India - Punjab Water Supply and Sewerage Project

Document of FILE COY X The World Bank FOR OMCIAL USE ONLY Report No. P-2293-IN REPORT AND RECOMMENDATION OF THE - PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE GOVERNMENT OF INDIA FOR THE PUNJAB WATER SUPPLY AND SEWERAGE PROJECT August 23, 1978 This document hua msicted distribuilon mud may be used by reciplents only In the performnce of their ofiAcial duties. Its contes may not otherwise be diselsed witbout World BDnk autboriation.  CURRENCY EQUIVALENTS (as of August 15, 1978) Rs 1.00 Paise 100 US$1.00 Rs 7.88 Rs 1.00 US$0.1269 Rs 1 million US$126,900 (Since September 24, 1975, the Rupee has been officially valued relative to a "basket" of.currencies. As these currencies are now floating, the US Dollar/Rupee exchange rate is subject to change. Conversions in the Appraisal Report were made at US$1 to Rs 8.6). FISCAL YEAR April 1 - March 31 ABBREVIATIONS AND ACRONYMS GOI - Government of India GOP - Government of Punjab IBRD/WHO CP - World Bank/World Health Organization Cooperative Program LIC - Life Insurance Corporation of India NCs - Municipal Corporations/Committees PHDRW - Public Health Department, Rural Wing PWD - Public Works Department WSSB - Punjab Water Supply and Sewerage Board  FOR OFFICIAL USE ONLY INDIA PUNJAB WATER SUPPLY AND SEWERAGE PROJECT CREDIT AND PROJECT SUMMARY Borrower: India, acting by its President Beneficiaries: The Punjab Water Supply and Sewerage Board (WSSB) and participating Municipal Corporations/Committees (MCs) Amount: US$38.0 million Terms: Standard On-lending Terms: (a) GOI to GOP: As part of central assistance for state development projects on terms and condi- tions applicable at the time. (b) GOP to WSSB: Repayable over 25 years at 8-1/2% interest per annum including three years grace. (c) WSSB to MCs: Same terms as (b). The foreign exchange risk will be borne by GOI. Project Description: Water supply and sewerage facilities would be improved and expanded in eight rapidly growing towns in the State of Punjab to provide an additional 0.8 million people with water supply (about 24% of the total urban popula- tion), and 1.2 million people with sewerage (about 36% of the total urban population). The project would also develop WSSB as an institution capable of planning and implementing sectoral development programs in Punjab. Separate water supply and sewerage departments estab- lished within MCs would be strengthened to ensure that systems constructed under the project would be operated efficiently. The needs of the urban poor would be met through the free supply of water from standpipes. Credit would also be provided on easy terms to facili- tate service connections by the economically weaker sections of society. The risk that sewer connections might not materialize at the rates envisaged at appraisal is minimized by the fact that GOP will introduce sewerage charges for all unconnected premises that have access to and benefit from a sewer. As a further incentive, credit on easy terms would be pro- vided to low income families to help finance connec- tion charges. The project entails no other unusual risks. This document hu a restricted distribution and may be used by recipients only in the performance of their official duties. lu contents may not otherwise be disclosed without World Bank authorization.  Estimated --- US$ million----- Project Costs: Local Foreign Total Equipment and Materials Water Supply Schemes 7.3 3.4 10.7 Sewerage Schemes 15.0 0.6 15.6 Sub-total 22.3 4.0 26.3 Civil Works Water Supply Schemes 5.2 - 5.2 Sewerage Schemes 16.2 - 16.2 Sub-total 21.4 - 21.4 Engineering 10.0 10.0 Specialized Equipment, Consultant Services and Training 1.1 0.1 1.2 Physical Contingencies 5.2 0.5 5.7 Price Contingencies 12.1 0.9 13.0 Total Project Costs 72.1 5.5 77.6 Financing -------US$ million----- Plan: Local Foreign Total IDA 32.5 5.5 38.0 LIC 15.1 - 15.1 MCs 24.4 - 24.4 GOP 0.1 - 0.1 Total 72.1 5.5 77.6 Estimated ----------(US$ million)--------- Disbursements: FY79 FY80 FY81 FY82 FY83 Annual 3.0 9.3 10.7 10.7 4.3 3.0 12.3 23.0 33.7 38.0 Rate of Return: The weighted average internal rate of return in three of the eight towns, which account for about 80% of total project costs, is 17.1%. Appraisal Report: No. 1822b-IN, dated August 24, 1978.  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE GOVERNMENT OF INDIA FOR THE PUNJAB WATER SUPPLY AND SEWERAGE PROJECT 1. I submit the following report and recommendation on a proposed development credit to India in an amount equivalent to US$38 million on standard IDA terms. The credit would support the program of the Government of Punjab (GOP) to expand and upgrade water supply and sewerage systems in eight large towns of the State. The proceeds of the credit would be chan- nelled to GOP in accordance with the Government of India's standard terms and arrangements for the financing of state development projects. GOP would make the Credit available to the Punjab Water Supply and Sewerage Board (WSSB) on terms requiring repayment over 25 years, including 3 years of grace, with interest at 8-1/2% per annum. WSSB would in turn relend the proceeds of the Credit to participating Municipal Corporations/Committees under Subsidiary Loan Agreements substantially on the same terms and conditions as the GOP loan. The exchange risk would be borne by the Government of India. PART I - THE ECONOMY 1/ 2. An economic report, "Economic Situation and Prospects of India" (2008-IN dated April 17, 1978), was distributed to the Executive Directors on April 18, 1978. Country data sheets are attached as Annex I. Background 3. India is a vast, continental country with over twenty States divided on linguistic and ethnic grounds with a population of over 620 million people, almost as many as live in Africa and Latin America combined. It has a dual economy. While 79% of its population lives in rural areas, their productivity is low. Agriculture's share in value added declined only gradually from about 50% to 43% over the last twenty years. The share of manufacturing has in- creased slowly and, since the late 1960s, has remained approximately constant at about 16%. Industry has a highly diversified structure with import substi- tution and self-sufficiency pushed to the point where India has the capacity to produce virtually every type of consumer and capital good required for a modern economy. As in the case of many other large economies, the foreign sector plays a relatively minor role; both exports and imports represent about 7% of GDP; foreign saving has supplied only about 5% of gross investment in the recent past. 1/ Parts I and II of this report are substantially the same as Parts I and II of the President's Report for the Railway Modernization and Maintenance Project (Report No. P-2349-IN), dated July 19, 1978.  - 2 - 4. Even though growth has been slow in the past, the economy enjoys many of the prerequisites for sustaining faster growth and development. Although literacy is far from universal, India has large resources of well trained administrative, scientific and technical manpower and a dynamic entre- preneurial class. Per capita consumption of commercial energy is low by international comparison and power shortages are a way of life; but India is relatively well-placed with regard to primary fuel sources. There are very large reserves of coal and nuclear ores, and considerable hydro-electric potential. Recent petroleum and gas discoveries have begun to be exploited and prospects are bright for further discoveries. The basic elements of the infrastructure needed to serve the economy have been established; in absolute terms the irrigation, railway, telecommunication, road and power systems are each among the largest in the developing, and in some cases the developed, world. However, considerable gaps remain as the situation varies greatly from state to state. 5. Given the size of India's population, its annual increase of 13 mil- lion people is such as to absorb a large portion of any provision to increase standards of living. It is not possible to discern any significant increase in the incomes of the vast mass of the rural and urban poor, who number 200 million with a per capita income of US$70 per annum or less. Although food- grain production may be persistently underestimated, there has been no perma- nent increase in per capita foodgrain consumption recorded in aggregate statistics since 1960/61. Many years after the initial target, primary educa- tion is still not universal. The labor force has grown faster than employment and a considerable backlog of unemployed exists. Nevertheless, there has been progress, with per capita income increasing on trend 1%-1.5% per annum; birth rates falling to below 37 per thousand from levels of 45-50 per thousand at the start of the 1950s, life expectancy increasing from about 32 years in the 1940s to 45-50 years in the 1970s, school enrollment rising from 32% to 65% of children of primary school age and from 5% to 29% of children of secondary school age since 1950/51. 6. The rate of growth of GDP has been 3.5% per annum over the period since Independence and 2.8% per annum over the period 1969/70 to 1976/77. These low rates of growth are only partly due to low availability of inves- tible resources, although there have been times that foreign exchange was a severe bottleneck. The net transfer of resources from abroad has never been above 3% of GDP and fell to as little as 0.8% between 1969/70 and 1973/74. India's saving effort has grown steadily since the beginning of planning in 1951, when it was 9% of GDP, to its recent level of 20% of GDP, which compares well with other countries' saving performance at the same level of per capita incomes. Despite a doubling in the rate of investment, from about 10% of GDP in the early 1950s to about 20% at present, the trend rate of GDP growth has not increased. This marks a decline in the efficiency of capital use which transcends fluctuations due to weather, war or international terms of trade shifts. Recent Trends 7. In many respects economic conditions during the last three years have been significantly different from those prevailing in previous years.  - 3 - In the late 1960s and early 1970s, the economy faced several shortages-- foodgrains, agricultural and industrial inputs and foreign exchange--which retarded production and investment and often led to price increases. An ad- verse shift in terms of trade, starting with the oil price hike in 1973 and continuing with the foodgrain and fertilizer price rises in the following year, greatly increased the cost of acquiring these essential commodities abroad. These external shocks combined with a spate of bad weather played havoc with the economy through 1974/75, causing slow growth in production and investment and a record level of inflation. 