Document of

FILE COPY The World Bank

FOR OFFICIAL USE ONLY

RETURN T Rtepo No. P-2072-EGT

REPORTS D(Su7REPORT AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

AND THE

INTERNATIONAL DEVELOPMENT ASSOCIATION

TO THE

EXECUTIVE DIRECTORS

ON

PROPOSED DEVELOPMENT CREDIT AND LOANS

TO THE

ARAB REPUBLIC OF EGYPT

FOR A

NILE DELTA DRAINAGE II PROJECT

May 18, 1977

This document hu a resricted distribution nd may be used by recipients only In the performance oftheir offical duties. Its contents may not otherwise be disclosed without World Bank authorlutlon.

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CURRENCY EQUIVALENTS

Official Rate

1 Egyptian Pound (LE) = US$2.56 or SDR 2.118

1 US Dollar = LE 0.391

Parallel Market Rate

Until February 1976:

1 Egyptian Pound (LE) US$1.70

1 US Dollar = LE 0.59

From February to May 1976:

1 Egyptian Pound (LE) US$1.56

1 US Dollar LE 0.64

From May 21, 1976:

1 Egyptian Pound (LE) US$1.47

1 US Dollar LE 0.68

From December 1, 1976:

1 Egyptian Pound (LE) = US$1.43

1 US Dollar LE 0.70

ABBREVIATIONS

DCA - Development Credit AgreementEPADP - Egyptian Public Authority for Drainage Projectsfd - Feddan = 1.04' acres = 0.42 hectaresKfW - Kreditanstalt fur WiederaufbauM&LT - Medium and long termPA - Project AgreementPVC pipes - poly-vinyl chloride pipesUSAID - United States Agency for.International Development

Fiacal Year

January 1 - December 31

FOR OFFICIAL USE ONLY

ARAB REPUBLIC OF EGYPT - NILE DELTA DRAINAGE II PROJECT

Credit/Loan and Project Summary

Borrower: Arab Republic of Egypt

Amount: Credit: $27.0 millionLoan: $27.0 millionThird Window Loan: $12.0 million

Total $66.0 million

Terms: Credit: StandardLoan: 20 years, including 4 1/2 years grace with

interest at 8.2 percent.Third Window Loan: First repayment date: January 15, 1983,

Final maturity: January 15, 2001.

Prolect The project works include:Description:

1. Drainage Works:

(a) construction of four new drainage pumping stations,including electric transmission lines;

(b) replacement of ten obsolete pumping units in twoexisting drainage pumping stations;

(c) deepening and widening of 1,565 km of existing openmain drains serving an area of 810,000 fd and exten-sion or reconstruction of existing structures; and

(d) installation of covered field drains and collectorsin an area of 400,000 fd.

2. Assistance to the Extension Service of the Ministry ofAgriculture by financing transportation and audio-visualequipment.

3. Extension of the Government's bilharzia control programby about 1,200,000 fd between Giza and the Aswan High Dam.

4. Assist in financing the partly UNDP-financed "Master Planfor Water Resource Development and Use."

This document has a retrictd distribution and may be used by rcipients only in the performaneof tholt offiW duties. Its contents may not otherwie be dinclosed without World Bank authorlabnss.

Prolect Cost andFinancing Plan:

IDA/Bank KfW GovernmentForeign Foreign Local Total…--------------…$ million L -----------------

Drainage Works

Equipment andMaterials 20.2 -- - 20.2

Civil Works 16.3 - 60.2 76.5Administration - -- 7.1 7.1

Production of PVC Pipe

Equipment andMaterials -- 13.8 - 13.8

Civil Works -- 0.4 0.3 0.7Production - 1.8 1.0 2.8

Agricultural Extension 0.3 0.3

Bilharzia Control

Equipment andMaterials 8.4 - -- 8.4

Administration -- -- 3.6 3.6

Master Plan forWater ResourceDevelopment and Use 0.9 - -- 0.9

Base Cost EstimatesSub-total 46.1 16.0 72.2 134.3

Contingencies

Physical 5.4 1.7 10.6 17.7Price 14.5 6.3 34.2 55.0

Total 66.0 24.0 117.0 207.0

/1 Discrepancies are due to rounding.

Disbursements:

Egyptian Fiscal Year 1978 1979 1980 1981 1982Project Year 1 2 3 4' 5

------------$ million-----------

IDA Credit and Bank Loans

Total 21.1 18.8 11.2 8.4 6.5

Cumulative Total 21.1 39.9 51.1 59.5 66.0

Procurement Equipment and materials for project construction, operation andArrangements: maintenance estimated to total about $10.4 million 1/ would be

procured after international competitive bidding in accordancewith World Bank guidelines. Domestic bids would be allowed amargin of preference of 15 percent or the actual customs duty,whichever is lower. For purposes of bid comparison, theparallel market exchange rate will be applied. Procurement ofnon-proprietary equipment costing less than $10,000 each wouldbe exempted from international competitive bidding. Contractsmay be awarded to reliable suppliers after having obtainedprice quotations from at least three such suppliers. Theaggregate cost of such items would not exceed $150,000. Also,proprietary equipment may be purchased off-the-shelf from reli-able suppliers. The aggregate cost of such items would alsonot exceed $150,000. Molluscicide and drugs for chemotheraphyfor bilharzia estimated to cost $8.9 million would also beexempted from international competitive bidding. They wouldbe procured from the one manufacturer (in West Germany) who isknown to produce both these products and from a licensee, (inthe US) who is known to produce the molluscicide. The productsof the manufacturer, which have been tested in the proje tarea, have been accepted by WHO and have proven to be the mosteffective ones.

PVC pipe laying, construction of collfct'or drains and pumpingstations would be implemented under contracts estimated,at$31.2 million and awarded through international competitivebidding following World Bank guidelines for procurement.Contracts for civil works for construction of structures inopen drains, buildings, and installations of field drainage

1/ Excluding physical contingencies.

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in orchards with cement pipe, estimated to total about $9.4million, and which are being financed by IDA and the Bank,would be procured on the basis of local competition, accord-ing to local procedures, which are satisfactory. These smalland varied works, scattered throughout the project area, andplanned to be implemented during the whole project constructionperiod, are not suitable for international competition. Theywould be effectively implemented by local private contractors,whose performance in the past has been proven to be adequate.The remaining civil works (earthworks) for remodelling of opendrains will be financed by the Government and procured on thebasis of local procedures.

Procurement for the production of PVC plastic pipes will be inaccordance with the agreement between KfW and the Government.

Technical Contractors would train Egyptian personnel in the operation,Assistance: maintenance and repair of project equipment. EPADP would

implement a training program for engineers and technicians.

EstimatedEconomicRate ofReturn: 23 percent on drainage component.

Appraisal Report No. 1451-EGTReport: Date: May 5, 1977

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

INTERNATIONAL DEVELOPMENT ASSOCIATION

REPORT AND RECOMMENDATION OF THE PRESIDENTTO THE EXECUTIVE DIRECTORS ON PROPOSED DEVELOPMENTCREDIT AND LOANS TO THE ARAB REPUBLIC OF EGYPT FOR

THE NILE DELTA DRAINAGE II PROJECT

1. I submit the following report and recommendation on a proposed devel-opment credit of $27 million on standard IDA terms, a proposed Bank loan of$27 million for a term of 20 years including 4-1/2 years grace, with interestat 8.2 percent per annum, and a proposed Bank loan of $12 million on standardThird Window terms for which the first repayment date would be January 15,1983 and the final maturity January 15, 2001, to the Arab Republic of Egypt tofinance part of the costs of the Nile Delta Drainage II Project. (The grantelement of the combined Bank/IDA financing is 46.3 percent.) The Kreditanstaltfur Wiederaufbau (KfW) of Germany is also expected to participate in the fi-nancing of the project.

PART I - THE ECONOMY 1/

2. An Economic Report on the Arab Republic of Egypt (No. 870a-EGT),dated January 5, 1976, has been distributed to the Executive Directors. Abasic economic mission visited Egypt in May/June 1976 and its report is underpreparation. Updating missions visited Egypt in October 1976 and January1977; the findings of these missions are incorporated in this report. Countrydata sheets are attached as Annex I.

Background

3. From 1960 to 1966 Egypt experienced rapid growth (around 6 percent ayear in real terms) under fairly rigid centralized planning and control. Thissystem came under increasing pressure in the second half of the decade follow-ing bad harvests and increased defense expenditures, particularly as a resultof the civil war in Yemen. It deteriorated further after the war of 1967,with the loss of the Sinai oil fields, the closure of the Suez Canal, theabandonment of the Canal cities and the cost of resettling the population ofabout a million, and the virtual cessation of Western economic assistance.With the continuing military confrontation in the Middle East, Egypt furtherincreased defense spending at the expense of other types of consumption andof its development program. Thus, in 1973 the economic picture was one ofrigorously curtailed private consumption and inadequate investment, with adeteriorating capital stock of infrastructure and productive facilities. RealGDP growth for 1967-73 averaged only 3.5 percent a year.

1/ All currency conversions are at the official rate of $2.56 = LE 1.

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4. The changed political situation after October 1973 laid the ground-work for a new "open-door" policy enunciated by President Sadat and approvedin a national referendum in May 1974. This policy reflects a major effortto accelerate economic development through modernization and making Egypt'slargely publicly owned and centrally controlled economy more market-oriented.Specifically, the policy envisaged (i) decentralization of decision-making instate-owned enterprises, (ii) liberalization of the private sector, (iii) in-centives for private foreign investment, and (iv) expanded economic coopera-tion with Arab countries. Since 1974 Egypt has initiated a number of stepswhich are expected to lead to a significant restructuring of the economy. Inparticular, steps have been taken to remove some of the restrictions on privatebusiness activities, to decentralize public enterprise management, to encourageforeign private investment, to expand foreign exchange transactions outsidethe official rate, and to loosen many of the restraints on banking activities.

5. Substantial inflows of external assistance from both Arab countriesand Western aid donors and institutions have eased some of the problems of theEgyptian economy in making the transition. However, major structural diffi-culties remain, largely due to the continuing tension in the region and theneglect of investment. These structural difficulties are also linked to themajor immediate weaknesses of the economy: the large deficit in the balanceof payments, the low level of government savings, and low efficiency in publicsector enterprises.

6. The present government was formed in November 1976 following elec-tions to the People's Assembly, which were the first in which a choice ofcandidates representing diverse political views was offered to the voters.The Cabinet was strengthened on the economic side, and a Deputy Prime Ministerfor Financial and Economic Affairs was appointed to coordinate economicpolicy-making, while President Sadat directed that economic questions shouldbe in the forefront of the new Cabinet's tasks.

Recent Economic Developments

7. Growth in National Income. Real growth in GDP (1975 prices) in-creased from less than 3 percent in 1973 to about 3.2 percent in 1974 and anestimated 9.8 percent in 1975 1/; the rise is attributed largely to recoveryof industrial activity through the provision of greater aid-financed inputs,increased construction (particularly in the Canal Zone) and growth of tradeand services. The high rate of growth for 1975 was in part due to the recoveryof the Sinai oil fields (November 1975) and the reopening of the Suez Canal(June 1975). If their effect on growth of the gross domestic product is ex-cluded, the overall growth rate is estimated (by the Ministry of Planning) at8.0 percent. Preliminary production data for 1976 indicate that the economycontinued to expand. The estimated rate of growth of 6.1 percent, however,reflects increasing capacity constraints in some sectors.

8. Investment. Egypt was able to sustain a higher level of investmentduring 1974 and 1975, largely as a result of generous external assistance from

1/ Ministry of Planning.

