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Evaluation of the Madhya Pradesh Public Resource Management Program in India
Completed: 2007
In 1999, Madhya Pradesh became the second state to receive ADB support to implement public resource management reforms. Madhya Pradesh was India's most populated state, with high levels of poverty, poor infrastructure, a limited industrial base and a strong and long-standing political commitment to social development.
The three-tranche $250 million program loan aiming to improve social development and sustainable economic growth through improved public resource management and increased social sector expenditure was finalized by late 1998. Like the Gujarat program, reforms focused on fiscal stabilization measures, public enterprise restructuring, and encouraging private sector investment, with the loan complemented by three technical assistance projects valued at $2.18 million.
However, a combination of international sanctions against India in response to its nuclear tests, and the holding of state elections in late-1998, resulted in approval being delayed by 12 months. This had a deleterious effect on ADB-government relations.
Summary of Findings
The Madhya Pradesh Public Resource Management Program was rated as "partly successful".
- The program was rated "relevant," as it was consistent with the reform agenda of both the governments of India and Madhya Pradesh, and ADB's country strategy. The program had strong political support, and momentum was maintained through changes of state government.
- The program was rated "less effective," as two of the three outcomes were not achieved. There was a marginal but not sustained reduction in the fiscal deficit during the program, despite the effect of the state being bifurcated forming the new state of Chhattisgarh. The state government's social sector expenditure was not increased.
- The program was rated "less efficient" because the expectation of increased revenue from tax and the sale of public enterprise shares and assets to contribute to the government's share was overambitious. Adjustment costs were revised down by $70 million to $530 million as a result of bifurcation. The TA resources were not efficiently used with two of the three TAs rated unsuccessful.
- The program was rated "less likely sustainable." The state's fiscal position deteriorated after the program with local government own-revenues likely to remain inadequate. Tax administration and treasury systems provided a foundation for government to maximize the benefits from the value-added tax, particularly with additional computerization.
The socioeconomic, environment, and anticorruption impacts have been varied. Although the expected increase in social sector allocations was not met, central Government education, health care, employment generation, and poverty alleviation programs, ensured that total social sector expenditure was maintained. Given the high levels of poverty in the state, considerable effort will be required to reduce poverty. The approval of environment and rehabilitation policies was an important step in establishing state-wide standards. A number of reforms limited opportunities for corrupt practices. The TA assessed by the study was rated "partly successful," failing to achieve its outputs and outcome, despite the fact that the consultants produced quality advice, and adjusted to the failure to establish the technical secretariat.
Key Issues
- The initiative to support the Madhya Pradesh government to formulate environment and rehabilitation policies was extremely positive.
- The scope and sequencing of TA for complex reforms, which are often subject to delay in implementation, raises challenges for ADB.
- The method of setting nominal fiscal targets as loan conditions needs to be carefully reviewed, along with mechanisms to respond to the impact of exogenous factors, including ensuring changes in Government of India policy are not at variance with loan conditions.
- A balance is required between revenue and expenditure reforms, and where public enterprise reforms include closure of enterprises, sufficient time and resources should be provided to at least achieve financial closure.
- The importance of ADB's resident mission to maintain continuous support to complex reforms can not be overstated.
Lessons
- Although the 3-year design time frame was a positive lesson from the Gujarat program, a challenge remains for ADB to sustain involvement given the long-term, iterative nature of reform. The experience since the Madhya Pradesh program of using cluster loans and project loans for institutional and capacity development needs to be assessed.
- Increased effort is required in design to assess political economy factors, and agree on mechanisms to ensure that reform targets can be realigned with government policies should the need arise.
- Balancing the scope of reforms, including explicitly targeting reforms that will further the government's anticorruption efforts, will have significant flow-on effects.
- ADB needs to formalize management arrangements to ensure continuous policy dialogue from within the country in complex reform programs that are not delegated to resident missions.
- The Board needs to review how it monitors its concerns are addressed by Management during program implementation.
Recommendations
In formulating the India country partnership strategy, the study recommended that ADB's state level support strategy, as revised in the 2003-2006 country strategy and program, should be reviewed-including assessing (i) the opportunities to support priority aspects of ongoing state level public resource management reforms, and (ii) the most appropriate funding modalities to achieve jointly agreed outcomes.
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