Malawi - Blantyre Water Supply Project

Document of FILE COPY The World Bank FOR OFFICIAL USE ONLY Report No. P-2063-MAI REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF MALAWI FOR A BLANTYRE WATER SUPPLY PROJECT May 2, 1977 This document has a restricted distribution and may be usd by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank autborization.  CURRENCY EQUIVALENTS 1 US$ = Malawi Kwacha (MK) 0.9091 1 MK = US$1.10 WEIGHTS AND MEASURES I imperial gallon (Ig) = 1.2 US gallons = 4.55 liters 1 million imperial gallons (Img) = 4,545 cubic meters 1 kilometer = 0.62 miles ABBREVIATIONS AND ACRONYMS AfDF = African Development Fund BWB = Blantyre Water Board CDC = Commonwealth Development Corporation DEVPOL = Statement of Development Policies LWB = Lilongwe Water Board BLANTYRE WATER BOARD'S FISCAL YEAR January 1 - December 31 GOVERNMENT'S FISCAL YEAR April 1 - March 31  FOR OFFICIAL USE ONLY INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE REPUBLIC OF MALAWI FOR A BLANTYRE WATER SUPPLY PROJECT 1. I submit the following report and recommendation on a proposed credit to the Republic of Malawi for the equivalent of US$7.0 million on standard IDA terms to help finance a Water Supply Project for the City of Blantyre. The Government will relend the proceeds of the proposed credit to the Blantyre Water Board for 24 years, including a grace period of 4 years, at an interest rate of 8.5 percent per annum. The project is ex- pected to be cofinanced by the African Development Fund and the Commonwealth Development Corporation in an aggregate amount of up to about US$6.7 million equivalent. PART I - THE ECONOMY 2. A report entitled "Recent Economic Development and Prospects of Malawi" (Report No. 560a-MAI) was distributed to the Executive Directors on January 14, 1975. An updating economic mission visited Malawi in November/ December 1975. The following paragraphs are based on the mission's findings and on additional information recently received from the Government. Country data sheets are provided in Annex I. 3. At Independence in 1964, Malawi was the poorest of the three terri- tories of the former Central African Flderation. With a population of about 5 million and a land area of 93,000 km , its population density is among the highest of African countries. Its main assets are moderately fertile soils, good water resources and a climate favorable for crop production. Unlike its neighbors, Malawi has no substantial mineral resources. Forests constitute the main, essentially untapped, resource which could be exploited on a signi- ficant scale in the future. At Independence, the tax base was very narrow, government revenues had to be supplemented with British budgetary aid to support the administration, and prospects for economic development were generally regarded as bleak. 4. Measured against the country's natural endowment, progress since 1964 has been remarkable. Between 1964 and 1975, GDP at constant prices grew at an average annual rate of 7.5 percent, domestic investment and savings increased rapidly, and government finances have improved sufficiently to eliminate the need for budgetary aid. Agriculture, which dominates the economy and contributed 45 percent of GDP in 1975, has been directed towards export markets by encouraging cash crop estates production and integrated rural development schemes. Diversification has also been promoted. In addition, rapid industrial development (the share of industry rose from 9 percent of GDP in 1964 to 14 percent in 1975) has significantly broadened the economic base. Despite this economic improvement, however, Malawi still has a GNP per capita of only US$150 and is listed by the United Nations among the world's poorest countries. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. It contents may not otherwise be disclosed without World Bank authorization.  5. Malawi's success has been the result of realistic and purposeful planning by the Government. In 1971, a Statement of Development Policies (DEVPOL) was published, which provides a general framework within which the Government operates a three-year rolling plan. DEVPOL contains guidelines for major economic indicators up to 1980 and states the main socio-economic objectives, among which are: (a) to raise living standards and productivity in rural areas; (b) to achieve an average annual growth of GDP of 8 percent through the parallel development of smallholder output, estate agriculture and industry; (c) to promote a more balanced regional development; and (d) to develop local initiatives and a gradual increase of local participation in the economy. 6. DEVPOL recognizes the important role of private investment in development which, it is anticipated, will account for about half of total fixed capital formation over the 1971-1980 period. The Government also recog- nizes the role of a healthy private sector in generating foreign exchange and savings needed to sustain other elements of the development strategy, and has adopted policies which are intended to attract foreign investors and to ensure a continued high growth of the private sector. Trade and pay- ments policies are liberal, profits moderately taxed and wages are held down to favor labor-intensive estates and industries. The modern private sector has been the leader in economic growth. The output of estate agri- culture increased by 10 percent a year in real terms over the past decade, and industrial production rose by 13 percent annually. 7. Within the public sector investment program, agriculture will receive 19 percent, public utilities 17 percent, and social services 15 percent during the 1971-1980 period. Government investment in transport infrastructure will be reduced from 37 percent in the late 1960s to less than 30 percent of total public investment. Malawi has an effective admin- istration which has been remarkably successful in preparing and implementing development projects. 8. Firm information on which reliable estimates of income distribution could be based dates back to 1969. At that time, income distribution was relatively favorable. The poorest 40 percent of households received 15 percent of incomes; the highest 20 percent received 53 percent and the high- est 5 percent received 30 percent. These figures compared well with those of other developing countries. Since then, the rapid development of estate agriculture and industry has undoubtedly led to a greater concentration of incomes. 9. To offset the adverse distributional effect of the growth of the modern private sector, the Government has directed its agricultural invest- ment program towards the smallholders. It is true, however, that for a long time, agricultural producer prices have been kept at a level which was low as compared to international levels, and which was probably also too low to provide a sufficient incentive to higher production. Only recently has the  - 3 - Government recognized the importance of sufficiently remunerative producer prices, and it has increased them substantially. Indirectly, wage and price policies have reduced the gap between wage earners and subsistence farmers. Over the past seven years, real wages have fallen somewhat, while the real earnings of smallholders have risen. Keeping a firm check on wage increases has also had a beneficial effect on wage employment. Total wage employment has increased by 10 percent a year on the average. About 20 percent of Malawai's labor force is now engaged in wage employment as compared to 12 percent in 1968. 10. Owing to its fast rate of population increase, estimated at 2.6 percent annually, population pressure is heavy in relation to arable land. While recognizing the existence of this problem, the Government has been reluctant to introduce population control policies and intends to rely in- stead on balanced regional development policies that would encourage the movement of population to the less densely populated areas. In mid-1975, Malawi's urban population represented only 10 percent of the total popula- tion. However, because of the diversification of the economy, urban popu- lation is rapidly increasing by more than 10 percent per annum, in line with the expansion of wage employment opportunities in the non-agricultural sectors. The construction of the new capital city at Lilongwe has also contributed to spreading more evenly the newly urbanized population among the different cities. Nevertheless, this fast urban growth, coupled with Government's higher priority for rural development and infrastructure in the use of public funds, has caused urban infrastructure to somewhat lag beh; the needs of the city dwellers. 11. Since almost 90 percent of the population live in rural areas, rural development is a primary social and economic objective. At the moment, the majority of farmers are smallholders on the fringe of the market economy. Their staple crop is almost exclusively maize and their principal cash crops are tobacco and groundnuts. Until now, the principal instrument for increas- ing smallholder productivity has been relatively intensive integrated develop- ment projects in specific areas, which at the moment reach about 25 percent of the rural population. 12. In spite of the Government's efforts, however, the production from the traditional agricultural sector has lagged behind that of the estate sector. Although firm figures are lacking, indications are that produc- tion from the traditional sector has not increased by much more than 3 per- cent a year over the past decade. The Government is concerned about this relatively slow growth and is preparing a country-wide approach to rural development, which would be a departure from the previous approach in that it would primarily concentrate on the provision of farm inputs and extension services. This new approach -: the National Rural Development Program - is to become the Government's chief vehicle for smallholder development. 13. In the past, the generation and use of domestic resources have been good. Investments grew from 8 percent of GDP in 1964 to 27 percent in 1974. Domestic savings, which were virtually nil in 1964, financed 42 percent of  - 4 - total investment in 1975. The Government's budget has been skillfully managed in order to put government finances on a firmer footing. From 1964 to 1974/75, recurrent revenues grew by 14 percent a year on the average, while the increase in recurrent expenditures was kept down to 8 percent a year. British budgetary support - which financed MK 10 mil- lion, or about one third of the current budget in 1964 - was gradually reduced and was eliminated entirely in 1972/73. In 1973/74 and 1974/75, small recurrent budget surpluses of MK 1.5 million and MK 5 million were achieved. At the same time, the Government's domestic medium- and long- term borrowing was also stepped up from MK 0.1 million in 1964 to MK 13.5 million in 1974/75. The financial situation of public corporations is generally healthy, and part of their surpluses is used to finance govern- ment investments. As a result of the factors mentioned above, the domestic contribution to the financing of development expenditures, which was nega- tive in 1964, increased to 45 percent in 1974/75. 14. Up to 1974, Malawi's balance of payments had shown a healthy de- velopment. Since 1967, exports have increased by about 7 percent a year in real terms, while imports have increased by about 6 percent a year in real terms. The terms of trade, however, have moved somewhat against Malawi. Payments for services increased substantially but they were partly offset by increases in workers' remittances from South Africa. The balance of pay- ments current account deficit increased from US$18 million in 1967 to US$45 million in 1974. This deterioration, however, was more than compensated for by increasing private and public capital inflows. As a result, official international reserves increased from US$22.5 million at the end of 1967 to US$81.5 million (4.5 months of imports) at the end of 1974. 15. In 1975, Malawi's balance of payments deteriorated. The current account deficit is estimated to have increased from US$45 million in 1974 to about US$100 million. Private and public capital inflow did not increase correspondingly, as a result of which international reserves declined to US$61 million (3 months of imports) at the end of 1975. A number of factors have contributed to the deterioration in Malawai's balance of payments posi- tion in 1975. While merchandise exports increased by 12 percent in real terms over 1974, imports increased by 15 percent. As a result, the trade deficit increased from US$77 million in 1974 to an estimated US$115 million in 1975, which explains most of the increase in the current account deficit in that year. 16. The sharp increase in the volume of imports in 1975 was, to some extent, due to the political uncertainties in Malawi's neighboring countries, which led Malawian importers to accelerate their imports in order to build up precautionary stocks. Among domestic factors which may have adversely affected the balance of payments, is the large expansion of credit, which amounted to 85 percent in 1975. Mainly as a result of a sharp decline in receipts from migrant labor after the Malawian Government suspended offi- cial recruitment, international reserves continued to decline, in the first half of 1976, to a level of US$30 million in June (since then they have remained stable). The development of the trade balance, however, was much  - 5 - more favorable than in 1975. In the first nine months of 1976, merchandise exports were 20 percent higher than in the corresponding period of 1975, while imports of goods were 14 percent lower, which would suggest that the balance of payments problems are being overcome. 17. Notwithstanding the recent balance of payments difficulties, Malawi's longer term prospects for growth, external trade and payments are good. Its agricultural products have generally found ready markets, par- ticularly in the UK, and more recently in the USA. Traditional outlets and Malawi's associate membership in the EEC offer good prospects of expanded markets for Malawi's exports. With the substantial expansion of sugar pro- duction that is about to get under way, total exports in real terms can realistically be expected to grow even faster in the future (more than 9 percent a year) than in the past (about 8 percent a year). However, Malawi's terms of trade are likely to show a further deterioration of about 8 percent over the next five years. On these assumptions, the current account deficit is projected to increase from US$100 million in 1975 to some US$150 million by 1980. 18. With the increase in the Government's investment program, net long- term public capital inflow also increased substantially from US$17 million in 1967 to US$47 million in 1975. The sources of public capital inflow have gradually been diversified. At Independence, the UK was virtually the only source, but by 1974, the British contribution had declined to less than 50 percent. International organizations, especially IDA, provided 20 percent and the remainder came from a variety of bilateral sources. Development grants amounted to about 25 percent of total public capital inflow. Loan capital was generally made available on concessionary terms. From 1971 through 1974, total commitments of public loans and grants averaged US$60 million a year. The average grant element of these commitments was 77 per- cent. 19. At the end of 1975, Malawi's external public debt totalled US$322 million, of which US$239 million had been disbursed. Debt service in 1975 amounted to US$12.7 million, equivalent to about 6 percent of foreign exchange earnings. At the end of 1975, IDA's share in Malawi's disbursed debt was 25.8 percent and servicing of IDA credits accounted for 3.0 percent of total debt service. As Malawi's need for external capital is expected to grow over the next years, the Government may encounter greater difficulty in borrowing on terms as soft as those it has received in the past. Debt service is likely to increase, but even if the average grant element of external assistance declines from almost 80 percent in the recent past to some 60 percent by 1980, the debt service ratio would not increase to more than 10 percent by 1985. The past record of good economic management and high growth, together with continued favorable prospects for exports and a relatively low debt service, makes Malawi creditworthy for limited amounts of lending on conventional terms. External capital requirements will continue to be in excess of the foreign exchange component of project costs and external assistance should, therefore, also cover some local costs in appropriate cases.  - 6 - PART II - BANK GROUP OPERATIONS IN MALAWI 20. To date IDA has made thirteen development credits to Malawi amount- ing to US$96.7 million equivalent. Six of these credits, totaling US$42.5 million, financed agricultural projects. The remaining credits were allo- cated as follows: two credits totaling US$21.5 million for highways in 1968 and 1974; two credits totaling US$12.8 million for power projects in 1970 and 1973; two other credits amounting to US$17.9 million for education projects in 1967 and 1975; and a US$2 million credit in 1974 to finance the preparation of a planned pulp mill at Viphya. The first Bank loan (US$9.2 million) to Malawi was made on Third Window terms in June 1976 to help finance the Karonga Rural Development Scheme. A Bank Group contribution of US$25.0 million consisting of a standard Bank loan of US$9.0 million, a US$8.0 million Bank loan on Third Window terms and a US$8.0 million IDA credit to help finance a Third Power Project was approved by the Executive Directors in March 1977. IFC's first investment in the country was made in February 1976 with US$6 million for a textile mill. A second IFC loan of US$9.0 million for a sugar development scheme was approved by its Board of Directors early in April. A summary statement of Bank Group operations in Malawi as of March 31, 1977, is given in Annex II which also contains notes on the execution of ongoing projects. Project implementation is generally very satisfactory. 21. Bank Group operations in Malawi will continue to emphasize rural development but importance will also be attached to infrastructure develop- ment (power, water supply and roads) and education. In agriculture, we are presently assisting the Government in devising a National Rural Development Program, for which we expect to recommend Bank Group financial assistance in FY78. Other external agencies are likely to participate in the financing of this program. We are also considering further assistance to help consoli- date two previously IDA-financed agriculture schemes in the Shire Valley. A third highway project, which was appraised last February, is expected to include construction of the main road from Kasungu to Jenda as well as the expansion of the district roads maintenance program initiated under the Second Highway Project. In education, a sector study, to be carried out jointly by UNESCO and the Bank, is scheduled for May/June 1977, and we would expect it to lead to further Bank Group financing. Finally, the Bank Group is also assist- ing the Government in the preparation of a major pulp development project, whose total cost has been estimated at over US$300 million equivalent. Bank financial assistance for this project would be considered if suitable external guarantees can be obtained. PART III - THE WATER SUPPLY SECTOR General 22. Malawi is rich in water resources. The level of precipitation, though varying significantly according to location and season, ranges from 25 inches (63.5 cm) to 114 inches (290 cm) annually, and is more than adequate.  - 7 - Lake Malawi, the third largest lake in Africa, forms a gigantic reservoir which discharges at its southern end into the Shire river, the country's principal river. Good records of precipitation exist due to the existence of 475 monitoring stations located throughout the country, and substantial information is available on surface water and ground water resources. Because of the importance of Lake Malawi and of the Shire river, surface water has so far been the country's largest source of supply. Ground water is widely available from shallow wells, dugwells and boreholes, but individual yields are low and water quality varies from fair to poor. Organization 23. Though most technical matters related to water resources fall under the supervision of the Ministry of Agriculture and Natural Resources, several other ministries share the responsibility for water management and operation. The Ministry of Local Government has jurisdiction over municipalities which provide water supply and sewer service, with the exception of the Blantyre Water Board which is supervised by the Ministry of Trade, Industry and Tour- ism. Assistance in planning and engineering is provided to Lilongwe by the Ministry of Works and Supplies which, in addition, is responsible for design, construction and operation of water supply systems in two cities (Zomba and Mzuzu), 35 districts and 20 smaller towns. Finally, the Ministry of Community Development and Social Welfare is responsible for planning, constructing and operating small, self-help type schemes providing potable water supply from public standposts in rural areas. Although the Government, through the Water Resources Act of 1969, has considerable power to control water development, difficulties in coordinating action by the various ministries and authori- ties concerned, as well as budget and staffing constraints, have resulted in relatively ineffective operations within the sector as a whole. The crea- tion of a single national water authority has been considered, but in the immediate future only relatively minor organizational changes are being envisaged. An IBRD/WHO Cooperative Program sector mission, which has been tentatively scheduled for late 1977, would examine ways to bring about im- provements, particularly in the field of planning. 24. Capital and recurrent expenditures of nearly all water supply authorities are in general financed through the budgetary appropriations of the ministries concerned, except for the Blantyre and Lilongwe Water Boards which are autonomous and self-financing for recurrent expenses. The capital costs of improvements by the Blantyre and Lilongwe Water Boards have been met mainly from external assistance and from Government grants and loans. Other water supply development works in urban areas and in small towns have been financed from Government funds, bilateral assistance and grants from chari- table organizations. Urban Water Supply 25. About 240,000 persons or 70 percent of Malawi's urban population (living in the cities of Blantyre, Lilongwe, Mzuzu and Zomba) presently have access to piped water supplies. The level of service varies, with about  -8- two thirds of the customers .aving indivi_:ual conne.z- ons and the balance being serviced from kiosks. All connections are metered. Improvement programs are underway or about to be undertaken to increase the level of supply for Blantyre and Lilongwe. In Blantyre, works under execution with financing from the British Government and the Commonwealth Development Cor- poration will enable the Blantyre Water Board (BWB) to expand its service so as to reach approximately 220,000 persons. The proposed project would enable BWB to satisfy the demand through the mid-1980s, and would include an expan- sion of service to residents of unplanned, low-income areas. With regard to Lilongwe, the European Development Fund has been approached to finance a doubling of the existing system that should enable the Lilongwe Water Board to serve a population increase through the mid-1980s. Small Town and Rural Water Supply 26. In 1975, an estimated 1.2 million persons (about one fourth of Malawi's rural population), had access to potable water. Of these, some 60,000 persons living in 38 small towns had piped water supply from systems constructed since 1971. An additional 150,000 persons living in rural vil- lages benefited from simple, untreated water supplies using high elevation streams as sources. Within the context of large comprehensive rural develop- ment projects, such as the Shire Valley, Lilongwe, and Karonga schemes, which are assisted by IDA, water supply, generally consisting of manually-operated tubewells, now serve approximately one million persons. The remainder of the population use traditional "dambos" (swamps) or dugwells, which provide water of questionable quality. Various schemes to improve water supply in rural areas are being prepared, which may lead to assistance by the World Bank Group. Sewage and Drainage 27. Community wastewater systems exist only in Blantyre and Lilongwe, and provide service to about 10 percent of the population of these two cities. Both systems provide secondary treatment prior to disposal. Elsewhere in ur- ban areas, sanitation service consists mainly of septic tanks and pit privies, the latter generally restricted to traditional housing areas. In Blantyre, a wastewater improvement scheme is currently underway with financial and tech- nical assistance from Germany. PART IV - THE PROJECT Introduction 28. A report entitled "Malawi - Appraisal of Blantyre Water Supply Project" (No. 1328a-MAI, dated April 19, 1977) is being circulated sepa- rately. A credit and project summary is given in Annex III and a supple- mentary project data sheet is given in Annex IV. The project was appraised in May/June 1976. Negotiations were held in Washington, D.C. from March 21 to March 30, 1977. The Malawi delegation was headed by Mr. Kukada, Secretary of the Ministry of Trade, Industry and Tourism.  -9- Project Description 29. The project is the fifth phase of BWB's water supply expansion program, and would constitute the Bank Group's first operation in Malawi's water supply sector. It would increase the capacity of the supply facilities at Walker's Ferry on the Shire River from 10 to 14 imperial gallons per day, the maximum economic capacity attainable from the existing single pipeline, and would provide other major system improvements. It will include the following principal elements: (a) Improvements and extensions to existing facilities at Walker's Ferry including raw water pumping plant and water treatment plant; (b) Addition to Walker's Ferry supply system, consisting of about 15,000 feet of treated water supply main generally parallel to the existing Walker's Ferry pipeline; balancing tanks and pumping plant provided at Walker's Ferry, Chileka and at a new, intermediate site; and a new terminus of the pipeline in the Blantyre area; (c) Distribution system changes including the creation of seven new pressure zones, the modification or reloca- tion of two existing pump stations, and the construc- tion of the following additional elements: nine service reservoirs, a pump station, and approximately 35 miles (56 km) of transmission and distribution mains ranging from 2 inches (50 mm) to 24 inches (600 mm) in size; (d) Construction of general plant including staff housing and workshop; procurement of vehicles, maintenance equipment, spare parts, accounting machines and miscel- laneous; equipment for laboratory and workshop; (e) Consulting services for engineering design and super- vision of construction; for management services to evaluate and improve BWB's accounting practices; for engineering services to determine the most economic mode of future operation of the Walker's Ferry supply system; and (f) Training of BWB staff in engineering and accountancy. Project Cost and Financing 30. The total financing requirements for the proposed project (includ- ing an amount for taxes and duties which is insignificant, since duties on all directly imported goods and services are expected to be waived) are estimated at US$16.6 million, with a foreign exchange component of US$11.2 million or about 67 percent. This amount includes US$1.1 million for interest during construction, of which US$0.3 million would be in foreign exchange. A summary of the project cost estimates is given below:  - 10 - Millions of US Dollars Percent Description Local Foreign Total of Total Cost Civil works 2.71 4.75 7.46 48.0 Equipment 0.30 2.56 2.86 18.4 Land 0.02 - 0.02 .1 Training - 0.15 0.15 1.0 Consulting Services 0.40 0.70 1.10 7.1 Subtotal 3.43 8.16 11.59 74.6 Contingencies: Physical 0.43 0.98 1.41 9.1 Expected Price Increase 0.83 1.70 2.53 16.3 TOTAL PROJECT COSTS 4.69 10.84 15.53 100.0 Interest during Construction 0.75 0.35 /a 1.10 TOTAL FINANCING REQUIREMENTS 5.44 11.19 16.63 /a Interest on proposed CDC and AfDF loans. 