RESTRICTED Report No. P-951 r L, tA.,,. This report is for official use only by the Bank Group and specifically authorized organizations or persons. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or compicteness of the report. INIERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE HELLENIC STATE FOR A GROUNDWATER DEVELOPMENT PROJECT May 28, 1971 1NTERNATIONAL BAN}; FOR RECONSTRUCTION AND DEVELOPIfENT REPORT AND RECOBThENDATION OF TliE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO TIIE HELLENIC STATE FOR A GROUNDWATER DEVELOPMENT PROJECT 1. I submit the following report and recommendation on a proposed loan in an amount in various currencies equivalent to $25.0 million to the Hellenic State for a groundwater development project. PART I - HISTORICAL 2. The proposed loan would be the Bank's fourth loan to Greece, and the first for agricultural development. Two previous loans were made to a development finance company for industrial lending, and one for education. The project to be financed under the proposed loan was prepared with assist- ance from the FAO/IBRD Cooperative Program and presented to the Bank in September 1970. Appraisal took place in November 1970. 3. Negotiations were held in Washington from April 21 to 27, 1971. The Greek delegation was headed by Mr. Papadakis, Director-General, Ministry of Coordination. It included MIessrs. Vassios and Karavias from that minis- try, Mrs. Douma and Messrs. Zacharopoulos and Veltas from the Ministry of Agriculture, and Mr. Coutris from the Greek Embassy in Washington. 4. Following is a summary statement of loans to Greece as of April 30, 1971: Amount Undisbursed Loan No. Year Borrower Purpose ---(US$ million)--- 530 GR 1968 National Investment Bank Industry 12.5 2.2 for Industrial Develop- ment 665 CR 1970 National Investment Bank Industry 20.0 16.4 for Industrial Develop- ment 711 CR 1970 Hellenic State Education 13.8 13.8 Total (less cancellations) 46.3 of which has been repaid to Bank and others .8 Total now held by Bank 45.5 Total undisbursed 32.4 5. Disbursements under the two loans to the National Investment Bank for Industrial Development (NIBID) have progressed satisfactorily. I'he Edu- cation loan (No. 711 GR) became effective on March 31, 1971. 6. IFC has made investments in five enterprises in Greece totalling about $15.3 million. This includes an equity investment in NIBID of $700,000 made in 1965; an equity and loan investment of $600,000 in a fertilizer com- pany in 1962 (sold in 1970); $5 million in two cement companies in 1965 and 1966; and $9 million in an aluminium company in 1970. No new proposals are in an advanced state of consideration at present. 7. The Bank is presently considering a road maintenance project and a third loan to NIBID. PART II - DESCRIPTION OF THE PROPOSED LOAN Borrower: The liellenic State Amount: The equivalent in various currencies of $25.0 million. Purpose: To finance the foreign exchange com- ponent of a groundwater development program consisting of the installa- tion of pumps and construction of irrigation and drainage facilities and of farm roads. Amortization: In 20 years including a 5-1/2 year period of grace, through semi-annual installments beginning on February 1, 1977 and ending on February 1, 1991. Interest Rate: 7-1/4 percent per annum Commitment Charge: 3/4 of 1 percent per annum Estimated Economic Return on the Project: 18 percent PART III - THE PROJECT 8. An appraisal report entitled "Groundwater Development Project - Creece" (No. PA-83a) is attached. 9. Agriculture plays a central role in the Creek economy. In 1970, it employed 48 percent of the total working population, contributed 20 per- cent to gross domestic product and accounted for about 53 percent of the -3- country's commodity exports. With an annual growth rate of about 4 percent during the last decade the sector has been lagging behind GDP growth aver- aging 7 percent. To a large extent, this slow growth in relation to other sectors reflects difficulties inlherent in any transition from a traditional to a modern agriculture. Farm holdings are small with an average size of 3.3 hectare which, on the average, is fragmented into seven parcels. Land consolidation is under way, but has not covered all regions adequately. iiew cropping patterns are being introduced, particularly with the expansion of irrigation. 10. In ttke past, public agricultural investment has largely been di- rected into irrigation projects, and lias been concentrated on surface irri- gation which generally hias been more expensive than groundwater irrigation. Moreover, limited funds were dispersed over too many projects whiclh were often inadequately prepared, and in many cases not completed. Thie Govern- ment is now trying to correct this situation by concentrating investments on high priority projects and also by exploring the less costly tecliaiques of groundwater irrigation. As the first large-scale groundwater irrigation scheme, the proposed project would have pivotal importance in future irri- gation development in Greece. 