India - Karnataka Social Forestry Project

Document of The World Bank FOR OMCIL USE ONLY Rqmt Nh. P-3683-IN REPORTI AMD UIEIWION OF THE PRESET OF THE INTERNATIONL DEVEOPMENT ASSOCIATION TO THE EXECUTIV nIRECTORS ON A PROPOSED CREDIT In AI AMN OF SDR 25.6 MILLON TO NDMIA FOR THE SOCIAL FORESTRY PRTECT November 21, 1983 This dommmhina I I iikIbmiud mdimy be d byecdbmlyi In ihupindu..o rw fii amIt= o sdw__w_ebeddosd ideWw BkauwS  -ii- CURRENCY EQUIVALENTS (As of November 18, 1983) US$1.00 - Rs 10.412441 Rs 1.00 8 US$0.0960389 Rs 1 m4llion - US$96,039 The US Dollar/Rupee exchange rate is subject to change. Conversions in the Staff Appraisal Report were, except as otherwise noted, made at the rate of US$1 to Rs 9.75, which represents the projected exchange rate over the disbursement period. FISCAL YEAR April 1 - March 31 ABBREVIATIONS CCr - Chief Conservator of Forests DCF - Divisional Conservator of Forests DDC - District Development Council GOI - Government of India GOK - Government of Karnataka ICB - International Competitive Bidding KSFD - Karnataka State Forest Department LCB - Local Competitive Bidding ODA - Overseas Development Administration of the United Kingdom SFAC - Social Forestry Advisory Committee SFPWG - Social Forestry Project Working Group SFW - Social Forestry Wing TDB - Taluk Development Board TLFC - Taluka Level Forestry Committee  -iii- FOR OMCIL USE ONLY INDIA KARNATAKA SOCIAL FORESTRY PROJECT CREDIT AND PROJECT SUM&R.Y Borrower: India, acting by its President. Beneficiary: Government of Karnataka (GOK). Amount: SDR 25.6 million (US$27 million equivalent). Terms: Standard. On-lending Terms: From the Government of India (GOI) to the Government of Karnataka as part of Central assistance for State development projects on terms and conditions applicable at the time. GOI would bear the foreign exchange risk. Project Description: The project would increase supplies of fuelwood through the establishment of about 150,000 ha of plantations, and also provide small timber for construction, fodder for livestock, bamboo for cot- tage industry and other minor forest and agricultural products. It would strengthen institutional capabilities through provision for additional forestry staff and training of existing personnel; improvement of silviculture research and forestry extension; and additional housing, vehicles and equipment. A wood balance study and a number of other short-term studies would be carried out. Potential project risks include firstly, the limited capabilities of the implementing agency, which could constrain project implementation. The risk would be minlmized by provision for adequate incremental staff, early recruitment of senior professional personnel, and the use of field staff from other relevent agencies. Secondly, limiting free distribu- tion of seedlings to 650 seedlings per family, could adversely affect planting by private farmers. However, the financial rates of return of farm forestry are sufficiently high to offset any price disincentives. Moreover, the issue would be kept under constant review by GOK and IDA supervision missions. Thirdly, the high mortality rate of plants poses a risk that the projected yield-.levels might not be attained. However, this has been taken into account in estimating the project's benefits and estimated yield levels are below the potential yields. Thb documut ha *nstiNed aWmlanuY be umd bsy xients onlyintheperformanceo tb oJdrKlcddube Its ontents sY Goto&erwUe bedbJOsedithout Word Bank authonfot  -iv- Estimated Cost: (US$ millions) Project Organization Foreign Total Incremental Staff 8.54 - 8.54 Operating Costs 1.91 .28 2.19 VehicLes and Equipment 2.17 .67 2.84 Civil Works 2.53 .09 2.62 Sub-total 15.15 1.04 16.19 Plantation Gomal Land 6.18 .21 6.39 C and D Land 2.65 .24 2.89 Tank Foreshores .70 .03 .73 Tribal Bamboo .10 - .10 Roadside (dry zone) .47 .02 .49 Roadside (wet zone) .11 - .11 Canal Bank .35 .01 .36 Farm Forestry 17.54 .90 18.44 Sub-total 28.10 1.41 29.51 Training In-Country Training .60 - .60 Foreign Fellowships - .19 .19 Sub-total .60 .19 .79 Research and Studies .07 - .07 Sub-total 43.85 2.64 46.49 Physical Contingencies 2.42 .16 2.58 Price Contingencies 6.96 .57 7.53 Sub-total 9.38 .73 10.11 Total Project Cost a/ 53.23 3.37 56.60 Financing Plan: (US$ millions) Local Foreign Total IDA 25.1 1.9 27.0 ODA (UK) 21.5 1.5 23.0 GOI/GOK 6.6 - 6.6 Total 53.2 3.4 56.6 a/ Includes taxes and duties of US$1.1 million or 2X of total project cost.  Estimated Disbursements (US$ millions) IDA FY FY84 FY85 FY56 FY87 FY88 FY89 FY90 Annual 1.4 1.4 7.9 8.3 4.7 2.4 0.9 Cumulative 1.4 2.8 10.7 19.0 23.7 26.1 27.0 Rate of Return: The ERR is 22% Appraisal Report: No. 4590-IN, dated November 18, 1983.  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO INDIA FOR THE KARNATAKA SOCIAL FORESTRY PROJECT 1. I submit the following report and recommendation on a proposed credit to India for SDR 25.6 million (US$27.0 million equivalent) on standard IDA terms, to help finance a social forestry project in order to increase supplies of fuelwood to rural and semi-urban areas in the State of Karnataka. The proceeds of the credit would be channelled to the Government of Karnataka in accordance with the Government of India's standard terms and arrangements for financing State development projects. The exchange risk would be borne by the Government of India. The Overseas Development Administration is also expected to provide a grant of US$23 million equivalent. PART I - THE ECONOMY 1/ 2. An economic report, 'Economic Situation of India and Resource Mobilization Issues' (4395-IN, dated April 11, 1983), was distributed to the Executive Directors on April 19, 1983. Country data sheets are attached as Annex I. Background 3. India is a large and diverse country with a population of about 700 mil- lion (in mid-1982) and an annual per capita income of US$250. The economy is dominated by agriculture which employs more than two-thirds of the labor force. However, the land base is not sufficient to provide an adequate livelihood to everyone engaged in agricultural activities, especially those with little or no land. Growth of value-added in agriculture - 2.2% since 1950/51 - has been slower than growth of industrial value-added (5.0Z per annum). As a result, there has been a gradual decline in the share of agriculture in GDP (at factor cost) from 602 to just under 40X, while the share of industry rose from 15% to around 25Z. But industrialization has not been rapid enough to absorb the growing labor force, or to bring about a rapid economic transformation, with significantly higher productivity and income levels. As a result economic growth has been slow over the past three decades, averaging about 3.6% per annum since 1950/51. 4. Nevertheless, there has been steady progress with per capita income rising by about 1.4% per year in the period 1950 to 1980. Despite the large population base and its relatively rapid growth, India has been able to eliminate persistent dependence on foodgrain imports through significant improvements in agricultural production. Savings and investment have increased 1/ Parts I and II of the report are substantially the same as Parts I and II of the President-s Report for the Orissa Irrigation II Project (No. P-3612-IN), dated June 9, 1983.  -2- markedly since 1950/51: gross national savings more than doubled from 10.8X of GDP (at factor cost) to 22.8% in 1982/83, while gross domestic investment rose from 12.5Z of GDP to 24.9% in 1982/83. Foreign savings (balance of payments deficit on current account) have never financed a major portion of domestic investment: a peak of about 202 was reached during the early 1960s. Surpluses arose for a few years in the late 1970s, and at the present time, foreign savings are about 8% of investment. External assistance has been low both as a percentage of GDP and in per capita terms, never rising above 3X of GDP and averaging below 1% for the past five years. Net foreign savings have never risen above 3% of GDP, and presently stands at 2.1%. 