India - Bombay Urban Development Project

Docum_t of The World Bank FOR OMCIAL USE ONLY c R - /5sy4'- xs R11gt No. P-3920-IN REPORT AND RECOMMENDATION OF THE PRESIDENT OF T7E INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT IN AN AMOUNT OF SDR 137.7 MILLION TO INDIA FOR THE BOMBAY URBAN DEVELOPMENT PROJECT -- January 7, 1985 Thns Imecmeat has a ve cled dsbibutom and my be used by recipiemts iy in the pefoaae of thei .dlW dudes. If cs embb may not otherwi be disemed wathmt Woeld Dank amthoiatm..  CURRENCY E V S (As of January 3, 1985) US$1.00 Rs 12.447 Rs 1.00 = US$0.0803 Rs 1 million = US$80,342 The US Dollar/Rupee exchange rate is subject to change. Conversions in the Staff Appraisal Report vere made at US$1.00 Bs 11.00, which represents the average exchange rate projected over the disbursement period. FISCAL YEAR April 1 - March 31 Abbreviations and Acronyms BNC - Bombay Municipal Corporation BMK - Bombay Metropolitan Region BNRD& - Bombay Metropolitan Region Development Authority CIDCO - City and Industrial Development Corporation GOI - Government of India GOM - Government of Maharashtra KNC - Kalyan Municipal Corporation MoH4A - Maharashtra Housing and Area Development Authority MMW - Minis try of Works and Housing NBMC - New Bombay Municipal Corporation mc - Thana Municipal Corporation  FOR OFFIC" IAUSE ONLY INDIA BOHMLY URBAN DEVELOPMENT PROJECr CREDIT AND PROJECT SUMMARY Borrower: India, acting by its President. Beneficiaries: The Government of Maharashtra (GOM); the Mabarashtra Housing and Area Development Authority (MIADA); the City and Industrial Development Corporation (CIDCO); the Bombay Metropolitan Region Development Authority (B3RDA); and the Municipal Corporations of Bombay, Thana, Kalyan and the proposed New Bombay corporation area. Amount: SDR 137.7 million (US$138 million equivalent). Terms: Standard. Relending Terms: India to GOM: As part of Central assistance for State Development projects on terms and conditions applicable at the time. GOX to participatint agencies and Municipal Corporations: US$136.2 million at 8.52 inter- est per annum over 25 years including a 5 year grace period; US$1.8 million for tecnnical assistance on a grant basis. The foreign exchange risk will be borne by the Government of India. Proiect Description: (i) Land Infrastructure Servicing Proxram. The construction and financing of about 85,000 serviced residential, commercial and small industrial plots, including community facilities, core housing, and house expansion loans on about 13 sites in the Bombay Metropolitan Region benefitting about 500,000 people. (ii) Slum UpRrading Program. Upgrading of about 300 ha of slum areas, mostly in the Bombay Municipal Corporation (BMC) area, including the provision of tenure, improved infrastructure, urban services, home improve- ment loans and community facilities, benefit- ting about 500,000 people. This document has a nsticted distbuton and may be used by rcipents only in the performance of ther official duties Its contents may not otherwise be disclosed without World Bank authorization.  -ii- (iii) Local Government Finance. Administration and Services. Equipment and civil vorks for improving the maintenance of roads, drains and services, and the collec- tion and disposal of refuse in the Nunicipal Corporation areas of Bombay, Thana, Kalyan and the proposed New Bombay area benefitting over one million people. (iv) Technical Assistance. Trainint and Equinment. To improve the capacity of the project implementing and coordinating agencies. The project is large and a nmer of agencies are involved in its implementation. Consequently, considerable effort in planning and monitoring its execution will be required by BENDA, the project coordinating agency. A number of measures have been taken to mini- mize the risks of delay, including She advance acquisition of about 70Z of the land required for the infrastructure servicing compouent, and the early provision of techni- cal assistance to strengthen the organization, management and accounting capability of MEADM, the principal implement- ing agency. Retroactive financing has been provided for the first year of land prepara- tion and for civil works for the infrastruc- ture servicing component, while a detailed program for multi-agency coordination has been worked out for the execution of each project component. The planning and coor- dinating capacity of BERTA has also been further strengthened. Consequently, the timely completion of the project would appear feasible.  -iii- (US$ Millions) Estimated Costs Local Foreijn Total Land lnfrastructure Servicing Program l'3.2 7.7 120.9 Slum Upgrading Program ;2.6 1.4 34.0 Local Government Finauce Administration and Services 14.7 3.7 18.4 Technical Assistance and Training 1.3 0.2 1.5 Design, Supervision and Management 17.0 1.5 18.5 - 178.8 14.5 193.3 Physical Contingencies 12.5 1.3 13.8 Price Contingencies 45.9 3.7 49.6 Total Project Cost J 237.2 19.5 256.7 Financinz Plan: (US$ Millions) Local Foreien Total IDA Credit 118.5 19.5 138.0 GOW Loans/Grants 51.6 - 51.6 Down Payments 67.1 67.1 237.2 19.5 256.7 Estimated Disbursements: (US$ millions) TDA FY FY85 FY86 FY87 FY88 FY89 FY90 FY91 Anual 5.5 26.2 42.4 36.6 19.2 7.0 1.1 Cumulative 5.5 31.7 74.1 110.7 129.9 136.9 138.0 Rates of Return: The averages for prototype land infrastructure servicing and slum upgrading program sites are * about 18Z and 31% respectively. Appraisal Report: No. 4794-IN dated January 4, 1985. i/ Includes US$17.5 million of duties and taxes.  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOHEENDAIION OF THE PRESIDENT TO THE EXECUTITVE DIRECTORS ON A PROPOSED CREDIT TO IUDIA FOR THE BOMBAY URBAN DEVELOPMENT PROJECT 1. I submit the following report and recomendation on a proposed development credit to India in an amount equivalent to SDR 137.7 million (US$138 million equivalent) on standard IDA terms to help finance a project designed to improve the provision of shelter and urban services in the Bombay Metropolitan Region (EMR) and to strengthen State and local institutions involved in urban development. The proceeds of the credit would be channeled to the Government of Maharashtra (COX) in accordance with the Government of India-s (GOI) standard terms and arrangements for the financing of State development projects. GON will relend US$136.2 million of the credit to participating agencies and Municipal Corporations in the BMR at 8.5% interest per annum over 25 years, including five years of grace and grant them US$1.8 million for technical assistance. The proposed relending rate of 8.5% is comparable with the current rates of interest charged by financial institutions in India on loans for similar purposes. GOI would bear the foreign exchange risk. PART I - THE ECONOMY 1/ 2. An economic report, "Situation and Prospects of the Indian Economy - A Medium Term Perspective" (4962-IN, dated April 16, 1984), was distributed to the Fxecutive Directors on April 23, 1984. Country data sheets are attached as Annex I. Backaround 3. India is a large and diverse country with a population of about 750 million (in mid-1984) and an annual per capita income of US$260. The economy is dominated by agriculture which employs more than two-thirds of the labor force. However, the land base is not sufficient to provide an adequate livelihood to everyone engaged in agricultural activities, espe- cially those who own little or no land. Growth of value-added in agriculture - 2.22 since 1950/51 - has been slower than growth of industrial value-added (5.3% per annum). As a result, there has been a gradual decline in the share of agriculture in GDP (at factor cost) from 52% in 1950/51 to about 33Z in 1981/82, while the share of industry rose from 20% to around 26%. But industrialization has not been rapid enough to absorb the growing labor force, or to bring about a rapid economic transformation, with significantly higher productivity and income levels. As a result economic growth has been slow over the past three decades, averaging about 3.6% per annum since 1950/51. l/ Parts I and II of the report are similar to Parts I and II of the President's Report for the National Agricultural Extension Project (No.P-3876-IN), dated September 6, 19E4.  -2- 4. Nevertheless, there has been steady progress, with per capita income rising by about 1.4% per year in the period 1950 to 1980. Despite the large population base and its relatively rapid growth, India has been able to eliminate persistent dependence on foodgrain imports through significant improvements in agricultural production. Savings and invest- ment have increased markedly since 1950/51: the gross national savings rate more than doubled from 10.8% of GDP (at factor cost) to 22.71 in 1983/84, while the gross domestic investment rate rose from 12.5Z of GDP to 24.8% in 1983184. Foreign savings (balance of payments deficit on current account) have never financed a major portion of domestic investment: a peak of about 20X was reached during the early 1960g. Currently, foreign savings account for about 8% of investment. Ezternal assistance has been low both as a percentage of GDP and in per capita terms, never rising above 3Z of GDP and averaging below 1Z for the past five years. Net use of foreign savings has never risen above 3X of GDP, and presently stands at 2.1Z. 5. Before the 1970s, India placed relatively less emphasis on export promotion and more on import substitution. The volume growth of exports between 1950/51 and 1969/70 averaged omly 2.2% per annum, while the volume growtb of imports over the same period was 4.3Z. In the early to mid- 1970s, however, India's terms of trade, which had remained roughly con- stant during the 1960s, deteriorated sharply. In response, the Government introduced various policy measures designed to stimulate exports. As a result, the volume of India's exports grew on average about 7.31 per annum for the 1970s as a whole, a performance which demonstrates that sustained rapid growth is possible. While expanding world markets, particularly in the nearby Middle East, contributed to this growth, liberalized access to imported inputs and more effective export incentives played a major role. 6. Moving into the second half of the 1970s, the Indian economy was buoyed by higher levels of investment and an expanding level of foodgrain output. As a result, growth in real GDP and in agricultural and industrial value-added substantially exceeded the historical 30-year trends (paragraph 3) averaging 5.3Z, 3.3% and 8.1X, respectively, during the 1975/76 to 1978/79 period. In 1979/80, however, this momentum was broken when the worst drought in recent years, combined vith a doubling of international oil prices and domestic supply shortages, led to a sharp fall in foodgrain production, a decline in GDP, and the opening up of a relatively large trade deficit. Severe inflationary pressures also emerged after several years of virtual price stability. These setbacks coincided with the preparation of the Sixth Five-Year Plan which laid down a program of adjustment that aimed at improving the trade deficit, remov- ing infrastructural bottlenecks and ensuring price stability vith an overall growth of the economy of 5.2% per annum. Recent Trends 7. Despite the effects of two severe droughts in 1979/80 and 1982/83, India's economy in the early 1980s continued to grow at the faster pace of the second half of the 1970s. Between the two droughts (from 1979/80 to 1982/83), GDP growth averaged almost 5% per annum, while between the two recovery years (from 1980/81 to 1983/84), it was 4.5% per annum - sub- stantially higher than India's long-term growth rate of 3.6%. Continued rapid economic growth has resulted from a development strategy which  -3- includes higher investment levels and liberalized policies on imports, industrial licensing, prices, and comercial borrowing. These policies, by easing constraints on the supply of infrastructure and basic cosmodities, were a determining factor in the improved performance of the economy and the industrial sector. This overall improvement in performance, combined vith a more restrictive monetary policy in 1981/82 and 1982/83, resulted in a sharp decline in the rate of inflation. The growth rate of wholesale prices declined from over 182 in 1980/81 to only 2.6Z in 1982/83, but rose to over 9X in 1983184, mainly due to the effect of the 1982/83 drought on food prices. Further improvements in the policy euvironment will be required to maintain these higher levels of economic * growth and investment without putting undue pressure on the balance of payments or reviving inflationary expectations. 8. Economic grovth in the early 19809 has not been steady, mainly because of the effect of uneven rainfall on agricultural production during the period. In 1960/81 and 1981/82, the economy substantially recovered from the 1979 drought, with real GDP groving by 7.6Z and 5.32, respectively. While industrial output expanded by 42 in 1980/81 and 8.6Z in 1981/82, recovery vas particularly robust in agriculture where normal weather helped output to rise by more than 15X and 5.5%, respectively. The supply of power, coal, and rail transport, already improved in 1980/81, was further expanded in 1981/82, recording growth rates of about 10X, 9.6Z and 12.5%, respectively. This overall improvement in the Indian economy was halted in 1902/83 by a severe drought in mid-1982 which reduced agricultural production by 4%, brought down the GDP growth rate to 1.82, and put further strains on the already difficult balance of payments and domestic resource situation. The timely implementation of various economic policies relating to foodgrain imports, procurement and distribution, and the allocation of power to irrigation pumps mitigated the otherwise very distressing effects of the poor monsoon. The economy recovered in 1983/84, led by a robust agricultural sector - GDP grew by about 6.5% to 7% with agricultural productioa growth in the 92-10X range and industrial growth of 4.52. The ma-3r factors contributing to the good economic performance during 1983/84 were the excellent monsoon, combined with adequate agricultural policies and programs, and satiefactory perfor- mance of the coal and transport sectors. The power secror, however, emerged again as a constraint on hig1er growth, especially in industry. 9. Agricultural production rebounded strongly in 1983/84 in response to the monsoon, improved use of inputs and continued expansion of * irrigation. Overall foodgrain production rose by 102-12Z over the pre- vious year, reaching a new record of 142-144 million tons, a substantial increase over the previous peak of 133 million tons in 1981/82. Corrected for weather variations, foodgrain production continues to grow at a. trend of 2.6Z per annum--sufficient to maintain a broad balance between suvply and steadily increasing domestic demand. Nonetheless, the balance remains delicate, and the need for foodgrain imports to maintain consumer supplies or adequate buffer stocks could arise from time to time. Thu:, adequate management of foodgrain stocks and programs to expand irrigation, strengthen extension and encourage the efficient use of other agricultural inputs continue to receive high priority. 10. Basic infrastructure services had a mxzed performance in 1983/84, partially because of sluggish demand from industry during the first half  -4- of the year but also due to a failure to maintain the Iroductivity gains of 1980-82. Electricity generation grev only by about 3.7Z due to low reservoir water levels during the first half of the year, delays in the commissioning of new capacity, and a deterioration of capacity utilization in thermal plants. Aa a result, power generation was about 11.51 below requirements and constituted a major bottleneck in the economy. Key industries which were adversely affected by pover constraints included steel, fertilizers, cement, and coal. To improve performance in the power sector, the Government recently increased incentives for higher labor and management productivity in thermal plants. Railway freight traffic, measured in ton-kma, grew by only 0.5X in 1983/84, reflecting sluggish demand. Coal production increased by about 6.5Z in 1983/8" reaching 139 million tons. When combined with stocks already available this level of production was sufficient to meet the relatively slow demand growth. Infrastructural constraints would have emerged much more sharply had the pace of industrial growth and demand been more rapid. It is therefore critically important that India maintain the pace of investment in these key sectors, mobilize sufficient resources to do so, and implement programs to enhance productivity. 11. The Indian economy has reverted from a situation of resource surplus in the late 1970s to an aggregate resource deficit. The gap between gross investment and national savings increased from negligible levels during the late 1970s to an average equivalent to 2.1Z of GDP in 1980-84. India's gross national savings rate, which averaged 22.6Z of GDP in the last four years, is high by any standard, particularly considering India's low income and the large proportion of its population below the poverty line. The scope for a substantial increase in the savings rate is therefore quite limited. If India is to maintain investment at about 251 of GDP, a major effort will be required to raise additional domestic resources particularly in the public sector. Future increases in savings will depend heavily upon the enhanced profitability of public sector enterprises which would require better utilization of capacity, more efficient operations and adequate pricing policies. This would also allow a marginal decline in the use of foreign savings from the recent 2.1Z-2.3% of GDP to 1.5x-1.81, to ensure a sustainable external debt service burden. 12. India's external resource position has changed notably since the late 1970s. The current account balance, which recorded surpluses from 1976/77 to 1978/79, reverted to deficits averaging US$3.5 billion and 2.1Z of GDP during 1980/81 to 1983/84. Several developments contributed to these relatively larger current account deficits. First, the terms of trade deteriorated sharply in 1979/80 due to the second round of oil price increases and continued to move against India during the first three years of the 1980s. Second, a more liberal import policy towards industrial inputs was pursued. Third, net invisibles declined as travel receipts fell off, workers' remittances stagnated (reflecting slower development activity in the Middle East), and payment of interest on higher levels of foreign debt increased. Faced with -evere infrastructural constraints and a deterioration in its balance of payments, India initiated an adjustment program in 1980/81 designed to raise the growth rate from its historical level of 3.61 to 5.21 while adjusting the country's external balance to the adverse price developments in the world markets. The main elements of this strategy, which is being successfully implemented, are export promotion, import substitution where economically justifiable, implementa-  -5- tion of a coherent energy policy designed to meet the energy needs of the economy while curbing the growth of oil imports, and continued movement toward a more liberal import policy aimed at providing producers with access to inputs for higher capacity utilization, greater efficiency, improved technology and capacity expansion. 