Completion Report

Project Number: 44453-014 Loan Number: 2926 August 2015

India: West Bengal Development Finance Program This document is being disclosed to the public in accordance with ADB’s Public Communications Policy 2011.

CURRENCY EQUIVALENTS

Currency Unit – Indian rupee/s (Re/Rs)

At Appraisal At Program Completion (11 May 2012) (24 July 2014)

Rs1.00 = $53.2950 $59.9700 $1.00 = 0.01876 0.01668

ABBREVIATIONS

ADB – Asian Development Bank COSA – computerization of salary accounts DMF – design and monitoring framework EA – executing agency FPMU – fiscal policy and management unit FRBM – Fiscal Responsibility and Budget Management GOI – Government of India GOWB – Government of West Bengal GSDP – gross state domestic product IFMS – integrated financial management system IT – information technology MTEF – medium-term expenditure framework NSCS non-special category states OTR – own-tax revenue PM – person-month PPP – public‒private partnership PPTA – project preparatory technical assistance RBI – Reserve Bank of India TA – technical assistance TIMS – tax information management information system VAT – value-added tax WBDFP

WBDFP II – –

West Bengal Development Finance Program Second West Bengal Development Finance Program

WBMSC – West Bengal Medical Services Corporation

NOTES

(i) The fiscal year (FY) of the Government of India and its agencies begins on 1 April and ends on 31 March. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2015 begins on 1 April 2014 and ends on 31 March 2015.

(ii) In this report, "$" refers to US dollars.

Vice-President W. Zhang, Operations 1 Director General H. Kim, South Asia Department (SARD) Director B. Carrasco, Public Management, Financial Sector and Trade Division,

SARD Team leader Ç. Akın, Public Management Economist, SARD Team members A. Gacutan, Senior Operations Assistant, SARD K. Hidalgo, Financial Sector Officer, SARD

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS

Page

BASIC DATA i

I. PROGRAM DESCRIPTION 1

II. EVALUATION OF DESIGN AND IMPLEMENTATION 1

A. Relevance of Design and Formulation 1 B. Program Outputs 3 C. Program Costs 5 D. Disbursements 5 E. Program Schedule 5 F. Implementation Arrangements 5 G. Conditions and Covenants 6 H. Related Technical Assistance 6 I. Recruitment and Performance of Consultants, Contractors, and Suppliers 6 J. Performance of the Borrower and the Executing Agency 6 K. Performance of the Asian Development Bank 7

III. EVALUATION OF PERFORMANCE 7

A. Relevance 7 B. Effectiveness in Achieving Outcome 8 C. Efficiency in Achieving Outcome and Outputs 9 D. Preliminary Assessment of Sustainability 9 E. Institutional Development 10

F. Impact 13

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS 13 A. Overall Assessment 13 B. Lessons 14 C. Recommendations 14

APPENDIXES

1. Design and Monitoring Framework 16

2. Status of Compliance with First Tranche Policy Actions 20

3. Status of Compliance with Second Tranche Policy Actions 22

4. Status of Compliance with Loan Covenants 28

5. Technical Assistance Completion Report 32

6. Buoyancy Estimate for State’s Own-Tax Revenue 34

7. Debt Sustainability Analysis for West Bengal 35

BASIC DATA

A. Loan Identification 1. Country 2. Loan Number 3. Program Title 4. Borrower 5. Executing Agency 6. Amount of Loan 7. Program Completion Report Number

India 2926 West Bengal Development Finance Program India Finance Department, Government of West Bengal $400 million 1522

B. Loan Data 1. Appraisal (PPTA Review Mission) – Date Started – Date Completed 2. Loan Negotiations – Date Started – Date Completed 3. Date of Board Approval 4. Date of Loan Agreement 5. Date of Loan Effectiveness – In Loan Agreement – Actual – Number of Extensions 6. Closing Date – In Loan Agreement – Actual – Number of Extensions 7. Terms of Loan – Interest Rate – Maturity (number of years) – Grace Period (number of years) 8. Terms of Relending (if any) – Interest Rate – Maturity (number of years) – Grace Period (number of years) – Second-Step Borrower

8 May 2012 11 May 2012 30 August 2012 30 August 2012 30 October 2012 6 November 2012 4 February 2013 26 November 2012 None 30 November 2014 24 July 2014 None LIBOR-based 15 years 3 years None

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9. Disbursements a. Dates Initial Disbursement

5 December 2012

Final Disbursement

24 July 2014

Time Interval

19.59 months

Effective Date

26 November 2012

Original Closing Date

30 November 2014

Time Interval

24.13 months

b. Amount ($ million)

Category or Subloan

Original

Allocation

Last Revised

Allocation

Amount

Canceled

Net Amount

Available

Amount

Disbursed

Undisbursed

Balance Tranche 1 200 - - 400 200 200

Tranche 2 200 200 200 -

Total 400 - - - 400 -

10. Local Costs (Financed) None - Amount ($) - Percent of Local Costs - Percent of Total Cost C. Program Data

1. Program Cost ($ million)

Cost Appraisal Estimate Actual

Foreign Exchange Cost 400 400 Local Currency Cost - - Total 400 400

2. Financing Plan ($ million)

Cost Appraisal Estimate Actual

Implementation Costs Borrower Financed - - ADB Financed 400 400 Other External Financing - -

Total 400 400

IDC Costs Borrower Financed - - ADB Financed - - Other External Financing - -

Total - -

ADB = Asian Development Bank, IDC = interest during construction.

iii

3. Cost Breakdown by Program Component ($ million)

Component Appraisal Estimate Actual Date Disbursed

Tranche 1 200 200 5 December 2012 Tranche 2 200 200 24 July 2014

Total 400 400

4. Program Schedule (Not Applicable)

Item Appraisal Estimate Actual

Date of Contract with Consultants Completion of Engineering Designs Civil Works Contract Date of Award Completion of Work Equipment and Supplies Dates First Procurement Last Procurement Completion of Equipment Installation Start of Operations Completion of Tests and Commissioning Beginning of Start-Up

Other Milestones

5. Program Performance Report Ratings

Implementation Period

Ratings

Development Objectives

Implementation Progress

From 26 November 2012 to 24 July 2014 On-Track

D. Data on Asian Development Bank Missions

Name of Mission

Date

No. of Persons

No. of Person-Days

Specialization of Members

PPTA Review Mission (Appraisal Mission)

8‒11 May 2012 2 4 a, e

Fact-Finding Mission 27 June‒4 July 2012 5 8 a, b, c, d, e Loan Negotiations 30 August 2012 2 1 a, b Consultation Mission 28 January‒1 February 2013 2 5 a, d TA Inception Mission 6‒9 March 2013 1 3 a Mid-term Review Mission 16‒18 June 2013 2 3 a, d Mid-term Review Mission 25‒26 October 2013 1 2 a Review Mission 26‒29 January 2014 1 3 a Review Mission 19 May 2014 2 4 a, d Program completion review 17-20 July 2015 1 1 a Note: a = Public Management Economist, SAPF; b = Principal Counsel, OGC; c = Senior Economics Officer, INRM; d = Director, SAPF; e = Deputy Country Director, INRM.

I. PROGRAM DESCRIPTION 1. The fourth largest state in India, West Bengal has a population of over 91 million people and is strategically located in the eastern part of the country, bordering Bangladesh, Bhutan, and Nepal. During 2002‒2012, although the state recorded an average annual real gross state domestic product (GSDP) growth rate of 7%, the state’s own-tax revenue (OTR) base was eroding due to weak manufacturing growth and an inefficient tax collection system. Consequently, the budget of the Government of West Bengal (GOWB) became more dependent on grants from the central government.1 2. On the other hand, high levels of committed expenditures by GOWB alone almost exhausted the total revenue receipts of the state,2 leaving hardly any fiscal space for critical investments in economic and social infrastructure. The large public sector was one of the legacies of the previous state government, which uninterruptedly ruled for 34 years until the 2011 election. The state-dominated economic model has overtime created vested interests benefiting from the continuation of the system, leading to inertia and lack of political will to reform the state’s finances. As a result, chronic revenue deficits dragged West Bengal into a spiral of mounting public debt, whereby financing of current expenditures through large borrowings and higher debt servicing costs triggered a vicious cycle of current account, revenue, and fiscal deficits, feeding each other. Because of the large demand on recurrent expenditures, the capital outlay to GSDP ratio was increasingly squeezed and remained one of the lowest in the country (below 1% of GSDP), undermining the growth potential of the state.3 3. Given this background, the Asian Development Bank (ADB) approved a program loan of $400 million and a technical assistance (TA) grant of $700,000 on 30 October 2012 to the Government of India (GOI) for the West Bengal Development Finance Program (WBDFP)4 with the goal of creating the fiscal space to sustain development spending in West Bengal.

II. EVALUATION OF DESIGN AND IMPLEMENTATION A. Relevance of Design and Formulation 4. The need to develop a comprehensive fiscal consolidation and development-focused program for GOWB has been in ADB’s agenda since 2005 when the preparatory stage of a

1 From FY2005 to FY2011, OTR declined from 49.9% of total revenues of the state to 44.7% while grants increased

from 11.4% to 16.5% (GOWB, Finance Department. 2015. Medium-Term Fiscal Policy Statement and Fiscal Policy Strategy Statement, 2015–2016. Kolkata. p. 9; GOWB finance accounts and budget publications).

2 As a result of salary increases introduced by the Fifth Pay Commission, non-discretionary expenditures such as

salaries, interests, and pensions accounted for 113% of total revenue receipts in FY2010. The burden of subsidies to various sectors other than education, health, and social welfare reached 4.7% of the GSDP in FY2011. Budget transfers to unprofitable public sector enterprises also contributed to increasing public expenditure.

3 During 2008–2010, West Bengal had an average fiscal deficit to GSDP ratio of 5.1%, the highest among the non-

special category states (NSCS), which had an average of 3.1%. The OTR to GSDP ratio of 4.2% was the lowest among the NSCS, which had an average of 6.7%. The capital outlay to GSDP ratio was 0.9%, the lowest among the NSCS, which had an average of 2.6% (Reserve Bank of India (RBI). 2014. State Finances, A Study of Budgets, 2013–14, Section 4. Mumbai). In FY2011, West Bengal’s public debt to GSDP ratio reached 40.7% and its interest payment to GSDP ratio reached 3%, the highest among the NSCS, whose ratios averaged 27.5% and 1.9% (RBI. 2013. State Finances, A Study of Budgets, 2012–13, Sections 4 and 5. Mumbai).

4 ADB. 2012. Report and Recommendation of the President to the Board of Directors: Proposed Policy-Based Loan

and Technical Assistance Grant to the Government of India for the West Bengal Development Finance Program. Manila (LN 2926-IND).

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policy-based loan was first initiated.5 Following the elections on May 2011, this acquired a renewed focus when the new administration requested ADB’s assistance. 5. At appraisal, the WBDFP was highly relevant to and consistent with ADB’s Country Partnership Strategy, 2009–2012 for India, which supported (i) inclusive and gender-equitable economic growth; (ii) improvements in social sectors; (iii) provision of essential services to the poor; and (iv) bridging of interstate and regional economic disparities. 6 The program also aligned with the objectives of the Fiscal Responsibility and Budget Management (FRBM) Act, 2010 and the 12th Five-Year Plan, 2012‒2017 of the GOI on (i) creating fiscal space for investments in infrastructure, health, and education to promote sustainable growth; (ii) improving the quality and outreach of service delivery; and (iii) poverty reduction. 6. In the design stage, ADB tailored the best practices from recent policy-based loans in Indian states to the specific conditions of West Bengal.7 The program formulation also benefited from ADB’s experience in public resource management programs across South Asia.8 During the program preparation, the GOWB Finance Secretary expressed strong political commitment. Various government agencies were included in the policy dialogue to cultivate strong ownership. 7. ADB provided a project preparatory technical assistance (PPTA) to GOWB, approved on 17 December 2011 for $220,000 as a subproject under the cluster TA for India,9 to identify a combination of high impact public sector reform measures for (i) rationalizing expenditures, (ii) augmenting the state’s revenues, and (iii) creating a fiscal space. The PPTA inputs supported the formulation of the policy matrix as well as the overall framework of the WBDFP. Through single source selection of PricewaterhouseCoopers Pvt. Ltd. India (PwC), the PPTA engaged national consultants for 14 person months (PMs) and an international consultant for 2 PMs. The implementation lasted from January 2012 to July 2012. The Finance Department was the executing agency (EA). 8. For expenditure rationalization, fiscal and public expenditure experts supported detailed public expenditure tracking surveys that looked objectively at the flow of public spending on capital investment projects across sectors, and recurring expenses such as salaries, wages, debt servicing, and operation and maintenance costs. These surveys identified possibilities for fiscal savings by computerizing teachers’ salary payments, and streamlining drug procurement. The public debt expert also supported the development of a debt restructuring roadmap that included prepayment of high cost debt, and helped prepare the debt database and manual for efficient debt management.

5 During 2005–2006, ADB undertook a thorough diagnosis of the major deficiencies leading to fiscal distress under

ADB. 2004. Technical Assistance to India for West Bengal Development Finance. Manila., which was financed by the Government of the United Kingdom.

6 ADB. 2009. Country Partnership Strategy: India, 2009–2012. Manila.

7 ADB provided policy-based program loans for public resource management to five states in India—Gujarat (1996),

Madhya Pradesh (1999), Kerala (2002), Assam (2004 and 2008), and Mizoram (2009)—which achieved fiscal stabilization using a combination of reforms including (i) compliance with the FRBM Act; (ii) revenue augmentation; (iii) expenditure rationalization; (iv) budget, audit, procurement, and governance reforms; (v) restructuring of public sector enterprises; and (vi) improvements in services especially health and education.

8 (i) ADB. 2007. Special Evaluation Study: ADB Support to Public Resource Management in India. Manila; (ii) M.

Attinasi and B. Carrasco. 2008. Public Resource Management Reform Programs: Do They Work? Manila: ADB; and (iii) A. Mukherji and H. Mukhopadhyay. 2011. Evaluating the Public Resource Management Program in Assam Using a Synthetic Control Group. South Asia Working Paper Series. No. 2. Manila: ADB.

9 ADB. Designing and Capacity Building for Strengthening State Finances and Service Delivery in West Bengal

(Subproject 21 C-TA 0003-IND), financed by the Government of the United Kingdom through the Department for International Development under ADB. 2009. Technical Assistance Cluster to India for Advanced Project Preparedness for Poverty Reduction. Manila. (TA 8041-IND).

