India - Pochampad Irrigation Project

RESTRI CTED Report No. P-974 This report is for official use only by the Bank Group and specifically authorized organizations or persons. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report. INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE GOVERNMENT OF INDIA FOR THE POCHAMPAD IRRIGATION PROJECT June 21, 1971   INTERNATIONAL DEVEIOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE GOVERNMENT OF INDIA FOR THE POCHAMPAD IRRIGATION PROJECT 1. I submit the following report and recommendation on a proposed credit in an amount in various currencies equivalent to US $39 million to India for an irrigation project. PART I - HISTORICAL 2. The importance of agriculture in the economy of India and the pressing need to improve agricultural productivity have led the Bank Group to give high priority to lending for agricultural projects. In 1968 and 1969 the staff had extensive discussions with officials of the Government of India (GOI) to identify projects suitable for financing. As a result, lending for agriculture has increased from US $13 million in FY 1969 to US $97.5 million in FY 1970 and - US $90.h million in FY 1971. The proposed credit would be the first large commitment toward an even higher level of lending to Indian agriculture planned for FY 1972. The proposed credit would be IDA's first financing for improving a major surface irriga- tion system since the Kadana Project in Gujarat State (Credit No. 176-IN) was approved in February 1970. 3. The proposed Pochampad project was appraised in November 1969. The appraisal mission found that the funds required for timely construction of the project would be substantially more than had been allocated under the Fourth Plan (1969-1974). As a result,GOI and the Government of Andhra Pradesh reconsidered the allocations required and, in November 1970, con- firmed that the amount would be increased. This confirmation cleared the way for completion of the appraisal, and an updating mission visited India in February 1971. During negotiations, which took place in Washington from May 10 to May 20, 1971, the Borrower was represented by Mr. G.V. Ramakrishna (Joint Secretary, Department of Economic Affairs, Ministry of Finance), Mr. Sreenevasa Rao (Member, Central Water and Power Commission (CWPC)), Mr. A. F. Couto (Director, Ministry of Irrigation and Power), Mr. Hit Prakash (Deputy Secretary, Ministry of Agriculture) and the State of Andhra Pradesh was represented by Mr. B.C. Gangopadhyay (Secretary, Public Works Department (PWD)), Mr. P. Tripath Reddy (Chief Engineer, PWD), and Mr. L. Venkataratnam (Joint Director of Agriculture). h. A Summary Statement of Loans and Credits is at Attachment I. Comments on delays in disbursement are given in paragraphs 6-8 of the Report and Recommendations for the Tamil Nadu and Haryana Agricultural Credit Projects circulated to the Executive Directors on May 17, 1971.  With regard to IFC, 13 commitments have been made in India since 1957 totalling US $42.3 million of which US $2.8 million has been repaid, US $5.8 million sold and US $6.3 million cancelled. Of the balance of US $27.4 million, US $19.1 million represents loans and US $8.3 million equity. As of May 31, 1971, US $25.6 million of this total had been disbursed, leaving US $10.4 million undisbursed. The largest commitment was a total of US $18.9 million to Zuari Agro-Chemicals for a fertilizer plant in Goa. PART II - THE ECONOMY 5. The latest economic report entitled "Economic Situation and Prospects of India" (SA-25a) was distributed to the Executive Directors on May 24, 1971 (F 71-120). It reports the continuation of many of the encouraging trends observed in the 1970 report - in particular the fur- ther growth of exports and of agricultural production. On the other hand -ne report also notes that net aid receipts have fallen to a level lower than at any time in the past decade, and in the fiscal year ended March 31, 1971, were less than one-third of the peak reached five years ago. The resulting shortage of resources has inevitably been reflected in a short- fall of investment, from the planned level, which seems to be the bare minimum required if India is to achieve a tolerable rate of growth. As the report notes, India continues to need substantial aid on concessionary terms. 