Completion Report

Project Number: 41607-013 Loan Numbers: 2536 and 2537 March 2017

India: Mizoram Public Resource Management Program

This document is being disclosed to the public in accordance with ADB’s Public Communications Policy 2011.

CURRENCY EQUIVALENTS

Currency unit – Indian rupee/s (`)

At Appraisal At Program Completion (23 September 2009) (31 January 2015)

`1.00 = $0.0209 $0.0162

$1.00 = `47.96 `61.76

ABBREVIATIONS

ADB - Asian Development Bank DOF - Department of Finance CS-DRMS - Commonwealth Secretariat Debt Recording Management System FMU - Fiscal Management Unit, Government of Mizoram FY - fiscal year GSDP - gross state domestic product MHCS - Mizoram Health Care Scheme MIS - management information system MTEF - medium-term expenditure framework PFM - public financial management PSC - program steering committee PSE - public sector enterprise RSBY - Rashtriya Swasthya Bima Yojana SGM - State Government of Mizoram TA - technical assistance VRS - voluntary retirement scheme

NOTES

(i) The fiscal year (FY) of the Government of India and its agencies begins on 1 April and ends on 31 March. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2016 begins on 1 April 2015 and ends on 31 March 2016.

(ii) In this report, "$" refers to US dollars and “`” refers to Indian Rupees.

Vice-President W. Zhang, Operations 1

Director General H. Kim, South Asia Department (SARD) Director L.B. Sondjaja, Officer-in-Charge, India Resident Mission, SARD Team leader A. Sen Gupta, Senior Economics Officer, SARD Team member R. Pandey, Project Analyst, SARD

N. Saini, Senior Operations Assistant, SARD

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

CONTENTS

Page

BASIC DATA i

I. PROGRAM DESCRIPTION 1

II. EVALUATION OF DESIGN AND IMPLEMENTATION 2

A. Relevance of Design and Formulation 2 B. Program and Technical Assistance Loan Outputs 4 C. Program and Technical Assistance Loan Costs 7 D. Disbursements 7 E. Program Schedule 8 F. Implementation Arrangements 8 G. Conditions and Covenants 8 H. Consultant Recruitment and Procurement 9 I. Performance of Consultants, Contractors, and Suppliers 10

J. Performance of the Borrower and the Executing Agency 10 K. Performance of the Asian Development Bank 10

III. EVALUATION OF PERFORMANCE 11

A. Relevance 11 B. Effectiveness in Achieving Outcome 11 C. Efficiency in Achieving Outcome and Outputs 12 D. Preliminary Assessment of Sustainability 12 E. Impact 13

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS 13

A. Overall Assessment 13 B. Lessons 14 C. Recommendations 15

APPENDIXES

1. Design and Monitoring Framework and Achievements 16 2. Status of Compliance with First Tranche Policy Actions 24 3. Status of Compliance with Second Tranche Policy Actions 27 4. Status of Compliance with Third Tranche Policy Actions 31 5. Status of Compliance with Loan Covenants 35 6. Costs and Disbursements 50

BASIC DATA A. Loan Identification

1. Country India

2. Loan Numbers 2536 and 2537

3. Program Title Mizoram Public Resource Management Program

4. Borrower India

5. Executing Agency Department of Finance (Fiscal Management Unit), Government of Mizoram

6. Amount of Loan $94 million (program loan) and $6 million (technical assistance loan)

7. Program Completion Report Number

PCR:IND 1610

B. Loan Data

1. Appraisal – Date started – Date completed

20 January 2009 23 January 2009

2. Loan Negotiations – Date started – Date completed

7 July 2009 7 July 2009

3. Date of Board Approval 18 August 2009

4. Date of Loan Agreement 17 September 2009

5. Date of Loan Effectiveness – In loan agreement – Actual – Number of extensions

19 October 2009 19 October 2009 None

6. Closing Date – In loan agreement – Actual – Number of extensions

31 January 2013 2 March 2015 One (1)

7. Terms of Loan – Interest rate – Maturity (number of years) – Grace period (number of years)

London interbank offered rate + 0.6 12.0 (1 February 2013 to 1 August 2024) 3.0

8. Terms of Relending (if any) – Interest rate – Maturity (number of years) – Grace period (number of years) – Second-step borrower

None

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9. Disbursements a. Dates

Initial Disbursement

30 October 2009

Final Disbursement

9 December 2014

Time Interval

5 years and 14 days

Effective Date

19 October 2009

Original Closing Date

31 January 2013

Time Interval

61.03 months

b. Amount ($'000)

Loan Category or Subloan

Original

Allocation

Last Revised

Allocation

Amount

Cancelled

Net Amount

Available

Amount

Disbursed

Undisbursed

Balance

2536

Program loan

94,000 94,000 0 94,000 94,000 -

2537

Technical Assistance

loan

6,000 6,000 0 6,000 1,259 4,741

Total 100,000 100,000 0 100,000 95,259 4,741

10. Local Costs (Financed) – Amount ($) – Percent of local costs – Percent of total cost

None

C. Program Data

1. Program Cost ($'000)

Cost Appraisal Estimate Actual

Foreign exchange cost 94,000 94,000 Local currency cost - - Total 94,000 94,000

2. Financing Plan ($'000)

Loan Cost Appraisal Estimate Actual

2536 Implementation Costs Borrower financed 32,960 12,375 ADB financed 94,000 94,000 Other external financing 0 0 Total 126,960 103,375

2537 Implementation Costs Borrower financed 1.360 1,104 ADB financed 6,000 1,259 Other external financing

(Government of India)

Total 7,360 2,363 ADB = Asian Development Bank.

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3. Cost Breakdown by Program Components ($'000)

Loan Component Appraisal Estimate

Actual

2536 Program Loan Tax and nontax revenue reforms 2,000 2,000 Debt management 46,000 46,000 Public expenditure management 3,000 3,000 Sector service improvements

Health corpus VRS

25,000 15,000

25,000 15,000

Pension reforms 2,000 2,000 PSE restructuring 1,000 1,000

TOTAL 94,000 94,000

PSE = public sector enterprise, VRS = voluntary retirement scheme.

4. Program Schedule (Not Applicable)

Item Appraisal Estimate Actual

Date of Contract with Consultants

Completion of Engineering Designs

Civil Works Contract

Date of Award

Completion of Work

Equipment and Supplies Dates First Procurement Last Procurement Completion of Equipment Installation Start of Operations Completion of Tests and Commissioning Beginning of Start-Up Other Milestones

5. Program Performance Report Ratings (Not Applicable)

Implementation Period

Ratings

Development Objectives

Implementation Progress

iv

D. Data on Asian Development Bank Missions

Name of Mission Date No. of Persons

No. of Person-

Days

Specialization of Members

Contact mission 28–31 January 2008 2 8 a, c Review mission 16–19 June 2008 2 8 a, c Fact-finding mission 3–7 November 2008 2 10 b, c Loan appraisal mission 20–23 January 2009 3 12 b, c, d Loan follow-up appraisal mission

20–23 May 2009 2 8 b, c

Inception mission 4–6 February 2010 2 6 b, c Loan review mission 10–11 March 2011 1 2 c Loan review mission 23–25 April 2012 2 6 f Loan review mission 21–24 January 2013 2 8 e, f Loan review mission 1–5 April 2014 1 5 f Program completion review mission

28–30 August 2016 1 2 c

a = Principal Economist, SAPF; b = Principal Governance Specialist, SAPF; c = Senior Economics Officer, INRM; d = Senior Counsel, OGC; e = Principal Finance Sector and PPP Specialist; f = Senior Project Officer Finance, INRM. INRM = Indian Resident Mission, OGC = Office of the General Counsel, PPP = public–private partnership, SAPF = South Asia Finance and Public Sector Management.

I. PROGRAM DESCRIPTION 1. The Government of India has been keen on providing development assistance to the states of India’s Northeast region, of which Mizoram is one. Both the Asian Development Bank (ADB) and the government agreed that the states in the Northeast region were lagging behind other parts of the country in terms of development. The region suffered from poor infrastructure, lack of connectivity with the rest of India, a poor resource base, limited market access, and poor governance. Consequently, the government introduced several schemes to improve the livelihoods in the Northeast region. 2. Mizoram is one of the smallest states in India with a weak economic base and poor development of infrastructure.1 An improvement in these was contingent on several factors, not the least of which is a strong fiscal position of the state. Due to substantial dependence on grants received from the central government, Mizoram attained a revenue surplus during most of the period from fiscal year (FY) 2003 to FY2009. However, its own tax revenue collection remained low with an average of 2.2% of gross state domestic product (GSDP) during this period. Despite a surplus in the revenue balance, Mizoram ran a large fiscal deficit as expenditure on the capital account exceeded revenue by an average of 5% of GSDP during this period. Further, its ratio of debt to GSDP hovered above 80% during FY2003–FY2009, reaching a peak of 94.0% in FY2008, well above the 28% long-term goal set by the Twelfth Finance Commission, and was unsustainable. 3. Given this background, ADB approved a program loan of $94 million on 18 August 2009 to the Government of India for the Mizoram Public Resource Management Program with the goal of creating fiscal space and improving service delivery in two key sectors (health and education).2 As per its arrangement of transfer of external resources, the central government would relend 10% of the loan, and provide 90% as grants. 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 through improved expenditure management based on medium-term expenditure frameworks (MTEFs), and introducing reforms in key fiscal areas that heavily weigh on the government budget, i.e., pensions and public sector enterprises (PSEs). It also targeted reforms in the health and education sectors, which represent the largest burden on the government budget. Further, the program sought to create fiscal space by facilitating prepayment of high-cost debt and improving the SGM’s management of government debt, which was scattered over several government agencies. A $6 million technical assistance (TA) loan was extended with the aim to augment the capacity of the SGM to establish strong institutions that would support the reform process (through compliance with policy actions under the program loan), and to improve fiscal management performance. The program followed a successful ADB intervention in a neighboring state, Assam (Assam subprograms I and II).3 4. Three aspects were considered key to undertaking the program with the SGM. First, its demonstrated political commitment of SGM to effect the reforms needed to set the fiscal situation on a trajectory that is balanced, sustainable, and geared to achieving inclusive growth. Proof, for example, was the state’s decision to aggressively pursue reforms such as putting in

1 According to the NCAER State Investment Potential Index (N-SIPI), Mizoram is ranked 28th on the Economy pillar

and 21st on the Infrastructure pillar. 2 ADB. 2009. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the Government of India for the Mizoram Public Resource Management Program. Manila.

3 Prior to this program, ADB had provided policy-based loans for public resource management to Gujarat (1996),

Madhya Pradesh (1999), Kerala (2002), and Assam (2004 and 2008), which resulted in (i) revenue augmentation; (ii) expenditure rationalization, (ii) restructuring of PSEs, and (iv) improvements in service delivery.

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place a voluntary retirement scheme (VRS) for underqualified teachers and substantially reforming PSEs. Second, strong central government support was manifest in its lowering the threshold of high-cost debt to 9% for Mizoram, whereas it continues to stand at 10% for other states, in extending financial and technical support to assist the state in exporting its unique agricultural produce, and in liberalizing the airfreight assistance scheme for perishable product exports, among other measures. Third, the SGM needed support in undertaking a comprehensive program with a holistic view of fiscal reforms—from a focus on macro aspects, such as MTEFs, to paying attention to micro aspects, such as sector reforms—that would contribute to better service delivery and enhanced fiscal space.

II. EVALUATION OF DESIGN AND IMPLEMENTATION A. Relevance of Design and Formulation 5. Since 2003, ADB’s country strategy and program for India, and its respective updates and country operations business plans, have centered on poverty reduction as the overarching goal of its support to the country. The Mizoram program was highly relevant to and consistent with the country partnership strategy, 2009–2012 for India, which supported (i) inclusive and gender-equitable economic growth; (ii) improvement in social sectors; (iii) provision of essential services to the poor; and (iv) bridging of interstate and regional economic disparities.4 The program was also in line with the objectives of the 11th Five Year Plan (FY2008 to FY2012), which aimed to create fiscal space to allow more investment in infrastructure for inclusive growth and better quality of service delivery to the poor at large. 6. Further, the program built upon public expenditure and financial management reforms adopted by the SGM and embodied in the Mizoram Fiscal Responsibility and Budget Management Act, 2006. The act aimed to (i) eliminate the revenue deficit and contain the fiscal deficit to 3% of GSDP by FY2009, and for the SGM to adopt measures to raise nontax revenues and prioritize capital expenditures; and (ii) pursue expenditure policies that would bolster growth and poverty reduction, and improve welfare. Consequently, the SGM had taken several steps to implement fiscal reforms: (i) conducted half-yearly reviews; (ii) set up the Debt Consolidation and Relief Facility, and the Consolidated Sinking Fund; (iii) arranged for management of debt; and (iv) initiated reforms in the areas of tax, expenditure, and service delivery.

7. The formulation of the program also drew on many valuable lessons given that ADB had designed similar assistance in some other Indian states and in neighboring countries (Afghanistan, Pakistan, and Sri Lanka). The program design reflected lessons from the recommendations of the Independent Evaluation Department of ADB in various special evaluation studies and assessments of ADB’s public resource management reform programs.5 8. The program was preceded by project preparatory technical assistance that provided the background analysis and fiscal profile of the state, and discussed possible areas of reform.6

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

5 Independent Evaluation Department (IED). 2007. Special Evaluation Study on ADB Support to Public Resource

Management in India. Manila: ADB; IED. 2007. Special Evaluation Study Update on Policy-Based Lending: Emerging Practices in Supporting Reforms in Developing Member Countries. Manila: ADB; IED. 2007. A Comparative Assessment of the Asian Development Bank’s Public Resource Management Reform Programs. Manila: ADB; and IED. 2008. Public Resource Management Reform Programs: Do They Work? The Asian Development Bank Experience. Manila: ADB.

6 ADB. 2008. Technical Assistance to India for Preparing the Mizoram Public Resource Management Development

Program. Manila (TA 4814-IND).