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Arab countries. Gross investment increased from $1,373 million in 1973to $2,867 million in 1975 (in 1975 prices). This included a considerablereplenishment of stocks, which had been drawn down in the pre-October 1973period. During 1976, as a result of shortages of both domestic and foreignresources, investment is estimated at only about $2,300 million (1975 prices).

9. Public Finance. Because of the size of the public sector, the bulkof Egypt's domestic financial resources for development is mobilized throughthe state budget and public sector corporations. Considerable efforts havebeen made in the past to increase such resources, largely by way of taxation.In 1975 tax revenues were 22 percent of GNP. Public enterprises (althoughhampered by Government-imposed pricing policies) and social insurance andpension funds contributed an additional 8 percent and 5 percent of GNP, re-spectively. Total public revenues reached 38 percent of GNP, a major effortfor a country of Egypt's low per capita income.

10. The high level of Government current expenditures, however, absorbedmost of these resources. This was almost entirely due to the level of defenseexpenditures, and, more recently, to the growth of subsidies, which increasedfrom $480 million (about 5 percent of GNP) in 1973 to $1,830 1/ million (about15 percent of GNP) in 1975, as the Government endeavored to protect domesticconsumers from the sharp increases in the import prices of foodstuffs and otheressential commodities. While exact data on defense spending are not available(since a large portion is channelled through a separate account, partly foreignfinanced--the Emergency Fund) it appears that the defense burden on the budgeteased over this period. Although it increased in absolute terms--from $1,100million in 1973 to $1,485 million in 1976--defense spending, as a ptoportionof total current expenditures, declined from about 39 percent to about 28 per-cent in this period. Expenditures on economic and social services provided bythe Government (education, health, etc.) and other general expenditures haverisen at approximately the same rate as GNP.

11. With increased current spending, public savings declined from 4 per-cent to less than 1 percent of GNP between 1973 and 1975. However, preliminarydata for 1976 show an increase in public sector savings. As of May 1, 1976,a number of subsidies were abolished, saving $140 million. A decline in inter-national prices also helped cut the actual subsidy bill for 1976 to $1,600million.

12. Credit expansion in 1976 was 16 percent, a much smaller increasethan the 42 percent registered in 1975. Credit policy was more restrictiveand the credit needs of public sector companies were reduced because of arunning down of inventories and a decline in import commitments. Money andquasi-money expanded by 25 percent compared with 21 percent in 1975. Theofficial consumer price index for the urban population estimated the priceindex in 1975 at 10 percent, but the real rate was probably much higher. Theindex for 1976 is not available, but indications are that the rate of infla-tion was comparable to that in 1975.

1/ Including direct subsidies and public economic sector deficits.

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13. Balance of Payments. Despite an increase in the value of com-modity exports by 56 percent between 1973 and 1975 (largely as a result ofimproved international prices) export earnings fell well short of imports.Indeed, the country's import bill almost tripled in this period due to in-creases in quantities imported, and soaring food and other prices. Egypt'sexport receipts were influenced by declines in the physical production ofcertain field crops (particularly cotton) due to a shift towards more profit-able cash crops (fruits, vegetables, clover) and increased domestic demand forexportable products. As a result, there was a decline in both the value andquantity of some important exports.

14. The imbalance in Egypt's trade was compensated to some extent byfast-growing earnings from services and from workers' remittances. Never-theless, the overall deficit on the trade and services account reached recordlevels, increasing from $654 million in 1973 to $2,480 million in 1975.

15. In 1976 the deficit was reduced significantly, although at $1,390million it was still high. Preliminafy estimates show export earnings in-creased by about 16 percent, due mainly to increased receipts from the SuezCanal and to oil exports. Imports of goods and services fell by about 13percent, in large part due to a decision to abandon the second tranche of the1976 investment program and to restrict imports of intermediate and capitalgoods. While there were some reductions in imports of consumer goods as well,the smaller deficit must have been partly purchased at the cost of Egypt'sfuture growth.

16. The large deficits on the goods and services account in 1974-1976were met mainly through assistance from Arab countries, Iran and the UnitedStates. The Arab support comprised grants as well as loans, and deposits inthe Central Bank of Egypt. However, in 1974 the deficit could be fully metonly by a substantial increase in short-term borrowing, including the use ofbanking facilities. Higher levels of concessional assistance enabled a re-duction in the use of these facilities in 1975, but lower aid flows in thefollowing year led Egypt to increase the use of this type of credit by over$200 million to a total of $1.45 billion.

Development Problems and Prospects

17. Egypt's rapidly growing population, widespread poverty and dilapi-dated infrastructure require the generation of more resources for investmentand a more rigorous determination of the priorities of the projects into whichthey are channelled. In turn, this implies: (i) greater restraint on thegrowth of consumption; (ii) the removal of constraints created by inadequateinfrastructure (particulary ports, power, transport, and telecommunications);(iii) greater emphasis on quick-yielding projects; (iv) more emphasis on com-pleting ongoing projects than on starting new ones; (v) more active use ofprices (including the price of foreign exchange) as indicators of relativescarcities; (vi) streamlining bureaucratic processes; (vii) a vigorous movetowards increasing industry's efficiency and making it more export-orientedand employment-generating (which would involve using existing industrialcapacity more fully, paying more attention to considerations of quality, and

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encouraging small-scale industry); and (viii) a strengthened program to curbthe growth of population and the articulation of urban and rural strategieswhich would decentralize the growth of the urban population away from Cairoand Alexandria and create more productive opportunities in smaller towns andthe rural areas. These issues will be addressed in the context o. a medium-term plan the framework of which has been completed. The plan is presentlyunder preparation.

18. Over the long-run, Egypt's economic potential is considerable. Thereasons for this are in brief: (i) the country has a large domestic market, aproficient population, low wages, varied raw materials, and a key geographicallocation, which makes it a natural base for industries that wish to supply thegrowing regional market; (ii) Suez Canal revenues are estimated to continue torise gradually until the Canal expansion program is completed in about 1980--there is then likely to be a substantial increase in revenues; (iii) Egypt'simproved prospects for oil production, which is put (by the oil companies) atone million barrels a day by 1980-82, substantially exceed domestic require-ments; (iv) considerably increased earnings from tourism--these reached anestimated $383 million in 1976; (v) the possibility of using agriculturalland more intensely with greater emphasis on high-value crops; and (vi) anincreasing flow of remittances ($445 million in 1976) from Egyptians workingabroad. 1/

19. However, Egypt's long-term potential also hinges upon a number offactors outside its own control. The most important is a movement towards anequitable and definitive peace settlement in the Middle East. Moreover, Egyptrequires the transfer of large amounts of capital from abroad; this, in turn,must be preceded by preparation of a suitable portfolio of projects to whichpotential investors, whether private or official, foreign or domestic, cancontribute. Finally, it requires fundamental changes in economic policiesand institutions. Hence, it will probably take 5-10 years to achieve asignificant restructuring of the economy.

20. .Recent Policy Actions. Beginning in 1976, the Government, in closeconsultation with the Bank and the IMF, began to undertake a series of policyactions aimed at making more effective use of foreign resources, curbing excessconsumption, and improving allocative efficiency. Thus (i) the parallel ex-change market has been successively widened (the last widening took place inMarch 1977), to comprise all exports except raw cotton, rice and petroleum andall imports except basic mass consumption commodities and also excluding SuezCanal revenues; (ii) the parallel market rate itself was further depreciatedto about 56 percent of the official rate; (iii) the attractiveness of theparallel market was increased by establishing a list of items which may beimported through it without exchange restrictions; (iv) parallel market importswere valued for customs duties at the parallel market exchange rate (a measureequivalent to an increase of about 80 percent in the tariff on applicableimports); (v) ceilings on interest rates were removed and interest rates in-creased; and (vi) the "general organizations" that exercised rigid controlover public industrial enterprises were dissolved and replaced by "higher

1/ Additional substantial remittances came in the form of "own-exchange"imports.

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councils," which permit somewhat more initiative to the individual enterprises.The Government submitted a letter of intent to the IMF on March 4, proposingto undertake further economic reform. On April 20, 1977, the Fund approved astandby arrangement for the Government authorizing provision up to the equiv-alent of SDR 125 million (approximately $145 million) over the next 12 months.Drawings under the standby arrangement will be closely monitored and depend onEgypt remaining within a series of quarterly credit ceilings designed to limitthe increase in the net domestic assets of the banking system to $1,536 millionin 1977.

External Assistance

21. In 1967 the substantial amounts of Western external aid which Egypthad been receiving practically ceased, and up to 1974 service payments gen-erally exceeded disbursements. During the period 1968-1973, non-militaryaid from Eastern countries, estimated to have been in excess of $800 million,financed the bulk of Egypt's development.

22. Since 1973 the substantial deficits on the goods and services ac-count have been financed primarily by official Arab grants, loans and depositswith the Central Bank of Egypt. Western medium- and long-term (M&LT) capitalassistance began to grow after October 1973. However, because of the slowdisbursements inherent in the aid process, and the heavy repayments due onpast loans, net M&LT transfers from OECD countries to Egypt were initiallysmall. Commitments from the OECD countries have, however, led to a strongaid pipeline, and it is estimated that there were substantial inflows in 1976which should continue in 1977.

23. Among western aid donors, the US Government is currently committingabout $700 million of project and commodity aid per annum (in addition to about$210 million of food assistance under US Law PL 480). Aid from the other OECDcountries, especially France, Germany and Japan, has remained at the increasedlevels of 1974/75 (i.e., about $235 million per year). The European Communityis providing increasing amounts of food aid; moreover, in January 1977 theCommunity signed a financial protocol with Egypt committing, over a five-yearperiod, $70 million in grants and $119 million in concessional loans.

24. Disbursements during 1977 under existing grant and M&LT loan commit-ments are expected to total about $1.47 billion. 1/ If Egypt is to attemptto solve its economic problems it will need to finance in 1977 substantialincreases in imports and to reduce its short-term indebtedness. Its need

1/ This amount includes among others disbursements from (i) a $250 millioncash loan made in 1976 by the Gulf Organization for Development in Egypt,which is a $2.0 billion fund created by Saudi Arabia, Kuwait, UAE andQatar to participate in financing Egypt's development program; (ii)a Eurodollar loan of $250 million from a consortium of American andEuropean banks, guaranteed by the Gulf Organization; and (iii) M&LTproject aid estimated $435 million (including $185 million from bila-teral agreement countries). It excludes the additional assistance to beprovided by the Gulf Organization mentioned at the end of paragraph 24.

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for imports of goods, including capital goods, is estimated at $5.0 billion,partly to compensate for the severe reduction in imports in 1976. Whileprospects for increases in receipts from exports are good, a current accountdeficit of approximately $1.86 billion is forecast; in addition, a reductionin short-term debt of at least $700 million (including paying off $450 millionof overdues) is desirable, amortization of M&LT debt will require $840 million,and there will be a reduction in bilateral balances of about $200 million.Thus total foreign exchange requirements will be about $3.60 billion. Takinginto account the estimated aid disbursements of $1,470 million, and estimatedsuppliers' credits, private transfers and foreign investment of $480 million,Egypt at present has a foreign exchange financing gap of approximately $1,650million for 1977. A major effort towards meeting this gap was recently accom-plished. In early April 1977, the Gulf Organization for Development in Egyptagreed to provide financial support to Egypt in the amount of $1,475 millionto be made available in 1977 as a loan to the Central Bank of Egypt in stages,while Egypt carries out its declared policies to correct its balance of pay-ments disequilibrium.

25. Consultative Group. In July 1976, Egypt requested the Bank to setup a Consultative Group comprising a number of oil-producing Arab countries,Iran, major Western countries and Japan. Given the favorable responses re-ceived from prospective members of the Group, an introductory meeting (focus-sing on financing requirements) was held on May 11 and 12, 1977.