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9. For revenue mobilization, a tax expert helped identify measures to streamline tax administration through (i) expansion of the tax bases for value-added tax (VAT), government service tax, stamp duty and registration fee, motor vehicle tax, and state excise duty; and (ii) information technology (IT)-based tax services. For improvement of public service delivery, a social development specialist undertook a baseline analysis of poverty and gender mainstreaming and identified cost-effective improvements in the delivery of education and health services. Finally, the PPTA provided capacity building to GOWB for designing public‒private partnership (PPP) projects in rural transport, education, and health sectors. A PPP workshop was held in Kolkata on March 2012. The PPTA was rated satisfactory. B. Program Outputs 10. The program had three outputs, namely (i) improved expenditure efficiency, (ii) improved revenue efforts, and (iii) efficient debt management, with a total of 25 policy actions.10 The program outputs and their components remained unchanged throughout the program implementation. The details of the status of compliance for 10 policy actions under the first tranche are in Appendix 2 and for 15 policy actions under the second tranche are in Appendix 3. 11. Output 1: Improved expenditure efficiency. The program implemented several reforms to moderate expenditure growth for generating fiscal space to sustain development financing and encouraging the efficient allocation of public resources. 12. To improve public expenditure management, a fiscal policy and management unit (FPMU) was established under the Finance Department, and a PPP policy for implementing infrastructure projects was put into place. A medium-term fiscal plan for FY2014‒FY2017 specifying performance indicators for current and fiscal deficits, and total debt stock was approved to encourage fiscal discipline in line with the FRBM Act, 2010. In FY2012, an action plan to rationalize subsidies and streamline expenditures was prepared, and the GOWB began to implement it by (i) increasing cost recovery rate across sectors, (ii) rationalizing expenditures in non-merit (e.g. tourism) and select merit-II sectors (e.g. transport), and (iii) leveraging investments through PPPs.11 13. To strengthen the links between policy, planning, and budget spending, four modules of the integrated financial management system (IFMS) became fully functional in all state treasuries. The drawing and disbursement module, dealing with the online transaction processing system for bill payments, improved the expenditure planning and forecasting of cash requirements during the budget cycle to avoid unexpected short-term borrowing. Under the employees’ database module, computerization of salary accounts (COSA) software was installed in all 6,505 treasuries. A comprehensive database was created, capturing records for 346,075 state government employees and pensioners and this database was linked to all treasuries using COSA. Under the budget-treasury interface (e-allotment) module, budgets were distributed to the drawing and disbursing officers at different levels such as directorates, regional offices, divisional offices, and sub-divisional offices for effective expenditure planning and management. Finally, under the module for the government revenue receipt portal system, electronic receipt of all state government tax and non-tax revenues and user charges were

10

The WBDFP targeted pro-growth stabilization through improved revenue performance and expenditure efficiency, laying the groundwork for a follow-on structural reform program that focuses on service delivery.

11 Examples of specific measures to be undertaken included (i) a voluntary retirement scheme for employees in the four state-run transport corporations, (ii) the commercial utilization of excess or idle land in six Calcutta Tramways Company depots, and (iii) the restructuring of select closed or perpetually loss-making public sector enterprises.

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centralized, which reduced the interface between taxpayers and tax officers, thereby improving the transparency in tax administration. 14. To align budget and expenditure with the state’s Five-Year Plan, medium-term expenditure frameworks (MTEFs) for the Health and Family Welfare, School Education, and Public Works Departments for FY2014‒FY2016 were prepared and approved for pilot implementation. The MTEFs included pro-poor and gender-responsive performance indicators and interventions. To increase the budgetary resources for development financing, the GOWB increased the annual capital outlay from 0.74% of the GSDP in FY2013 to 1.9% of the GSDP in FY2015 without breaching the fiscal deficit target established by the FRBM Act. 15. To contain short-term expenditures, salary growth was moderated by restricting the replacement of employees against natural attrition.12 Under the WBDFP, the annual growth rate of salary bill was 5% in FY2013 and 3.8% in FY2014, remaining below the target of 7%. To streamline expenditures, online salary management system under COSA was fully operationalized for salary payments to the state government-aided secondary school teachers. Similarly, an IT-based store management information system was introduced to standardize drug procurement and stock management using e-tendering system for the West Bengal Medical Services Corporation (WBMSC). 16. Output 2: Improved revenue efforts. To improve the state’s own-revenue mobilization for fiscal consolidation, the WBDFP strengthened revenue administration efficiency and reduced compliance costs by simplifying tax policies and procedures, in particular by using IT-based tax administration systems and risk-based tax audits. 17. To improve taxpayer services and reduce the interface between taxpayers and tax officers, the Finance Department introduced (i) digital signatures, (ii) online waybill generation and cancellation for importing goods across states, and (iii) system-based matching of waybill data in VAT administration. These services were strengthened by (i) making the online payment, recovery and appeal modules of the tax information management system (TIMS) fully functional, (ii) enabling interface between the TIMS and state excise management system, and (iii) introducing registration with a permanent account number. 18. Tax compliance was also enhanced through improved taxpayer service delivery, including (i) the introduction of VAT return preparers, (ii) digitization of over-the-counter tax payments, (iii) simplification of registration and tax payments for one-off transactions, (iv) operationalization of online tax filing, and (v) creation of an online grievance redressal system. The TIMS also linked barcoding of transit documents with major check posts to reduce tax leakages during transit of goods. 19. To prevent leakages, the IT-based excise management system, xPERT was developed, including (i) online license renewal, (ii) product registration, (iii) issuance of import passes for bulk spirits for industrial and medicinal purposes, (iv) a barcode-based supply chain management system, and (v) a single point duty on wholesale of Indian-made foreign liquor. 20. During program implementation, the property registration system was strengthened by implementing e-stamping in 160 registration offices. Under this system, the stamp duty can be paid online after the e-assessment slip is generated without a physical stamp paper. The

12

Salary expenditure averaged 45% of the state’s total revenue receipts during FY2005–FY2013. Reducing salary growth was crucial for lowering the current deficit of GOWB.

5

system prevents issuance of fraud stamp paper, and thereby reduces leakages in stamp duty collection. In addition, digitization of legacy data was piloted in at least 20 sub-registrar’s offices, which improved the time and cost efficiency of property tax administration by providing the public with online search facilities. Finally, to increase compliance, tax slabs under the profession tax in the Finance Act, 2014 were reduced from 23 to four categories. 21. Output 3: Efficient debt management. The Finance Department approved a medium-term debt strategy under the program, setting out policies, guidelines, and institutional arrangements for managing government debt (Appendix 7). The Finance Department also prepared a database of comprehensive and up-to-date information on all state government debt, including contingent liabilities, cost of funds, and maturity profiles. The development of integrated debt management system strengthened the GOWB’s institutional capacity for effective debt management. C. Program Costs 22. At appraisal, the program size was determined by the state’s development financing requirements after factoring in the estimated fiscal savings generated through (i) an increase in efficiency and reduction in systemic leakages and compliance costs for revenue administration; (ii) expenditure rationalization; and (iii) a reduction in debt service burden.13 The development financing gap—additional capital outlays net of new fiscal space created under the program —was estimated at $493 million. ADB provided the GOWB with $400 million as a budget support, which covered 81% of this gap.14 The expected improvements in the capital outlay to GSDP ratio and the fiscal deficit to GSDP ratio fully justified the program’s economic returns. D. Disbursements 23. ADB provided a policy-based loan of $400 million from its ordinary capital resources. In keeping with the ADB guidelines (1998), the first tranche of $200 million was disbursed to the GOI, for on-lending to the GOWB, on 5 December 2012, following full compliance of all first tranche policy actions and loan effectiveness on 26 November 2012. Upon successful compliance with all second tranche policy actions, disbursement of the second tranche of $200 million was completed on 24 July 2014, four months ahead of the original closing date of 30 November 2014. Thus, the original disbursement schedule was realistic. E. Program Schedule 24. The policy actions were to be implemented over 24 months from 26 November 2012 to 30 November 2014. Because of (i) the GOWB’s commitment to the WBDFP; (ii) ADB’s continuous monitoring of implementation through periodic missions and progress reports; and (iii) support provided to the implementing agencies through the TA, the program was completed without extensions and all policy conditions were fully complied on 24 July 2014. F. Implementation Arrangements 25. The implementation arrangements designed at appraisal were satisfactory and there were no changes during the program implementation. The Finance Department was the EA and

13

As indicated in the economic and financial analysis of the report and recommendation of the President (see footnote 4), the WBDFP was expected to generate fiscal savings equivalent to $1.4 billion over the program period.

14 On August 2012, ADB increased the initial loan size from $300 million to $400 million at the GOWB’s request.

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the Secretary of the Finance Department was the focal point for matters pertaining to the program. A program steering committee chaired by the Finance Department Secretary and including representatives from other departments met at least once every quarter to facilitate and give directions for complying with policy actions. The FPMU, headed by the Finance Department Secretary (i) helped the line departments implement the program and the TA; (ii) was responsible for coordinating and monitoring the program, including the policy actions; and (iii) prepared and submitted all required reports to the program steering committee and ADB. G. Conditions and Covenants 26. The loan agreement with the GOI and the program agreement with the GOWB consisted of standard covenants relevant to the program requirements, including those on program management, review and evaluation, use of counterpart funds, and safeguard policies. These were fully complied with according to ADB policies (Appendix 4). The GOWB submitted regular progress reports alongside the information provided by the ADB missions. H. Related Technical Assistance 27. The piggybacked TA for the WBDFP 15 was approved on 30 October 2012 to (i) strengthen the institutional capacity and human resources of key government agencies to implement the fiscal reforms, and (ii) support the GOWB in complying with the policy actions. A grant of $700,000 was provided by ADB’s Technical Assistance Special Fund, of which only 76% was utilized due to cost savings generated by the efficient implementation of quality-cost-based consultant recruitment. The implementation arrangements were similar to that of the WBDFP. PwC was hired from 8 March 2013 until 15 November 2014 for a total of 59 PMs of national consultants. In alignment with the design of the WBDFP, the TA focused on (i) revenue administration, (ii) project appraisal and monitoring, (iii) MTEFs, (iv) IFMS, (v) an employee database, and (vi) debt management. Additional activities were also undertaken such as drafting of the Memorandum to the 14th Central Finance Commission, and preparation of an operational PPP handbook as per the FPMU’s request, to be used as a practical guide by the GOWB for planning and executing PPP projects. A workshop was organized on 27 June 2014 to provide information on identification, development, and financing of PPP projects, mainly in social sector, transport, roads and highways. The TA is rated highly successful, due to the timely completion of all TA activities, leading to full compliance with all policy actions under the WBDFP ahead of schedule, and the generation of savings within the allocated TA budget. The TA completion report is in Appendix 5. I. Recruitment and Performance of Consultants, Contractors, and Suppliers 28. There was no procurement, advance contracting, or retroactive financing. ADB hired PwC with 59 PMs of national consultants for the TA through quality-cost-based selection with a standard quality-cost ratio of 80:20. The performance of the firm was rated satisfactory (see Appendix 5). Except for the TA, no other consultants were hired. J. Performance of the Borrower and the Executing Agency 29. The performance of the borrower, the GOWB, and the EA was highly satisfactory. The GOWB showed genuine commitment to achieving the necessary reforms to set the fiscal balance on a sustainable trajectory for long-term development in West Bengal. The WBDFP

15

ADB. 2012. Support for the West Bengal Development Finance Program. Manila (TA 8203-IND).

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benefited greatly from the Finance Secretary’s reform-minded leadership, which eliminated any political risk that could hinder the program’s completion. 30. The GOWB resisted populist pressures and implemented politically-sensitive reforms such as keeping salary growth within the program target. Although initially lacking the technical capacity to carry out complex and multidimensional revenue administration and expenditure rationalization measures, the EA with the support of the TA, successfully introduced IT systems in tax administration and expenditure management, and prepared the MTEFs for transparency and accountability in the allocation of scarce public resources. Continuity of key staff throughout the program period greatly enhanced the program implementation The GOWB and the EA ensured full compliance with all loan covenants. K. Performance of the Asian Development Bank 31. ADB’s performance was highly satisfactory. The WBDFP was an example of a successful partnership among the GOI, the GOWB, and ADB. The program was administered and supervised from ADB headquarters, and complemented by four review missions during June 2013‒May 2014 that effectively monitored its progress, addressed implementation issues, and provided technical input. ADB project staff also maintained a close and continuous connection with the Finance Secretary via teleconferencing throughout the processing and implementation period, while staff from ADB’s India Resident Mission provided valuable assistance. ADB cooperated closely with the EA and the implementing agencies, and no major disagreements arose during implementation. 32. Although the program’s comprehensive nature placed considerable demands on GOWB’s institutional capabilities, ADB’s advisory role and the TA contributed significantly to capacity development, and helped realize the necessary policy and institutional changes to strengthen administration, systems, and procedures in key reform areas. ADB demonstrated sufficient flexibility to accommodate the government’s requests for a training component and additional activities under the TA. The partnership between the GOWB and ADB is expected to continue under a proposed follow-on program, the Second West Bengal Development Finance Program (WBDFP II) as envisaged under the WBDF (see paras. 44 and 65).

