India - Beas Equipment Project

RESTRICTED FILE LUJf{ IReport No. p-490 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 The report may not be published -nor may it be quoted as representing their views.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 ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO INDIA FOR THE BEAS EQUIPMENT PROJECT June 20, 1966  IMTERMATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMIMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELO11ENT CREDIT TO INDIA FOR THE BEAS EQUIPIMENT PROJECT 1. I submit the followuing report and. recommendation on a proposed credit to India in an amount in various currencies equivalent to U.S. $23 million. PART I - HISTORICAL 2. The Indus Basin Settlement of 1960 provid.ed that, with certain exceptions, Pakistan Tzould have the use of the i!aters of the Western Rivers (the Indus, Jhelum and Chenab) and, after a transition period., India the use of the waters of the Eastern Rivers of the Indus Basin (the Beas, Ravi and. Sutlej). As part of the Settlement, India agreed. to contribute toTjard.s the financing of works designed. to transfer water from the W1Jestern Rivers for irrigation uses in Pakistan theretofore met from the Eastern Rivers. Apart from joining Tith certain member countries in assisting to finance these wforks, the United States and. the Bank agreed -- also as part of the Settlement -- to provid.e India with the foreign exchange cost of works on the Beas River for irrigation and. power purposes to the extent of $33 million and.$23 million respectively. It was und.erstood that the approval of these financing arrangements would. be coordinated. The map attached. (No. 1) shows the main elements of the project. The principal d,ocuments relating to the Indus Settlement were distributed. to the Executive Directors on September 6, 1Q6O (R 60-11i). 3. As the Executive Directors were advised. in July 1964 (Sec-N 64-182) negotiations between the Bank and India were substantially completed at that time when it was thought that the U.S. authorities wgere prepared. to execute an agreement in respect of the U.S. loan. As noted in paragraph 13 of this Report discussions between the U.S. and India continued for some time. The d.ocunents giving effect to the 1964 negotiations have now been revised to reflect developments since that time, including the execution on June 16, 1966, by India and U.S. AID of the agreement for the U.S. loan of $33 million.  -2- 4. The Association has mad.e 17 cred.its to India, includ.ing four which are fully disbursed.. The Bank has made 34 loans, including twenty-one which are fully disbursed.. The status of Bank loans and. IDA credits to India as at May 31, 1966, is summarized, below: Amounts ($ million) Bank IDA Total (less cancellations) 971.9 584.5 Of which has been repaid. 256.8 - Total now outstanding 715.1 584.5 Amount sold 100.3 Of vhich has been repaid 84.5 15.8 - Total now held. by Bank and. IDA 699.3 584.5 Of uhich still undisbursed. 169.7 14o.9 5. The following loans mad.e before July 1, 1960 are not yet fully disbursed. Loan/ Amount ($ million) Year Credit Borrower Purpose Bank IDA Undisbursed No. on May 31/66 11,/19 1954 106 Tata Power Trombay I 16.2 0.0O 5/29 1957 164 Tata Power Trombay II 9.8 0.09 6/25 1958 199 Madras Port Trust Equipment 14.0 0.95 7/15 1959 232 ICICI Industry II 10.0 0.01  -3- 6. The following loans and credits were approved since July 1, 1960: Loan/ A,mount ($ million) Year Credit Borrower Purpose Bank IDA Undisburser No. on May 31/66 7/29 1960 262 India Railways V 7000 - 10/28 1960 269 ICICI Industry III 20.0 1.1h 6/21 1961 3 India Roads 60.0 4.85 8/9 1961 292 India Private Coal Mining 35.0 0.78 8/17 1961 294 Calcutta Port Equipment II 21.0 10.39 9/6 1961 8 India Tubewell Irrigation 6.0 - 10/13 1961 298 India Railways VI 50.0 - 11/22 1961 13 India Shetrunji Irrigation 4.5 1.11 11/22 1961 14 India Salandi Irrigation 8.0 6.42 11/22 1961 15 India Punjab Flood Protection 10.0 0.55 12/22 1961 307 IISCO Coal Mining 19.5 14.15 2/14 1962 19 India Durgapur Power 18.5 5.78 2/28 1962 312 ICICI Industry IV 20.0 2.96 6,'29 1962 21 India Sone Irrigation 15.0 3.27 7/18 1962 23 India Purna Irrigation 13.0 3.57 8/8 1962 24 India Koyna Power II 17.5 8.41 9/14 1962 27 India Bombay Port 18.0 12.73 9/14 1962 28 India Telecommunications I 42.0 6.05 3/22 1963 36 India Railways VII 67.5 - 5/24 1963 37 India Kothagudem Power I 20.0 6.49 6/5 1963 340 ICICI Industry V 30.0 11.50 6/9 1964 52 India Industrial Imports I 90.0 - 7/6 1964 58 India Telecommunications II 33.0 10.16 10/26 196h 67 India Railways VIII 62.0 - 5/28 1965 414 ICICI Industry VI 50.0 49,08 6/).1 1965 416 India Power Transmission 70.0 70.0 6/11 1965 417 India Kothagudem Power II 14.0 8.57 8/11 1965 78 India Industrial Imports II 100.0 71.50  -4.