External Debt and Creditworthiness

26. Egypt's non-military medium- and long-term debt outstanding and dis-bursed at December 31, 1975 was estimated at $5,101 million. This was almostdouble the amount at end-1974 of $2,760 million. During the first nine monthsof 1976 the debt rose to $5,670 million. Of this, official M&LT loans amountedto $3,043 million (of which $731 million was in clearing currencies). Another$1,942 million was in convertible currency deposits and $685 million in sup-pliers credits. Major creditors were Saudi Arabia, Kuwait, USSR, USA, AbuDhabi and Iran. IBRD/IDA debt comprised about 2.7 percent of the total. Debtservice on medium- and long-term debt was estimated to amount to $680 millionin 1975, giving a debt service ratio of 26 percent. No reliable estimates ofmilitary debt are available; Egypt is still making efforts to obtain resched-uling of service payments on such debt.

27. While the bulk of external assistance to Egypt was obtained on con-cessional terms, the continued high level of short-term indebtedness continuedto be a cause of serious concern. Commercial bankers' credit facilities out-standing (including undisbursed) amounted to $2,297 million at the end ofDecember 1976 of which $1,447 million were disbursed. The liquidity require-ments of this type of indebtedness created severe problems for Egypt andarrears in repayments were reported during the latter half of 1976.

28. The Government's recent policy actions (discussed in paragraph 20above) have initiated the structural adjustments required by Egypt's economicsituation and international environment. The situation however requires con-tinuing review and further action. At the Government's request, the Bank has

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arranged to review developments in the economy by economic missions three orfour times a year.

29. If progress towards curbing the increase of both consumption expend-itures and imports is maintained and the country's export earnings potentialrealized, Egypt's foreign capital inflow requirements are estimated at about$2.8 billion per annum for the remainder of the decade. The required capitalinflows are large--but if they are available on the terms expected, Egyptwould have the debt servicing capacity to borrow the amounts envisaged, includ-ing a limited amount on harder terms. The burden of servicing M&LT debt as apercentage of total foreign exchange earnings is estimated at 25 percent in1976 and is expected to decline to 19 percent in 1980. In these circumstancesEgypt may be considered creditworthy for a limited amount of Bank lending inaddition to the IDA assistance which Eygpt merits on the ground of its povertyand difficult balance of payments position.

Eligibility for Third Window Lending

30. Egypt is considered eligible for Third Window financing on the basisof the following considerations:

(a) Poverty: Per capita income was US$310 in 1975.

(b) Performance: Improved economic performance is illustrated bythe recent steps taken (see para 20) to begin the process ofstructural change needed in the economy.

(c) Creditworthiness: As the analysis in para 29 above shows,Egypt may be considered creditworthy for a limited amount ofBank lending, but must seek to obtain as large a portion aspossible of its external capital requirements on concessionalterms.

(d) Alternative Sources of Finance: Although Egypt has receiveda considerable amount of support from a wide range of donorsto meet the foreign exchange needs in 1977, large amounts ofproject aid are r'Squired to support Egypt's growing invest-ment program. The amounts of external assistance on appro-priate terms needed for this program are likely to exceedthe funds available from donors. In addition to contributingdirectly to meeting Egypt's financial requirements, Bank Groupprojects provide cofinancing opportunities for other donors,as in the proposed Second Nile Delta Drainage Project.

PART II - BANK GROUP OPERATIONS IN EGYPT

31. The proposed development credit and loans would be the World Bank'stwenty fifth, twenty sixth and twenty seventh lending operations in Egypt. Itwould bring Bank and IDA commitments made since 1970 to $746.5 million. Annex

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II contains a summary of Bank loans and IDA credits as of April 30, 1977, andnotes on the execution of ongoing projects.

32. The principal objective of the Bank/IDA lending program in Egypt isto support its development program through lending for (i) increasing utiliza-tion of available productive capacity, (ii) projects which would increase pro-duction and foreign exchange earnings or substitute for imports, particularlyin the key industrial and agricultural sectors, (iii) projects aimed at rehab-ilitation and expanding infrastructure necessary to facilitate development,and (iv) selected social sectors, namely population and education. The impactof Bank/IDA participation in projects has been widened by attracting addi-tional foreign exchange required for many of these projects from other donors.Besides the technical assistance included under the Bank/IDA projects, theBank is acting as executing agency for a partly UNDP-financed National PowerSector Survey and for a study which will prepare a Master Plan for Water Re-source Development and Use (see para. 57 below). The Bank also extendedlimited technical assistance in April 1976 in the preparation of a five-yeardevelopment plan.

33. The projects financed to date have been in support of the strategyoutlined in the preceding paragraph. Preparation of projects for future lend-ing is following the same line. Projects for regional electrification, theexpansion of the Suez Canal, a loan for industrial imports and an iron oreengineering project have been appraised and are scheduled for presentation tothe Executive Directors within the next few weeks. A pipeline of projectsfor possible future lending is also being developed, comprising additionalprojects in the water supply and sewerage, education and power sectors, and inagriculture including drainage, and in industry. Projects under study in newfields include urban and rural development and the tourism sector.

34. Bank Group disbursements continued in 1976 to represent about 5 per-cent of Egypt's overall capital inflow. The Bank/IDA share of total externaldebt outstanding and disbursed was about 3 percent at the end of 1976. Forthe future, the Bank/IDA share of total external debt outstanding and disbursed(excluding military debts) is estimated to reach about 7 percent in 1980, ofwhich the Bank share would be about 4 percent. It is estimated that in 1980,debt service payments due to the Bank and IDA will represent about 3 percentof service payments due on Egypt's external debt.

35. The first IFC participation and lending, for a ceramics project,was approved by the Executive Directors in April 1976. IFC is also discuss-ing several other private sector and joint venture projects.

PART III - THE AGRICULTURAL SECTOR

36. The Egyptian Agriculture Sector is discussed in detail in the report"Egyptian Agriculture: Development Problems, Constraints and Alternatives"(931b-EGT) distributed to the Executive Directors on April 13, 1976. Onlyabout 2-1/2 percent of Egypt's total land area, or about 2.53 million hectares,

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equivalent to about six million feddans (fd), is cultivated. About 5-1/2million fd in the valley of the Nile and the Delta, known as the "Old Lands,"is cultivated, as is about half a million fd of reclaimed land, almost allof which is on the fringes of the Nile Valley and, especially, of the Delta.However, since two or more crops are grown each year on much of the land,the cropped area averages about 10.8 million fd. Egypt has virtually norainfall, and agriculture is dependent on the Nile: successive dammings haveenabled almost the whole of the Old Lands to benefit from perennial irrigation.The flat topography and rich soil, and the long agricultural tradition, havealso helped maintain a relatively high level of land productivity, althoughthere is considerable scope for further increases.

37. Agriculture accounts for approximately 30 percent of GNP and pro-cessed and unprocessed agricultural food for some 33 percent of exports. Thesector employs just under half the labor force and remains the dominant sectorof Egypt's economy. Field crops account for about 60 percent of agriculturaloutput, with cotton, maize, wheat, rice and berseem (a fodder crop) being themajor crops; fruit and vegetables about 15 percent, and livestock about 25percent. Egypt's main agricultural exports are cotton, rice, and fresh andprocessed fruits and vegetables. There are also substantial imports of foodand feed, including wheat and flour (about $825 million in 1975), sugar, feedgrains and meat. Food import costs rose sharply from about $250 million in1972 to about $1 billion in 1975.

38. Agricultural output increased at nearly 4 percent per annum between1955 and 1965; since then it has increased about 2 percent per annum. Growthfrom expanding perennial irrigation has been offset by waterlogging, salinity,and the constraints described below (para. 40). In per capita terms both foodand overall agricultural production have declined resulting in a substantialincrease in basic food imports, while agricultural exports have not risenappreciably. Government subsidy costs to supply basic foods rose from $100million in 1972 to $1.25 billion in 1975 and an estimated $900 million in1976; the major part of the fall is due to the decline in international pricesof these items.

39. Following land reform legislation in 1952, 1961 and 1969, land owner-ship in Egypt is more widely distributed: 94 percent of the cultivated landis in farms of less than 5 fd and approximately 70 percent of the farmers havean average holding of less than 3 fd. The maximum holding is 50 fd, or 100 fdfor a family, and only 12 percent of the land (owned by 0.3 percent of thefarmers) is in family holdings of more than 50 fd. The three and a quartermillion holdings in the Old Lands are grouped into 4,000 cooperatives, admin-istered by the General Agricultural Cooperative Society, and the Land ReformCooperative Society. This system is still under review, and proposals havebeen made for streamlining it and reducing the number of cooperatives to about700. The Ministry of Agriculture, operating through semi-autonomous companieswhich report to it, is responsible for agricultural production, desert landreclamation and for developing reclaimed land, while the construction andoperation and maintenance of irrigation and drainage works are the responsi-bility of the Ministry of Irrigation.

Policies and Constraints

40. Since 1965 agricultural planning has been essentially short-term.Drafts of formal long-term plans have been discussed in the past, and a FiveYear Plan is u.,der preparation as part of the overall plan (para 17). Never-theless, there are some generally accepted policy goals and guidelines. Agri-culture should supply much of the domestic food needs, and generate foreignexchange earnings from exports to help meet Egypt's large import needs. Tothis end, and given the policy aim of maintaining low and stable domestic foodprices, the Ministry of Agriculture has maintained close control over agricul-tural production by regulating the cropping patterns of all farmers, supplyingthem with inputs at fixed, subsidized prices, and by buying allocated amountsof traditional crops at low, controlled prices. This policy is now under re-view as part of the general review of domestic economic policies. The low,administered profit margins for traditional field crops make it unprofitablefor the farmer to use the inputs necessary for increased output of traditionalcrops. Thus incentives to produce the major crops efficiently are lacking,while the system of controls over cropping patterns inhibits farmers' reactionsto economic incentives. The Government has therefore made a beginning in re-viewing its current pricing and production policies, to move towards a systemwhich alllows and encourages the farmer to react to economic incentives, and toensure that these incentives reflect appropriate overall social and economicpriorities. As a first step, procurement prices for cotton have been raisedsignificantly over the previous level. Also, the Bank is preparing a studyof the price and subsidy policy in Egypt's agricultural sector and we expectto review the findings of the study later this year with the Government.

41. Physical, financial and institutional constraints have all contri-buted to the modest performance of the sector. In the past emphasis was oneasing the physical constraints on agriculture through a program of horizontalexpansion, i.e., desert land reclamation projects. This has been costly andslow to produce results. In recent years, investment in reclamation (as wellas in large-scale public sector poultry projects) have absorbed most of therelatively small amount of Government funds allocated to agriculture, at theexpense of investment needs elsewhere in the sector, including provision offarm inputs, research and extension services, processing and marketing facili-ties and agricultural credit. A decline in the productivity of the Old Lands,the basic source of Egyptian agricultural wealth, also points to the need toallocate considerably larger funds to public investment in the Old Lands.

42. The sector report (para. 36 above) describes the possibilities ofsubstantial increases in agricultural output, and the increased returns thatcan be obtained from an increased allocation of public investment to the OldLands, coupled with removal of agricultural institutional constraints. TheGovernment is aware of many of the shortcomings described above, particularlyof the physical constraints, and the need to improve agricultural planning.It is also considering redirecting investment towards increasing the produc-tivity of existing arable land which is capable of producing substantiallygreater and quicker returns. We are continuing our discussion on agricul-tural policy with the Egyptian authorities.