31. The proposed IDA credit of US$7 million would help finance the foreign cost of the civil works contract for reservoirs, pumping plant in the Blantyre area, trunk mains, laboratory, workshop and general plant and to cover the foreign cost of equipment for pumping plant, vehicles, spare parts, workshop equipment and engineering services. This contribution would cover about 42 percent of the project total financing requirements, with about US$6.5 million applied towards foreign expenditures and US$0.5 million towards local expenditures. Up to US$6.0 million representing 36 percent of the project's total financing requirements, would be financed by the African Development Fund (AfDF) on a parallel basis. The AfDF loan would be used to finance the cost of civil works of the Walker's Ferry supply and treatment works, additions to the Blantyre reticulation system, staff housing as well as training. About 26 percent of the loan would be applied towards local costs. About US$0.7 million, representing 4 percent of the project's total financing requirements, would be financed by the Commonwealth Development Corporation (CDC). CDC funds would be available to the project without any restriction as to their use and would be applied towards foreign exchange as well as local currency components. The balance, or about 18 percent of the project's total financing requirements, is expected to be provided by the Blantyre Water Board through internal cash generation. 32. The proceeds of the IDA credit would be relent by the Government to BWB for a period of 24 years, including a grace period of 4 years, and would carry interest at a rate of 8.5 percent per annum. The proposed AfDF contribution is expected to be made available to the Republic of Malawi  - 11 - on IDA terms with the proceeds to be relent to BWB for a period of 25 years, including 5 years of grace, at an interest rate of 8 percent per annum. 1/ The AfDF contribution is expected to be submitted for consideration by its Board in June 1977. The CDC contribution, which would be lent directly to the Blantyre Water Board for about 20 years, including a grace period of about 4 years, at an interest rate of about 8.5 percent per annum, is also expected to be presented to the CDC's Board for consideration in June. The effectiveness of the AfDB and CDC Loan Agreements would be a condition of effectiveness of the IDA credit (draft Credit Agreement, section 5.01 (c)). Procurement and Disbursement 33. All construction and supply contracts to be financed by the proposed IDA credit would be awarded on the basis of international competitive bidding in accordance with Bank Group guidelines. Foreign contractors are expected to win all major construction contracts, and foreign manufacturers are expected to furnish all pipes required for the project. Major mechanical and electrical equipment required for pumping and treatment plant is not expected to be available from local manufacturers. Nevertheless, should local manufacturers bid for supply contracts, a preference of 15 percent or the applicable customs duty, whichever is lower, would be applied to such bids. A preference of 7.5 percent would be applied to bids by domestic firms for construction contracts. Items to be financed by AfDF would be procured in accordance with AfDF's procurement procedures. CDC may agree to finance items jointly with IDA or with AfDF, in which case CDC would accept the procurement rules followed by IDA or AfDF. Land required for the project, particularly for the intermediate pumping station and for reservoirs in Blantyre, would be acquired by the Government. No difficulties are expected in this respect. 34. The IDA credit would be disbursed on the basis of 65 percent of the total cost of civil works, 100 percent of foreign expenditures for di- rectly imported pumping equipment, spare parts, vehicles and workshop equip- ment, 90 percent of local expenditures for locally purchased items and 100 percent of foreign expenditures for consultants. Project Implementation 35. The project would be carried out by the Blantyre Water Board (BWB), a government-owned entity created under the Blantyre Water Works Act of October 1975, responsible for the supply of water to Blantyre and certain areas adjacent to the city. The Board consists of a Chairman and ten members 1/ Although this rate of interest would be higher than that assumed in making financial projections in this report as well as in the Appraisal Report (3.5 percent), BWB would have no difficulty in meeting this higher charge from internal cash generation.  - 12 - appointed by the Minister of Trade, Industry and Tourism. The present Chair- man of the Board is the General Manager of the Malawi Housing Corporation, an institution responsible for the execution of urban development projects and whose activities are primarily concentrated in Blantyre. The Board includes representatives of private industry, the Blantyre City Council, banking in- stitutions, the academic world, and the CDC representative in Blantyre. BWB has a long history of efficient management. The senior position of Engineer/ Manager has been filled since December 30, 1976 with an expatriate engineer who had formerly been associated with the Public Utilities Board of Singapore. His Deputy Engineer is a Malawian, who has assumed increased responsibility with BWB and who served as Acting Engineer/Manager during 1976. Financial operations are supervised by a Clerk/Treasurer with many years of experience with BWB. To ensure a continuation of BWB's management capability, BWB would consult with the Association regarding future appointments to the posts of Engineer/Manager and Clerk/Treasurer (draft Project Agreement, Section 3.03). In order to cope with the growing size of the Board's activities, and to improve the accounting information system and help introduce tariff reforms, BWB has recently appointed a Chief Accountant. 