Document of

The World Bank

FOR OFFICIAL USE ONLY

GjVk 3 3L/ ,'A]-/t

Report No. 9347-IN

STAFF APPRAISAL REPORT

INDIA

INDUSTRIAL POLLUTION CONTROL PROJECT

MAY 7, 1991

Industry and Finance DivisionAsia Technical Department

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

CURRENCY EOUIVALENTS(as of May 1, 1991)

US$ 1.00 Rs. 20.00US$ 0.05 - Rs. 1.00

PRINCIPAL ABBREVIATIONS AND ACRONYMS USED

BOD - Biological Oxygen DemandCETP - Common Effluent Treatment PlantCOD - Chemical Oxygen DemandCO2 - Carbon DioxideCP - Commercial PracticesCPCB - Central Pollution Control BoardCSS - Central Sector SchemeDEA - Department of Economic AffairsDFI - Development Finance InstitutionEAP - Environmental Action PlanEDI - Economic Development InstituteEIA - Environmental Impact AssessmentFY - Fiscal YearGEF - Global Environmental FacilityGOI - Government of IndiaICB - International Competitive BiddingICICI - The Industrial Credit and Investment Corporation of

India, LimitedIDBI - The Industrial Development Bank of India, LimitedLCB - Local Competitive BiddingLOU - Letter of UnderstandingHINAS - Minimum National Discharge StandardsHOEF - Ministry of Enviroment and ForestsNOC - No Objection CertificateR & D - Research and DevelopmentSA - Special AccountsSIDC - State Industrial Development CorporationSOE - Statement of ExpendituresSOx - Sulfur DioxidesSPCB - State Pollution Control BoardSSI - Small Scale IndustryTA - Technical AssistanceTPY - Tons Per Year

FISCAL YEAR

Government of India - April 1 - March 31ICICI - April 1 - March 31IDBI - April 1 - March 31

FOR OFFICIAL USE ONLYINDI

INDUSTRIAL POLLUTION CONTROL PROJECT

LOAN, CREDIT AND PROJECT SUMMARY

norroweru India, acting by its President

Beneficlaries: Industrial Credit and Investment Corporations of India (ICICI)Industrial Development Bank of India (IDBI)

Loan Amount US$124.0 million equivalentCredit Amount SDR 23.4 million (US$31.6 million equivalent)

Terms The loan would be made at the Bank's standard variable interest rate andwould be repaid over twenty years including five years of grace. The IDAcredit would be on standard terms, with a 35 year maturity.

Onlending Terms The Government of India (GOI) would onlend the proceeds of the Bank loanto the ICICI (US$50 million) and the IDBI (US$74 million). The GOI wouldbear the foreign exchange risk, onlending to the institutions in Rupees, at aninterest rate of 2% below the long term commercial lending rate (currently15%), with a repayment period of 15 years, including five years of grace. TheICICI and IDBI would onlend at 15% or such rate as may be set in consultationwith the Bank.

The GOI would pass, as budgetary allocations from the proceeds of the IDAcredit i) US$14.1 million equivalent to the Ministry of Environment andForests (MOEF) for the institutional and technical assistance components; andii) US$5.5 million equivalent to IDBI which will act as a Government agentfor the demonstration projects and technical assistance schemes. Theremaining US$12 million equivalent will be used by the GOI for direct supporton a grant basis of the Common Treatment Facilities, through the IDBI whichwill act as the lending agent.

ProlectDescrlDtion The project's objective is to support the Gors efforts to prevent and alleviate

environmental degradation caused by industrial operations and assist in thesuccessful attainment of the proposed short and medium-term targets of itsenvironmental policy. The project is designed to assist in the identificationand implementation of a cost effective program for industrial pollutionmonitoring, control, and abatement within the context of institutional andfinancial constraints present in India.

The proposed project comprises three components: i) an institutionalcomponent designed to strengthen the Central and State Pollution ControlBoards in the states of Gujarat, Maharashtra, Tamil Nadu and Uttar Pradesh;ii) an investment component designed to support efforts by industry to complywith regulations, including the support for the set up of common treatmentfacilities; and iii) a technical assistance component designed to support theMinistry of Environment and the DFI's to provide specialized technicalassistance for the evaluation of environmental problems and the assessmentof their solutions.

