Public Disclosure Authorized Public Disclosure Authorized RESTR ICTED FIE COPY Report No. P-32 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 The report may not be published nor moy it be quoted as representing their views. INTERNATIONAL DEVELOPMENT ASSOCIATION Public Disclosure Authorized REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A Public Disclosure Authorized PROPOSED DEVELOPMENT CREDIT TO THE REPUBLIC OF PAKISTAN FOR THE BRAHMAPUTRA FLOOD EMBANKMENT PROJECT June 17, 1963
REPORT Al D?LCO*lLE q]dations OF TI PELSDZNT TO T3EI XECUTITE DIRECTORS O> A PR;OPORED CREDIT TO TlE REPUBLIC OF PAKISTAN FOP. TaE BURAHAPFTRA FLOOD EiBEASIKKiET PROJECT 1. I s'i:ntit herewiith the following repcrt and reccmendations on a propcse& Qevelopmrernt credit tc tihed Governmeti cif?akistan in an anount in various currencies equivalent to $5 millian to assist in the financing of a flocd protectocn project or the Prahmaputra River in East Pakistan. PART I - BACKGROUND 2. The economy of East Pakistan is predominantly agricultural. To ensure that agricultural production is adequate to supply the food requirements of an increasing population and industrial raw materials for local consumption and emort, the highest priority has been placed on its development in tfhe Second Five-Year Plan, 1960/61-1964/65. flood protection is one of the mleans of increasing agricultural production since it wi-il enable farmers to avoid heavy losses due to flooding, to adopt a more profitable cropping pattern, and to attain higher yields. 3. An I.D.A. mission appraised the project in the field in iarch and April 1962. Negotiations took place in Washington with representatives of the Pakistan Government, the Provincial Government and the East Pakistan T;Iater and Po-,wer Development Authority (E.P.IUT.A.P.D.A. ) in June and July 1962. Negotiations,were suspended because the Pakistan Government had not decided upon the terms on which the proposed credit would be made available to the Province of East Pakistan and also because the Provincial Goverrnment was considering the promulgation of a new law regarding wat-er rates applicable to all agricultural projects. Later the Governnent decided that the new ordinance would only apply to irrigation projects. In the case of this project, therefore, we are relying on the East Bengal Embankment and Drainage Act which will permit the East Pakistan Government to levy appropriate flood protection charges. L. The proposed credit would be the Association's fifth oneration in Pakistan and would increase the total amount of I.D.A. lending tco Pakistan to 4i32.5 -nillaon. The folloring credits have already been made:
-2- Credit No. Purpose Amount ($ million) 11 PAK Dacca/Narayanganj/Demra Irrigation 1.0 16 PAK Development of Inland Ports 2.0 22 PAK Khairpur Ground Water and Salinity Control 18.0 30 PAK Industrial Estates 6.5 27.5 5. Bank loans to Pakistan amount in the aggregate to $292 rmillion. The status of these loans on iiay 31, 1963, was as follows: 1/ $ million Total7net of cancellations 299.3 of which has been repaid 39.3 Total now outstanding 260.0 Amount sold 12.5 of which has been repaid 8.3 4.2 Net amount held by Bank 255.8 1/ Including $143.0 rmillion not yet disbursed. PART II - DESCRIPTION OF PROPOSED CREDIT 6. Purpose: To finance about one-half of the total cost of the construction of an earthen embankment and regulators to provide flood protection to a cultivated area of about h00,000 acres. Borrower: Amount: Term and Amortization: Republic of Pakistan. The equivalent in various currencies of $5 million. The term of the credit would be fifty years with no amortization for ten years. From July 1, 1973 2 of 1 per cent of the principal amount would be repayable semiannually for ten years; and 1- per cent se-d-annually thereafter to January 1, 2013.
-3- Service Charge: 3/4 of 1 per cent per annum on the principal amount of the credit disbursed and outstanding. Payment Dates: January 1 and July 1. Project Agreement: The Government of Pakistan would relend the proceeds of the credit to the Province of East Pakistan whicth in turn would relend the funds to E.P.JT.A.P.D.A. which will construct and operate the project (for the terms of relending see para. 11 below). The Association would enter into a Project Agreement with the Province of East Pakistan. PART III - APPRAISAL OF THE PROPOSED CREDIT The Project 7. A detailed appraisal of the project (TO-334a) is attached (No. 1). The main agricultural problem in East Pakistan is to increase production from alread-y cultivated areas to feed an ever-growing population. In a climate such as East Pakistants with too much water in the monsoon season and not enough in the dry season, the key to increased production is water control, firstly by the prevention of flooding and secondly by irrigation. This project would protect about 400,000 acres of presently cultivated land from flooding by the Brahmaputra and Teesta rivers, This area suffers particularly severe damage to crops every year owing to the persistent and heavy floods in the summer monsoon months. During the years 1958 to 1960, flood damage to the main crops, rice, jute and pulses, in parts of the area was estimated at up to 80 per cent. 1962 has also proved to be a particularly bad year and floods have caused extensive damage. o. The project would consist mainly of a 135 mile long earthen embankment on the Brahmaputra and Teesta rivers with regulators to provide controlled water supplies. It would also include the provision of necessary technical assistance and extension services to farmers to enable them to obtain the maximum advantage from the flood protection and to guide them in the establishment of satisfactory cropping and rotation patterns and in the the adoption of improved cultural practices.
