RRP: Urban Governance Assessment · 2018-10-05 · Tamil Nadu Urban Flagship Investment Program (RRP IND 49107-003) URBAN GOVERNANCE ASSESSMENT I. INTRODUCTION 1. The Government of

Tamil Nadu Urban Flagship Investment Program (RRP IND 49107-003)

URBAN GOVERNANCE ASSESSMENT

I. INTRODUCTION

1. The Government of Tamil Nadu (GOTN) requested support for a Governance Improvement Component (GIC) under the ADB supported Tamil Nadu Urban Flagship Investment Program (program). The GIC aims to incentivize urban local bodies (ULBs) to improve key areas of urban governance through performance-based grants. The objectives of this report are (i) to assess the status of urban governance reforms in Tamil Nadu, (ii) identify key bottlenecks and issues in urban governance, (iii) summarize the state’s priorities in relation to past achievements, and (iv) elaborate the design features of the GIC to incentivize governance improvements of ULBs in Tamil Nadu.

2. In past reform programs led by the Government of India’s Ministry of Urban Development, Tamil Nadu performed well compared to other states in India. Under the national Jawaharlal Nehru National Urban Renewal Mission (JNNURM) and Atal Mission for Rejuvenation and Urban Transformation Mission (AMRUT), the state scored high (nearly 100% of compliance with reforms). Areas of good performance include accounting; systematic devolution of functions to urban local bodies; mobilizing commercial finance for urban infrastructure; and building a professional municipal cadre.

3. However, there are urban reforms still to be completed or are underperforming in Tamil Nadu, and smaller ULBs have gotten left behind in past reform programs. Key areas requiring improvement include: (i) strengthening of water supply and sewage at the ULB levels where many ULBs rely on parastatal agencies for delivering municipal services, (ii) financial management, (iii) revenue mobilization, and (iv) filling municipal vacancies. To achieve a more balanced development of ULBs across the state, the GOTN proposed a governance improvement incentive system through the program, applicable to all 135 urban local bodies in Tamil Nadu. The proposed Governance Improvement Component (GIC) of the program will support the GOTN in providing performance-based grants to achieve priority governance reforms of the State.

II. OVERVIEW OF URBAN GOVERNANCE PROGRAMS IN INDIA

4. The performance of Tamil Nadu in urban governance is assessed using three frameworks: (i) the 74th Constitutional Amendment, (ii) the reforms required under JNNURM, and (iii) the reform agenda under AMRUT. These frameworks are selected as they are nationwide frameworks and enable a simple comparison of Tamil Nadu’s performance vis-à-vis other states. 5. 74th Constitutional Amendment. The 74th Constitutional Amendment of 1992 provided constitutional recognition of local bodies as the third tier of government. Even though ULBs had been in existence for several years under state legislations, there was lack of uniformity in their form and functions across states. In many States, elections were not held for long periods and therefore authority given to the state government. The 74th Amendment mandated certain measures be taken by the states forming the first guiding framework for urban governance reforms in India. The 74th Amendment required states to: (i) constitute ULBs for urban areas; (ii) hold regular elections; (iii) provide reservation for women and marginalized sections in the elected body; (iv) devolve, at the state Government’s discretion, urban functions to the ULBs; (v) constitute district and metropolitan planning committees; (vi) decide taxes and fees that would be collected by ULBs; and (vii) constitute State Finance Commissions (SFCs) to decide the sharing of the revenue of state Governments with the local Governments, both urban and rural. After the 74th Amendment was approved, State Governments were required to take legal and administrative measures to ensure compliance.

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6. JNNURM. The JNNURM was launched as a national grant program for the urban sector in 2005. It provided grants to ULBs and operated through separate windows for large cities and for the rest. Grants were provided for building urban infrastructure and for delivering services to the urban poor, but were contingent on the state Governments and cities implementing a list of reforms. These were divided into reforms to be implemented at the state level and those to be implemented at the city level. At the state level JNNURM focused on a) implementation of the 74th constitutional amendment and transfer of urban planning function to ULBs, b) repeal of laws on rent control and urban land holdings, c) reduction in stamp duty on property transfers and e) introducing new laws on public disclosure and community participation. At the city level, JNNURM focused on (i) e-Governance, (ii) accounting reforms, (iii) property tax reforms, (iv) levy of user charges to recover operations and maintenance costs, (v) earmarking of a share of the budget for urban poor, and (vi) provision of basic services for the urban poor. In addition to these, JNNURM also required states and cities to implement ten measures to simplify processes, introduce transparent by laws and administrative reforms. These were termed optional reforms, though they were also required to be implemented within the mission duration. 7. As per the design of JNNURM, funding was provided for infrastructure investments, but was conditional on implementation of reforms as per an agreed timetable. As part of the JNNURM process, independent agencies evaluated and scored the implementation of reforms by states and cities on a common framework. 8. AMRUT. The AMRUT was launched in 2015 as national grant fund for financing urban infrastructure in 500 cities. Unlike JNNURM, AMRUT provided grants for infrastructure without any linkage to reforms. A separate window of 10% of the program funds were set aside as a reform incentive. 9. The AMRUT built further on the reform agenda of JNNURM. It retained some of the critical reforms measures of JNNURM such as devolution of funds and functions as per 74th amendment, e-Governance, accounting, tax and user charge reforms, etc. It also introduced new measures such as professionalization of municipal cadre, energy and water audit, financial intermediary at state level, credit rating and implementation of Swachh Bharat Mission. The AMRUT specified a total of 54 reform milestones under 11 reform areas with yearly targets. States and cities implementing more than 70% of the reform milestones scheduled during each year of AMRUT will be eligible to receive reform incentive fund. 10. The summary of constitutional requirements and major state and ULB level reforms are presented in Table 1 and Table 2. The reforms requirements are categorized as follows: (i) constitutional framework for ULBs, (ii) state actions to strengthen ULBs, (iii) legal and institutional actions at state level, (iv) e-Governance at ULB level, (v) financial management at ULB level and (vi) process simplification, by-laws and other continuous improvements at ULB level.

Table 1: Summary of Urban Governance Reforms in India’s National Programs 74th CAA JNNURM AMRUT

Constitutional Framework for ULBs

1 Constitution of urban local bodies

2 Conduct of elections

3 Reservation of seats in the elected bodies for women and marginalized communities

4 Devolution of urban functions to ULBs

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74th CAA JNNURM AMRUT

5 Devolving taxes and fees to ULBs

6 Constituting State Finance Commissions for sharing of revenues

7 Constitution of district planning committees

8 Constitution of metropolitan planning committees

State level reforms

Strengthening ULBs

9 Transfer of urban planning to ULBs

10 Transfer of water supply and sanitation function to ULBs

11 Constitution and professionalization of municipal cadre

12 Implementation of SFC recommendations within timeline.

Legal and institutional actions at State level

13 Rationalization of stamp duty

14 Reforms in rent control Act

15 Repeal of Urban Land Ceiling Act

16 Enactment of law on public disclosure

17 Enactment of law on community participation

18 Establish Urban Development Authorities

19 Set up financial intermediary at State level

ULB level reforms

20 E-Governance

With additional milestones

21 Provision of basic services to urban poor

Financial management

22 Shift to double entry accrual accounting

With additional milestones

23 Property tax reforms (coverage and collection efficiency)

24 100% O&M cost recovery in water supply and solid waste management

25 Internal earmarking of funds for services to urban poor

26 Credit Rating AMRUT = Atal Mission for Rejuvenation and Urban Transformation Mission, CAA = Constitutional Amendment Act, JNNURM = Jawaharlal Nehru National Urban Renewal Mission, O&M = operation and maintenance, SFC = State Finance Commission, ULB = urban local body.

11. Other urban governance improvements are presented in Table 2.

Table 2: Summary of Other Related Urban Governance Improvements 74th CAA JNNURM AMRUT

Process improvements, by-laws and other continuous improvements

1 Introduction of property title certification in ULBs

2 Simplification of conversion of agricultural land to urban land

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74th CAA JNNURM AMRUT

3 Computerized registration of land and property

4 Revision of building by-laws to streamline approvals

5 Revision of building by-laws to mandate rain water harvesting

6 Earmarking of developed land in housing projects for urban poor

7 By-laws on reuse of recycled water

8 Revision of by-laws to mandate solar rooftop

9 Regular revision of by-laws

10 Administrative reforms

11 Structural reforms

12 Encouraging public private participation

13 Preparation of Master Plan using GIS

14 Preparation of SLIP, and SAAP

15 Make action plan to progressively increase Green cover in cities to 15% in 5 years

16 Develop at least one Children Park every year in AMRUT cities.

17 Establish a system for maintaining of parks on PPPP model.

18 State level policy to implement National Mission for Sustainable Habitat.

19 Energy and water audit

20 Implementation of Swachh Bharat Mission AMRUT = Atal Mission for Rejuvenation and Urban Transformation Mission, CAA = Constitutional Amendment Act, GIS = geographic information system, JNNURM = Jawaharlal Nehru National Urban Renewal Mission, PPPP = people public private partnership, SAAP = state annual action plans, SLIP = service level improvement plans, ULB = urban local body.

Other Governance Initiatives 12. Urban Reform Incentive Fund. In 2003-2004, the Government of India launched the Urban Reform Incentive Fund (URIF) to incentivize urban reforms which were later incorporated into JNNURM (items 11, 12, 13, 17, 18, and 19 in Table 1, and item 3 in Table 2). Even though state governments agreed to implement the reforms and signed a Memorandum of Agreement with the Government of India to draw down the first installment of grants, reform implementation was slow which led to a lapse of the program. 1 13. 13th Finance Commission. The 13th finance commission (period 2010-2011 to 2014-2015) constituted by the Government of India recommended performance-based grants provided if State governments fulfilled the following: (i) supplementary state budget for local bodies and accounting systems in local bodies, (ii) audit of local bodies, (iii) ombudsmen for local bodies, (iv) electronic transfer of finance commission grants to local bodies, (v) specifying qualifications of members of SFCs, (vi) levy of property tax and property tax valuation board at state level, (vii) publish existing and proposed service levels for urban services, and (viii) a mechanism for fire hazard response in ULBs.