13. A positive development in India's balance of payments is the reduction in the trade deficit from US$7.7 billion in 1980/81 to US$5.9 billion in 1983/84 despite unfavorable world market conditions and import liberalization. Export volume growth and import substitution of oil and petroleum products, metals and fertilizers more than offset the substan- tial increase in "other" imports. These "other" imports consist mainly of industrial imports and capital goods which historically have been in chronic short supply and which are of critical importance to capacity utilization, product quality, and plant modernization and expansion. A major factor in the decline of the trade deficit vas the lower net import bill for petroleum, which dropped from US$6.7 billion in 1980/81 to US$3.4 billion in 1983/84 in response to a successful oil development program that reduced import needs and allowed crude oil exports, which totalled about US$1.5 billion in 1983/84. These structural changes in the balance of payments are to a significant degree the result of India's development and adjustment efforts over the past three years. It is expected that the balance of payments will continue to be under strain for the next several years, since the adjustment strategy will continue to require high levels of imports. 14. Even assuming a favorable export performance, India will need external capital flows to augment its own resources for the foreseeable future, given the low per capita income level in the country, the already high savings rate, and the structural adjustment process. Faced with a growing need for external capital inflows and stagnation in the availability of concessional assistance, India decided at the start of the Sixth Plan to increase borrowings from the International Monetary Fund (IMF) and comercial banks to substantial levels. In the period covering the fiscal years 1981/82 to 1983/84, India drew SDR 3.9 billion from the Extended Fund Facility of the IMF. In addition, India borrowed sig- nificant amounts on commercial terms from the Euro-dollar market and increased the use of suppliers' and export credits. In the period 1980-84, India contracted commercial loans totalling over US$6,000 million and suppliers' credits of over US$1,000 million. The bulk of this borrow- ing has been used for specific development projects in the public and private sector (mostly for petroleum exploration and development, steel, power, aluminum and shipping). India's favorable debt service position and the nature of its borrowings, for project-related purposes instead of direct balance of payments support, enabled it to tap commercial capital markets at favorable spreads. This larger commercial borrowing and trans- fer of funds under the arrangement witb the I1F has stemmed the use of foreign exchange reserves which had fallen to less than four months of import coverage in 1981/82. Development Prospects 15. The experience of recent years illustrates that India has the capacity to grow and develop at a more rapid pace. Although the industrial sector is small compared to the size of the economy, it never-  -6- theless is large in absolute terms and has a highly diversified structure, capable of manufacturing a wide variety of consumer and capital goods. Basic infrastructure - irrigation, railways, telecomunications, paver, roads and ports -- is extensive compared to many countries, although there is considerable need for additional capacity as well as improvement in the utilization of existing capacity. India also has a wide range of institu- tions capable of fostering development and is well-endowed with human resources. Finally, India has an extensive natural resource base in terms of land, water, and minerals (primarily coal and ferrous ores, but also gas and oil). With good economic policies and reasonable access to for- eign savings, India has the capability for managing these considerable resources to accelerate its long-term growth. 16. The Government is currently preparing the Seventh Plan vhich vill lay down the development strategy for 1985/86-1989/90. This strategy is expected to continue the emphasis of the Sixth Plan on agriculture, energy development, export promotion, domestic import substitution where economi- cally justifiable and the removal of infrastructural bottlenecks. Overall Sixth Plan performance has been encouraging, with aggregate real invest- ment projected to be about 30% higher than in the period 1975-80-a creditable performance indeed. The Sixth Plan expenditure targets, however, vill not be fulfilled as resource mobilization by the public sector will fall short of the financing requirements of planned public investment. Actual aggregate real investment is projected to be about 7Z below the original target for the period 1980-85, private investment being 5% to 10% higher and public investment about 20Z lower in real terms than actually projected. In terms of meeting Plan expenditure targets, the performance of the Central Government is considerably better than that of the State Governments. The Central Government's Plan outlays are likely to reach about 80% to 90% of the original Plan allocation in real terms, while the States' will probably achieve only about 502 of their targets, due principally to shortfalls in resource generation. Bottlenecks in key sectors such as power, transport and irrigation are likely to persist as a consequence of real investment shortfalls relative to original Plan allocations. 17. Although Sixth Plan expenditure targets will not be met, India's capital formation rates have increased from 22.6% in 1975-80 to 24.7Z of GDP in 1980-84. Recent higher capital formation rates are encouraging for future income growth, but returns to investment have so far been rela- tively low. Much of this phenomenon relates to India's stage of development, in which a large and growing proportion of investment has been needed to build up basic infrastructure services which have inherently high capital-output ratios. However, there is scope to reduce capital-output ratios through improvements in efficiency. As discussed in greater detail in our recent economic reports, performance in the basic service sectors can be improved through better planning and management, thus leading to higher productivity and capacity utilization throughout the economy. At the same time, programs to expand domestic capacity are vital. In the case of tradeable commodities like coal, steel and cement, this is justified on the grounds of comparative advantage. For sectors such as irrigation, power and transportation, expansion of planned capacity in accordance with the requirements of the rest of the economy will be vital for sustained growth.  -7- 18. Under the Sixth Plan, India has an ambitious oil development program backed by substantial financial commitment. Performance under the program has been excellent with real investment and oil production levels running vell ahead of Plan Targets. In 1981, and again in early 1983, resources for exploration and development vere raised by successive price increases for domestic crude and products. While the gap betveen domestic consumption of petroleum and production remains large, India's dependence on oil imports dropped from 63S of consumption in 1979/80 to about 41% in 1983/84 and is expected to decrease to about 33Z of consumption by 1984/85. The rapidly expanding level of exploration activity, combined with the possibilities for accelerated offtake from known fields, offers much encouragement for India's longer-term energy prospects. At the same time, the increases in domestic petLoleum priceo have helped encourage conservation and slow demand growth. 19. India's development prospects over the next few years will hinge on the extent to which the economy can be brought into both internal and external balance, while at the same time achieving more rapid growth than in the past. This will require the continuation of the current develop- ment strategy which assigns high priority to export promotion, public finance discipline, improvement of economic efficiency, and investment in infrastructure, supported by adequate flows of external borrowing and aid. In the short term, a relatively large level of external borrowing, includ- ing an increased emphasis on commercial borrowing, will be necessary to cope with the balance of payments consequences of such a grovth strategy. However, an important element in providing India with the capacity to adjust flexibly will be adequate flows of concessional assistance since India is still a very poor country with a large rural sector and enormous investment requirements for human development dnd basic infrastructure. Although India is currently in a position to increase borroving on commer- cial terms from the very low levels of the past, there are, of course, limits beyond which India will choose to sacrifice growth objectives rather than accept debt on unfavorable or unmanageable terms. Nevertheless, with a more open trade policy and expanded efforts to remove constraints on the growth of productive capacity, supported by adequate mobilization of both foreign and domestic savings, India is demonstrating that it can sustain a rate of growth closer to 5.01 per annum than to the long-run trend of 3.6% per annum. If the rate of population growth can be brought to below 2.0Z per annum, a 5.0% growth rate would mean a doubling of the trend rete of growth of per capita income of 1.4% per annum. Success in these efforts would make a significant difference to the prospects of easing poverty in India. 