IkO==ant of TheWorld Bank FOR OFFICIAL USE ONLY fA1 37 7 4- -7 AJ .3 7 4d A Report No. P-6293-IN MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS AND ON A PROPOSED CREDIT OF SDR 17.7 MILLION TO INDIA A PROPOSED SINGLE CURRENCY LOAN IN THE AMOUNT OF US$93 MILLION TO THE INDUSTRIAL DEVELOPMENT BANK OF INDIA (IDBI) AND A PROPOSED LOAN IN THE AMOUNT EQUIVALENT TO US$50 MILLION TO THE INDUSTRIAL CREDIT AND INVESTMENT CORPORATION (ICICI) FOR THE INDUSTRIALPOLLUTION PREVENTION PROJECT JUNE 9, 1994 MICROGRAPHICS This document hasa restricted distribution and Report No: P- 6293 IN their official duties. Its contents may not othe Type: MOP Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
Transcript
IkO==ant of
The World Bank
FOR OFFICIAL USE ONLY
fA1 37 7 4- -7AJ .3 7 4d A
Report No. P-6293-IN
MEMORANDUM AND RECOMMENDATION
OF THE PRESIDENT
OF THE
INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT
TO THE
EXECUTIVE DIRECTORS
AND ON A PROPOSED CREDIT
OF SDR 17.7 MILLION
TO
INDIA
A PROPOSED SINGLE CURRENCY LOAN
IN THE AMOUNT OF US$93 MILLION
TO THE INDUSTRIAL DEVELOPMENT BANK OF INDIA (IDBI)
AND A PROPOSED LOAN
IN THE AMOUNT EQUIVALENT TO US$50 MILLION
TO THE INDUSTRIAL CREDIT AND INVESTMENT CORPORATION (ICICI)
FOR THE
INDUSTRIAL POLLUTION PREVENTION PROJECT
JUNE 9, 1994
MICROGRAPHICS
This document has a restricted distribution and Report No: P- 6293 INtheir official duties. Its contents may not othe Type: MOP
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CURRENCY EQUIV'ALENTS(as of Februarv 28. 1994)
USS I 00 Rs. 31 37L*SS 0 03 - Rs 1 00
PRlNCIPCTL ABBREVIATIONS AND ACRONYMS USED
CETP Common Effluent Treatnent PlantCPCB Central Pollutm.n Control BoardDFI - Development Finance InstitutionEAP - Environmrental Acton PlanFY - Fiscal YearGOI - Government of IndiaICB - Intemational Competitive BiddingIcICI The Industrial Credit and Investment Corporation of India. LimitedIDBI - The Industrial Development Bank of India. LinmtedIWRP - Industrial Wastewater Recycling PlantLCB - Local Competitive BiddingM10EF - Ministry of Environment and ForestsNIB - Nordic Investment BankNIPFP - National Instirute of Public Finance and PolicvOECF - The Overseas Economic Cooperation Fund of JapanSA - Special AccountsSCL - Single Currency LoanSO, - Sulfur DioxidesSPCB - State Pollution Control BoardSSI - Small Scale IndustryTA - Technical Assistance
FISCAL YEAR
Government of India = April I - March 31ICICI = April 1 - March 31IDBI = April I - March 31
FOR OFFICIAL USE ONLY
INDIA
INDUSTRIAL POLLUTION PREVENTION PROJECTLOAN. CREDIT AND PROJECT SUMMARY
Borrowers: a) India, acting by its President, for the IDA credit:b) the Industrial Development Bank of India (IDBI); and c) the IndustrialCredit and Investment Corporation of India (ICICI).
Guarantor: India. acting by its President for the loans to IDBI andICICT.
Beneficiaries: For the India credit, the State Pollution Control Boards of AndhraPradesh, Gujarat, Karnataka, Madhya Pradesh and Rajasthan.
Credit Amount: SDR 17.7 million (US$25.0 million equivalent)
Loan Amounts: A total of USS143.0 million equivalent comprising: a) a US$93 millionsingle currency loan to IDBI; and b) a US$50 million equivalent loan toICICI .