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Preparatory action, including stakeholder consultations, was taken in parallel to designing and formulating the reform agenda to ensure smooth implementation of the reforms covered under the program and those built upon already-existing arrangements and ongoing initiatives. 9. A TA loan of $6 million was provided to help implement the reforms that would create the operational support for achieving the program outputs.7 The TA outputs involved (i) developing computerized systems, procedures, and guidelines; and (ii) implementing tangible policy actions in revenue administration, expenditure management, debt management, pension reforms, and PSE restructuring. 10. The consultants provided assistance in developing the management information system (MIS), supported the Fiscal Management Unit (FMU) in procuring hardware for treasury computerization and the proposed MIS software, and helped prepare requests for proposal and bid evaluation. They also assisted the FMU in developing the database of all permanent SGM employees. Consultants were further responsible for preparing objective valuation guidelines for the SGM, developing and implementing the MTEF in selected SGM departments, and for supporting the SGM in PSE restructuring. Workshops, in association with the training experts, were conducted to disseminate the new proposals to support the MTEF. Consultants assisted in creating a database of pensioners, assessed future pension liabilities, and also monitored the implementation of the defined contribution pension scheme. Consultants were engaged for providing coordination and support in program administration, and support for the SGM’s compliance with the tranche requirements of the program and preparation of the program completion report. However, the contract packages relating to public financial management (PFM) and information technology consultancies were not completed. 11. The smallness of the contract packages and the remoteness of Mizoram meant that it took time to recruit consultants. Moreover, inordinate delays occurred and disproportionate resources were spent on non-core activities such as changes in scope and implementation arrangements, contract variations and extensions, and processing of payments. The implementation, during the early stages, was affected by frequent changes in consultants. The first team leader (a third choice after the first choice had backed out and the second choice did not come) had limited coordination with other consultants because he was from a different firm, which may be a design flaw. The team leader left after 15 months, and several months elapsed before a new team leader was hired. 12. To facilitate procurement under, and management of, the TA loan, it was agreed to reduce the number of remaining packages from 36 to 2—PFM consultancy and information technology consultancy—with a provision for a procurement specialist to assist the SGM without affecting the ongoing contracts, such as the MIS and treasury computerization, for which procurement was advanced. This was done to create interest from reputed firms despite the remoteness of Mizoram. Also, compatibility issues with respect to inputs were likely to be eliminated, frequent turnover of consultants would be dealt with by the consultancy firms themselves, and ownership would increase as the firms helped implement their recommendations. However, the appointment of consultants was delayed because the executing agency lacked familiarity with ADB’s procurement procedures. In August 2014, it was decided not to extend the TA loan beyond January 2015, so the procurement of consultancy services under the two packages was cancelled.

7 ADB. 2009. Technical Assistance to India for the Mizoram Public Resource Management Program. Manila (TA

2537-IND).

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13. Thus, acceptance and ownership of the reforms was clearly high at the start of the program and wide-ranging consultations were carried out during the processing of the program, as shown in the report and recommendation of the President8 and the tranche release reports. However, several factors affected the soundness of program design and formulation, and eventually led to failure to achieve the intended outcomes: (i) delays in implementation arising from the difficulties in recruiting consultants, for reasons that were not anticipated when the TA was conceived; (ii) insufficient capacity on the part of the SGM and inability to make full use of the TA loan; (iii) and the waning of political will (para. 45) in carrying out the reforms, especially in an election period. B. Program and Technical Assistance Loan Outputs 14. The key program outputs were: (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, services in the health and education sectors; (v) reform of the government pension scheme; and (vi) restructuring and/or closure of loss-making PSEs. 9 The status of compliance with the policy action requirements under the first, second, and third tranches is detailed in Appendixes 2–4. 15. Output 1: Successful implementation of tax and nontax revenue reforms. The program aimed to bolster Mizoram’s own-revenue mobilization by improving revenue administration. It would help the SGM to restructure some tax departments to bolster reforms, using computerized tax administration and risk-based audits, and ensuring greater efforts to mobilize revenue, including revising the tax and nontax (user charges) rates. Three departments—Taxation, Land Revenue and Settlement, and Transport—were identified for restructuring and capacity development. These departments took steps to streamline their business processes and improve their efficiency. The Department of Taxation (i) appointed a full-fledged commissioner to head the department, (ii) created the audit cell and the statistical cell, and (iii) upgraded six tax circles into zones to ease collection.10 Similarly, the Department of Land Revenue and Settlement (i) separated the Directorate of Land and Revenue Settlement into Commissioner of Revenues and Directorate of Survey and Settlement, and (ii) entrusted deputy commissioners and subdivisional officers with the responsibility of land settlement and collection of revenues. The Department of Transport (i) consolidated or amalgamated the offices of station superintendent in several districts, reallocating surplus staff to other offices; and (ii) rationalized several positions. 16. To improve tax compliance, an audit manual for introducing risk-based audit was approved and staff was trained. The top three serious cases identified by the risk-based audit were reassessed, and the amount of value-added tax due from the vendors was recovered. To bring in transparency and curb undervaluation of transactions, objective valuation was introduced for classification and assessment of property values. Other measures were

8 ADB. 2009. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the Government of India for the Mizoram Public Resource Management Program. Manila (LN 41607-IND).

9 This section is based on various ADB reports, e.g., (i) ADB. 2011. Progress Report on Second Tranche Release,

India: Mizoram Public Resource Management Program. Manila; (ii) ADB. 2014. Progress Report on Second Tranche Release, India: Mizoram Public Resource Management Program. Manila; and (iii) ADB. 2015. Project Data Sheet, India: Mizoram Public Resource Management Program. Manila. The section also draws on SGM reports: (i) Fiscal Policy Strategy Statement, Government of Mizoram, 2016–2017; (ii) Medium Term Fiscal Policy Statement, Government of Mizoram, 2016–2017; and (ii) Draft Project Completion Report prepared by the Finance Department, Government of Mizoram.

10 The six circles are Champhai, Kolasib, Lawngtlai, Mamit, Saiha, and Serchhip. Along with Aizawl and Lunglei, they comprise the eight districts of Mizoram.

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introduced to bolster tax revenue, e.g., revising tax rates, enhancing tax compliance, and improving tax administration. In 2011, the SGM raised the taxes on land, buildings, houses, and shops, which had been revised last in 2006. The professional tax rate was also raised with the exemption limit being halved. The SGM also reduced the compliance cost by shifting to a lump-sum payment of road tax in lieu of annual payments. To improve collections of arrears, the departments of taxation, transport, and land revenue took several steps: (i) information collection and assessment of arrears, (ii) setting up of local collection teams, (iii) awareness campaigns, and (iv) imposition of penalties on defaulters. 17. Output 2: Improvement of debt management. The program also sought to improve the efficiency of the SGM’s debt management by using computerized debt management tools and strengthening its institutional capacity for effective debt management and retirement of high-cost debt. 18. By FY2010, the SGM had contracted high-cost loans (interest rate of 9% or more) equivalent to $52 million. Of this, 86.1% were prepaid to free up fiscal space. The SGM also refrained from incurring additional high-cost loans. As a result, such loans amounted to only 1.1% of GSDP during FY2011 and FY2012. The Mizoram Guarantee Redemption Fund was established to have an amortization fund to service contingent liabilities arising from invocation of state guarantees. The SGM prepared a comprehensive database detailing different parameters of the loans taken. However, the Commonwealth Secretariat Debt Recording Management System (CS-DRMS) software that would drive the database was yet to be fully implemented because of procedural issues. Also, the SGM prepared an information technology consultancy project under a TA loan (footnote 7), which included a debt management module as one of the project components. However, delays in selecting information technology firms led to the cancellation of the loan (para. 12). So the SGM has been using a spreadsheet-based application to assess the risks in its overall debt portfolio. 19. Output 3: Improvements to efficiency and management of expenditure. The program pursued several reforms to improve allocation of scarce public resources. Treasury computerization to enable greater efficiency in resource allocation is a key ingredient for better cash management, leading to less short-term borrowing needs and more fiscal savings. The SGM completed the computerization of South Aizawl as a part of the second-tranche condition. However, computerization of the remaining treasuries, a part of the third-tranche condition, was not completed at the time of the release of the third tranche owing to delays in the procurement and selection processes as well as delays on the part of the supplier. Subsequently, the SGM completed the computerization of all treasuries. However, connectivity is poor in the remote areas, where real-time information could not be obtained. In addition, 80 staff members were trained on various modules in four treasuries where the software is running, out of eight targeted treasuries. 20. Effective implementation of the MTEF is contingent on preparing a long-term sector strategy and a system of project appraisal and evaluation. Two pilot MTEFs for the Department of School Education and the Department of Health and Family Welfare were completed in 2011 and provided estimates for FY2012–FY2016. However, it does not appear that the MTEFs were pursued after the pilots. Two reasons were cited: (i) the difficulty in projecting capital expenditures because allocation for such expenditures was uncertain and determined by the erstwhile Planning Commission and the State Planning Board, which was outside the control of the agencies involved; and (ii) lack of resources to push for implementation. Since allocation is now being centralized under the Ministry of Finance and the distinction between plan and nonplan expenditures has been eliminated, the MTEFs might yet be institutionalized.

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21. The SGM prepared a detailed project appraisal and performance evaluation system. The guidelines provide a broad framework for project appraisal, applicability, delegation of authority for project appraisal, and approval. Moreover, the guidelines restrict continuation of projects and/or schemes without an independent evaluation being submitted. 22. Output 4: Service improvements in health and education. In the health sector, the program sought to help develop the Mizoram Health Care Scheme (MHCS) on a sustainable basis, so as to minimize the expenditure burden on the SGM. In the education sector, the focus was on improving the education quality by upgrading the quality of the teachers and strengthening vocational training to allow skilled individuals to access jobs. 23. Under the program, financial assistance was given to establish a health fund trust and to pay the premium to the insurance provider from the interest income. The amount was invested in three banks, with interest released quarterly, to run the MHCS. The MHCS is also implementing the Rashtriya Swasthya Bima Yojana (RSBY) scheme11 in the state, and the convergence of MSHCS and RSBY as well as their implementation by a single agency have reduced the number of claims under the MHCS. The program thus helped ensure that the SGM is now providing better health-care services in a cost-effective and sustainable manner by using the proceeds of the health fund to pay for expenses, thereby eliminating the need for direct budgetary support for administrative expenses. To ensure proper administration of the health insurance, the program formulated and implemented a comprehensive capacity development plan that involved participatory workshops, grassroots training to raise awareness, provision of access to services, identification of beneficiaries, and execution of the schemes. 24. To improve the education quality at the middle and primary school levels, the program sought to upgrade the quality of the teachers. After detailed consultations, the framework for Mizoram Special Voluntary Retirement Rules 2009—a voluntary retirement scheme (VRS) for school teachers—was developed and implemented. In the first phase, 193 primary school teachers who did not meet the qualification criteria were retired. The VRS was then extended to cover both primary and middle school teachers during the second phase, and 303 teachers lacking in qualifications were retired. Overall, more than `1 million was spent on retirement and pension benefits, monitoring and inspection of vocational schools, and district-based evaluation studies.

25. Output 5: Pension system reform. The program aimed to introduce reforms in the pension system and thereby reduce the pressure on state finances. In June 2010, a defined contribution pension scheme was introduced for state government employees who were recruited after September 2010. This would help ease the burden on state finances in the medium term. 26. Output 6: Public sector enterprise reform. The PSEs have historically been a drag on public finances. To improve fiscal health, the program supported SGM efforts to initiate an effective PSE reform program. The state prepared a detailed report on restructuring and consolidation of the PSEs with the TA loan (footnote 7). The report, based on consultations with the stakeholders, recommended closure of three PSEs, restructuring of one, and privatization of another. The report was sent to the cabinet. At the time of the closure of the loan, the matter was pending before the cabinet. The SGM has been committed to carrying out the PSE reforms,

11

RSBY is a nationwide health insurance scheme developed by the Government of India and targeting people living below the poverty line.

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and the delay in implementation was driven by careful deliberations, as required for an inclusive approach. The sustained commitment led to closure of three PSEs—Zoram Electronics Development Corporation, Mizoram Handloom and Handicrafts Development Corporation, and Mizoram Agricultural Marketing Corporation—in December 2015, with workers being either absorbed into the state government or retired under the Mizoram State Public Enterprises (Early Retirement) Rules, 2015 as per their choice.12 Zoram Industrial Development Corporation is to be restructured and Mizoram Food and Allied Industries Corporation is to be privatized. C. Program and Technical Assistance Loan Costs 27. ADB, the SGM, and the central government together provided loans amounting to $134.64 million equivalent in support of the costs under the program over a 5.5-year period. The program comprises a program loan and a TA loan from ADB. At appraisal, the size of the program loan was determined by policy reform adjustment costs, which were based on medium-term adjustment scenarios. The program adjustment costs were estimated at $126.96 million, of which ADB support of $94 million from ordinary capital resources covered 74%. Three components largely accounted for the adjustment costs: (i) retiring high-cost debts, (ii) establishing the MHCS, and (iii) contributing to VRS costs for school teachers. ADB provided a TA loan of $6 million to help implement the reforms, with SGM providing the counterpart funds of $1.36 million in kind, while the central government financed the interest and commitment charges of $0.32 million. The central government re-lent, in local currency, 10% of the loan proceeds to the SGM, in accordance with its agreement for transfer of external assistance to the SGM. The balance of 90% of the loan proceeds was provided to the SGM as grants. The total cost is shown in the table below:13

Total Program and Technical Assistance Loan Costs

Appraisal Actual

Program TA Total Program TA Total

ADB 94.00 6.00 100.00 94.00 1.26 95.26

SGM 32.96 1.36 34.32 12.38 1.16 13.54

Govt of India 0.32 0.32 0.17 0.05 0.22

Total 126.96 7.68 134.64 106.55 2.47 109.02

ADB = Asian Development Bank, Govt = government, SGM = State Government of Mizoram, TA = technical assistance.

28. No significant cost overruns occurred. Since the duration was extended by 2.5 years, the disbursement and procurement schedules were adjusted. A significant part of the TA loan was not utilized when recruitment of some consultants could not be completed (paras. 9–12). Appendix 6 details the program cost and tranche releases. D. Disbursements 29. While delayed for 2.5 years, the program loan was released in three tranches to meet the associated reforms.

(i) The first tranche ($47 million) was released on 30 October 2009 upon loan effectiveness.

(ii) The second tranche ($40 million) was released on 10 October 2011 upon satisfactory compliance with all second-tranche release policy conditions.

12

Budget Speech in the Mizoram Legislative Assembly. 13

This includes only the SGM’s counterpart funding involving cash. The SGM also undertook in-kind counterpart funding: upgrades to the taxation offices, site preparation, and staff deployment for computerized water charge billing.

8

(iii) The third trance ($7 million) was released on 9 December 2014 upon compliance with policy conditions.

30. The program loan was released in full after a delay of 2.5 years. Of the TA loan, $1,259,361.86 was disbursed. The balance was cancelled (para. 41). All disbursements under that loan were made in accordance with ADB’s Loan Disbursement Handbook (2007, as amended from time to time) and arrangements agreed between the SGM and ADB. E. Program Schedule 31. The reforms supported under the program were expected to be completed between August 2009 and July 2012. However, given the large number of small contract packages (49) under the procurement plan and the relative inexperience of SGM staff on ADB procurement policies and procedures, coupled with the prospect of working in a remote location, it proved difficult to recruit suitable consultants, which led to delays, which in turn stretched the timelines for achieving the targets. The program completion deadline was later extended to January 2015. F. Implementation Arrangements 32. The SGM’s Department of Finance (DOF) was the executing agency for the program. The SGM set up several new committees and institutions to supervise and monitor program implementation. A program steering committee (PSC) comprising secretaries of participating departments and chaired by the principal secretary was created to provide strategic overview and ensure effective use of funds. Under the guidance of the PSC, a fiscal management unit (FMU) was formed within DOF and headed by the program director. It was responsible for the day-to-day implementation of the program and for close coordination with the various program implementing units (established in the pertinent departments to carry out functions in support of the reforms) and with ADB and various stakeholders. The FMU was responsible for gathering feedback from experts, providing support on procurement, preparing documentation in accordance with ADB guidelines, and regularly monitoring the progress of the program. G. Conditions and Covenants 33. The program was contingent on 59 policy actions, of which 7 were not related to tranche release. Of the others, 15 were required for release of the first tranche, 21 for release of the second tranche, and 16 for release of the third tranche. All first and second-tranche policy actions were met. For the third tranche, 13 of the 16 policy actions were met, 1 was partially met, and 2 were not met. The tranche condition that was partially met pertained to the implementation of the debt management software. The SGM initiated the implementation of the CS-DRMS to streamline debt management operations, compiled the public debt information, developed a database, and prepared a debt management manual. However, procedural issues with the central government and the time it took to recruit an information technology firm led to the project being cancelled for lack of time to undertake implementation. Consequently, the SGM developed a spreadsheet-based application to assess risks in its debt portfolio. 34. The two unmet conditions relate to the computerization of eight treasuries and the reform of PSEs. At the time of the release of the third tranche, the SGM had computerized only four treasuries. Restructuring of the procurement plan had delayed the procurement process. Delays also occurred in the selection process, and on the part of the supplier after selection. The SGM pursued the computerization in the remaining treasuries after loan closure. In April

9

2015, DOF ordered the use of the software in the other treasuries as from 1 May 2015.14 However, connectivity in the remote areas is poor. Moreover, the system is still not fully interfaced and compatible with the network. As for PSE reform, it was decided to close three PSEs, restructure one, and privatize another one. This did not happen within the program period because of the time taken for deliberations and for reaching consensus among the stakeholders. The SGM pursued these reforms after loan closure and closed three PSEs in 2015. Restructuring and privatization of two PSEs are pending (para. 26). 35. The loan agreements with India and the project and program agreement with the SGM consisted of covenants relevant to the program requirements. These were fully complied with according to ADB policies (Appendix 5). H. Consultant Recruitment and Procurement 36. Recruitment of consulting services was funded through ADB’s TA loan, and carried out following ADB procedures. The proposals and terms of reference originated from various government departments, thus reflecting their needs, with assistance from the FMU, and were vetted by the PSC and ADB. Under the program, the FMU processed around 11 TA contracts. The provision for the TA loan to be implemented by the SGM ensured state ownership and participation, enabled the SGM to build capacity for recruiting and managing consultants, and increased efficiency and transparency in awarding contracts. Procurement of goods and works financed under the TA loan were carried out in accordance with ADB’s Procurement Guidelines. The methods of procurement also covered consulting services, using individual selection (curriculum vitae method for contracts) and quality- and cost-based selection for firms as needed. 37. However, this being the first large ADB-funded project to be undertaken by DOF (the executing agency), staff lacked a clear understanding of ADB procurement processes and found them complicated. Lack of familiarity with the procedures led to non-reimbursement of certain claims because DOF was not aware of deadlines. This also led to procurement delays and lack of synchronization of program activities, e.g., software implementation in some departments started before the appointment of the MIS consultants. The remoteness of Mizoram and the smallness of the contract packages discouraged consultants, and some even left. 15 For example, 17 consultants were required for the preparation of the debt profile, but only 8 or 9 could be recruited. 38. ADB’s handling of TA loan administration could stand improvement given the results. ADB was urging DOF to speed up processing from the start. In 2011, ADB agreed to provide support to the FMU staff to facilitate the filing of disbursement applications. In 2012, the procurement expert suggested grouping the small contract packages into larger packages to make procurement easier. However, it was only in 2013 that this suggestion was acted upon. It was clear that processing was lagging behind. ADB again offered procurement support to the FMU through its Guwahati Office. The program and TA loan administration were transferred to the India Resident Mission in February 2012, when the loan was about to close and compliance delays arose. However, action to speed up implementation was only taken in 2013 when the contract packages were consolidated. ADB provided support, taking care of the contract variations and helping resolve conflicts of interest and possible collusion among consultants, to

14

Notification No. G.21014/47/2012-FMU/Vol III dated 21 April 2015. 15

There were only limited flights to and from Aizawl (the state’s capital city) and few hotels with very poor internet connectivity, few transport options, and narrow roads prone to accidents.

10

speed up the process. A procurement expert was included in the revised contract packages. Nonetheless, the restructured packages were cancelled because of the extended time needed for their implementation, and at the Tripartite Portfolio Review Meeting in August 2014 it was decided to conclude the loan in January 2015. The changes in personnel at ADB and the SGM exacerbated the delays since it takes considerable time to gain understanding of the program. I. Performance of Consultants, Contractors, and Suppliers 39. The performance of the consultants is considered generally satisfactory. The consultants coordinated closely with various agencies and participated in the procurement of contractors and suppliers organized by the SGM and ADB. This helped the transition from initial operation to project completion. However, initial implementation was affected by discontinuity of workflow because consultants changed frequently. The staff in key SGM departments was supportive throughout the loan period. The consultants showed flexibility by providing the necessary support to the SGM while accommodating delays during the TA loan and project implementation. All deliverables were submitted on time and accepted by the SGM and ADB. J. Performance of the Borrower and the Executing Agency 40. The performance of the borrower and DOF (as executing agency) is deemed less than satisfactory. The SGM largely carried out the policy actions under the policy matrix. However, one reform measure was hindered by procurement delays (para. 19) and another one for want of a timely decision on PSE reform (para. 26). Finally, a third one was delayed by procedural issues with the central government and time needed for procurement (para. 18). The lack of capacity on the part of the SGM contributed to the delays in procurement and therefore delays in implementation (paras. 9–12). The program was delayed for 2.5 years. Political issues posed problems to PSE reform.16 The political will to carry out the program and achieve the targeted outcomes and fiscal sustainability proved not as strong as originally thought. K. Performance of the Asian Development Bank 41. The performance of ADB is deemed less than satisfactory. While the program itself was well prepared with project preparatory TA, and TA support for implementation and consultation with stakeholders, it miscalculated on several factors. Design issues that cropped up later could have been solved early with adequate consultations. The adequacy of staff capacity to undertake the TA loan could have been better calibrated by strengthening the capacity of the executing agency on ADB procurement procedures at the outset, or taking early corrective action to avoid the delays in implementation, or allowing for a more suitable timeframe for the policy actions to be undertaken. Five review missions were carried out—two after inception and one for each year of the program thereafter. Although these were interspersed with Tripartite Portfolio Review Meetings, more frequent interaction appear to have been called for. The extent of the political will seems to have been overestimated because the targeted outcomes were not met, especially the rise in current expenditures that appears to have been glossed over under

16

The High Power Committee (2008) had the following findings: (i) political appointment of the members of the management board without considering capabilities; (ii) irregular fund flow to the PSEs; (iii) overstaffing with people not having technical or managerial expertise, causing huge salary expenditure, and share capital hardly covered the administrative expenses; (iv) no policy backup towards better performance; (v) nonexistence of proper monitoring mechanisms; (vi) general infrastructure backwardness and absence of entrepreneurship. Evaluation of the State Finances with respect to the State of Mizoram (A Project sponsored by Fourteenth Finance Commission,

Government of India), Prof. Vanlalchhawna Department of Economics, Mizoram University, October 2013, p. 116.

11

the program. Early administration of the program is considered focused and closely managed. Subsequent staff changes appear to have lessened ADB’s focus on close administration of the program. It took about 1 year for new staff to take steps to move on with the program.

III. EVALUATION OF PERFORMANCE A. Relevance 42. The program is considered relevant, both at appraisal and completion. It was consistent with the needs of the state, India’s priorities, and ADB’s country partnership strategy. It heeded lessons from previous programs. Stakeholders were apparently on board with regard to the policy reforms, given consultations undertaken during program implementation. The policy actions were substantially complied with even if some were effectively carried out after the program period. The soundness of the program design, however, was weakened by the unanticipated lack of capacity on the part of the SGM, which should have been dealt with at the outset, and factors that made consultant recruitment difficult, which led to delays in program implementation and eventually to the cancellation of a significant part of the TA loan designed to assist the SGM in undertaking the reform program, as well as to non-achievement of the intended outcomes due to factors not covered under the program.

43. The TA loan was also relevant given the lack of capacity at the SGM and the need for support to implement the program. The midterm corrective action of consolidating contract packages to overcome the difficulty in recruiting consultants, though a step in the right direction, was not sufficient to compensate for the lack of experience with ADB procurement requirements and for the disadvantages of working in Mizoram. Nor was “handholding” support from ADB able to avoid the time constraints in consultant recruitment. B. Effectiveness in Achieving Outcome 44. Despite the policy reform actions being largely met—including 20% improvement in own-source revenue, reduction in tax arrears by 50%, premature retirement of 80% of high-cost debt, documentation of all incurred debts and contingent liabilities in a debt database, preparation of MTEF documents for the health and education sectors, VRS provided to eligible teachers, new recruits covered by a defined contributory pension scheme, computerization of treasuries, and PSE reforms—the program was less than effective in achieving the outcomes envisioned under the design and monitoring framework. The targeted creation of fiscal space never materialized. Fiscal deficit rose to 16% of GSDP in FY2011 after the program started, and ranged from 6.8% to 8.3% till FY2015, 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 FY2014 and FY2015. Interest payments exceeded own tax revenues by 19.2% in FY2014 and FY2015. Mizoram witnessed robust growth from FY2012 to FY2016, which reduced its outstanding debt relative to GSDP. 45. The failure to adhere to its own fiscal correction path was precipitated by a surge in current expenditure. Factors driving this include implementation of the Sixth Pay Commission recommendation of increases in salary and pensions, the declining recovery of electricity costs because of high transmission and distribution losses,17 interest payments, mass subsidization of

17

Prof. Vanlalchhawna. Department of Economics, Mizoram University. 2013. Evaluation of the State Finances with respect to the State of Mizoram (A project sponsored by the Fourteenth Finance Commission, Government of India).

12

food grains, and rising cost of administration.18 Unexpected expenditures such as the reportedly “mass” provincialization of private schools also occurred. Thus the increase in expenditures outpaced revenue growth over the program period. Salaries and food subsidies were left out of the program, reportedly because of their very sensitive nature. Power sector reform was planned as a separate agenda but did not materialize. Thus, several factors that had key bearings on targeted fiscal outcomes were left out of the program.

46. The TA loan proved useful to the extent that deliverables were completed for those contracts that the SGM was able to implement and, as the SGM reported, provided much-needed support in helping achieve compliance with required policy actions as well as helping institutionalize systems and processes as required under the program. Overall, however, the cancellation of a large part of the TA loan that could have helped the SGM in pursuing reforms, and the delays arising from inefficient handling of procurement and consultant recruitment led to the TA loan to be rated less than effective in achieving its objectives.

C. Efficiency in Achieving Outcome and Outputs 47. The program was less than efficient. It was delayed for 2.5 years yet not all the policy actions were achieved during the program period. The nonfulfillment of the computerization of the eight treasuries within the program period was concededly due to the delay in procurement. The PSE reforms that appear to be pursued by the SGM would require more time to complete than was provided under the program. The state elections that took place in 2013 delayed the process because the SGM was unable to take major decisions. The SGM concedes that profound political will was needed to push the reform. The delay in installing the debt management software is reportedly the result of an unresolved issue with the central government and the time it took to recruit an information technology firm, which led to cancellation for lack of implementation time within the program period. The significant part of the TA loan that was designed to assist the SGM in carrying out the reforms and improving its fiscal performance did not materialize given the slowness of the process. Thus, the TA loan was less than efficient in achieving its purpose.

D. Preliminary Assessment of Sustainability 48. Several policy reforms under the program are likely to continue. Higher taxes on fuel products, and stamp and registration duties are unlikely to be reversed; as would the shift in the pension schemes. The MHSC in health and VRS in education have become the practice and are likely to be continued. The use of MTEFs was introduced but needs strong follow-up to continue, and not all line departments have adopted it. The centralization of fund allocation in the central government may eventually help institutionalize the process (para. 21). Treasury computerization is likely to become a permanent feature. However, the issue of connectivity needs to be addressed. Albeit, all these positives have been overshadowed by an increase in spending, which, if not curbed, will lead to an unsustainable fiscal position for the state. Thus, the impact of the program is rated less than likely sustainable. The contribution of the TA loan will likely continue in reform areas where capacity deficiency was rectified, but unless some other reforms are completed—such as MTEF implementation, or treasury computerization, where connectivity remains an issue—and, most importantly, state spending is curbed, the TA’s contributions are less than likely sustainable.19

18

Mixoram Economic Survey. 2015–16, Government of Mizoram, Planning and Program Implementation Department (p. 26, paras. 4 and 5).

19 Treasuries are currently functional only for limited basic functions, and continue to have network connectivity issues. To improve connectivity, talks are ongoing between the SGM and telecom operators.

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E. Impact 49. Institutional development. The program included several initiatives to establish systems and processes for improving the efficiency of SGM operations as well as related capacity building. The introduction of MTEFs was meant to strengthen budget planning and the treasury computerization was intended to better manage public expenditures. Staff underwent training on the new computerized systems. A Finance Commission and Project Monitoring Cell was set up in 2009. As for debt management, a comprehensive debt database and a debt management manual were prepared. A spreadsheet application is helping the SGM to assess risks in its debt portfolio. On MHCS, officials have attended participatory workshops and seminars and grassroots training as conducted to raise awareness of health schemes, provide access to services, identify beneficiaries, and help implement the scheme. MHCS has also procured MIS software for monitoring and reporting, and procured additional staff computers, equipment, and office furniture. On education, the plan for strengthening vocational training for employment generation was prepared and the detailed financial estimates were submitted as part of the plan. In September 2013, the Department of Land Revenue and Settlement developed comprehensive guidelines to implement the objective valuation method. The audit manual was approved in May 2010. The Department of Taxation organized training on the audit manual with the Committee on Public Finance and Government Accounting. The MHCS was expanded to cover 30% of households headed by women and 65.1% of families living below the poverty line. The framework for Mizoram Special Voluntary Retirement Rules 2009, a VRS for schoolteachers, was developed and implemented. The pension database management system was developed, is fully functional and run by the Accounts & Treasury Department. The Mizoram State Public Enterprises (Early Retirement) Rules, 2015 were passed to enable PSE closure and, thereby, reform. A fuller set of achievements under the program is in Appendix 1. 50. In conjunction, organizational changes were effected in various SGM offices, such as the departments of Taxation, Land Revenue and Settlement, and Transport. On various facets of the program, consultants were providing guidance and assistance to the SGM. Various vendors handled the installation of information technology infrastructure, such as for treasury automation, the new water charge billing system, and the Land Revenue MIS. 51. Inclusive economic growth. With the program missing its outcome targets, the impact on poverty will likely be limited. The initiatives in the health sector could have some benefits for the poor with inclusion of below-the-poverty-line families in the MHCS. The quality of education should improve with more qualified teachers. The program was environmental category C and had no direct environmental impact. It was categorized as C for both involuntary resettlement and indigenous people safeguards. No safeguard issues in these respects were reported. The development impact of the program is considered less than satisfactory.

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS A. Overall Assessment 52. The program is rated less than successful. It was relevant for the fiscal consolidation of Mizoram and consistent with India’s and ADB’s priorities. It was less than effective in fully complying with policy reform actions under the program and putting in place systems and processes for solidifying the reforms, and in building the requisite capacity. It was successful in raising the state’s own revenues during the program period. The SGM appears intent on completing PSE reform. Program implementation was less than efficient mainly for the lack of

14

capacity in procuring and recruiting consultants and failure to attract suitable consultants for the TA loan. The SGM failed to halt expenditure growth in areas outside the program, which led to the inability to meet the outcome targets. Unless government spending is held within prescribed limits, the impact of the program is less than likely sustainable. Moreover, unless follow-up action is taken by the SGM regarding program reforms, it may prove less useful than intended.

B. Lessons 53. Lessons from the recommendations of various special evaluation studies by the Independent Evaluation Department as well as its assessments of ADB’s public resource management reform programs (footnote 5) continue to apply in the case of the program, particularly “effective and viable political economy analysis is required to improve reform design and risk-mitigation measures” and “reform options have to be based on feasible governance risk assessments”. The political economy considerations would appear to have needed more careful analysis of the willingness of the SGM to come to terms with its expenditure burden, and the risks this will pose in achieving the outcomes.20 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 could have been taken into greater consideration in program design. The third-tranche amount was too small to act as an incentive, as it fell short of even covering the early retirement of SGM employees. The lack of capacity and limited time for preparation of the complex reforms that had to be put in place could have been better served by a cluster loan with a longer time frame. Besides, few expenditure issues outside the program were intractable ones. It also appears inadvisable to have carried out the reform program during an intervening election period and, if that could not be avoided, some flexibility could have been built in. 54. The design of the program envisaged 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. Also, the small sizes of the contracts did not attract consultants from reputed firms. This shortcoming was mitigated to some extent during the restructuring of the TA loan in 2013, when two large packages were made for PFM and information technology consultancies by consolidating various pending consulting services. However, delays in the procurement process and time constraints led to both packages finally being cancelled. It has been suggested that a firm-based consultancy might have worked better than the use of individual consultants. Moreover, owing to the remote location and weak infrastructure, a higher pay structure as an incentive might have improved the chances of recruitment. With corrective action taken only after 4 years, the feedback mechanism and the reaction time were very slow. Considering the lack of capacity early on, communication lines should have been left open and easy to access, and handholding support given on a more intensive and continuing basis. Since ADB deals with small countries, it could draw on their experiences in dealing with consultant recruitment. 55. This being the first large ADB-funded project for DOF and the SGM, their capacity in procurement processes of ADB was limited. Building staff capacities should have been considered by evaluating their skills in managing the procurement processes prior to TA loan implementation, and the required training should have been provided to ensure that procurement activities were managed efficiently. While this risk was recognized, it was thought

20

As discussed, although key conditions for the successful implementation of the program were met, the program failed to achieve the targeted outcomes given the rise in current expenditures outside of the program.

15

that it could be mitigated through capacity building under the TA loan. Unfortunately, the TA loan could not be managed efficiently because of this lack of capacity. Considering the vital role that the TA loan itself was to play, greater attention and more extensive consultation on TA preparation appear warranted early in the process. As early as inception, DOF as the executing agency had requested changes to the TA loan. C. Recommendations

1. Program and Technical Assistance Loan Related

56. Lack of capacity made it difficult for the SGM to implement all the policy reform conditions. In the process, attention was focused more on complying with policy conditions than building long-lasting reforms. It may be more advisable to cut down on the number of policy conditions and dwell on a few conditions that could remove the major bottlenecks, be capable of triggering other virtuous changes, and deliver a more beneficial impact in the long run. Moreover, the focus should have been on the transfer of technology from consultants to the SGM, rather than just the need to comply with required policy actions. Likewise, in reform programs where political will plays a major part, ADB’s presence and ability to put its weight behind the reforms could be of considerable value, especially in keeping the reform program on course and strengthening the hand of government. A less than strong presence and focus send unclear signals on the part of ADB and appear to tend to weaken the urgency for reform on the part of the government. ADB may reexamine its supervision processes and procedures, which appear to require strengthening given the weaknesses and lapses indicated under the program.

2. Future Monitoring

57. Although the program is closed, it would be useful to follow up on the status of the promised reforms and the progress of such reforms, so as to draw lessons for future programs. A program performance evaluation report may be appropriate if the SGM displays concrete action in terms of completing policy actions yet to be fully complied with and deepening policy reforms already in place, and takes steps to contain its expenditures. This would indicate that the reforms have taken root despite slow implementation, and that the dynamics of the reform process is such as to have continuing ripple effects, especially on the mindset of policy makers.

3. Further action or follow-up 58. To sustain the benefits of the program and to further deepen its impact, various follow-up actions are needed, such as:

(i) An MTEF needs to be rolled out and institutionalized in all the departments of the SGM.

(ii) In revenue management, the SGM should implement measures for augmentation of revenues from existing sources by improving compliance and exploring new areas. Necessary changes in policy, laws, and rules will be required for this.

(iii) Information-technology-based budget and expenditure management should be taken up for better control over budget preparation and execution.

(iv) Establishment and implementation of CS-DRMS has to be pursued. (v) A comprehensive MIS system for PFM needs to be put in place so that all

the financial information of the system is available from one source, which will enable the SGM to take more informed decisions.

(vi) The PSE reform must be pursued to completion.

16 Appendix 1

DESIGN AND MONITORING FRAMEWORK AND ACHIEVEMENTS

Design Summary

Performance Targets and /or Indicatorsa

Achievementb

Impact

The SGM increases investments of public funds for improved social and gender-inclusive human development in the state

Effective participation rate in primary schools rises to 33% within 3 years of program-end for both males and females. (2008 baseline: 22%)

Following the enactment of the Right of Children to Free and Compulsory Education (RTE) Act, 2009 in India, schools across all states are mandated not to hold back students until class VIII (i.e., including primary level) on account of their performance in examinations. Consequent to pursuit of this “no detention policy,” the indicator of effective participation ratio, which measures the percentage of students passing their examination with 60% marks or above, has become irrelevant. Thus the act has superseded this target. Source: Right of Children to Free and Compulsory Education (RTE) Act, 2009, published in Gazette of India on 27 August 2009

All enrollees in the MHCS have access to basic health services. (2008 baseline: 84%)

All enrolled below-the-poverty-line families have access to basic health services. Above-the-poverty-line families that have job-cards under the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) 2005 also have access to basic health services, while the other families above the poverty level and enrolled under the scheme have access to tertiary and secondary services, i.e., the benefit for treatment of critical illness. This target was achieved. Source: Compiled from data provided by Finance Department, State Government of Mizoram

Two percentage point increase in nonsalaried expenditures in the state on health and education. (2008 baseline: –1% growth)

The compound annual growth rate of nonsalaried expenditure in the state on health and education during the program period, i.e., from FY2010 to FY2015, is 7.74%, which translates into much higher growth than the two percentage point increase. This target was achieved. Source: Finance Accounts, State Government of Mizoram and data provided by Finance Department, State Government of Mizoram

Outcome

Creation of greater fiscal space in, and financial flexibility of, the budget of the SGM

Deficits are within prescribed limits of the FRBM Act without resorting to capital expenditure reductions, with a fiscal deficit of 3% or in line with any

From FY2010 onward, the fiscal deficit has invariably remained higher than 3% of GSDP. Revenue surplus, too, turned into a deficit in FY2014 and FY2015. Capital outlay, which was more than 10% of GSDP until FY2011, stagnated thereafter at around 7% of GSDP. This target was not achieved. Source: Medium Term Fiscal Policy Statement 2016-

Appendix 1 17

Design Summary

Performance Targets and /or Indicatorsa

Achievementb

other numerical target specified by the Thirteenth Finance Commission. (2008 baseline: 3.8%)

17, Finance Department, Government of Mizoram.

At least zero revenue deficit during the entire program period or in line with any other numerical target specified by the Thirteenth Finance Commission. (FY2007 baseline: $27 million revenue surplus)

Revenue surplus was maintained during the program period until FY2013. However, in FY2014 and FY2015, the revenue balance turned into a deficit of more than 1% of GSDP. This target was not achieved. Source: Medium Term Fiscal Policy Statement 2016-17, Finance Department, Government of Mizoram.

20% increase in own revenue, with FY2007 as the baseline. (FY2007 baseline: $43 million)

Own revenue of the SGM increased from $43 million in FY2008 to $81.87 million in FY2015, thereby registering a total increase of more than 100%. This target was achieved. Source: Medium Term Fiscal Policy Statement 2016-17, Finance Department, Government of Mizoram.

Interest payments less than own revenue by at least 2% of GSDP. (FY2007 baseline: almost identical at $43 million)

Own revenues amounted to $82 million in FY2015, against interest payments of $49 million. This implies that the interest payments of the SGM constituted less than its own revenues by 1.72% of GSDP. This target was not achieved. Source: Medium Term Fiscal Policy Statement 2016-17, Finance Department, Government of Mizoram.

Outputs

1. Tax and nontax revenue reforms successfully implemented

20% improvement in own-source revenue collection. (FY2007 baseline: $43 million)

Own revenues of the SGM increased from $43 million in FY2008 to $81.87 million in FY2015, thereby registering a total increase of more than 100%. This target was achieved. Source: Medium Term Fiscal Policy Statement 2016-17, Finance Department, Government of Mizoram.

Tax arrears reduced by 50%. (2008 baseline: $25 million)

The tax arrears increased and stood at $2.77 million in FY2016, which is a cumulative increase of more than 6 times. This target was not achieved. Source: Government of Mizoram Letter No. C.30016/1/2012-COMTAX/193 dated 21 September

18 Appendix 1

Design Summary

Performance Targets and /or Indicatorsa

Achievementb

2016

At least 20% increase in revenues from stamp duties and registration fees. (2008 baseline: $0.05 million)

The own revenues from stamp duties and registration fees increased by more than 7 times to reach $0.60 million in FY2015 on a cumulative basis. This target was achieved. Source: Receipt Budget 2016-17, Finance Department, Government of Mizoram

Maximum professional tax (as per Constitution of India) imposed on selected nonsalaried professional groups. (2008 baseline: only 50% of ceiling imposed)

Maximum professional tax as governed by constitutional annual limit of `2500 p.a. was levied on all nonsalaried professional groups—except for (i) salaries and wage earners whose monthly income is less than `15,000, (ii) dealers with annual gross

turnover on all sales of up to `20,000; and (iii) holders of permits for transport vehicles—with effect from May 2011. This target was achieved. Source: Notification No. 11020/1/05-TAX Taxation Department, Government of Mizoram.

User charges for water usage cover at least 50% of O&M costs. (2008 baseline: 16%)

The revenue collected from water usage charges have increased almost fourfold between FY2009 and FY2015, and exceeded the target from FY2013 to FY2015. Source: Letter No. G25021/2/2012-E-in_C/PHE/78 Department of Public Health Engineering, Government of Mizoram.

At least the top three most serious risk-based cases scrutinized and reassessed. (2008 baseline: none reassessed)

The top three most serious cases were identified by the risk-based audit for the assessment year FY2010 based on various risk parameters according to the provisions of chapter 4 of the VAT audit manual. In accordance with the rules of procedure, notices were issued to the dealers for audit assessment. Assessment orders were passed by the superintendent of taxes, which determined the VAT due from each dealer. Thereafter, demand notices were sent to the dealers for payment of the sum as determined in the assessment order. The dealers subsequently made the payments, thereby concluding the process. This target was achieved. Source: Letter No. G.28042/36/2009-COMTAX/269, Office of the Commissioner of Taxes, Government of Mizoram

2. Government debts are effectively

Premature retirement of at least 80% of high-

The total debt stock of high-cost loans contracted by the SGM at the end of FY2009 was `2.31 billion. In

addition, during FY2010, the SGM contracted an

Appendix 1 19

Design Summary

Performance Targets and /or Indicatorsa

Achievementb

restructured and managed

cost debt (with interest rate >9%). (2008 baseline: $58 million in high-cost debt, excluding government loans)

additional `0.2 billion in high-cost loans, resulting in a total debt stock of high-cost loans of `2.51 billion. Of

this, the SGM has prepaid `2.16 billion (about 86.10%). This target was achieved. Source: Letter No. 27033/1/2013-FMU, Finance Department, Government of Mizoram, along with supporting certificates from banks and financial institutions

Documentation of all incurred debts and contingent liabilities in a debt database. (2008 baseline: 0% in database, relevant software identified)

The debt database is currently operational in MS Excel Workbook (i.e., spreadsheet format) but it does not capture data on contingent liabilities. Consequently, this target was partially achieved. Source: Letter No. 21014/37/2008-FMU, Finance Department, Government of Mizoram

All staff responsible for debt management skilled in use of debt database management. (2008 baseline: none, capacity building plan being developed)

A Debt Management Manual was developed in 2011 as a guidance document for the staff. Training will be provided to the staff once implementation of CS-DRMS is completed. Consequently, this target was partially achieved. Source: Notification No. G.21015/2/2011-DMU, Finance Department, State Government of Mizoram

All contingent liabilities guaranteed by the GRF. (2008 baseline: 0%, policy decision already taken on fund establishment)

The contingent liabilities (or outstanding guarantees as at 31 March 2015) are significantly higher than the corpus of GRF. This target was not achieved. Source: Finance Accounts, State Government of Mizoram, and data provided by Finance Department, State Government of Mizoram

No increase in ratio of contingent liabilities to GSDP during program period. (2008 baseline: 4%)

The ratio has remained below the baseline level of 4% between FY2010 and FY2015. Though there was an increase in the ratio between in FY2011 and FY2012, it has steadily declined since FY2013, and stood at around 1% in FY2015. It is also noteworthy that throughout the program period, the ratio was substantially less than the 25% mandated under the Mizoram Ceiling on Govt. Guarantees Act 2011. Thus the performance condition is met over the period. The target is considered as achieved.

20 Appendix 1

Design Summary

Performance Targets and /or Indicatorsa

Achievementb

Source: Finance Accounts, State Government of Mizoram, and data provided by Finance Department, State Government of Mizoram

3. The management of public expenditure is rationalized

All public investment decisions of the SGM are vetted by the FMC. (2008 baseline: 0%, FMC established early 2009)

An FMC was set up in April 2009 for undertaking the appraisal, monitoring, and evaluation of projects or schemes of the SGM. Subsequently, a project appraisal manual was prepared and notified in June 2011. Later, the SGM mandated the Planning and Programme Implementation Department to carry out the function. However, the function was not fully performed. This target was not achieved. Source: Notifications number G.16035/106/2008-FEA and A.4505/1/06-FCC, State Government of Mizoram

Well-documented MTEFs in place for the departments of Health and Family Welfare and of School Education based on relevant long-term sector strategy and road map. (2008 baseline: no MTEF in place)

MTEFs were prepared once for the two departments: in 2011 for FY2012–FY2016 based on long-term sector strategies and road maps. The SGM integrated the MTEFs into the respective departments’ budget-making process for subsequent years. However, it does not appear that the MTEF program was pursued after the pilots. This target was partially achieved. Source: Letter No. 21014/18/2008-FMU, Finance Department, Government of Mizoram

No more than 5% variance in the annual budgets of the departments of Health and Family Welfare and of School Education from their respective MTEFs. (FY2006–FY2007 estimated baseline: 12% for health and 16% for education)

For FY2013, the MTEF estimates for the Department of School Education varied by less than 1%, but it was higher than 5% for the Department of Health and Family Welfare. This target was partially achieved. Source: Approved MTEFs and annual budgets for the two departments

4. Services in the health and education sectors are more accessible and improved

At least 30% of households headed by women and 60% of families living below the poverty line covered under the MHCS. (2008 baseline:

As at 31 March 2015, 30.04% of households headed by women and 65.1% of families below the poverty line are covered under the MHCS. This target was achieved. Source: Compiled from data provided by Finance Department, State Government of Mizoram

Appendix 1 21

Design Summary

Performance Targets and /or Indicatorsa

Achievementb

17.3% for households headed by women and 40.5% for families living below the poverty line)

The SGM is able to offer VRS to all eligible and interested teachers. (2008 baseline: none, VRS yet to be finalized)

The framework for Mizoram Special Voluntary Retirement Rules 2009, a VRS for schoolteachers, was developed and implemented. During the program period, 823 primary-school teachers and 243 middle-school teachers were assessed as eligible under the VRS. All were given the VRS, except for 8 willing teachers who were rejected because for age-based non-eligibility. This target was achieved. Source: Compiled from data provided by Finance Department, State Government of Mizoram

At least 90% of teachers who opt for VRS are replaced by suitably qualified teachers. (2008 baseline: VRS not in place)

Vacancies resulting from the implementation of the VRS were 100% filled. This target was achieved. Source: Compiled from data provided by Finance Department, State Government of Mizoram

All new recruitment of teachers from FY2010 is by documented merit criteria, and in consonance with all policies for equal employment. (2008 baseline: merit criteria finalized)

Selection of all new teachers who replaced those given VRS was done by merit criteria as required by the revised rules for recruitment of primary and middle-school teachers. Further, No discriminatory provisions exist in the amended recruitment rules under the VRS. This is corroborated by the fact that 63.4% of primary-school and 60% of middle-school teachers who were recruited as VRS replacements happened to be women. This target was achieved. Source: Compiled from data provided by Finance Department, State Government of Mizoram

5. The government pension scheme is reformed and made more financially sustainable

All new recruits in the SGM are covered by the defined contributory pension scheme. (2008 baseline: none, the scheme is not yet in place)

All new recruits in the SGM are covered under the Mizoram New Defined Contribution Scheme, which came into effect from September 2010 and applies to employees who joined the service of the SGM on or after 1 September 2010. This target was achieved. Source: Letter No. 21014/6/2008, Finance Department, Government of Mizoram

Fully functional The Pension Database Management System was

22 Appendix 1

Design Summary

Performance Targets and /or Indicatorsa

Achievementb

pension database of existing pension scheme. (2008 baseline: no such database in place)

developed, is fully functional, and run by the Accounts & Treasury Department. This target was achieved.

6. Loss-making PSEs are restructured or closed

At least one PSE, from the set of PSEs selected for closure, is closed. (2008 baseline: no such set determined yet)

The cabinet decision to close three of the five PSEs—Mizoram Agricultural Marketing Corporation, Zoram Electronics Development Corporation, and Mizoram Handloom and Handicrafts Development Corporation was taken on 18 February 2015. Regular employees under these PSEs were either absorbed into the SGM or were given retirement under the Mizoram State Public Enterprises (Early Retirement) Rules, 2015, according to their choice. This target was achieved. Source: Letter No. G.21014/15/2014-FMU and Budget Speech for 2016-17.

At least one PSE contributes dividends to the state treasury by 3 years of program-end. (2008 baseline: none)

Deliberations on the same are ongoing. Thus the target was not achieved within the span of the program.

PSE employment levels remain at least constant to the 2008 baseline. (2008 baseline: 266 employees)

Before the implementation of PSE reforms, employees of all five PSEs totaled 243. Of these, 118 were retired from the three closed PSEs, while 15 were retired from Zoram Industrial Development Corporation, which is now being restructured. Also, 54 employees were retired from Mizoram Food and Allied Industries Corporation, which is being privatized. This means that about 50 employees are likely to remain in the existing PSEs, so the target was not achieved.

Government outlays on PSEs remain constant to the FY2006 baseline. (FY2006 baseline: $0.9 million)

The SGM’s outlays on PSEs amounted to $1.7 million in FY2012, $2.7 million in FY2013, $3.0 million in FY2014, $2.7 million in FY2015, and $1.5 million in FY2016. This target was not achieved.

All restructured PSEs have good-practice corporate governance standards in place. (2008 baseline: none)

Restructuring of the existing two PSEs is underway, so the target was not achieved within the time span of the program.

Appendix 1 23

CS-DRMS = Commonwealth Secretariat Debt Recording Management System, FMC = finance monitoring cell, FRBM = Fiscal Responsibility and Budget Management Act 2006, FY = fiscal year, GSDP = gross state domestic product, MHCS = Mizoram Health Care System, MTEF = medium-term expenditure framework, O&M = operation and maintenance, PSE = public sector enterprise, SGM = State Government of Mizoram, VAT = value-added tax, VRS = voluntary retirement scheme. a

FY in the Performance Targets and/or Indicators column uses the old definition, whereas FY in the Achievement column uses the new definition, as provided in the Notes of the main text. For example, the fiscal year beginning on 1 April 2010 and ending on 31 March 2011 is represented as FY2010 using the beginning year under the old definition, but is represented as FY2011 using the end year under the new definition. b

In the Achievement column, the baseline figures for performance targets and indicators may differ from the ones in Performance Targets and/or Indicators column since updated and revised figures from the cited government publications are used to assess the achievement during program implementation.

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STATUS OF COMPLIANCE WITH FIRST TRANCHE POLICY ACTIONS

First Tranche Status of Compliance

I. Tax and Non Tax Reforms Objective: Improve revenue mobilization

Department of Taxation, Department of Land Revenue and Settlement, and Department of Transport will approve and issue notifications on their respective organizational restructuring plans. (Documents required: notifications and plans)

Complied with. Organizational restructuring plans were issued by the three departments as per Notifications (i) A.11007/2/2007-TRP, (ii) F.23012/2/05-REV, and (iii) D.11012/2/2000-TAX(ii) in May 2009

Department of Taxation, Department of Land Revenue and Settlement, and Department of Transport will approve their capacity development plans. (Documents required: copies of the approval and the plans)

Complied with. Capacity development plans for the three departments were formulated and introduced through Notifications Notifications (i) B.11013/6/08-TRP, (ii) F.23012/2/05-REV, and (iii) D.11012/2/2000-TAX(i) in May 2009

Department of Finance will approve a plan to increase the availability of stamps for registration of financial transactions. (Documents required: copy of the approval and the plan)

Complied with. The Finance Department, through Notification G.16035/94/2008-FEA issued instructions on the use and regulation of stamp papers. Eight authorized vendors were identified to sell stamps across the various districts and a new Schedule indicating the value of stamp to be affixed in various types of instruments were issued.

I. Debt Management Objective: Improve efficiency of debt management

Department of Finance will finalize the legal arrangements with RBI and the financial institutions for the prepayment of the high-cost loans. (Documents required: confirmation letters from RBI and each of the financial institutions)

Complied with. The Finance Department through letter No. G.16035/84/2008-FEA proposed prepayment of high interest loans, which was agreed to by RBI and Rural Electrification Corporation Limited through Notification DO.IDMD/5178/11.08.06/2008-09 and REC/Fin/Loans/Mizoram/2009-10

Department of Finance will issue a notification on the ceiling of new guarantees to minimize SGM contingent liabilities. (Documents required: copy of the notification)

Complied with. Through Notification No. G.16035/59/2006-FEA on 15 June 2009 SGM issued the order that fresh guarantees to be extended by the Government in a fiscal year shall not exceed 3% of GSDP to avoid accumulation of contingent liabilities.

Department of Finance will issue a notification on a GRF scheme and establish the GRF (Documents required: SGM notification of

Complied with. Through Notification No. G.16035/59/2006-FEA on 15 June 2009 notified the “Scheme for Constitution and Administration of the Guarantees redemption Fund”. SGM also provided an advice to invest `5 million in Guarantee

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establishment of GRF and copy of SGM advice to RBI to open account)

Redemption Fund.

II. Public Expenditure Management Objective: Improve allocation of scarce resources

SGM will issue a notification on the establishment of the finance commission and project monitoring cell within the Department of Finance. (Document required: copy of notification)

Complied with. Through Notification G.16035/106/2008-FEA, SGM established the Finance Commission and Project Monitoring Cell under the Finance Department, and which will be responsible for appraisal, monitoring and evaluation of various projects and scheme under SGM.

Department of Finance will approve the capacity development plan for the proposed finance commission and project monitoring cell. (Document required: copy of notification and the plan)

Complied with. SGM approved a capacity development plan for Finance Commission and Project Monitoring Cell by Notification No. A.45015/1/06-FCC in 21 may 2009.

Department of Finance will approve the treasury computerization plan, which will include a pilot plan for South Aizawl treasury. (Document required: copy of the Department of Finance approval)

Complied with. SGM approved the proposal for computerization of all the treasuries in Mizoram including the pilot project at Aizawl South Treasury by Notification No. G.25022/1/2000-F.Est/Pt.(Loose)

III. Service Improvement in Health and Education Sector Objective: Improve service delivery in health and education sectors

Department of Health and Family Welfare will submit to the Department of Finance a performance report based on the review of the existing state health insurance scheme. (Document required: letter of submission to the Department of Finance and the report)

Complied with. A performance report of the Mizoram State Health Care Scheme for 2008-09 and capacity Building Plan for 2009-10 was submitted to the Finance Department through Notification No. B.1208/03/2008-DHME/MSHCS

Department of Health will notify the new MHC Scheme based on self-financing. (Documents required: notification letter of the scheme and the detailed design of the scheme)

Complied with. Through Notification No. B.1208/03/2008-DHME/MSHCS, SGM notified the Mizoram Health Care Scheme based on self-financing. The Scheme came into force on 1 July 2009. The notification also included the detailed design of the scheme including covered benefits, eligibility of beneficiaries, and benefit

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exclusions among others. The scheme was to be implemented utilizing the

services of a Third Party Arbitrator duly selected through competitive bidding.

Department of Health and Family Welfare will submit to the Department of Finance a capacity development plan to improve the basic managerial capacity of the Mizoram Health Care Society. (Document required: capacity development plan)

Complied with. A capacity development plan for the Mizoram State Health Care Society was submitted to enhance the technical capacity of the Society staff in health insurance and to help in implementation of the scheme.

Department of Health and Family Welfare will submit to the Department of Finance an investment plan for the corpus for the MHC Scheme based on sound financial principles. (Document required: Investment plan and letter of submission to Department of Finance)

Complied with. Through Notification No. B.1208/03/2008-DHME/MSHCS, a plan for “Investment and Sustainability of the Mizoram health Scheme” was submitted.

Department of School Education will revise and finalize the VRS for teachers after endorsement from the Department of Law and Judicial and the Department of Finance. (Documents required: (i) copies of VRS endorsement from the Department of Finance and Department of Law and Judicial, and (ii) copy of notification with VRS rules)

Complied with. The Department of School Education notified the ‘Special Voluntary Retirement (for School Teachers) Rules 2009 in May 2009.The Rules were vetted by Law & Judicial Department and approved by Finance Department.

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STATUS OF COMPLIANCE WITH SECOND TRANCHE POLICY ACTIONS

Second Tranche (approximately 16 months after loan

effectiveness)

Status of Compliance

I. Tax and Non Tax Reforms Objective: Improve revenue mobilization

Department of Taxation, Department of Land Revenue and Settlement, and the Department of Transport will complete the changes prescribed in their organizational restructuring plan. (Document required: status report on department restructuring)

Complied with. The Department of Taxation, Department of Land Revenue and Settlement, and Department of Transport have implemented the changes prescribed in their respective organizational restructuring plan. These were notified through No. D.11012/2/2000-TAX(ii), A-11011/1/2008-DTE-TRP and F.23012/2/08-REV(Loose).

Department of Taxation will finalize an audit manual for introducing risk-based audit and provide training to the staff on risk-based audit. (Document required: audit manual and status report on training activities)

Complied with. The audit manual was approved by the Council of Ministers on 18 May 2010 (Notification No. G.28042/38/08-COMTAX/42). The Department of Taxation has also organized training (in May 2010) on the audit manual in conjunction with the Committee on Public Finance and Government Accounting.

SGM will issue and notify the OVM for property tax. (Document required: copy of notification)

Complied with. A Notification No. G.16035/2/2011-REV issued on 11 July 2011 introduced an objective valuation method for assessment of property values, which will be carried out based on eight parameters.

Department of Land Revenue and Settlement will carry out upward revision of the tax rates on land, building, house, shops, and stalls. (Document required: copy of notification)

Complied with. A Notification No. J.11011/1/06-REV was issued on 15 July 2011 detailing upward revisions in taxes on land, building, house, shops, and stalls. The annual land revenue rates (per square meter) were raised between 50% and 100% depending on the locations.