- 7. Delays in disbursement continue to be a source of concern for a number of Bank and. IDA projects in India. About 8 percent of Credit 3-IN (Road. Project) made in June 1961 is still to be disbursed, and. the Closing Date has been postponed to June 30, 1967; the undisbursed. portion relating to the Bassein Creek Bridge ($530,000) was cancelled. at the request of the Borrower. The Second. Calcutta Port Project (Loan 294-IN), after suffering initially from delays in placing orders for equipment and. floating craft, will be completed. by March 1967. Ilith respect to the Salandi Irrigation Project (Credit 14-IN) a full report will be presented. to the Executive Directors within a few days. The Third. IISCO Coal Mining Project (Loan 307-IN) was delayed nearly three years by a change from open pit to sllaft mining, and is now- scheduled. for com- pletion by 1970. The Durgapur Power Project (Credit 19-IN) woill be fully d.isbursed. by the middle of 1967 except for a small amount.in respect of retention payments that will not fall due until some months later. A project reviewi mission visited. the Sone Irrigation Project (Credit 21-1Ji) in May 1966 and. has confirmed that construction will be completed. by March 1967. The Purna Irrigation Project (Credit 23-IN) is about two years behind schedule but will be completed. by August 1967. 8. The first unit of the Second Koyna Project (Credit 24-IN) is being commissioned. on schedule and the rest of the Project .is proceeding satisfac- torily. The Bombay Port Project (Cred.it 27-IN) is about two years beh.ind the original schedule; recently, deadlines have been established. -ith respect to several important aspects of the Credit, and these are being folloiwed up closely. The Closing Date of the Telecommunications Project (Credit 28-IN) had. to be extended. by 15 months to March 31, 19S7 on account of the time need.ed. initially to make an adequate choice among suppliers competing to pro- vid.e a newJ exchange system. The first Kothagudem Power Project (Cred.it 37-IH) wTill be completed. on schedule early next year. To date no disbursements have been mad.e for the PowTer Transmission Project (Loan 416-IN) because of the time required. by Government in obtaining satisfactory financial undertakings from all participating Boards and. Agencies and. .in awarding procurement contracts. PART II - DESCRIPTION OF THE PROPOSED CREDIT 9. Borrower: India, acting by its President. Anount: Various currencies equivalent to U.S. $23 million Purpose: To provid.e part of the foreign exchange cost of imported. equipment and. services required. to d.evelop hydroelectric power from the River Beas, to extend irrigation in the Punjab and. in Rajasthan and. for associated. construction. Amortization: The term of the credit would be 50 years iwith a grace period. of ten years. One-half of 1 per cent of the principal amount would. be repayable semi-annually for ten years beginning February 1, 1977, and 1-1/2 per cent of such principal amount would. be repayable semi-annually beginning February 1, 1987, and ending August 1, 2016. Service Charge: 3/h of 1 per cent annually.  -5- PART III - THIE PROJECT 10. The Beas project is part of the integrated development of the three Eastern Rivers of the Indus Basin -- Ravi, Beas and Sutlej. The project consists of two main parts, each of which involves both the provision of irrigation works and the development of hydro-electric power. The first part of the project is the Beas-Sutlej link which will divert water from the Beas River to the Sutlej River. The principal works involved are: a diversion dam on the Beas River (the Pandoh Dam), a tunnel 8 miles long, a canal 7.2 miles long, a balancing reservoir from which water would be released into a further tunmel, 8.5 miles in length, and a power plant (the Dehar Power Plant) which is to consist of four units having a total installed capacity of 6)o M.W. with provision in the penstocks for the installation of two further units of 160 M.W. each. In addition to the Dehar Power Plant, further hydro-electric power will be developed on completion of this part of the project, since water released from the Dehar Plant would enter the upper reach of the Bhakra Reservoi and be utilizea by a power plant n6w'niearing cori-pletion on the right bank gt Bhakr,a Da;n. Supplemental waters will be provided to the Punjab and Rajasthan areas. The cost of the Beas-Sutlej link has been estimated by the Indian Government at the equivalent of about U.S. $140 million including about IJ.S. $23 million of foreign exchange. Preparatory work began in 1960 and, as of March 1966, officials of the Government of India estimated that just over 1 per cent of the necessary works had been completed. They also estimated that the diversion of Beas waters to the Sutlej would be completed by March 1972 and the first unit of the Dehar Power Plant be on line one year later. 