8. Since the excellent monsoon in the summer of 1975, a new situation has arisen. The period 1975 to 1978 has been characterized by much greater price stability, enhanced agricultural and industrial output and comfortable foodgrain and foreign exchange reserves. The new situation was a combined result of domestic policies and fortuitous circumstances. The increase in foodgrain stocks was only in part due to improved policies and programs. The more decisive factor has been the three good-to-excellent monsoons coming on top of substantial foodgrain imports in 1975 and 1976. Industrial output increased on average by 7% a year in 1975-1978 compared to 3% in 1970-75, due to greater power availability, better management in the public sector, improved labor relations, better transport and some increase in demand derived from increased 'incomes due to improved harvests, greater exports and higher levels of public investment. The most dramatic turnaround ocurred in the balance of payments, with a sharp real reduction of the import bill helped by good harvests and increased domestic production of iron and steel, fertilizer and oil, which reduced demand for imports. The supply of foreign exchange was also greatly increased by a significant step-up in the volume of exports, an increase in foreign aid and a substantial jump in remittances from Indians working in the Middle East, Europe and America. 9. In 1977/78, the growth of GDP was about 5%, a recovery over the rate of 1.6% in 1976/77 but less than the 8.5% reached two years earlier. Prices, which had been rising during 1976/77 after a decline in 1975/76, were stabilized; wholesale prices at the end of March 1978 stood at about the same level as in March 1977, and the yearly average was only 5.4% above that of the previous year. Exports in 1977/78 are estimated at US$6.4 billion and imports at US$6.6 billion. The inflow of invisibles from abroad at US$1.4 billion and net aid disbursements of US$1.2 billion more than offset the small trade deficit of US$200 million and IMF repurchases of US$330 million to in- crease reserves by US$2.1 billion to US$5.8 billion by end of March 1978. 10. The 1977/78 foodgrain crop may exceed the 1975/76 record level of 121 million tons due to very good weather and increased input use. Support purchases could result in peak foodgrain stocks as high or even higher than in 1977, when they were 21 million tons. In addition to ample and evenly distributed rainfall, more intensive and widespread use of three crucial inputs--irrigation water, fertilizer and extension advice--contributed to the bumper harvest. Fertilizer consumption surged 30% in 1977/78, continuing its recovery from the depressed level of 1974/75. Annual additions to irri- gated area have averaged 2 million hectares since 1975/76 compared with 1.3 million hectares per annum achieved from 1969 to 1975. An improved extension  - 4 - system, which has been getting heartening results, has been introduced in several states and is slated for further coverage. Development Prospects 11. India faces the future with large stocks of foodgrains, high and rising external reserves, excellent crop expectations, price stability and good prospects for sustaining the improved supply of foreign exchange. The circum- stances present a great opportunity for further promoting the development of the Indian economy. The Draft Five Year Plan for 1978-83, discussed though not yet approved by the National Development Council, responds to this chal- lenge by projecting a rapid growth in real terms of both overall investment and public Plan expenditures. Investment is to rise on average by 10.7% per annum and the economy is expected to grow on average by 4.7% per annum during the years 1978-83. 12. The new Draft Plan reveals an intention to reorient the country's development toward improving the living conditions of the poor. This is reflected in its principal objectives: (i) the removal of unemployment and significant underemployment; (ii) an appreciable rise in the standard of living of the poorest sections; and (iii) the provision of basic needs to low-income groups. To achieve these objectives, the Government proposes to emphasize agricultural development, cottage and small-scale industries, area planning for integrated rural development and the provision of minimum needs. As a first step toward complete removal of unemployment, the Plan envisages the creation of a large number of new jobs through a considerable expansion of construction activity as well as a boost in the consumption levels of the poor--which in turn would require the production of the necessary wage goods, largely in small-scale, labor-intensive units. Specific programs to achieve these objectives are still in the making. 13. In order to achieve a sizable rise in the income of the poorest classes of society, the Draft Plan--in conformity with the Janata Party policy-- places prime emphasis on the development of rural areas. A major impulse for agricultural development will be provided by the expansion of irrigation and related agricultural inputs, such as fertilizers and better farming techniques. The Draft Plan argues that efforts to increase productivity should be sup- plemented by measures with a redistributive impact such as supporting small farmers and small industry with institutional credit and material supplies and assistance for marketing. The Draft Plan also intends to complement the creation of employment and the increase in rural productivity by providing basic services to those groups which have so far been unaffected. For this purpose, the minimum needs program launched at the onset of the Fifth Plan is being revitalized and accelerated. 14. The allocation of the Draft Plan outlay for the next five years reflects these priorities. Out of a total expected spending of US$81 billion, US$35 billion--43%--have been earmarked for rural development programs includ- ing agriculture, irrigation, fertilizer and social infrastructure expenditures directly benefitting the rural areas. The share of these sectors amounted to 37% during the Fifth Plan period and to 40% in the Annual Plan for 1978/79.  - 5 - It can thus be expected to rise further during the next four years. Similarly, spending on the minimum needs program in 1978-83 will absorb 6% of the Plan resources, as compared to less than 3% in the Fifth Plan. On the other hand, the shares of industry and of transport and communication have been reduced. 15. There is considerable scope for stepping up growth in agriculture. The most promising development is the sharp increase in government outlays and improved project implementation for irrigation. There are also indica- tions that private investment in tubewells is picking up again after a slump in the early 1970s. Other favorable indicators include the spread of an improved system of extension to more states and the recovery of fertilizer demand. With regard to more productive use of existing capacity, there is an increased awareness in the Government that the benefits of irrigation projects can be much increased, not only through command area development, but also through improved design standards in major surface irrigation infrastructure. Nevertheless, comprehensive improvement in water management remains a distant goal, particularly in existing systems and where farms are small and frag- mented. The bulk of the increase in private tubewell development in the last few years has come from the Eastern Region, where more and more farmers are sinking wells to enable them to grow a winter crop of wheat in addition to providing better water control for the summer rice crop. Improved water man- agement would make such investments even more productive. Increased farmer incomes from the recent good harvests, somewhat lower fertilizer prices, and grain prices supported at incentive levels have encouraged farmers to apply considerably more fertilizer. Finally, the reorganized and improved extension and research system which has been introduced recently in several states in northern and eastern India holds out the hope that sound advice will reach many more farmers in both irrigated and rainfed areas and will raise their productivity significantly. The improved extension system is an excellent example of how the growth effort can and must be structured so as to increase the incomes of small and marginal farmers, who work 25% of the cultivated land and account for somewhat more than 25% of production; more importantly, these farmers make up about 70% of the rural population and constitute the majority of those living below the poverty level in India. 16. Industrial prospects are somewhat more difficult to discern. Moderate growth in 1977/78 after an excellent year in 1976/77 suggests the persistence of problems plaguing the sector since the mid-1960s--large un- utilized capacity, stagnant capital formation in the private sector and low productivity growth. Lower investment than expected, of course, is one of the reasons for low capacity utilization in capital goods industries, which make up a significant portion of the sector. Sluggish demand for industrial products from all sources--not only from investments but also from agricul- ture, exports and import substitution--has been a basic constraint. Further import substitution cannot be a major source of growth for manufactured goods in the future because most opportunities for efficient import substitution have been exploited. Increased growth of real incomes from greater produc- tivity in both agriculture and manufacturing, sustained increases in exports and increased investment, particularly by the public sector, all can raise demand for industrial production.  - 6 - 17. The new industrial policy of the Janata government and the orienta- tion of the Draft Five-Year Plan emphasize small-scale industry over heavy industry and have accordingly promoted such measures as product reservation, credit rationing and, within the small-scale sector, plans to initiate special efforts for the growth of the "tiny" sector. While the priority accorded to the small-scale sector is laudable, there are doubts about the efficacy of the policy measures chosen. Past experience indicates that other factors are also crucial to its development, particularly effective demand, quality control, prices and marketing techniques. Some small-scale industry is cap- ital intensive and not well suited to as rapid employment generation as is hoped; nor can all goods be efficiently produced using small-scale technology. 