1 Government of India. Planning Commission. 2005. Mid Term Appraisal of the Tenth Five Year Plan. New Delhi

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III. PERFORMANCE OF URBAN GOVERNANCE IN TAMIL NADU

14. Performance under the 74th Constitutional Amendment. 2 Tamil Nadu, like most States, had a system for constitution of local bodies even prior to the 74th amendment. Chennai Corporation is the first local body to be constituted in India in 1688. Under state legislation, Tamil Nadu had constituted various tiers of ULBs prior to the 74th CAA. After adopting the 74th CAA in 1994, Tamil Nadu reclassified transitional village areas as ULBs and brought them under the jurisdiction of the municipal administration department; and streamlined income and population based criteria for classifying ULBs. Even though ULBs were in existence, elections had not been conducted for the local bodies since the year 1968, except once in 1986. After the 74th CAA, elections to local bodies were held under an independent State Election Commission in the year 1996. 15. Prior to 74th CAA, the state established autonomous parastatal organizations for urban functions such as Chennai Metropolitan Water Supply and Sewage Board, Tamil Nadu Water and Drainage Board, Chennai Metropolitan Development Authority (CMDA), Tamil Nadu Housing Board and Tamil Nadu Slum Clearance Board. Further, the Directorate of Town Planning was responsible for town planning functions. Thus, key functions of water supply, sewage, housing and urban planning were outside the domain of ULBs prior to 74th CAA and were performed by such autonomous organizations under the administrative control of the state Government. The functions of these agencies were not transferred to ULBs even after the 74th CAA and the functional domain of local bodies was not substantially changed. District or Metropolitan Planning Committees were not constituted. The Tamil Nadu Urban Development Project II supported reforms in streamlining responsibilities between ULBs and parastatal agencies but on completion of the Project found that the State could not sustain these reforms.3 16. The first SFC was constituted in 1994 and its recommendations were accepted in 1997. The state agreed to devolve 90% of entertainment tax and 8% of the consolidated tax revenue of the state government to local bodies. This started systematic devolution of funds to urban local bodies and increased the financial strength of ULBs. This in turn enabled channeling of external funds into the urban sector through a state level urban financial intermediary, the Tamil Nadu Urban Development Fund. 17. While Tamil Nadu implemented the 74th CAA provisions regarding constitution of ULBs and regular elections, the functional domain of the ULBs was not expanded but substantial financial devolution was initiated. 18. Performance under JNNURM. Three urban agglomerations in Tamil Nadu, Chennai, Coimbatore and Madurai were included under the Urban Infrastructure and Governance (UIG) and Basic Services for the Urban Poor (BSUP) components of JNNRUM.4 The three ULBs signed a Memorandum of Agreement with the Government of India agreeing to a timeline for implementation of reforms. The Memorandum of Agreement was elaborate and covered intermediate milestones for each reform commitment. As per the reform agenda of JNNURM, both the state and ULBs were expected to implement the urban reforms. During the implementation period, the Government of India provided toolkits for each reform, clarifying the implementation requirements. Independent agencies were also engaged to evaluate the quality of implementation of reforms. A standard framework for evaluation of progress was developed by

2 Madras Institute of Development Studies. 2011. State Level Background Paper on Tamil Nadu. Chennai. 3 World Bank. 2005. Implementation Completion Report – Tamil Nadu Urban Development Project II. Washington. 4 Smaller ULBs were covered under two other windows of JNNURM.

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Government of India and all States and ULBs were scored under the framework. On completion of the program, Tamil Nadu achieved a score of 99.64%5 in reform completion (average of performance under State level reforms and ULB level reforms by each of the three ULBs), and ranked second in the country. The national average of reform performance was 84%. The State Government implemented all reforms except setting up of district planning committees. Coimbatore and Madurai implemented all ULB level reforms but received less than 100% score due to shortfall in State Government level reforms. Chennai was unable to recover 100% of O&M charges. The cities were ranked 4th and 6th among 65 cities ranked nationally. 19. Performance under AMRUT. AMRUT, launched in 2015, also listed governance reforms states and ULBs were expected to implement. During the year 2016-2017, States completed a self-assessment of the reform implementation in the year 2015-2016 based on a scoring framework provided by the Government of India. Tamil Nadu stood 4th nationally with a score of 94.05%.6 The shortfall was in the area of achieving at least 90% collection efficiency in municipal taxes and fees (only 5 out of the 27 ULBs achieved this target). The state and the ULBs achieved all other reform milestones scheduled for the year in the areas of (i) e-Governance; (ii) professionalization of municipal cadre; (iii) augmenting double entry accounting; (iv) urban planning and city level plans; (v) devolution of funds and functions; (vi) review of building by-laws; (vii) municipal taxes, fees and user charges improvement; and (viii) energy and water audit. 20. The number of ULBs covered under JNNURM and AMRUT and the number meeting all reform milestones are listed in Table 3 below.

Table 3: Reform Achievement of Urban Local Bodies in Tamil Nadu JNNURM (UIG Component) AMRUT

Number of ULBs participating 3 27

Number of ULBs meeting all reform milestones

0 5

Percentage of achievement of ULBs not meeting all reform milestones

99.35% to 99.78%, 4th and 6th ranked among 65 Indian cities

92.85%

Average score of all ULBs 99.64% (ranked second) 94.05% (ranked fourth) JNNURM =, Jawaharlal Nehru National Urban Renewal Mission, UIG = Urban Infrastructure Governance, ULBs = urban local bodies

21. While Tamil Nadu scored high in reform implementation under both JNNURM and AMRUT, there are reforms not completed including (i) urban planning not in the domain of ULBs, (ii) parastatals still manage water supply and sewage in many ULBs, and (iii) low revenue generation including property tax collection. 22. The Government of India found reform implementation under JNNURM was incomplete.7 The Arun Maira Committee8 for evaluation of JNNURM found crucial reforms were yet to be implemented. The Committee found differing perceptions amongst stakeholders regarding the actual completion of reforms and their impact; and where laws were enacted, rules were pending thereby undermining the substance of reforms. The Isher Ahluwalia Committee9 found most

5 Government of India. Ministry of Urban Development. 2016. Handbook of Urban Statistics. New Delhi. 6 Government of Tamil Nadu. 2016-17. State Annual Action Plan for Atal Mission for Rejuvenation and Urban

Transformation. Chennai. 7 This is not specific to Tamil Nadu or any specific State, but on the overall reform implementation under JNNURM. 8 Government of India. Planning Commission. 2012. Report of the Committee on JNNURM II. New Delhi. 9 Government of India, Ministry of Urban Development. 2011. The High Powered Expert Committee (HPEC) for

Estimating the Investment Requirements for Urban Infrastructure Services. Delhi.

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states did not take serious initiatives to implement and sustain reforms and that the exercise became one of satisfying the technicalities of reforms and drawing funds from Government of India. Therefore, the near 100% reform implementation of Tamil Nadu cannot be taken as completion of the reform agenda, but only as a relative performance indicator of Tamil Nadu in comparison to other states. 23. Best practices of Tamil Nadu. Apart from the performance under national grant programs, Tamil Nadu is considered as a pioneer in four reform areas: (i) statewide accounting reforms, (ii) mobilization of external and commercial finance for infrastructure development through financial intermediary, (iii) devolution of funds based on SFC recommendations, and (iv) professionalization of municipal cadre. 24. Accounting reforms.10 Tamil Nadu was the first state to implement accounting reforms statewide. It decided to change to a double entry accrual accounting system in late 1997 to be able to present acceptable information to funding agencies. This coincided with the parallel reform of the state government to set up a state level financial intermediary for the urban sector. The state government appointed a committee chaired by a retired joint director of the Local Fund Audit in January 1998. The committee submitted its first draft of an accounting system manual for all ULBs in the state in June 1998. In January 1999, the State Department of Municipal Administration and Water Supply decided to test the new system in 12 selected cities. The pilot began at the start of the new fiscal year on 1 April 1999. Based on the successful experience in these pilot cities, in January 2000 the State Department of Municipal Administration and Water Supply instructed the new accounting system be started in the remaining municipalities on 1 April 2000. Tamil Nadu thus became the first state to introduce comprehensive accounting reforms statewide. Tamil Nadu received technical assistance from the USAID supported Financial Institutions Reform and Expansion project and financial assistance from World Bank supported Tamil Nadu Urban Development (II) Project11 for implementing the accounting reforms. ULBs in Tamil Nadu regularly prepare their accounts on accrual basis, their accounts are audited by the Local Fund Audit, and the audit observations are recorded and their resolution is tracked regularly. Tamil Nadu met accounting reform related milestones in both JNNURM and AMRUT. However, even though ULBs prepare financial statements and audit them, the time taken for finalization of accounts is prolonged. Completion of audits takes more than 12 months for most ULBs; as on February 2017, audit for the year 2015-2016 was completed for only 11 out of 135 ULBs. Even though the financial statements are audited, the objections raised after audit remain unresolved. As on June 2017, more than 148,672 audit observations were pending resolution. 25. Mobilizing external and market finance for infrastructure investments. The Tamil Nadu Urban Development Fund (TNUDF) is recognized as a pioneering urban financial intermediary. Prior to TNUDF, Tamil Nadu introduced the concept of a Municipal Urban Development Fund (MUDF) under World Bank supported Tamil Nadu Urban Development Project (TNUDP) in 1988. MUDF operated as an incorporated fund managed by the project management group of TNUDP. By 1996, MUDF provided support to 94 of the state's 109 municipalities and municipal corporations for over 500 subprojects; generated profits; and achieved high rate of loan

10 USAID. Indo-US Financial Institutions Reform and Expansion (Debt) Project. 2004. Project Note: 22 Introducing an

Improved Financial Accounting System in Urban Local Bodies in India. Washington DC. 11 (i) The World Bank project originally intended to support ULBs to develop and implement City Corporate Plans.

During implementation, the emphasis changed to supporting accounting reforms since the USAID Program had succeeded in introducing accounting reforms across all the ULBs in the State. Other reform measures in the Project included training; plans for strengthening staffing and personnel policies; and studies on sharing of responsibility between ULBs and parastatal agencies; (ii) World Bank. 2005. Implementation Completion Report – Tamil Nadu

Urban Development Project II. Washington DC.

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repayment.12 However, it needed to overcome constraints including: (i) dependence on public financing, (ii) administrative control by GOTN with a potential for political risks, and (iii) rigid staff compensation and transfers. Therefore, GOTN restructured MUDF into TNUDF, an autonomous financial intermediary with private sector participation in 1996. The GOTN contributed to 70% of the fund, and private sector financial institutions (ICICI, HDFC and IL&FS) contributed 30% of the fund. The GOTN setup Tamil Nadu Urban Infrastructure Financial Services Limited (TNUIFSL) as a fund manager to TNUDF with majority private ownership from the same private sector institutions. The TNUDF achieved 100% loan recovery for the last thirteen since 2003-04 and had no non-performing assets as of 31 March 2016.13 TNUDF provided loan funds to almost all ULBs in Tamil Nadu (except town panchayats). 26. One function of TNUIFSL is to support ULBs in commercial borrowing and structuring of projects with private sector participation. Key TNUIFSL achievements in this area are:

(i) Supporting Karur ULB in structuring a bridge on Build-Operate-Transfer basis; (ii) Supporting Alandur ULB in structuring an underground sewerage project with

commercial borrowing, user contribution and public-private partnership (PPP); (iii) Supporting Madurai ULB in issuing a municipal bond; (iv) Supporting Chennai Corporation and Chennai Metropolitan Water Supply and

Sewage Board in issuing bonds; (v) TNUDF own bond issue to raise resources; and (vi) Pooled bond issue to raise resources from the market for the Water and Sanitation

Pooled Fund to refinance borrowings of 13 ULBs. 27. In addition to TNUDF, Tamil Nadu also has another financial intermediary for the urban sector called Tamil Nadu Urban Finance and Infrastructure Development Corporation (TUFIDCO), which is 96.4% GOTN owned company14 incorporated under the Companies Act in 1990. TUFIDCO manages funds from the grant programs of Government of India and own funds borrowed from commercial banks. 28. The success of TNUDF in mobilizing external finance, introducing a credit culture within ULBs and in commercial borrowing encouraged other State Governments in India to set up a financial intermediary modelled on TNUDF. 29. Devolution of funds based on State Finance Commission Recommendations. Tamil Nadu was one of the first States to set up a State Finance Commission (SFC) as mandated by the 74th CAA. The first SFC was set up in 1994 and submitted its recommendations in 1996 which were accepted in March 1997 by the state government. Based on the SFC recommendations, the GOTN decided to share 8% of its own tax revenues with the ULBs. Tamil Nadu was amongst the first states to follow the approach of sharing a part its total revenues. This encouraged other SFCs to recommend this approach and has been adopted by other states. Tamil Nadu since set up four more SFCs periodically and the share of own tax revenues to ULBs has increased to 10%. In addition, the SFCs made important recommendations accepted by the state government on: (i) reclassification of ULBs, (ii) incentive and equalization funds, (iii) limiting salary expenditure of ULBs to less than 49% of revenues, (iv) debt relief for ULBs, (v) property tax reforms, and (vi) award and incentive for best practices.

