RESTRI CTED

Report No. P-974

This report is for official use only by the Bank Group and specifically authorized organizationsor persons. It may not be published, quoted or cited without Bank Group authorization. TheBank Group does not accept responsibility for the accuracy or completeness of the report.

INTERNATIONAL DEVELOPMENT ASSOCIATION

REPORT AND RECOMMENDATION

OF THE

PRESIDENT

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED CREDIT

TO

THE GOVERNMENT OF INDIA

FOR THE

POCHAMPAD IRRIGATION PROJECT

June 21, 1971

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INTERNATIONAL DEVEIOPMENT ASSOCIATION

REPORT AND RECOMMENDATION OF THE PRESIDENTTO THE EXECUTIVE DIRECTORS ON A

PROPOSED CREDIT TO THE GOVERNMENT OF INDIAFOR THE POCHAMPAD IRRIGATION PROJECT

1. I submit the following report and recommendation on a proposedcredit in an amount in various currencies equivalent to US $39 millionto India for an irrigation project.

PART I - HISTORICAL

2. The importance of agriculture in the economy of India and thepressing need to improve agricultural productivity have led the Bank Groupto give high priority to lending for agricultural projects. In 1968 and1969 the staff had extensive discussions with officials of the Governmentof India (GOI) to identify projects suitable for financing. As a result,lending for agriculture has increased from US $13 million in FY 1969 toUS $97.5 million in FY 1970 and - US $90.h million in FY 1971. Theproposed credit would be the first large commitment toward an even higherlevel of lending to Indian agriculture planned for FY 1972. The proposedcredit would be IDA's first financing for improving a major surface irriga-tion system since the Kadana Project in Gujarat State (Credit No. 176-IN)was approved in February 1970.

3. The proposed Pochampad project was appraised in November 1969.The appraisal mission found that the funds required for timely constructionof the project would be substantially more than had been allocated underthe Fourth Plan (1969-1974). As a result,GOI and the Government of AndhraPradesh reconsidered the allocations required and, in November 1970, con-firmed that the amount would be increased. This confirmation cleared theway for completion of the appraisal, and an updating mission visited Indiain February 1971. During negotiations, which took place in Washington fromMay 10 to May 20, 1971, the Borrower was represented by Mr. G.V. Ramakrishna(Joint Secretary, Department of Economic Affairs, Ministry of Finance),Mr. Sreenevasa Rao (Member, Central Water and Power Commission (CWPC)),Mr. A. F. Couto (Director, Ministry of Irrigation and Power), Mr. HitPrakash (Deputy Secretary, Ministry of Agriculture) and the State of AndhraPradesh was represented by Mr. B.C. Gangopadhyay (Secretary, Public WorksDepartment (PWD)), Mr. P. Tripath Reddy (Chief Engineer, PWD), and Mr. L.Venkataratnam (Joint Director of Agriculture).

h. A Summary Statement of Loans and Credits is at Attachment I.Comments on delays in disbursement are given in paragraphs 6-8 of theReport and Recommendations for the Tamil Nadu and Haryana AgriculturalCredit Projects circulated to the Executive Directors on May 17, 1971.

With regard to IFC, 13 commitments have been made in India since 1957totalling US $42.3 million of which US $2.8 million has been repaid,US $5.8 million sold and US $6.3 million cancelled. Of the balance ofUS $27.4 million, US $19.1 million represents loans and US $8.3 millionequity. As of May 31, 1971, US $25.6 million of this total had beendisbursed, leaving US $10.4 million undisbursed. The largest commitmentwas a total of US $18.9 million to Zuari Agro-Chemicals for a fertilizerplant in Goa.

PART II - THE ECONOMY

5. The latest economic report entitled "Economic Situation andProspects of India" (SA-25a) was distributed to the Executive Directorson May 24, 1971 (F 71-120). It reports the continuation of many of theencouraging trends observed in the 1970 report - in particular the fur-ther growth of exports and of agricultural production. On the other hand-ne report also notes that net aid receipts have fallen to a level lowerthan at any time in the past decade, and in the fiscal year ended March 31,1971, were less than one-third of the peak reached five years ago. Theresulting shortage of resources has inevitably been reflected in a short-fall of investment, from the planned level, which seems to be the bareminimum required if India is to achieve a tolerable rate of growth. Asthe report notes, India continues to need substantial aid on concessionaryterms.

