Description

For some three and a half decades after independence, the Indian economy grew slowly, with annual gross domestic product growth averaging around 3.5%. In the mid-1990s with the fiscal crisis deepening at both national and state levels, the Government agreed to allow reform-oriented states to negotiate loans from multilateral institutions. As early as 1992, the Gujarat state government established a high-level commission to recommend a public financial reform strategy.

In providing a $250 million loan to support the Gujarat government implement its reforms in 1996, ADB became the first multilateral development bank to support state level public resource management reforms. The Gujarat Public Sector Resource Management Program aimed to restore fiscal stability, reform public enterprises, and create an enabling environment for public private partnerships. A 2-year policy based program loan funded by ordinary capital resources was complemented by five technical assistance projects valued at $2.65 million.

Summary of Findings

The Gujarat Public Sector Resource Management Program was rated as "successful".

• The program was rated as "relevant," being consistent with both the central and state governments' overall reform agenda, and ADB's country strategy.

• The program was rated as "effective," revenue and expenditure interventions had a limited positive effect, selected public enterprises were closed, merged or privatized, and reforms to encourage private sector participation in infrastructure development were highly effective.

• The program was rated as "efficient." The actual government financed adjustment costs were close to the ex ante estimates, and TA resources were used in an efficient manner.

• The program was rated as "sustainable" with the Gujarat government continuing reforms beyond the life of the program. Support to state-level fiscal reform was to be replicated by ADB and the World Bank in six other states.

The three TA projects assessed by the study were rated as highly successful, successful, and unsuccessful. In each case, the original time frame was overly ambitious, given the scope, and linkage to a 2-year program loan. Key features of the TA rated highly successful were (i) strong government commitment to the success of the institution being strengthened, (ii) ability of staff to take advantage of high quality consultant advice, and (iii) readiness of the private sector to take advantage of opportunities to invest in public infrastructure when the conditions were right. The TA rated as unsuccessful was provided to an institution that subsequent to TA approval was found to be incapable of performing the functions for which the TA was designed to strengthen, and the consultants did not perform to the expected level.

Key Issues

• The iterative, long-term nature of reform provides opportunities, but also presents challenges for ADB to adjust during implementation, and engage beyond the life of a program loan.
• While nominal fiscal targets provide a focus for reforms, transparent mechanisms are required to address the impact of exogenous factors and to ensure conditions are not at variance with changing government policies.
• Public enterprise reform requires time, and naming specific enterprises to be privatized as tranche release conditions holds significant risk.
• A broader range of opportunities for expenditure reform need to be pursued to complement revenue reforms.
• ADB's resident missions have a significant role to ensure continuous policy dialogue within the country in complex reform programs.
• The Board needs to review how it monitors its concerns are addressed by Management during program implementation.

Lessons

• Public sector reforms require a long-term commitment with flexibility to respond to their iterative nature.
• Mechanisms to respond to the effect of external factors on conditions should be agreed during design.
• Public resource management programs create opportunities to strengthen government's anticorruption efforts.

Recommendations

In formulating the India country partnership strategy, the study recommended ADB's state support strategy, as revised in the 2003-2006 India country strategy and program, should be reviewed, including assessing the opportunities to support priority aspects of ongoing state public resource management reforms and the most appropriate funding modalities to achieve jointly agreed outcomes.

Contents

• Executive Summary
• Introduction
• Design and Implementation
• Performance Assessment
• Other Assessments
• Issues, Lessons, and Follow-up Actions
• Appendixes