20. A large and growing population and severe poverty under'ine the need to accelerate India's development efforts. The 1981 Census indicated there was no decline in the rate of population growth, which remained about 2.2% per annum in the 1970s despite a measurable decline in fer- tility rates. The population growth rate failed to decline in the past decade due to a reduction in the infant mortality rate and an increase in life expectancy, reflecting larger availability of food and health services. While this is a welcome development, it implies a greater strain on the economy and re-emphasizes the need for continuing efforts to strengthen the health and family planning programs in a broad range of activities and services. These efforts are given high priority in the Sixth Plan, which aims at a rise in the proportion of protected couples in  -8- the reproductive age group from its estimated 1979180 level of about 23% to over 35% by 1984185. The GCovernment is reviewing its population policy for the Seventh Plan, with indications of a determination to retain the emphasis on the implementation of family planning, health, education and literacy programs aimed at reducing fertility rates. 21. Reduction of poverty remains the central goal of Indian economic and social policy. More than one-third of the vorldCs poor live in Iudia, and about 80% of the Indian poor belong to the rural households of land- less laborers and small farmers. About 51Z of the rural population and 40Z of the urban population subsist below the poverty line. Significaut reductions in poverty will depend primarily on an acceleration of economic growth, particularly in agriculture, combined with effective implemeta- tion of poverty alleviation programs. India-s poverty alleviation strategy appropriately recognizes that production-oriented programs, which aim at accelerating the overall pace of economic growth, and poverty alleviation programs, targetted at those least able to participate in the general growth of the economy, can be mutually reinforcing rather than substituting for each other. Major poverty programs operating on a nationwide basis at present include: the Minimum Needs Program (NIP), the Integrated Rural Development Program (IRDP), and the National Rural Employment Progran (AMEP). The IRDP and JEEP are targeted programs aimed at increasing the incomes of the poor rapidly, either through the trausfer of productive assets or direct employment. The NEP, aims at broadening the provision of social infrastructure and basic services which enhance the human capital of the poor and improve living standards. These programs represent a vitally important comitment of the Government to address the needs of the poorest. The scale of the poverty problem in India, combined with the inherent difficulties in implementing poverty progrms in any country, imply the need for continued efforts to enhance the effectiveness of these programs. PART II - BAR GROUP OPERATIONS IN INDIA 22. Since 1949, the Bank Group has made 82 loans and 165 development credits to ITdia totalling US$6,526 million and US$12,268 million (both net of cancellation), respectively. Of these amounts, US$1,524 million bas been repaid, and US$6,207 million was still undisbursed as of September, 30, 1984. Bank Group disbursements to India in the current fiscal year through September 30, 1984 totalled US$171 million, repre- senting a decrease of about 40 percent over the same period last year. Annex II contains a sumary statement of disbursements as of September 30, 1984. 23. Since 1959, IFC has made 29 commitments in India totalling US$223 million, of which US$34 million has been repaid, US$56 million sold and US$34 million cancelled. Of the balance of US$98 million, US$91 million represents loans and US$7 million equity. A sunuary statement of IFC disbursements as of September 30, 1984, is also included in Annex II (page 4). 24. The thrust of Bank Group assistance to India has been consistent with the country's development objectives in its support of agriculture, energy and infrastructure. Of particular importance have been investments in irrigation, extension and on-farm development designed to increase  -9- agricultural productivity, and efforts to moprove the availability of basic agricultural inputs to fanmers through credit, fertilizer, marketing, storage, and seed projects. Major elements of the lending program have also been directed at helping to meet the energy needs of the economy while curbing the growth of oil imports, and to ease the infrastructure bottlexecks which have hampered economic growth in India, particularly through power generation and distribution, and railways and telecommunications projects. The Bank Group has also provided financing for a broad range of medium- and small-scale industrial enterprises, primarily in the private sector, through its support of development finance institutions. Recognizing the importance of improving the ability to satisfy the essential needs of urban and rural populations, the Bank Group has supported nutrition and family planning programs, a rural roads project, as well as water supply and sewerage and other urban infrastruc- ture projects. 25. This pattern of assistance remains highly relevant, and con- sonwnt with Government priorities, as reflected in the Sixth Plan and in the approach being taken by GOI in the preparation of the Seventh Plan. First, h! v priority will coutinue to be given to GOI's agricultural program. While India has made significant progress in agriculture, productivity growth will have to be sustained to improve the balance between food demand and supply and to contribute to poverty alleviation and employment. Thus, the Bank Group will continue to support irrigation, fertilizer production and distribution, and agricultural extension and =redit. Second, alongside GOI's efforts in promoting greater efficiency and faster developmeut of the industrial sector, increased assistance will be provided for industrial development. Third, the reviev of performance under the Sixth Plan confirms the high priority that should continue to be given to the expansion and more efficient use of basic infrastructure capacity and to the development of India's indigenous bydrocarbon resources. Acco--dingly the Bank Group will continue to support the development of the energy, transport and telecommunications sectors to alleviate critical shortages vhich constrain output in both agricultural and industrial sectors. Fourth, support of urban development and other GOI basic social services programs for the poor will also continue in light of the growth in population which, despite successes in lowering * birt.i and death rates, still increases by about 16 million each year. 26. 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 part to the response of the aid community, India successfully adjusted to the changed world price situation of the mid- 1970s. Hovever, India continues to require a substantial level of foreign assistance both to offset the overall deterioration in the world trade environment, and to sustain the relatively higher irvestment and growth rates achieved during the first four years of the Sixth Plan. As in the past, Bank Group assistance for projects in India should aim to include the financing of local expenditures. India imports relatively few capital goods because of the capacity and competitiveness of the domestic capital goods industry. Consequently, the foreign exchange component tends to be small in most projects. This is particularly the case in such high- priority sectors as agriculture and irrigation.  -10- 27- India's poverty and needs are such that whenever possible, external capital requirements should be provided on coucessional terms. Accordingly, the bulk of the Bank Group assistance to Tndia in the past was provided from IDA. However, IDA lending to India is decliuing from a peak of US$1.6 billion in FY82, mostly due to funding constraints related to IDA. The amount of IDA funds availab1s to India is likely to remain small in relation to India-s needs for external support. Thus, this requirement for additional assistance will have to be met. in part, through larger Bank lending. Given its development prospects and policies, India is judged creditworthy for Bank lending to supplement IDA assistance. A continuation of efforts already underway to achieve growth in prodtctive capacity, trade expansion, higher levels of savings, foodgrains self-sufficiency and a reduction in the rate of population growth should result in continued economic grovth and improvement in the balance of payments. Despite recent setbacks, Tndia's external payments position is still manageable. The ratio of India-s debt service to the level of its total current account vas about 12.9% in 1983184. Over the next several years this ratio is projected to rise to around 20S and remain around that level through 1995196. As of March 31, 1984, outstand- ing loans to India held by the Bank totalled US$3,884 million, of which US$2,021 million remain to be disbursed, leaving a net amount outstanding of US$1,863 million. 