (b) Complied.

28. Procurement 1(a) For Subloans that involve contracts for supply and

installation contracts valued at $ 5 million or above, or civil works valued at $ 10 million or above for any subproject, the Borrower shall cause and ensure that to the extent feasible, the concerned Subborrower shall apply international competitive bidding procedures in accordance with the Bank’s Guidelines for Procurement, February 1999 including as amended from time to time as has been provided to the Borrower.

Schedule 3 Complied.

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1 (b) For Subloans that involve contracts valued below the threshold levels stated in clause (a) above, the Borrower shall cause and ensure that the concerned Subborrower follows competitive and transparent procedures in consultants selection prequalification of contractors bid evaluating and contract award with due consideration of efficiency, economy and speed of delivery.

Complied.

29. 2. Procurement of goods and services shall be: (i) made without any restriction against or preference for any particular supplier or contractor or any particular class of suppliers or contractors and (ii) only for goods and works supplied from, and produced in member countries of the Bank. 3. The term “services” for purposes of this Schedule does not include consulting services.

Schedule 3 Complied. Complied.

30. 4 (a) The Borrower shall require each Subborrower to ensure that all Bank-financed goods and services procured (including without limitation all computer hardware, software and systems, whether separately procured or incorporated within other goods and services procured) do not violate or infringe any industrial property or intellectual property right or claim of any third party.

4 (b) The Borrower shall require each Subborrower to ensure that (i) all bank financed goods and services procured (including without limitation all computer hardware, software and systems, whether separately procured) are designed to be used prior to, during and after the calendar year 2000 (ii) neither the performance nor the functionality of such goods and services shall be affected by dates

Schedule 3 ICICI Bank agreed to obtain confirmatory letters on compliance of this from the subborrowers and forward a copy to ADB; however the same has not been received so far. Therefore, the PCR Mission could not independently verify the compliance.

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prior to during and after the year 2000 and (iii) such goods and services and the logic included therein will operate during each such time period without error relating to date specifically including any error relating to the production of date which represents or references different centuries or more than one century and the correct treatment of the year 2000 as a leap year.

4 (c) The Borrower shall require each Subborrower to ensure that all Bank–financed contracts for the procurement of goods and services contain appropriate representations warranties and if appropriate, indemnities from the contractor or supplier with respect to the matters referred to in subparagraphs (a) and (b) of this paragraph.