India - Gujarat Rural Roads Project

Drm i a o The World Bank FOR OMFICIAL USE ONLY CR. ? Report No. P-4439-IN REPORT AND RECOMWNDATION OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT IN AN AMOUNT OF SDR 101 MILLION TO INDIA FOR THE GUJARAT RURAL ROADS PROJECT January 16, 1987 This document has a resicted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be discksed without World Bank authorization.  CURRENCY EQUIVALENTS (As of December 23, 1986) Currency Unit a Indian Rupee (Rs) US$ 1.00 a Rs 13.1 US$ 0.077 a RS 1 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 13.0. FISCAL YEAR April 1 - March 31 Abbreviations and Acronyms GOG - Government of Gujarat COI - Government of India DRD - Department of Rural Development, Ministry of Agriculture IR - Indian Railways NDDB - National Dairy Development Board NTPC - National Transport Policy Committee MNP - Minimum Needs Program MRD - Ministry of Rural Development RBD - Roads and Bridges Department, Covernment of Cujarat  FOR OFFICIAL USE ONLY INDIA GUJARAT RURAL ROADS PROJECT CREDIT AND PROJECT SUMMARY Borrower: India, acting by its President Beneficiary: The State of Cujarat Amount: IDA Credit: SOR 101 million (US$119.6 million equivalent) Terms: IDA Credit: Standard Relending Terms: As part of Central assistance to States for development projects on terms and conditions applicable at the time. cOr would bear the foreign exchange and interest rate risks. Project Description: The project's main objectives are to provide additional all-weather roads to the rural poor, and to improve rural road construction and maintenance, road planning, and road maintenance management in the State of Gujarat. The project comprises: (i) a program of construction, reconstruction, and improvement of about 4,042 km of village roads connecting 1,900 villages; (ii) the procurement of construction equipment, vehicles, and laboratory equipment; (iii) the construction of office buildings, warehouses, workshops, and housing; (iv) engineering and consulting services for project planning, design, supervision, and monitoring, and for staff training; (v) technical assistance for a road maintenance study and (vi) the preparation of a road safety program. The risks are those normally associated with this type of project. Since most project components involve proven technology, technical risks are minimal. The State Roads and Bridges Department has demonstrated satisfactory technical capabilities in the implementation of a previous Bank-financed irrigation project which included construction of rural roads. Training and supervision activities will minimize risks associated with new equipment, contracting procedures, ma2intenance operations, and project management. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  -ii- Estimated Cost: 1/ (US$ millions) Item Local Foreign Total Civil works 75.5 16.9 92.4 Equipment procurement 6.8 7.4 14.2 Engineering, Supervision & Training 11.1 - 11.1 Buildings and Housing 2.0 - 2.0 Studies, Road Safety, STC 0.9 0.9 1.8 Base Costs 96.3 25.2 121.5 Physical contingencies 9.1 2.1 11.2 Price contingencies 35.5 2.6 38.1 Total Project Costs 140.9 29.9 170.8 1J Excluding taxes and duties, which are significant Financing Plan: (US$ millions) Local Foreign Total IDA 89.7 29.9 119.6 COIIcOC 51.2 - 51.2 Total 140.9 29.9 170.8 Estimated Disbursements: (Millions of SDR) Bank/IDA FY FY88 FY89 FY90 FY91 FY92 FY93 FY94 FY95 Annual 7.0 15.0 20.0 20.0 17.0 12.0 8.0 2.0 Cumulative 7.0 22.0 42.0 62.0 79.0 91.0 99.0 101.0 Rate of Return: About 28% AppraisaL Report: No. 5799-IN, dated December 23, 1986  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO INDIA FOR THE CUJARAT RURAL ROADS PROJECT 1. I submit the following report and recommendation on a proposed credit of SDR 101 miLlion (US$119.6 million equivalent) to India, on standard terms to help finance the construction, reconstruction, and improvement of about 4,000 km of village roads connecting 1,900 villages in the State of Gujarat, the procurement of road construction, laboratory, and testing equipment, and the execution of road transport studies. The Government of India (GOT) will channel the proceeds of the credit to the Government of Gujarat (COG) in accordance with GOI's standard terms and arrangements for financing State development projects. The foreign exchange and interesc risks will be borne by the Government of India. INDIA PART I - THE ECONOMY 2. A country economic report, "India: Economic Situation and Develop- ment Prospects" (6090-IN, dated May 9, 1986), was distributed to the Execu- tive Directors on May 12, 1986. Country data sheets are attached as Annex I. Background 3. India is a large and diverse country with a population of about 780 million (in mid-1986) and an average per capita income of about US$260. Agriculture continues to dominate the economy, accounting for about two-thirds of employment. The steady increase in population, which continues at a rate of 2.0X a year, has put increasing pressure on natural resources, in particular cultivable land. By the mid-1960s, nearly all productive land bad been brought under cultivation. Although irrigation continues to expand total cultivabLe area, an increasing share of the labor force will have to be absorbed in non-agricultural activities. Industrial development has not progressed rapidly enough to provide employment opportunities for the growing labor force, or to bring about a rapid economic transformation, with sig- nificantly higher productivity and income levels. As a result, the long-term growth of per capita income has only averaged about 1.4% p.a. and close to one-half of India's population continues to live below the poverty line. Alleviation of poverty has been and remains thus at the core of India's development strategy.  -2- 4. During the 1950a and 1960s, India's economic performan:e was charac- terized by sLow economic growth, moderate inflation and a sustainable exter- nal position. CDP grew at about 3.5%, agriculture at 1.8X and industry 4.8%; imports grew at 4.6% and exports at 5.8% a year. Although India was able to reduce its dependence on foodgrain imports, from a peak of 14% of total consumption in 1966167 to 4.5% in 1969/70--mainly as a result of the Green Revolution--progrens in poverty alleviation was slow. 5. The steep rise in international oil prices and accelerating global inflation led to a sharp deterioration of India's terms of trade in the earLy 1970s, eroding its capacity to import. In response, the Covernment inten- sified its export promotion efforts and Liberalized access to imported inputs. As a result of these efforts, which were helped by the expansion of export markets, particularly in the Middle East, export growth rose from an average of 2.2% a year during the 1950s and 1960s to 7.3% in the 1970s. In turn, this expansion of exports together with continued import substitution, particularly in food grains and increased remittances, made it possible for India to attain a surplus in its current account between i976177 and 1978/79. Thus India was able to achieve, in a relatively short time, a comfortable foreign exchange position, which was further enhanced by a steady increase in concessional aid. Towards the end of the 1970s, India experienced a series of domestic and external setbacks. Industrial production, plagued by labor unrest and a shortage of key inputs began to stagnate. One of the worst droughts in India's history reduced agricultural output in 1979/80 by more than 15%. And, in the same year, a second major increase in internaLional oil prices more than doubled the costs of India's oil import bill. As a result, the current account showed again a deficit and the remarkable price stability that the Indian economy had enjoyed after 1975 came to an abrupt end. The Government responded by mounting an economic adjustment program, which was eventually embodied in the Sixth Five Year Plan (L980-85). The principal objective of the program was to raise the CDP growth rate from its historical level of 3.6% to 5.2% per annum, through alleviation of infrastructure and supply constraints, increased energy independence, improved efficiency in resource use, promotion of exports and efficient import substitution. The Sixth Five Year Plan (1980-85) 6. Overall the adjustment program has been successful, despite unfavorable weather in several years, a continued worsening of the external environment and adverse political developments. The developments of the Indian economy during the Sixth Plan underscore the fundamental soundness of key policies and programs, particularly in agriculture and energy, and attest to prudent and skillful macro-economic management, which allowed production to grow while at the same time keeping external borrowing well within acceptable levels of risk and holding inflationary pressures in check. But the results during the Plan period also highlight the disappointing performance of industry, continuing shortfalls in electric power generation,  -3- rising public sector deficits and the importance of regaining and sustaining momentum in export growth. 7. During the Sixth Plan period, CDP grew by 5.4% per annum, 1/ well above India's long-term growth rate of 3.6%. This increase in the average growth rate reflects improvements in the performance of several key sectors. In agriculture, the ambitious Plan targets with respect to foodgrain nnd oiLseed production were virtually attained, and the average growth of agricultural value added of 4.5Z a year exceeded the Plan target of 3.8X. The progress achieved is an indication of the effectiveness of programs to expand irrigation, strengthen reserand exton and t use of time,hile achieving output gains, agriculture appears to have become more resilient and resistent to poor weather. During the Sixth Plan, India also succeeded in raising the output of most raw materials. Domestic production of petroleum grate of 12.1%nd fertilizer at 10.6% and 8.1%, respectively. The Sixth Plan also witnessed rapid growth in the services sector, in particuLar transport and communications. 8. However, this dramatic improvement in performance did not occur evenly throughout the economy. The industrial sector performed relatively poorLy, growth averaged about 4.9% (1980/81-1984/85) a year--below the growth rates achieved in the 1960s and 1970s. Industrial growth has been inhibited by an inadequate policy environment, coupled with a depressed domestic demand, power shortages, and labor unrest. In addition, quantitative restrictions and high tariffs on imports of inputs and capital goods have led to high inflated costs and prices of industrial goods and manufactures, which has severely impaired India's competitiveness in world markets. India's export performance under the Sixth Plan reflects this. Instead of the tar- getted 9% a year, exports grew only by 4.5%. The savings performance of the economy also deteriorated somewhat. The national savings rate, which had risen steeply in the 1970s, fell from 24.3% to about 23%, and remained weLl below the rate required (24.5%) to finance the investment program of the Sixth Plan. As a consequence, gross investment grew only at 6.4% a year instead of the targetted 8.9%. The shortfall in savings was most noticeable in the public sector, mainly because of the low profits or financial losses of public enterprises and lower than expected tax revenues. The Seventh Plan (1985-90) 9. The Seventh Plan aims to build upon the accomplishments of the Sixth Plan, which is regarded by many as a turning point in India's development experience. To deal effectively with the dual challenges of alleviating if Actual CDP growth rate during the 1979/80-1984/85 period was 5.4% per annum. However, this figure overstates the trend in recent years because of the relatively low base year (1979/80). The 4.5% CDP growth per annum and 3.3% annual agricultural growth between 1980/81-1983/B4 (two "normal" years) are more representative of the growth rates during the period.  -4- pervasive poverty and expanding employment opportunities for a growing labor force, the Seventh Plan will need to sustain the growth momentum attained under the Sixth Plan. India's policy makers have become acutely aware in recent years of the development constraints and in particular, the shortcom- ings of the oxisting policy framework. The Seventh Plan portends to break new ground in dealing with these constraints. More so than previous pLans, it focusses on the urgent need for greater efficiency, productivity arid competitiveness in the economy. In its various sectoral strategies the Plan adopts some new approaches: in agRriculture, the Plan gives top priority to the completion of ongoing irrigation schemes; in industry, thle Plan emphasizes improvements in productivity, reductions in costs, and improved competitiveness. Unlike previous plans it encourages a greater role for the private sector and promises to provide the incentives needed to attract private industriaL investment; in the wake of the liberalization measures taken under the Sixth Plan, which provided entrepreneurs with greater flexibility in decision making, the Seventh Plan envisages further changes in licensing policies and the pricing of commodities which are subject Lo administered price controls; the Plan aims also for continued trade liberalization and places particular emphasis on the promotion of export growth; the Plan also ensures that, even with acceLerated growth, the benefits of that growth are distributed proportionately. Sufficient availability of food, which would have a dampening effect on food prices and thus protect real incomes of the poor, as well as additional employment and productivity increases which would raise per capita incomes, remain the top priorities of the Plan. 10. Recent Developments. In its effort to implement the economic strategy embodied in the Seventh Plan, the Government has provided, in the past year, the critical detaiLs of its new economic policy framework through a series of policy statements and committee reports. The Latter included the Hussain committee report and the import and export policy statement on trade policies; the Narasimham committee report on shifting from physical to finan- cial controls; a report on the black economy; the Chakarvarty committee report on monetary policies; and a statement on long term fiscal policy issues by the Ministry of Finance. These reports deal with many of the major issues that constrain economic growth in India. Attainment of the Seventh Plan targets depends now to a large extent on the early implementation of their recommendations. The Government's commitment to policy change is underscored by its decision to introduce, in short succession, a series of new policy initiatives in the industrial sector and with respect to trade and fiscal policy. 11. In addition to the measures implemented in 1984/85 that aimed primarily at improving industrial efficiency--including the opening up of the telecommunication equipment manufacturing industry to the private sector, new initiatives in the development of the electronics and computer industries, introduction of "broadbanding" into the automotive and machine tool industries--the focus of the policy changes introduced by the Government was directed at further reducing industrial controls: the number of industrial units coming under the Monopolies and Restrictive Trade Policies act was  -5- reduced by 230 to 1505 units; the number of industries required to obtain licenses to instill new capacity or expand existing capacity was reduced substantially; the number of industries benefitting from "broadbanding" was increased; and there was alno a series of improvements in procedures that reduced delays in obtaining clearances especially for large units and firms with foreign collaboration. 12. Unlike the changes in industrial policy, many of which reprenented a radical departure from the past, recent changes in trade policy, in par- ticular those with respect to export promotion failed to show the same strong commitment. In its new Import-Export policy, the Covernment provided both measures to liberalize imports including substantial import duty reductions and export incentives. While the import liberalizing measures led to a surge in imports, the export promotion measures --which included a simplification of the administrative requirements for duty frec imports, a widening of the eligibility for advance licenses, and a reduction of export taxes and improvements in foreign exchange forward cover facilities--had only a mar- ginal impact on the overall ease and profitability of exporting. This result was at least in part due to several policy changes that undermined the export promotion effort. The advance licensing system, for example, was tightened and a number of facilities previously available to large export houses were withdrawn or restricted. A future strengthening of existing export promotion policies is clearly of high priority, if India is to meet its export targets under the Seventh Plan. 13. In parallel with the policy changes in the industrial and trade sectors, the Covernment introduced significant changes in the tax policy. In its 1985186 budget the Government reduced income tax rates for individuals and abolished the surcharge on income tax. Wealth taxes were also lowered which together with lower income tax rates reduced the maximum marginal tax rate on income from wealth from over 110% to 70%. In the 1986/87 budget, further concessions and simplification foreshadowed by the Long Term Fiscal Policy statement were made. But perhaps the most far-reaching policy change in the 1986/87 budget was the introduction of the modified value added tax system for 37 of the 68 chapters of the excise tariff covering about 35% of its manufactured production. Other potentially important policy changes included a new, more smoothly phased, excise tax concession scheme for small scale industry and simplification of the excise tariff schedule through the elimination of special excise duties covering 132 items. 14. The performance of the economy in the first year (1985/86) of the Seventh Plan attests not only to the soundness of the Government's overall approach, but also its determination to attain the ambitious Plan targets. Economic growth during this past year was indeed robust. Real CDP is estimated to have grown by almost 6% with industry growing somewhat faster than the Seventh Plan's target of 6.62. Agricultural CDP growth is expected to be roughly on target with foodgrain production reaching about 150 million tons, just a Little below the peak production level of 1983/84. There was also a marked improvement in the performance of the key infrastructural  -6- sectors. During the first ten months of the fiscal year, electricity gener- ation increased by 82 on top of the 13% increase achieved in the previous year, mainly because of better utilization of thermal plant capacity. Coal production grew more slowLy than in the previous year, reflecting the Govern- ment's efforts to reduce Large pithead stocks. Railway froight traffic increased by more than 9% during the first nine months as larger quantities of cement, coal, petroleum and fertilizer were shipped. The strong perfor- mance of the agriculture, energy, and Lransport sectors, combined with the new initiatives in trade and fiscal policy have lead to a surge in industrial output and a buoyant stock market. 15. Inflation, in terms of the wholesale price index, rose by only 6% during the first nine months of the fiscal year, compared to 7Z during the same period in 1984. High foodgrain stocks, sugar and edible oil imports, the strict control of non-plan expenditure, and increases in the statutory liquidity ratio of commercial banks were key factors restraining inflation. The recent price increases of coal, fertilizer, grain and petroleum products are not expected to significantly affect the infLation rate. 16. However, with respect to one of the principal objectives of the Seventh Plan, namely to accelerate export growth to a level that would allow India to finance its imports, performance during the past year has been disappointing. Preliminary data indicate a 1Z decline in the US dollar value of non-petroleum exports and a 21% increase in imports during the first half of the fiscal year over the same period in 1984/85. Most of the increase in imports was due to a bunching of bulk imports by canalizing agencies in the first two quarters of the year to take advantage of declining commodity prices. During the third quarter, import growth subsided significantly and there was also a discernible improvement in exports. Despite the expected increase in the trade deficit for the year as a whole, however, reserves are expected to increase by US$600 million. This is in part due to a moderate increase in worker's remittances, tourism receipts and a surge in non-resident deposits which amount now to almost US$1.4 billion. 17. Development Prospects and Policies. Attaining the objectives of the Seventh Plan in the years ahead will place heavy demands on policy adjustment and entail major challenges. India will need to: (a) maintain the recent higher rate of expansion of agricultural production; (b) acceleratet industrial production and export growth through policy changes which enhance competition and efficiency; (c) expand supply capacities in the economy by improving basic infrastructure services and the availability of energy; (d) improve the efficiency with which resources are used, including the existing and new capital stock in infrastructure and industry; and (e) further improve the already high resource mobilization effort. 18. Agriculture. Despite an impressive performance under the Sixth Plan, Indian agriculture faces many challenges in the second half of the decade. As possibilities for extending cultivated acreage shrink, agricultural growth wilL depend on finding new ways of increasing the productivity of land through further development of irrigation, better water management, more  -7- intensive use of new technology, efficient delivery of inputs and services, and appropriate pricing policies. High priority must be given to the expan- sion of the country's irrigable area through completion of ongoing irrigation projects, an well as selective investment in now undertakings. Besides creating now irrigation potential, the efficiency of irrigated farming will have to be enhanced through the improvement of water management practicns in existing irrigation systems. CreAtor emphasis should also be given to obtaining higher yields under rninfed and dryland fari!ing conditions. Finally, even grenAter efforts must be made to build and strengthen institu- tions to ensure the efficient delivery of agriculturaL services, input oup- plies, credit and technology. 19. Industry and Trade. Prospects for raining India's CDP growth ratn will, to a large extent, depend on more rapid industrial production and export growth. A key requirement will be greater competitive pressure on industry than has been the case in the past. The size and domestic orienta- tion of the Indian economy make it necessary that this competitive pressure come mainly from within the domestic economy. An important complement, however, wiLl be greater exposure to foreign trade to stimulate domestic competition as well as Lo induce technological innovation and modernization. 20. To increase domestic competition, domestic policies will need to allow freer entry and exit of firms in the industrial sector and gLjater reliance on market price signals. As indicated above the Government has taken various initiatives in the above directions during the past several years. These changes have begun to produce a marked favorable impact on the investment climate, private corporate profitability and the growth of the stock market. All these suggest that the manufacturing sector is beginning to respond to the new policy changes in industry. However, the policy chan- ges initiated to date only begin the long process of adjusting the trade and industrial policy environment under which industry operates. Much more remains to be done to transform the policy environment from one based on a system of extensive direct physical controls to one in which competitive pressures both within the country and abroad induce the improvements in productivity and technology upgrading which are required by Indian industry for accelerated investment, production and export growth. As indicated above, the Government has introduced a number of measures to promote exports. Up to now these changes have had little impact on export growth. If further efforts fail to bring the export growth rate closer to the 7% target of the Seventh Plan, the prospects for sustaining the import liberalization effort and in turn the prospects for accelerating industrial and overall GDP growth will be seriously affected. Thus, there remains an urgent need for the Government to (a) intensify its efforts in improving direct export incentives and to provide greater access to imported inputs and capital goods through continued import liberaLization; (b) review tariffs, eliminating anomalies and lowering their overall level; and (c) modify trade policies in such a way that the net impact of incentives is more neutral between exports and import substitution.  -a- 21. lnErautructura Sectors. Inveetmmnts in these sectors curronLly constitute about one-third of total invastment in India, and the effi.ciency with which thene invostmento are managed has an important beAring on the efficiency of total investment and the growth rate of the entire economy. There is nubstantial ovidence that better planning and management of public inveutments in power, coal, railways and irrigaLion could improve returns and lower rhn currenL capital-ouLput ration. For nxampla, more efficient use of investment could bo achieved by better water management in irrigation projects, improved load factors in thermal power gnneration, bettor capacity utilization in tho fertilizer industry and improved efficiency in railway trannport. 22. Resource Mobilization. India's grosn national savings rate (22.6% in 1980-i.FrV 3 already hihFor country at India's level of income. The Seventh Plan calls for a public sector outlay of 1,800 billion rupees. Out of this total, 42% is to be financed from the public sector's own resources, compared to the 37% level during the Sixth PLan period. 1Pinancinp, of the Plan--while holding foreign savings as a share of CDP at prudent levels--will require, apart from restraint in current expenditures (including A reduction in the rapidly growing food and fertilizer subsidies), some further increase in the aggregate savings rate especially in public savings. 1/ Economically efficient pricing policies in public enterprises, supported by improvements in their operational efficiency, would be the preferred means for increasing public resource mobilization. 23. Balance of Payments. A policy of sustained CDP growth of 5% per annum will need to be complemented by measures which assure a viable balance of payments position. Acceleration of industrial growth will lead to a substantial increase in import requirements, even after allowing for con- tinued import substitution of key bulk commodity items. Bank staff estimates place the export volume growth necessary to support these growing import requirements without excessive increases in external borrowing at about 7% a year over the Seventh Plan period. Prospects for India to attain the needed higher export growth rates will depend heavily on changes in domestic policy to improve the profitability of exports. 24. Even assuming favorable export performance, India will continue to need substantial external capital flows to augment its own resources for the foreseeable future. Even with 8% export growth, the 5% GDP growth implies an increase in gross capital inflows from US$17.5 billion to US$23.5 billion between the Sixth and Seventh Plan periods. In the past, the bulk of this 1/ As indicated above, the Government has introduced significant changes in its tax poLicy, including a reduction of income tax rates for individuals and the introduction of a modified value added tax system. While it is too early to judge the longer term impact of these changes, it is encouraging that the Central Government's tax receipts during 1985186 were running welL ahead of last year and of the budget estimates.  -9- financing was provided in the form of official development assistance. In more recent years the availability of concessional assistance to India has declined. Total bilateral grants and concessional loans declined from a level of about US$1.3 billion per annum over the years 1979180-1981/82 to US$1.l billion in 1984185. Moreover, there was a large deterioration in the terms of aid from multilateral sources. For example, while total lending from the Bank Group continued to increase in nominal terms, the grant element declined from 712 to 41X as new commitments of IDA declined from a peak of $1,535 million in FY80 to $673 million in FY85 and about $600 million in FY86. 25. In the event that official development assistance does not increase significantly from recent levels, nearly the full additional financing required would have to be provided from additional non-concessional borrowing from official and commercial sources. This will increase India's debt serv- ice ratio from the present level of 15.5% to 21.6% by 1989190. Provided India can in fact expand export earnings along the lines described earlier, the country should be able to raise the projected amounts. 26. In the short term, a relatively large level of external borrowing, including an increased emphasis on commercial borrowing, will be necessary to cope with the balance of payments consequences of the growth strategy described earlier. 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 unmanageable terms. WhiL therefore a greater volume of both official concessional and non-concessional assistance is warranted, concessional assistance, in par- ticular, will be invaluable in moderating the build-up in India's debt serv- ice burden. Apart from the quantitative arguments for concessional aid, there remains the imperative to assist India in addressing the problems of pervasive poverty. While India is now better placed than other poor countries to tackle its development problems, the mobilization of additional resources to address poverty problems is heavily constrained. Concessional assistance can play an important role in relieving this constraint. PART II - BANK GROUP OPERATIONS IN INDIA 27. Since 1949, the Bank Group has made 100 loans and 185 development credits to India totalling US$10,228 million and US$14,tiG million (both net of cancellations), respectively. Of these amounts, US$1.735 million has been repaid, and US$9,169 million was still undisbursed as oil September 30, 198alled US$182 million, representing an increase of aboL: 2 percent over the same period last year. Annex II conLains a summary statement of disburse- ments as of September 30, 1986. 28. Since 1959, IFC has made 45 commitments in India totalling US$396 million, oh a total of US$209 million has been repaid, sold, ter- minated or cancelled. Of the balance of US$187 million, US$179 million  -10- represents loans and US$8 million equity. A summary statement of IFC disbur- sements as of September 30, 1986, is also included in Annex II. 29. The thrust of Bank Group assistance to India has been consistent with the country's development objectives in its support of agriculture, energy and infrastructure. Of particular importance have been investments in irrigation, extension and on-farm development designed to increase agricul- tural productivity, and efforts to improve the availability of basic agricul- tural inputs to farmers through credit, Eertilizer, 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 development finance institutions. Recognizing the importance of improving the abilLty 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. 30. This pattern of assistance remains relevant, and consonant with, Government priorities, as reflected in the the Seventh Plan. First, high priority will continue to be given to GOI's agricultural program. While India has made significant progress in agriculture, productivity growth will have to be sustained to improve the balance between food demand and supply and to contribute to poverty alleviation and employment. Thus, the Bank Group will continue to support irrigation, fertilizer production and dis- tribution, and agricultural extension, research and credit. Second, alongside GOI's efforts in promoting greater efficiency 2nd faster develop- ment of the industrial sector, increased assistance will be provided for industrial development. Third, in line with the stress which the Seventh Plan gives to the expansion and more efficient use of basic infrastructure capacity and to the development of India's indigenous hydrocarbon resources, the Bank Group will continue to provide substantial support to the develop- ment of the energy, transport and telecomuunications sectors to aLleviate critical shortages which constrain output in both the agricultural and industriaL sectors. Fourth, support of urban development and other GOI basic social services programs for the poor will also continue in Light of the growth in population which, despite successes in lowering birth and death rates, still increases by about 16 million each year. 31. 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 coumunity, India successfully adjusted to the changed world price situation of the mid-1970s. However, India continues to require a substantial level of foreign assistance both to offset the overall deterioration in the world trade environment, and to  -11- sustain the relatively higher investment and growth rates achieved during the Sixth Plan period. 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 competitive- ness of the domestic capital goods industry. Consequently, the foreign exchange component tends to be small in most projects. This is particularly the case in agriculture and the social sectors. 32. India's poverty and needs are such that whenever possible, external capital requirements should be provided on concessional terms. Accordingly, the bulk of the Bank Group assistance to India in the past was provided from IDA. However, IDA lending to India is declining from a peak of US$1.5 bil- lion in FYBO, mostly due to funding constraints. The amount of IDA funds available to India is likely to remain small in relation to India's needs for external support. Thus, this requirement for additional assistance will have to be met, in part, through larger Bank lending. Given its deveLopment prospects and policies, India is judged creditworthy for Bank lending to supplement IDA assistance. A continuation of efforts already underway to achieve growth in productive capacity, trade expansion, higher levels of savings, foodgrains self-sufficiency and a reduction in the rate of popula- tion growth should result in continued economic growth and improvement in the balance of payments. India's debt service ratio is estimated at about 15.2Z in 1984/85. This ratio is projected to rise to around 20% by 1989190, mainly due to the hardening structure of India's debt; and to increase sLightly over this level through the mid-1990's. Although the projected debt service ratios are considerably above historicaL levels, they are still manageable and will not adversely affect India's creditworthiness. 33. Of the external assistance received by India, the proportion con- tributed by the Bank Group has grown significantly. In 1970/71, the Bank Group accounted for 22% if total commitments, 11% of gross disbursements, and 1OX of net disbursements as compared with 62%, 40% and 51X, respectively, in 1985/86. In 1985/86, about 23.8% of India's total debt service payments were to the Bank Group. On March 31, 1986, India's outstanding and disbursed external public debt was estimated to be about US$26.7 billion, of which the Bank Group's share was US$11.9 billion or 45% (IDA's US$9.8 billion and IBRD's US$2.2 billion). As of September 30, 1986 outstanding loans and credits to India held by the Bank totalled US$22,492 million, of which US$9,169 million remain to be disbursed, leaving a net amount outstanding of US$13,323 million.  -12- PART IIT - THE TRANSPORT SECTOR Overview of the Transport Sector 34. Rail and road are the dominant modes of transport in India. RaiL- ways provide trunk services for bulk freight, and road transport provides long-distance service for other commodities as well as most of the feeder and distribution activities. Since it is estimated that rail and road carry about 95% of the total domestic passengers and freight, the role of other modes of transport is relatively insignificant. Nonetheless, these other modes (air transport, pipelines, coastal shipping, and inland water- ways) have an important role to play in providing specialized services. 35. Transport responsibility in India is shared between the Central and State Governments and the private sector. The private sector controls the trucking industry, a small portion of the shipping industry, and about 40% of nonurban passenger road transport. The Government owns the rail- ways, public passenger transport companies, the ports, the major shipping companies, and all the institutions involved in civil aviation, and is responsible, at the Central or State level, for the construction and maintenance of all roads. 36. Virtually all sectors in the economy depend on efficient and reliable transport services. Transport investment represents an important part of total investment in India, although over the last two decades, investments for the development of the transport system have declined relative to development investments elsewhere in the economy. Transport expenditures in the country's first Five-Year Plan (1951/52 - 1955/56) constituted more than 22% of total investment, but declined to about 15% in the next three plans, and to 13% in the Sixth Plan. This trend is partly explained by the need in earlier years to concentrate on basic infrastructure and by the greater emphasis on other sectors in later years. Nonetheless, the level of investment in the sector has not been sufficient to provide adequate service, as is evident from the following problems: (a) railways do not have the capacity to carry coal, some of which has had to be moved less efficiently by road transport; (b) ports operate with obsolete equipment and use outdated management practices; (c) passenger trains are overcrowded; (d) the national highway system is in poor condition; (e) the country's network of rural roads is inadequate (about 35% of villages are not connected by all-weather roads); and (f) maintenance funding is insufficient across the sector. The Government is aware of the massive expenditures required for the transport system,  -13- and real investment in the sector is expected to increase during the Seventh Plan (1985/86-1989190). The Roads Sector and Rural Roads 37. Roads in India are composed of: (a) national highways, which are the main highways in the country connecting major ports and adjoining countries, and linking State capitals, and include strategic roads required for national security; (b) state highways, which are the main trunk roads within the States (other than national highways) connecting important cities and districts; (c) district roads, which traverse each district, serve areas of production and markets, and connect each district with highways or railways; and (d) village roads, which connect villages to the nearest district road, main highway, or railway. Rural roads comprise minor district roads and village roads. 38. The road network has expanded almost fourfold since 1950/51, from 0.4 million km in 1950/51 to 1.5 million in 1980/81; the average annual rate of increase has been 4.52. India's density of roads, which stood at 0.46 km/km in 1980/81, compares favorably with densities in other developing countries. Nonetheless, because India has a high population density scattered throughout the country, road transport requirements are considerable and call For further expansion and strengthening of the road network. Traffic in India's total road system has been growing at about 5.4Z per annum, with traffic in the national highway system growing at a faster rate--according to census data, annual growth rates for the system ranged from 8% to 20% during 1979-1984. 39. The rural roads policy in India is defined in the context of the Minimum Needs Program (MN?), which envisages providing, by 1990, basic infrastructure, including all-weather roads, to all villages with a popuLation of 1,500 or more, and to 50% of the villages with populations of 1,000 to 1,500. Many States have ongoing MNPs that form part of their five-year plans. The development of rural roads became an integral part of the MNP for the first time in India's Fifth PLan (1974175-1978/79), and was continued under the Sixth Plan (1980/81-1984/85). Under the Seventh Plan (1985/86-1989/90), the Department of Rural Development, Ministry of Agriculture (DRD) has required that each State propose a master plan for its rural roads covering a period of 15-20 years. Gujarat's master plan forms the basis for the proposed project. Road Administration and Financing 40. With the exception of the national highway system, all roads in India are the responsibility of State Governments. In Gujarat, the road sector is administered by the Government of Gujarat (COG) through its Roads and Bridges Department (RBD) and the Department of Transport. COG's Planning Department coordinates investment planning and the allocation of  -14- resources. Road construction and maintenance is the responsibility of RBD. Funds for State road maintenance are provided under Government Resolutions, released to RBD throughout the year by the State Finance Department. Road maintenance in Gujarat is carried out by contract and force account, under the supervision of the RBD's Chief Engineer (Roads and Bridges) and Chief Engineer (Panchayats). Rural Roads in Gujarat 41. The Cujarat State road network consists of some 55,000 km of road, of which over 45,000 km is surfaced. Rural roads make up 33,500 km of the total. Of the State's 18,000 villages, over 4,000 have no road connec- tions, and only about 55% are connected by all-weather roads. The lack of adequate roads has had a considerable impact on Cujarat's rural economy, particularly on the dairy industry, which is the mainstay of the economy of the northern and western areas of the State. Much of the land where the project roads are located is unsuitable for comercial agriculture and supports only subsistence farming. Many farmers augment their marginal income by keeping a milch animal (cows and buffalos) or two. Where good all-weather transport exists, a dairy industry has successfully developed with the help of the National Dairy Development Board (NDDB) and numerous dairy cooperatives, which provide various extension and veterinary serv- ices, credit facilities, and milk chilling r -aters. Where only rudimen- tary dry-weather roads exist, however, the tairy developmental potential has not been realized since viable dairy operations depend heavily on rapid and reliable transport between collection centers and chilling centers or the main dairies. Moreover, the farmers in these isolated villages cannot make use of free or low-cost veterinary and extension services provided by the village cooperatives, and consequently experience a higher incidence of cattle deaths owing to inadequate care. Poor access or isolation also means reduced opportunities for education, primary health care, and other socioeconomic development. The proposed project is designed to meet the needs of these isolated farmers and eliminate some of the constraints impeding further development of the dairy industry. Previous Bank Group Involvement in the Transport Sector 42. The Bank Group's involvement in India's transport sector, which dates back to 1949, has consisted of eight loans and ten credits for Indian Railways totaling more than US$1.8 billion, five port projects and one shipping project totaling US$410 million, and one rural roads project and two highway projects totaling US$295 million. Whereas the Bank Group's involvement with railways has been almost continuous since 1949, lending to the roads and ports subsectors was discontinued in 1962, mainly because of UGI's preference for local competitive bidding for projects in these subsectors. However, in 1980 the Bank Group resumed its leading to these subsectors with a rural roads project in the State of Bihar (Cr. 1072-IN, l980)--for which local competitive bidding procedures were  -15- retained because of the remoteness of the project area and the small size of the project elements--followed by a ports project--the Nhava SheCa Port Project (Ln. 2387-IN, 1984), and a highway project--the National Highnway Project (Ln. 2534-IN, 1985), for both of which international competitive bidding procedures were adopted. 43. The Bihar Rural Roads Project has progressed reasonably smoothly, after start-up delays and minor modifications to procedures and documenta- tion. Another project--the Cujarat Irrigation II Project (Cr. 1011-IN, 1980)--contains a command area roads component, which suffered initially from poor quality construction resulting from the use oE outdated methods and materials, and from delays in the release of funds. In the early years of this project COG also had difficulty scheduling the complex implementation activities, but was able to overcome the problems by form- ing a Project Planning and Monitoring Cell and introducing computerized methods to project planning. The proposed project incorporates provisions to avoid some of the problems enccuntered. Bank Group Strategyjin the Transport Sector 44. The Government recognizes that an integrated policy must be formu- lated if it is to improve the planning and coordination of intermodal investments, introduce appropriate cost-based pricing, and better utilize the available transport system. To deal with the mounting problems in the transport sector, GOI commissioned the National Transport Policy Committee (NTPC) to evaluate the main transport problems in the country. The Com- mittee's report, which was presented to GOI in 1980, recommends greater competition, the use of the price mechanism in resource mobilization within the sector, and improved intermodal coordination. The Bank Group, in its policy dialogue with GOI, is strongly supporting the implementation of the NTPC's recommendations, most of which have been accepted by the Government. 45. 00 has already begun to implement the key recommendations of NTPC's report--a task that is calling for major changes in COI's views on such issues as resource mobilization, subsidy elimination, and, where advantageous, foreign contractor participation in a sector that has tradi- tionally been reserved for local contracting organizations. It is in this environment that the Association foresees a continuing role in assisting GOI in its efforts to modernize the transport sector. 46. Within the framework of priorities recommended by the NTPC, the Bank Group assistance program is designed to emphasize: (a) expansion of transport capacity, through greater operational efficiency, investments in the rehabilitation of existing capacity, and streamlining of maintenance and project execu- tion practices;  -16- (b) modernization of transport infrastructure, equipment, and operating conditions; (c) introduction of coat-based pricing principles and reduction of subsidy levels; and (d) strengthening of GO0 capabilities of traffic forecasting, maintenance engineering, safety and investment planning. 47. The proposed project is designed to support the selected aspects of the Bank Group's strategy listed above through the provision of increased transport capacity in rural areas, improvements in road main- tenance planning and operation, and analysis of road user costs and char- ges to identify the potential for resource mobilization in Gujarat. Fol- lowing successful implementation of the proposed project, future projects in the roads subsector would extend the institution-building component begun under the National Highway Project and the proposed project to other States; embody the results of the vehicle fleet modernization, road user charges, and road maintenance planning studies to be undertaken in the context of those projects; and focus on other institutional issues iden- tified in the NTPC Report. PART IV - THE PROJECT 48. The project was prepared by the Roads and Buildings Department of the Government of Gujarat and appraised by a mission that visited India in November 1984. A Staff Appraisal Report is being distributed separately to the Executive Directors. Negotiations were held in Washington in November 1986. OI and GOG were represented by a delegation with Mr. P.V. Bhide of the Department of Economic Affairs as coordinator. A Supplementary Project Data Sheet is attached as Annex III. Project Objectives and Rationale for Bank Group Involvement 49. The proposed project grew out of GOI's wish to replicate and improve upon the implementation of the Bihar Rural Roads Project (Credit 1072-IN). The proposed project, by providing a vehicle for the Associa- tion's involvement in Cujarat's road subsector, would enable COG to pursue important institutional development and technical objectives through the introduction of improved techniques of project planning, preparation, management, construction and maintenance. The project will also introduce modernizing elements to the construction industry via new techniques, equipment, and materials, as well as provide supporting training, and begin important changes in sector management through the proposed road user charge and maintenance planning studies. The project is also expected to provide a "demonstration" effect for other States.  -17- Project Description 50, The project comprises the following components: (a) a six-year program of construction, reconstruction, and improvement of about 4,042 km of village roads connecting 1,900 villages; (b) provision of construction equipment, vehicles, and laboratory and testing equipment; (c) construction of office buildings, warehouses, workshops, and housing accommodation; (d) provision of engineering and other services for project planning, design, supervision, and monitoring, and for training of project staff; Ce) provision of technical assistance for a program of studies of road maintenance and road user charges; and Cf) preparation of a road safety program. The road program calls for the construction of 1,021 km of new road, the reconstruction of 998 km, and the improvement of 2,023 km of existing roads in seven of Gujarat's twelve districts. Districts and roads were selected by thet Roads and Bridges Department on the basis of planning studies of the spatial distribution of village populations and their relation to the all-weather road network. Construction work will consist of embankment, drainage, and bridging, where necessary, and provision of sub-base, base, and bituminous surfacing. Reconstruction work will usually entail putting a base and bituminous surface on existing unsur- faced roads, and improving drainage, where necessary. Road improvement work will usually consist of providing new base and surface on existing surfaced roads, and repairing the existing structure, as required. Build- ings required under the project include circle, district, and subdivi- sional offices (at 36 locations), housing accommodation (416 units), workshops (5), and warehouses (5). 51. The construction equipment under the project will be hired out to contractors and will be used to introduce new methods of laying and com- pacting paving materials. The vehicles, mobile workshops, and laboratories will be used by RBD supervisory staff and field personnel. The remaining equipment to be procured will be for administrative and drawing offices, materials testing, vehicle testing, the road maintenance study, and the road safety program.  -18- 52. The engineering and 4dministrative services will be provided for the planning, design, supervisory, and monitoring activities associated with the construction work. In addition, professional and aechnicnL stant will be instructed in the engineering aspects of the project and construc- tion workers will be trained to use the mechanical equipment. The project will also provide for overseas training for RBD engineers in the form ol short-term assignments that will expose them to new construct ion metiLods and equipment. 53. The road maintenance planning stud to be carried out under the project is designed to assist GOG in the preparation of a ten-year peri- odic maintenance program and to introduce a modern system of maintenance planning in Gujarat. The study will include a StaLe-wide invento.y of road conditions and a traffic survey, from which will be established road maintenance needs and standards for each class of road. This information will then be used as a basis for the development of the maintenance program and the system of maintenance planning. 54. The road user charges study wiLl consider whether the existing system and levels of road user charges in Gujarat tor different types of vehicles are adequate to ensure the optimum development and utilization of the road network, and to cover infrastructure and other costs. The study will also identify any distortions or deficiencies that may exist in the present system and suggest how to correct them. 55. The road safety program will support the activities of a number of pilot schemes already in progress in Cujarat that are designed to imple- ment measures proposed in March 1983 by the Committee on Planning Road Safety. These measures include periodic vehicle inspection, enforcement of traffic regulations, driver training and licensing, and improvement of road conditions. Under the National Highways Project, approved in May 1985, funds were provided for the establishment of five vehicle inspection stations in the Ahmedabad-Surat area of Gujarat as part of these schemes. The proposed project complements the assistance already provided to Gujarat through the financing of specialized equipment and the preparation of a long-term road safety progran. for the State. Project Implementation 56. The project will be implemented over a seven-year period (FY86-FY93) by RBD, assisted in certain aspects of the work (e.g., project planning, design, supervision, monitoring, and training) by other depart- ments of COG and by consultants. Design, contracting, and supervision oE road works and building construction, as well as equipment procurement, will je undertaken by RBD staff. Additional staff for RBD for the project will be recruited or transferred, as necessary. A number of key staff currently administering the roads component of the Bank Group-supported Gujarat Medium Irrigation Project (Credit 1496-IN, 1984) wilL shortly be  -19- available for transfer. Road construction equipment procured under the project will be used either by RBD for works to be carried out under force account, or by contractors who will hire the equipment from RBD, as neces- sary, under RBD's established terms, which are satisfactory. RBD has well-established procedures for fixing and collecting hire charges. If the contractors awarded the civil works contracts have their own equip- ment, RBD equipment purchases may be reduced accordingly. Project manage- ment will be assisted by a computer-based monitoring system that will be designed and installed by a local firm of consultants (Operational Research Group) presently doing similar work under another Bank Group-financed project in Gujarat. Terms of reference for these consult- ants were agreed between COG and the Association. 57. An economic analysis of 260 (30%) of the total roads to be con- structed under the project has been carried out, in accordance with an economic evaluation methodology developed by Bank Croup staff (para 70). The technical and economic feasibility of constructing the remaining project roads will be assessed by RBD using a satisfactory methodology. Only economically viable roads would be accepted for financing. 58. Land acquisition for new road construction and, in a few cases, for realignment will be carried out by RBD. In most cases, land can be readily acquired, but, in view of the land acquisition delays that have occurred in the past, GOG will take steps to ensure that land required for the project is acquired in a timely manner. Furthermore, no road works contract will be signed if the necessary possession of the land has not been obtained. 59. In Cujarat, each road project must receive administrative approval before it can be executed. This process involves departments outside RBD, and basically confirms that budgetary provision has been made by COG for the project. Delays are often incurred in obtaining this approval. To reduce these delays, GOG will grant "umbrella" administrative approval to each year's construction program in advance. Evidence of COG's administrative approval of the first year's program was submitted to the Association during negotiations. 60. Road maintenance in Gujarat is the responsibility of RBD, and is carried out by contract or force account under the supervision of RBD Chief Engineers. Funds for road maintenance are provided under Government Resolutions, which establish "norms" in rupees per km for each class of road, and the corresponding amounts are released to RBD throughout the year by COG's Finance Department. These amounts cover both routine and periodic maintenance. This system is expected to assure adequate funds for the roads in the project. Recently, the GOI Finance Commission recom- mended increases in maintenance funds of 150%-200Z above the current levels, which were last revised in 1979. Accordingly, during nego- tiations, assurances were obtained from COG that budgetary resources to be  -20- allocated for road maintenance for the project roads would be at the level necessary to meet the technical norms established by the latest Finance Commission. For the remainder of the State roads, COG expressed its intention to endeavor to allocate resources for road maintenance which would approach the Comminsion's recommended norms. 61. For the proposed road user charge study in the State, it was agreed during negotiations that in consultation with the Association, the scope of the Road User Charge Study being carried out under the National Highway Project (Loan 2534-IN) would be expanded to include a review of the existing taxation system and levels of road user charges for different types of vehicles in Gujarat, with the objective of improving the availability of resources for road maintenance. It was also agreed that such a study covering Gujarat would be completed by December 31, 1988, and thereafter Gujarat will discuss the findings with the Association. 62. Technical assistance for the maintenance planning study will be provided by consultants recruited by COG. These consultants will be under the direction of RBD, whose staff will assist them with the collection of data. The consultants will have access to the materials testing facilities in GOG's materials laboratories, and to drawing office facilities. In the event that additional equipment such as microcomputers is required for the study, it will be purchased and retained by RBD. Similarly, other equipment that may be required to measure road roughness and deflection will be purchased by RBD and operated through the Gujarat Engineering Research Institute in Vadodara. The consultants "ill be recruited according to Association guidelines under terms of reference to be agreed with the Association. About 30 man-months of consultant time will be required for the maintenance planning study, which will be com- pleted by December 31, 1988. The findings and recommendations of the study, and their implementation, will be discussed by GOG with the Association upon completion of the study. 63. The road safety program (ref. para. 55) will be implemented by GOG's Department of Transport. COG will prepare the program and provide it to the Association by December 31, 1988 for its review. 64. While the environment may be adversely affected during the con- struction phase, the proposed roads will have a beneficial effect on the local environment once the roads are completed. For road users and road- side dwellers, dust and noise will be greatly reduced and riding comfort improved; properly designed earthworks and drainage structures will reduce ponding of water and soil erosion, Status of Project Preparation 65. Survey and design work for the roads component is currently under way, and has been completed for about 40% of the first-year schemes. All  -21- jobs in the first year of the road construction program will have been designed by early 1987. Bids were invited for a number of contracts immediately after credit negotiations. Work has begun on construction of offices and accommodation in remote areas. Retroactive financing would be provided for this purpose (para 69). Bidding documents for equipment have been prepared by RBD's Mechanical Branch. Land acquisition (paragraph 58), required primarily in connection with new road construction, has begun. Project CostAndFinancin 66. The total cost of the project, including contingencies but exclusive nf taxes and duties which are insignificant, is estimated at about US$170.8 miLlion equivalent, of which about US$29.9 million (10.7%) represents the estimated foreign exchange costs. The estimates of costs for the civil works are based on COG's schedule of rates, which is updated annuaLly to reflect actual costs of works undertaken during the year. The estimates of equipment costs are based on manufacturers' prices, suitably adjusted for inflation. The cost of consulting services for the studies is based upon an estimated total requirement of 80 man-months. Price contingencies, amounting to 37% of base cost, are based on expected annual infLation rates of 6.B% for 1987/88 through 1989/90, 7% for 1990/91-1991/92, and 4% thereafter for local costs, and 1.2% for 1987/88, 1% for 19B8/89-1989/90, 2.2% for 1990/91, and 3.5% thereafter for foreign costs. Physical contingencies of 10% on civil works, supervision and administration, and 5% on equipment have been allowed, all of which amount to about 9% of base cost. 67. The proposed Association credit of SDR 101 million (US$119.6 million equivalent) will finance all of the total foreign exchange financ- ing requirement of about US$29.9 million, together with US$89.7 million of the local costs, and would cover 70% of the total project cost. The balance of the funds required, aggregating to about US$51.2 million equiv- alent, will be provided by COG from its Seventh Plan (1985/86-1989/90) and Eighth Plan (1990/91-1994/95) budgetary allocations received from COI, and from COG's own resources. The proceeds of the proposed credit will be channeled by GOI to GOC as part of its normal assistance to States for development projects on terms and conditions applicable at the time. The foreign exchange and interest rate risks will be borne by GOI. Procurement and Disbursement 68. Procurement arrangements are sumnarized in Annex IV. Equipment purchases will be made under local competitive bidding (LCB) and interna- tional competitive bidding (ICB) procedures in accordance witb the agreed list of items. The equipment items worth about US$11 million equivalent will be awarded on the basis