11. The second part of the project is the Beas dam and power plant, down- stream from the Beas-Sutlej link, which will regulate the flow of tie Beas River primarily for irrigation but also for the production of hydro-electric power. The Beas dam will be part of the works controlling the water to be directed through the Rajasthan canal, construction of which is well under way and which, with associated facilities, will provide water for an irrigation system serving about 4.5 million acres in the States of Punjab and Rajasthan. The works of this part include the construction of a dam with a height of 330 feet above river bed level, a reservoir with gross storage capacity of 6.5 million acre-feet, including 5.5 million of live storage, and the installation of the Pong Power Plant with four 60 M.W. units, but designed to accommodate two additional such units, The Governnlent estimate the total cos of this part of the project at roughly $175 million equivalent including just over $33 million in foreign exchange. The total cost includes some $60 million for expenditures on rights-of-way, resettlement of about 60,000 people, access roads and a railroad extension, a permanent town to house construction workers initially and other costs related to but separate from the dam and powerhouse. Construction began in 1960 and the Government of India estimate that it was approximately 24 per cent completed in M,arch 1966. The Government also estimate that the work necessary to commence irrigation releases will have been completed by June 1973 and that the first unit of the Pong Power Plant will be on line by December of that year.  -6- 12. After the Indus Settlement of 1960, more detailed information was obtained on the Beas project and various points were discussed with the Governments of India and the United States over a considerable period of time. In April 1962 the Bank made a desk study of all available material and as a result of this review it became clear, first, that a great deal of additional information would have to be obtained if the agricultural benefits of the works were to be properly appraised, and second, that to obtain this information would take several years of detailed engineering, agricultural and soil studies. In these circumstances and considering the terms of the Settlement, the Bank decided that it would not be appropriate to make a loan covering physical works and informed India that it proposed to honor its commitment by making available funds for the purchase of imported equipment to be used in the construction of any of the works associated with the develop ment of the River Beas. 13. In 1963, after examining various ways of providing its $33 million for development of the River Beas, the Government of the United States sent a mission of specialists from the U.S. Bureau of Reclamation to India to study the project. On the basis of the mission's findings, the Agency for Inter- national Development on August 31, 1964, authorized a loan of $33 million to be used in financing the Beas dam. As the loan was authorized in 1964 its mai features are those applicable to U.S. development loans made at the time, namely, interest at 3-1/2 per cent per annum, a term of 30 years, including 10 years' grace, with interest and principal repayable in Indian currency. The use of the proceeds is tied to procurement of goods and services from the United States. After authorization of the loan, the U.S. and Indian Govern- ments held lengthy discussions concerning the irrigation program for the utilization of the waters to be supplied by the Beas dam. Recently these discussions were satisfactorily concluded, and the U.S. and Indian Governments signed a loan agreement on June 16, 1966. 1. In view of the delays in making the loans (primarily resulting from discussions between officials of the U.S. and Indian Governments on technical aspects of the project), the Government of India in July 1962 requested that foreign exchange expenditure for certain equipment being purchased for the project be considered eligible for reimbursement from the AID loan and the Bank's Group financing if and when such financing were approved. AID agreed to this request. The Association also agreed on the understanding that orders would be placed only after international competitive bidding. Therefore, if the proposed I.D.A. credit is approved, India would be reimbursed for expenditures incurred during the early stages of construction to the.extent of almost $7 million. It is expected that the credit would be largely dis- bursed within the next three years but some disbursements will be necessary through 1972 to cover the import of necessary spares and the foreign exchange cost of training and consultants services.  -7- PART IV - TlIE ECON\OMY 15. A report on the economic position and prospects of India is being circulated to the Executive Directors on June 20, 1966 (R66-8o). India's credit-worthiness for additional Banlk lending at this time is limited, considering her present debt service burden. The country's development prograra would justify substantially increased IDA financing. As one of a series of steps designed to relax adiinistrative controls and bring a more realistic structure of prices into the economy, India on June 5 announced a change in the par value of the rupee (Rs 7.5 = U.S. 41.00). Other major developments in the economy are outlined in the following paragraphs. 16. The level of Indian income and product showed only a modest increase over the first three years (1961/62 - 1963/64) of the Third Plan. This period was characterized by relatively poor perfornance in the agricultural sector. As a consequence, growth in total income and product during that period averaged about 3.2 per cent. In per capita terms, income rose by less than 1 per cent a year. 17. The economic picture brightened considerably in the fourth year of the Plan (1964/65), in large measure due to a favorable monsoon and a consequent recovery of agricultural production to levels more consistent with the longer-term trend of growth in that sector. Foodgrain production expanded by over 8 million metric tons in that year, an increase of almost 10 per cent. Industrial production continued to show fairly vigorous expan- sion during 1964/65. In that year, real income increased by about 7.7 per cent in total and by 5.3 per cent per capita, raising average annual total and per capita growth rates for the first four years of the Third Plan period to 4.3 per cent and 2.0 per cent, respectively. 18. The recovery of agriculture was, unfortunately, short-lived. Wide- spread absence of rainfall in the summer and fall of 1965 brought in its wake the worst drought in half a century. Crop failures of unprecedented magnitudes occurred over much of the Indian sub-continent, and production of foodgrains appears to have fallen by some 13 million tons. This failure of agriculture, combined with a concurrent slowing of industrial production, is likely to mean that Indian income and product levels have declined in the final year (1965/66) of the Third Plan period, although the magnitude involved cannot yet be determined. 19. A direct consequence of the drought has been the necessity for India to import large quantities of foodgrains on an emergency basis. Fortunately, most of these imports have been provided by external assistance, predominant- ly under the U.S. PL 480 program which is supplying some ten million tons of foodgrains. Australia, Canada, the U.K. and other aid donors have also provided grants of food or financing for shipment of such imports. An upward movement in food prices, following the first indications of crop failure in 1965/66, was moderated somewhat by the arrival of aid-provided foodgrains, but inflationary pressures persist throughout the economy.  -8- 20. Tax revenues represented some 14 per cent of Indian national income and product in 1965/66. Goverrnment expenditure for development grew rapidly over the Third Plan period, but an even more substantial increase was registered in current expenditures, in large part because of larger defense outlays after the Chinese attack in 1962. The Central Government has consistently increased taxes to meet such increased outlays and is now attempting to keep non- developmental outlays in check. The States, however, have fr quently had recourse to Reserve Bank overdrafts despite substantial transfers of resources from the Center. Efforts are now being made to limit State borrowing, and - many States have recently increased taxes in an effort to balance their 1966/67 budgets. 