5. Before the 1970s, India placed relatively less emphasis on export promotion and more on import substitution. The volume growth of exports between 1950/51 and 1969/70 averaged only 2.2Z per annum, while the volume growth of imports over the same period was 4.32. In the early to mid-1970s, however, India-s terms of trade, which had remained roughly constant during the 1960s, deteriorated sharply. In response, the Government introduced various policy measures designed to stimulate exports. As a result, the volume of India-s exports grew on average about 7.3% per annum for the 1970s as a whole, a performance which demonstrates that sustained rapid growth is possible. While expanding world markets, particularly in the nearby Middle East, con- tributed to this growth, liberalized access to imported inputs and more effec- tive export incentives played a major role. 6. Moving into the second half of the 1970s, the Indian economy was buoyed by higher levels of investment and an expanding level of foodgrain output. As a result, growth in real GDP and in agricultural and industrial value-added, substantially exceeded the historical 30-year trends (paragraph 3) averaging 4.9%, 3.9Z and 5.6%, respectively. In 1979/80, however, this momentum was broken when the worst drought in recent years, combined with a doubling of international oil prices and domestic supply shortages, led to a sharp fall in foodgrain production, a decline in GDP, and the opening up of a large trade deficit. Severe inflationary pressures also emerged after several years of virtual price stability. These setbacks in 1979/80 coincided with the prepara- tion of the Sixth Five-Year Plan which laid down a program of adjustment that aimed at improving the trade deficit, removing infrastructural bottlenecks and ensuring price stability with an overall growth of the economy of 5.2%, 1.6 per- centage points above the trend growth of 3.6%. Recent Trends 7. In 1980/81 and 1981/82, the economy substantially recovered with real GDP growing by 7.9% and 5.2%, respectively. While industrial output expanded by 4% in 1980/81 and 8.6% in 1981/82, recovery was particularly robust in agriculture where normal weather helped output to rise by more than 15% and 5.5%, respectively. The availability of power, coal, and rail transport, already improved in 1980/81, was even better In 1981/82, recording growth rates of about 10%, 9.6% and 12.9%, respectively. The easing of constraints on the supply of infrastructure and basic commodities was a determining factor in the improved performance of the industrial sector. This overall improvement in the Indian economy, combined with a more restrictive monetary policy contributed to a sharp decline in the rate of inflation. Wholesale prices rose by about 9% on an average annual basis in 1981/82 and by only 2.5% in 1982/83, reflecting a strong deceleration from a peak increase of 18% in 1980/81.  -3- 8. After two years of fairly solid performance, the Indian economy faced a difficult year in 1982/83 due to the drought in mid-1982 which brought down the GDP growth rate to around 2% and put further strains on the already dif- ficult balance of payments and domestic resource situation. Besides a sig- nificant decline in the range of 4.5X-6.5Z in agricultural production, GDP growth was also constrained by a slowdown in industrial growth from 8.6% in 1981/82 to about 4% in 1982/83. This resulted from a combination of several factors, notably the decline in agriculture income, persistent (though lessened) power shortages, a textile strike in Bombay, as well as depressed export markets and increased competition from imports. The Government was able, however, to protect the level of savings to a large extent and keep the momentum of the investment program through largely successful public sector resource mobilization efforts. Foreign savings played a crucial role in sup- port of this effort. Similarly, the timely implementation of various economic policies mitigated the otherwise very distressing effects of a poor monsoon. Continued improvements of the infrastructure sectors, although at a slower pace than in the previous two years, also reduced the negative effects of the drought. 9. Agricultural production in 1982/83 received a serious setback from the drought. Foodgrain production, which had reached a record 133 million tons in 1981/82, declined to 124-127 million tons. Production of most other major crops aiso declined in 1982/83. Corrected for weather variations, this still represents a creditable performance. In 1979/80, with a broadly comparable monsoon, foodgrain production reached only 109 million tons. The Government was able to mitigate the effects of the 1982 drought through efficient manage- ment of foodgrain procurement and distribution, careful timing of foodgrain imports, and appropriate allocation of power to irrigation pumps. These policies helped to avoid disruptions in basic food supplies and contributed to price stability during the year. While the management of the foodgrain economy after the drought was a significant achievement, the effect of the drought on production re-emphasized the continued importance of the monsoon in India's agriculture. The performance of the recent past and probable future trends suggest that on average foodgrain supplies will meet demand. The balance remains delicate, and the need for foodgrain imports to maintain conr sumer supplies or adequate buffer stocks could arise from time to time. Thus, programs to expand irrigation, strengthen extension and encourage the efficient use of other agricultural inputs continue to receive high priority. 10. Basic infrastructure services performed generally well in 1982/83, although growth of coal, power and rail transport failed to maintain the momen- tum of the marked recovery of 1981/82. Despite lower hydro generation due to the failure of the monsoon, overall power generation recorded an increase of about 7%. This was due largely to an increase in capacity utilization in thermal plants resulting from improved overall management, stabilization of most of the new large units and better availability of coal due to the combina- tion of increased coal production and improved railway performance. Nevertheless, power shortages remain the major bottleneck in the economy. Railway traffic grew by only 3.7% in 1982/83 reflecting a slowdown from 1981/82. The lower growth was due not to a decline in the operational efficiency of the railways but rather to slack demand from core sectors like steel, iron ore, coal washeries and fertilizers. Coal production growth (4% in 1982/83), after 10% growth in the two preceding years was creditable. There were no major shortages and there were improvements in the quality of coal. Recent easing of shortages and bottlenecks in infrastructure has come primarily  -4- from better utilization of existing capacity, but in the future most lmprove- ment must result from added capacity. It is therefore critically important that India maintain the pace of investment in these key sectors and mobilize sufficient resources to do so. 11. The Indian economy has reverted from a situation of resource surplus, which had been a temporary phenomenon of the late 1970s, to one of resource scarcity. Investment has again grown quicker than national savings, and the scope for further increases in the latter appears limited. India's gross national savings rate, which averaged 22.4% of GDP in the last three years, is high by any standard, particularly considering India's low income and the large proportion of its population living below the poverty line. Future increases in savings will depend heavily upon the enhanced profitability of public sector enterprises which would require better utilization of capacity, more efficient operations and adequate pricing policies. In 1981/82 there was a significant increase in public savings due to improved profitability of various public sector enterprises. This trend which was maintained in 1982/83 needs to be accelerated. The gap between gross investment and national savings which rose from 0.4% of GDP in 1979/80 to 1.8%, 2.3% and 2.1%, respectively in the first three years of the 1980s, has been financed by foreign savings. 12. India's ability to generate resources to meet its development objec- tives has become increasingly linked to the balance of payments. The current account balance which recorded surpluses between 1976/77 and 1978/79, sharply deteriorated to deficits of nearly US$2.9 billion in 1980/81 and US$3.8 billion in 1981/82 (1.8% and 2.3% of GDP, respectively). This was partly due to a sharp rise in the oil import bill as a result of both the disruption of oil production in northeast India in 1980 and significant oil price increases, and to a more liberal import policy aimed at providing producers with access to inputs for higher capacity utilization, greater efficiency, improved technology and capacity expansion. The current account deficit in 1982/83 declined to US$3.3 billion or 2.1% of GDP. The improvement would have been greater had not the drought resulted in the need to rebuild food stocks through imports and at the same time led to a lower level of GDP growth. This improvement in the balance of payments is to a significant degree the result of India's develor ment and adjustment efforts over the past three years. It also reflects a reduction in the trade deficit as compared to the levels reached in 1980/81 and 1981/82. The trade deficit declined from US$7.6 billion in 1980/81 to US$6.0 billion in 1982/83 due to continued export volume growth (following the sub- stantial resumption in 1981/82) despite poor world market conditions, coupled with the containment in import growth due to import substitution of petroleum products, metals and fertilizers while allowing substantial growth in 'other' imports through more liberal import policies. Nevertheless, it is expected that the balance of payments will be under strain for the next several years, for India-s adjustment program will continue to require high levels of imports. 13. The high investment rate, about 25% of GDP, envisaged in the Sixth Plan coupled with the limited possibilities of raising domestic savings beyond the present high levels, necessarily implies a need for external resources. Faced with a reduction in the availability of bilateral and multilateral concessional assistance, India has begun to borrow significant amounts on commercial terms from the Euro-dollar market in addition to much greater utilization of suppliers- and export credits. India-s favorable debt service profile has enabled India to tap commercial capital markets at favorable spreads (over relatively high underlying rates). In the period 1980-82 India contracted  -5- commercial loans totalling over US$2,000 million and suppliers' credits of about US$520 million. The bulk of the loans are linked to specific development projects in the public sector while the credits are linked, by and large, to development projects in the private sector. India also reached an agreement with the International Monetary Fund for the use of the Extended Fund Facility for SDR 5 billion, of which SDR 2.5 billion have already been drawn. The transfer of funds under the EFF has stemmed the use of foreign exchange reser- ves which had fallen to less than four months of import coverage in 1981/82. In 1982/83, in addition to continued use of the EFF, financing requirements vere met by increased nonrconcessional borrowing (about US$2,000 million in new committments) and a 10X increase in net aid disbursement. Development Prospects 14. The experience of recent years illustrates that India has the capacity to grow and develop at a more rapid pace. Although the industrial sector is small compared to the size of the economy, it nevertheless is large in absolute terms and has a highly diversified structure, capable of manufacturing a wide variety of consumer and capital goods. Basic infrastructure -- irrigation, railways, telecommunications, power, roads and ports -- is extensive compared to many countries, although there is considerable need for additional capacity as well as improvement in the utilization of existing capacity. India is also well-endowed with human resources and with institutional infrastructure for development. Finally, India has an extensive natural resource base in terms of land, water, and minerals (primarily coal and ferrous ores, but also gas and oil). With good economic policies and reasonable access to foreign savings, India has the capability for managing these considerable resources to accelerate its long-term growth. 15. The medium-term framework for advancing India's development objectives is the Sixth Five-Year Plan (1980/81-1984/85), which is now in its fourth year. The Plan assigns priority to agriculture, energy development, the growth of exports and domestic import substitutes where appropriate, and the removal of infrastructural bottlenecks. Overall performance has so far been encouraging, although bottlenecks in key sectors such as power and transport are likely to persist. Moreover, fulfillment of the Plan targets will require additional resource mobilization. The efforts of the Central Government to raise resour- ces have so far been impressive and are likely to be broadly sufficient to meet the financing requirements of the Central Government's share in plan investment, even if some increase in inflation is experienced above current low levels. However, a shortfall in public savings is likely to occur in some States unless further measures are introduced. There will be a need also for continuous efforts to maintain the current level of private savings. Recent increases in interest rates and tax concessions on time deposits and the con- tinued dampening of inflationary expectations should stimulate such savings. 16. The higher capital formation rates of the past few years augur well for future income growth. However, returns to investment have so far been relatively low. Much of this phenomenon relates to India's stage of development, in which a large and growing proportion of investment has been needed to build up basic infrastructure. These services, such as power, tranr- sport and irrigation, have inherently high capital-output ratios. However, there is scope to improve the sectoral capital-output ratios through greater efficiency and better management. Bottlenecks in basic infrastructural sectors clearly can prejudice growth in other sectors where large investments have been  -6- made. As demonstrated in the last three years, performance in the basic serv- ice sectors can be improved through better planning and management, thus lead- ing to higher productivity and capacity utilization throughout the economy. At the same time, programs to expand domestic capacity are vital. In the case of tradeable commodities like coal, steel and cement, this is justified on the grounds of comparative advantage. For sectors such as irrigation, power and transportation, expansion of planned capacity in accordance with the require- ments of the rest of the economy will be vital to overall medium- and long-term development prospects. In the short term, however, achieving an adequate balance between supply and demand in these sectors will remain a difficult objective. 17. Under the Sixth Plan, India has an ambitious oil production program backed by substantial financial commitment. While the gap between domestic consumption of petroleum and production remains large, the prospects for progressive substitution of domestic petroleum for imports are quite bright. In 1981, and again in early 1983, resources for exploration and development were raised by successive price increases for domestic crude and products. India's dependence on oil imports dropped from 63% in 1979/80 to about 45Z now and a scheduled expansion in production is expected to decrease oil imports (in crude equivalent terms) to about 33Z of consumption by 1984/85. The rapidly expanding level of exploration activity, combined with the possibilities for accelerated offtake from known fields, offers much encouragement for India's longer-term energy prospects. 18. Despite an expected continued decline in its current account deficits from the current 2.1% to about 1.7Z of GDP by the late 19809, India will require growing access to world financial markets to complement concessional assistance. These commercial sources of funds will be important in the future since India's current account deficits, though not large relative to the size of the economy, will nevertheless be large in absolute terms and will neces- sitate external borrowing beyond levels expected to be available from normal concessional sources. Given the favorable structure of India's external debt, which reflects the past reliance on concessional sources, India should remain creditworthy for a substantial growth in external borrowing. 19. India's development prospects over the next few years will hinge on the extent to which the economy can be brought into both internal and external balance, while at the same time achieving more rapid growth than in the past. In the longer term, income growth represents the best strategy for achieving these needed adjustments, both by generating higher savings for further investment, and by fostering the development of export and import-substituting industry to improve the balance of payments. In the short term, a relatively large external borrowing, including an increased emphasis on commercial borrowing, will be necessary to cope with the balance of payments consequences of such a growth strategy. However, an important element in providing India with the capacity to adjust flexibly will be adequate flows of concessional assistance. Although India is currently in a position to increase borrowing on commercial terms from the very low levels of the past, there are, of course, limits beyond which India will choose to sacrifice growth objectives rather than accept debt on unfavorable or unmalageable terms. The Goverument's effort to maintain an adequate rate of growth while adjusting the structure of the Indian economy to a more open and efficient environment requires foreign resources in addition to the level of commercial borrowing available to India. India is still a very poor country with a large rural sector and enormous  -7- investment requirements for human development and basic infrastructure. The fact that India has been able over the past seven yearn to inaintain a rate of growth above the long term trend, despite the poor monsoons of 1979/80 and 1982/83, lends substance to the hope that a more open trade policy and conr certed efforts to remove constraints on the growth of productive capacity, supported by adequate mobilization of savings both foreign and domestic, can sustain a rate of growth closer to 5.0% per annum than the long-run trend of 3.6% per annum. Combined with a reduction in the rate of population increase to below 2.0% per annum, a 5.0% growth rate would mean a doubling of the trend rate of growth of per capita income of less than 1.4% per annum. Success in these efforts would make a significant difference to the prospects of easlng poverty in India. 20. A large and growing population and severe poverty underline the need to accelerate India's development efforts. The 1981 Census placed India's popula- tion at 683.8 mlllion, or about 12 million higher than official projections. The fact that there was no decline in inter-census rates of population growth, equivalent to about 2.2% per annum, is a cause for concern. While further analysis of the Census may suggest this rate of growth to be slightly overestimated, the expectation of a measurable decline in the population growth rate has not materialized. Until the results of the Census are fully analyzed, firm judgements about the reasons for this outcome are not possible. However, the results re-emphasize the need for continuing efforts to strengthen the health and family planning program in a broad range of activities and services. These efforts are given high priority in the Sixth Plan, which aims at a rise in the proportion of protected couples in the reproductive age group from its estimated 1979/80 level of about 23% to over 35% by 1984/85. 