This is a short summary of the Implementation Completion Report (ICR) of a recently-closed World Bank project. The full text of the ICR is available on the Bank’s website. To access this document, go to www.worldbank.org/reference/ and then opt for the Documents & Reports section.

Tamil Nadu Urban Development Project II

Context:

Forty three percent of Tamil Nadu’s people live in towns and cities. The state and the World Bank have been engaged on the urban development front since the 1970s. While the first projects focused on slum improvement and neighborhood development in the largest cities, the focus broadened later to include projects in other cities in the state, and a broader range of urban infrastructure. The state government set up a municipal fund, supported by World Bank lending, to implement this more diverse portfolio across numerous municipalities.

In the mid-90s, coinciding with a strong push for more private sector involvement in infrastructure in both India and the rest of the world, the Tamil Nadu government restructured the fund in 1996, seeking private equity participation from the ICICI, the Housing Development Finance Corporation Limited (HDFC) and Infrastructure Leasing and Financial Services Limited (ILFS) to establish the Tamil Nadu Urban Infrastructure Development Fund (TNUDF). The Tamil Nadu Urban Infrastructure Financial Services Limited (TNUIFSL) a company registered under Indian Companies Act, 1956 is the Fund Manager of TNUDF.

The principle component of the Second Tamil Nadu Urban Development project supported the consolidation and expansion of this new model.

Project Development Objective:

To improve urban infrastructure services in a sustainable manner, and build the institutional and financial capacities of the urban local bodies (ULBs) in Tamil Nadu.

Project Components:

• Strengthening the managerial, financial and technical capacities of Urban Local Bodies (ULBs), through an institutional development program, in line with the urban sector reforms which the GoTN is implementing;
• Mobilizing resources for basic urban infrastructure investments (water supply, sewerage and sanitation, solid waste management, roads, transports, storm water drains and street lighting, etc.); and
• Securing sustainable funding sources for the urban infrastructure investment, through TNUDF and municipal bond issuance, beyond the Bank’s line of credit operations.

Urban infrastructure investments:

The project succeeded in mobilizing considerable resources for investments in urban infrastructure in Tamil Nadu’s cities and towns. Nearly US$160 million of investments were supported. A total of US$62 million were financed directly by the Bank line of credit while over $97 million in other funds was mobilized for urban investments, from beneficiaries, capital markets, and in some cases, private infrastructure operators. Some of the innovative transactions supported by the TNUDF include:

• Madurai Ring Road, a toll road financed by TNUDF and then taken out by the market (US$ 6.4 million), resulting in a savings of Rs 6.5 million (US$ 140,000 approximately) a year to the municipality.
• Karur toll bridge (Rs 1,400 million) on BOT, with a concession period of 14 years.
• Alandur Sewerage with an investment of Rs 80 million on the treatment plant by the operator of a total project cost of Rs 420 million
• Tirunelveli and Cumbum Bus Stands financed by the project, with loan repaid on receipt of cash payments from potential tenants. This complex in Tirunelveli also includes outsourcing of Operation & Maintenance (O&M) resulting in an annual saving of Rs 2.5 million.
• Facilitated the first tax-free Municipal Bond for Chennai Metro Water Supply & Sewerage Board (CMWSSB) to finance the Chennai Water Supply Augmentation Project I (Rs 420 million)

Capacity-building:

TNUDP II also supported capacity-building to help urban local governments manage their finances better. The Project supported a successful shift from cash to accrual accounting, along with a computerization of accounts in municipalities, and a large training program for municipal accountants. Although a strong accounting tradition gave Tamil Nadu an edge over other states, this achievement is quite substantial and unparalleled in India. Not only have municipal accounts been computerized, but public information kiosks have been set up in all municipalities and corporations, providing residents with ready information on dues relating to charges like property tax and water charges. This provides transparency to taxpayers and reduces the element of discretion exercised by tax collectors in their interface with the public.

Upgrading basic urban services, especially sanitation:

The third component of the project involved the construction of public toilets in a large number of municipalities and panchayats. User-groups were established to maintain and operate the toilets. This model, while interesting, needs more work, because a number of toilets built had already stopped working by the time of Project completion. Nonetheless, the GoTN feels the model represents a significant improvement over earlier practices.

Sustainability Quotient:

In the later phases of the project, the TNUDF faced new challenges, such as a state fiscal crisis that delayed transfer payments to municipalities, a change in state government, declining interest rates in the local market that made World Bank funds less competitive, as well as the establishment of a competing state intermediary offering funding at lower cost to municipalities.

However, the TNUDF weathered the difficult period, and a follow-on project — the TNUDF III approved in July 2005 – will focus on adapting the Fund and its operating environment to help it manage shifts in the financial market, while increasing the menu of financing instruments available to its municipal clientele.

The likelihood of sustainability is strengthened by the fact that the TNUDF has maintained reasonable profitability, and, in the course of appraisal of TNUDP III, has agreed to measures that will help it respond better to changes in the market.

Lessons Learned:

• Experience under this project illustrated some of the limitations of partial private ownership to improve municipal finances. The restructuring that created the TNUDF as an autonomous agency with partial private ownership improved operational efficiency. However, the GoTN’s strong controls on the ULBs meant that TNUDF, in order to do business with them, remained dependent on the government for key decisions.
• Decentralization is a process that is prone to reversals and decelerations. The state-level reforms expected at the beginning of the project did not materialize, although the Project still achieved considerable successes. It is thus better to design a project to be robust to the vagaries of decentralization, and address the issues that policy setbacks create during implementation than to create a project that is premised on strong and continuous decentralization process that may not materialize.
• The sanitation component would most likely have been handled much better in a stand-alone project or as part of an operation involving more closely related issues.
• It has been noted by an external reviewer that the innovative transactions pioneered by the TNUDF have not been succeeded by the creation of a framework that would permit a market for this type of transaction. For example, TNUDF’s origination and resale of its loans could be used as a model that could be developed to create a secondary market in infrastructure loans. The Bank could add value in its promotion of private financing by ensuring that this additional step is taken. Individual market players have no incentive to perform this role that is of public policy interest.