The Institutional ComDonent is designed to strengthen the monitoring andenforcement ability of the GOI through the financing of a program ofimprovements at the Central and the selected State Pollution Control Boardsto enable the effective development of their mandates. The component would

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

ii

finance: a) a training program in technical and managerial skills; b) acquisitionof equipment (analytical and monitoring) required to upgrade technicalcapabilities of the Boards; and c) other laboratory facilities including mobilestations.

The Investment Comnonent would finance a) individual projects in the targetsectors dealing with waste minimization, resource recovery and pollutionabatement; b) the set up of common treatment facilities at industrial estates,for the treatment and proper disposal of liquid and solid wastes; and c) selecteddemonstration projects based on their prototype nature or novelty ofapplication in India, the potential environmental benefits and other eligibilitycriteria.

The Technical Alsistance Comnonent would assist a) the Ministry ofEnvironment and Forests (MOEF) to evaluate environmental problems anddevelop solutions; and b) the DFl's to assist enterprises in undertaking therequired feasibility studies for pollution control investments.

Prolect Benefitsand Rilsks The main benefits of the project are associated with the reduction in

environmental degradation, caused by industrial sources, to be obtained fromthe implementation of the activities described in the report. The institutionalcomponent is expected to yield, in the short term, improvements in theeffectiveness and coverage of the Boards in their monitoring and enforcementactivities. With stronger Boards, the GOI will be able to promote strictercompliance with the provisions of the environmental acts.

The sponsoring of the common treatment facilities is a pioneering effort withpotential for replication across India. Successful implementation of theproposed facilities should result in a substantial impact in the environmentalperformance of the small and medium scale industry which so far has provedresistant to change. By providing technical and financial support forindividual enterprise efforts in waste minimization and resource recovery, theproject is expected to contribute substantially to a reduction of wastegeneration in the chemical and related industries. The support ofdemonstration projects will assist in the introduction of novel techniques andprocesses for the solution to pervasive environmental problems in industry.

Specific risks are associated with the response of industry to the need toimprove the environmental aspects of their operations. In the absence ofpositive financial incentives, the enforcement of the law and the negativeincentives in place will determine the demand for the credit line for individualprojects. Although the project places priority on the strengthening of themonitoring and enforcement institutions, in the final analysis it is the abilityto convey these concerns to the manufacturer that will determine the successof the operation. Success of the activities promoted by the project, wiU in thelong run also depend on the will and commitment from the GOI to enforce theenvironmental regulations and increase the costs of non-compliance as wellas to persuade industrialists of the long term benefits of pollution control.This is a risk difficult to evaluate. However, the MOEF is strongly committedto the objectives of the GOI policy statement on the environment and to assistin the reduction of the conflict between industrial development andenvironmental protection.

ili

Etlmabed Cost

Components ..................... (USS million)

Institutional 8.9 9.1 18.0Investment 194.0 43.0 237.0Technical Assistance 1.0 4.0 5.0

Io1a a/

Financing Plan:

Government of India 17.4 --- 17.4Financial Institutions 25.0 --- 25.0Project Sponsors 62.0 --- 62.0IBRD 89.5 34.5 124.0IDA 10.0 21.6 31.6

IT22

Estimated Loan and Credit hsbusetmemOs

DANK GROUP FISCAL YEAR92 93 94 95 96 97 98

............................ (USS million).

Annual 8.0 8.0 18.0 48.0 36.0 22.0 15.6Cumulative 8.0 16.0 34.0 82.0 118.0 140.0 155.6

Econgml Rate of Return: Not Applicable

a/ Physical and price contingencies are already added to the total; the project cost is exclusive oftaxes and duties.

I2mAIMSTRIAL POLLUTION CONTROL PROJECT

STAFF APPRAISAL REPORT

Table of Contents lto No

LOAN CREDIT AND PROJECT SUMMARY .. ..............................i l-iL

I. INTRODUCTION ............................ 1

II. INDUSTRIAL POLICY AND ENVIRONMENTAL PROTECTION. ... 3A. Industrial Policy and its Effect on Industrial Pollution . .. 3B. Environmental Regulations Governing Industrial Sources .......... 4C. The Environmental Clearance and Permit Procedures . . 5D. The Record of Compliance in the Chemical Industries .6E. Incentives for Pollution Control .10F. Priorities for Strategy Development and Implementation . .13

