India - Industrial Pollution Control Project

Document of The World Bank FOR OFFICIAL USE ONLY GjVk 3 3L/ ,'A]-/t Report No. 9347-IN STAFF APPRAISAL REPORT INDIA INDUSTRIAL POLLUTION CONTROL PROJECT MAY 7, 1991 Industry and Finance Division Asia Technical Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EOUIVALENTS (as of May 1, 1991) US$ 1.00 Rs. 20.00 US$ 0.05 - Rs. 1.00 PRINCIPAL ABBREVIATIONS AND ACRONYMS USED BOD - Biological Oxygen Demand CETP - Common Effluent Treatment Plant COD - Chemical Oxygen Demand CO2 - Carbon Dioxide CP - Commercial Practices CPCB - Central Pollution Control Board CSS - Central Sector Scheme DEA - Department of Economic Affairs DFI - Development Finance Institution EAP - Environmental Action Plan EDI - Economic Development Institute EIA - Environmental Impact Assessment FY - Fiscal Year GEF - Global Environmental Facility GOI - Government of India ICB - International Competitive Bidding ICICI - The Industrial Credit and Investment Corporation of India, Limited IDBI - The Industrial Development Bank of India, Limited LCB - Local Competitive Bidding LOU - Letter of Understanding HINAS - Minimum National Discharge Standards HOEF - Ministry of Enviroment and Forests NOC - No Objection Certificate R & D - Research and Development SA - Special Accounts SIDC - State Industrial Development Corporation SOE - Statement of Expenditures SOx - Sulfur Dioxides SPCB - State Pollution Control Board SSI - Small Scale Industry TA - Technical Assistance TPY - Tons Per Year FISCAL YEAR Government of India - April 1 - March 31 ICICI - April 1 - March 31 IDBI - April 1 - March 31  FOR OFFICIAL USE ONLY INDI INDUSTRIAL POLLUTION CONTROL PROJECT LOAN, CREDIT AND PROJECT SUMMARY norroweru India, acting by its President Beneficlaries: Industrial Credit and Investment Corporations of India (ICICI) Industrial Development Bank of India (IDBI) Loan Amount US$124.0 million equivalent Credit Amount SDR 23.4 million (US$31.6 million equivalent) Terms The loan would be made at the Bank's standard variable interest rate and would be repaid over twenty years including five years of grace. The IDA credit would be on standard terms, with a 35 year maturity. Onlending Terms The Government of India (GOI) would onlend the proceeds of the Bank loan to the ICICI (US$50 million) and the IDBI (US$74 million). The GOI would bear the foreign exchange risk, onlending to the institutions in Rupees, at an interest rate of 2% below the long term commercial lending rate (currently 15%), with a repayment period of 15 years, including five years of grace. The ICICI and IDBI would onlend at 15% or such rate as may be set in consultation with the Bank. The GOI would pass, as budgetary allocations from the proceeds of the IDA credit i) US$14.1 million equivalent to the Ministry of Environment and Forests (MOEF) for the institutional and technical assistance components; and ii) US$5.5 million equivalent to IDBI which will act as a Government agent for the demonstration projects and technical assistance schemes. The remaining US$12 million equivalent will be used by the GOI for direct support on a grant basis of the Common Treatment Facilities, through the IDBI which will act as the lending agent. Prolect DescrlDtion The project's objective is to support the Gors efforts to prevent and alleviate environmental degradation caused by industrial operations and assist in the successful attainment of the proposed short and medium-term targets of its environmental policy. The project is designed to assist in the identification and implementation of a cost effective program for industrial pollution monitoring, control, and abatement within the context of institutional and financial constraints present in India. The proposed project comprises three components: i) an institutional component designed to strengthen the Central and State Pollution Control Boards in the states of Gujarat, Maharashtra, Tamil Nadu and Uttar Pradesh; ii) an investment component designed to support efforts by industry to comply with regulations, including the support for the set up of common treatment facilities; and iii) a technical assistance component designed to support the Ministry of Environment and the DFI's to provide specialized technical assistance for the evaluation of environmental problems and the assessment of their solutions. The Institutional ComDonent is designed to strengthen the monitoring and enforcement ability of the GOI through the financing of a program of improvements at the Central and the selected State Pollution Control Boards to enable the effective development of their mandates. The component would 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 finance: a) a training program in technical and managerial skills; b) acquisition of equipment (analytical and monitoring) required to upgrade technical capabilities of the Boards; and c) other laboratory facilities including mobile stations. The Investment Comnonent would finance a) individual projects in the target sectors dealing with waste minimization, resource recovery and pollution abatement; b) the set up of common treatment facilities at industrial estates, for the treatment and proper disposal of liquid and solid wastes; and c) selected demonstration projects based on their prototype nature or novelty of application in India, the potential environmental benefits and other eligibility criteria. The Technical Alsistance Comnonent would assist a) the Ministry of Environment and Forests (MOEF) to evaluate environmental problems and develop solutions; and b) the DFl's to assist enterprises in undertaking the required feasibility studies for pollution control investments. Prolect Benefits and Rilsks The main benefits of the project are associated with the reduction in environmental degradation, caused by industrial sources, to be obtained from the implementation of the activities described in the report. The institutional component is expected to yield, in the short term, improvements in the effectiveness and coverage of the Boards in their monitoring and enforcement activities. With stronger Boards, the GOI will be able to promote stricter compliance with the provisions of the environmental acts. The sponsoring of the common treatment facilities is a pioneering effort with potential for replication across India. Successful implementation of the proposed facilities should result in a substantial impact in the environmental performance of the small and medium scale industry which so far has proved resistant to change. By providing technical and financial support for individual enterprise efforts in waste minimization and resource recovery, the project is expected to contribute substantially to a reduction of waste generation in the chemical and related industries. The support of demonstration projects will assist in the introduction of novel techniques and processes for the solution to pervasive environmental problems in industry. Specific risks are associated with the response of industry to the need to improve the environmental aspects of their operations. In the absence of positive financial incentives, the enforcement of the law and the negative incentives in place will determine the demand for the credit line for individual projects. Although the project places priority on the strengthening of the monitoring and enforcement institutions, in the final analysis it is the ability to convey these concerns to the manufacturer that will determine the success of the operation. Success of the activities promoted by the project, wiU in the long run also depend on the will and commitment from the GOI to enforce the environmental regulations and increase the costs of non-compliance as well as to persuade industrialists of the long term benefits of pollution control. This is a risk difficult to evaluate. However, the MOEF is strongly committed to the objectives of the GOI policy statement on the environment and to assist in the reduction of the conflict between industrial development and environmental protection.  ili Etlmabed Cost Components ..................... (USS million) Institutional 8.9 9.1 18.0 Investment 194.0 43.0 237.0 Technical Assistance 1.0 4.0 5.0 Io1a a/ Financing Plan: Government of India 17.4 --- 17.4 Financial Institutions 25.0 --- 25.0 Project Sponsors 62.0 --- 62.0 IBRD 89.5 34.5 124.0 IDA 10.0 21.6 31.6 IT22 Estimated Loan and Credit hsbusetmemOs DANK GROUP FISCAL YEAR 92 93 94 95 96 97 98 . ........................... (USS million). Annual 8.0 8.0 18.0 48.0 36.0 22.0 15.6 Cumulative 8.0 16.0 34.0 82.0 118.0 140.0 155.6 Econgml Rate of Return: Not Applicable a/ Physical and price contingencies are already added to the total; the project cost is exclusive of taxes and duties.  I2mA IMSTRIAL POLLUTION CONTROL PROJECT STAFF APPRAISAL REPORT Table of Contents lto No LOAN CREDIT AND PROJECT SUMMARY .. ..............................i l-iL I. INTRODUCTION ............................1 II. INDUSTRIAL POLICY AND ENVIRONMENTAL PROTECTION. ... 3 A. Industrial Policy and its Effect on Industrial Pollution . ..3 B. Environmental Regulations Governing Industrial Sources .......... 4 C. The Environmental Clearance and Permit Procedures . . 5 D. The Record of Compliance in the Chemical Industries .6 E. Incentives for Pollution Control .10 F. Priorities for Strategy Development and Implementation . .13 III. BANK ROLE AND LENDING STRATEGY 15 A. Strategy for Bank Assistance in Environment ..... .. 15 B. Environmental Protection in Industrial Sector Lending .16 IV. TE PROJECT ....17 A. Project Objectives ....17 B. Project Description . . .17 C. Project Costs ...19 D. Project Financing ...20 E. The Proposed Loan and Credit ... .22 V. RQOJ.L.LECTTATION .. ...... . .25 A. Management ...25 B. Implementation Schedule . . .27 C. Procurement ............................................... .... 27 D. Disbursements ... 27 E. Monitoring and Evaluation ..... 29 VI. IMP1EMENTING AGEIES .. 30 A. The Central and State Pollution Control Boards .... 30 B. Participating Financing Institutions . 32 VII. BENEFITS AND RISKS .... 35 A. Project Benefits ... 35 B. Project Risks .. . 35 This report was prepared by Messrs. W. Vergara (ASTIF) based on the results of an appraisal mission that included Messrs/Mme. R. Batstone, D. Williams and C.H. Zhang (ASTEN), W. Futur (AS4IF), N. Hadjitarkhani (ASTIF), D. Kantawala, R. Rotkar and R. Kelly (consultants). Peer reviewers were H. Daly (ENVPR); A. Khanna (AS4IF); S. Talbot (AS4CO) and W. Angell (ASTEN). Messrs. N. Gould (AS4IF) and H. Vergin (AS4DR) cleared the report.  VIIF^ill, aOT M D* T f ON .................................................. *37 2.1 Ninimum National Standards for Discharges into Water (NMKS) ..... 