6. More specifically in relation to agriculture, the report summarizes the continued progress of the green revolution which has been encouraging. Foodgrain production reached a new record of 105 million tons in 1969/70 crop year, showing a 5 percent increase over the previous year, and a fur- ther increase of 5 percent appears to have occurred in 1970/71. The main force behind this progress has come from wheat, although sustainable increasesin rice production can also be expected now with some confidence. The Fourth Plan set a production target of 129 million tons by 1973/74; however, actual production is unlikely to exceed 120 million. Two reasons for the shortfall in foodgrain production are the delay in increasing assured irrigation supplies and the closely related slowdown in the growth of fertilizer consumption. In the longer term future, the further develop- ment of irrigation with effective agricultural support programs should ensure continued growth in the use of new inputs, including fertilizer,and in overall farm output. PART III - THE PROJECT 7. A country basic data sheet is at Attachment II. 8. A report entitled "Appraisal of Pochampad Irrigation Project, Andhra Pradesh" (PA-90a, June 16, 1971) is attached. A Credit and Project Summary is at Attachment III.  -3- 9. The Pochampad Irrigation scheme is situated in the State of Andhra Pradesh in the south of India. Construction of the dam and other major works started in 1965, although it is only over the last two years that work has got underway. Ultimately, about 400,000 ha along the right bank of the Godavari River will be irrigated. The proposed project is the first intensive phase of this scheme and provides for the irrigation of 100,000 ha and related infrastructure. The total cost of this phase is estimated to be Rs. 9hh million (US $126 million), of which Rs. 262 million (or 28 percent of the project cost)had been spent by March 1971. Rs. 129 million would be required for on-farm developments and, therefore, would be provided by farmers and credit institutions. Of the balance of Rs. 553 million (about US $74 million), the estimated foreign exchange content is only Rs. 75 million (US $10 million) and Rs. 478 million (about US $6h million) will be local costs. 10. The project would be financed from the Andhra Pradesh develop- ment budget which is supported by loans and grants from GOI: the Association would have an opportunity to comment on proposed annual allocations for the project in relation to the construction programs before budget proposals are finalized. The proportion of project costs, excluding on-farm expend- itures, to be financed by the Association would be about 53 percent, suffi- cient to make a decisive contribution to the completion of the project. Since the foreign exchange component, excluding village roads, to be covered out of the proposed credit (US $9.7 million) is so small, this means that about 25 percent of the credit would go to finance foreign exchange expend- itures and about 75 percent to finance local expenditures. The basic justification for financing local expenditures on projects in India, especially those with a low foreign exchange content,has been discussed in recenb economic reports, including Chapter X of the latest report (SA-25a). 11. The parts of the project which still have to be carried out, and towards which the proceeds of the credit would be allocated, include com- pletion of the dam (which will be one of the longest in Asia), completion of the remaining 65 km of Godavari South main canal, lining of the first phase construction of the main canal (112 km), construction of a distri- bution system to serve the 83,000 ha not so far covered, construction of field drainage, and the improvement and extension of village roads. 12. The principal benefit of the project would be the intensification of agriculture in an area which hitherto has been dependent upon uncertain rainfall. This would have two effects upon present cropping patterns. First, although the kharif (summer) cropping intensity would remain much the same, irrigation would permit about half the acreage to be put under rice instead of pulses and maize. Second, rabi (winter) cropping intensity would more than double. Overall intensity would increase from 110 percent to 155 percent. In addition, the availability of assured irrigation supplies would enable high-yielding varieties of rice and maize to be introduced and would also justify the application of fertilizer. As a result, yields from rice and maize are expected to increase three times or more, while the yield from groundnuts should double. Thus, there would be a substantial increase in production, especially of foodgrains. The resulting foreign exchange saving is estimated at about US $18 million per annum, once full development has been reached. Treating past expenditures as sunk costs, but allocating  the entire cost of project works to the 100,000 ha to be irrigated in this first phase, the economic rate of return for the project is estimated at 14 percent; this rate of return will progressively increase and will approach 24 percent as the project costs are spread over the 400,000 ha of the scheme expected to be fully deve:Loped by the early 1980's. 13. Presently authorized measures for the recovery of project costs would cover the full cost of operation and maintenance and about 50 percent of the capital cost over 45 years excluding interest. Thus, by proper col- lection, a creditable contribution towards the cost of the project can be achieved. Full recovery of project costs would require some increase in existing taxes and levies; the Government of Andhra Pradesh (GAP) has agreed to study and then to implement by 1974, measures to ensure recovery of as much as practical of all project costs. 