21. Reduction of poverty remains the central goal of Indian economic growth. More than one-third of the world's poor live in India, and more than 80% of the Indian poor belong to the rural households of landless laborers and small farmers. About 51% of the rural population and 40% of the urban popula- tion subsist below the poverty line. Improvements in the living standards of the poor will depend to a large extent on the overall growth of the economy, particularly on increases in agricultural production and employment, and in nonr-farm rural employment. These developments will have to stem in large part from market forces which can be encouraged and reinforced by appropriate Government policies and the strengthening of basic services and infrastructure. The declining trend in real foodgrain prices between 1970 and 1981, resulting from India's sustained effort to raise agricultural duction, reflects such developments. There is also a role for direct Government action in faster implementation of land reform (though the scope for significant reduction in poverty through land redistribution is quite limited in India), in increasing the supply of credit available to small farmers and rural artisans, and finally in broadening the provision of those services which enhance the human capital of the poor and improve living standards. Many of the latter are elements of the Minimum Needs Program, which has been an integral part of Indian planning for the past decade. Progress has been slow but steady in the expansion of primary education, the extension of rural health facilities and the provision of secure village water supplies. Operations such as the community health volunteer program and the national adult literacy campaign provide encouraging evidence that well-targetted, relatively low-cost programs can lead to enhanced prospects for India-s poor.  -8- PART II - BANK GROUP OPERATIONS IN INDIA 22. Since 1949, the Bank Grcr.p has made 76 loans and 160 development credits to India totalling US$5,183 million and US$11,851 million (both net of cancellation), respectively. Of these amounts, US$1,387 million has been repaid, and US$6,224 million was still undisbursed as of September 30, 1983. Bank Group disbursements to India in the current fiscal year through September 30, 1983 totalled US$286 million, representing a decrease of about 2 percent over the same period last year. Annex II contains a summary state- ment of disbursements as of September 30, 1983. 23. Since 1959, IFC has made 29 commitments in India totalling US$224 million, of which US$30 million has beer. repaid, US$56 million sold and US$18 million cancelled. Of the balance of US$120 million, US$113 million represents loans and US$8 million equity. A summary statement of IFC disbursements as of September 30, 1983, is also included in Annex II (page 4). 24. The thrust of Bank Group assistance to India has been consistent with the country's development objertives in its support of agriculture, energy and infrastructure. Of particular importance have been investments in irrigation, extension and on-farm development designed to increase agricultural productivity, and efforts to improve the availability of basic agricultural inputs to farmers through credit, fertilizer, marketing, storage, and seed projects. Major elements of the lending program have also been directed at helping to meet the energy needs of the economy while curbing the growth of oil imports, and to ease the infrastructure bottlenecks which have hampered economic growth in India, particularly through power generation and distribution, and railways and telecommunications projects. The Bank Group has also provided financing for a broad range of medium- and small-scale industrial enterprises, primarily in the private sector, through its support of develhp- ment finance institutions. Recognizing the importance of improving the a',ility to satisfy the essential needs of urban and rural populations, the Bank Group has supported nutrition and family planning programs, a rural roads project, as well as water supply and sewerage and other urban infrastructure projects. 25. This pattern of assistance remains highly relevant, and consonant with Government priorities, as reflected in the Sixth Plan. The continued active involvement of the Bank Group in agriculture, energy and infrastructure development will appropriately contribute to Indias adjustment and growth prospects. Irrigation will need continuing support, with emphasis on improved efficiency in water conveyance systems to ensure reliable delivery to farmers- fields. Iu addition, major investments to develop the large Narmada River basin will be vital to India-s efforts to increase agricultural production. Important complements to these efforts, such as fertilizer production and listribution, agricultural credit and extension, will continue to receive support. A continued program of investments aimed at rapidly increasing the domestic supply of energy will clearly be necessary if India is to curb the cost of oil imports and alleviate the critical power shortages which constrain output in both the agricultural and industrial sectors. Exploitation of oil and gas resources is a central element of this program, which should be supple- mented by investments in hydro and thermal power generation, and in the expanr- sion of the transmission and distribution networks. Industrial projects to increase the domestic production of basic commodities, which have been in short supply and which India has a comparative advantage in producing, should also receive high priority. Finally, raising the efficiency and levels of transpor-  -9- tation infrastructure would mitigate a key constraint to achieving higher levels of economic growth so that further support of the railways and for ports development will be particularly appropriate. 26. The need for a substantial net transfer of external resources in support of the development of India's economy has been a recurrent theme of Bank economic reports and of the discussions within the India Consortium. Thanks in part to the response of the aid community, India successfully adjusted to the changed world price situation of the mid-1970s. However, there is now a need for increased foreign assistance to India, not only to help the economy adjust to the more recent oil price increases and the overall deterioration in the world trade environment but also to maintain the rela- tively higher growth rates achieved during the first two years of the Sixth Plan. As in the past, Bank Group assistance for projects in India should aim to include the financing of local expenditures. India imports relatively few capital goods because of the capacity and competitiveness of the domestic capital goods industry. Consequently, the foreign exchange component tends to be small in most projects. This is particularly the case in such high-priority sectors as agriculture, irrigation, and water supply. 27. India-s poverty and needs are such that whenever possible, external capital 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 rema-as small in relation to India-s needs for external support. This requirement for additional assistance can be met, in part, through Bank lending. Given its development prospects and policies, India is judged credit-worthy for Bank lending to supplement IDA assistance. A con- tinuation of efforts already underway to achieve growth in productive capacity, trade expansion, higher levels of savings, foodgrains self-sufficiency and a reduction in the rate of population growth should result in continued economic growth and Improvement in the balance of payments. Despite recent setbacks, India-s external payments position is still manageable. The ratio of India's debt service to the level of exports was about 11% in 1982/83 and is projected to remain below 20% through 1995/96. As of September 30, 1983, outstanding loans to India held by the Bank totalled US$3,932 million, of which US$2,100 million remain to be disbursed, leaving a net amount outstanding of US$1,832 million. 28. Of the exterral assistance received by India, the proportion conr- 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 50%, 43% and 53%, respectively, in 1981/82. On March 31, 1982, India-s outstanding and disbursed external public debt was about US$17.9 billion, of which the Bank Group's share was US$7.1 billion or 38% (IDA's US$5.9 billion and IBRD's US$1.2 billion). In 1981/82, about 16.0% of India's total debt service payments were to the Bank Group.  -10- PART III - FORESTRY IN INDIA AND KARNATAKA 29. India-s forest lands -- about 75 million hectares -- cover 23% of the total land area. However, excessive pressures of human and cattle popuilations on forest lands have resulted in rapid depletion and degredation of much of the natural forests. Nonr-commercial energy sources, including fuelwood, agricultural wastes and animal dung, account for about 40Z of the total, 80% of the rural and 50% of the urban household-s energy consumption. Almost 55X of the nonrcommercial energy is obtained from fuelvood, mostly in primary form. About 20% of available manpower in farming families is spent in fuelwood collection. Existing planting programs, of about 100,000 ha annually, are inadequate for meeting the demand for fuelwood. It is estimated that annual plantings of at least 300,000 ha over the next two development plan periods (1986 to 1995), would be required to meet the projected shortfall. GOI Policies and Social Forestry Programs 30. The Government has concluded that firstly, the tradicional develop- ment and managemenc of forestry resources would not be adequate to meet the country's basic needs for forestry products; and secondly, development of forest resources outside the traditional reserve forests through active participation of local communities is requircd in order to overcome the shortage of fuelwood, fodder and small timber. The country-s Fifth (1974-79) and Sixth (1980-85) Plans reflected the concern by allocating 49Z and 78Z of total forestry sector allocations respectively, and 46Z and 70Z of total forest planting respectively, to social forestry. 