A Bit of History

This is not the first time Kerala is taking loans from multilateral agencies. From the latter part of the 1970s to date, Kerala has taken loans from the World Bank to the tune of $ 648.3 million for the development of agriculture, water supply, power and forestry. In 2002, the United Democratic Front (UDF) government took a loan of $ 300 million for modernising the government and for fiscal reform from the ADB, making a total of over a billion dollars, if we include the Japanese loan of $ 110 million, for water supply. Not only

20 18 16 14 12 10

8

6

4

2

various years.

The ADB charges the London Inter Bank Offer Rate (LIBOR) for the loan plus 0.6 per cent. The LIBOR is used as the base for determining the lending rate charged by the banks engaged in medium-term lending of euro currencies for a variety of purposes. The actual rate charged by the ADB will be a six-month average of LIBOR and not what prevails on a particular day. There is also a commitment charge of 0.75 per cent per annum. The repayment period is spread over 25 years from January 15, 2011 which include a grace period of five years. Since the commitment charge commences after 60 days of the signing of the contract, by now the loan might have started attracting the charge.3 The foreign exchange risk has to be borne by the GoK.

The loan agreement is not a simple document as it may appear at first sight because the details appended to it are spread over several documents such as the report and recommendations of the ADB president (RRP), the ADB guidelines and handbooks and so on and highlighting them is beyond the scope of this brief note. Suffice to note that details have been worked out in regard to appointment of technical support units, design and supervision consultants, award of contracts (international bidding only for contracts above $ 10 million or Rs 44 crore), environmental assessment, compensation to be paid in regard to land acquisition, location of sewerage process plant, consultation with local community and so on. It is important to mention that the scandalously huge number of foreign consultancies that characterise donor agency loans have been reduced to just one. Elaborate arrangements for monthly monitoring of all activities are also provided for. There are certain conditionalities which no one can dispute such as the clauses relating to HIV/ AIDS awareness, prevention of child labour, strict implementation of statutory labour legislations (including equal pay for equal work), strict monitoring of performance, transparency guarantees, accounting and auditing norms and so on.

Rationale and Relevance

Without entering into the polemics enveloping the ADB loan, I shall endeavour to raise a few questions to put the issue in perspective: Why go for an ADB loan with much conditionalities, why not mobilise domestic resources? What is the rationale in choosing an urban development project as a priority? Is the KSUDP an economically and financially viable project? In other words, is it going to impose an extra burden on the present and future urban community than what is reasonable?

The case for the sustainable urban infrastructure development of Kerala which historically evolved as a rural-urban continuum, but currently confronted with the somewhat strange phenomenon of a bulging urban poverty overhang and groaning under the heavy load of the liquid and solid wastes of a growing consumer society (confounded by the medical wastes that keep multiplying everyday) stands on unassailable grounds. The logical culmination of the innovative decentralised regime initiated by the GoK is to make the local environment liveable and pleasant first in the urban context where it is badly needed and then in the rest of the space in the continuum fashion. The poor quality of urban infrastructure in the major cities of Kerala, including its capital, is due to the lack of planned investment and proper management which can be remedied best by a critical input such as those envisaged in the KSUDP. Spreading out meagre annual allocations thinly can only be counterproductive. Although poverty levels as measured by the calorie-norm based headcount ratio (based on the NSS consumer expenditure survey) has fallen to

Economic and Political Weekly March 3, 2007

supply, sewerage and sanitation, etc) are “economically viable with the estimated economic internal rate of return (EIRR) values exceeding the economic opportunity cost of capital in all cases”. Sensitivity analysis indicates that the EIRR is most sensitive to the extent to which the new urban services attract and retain the targeted number of users and beneficiaries. The reported financial rate of return is also equally robust except the sewerage schemes.

The ADB has drawn up a detailed financial plan to ensure the repayment of loans. Surely some of them appear objectionable.5 But they are not part of conditionalities. They form part of the specific assurances. Even so, there should have been greater appreciation of the fact that GoK today devolves 5.5 per cent of its own tax revenue to the local governments for maintenance, besides the 3.5 per cent for general purposes and the untied plan grants which have been on an average around 30 per cent of the annual plan during the last decade. It is important to acknowledge the fact that the local bodies in Kerala have a respectable record of generating own revenue (M A Oommen, ‘Fiscal Decentralisation to Sub-state Level Governments’, EPW, March 11, 2006), while underscoring the tremendous potential to augment the own revenue of local bodies. Already property tax and service tax reforms are in the pipeline in Kerala. Again, it is not proper for the ADB to put a target to reduce the supply of non-revenue water (NRW).6 It should be the sovereign privilege of the concerned local body to give water or any service free or price it. Moreover, the ADB’s observation that because the proposed tariff hike will only be about 5 per cent of the average household income, it is not high, is not correct. Actually, it is not the average for all households but the share of the hike to the income of the poor households that ought to have been considered especially because the project seeks to reduce the NRW margin substantially. While the bank as a prudent lender has every right to insist that the counterpart funds flow as scheduled or the repayment happens as agreed upon, the tone of clause number 9 in the schedule 6 of the loan agreement (repetition of what was there in the earlier draft of November 23, 2005) requires modification at some appropriate time. It reads: “The state shall ensure that all the MCs pass a resolution by March 2008 to introduce service tax and/or revenue mobilisation measures in each MC to meet shortfall of revenues needed to fund O&M of the expanded water supply”. Equally peremptory is the clause 8 which says: “By not later than March 2007, the state shall formulate a policy on conversion of stand posts to individual metered house service connections, and/or metering the stand posts, for the purpose of efficient demand side management and reduction of NRW”. Given the economic potential of the urban local bodies, the language of and the compulsions following from these clauses need modifications. This can be taken up in due course. Even so, one cannot but help show the other side of the medal as well. Anyone who sees the daily leakage of public water taps and pipes and misuse of them for washing of vehicles and animals will have no difficulty in testifying to the poor demand and supply management of water. For every tap (whether functioning or not) the MCs have to pay Rs 2,628 per tap to the Kerala Water Authority and it is only prudent management to meter and measure it. Why object to it and cry wolf? To conclude, every choice has its costs as well as benefits. So long as benefits far outweigh costs you are on the safe grounds. We need reasoned choices and not much ado about nothing.

l:'

Email: maoommen@gmail.com