India - Second Calcutta Urban Development Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-2141-IN REPORT AND RECOMMENDATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO INDIA FOR THE SECOND CALCUTTA URBAN DEVELOPMENT PROJECT November 30, 1977 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (as of October 14, 1977) Rs 1.00 Paise 100 US$1.00 = Rs 8.51 Rs 1.00 = US$0.1175 Rs 1 million = US$117,500 (Since September 24, 1975, the Rupee has been officially valued relative to a "basket" of currencies. As these currencies are now floating, the U.S. Dollar/Rupee ex- change 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 List of Abbreviations and Acronyms Used in this Report GOI - Government of India GOWB - Government of West Bengal CMD - Calcutta Metropolitan District CMDA - Calcutta Metropolitan Development Authority CC - Calcutta Corporation CIT - Calcutta Improvement Trust HIT - Howrah Improvement Trust CM4SA - Calcutta Metropolitan Water and Sanitation Authority WBHB - West Bengal Housing Board WBSIC - West Bengal Small Industries Corporation CSSI - Government of West Bengal - Directorate of Cottage and Small-Scale Industries IWD - Government of West Bengal - Irrigation and Waterways Department SSE - Small-scale enterprises DMS - Department of Municipal Services  FOR OFFICIAL USE ONLY INDIA SECOND CALCUTTA URBAN DEVELOPMENT PROJECT CREDIT AND PROJECT SUMMARY Borrower: India, acting by its President. Beneficiaries: The Calcutta Metropolitan Development Authority (CMDA). Amount: US$87 million. Terms: Standard. On-lending Terms: (a) India to GOWB: Standard terms and conditions. (b) GOWB to CMDA: Grants and loans repayable over 20 years at the standard on-lending rate with grace periods of approximately 3 years timed to coincide with construction periods. (c) CMDA to operating agencies: (i) Non-revenue- producing assets will be financed by GOWB grants and turned over to operating agencies on that basis; (ii) revenue-producing assets will be financed by GOWB loans and turned over on com- pletion to operating agencies with the obligation to commence servicing the debt to GOWB directly. Project Description: The purpose of the project is to expand and upgrade the capabilities of the administrative authorities in the Calcutta Metropolitan District (CMD), to strengthen the CMD's fiscal base, and to extend and rehabilitate the city's urban service systems, particularly those of critical importance to the urban poor. To accomplish this, the project includes a program of organizational, managerial, and fiscal reform for the CMD's administra- tive agencies as well as a technical assistance and service program including area development and slum improvement schemes serving about 900,000 of the city's poor; extensive improvements to the CMD's water supply, sewerage and sanitation facilities; and a pilot health program serving about 175,000 low-income people. The project also includes measures to rehabilitate the system of solid waste management in the CMD, the provision of credit and expanded extension services to about 4,800 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii - very small enterprises, traffic and transportation improvements, and construction or remodelling of 440 primary schools, mostly in slum areas. The chief con- cerns or risks in the project relate to the ability of the Calcutta Metropolitan Development Authority to manage the project effectively and to acquire promptly the remaining land needed for implementation of the project. Estimated (US$ million) Project Cost: 1/ Local Foreign Total Area Development 15.83 1.72 17.55 Bustee Improvement 22.64 3.49 26.13 Primary School Construction 2.36 0.30 2.66 Health Centers 0.22 0.01 0.23 Small-Scale Enterprise Support 3.49 - 3.49 Water Supply, Sewerage and Drainage 34.81 3.22 38.03 Solid Waste Management 9.12 2.03 11.15 Sanitary Latrines 2.29 0.16 2.45 Municipal and Anchal Development 6.48 0.99 7.47 Traffic and Transportation 27.98 4.55 32.53 Technical Assistance and Training 2.43 0.77 3.20 Physical Contingencies 9.56 1.81 11.37 Price Contingencies 22.66 4.79 27.45 Total Project Cost 159.87 23.84 183.71 Financing (US$ million) Plan: Local Foreign Total IDA 63.16 23.84 87.00 GOI & GOWB Grants and Loans 2/ 72.27 - 72.27 Open Market Borrowings 2/ 19.15 - 19.15 Netherlands Government 1.80 - 1.80 Subtotal-CMDA program 156.38 23.84 180.22 1/ Commercial Banks 3.49 - 3.49 Total 159.87 23.84 183.87 1/ Inclusive of US$5.08 million in taxes and duties. 2/ The budgeting of GOI and GOWB grants and loans and open market borrowings is done on the basis of the entire CMDA program, not just the proposed project. The split between state and federal grants and loans and open market borrowings for this project, therefore, is a notional one derived from the proportions of the entire program these funds are to support.  Estimated Disbursements: (US$ millions) FY78 FY79 FY80 FY81 FY82 FY83 Annual: 8.0 17.0 20.0 20.0 18.0 4.0 Cummulative: 8.0 25.0 45.0 65.0 83.0 87.0 Rate of Return: Weighted average rate of return is 20% on 60% of the total project costs, for which benefits are quantifi- able. Appraisal Report: No. 1662a-IN, dated November 23, 1977.   INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO INDIA FOR THE SECOND CALCUTTA URBAN DEVELOPMENT PROJECT 1. I submit the following report and recommendation on a proposed dev- elopment credit to India in an amount equivalent to US$87 million on standard IDA terms to help finance a US$180 million project designed to expand and upgrade the capabilities of administrative agencies in metropolitan Calcutta and to improve urban services in the metropolitan area. The proceeds of the credit would be channelled to the Government of West Bengal in accordance with the Government of India's standard terms and arrangements for the finan- cing of state development projects. PART I - THE ECONOMY 1/ 2. An economic report, "Economic Situation and Prospects of India" (1529-IN dated April 25, 1977), was distributed to the Executive Directors on May 3, 1977. Country data sheets are attached as Annex I. Background 3. India is exceptional among the Bank Group's member countries for its size and diversity; the country is divided into more than 20 States with a population of some 620 million speaking over 60 languages. Since Independ- ence the trend in growth of GNP has been about 3.5% per annum, or a little over 1% per annum in per capita terms, while over the five years 1971/72 - 1975/76 it fell to as low as 2.5% per annum, in spite of the record harvest of 1975/76. This unsatisfactory performance is in part the result of the low availability of investable resources: while India's domestic savings effort compares well with other countries at the same average income levels, the rate has very rarely exceeded 17% of GNP; similarly, the net transfer of resources from abroad has never been above 3% of GNP, and fell to as little as 0.8% between 1969/70 and 1973/74. The investment rate puts India in the lower third of all developing countries. More significant perhaps is the fact that in spite of a marked rise in the investment rate from about 10% in the early 1950's to about 18% over the past fifteen years, the trend in GNP growth has remained about the same. This indicates a marked decline in the efficiency of 1/ Parts I and II of this report are the same as Parts I and II of the President's Report for the Second Foodgrain Storage Project (Report No. P-2135-IN, dated November 3, 1977).  -2 - capital use, as a result of increasing capacity underutilization, long project gestation, and increased emphasis on relatively capital intensive projects and sectors. 4. Since Independence the growth of the socio-economic infrastructure (transport, education, health services, etc.) has been impressive, but has often been achieved at high cost and has yielded results of variable quality. Many industrial and agricultural investment schemes have been highly successful, but others have taken excessively long to be completed and have operated well below full capacity. In some regions of the country, growth and structural change have been rapid and compare favorably with developments in many other parts of the world; in other regions there has been stagnation, and in some, decline. Although national income has increased in most years, there has been no rise in the living standards of the vast mass of rural and urban poor, conservatively estimated at 295 million people with per capita incomes of US$70 per annum. 5. The structure of the economy has been slow to change. Agriculture remains the dominant sector, with its share of national product declining only gradually from about 50% to 42% over the last twenty years. The share of manufacturing industry has increased only slowly and, since the late 1960s, has remained approximately constant at about 16%. There has, however, been a shift in the composition of manufacturing production, with consumer, inter- mediate, and capital goods now contributing about one third each, compared with an overwhelming preponderance of consumer goods 25 years ago. Recent Trends 6. In March 1977, a party other than Congress formed a Government for the first time since Independence. The state of the economy was not a promi- nent election issue; in fact the economy was generally stronger than at any time in the last six years. Although the growth of GDP in 1976/77 is not expected to have exceeded 2%, this was on top of the very good growth of 8.8% in 1975/76. Agricultural production is expected to have fallen by about 3%, but only because of the return to a more normal harvest of 110-114 million tons of foodgrains after the record 121 million tons of the previous year. Industrial growth was around 10% in 1976/77, which is significantly above the rates achieved in the late 1960's and early 1970's. Exports continued their bright performance, rising by 25% in nominal terms. The overall resource position, with record foreign exchange and foodgrain reserves, is exception- ally strong, and gives the Government considerable room for maneuver. 