31. GOI has increab5ngly mobilized domestic and external resources for implementing a national rural afforestation program, and State Governments are being assisted to implement the program, which now is underway in 100 districts. GOI is also providing assistance for social forestry planta- tions established under various programs including the National Employment, Minimum Needs and Drought Prone Areas Programs. In addition, State wide projects are being implemented with external assistance in a number of States. Bank Group Role In Social Forestry 32. The Bank Group as well as other donors have supported India-s overall strategy for forestry development, particularly the social forestry programs. The Bank Group-s first project, the Madhya Pradesh Forestry Technical Assistance Project (Credit 609-IN, December 1975) was, however, directed primarily towards the development of plantation for the pulp and paper industry. Since then the main thrust of Bank Group operations in this sector has been for social forestry development. So far, four such projects have been approved: the Uttar Pradesh Social Forestry Project (Credit 925-IN; US$23 million; June 1979); the Gujarat Community Forestry Project (Credit 961-IN; US$37 million; December 1979); the West Bengal Social Forestry Project (Credit 1178-IN; US$29 million; October 1981) and the Jammu and Kashmir and Haryana Social Forestry Project (Credit 1286-IN;  -11- US$33 million; August 1982). The proposed project would be the fifth Bank Group operation in this sector. In addition, the Kandi Watershed and Area Development Project (Loan 1897-IN; US$30 million; July 1980) and the Himalayan Watershed Management Project (Loan 2295-IN; US$46.2 million; June 1983) also include substantial components for reforestation and pasture development. The recent mid-term review of the Uttar Pradesh and Gujarat projects, and the supervision of the West Bengal and Jammu and Kashmir and Haryana projects show that overall progress in tree planting under those programs has been very satisfactory despite staffing shortages and high plant mortalities in the early stages of project implementation. Tree planting has exceeded appraisal ectimates except in self-help village wood lots developr ment schemes which has proceeded slower than anticipated. Experience to date indicates that given sufficient resources, State Forestry Departments are able to successfully implement substantial rural afforestation programs. The State of Karnataka 33. The State of Karnataka, situated in South West India with an area of about 192,000 km2 (19.2 million ha) and a population of about 37 million, is one of the fastest growing States of the Union. About 71% of the population resides in the rural areas. The labor force constitutes about 35% of Karnataka-s population, and almost 3.6 million people or about 14% of the total rural population, are landless laborers. The agricultural sector (including crops, forestry and livestock) accounts for about 50% of the StateCs GDP. Average per capita income is about Rs 750 per year, and nearly 70% of the rural population is living at or below the poverty threshold, estimated at Rs 780 per capita per annum for rural India. 34. Agro-climatic Conditions. Most of the State lies on a plateau. Average rainfall is about 1,350mm. There are considerable variations in the amount and distribution of monsoon rains, and as many as 135 out of 175 taluks (an administrative subdivision of a district) are classified as 'drought prone". In the northern/north-eastern districts, rainfall in any particular year may deviate from normal by about 30Z-40Z. Deviations by more than 30% cause large scale failures in plantations. 35. Land Tenure Classification and Utilization. Land is owned either by the State or private individuals and/or organizations. Surplus Government-owned land can be granted to individuals or groups for specific purposes. However, the Chief Revenue Officer can authorize a change in land use. Of the uncultivable and fallow lands (4.2 million ha) about 1.4 million ha are cultivable wastes (categorized as A and B class lands) and about 2.8 million ha are barren noncultivable lands (categorized as C and D class lands). Most of Government A and B class lands have been made available to villagers for common use as grazing grounds (known as gomal or peramboke lands). With appropriate land development and soil works, some of the uncul- tivable wastes (C and D class lands) are suitable for tree growing. About 3.2 million ha, 16% of the State-s land surface, are under forests (the all India average is 23%, and the National policy is to maintain 33% of the total geographical area under forests). Rural Institutions Supporting Forestry Development 36. There is a three tier system of corporate bodies: (i) village panchayats, which are bodies elected 'y all adult members residing in the  -12- village or group of villages (there are 8249 panchayats); (ii) Taluk Development Boards (TDB) at the intermediate level, comprising directly elected, co-opted and ex-officio members; and (iii) the District Development Council (DDC) which constitutes the apex of the system. The Village Panchayats, TDBs and DDCs perform a wide range of functions including plant- ing and preservation of trees, maintenance of grazing and forestry lands, and maintenance and management of forests adjacent to the village. Forestry in Karnataka 37. About 752 of the State's forests are classified as reserved forests, 10% as district (protected) forests, 1% as village and private forests and the remaining 14% is unclassified. About 50% of the total growing stock (216 million m3) is in the high rainfall, evergreen and semi-evergreen forests, 26% in the moist deciduous and 17% in dry deciduous forests. The remaining 7% comprise scrub and thorny bushes in the eastern and north- eastern dry zones of the State. The Karnataka State Forestry Department (KSFD) began a modest program of social forestry planting in 1979/80, and since then GOK has spent about Rs 81 million, and about Rs 121 million has been allocated for the 1983-84 program. To date there has been very little participation by local people and communities, and program implementation is ad hoc. 38. Total recorded production of round wood, sawn lumber, poles and other construction timber and firewood amounts to 2.5 million m3 per year, of which about 1.4 million m3 is firewood. In addition, the State produces about 1.4 million tons of bamboo. However, the shortage of fuelwood and small timber is growing, especially in semi-urban and rural areas and the drier districts. Annual availability of fuelwood is only 60% of the total requirements. Fodder availability is estimated at about 5 million tons of dry matter which is sufficient only to maintain the existing livestock at survival levels. 39. GOK Objectives and Policies. To overcome the forest products deficit, GOK aims at planting about 95,000 ha per year. To achieve this objective, the Government is mobilizing the State's own resources for planta- tion development, enforcing the 1976 Tree Preservation Act, increasing afforestation on public lands, accelerating afforestation in drought prone areas and providing incentives to private individuals for planting trees. The proposed allocation of Rs 160 million to the forestry sector in the Sixth Five Year Plan reflects a sulstantial increase over allocations of the pre- vious Plan periods of Rs 10.5 million, Rs 40 million, Rs 50.2 million and Rs 70.2 million in the Second, Third, Fourth and Fifth Plan periods, respectively. Forestry Institutions 40. The Karnataka State Forestry Department (KSFD) is an entity within the Department of Agriculture and Cooperatives which has overall responr sibility for forestry activities in the State. KSFD has two operational wings, General and Development, each headed by a Chief Conservator of Forests (CCF). The General Wing is responsible for all traditional forest management and the Development Wing, established in 1981, is mainly respon- sible for working plan development, research, wildlife preservation, surveys, demarcation of State forests and other revenue lands transferred to KSFD for  -13- afforestation, and more importantly, the implementation of social forestry programs. There are seven territorial circles each headed by a Conservator of Forests, and 35 Forest Divisions, each headed by a Divisional Conservator of Forests (DCF). Within each Division are Range Offices, headed by Range Forest Officers. There are 466 Range Forest Officers In the State. 41. Extension. KSFD's structure, staffing pattern, training and orienta- tion are based on the concept of traditional forest management, focussing on protection. Hence, it is not geared towards providing extension and advisory services to individuals. However, it would aot be necessary for KSFD to establish a separate extension service, because the necessary technical information can be conveyed by a core of trained field staff of the KSFD, supplemented by extension staff available from other relevant departments like livestock, agriculture and rural development and even non-governmental agencies (para 63). 42. Silviculture Research and Training. The State has a generally ade- quate research infrastructure. However, there is need for a program narrowly focussed on the problems of social forestry, and for more effective liaison between KSFD and other State and regional forestry research institutions (para 57). GOK has its own training school for foresters and facilities for training of forest guards. PART IV - THE PROJECT Background 43. The project was prepared by the Government of Karnataka. It was appraised by a Bank mission which visited India in January/February 1983. Negotiations were held in Washington, D.C. in October 1983. The Governments of India and Karnataka were represented by a delegation coordinated by Kr. N. Misra, Director of the Government of Indias Department of Economic Affairs, Ministry of Finance. The Staff Appraisal Report (No. 4590-IN) is being distributed separately to the Executive Directors. A Supplementary Data Sheet is attached as Annex III. Project Rationale 44. A severe disparity between supply and demand of primary forest products, especially fuelwood, building poles, small timber and fodder, is creating social, economic and ecological problems. An average rural family spends about 36X of its daily labor and almost 12Z of its daily calories on firewood collection, which is substantially more than what it is able to spend on agricultural activities. The Governments of India and Karnataka have made a laudible effort to overcome the problem. However, the scope, content and intensity of the programs fall short of development needs of the subsector. Consequently, assistance is needed in order to (i) adequately expand resource availability to a minimum critical level as quickly as possible; (ii) create adequate institutional capabilities to support the programs; (iii) strengthen research, training and extension activities in order to mike them responsive to the requirements of implementing the program; and (iv) create conditions which would invoke support and participa-  -14- tion by expected beneficiaries. The proposed project is designed to address these needs. Project Objectives and Description 45. The project's primary objective would be, over a five year period, to increase supplies of fuelwood to rural and semi-urban areas through the establishment of about 150,000 ha of plantations to be located throughout the State. Secondary objectives would be to provide small timber, livestock fodder, fruits, bamboo for the cottage industry and other minor forest and agricultural products. Priority for tree planting would be in the districts which have at least two of the following conditions: mean annual rainfall below 800mm; designated forest area less than 15% of the total geographic area; and more than nine persons per hectare of presently designated forest area. Within such districts, the following additional criteria would also be used to determine priorities: (i) only land with minimal agricultural poten- tial would be planted with trees; (ii) shift in land use away from subsis- tence crop would be discouraged; (iii) emphasis would be on encouraging communal participation and creating employment for the rural poor; (iv) project output would be first made available to meet the needs of the area in which development takes place; and (v) development costs would be recovered where possible. On the above basis, there would be 13 priority districts with a total population of 20 million. In order to execute the program, the project would provide funds for additional vehicles, housing, equipment and forestry staff, and training, and improvement of silvicultural research and studies and forestry extension activities. Plantation Activities 46. Farm Forestry (120,000 ha - 80% of Total Planting Program under the Project). The project would provide funds for establishing of 120,000 ha of forestry on private farm land through development of additional nurseries, distribution of planting materials and provision of advisory services. For this purpose KSFD would raise and distribute 600 million seedlings of fuelwood, small timber, poles and fruit tree and various species of fodder for planting by private individuals -- with priority given to small and marginal farmers. The seedlings would be raised primarily in KSFD nurseries, however, incentives would be given for the development of nurseries by private individuals and local institutions such as schools and cooperatives. Under the project, the preseat policy of unlimited free distribution of seedlings would be amended so that in the 1984/85 planting season, only 1500 seedlings per farm family would be distributed free of charge, and from the 1985/86 planting season, only 750 seedlings per farm family would be given free of charge. This is the estimated number of trees required to meet the domestic needs for fuelwood and fodder of an average family. Seedlings above the 750 free limit would be charged at the actual financial cost of produc- tion (draft Project Agreement, Schedule 2.5). However, germinated seedlings in bags would be supplied free of charge. Individual farmers would meet planting and maintenance costs. 47. Plantations on Gomal lands (15,000 ha - 10% of Total Planting Program under the Project). The project would finance the planting, mainr tenance and protection costs of 15,000 ha, representing 25% of the available 60,000 ha of gomal lands. It has been agreed that Karnataka would ensure that: (a) the establishment of the plantations would not adversely affect  -15- grazing and aggregate fodder availability from gomal lands (draft Project Agreement, Schedule 2.1a); (b) the identification of goinal land and species to be planted would be done in consultation with the respective panchayats, Taluka Level Forestry Committees (TLFCs) and concerned villagers (draft Project Agreement, Schedule 2.1b); and (c) once agreement had been reached, the Deputy Commissioner would authorize plantations on the lands identified (draft Project Agreement, Schedule 2.2). 48. Plantation on C&D Class Lands (5,000 ha - 3% of Total Planting Program under the Project). About 5,000 ha of C&D class lands, out of the 300,000 ha transferred to the KSFD for management, control and afforestation, would be planted with fodder, fruit, fuelwood, wood for small timber and bamboo. Planting, maintenance and protection costs would be borne by KSFD. Where possible all or portions of such plantations would be earmarked for maintenance and protection by the poor sections of the community in return for a specified share of produce. 49. Strip Plantations on Roadsides (3,000 ha - 2% of Total Planting Program under the Project). Avenue planting of about 2500 trees/ha would be established in areas with less than 650mm of annual rainfall. Permanent, hardy and drought tolerant species which have value as ornamental, shade, fuel timber and fruit trees would be planted. About 420 km of roadsides equivalent to about 500 ha, would be planted with a mixture of fast-growing fuelwood species and permanent fruit and avenue trees in areas where the annual rainfall is between 650-1000mm. Establishment and maintenance would be by KSFD. 50. Plantations on Tank Foreshores and Upper Reaches of Derelict Tanks: (3,000 ha -- 2% of Total Planting Program under the Project). The project would finance plantation of 3,000 ha out of the existing 40,000 ha of tank foreshores and upper reaches of derelict tank beds. Establishment of the plantations would be the responsibility of the KSFD. Later management including usage, shall be governed by an agreement between KSFD and village panchayats (draft Project Agreement, Schedule 2.3). 51. Plantations on Canal Banks (1,000 ha - 0.7Z of Total Planting Program under the Project). The project would plant trees on 1,000 ha along 800-900 km length of canal banks out of a total length of 4500 km. KSFD would bear all plantaticn, maintenance and protection cost for the intitial three years. Thereafter, the Irrigation Department and the local people would be responsible for maintenance and protection. Site selection design and plantation techniques would be determined after consultation with the Irrigation Department. 52. Bamboo Plantation for Tribal People (2000 ha - 1.3X of Total Planting Program under the Project). The project would plant about 2000 ha of bamboo in the forest reserves. Tribal people living in the vicinity of the selected areas would be employed for planting, maintenance, and harvesting, and would utilize the produce, although all costs for plantation establishment would be borne by KSFD. GOK has submitted to and IDA has approved a detailed plan for implementing the bamboo plantation program. 