INTERNATIONAL DEVELOPMENT ASSOCIATION

Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized RESTRICTED Report No. P-39 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 The report may not be published nor may it be quoted as representing their views.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 RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE ISLAMIC REPUBLIC OF PAKISTAN FOR AN INLAND WATER TRANSPORT PROJECT August 14, 1964

REPOPOT AND REC0 TP2DATIONS OF TLE PRESIDENT TO THE EIXfUTIVE DIRECTORS ON A PROPOSED CREDIT TO TIIE ISLAMIC REPUBLIC OP PAKISTAN FOR AN INLAND WATER TRANSPORT PROJECT 1. I subnit the following report and recommendations on a proposed development credit to the Islamic Republic of Pakistan in an amount in var½ous currencies equivalent to $.25 million to assist in financing a project for the improvement of inland water transport in East Pakistan. PAIRT I - BACKGROUND 2. In November 1961 an IDA credit of $2 million was extended to Pakistan to assist in financing the start of a program for the imorovement of inland water transport in East Pakistan. In 1902 the Government of Pakistan requested a second credit to finance the foreign exchange cost of further schemes in its development program. A mission appraised the project in April 1963. These findings were updated by a second mission in May 1964. Negotiations with representatives of the Government of Pakistan, the Provincial GovernmLent of East Pakistan and the Inland Water Transport Authority (IWTA), were held in -Tashington in June and July 1964. 3. The Association has already made l5 credits to Pakistan totalling $237.54 million. The proposed credit would increase the total of IDA credits to Pakistan to $242.4:9 million. The credit of $5R.5h million for the Indus Basin Project is not included under the pledges made within the Consortium arrangements. Accordingly, if the proposed credit is approved today, credits made uwnder these pledges would total $184.25 rmllion, fully committing the pledges made for the second, third and fourth years (1961,X62-196/"64t) of the Second Five-Year Plan. Of the $237.54 million of previ-ous IDA credits, six credits totalling $123654 million were signed recently and are not yct effective. Of the $114.0 million of effective IDA credits, on'ly abcut $2.3 million had been disbursed on July 31, 1964. Every effort is being made to get further disbursements under way. 4I. The Bank has made twenty loans to Pakist,un iu the amount of $361.2 mi,llion. The status of these loans on July 31, 190<, wuas as follows:

-2-. rmllions Total loans, net of cancellauions 361.2 * of which repaid 5C.1 Total outstanding 311.1 Amount sold 16.6 of Ltich repaid 9.2 7.4 Niet amou:nt held by Bank 303.7 * Includes $62 million not yet effective. Of the $299.2 million of effective Balk loans, $118.9 million was undisbursed on July 31, 1964, including $82.3 million on account of the $9C million Indus Basin loan made in 1960 (Loan No. 266 PAK). PART II - DESCRIPTION OF THIe PROPOSED CREDIT 5. Purpose: To finance the foreign exchange cost of sclhemes to improve inland water transport in East Pakistan corsisting of surveys of river ports and waterways, radio location stations, expansion of a workishop, a salvage unit, construction of landing facilities and consulting services for IUfA organization. Borrower: Amount: Term and Amortization: Service Charge: The Islamic Republic of Pakistan. '$5.25 million equivalent in various currencies. The development credit would be for a period of 50 years Tith no amortization for 10 years. One half of one per cent of the principal amolnt would be repayable semi-annually from July 15, 1974, to January 15, 1934, and one and one half per cent semi-annually from July 15, 1984, to January 15, 2014. 3/4 of one per cent per annum on the principal amount of the credit disbursed and outstanding.

