Economic development assistance is debt trap

The Times of India feature, “A ‘Risky’ State of Affairs,” (Oct. 18, 2016) describes the dismal state of development projects in Kerala.

The report says, “A comparison of the World Bank’s rating for its projects in Kerala and other southern Indian states show that risk factor is ‘substantial’ for two categories in Kerala – ‘Political and Governance’ and ‘Institutional Capacity for Implementation and Sustainability.’

“What is worrying is the ‘substantial’ SORT (Systematic Operations Risk Rating Tool) rating for two aspects of the on-going World Bank part-funded Kerala State Transport Project – 2 (KSTP-2), a five-year project which began in July 2013. The International Bank for Reconstruction and Development (World Bank) is funding $216 million of the total expected cost of $445 million.

“World Bank officials might downplay the substantial risk rating as the Kerala Government is their client and the bank couldn’t survive alienating its clients.” a policy maker commented on conditions of anonymity.

“According to the document, these aspects pose governance challenges to the current project: political interference in project implementation, poor quality of works, delayed payments to contractors, delayed decision-making, repeated termination and rebidding of contracts, poor sustainability arrangements for roads and lack of mechanisms for adequate citizen feedback and public disclosure.

“There is a substantial likelihood that weak institutional capacity for implementing and sustaining the operation or operational engagement may adversely impact the project development outcome. The implementing agencies have limited experience with bank and other multilateral development partner operations. The implementing agencies have some in-house capacity, but external consultants play an important role in the design and day-to-day operation implementation. Staff turnover is substantial and they have limited access to relevant training. There are significant gaps in the agencies’ monitoring and evaluation of arrangements, and the lines of accountability are somewhat unclear.”

“How many of bureaucrats have the expertise to see these projects thought?” asks D Narayana, director, Gulati Institute of Finance Taxation. “First thing they need is this expertise and then commitment.”

Even in the World Bank’s restrained language, the problems facing development projects in Kerala are clear: institutional capability deficits, lack of expertise among bureaucrats, lack of management skills, lack of dedication, and corruption.

It is not difficult to trace the causes of these problems. The problem starts with education. Kerala Government has full control of the quality of the education in the state – and the goal is to ensure uniform mediocrity. For example, recently there is a new initiative to offer WiFi in schools. However, such cosmetic efforts will not result in the skills needed for a vibrant economy. Studies have found that computers, smartphones and internet can be an inhibitor for learning. Fundamental education reforms are essential for effective functioning of the state economy. For instance, OECD recommends, “Governments should develop smart innovation strategies for education with the right policy mix to give meaning and purpose to innovation, including creating an innovation-friendly culture.”

Kerala Government and its agencies need change of mindset to bring real benefits from development projects. Here is an outline of a typical process for a development project.

  1. Target an agency to get loan from.
  2. Find a consultant who can prepare a proposal that will be accepted by the funding agency.
  3. Once the loan is approved, find another consultant to manage the project.
  4. Hire other consultants to implement the project.
    (In practice, there may be additional creative steps.)

The result of this process is that the supervising agency does not have the skills, know-how or expertise needed to supervise the project successfully — a problem identified in the World Bank report. In addition, the process inhibits the supervising agencies from acquiring essential expertise and know-how for effective project implementation (institutional capacity).

Kerala Government has so far received development loans from World bank, ADB, governments of Japan, France, Germany and others. Some of them are in the early stages. Projects that are due for completion share the fate of the World Bank KSTP-2 project or worse.

The situation with these development loans is all the more deplorable because there is no need for these loans in the first place. Kerala has huge amount of bank deposits and gold holdings to finance these projects and more. The problem is people (depositors) don’t trust the Kerala Government with their money. Instead, Kerala Government goes to these development agencies for loans to squander away, without accountability — as the World Bank has identified.

The economic development agencies — World Bank, ADB (Asian Development Bank [2]), governments of Japan [2], France [2], Germany [2] — are doing a disservice to the people of Kerala by giving loans to Kerala Government and its agencies by helping politicians and bureaucrats escape accountability.

What Kerala needs is assistance with institutional capability and capacity building. The priority for the economic development agencies need to be helping with institutional capacity building, not loans. Otherwise, they are just helping Kerala Government get deeper into the debt trap it is in.

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Author: Kerala Insider

Topics and issues related to Kerala economic development challenges.

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