11. The Land Reclamation Service (LRS) of the Ministry of Agriculture would execute the project. It is in clharge of Government-promoted agricul- tural development throughout Greece, and has a fairly dense network of re- gional headquarters and local offices. Its regional headquarters in Thessaly would be mainly responsible for project implementation, wlhile the central Athens office, besides its supervisory function, would prepare tender docu- ments, review bids and award contracts. In the interest of speedy project implementation a senior official of the Athens office would be responsible for coordinating all field activities with those of other agencies concerned. LRS has sufficient experience in groundwater development and should be able to discharge its functions under the project satisfactorily. Its staff, particularly for design and construction work, would have to be expanded to meet the needs of the project. A consultant firm with broad experience in groundwater development would assist in project implementation and the execution of hydrogeologic studies. 12. The project would provide irrigation for some 40,000 hectares of dry farming land in the Tliessaly plain. It would include drilling 1,600 deep wells for production and 35 wells for exploration, installing pumps and electric motors, irrigation pipes, distribution canals, and sprinkler units, and constructing farm roads and surface drainage ditches. Explora- tory wells would be drilled in preparation of a further expansion of the area to be irrigated under the government's groundwater development program, partly in Tlhessaly and partly in Macedonia and Thrace. Project wells would be about 120 meters deep and serve between 15 and 29 hectares. Pumps would be driven by electric motors. Construction of pump houses and installation of pumps including the motors would be the responsibility of thie pump supplier. Sprinkler distribution systems would be used on about 80 percent of the wells. The rest would serve gravity systems. About 1,500 kilometers of farm roads and an equal length of drains would be built. - 4 - 13. As noted in paragraph 9 above, fragmentation of land holdings ham- pers agricultural development in Greece. tiuch of the effort in land consoli- dation to date, however, has been concentrated on the Thessaly plain, where average farm size is larger than in the rest of the country, and wlhere al- ready about half of the project land has been consolidated into single units. The Government has agreed that project wells would only be drilled on con- solidated lands. Consolidation would progress in step with project imple- mentation. 14. LRS would install 80 percent of wells and related equipment on behalf of water users' associations (hereafter referred to by their Greek acronym TOEV). Such TOEVs would be set up prior to project implementation with the assistance of LRS. They would own wells and irrigation installa- tions, be responsible for their maintenance, and later collect payments from members. About 20 percent of wells would be drilled on property of farmers large enough to run a well by themselves, or by small groups of farmers. In this case .TOEVs would still be established for the purpose of maintaining farm roads and drainage canals. 15. The overall cost of the project including provision for engineering, administration, consulting services and further groundwater exploration is estimated at $50 million. The proposed $25 million loan would cover the for- eign exchange component estimated at 50 percent. 16. Construction of wells would enable farmers in the project area to diversify their production. An increase in feed production would lead to savings on imports of beef and dairy products. The project would create additional employment opportunities for some 6,000 farm families. The eco- nomic rate of return on the project is estimated at about 18 percent. 17. Farmers would pay for about 75 percent of total installation cost, excluding interest. This would be in line with present practices applied on Government sponsored groundwater irrigation works. It would allow the Government to recover from farmers the capital cost of the well, pump and sprinkler equipment, while it would bear the cost of farm roads and drainage canals itself. Farmers would repay their share over 25 years, the useful life of the well, without interest. Farmers' total annual payments, which also include operations and maintenance cost, would amount to about $97 per hectare. This rate is high, largely due to the highler power cost of sprinkler irrigation, but still within the farirers' repayment capacity. For the first two years after completion of a well, when cash generation would be less, repayments would be reduced accordingly. 18. Almost all deep well drilling in Greece is presently executed by force account. The Government has agreed that drilling on force account be limited to 600 out of 1600 wells to be financed under the project and to an additional 35 exploration wells. The balance would be opened to international competitive bidding in accordance with the Banlk's guidelines. In order to render bidding attractive also for foreign firms, the Covernment hias agreed to lump drilling orders in one contract of 200 and two contracts of 400. - 5 - Individual road and drainage contracts would have a minimum size of $1.7 million. Out of total project cost of $50 million equivalent, contracts for an estimated total of $43 million would be tendered on the basis of inter- national competitive bidding. Domestic manufacturers of equipment would be accorded a margin of preference for purposes of bid comparison which would be the existing rate of customs duty applicable to competing imports or 15 percent of c.i.f. cost, whichever is the lower. 