-3- Payment Dates: January 15 and July 15. Relending Arrangements and Project Agreement: The Government of Pakistan would relend the proceeds of the credit to the Province of East Pakistan on IDA terms. The Province in turn would make available the proceeds of the credit to the East Pakistan Inland WJater Transport Authority on terms and conditions agreed upon during negotiations (see paragraph lb). The Association would enter into a Project Agreement with the Province of East Pakistan covering the execution and operation of the project. PART III - APPRAISAL OF THE PROPOSED PROJECT The Project 6. A detailed appraisal of the project (TO-430c) is attached (No. 1). 7. East Pakistan is largely composed of the deltaic area of two of the worldts largest rivers, the Ganges and the Bralnaputra, which inerge in East Pakistan to form a vast network of rivers and estuaries. This netwiork makes the construction of road and rail communication difficult and expensive, but it provides a cheap and economical means of communication. The development of inland water transport must therefore remain of immense importance in the development of the East Pakistan economy. B. However, inland water transport has to operate under difficult conditions since most of the rivers are unstable, subject to siltation and to frequent changes in course. There is accordingly a special need for the maintenance of water channels, the provision of navigational aids and pilotage service. Also, under these conditions, the construction and operation of inaland ports and landing facilities require special care and supervision. 9. It was for this reason that the Bank encouraged the Government of East Pakistan to establish the Inland Wrater Transport Authority in 1958 as an Authority wihich would centralise responsibility for services required for more efficient operation of inland water transport. The development credit (Credit No. 16-PAK) made in November 196l was to help in the financing of inland ports and in the improvement and strengthening of the IVTA organization. It was realised that this was only the beginning of INTA?s long-term development program, and the Pakistan authorities were advised, at that time, that further IDA assistance to inland water transport would be considered as soon as other schemes became ready.

- 4-1C. The project for which financing has been requested is part of TWTA's continuous development program and consists of the following: (1) Detailed surveys of river ports and waterways looking to the preparation of a priority plan of selected waterways and ports requiring maintenance and improvement; (2) Radio location stations to provide a position fixing system and to act as an aid to navigation; (3) The expansion of IWTA t s workshop at Barisal to provide increased facilities for the repair and maintenanace of navigational equipment; (a) Construction of some 50 to 60 landing facilities for passengers and cargo; (5) The acquisition of a salvage unit to remove wrecks and obstructions to navigation; (6) Consulting services for the strengthening of IWrA 1 s organization. 11. The total cost of these items is estimated at 411.3 million equivalent, of which $6.2 million would be required in foreign exchange. However, I recommend that an amount of $950,0CC for the foreign exchange cost of the consultants' services required for purposes of item (1) be financed by the Bani under its technical assistance program since these expenditures are of a pre-investment nature. This recommendation is fully set out in my accompanying memorandum to the Execubive Directors (n61-l08) dated August Ilii 19614. The balance o' thie foreign exchange required amounting to $5.25 million would be financed by the proposed IDA credit. 12. All the elements wlich form part of the project have been ready for some time. However, the Association felt that it could not begin negotiations for a second credit to IWITA until progress had been made on three particular matters which have been under discussion with the Pakistan Government and I.,TTA for some time. (1) The delay in the use of the IDA Credit No. 16-PAK. The main reason for this delay was the inability of IWTA to acquire land for the sites of some of the inland ports financed under the credit. This problem was brought to the attention of the Provincial Government of East Pakistan not only with regard to this project but in regard to other projects financed by IDA in East Pakistan. As a result the East Pakistan Government has passed an ordinance making expropriation of land by the Government less cumbersome and we nowx expect that the difficulty of land acquisition will be gradually overcome. Out of the $2 million IDA Credit No. 16-PAK $1.2 million had been disbursed by July 31, 1964.

- 5 - (2) The Provincial Government of East Pakistan had not been able to formulate a definite financial policy towards INTA since the studies have not been completed which would recowmend which of IWJTAts activities should be regarded as developmental and thus financed directly from the budget of the Provincial Government. The Provincial Goverwnent has now undertaken that pending the completion of these studies the Province will provide the Authority with all the sums needed to meet its cash deficit and its working capital and that it will consult with the Association regarding the studies and their recommendations before it takes any action. The supplemental letter on financial policy is attached (No. 2). (3) The caliber and performance of the IWTA organization, even though assisted by a team of consultants financed under IDA Credit No. 16-PAK had not come up to our expectations. A factor in this situation was the tendency of IVTA to spread itself over too many activi.ties. After discussions with the Provincial Government and rrjta, cooperation between thie administration and the consultants improved and the organization is now working more smoothly. Furthermore, some of IWTA's activities have been transferred to another organization and the Provinci al Government has decided to change the management of IITA by appointing a new Chairman of the Board (the Chief Executive Officer of IWTA) who is about to take over his duties. On the expiry of the present consultantst contract, arrangements satisfactory to the Association will be made for their continuance or replacement for a period of two to three years. 13. WTe are now satisfied with the steps that the Provincial Government and IWiTA have taken on the above matters. It was our expectation and that of the Pakistan Government that a second IDA credit would follow shortly after the first IDA credit. IWTA has proceeded with its program on this expectation. However, the above matters have taken much longer to resolve than had been originally contemplated so that many of the items for which IDA financing was envisaged are already under wjay. In these circumstances, I recommend that the Association reimburse expenditures already made on the project after March 31, 1962, (Section 2.C3 (b) of the Development Credit Agreement). Relending 1. The proceeds of the proposed credit would be lent by the Government of Pakistan to the Provincial Goverrment on IDA terms. These funds would initially be made available by the Government of East Pakistan to DITA at 3½ per cent interest to be repaid over a period of 25 years including 5 years of grace. These are the usual relending terms in Pakistan for projects of this kind. Once the studies referred to in paragraph 12(2) are completed and the decisions on IWTA financial policy have been taken, the Provincial Government will review with the Association the appropriateness

- 6 - of the terms with respect to the various categories of expenditures from the credit. Any changes in the releinding terms will be subject to agreement by the Province and the Association. The supplemental letter on relending by the Province of East Pakistan is attached (No. 3). The present intentions of the Provincial Government with regard to relending terms are as follows: (a) for expenditures on activities of I1JTA which can be regarded as primarily developmental and regulatory, it would consider converting the relending terms into a grant, and (b) for expenditures on other ICrA activities which can be regarded as more of a self-supporting or selfliquidating nature, it would consider selective adjustments in the terms of relending, taking into account the charges and fees which could appropriately be levied for each activity of this nature. Procurement 15. The major contracts for the project have been awarded on the basis of international competitive bidding, with the exception of the radio location system which is a specialized type of equipment. The remaining major civil works and procurement contracts will be placed on the basis of international competitive bidding. The Economy 16. A Report on "The Economic Development Program of Pakistan" which included a review of the economic situation and prospects, was circulated to the Executive Directors on April 28, 1964 (R64-45). 17. At the meeting of the Executive Directors on July 16, 1964, on the proposed development credit to Pakistan for the Indus Basin Project, I made a statement which dealt in part with the economic situation of Pakistan. This statement was circulated on July 17, 1964 (IDA/SeeN 64-57). 18. Since then the sixth meeting of the Pakistan Consortium has been held. A total of i;h31 million was pledged by members for the year 1964/65 and some improvements in the terms of aid were made by certain countries. Realizing the need for Pakistan to receive as much non-project aid as possible to assist her to finance imports of raw materials and equipment required for modernization and the fuller utilization of existing industrial capacity, particularly for the private sector, members expect to provide approximately $200 million of the aid pledged in non-project form. PART IV - LEGAL I1STRUOENTS AND AUTHORITY 19. Attached are a draft Development Credit Agreement between the Islamic Republic of Pakistan and the Association (No. 4) and a draft Project Agreement betwjeen the Province of East Pakistan and the Association (No. 5). Both these draft agreements follow the pattern of the corresponding documents for previous IDA credits to Pakistan.

- 7-20. The recommendations of the Cormittee provided for in Article V Section 1(d) of the Articles of Agreement of the Association are attached (No. 6). PART V - COMPLIANCE WITH ARTICLES OF AGREEMENT 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 - RECOQUJIDATIONS 22. I reccmmend that the Association make available to the Islamic Republic of Pakistan, a development credit in an amount in various currencies equivalent to $5.25 million for the proposed Inland Wlater Transport Project in East Pakistan, for a term of 50 years with a service charge of 3/4 of one per cent per annum and on such other terms as are specified in the draft Development Credit Agreement and the draft Project L,,greeke2nt, and that the Executive Directors adopt a resolution to that effect in the form attaclhed (N1o. 7). Gecrge D. Woods Presldent by J. Burke Knapp South Asia and Middle East August 1t, 196h