India - Gujarat Fisheries Project

1111 {> ?! Sfi\V7 Document of The World Bank FOIR OIF1FCXAL USE ONLY Report No. P-1974-IN REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT AND OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN AND A PROPOSED CREDIT TO THE GOVERNMENT OF INDIA FOR A GUJARAT FISHERIES PROJECT March 21, 1977 I This dcumene hns n reskiced drsirlboAonm und mny be used by recipiemts ouny n thie perfonmnce Of their o#Mcgd duties. Its conentems may nea oftberwise be disclsed wihiout World BanJk flutobrintfon.  CURRENCY EQUIVALENTS (as of October 20, 1976) US$1.00 = Rs 9000 Rs 1.00 = US$0.11 Rs 1 million US$111,111 (Since September 24, 1975, the Rupee has been officially valued relative to a "basket" of currencies. As these currencies are now floating, the US Dollar/Rupee exchange rate is subject to change. Conversions in the Appraisal Report were made at US$1 to Rs 9.00). FISCAL YEAR April 1 - March 31 ABBREVIATIONS ARDC = Agricultural Refinance and Development Corporation CCC = Central Coordinating Committee FPCS Fishermen's Primary Cooperative Societies FTD = Fisheries Terminal Division GFCCA = Gujarat Fisheries Central Cooperative Association Ltd. GOG = Government of Gujarat GOI Government of India GPD = Gujarat Ports Directorate GSCB = Gujarat State Cooperative Bank ICB International Competitive Bidding PSC = Project Supervision Committee  FOR OFFICIAL USE ONLY REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN AND A PROPOSED CREDIT TO THE GOVERNMENT OF INDIA FOR THE GUJARAT FISHERIES PROJECT 1. I submit the following report and recommendation on a proposed loan and a proposed development credit to the Government of India (GOI) in amounts equivalent to US$14 million and US$4 million, respectively, to help finance a project for increasing marine fishery yields and consequently the incomes of traditional and commercial fishermen in Gujarat. The loan would be on standard Third Window Terms, with the first repayment falling due on January 15, 1983, and the final maturity on January 15, 2001. The develop- ment credit would be on standard IDA terms. US$11.9 million from the loan and credit would be channelled by GOI to the Government of Gujarat (GOG) in accordance with GOI's standard terms and arrangements for financing state development projects. US$4.7 million from the loan and credit would be made available by GOI to the Agricultural Refinance and Development Corporation (ARDC) repayable to GOI over nine years at 6.75% per annum. ARDC would make these funds available to the Gujarat State Cooperative Bank (GSCB) and com- mercial banks for financing investments in mechanized fishing vessels and shore installations, and to Fishermen's Primary Cooperative Societies (FPCS) for financing the purchase of canoes, outboard motors and fishing gear. Relending terms and arrangements are given in Annex III. US$1.4 million from the loan and credit would be used by GOI to cover the cost of technical assistance. PART I - THE ECONOMY-/ 2. An economic report, "Economic Situation and Prospects of India" (1073-IN dated March 29, 1976), was distributed to the Executive Directors on April 2, 1976. 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 600 million and over 60 languages. The country's poverty and inadequate domestic savings, together with a net transfer of external resources averaging over the past five years only about US$1.20 per person per annum, have imposed sharp limitations on the rate of growth. Account must be taken, also, of the uncertainties imposed by the erratic availability of water. A bad monsoon, which is likely to occur about two years out of every five, has a pervasive influence over the entire economy and can wipe out the results of years of efforts. Thus, the annual growth of national income over the last five years (1971/72 - 1975/76), which included two consecutive mon- soon failures, has averaged only 2% per annum, less than the rate of popula- tion increase. 1/ Parts I and II of this report are substantially the same as Parts I and II of the President's Report for the Kerala Agricultural Development (Report No. P-1953-IN), dated February 3, 1977. This document ha a restricted distribution and may be used by recipients only in the performance of their omcial duties. IU contents may not otherwise be disclosed without World Bank authorization.  - 2 - 4. Since Independence, progress has been impressive on many fronts, but disappointing on others, and generally has fallen short of India's mas- sive needs. 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 struc- tural change have been rapid and compare favorably with developments in many other parts of the world, but in other regions there has been stagnation and possibly even decline. Although national income has increased in most years, there has been in general little impact upon the living standards of the vast masses of the urban and rural population. In recent years, the Government has initiated a variety of programs specifically directed toward helping the lower income strata, which - conservatively measured - consist of some 200 million people with incomes of less than US$60 per head per year. 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 industry has increased only slowly and, since the late 1960s, has remained approximately constant at about 23%. There has, however, been a shift in the composition of industrial production, with consumer, intermediate, and capital goods now contributing about one third each, compared with an overwhelming preponderance of consumer goods 25 years ago. Recent Trends 6. India entered 1975/76 having been through one of the most difficult periods since Independence. Progress in dealing with long-term development problems had been limited by poor crops, the dramatic shifts against India in the terms of trade, and inflation. Adjustments to these immediate difficul- ties thus became the principal preoccupation in economic management. However, with the support of favorable weather and additional foreign assistance, it now appears that India has successfully weathered the problems of the recent past; once again there is the basis for an upturn in the growth rate of the economy. 7. Most important among the favorable factors have been a bumper har- vest which followed years of poor or modest agricultural output. Foodgrain production in 1975/76, estimated at around 117 million tons, exceeded the previous record of 1970/71 by 8%. Oilseeds, sugarcane and cotton also reached new production peaks and provided ample supplies for the agro-industries. In 1976/77 a good harvest is again expected of at least 110 million tons of foodgrains. Secondly, deficiencies in the supply of basic commodities and of infrastructural inputs such as energy and transport, which had been prevalent in the past, have been eased. Electricity generation and domestic production of coal, oil, cement and steel all increased by over 10% during 1975/76 and by a further 15% in the first eight months of 1976/77. Finally, the increased supply of agricultural and industrial products and of services, together with the demand restraint imposed by the Government since mid-1974, put a virtual  stop to inflation. From April 1975 to March 1976 the Wholesale Price Index fell by 8.1%. Although from April to September 1976 the Index rose by 11.0%, it was still 5% lower in September 1976 than in September 1974. 