Iraq - Lower Khalis Irrigation Project

CIRCULATING COPY I0BE RETURNED TO REPORTS DESK' DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Not For Public Use FILE f Rport No. P-1138 REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF IRAQ FOR THE LOWER KNALIS IRRIGATION PROJECT December 12, 1972 This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.   INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPENMT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED IOAN TO THE REPUBLIC OF IRAQ FOR THE LOWER KHALIS IRRIGATION PROJECT 1. I submit the following report and recommendation on a proposed loan to the Republic of Iraq for the equivalent of US $40.0 million to finance the foreign exchange cost of the Lower Khalis irrigation project which will provide for the construction of an efficient irrigation and drainage system in the Lower Khalis area of Iraq. The loan would have a term of 25 years, including 7 years of grace, with interest at 7-1/4 percent per annum. PART I - THE ECONOMY 2. A report entitled "Current Economic Position and Prospects of Iraq" (EMA-35a) dated August 20, 1971 was distributed to the Executive Directors on August 26, 1971 (R 71-213). More recent infor*ation on the economy was obtained by a mission to Iraq in April, and has been incor- porated in the following paragraphs. Country data is provided in Annex I 3. The 1958 revolution established a republican form of govern- ment and initiated a decade of fundamental social and political change. The landowner and entrepreneurial classes steadily lost their political and economic influence as successive governments introduced comprehen- sive land reform and gradually assumed control of the larger commercial and industrial enterprises. This gradual but fundamental transition to a socialist economic system, together with frequent changes of govern- ment and key officials, has for several years resulted in a lover rate of growth than Iraq's economic potential would permit. However, the present military Batathist Government has been in power far over four years and has consolidated its position. A number of measures taken since late 1970, reflect its growing sense of confidence and concentration on domestic economic and social problems. 4. The economy is dependent on oil which,in 1971,provided close to one-third of national output, over 90 percent of exports and more than half of government revenues. During the 1960's however, the growth of crude oil production has averaged only about 5 percent per year, compared to over 10 percent for all Middle Eastern producers. This was due to the low and declining levels of investment by the Iraq Petroleum Company (Ilu),  -2- as a result of the protracted and continuing dispute with the Government going back to 1961, when a law was passed withdrawing IPC's original con- cessions in all non-producing areas of Iraq, including the proven and large North Rumeila field. IPCts claims for compensation were not accepted by the Government on the grounds that untapped underground resources were national property, previous concessions notwithstanding. A large part of IPC's former concession area was later awarded to the government-owned Iraq National Oil Company (INOC), established in 1964. In recent years, INOC has started exploring and developing new oil fields, essentially in North Rumeila, in cooperation with East European countries and foreign firms on a contractual rather than concessionary basis. 5. Throughout the past decade, the Government and IPC have inter- mittently negotiateid and reached agreement on a number of issues concerning mainly the company's payments for current production. A major boost in such payments resulted from the October 1970 agreement with IPC and the 1971 Teheran and Tripoli agreements, which provided for increased production from IPC's southern field, and substantially higher international oil prices. Despite these impr:ovements little progress was made on i&at IPC regarded as a fundamental issue of compensation for the 1961 cancellation of concession rights in North Rumeila, and o*_ the claim of the Government for back payments of royalties and taxes. Moreover, early in 1972 the IPC group of companies curtailed production and exports from a daily average of about 1,900,000 barrels in January to about 1,400,000 barrels in March and April. 6. After negotiations, which extended over a period of nea.rly five months, the Government and IPC failed to find comon ground on the question of restoring production to the 1971 level and related issues. The Government nationalized IPC's assets in Iraq on June 1. Although the expropriation did not affect IPC's two Affiliates, the Basrah Petroleum Company and the Mosul Petroleum Company, present indications are that oil revenues may decline from $876 million in 1971/72 to about half that level in 1972/73. As a result, government revenues will be cut by about one-third. Although this is a subs- tantial reduction in revenues, the financial situation is less tight than would appear, at least in the short run. The reason for this is that, as a result of sharp increases in prices in 1970, coupled