36. To assist in the execution of the project, BWB will retain engi- neering consultants for detailed design, preparation of tender documents, evaluation of tenders and construction supervision (draft Project Agreement, Section 2.02). BWB has engaged the firm of Sir Alexander Gibb and Partners which has assisted in carrying out preinvestment studies and is supervising the execution of BWB's ongoing development program. BWB will also, by 1980, retain engineering consultants to carry out studies to determine the most economic mode of future operation of the Walker's Ferry supply system (draft Project Agreement, Section 2.02). In addition, BWB would retain for a short term the services of management consultants to assist in the selection and introduction of data processing equipment to improve BWB's capability to collect financial and statistical information for planning purposes, and to increase the efficiency of its accounting operations (draft Project Agreement, Section 2.02). 37. In the past, there have been frequent breakdowns at BWB's pumping plant. BWB has taken steps to determine the cause of these failures and will, by December 31, 1977, submit to the Association for comments a plan of action to evaluate and upgrade its maintenance and operation practices (draft Project Agreement, Section 3.05). BWB's Finances 38. Until now BWB's policy has been to set tariffs at a level adequate to meet annual operating expenditures and debt service, with only minor capital expenditures being financed from internal cash generation. BWB has met these financial objectives, but has not been in a position to accumulate liquid resources to help finance capital expenditures. The effect of this financial policy has been that water has generally been priced substantially below its economic cost. BWB's tariff presently includes a fixed monthly fee varying according to the type of consumer and assessed value of property, as well as a monthly consumption charge for use of water above certain amounts. This system is unnecessarily complex and results in pricing  - 13 - inconsistencies, which are both uneconomic and inequitable. BWB recognizes the need to modify its tariff structure, but actual implementation will require some time and structural changes will be made in consultation with the Association (draft Project Agreement, Section 4.05). BWB's future tariff policy will include raising tariff levels close to long-run marginal cost by 1981. BWB, effective January 1, 1977, increased charges to a level expected to yield average revenues of MK 1.12 per thousand imperial gallons (US$1.03 per thousand US gallons). During the next four years, tariffs will be ad- justed periodically so as to yield a rate of return of not less than 8 percent in 1978 and 1979, 10 percent in 1980 and 1981, and 9 percent thereafter on BWB's average revalued net fixed assets in operation (draft Project Agreement, Section 4.03). To achieve these rates of return, it has been estimated that, expressed in constant prices, it would be necessary to increase the average revenue per thousand imperial gallons by about 45 percent to MK 1.62 per thousand imperial gallons (US$1.48 per thousand US gallons) by 1981. BWB is currently preparing a proposal for revaluing its assets, and will, by December 31, 1977, submit to the Association the methods to be used to carry out annual revaluations (draft Project Agreement, Section 4.06). 39. With the proposed increase in tariff levels, BWB should be able to strengthen its financial position. To ensure that BWB maintains a sound financial structure, future borrowings should be related to its ability to service debt. Further debt would not be incurred by BWB without the Associa- tion's consent, unless future debt service is covered at least 1.5 times by net internal cash generation (draft Project Agreement, Section 4.04). 40. Meter readings are made monthly and bills are usually sent by BWB within one week thereafter. Service is discontinued if payments are not received within thirty days of billing. BWB's collection record is good. 41. BWB's accounting system is adequate for recording and preparing financial statements and annual budgets. There is a need, however, to improve the system to provide information for project and tariff planning. To assist BWB in this task, the project would include the provision of equipment and, as indicated in paragraph 36 above, consulting assistance in the selection of equipment and the development of appropriate procedures. BWB will continue to have its accounts audited by independent accountants, and will submit the audited accounts to the Association within six months of the end of the fiscal year (draft Project Agreement,-Section 4.02). Justification 42. The population of Blantyre, which in 1975 was about 210,000 persons, is growing at an annual rate of 6.5 percent, or about 2-1/2 times the national rate. Water demand, however, has grown at approximately twice the rate of population increase, due to increases in industrial needs and in domestic per capita water usage and to the extension of water supply service to parts of the city not previously served. The proposed project, which constitutes the least-cost scheme for supplying treated water to the Blantyre area would help satisfy future growth in demand and, by the mid-1980s, would serve a popula- tion of about 360,000. Improvements in the distribution system should help to reduce current interruptions in supply or delivery at inadequate pressure.  - 14 - If benefits are valued at the tariff levels to be attained by the time the project is completed, the rate of return would be about 7 percent. However, the tariffs do not recapture all benefits, including the intangible ones related to health and environmental improvement. In particular, the project would reduce health hazards and improve public health standards through the extension of piped water service to people now relying on local streams and other water supplies of doubtful quality. At present, about 50,000 persons live in unplanned, low-income areas without piped water service. The project would include improvements through the provision of water kiosks in such areas to be selected from time to time by BWB, beginning December 31, 1977 (draft Project Agreement, Section 2.04). The project by itself would not prevent or reduce pollution in the Blantyre area, but where direct water con- nections to buildings are proposed, BWB requires sewer connections or septic tanks as a prerequisite. This requirement, in effect, will result in improved sanitation service to that part of Blantyre not now receiving water service. PART V - LEGAL INSTRUMENTS AND AUTHORITY 43. The draft Development Credit Agreement between the Republic of Malawi and the Association, the draft Project Agreement between the Associa- tion and the Blantyre Water Board, the Recommendation of the Committee pro- vided for in Article V, Section 1 (d) of the Articles of Agreement of the Association and the text of a draft Resolution approving the proposed credit are being distributed to the Executive Directors separately. 44. Features of the Credit Agreement of special interest are referred to in paragraphs 32, 35 - 39, 41 and 42 of this Report. An additional con- dition of effectiveness of the credit is that cofinancing agreements with the African Development Fund and the Commonwealth Development Corporation have been signed and conditions, if any, precedent to first disbursement thereunder have been fulfilled. 45. I am satisfied that the proposed development credit would comply with the Articles of Agreement of the Association. PART VI - RECOMMENDATION 46. I recommend that the Executive Directors approve the proposed credit. Robert S. McNamara President Attachments May 2, 1977  03~~~~~~~~~~~~~~~~~~~~~~~~01 .03 IWU. 'wo 0~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ . ** 60 41 3 .4-] 10,~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~4 30 N up, 0130 .. oo . o.,n. o -- pnr c opW'43 4 o o 3 N -~ ~ In 'I..*4340 34 Wm' 'Wm o~ 43 .03 0~~~~~~~~~~~~~~~~~l W34 *1 3.3 3- 3 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~~~~~~~~x7.I &&W:cz~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~3 Sb. 30 0 0 p.. 3j~~~~~~0 4 0 0 0 0 0 0 0 0 . . . 0* 0 0 0 0 0 0 0 0 0~~~~~~~ 0JZ - W C Z N S N343 S. . . .. .*. .... .. 3V O, wa * 30 30 N C 33% - - * C~~~. nN a0 mNa0 > ' >04 N 0O C Zw: C: - 00 ...00N C . . . . . 3~~~~~~~~~~~A x 00 00 nana . 413.30 30 Cl 3~~~~~~~~~~~~~~~~~~~-y34.. N go o 4 .. NOo~~~~~~~~~~~~~~~~~~1 , .,o  ANNEX I Page 2 of 4 pages NOTES Unless otherisuie noted, data for 1960 refer to any year between 1959 and 1961. for 1970 between 1968 mid 1970, and for Moot Reconr Estioare between 1971 and 1973. -' Swaziland has been aelected as an objective n-untry because the economic structures of both cou ntries are quite similar. MALAWI 1960 /a 1962, African population; /b Ratio of Population under 13 and 65 and over to total labor force; Ic 1963, !d 1961- 1963, In Including data f-or Southern Rhodesia and Zambia 1970 /a 1966, /b Ratio of population under 15 and 65 and over to total labor force, Ic Coverage of data unknown, Id 1904- I__ 966, 7e 1967, /f Urban onlSy MOST RECENT ESTIM2ATE: Ia 1975, /b 1970-75. SOMIALIA 1970 /a Urban only; Lb 1964-66, Ic Public education only. ANIAN !A 1970 /a Mainland Tanzanaia, lb 1967, /c 1963; /d Urban only SWAZILANDS 1970 Ia 1956-66, lb 1966; /c African population only, Id Ratio of population under 15 and 65 and over to total labor forc. R9. July 19, 1976 DEFINITIONS OF SOCIAL INDICATORS Land Area lihno k.2) Population per nursing person - Population divided by nnber of pracr~lclo Total Total surface area conprising land area and inland waters, male and femal gradsa ta nurses, "trained" or "e.rtified' nurse, and Agric.- Mooc recnt eatisste of agricultural area used tenpersrily or p-em- asaiIiary personnel with training oreprIn. netly for crops, postures, market & kitcben gardens or to lie fallow. P.pulatian ear hospital bed - Population divided by somber of hospital beds available in Public and Private general and specia11ed bospira1 and IMP car capita (US$) - GNP Par capita estimates at curest market prices., rehabilitation centrer, occludes nuring homes and eatabliabme-ts for calculated by same cnversior, meibod as World Sank Atlas (1973-75 basis) , cuaredia1 and preventive care. 1960; 1970 and 1971 dare. Per capita supply of clre (7. of requirements) - Computed frns energy equivalent of net food Supplies available in country per capita pee day, Pupalatioo and vital statistic available aupplies conprise dosestic production, imports less esports, and Population (mid-year million) 0 of July first' if not available, average changes in stock, net supplies exclude anImal feed, seeds, quantties- used of two end-year esti.ates; 1l"6i, 1970 and 1975 data. in food processing and Iases in distribution; requiremnts wer r.tiuated by FAO base.d om physiological needs for noma actIvity ad health - ond- Population d-nity - pear anae . - Mid-year population per square kilomter erng enironmental temperatur, body weights, ag ad assdistr ibuton c (100 hectares) of total urea. populat ion, and allowing 102. for waste at bousahold I-el. Population density - per qanuesk sofu agric. land - Computed as above for Per capita supply of protein (gram par dayS - Protein content of per vapite, agricultural land only. net supply of food per day; net supply af food is defined as above, requici- meats fur all countries established by USDA Econmic Reaaareh eS-uces Vi tal_ 1 statisItics provide for a imiaus allowance of 60 grins of total preneie per don, and trude birtb rate per thousand, average - Annual live births per thousand of 21 gras ofaia and pulse protein, of which 11 gros should be aninul old-year population; ten-year arithsntic averages ending in 1960 sad 1970, protein; these standards are lower than those of 75 grams of total protein and fiv-yea avrage ending in 1975 for most recen.t eatlate. and 23 grasa of animal protein asa verage for the world, proposed by FAO Crude death rate per thousa.nd, average - Annual deaths per thousand of mid-year in the Third World Pond Survey. Ppoplation, ten-yeor -nithse tic -averae ending in 1960 and 1970 and fiv- Per .apit. protein supply from animal sad pulse - Protein supply of food year average ending in 1973 for most recent estima te, derived from animals and pulses in gas- per day. Iofant mortality rate (Ithoul - Annual deaths of infants under one year of age Death rate (/thou) ages 1-4 - Annual deaths Par thousand in age gronp 1-L- ipe thousand lIve births. years, is children in this age group, .suggeted as an indicator of Lieasetancy at birth (yes) - A-eroge number of years of life raemaining at malnutritio.. birth, .usualy five-ye arouses rgas ending in 1960, 1970 and 1975 for develop- ing countries. Education truss -reerducti-n rate - Average number of live daughters. . woman will bear Adiusted erollment ratio - Drimary school - Enrollment of all ages as pa- is her nona1 reproductive Period if she enperiencen present age-specific centoge of prinary school-age population; includes childre aged h-Il yeurn fertility rates; unually five-year averages ending in 1960. 