19. Pumps and motors would be tendered as units and the successful bidder would be responsible for the installation of both so as to avoid difficulties in assembling them. Pump elements are being produced locally, and a bidder offering locally made pumps would receive a preference of 15% on the pump element in his bid. On the other hand all electric motors, at present, have to be imported. Since the assembly operation is simple and therefore the value added domestically to the imported motor marginal, the motor portion of the bid would be treated as a foreign bid for purposes of bid evaluation. 20. Disbursements would be made against c.i.f. cost of imported equip- ment and foreign exchange payments for consulting services. For civil works and locally manufactured equipment, disbursements would be made on a percent- age basis (37%) representing the estimated foreign exchange component. PART IV - LEGAL INSTRUMENTS AND AUTHORITY 21. The draft Loan Agreement between the Hellenic State and the Bank, the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement and a draft Resolution approving the proposed loan are being distributed to the Executive Directors separately. 22. The provisions of the Loan Agreement generally conform to the pattern of Bank loans for agricultural development. It should be noted that Section 8.01 requires fulfillment of the following conditions of ef- fectiveness: (a) issuance of the necessary proclamation regulating the use and exploitation of groundwater resources in the Project area, and (b) retaining consultants for the Project. 23. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART V - THE ECONOMTY 24. An economic report on the "Current Economic Position and Prospects of Greece" (DEA-36a) is being circulated to the Executive Directors con- currently. A basic data sheet is attached. - 6 - 25. The economic report notes the continued expansion of the Greek economy in the past two years when GNP at constant prices rose by 8 percent, while prices remained remarkably stable. It also notes the high increase in imports which was associated with rapid growth, and which entailed a consid- erable current account deficit, largely financed by private capital inflows and short- and medium-term borrowing from abroad. Debt service has been rising; taking into account additional public sector borrowing the debt service ratio will increase from the present 5 percent to between 11 and 15 percent over the next 5 to 6 years, and a cautious short-term borrowing policy is advisable. Considering, however, the favorable prospects for further economic growth, Greece continues to be creditworthy for Bank lend- ing. PART VI - RECOIIMENDATION 26. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments 2;ay 28, 1971 ANNEX GREECE BASIC DATA Area: Total - 132,ooo square kilometers Cultivated - 40,000 square kilometers Population (1970): 8.9 million Rate of growth (1960-70): 0.8% Density (per square kilometer): 68 Gross National Product (GNP) at current market prices (1969): Drachma 252.2 billion (or Us$8.4 billion at the exchange rate of Drs. 30 U US$1) Rate of growth (in real terms) 1960-67 - 7.6% 1968 - 6.6% 1969 - 7.8% 1970 - 8.o% Per capita GNP at factor cost (1970) approx. Drs. 27,000 (US$900) Industrial Origin of GDP at Current Factor Cost (% share) 1960 1966 1969 Agriculture 24.7 24.0 20.4 Mining 1.1 1.2 1.4 Manufacturing 17.0 16.6 16.3 Construction 6.8 6.9 8.5 Other 50.4 51.3 53.4 Expenditure on GNP (% share) Private consumption 75.5 71.5 67.2 Public consumption 11.2 11.9 13.2 Gross Domestic Investment 18.5 22.3 26.3 Net Export -5.3 -5.7 -6.6 Central Government Account Budget (in billion drachmas) 1967 1968 1969 1970 1971 Current Revenue 38.7 44.8 50.4 57.5 63.2 Current Expenditure 38.4 42.8 47.7 54.6 59.3 Current Surplus 0.3 2.0 2.7 2.9 3.9 Capital Expenditures 7.2 9.3 10.8 12.9 14.0 Overall Balance -5.3 -6.5 -7.3 -9.1 -8.9 Money and Credit (billion drachmas) October Increase over Average Growth 1970 October 1969 196o-69 Total money supply 49.6 9.7% 13.6% Time and savings deposita 85.7 18.7% 20.0% Commercial bank credit to private 58.14 20.4% 16.9% sector External Public Debt, Includlng Undisbursed (US $ million) 1968 1969 1970 5V Total debt (year end) 618.1 769.6 9741.8 Total debt service 52.5 59.9 70.0 Debt service ratio (% of merchandise 5.2 5-4 5.3 exports, and net invisibles) Average Gro-wth Balance of Payments (JS $ million) 1960 1969 1970 1960-70 Exports of goods 209 530 612 11.4% Iports of goods 520 11434 1705 12.6% Net services and current transfers 208 5;45 673 12.5% Current account balance -104 -358 -419 - C0modity composition of exports: 1960 1969 1970 (percent share): Tobacco 34.7 17.7 16.6 Currants and sultanas 13.1 8.1 6.2 Raw cotton 9.2 6.7 5.1 Manufactures 3.8 33.5 37.0 Foreign exchange reserves (US $ million) 1965 1969 1970 250 317 310 (or 3.0 (or 2.7 (or 2.2 months' months' months' imports) imports) imports) IMF Position (US $ million) 1968 1969 1970 Quota 100 100 138 Drawings - - - IBRD Position (US $ million) Debt outstanding 12.5 12.5 46.3 Disbursed only - 5.L 10.8 Rate of Exchange US $1.00 30.00 Drachmas (Drs.) a! Loans outstanding at the end of 1969 plus major reported additions in 1970 minus repayments in 1970. May 27, 1971