III. EVALUATION OF PERFORMANCE A. Relevance 33. The WBDFP is rated as highly relevant. The program was provided in response to the GOWB’s deteriorating fiscal situation and urgent need to increase state’s own-revenues, rationalize expenditures, and reduce the debt burden. The objective of these reforms was to create fiscal space in the budget, to be allocated to development financing through fixed capital formation and investment in social sectors like education and health to encourage sustainable growth (see paras. 54-56). The decision to provide budget support was timely given the state’s pressing fiscal deficits, mounting debt burden, and low-growth economy. The program design was appropriate at the time of the appraisal. While the policy matrix and design and monitoring framework (DMF) set out conditions that were ambitious in scope and number, they were indispensable for addressing the fiscal reform needs in proper sequence. Using IT-based systems, the program design included various innovative as well as pioneering e-governance reforms, some of which were introduced for the first time in India, with a highly transformative impact on the GOWB’s institutional capacity in public resource management and service

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delivery (see paras. 45-53). All policy actions were developed in close cooperation with the GOWB, and the capacity building support of the TA helped complete the program successfully. 34. The WBDFP remains highly relevant after completion as evidenced by the proposed WBDFP II. The GOWB strives to improve the accessibility, quality, and affordability of public services, as laid out in its Annual Plan for 2013‒2014.16 The WBDFP is consistent with ADB’s Strategy 2020, which identified good governance that includes the efficient use of public resources as a key driver of change. The program also supported private sector development by promoting PPPs in public service delivery, which is another driver of change under ADB’s Strategy 2020. Finally, the outcomes and impact of the WBDFP is in line with ADB’s Country Partnership Strategy, 2013‒201717 and ADB’s Country Operations Business Plan, 2013‒201518 for India, both of which support (i) improvements in state-level fiscal indicators through expenditure rationalization and revenue mobilization for increased infrastructure and social sector investments, (ii) improvement in service delivery for inclusive growth, and (iii) enhanced government capacity in PPP projects. B. Effectiveness in Achieving Outcome 35. The WBDFP was effective in achieving the outcome of greater fiscal space in the government budget. With the implementation of 25 policy actions, all outcome indicators were achieved as of FY2015, and thereby the fiscally-stressed situation of the state has witnessed a positive turnaround. As discussed under the DMF outcome indicators (Appendix 1), the fiscal deficit to GSDP ratio declined progressively from 4.24% in FY2011 to 3.62% in FY2014. The ratio is expected to reach 2.98% by FY2015, which is below the 3% limit of the FRBM Act, 2010. 36. Fiscal consolidation was achieved with the state’s OTR to GSDP ratio increasing from 4.58% in FY2011 to 5.12% in FY2014, exceeding the 5% threshold for the first time in 15 years. The improvement in the ratio by 0.54 percentage points met the program target of at least half a percentage point. The ratio is expected to stabilize at 5% in FY2015 and 5.07% in FY2016. This success was driven by two critical factors: (i) the significant increase in buoyancy of the state’s OTR from 0.998 in FY2003–FY2012 to 1.007 during FY2013–FY2016, reflecting the introduction of revenue reforms under the WBDFP (Appendix 6), and (ii) the improved efficiency of revenue collection (Figure). 37. The debt stock to GSDP ratio decreased from 40.7% in FY2011 to 36% in FY2014, and is expected to decline to 34.3% in FY2015 due to (i) favorable macroeconomic conditions creating GSDP growth in excess of public debt growth, (ii) prudent fiscal policies stipulated by the FRBM Act, 2010 and pursued under the WBDFP, and (iii) relatively low interest rates for incremental debt in recent years (Appendix 7). The cumulative reduction in debt stock to GSDP ratio between FY2011 and FY2015 exceeds the program target of 5 percentage points. Debt service burden, measured by interest payments to GSDP ratio improved from 4.4% in FY2012 to 3% in FY2014, and is expected to decline to 2.7% in FY2015.19

16

Accessible from the website of Planning Commission of GOI. 17

ADB. 2013. Country Partnership Strategy: India, 2013–2017. Manila. 18

ADB. 2013. Country Operations Business Plan, 2013–2015. Manila. 19

The state’s management of cash and liquidity also improved. The off-budget ways and means advances from the RBI declined from 113 days in FY2011, 48 days in FY2013, and 31 days in FY2014 to 29 days in FY2015. The state was no longer in overdraft in FY2015, compared to four times for 10 days in FY2014, five times for 13 days in FY2013 and seven times for 62 days in FY2011 (RBI. 2015. State Finances, A Study of Budgets, 2014–2015. Mumbai. Statement 26).

9

38. The output performance indicators related to improved expenditure efficiency and efficient debt management were fully achieved (Appendix 1). Regarding improved revenue efforts, DMF indicators show an average annual growth rate of 17.8% for VAT, 19.2% for stamp duty and registration fees, and 20% for state excise duty during FY2013‒FY2015; and 6.1% for profession tax during FY2012‒FY2014. Although revenue collection from major taxes was positive, because of ambitious performance indicators, only stamp duty and registration fees achieved the program target of at least 17% annual growth. VAT collection did not meet its 20% target; collection of excise duties fell below its 25% target;20 and professional tax missed its target of an additional 2% annual growth above the baseline of 7% in FY2011. 21 C. Efficiency in Achieving Outcome and Outputs 39. The implementation of the WBDFP was highly efficient. No major change was required in the scope of the program, all policy actions were completed, and the loan was fully disbursed and closed ahead of schedule. The efficiency was a result of (i) thorough program preparation starting with the PPTA and leading to appropriate design; (ii) an effective policy dialogue with the EA; (iii) the political commitment of the GOWB; and (iv) capacity building, and implementation support provided through the effective use of the TA. ADB support under the WBDFP generated the envisaged economic and social benefits by creating fiscal space for development financing. D. Preliminary Assessment of Sustainability 40. Overall, the program outcomes are likely to be sustainable because of the GOWB’s strong commitment to achieving fiscal consolidation even after program completion. The GOWB moved beyond the requirements of the WBDFP to ensure sustainability. 41. To increase revenue and widen the tax base, the GOWB introduced additional complementary tax reforms such as (i) a new stamp duty on the market value of properties leased for more than 30 years; (ii) an amendment of the Stamp Act charging stamp duties and registration fees for the amalgamation and absorption of companies; and (iii) the issuance of new licenses for new country spirit bottling plants and distilleries. To increase tax rates and streamline tax structure, the GOWB increased (i) the upper and lower VAT rates by 1%, (ii) taxes on tobacco-related products, and (iii) the ad valorem excise duty for foreign liquors. It also introduced a lifetime tax when registering new vehicles by merging the road tax, audio and video taxes, registration charges, and other related taxes. Furthermore, in FY2012, the GOWB allowed power distribution companies to raise the power tariff to cover their costs. 42. The GOWB also improved taxpayer services to facilitate voluntary compliance. At the Commercial Tax Directorate, “e-Sahaj” was introduced to consolidate and simplify e-filing of all three sales taxes. The audit system was streamlined and an amnesty scheme was introduced to incentivize unregistered taxpayers to register upon tax payment. To encourage tax compliance, 20

On the other hand, using the same methodology as in Appendix 6, buoyancy estimate for excise duty during FY2003–FY2016 shows that it increased from 1.168 during FY2003–FY2012 to 1.176 during FY2013–FY2016, indicating a significant and positive difference between pre- and post-WBDFP buoyancies for excise duty.

21 Due to the economic slowdown in India when real GDP growth in FY2014 fell below 5% in contrast to an average growth of 8% during 2003–2012 (ADB. Asian Development Outlook. 2014), the revenue accounts of 18 states across India performed below the expectations. Major tax revenues in Indian states were affected by the slowdown in private consumption particularly in relation to automotive sales and real estate development, and investment due to sluggish manufacturing and industrial growth (RBI. 2015. State Finances, A Study of Budgets, 2014–2015. Mumbai). Despite a nationwide economic slowdown, based on the tax buoyancy analysis, buoyancy of VAT in West Bengal remained relatively stable at 1.485 during FY2006–FY2012 and 1.478 during FY2013–FY2016.

10

the GOWB (i) reorganized the enforcement wing of its Bureau of Investigation, (ii) formed a digitized data analysis wing, (iii) reorganized the excise administration with new districts and a special preventive unit, and (iv) set up an inspection wing for the Directorate of Stamps and Registration. With necessary amendments to the penal provisions of the Bengal Excise Act, cost of non-compliance was increased. 43. To increase capital expenditure for sustainable development financing, the GOWB invested approximately $125 million of $200 million in the first tranche release as seed money to create and operationalize the West Bengal Highways Development Corporation to modernize and upgrade state highways. A feasibility study was conducted to upgrade state highways under the PPP model. Furthermore, to rationalize subsidies in non-merit sectors and promote economic growth, greater focus was given on PPP projects for enhancing tourism revenues and improving related infrastructure.22 44. Building on the accomplishments of the WBDFP, the sustainability of the reforms will be reinforced by the proposed follow-on program, WBDFP II, which was requested by the GOWB.23 The rationale rests on the premise that some of the revenue, expenditure management, and public service delivery reforms initiated under the WBDFP, by their very nature, have a long-term implementation cycle. Continuation of complementary reforms (see para. 65) in revenue administration, expenditure rationalization, public service delivery, and improvements in the investment climate over the next three years is critical to (i) entrench the fiscal consolidation achieved under the WBDFP over the long-term, (ii) boost development financing, (iii) improve the efficiency of service delivery, and (iv) cover the operation and maintenance costs of the investments in IT-related, institutional, and other infrastructure for financial sustainability. E. Institutional Development 45. The implementation of e-governance systems in tax administration, expenditure management, public service delivery, and debt management under the WBDFP and the capacity building by the TA had a highly significant impact on institutional development. 46. The establishment of the TIMS and e-payment systems for VAT 24 and excise tax administration streamlined revenue collection, improved tax compliance and reduced tax leakages in West Bengal.25 E-payment of commercial taxes has increased progressively from

22

Examples of tourism-related PPP projects are (i) the Jharkhali and Sabujdweep eco-tourism projects; (ii) the Gajoldoba mega-tourism project in Jalpaiguri district; and (iii) a heritage tourism project in Paschim Medinipur district. A PPP project for urban infrastructure includes construction, operation and maintenance of the elevated road between Jhinjirabazar and Batanagar. For health care services, PPP initiatives include (i) the establishment of a medical college and hospital in Bhangore, Bhubulia and Coochbehar; and (ii) the installation, operation, and management of high-end diagnostic equipment in 47 medical institutions for affordable services. GOWB. Economic Review, 2014-2015. Kolkata.

23 The WBDFP II is at the concept stage and is expected to be submitted for Board consideration towards the end of 2015.

24 E-payment for VAT will facilitate the transition to the India-wide VAT on goods and services from April 2016.

25 The e-payment module of TIMS simplified tax payments by eliminating the need to stand in long queues to pay taxes and reduced the scope for irregularities from face-to-face interaction between taxpayers and tax officers. The recovery module improved assessment of unpaid taxes. With the appeal module, there was a decline in the number of pending appeal cases for sales tax from 15,067 in FY2012 to 12,902 in FY2014 (GOWB, Finance Department. 2014. Annual Administrative Report, 2013-2014. Kolkata). Interfacing with the TIMS enabled the excise authority to inspect importers at check posts and follow waybills to detect revenue leakages. The permanent account number (PAN) for registering excise and service tax dealers improved coordination among tax authorities and enhanced the detection of potential revenue leakages. In FY2013, 34,766 online applications with a PAN were received, of which 24,571 were registered.

11

Rs54 billion (45% of total tax collection) in FY2010 to Rs219 billion (86% of total tax collection) in FY2014. Collection costs have also declined from 1.28% of total tax revenue in FY2010 to 0.68% in FY2014 (Figure).26

E-payment of Commercial Taxes and Cost of Tax Collection

Source: Government of West Bengal, Finance Department. 2014. Annual Administrative Report, 2013‒2014. Kolkata. p.16 and 38.

47. In recognition of these successful e-governance initiatives, the Directorate of Commercial Taxes under the GOWB Finance Department received the 2014‒2015 GOI National Award and was given a silver award for excellence in government process re-engineering. Similarly, the Finance Department received two 2013‒2014 CSI-Nihilent e-governance awards for (i) the promotion of information management in commercial tax administration, and (ii) a workflow-based file and letter tracking system. At the 68th Independence Day of India on 15 August 2014, the Finance Department received an award from the Chief Minister for its outstanding contributions to citizen-friendly tax reforms and e-governance. In appreciation of the tax-related reforms, in its May 2014 report, the Department of Industrial Policy and Promotion of the Ministry of Commerce and Industries recognized the GOWB for improving the business environment.

48. The Excise Department received the 2014 Skotch digital inclusion award for the e-Abgari, which introduced an online excise administration and tax filing system for the first time in India. The system covers 6000 excise licensees and helps track production, distribution, and sale of liquor in real time using barcodes. The system improved the excise duty collection by (i) eliminating tax leakages throughout the supply chain, (ii) expanding the revenue base to small retail outlets, and (iii) speeding the processing of permits through e-licensing. It also prevented the rampant smuggling and illicit alcohol production seen under the earlier manual system, which had problems with maintaining efficient communication between tax offices, liquor producers, retail shops, and consumers. The system also prevented corruption by changing the basis of tax collection from alcohol content, which was easily manipulated, to ad valorem base using the minimum retail price. 27

26

An important reason for the reduced tax collection cost is the risk-based audit under the e-filing system. Although the earlier system audited all 200,000 VAT dealers through physical visits, it only generated 1% compliance due to corruption and errors in tax liability estimates. With e-filing, sales tax returns are automatically assessed and only 10,000 cases are selected for audit based on objective risk assessment criteria. This has not only reduced tax collection costs and increased compliance, but also improved ease of doing business.

27 Duty collection through e-Abgari reached 98.2% in FY2014 from 0% in FY2010; the total number of transactions increased from 9,165 in FY2012 to 705,582 in FY2014; and the monitoring of illegal activities improved from 49,602 cases in FY2010 to 51,616 in FY2014. E-Abgari helped triple the excise revenue from Rs10.8 billion in FY2010 to Rs30 billion in FY2014, even though liquor sales increased by 50% (GOWB Excise Department).

12

49. The introduction of e-stamp and digitization of land and property legacy deeds – to be extended to all registration and land offices under the WBDFP II, including 30 years of historic records – significantly improved service delivery in property tax administration while building safeguards against corruption and fraud.28 With the IT-based system, property registration and valuation can be completed using a simplified online process, and e-stamp can be issued within five minutes of a one-stop visit at the registration office. Additionally, revising property tax rates on par with the market value increased stamp duty and registration fee collection by 59% from Rs27.3 billion in FY2012 to Rs43.6 billion in FY2013. 50. With regard to budget and expenditure management, the development of IFMS modules and budget-treasury interface across drawing and disbursement offices through the e-Bantan system improved the efficiency of public resource allocation. Under the IFMS, the Finance Department can approve fund allotments to spending agencies within two days, which could take up to three months under the old manual system. To expedite the use of public funds, a certain degree of spending authority was delegated to administrative departments.

51. Among the IT-based expenditure management reforms, an online store management information system for drug procurement through the WBMSC using an e-tendering system was acclaimed “Best Practice” by the Planning Commission of India due to increased transparency, reduction in procurement costs, and improved quality control.29 Preliminary estimates indicate that cost savings generated by the e-tendering will triple the purchasing power of the same drug procurement budget, which will primarily benefit the poor using public health facilities.

52. Additionally, the creation of an employee and pensioner database and the computerization of salary payments of state government employees, pensioners, and teachers through COSA improved the accountability and transparency in expenditure management.30 With the completion of the employee and pensioner database under the WBDFP and the linking of salary payments directly to individual bank accounts of the employees under COSA instead of cash-based payments, the GOWB can accurately estimate its salary expenditure. 53. The creation of an automated debt management system and a consolidated debt database on the level and cost of government borrowing, debt related transactions, and loan agreements and guarantees replaced the manual debt management system, which was scattered across different government departments. A computerized debt management and recording system made it possible to obtain up-to-date and accurate public debt records on a monthly basis, and standardized the debt management processes. It improved the GOWB’s capacity to analyze liabilities and associated risks, and initiate appropriate measures for management, repayment, and restructuring in a timely and systematic fashion.

