Lessons

India: Mizoram Public Resource Management Program

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Lessons

Effective and viable political economy analysis is required to improve reform design and risk−mitigation. Reform options must be based on feasible governance risk assessments.

These two lessons, which came out of various special evaluation studies by the Independent Evaluation Department as well as its assessments of the public resource management reform programs of the Asian Development Bank (ADB) remained true in this program. Political economy considerations would appear to have needed more careful analysis, particularly regarding the willingness of the state government of Mizoram (SGM) to come to terms with its expenditure burden, and the risks this would pose in achieving the program outcomes. While this risk was recognized, it was believed that it could be overcome through dialogue. As a result, either the targets were too ambitious or the extent of the SGM’s commitment and capacity was overestimated. The political nature of the reforms and weak capacity should have been considered more carefully in the program design. It also appears inadvisable to have carried out the reform program during an election period and, if that could not be avoided, some flexibility should have been built in.

The difficulty of getting good specialists to work on a long−term basis in a remote state such as Mizoram must be considered in procurement packaging and consultant remuneration.

The program envisaged the services of specialists for different reform areas. However, given the remoteness of the state, getting good specialists to come and work in Mizoram on a long-term basis was difficult. This was evident from many consultants either not starting their work or leaving midway. The small sizes of the contracts also did not attract consultants from reputed firms. There were suggestions that a firm-based consultancy might have worked better than individual consultancies. Moreover, a higher pay structure as an incentive might have improved the chances of recruitment. Since ADB deals with small countries, it could draw on their experiences in dealing with consultant recruitment.

​Procurement capacity building is a must for first−time executing agencies (EAs) of ADB−assisted projects.

This being their first large ADB-funded project, the capacity of the SGM and the Department of Finance, the EA, for ADB procurement processes can be assumed to be nil during inception. While this risk was recognized, it was thought that it could be mitigated through capacity building under the TA loan. Unfortunately, the TA loan itself could not be managed efficiently because of lack of capacity. EA skills evaluation and capacity development should have been considered prior to TA loan implementation. Considering the vital role that the TA loan was to play, greater attention and more extensive consultation on the TA should also have been conducted especially because as early as inception, the DOF had already requested for changes in the TA loan.

 

 

 

 

Background

Until 2009, the small, remote state of Mizoram in India’s northeast region, had a weak economic base and poor infrastructure. Improving this condition was contingent on several factors, not the least of which was a strong fiscal position of the state. Due to substantial grants from the central government, Mizoram attained a revenue surplus during most of 2003−2009. However, its own tax revenue collection remained low, averaging 2.2% of gross state domestic product (GSDP) during the period. It also ran a large fiscal deficit, with expenditure exceeding revenue by an average of 5% of GSDP. Furthermore, its debt to GSDP ratio hovered above 80%, reaching a peak of 94.0% in 2008, well above the 28% long-term goal set by India’s Twelfth Finance Commission.

To help address the situation, the Asian Development Bank (ADB) approved a 3−tranche, policy−based program loan of $94 million in August 2009 to the government of India for the Mizoram Public Resource Management Program. The program aimed to augment the own−source revenues of the state government of Mizoram (SGM) by bolstering tax and nontax revenue sources, rationalizing public expenditures, and introducing reforms in fiscal areas that weigh heavily on the government budget. Its anticipated impact was increased SGM investment in gender-inclusive human development. Its intended outcome was the creation of fiscal space and greater flexibility in SGM budget.

The program had 6 planned outputs: (i) successful implementation of revenue reforms, (ii) effective restructuring and management of government debts, (iii) rationalization of government expenditures, (iv) broader access to and improvements in health and education services, (v) reform of the government pension scheme, and (vi) restructuring and/or closure of loss-making public sector enterprises (PSEs). Besides the program loan, ADB also provided a technical assistance (TA) loan of $6 million for the development of computerized systems, procedures, and guidelines; and implementation support for key policy actions.

At completion, the program achieved or overachieved half of its output targets. This resulted in the near−doubling of SGM’s own revenues in 2015 from its 2008 level; the premature retirement of 86% of high−cost debt; health insurance coverage of 30% of women−headed households and 65% of families below the poverty line; the voluntary retirement under the quality teacher upgrading scheme of over a thousand primary and middle school teachers who were 100% replaced by suitably qualified new recruits; and the closure of 3 PSEs, restructuring of 1, and privatization of another, among others.

However, the program failed to achieve its intended outcome. The creation of fiscal space did not materialize—fiscal deficit rose to 16% of GSDP in 2011 and ranged from 6.8% to 8.3% till 2015, well above the 3% target. The target of zero revenue deficit was also not attained—SGM incurred a deficit of 1.5% and 1.1% of GSDP in 2014 and 2015, respectively. Interest payments exceeded own tax revenues by 19.2% in 2014 and 2015.

ADB’s South Asia Department rated the project less than successful. The SGM’s Department of Finance (DOF) was the executing agency. A fiscal management unit within the DOF took charge of day-to-day implementation.

Project Information
Project Name: 
Mizoram Public Resource Management Program
Report Date: 
March, 2015
Main Sector: 
Public Sector Management
Country: 
India
Project Number: 
41607-013
Project/Modality: 
Loan
Themes: 
Gender Equity and Mainstreaming
Governance and Capacity Development
Private Sector Development and Private Sector Operations
Sub Sector: 
Public expenditure and fiscal management
Report Rating: 
Less than successful

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