of LCB, and the balance of equipment totall- ing approximately US$6 million will be procured through ICB. Local  -22- manufacturers are expected to be competitive for most of construction equipment contracts. Foreign suppliers would not be precluded from par- ticipating in LCB. A smaIL number of equipment items of low valua required for their demonstration affect and the technology they introduce will be purchased through prudent local and international shopping. The civil works contracts will be subject to local competitive bidding (LCD) using procedures developed in conjunction with the Association and cur- rently in use in the Aasociation-financed projects in Cujarat. The 1,025 road works areonmall (averaging about 4 km in length and US$100,000 in cost) and are dispersed over some 70,000 sq. km of territory. Therefore, LCD is generally appropriate for their execution. To the extent prac- ticable, contracts for civil works will be grouped in bid packages estimated to cost US$700,000 or more each. Foreign contractors would not be precluded from participating in LCB. Contractors (both local and foreign) (or those works will be prequalified. A small portion (3%) of the civil works will be carried out by force account. Consultants for the proposed studies and for technical assistance will be selected in accord- ance with the Association guidelines. Local manufacturers competing under ICB will be allowed a margini of preference of 15% of the c.i.f. bid price, or the actual customs duties and import taxes, whichever is less, for ..ar supply of goods. Civil works contracts costing the equivalent of US$700,0U0 or more, and equipment contracts costing the equivalent of US$50,000 or more, will be subject to the Association's prior review. Such review would cover contracts totaling about 30% of the estimated cost of the Association-financed components. 69. The proceeds of the credit will be disbursed over a period of 7-1/2 years (FY88-95) and will cover 100% of the c.i.f. cost of imported goods and 100D of the ex-factory cost of goods manufactured in India; 50% of local expenditures for other items procured locally; 70% of the cost of road works and 40% of the cost of buildings; 100% of the foreign cost and 40% of the local cost of engineering services and training; and 100% of the cost of consultancy services for technical assistance and studies. Expenditures incurred since March 31, 1985, and prior to credit signing, covering design services, down payments on essential items of equipment, technical assistance for the establishment of the project monitoring system, and initial payments on certain works concracts, will be financed retroactively up to an amount of US$5.6 million equivalent. Disbursement applications in respect of RBD staff expenses and small civil works con- tracts costing US$100,000 equivalent or less, and individual payments of US$10,000 or less in respect of contracts below US$100,000, will be made against statements of expenditure, and full documentation will be retained by GOG for inspection by the Association supervision missions. Disburse- ment applications for all other items will be fully documented. The disbursement period for this credit is consistent _ith the historical profile for this type of project.  -23- Project Justification and Risks 70. Since dairying is common to most areas and is a principal activity in Cujarat, the economic justification for the project is derived from an analysis of benefits for two types of areas: one devoted to dairying activity only and the other to both dairy farming and commercial agricul- Lural activity. The analysis takes into account the effects on these areas of new road construction with no existing traffic, and of road improvements in which existing traffic would be affected. Situations with and without all-weather roads were analyzed in each case Lo assess typical benefits and costs. Principal benefits accrue from the expected reduction in milk sourage, the reduction in deaths of the niilch animaL (cows and buffalos) population, the increase in the quantities of milk marketed during the rainy season in areas where there are now onLy dry-weather roads, and savings in vehicle operating costs for non-dairy-related traf- fic. Other agriculturaL benefits could not be adequateLy quantified, but the experience of the command area road projects in Cujarat suggests that, for some roads, these could be substantial. Costs are based upon the cost of road improvement and the estimated maintenance costs. The weighted average economic rate of return for 260 road sections (30% of total roads) is 281. Sensitivity analyses were run on a district by district basis. Only in one district in the worst case tested i.e., costs up 15%, benefits down 15%, did rates of return fall below 15%, to 12.7%. 71. hne project roads would directly benefit small milk farmers, many of them women, who are now unable to take advantage of readily available services such as veterinary services, artificial insemination, animal insurance, and easier marketing facilities provided free or at low cost by dairy cooperatives. The project's benefits would help to increase the incomes of the rural poor and would accrue to 2,608 villages with a total population of 3.5 million. Among the significant institutional benefits are improved road planning, economic evaluation, and project execution capabilities; improvements in road safety; modernization of the road subsector; improved road quality; and further development of domestic road contractor capabilities. The road transport market in India is highly competitive and thus the benefits of the project, which initially accrue almost entirely to road users, are expected to be passed on to the economy in general. 72. Since most project components involve proven technology, technical risks connected with the project are minimal. RBD has already demon- strated satisfactory technical capabilities in the implementation of the Gujarat II Irrigation Project, which has a substantial road component. Some risks connected with maintenance operacions, use of new contracting procedures and equipment, project management, and economic evaluation of future road projects will be minimized by the proposed provision of train- ing, intensive supervision, and studies during project implementation.  -24- PART V - RECOMMENDATION 73. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association, and recommend that the Executive Directors approve the proposed credit. Barber B. Conable President January 16, 1987  ANNEX 1 Page 1 of 2 tcmsuC IIVLOPWU ma apM Po1 cA RWI (3 I OuN PiPo CSI 0!0ss ~ ~ M5Bi ,lL IAucrLt 291tLz=ML wSI139 iO1-pn mig-um fIh'-ni'geE GDP :m #Mtel Price giOat 'l.0 2.7 Lu 3s i.e ci* 6*1 Cream DarneISe lnaaugmet u1.1 32.4 Cream Net 1slae Sawing 213.33 33.0 Currni Iaunt melan,e 11.2% a. OUYPUT. LSUfl Pog tS ^aw inlC?iV3YY IS iaa Va1w. bd*d (et Later -Prie I/ V.A. Per esar fetter~~~ ~~~ cost). S et RaS lanai Agriculture Il 96.1 i.? PSI i0. 204 so Isdaltry 24.1 Me. u1.S 1's 1.003 18l ea'. I ceft 5L -3J ati .a 1Jal *IO aTaimIAv.eraga liS.2 100.0 Zea.G in0.0 us" ice 3f!RNUSNT F INANCE Gbeel Geversnt of etl Gawan Re IllU. ao GDP Na mI. -- 4- ow MtGMg Ieevies morlfg-soles !234153 jflf5jJ *0i-I4/as Current IC11 4333 20.43 u9.gg i4s.s ii.30 0.42 Current tfaenditwres E.2X 22.34 *D.05 274.11 It." u.n0 Current SirpiueICletficl -a0.03 -Lam 0.43 -33.0 -i -c.am C sital t.andtil.ram tV 164.14 M." 1.12 1I..61 g.g 1.01 Eternel Aeiarnance (net) pr t5a.? 0.14 Ia - - - UOSV. UECDIT AND OICIES iU?CI11 n7?!' 362/ r par I3a4,fl P-3I lggfl !3 mone, end NOuai-Uana 106.1 224.1 43.3 111?.2 12T.5 In.? 01*et I,.02rl.7 '.Oe.c 1.ia. lnmh Credit to Gover.nmnt (eat) ate 106.2 200.3 Z3I-2 215.3 212.3 407.3 Sol s eo0.s *t- O*ah Crealt to Ca_rcial lectar 64.5 1n.2 310.1 3".4 434.4 II?.) *12.r 7i5.o e1s.0 iee.1 1975/1TI1 279/1A6112 ilM i2IhLEEd lUStS" Aar.-Fab L Money -. &ua I-mOnsf as a lb of GOP zID 27.2 30.2 43 . 43.6 42.S 44.2 44.4 46.0 - - Uiia.eala| PrICe mreet (EloIwl.e100) 110.0 172.0 2117. 257.3 201.3 2e.? 336.0 230.4 335.0 21S.% a.-.a. Percentag Cnanre_ ins elesale sPrice Inn.t. 7?- -1.1 tI.t 13.2 U.. 2.6 e .6 7.1 7.1 I l. lac Cradm :a -e.arn_rnt ,et) 1 .0 22.1: 2 n. . 13. 13.3 13.2 2 2. 20.3 gf 1e Ce.-r Crau. i. Ceserci Sect S.4 2 25 .11. .0a h. 2 I 1.4 ft/ Si Tna per cpI:as OAP aetiole ISat arkat StIfLe. ,aaln Nerle lent Atlam a *nadeiag. Dea parted 1442S3. All e;ner cen*raloene re a*tllars In tan's ta-1e era at tue aware aecuangoe rae prevaili ng during mr partee ceaor-. p 0-i. nmoletes. cent a Statieticl Ore iatsen. fg Cemstead tree t-nd lIn* Se GNiP at Pacte- eCst aerl. Inciluding em _berwattan bafere First yer enst one Deseratin far last eae of lStes perid. qs Wearl Sof a: _imte af hat disauram n et cencaeaenal aid a"d l1e. Tranafrm bSwaten Cantre and Satems nsa SeWn nt tge out. I laens enda adance. ap ire prat l n -ea ne bleen wttee wut. j' Pareeqenge cnnge Srom ene-d Sath S4 ae ene-Peeruars *os. ii Pareant"ga cange S _s et 0ns-rebruary lo. I) fetal Leaor Prca ad parcenta" orae.edn frem l61 Cas m. taclutem data for l Aen.  ANNEX . Page 2 of 2 SatamyCy or *AYhSSltS