28

The previous system suffered from a variety of issues including (i) fake stamp papers leading loss of revenue, (ii) inconvenient and time-consuming processes for citizens to obtain certificates, and (iii) lack of integration between the land records and registration, running the risk of litigation on property titles.

29 The manual system was inefficient and error-prone in tracking real-time information regarding the inventory, procurement, quality, and consumption of drugs. The system was open to corruption due to collusion among dealers, distributors, and traders to fix the “lowest rate,” leading to the cartelization of drug procurement. Under the e-tendering system, only qualified manufacturers, including generic brands, were allowed to participate and strict quality control standards were enforced.

30 Under the previous manual system, which was used in 70% of disbursement offices, the GOWB provided a lump-sum allotment for the salaries of government employees, teachers, and pensioners without exactly knowing how many were benefiting. Problems of “missing teachers” and other types of fraud and human errors in fixing payroll scales and pension payments were rampant. Based on a 2011 report from the Directorate of Accounts and Audit, teaching and non-teaching staff withdrew an excess amount of Rs20.6 million in FY2010 and Rs27.6 million in FY2011. In the absence of an up-to-date pensioner database, 38% of pension cases were rejected in FY2011.

13

F. Impact 54. The impact of the WBDFP was significant in improving the West Bengal’s development financing in a sustainable manner. The reforms helped the GOWB generate additional resources for investment in economic and social infrastructure while reducing the fiscal deficit by revenue augmentation and expenditure rationalization. As discussed under the DMF impact indicators (Appendix 1), the capital outlay to GSDP ratio increased and crossed over 1% after remaining below that level for almost a decade. The allocation of resources for development financing is likely to accelerate economic growth and create new employment opportunities. The proposed follow-on WBDFP II will further augment the capital formation. 55. The WBDFP also has a significant social and poverty reduction impact.31 Women and the poor will benefit from increased development financing in social and economic infrastructure, targeted subsidies, and improved delivery of public services. As reflected in the DMF (Appendix 1), under the WBDFP, the education and health accounted for 27.1% of the total capital outlay in FY2014 and is expected to reach 24.5% in FY2015, exceeding the target of 15%. 56. For the first time in West Bengal, the program supported poverty-focused and gender-responsive MTEFs that will (i) reduce variability in fund allocation for critical social sectors, and (ii) promote expenditure targeting in actual budget allocations of the Health and Family Welfare, School Education, and Public Works Departments.32 The GOWB has also experimented with alternative models of centralized drug procurement to eliminate leakages and set up Fair Price Medicine Shops on a PPP basis, which offer discounts on medicines ranging from 48% to 67% of the retail price, in all major medical colleges and district hospitals. Substantial cost savings achieved through these reforms have benefited the recipients of public health services.

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS A. Overall Assessment 57. Overall, the WBDFP is rated successful. It was highly relevant to the GOWB’s efforts to stabilize and consolidate state finances, generate fiscal space, and sustain development financing; and it was effective in achieving the targeted outcomes. The program was highly efficient in completing the policy actions four months ahead of schedule. The program is likely to be sustainable due to the GOWB’s commitment to continue public sector reforms, in particular through the follow-on program, WBDFP II. The institutional development is highly significant, and the overall impact of the program is significant. ADB’s overall performance in the program is rated highly satisfactory, the performance of the borrower highly satisfactory, and the consultants satisfactory. The TA is rated highly successful.

31

As a policy-based loan, the WBDFP involved no impact on the environment, involuntary resettlement, or indigenous peoples (categorized as C at appraisal) in compliance with ADB’s Safeguard Policy Statement (2009).

32The three-year MTEF of the Health and Family Welfare Department for FY2014‒FY2016 included critical interventions such as (i) the construction of primary healthcare infrastructure catering to rural areas, and (ii) improved public education and communication promoting the delivery of babies in healthcare institutions to reduce the maternal and infant mortality rates. Greater coverage of healthcare facilities across the state, and accessibility for women and children will help improve the effective delivery of healthcare services. For the School Education Department, interventions reflected in the MTEF—such as the provision of a monthly stipend to all secondary and higher-secondary school students living below the poverty line, the universalization of elementary and secondary education, and ensuring 100% enrollment of female students, especially those from backward and minority communities—are expected to improve education services and make them more accessible across gender lines. Finally, for the Public Works Department, new construction work on district roads, and enhanced transport services are expected to improve the connectivity of underserved communities.

14

B. Lessons 58. The sustained commitment by the GOWB ensured that reforms transcended short-term political considerations. For a policy-based program to be successful, sufficient resources must be devoted to cultivate dialogue with all stakeholders and institutionalize ownership of reforms. 59. Policy-based programs targeting fiscal consolidation should not sacrifice economic growth by insisting on rapid and drastic fiscal adjustment in the short-term. Instead, fiscal space must be created gradually through carefully sequenced and multifaceted reforms that promote a sustainable fiscal trajectory along with economic growth. To achieve this balanced approach, revenue collection should be augmented with more efficient tax administration and an expansion of tax base instead of tax rate increases, which might hinder economic growth. Expenditure rationalization should complement revenue reforms by substituting the fiscal savings generated through streamlining current expenditures with growth-enhancing capital outlay in infrastructure and critical social sectors. To promote economic growth, private investment must be encouraged at the same time, especially through PPPs in public service delivery, which reinforces the rationalization of public spending and improvement in the quality of services. Finally, accompanying social programs embedded in the MTEFs are necessary to distribute the reform benefits more equitably across the society, and especially to disadvantaged socioeconomic groups. 60. The effective use of IT-based e-governance systems not only strengthens the government’s capability and efficiency in tax administration, expenditure, and debt management, but also enhances the quality and accessibility of public service delivery at affordable costs to many different segments of society, including the poor. IT-based public sector reforms are also very effective at standardizing processes and preventing leakage, fraud, and corruption, and thereby improving accountability and governance at all levels of public administration. For sustainable fiscal reforms with maximum institutional impact, policy-based programs should prioritize investment in IT-based systems. 61. A program design of this nature should avoid numerous and complex policy actions, and focus on the core elements of the government’s reform agenda. Policy actions must be prioritized thoroughly based on a clearly defined, time-bound roadmap. Policy-based programs should be supported by an accompanying TA to meet all targeted policy actions in a timely manner, and strengthen the government’s capacity to ensure the effectiveness and sustainability of the reforms. An accurate assessment of training and capacity building needs should be carried out at the fact-finding stage to determine the precise scope of the TA support. 62. Ensuring continuity of staff at the program directorate builds institutional memory and supports the successful implementation and sustainability of the reforms. C. Recommendations 1. Program Related 63. Additional assistance and future monitoring. Close coordination between ADB, the India Resident Mission, and the GOWB should be maintained to foster a fruitful policy dialogue for the upcoming follow-on program, WBDFP II. 64. Covenants. The covenants of the WBDFP were relevant and in line with program requirements. They should therefore be maintained in their existing form.

15

65. Further action or follow-up. As follow-up policy actions under the proposed WBDFP II, MTEFs for three departments must be linked with actual budget allocations for strengthening effectiveness of expenditure management. To operationalize the strategies for subsidy rationalization, stakeholder consultations are necessary to carry forward (i) the voluntary retirement scheme for select state-owned enterprises and transport corporations, (ii) the introduction of a defined contribution pension scheme for newly recruited state government employees, and (iii) the restructuring or closure of loss-making public sector enterprises. To fully automate treasury management, the remaining three IFMS modules must be integrated with the revenue modules. With regard to revenue administration, it is necessary to (i) set up an automated excise tax management system, (ii) digitize legacy deed data in more than 200 registration and land offices, and (iii) establish an advanced queue management system and facilitation centers in registration offices. To promote PPP projects in health, education, and urban service delivery, the WBDFP II proposes (i) setting up a “West Bengal Infrastructure Development Facility” and (ii) operationalizing a centralized single portal in the Commerce and Industries Department for selected regulatory services to support ease of doing business. 66. Timing of the program performance evaluation report. Although WBDFP has ended, if WBDFP II is approved, it is highly recommended that ADB’s Independent Evaluation Department prepares a program performance evaluation report within two years of completion of the WBDFP II to assess the cumulative impact of the two interrelated public sector programs. This will result in a more precise and comprehensive assessment of the long-term impact and sustainability of the reforms while the EA still retains the key government officials. 2. General 67. To design a successful program, it is essential to understand the level of political will, institutional and governance constraints, and capacity of government agencies and other relevant stakeholders to handle comprehensive reforms. ADB’s involvement typically strengthens the commitment of the EA and stakeholders’ buy-in for politically difficult reforms. 68. ADB should maintain its strengths in (i) results-based technical requirements aligned with the country’s standards for policy-based program preparation, (ii) a consultative approach to program design, and (iii) flexibility for the EA to use program resources for budgetary support. At the same time, more funds should be devoted at the PPTA stage to bring the technical expertise with in-depth understanding of the realities of the country and the transfer of know-how from international best practices. Additionally, at the program design stage, ambitious performance targets and indicators should be avoided through a realistic assessment of the economic conditions and all risks that may affect program implementation. 69. For successful implementation, the tendency to address all major constraints within one program should be avoided. ADB should consider piloting new reforms or taking a gradual approach to validate the applicability of the concept, learn lessons, and motivate stakeholders before originating larger programs. The two complementary policy-based programs, the WBDFP and the proposed WBDFP II, follow this kind of incremental reform approach.

16 Appendix 1

DESIGN AND MONITORING FRAMEWORK

Design Summary

Performance Targets and/or Indicators

a

Achievement

b

Impact Development financing has improved in a sustained manner.

Capital outlays to GSDP ratio is not less than 2.5% by FY2016 (Baseline: 0.7% in FY2011)

On track towards achievement. The ratio was 1.32% in FY2014 and is expected to reach 1.9% in FY2015 and 1.7% in FY2016. Sources: GOWB, Finance Department. 2014. Budget Publication, 2014‒2015. Kolkata. p. 15; GOWB, Finance Department. 2015. Medium-Term Fiscal Policy Statement and Fiscal Policy Strategy Statement for 2015‒2016. Kolkata. p. 16 and 20.

The share of capital outlays in education and health should be at least 15% of total capital outlays by FY2017 (Baseline: 11.7% in FY2010).

Achieved. The combined share of education and health was 27.1% of total capital outlay in FY2014 and is expected to reach 24.5% in FY2015. Source: GOWB. Finance Department. 2014. Budget Publication, 2014‒2015. Kolkata. p. 12 and15.

Outcome Greater fiscal space is achieved in the government budget.

Fiscal deficit is within prescribed limits of the Fiscal Responsibility and Budget Management Act 2010 (3% of GSDP) net of additional capital expenditure by FY2014 (Baseline: 4.1% of GSDP in FY2010).

Achieved. The fiscal deficit to GSDP ratio declined from 4.24% in FY2011 to 3.62% in FY2014, and is expected to reach 2.98% in FY2015 and 1.74% in FY2016. Source: GOWB. Finance Department. 2015. Medium-Term Fiscal Policy Statement and Fiscal Policy Strategy Statement for 2015‒2016. Kolkata. p. 16.

At least half a percentage point increase in own revenue to GSDP ratio by FY2014 (Baseline: 5% of GSDP in FY2010)

Achieved. The own-tax revenue to GSDP ratio increased from 4.58% in FY2011 to 5.35% in FY2013 and to 5.12% in FY2014, indicating an increase of 0.54 percentage points from FY2011 to FY2014; it is expected to reach 5% in FY2015 and 5.07% in FY2016. Source: GOWB. Finance Department. 2015. Medium-Term Fiscal Policy Statement and Fiscal Policy Strategy Statement for 2015‒2016. Kolkata. p. 15.

Debt stock to GSDP ratio decline by at least five percentage points by FY2014 (Baseline: 39.5% in FY2010)

Achieved. The debt stock to GSDP ratio declined by 4.7 percentage points, from 40.7% in FY2011 to 36% in FY2014, and is expected to decline further to 34.3% in FY2015 and 32.6% in FY2016. Source: GOWB, Finance Department. 2015. Medium-Term Fiscal Policy Statement and Fiscal Policy Strategy Statement for 2015‒2016. Kolkata. p. 15.

Appendix 1 17

Design Summary

Performance Targets and/or Indicators

a

Achievement

b

Outputs 1. Improved

expenditure efficiency

100% of public investment decisions of the state government vetted by the FPMU by 2014. (Baseline: FPMU does not exist)

Achieved. The FPMU was formed as per the Notification No. 965-FB dated 27 August 2012 issued by the Finance Department. All public investment decisions of the state government are vetted by senior FPMU officers.

Well-documented pro-poor and gender responsive MTEFs in place for the Departments of Health, School Education and Public Works based on relevant long-term sector strategy by FY2014. (Baseline: no MTEF in place)

Achieved. MTEFs for the Health and Family Welfare, School Education, and Public Works Departments were prepared and approved on 6 June 2014 for three years in budget year (FY2014) and two additional years (FY2015 and FY2016). They were aligned with the long-term government strategies and objectives in the state’s five-year plan for these sectors. MTEF reports included pro-poor and gender-responsive performance indicators and reform interventions aligned with the departments’ long-term strategies.

No more than 5% variance in the annual budgets of health and education from their respective MTEFs for FY2014. (Baseline: The system is currently not in place)

Achieved. Health: A variance of 2.65% (Rs1,490 million) was observed in FY2015, with the MTEF estimate of Rs57,809 million exceeding the annual budget estimate of Rs56,319 million for the Department of Health and Family Welfare. Education: A variance of 3.87% (Rs7,337 million) was observed in FY2015 between the MTEF estimate of Rs182,196 million and the annual budget estimate of Rs189,533 million for the Department of School Education.

2. Improved revenue efforts

At least 20% annual increase in VAT revenue by FY2014. (Baseline: $2.1 billion in FY2010)

Not Achieved. The average annual VAT growth rate was 17.8% during FY2013–FY2015 (17.3% in FY2013, 22.3% in FY2014, and 13.8% in FY2015). Source: Compiled from GOWB state budget documents.

