KSUDP: SCRAP THE PROJECT, OPT OUT OF ADB LOAN

By K Vijayachandran

Signing of the ADB loan agreement for the Kerala Sustainable Urban Development Project (KSUDP) by the Kerala Government representative in Delhi, last month, had triggered a major political controversy: Neither the Chief Minister of Kerala nor his council of ministers were not in the know of things. However, the Minister for Local Self Government (LSG) has stated that he had authorized the signing, and his colleague, the Finance Minister, has openly defended the loan agreement. The full political and legal impacts of this controversy will be known only in the coming weeks: Central leadership of CPI(M) has, in the meanwhile, directed its State Unit to open up the ADB deal for a public debate, possibly with the intention of defusing a crisis situation.

Conditions insisted on by ADB were always the bone of contention and the LDF Finance Minister had taken pains to explain, how the obnoxious conditionalities accepted by the earlier UDF Government that negotiated the loan were knocked off through hid personal intervention. In all these explanations, increasing of water rates, discontinuation or metering of street taps and consequent burden on the poor people were the major evils against which Dr. Isaac claims to have put up his stiff fight with ADB officials, while he was in the opposition. It was also claimed that thanks to his intervention all sub-projects will be executed directly by the concerned LSGIs. State leadership of CPI(M) had directed the Mayors of the municipal corporations, all under LDF rule, to sign on the ADB project documents in December 2005, six months before LDF government was voted to power. However, a local ADB spokesmen have asserted that no changes were effected in the lending policies because of all these or change in Government.

Project documents published on ADB website confirm these public statements of local ADB officials: there were no changes whatsoever after the change of Government in June 2006. Claims of Dr. Isaac as well as the CPI(M) leadership in this regard appear to be fraudulent. In fact, Mayors of the five corporations were virtually forced on to sign up the project documents involving large financial commitments, without any debate, discussion or consultations in their respective councils. The 316 million dollar (Rs. 1422 Cr.) ADB project conceived in early 2005 has thus developed serious structural cracks: it was never discussed with any seriousness at any level in State Government or in Local Self Government Institutions: And, now the Finance Minister of Kerala seems to be threatening the people with an imminent treasury crisis, in case the State decides to opt out from this ADB funded project.

What are the components of KSUDP and what are the consequences if the state opts out? Improvements in water supply, sanitation, sewerage, drainage, and road improvements in the five municipal corporations of Thiruvananthapurm, Kollam, Kochi, Thrissur and Kozhikode, estimated to cost Rs. 656 Cr is the major component of KSUDP. Another Rs. 243 Cr is provided for a large number of small infrastructure projects in 53 municipal towns. The third component is for financing social welfare projects of the Kudumbasree type totaling Rs. 101 Cr. These three basic components add up tom Rs. 1000 Cr or around 70 percent of the total estimated project cost. The balance of Rs. 422 Cr, constitutes the provision for interest (132 Cr), consultancy (79 Cr), taxes and duties (95 Cr), and contingencies (116 Cr). The project is proposed to be financed by an ADB loan repayable in 40 half yearly installments starting in the sixth year (Rs. 995 Cr), Government of Kerala (Rs. 220 Cr) and municipal corporations (Rs.158 Cr).

Water supply schemes, costing Rs. 126 Cr, are to benefit Kochi, Kollam and Trichur mainly by reducing leakage losses and improvement of quality of supply. This as well as the sewerage and sanitation schemes, estimated at Rs.280 Cr, will be implemented through Kerala Water Authority (KWA), which has been incurring heavy losses year after year and starving for plan funds. It appears that KWA will be the major beneficiary of the KSDP budget. Roads and drainage projects identified for the corporation areas, estimated at Rs. 210 Cr, will be mostly implemented through the State Public Works Department. More than 92 percent of the funds provided is for routine civil works which require neither foreign exchange nor foreign expertise. The remaining part, or eight percent is for office vehicles and equipment or routine machinery like pumps, pipes or electric motors which are available in plenty within the country. Local financial resources are best suited for the numerous small projects identified for the 53 municipal towns, which are envisaged to be managed by the Kerala Urban Development Financing Corporation Ltd., a tiny public sector company under the LSG Department. There is little justification for borrowing ADB funds for these small projects and the financing social welfare schemes like Kudumbashree.

A team of engineers from FEDO who examined in detail the water supply, drainage and other civil engineering projects envisaged for the five corporations had found the costs were overestimated by about 30 percent. In a recent workshop organized in Kochi on the theme Water Supply in Kerala, Yesterday, Today, Tomorrow, experts had pointed the possibilities for alternative technologies that could be far more cost-effective, considering the specific hydrological and demographic features of the State (see the report in the October issue of Passline). The workshop had discussed at length the problems faced by KWA, from its very beginnings in early eighties, and pointed out the urgent need for the restructuring that organization on more rational lines, taking into account the specific features of the region. However, KSUDP project envisages to develop a road map on the role of KWA and other statutory bodies related to water supply industry in the state only as part of its mid-term review. This is a self defeating approach, because the economic and financial viability of KSUDP is largely dependent on the performance efficacy of KWA and its revenue earning capacity from the existing assets. This fact is evident from the cash flow projections given in the project report and is proof for the utter lack of sincerity and professionalism on the part of the bureaucracy that had conceived the project, as well as the ADB officials.

