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1 Project Name Region Sector Project ID Borrower Beneficiaries Implementing Agency Report No. PID10910 India-Andhra Pradesh Economic Reform... Loan/Credit South Asia Poverty Reduction and Economic Management INPE73113 GOVERNMENT OF INDIA State of Andhra Pradesh Date PID Prepared January 25, 2002 Appraisal Mission January 15, 2002 Board Date GOVERNMENT OF ANDHRA PRADESH Secretariat Bldg., Hyderabad , INDIA Mr. S.K. Arora Principal Finance Secretary Phone Fax March 14, 2002 (tentative) 1. Country and Sector Background Economic growth has slowed in India during 2001, and the country is expected to register growth of 4-5% in the fiscal year 2001/02, good by global standards, but below the average annual growth rate of 6% achieved over the last decade. Causes for the slowdown in growth include the global slowdown, negative investor sentiment due to the slow pace of reforms at the national level, weak agricultural demand on the back of successive poor agricultural seasons, and the oil price rises last year. The slowdown in growth has hurt India's fiscal position. Central government's tax revenues for the first eight months of 2001/02 were 3% below the figure for the first eight months of last fiscal year. Overall, at about 10% of GDP, the size of the combined central and state government deficit is a matter of substantial concern. However, India's macroeconomic vulnerability continues to be contained by a strong external position, a largely closed capital account, low and declining (on a percentage basis) external debt, and low inflation. There is a consensus that many of the reforms required to accelerate India's growth and reduce poverty need to be implemented by the states. These include not only fiscal reforms to address resource constraints which are increasingly circumscribing the states' developmental role, but also power sector reforms to address a fundamental source of fiscal pressure and a constraint on growth, and governance reforms to make the government smaller, more accountable and effective in the delivery of services. The momentum for reforms is definitely growing at the state level as an increasing number of states embrace fiscal, governance and sectoral reforms.

The State of Andhra Pradesh Andhra Pradesh (AP) is the fifth largest state in India with a population of 76 million people. Per capita income at $380 in 1999/00 is about 90% of the All-India average.

2 The State of Andhra Pradesh Andhra Pradesh (AP) is the fifth largest state in India with a population of 76 million people. Per capita income at $380 in 1999/00 is about 90% of the All-India average. Around nineteen million people (one-quarter of the population) live in poverty, depend largely on agriculture, and are often outside the reach of public services. Although literacy has improved dramatically over the 1990s (rising from 44% to 61% of the population), it remains below the national average and is particularly high among schedule castes and tribes. Real growth in AP has averaged 5.29 over the 1990s, a full percentage point below the All-India average of 6.2%. Weak agricultural performance, upon which most of rural poor depend, has been a significant constraint on growth with investment in agriculture falling during the 1990s. AP's regulatory environment and weak infrastructure constrain investment, and its fiscal position has been a mounting source of concern. Andhra Pradesh's Reform Program The Government of Andhra Pradesh (GoAP) has emerged in recent years as a pioneer in many areas of reform, and in 1999 GoAP published a new vision for state development called Vision Many important policy reforms were initiated in the late 1990s, and Vision 2020 sets out an ambitious program aimed at accelerating growth, strengthening social protection, and reducing poverty. The central objectives of the reforms include: (i) eradicating poverty and take care of the old, the infirm, and the genuinely needy; (ii) enabling the people to learn, earn, and lead healthful and productive lives; and (iii) making government simple, transparent, accountable, and responsive. Sectoral reforms are being implemented in the power, roads, water, health and agriculture sectors. The power reforms are particularly important given the sector's importance for fiscal sustainability and growth. Power reforms, launched in 1998, aim to strengthen governance, improve finances through operational efficiency, improve cost recovery, and rapidly privatize power distribution. AP launched India's most far-reaching antitheft and power regularization drive in Andhra Pradesh has also embarked on a major program of fiscal and governance reform. Fiscal reforms include significant increases in revenue mobilization, cuts in food subsidies, improved allocation of resources to priority sectors, and a freeze on civil servant hiring. Public expenditure management changes have been adopted to restore credibility to the budget process and improve fiscal transparency. GoAP has made governance improvements a central plank of its reform agenda and has built an impressive record of achievement. AP initially pursued significant gains in areas such as e-governance and human resource development, and subsequently expanded the agenda to tackle systemic issues, such as anticorruption, civil service reform, deregulation, and public enterprise privatization. GoAP is also developing capacity in poverty monitoring and evaluation to better inform policy makers and target poverty reduction initiatives. 2. Project's Objectives and Description -2 -