53. Overall, 95% of the species planted would produce fuelwood and small timber, poles, softwood and leaf fodder. Wherever possible, plantations would be undersown with herbaceous legumes and grasses. Land and site  -16- preparation would be primarily by manual labor. Use of heavy machinery would be minimal and limited only to hard compacted soll and lateritic areas (draft Project Agreement, Schedule 2.6). Implementation Assistance to KSFD 54. Incremental Staff and Staff Development. The project would finance 7,382 man-years of full time incremental staff for establishment of a Social Forestry Wing (SFW), and 12,000 man-years of part-time motivators. All staff on first appointment or on transfer to SFW, would be given orientation cour- ses with particular emphasis on farm forestry and extension. This would be followed by short duration inrservice training within or outside the State, as well as outside the country, as required. 55. Vehicles, Equipment and Furniture. The SFW would be provided with earthmoving equipment, transport vehicles, tractors, together with appropriate farm and office equipment for carrying out the project, and funds for operating and maintaining such vehicles and equipment. In addition, furniture would be provided for offices and traiuing centers. 56. Civil Works. The project would provide funds for constructing a training center at Dharwad including dormitories and expansion of existing facilities. In addition, residential housing for senior professional staff and for Range Forest Officers, Foresters and Forest Extension Workers would be constructed to standard Public Works Department design and specifications. Seed testing laboratories, storages, pumphouses, garages would also be constructed. 57. Research. Studies and Consultancies. Funds would be provided for consultants to undertake social forestry related research (silvicultural, as well as socio-economic). KSFD, assisted by the Forestry Research Institute and other relevant Institutions would, by June 30, 1984, review its current social forestry research program, and prepare a detailed program for implementation under the project (draft Project Agreement, Section 3.03). Funds would also be provided for hiring consultants to conduct a wood-balance study and to assist KSFD in monitoring and evaluation of the project. KSFD has finalized the terms of reference for the wood balance study in consult- ation with IDA, and consultants with qualifications and terms of employment satisfactory to IDA, would be appointed to undertake and complete the studies by June 1986 (draft Project Agreement, Section 2.02). 58. Publicity and Mass Communication. A publicity cell headed by a person of the rank of DCF would be established within the office of the CCF (Development). It would plan, produce and disseminate social forestry related materials. Similar cells headed by an Assistant Conservator of Forests would also be established at the divisional level, these would be equipped with mobile vans and audio-visual aids. 59. Monitoring and Evaluation. A monitor'ng and evaluation cell would be established in the office of CCF (Development). It would collect data, monitor progress regarding project implementation, and undertake onr-going and ex-post evaluation of the impact of the project. The SFW would carry out a mid-term review by March 31, 1986 after the third year planting season (draft Project Agreement, Section 3.02). The SFW would also submit bi-annual progress reports to IDA and the Overseas Development Administration of the  -17- UK (ODA). Not later than six months after project completion, GOK would prepare and submit to IDA a project completion report (draft Project Agreement, Section 2.05(d)). 60. Distribution of Produce from KSFD Plantations. Distribution of forestry produce from the project plantations on public lands would be done in a manner which would: help meet the needs of the local population; encourage community/panchayat participation; promote further social forestry plantation projects by the panchayats; provide additional resources to panchayats; and help KSFD recover part of the investment costs. Distribution of production from all KSFD plantations on public lands would be in accord- ance with the principles agreed between KSFD and the Association (draft Project Agreement, Schedule 2.13). 61. Except for the small quantities of fuelwood sold through Government fuel depots at subsidised prices (established on a no loss/no profit basis) fuelwood, poles, construction timber, etc. are sold at prices determined in the free market. However, adequate reliable information regarding the long- term supply and demand situation is lacking. The proposed wood-balance study is designed to provide this information. Cost Recovery 62. The proposed project is intended to meet critical basic needs of rural and semi-urban people for fuelwood and other minor forestry products. The associated public investment is viewed as part of Government-s normal program for the socio-economic uplift and welfare of the rural population, costs of which, traditionally are not recovered from the beneficiaries. However, some cost recovery would be made for investments made for afforesta- tion of public lands by selling part of the produce accruing to the Forestry Department. Furthermore, the costs of seedlings in excess of 750 seedlings per farm family, would be fully recovered (currently unlimited quantities of seedlings are distributed free of charge). The project would therefore, substantialy reduce the incremental fiscal impact of the Earm forestry component. Organization, Management and Project Coordination 63. A Social Forestry Wing headed by an Additional Chief Conservator of Forests has been created within the Development Wing of KSFD specifically, to implement the proposed project and also to continue social forestry development during post project years. Below the headquarters level, project implemention would be coordinated by Circle Conservators of Forests who are responsible for all forestry development activities within their respective jurisdictions. At the divisional level a separate group of professionals and field staff with sole responsibility for social forestry programs would be established. Senior level forestry staff and at least 20% of field staff of the SFW would be appointed by April 30, 1984 (draft Project Agreement, Schedule 2.9). In order to provide the required extension service and advice (para 41), orientation and training programs for KSFD staff would be initiated in time for their services to be available for the 1984 planting season (draft Project Agreement, Schedule 2.9). Furthermore, KSFD would finalize arrangements with the Departments of Agriculture, Livestock, Rural Development and other relevant agencies by June 30, 1984 to make available  -18- their services to supplement KSFD-s extension effort (draft Project Agreement, Schedule 2.10). 64. Three committees would assist in project implementation. At the State level, a Social Forestry Advisory Committee (SPAC) would be established, headed by the Secretary, Department of Food and Forests, and would comprise representatives of appropriate departments and institutions. Its main functions would be to provide policy guidelines, ensure inter- ministerial collaboration and review progress of social forestry development activities. At the territorial level, a Social Forestry Project Working Group (SFPWG) would be established, and at the local level, the TLFC on social forestry would provide guidance and implementation assistance. The SFAC and SFPWGs would be established by March 31, 1984 (draft Project Agreement, Schedule 2.11), and KSFD would review the composition and func- tions of TLFC to ensure their effective contribution to project implementa- tion (draft Project Agreement, Schedule 2.11). To facilitate participation by the poorer section of the population, KSFD plantations would be sited as much as possible in close proximity to poor villages. Project Costs and Financing 65. Total project cost based on January-February 1983 prices and updated to September 1983, is estimated at US$56.6 million, including taxes and duties entimated at US$1.1 million, or 2% of total project cost. The foreign expenditure component is estimated at US$3.4 million equivalent to 6.0% of the total project cost. The principal cost components net of physical and price contingencies are: planting activities (US$29.5 million); incremental staff (US$8.5 million); capital goods and civil works (US$5.4 million); operation and maintenance (US$2.2 million); and research, studies and staff development (US$0.8 million). Physical contingencies at about US$2.6 million were estimated separately on each item and average 5.5% of total project base cost. Price contingencies at US$7.5 million accounting for 16% of base line costs were derived from projected domestic inflation rates of 7X in FY84-86; and 6% in FY87 and FY88; and inflation rates on foreign expenditures of 7.9%, 7.4%, 6.5%, 6.0% and 6.0% for each of the years FY84-88. 66. The credit of US$27.0 million equivalent would cover 49% of total project costs, net of duties and taxes. The Overseas Development Administration is expected to contribute US$23 million equivalent, or 42% of net project costs. COK/GOI is expected to contribute US$6.6 million equivalent, or 11.7% of project costs. 