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Drainage in Egypt

43. Waterlogging and salinity have recently become major, physicallimiting factors to crop production in many areas. Present drainage condi-tions result from the commissioning of the Aswan High Dam in 1965 and theresultant shift from basin to perennial irrigation. With the spread ofperennial irrigation, the groundwater levels have been rising over time.The existing drainage system has not been able to cope with the additionalirrigation water. Moreover, seepage from the new irrigation canals and fromhigher fields have contributed to a rise in the groundwater levels in manyareas. The result has been to create waterlogging conditions which haveserious effects on agricultural output. Soil salinity has also increased.Installation of drainage will reduce waterlogging and allow soil to beflushed by irrigation, removing salt with the excess water.

44. In 1960 the Government decided to launch a 30-year program toimprove drainage in about 5 million fd of irrigated land. However, mainlybecause of financial and administrative constraints between 1960 and 1970,only some 500,000 fd in the Delta and 80,000 fd in Upper Egypt were drained.The table below summarizes the situation with respect to drainage in thecountry as a whole, showing the irrigated area and the lands in urgent needof drainage facilities.

Drainage area ofIrrigated Priority area Area drained Bank/IDA financedarea for drainage (as of 1970) projects to date

('000 feddans)

Lower Egypt 4,000 3,500 500 950 /1(approx.)

Upper Egypt 2,000 1,500 80 800 /2(approx.)

/1 $26 million Nile Delta Credit, 1970./2 $36 million Upper Egypt I Credit, 1973 and $50 million Upper Egypt II

Loan and Credit, 1976.

Previous Bank/IDA Drainage Projects in Egypt

45. The Bank/IDA have helped finance the Government's drainage programthrough three credits and one loan. The first two projects (Nile Delta I -Cr. 181-UAR, and Upper Egypt I - Cr. 393-UAR) initially faced a number ofproblems namely lack of local funds, shortage of engineers, shortage of cementfor production of cement pipes, poor performance of local contractors andother managerial difficulties. This situation became critical after the 1973October war and little was achieved during 1974. However, since mid-1975the situation has improved and for the first time, in 1976, the annual fielddrainage construction targets of the two projects were met. The total area

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provided with field drainage by the end of 1976 was 1,220,000 fd of which690,000 fd were financed by the Government alone, 480,000 fd under the credit181-EGT and 50,000 fd under Credit 393-EGT. The third project (Upper EgyptDrainage II - Loan 1285 and Credit 637-EGT), which the United States Agencyfor International Development (USAID) is cofinancing with a US$31 millionloan, became effective on January 31,1977. It is expected that in 1977 therate of implementation of field drainage construction will rise to some170,000 fd in the Nile Delta and to 80,000 fd under the two Upper Egyptprojects. The Bank and IDA are planning to continue their support for theGovernment's drainage program. A new drainage project (Nile Delta DrainageIII) covering the remaining 600,000 fd for field drainage not included underthe proposed project is tentatively scheduled for Bank/IDA considerationduring FY1981. Bilateral aid agencies are expected to continue their sup-port for the sector.

Egyptian Public Authority for Drainage Projects (EPADP)

46. In 1973 after the appraisal of the Upper Egypt Drainage I Project,the Government combined the two separate bodies which had been responsible fordrainage in Lower and Upper Egypt, respectively, to form the EPADP which becameresponsible for the execution of all drainage works in the country, includingthe three Bank/IDA-financed projects. EPADP which is headed by a chairman isa special agency within the Ministry of Irrigation responsible for carryingout field investigations, planning, design, procurement, construction, budget-ing and operation of project accounts. Two vice-chairmen are responsible forthe drainage activities in Upper and Lower Egypt, respectively. Attached toeach vice chairman is a special design officer responsible for detailed designof project works. Field supervision of drainage works is carried out by theEPADP directors general in the various governorates. The mechanical departmentof EPADP is responsible for supervising the installation of pumping stationsand transmission lines, maintenance workshops, stores and mechanical equipment.EPADP's performance in 1976 has markedly improved and its staff and facilitieshave been expanded to cope with the accelerated pace of the drainage program.

Bilharzia

47. Bilharzia, or schistosomiasis, a disease caused by a parasite whichpasses part of its life cycle in a water snail-host, has been endemic in Egyptsince ancient times, and is the most prevalent and serious endemic disease inUpper Egypt. Its spread has been intensified by perennial irrigation; over60 percent of the rural population in some irrigated areas is infected. Pastcampaigns to treat snail-infested areas suffered because they were localisedand there was rapid infestation from surrounding areas. In 1968-1971 follow-ing a successful large-scale operation carried out in a heavily infested areain Fayoum, financed by the German Government, the incidence of the disease wasreduced from 46 percent in 1968 to 9 percent in 1974. Bilharzia control re-quires blanket treatment with molluscicide of all canals and drainage ditchesin an area for about three years, together with chemotherapy for infectedpeople in the area. The canals can thereafter be maintained with small, localapplications of molluscicide. Thus after the three years, costs for main-tenance control are minimal and can be borne by the Government. The Fayoum

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project formed a practical pattern of control which was adopted as the basisfor the current bilharzia control program financed by IDA as a component ofthe ongoing Upper Egypt I and II Drainage Projects. This program coversan area of over 1 million fd (about half the total fertile area of UpperEgypt), where incidence of bilharzia is amongst the highest in Egypt. It isthe largest bilharzia control program undertaken in the world and benefitssome 4 million people living in the area.

The Project Area

48. The proposed drainage project area covers a total of 1,000,000fd in six governorates in the east, west and central part of the Nile Deltawithin 25 km of the Mediterranean in the north, to about 150 km from thecoast at the southernmost limit of the project (see map). When supplied withirrigation water and adequate drainage facilities, most of the lands in theNile Delta can support good crops of cotton, wheat, maize, rice, vegetables,beans, Egyptian clover and some fruits. However, the nature of the soils,irrigation practices and lack of adequate drainage facilities have broughtabout waterlogging and salinity problems that are seriously affecting cropproduction. Thus, the 1972-75 average yields on those soils seriously suf-fering from waterlogging and salinity show as much as a 46 percent reductionin yield for maize, 50 percent for cotton and wheat, and 30 percent for rice,as compared to soils in the same area less affected at that time. Withoutadequate drainage facilities, it has been estimated that average crop yieldsin the project area would decline by at least an overall 30 percent over thenext 35 years. Within the project area, there are an estimated 295,000 farmfamilies or some 1.6 million people. At present more than half of the in-habitants in the project area are estimated to have incomes below the coun-try's relative poverty level, estimated to be about $60 per capita.

PART IV - THE PROJECT

Project History

49. The project forms part of the continuing program of the Governmentto install drainage works in the entire irrigated land in Egypt and coverslands identified by the Ministries of Agriculture and Irrigation as being areasin the Nile Delta having the most urgent need for drainage. It was preparedby EPADP in September 1976 and appraised by the Association and the Bank inOctober 1976. Negotiations were held in Washington from April 4 to 8, 1977.The Egyptian Government was represented by Mr. S. Koraiem, Ministry of Economyand Economic Cooperation. An appraisal report entitled "Appraisal of the NileDelta Drainage II Project" (No. 1451-EGT, dated May 5, 1977) is being distri-buted separately, a Credit/Loan and Project Summary is attached. Maps ofEgypt and of the proposed project area are also attached.

Project Objectives and Description

50. The objectives of this project are:

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(a) to prevent land productivity from declining on onemillion fd in the Nile Delta by constructing pumpingstations and remodelling the main drainage system;

(b) to increase productivity on about 400,000 fd out ofthe one million by installing field drains;

(c) to expand the bilharzia control program financed underthe two ongoing Upper Egypt Drainage Projects by 1,200,000fd thereby instituting a control program over the entirecultivated area from Giza to the Aswan High Dam; and

(d) to cover additional foreign exchange expenditures not coveredby UNDP under a UNDP-financed study to draw up a "Master Planfor Water Resource Development and Use" for which the Bankis acting as executing agency.

Drainage Components

51. The project drainage works would consist of:

(a) construction of four new drainage pumping stations,including electric transmission lines;

(b) replacement of ten obsolete pumping units in twoexisting drainage pumping stations;

(c) deepening and widening of 1,565 km of existing openmain drains serving an area of 810,000 fd and extensionor reconstruction of existing structures;

(d) installation of covered field drains and collectors inan area of 400,000 fd.

52. Of the total project area of 1,000,000 fd, the discharge effluentfrom 400,000 fd will be evacuated into the Nile or into main open drains bygravity. The effluent from the remaining 600,000 fd will be evacuated throughseven existing and four proposed new pumping stations. Electric transmissionlines of 19 km length in total will connect the four new stations to thenational grid.

53. The open main and branch drains affecting 810,000 fd would bewidened and deepened in order to lower further the groundwater and to pro-vide free-fall discharge from the pipe collectors of the field drainagesystem. As part of the work, existing bridges, syphons, flumes and otherstructures would have to be either expanded or rebuilt.

54. Field drains would be installed on 400,000 fd of the project area,giving priority to areas suffering severely from waterlogging and salinity.As in the most recent drainage project (Ln. 1285-EGT and Cr. 637-EGT), poly-vinyl chloride (PVC) corrugated pipes would be used in 90 percent of the

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area which is field drained and cultivated with field crops. The PVC pipeswould be manufactured locally out of imported resin powder in two plantswith a capacity of 1,000 m/hour; these plants also would be imported. PVCpipes have been found to be more suitable for field drainage than the cementpipes used in the past. They are easier to transport and can be laid morequickly by machines thus lowering cost per fd drained. Because of the highrate of construction proposed for field drainage, more labor-intensive methodsare not appropriate. Also, there is a general shortage of qualified laborersin the construction industry and a shortage of cement. In the remaining 10percent of the project area to be field drained and which is cultivated withorchards, cement pipes would still be used for field drains since the pipeshave to be laid manually.

55. Project implementation during the first two years will consistmainly of constructing pumping stations and remodeling of existing opendrains, since covered field drains cannot be installed until this work isdone. EPADP and its contractors will concentrate on the installation of fielddrainage in the remaining area of 470,000 fd under the Nile Delta I Project.Field drainage under the proposed project will commence at the beginning of1980. EPADP has the capacity to undertake this work at the required implemen-tation rate. With the provision of additional equipment under the Upper EgyptDrainage II project and with the introduction of PVC pipes and foreign con-tractors for field drainage installation, it is expected that by 1978 theannual implementation capacity will have increased for remodelling to 400,000fd and for field drainage to 340,000 fd. EPADP will be supported by threefull-time consultants and some short-term specialists to provide additionaladvice and assistance in using PVC pipes for field drainage and for traininglocal staff in the new techniques involved. Funds have been provided for thispurpose and are still available under the Upper Egypt Drainage I Project.

Bilharzia Control Component

56. The bilharzia control program (see para. 47 above) will be furtherextended under the proposed project to cover an additional area of 1,200,000fd between Asyut and the Aswan High Dam with a total population of about5 million people and would thus complete the bilharzia control program inUpper Egypt. Provision of molluscicide, drugs for chemotherapy and equipmentis included under the proposed project.

Master Plan for Water Resources

57. The Bank is executing agency for a UNDP-financed project to draw upa "Master Plan for Water Resource Development and Use." The relevant projectdocument was signed on January 16, 1977. The project will provide for amethodological study of water-related problems in Egypt. It will generateoptimal required investment programs taking into account the predicted demandpatterns of the various sectors, and the changes which will be imposed byincreasing population pressures and increasing industrialization of what ispredominantly an agricultural economy while at the same time seeking tointensify agricultural production. UNDP would contribute $1,250,000 to theproject which is insufficient to cover the full foreign exchange costs ofthe study. Therefore, $850,000 has been included under the proposed drainage

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project which would be used to cover the additional foreign exchange expendi-tures which otherwise would have had to be borne by the Government. The Gov-ernment will bear all the local costs of the study estimated at LE 640,500of which LE 232,200 is in cash and LE 408,300 in kind.

