R E S T R I C T E D fCOPY R e p o r t N o. P (IDA) 18 This report was prepared for use within the Association. It may not be pub- lished nor may it be quoted as representing the Association's views. The Association accepts no responsibility for the accuracy or completeness of the contents of the 'report. INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE HASHEMITE KINGDOM OF JORDAN FOR THE AMMAN WATER SUPPLY PROJECT December 13, 1961 INTFRNAlLTIONAL DETVlELOR4ENT ASSOCIIAT1ON REPORT AND RECIVTHEND4TIONS OF THE PRESIDENT TO THE EXECIUTIVE DIRECTORS ON A PROPOSED CPRDIT TO THE HASHEMITE KINGDOM OF JORDAN FOR THE A1wlAN WATER SUPPLY PROJECT 1.. I submit the following report and recommendations on a proposed development credit to the Hashemite Kingdom of Jordan in an amount in varl.ous currencies equivalent to $2 million to assist in financing a water supply project for the city of Amman. I. BACKGROUND 2. In the late summer of 1960 when the International Development Association was about to be established, the Goverrment of Jordan suo- r,itted several proposals of which highest priority was given to a group of water supply projects. The Amnan Water Supply project is the first of these. A preliminary appraisal of it was made by a missi.on which went to Jordan in November 1960. Since that time, at the suggestior. of the Bank, the demand estimates on which the project had originally been based have been reexamined, It was found that the project could be reduced in &cale withollt prejudicing the objective of provriding a water system adequate to supply the needs of the city for a substantial period of time. On this basis the project design was considerably changed by the engineer- ing consultants to the Municipality of Amman. Negotiations with repre- sentatives of the Government of Jordan and of the Municipality of Am.fian were held in Washington during November 1961. 3. The proposed credit would be the Associationts first operatbioil in Jordan. The Bank has made no loans there. Apart from several further water supply projects, the Association has under consideration a number of proposals in other fields, including agriculture. II. DESCRIPTION OF PROPOSED CRE3DIT L! Purpose: To assist in financing the cost of expanding and improving the water supply system of the city of A-man. Borrowier: The Hashemite Kingdom of Jordan. Amount: The equivalent in various currenrcies of $2 million. -2- Term and Amortization: The term of the credit would be 50 years with no amortization for 10 years. From November 15, 1971, 1 of 1% of the principal amount would be repayable semi-annuall-y fcr 10 years; and l-% semi-annually there- after to Nlay 15 2011. Service Charge: 3/4 of 1% p0a. on the principal amount of the credit withdrawn and outstand- ing a Payment Dates: May 15 and November 15. The Borrower would relend the proceeds of the credit to the Municipality of Amaan which would construct and operate the project through its Water Depart- ment. The project is divided into two parts: The basic project as described in Part A of Schedule I to the draft Credit Agreement; and additional water treatment facilities as described in Part B of that Schedule. These latter facilities wou'ld not be constructed, and the portion of the credit relating thereto could not be withdrawn, unless and until the need for additional water treatment, beyond what is provided in the basic project, had been demonstrated. III. LEGAL DOCUNENTS AND lEGAL AUTHORITY 5, Attached are a draft Development Credit Agreement between the Hashemite Kingdom of Jordan and the Associa.tion (No. 1) and a draft Project Agreament between the wundicipality of Amman and the Association (No, 2). 6. Section 2.03(b) of the draft Development Credit Agreement pro- vides that the Borrower shall not be entitled to make withdrawals in respect of goods required to carry out the facilities described in Part B of Schedule 1 (Project Descriptiori) of the Development Credit Agreement until satisfactory evidence shall have been furnished to the Association establish- ing the need for these facilities. Section 2.11 of the draft Project Agreerrent contains a corresponding provision with regard to the construction of these facilities by Amman. 