Terms: For IDBI loan, the proceeds will be lent as a Single Currency Loan(SCL) in US Dollars, for twenty years including five-years grace, at theBank's standard LIBOR-based SCL rate. For ICICI loan, the proceedswill be lent in the Bank's currency pool, for twenty years including fiveyears of grace. at the Bank's standard variable rate. The IDA creditwould be on standard terms, with a 35 year maturity.
Onlendina Terms: IDBI and ICICI will provide sub-loans to sub-borrowers at ratesdetermined by the borrower based on market conditions and its lendingpolicies and set at levels not lower than prevailing minimum lendingrates, with a maximum ten year repayment period including up to twoyears grace.
The GOI would provide from the proceeds of the IDA credit: i) US$22.5million equivalent to the Ministry of Environment and Forests (MOEF)for the institutional and technical assistance components; ii) US$0.5million equivalent to IDBI which will act as a Government agent for thefinancing of pre-investment studies under the technical assistancecomponent; and iii) US$2.0 million equivalent as direct support on agrant basis to the Common Effluent Treatment Plants, through IDBI.
This document has a restricted distribution amd may be used by recipients only in the performance of theirofficial duties. Its contents my not otherwise be disclosed without World Bank authorzaton.
Financing Plan Local Foreign Total.............. .US$ Million.
MEMORANDUM AND RECOMMENDATION OF THE PRESIDENTOF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT
AND THE INTERNATIONAL DEVELOPMENT ASSOCIATIONTO THE EXECUTIVE DIRECTORS
ON A PROPOSED CREDIT, A SINGLE CURRENCY LOAtq.AND LOAN TO INDIA, IDBI AND ICICI RESPECTIVELY
FOR AN INDUSTRIAL POLLUTION PREVENTION PROJECT
I. I submit for your approval the following memorandum 3nd recommendation on a proposeddevelopment credit of SDR 17.7 million (US$25.0 million equivalent) to India. a proposed singlecurrency loan (SCL) of US$93.0 million to the Industrial Development Bank of India (IDBI). and aproposed standard variable rate !oan equivalent to US$50.0 million to the Industrial Credit and InvestmentCorporation of India (ICICI) to help finance an Industrial Pollution Prevention project. The proposedcredit would be on standard IDA terms with 35 years maturity. The SCL to IDBI will be lent in USDollars. at the Bank's SCL variable interest rate, repayable over 20 years including 5 vears of grace.The loan to ICICI will be at the Bank's standard variable interest rate. repayable over 20 vears including5 years of grace.
2. IDBI and ICICI will provide sub-loans to sub-borrowers with a maximum 10 yearrepayment period including two vears grace.
Background
3. In May 1991, the Bank approved the Industrial Pollution Control project for India(Loan/Credit 3334/2252-IN). The project was intended to assist the GOI's efforts to preventenvironmental degradation caused by industrial operations and assist in the attainment of the proposedshort and medium-term targets of its environmental policy. Since the project became effective inNovember 1991, the State Pollution Control Boards (SPCBs) supported under the project havesignificantly increased their effectiveness and efforts are continuing to promote compliance by theindustrial sector with current regulations. Current and anticipated improvements at the Boards aresignaling a renewed effort to meet industrial discharge standards and, on a wider scale, to theinternalization of environmental considerations by industry. The Central Pollution Control Board (CPCB)reports a large increase in the number of industries closed due to non-compliance during the last year.On a sub-project scale, as of January 1994, nearly 92% of the resources made available under the lineof credit had been committed and over 64 innovative environmental schemes were at different stages ofcompletion. Likewise, eight common effluent treatment plants had been financed providing cost effectivetreatment to over 2000 small and medium scale industries. Progress has also been achieved in the overallimplementation of the institutional and training components, even though there have been delays inprocurement of equipment for SPCBs.
4. Despite the progress achieved so far, pollution from industrial sources continues to be ofwidespread concern, and a threat to the sustainability of economic growth. The control efforts underwaycover only a limited number of industries, and the four SPCBs supported under the first project only haveauthority over a part of the Indian territory. As the economy expands, potential impacts of industrialactivity on the environment may further stress the natural resource base of the country and impact thewelfare of its population. Given large costs associated with pollution abatement, and massive effortsrequired for monitoring and enforcement, GOI has adopted the philosophy of pollution prevention byencouraging the adoption of clean technologies and providing incentives for industry to prevent pollution.This approach is clearly outlined in GOI's policy statement and recent initiatives by the Ministry ofEnvironment and Forests (MOEF).
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5. GOI's policy statement for abatement of Pollution (No.H. 1 1013(2)/90.CPW, February,1992) calls for integration of environmental considerations into decision making at all levels. The policystresses the preventive aspects of pollution abatement and the promotion of clean technologies. Specificsteps identified to meet this objective are to: (i) prevent pollution at source; (ii) encourage, develop andapply the best available practicable technical solutions; (iii) ensure that the polluter pays for the pollutionand control ariangements; (iv) focus protection on heavily polluted areas and river stretches: (v) involvethe public in decision making; and (vi) increase the safety of industrial operations.
6. This approach is appropriate and merits the support of the Bank. The proposed projectwould focus on pollution prevention through the effective use of cleaner means of manufacture andpollution abatement. The key long-term policy issue lies in the implementation of the "polluter pays"principle, which requires setting and enforcing appropriate discharge standards for industry as well asestablishing fees and charges for polluters. In the inmmediate term, GOI's focus is on increasing the watercess and on shif.ing from concentration-based to load-based standards. This would add to polluter costs,remove the incentive for polluters to dilute effluents by adding water, and strengthen incentives foradoption of cleaner technologies. This agenda in the incentives area is adequate and in keeping with the"gradual change" strategy initiated under the first project. As a next step, measures to further promote
compliance (such as wider use of pollution taxes) are envisaged. In the longer-term. MOEF intends toexplore wider usage of economic instruments.
Lessons from the Previous Bank Operation
7. The proposed project represents an extension of the efforts already initiated through thefirst project. It relies on the experience gained in the implementation of different components and usesthe institutional framework already engaged in their execution. Although the project has been underimplementation for only two years, there are a number of lessons that were utilized in the design of theproposed project, such as: (i) strong institutional coordination between the CPCB and the State Boardsis required to prevent the duplication of efforts and to ensure efficient use of the resources invested intraining, monitoring and equipment. Coordination and mutual consultation is also essential to ensure thatthe State Boards are fully engaged in the development of the sponsored activities; (ii) dissemination ofinformnation by MOEF and SPCBs is required to ensure that potential beneficiaries are appraised of theavailability of financial resources and technical assistance under the project; (iii) Common EffluentTreatment Plants (CETPs) are particularly difficult to organize, because of the large number of industriesand parties involved and monitoring and assistance from the part of SPCBs and financial intermediariesis therefore essential to achieve the proposed objectives; (iv) procurement of equipment for the SPCBsunder the first project has been disappointingly slow. The new project will focus on procurementprocedures and contract documentation early in the project cycle.
Rationale for Bank Involvement
8. The Bank's commitment to environmentally sound development is pursued simultaneouslythrough sector work (aimed at assisting India develop environmental managemept -olicies and strategies)and lending operations (designed to support the development of environmental and natural resourcemanagement Institutions and financing of investments that will address priority environmental problems).On the policy front, the Bank is discussing ways to prioritize environmental problems and strategies totackle them. This is being pursued in the context of the Environmental Action Plan (EAP), and isconsistent with the Country Assistance Strategy (CAS) discussed by the Board in May 1994. The Bank'sstrategy, as it relates to environment, places a premium on improved natural resource management witha focus on reforestation, prevention of land and water degradation and control of industrial pollution.The project addresses issues related to land and water degradation and industrial pollution.
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9. Equally important, the proposed project is expected to serve as a catalyst to attractadditional financial resources from other sources as it is being replicated in substance and format by; i)Overseas Economic Cooperation Fund (OECF) which is considering a request for about $50 millionequivalent for funding of waste minimization efforts and support to the West Bengal State PollutionControl Board: and ii) the Nordic Investment Bank (NDB) which is considering a GOI request forassistance of $50 million to fund waste minimization and pollution prevention efforts in other states.Together. these efforts by the World Bank, OECF and NIB constitute a large pollution abatementprogram.