3 The proposed Andhra Pradesh Economic Reform Loan/Credit (APERL) would support GoAP's efforts in developing and implementing multi-year reforms that are designed to stabilize the fiscal situation, improve governance, and foster an enabling environment for improved growth and poverty reduction. APERL is a single-tranche loan/credit, based on upfront actions to support Andhra Pradesh's reform program, and is anchored in the Government's medium-term fiscal framework. APERL is the first World Bank adjustment loan/credit in Andhra Pradesh and follows adjustment operations in Uttar Pradesh and Karnataka. The proposed operation supports GoAP's comprehensive set of reforms in several areas. First, the fiscal and public expenditure reforms of the APERL include a multi-year fiscal framework, fiscal transparency, tax and expenditure reforms, public expenditure management, and financial accountability reforms. The emphasis is on institutional reform to ensure sustainability of the program, and on fiscal reforms to help create additional fiscal space for financing priority development expenditures (primary education, health care, infrastructure, recurrent maintenance needs, etc.) Together, these aim to reduce poverty, and to promote more efficient and transparent management of public resources. Second, the administrative reforms focus on civil service reform, freedom of information, anti-corruption strategy, and e-governance, with the objectives of improving the efficiency and transparency by which the government transacts its business and delivers services. These are complemented by measures to improve the environment for private sector development through deregulation of the business environment and privatization/closure of public enterprises. Finally, the APERL also supports the establishment of poverty monitoring and analysis capacity to enable the state to better track the impact of its services, policies, and reforms on poverty reduction and the improvement of social indicators. 3. Rationale for Bank's Involvement The focus on reforming states is an important part of the India Country Assistance Strategy (CAS). The most recent CAS (June, 2001) documents the substantial progress being made in the implementation of this strategy. AP is one of India's leading reform states, and the Bank has a large number of projects within the state, including the multi-sector AP Economic Restructuring Project which aims, among other things, at strengthening public services in primary health, education, irrigation, roads, and child nutrition. The proposed operation has been structured to support growth-oriented fiscal adjustment and structural reforms, with a focus on governance. It is justified on the basis of the state's need for financial assistance to proceed with a growth-oriented stabilization and structural reform program. The state-level reforms will contribute to the overall macroeconomic stability of India and complement the reforms initiated by the central government. External financial and technical assistance significantly strengthens incentives for sub-national reform and complements efforts by the Government of India. The Bank's backing for the reform program in Andhra Pradesh - 3 -

4 helps provide support for implementation based on the lessons of international experience. Success with respect to the Government's fiscal and governance reform program will improve the enabling environment for the significant range of Banksupported (and other) sectoral investments in priority social and infrastructure areas, such as roads, poverty reduction, education, irrigation, child nutrition, health, and sustainable forestry. With considerable fiscal stress confronting the state, Bank financing helps to ensure that high-priority social expenditures are protected and expanded rather than crowded-out. 4. Financing Total US$250 million IBRD US$125 million IDA US$125 million equivalent 5. Implementation Arrangements The Chief Secretary of GoAP will coordinate the overall program. The Finance Department is the nodal agency for the fiscal and public expenditure management reforms. The General Administration Department is overseeing the administrative reform program, with support from the Center for Good Governance and other GoAP departments. The Public Enterprise Department and the Implementation Secretariat are responsible for implementing the public enterprise restructuring and privatization program. Finally, the State Poverty Eradication Mission, and the newly created Poverty and Social Monitoring Unit, are responsible for overseeing poverty monitoring and evaluation activities. 6. Sustainability and Poverty Impact Andhra Pradesh's reform program is owned and under implementation by a highly committed and reform-minded government. The state's strengths include a strong track record in reform, a capable bureaucracy and a high growth potential. These strengths would mitigate risks associated with the reforms. Moreover, the success of the GoAP reform program is expected to have a considerable demonstration effect across states in India. Given its already-established position as a reform leader in fiscal, power, and governance areas, Andhra Pradesh has the potential to set precedents, and to help generate reform competition and momentum across India. Andhra Pradesh's reforms are expected to have a strongly positive impact on poverty reduction through various channels, specifically:? AP's fiscal reforms will enable a greater share of resources to be focused on poverty-related expenditures. The fiscal framework reorients public spending towards priority development spending (primary social services, O&M, infrastructure) to provide basic social services to the poor.? AP's governance reforms seek to improve the delivery of public services at local levels (e.g., through citizen charters, user surveys, and performance monitoring). The governance reforms should also reduce corruption and harassment, which tend to hurt the poor disproportionately. Deregulation will help improve the investment climate, especially for small and - 4 -

5 medium enterprises, and improve rural growth to help generate non-farm employment, of great benefit to the poor.? The emphasis being given to improving poverty monitoring will help the government to better track poverty, and to adjust its policies and programs accordingly. This includes the new poverty monitoring system, as well as AP sector-specific studies such as on power subsidies to agriculture (completed) and irrigation subsidies (under preparation).? The fiscal and governance reform program will increase the effectiveness of the Government's sectoral anti-poverty interventions, e.g., in health, education, and forestry. 7. Environment Aspects There are no major environmental issues identified under this loan/credit. However, there are certain environmental issues relating to the Government's proposed divestment or closure of public enterprises (PEs): (i) potential environmental liabilities associated with past pollution; and (ii) environmental compliance by each PE. In this context, the proposed operation envisages that at the time of privatization or closure of each PE, an environmental screening would be carried out which would then determine if an environment audit would be needed to assess the current environmental compliance and liabilities of the PE, and recommend corrective measures, to ensure that the divestment and closure process will be environmentally sound. 8.Contact Points: Task Team Leader: Mark Sundberg The World Bank: Mark Sundberg 1818 H Street, NW Washington D.C Telephone: (202) Fax: (202) Note: This is information on an evolving project. Certain activities and/or components may not be included in the final project. This PID was processed by the InfoShop during the week ending February 8,

Public Information Document for Project P075192

Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Information Document for Project P075192 Project Name: Region : Sector: Project: