ADB loan: major terms agreed to by LDF

THIRUVANANTHAPURAM MAY 9. The difference between policy formulations during the LDF Government and the UDF Government for obtaining the Asian Development Bank (ADB) loan is not substantial, the ADB papers released by the Government indicate.

The concept paper submitted by the LDF Government to the Centre for getting the assistance contained most of the important proposals that the Government is carrying out now. However, some of the details were worked out after the UDF Government came to power and it is possible that the LDF, which is criticising the conditions imposed by the ADB now, may not have agreed to all of them.

Among the released documents, the concept paper is the only document authored by the LDF Government. The rest are aide memoire prepared by ADB officials. So, the LDF Government's stand on various issues is available only in the words of the ADB officials. Though the ADB has been seeking confirmation of the aide memoire from the State Government, no Government communication confirming them in full or partially are among the documents released. So, it is not clear whether the LDF Government negotiated on any of the issues or agreed to all suggestions of the ADB teams in Toto.

The papers show that the only major policy recommendation made by the ADB after the UDF Government came to power was the one on setting up a new funded pension scheme for Government employees, appearing in the aide memoire of June 2001.

It said that the aggregate value of pension payments was expected to surpass the size of the current wage bill by serving Government employees within a few years. It recommended that the Government carefully examine, with the support of the ADB's technical assistance, the option of adopting a funded pension system based on the one being currently introduced by the Central Government. The Government issued orders in this regard this year.

The first aide memoire relating to the selection of Kerala as the third focal State (February 2000) says that the ADB Mission had requested strong political commitment from the LDF Cabinet to the reform process. Without the political will of the Cabinet to implement the comprehensive reform programmes, the ADB's assistance to the State may achieve little more than to increase the debt burden of the State. In this context, the Mission reiterated the importance of the Government having a strong sense of ownership of the reform process.

Ministers, it said, fully agreed on the urgency of reforms and requested an expeditious decision from the ADB regarding selection of the State for the loan. They expressed in principle support for the ADB's overall approach in key reform areas, which include fiscal consolidation, public enterprises restructuring, creating an enabling environment for private sector participation in infrastructure development and strengthening of the capacities of the local self-governments in the decentralisation process. "They, however, pleaded for more pragmatic approach for reforming public enterprises in view its social consequences. But they are not averse to downsizing of enterprises to make them viable before privatisation,'' the document said.

The formulation regarding public sector remained more or less the same after the UDF Government came to power, but the proposal had become more concrete. "The Mission understands that the current Government policy supports partial disinvestment, but not necessarily privatisation for profitable or marginal PSUs. However, the Government does support the closure of PSUs, which are chronic loss-makers provided that funds can be found for one-time settlement with financial institutions and VRS for employees. The Mission is encouraging the Government to clarify its position on outright privatisation.''

This is from the aide memoire of November 2001. No documents clarifying the position of the Government is among the documents released. The Mission suggested that the Government makes a beginning in the PSU reform process through the selective use of privatisations, closures, leasing and restructuring with a focus on those enterprises that are potential candidates for successful privatisation or, in the case of closures, by targeting those enterprises which impose the greatest incremental contingent liability claims per person employed.

An earlier aide memoire (June 2001) said that the new components, which the UDF Government had added to the power sector reform plan, were a commitment to establish an independent regulatory authority through an Ordinance under Central legislation and to modernise metering. The LDF Government had agreed on rational tariff structure, restructuring of the Board and operational improvements including separation of the Board into three profit centres.

In the concept paper, the LDF had also agreed on identifying of surplus staff in public sector units and offering them a voluntary retirement scheme (VRS) to phase out ten per cent of the staff in units identified in the White Paper to be prepared on the PSUs.

After the UDF came to power, the ADB was informed that Rs. 790 crores would be required to provide VRS to 31,000 affected employees. When the estimated cost of Rs. 568 crores for one-time settlement of financial liabilities to lending institutions are added, the overall cost of winding up the sick PSUs would be Rs. 1,358 crores.

The Mission noted that such an outlay would be too large for the State to finance over a short period and recommended that the authorities explore ways to reduce costs involved in closure.

The bank did not accept the proposal of the Government for setting up a renewal fund using ADB loan for economic and social services deliveryIt is notable that when the LDF Government submitted the concept paper, it expected loans for large infrastructure projects.

The introduction of the concept paper said that "external aid was ideally suited to meet the requirement for financing large infrastructure projects.''

However, these expectations were belied. The bank would be providing the loan only for reforms and restructuring with a focus on privatisation in the immediate future.

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