Project Objective
10. The objective of the proposed project is to promote cost-effective pollution abatement fromindustrial sources. The specific goals are to: (i) strengthen the facilities, equipment and skills, of four2dditional SPCBs to enable them to perform their mandate more effectively, while continuing the programof support to the Boards already assisted; (ii) facilitate priority investments dedicated to preventingpollution from industrial sources by encouraging the use of clean technologies, waste minimization andresource recovery by industry, or pollution control where cost effective, and where these investmentshave a significant demonstration and replicability potential; and (iii) provide technical assistance for: (a)adoption of modern tools of information, management and control of residues; (b) organization of a cleantechnology institutional network, and (c) the establishment of an extension service on environmentallysound practices for small scale industry.
Project Description
11. The proposed project will focus on the most polluting industrial sectors, as already definedin the context of the previous project and will comprise three components: (i) an institutional component;(ii) an investment component, and (iii) a technical assistance component:
(i) The Institutional Component is designed to support a program of strengthening of theState Pollution Control Boards in the States of Rajasthan, Madhya Pradesh, Karnataka,and Andhra Pradesh, which as a group constitute the next tier of industrialized states inIndia. In addition, support to SPCB in the States of Gujarat will continue to be providedcomplementing the activities already sponsored through the first project.
(ii) The Investment Component is designed to support efforts by individual firms in pollutionabatement through lines of credit, with a focus on waste minimization, and adoption ofcleaner methods of production. Resources would also be used for financing of CETPswhich would now include funding for industrial water recycling plants (IWRPs) that usesewage as input.
(iii) The Technical Assistance Component will: (i) support the establishment of a "cleantechnology institutional network" designed to promote the development, diffusion andtransfer of technologies with environnental benefits for industry; (ii) support extensionservices for the identification of waste minimization and abatement methods for smallscale industry, and the organization of waste minimization circles; (iii) support pre-investment studies for CETPs, IWRPs and other waste minimization facilities proposedto be financed under the project; and (iv) support other training and consulting servicesunder planning by MOEF, including the training requirements for the preparation ofenvironmental statements by industries.
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12. The estimated project cost is US$330 million equivalent, including physical and pricecontingencies. Direct and indirect foreign exchange costs account for about US$76.5 million or about23 % of the total cost. The costs are based on estimates gathered during the appraisal mission of February1994, and other preparation activities, including the studies financed through a grant from the Policy andHuman Resource Development Fund of Japan. A summary of project costs and the financing plan arepresented in Schedule A. Amounts and methods of procurement, and the disbursement schedule areshown in Schedule B. The project funds are expected to be fully disbursed in seven years. A timetableof key project processing events and the status of the Bank group operations in India are given inschedules C and D, respectively. The Staff Appraisal Report is No. 12822-IN.
Agreements Reached
13. During negotiations, the following agreements were reached with GOI that MOEF will:(i) maintain the Steering Connittee and provide the necessary assistance for it to carry out its functionsproperly (SAR para. 5.07); (ii) strengthen the Implementation Cell (IC) by maintaining two full timeprofessionals, and maintain IC for the duration of the project, providing the necessary assistance to carryout its functions properly (SAR para. 5.03); (iii) by December 31, 1994 a task force would beestablished by MOEF to carry out further analysis of market based instruments for pollution abatementunder terms of reference satisfactory to the Bank and to discuss thereafter steps for the implementationof a program for the use of such instruments (SAR para. 2.12-'il); (iv) establish by December 31, 1994,general indic^tors to measure project performance, including overall rate of compliance of the industrialsector with regulations and the overall emission of key pollutants (SAR para. 5.16); (v) prepare by June30, 1995, an action plan for institutional strengthening of the SPCBs in each participating state, basedon the review of the reconmmendations of the studies on restructuring of SPCBs (SAR para. 6.02-viii);and (vi) the IDBI and ICICI will: (a) make sub-loans to sub-borrowers at rates determined by theborrowers based on market conditions and its lending policies and set at levels not lower than prevailingminimum lending rates; (b) sub-loans would have maximum maturity of 10 years, including up to twoyears grace; and (c) both institutions will ensure that the sub-projects will satisfy the eligibility criteriaas described in SAR paras. 4.094.11.
