Bhi 2

Key Deliverable 3
Page 1 of I
I
1.0
INFRASTRUCTURE DEVELOPMENT IN RAJASTHAN

Need and Coverage Estimates of funding requirements in infrastructure to support the envisaged economic growth (KD1) in Rajasthan have already been discussed in previous reports. It has also been highlighted that ensuring greater private participation in the development and management of infrastructure assets would have to be an integral part of the states strategy to meet the funding requirements. Projections of state finances (KD2), reveal that state can meet only up to 38% of the total infrastructure funding requirements of the state thus, highlighting the need for private sector. However, the same cannot be achieved unless a favorable enabling environment is created. While the focus of this report is to present a reform agenda in key infrastructure sectors, it is also important to highlight and internalize the concerns of the private sector with respect to investment in this sector. The rationale for highlighting these concerns is to recommend ways to address some of these concerns through interventions at a state level, since many of the concerns are not specific to a sector but relate to the investment climate in the state in general. The recommendations set out in this chapter are based upon initiatives taken by other states to address similar concerns, after taking into account the existing policy and institutional set-up in the state. As indicated, the report (KD3) focuses on four key infrastructure sectors, development of which would be critical for achieving the overall economic rate of growth. This report sets out a reform agenda aimed at addressing the key issues facing these sectors and hence pave the way for greater private participation.
2.0
Attracting Private Investments Key Concerns
The figure on the following page presents the context of the assignment, the key issues and concerns and the interventions necessary to achieve the desired objectives.
Rajasthan Infrastructure Agenda 2025
Key Deliverable 3
Page 2 of I
Context of the Assignment Consequent Impact
Overall economic slowdown

Last five years have been worse than the previous five
Low level of Investments and Industrial Sickness

Rate of implementation of IEMs have come down together with frequent droughts
Low Competitive Advantage

Key Reasons and Issues
Existing quality of infrastructure negatively impacts competitive advantage of existing industries
Deficient Sector Outputs
Inadequate policy and regulatory framework
Inability to unbundle and mitigate risks
Affordabi lity: commerc ial rates vs. per capita incomes
Public interest and litigatio ns
Delay in project approv als
Lack of standar dised agreem ents
Question of transpare ncy and accounta bility
No established policy / legal / regulatory framework
Lack of ownership
Policies and Institutions
Pace of Reform
Sector Inputs
Project Preparation Capacity

project development and financial engineering
Public Private Interface
Governance Structures
Inability of states to fully address the above concerns of investors has resulted in the fact that, after accounting for inflation, only about 30 percent of projected financing for infrastructure from private sector has actually materialized since 1994/95. At the root of this issue is the slow development of an enabling environment for the private sector. More specifically, why the response by the private sector to the liberalization of Indias infrastructure sectors, particularly at the state level, fell below expectations may be attributed to the confluence of several major factors: the progress of reforms has been slower than anticipated (in most sectors there exist no independent regulatory bodies, even in infrastructure sectors, where Rajasthan has initiated reforms water resources and power progress has been slow); governance structures are not suited for the broad participation by the private sector in infrastructure in a liberalized environment (project identification and feasibility studies do not take into account views of the private sector), public/private interface require substantial strengthening (even though today most states acknowledge private participation
Key Deliverable 3
Page 3 of I
cannot happen without significant subsidy coming from Govt, existing policy of the state do not provide for the same ), and inability to unbundle and allocate risk (in most cases project risks are not addressed thus delaying financial closure of projects) However, as a result of liberalization and the competition among states to attract private sector participation in infrastructure operation and development, past philosophies would need to be shed. The past role needs to be reexamined in the different infrastructure sectors with a view to separating existing governance structures into various roles to ensure predictability, institute appropriate checks and balances, promote fair competition and more effective regulation and supervision, and address most of the uncertainties that often discourage broader private sector participation all crucial factors for sustainable private sector engagement. Recognizing the above concerns of the investors, a few states have already adopted formal policies for private sector participation or defined the rules and terms under which private sector entry and participation would be allowed and with what incentives. It is also therefore believed that in the absence of formal or enunciated state policy on private sector participation, few states are organized to deal with the private sector and privatization, since they lack appropriate institutional structures and processes (common philosophy and polices across sectors, adequate project preparation, etc) , established systems and procedures (for project approvals) and capable dedicated staff. The above deficiency often leads to delays in seeking approvals for projects; obtaining permits and clearances; processing, negotiating, and finalizing contracts; and bringing infrastructure projects to financial closure. Due to inexperience, capacity of existing departments for promoting and developing infrastructure projects is limited. Thus, priority areas for private sector participation are not identified early and feasible projects are not developed for bidding. Reliability and lack of adequate access to required data is also a serious constraint for attracting private sector participation. For example, developing a pipeline of bankable projects for private sector investments in roads against a defined plan rather than dealing with projects on an individual stand-alone basis has proved to be a more cost-effective approach in a number of states. Therefore, more and more states under their enunciated policy, have now agreed to provide support for preparing detailed feasibility studies, identifying land for right-of-way and enroute facilities and providing land as well as environmental clearances (including relocation of utilities and resettlement and rehabilitation of affected people/establishments). Equally important is the need to develop bankable projects. Lack of financial engineering expertise poses difficulties in packaging
Key Deliverable 3
Page 4 of I
projects that could be successfully offered for financing. Hence, project development is proving to be a very risky and costly exercise. 3.0 Solution Framework Presented below is broad solution framework for addressing the concerns of private investors. The framework is basically weaved around the development of an overarching Infrastructure development and regulatory act for Rajasthan.
Inadequate policy and regulatory framework Inability to unbundle and mitigate risks Affordabi lity: commerc ial rates vs. per capita incomes Public interest and litigatio ns Delay in project approv als Lack of standar dised agreem ents Question of transpare ncy and accounta bility No established policy / legal / regulatory framework
Key Concerns of the Private Investor
Lack of ownership
Intervention Areas
1. Enunciate policy framework
2. Define Institutiona l Set-up Establishment of an institutional framework to facilitate private sector participation in infrastructure that provides a formal mandate to deal with the private sector on matters concerning private sector participation in infrastructure
3. Establish inst. support structure Establishment of a formal Governmentsupported organizational structure that will serve as a onestop facility for securing approvals, licenses and clearances for private infrastructure projects.
4. Establish regulatory authority Establishment of a regulatory framework
5. Define GoR Infrastruct ure Priority Promulgation of guidelines regarding Government priorities and plans for infrastructure development and specification of private sector projects for development.
Adoption of an overall development policy setting the terms and conditions for private sector participation in infrastructure development.
Key Deliverable 3
Page 5 of I
Affordabili ty: commerci al rates vs. per capita incomes Question of transparen cy and accountab ility
Key Concerns of the Private Investor
Inadequate policy and regulatory framework
Inability to unbundle and mitigate risks
Public interest and litigatio ns
Delay in project approv als
Lack of standar dized agreem ents
No established policy / legal / regulatory framework
Lack of ownership
Intervention Areas
1. Enunciate policy framework 6. Define Sectoral Policies
2. Define Institutional Set-up 7. Define incentive criteria
3. Establish inst. support structure 8. Establish dispute resolution mechanism
4. Establish regulatory authority 9. Std. contracting procedure
5. Define GoR Infrastructure Priority 10. Draft model concession agreement
The key benefits are as follows: It provides an overarching legislation to secure a level playing field for private participants as It provides a legal framework for private participation in infrastructure development in the state consistent across sectors. This is important as all investors seek a policy regime which is stable and predictable. Legislation vis--vis government orders provides added comfort to investors. Defines and standardizes the project delivery process (timelines and transparency) and procedures for reconciliation of disputes and also to provide for any other ancillary and incidental matters related to development of bankable projects for development by the private sector. Helps ensure coordination between various departments and to provide cross-sectoral perspective to infrastructure planning and development. Helps in spreading awareness amongst various departments of the government on project structuring and bid process requirements for development of infrastructure projects with PSP Provides a framework to determine the form and level of state support and the eligibility criteria for availing each form of support. This would not only encourage the private sector but also provide a level playing field. Provides a generic framework for identification and allocation of risks in infrastructure projects in concession agreements. Existence of such a legislation is seen by investors as a sign of progressiveness or reform orientation. The Asian Development Bank lists such a legislation as one of the requisites of an investor friendly climate. The need for such an act has also been highlighted by the steering group on foreign direct investment (planning commission August 2002). According to the report, infrastructure development and exports can be key drivers for productivity change and economic growth.. It goes on to recommend that states consider enacting a special Investment Law covering infrastructure investment. This law would apply to both domestic and foreign investment. The Andhra Pradesh Infrastructure Act provides a useful template on which other States laws could be based upon. This law would cover issues connected to investment in and production of infrastructure services. The objective of this law would be to
Key Deliverable 3
Page 6 of I
integrate to the extent feasible, the many State laws, rules and regulations applicable to these critical sectors. It could thus potentially cover environmental clearances, industrial relations, worker health and safety etc. It could also specify special labour laws, rules and procedures for investment in infrastructure and production/supply of infrastructure services. It would have simplified rules and regulations and would specify and enforce time limits on all relevant clearances. A statutory body should be defined and set up under the Act, whose primary objective would be to increase and speed up private investment in these sectors. This body could also have some members from the private sector. It may be noted that the objective and scope of such an act is to address generic issues in infrastructure sectors and provide a link to the sector policies through which sector specific issues such as the extent and form of PSP, identification and treatment of sector specific risks, additional incentives and the sector regulatory framework could be addressed. Key Recommendations The key recommendations are as follows Enactment of the Infrastructure Development and Regulation Act would create the overall development policy setting the terms and conditions for private sector participation in infrastructure development. It should apply to all departments, corporations, agencies, boards, authorities and organizations of the Government of Rajasthan and for all projects which involve private sector participation, thereby creating consistency of project delivery. It should also apply to projects implemented by local self governments to the extent that the concessions for developing / operating / maintaining the project is given by the Government and / or the project is supported by the Government as defined under the act.
Key Deliverable 3
Page 7 of I
Rajasthan Infrastructure Development and Regulation Act
Institutional Framework Infrastructure Development Authority Infrastructure Regulatory Authority Policy Framework Project Delivery Process State Support User Levies
Government Department and Bodies
Decision Making (cabinet sub-committee)
Risk Issues Sector Policies Concession Agreements
Recommendatory Board
Infrastructure Secretariat Supported by a Technical Secretariat
Infrastructure Development Authority (IDA) IDA would have the formal mandate to deal with the private sector on matters concerning private sector participation in infrastructure Infrastructure Development Authority (IDA) should be composed in two parts. Part 1 being the decision making body, which should be in the nature of a "cabinet sub-committee" headed by the chief minister and having representations from key ministries. A cabinet sub-committee headed by the chief minister would not only have coercive powers but also have binding powers. IDA should have concurrent jurisdiction to grant statutory clearances under the act as also review and grant clearances (along with the concerned department) for enabling projects. GoR already has an existing Board of Infrastructure and Investment Promotion (BIIP) and can look at granting this committee the above mandate. Part 2 of the Infrastructure Authority should be the recommendatory body headed by the Chief Secretary. This committee would support the cabinet sub committee in its role by providing advise and recommendations on matters that are subject to the Act. GoR could look at using the existing empowered committee on infrastructure development (under the chairmanship of the Chief Secretary) for this mandate. Annexure 1 to the chapter lists out the role of the two components of this Infrastructure Development Authority. In order to ensure professionalism, transparency and unbiased views into decision making, independent experts should be incorporated into IDA, specially in Part 2. As a matter of fact states such as Maharashtra plan to have equal number of independent outside experts into this recommendatory body. The above recommendation (creating a cabinet sub-committee as the decision making body) would obviate the difficulty faced in
Key Deliverable 3
Page 8 of I
Gujarat in implementing a similar law, wherein a corporation was given this role. However, in the initial stage it was seen that due to lack of power it has been ineffective in ensuring decision taken are actually implemented. Many states have created IDA as part of such a legislation. AP has established an institutional framework as part of Infrastructure Development Enabling Act (IDEA) for facilitating private sector participation. At the center of this framework is the Infrastructure Authority created under IDEA. In Gujarat, Gujarat Infrastructure Development Board (GIDB) was established with a formal mandate to deal with the private sector. Maharashtra envisages creation of a focused two tier project facilitating organization structure comprising the IDCM (Infrastructure Development Corporation of Maharashtra) and AIM (Authority for Infrastructure in Maharashtra) at the government level. Infrastructure Secretariat The Infrastructure secretariat would serve as a one-stop facility for securing approvals, licenses, and clearances for private infrastructure projects. It would be the nodal agency to coordinate all the efforts of the State Government in the identification and prioritization of infrastructure projects. It would: Promote participation of a person in financing, construction, maintenance and operation of any project irrespective of its cost In consultation with the State Government scrutinize, evaluate and prioritize infrastructure projects to be developed, managed and operated in the State. Issue Notification of infrastructure projects inviting bids or placement of Request For Proposal; Conducting pre-bid processes; Conducting evaluation of bids and Conducting negotiations and recommending the grant of Concession by the IDA Advise the State Government, the Government agency or the specified Government agency on matters of policy in respect of participation as envisaged under the act. Consider the proposal for undertaking a project and the proposed concession agreement submitted to it and to recommend with or without modifications, or not recommend or return the proposal and proposed concession agreement for reconsideration of the State Government, the Government agency or, as the case may be, the specified Government agency. Co-ordinate and monitor the projects undertaken in the State. Assist in developing concepts of projects by undertaking prefeasibility and feasibility studies of the project ; Undertake such projects as may be entrusted to it by the State Government Assist the Infrastructure Regulatory Authority in conducting public hearing on objections and suggestions received to finalize the scope of the infrastructure project.
Key Deliverable 3
Page 9 of I
In the context of Rajasthan, GoR could look at Bureau of Investment Promotion - BIP (has similar experience - responsible for administering the single window system) for undertaking this activity. It is also felt that in executing the roles discussed above, the agency would require technical support for activities such as project preparation, commercialization of projects, etc. The role of the technical secretariat would either need to be outsourced or be taken up by agencies such as PDCOR, a joint venture between ILFS and GoR, that possess experience in areas such as identification of infrastructure projects that are prima-facie commercially viable and preparing detailed feasibility and investment banking reports. Infrastructure Regulatory Authority It is suggested that Rajasthan set up an independent regulatory authority upfront for matters and sectors relating to the Act (excluding functions in respect of which Rajasthan State Electricity Regulatory Commission has been established). The reasons for the same are two fold. First, it would provide an added comfort to private investors and second, it takes time for establishing a stable regulatory practice and it is best if regulatory authority is created upfront thereby ensuring regulatory regime is developed in line with the opening up of a sector. The role of the authority would be to: aid and advise the State Government in the formulation of appropriate policies or guidelines relating to tariffs. conduct public hearing regarding the approval of proposed infrastructure projects. determine, modify or vary the tariff on the basis of the concessions granted to the concessionaires and the interest of the consumer. regulate the working of the concessionaire and promote efficient, economical and equitable performance, including laying down standards of performance of the concessionaire with regard to service to the consumer. adjudicate upon appeal preferred to it against an order passed by the Infrastructure Development Authority or the State Government, related to the approval of an infrastructure project or the award of a concession. adjudicate upon disputes inter-se two or more Concessionaires, operators of infrastructure projects, the State Government and IDA.
Key Deliverable 3
Page 10 of I
In designing the regulatory authority, one should ensure i) financial independence of the regulator (sources of funds for effective functioning of the regulator should be independent of the state even if funded by the state), ii) it should be at least a three member commission (one person commission may not ensure enough discussions) iii) the manner in which the members are appointed and their qualification should not undermine their position iv) the term of office should be limited and should not be eligible for reappointment so as to minimize external pressures. Creating an independent regulatory authority have been provided for in most states, which have enacted an overarching infrastructure development and regulatory act. In most cases, except Punjab, the Act proposes setting up of independent sector specific regulatory commissions. In case of Punjab, the Punjab Infrastructure (Development & Regulation) Act, 2002 specifies that within a period of three months from the date of coming into force of the Act, the State Government shall, by notification, establish for the purpose of this Act, an authority to be called the Punjab Infrastructure Regulatory Authority. Government Department and Bodies The existing government departments and bodies would continue to play an integral role (though coordinated) in the development of infrastructure projects. They would be responsible for: Development of model concession agreements as defined under the act. Development of sector policy consistent with the philosophy contained in the act Development / acceptance of master plan / reform plan for the sector Ensure clearances (as stipulated by IDA) are granted in time and in case of delay informing the same to IDA Review suo-moto proposals and call for swiss challenge, if included in the act Policy Framework Although no formal document exists, the output of this study i.e. Rajasthan Infrastructure Agenda "2025, is likely to help set the priorities of the state. The project would also provide an immediate pipeline of projects, some of which can be developed through PSP. However, there is need for each department to prepare a pipeline of projects, which can be taken up through the infrastructure secretariat (under the proposed act), if found feasible for development through PSP. Formal policies exist in most infrastructure sectors in Rajasthan. However, there are a number of issues that need to be addressed so as to make these policies effective. As part of this assignment, recommendation for improving policies across four infrastructure sectors is being undertaken. It needs to be ensured that existing
Key Deliverable 3
Page 11 of I
policies are changed to align with the objectives and directions contained in this Act There should be a clear policy on transparency in the awarding of bids and concessions for individual projects. The proposed Act should delineate the rules of the game for selection of a developer, giving a clear mandate to go through a competitive bidding route for any infrastructure development project, except where some projects having proprietary knowledge or exclusive global franchise with the bidder. In order to provide for and rationalize incentive framework for private sector participation in infrastructure projects, the state could consider categorization of projects under separate and distinct categories and thereafter delineate the incentive framework (as is being done in AP and Maharashtra). More importantly, it needs to be recognized through the act and in turn in sector specific policies, that private investment in infrastructure (specially in a context where infrastructure services have till recently been treated as public goods and where user charges are out of line with the cost structure) would not take place until and unless governments incentivises private investors for perceived risks and low financial returns in projects. State support to different categories of projects (to be decided post a feasibility study by the infrastructure secretariat) such as administrative support, land and infrastructure support, tax and duty incentives, credit enhancements and direct financial support should be clearly laid down as part of the Act. 4.0 Action Plan for Implementation
It is felt that establishment of the recommended legislative framework would help provide necessary fillip to the overall infrastructure development efforts in the state and send positive signals to potential investors and hence the same should be taken up in earnest. We believe the empowered committee on infrastructure of the state government is best placed to anchor this effort and the best way to prepare and finalize the act would be to appoint consultants who could help draft the document. We believe the same can and should be undertaken in the next six nine months.
Key Deliverable 3
Page 12 of I
Annexure 1 Role and Mandate of Infrastructure Development Authority Cabinet sub committee of the Infrastructure Development Authority would have the power to take decisions with respect to the following: Promoting private investments in infrastructure development and addressing investor concerns Initiating and approving sector PSP policies and model concession agreements for sectors specified under the act Deciding form and extent of state support to PSP projects within the ambit of the act and specific sector policies Approving risk sharing frameworks in PSP projects Identifying, allocating, reallocating and directing departments to undertake necessary activities for developing projects under PSP Recommending inter sector infrastructure linkages Approving and modifying projects involving direct negotiation process and suo-moto proposals Resolving disputes relating to user levies Prescribing timelines for clearances and approvals Coordinating within various government departments
Recommendatory board headed by the chief secretary would support the cabinet sub committee in its role by providing advice and recommendation on matters that are subject to the Act
Key Deliverable 3
Page 1 of II
II
URBAN INFRASTRUCTURE
1.0
Introduction Key Deliverable 2 has dwelled into the various issues facing the development of the urban sector in Rajasthan. It has also highlighted the extent of funding requirement for urban infrastructure in the Class I cities in Rajasthan. This chapter presents the reform agenda for the sector. This agenda has been developed keeping in mind the two fundamental issues that need to be addressed in any reform agenda for this sector. These are: Proper urbanisation cannot take place without substantial increase in funding for the urban sector increase in funding for the urban sector Urbanisation leads to economic development and thus urbanisation needs to be viewed as a tool for economic development. The reasons why we believe this to be true has been explained in the exhibit given below:
Foreign Direct Investment flowed mainly to the urbanised states and to the states with large mining sectors Rate of growth of GSDP per capita is highly correlated with the extent of urbanisation 82% of the variation in the growth rate across states is explained by the extent of urbanisation Two-thirds of the variation in the urbanisation rates across 14 sectors is explained by two factors - presence of a major port and high wheat production (suitability of climate) The performance of the more urbanised states is relatively much better as compared to that of less urbanised states during the post reform period (1992-98)
Source: Centre for International Development Harvard University
Key Deliverable 3
Page 2 of II
2.0
Reform Agenda Our reform agenda for the sector is driven by the strategy of strengthening the city level framework for urban management and the state government providing a facilitatory framework. This is due to the firm belief that developed cities would attract investment on the basis of their inherent strength and infrastructure as more and more nations (states) follow the route to trade and globalisation. This has already been witnessed to certain extent in Rajasthan where certain cities have grown much faster than others due to their respective economic and trade potential. This brings to fore the need for city level planning and infrastructure development. The reform agenda for the sector would cover the followings aspects:
Planning
Development of a comprehensive City Development Planning Framework for select cities in the State for ensuring that urbanisation promotes economic growth
Institutional Reform Funding
Ensuring coordinated implementation of the City Development Planning Framework
Ensuring that the institutions mandate to undertake urban development projects are able to access funds for implementation
Regulatory and Policy Reform
Ensuring that the recommendations made in the above areas are suitably incorporated in the existing framework for smooth implementation
Capacity Building
Ensuring that the institutions have the requisite capacities to implement the reform measures
The reform agenda seeks to address the multitude of issues faced by urban sector in Rajasthan. The urban landscape in Rajasthan consists of 222 urban centres (as per 2001 census) of which 20 are class I cities with population of 1 lakh or more and rest have population of less than 1 lakh. About 170 urban centres have population of less than 50000. There are also wide differences among class I cities with 10 cities having a population of less than 2 lakh and 6 cities having population between 2 to 5 lakh. There are only 4 cities with population more than 5 lakh and only Jaipur is a metropolitan city with a population of about 23 lakh.
Key Deliverable 3
Page 3 of II
In view of the vast difference in population across different urban cities, the various class I cities in Rajasthan have been categorized into three distinct categories as indicated below: - Cities with more than 5 lakh population - Cities with 2 - 5 lakh population, and - Cities with less than 1 lakh population The rationale for this categorization is the fact that all the reform measures suggested in the reform agenda for the sector may not be equally applicable to all cities. Therefore, wherever possible, effort has been made to distinguish the extent to which a measure would be applicable to a particular category of town. 2.1 Reform Agenda Planning If urbanisation has to aid economic development, there needs to be a planned approach to urbanisation. Thus, ensuring proper planning is the critical and first element of our reform agenda. Over the last decade, Rajasthan has experienced a decadal urban growth rate of 31.17%, which is equal to the growth rate of urban population (1991-2001) for whole of India. Some of the key aspects relating to the urban sector in Rajasthan are as follows: - Jaipur has experienced a very high rate of growth of 59% over the last decade - Other large cities such as Ajmer, Bikaner, Jodhpur, Udaipur and Kota have experienced a growth rate of 20-30%, despite having a lower population base as compared to Jaipur, indicating that these urban centres have not contributed fully to ensuring growth of economic opportunities At the same time, smaller urban centres have emerged during the last decade and the decadal rate of growth of population in these cities is mentioned below: - Ganganagar - 38% (Key centre contributing to agriculture production in the state) - Hanumangarh - 58% (Key centre contributing to agriculture production in the state) - Bhilwara - 52% (Industrial town with a focus on textiles) - Kishangarh - 42% (Centre for mining activity) - Jhunjhunu - 39% (Presents enormous potential for tourism and has lot of unexplored tourist attractions) The fast rate of urbanisation in these cities has been on the basis of the strength of economic activity in the cities and their adjoining areas, which needs to be harnessed to ensure overall economic growth. The first step in linking urbanisation to economic growth is ensuring that the linkage is established right at the planning stage. However, the existing framework for planning does not facilitate in undertaking economic planning with city as the central unit.
Key Deliverable 3
Page 4 of II
City Development Planning In our view, the planning intervention in select towns in Rajasthan is best addressed through City Development Planning (CDP). The CDP framework would ensure that integration between the economic development needs of a city and the urbanisation process is established right at the planning stage.
Key Issues
Lack of integration between planning and economic development
Proposed Solution Framework
City Development Planning
Inadequate focus on planning
Departmental planning approach
The CDP framework would be the appropriate intervention as it would help eliminate the current issues involved in urban planning. These issues are highlighted below: - Preparation of master plans is the responsibility of the Town Planning Department. The municipalities, consisting of people representatives do not play any role in preparation of master plans. While the municipalities have a town planner on deputation from Town Planning Department, the role of this individual is restricted to clearing building plans. - Economic development requirements and future potential of the city are not adequately integrated into the master plans - There is absence of any legal framework for guiding the preparation of city level plans. - Existing legislations do not specify the role of multiple agencies in city level planning. The proposed solution for strengthening planning function is to adopt a City Development Planning (CDP). Increasingly, this tool is being used by progressive cities across the world for long-term planning. Johannesburg, Bangdung (Indonesia), etc. have undertaken such an exercise. Cities such as Coimbatore, Tiruppur and Bangalore in India have already undertaken such exercise. More than 10 towns in Uttar Pradesh are currently in the process of undertaking this activity. Recognising the importance of CDP more than 50 ULBs in Tamil Nadu have embarked upon a similar exercise. Thiruvananthapuram in Kerala has also embarked on such an exercise. The process involved in preparation of CDP is presented on the following page
Key Deliverable 3
Page 5 of II
Development of city vision
Identify strategic initiatives
Define Action Plan/ Projects
Implementation and monitoring
Involve multiple stakeholder at the city level to arrive at a common vision for the city
Initiatives necessary to achieve the vision. These could include removing bottlenecks or creating condition for realising opportunities or both
Each initiative broken down into specific actionable project that need to be implemented
Fixing the responsibility for implementation among the various agencies at city level together with the time plan
The CDP needs to be undertaken for all class I cities as these cities are most likely to drive urbanization in the short to medium term. As the first step the CDP process needs to be initiated for cities that hold most potential and where implementation can be undertaken with relative ease. The CDP may not yield the proper benefits if it is undertaken for smaller towns with population less than 1 lakh as they may not have sufficient economic potential at this stage. For these towns, the existing process of preparation of master plans through town planning department could continue. However, it should be ensured that the master plan takes into account the need of land for economic purposes. In order to identify the cities for which this exercise needs to be undertaken immediately, the population of class I cities along with their respective decadal rate of growth has been analysed. The analysis of the findings is presented below.
60
Jaipur
Hanumangarh Gangapur City Bhilwara
50
Decadal Growth Rate (91-01)
40
Kishangarh Jhunjhunun Ganganagar Tonk Pali

