PROJECT INFORMATION DOCUMENT (PID)



PROJECT INFORMATION DOCUMENT (PID)

CONCEPT STAGE

Report No.: AB1342

|Project Name |IN: National Urban Infrastructure Fund (NUIF) |

|Region |SOUTH ASIA |

|Sector |General water, sanitation and flood protection sector (45%);General transportation sector |

| |(25%);Roads and highways (15%);Sub-national government administration (15%) |

|Project ID |P092699 |

|Borrower(s) |GOVERNMENT OF INDIA |

|Implementing Agency |Infrastructure Leasing & Financial Services Limited (IL&FS) |

|Environment Category |[ ] A [ ] B [ ] C [x ] FI [ ] TBD (to be determined) |

|Safeguard Classification |[ ] S1 [X] S2 [ ] S3 [ ] SF [ ] TBD (to be determined) |

|Date PID Prepared |January 19, 2005 |

|Estimated Date of Appraisal Authorization |September 30, 2005 |

|Estimated Date of Board Approval |March 31, 2006 |

1. Key development issues and rationale for Bank involvement

With nearly 300 million urban residents, India’s cities contribute over 60% of GDP and account for more than 90% of Government revenues. Their efficiency has a significant and direct bearing on the country’s overall economy. Yet, few, if any, are able to provide the kinds of urban services required on a regular and sustainable basis. In addition, even fewer adequately collect tariffs for the services provided or have credible financial management systems that would allow them to access India’s emerging financial markets. India's cities could contribute more effectively to the country's economic growth, and poverty reduction. The National Planning Commission estimates that achieving meaningful urban reform could add 1.25-1.4 percentage points to India’s economic growth rate over the 10th Plan period (2002-2007). However, the urban contribution to growth and poverty alleviation is not being realized since most cities suffer from severe infrastructure bottlenecks, service deficiencies, weak finances, poor local governance and distortions in land and factor markets. Thus for India, accommodating the needs of its growing urban populations is and will continue to be a strategic policy issue for many years to come.

The Tenth Plan estimates urban investment needs to be about US$7 billion for the Plan period (2002-2007) of which only about a third is available through budgetary resources. Over the past decade, growing concern about the ability of cities to provide the level of urban services commensurate with their contribution to economic activity has led to significant changes in India’s urban development policies, through complementary strategies of decentralization and financial sector reform. The 74th Constitutional Amendment aimed to decentralize what had been highly centralized and regulated policies which had directed investments away from cities, particularly away from long term urban infrastructure investments. Financial sector reforms, begun in 1991, allow for urban local bodies (ULBs) to raise financial resources to meet their infrastructure needs independently of state loans or grants. Together, these policies aim to empower ULBs through greater self sufficiency. Part of these reform efforts and new approaches aim at tapping additional private resources for traditionally public investments.

A new momentum has recently emerged in addressing the needs of India’s urban areas. This encompasses GoI’s emphasis on urban reform and urban investment in the Tenth Plan, the development of a comprehensive Urban Development Strategy by the Ministry of Urban Development and Poverty Alleviation (MUDPA), and the introduction of central, performance-based programs to encourage reforms. A Model Municipal Act was prepared to assist with simplification of multiple regulations. The Urban Reform Incentive Fund (URIF) was set up to provide financial incentives to encourage state level reforms to remove distortions in real estate markets and strengthen the financial viability of ULBs. The City Challenge Fund (CCF) and Pooled Finance Development Fund (PFDF), are being designed as incentive schemes to support city level reforms towards greater creditworthiness. Also noteworthy is the development of alternate mechanisms for financing urban infrastructure projects such as Municipal Funds (Tamil Nadu Urban Development Fund) and the growth of the municipal bond market.

However, these initiatives are not sufficient to meet the growing demands for urban services and infrastructure investment needs. For example, URIF is a state level budgetary support initiative and does not provide financing access for ULB infrastructure projects, the CCF is selective and small, and TNUDF, while very successful is localized in its impact in the state of Tamil Nadu. Increased public funding for public sector investments is not an option due to the existing fiscal constraints and inherent inefficiencies in the system. Growth in urban infrastructure investments would require additional capital to be sourced from the private sector. To achieve this goal, private financial markets need to be more effectively connected with urban infrastructure, and ULBs need to be enabled to better attract private financial resources.

The Bank recognizes the importance of efficiently functioning cities in India’s overall economic development. As outlined in the India Country Strategy (CAS), discussed by the Board on August 26, 20042004 CAS, the Bank’s strategy is to support the urban reform agenda of the Tenth Plan in the context of the broader decentralization framework, while strengthening citizens’ empowerment, urban management, governance and resource mobilization. The proposed project would directly contribute to the strategy by connecting private financial markets with urban infrastructure, assisting in mobilizing private financial resources and by strengthening the financial and administrative capacity of ULBs to plan, finance and deliver services in a fiscally sustainable manner.