with considerable growth in production, past oil revenues have made possible an accumulation of reserves which, at the end of August,1972, stood at about $715 million, equi- valent to eleven months imports at the 1971 level. A settlement of the disspute with IPC on compensation for nationalized assets and other issues (para. 18 below) could pave the way for a resumption of the oil trade with traditional customers in Western Europe. Iraq is intensifying its efforts to open up new markets and find other diitlets for nationalized oil. 7. Although Iraq is an oil-producing country, its per capita GNP (around $320 in 1970) is relatively low. Income disparities betveen rural and urban areas, as well as between regions, are very substantial. Population  -3- is growing at a high rate (more than 3 percent a year), leading to unemploy- ment particularly in urban areas, where employment opportunities have not kept pace with production. growth in recent years. The growing urban popu- lation also demands housing, public utilities and transport. There is a serious shortage of public economic and social services throughout the country and a considerable backlog of infrastructural investments. Subs- tantial investment in agriculture is needed. The Government is faced with the task of diversifying the economy and creating additional income and employment. 8. The agricultural sector is discussed in PartIlI of this report. The study of Iraq's land and water resources, which the Government is fin- ancing, and for which it has requested some technical assistance from the Bank, should provide a basis for assessing the priorities to be accorded to proposals to extend irrigation and drainage and to bring new lands under cultivation, as well as for measures to make better use of existing resources The Government is particularly keen to develop the agricultural potential of Northern Iraq, now that the dispute with the Kurds has been settled. 9. Iraq has a small and unsophisticated manufacturing sector which contributed around 10 percent of GDP in 1970 and employed less than 5 per- cent of the total labour force. The major industries are foodstuffs, beve- rages, textiles, clothing, petroleum refining and building materials. Other industries are soaps and detergents, furniture, assembly and repair work. Most industries rely on imported materials, produce for the home market and receive protection through tariffs and import quotas. The shortage of trained manpower is probably the most serious impediment to industrial growth. The petroleum-based and other chemical industries have considerable potential for further development. 10. The transport system consists of river transport on the Tigris and Euphrates, about 2,300 km of railways whose efficiency is reduced by the two-gauge system and a heavy backlog of replacement needs, and about 10,000 km of roads, of which less than half are paved for all-weather use. Traffic demands on the rail and road systems are increasing. Further investment is required to help increase the capacity of the present net- works and extend them into the more remote parts of the country. A trans- port study being prepared under the 1966 road project is expected to iden- tify priorities for the road system. Meanwhile, the Government proposes to complete the system of main trunk roads linking the major economic centers of north and south Iraq. 11. In the last few years, Iraq's reliance on external financing for public investment has been modest. The total amount of external public debt stood at approximately $454 million at the end of 1971, most of it in the form of long-term loans at relatively low interest. Of this, 26 percent was owed to USSR and another 25 percent to Kuwait. The debt service ratio is low (2 percent in 1971) and even assuming the present much smaller oil revenue on an annual basis, the debt service ratio for 1972 would still be less than 10 percent. Iraq should therefore be able to service additional loans on IBRD terms.  12. In recent years, Iraq has relied increasingly on bilateral assistance from socialist countries. In March 1971.. _ f6r instancie, Iraq obtained a 200-million rouble credit from the USSR to be repaid by oil exports. The credit will be utilized primaril;y for exploiting oil and mineral resources, and for,industrial development. Similarly in June, 1971, Iraq obtained a $39 million loan from the Peoplets Republic of China, to be repaid in the same manner. This pattern of financing can be expected to continue for oil and industrial investments. There are little or no prospects for foreign private capital, except suppliers' credits. Long-term finance for,agricultural.development, training of human resources and some areas of ba,sic infrastructure has not 1b;een available from Ea,tern Europe nor through suppliers' credits, and thus is likely to be sought from sources such as the Bank and the UNDP,. PART,,I: - BANK GROUP OPERATIONS IN IRAQ 13. The Bank has made four loans to Iraq over a period of 25 years, totalling $65.7 million (net of cancella-tions). These financed flood control in 1950, roads in 1,9.66 and telecammunications in 1971. The fourth loan of $12.9 million for angoducation project was approved by the Boar,d on June 20, 1972.. $2.2 million of the 1966 Roads loan (US $19 millio'n) remains undisbursed. ,While the exeicut-on of the road,s pr,oject has faced many difficulties, the Government is giving greater attention to project implementation than was the case a -few ye,ars ago. The evaluation of bids for the long diptant,ce .network under the telecommunications project is well ad- vanced. Annex 1 conita-ins a .pmmary statement of Bank loans as of October 31, 1972, and notes'o6n'the execution"f'theto on-going projects, with particular reference to the problems encountered with the roads project. There have been no IFC investments in Iraq so far and none are expected. 