18. India's population growth rate of about 2% is not high in comparison with that of most developing countries. Moreover, the rate is on the decline, after growing steadily census to census from 1920 through 1970, both because the birth rate continues to fall and because mortality is not falling as steeply as in the past. Family planning acceptor rates slowed down in the wake of the abandonment of the 1976 population policy after the 1977 general elections and the momentum of the program has yet to be recaptured, particu- larly in Northern India. However, the new Government has reaffirmed its com- mitment to a voluntary family planning program and has budgeted the resources to carry it out. Over the longer term, with a sustained family planning effort, it should be possible to bring the birth rate down from its 1970-75 level of about 37 per thousand to about 23 per thousand by the end of the century, implying a population growth rate somewhat under 1.1%. Our "best guess" pro- jection of India's population in the year 2000 is 885 million. Many of the benefits of family planning policy will only be felt beyond the turn of the century; the decline in fertility will, however, bring about an earlier change in the age structure of the population. The school age group will grow more slowly or not at all after 1981, thereby reducing the pressures on the primary and secondary education systems. However, the labor force will continue to grow at a faster rate -- 2.5% per annum -- until well into the 1990s, result- ing in an increasing proportion of the population in the labor force from 40.8% to 45% in 1991. 19. The Government's goal of eliminating unemployment in 10 years implies an expansion of the number of jobs at the rate of 9 million per annum -- 7 million new entrants to the labor force and the absorption of 2 million or so formerly unemployed. The majority of these will have to continue to be absorbed -- judging from the prevailing composition of the labor force -- in agriculture and the unorganized small-scale sector. The absorptive capacity of the modern organized sector is unfortunately low; its employment elasticity is expected to be no more than 0.5. Given its low current share of output, even rapid growth of this sector would not make much of a dent in the backlog of the unemployed. Employment in the organized sector has been growing at about 2.2% per annum in the past ten years, less than the labor force growth rate, and all of this in the public sector. Private sector employment has not grown at all since 1966. While the labor absorption elasticities of the small- scale sector may be higher in some cases than that of the large-scale sector, a major effort to expand production must succeed before an appreciable employ- ment impact will materialize.  - 7 - 20. In the short run India's balance of payments should not be a con- straint on growth and development. With good medium-term prospects for India's exports, the expected continuation of growth in invisible receipts and the potential for an increase in net aid disbursments, the net availability of foreign exchange to finance merchandise imports is projected to rise over the next five years, in current prices, from US$8.7 billion in 1977/78 to US$16.7 billion in 1982/83, an average of 14% per annum. Given the unlikely need to increase rapidly imports of some traditionally important items -- e.g., petroleum, fertilizer, foodgrains, edible oil and cotton -- other imports can increase at the rate of 20% a year over the next five years. 21. Altogether, these currently favorable circumstances present the opportunity to double India's trend rate of growth of per capita income from the average annual rate of 1.5% that prevailed for the last thirty years to 3% over the next five, and thereafter. This requires a continued fall in the rate of population growth to below 2% per annum and a rise in the growth of GDP from the historical rato of 3.5% to 5.0% per annum. Both of these targets are within reach. The firsL should be achieved barring a total abandonment of the family planning program. The second requires improved efficiency and increased investment by both Fhe public and private sectors; it also means more fully harnessing the gains from trade through international specializa- tion, implying a strong export effort and continued easier access to imports. In addition to enabling a faster rate of per capita income growth, the pre- sent situation allows for increasing the coverage of the population's minimum needs. This requires formulating and administering effective, efficient programs of public investment and, of course, requires larger public outlays. 22. With the enhanced resources at India's disposal, the economy is poised for a higher rate of economic growth. The Government is moving to take advantage of this opportunity with increased public expenditure envi- sioned over the next five years, and the liberalized trade policies recently announced. It is yet too early to know whether the moves made so far will be sufficient to achieve the desired targets or whether additional steps will be necessary. Assured international support for India's development effort will be an important factor in moving the Government to take greater risks in pursuing a dynamic development program directed at meeting the huge needs of its large and impoverished population. PART II - BANK GROUP OPERATIONS IN INDIA 23. Since 1949, the Bank Group has made 55 loans and 105 development credits to India totalling US$2,236 million and US$5,738 million (both net of cancellation), K2spectively. Of these amounts, US$924 million had been repaid, and US$1,928 million was still undisbursed as of July 31, 1978. Annex II contains a summary statement of disbursements as of July 31, 1978, and notes on the execution of ongoing projects. 24. Since 1957, IFC has made 15 commitments in India totalling US$63.6 million, of which US$14.5 million has been repaid, US$7.6 million sold and  - 8 - US$6.9 million cancelled. Of the balance of US$34.6 million, US$26.9 mil- lion represents loans and US$7.7 million equity. A summary statement of IFC operations as of July 31, 1978, is also included in Annex II (page 2). 25. In recent years, the emphasis of Bank Group lending has been on agriculture. The Bank Group has been particularly active in supporting minor irrigation and other on-farm investments through agricultural credit opera- tions. Major irrigation, marketing, seed development, and dairying are other agricultural activities supported by the Bank Group. Also, the Bank Group has been active in financing the expansion of output in the fertilizer sector and, through its sizeable assistance to development finance institutions, in a wide range of geographically scattered medium- and small-scale industrial enterprises. IDA financing of industrial raw materials and components for selected priority sectors has been instrumental in facilitating better capac- ity utilization in industry. The Bank Group has also been active in support- ing infrastructure development for power, telecommunications, and railways. Family planning, education, water supply development, and urban investments have also received Bank Group support in recent years. 26. The direction of assistance under the Bank/IDA program has been consistent with India's needs and the Government's priorities. The emphasis of the program on agriculture, industry, power, urban development and water supply remains highly relevant. Projects designed to foster agricultural production through the provision of essential inputs such as credit for on-farm investments, command area development of existing irrigation schemes, intensification and streamlining of extension systems, and seed production form an important aspect of the Bank Group's program for the next several years. Special emphasis will be given to projects benefitting small farmers. Projects supporting water supply, sewerage, and urban development also form an integral part of the Bank's lending strategy to India for the next several years. Lending in support of infrastructure and industrial investments will focus on agriculture-, export- and energy-related projects. 27. The need for a substantial net transfer of external resources in support of the development of India's economy has been a recurrent theme of Bank economic reports and of the discussions within the India Consortium. Thanks in large part to the response of the aid community, India has success- fully adjusted to the changed world price situation. However, the basic need for foreign assistance, to augment domestic resources, stimulate investment and accelerate economic growth, remains. As in the past, Bank Group assist- ance for projects in India should include, as appropriate, the financing of local expenditures. India imports relatively few capital goods because of the capacity and competitiveness of the domestic capital goods industry. Con- sequently, the foreign exchange component tends to be small in most projects. This is particularly the case in such high-priority sectors as agriculture, irrigation, rural water supply and medium- and small-scale industry. 28. Although the growth prospects of the economy have improved, India's poverty and needs are such that as much as possible of India's external capi- tal requirements should be provided on concessionary terms. Accordingly, the bulk of the Bank Group assistance to India has been, and should continue to be,  - 9 - provided from IDA. However, the amount of IDA funds that can reasonably be allocated to India remains small in relation to India's needs for external support, and India may be regarded as creditworthy for some supplemental Bank lending. As of July 31, 1978, outstanding loans to India totaled US$1,247 million, of which US$559 million remained to be disbursed, leaving a net amount outstanding of US$688 million. 29. Of the external assistance received by India, the proportion con- tributed by the Bank Group has grown significantly. In 1969/70, the Bank Group accounted for 34% of total commitments, 13% of gross disbursements, and 12% of net disbursements as compared with an estimated 62%, 27% and 38%, respectively, in 1977/78. On March 31, 1977, India's outstanding and dis- bursed external public debt was US$13.3 billion, of which the Bank Group's share was 28%. Because Bank Group assistance to India is predominantly in the form of IDA credits, debt service to the Bank Group will rise slowly. In 1977/78, about 16% of India's total debt service payments were to the Bank Group. PART III - THE WATER SUPPLY AND SEWERAGE SECTOR IN PUNJAB Background 30. Although State Governments in India have primary responsibility for development of water supply and sewerage facilities, the Central Gov- ernment, through its five-year plans and/or special programs, has considerable influence on sector development. Funds are normally allocated by the Govern- ment of India (GOI) in the form of grants and loans which State Governments supplement with local resources. The States execute their responsibilities through various departments and agencies which, in turn, may delegate part or all of their duties to local authorities. In certain cases, municipal authorities, or other agencies, by special legislation assume the entire responsibility for planning, design, construction, operation and maintenance of water supply and sewerage services within their jurisdictions. 