At least 17% annual increase in revenue from stamp duties and registration fees by FY2014. (Baseline: $0.5 billion in FY2010)

Achieved. The average annual growth rate of stamp duty and registration fees was 19.2% during FY2013–FY2015 (59.5% in FY2013, –7% in FY2014, and 5.03% in FY2015). Sources: GOWB, Finance Department. 2015. Medium-Term Fiscal Policy Statement and Fiscal Policy Strategy Statement for 2015‒2016. Kolkata. p. 9; GOWB state budget documents.

At least 25% annual increase in revenues from excise duties by FY2014. (Baseline: $0.4 billion in FY2010)

Not Achieved. Average annual excise duty growth rate was 20% during FY2013‒FY2015 (23.8% in FY2013, 15.1% in FY2014, and 21% in FY2015). Sources: GOWB, Finance Department. 2015. Medium-Term Fiscal Policy Statement and Fiscal Policy Strategy Statement for 2015‒2016. Kolkata. p. 9; GOWB state budget documents.

18 Appendix 1

Design Summary

Performance Targets and/or Indicators

a

Achievement

b

At least 2% additional annual growth in revenues from profession tax. (Baseline: 7% growth in FY2010)

Not achieved. Average annual growth rate during FY2012-FY2014 was 6.1% (9.8% in FY2012, 4.9% in FY2013 and 3.7% FY2014). Source: GOWB, Finance Department. 2014. Annual Administrative Report 2013-2014. Kolkata. p. 42.

3. Efficient debt management

A debt management strategy is in place (Baseline: not available) by FY2012.

Achieved. The GOWB adopted the Public Debt Strategy as per notification No. 993-FB issued by the Finance Department on 29 August 2012.

100% documentation of incurred debts and contingent liabilities in a debt database by FY2014. (Baseline: Not available)

Achieved. The National Informatics Centre developed an integrated debt management system for the Finance Department at the end of 2012, and this system has been fully functional since then. A debt database with comprehensive and up-to-date information on all state government debt including market debt, NSSF and other institutional loans as well as contingent liabilities, cost of funds, and maturity profiles was prepared under the program in 2013. A manual was also prepared as a guide and reference tool for the standardization of processes.

All staff responsible for debt management skilled in use of debt database management software by FY2014 (Baseline: none)

Achieved. The staff of the Finance Department, responsible for debt management, received capacity building from the RBI regarding the debt management database and software. TA of the WBDFP also provided capacity building on the debt management software following the enhancements of the debt database.

Appendix 1 19

Activities with Milestones 1. Improved Expenditure Efficiency 1.1. Notify establishment of a fiscal policy and management unit

in the Finance Department (by Q3 2012) 1.2. Prepare an action plan on government subsidies (by Q3

2012) 1.3. Prepare a roadmap for implementing integrated financial

management system (Q1 2013) 1.4. Prepare an action plan for introducing MTEFs in the

selected departments (by Q3 2012) 1.5. Prepare a roadmap for drugs procurement (Q3 2012) 1.6. Prepare rolling MTEFs for the Departments of Health,

Education, and Public Works Departments (by Q4 2013) 1.7. Prepare the budget (for the relevant year) based on the new

MTEFs (by Q1 2014)

2. Improved Revenue Effort 2.1 Develop the system for digital signature and the

management of transit documents for imported goods from other states (waybill) (by Q3 2012)

2.2 Develop the system for improving compliance for VAT, including online tax filing and simplification for one-off transactions (by Q3 2012)

2.3 Develop the roadmap for strengthening tax information management system (by Q1 2013)

2.4 Prepare the blueprint for developing the system of barcoding of transit documents (by Q1 2013)

2.5 Develop the roadmap for strengthening excise management system (by Q1 2013)

2.6 Develop the roadmap for strengthening registration management system (by Q1 2013)

3. Efficient Debt Management 3.1 Prepare the debt strategy (by Q3 2012) 3.2 Finalize the debt database (by Q3 2013)

Inputs Policy-based Loan: ADB: $400 million TA Grant: ADB: $0.7 million

Item

Amount ($ million)

Consultancy (national; 59 person-months)

0.56

Training/workshop 0.06 Printing and communication

0.01

Contingency 0.07

ADB = Asian Development Bank, FPMU = fiscal policy and management unit, FY = fiscal year, GOWB = Government of West Bengal, GSDP = gross state domestic product, IFMS = integrated financial management system, MTEF = medium-term expenditure framework, NSSF = National Small Savings Fund, Q = quarter, RBI = Reserve Bank of India, TA = technical assistance, VAT = value-added tax. a FY under the Performance Targets and/or Indicators column uses the old definition, whereas FY under the

Achievement column uses the new definition, as provided in the Notes of the main text. For example, the fiscal year that is beginning on 1 April 2010 and ending on 31 March 2011 is represented as FY2010 using the beginning year under the old definition, and is represented as FY2011 using the end year under the new definition.

b Under the Achievement column, the baseline figures for performance targets and indicators may differ from the ones

in Performance Targets and/or Indicators column since updated and revised figures from the cited government publications are used to assess the achievement during the program implementation.

Source: Asian Development Bank.

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STATUS OF COMPLIANCE WITH FIRST TRANCHE POLICY ACTIONS

First Tranche Status of Compliance

I. Expenditure Rationalization Measures Objective: Improving allocative efficiency of public resources.

1. FPMU in the Finance Department set up by GOWB and made fully operational, to supervise (i) fiscal programming, (ii) project appraisal and evaluation, (iii) debt management, and (iv) overall program implementation. (Document required: copy of notification)

Complied with. An FPMU was set up as per the Notification No. 965-FB issued by the GOWB Finance Department on 27 August 2012.

2. PPP policy for the state notified by GOWB. (Document required: copy of the notification and PPP policy)

Complied with. A PPP policy for the implementation of physical and social infrastructure projects in the state was introduced as per Notification No. 5267-F(H) issued by the GOWB Finance Department on 31 June 2012. Following the provisions in Resolution No. 5266-F(H) dated 21 June 2012, the Finance Department was designated as the Nodal Department for coordinating with different state government departments, authorities and agencies, the GOI, and other financial and technical organizations involved in PPPs.

3. Action plan on subsidies prepared by the Finance Department. (Document required: action plan approved by the Finance Department).

Complied with. The subsidy action plan was adopted as per Memorandum No. 997-FB issued by the GOWB Finance Department on 29 August 2012.

4. IFMS for improved public financial management notified by GOWB. (Document required: budget document that includes IFMS)

Complied with. An IFMS was approved as per Memorandum No. 893-FB issued by the GOWB Finance Department on 14 August 2012.

5. Action plan to introduce MTEFs for the health, school education, and public works departments issued by the Finance Department. (Document required: copy of action plans as issued by the Finance Department to the state departments)

Complied with. The GOWB Finance Department introduced the MTEF and action plan to (i) the School Education Department as per Notification No. 994-FB dated 29 August 2012, (ii) the Public Works Department as per Notification No. 995-FB dated 29 August 2012, and (iii) the Health and Family Welfare Department as per Notification No. 996-FB dated 29 August 2012.

6. COSA for all state government-aided secondary school teachers to improve expenditure targeting notified by GOWB. (Document required: copy of notification as issued by the Finance Department)

Complied with. As per Memorandum No. 1829-F(Y) dated 1 March 2012 and Memorandum No. 9368 dated 20 November 2012, the GOWB Finance Department required all heads of offices and/or DDOs to prepare government employees’ salary bills using the COSA software package developed by the National Informatics Centre in order to create a centralized and comprehensive employee database.

7. Roadmap for the procurement of medicines and stock management through the WBMSC to streamline drug procurement

Complied with. As of 29 August 2012, the GOWB Department of Health and Family Welfare announced a roadmap for procurement of

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First Tranche Status of Compliance in a cost-effective manner notified by GOWB. (Document required: copy of roadmap as issued by the health department)

medicines and stock management under the WBMSC.

II. Revenue Reform Measures Objective: Improving own revenue mobilization by strengthening revenue administration and reducing compliance cost

8. Value-added tax. Tax administration strengthened towards progressively reducing interface requirements between taxpayer and tax officers by undertaking the following by the Finance Department:

(i) Digital signatures for returns; (ii) Online waybill (transit documents for importing goods from

other states) generation for new dealers; (iii) Online cancellation of waybills; and (iv) System-based matching of waybill and return data.

(Document required: report issued by the Finance Department)

Complied with. The GOWB Finance Department issued a report as per Notification No. 998-FB dated 29 August 2012.

9. Tax compliance through better service delivery to taxpayers by introduction of the following by the Finance Department:

(i) A system of VAT return preparers; (ii) Digitization of over-the-counter tax payments; (iii) Migration to pure online tax filing without hardcopy

submission requirement; (iv) Online grievance redressal system; and (v) Simplified registration and tax payment for one-off

transaction. (Document required: report issued by the Finance Department)

Complied with. The GOWB Finance Department issued a report as per Notification No. 7426-F(Y) dated 29 August 2012.

III. Debt Management Measures Objective: Reducing debt servicing burden and better management of debt 10. Debt strategy that sets out policy, guidelines, and institutional

arrangements for government borrowings and management of government debt approved by the Finance Department. (Document required: debt strategy approved by the Finance Department)

Complied with. The GOWB Finance Department adopted the debt strategy as per Memorandum No. 993-FB dated 29 August 2012.

COSA = computerization of salary accounts, DDO = drawing and disbursing officers, FPMU = fiscal policy and management unit, GOI = Government of India, GOWB = Government of West Bengal, IFMS = integrated financial management system, MTEF = medium-term expenditure framework, PPP = public–private partnership, VAT = value-added tax, WBMSC = West Bengal Medical Services Corporation. Sources: Asian Development Bank; GOWB.

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STATUS OF COMPLIANCE WITH SECOND TRANCHE POLICY ACTIONS

Second Tranche (approximately 18 months after the first tranche)

Status of Compliance

I. Expenditure Rationalization Measures Objective: Improving allocative efficiency of public resources 1. Medium-term Fiscal Plan for FY2014 to FY2017

approved by GOWB. (Document required: budget document highlighting the medium-term fiscal plan)

Complied with. In line with the statute of the West Bengal FRBM Act, 2010, the Medium-term Fiscal Plan for FY2014–FY2017 was approved by the Finance Department on 17 February 2014 along with the budget for 2014‒2015. The plan approved for FY2014 presented the rolling targets of the state for the budget year (FY2014) and three outer years (FY2015–FY2017) on three key fiscal indicators: current deficit, fiscal deficit, and total debt stock.

2. Actions taken by the Finance Department on the recommendations of the action plan on subsidies. (Document required: action taken report by the Finance Department)

Complied with. Following the action plan prepared by the GOWB Finance Department for subsidy rationalization in FY2012 as part of the first tranche policy action, the GOWB adopted a three-pronged approach to put the plan into effect, involving (i) an increasing cost recovery rate across sectors, (ii) expenditure rationalization in non-merit sectors (e.g. tourism) and select merit-II sectors (e.g. transport), and (iii) leveraging private investments in the state through PPPs. Examples of measures to be taken include (i) implementation of voluntary retirement scheme for employees in the four state-run transport corporations; (ii) commercial utilization of excess and/or idle vacant land at six Calcutta Tramways Company depots, regarding which a proposal was issued for a 99-year lease; (iii) restructuring of select closed and/or perpetually loss-making public sector enterprises; (iv) revamping of the public distribution system through measures including digitizing ration cards, which eliminated Rs7,725,000 bogus ration cards, and constructing warehouses to meet the existing shortfall of storage space and avoid waste; and (v) the periodic filing of tariff petitions by the West Bengal State Electricity Distribution Company before the state regulator.

3. Following four modules under IFMS developed and rolled out by the Finance Department: (i) Drawing- and disbursement module (bill preparation,

submission, and management); (ii) Employees’ database; (iii) Budget-treasury interface (e-allotment); and (iv) State government revenue receipt portal system. (Document required: a report by the Finance Department on IFMS)

Complied with. The four modules were developed and deployed in treasuries across the state and have been fully functional. (i) Drawing and disbursement module. The entire process chain (including bill capturing, automatic bill distribution, token generation, allotment, ceiling verification, bill checking, ceiling adjustment, and automatic pay-order generation) has been done electronically in each treasury through an online transaction processing system. (ii) Employees’ database. All 6,505 DDOs of state government offices installed COSA software. All government employee data up to January 2014,

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Second Tranche (approximately 18 months after the first tranche)

Status of Compliance

representing 346,075 employees, were successfully uploaded to the central employee-pensioner server.

(iii) Budget-treasury interface. A budget–treasury interface has been operational and budgets have been distributed to the DDOs at all levels—such as directorates, regional offices, divisional offices, and sub-divisional offices through the e-Bantan module of the IFMS. The Finance Department issued an office order related to e-Bantan in Notice No. FS-46/2014 dated 11 March 2014 and Notice No. FS-47/2014 dated 12 March 2014. The DDO management submodule of e-Bantan maps the DDOs to the corresponding treasuries for bill processing.

(iv) State Government Revenue Receipt Portal System. The Government Receipt Portal System is a centralized portal for electronic receipt of all types of state government tax, nontax revenue, and other deposits, and has been fully operational since its introduction by the state government with Notification No. 8298-F(Y) dated 3 October 2012.

4. MTEFs for health, education, and public works departments approved by the Finance Department. (Document required: MTEF reports as approved by the Finance Department)

Complied with. The School Education, Health and Family Welfare, and Public Works Departments were selected for the MTEF pilot implementation. MTEFs were prepared and approved on 6 June 2014 for three years for budget year (FY2014) and two outer years (FY2015 and FY2016) based on long-term government strategies and objectives in the state’s five-year plan for the sector.

5. Payment of salary to the state government-aided secondary school teachers under COSA fully implemented by the Finance Department. (Document required: a report on COSA for aided school teachers prepared by the Finance Department)

Complied with. The teachers’ salaries have been released through an IT-based system-driven process, including a new software application called an online salary management system (OSMS). OSMS is fully compliant with the COSA of state government employees and has been made fully operational. The entry of data for all 191,477 teachers of 12,662 government-aided secondary schools across 19 districts was completed, and salaries for April 2014 were credited to the teachers’ individual accounts on 2 May 2014.