Bharatpur Alwar
30
Sawai Madhopur
Kota Udaipur Bikaner Ajmer
Jodhpur
Sikar Churu 20 Beawar
10
0 0 100000 200000 300000 400000 500000 600000 700000 800000 900000
Population (2001 Census)
Key Deliverable 3
Page 6 of II
For the top six cities, initiatives for economic revival through development of urban infrastructure is already underway in the Rajasthan Urban Infrastructure Development Project (RUIDP) and therefore, the CDP need not be undertaken for these cities at the outset. Cities that have exhibited high rate of growth are: Hanumangarh Ganganagar Kishangarh Bhilwara Jhunjhunu Gangapur City Tonk and Pali As a first step a representative set of cities that have potential or have already displayed strong growth of economic activities (agriculture, industry, tourism and mining) could be taken for development of CDP. These should include: Ganganagar: Agriculture Kishangarh: Mining Bhilwara: Industry Jhunjhunu: Tourism CDP has been undertaken for a number of cities. The key outcomes of the CDP process for Coimbatore is presented below. It shows the outcomes at each stage of the process and the linkages between the different stages.
City Vision: The city vision was developed through a highly consultative process involving multiple stakeholders. The Citys vision was to develop its potential as the Manchester of the South. The key issues/opportunities identified were: Recession in industrial production and inadequate trading facilities Undue delay in movement of goods City a key node for surrounding tourism sites Strategic Initiatives: In Coimbatore, the City Corporate Plan identified the following strategic initiatives : Facility siting for the textile industry and creation of a cotton futures exchange Development of a Centre for Information Technology Development of the city as a node for surrounding tourist attractions (Ooty, Palakkad) Decongestion of the city centre Development of action plan/ projects:The action plan identified specific projects that need to be planned and executed for each strategic initiative. For instance, for decongestion of the city centre, the following projects were identified: Relocation of truck terminals, grain market, wholesale market and iron & steel market Development of radial bus stands Development of industrial park along proposed bypass Implementation and monitoring: The different institutions responsible for executing the identified projects (for each initiative multiple projects were identified) include: Coimbatore City Corporation Local Planning Authority District Industries Centre Indian Chamber of Commerce and Industry (local chapter) Tamil Nadu Electricity Board Voluntary Organisations Citizen Groups
Key Deliverable 3
Page 7 of II
As an illustration, the possible outcomes of a CDP for Ganganagar could be as follows: City Vision: Develop Ganganagar as a node for agro-based industries in Northern India Strategic Initiatives: - Decongestion of city - Upgradation of urban infrastructure - Promote Agro-industrial development - Strengthening transportation linkages Identify action plan/ projects: This step would include identifying one or more actionable projects that would help achieve each of the above strategic initiatives
Decongestion of City Upgradation of urban infrastructure Promote AgroIndustrial Development Strengthening transportation linkages 4Relocation of agriculture mandi (Expansion of its area) 4Relocation of bus-stand and development of radial bus stands 4Development of Rail Over Bridges 4Development of sewerage facility and treatment plant 4Widening of city roads 4Disposal facility for solid waste and bio-medical waste 4Creation of AEZ for a specific product 4Development of cold storage network 4Upgradation of facilities in Agriculture Mandis 4Strengthening and widening of SH No. 7 4Construction of a bypass 4Broad-guaging of rail network
Implementation and monitoring: Before fixing responsibility for implementation, the issue relating to resource availability should be examined. Overall financing plan should be prepared for all projects. Feasibility of involving private sector in specific components should be established. Once the funding pattern has been finalised, the responsibility for implementation should be fixed. The support required from different city level institutions for each project should also be pre-determined and agreed upon. The second issue relating to urban planning is the agency that would be responsible for undertaking this activity. The presence of multiple institutions in urban planning and development is highlighted through the exhibit given below. As can be seen, there are overlapping responsibilities across various urban services and there is no over arching agency or process to ensure integrated planning at a city level.
Urban Service / Activity Water Supply Sewerage Solid Waste Management RoBs/ Flyovers Urban Development and Housing Land Use Planning Financing Responsibility PHED UIT/ PHED Municipality PWD/ UIT UIT/ Housing Board/ Municipality Municipality/ UIT/ District Admn/ State Govt Joint
Key Deliverable 3
Page 8 of II
Under the current framework, municipalities have very limited role to play in urban management. There are multiple agencies responsible for various urban services and activities relating to urban management. This has resulted in a departmental approach to planning and urban infrastructure development. The roles and responsibilities of institutions have not been clearly demarcated. Funding for urban infrastructure is the responsibility of each department. As a result, infrastructure upgradation is seldom taken up in an integrated manner and is left to departmental priority.
Key Issues
Institutional Capacity for undertaking and implementing CDP

Options for Institutional Framework Option A - Creation of a State Level Urban Development Corporation Option B - Creation of UIT/ Development Authority Option C - Integration of UIT into municipalities as the planning division
Absence of institutions in a number of cities
Lack of capacity among municipalities
Preparation of a CDP requires expertise in urban planning and project preparation. Such expertise is available to a certain extent among city level development institutions such as DA and UITs. There is only one development authority and 9 UITs in the state. That leaves about 210 urban centres that lack any institutional framework for integrated urban planning and development. The defacto responsibility for undertaking urban development in other towns falls upon municipalities. These municipalities lack the financial resources as well as technical expertise for urban planning and development. In order to address the above issue, three options have been considered for strengthening the institutional framework: - Option A : Creation of a State Level Urban Development Corporation - Option B : Creation of UIT/ Development Authority - Option C : Integration of UIT into municipalities as the planning division. The merits and demerits for each of the option have been analysed below. Option A - State Level Urban Development Corporation Merits Centralisation of planning function Possible to remove multiplicity of institutions UITs and TP departmentt could be re-organised as the corporation De-merits Against the tenets of 74th CAA Large scale reorganisation of a number of institutions
Key Deliverable 3
Page 9 of II
Municipalities would have a marginal role in planning for urban development Option B - Creation of new UITs/ Development Authorities Merits Specialised agencies created in cities which do not have any such agency Minimal changes in existing structure De-merits Against the tenets of 74th CAA Fundamental issue of multiplicity not addressed Would have high cost implication due to creation of new institution. Short-term solution Option C - Integration of UITs as the planning division of municipalities Merits Integrates the principle of 74th CAA Municipalities would have an important role in urban planning Minimises multiplicity of mandates in existing towns Need for capacity building of municipalities is minimised Municipality benefits from large scale urban development De-merits Achieving operational integration would require strong political and administrative will Option C seems the most preferable solution as it fully confers to the key principles of the 74th Constitutional Amendment and also addresses the existing issues. The 74th Constitution Amendment Act has established the primacy of Municipalities in undertaking economic planning at the city level. A CDP would take an integrated view of the needs at the city level. Since Municipalities represent the people, the responsibility for preparation of the City Development Plan should be the responsibility of the Municipality (at least in larger towns) and other institutions should play a facilitatory role in the process. Such consolidation would also have the following benefits: The need for building capacity for urban planning in municipalities in towns were UITs are present would be minimised as these skills would be readily available In cities that do not have any UIT, a new town planning division should be created in the municipality and should be staffed with people have education and experience in urban planning. In the class I cities viz., Beawar, Pali, Sikar and Tonk which do not have UITs, urban planning capacities would need to be created in the municipalities.
Key Deliverable 3
Page 10 of II
This option would also enhance the role of municipalities in shaping the future plans for urban development in their respective cities. Involvement of elected representatives would ensure that there is wider participation in city level planning. The multiplicity of roles between UIT and Municipalities would be automatically removed.
Apart from the above measures, the following initiatives need to be taken to further strengthen the planning function and to effectively implement the principles of the 74th Constitutional Amendment: Creation of District Planning Committees Creation of Ward Committees Creation of Metropolitan Planning Committees District Planning Committee (DPC) The Rajasthan Municipal Act provides for setting-up of DPCs for consolidation of development of rural and urban areas within a district. The DPC is expected to prepare a development plan by reconciling the interests of panchayats and municipalities. However, these have not become functional. Ward Committees To further strengthen the process of decentralisation and involvement of people in city level planning, the role of Ward Committees should be institutionalised. The Rajasthan Municipal Act provides for establishment of Ward Committees in cities with more than three lakh population. While some Ward Committees have been set-up they do not play an active role in city level planning and management. Specific steps that could be taken in this direction are: The roles of responsibilities of Ward Committees should be specified by the State Government Formation of these Committees should be one of the consideration for devolution of funds to Municipalities At least 10-20% of the municipal budget each year should consist of projects identified by Ward Committees Certain responsibilities for monitoring municipal staff (especially those involved in solid waste management as majority of the municipal staff are involved in primary and secondary collection of garbage) as well as monitoring small value contract works could be delegated to Ward Committees. This would reduce the work load on the top management in municipalities and at the same time also strengthen the decentralisation process.
Metropolitan Planning Committee (MPC) A MPC needs to be set-up for Jaipur and provisions for setting-up of the MPC have been provided in the Rajasthan Municipal Act. Such a committee could act as an intermediary between farmers and government regarding acquisition of land for urban development. An MPC would ensure that the conflicting interests of land for agriculture and urban development are harmonised.
Key Deliverable 3
Page 11 of II
Strengthening role of Town Planning Department (TPD) and Directorate of Local Bodies (DLB) Town Planning Department (TPD) and Directorate of Local Bodies (DLB) are responsible for carrying out a number of administrative functions for the Urban Development Department. The responsibilities of TPD and DLB are as follows: - TPD is responsible for the preparation of master plans for urban areas. The other major functions are as follows: Planning, monitoring and coordinating Integrated Development of Small and Medium Town projects Preparing schemes and projects for local bodies Advising on matters relating to urban development - Directorate of Local Bodies (DLB):DLB is the administrative agency for all Municipalities in the state. The major functions of DLB are as follows: Advising the State Government on policy formulation w.r.t Municipalities in the state Co-ordinating and monitoring agency for operation of various state and centrally sponsored schemes for the urban sector Town Planning Department (TPD) and Directorate of Local Bodies (DLB) could be re-aligned along functional skills and provide assistance to local bodies. While TPD possesses urban planning skills, DLB has technical resource base for activities relating to solid waste management, revenue mobilisation and urban taxation (Property Tax), etc. The specific functional areas could include: - Solid Waste Management - Training - Urban Planning and architecture - Urban Taxation (Property Tax) The role of these agencies should be thus to provide support to municipalities in urban cities (other than 20 class I cities where UIT exists or where it has been recommended that the state create a separate planning function in the municipalities) that do not have urban planning and other functional expertise by deputation of staff during the interim period in which such capacities are being built and also provide functional resource base for municipalities for planning and implementing urban infrastructure projects. Assistance of external experts Preparation of CDP would require multi-disciplinary skills involving community participation, economic planning, urban planning and land use, project preparation, etc. Since these skills do not reside among all municipalities and it would be cost ineffective to develop the same across municipalities, the state government should identify and approve a list of accredited agencies and individuals possessing these skills. The municipalities should be free to employ these agencies for preparation of the CDP. The state government should also identify a common terms of reference for the CDP in terms of its output to assist municipalities to effectively utilize external experts.
Key Deliverable 3
Page 12 of II
2.2
Reform Agenda Funding The first and second element of the reform agenda would help stream line the planning process and role of institutions. In order to implement the priority projects, the question on meeting the funding requirements, still remains unanswered. Accordingly, the third element of the reform agenda deals with recommendations aimed at ensuring higher levels of fund availability for the urban sector. KD2 has already highlighted the enormous funding requirement for urban infrastructure in the class I cities in Rajasthan over the next 20 years. Existing budgetary sources are expected to meet only about 25% of the requirement. The issues relating to the funding gap and the proposed solution framework are presented in below.
K e y Is s u es
In ad eq uate d evo lu tion of fu n d s from S tate
L ow m o b ilisatio n of ow n so u rces o f reven u e
In a d e q u a c y o f ex is tin g fu n d in g s o u rces
In adeq u ate leverag in g o f resou rces
In su fficient co st reco very

1.Enhance revenue mobilisation from own sources, especially property tax 2.Innovative use of urban land for resource generation 3. Improve cost recovery in a phased manner 4.Streamlining devolution of funds to ULBs 5.Create mechanism for leveraging funds for urban infrastructure 6.Access Urban Reform Incentive Fund (GoI) 7.Promote PSP for development and operation and maintenance of urban services
Key Deliverable 3
Page 13 of II
The measures for enhancing the quantum of funds available for meeting the funding requirements of urban infrastructure are presented below: 1. Enhance recovery from Property Tax 2. Innovative use of urban land for resource generation 3. Improve cost recovery through user charges in a phased manner 4. Streamlining devolution of funds to ULBs 5. Create institutional mechanism for leveraging funds for urban infrastructure 6. Promote PSP for development and operation and maintenance of urban services 7. Access Urban Reform Incentive Fund (GoI) The table given below presents the category of town to which each of the funding options would be most suitable.
Category of city to which most applicable 5 lakh and more population. Limited potential in other towns
Funding Options 1 Enhance recovery from Property Tax
Innovative use of urban land for resource 2-5 lakh population as well as more than 5 lakh population towns. 2 generation Improve cost recovery through user charges in 5 lakh and more population 3 a phased manner Less than 2 lakh population and also smaller urban centres (non class I cities) 4 Streamlining devolution of funds to ULBs More suitable for towns with more than Leveraging funds through Urban Infrastructure 5 lakh population due to presence of economies of scale 5 Fund All categories of towns as primary benefit is efficiency gains. Additional Promote PSP for development and operation benefits in larger towns due to feasibility of user charges 6 and maintenance of urban services More suitable for towns with less than 2 lakh population 7 Access Urban Reform Incentive Fund (GoI)
Property Tax has highest potential in cities with more than 5 lakh population. Since many smaller cities do not levy the tax, there is potential for immediate improvement through levy of tax in such towns as well . Potential for revenue generation from innovative use of urban land exists in all categories of towns. In case of larger towns this could be through regularisation of development. In case of smaller towns, there is potential to ensure planned development and creation of land bank to provide for future development. Cost recovery through user charges has good potential in larger cities with population of more than 5 lakh population as the willingness to pay would be higher. There would also be opportunity to cross subsidise domestic consumers due to good potential from industrial and commercial consumers.
Key Deliverable 3
Page 14 of II
Streamlining devolution of funds to municipalities would be beneficial to smaller towns (less than 2 lakh population) that may not have sufficient potential for raising revenues from own sources as compared to larger towns. Ensuring devolution of a higher percentage of funds to such towns would increase the quantum of funds available. This can be ensured by moving towards cost recovery in towns above 5 lakh population thereby making municipalities in such towns financially less dependent upon the state. Leveraging of funds for private sector participation through Urban Infrastructure Fund (UIF) would be most suitable for larger cities (more than 5 lakh population) due to economies of scale and user base. Due to higher level of economic activities in such towns there would be relatively higher capacity and willingness to pay for services. Funds from the Urban Reform Incentive Fund (URIF) could be used for supporting projects undertaken by municipalities in smaller cities (less than 2 lakh population). The support could be in the form of equity support of soft loans as the funds would be available as grant. Private sector participation in operation and maintenance of urban services could be undertaken across all cities as the scale of operations would be small and the primary benefits to be realised would be efficiency gains and better service. There would be good potential for levying user charges, especially in larger cities as there would be better willingness to pay. 1.Enhance revenue mobilisation from Property Tax The resource mobilisation from own sources of revenue (tax and non-tax) is extremely low in Rajasthan. Property Tax (PT) is the most important source of revenue, however, its potential is underutilised. PT is not levied in a number of Municipalities in the State despite the fact that it is an obligatory tax. Even large cities such as Kota and Udaipur do not levy this tax. The total collection from PT is estimated to be Rs. 20 crore per annum of which about Rs. 14 crore is collected in Jaipur. Recovery of PT in the state is low due to the following reasons: - It is not levied in a number of cities although it is an obligatory tax to be levied by the municipality - All properties have not been covered under the tax net - Leakages due to under assessment of Annual Rental Value - Leakages in the tax collection mechanism The table given on the next page shows the per capita collection from PT in Jaipur and other cities in India. It can be observed that the per capita collection in other cities, even 5-7 years ago was many times higher than the current collection in Jaipur. It also highlights that the situation in other cities in Rajasthan is even worse.
Key Deliverable 3
Page 15 of II
City Property Tax Per Capita (Rs) Delhi (MCD) 313 Mumbai 153 Chennai 120 Ahmedabad 275 Hyderabad 143 Vijayawada 140 Pune 152 Patna 105 Shimla 148 Jaipur 60 11 Rest of UAs in Rajasthan
Reference Year 1995-96 1991-92 1993-94 1995-96 1995-96 1995-96 1994-95 1995-96 1994-95 2001-02 2001-02
Per capita collection of PT in Rajasthan needs to be looked at in the context of cumulative incidence of other taxes (sales tax, user charges for electricity and water, etc.)on residents in other states vis--vis Rajasthan. It is possible that the cumulative incidence of taxes in Rajasthan is higher as compared to that in other states. The point being argued is that the collections are low primarily due to ineffective administration of the tax (factors highlighted above) and not due to low rate of tax. Commenting on the enhancement in rate of tax would require a detailed study which is beyond the scope of the current assignment. The presence of significant potential for revenue mobilisation from Property Tax has been well established. The extent of this potential could be gauged from the fact that the annual collection of PT in Jodhpur Municipal Corporation ranged between Rs.2-9 lakh during the period 1976-2000. The corporation adopted a simplified SelfAssessment System (SAS) for Property Tax in 2000-01 and the collections increased to Rs. 1.18 crore during 2000-01. It is important to note that the collections improved mainly by strengthening the implementation system and ensuring wider coverage of properties in the tax net. Government of Rajasthan (GoR) has adopted the SAS for PT across the state. A number of cities across India, viz., Bangalore, Patna, Hyderabad, etc. have been able to show a manifold increase in tax mobilisation by switching over to the system. However, it is necessary for GoR to formulate an action plan for implementation and ensure that all Municipalities adher to the action plan. The key steps involved in the action plan are as follows: - Build internal commitment and faith of municipal councillors and tax administration staff on the need for SAS - Conduct a well-thought out PR campaign highlighting the benefits of SAS over the earlier system. The fact that the new system brings greater transparency and reduces subjectivity in the tax administration process should be highlighted
Key Deliverable 3
Page 16 of II
Ensure complete coverage of all assesses under the tax net by preparing a comprehensive assessment list. This is essential to bring those assesses under the tax net, who do not voluntarily disclose their tax. Carrying out a detailed physical survey and mapping all properties on a Geographical Information System (GIS) would also help in unearthing properties hitherto not in the tax net. Conducting property tax camps throughout the city to facilitate assesses to file their tax return Introduce a graduated scheme of discounts to encourage more and more assesses to file their tax returns in the beginning of the year
2. Innovative use of urban land for resource generation The potential of urban land for resource generation has been under-utilised by Municipalities. Since UITs were earlier responsible for large scale urban development, Municipalities only received a portion of the sale proceeds of land sold by the UITs. With consolidation of UITs and Municipalities, there is an opportunity for Municipalities to benefit from large scale development of urban land. The first step in realising the potential is to ensure that properties belonging to Municipalities are identified. An exercise undertaken by Ludhiana Municipal Corporation un-earthed properties worth Rs. 760 crore belonging to the Corporation. This was primarily due to lack of updation of asset records by the municipal corporation The next step is to establish legal ownership of such properties and remove encroachments Finally a disposal mechanism for such land has to be put in place. The options include: - Outright sale - Long-term lease - Construction of shops or commercial establishment - Provide land as equity for commercial ventures with private sector Apart from better utilisation of municipal property, there is opportunity to raise resources from ensuring planned development of urban land. There is opportunity for revenue mobilisation in centres such as Jaipur, Jodhpur, etc. by adopting innovative measures relating to building permission and urban land use. This should be taken up only in those areas where the land is being used for commercial purposes and there is no realistic chance of reverting to the planned land use. In smaller centres that are yet to witness unplanned development, land banks should be created and offered to private sector for further development In order to ensure better utilisation of urban land, there would be need for an appropriate urban land policy. The key principles
Key Deliverable 3
Page 17 of II
of such a policy have been identified later in the section on Regulatory and Policy Reform 3. Improve cost recovery through user charges in a phased manner Our analysis reveals that recovery from user charges for water supply covers only 35-40% of the cost of service provision. The reasons for such low cost recovery are as follows: Water tariffs are currently set at a level that does not cover the cost of service provision. There is also no framework for regular revision in tariffs in line with the increasing cost of service provision. Both the factors have a cascading effect on keeping the cost recovery at low levels Physical losses in the water distribution system reduces the quantity of water supplied to customers Leakages in the billing and collection system for water supply Recovery of the cost of service provision for water supply through user charges is essential for ensuring long-term sustainability in the sector. The action steps for ensuring cost recovery include: Enhancing the existing tariff levels to support cost recovery Introducing a regulatory framework for water supply and sewerage which would provide greater validity and a sound basis for regular tariff revisions. To start with, this could be done through a common regulator suggested as part of Rajasthan Infrastructure Development and Regulation Act The recommendations relating to urban water supply have been dealt with in detail in the section on water resources. Apart from water supply, there are other municipal services for which the cost of service provision needs to be recovered through user charges. These include: - Sanitary tax for construction and maintenance of public toilets - Street lighting tax Provisions for levying the above taxes is also provided in the Rajasthan Municipal Act, however, they have not been levied. Sewerage charges are currently being imposed at 20% of the water charges and collected by PHED although municipalities are responsible for O&M of sewerage facilities. Further, the user charges currently levied do not reflect the cost of service provision. Therefore, it is necessary, that sewerage charges should be levied after assessment of cost of service provision. Since the cost of service provision would be different in different cities, the sewerage charges should also be different in order to effectively reflect the cost of service provision. The GoR could also consider imposing a user charge for Solid Waste Management (SWM). SWM also accounts for majority of the funds spent by municipalities on urban service.
Key Deliverable 3
Page 18 of II
In most of the ULBs, more than 50% of the staff is involved in street cleaning and garbage removal. Primary collection, including street sweeping is a specific service against which common beneficiaries could be identified. To begin with, the user charge could be levied on bulk generators of garbage such as cinema halls, restaurants, etc. Depending upon its success, the user charge could be extended to other commercial establishments and finally to all residents. Municipal Corporation of Hyderabad levies a user charge of Rs. 400 per tonne for lifting garbage from restaurants, hotels, lodges, function halls, clubs and private guesthouses Before imposing the user charge, the quality of service to be delivered should be specified, and there should be a mechanism for penalising the service provider (municipality or private sector) in case of failure in service delivery The user charge could be levied along with PT. In case of projects involving primary collection of municipal waste through private sector, the municipality could assign the right to collect this user charge against the service provided by the private agency.
4. Streamlining devolution of funds to Municipalities With abolition of Octroi in 1998, the largest source of income for Municipalities was taken away. While the state government provides compensation in lieu of Octroi, the annual rate of increase is only about 5% as compared to the 20% growth experienced in Octroi collections at the time it was abolished Entertainment Tax is a source of income that should accrue to the Municipalities. According to the second State Finance Commission (SFC) in Rajasthan, the state government has not paid any compensation in the last two years despite the commitment to pay all the proceeds from this tax to municipalities within 4 years commencing 1997-98. States like Tamil Nadu have assigned 90% of the proceeds from this tax to municipalities.The existing issues and recommendations relating to streamlining devolution of grants to municipalities is summarised below.
Existing Situation
Devolution of funds to ULBs (Rs. 40 crore p.a)
Allocation based on formula (Rs. 39 crore)
Incentive grant (Rs. 1 crore)
Property Tax excluded Municipal Corporations not eligible
Key Deliverable 3
Page 19 of II