31. Since the early 1950s, State Governments have endeavored to meet the increasing demand for services caused by rapidly expanding population and unprecedented rates of urban growth. Competing demands for resources from other high priority sectors, lack of management and planning skills, and shortages of key materials and equipment have resulted in only 1 to 2% of developmental expenditures being invested in the water supply and sewerage sector. 32. The present levels of water supply and sewerage services in India reflect the history of relatively small investments, against a background of rising populations and urbanization. In 1975, WHO 1/ estimated that only 1/ WHO Community Water Supply and Waste Water Disposal Mid-Decade Progress Report, May 1, 1976.  - 10 - 193 million people, or 31% of India's total population of 620 million, had access to reasonably safe drinking water and that only 125 million (20%) had acceptable means of disposing of sewage. These levels are lower than average levels for all developing countries as a whole, in which water and sewerage services reach 38% and 33% of the population respectively. Punjab Water Supply and Sewerage Sector 33. The State of Punjab, located in the plains Sf northwestern India, bordering Pakistan, covers an area of about 50,400 km . The State's economy is largely dependent on agriculture which accounts for some 82% of total land area and contributes approximately 52% of its total income. Agricultural and industrial development have been impressive in Punjab with the result that the State's per capita domestic product is the highest in India. The State is generously endowed with an abundant supply of water from three major perennial rivers, the Beas, Sutlej and Ghaggar and an ample supply of groundwater which is its main source of domestic water supply. 34. Punjab faces most of the problems typical of the water supply sector in India. These problems are particularly acute in urban areas which have grown rapidly to meet the expanding industrial, trade and services require- ments of Punjab's flourishing rural sector. Development of the sector has proceeded without a properly designed long-term program. Furthermore, being in no position to generate sufficient resources by itself, the sector has been dependent on the State budget for the financing of its development expendi- tures and is, therefore, subject to the uncertainties of annual appropriations. The result is that the sector is now facing serious problems. In most urban areas, the water supply is intermittent and unevenly distributed. Operation of the systems is unsatisfactory with no proper assessment of the amount of water pumped into them and the amount that is actually used. Punjab has a population of 13.6 million, of which 76% live in rural areas (12,188 villages) and 24% in urban areas (108 townships). In 1976, 59 townships had partially piped water supply systems which served some 1.4 million or about 42% of the total urban population in the State. The balance of Punjab's urban population relies mainly on shallow wells. The development of rural water supply schemes has concentrated mainly in water scarcity areas or in areas where the ground- water contains excessive fluoride. There are about 4.6 million people in these areas living in about 3,700 such villages. Of these villages, about 1,700 have been provided with standpost water supply covering a population of about 1.6 million and schemes are under preparation or implementation to serve the remaining 2,000 villages. The rest of the rural population obtain their supplies from groundwater. The incidence of water-related diseases such as dysentery and infectious hepatitis, though lower in Punjab than in other Indian States, still poses serious health hazards. 35. Sewerage systems in Punjab are less developed than water supply. Only 7% of the total urban population enjoy any sewerage facilities. The bulk of the urban population depend on the conservancy system or use open drains or fields. Sanitary conditions, particularly in industrialized and congested urban areas, are poor and are steadily deteriorating with sewage flowing in open drains or stagnating in ponds. The maintenance of existing sewerage systems is unsatisfactory with silting of the sewers constituting a major problem. In rural areas, sanitation is of a very low standard.  - 11 - Sector Organization and Objectives 36. Until 1976, the Public Health Branch of the Public Works Depart- ment (PWD) was primarily responsible for the planning and execution of urban and rural water supply and sewerage systems in Punjab. Responsibility for systems operation and maintenance was vested in Panchayats (village councils) or Municipal Corporations/Committees (MCs), with the PWD operating the rural water supply schemes on behalf of the Panchayats. 37. In November 1976, the functions of the Public Health Branch of the PWD were reallocated. A newly established Punjab Water Supply and Sewerage Board (WSSB) was made responsible for the construction of urban water supply and sewerage systems. Operation and maintenance of these systems, however, remained the responsibility of individual municipal authorities. Responsi- bility for planning, design, construction and operation of rural water supply schemes remained with the Public Health Branch, Rural Water Supply Wing, of the Ministry of Public Works. 38. GOP's objectives for the development of its water supply and sewer- age sector include (i) developing an adequate institutional framework to provide urban water supply and sewerage services rapidly; (ii) making the urban water supply and sewerage systems financially self-sufficient; (iii) better utilization of existing water supply and sewerage systems; and (iv) extending and improving services where needs are greatest. Towards this end, the establishment of WSSB was an important first step and it provides GOP with a suitable base for institutional development in the sector. 39. Following a sector study by IBRD/WHO Cooperative Program staff in February/March 1977, various organizational alternatives were discussed with GOP with a view to furthering sectoral objectives. These included the merging of water supply and sewerage organizations for urban and rural areas under a single entity with full responsibility for implementation, and operation and maintenance; establishing a separate Board for rural water supply; and estab- lishing municipal enterprises for system operation and maintenance. GOP felt that, as WSSB is still in its formative stage, it was too early to consider burdening it with the added responsibility for implementation and operation of rural water works. GOP also considered that the establishment of a second Board could unnecessarily perpetuate a division of the sector. GOP opted for retaining the present institutional framework for rural water supply, while accepting as an objective for the urban sector the strengthening of WSSB and the development of viable local undertakings capable of handling systems operation on a self-supporting basis. In this respect, GOP's decision was in keeping with its policy of fostering the development of self-government by democratically elected local bodies. MCs presently lack the expertise neces- sary to operate and maintain water supply and sewerage systems efficiently. GOP has, therefore, agreed to strengthen WSSB to enable it to assist the MCs in institutional development and systems operation. GOP has also agreed to pass amending legislation to enable WSSB to take over the operation and main- tenance of the water supply and sewerage systems of MCs in case of default or mismanagement.  - 12 - 40. The original project package presented to the Association covered water supply and sewerage works (100% connections) in the three major towns of Jullundur, Amritsar and Ludhiana, and water supply works for rural areas classified as "scarcity" areas. In the context of further project preparation, GOP agreed to extend the project to cover additional urban areas and to reduce the levels of service contemplated for the three major towns. IDA was keen that GOP retain the rural water supply component in the project. However, GOP was unable to accept the principle that the cost of such services be recovered in accordance with the ability of consumers to pay, and decided to withdraw this component which it proposes to finance entirely on a grant basis. Sector Investment 41. The GOP investment program for the urban sector involves an increase from an amount of US$5.3 million equivalent, in the period 1970-1974, to US$36.4 million equivalent, in the period 1975-1979. Investments of US$104.6 million equivalent are planned for 1979-1982 (the proposed project period). Past annual investments in rural water supplies have increased from about US$2.6 million equivalent in the period 1970-1974 to about US$4.7 million equivalent in 1975/76. The GOP budget for the fiscal year 1977/78 provides US$9.3 million for rural water schemes with annual investments of US$18.6 million forecast by fiscal year 1979/80. The planned increase in both urban and rural water supply investments is appropriate in light of sectoral needs and the past neglect of the sector. The fact that the urban sector would continue to absorb a larger proportion of resources than the rural sector reflects the urgency of improving sanitary conditions in congested industrial and urban areas where health hazards are significant. Consequently, whereas past urban sector investments have been equally divided between water supply and sewerage, proposed investments through 1982 would concentrate on the extension of sewerage systems (68% of average annual investments in the pro- posed project period). Previous Bank Group Operations in Punjab 42. Previous Bank Group involvement has been in the agricultural sector in Punjab. In June 1970, Credit 203-IN (US$27.5 million), was approved to provide medium and long term finance for the purchase of imported tractors, tractor implements and harvesters by farmers, cooperative farming societies and farmers groups, to increase agricultural production. After initial delays over tractor procurement, culminating in the Credit being amended to permit the financing of indigenously manufactured tractors as well as imported tractors, good progress was made and the Credit was fully disbursed on schedule. PART IV - THE PROJECT 43. The proposed project was prepared by WSSB with assistance from Bank Staff and consultants and was appraised in October/November 1977. The Staff Appraisal Report No. 1882b-IN dated August 24, 1978, is being dis- tributed separately. Negotiations were held in Washington in May 1978. The  - 13 - negotiating delegation for India was headed by Dr. Y. V. Reddy, Deputy Secretary, Department of Economic Affairs and the Life Insurance Corporation of India (LIC) was represented by Mr. C. R. Thakore, Chief (Investment). A supplementary Project Data Sheet is attached as Annex III. Project Objectives and Description 44. The proposed project would be implemented over 4 years and forms a major part (75%) of GOP's urban water supply and sewerage program through 1982. The project has been designed to improve and expand water supply and sewerage facilities in 8 towns (Jullundur, Amritsar, Ludhiana, Moga, Patiala, Bhatinda, Rajpura and Pathankot). These are rapidly expanding, congested, industrial- ized areas which contain about 62% of the State's total urban population of about 3.3 million. Water supply connections would be provided to an addi- tional 24% (approx. 