14. Experience with surface irrigation projects in the early 1960's underlined the importance of project organization with comprehensive terms uf reference, assured funding and timely construction in order to ensure proper use of irrigation water as soon as it becomes available and the arrangements for implementation of the Pochampad Project have taken these lessons into account. Moreover, agricultural support, including construction of new village roads, facilities for on-farm works (such as land levelling and drainage), and credit, is being planned in such a way that agricultural development complements progress on construction. In the case of agricul- tural credit, the Association is already providing assistance to the Andhra Pradesh Land Mortgage Bank (Credit 226-IN), which together with other govern- ment agencies will meet the credit needs of the project area. A project organization will be set up under a senior government officer (the Project Co-ordinator), with comprehensive terms of reference, in order to co-ordinate all the elerrments required to bring about successful development. The Project Co-ordinator will be responsible to a State level Development Committee, which will provide general policy direction. This organizational arrange- ment is similar in scope to that now in operation for -he Kadana Irrigation Project (Credit No. 176-IN), and it is hoped that this organization will. enable the State Government to overcome some of the difficulties encountered in earlier projects where less attention was given to co-ordination of the sevoail elements necessary to the modernization of agriculture. 15. Procurement of imported equipment, machinery, and spares (US $3.5 million) would be largely on the basis of international competitive bidding in which local manufacturers would receive a preference of 15 percent. (Actual customs duties for most of these items are presently higher at about. 30 percent.) Minor items of equipment (US $1.3 million) would be purchased locally under regular Government procedures. The balance of US $34.2 million would be allocated for civil works.  - 5 - 16. Traditionally, India has arranged for construction work on irri- gatl.vn projects largely through force account procedures. In this case, however, only US$4 million equivalent would be used to pay for force account work and the balance of US$30.2 million would be disbursed on civil works contracts awarded under local competitive bidding. There would be a variety of large and small contracts which would be designed to offer oppor- tunities for both large and small contractors to compete. These procedures represent part of the effort which is being made by the Government of India, supported by the Bank, to build up the capacity of the local contracting industry in the construction field. 17. Attention is called to the fact that these arrangements contemplate the award of civil works contracts entirely on the basis of local competition rather than having resort to international competitive bidding. It is the judgment of our staff that there are a number of Indian contractors who have the technical and managerial capacity to execute the works in question and that they would be likely to win most if not all of the contracts concerned even under conditions of international competitive bidding. None- theless, the results of bidding cannot be predicted in advance and under the Bank's normal procedures we would have regarded a large portion of the civil works on this project as suitable for international competitive bidding, and we would normally have required that contracts for these civil works be put out to international competitive bidding in order to ensure that the project is carried out in the most economic and efficient manner. We have not pressed this requirement upon the Indian Government in this particular case since we have felt it desirable to gain more experience with the problem and to pursue further discussions with the Indian Govern- ..ncnt as to what terms and conditions might be appropriate to secure effective competition between Indian and foreign contractors. PART IV - LEGAL INSTRUMENTS AND AUTHORITY 18. The draft Development Credit Agreement between India and the Association, the draft Project Agreement between the Government of Andhra Pradesh and the Association, the Recommendation of the Committee provided for in Article V, Section l(d) of the Articles of Agreement and the text of the Reso:Lution concerning the proposed credit are being distributed separately. 