Devolution of funds (Rs. crore 90 crore) 50% of Entertainment Tax (Rs. 18 crore p.a) 10% annual increase in compensation in Lieu of Octroi (Additional Rs. 30 crore per annum)
70%
10%
20%
Urban Infrastructure Fund - Rs. 18 crore)
Incentivise collection of PT Include Municipal Corporations Establish benchmarks for incentivisation
Entertainment Tax Entertainment tax should be within the domain of Municipalities. The SFC has recommended that 15% of the proceeds of this tax should be devolved to Municipalities. Ideally, all the proceeds from entertainment tax should be devolved to Municipalities. In case this is found to be infeasible in the short term, the same should be achieved in a graduated manner over 5 years. Even if 50% of the proceeds from this tax are devolved to Municipalities it would generate about Rs. 18 crore per annum. It should be noted that the Tamil Nadu State Finance Commission (TNSFC) has recommended that 90% of the proceeds from Entertainment Tax should be devolved to Municipalities Compensation in Lieu of Octroi Given the fact that Octroi was the largest source of income for Municipalities before its abolition and no other source of income has replaced Octroi, the reduction in compensation in lieu of Octroi has created a severe resource crunch for Municipalities in Rajasthan. The State Government should ensure that the rate of increase in the compensation in lieu of Octroi devolved to Municipalities should be at least 10% per annum. Currently about Rs. 286 crore is devolved as compensation in lieu of Octroi (for 1999-2000, as per the Second State Finance Commission Report) and ensuring 10% annual increase would provide about Rs.28-30 crore per annum
Key Deliverable 3
Page 20 of II
Inter-se allocation of funds The total quantum of funds available from the above measures would be about Rs. 90 crore per annum. The indicative inter-se allocation of funds for different purposes should ensure that the multiple objectives sought to be achieved through devolution of funds are effectively addressed. The following distribution of funds could be considered: - 70% based on allocation formula - 20% allocated to a dedicated Urban Infrastructure Fund (this has been discussed in detail later in the section) - 10% as incentive fund for municipalities The indicated distribution mechanism has the following benefits - Dedicated funds available for an Urban Infrastructure Fund which could be used for leveraging further resources - The quantum of incentive fund is significantly enhanced thus increasing the reward for municipalities that undertake capacity building measures and show improvement in revenue mobilisation initiatives Incentive Mechanism 0.05% of the states own net tax revenue has been set-aside as incentive for raising resources. This amounts to only Rs. 3.84 crore for 220 ULBs. The quantum of incentive fund should be enhanced to atlest Rs. 9-10 crore which would still represents only about 0.13% of the States own tax revenue. Over time this would need to increase to encourage better performance. The Tamil Nadu State Finance Commission has recommended the creation of equalisation and incentive fund of 1.2% of States own tax revenue The incentive fund is only applicable to revenue recovery from discretionary taxes and not to obligatory taxes such as Property Tax. Property Tax represents the largest source of income and therefore, the collection of Property Tax needs to be incentivised. Municipal Corporations have been excluded from the purview of the incentive fund as the quantum of the fund is too small. However, Municipal Corporations have the largest potential to raise revenue from discretionary taxes. A component of the fund could be kept separately for Municipal Corporations as they also need to be incentivised for better revenue collection An assessment of revenue potential should be carried out in all Municipalities in order to arrive at a realistic estimate of taxes and user charges that could be collected. There should be acceptance from the Municipalities regarding the revenue potential and this should also be reflected in the budget as proposed income. The actual volume of incentive fund for each Municipalities should be based on the extent of achievement against the revenue potential.
Key Deliverable 3
Page 21 of II
5. Mechanism for leveraging funds for urban infrastructure The existing issues relating to leveraging of resources for urban infrastructure are: There is no mechanism for leveraging the funds available from state government for raising additional resources Most of the funds are used for operation and maintenance leaving very little for capital investment Private sector participation, especially for operation and maintenance of urban services has been attempted in very few cases. For example in water supply in Alwar and Solid Waste Management in Jaipur.