800,000 people) of the State's total urban population. 45. Through the expansion and improvement of sewerage in the eight towns, an additional 36% (approx. 1.2 million people) of the total urban population of Punjab would be provided with sewerage facilities. The project would also effect improvements in operational and management techniques which would benefit both WSSB and participating MCs in the development of future water supply and sewerage systems throughout the State. 46. The proposed water supply works in the eight towns include the construction of tubewells, service reservoirs, distribution mains, about 93,000 water service connections and treatment works for two towns. The sewerage component would provide for interceptors, outfall mains, pumping stations, some disposal facilities and about 120,000 connections. Project Implementation 47. The Punjab Water Supply and Sewerage Board (WSSB), established under the Punjab Water Supply and Sewerage Board Act 1976, would be responsible for project implementation. WSSB is headed by a full-time Chairman, a full-time Managing Director, six ex-officio directors and up to five associate members representing special interests. Under the Managing Director's guidance, WSSB plans, designs and constructs urban water supply and sewerage schemes. For this purpose, WSSB is organized into centralized departments responsible for design, planning, finance and administration, and into four regional engineering circles. WSSB's performance has been satisfactory within the constraints imposed by its limited technical staff. Under the proposed pro- ject WSSB would exercise a supervisory role over the MCs to ensure that they operate and maintain efficiently the water supply and sewerage systems within their jurisdiction. GOP has agreed to provide a legislative framework suit- able to enabling WSSB to function effectively. The Punjab Water Supply and Sewerage Board Act 1976, has been amended provisionally by the passage of an Ordinance enabling WSSB to take over the operation and maintenance of water and sewerage systems in the project area in case of default or mismanagement by any MC. The Ordinance also empowers WSSB to relend funds to the MCs. It is a condition of credit effectiveness for these provisional arrangements to be finalized through appropriate action as agreed with IDA (see Section 5.01(e)  - 14 - of the Development Credit Agreement). GOP has also agreed to establish within WSSB, five design divisions and has appointed a Chief Engineer to head WSSB's Design and Planning Department. In addition, WSSB has agreed to employ quali- fied staff in sufficient numbers, to carry out the proposed investment program and to assist the MCs to operate and maintain the works and facilities con- structed or improved on their behalf (see Section 2.08 of the Project Agree- ment). Furthermore, WSSB has engaged consultants to advise both the WSSB and the MCs on organization and management, and staffing. By December 1, 1978, WSSB would also hire consultants to advise on training programs and design sewage treatment works (see Section 2.02 of the Project Agreement). In all approximately 500 man-months of local consultant services, costed at US$1,000 per man-month, would be required to provide these services under the project. To ensure timely project implementation and to enable the early hiring of consultants, retroactive financing up to US$100,000 has been provided from February 28, 1978 to the date of Credit signing (see paragraph 4 of Schedule I to the Development Credit Agreement). 48. Under the project, each MC would be required to meet specific re- quirements to ensure the efficient operation and maintenance of the water supply and sewerage systems to be constructed within their jurisdictions. To achieve this objective, GOP would be required to cause each MC to: (1) establish a separate advisory committee with the authority to recommend policy relating to water supply and sewerage services; (2) establish a separate water supply and sewerage department by March 31, 1979, and require the head of the department to report directly to the Commissioner or President of such MC; (3) ensure that the water supply and sewerage department maintain separate accounts for water supply and sewerage services and has its own budget and bank account; (4) ensure that the water supply and sewerage department main- tains its accounts in accordance with a full public utility commercial accounting system beginning April 1, 1980; (5) ensure that key personnel with appropriate qualifications are appointed in the water supply and sewerage department; and (6) ensure that its water supply and sewerage department shall operate and maintain the water supply and sewerage systems within its jurisdiction in accordance with sound engineering, administrative, personnel, financial and public utility practices. For the purpose of the latter, MCs would be required to adopt by September 30, 1979, technical and financial performance criteria and indicators on operation and maintenance to be established by WSSB in consultation with the Association and MCs (see Section 2.04 of the Punjab Agreement).  - 15 - 49. IDA has appraised the water supply and sewerage schemes planned for the three major towns of Jullundur, Amritsar and Ludhiana, comprising nearly 80% of total project costs, leaving the schemes proposed for the remaining five towns to be appraised by WSSB. IDA's review and approval of the engineering reports would be made a condition of disbursement for each of the subprojects in the eight towns (see paragraph 4 of Schedule I to the Development Credit Agreement). Project Costs and Financing 50. The estimated cost of the proposed project is about US$77.6 million equivalent, including about US$2.5 million of taxes and duties. The principal components net of contingencies are: water supply schemes (US$15.9 million); sewerage works (US$31.8 million); engineering costs (US$10.0 million); and specialized equipment, consultancy services and training (US$1.2 million). Physical contingencies average about 12% for all items (US$5.7 million), while price contingencies of US$13.0 million are based on annual price increases of 7% for material and equipment and 8% for civil works. 51. The proposed Credit of US$38.0 million equivalent would finance about 50% of project costs, net of taxes and duties. The Credit would finance all foreign exchange costs (approximately US$5.5 million) and US$32.5 million of local costs. The balance of funds for the project would be pro- vided by the Life Insurance Corporation of India (LIC), GOP and participating MCs. LIC is actively involved in lending for State water supply schemes and will provide US$15.1 million equivalent, representing about 20% of the total financing required. GOP together with participating MCs would provide the balance US$24.5 million equivalent (see Section 2.02 of the Punjab Agreement). The proceeds of the Credit would be channelled through GOI to GOP, on standard terms, as part of Central assistance provided to State Governments for devel- opment purposes. GOP will on-lend these funds to WSSB at 8.5% interest, for a period of 25 years, including three years of grace. Under Subsidiary Loan Agreements between WSSB and each participating MC these funds would be held by WSSB to the account of MCs. These Agreements would also make MCs liable for repayment of the loan to WSSB on the same terms and conditions applicable to the GOP loan to WSSB. The signing of the Subsidiary Loan Agreements has been made a condition of credit disbursement (para 4(b)(ii) of Schedule 1 to the Development Credit Agreement). LIC will provide its loan to WSSB at 8.5% interest, with the same repayment period as for the GOP loan to WSSB. Con- tributions from MCs would be in the form of capital grants. GOP would be required to provide these funds in the event the MCs fail to do so (see Schedule 2 of the Project AgreemenL and Section 2.02(b) of the Punjab Agreement). Cost Recovery 52. The MCs keep their accounts on a simple cash basis. This does not provide financial data adequate to judge their performance. They do not pre- pare annual reports or annual financial statements. Available information on past financial performance in the three major towns shows a history of losses on sewerage operations, although Amritsar and Ludhiana are close to breaking  - 16 - even in FY1977 and FY1978 on their overall water and sewerage operations. Jullundur, however, will meet only about 35% of its operating costs during these two years. 53. Under the proposed project GOP aims to have the water supply and sewerage operations in the eight towns generate sufficient revenues to meet the cost of services provided. Pending a tariff study, the MCs have intro- duced water charges in the eight towns based on the existing tariffs for Amritsar and Ludhiana. As a result, a flat rate water charge of Is 8.00 (US$0.94) per month, and a metered water charge of Rs 0.35 per M (US$0.16 per 1,000 US gallons), has been made applicable to all these towns from July 1, 1978. As of this date, a sewerage charge, equivalent to the water charge, has also been introduced for all premises which have both a water and a sewer connection. The present domestic water consumption pattern cannot be readily established because of the lack of production meters and reliable customer meters. Projected domestic water consumption, estimated on the basis that the proposed leak detection program, installation of new meters, and repair of existing meters would be carried out under the project, ranges between 90 and 160 1/cd (about 24 to 42 US gallons) in the eight towns. Standpipe consumption has been projected at 45 1/cd (about 12 US gallons) for an average of between 40 to 50 families per standpost. 