14. After the first loan in 1950, Iraq did not seek further assist- ance from the Bank for.a long time, partly because foreign exchange require- ments for public investment were being met from oil revenues. ,An increase in public investment ,in ,the mid-1,960' s was largely responsible for a brief revival of inte,rest in Bank lending, which resulted in the 1966 roads pro- ject. Over the past three years, the Government has again expressed con- siderable interest.i.n Bank assistance in several key sectors and a number of projects have been preparred. The telecommunications loan was the first of these. 15. While it is expected that Iraq will continue to earn substantial oil-revenues when the.nationalization disputes have been resolved, most parts of the country are still at an earlJy stage of development and have .a low per capita income. Sabstantial resources are required to build ,up adequate public services and create additional.sources of income and employment. Progress under the current Development Plan has been cons- trained by limited capacity,in project.identification, preparation and management. Conscious of these shortcomings, Iraq recognizes the need  to make greater use of the'assistance of organizations such as the Bank and is pursuing a more open policy of welcoming technical assistance and foreign'contractors and consultants from whatever source. 16. ' Iraq is creditworthy for substantial amountB of foreign borrowing, and Bank lending to Iraq is justified not only because of Iraq's low per capita income but also because of the need to provide the Government with the experience required to use its financial resources more effectively. The Government is interested in obtaining from the Bank expertise in sector planning and particularly in project preparation and implementation, including institution building. It is hoped that the demonstration effects of the projects in which the Bank is likely to participate over the coming years will spread throughout the economy. 17. In the lending program for Iraq the Bank proposes to give particular attention to investment in agriculture, education and transport and communication. During the past two years, the Bank has been providing technical assistance for the preparation of projects in these sectors. The education project (which was presented to the Board on June 20) and this project (for which preparation work was initiated in 1969)' were prepared with the assistance of the Bank and the cooperative programs with UNESCO and FAO respectively. A Grain Storage Projee.t, also prepared with guidance provided by Bank staff, is likely to be ready for negotiations by January, 1973. The Bank is helping with the preparation of a second roads-bridges project and an irrigation_ project in Northern Iraq which may be ready for Board consideration late in ; FY 1974. Other projects in the agricultural sector have been identified anid preparatory work on them should begin shortly. The Bank has provided technical assistance with the preparation of terms of refe- rence for a comprehensive study of Iraq's land and water resources, which the government is financing. Consultants' proposals are being evaluated by Iraq's Higher Agricultural Council, and it is expected that the Bank will continue to provide technica1 assistance during the conduct of the study. 18. Prior to the presentation of the Education Project on June 20, I distributed to the Executive Directors copies of a letter from the Iraqi authorities confirming their intention of paying compensation for IPC's assets taken over by nationalization. A month later mediation between Iraq and the company was initiated by OPFEC,and two officials, one from OPEC and the other from Compagnie Francaise des Petroles, established preliminary contacts with the two parties. In view of this mediation, IPC announced that it would, without-'prejudice to its rights, abstain from commencing legal pro- ceedings in relation to oil from the nationalized oil fields prior to any declaration by one or both mediators regarding the status of the mediation to be made not later than October 12, 1972. It was also announced that if this or any other declaration states that the mediation has failed, IPC would be free to exercise its full legal rights. The Bank also receved a second letter from the Iraqi authorities, dated August '24, '1972-,- which-rieported on  - 6 - the