Grant based on SFC recommendations Savings from RUIDP or other sources
Rs. 100-125 crore Rs. 18 crore
Funds set aside under urban renewal fund
Rs. 3-5 crore
Urban Infrastructure Fund (Rs. 125-150 crore)
Managed by Asset Management Company
80%
10%
10%
Capital subsidy for private sector projects Loan funding for projects taken by municipalities
Capacity building of municipalities
Facilitate project preparation for private sector participation
The funding support available from government and other institutional sources is utilised by municipalities for funding infrastructure projects. The current mechanism has the following drawbacks: - Lack of leveraging of funds to generate more resources from other sources - There is no framework for supporting project preparation which is a crucial aspect in determining viability of projects for private sector participation - Lack of support for private sector participation as many projects would require either initial capital subsidy or O&M support in those cases where direct user charges would be insufficient
Key Deliverable 3
Page 22 of II
Remunerative as well as non-remunerative projects compete for the same pool of funds. As a result projects that are not amenable for direct user charges are often accorded lower priority The State Government has created an Urban Renewal Fund by allocating 3% of the fee received from conversion of agriculture land into this fund. The expected flow into this fund is estimated to be about Rs. 3 crore per annum. Grants from state government as well as contributions from ULBs would also be made available in the fund. The fund is likely to be used for the following purposes: Special assistance to deal with natural disasters Assistance for taking up special projects for public services Heritage conservation Grants and interest free loans to ULBs However, given the quantum of the fund it is unlikely that it would be able to make any significant impact. The issues identified above could be effectively addressed by creating an Urban Infrastructure Fund (UIF) in Rajasthan. The UIF could help address the dual need of funding urban infrastructure projects and at the same time incentivising and facilitating capacity building initiatives in municipalities. Benefits of an UIF The benefits of creating an UIF in Rajasthan are presented below: Implementing a directed programme for channelising state grants for municipalities. The grants could be used effectively for catalysing municipal reforms and could also be used for leveraging the resources available from GoI and other sources Ensure a dedicated channel of funds for funding urban infrastructure projects. Mixing state grants with loan funds would help reduce the effective borrowing cost for municipalities Earmarking resources for undertaking capacity building of municipalities Financial intermediation through pooling the requirements of multiple municipalities is an effective mechanism for municipalities to access the capital market in the interim period till the time they have the capacity to directly access the market It is proposed to create an Urban Infrastructure Fund (UIF) with a Corpus of about Rs. 120-150 crore. The corpus would be made up of the following sources: Initial capitalisation of about Rs. 100-120 crore could be available by channelising savings from RUIDP into the fund. Alternatively, the government could look at other institutional sources or approach a financial institution to provide the initial capital Rs. 18-20 crore would be available by setting aside from devolution of grants to ULBs Rs. 3-5 crore would be available from Urban Renewal Fund. The annual receipts under this fund could be channeled to the UIF
Key Deliverable 3
Page 23 of II
The annual inflows into the UIF (devolution of grants and Urban Renewal Fund) would be about Rs. 20-25 crore. Repayments of loans would also flow into the fund and would be available for future funding Utilisation of funds The UIF should be used for leveraging funds for investment in urban infrastructure projects in Rajasthan. With this objective the indicative utilisation of funds from the UIF could be as follows: 80% for providing capital subsidy and loan funding for urban infrastructure projects that could be taken up by municipalities. The quantum of funds available would be about Rs. 100-125 crore initially. After the first round of projects have been funded, about Rs.20-23 crore would be available annually for funding projects. Since the annual devolution would not involve any interest cost, it could be used for extended loans at lower rates to municipalities. To ensure linkage with the CDP process, the first phase of projects to be funded by UIF could be those identified through the CDP. 10% could be available for project preparation for assessing viability of involving private sector in developing urban infrastructure projects. This would identify the viability of executing the project through user charges. The extent of capital subsidy or O&M support required for making the project attractive to the private sector should also be identified 10% of the funds could be dedicated for assisting municipalities for undertaking capacity building measures such as: Computerisation of property tax records Implementation of double entry accounting system, Geographical Information System (GIS) Training municipal staff on complaint redressal, community participation and private sector involvement, etc. Management of the UIF The management structure adopted for operationalising and managing the UIF would be critical in ensuring success of the UIF. The UIF should be managed by an independent Asset Management Company consisting of professional management. The most suitable example relating to operation of an UIF elsewhere in the country relates to Tamil Nadu Urban Development Fund (TNUDF). The case study presented on the next page analyses the stages in evolution of TNUDF.
The Asset Management Company should have the following responsibilities: - Management of the UIF in Rajasthan and raising institutional finance - Assisting municipalities in identifying and developing projects - Defining the investment criteria and project appraisal guidelines
Key Deliverable 3
Page 24 of II
Monitoring utilization of funds and establishing performance criteria for future access to funds for ULBs. While Government could have the largest equity initially (due to initial capitalisation of the UIF), this equity could be divested progressively as the UIF is able to show good performance and repayment record. -
TNUDF is managed through a separate asset management company in which the majority holding is with the private sector (ICICI, HDFC and IL&FS). The Genesis of TNUDF can be found in the Municipal Urban Development Fund (MUDF) that was established under a World Bank Project in 1988. After 8 years of operation, TNUDF was set-up with majority stake for the private sector.
Municipal Urban Development Fund (1988-1996) Tamil Nadu Urban Development Fund (1996 - Till Date) Raised over Rs. 100 crore through a bond issue in 2000 Facilitate ULBs in Bond Issue - Rs. 29 cr for Madurai in 2001 Raise funds through bond issue for smaller towns through pooled finance mechanism
Managed by GoTN
Managed by AMC with 51% stake with private sector
Funds raised without any State Government Guarantee
Phase II Once the UIF is able to demonstrate a good track record and municipalities also build up capacity in planning and executing projects, it could raise bonds through a pooled finance mechanism by combining the funding requirements of certain projects into one bond issue which could be repaid by municipalities through project specific revenues. Issue of municipal bonds Municipalities across the country are considering issuing municipal bonds for financing urban infrastructure needs. However, there is need for comprehensive restructuring of municipalities on all dimensions (financial, institutional, systems, human resource, etc.) before municipalities in Rajasthan can directly access the capital market. The Credit Rating Information Services of India Limited (CRISIL), one of the premier rating agency in the country has rated a few municipalities for bond issues. The factors considered relevant while rating a bond issue by the municipality are presented below: - Legal and administrative framework - Economic base of service area - Quality of municipal finances - Quality of existing operations - Assessment of managerial capacity - Project details and - Credit Enhancement Structure The details of parameters under each of the above areas is presented in annexure 1. Ensuring a good credit rating would require all round improvement in management of municipalities. This is addressed in detail in the subsequent section on capacity building of municipalities.
Key Deliverable 3
Page 25 of II
6. Access Urban Reform Incentive Fund (GoI) The Urban Reform Incentive Fund (URIF) has been set-up by the GoI to provide reform linked assistance to states. The total quantum of funds available from URIF is Rs. 500 crore during 2002-03. Rs. 23 crore has been apportioned as Rajasthans share under URIF. The Fund seeks to incentivise reforms in the following areas: - Repeal of Urban Land Ceiling and Regulation Act at the state level - Rationalization of high stamp duty - Introduction of computerisation in property registration - Reforms in Property Tax system and improving collection efficiency - Levy of realistic user charges to cover full O&M cost recovery by the end of the tenth plan period. - Adoption of double entry system of accounting To access the URIF, GoR has to sign a Memorandum of Agreement with Ministry of Urban Development and Poverty Alleviation, Government of India that it would undertake the above reform measures. GoR has already taken a number of initiatives on the above areas. These are highlighted below: - Adoption of area based Self-Assessment-System for Property Tax - The process of adoption of double entry accounting system is already underway under RUIDP for the six towns and therefore, substantial work has already been undertaken on this front. - ULCRA has already been repealed in Rajasthan Reform agenda for the urban sector also underscores the need for reforms in PT system and the need to increase user charges for recovering cost of service provision. Agreement by GoR on the terms and conditions laid down above will help the state in accessing additional funds besides initiating reforms (and benefiting from them) in the sector. Since funds would be available as grant, the URIF could be channeled for undertaking urban infrastructure projects in smaller towns. It could be used for subsidising the cost of project and promoting private sector participation in such towns. 7. Promote Private Sector Participation (PSP) in development and Operation and Maintenance of urban services Rajasthan has very limited involvement of private sector in delivery of urban services. Maintenance of water supply in Alwar is being done through private sector and there are some other isolated examples of primary collection of garbage in cities like Jaipur, Jodhpur, etc. being undertaken through private sector. However, there is opportunity for larger involvement of private sector in delivery of urban services. Besides reducing the funding
Key Deliverable 3
Page 26 of II
requirement for urban infrastructure (to be met from government sources), PSP also brings the following benefits: - Lower cost of operation and maintenance: It has been observed in a number of cases that O&M expenditure has significantly come down by involving private sector due to effective uitlisation of labour. - Expand service coverage: Most of the municipalities are unable to effectively service the whole area under their jurisdiction due to paucity of staff. In such a scenario, involving the private sector to provide municipal services, especially in the extension colonies of the city would ensure full service coverage - Quality of service: In a number of cases it has been found that the quality of service improved with the involvement of private sector The following table shows some of the options for involving private sector that has been employed by municipalities as well as other agencies involved in providing urban services. It also highlights the indicative savings achieved through PSP. Cities that have been proactive in engaging private sector are Rajkot, Chennai, Mumbai, Tirunelveli, Pune, Ahmedabad, Ludhiana, etc.
Service Water Supply Activities Billing and collection Maintenance of pumping stations O&M of water treatment plants Maintenance of pipelines Construction of new treatment plant Solid Waste Manegement Primary collection Transportation Treatment & Composting Sanitation O&M of sewage pumping plants Construction and O&M of new plants Maintenance of parks Roads Maintenance of streets and roads Construction of bypasses Street lighting Indicative Savings 100% collection efficiency 56% cost savings 30-40% savings 20% savings Not Available 15-40% savings 20-45% savings Not Available 25-35% savings 50-60% savings 40% savings Not Available Not Available 90-100% service efficiency, 20Maintenance and replacement of streetlights 30% cost savings
Private sector participation in urban services in India has been mainly in the form of operation and maintenance of service delivery systems. These have mostly been achieved through service and management contracts. There are very few examples of private sector participation through concessioning involving large investments. However, there is opportunity for undertaking city wide urban infrastructure projects (distribution of water supply, primary and secondary collection of garbage, etc.) which also involves capital investment by private sector. Such opportunities would exist in large towns (more than 5 lakh population) where, due to higher economic and user base, there would be potential to ensure adequate returns for the private investor.
Key Deliverable 3
Page 27 of II
The fundamental issue hampering PSP in management of urban services in Rajasthan is the lack of a clear policy and legislative framework. This issue is exemplified through the following points: - The Rajasthan Municipal Act does not clearly specify the powers of municipalities to involve private sector in management of urban services. Further, in the absence of a clear policy guideline from the state government, the municipalities are not proactive in seeking out PSP in urban services. - The state government does not have an explicit policy of recovering user charges for municipal services. Low cost recovery also hampers initiative of private sector to manage urban services. Recognising the potential for involvement of private sector, especially in waste management, GoR has formulated a policy for the management of solid waste and bio-medical waste in Rajasthan through private sector. According to the SWM policy, a state level empowered committee has been formed for the approval of proposals and selection of private party for setting up of Waste To Energy (WTE) and Waste To Compost (WTC). The policy also specifies the concessions available to and responsibilities of private entrepreneurs. Based on the policy, proposals have been invited from private sector for SWM as well as for bio-medical waste disposal in class I cities. For SWM, more than two proposals have been received for Jaipur, Jodhpur and Kota. These proposals are under consideration by the State Government. For other cities only one or no proposals were received. For these cities, bids have been re-invited. For Biomedical waste disposal, more than two proposals have been received for Jodhpur, Kota, Bikaner, Ajmer, Udaipur and Kishangarh. These proposals are under consideration. The reasons for lack of response to the policy is as follows: - The selection criteria for parties have not been clearly indicated - There are multiple layers of decision making leading to delays - There are no time limits under which the State Government has to take decisions. - Responsibility for waste segregation has not been specified - The policy does not address how primary collection and transportation of garbage to the processing site would be ensured - The policy does not clarify the role of the State Pollution Control Board (SPCB) in projects involving bio-medical waste treatment projects since SPCB has the authority for regulating bio-medical waste - Lack of clarity in the role of municipalities. Municipalities have no powers to ensure that nursing homes and hospitals hand over their bio-medical waste to the private operator The need for a clear policy and legislative framework is brought out from the above example. Promoting PSP in management of urban services requires putting in place an enabling legal and policy
Key Deliverable 3
Page 28 of II
framework. This has been discussed as the next element in the reform agenda.
2.2
Reform Agenda Policy and Regulatory and Capacity Building The Reform Agenda has identified a number of initiatives for addressing the two fundamental issues identified at the beginning of the section. Implementing these reform measures requires - Changes in the policy and regulatory framework: This would involve changes in various legislations and policy framework that currently govern the urban sector in Rajasthan - Capacity Building Plan for Municipalities: The reform measures significantly expand the role of municipalities in all aspects of urban management. There is need to undertake a systematic plan for capacity building of municipalities as it would be fundamental to bring about sustainable improvement in management of urban services
Regulatory and Policy
Private Sector Participation Access Urban Reform Incentive Fund (GoI) Recovery of taxes and user charges Rechannelising govt grants Consolidation of UITs and Municipalities Urban Infrastructure Fund City level planning
Rajasthan Urban Infrastructure Finance Corporation
Capacity Building Plan for Municipalities
Rajasthan Municipal Act Proposed changes would enable private sector participation, especially for operation and maintenance of urban services. It would also enable optimum recovery of user charges based on local economic conditions as well as ability and willingness to pay of urban consumers in different cities There is a need for comprehensive review of the existing Rajasthan Municipal Act to embody the provisions of the 74th Constitutional Amendment Act. It is believed that over 200 amendments are being contemplated in the Act. In such a scenario it would be appropriate
Key Deliverable 3
Page 29 of II
to draft a new legislation. This legislation should include enabling provisions relating to the following: - Mandate for city planning should be incorporated as part of functions of municipalities - The Sections which refer to the manner in which the Municipal Board carries out its duties should be amended to include a specific proviso which would provide freedom to ULBs to carry out their functions through private party and/ or through joint ventures with private party. The Act should provide operational freedom for ULBs to determine the exact rate of tax or level of user charges. Specific provisions need to be inserted in sections dealing with the power to impose taxes. The State government should fix the upper and lower limit of tax/ user charges and should allow the ULB to fix the exact rate taking into account the local scenario. It should be noted that the State Finance Commissions of Karnataka, UP, Maharashtra, Kerala, Punjab, TN and Andhra Pradesh have recommended own rate structure determination right to municipalities without prior permission of the State Government. - Strengthen the decentralisation process by providing a central role to ward committees and institutionalising their role in specific activities such as monitoring of staff, works contracts upto a specific value, preparation of municipal budget, etc. - There is a need for changing the system of assessment of Property Tax to an area based Self-Assessment System (SAS). While GoR has taken a decision to implement the SAS, appropriate amendments need to be carried out in the Act to implement the SAS. The Act should also provide for automatic revision of rate of tax every two-three years. - Introduce a user charge for solid waste management Water Supply and Sewerage Act Proposed Act would facilitate private sector participation and could lay down the principles for ensuring cost recovery and pave the way for cost based levy of user charges. The legislation would also enable the formation of an independent regulatory agency for monitoring the quality of service and ensuring regular tariff revisions. Legislative backing is essential to provide such an agency with the powers to regulate The need for a Water Supply and Sewerage Legislation is presented below: - User charges for water supply and sewerage is currently being levied thorough government orders. The procedure for revision of tariffs is not well defined and is subject to external influences. - There is absence of a framework relating to PSP in water supply and sewerage as the Rajasthan Municipal Act does not apply to these services. The legislation would enable the Government to authorize any agency for management of these services and for collection of user charges.
Key Deliverable 3
Page 30 of II
Currently user charges for water supply and sewerage do not relate to cost of service provision. Presence of a legal framework that recognises the role of private sector would pave the way for immediate involvement of private sector through O&M contracts.
Town Planning Legislation Proposed legislation would facilitate planning on a state wide level The need for such a legislation is presented below: - The state does not have a comprehensive town planning legislation. While the JDA Act and Urban Improvement Act provide for provisions relating to town planning for Jaipur and 10 more towns respectively, there is no framework to cater to urban planning and development needs of over 200 urban centres in Rajasthan. - The Town Planning legislation becomes even more essential if the State government is unable to incorporate provisions relating to city planning as part of the Municipal Act - The legislation could include provisions relating to preparation of master plan, declaration of area as development area, provisions to ensure planned growth of urban areas, etc. Slum Improvement Legislation The proposed legislation would ensure proper management of urban slums and ensuring delivery of urban services to slum dwellers The need for a slum improvement legislation is given below: - Presence of urban slums is a reality that has to be considered while planning for urban development and service delivery to slum dwellers. - The State does not have any law relating to slum improvement. Management of slums is done through administrative orders issued regarding slums, economic criteria, etc. The legislation would help in conferring tenure rights to slum dwellers and provide a basis for regularisation of slum. - In-situ development of slums is now considered as part of national policy. The legislation should lay down the basis for selecting slum colonies for in-situ development and conditions under which relocation would be considered necessary - The legislation would help in recognition of slums and ensure service delivery in slums by municipalities
Key Deliverable 3
Page 31 of II
Amendments in the Rajasthan Housing Board Act The proposed legislation would ensure that the state level agency is able to shift its focus in line with the changing role of state level institutions There would be a need for the housing board to re-orient its focus from construction to creation and management of land banks Amendments in the Rajasthan Housing Board Act need to be considered in view of the facilitatory role that the state housing board is expected to play Policy framework Urban Land Policy There would be need for strengthening the policy framework in the urban sector. The first and foremost would be the adoption of an Urban Land Policy. The key tenets of this policy should be: - Urban land should be considered as a distinct entity different from agriculture/ revenue land. All land included in any municipal area or master plan limits, by virtue of the notification should be designated as urban land. Regulation and use of such land should be governed by the Urban Development Department with the help of Rajasthan Municipalities Act, UIT Act and Rajasthan Municipal Act. - Any further use of this land, including for residential purposes, would be treated as Land Use Change amounting to value addition entitling the state to levy development charges and charges for regularisation, in cases where land use change has already taken place without prior approval of the competent authority - Streamling acquisition and development of urban land through involvement of community and private sector - Ensuring appropriate provision of land for urban poor Apart from these, the state should also adopt an appropriate slum policy and housing policy SWM Policy Our analysis of the SWM policy has identified areas that need to be addressed to make the policy effective. These improvement are highlighted below: - The selection criteria should be clearly specified in the policy. More weightage should be given to technical competence of parties before making a final selection as the objective should be to select the technically most competitive agency and not to ensure that the ULB maximizes its revenue from royalty on garbage. - The policy should specify a time-limit within which the Government would take its decisions. It should also specify the
Key Deliverable 3
Page 32 of II
period in which the site for setting-up the project would be handed over to the private party The layers in decision making should be minimized. Ideally, the power to take the final decision should be decentralized to the Empowered Committee. The Empowered Committee should also have representation from the State Pollution Control Board to ensure that there is adequate technical expertise for assessing proposals relating to bio-medical waste treatment facility.
There should be a strong statement of intent regarding enforcement of guidelines relating to SWM and bio-medical waste. This is especially required for bio-medical waste treatment projects, as the government would not be responsible for guaranteeing minimum quantum of garbage for the private operator. In the absence of strict regulation, hospitals and nursing homes could continue to dump their bio-medical waste along with municipal waste and therefore would not be willing to pay a user fee to the private operator. The government should consider committing certain minimum quantum of garbage, especially from government hospitals that do not have appropriate disposal facilities. Capacity Building ULBs in Rajasthan are faced with a seemingly ironical situation. On the one hand, the CAA requires a more central role for ULBs in all aspects relating to urban management and on the other hand, ULBs are in a serious crisis, both in terms of availability of financial resources and also in terms of their institutional and management capacity to handle higher responsibilities. In such a scenario there is need for a systematic approach for sustainable reform of ULBs. Reform in the existing scenario requires initiatives to be taken on multiple fronts. These are: - Resource mobilisation - Private sector participation - Organisation restructuring - Converting passive assets into resources - Efficient O&M of municipal services - Community participation and decentralisation For addressing the areas identified above it is necessary to follow a structured reform Road Map. PricewaterhouseCoopers (PwC) has developed a comprehensive road map that could act a guide for reform of ULBs. This road map involves implementing certain initiatives over a 4-5 year period that would bring about a sustainable improvement in service delivery, financial position and the institutional capacity of ULBs. The Road Map provides a comprehensive tool for the ULBs to execute and monitor the reform process. The Road Map identifies the various initiatives that need to be taken up by the ULBs in order to successfully transform themselves into effective institutions of urban governance and ensure efficient delivery of urban services.
Key Deliverable 3
Page 33 of II
The Road Map has been accepted by all major players in the sector such as municipal experts, political representatives ,municipal commissioners, state government officials, funding institutions, etc. It has been accepted by agencies such as JBIC and DFID as a practical roadmap for initiating wholesome reforms in urban local bodies. The roadmap has also been featured in the Urban Good Governance campaign of the Government of India. Action plan for Capacity building The road map along with time schedule for various reform initiatives is indicated on the next few pages Various Municipalities in Rajasthan are in different stages of reform. For instance, Jaipur Municipal Corporation has already taken-up a number of initiatives for revenue mobilization, improvement in service delivery through private sector participation, improvement of accounting systems, etc. The Municipalities in key urban centers should be mapped on the reform road map in order to identify the extent of initiatives still to be taken. This exercise needs to be under taken immediately in order to arrive at a report card of Municipalities . This would help develop a customized reform plan for each of the Municipalities . 10% of the funds under the proposed Urban Infrastructure Fund is expected to be dedicated for undertaking capacity building measures for municipalities. These could include, inter alia: - Implementation of double entry accounting system - Computerisation of asset and tax records - Implementation of a complaint redressal system - Training of municipal staff on community and public participation - Appointment of professional staff on contract basis The example of how Ahmedabad Municipal Corporation (AMC) was successfully able to improve its financial position and raise funds from municipal bonds after undertaking a series of reform measures is presented in annexure 2. The reform measures undertaken by AMC broadly fall along the five phases of reform presented in the Road Map. The road map has been divided into five phases with each phase focussing on a set of initiatives. The indicative time plan and schedule for various activities is present on the following page:
Key Deliverable 3
Page 34 of II
Task Name
Year 1 Year 2 Year 3 Year 4 Year 5 Ye Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
Implement preliminary MIS & Planning for Reform Improve A/cing and FMS Intensive political commitment building programme Mobilise resources from passive assets Infrastructure status assessment Implement quick hit successes in civic utilities Phase 2 - Revenue Improvement Infrastructure planning Citizen communication & participation programme Revenue Improvement from Property Tax Revenue mobilisation - other tax & non-tax sources Improve recovery of utility charges Phase 3 - Project Prep. & Internal reorganisation Preparation of comprehensive investment prog. Restructure ULB organisation, tackle staff issues Phase 4 - Infrastructure Financing & Development Raise project finance Tariff reform programme Execution of city level infrastructure projects Phase 5 - Stabilisation and Sustenance Consolidation & integration of info. systems Long-term fiscal stabilisation of ULB finance Continous improvement in civic services Source: PwC Research
Phase I
Phase 1 - Internal Assessment & Building Credibility
Phase II
Phase III
Phase IV
Phase 1 - Internal assessment and building credibility The objective of this phase is to enhance the credibility of the Municipalities and put in place systems that would enable comprehensive assessment of the Municipalities . The key initiatives in this phase include: A quick assessment (financial and operational) of the Municipalities followed by planning for the reform process. One of the first initiatives involves putting the accounting and financial management systems in place. Building political commitment towards the reform process is a vital initiative in this phase. In order to build this commitment, a positive public opinion needs to be built-up and reinforced. Comprehensive assessment of the existing quality of infrastructure and standards of service delivery is the other important initiative. This is to be achieved through measures (quick-hits) that have a high-impact on the lives of ordinary citizens. Such quick hits may be financed from mobilizing funds from passive/ under-utilized assets through sale /lease etc.
Phase V
Key Deliverable 3
Page 35 of II
Phase 2 - Revenue Improvement This phase involves undertaking revenue improvement initiatives from internal sources such as tax, non-tax, rents and utility charges. In a scenario of decreasing financial support from the state government and the need for financial sustainability of Municipalities, revenue enhancement from internal sources takes precedence over funds mobilization from external sources. Initiatives in this phase should thus seek to enhance base of tax/ utility charge, rationalize the rate and streamline administrative mechanisms with the use of Information Technology. While this phase should attempt a rationalisation of rates (application of principles of user pays / beneficiary pays or polluter pays), comprehensive tariff reform to reach a situation of complete cost recovery should be taken up in subsequent phases (Phase 4 and Phase 5). This is because, without a significant increase in the standards of service delivery, citizens are unlikely to accept substantial hikes in tax rates / utility tariff charges. Private participation (through contracting) in managing systems related to revenue improvement and managing existing municipal assets should be explored in this phase. Cost reduction measures too need to be undertaken in this phase of the reform process.
Phase 3 Project preparation and internal reorganization This phase involves simultaneous initiatives towards preparation for major capital enhancement projects and organizational restructuring of the Municipalities . Initiatives in this phase will lay the foundation for enabling the Municipalities to seek external sources of funding for building / enhancing city infrastructure. Internal reorganization of the Municipalities should also be carried out in this phase. This would involve identifying the structural changes required to effectively manage the activities of the Municipalities . Since this initiative would have a high impact on the roles and responsibilities of the functionaries, it should be taken up only after the commitment of political and administrative leadership in such an exercise is firmly established. Phase 4 - Infrastructure financing and development This phase comprises initiatives towards obtaining credit rating, raising institutional finance/ approaching capital markets, carrying out tariff reform and implementing physical works of city level infrastructure projects. Appropriately structured city level infrastructure projects backed by financially sound Municipalities will prepare the ground for private sector investment and participation.
Key Deliverable 3
Page 36 of II
Phase 5. - Stabilisation and sustenance Initiatives in this phase are aimed towards stabilizing earlier initiatives and building sustainability within the Municipalities . This phase addresses financial sustenance of the Municipalities , integration of various information systems within the Municipalities and institutionalization of continuous improvement processes. 3.0 Analysis of Funding Gap
Having dealt with all the reform measures that need to be taken up for development of urban sector in Rajasthan, it is important to address the moot question this chapter started with, i.e. how to bridge the funding gap. The analysis of the extent to which the reform initiatives would help bridge the funding gap is presented in this section The funds requirement for urban services over the next 10 years is estimated at Rs. 14267 crore (refer to KD2 for details). This includes: - Backlog demand - Rs. 3347 crore - Future Demand - Rs. 5292 crore - O&M of urban services - Rs. 5628 crore The break-up of the requirement in two blocks of five years each is given in the table given below. It has been assumed that backlog demand would be met over the 10 year period.
Cumulative requirement of funds for urban services Rs. Crore 2002-07 2007-12 2002-12 Backlog demand 1673 1673 3347 Future Demand 2573 2719 5292 O&M 2601 3027 5628 14267 Total requirement
Analysis of the States budget indicates that the Budgetary sources (including funds from RUIDP) would cover about 38% (refer to KD2 for details) of the requirement leaving a gap of about 62%. However, this does not take into account any effect of leveraging state funds for attracting private sector and from other institutional sources. Bridging the Funding Gap This section presents an analysis of the extent to which the funding gap could be bridged by undertaking the reform measures listed earlier. For the purpose of this analysis the funding requirement over the next 10 years has been considered. The analysis has been broken into two parts:
Key Deliverable 3
Page 37 of II
Demand side: Reducing the demand for funds by considering alternatives such as lower services levels and promoting greater private sector participation in operation and maintenance of urban services - Supply side: Analysing the Impact of measures that would increase the supply of funds. These measures include: Greater mobilisation of resources through tax (especially property tax) and non-tax revenue (innovative use of land) Better recovery of user charges for water supply and sewerage Mobilisation of funds through the proposed Urban Infrastructure Fund and the Urban Reform Incentive Fund (URIF) Effective channelisation of budgetary support. This involves the following two measures: Enhancing the quantum of funds devolved to municipalities by increasing the compensation in lieu of octroi and quantum of entertainment tax Regular budgetary support: This includes budgetary support available to PHED and Urban Development Department The potential for funds mobilisation from each of the sources is presented in the table below. The details of the assumptions used for calculating the potential from fund mobilisation from each source is presented as annexure 3.It should be noted that the potential for revenue mobilisation from each source is based upon a preliminary analysis and certain key assumptions. A detailed study needs to be undertaken to verify the extent of revenue potential especially for measures involving imposition of taxes and user charges. -
Strategy for Bridging Funding Gap Rs. Crore Funding Requirement 14267 Demand Side Reduction in requirement due to lower service level and cost norms 1584 Savings due to PSP in O&M of services 618 Funding gap remaining 12065 Supply Side Direct Budgetary Funding 5161 Revenue mobilisation from Taxes & Non-Tax Revenue 1603 Revenue mobilisation from User Charges 2082 Leveraging through UIF and URIF 1696 Funding gap met from resource mobilisation 10542 Funding Gap unmet 1523
Demand side management and involvement of private sector for O&M of services and adopting lower level cost and service norms would help bridge the funding requirement by about 2200 crore or by about 15%
Key Deliverable 3
Page 38 of II
On the supply side, existing budgetary sources (including RUIDP) would meet about Rs. 5161 crore or 36% of the funding requirement. While this is similar to the earlier situation (wherein state funds were not being leveraged) it should be noted that the total pool of budgetary funds available to the urban sector has been enhanced by increasing the rate of growth in compensation in lieu of octroi and allocating 50% of the entertainment tax proceeds. At the same time, about 20% of the funds devolved to ULBs has been channelised to a UIF that would have a greater impact through leveraging of resources Revenue mobilisation from Tax and non-tax revenue could generate about Rs. 1603 crore or 11% of the requirement Mobilisation of user charges could help generate about Rs. 2082 crore or Rs. 15% of the requirement Leveraging resources through UIF (including the URIF available from GoI used for leveraging) could further bridge the gap by about Rs. 1696 crore or 12%. This is based on the assumption that UIF would be able to leverage funds in the ratio of 30:70. The above listed measures could help reduce the funding gap to about 11% or Rs. 1523 crore. 4.0 Action Plan for Implementation
This section presents the action plan for implementing the reform agenda identified in the earlier sections. The implementation plan would be fundamentally driven by Government of Rajasthan based on the acceptance of recommendations presented in the report. For the purpose of preparation of this reform action plan it has been assumed that the recommendations are acceptable to GoR and therefore, the action plan presents steps that need to be followed for implementation of the reform agenda. The action plan has been presented for each of the five elements of the reform agenda viz., City Development Planning Re-organisation of institutional framework Changes in policy and legal framework Capacity building of municipalities Bridging the funding gap For each element of the reform agenda, the activities to be undertaken, the mechanism and responsibility for implementation have been defined. A time plan has also been suggested for implementation of each element.
Key Deliverable 3
Page 39 of II
S.No 1
Reform Agenda Development of city development plan (8-10 months)
Activities to be undertaken Identification of cities Identify funding options for preparing CDP Develop terms of reference for preparation of CDP Define role of institutions for preparing CDP Arrive at a common vision for the city Identification of strategic initiatives Definition of projects Role of institutions in implementing CDP Funding options for implementation of projects Detailed feasibility of the identified projects
Mechanism Discussion between stakeholders in the urban sector Discussions with GoI and multi-lateral agencies such as World Bank (Cities Alliance & PPIAF) Appointment of consultants for preparation of CDP Joint Consultations
Responsibility UD&HD UD&HD, Municipalities UD&HD, Municipalities Consultant, UD&HD, TPD, PHED, Municipalities Consultant, UD&HD, TPD, PHED, Municipalities Consultant, UD&HD Consultant Consultant, UD&HD, TPD, PHED, Municipalities Consultant, UD&HD Concerned departments
Time frame 1 month 1 month
3 months 0.5 month
Stakeholder Workshop
1 month
Stakeholder workshops and analysis by consultant Analysis by consultant Stakeholder workshops and analysis by consultant Discussions with GoI, Multi-lateral agencies Appointment of consultants
1.5 months 2 months 1 month
1 month Depending upon project
Key Deliverable 3
Time Duration - 12 months 1 Development of City Development Plan 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 1.10
Page 40 of II
Identification of cities Identify funding options for preparing CDP Appointment of consultants Define role of institutions for preparing CDP Arrive at a common vision for the city Identification of strategic initiatives Definition of projects Role of institutions in implementing CDP Funding options for implementation of Detailed feasibility of the identified projects
S.No 2
Reform Agenda Reorganisation of institutional framework (18 months)
Sequence of steps Integration of UITs and Municipalities Transfer of staff and functions to municipalities Creation of urban planning division in cities without UITs Operationalise District Planning Committee Operationalise Ward Committee Establish Metropolitan Planning Committee for Jaipur Operationalise MPC for Jaipur Training of TPD staff on new urban planning approach
Mechanism Amendments to concerned Acts and presented to state legislature for approval Issue of directions and guidelines by the department. Allocation of budget to municipalities Issue of directions and guidelines by the department. Amendment to Municipal Act/ concerned rules if required Issue directions regarding functions, responsibilities and powers Issue directions regarding functions, responsibilities and powers Issue directions for establishment of MPC
Responsibility UD&HD UD&HD
Time frame 2 month 2 months
UD&HD
1 month
UD&HD UD&HD UD&HD
1 months 1 months 1 month
Issue directions regarding functions, responsibilities and powers Issue of direction and provision of budget for training through recognized institution such as HSMI
UD&HD UD&HD, TPD
1 month Ongoing
Key Deliverable 3
Page 41 of II
S.No
Reform Agenda
Sequence of steps Deputation of TPD staff to municipalities that do not have town planning department Realignment of Directorate of Local Bodies along functional specialization Training of DLB staff of realigned roles and responsibilities Deputation of staff to municipalities for project design and implementation
Mechanism Issue of office orders. Allocation of departmental budget
Responsibility UD&HD, TPD
Time frame 1 month
Issue of office orders.
UD&HD, DLB
1 month
Issue of directions and provision of budget for training through recognized institution such as HSMI Issue of office orders. Allocation of departmental budget
UD&HD, DLB
Ongoing
UD&HD, DLB
1 month
Time Duration - 18months 2 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 2.10 2.11 2.12
Reorganisation of Institutional Framework Integration of UITs and Municipalities Transfer of staff and functions to municipalities Creation of urban planning division in cities without UITs Operationalise District Planning Committee Operationalise Ward Committee Establish Metropolitan Planning Committee for Jaipur Operationalise MPC for Jaipur Training of TPD staff on new urban planning approach Deputation of TPD staff to municipalities that do not have town planning expertise Realignment of Directorate of Local Bodies along functional specialization Training of DLB staff of realigned roles and Deputation of staff to municipalities for project design and implementation
Ongoing training of staff at regular intervals
Ongoing training of staff at regular intervals
Key Deliverable 3
Page 42 of II
S.No 3
Reform Agenda Changes in policy and legal framework (6 months)
Sequence of steps Review and adoption of changes in Rajasthan Municipal Act and Rajasthan Housing Board Act Adoption of new legislation Water Supply and Sewerage Act Town Planning Legislation Slum Improvement Legislation Adoption of new policies: Urban Land Policy Housing policy Slum policy Modification to SWM policy
Mechanism Amendments presented to state legislature Amendments presented to state legislature
Responsibility UD&HD, legal experts
Time frame 2 months
UD&HD, legal experts
3 months
Approval by the department
UD&HD
3 months
Approval by the department
UD&HD, State Pollution Control Board
0.5 month
Time Duration - 6 months 3 Changes in Policy and Legal Framework 3.1 3.2 3.3 3.4
Review and adoption of changes in Rajasthan Municipal Act and Rajasthan Housing Board Act Adoption of new policies: Adoption of new legislation Modification to SWM policy
Key Deliverable 3
Page 43 of II
S.No 4
Reform Agenda Capacity building of municipalities (3 years)
Sequence of steps Preparation of capacity building plan for municipalities Identification of priority action steps Assessment and identification of funding sources for capacity building Identification of assistance for capacity building Implementation of capacity building plan
Mechanism Appointment of consultants/ HSMI for preparation of capacity building plan for municipalities Stakeholder consultations for consensus on reform steps Discussions with GoI, Multi-lateral agencies.
Responsibility UD&HD, DLB, Municipalities, consultants UD&HD, DLB, Concerned Municipality, consultants UD&HD, DLB, Concerned Municipality, consultants
Time frame 4 months
2 months 2 months
Appointment of consultants for assisting in capacity building Implementation assistance from consultants
UD&HD, DLB, Concerned Municipality UD&HD, DLB, Concerned Municipality, consultants
2 months
Continuous
Time Duration - 36 months 4 4.1 4.2 4.3 4.4 4.5
Capacity Building of Municipalities Preparation of capacity building plan for municipalities Identification of priority action steps Assessment and identification of funding sources for capacity building Identification of assistance for capacity building Implementation of capacity building plan
Key Deliverable 3
Page 44 of II
S.No 5 5.1
Reform Agenda Bridging the Funding Gap Revenue mobilistion from Property Tax (12-15 months)
Sequence of steps
Mechanism
Responsibility
Time frame
Issue of detailed guidelines for implementation of Unit Area Method for SAS for Property Tax Training of municipal staff on new method Development and implementation of a PR campaign Enumeration of properties and implementation of GIS Identification of true cost of service delivery for water supply and sewerage Recommend fresh tariff regime for water supply and sewerage Determine user charge for SWM on bulk generators of waste Impose user charge on SWM for bulk generators Set-up Urban Infrastructure Fund
Issue of guidelines
UD&HD, DLB
1 month
Issue of directions and provision of budget for training Issue of directions and provision of budget for PR campaign Issue of directions and provision of budget for GIS implementation in phases Set-up a multi-disciplinary committee to prepare a white paper on cost of service provision Approval/ modification of the proposal by GoR Set-up a committee to examine the quantum of charge for providing SWM services to large undertakings Approval by GoR and amendment to the Rajasthan Municipal Act Approval by Empowered Committee on Infrastructure. Amendment to the Rajasthan Municipal Act
UD&HD, DLB, Concerned Municipality UD&HD, DLB, Concerned Municipality, PR agency UD&HD, DLB, Concerned Municipality, GIS implementation agency PHED, UD&HD, DLB and Municipalities
6 months
4 months
10-12 months 2 months
5.2
Improving cost recovery (4 months)
Multi-Disciplinary Committee, PHED, UD&HD UD&HD, DLB Concerned Municipality Departmental Committee UD&HD
0.5 month 1 month
5.3
Creation of Urban Infrastructure Fund (8 months)
0.5 month 1 month
Key Deliverable 3
Page 45 of II
S.No
Reform Agenda
Sequence of steps Establish operating guidelines and principles for UIF Set-up Asset Management Company for managing UIF Creation of the initial corpus for the UIF
Mechanism Appointment of consultant for defining the operating mechanism for UIF Appointment of a professional agency as AMC for managing the UIF Issue of orders for allocating Urban Renewal Fund, receipts from Urban Reform Incentive Fund and part of state government grants to municipalities to the UIF. Amendments to Rajasthan Municipal Act. Accepting recommendations of the Second SFC report Issue of directions for resource mobilization based incentives Issue of guidelines on types of functions/ activities for which PSP would be strongly promoted along with type and quantum of subsidy, wherever necessary. Appointment of consultants for preparing standard contractual documents for various types of services Undertake project development process through private sector
Responsibility UD&HD, Consultant
Time frame 2 months
UD&HD
2 months
UD&HD
3 months
5.4
5.5
Streamlining devolution of grants to Municipalities (4 months) Promote PSP for urban services (5 months)
Enhance devolution of funds to Municipalities Higher allocation of funds for incentivising resources mobilisation Demonstration of support and commitment for PSP in management of urban services Preparation of standard contractual frameworks
UD&HD, Finance Department UD&HD, Finance Department UD&HD, PHED
2 month 2 month
1 month
UD&HD, DLB, Consultant
4 months
Initiate demonstration projects involving private sector
UD&HD, PHED, Municipalities
6 months
Key Deliverable 3
Duration - 18 months 5 Funding 5.1 Revenue mobilisation from Property Tax
Page 46 of II
Issue of detailed guidelines for implementation of Unit Area Method for SAS for Property Tax Training of municipal staff on new method Development and implementation of a PR campaign Enumeration of properties and implementation of GIS 5.2 Improving cost recovery Identification of true cost of service delivery for water supply and sewerage Recommend fresh tariff regime for water supply and sewerage Determine user charge for SWM on bulk generators Impose user charge on SWM for bulk generators 5.3 Creation of Urban Infrastructure Fund Set-up Urban Infrastructure Fund Establish operating guidelines and principles for UIF Set-up Asset Management Company for managing UIF Creation of the initial corpus for the UIF Streamlining devolution of grants to Municipalities
5.4
Enhance devolution of funds to Municipalities Higher allocation of funds for incentivising resources mobilisation 5.5 Promote PSP for urban services Demonstration of support and commitment for PSP in management of urban services Preparation of standard contractual frameworks Initiate demonstration projects involving private sector
Key Deliverable 3
Page 47 of II
The overall implementation plan for the urban sector is presented below. Multiple elements of the reform agenda need to be addressed simultaneously in order to ensure that there is impact on all fronts. Wherever, external support is envisaged, the same has been incorporated into the implementation plan.
1 2 3 4 5
Reform Agenda for Urban Sector Development of City Development Plan Reorganisation of Institutional Framework Changes in Policy and Legal Framework Capacity Building of Municipalities Bridging the Funding Gap
Duration - 36 months
Key Deliverable 3
Page 48 of II
ANNEXURES URBAN INFRASTRUCTURE Annexure 1- Parameters for Rating Municipal Bonds