12 World Bank. 1998. Implementation Completion Report – Tamil Nadu Urban Development Project. Washington DC. 13 Tamil Nadu Urban Development Fund. 2016. Annual Report 2015-16. Chennai. 14 Remaining shareholding is owned by local bodies; and Housing and Urban Development Corporation Limited, a

Government of India owned institution.

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30. Professionalization of municipal cadre.15 In 1970, the Tamil Nadu adopted a series of rules for various municipal services, which provincialized many cadres of municipal staff, bringing them within a statutory framework for recruitments, grades and salaries, and regulating transfers and promotions. These rules included the Tamil Nadu Municipal Town Planning Rules, 1970; the Tamil Nadu Municipal Medical Service Rules, the Tamil Nadu Municipal Engineering Service Rules, 1970; the Tamil Nadu Municipal General Service Rules, 1970; and the Tamil Nadu Municipal Educational Service Rules, 1970. At present, Tamil Nadu has a cadre of municipal officers for key roles such as chief officers of ULBs, engineering, finance, town planning and public health. Senior positions are recruited by the state governments which increases the attractiveness of these job positions to potential applicants. The positions are transferable across the state which ensures good practices are replicated across ULBs. Transfer of staff from small to large towns also provides opportunities for career progression. However, the average vacancy is 18.8% in key positions. 31. Other ongoing reforms. Tamil Nadu is in the process of implementing a common e- Governance system across the ULBs. This is being undertaken to eliminate inconsistencies in software systems within a ULB and across ULBs. The first phase of this exercise comprises of e- Governance modules related to accounting, revenue and financial management and implementation has commenced. This will introduce uniformity in processes across ULBs and State level supervision due to direct access to centralized accounting and revenue database. A credit rating exercise for all ULBs covered under AMRUT is underway. 32. Model Cities Program. 16 The GOTN introduced results-based grants for urban governance under the ongoing Tamil Nadu Sustainable Urban Development Program (TNSUDP) supported by the World Bank. Three small and medium sized cities (Vellore, Erode and Hosur with population of 0.5 million, 0.5 million and 0.25 million respectively in the year 2011) with a total population of 1.25 million are eligible to receive grants of up to $60 million for implementing urban governance initiatives. The governance areas targeted are: (i) ULB empowerment and organizational capacity, (ii) spatial/ development planning, (iii) sustainable finances and (iv) e-Governance and public disclosure. 33. During the period 2014-2015 to 2020-2021, the three model cities were expected to achieve 21 milestones in the four governance areas identified. The ULBs are to receive a pre-determined grant of $ 0.5 million to $1.5 million on achievement of each milestone totaling to a potential grant of $60 million. 34. The results-based grants is in its third year of operation. The milestones so far have been preparatory activities such as revenue improvement plans, area development plans etc. Outputs are scheduled in the latter years of the Program and therefore no assessment of outputs is possible at this time. The GOTN feedback about the design of the program is positive and the only concerns expressed have been that the per capita incentive is high (₹501 per capita per year) and that some measures are outside the control of the ULB such as delegation of powers by the state government. 35. A summary of performance of Tamil Nadu on the framework for reforms is provided in Table 4. Only major reforms at state and ULB level have been considered.

15 Madras Institute of Development Studies. 2011. State Level Background Paper on Tamil Nadu. Chennai 16 International Bank for Reconstruction and Development. 2015. Project Appraisal Document – Tamil Nadu

Sustainable Urban Development Program. Washington DC.

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Table 4: Performance in Constitutional and Major State and Urban Local Body Level Reforms

Area Status in Tamil Nadu

Constitutional Framework for ULBs

1 Constitution of urban local bodies In practice prior to 74th CAA

2 Conduct of elections Regular elections held after 74th CAA

3 Reservation of seats in the elected bodies for women and marginalized communities

In compliance with requirements

4 Devolution of urban functions to ULBs Except urban planning, housing and slum clearance; Water supply in Chennai and select smaller ULBs

5 Devolving taxes and fees to ULBs In practice prior to 74th CAA

6 Constituting State Finance Commissions for sharing of revenues

Leading State in India

7 Constitution of district planning committees

Not implemented

8 Constitution of metropolitan planning committees

CMDA is responsible for planning in Chennai

State level reforms

Strengthening ULBs

9 Transfer of urban planning to ULBs Not implemented fully

10 Transfer of water supply and sanitation function to ULBs

Substantially with some exceptions

11 Constitution and professionalization of municipal cadre

In practice prior to 74th CAA; among leading States in India

12 Implementation of SFC recommendations within timeline.

Leading State in India

Legal and institutional actions at State level

13 Rationalization of stamp duty Substantially

14 Reforms in rent control Act Implemented

15 Repeal of Urban Land Ceiling Act Implemented

16 Enactment of law on public disclosure Implemented

17 Enactment of law on community participation

Implemented

18 Establish Urban Development Authorities Not implemented

19 Set up financial intermediary at State level Leading State in India

ULB level reforms

20 E-Governance Under implementation

21 Provision of basic services to urban poor Implemented

Financial management

22 Shift to double entry accrual accounting Leading State in India

23 Property tax reforms (coverage and collection efficiency)

Meets JNNURM requirements

24 100% O&M cost recovery in water supply and solid waste management

Meets JNNURM requirements

25 Internal earmarking of funds for services to urban poor

Meets JNNURM requirements

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Area Status in Tamil Nadu

26 Credit Rating Substantially complete for AMRUT cities

AMRUT = Atal Mission for Rejuvenation and Urban Transformation, CAA =Constitutional Amendment Act, CMDA = Chennai Metropolitan Development Authority, O&M = operation and maintenance, JNNURM = Jawaharlal Nehru national Urban Renewal Mission, SFC = State Finance Commission, ULBs = urban local body.

IV. URBAN GOVERNANCE PRIORITIES IN TAMIL NADU

36. The state identified priority areas for improving urban governance. The identified measures described below deepen the progress made by the state under previous initiatives. They also align with ongoing AMRUT reforms by setting additional or stricter targets. 37. The urban governance priorities identified by the State government are as follows:

(i) Financial management (a) Preparation of accounts; (b) Settling local fund audit (LFA) audit objections; and (c) No dues on statutory and institutional payments–debt, electricity, bulk

water supply and contributory pension scheme. (ii) Revenue improvement

(a) Collection efficiency of user charges for underground drainage; and (b) Increase in the number of professional tax assessments.

(iii) Administration a. Filling vacancies in sanctioned posts.

(iv) Project management (a) Achieving targeted number of new household connections for water and

underground drainage projects; and (b) Timely completion of projects.

(v) New initiatives (a) Sale of treated wastewater/ use of treated wastewater (applicable to all

ULBs with functioning wastewater systems); and (b) Fecal sludge management in areas not covered by underground drainage.

38. Financial management. In accounting and audit, even though the ULBs prepare financial statements and audit them, the time taken for finalization of accounts is long. Completion of audit takes more than 12 months for most ULBs; as on February 2017, audit for the year 2015-2016 was completed for only 11 out of 135 ULBs. Even though the financial statements are audited, the objections raised after audit remain unresolved. As on June 2017, more than 148,672 audit observations were pending resolution. 39. Revenue improvement. The Fifth SFC identified that Tamil Nadu ranks last among six comparable states in realization of property tax measured as a percentage of state domestic product, even though property tax collection efficiency (of current year demand as on 31 March 2017) is 82% for municipal corporations and 80% for municipalities. The SFC has identified shortfalls in coverage, assessments, exemptions and enforcement. The SFC has recommended that 5% of the devolution to ULBs should be in the form of an incentive fund promoting improved property tax collections. The commission also identified weaknesses in collection of professional tax, the second largest own revenue source for ULBs in Tamil Nadu. The collection efficiency of professional tax is 90% (current year demand as on 31 March 2017). The SFC has found that profession tax is collected at source from Government employees, but it has not been paid regularly in the case of private enterprises, self-employed, entrepreneurs and traders.

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40. Administrative strengthening. The system of professional municipal cadre has benefited ULBs in the state. The state government recruits senior officers and provides them to the ULBs. The senior officers are transferable across ULBs, thus ensuring opportunities for career progression as well as cross learning from the experience of well performing ULBs. However, many of the sanctioned posts remain unfilled. The average vacancy is 18.8% in key positions. This is partly due to lack of initiative by the ULBs and partly due to restrictions imposed by the state government on the share of revenue that can be spent on salaries by the ULBs. 41. User charges for sewerage. Tamil Nadu implemented underground drainage systems in several ULBs. In parallel, the state has also introduced underground drainage charges to be collected from the benefitting households. As on July 2017, only 71.1% of households were connected to underground drainage and water networks as compared to the project targets. Collection efficiency of user charges for underground drainage is only 49% (current year collection as on 31 March 2017); underground drainage projects are delayed by more than 24 months. 42. Fecal sludge management and wastewater recycling. Even though underground drainage projects have been taken up in ULBs, they are not designed to cover the entire city. There is a need to provide fecal sludge management solution in areas not covered by underground drainage. Further, several wastewater treatment plants have been set up and are operational, but the treated wastewater is being disposed of without being put to productive use. The State intends to promote reuse of wastewater, either for industrial or for agricultural use. 43. Bottlenecks in reform implementation. In the identified priority reform areas, the ULB has primary responsibility and dependence on state government is low. The state designed and implemented a common web-based statewide accounting software. The ULBs carryout financial transactions in this module and will be able to finalize accounts on the last day of the financial year itself. This eliminates delays in manual finalization of accounts. The state government stipulated the finance commission devolutions needs to be used for paying statutory debts. Thus, as and when the funds are released by the state government, ULBs can use these to clear statutory debts. The ULB has full responsibility and authority to increase collection efficiency in sewerage charges and to increase assessments in professional tax. Filling up of vacancies requires both ULB and state government actions. Project implementation and new initiatives are also within the control of ULBs, but involve support from other agencies and households. 44. The GIC enables the state government to clarify its priorities through a formal multi-year framework that has Tamil Nadu-specific targets and is applicable across ULBs. This is unlike other ongoing incentive programs (discussed further in Section V) which have same focus areas and targets across the country (or) are applicable only to few ULBs in the State. Apart from the financial incentive, the GIC provides a clear signal to the ULBs that these reforms are priorities of the State; it provides clarity to ULBs on the targets to achieve; and provides a uniform statewide framework to evaluate implementation. 45. Where required, the state government has already taken actions to enable reforms or is committed to support ULBs. For example, the state government needs to approve the resolution of audit objections. The GOTN has already formed committees to provide approvals to resolve audit objections. If positions have been vacant for more than 6 months, state government approval is required for filling up the vacancy. The state government is responsible for recruitments to senior positions. The Commissioner of Municipal Administration (CMA) has committed to take these actions.

