India - Second Bombay Water Supply and Sewerage Project

FILE Copy Document of The World BanW FOR OFFICIAL USE ONLY Report No. P-2308-IN REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO INDIA FOR THE SECOND BOMBAY WATER SUPPLY AND SEWERAGE PROJECT July 10, 1978 IThis dOCUent 1m raestIcted dtrbud mad my he ued by recipents only In the perfomace of their offical du. IS entess mny bnt re be discosemd wtht World Dak atoriation.  CURRENCY EQUIVALENTS Currency Unit = Rupee (Rs) Rs 1 - Paise 100 US$1 Rs 8.6 Rs 1 = US$0.1163 Rs 1 million = US$116,279.07 Rs 1 billion US$116,279,068.77 (Since September 25, 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. As of June 26, 1978, the exchange rate was Rs 8.30 to US$1.0). FISCAL YEAR April 1 - March 31 LIST OF ABBREVIATIONS AND ACRONYMS USED IN THIS REPORT BMC - Bombay Municipal Corporation GOM - Government of Maharashtra BMRDA - Bombay Metropolitan Regional Development Authority WSSD - Water Supply and Sewerage Department BEST - Bombay Electricity Supply and Transport Authority  FOR OFFICIAL USE ONLY INDIA SECOND BOMBAY WATER SUPPLY AND SEWERAGE PROJECT CREDIT AND PROJECT SUMMARY Borrower: India, acting by its President. Beneficiary: Bombay Municipal Corporation (BMC). Amount: US$196 million. Terms: Standard. On-Lending India to Maharashtra: As part of Central assistance for Terms: State development projects on terms and conditions appli- cable at the time. Maharashtra to BMC: For 25 years, including four years of grace, at 6-3/4% per annum. Project Construction of facilities required for the treatment, Description: transmission and distribution of 450 million liters per day of water, and for improvement and extension of sewage collection, treatment and disposal; provi- sion of public water taps and latrines for the slum areas; improved detection of water distribution system losses, repair of mains and metering; training and technical assistance. Because the project involves large and complex civil engineering works, there is a risk that temporary shortages of materials, lateness on the part of manufacturers in meeting contractual delivery dates, or lack of management skills on the part of contractors could lead to delays in implementa- tion. However, BMC is expected to be able to minimize the impact of these delaying factors as a result of the experience and improved management techniques it has gained as a result of the first IDA-assisted Bombay Water Supply and Sewerage Project. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii. - Estimated (US$ million) Cost: Components Local Foreign Total Water Supply 90.5 24.0 114.5 Sewerage 72.8 21.2 94.0 Common Services 3.5 - 3.5 Engineering 24.3 5.0 29.3 Training 0.7 0.2 0.9 Land 3.8 - 3.8 Public Taps and Latrines 11.6 -- 11.6 Subtotal 207.2 50.4 257.6 Physical Contingency 25.1 9.0 34.1 Price Contingency 82.7 18.5 101.2 Duties and Taxes 18.7 -- 18.7 Total Project Cost 333.7 77.9 411.6 Financing (US$ million) Plan: Local Foreign Total IDA Credit 118.1 77.9 196.0 cOM Loans 50.9 -- 50.9 BMC Internal Cash Generation 164.7 -- 164.7 Total 333.7 77.9 411.6 Estimated Disbursements: (US$ millions) IDA FY FY79 FY80 FY81 FY82 FY83 FY84 FY85 Annual 1.0 16.0 33.6 49.0 50.6 36.8 9.0 Cummulative 1.0 17.0 50.6 99.6 150.2 187.0 196.0 Rate of Return: 6%. Appraisal Report: Report No. 1970b-IN, dated July 5, 1978.  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO INDIA FOR THE SECOND BOMBAY WATER SUPPLY AND SEWERAGE PROJECT 1. I submit the following report and recommendation on a proposed development credit to India in an amount equivalent to US$196 million on standard IDA terms to help finance a water supply and sewerage project in Bombay. The proceeds of the credit would be channelled to the Government of Maharashtra in accordance with the Government of India's standard terms and arrangements for the financing of State development projects. The Government of Maharashtra will lend the funds to the Bombay Municipal Cor- poration for 25 years, including four years of grace, at 6-3/4% per annum. PART I - THE ECONOMY 1/ 2. An economic report, "Economic Situation and Prospects of India" (2008-IN dated April 17, 1978), was distributed to the Executive Directors on April 18, 1978. Country data sheets are attached as Annex I. Background 3. India is a vast, continental country with over twenty States divided on linguistic and ethnic grounds with a population of over 620 million people, almost as many as live in Africa and Latin America combined. It has a dual economy. While 79% of its population lives in rural areas, their productivity is low. Agriculture's share in value added declined only gradually from about 50% to 43% over the last twenty years. The share of manufacturing has in- creased slowly and, since the late 1960s, has remained approximately constant at about 16%. Industry has a highly diversified structure with import substi- tution and self-sufficiency pushed to the point where India has the capacity to produce virtually every type of consumer and capital good required for a modern economy. As in the case of many other large economies, the foreign sector plays a relatively minor role; both exports and imports represent about 7% of GDP; foreign saving has supplied only about 5% of gross investment in the recent past. 4. Even though growth has been slow in the past, the economy enjoys many of the prerequisites for sustaining faster growth and development. Although literacy is far from universal, India has large resources of well trained administrative, scientific and technical manpower and a dynamic entre- preneurial class. Per capita consumption of commercial energy is low by I/ Parts I and II of this report are the same as Parts I and II of the President's Report for the Second National Dairy Development Project (Report No. P-2309-IN), dated May 26, 1978.  - 2- international comparison and power shortages are a way of life; but India is relatively well-placed with regard to primary fuel sources. There are very large reserves of coal and nuclear ores, and considerable hydro-electric potential. Recent petroleum and gas discoveries have begun to be exploited and prospects are bright for further discoveries. The basic elements of the infrastructure needed to serve the economy have been established; in absolute terms the irrigation, railway, telecommunication, road and power systems are each among the largest in the developing, and in some cases the developed, world. However, considerable gaps remain as the situation varies greatly from state to state. 5. Given the size of India's population, its annual increase of 13 mil- lion people is such as to absorb a large portion of any provision to increase standards of living. It is not possible to discern any significant increase in the incomes of the vast mass of the rural and urban poor, who number 200 million with a per capita income of US$70 per annum or less. Although food- grain production may be persistently underestimated, there has been no perma- nent increase in per capita foodgrain consumption recorded in aggregate statistics since 1960/61. Many years after the initial target, primary educa- tion is still not universal. The labor force has grown faster than employment and a considerable backlog of unemployed exists. Nevertheless, there has been progress, with per capita income increasing on trend 1%-1.5% per annum; birth rates falling to below 37 per thousand from levels of 45-50 per thousand at the start of the 1950s, life expectancy increasing from about 32 years in the 1940s to 45-50 years in the 1970s, school enrollment rising from 32% to 65% of children of primary school age and from 5% to 29% of children of secondary school age since 1950/51. 