Legal and administrative framework - Municipal functional domain as defined in the Municipal Act - Decision making process - State government transfers - Tax rates, user charges and basis for assessment - Borrowing powers and ability to pledge revenues - State government and municipal linkages Economic base of the service area - Population base and growth rate - Level of industrial and commercial activity - Diversity and elasticity of tax base - Per capita income levels - Prospects for widening tax base Municipal finances - Quality of accounting function - Overall surplus/ deficit in revenue account - Profile and trend in tax and non-tax revenues - Property tax - Demand, rates, system and collection efficiency - Dependence on government transfers - stability and transparency - Expenditure profile - Headwise and activity wise - Capital receipts and expenditure - trends - Debt profile - cost, tenure, coverage - Future sources of revenue growth - Measures to curtail revenue expenditure Existing operations - Range of services - obligatory/ discretionary functions - Core services - water, sewerage, primary education & health, etc - Systems for service delivery - Level and trend of expenditure on service delivery - Projected levels of service enhancement - Major projects undertaken - Managerial assessment - Linkage between financial health and initiatives taken by management - Organisation structure - Administrative systems and procedures - Project management skills - Level of expenditure control - Initiatives taken to enhance resources and improve collections
Key Deliverable 3
Page 49 of II
Project details - Proposed projects - Project tenure and funding patterns - Debt servicing requirement due to new projects - Existing levels of service and improvements envisaged Escrow of specific tax revenues - Ensure non co-mingling of cash flows - Level of collateralisation - Reliability of source State government guarantee - Credit quality of guarantor - Legal validity - Conditional/ unconditional - Irrevocability - Trustees power to invoke guarantee
Key Deliverable 3
Page 50 of II
Annexure 2- Municipal Reforms in Ahmedabad Municipal