progress made towards a settlement of the compensation issue. The letter stated that the committee referred to in the earlier letter, composed of legal, economic and technical experts to study and report on the question of compensation, has completed this task and submitted its report to the Iraqi Government; that following the initiation of media- tion preliminary contacts had taken place before the end of July 1972 and propo- sals for a settlement of the outstanding issues were under consideration; and that the Iraqi Government would agree to postpone discussions on the ques- tion of.compensation, if IPC so wished, until negotiations on participation by Gulf oil-producing countries in the ownership of oil companies operating there, had been completed. On October 12, 1972, IPC announced that the joint mediators had made a declaration to the effect that the mediation was progressing and that a further declaration regarding the status of the mediation would be made by one or both of them not later than December 31, 1972. IPC added that it would continue to abstain from commencing legal proceedings in relation to oil from the nationalized oil fields until one or bothmediators had issued a decla- ration indicating that the mediation had failed. I am informed that active discussions are taking place in Baghdad on t1. basis of proposals put forward by the oil companies. In view of the fact that a solution to the dispute is being pursued intensively by both sides, I believe that the issues arising out of the nationalization of IPC should not be regarded as an obstacle to the making of this loan. 19. Earlier this year, the Iranian authorities raised the issue of the expulsion by Iraq of about 60,000 Iranians who had been living in Iraq and who appear to have lost their properties. During the Executive Directors' discussion of the Iraq education project on June 20, 1972,I explained that this problem did not fall within the purview of the Bank's policy on expropriation, with which the Executive Directors concurred. PART III - THE SECTOR AND THE PROJECT 20. Agriculture accounts for one-fifth of GDP but provides employ- ment for about half the labour force. Some 12 million hectares, about 28 percent of the total land area, are potentially suitable for cultiva- tion, of which at present only 8.5 million are cultivated. In any one year, only about 50 percent of the cultivated area is cropped, because under the present system an area remains fallow in alternate years. Most of the cropped area is given over to wheat and barley in the winter season while rice, cotton and vegetables are grown on a relatively small scale in the summer. Dates grown in the southern part of the Tigris-Euphrates basin are an important export crop. 21. Agricultural output in the past two decades has increased very slowly and in the five years ending 1970, the sector achieved a growth rate of only 3.5 percent compared to the Plan target of 7 percent. Iraq, an exporter of cereals until the early 1950's, is now importing large quantities of wheat every year. Foodstuffs constituted half the consumer goods imported over the last five years. 22. Annual precipitation in the mountains and foothills of the northern provinces occurs mostly in the winter season and averages about 1000 mm per year. The potential cultivable area in this "dryland zone", where rainfed cultivation is practiced, is about 4 million hectares.  -7- Despite the high rainfall, the difficult topography of the mountains in the northeast makes them unsuitable for agriculture. The piedmont zone to the east of the river Tigris is a rainfed area supporting a substantial livestock population. Annual rainfall over the remaining three-quarters of Iraq averages less than 100 mm. Outside of the "dryland zone", the potentially cultivable area is about 8 million hectares which are depend- ent on irrigation. 4.5 million hectares are presently irrigated from the Tigris and Euphrates rivers, south of the rainfed zone. 23. Despite its share in the GDP, the agricultural sector is under- developed and its productivity is amongst the lowest in the world. The major constraints on agricultural development include reliance on the vagaries of rainfall, shortage of irrigation water and insufficient water distribution and control facilities, besides excessive soil salinity and poor drainage. Soil salinity is so severe in some areas that until the soils are leached and proper drainage provided, the effect of modern farming inputs would be negated. These constraints are aggravated by the disruption of established patterns of production by successive land reforms, the traditional reluctance of farmers to use modern agricultural techniques, inadequate credit facilities and extension services, and poor investment plannning and implementation. 