The Bank has been an active partner to the Government of India (GOI) and Indian states in urban infrastructure projects. Bank’s involvement in the urban sector through the Tamil Nadu Urban Fund (TNUDF) and the URIF has had a catalytic role in promoting successive urban reform initiatives and private sector participation in urban infrastructure. Furthermore, a number of projects are underway in states such as Karnataka and Andhra Pradesh, to strengthen urban sector reform, build ULB capacity and finance urban infrastructure. The proposed project would complement the existing initiatives in the sector. The NUIF would be a vehicle for scaling-up urban infrastructure investments throughout India, following the successful TNUDF model, by leveraging Bank resources to mobilize private financing and implementing the reform agenda in the sector. The project is thus a key element in the Bank’s overall approach to the urban agenda, as laid out in the CAS.

2. Proposed objective(s)

The proposed project has two key development objectives:

i) to mobilize private resources for urban infrastructure investments in a sustainable manner by linking ULBs with the financial markets;

ii) continue urban sector reforms and the empowerment of ULBs through institutional capacity building and improved financial management.

The proposed project will assist in mobilizing long term financing for urban infrastructure projects by linking ULBs to the financial market through the intermediation of the National Urban Infrastructure Fund (NUIF). The NUIF would catalyze a larger flow of resources into urban infrastructure from the capital markets through the introduction of more efficient and innovative financial instruments, thereby leveraging the resources of the Fund[1]. Nearly 70 percent of the total financial flows to the ULBs are through budgetary allocations; ULB borrowings are also generally backed by state guarantees and are funneled through large state owned institutions without rigorous project preparation or appraisal. The municipal bond markets have also not been very active due to a lack of creditworthy borrowers and bankable projects as a result of capacity and fiscal constraints on part of the ULBs and lack of cost recovery in urban infrastructure operations. It is proposed that the NUIF would provide innovative structures to make projects bankable and develop suitable credit enhancement measures. The proposed project would improve the capacity of ULBs to develop commercially viable projects.

The proposed project would assist urban reforms and strengthen the empowerment of ULBs in the context of decentralization through delegation of powers from state level bodies to ULBs and institutional capacity building. The project is expected to create a conducive environment for ULBs, State Governments and other stakeholders in the urban sector to embark on a series of reforms to improve creditworthiness of ULBs and ensure that only high priority, sustainable investments are made, which would go a long way in substantially improving the quality of life in urban areas. Capacity building measures such as tariff rationalization, efficiency improvements in service delivery and improved utilization of resources, are expected to assist ULBs in conceptualization, development and implementation of urban investment projects. The eligibility criteria to access the Fund would include progress in the implementation of URIF requirements and general urban sector reforms. It is proposed that the reforms undertaken by ULBs would be supported through Technical Assistance and project preparation funds.

3. Preliminary description

The project would support establishment of the National Urban Infrastructure Fund as an effective vehicle for mobilizing financing for urban infrastructure. The initial Fund size is expected to be US$1 billion, of which GOI has requested Bank financing in the amount of US$500 million, the rest would be mobilized through domestic FIs in India. Infrastructure Leasing and Financial Services (IL&FS) Ltd. has been designated by GOI as the lead bank in the NUIF. IL&FS is a leading financial institution in India and has taken the lead in developing infrastructure projects through providing advisory, structured finance and capital market services and has substantial experience in managing funds. World Bank financing would be used to leverage financing from the domestic markets in the form of equity, debt or sub-ordinate debt, both upstream and downstream – i.e., both at the Fund level and at the sub-project level. The Fund would be established as an irrevocable Trust under the Indian Trust Act and would be managed by an Asset Management Company constituted as subsidiary of IL&FS.

The Fund would finance basic urban infrastructure sub-sectors, such as water supply and sewerage, solid waste management, urban transport, sanitation and area development. The Fund would aim to bring liquidity to the sector, facilitate the creation of a secondary market for municipal debt, and enable restructuring of existing exposure to the municipal sector.

It is envisaged that the Fund would offer a number of financial instruments as well as technical assistance in order to play a catalytic role both in the financial markets and for urban reforms. The fund would offer loans, credit enhancement and Technical Assistance financing

Eligibility criteria to access NUIF would include urban sector reforms in order to provide an incentive for ULBs and state governments to undertake reforms to improve credit worthiness of ULBs and bankability of projects. Measures to improve creditworthiness of ULBs and urban sector utilities such as tariff rationalization, efficiency improvements in service delivery and improved utilization of resources would lead to additional internal resources generation.

Participation of IFC’s Municipal Fund in the project is also envisaged.

4. Safeguard policies that might apply

The project would fall under the FI category. A framework for social and environmental assessment would be developed under the project.

5. Tentative financing

|Source: |($m.) |

|BORROWER | |

|IL&FS & other FIs |500 |

|INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT |500 |

| Total |1000 |

6. Contact point

Contact: Abha Joshi-Ghani

Title: Senior Financial Officer

Tel: (202) 473-3714

Fax:

Email: Ajoshighani@

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[1] The proposed project would come under the Bank’s Financial Intermediary Lending OP 8.30

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