SGM will approve a plan for collection of tax arrears. (Document required: collection plan)

Complied with. To improve collections of arrears the departments of taxation, transport and land revenue undertook a number of steps including (i) information collection and assessment of arrears, (ii) setting up arrear collection teams at the local level, (iii) public awareness campaigns and (iv) imposition of penalties on defaulters.

SGM will notify introduction of a lump sum payment system of road tax for a specific period of time in place of annual payments. (Document required: copy of notification)

Complied with. With Notification No. H.12018/71/96-LJD, issued on 14 July 2011, the state notified introduction of a lump sum payment system of road tax in place of annual payments, which is expected to improve tax compliance by reducing the compliance cost.

SGM will issue and notify an increase in the professional tax rates within the ceiling fixed by the Constitution of India. (Document required:

Complied with. The notification (No. J.11020/1/05-TAX) was issued on 23 May 2011. Over and above upward revisions in the tax rates across various income classes and professions, the exemption limit was reduced from `10,000 to

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copy of notification) `5,000.

Department of Public Health Engineering will finalize a quality- and cost-based methodology to revise water charges periodically and revise the charges accordingly. (Document required: the implementation report)

Complied with. The implementation report on the methodology of quality- and cost-based user charge recovery was prepared and submitted to the Finance Department by Public Health Engineering Department in June 2011. The notification (No. G-25022/!/2000-PHE) to revise the water charges for commercial and noncommercial users was issued on 10 June 2011.

II. Debt Management Objective: Improve efficiency of debt management

Department of Finance will finalize a debt management manual that includes provisions on institutional arrangements for improved management of the debt stock and new borrowings. (Document required: copy of the manual)

Complied with. The Debt Management Manual was prepared and approved by the state under a notification (No. G-21015/2/2011-DMU) issued on 17 June 2011. The manual covers (i) institutional structure and governance; (ii) medium-term debt strategy; (iii) debt management policies, limits, and controls;

Department of Finance will finalize a debt database, which includes data on debt stock, cost of funds, and maturity profile. (Document required: report on the establishment of the database)

Complied with. A comprehensive database has been prepared detailing different parameters (interest rate, maturity profile, etc.) of the loans taken from various sources.

SGM will augment the GRF based on the plan for fund augmentation as well as the risk assessment report on SGM guarantees. (Document required: budget document)

Complied with. A risk assessment report was prepared detailing probabilities of default of various loans guaranteed by the state. The guarantee redemption fund (GRF) has been augmented by `10 million and documented in the budget for FY2011.

III. Public Expenditure Management Objective: Improve allocation of scarce resources

Department of Health and Family Welfare and Department of School Education will prepare a long-term sector strategy and road map for the health and education sectors, respectively, and identify concrete and detailed goals for each sector. (Documents required: sector strategies and road maps)

Complied with. To facilitate implementation of the MTEFs sector strategies with detailed goals and roadmaps were prepared by the Department of Health and Family Welfare and Department of School Education.

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Department of Finance will institute a system of project appraisal reports for all new projects and project performance evaluation for existing projects and institutionalize a system of linking them with fund allocation. (Document required: report that documents project performance evaluation system)

Complied with. A detailed project appraisal and performance evaluation system was prepared and notified on 24 June 2011 (Notification No. G.11023/39/2009-FMC). The guidelines provide a broad framework for project appraisal, delegation of power for project appraisal, and approval.

Department of Health and Family Welfare and Department of School Education will prepare departmental rolling MTEFs for their departments based on the projected resources available and sectoral goals/targets. (Document required: report on MTEF)

Complied with. While the Department of Health and Family Welfare prepared the report on MTEF in March 2011 and Department of School Education prepared the MTEF report in June 2011.

Department of Finance will finalize a performance evaluation report of the treasury pilot in South Aizawl, and based on the report prepare a blueprint for computerization of the remaining eight treasuries (including the capacity building requirements). (Documents required: performance evaluation report and blueprint for computerization)

Complied with. The Finance Department submitted the Performance Evaluation Report on computerization of Aizawl South Treasury. The staff of the South Aizawl Treasury were given several rounds of training, and they most of them now have a fair degree of understanding of the pre-check and compilation modules of the COMPACT software along with the associated budget modules. It was also envisaged that the lessons learned from this pilot would be incorporated when computerizing the remaining eight treasuries by the end of the program period

IV. Service Improvement in Health and Education Sector Objective: Improve service delivery in health and education sectors

Department of Health and Family Welfare will complete and publish an evaluation of the MHC Scheme, including any corrective actions required to improve the performance of the Scheme. (Document required: evaluation report)

Complied with. The Department of Health and Family Welfare completed the evaluation of the Mizoram Health Care Scheme, and submitted the report. The report outlined the claims submitted and claims paid under the MHCS. The government also has submitted detailed recommendations for further improvement in the implementation of the scheme.

Department of Finance will prepare a report on the performance of the MHC Scheme corpus fund. (Document required: performance

Complied with. The Finance Department prepared a report outlining the performance of the Mizoram Health Care scheme corpus fund (Notification No. G.21014/21/2008-FMU). The report comprehensively documented interest

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report)

income earned from various sources on the corpus fund. The report revealed that financing of the MHC scheme could be sustained over the long run. However, safe and innovative investment decisions by the Department of Finance will continue to be essential for the financial sustainability of the MHC scheme.

Department of School Education will complete the implementation of the VRS for those primary school teachers that are determined to be the least qualified. (Document required: report on the VRS)

Complied with. The Department of School Education provided VRS to 193 underqualified primary school teachers and initiated steps to select qualified teachers to replace underqualified teachers. This initiative is expected to improve the quality of school education in the state.

Department of School Education will prepare and complete an annual administrative report. (Document required: annual administrative report)

Complied with. The Department of School Education prepared the annual administrative report, which contains a detailed discussion on infrastructure gaps in school education. It also deals with the achievements and problems of various public schemes in primary, middle, and high schools.

V. Pension Reforms Objective: Reduce the pressure on state finances

SGM will approve and implement the defined contributory pension scheme for new recruits with a specified cutoff date. (Document required: copy of notification)

Complied with. The state introduced, through Notification No. G.17011/2/2008-F.APF on 17 June 2010, a defined-contribution pension scheme for state government employees recruited on or after September 2010.

VI. Public Sector Enterprise Reforms Objective: Improve the fiscal health of the state

Department of Finance will finalize an assessment report on the restructuring and/or consolidation of PSEs, and based on the report, will prepare plans for the implementation, including labor rehabilitation plans. (Document required: report on restructuring and the implementation plan)

Complied with. With Notification No. G.21014/15/2008-FMU, the Finance Department submitted a detailed report on restructuring and consolidation of the PSEs. The report suggested closure of three PSEs, restructuring of one PSE under the ownership of the state, and privatization of one PSE.

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STATUS OF COMPLIANCE WITH THIRD TRANCHE POLICY ACTIONS

Second Tranche (approximately 16 months after loan

effectiveness)

Status of Compliance

I. Tax and Non Tax Reforms Objective: Improve revenue mobilization

Department of Taxation will complete scrutiny and reassessment of at least top 3 most serious cases identified by the risk-based audit for the assessment year 2010/11. (Document required: audit report)

Complied with. With Notification No.G.28042/36/2009-COMTAX/269 dated 18 September 2013, the Department of Taxation submitted the scrutiny and reassessment of top three most serious cases identified by the risk based audit.

Department of Land Revenue and Settlement will complete a pilot on the use of OVM in at least one district. (Document required: status report on the pilot)

Complied with. With Notification No. G.28013/5/2011-DTE(Rev)/Plan dated 11 October 2013, the Department of Land Revenue and Settlement submitted the status report. The district of Aizawl was chosen as a pilot for OVM implementation.

II. Debt Management Objective: Improve efficiency of debt management

DOF will complete the implementation of the plan for the debt management software (CS–DRMS). (Document required: completion report)

Partially complied with. While SGM Initiated the implementation of the Commonwealth Secretariat Debt Recording Management System (CS-DRMS) to streamline overall debt management operations, compiled the public debt information, developed a database and prepared a debt management manual. However, due to procedural issues with the central government and the time taken to recruit an IT firm, the project had to be cancelled for lack of time to undertake implementation. Consequently, SGM went ahead and developed a spreadsheet-based application to enable assessment of the risks in its overall debt portfolio.

DOF will have prepaid at least 80% of the high-cost loans (Documents required: certificate from RBI and the financial institutions)

Complied with. SGM prepaid about 86.10% of high cost loans to RBI, Rural Electrification Corporation Limited and Life Insurance Corporation of India. The relevant notifications are (i) IDMD.DOD/3743/11.08.008/2011-12 dated 28 March 2012, (ii) REC/FIN/LOANS/MIZORAM dated 20 July 2010, (iii) Acknowledgement letter from REC dated 7 December 2011 and (iv) Acknowledgement Letter from LIC dated 24 July 2012.

The total of new high-cost loans incurred by SGM will not exceed the ceiling of 5% of GSDP. (Document required: report from the DOF)

Complied with. According to the report enclosed with Notification No. 27033/1/2013-FMU, dated 24 September 2013, loans secured by SGM constituted less than 5% of GSDP for 2010-11, 2011-12 and 2012-13.

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III. Public Expenditure Management Objective: Improve allocation of scarce resources

Department of Health and Family Welfare and Department of School Education will prepare their respective budget, in consultation with the DOF, in line with the MTEFs developed for those departments. (Document required: budget statement)

Complied with. SGM completed two pilot medium-term expenditure frameworks (MTEFs) for the Department of School Education and Department of Health and Family Welfare (DOHFW) in 2011 that provide estimates for FY2011–FY2015. MTEFs have been institutionalized as part of the formal budget process for these two departments. The reports were submitted with Letter No: 21014/18/2008-FMU, dated 26 September 2013.

DOF will complete the computerization for all 8 remaining treasuries. (Document required: status report)

Not complied with. At the time of the release of the third tranche SGM had computerized four treasuries. The delay in computerization was due to the restructuring of the procurement plan, which in turn delayed the procurement process. There were delays in the selection process, as well as on the part of the supplier even after selection. SGM continued with this reform process even after the closure of the loan. In April 2015, Finance Department ordered the start of use of the software in the other treasuries from 1 May 2015.

IV. Service Improvement in Health and Education Sector Objective: Improve service delivery in health and education sectors

Department of Health and Family Welfare will complete the implementation of the managerial capacity development plan for the Mizoram Health Care Society. (Document required: status report on implementation)

Complied with. SGM has taken steps to implement the capacity development plan including having officials attending workshops to share ideas and experience, and conducting grassroots training and workshops. New personnel were recruited for various posts. MHCS has also procured management information system (MIS) software for monitoring and reporting, and procured additional staff computers, equipment and office furniture. The status report was submitted with Letter No. B.12018/08/2010-DHME/MSHCS, dated 19 September 2013

SGM will augment the health corpus from its own resources in line with the investment plan.(Document required: budget statement)

Complied with. The SGM Finance Department has provided a detailed report regarding the status of the MHCS health corpus fund with Letter No. 21014/21/2008-FMU dated 26 September 2013.

Department of Health and Family Welfare will publish the results of an independent assessment to ascertain the effectiveness of the MHC scheme and specify how the recommendations will be implemented. (Document required: assessment report)

Complied with. Mizoram University was engaged by SGM to independently assess and make recommendations for improving the effectiveness of the MSHCS. The study highlighted the positive impact of the scheme in providing enhanced access to healthcare and also commended the MHCS for the its rapid settlement of claims. The report was submitted with Letter No.B.12018/08/2010-DHME/MSHCS dated 27 September 2013.

Department of School Education will complete the implementation of the VRS for primary and

Complied with. With Notification No. A.38/23/2010-DTE(EDN)/Pt, Department of School Education submitted the compliance report on implementation of VRS for

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middle school teachers. (Document required: report on the VRS)

primary and middle school teachers.

Department of School Education will publish the results of an independent survey to ascertain demand for vocational education (both from prospective students and from potential employers) and revise existing curriculum based on the survey result. (Documents required: survey report and report on revised curriculum)

Complied with. With Notification No. B.12021/2/2012-EDN(VSHE) SGM published the Survey report on Demand for Vocational Education from prospective students and from potential employees.

Department of School Education will prepare and finalize a plan for strengthening vocational training for students for employment generation, including the required cost. (Document required: plan document)

Complied with. The Department of School Education submitted a copy of the proposed plan for Strengthening Vocational Education in Mizoram with Letter No.A.38/23/2010-DTE(Edn)/Pt. dated 2 September 2013.

V. Pension Reforms Objective: Reduce the pressure on state finances

DOF will conclude an agreement with a fund manager for managing the new pension scheme. (Document required: pension fund agreement)

Complied with. Following approval of the program, the Government of India established the Pension Fund Regulatory and Development Authority (PFRDA) as the regulator for the New Pension System (NPS). The PFRDA is tasked with appointing and establishing various intermediaries to execute the NPS, including the Central Record-Keeping Agency, NPS Trust, custodian banks, and others. Participating states enter into an agreement with the NPS Trust and the Central Record-Keeping Agency; the NPS Trust has an agreement with the fund managers that covers the participating states. Therefore, an agreement between SGM and the fund manager was achieved when SGM signed an agreement with the NPS Trust; the tranche condition is thus effectively complied with, and no further action is required. A copy of the agreement between SGM and NPS trust was submitted with Notification No. 21014/6/2008-FMU on 3 October 2013.

DOF will submit a report on new employees’ contribution to the pension fund. (Document required: report on level of contributions)

Complied with. The Finance Department submitted a report on contribution of new employees to the pension fund with Notification No. 21014/6/2008-FMU on 3 October 2013.

VI. Public Sector Enterprise Reforms Objective: Improve the fiscal health of the state

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SGM will implement the plan, ensuring that the PSEs that are recommended for closure have been closed and the compensation payment for the labor of the closed PSEs has been finalized. (Documents required: notification letter, closure report, and evidence of compensation payment)

Not complied with. Under MPRMP, it was decided to close three PSE, and restructure one PSE and privatize another one. SGM was unable to complete this within the loan period due to time taken for necessary deliberations and reach consensus among the various stakeholders. Subsequent to the closure of the program, the government pursued these reforms and closed down three PSEs, while one each are being restructured and privatized respectively.

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STATUS OF COMPLIANCE WITH LOAN COVENANTS

Loan No. 2536

Covenant Reference in Loan

Agreement Status of

Compliance

(a) The State shall carry out the MPRMP with due diligence and efficiency, and in conformity with sound administrative, financial, fiscal and public resource management practices.

