R E S T R I C T E D ; X .: 1 , ; :, R e p o r t N o. P (IDA) 8 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 EXECUTTVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE REPUBLIC OF CHINA FOR THE TAIPEI REGIONAL WATER SUPPLY PROJECT August 28, 1961 IMTENATIONAIL DEVEMOPENT ASSOCIATION R-EPORT AND RECOPT21TD/ATIONS OF THIE PRESIDECIT TO THE EXEUTVEDIRCTRSO_ A PROPOSED DEVELOLEJT CREDIT To THEri REPUBLIC OF CIThTA FOR TIE TAT PEI REGIOAL WVIATER SUPPLY PROJECT 1. I submit the following Report and Recommendations on a proposed Development Credit, for an amount in various currencies equivalent to $`h.h4 million, to The Republic of China, to finance part of the cost of the Taipei Regional Water Supply Project. PART I - INTRODUCTION 2. As mentioned in rnvy Report and Recommendations on the Harbor Dredging Project (IDPA/R61-25) presented to the EDecutive Directors on August 29, the Taipei Regional iTater Supply Project is one of the four selected for appraisal and consideration from a group of priority projects presented by the Govern- ment tith its request for financial assistance. The project was appraised by a technical mission in Fe,ruary a-nd March of this year and found to be suitabole for consideration by the Associations 3. Negotiations with representatives of the Govermnent of The Republic of China began on August 8 and were concluded on August 21, 1961, 4. The Bank has made no loans to The Republic of Chiina. The proposed credit, if made, would be the third development credit to China by the Association and wTould increase the total amount of such credits to 310.3 million, PART II - ECOO-UTOrC JUSTIFICATION FOR M- IDA CEDITT TO CHA11 5. A report on the economic situation in Taiwan was attached to my Report and Recommendations on the credit for the Harbor Dredging Project0 I also set forth at that time my reasons for recomimending that financial assistance be given to China in the form of development credits ratlher than on conventional terms, PART III - BACKGROUND AIND DESCRIPTION OF THE PROPOSED CREDIT 6. The Project, as presented to the AssociatiJn originally, was drafted in 1958 and provided for more extensive facilities. In developing plans for the Project the mission suggested, and the Government agreed, that in view of the scarcity of capital in Taiwan only those facilities needed in the reasonably near future be included. The major planning and design work of the Project has been done by the Taipei Regional Water Supply Conmmission (TRWSC), an agency of the Province of Taiwan, formed to plan and engineer the Project, and was reviewed by the JOG. WMhite Engineering Company of New York. Descrti o -- P o DeveLoment Credit 7. Purpose: To assist in financing the cost of expansion and improvement of water supply facilities in the City of Taipei and eight suburban corumuni- ties. Borrower: The Republic of China Amount: The equivalent in various currencies of 64.4 million. Termrn and Alortizatiorn: 50 years with no amortization for the first 10 years. One-half of one per- cent of the principal amount will be repayable semi-annually for 10 years commnencing TMarch 1,, 1972 and ending September 15, 1981 and one and one- half percent will be repayable semi- annually thereafter to and including September 15, 2011h Service Charge: 3/4 of 1 per alnum on the principal amount of the credit withdrawn and outstanding. Payment Dates: IMTarch 15 and September 1.5 Suibsidiary Borrower: Taipei Water Works PART IV - LEGAL INSTRTIEMITS MID IEGAL AUTTHORITY 8* Attached is a draft Development Credit Agreement between The Re-public of China and the Association (No, 1) The provisions of the Developmelnt Credit Regulations To. 1, dated June 1, 1961, will be applicable to this agreement. The draft Agreement contains covenants for the carrying out of the Project and its proper operation, and for consultation with, and in- formation to be su.pplied to, the Association. 9. Section 4.0l(a) of the draft Development Credit Agreement provides that the Borrower shall relend the proceeds of the Credit to the Taipei Water Works, a local public water supply agency of the municipality of Taipei, pursuant to a subsidiary loan agreement satisfactory to the Asso- ciation. The execution and delivery of such subsidiary loan agreement is a condition to the effectiveness of the draft Agreement (Section 6.01). The subsidiary loan agreemengt would contain provisions corresponding to those in the draft Agreement and the Development Credit Regulations and would provide that the rights and obligation of the Taipei Water Works toward The Republic of Chlina would correspond to those of the Republic toward the Association. - 3 - 10. The recor.nendations of the Coimmittee provided for in Section l(d) of Article V of the Articles of Agreement of the Association are attached (Meo. 2) . PART V - APPRAISAL OF TIE PhROPOSED CREDIT 116 A report entitled, ttAppraisal of the Taipei Regional Water Su-pply Project" is attached (No. 3). 12. There is a need for an improved and expanded public water supply and distribution siystem in the Taipei region to provide adequate year-round reliable water service for present users, to furnish public water to areas hitherto not served, and to provide for groith in demand in future years. The proposed project would fill this need and provide a service facility of importance to the continued develonment of the region. 