8. On the balance of payments front there have been a number of en- couraging developments. Firstly, the rapid build-up of foodgrain stocks to a level of 17 million tons by December 1976 provides a buffer against the impact of a future crop failure on the balance of payments and has reduced current import requirements. Secondly, despite generally unfavorable world trading conditions, export earnings rose by 9% in 1975/76, and seem likely to rise by more than this in 1976/77. Thirdly, the value of petroleum imports was stabilized in 1975/76 (although there is likely to be a rise in 1976/77), and steel imports have been progressively reduced in 1975/76 and 1976/77 as a result of increased domestic production. Finally, increased production and lowered world prices have reduced fertilizer import values quite sharply. As a result of these factors, imports rose only 5% in value in 1975/76 and the trade deficit fell by almost $100 million. Development so far in 1976/77 suggest a more dramatic improvement in the trade balance this year. More- over, since net aid rose 49% in 1975/76 and India received substantial in- flows of private remittances during the past one and a half years, reserves rose by almost $800 million in 1975/76, and are continuing to rise at a com- parable rate in 1976/77. These reserves give India added flexibility in adjusting to a higher rate of growth in the future. Development Prospects 9. While many of the most acute problems were eased during 1975/76, longer-term constraints to growth remain. Many of these have existed for some time, but their importance had been temporarily overshadowed by the -e overwhelming limitations imposed by supply shortages and balance of payment-s problems. One such constraint is the deficiency of demand for a large seg- ment of the manufacturing industry. Consequently, in the midst of adequate supplies during 1975/76, the use of manufacturing capacity - especially for consumer durables - remained low. In the short and medium term, the two most promising ways of stimulating demand are to boost public investment and ex- pand exports. Both avenues are currently being pursued by the Government. During 1975/76, real Plan outlay rose by 18-20%, after having fallen during each of the previous two years. The 1976/77 Budget proposed a further in- crease of 16% in real terms and introduced new measures to stimulate invest- ment in the private sector. Investment priorities remain the same as last year, namely agricultural development and increased production of critical industrial inputs, such as power, coal, oil, and iron and steel. The Budget also stresses the importance of exports as an essential condition for sus- tained stability in the balance of payments. 10. In agriculture, the basic problem remains that, despite the record foodgrain crop in 1975/76, the long-term growth rate of foodgrain production in India has been unacceptably low, at about 2.3% per annum over the last 15 years. This is about the same as the rate of population increase. Starting from a situation of deficit, this has meant that only in good years has there been a significant margin of production to cater to any per capita growth in consumption, and even in normal years it has been necessary to rely on stocks  or imports to meet any growth in demand. With a major effort to expand the irrigated area and provide complementary inputs, the average growth rate of foodgrain production could be substantially increased. This is essential, not only because of the necessity to meet food requirements without unmanage- able consequences for the ba:Lance of payments but also because of the strong influence of agriculture on the levels of activity in other sectors of the economy. Even with a higher growth rate of foodgrain production, imports will still be required. However, in relation to India's total consumption of foodgrains, the dependence on imports has been and will remain small. In the past, domestic production has accounted for almost 100% of supplies in good weather years and about 90% when harvests were poor. 11. The energy sector in India was characterized by shortages even before the international oil crisis developed. The dramatic hike in oil prices, coinciding as it did with the accentuation of electric power shortages - caused in part by low hydroelectric generation due to poor monsoons - led to an acceleration of measures to improve performance of existing facilities and to a much higher priority for investments in the energy sector. The effects of these measures, aided by the good monsoon, are now starting to be felt. Coal production has increased by 10% or more in each of the last two years, and, partly as a result of this, power shortages and restrictions have been greatly reduced. The medium-term prospects for oil and natural gas have improved with the delineation of the offshore Bombay High field. Crude production from this field is expected to be 1 million tons in 1976/77 and to reach 6 million tons by the end of the Plan period. On this basis, petroleum imports are projected to start declining in 1978/79, as increased crude production and expanded refinery output more than offset increases in demand. 12. In the past, export growth was affected in varying degrees by in- adequate profitability, lack of access to imported inputs, poor quality, instability of the policy environment and vulnerability to ad hoc decisions. In addition, for agricultural commodities export taxes were significant. For some homogeneous commodities, such as iron ore and tea, inadequate sup- plies or limited world demand have been important constraints. In recent years, mainly because of the large trade deficit, the Government's emphasis on export promotion has intensified. As a result, although the fundamental orientation of India's industrial and trade policy and the specific instru- ments of the export regime have, by and large, remained the same, a signi- ficant shift in emphasis and in the way these policies are operated has oc- curred. These are likely to lead to a better utilization of current export potential and reflect a willingness to make policy adjustments, when neces- sary, to expand exports. 13. While it is difficult to assess the impact of the new measures in an area where policy is already very complex, some improvement has already taken place and further improvement in medium-term performance seems likely. An annual real export growth rate of over 7% should be feasible, compared to an average of 5% over the last five years. However, to achieve a higher export growth over the long run, more far-reaching policy measures will be required, including the introduction of a more uniform and more stable sys- tem of export incentives. Even so, the export drive might be impeded by controls in some developed markets.  