6. The rate of growth of GDP has been 3.5% per annum over the period since Independence and 2.8% per annum over the period 1969/70 to 1976/77. These low rates of growth are only partly due to low availability of inves- tible resources, although there have been times that foreign exchange was a severe bottleneck. The net transfer of resources from abroad has never been above 3% of GDP and fell to as little as 0.8% between 1969/70 and 1973/74. India's saving effort has grown steadily since the beginning of planning in 1951, when it was 9% of GDP, to its recent level of 20% of GDP, which compares well with other countries' saving performance at the same level of per capita incomes. Despite a doubling in the rate of investment, from about 10% of GDP in the early 1950s to about 20% at present, the trend rate of GDP growth has not increased. This marks a decline in the efficiency of capital use which transcends fluctuations due to weather, war or international terms of trade shifts. Recent Trends 7. In many respects economic conditions during the last three years have been significantly different from those prevailing in previous years. In the late 1960s and early 1970s, the economy faced several shortages-- foodgrains, agricultural and industrial inputs and foreign exchange--which retarded production and investment and often led to price increases. An ad- verse shift in terms of trade, starting with the oil price hike in 1973 and  - 3 - continuing with the foodgrain and fertilizer price rises in the following year, greatly increased the cost of acquiring these essential commodities abroad. These external shocks combined with a spate of bad weather played havoc with the economy through 1974/75, causing slow growth in production and investment and a record level of inflation. 8. Since the excellent monsoon in the summer of 1975, a new situation has arisen. The period 1975 to 1978 has been characterized by much greater price stability, enhanced agricultural and industrial output and comfortable foodgrain and foreign exchange reserves. The new situation was a combined result of domestic policies and fortuitous circumstances. The increase in foodgrain stocks was only in part due to improved policies and programs. The more decisive factor has been the three good-to-excellent monsoons coming on top of substantial foodgrain imports in 1975 and 1976. Industrial output increased on average by 7% a year in 1975-1978 compared to 3% in 1970-75, due to greater power availability, better management in the public sector, improved labor relations, better transport and some increase in demand derived from increased incomes due to improved harvests, greater exports and higher levels of public investment. The most dramatic turnaround ocurred in the balance of payments, with a sharp real reduction of the import bill helped by good harvests and increased domestic production of iron and steel, fertilizer and oil, which reduced demand for imports. The supply of foreign exchange was also greatly increased by a significant step-up in the volume of exports, an increase in foreign aid and a substantial jump in remittances from Indians working in the Middle East, Europe and America. 9. In 1977/78, the growth of GDP was about 5%, a recovery over the rate of 1.6% in 1976/77 but less than the 8.5% reached two years earlier. Prices, which had been rising during 1976/77 after a decline in 1975/76, were stabilized; wholesale prices at the end of March 1978 stood at about the same level as in March 1977, and the yearly average was only 5.4% above that of the previous year. Exports in 1977/78 are estimated at US$6.4 billion and imports at US$6.6 billion. The inflow of invisibles from abroad at US$1.4 billion and net aid disbursements of US$1.2 billion more than offset the small trade deficit of US$200 million and IMF repurchases of US$330 million to in- crease reserves by US$2.1 billion to US$5.8 billion by end of March 1978. 10. The 1977/78 foodgrain crop may exceed the 1975/76 record level of 121 million tons due to very good weather and increased input use. Support purchases could result in peak foodgrain stocks as high or even higher than in 1977, when they were 21 million tons. In addition to ample and evenly distributed rainfall, more intensive and widespread use of three crucial inputs--irrigation water, fertilizer and extension advice--contributed to the bumper harvest. Fertilizer consumption surged 30% in 1977/78, continuing its recovery from the depressed level of 1974/75. Annual additions to irri- gated area have averaged 2 million hectares since 1975/76 compared with 1.3 million hectares per annum achieved from 1969 to 1975. An improved extension system, which has been getting heartening results, has been intro- duced in several states and is slated for further coverage.  -4- Development Prospects 11. India faces the future with large stocks of foodgrains, high and rising external reserves, excellent crop expectations, price stability and good prospects for sustaining the improved supply of foreign exchange. The circum- stances present a great opportunity for further promoting the development of the Indian economy. The Draft Five Year Plan for 1978-83, discussed though not yet approved by the National Development Council, responds to this chal- lenge by projecting a rapid growth in real terms of both overall investment and public Plan expenditures. Investment is to rise on average by 10.7% per annum and the economy is expected to grow on average by 4.7% per annum during the years 1978-83. 12. The new Draft Plan reveals an intention to reorient the country's development toward improving the living conditions of the poor. This is reflected in its principal objectives: (i) the removal of unemployment and significant underemployment; (ii) an appreciable rise in the standard of living of the poorest sections; and (iii) the provision of basic needs to low-income groups. To achieve these objectives, the Government proposes to emphasize agricultural development, cottage and small-scale industries, area planning for integrated rural development and the provision of minimum needs. As a first step toward complete removal of unemployment, the Plan envisages the creation of a large number of new jobs through a considerable expansion of construction activity as well as a boost in the consumption levels of the poor--which in turn would require the production of the necessary wage goods, largely in small-scale, labor-intensive units. Specific programs to achieve these objectives are still in the making. 13. In order to achieve a sizable rise in the income of the poorest classes of society, the Draft Plan--in conformity with the Janata Party policy-- places prime emphasis on the development of rural areas. A major impulse for agricultural development will be provided by the expansion of irrigation and related agricultural inputs, such as fertilizers and better farming techniques. The Draft Plan argues that efforts to increase productivity should be sup- plemented by measures with a redistributive impact such as supporting small farmers and small industry with institutional credit and material supplies and assistance for marketing. The Draft Plan also intends to complement the creation of employment and the increase in rural productivity by providing basic services to those groups which have so far been unaffected. For this purpose, the minimum needs program launched at the onset of the Fifth Plan is being revitalized and accelerated. 14. The allocation of the Draft Plan outlay for the next five years reflects these priorities. Out of a total expected spending of US$81 billion, US$35 billion--43%--have been earmarked for rural development programs includ- ing agriculture, irrigation, fertilizer and social infrastructure expenditures directly benefitting the rural areas. The share of these sectors amounted to 37% during the Fifth Plan period and to 40% in the Annual Plan for 1978/79. It can thus be expected to rise further during the next four years. Similarly, spending on the minimum needs program in 1978-83 will absorb 6% of the Plan resources, as compared to less than 3% in the Fifth Plan. On the other hand, the shares of industry and of transport and communication have been reduced.  