7. In agriculture the bumper crop of 1975/76 was largely due to remarkably good weather conditions; the good crop in 1976/77 - a foodgrain harvest in the region of 110 million tons would be the second largest on record - was produced under generally normal weather. A conspicuous change was the increase in fertilizer use, which rose by more than 20% over 1975/76,  -3- following marked declines in fertilizer prices. Industrial production bene- fited from fewer labor disputes, fuller utilization of installed capacity in both private and public sectors, a more liberal import policy, relatively good power availability, and increased demand because of higher consumer incomes, expanded exports and higher public expenditures. However, whole- sale prices which had fallen 14% from September 1974 through March 1976, rose 11% from the end of March to December 1976. This upsurge may be a new inflationary trend or merely a correction of the previous sharp decline in the relative prices of a range of agricultural commodities. 8. The balance of payments situation has improved dramatically since the 1973-1975 period. In 1975/76 the trade deficit was US$1,530 million, which was more than covered by US$1,560 million in net aid, US$205 million in net purchases of currency from the LMF, and US$559 million in net miscellaneous capital and invisibles (mostly private remittances); indeed, this large aggregate net resource inflow led to a US$794 million increase in foreign exchange reserves, to a level of almost US$2.2 billion. In 1976/77, the balance of payments continued to improve, with exports provisionally esti- mated to have increased by US$1,135 million against an imports increase of only US$15 million, so that the trade balance deficit is now estimated at a mere US$380 million. The sharply decreased trade deficit, along with a further increase in the net inflow of miscellaneous capital and invisibles from abroad of US$470 million, more than offset the fall of US$350 million in net aid and the US$365 million repurchases of currency from the IMF, and allowed a US$1.5 billion addition to reserves, which reached a level of US$3.7 billion at the end of March 1977. Development Prospects 9. The favorable economic situation gives the Government the opportun- ity to address the longer-term constraints on growth. The basic task is to raise the overall rate of growth from its historic range of 3% to 4%. In the long run this will require raising more resources for investment. But it will also be important to achieve significantly better utilization of avail- able resources, partly through an immediate boost to industrial demand. 10. In agriculture, the basic problem remains that, despite the record foodgrain crop in 1975/76 and the good crop in 1976/77, the long-term growth rate of foodgrain production has been unacceptably low, at about 2.5% per annum over the last seventeen years, and only 2% in the last ten. This has meant that only in good years has there been any margin of production to cater to per capita growth in food consumption, and in normal years it has been necessary to import food. There is considerable scope for stepping up growth both by increasing the use of inputs and by raising the productivity of existing capacity. Three promising developments in regard to the first are the sharply higher outlays on irrigation in the Fifth Plan Period along with a renewed determination to complete projects expeditiously; the indica- tions that private investment in tubewells is picking up again after a slow- down in the early 1970's; and the recent recovery of fertilizer demand. With  regard to more productive use of existing capacity, there is increased aware- ness in the Government that the benefits of irrigation projects can be much increased not only through command area development but also through more efficient design and operation of major surface irrigation infrastructure. Also, hopes have been generated for increasing productivity on both irrigated and rainfed farms through a reorganized and improved extension and research system, which has been recently introduced in several States in northern and eastern India. 11. A strong effort to raise agricultural growth is essential, not only to meet food requirements, but also because of the pervasive influence of agriculture on the levels of activity in other sectors of the economy. This effort must also be so structured as to increase the incomes of small and marginal farmers, in order to increase production since they operate 25% of the cultivated land and account for somewhat more than 25% of production, and for welfare reasons, since they make up about 70% of rural population and constitute the majority of those living below the poverty level. 12. The industrial sector is poised for growth, as serious constraints on the supply side have been removed by the improved situation, particularly with respect to coal and imported raw materials and components; the power supply situation is once more somewhat worrisome (paragraph 13 below). There has been a progressive liberalization of controls and the 1976/77 Central Budget announced a reduction of some taxes on private industry. In many cases management of public enterprises has improved, as is reflected in their markedly higher production and profitability as a group. In the medium term it is the demand for industrial output that will determine indus- trial growth. In certain industries, export demand will provide a strong pull on production; this is true, for example, for iron and steel, certain chemicals, some electrical equipment, processed agricultural products, and vehicles. But the impact of increased exports on overall industrial demand will grow only slowly given the current low share of exports in sales. If the higher growth and productivity in agriculture discussed earlier were to materialize, it would provide a significant stimulus to industry. It is difficult to specify the linkages explicitly; but because of the large share that agriculture holds in GNP, the coefficients do not have to be large for agricultural growth and the concomitant growth in demand for industrially produced inputs and mass consumption goods to boost overall industrial demand significantly. A higher public deficit and increased public investments are the instruments most directly under Government control, and also those that can increase demand for industrial products most immediately. The interim budget of the new Government moves strongly in this direction with a 240% increase in the planned budget deficit over 1976/77. 13. The general improvement in the supply of energy augurs well for India's ability to meet the needs of a more rapidly growing economy. Organ- izational and transportation problems in the coal industry have largely been overcome, production is sufficient to meet demand, stocks are comfortable, and the industry has good prospects for meeting both domestic and export demand. However, the supply of electricity continues to be a concern, since the power situation is not uniformly good. Power shortages affect a number  of the more industrialized states, particularly Maharashtra in the west and Tamil Nadu in the south, and as a result, there is a continued constraint on the expansion of industry. This is despite a number of favorable factors: greatly improved capacity utilization in thermal power stations; more effi- cient exchange of power between states; accelerated implementation of power projects; and somewhat improved availability of finance for power investment. The underlying reason for the weak power supply position is that capacity shortages continue despite the improved investment program. In the short-term, the situation may improve somewhat if, as is hoped, reservoir replenishment is better than average during the last stages of the monsoon. The prospects for the oil and gas sector have been further improved by major new finds of oil and gas near the large offshore Bombay High field. Crude oil from Bombay High was brought to shore for the first time in May 1976; production reached an annual rate of 2 million tons by March 1977, and will rise to a level of 12-13 million tons by 1984/85. Although India will continue to import crude at or somewhat above the current level, much of the foreign exchange burden of rapidly rising imports will be avoided by the development of these resources. Prospects are also bright for further discoveries offshore, given the current high level of exploration activity. 14. Underlying all other development issues is that of population. Al- though India's population growth rate of a little over 2% is not high in com- parison with most LDCs, the size of the absolute increment - 13 million annually - is daunting. It appears, however, that population growth may have passed its peak in the 1960's, and it is expected to continue to slow down, both because the birth rate will continue to decline and because the death rate will not fall as steeply as in the past. With a sustained family plan- ning effort, it should be possible to lower the population growth rate to 1.1% per annum by the end of the century. Our "best guess" projection of India's population by 2000 is 880 million. Many of the benefits of family planning policy will only be felt beyond the turn of the century, but the decline in fertility will bring about an early change in the age structure of the popu- lation. The school age group will grow more slowly or not at all after 1981 thereby reducing the pressures on the primary and secondary education system. The labor force, however, will continue to grow at a fast rate until the end of the century. 