14. India's balance of payments problems should be manageable over the next few years, even with the repayment obligations resulting from re- cent short-term OPEC and IMF borrowings. The worldwide inflation has bene- fitted India by reducing the proportion of export earnings that have to be devoted to debt service. India's debt service ratio has come down from 31% in 1970/71 to 17% in 1975/76. Provided the real growth of exports remains at about 7% per annum, the debt service ratio is unlikely to rise much above 20% in the foreseeable future. On the import side, given the adequate level of stocks on hand at the end of 1975/76 and assuming normal weather condi- tions, annual foodgrain imports could be kept to 5-6 million tons during the next three years. Within the general category of non-food imports, India has substantial medium-term import substitution opportunities for three major items -- petroleum, fertilizer and steel -- which constituted more than 60% of imports in 1975/76. If the medium-term targets for production in these areas are achieved, the total expenditure on these three import items in 1978/79 need not be any higher than in 1975/76 and could quite conceiva- bly be less. Provided the Government is willing to liberalize imports and donors continue to respond to India's needs, the easing in the external payments situation presents an opportunity to raise the level of investment (complemented by larger imports of capital goods, components, and raw materials) and, consequently, reach a more satisfactory level of long-term growth. PART II - BANK GROUP OPERATIONS IN INDIA 15. Since 1949, the Bank Group has made 49 loans and 80 development credits to India totalling US$1,751 million and US$4,112 million (both net of cancellation), respectively. Of these amounts, US$799 million has been repaid, and US$1,606 million was still undisbursed as of January 31, 1977. Annex II contains a summary statement of disbursements as of January 31, 1977, and notes on the execution of ongoing projects. 16. Since 1957, IFC has made 14 commitments in India totalling US$58.4 million, of which US$11.9 million has been repaid, US$7.6 million sold and US$6.9 million cancelled. Of the balance of US$32.0 million, US$25.5 mil- lion represents loans and US$6.5 million equity. A summary statement of IFC operations as of January 31, 1977 is also included in Annex II (page 2). 17. 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.  - 6 - Family planning, education, water supply development, and urban investments have also received Bank Group support in recent years. 18. The direction of assistance under the Bank/IDA program has been consistent with India's needs and the Government's priorities. The emphasis of the program on agriculture, industry, power, urban development and water supply remains highly relevant. Projects designed to foster agricultural production through the provision of essential inputs such as credit for on-farm investments, command area development of existing irrigation schemes, intensification and streamlining of extension systems, and seed production form an important aspect of the Bank Group's program for the next several years. Special emphasis will be given to projects benefitting small farmers. Projects supporting water supply, sewerage, and urban development also form an integral part of the Bank's lending strategy to India for the next several years. Lending in support of infrastructure and industrial investments will focus on agriculture-, export- and energy-related projects. 19. The need for a substantial net transfer of external resources in support of India's economy has 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, stimulate investment and accelerate economic growth, remains. Bank Group lending for critical industrial raw materials and components continues to be an important element within the overall program of assistance. As in the past, Bank Group assistance for projects in India should include, as 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. 20. 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. India is also eligible for Bank lending on Third Window terms on the basis of the fol- lowing criteria: - per capita income as GNP in 1974 was US$140 per capita; - the Government's development effort has been commendable and a significant part of this effort has been directed towards the agricultural sector thereby assisting to alle- viate rural poverty;  - 7 - - India is creditworthy for a limited amount of Bank lending; - India has a continuing need for external financial assistance. However, it has no special access to new sources of concessionary finance and cannot prudently afford to borrow substantial sums on com- mercial terms. As of January 31, 1977, outstanding loans to India totaled US$976 million, of which US$502 million remained to be disbursed, leaving a net amount outstand- ing of US$474 million. 21. 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 - MARINE FISHERIES IN INDIA AND GUJARAT Marine Fisheries in India 22. India is one of the most protein-deficient areas in the world. Consequently, GOI is placing increasing emphasis on the development of fish- eries which can provide the cheapest source of animal protein. Apart from supplementing local diets, fishery development is also important for exports. India is presently the world's largest exporter of shrimps, which account for the bulk of India's marine exports and which in 1975 contributed US$140 mil- lion or about 3.5% of India's total export earnings. 23. India's marine fishery industry is heavily concentrated on the west coast with Kerala, Maharashtra, Gujarat and Karnataka accounting for over 70% of total output. Tamil Nadu, Andhra Pradesh and West Bengal on the east coast account for most of the balance. The Indian Ocean is one of the least exploited fishery resources in the world. FAO and Indian fishery experts con- servatively estimate the potential of the Indian Ocean at 14 million tons per annum as compared with Pacific and Atlantic Ocean fish yields of about 33 and 23 million tons per annum, respectively. Yet in 1975, India's marine fish catch was only about 1.6 million tons. Under the revised Fifth Five-Year Plan (1974-1979), GOI's target for 1979 is a catch of 2 million tons. The long-term perspective target of the Indian National Commission on Agriculture (1976) is an annual catch of 3.5 million tons by the year 2000.  - 8 - 24. India's marine fishery industry is composed of two distinct sectors - the traditional and the commercial. The former provides employment for about 1.3 million of India's poorest income earners and accounts for about 60% of the total catch. These fishermen use traditional marine fishing craft including dugout canoes, plank boats and catamarans which operate primarily from unprotected beaches where their catch is sold to fish traders who also act as money lenders. This marketing arrangement is not efficient and results in the fishermen receiving low prices, and thus low earnings, which may be further adversely affected by bad weather conditions. These conditions usually result in the fishermen being heavily indebted. Fishing villages are often isolated and inadequately provided with potable water, access roads, primary schools, medical facilities and communications. Hitherto, moderniza- tion in this sector has been restricted to the use of nylon nets, synthetic fibre fishing gear and some out-board motors. Because of social considera- tions and because the sector remains the larger part of the industry, GOI plans to accelerate its modernization through infrastructure improvements as well as the provision of credit to fishermen to promote fleet expansion. 25. In the commercial fishing sector, which presently accounts for 40% of the total catch, the most conspicuous recent development has been the ex- pansion of the fleet of small mechanized vessels, which has increased from about 3,000 to 11,000 over the past decade. These vessels are 10-15 meters in length, are generally constructed of wood, and carry crews of 4 to 8 on daily fishing trips; they are equipped with inboard engines of up to 90 h.p. and operate as trawlers when shrimp is plentiful, and as gillnetters when good quality fish are abundant. Present facilities are generally inadequate and, therefore, GOI plans to expand fishing harbors and shore facilities for these vessels as well as to provide credit to promote expansion and modern- ization of the fishing fleet. Marine Fisheries in Gujarat 2 26. Gujarat commands about 2100,000 km , or about 25% of the Indian continential shelf of 415,000 km , but harvests only about 190,000 tons of marine products, or approximately 11% of the national catch. The Department of Fisheries which is responsible for fishery development in the State, has been active in stimulating mechanization, providing infrastructure and credit, conducting research, exploratory fishing and training. Under the guidance of the Department of Fisheries, the Gujarat Fisheries Central Cooperative Asso- ciation Ltd. (GFCCA) is engaged in activities which include catching, market- ing, transporting, processing, storing, freezing and exporting of fish; manu- facturing fishing gear; building vessels, and promoting inland fisheries. The Gujarat Ports Directorate (GPD) also assists the fishing industry through the construction of harbor works, shore facilities and the supervision and maintenance of port services. 27. Between 1965 and 1975, the number of mechanized fishing vessels operating off the coast of Gujarat increased from about 400 to 1,300 and is continuing to increase. The vessels used in Gujarat are primarily 14.8 meter  - 9 - trawler-cum-gillnetters. The average annual catch of these vessels is approx- imately 120 tons of such principal commercial varieties as Bombay duck, dhoma, clupeids and shark. Fish are landed at four partially protected fishing harbors - Veraval, Mangrol, Porbandar and Okha, as well as 15 other landing points. Traditional fishing is carried on in about 200 villages which have an estimated population of about 200,000. The villages are comparatively isolated and lack basic facilities. The constraints to national fishery development described earlier are reflected in the fishery sector of Gujarat. Mangrol and Veraval - Marine Works 28. All the fishery harbors in Gujarat need to be upgraded. However, the Government of Gujarat (GOG) has given priority to Mangrol and Veraval where the immediate needs are most pressing and where there is also considerable potential. In Mangrol the harbor is too small to accommodate the present fleet and provides insufficient depth for vessels larger than 13 meters. In addition, as there are no landing quays, fish are landed on the breakwater which becomes highly congested and there are no facilities for handling fish hygienically. Moreover, the harbor is not properly protected from heavy seas. 29. Veraval is both a fishing harbor and a commercial port. At low tide the existing trawler quay cannot be used by mechanized fishing vessels so that they have to use the commercial port facilities thus causing conges- tion. In any case, landing space is insufficient to cope with the catch of the present fleet of 400 vessels and as shore facilities are inadequate, mar- keting is disorganized and unhygienic. The port entrance is not only shallow but provides insufficient protection to the craft in the harbor from monsoon winds. Mangrol and Veraval - Shore Facilities 30. Shore facilities in both ports are provided by GFCCA and the present inadequacies are especially acute in storage and refrigeration. In Mangrol the availability of block ice is about half of current demand while storage facilities are almost non-existent. As a result fish have to be transported in ice to Veraval (50 km away) or even further to Bombay for processing. A private commercial undertaking is developing a complex comprising ice and freezing plants as well as frozen storage. But the capacities of these units will not be adequate to handle the catch of the expanded fleet proposed under this project. The situation in Veraval is not much better as supplementary supplies of ice have to be brought from Rajkot (150 km away) in peak months. GFCCA is installing a new ice plant with storage, financed through the Agri- cultural Refinance and Development Corporation (ARDC), which is expected to go on stream by July 1977. However, capacity will only be adequate for 50% of requirements. Unlike Mangrol, Veraval will have adequate storage when a fish storage project being developed by a private commercial venture and financed by GFCCA and ARDC is completed towards the end of 1977.  - 10 - PART IV - THE PROJECT 31. The project was prepared by GOG with the assistance of FAO/IBRD Cooperative Program Missions which visited India during November/December 1974 and at various times in the period July to December 1975. ARDC participated in the preparation of the traditional fisherman component of the project. It was appraised by IDA in May 1976. The Appraisal Report No. 1326 (b), dated March 16, 1977, is being circulated separately to the Executive Directors. Negotiations were held in Washington in February 1977. The Borrower was represented by Messrs. D. K. Chatterjee, S. P. Balasubramanyam and H. K. Khan. A loan, credit and project summary is attached as Annex III and a supplementary data sheet is attached as Annex IV. Project Description 32. Hitherto, the efforts of GOI and the GOG to promote fishery develop- ment have been concentrated on extending the use of mechanized fishing vessels and modernizing traditional fishing craft and gear. This drive has, in general, been successful. In the case of Gujarat, the resulting growth in fish catching capacity has placed great strain on existing fishing harbors and on marketing channels and facilities. The proposed project has been designed to alleviate