15. There is considerable scope for stepping up growth in agriculture. The most promising development is the sharp increase in governimcnt outlays and improved project implementation for irrigation. There are also indica- tions that private investment in tubewells is picking up again after a slump in the early 1970s. Other favorable indicators include the spread of an improved system of extension to more states and the recovery of fertilizer demand. With regard to more productive use of existing capacity, there is an increased awareness in the Government that the benefits of irrigation projects can be much increased, not only through command area development, but also through improved design standards in major surface irrigation infrastructure. Nevertheless, comprehensive improvement in water management remains a distant goal, particularly in existing systems and where farms are small and frag- mented. The bulk of the increase in private tubewell development in the last few years has come from the Eastern Region, where more and more farmers are sinking wells to enable them to grow a winter crop of wheat in addition to providing better water control for the summer rice crop. Improved water man- agement would make such investments even more productive. Increased farmer incomes from the recent good harvests, somewhat lower fertilizer prices, and grain prices supported at incentive levels have encouraged farmers to apply considerably more fertilizer. Finally, the reorganized and improved extension and research system which has been introduced recently in several states in northern and eastern India holds out the hope that sound advice will reach many more farmers in both irrigated and rainfed areas and will raise their productivity significantly. The improved extension system is an excellent example of how the growth effort can and must be structured so as to increase the incomes of small and marginal farmers, who work 25% of the cultivated land and account for somewhat more than 25% of production; more importantly, these farmers make up about 70% of the rural population and constitute the majority of those living below the poverty level in India. 16. Industrial prospects are somewhat more difficult to discern. Moderate growth in 1977/78 after an excellent year in 1976/77 suggests the persistence of problems plaguing the sector since the mid-1960s--large un- utilized capacity, stagnant capital formation in the private sector and low productivity growth. Lower investment than expected, of course, is one of the reasons for low capacity utilization in capital goods industries, which make up a significant portion of the sector. Sluggish demand for industrial products from all sources--not only from investments but also from agricul- ture, exports and import substitution--has been a basic constraint. Further import substitution cannot be a major source of growth for manufactured goods in the future because most opportunities for efficient import substitution have been exploited. Increased growth of real incomes from greater produc- tivity in both agriculture and manufacturing, sustained increases in exports and increased investment, particularly by the public sector, all can raise demand for industrial production. 17. The new industrial policy of the Janata government and the orienta- tion of the Draft Five-Year Plan emphasize small-scale industry over heavy industry and have accordingly promoted such measures as product reservation, credit rationing and, within the small-scale sector, plans to initiate special  - 6 - efforts for the growth of the "tiny" sector. While the priority accorded to the small-scale sector is laudable, there are doubts about the efficacy of the policy measures chosen. Past experience indicates that other factors are also crucial to its development, particularly effective demand, quality control, prices and marketing techniques. Some small-scale industry is cap- ital intensive and not well suited to as rapid employment generation as is hoped; nor can all goods be efficiently produced using small-scale technology. 18. India's population growth rate of about 2% is not high in comparison with that of most developing countries. Moreover, the rate is on the decline, after growing steadily census to census from 1920 through 1970, both because the birth rate continues to fall and because mortality is not falling as steeply as in the past. Family planning acceptor rates slowed down in the wake of the abandonment of the 1976 population policy after the 1977 general elections and the momentum of the program has yet to be recaptured, particu- larly in Northern India. However, the new Government has reaffirmed its com- mitment to a voluntary family planning program and has budgeted the resources to carry it out. Over the longer term, with a sustained family planning effort, it should be possible to bring the birth rate down from its 1970-75 level of about 37 per thousand to about 23 per thousand by the end of the century, implying a population growth rate somewhat under 1.1%. Our "best guess" pro- jection of India's population in the year 2000 is 885 million. Many of the benefits of family planning policy will only be felt beyond the turn of the century; the decline in fertility will, however, bring about an earlier change in the age structure of the population. The school age group will grow more slowly or not at all after 1981, thereby reducing the pressures on the primary and secondary education systems. However, the labor force will continue to grow at a faster rate -- 2.5% per annum -- until well into the 1990s, result- ing in an increasing proportion of the population in the labor force from 40.8% to 45% in 1991. 19. The Government's goal of eliminating unemployment in 10 years implies an expansion of the number of jobs at the rate of 9 million per annum -- 7 million new entrants to the labor force and the absorption of 2 million or so formerly unemployed. The majority of these will have to continue to be absorbed -- judging from the prevailing composition of the labor force -- in agriculture and the unorganized small-scale sector. The absorptive capacity of the modern organized sector is unfortunately low; its employment elasticity is expected to be no more than 0.5. Given its low current share of output, even rapid growth of this sector would not make much of a dent in the backlog of the unemployed. Employment in the organized sector has been growing at about 2.2% per annum in the past ten years, less than the labor force growth rate, and all of this in the public sector. Private sector employment has not grown at all since 1966. While the labor absorption elasticities of the small- scale sector may be higher in some cases than that of the large-scale sector, a major effort to expand production must succeed before an appreciable employ- ment impact will materialize. 20. In the short run India's balance of payments should not be a con- straint on growth and development. With good medium-term prospects for India's exports, the expected continuation of growth in invisible receipts  and the potential for an increase in net aid disbursments, the net availability of foreign exchange to finance merchandise imports is projected to rise over the next five years, in current prices, from US$8.7 billion in 1977/78 to US$16.7 billion in 1982/83, an average of 14% per annum. Given the unlikely need to increase rapidly imports of some traditionally important items -- e.g., petroleum, fertilizer, foodgrains, edible oil and cotton -- other imports can increase at the rate of 20% a year over the next five years. 21. Altogether, these currently favorable circumstances present the opportunity to double India's trend rate of growth of per capita income from the average annual rate of 1.5% that prevailed for the last thirty years to 3% over the next five, and thereafter. This requires a continued fall in the rate of population growth to below 2% per annum and a rise in the growth of GDP from the historical rate of 3.5% to 5.0% per annum. Both of these targets are within reach. The first should be achieved barring a total abandonment of the family planning program. The second requires improved efficiency and increased investment by both the public and private sectors; it also means more fully harnessing the gains from trade through international specializa- tion, implying a strong export effort and continued easier access to imports. In addition to enabling a faster rate of per capita income growth, the pre- sent situation allows for increasing the coverage of the population's minimum needs. This requires formulating and administering effective, efficient programs of public investment and, of course, requires larger public outlays. 