III. BANK ROLE AND LENDING STRATEGY 15A. Strategy for Bank Assistance in Environment ..... .. 15B. Environmental Protection in Industrial Sector Lending .16

IV. TE PROJECT .... 17A. Project Objectives .... 17B. Project Description . . .17C. Project Costs ... 19D. Project Financing ... 20E. The Proposed Loan and Credit ... .22

V. RQOJ.L.LECTTATION .. ...... . .25

A. Management ... 25B. Implementation Schedule . . .27C. Procurement ............................................... .... 27D. Disbursements ... 27E. Monitoring and Evaluation ..... 29

VI. IMP1EMENTING AGEIES .. 30A. The Central and State Pollution Control Boards .... 30B. Participating Financing Institutions . 32

VII. BENEFITS AND RISKS .... 35A. Project Benefits ... 35B. Project Risks .. . 35

This report was prepared by Messrs. W. Vergara (ASTIF) based on the results ofan appraisal mission that included Messrs/Mme. R. Batstone, D. Williams and C.H.Zhang (ASTEN), W. Futur (AS4IF), N. Hadjitarkhani (ASTIF), D. Kantawala, R.Rotkar and R. Kelly (consultants). Peer reviewers were H. Daly (ENVPR); A. Khanna(AS4IF); S. Talbot (AS4CO) and W. Angell (ASTEN). Messrs. N. Gould (AS4IF) andH. Vergin (AS4DR) cleared the report.

VIIF^ill, aOT M D* T f ON .................................................. *37

2.1 Ninimum National Standards for Discharges into Water (NMKS) ..... 382.2 The Environmental Clearance Procedure . ................... 412.3 Current Incentives for Pollution Control by Industry . .442.4 Experience of Some Developed Countries in the Control of

Industrial Pollution Using Economic Instruments . . 46

4.1 Institutional Component. Cost of Improvements to the Control .....Board Laboratories . .............................................. 53

4.2 Common Effluent Treatment Plants: Preliminary List of Proposals. .664.3 Summary Description of Some Technical Assistance Schemes ......... 67

5.1 Organization and Staffing at the State Pollution Control Boards ..685.2 Common Effluent Treatment Plants (Guidelines for Evaluating

Institutional and Technical Proposals) .. ... 785.3 Implementation Schedule . . . 805.4 Anticipated Disbursements . . ................... 81

6.1 Participating Financing Institutions ............................. 82

7.1 Documents in the Project Files ................................... 95

INDI

INDUSTRIAL POLLUTION CONTROL PROJECT

I. INTRODUCTION

1.01 Since the early 1970s, but more so in the aftermath of the Bhopalaccident, India has forcefully moved to reduce the conflict between environmentalprotection and industrial development. Among the actions already undertaken toachieve this goal are: a) the enactment of laws and regulations governing thedischarge of pollutants into the air and water bodies, the generation and disposalof toxic and hazardous residues and the development of safety codes for factoryoperations; b) the creation of enforcement agencies to monitor and overseecompliance with the environmental laws; and, c) the enactment of an umbrellaenvironmental act empowering Lhe state to broadly pursue environmental protectionmeasures. These actions have already had a significant effect by fostering afavorable change in attitude in the industry toward environmental concerns and bybeing instrumental in the adoption of environmental impact assessments for newindustrial projects and the implementation of a large number of treatment plantsand abatement measures at existing units.

1.02 Yet, pollution and environmental degradation caused by industrialsources continue to be major concerns and a threat to the sustainability ofeconomic development of the country. For example, the Ministry of Environment andForests (MOEF) has recently estimated that industrial sources, althoughcomparatively smaller in volume, compared to municipal discharges, continue tocontribute over one third of the total load of pollutants into rivers and otherwater bodies. About half of this load originates from large and medium scaleindustries, specially from those in the chemical and related sectors. Sources ofwater pollution are particularly worrisome given the periodic water shortages inthe country and the already large impact of industrial sources of pollution on thequality of surface waters and groundwater reservoirs.