- 4-9. The project is to be constructed by E.P.W.A.P.B.A. and is expected to be completed in about thiree years. Contracts for major items of imported materials and equipment for the construction of the regulators would be awarded on the basis of international competitive bidding. E.P.IJ.A.P.D A. would be responsible for the operation and maintenance of the project after its completion. The Authority would retain a suitably qualified firm of engineering consultants to supervise the preparation of designs and the construction of the works. 10. The total cost of the project, including interest during construction, is estimated to be about $10 million of which about $1.7 million would be in foreign exchange. 11. The proposed credit which would be equivalent to about 50 per cent of the cost of the project would be made to the Central C-overnment of Pakistan. The latter wjould relend the proceeds of the credit to the Provincial Government of East Pakistan on I.D.A. terms and the Province would, in turn, relend the equivalent to E.P.W.A.P.D.A. for a period of 25 years, including a five-year grace period, at h per cent interest per annum. 12, The project would prevent severe losses to crops by protecting them from flood waters, and would give the farmers the opportunity of practising improved cropping patterns and also to increase crop yields. The net annual farm berefit, after meeting operation and maintenance costs of the project is estimated at about Rs. 30 million. Allowing for a development period of five years after commencement o0 construction, and coi'puting the annual net benefits over the lifetime of the project - 50 years - the average annual return to the economy at fanr prices would be about 50 per cent. Flood protection charges would be levied in amounts sufficient to cover operation and maintenance costs and to recover the investment with interest over a period of sixteen years. Economic Situation 13. A report entitled "The Econozmic Development Program of Pakistan" (Seciq63-36) dated February 15, 1963, has been circulated to the Executive Directors. 14. Progress under the Second Plan (1960-1965) has so far been encouraging. The Plan uas estimated to involve development expenditures averaging close to $1 billion a year, nearly half of which was to be obtained from abroad. The tempo of investment was expected to rise steadily durint the Plan period with a corresponding acceleration of economic growth. During the first twqo years, however, while expenditures on the Plan amounted to less than one-third of thie total projected for the five years, the national product rose by- nearly 12 per cent or about half the increase projected for the whc:ole period.
- 5-15. Agriculture did unusually well, mainly because of good weather and the increased use of fertilisers. In this vital sector, however, grcater emphasis must be placed on improving services to farmers and making it easier for them to get agricultural supplies if the gains of the last two years are to be continued. The rise in industrial output, 15 per cent in the last two years, was moderate compared with the boom of the last decade, but it was sulficient to relieve deomestic shortages and make possible some increase in exports. The outlook for the manufacturing industry appears to be quite promising. 16. During 1960/61 and 1961/62 the balance of payments showed a deficit of about $325 million in each year which was, however, only 65 per cent of that assumed when the Plan was drawn up. This was mainly because non-development imports were lower and current foreign exchange receipts somewhat higher than had been expected. Nevertheless, Pakistants balance of payments position is likvely to remain weak for a considerable tiise to come. Foreign exchange earnincs at nxesent are barely equal to normal non-development imports plus service on the present foreign debt. 17. For the two-year period ending June 30, 1963, the second and third years of Pakistan's second Five-Year Plan, the Consortium of governments and institutions providing development assistance to Pakistan pledged a total amount of $545 million including $209.4 million fromn the Bank and I.D.A. Of this latter total $90.5 million ($58 million in loans from the Bank and $32.5 million in credits from I.D.A, will have been comnitted if the proposed credit is approved. In the near Luture I expect to submit several more projects for your consideration. 18. At a recent meeting of the Consortium held in Wiashington on hiay 2 and 3, 1963, a total of $425 million was pledged for the fiscal year ending June 30, 1964, including an additional $80 million from the Bank and I.D.A. PART IV - LEGAL DOCUI-LHTS AhND LLGAL AUTHORITY 19. Attached are a draft Development Credit Agreement between the Republic of Pakistan and the Association (lio. 2) and a draft Project Agreement between the Province of East Pakistan and the Association (No. 3). These agreements conform to the pattern of I.D.A. credits which include a project agreement. Attention is drawn to Section 2.04 of the draft Project Agreement which concerns the arrangements for the improvement and expansion of agriculture in the area, and Section 2.05 which concerns the rates to be charged to recover the funds invested in the project and to cover operation and maintenance costs.
- 6-20. The recormendation of the Committee provided for in Article V, Section l(d) of the Articles of Agreement of the Association is attached. (No.4). PART V - COiiPLIANCE.ITH ARTICLES OF AGREfEINT 21. I am satisfied that the Borrower and the Province of East Pakistan will be able to fulfill their respective obligations under the Agreements and that the proposed development credit complies with the Articles of Agreement of the Association. PART VI - RECOIENDATIONS 22. I recommend that the Association make available a development credit to Pakistan in an amount in various currencies equivalent to $5 million for a term of fifty years with service charge of 3/4 of 1 per cent per annum and on such other terms as are specified in the draft Development Credit Agreement and draft Project Agreement, and that the Executive Directors adopt a resolution to that effect in the form attached (Hio. 5). George D. Woods President Washington, D.C. June 17, 1963