JULY 04, 209

By Naresh Minocha, Consulting Editor

"FOR the last 18 months there had been paralysis on the economic front. The last two governments postponed taking vital decisions. The fiscal position was allowed to deteriorate", stated Prime Minister P.V. Narasimha Rao on 9th July 1991 in a broadcast to the Nation explaining rationale for reforms.

If late Mr. Rao served as PM today, he might have made a similar observation about policy paralysis (PP) in the arena of independently verifiable urban reforms (UR). PP led to cancellation of two world Bank-aided, UR projects - one in 2006 under UPA and another in 2019 under Modi-led NDA Govt.

These & similar other cancelled projects have ensured that urban rot persists. The rot explodes periodically as it is now: Over two dozen deaths due to recent wall collapses in Maharashtra and Odisha, average 10 pot-hole deaths/day across India, avoidable fire tragedies, water crisis as in Chennai and other cities and unstoppable growth in slums. Monsoon mirrors state of Governance in India.

All problems are due to multiple flaws in urban governance for which Centre, States & cities need to share the blame. On paper, the Union Government is executing wonderful urban reforms.

Cancellation of two successive UR-linked, cities development projects is not an isolated case of India dropping project proposals. Such developments happen every year after long negotiations with multilateral financial institutions (MFIs) such as WB, Asian Development Bank (ADB), etc.

Add to these, instances where foreign soft loans are partly cancelled or surrendered due to problems in implementation of projects. If this happens in MFI domain, there is no reason to leave scope for such cancellations in bilaterally funded projects.

Cancellation of project proposals, coupled with pruning of existing projects, has resulted in sacrifice of opportunity to invest many billions of dollars on social and economic development. India's growth story would have been on different trajectory had successive regimes fully appreciated value of soft loans with long maturity offered by MFIs.

Guesstimate the total investment foregone due to cancellation of proposed projects and part of undisbursed loans sanctioned for existing projects since the fifties.

This is one area that no Finance Minister has so far addressed in his/her budget speech. The government's inability to negotiate all reforms-linked soft credit & grants impacts fiscal management. An allied problem is inability of authorities to utilize in time, sanctioned loans. This costs the exchequer commitment charges on undisbursed loans.

This is an issue that speedy decisions-loving Prime Minister Narendra Modi is yet to resolve. Are there any timelines for completion and finalization of MFI funded-projects? If so, how often are they adhered to? Why can't loans be utilized in keeping with credit agreements?

Legislature should debate projects that are badly implemented or aborted in spite of external guidance & oversight. Does public not have a right to know reasons why certain project proposals are abandoned after negotiations over a few years?

There are a whole lot of issues on soft loans front that the Government should speak on. Let Prime Minister Narendra Modi demonstrate his self-proclaimed impatience "to take the country to new heights" by clearing cobwebs in the flow and utilization of untied foreign aid.

Turn now to dropped project proposals and pruning of approved projects. Take first the two cancelled UR projects. WB has lately dropped USD 1500-million AMRUT PLUS project without disclosing any reason. The target for its approval by WB Board of Directors was 28th September 2018.

The USD 1500 million funding over eight years might have given good push to AMRUT (Atal Mission for Rejuvenation and Urban Transformation), a centrally sponsored scheme launched in 2015.

WB merely discloses projects' status as 1) closed, 2) active, 3) in pipeline and 4) dropped. It does not disclose reasons why a proposed project has been dropped. Projects are normally dropped / cancelled after consultation between the Government and MFI concerned. The Government often moots idea to drop a proposed project.

In all, WB has dropped 64 projects over last 18 years or so. The first dropped project perhaps was USD 150-million Gujarat urban reforms project mooted in 2001. As many as nine proposed WB-aided projects were scrapped during first tenure of Modi Government.

Similarly, Modi Government has dropped 'Smart Cities Infrastructure Investment Program' from ADB list of proposed projects. Under this, ADB was to provide USD 500 million loan to India Infrastructure Financing Company Limited in local currency. The proposal apparently did not move beyond the concept stage as no detailed document on it is available in public domain.

Earlier, UPA Government dropped the proposed USD 400-million WB project conceived to support Urban Reforms Finance Fund in 2006.