1.03 Many medium and small industries, although in clear non-compliance,continue to violate environmental codes because of inefficient or inoperativecontrols and, in the case of many small plants, out of sheer incapacity to meetthe financial costs and technical requirements associated with plant modernizationand/or control technology. Also, with closer monitoring and stricter controlbeing placed on airborne emissions and wastewater, chemical wastes are beingdiverted to land disposal. As common pollution problems (such as suspended solidsand c'cygen demand in wastewater) become better controlled, the effects of smallerquantities of toxic materials being discharged into alr and water media havebecome more evident and the need to address them more pressing.

1.04 As industrial modernization is a key element of the developmentstrategy of the country, efforts continue to be mounted to control and reduceits environmental impact. The Government is, therefore, in the process ofimplementing a comprehensive plan for the promotion of environmentally-safeindustrial growth, conservation of the natural resources, waste minimization and

2

control and abatement of pollution. The elements of this strategy can be broadlydescribed as: a) the internalization of environmental concerns in economic policymaking; b) the integration of environmental policy within industrial policyparticularly for the future development of the chemical industry and the smallscale sectors; and c) the adoption of a common management strategy forenvironmental policy at the State and local governments with active participationof the industry and the public. The proposed targets for this policy for the nextfive years are: a) to reduce by 25% the use of water by the industrial sector, thegeneration of solid residues and all emissions of pollutants from industrialsources into water bodies; b) to promote the adoption and implementation of commoneffluent treatment plants at existing clusters of small scale industries; c) tocontain the emissions of airborne pollutants, in particular C02 and SOx, atpresent levels; and, d) to regulate the use of non-biodegradable products and thedisposal of toxic and hazardous waste.

1.05 The proposed project has been designed to support the key aspects ofthis strategy by contributing to the achievement of all four proposed targets.First, the project would assist in the strengthening of the enforcement ofmonitoring agencies to facilitate compliance with the law and to broaden theirfield of action. Second, the project would contribute to the introduction andoperation of common treatment plants at industrial estates by providing technicaland financial assistance. Third, the project would aid the efforts of thechemical and related sector industries for adoption of cost effective wasteminimization and resource recovery or pollution abatement measures.

1.06 Since some of the elements of the government strategy for the EighthFive Year Plan (1990-1995) are still being formulated, the timing of the projectprovides a unique opportunity to support a major effort of the GOI to redirectindustrial policy toward a long term sustainable basis and toward a reduction ofthe conflict between industrialization and environmental protection. In a widerframework, Bank participation in industrial pollution control fits with the Bank'sintentions to promote environmentally sound development and complements theefforts already launched in India in energy conservation and technologydevelopment.

1.07 The appraisal report provides a review of the industrial andenvironmental policy in India in chapter 2, emphasizing recent reforms andproposals to promote effective enforcement and adoption of control measures. Inchapter 3, the report describes the Bank role and lending strategy forenvironmental assistance to industry in India. Chapter 4 describes the proposedproject, chapter 5 the implementation arrangements, chapter 6 the participatinginstitutions, chapter 7 the benefits and risks associated to the project andchapter 8 the agreements reached with the government and other institutions.

3

II. XNDVSTRIAI. POLICY AND_ENIROMENTAL PROTECTION

A. Industrial Policy and its Effect on Industrial Pollution

2.01 The Bank, through its economic and sector work, has been analyzing thepolicy framework and incentive system underlying the industrial development ofIndia. Until recently, however, it had not specifically focused on the potentialconflict between the pattern of industrialization and the goal of sustainabledevelopment and on the required actions to mitigate the problem from a policypoint of view. The pricing, trade, fiscal (taxes and s0''sidies), and monetary(interest/exchange rate) policies adopted to promote industrialization have animpact on the nature and volumes of industrial pollution. While promotingindustrial transformation, these policies have unintoanded effects on theenvironment that need to be understood and addressed.

2.02 Indian industrial policy has had an environmental impact through itsinfluence in the pattern and rate of industrialization, and on the recovery andrecycling of industrial residues. For example, the cost-plus pricing of output(such as for fertilizers and refinery products), together with the protectivetrade regime, influenced the pattern of industrialization in favor of capitalintensive sectors, often at sub-optimum plant size. Notwithstanding the fact thatIndia is a net importer of both energy and capital, its industrial policyframework favored expansion of energy and capital intensive industries (such assteel, refineries, chemicals/petrochemicals, and cement among others), frequentlyassociated with significant environmental impacts.