24. The Government is aware of these problems and has accorded high priority to agriculture in the 1970-74 Development Plan, which calls for extensive drainage to combat increasing soil salinity and for increases in the area under irrigation, cropping intensity and the production of cereals. Only 15 percent of the allocated funds were spent during the first two years of the Plan. The achievement of the Plan investment tar- get will therefore throw a heavy burden on the administration's capacity for project preparation and implementation. So far, the Government's tendency has been to over-emphasize water resource development without adequate attention to the other measures required to alleviate the prob- lems facing agricultural development. The Government has, therefore, shown ccnsiderable interest in developing a model irrigation and drainage project which would provide valuable demonstration effects of the various inputs required to promote balanced agricultural development. The Govern- ment is pressing ahead with other irrigation and drainage projects with comprehensive agricultural and engineering inputs, and improved adminis- tration of reclamation projects. History of Project 25. The proposed project was identified by an economic mission which visited Iraq in late 1968. The feasibility study was prepared by the Government's consultants, Sir M. MacDonald and Partners and Hunting Technical Services, with the guidance of the FAO/IBRD Cooperative Program. Appraisal took place in November/December 1971. Negotiations were held early in May, 1972. The Iraqi delegation, which was led by the former Minister of Planning, Dr. Rashid Al-Rifai, included Dr. Samal Faraj, Member of the Higher Agricultural Council, and Mr. Halim Al-Rawi, Director- General (Irrigation) in the Irrigation Ministry.  -8- Project Description 26. The proposed project, part of the long-term planned development of 350,000 hectares in the Diyala basin, is an important part of the Government's program for the reclamation of land and'the development of agriculture in Iraq. It would replace haphazard and inadequate irrigation in an area of 930 km2 from Khalis town to the northern flood protection bund of Baghdad in the Central Iraq plain between the Tigris and Diyala rivers, with an efficient irrigation and drainage scheme. The irrigated area would be increased from the present 42,000 ha to 61,700 ha3 water delivery capacity would be increased and improvements through on-farm works made in about 57,000 ha of land. The proposed project would have a ccnsiderable demonstration effect: in particular the Khalis Agricultural Adninistration (see para. 32 below) will serve as a model for other land redevelopment authorities. The main features of the project are summarized in the Loan and Project Summary in Annex III and in the repcrt "lAppraisal of Lower Khalis Irrigation Project", dated October 19, 1972 which is being circulated separately to the Executive Directors. Briefly, the project would consist of the construction of an irrigation and distri- bution system, including a 48 km extension of the existing Khalis main canal bringing water from the Diyala river through Upper Khalis; cons- truction of two pumping stations on the Tigris river and about 3,400 Ian of branch and distributory canals and watercourses; construction of a land drainage system, including about 1,600 km of associated outfiall, collector and field drains; levelling and installation of buried field drains in a net command area of about 57,000 ha; strengthening the flood protection embankment along the Diyala river; construction of facilities for the project administration and feeder roads; provision of vehicles and equipment for the administration and consultant services for engineer- ing and management of the project. Construction would take place over a four and a half-year period com,mencing in the last quarter- of 1973! Irri- gation in various areas within the project system would start in mid-1975 and be fully operative by early 1978. International Water Aspects 27. The project would make use of the Diyala and Tigris rivers whose head waters rise in Iran and Turkey respectively. Iraq does not have water treaties with either country. The Bank informed both upper riparians of the proposed project in September 1971. Turkey, while reserving its right to use the Tigris waters in its own territories according to its needs, offered no other view on the prcposed project. It is worth noting that withdrawals for the project, assuming unrestricted use of Diyala waters, would amount to less than 1 percent of the annual Tigris flow measured at Baghdad or about 5 percent of the average low monthly flow. The Iranian authorities, however, objected to the project stating tha,t they planned to make extensive use of the Diyala headwaters in their territories.  -9- 28. On the basis of information available during appraisal, a Bank staff study suggested that about 28,000 ha within the Diyala catchment area in Iran might be irrigated by the Diyala river. Later, Iran informed the Bank of plans to irrigate a further 50,000 ha by diverting water from the Diyala, outside the catchment area. It therefore became necessary for the Bank to exanine what consequences these possible developments in Iran might have for the Lower Khalis project. 