6. More specifically in relation to agriculture, the report summarizesthe continued progress of the green revolution which has been encouraging.Foodgrain production reached a new record of 105 million tons in 1969/70crop year, showing a 5 percent increase over the previous year, and a fur-ther increase of 5 percent appears to have occurred in 1970/71. The mainforce behind this progress has come from wheat, although sustainableincreasesin rice production can also be expected now with some confidence.The Fourth Plan set a production target of 129 million tons by 1973/74;however, actual production is unlikely to exceed 120 million. Two reasonsfor the shortfall in foodgrain production are the delay in increasingassured irrigation supplies and the closely related slowdown in the growthof fertilizer consumption. In the longer term future, the further develop-ment of irrigation with effective agricultural support programs shouldensure continued growth in the use of new inputs, including fertilizer,andin overall farm output.

PART III - THE PROJECT

7. A country basic data sheet is at Attachment II.

8. A report entitled "Appraisal of Pochampad Irrigation Project,Andhra Pradesh" (PA-90a, June 16, 1971) is attached. A Credit andProject Summary is at Attachment III.

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9. The Pochampad Irrigation scheme is situated in the State ofAndhra Pradesh in the south of India. Construction of the dam and othermajor works started in 1965, although it is only over the last two yearsthat work has got underway. Ultimately, about 400,000 ha along the rightbank of the Godavari River will be irrigated. The proposed project isthe first intensive phase of this scheme and provides for the irrigationof 100,000 ha and related infrastructure. The total cost of this phase isestimated to be Rs. 9hh million (US $126 million), of which Rs. 262 million(or 28 percent of the project cost)had been spent by March 1971. Rs. 129million would be required for on-farm developments and, therefore, wouldbe provided by farmers and credit institutions. Of the balance of Rs. 553million (about US $74 million), the estimated foreign exchange content isonly Rs. 75 million (US $10 million) and Rs. 478 million (about US $6hmillion) will be local costs.

10. The project would be financed from the Andhra Pradesh develop-ment budget which is supported by loans and grants from GOI: the Associationwould have an opportunity to comment on proposed annual allocations for theproject in relation to the construction programs before budget proposalsare finalized. The proportion of project costs, excluding on-farm expend-itures, to be financed by the Association would be about 53 percent, suffi-cient to make a decisive contribution to the completion of the project.Since the foreign exchange component, excluding village roads, to be coveredout of the proposed credit (US $9.7 million) is so small, this means thatabout 25 percent of the credit would go to finance foreign exchange expend-itures and about 75 percent to finance local expenditures. The basicjustification for financing local expenditures on projects in India,especially those with a low foreign exchange content,has been discussed inrecenb economic reports, including Chapter X of the latest report (SA-25a).

11. The parts of the project which still have to be carried out, andtowards which the proceeds of the credit would be allocated, include com-pletion of the dam (which will be one of the longest in Asia), completionof the remaining 65 km of Godavari South main canal, lining of the firstphase construction of the main canal (112 km), construction of a distri-bution system to serve the 83,000 ha not so far covered, construction offield drainage, and the improvement and extension of village roads.

12. The principal benefit of the project would be the intensificationof agriculture in an area which hitherto has been dependent upon uncertainrainfall. This would have two effects upon present cropping patterns.First, although the kharif (summer) cropping intensity would remain muchthe same, irrigation would permit about half the acreage to be put underrice instead of pulses and maize. Second, rabi (winter) cropping intensitywould more than double. Overall intensity would increase from 110 percentto 155 percent. In addition, the availability of assured irrigation supplieswould enable high-yielding varieties of rice and maize to be introduced andwould also justify the application of fertilizer. As a result, yields fromrice and maize are expected to increase three times or more, while the yieldfrom groundnuts should double. Thus, there would be a substantial increasein production, especially of foodgrains. The resulting foreign exchangesaving is estimated at about US $18 million per annum, once full developmenthas been reached. Treating past expenditures as sunk costs, but allocating

the entire cost of project works to the 100,000 ha to be irrigated in thisfirst phase, the economic rate of return for the project is estimated at14 percent; this rate of return will progressively increase and willapproach 24 percent as the project costs are spread over the 400,000 haof the scheme expected to be fully deve:Loped by the early 1980's.