Corporation
Ahmedabad Municipal Corporation (AMC) was in a state of financial strain between 1992-93. There were enormous leakages in property tax and octroi revenues. There were accumulated losses to the extent of Rs. 35 crore and outstanding bank overdrafts to the tune of Rs. 22 crore. The various series of measures taken by AMC to address the above issues include: Property tax Disconnection of water supply and drainage connection for defaulters Attachment and confiscation of property Auction of property for tax recovery Property tax revenues in 1994-95 increased by over 72% compared to 1993-94 Octroi Better law enforcement - arresting anti social elements Increased supervision and vigil in check posts Use of CAs and CWAs for valuation of goods Octroi revenue increased by over 20% in 1994-95 compared to 93-94 Credibility building Commitment of the elected body and administrators to adopt stern measures Improving law enforcement Improving recovery of Property Tax Enforcing stricter discipline among staff Involvement of NGOs and CBOs Long term planning Preparation of comprehensive Corporate Plan for upgrading service levels Preparation of infrastructure financing plan Identifying private sector initiatives Need to access capital markets Introduction of public private partnerships Organisation re-structuring Lateral recruitment of MBAs and CAs Merit based recruitment and promotion system Reassessment of job specifications and qualifications Adoption of zonal management structure Decentralisation of public grievance redressal
Key Deliverable 3
Page 51 of II
City level projects Identification of city level projects Special project cell to supervise and monitor completion of projects Adoption of CIDCO model of out-sourcing for planning, designing, monitoring and execution of projects Innovative financing and operational mechanism through publicprivate partnerships Public Private Partnerships Adoption of city streets by corporate sector- Revenue recovery from advertising and parking fees Urban forestry through NGOs and CBOs - Community allowed to undertake remunerative activities Transforming quality of life in slums through private sector and NGOs participation Solid Waste Management Use of NGOs for conducting awareness campaigns for waste segregation by households Use of NGOs and rag pickers for organising primary collection Improving logistics and collection systems Use of private sector for operating landfill site Improvement in Financial Position These initiatives helped transform the financial situation of AMC. The following table provides a snap shot of AMCs financial position between 1992-98.
Year 91-92 93-94 94-95 97-98 91-94 94-98 Financial Summary - AMC (Rs. Cr) Octroi Property Tax Non-Tax Income 97.25 35.79 16.11 129.58 44.2 14.76 156.14 73.14 20.31 242.54 100.94 30.13 CAGR 15% 11% -4% 17% 23% 20% Grants 25.51 31.23 35.88 47.12 11% 11%
AMC also successfully raised a bond issue worth Rs. 100 crores in 1997. The figure on the following page maps the course charted by AMC between 1992-98. It broadly reflects the five phases of the Road Map presented as part of the Reform Agenda.
Key Deliverable 3
Page 52 of II
Phase I
Phase II Phase III Phase IV PT and Octroi Credibility Building Comprehensive Investment Planning Organisation Restructuring City level projects Municipal Bond
Phase V
Improvement of systems 92-94 94-95 95-96
Public Private Partnerships 96-97 97-98
Key Deliverable 3
Page 53 of II
Annexure 3- Assumptions for Bridging Funding Gap Demand side The funds requirement for urban services over the next 10 years is estimated at Rs. 14267 crore. This includes: Backlog demand - Rs. 3347 crore Future Demand - Rs. 5292 crore O&M of urban services - Rs. 5628 crore Lower service levels The demand for funds could be reduced by adopted lower service levels. For instance, by adopting an average service norm of 100 LPCD for all Class I cities, the demand for funds could be reduced by Rs. 1286 crore. The approach paper prepared by PHED for the Xth five year plan has adopted three different service norms for water supply in urban areas in Rajasthan. These are: 70 lpcd for towns without sewerage system 135 lpcd for towns in which sewerage system exists or is contemplated 150 lpcd for metropolitan towns Given the scarcity of water resources in Rajasthan, it would be appropriate to adopt an average service norm of 100 lpcd for the purpose of projecting investment requirements. The demand for funds could be further reduced by Rs. 298 crore adopting a cost norms of Rs. 1.5 crore per MLD instead of Rs. 2.03 crore adopted earlier as this is the highest cost norm considered by HUDCO in case the source of water is very far off. In Rajasthan in few cases such as Jaipur, the water source is quite far off (over 100 km) and therefore, conveyance of water would involve high cost. In other cases, the source of water would be available at shorter distances. Further the availability of local construction material would also help reduce the cost of construction. Promoting private sector participation Private sector could be effectively utilised for O&M of urban services. The cost savings achieved by other cities in each urban service by involving private sector has been analysed. In order to be conservative, the least cost saving norm has been adopted for calculating cost savings. The services and specific activities for which cost savings has been analysed are: Water supply Operation and maintenance of treatment plants O&M of pumping stations and distribution system Sewerage O&M of Treatment Plant
Key Deliverable 3
Page 54 of II
O&M of Pumping stations O&M & Distribution system Solid Waste Management Primary collection Transportation of waste Final disposal and treatment Maintenance and repair of street lights For each of the urban service the cost involved in O&M has been broken up into activities in the process chain based on information available from secondary sources. For instance, it is estimated that out of Rs. 100 required for ensuring safe disposal of municipal solid waste, the inter-se distribution of O&M cost is as follows: Primary collection - 60% Transportation - 20%and Disposal - 20% Similar analysis has been done for all other services. Further, for each of the service and activity within a service, the proportion of population that could be potentially serviced through private sector has been estimated. This is based upon experience of other cities. For instance, in SWM it has been assumed that primary collection and transportation for at least 25% of the urban population could be served through private sector . This is a fairly conservative estimate as in cities such as Rajkot, Chennai, etc. the service delivery for almost 50% or more of the urban population is being currently managed through private sector. Final treatment and disposal is also amenable to private sector participation as there are a number of example where municipal solid waste is currently being converted into compost. It is also expected that after the acceptance of the Kyoto Protocol, the system of trading on carbon credits is likely to become attractive over the next 5-10 years. As a result, municipal solid waste treatment projects involving incineration, biomethenation could become financially viable given the value of carbon emissions that would be reduced through such projects. It has therefore been estimated that about 50% of the waste disposal could be effectively managed through private sector and rest of the waste would continue to be dumped at existing landfill sites. Overall it is estimated that private sector participation could help in reducing the cost of O&M of urban services by about Rs. 618 crore out of the total O&M cost of Rs. 5628 crore. This represents a savings of about 11%. This is fairly conservative given the fact that in many cases, PSP has help achieve cost savings in excess of 20-30% across services.
Key Deliverable 3
Page 55 of II
Supply side Tax mobilisation Mobilisation of revenues from tax sources has good potential in Rajasthan, especially considering that fact that about 33% of cities do not currently levy Property Tax (PT), the largest tax resource. This situation needs to be rectified and adoption of the Self-AssessmentSystem for PT is a step in the right direction. While it is difficult to estimate the potential for revenue generation from PT without a detailed assessment of the rate, existing base and leakages through exemption and collection efficiency, the revenues could be significantly enhanced by effective administration of the system. The annual collection of PT in Rajasthan is about Rs. 20 crore. If cities that currently do not levy the tax also start to levy and collect the tax, the revenues could be expected to increase by about 33% to about Rs. 27 crore The performance of Jodhpur in PT collection has been commendable. The annual collections increased from about Rs. 9 lakh to about RS. 1.18 crore within one year by effectively implementing the SAS. The success has been mainly due to the following: Coverage of all properties under the tax net Ensuring efficient administration and collection of the property tax (including arrears) by organising camps, public participation, etc. Even by conservative estimates, effective implementation of the system should result in at least a two fold increase in tax collection to about Rs. 54 crore per annum The rate of growth in the tax has been assumed at 12% per annum which is slightly higher than the real rate of growth of the States tax revenue as assumed in KD 1. This is because with economic growth and higher levels of urbanisation, the demand for urban land and hence its value is likely to register an increase. Over the next 10 years, PT could generate about Rs. 934 crore Non-tax sources The current revenue from non-tax sources such as income from fees, sale of land, licenses and permits, etc is about 1.5 times the recovery from PT. However, sale of land cannot be considered as a recurring source of revenue in future. Therefore, it has been assumed that revenues from non-tax sources would be equal to the revenue from PT in the first year, i.e., Rs. 53 crore Innovative uses of urban land such entering into joint ventures, construction and leasing of shops should ensuring availability of sustainable revenue stream from utilisation of urban land. Therefore, it has been assumed to grow at a rate of about 5% per annum. The total revenue from non-tax sources would be about Rs.669 crore.
Key Deliverable 3
Page 56 of II
Recovery of user charges The current recovery of user charges for water supply is about 40% of the O&M cost. If Rajasthan has to be eligible for the Urban Reform Incentive Fund, it has to ensure at least 100% O&M cost recovery by 2007. Beyond 2007 it has been assumed that user charges should cover at least 25% of the capital cost by 2012. Currently sewerage charges are levied at 20% of water charges. Since the coverage of sewerage system is negligible, it would not be realistic to assume full recovery of user charges 2012. Therefore, it has been assumed that only 20% of the O&M cost would be covered by user charges and the balance O&M cost as well as capital cost would have to be met from other sources The total recovery from user charges would be about Rs. 2082 crore over the next 10 years Urban Infrastructure Fund The UIF should be used for leveraging greater investment from private sector and other sources into urban infrastructure development in Rajasthan. There would be two types of leveraging effects One time - The initial capital of about Rs. 100 crore that would be available out of RUIDP or other sources Recurring - Allocation of 20% of the grants from SFC every year. This would amount to Rs. 18 crore in the first year. This would grow at a rate of 11% per annum (similar to the rate of growth of revenues from the states own taxes and non tax sources. Assuming that the UIF would be able to leverage resource in the ratio of 30:70, the total value of project that could be funded by the UIF is about Investment of Rs. 1536 crore could be leveraged over the next 10 years through UIF Urban Reform Incentive Fund (URIF) The URIF would provide about Rs. 24 crore if the state takes up the reform measures identified earlier. If this is also used for leveraging funds in a manner similar to the UIF, it would be able to leverage investment of about Rs. 80 crore in the Xth plan period. It has been assumed that a similar quantum of funds would be available between the period 2007-12. Therefore, the total quantum of funds that could be leveraged through URIF would be about Rs. 160 crore Budgetary resources The budgetary resources available for the urban sector essentially consists of: Loans from RUIDP - Rs. 1200 crore (in the Xth plan period) Funding from SFC grants is expected to be about Rs. 90 crore per annum of which 20% would be allocated to UIF. Out of the balance 57% would be available for Class I cities which amounts to Rs. 41 crore per annum
Key Deliverable 3
Page 57 of II
Budgetary support for urban sector (urban water supply and sewerage for PHED and other urban services for municipalities) amounts to about Rs. 4306 crore (excluding grants channelised through the SFC) during the Xth plan period. Since 57% of the urban population lives in the Class I cities, about 2455 crore would be available for class I cities or Rs. 491 crore per annum between 2002-07 It is assumed that the during the next five years, direct budgetary support would grow at a rate of 11% per annum, similar to the expected rate of growth in the states own tax and non-tax revenues. It has been assumed that funds available from RUIDP would be utilised in the first five years and similar funds would not be available in the next five years In all about Rs. 5161 crore could be generated through budgetary sources
Key Deliverable 3
Page 1 of III
III
1.0 Introduction
ROADS
The objective of this chapter is to present the reform agenda for roads in Rajasthan, with the focus being on bridging the funding gap and identifying alternative methods of financing road projects. The rationale for reforms is based on the following parameters: Need to utilize the existing limited resources for roads through better planning and project prioritization Need to leverage funds to enhance private investment and formulate projects on a public-private partnership Enhance the availability of funds for the sector as the state would continue to play a significant role in road development. Exhibit III.1 highlights the potential of efficient transportation network by way of a case study on the impact of a highway improvement project funded by the World Bank in Morocco.
Exhibit III.1
Impact of Highway Improvement Project, Morocco Cost of transport services in some cases dropped by 50% Road closures that ranged between 30-90 days a year were almost eliminated Traffic on one of the roads increased by about five times. On all other roads it became more than the national average Percentage of bigger and lower-operating cost trucks increased by about five times High-frequency shared taxi services started on the rural roads, replacing single frequency buses Agriculture yield increased, more than 30% in case of fruit orchards. Use of fertilizers increased substantially, upto 100% in one region Use of extension services by small farms quadrupled Land devoted to fruits and vegetables increased between 8-40% Primary school enrolment increased from 28% to 68% Visits to hospitals and primary health centres more than doubled
World Bank Research Report, 2000
Key Deliverable 3
Page 2 of III
2.0
Coverage and Scope
Key Deliverable 2 had dwelled into the various issues facing the development of the road sector in the state. The report had also highlighted the importance of roads in the context of Rajasthan. This chapter presents the reform agenda for the roads sector. The agenda has been developed keeping in mind the key issues facing roads with the overall objective of reducing the funding gap for the sector. The proposed reform agenda for the road sector can basically be segregated into three areas relating to: Planning To ensure that existing funds are used in a manner which maximizes economic and social returns Resource Mobilization To supplement existing sources of funding, create dedicated funding for the sector and leverage private capital Institutional and Policy Framework To align the existing institutional and policy framework to support future challenges and recommendations with respect to the above two. The proposed recommendations for the roads sector have been suggested in light of the fact that there are massive investments required for road upgradation and maintenance and there needs to be a dedicated mechanism for funding road projects. There also needs to be a co-ordinated planning exercise at the state level to plan and prioritize road projects and investments. It is suggested that a Road Board is created at the state level which has participation from the government, PWD, economic departments and road users. The Board should be set-up as a statutory body. The Board is proposed to govern the overall road sector and plan various road related activities. The Board would also oversee the allocation and disbursements of funds from the Road Fund (dedicated funding mechanism explained later) for economic and strategic road projects. As part of the implementation strategy, the Board could initially handle the Core Road Network (identified later in the report). This network would comprise of NH and key SH and MDRs that have strong economic importance in terms of linkages with agriculture, industrial, mining and tourism sectors. The roads within this network would be classified in three categories: Economically important and financially attractive road projects: To be undertaken through BOT Economically important but financially unviable projects (upto 40% subsidy): To be undertaken by private sector- project to be given capital / operational subsidy upto 40% Economically important but financially unviable projects (projects require greater than 40% subsidy for private participation): To be undertaken by the state road development corporation which can raise fund from the market (on the back of government commitment to repayment) to undertake such projects.
Key Deliverable 3
Page 3 of III
As a measure for reducing the massive fund requirement for roads, it is proposed to set-up a Road Fund in the state. This fund would consist of sources like cess on fuel, motor vehicle tax, etc. to ensure dedicated funding for road projects. The fund could initially be utilized for maintenance and development of the core network. However a proportion of the fund would be used to leverage funds from the market as well as assist the Road Board in planning and preparatory activities for road projects. An Asset Management Company would be responsible for maintaining the road fund. The company would work under the guidelines of the Board. Its primary function would be to evaluate investment options and recommend projects to Road Board for funding. With regards to institutional reforms, PWD could continue to be the nodal agency responsible for road network in the state. However, it would need to be strengthened for undertaking this role and mandate. To ensure clear separation of client and provider function as also regulatory function, it is believed that in the long term PWD would emerge as the strategic planning unit responsible for network operation, maintenance and ensuring quality. The department would outsource execution functions and retain only the ownership of the road network. PWD would however be responsible for ensuring private participation in road projects and would contract private sector through BOT / ROT and provide capital subsidy upto 40% of the project cost for road projects through the Road Fund. It is also proposed that the state could consider re-defining the mandate of RSRDCCL and modeling it on the lines of a State Road Development Corporation (SRDC). The primary objective of this corporation could be to undertake construction activities relating to road and building and leverage funds from the capital markets and other institutional sources. Concentration of construction activity and construction management within a single agency i.e. SRDC would help develop institutional capacity for introducing better construction technology, management and contracting. SRDC could also be responsible for undertaking construction of economically important but financially unviable road stretches, for which it can raised funds from the market. Recommendations have also been suggested with respect to the BOT policy. Acceptance of toll road projects usually grow over a period of time. Thus, till the time tolls are widely accepted by road users, the state could stipulate toll rates for individual projects and select the variable of selection as the lowest concession period. It is proposed that gradually the state could consider alternative variables for selecting and shortlisting entrepreneurs and it should explore implementing projects both on variable toll road concept and concession periods. The applicable toll rates could be computed by the private entrepreneur based on savings in vehicle operating cost
Key Deliverable 3
Page 4 of III
supplemented by a willingness to pay survey. Rajasthan could also consider alternative tolling mechanism like shadow toll and annuity. These measures are aimed to attract greater private participation in road projects. The next few pages detail out the recommendations proposed as part of the reform agenda for roads. 3.0 3.1 Reform Agenda Planning
In order to appreciate the need for strengthening the planning function of roads in Rajasthan, it would be necessary to look at the current road scenario in the state. While the current scenario has been discussed in detail in KD2, the salient features of the same are as under: Poor connectivity Though the road network in the state has increased by almost three times during the last 50 years, there are still about 50% of the villages that require BT connectivity. All the PHQs are still not connected through BT roads. Approximately 80,000 KM of BT roads need to be constructed for providing access to all villages Poor Quality According to estimates made by PWD, pavement structure of approximately 90% of SHs and MDRs is far below the norms and specifications. Most state highways require lane upgradation. Approximately 40,000 KM of roads have not been renewed and strengthened as per the prescribed maintenance cycle. The existing road network including what one would call the core network (key SHs and MDRs) is today a major bottleneck to efficient movement of goods and passengers. At the root of the above problems is the allocation made to the sector over the plan periods. The plan allocation to the sector went down from 9.80% during the first five year plan to 2.5% in the 7th five year plan. This has in recent time improved but is still inadequate to meet the current needs of the sector. It is in this background that planning becomes important. Planning is important to ensure that: Limited available funds are allocated to projects based upon economic return of projects and the subjectivity in fund allocation is reduced There is proper coordination between concerned departments and users Scientific basis for planning and development of suitable database is adopted Roads are classified on functional basis linked to the economic potential of network Projects can attract private financing.
Key Deliverable 3
Page 5 of III
In order to address the above concerns and with a view to provide a better structure for organizing the sector as a whole (discussed later), it is felt that the state should create a Rajasthan State Road Board. Exhibit III.2 depicts the key issue relating to limited funds for roads secror and thus the proposed solution framework Road Board.
Exhibit III.2
Key Issues Proposed Solution Framework
Limited Funds
1
Inadequate Maintenance Inadequate Project Prioritization
State Road Board / Authority
Source: PwC Research
The board is expected to be the governing body for the road network of the state with the responsibility of: Policy Formulation and Strategy Planning for the road sector The board would be responsible for defining and preparing strategic plans for Core road network, standards and methodologies for feasibility studies and design and tender documents to reflect changing needs and practices. For instance, the travel demand in Rajasthan needs to be estimated to cater to the additional industrial and agricultural based traffic. This could be done by preparing Origin-Destination (O-D) matrices and identifying parameters that contribute to traffic demand and would assist in prioritizing appropriate linkages for industrial and agricultural projects in the state Allocation of resources in a rational and equitable manner This should be done keeping in view the economic aspects of roads. The Road Board would provide a strategic orientation to the process of identifying and prioritizing economically and strategically important road corridors that would be taken up by the department or private sector for construction and maintenance and identify means to raise resources for the same Rationalization and Mobilization of resources for road related activity - A key function of the Road Board would be to oversee the resource mobilization and funds allocation to and from the Road Development Fund (dedicated funding mechanism for roads), which has been suggested as part of the reform agenda for the sector
Key Deliverable 3
Page 6 of III
Defining quality standards of different road networks The road board would be responsible for identifying and defining quality standards for different road network in Rajasthan Ensuring equitable pricing of road related services Necessary for promoting private investment in road development and maintenance. PWD could be the nodal agency responsible for carrying the above activities and assist the Board in planning and prioritizing road related activities and funding. As part of the implementation strategy, the Board could initially handle the Core Road Network. This network would comprise of NH and key SH and MDR that have strong economic importance in terms of linkages with industrial, mining and tourism sectors. The identification of this network could also be done based on criteria like through commercial traffic corridors and connectivity to major traffic generating centres. Approximately 9094 km of roads have been identified under the core network. These stretches have been identified on the basis of economic importance (connecting routes of agriculture, industry, mining and tourist importance) and recommendations of the consultants for the Rajasthan State Highway Project. This is only a preliminary assessment of the roads sector and a more detailed analysis of critical road infrastructure in Rajasthan needs to be undertaken through a Strategic Options Study. This network would act as a priority level network within the existing state road network. Details of the proposed road stretches within the core network have been provided in Annexure 1 to this report. The roads within this network could be classified in three categories: Economically important and financially attractive road projects: To be undertaken through BOT Economically important but financially unviable projects (upto 40% capital subsidy): To be undertaken in collaboration with private sector - project to be given capital / operational subsidy upto 40% Economically important but financially unviable projects (greater than 40% capital subsidy): To be undertaken by the road development corporation - which can raise fund from the market (on the back of government commitment to repayment) to undertake such projects. The remaining roads in Rajasthan could continue to be governed by the PWD. Funds for these roads would be provided through the budgetary allocation to roads. In a phased manner, the Board could be given the mandate of managing the entire road network in the state. The State Road Board would then be responsible for planning and prioritizing all road projects in Rajasthan and identify funding requirements and sources for the same. The board should ideally be set-up as an statutory body, suitably empowered, through a road act, which would allow consolidation of disparate laws pertaining to roads under one statute and also legalize
Key Deliverable 3
Page 7 of III
and legitimize the road board. In order to ensure that the board is able to perform its above mandate satisfactorily, the board should also have representation from not just PWD but also from other government departments, road user bodies, elected representatives and professional bodies in the road sector. It is also suggested that District Planning Committees could assist the board in formulating road projects at the district level. These committees could involve a wider participation from stakeholder groups including economic departments to incorporate their needs. The committees could typically be headed by the District Collector. The role envisaged for the board is complementary in nature to the role of state government (Exhibit III.3).
Exhibit III.3
Areas of Work Planning and Policy Coordination Network Safety Level (safety and environment) Private sector participation Resources
Role of the Government Role of the Authority Formulation - Decision Making Advisory Direct / Status quo - defines roles of agencies Enables Advisory and ensure Define compliance Policy Pricing Ensure availability and Commit / Provide allocation
Besides improving overall planning in the state and other benefits (highlighted through role definition) constitution of a road development board in the state would also help improve the overall governance in the sector. More specifically it would be able to address the following issues: The institutional environment of the road sector has multiple agencies for implementation, with PWD, and to some extent RSRDCCL and RSAMB, as key agencies. Multiplicity of agencies within a government set-up, in the absence of a formal and suitably empowered coordinating entity, is likely to lead to problem in task accomplishment. The voice of the user, a key stakeholder, is hardly audible in the matters of road construction and quality. Although, there are mechanisms at district level that provides for the elected representatives to have a say in matters relating to projects, the effectiveness of these in enabling the voice of the ultimate user is debatable. The concept that the elected representative represents the interests of the electorate though valid in general appears inadequate for the purpose of diversity of interest in the sub-group of the population. Hence, district planning committees by
Key Deliverable 3
Page 8 of III
themselves may not be appropriate for the purpose of enabling the user voice to be heard. Enforcement of property rights is weak. The fact that encroachments of roads are difficult to be removed, if not impossible, points towards a possibility of one or both of: improper mechanisms for attribution of rights and inadequate enforcement. Road safety is not a priority area for any of the implementing agencies and there seems to be no indication of any organized effort towards the same. Creation of Road Boards to manage road network is widely accepted and followed in many countries. In most countries these Boards are responsible for the overall planning and policy framework constituting roads and are assisted by organizations at the local level to implement. Even other states in India are setting-up road boards / authority to govern the road sector. While Uttar Pradesh is setting-up a Road Development Authority, Tamil Nadu is considering a Road Board to manage the road fund and prioritize investments in the road sector. A case study on the Road Board in Malawi is presented in Exhibit III.4
Exhibit III.4 Case Study: Road Board Malawi The National Road Fund was established under the National Roads Authority Act and is managed by a sub-committee of the main National Roads Authority Board. The main Board has 13 members; seven drawn from organizations representing road users, farming interests, business community, local government, and the National Road Safety Council; three representing the public interest; and three ex officio members representing the Ministries of Works, Local Government, and Transport.
Source: World Bank
The main functions of the Road Board are: Review the annual road programs prepared by the road agencies and consolidate them into a national program, submitted to the minister for approval Determine the allocation of financial resources required by road agencies for maintenance, rehabilitation, and development of public roads Recommend to the minister appropriate road-user charges, fines, penalties, levies, or any other sums to be collected under the act and paid into the road fund Disburse funds or authorize payment of funds to contractors only after it has been certified in writing that the work has been carried out to the required standard Prepare, publish, and submit to the minister audited annual accounts for the fund and also submit, at such intervals as the minister shall provide in writing, reports and financial statements regarding operations of the Authority, the board, and the Fund
Source: World Bank
Key Deliverable 3
Page 9 of III
3.2
Resource Mobilization
Road projects typically have a low financial rate of return. However, the economic return to the community from road development is substantially higher. This is mainly due to the many positive externalities that accompany road projects. These include increases in the overall efficiency of the economy and its rate of growth as well as increases in the value of land surrounding the road. These benefits, however, are usually difficult to measure and price since they accrue to the community as a whole. Only the government can capture some of this value through an increase in the productivity of the economy and the consequent increase in tax revenues. Consequently, the government needs to play a dominant role in the creation of road infrastructure. Examples from across the world collaborate the above. In countries such as USA and Japan, governments have funded most of the road developments. At the same time, a significant role for private sector participation does exist. In fact, over the last few years, private investment has already commenced through the creation of short urban bypasses or bridges as well as short inter-urban stretches with high traffic density and easily demonstrable benefits. However, this is yet to be extended over a wider array of projects. The main reasons for the same include: Lack of consensus on sharing of risks - Project promoters want greater traffic guarantees than the authorities have been willing to provide. Forex cover has also been an issue of contention. Most large road projects in the country are seen as unviable without some / significant government subsidy. In fact a large part of projects under NHDP are being undertaken only after the government has taken a significant part of the demand risk. Demand risk is largely seen in the context of low level of economic activity, low toll rates and inadequate project preparation. In a state like Rajasthan, there is still no policy on providing subsidy direct or indirect to road projects to attract private investments. Investor appetite - Most large road developers are not looking at large number of projects in the country. As a result most of the projects taken up by them are confined to states which are seen as economically prosperous and therefore lower level of demand risks or where states provide added security through direct subsidy. Annexure 2 to this chapter provides details of some these projects. Heavy subsidization of tolls - User charges do not recover costs and investors are concerned that in future too these charges will not be adequate. Alternatives like shadow traffic (guaranteed compensation) and partial recovery (government shares costs) are yet to be used extensively. Shadow tolling has been adopted by NHAI for Panagarh Palsit section in West Bengal. A market survey in 2000 of potential private sector providers of toll roads
Key Deliverable 3
Page 10 of III
indicated that concern over the ability and willingness of users to pay direct tolls is an important financing constraint. Thus, widespread direct tolling as a significant road pricing and cost recovery tool is unlikely till the implementation of any future restricted access expressway network, and the growth of public acceptance of direct charging. Reluctance of banks and financial institutions - to extend loans to road projects stems from the problem of creating security and obtaining guarantees. Few Indian corporates are willing to extend corporate guarantees and prefer to create independent special purpose vehicles to implement the projects. After all, guarantee outflows could wipe out their balance sheets overnight, especially in the case of large projects. An alternative to this is to offer a minimum traffic flow measured in passenger car units with an annual growth factor. Exchange rate risk - is one of the main reasons deterring foreign investment in the roads sector. This sector is not capable of absorbing exchange rate risks and exchange losses cannot be easily passed on to toll rates. In few cases where this risk has sought to be allocated 75 per cent or more of the toll rates are pegged to the wholesale price index and 25 per cent or less to the exchange rate. The above discussions clearly demonstrate the need for increased fund mobilization for the sector in the hands of the government and providing a framework for leveraging private sector funds. We propose to address the above through creation of a Dedicated Road Fund in the state of Rajasthan.. Exhibit III.5 highlights the key issues relating to resource mobilization and the proposed solution framework. The next few pages discuss our recommendations on the same.
Exhibit III.5
Key Issues
Limited Funds State Road Board / Authority
Inadequate Maintenance
Inadequate Project Prioritization
Asset Management Company
Planning and Project Preparation
Large Funding Gap
Road Fund
Limited private investments
Huge backlog of investment
Operation and Maintenance
Leveraging Private Capital
Key Deliverable 3
Page 11 of III
As discussed, the need for a dedicated road fund is driven by fiscal stringency, wherein funds required for road maintenance and upgradation are not likely to be available through normal budgetary sources and thus making it essential that extra resources are found and are earmarked as dedicated road fund. The road fund could initially be utilized for projects within the core road network. The basic principles that have been used to define the framework for the fund include the following: The fund should be primarily for road maintenance activities The fund should be dedicated It should be sustainable, buoyant and be autonomous in character Should be managed professionally Levies are linked to road usage and Legal framework to prevent the fund from being utilized for any other activity. The objective of the fund (besides the obvious increased funding for the sector) include the following: Influence long term planning and maintenance of the existing network a part of the fund is proposed for dedicated use for planning and project preparation. Provide support for structuring of projects that leverage private funding by drawing upon government resources a part of the fund is proposed to be used for providing direct financial support to private investors The benefits of creating the fund in the context of Rajasthan would be the following: Provide a dedicated (professionally managed) fund, predominantly for improvement in the existing network, which has been neglected due to past policies and lack of funding. This in turn would help establish a commercial relationship between road service providers and road users. Provide funds for leveraging private capital in road projects in Rajasthan. This would minimize the cost of provision of the road service, by exploiting efficiencies of private sector competition, which is made possible due to the reliable sources of revenue provided by the dedicated fund. Enable the road users to be provided quality road services quicker by accelerating the road programme, as the consistent revenue stream can be capitalized by financial institutions. Would help in the creation of a long term debt market. Revenue flows into a dedicated fund that are clearly identifiable and forecastable often makes it possible for these resources to be capitalized by the private sector. Concessionaires who have been awarded long term operation and maintenance contracts, based upon payments from the dedicated funds, are often able to place long term bonds with investors.
Key Deliverable 3
Page 12 of III
Before discussing the basic contours of the proposed fund, it is desirable to address upfront some of the basic concerns that are raised against such funds. These include: Finance department at the state level often sees such funds are earmarking, which balkanises fiscal resources and prevents them from being optimally reallocated in response to changing demands. Such funds would increase the cost of financing the deficit, as the government would have to resort to market borrowing, even when surplus resources are available in such dedicated funds. To ensure that dedicated fund does not start a process of balkanisation, it is proposed that the sources of funds are separate and additional to existing levies. Also, to ensure that surplus funds does not lie idle, as they can be invested in government security, it is proposed that the fund be managed by a professional Asset Management Company (AMC) under the overall guidance of the road board. In fact, it can be argued that such funds reduce the permanence of fiscal burden by insulating the resources required for regular maintenance and by permitting the efficiency of private sector. In addition, such funds often lead to lower vehicle operating costs, leading to lower transport costs, greater integration of economic activity and thus resulting in higher tax revenues. Having discussed the rationale, principles, objectives and benefits of a dedicated road fund, this section discusses the contours of the proposed fund, which include the following: Sources of funds and likely corpus Areas of application Management of fund Critical success factors 3.2.1 Sources of Funds In deciding upon the sources of funds for the road fund, it has been ensured that there is no defined transfer from general budgetary revenues (which is possibly the easiest to do) as it send wrong signals creates pressure from other departments for the same and also it would not not allow the conceptualization of revenue flows into the fund as user fees, which is essential for commercialisation of the sector. It is therefore important to ensure that the revenue stream into the funds are transparent and are seen to be used for improvement of the sector. In view of the above, we propose the following sources for the fund: Cess on fuel: This could be a major source of revenue for the Road Fund. A Rs. 1 cess on petrol and a Rs. 0.50 cess on diesel could generate around Rs. 100 - 150 crores per annum for the state that could be directly deposited to the road fund by the oil companies. Since consumption of fuel is income elastic, revenues from this source would increase with the growth in state GDP. Also
Key Deliverable 3
Page 13 of III
the fact that it is relatively price inelastic in demand, the revenues do not vary sharply with changes in oil prices, this coupled with the fact that it has a large tax base makes fuel cess a plausible option. It may be argued that since the sales tax rate is already high in the state with respect to some of the neigbouring state this may not be possible. While, this may be correct it is felt that 1) after dismantling of the Administered Pricing Mechanism (APM) fuel prices are now determined by market conditions and are subject to changes every few weeks and a marginal increase at one time may not be very noticeable, 2) several states levy sales tax on fuel to increase their revenue (Since 1998, the UP government has been collecting Rs. 200 crores per annum by applying an additional sales tax of Rs. 1 on petrol and diesel), 3) States such as Maharashtra have a very high sales tax on fuel - 34% on diesel and 30% on petrol compared to Rajasthan and are yet not affected (Maharashtra continues to register high rates of economic growth) and 4) improvement of existing roads (through channeling of this cess to road improvement programmes) would mitigate any increase in immediate cost by bringing down vehicle operating costs. Motor Vehicle Taxes: Motor Vehicle Tax in the form of vehicle registration charges, etc. could be an important source of revenue for the fund. Since road users would primarily benefit from projects financed through this fund, it would be apt to increase say the vehicle tax on newly registered vehicles. The state government receives Rs. 650 crores per annum through taxes on vehicles. An increase of motor vehicle tax by 1% for private vehicles and 2% for others would generate additional revenue of about Rs.50 crore. For example, the government of Uttar Pradesh plans to generate an additional Rs. 85 -100 crores through road related taxes including road tax and passenger tax. The rationale for higher rate of increase for commercial vehicle is the fact that the cost of registration of vehicle is added to the cost of the vehicle and would be eligible for depreciation and hence reduces businesss tax liability. It is also believed, as in the previous case the benefits accruing from adequately maintained road system would surpass negative impacts of increase in fuel and motor vehicle taxes. Motor Vehicle Insurance Charge: Motor vehicle insurance surcharge can also provide modest revenues to the fund, although they are not directly linked to road usage. Thus, it is suggested that government consider introducing an annual surcharge on the vehicle insurance premium, to be paid by the vehicle owner, which will be deposited by the vehicle insurance company to the road fund. The cost of administration is very minimal. Improvements to the road network relating to road safety would benefit both the vehicle users and insurance companies, because large portion of insurance payouts by non life insurance companies for India as a whole are for road accidents, where third party liability is unlimited. Depending upon the level of surcharge to be levied on different type of vehicle, collections from this source could vary from Rs. 30 - 60 crore per annum.
Key Deliverable 3
Page 14 of III
Toll from projects undertaken by the PWD / SRDC: The state could consider levying toll on the some of road stretches built by it. Tolls from projects completed / implementation stages could accrue to the road fund. Though revenue from tolls would be easy to administer for the state, only a small proportion of the roads can be tolled (less than 20% of state highways have a PCU more than 10000). Mandi Fees: The Rajasthan State Agricultural Marketing Board collects appx. Rs. 120 crores annually as mandi fees. 60% of these funds are utilized for linking mandi roads and 40% for constructing mandi yards. A proportion of this fund say 10% could be dedicated for road fund for taking up project earmarked for improving linkages of mandis with main arterial roads. It should be emphasized that the above recommendations are based upon preliminary and strategic consideration and may require a detailed analysis of such tax increase on state government. 3.2.2 Application of Funds The basic decision that needs to be taken in this regard relates to what activities should be permissible i.e. operation and maintenance, new construction, private investment, etc. These decisions should typically be taken by the road board. In arriving at our recommendation we have largely been driven by the needs of the sector, which is primarily proper planning and ensuring network maintenance. According to PwC analysis, in the next decade, appx. Rs. 12037 crores would be required for road maintenance. Therefore, this fund would help in reducing the costs and fiscal burden of the state for maintaining roads. In view of the above, it is proposed that in the first five years of its operation: The Road Fund could primarily be responsible for rehabilitation and maintenance of existing road networks (studies by the World Bank have indicated that Re. 1 spent on maintenance, reduces vehicle operating costs by Rs. 2-3), and therefore a large proportion of the funds should be utilized only for rehabilitation / maintenance of road stretches. The need for providing fiscal inducements to attract private capital have been discussed before and is now widely accepted. It is therefore suggested that a proportion of the fund should be earmarked to leverage additional funds from the market for ROT / new construction / lane upgradation. This amount could assist in providing either capital subsidy or any such instrument that may be decided for projects. The rationale for apportioning this fund is based upon a broad assessment of road (SHs and MDRs) in terms of their ability to attract private sector capital based upon existing traffic (only a small percentage of state roads are tollable). 10% of the fund would be used for meeting administrative expenses of the AMC (which is typically 2%) and the Road Board for planning road activities and preparing feasibility studies. This is necessary to ensure planning process is not stymied due to lack of dedicated funds.
Key Deliverable 3
Page 15 of III
Allocation after five years could be re-looked at on the basis of the requirements of the sector as on that date. 3.2.3 Management of Funds It is essential to have an independent and professional organization responsible for managing the day to day affairs of the road fund. Dayto-day management of funds would involves making projections for revenues, commitments, and disbursements. Based on cash-flow projections, the board could then decide how to handle short-term borrowing and cash surpluses. Since the credit rating of these funds would determine their ability to leverage funds from the market, it would be important to prepare accurate forecasts for future revenue sources. Thus it is suggested that the Road Fund could be administered by the Road Board which could be assisted by the Asset Management Company (AMC). AMC could conduct its affairs based on the framework evolved by the Road Board and the Board and AMC could enter into Specific Management Contract. The specific role and functions of the AMC could include: Evaluate investment options and recommend to Road Board for fund development Maintain project related records and audit their performance Ensure effective and timely transfer of funds to implementing agencies Prepare quarterly and annual financial statements and submit to the Road Board Prepare operational plans and budgets for submission to the Road Board. Key success factors For the above fund to be successful and meet the desired objectives, it should be ensured that: The establishment of the fund has a strong legal basis to secure the revenue stream, to establish a clear demarcation from the government, and to provide security against political interventions. Most successful road funds in various countries have been established by specific legislation The fund should be governed by a public-private board, as suggested for the Rajasthan State Road Board, having representation from key government departments and road user groups The funds should have a professional and independent asset management company so as to ensure policies defined by a public-private road board is implemented without bias The fund should have well established procedure for appropriate allocation of funds.
Key Deliverable 3
Page 16 of III
In recent times more and more states are looking at establishing dedicated road funds. Exhibit III.6 show cases examples of Tamil Nadu and Uttar Pradesh. Annexure 3 to this chapter provides best practices for such funds defined by The World Bank.
Exhibit III.6 Road Fund - Uttar Pradesh Features of Road Fund
The government of Uttar Pradesh created a road fund in 1998 by levying

additional sales tax of Rs. 1 per litre on petrol and diesel. The revenues collected under the fund are transferred by the oil companies to the State Consolidated Fund and are then allocated to PWD
The Fund generates additional Rs. 200 crores per year for road
maintenance
The Fund has a Management Committee, chaired by the Minister of Public