Project Execution

58. EPADP (para. 46) would be responsible for execution of the drainageelements of the project. In order to ensure that the installation of covereddrains is not held up by delays in award of contracts for pumping stationsand for remodelling of open drains, EPADP has agreed that timely awards ofcontracts for open drains and for the pumping stations will be made (Section2.02 of the Project Agreement (PA)). Procurement would be the responsibilityof the Administration and Finance Department of EPADP. An ad hoc committeecomposed of the chairman, the responsible regional vice-chairman and the headof the Technical Office of EPADP would approve specifications and evaluatebids. EPADP agreed that both a qualified and experienced chairman of EPADPand a vice-chairman for Lower Egypt would continue to serve at all times andon a full-time basis (Section 3.01(b)(ii) PA).

59. Soil studies and collection of data on crop yields would be under-taken by the Ministry of Agriculture. The participation of the ExtensionService of the Ministry of Agriculture in the drainage program and for im-proving irrigation practices is essential. In order to ensure that extensionagents communicate more effectively with farmers on the subject of drainageand irrigation and collaborate with the drainage maintenance units to assurefarmers' cooperation, the Government agreed to ensure a continued adequatecoordination between the Extension Service and EPADP and to continue to main-tain coordinating committees at national, governorate, and district levels(Section 3.04 of the Development Credit Agreement (DCA)).

60. The Ministry of Health would be responsible for the planning, execu-tion, and supervison of the bilharzia control program of which the Bank wouldfinance the foreign exchange cost. This new program would be in addition tothe ongoing program now in force under the Upper Egypt Drainage I and II Proj-ects, and would have the same program director and key personnel. A plan ofoperation acceptable to the Bank/IDA will be prepared by the Ministry ofHealth for the bilharzia control program under the proposed project. TheGovernment agreed to continue to employ a qualified and experienced programdirector (Section 3.08, DCA). The application of molluscicide would beclosely supervised by the Snail Control Department of the same ministry. Thechemotherapy treatment of infected persons would be conducted by the Ministryof Health as well as all bioassay checks and chemical analyses. The Governmentagreed to maintain in its Ministry of Health a supervision and evaluation unit,responsible for overall supervision of the program, and for collecting data oncontrol effectiveness (Section 3.10, DCA). After completion of the program,the irrigation and drainage canals can be maintained snail-free with a smallapplication of molluscicide about once or twice a year. The Government agreedto continue the bilharzia control program and provide adequate funds for ituntil December 31, 1997 (Section 3.11, DCA).

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Operation and Maintenance of Drainage Works

61. As in previous drainage projects, the contractors would be respon-sible for the maintenance of the pumping stations until final acceptance byEPADP, which normally occurs one year after completion. Following acceptance,the stations would be handed over to the Maintenance Department of the Ministryof Irrigation. Maintenance of open drains would be the responsibility of thesame Department. Field drainage works would be maintained for one year aftercompletion by the contractors. After formal acceptance by EPADP, field drain-age works would be maintained by EPADP. EPADP agreed that special fielddrainage maintenance units would be established in the project area and thatthe necessary funds, staff, equipment and transportation facilities for main-tenance of field drainage works would be provided (Section 2.01(b), PA).

Technical Assistance. Training and Staff Requirements

62. Contractors of PVC pipe-making plants, and suppliers of pumpingstation and drainage equipment would be required to train the local staffin the operation, maintenance and repair of their equipment. In order tostrengthen its technical services to carry out the project, EPADP agreedto implement a training program to train engineers and technicians of theproject in modern drainage practices, and operators and mechanics in theproper operation and maintenance of the project equipment (Section 3.03, PA).No funds are provided under the project for training abroad, as variousbilateral aid programs provide financing for this purpose.

63. Although in the past shortage of engineering staff has been aproblem, the supply of engineers has now increased, following the reductionin military needs for the same type of personnel. A considerable amount oftechnicians-supervisors will be made available to EPADP from among graduatesof the recently established Technical Institute for Survey. Thus recruitingnew staff will be easier than in the past. In addition, EPAPD pays to itsstaff a special field allowance plus an annual bonus to attract them to workin the Authority. In order to attract and retain qualified and experiencedpersonnel, EPAPD agreed to continue its existing policy for incentives tostaff (Section 3.01(b)(i), PA).

64. The proposed project would also provide funds for visual aid equip-ment and supplies as well as transportation facilities for the extensionservice of the Ministry of Agriculture. Consultant services for the extensionservice are already being provided for by USAID and by FAO.

Project Costs and Financing

65. The total project cost, 1/ including contingencies, is estimatedon the basis of end-1976 contract prices to be $207.0 million, excluding cus-toms duties. The foreign exchange component of the project cost is estimatedat $90.0 million. Details of the project costs are given in the Credit/Loanand Project Summary.

1/ All costs have been calculated on the basis of a parallel market rateequalling LE 1 = $1.50.

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66. The Egyptian Government has requested KfW to provide financing forequipment and raw material for production of PVC pipes, and the foreign ex-change cost for operation and maintenance of the pipe production plants, esti-mated to cost some $24 million. If the agreement with KfW has not becomeeffective by Dec-mber 31, 1977 or a subsequent date agreed upon with the Bank/IDA, a condition of default would exist under the loans/credit unless the Gov-ernment satisfies the Bank/IDA that it can secure the additional funds re-quired from other sources (Section 5.01(c), DCA). The proposed World Bankfinancing of $66 million would cover the foreign exchange cost of equipmentand civil works for drainage ($54.35 million), equipment for the AgriculturalExtension Service ($0.4 million), equipment and molluscicides for extensionof the bilharzia control program ($10.4 million), and $0.85 million for thepartly UNDP-financed Master Plan for Water Resource Development and Use. Thelocal currency requirements of about $117 million would be provided by theGovernment. The Government agreed to establish a special fund under thisproject to serve the project as well as the previously Bank/IDA-financed drain-age projects to help overcome difficulties experienced in the past in obtain-ing a timely allocation of local funds. The Government will replenish thespecial fund at monthly intervals to a level equivalent to the estimated localexpenditures during the following three month period. The establishment ofsuch a special fund would be a condition of effectiveness (Sections 3.06 and6.01(d), DCA).

Procurement

67. Equipment and materials for project construction, operation andmaintenance estimated to total about $10.4 million 1/ would be procured afterinternational competitive bidding in accordance with World Bank guidelines.Domestic bids would be allowed a margin of preference of 15 percent or theactual customs duty, whichever is lower. For purposes of bid comparison, theparallel market exchange rate will be applied. Procurement of non-proprietaryequipment costing less than $10,000 each would be exempted from internationalcompetitive bidding. Contracts may be awarded to reliable suppliers afterhaving obtained price quotations from at least three such suppliers. Theaggregate cost of such items would not exceed $150,000. Also, proprietaryequipment may be purchased off-the-shelf from reliable suppliers. The aggre-gate cost of such items would also not exceed $150,000. Molluscicide anddrugs for chemotheraphy for bilharzia estimated to cost $8.9 million wouldalso be exempted from international competitive bidding. They would beprocured from the one manufacturer (in West Germany) who is known to produceboth these products and from a licensee (in the US) who is known to producethe molluscicide. The products of the manufacturer, which have been testedin the project area, have been accepted by WHO and have proven to be the mosteffective ones.

68. Field drainage with PVC pipes and pumping stations would be imple-mented under civil works contracts estimated at $31.2 million awarded throughinternational competitive bidding following World Bank guidelines for procure-ment. Contracts for civil works for construction of structures in open drains,buildings, and installation of field drains in orchards with cement pipes,estimated to total about $9.4 million, and which are being financed by IDA and

1/ Excluding physical contingencies.

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the Bank, would be procured on the basis of local competition, according tolocal procedures, which are satisfactory. These small and varied works, scat-tered throughout the project area, and planned to be implemented during thewhole project construction period, are not suitable for international competi-tion. They would be effectively implemented by local private contractors,whose performance in the past has proven to be adequate. The remaining civilworks contracts (earthworks) for remodelling of open drains will be financedby the Government and procured on the basis of local procedures.

69. Procurement for the production of PVC plastic pipes will be inaccordance with the agreement between KfW and the Government.

Disbursement

70. The IDA Credit and Bank Loan would be disbursed as follows:

- Equipment and materials: 100 percent of the foreign exchangecosts of imported goods, or 100 percent of ex-factory cost iflocally manufactured, or 80 percent of local cost if importedbut locally procured.

- Civil works: 100 percent of foreign expenditures and40 percent of local expenditures, representing theirforeign component.

- 100 percent of foreign expenditures for the Master Planfor Water Resource Development and Use, representingthe $850,000 share of the Bank/IDA to the UNDP-financedstudy.

IDA funds will be disbursed prior to the pro-rata disbursement of the Bank andThird Window funds.

Accounting and Audit

71. A cost accounting system was to be established by EPADP under theprevious IDA/Bank-financed drainage projects. This system is now being imple-mented. EPADP will maintain this cost accounting system. EPADP will alsoestablish and maintain separate project accounts for the drainage works andwill submit to IDA and the Bank copies of audit reports for each calendaryear, within six months of closing the yearly Government accounts. The auditwill be carried out by the Egyptian Central Auditing Organization.

Monitoring

72. Under the Upper Egypt Drainage II Project (Ln. 1285 and Cr. 637-EGT)EPADP agreed to initiate an evaluation of the effect of drainage works alreadycompleted under the Nile Delta I and Upper Egypt Drainage I Projects. Therelevant evaluation reports are to be completed by June 30, 1978 and June 30,1979, respectively. In order to also monitor and evaluate drainage worksfinanced under the Upper Egypt Drainage II Project, and the proposed NileDelta Drainage II Project, EPADP agreed to present an interim analysis of

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these two projects by June 1981 and June 1983, respectively, and the evalua-tion report by June 1982 and June 1984, respectively. Upon completion of therespective final evaluation reports, EPADP will continue to monitor all theabove drainage projects for an additional six years (Section 2.06, PA).

Cost Recovery

73. As provided by law and being provided for under the ongoing drainageprojects, the capital costs of installing field drains, plus a 10 percentadministrative charge, would be recovered from beneficiaries, by annual in-stallments over a period of not more than 20 years, free of interest (Section3.05, DCA). Since the law does not specifically provide for any charges to bepaid for the maintenance of field drainage systems, a ministerial decree pro-viding for the full recovery for this and the other on-going Bank/IDA-financeddrainage projects has been issued. Under the Upper Egypt Drainage II Project,EPADP agreed to conduct a socioeconomic study within the project area to deter-mine the ability of beneficiaries to pay for the full cost of the field drain-age investments, including the opportunity cost of capital for which farmersare presently not charged. EPADP agreed to complete this study and to extendit to the project area under the proposed project and to submit this study tothe Bank and IDA by June 30, 1978, for review and comments (Section 2.07, PA).The Government agreed to implement mutually acceptable recommendations of thestudy (Section 3.12, DCA).

Benefits and Justification

74. The project would bring about a substantial increase in agriculturalproduction on the 400,000 fd that would be field drained and on 30,000 fdlocated along both sides of the remodelled open drains. At full development,yield increases due to the project are expected to stabilize at 12 to 25 per-cent above present levels. These increases would produce a stream of benefitswhose incremental net economic value is estimated to be some $33 million peryear. The additional production would provide for increased exports in thecase of cotton and vegetables or reduced imports in the case of other productsabsorbed by the local market. In addition, the project would prevent declineof crop yields on 1 million fd which would otherwise drop at least 30 percentover the next 35 years.