29. The project area constitutes about one-sixth of the potentially irrigable areas of the Diyala basin within Iraq. Since it would be unreal- istic to consider only the supply of water for the project area without taking into account the requirements of other areas in the basin, it was also neces- sary to assess what the overall requirements would be. The Bank study suggested that, in the event that Iran undertook all the developments mentioned above, Iraq would need to provide 1,165 million m3 per annum, including 870 million m3 for the Lower Khalis project, from an alternative source. Of the three or more alter- natives, pumping from the Tigris would probably prove most suitable. This would mean that the average withdrawal from the Tigris for the Diyala basin in Iraq, as measured at Baghdad, would increase from the present 1 percent to about 3 percent; in the low flow month, withdrawals would increase from the present 5 percent to about 12 percent. 30. On October 18, 1972, Iran transmitted to the Bank a reconnaissance report on the development potential of its part of the Diyala basin. This report concluded that, over the next 15 years, 146,000 ha could be developed for irrigation and that minor amounts of water would be consumed for industrial and municipal purposes. The developments, including 150 million m3 to be diver- ted out of the basin, would require up to 2,000 million m3 per annum at full deve- lopment. But even if 2,000 million m5 had to be replaced by water from the Tigris, abstractions would still be only 5 percent of the average flow, measured at Baghdac 31. Assurances have been obtained from Iraq that it would take all measures necessary to secure the supply of irrigation water for the project. In these circumstances, I believe not only that the water supply for the proposed project will be secure, but that the project would not adversely affect, nor be adversely affected by, the interest of ainy of the riparians involved. Project Implementation 32. A law providing for the setting-up of autonomous administrations to operate, inter alia, reclamation, agricultural development and land utilization projects, was enacted in late May 1972. Under this law, an administration called the Khalis Agricultural Administration, with res- ponsibility for the Upper and Lower Khalis areas, has been established by Presidential Decree. This administration, under the policy direction of the Minister of Agrarian Reform, will have responsibility for the cons- truction and operation of the project and for future agricultural develop- ment in these areas. The administration is headed by a suitably-qualified  - 10 - Director-General, who will also be the Chairman of its Board of Directors. The administration will be responsible for employing and training its staff and will establish headquarters in Baquba in the Lower Khalis area. Staff are being engaged. A firm of engineering, management and agricul- tural consultants will be engaged to design and supervise the construction of the project and initially to assist the Administration in the management and operation of the project. Proposals from firms of international repute are now being evaluated. Project Costs 33. The total cost of the project, net of taxes and excluding interest during construction, would be US $78 million equivalent, with a foreign exchange cost of US $40 million which would be financed under the proposed Bank loan. The Bank loan would cover about 51 percent of total project costs. Disbursements would be for the foreign exchange costs of civil works, vehicles and maintenance equipment and for consultancy services. The local financing required forthe project would be provided by the Government. 34. For the agrarian reform lands (expropriation of lands under the 1970 Agrarian Reform Law has been completed in the project area), the Government is empowered to collect a certain amount of project costs from the farmers in the form of crop sharing based on an assessment of ownership, services rendered and method of irrigation. The effectiveness of this method of recovery has not been fully ascertained. The Government has agreed, as part of the Project, to make a study of the recovery of the costs of the Project, with a view to ensuring an equitable impact of public subsidies and taxation on the one hand, and to provide adequate incentives to the farmers on the other. It has also agreed to take measures necessary to generate a reason- able revenue from the Project, to cover at least the operation and maintenance costs of the project facilities. Procurement and Disbursements 35. Contracts for civil works and the supply of equipment would be awarded on the basis of international competitive bidding in accordance with the Bank's guidelines. It is anticipated that there would be four large contracts for civil works, one for each of three development areas within the project area, and the fourth for the administration's buildings and facilities. There are no preferential tariff agreements between Iraq and other Bank member countries. At this stage there is no domestic manufacture of vehicles or maintenance equipment which would be needed for the project. However, if these were later to be manufactured to a substantial extent in Iraq during the implementation period of the project, a preferential margin of 15 percent or the applicable customs duty, which- ever is the lower, would be applied in the comparison of bids. The Bank loan would finance 100 percent of foreign expenditures under civil works contracts awarded to foreign contractors or 49 percent of total expendi- tures (representing the estimated foreign exchange component) awarded to local contractors. The loan would also cover the c. and f. cost of imported maintenance equipment, workshop machinery, vehicles and spare parts.  