28. Of the external assistance received by India, the proportion contributed by the Bank Group has grown significantly. In 1969170, the Bank Group accounted for 34Z of total co.itments, 13% of gross disbursements, and 12% of net disbursements as compared with 62Z, 33Z and 37Z, respectively, in 1983184. On March 31, 1984, India's outstanding and disbursed external public debt was estimated to be about US$26.9 billion, of which the Bank Group's share was US$9.6 billion or 36% (UDW's US$7.8 billion and IBRD's US$1.8 billion). In 1983184, about 19.0Z of India's total debt service payments were to the Bank Group. PART III - THE URBAN SECTOR IN INDIA AND THE BOMBAY METROPOLITAN REGION (IBM) 29. Although India is primarily an agricultural countrv with about 76% of its population (approximately 684 million, 1981 census) living in rural areas, the country is becoming increasingly urbanized. Its urban popula- tion (about 156 million) has grown by 3.9Z per annum, compared with 1.7% per annum for its rural population over the 1971-81 period, resulting in about 6.1 million more people being added to urban areas every year. If the present trend continues, half of India's population growth during the next two decades will be in urban areas. Approximately 40% of urban households throughout the country have monthly incomes below the absolute poverty threshold (Rs 520 in 1980). The large growth in urban population on top of already acute urban poverty is straining the capacities of city administrations throughout India to deliver, maintain and finance essen- tial urban services and to supply serviced land. 30. ihile primary responsibility for the fornulation and implementa- tion of urban development programs in India rests with state governments  -11- and local bodies, the overall development of policies and strategies is influenced by objectives laid down in the national five-year plans. The Sixth Five-Year Plan (1980-85) stresses the need for providing affordable shelter, safe vater supply and adequate sanitation to the urban poor, and for modifying existing by-lavs, land use controls and minimum plot size requirements to achieve these ends. 31. In the early 1970's, GOI began to fund directly urban projects in the larger metropolitan cities, beginning with Calcutta. Similar efforts in Bombay and Madras followed. Also, a centrally funded Minimum Needs Program was introduced under the Fifth Five-Year Plan which emphasised environmental improvements in many urban slums. However, costs were not recovered under this Program, tenure vas not provided, and local govern- ment management and financial capacity to maintain and service improved neighborhoods was not addressed. Under the Sixth Five-Year Plan, a centrally funded Program for Integrated Development of Small and Medium Towns is financing land development, market centers and traffic and tran- sportation schemes in towns with less than 100,000 inhabitants. 32. Urban policies and programs, including centrally funded urban programs and a number of technical assistance and training prograsa, are directed at the national level by the Ministry of Works and Housing (MMW) and its agencies. The agencies of MOVE include the Town and Country Planning Organization, the National Building Organization, and the Public Health Engineering and Environment Organization. In addition, the MOW is the principal sponsor of the National Institute of Urban Affairs, sn autonomous organization, and it has supervisory responsibility over the Housing and Urban Development Corporation, Ltd., a semi-autonomous Government of India Corporation which provides much of the capital for State housing and development authorities. 33. Urban Trends in Maharashtra and the MM. Maharsshtra is the third largest State in India covering a total land area of approximately 308,000 sq. km, with a population of about 63 million (1981 Census). The State has the third highest per capita income (about Rs 2,519 in 1981182) after the States of Punjab and Haryana; it ranks first in India in large and smaliscale industry and in the number of its population gainfully employed. Maharashtra is the most urbanized State in India. In 1981> approximately 35% of its population was living in urban areas, of which about 70Z was concentrated in the Bombav Metropolitan Region (DMR) and in 10 medium-sized cities. But despite its generally high level of wealth and income, about 48% of Hbharashtra's population still have incomes below the poverty line. 34. Naharashtra's position as the most industrialized and urbanized State in India is due largely to the development of the BRM. With an estimated 10.5 million population (1983) spread over a 4,370 km2 planning area, the BNl is India's largest metropolitan area. The BMM generates about 10X of factory employment and manufacturing value added in India, and about 25% of India's income tax revenue. The growth of its organized sector in recent years has generated about 51,000 jobs annually. Approximately 84% of the BMR's population is located in the Bombay Municipal Corporation (BHC) area (437 km2), with the balance spread over the recently established municipal corporation areas of Thana (149 km2), Kalyan (400 km2) and the proposed New Bombay corporation area (330 km2).  -12- Apart from the BHC area, which has a 3.2% per annum population growth rate, the growth rate in the Thnaa and Kalyan Municipal Corporation areas and in the proposed New Bombay area has averaged 5Z per annum or more over the last two decades. With substantial industrial development con- centrated in the Thana-Belapur industrial estate in New Bombay and the potential for further industrial and commercial growth in the cities of Thana and Ra'yan, BM's population is projected to reach about 13 million by 1991. 35. GOM's Department of Urban Development has the primary respon- sibility for development programning in urban areas throughout the State. The Bombay Metropolitan Region Development Authority (BHRDA) under the overall direction of COD's Urban Development Department, is responsible for physical and investment planning in the RHR, as well as for the regulation of land use. Under the policy guidance of BURDA, the implemen- tation and management of specific urban projects in the BMR is the respon- sibility of a number of central, state and local district agencies. 36. The supply of serviced land and housing in the ENR is only about 35Z of its annual incremental household needs. The private and public supply of housing, mostly apartments at costs ranging from Rs 30,000 (about US$2,700) to over Rs 100,000 (about US$9,000), is unaffordable to at least 50S of the population, even though low income buyers of public housing are heavily subsidized. Since 1974, slum improvement programs under the State Minimum Needs Program have covered about 2 million people in SNC slums on public land. These programs improved environmental condi- tione marginally, but did not provide for security of tenure, adequate cost recovery, maintenance and environmental services. The Bombay Housing and Area Development Board which is presently responsible for slum imrovement programs, also repairs and reconstructs old tenement buildings in the BNC area, but because of controlled lov rentals and inadequate maintenance contributes little to the stock of environmentally acceptable shelter. Institutional finance for housing construction is largely sup- plied by the Housing Development Finance Corporation and the Maharashtra Cooperative Housing Society. Their programs, however, are small in rela- tion to current needs for shelter. 37. The GOI Urban Land Ceiling Act of 1976 was passed to facilitate the acquisition of undeveloped private land in urban areas to assist in providing low income shelter needs. However, implementation of the Act has been delayed on account of court actions and the supply of marketable DIR land has been severely constrained with the prices of available lots rising beyond the reach of the majority of BDR households. Moreover, the high standards imposed by Development Control and Building Regulations on land development and housing construction are inappropriate to the needs for serviced land for low income families. 38. Furthermore, under the Bombay Rent Control Act of 1947, rental values have been frozen at 1940 "Standard Rents" which are only a fraction of current rental values. Consequently, owners have been left with no legal means of obtaining adequate rents to enable them to maintain these properties and earn a reasonable rate of return on investment, or of regaining the use of their properties. As a result, investment in new legal rental accommodation, particularly for lower income families is minimal, vhile illegal rentals are highly inflated and coupled vith  -13- insecurity of tenure. Additionally, since controlled rents are used as the basis for the calculation of the property tax, local government revenues from this source for the provision of urbau services to EnR's rapidly expanding urban population, is severely restricted. 