75. The drainage component will benefit about 295,000 farm families orabout 1.6 million persons, occupying small farms, more than half of whom haveannual incomes of below the $60 per capita, i.e., the relative poverty level.At full development of the project (three years after installation of drainagestructures for any individual farmer), the annual net return of a farmer fora 3 fd owner-operated holding would have increased from $584 to about $708or 21 percent, while for a 1 fd tenant holding the net return would haveincreased from $167 to $202 or 21 percent. Since without the project cropyields and incomes would decline, these increases understate the total bene-fits accruing to farmers as a result of the drainage works. Compared to thesituation without the project at year 10, the annual net return will haveincreased in both cases by more than 40 percent.

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76. Based on the above benefits and a 35-year project life, the econ-omic rate of return is estimated to be 23 percent, using the parallel marketrate for foreign exchange. This rate of return is based on conservativeassumptions as incremental production and prevented yield decreases of onlythe major food and export crops, wheat, maize, rice, and cotton, have beenincluded in the calculation. Additional benefits are certain to accrue fromincremental production and prevented yield decreases of vegetables, fruits,and berseem, the yields of which are expected to react to improved drainagesimilarly to the mentioned major crops. The rate of return has been testedagainst adverse developments affecting production and investment costs. Thus,with a cost increase of 25 percent and a simultaneous decrease in productionof 25 percent, the project would still yield a rate of return of 15.3 percent.

77. During the five-year implementation period the project would createdemand for labor totaling 58,000 man-years. From year 6 onwards the annuallabor demand for operation and maintenance would be 2,310 man-years. At fulldevelopment, seasonal on-farm labor requirements would have increased by 8percent or 1.5 million man-days annually. This additional on-farm labor wouldmainly be required during harvest periods, which, however, due to multiplecropping, would be spread over the year.

PART V - LEGAL INSTRUMENTS AND AUTHORITY

78. The draft Development Credit Agreement between the Arab Republic ofEgypt and the Association, the draft Loan Agreements between the Arab Republicof Egypt and the Bank, the draft Project Agreement between the Association andthe Bank and the Egyptian Public Authority for Drainage Projects, the Recom-mendation of the Committee provided for in Article V, Section l(d) of theArticles of Agreement of the Association, the Reports of the Committee providedfor in Article III, Section 4 (iii) of the Articles of Agreement of the Bankand the texts of three draft Resolutions approving the proposed credit andloans are being distributed to the Executive Directors separately.

79. Features of the draft Development Credit, Loan and Project Agree-ments of special interest are listed in Section III of Annex III.

80. An additional condition of effectiveness will be the establishmentof a "special fund" for the previous and proposed IDA/Bank-financed drainageprojects (para. 66).

81. I am satisfied that the proposed credit and loans would comply withthe Articles of Agreement of the Association and the Bank and with the estab-lished criteria for Third Window Loans.

- 23 -

PART VI - RECOMMENDATION

82. I recommend that the Executive Directors approve the proposedcredit and loans.

Robert S. McNamaraPresident

May 19, 1977

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Page 2 of 4s Page

Unless otherwise noted, data for 1960 refer to any'year between 1959 and 1961, for 1970 between 1968 end 1970, end for Most Recent Estimate between1973 end 1975.

*4 Spain's succeasful diversification of ita economic structure, derree of industrialisation end development of touriam makes it an appropriate"objective' country.

mm1960 /a 1950-551 A Excluding population of saiLU agglonerationa in the frontier districts; & Figures relate to personssix yearn end over, excluding nomad population; ag 19

61a-

65; /o 1962; Zt Including "asistaLnt nuresa and

midwiveal I& 196D-621 lb Urban only.

190 / l966j /b Relatea to 12-6, yearn of age; /c Registered, not nil practioing in thle country.

MOST RZCRNT ESTIM s. /a As percentage of employment; N ay 1973; / 1972; 4g Registered, not all practicing in thecountry; /a 1971j 11 1969-71 average; 1976, percentage of population.

THILXPIES 97 / As percentage of employment; /b Inside.

Tugxgx 1970 / Rocludes 17 Eastern provinces; /b 1965-67; /c ReLtic of population under 15 and 65 and over to lAbor force 15 yearsend over; /cg 15 years and over excludes unemployed; /a Registered only; IL Dapoaable income; & Includingassistant nurses ard midwives; &3 1961a-66j L Persons six yearn and over who tell the census taLkers that they canread end write.

SPAIN I'V REnploynent office estimate; /b Registered, not nil practicing in thle country.

R7, April 25, 1977

oZXpTI'rONS OF SOCIAL INDICATOR

Lend Are. (thou ko.n PoPulation Per nursing person - Population divided by umbahr of practicingTotal -Total surfacs ares conprisiog lend area ad inland waters. ml. and female graduate nurses, "trained" or "certified' nurses, endAxcic. -Mont ..e..nt ssti-,ts of agricultural area used tempo..arily or Pmr.- atailiary p.rersmoal with tr-ining or experience.nently for crops, pastures, market & kitchen gardens or to lie fall-w Population Pear hospital bad - Population divded by -eber of hospital beds

savalable in public end privats general and specialized hospital endGNP Per c.pita (US$) C- GPeP- Capita estimates at currant market prices, rehabilitation rantrs; excludes nursieg homes and nstsblishmeots forcalculated by name conversion method aso World Bank Atlas (1973-75 basis); cus todial and preventive rare.1960; 1970 and 1975 data. Per capita supply of caloriss (7 of r-suirenotets) - Computed from energy

equivalent of net food supplies available in country per capita per day;Population and vital statistic, available supplies comprise domestic production, imports less exporte, andPp.olation (mid-year million) A. of July first, if not availeble, -avrage changen insatock; net supplies sxcluds animal feed, seeds., quaetitiea usedof two end-year estimates. 1,)60, 1970 and 1975 date, in fond processsing end Inesea in distribution; requirements were estimated

by FAO based om physiological needs for norma activity and health coneid-Population d...ity -par square ho - Mid-y.ar population per square kilometer ering eniromesenta1 temperature, body wasights, age and en. distributions of(100 hectares) of total area, population, and .11osing 107. for waste at household lnvel.

Population density- per square ho of asric. land - Computed an above for Per capita supply of protein (grams, per day) - Protein content of per capitaagricultural land mnly. net supply of food per day; eat supply of food is defimed asa abov; require-

ma.ts f. or al countries established by USDA Economic geseasrh Servi-esVital taetistics provide for a mInismu allowane of 60 eras of total protein per day, adCr.ds birth rate ear thousand. average - Annual live births per thousand of 20 gras. of animal and polses protein, of which 10 gras should be anhoa1mid-year population; tee-year arithmnetic averages ending in 1960 anod 1970, protein; those standards are iower then those of 75 grams of total proteinand five-year averass ending in 1975 for moot rscent estimate, and 23 geaseo of animal protein xs am average for the wsrld, proposed by~ FAO

Crude dssth rate par thousend. average - Annual deaths per thousand of mid-year in the Third World Pond Survey.population; ten-year arithmetic averages ending in 1960 and 1970 and five- Per capita protein supply from anial and pulas - Protein supply of foodyear avrag ending in 1975 for nost recent eatimats. derived from animals ad pulse. is grasn per day.

Inatmrai ty rate f/thou) - Annual deaths of infants under one year of age Death rate (/thoul at.. 1-4 - Annua deethe per thousand in age group 1-4per thousand live births, years,' to children in thie age group; suggested as an indicator of

Life eatnctac at bith fyral - Average cmbser of yearsr of life rmiming at malnutrition.birth; usually five-year averages ending in 1960, 1970 and 1971 for develop-ing countrims. Ed-ction

irons reproduction rate - Aerage somber of live daughters a woman will bear Adjusted enrol lment ratio - primary school - Enrollent of all agea as per-in her normal reproductive period if she seperiences preaent age-specific cetage of pria:ry school-age population; includes children aged 6-11 yearsfertility rates; usually five-year averages ending is 1960, 1970 and 1971 but adjusted for different lengths of primary education; far countries withfor developing countries. universe1 education, enrollment may esceed 1007. since s- pupils aer bel-

Population growth rate (7.) - total - Compoud annual grovth rates of mid-year or aboew the official school age.population for 1950-60, 1960-70 and 1970-71. Adjusted enrollmet ratio- secondary sshol - Computed as abova; secondary

Pouato rowth rate (7.) - urban - Computed like growth rat of total education requires at least four yeas of appround primery instmuctism;population; different definitions of urban aroe. may affect comparability of provides general, vo..ational or teacher traisig instruntiasm for pupilsdsta among ecountries, of 12 to 17 years of age; correspondencecou..rses are generally excluded.

Urban population C7. of total) - Ratio of urban to total population; different Y"ear of schoolima erovided (first and second 1.vals) - Total years ofdefinitions of urban areas may affect cpomprability of data amnog countriesa. schoolixg; at secanary level, vocational instruction my be pertially or

completely excluded.Age structure (percent) - Children (0-14 yearn), working-age (15-64 years), Voncational enrollment (. of secondary) - Vocational imetitutiaus in-ludea:nd retired (65 yaare asd over) as percentages of mid-ye.r population. technical, industrial or other programs which operate indspandently or Ca

Aedependency ratio - gatic of population under 1) and 61 and over to those departments of ...condery institutions.of ages 1) through 64. Adult literacy rats (7.) - Literate adults (able to read and write) as per-

Economic dep.ndency r.tio - Retia of population under 1) and A5 and over to centage of total adult population aged 15 years ad over.the labor forc in age group of 15-64 years.

Faily piannit - acpto2trs (oteolative. thou) - Cuoulativ snmber of acceaptors Hous ingof birth-control devic under aus pices of national fatly planning progra Prersns par room (urban; - Aver..age somber of persons per roo in oncupiedsince inception onvetional dwelling, in urban ares.,. dwellings e.ccide non-permanent

Family pla...iin - users (72 of married women) - Percentages of married womn of atructures and unoncupled partn.child-hearing age (11-44 years) who use birth-control devices to all married Occupied dweIlinee without Pplead water (2) - Occu pied conventiona1 dwellings.omen fi, san ago grop in urban smd rural .arse without inside or outside piped water facilities

an percentage of all ocoupied dwellings.E.p1ovnent ACcs to el-ctricity (7 of all dwalliXgs) - Conentional dwellings withTotal labor force (thousand) - Econoically active persons. including armed electricity in living quarters as percent of tcta1 dwellimga in urben and

force and unemployed but secluding housewives. e-dntst, etc. definitions rural areas.

in variou ..ou.ntrino are not comparable. Rural dwellings connected to electricity (. Computed as above for -ruraLabor force in agriculture (2) - Agricultural labor force (in farming, forestry, deellings only.hosting and fishing) as percentage of total labor forc..

Un-ploy.d (7. of labor force) P- ueployed are unually defined as persone who Consonotiouare able and willing to tale aJob, out of a Job on a given day, renained out Radio receivers (ear thou pop) - All types of receivers for radio broadcastsof a job, and seeking worb for a epeified ninimun period not e..ceeding one tm general public per thousand of population; excludsa unlicenseBd receivereveek; may not be coparable between countri.e due to different definitiona in countries and Le years when registration of radio seta was in effect;of unemployed and source of data, e.g., employment office statistics, sempls data for recen.t years my not be comperable since most countries abelishedsurvys, compulsory unemployment isuac.licensing.