67. The proposed IDA credit would be made to GOI on standard terms. GOI would channel the proceeds to GOK in accordance with GOI's terms and condi- tions for development assistance to constituent States. ODA financing would be from its Retroactive Term Adjustment Funds which is an interest-free debt relief on assistance previously provided. Retroactive Financing 68. Up to US$2.7 million would be provided to cover expenditures incurred after March 1, 1983, for nulrsery development, advance soil works for plantations, civil works related to construction of a training center, procurement of essential vehicles and equipment, and incremental staff  -1 9- employed on the 1984 planting operation (draft Development Credit Agreement, Schedule 1.4(a)). Procurement 69. Most civil works (US$3.1 million) would be small and simple struc- tures widely dispersed, and scattered. As such International Competitive Bidding (ICB) would not be suitable and contracts would be let on the basis of Local Competitive Bidding (LCB), under established GOI procedures satis- factory to IDA and ODA, and/or by force account. Contracts up to Rs 0.7 million would be subject to post-award review, and those over this amount to pre-award review by IDA. Land acquisition (US$0.5 million) would follow established rules and regulations of GOK. Vehicles (US$2.6 million), comprising small numbers of several types, would be purchased over three years and, as adequate maintenance and availability of spare parts would be of paramount importance, this would necessitate purchase of locally made vehicles of types already used by Government departments. Thus procurement would be by LCB under existing Government procedures which are acceptable to IDA. Equipment and furniture (US$0.6 million), comprising small numbers of a wide and miscellaneous range of items purchased over three years would be purchased by LCB with bulking wherever appropriate to facilitate this. About 50% of the total (US$37.2 million) direct plantation costs would be for hired labor, 26% for materials and 24% for transportation. Nursery work would be done by force account because LCB is not feasible. Land preparation, plant- ing and maintenance for plantations by KSFD on public lands would be con- tracted to laborers on piece rates established by the Public Works Department for each work season. However, where such contracts exceed Rs 0.3 million, LCB would be followed. KSFD would give priority to the disadvantaged com- munity when hiring laborers for the project (draft Project Agreement, Schedule 2.8). Materials including polybags, fertilizer, insecticides, etc. would be procured locally in accordance with GOK procedures. KSFD would use its own vehicles or leased ones to transport materials. Lease contracts of more than Rs 0.5 million would be on the basis of LCB following procedures satisfactory to IDA. Incremental recurrent costs amounting to US$12.1 million, including salaries, wages, operations and maintenance costs and office expenses; training costs (US$0.8 million); and costs for research and studies (US$0.07 million) would uot be suitable for any form of competitive bidding. Disbursement 70. The proceeds of the credit would be disbursed as follows: (a) 70% of total costs of civil works, including maintenance of buildings; (b) 100% of CIF price of imported vehicles, equipment and furniture, 10O% ex-factory or 75% of invoice price if locally procured; (c) 50% of total cost of planta- tion costs; (d) 50Z of incremental staff salaries, in-country training and vehicle operation and maintenance costs; and (e) 100% of total costs of overseas training, research, and studies, including consultants. The ODA grant of US$23.0 million equivalent would be disbursed as followt.: (a) 25% of all costs of civil works; (b) 50% of plantation costs; and (c) 45x of total costs of incremental staff salaries. 71. Disbursements against expenditures for the following items would be against statements of expenditure certified by the CCF (Development), the documentation for which would not be submitted to IDA/ODA for review but  -20- would be retained by KSFD/GOK and made available to IDA/ODA review misslons for their inspection: staff salaries, operating costs, local tralning, and plantation costs; civil works payments not exceeding Rs 300,000 and those carried out under force account; locally procured vehicles, equipment and furniture costing Rs 150,000 or less; and research, studies and local con- sultant costs. Disbursements against all other items would be contlngent upon full and satisfactory documentation. All Certificates of Expenditure would be audited at least once every year and reports submitted to IDA and ODA promptly thereafter. The estimated disbursement schedule for the proposed IDA credit has been based on the disbursement record for the onr going IDA-financed social forestry projects in India. Accounts and Audit 72. KSFD would maintain separate accounts for all project expenditures, categorized by each component. Such accounts and certified statements of expenditure would be audited annually by Government or a prlvate auditing firm satisfactory to IDA, in accordance with sound auditing principles con- sistently applied, and submitted to IDA and ODA within nine months after the end of each fiscal year (draft Project Agreement, Section 3.01). Benefits, Justification and Risks 73. The project's annual incremental production of biomass l/ comprising: 0.36 million tons of fuelwood, 0.97 million tons of eucalyptus wood, 0.2 mil- lion tons of small timber and about 0.01 million tons of bamboo, which would be about 45Z over the current production levels, would help reduce the rapidly increasing shortage of these products. The incremental production of fodder would support about 0.2 million cattle. Over the five year period, the project would generate about 70 million mandays of labor, and some 118 mil- lion mandays of labor are expected to be created on harvesting, maintenance and fodder collection during the post investment years. Most of the employ- ment would benefit the landless laborers, marginal farmers and other poor sections of the population. Furthermore, the project would strengthen KSFD-s organizational and operational capabilities for providing effective social forestry extension services. The major enviroumental benefits would include a significantly improved ecology through soil conservation, improvements in soil fertility and micro-climatic improvements. 74. The financial and economic rates of return are estimated at 23% and 22Z, respectively. Sensitivity analysis indicates that benefits would have to go down by 60Z, or costs increase by 149%, for the project to be economi- cally unattractive. The net present value of the project is Rs 691 million and that of the KSFD plantation and farm forestry components are Rs 6 million and Rs 581 million, respectively. The NPV of the bamboo plantations, planta- tions on the tank foreshores and on road side plantations in dry zones com- ponents are negative. However, these represent only about 5% of total project plantations and less than 3% of project costs; these components are justified on ecological and social grounds. The bamboo plantations would 1/ From the eighth year of planting for fuelwood species and Eucalyptus, and from the fifteenth year for bamboo and timber.  -21- exclusively benefit tribal people, while the plantations on Tank foreshores and road sides would help prevent soil erosion. 75. While KSFD is a well established department, its expertise and experience regarding social forestry are llmited, and could constrain proper project implementation. To minimize the risk, the project would provide adequate incremental staff as well as intensive staff training. Moreover, It is intended to recruit senior professional personnel early, and wherever possible to utilize field staff of other relevant agencies. Limiting froe distribution of seedlings to 650 per farm family could adversely affect planting by private farmers. However, financial rate. of return to all categories oE farm forestry are sufficiently high to overcome any potential disincentives arising out of charging a price for seedlings over the free limit. Nevertheless, the issue would intensively be reviewed by GOK and IDA supervision mlssions, and particularly at the time of the mid-term review. Finally, the high mortalilty rates and the problems of protection against grazing pose a risk that the projected yield levels may not be attained. However, this has been taken into account in estimating the project's benefits, and estimated yields are well below the potential yield. Over all, the project risks are low. Moreover, continuous, on-going monitoring and evaluation, and the proposed mid-term review would help ensure the financLal and economic viability of the project. PART V - LEGAL INSTRUMENTS AND AUTHORITY 76. The draft Development Credit Agreement between India and the Association, the draft Project Agreement between the Association and the State of Karnataka, and the Recommendation of the Committee provided for in Article V, Section I (d), of the Articles of Agreement are being distributed to the Executive Directors separately. 77. Special conditions of the project are listed in Section III of Annex III. 78. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association. PART VI - RECOMMENDATION 79. I recommend that the Executive Directors approve the proposed credit. A.W. Clausen President November 21, 1983  AMU r USiA Page 1 of 5 A334~~~~ ~ Ra3 -(otul es S?cta A 0A - T - 1960- 197g LIS T AcAIcUL?UR& 2L 3287.4 SA6PCFCAI AII C3F pR 0AflA CM3) 21. 70.0 100.0 260.p 276. 102L1 mtocRAWcr Cox imu&LU!.) lU4.0 16 210-0 7P2.a t A A ) 434650O A7569 '90183. . POtLATZW pRiI1Cr. 19.a 23.7 70es rw 2140~~~~~~~~~~~~~~~2. STT llM ?EPAR 200 (iML) 1001.3 3. 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