13. Presently authorized measures for the recovery of project costswould cover the full cost of operation and maintenance and about 50 percentof the capital cost over 45 years excluding interest. Thus, by proper col-lection, a creditable contribution towards the cost of the project can beachieved. Full recovery of project costs would require some increase inexisting taxes and levies; the Government of Andhra Pradesh (GAP) hasagreed to study and then to implement by 1974, measures to ensure recoveryof as much as practical of all project costs.

14. Experience with surface irrigation projects in the early 1960'sunderlined the importance of project organization with comprehensive termsuf reference, assured funding and timely construction in order to ensureproper use of irrigation water as soon as it becomes available and thearrangements for implementation of the Pochampad Project have taken theselessons into account. Moreover, agricultural support, including constructionof new village roads, facilities for on-farm works (such as land levellingand drainage), and credit, is being planned in such a way that agriculturaldevelopment complements progress on construction. In the case of agricul-tural credit, the Association is already providing assistance to the AndhraPradesh Land Mortgage Bank (Credit 226-IN), which together with other govern-ment agencies will meet the credit needs of the project area. A projectorganization will be set up under a senior government officer (the ProjectCo-ordinator), with comprehensive terms of reference, in order to co-ordinateall the elerrments required to bring about successful development. The ProjectCo-ordinator will be responsible to a State level Development Committee,which will provide general policy direction. This organizational arrange-ment is similar in scope to that now in operation for -he Kadana IrrigationProject (Credit No. 176-IN), and it is hoped that this organization will.enable the State Government to overcome some of the difficulties encounteredin earlier projects where less attention was given to co-ordination of thesevoail elements necessary to the modernization of agriculture.

15. Procurement of imported equipment, machinery, and spares (US $3.5million) would be largely on the basis of international competitive biddingin which local manufacturers would receive a preference of 15 percent.(Actual customs duties for most of these items are presently higher atabout. 30 percent.) Minor items of equipment (US $1.3 million) would bepurchased locally under regular Government procedures. The balance ofUS $34.2 million would be allocated for civil works.

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16. Traditionally, India has arranged for construction work on irri-gatl.vn projects largely through force account procedures. In this case,however, only US$4 million equivalent would be used to pay for force accountwork and the balance of US$30.2 million would be disbursed on civil workscontracts awarded under local competitive bidding. There would be avariety of large and small contracts which would be designed to offer oppor-tunities for both large and small contractors to compete. These proceduresrepresent part of the effort which is being made by the Government of India,supported by the Bank, to build up the capacity of the local contractingindustry in the construction field.

17. Attention is called to the fact that these arrangements contemplatethe award of civil works contracts entirely on the basis of local competitionrather than having resort to international competitive bidding. It is thejudgment of our staff that there are a number of Indian contractors whohave the technical and managerial capacity to execute the works in questionand that they would be likely to win most if not all of the contractsconcerned even under conditions of international competitive bidding. None-theless, the results of bidding cannot be predicted in advance and underthe Bank's normal procedures we would have regarded a large portion of thecivil works on this project as suitable for international competitivebidding, and we would normally have required that contracts for these civilworks be put out to international competitive bidding in order to ensurethat the project is carried out in the most economic and efficient manner.We have not pressed this requirement upon the Indian Government in thisparticular case since we have felt it desirable to gain more experiencewith the problem and to pursue further discussions with the Indian Govern-.. ncnt as to what terms and conditions might be appropriate to secure effectivecompetition between Indian and foreign contractors.