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

Program Agreement (PA) between State of

Mizoram and ADB dated 17 September 2009 (Loan 2536 – IND) Section 2.01

Complied with

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

PA Section 2.02 Complied with

The State shall carry out the MPRMP in accordance with plans and programs formulated in accordance with governance and public resource management best practices as acceptable to ADB. The State shall furnish, or cause to be furnished, to ADB, promptly after their preparation, such plans and programs, and any material modifications subsequently made therein, in such detail as ADB shall reasonably request.

PA Section 2.03 Complied with

The State shall maintain, or cause to be maintained, records and accounts adequate to identify the use of Counterpart Funds, to disclose the use thereof ¡n the Program, to record the progress of the Program (including the cost thereof) and to reflect, in accordance with consistently maintained sound accounting principles, its operations and financial condition.

PA Section 2.04 Complied with

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

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

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

PA Section 2.05 Complied with

(a) The State shall furnish to ADB all such reports and information as ADB shall reasonably request concerning: (i) the Loan and the expenditure of the proceeds

PA Section 2.06 Complied with

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thereof; (ii) the expenditures financed out of the Matching Funds; (iii) the Program; (iv) the administration, operations and financial condition of the State to the extent relevant to the Program; and (v) any other matters relating to the purposes of the Loan.

(b) Without limiting the generality of the foregoing, the State shall furnish to ADB quarterly reports on the execution of the Program, on the operation and management of the Program facilities and the State’s budgetary position in each current FY and its medium term projections. Such reports shall be submitted quarterly or in such other period as ADB shall reasonably request, and shall indicate, among other things, progress made and problems encountered during the quarter under review, steps taken or proposed to be taken to remedy these problems, status and progress of expenditures to be financed out of the Counterpart Funds, and proposed program of activities and expected progress during the following quarter.

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

The State shall: (i) maintain separate records of accounts for the Program and for its overall operations; (ii) have such accounts and related financial statements (statement of income and expenses, and related statements) audited by independent auditors whose qualifications, experience and terms of reference are acceptable to ADB; and, in accordance with appropriate auditing standards; and (iii) furnish to ADB, promptly after their preparation but in any event not later than six (6) months after the close of the FY to which they relate, certified copies of such audited accounts and financial statements arid the report of the auditors relating thereto (including the auditors’ opinion on the use of the Loan proceeds and compliance with the covenants of the Loan Agreement), all in the English language. The State shall furnish to ADB such further information concerning such accounts and financial statements and the audit thereof as ADB shall from time to time reasonably request.

PA Section 2.07 Complied with

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

PA Section 2.08 Complied with

(a) The State shall, promptly as required, take all action within its powers which are PA Section 2.09 Complied with

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necessary to carry out the Program.

(b) In respect to the Program, the State shall at all times conduct its business in accordance with sound administrative, financial, environmental and fiscal practices, with competent and experienced management and personnel.

Except as ADB may otherwise agree, the State shall apply the proceeds of the Counterpart Funds to the financing of expenditures on the Program in accordance with the provisions of the Loan Agreement and this Program Agreement, and shall ensure that the expenditures financed out of such counterpart Funds are used exclusively in the carrying out of the Program.

PA Section 2.10 Complied with

The State shall promptly notify ADB of any proposal which in any manner impacts the Program and shall afford ADB an adequate opportunity to comment on such proposal for due consideration by the State.

PA Section 2.11 Complied with

Program Executing Agency and Program Implementing Agencies 1. (a) The State shall be responsible for the coordination and execution of the Program

with the various concerned departments and agencies of the State. (b) Without limiting the generality of the foregoing subparagraph, DOF shall be the

Program Executing Agency and shall be responsible for implementation and monitoring of the Program. The Program Implementing Agencies shall be responsible for complying with the policy actions.

(c) The State shall endeavor that (i) critical Program staff shall remain in their position

on a full-time basis for a reasonable duration to ensure continuity in the implementation of the Program; and (ii) all implementing agencies will be adequately staffed and provided with the necessary financial, technical, and other resources to perform their functions under the Program.

PA Schedule Complied with

Program Coordination

2. The PSC shall be responsible for overall direction, guidance, monitoring and providing oversight role under the Program. The PSC shall be chaired by the Principal Secretary of DOF and include the Principal Secretary or Secretary of DOPPI and of each of the Program Implementing Agencies, including their heads of departments. The PSC shall report to the Chief Minister through the Chief Secretary. The PSC shall meet, as and when necessary, at least once every quarter.

PA Schedule Complied with

3. The FMU shall serve as the program management unit, and shall facilitate the PA Schedule Complied with

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various reforms under the Program. The FMU shall be responsible for daily implementation of the Program under the guidance of the PSC. Towards this end, FMU shall (i) coordinate with, and help to the extent necessary, the various PIUs established in each of the Program Implementing Agencies, to carry out their functions in support of the reforms; and (ii) coordinate with ADB and various stakeholders and solicit feedback from experts from within and outside the Government on a regular basis.

Policy Actions

5. The Borrower and the State shall ensure that all policies adopted and actions taken under the Program, as set forth in the Policy Letter and the Policy Matrix, shall continue to be in effect for and beyond the duration of the Program.

PA Schedule Complied with

6. The Borrower and the State shall give due consideration to the findings and recommendations proposed as a result of the Program while carrying out the policies and actions under the Program.

PA Schedule Complied with

Policy Dialogue

7. The Borrower shall cause the State to keep ADB informed of, and the State and ADB shall from time to time exchange views on, the progress made in carrying out the policies and actions set out in the Policy Letter and the Policy Matrix and in the formulation and implementation of new related policies, and keep the Borrower informed.

PA Schedule Complied with

8. The Borrower, the State and ADB shall promptly discuss problems and constraints encountered during the implementation of the Program and appropriate measures to overcome or mitigate such problems and constraints.

PA Schedule Complied with

9. The Borrower and the State shall keep ADB informed of policy discussions with other multilateral and bilateral aid agencies that may have implications for the implementation of the Program and shall provide ADB with an opportunity to comment on any resulting policy proposals. The Borrower and the State shall take into account ADB’s views before finalizing and implementing any such proposals.

PA Schedule Complied with

Loan Proceeds and Counterpart Funds

10. The Borrower shall transfer the Counterpart Funds generated under the Loan under the normal arrangements for transfer of external assistance to the State and shall treat such Counterpart Funds as an additional to its transfers allocated annually to the State.

PA Schedule Complied with

11. The Borrower shall cause the State to use the Counterpart Funds to support the adjustment costs for the policies adopted and actions taken for Program

PA Schedule Complied with

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implementation. The Borrower shall cause the State to ensure that sufficient budgetary allocations are made in a timely manner for the efficient and timely implementation of Program.

VRS, Health Corpus, and GRF

12. The Borrower shall cause the State to provide the necessary Matching Funds for the (a) complete disbursement of VRS and related compensation for school teachers; (b) augmentation of the health corpus to ensure its sustainability; and (c) augmentation of the GRF to ensure compliance with the relevant tranche conditions.

PA Schedule Complied with

13. The Borrower shall cause the State to ensure that information relating to the implementation of VRS compensation for teachers is made available to all teachers uniformly.

PA Schedule Complied with

14. The Borrower shall cause the State to ensure that (a) consultation plans shall be prepared for and applied to teachers affected by reforms; (b) men and women shall be given equal access to, and use of, relevant services, resources, assets, and opportunities in the MHC Scheme and VRS; (c) the Program Implementing Agencies shall receive support in upgrading their information gathering capabilities; (d) specific health care products for women will be made available in the MHC Scheme; and (e) a labor restructuring plan shall be prepared once it is determined the PSEs that are to be restructured.

PA Schedule Complied with

Program Review

15. The State shall, through DOF, undertake periodic reviews during Program implementation to evaluate the scope, implementation arrangements, progress and achievement of the objectives of the Program. DOF shall ensure that ADB shall have the opportunity to participate in these reviews. The State shall approve a time bound action plan on staffing, computerization, and reporting arrangements for the FMC, as well as the FMU.

PA Schedule Complied with

Plan for Program Monitoring

16. The Borrower shall cause the State to ensure that all relevant baseline data related to the Program and its components shall be regularly monitored and continually updated. Within 6 months after the Effective Date, the State shall finalize a methodology or plan for monitoring the performance of the Program in line with the design and monitoring framework and the Policy Matrix.

PA Schedule Complied with

Fund Flow Tracking System PA Schedule Complied with

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17. The Borrower shall cause the State to establish a fund flow tracking system to track the use of the counterpart funds generated by the loan on a quarterly basis, particularly on ring-fenced Program investments (such as high-cost debt pre-payment, the health corpus, and the VRS for teachers

(a) The Borrower shall cause the Program to be carried out with due diligence and efficiency and in conformity with sound administrative, financial, fiscal and public resource management practices.

(b) In the carrying out of the Program, the Borrower shall perform, or cause the State to perform, all obligations set forth in Schedule 5 to this Loan Agreement

Loan Agreement (LA) between India and

ADB dated 17 September 2009

(Loan 2536 – IND) Section 4.01

Complied with

The Borrower shall cause the State to make available, promptly as needed, and on terms and conditions acceptable to ADB, the funds, facilities, services, and other resources which are required, in addition to the proceeds of the Loan, for the carrying out of the Program.

LA Section 4.02 Complied with

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

LA Section 4.03 Complied with

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

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

LA Section 4.04 Complied with

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

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

LA Section 4.05 Complied with

Program Executing Agency and Program Implementing Agencies LA Schedule 5 Complied with

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Para. 1. (a) The State shall be responsible for the coordination and execution of the Program with the various concerned departments and agencies of the State.

(b) Without limiting the generality of the foregoing subparagraph, DOF shall be the Program Executing Agency and shall be responsible for implementation and monitoring of the Program. The Program Implementing Agencies shall be responsible for complying with the policy actions.

(c) The State shall endeavor that (i) critical Program staff shall remain in their position on a full-time basis for a reasonable duration to ensure continuity in the implementation of the Program; and (ii) all implementing agencies will be adequately staffed and provided with the necessary financial, technical, and other resources to perform their functions under the Program.

Program Co-ordination

Para. 2. The Program Steering Committee shall be: (a) the body responsible for overall direction, guidance, monitoring and providing an oversight role under the Program; and (b) chaired by the Principal Secretary of DOF and include the Principal Secretaries/ Secretaries of DOPPI and of each of the Program Implementing Agencies, including their heads of departments. The PSC shall report to the Chief Minister through the Chief Secretary. The PSC shall meet, as and when necessary, at least once every quarter. Para. 3. The FMU, in DOF, shall serve as the PMU and shall facilitate the various reforms under the Program. The FMU shall be responsible for daily implementation of the Program under the guidance of the PSC. Towards this end, FMU shall (i) coordinate with, and help to the extent necessary, the various PIUs established in each of the Program Implementing Agencies, to carry out their functions in support of the reforms; and (ii) coordinate with ADB and various stakeholders and solicit feedback from experts from within and outside the Government on a regular basis. Para. 4. The PIUs shall liaise closely with the PSC through the FMU. Each of the PIUs shall be chaired by the head of the relevant Department and shall report directly to the Principal Secretary/Secretary of the respective Program Implementing Agency.

LA Schedule 5 Complied with

Policy Actions

Para. 5. The Borrower and the State shall (a) ensure that all policies adopted and actions taken under the Program, as set forth in the Policy Letter and the Policy Matrix,

LA Schedule 5 Complied with

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shall continue to be in effect for and beyond the duration of the Program, and (b) promptly adopt and implement the policies and actions included in the Program as set forth in the Policy Letter and the policy Matrix.

Para. 6. The Borrower and the State shall give due consideration to the findings and recommendations proposed as a result of the Program while carrying out the policies and actions under the Program.

Policy Dialogue

Para. 7. The Borrower shall cause the State to keep ADB informed of, and the State and ADB shall from time to time exchange views on, the progress made in carrying out the policies and actions set out in the Policy Letter and the Policy Matrix and in the formulation and implementation of new related policies, and keep the Borrower informed.

Para. 8. The Borrower, the State and ADB shall promptly discuss problems and constraints encountered during the implementation of the Program and appropriate measures to overcome or mitigate such problems and constraints.

Para. 9. The Borrower and the State shall keep ADB informed of policy discussions with other multilateral and bilateral aid agencies that may have implications for the implementation of the Program and shall provide ADB with an opportunity to comment on any resulting policy proposals. The Borrower and the State shall take into account ADB’s views before finalizing and implementing any such proposals.

LA Schedule 5 Complied with

Loan Proceeds and Counterpart Funds

Para. 10. The Borrower shall transfer the Counterpart Funds generated under the Loan under the normal arrangements for transfer of external assistance to the State and shall treat such Counterpart Funds as an addition to its transfers allocated annually to the State

Para. 11. The Borrower shall cause the State to use the Counterpart Funds to support the adjustment costs for the policies adopted and actions taken for Program implementation. The Borrower shall cause the State to ensure that sufficient budgetary allocations are made in a timely manner for the efficient and timely implementation of Program.

LA Schedule 5 Complied with

VRS, Health Corpus and GRF

Para. 12. The Borrower shall cause the State to provide the necessary matching funds

LA Schedule 5 Complied with

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for the (a) complete disbursement of VRS and related compensation for school teachers, (b) augmentation of the health corpus to ensure its sustainability; and (c) augmentation of the GRF to ensure compliance with the relevant tranche conditions.

Para. 13. The Borrower shall cause the State to ensure that information relating to the implementation of VRS compensation for teachers is made available to all teachers uniformly.

Para. 14. The Borrower shall cause the State to ensure that (a) consultation plans shall be prepared for and applied to teachers affected by reforms; (b) men and women shall be given equal access to, and use of, relevant services, resources, assets, and opportunities in the MHC Scheme and VRS; (c) the Program Implementing Agencies shall receive support in upgrading their information gathering capabilities; (d) specific health care products for women will be made available in the MHC Scheme; and (e) a labor restructuring plan shall be prepared once it is determined the PSEs that are to be restructured.

Program Review

Para. 15 The State shall, through DOF, undertake periodic reviews during Program implementation to evaluate the scope, implementation arrangements, progress and achievement of the objectives of the Program. DOF shall ensure that ADB shall have the opportunity to participate in these reviews. The State shall approve a time bound action plan on staffing, computerization, and reporting arrangements for the FMC, as well as the FMU.

LA Schedule 5 Complied with

Plan for Program Monitoring

Para. 16 The Borrower shall cause the State to ensure that all relevant baseline data related to the Program and its components shall be regularly monitored and continually updated. Within 6 months after the Effective Date, the State shall finalize a methodology or plan satisfactory to ADB, for monitoring the performance of the Program in line with the design and monitoring framework and the Policy Matrix.