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V. KEY CONSIDERATIONS FOR DESIGNING THE GOVERNANCE IMPROVEMENT COMPONENT FOR THE TAMIL NADU URBAN FLAGSHIP INVESTMENT PROGRAM

46. In designing the GIC, lessons learned were collected from the past reforms programs. Since ULBs in Tamil Nadu have access to multiple sources of grants, the proposed GIC should not duplicate but complement ongoing initiatives mentioned above. 17 It should also be sized so that there is sufficient incentive for the ULBs, commensurate with the effort required to perform. Three types of incentive linked programs (applicable to Tamil Nadu) were earlier introduced in the urban sector in India in the last 15 years; these are: (i) reform linked funding under the JNNURM and the AMRUT program; (ii) performance linked grants by the Central Finance Commission (CFC) and the State Finance Commission (SFC) of Tamil Nadu, and (iii) ongoing TNSUDP. A. Key features of the three programs applicable in Tamil Nadu are as follows: 47. Size. The programs had an outlay of 5% to 20% towards performance linked incentives. On per capita basis, the average per capita outlay for incentives per annum was ₹45 for AMRUT. However, the reform outlay was revised to ₹135 capita (₹9000 crores for three years) from 2018-19 onwards. The per capita per year outlay is ₹98 for 14th CFC, ₹74 for TN SFC and ₹501 for TNSUDP. Excluding TNSUDP which is an outlier, the average is ₹102 per capita per annum for the other three programs. The JNNURM provided investment funds based on performance and therefore its outlay is higher and not comparable to the incentive component in other programs. 48. Coverage. The AMRUT covers about 500 ULBs across India which account for approximately 62% of India’s urban population. It covers 33 ULBs in Tamil Nadu.18 The 14th CFC covers the entire urban population (except union territories). All the ULBs in Tamil Nadu are covered. The Tamil Nadu SFC covers the entire State urban population. TNUSDP covers three model cities with a population of 1.24 million (approximately 4% of state’s urban population). The JNNURM covered the entire urban population though the emphasis was on 65 select cities under the Urban Infrastructure and Governance component, which amounted to approximately one third of the urban population. 49. Nature of performance incentivized. Both JNNURM and AMRUT advocated a wide set of reforms. ULBs were expected to implement 13 reforms under JNNURM, while AMRUT specifies 54 reform milestones in 11 areas (some of which are the responsibility of the state government). However, AMRUT will narrow its focus to five reform areas 19 from 2018-2019 onwards. The 14th CFC specifies three simple criteria for incentives. The Tamil Nadu SFC (5th) focused on improvement in property tax as the sole criteria for incentives. The TNSUDP project specifies four indicators (with year wise milestones). A comparison of the reform areas in these Programs is provided in Annexure 1.

17 These include grants for investments (such as AMRUT, Smart Cities), devolutions (14th Finance commission grants

from Government of India, State Finance Commission grants) and performance-based grants (reform component of AMRUT, conditional grants under 14th Finance Commission, Model Cities component under an ongoing World Bank project for select ULBs).

18 AMRUT initially covered 32 ULBs in Tamil Nadu out of which 5 were merged into larger ULBs by the state government subsequently resulting in 27 AMRUT towns. Another ULB was added to the AMRUT program in subsequent years.

19 (i) Trust-and-verify approach, (ii) credit rating and municipal bonds, (iii) land titling laws, (iv) value capture financing and (v) professionalization of ULBs.

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B. Lessons Learned from Past Urban Reform Programs 50. Focused set of reforms is preferred over a wide agenda. The JNNURM, with a wide scope of reforms, has not been successful in reform implementation. The Committee on JNNURM II20 noted “while significant progress has been achieved in completion of many non- complex reforms, the crucial ones are yet to be completed.” The committee also recommended that a robust mechanism for objective evaluation of the progress of reforms is needed. The design of JNNURM stated that release of grants for capital investments will be linked to progress in reforms. However, progress in reforms was slower than expected and these created bottlenecks in funds release. Based on this experience, in the subsequent AMRUT program, the reform component was separated from the capital investment component. However, the reform agenda continued to be wide. The Ministry of Housing and Urban Affairs (MOHUA) has now proposed to narrow down the reform agenda of AMRUT to five areas19 to ensure that the reform agenda is not incremental but transformative.21 51. Targets relevant to the situation in Tamil Nadu. Tamil Nadu has ranked high in reform performance under JNNURM (Rank 2) and AMRUT (Rank 4). Further, Tamil Nadu also scores well in performance areas specified by 14th CFC. Therefore, ULBs in Tamil Nadu rank high in reform performance. The 14th CFC requires ULBs to demonstrate positive growth in own revenue. Own revenues of ULBs in Tamil Nadu grew by a CAGR of 13.46% between 2010-11 and 2014-15. Therefore, any incentive program should identify measures and performance targets that take into consideration the already high achievement of ULBs in Tamil Nadu. Where possible, they should focus on priorities in Tamil Nadu. For example, Tamil Nadu is one of the few States which have taken up a number of underground drainage projects. The relevant performance measure the for Tamil Nadu would be the number of households connected to underground drainage. 52. Competition of various reform programs. The proposed performance based governance reforms component under the program would operate in parallel with at least three other incentives–under 14th CFC, under 5th SFC and AMRUT. In addition, the Model City Programme will also be in operation in parallel in three cities. The CFC performance requirements are simple (audit of accounts, improvement in own revenue and disclosure of service levels) while the SFC is focused (property tax improvement). 53. In addition, the ULBs also receive large unconditional revenue grants from both the SFC (₹1396 per capita in 2018-19) and CFC (average of ₹396 per capita per annum). These are in addition to capital grants for specific investments under various programs of the Government of India and the Government of Tamil Nadu. Further, the local autonomy for expenditure and absorption capacities are low, which reduces the attractiveness of incentive funds for ULBs; their effort is upfront but their ability to utilize funds is slow. 54. As a result, the willingness of the ULBs to participate in this component will be influenced by the size and the scope of reforms that they are required to implement. Their capacity to take up reforms are also limited since they are pursuing parallel reforms and capital investments under a variety of Government of India and GOTN programs. Therefore, the reform areas should be linked to their routine functions as far as possible.

20 Government of India, Planning Commission. 2012. Report of the Committee on JNNURM-II: Clean Bastis, safe

communities and people’s cities. Delhi. 21 Press Information Bureau, Government of India, Ministry of Housing & Urban Affairs.

http://pib.nic.in/newsite/PrintRelease.aspx?relid=158703.

15

55. Preference for incentivizing outputs and for actions within the control of urban local bodies. The stakeholders have shared a preference for measuring actions based on output and not based on simple measures. For example, preparation of actions plan for revenue improvement or physical plans are not preferred as a milestone. Instead outputs such as actual improvements in revenue collection or physical connection to households should be measured. Further, ULBs depend on the state government for implementation of some measures and these should not be specified as a reform agenda. For example, increased autonomy to ULBs can be provided only by the state government and this should not be a performance measure for ULBs. 56. Clarity on implementation. Only the Model City Programme finalized implementation modalities, data requirements and validation methods at the time of launch of the incentive scheme. In JNNURM, AMRUT and in the 13th CFC, the implementation modalities were developed after the launch of the scheme. Under AMRUT, performance measures are self certified and the thresholds are low. This, at the minimum, led to delays and in the case of JNNURM (footnote 20), to differing perceptions on actual implementation. Therefore, simple, transparent performance measures which can be quantified upfront are preferred. 57. Size of the component. The initial project proposal envisaged a reform component of 1% of the investments. This would be approximately ₹32.3 crores ($5 million) for the entire project period, or ₹3.8 per capita per year. This is very low compared to the other ongoing reform program where the average is ₹102 per capita per annum; and ₹501 per capita per annum in model cities. Even if the participating cities are limited, this outlay will still be low which would in turn affect the quality of reforms that can be targeted. Other programs have an outlay of 5% to 10% for the reform component. An outlay of 5% ($ 25 million) of the ADB loan size ($500 million) was approved by GOTN. This is approximately ₹100 per capita for the entire duration of the program as compared to an average of ₹102 per capita per annum in other ongoing programs. Out of this outlay, 2% would be available in Tranche 1 and 3% would be available in Tranche 2. 58. Coverage. The ULBs in Tamil Nadu are classified into three categories, municipal corporations, municipalities and town panchayats. GIC will cover all 135 ULBs in Tamil Nadu except Corporation of Chennai and town panchayats. The reason for excluding Chennai is the relatively large size of Chennai which would require that substantial share of the incentive fund be allocated to it. The reason for excluding town panchayats is due to the large number of small size town panchayats; they are also not under the administrative control of Commissioner of Municipal Administration who is the implementing agency for this component. Based on the Census 2011 population adjusted for amalgamations, the total number of ULBs covered is 135 and the total population covered is 16,700,000. 59. Nature of reforms targeted. The per capita incentive for GIC is less than other ongoing reforms programs. This is only a marginal addition to the performance based or conditional grants that the ULBs currently receive under 14th FC (average conditional grants will ₹97.52 per capita per annum) which has relatively simple performance measures. GIC will maximize impact by: (i) supporting limited ULBs to implement difficult reforms; e.g., ADB project towns incentivized for timely project completion; and (ii) supporting all ULBs in priority reforms like accounting, but with targets that will deepen and sustain these reforms, such as resolution of audit objections. Thus, even though national incentive programs provide a higher incentive, by supporting priority reforms of the Government; Tamil Nadu specific targets; and supporting select ULBs, GIC can deliver higher impact. 60. Duration. The wider the coverage of GIC, the lesser is the impact of the incentive. Therefore. as a balance, a part of the outlay would be accessible to all ULBs (except Chennai

16

and town panchayats) while the rest would be limited to ADB project towns. Tranche 1 (2% of ADB loan size) would be open to all targeted ULBs. Tranche 2 (3% of ADB loan size) will be targeted towards ADB Program ULBs (Tranche 1 and Tranche 2 ULBs) and will focus on performance measures related to program implementation, such as achieving household connections and timely project implementation. 61. The other design considerations are as follows:

(i) There will be no competition between ULBs. Each ULB will receive an incentive calculated based on its standalone achievement. The size of the incentive for each city will be scaled based on its population (or other relevant performance measures such as number of connections or number of tax assessments);

(ii) There will be no minimum eligibility or conditions to receive the incentive, other than the performance indicators;

(iii) Use of funds. ULBs will utilize the grants for ‘Eligible Expenditure” defined by the CMA which will take into account the list of activities ineligible for ADB funding. The ULBs will be required to sign an memorandum of understanding (MOU) with the CMA under which the ULBs agree to provide utilization of funds only for the defined “Eligible Expenditure.” Further, the ULBs will also authorize CMA to take corrective measures and improvements in the design and administration of GIC as authorized by ULBs participation in the GIC will be conditional on signing the Memorandum of Understanding. Ineligible expenditures defined by ADB’s safeguards policy apply to this component; and

(iv) Tranche 1 of the GIC will operate from 2018-2019 till 2020-2021. Disbursements will be made within the first 6 months of the completion of the financial year. The first disbursement is targeted in June-July 2019 and the last disbursement is targeted in June-July 2021. Tranche 2 will operate from 2020-21 till 2022-2023.

62. The following performance parameters have been considered for the GIC, based on (i) detailed discussions with the CMA and TNUIFSL in April and August 2017, (ii) review of reform areas under AMRUT, and (iii) review of performance components of 14th CFC and 5th SFC of Tamil Nadu.

(i) Tranche 1 - Accessible by all ULBs (except Chennai and town panchayats) (a) Financial management

i. Preparation of accounts; ii. Settling LFA audit objections; and iii. No dues on statutory and institutional payments–debt, electricity,

bulk water supply and contributory pension scheme. (b) Revenue improvement

i. Collection efficiency of user charges for underground drainage; and ii. Increase in the number of professional tax assessments.

(c) Administration i. Filling vacancies in sanctioned posts.