54. To induce maximum utilization of sewerage facilities, GOP has under- taken to cause MCs to introduce full sewerage charges from April 1, 1979, for premises which have access to, and benefit from, the sewerage system regardless of whether they are connected or not (see Section 2.08 of the Punjab Agreement). To help the poorer sections of the community meet the costs of connecting to the water supply and sewerage systems, WSSB has agreed to waive the administra- tive charge for connections, and to reduce water meter deposits. Additionally, the project would provide credit on easy terms for water supply and sewerage connections. The preparation of a credit program and the formulation of detailed programs for sewerage connections satisfactory to IDA would be conditions for disbursement in the eight project towns (see para 4 of Schedule I to the Development Credit Agreement). 55. The project also provides for a tariff study to be carried out by consultants employed by WSSB to design tariffs which would seek to maximize income, minimize wastage of water and at the same time provide a reasonable level of service to the urban poor at a price they can afford. The latter objective is expected to be achieved by the provision of free supplies of water from standposts and by the use of a stepped tariff for metered supplies. The tariff study is also expected to recommend additional sources of revenue such as charges for (a) properties connected to the sewers but using private water supplies; (b) the sale of waste water for irrigation purposes; and (c) the private extraction of water from the aquifer. Supplementary revenues from these sources can be expected during the project construction period, but have not been taken into account in the financial projections.  - 17 - The Financial Position of Project Entities 56. With the introduction of the new water charges and a sewerage charge the three major towns together would attain a positive overall financial rate of return on net fixed assets during the construction period to FY1981/82. This will also be true of the three towns individually, except for Jullundur in the first year FY1978/79. During this period, there should be no need for any further tariff increases, provided unit costs do not escalate beyond the forecast level of about 7% to 8% annually. During the construction period GOP would cause each MC to cover annual operating expenses, working capital and debt service or depreciation, whichever is the higher (see Section 2.10(a) of the Punjab Agreement). 57. With the improvements in service created by the project, a large increase in tariffs should be possible in FY1982-83 in order to generate cash to finance a proportion of future investment and to ensure that an adequate return on capital investment is obtained. The actual size of this increase will depend upon the level of inflation during the intervening years, on the ability of the MCs to generate additional sources of revenue as a result of the tariff study (para 55) and, to a lesser extent, on the level of recoveries of credits to the poorer sections of the community for connections. GOP would cause each MC to generate internally sufficient cash to finance a proportion of the annual investment, taking the average of the investments in the current, the last preceding and the next following year, at the rate of at least 30% in FY1982-83, 35% in FY1983-84 and 40% from FY1984-85 onwards (see Section 2.10(b) of the Punjab Agreement). However, for balance sheet purposes, WSSB also plans to instruct its consultants to properly value and record all existing assets. This would enable a rate of return calculation to be made as a further test of financial viability. GOP would also cause the MCs not to incur any further long-term debt in respect of their water supply and sewerage services unless their net incomes before interest and depreciation are at least 1.5 times the maximum debt service in any future year (see Section 2.11 of the Punjab Agreement). 58. WSSB would carry out the design and supervision of construction in the eight towns and an engineering charge of 15% of total cost would be in- cluded in all construction work undertaken on behalf of the MCs. This income should be adequate to meet the supervisory costs of WSSB operations throughout the project construction period. GOP would also provide WSSB with an equity contribution of about Rs 80 million (about US$9.3 million) as working capital to enable it to finance the high level of expenditure that would be necessary to sustain the project and other sector work, pending receipt of proceeds of the loan from GOP and LIC, and funds from MCs (see Section 2.02(a)(i) of the Punjab Agreement). 59. Consultants would be appointed by WSSB to establish public utility commercial accounting systems for both WSSB and the MCs in two phases. In the first phase, the focus would be on improved billing and collection and basic accounting records, to be implemented by April 1, 1979, followed by a full system to be implemented by April 1, 1980. GOP would cause the MCs to imple- ment a public utility commercial accounting system by April 1, 1980, for  - 18 - the eight towns; WSSB would also implement a similar system by the same date (see Sections 2.04(d) of the Punjab Agreement and 4.03 of the Project Agreement). Procurement and Disbursement 60. Contracts for equipment and materials with an estimated value of US$14.0 million would be awarded on the basis of international competitive bidding in accordance with IDA guidelines. A margin of preference of 15% or the current import duty, whichever is lower, would be granted to local manufacturers in evaluating bids for these contracts. Contracts for equip- ment and materials with an estimated value of US$22.0 million would be awarded on the basis of local competitive bidding. These contracts would involve either small items (below US$100,000) unlikely to attract bids from foreign suppliers, or items unsuitable for international bidding because of high transport costs and/or high risk of damage in transit (e.g., concrete and stoneware pipes). 61. The total value of civil works under the project is estimated at US$21.4 million, excluding contingencies. Because of the dispersed nature of the project and the limited possibilities of grouping the contracts, there would be at least 100 distinct civil works contracts involved. One or two of the contracts could be of the order of US$1.5 million equivalent, but the rest would be much smaller in value with the average contract size being about US$250,000 equivalent. The majority of the contracts would comprise labor intensive pipe laying works. Consequently, all civil works contracts would be awarded on the basis of local competitive bidding, or in exceptional cases be executed by force account. Where force account is used for civil works, GOP has agreed not to exceed US$30,000 equivalent for any single contract, without obtaining the prior agreement of IDA (see paragraph B.3 of Schedule I to the Project Agreement). 62. The proceeds of the proposed credit would be disbursed against 100% of foreign expenditures or 100% of local expenditures (ex-factory) of equipment and materials procured through international competitive bidding, 100% of staff training and consultant costs, and 45% of the costs of civil works and locally procured equipment and materials excluding WSSB's adminis- trative costs. Disbursements against civil works and material and equipment contracts for one or more progress payments not exceeding Rs 100,000 (about US$11,600) and Rs 50,000 (about US$5,800) respectively, would be on the basis of certificates of expenditure. The supporting documentation would not be submitted for review but would be retained for inspection by review missions. There is provision for periodic local auditing of these certificates of ex- penditure. Disbursements against all other items would be fully documented. The LIC loan will be disbursed against 22% of the expenditures on locally procured equipment, materials and civil works excluding WSSB administrative charges up to Rs 65 million (about US$7.6 million) and 28% thereafter. Benefits and Risks 63. It is difficult to use conventional economic rate of return analysis in water supply projects because benefits are hard to quantify. The financial  - 19 - rate of return approximates a minimum measure of the likely economic return to the extent that financial and economic costs are comparable and on the assumption that the expected revenues accurately measure consumers' valuation of the benefits derived from the services provided, as established in their "willingness-to-pay". The financial rate of return for the subprojects in the three major towns constituting the greater portion of total project costs, could thus serve as a rough indicator of the economic benefits that are likely to flow as a result of this project. The overall financial rates of return for these towns for water and sewerage combined are 15.1% (Jullundur), 19.7% (Amritsar), and 16.5% (Ludhiana). The weighted average rate of return for investments in these three towns which account for about 80% of total project costs is 17.1%. In each case, the project design represents the least cost alternative from among those considered. 64. A primary economic benefit of the proposed project would be an improved water and sewerage service in areas where they are most urgently needed. Since the major towns are thriving industrial centers as well, failure to improve and expand the facilities to meet demand would adversely affect industrial development in these areas. 65. The rate of return as calculated above tends to understate the con- siderable health benefits of improved water supply and sewerage services that accrue to the community as a whole. As with other states in India, Punjab has a history of water-related diseases, such as dysentery and infectious hepatitis. In some districts, the incidence of dental and skeletal fluorosis is severe because of the use of groundwater with a high fluoride content. In congested urban areas in particular, which are the focus of the proposed project, the dangers of large scale outbreaks of these water-borne diseases are ever present due to the lack of safe drinking water and to unhygenic living conditions. Apart from the direct personal benefits, the community at large benefits from reduced medical and hospital costs and increased work productivity along with increases in effective nutrition due to a reduction in intestinal diseases. 