these problems in Gujarat by modernizing and expanding the harbors and shore facilities at Mangrol and Veraval. It would complement these efforts by fi- nancing further expansion in mechanized fishing vessels, by modernizing traditional fishing craft and by improving the physical infrastructure in selected fishing villages. The principal components of the project are: - improvement of the fishing harbors at Mangrol and Veraval to permit more mechanized fishing vessels to use these facilities and to provide better protection against adverse weather; - improvement of shore facilities and services at Mangrol and Veraval to provide suitable support for the existing fleet and expansions which are expected to occur as a consequence of the project; - provision of credit to cooperatives and entrepreneurs to establish fish processing, freezing, and ice plants at the two harbors; - construction and equipping of 270 mechanized fishing vessels and their sale on credit to fishermen and cooperatives; - assistance to traditional fishermen by the provision of, (i) credit for 350 fishing canoes equipped with outboard motors and gear, and 1,400 outboard motors; (ii) infra- structure in eight fishing villages and (iii) improvements in the fish marketing system of these villages; - provision of two fish net manufacturing machines for GFCCA; and  - technical assistance for two test fishing operations, a marketing study, and project implementation. Project Implementation 33. The project, with the exception of the test fishing operations and marketing study which would be the responsibility of GOI, would be carried out by GOG with refinance for credit operations being provided by ARDC. Im- plementation would require considerable coordination. At State level, coor- dination would be effected through a Project Supervision Committee (PSC), chaired by the Secretary of Agriculture, Cooperatives, Forests and Fisheries. The establishment of this committee would be a condition of credit effective- ness (see Section 5.01(d) of the Credit Agreement). The Commissioner of Fisheries would act as its Secretary and full-time coordinator and be respon- sible for organization and coordination of project implementation by appro- priate Gujarat State agencies, including GFCCA, GPD and the Fisheries Terminal Division (FTD) which would be set up as a separate Division under the project in the Office of the Commissioner of Fisheries of Gujarat (see Section 2.12(a) of the Project Agreement). At the GOI level, a Central Coordinating Committee, chaired by the Joint Secretary of Fisheries, would be established as a condi- tion of credit effectiveness. This Committee would be responsible for overall policy guidance (see Sections 5.01(e) and 3.02 (a) of the Credit Agreement). 34. Under the project GFCCA would own and operate most of the shore facilities, build the 14.8 meter trawlers, expand its fish net manufacturing capacity, supply canoes for the traditional fishermen component, 'assist in establishing fishermen's primary cooperative societies and operate an insur- ance scheme for fishing vessels. GFCCA, which is run by a 19-member Board chaired by the Commissioner of Fisheries, has a membership of 60 fisheries cooperatives. Since its establishment in 1956, GFCCA has been engaged in numerous activities connected with the fishing industry, including boat building, fish purchase and sales, marine engine and pump sales, and the operation of fishmeal, quick freezing, canning and ice plants. Although GFCCA has been able to show a small profit from 1971/72 onwards, it suffers from management and staffing problems, lack of budgetary and inventory con- trol, and inadequate forward planning. Strengthening its organization and improving its financial management is essential to enable GFCCA to carry out its responsibilities under the project. A satisfactory organizational and staffing program has been prepared by GOG in consultation with ARDC on the basis of proposals made by a firm of Indian management consultants and is currently being implemented (see Section 2.11 of the Project Agreement). The proposed project would be carried out over five years and further details of the principal components and their implementation are set out below. 35. Fishing Harbors. At Mangrol, an additional 250 meters of breakwater would be constructed and dredging would be carried out to form a tidal basin for landing fish. On completion, the harbor would be able to handle about 110 mechanized fishing vessels while during emergencies, a fleet of 165 mechanized fishing vessels could be accommodated in the sheltered berths. Additionally, a protected beach would be formed for use by traditional craft and 2 hectares  - 12 - of land cleared and leveled as a fisheries terminal where supporting services and facilities would be located. At Veraval the existing breakwater would be extended in addition to the construction of a lee breakwater, landing and berthing quays, and open berthing jetties. The entire harbor would be dredged as would the entrance channel. On completion, the harbor would accommodate 700 mechanized fishing vessels, and would remain open to vessels throughout the year. The entrance channel dredging would permit use of the harbor in the future by larger vessels up to 23 m. Improvements would also include construc- tion of a slipway (to accommodate the equivalent of sixty 15 meter vessels), and development of 7.5 hectares as a fisheries terminal where shore facilities and services would be provided. 36. GPD would be responsible for effecting the foregoing harbor improvements and would use as consultants the Pre-Investment Survey of Fishing Harbors, a unit established in the GOI Ministry of Agriculture and Irrigation with UNDP assistance, which has designed the proposed harbor improvements at Veraval and Mangrol. In addition to the construction of harbor improvements, GPD would continue to manage the harbor services at Mangrol and Veraval. GPD is a State organization with adequate port construction and operation exper- tise to enable it to handle this work. 37. Shore Facilities and Services. Under the project, GOG and its departments would be responsible for supervising construction of a number of facilities at the two terminals. At Mangrol, GOG would provide and operate on its own behalf, roads and drainage facilities, offices, an improved water supply system and, a 66 Kv electricity supply line. At Veraval the facilities to be provided and operated by GOG would include offices, roads and drainage, security fencing of the development area, a water system and a 40 MW power supply. Sites for fuel and oil stations would also be provided at both harbors. 