22. With the enhanced resources at India's disposal, the economy is poised for a higher rate of economic growth. The Government is moving to take advantage of this opportunity with increased public expenditure envi- sioned over the next five years, and the liberalized trade policies recently announced. It is yet too early to know whether the moves made so far will be sufficient to achieve the desired targets or whether additional steps will be necessary. Assured international support for India's development effort will be an important factor in moving the Government to take greater risks in pursuing a dynamic development program directed at meeting the huge needs of its large and impoverished population. PART II - BANK GROUP OPERATIONS IN INDIA 23. Since 1949, the Bank Group has made 54 loans and 103 development credits to India totalling US$2,117 million and US$5,932 million (both net of cancellation), respectively. Of these amounts, US$901 million had been repaid, and US$2,236 million was still undisbursed as of May 31, 1978. Annex II contains a summary statement of disbursements as of May 31, 1978, and notes on the execution of ongoing projects. 24. Since 1957, IFC has made 15 commitments in India totalling US$63.6 million, of which US$14.5 million has been repaid, US$7.6 million sold and US$6.9 million cancelled. Of the balance of US$34.6 million, US$26.9 mil- lion represents loans and US$7.7 million equity. A summary statement of IFC operations as of May 31, 1978, is also included in Annex II (page 2).  - 8 - 25. In recent years, the emphasis of Bank Group lending has been on agriculture. The Bank Group has been particularly active in supporting minor irrigation and other on-farm investments through agricultural credit opera- tions. Major irrigation, marketing, seed development, and dairying are other agricultural activities supported by the Bank Group. Also, the Bank Group has been active in financing the expansion of output in the fertilizer sector and, through its sizeable assistance to development finance institutions, in a wide range of geographically scattered medium- and small-scale industrial enterprises. IDA financing of industrial raw materials and components for selected priority sectors has been instrumental in facilitating better capac- ity utilization in industry. The Bank Group has also been active in support- ing infrastructure development for power, telecommunications, and railways. Family planning, education, water supply development, and urban investments have also received Bank Group support in recent years. 26. The direction of assistance under the Bank/IDA program has been consistent with India's needs and the Government's priorities. The emphasis of the program on agriculture, industry, power, urban development and water supply remains highly relevant. Projects designed to foster agricultural production through the provision of essential inputs such as credit for on-farm investments, command area development of existing irrigation schemes, intensification and streamlining of extension systems, and seed production form an important aspect of the Bank Group's program for the next several years. Special emphasis will be given to projects benefitting small farmers. Projects supporting water supply, sewerage, and urban development also form an integral part of the Bank's lending strategy to India for the next several years. Lending in support of infrastructure and industrial investments will focus on agriculture-, export- and energy-related projects. 27. The need for a substantial net transfer of external resources in support of the development of India's economy has been a recurrent theme of Bank economic reports and of the discussions within the India Consortium. Thanks in large part to the response of the aid community, India has success- fully adjusted to the changed world price situation. However, the basic need for foreign assistance, to augment domestic resources, stimulate investment and accelerate economic growth, remains. As in the past, Bank Group assist- ance for projects in India should include, as appropriate, the financing of local expenditures. India imports relatively few capital goods because of the capacity and competitiveness of the domestic capital goods industry. Con- sequently, the foreign exchange component tends to be small in most projects. This is particularly the case in such high-priority sectors as agriculture, irrigation, rural water supply and medium- and small-scale industry. 28. Although the growth prospects of the economy have improved, India's poverty and needs are such that as much as possible of India's external capi- tal requirements should be provided on concessionary terms. Accordingly, the bulk of the Bank Group assistance to India has been, and should continue to be, provided from IDA. However, the amount of IDA funds that can reasonably be allocated to India remains small in relation to India's needs for external support, and India may be regarded as creditworthy for some supplemental Bank  - 9 - lending. As of May 31, 1978, outstanding loans to India totaled US$1,254 million, of which US$566 million remained to be disbursed, leaving a net amount outstanding of US$689 million. 29. Of the external assistance received by India, the proportion con- tributed by the Bank Group has grown significantly. In 1969/70, the Bank Group accounted for 34% of total commitments, 13% of gross disbursements, and 12% of net disbursements as compared with an estimated 62%, 27% and 38%, respectively, in 1977/78. On March 31, 1977, India's outstanding and dis- bursed external public debt was US$13.3 billion, of which the Bank Group's share was 28%. Because Bank Group assistance to India is predominantly in the form of IDA credits, debt service to the Bank Group will rise slowly. In 1977/78, about 16% of India's total debt service payments were to the Bank Group. PART III - WATER SUPPLY AND SEWERAGE IN BOMBAY 30. Since the early 1950s, rapidly expanding population and unprece- dented rates of urban growth have led to increasing demand for water supply and sanitation. However, competing demands for resources for other sectors, lack of management and planning skills, shortages of key materials and equip- ment and foreign exchange constraints have resulted in only 1 to 2% of public expenditures being invested in this sector. Present levels of water supply and sewerage services reflect this history of relatively small investments against a background of rising population and urbanization. The World Health Organization has estimated that, according to its standards, in 1975 about 193 million people in India, or 31% of the total population, had access to reasonably safe drinking water and that about 125 million (20%) had acceptable means of sewage disposal. Rapid urbanization in India's four largest metro- politan areas -- Calcutta, Bombay, Delhi and Madras -- has created an urgent need to strengthen the water supply and sewerage systems serving these areas, if acceptable levels of service are to be provided. 31. Bombay, which had a population in 1977 of 7.6 million people, is the second largest city and largest port in India, the capital of the State of Maharashtra, and an industrial center accounting for about 30% of India's industrial output. Extension of the original city limits in 1951 and 1958 created the Greater Bombay area of 440 square kilometers, which is administered by the Bombay Municipal Corporation (BMC). The BMC was established in 1888 and is responsible for the provision of many services, including water supply, sewerage and sewage disposal, in the Greater Bombay area. Water Supply 32. Bombay's first piped water system was constructed in the mid- nineteenth century to serve commercial and residential areas on the southern portion of Bombay island near the harbor and the Fort. Vihar Lake was Bombay's first source of water. The lake, or reservoir, was brought into use in 1860 and provided a 24-hour supply for an 8-year period. However,  - 10 - rapid growth of commerce and industry caused a northward expansion of the city, accompanied by the development of Salsette, an adjacent island, and reclamation of land from the sea by filling shallows, bays, inlets and creeks. As a result, the demand for water soon outstripped the supply from Vihar Lake, leading to development of an adjacent source, the Tulsi reservoir, which was brought into use in 1879. By 1883, further increases in demand for water prompted the development of the Tansa reservoir, the first of the more distant, and more expensive, sources of water on the mainland. 