14. During negotiations, the following agreement was established as a condition ofeffectiveness for the proposed loan to IDBI: a Grant Agreement (GA) shall have been obtained by theGOl from IDBI for the channeling of the grant funds for the CETPs under the Investment Componentand for the pre-investment studies under the Technical Assistance Component (para. 4.20-iii).
Benefits and Risks
15. The project will support the implementation of GOI's policy framework for industrialpollution prevention. Strengthening of four additional SOCBs will result in a greater effective coverageby monitoring and enforcement agencies. The project will play a role in the development and diffusionof pollution prevention techniques by industry. The proposed technical assistance will introduce modeminformation and monitoring tools. Above all, the project benefits will result from the reduction ofindustrial pollution. This will produce a substantial improvement in industrial safety indicators, andprovide associated benefits for populations near industrial areas. The availability of SCL will assist IDBIin reducing its overall currency risk.
16. During the project preparation, each of the potential constraints has been identified andaddressed. The lessons from the first project have been analyzed and corrective actions have been builrinto the structure of the new project. However, despite these efforts, several risks remain. These havebeen grouped into three categories: technical, financial and managerial.
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(i) Technical: the institutional component focuses on the next tier of industrial -tates. TheSPCBs in these states imply a higher technical risk because of their limited e ., erience andin-house capabilities. Also, more activities are now being planned that may result in acrowded agenda for the managerial and technical staff at the of SPCBs. It has beenagreed that SPCBs involved in this project will panicipate in the review of the supervisionresults of the first project to assimilate the lessons from implementation and that theresults of the restructuring study will be implemented as soon as possible (SAR para.6.02).
(ii) Financial: the key risk is that if the enforcement is not sufficiently strengthened, theindustries may not have a sufficient incentive to make use of the credit line and generallyto undertake abatement measures. This risk is mitigated through the institutionalstrengthening of the enforcement agencies needed to ensure credible enforcement effortsand by adoption of economic incentives for firms to comply with regulations, such as theincreases in water cess. In addition, if domestic interest rates should decline substantiallyover the medium term, there is a risk that the terms of subloans might becomeuncompetitive. This risk would be partially mitigated by the fact that subloans would bemade on floating rate terms. There is also the risk that sub-borrowers might go out ofbusiness in the future, as the Indian economy restruccures and bec)mes more efficient.This risk would be mitigated by requiring ICICI and IDBI to apply stringent economicanalysis both on a subsector basis and to each proposal (SAR para. 4.09).
(iii) Managerial: a major risk is that MOEF may fail to manage the program effectively orimplement it in a timely fashion, given the large number of SPCBs now involved and theincreased number of activities being sponsored under the project. MOEF nas alreadydemonstrated a high level of commitment in implementation of the first project; measuresare also being taken to strengthen the Implementation Cell to cope with the additionalwork load and assurances were obtained regarding its staffing (SAR para. 5.03).
Recommendation
17. On the basis of the above agreements, I am satisfied that the proposed loans and creditcomply with the Articles of Agreement of the Bank and the Association respectively, and recommend thatthe Executive Directors approve the proposed loans and credit.
(ii) Project Implementation & Support --- --- 0.7 0.7(0.7) (0.7)
(iii) Training --- 0.3 0.3--- ) (--(0.3) (0.3)
Total 2.0 -- 2.5 4.5(2.0) -- (1.5) (3.5)
TOTAL 73.4 3.4 253.2 330.0(602) L(. 41 (104.4) (168.0)
Figures in parenthesis are the respective amounts financed by the Bank.
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SCHEDULE BPage 2 of 2
Amount % ExpenditureCateeory US$ mill to be financed
1. Part A (institutional Component)a) Equipment 15.5 lOOF/lOOLE/80Lb) Civil Works 1.0 90c) Consultant Services & Training 3.0 iO0
2. Part B (Investment Component)Equipment. civil works andconsultancy services under:a) Subloans for Individual Projects 125.0 100F/75Lb) Subloans and subgrants for CETPs 20.0 lOOF/80L
3. Part C (Technical Assistance)a) Equipment 2.0 lOOF/100LE/80Lb) Services 1.5 100
TOTAL 168.0
F-foreign expenditures, LE-local ex-factory, L-other local