2.03 Trade and Pricina Policies. Artificially low raw material prices,usually lead to wasteful utilization of these inputs and, as in the case of lowcost water, promote high water usage and dilution rather than treatment orrecycle. Low prices for raw materials increase demand while discouragingconservation and recycling. When inputs are underpriced, industries that use themintensively tend to expand beyond the level justified by their economic potential.

2.04 High product prices arising from high effective protection and/orcost-plus pricing schemes have similar effects. They encourage expansion ofcapacities that may not be consistent with India's comparative advantages andprovide little incentive for enterprises to be efficient. High tariff andnon-tariff barriers to trade and cost-plus-pricing of output attract resourcestoward sectors that are highly protected, creating a pattern of industrializationthat is not warranted on the basis of resource endowment. Protection may alsogenerate increased pollution levels that could have been avoided. Producers knowthat their costs'would be covered by higher prices supported by the protectivetrade regime and/or cost-plus pricing scheme, therefore discouraging efficient useof raw materials and other inputs which in turn leads to an increase in pollution.Examples are, the high water usage by the pulp and paper industry (relative toworld standards) and the relatively low sugar yield in the sugar industry. Suchoutput pricing also make penalties for violation of discharge standards affordableas these may be factored into the cost of production. It can also favor theadoption of end of pipe treatments, which are not necessarily the most costeffective option to pollution control. Yields are usually lower (and residueshigher) under a protective trade regime and a cost-plus pricing scheme comparedto a free market situation.

4

2.05 Sub-optiM1a scales of groduction. The protection afforded to industryand the 001 emphasis on decentralization of industrial development have resultedin the adoption of sub-optimal scales of production, most notably, for somesectors such as pulp and paper, sugar and distilleries and leather tanning, wherethe median size of operating plants is below world standards. Adoption of a smallproduction scale frequently increases the cost of production and cost of treatmentof effluent, making it difficult for companies to meet emission standards.

2.06 Product and process obsoloscence. In some cases (dyes andintermediates, pesticides, for example) the industries have adopted outdated, lowefficiency processes and technologies associated with higher levels of pollution.Chemicals already banned or obsolete in other industrialized countries are stillbeing produced in the country (some pesticides and insecticides). In other cases,relatively dirty industries (some dye intermediates) or processes (chemicalbleaching of pulp), which find themselves under considerable economic andenvironmental pressure in developed nations, have been installed in India,exacerbating the environmental problems associated with industrial sources.

2.07 To address these problems, the GOI has so far focused on encouragingmore competition among domestic enterprises through the deregulation of barriersto entry and expansion. It has also taken measures to decontrol prices andpromote exports. To address the issue of sub-standard scales, the GOI hasinstituted minimum scales of production in most sectors of the chemical industryto be met as a condition to issuing a license. These measures have beensuccessful in creating significant incentives for greater efficiency and optimumuse of raw materials. They have also resulted in an increase in industrialproductivity which rose at an annual rate of nearly 4% between 1980 and 1986.However, additional measures need to be taken, particularly in regard to tradepolicies. More efficient use of raw materials would result from reduced levelsof effective protection accrued from tariff and pricing reform.

B. Environmental Reaulations Governing Industrisl Sources

2.08 There are four pollution control acts *with amendments that have beenenacted since 1974. The Water (Prevention and Control of Pollution) &Ac of 1974,amended in 1988 is the earliest legislation. This act provided for the creationof the Central and State Pollution Control Boards as the agencies for monitoringand enforcement of the Act. The Boards have the authority to inspect and placeenvironmental conditions on the operation of industrial facilities, set waterquality and effluent standards and permit or prohibit the discharge of wastes intowater bodies. Surcharge procedures and monitoring fees payable by industry arealso established under the act to pay for the costs of implementing the Boardfunctions. No facility is allowed to discharge liquid effluent without theconsent of the Boards. After consent is granted the Board is empowered to monitorcompliance and to initiate enforcement for violations to the Act. Although theStates may approve other laboratories for environmental monitoring, some haveelected to use the Boards as the only agency for consent applications; thisrestriction results in workloads which are difficult to handle on a timely basis.