38 2.2 The Environmental Clearance Procedure . ................... 41 2.3 Current Incentives for Pollution Control by Industry . . 44 2.4 Experience of Some Developed Countries in the Control of Industrial Pollution Using Economic Instruments . . 46 4.1 Institutional Component. Cost of Improvements to the Control ..... Board Laboratories . .............................................. 53 4.2 Common Effluent Treatment Plants: Preliminary List of Proposals. .66 4.3 Summary Description of Some Technical Assistance Schemes ......... 67 5.1 Organization and Staffing at the State Pollution Control Boards ..68 5.2 Common Effluent Treatment Plants (Guidelines for Evaluating Institutional and Technical Proposals) .. ... 78 5.3 Implementation Schedule . . . 80 5.4 Anticipated Disbursements . . ................... 81 6.1 Participating Financing Institutions ............................. 82 7.1 Documents in the Project Files ................................... 95  INDI INDUSTRIAL POLLUTION CONTROL PROJECT I. INTRODUCTION 1.01 Since the early 1970s, but more so in the aftermath of the Bhopal accident, India has forcefully moved to reduce the conflict between environmental protection and industrial development. Among the actions already undertaken to achieve this goal are: a) the enactment of laws and regulations governing the discharge of pollutants into the air and water bodies, the generation and disposal of toxic and hazardous residues and the development of safety codes for factory operations; b) the creation of enforcement agencies to monitor and oversee compliance with the environmental laws; and, c) the enactment of an umbrella environmental act empowering Lhe state to broadly pursue environmental protection measures. These actions have already had a significant effect by fostering a favorable change in attitude in the industry toward environmental concerns and by being instrumental in the adoption of environmental impact assessments for new industrial projects and the implementation of a large number of treatment plants and abatement measures at existing units. 1.02 Yet, pollution and environmental degradation caused by industrial sources continue to be major concerns and a threat to the sustainability of economic development of the country. For example, the Ministry of Environment and Forests (MOEF) has recently estimated that industrial sources, although comparatively smaller in volume, compared to municipal discharges, continue to contribute over one third of the total load of pollutants into rivers and other water bodies. About half of this load originates from large and medium scale industries, specially from those in the chemical and related sectors. Sources of water pollution are particularly worrisome given the periodic water shortages in the country and the already large impact of industrial sources of pollution on the quality of surface waters and groundwater reservoirs. 1.03 Many medium and small industries, although in clear non-compliance, continue to violate environmental codes because of inefficient or inoperative controls and, in the case of many small plants, out of sheer incapacity to meet the financial costs and technical requirements associated with plant modernization and/or control technology. Also, with closer monitoring and stricter control being placed on airborne emissions and wastewater, chemical wastes are being diverted to land disposal. As common pollution problems (such as suspended solids and c'cygen demand in wastewater) become better controlled, the effects of smaller quantities of toxic materials being discharged into alr and water media have become more evident and the need to address them more pressing. 1.04 As industrial modernization is a key element of the development strategy of the country, efforts continue to be mounted to control and reduce its environmental impact. The Government is, therefore, in the process of implementing a comprehensive plan for the promotion of environmentally-safe industrial growth, conservation of the natural resources, waste minimization and  2 control and abatement of pollution. The elements of this strategy can be broadly described as: a) the internalization of environmental concerns in economic policy making; b) the integration of environmental policy within industrial policy particularly for the future development of the chemical industry and the small scale sectors; and c) the adoption of a common management strategy for environmental policy at the State and local governments with active participation of the industry and the public. The proposed targets for this policy for the next five years are: a) to reduce by 25% the use of water by the industrial sector, the generation of solid residues and all emissions of pollutants from industrial sources into water bodies; b) to promote the adoption and implementation of common effluent treatment plants at existing clusters of small scale industries; c) to contain the emissions of airborne pollutants, in particular C02 and SOx, at present levels; and, d) to regulate the use of non-biodegradable products and the disposal of toxic and hazardous waste. 1.05 The proposed project has been designed to support the key aspects of this strategy by contributing to the achievement of all four proposed targets. First, the project would assist in the strengthening of the enforcement of monitoring agencies to facilitate compliance with the law and to broaden their field of action. Second, the project would contribute to the introduction and operation of common treatment plants at industrial estates by providing technical and financial assistance. Third, the project would aid the efforts of the chemical and related sector industries for adoption of cost effective waste minimization and resource recovery or pollution abatement measures. 1.06 Since some of the elements of the government strategy for the Eighth Five Year Plan (1990-1995) are still being formulated, the timing of the project provides a unique opportunity to support a major effort of the GOI to redirect industrial policy toward a long term sustainable basis and toward a reduction of the conflict between industrialization and environmental protection. In a wider framework, Bank participation in industrial pollution control fits with the Bank's intentions to promote environmentally sound development and complements the efforts already launched in India in energy conservation and technology development. 1.07 The appraisal report provides a review of the industrial and environmental policy in India in chapter 2, emphasizing recent reforms and proposals to promote effective enforcement and adoption of control measures. In chapter 3, the report describes the Bank role and lending strategy for environmental assistance to industry in India. Chapter 4 describes the proposed project, chapter 5 the implementation arrangements, chapter 6 the participating institutions, chapter 7 the benefits and risks associated to the project and chapter 8 the agreements reached with the government and other institutions.  3 II. XNDVSTRIAI. POLICY AND_ENIROMENTAL PROTECTION A. Industrial Policy and its Effect on Industrial Pollution 2.01 The Bank, through its economic and sector work, has been analyzing the policy framework and incentive system underlying the industrial development of India. Until recently, however, it had not specifically focused on the potential conflict between the pattern of industrialization and the goal of sustainable development and on the required actions to mitigate the problem from a policy point of view. The pricing, trade, fiscal (taxes and s0''sidies), and monetary (interest/exchange rate) policies adopted to promote industrialization have an impact on the nature and volumes of industrial pollution. While promoting industrial transformation, these policies have unintoanded effects on the environment that need to be understood and addressed. 2.02 Indian industrial policy has had an environmental impact through its influence in the pattern and rate of industrialization, and on the recovery and recycling of industrial residues. For example, the cost-plus pricing of output (such as for fertilizers and refinery products), together with the protective trade regime, influenced the pattern of industrialization in favor of capital intensive sectors, often at sub-optimum plant size. Notwithstanding the fact that India is a net importer of both energy and capital, its industrial policy framework favored expansion of energy and capital intensive industries (such as steel, refineries, chemicals/petrochemicals, and cement among others), frequently associated with significant environmental impacts. 2.03 Trade and Pricina Policies. Artificially low raw material prices, usually lead to wasteful utilization of these inputs and, as in the case of low cost water, promote high water usage and dilution rather than treatment or recycle. Low prices for raw materials increase demand while discouraging conservation and recycling. When inputs are underpriced, industries that use them intensively tend to expand beyond the level justified by their economic potential. 2.04 High product prices arising from high effective protection and/or cost-plus pricing schemes have similar effects. They encourage expansion of capacities that may not be consistent with India's comparative advantages and provide little incentive for enterprises to be efficient. High tariff and non-tariff barriers to trade and cost-plus-pricing of output attract resources toward sectors that are highly protected, creating a pattern of industrialization that is not warranted on the basis of resource endowment. Protection may also generate increased pollution levels that could have been avoided. Producers know that their costs'would be covered by higher prices supported by the protective trade regime and/or cost-plus pricing scheme, therefore discouraging efficient use of raw materials and other inputs which in turn leads to an increase in pollution. Examples are, the high water usage by the pulp and paper industry (relative to world standards) and the relatively low sugar yield in the sugar industry. Such output pricing also make penalties for violation of discharge standards affordable as these may be factored into the cost of production. It can also favor the adoption of end of pipe treatments, which are not necessarily the most cost effective option to pollution control. Yields are usually lower (and residues higher) under a protective trade regime and a cost-plus pricing scheme compared to a free market situation.  