Afghanistan - Khanabad Irrigation Project

RESTRICTED FILE coPi Report No. P-938 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL DEVELOPMENT ASSOCLATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE KINGDOM OF AFGHANISTAN FOR THE KHANABAD IRRIGATION PROJECT May 13, 1971  REPORT ATK RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE KINGDOM OF AFGHANISTIN FOR THE KI-IAJ\ABAD IRRIGATION PROJECT 1. I submit the fol'owing report and recommendation for a proposed Development Credit to the Kingdom of Afghanistan in an amount in various currencies equivalent to $5.o million. PART I - HISTORICAL 2. The proposed Credit would be the second financing provided by IDA for agriculture in Afghanistan, where to date the Association has made three credits. 3. The rehabilitationof irrigation facilities in the Kunduz and Khanabad valleys was first suggested by the economic mission of 1961 as a possible project for Bank Group financing. In 1962 the Government formally requested assistance in arranging for consultants to select an area which warranted priority for project development. The aim was to prepare a project for improving the existing traditional irrigation systems, which required continuous reconstruction and repair, by introducing permanent structures and better water management. After background studies were prepared by SCGREAH (Reconnaissance Survey, June, 1966, fin^nced by an IBRD %ec'n-)iical assistance grant), Development and Resources Corporation (Feasibility Study, JuiyT, 170, finenced by UJBDP), and FJO (S.ummary Project Submission, August, 1970), the project was appraised in October/iNTovember, 1970. 4. Megotiations for the proposed Credit took place in Washington during April 15 - 27, 1971. Messrs. J. Mohammedi (President, Department of Irrigation, 11inistry of Agriculture and Irrigation), A.. A. Khorram (President, Department of Planning and Economic Analysis, Ministry of Planning), and A. S. Khaliki (President, Treasury Department, Ministry of Finance) represented the Borrower. The proposed Credit is summarized in Attachment I. 5. The present status of credits to Afghanistan at April 30, 1971 is summarized below: Year NTo. Borrower Purpose Amount (US$ Million) IDA Undisbursed 1964 68-AF Afghanistan Education 3.5 - 1969 158-AF Afghanistan Highway Maintenance 5.0 4.9 1970 202-PF Afghanistan Agricultural Bank 5.0 5.0 Total 13.5 9.9  -2- 6. The Credit for the improvement of highway maintenance (Mo. 158-AF, signed June 26, 1969) was declared effective in June, 1970, a month after parliamentary ratification. Even prior to effectiveness, the consultants, financed by the UNDP with the Bank as Executing Agency, were engaged on the Project and working on schedule. However, during the financial year which ended March 20, 1971, there was considerable delay in securing Parliament's approval of the Government budget (which was finally approved in February, 1971); consequently, the implementation of the Project was affected adversely by the delays in the provision of local currency funds. This year the Govern- ment hopes for earlier approval of the budget and is taking various steps to ensure that sufficient local financing is available to get the Project moving at a more satisfactory pace. 7. The Agricultural Development Bank Credit (No. 202-AF, signed June 24, 1970), is to help finance farm mechanization, shallow well pumps and other improvements in minor irrigation. The Credit was declared effective in December, 1970, and work on several elements of the Project has begun. In addition, under a complementary UNDP grant approved in 1969 with the Bank as Executing Agency, consultants have been working on the reorganization of the administrative, operational and accounting systems. The activities of the Agricultural Development Bank are being enlarged and improved. 8. IDA's first Credit to Afghanistan (No. 68-SF, signed November 23, 1964) was for an Education Project. Because of long delays in implementation and a reassessment of Afghanistan's most urgent educational needs, the Govern- ment last year concluded that the Project, as originally conceived, should no longer have priority and in July, 1970, requested cancellation of the undisbursed balance (roughly $3.2 million equivalent). The Association agreed to this. Because the economy is relatively unsophisticated and the number of trainees very small, minor changes in estimates of manpower requirements or changes in the numbers of graduates of other institutions are bound to have a disproportionate effect on a Project of this type, which may be doubling or tripling "places" for certain types of students. We believe that the authorities were correct in choosing to abandon the 1964 Project and to review educational needs and alternative ways of achieving our joint objectives before proposing major new investments in this sector. This view is shared by authorities of the Federal Republic of Germany and Ui,ESCO/UNICEF, who were also participants in the Project. 9. The entire amount disbursed for the Education Project was for consultants' fees ($277,312.62). Now, however, the construction of schools which the consultants designed is not going forward, so these plans are of no immediate use. At the time of cancellation, the Government requested that this amount be converted into a technical assistance grant, but I did  - 3 - not feel this to be appropriate. However, in order to avoid carrying this small remainder of the Education Credit, I propose that it would be refinanced out of the proceeds of the Credit now proposed for the Khanabad Irrigation Project. This Project requires IDA financing of $4.7 million to which we have added $300,000 to cover the repayment to IDA of the outstanding balance on -the Education Credit, making the Credit now proposed $5 million. PART II - THE PROJECT 10. An Appraisal Report entitled "Khanabad Irrigation Project" (PA-75a) dated May 10, 1971 is attached. 11. The Khanabad valley of the Kunduz province is one of the most fertile areas in Afghanistan. The irrigation system in the valley consists of loose stone structures to divert water from the river into irrigation canals, with brushwood drops controlling the flow through the canals to primitive farm turnouts. As there is no regulation of water use, fields at the head of canals receive too muchl water while those lower down do not get enough. During periods of high water flow, too much water enters the canals and breaches their banks, thus flooding the valley. Several times a year diversion structures are washled away, and inadequate flows enter the canal, causing water shortages. Maintenance is carried out by the farmers themselves. There are about 72,000 inhabitants in the area, of whom 42,000, representing about 6,000 families, are classified as rural. 12. The proposed Project would be the first phase of a program for modernizing the irrigation system in the valley. It would cover an area of 30,000 ha and would include civil works consisting of a diversion weir on the river, a main canal and link canals, water control structures, cross drainage, bridges and culverts (total cost $4.2 million). In addition, consultants services ($635,000) would be included for design and supervision of construction, agricultural extension and preparation of a second phase of modernization. Land acquisition, vehicles and equipment, local staff cost and contingencies account for another $1,165,000. The total cost of the Project is therefore estimated at $6 million, of which we propose that 78 percent, or $4.7 million, be financed under the proposed Credit. The Borrower would be the Kingdom of Afghanistan. 13. The major benefit of the Project would be a substantial increase in crop production in the valley resulting from improved water control. Rural incomes would be improved as a direct result of the Project, and this would  undoubtedly also spill over into the towns. The present annual gross value of production in the area is estimated at about $5.0 million and at full development it is expected to reach about $9.3 million; of course, some of this increase (i.e. to $6.9 million) might be expected even without the Project because of improved supply of fertilizer, seeds, etc. The net value of agricultural production after deducting on-farm costs is estimated at $5.8 million, compared with $4.0 million without the rroj,ct; after deducting operating and maintenance costs, the direct annual benefit to the economy would be about $1.7 million. The Project is expected to yield about eighty percent of the benefits, or about $1.36 million annually, within five years of completion of construction. The Project would help reduce the country's foodgrain deficit and thus improve the balance of payments position through foreign exchange savings. 14. The Project would be implemented by the Ministry of Agriculture and Irrigation. Currently the Ministry consists of nineteen departments (each of which is headed by a President, including one each for the Sardeh, Parwan and Nangarhar irrigation projects and one for a recently approved Asian Development Bank irrigation project in the neighboring Kunduz valley. The Government proposes to establish another department in the Ministry to assume the responsibility for the execution of the proposed Project. Most of the staff of the Department would be located at Kunduz, including the President who will be directly assisted by consultants. An imprest account for the Department will be established and periodically replenished to enable the timely provision of local currency funds for the Project. All tendering for both civil works and procurement contracts will be on the basis of international competitive bidding. PART III - LEGAL INSTRUMENTS AND AUTHORITY 15. The draft Development Credit Agreement (Khanabad Irrigation Project) between the Association and the Kingdom of Afghanistan, the Recommendation of the Committee provided for in Article V; Section l(d) of the Articles of Agreement and the text of a resolution approving the proposed Development Credit are being distributed to t-he Executive Directors separately. The draft Development Credit Agreement follows the pattern for projects of the same kind. In addition, provision is made in Section 2.02(b) of the draft Agreement for withdrawal from the Credit account and payment to the Association of the amount outstanding under Credit 68-AF. 16. The conditions of effectiveness of the Agreement include the establishment of the Khanabad Irrigation Project Department; the appointment of a cuitably qualified person as President of the Departmentj the establish- ment of the Imprest Account for the Project and the employment of consultants (Section 8.01). These steps are expected to be completed by September 30 provided that the Afghan Parliament ratifies the proposed Agree- ment before it- adjourns in mid-rAugust.  PART IV - TIE ECONOMY 17. The most recent economic report "Current Economic Position and Prospects of Afghanistan" (SA-22a) dated January 12, 1971 was distributed to the Executive Directors on January 27, 1971 (R71-16). The basic data are given in Attachment II. In economic mission is expected to visit lfghanistan again this summer. 18. Despite nominally high levels of bilateral aid during the last decade, economic growth in Afghanistan has barely kept pace with the increase in population. Investments have been largely for infrastructure projects such as a trunk road system, the Helmand Valley scheme, the Nangarhar Irrigation project, the l4ahipar power plant and the Kandahar airport. The benefits from these large projects have been slight compared to the massive amounts of capital expended. About three-fourths of the country's development expen- ditures have been financed from foreign sources. Efforts at mobilization of domestic revenues have been inadequate, and the short-run prospect for a significant increase in public revenue is not good. The balance of payments continues to show a deficit, and the Government's difficulties have been further accentuated by a decline in export earnings in the first part of last year. The debt service ratio for 1969/70 was 25 percent. It appears that the total output of staple food has not kept pace with demand, although the first results of the recent introduction of modern practices are encouraging. 19. The Government recognizes that output could be increased by making better use of existing facilities and by improving techniques of production. The thrust of the IDA program for Afghanistan consists of quick y,ielding projects, which offer a reasonable chance of bringing about economic improve- ments on a moderate scale in key areas of the economy, and which can serve as pilot projects to be replicated in future as experience with such schemes grows and the development program gathers momentum. This is also in line with the Government's desire not to launch any new large infrastructure projects at this time. Agriculture,