7. According to Section 4h02(a) of the draft Developrment Credi.t Agreemelnt, the Borrower shall relend the proceeds of the credit to Amman on terms and conditions satisfactory to the Association. Section 6601(d) of the draft Development Credit Agreement provides as an additional condition of effectiveness that Amman shall make arrangements, satisfactory to the Borrower, Amnan and the Association, for the establishment and operation of a Water Department which would be responsible for carrying out anid operating the project and all other municipal water supply facilities, 8. In other respects the draft Development Credit Agreement and the draft Project Agreement conform generallv to the pattern of IDA credits which have inicluded a project agreement. Both agreements would be submitted for ratification to the Council of Mlinisters of the Borrowe: and to the Municipal Council of Amman, 9. The recommendation of the Commrittee provided for in Article V, Section l(d) of the Articles of Agreement, of the Association is attached (No. 3). IV, APPRAISAL OF THE PROPOSED CREDIT The Project 10. A detailed appraisal of the project (TO(IDA)19) is attached (No. 1). Duae to its extremely rapid growth, Amman has for many years been faced with increasing wa.ter supply problems. Because of a high rate of natural increase, a large influx of refugees from Palestine and a continuous m.ovement of Jordanians from other parts of the country into the capital, the population has increased from 20,000 in the 1930s to 108,000 in 1952 aana an estimated 203,000 in 1961. This has put a tremendous strain on the exist ng water system, which until 10 years ago received its supply from an old Roman collection gallery. The Municipality has attempted to adapt the system to the extracrdinary increase in demand by developing new wells and constructing further distribution lines on an emergency basis. Since no imajor extension and rehabilitation works were undertaken, however, the water system has bedome increasingly inadequate. At present it serves only about two-thirds of the population. Its poor operating condition leads to contamination and makes it impossible to maintain pressures and ensure regular supply. In some areas of the city service is frequently interrupted for periods of up to several days. As a consequence, water consumption per head is low by world standards and the incidence oL water-borne diseases, although declining, is still relatively high. 11. Although the nature of the recent population increase makes ary forecast quite speculative, Ammian's population can be expected to conuiiue to grow rapidly. Besides planning for a system adequate to meet present demand, the Munici.pality has drawqn up a 25-year master plan designed tG pro- vide the basic elements for long-term expansion. Within this framework the project woould provide a safe and dependable water supply sufficient to meet the demand expected up to 1972 when population is estimated to ieach 360,000. 12, The project provides for the development of several new deep wclls to increase the total water supply from a capacity of approximately 620 cubic metars per hour to approx-imately 1,00 cubic meters per hour, for pumping stations at the new wells, for about 3,000 cubic meters of additional distrLbu- t-ion storage capacity and for major improvements and reinforcements to the existing transmission and distribution mains. The project also includes facilities for water treatment by superchlorination, dechlorination and retention at two collection points. Because water testing facilities are inadequate and because the new wells have been drilled only recently, com- plete analyses of the water sources are not yet availabl.e. Funds have therefore been included in the proposed credit for water testing equipment and for additionaltreatmernt facilities if further analyses demonstrate the need for these. 13e The total cost of the project as a whole, including interest during construction, is estimated. at about JD 1.1 million, equivalent to aboult $3.0 million. The foreign exchange costs would be around 60% of the total, or $1.8 millionc Amman would provide JD 375X,00, or about one-third of the total, from municipal funads and loans received from the Municipal Loan Fund, a governmental agency. Most of this sum has already been spent on work con- nected with the project during the last twelve months. JD 714,300, eqiLva- lent to $2.0 million and representing about two-thirds of total cost, would be financed by a loan which the Government of Jordan would make to the Municipality of Amman out of the proceeds of the proposed credit. This loan would be repaid by Ammnan in local currency ovor a period of 20 years. after 3 years of grace, with interest at 4% per annum, which is the prevailing rate for loans of this type in Jordan, These terms are acceptable. 14. Of the proposed credit, $15 million would be allocated to the basic project referred to in paragraph 4 above and $0o5 million to the additional treatment facilities. 15, All contracts for major items of equipment and work6 required for the project would be awarded on the basis of international competitive bidding. 16. The project would be carried out by the Municipal Water Depart- ment with the assistance of engineering consultants. At the suggestion of the Association, the Mlunicipality has drafted new regulations for the Department, giving it a large degree of autonomy and separate accounts. In order to improve the Departmentts management and administration, funds would be provided under the proposed credit for the employment of a management team which would be in charge of the Departmentts operations during the period of construction and an initial period of operation, and wo-uld train local personnel. 