LA Schedule 5 Complied with

Fund Flow Tracking Mechanism

Para 17. The Borrower shall cause the State to establish a fund flow tracking system to track the use of the counterpart funds generated by the loan on a quarterly basis, particularly on ring-fenced Program investments (such as high-cost debt pre-payment, the health corpus, and the VRS for teachers).

LA Schedule 5 Complied with

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STATUS OF COMPLIANCE WITH LOAN COVENANTS

Loan No. 2537

Covenant Reference in Loan

Agreement Status of

Compliance

(a) The State shall carry out the Project with due diligence and efficiency, and in conformity with sound administrative, financial, fiscal and public resource management practices.

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

Project Agreement (PA) dated 17

September 2009 (Loan 2537 – IND)

Section 2.01

Complied with

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

PA Section 2.02 Complied with

(a) In the carrying out of the Project, the State shall employ competent and qualified consultants and contractors, acceptable to ADB, to an extent and upon terms and conditions satisfactory to ADB.

(b) Except as ADB may otherwise agree, all Goods, Works and consulting services to be financed out of the proceeds of the Loan shall be procured in accordance with the provisions of Schedule 4 to the TA Loan Agreement. ADB may refuse to finance a contract where Goods, Works or consulting services have not been procured under procedures substantially in accordance with those agreed between the Borrower and ADB or where the terms and conditions of the contract are not satisfactory to ADB.

PA Section 2.03 Complied with

The State shall carry out the Project in accordance with plans, design standards, specifications, work schedules and construction methods acceptable to ADB. The State shall furnish, or cause to be furnished, to ADB, promptly after their preparation, such plans, design standards, specifications and work schedules, and any material modifications subsequently made therein, in such detail as ADB shall reasonably request.

PA Section 2.04 Complied with

(a) The State shall take out and maintain with responsible insurers, or make other arrangements satisfactory to ADB for, insurance of Project facilities to such extent and against such risks and in such amounts as shall be consistent with sound practice.

(b) Without limiting the generality of the foregoing, the State undertakes to insure, or cause to be insured, the Goods to be imported for the Project and to be financed out of the proceeds of the Loan against hazards incident to the acquisition, transportation and delivery thereof to the place of use or installation, and for such insurance any indemnity shall be payable in a currency freely usable to replace or repair such Goods.

PA Section 2.05 Complied with

The State shall maintain, or cause to be maintained, records and accounts adequate to PA Section 2.06 Complied with

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Compliance

identify the Goods, Works and consulting services financed out of the proceeds of the Loan, to disclose the use thereof in the Project, to record the progress of the Project (including the cost thereof) and to reflect, in accordance with consistently maintained sound accounting principles, its operations and financial condition.

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

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

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

PA Section 2.07 Complied with

(a) The State shall furnish to ADB all such reports and information as ADB shall reasonably request concerning (i) the Loan and the expenditure of the proceeds thereof; (ii) the Goods, Works and consulting services financed out of such proceeds; (iii) the Technical Assistance; (iv) the administration, operations and financial condition of the State; and (v) any other matters relating to the purposes of the Loan.

(b) Without limiting the generality of the foregoing, the State shall furnish to ADB quarterly reports on the execution of the Project. Such reports shall be submitted in such form and ¡n such detail and within such a period as ADB shall reasonably request, and shall indicate, among other things, progress made and problems encountered during the quarter under review, steps taken or proposed to be taken to remedy these problems, and proposed program of activities and expected progress during the following quarter.

(c) Promptly after completion of the Project, but in any event not later than three (3) months thereafter or such later date as ADB may agree for this purpose, the State shall prepare and furnish to ADB a report, in such form and ¡n such detail as ADB shall reasonably request, on the execution of the Project, including its cost, the performance by the State of its obligations under this Project Agreement and the accomplishment of the purposes of the Loan.

PA Section 2.08 Complied with

The State shall (i) maintain separate records accounts for the Project; (ii) have such accounts and related financial statements (balance sheet, statement of income and

PA Section 2.09 Complied with

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expenses, and related statements) audited annually, in accordance with appropriate auditing standards consistently applied, by independent auditors whose qualifications, experience and terms of reference are acceptable to ADB; and (iii) furnish to ADB, promptly after their preparation but in any event not later than 6 months after the close of the fiscal year to which they relate, certified copies of such audited accounts and financial statements and the report of the auditors relating thereto (including the auditors’ opinion on the use of the Loan proceeds and compliance with the covenants of the Loan Agreement as well as on the use of the procedures for statement of expenditures), all ¡n the English language. The State shall furnish to ADB such further information concerning such accounts and financial statements and the audit thereof as ADB shall from time to time reasonably request.

The State shall enable ADB’s representatives to examine the Project, the Goods and Works financed out of the proceeds of the Loan.

PA Section 2.10 Complied with

Except as ADB may otherwise agree, the State shall apply the proceeds of the Loan to the financing of expenditures on the Project in accordance with the provisions of the Loan Agreement and this Project Agreement, and shall ensure that all Goods, Works and consulting services financed out of such proceeds are used exclusively in the carrying out of the Project.

PA Section 2.11 Complied with

(a) The Borrower shall cause the State to carry out the Project with due diligence and efficiency and in conformity with sound administrative, financial, fiscal and public resources management practices.

(b) In the carrying out of the Project, the Borrower shall perform, or cause the State to perform, all obligations set forth in Schedule 5 to this Loan Agreement.

TA Loan Agreement (TA LA) dated 17 September 2009 (Loan 2537 - IND)

Section 4.01

Complied with

The Borrower shall cause the State to make available, promptly as needed, the funds, facilities, services and other resources which are required, in addition to the proceeds of the Loan, for the carrying out of the Project and for the operation and maintenance of the facilities.

TA LA Section 4.02 Complied with

(a) In the carrying out of the Project, the Borrower shall cause the State to employ competent and qualified consultants, acceptable to ADB, to an extent and upon terms and conditions satisfactory to the Borrower and ADB. (b) The Borrower shall cause the State to carry out the Project in accordance with plans, specifications and work schedules acceptable to ADB. The Borrower shall furnish, or cause to be furnished, to ADB, promptly after their preparation, such plans, specifications and work schedules, and any material modifications subsequently made

TA LA Section 4.03 Complied with

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therein, in such detail as ADB shall reasonably request.

The Borrower shall ensure that the activities of the State with respect to the carrying out of the Project and operation of the facilities are conducted and coordinated in accordance with sound administrative policies and procedures.

TA LA Section 4.04 Complied with

The Borrower shall (i) maintain, or cause to be maintained, separate accounts for the Project; (ii) have such accounts and related financial statements audited annually, in accordance with appropriate auditing standards consistently applied, by independent auditors whose qualifications, experience and terms of reference are acceptable to ADB; (iii) furnish to ADB, as soon as available but in any event not later than 6 months after the end of each related fiscal year, certified copies of such audited accounts and financial statements and the report of the auditors relating thereto (including the auditors' opinion on the use of the Loan proceeds and compliance with the financial covenants of this Loan Agreement as well as on the use of the procedures for statement of expenditures), all in the English language; and (iv) furnish to ADB such other information concerning such accounts and financial statements and the audit thereof as ADB shall from time to time reasonably request.

TA LA Section 4.05 Complied with

Project Executing Agency and Project Implementing Agencies

Para. 1 (a) The DOF shall be the Project Executing Agency and shall be responsible for the overall implementation of the Project. (b) DAT, DOT, DOTr, DOHFW, DOSE, DPHE and DOLRS shall be the Project Implementing Agencies. Each of the Project Implementing Agencies, shall be responsible for carrying out the Project activities that are within their respective responsibilities.

TA LA Schedule 5 Complied with

Project Co-ordination Para. 2 The PSC under the Program shall also be the PSC for the Project. The PSC shall be responsible for overall direction, guidance, monitoring and providing oversight role under the Project. The PSC shall be chaired by the Principal Secretary of DOF and include all Principal Secretaries or Secretaries of each of the Project Implementing Agencies. The PSC shall report to the Chief Minister through the Chief Secretary. The PSC shall meet, as and when necessary, at least once every quarter. Para. 3 The FMU shall serve as the project management unit and shall facilitate the various activities under the Project. The FMU shall be responsible for daily

TA LA Schedule 5 Complied with

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implementation of the Project under the guidance of the PSC. Towards this end, FMU shall (i) coordinate with, and help to the extent necessary, the various PIUs established in each of the Project Implementing Agencies, to carry out their functions in support of the Project; and (ii) coordinate with ADB and various stakeholders and solicit feedback from experts from within and outside the Government on a regular basis. Para. 4 The PIUs shall liaise closely with the PSC through the FMU. Each of the PIUs shall be chaired by the head of the relevant Department and shall report directly to the Principal Secretary or Secretary of the respective Program Implementing Agency.

TA Loan Proceeds

Para. 5 The Borrower shall transfer the TA Loan proceeds to the State under the Borrower's normal arrangements for transferring external assistance to the State. The Borrower shall ensure that such transfer shall be additional to the transfer allocated annually to the State.

TA LA Schedule 5 Complied with

Matching Funds

Para. 6 The Borrower shall cause the State to provide Matching Funds for the implementation of the Project on time. Each of the Project Implementing Agencies shall make timely submission of annual budgetary appropriation request to DOF and the State shall ensure prompt disbursement of appropriated funds during each year of the Project implementation.

Para. 7 The Borrower shall cause the State to provide the TA Loan proceeds and the Matching Funds to each of the Project Implementing Agencies promptly to ensure the smooth implementation of the Project.

TA LA Schedule 5 Complied with

Capacity Development Plans

Para. 8 The Borrower shall cause the State to ensure that each of the Project Implementing Agencies shall update their capacity development plans annually.

TA LA Schedule 5 Complied with

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Social Issues

Para. 9 The Borrower shall cause the State to ensure that equal opportunity be given to men and women staff from each of the Project Executing Agency and Project Implementing Agencies to receive the various training provided under the Program. The State shall include a list of the training participants, in the quarterly report, to show the number of women staff who participated in the various training programs.

TA LA Schedule 5

Accounting, Auditing and Reporting

Para. 10 The Borrower shall cause the State to maintain separate records of account for the TA loan. To ensure proper fund management, ADB retains the right to audit the use of TA loan proceeds. The State, through the FMU, shall prepare a quarterly consolidated progress report on specific actions taken in the TA loan and shall forward the same to ADB and the PSC. The reports shall describe progress made under the TA loan and any changes to the implementation schedule as well as the procurement plan. The reports shall also identify any problems encountered and remedial actions taken. The State shall provide ADB with a Project completion report, within 3 months after Project completion.

TA LA Schedule 5

Complied with

Project Performance Management System

Para. 11 The PSC and ADB shall monitor the Project as an integral part of the program performance management system. The Project inputs, process, and output indicators will be monitored to determine how they affect impact. Capacity building requirements shall be continuously monitored and reassessed so that capacity building can be tracked as an ongoing process. Special attention will be paid to the capacity of the FMU.

TA LA Schedule 5 Complied with

50 Appendix 6

COSTS AND DISBURSEMENTS TOTAL COST OF PROGRAM

`/$ Conversion Cost in Total

Item Rate $ million Cost (`)

A. PROGRAM LOAN

1. Tax and nontax revenue reforms 55.00 2.00 110,000,000.00

2. Debt management 55.00 46.00 2530,000,000.00

3. Public expenditure management 55.00 3.00 165,000,000.00

4. Health corpus 55.00 40.00 2,200,000,000.00

5. VRS 55.00

6. Pension reforms 55.00 2.00 110,000,000.00

7. PSE restructuring 55.00 1.00 55,000,000.00

Subtotal (A) 94.00 5,170,000,000.00

`/$ Conversion Cost in Total

Item Rate $'000 Cost (`)

B. TECHNICAL ASSISTANCE

1. PFM consultancy 55.00 1,883.00 103,565,000.00

2. IT consulting/computerization 55.00 2,015.00 110,825,000.00

3. MIS consultancy 55.00 594.90 32,719,500.00

4. MIS consultancy (Extension) 55.00 125.99 6,929,450.00

5. Project coordination specialist 55.00 124.00 6,820,000.00

6. Land Revenue Information System (LAREMIS) software program

55.00 16.40

902,000.00

7. Water charge billing computerization (hardware) 55.00 120.00 6,600,000.00

8. Water charge billing (software) 55.00 65.00 3,575,000.00

9. Treasury piloting 55.00 75.00 4,125,000.00

10. Treasury computerization (hardware) 55.00 350.00 19,250,000.00

11. MTEF specialist – education 55.00 36.45 2,004,750.00

12. MTEF specialist – health 55.00 39.45 2,169,750.00

13. PSE restructuring specialist 55.00 50.40 2,772,000.00

14. Project appraisal specialist 55.00 36.83 2,025,650.00

15. Research assistant 55.00 10.00 550,000.00

16. Procurement specialist 55.00 75.00 4,125,000.00 Subtotal (B) 5,617.42 308,958,100.00

`/$ Conversion Cost in Total

Item Rate $ million Cost (`)

TOTAL 55.00 99.62.00 5,478,958,100.00

Appendix 6 51

ANNUAL DISBURSEMENT BY CATEGORY

Table A6.2: Annual Disbursement by Category – Program Loan (Loan no. 2536)

($ million)

No. Project Component Tranche 1 Tranche 2 Tranche 3 Total

1. Tax and nontax reforms - - 2 2

2. Debt management 19 27 - 46

3. Public expenditure management - 1 2 3

4. Sector improvement – health & education

28 12 - 40

5. Pension reforms - - 2 2

6. Public enterprise reforms - - 1 1

TOTAL 47 40 7 94

Table A6.2: Annual Disbursement by Category – Technical Assistance Loan

(Loan no. 2537)

($)

No. Project Component FY2011 FY2012 FY2013 FY2014

1. Public finance management consultancy

2. IT consulting/computerization

3. Project coordination specialist 32,700.88 34,813.71 6,773.50

4. MIS consultancy 271,844.43 73,096.74

5. LAREMIS software 13,702.68

6. Water charge billing computerization (hardware)

100,079.17

7. Software for water charge billing

8. Treasury piloting 61,786.52

9. Hardware for treasury computerization

10. MTEF specialist – education 12,436.05

11. MTEF specialist – health 3,302.48 30,333.82

12. PSE restructuring specialist 16,468.88

13. Project appraisal specialist 4,692.6

14. Research assistant 5,868.86 8,216.40

15. Procurement specialist

FY = fiscal year, IT = information technology, LAREMIS = Land revenue management information system, MIS = management information system, MTEF = medium-term expenditure framework, PSE = public sector enterprise. Note: The above figures show only the reimbursement claimed by the State Government of Mizoram from the Asian Development Bank.