38. The Fisheries Terminal Division (FTD) to be established within the Office of the Commissioner of Fisheries would manage the service facilities at Mangrol and Veraval, other than the utility services. FTD would take over all GPD buildings at these sites as well as the new buildings to be constructed under the project, which would provide offices for FTD, auction halls, canteens, gear sheds and workshops. FTD would run the auction halls itself, but would lease the other buildings to entrepreneurs wishing to provide services to fishermen. FTD would operate as a financially autonomous unit and would be required to earn sufficient revenue to cover all operating expenditure, interest and depreciation (see Section 3.03 of the Project Agreement). FTD would be required to prepare its accounts according to com- mercial practice and have them audited by independent auditors. In order to fulfill the critical role assigned to it under the project, FTD would be provided with the services of a consultant for a period of two years to help in setting up its own organization and in establishing an efficient fish auc- tion system at the terminals (see Section 2.02(a) of the Project Agreement). 39. Fish Processing, Freezing, and Ice Plants. Credit would be provided for construction of plants at the Mangrol and Veraval fisheries terminals to be owned and operated by GFCCA, in the majority of cases, and private entrepre- neurs. Sites for these plants would be leased to entrepreneurs by FTD. For  - 13 - Mangrol, provision has been made for a 75 ton/day block ice plant with 200 tons storage; a 10 ton/day freezing plant for shrimp and other fish; and 100 ton storage for iced fish. At Veraval the program planned would comprise two 200 ton/day block ice plants each with 400 ton storage; an 18 ton/day freezing plant with 500 tons storage for frozen fish, 150 tons storage for iced fish; and a fish meal plant with a processing capacity of 75 tons a day. The con- struction of the freezing complexes for Mangrol and Veraval will be in accord- ance with designs to be reviewed by ARDC (see Section 2.07(a) of the Project Agreement). Credit would be provided by the Gujarat State Cooperative Bank and commercial banks, refinanced by ARDC. 40. Construction of Mechanized Fishing Vessels. Under the project, finance would be provided for 270 14.8 meter mechanized fishing vessels (70 to operate from Mangrol and 200 from Veraval) suitable for trawling and gill-netting. These would be fully equipped with 90 hp air or water cooled inboard engines (according to owner preference) and fishing gear; they would be operated by a crew of six and would have a carrying capacity of 4 tons of fish. They would be constructed by GFCCA at Veraval in Gujarat. The demand for these vessels is substantial as evidenced by the waiting lists. 41. Traditional Fishermen Component. Fishermen assisted under this com- ponent would be located in fishing villages identified in the ARDC Banking Plan situated between Mangrol and Veraval; approximately 38 villages are ex- pected to be involved, for 8 of which infrastructure will be provided. They would be provided with finance for 350 new 9 m canoes equipped with 8 hp outboard motors and fishing gear, of which 344 would be dugout canoes made from a single log of wood designed for a crew of three, and six would be fiberglass canoes which would be used to test the suitability of this type of craft for Gujarat conditions. 1,400 outboard motors would be supplied on credit to fishermen: 475 for existing non-motorized canoes, 575 as replace- ments, and 350 for the new canoes to be constructed under the project. The demand for modernization and expansion is evidenced by the response to earlier schemes for modernizing canoes. To improve the marketing arrangements in eight of the villages, the project would provide four trucks for use by GFCCA for the delivery of ice and spare parts and to collect fish from the eight villages. A shed would be provided by GOG at each village to be used as a market and for the temporary storage of fish, and about 33.5 km of asphalted roads would be constructed by GOG to provide better access to the village fish markets. Village water supply systems would be constructed by GOG in five of these villages which are now without them. 42. Net Manufacturing Machines. Two net manufacturing machines would be provided for GFCCA, which is one of India's leading net manufacturers. GFCCA's net manufacturing factory, which is now operating six days per week and three shifts per day, needs these machines to meet the increasing demand for nets. 43. Credit Arrangements. The Gujarat State Cooperative Bank (GSCB) heads the short- and medium-term cooperative credit structure in the State. Along with other commercial banks it would provide credit to project bene- ficiaries. GSCB membership consists of Central Cooperative Banks at the  - 14 - district level and Fishermen's Primary Cooperative Societies (FPCS) at the village level. It is a financially sound institution with a good debt recovery record and is fully qualified to undertake its project role. 44. ARDC would be responsible for refinancing loans made by GSCB and commercial banks for mechanized fishing vessels and shore installations, and to Fishermen's Primary Cooperative Societies for canoes, outboard motors and fishing gear. It would also assist participating banks and prospective bor- rowers to prepare and evaluate investment plans and advise GOG on the estab- lishment and management of FPCS which would play a significant role in the traditional fisheries component. As a condition of disbursement ARDC would prepare a Banking Plan specifying the terms, conditions and procedures for lending by commercial banks and the GSCB and would identify the villages to be covered and the criteria to be applied (see Section 2.08 of the ARDC Agreement). 45. FPCS would be provided with loans for canoes and outboard motors by participating commercial banks. FPCS would in turn enter into hire-purchase arrangements with final beneficiaries. Ownership of items financed through FPCS would be transferred to beneficiaries on final loan repayment. These societies would be run by and for the traditional fishermen. 46. Technical Assistance. Technical assistance amounting to US$2.9 million, excluding contingencies would be provided to GOI and GOG under the project. The technical assistance provided with these funds includes 50 man- months of consultancy services at an average monthly cost of US$8,000 including subsistence and travel. This assistance would cover the cost of specialized engineering assistance required by GPD to complete its part of the project and would comprise a rock excavation specialist and a harbor engineer. Technical assistance would also include a management specialist to assist GOG in estab- lishing management systems for its fisheries terminals and organizing fish auctions at Mangrol and Veraval terminals. In addition, two test fishing operations would be financed, one off the coast of Gujarat and the other off Andhra Pradesh, for resource data collection. The tests would be carried out by GOI to determine improved methods of harvesting for which the services of a fisheries resource management specialist would be required (see Section 3.03(a) of the Credit Agreement). The project also provides for a study covering fresh and dried