33. Work on the Vaitarna project was begun in 1944 and completed in 1957. However, the extension of the city's boundaries in the 1950s once again led to an increase in the city's water demand, and the Upper Vaitarna scheme was started in 1965. The State Government also permits the Corporation to extract water from the Ulhas river, for which works were completed in 1967. The estimated present (1977) yield from the existing sources is 1,600 million liters per day (mld), of which 955 mld is available for distribution to 7.6 million domestic consumers after allocations to industry, commerce, areas on the route of major conduits, and after allowances for transmission and dis- tribution losses. The resulting average availability of water of about 125 liters per capita per day (lpcd) is much less than the demand, and the supply is therefore limited to between 2 and 8 hours per day, depending on location. 34. The quality of water is unsatisfactory since the only form of treatment--pending completion of the on-going project (see paragraph 39 below) in 1979--is chlorination, which is ineffective during periods of high water turbidity. Even this low level of supply of doubtful quality water can only be maintained during years of normal rainfall. Failure or partial failure of the monsoon in India is a cyclical event rather than a rare phenomenon; recent occurences (1966 and 1972) caused drastic curtailment of the already restricted hours of supply and serious interruption of industrial activity as well as severe hardship to the people. Consideration was even given to evacuating a significant part of the city's population, because there was insufficient water to provide for the most essential uses. 35. In 1964 a special committee appointed by BMC to investigate new sources of water for Bombay recommended construction of a dam across the Bhatsai river to provide ultimately 1,350 mld for Bombay and 450 mld for irrigation. The State Government took up the work, and the first stage of the massive masonry dam, supplying 450 mld to Bombay, was completed in June 1978. Two subsequent stages, each supplying an additional 450 mld to Bombay, will be completed by 1985, when the total amount of water available for dis- tribution in Bombay from all sources is expected to reach about 2,415 mld. Even if the proposed project is implemented, the per capita availability of water would decline slightly from its present level of 125 lpcd to 120 lpcd in 1991 if the population were to reach 11 million. (This is the mean of available population projections, which range from 9 to 13 million.) How- ever, if the population should reach 13 million and if the project is not implemented, the supply in 1991 during a year of normal rainfall could decline to 75 lpcd, the lowest level in the 120-year history of Bombay's piped water supply system.  - 11 - Sewerage 36. Sewerage facilities for Bombay also date back to the 1860s. The Worli marine outfall, which discharges sewage to the Arabian Sea above low- water level, was completed in 1880; by 1900 all sewage within the city was conveyed to Lovegrove and thence to sea via the Worli outfall. By 1905, the basis of the present, separate system had been established and subsequent increments of flow were met by duplicating or replacing sewers, providing overflows to relieve surcharged sections in developing areas, laying new sewers in newly developed areas, and adding treatment plants. 37. In an effort to provide adequate service for the rapidly growing population, extensive relief works were sanctioned in 1948, but these measures were rapidly overtaken by industrial and commercial development and population increases. The need for improvement of the system was intensified by the extension of the city's boundaries in the 1950s. In 1963 a committee of ex- perts appointed by BMC recommended expanding and upgrading the system to meet the 1981 population requirements. Due to financial constraints, only minor improvements were made, so that Bombay's sewerage facilities continue to be grossly inadequate. 38. Sewerage service levels lag behind water supply in terms of popula- tion served, percentage of urban and suburban areas covered, capacity of the collection and conveyance system and effectiveness of treatment and disposal facilities. Only 44% of the total area of Greater Bombay is served by sewers. The existing sewerage system is characterized by inadequate capacity and obsolescence. The surcharged system often causes sewage to overflow into sur- face water drains, footpaths, roadways and private properties. Since sewage treatment is negligible, there is widespread pollution of creeks, inland waterways and beaches. Recent Developments 39. In the late 1960s the Government of Maharashtra appointed Messrs. Binnie and Partners Ltd. (U.K.), Consulting Engineers, to investigate and report on the water supply and sewerage systems for Bombay. The report, which was issued in 1971, identified the least-cost means of improving those systems over the period 1971 to 1981. The first stage of this program formed the IDA-assisted Bombay Water Supply and Sewerage Project (Credit No. 390-IN, of January 22, 1974, for US$55 million). 40. In the water supply component under the first project, water released from the Bhatsai dam will be pumped from Pise Weir, some 48 km below the dam, over a distance of 8 km to a treatment plant at Panjrapur, where it will be clarified into settling tanks. This settled water will then be conveyed to the main treatment plant at Bhandup, where water from all of the BMC sources will be filtered and chlorinated. Fully treated water from Bhandup will be conveyed to distribution reservoirs in Greater Bombay and thence to consumers. Sewerage system improvements under the first project comprise extension of parts of the sewage collection system, including renovation and construction of sewage pumping stations.  - 12 - 41. The first project was intended to cover works during the period 1973-77, but it was subsequently reduced in scope because of rising costs, and its completion was extended from 1978 to 1979. Despite these setbacks, the project will achieve much of its original purpose, increasing the water supply by about 450 mld to a total of about 1,900 mld, providing full water treatment, and moderately improving the sewage collection system. BMC pro- poses to implement a second stage of the original program--which was intended to cover works scheduled for implementation during the period 1977 to 1981-- and has requested the Association's assistance; this work, with the addition of items deferred from the first project, would form the basis of the proposed project. Water Supply and Sewerage Sector Organization 42. While the Central Government has considerable influence on the sector, State Governments in India have primary responsibility for develop- ment of water supply and sewerage facilities. The States execute their responsibilities through various departments of government and agencies which, in turn, may delegate part or all of their duties to local authorities. In certain cases (as in the case of BMC), legislation has been enacted to permit municipal authorities or other agencies to assume responsibility for planning, design, construction, operation and maintenance of water supply and sewerage services within their jurisdictions. 