Pan.angar cars (pear thou nop) - Passenger cars comprise wator cars esatingIm-m di-tribution- Pr ...tags of private in-om (both in cash and kind) le.a than aight persons; secludes asbulencas, hearses and militaryreceived by richest 17.. richest 207.. poorest 207.. and pooresi 407. of house- vehicles.holds. Electricity (kwh/yr pear cap) - Annual cansmption of industrial, commercial.

public and Private elantricity is kilmowtt hours per capita, generallyDietribution of land ownership - P-rentages of land owned by wealthiest 107. based on production data, without allowance for losses in grids but allow-and poorest 107. of land owners, tog far Imports and eaporta of siactritity.

Newsprint (be/yr pear use) - Per .apit. annual caneomption is kilogramHealth and Nutrition estimated from domstin production plus met imports of newsprint.Ppoplation par physician - Population divided by n,uber of practicing

phyatalane qualified from a medical school at university isvol.

ANNEX IPage 3 of 4

EGYPTBCOSOMIC DEVELOPMENT DATA

(Amounts in milltons of US dollars)

Actual Eat. Projected 1973- 1975-1973 1974 1975 1976 1980 1975 1980 1973 1975 1980

NATIONAL ACCOUNTSI/ (Constant 1975 Prices) Ava;age AnnualGrowth RtgAt As Percent of CDY

Gross Domestic Product 10,517 10.849 11,912 12,636 16,288 6.3 6.4 99 100 99

Gains from Terms of Trade (+) 57 365 .. 82 113 .. +1 ., +1Gross Domestic Income 10,574 11,214 11,912 12,718 16,401 6.1 T!t 100 100 100

imports(incl. non-factor services) -2,864 -4,052 -4,989 -3,904 -5,970 32.0 3.6 27 42 36Exports (incl. non-factor services) 1,950 2.230 2.198 2.512 4.226 6.2 14.2 1l 19 26Resource Gap -914 -1,822 -2,791 -1,392 -1,744 75.0 -9.0 9 23 10

Consuaption Expenditures 10,115 10,887 11,836 11,806 14,179 8.2 3.7 96 99 86investsent Expenditures (tncl. stocks) 1,373 2,149 2,867 2,304 3,966 44.0 6.7 13 24 24

Domestic Savings 459 327 76 912 2,222 -60.0 95.0 4 1 14

MERCRAINDISE TRADE Annual Data at Current Prices AA Percent of Total

ImportsCapital Goods 291 480 728 550 17 17Fuels and intermediate goods 633 1,655 2,057 1,566 38 48Cnn-,umtion Goods 740 1.340 1.54 1.349 45 _35

Total Merchandise Imports (c.i.f.) 1,664 3,475 4,329 3,465 100 100

ExportsAgricultural Products 423 857 522 490 42 33

Industrial Goods 580 817 1.046 1 115 58 67Total Merchandise Exports (f.o.b.) 1,003 1,674 1,568 1,605 100 100Travel 156 266 332 383Suez Canal .. 85 308

Merchandise Trade Indices Average 1975 - 100Export Price Index 68 122 100 109Import Price Index 67 95 100 105Terms of Trade Index 101 128 100 103Exports Volume Index 94 88 100 114

VALUE ADDED BY SECTOR As Percent of Total

Agriculture 33 34 33 31Industry, Electricity & Construction 24 26 28 28Services 43 40 39 41

Total 100 100 100 100

PUBLIC FINANCE 1977Current Prices Budgeted As Percent of GDP

Current Receipts 3,142 3,648 4,593 5,673 7,821 30 39Current Expenditures 2.786 3.487 5.056 5.238 6.121 26 42Budgetary Savings 356 161 -463 435 1,700 4 .3Public Sector Investment 1,141 1,446 2,337 2,196 3,502 11 20

CURRENT EXPENDITUIRES DETAILS Actual Prelim. DETAIL ON At 1975 P and ER(AS X of Total Current Expanditures) 1973 1974 1975 1976 PUBLIC SECTOR Draft Plan

Defenae 39.1 24.8 29.721 28,3-/ IRVE8TISNT PROGRAM (1976-80) % of Total

Subsidies 17.1 35.8 36.2 30.5 Agriculture 1,997 10

General Services 19.6 17.6 16.6 21.3 Industry and Mining 4,792 24Economic Services 24.2 21.8 17.5 19.8 Services 3,993 20Total Current Expenditures 100.0 100.0 100.0 100.0 Transport and com-

nuuications (Inc. Suez) 5,191 26Oth,er 3.993 20

Total Expenditures 19,966 100SELECTED INDICATORS 1973- 1975-

1975 1980Average ICOR 2.08 3 .663Import Elasticity 3.81 0.75

LABOR FORCE ANDOUTPUT PER WORKER Total Labor Force Value dded Per Worker iCurrent Prices)

In Millions % of o9tal n U8 Dollars Ave"1973 1975 1973 1975 0 1973 1975 1973 1975

Agriculture 4.2 4.2 47 44.2 624 858 67 68.8Industry 1.2 1.2 13 12.6 1,55

72,087 167 167.4

Service 4/ 3.6 4.1 40 43.2 615 1J,74 66 110.2Total 9.0 9.5 100 100.0 932 1,2Y47 100 100.0

V/ Incorporat.ng revised GDP estimates by the Ministry of Planning December 1976.i/ Includes reconstruction expenditures.3/ Import elasticity for 1975-80 low because of decrease in imports experienced in 1976. For the period 1977-80,

import elasticity is estimated at 1.00.4/ Includes distribution, electricity and construction sectors.

ANNEX IEGYPT Page 4 of 4

BALANCE OF PAYMZNTS. EXTERNAL ASSISTANCE AND DEBT(amounts in millions of US dollars at current prices)

Actual Est.1973 1974 1975 1976

SUMMARY BALANCE OF PAYMENTSExport of Goods, f.o.b. 1,003 1,674 1,568 1,605Import of Goods, c.i.f./ -1.664 -3,475 -4,329 -3,465

Trade Balance -661 -1,801 -2,761 -1,860Service Receiptsl' 421 710 1,082 1,480Service Payments -414 -541 -801 -1,010

Service Balance 7 169 281 470

A. Deficit on Goods and Services -654 -1.632 -2,480 -1,390

B. Amortization of LMT Debt -407 -631 -568 -545

(of which suppliers' credits) (277) (-285) (-280) (-300)

C. Net Reduction in Short-term Debt -- -- -264 --

D. Reductions of- Balances on Bilateral Accounts -113 -28 -241 -200

E. Foreign Exchange Requirements -1,174 -2,291 -3,553 -2,135

F. Supply of Funds 1,290 2,119 3,573 2,135

Private unrequited transfers 6 42 91 65Official grants 725 1,264 988 635Gulf Organization for Development in Egypt -- -- -- --

Other MLT loans 170 199 583 665Suppliers' credits 160 273 363 420MLT deposits/loans CBE -- 5 1,580 470Foreign investment -- 7 20 50

Net increase in short-term commercial bank credits 352 585 -- 235Other monetary movements, net 2/ -123 -256 -52 -405

G. Changes in Reserves 116 -172 20 n.a.

GRANT AND LOAN COMMITMENTSOfficial Grants and Grant-like 725 1,264 988 635

Public MLT LoansIBED -- 85 77 157IDA 75 55 55 40

Other Multilateral -- 6 100 100Governments 290 595 2,507 1,375Suppliers/Commercial 160 273 363 420Total Public MLT Loans 525 1,014 3,102 2,092

DEBT AND DEBT SERVICE. MLT(Public Debt Outstanding & Disbursed)

Interest on Public Debt 79 95 111 231Repayments on Public Debt 407 631 569 545Total Public Debt Service 486 726 680 776

Burden on Exchange Earnings (%)Public Debf Service 34.1 30.5 25.7 25.2

EXTERNAL DEBT Actual Debt Outstanding on September 30, 1976

Disbursed Only PercentWorld Bank/IDA 154.5 2.7Governments and Arab Dev. Funds 4,604.4 81.2Suppliers 685.9 12.1Other MLT 226.0 4.0Total Public MLT Debt 5,670.3 100.0

Short-term Debt (disb. only) 1,380.7

1/ Excludes "own-exchangel' imports2/ Includes errors and omissions

ANNEX IIPage 1 of 6

THE STATUS OF BANK GROUP OPERATIONS IN EGYPT

A. STATEMENT OF BANK LOANS AND IDA CREDITS

(as of April 30, 1977)

Amount in million US dollarsLoan/Credit Less cancellations

Numbers Year Borrower Purpose Bank IDA Undisbursed

Ln 243-UAR 1959 SCA Suez Canal Expansion 56.5 -- --Cr 181-UAR 1970 UAR Nile Delta Drainage -- 26.0 8.3Cr 284-UAR 1972 ARE Railways -- 30.0 1.9Cr S-13-UAR 1/ 1972 ARE Cotton Ginning Engineering -- 0.2 --Cr 393-UAR 1973 ARE Upper Egypt Drainage -- 36.0 18.7

Cr 412-UAR 1973 ARE Development Industrial Bank 2/ -- 15.0 2.1Cr 423-UAR 1973 ARE Cotton Ginning Rehabilitation -- 18.5 6.2Cr 437-UAR 1973 ARE Population -- 5.0 3.9Cr S-15-UAR3/ 1973 ARE Talkha Engineering 0.4 -

Cr 484-UAR 1974 ARE Talkha Fertilizer -- 20.0 10.0

Cr 524-EGT 1974 ARE Ag/Ind Imports -- 35.0 2.9Ln 1062-EGT 1974 ARE Ag/Ind Imports 35.0 -- 4.9Ln 1064-EGT 1974 SCA Suez Canal Rehabilitation 50.0 -- 42.1Ln 1085-EGT 1975 ARE Tourah Cement 40.0 -- 26.0Ln 1098-EGT 1975 ER Railways II 37.0 24.8

Cr 548-EGT 1975 ARE Telecommunications -- 30.0 27.0Cr 576-EGT 1975 ARE DIB II 2/ -- 25.0 23.3Ln 1239-EGT 1976 APA Alexandria Port 45.0 -- 45.0Ln 1276-EGT 41 1976 ARE Fruit and Vegetable Dev. 50.0 -- 50.0

Cr 637-EGT 1977 ARE Upper Egypt Drainage II -- 40.0 40.0Ln 1285-EGT 1977 ARE Upper Egypt Drainage II 10.0 -- 10.0Ln 1292-EGT 1977 ARE Textile Rehabilitation 52.0 -- 52.0Ln 1369-EGT 5/ 1977 AWA Alexandria Water Supply 56.0 -- 56.0Cr 681-EGT 6/ 1977 ARE Education -- 25.0 25.0

Totals 431.5 306.1 480.1Of which has been repaid 56.5 0.6Total now outstanding 375.0 305.5Amount Bold 7.6Of which has been repaid 6.0 1.6Total now held by Bank and IDA 5/ 373.4 305.5 480.1

B. STATEMENT OF IFC INVESTMENTS(amount in US$ million)

Year Obligor Type of Business Loan Equity Total

1976 Arab Ceramic Company Ceramic Industry 4.25 .75 5.0(plus .635contingency (5.635)comnitnen t)

1/ Refinanced under Credit 423-UAR2/ Formerly Bank of Alexandria3/ Refinanced under Credit 484-UAR4/ Third Window Loan5/ Not yet effective EMIDA6/ Excluding exchange adjustments May 10, 1977

ANNEX IIPage 2 of 6

C. PROJECTS IL EXECUTION 1/

Cr. No. 181-UAR - Nile Delta Drainage I Prolect: USS26 million Creditof April 17, 1970: Effective Date: December 22. 1970: Closing Date:September 30, 1978

At present, about 65 percent of the project is completed; full com-pletion is expected by end-1979, i.e., 2-1/2 years behind schedule. However,procurement is proceeding satisfactorily and it is expected that the whole ofthe credit will have been committed by December 1977, and that disbursementwill be completed by mid-1978. Due to inflation the local cost of the projecthas increased by 90 percent, from $116 million to $220 million. There is noforeign exchange cost overrun. Progress in project implementation during 1976was satisfactory and, for the first time, the project reached the establishedannual target. Government has allocated the required local funds for the year1977 for the implementation of the ongoing Bank/IDA financed drainage projects.It has also agreed that local funds required in the future would be includedin the medium-term development plan.