66. The project would benefit approximately 2.0 million people. It would aim at providing the maximum coverage to all sections of society, particularly the urban poor. The latter would be provided with free supplies of water from standposts and benefit through the introduction of a stepped tariff for metered supplies. Also concessional credit would be extended by WSSB to the economically weaker sections to facilitate connections to the water supply and sewerage systems. During construction, the project would provide employment to 10,000 people annually. 67. The project would also make an important contribution to institu- tional development. It would build up the organizational capability of the recently established WSSB. The water supply and sewerage departments to be established within MCs would similarly benefit through a considerable improve- ment in works operation in the eight project towns. it is expected that ultimately the whole sector in Punjab would benefit from this experience. WSSB and the participating MCs would also benefit through the training pro- grams WSSB would initiate with the assistance of consultants for the purpose  - 20 - of improving the capabilities of the staff engaged in operating and maintain- ing the works. Additionally, the project would help to impose financial discipline and improve the financial management of both WSSB and the MCs. The restructuring and increase of tariffs would provide a cash generating capacity which would enable the eight towns in the project area to be less dependent on GOP loans for future capital expenditures, releasing State funds for invest- ments in other urban and rural areas within the sector. 68. The establishment of WSSB is an important first step towards re- solving the complex problems of this sector in Punjab. To perform its role under the project, WSSB will have to be very much strengthened. There is a risk that project execution may be slower than now foreseen if WSSB's capa- bilities are not developed rapidly. Similar risks relate to the water supply and sewerage departments to be set up within the MCs in the eight project towns. These risks are however minimized through the provision of technical assistance to both WSSB and the MCs. A further risk lies in the fact that the project concentrates on investment in sewerage works against a background of low connection rates. The project has, however, built-in provisions to encourage and facilitate connections to sewerage systems. Nevertheless, these methods are generally untested and the possibility of delays in the achieve- ment of the expected number of connections cannot be ruled out. PART V - LEGAL INSTRUMENTS AND AUTHORITY 69. The draft Development Credit Agreement between India and the Asso- ciation; the draft Punjab Agreement between the Association and the State of Punjab; the draft Project Agreement between the Association and the Punjab Water Supply and Sewerage Board, the draft LIC Agreement between the Associa- tion and the Life Insurance Corporation of India, and the Recommendation of the Committee provided for in Article V, Section l(d) of the Articles of Agreement are being distributed to Executive Directors separately. 70. Special conditions of the Project are listed in Section III of Annex III. 71. In addition to the features of the Development Credit Agreement which are referred to in the text and listed in Section III of Annex III, the following features are of particular interest: (a) The following event of suspension has been added, namely that: (A) (1) the right of WSSB to withdraw the proceeds of the LIC Loan has been suspended, cancelled or terminated pursuant to the terms of the LIC-WSSB Loan Agreement, or (2) the LIC Loan has become due and payable prior to its maturity.  - 21 - (B) However, subparagraph (A) shall not apply if WSSB estab- lishes to the satisfaction of the Association that: (1) such suspension, cancellation, termination or prematuring is not caused by any default of WSSB, and (2) adequate funds for the Project are available to WSSB from other sources on terms and condi- tions consistent with those under the LIC-WSSB Loan Agreement (Section 4.01(g) of the Develop- ment Credit Agreement). (b) Additional conditions of effectiveness include: (i) the execution of the LIC Agreement and the execution of the LIC-WSSB Loan Agreement have been duly author- ized or ratified by all necessary corporate action (Section 5.01(c) and (d) of the Development Credit Agreement); and (ii) the modifications to the institutional framework of WSSB as agreed between the Association and Punjab has been made effective (Section 5.01(e) of the Development Credit Agreement). 72. The execution of the Subsidiary Loan Agreements between WSSB and the participating MCs would be a condition of disbursement for expenditures incurred by the sub-projects in the eight project towns (see paragraph 51). 73. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association. PART VI - RECOMMENDATION 74. I recommend that the Executive Directors approve the proposed credit. Robert S. McNamara President By Ernest Stern August 23, 1978   ANNEX I Page 1 INDIA - SOCIAL INDICATORS DATA SHEET LAND AREA (7HOU KM2) ----- ------------------------------ INDIA REFERENCE COUNTRIES (1970) TSTAi 32a0.5 MOST RECENT ACRIC. 1797.5 1960 1970 ESTIMATE INDONESIA PHILIPPINES BRAZIL** --- - -- -- - - - - -- - - --- --_- -------- _- -- - ___---_ __----_--_-- _-- -__- ---_-_-_- - -- _- _- ---- GNP ;R CAPITA (USs) 60.0 100.0 150.0 130.0 230.0 550.0 POPULATION AND VITAL STATISTICS _______________________________ POPULATION (MID-YR. MILLION) 434.9 547.6 620.4 /a 117.6 36.9 92.8 POPULATION DENSITY PER SQUARE KM. 133.0 167.0 189.0 62.0 123.0 11.0 PER SQ. KM. AGRICULTURAL LAND 247.0 308.0 345.0 411.0 375.0 49.0 VITAL STATISTICS CRUDE BIRTH RATE (/THOU. AV) 43.2 41.0 37.0 45.9 44.2 38.4 CRUDE DEATH RATE (/THOU,AV) 23.9 19.0 17.0 20.6 13.2 9.9 INFANT MORTALITY RATE (/TNOU) 139.0/a .. 130.0 *- 81.0 110.0 LIFE EXPECTANCY AT BIRTH (YRS) 41.7 47.2 49.5 *. 55.6 59.4 GROSS REPRODUCTION RATE 3.2 2.9 2.8 3.2 3.3 2.6 POPULATION GROWTH RATE (%) TOTAL 2.0 2.3 2.1 2.0 3.0 2.9 URBAN 2.51b 3.2 3.1 3.7/a 4.0 5.0 URBAN POPULAtION (1 OF tOTAL) 17.9 19.8 20.6 17. 5] 27.6 56.0 AGE STRUCTURE (PERCENT) 0 TO 14 YEARS 41.0 41.6 40.1 44.0 45.6 42.o 15 TO 64 YEARS 55.9 55.3 56.7 53.5 51.6 55.o 65 YEARS AND OVER 3.1 3.1 3.2 2.5 2.8 3.0 AGE DEPENDENCY RATIO 0. 08 D. 0.9 0.9 0.8 ECONOmIC DEPENDENCY RATIO 1I1 1.1.,/a 1.1: . 1.5 1.5 FAMILY PLANNING ACCEPTORS (CUMULATIVE, THOU) 71.0 14585.0 37858.0 259.3 320.0 250.0 USERS (% OF MARRIED WOMEN) .. .. 16.7 .. 2.0 1.6 EMPLOYMENT TOTAL LABOR FORCE (THOUSAND) 175000.0 218000.0 261000. 0/a 12400.0 29400. LABOR FORCE IN AGRICULTURE (1) 7110 6. 0 690 .. ss.o[ 40.4 UNEMPLOYED (x OF LABOR FORCE) 4.8 Id 4.4 lb 4 .a. 7.6 75 INCOME DISTRIBUTION X OF PRIVATE INCOME REC D BY- HIGHEST 5% OF HOUSEHOLDS 26.7 25.0 Jc , 35.0/a HIGHEST 20% OF HOUSEHOLDS 51.7 53.1 : - 54.0 62.07ia LO"E5T 20% OF HOUSEHOLDS 4.1 4.7 J3 * . 6 3 o1T LONEST 40S OF HOUSEHOLDS 13.6 13.1 3f ..6 11 DISTRIBUTION OF LANO OWNERSHIP X OWNED 8Y TOP 10% OF OWNERS .. . .. .. .. 45.0 X OWNED BY SMALLEST 10% OWNERS .. .. .. 1.5 HEALTH AND NUTRITION _ _ _ _ _ _ _ _ _ _ _ POPULATION PER PHYSICIAN 5840.0 L8.e 4890.0 4220.0 26370.0 . 1910.0 POPULATION PER NURSING PERSON 5310.0.&m220.0/d 3660.01e 7630.0/ge . 3220.0Jjf POPULATION PER HOSPITAL BED 2590.0/h 1610.0 .. 1640.0 850.0 260.0 PER CAPITA SUPPLY OF - CALORIES (% OF REQUIREMENTS) 95.0 92.0 89.0 91.0 93.0 109.0 PROTEIN (GRAMS PER DAY) 58.0 53.0 48.0 43.0 45.0 64.0 -OF WHICH ANIMAL AND PULSE 19.o01 16.0 126 14.0 22.0 39.0 DEATH RATE (/THOU) AGES 1-4 44.0 .. . . 6.6 EDUCATION ADOUSTED ENROLLMENT RATIO PRIMARY SCHOOL 41.0 63.0 65.0 75.0 113.0 87.0 SECONDARY SCHOOL 23.0 30.0 29.0 15.0 49.0 68.0 YEARS OF SCHOOLING PROVIDED (FIRST AND SECONO LEVEL) 12.0 12.0 11.0 12.0 10.0 11.0 VOCATIONAL ENROLLMENT (% OF SECONDARY) 9.0 .* .. 29.0 6.0 /b 17.0 ADULT LITERACY RATE (x) 24.0 33.0 36.0A 59.0 .. 64.0 HOUSING PERSONS PER ROOM (URBAN) 2.6 2.8 .. .. 2.1 1.0 OCCUPIED DWELLINGS WITHOUT PIPED WATER (V) .. .. .. .. 76.0 73.0 /c ACCESS TO ELECTRICITY (x OF ALL DWELLINGS) .. .. .. .. 23.0 48.0 RURAL DWELLINGS CONNECTED TO ELECTRICITY (%) 7.0 8.0 CONSUMPT ION RADIO RECEIVERS (PER THOU POP) 5.0 21.0 25.0 114.0 39.0 60.0 PASSENGER CARS (PER THOU POP) 0.7 1.0 1.0 2.0 8.0 25.0 ELECTRICITY (KWH/YR PER CAP) 46.0 t14.0 143.0 20.0 235.0 491.0 NEWSPR'NT '^ YR PER CAP) 0.2 0.3 0.3 0.3 2.0 2.7 SEE_NOTES A DEFINITIONS ON-R-E--RS---- SEE 4DTES AND DEFINITIONS ON REVERSE  ANNEX I Page 2 NOTES Unleo otherwise noted, data for 1960 refer to eny year between 1959 nd 1961, for 1970 between 1969 and 1971, and for Most Recent Etieuote between 19 73 ad 1976. * brasil hoe been eslctd as a objective co..ury b canse of ite eise nd casparable problem- of regIonal inequality. INDIA 1960 /a 1951-61 average; /b 1951-60C /c Ratio of population under 15 and 65 and over to labor force age 15 and over; /d Estimated by National Ssple Survey, in terms of tbe averge nunber of peron/wee.k of unemployment as per-en ctge of total person/weekb in the labor force; /I 1962; /f Regietered, not a11 practicitg in the cntry; gj Including midwives; /b 1958; /i 1960-62. 1970 /a Ratio of population cnder 15 aod 65 nd over to total labor force age 15 and over; /b Estimted by National Saple Survey, in term of the average nasber of peraon/week of unomployment as parcentoge of total pereon/weeka in the tota1 labor foroa; /c 1967-68; /d Including midwives. MOST RECENT ESTIMATE: /a 1978 mid-year population and labor force aetimated at 640.4 and 261 millions respectively; /b Ratio of population under 15 and 65 ed over to cotal labor force; /c 1977; /d Fstiated by National SRple Survy, in terms of the average number of pereon/week of unemployment as percentage of total person/weeka in the labor force; /I Including midwives; /f Population 10 years and over. TNDLONESIA 1970 /a 1961-71; /b 1971; /c Including midwiv. PHILIPPIMES 1970 /a As percentage of employment; /b Not including private vocational choolo. BRAZIL 1970 /a Econnoicaly active population; lb Hospital personnel; Ic Inoide only. R13, May 2, 1978 D1WNITaNu OF SOC, INDIICATORS Land Aras (thou bIn2) Poculation per nursing p-rson - Populstion divided by n.