(ii) Tranche 2 - Limited to ADB Program towns only

(a) Project management i. Achieving targeted number of new household connections for water

and underground drainage projects; and ii. Timely completion of projects.

(b) New initiatives

17

i. Sale of treated wastewater/ use of treated wastewater (differing incentives); and

ii. Fecal sludge management in areas not covered by underground drainage.

(iii) Gender quality and social inclusion indicator (for ADB project ULBs,

applicable in both tranche 1 and tranche 2) 63. Other performance measures were examined but not considered in the final framework.

(i) Property tax improvements were not considered since these are the focus of 5th Tamil Nadu SFC incentive component. Apart from property tax, underground drainage charges and professional tax were considered as the top two priorities. Therefore, revenue sources such as water supply charges have not been chosen;

(ii) To keep the verification process simple, e-Governance has not been chosen as a performance measure. e-Governance is wide in scope and quality of implementation requires detailed verification;

(iii) The preference of GOTN stakeholders was to consider outputs instead of input measures in the first phase of GIC. Therefore, urban planning and other financial planning measures were not considered; and

(iv) Citywide improvement in service delivery parameters (such as 24 x 7 water supply) have not been considered since the experience under JNNURM in reform linked investments has been poor.

64. Deepening AMRUT reforms under the program. All indicators except indicators 8 and 9 (sale of treated wastewater and timely completion of projects) deepen the AMRUT reform agenda. For example, under AMRUT a common target is specified for all ULBs across India in revenue improvement, and the focus has been on two broad heads, taxes and user charges. GIC specifically focusses on collection efficiency in underground drainage charges and increase in the number of professional tax assessments. They constituted 13% of own source revenues of ULBs in the year 2016-2017 and a 50% improvement in collections can increase the municipal own source revenue by 6.5%. Since current collection efficiency in underground charges is only 50% and professional tax from private organizations has not been exploited, a 50% improvement is possible. Thus, it deepens ongoing AMRUT reform initiatives. Overlap with 14th CFC has been avoided by clearly defining the performance relevant in Tamil Nadu. For example, 14th CFC specifies audit of accounts as a performance requirement. The ULBs in Tamil Nadu have chosen to secure an external audit to comply with this requirement. However, under GIC, they need to complete the audit through Local Fund Audit which is the legal requirement for ULBs in Tamil Nadu. Further, resolution of audit objections is also included as a performance measure. There is no overlap with 5th Tamil Nadu SFC. Property tax is the only performance measure recommended by the SFC and it has not been included in GIC. 65. The GIC component has the potential to develop into a performance-based investment support framework for the ULBs. It is the first statewide framework developed based on GOTN governance priorities and therefore is demand driven with high ownership. In future, GOTN can mainstream the GIC framework as an eligibility criterion for ULBs to enter into an investment program; the support that a ULB receives can be made proportional to their performance in key priority areas of the state government. The state can also enhance the size of the program by integrating it into the SFC devolution framework in the future.

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VI. SUMMARY AND KEY RECOMMENDATIONS

66. Summary. The 74th CAA triggered urban governance reforms in India. Tamil Nadu implemented the 74th CAA provisions regarding constitution of ULBs and regular elections. However, it did not expand the functional domain of the ULBs. It carried out substantial financial devolution to ULBs. After the 74th CAA, JNNURM in 2005 and AMRUT in 2015 set a nationwide reform agenda and evaluated State and ULB performance through a common framework. Tamil Nadu ranks second under JNNURM with a score of 99.64% and fourth under AMRUT with a score of 94.05% in reform implementation. Tamil Nadu’s performance in these programs indicates that it performs well in comparison to other states. Tamil Nadu has leadership position in accounting reforms; systematic devolution to urban local bodies; mobilizing commercial finance for urban infrastructure; and in building a professional municipal cadre. 67. Even though Tamil Nadu performed well in other reform programs, there are pending areas of reforms; planning and water supply are not fully devolved to ULBs and the state finance commission identified that Tamil Nadu lags other comparable states in property tax realizations. The GOTN has also identified areas where it intends to deepen reforms and build on the progress already made. These are in the areas of financial management, revenue improvement, filling vacancies and in project implementation including in providing household coverage in water supply and sewage. However, the state lacks an incentive framework to reward ULBs for good performance in governance improvement. The available incentive framework does not cover all the ULBs in Tamil Nadu or do not have targets specific to Tamil Nadu. The model cities program, the only program specific to Tamil Nadu covers only three ULBs. 68. Key Recommendations. A GIC which will provide results based grants can support GOTN pursue its governance priorities with urban local bodies. An outlay of 5% of the ADB loan size was approved for GIC by the GOTN. This results in a per capita grant of approximately ₹100 during the entire program. Average per capita grant under other incentive programs is ₹102 per year. The 2% of the approved budget is available during Tranche 1 and 3% during tranche 2. 69. In order to balance the available budget and the need to cover all the ULBs, Tranche 1 will focus on all ULBs and Tranche 2 on ADB project ULBs under the program. This will enable Tranche 1 to target simpler reforms (financial management, revenue improvement and filling vacancies) across all ULBs. Tranche 2 will provide a higher incentive to ADB project ULBs (irrespective of whether they received investments in Tranche 1 or Tranche 2) to implement relatively tougher reforms such as project implementation, providing household coverage, reuse of wastewater and fecal sludge management. Implementation of the gender action plan will be included in both tranches for ADB project ULBs. Tranche 1 of the GIC will operate from 2018-2019 until 2020-2021. Tranche 2 will operate from 2020-2021 till 2022-2023. An independent agency will support the Commissioner of Municipal Administration in evaluating results and in field verification. 70. The GIC will cover all ULBs expect Chennai, which is too large to be included with other ULBs; and town panchayats, which do not come under the administrative control of the Commissioner of Municipal Administration which will be the implementing agency for this component. Based on the Census 2011 population adjusted for amalgamations, the total population covered under GIC is 16.7 million and the number of ULBs covered is 135.

Annexure 1 19

COMPARISON OF REFORM AREAS IN INCENTIVE PROGRAMS

AMRUT = Atal Mission for Rejuvenation and Urban Transformation, CFC = Central Finance Commission, SFC = State Finance Commission, TNSUDP = Tamil Nadu Sustainable Urban Development Program, ULB = urban local body.

AMRUT AMRUT (Proposed) 14th CFC 5th SFC TNSUDP e-Governance Trust and verify for online

services Publishing service levels Implementation of

municipal E-Governance solutions

Municipal tax and fees improvement

Value capture finance Increase in own revenues over previous year

Improvements in property tax collections

Increase in own source revenue

Professionalization of municipal cadre

Professionalization of municipal cadre

Augmenting double entry accounting

Publishing audited accounts

Urban planning and city level plans Increased capacity for preparation of local area specific urban designs

Devolution of funds and functions Autonomy and capacity of ULB with respect to local capital expenditure

Review of building by-laws Land titling

Set up financial intermediary at State level

Credit rating and municipal bonds

Improvement in levy and collection of user charges

Credit rating

Energy and water audit

Swachh Bharat Mission

Annexure 2 20

PERFORMANCE-BASED GRANT INCENTIVE URBAN GOVERNANCE PROGRAM A. Background 1. Performance-based grant incentive urban governance program. The Government of Tamil Nadu (GOTN) requested support for a performance-based grant Governance Improvement Component (GIC). Allocation for GIC in Tranche 1 is $10 million and $25 million for remaining tranches. In Tranche 1, improvements include financial management, revenue improvement, filling of vacancies, and gender mainstreaming activities. Tranche 1 will cover all 135 urban local bodies (ULBs) (total population 16,700,000) in Tamil Nadu except Chennai and town panchayats which are not under the administrative control of the Commissionerate of Municipal Administration (CMA). Tranche 2 will focus on Asian Development Bank (ADB) project towns with functioning wastewater systems and focus on improved service delivery and innovation including household coverage, wastewater reuse, and gender mainstreaming activities, and project implementation performance. CMA will administer the GIC. 2. Use of performance grant funds. Eligible expenditures for ULBs receiving performance grants will be defined by the CMA. ADB’s list of ineligible expenditures (Safeguards Policy Statement, 2009) will be included in the official order from CMA issued to ULBs. Grants cannot be used as ULB counterpart funding. The ULBs will be required to sign an Memorandum of Understanding (MOU) with the CMA under which the ULBs agree to utilize the grants only for defined “Eligible Expenditures.” A ULB’s participation in the GIC will be conditional on its signing the MOU. CMA may take corrective measures and improvements in the design and administration of GIC.

3. The CMA will establish an Urban Data and Governance Improvement Cell (UDGIC). This cell will undertake research on urban finance and performance improvement. In the first three years of the program, the cell will primarily focus on administering the GIC and will be supported by the Governance Improvement and Awareness Consultants (GIAC) hired under the program and two senior level experts hired on contract basis for this purpose. From year 4 onwards, it will take up research on urban finance and management of all incentive programs across the State. The GIAC will serve as an independent verification agency (IVA) to conduct annual performance assessments, regular data collection, field verifications and recommending incentive payouts.

4. The GIC will incentivize ULBs to implement governance priorities. This component has been designed in response to the following situation:

(i) Need for focus on the priorities of GOTN. Tamil Nadu ranks high in reform scores as compared to other states. Under Jawaharlal Nehru National Urban Renewal Mission (JNNURM), Tamil Nadu ranked second in reforms on mission completion; under Atal Mission for Rejuvenation and Urban Transformation (AMRUT), Tamil Nadu ranked fourth in reforms in the year 2015-2016. However, GOTN has identified further areas for improvement. For example, even though ULBs in Tamil Nadu complete audit of their financial statements, the process is delayed and the observations of the Local Fund Auditor remain unattended; as on June 2017, more than 148,672 audit observations were pending resolution. Completion of audit takes more than twelve months for most ULBs; as on February 2017, audit for the year 2015-16 was completed for only 11 out of 135 ULBs. Only 71.1% of households were connected to underground drainage and water networks as compared to the project targets; collection efficiency of user charges for underground drainage is only 49%; underground drainage projects are delayed by more than 24 months.

Annexure 2 21

Sanctioned posts remain unfilled and there is an average vacancy of 18.8% in key positions. New areas such as fecal sludge management and wastewater reuse need attention.

(ii) Lack of an incentive fund that covers the cross section of ULBs and which has Tamil Nadu specific targets: The incentive funds in operation are too focused. The Model Cities component of the Tamil Nadu Sustainable Urban Development Project supports only three ULBs. The incentive fund recommended by the fifth State Finance Commission focuses only on property tax. The performance component of 14th Central Finance Commission (CFC) supports all ULBs, but the targets are based on all India averages and are not relevant to Tamil Nadu. For example, the 14th CFC requires ULBs to demonstrate positive growth in own revenue. Own revenues of ULBs in Tamil Nadu grew by a CAGR of 13.46% between 2010-2011 and 2014-2015.

(iii) The design of GIC has taken into consideration the learning from other incentive programs which include: (a) deepening national incentive programs such as AMRUT; (b) focused initiatives as compared to a wide agenda; (c) setting targets relevant to Tamil Nadu; (d) focusing on regular functions of ULBs since their capacity and attention are divided between several parallel programs (which also offer higher incentives than GIC); (e) preference for incentivizing outputs and for actions within the control of ULBs; and (f) simple and objective evaluation methodology to provide clarity to ULBs.