PART IV - LEGAL INSTRUMENTS AND AUTHORITY

18. The draft Development Credit Agreement between India and theAssociation, the draft Project Agreement between the Government of AndhraPradesh and the Association, the Recommendation of the Committee providedfor in Article V, Section l(d) of the Articles of Agreement and the textof the Reso:Lution concerning the proposed credit are being distributedseparately.

19. There is one special condition of effectiveness included inSection 8.01(b) of the draft Development Credit Agreement which requiresthat Andhra Pradesh shall have appointed a Project Co-ordinator withsuitable rank, powers, and responsibilities, after consultation with theAssociation with respect to the experience and qualifications required forthis post.

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PART V - COMPLIANCE WITH ARTICLES OF ASSOCIATION

20. I am satisfied that the proposed Credit would comply with theArticles of Agreement of the Association.

PART VI - RECOMMENDATION

21. I recommend that the Executive Directors approve the proposedCredit.

Robert S. McNamaraPresident

Attachments

June 21,1971

Attachment I

INDIA

SUMMNRY STATEMENT OF LOANS AND CREDITS

as at May 31, 1971 (US $ million)

Loan or Undis-Credit No. Year Borrower Purpose Bank IDA bursedLoans/Credits fully disbursed =76.14 985.6

307-IN 1961 IISOO Coal Mining 19.5 3.1414-IN 1965 ICICI Industry DFC VI 49.8 7.189-IN 1966 India Beas Equipment 23.0 9.2

515-IN 1967 ICICI Industry DFC VII 25.0 10.1614-IN 1969 India Tarai Seeds 13.0 10.9615-IN 1969 India Telecommunications II 27.5 26.9153-IN 1969 India Telecommunications III 27.5 10.0162-IN 1969 India Tenth Railways 55.0 19.5176-IN 1970 India Kadana Irrigation 35.0 33.4182-IN 1970 India Sixth Industrial Imports 75.0 46.7683-IN 1970 ICICI Industry DFC VIII 40.0 32.4191-IN 1970 India GuJarat Agriculture 35.0 35.0203-IN 1970 India Punjab Agriculture 27.5 27.5226-IN 1971 India Andhra Pradesh

Agriculture 2b.4 24.4230-IN 1971 India Agro-Aviation 6.0 6.0241-IN 1971 India Telecommunications IV 78.0 78.0 *222-IN 1971 India Power Transmission II 75.0 75.0 *249-IN 1971 India Haryana Agriculture 25.0 25.0250-IN 1971 India Tamil Nadu Agriculture 35.0 35.0

Total (less cancellations) 1,051.2 1,507.0 515.2of which has been repaid toBank and others 469.1

Total now outstanding 582.1Amount sold 110.2

of which hasbeen repaid 108.4 1.8

Total now held by Bank and IDA 580.3 1 507.0Total Undisbursed 90. 424.7 515.2

Signed May 3, 19_71 but not yet effective.

* Signed June 11, 1971 but not yet effective.

Attachment II

INDIA

BASIC DATA

Total PercentArea: in km Cultivated

3,268,580 43.0

DensitPopulation: Total

(Preliminary 1971 Census estimate) 547 million 167

Annual Rate of Growth, current estimates 2.25 percent

Political Statust Republic

Groas National Product at Market Prices, 1970/71-/s Rs. 346.7 billion

Rate of growth 1955/56 - 1968/69: 3.4% p.a.at constant 1965/66: -5.2%prices 1966/67: 1.3%

1967/68: 8.9%1968/691/ 2.2%1969/701/ 5-5.5%1970/7i1/ 4.5-5%

Per capita, 1970/71: US $84

Gross Domestic Product at Current Prices, 1970/71 /: Rs. 3h9.5 billion

Percentage breakdownt Agriculture 49(for 1968/69) Mining 1

Manufacturing 19Commerce and Transport 16Government and Other Services 15

Percent of National Income at Market Prices:

196/6 9 66/67 1967/682/ 19 6 8 / 6 9 3/ 1969/70;/

Net domestic investment 13.3 12.1 11.3 11.3 12.0Net domestic saving 10.6 8.2 7.8 8.8 9.9Current account balance -2.7 -3.9 -3.5 -2.5 -2.5