6. Procurement of medicines through the WBMSC fully operationalized. (Document required: a report on the drug procurement activities of the WBMSC prepared by the health department)

Complied with. The WBMSC was made fully operational. A dedicated web-enabled software for store management information system was introduced. This initiative was acclaimed as a “Best Practice” by the Planning Commission of India. The procurement unit has been staffed with professionals including one procurement manager and five bio-medical engineers and headed by one officer on special duty. The tendering process was standardized through open tender, and e-tendering became mandatory for all drug procurements valued at Rs0.5 million or more. The quality control system has been ensured by sampling all drug procurements for quality analysis. The condition in the tender document of a 2% deduction from every vendor bill to meet drug quality testing and handling charges

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Status of Compliance

ensures transparency and commitment to quality. The WBMSC compliments the existing decentralized system of medicine distribution throughout the state through district reserve stores by handling high value and/or complicated drug procurements at state level. The state government also undertook a major initiative to set up “Fair Price Medicine Shops” on a PPP basis in all major medical colleges and district hospitals, which offer discounts on medicines ranging from 48% to 67% of the maximum retail price.

7. GOWB’s annual growth in nominal salary bill does not exceed 7% in 2013–2014. (Document required: budget documents)

Complied with. The nominal GOWB salary bill increased from Rs269,837 million in FY2012 to Rs283,434 million in FY2013, registering an annual growth of 5.04% in FY2013, and increased further to Rs294,254 million in FY2014, registering an annual growth of 3.82% in FY2014. The annual salary increase remained below the targeted limit of 7% growth rate. Source: GOWB, Finance Department. 2015. Medium-Term Fiscal Policy Statement and Fiscal Policy Strategy Statement for 2015‒2016. Kolkata. p. 8.

8. Comprehensive database on GOWB employees and pensioners to facilitate rationalization of state government expenditures, prepared by the Finance Department. (Document required: a report on the database highlighting the key statistics as prepared by the Finance Department)

Complied with. The standardized COSA software was introduced. According to this system, DDOs submit monthly reports on personnel and salary data in softcopy to the 88 treasury offices that are then transferred through the West Bengal State Wide Area Network to the dedicated server for employee and/or pensioner data management of the Finance Department. By January 2014, this database contained the data from all 6,505 DDOs in the state representing all 346,075 state government employees and 535,371 pensioners.

9. Annual capital outlays to GSDP ratio increased by 0.5 percentage points during 2013–2014 and 2014–2015 over the previous years. (Document required: budget documents)

Complied with. The annual capital outlay to GSDP ratio increased by 0.58 percentage points from FY2013 to FY2014 and by 0.57 percentage points from FY2014 to FY2015. Sources: GOWB, Finance Department. 2014. Budget Publication, 2014‒2015. Kolkata. p. 15; GOWB, Finance Department. 2015. Medium-Term Fiscal Policy Statement and Fiscal Policy Strategy Statement for 2015‒2016. Kolkata. p. 16 and 20.

II. Revenue Reform Measures Objective: Improving own-revenue mobilization by strengthening revenue administration and reducing compliance cost

10. Tax information management system (TIMS) further enhanced by the Finance Department by (i) making the payment, recovery, and appeal modules

fully operational; (ii) enabling interface between TIMS and state excise;

and

Complied with. The TIMS is a software application called “information management for promotion of administration in commercial taxes.” (i) Payment. The e-payment module operates through internet banking facilities via GRIPS and has been fully functional. Trade Circular No. 16/2012, issued by the DCT on 1 November 2012, made e-payment of all commercial taxes through GRIPS compulsory.

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Status of Compliance

(iii) introducing permanent account-number-based registration numbers for better cross-checking of information.

(Document required: report and relevant notifications by the Finance Department)

Recovery. This module has been operational and is for the internal use of the DCT to assess penalties and interests on unpaid taxes so that the officers can recover the dues by available means, e.g. a demand notice or court order proceedings. Appeal. Trade Circular No. 14/2013 issued by the DCT on 5 December 2013, announced electronic filing for appeal petitions for dealers registered under the VAT Act, 2003 and Commercial Services Tax Act, 1956. For dealers of the corporate division, the DCT issued an addendum to the Trade Circular on 26 March 2014 announcing the extension of the appeal module to the entire state. The module is available online and has been fully operational. (ii) Interface between the TIMS and excise. The interface between the TIMS and state excise management system has been enabled with a web service in the state excise portal for internal use since May 2014. Data at the state excise portal pertaining to waybills for importing excisable goods can be processed automatically by TIMS at six hour intervals. The excise authority can inspect and physically verify the tankers and/or importers at the check posts to detect revenue leakages using this system. (iii) Permanent-account-number-based registration. PANs became mandatory for all electronic submission of applications to register under the VAT Act, 2003 or the Commercial Services Tax Act, 1956.

11. System of barcoding of transit documents and linking of check posts with TIMS to address tax leakages in transit of goods introduced by the Finance Department. (Document required: report and relevant notifications by the Finance Department)

Complied with. Barcode scanners and the necessary infrastructure were introduced at all the major check posts (Barobisha, Boxirhat, Chichira, Dalkhola, Duburdi, Jaigaon, Melli, More, Phansidewa, and Sonakanya), while a multiprotocol label switching system and connection and application software were provided to enable document scanning. At check posts located in difficult terrain or remote areas, handheld devices with both online and offline facility were deployed. The system has been linked with the DCT central server, providing real-time access to information. The system has been fully operational.

12. Excise management system implemented by the Finance Department including for: (i) online license renewal, (ii) product registration, (iii) issue of import passes for bulk spirit for industrial

and medicinal purposes, (iv) a barcode-based supply chain management system,

and

Complied with. A web-based application for the excise program for effective revenue tracking (xPERT) was developed. It is hosted with disaster recovery facilities at the National Data Centre in the National Informatics Centre headquarters, New Delhi, and is easily accessible. (i, ii, and iii) Online renewal of excise licenses, label registration, and issuance of import passes for bulk spirits for industrial and medicinal purposes. These measures were implemented.

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Status of Compliance

(v) single point duty on wholesale of Indian-made foreign liquor (IMFL).

(Document required: report and relevant notifications by the Finance Department)

(iv) A barcode-based supply chain management system. A barcode-based supply chain management system for packaged IMFL and country spirit, and mark of authenticity on state-produced and state-imported bottled liquor were developed and have been functional in the existing xPERT package of the excise directorate. At present, barcodes are printed on import permits and/or transport passes using xPERT software, enabling the state government to track the production, distribution, and sale of IMFL and country spirit consignments. This system was implemented as per Circular No. 01E/14-15 issued by the excise directorate on 25 April 2014. (v) Single-point duty on the wholesale of IMFL. The state government introduced a single-point duty at the factory on 1 April 2014 as per Gazette Notification No. WB (Part-I)/2014/SAR-55 dated 21 January 2014 and Government Order No. 36 Ex dated 16 January 2014 to prevent excise revenue leakage in transit from the factory to the bonded warehouses.

13. Property registration management system strengthened by the Finance Department by: (i) Implementing e-stamps requirement; and (ii) Digitizing legacy deed data on a pilot basis in two

sub-registrar’s offices and rolling-out the process of digitization of legacy deed data in at least 20 sub-registrar’s offices.

(Document required: report and relevant notifications by the Finance Department)

Complied with. e-Stamping is a computer-based application available at the website of the GOWB Directorate of Registration and Stamp Revenue. (i) e-Stamping. The West Bengal Registration Rules, 1994 were amended to accommodate the introduction of e-Stamping in all registration offices as per Notification No. WB/SC-247 dated 27 November 2012. The e-Stamping system was made compulsory for payment of stamp duty and registration fees above Rs5,000, and was implemented in 160 registration offices. As of May 2015, e-stamping was introduced in all 247 offices. (ii) Digitizing legacy deeds. The Directorate of Registration and Stamp Revenue began digitizing legacy deeds (land registration records) in the state. Data entry and scanning of legacy encumbrance data for four years was completed in two registration offices—Diamond-Harbour and the office of the Additional District Sub-Registrar Alipore/DSR-I in South 24 Parganas—under a pilot scheme as approved by the Finance Department vide no. 427 FT Dt. 28.03.2012. The Finance Department issued an order vide no. 504-F.T FT/O/1M-11/2014 on 27 March 2014 for the digitization of legacy encumbrance data in the offices of ARA I and ARA II in Kolkata, DSR Howrah, ADSR. As of May 2015, legacy deed data was digitized in 50 registration offices.

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14. Number of tax slabs under the profession tax rationalized. (Document required: copy of notification by the Finance Department)

Complied with. The profession tax schedules contained in the Finance Act 2014 (dated 11 March 2014) were rationalized by: (i) consolidating the tax slabs by removing the first three slabs for two categories, viz. salaried employees and wage earners; and persons engaged in any profession (but not as an employee, e.g. legal or medical practitioners); and (ii) reducing the entire schedule from 23 categories of persons and/or entities in FY2012 to 4 in FY2014.

III. Debt Management Measures Objective: Reducing debt servicing burden and better management of debt 15. A debt database with comprehensive and up-to-date

information on all state government debt, including contingent liabilities, cost of funds, and maturity profile prepared by the Finance Department. (Document required: report of the Finance Department including database)

Complied with. The National Informatics Centre developed an integrated debt management system for the Finance Department at the end of 2012. This system has been fully functional since then. In 2013, the program contained up-to-date data on all market, NSSF, and other institutional loans. The debt management system was also strengthened by adding the facility to record the state government’s contingent liabilities. A manual was prepared to serve as a guide and reference tool for the standardization of processes.

COSA = computerization of salary accounts, DCT = directorate of commercial taxes, DDO = drawing and disbursement officer, FRBM = Fiscal Responsibility and Budget Management, GOWB = Government of West Bengal, GRIPS = government receipt portal system, GSDP = gross state domestic product, IFMS = integrated financial management system, IMFL = Indian-made foreign liquor, IT = information technology, MIS = management information system, MTEF = medium-term expenditure framework, NSSF = National Small Savings Fund, OSMS = online salary management system, PAN = permanent account number, PPP = public–private partnership, TIMS = tax information management system, VAT = value-added tax, WBMSC = West Bengal Medical Services Corporation. Sources: Asian Development Bank; GOWB.

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STATUS OF COMPLIANCE WITH LOAN COVENANTS

Covenant Reference in Loan

Agreement Status of

Compliance (a) The Borrower shall cause the State to cause the Program to be carried out with due

diligence and efficiency and in conformity with sound applicable, financial, business, and development practices.

(b) In carrying out the Program, the Borrower shall perform, or cause by the Program Executing Agency to be performed, all obligations set forth in Schedule 4 to this Loan Agreement.

Loan Agreement (LA) between India and ADB signed on 6 November 2012 (Loan 2926-IND) LA Section 4.01

Complied with.

The Borrower shall make available or cause to be made available by the Program Executing Agency, promptly as needed, the funds, facilities, services, and other resources, as required, in addition to the proceeds of the Loan, for the carrying out of the Program and for the operation and maintenance of the Program facilities.

LA Section 4.02 Complied with.

The Borrower shall cause and cause the state to likewise ensure that the activities of its departments and agencies with respect to the carrying out of the Program are conducted and coordinated in accordance with sound administrative policies and procedures.

LA Section 4.03 Complied with.

(a) The Borrower shall maintain, or cause to be maintained by the Program Executing Agency, records and documents adequate to identify the eligible items financed out of the proceeds of the Loan and to indicate the progress of the Program.

(b) The Borrower shall enable ADB’s representatives to inspect any relevant records and documents referred to in paragraph (a) of this Section.

LA Section 4.04 Complied with.

(a) As part of the reports and information referred to in Section 7.04 of the Loan Regulations, the Borrower shall furnish or cause to be furnished by the Program Executing Agency, to ADB all such reports and information as ADB shall reasonably request concerning the implementation of the Program, including the accomplishment of the targets and carrying out of the actions set out in the Policy Letter.

(b) Without limiting the generality of the foregoing or Section 7.04 of the Loan Regulations, the Borrower shall furnish, or cause to be furnished by the Program Executing Agency, to ADB quarterly reports on the carrying out of the Program and on the accomplishment of the targets and carrying out of the actions set out in the Policy Letter.

LA Section 4.05 Complied with.

(a) In relation to the Program, the Borrower shall exercise its rights under the Financing Agreements in such a manner as to protect the interests of the Borrower and ADB and to accomplish the purposes of the Loan.

(b) In relation to the Program, no rights or obligations under the Financing Arrangements shall be assigned, amended, abrogated or waived without prior notice to ADB.

LA Section 4.06 Complied with.

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Covenant Reference in Loan

Agreement Status of

Compliance Implementation Arrangements Para. 1. The Program shall be implemented by the Borrower, and the State acting through its Finance Department. Para. 2. The State shall ensure that the Program Steering Committee meets regularly at least once every quarter to facilitate and give direction for complying with policy actions under the Program. Para 3. In addition to the fiscal programming, the Fiscal Policy and Management Unit shall be responsible for the (a) overall coordination and monitoring of the Program, including the policy actions; (b) preparing and submitting all required reports to PSC and ADB; (c) submitting the audited financial statements to ADB; and (d) implementing the TA. Para 4. The Borrower and Program Executing Agency shall ensure that (a) the Program and the TA, as applicable, shall conform to all applicable ADB policies including those concerning safeguards, gender, anticorruption measures, procurement, consulting services and disbursement; and (b) the recommendation of the TA, as also other necessary actions, shall be undertaken in a timely manner to ensure completion of the required Policy Actions and the Program on time.

LA Schedule 4 Complied with

Policy Actions and Dialogue Para. 5. The Borrower shall ensure, and cause the State to ensure that all policy actions adopted under the Program, as set forth in the Policy Letter and the Policy Matrix, continue to be in effect for the duration of the Program. Para. 6. The Borrower shall keep and cause the State to keep ADB informed of policy discussions with other multilateral and bilateral aid agencies that may have implications for the implementation of the Program and shall provide ADB with an opportunity to comment on any resulting policy proposals. The Borrower shall and shall cause the State to take into account ADB’s views before finalizing and implementing any such proposal.

LA Schedule 4 Complied with.

Use of Counterpart Funds Para. 7. The Borrower shall ensure and cause the State to ensure that the counterpart funds are used to finance the implementation of certain programs and activities consistent with the objectives of the Program.

LA Schedule 4 Complied with.

Governance and Anticorruption Para. 8. The Borrower, the State, and the Finance Department, shall: (a) comply with ADB’s Anticorruption policy (1998, as amended to date) and acknowledge that ADB reserves the right to investigate directly, or through its agents, any alleged corrupt, fraudulent, collusive, or coercive practice relating to the Program; and (b) cooperate with any such investigation and extend all necessary assistance for satisfactory completion of such investigation.

LA Schedule 4 Complied with.