fish marketing throughout India to be undertaken by the Indian Institute of Management, Ahmadabad, or similar institution. The study is intended to identify bottlenecks in marketing and develop solutions for over- coming them, as well as determine the future demand for fish for domestic consumption and for export. Particular attention would be paid to fish marketing in Bombay. Terms of reference for the study would be prepared by the Ministry of Agriculture, GOI, in consultation with the Bank and IDA (see Section 3.02(c) of the Credit Agreement). Monitoring, Evaluation and Reporting 47. A monitoring, evaluation and reporting system has been established in the Gujarat Department of Agriculture, Cooperatives, Forests and Fisheries  - 15 - to provide information on project implementation and achievements, and to pro- vide information for planning of future projects. The system comprises sur- veys, covering vessel production, fisherman household incomes and effective- ness of credit arrangements. The terms of reference for these surveys would be prepared by GOG and furnished to the Bank and the Association for approval by September 1977 (see Section 2.07 (b) of the Project Agreement). The Statistical Unit of the GOG Department of fisheries would also be strengthened to assist with the survey (see Section 2.09 of the Project Agreement). Project Cost and Financing 48. The total cost of the project is estimated at US$38 million equiva- lent, including US$11.5 million in foreign exchange costs and about US$2.4 mil- lion of taxes and duties. The principal components, net of contingencies, are: harbor improvements in the Ports of Mangrol and Veraval (US$11.2 mil- lion); shore facilities at Mangrol and Veraval, including supporting services (US$2.7 million); mechanized fishing vessels (US$5.8 million); traditional fishermen component including, canoes, outboard motors and infrastructure (US$2.7 million); and technical assistance (US$2.9 million). The provision for contingencies of US$12.7 million covers a price contingency element of about 27% and physical contingencies of about 6%. The proposed loan and credit of US$18 million would finance about 50% of project costs net of taxes and duties, including the whole of the foreign exchange costs and an estimated US$6.5 million of local costs. The remaining local costs would be financed by GOI, GOG, ARDC, participating banks, and borrowers. Details of cost estimates and financing are given in Annex III. 49. The proceeds of the loan and credit, with the exception of US$1.4 million for technical assistance provided to GOI, would be channelled to GOG (US$11.9 million) and ARDC (US$4.7 million). The funds made available to GOG would be for marine and civil works and would be provided to GOG in accordance with GOI's established policies for development assistance to State Govern- ments. Loan and credit proceeds made available to ARDC would be repayable over nine years at an annual interest rate of 6.75% with GOI bearing the foreign exchange risk. ARDC would on-lend the funds to participating commercial banks at an annual interest rate of not less than 8% with repayment set to coincide with collection dates from ultimate borrowers. The commercial banks, in turn would lend to ultimate borrowers (GFCCA, cooperatives, and individual fisher- men) at not less than 11% interest per annum minimum with repayment over periods up to nine years. Annex III gives details of on-lending arrangements (see Schedule III of the Credit Agreement). Lending rates under the project would be consistent with other loans and credits to India by the Bank Group and in line with prevailing interest rates. Subsidies 50. GOG currently grants a number of subsidies to fishermen. These range from 22.5% of the total cost of mechanized fishing vessels, to varying amounts of the cost of items used in the traditional fishing sector such a canoe hulls (7.5%), sails and equipment (15%), nets (10%), outboard motors (Rs 400 or about 13%), and fully equipped 9 meter canoes (Rs 2,700  - 16 - or about 8%). GOG has agreed to eliminate the subsidies on mechanized fish- ing vessels as a condition of disbursement against this component (para 4 (b) of Schedule 1 to the Credit Agreement). Subsidies on motorized canoes and fishing gear would however be retained as the beneficiaries of these are among the poorest sections of Indian society. This is consistent with the capital grant assistance provided to small farmers by the GOI through the Small Farmers Development Agency. As traditional fishermen are a disadvantaged group and the subsidies assist substantially in introducing new technology, in particular the use of outboard motors, the subsidy policy is justified. Eligibility criteria which, inter alia, limit the subsidy to one canoe per beneficiary, are satisfactory and the subsidy funds are channeled through the banking system. Boat Risk Fund 51. GOG, in consultation with ARDC, has agreed to prepare by September 1977 a proposal for the funding of a Boat Risk Fund to provide cheaper and more effective insurance cover to the owners of MFVs as well as of traditional craft (see Section 2.08 (a) of the Project Agreement). Procurement and Disbursement 52. Civil works for harbor improvements at Veraval comprising the con- struction of breakwaters, quays, cofferdam and excavation (US$4.75 million) would be procured on the basis of international competitive bidding in accord- ance with Bank guidelines. Equipment (US$3.4 million) to be procured under international competitive bidding would include net making machinery, refri- geration equipment for ice plants, cold stores and freezing units, as well as a rock dredger and ancillary equipment. Also subject to international com- petitive bidding would be 1,400 outboard engines and spares (US$0.6 million) required for the traditional fishermen component. In the case of equipment, exceptions to the ICB would be small contracts or orders of less than US$100,000 which cannot be bulked. Of the total cost of items expected to be let on the basis of international competitive bidding (US$8.75 million), about US$4.75 million is likely to be won by domestic bidders. For the civil works, domestic contractors would receive a preference of 7-1/2%. For equipment, domestic suppliers would be accorded the usual preferential margin equal to 15% of the c.i.f. cost or the existing rate of import duty, whichever is lower. 53. Local competitive bidding would be applied for civil works for shore facilities (US$1.1 million), for infrastructure in villages as part of the traditional fishermen's component (US$0.8 million) and for harbor improve- ment works at Mangrol (US$1.6 million). In the case of the first and second of these, the works are to be spread over 5 years and are geographically scat- tered while the harbor works at Mangrol are too small to be of interest to foreign bidders. The procurement procedures for the civil works would be those applied by GOG which are satisfactory. 