Attachment IIPage 2

1966/67-1969/70March 1970 Average Rate of

Mone and Credit (Re. billion): (Last Friday) Increase (%)

Total money supply 63.85 9.0Net bank credit to gov't sector 47.26 5.5Net bank credit to commercial sector 18.36 15.0

1 9 69 / 704Rate of increase in prices

Consumer prices $1 6.8 6.2Wholesale prices 6.5 6.9

Third Plan Period1961/62 - 1965/66

Public Sector Operations (R8. billion): 1969/70 Annual Average

Public secotr plan outlay 21.76 17.15Balance from current revenues plus

surpluses of public enterprises 6.68 5.82Domestic borrowings 9.11 4.23Total external assistance to

public sector 5.39 4.84Deficit financing 0.58 2.26

External Public Debt, excluding 1965/66 - 1970/71Su ppier's Credits (US $ million): 1970/71 Annual Average

Total debt outstanding (As of March 31, 8,263

Total annual debt sagvice 1970) 584- / 60YDebt service ratio - 30 26

1964/65 - 1970/71Average Rate of

Balance of Payments (US $ million): 1970/71 1/ Increase (g)

Total exports 2040 3.0Total imports 2170 3.5Trade balance -130

1966/67 - 1969/701969/70 Annual Average

Commodity concentration of exports 7 28 35

Attachment IIPage 3

Official reserves IMF gold Use of Net inter-of gold, foreign tranche Overall IMF national

Foreign Exchane Reserves: exchange and SDRs position reserves credit liquidity(TS $ million)

As of December 31, 1967 662 Nil 662 456 206As of March 31, 1970 1095 Nil / 1095 183 912As of March 31, 1971 9768' 7& - 1052 Nil 1052Y

/ Government of Indiatpreliminary estimates as of Mqy 1971. These figures requirefurther clarification.

2/ Preliminary estimates.7/ Preliminary estimates and not strictly comparable with data for

1961/62-1965/66.4/ December 1969 to December 1970.

Working class consumer price index. November 1969 to November 1970.Y/ Before debt relief.7/ Jute, tea and cotton fabrics as a percentage of total exports.§/ Includes allocation of $100.58 mlllion in SDRs in January 1971.2/ Includes use of $17.5 million previously non-monetary gold.

June 21, 1971

ATTACHMENT III

CREDIT SUMMARYPOCHAMPAD IRRIGATION PROJECT

BORROWERs India, Acting by its President

BENEFICIARY: Government of Andhra Pradesh

PURPOSE: To assist in financing the completion of the firstphase of the Pbhabmpad Irrigation Scheme. The firstphase comprises construction of a dam on the GodavariRiver, a main canal and a distribution system to serve100,000 ha, as well as agricultural support servicesand the construction of village roads.

AMOUNIT AND TERMSOF THE CREDIT: US $39 million equivalent - IDA terms.

TOTAL PROJECT COST: (US $ million)Local Foreign Total

Construction 53.5 4.9 58.4Equipment andImported Materials 3.0 4.8 7.8Land Acquisition 7.2 _ 7.2Supporting Services 0.3 - 0.3

Total 64.0 9.7 73.7

FINANCED BY: (US $ million)Local Foreign Total

IDA Credit 29.3 9.7 39.0Andhra PradesbState and Governmentof India 34.7 -34.7

Total 64.0 9.7 73.7

PROCUREMENTARRANGEMENTSt (1) International competitive bidding with Indian manu-

facturers having a 15 percent preference or actualcustom duty, whichever is lower, for some majorequipment (US $3.1 million).

(2) Proprietary items (US $0.4 million).(3) Procurement locally of minor plant, spares and equipment

(US $1.3 million).(4) Procurement of civil works by local competitive

bidding (US $30.2 million)together with a limitedamount by departmental forces (US $4 million).

PROJECT PERIOD: April 1971 - June 1976

ECONOMIC RATE OFRETURN: about 14 percent.