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Agreement Status of

Compliance Monitoring and Review Para. 9. Without limiting the generality of Section 2.05 of the Program Agreement, the State, and ADB shall closely monitor the implementation of the Program and its impact. Para. 10. (a) The Borrower, the State, and ADB shall undertake a midterm review of the Program

within one year of Effective Date. The midterm review shall (i) review the scope, design, and implementation of the Program; (ii) identify changes needed since the time of the Program processing; (iii) assess implementation performance against Program performance indicators and objectives; (iv) review and establish compliance with the legal covenants; (v) identify problems and constraints and remedial measures.

(b) In case of any changes required in Program implementation, as may be assessed during the midterm review, the Borrower, the State, and ADB shall mutually agree on appropriate measures including changes in implementation arrangements to ensure that obligations under the Program are met.

LA Schedule 4 Complied with.

(a) The State shall carry out the Program with due diligence and efficiency, and inconformity with sound public management, administrative, financial, business and development practices.

(b) In the carrying out the Program, the State shall perform all obligations set forth in the Loan Agreement to the extent that they are applicable to the State, and all obligations set forth in this Program Agreement.

Program Agreement (PA) between State of West Bengal and ADB signed on 6 November 2012 (Loan 2926-IND) PA Section 2.01

Complied with.

The State shall make available, promptly as needed, the funds, facilities, services, and other resources as required, in addition to the proceeds of the Loan, for carrying out the Program.

PA Section 2.02 Complied with.

The State shall carry out the Program in accordance with plans, and programs formulated in accordance with public management best practices. The State shall furnish to ADB, promptly after their preparation, such plans, programs, techniques or methods, and any material modifications subsequently made therein, in such detail as ADB may reasonably request.

PA Section 2.03 Complied with.

The State shall maintain, or cause to be maintained by the Program Executing Agency, records and documents adequate to identify the eligible items financed out of the proceeds of the Loan and to indicate the progress of the Program.

PA Section 2.04 Complied with.

(a) ADB and the State shall cooperate fully to ensure that the purposes of the Loan will be accomplished.

(b) The State shall, with a copy to the Borrower, promptly inform ADB of any condition which interferes with, or threatens to interfere with, the progress of the Program, the performance of its obligations under this Program Agreement, or the accomplishment of the purposes of the Loan.

(c) ADB and the State shall form time to time, at the request of either party, exchange views through their representatives with regard to any matters relating to the Program, the State, and the Loan.

PA Section 2.05 Complied with.

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Covenant Reference in Loan

Agreement Status of

Compliance (a) The State shall furnish to ADB all such reports and information as ADB shall reasonably

request concerning (i) the Loan and the expenditure of the proceeds thereof; (ii) the expenditures financed out of such proceeds; (iii) the Program; (iv) the administration, operations, and financial position of the State; and (v) any other matters relating to the purposes of the Loan.

(b) Without limiting the generality of the foregoing, the State shall furnish to ADB quarterly reports on the execution of the Program and the State’s budgetary position and its medium-term projections. Such reports shall be submitted in such form and in such detail and within such a period as ADB shall reasonably request, and shall indicate, among other things, a plan of implementation, progress made and problems encountered during the period under review, steps taken or proposed to be taken to remedy these problem, and proposed program of activities and expected progress during the following period.

(c) Promptly after closing date for withdrawal from the Loan Account, but in any event not later than 3 months thereafter or such later date as ADB may agree for this purpose, the State shall prepare and furnish to ADB a report, in such form and in such detail as ADB shall reasonably request, on the execution of the Program, including its cost, the performance by the State of its obligations under this Program Agreement and the accomplishment of the purposes of the Loan, including a comprehensive description of the impact of the reforms under the Program.

PA Section 2.06 Complied with.

The State shall enable ADB’s representatives to examine relevant records and documents pertaining to the use of Loan proceeds.

PA Section 2.07 Complied with.

(a) The State shall, promptly as required, take all action within its powers that are necessary to carry out the Program.

(b) The State shall, at all times, conduct its operations in accordance with sound public management, financial, business, development and operational practices, and under the supervision of competent and experienced management and personnel.

PA Section 2.08 Complied with.

Except as ADB may otherwise agree, the State shall cause the proceeds of the Loan to be applied to the financing of expenditures for the Program in accordance with the provisions of the Loan Agreement and this Program Agreement.

PA Section 2.09 Complied with.

Except as ADB may otherwise agree, the State shall duly perform all its obligations under the Financing Arrangements, and shall not take, or concur in, any action which would have the effect of assigning, amending, abrogating, or waiving any rights or obligations of the parties under the Financing Arrangements.

PA Section 2.10 Complied with.

The State shall promptly notify ADB of any proposal that may impact the Program or alter its status under the Constitution of India.

PA Section 2.11 Complied with.

ADB = Asian Development Bank, LA = loan agreement, PA = program agreement, PSC = program steering committee, TA = technical assistance. Source: Asian Development Bank.

32 Appendix 5

TECHNICAL ASSISTANCE COMPLETION REPORT

Division: South Asia Public Management, Financial Sector, and Trade Division (SAPF) TA No., Country and Name: Amount Approved: $700,000

TA 8203-IND: Supporting West Bengal Development Finance Program Revised Amount: $700,000 Executing Agency: Finance Department of the Government of West Bengal

Source of Funding: Technical Assistance Special Fund (TASF)-Others

Amount Undisbursed: $170,425

Amount Utilized: $529,575

TA Approval Date: TA Signing Date: Fielding of First Consultants: TA Completion Date Original: 30 January 2015

Actual: 30 January 2015

30 October 2012 12 November 2012 8 March 2013 Account Closing Date Original: 30 January 2015

Actual: 24 March 2015

Description. The State of West Bengal was facing a deteriorating fiscal situation with high recurrent fiscal deficit and debt undermining investment and gross state domestic product (GSDP) growth. The Asian Development Bank (ADB) approved the West Bengal Development Finance Program (WBDFP) to create fiscal space to sustain development financing and improve the delivery of public services.

1 The WBDFP targeted reforms in (i) government expenditure rationalization, (ii) augmentation of the

state’s own-revenues, and (iii) better debt management. The piggybacked technical assistance (TA) was approved with the WBDFP on 30 October 2012, with the objectives of (i) strengthening the capacity of key institutions to implement fiscal management and governance reforms under the WBDFP, and (ii) supporting the Government of West Bengal (GOWB) in complying with the program’s policy actions. The TA was estimated to cost $875,000, of which $700,000 was financed on a grant basis by ADB’s Technical Assistance Special Fund (TASF-other sources) and the rest was provided in kind by the GOWB. The expected duration of the TA was over 16 months. The executing agency (EA) was the Finance Department of the GOWB and the fiscal policy and management unit (FPMU) under the EA was responsible for overall supervision and coordination of the program and TA implementation, reporting to the program steering committee.

Expected Impact, Outcome, and Outputs. The impact of the TA was the successful implementation of the WBDFP. The outcome of the TA was to strengthen capacity of the EA and implementing agencies of the GOWB to undertake the reforms and comply with the program’s policy actions. The TA was fully aligned with the design of the WBDFP and the outputs focused on (i) revenue administration, (ii) project appraisal and monitoring, (iii) medium-term expenditure frameworks (MTEFs), (iv) an integrated financial management system (IFMS),

2 (v) an employee database, and (vi) debt management.

Delivery of Inputs and Conduct of Activities. The TA hired a consulting firm, PricewaterhouseCoopers Pvt. Ltd. India (PwC), through quality-cost-based selection with a standard quality-cost ratio of 80:20.

3 PwC engaged national consultants for a total of

59 intermittent person-months (PMs) (43.5 PMs in the home office and 15.5 PMs in the field). The firm assignment commenced on 8 March 2013 and ended on 15 November 2014. There were four review missions. During the midterm review mission on 16‒18 June 2013, the GOWB requested a minor change in the TA implementation to provide support to the Finance Department to build capacity on best practices in tax administration and expenditure rationalization from other states in India. For this purpose, two research assistants (11 PMs each) at the Finance Department secretariat in Kolkata, and a new MTEF specialist were assigned in a cost-neutral manner, with no effect on the budget. The firm and consultants were rated satisfactory.

To improve revenue administration, the value-added tax (VAT) tax expert (7 PMs) supported the enhancement of the tax information management system (TIMS) by (i) making the payment, recovery, and appeal modules fully operational; (ii) enabling interface between the TIMS and state excise management system; (iii) introducing permanent account number-based registration to make the cross-checking of information and barcoding of transit documents more efficient; and (iv) preparing a VAT audit manual. The excise tax expert (7 PMs) supported the introduction of (i) an excise management system with online license renewal, product registration, and issuance of import passes for bulk spirits for industrial and medical purposes; (ii) a barcode-based supply chain management system; and (iii) single-point duty on the wholesale of wholesale of Indian-made foreign liquor. The property tax expert (7 PMs) supported (i) the property registration management system; (ii) e-stamp requirement; (iii) digitizing legacy deed data on a pilot basis in 2 sub-registrar’s offices; and (iv) digitization of legacy deed data in at least 20 sub-registrar’s offices.

With regard to project appraisal and monitoring, the project evaluation specialist (5 PMs) supported (i) the FPMU with medium-term fiscal programming and appraisal and evaluation of government projects; (ii) the project evaluation roadmap for new capital investments; and (iii) the training of selected government employees, particularly in the Public Works Department. The state finance specialist (8 PMs) and medium-term expenditure specialist (9 PMs) assisted the preparation of MTEFs for the School Education, Public Works, and Health and Family Welfare Departments, including production of manuals and staff capacity building. Relevant departments were supported in preparation of gender-disaggregated and poverty-focused expenditure incidence analysis as a basis for long-term sector strategies for MTEFs. An MTEF workshop was held with relevant stakeholders in August 2013.

1 ADB. 2012. Report and Recommendation of the President to the Board of Directors: Proposed Policy-Based Loan and Technical

Assistance Grant to the Government of India for the West Bengal Development Finance Program. Manila (LN 2926-IND). 2 Development of the IFMS was carried out by CMC Limited as contracted by the Finance Department in November 2013.

3 PWC was engaged earlier for the project preparatory technical assistance (TA 8041-IND).

Appendix 5 33

With regard to developing integrated financial management, an IFMS specialist (8 PMs) and a software/hardware specialist (2 PMs) were engaged as technical support to implement four IFMS modules: (i) a drawing and disbursement module (bill preparation, submission, and management); (ii) an employee database; (iii) a budget-treasury interface (e-allotment); and (iv) a government revenue receipt portal system. Under the TA, pilot testing of the modules with training were completed. The employee database specialist (3 PMs) helped prepare a comprehensive and gender-disaggregated database for employees and pensioners. Data for all of 346,075 government employees were successfully uploaded in the central employee-pensioner server by January 2014. To improve debt management, the debt management specialist (3 PMs) supported the Finance Department in (i) review of state debt profile, including contingent liabilities; (ii) preparing a comprehensive state debt database; (iii) developing debt management policies and strategies; and (iv) training of the relevant staff on debt management software.

Under the external training component of the TA, 5 GOWB officials received training on “Financial Systems, Management, and Accountability in Government” at the Administrative Staff College of India in Hyderabad on 23‒27 September 2013. Additionally, five officials from the Commercial Tax Directorate participated in the training program on “Management of Indirect Taxes in India: VAT/CST/CENVAT/Services Tax/Customs and GST,” at the Indian Institute of Management in Bangalore on 10‒12 November 2014. Finally, two officials received foreign training courses on “Principles for International Tax Planning” offered by the International Bureau of Fiscal Documentation in the Netherlands on 10‒14 November 2014.

The TA team also undertook two activities not included in the TA design. First, the team supported the Finance Department in drafting the Memorandum to the 14th Central Finance Commission by analyzing (i) the state’s expenditure and tax receipts to highlight the imbalances in sharing the expenditure burden with the central government, and to establish the case for resource transfer from the center; and (ii) the debt burden of West Bengal with implications for development expenditure and growth. A ‘Special Debt Relief Package’ and central assistance to fund infrastructure gap were recommended for West Bengal based on economic projections and a fiscal consolidation roadmap. The Finance Department also requested a compendium describing the utilization of all ongoing centrally-sponsored and center sector schemes to improve internal control and monitoring. Second, the team helped strengthen the capacity of the public‒private partnership (PPP) cell in the Finance Department.

4 Upon request from

the FPMU and PPP cell, the team prepared a comprehensive “Operational PPP Handbook,” inclusive of project appraisal methodology and manual, which provides a reference and practical guide regarding the requirements of PPP projects and the planning, funding, and execution of such transactions. A workshop, attended by 41 senior GOWB officials, was organized on 27 June 2014 to enhance understanding of PPPs.

ADB’s performance was rated highly satisfactory based on effective coordination among the EA, consultants, and related agencies, and successful accommodation of GOWB’s requests involving changes in the scope of the TA. The performance of the EA was highly satisfactory in carrying out the TA activities.

Evaluation of Outputs and Achievement of Outcome. With the TA, program outputs of (i) improved expenditure efficiency, (ii) improved revenue efforts, and (iii) efficient debt management were successfully achieved. The outcome of greater fiscal space was created with (i) the reduction in fiscal deficit to GSDP ratio from 4.24% in FY2011 to 3.62% in FY2014, (ii) the increase in state’s own-tax revenue to GSDP ratio by 0.54 percentage points (exceeding the target of 0.5) from 4.58% in FY2011 to 5.12% in FY2014, and (iii) the decline in debt stock to GSDP ratio from 40.7% in FY2011 to 36% in FY2014 (Appendix 1).

Overall Assessment and Rating. The TA is rated highly successful. The TA was highly relevant in supporting the implementation of the WBDFP; and highly effective as evidenced by the successful compliance of all related tranche conditions under the WBDFP and completion of activities beyond the originally envisaged scope. The implementation was highly efficient because of (i) the timely completion of the outputs, leading to the early closure of the WBDFP on 24 July 2014 instead of 30 November 2014, and (ii) cost savings of $170,425 generated within the allocated budget due to the efficient implementation of quality-cost-based consultant recruitment. The TA is most likely to be sustainable as the policies for prudent fiscal management; establishment of information and communication technology-based systems for revenue, expenditure, and debt management; and capacity building under the TA helped the GOWB develop the technical skills to continue the reforms.

Major Lessons. The success of the implementation was due to (i) the GOWB’s political commitment to the WBDFP and the Finance Department’s reform-minded leadership; (ii) the devotion of adequate TA resources and a good project management structure with clear milestones for deliverables; (iii) the maintenance of regular and effective communication among ADB, the EA, the consultants, and other stakeholders to ensure that roles and responsibilities remained clear; resources were fully utilized based on priorities; outcomes were continually reviewed; and problems were identified and resolved in a timely fashion; and (iv) the enhancement of human resources and institutional capacity to ensure effectiveness and sustainability of reforms.