19. There is one special condition of effectiveness included in Section 8.01(b) of the draft Development Credit Agreement which requires that Andhra Pradesh shall have appointed a Project Co-ordinator with suitable rank, powers, and responsibilities, after consultation with the Association with respect to the experience and qualifications required for this post.  - 6 - PART V - COMPLIANCE WITH ARTICLES OF ASSOCIATION 20. I am satisfied that the proposed Credit would comply with the Articles of Agreement of the Association. PART VI - RECOMMENDATION 21. I recommend that the Executive Directors approve the proposed Credit. Robert S. McNamara President Attachments June 21,1971  Attachment I INDIA SUMMNRY STATEMENT OF LOANS AND CREDITS as at May 31, 1971 (US $ million) Loan or Undis- Credit No. Year Borrower Purpose Bank IDA bursed Loans/Credits fully disbursed =76.14 985.6 307-IN 1961 IISOO Coal Mining 19.5 3.1 414-IN 1965 ICICI Industry DFC VI 49.8 7.1 89-IN 1966 India Beas Equipment 23.0 9.2 515-IN 1967 ICICI Industry DFC VII 25.0 10.1 614-IN 1969 India Tarai Seeds 13.0 10.9 615-IN 1969 India Telecommunications II 27.5 26.9 153-IN 1969 India Telecommunications III 27.5 10.0 162-IN 1969 India Tenth Railways 55.0 19.5 176-IN 1970 India Kadana Irrigation 35.0 33.4 182-IN 1970 India Sixth Industrial Imports 75.0 46.7 683-IN 1970 ICICI Industry DFC VIII 40.0 32.4 191-IN 1970 India GuJarat Agriculture 35.0 35.0 203-IN 1970 India Punjab Agriculture 27.5 27.5 226-IN 1971 India Andhra Pradesh Agriculture 2b.4 24.4 230-IN 1971 India Agro-Aviation 6.0 6.0 241-IN 1971 India Telecommunications IV 78.0 78.0 * 222-IN 1971 India Power Transmission II 75.0 75.0 * 249-IN 1971 India Haryana Agriculture 25.0 25.0 250-IN 1971 India Tamil Nadu Agriculture 35.0 35.0 Total (less cancellations) 1,051.2 1,507.0 515.2 of which has been repaid to Bank and others 469.1 Total now outstanding 582.1 Amount sold 110.2 of which has been repaid 108.4 1.8 Total now held by Bank and IDA 580.3 1 507.0 Total Undisbursed 90. 424.7 515.2 Signed May 3, 19_71 but not yet effective. * Signed June 11, 1971 but not yet effective.   Attachment II INDIA BASIC DATA Total Percent Area: in km Cultivated 3,268,580 43.0 Densit Population: Total (Preliminary 1971 Census estimate) 547 million 167 Annual Rate of Growth, current estimates 2.25 percent Political Statust Republic Groas National Product at Market Prices, 1970/71-/s Rs. 346.7 billion Rate of growth 1955/56 - 1968/69: 3.4% p.a. at constant 1965/66: -5.2% prices 1966/67: 1.3% 1967/68: 8.9% 1968/691/ 2.2% 1969/701/ 5-5.5% 1970/7i1/ 4.5-5% Per capita, 1970/71: US $84 Gross Domestic Product at Current Prices, 1970/71 /: Rs. 3h9.5 billion Percentage breakdownt Agriculture 49 (for 1968/69) Mining 1 Manufacturing 19 Commerce and Transport 16 Government and Other Services 15 Percent of National Income at Market Prices: 196/6 9 66/67 1967/682/ 1968/693/ 1969/70;/ Net domestic investment 13.3 12.1 11.3 11.3 12.0 Net domestic saving 10.6 8.2 7.8 8.8 9.9 Current account balance -2.7 -3.9 -3.5 -2.5 -2.5  Attachment II Page 2 1966/67-1969/70 March 1970 Average Rate of Mone and Credit (Re. billion): (Last Friday) Increase (%) Total money supply 63.85 9.0 Net bank credit to gov't sector 47.26 5.5 Net bank credit to commercial sector 18.36 15.0 1969/704 Rate of increase in prices Consumer prices $1 6.8 6.2 Wholesale prices 6.5 6.9 Third Plan Period 1961/62 - 1965/66 Public Sector Operations (R8. billion): 1969/70 Annual Average Public secotr plan outlay 21.76 17.15 Balance from current revenues plus surpluses of public enterprises 6.68 5.82 Domestic borrowings 9.11 4.23 Total external assistance to public sector 5.39 4.84 Deficit financing 0.58 2.26 External Public Debt, excluding 1965/66 - 1970/71 Su ppier's Credits (US $ million): 1970/71 Annual Average Total debt outstanding (As of March 31, 8,263 Total annual debt sagvice 1970) 584- / 60Y Debt service ratio - 30 26 1964/65 - 1970/71 Average Rate of Balance of Payments (US $ million): 1970/71 1/ Increase (g) Total exports 2040 3.0 Total imports 2170 3.5 Trade balance -130 1966/67 - 1969/70 1969/70 Annual Average Commodity concentration of exports 7 28 35  Attachment II Page 3 Official reserves IMF gold Use of Net inter- of gold, foreign tranche Overall IMF national Foreign Exchane Reserves: exchange and SDRs position reserves credit liquidity (TS $ million) As of December 31, 1967 662 Nil 662 456 206 As of March 31, 1970 1095 Nil / 1095 183 912 As of March 31, 1971 9768' 7& - 1052 Nil 1052Y / Government of Indiatpreliminary estimates as of Mqy 1971. These figures require further clarification. 2/ Preliminary estimates. 7/ Preliminary estimates and not strictly comparable with data for 1961/62-1965/66. 4/ December 1969 to December 1970. Working class consumer price index. November 1969 to November 1970. Y/ Before debt relief. 7/ Jute, tea and cotton fabrics as a percentage of total exports.