Works, with representatives from key line ministries, local government, the Legislative Assembly and two road user organizations. Recently, the Government of Uttar Pradesh decided to expand the membership of the Committee to bring in more non- government members.
In January 2000, the Government of Uttar Pradesh issued the Road Fund
Rules for operation of the Fund which established a mechanism for effective use of the resources. The Rules stipulate, among other things, that the fund shall: (i) be used for maintenance and repair of all roads in the State, (ii) be accounted for separately; and (iii) only be disbursed against plans submitted by implementing agencies and approved by the Committee Road Fund - Tamil Nadu Features of Road Fund
70 % of the road funds are to be deployed towards maintaining roads under

the control of Government, Panchayats and Municipalities, 20% for leveraging funds from private sector and the remaining 10% to be used for project development, capacity building, and road safety
Sources of funds include transfer from the central road fund, existing road
fund, additional levy of Rs. 1 per litre on petrol and Rs. 0.5 per litre on diesel to generate additional funds, vehicle road tax, special levy on vehicles and spare parts and contribution by insurance companies
It is proposed to be administered by a high powered autonomous road

board, which would be assisted by the Asset Management Company. AMC would be conducting its affairs based on the framework evolved by the Road Board, for which it would enter into a specific management contract.
Source: World Bank
Key Deliverable 3
Page 17 of III
3.3
Institutional and Policy Reform
This section looks at the need for strengthening the existing policy and institutional framework for the development of the road sector in Rajasthan in order to : support implementation of the recommendations made so far, help attract private investment into the sector, which has not happened inspite of the fact that the state has been proactive in formulating a BOT policy for roads. There is thus a need to re-look at the government policy and benchmark it with other states who have been successful in attracting private participation. support the long term growth of the sector by looking at the governance structure for the sector. Exhibit III.7 highlights the key issues facing the institutional structure and the proposed solution framework for the same.
Exhibit III.7
Key Issues
Limited Funds State Road Board / Authority 1 Inadequate Maintenance Inadequate Project Prioritization Planning and Project Preparation
Asset Management Company
Large Funding Gap
Road Fund
Limited private investments
Huge backlog of investment
Operation and Maintenance
Leveraging Private Capital
Strengthen Policy Initiatives
Define Roles of Institutions
3
Greater Private Participation PWD RSRDCCL
It is believed that in the recent past, an Institutional Development Study has been undertaken (as part of the erstwhile proposed World Bank State Highway Project) by the state to develop long term institutional strategy. We believe such a study is critical for defining the long term institutional reform agenda. This section sets out recommendation on the future institutional structure for the sector in Rajasthan. This is based upon a preliminary study of the issues facing the sector in Rajasthan (a detailed study on institutional structure across sectors is not part of the scope of this assignment) and strategies undertaken by other states.
Key Deliverable 3
Page 18 of III
Therefore, it needs to be emphasized that the recommendations on governance structure (institutional) are based upon preliminary and strategic consideration and may require a detailed analysis by the state government. 3.3.1 Institutional Reform Due to the reasons mentioned above, in developing the institutional reform for the sector, we have largely relied on the broad consensus on issues facing the sector. A number of state PWDs and the National Highways Authority of India (NHAI) have undertaken independent institutional audits over the past few years. These activities have produced a considerable amount of information on how road agencies at the state level view the main problems in the sector, and how these problems are currently being addressed; as well as how the performance of Indian road agencies compares with their international counterparts. Overall, the consensus is that road agencies in India, with a few exceptions, are traditional bureaucratic organizations that lack both autonomy and external pressures for optimal performance. They also operate using outdated processes. Moving forward there is a general consensus (demonstrated by reform measures undertaken by states such as Karnataka, Kerala and Madhya Pradesh) that a clear separation of client and provider functions, and using output-oriented performance indicators and effective monitoring mechanisms needs to be undertaken. The recommendations presented in the next section are largely driven by this basic principle. We believe the proposed State Road Board would be the basic umbrella for governance of the structure constituted by various players with clear roles and mandates. It is widely accepted (based upon reform measures and IDS reports of various states) that Public Works Department (PWD) could continue to be the nodal agency responsible for road network in states. However, it would need to be strengthened for undertaking this role and mandate. The areas where strengthening needs to be undertaken is discussed later in the section. To ensure clear separation of client and provider function as also regulatory function, it is believed that in the long term PWD would emerge as the strategic planning unit responsible for network operation and maintenance and ensuring quality. PWD could also be the nodal agency assisting the Board in planning and prioritizing road related activities and funding. It is proposed that over a period of time the department should outsource execution functions and retain only the ownership of the road network. Also, as the nodal road agency in the state, PWD would need to move away from any other activity such as construction and management of buildings. However, during the initial phase of the reform agenda PWD would be responsible for construction and management of the non-core road network in the state.
Key Deliverable 3
Page 19 of III
PWD would also continue to act as the government agency responsible for attracting private investment in road projects (ROT / BOT). It is suggested that PWD could contract private sector through BOT / ROT and provide capital subsidy up to 40% of the project cost for road projects. 40% is based upon experience of GoI and other states such as Tamil Nadu, Madhya Pradesh and Maharashtra, wherein for private sector participation in roads the government is willing to grant capital subsidy to the extent of 40% of the project cost on competitive basis. It may be noted that the extent to which subsidy needs to be provided varies from project to project and the maximum level (with the overall cap of 40%) can only only be determined through project feasibility reports. The funds required for providing subsidy to the private developer would be sourced from the dedicated road fund. The various areas that require strengthening (capacity building) of PWD to address current issues and for it to play the long term role of a network management agency include: Improvements in personal performance reviews Identification and elimination of redundant departments Procurement systems - In the Andhra Pradesh roads and buildings department (RBD) for example, contract documentation has been standardized, tendering processes have been improved, and new mechanisms for dispute settlement are being adopted. In Tamil Nadu, a Transparency in Tenders Act passed in 1998 regulates the procedure for inviting and accepting tenders. A Commissionerate of Tenders has been established with adequate delegated powers to evaluate bids and award contracts. Karnataka has also been particularly proactive. Case examples of efforts made by Madhya Pradesh and Karnataka are presented in Annexure 4 to this chapter Reliable and comprehensive system for collecting critical information - such as asset condition, traffic flows, road accidents and financial information to feed key databases and improve future decision making. For example, the Maharashtra PWD has made a considerable investment in IT, putting in place a Management Information Service (MIS) for works, inventory and personnel, and a pavement management system. In Karnataka, a GIS-based Road Information System (RIS) is being developed by the PWD. The department intends to use the RIS as the core database and plans to deliver information to the general public through the Internet. State Road Development Corporation In so far as the mandate for road and building construction and raising institutional finance for the same is concerned, the state already has Rajasthan State Road Development and Construction Company Limited, which has experience of undertaking projects (road and buildings) as a construction contractor. In the recent past a number of states have constituted road development corporations (RDCs) as the implementing agencies with clear mandates and capacity to raise
Key Deliverable 3
Page 20 of III
private finance (e.g. Tamil Nadu, Gujarat, Karnataka and Maharashtra). The RDCs work with minimum staff and outsource most of the activities related to design, construction supervision and actual works. Annexure 5 to the chapter details the experience of one such agency. Accordingly, it is suggested that the state could consider re-defining the mandate of RSRDCCL and modeling it on the lines of a State Road Development Corporation (SRDC). The primary objective of this corporation could be: To undertake all construction activities relating to road and building To form special purpose vehicle (SPV) with private sector through equity participation Leverage funds from the capital markets and other institutional sources to undertake road projects that are economically important but financially unviable. Financially unviable roads have been defined as roads where the state cannot charge tolls or where capital subsidy required for attracting private investments is in excess of 40%. It is believed that it is cost effective to undertake road construction directly in projects where project requires capital subsidy in excess of 40%. This is because typically private investor assess higher levels of risk thereby increasing project cost and assume a higher level of profitability. On the other hand, the cost of funds with the state is lower and it operates on a much lower profit margin. A case study on the Madhya Pradesh Rajya Setu Nirman Nigam Limited raising funds from HUDCO though bonds is presented in Exhibit III.8
Exhibit III.8 MP Bond-BOT Programme The Madhya Pradesh Rajya Setu Nirman Nigam (MPRSNN) is implementing the MP Bonds programme. This is primarily a debt of Rs. 500 crores that has been taken from HUDCO and the state support to the specified road projects that was to be Rs. 100 crores per annum (state budget) would be used to repay HUDCO. The state is acting as the guarantor in this arrangement and in case of default of payment, HUDCO would have the first right on the states share of funds for roads from the central government. The project is being implemented for 16 strategically important stretches linking major cities with industrial / tourist centres, agricultural areas to important marketing centres, etc. It is important to highlight that this funding has happened primarily due to the fact that MP govt. provided a legal framework by enacting the Madhya Pradesh Adhosanrachana Vinidhan Nidhi Board Adhiniyam 2000 Act, to raise and deploy funds for infrastructure projects.
Source: HUDCO
Repayment of borrowing resorted by SRDC for road projects that are economically viable but not financially should be provided by the state (as all projects undertaken by the corporation through institutional finance / market borrowings would have to be backed by a government guarantee). These repayments could be partly provided through the road fund and partly through some level of user charges /
Key Deliverable 3
Page 21 of III
tolls. The remaining repayments would need to be catered through earmarked state budgetary support for roads 3.3.2 Policy Reform As discussed, recommendation on policy reform has largely been driven by the need for making changes in the existing policies so as to attract private capital in the sector and align the policy framework with various recommendations made elsewhere in this report. Rajasthan has a well laid down BOT policy and concession agreement laying down the terms and conditions for attracting private participation. However based on discussions with NHAI, private sector and review of concession agreement of other states, few recommendations are suggested for the existing agreement. These recommendations are aimed at providing alternatives for selecting private entrepreneurs (necessitated by the fact that the state needs to provide subsidy to projects) and removing ambiguity in terms of the contract procedures. These include: Rajasthan currently adopts length of the concession period for selecting BOT operator. All road projects can be categorized as either viable (on a pure BOT basis) or viable only with fiscal support. For projects in the first category, no financial support from the government would be required. Acceptance of toll road projects usually grow over a period of time. Thus, till the time tolls are widely accepted by road users, the state could stipulate toll rates for individual projects and select the variable of selection as the lowest concession period. It is proposed that gradually the state could consider alternative variables for selecting and shortlisting entrepreneurs and it should explore implementing projects both on variable toll road concept and concession periods with the lowest net present value for the private party as criteria for selection. The applicable toll rates could be computed by the private entrepreneur based on savings in vehicle operating cost supplemented by a willingness to pay survey. For projects that are financially unviable, the state could be willing to provide capital subsidy. For selecting such projects the variable of selection could be the lowest net present value of government support to the private party. This would effectively minimize the combination of state government, concession period and toll rates. In case of Rajasthan, the Superintending Engineer (SE) has been appointed as an independent engineer (IE). The independent engineer should be truly independent so as to be able to take an un-biased view in case of any dispute between concessionaire and govt. Other states like Gujarat have appointed MoRTH approved consultants as IE. In Haryana, independent proof and supervision consultants are appointed during construction phase. During the operation phase, the project is supervised by PWD engineer. The practice in Rajasthan should thus be changed. While this would include some cost, the same could be recovered from the concessionaire as is being done in other states.
Key Deliverable 3
Page 22 of III
There needs to be separate provision for fixing tolls for ROT and BOT projects. For instance the Kekri - Nasirabad road stretch in Rajasthan has been taken under ROT but same toll rates are being charged as for a new road construction, which may invite public interest litigations. The state government should thus give proper directions linking tariff to project cost and specific works and executing these tariff structures through government orders for different project categories. The norms for maintenance have not been clearly established. The state needs to clearly specify either its own norms or as laid down by the Indian Road Congress (IRC). These norms should be defined for the end of the project construction period, during operation and maintenance and at the time of handing back to PWD. The current practice of inviting schedule of maintenance from the bidder brings in subjectivity. Since Rajasthan is the largest state and has varying geographical terrain, different specifications for different zones based on weather conditions and environment could be specified for construction and maintenance. Differentiate between Access and Through Roads - The state needs to take cognizance of the fact that alternative provisions would be required for traffic originating from wayside establishments who are either unwilling to pay the toll or who do not have entry and exit points from the new facility to their establishments. The state could thus acquire additional land that can be used for provision of service roads to these users. Limited access highway can be constructed at a level, which is higher than the existing road, thereby restricting access to encroachers. Provisions for the same needs to be made in the feasibility reports. Commercial Exploitation of Adjacent Land - In cases, wherever levy of toll alone is not enough for ensuring financial viability, government could consider providing additional land to the investor for commercial development so as to augment returns. The state could explore the possibility of of drafting principles for allocation of additional land for commercial exploitation. The private operator could thus supplement his toll income (in cases where use levy is inadequate to provide the desired return) by developing ancillary facilities. Ancillary facilities are typically developed with the objective of supplementing the toll income from the project during the stabilization period. As the land required for these facilities would be adjacent to ROW granted for the project, these amenities will be used only after the facility has been established. Thus the primary problem of large negative cash flow during initial period remains unaddressed. Thus, GoR needs to consider providing development rights in areas independent of the facility. Further, it would be relevant to highlight that the skills required for developing real estate and other ancillary facility is
Key Deliverable 3
Page 23 of III
different from that of a road. Thus, while selecting a private party, the government should ensure that the bidder would be capable of developing and implementing both the projects. Subsidizing loss of revenue Inadequacy of tolls to cover capital cost of private road projects and need for government to provide cash support has already been discussed. The basis and extent to which the state is willing to share needs to be included into a policy statement. Alternative Tolling Mechanisms - Besides the direct toll mechanism which is being followed in the BOT projects and under which the BOT concessionaire directly collects toll from the road user, there are other alternative tolling mechanisms that need be considered by the state government, specially given the acceptance that it is unlikely there would be large pure BOT based projects. The state should consider alternatives such as shadow toll and annuity. Tolls for shadow toll projects are predicted on recovery of user charges for the use of the highway by each vehicle, in accordance with a pre-determined tolling structure. They are referred to as shadow, as opposed to real tolls because the payment for usage is made by the government, and not by the user. Payment to the operator is made on the basis of measured traffic volume on the facility. So while the traffic risk is borne by the operator, it is free from toll collection risk. Annuity payment is a variation of shadow toll wherein the payment to the BOT concessionaire is determined in absolute terms with no direct reference to the number of vehicles using the highway. A fixed sum is paid by the government annually/semiannually/quarterly over the concession period irrespective of the number of vehicles. Under annuity payment scheme the government retains the right to charge toll from users at any stage of the project. Shadow toll and annuity payments essentially entail budgetary funding on a deferred basis. However these mechanism are suitable only for select road projects as the private entrepreneur operates on a higher profit margin and thus the state government would end up paying more than if it had undertaken the construction of the facility on its own. The recovery of land acquisition cost (which typically ranges from 10-30% of project cost) from user charges, which is determined by the Government increases the length of the concession period. Since most private developers user payback period as one of the criteria to evaluate project attractiveness, long concession period projects are not preferred. Thus the road policy needs to examine the possibility of developing a methodology to evaluate the impact of the land acquisition cost on the financial feasibility of the project. In case this cost drastically affects the financial viability of project, government should consider bearing the cost of land acquisition.
Key Deliverable 3
Page 24 of III
Further, land acquisition process is a time consuming one and typically takes 1 to 2 years. Thus it is imperative that this process should be initiated in parallel with the feasibility studies and the tender process inviting private participation. GoR could also consider a policy for developing road stretches in association with beneficiary industries, on the lines taken by Gujarat and Chhattisgarh. This would largely involve beneficiary industry taking up project by giving a one time grant to Government in lieu of tolls. Government also needs to develop a role and nature of an independent regulation for the sector one of the principal requirements for the concession agreements to be truly bankable. To start with this role can be taken up by a multi sector regulator (except power), as defined under the proposed Rajasthan Infrastructure Development and Regulation Act. 4.0 Investment Requirements and Funding Gap
The investment requirements for roads as presented in KD2 was Rs. 131743 crores. These investment estimates have been revised based on lower norms for maintenance and lane upgradation and discussions with PWD and other road agencies. The revised investments till 2025 (all roads) is Rs. 91110 crores. The rationale for changes in investment norms are discussed in Annexure 6. The revised investments for roads over the next ten years i.e. till 2013 works out to appx. Rs. 36724 crores. These investments do not take into account the requirements for national highways. Details of these investments is presented in Exhibits III.9 to III.11.
Exhibit III.9
Investment required for upgradation of roads 2003-2013 (Rs. Crore) 2003-04 SH MDR ODR VR Total 857 387 133 565 1942 2004-05 857 387 133 611 1988 2005-06 857 387 133 628 2005 2006-07 857 387 133 628 2005 2007-08 857 387 13 251 1508 2008-09 857 387 13 251 1508 2009-2010 857 387 13 251 1508 2010-11 857 387 13 251 1508 2011-12 857 387 13 251 1508 2012-13 857 387 13 251 1508 Total 8571 3869 609 3939 16989
Exhibit III.10
SH MDR ODR VR Total 2003-04 259 76 105 529 969 Investment required for maintenance of roads 2003-2013 (Rs. Crore) 2004-05 2005-06 2006-07 2007-08 2008-09 2009-2010 2010-11 2011-12 272 286 299 312 325 339 352 365 80 85 90 95 100 104 109 114 111 118 124 125 126 126 127 127 524 524 524 577 653 729 805 881 988 1013 1038 1109 1204 1298 1393 1488 2012-13 378 119 128 912 1537 Total 3187 971 1216 6662 12037
Key Deliverable 3 Exhibit III.11