4 2.05 Sub-optiM1a scales of groduction. The protection afforded to industry and the 001 emphasis on decentralization of industrial development have resulted in the adoption of sub-optimal scales of production, most notably, for some sectors such as pulp and paper, sugar and distilleries and leather tanning, where the median size of operating plants is below world standards. Adoption of a small production scale frequently increases the cost of production and cost of treatment of effluent, making it difficult for companies to meet emission standards. 2.06 Product and process obsoloscence. In some cases (dyes and intermediates, pesticides, for example) the industries have adopted outdated, low efficiency processes and technologies associated with higher levels of pollution. Chemicals already banned or obsolete in other industrialized countries are still being produced in the country (some pesticides and insecticides). In other cases, relatively dirty industries (some dye intermediates) or processes (chemical bleaching of pulp), which find themselves under considerable economic and environmental pressure in developed nations, have been installed in India, exacerbating the environmental problems associated with industrial sources. 2.07 To address these problems, the GOI has so far focused on encouraging more competition among domestic enterprises through the deregulation of barriers to entry and expansion. It has also taken measures to decontrol prices and promote exports. To address the issue of sub-standard scales, the GOI has instituted minimum scales of production in most sectors of the chemical industry to be met as a condition to issuing a license. These measures have been successful in creating significant incentives for greater efficiency and optimum use of raw materials. They have also resulted in an increase in industrial productivity which rose at an annual rate of nearly 4% between 1980 and 1986. However, additional measures need to be taken, particularly in regard to trade policies. More efficient use of raw materials would result from reduced levels of effective protection accrued from tariff and pricing reform. B. Environmental Reaulations Governing Industrisl Sources 2.08 There are four pollution control acts *with amendments that have been enacted since 1974. The Water (Prevention and Control of Pollution) &Ac of 1974, amended in 1988 is the earliest legislation. This act provided for the creation of the Central and State Pollution Control Boards as the agencies for monitoring and enforcement of the Act. The Boards have the authority to inspect and place environmental conditions on the operation of industrial facilities, set water quality and effluent standards and permit or prohibit the discharge of wastes into water bodies. Surcharge procedures and monitoring fees payable by industry are also established under the act to pay for the costs of implementing the Board functions. No facility is allowed to discharge liquid effluent without the consent of the Boards. After consent is granted the Board is empowered to monitor compliance and to initiate enforcement for violations to the Act. Although the States may approve other laboratories for environmental monitoring, some have elected to use the Boards as the only agency for consent applications; this restriction results in workloads which are difficult to handle on a timely basis. 2.09 The Air (Prevention and Control of Pollution) Act of 1981 amended in 1987 added the responslbility for protection of air quality to the Boards, providing authority for the set up of emission standards for airborne pollutants,  establishment of air quallty standards as well as monitorlng and enforcomont procedures. Under the Act, relevant lndustrlal facilities are requlred to submit an appllcatlon to operate and emit alrborne pollutants, which lncludes analysis of the concentration of emissions from stacks. The provislons of the Act encourage regulation of alr quality by adoption of speciflc technologies but enables as well the settin8 up of specific discharge standards. 2.10 TRho Environent (Protection) Au and Rules of 1986 are an umbrella environmental Act that empowers the Central Government to take all measures deemed necessary to protect and improve the quality of the environment and control and reduce pollution from all sources. The rules give the Central Government the ability to prohibit or restrict the location or operation of an industrial facility on environmental grounds; these rules also establish comprehensive national standards for particular industrial operations (Nlnimum Natior>sl Discharge Standards, MINAS; see Ar..Lrx 2, for a summary description). These standards compare satisfactorily to standards in use in many developed countries, Additionally, the states are allowed to tighten the standards. The Envlronment Act also allows a citizen to bring charges against polluters and take legal action on his own against them. In 1989, additional rules were established under the Act to address the issues related to hazardous waste management and disposal. 2.11 Thus, the legal framework is weill in place to achieve significant progress in environmental protection. However, despite these legal provisions, the considerable progress achieved through the Boards' actions and an increasingly responsive corporate attitude toward the environment, serious water and air quality problems remain chronic and unresolved. The pace of industriAlization and urbanization has in many cases eliminated the progress gained through these