15. India's balance of payments position should be comfortable for the next few years. The combination of past global inflation and increased ex- ports has reduced the proportion of export earnings needed for debt service from 30% in 1970/71 to 16% in 1976/77. The ratio is not likely to rise above this level in the next few years. Given continuing favorable policies, the volume of exports should continue to grow by 7% to 10% annually in the near future; and import needs for fertilizer, POL and foodgrains will continue to require a diminishing proportion of available foreign exchange. The large inflow of private remittances shows no immediate signs of declining and should continue to bolster the foreign exchange position in the medium term. Imports,  - 6 - including a variety of capital goods, have already been liberalized signifi- cantly. Increased public investment and a revival of the domestic economy is likely to generate substantial additional import demand. However, this should be quite manageable, given the currently comfortable foreign exchange position, bright export prospects, and continuation of the current real level of net aid. The present situation presents an opportunity to raise the level of investment and, consequently, reach a more satisfactory level of long term growth. PART II - BANK GROUP OPERATIONS IN INDIA 16. Since 1949, the Bank Group has made 51 loans and 90 development credits to India totalling US$1,912 million and US$4,591 million (both net of cancellation), respectively. Of these amounts, US$820 million has been repaid, and US$1,552 million was still undisbursed as of June 30, 1977. Annex II contains a summary statement of disbursements as of June 30, 1977, and notes on the execution of ongoing projects. 17. Since 1957, IFC has made 14 commitments in India totalling US$58.4 million, of which US$13.0 million has been repaid, US$7.6 million sold and US$6.9 million cancelled. Of the balance of US$30.9 million, US$24.4 mil- lion represents loans and US$6.5 million equity. A summary statement of IFC operations as of June 30, 1977, is also included in Annex II (page 2). 18. 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. 19. 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.  - 7 - 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. 20. The need for a substantial net transfer of external resources in support of India's economy )as been a recurrent theme of Bank economic re- ports and of the discussions within the India Consortium. Thanks in large part to the response of the aid community, India has successfully adjusted to the changed world price situation. However, the basic need for readily usable foreign exchange assistance, to augment domestic resources, assure effective utilization of existing capacity, stimulate investment and acceler- ate economic growth, remains. As in the past, Bank Group assistance for projects in India should include, .,s appropriate, the financing of local expenditures. India imports relatively few capital goods because of the capacity of the domestic capital goods industry. The import component of projects tends to be especially low in such high-priority areas as agriculture, education, and family planning. For the Bank Group to be able to make an appropriate contribution to the financing of projects in these sectors, it is important to cover a proportion of local expenditures. 21. It is clear from the review of the Indian economy that as much as possible of India's external capital requirements should be provided on con- cessionary terms. Accordingly, the bulk of the Bank Group assistance to India has been, and should continue to be, 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 some Bank lending to India, for which the country is creditworthy, is appropriate. As of June 30, 1977, outstanding loans to India totaled US$1,119 million, of which US$483 million remained to be disbursed, leaving a net amount outstanding of US$636 million. 22. 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 58%, 24% and 29%, respectively, in 1975/76. On March 31, 1976, India's outstanding and disbursed external public debt was US$13.1 billion, of which the Bank Group's share was 25%. The Bank Group's share is expected to remain around this level in the future. Because Bank Group assistance to India is predominantly in the form of IDA credits, debt service to the Bank Group will rise slowly. In 1975/76, about 15% of India's total debt service payments were to the Bank Group. PART III - THE CALCUTTA METROPOLITAN DISTRICT Physical Characteristics 23. The Calcutta Metropolitan District (CMD) is the most populous urban agglomeration in all of India and the dominant urban center of eastern India,  -8- a nine-state region with a population of approximately 150 million, nearly one-quarter of the population of India itself. The estimated 9.7 million residents of the CMD comprise 46% of the urban population of eastern India and 70% of the urban population of West Bengal, the state in which Calcutta is situated. 24. The CMD stretches north and south for nearly 70 km along both sides of West Bengal's Hooghly River. For most of this distance it forms a narrow corridor along the limited area of elevated land close to the river. Competition for the high land on the banks of the river is keen, as much of the remaining land in the Hooghly's basin is low-lying, waterlogged, and unsuitable for settlement. The central core of the metropolitan area is on the east bank of the river in the city of Calcutta, or Calcutta Corporation, which has a population in excess of three million. Howrah, Calcutta's twin city, lies on the west bank of the river, opposite the Calcutta Corporation. Both the Calcutta Corporation and Howrah are encircled by numerous munici- palities, small towns, and semi-urban areas which extend north and south along the river and combine with the Calcutta Corporation and Howrah to make up the Calcutta Metropolitan District. 25. Within the CMD, three bridges link the east and west banks of the Hooghly River. Only two of these bridges serve motorized vehicles, trams, and pedestrians; the third is a rail bridge. Crossing facilities for pedestrian traffic, the dominant mode of travel, are particularly poor. As a result, travel between the east and west banks of the river is severely constrained. 26. Although it is the traditional and unrivaled urban center of eastern India and the most populous metropolitan area in the entire country, the CMD is by far the most slowly growing large metropolis in India, and one of the most slowly growing of the great cities of the developing world. Neverthe- less, in absolute terms its annual growth is impressive. With its rate of population increase of 2.1%, the CMD adds 200,000 persons to its pop- ulation annually. The annual growth combines with the limited availability of elevated land to produce extremely high population density in the CMD. Population density in the Calcutta Co5poration averages 33,000 persons per km , peaking to 44,000 persons per km in the central core of the city. These figures are significanily higher than densit! statistics for cities such as Manhattan (26,000/km ), Bangkok (21,000/km ), and Tokyo (15,320/km ), whose infrastructure and facilities greatly exceed Calcutta's and whose high-rise pattern of development acts to ease crowding, in contrast with Calcutta's low-rise design. The implication of Calcutta's density profile, then, is serious overcrowding. This, compounded by inadequate past invest- ment, has led to excessive demand on existing urban infrastructure. The Urban Economy 27. At the time of Independence in 1947, Calcutta was the largest city and principal industrial center in India and the major entrepot of the entire subcontinent. Since 1947, however, Calcutta's economic situation has changed substantially. With the partition of India and Pakistan, Calcutta lost a  - 9 - major part of the hinterland that had supplied it with food and raw materials and had provided markets for its goods, and simultaneously began to receive an influx of refugees from East Bengal, whose presence strained public service systems and increased unemployment. In addition, Calcutta has, since Inde- pendence, seen a substantial decline in world demand for jute, one of the major outputs of its manufacturing sector. Moreover, the progressive silting of the Hooghly River has undermined the capacity of Calcutta's port and contributed to its decline relative to other Indian ports. At the same time, Central Government policies relative to steel and coal pricing have neutralized many of the locational advantages enjoyed by Calcutta's industries. And finally, deteriorating public services in Calcutta have combined with political in- stability, civil unrest and labor disruptions to discourage private investment in the CMD. 28. The result of these developments is that, while the CMD is still a very important element in the Indian economy, its per capita income is much lower than that of its industrial rival, Bombay; its value added per indus- trial worker is considerably lower than the all-India average; and the average annual rate of growth in employment between 1961 and 1971 was a modest 0.8%. Structural adjustments in the economy of the CMD are underway. GOWB, which considers the rapid economic development of Calcutta's rural hinterland a prerequisite for economic growth in the CMD, is implementing a variety of programs to bring modern agricultural technology to West Bengal and improve agricultural marketing and storage. If these programs succeed, the revived rural areas should become important markets for Calcutta's manufactured con- sumer goods. Substantial investment has also been made in the coal and iron deposits of Calcutta's hinterland, which provide raw materials for Calcutta's basic metals, metal products and machinery industries. The manufacturing sector of the CMD, which provides 38% of the area's employment, has undergone a major shift from dominance by the declining jute industry to dominance by the engineering industry, and a new port is being constructed at Haldia, 45 miles downstream from Calcutta city. In addition, the Government of India has instituted a program specifically aimed at removing some of the administrative and legal bottlenecks which discourage private investment in West Bengal, and has implemented incentive and assistance programs to promote growth in the private sector. 29. The success of the efforts at spurring the economy of the CMD, how- ever, depends not only on the wisdom of the individual investment decisions made, but also on the ability of local authorities to build and sustain a physical environment in which individual and industrial efficiency are pos- sible. With this in mind, the Government of West Bengal has planned a sub- stantial program for the rehabilitation and expansion of urban infrastructure in the CMD. It is the government's intention that these infrastructure in- vestments combine with the development efforts described above to halt the economic decline of the Calcutta metropolitan area. Municipal Administration 30. The CMD has been delineated as a unified planning region by the Government of West Bengal. It is not, however, a single administrative unit.  - 10 - Local administration in the CMD is the responsibility of four district admin- istrations, 35 municipal authorities, 61 non-municipal areas and 500 semi- rural units. Only the state and national governments and their agencies have jurisdiction over the entire area. 31. In effect, the Government of India (GOI) and the Government of West Bengal (GOWB) exert a dominating influence on municipal administration in the CMD. GOI sponsors industrial development and has responsibility for the national highways, the railway system, airports and seaports. GOWB agen- cies execute projects within the CMD in the areas of education, public health, road construction and maintenance, housing, small-scale industry promotion, power, and public transport. Deficiencies in the organization and management of the local authorities reduce their ability to handle their own development problems. Moreover, as self-generated revenues are inadequate to their needs, most of the local bodies in the CMD rely heavily on financial support from GOWB. Borrowings and grants from GOWB are tightly regulated. To qualify for financial assistance, development projects must be sanctioned by GOI and GOWB and must be integrated into GOWB's overall development plan. Thus, as a re- sult of the weaknesses in the local authorities and the existing administra- tive structure in the CMD, little development work is undertaken by local bodies on their own initiative. The activities of local authorities are largely confined to the provision of primary education and preventive health services, limited commercial activities (e.g., market administration), and the operation and maintenance of infrastructure put in place by state and national authorities. Even in this last function, local bodies are given financial and technical assistance by GOWB. 32. In 1970, GOWB established the Calcutta Metropolitan Development Authority (CMDA) and gave it overall responsibility for the planning, design, and construction of public works in the CMD. CMDA was created at a time of virtual crisis, when public service delivery in Calcutta had all but broken down. Between 1970 and 1973, annual public urban investment in the CMD was increased from approximately Rs 30 million to Rs 400 million, largely through badly needed infrastructure investments. However, weaknesses in CMDA's project planning, management information, budgeting, and accounting systems led to a decline in investment (both absolute and relative to forecast investment tar- gets) after fiscal year 1972/73. Output (i.e., commissioned works and works- in-progress) fell behind original targets and a considerable number of planned schemes either remained incomplete or were completed without the accompanying support systems required to make them fully operational or cost-effective. GOI, GOWB and IDA have jointly identified the management deficiencies that have undermined CMDA's performance in recent years. A broad program of finan- cial and administrative reform designed to rehabilitate CMDA's planning and plan implementation capabilities is currently underway. 33. Despite the efforts of CMDA, provision of all municipal services in the CMD is seriously deficient. Sixty percent of the district's population, or 5.5 million people, live in conditions characterized by a lack of sewerage and drainage facilities and inadequate water supply and garbage collection. Of these, some 3.3 million live in temporary or make-shift structures in refugee  colonies or bustee areas. 1/ Existing health programs in the CMD are frag- mented, with only weak links between preventive and curative services. Pri- mary school facilities are equally inadequate, and reach only 66% of eligible children in the district as a whole, less than 60% in the bustee areas. Con- certed effort to develop the capacities of state and local authorities to expand primary and secondary service systems is needed. Bank Group Involvement in the CMD 34. In 1973, the International Development Association extended a US$35 million credit to India (Cr. 427-IN) to assist in the development of the CMD. This credit supported 34% of CMDA's budget from 1973 through 1976. It funded, for the most part, primary infrastructure; all but 8.3% of the project's estimated expenditures were allocated to schemes for water supply, sewerage and drainage, solid waste management, and road construction and improvement. Progress under this first credit has been slow, disbursements having fallen considerably behind the forecast schedule. 2/ IDA, in consultation with GOI, redefined the project in 1976, and it is now expected that the revised project will be subtantially completed by March 1979. The delays in the project have been largely due to cumbersome budgetary procedures, land acquisition problems, and management deficiencies, and have generated considerable concern on the part of GOI, GOWB and IDA. After extended discussions with IDA, GOWB has agreed on a set of administrative and fiscal reforms designed to prevent recurrence of the problems experienced under the first IDA credit to Calcutta. These reforms are currently being implemented by CMDA and other local autho- rities (see para 38). PART IV - THE PROJECT 35. The proposed project was appraised by missions which visited India in December 1976 and in February/March 1977. A report entitled "Appraisal of the Second Calcutta Urban Development Project" (No. 1662a-IN, dated November 30, 1977) is being distributed separately to the Executive Directors. Negotiations were held in Washington in October 1977. The Government of India was represented by Messrs. Vineet Nayyar (Director, Department of Economic Affairs) and K. Biswas (Deputy Secretary, Ministry of Works and Housing); the Government of West Bengal by Mr. T. C. Dutt (Secretary, GOWB); and the Calcutta Metropolitan Development Authority by Messrs. S. B. Ray (Chief Executive Officer, CMDA) and S. K. Roy (Director of Planning, CMDA). 1/ "Bustee areas" are areas of land occupied by compact groups of small, single-storey structures of temporary construction. Residents generally rent accommodation in these structures from a resident owner or "thika tenant." The thika tenant in turn rents the land on which the struc- tures sit from a non-resident landowner. 2/ As of September 20, 1977, US$22.2 million of the US$35 million credit had been disbursed.  - 12 - Project Description 36. Objectives. The objectives of IDA involvement in the proposed project are: (a) to expand and upgrade the capabilities of the institutions responsible for delivering urban services and maintaining and operating urban infrastructure in the CMD; (b) to improve the fiscal base in the CMD; and (c) to effect the desired institutional and fiscal changes in the context of a program which is simultaneously responsive to Calcutta's pressing need for improved urban services. 37. The project pursues these objectives in three ways. First, it is structured around a series of organizational, administrative, and fiscal re- forms. The program of reform is already underway and would continue throughout the course of the project. Second, the project provides consulting services, technical assistance and staff training to the Calcutta Corporation, CMDA, and several state government agencies. These services are designed to direct and facilitate institutional and fiscal reform and to help rationalize over- all and sectoral planning and plan implementation in Calcutta. Third, the project addresses Calcutta's critical need for expanded services and employ- ment. It seeks to organize the efforts at institutional development, rational planning, efficient service delivery, and improved fiscal performance around the ever-pressing task facing local authorities, that is, ministering to the critical needs of their constituents. The sections which follow describe each element of the project in detail. 38. Institutional Development. Over the course of the project, Calcutta governing authorities will implement a series of organizational, administra- tive, and fiscal reforms. Among the reforms already implemented or planned are the following: (a) GOWB has appointed a new top management team for CMDA, including a Chief Executive Officer and Directors of Finance, Administration, Operations, and Planning. Moreover, CMDA has been reorganized according to a plan established in consultation with GOI. New units have been created to design and implement the specialized development schemes to be undertaken in the proposed project. (b) GOWB will reorganize its Department of Municipal Services (DMS) by March 31, 1979 (Section 3.06(a), West Bengal Agreement). (c) GOWB will implement an experimental program through which selected local authorities in the CMD will be provided with State-level public service employees to assist them in the operation of municipal services (Section 3.07, West Bengal Agreement).  - 13 - (d) GOWB has agreed to implement by April 1, 1979 improvements to the senior management structure of the Calcutta Corporation (CC) as well as to CC's accounting, stores, and financial management systems (Section 3.06(c), West Bengal Agreement). (e) GOWB has agreed to establish by December 31, 1978, a new Central Valuation Board to reform the existing system for assessment and levy of property taxes in the CMD. Consul- tants will be hired to assist in the revaluation of lands and buildings in the CMD, which is scheduled to be completed by March 31, 1982 (Section 3.05, West Bengal Agreement). Moreover, GOWB has established, in consultation with IDA, revenue collection targets for the CC and required revenue/ expenditure ratios for the CC and other municipal bodies in the CMD, in order to garner additional funds for operation and maintenance of urban services and to ensure that an increasing proportion of local expenditures will be covered by local revenues (Sections 3.10 and 3.11, West Bengal Agreement). (f) GOWB will prepare and implement, by April 1, 1980, a revised system for awarding grants from GOWB to local authorities in the CMD (Section 3.06(d), West Bengal Agreement). (g) GOWB will cause the Calcutta Corporation to separate water supply and sewerage taxes and charges from its consolidated property tax by April 1, 1981, and to levy earmarked water supply and sewerage taxes and charges adequate to meet at least 84% of the CC's expenditures for those services for fiscal year 1981/82 and thereafter. In the period between April 1, 1978 and April 1, 1981, the CC will keep a separate water supply and sewerage account and will transfer to it from general revenues funds adequate to meet all of the CC's expenditures for water supply and sewerage (including debt service on loans to meet capital costs), thus ensuring that all of these expenditures are met from local revenues during this period. GOWB will also commission studies to advise on the regulation of tubewells and groundwater supplies in the CMD; draw up, by September 1, 1978, a program for metering water connections in the CMD; and develop and implement, by April 1, 1980, new institutional arrangements for water and sewerage revenue collection in the CMD (Section 3.08, West Bengal Agreement). (h) CMDA has employed consultants to design and install new accounting and management information systems. The new systems will be operational by April 1, 1979 (Section 3.03, Project Agreement).  - 14 - (i) CMDA has agreed to introduce a modern project appraisal system by July 1, 1978, and is developing a project monitoring and evaluation system to be fully operational by April 30, 1978 (Section 3.03, Project Agreement). 39. Technical Assistance and Training. Both the efforts at institu- tional change to be undertaken during the course of the proposed project (see para 38) and the planned expansion of Calcutta's urban service systems (see para 40) will require external assistance. Technical assistance, training programs, and the services of local and foreign consultants will be required to increase local authorities' planning and operational capabilities. Thus, the proposed project includes a technical assistance component which will inter alia: (a) provide assistance to GOWB, CMDA and CC in their fiscal and administrative reforms; (b) provide initial training and other assistance to these bodies in managing the service components of the proposed project; (c) support studies of CMD's current and future requirements in the areas of public transport, solid waste management, and traffic management; (d) fund air and water pollution and groundwater supply studies; and (e) support a rigorous evaluation of alternative long-term development plans for the CMD. This component of the project carries an estimated cost of US$3.2 million. 1/ 40. Urban Service Delivery. The goal of institutional development in the CMD is to improve the local authorities' capacity to respond to the needs of the city's inhabitants. To be effective, institutional reform must be woven into the fabric of the city's operational program and must be related to the service responsibilities of local administrators. The focus of the proposed project, then, is a broad service delivery program which incorpo- rates and, in effect, renders operational the on-going management and fiscal reforms. This service program is aimed particularly at Calcutta's urban poor. Its components and their cost are summarized below. 2/ (a) Sites and Services. (US$16.2 million). Approximately 302 ha of land at two sites would be acquired and filled. Development of one of the sites (East Calcutta) would be undertaken during the project and would include the following: preparation of approximately 8,200 residential plots serviced with access roads, drainage, and individual water and sewer connections; construc- tion of approximately 5,840 core housing units provided with toilet, plinth wall and service connections; construction of 684 dormitory rental units with shared sanitary facilities for the lowest income groups; preparation and servicing of sites for 483 rental units for middle and higher income groups (the structures for which would be financed by private capital); preparation and servicing of 10 ha of land for industrial use and 3 ha of land 1/ Exclusive of price contingencies. 2/ In each case, component cost figures exclude physical and price contingencies.  - 15 - for commercial use, provision of 50 industrial sheds; and construction, on 16 ha of land, of tanks, drying areas, and cattle compounds sufficient to serve the needs of 1,700 washermen and 500 milkmen. Community facilities (schools, health centers, markets, and police, fire, and postal services) would also be provided at East Calcutta site, as well as housing loans for the self-help completion of core houses. Seventy-nine percent of all residential lots and units would serve households earning less than US$66 per month; rental units would be within the financial capability of those falling as low as the 10th percentile in family income. In addition, it is expected that bed spaces will become available in these units for subrental to households below the tenth income percentile. (b) Redevelopment of the Howrah Fish and Pan Market (US$1.35 million). Redevelopment of 2.32 acres of prime location land used primarily for fish and pan (betel leaf) marketing and related activities (e.g., ice and fish packing). This area is currently ineffi- ciently utilized and extremely congested and presents a serious environmental hazard. The proposed project would improve land management and sanitation in the market complex, and thereby provide direct and indirect employment opportunities and im- proved accommodation to the 3,500 low income residents of the area, in addition to benefitting non-resident small businessmen and hawkers. Later phases of the broader redevelopment effort would be financed largely by commercial banks. (c) Bustee Improvement (US$26.13 million). Participation in an on-going program designed to serve 1,200,000 people in over 420 bustees, occupying 1,400 ha of land. The program provides water, improved roads, sanitary latrines, lighting, and drainage ditches to upgrade living conditions in these crowded, largely unserviced urban settlements. (d) Primary School Construction (US$2.66 million). Construction of 40 new primary schools and remodelling and extension of 400 existing schools. The objective is to help raise primary school coverage in the CMD, which is low (66%) relative to coverage in West Bengal as a whole (80%) and relative to GOI's national target for primary school coverage (88%). (e) Health Centers (US$0.23 million). Construction of two primary health centers and 10 subsidiary health centers to serve a target population of 175,000. The centers would be placed in areas where no health centers exist currently and would offer a new approach to health care delivery which combines periodic health examinations; referral services to specialized clinics and nutrition centers; community outreach services; family planning, maternal and child health care; and immunization against small- pox, diptheria, tetanus, whooping cough, typhoid, and polio.  - 16 - (f) Small-Scale Enterprises 1/ (US$3.49 million). Provision of US$3.5 million in credit and expanded extension services to approximately 4,800 very small enterprises. Small enterprises in ten selected bustees and in the industrial estate established under the sites and services component of the project would be eligible for credit. In addition, small enterprises not in these locations but engaged in any of five selected industrial subsectors -- leather tanning, clay modelling, tailoring and garment making, plywood fabrication, or light engineering -- would be eligible. An extension service to apprise low income entrepreneurs of credit opportunities and provide them with technical assistance would be established. Studies of the small-scale enterprise (SSE) potential in Calcutta would be undertaken in order to facilitate preparation of a second phase SSE project. (g) Water Supply, Sewerage, and Drainage (US$38.03 million). Provision of water (90 liters/capita/day) to over 900,000 people in the CMD. The Palta-Tallah water system in the Calcutta Corporation (CC) would be renovated; additional tube- wells sunk in the CC; sewers extended and pumping and treatment facilities installed in several currently unserviced areas in Howrah and the CC; surface and storm water drainage subprojects undertaken in several locations to relieve severe flooding; and 650 km of blocked sewers cleaned in the CC. (h) Solid Waste Management 2/ (US$11.15 million). Rehabilitation of the existing system of solid waste management through the construction of 80 ward depots, 400 masonry vats and 10 trailer sites for solid waste collection; the purchase of 8,000 hand- carts, 81 tipping trucks, 12 tractors, and 25 trailers for nightsoil and solid waste collection; the purchase of cesspool emptiers and bulldozers; the improvement of existing vehicle maintenance facilities; the renovation of existing nightsoil disposal areas; and the construction of access roads to intro- duce sanitary landfill methods. In addition, this component would support training, studies, and pilot projects to test alternative methods of storage, collection, and disposal of solid wastes. 1/ "Small-scale enterprises," for the purposes of this project, are small industries and businesses which are engaged in manufacturing, commerce or service provision and which employ total capital valued at less than Rs 100,000 (approximately US$11,600 equivalent). 2/ The collection and disposal of nightsoil and domestic and trade wastes.  - 17 - (i) Sanitary Latrines (US$2.45 million). Installation of 12,300 flush toilets at the request of property owners (and on partial payment by property owners) in areas which currently lack such facilities. (j) Municipal and Anchal 1/ Development (US$7.47 million). Provision of low-cost water supply, drainage, sanitation facilities, and roads in the rural fringe areas of the CMD. (k) Traffic and Transportation (US$32.54 million). Rationalization of travel patterns, improvements in circulation in the urban core, improvements in road and footway maintenance in the CC, and opening up of new areas for development. This component would include improvements in traffic operation on over 140 km of roads and footways, purchase of equipment for traffic engineering and control and road and footpath maintenance; support of ongoing street lighting improvements; widening and improvement of about 10 km of existing highway; construction of a flyover to segregate 750,000 pedestrian commuters from other traffic; and construction of approximately 51 km of new road, one section of which will provide an important roadway link to a badly needed river crossing now under construction. Project Implementation 41. The Government of West Bengal has designated CMDA as the agency responsible for coordinating the implementation of the project (Section 2.09, West Bengal Agreement). The project would be implemented over five years (1977/78 - 1981/82) and, together with the remainder of the First Calcutta Urban Development Project, would represent over 77% of CMDA's identified pro- gram for that period. The agencies responsible for the execution and main- tenance of individual project components are listed in Table 1 on the follow- ing page. GOWB, CMDA and IDA have agreed on CMDA's five-year investment program for 1977-82. This program will not be changed in any major way with- out prior consultation with IDA (Section 4.03, Project Agreement) . GOWB has accepted the responsibility of ensuring that CMDA has sufficient funds to carry out the agreed program (Section 2.10, West Bengal Agreement) and that other implementing agencies have sufficient funds to maintain existing municipal services as well as service systems established under the proposed project (Section 3.03, West Bengal Agreement). 42. The administrative and fiscal reforms currently underway or planned in the governing agencies of the CMD (see para 38), supplemented by the pro- posed technical assistance and training program (see para 39), should ensure 1/ There are 154 "anchals" -- semi-rural non-municipal administrative units -- in the CMD. Each anchal includes roughly 10-15 villages.  - 18 - Table 1 SECOND CALCUTTA URBAN DEVELOPMENT PROJECT Schedule of Executing and Operating Agencies Agency Responsible Agency Responsible Project Component for Execution for Maintenance Sites and Services Physical Works Calcutta Metropolitan Development CMDA/Municipalities Authority (CMDA) Community Development CMDA Government of West Bengal (GOWB) agencies Self-help Construction West Bengal Housing Board (WBHB) WBHB Loans Industrial Estates West Bengal Small Industries WBSIC Corporation (WBSIC) Fish and Pan Market CMDA CMDA (Redevelopment) Bustee Improvement CMDA Calcutta Corporation (CC) /Municipalities Primary School Construction CMDA Education Department, GOWB Health Centers CMDA Health Department, GOWB Small-Scale Enterprise Department of Cottage and Small- CSSI/Nominated Commercial Scale Industries (SCCI)/Nominated Commercial Banks Commercial Banks Water Supply, Sewerage & Drainage Water Supply CMDA/CC CMDA/CC/Calcutta Munici- pal Water and Sanitation Authority (CMWSA) Sewerage and Drainage CMDA/CMWSA/CC/Howrah Improvement CMWSA/CC/HIT/IWD Trust (HIT)/Irrigation and Water- ways Department (IWD) Solid Waste Management CMDA CC Sanitary Latrines CMDA CC/Municipalities Traffic and Transportation Traffic Operations CMDA/Police/Calcutta Improvement CC/Police Trust (CIT) Roads & Terminals CMDA/HIT Public Works Department (PWD), GOWB/CC/HIT Technical Assistance and CC/CMDA/Department of Municipal Training Services (DMS), GOI  - 19 - that CMDA and other implementing agencies have the capacity to carry out the tasks assigned them under the project. Where inter-agency cooperation is required, GOWB will establish inter-agency working groups. The Management Information and Monitoring Unit of CMDA would have overall responsibility for monitoring the project, in association with each of the implementing agencies. Performance indicators for each component are currently being developed, as is a system of project implementation reporting. 43. The credit element of the small-scale enterprise component would be handled by four nationalized commercial banks, the United Commercial Bank, the State Bank of India, the Allahabad Bank, and the United Bank of India. Funds equivalent to US$3.5 million, the estimated credit demand by the target group, would be lent by these banks to eligible enterprises. These banks have interest in and experience with lending to small enterprises and have staff units adequate to handle the credit component, which is small relative to their overall operations. Moreover, a coordination and monitoring committee chaired by CMDA has been created to ensure close cooperation among all insti- tutions involved in the execution of the small-scale enterprise component. Project Costs and Financing 44. The total project cost is estimated at US$183.71 million, of which US$23.85 million, roughly 13% of the total, represents foreign exchange costs. This estimate includes physical contingencies of 15% for area development (i.e., Sites and Services, Fish and Pan Market Redevelopment) and bustee improvement and 10% for other components. Price contingencies, also included in the total cost figure, are estimated at 6% to 7.5% per year for equipment and 8% for civil works. 45. The proposed IDA credit of US$87 million would finance 50% of proj- ect costs net of taxes and duties, of the cost of the cattle compounds in East Calcutta, 1/ and of the loans for small-scale entrepreneurs which are to be provided by commercial banks. The balance of the funds for the project would come from GOI and GOWB grants, GOWB loans, market borrowings, commercial banks and bilateral assistance from the Government of the Netherlands. No disbursements would be made against land acquisition costs although they have been included in calculating the total project cost. GOI would make the proceeds of the credit available to GOWB on the standard terms and conditions for development projects. GOWB, in turn, would channel the proceeds of the credit to CMDA. 46. CMDA is responsible for the financing of all works included in the project, even where executed by other agencies. The proceeds of the credit would be channelled to CMDA from GOWB as grants and loans. Project funds would be transferred to CMDA in the form of grants for all non-revenue-producing schemes. Assets commissioned under these schemes would then be transferred 1/ These compounds are being funded with US$1.8 million in bilateral assistance from the Netherlands Government.  - 20 - to operating agencies debt-free. The transfer of funds to CMDA would be in the form of loans (from GOWB) for revenue-producing components of the project only (e.g., area development and water supply). These loans to CMDA would be made at GOWB's standard on-lending rate (currently 6%) and would carry grace periods of approximately three years, timed to coincide with construction periods. On completion, the revenue-producing assets financed by GOWB loans would be transferred by CMDA to operating agencies, which would commence servicing the debt to GOWB directly. 47. Retroactive financing of up to US$5 million is proposed for various project-related expenditures incurred on or after April 1, 1977. This pro- posed retroactive financing would allow uninterrupted progress on the on-going programs the project supports, would encourage letting of further contracts for these schemes in accordance with IDA's procurement procedures, and would facilitate expeditious implementation of new schemes supported by the proposed project. Procurement and Disbursement 48. Contracts for equipment with an estimated value of US$13 million (net of contingencies and taxes) 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, will be granted to local manufacturers in evaluating bids for these contracts. Contracts for equipment with an estimated value of US$8.5 million would be awarded on the basis of local (all-India) competitive bidding. These contracts would involve either small items unlikely to draw bids from foreign suppliers (e.g., hand- carts for refuse collection, bicycles) or equipment unsuitable for inter- national bidding because of high transport costs and/or high risk of damage in transit (e.g., precast concrete latrines, concrete and stoneware pipes). 49. The total value of civil works under the project is estimated at US$85.5 million, excluding contingencies, the cost of land, and in many cases the cost of heavy equipment issued to contractors by CMDA. Few portions of the civil works program are likely to be attractive or suitable for foreign contractors. Implementation of road construction, sewerage, and drainage subprojects in traffic-congested areas must be carefully balanced over time and location to conform to the work schedule of local municipal service agencies. Such subprojects require execution by local departmental crews or closely supervised labor contractors. Therefore, it has been agreed that while contracts for two large road projects (i.e. the Barrackpore-Kalyani Expressway and the Eastern Metropolitan Bypass, total cost US$7.5 million) will be awarded on the basis of international competitive bidding (ICB), the remainder of the civil works subprojects will be awarded on the basis of local (all-India) competitive bidding or executed by force account. A margin of preference of 7.5% will be granted to local contractors on subprojects submitted to ICB. CMDA will "slice and package" civil works contracts into bid packages of not less than US$1.1 million equivalent wherever feasible and will refrain from employing force account labor for civil works subproject components whose cost exceeds US$200,000 equivalent without obtaining prior agreement from IDA. These arrangements are satisfactory to IDA.  - 21 - 50. The proceeds of the proposed credit would be disbursed against the following expenditures: (a) 100% of the foreign cost of imported equipment procured through international competitive bidding; (b) 100% of the ex-factory cost of locally manufactured equipment procured through international competitive bidding; (c) 75% of the local cost of locally manufactured equipment otherwise procured; (d) 75% of expenditures for civil works awarded through international competitive bidding; (e) 70% of expenditures for civil works otherwise awarded; (f) 50% of disbursements on housing loans to eligible households; and (g) 100% of expenditures on technical assistance and training. Cost Recovery 51. The principal revenue-producing components of the proposed proj- ect -- that is, the area development, water supply, and small scale enter- prise schemes -- have been designed with considerable attention to building in mechanisms for cost recovery. In addition, the program of fiscal reform to which local governing authorities have committed themselves involves amending existing municipal service charges and property taxes and improving revenue collection performance in order to increase overall cost recovery for currently provided as well as planned services, and thereby move local authorities in the direction of financial self-sufficiency. Individual cost recovery efforts are outlined below. 52. Cost Recovery in Area Development. Since finance has been one of the critical constraints in the expansion of housing and related urban services, one of the prime objectives of the sites and services components is to demonstrate the possibility of.providing urban services to low income groups without government subsidy. The West Bengal Housing Board (WBHB), which will participate in the operation of East Calcutta once it is developed, will recover the costs of on-site infrastructure and core houses on residential and washermen's plots by selling 99-year leases for the serviced residential and commercial plots and core houses, by charging a monthly rent of approxi- mately Rs 20 in dormitory rental units, and by requiring a monthly payment of approximately Rs 10 from washermen in return for facilities provided. The West Bengal Small Industries Corporation (WBSIC) will recover the costs of on-site infrastructure for industrial lots through the sale of leases for industrial sites and rental charges for space in industrial sheds. The GOWB Animal and Husbandry Directorate will recover the cost of on-site develop- ment in the cattle compounds and milk processing facilities through direct  - 22 - charges for space in the cattle sheds (approximately Rs 20 per month per head of cattle housed) and for milk processing (approximately Rs .15 per liter of milk processed). 1/ Downpayments for the purchase of serviced site leases will range from 5% to 20%; mortgages for residential lots and accompany- ing building loans will be payable over 20 years at approximately 8.5% per annum, while mortgages for commercial and industrial lots will be payable over 10 to 15 years of an annual interest rate of approximately 11.5%. By charging differential rates which take into account lot size and locational advantages in allocating the costs of plot development, the sites and services schemes effect internal cross-subsidies between low income groups and higher income and industrial purchasers, thereby achieving full cost recovery while keeping monthly expenses at an affordable level for all beneficiaries, including those in the lowest income groups. 53. Cost recovery in the Howrah Fish and Pan Market will be achieved by renting or leasing all shops, stalls, kiosks, offices, dormitories, and park- ing areas constructed. Rents will range from about Rs 130 per square meter per year for small shops to about Rs 540 per square meter per year for offices. Rents in the dormitories will be approximately Rs 0.5 per bed/day. Rent reviews will be required every three years and rents will be set at a level which ensures recovery of the full costs of property maintenance, administra- tion, and debt service. 54. Cost Recovery in the Small Scale Enterprise Component. Under this component four commercial banks would lend US$3.5 million to small entre- preneurs at an interest rate not less than 10% and not more than 12% for a maximum term of 10 years. Most lending would likely be in the form of short- term lines of credit which do not carry fixed repayment schedules. While there is a high risk of default in these loans, the commercial banks are be- coming experienced in evaluating and financing small enterprises and maintain an interest rate spread adequate to cover the risk as well as the administra- tive expenses. 55. Cost Recovery in the Water Supply and Sewerage Program. Over the course of the proposed project, the Calcutta Corporation will implement an expanded system for metering water connections, will de-link water supply and sewerage taxes and charges from the consolidated property tax, and with effect from fiscal year 1981/82, will levy taxes and charges for water supply and sewerage services adequate to cover at least 84% of the cost of providing them (Section 3.08, West Bengal Agreement). This represents a considerable improvement over the current situation, in which property tax revenues notion- ally earmarked for water supply and sewerage cover only about 30% of the service cost. In the meanwhile (i.e., from April 1, 1978 - March 31, 1981), the Corporation will cover its annual expenditures on water supply and sewer- age from its general revenues. 1/ In all cases, off-site infrastructure will be financed from property taxes and GOWB subventions, as is customary with all public and private housing schemes in the CMD.  - 23 - 56. Cost Recovery in the Sanitary Latrine Program. The 12,300 sanitary latrines to be installed during the proposed project will be put in place at the request of a property owner following payment of Rs 450, one quarter of the installed cost, by the property owner. The remainder of the cost will be met by GOWB, in accordance with established policy. Experience has indicated that the incentive of a government contribution to the cost of the latrines of roughly this magnitude is necessary to elicit interest in and private funds for the installation of these badly needed facilities. 57. Cost Recovery in the Bustee Improvement Program. Difficulty in tracing hut owners ("thika tenants") and occupants of bustees makes effective direct cost recovery for improvements to the bustees very difficult. Thus the proposed bustee program will be financed by GOWB grants. However, any bustee which is improved will be revalued for property tax purposes. The proposed improvements to the bustees are expected to effect a 40% increase in bustee property value, which will be reflected in higher tax assessments to landowners in bustee areas. 58. Increased Cost Recovery via Fiscal Reform. GOWB views the fiscal problems of Calcutta as pressing, and has implemented or proposed several reforms in urban service rates, tax schedules, and tax collection in an effort to improve cost recovery in urban service systems in the CMD. In addition to the fiscal measures relating to water supply and sewerage des- cribed in para 55, several of the agreed reforms discussed in para 38 are in fact changes in fiscal policy that are aimed specifically at increasing the financial self-sufficiency of local authorities by increasing their capacity to recover the costs of service provision through taxation. More specifically, the revaluation of lands and buildings in the CMD, imposition of revenue collection targets for the CC, and establishment of required revenue/expenditure ratios for local authorities in the CMD are designed to increase the tax yield of the local authorities in order that local revenues might more fully cover the costs of service provision. These and other measures will have the result of ensuring that by fiscal year 1981/82 the CC will finance not less than 84% of its expenditures from local revenues and other authorities will finance not less than 50% of their expenditures. In order to assist local authorities in meeting the new requirements, GOWB, in consultation with IDA, will advise them on methods of improving revenue collection. In order to safeguard the CMD's urban service program, GOWB will ensure that in any event adequate funds will be available to local bodies for the operation and maintenance of new and existing assets. Benefits and Risks 59. Among the key benefits of the proposed project are the following: (a) Fiscal and institutional reforms implemented during the course of the project will establish a financial basis for sustaining an expanded program of public investment and develop the organizational capabilities necessary to plan and execute such an investment program.  - 24 - (b) The program of urban services supported by the project embodies and renders operational the on-going institutional reforms, rehabilitates existing urban service delivery sys- tems, and enhances the value of prior investments in primary infrastructure, particularly those financed by the first IDA credit, by establishing secondary systems to bring the benefits of those investments directly to the target pop- ulation, particularly the urban poor. The project further complements the First Calcutta Urban Development Project by emphasizing the development of operation and maintenance procedures to safeguard the infrastructure financed under the earlier credit and to ensure full and efficient use of that infrastructure. (c) The project would support low-cost service designs which would be replicable in future development efforts. Per capita costs in the service program are very low, as demonstrated by the following examples: 1/ sites and services infrastructure on- and off-site US$125; bustee improvement, US$41; health services, US$1.50. (d) The project would develop new residential, commercial and industrial areas in the CMD and open up additional areas for future development by extending basic trans- port and service linkages. This would be of considerable importance to local authorities' efforts to accommodate growth in the CMD, which adds 200,000 people to its pop- ulation each year. (e) The sites and services component of the project introduces an integrated low-cost approach to providing accommodation, community facilities, and employment opportunities. It is particularly sensitive to the housing needs and preferences of low-income groups. Approximately 45,400 people will be accommodated by this portion of the project, 70% of whom belong to families which earn less than the average family monthly income in Calcutta and 35% of whom fall in the bottom 40% in terms of family income. Approximately 3,800 people will be housed in dormitory rental units where monthly rents fall within the financial capabilities of those as low as the tenth percentile on the income curve. In addition, subrental of bed spaces within these units is expected to accommodate households even below the tenth percentile in income. In the case of all residential lots and units, GOWB has agreed to establish equitable beneficiary selec- tion criteria (Section 3.04(a), West Bengal Agreement) in order to ensure that low income groups benefit to the maximum extent possible. Per capita costs detailed here include design costs and physical contingencies.  - 25 - (f) The bustee improvement component combines physical infra- structure improvements with social and economic support programs to benefit directly 880,000 bustee dwellers. Basic services will be provided to all unserviced bustees in the Calcutta Corporation and Howrah and more than 80% of the unserviced bustees in other parts of the CMD. The component will also generate employment for 4,000 laborers, most of whom will be recruited from the bustee areas. (g) The primary school component will allow an increase in enrollment of about 60,000 in primary schools, largely in slum areas. The accompanying health component will provide comprehensive health care to a target population of 175,000 people, again predominantly bustee dwellers. (h) The small-scale enterprise support program will provide credit and technical assistance to approximately 4,800 small entrepreneurs, and is expected to result in the creation of an estimated 8,500 jobs in the small-scale sector at a capital cost of about US$425 per 15-year job. (i) Finally, construction of the civil works included in the project would generate employment for approximately 40,000 persons for a period of four years. 60. The estimated weighted average of the economic rates of return for the components of the project with quantifiable benefits (which account for 60% of the total project cost) is 20%. Rates of return for individual com- ponents whose economic benefits are measurable are: sites and services -- 18%; fish and pan market development -- 17%; bustee improvement -- 16%; solid waste management -- 27%; traffic and transportation -- rates of return for various subprojects range from 12% to 22%. 61. An integrated urban development project in a city as economically troubled as Calcutta inevitably involves substantial risk. The success of this project is dependent on a number of factors which are not fully predict- able. In a general sense, Calcutta's ability to meet the needs of its inha- bitants ultimately rests on the acceleration and success of on-going efforts to spur the economy of the CMD (see para 28). These programs, in turn, will require the strong and sustained support of both GOI and GOWB, and our eco- nomic work program includes a special study of Calcutta's economic decline to see what national or state-level policies offer the best change of reviving the city's economy. Success also depends on the effective and early imple- mentation of planned fiscal reforms. IDA and GOWB have agreed on the nature and timing of the necessary reforms; delays in implementing them would adversely effect the long-run financial position of local governing bodies. Adequate funds for the execution of the proposed project and the operation and maintenance of the facilities it funds, however, have been guaranteed by GOWB (see para 41). From a more restricted viewpoint, the financial success and replicability of the revenue-generating components of the project itself will require careful observance of the cost recovery measures described above (paras 51-58). IDA, GOI, and GOWB have reached understandings on the on-  - 26 - lending terms for small-scale enterprise loans and on the procedures for establishing downpayments, mortgage charges, and rents in the area development schemes. Adherence to agreed rate structures will be essential to achievement of the project's cost recovery goals. 62. In addition to the question of the CMD's economic and fiscal base, there is some concern over the management capability of CMDA. Progress under the first IDA Credit to Calcutta was slowed by deficiencies in program manage- ment and coordination. In order to overcome these problems, CMDA has under- gone a major reorganization at the top management level, has set up individual units to handle various components of the project currently proposed, and has agreed to install new management information, budgeting, and accounting sys- tems (Section 3.03, Project Agreement). Annual accounts of CMDA would be audited and the auditor's report submitted to IDA each year during the project. Moreover, CMDA's Information and Monitoring Unit is preparing performance mea- sures in order to closely monitor physical and financial progress under the proposed project. Nevertheless, it should be recognized that certain compo- nents of the proposed project (e.g., area development) assign new responsibil- ities to CMDA. Careful planning and sustained support at the federal and state levels and close supervision by IDA will be important to ensure effi- cient program management. 63. Finally, recurrence of the land acquisition problems which ham- pered progress under the first IDA Credit to Calcutta could cause delays in the execution of several components of the second project. Concerted efforts have been made to guard against delays in land acquisition. Over 50% of the land required for the project has already been acquired and the remainder has been notified in accordance with existing land acquisition acts. GOWB has prepared a land acquisition program in consultation with IDA and has stipulated that no work would begin on a given subproject without a realistic plan for acquiring all of the land needed for that subproject. More specifically, GOWB has confirmed that all land required for health centers included in the project and 50% of the land required for ward depots and schools will be acquired by March 31, 1979, and that the remainder of the land required for ward depots and schools will be acquired by March 31, 1980. A considerable amount of the land needed in bustee areas will be freed by an already on-going buffalo relocation scheme. Nevertheless, continued conscientious and timely attention to the task of land acquisition, particularly for the area develop- ment program, will be essential if the prescribed project implementation schedule is to be observed. PART V - LEGAL INSTRUMENTS AND AUTHORITY 64. The draft Development Credit Agreement between India and the Asso- ciation, the draft West Bengal Agreement between the Association and the State of West Bengal, the draft Project Agreement between the Association and CMDA, the Recommendation of the Committee provided for in Article V, Section 1 (d) of the Articles of Agreement, and the text of a draft Resolution approving the proposed development credit are being distributed to the Executive Directors separately.  - 27 - 65. Special conditions of the Project are listed in Section III of Annex III. 66. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association. PART VI - RECOMMENDATION 67. I recommend that the Executive Directors approve the proposed credit. Robert S. McNamara President November 30, 1977   ANNEX I TABLE 3A INDIA - SOCIAL INDICATORS DATA SHEET Page 1 of 4 LAND AREA (THOU KM2- ____ ______ __ INDIA REFERENCE CDUNTRIES (1970) TOTAL 3280.5 MOST RECENT AGRIC. 1780.7 1960 1970 ESTIMATE INDONESIA PHILIPPINES BOAZ IL_ GNP PER CAPITA (USS) 60.0* 100.0* 150.0/a* 130.0* 230.0* 550.0* POPULATION AND VITAL STATISTICS POPULATION (MID-YR MILLION) 434.9 547.6 620.4/a 117.6 3B.9 92.8 POPULATION DENSITY PER SQUARE KM. 133.0 167.0 189.0/a 62.0 123.0 11.0 PER SQ. KM. AGRICULTURAL LAND 252.0 308.0 348.c7T 414.0 375.0 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 (/THOU) 139.0/a .. 130.0 .. 80.0 110.0 LIFE EXPECTANCY AT BIRTH (YRS) 41.7 47.2 49.5 .. 55.6 9.; GROSS REPRODUCTIOIN RATE 3.2 2.9 2.8 3.2 3.3 2.6 POPULATION GROWTH RATE (%) TOTAL 2.0 2.3 2.2 2.0 3.0 2.9 URBAN 2.5/b 3.2 3.1 3.7 /a 4.0 5.0 URBAN POPULATION T% OF TOTAL) 17.9 19.8 20.6 17.5 /b 27.8 56.0 AGE STRUCTURE (PERCENT) 0 TO 14 YEARS 41.0 41.6 40.1 /b 44.0 45.6 42.0 15 TO 64 YEARS 59.9 55.3 56.7 76 53.5 51.6 55.0 65 YEARS AND OVER 3.1 3.1 3.2 75 2.5 2.8 3.0 AGE DEPENDENCY RATIO 0.8 a .aB 0 8 0.9 0.9 0.8 ECONOMIC DEPENDENCY RATIO 1.1/C 1.1/a 1.2 jc . 1.5 1.5 FAMILY PLANNING ACCEPTORS (CUMULATIVE, THOU) 71.0 14565.0 37658.0 259.3 354.0 250.0 USERS (% OF MARRIED WOMEN) .. .. 18.7 *- 2.0 1.8 EMPLOYMENT TOTAL LABOR FORCE (THOUSAND) 175000.0 218000.0 248000.0 /a .. 12400.0 29400.0 LABOR FORCE IN AGRICULTURE (%) 71.0 69.0 68.0 * SS.o /a 40.4 UNEMPLOYED (% OF LABOR FORCE) 1.0/d .- 1.7 .. 7.6 7.5 INCOME DISTRIBUTION % OF PRIVATE INCOME RECOD 8i- HIGHEST 5% OF HOUSEHOLDS 26.7 25.0/b .. .. .. 35.0 /a HIGHEST 20% OF HOUSEHOLDS 51.7 53.17T .. .. .. 62.07W LOWEST 20% OF HOUSEHOLDS 4.1 4.77W .. .. .. 3.0 71 LOWEST 40% OF HOUSEHOLDS 13.6 i3.175 .. .. .. 1.o 75a DISTRIBUTION OF LANo OWNERSHIP % OWNED BY TOP 10% OF OWNERS .. .- .. .. * 45.0 % OWNED BY SMALLEST ' OWNERS .. .. .. .. .5 HEALTH AND NUTRITION POPULATION PER PHYSICIAN 5840.0/e f4890.0 4220.0 26370.0 . 1910.0 POPULATION PER NURSING PERSON 5310 . O7g220. O/c 36SO.0/d 7630.0/C . 3220.0/b POPULATION PER HOSPITAL sED 2590.07f 161O. 0 . 1640.O-- ss0.0 260.0 PER CAPITA SUPPLY OF - CALORIES (% OF REQUIREMENTS) 95.0 92.0 89.0/e 91.0 93.0 109.0 PROTEIN (GRAMS PER DAY) 55.0 53.0 52.0 75 43.0 45.0 64.0 -OF WHICH ANIMAL AND PULSE 19.0 16.0 .. 14.0 22.0 39.0 DEATH RATE (/THOU) AGES 1-4 44.0 .. .. .. 6.6 EDUCATlON ADJUSTED ENROLLMENT RATIO PRIMARY SCHOOL 38.0 65.0 79.0/b 6B.0 13.0 87.0 SECONDARY SCHOOL 9.0 .. 28.0 7 12.0 - 49.0 YEARS OF SCHOOLING PROVIDED (FIRST AND SECOND LEVEL) 12.0 12.0 11.0 12.0 10.0 11.0 VOCATIONAL ENROLLMENT (% OF SECONDARY) 8.0 6-0/d *- 29.0 6.0/b 17.0 ADULT LITERACY RATE (%) 24.0 33.0u 36.D/b.f 59.0 .. 64.0 HOUSING PERSONS PER ROOM (URBAN) 2.6 .- 2.6 8* 2.1 1.0 OCCUPIED DWELLINGS 'WIT'OUT PIPED WATER (%x *- *- *- *- 76.0 73.0/C ACCESS TO ELECTRICITY (% OF ALL DWELLINGS) .. .. .. .. 23.0 48.0 RURAL DWELLINGS CONNECTED TO ELECTR:CITY (%) .. .. .. .. 7.0 8.0 CONSUMPTION RADIO RECEIVERS (PER THOU POP) 5.0 21.0 24.0 114.0 45.0 60.0 PASSENGER CARS (PER THOU POP) 0.7 1.0 1.0 2.0 6.0 25.0 ELECTRICITY (KWH/YR PER CAP) 46.0 114.0 143.0 20.0 235.0 491.0 NEWSPRINT (KG/YR PER CAP) 0.2 0.3 0.3 0.3 2.0 2.7