43. Water supply and sewerage development in the State of Maharashtra is largely the responsibility of the Environmental Engineering Organization, a State Government agency, which undertakes planning, implementation, operation and maintenance of most rural water supply projects as well as planning and implementation of some of the municipal water supply and sewerage projects. In January 1977, the Maharashtra Water Supply and Sewerage Board was formed; however, for the moment it is acting only as a financing channel, raising funds by borrowing from local financing institutions and on the open market. 44. Although BMC has been responsible for municipal services, including water supply and sewerage, since 1888, the need for planning on a broader geographic basis was realized during engineering studies of BMC's water needs in 1971. The Bombay Metropolitan Regional Development Authority (BMRDA) was therefore established by the Government of Maharashtra (GOM) in 1975 to co- ordinate the activities of local bodies within the Bombay Metropolitan Region and to promote regional investment planning in such sectors as urban renewal, transportation, communication and water resources management. It has recently completed a water resources study for the Bombay Metropolitan Region; this study is satisfactory, and the proposed project is consistent with its recommendations. 45. A separate Water Supply and Sewerage Department (WSSD) of BMC was established in 1973 and is responsible to the principal committee of BMC for the planning, development, operation and maintenance of water supply, sewerage and sewage disposal services. A separate Water and Sewerage Fund and a Con- solidated Loans Fund for WSSD were established with effect from April 1, 1974. The Municipal Commissioner, an officer appointed by GOM, is the principal officer of BMC and is responsible for the management of all services except  - 13 - those of Bombay Electricity Supply and Transport Authority (BESl). He retains overall control of WSSD, assisted by a Deputy Municipal Commissioner, Special Engineering. Investment in Water Supply and Sewerage 46. Substantial investment in capital works is necessary, since substan- tial parts of the water supply and sewerage infrastructure in Bombay must be enlarged, renovated or even constructed in their entirety from the water source or to the sewage outfall. Water augmentation is expensive in Bombay because of the remoteness of the sources of supply and the absence of ground- water. The comparatively large investment in sewerage reflects the long failure to provide treatment or disposal facilities. There is no question that these large investments are critically needed in Bombay, for the reasons outlined above. However, the very large absolute size of the investment raises questions as to the costs in terms of investment foregone in other sectors and other areas. Because the total public Plan expenditure in Maharasthra is expected to increase substantially during the Sixth Plan Period (1978/79-1982/83), the proportion devoted to urban water supply is not ex- pected to exceed the 4.5% share of this sector during the Fifth Plan. Thus, the share of investment in other sectors will not be reduced as a result of the proposed project. Investment in water supply and sewerage amounts to about 40% of total public sector investment in the BMC area (1977/78) and has risen in the past four years from 35% to 60% of BMC's capital budget. This appears reasonable, since the historic neglect of the sector has resulted in a marked deterioration in service levels relative to those in other sectors for which BMC is responsible. Since operating expenses in the sector consti- tute a relatively small proportion (7-8%) of BMC's total operating budget, the overall share of BMC's budget allocated to water supply and sewerage is no more than 20%. Bank Group Involvement in Bombay 47. In addition to the (first) Bombay Water Supply and Sewerage Project, described above, a US$25 million Bank Loan (No. 1335-IN of December 20, 1976) was extended for the Bombay Urban Transport Project. This project, which is designed to improve bus services in Greater Bombay and to improve BMRDA's traffic management and development planning activities, is progressing satis- factorily after initial delays. While BMRDA has undertaken some regional studies, it is not clear that it has made much progress toward fulfilling the broader planning and coordination functions envisaged for it. A super- vision mission now in the field will review the situation. The recently approved Third Trombay Thermal Power Project (Loan No. 1549-IN of June 19, 1978) provides US$105 million toward the cost of a 500 MW power station which is expected to contribute to the reduction of power shortages in the Bombay area. Bombay's large industrial sector has also benefitted from Bank Group lending to ICICI and IDBI as well as for industrial imports.  - 14 - PART IV - THE PROJECT 48. The proposed project was prepared by BMC with the assistance of con- sultants and appraised by an IDA mission in January 1978. A Staff Appraisal Report entitled "India: The Second Bombay Water Supply and Sewerage Project" (No. 1970b-IN, dated July 5, 1978) is being distributed separately to the Executive Directors. Negotiations were held in Washington in June 1978. The Government of India was represented by Dr. Y. V. Reddy of the Department of Economic Affairs, Ministry of Finance; the Government of Maharashtra was re- presented by Mr. V. Venkatesan, Secretary (Planning); and BMC was represented by a team headed by Mr. B. K. Chougule, Municipal Commissioner. A Supple- mentary Project Data Sheet is attached as Annex III. Project Description 49. The water supply component of the proposed project would provide for the treatment, transmission and distribution of an additional 450 mld of water to the Greater Bombay area, thus maintaining the supply for domestic purposes roughly at its present per capita level as the population increases over the next 10-15 years and slightly increasing the supply to industry. The water distribution system and facilities for slum areas would also be improved. However, the hours of supply throughout most of the city would continue to be limited to 3-8 hours per day. The project also contains provision for more intensive detection of distribution system losses and repair of existing mains. 1/ 50. The sewerage component would improve and extend the collection system from 44% to 90% of the Greater Bombay area, would provide treatment and safe means of disposing of sewage from the whole of the urban population, and would provide additional public latrines for the slum areas. While main- tenance of public latrines is good in some areas, it is quite poor in others; this depends in large part on the energy and efficiency of the Ward Officer. BMC intends to improve maintenance in the wards where it is inadequate through improved supervision of attendants, whose task will be made easier by the increased availability of water for flushing and cleansing. The project also provides for continuation of WSSD's training program and technical assistance for engineering design and supervision of the proposed works. 51. The source of water for the project is the Bhatsai reservoir, for which the Bhatsai dam is now under construction by the Irrigation Department of GOM. GOM has agreed to ensure the construction of the dam, including the 1/ Bombay's estimated distribution system losses of 15% are below the generally accepted average for a system of this age and size; however, losses would increase to unacceptable levels of 35 or 40% if the mains were under pressure for 24 hours a day. WSSD therefore has expanded its activities to detect system losses, with a view to limiting such losses to not more than 17% as the distribution system is extended and the hours of water supply are lengthened.  - 15 - provision of sufficient funds, according to a schedule that will make avail- able water from the Bhatsai reservoir required for the Project, and to have this and other dams impounding water for use by BMC to be inspected annually (Sections 2.04 and 2.06 of Maharashtra Agreement). BMC has agreed to give IDA an opportunity to review and comment upon any contracts for the purchase of bulk supplies of water (Section 4.09 of Project Agreement). In addition, BMC has agreed that the program for detection of system losses and mains re- pair will be improved and that improved metering procedures will be developed and applied, both in accordance with programs acceptable to IDA (Sections 2.07 and 2.08 of Project Agreement). Finally, GOM and BMC have agreed to acquire the land needed for the project (Section 2.05 of Maharashtra Agreement and Section 2.09 of Project Agreement). None of the land (480 hectares) to be acquired is used for agricultural purposes, and no resettlement is involved. Project Implementation 52. WSSD will have overall responsibility for project design and imple- mentation. Although WSSD staff is capable of carrying out projects of this type, it will require assistance by consultants to complete final engineering design and to supervise construction of a major part of the water supply and sewerage systems; the appointment of consulting Engineers for the engineering design of the project is a condition of effectiveness of the proposed credit (Section 5.01(c) of Development Credit Agreement). BMC has also agreed to consult with IDA prior to making any material modification in WSSD's structure, organization, responsibilities, and technical and financial operations (Sec- tion 3.03 of Project Agreement). WSSD plans to implement the project over a five-year period (1979-84); this schedule is realistic. Completion of the works within this time frame will require careful planning and good management, which WSSD is capable of providing. Project Costs and Financing 53. The estimated cost of the project, including contingencies (US$135.3 million), is US$411.6 million, of which US$77.9 million, or 19%, represents foreign exchange costs. Taxes and duties account for US$18.7 million and physical and price contingencies for US$135.3 million of the total. The proposed IDA credit of US$196 million would provide 50% of the cost of the project excluding duties and taxes. An additional US$50.9 million would be provided in the form of loans from the Government of Maharashtra, and the balance would be provided from BMC's internal cash generation. Procurement and Disbursement 54. All contracts for equipment, materials and meters would be awarded under international competitive bidding procedures in accordance with the Association's guidelines, with the exception of contracts for sewer pipes, fabrication of steel pipes (from steel plate purchased under international bidding procedures) and items costing less than US$50,000 with an aggregate value of not more than US$1.0 million. These items, having a total cost of about US$26 million, are either unsuitable for overseas purchases (as in the case of sewer pipes and fabricated steel pipe) or are too low in value to  - 16 - attract foreign bidders or to justify international bidding. Contracts for sewer pipes and fabrication of steel pipes would be awarded under local competitive bidding procedures, and items costing less than US$50,000 would be procured under BMC's local procurement procedures, both of which are acceptable. 55. Civil works in this project fall into two categories; the first category includes a large number of relatively small contracts, which are fairly widely dispersed throughout the project area, do not require special plant, equipment or techniques, and are traditionally carried out by regis- tered contractors established in Bombay and other major Indian cities. These works, which include sewers and sewage pumping stations, would not attract foreign bidders since it is clear that overseas firms could not successfully compete with local bidders for works of this type and size. The proceeds of the proposed credit would not be disbursed against these small civil works contracts. The second category of civil works includes larger and more spe- cialized works; although some local contractors have the required special- ized knowledge, capacity, management skills and organizational ability for these works, the contract values might be large enough to attract foreign bidders. Such works include submarine outfalls, tunnels, one of the trunk sewers, construction and renovation of large water mains, construction of water and sewage pumping stations and construction of a balancing reservoir. The estimated total value of these civil works to be internationally bid is US$100 million. 56. The proceeds of the credit would be disbursed against 100% of the cost of directly imported goods, 100% of the ex-factory cost of locally manufactured goods, 50% of expenditures for goods procured under BMC's local procedures, 80% of the cost of civil works contracts awarded on the basis of international competitive bidding, 100% of foreign expenditures for training, and 100% of the cost of consultants' services. A preference margin of 15% or the current rate of import duty, whichever is less, would be granted to local equipment manufacturers competing under international competitive bidding. A preference margin of 7-1/2% would be allowed for local contractors in evaluating civil works bids. All contracts except some of the larger, spe- cialized civil works are likely to be won by local contractors. Since the early appointment of engineering consultants is critical to project progress, and because WSSD proposes to proceed as quickly as possible with construction of urgently needed steel water mains, it is proposed that expenditures after September 1, 1978 for consultants' services and advance purchase of steel plates be retroactively financed up to a total value of US$1.0 million. WSSD Finances 57. WSSD was established as a separate financial entity within BMC with effect from April 1, 1974. Accounting systems based on commercial principles are in operation and further improvements to accounting, costing and billing systems are planned following the installation of BMC's own computer during 1978/79. The revaluation of existing assets was completed during 1977/78. WSSD's financial performance during the last four years has been satisfactory. The rate of return on revalued assets was 11% in 1974/75, 9% in 1975/76, 17%  - 17 - in 1976/77, and is estimated at 12% in 1977/78. The debt/equity ratio as of March 31, 1978 was 38:62 and provides an adequate margin for further borrow- ing. The current ratio was 1.8. BMC has agreed to credit to WSSD's account Rs 56.6 million (US$6.6 million), which BMC has owed to WSSD since 1974, in two installments in 1978/79 and 1979/80 (Section 4.06 of Project Agreement). 58. BMC agreed, in connection with the first Bombay Water Supply and Sewerage Project, that WSSD would generate an annual surplus which, together with any other internal funds, is sufficient to finance 40% of the annual capital expenditure. That requirement is met if, in any two consecutive years, 40% of the aggregate capital expenditure is met from internal sources and if at least 33% of capital expenditure is met from internal sources in each of such years. This financial target has been exceeded during the last three years--internal cash generation financed 125% of capital expenditures in 1974/75, 52% in 1975/76, and 88% in 1976/77--partly because of capital expenditure shortfalls caused by project delays, and is expected to be met in 1977/78. This covenant would be repeated in the proposed project (Section 4.03 of Project Agreement). In addition, BMC has agreed to make available to IDA WSSD's annual investment program (Section 4.04 of Project Agreement). GOM has agreed to ensure the availability to BMC of sufficient funds to complete the project (Section 2.03 of Maharashtra Agreement). 