1970 and 1975 hut adjusted for different lengths sf prima,ry education ; for countries with far developing c-ntries. unvra ducation, enrollment may ascend 100% sincesoe pupl1a are below Pupulation growth rate (7.) - total - Compound annusl growth rates of mid-year or above the official nchosl age .poplation for 1950-60, 1960-70 and 1970-75. Aid-uted enrollment ratio - secon.dary school - Computed aabove, secondary Population irowh rate (7.3 - urban - Computed like growth rate of total education requires at leant Psor yeo- of approvd primary incistrciti., population, different definitions of urban areas may affect comparability of providen general, vocational or teacher training instructions fur pupils data among coutries, of 12 to 17 years of age; esrreapondence courses are generally e-clcded Urban posulation (7. of total) - Ratls of urban to total population, different Years of Schooling provided (first and second levels) - Total years of definitions of urban areas may affect comparabiliry of data among countries, schooling; at secondary level, vocational instruction m,ay he porrial1y or completely emcluded. Age structure (percent) - Children (0-14 years), working-age (15-64 yeas), Vucationa1 enrollent (. of secondary) - Vucotional institutions -inclde and retired (65 years and over) as percentages of nid-year population technical, industrial or other programs which operate independecIy or as Age dependency ratio - laths of populatIon under 15 acd 65 asd over to those departments of secondary institutions. of ages 15 through 64. Adult literacy rote (7.) - Literte adults (able to read and write) as per- Economic dependency ratio - SRtis of papulatico under 15 and 65 and over to centuge of total adult pcpuloti- aged 15 yearn asd o-en the labor foc in a 1,ge gropup of 15-hi years, foiypann - _ccptors (nioulaive ,thou) - uolativ- cober of accePtors Noosing of birth-cotrol devices under auspices f national tinily plannin-g progrom Person par room (urban) - Averge noser of person Per roo iv, uccpsod since inception conventional dwellings in urban area, dwellings ecclcd nu-ceo Family placisga- users (7. of marred women) - Percentages fi married women of structure and unoccupied ports. child-bearssg age (15-44 years) wbo use birth-control devices to all nsrried Occupied dwellings without piped water (7.) - Occupied conentonl 1Ael gsi woe csame age grop. in urban and rural areas without inside or actsida piped waler facIuti-c aspercentage of all.. sc ied dwellIngs. fiEplayment Access. to electricity (7. of all dwelings. Convenricca1 dwell1sgs w-n Toto1 labor force (thousand) - Economically active persona, including sined electricity in living quartersa Pecn o. f total dwellings is echos and forces and unemployed but .exluding housewieen, students, etc.; definitions rural areas. in various countries are not comparable, Rural dwellings connec ted to electricIty (7.) - Computed as above fur --Ii Labor force in agriculture f7*) - Agnicult-rl labor force (in farming, forestry, dwellings only. hunting and fishing) as percentage of total labor force. Unemployed (7. of labor farce)- Unemployed are snuelly defined as persona who C.n.omption are able and willing to take ajob, ant of a Job on a given day, remained our Radio receivers leer thou cop) - A11 types of receivers for radio brodcast of a job, and seeking work for a specified minimum period sot eaceeding one to general public per thous.and of population; -sclden unlicensed ce --ec wek, may not be comparable between countries due to different definitions in countries and in years when registration of radio nets was in effect of unemployed and source of data, e.g., employment office statistics, somple data for recnt years may not be comparble since so t -oostic aholfsHud ncreya, copulsory unemployment insurance, licens ing. Passenger cars (per thou pop) - Pan..enger cars comprise sorer cars scaing Income distribution - Percentage of private income (both in cask and kind) less than eight persons; eacluden onbuloncen, hearses and il1itury received by richest 5%, riebest 20%., poorest 20%, and poorest 40% of house- vehicles, bo1da. Elect,ricity (hkh/yr per can) - Annual consumption of InduStrial, ciomeercial, public and Private 1eltentrity in kilowatt banns per capita, generally Discribution of land ownrship - Percentages of land owed by wealthiest 107. based o production data, without allowance for loss.es in grids but allow and poorest 10%. of lend ownrs. ing far imparts and exports of electricity. Newsprint (kg/yr per cap) - Per capita annual consumption in kilograms Hes1th and Nutrition estimated from domestic production plun net imports of newsprint. Posolation per physicia!n - Papulatiom dIi"ded by nameier of practicing Physicians qualified from a medical school at university level.  ANNEX I M A L A W I Page 3 of 4 pages ECONOMIC INDICATORS GROSS NATIONAL PRODUCT IN 1975 ANNUAL RATE OF GROWTH (%. constant prices) US $ Nln. h 1960- 74 1975 GNP at Market Prices 771.6 100.0 7.7 5.6 Gross Domestic Investment 208.2 27.0 12.4 23.5 Gross National Saving 105.0 13.6 20.5 -5.0 Current Account Balance -103.2 -13.4 Exports of Goods, NFS 171.7 22.3 6.7 15.9 Imports of Goods, NFS 292.3 37.9 6.2 17.4 OUTPUT, LABOR FORCE AND PRODUCTIVITY IN 1975 Value Added Labor Force1 V. A. Per Worker USI$ M1n. Z Thousand % $% Agriculture 322.3 44.5 1,300 8''.3 247.9 51.0 Industry 162.2 22.4 75 3.0 2,162.7 449.0 Services 239.7 33.1 115 5.7 2,084.4 428.9 Unallocated _ 100.0 Total/Average 724.2 100.0 1,490 100.0 486.0 GOVERNMENT FINANCE GO-ERNMENT FINANCE Public Sector Central Government (MK Mln) b of GDP ( MK, Mln.) % of GDP 1973 1973 1969-73 1974/75Z/ 1974/75 1970/71-1974/75 Current Receipts 63.4 14.4 14.8 78.7 13.5 14.0 Current Expenditure 64.5 14.L 16.5 72A-8 12 13.8 Current Surplus -1.1 - 0.2 -1.8 4.9 0.8 0.2 Capital Expenditures 47.6 10.8 11.0 40.8 7.0 7.9 External Assistance (net) 43.5 9.9 10.8 19.1 3.3 5.1 NnTE : All conversions to dollars in this Annex are at the average exchange rate prevailing during the period covered. 1/ Total labor force defined as male population between 15 and 60 years of age plus women actually employed. 2/ The fiscal year is from April to March; the GDP has been adjusted accordingly. not available not applicable  ANNEX I Page 4 of 4 pages MONEY. CREDIT and ~~~1965 1972 1973 1974 1975 MONEY, CREDIT and PRICES 1965 (Million MK outstanding end period) Money and Quasi Money 25.3 63.5 85.6 116.0 127.6 Bank Credit to Public Sector -2.1 11.0 11.4 19.8 72.5 Bank Credit to Private Sector 10.1 35.7 33.0 49.7 56.1 (Percentages or Index Numbers) Money and Quasi Money as % of GDP 14.0 16.7 19.4 21.0 19.2 General Price Index (1970 = 100) 78.9 112.1 117.8 135.9 157.2 Annual percentage changes in: General Pric: Index .. 3.6 5.1 15.4 15.7 Bank credit to Public Sector .. 150.0 3.6 73.7 266.2 Bank credit to Private Sector , 6.1 -7.6 50.6 12.9 BALANCE OF PAYMENTS MERCHANDISE EXPORTS (AVERAGE 1973-75) 1973 1974 1975 US $ Mln 7. (Millions US $) Exports of Goods, NFS 121.2 157.0 171.7 Tobacco 46j16 39.2 Imports of Goods, NFS 168.3 220.3 292.3 Tea 20.5 17.2 Resource Gat (deficit -) -47.l -63-7T -120.6 Groundnuts 7.0 5.9 Sugar 9.8 8.2 Interest Payments (net) -3.0 -3.0 ( All other commodities 35.1 29.5 Workers' Remittances 23.7 35.7 ( 9.3 Total 119.0 100.0 Other Factor Payments (net) -18.5 -22.1 Net Transfers 7.0 7.0 8.1 EXTERNAL DEBT. DECEMBER 31. 1975 Balance on Current Account -37.9 -45 103.2 .7 -103.2 ~~~~~~~~~~US $ Mln Direct Foreign Investment (net) 6.4 11.9 9.3 Net MLT Borrowing Public Debt, incl. guaranteed 239.0 Disbursement (37.4) (31.7) Non-Guaranteed Private Debt ,, AmortizatJon (-4.2) (-j.7) Total outstanding & Disbursed Subtotal 33.2 25.0 31.3 2/ Capital Grants 9.6 11.9 16.2 DEBT SERVICE RATIO for 1975 Other Capital (net) 16.9 14.3 (-11.0