(iv) The per capita incentive for GIC is ₹13 per capita per annum which is lesser than other ongoing incentive programs. In the year 2015-2016, AMRUT provided performance based incentive of ₹45 per capita. Conditional grants available under 14th CFC is ₹98 per capita per annum. Own source revenues of municipalities in the year 2014-15 was ₹1112 per capita. Therefore, GIC is only a marginal addition to the revenues of ULBs and cannot trigger performance in difficult areas. It can only serve as recognition of performance in routine activities; when applied to select ULBs like ADB project towns, it can focus attention on priority activities, like timely project completion. Therefore, GIC will target performance measures which are already a priority for state government and ULBs.

(v) The GIC will have an outlay of $10 million in Tranche 1 and $25 million for the overall program. In Tranche 1, improvements with potential for immediate implementation in financial management, revenue improvement and filling of vacancies will be focused on. These are applicable to all ULBs and therefore Tranche 1 will cover all ULBs except Corporation of Chennai and town panchayats which are not under the administrative control of the CMA which will be the implementing agency for this component. The total number of ULBs covered in tranche 1 is 135 and the total population covered is 16,700,000. Tranche 2 will focus on more difficult improvements such as project implementation, household coverage, wastewater reuse etc. It will cover ADB project ULBs and ULBs with functioning wastewater systems. In both Tranche 1 and Tranche 2, implementation of gender equality and social inclusion plan will be incentivized for ADB project ULBs.

5. Use of funds. ULBs will utilize the grants for ‘Eligible Expenditure” to be defined by the CMA. Activities which are not permitted under ADB funding will be excluded from the list of Eligible Expenditure. The grants will also not be used as ULB counterpart funding. The ULBs will be required to sign a MOU with the CMA under which the ULBs agree to utilize the grants only for the defined “Eligible Expenditure.” Further, the ULBs will also authorize CMA to take corrective measures and improvements in the design and administration of GIC. A ULB’s participation in the GIC will be conditional on its signing the MOU.

22 Annexure 2

6. Tranche 1 of the GIC will operate from 2018-2019 until 2020-2021. Disbursements will be made within the first 6 months of the completion of the financial year. The first disbursement is targeted in June-July 2019 and the last disbursement is targeted in June-July 2021. Tranche 2 will operate from 2020-2021 until 2023-2024.

B. Performance Indicators 7. The GIC will have the following performance parameters

I) Tranche 1 - Accessible by all ULBs (except Chennai and town panchayats) a) Financial management

1) Preparation of accounts; 2) Settling local fund audit (LFA) audit objections; and 3) No dues on statutory and institutional payments – debt, electricity, bulk water

supply and contributory pension scheme. b) Revenue improvement

1) Collection efficiency of user charges for underground drainage; and 2) Increase in the number of professional tax assessments.

c) Administration 1) Filling vacancies in sanctioned posts.

d) Gender equality and social inclusion 1) Implementing the gender action plan (GAP) (only for ADB Project ULBs).

II) Tranche 2 - Limited to ADB project ULBs only, unless specified otherwise

a) Project management 1) Achieving targeted number of new household connections for water and

underground drainage projects; and 2) Timely completion of projects.

b) New initiatives 1) Sale of treated wastewater/ Use of treated wastewater (applicable to all ULBs

with functioning wastewater systems); and 2) Fecal sludge management in areas not covered by underground drainage.

c) Gender equality and social inclusion 1) Implementing GAP (only for ADB Project ULBs).

8. Definitions, eligible ULBs, performance requirement and corresponding incentives are summarized in Annexure I. The verification methodology is provided in Annexure II. 9. Other performance measures were examined but not considered in the final framework.

(i) Property tax improvements were not considered since these are the focus of 5th TN SFC incentive component. Apart from property tax, underground drainage charges and professional tax were considered as the top two priorities. Therefore, revenue sources such as water supply charges have not been chosen;

III) To keep the verification process simple, e-Governance has not been chosen as a performance measure. e-Governance is wide in scope and quality of implementation requires detailed verification;

IV) The preference of GOTN stakeholders was to consider outputs instead of input measures in the first phase of GIC. Therefore urban planning and other financial planning measures were not considered; and

Annexure 2 23

V) Citywide improvement in service delivery parameters (such as 24 x 7 water supply) have not been considered since the experience under JNNURM in reform linked investments has been poor.

10. The performance indicators deepen the AMRUT reform agenda. For example, under AMRUT a common target is specified for all ULBs across India in revenue improvement, and the focus has been on two broad heads, taxes and user charges. GIC specifically focuses on collection efficiency in underground drainage charges and increase in the number of professional tax assessments. Overlap with 14th CFC has been avoided by clearly defining the performance relevant to Tamil Nadu. For example, 14th CFC specifies audit of accounts as a performance requirement. The ULBs in Tamil Nadu have chosen to secure an external audit to comply with this requirement. However, under GIC, they need to complete the audit through Local Fund Audit which is the legal requirement for ULBs in Tamil Nadu. Further, resolution of audit objections is also included as a performance measure. There is no overlap with 5th Tamil Nadu SFC. Property tax is the only performance measure recommended by the SFC and it has not been included in GIC. C. Implementation Arrangements

11. The CMA will administer the GIC. It is responsible for administrative oversight of the participating ULBs. It has experience in funds flow management from higher levels of Government to the ULBs and monitors expenditure and performance of ULBs. In addition, CMA has experience in administering conditional grant release under the 13th and 14th Finance Commissions and the Model Cities component of the World Bank funded Tamil Nadu Sustainable Urban Development Project. 12. The CMA will establish an UDGIC. This cell will undertake research on urban finance and performance improvement. In the first 3 years of the program, the cell will primarily focus on administering the GIC and will hire two experts on contract basis for this purpose. From year 4 onwards, it will take up research on urban finance and management of all incentive programs across the state. The Center will be responsible for engaging an independent verification agency (IVA) to conduct annual performance assessments, regular data collection, field verifications and recommending incentive payouts. 13. The GIC will be implemented from late 2018 (upon mobilization of the GIAC consultants) in the target ULBs. The financial year 2018-2019 will be the first year of performance. CMA till take up the following responsibilities for implementation of GIC:

(i) Pre-launch activities. Communicated to all target ULBs along with toolkits and guidelines on performance requirements, data collection and reporting requirements. Dissemination workshops to familiarize ULBs by fourth quarter of 2018;

(ii) Change in data collection methodology prior to launch. The total number of employees under each professional tax assessment is not collated, though it is available in the ULB as part of the individual assessment. This needs to be aggregated at the ULB level. This is the only change in data collection methodology that needs to be introduced prior to launch (by Q4 2018);

(iii) Preparatory activities in 2018-2019 to carryout first performance assessment in May 2019. The performance of the ULBs in the year 2018-2018 will be assessed starting from May 2019. Annexure III details the changes required in data collection, reporting requirement and IT systems. The changes other than for professional tax can be completed during the year 2018-19 after the launch of GIC. Two experts in

24 Annexure 2

UDGIC will be responsible for preparatory activities. During 2018-19, the experts will also collect baseline information as on 31 March 2018 and support CMA to procure consultants for annual performance assessment. Outline terms of reference (TOR) for the experts is provided in Annexure IV;

(iv) Annual performance assessments: Prepare a model annual calendar for performance assessment; conduct annual performance assessment of ULBs through IVA; calculate incentive payments and release payments; organize dissemination workshop with participating ULBs on regional basis. Outline TOR for IVA is included in Annexure IV; and

(v) Management of GIC framework: Annual review of performance indicators; baseline data collection; updating information technology and other reporting systems; revising performance indicators; forecast of performance and revision of yearly budgets; expedite state level actions required to improve performance (such as sanctioning of recruitment requests).

14. Annual performance assessment will follow the indicative cycle given below.

Table A2.4: Annual Performance Assessment Activity Time period Responsibility

Publish annual performance assessment calendar

By March 31 of preceding year CMA (UDGIC Cell)

Routine quarterly reports Within fifteen days of end of quarter

ULBs, Local Fund Audit

Annual reporting of data Within thirty days of completion of the financial year

TWAD, TNUIFSL, TUIFDCO

Independent verification Within sixty days of completion of financial year

Independent Verification Agency (IVA)

Approval of final incentive allocation

Within ninety days of completion of financial year

CMA

Release of payments Within ninety days of financial year

CMA

CMA = Commissionnerate of Municipal Administration, IVA = Independent Verification Agency, TNUIFSL = Tamil Nadu Urban Infrastructure Financial Services Limited, TUIFDCO = Tamil Nadu Urban Finance and Infrastructure Development Corporation Ltd., TWAD = Tamil Nadu Water Supply & Drainage Board, UDGIC = Urban Data and Governance Improvement Cell, ULBs = urban local bodies.

15. The following are the consulting/ procurement requirements for administering GIC. The implementation support for ADB Program includes expenditure provisions for these.

(i) Two experts to be hired on contract basis in UDGIC; (ii) IVA for annual performance assessments. The IVA responsibilities are part of the

IEC, Governance improvement and awareness consultant; and (iii) Information technology systems for performance reporting by ULBs or modifications

in the existing information technology system for data collection and reporting. These will be procured under the ADB program loan.

16. The yearly forecast of incentive payouts from 2018-2019 is provided below.

(i) The payouts are for a performance year and will be paid in the first half of the next financial year;

Annexure 2 25

(ii) The payouts are estimates and will be revised for Tranche 2 by CMA as per baseline data for Tranche 2 and after considering revisions in the GIC framework based on the experience of Tranche 1;

(iii) Performance indicator 2 expires by the last year of payout and cannot be carried forward. However, if minimum performance is achieved earlier, incentive payout can be claimed in the earlier year itself;

(iv) Payout for performance indicator 8 will commence from the performance year when the minimum performance is achieved until the last performance year;

(v) Payout for performance indicator 9 will be applicable for the performance year when project completion occurs; and

(vi) Performance indicators 1, 3, 4, 5, 6, 7, 10, 11 and 12 are for achievement in each performance year. If minimum performance is not achieved by a ULB in a particular performance year the incentive expires for that performance year and cannot be carried forward to the next year. If a ULB did not receive the incentive in a particular performance year, it is still eligible for incentive payout for the next performance year provided minimum performance in the next performance year is achieved.

Table A2.5: Forecast Incentive Payouts

Incentive payout for the performance year (Disbursed in the next financial year), $ million

Total ($ million)

Tranche 1 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 2018-2024

1. Audited accounts 0.5 0.5 0.5 - - - 1.6

2. Audit Paras 0.2 1.5 0.0 - - - 1.6

3. Clearing mandatory payments 0.5 0.5 0.5 - - - 1.4

4. UGD Charges 0.6 0.6 0.6 - - - 1.7

5. Professional Tax 0.4 0.5 0.5 - - - 1.4

6. Vacancies 0.3 0.5 0.8 - - - 1.6

7. GAP Implementation 0.2 0.2 0.2 - - - 0.7

Total Tranche 1 2.6 4.2 3.2 - - - 10.0

Tranche 2

8. New Connections - - 1.3 1.9 2.5 0.6 6.3

9. Project Completion - - 0.4 1.2 1.9 0.4 3.8

10. Wastewater reuse - - 0.2 0.3 0.4 0.4 1.2

11. Fecal sludge management - - 0.4 0.6 0.7 0.8 2.4

12. GAP Implementation - - 0.3 0.3 0.3 0.3 1.2

Total Tranche 2 - - 2.5 4.2 5.8 2.5 15.0 UGD = underground drainage, GAP = gender action plan.

26 Annexure 3

PERFORMANCE INDICATORS AND INCENTIVES A. Definitions 1. Performance Year – Year in which performance is achieved. For example, for completion of audit of year 2017-18, the Performance Year will be the year 2018-19. 2. Payment Year – Year in which the payment of incentive is made. This will be the year following the Performance Year.