Possibly, this is not at all a new experience: Kerala was so far blessed with ten foreign funded projects, starting with the Kerala Agricultural Development Project of 1977 assisted by World Bank (see the list) which included the Kallada irrigation project, which was a colossal failure. The ninth project, the Kerala Transport Project was another disaster and is getting messed up with numerous vigilance cases. The tenth one, the ADB assisted Modernization in Government Program (MGP) was notorious for the numerous consultancy assignments it palmed out to all sorts people. It is time that we ask the question: what has Kerala gained out of this ten projects costing Rs 4761Cr, funded by these multilateral agencies? With no tangible gains worth mentioning, our people continue to bear the burden of repaying these unproductive loans even today. There has to be detailed performance audit on each one of these loans and responsibilities need to be fixed for their failures. Kerala Government should not entertain any more foreign loans, until we develop adequate expertise in the cost-benefit evaluation and management of foreign funded infrastructure projects.

The ADB report on KSUDP draws no reference to any internal reports of GOK or plan documents: It is surprising that we do not have our own project or evaluation report for KSUDP, which the local officers of ADB have qualified as a project of GOK. ADB report mentions that Department of Local Self Government will be the executing agency for the project. Obviously, various components of KSUDP did not originate from this department and no body has ascertained that ADB funding is the best suited for this assorted package of projects. If we go by simple management methods the user department should have examined the various financing options before zeroing in on ADB. If the concerned department had failed to do this, the Finance Department should have insisted on getting it done or do this basic exercise on its own. It is true that the finance department in secretariat does not possess this expertise, despite its large strength, which was frowned upon by the Estimate Committee of the Legislative Assembly in 1998 in its twelfth report. There has to be sea change in the policy for foreign funded projects and contracting foreign loans based the past experience as well as the present one.

KSUDP is proposed to be executed by a Project Management Unit headed by a Project Director, directly reporting the LSG Secretary, with the technical support of Project Management Consultants. Three functional heads will be positioned under this Director, one each for the three project components: They will supervise the work of project implementation units located in the five municipal corporations. Work of the project implementation unit in every city will be over-viewed by a steering committees, to be chaired by the Mayor and the committee will consists of corporation secretary, district collector, officers of PWD, KWA, KSEB, NGO representatives etc. There will be a Project Empowered Committee at the state level, headed by the Chief Secretary, the director of Kudunbasree, the five Mayors, and Secretaries of all major departments as members and the Project Director as member-secretary. These are the typical arrangements for stage-managing of the projects of this type by the senior bureaucrats in Government Secretariat. Mayors may sit in the review meetings: But that does not mean that the project will be implemented by the corporations, who are asked to bear 11 percent of the project cost, in order to make it participative. This project management model is the sure recipe for creating scandalous situations as in the case of the recent IBRD funded transport project.

KSUDP is deemed sustainable, possibly because of its Kudumbashree component. Finance department of GOK has not evaluated KSUDP as a development project nor has it taken the help of the State Planning Board for an independent economic appraisal. Administration of our municipal corporations need considerable improvements and revamping and our urban infrastructure sector, including water supply, sanitation etc need urgent reforms and restructuring. The problem is lack of political will and not paucity of financial resources as revealed through numerous professional studies and appraisals including those of the State Planning Board. Bulk of the revenue needed for servicing the KSUDP loan has to come as a result of reforms restructuring, which could be implemented at far lower economic costs by local finance, compared to the ADB loan with its very high overhead content.

KSUDP is a shabbily conceived joint enterprise of ADB bureaucrats and their collaborators in Kerala Government. Gains will be substantial if the State opts out of it even at this late hour and look for alternatives. What is important is the political will to plan and implement the reforms and restructuring of our institutions that are long overdue, with the cooperation of LSGIs and the people at large.

FORIEGN FUNDED PROJECTS IN KERALA

(Source: ADB Report on KSUDP)

Name of Project Year Source Amount

Kerala Agricultural Development Project 1977 World Bank 30.00

Kerala Agricultural Extension Project 1980 World Bank 10.00

Social Forestry Project 1984 World Bank 31.80

Power Project – Kerala 1985 World Bank 176.00

Kerala Water Supply Project 1985 World Bank 41.00

Kerala Water Supply Project 1997 Japan 10.37

Kerala Forestry Project 1998 World Bank 39.00

Kerala Rural Water Supply and Sanitation 2000 World Bank 65.50

Kerala State Transport Project 2002 World Bank 255.00

Modernizing and Fiscal Reform in Kerala Program 2002 ADB/Netherlands 300.00

Total 1,058.67