Another mega project lately categorized by WB as dropped project is Mumbai Urban Transport Project 3 (MUTP3) whose cost is estimated at USD 2500 million. Of this, USD 500 million each was to be chipped by WB and Asian Infrastructure Investment Bank (AIIB). The balance USD 1500 million was to be contributed by project developer-cum-borrower - Mumbai Railway Vikas Corporation (MRVC), a public enterprise.

MUTP3 is, however, now listed by AIIB as USD 997-million project for which it is considering lending USD 500 million. It is now a truncated version of original MUTP3 project.

Yet another WB project dropped by Modi Government envisaged setting up of large solar power stations with USD 500 million loan.

The six other WB projects dropped by Modi Government in its first tenure are: 1) Himachal Pradesh: Forests for Prosperity Project, 2) Assam Flood, Erosion and River Management Modernization Project, 3) Jharkhand Service Delivery Enhancement Project 4) Addl. Financing - Scaling Up Sustainable and Responsible Microfinance, 5) Strengthening Governance & Service Delivery in Karnataka Panchayats, and 6) Uttar Pradesh Solid Waste Management Project.

Turn now to cancellation of a part of undisbursed loans sanctioned by MFIs for existing projects.

WB cancelled USD 25 million unutilized loan sanctioned to Haryana Power Systems Improvement Project in April 2017. At the request of Union Finance Ministry, WB also extended the closing date for this project.

In the same month, WB also cancelled USD 25 million 'savings' from loan sanctioned to Andhra Pradesh and Telangana road sector project. Did the saving result from decision to drop Kakinada-Rajahmundry package from the road project? WB acted on Union Finance Ministry's plea in this case too.

The most shocking case in loan cancellation domain is ADB-funded 'India: Agribusiness Infrastructure Development Investment Program'. It envisaged setting up of horticulture value chain projects in Bihar and Maharashtra.

The Tranche 1 of USD 67.6 million approved for Bihar in September 2010 remained unutilized for almost six years due to governance woes.

According to ADB document prepared in May 2017, "After several rounds of consultations and the fielding of seven review missions and four special loan administration missions to Bihar, a decision was taken to move towards loan closure".

The document adds: "The tranche was subsequently closed on 12 August 2016 with zero disbursement. The executing agency rescinded the contract with the consultants in August, 2016 with the assurance that it will meet the contract obligations through its own resources, and confirmed that no withdrawals were made under the loan".

The second tranche of USD 24.3 million was sanctioned for Maharashtra in December 2011. Maharashtra segment of the project too was virtually a flop-show.

According to ADB's project completion report issued during August 2017, ADB cancelled USD 13.1 million of total loan at Maharashtra's request in January 2014. An additional undisbursed loan of USD 10.7 million was cancelled at loan closure on 31 March 2016.

As put by the Report, "the overall rating of the project is unsuccessful given the ratings of less than relevant, ineffective, inefficient, and unlikely sustainable".

Consider now ADB extended review report on USD 100 million loan given to EXIM Bank to finance export-focused small and medium enterprises (SMEs). The report, released in December 2017, says: "The economic sustainability of the loan is rated less than satisfactory. The lack of bankable exporting SMEs in the lagging states made it difficult for Exim Bank to expand its direct lending and cluster financing to SMEs".

It adds: "Due to low demand for loans in the lagging states, the loan condition of 50% utilization of the ADB loan to specified lagging states was subsequently waived by ADB. Due to insufficient data, the development impact of the loan in fostering economic sustainability was difficult to assess".

Multiple problems in effective and timely utilization of loans calls for strong monitoring of entire area of multilateral and bilateral foreign loans right from negotiating loans to repayment of loans.

This area comes under the jurisdiction of Finance Ministry's Aid Accounts and Audit Division (AAAD). It itself suffers several deficiencies. The Ministry last year started availing ADB's aid for the second time to thoroughly revamp AAAD.

As put by ADB, "AAAD relies heavily on IT (information technology) for its daily operations, but the present systems are constrained by inadequate IT infrastructure and resources. The Department of Economic Affairs recognizes that AAAD's IT functions are in urgent need of upgrading-the present IT system lacks useful functions, is hard to use, slow, and too inflexible to meet current business needs. Overall disbursement processing and accounting activities conducted via the existing IT interface need to be improved".

All this should serve as sufficient basis for the Ministry to turn annual budget into an instrument for effective utilization of development expenditure. Torchlight should shift from ritualistic hikes in budgetary allocations to optimizing returns on allocations. Let this be new mantra for efficiency-driven growth in gross domestic product.