Recommendations and Follow-Up Actions. To fully realize the impact of the reforms, further action is needed in the following areas: (i) MTEF targets must be linked with medium-term fiscal plan indicators in the budget-making and allocation process, (ii) the remaining IFMS modules must be rolled out, and (iii) land and property registration data must be digitized in all state sub-registrar’s offices to integrate registration and land records and improve revenue collection from property taxes. The GOWB can further improve the delivery of health, education, and urban services by facilitating PPP projects in those areas.

Prepared by: Çiğdem Akın Designation: Public Management Economist

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

4 ADB assisted the GOWB for establishing a PPP cell for PPP projects under ADB. 2010. Technical Assistance to India for

Deepening Capacity Building for Mainstreaming Public–Private Partnerships. Manila (TA 7625-IND).

34 Appendix 6

BUOYANCY ESTIMATE FOR STATE’S OWN-TAX REVENUE 1. The tax buoyancy analysis shows the sensitivity of tax revenue collection to the growth of the gross state domestic product (GSDP) and indicates whether the increase in tax collection has been commensurate with the growth of the tax base, offering insights into the effectiveness of the state’s tax policy and administration system. 2. The buoyancy estimate for West Bengal’s own-tax revenue (OTR) during FY2003–FY2016, reflecting the incremental impact of the West Bengal Development Finance Program (WBDFP) during FY2013–FY2016, is calculated using the following equation:

Log (OTR) = α + β x log (GSDP) + γ x (DFY2013-16) x log (GSDP))

β gives the buoyancy estimate during FY2003–FY2012, and β + γ gives the buoyancy estimate during FY2013–FY2016. The regression equation below gives the coefficient estimates, with t statistics in parentheses where *** indicate 1% significance level.

Log OTR = -3.083 + 0.998 x log (GSDP) + 0.009 x (DFY2013-16) * log (GSDP)) R2 = 0.9954 (-5.53)*** (26.66)*** (3.12)*** 3. The results show that the buoyancy of OTR for West Bengal has increased from 0.998 to 1.007 during FY2013–FY2016, reflecting the introduction of revenue augmenting reforms under the WBDFP. The figure also shows that the state’s OTR to GSDP ratio has risen during FY2013–FY2016.

West Bengal’s Own-Tax Revenue/GSDP Ratio (%)

Source: Government of West Bengal, Budget Publications of the Finance Department for each year.

Appendix 7 35

DEBT SUSTAINABILITY ANALYSIS FOR WEST BENGAL

I. Public Debt Strategy 1. The main objective of the public debt strategy of the Government of West Bengal (GOWB), approved under the West Bengal Development Finance Program (WBDFP), is to ensure that the government’s financing needs and payment obligations are met at the lowest possible cost in the medium to long term, consistent with the medium-term fiscal framework and budget planning process.1 To this end, the debt management strategy includes (i) devising a borrowing plan with the budget division, (ii) minimizing the cost of debt in terms of life-cycle impact on budgeted cash flows, (iii) timely recording new debt, (iv) initiating internal processes for making debt service payments on time, (v) managing and monitoring the government on-lending system, (vi) provisioning and monitoring government guarantees and other contingent liabilities in line with state government policy, (vii) funding the government’s cash and liquidity management requirements, (viii) conducting risk analysis and management including debt restructuring and debt swaps to reduce debt service costs and manage risks, and (ix) conducting a multi-dimensional debt analysis. 2. Following the recommendations of the 13th Central Finance Commission (CFC), 2010–2011 of the Government of India (GOI), annual borrowing limits, debt composition, and caps on government guarantees are prescribed by the CFC and West Bengal’s Fiscal Responsibility and Budget Management (FRBM) Act, 2010, based on consultations with the Ministry of Finance (MOF) of GOI, the GOWB Finance Department, and the Planning Commission.2 West Bengal’s Public Debt Committee sets annual operational limits on debt management and government guarantees, as well as a quarterly borrowing calendar followed by the Finance Department.

3. As part of its debt management strategy, the state government exercises fiscal prudence by ensuring that (i) borrowing is only used to finance capital investments, not to meet current revenue expenditures; and (ii) risk and cost of borrowing are minimized as much as possible. Approved funding sources for the GOWB are (i) market loans using securities on fixed interest rates payable semi-annually, normally with a 10 year maturity; (ii) loans and advances from the central government; (iii) loans from banks and financial institutions; (iv) special securities issued to the National Small Savings Fund (NSSF); (v) small savings and provident funds; (vi) special purpose vehicles; and (vii) ways and means advances and overdrafts from the Reserve Bank of India (RBI) for liquidity management purposes. II. Analysis of Fiscal and Debt Indicators

4. Even though the state remains one of the most indebted among the non-special category states (NSCS),3 Figure 1 shows that West Bengal’s public debt stock to gross state

1 West Bengal’s total budgetary liabilities consist of (i) public debt, (ii) ways and means advances and overdrafts

from the Reserve Bank of India (RBI), (iii) public accounts, and (iv) contingent liabilities. The contingent liabilities are in the form of guarantees issued by the state to support its enterprises and are below the ceiling set by the West Bengal Ceiling on Government Guarantees Act, 2001. Except for the West Bengal Infrastructure Development and Finance Corporation, all other public sector enterprises are liable to pay a guarantee commission at the rate of 1% per annum to the GOWB on the maximum sanctioned guarantee.

2 The West Bengal FRBM Act, 2010 limited the debt to GSDP ratio to 40.6% for FY2011, 39.1% for FY2012, 37.7%

for FY2013, 35.9% for FY2014, and 34.3% for FY2015. 3 In FY2011, West Bengal’s debt to GSDP and interest payment to GSDP ratios were the highest of among the non-

special category states (NSCS), which had averages of 27.5% and 1.9% (RBI. 2013. State Finances, A Study of Budgets, 2012–13. Mumbai. Table V.4 and Table IV.12).

36 Appendix 7

domestic product (GSDP) ratio declined from 50% of the GSDP in FY2005 to 36% in FY2014 due to (i) favorable macroeconomic conditions creating GSDP growth exceeding that of public debt, (ii) prudent fiscal policies by the GOWB as stipulated by the FRBM Act, 2010 and pursued under the WBDFP, and (iii) relatively low interest rates for incremental debt in recent years. Debt servicing costs as measured by the interest payment to GSDP ratio declined from 4.6% in FY2005 to 3% in FY2015. Under the WBDFP, the debt to GSDP ratio decreased from 40.7% in FY2011 to 36% in FY2014, and is expected to decline to 34.3% in FY2015.

Figure 1: Public Debt Stock and Interest Payment to GSDP Ratio

Source: Government of West Bengal, Budget Publications of the Finance Department for each year.

5. Figure 2 shows that during FY2004–FY2014, nominal GSDP growth in West Bengal averaged 14% while the nominal growth rate of outstanding public debt was 11%. Real GSDP growth was 7% during this period. During the WBDFP implementation period, the debt growth rate decreased steadily from 11.8% in FY2011 to 9.7% in FY2014, and is expected to reach 9% in FY2015 and FY2016.

Figure 2: Growth Rate of the GSDP and Outstanding Public Debt of West Bengal

Source: Government of West Bengal, Budget Publications of the Finance Department for each year.

Appendix 7 37

6. The fiscal indicators in Figure 3 show that—except for the one-time spikes related to book adjustment entry on account of West Bengal State Electricity Board, which impacted non-tax revenue receipts in FY2009 and implementation of the Fifth Pay Commission recommendations in FY2010— West Bengal’s revenue and fiscal deficits have been improving since FY2011. This is attributed primarily to rationalization of current expenditures and increases in own-tax revenue collection through improvements under the WBDFP such as the introduction of (i) an electronic VAT filing system, (ii) comprehensive e-governance and regulator monitoring of stamp duty and registration fees, and (iii) a system of ad valorem state excise duty. In the past, the financing of current expenditure with large borrowings and an accumulated interest burden exacerbated revenue deficits, leading to a vicious cycle of revenue and fiscal deficits feeding each other. During implementation of the WBDFP, the primary deficit declined from 1.2% of GSDP in FY2011 to 0.3% in FY2013 and 0.6% in FY2014.

Figure 3: Fiscal Indicators of West Bengal

Revenue Deficit = Revenue Receipts - Revenue Expenditures; Fiscal Deficit = Revenue Receipts - Revenue Expenditures - Capital Outlay - Net Loans and Advances; Primary Deficit = Fiscal Deficit + Interest Payment. Negative figure indicates a surplus. Source: Government of West Bengal, Budget Publications of the Finance Department for each year.

7. The lower interest rate regime also improved the GOWB’s debt to GSDP ratio. In recent years, composition of the GOWB’s outstanding liabilities has shifted toward relatively lower cost market borrowings, which have become the biggest source of deficit financing, comprising almost half of the total state debt in FY2013.4 Although special securities to NSSF remained the dominant source of state debt until FY2011, its share declined from 43% in FY2009 to 38% in FY2013. Following the 12th CFC recommendation to discontinue the practice of on-lending to state governments from FY2006 onwards, the share of central government loans declined from 52% in FY2000 to 19% in FY2005 and to 6% in FY2013. In FY2014, the GOWB financed 89.4%

4 The interest profile of state government securities in India shows that the share of high cost market loans with

interest rates of 10% and above declined sharply by FY2012, while those ranging from 7–9% increased. In FY2014, the weighted average interest rate on state government securities across India was 9% (RBI. 2014. State Finances, A Study of Budgets, 2013–2014. Mumbai. p. 56).

38 Appendix 7

of its gross fiscal deficit with market borrowings in contrast to the national average of 71% for all Indian states.5 Another factor contributing to the state’s lower interest burden is that, following the enactment of the FRBM Act, 2010, the GOWB benefitted from the Debt Consolidation and Relief Facility (DCRF) of the GOI, which provided interest relief on outstanding high cost central government loans to states with FRBM Acts. The 13th CFC (i) extended the DCRF in the form of debt consolidation of central loans and resetting their interest at 7.5%, (ii) allowed consolidation of NSSF loans contracted until 2006–2007 at 9% interest instead of 10.5% and 9.5%, and (iii) recommended waiver of central government loans administered by ministries other than the MOF. 8. The comparative analysis in Table 1 indicates the steady decline of the debt service burden of all Indian states during FY2006–FY2014. Average interest payments to revenue receipts ratio steadily declined from 24.3% during FY2001–FY2005 to 12.2% during FY2011-FY2014. West Bengal’s interest payment to revenue receipts ratio declined by about 12 percentage points from 37.9% during FY2006–FY2010 to 25.8% during FY2011–FY2014, encompassing the implementation period of the WBDFP.6 Although this ratio is almost double the national average and higher than the 12th CFC target of 15% because of the state’s large debt burden, the improvement in the ratio is triple the national average.

Table 1: Debt Service Indicators IP/RR IP/GSDP IP/RE West Bengal All States West Bengal All States West Bengal All States FY1996-FY2000 28.9 18.7 2.4 1.9 20.2 16.1 FY2001-FY2005 47.3 24.3 4.4 2.6 30.8 20.3 FY2006-FY2010 37.9 16.5 3.8 2.0 27.8 16.8 FY2011-FY2014 25.8 12.2 2.8 1.5 21.3 12.4 GSDP = gross state domestic product, IP = interest payment, RE = revenue expenditures, RR = revenue receipts. Source: Reserve Bank of India. 2014. State Finances, A Study of Budgets, 2013–2014. Mumbai. Table II.7.

9. Table 2 shows that more than half of West Bengal’s outstanding state government securities have a maturity above seven years, and one fifth have a maturity between five and seven years. These numbers are comparable to the averages of the NSCS and all other Indian states. West Bengal’s outstanding debt has a relatively longer maturity as its share of short-term debt below three years is 7.9% in contrast to the average of 14.9% for NCSC states.

Table 2: Maturity Profile of Outstanding State Government Securities Percent of Total Amount Outstanding (as of end-March 2014)

0–1 years 1–3 years 3–5 years 5–7 years Above 7 years

West Bengal 2.7 5.1 19.5 21.1 51.7 NSCS 6.0 8.9 15.4 20.0 49.7 All Indian states 3.2 6.4 18.1 22.5 49.8

Source: Reserve Bank of India. 2015. State Finances, A Study of Budgets, 2014–2015. Mumbai. Table III.13.

5 RBI. 2015. State Finances, A Study of Budgets, 2014–2015. Mumbai. Statement 8.

6 The interest payment to revenue receipts ratio is expected to fall further to 22.5% in FY2015 and 20.9% in FY2016

(GOWB, Finance Department. 2015. Medium-Term Fiscal Policy Statement and Fiscal Policy Strategy Statement, 2015–2016. Kolkata. p. 20).

Appendix 7 39

III. Debt Sustainability Analysis

Dt

Yt

−Dt−1

Yt−1

= (i − g)

(1 + g)

Dt−1

Yt−1

+Pt

Yt

10. Using the actual public debt to GSDP ratios in Figure 1, which show a decline over the years, and the primary deficit to GSDP ratios in Figure 3, for the above equation to hold, the average cost of debt (i) in West Bengal must be less than the nominal GSDP growth rate (g). Figure 4 shows the calculated difference between the average cost of debt and the nominal GSDP growth rate, (i-g). The negative difference reveals that the average cost of borrowing was about 4 percentage points lower than the average growth rate of the economy during FY2004–FY2014, and about 6 percentage points lower during the WBDFP implementation from FY2012 to FY2014. The compositional shift towards market borrowings, which had interest rates lower than those on other sources of financing, and interest relief for high cost borrowings from the NSSF contributed to the decrease in the interest payment to GSDP ratio. Moderation in the effective interest rate and higher nominal GSDP growth contributed to improved debt sustainability indicators for West Bengal.7 11. With the consolidation of the reforms introduced under the WBDFP and the proposed follow-on program, WBDFP II, further reductions in primary deficit to GSDP ratio through increased revenue collection and expenditure rationalization in combination with the promotion of economic growth would speed the reduction of the debt to GSDP ratio.

Figure 4: Debt Sustainability

Sources: Government of West Bengal, Budget Publications of the Finance Department for each year; ADB staff estimates.

7 A study on the debt sustainability indicators of West Bengal in comparison to the average of the NSCS and all

Indian states also shows that West Bengal’s GSDP growth rate exceeded its effective interest rate during FY2006–FY2014 (RBI. 2014. State Finances, A Study of Budgets, 2013–2014. Mumbai. Table II.6).