-bsr of practicing Total - Total surface ares comprising land rea and inland waters m.le and fiauls graduate nurses, "trained" or "certified" nurses, and aric. - Mot recast stia-te of gsricultural rsea us-d tampar-ily or parin- a.ilisry paronmal with trining or esperienc natly for crops, pastures, market & kitchnn garden or to lie fallow. Population per hospital bed - Popletion divdd by i,.r f boepita1 beds available in public and private general sod specilal d hospital and GNP se .ca.it. USS1 - GclP per capita astits t currant mrket prina, rehilitation centrer; secludss ursi.g hown sod r *tc blis.hent for calculted by sam conv-rsion _thod as World gask Atlee (1974-76 bseia); cu todial and preveotiw_ cre. 1960; 1970 sod 1976 data. Per cesita eunoly of calories ( of raauirnas.ts) - Computed from soergy a1uiv6C;o o7f me7t food eupplis availabls in icoutry per capita per dy; Pouulation and vital tatintic available eupplisa cnoprise doosatic production, imports Ioss exports, and Population (mid-yasr million) - As of July firt: if not available, -rsag chasgas in tock; net supplies maclode anil feed, seeds, quantities used of two and-year setimates; 1960, 1970 and 1976 data, in food procssing and loses in diatribotton; rquirv nte war es ctimted by FAO base.d on phyaLologica1 needs for normal activity and health conald- Populatlon density - per aqu-re be - Mid-year popultion par aquere kilost- aring *nviromtntal tmperature, body weights, age and es distributions of (100 hactare) of total are. population, nd allowing 101 for waste at housahold level. Pocplatlon dauicy - ne anusrs kb of anic. land - Compud as sows for Pa caPita suply of orotmin (sa per day) - Protein nontant of per c.pitc eg,icultural Ilnd only. nt upply of food per day; net upply of food is defined as bove; rtqulrt- mote for all c..atries established by UlSDA Economic Raeearch Services vital statistics provide for minisas allonsme of 60 gris of total protain per day, and Crude birth rats per thowasd, avrag - Annvul live birth. per thound of 2t grs of *niml and pulas protain, of which 10 grasa hould be animl sid-year population; ten-year arith_sti averages nding in 1960 and 1970, protein; thee standards are lower than thoa- of 75 gra of total protein and five-ysar verage nding in 1975 for mt recnt stimte, and 23 grss of animl protein an soerage for the world, proposed by FAO Cruds dsath rate per thouand. averate - Annual deatba per thousand of mid-year in the Third World Food Survey. population; ten-year aritlatic avrages ending in 1960 and 1970 and five- Per capita protein suppl, fro animal and plee - Protein supply of food yaac average ending in 1975 for mat rec nt etimate, derived fras nimal end pulses in grsAq per day. Infant mortality rats (/,hou. - Ann.ul dsath of infants under one yer of ge Deth rate (/thou sass 1-4 - Annual deaths per thousnd to age group 1-4 per thousand live birth.. y.ars, to children in thi ge go p; uggeeted indinstor of life expectancy at birth (yre) - Average number of years of life ramaining at malnutrition. birth; usually -iv-y.r av r-p ending in 1960, 1970 and 1975 for dsvslop- ing co-otrie Education Gross reproduction rate - Averge number of live daughtars a woman vill bear Adjusted nrolLent ratio - primry school - terullent of 11 ageS a pe- in her norl reproductive period if ah separi-nces prea..t ag6-pecific e-ntags f primary school-ag population; inclod-- children a8gd 6-li years fertility ratas; ueually fiv--yat ayvrages *nding in 1960, 1970 sod 1975 but djusted for different lengths of primary education; for countris with for dv.I.ping countri*. vuniversal education, enrollmnt my escead 100% since *oe pupils re below Poculation grovth rate (71 - total - Compound annual growth rates of mid-year or sbov the official chool age. population for 1950-60, 1960-70 and 1970-75. Adjusted enrollment ratio - secondary chool - Computed as above; -econdery Population gro-th rate (%) - urban - Computed like grovth rate of total education requires t leat four pests of pprovd primtry inatruction; populstion; different definitions of urban *reas may ffect comparability of pro,idee general, vocational or teecher training instruction for pupils data sung countris.. of 12 to 17 years of ege; cnrrespoodec coursas ar enerally excluded. Urban copulation M% of total) - Ratio of urban to total population; different Yrer of schooling Prowided (first ad econd levels; - Total yers of definition of urban areas my affect comparability of dsta ang countries, schooling; at secondary levl, voctio-al istruction may be partially or completely =ccivVded. Ade tru, tur- (percest) - Children (0-14 y -ars) worbing-ege (15-64 Ters) Vocational asroll_et n of sacondary) - Vocation l institution include and retired (65 years aAd ovr) as p .cnntag-- of id-year ppultion. technical, indutrial or otber progra- hinh operatc independently or as Ae depend-ncy rstio - Ratio of population under 15 and 65 and or to those departments of secondary inatitutions. of ags 15 through 64. Adult literacy rate (2) - Litarate adults (able co read and yrlr.) a, per- Fconomic dacandenc. ratio - Ratio of population undsr 15 sod 65 and over to centage of total adult population egod 15 y.ara nd over. the labor forte c ag group of 15-64 ycare. F_aily clannin _ - acceptorr (cuulative, thou) - Cumulative number of acceptors Housing of birch-control device under auspices of netional family planning progra Person Per oom (urban) - Average number of prsons per room in occupied since inceptIon, conventional dellinge in orbsc ares. ; dwellinge -oclodc non-permanent Femilv plnnnin& - users (% of married women) - Percentages of larrid vomen of struture and unoccupied parts. child-besring age (15-44 years) shi ue birth-control devices to a11 mrried Occupied dvellings witbhut piped water (2) - Occupied conventional dwellngs iumec n stce age group. in urban nd rural *rea without im id or outside piped water facilities se prcac..tage of all occupied dwellings Employ-ent Acces to electricity (2 of a11 dwellings) - Conv-ntional dwellIngs with Tots1 labor force (thousand) - Economically active perons, including aemd electricity in living quarters as percet of total dwellings in uban end forco and unemployed but scluding hous-eive, st,dnts, etc. definitions rural areas. in various councrie are not comparable. Rural dwellings connected to lectricity (2) - Computed as above for rural Lahot force in zariculture (2) - Agricultural Ilbor force (in faring, forestry, dwelling only. hunting and fiehing) as p-enentosa of total labor force. unemployed (7 of labor fore) - n_aployed are usually defined *a perone who Consumption are able nd willing to take job, out of a job on a givaen day, reined out Radio receivera (per thou pOP) - All type of recaivers for radio broadoe.ts of a )ob, and .s.iking work for s specified minimum period not esceeding one to general publir per thonnend of population; excludes ulicned rs.eioere womk; my not be comparable betwen countri.e d. to different definitions in countries and in yeara whn r. gistration of radio sets w in effct; of unmpFloyed snd source of data .g., g mploymt office stotiatics, smple data for recent yars my nut be comparable since osat countries abolished -veye, compulsory unamployment insurance, licensing. Paseneer care (Por thou Pop) - Paseenger care compriae motor cars sating Income distribution - Percstage of private income (both in ca and kind) les than ight persons; *mclude ambulances, hearrs and military -c..- .d --ott 5%, richest 207., poorc-t 207, and poorest 40% of house- vehicle. holds. Electricity (kwh/yr per sp) - Annu-l conameption of industrial cnercil, public aod private electricity in kclowatt h-ur per capita, generally DS-trihubiuc of land ownership - percent.ges of land ow-nd by weslthisat 10% ba sd on producti data, ithout allowne for losses in grids ht all- nd poor--t 10% of land ownr. ing fr imports and aperts of e tcuricity. Naeerimt (ha/yr Der cas) - Pec capita annul conaumption in kilogra Maelth and Nutrition satimted from do_mtic production plue nt impots of neprint Pop.lation Per Phyacian - Population divided by omeber of practicing phyeiclans qualified fri a mdical school at university leel.  ANNEX I Page 3 ECONOMIC DEVELOPMENT DATA GNP PER CAPITA IN 1976 A US$ 150 GROSS NATIONAL PRODUCT IN 1976/77 @/ ANNUAL RATE OF GROWTH (N. oonstant Prices) St usS Bln. J 1960/61-1964/65 1965/66-1969/70 1970/71-1975/76 GNP at Nlarket Prices 86.04 100.0 3.9 3.8 2.9 Gross Domestic Investment 16.62 19.3 Gross National Saving 18.18 21.1 Current Account Balance 1.56 1.8 Resource Gap 0.95 1.1 OUTPTJT. LABOR FORCE AND PRODUCTIVITY IN 1975/76 Value Added (at factor cost) Labor Force V.A. Per Worker _Ss Rl. % Mil. _i Agriculture 30.2 43 179.0 69 169 63 Industry 16.7 24 33.9 13 494 193 Services 23.4 33 48.0 18 488 133 Total/average 70.3 100 261 100 277 100 GOVERNMENT FINANCE General Government Central Government (RB._Bln) of GI R. Bln) of GDP 1976/77 1976/77 1974/75-1976/77 1976/77 1976/77 1974775-1976/77 Current Receipts 147.46 19.1 17.9 83.78 10.9 10.4 Current Expenditures 140.18 18.2 16.2 84.25 10.9 9.6 Current Surplus/Deficit 7.28 0-9 1.7 - 0.47 - 0.8 Capital Expenditures e/ 59-05 7.6 7.1 40.39 5.2 5.0 External Assistance (net) 11.21 1.5 1.7 11.21 1.5 1.7 MONEY, CREDIT AND PRICES 1970/71 1972/7 1973/74 1974/75 1 6 1976/77 September 1976 September 1977 (Billion Rs outstanding at end of period Money and Quasi Money 105.7 142.2 169.0 186.9 215.0 262.6 238.2 284.8 Bank Credit to Public Sector(net) 56.9 82.5 92.9 102.6 109.1 117.3 112.7 130.7 Bank Credit to Private Sector 56.7 76.0 90.1 109.5 127.5 161.0 144.0 170.0 (Percentage or Index Numbers) Januaxy 1977 January 1978 Money and Quasi Money as % of GDP 24.3 27.3 26.4 25.5 27.6 31.3 Wholesale Price Index (1970/71 = 100) 100.0 116.2 139.7 174.9 173.0 176.6 178.8 183.3 Annual percentage changes in: Wholesale Price Index 7.7 10.0 20.2 25.2 -1.1 2.1 7.5 2.5 Bank Credit to Public Sector (net) 8.6 19.6 12.6 10.4 6.3 7.5 4.7 15.81/ Bank Credit to Private Sector 17.3 18.0 18.5 21.5 16.4 26.3 24.9 A 11.95/ a/ The per capita GNP estimate is at market prices, calculated by the conversion technique used in the World Atlas. All other conversions to dollars in this table are at the average exchange rate prevailing during the period covered. 1/ Quick Estimates. q/ Computed from trend line of GNP at factor cost series, including one observation before first year and one observation after last year of listed period. #/ Transfers between Center and States have been netted out. e/ All loans and advances to third parties have been netted out. f/ Net bank credit to Government Sector. 4/ Bank credit to Commercial Sector.  ANNEX I Page 4 BAIANCE OF PAnIWTS 1974/7S J9156 iL6T 1977/78 N'HIAuNISz EXPORTS (AVIIOG 1 974/75 - 1976/77) (05ST Million) oSE. _ Exports of Goods 4,174 4,665 5,760 6,400 Engineering Goods 515 11 Imports of Goods -5,665 -6,084 -5,950 -6,600 Sugar 379 8 Trade Balane -1 ,491 -1,419 - 19