21. For several years, India's foreign exchange position has been under strain. Exports have remained more or less stationary at Rs 8 billion annually, while imports moved upwards reaching Rs 15 billion in 1965/66. Export incentives adopted in the last two or three years did not produce very substantial results in part because of the active demand offered by a protected domestic market. In spite of grant or quasi-grant assistance, the drought is estimated to have cost India some $200 million in foreign exchange during the last year, of which an estimated $120 million is for freight on food shipments. In view of India's already-tight foreign exchange position, the Government found it necessary in February to approach the International Monetary Fund with respect to interim assistance to help meet the unanticipated exchange costs. In Diarch, the Fund approved a drawing of $187.5 million by India. Interim aid was also indicated with respect to 1966/67 import requirexments by several member countries of the Indian consortium. 22. In view of the uncertainties surrounding India's foreign exchange position, it was decided to frame a one-year program covering 1966/67, with the Fourth Plan to be issued when the longer-term external assistance picture is more clear. An Annual Plan for 1966/67 was accordingly announced in March. It is, in effect, an interim program calling for public sector outlays of Rs 2,082 crores in 1966/67, about Rs 215 crores below the corresponding figure expected for 1965/66. The annual program appears to be framed with due emphasis on the reorientation of agriculture announced 'ast fall. Outlays in most sectors are expected to show declines between 1965/66 and 1966/67, in part because emphasis is being given to completing projects already in process rather than to initiating new ones. An increase of some Rs 36 crores is, however, contemplated in agricultural programs and a smaller increase, of Rs 15 crores, is programmed for the industrial and mining sector. 23. On June 5, 1966, the Government of India announced a 36.5 per cent devaluation of the rupee. The Government has also indicated that direct administrative controls on imports would be relaxed as soon as the aid picture is clarified. In many industries, substantial capacity is under- utilized because of shortage of imported materials and components and also, to a lesser extent, because of a recent slackening in demand for their products. Therefore, the extent to which non-project aid is made available during the next year or two will largely determine how rapidly production can expand and how far India will be able to dismantle the cumbersome control system. Over the next several years the devaluation move is expected to stimulate exports, to encourage a more rational allocation of imports among alternative uses and t. increase the value of "invisible" receipts that flow through official channels.  PART V - LEGAL INSTRUIENTS AND AUTHORITY 24. The draft Development Credit Agreement between India and the Association and the Recormendation of the Committee provided for in Article V, Section l(d) of the Articles of Agreement, are being distributed to the Executive Directors separately. 25. Since the Credit is only to finance the foreign exchange cost of imported equipment required for works envisaged under the Indus Settlement, as described in Paragraph (2) of the preamble to the Development Credit Agreement, there is no need for a separate schedule of the description of the project. Also omitted are those covenants normally included in Development Credit Agreements relating to the carrying out of the project. 26. The Development Credit Agreement gives the Association the right to suspend in whole or in part the right of the Borrower to make withdrawals from the Credit Account if the right of the Borrower to withdrawr the proceeds of the loan provided for in the AID Agreement shall have been suspended or terminated. PART VI - COMPLIANCE WITH ARTICLES OF AGREEFENT 27. I am satisfied that the proposed development credit would comply with the Articles of Agreement of the Association. PART VII - RECOMINENDATION 28. I recommend that the Executive Directors adopt the following resolution: RESOLUTION NO._ _ Approval of Credit to India (Beas Equipment Project) is an amount equivalent to U.S. $23,000,000 RESOLVED: THAT the Association shall grant a development credit to India in an amount in various currencies equivalent to twenty-three million United States dollars (U.S. $23,000,000), to mature on and prior to August 1, 2016, to bear a service charge at the rate of three-fourths of one per cent (3/4 of 1%) per annum, and to be upon such other terms and conditions as shall be substantially in accoriance with the terms and con- ditions set forth in the form of Development Credit Agreement (Beas Equipment Project) between India and the Association which has been presented to this meeting. George D. 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