17. In order to ensure that tlle municipal water supply system is operated on a sound financial basis, the Municipality has agreed to establish water rates which will provide sufficient funds to cover operating costs, debt service, normal extension expenditures and a reasonable part of tho cost of future major expansion; It is estimated that present rates will have to be raised by about 15 or 25% depending on the degree of water treatment requiired. On the basis of the niew rates, ainual water expenditures would amount to not more than 3% of the average disposable income of Amman house- holds and should therefore not impose an undue burden on most consumers. 18. The project would be of substantiaal benefit to the population of Amman. It would provide an adequate supply of pure water to the whol'e city. This can be expected to have favorable effects on public health and will also be of importance for tourism, which is one of Jordants most promising sources of foreign exchange earningsg Economic Situation 19. A Bank mission visited Jordan during the winter of 1960/61 and presented its conclusions in a report "The Economy of Jordan" dated March 30, 1961 (IDA/R616). 20. Jordan is an overpopulated country. Almost 90% of the country is uncultivable desert. Its present population is about l.65 million and is growing at about 3% a year. Roughly one-third of the people are refagees from the area which is now Israel and a high proportion of these are still unemployed. 21. The economy is not self-supporting and foreign aid has been necessary in substantial proportions since the inception of the State of Jordan in 19"O, partly because the Kingdom, owing to its special circum- stances, maintains a military establishment much larger than it can. support from its own resources, The steadily growing import surplus, which in 1959 represented an addition of 40% to the gross domestic product of JD 82 million ($230 million), has been made possible by foreign aid which provides about 60% of total government revenues. 22. The Jordan Development Board recently prepared a draft Five-Year Plan which is now under consideration by the Government. The principal objectives of the Plan would be (1) to reduce substantially the annual deficit in the balance of trade which at present is JD 36.5 million, by vigorously exploiting Jordants exportable resources (mainly potash, phosphate, agriculture and tourism), (2) to create employment, and (3) to increase the national income which in 1959, including the import surplus, was JD 116 million or approxdmate- ly $196f per head. 23. The Bank report referred to above stated: "'Assumling that U.S. and U.K. development aid continues at about the present, level, Jordan could achieve a significant increase in its public investmernt expenditures by improving the tax system and by. .mobilizing «/art of7 the economy's financial reserves. It should not be unduly difficult to reach an investment level of JD 5-6 million a year, which should be well within Jordants capacity to use effectively. It would permit a /jubstantial7 development program to go for- ward... assuming that Jordan will7be successTful in attracting private capita] for investment in the limited number of important industrial projects, e.g. Dead Sea Potash, which are open to it. It would not, however, permit much increase in the rather low level of social investment," - 6 - 24. The report stated (paragraph 95) that: "To make up the balance of its requirements, particularly in the social field, Jordan will have to find additional sources of finance. It cannot borrow abroad from con- ventional sources because it has no capacity to service debt except by drawing on other aid funds." It is clear that if Jordan is to rely on additional foreign assistance to carry out its development program, this will have to be given largely on terms which do not impose a heavy trans- fer burden. IDA assistance is therefore particularly appropriate. V. CONPLIANCB WITH ARTICLES OF AGREEMENT 25. I am satisfied that the proposed Development Credit will comply with the Articles of Agreement of the Association. VI. RECO0I4 E\DATIONS 26. I recormend that the Association make available a development credit to thae Hashemite Kingdom of Jordan in an amount in various currencies equivalent to $2 million for a total term of 50 years with service charge of 3/4 of 1% per annum and on such other terms as are specified in the draft Development Credit Agreement and draft Project Agreement, and that the Executive Directors adopt a resolution to that effect in the form attached (No. 5). Eugene R. Black President Washington, D.C. December 13, 1961