59. Charges to industrial consumers have increased by 150% since 1973/74, whereas the taxes or charges to domestic consumers have remained unchanged. However, benefit taxes which are borne by all consumers with a connected water supply and which are based on the rateable value of all pro- perty in Greater Bombay, were introduced from 1974/75 to finance the program of capital expenditure. On the basis of present forecasts, which include assumed inflation of 7% per year, cumulative tariff increases of 35% would be needed during the project period to provide sufficient funds to meet the cash generation covenant (paragraph 58). Although the 40% contribution to investment could thus be met by maintaining existing tariffs in constant prices over the project period, BMC has indicated its intention to increase its contribution to investment to 55 or 60% by the mid-1980s. BMC has also agreed to review by April 1, 1979 the tariff structure for water supply and sewerage services, taking into account, inter alia, the consumers' ability to pay, the economic cost of future expansion of these services, and IDA's views (Section 4.08 of Project Agreement). 60. BMC provides, on a reimbursable basis, certain services to WSSD, the principal one of which is the billing and collection of water and sewer- age taxes, jointly with other municipal taxes, and water and sewerage charges. While these arrangements have administrative advantages, there have been re- peated delays in crediting revenues to the separate WSSD account. BMC has agreed, on receipt of WSSD's revenues, to transfer to WSSD's account suffi- cient cash to meet WSSDs obligations and to pay interest to WSSD on any cash balance remaining with BMC until it is required by WSSD (Section 4.05 of Project Agreement). BMC has also agreed to separate WSSD's insurance funds from those of the other BMC departments by March 31, 1979 (Section 3.04 of Project Agreement). Consumer receivables have fallen from 52% of billings in 1975/76 to 34% in 1977/78. Almost 20% of total billings in any year are  - 18 - described as receivables simply because many of the bills for actual usage, which are issued every two months, are issued only in the last month of the fiscal year or after the end of the fiscal year. Some 75-80% of all bills are paid within one year and about 90% within two years of the date they are due. BMC has agreed to reduce progressively the level of receivables to not more than 20% of billings by March 31, 1984 (Section 4.07 of Project Agreement). 61. Financial projections for WSSD through 1984/85 indicate that the debt/equity ratio will not exceed 45/55, and a debt service coverage of 1.9 is expected on completion of the second project. The current ratio will range from 1.7 to 2.6, thus ensuring adequate liquidity during the project period. Benefits and Risks 62. Without the project BMC could not maintain the water supply service even at its present level; with it, all sections of the community, including the urban poor, will have access to reasonably safe water, although the per capita supply will not increase. The systems for collection, conveyance and disposal of human wastes and industrial wastes would be improved to a level whereby health hazards would be limited to a fraction of their present levels, and environmental pollution would be reduced. The project would strengthen WSSD, provide additional training for technical staff and administrative personnel and further foster the practices and concepts of sound engineering, cost recovery and efficiency pricing in the public sector. 63. Approximately one-third of the population of Bombay, about 2.5 million people, live in slums. The present program for the provision of standpipes and latrines will be supplemented under the project, so that some 15,000 new latrines and 10,000 additional water taps, as well as extensions of mains and sewers to slum areas, will be provided under the project. These facilities will benefit the major part of the slum population. The sewerage component will benefit the entire slum population through its impact on health. 64. Almost all industries in the project area rely entirely on water supplied by BMC. Since the water supply system cannot meet demand, water to industry is supplied on a quota system, under which the supply to indus- trial establishments is shut off when a predetermined quantity, or quota, has been provided. This practice of restricting water is particularly detrimental to some industries such as textiles and chemicals. The economic value of the increase in output and employment due to increased water supply to industry is difficult to quantify. However, it is almost certainly larger than the revenue proxy for industrial benefits (see paragraph 66 below). 65. Records of deaths registered in Greater Bombay in the period 1972 to 1976 indicate that 40% of all deaths were attributed to infectious and parasitic diseases. A major part of deaths attributed to these causes is from water- and sanitation-related diseases such as enteric fever, dysentery, enteritis (and other diarrheal diseases), parasitic diseases and infectious hepatitis. Reliable data on the incidence of water-borne and sanitation- related diseases is not available, but it is clearly much higher than the mortality figures indicate; this is demonstrated by data from Kasturba  - 19 - Municipal Hospital for Infectious Diseases which show one death for every 20 cases treated. During monsoon months, the incidence of (and deaths from) water-and sanitation-related diseases increases dramatically. Statistics for gastro-inte-^inal diseases show that 37 to 56% of cases each year occur during three monsoon months. This is attributable to a number of factors, including a deterioration in water quality during higher monsoon flows and reduced periods of retention in mainland reservoirs, as well as the spread of con- taminated storm water throughout the city as the inadequate sewerage system discharges monsoon flows mixed with untreated sewage. 66. The internal economic rate of return of the project was calculated using the incremental revenue that is expected to accrue to BMC as a result of the implementation of the project. The rate of return is 5.5% if labor is valued at its full market price and 6.0% if labor is valued at 70% of its market price. The incremental revenue represents a minimum proxy for benefits. For one thing, although BMC has indicated its willingness to in- crease tariffs in real terms (paragraph 59), the rate of return calculations are based on projections of tariffs which are constant in real terms. For another, this method of calculation disregards various benefits: the value of the increment in industrial output in excess of the revenue proxy; the value of water from standpipes; the productive time saved in waiting for water; and the health and other social benefits to the community as a whole, which are not quantifiable but which exceed the sum of individual benefits. 67. The risks involved in the project are no greater than can normally be expected with operations of this type. Because the project involves large and complex civil engineering works, there is a risk that temporary shortages of materials, lateness on the part of manufacturers in meeting contractual delivery deadlines, or lack of management skills on the part of contractors will lead to delays. However, WSSD has minimized the impact of these delay- ing factors during the first project and is expected to be able to do so even more effectively in the future as a result of its increased experience and improved management techniques. PART V - LEGAL INSTRUMENTS AND AUTHORITY 68. The draft Development Credit Agreement between India and the Association, the draft Maharashtra Agreement between the Association and the Government of Maharashtra, the draft Project Agreement between the Association and the BMC, and the Recommendation of the Committee provided for in Article V, Section l(d) of the IDA Articles of Agreement are being distributed to the Executive Directors separately. 69. Special conditions of the project are listed in Section III of Annex III. The appointment of consulting engineers for the engineering design of the project is a special condition of effectiveness (see paragraph 52 above).  - 20 - 70. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association. PART VI - RECOMMENDATION 71. I recommend that the Executive Directors approve the proposed credit. Robert S. McNamara President July 10, 1978  ANNEX I Page 1 INDIA SOCIAL INOICATORS DATA SHEET LAND AREA (tHOU KM2) ------ ----------