2.09 The Air (Prevention and Control of Pollution) Act of 1981 amended in1987 added the responslbility for protection of air quality to the Boards,providing authority for the set up of emission standards for airborne pollutants,

establishment of air quallty standards as well as monitorlng and enforcomontprocedures. Under the Act, relevant lndustrlal facilities are requlred to submitan appllcatlon to operate and emit alrborne pollutants, which lncludes analysisof the concentration of emissions from stacks. The provislons of the Actencourage regulation of alr quality by adoption of speciflc technologies butenables as well the settin8 up of specific discharge standards.

2.10 TRho Environent (Protection) Au and Rules of 1986 are an umbrellaenvironmental Act that empowers the Central Government to take all measures deemednecessary to protect and improve the quality of the environment and control andreduce pollution from all sources. The rules give the Central Government theability to prohibit or restrict the location or operation of an industrialfacility on environmental grounds; these rules also establish comprehensivenational standards for particular industrial operations (Nlnimum Natior>slDischarge Standards, MINAS; see Ar..Lrx 2, for a summary description). Thesestandards compare satisfactorily to standards in use in many developed countries,Additionally, the states are allowed to tighten the standards. The EnvlronmentAct also allows a citizen to bring charges against polluters and take legal actionon his own against them. In 1989, additional rules were established under the Actto address the issues related to hazardous waste management and disposal.

2.11 Thus, the legal framework is weill in place to achieve significantprogress in environmental protection. However, despite these legal provisions,the considerable progress achieved through the Boards' actions and anincreasingly responsive corporate attitude toward the environment, serious waterand air quality problems remain chronic and unresolved. The pace ofindustriAlization and urbanization has in many cases eliminated the progressgained through these ¢umulative efforts, with a net effect of growingdeterioration in environmental quality at specific industrial areas. Ilany of theindustries in tlon-compliance with environmental standards are tolerated partly as.-he result of the immense workload at the Boards and the insufficiencie¢ causedby lack of staff, equipment and facilities, but also becaulse of a reluctance toclose industries becawse of social and employment considerations. A brief summaryof the procedures adopted to control pollution from new industries, as well as toensure that the existing industry complies with established regulations is givenbelow, together with a summary of the record of compliance of the chemical andrelated industries.

C. The ISmrironmental CleWarance and Permit Procedures

2.12 Procediures for Nex Industrial Sources. The GOI has madeenvironmental clearance a eondition for new project approvals for all potentiallypolluting industries. There are three environmental clearance systems in place(the clearance process is described in detail in Annx .2). The first, is Apermit process imvolving the issuance of a "notice of consent to establish" aplant. The second is the environmental impact assessment process involvingapprovals to proceed; and, the third involves the "notice of consent to operatea plant". These procedures are more or less demanding depending on whether thenew industry is classified as highly polluting, moderately polluting or non-polluting. They also depend on the proposed location of the plant. Depending onthe particulars of the case, both the State Pollution Control Boards and the N013Fmay be imvolved. Only after the "consent to establish" has been obtained, and

6

when required an Environmental Impact Assessment (EIA) has been completedsatisfactorily, can the industry proceed with the construction and commissioning.After commissioning a "consent to operate" is routinely required from the StatePollution Control Boards, that certifies compliance with regulations.

2.13 However, for these procedures to be adequately enforced, efforts mustbe made to: a) strengthen the monitoring and enforcement capabilities of theState Pollution Control Boards (SPCB) and the Central Pollution Control Board(CPCB) in the MOEF (paras. 6.01 to 6.11), b) improve local capacity (both inprivate and public sector firms) to prepare EIA studies, and c) create anincentive system that does not favor the unregulated discharge of pollutants butrather promotes the adoption of cleaner processes, as well as recycling andresource recovery. These are areas where the Bank, through its policy dialogueand by supporting technical assistance for institutional development may assistin bringing about substantial benefits.

2.14 Procedures for Established Industrial Sources. All establishedsources need to secure renewals of their consent to operate, every one to threeyears depending on their nature and location. For known sources of untreatedwastewater discharges, the issuance of a renewal may imply satisfactorycommissioning and operation of new wastewater treatment facilities. Renewals areissued by the Pollution Control Boards based on monitoring of samples and fieldsurveys. But, despite considerable effort and progress already achieved,application of the environmental provisions has only been partial. Pollution fromestablished industrial sources continues to be a problem in many of th;s industrialareas of the country. It is particularly severe in heavily industrialized statessuch as: Maharashtra, Gujarat, Tamil Nadu, and Uttar Pradesh. Remedial steps needto be taken to achieve the desired objectives.

