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Document of FILE COPY The World Bank wTTsI) FOR OFFICIAL USE ONLY R ?- 2 £:f ;6 Public Disclosure Authorized Report No. P-2170-3GT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE Public Disclosure Authorized EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE ARAB REPUBLIC OF EGYPT FOR A WATER SUPPLY ENGINEERING AND TECHNICAL ASSISTANCE PROJECT Public Disclosure Authorized November 21, 1977 Public Disclosure Authorized This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. 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 ACR Advisory Committee for-Reconstruction AWA Alexandria Water General Authority GODE Gulf Organization for the Development of Egypt GOPW General Organization for Potable Water GOSSD General Authority for Sewerage and Sanitary Drainage MOHAR Ministry of Housing and Reconstruction M< Medium and Long Term UNDP United Nations Development Program FISCAL' YEAR January 1 - December 31 FOR OFFICIAL USE ONLY ARAB REPUBLIC OF EGYPT WATER SUPPLY ENGINEERING AND TECHNICAL ASSISTANCE PROJECT Credit and Pro1ect Summary Borrower: Arab Republic of Egypt Amount: $2.0 million Terms: Repayable in 10 years, including 2 years of grace, through semi-annual installments at a service charge of 3/4 of I percent per annum. The credit would be refunded under any later loan or credit the Bank/IDA might make for the water supply project itself. Pro1ect Description: The project would finance the foreign costs of a feasibil- ity study and related technical assistance to help (i) identify and prepare a regional water supply project, (ii) define a suitable regional grouping for water supply ser- vices in the territory served by the General Organization for Potable Water (GOPW), and (iii) develop appropriate management, organization and financial structures for re- gional water supply authorities which would operate under the direction of GOPW. Estimated Costs: U-S$ million Local Foreizn Total Technical and Managtement Personnel Project Manager - .120 .120 Engineers and Technicians .152 .962 1.114 Management Team - .500 .500 Other Supply and Personnel Administrative and Clerical Support, .077 .010 .087 Travel .028 .122 .150 Sub-total .257 1.714 1.971 Physical Contingencies .026 .172 .198 Price Contingencies .017 .114 .131 Total .300 2.000 2.300 This document has raetrictod distribution oad may be wed by recipients only in the performance | of their omcial duties. Its contents may not otherwbo be disclosed without World Dank authorization. Financing Plan: Local Foreign Total --------- (US$ '000)-------- IDA - 2.0 2.0 Government .3 - .3 Total .3 2.0 2.3 Estimated Disbursements: IDA FY 78 79 -- (US$ '000)-- Annual .2 1.8 Cumulative .2 2.0 Rate of Return: Not applicable Appraisal Report: None. Consultants: 264 man-months of technical and professional personnel, including the project manager, engineers and technicians will be required. The average cost of consulting ser- vices, excluding contingencies, is estimated at $6,600 per man-month. INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE ARAB REPUBLIC OF EGYPT FOR A WATER SUPPLY ENGINEERING AND TECHNICAL ASSISTANCE PROJECT 1. I submit the following report and recommendation on a proposed development credit to the Arab Republic of Egypt, for the equivalent of $2.0 million to finance the foreign exchange cost of a Water Supply Engineering and Technical Assistance Project. In accordance with the normal procedures for credits of this type, the credit would have a term of 10 years with two years of grace; it would subsequently be refinanced under any later loan or credit that the Bank Group might make for a water supply project itself. 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. An updating economic report dated March 22, 1977 was distributed to the Executive Directors on June 8, 1977. A basic economic mission visited Egypt in May/June 1976 and its report is under preparation. Updating missions visited Egypt in October 1976, January 1977 and July 1977; the findings of these missions are incorporated in this report. Country data sheets are attached as Annex I. Background 3. From 1960 to 1966 Egypt experienced rapid growth (around 6 percent a year in real terms) under fairly rigid centralized planning and control. This system came under increasing pressure in the second half of the decade follow- ing bad harvests and increased defense expenditures, particularly as a result of 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, the abandonment of the Canal cities and the cost of resettling the population of about a million, and the virtual cessation of Western economic assistance. With the continuing military confrontation in the Middle East, Egypt further increased defense spending at the expense of other types of consumption and of its development program. Thus, in 1973 the economic picture was one of rigorously curtailed private consumption and inadequate investment, with a deteriorating capital stock of infrastructure and productive facilities. Real GDP growth for 1967-73 averaged only 3.5 percent a year. 1/ Part I of this report is virtually identical to Part I of the recent President's Report for the Suez Canal Expansion project, distributed to the Executive Directors on July 27, 1977. 4. The changed political situation after October 1973 laid the ground- work for a new "open-door" policy enunciated by President Sadat and approved in a national referendum in May 1974. This policy reflects a major effort to accelerate economic development through modernization and making Egypt's largely publicly owned and centrally controlled economy more market-oriented. Specifically, the policy envisaged (i) decentralization of decision-making in state-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 steps which are expected to lead to a significant restructuring of the economy. In particular, steps have been taken to remove some of the restrictions on pri- vate business activities, to decentralize public enterprise management, to encourage foreign private investment, to expand foreign exchange transactions outside the official rate, and to loosen many of the restraints on banking activities. 5. Substantial inflows of external assistance from both Arab countries and Western aid donors and institutions have eased some of the problems of the Egyptian economy in making the transition. However, major structural diffi- culties remain, largely due to the continuing tension in the region and the neglect of investment. These structural difficulties are also linked to the major immediate weaknesses of the economy: the large deficit in the balance of payments, the low level of government savings, and low efficiency in public sector enterprises. 6. A new government was formed in November 1976 following elections to the People's Assembly, which were the first in which a choice of candidates representing diverse political views was offered to the voters. The Cabinet was strengthened on the economic side, and a Deputy Prime Minister for Finan- cial and Economic Affairs was appointed to coordinate economic policy-making, while President Sadat directed that economic questions should be in the fore- front of the new Cabinet's tasks. Since then two minor cabinet reshuffles have taken place. 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 an estimated 9.8 percent in 1975 1/; the rise is attributed largely to recovery of industrial activity through the provision of greater aid-financed inputs, increased construction (particularly in the Canal Zone) and growth of trade and services. The high rate of growth for 1975 was in part due to the recovery of 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) at 8.0 percent. Preliminary production data for 1976 indicate that the economy continued to expand. The estimated rate of growth of 6.1 percent, however, reflects increasing capacity constraints in some sectors. 1/ Ministry of Planning. -3- 8. Investment. Egypt was able to sustain a higher level of investment during 1974 and 1975, largely as a result of generous external assistance from Arab countries. Gross investment increased from $1,373 million in 1973 to $2,867 million in 1975 (in 1975 prices). This included a considerable replen- ishment of stocks, which had been drawn down in the pre-October 1973 period. During 1976, as a result of shortages of both domestic and foreign resources, investment is estimated at only about $2,300 million (1975 prices). 9. Public Finance. Because of the size of the public sector, the bulk of Egypt's domestic financial resources for development is mobilized through the state budget and public sector corporations.