13. The City of Taipei has had a water supply system since 1908. At present the system serves Taipei City and a portion of Tien-mu, a suburb; Shih-Lin, mother suburb, has its own water system and there is a small private w,ater system which serres part of a third suburb. Five other suburbs which wllTill be included in th-iis regional developmnent proposal have no water system at all at present and obtain their water from shallow wells, streams and canals, These indivridual supplies are subject to pollution and without treatmelnt constitute public health . Nost industrial and some governrmental installations use deep wJells, As evidenced by the lolw water presssure in Taipei City, the system6 does not meet the demand adequlately even in the areas served. In an atteirpt to meet the peak demand in the sunmer season, a nuaber of wells have been drilled in the city over the last several years. However, pressure in the distribuLtion system has fallen duLring the summer to levels which are dangerous due to the risk of con- ta.ination by seepage into the distribution pipes. Also the low pressure results in wasteful storage and use by consumers. 14, Of the popuilation of 1,100,000 in the Taipei Region, only some 800,000 are being served. A very conservative estimate by the Water Works forecasts the Region's population, at an annual increase of 2-1/2%, as 1,400,000 in 1970, It is clear that if some expansion of the system is not carried out within the next few years, a large part of the Region's population will not be served, and even the present service will deteriorate substantially thus tlreatening the health and well-being of the population. In order to escape tlhe necessity for patchwork and improvised measures to keep up with demand, the water supply facilities should be expanded in accordance with a plan designed to meet the expected dem;iand a number of years hence, 15. The proposed project provides for a raw river water pumping station, a raw water pipeline, a new filtration plant with an estimated capacity of 200,000 cubic meters per dayr, reservoirs at two sites, a substanitial ex- pansion of the distribution system and at least three deep wells to provide increased water in the near fuLture and water to meet peak demand later. 16, The total cost of the project., including irterest during construction on the loans involved, is estirmiated at NT:';h58 million equivalent to US$11.4 million. Abouit 13% of this amount will be generated from earnings by the Taipei Water Works during the period of construction. The balance will be covered by loans froml the Governlment. Somne 38% of the total cost will be provided boy a loan from the proceeds of the Association Credit; repayment will be in local currency over a period of 23 years, including a grace period of 3 years at an interest rate of 12% (a rate which is conventional in China under present conditions on loans repayable in local currency without a mainte-nance of value clause). Another Government loan from counterpart funds will cover 41% of the cost, with repayment over 20 years, a grace period of 3 years, and an interest rate of 12%. The balance re- presents capitalization of interest during construction on tho Government loan of the proceeds of the IDA. credit. 17, The Taipei Regional Water Sicuprly Commission will construct the project for the Taipei Water Works. This Commission should be able to carry out the project design and the construction efficiently. Taipei Water Works will operate as a single operating unit their existing facilities, those existing in the surrounding cormmunities to be served by the Project, and those to be constructed. The mtianagemeint and the staff of the Taipei Water W,Torks are capable and should be able to operate the s,ystem satisfactorily,7 18 The Taipei Water Works and the Government of China have undertaklen to ensure that the rates charged will be adequate to ensure adequate genera- tion of funds to provide for operating costs, debt service, norrmial extension ex7penditures and a portion of future major expansion costs. The scheduled water service charges, which may have to be increased on the average by abouLt 80%, are expected to have no depressing effect on water demand except to curta1 waste. 19. Goods to be financed out of tne proceeds of the Credit will be pro- cured on the basis of international competitive biclding. Piping and equip- ment for use in the construction of tlhe distribution systemr, are produced in Taiwan from imported comrponents. Technuically competent companies within Taiwrain iwill be allowed to compete in the bidding for the supply of these goods and if the local companies are successful, goods so purchased locally would be accepted for financing with tlhe proceeds of the credit. PSET VI - COiPLIMiYCE :JIT11 ARTICLES OF AGREEIITT 20. I am satisfied that the proposed Development Credit would comply with the Articles of Agreement of the Association. PART VII - RECOMIMDATIOITS 21. I recomrnend that the Association make available a Development Credit to The Republic of China in an amount in various currencries eciuivlerzL t-o USL4.4 nmillion for a total term of 50 years with servLce chai-g3s a-t 3/f cf 1% per anmum, and on such other terms as are specified in the attached draft Develop-,ment Credit Agreement, and that the Executive Directors adopt a Resolution to that effect in the form attached (Mo. 4.). W. A. B0 1l ziff Vice Presidernt for Eugene R. Black President August 28, 1961 Wash'Llgton, D.C.