39. Consequently, the provision of serviced land and housing has been severely constrained and has become Bombay's most critical problem. About 50X of the population live without tenure and adequate services in hutment areas under private and public ownership, or on the pavements. Another 10-152 are crowded (3-5 m2 of space per person) in decaying, environmen- tally unacceptable, multi-story tenements (chawls) which, because of rent control, can neither be maintained nor upgraded, despite the efforts of the Bombay Rousing and Area Development Board. The land and housing shortage in Bombay is worse than in most other major Indian metropolitan areas. 40. Bank Group Role and StratesM. Il The Bank Group's strategy for urban development in India has concentrated over the past decade on three of India-s largest cities--Calcutta, Madras, and Bombay. The first Bank Group-supported urban projects, in Calcutta and Madras, financed integrated packages of urban services (i.e., sites and services, slum upgrading, water supply, sanitation, and transport). Follow-up projects in both cities have continued this pattern, although in Calcutta, three general urban development projects have been supplemented by a project focused on a specific sector in the urbMn area through the Calcutta Urban Transport Project, vhich supports a program of investments and policy ueasures designed to alleviate the critical transport deficiencies in the city. In Bombay, such a sectoral approach has been followed from the beginning, largely due to the strength of sectoral institutions and the lack of a strong regional development author.ty to prepare and coordinate a multi-sectoral project. Urban projects in Bombay have thus far focused on transport and traffic management and water supply and sewage disposal. In tne case of each of the Bank Group-supported urban projects, the objective - which has been pursued with considerable success in Bombay - has been not only to raise the level of urban services provided to the population, but also to strengthen urban planning and service delivery institutions, particularly those of local governments, and to improve the use of available resources as well as local resource mobilization. 1/ Bank Group-assisted urban development projects include: Calcutta Urban Devolopment Project (Cr. 427-TN, approved in August 1973); Madras Urban Development Project (Cr. 687-IN), approved in March 1977); Second Calcutta Urban Development Project (Cr. 756-IN, approved in December 1977); Second Madras Urban Development Project (Cr. 1082-IN, approved in December 1980); Kanpur Urban Development Project (Cr. 1185-IN, approved in October 1981); Third Calcutta Urban Development Project (Cr. 1369-IN, approved in May 1983) and Madhya Pradesh Urban Development Project (Ln. 2329-IN, approved June 1983). Sector-specific projects in major Indian cities include: Bombay Water Supply and Sewerage Project (Cr. 390-IN); Second Bombay Water Supply and Sewerage Project (Cr. 842-IN); Bombay Urban Transport Project (Ln. 1335-IN); and Calcutta Urban Transport Project (Cr. 1033-IN).  -14- 41. All of the Bank-assisted urban projects in India to date heve supported policy changes in urban investment programs as vell as institu- tional improvements. Changes accomplished include: (i) design changes (e.g., cost per household for land, infrastructure and shelter has been reduced by some 75Z over previous programs); (ii) improved cost recovery (e.g., interest rates increases); and (iii) the gradual shi:t of housing construction and finance from the public to the private sector with the public sector focusing on land aud infrastructure development. Institutional strengthening has included improved municipal accounting, financial management and maintenance and support for planning, coordina- tion and performance evaluation by metropolitan region development authorities. 42. While the need for improving the management of India's major metropolitan areas has not lessened, the scope of urban development activities is nov being broadened to include medium cities, which coin- cides with GOI's emphasis on the development of small and medium towns. Thus, the experience gained in the major metropolitan areas is being used to strengthen the management of medium-sized cities. Urban projects for Kanpur in the State of Uttar Pradesh and Indore, Ujjain and Raipur in Madhya Pradesh represent the first steps in this direction. PART IV - THE PROJECT Backaround 43. The proposed project was prepared by the Bombay Metropolitan Regional Development Authority (BNRDA), Bombay Municipal Corporation (EMC), City and Industrial Development Corporation (CIDCO), Maharashtra Housing and Area Development Authority (HRADA) and the Government of Maharashtra's (GOH) Department of Housing. It vas appraised in July 1983. Negotiations were held in Washington, D.C. in November/December 1984, with a delegation representing the Government of India (GOI), coordinated by Mr. C. K. Ramachandran, Deputy Secretary of the Department of Economic Affairs, GOI. The Staff Appraisal Report No. 4794-IN, dated January 4, 1985, is being circulated to the Executive Directors separately. A supplementary Project Data Sheet is attached as Annex III. Proiect Objectives 4.4. The proposed project forms a part of GON's Affordable Low Income Shelter Program in the Bombay Metropolitan Region (BNR) for the period 1983184 through 1989/90. The overall objective of the Program is to secure a better match between available resources of land, infrastructure and funding from the private, cooperative and public sectors and the need for environmentally acceptable shelter in the BMR, particularly for low income families. Within this overall objective, the Program seeks to: (i3 shift public investment from subsidized, high unit cost apartment construction programs into programs focused primarily on the production of larger numbers of residential, coumercial and small industry serviced plots at much lower affordable unit costs, (ii) halt slum growth in the BMR by about 1987 and subsequently reduce the absolute number of slum  -15- households and (iii) explore vays and means of shifting private capital into the production of legal affordable shelter. 45. The proposed project has been designed to assist COX in achieving its objectives. It would (a) support a three-fold increase in the annual supply of affordable shelter in the BUR, particularly for low income families thereby helping to significantly reduce the number of households in illegal and/or environmentally unsound shelter; (b) help to substan- * tially improve local government financial and administrative capacity to deliver and maintain services, particularly for low income families within the jurisdictions of the new Municipal Corporation areas (NCa) of Thana, Ralyan and the proposed New Bombay area; (c) strengthen state and local government institutions for planning, executing and replicating projects in the problem-plagued shelter sector; (d) demonstrate that more effi- cient and equitable land use planning and pricing policies, and more appropriate design standards can result in a reduction in costs of shelter investments, significant investment of private capital in low income housing and full cost recovery of shelter provided through the public sector, and finally, (e) direct a larger proportion of public and private investment in land servicing and shelter construction into low coat units, while providing large numbers of plots for higher income housing, com- munity facilities, commercial and small industry use. 46. During project preparation, a number of initiatives were taken to facilitate project implementation. These included: (i) the restructur- ing of BMGDM to enable better planning, coordination, and monitoring and evaluation of BM1 development programs; (ii) the establishment of NCs for the towns of Thana (September 1982) and Kalyan (September 1983) and action to confer similar status on the Nev Bombay area (November 1983) to assist in developing their capacity to manage, finAnce and maintain essential services; and finally, (iii) the reorientation of existing Development Control and Building Regulations to provide for more efficient and equi- table land and infrastructure servicing for the public sector and agree- ment to conduct a study of the ways and means by which Development Control and Building and Regulations would be applied to provide a greater role to the private sector in the supply of affordable low cost sites and service- type plots to low income families. 47. But more remains to be done. Rent control and property tax reform is essential to improve the maintenance of the existing stock of rental housing in the EKR, encourage private sector participation in the provi- sion of long-term rental housing, and increase local government resources for the maintenance and delivery of essential environmental services. GON has made appreciable progress in preparing the groundwork for bringing about rent control reform over the last two years. Rent control reform is also to be promoted as an important sectoral objective at the national level during the period of the Seventh Plan (1985-90). The Approach Paper to the Seventh Plan states that it would be necessary to adjust the laws relating to rent control and land price control, to among other things, encourage tenants to build houses for themselves, give incentives to house-owners for maintenance and expansion of housing and simultaneously enhance the receipts from property taxes.  -16- Proiect Description Land Infrastructure Servicing Prosram 48. Under the project, about 700 ha would be developed on about 13 sites to provide about 85,000 serviced residential plots, including about 1,460 plots for apartment construction by cooperatives. The sites are located in five sub-regions of the BMR within the MC areas of Bombay (374 ha), Thana (77 ha), Kalyan (106 ha) and the proposed Nev Bombay MC (145 ha). All sites are located witbin about 5 km of commercial, industrial and residential areas and would in most cases be connected to existing water supply and severage systems within their Corporation areas. Schemes will only be implemented on the selected list of sites, or such other sites as may be satisfactory to the Association (See Schedule 2, para. 2 of the Project Agreement). 49. Emphasis will be on the provision of residential plots to very low income households jf. Consequently, about 45 to 55Z of the plots would be affordable to families with monthly household incomes of between US$23 and US$57. A further 10 to 20X would be affordable to those with household incomes of between US$57 and US$88 per month. Procedures for the selec- tion of beneficiaries would ensure that each plot type would be reserved for the target income groups. Plots for middle income households (up to US$114 per month) would be sold at market prices, while larger plots for higher income groups (above US$227 a month), cooperative society apartments, and commercial and service industry plots would be auctioned. 50. All beneficiaries would be provided with secure tenancy rights on a 60 year renewable leasehold basis. Beneficiary selection criteria including terms and conditions of sales and leases of these plots would as agreed upon among GOI, GOM and the Association (see para. 8 of Schedule 2 to the Project Agreement). All beneficiaries would be provided with serviced plots. Additionally, core housing vould be provided on the low income plot options varying from the provision of a squat pan, water point and plinth for the lowest income (US$23-$57 per month) households to the addition of bare side walls and a roof in row houses for households with monthly incomes of about US$88. Optional core expansion loans would also be available to the low income categories covered by the project (about 65Z of beneficiaries). Slum Upgrading Prosram 51. About 300 ha in about 200 slum hutment areas, mostly in the Bombay Municipal Corporation (BMC) area affecting about 100,000 households, numerous small shops and industries would be upgraded. Some 90X of the slums are located on public land, and only 10X or so would need to be 1/ Households in the BMR are made up of very low-income groups with incomes of Rs 250 (about US$23) to Rs 625 (about US$57) per month; low-income groups with incomes of Rs 625 to Rs 880 (about TS$88) per month; middle income groups Rs 880 to Rs 1,250 (about US$114) per moatu and higher income groups with incomes of Rs 2,500 (about US$227) per month and above.  -17- acquired from private owners by NHM)A under the Land Acquisitiol or Urban Land Ceiling Acts (See Section 2.08 of the Project Agreement). The slums would be imprc-u:ed through the provision of water, sanitation, roads, footpathe, drainage, street lightiug and landscaping. HBADA would make optional home improvement loans available to occupants ranging from about US$90 for the lowest income household to US$455 for the highest, at not less than 12% interest per annum. Secure tenancy rights would be ensured to beneficiaries through a 60 year renewable leasehold. Local Government Finance. Administration and Ser-' ' V 52. BMC, TNC and KNC and the proposed New Bombay MC (NBMC) would be responsible for the maintenance of water supply and sewage disposal systems, roads, drains and solid waste collection and disposal services including those generated under the project. In addition to user charges paid for water supply and sewerage, beneficiaries would pay an affordable monthly charge ranging from Rs 3 to Rs 10 per household covering about 302 of maintenance and service costs for the additional amenities to be provided under the project. BNC would provide additional revenues to cover the balance of costs from increased municipal taxes which are already operative . To improve maintenance and environmental services, funds would be provided to TMC for a maintenance workshop and to BMC, TMC, INC and NBNC for equipment and civil works. Training and Technical Assistance 53. Technical assistance would be provided under the project to UHADA and TMC in the design and implementation of organization, management and financial systems. TEC would also receive technical assistance for the review of existing Development Control and Building Regulations (see para. 46). Expert advisors will be provided to assist BNMRD's Technical Committee as well as the managers of TNC, KMC and NBMC (see para. 54). The staff of implementing agencies will receive training in the organiza- tion and management of urban systems, project preparation and financial analysis. Training would also be provided for the staff involved in implementing the management, accounting and development control systems. Funds would also be made available for the provision of such other techni- cal assistance and training as GOI, GOM and the Association may agree upon during the course of project implementation. Proiect Implementation 54. BMRDA will be the project coordinating agency and will assist in implementing the project along with MEADA, CIDCO, BNC, TMC, KNC and NBXC. The BNRDA Executive Committee, chaired by the Chief Secretary of GOM will be responsible for policy direction. In the context of the proposed project GON reorganized BMRDA in July 1983, to improve its efficiency and planning capability and clarify lines of responsibility. GOX also estab- lished a Technical Committee (TC), chaired by the BXRDA Metropolitan Commissioner and consisting of the Chief Engineers of MHADA, CIDCO, BMRDA (Execution Division), BHC and other local government departments, with the Chief of BMRDA's Planning Division as its Member Secretary. The TC has responsibility for day-to-day coordination of the activities of the various agencies involved in the project. To assist it in carrying out its work, the TC will be provided with expert assistance on terms and  -18- conditions satisfactory to the Association. This expert assistance vill help to strengthen BNRDALs role in overall project management, including monitoring and evaluation of physical and financial progress. 55. The primary responsibility for the individual project components will lie with the following agencies: Land Infrastructure Servicing Program - MNADA, CIDCO and BHC Slum Unaradins Protram - NEADA and BIC Local Government Finance Administration Services - B1C, TMC, INC and NINC Trainint and Technical Assistance - MRADM, BRD& and THC Off-site Infrastructure - BMC and TNC Proiect Costs and Financing 56. The total estimated cost of the project is about US$256.7 million, including about US$19.5 million of foreign exchange costs and an estimated US$17.5 million in taxes and duties. The project components, net of contingencies, consist of a land infrastructure servicing program (US$120.9 million), slum upgr;.ding program (US$34.0 million), local government finance, administration and services (US$18.4 million), techni- cal assistance and training (US$1.5 million) and design, supervision and management (US$18.5 million). Physical Contingencies (US$13.8 million) have been estimated at 10% of base costs for civil works. Price contin- gencies of US$49.6 million have been added for local and foreign costs at 8X for fiscal year 1984/85; 9% for 1985/86 through 1987/88, 7.5 in 1988/89 and 6% in 1989/90. Approximately 468 man-months of consultant and expert services, including about 7 man-months of foreign consultant services vould be needed for the project (see para. 53). 57. The proposed credit of US$138 million would finance about 58Z of project costs net of taxes and duties. COM would provide a further US$51.6 million in the form of loans and grants and the balance of about US$67.1 million would be financed by beneficiary down payments on the sales and leases of serviced plots under the project. The credit covers 1002 of foreign exchange costs of the project and about 58% of local costs net of taxes and duties. The project would also provide retroactive financing of up to US$7 million for expenditures incurred after January 1, 1984 on essential project related expenditures for consulting Services and expert assistance to MNHDA, TNC and the ENRDA Technical Coumittee and for site preparation (land filling and connected civil works) for the Airoli and Charkop-Kandivalli sites to enable construction to commence in a timely manner. COM will re-lend US$187.8 million equivalent, including the proceeds of the credit, to the participating ageucies at an annual interest rate of 8.5% for 25 years, inclusive of 5 years grace and provide them with a US$1.8 million equivalent grant to meet the cost of consulting services and training. Approximately 45% (about US$84.5 million) of the principal repayments due to GON from the implementing agencies on the funds on-lent would be credited to a revolving fund and used for financing future projects in line with the objectives of the proposed project and  -19- GON's Affordable Low-Income Shelter program. (Bee para. 5 of Schedule 2 to the Project Agreement). Procurement and Diaburememt 58. Annex IV, attached, details the manner in which item would be procured under the project. About Us$14.0 million, including contingencies, would be spent for the procurement of plant and equipment * including vehicles and spares. Of this amount, contracts totalling US$8.4 million for packages of major iteus such as bulldosers and trout end loaders would be awarded on the basis of international competitive bidding in accordance with IDA guidelines for procurment. In bid evaluation, a preference margin of 15, or the current import duty whichever is lower, would be granted to local manufacturers. Other con- tracts for equipment and related spares totalling approzimately US$4.5 million vould be let on the basis of competitive bidding advertised locally, in accordance with procedures satisfactory to IDA. These involve numerous items (such as hand carts and maintenance tools) for which there are a large number of Indian manufacturers. They also include vehicles and equipment for which locally available spare parts and maintenance are important. The remaining equipment (approximately US$1.1 million) invol- ves items of a specialized nature for which there are only a limited number of suppliers and small amounts are involved (under US$100,000). These items would be procured through normal comercial channels after obtaining quotations from at least three suppliers. 