Cumulative Funding Requirement till 2013 Component Rs. Crore Backlog demand 7698 Future investments 16989 O&M requirement 12037 Total 36724
Page 25 of III
Against the total investment requirements of Rs. 36724 crores, the tenth five year plan envisages an allocation of Rs. 3290 crores (including funds from RSAMB) for the road sector. Based on the past trends the total funds available for road development in 2013 would be appx. Rs. 8465 crores. This would thus lead to a funding gap of Rs. 28259 crores i.e approximately 77% of the total requirement. However, this gap can be reduced in case the state is able to implement the reform agenda proposed as part of this report. The reduction in gap would happen on account of the following four reasons: Higher allocation to the road sector from regular budgetary support on account of higher tax and non tax receipt (which would be on account of higher economic development aided by better planning of road projects). This is because improved road planning (largely driven by economic basis) would help improve productive capacity in the state. It is projected that the states own tax revenues (refer chapter on state finances - KD2) can grow at approximately 15% in case the state is able to sustain the projected economic rate of 7.76% and implement fiscal balancing measures. Higher allocation to the sector is proposed in light of the fact that roads is critical infrastructure and the government needs to greatly enhance the budgetary allocation to the sector Road fund: The road fund with an initial corpus of appx. Rs. 330 crore can grow upto appx. Rs. 1074 crores by 2013. This is based upon the elasticity ratio of underlying sources of revenue to the road fund with rate of economic growth Leveraging of private funds to BOT / MOT: It has been assumed that through the road fund the state could on an average be able to leverage private funds in the ration of 20:80. This can subsequently (say after 5 years) be reduced to 15:85 (on account of likely higher economic growth) in the state Ability to attract multilateral funding / borrowing from market - This is on account of better institutional framework and fiscal condition of the state. Based upon the average funding from such sources to various other state highway projects, this comes to Rs. 3030 crores. Based on the above, the funds available to the sector could increase from the projected level of Rs. 8465 crore to Rs. 26503 crore, thereby reducing the funding gap from approximately 77% to 28%. Details are presented in Exhibit III.12.
Key Deliverable 3
Page 26 of III
Exhibit III.12
Funding Sources and Gap for Roads till 2013 Investment Requirements Particulars State Highways Major District Roads Other District Roads Village Roads Sub-total Backlog Demand Total Investments Sources of Funds State's Own Resources (PWD) RSAMB PMGSY NABARD Sub-total Road Fund Taxes on Vehicles Cess on fuel Motor Vehicle Insurance Central Road Fund Tolls Total BOT / MOT Funding from Multilateral Agencies Total Funds Available Funding Gap
Rs. Crores 11759 4840 1826 10601 29026 7698 36724
4241 2191 2915 1530 10878 602 4097 685 1405 207 6997 5597 3030 26503 10221
Key Deliverable 3
Page 27 of III
5.0
Action Plan for Recommendations This section presents the action plan for implementing the reform agenda identified in the earlier sections The implementation plan would be fundamentally driven by Government of Rajasthan based on the acceptance of recommendations presented in the report For the purpose of preparation of this reform action plan it has been assumed that the recommendations are acceptable to GoR and therefore, the action plan presents steps that need to be followed for implementation of the reform agenda The action plan has been presented for each of the five elements of the reform agenda viz., Setting-up of State Road Board Creation of Road Development Fund Remodeling RSRDCCL to State Road Development Corporation Amendments to Road Policy. For each element of the reform agenda, the activities to be undertaken, the mechanism and responsibility for implementation have been defined. A time plan has also been suggested for implementation of each element.
Key Deliverable 3
Page 28 of III
S. No 1
Reform Agenda Settingup of State Road Board
Activities to be undertaken Preparing terms of reference to appoint consultants for recommending & implementing institutional and policy reforms Define the need and mandate of the Road Board Identify the various organizations that would be represented in the board Identify the core road network that would be under the jurisdiction of the board Setting the broad guidelines for the Board to function Documentation and finalization of findings and recommendations Passing an Act to make the board a legal entity
Mechanism Expression of Interest / Tenders
Responsibility PWD
Time frame 1 month
White paper / department study Discussions with PWD and participation from road users and economic departments Traffic Survey and meetings with economic departments to identify key road stretches Stakeholder workshop
Consultant / PWD
3 month
Consultant & PWD
2 month
Consultant & PWD
3 month
Consultant & PWD
2 month
Stakeholder workshop
Consultant
3 month
Policy Change
PWD
3 month
Key Deliverable 3
Reform Agenda Setting-up of State Road Board Time Duration - 12 months
Page 29 of III
Preparing terms of reference to appoint consultants for recommending & implementing institutional and policy reforms Define the need and mandate of the Road Board Identify the various organizations that would be represented in the board Identify the core road network that would be under the jurisdiction of the board Setting the broad guidelines for the Board to function Documentation and finalization of findings and recommendations Passing an Act to make the board a legal entity
S. No 2
Reform Agenda Creation of Road Development Fund
Activities to be undertaken Review the quantum and sources of existing funds for roads Define the need for creating a separate and dedicated funding source Identify the alternative sources of funds Quantify the funds that can be generated Creation of legal framework for road fund Preparing terms of reference to appoint professional organization to manage the fund
Mechanism White paper
Responsibility PWD
Time frame 1 month
White paper
Consultant / PWD
1 month
Discussions with state level, central government and multilateral agencies White paper and stakeholder discussions Preparation of the draft of the Road Fund Act Expression of Interest / Empanelment of consultants
Consultant
3 month
Consultant PWD PWD
1 month 3 month 1 month
Key Deliverable 3
Reform Agenda Creation of Road Development Fund Time Duration - 10 months
Page 30 of III
Review the quantum and sources of existing funds for roads Define the need for creating a separate and dedicated funding source Identify the alternative sources of funds Quantify the funds that can be generated Creation of legal framework for road fund Preparing terms of reference to appoint professional organization to manage the fund
S. No 3
Reform Agenda Remodel RSRDCCL to State Road Development Corporation
Activities to be undertaken Review the existing structure and functioning of RSRDCCL Define the role and mandate for the Road Development Corporation Finalize the capacity building measures for remodeling RSRDCCL to road development corporation
Mechanism White paper
Responsibility Consultant/ RSRDCCL
Time frame 2 month
Stakeholders discussions
Consultant/ RSRDCCL
3 month
Workshop participation
Consultant/ RSRDCCL
2 month
Reform Agenda Remodel RSRDCCL to State Road Development Corporation
Time Duration - 6 months
Review the existing structure and functioning of RSRDCCL Define the role and mandate for the Road Development Corporation Finalize the capacity building measures for remodeling RSRDCCL to road development corporation
Key Deliverable 3
Page 31 of III
S. No 4
Reform Agenda Amendments to road policy
Activities to be undertaken Review the existing road policy Public debate and participation from economic departments and road user organizations Finalize recommendations
Mechanism Stakeholder discussions Stakeholder workshop
Responsibility Consultant/ PWD Consultant / PWD
Time frame 2 month 3 month
Presentation to government
Consultant/ PWD
1 month
Reform Agenda
Time Duration - 5 months
Amendments to Road Policy Review the existing road policy Public debate and participation from economic departments and road user organizations Finalize recommendations
Key Deliverable 3
Page 32 of III
ANNEXURE ROADS
Annexure I - Core Road Network
Sr. No Name of Stretch 1 Delhi-Jaipur-Ajmer-Udaipur-Ahmedabad-Mumbai 2 Agra-Bharatpur-Dausa-Jaipur-Sikar-Bikaner 3 Jaipur-Tonk-Bundi-Kota-Jhalawar-Aklera-Bhopal 4 Beawar-Pali-Sirohi-abu road-Kandla 5 Pathankot-Ganganagar-Bikaner-Jaisalmer-Barmer-Kandla 6 Ambala-Churu-Fatehpur-Nagaur-Jodhpur-Pali 7 Pindwara-Udaipur-Chittaurgarh-Kota-shivpuri 8 Ajmer-Nasirabad-Lambiya-Chittaurgarh-Nimbahera-Nimach 9 Ajmer-Nagaur-Bikaner 10 11 12 13 14 15 16 Ratangarh-Sardarshahr-Pallu-Hanumangarh-Sadulshahr Jaipur-Kuchaman-Nagaur-Phalodi Bhiwadi-Alwar-Rajgarh-Hindaun-Karauli-Gangapur-Sawai Madhopur Ganganagar-Padampur-Raisingnagar-AnupgarhChhattargarh-Bikaner Nimbahera-Pratapgarh-Banswara-Jhalod Sanchor-Abu Road-Swaroopganj-Kotra-Khairwara-Dungarpur-Sagwara-Banswara-Ratlam Phalodi-Balotra-Jalore-Sirohi
Road Category National Highway National Highway National Highway National Highway National Highway National Highway National Highway National Highway National Highway State Highway State Highway State Highway State Highway State Highway State Highway State Highway State Highway State Highway State Highway State Highway State Highway Major District Road Major District Road Major District Road Major District Road Major District Road Major District Road Major District Road
Length (km) 677 521 411 306 875 495 578 222 278 238 395 457 255 217 423 343 280 360 204 151 281 201 150 170 126 165 144 78 93
17 Nagaur-Didwana-Sikar-Jhunjhunu-Pilani-Loharu 18 Nawa-Dudu-Phagi-Lalsot-Gangapur-Karauli-Sirmauttra-Dholpur 19 Jodhpur-Balotra-Barmer 20 Udaipur-Dabok-Mavli-Bhopalsagar-Kapasan-Chittaurgarh-Ladpura-Bundi 21 Alwar-Shahpura-Neem ka thana-Khetri-Singhana-Chirawa-Pilani-Rajgarh 22 Chittaurgarh to Sarthuna via Bamora-Salumbar-Aspur-Peit 24 25 26 27 Bhaler to Kishangarh via Churu-Jhunjhunu-Gudha-Neem ka thana-Kotputli-Bansur-Tatarpur Gangapur to Sariska via Nandauti-Sikandra-Tehla Dabok to Charbhuja via Mavli-Nathdwara-Khilwara Pali to Pindwara via Sadri
23 Jaitaran to Udaipurwati via Lambia-Merta City-Degana-Tarnau-Khur-Didwana-Sikar-Raghunathgarh Major District Road
28 Merta City to Khairapa via Gotan-Palri 29 Kota to Khitoda via Sultanpur-Itawa-Khatoli
Annexure II - Financing of Road Projects Durg Bypass project The first build-operate-transfer (BOT) road project of the National Highways Authority of India (NHAI) achieved financial closure in July 1999. The promoter completed the project before the March 2001 deadline. The concession period for the project has been fixed at 30 years. The proposed road passes through Durg city at National Highway 6, which connects Dhule near Mumbai with Calcutta. The project was undertaken in two phases. Phase I involved construction of a two-lane bypass at a cost of Rs. 700 million. Phase II involved expansion to a four-lane system after 12.5 years at a cost of Rs. 1.5 billion. The bypass project had a debt-equity ratio of 70:30. Shaktikumar M Sancheti, a Nagpur-based civil construction and mining company were awarded the contract for construction of the 18.4 km road. The State Bank of India (SBI) and its associate banks, the State Bank of Indore and the State Bank of Hyderabad, funded the debt component of Rs. 490 million. Of this amount, SBI contributed
Key Deliverable 3
Page 33 of III
Rs. 200 million, the State Bank of Indore contributed Rs. 100 million and State Bank of Hyderabad contributed Rs. 50 million for a tenor of 13.5 years at an interest rate of 14 per cent. NHAI had also chipped in Rs. 140 million as a subordinate loan, at an interest rate of 14 per cent. Moradabad Bypass project The Moradabad Bypass project - a pilot project taken up by NHAI for implementation under the special purpose vehicle the Moradabad Toll Road Company - achieved financial closure in September 1999. The Moradabad bypass has been constructed in two phases. The first phase involved construction of a two-lane facility costing Rs. 1 billion. The project was funded on a debt-equity ratio of 70:30, of which NHAI contributed Rs. 250 million. The EPC contractor, the Uttar Pradesh State Bridge Corporation, contributed the balance Rs. 50 million, which also holds a 15 per cent stake in the SPV. SBI Caps, the financial advisor for the project, arranged for the debt component of Rs. 700 million. A consortium of banks, headed by SBI and including SBI Travancore, SBI Bikaner, Bank of India and Bank of Baroda, committed long-term funds for the project. ANZ Grindlays, ICICI, IDFC, SBI Patiala and PNB also expressed interest in funding the project. The debt was accessed only after exhausting the equity component so as to reduce the interest and repayment obligations during the initial years of the project. Vadodara Halol Road Project The IL&FS-promoted Rs. 1.75 billion Vadodara-Halol road project achieved financial closure in June 1999. The project comprised construction of a 35 km six-lane road. It had a debt-equity ratio of 70:30. The equity for the project was contributed by the Gujarat government, IL&FS and IRCON Punj Lloyd consortium (O&M contractors). IL&FS picked up Rs 150 million, the O&M contractors brought Rs. 150 million and the Gujarat government subscribed to Rs 50 million apart from picking up preferential equity of Rs 100 million. The state government's equity stake is to be converted into debt at a later date. The debt component comprises term loans; subordinated debt and deep discount bonds. The term loans have been sourced from IDBI (Rs. 250 million), IFCI (Rs. 250 million), ICICI (Rs. 350 million), GIIC (Rs. 100 million), Centurion Bank (Rs. 100 billion) and Bank of Baroda (Rs. 100 billion). SBI has also sanctioned a Rs. 300 million debt of which Rs. 150 million will be a term loan and Rs. 150 million will be in the form of risk participation. The average interest rate on the term loans is 16 -16.5 per cent. IL&FS has also sanctioned an Rs. 100 million-subordinated debt through its line of credit with the World Bank. This loan carries an interest rate of 17 per cent. The promoters of the project floated a deep discount bond worth Rs. 200 million with a return of 14.5 per cent. They entered into a take-out financing arrangement with IDFC. Bandra-Worli Sea Link project The Housing and Urban Development Corporation (HUDCO) signed an agreement with MSRDC in March 1999 to lend Rs. 4 billion to its
Key Deliverable 3
Page 34 of III
Rs. 4.12 billion Bandra-Worli Sea Link project. The agreement, on the basis of which the loan was obtained, sought a letter of comfort from the state government during the period of construction. The eight-lane 5.6 km sea link was the first part of a two-phase project, which provides a super fast alternative to the congested Mahim-Dadar-Worli route. Constructing approach roads for 421 villages covering 14 districts in Gujarat In July 1999, the National Bank for Agriculture and Rural Development (NABARD) sanctioned a loan of Rs. 1.1 billion for constructing approach roads for 421 villages covering 14 districts in Gujarat. The state government had approached NABARD for a loan of Rs. 1.7 billion to construct roads in all the 25 districts. The amount used for constructing 1,205 km of roads in the villages of Baruch, Dahod, Dang, Gandhinagar, Jamnagar, Junagadh, Kutch, Mehsana, Navsari, Panchmahal, Rajkot, Surat, Vadodara and Valsad districts. The remaining I I districts to be covered under the second phase and will involve a cost of Rs. 600 million. Narmada bridge project IDBI made significant disbursements to two road projects in 1998. It disbursed Rs. 250 million for the Rs. 1.44 billion Narmada bridge project through an investment in the 12-year 15 per cent infrastructure bonds of the project. This was done after the project achieved financial closure. The repayment of the bonds is slated to begin from the eighth year. It consists of a rupee debt of Rs. 960 million, of which IDBI is contributing Rs. 500 million. The remaining Rs. 460 million has been promised by the SBI-IDFC combine at the rate of 14 per cent per annum. The equity component of Rs. 480 million is being funded by Larsen & Toubro. Coimbatore bypass road project In December 1998, IDBI disbursed the first tranche (Rs. 150 million) of the Rs. 300 million loan promised to the Rs. 1.3 billion Coimbatore bypass road project. The IDBI loan has a seven-year tenor with 15 per cent interest. The repayment of the principal will start from the eighth year. SBI will be contributing Rs. 290 million of the total debt comprising Rs. 750 million. The SBI loan carries an interest rate of 14 per cent per annum. IDFC has structured a liquidity support arrangement for the project, which will be extended for about Rs. 300 million and will cover the SBI loan. The liquidity support will enable the bank to approach IDFC for refinancing, should it fail to raise money from other sources. HUDCO also announced an Rs. 405.3 billion loan for the project. The entire equity, amounting to about Rs. 650 million, funded by L&T, the project promoter. Implemented on a BOT basis with a concession period of 32 years for the bypass road and 21 years for the Athupalam Bridge. The funds for the project structured and arranged by L&T Finance.
Key Deliverable 3
Page 35 of III
Annexure III - Characteristic of Road Fund

Key Characteristics of Existing Road Funds in India Characteristic Legal Basis India Central Road Fund Act 200 Central Government principally Ministry of Finance Accounting mechanism managed by Ministry of Finance No Uttar Pradesh Government Orders 1998 and 1999 State Government plus 15 person Advisory Committee chaired by PWD Minister and 2 private sector members Accounting mechanism managed by Department of Finance No Andhra Pradesh Government Order No 184, 1997 Good Practice or Second Generation Road Fund Act, plus supporting regulations Public private executive board, strong and independent chairperson Separate legal agency established by law Yes, small secretariat, independent of any road agency O&M first use, then new investment, clear criteria for allocation between road agencies
Overseeing
Not stipulated
Type of Entity
Accounting mechanism managed by Department of Finance No
Own Staff
Eligibility of Use
Construction and Maintenance of all state or maintenance of NH, local government roads (but construction of rural roads, has been used for construction and construction of new roads maintenance of SH / MDR
Leveraging private finance
Sources of Revenue Annual Revenue (Rs. Crores)
Fuel cess
Fuel cess
50% of incremental revenues Fuel levy, annual license fees, on motor vehicle tax and fees heavy vehicle fees, fines, transit fees, tolls, weight distance plus taxes on fuel, spares, tyres charges Not Determined -
5800 100% for NH but dedicated for now to NHDP, likely large % for SH maintenance and dedicated for new construction of rural roads Amend Act
200
Portion of Total Maintenance Requirements
30%
Not determined but main road agency receives 80% of requirements
100% maintenance
Adjusting Charges Deposit Mechanism Auditing

Source: World Bank
Amend government order
Not stipulated Through consolidated fund
By board with government consent Directly monthly deposit Auditor General or independent auditor, technical and financial audits as well
Through consolidated fund Through consolidated fund Comptroller and Auditor General Comptroller and Auditor General
Not stipulated
Key Deliverable 3
Page 36 of III
Annexure IV - Case Study Institutional Reform
Annexure V - Case Study MSRDC The Maharashtra State Road Development Corporation (MSRDC) was set up in August 1996 to provide better road infrastructure in the state. This was to be achieved by generating additional resources, including private sector participation. The objective of the Corporation is to develop road projects in a time-bound professional manner and to achieve cost-effective solutions in road development. MSRDC has been set up as an empowered company under the Companies Act, outside the purview of the state Public Works Department (PWD). The objective was to ensure quick decision-making and an action oriented work culture. The Corporation is governed by an independent board of directors, constituted from among eminent professionals from the private sector and government. Since its inception, MSRDC has been setting standards in the efficient execution of road projects and has also met with unprecedented success in raising funds from the debt market.
Key Deliverable 3
Page 37 of III
The Corporation started with a seed capital of Rs. 5 crore in 1996. In addition, a commitment was obtained from the Government of Maharashtra to provide equity of Rs. 150 crore over the next 10 years. A similar agreement was struck with the Brihanmumbai Municipal Corporation (BMC) which agreed to provide a sum of Rs. 125 crore over 5 years as equity. With this seed capital, the company has managed to raise a sum of Rs. 1,170 crore as debt from the capital markets. The Corporation has executed / executing a number of projects including the Mumbai-Pune Expressway and the construction of 50 flyovers within Mumbai, entailing an investment of about Rs. 3000 crore. Reputed consultants were appointed to do the feasibility study for the different flyovers/stretches. Project Consultants were employed to monitor progress of the work and authorize payments to the contractor. They were also responsible for addressing any technical issues during the course of the project. At the same time, MSRDC has also facilitated the work of contractors by ensuring prompt payment for all bills submitted (within 48 hours). It also made available land within the city for pre-casting of sections for the flyovers and ensured access to power and fuel in remote locations for expressway construction. In addition, the Corporation has also offered foreign exchange cover to contractors for importing equipment for use in MSRDC promoted projects. All contractors were also provided with a 10 per cent advance for mobilization and a 5 per cent advance for equipment. The Corporation ensured that the projects put up for tendering had received all the necessary approvals and environmental clearances. The contracts were also awarded in a fair and transparent manner. The Corporation made the use of the latest technologies a prerequisite for all builders. This has cut down the construction period from 36-42 months to 17-18 months. The contracts have also been structured so as to provide an incentive for early completion of the project and a penalty for each day of delay. As a result of these progressive measures, MSRDC has consistently met both time and cost targets. It has also been argued that MSRDC is today facing financial difficulties and the state has had to provide budgetary support to MSRDC. We believe that while the above is true, the current situation needs to be seen in a context. The fact that today MSRDC has financial problem is because of low traffic (specially truck traffic) on the Pune-Mumbai expressway than what was projected. It is precisely this reason that there were no takers for this project (except one). Had the government gone with the sole bidder it was estimated that the present value of the capital subsidy asked by the sole bidder would be greater than the investment required by MSRDC to build the project themselves. One also has to evaluate the overall social and economic cost of the project not happening. It is precisely for this reason that government
Key Deliverable 3
Page 38 of III
has to continue to play a dominant role in building road infrastructure. Thus, the current financial problems of MSRDC would have to be seen in the context of overall benefit of the project. Annexure VI - Revised Cost Estimates The total investments required for roads sector have been revised in KD3. The revised investment estimates have been arrived at after discussions with the state PWD. The corresponding changes are highlighted below: The cost norms for lane upgradation in state highways were earlier assumed to be the same as that of national highways. After discussing with various stakeholders, these have been revised to 65% of NH costs. This is on account of the fact that axle loads are typically lower on state roads as compared to national highways which reduces the cost and time for lane upgradation / widening. In case of state roads the conditions for equity support and resource mobilization on behalf of private investor is not as stringent as national highway projects. Since most of the construction material for roads is available locally in the state and only a few road construction equipment needs to be imported / brought from outside, this further brings down the cost of road development and improves the cost efficiency of local entrepreneurs. There is also a greater ease of project execution in the case of state roads. The maintenance costs for SH and MDR had earlier been assumed for a higher range of CVD count. Since only a very small proportion of roads in the state have a high CVD, lower maintenance costs per km for state roads have been assumed. The maintenance norms for SH range from 450 -4500 CVD, while earlier they were taken for greater than 4500. Similarly maintenance norms in the case of MDR / ODR / VR have been taken for CVD ranging from 150 - 1500, whereas they had earlier been calculated for greater than 1500 CVD. The road connectivity for village roads (upgradation) is assumed to be covered under PMGSY till 2007-08. After that period village roads for population below 500 have been considered.

Bhi 2

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Bhi 2

Uploaded by

Copyright:

Available Formats

Key Deliverable 3

INFRASTRUCTURE DEVELOPMENT IN RAJASTHAN

Attracting Private Investments Key Concerns

Rajasthan Infrastructure Agenda 2025

Context of the Assignment Consequent Impact

Overall economic slowdown

Low level of Investments and Industrial Sickness

Low Competitive Advantage

Deficient Sector Outputs

Inadequate policy and regulatory framework

Inability to unbundle and mitigate risks

Affordabi lity: commerc ial rates vs. per capita incomes

Public interest and litigatio ns

Delay in project approv als

Lack of standar dised agreem ents

Question of transpare ncy and accounta bility

No established policy / legal / regulatory framework

Policies and Institutions

Project Preparation Capacity

Public Private Interface

Rajasthan Infrastructure Agenda 2025

Key Concerns of the Private Investor

1. Enunciate policy framework

4. Establish regulatory authority Establishment of a regulatory framework

Rajasthan Infrastructure Agenda 2025

Key Concerns of the Private Investor

Inadequate policy and regulatory framework

Inability to unbundle and mitigate risks

Public interest and litigatio ns

Delay in project approv als

Lack of standar dized agreem ents

No established policy / legal / regulatory framework

1. Enunciate policy framework 6. Define Sectoral Policies

2. Define Institutional Set-up 7. Define incentive criteria

3. Establish inst. support structure 8. Establish dispute resolution mechanism

4. Establish regulatory authority 9. Std. contracting procedure

5. Define GoR Infrastructure Priority 10. Draft model concession agreement

Rajasthan Infrastructure Agenda 2025

Rajasthan Infrastructure Agenda 2025

Government Department and Bodies

Decision Making (cabinet sub-committee)

Risk Issues Sector Policies Concession Agreements

Infrastructure Secretariat Supported by a Technical Secretariat

Rajasthan Infrastructure Agenda 2025

Rajasthan Infrastructure Agenda 2025

Rajasthan Infrastructure Agenda 2025

Rajasthan Infrastructure Agenda 2025

Rajasthan Infrastructure Agenda 2025

Rajasthan Infrastructure Agenda 2025

Source: Centre for International Development Harvard University

Rajasthan Infrastructure Agenda 2025

Institutional Reform Funding

Ensuring coordinated implementation of the City Development Planning Framework

Regulatory and Policy Reform

Rajasthan Infrastructure Agenda 2025

Rajasthan Infrastructure Agenda 2025

Proposed Solution Framework

City Development Planning

Inadequate focus on planning

Departmental planning approach

Rajasthan Infrastructure Agenda 2025

Development of city vision

Identify strategic initiatives