Rate of Return 36. The economic rate of return of the project waild be about 12 percent and would be insensitive to reasonable changes in the cost and benefit variables, given the diversity of crops whose yields would be enhanced. The beneficiaries would include farmers on the land re-dis- tributed to them under the agrarian reform law, which affects over 42 percent of the project area. The project would bring about systematic and intensive agriculture in an area inhabited by nearly 70,000 persons, currently subject to low cropping intensity and yields with little pros- pect for improvement without the project. The major quantifiable benefit from the project would be the substantial increase in agricultural pro- duction and consequent increase in farmers' income and employment oppor- tunities. At f'all development, the annual gross value of production from the project area is expected to reach about $30 million, nearly six times the expected output without the project. A sensitivity analysis also indicates that, regardless of the maximum diversion by Iran of the Diyala waters for planned developments, and the full development of the Diyala basin in Iraq, the additional investment required to supplement the water supply from the Tigris to ensure sufficient water for the basin, including the project area, would still leave the economic rate of return at about 10 percent. 37. Underemployment and unemployment in the project area are severe. The entire incremental agricultural output from the project could be pro- duced by utilizing this surplus labor. It is estimated that at full deve- lopment, employment in the project area would be some 17,000 man- years or roughly double employment without the project. The project is also expected to stimulate activity in food-processing, marketing and supporting industries. Among the intangible benefits would be the de- monstration effects of the project, institution-building and the train- ing of farmers, to which the Government attaches considerable importance. PART IV - LEGAL INSTRUMENTS AND AUTHORITY 38. The draft Loan Agreement between the Republic of Iraq and the Bank, the Report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement, the draft Supplementary Letter on Procurement and the text of a Resolution approving the proposed loan are being distributed to the Executive Directors separately. The draft loan documents generally follow the pattern of documents for similar projects. 39. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART V - RECOMMENDATION 40. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara Attachments President December 12, 1972 Washington, D.C.   COUNTFIF IRTA ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~~~~~~~3118 OUN218 , IRAQ ARsA, 435,oDDCo b2 POU7IATION, 9.7, Mi31tos (1970) DENSITY. 22 per k02 8EFou th 3.2%S (from 1965 to 02_) ibi d 78 per l.2 of -rble 1ed POPULATION ChARACTERISTICS H1ALTH, Crod. Birth R t. (p.r 1,000) 47.5 (4970) per phyesicio 3,774 (196M ) Crude D.uth Rate (per 1,000) 16.4 (1970) Popa.atios per hospital bed 517 (1970) I.fo,t Mortolity (p.r 1,000 104. births) 16.2 11967) NUTRITION, CNP PER CAPITA, $320 (1970) KEUCATION. 2 2 intoke Ce S s requ 0re.e,te 89.1 (1964-66) AdI!tii.r5y r.te (.) (26.0)(1969) Per capita protein int.ke (gr-o.e.) 57.8 (1964-66) 2Pri5 oo 8& 2 mol t (S) 69.0 (1968) 0CRSS NATIORAL PRODUCT (1970). ANNUAL RATE COF O9DWSH 1%. oonsteot pre..). Lu3s.o 1DUZS $ . .1 - 19c045 1965-70 1970 aNP at e.d.t price. 3.374.4 7.2% 6.0% ( 5.9%) Or"3g I.ve,tsent 608.0 18 0 2.41 4.9% (13.0%) G... Satitonel S.".spe 702.2 20.8 C-rrent Aco.c..t 8el ce 78.4 2.3 _ Ekporte of Coeds, N9S 1,192.6 35.3 n.. 4.9% ( 6.1%) reports of Ocod., N9S 596.8 17.7 so. 2.7% (15.2%) OUSPUT, LABOR FORCE AND PRCODCSIVITS IN 1970 Veluo Added Labor Foroe Volc Added Pnr Worker WS 5 llillLon) i lililopJ 1 ~~~~~~~(82 5j B of sotionoI overage Agrioulture 755.4 20.9 1.4 55.3 5J>1-5 214.. Induetry 1,973.6 51.8 0.4 15.8 4,731.19 213.9 erv1ieS 984.8 27.3 0.7 28.9 1,358.33 61.4 TotAi/Ah,erge 3.613.8 100.0 2.5 100.0 2,211.56 100.0 PUBLIC IRNANCES(1970/71) All O--o,e,te C.ltrsl/FPdor.1 -o --e,eeSt 1 SF -.,rMg. 9 of aOP a-erFgs US$ sine. % of MrP lst tisree YeaS' US$ 1p).- % Sf (OUP 15,1 tor. Yeas. Currtct R-ocipto 1,130.6 29.2 28.5 1,130.6 29.2 28.5 Curront EOp-ditors, (iml. tr-Sfer-) 968.8 25.0 24.6 968.8 25.0 24.6 Correct Surplc/Doflcit (-) 161.8 4.2 3.9 161.8 4.2 3.9 Copittl Bxpenditcroe 354.2 9.1 7.6 354.2 9.0 7.6 Eote.eel AeSiot..e (Set) 67.5 1.7 0.6 67.5 1.7 0.6 PRICgS AND CRE71T, end of y.r. -Oenerel Price I1do. pooh Credit to Pbliic Sectcr Boek Credit to Prieti. Sector iSAs B .ch-g9 'a~