3. Scaling of incentives – Incentives will be scaled on two factors: (i) based on population or households or other relevant parameters. For example, on successful completion of audit, ULBs will receive an incentive per capita. Thus, larger ULBs will receive a larger incentive in Rs, in relation to their population; and (ii) the second scaling factor will be the level of performance. For example, if audit is completed before September 30, the urban local body (ULB) would receive a higher per capita incentive as compared to a ULB that completed the audit between September 30 and December 31. The formula for scaling is listed along with the definition of the indicators.

4. Reference Population – Census 2011 population is used as reference population. Where ULB limits have been expanded since Census 2011, the combined population of the merged areas as per Census 2011 will be used for calculations. The Commissionerate of Municipal Administration (CMA) will publish the population figures as per Census 2011 to be used for calculations.

5. Minimum Performance or Threshold Performance – The performance level below which no incentive is payable. For example, if finalization of audit of the accounts of year 2019-20 is not completed by December 31 in the year 2020-2021, no incentive will be payable for this indicator.

Maximum Performance – The performance level above which the incentive is not scaled. For example, for clearing audit objections, the maximum performance assumed is clearing 95% objections. If performance at or above this level, the per capita incentive payable would remain the same, whereas between performance levels of 75% and 95%, the per capita incentive would vary between ₹2 and ₹3.

6. PI – Performance Indicator

7. GAP – Gender action plan.

8. Data sources for Indicator 1 and 2 are from the report of the Local Fund Auditor of the Government of Tamil Nadu. Data sources for indicators 3-6, 8-10 are CMA.

Annexure 3 27

Tranche 1: Financial Management

Indicator Eligible ULBs Yearly or one time

target Incentive

per capitaa Minimum

performanceb Maximum

performancec

Incentive for achievement in

between

PI 1 – Preparation of accounts Audited accounts of the previous year submitted to CMA

All ULBs except Chennai and town panchayats

Yearly target. First performance year 2018-19. Last performance year 2020-21

₹2 per year Audited accounts submitted to CMA by Dec 31 of each financial year; by Mar 31 in the year 2018-19.

Audited accounts submitted before Sep 30 of each financial year; By Dec 31 in year 2018-19.

At maximum - 1.5 times, i.e. ₹3.0 per capita per year. No scaling of incentive for performance levels in between.

Remarks Since accounting transactions are being carried out online, accounts will be ready within a fortnight of completion of financial year. Therefore audit of accounts is being chosen as the indicator. As per the statement of LFA Department dated 28/02/17, audit of 2014-15 (two years prior) was completed for 132/135 ULBs and audit for 2015-16 was completed for 11/135 ULBs. As per LFA statement dated 27/07/17, audit of accounts of 2015-16 (two years prior) was completed for 120 out of the 135 ULBs. Audit was completed for the year 2016-17 for only 1 out of 135 ULBs. Accounts are expected to be submitted to LFA early with online transactions and therefore audit milestones have also been fixed accordingly. For the first year of incentive (2018-19), the threshold milestone for completion of audit of accounts of the year 2017-18 will be March 31, 2019 and the milestones for maximum incentive will be December 31, 2018. Given the financial incentives, ULBs may find it easier to appoint an external auditor for the limited purpose of achieving the milestone. Therefore, external audit is not being taken as a substitute for local fund audit.

CMA = Commissionerate of Municiipal Administration, LFA = Local Fund Audit, PI = performance indicator, ULB = urban local body. a As per Census 2011 population. In case of ULBs where additional areas have been merged, the population of the merged areas as per Census 2011 may be

added. b To be eligible for incentive. c Beyond which no additional incentive is payable.

28 Annexure 3

Indicator Eligible ULBs

Yearly or one time target

Incentive per capita

Minimum performance

Maximum performance

Incentive for achievement in

between

PI 2 – Resolution of audit objections Percentage of audit objections from LFA pertaining to financial year 2015-16 or earlier that are pending settlement

All ULBs except Chennai and town panchayats

Year 2019-20 or 2018-19, whenever status of less than 5% pending settlements is achieved.

₹5 25% 5% Pro rata ₹5 X [25% - Achievement] / [20%]

Remarks Clearing audit objections paras is one of the priorities of CMA. Audit objections are classified as “ordinary” or “special” based on materiality. As per LFA statement dated 28/02/2017, the pending audit objections are 1,78,183. As per LFA statement dated 27/07/17, the pending audit objections are 148,672. This indicator is a one-time target. ULBs will receive this incentive when they achieve this target. To help focus the efforts of ULBs, a cutoff date of objections pertaining to the year 2015-16 or before has been adopted which must be cleared by March 31, 2020. Settling the audit paras for this period and prior period will make the ULBs eligible for this incentive. ULBs are eligible to receive the incentive for Performance Year 2019-20 (year in which performance is achieved, actual payment of incentive will be in the following financial year after verification). If the percentage of objections outstanding is less than 5% in the year 2018-19 itself, they are eligible to receive the incentive for the performance year 2018-19.

CMA = Commissionerate of Municipal Administration, LFA = Local Fund Audit, PI = performance indicator, ULB = urban local body.

Indicator Eligible ULBs

Yearly or one time target

Incentive per capita

Minimum performance

Maximum performance

Incentive for achievement in between

PI 3 – Timely debt and statutory payments Zero dues in electricity payments; interest and principal payment to TUFIDCO and TNUIFSL; contributory pension scheme; and bulk water charges to TWAD

All ULBs except Chennai and town panchayats

Yearly target. First performance year 2018-19. Last performance year 2020-21

₹2 per year No outstanding payments in these accounts

Not applicable Not applicable

Annexure 3 29

Indicator Eligible ULBs

Yearly or one time target

Incentive per capita

Minimum performance

Maximum performance

Incentive for achievement in between

ULBs meeting the payment obligations in these accounts will be provided an incentive, each year. The target is zero pending payments in these accounts as on March 31 of the Performance Year.

PI = performance indicator, TNUIFSL = Tamil Nadu Urban Infrastructure Financing Services Limited, TUFIDCO = Tamil Nadu Urban Finance Infrastructure Development Corporation, TWAD = Tamil Nadu Water and Drainage Board, ULB = urban local body.

Revenue improvement

Indicator Eligible ULBs Yearly or one time target

Incentive Minimum performance

Maximum performance

Incentive for achievement in between

PI 4 –User charges for Underground Drainage Collection efficiency in user charges collected from house connection for under ground drainage

All ULBs with completed, ongoing or proposed UGD projects; eligible list to be drawn up by CMA. Chennai and town panchayats not included.

Yearly target. First performance year 2018-19. Last performance year 2020-21

₹50 per connection

Collection of 60% of current year’s charges

Collection of 100% of current year’s charges

Pro rata Achievement in % X ₹50 per connection

Underground drainage schemes have been completed in 32 ULBs and are planned/ under implementation in another 29 ULBs. As of 31/07/2017, 522545 house service connections have been given. The collection efficiency of current year charges was 49.69% in the year ending 31 March 2017. The incentive would be paid per connection based on actual collection efficiency achieved. The more the number of connections in a ULB and the higher the collection efficiency, greater would be the incentive received by the ULB. The ULBs need to achieve a minimum collection efficiency of 60% of current year charges to be eligible for the incentive.

CMA = Commissionerate of Municiipal Administration, PI = performance indicator, UGD =underground drainage, ULB = urban local body.

Indicator Eligible ULBs Yearly or one

time target Incentive Minimum

performance Maximum performance

Incentive for achievement in between

PI 5 – Professional tax collections Increase in average number of assessments

All ULBs except Chennai and town panchayats

Yearly target. First performance year 2018-19. Last

₹800 per additional assessment that is realized.

Not applicable Not applicable Not applicable

30 Annexure 3

Indicator Eligible ULBs Yearly or one time target

Incentive Minimum performance

Maximum performance

Incentive for achievement in between

from which professional tax is realized in the two immediately prior six monthly assessment periods (current period) compared to average number of assessments from which professional tax is realized in the two assessment periods prior to current period.

performance year 2020-21

Total number of assessments in the year 2016-17 was 4,07,990. Data is not available in consolidated form prior to 2016-17. Increase in current year collections between the years 2013-14 and 2016-17 was 6.64% per annum. Based on an assumed per employee rate of ₹2000 per year (75% of employees pay the maximum slab of ₹2500 per annum and the rest pay an average of ₹600 per annum), the number of employees from whom professional tax is realized for the current year is assumed to be 6.66 lakhs in the year 2016-17. Professional tax is paid by employers or owners of business. Each assessment contains payment for multiple employees. The ULBs record the details of the number of employees in individual assessment forms. But this is not aggregated across assessments. The ULBs only report the total number of assessments, not the number of employees from whom professional tax is collected. ULBs need to aggregate and report the actual number of employees for which assessments have been made and collections realized. For the purposes of calculation of the incentive, assessment refers to the number of employees. When payments are collected from an organization, each employee for whom payment is received will be treated as an individual assessment, although the entire organization is treated as a single assessment at present.

Indicator Eligible ULBs Yearly or one time target

Incentive Minimum performance

Maximum performance

Incentive for achievement in between

PI 6 - Key staff positions filled Number of vacancies filled in Grade C and above positions in general administration, engineering, public health and town planning

All ULBs except Chennai and town panchayats

Yearly target. First performance year 2018-19. Last performance year 2020-21

₹500,000 per vacancy1

Each vacancy filled

- -

Annexure 3 31

Indicator Eligible ULBs Yearly or one time target

Incentive Minimum performance

Maximum performance

Incentive for achievement in between

Note 1. The vacancies in the positions of Grade II and above (including commissioners and Jt Directors) are about 120 in the key departments of general administration, engineering, public health and town planning. The incentive of ₹500,000 per vacancy needs to be revised proportionately (prior to launch of GIC) based on the number of vacancies in Grade C and above, so as to fit within the budget for this indicator. If the total vacancies are 600, then the incentive would be ₹500,000 x 120/600 = ₹100,000 per vacancy filled.

PI = performance indicator, ULB = urban local body.

Indicator Eligible ULBs

Yearly or one time target Incentive

Minimum performance

Maximum performance

Incentive for achievement in

between

PI7 – Implementation of GAP Equal opportunity employment across all positions and maintenance of sex disaggregated data on applicants including short listed and selected candidates

ADB Project ULBs

Yearly target. First performance year 2018-19. Last performance year 2020-21

₹2,800,000 per ULB per year

Conformance NA NA

This component is applicable for ADB project towns. From the year 2020-21 onwards, the progress in implementing the plan will be evaluated on a yearly basis. Those ULBs that achieve conformance will be incentivized.

ADB = Asian Development Bank, PI = performance indicator, ULB = urban local body.

32 Annexure 3

Project Management and Service Delivery

Indicator Eligible ULBs Yearly or one

time target Incentive Minimum

performance Maximum

performance

Incentive for achievement in

between

PI 8 - Achieving targetted household connections Number of new house service connections added under the Project for water supply and/or underground drainage

ADB Project ULBs2

Yearly from 2020-21 onwards; for individual ULBs, on achievement of threshold percentage of connections and every year thereafter till 2023-24

₹800 per house service connection

Minimum of 60% of targeted house service connections achieved

Not applicable Not applicable

Note 2: This component may also cover, based on availability of budget, other ULBs (except Chennai and town panchayats) where UGD projects have been completed. Prior to Trance 2, based on the baseline the feasibility of extending coverage will be assessed by CMA. The ULB will be provided incentive for each new house service connection under the project for water supply and sewerage. Based on per capita costs, 6,20,380 new connections are assumed to be targeted under the proposed water supply and sewerage projects. In 32 towns where underground sewerage projects have been completed/ near completion, the actual number of connections achieved as on 31/07/2017 has been 71.1% as compared to the estimates in the DPR. This incentive is applicable in those projects where the responsibility for providing house connections is with the ULB and not with a parastatal. However, if a project is being implemented by a parastatal but the operations are the responsibility of the ULB and house connections are being provided by the ULB then the incentive would be payable to the ULB. If the parastatals are responsible for providing the connections, then the ULB is not eligible for this indicator.