Cr. No. 284-UAR - Egyptian Railway Prolect: US$30 million Credit of February9. 1972; Effective Date: July 17. 1972; Closing Dates: (i) March 31. 1977,for track materials, locomotives and spare parts; and (ii) December 31, 1977,for signalling and telecommunications equipment and installation.

The project generally is being implemented satisfactorily. Allprocurement contracts have been awarded, and the credit has been fully com-mitted. To allow the remaining balance to be utilized, the Closing Date forthe part of the Credit allocated to signalling and telecommunications itemswas extended from September 30, 1976, the original date, to December 31, 1977;the Closing Date for the other parts of the Credit, originally December 31,1973, was extended for a fourth time to March 31, 1977.

Cr. No. S-13-UAR - Cotton Ginning Rehabilitation Engineering Project;US$175,000 Credit of November 17. 1972; Effective Date: June 15, 1973;Closing Date: November 30, 1973.

This credit was fully disbursed and subsequently refinanced underCr. 423 below.

1/ These notes are designed to inform the Executive Directors regarding theprogress of projects in execution, and in particular to report any prob-lems which are being encountered, and the action being taken to remedythem. They should be read in this sense, and with the understandingthat they do not purport to present a balanced evaluation of strengthsand weaknesses in project execution.

ANNEX IIPage 3 of 6

Cr. No. 393-UAR - Upper Egypt Drainage I Pro-ject; US$36 million Credit of June8. 1973; Effective Date: November 28, 1973; Closing Date: December 31. 1979.

At present, about 30 percent of the project is completed; full com-pletion is expected by end-1980, i.e., 6 months behind schedule. About 50percent of the contracts for equipment have been awarded. Foreign exchangecosts have risen by about 14 percent almost entirely due to price increasesof chemicals for bilharzia control. The foreign cost overrun of the bilharziacontrol program is being financed under the Upper Egypt Drainage II project(Loan No. 1285-EGT and Credit No. 637-EGT).

Cr. No. 412-UAR - Development Industrial Bank (formerly Bank of Alexandria)Project; US$15 million Credit of June 29, 1973; Effective Date: November 29,1973; Closing Date: September 30, 1977.

The entire amount of the credit has been committed to subprojects.As of March 31, 1977, $12.9 million had been disbursed. The transfer ofresponsibility for this project to the newly established Development Indus-trial Bank became effective on March 28, 1977.

Cr. No. 423-UAR - Cotton Ginning Rehabilitation Pro-ject; US$18.5 millionCredit of July 30. 1973; Effective Date: February 15. 1974; Closing Date:June 30, 1978.

The scaled-down project financed by IDA is estimated to be completedin June 1979 and the remainder of the full project financed by a loan from theSaudi Fund for Development, which became effective in July 1976, is expectedto be completed by June 1981. The foreign cost of the project ($34.3 million)are now firm as all procurement has been completed but the local componentcontinues to escalate mainly due to steady increase in the cost of civilworks. By Presidential Decree of 1977 the Project Implementation Unit hasbeen upgraded to the status of a General Authority for Rehabilitation ofGinneries which should give the management more freedom regarding financialand administrative matters.

Cr. No. 437-UAR - Population Project; US$5.0 million Credit of November 6,1973; Effective Date: March 25, 1974; Closing Date: December 31, 1977.

The project had been greatly delayed by a shortage of local fundsand by administrative problems. It is now being carried out with a reducedscope but substantially in accordance with a revised schedule.

Cr. No. S-15-UAR - Talkha Urea Fertilizer Engineering Project; US$400,000Credit of November 20, 1973; Effective Date: April 24, 1974; Closing Date:March 31, 1975.

The credit was refinanced under Cr. 484 below.

ANNEX IIPage 4-of 6

Cr. No. 484-UAR - Talkha II Fertilizer Project; US$20 million Credit of June24, 1974; Effective Date: January 22, 1975; Closing Date: April 1. 1979.

The project is proceeding well and mechanical completion by mid-1978 appears feasible. Additional foreign exchange financing to cover a32 percent cost overrun has been secured from the Arab co-lenders under theproject.

Cr. No. 524-EGT and Ln. No. 1062-EGT - Agricultural and Industrial ImportsProject; US$35 million Credit and US$35 million Loan of December 20, 1974;Effective Date: March 19, 1975; Closing Date: December 31, 1977.

The bulk of the procurement actions has been completed and dis-bursements are well advanced. One of the six surveys of industrial sub-sectors has been completed and the five others are expected to be completedby end-1977.

Ln. No. 1064-EGT - Suez Canal Rehabilitation Project; US$50 million Loan ofDecember 20, 1974; Effective Date: April 21, 1975; Closing Date: June 301978.

Disbursement of Bank funds has now begun, the Canal Authorityhaving first used lower interest funds from other sources. Progress to dateon project implementation has been good, and procurement on other items to befinanced by the Bank is well advanced. A new project for the enlargement ofthe canal has been appraised and is expected to be presented to the ExecutiveDirectors early in FY78. The financial situation of the Borrower is sound;canal traffic and revenues are both higher than expected at appraisal.

Ln. No. 1085-EGT - Tourah Cement Expansion Project; US$40 million Loan ofFebruary 10, 1975; Effective Date: June 9, 1975; Closinq Date: June 30,1979.

Contracts have been awarded for all equipment packages, and disburse-ments are proceeding. Construction of civil works is under way but at a slowrate and is about six months behind schedule. Consultants which assisted inbid evaluation are now assisting in supervision of project execution andimprovement of the existing plant.

Ln. No. 1098-EGT - Railways II Project; US$37 million Loan of April 2, 1975;Effective Date: August 20, 1975; Closing Date: December 31, 1978.

Progress on physical investment items under the project is generallysatisfactory. However, the Egyptian Railways (ER) are experiencing opera-tional difficulties with a large number of locomotives out of service becauseof inadequate maintenance largely due to lack of spare parts. A programto remedy this situation is being discussed with Government and ER. Also,declining traffic and rising costs resulted in a worsening of ER's financialposition. Government is considering an increase in rail tariffs proposedby ER.

ANNEX IIPage 5 of 6

Cr. No. 548-EGT - Telecommunications Project; US$30 million Credit of May 16,1975; Effective Date: August 14, 1975; Closing Date: September 30, 1978.

Project works are about two years behind schedule, primarily becauseof initial delays in building construction. Construction has, however, nowaccelerated and is expected to proceed satisfactorily. Contract awards forcables have been largely completed and bids for telex equipment are beingevaluated, both several months behind schedule.

Cr. No. 576-EGT - Second Development Industrial Bank (formerly Bank ofAlexandria) Project; US$25 million Credit of July 30, 1975; Effective Date:February 19, 1976; Closing Date: October 31, 1979.

As of March 31, 1977, about $12.7 million had been committed underthe project and $1.6 million had been disbursed. The transfer of respon-sibility for this project to the newly established Development IndustrialBank became effective on March 28, 1977.

Ln. No. 1239-EGT - Alexandria Port Prolect; US$45 million Loan of April 19,1976; Effective Date: August 17, 1976; Closing Date: December 31, 1980.

Project implementation is slower than expected. Civil engineeringconsultants have completed the first phase of their work; proposals frommanagement consultants have been invited. Prequalification of contractors fordredging and construction works has started. Tender documents for floatingcranes are being prepared.

Ln. No. 1276-EGT - Fruit and Vegetable Development Project; US$50 millionThird Window Loan of June 11, 1976; Effective Date: December 20, 1976;Closing Date: December 31, 1982.

Steps are being taken to commence project implementation. BankMisr has signed sub-loan agreements for most of the identified sub-projects;consultants have been appointed for Bank Misr and for the Nubariya civilworks.

Ln. No. 1285-EGT and Cr. 637-EGT - Upper Egypt Drainage II Project; US$10million Loan and US$40 million Credit, both of June 11, 1976. EffectiveDate: January 31, 1977; Closing Date: June 30, 1983.

This loan and credit were declared effective on January 31, 1977and project implementation has commenced.

ANNEX IIPage 6 of 6

Ln. No. 1292-EGT - Textile Prolect: US$52 million Loan of September 20, 1976.Effective Date: February 20. 1977; ClosinR Date: June 30, 1980.

This loan has been declared effective on February 16, 1977 andproject implementation has commenced. The two beneficiary companies haveestablished effective project implementation units. About 75 percent ofengineering drawings have been completed and contracts with contractors havebeen signed. Prequalification of the equipment suppliers has been completedand tender documents are expected to be issued shortly.

Ln. No. 1369-EGT - Alexandria Water Supply Prolect: US$56 million Loan ofMarch 7. 1977; Effective Date: July 7. 1977; Closing Date: June 30. 1982.

Action on effectiveness conditions is being initiated.

Cr. No. 681-EGT - Education Prolect: US$25 million Credit of March 7. 1977;Effective Date: July 6, 1977; ClosinR Date: June 30. 1979.

Action on effectiveness conditions is being initiated.

ANNEX IIIPage 1

ARAB REPUBLIC OF EGYPT

Nile Delta Drainage II Project

Supplementary Project Data Sheet

Section I: Timetable of Key Events

(a) Project first identified: August 1975

(b) Date of the First Bank Mission to Consider Project: November/December 1975

(c) Time taken by the Egyptian Public Authority for DrainageProjects (EPADP) to prepare the project: Nine months

(d) Date of Departure of Appraisal Mission: September 29, 1976

(e) Date of Completion of Negotiations: April 8, 1977

(f) Planned Date of Effectiveness: October 1977

Section II: Special Bank Implementation Actions

None.

Section III: Special Conditions

1. The failure of the agreement with the Kreditanstalt fur Wiederaufbau(KfW) of Germany to become effective by December 31, 1977 or by another date tobe agreed upon between the Government and the Bank/IDA will be a condition ofdefault unless the Government is able to secure the additional funds requiredfrom other sources.

2. The establishment of a special fund under this project as well asunder the ongoing Bank/IDA-financed drainage projects providing for timelyallocation of local funds will be a condition of effectiveness under theDevelopment Credit Agreement (para. 66).

3. Contracts for open drains and pumping stations will be awarded assoon as appropriate (para. 58).

4. A qualified and experienced chairman of EPADP and a vice-chairmanfor Lower Egypt will continue to serve on full-time basis (para. 58).

5. An adequate coordination between the extension service of theMinistry of Agriculture and EPADP will continue (para. 59).

ANNEX IIIPage 2

6. The Ministry of Health would continue to employ a qualified andexperienced program director and maintain a supervision and evaluation unitto carry out the bilharzia control program and would agree to continue thisprogram, including the provision of adequate funds, for at least 20 years(para. 60).

7. EPADP will establish and properly staff special field drainagemaintenance units (para. 61).

8. EPADP would implement a special training program for projectengineers and technicians and would continue its existing incentive policyto attract qualified staff (para. 62).

9. EPADP will introduce an adequate monitoring system (para. 72).

10. EPADP will recover investment and maintenance costs for fielddrainage (para. 73).

11. EPADP would complete a socioeconomic study to determine abilityof beneficiaries to pay for full cost of field drainage investment and theGovernment would implement mutually acceptable recommendations of the study(para. 73).

IBRD 125963a- 31 32- MARFCH 1977

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