54. The mechanized fishing vessels and their engines (US$7.2 million), canoes (US$0.8 million) and fishing gear (US$0.9 million) would be purchased  - 17 - by fishermen according to their preferences and would be financed under credit terms and accordingly local procurement would be appropriate. The mechanized fishing vessels are to be constructed to traditional design by GFCCA or other local private mechanized fishing vessel builders. Inboard engines for mecha- nized fishing vessels would be procured from two local suppliers whose products are well established and who can ensure efficient spare parts and after sales service. Canoes would be constructed to traditional designs. 55. The proceeds of the loan and credit would be disbursed against 100% of cif expenditures on dredging equipment procured under international compe- titive bidding; 100% of the expenditures on consultant services; 90% of the expenditures on the marketing study and test fishing operations; 50% of expen- ditures on civil works for harbor improvements at Mangrol and Veraval and infrastructure in the traditional fisherman component; and 55% of ARDC dis- bursements. Economic Benefits and Risks 56. The project's economic benefits would include: (i) an increase in the fish catch of nearly 45,000 tons annually; and (ii) the enhancement of the economic value of much of the existing and incremental catch through im- proved handling and marketing facilities. Other economic benefits would be generated by the improvement of the physical infrastructure in project fishing villages and from data collected and analyzed in the course of surveys and studies financed by the project. In addition important production and export constraints would be eased and useful experience would be provided particularly with respect to the operation of FTD, the extension of institutional credit to fishermen, and the organization of fishermen's primary cooperative societies in villages. 57. Financial rates of return calculated for the project beneficiaries indicate that for investments in shore facilities rates of return would be about 36% for the ice plants, over 55% for the freezing plants, and about 23% for the fish meal plant. The returns are expected to be adequate to ensure investor interest in leases in the port terminal areas. For mechanized fish- ing vessels and canoes the financial rates of return have been estimated at about 53% and 30% respectively, on the basis of an annual operating income after payment of wages of approximately US$9,000 for vessels and US$950 for canoes at 1976 prices. 58. Economic rates of return for the principal components are as follows with the percentage of total project costs attributable to these components shown in parenthesis in each case: A composite rate of return calculated for the whole of the traditional fishermen component of 53% (11%); on the harbor improvement works at Mangrol and Veraval, about 16% (8%) and 18% (37%) re- spectively; for ice plants about 45 to 59% (4%); for the fishmeal plant about 33% (3%) and for freezing plants over 60% (4%); for the mechanized fishing vessels about 48% (23%). The overall economic rate of return calculated for the project is 24%.  - 18 - 59. Further economic benefits will accrue from the additional employment for about 3,500 fishermen on trawlers, canoes and supporting industry serv- ices which would be provided under the project. Further employment and income benefits would also accrue to about 3,000 fishermen who would now be able to operate trawlers off the coast of Mangrol and Veraval for longer periods during the monsoon season and to about 1,400 traditional fishermen who would be pro- vided with outboard motors. Improvements under the traditional fishermen component would also benefit 10,000 people residing in eight villages through the provision of fish collection and storage sheds, water supply and access roads. The health and environmental effects of more hygienic standards for handling of fish, reduced wastage and conversion of low grade fish into fish- meal would be appreciable. Employment during project construction would pro- vide about 3 million man-days of work to the Gujarat fishing community. 60. The risk to the project of overfishing in the Mangrol and Veraval areas is minimal as existing data show that the planned increase in mechanized fishing vessels under the project will not tax existing resources. Also measures would be introduced under the project to monitor fish resources and to control, as may be necessary in the future, the overall number of vessels permitted to fish. Credit recovery, especially in the traditional fisheries sector, could be an area of risk if fluctuations in the catch occur. Provi- sion has, therefore, been made for such an eventuality through arrangements by ARDC for rescheduling of loan repayments. Delay in the completion of marine works is a potential risk which could affect project benefits. The monitoring system envisaged under the project should help to minimize such delay by timely detection of problems. PART V - LEGAL INSTRUMENTS AND AUTHORITY 61. The draft Loan Agreement and Development Credit Agreement between India and the Bank and the Association, respectively; the draft Gujarat Project Agreement between the Association, the Bank, and the State of Gujarat; the draft ARDC Agreement between the Association, the Bank, the Agricultural Refinance and Development Corporation; the Recommendation of the Committee provided for in Article III, Section 4(iii) and Article V, Section l(d) of the Articles of Agreement of the Bank and the Association and the text of a draft Resolutions approving the proposed Loan and Development Credit are being distributed to Executive Directors separately. 62. Special conditions of the Project are listed in Section III of Annex IV. 63. Additional conditions of effectiveness, specified in Section 5.01 of the Development Credit Agreement, would be: (a) the execution of the Gujarat Project Agreement; (b) the execution of the ARDC Agreement;  - 19 - (c) the execution of the Subsidiary Loan Agreement between the Borrower and ARDC; (d) the establishment of Project Supervision Committee; and (e) the establishment of Central Coordinating Committee. 64. The conditions of disbursement, specified in Schedule 1 to the Development Credit Agreement, would be that ARDC prepares a Project banking plan (see para 45) and the withdrawal of subsidies to fishermen for the purchase of mechanized fishing trawlers financed from the proceeds of the loan and credit (see para 51). 65. I am satisfied that the proposed loan/credit would comply with the Articles of Agreement of the Association. PART VI - RECOMMENDATIONS 66. I recommend that the Executive Directors approve the proposed loan and credit. Robert S. McNamara President Date: March 21, 1977   ANNEX I -- SOCIAL INDICATORS DATA SHE Page 1 L ANC ARE A (THOU KM2I I; u - - - - - - - - - - - - - - - - - - - - - --------------- ~~~~~INDIA REFERENCE COUNTRIES (19703 TOTAL 3280. 5 MOST RECENT AGRZIC. 1781.1 1960 1910 ESTIMAtE INDONESIA PHILIPPINES BRAZIL*