CMA = Commissionerate of Municipal Administration, DPR = detailed project report, PI = performance indicator, ULB = urban local body.

Annexure 3 33

Indicator Eligible ULBs Yearly or one

time target Incentive Minimum

performance Maximum

performance

Incentive for achievement in

between

PI 9 - Project management and completion Timely completion of construction as per construction contract

ADB Project towns

One time target. On project completion3

0%- 2% of original contract value

Projects completed within fifteen months of original completion date as per construction contract

Projects completed by completion date as per construction contract

Pro rata in between

Projects completing within deadline as per construction contract will receive an incentive of 2% of original contract value which will progressively reduce to zero if completion date is delayed by 15 months or beyond from deadline. This is applicable to projects implemented by the ULB only. This incentive is not applicable where projects are implemented by a parastatal. Since time overrun is a likely occurrence in most projects, completing within 15 months of original targeted date, without considering authorized extensions later on, will be incentivized. These targets also implicitly recognize that targets set during contracting stage are optimistic. Note 3: Partial commissioning will also be considered (pro rata based on the actual number of households benefitted as compared to target) provided the entire service delivery chain has been commissioned for that portion of households. For example, if 30% of the households as compared to the targets in DPR have been connected to the UGD collection system, and the required pumping and treatment facilities have also been commissioned, then 30% of the project would be deemed to have been completed (partial commissioning). The incentive would be payable on 30% of the project cost.

ADB = Asian Development Bank, UGD = underground reservoir, PI = performance indicator, ULB = urban local body.

Indicator Eligible ULBs Yearly or one

time target Incentive Minimum

performance Maximum

performance

Incentive for achievement in

between

PI10 – Reuse of treated wastewater

ULBs with functioning sewage treatment plants except Chennai Corporation and town panchayats

Yearly target. First performance year 2020-21. Last performance year 2022-24

Normative ₹10 Lakh per mld of treated wastewater sold for reuse4

At least 10% of the installed capacity of STP

Not applicable Not applicable

34 Annexure 3

About 62 ULBs have implemented/ implementing underground drainage systems and sewage treatment plants. In addition, some of the ULBs under the proposed ADB project will also take up investments in underground drainage. Amongst these ULBs, those that are able to sell treated wastewater will be incentivized. Note 4: Wastewater reused without sale (such as for agricultural purposes) will also be considered with 1/5 th of the weightage as for wastewater sold.

PI = performance indicator, STW = sewage treatment plant, ULB = urban local body.

Indicator Eligible ULBs Yearly or one

time target Incentive Minimum

performance Maximum

performance

Incentive for achievement in

between

PI11 – Fecal sludge management Number of houses where septic tanks are emptied to an approved treatment facility through an authorized fecal sludge emptying service

ADB Project ULBs

Yearly target. First performance year 2020-21. Last performance year 2023-24

₹200 per household per year

Not applicable Not applicable Not applicable

This component is open to ADB Project ULBs where the coverage of underground drainage is not universal. ULBs will be encouraged to develop fecal sludge management practices to serve the uncovered areas. The ULBs will be provided an incentive per household that is serviced through septic tank emptying services. The administration of this incentive is based on households emptied by public or private service providers. A transparent and auditable mechanism of verification will be required if this indicator is chosen.

ADB = Asian Development Bank, PI = performance indicator, ULB = urban local body.

Indicator Eligible ULBs

Yearly or one time target Incentive

Minimum performance

Maximum performance

Incentive for achievement in

between

PI12 – Implementation of GAP i) All non- statutory committees of the elected

ADB Project ULBs

Yearly target. First performance year 2020-21. Last performance year 2023-24

₹2,800,000 per ULB

Conformance NA NA

Annexure 3 35

Indicator Eligible ULBs

Yearly or one time target Incentive

Minimum performance

Maximum performance

Incentive for achievement in

between

representatives of the ULB have at least 33% participation of women and ii) ULBs prepare, maintain & publish sex disaggregated database on staff, elected representatives and members of Standing committees

This component is applicable for ADB project towns. From the year 2020-21 onwards, the progress in implementing the plan will be evaluated on a yearly basis. Those ULBs that achieve conformance will be incentivized.

ADB = Asian Development Bank, PI = performance indicator, ULB = urban local body.

36 Annexure 4

ACTIONS TO IMPROVE DATA COLLECTION AND REPORTING 1. The Governance Improvement Cell (GIC) will utilize the existing systems in urban local bodies (ULBs) and Commissionerate of Municipal Administration (CMA) including the new E-Governance system that is being implemented. The first phase of E-Governance implementation focuses on revenue and accounts modules. This is in advanced stage of implementation. This system can provide most of the information required for performance assessment. Further, for an ongoing rewards program, CM awards for ULBs, a separate data entry module has been developed. ULBs upload the required information in this module. A similar module can be created for the performance based governance reforms fund (performance assessment module). Information available in the E-Governance system can be updated into this module directly; information that is not captured in the E-Governance system can be separately entered by the ULBs. 2. The following paragraphs summarize changes that are required in data collection, reporting and E-Governance systems. These changes will be implemented by CMA with the support of Urban Data and Governance Improvement Cell (UDGIC) in the year 2018-19. The only change required prior to launch of GIC is in the aggregation of data regarding employees in professional tax. This needs to be completed before April 1, 2018. The other changes that are required are minor and can be implemented during the year 2018-19. However, if these are delayed beyond 31 March 2019, the performance assessment will require manual compilation of data and additional field verification. 3. Financial management

i) Data entry module of performance assessment system to capture the milestones in Local Fund Audit (LFA), a) submission of accounts to the LFA by ULB, b) intimation of corrections by LFA to ULB, c) submission of revised accounts by ULB to LFA, and d) date of LFA certificate of completion of accounts;

ii) Status of audit completion to be provided ULB-wise; iii) Audit paras pending settlement – To be provided ULB-wise, separated by financial

year and separated into special para/ ordinary para. ULBs also need to enter this information into the performance assessment module;

iv) ULBs need to modify bookkeeping procedures to track bills that are due and are pending payment. These should be reflected as current liabilities. Out of long-term loan liabilities, repayment due in the next financial year should be reflected as current liabilities. Revisions in E-Governance accounting module to allow ULBs to enter the bills as current liability; and

v) Based on data maintained by the ULBs and the data entered into the E-Governance system, a status report on settlement of statutory dues.

3. Revenue

i) The E-Governance module should provide a data field for the number of employees on whose behalf the assessment for professional tax is being filed (before 01 April 2018);

ii) The E-Governance module should also provide data fields to enter the details of each individual employee for professional tax (preferable), and this can be made accessible to professional tax payers to that the data entry load on the ULB is minimized;

iii) The baseline data on employees for professional tax for 2017-18 needs to be entered into the system manually by the ULBs;

iv) The E-Governance module should report the number of employees on whose behalf professional tax has been collected in the year and the corresponding number for the previous year (and the total collections in each of the years).

Annexure 4 37

4. A vacancy status report may need to be generated for input into the performance assessment module. 5. Project implementation and service delivery

i) Target number of connections for new projects as per the detailed project report in the E-Governance module as a data field, and generating a report of the number of new connections that have paid the connection fee;

ii) For each ULB that proposes to sell wastewater, the E-Governance module should include provisions for: a) Details of sewage treatment plant (STP) from which sale will be made; b) Updating monthly production of wastewater and sale of wastewater; c) Revenues from the sale of wastewater, as accounted for in the revenue

statements of the ULB; and d) Details of customers and sale agreements.

iii) Tracking wards earmarked for fecal sludge management by the ULB; iv) Database of households intended to be covered through fecal sludge

management; v) Details of emptying of septic tanks, either through ULB service or through

authorized service provider; and vi) Evidence of fee collection from the household (or) service completion

acknowledgement for fecal sludge management.

38 Annexure 5

DRAFT OUTLINE TERMS OF REFERENCE FOR INDIVIDUAL CONSULTANTS TO SUPPORT THE GOVERNANCE IMPROVEMENT COMPONENT

A. Tranche 1 Requirements 1. Position on contract –Senior Expert in Year 1, transitioning as General Manager

Urban Data and Governance Improvement Cell (UDGIC) in Year 4 Qualification: Graduate in engineering, planning, science or commerce Experience: At least ten years of experience in monitoring and evaluation or financial management of Government agencies. Experience within ULBs would be preferred. Key tasks:

(a) Implementation activities of Governance Improvement Cell (GIC): a) Preparatory. (i) Procure consultants for annual performance

assessment; (ii) identify changes required in data collection and information technology systems; Organize dissemination workshop with participating urban local bodies (ULBs) on regional basis; (iii) prepare baseline information as on 31 March 2018; and (iv) prepare a model annual calendar for performance assessment;

b) Carry-out annual performance assessment of 135 ULBs covered under GIC; oversee field verification and independent verification of ULB performance as may be required; and calculation of incentive payments and release of payments;

c) Monitor use of funds provided to ULBs under GIC to ensure compliance with financial management safeguards of Tamil Nadu Urban Flagship Infrastructure Program (program); and

d) Annual review of performance indicators; baseline data collection; updating information technology and other reporting systems; revising performance indicators; forecast of performance and revision of yearly budgets; and expedite State level actions required to improve performance (such as sanctioning of recruitment requests).

(b) Administer other incentive linked grants entrusted to UDGIC; (c) Support the Government of Tamil Nadu (GOTN) in developing a statewide

performance management framework for ULBs; (d) Develop, with the support of management information system (MIS) and

information technology specialist, data collection and online monitoring tools to facilitate performance assessment of ULBs on a single window approach; and

(e) Provide guidance and leadership to the team. 2. Position on contract- Information Technology and MIS specialist (engaged from

Year 1) Qualification: Graduate in information technology/ computer science or engineering graduate Experience: At least five years of experience in providing information technology support in reform implementation or program management in Government agencies. Experience within ULBs would be preferred. Key tasks:

1. Support UDGIC in developing management information system (MIS) for performance assessment, online data collection and integration with E-Governance modules;

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2. Support other divisions of CMA in designing changes/ additions to E-Governance system and co-ordinate with information technology vendors; and

3. Support General Manager Research in annual performance assessment and in reporting to funding agencies and the GOTN.

General Qualifications:

1. The independent consultant will have at least ten years of experience in monitoring and evaluation of programs in urban, education, health or utility sectors. The independent consultant will have experience of at least three years in reform monitoring and /or evaluation in urban sector;

2. The independent consultant will not deploy any current or past employees of the Government of Tamil Nadu or urban local bodies of Tamil Nadu in the evaluation team of GIC; and

3. None of the members of the evaluation team of GIC shall be part of project team of any consultancy or other projects with the Municipal Administration and Water Supply Department/ CMA/ Tamil Nadu Urban Infrastructure Financial Services of the GOTN or any of the participating ULBs for the duration of the independent verification assignment. This restriction does not apply to other team members who are not part of the independent verification.