59. The total estimated cost of civil works contracts, including contingencies, is US$194.6 million. This includes US$158.7 million for the land infrastructure servicing program for which there would be about 110 contract packages for on-site infrastructure and core houses and about 80 such packages for land preparation and off-site infrastructure. The average size of contract packages for blocks of about 1,000 plots each would be about US$600,000 with a few larger contracts going up to about US$1.1 million. The balance of US$35.9 million of civil works is for the slum upgrading and the local government finance, administration and serv- ices component of the project. There would be over 200 contract packages involved and the value of the largest contract would be approximately US$270,000. Due to the relatively small scale and value of individual contract packages, their dispersion over a large number of project areas, the labor intensive construction method and low cost tecbnology involved, they would not be of interest to foreign bidders. These contracts would, therefore, be awarded on the basis of competitive bidding advertised locally. The balance of the project costs would be for land (US$6.7 million), recoverable loans for home expansion and improvement (US$39.6 million) and technical assistance and training (US$1.8 million). 60. The proceeds of the credit would be disbursed against (a) 1002 of foreign expenditures for directly imported plant and equipment, 100X of local expenditures (ex-factory) for locally manufactured plant and equip- ment procured through international competitive bidding, and 75% of expen- ditures on plant, equipment and vehicles procured locally; (b) 50X of expenditures on contracts for civil vorks; (c) 75% of expenditures on loans made for home expansion and improvement; and (d) 1002 of expendi- tures for technical assistance, training and related office equipmuent. Disbursements for individual civil works contracts not exceeding  -20- Rs 300,000 (about UBS27,300), for expenditures incurred on home expansion and improvement loans, and for individual contracts for equipment not exceeding Rs 150,000 (about US$13,600), will be made against statements of expenditure, for which documentation would not be submitted to IDA but retained locally for inspection during the course of project review missions. All other disbursement claims would be fully documented. Independent auditors, satisfactory to IDA, would carry out annual audits of all statements of expenditure. Cost Recovery 61. About 75Z of the total project costs would be directly recovered from the beneficiaries. A further 24X would be recovered by BMC, TIMC, KMC and the public utilities through property taxes, user charges and other local government charges. The remaining 1% of the costs would go towards payments for technical assistance and training for which there would be no direct cost recovery. Interest charged to beneficiaries for loans for serviced plots, home expansion and improvement loans, and slum upgrading would be at not less than 12% per annum (Para. 10 of Schedule 2 to the Project Agreement). These rates are close to market rates and are expected to be positive in real terms, since the average annual rate of inflation over the project period is expected to range from 6 to 8%. These rates are well above the rates of 5 to 10-1/2Z presently charged to low income beneficiaries by MHADA in its conventional HUDCO financed schemes. 62. Recovery of the costs of plots under the land infrastructure service program under the above terms would be through a system of dif- ferential land pricing. The low prices charged for small plots designated for lower-income households ($23-$80 household income per month) reflect their lower servicing costs, less desirable location and limited develop- ment potential. Larger residential plots, including plots for apartments, which are more costly to service, in better locations and having a larger potential for housing construction, would be marketed to middle and higher income households (above US$114 household income per month) at prices higher than average costs. Plots for service industries would be priced at market value, while those for commercial activities would be auctioned. Plots for community service facilities would be sold to government agencies, or to private agencies in the case of schools, at their average development cost. Off-site infrastructure costs for roads and drains for schemes in Bombay, Thana and Kalyan would be recovered by BMC, THC an. RHC through general levies, including property tax and through user charges for water, sewerage and electricity collected by BMC and GON public utilities. The pricing scheme for upgraded slums vould vary with location and plot size. Prices would range from Rs 2000 (about US$180) for a small plot (16m2) in the most valuable inner city zone, to Rs 1000 (about US$90) for a similar plot in the suburbs. The scheme would result in a recovery of all costs of land and on-site improvements from all beneficiary households. Benefits and Risks 63. The land infrastructure servicing program would directly benefit about 100,000 households, of whom about 65Z are below the estimated Bombay poverty threshold (US$80 per household per month in September 1983),  -21- through the provision of tenured shelter, basic environmental services, primary and secondary education and health care facilities. The slum upgrading program and local government finance administration and services component would provide an additional 100,000 households with legal tenure, basic infrastructure, environmental services, and improved housing. In addition, about 620,000 households in BNC's island city wards would be provided vith better solid waste collection and disposal * services. The project's employment potential has been conservatively estimated to be approximately 26,000 jobs over a 4 to 5 year period. The economic rates of return have been calculated on prototype land infrastructure and slum upgrading program sites to be about 18% and 31% respectively. The estimated rates of return apply to items representing about 87% of project costs. Non-quantifiable benefits include reduced morbidity and mortality and increased labor productivity due to improved environmental services and community facilities. 64. A number of measures have been taken to reduce project risks. To avoid possible delays in land acquisition about 70Z of the land required is already owned by project implementing agencies. A schedule for the purchase of the balance of land, with possible alternate sites, was agreed at negotiations. Measures taken to avoid implementation bottlenecks include advance site preparation, packaging of civil works contracts, detailed multi-agency scheduling of all implementation activities from land acquisition through to the final home improvement loan stage, and the allocation of work to each agency according to its construction capacity. Also the Inter-agency Technical committee headed by BMRDA would help to minimize the risk of delays by facilitating coordination between par- ticipating agencies. The housing construction finance needs for middle and upper income groups would be met through the Housing Development Finance Corporation and the Maharasbtra Cooperative Housing Society. Also GOM is expected to consider establishing a public housing finance organization, should there be a likelihood of insufficient funds to finance lover middle income housing. PART V - LEGAL INSTRUMENTS AND AUTHORITY 65. The draft Development Credit Agreement between India and the Association, the draft Project Agreement between the Association and the State of MNharashtra and the Recommendation of the Committee provided for in Article V, Section I(d) of the Articles of Agreement are being dis- tributed to Executive Directors separately. 66. Special conditions of the project are listed in Section III of Annex II1. Signing of Subsidiary Loan Agreements by GOM with CIDCO and BMC are being made additional conditions of effectiveness of the Credit (Section 5.01 of the draft Development Credit Agreement). 67. I an satisfied that the proposed csedit would comply with the Articles of Agreement of the Association.  -22- PART VT - - 68. I recoend that the Executive Directors approv the proposed credit. Pid0t~~~~~~~ AJ. Clausen President I Jaunary 7, 1985  AIR= I Page 1 of 5 Ar A L E 316 IDrA - SOCIAL IOCATOB DlTA SNRm IqolDA RECEr GUPS (uE1CM AYERAS) Is