India: National Capital Region Urban Infrastructure Financing Facility

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Lessons

Significant time and effort is needed to develop the capacity of financial intermediaries to ensure safeguards compliance of urban infrastructure projects.

The financial intermediary modality has a significant potential to support infrastructure development more efficiently and to leverage private capital while building strong institutions. However, building strong financial intermediaries, especially in the urban sector, is complex, slow, and may prove ineffectual during the initial phases. As shown by this project, it would also be unrealistic to expect new intermediaries to immediately be able to ensure sub-borrowers’ compliance to Asian Development Bank (ADB) safeguards, for which they themselves need time and prior direct experience to effectively implement. Working closely together, ADB and the Indian’s government’s National Capital Region Planning Board (NCRPB), the borrower and executing agency for this project, succeeded in developing and mainstreaming an environmental and social management system (ESMS) that made it easier for both to review safeguard compliance issues. Learning from this experience, ADB can consider a phased approach to supporting urban infrastructure development through the financial intermediary modality. Such a phased approach will provide significant time for (i) an ESMS or similar mechanism to be developed and (ii) financial intermediaries to acquire enough initial experience and capacity in running the ESMS prior to embarking on regular sub-lending operations. It would also be important for ADB to assist intermediaries in supervising subproject implementation of ADB safeguard requirements during the startup phase.

Project Cycle Stage:

Preparation

Implementation

Promptly addressing capacity constraints and meaningfully engaging new clients will help strengthen the implementation of ADB safeguard requirements.

Limited understanding of safeguard policies and ability to identify safeguard risks and develop mitigation strategies—on both the part of the NCRPB, the financial intermediary, and the sub-borrowers of the National Capital Region Urban Infrastructure Financing Facility (NCRUIFF)—led to issues that delayed the implementation of certain subprojects. Some of these issues remained under judicial consideration for some time, preventing the inclusion of the subprojects in the NCRUIFF. Sub-borrower delays in taking remedial actions also led to the cancellation of project 2 that was planned during NCRUIFF preparation and appraisal. To prevent the recurrence of this experience, future projects should address new clients’ capacity constraints early in the project cycle and conduct more rigorous due diligence to identify and mitigate safeguard risks in a timely manner. Focus must shift from asking for reports based on a checklist of requirements to more proactively engaging clients in participatory and meaningful consultations, periodic joint compliance reviews, and knowledge activities to improve understanding, follow-up actions, and the resolution of critical issues. Sub-borrowers’ awareness and capacity to address safeguard issues must also be strengthened periodically.

Project Cycle Stage:

Implementation

A rigorous subproject appraisal process that incorporates important bankability criteria is crucial to the success of urban development financing facilities.

Except for those where safeguard issues emerged, the subprojects implemented under the NCRUIFF demonstrated satisfactory effectiveness, efficiency, and sustainability. This was the result of a rigorous subproject appraisal process that pushed for high-quality design, sustainability, and operation and maintenance contracts that could last over a long term. Bankability criteria incorporated in the appraisal process included the financial capacity of the borrowing entity and fiscal responsibility and budget management limits of borrowers from local governments, parastatals, and state departments.

Project Cycle Stage:

Preparation

Implementation

Updating the design and monitoring framework (DMF) throughout the project life cycle is important.

The project 1 DMF, approved in 2011, should have been updated following new guidelines for easier measurability during the project completion review. This would have provided the key parameters for assessing project accomplishments versus targets, and along with regular target reporting from the executing agency, would have facilitated evaluation at project completion. Given the replacement of some subprojects, the DMF should also have been updated to reflect the changes.

Project Cycle Stage:

Preparation

Implementation

Completion and Evaluation

Background

India’s National Capital Region (NCR), covering the National Capital Territory of Delhi and parts of Haryana, Uttar Pradesh, and Rajasthan, is one of the world’s largest urban agglomerations. In 2011, it had a population of 46 million, which was projected to increase to 64 million by 2021. Urbanization was at 62.5%, with the highest rate in Delhi at 97.5%. Urban infrastructure development, as in the rest of urban India, had not kept pace with the rapid population growth, rural to urban migration, and increasing economic demand on services. Furthermore, while Delhi was making remarkable strides in urban development, other parts of the NCR and its counter magnet areas (CMAs) were lagging in infrastructure and service provision, negatively affecting growth, competitiveness, and environmental sustainability.

To facilitate balanced, inclusive, and sustainable urbanization, the government-owned National Capital Region Planning Board (NCRPB) developed the Regional Plan 2021 for the NCR. Among other things, the plan sought to scale up urban infrastructure investment in the NCR and CMAs, to implement which, the NCRPB needed to raise funds and strengthen its position as a regional planner and financier. Against this backdrop, it sought assistance from the Asian Development Bank (ADB), which approved a multitranche financing facility (MFF) of up to $150 million for the National Capital Region Urban Infrastructure Financing Facility (NCRUIFF).

The NCRUIFF, was designed to address systemic constraints to urban infrastructure development in the NCR mainly by providing longer term low-cost debt, supporting sub-borrowers in urban and regional planning and complex project development and implementation, and encouraging public-private partnerships. Its envisaged impact was improved quality of life and well-being of urban residents in the NCR and its CMAs. Its expected outcome was improved growth-supporting public health and environmental urban infrastructure services in the intervention cities in the NCR and CMAs. It had three planned outputs: (i) high-quality urban public health and environmental infrastructure; (ii) high-quality economic growth-related regional and urban infrastructure; and (iii) strengthened capacity of the NCRPB and its sub-borrowers to scale up urban infrastructure and improve basic services.

Along with the MFF, ADB also approved $78 million for tranche 1 or project 1 in August 2010. This report covers the MFF and project 1 that prioritized improvements in transport and access to safe drinking water. By completion in December 2014, the project had financed six transport and three water supply and sanitation subprojects, which resulted in the construction or upgrade of 263 kilometers (km) of roads and 84.9 km of water supply pipes, and the installation or improvement of 18,658 household water supply connections. Project beneficiaries were estimated in 2016 to have included 215,000 road users and 66,000 vehicles per day for the road subprojects, and 167,000 and 120,000 people respectively for the drainage and two water supply subprojects.

By 2016, successful sub-loan operations increased NCRPB investments in the road subsector by 20%, and the water and subsector by 12% from 2010 baseline. And though most of the total loan amount approved by the NCRPB remained concentrated in Haryana, there had been a substantial geographic redistribution, with the total loan exposure in the said state declining from 70.0% in 2009 to 51.4% in 2017. Project 1 also substantially achieved its outcome target of strengthening NCRPB institutional and approval processes and mainstreaming an environmental and social management system in its sub-loan operations.

However, because of delays by the sub-borrowers in deciding remedial actions to address the unanticipated land issues that emerged during project 1 implementation, no other tranches could be processed under the NCRUIFF. As project 2 was dropped, the indicative pipeline for the facility could not be completed, preventing the NCRUIFF from delivering two of its three planned outputs and two of its four outcome targets. Subsequently, only $60 million of the approved $150 million MFF loan was utilized.

The NCRPB was the borrower and executing agency. A project management unit, created by the NCRPB, served as implementing agency.

Project Information

Project Name:

National Capital Region Urban Infrastructure Financing Facility

Report Date:

July, 2018

Main Sector:

Multisector

Country:

India

Project Number:

41598-023