2.15 The following problems contribute to prevent a better record ofcompliance from established sources: firstly, there are not enough trained staffand resources at both the CPCB and the SPCBs to ensure enforcement of establishednorms. Although fines and penalties for non-compliance are increasing, they arenot yet sufficient to induce positive response from industry and are notvigorously enforced. Even where polluters are brought to court, they arefrequently allowed to continue in operation until conviction. Secondly, datarequirements for consent orders are generally believed to be beyond thecapabilities, or resources, of the small and medium size firms. As a result,many firms are operating without any kind of environmental consent. Only thelarger, most visible polluters are investigated when, in fact, the small andmedium size firms are as important in terms of the overall volume of untreatedpollutants. Finally, discharge standards based on concentration of pollutantsrather than on pollution loads have encouraged some industries to dilute ratherthan to reduce discharges and improve process efficiency and waste minimization.

D. The Record of Compliance in the Chemical Industries

2.16 The chemical and related industries sector is among the most importantcontributors to industrial pollution in India, both in voltume and load includingthe potential release of toxic and hazardous residues. As a group, this industryhas been singled out by the GOI as a target for necessary improvements in thedraft policy statement under preparation as well as in the classification of

7

potentially polluting industries. The chemical and associated industries includethe following subsectors: Dyes and Intermediates, Fertilizers, Leather Tanneries,Pharmaceuticals, Pesticides and Insecticides, Petrochemicals, Pulp and Paper, andSugar and Distilleries. The overall compliance of the sector with theenvironmental regulations hab been estimated at about 50%. The current situationin terms of compliance and the type of environmental problems faced by theindustry varies from sector to sector. During project preparation an effort wasmade to characterize the environmental situation in each of these industries. Themajor results of this analysis are briefly summarized below (a more detaileddescription can be found in the project files under the title: The EnvironmentalSituation in the Chemical and Related Sectors in Indial,

2.17 The dyes and intermediates industry comprises about 3000 units witha total production of 28,000 tons in 1987. Over 65% of production comes from4% of the producers. Large scale units are financially strong and responsive toenvironmental concerns. The units in the small scale sector are in a precariousfinancial condition, with problems associated with obsolescence, diseconomies ofscale, and high unit production and transportation costs. Many of the small unitsare located in clusters at industrial estates. The vast majority of these plantsare in non-compliance, but their location at industrial estates makes them alikely target for common treatment facilities provided primary treatment is inplace. However, very little primary treatment of effluent is currently takingplace, and many of the installed treatment plants are inoperative or inadequatebecause of insufficient monitoring and lack of commitment on the part of theindustries. Toxic waste generated by the industry is often not properly disposed.

2.18 The leather tanning industry in India is made up of a few, big,modern, export oriented units and a large number of manual, small scale unitsproducing mainly for the domestic market. The small tanners lack quality controland the means to properly treat plant effluent. Most of the production capacityis located in Tamil Nadu and Uttar Pradesh. Over 70% of the tanneries havealready installed some treatment facilities. However, many of these systems donot meet the MINAS. Release of wastewater is seriously compromising the qualityof groundwater sources in both states. Problems are compounded by the dischargeof heavy metals in the liquid effluent. Large number of tanneries areconcentrated in clusters and are therefore candidates for common treatmentschemes, but heavy metals and sulfides will need to be pretreated prior to commontreatment. Solid residues and sludge are routinely disposed without treatment orcontrolled waste disposal sites.

2.19 The pharmaceutical industry in India produces a wide variety ofproducts. There are an estimated 16,000 plants in operation, out of which over96% are in the small scale sector. The main environmental problem caused by theindustry is the discharge of partially treated liquid wastes, including therelease of toxic materials, into water bodies. Organic solid wastes are in somecases being disposed in landfills without characterization, pretreatment oradequate control. In general, compliance from this industry is better than fordyes and tanneries. Still, over half of the total units provide no treatment orare in non-compliance.

2.20 The pesticides and insecticides industry has an installed capacity of90,000 tpy, out of which 20% is in small scale units. Demand for pesticides in

8

India is in the order of 55,000 tpy. Unreliable supply of raw materials andactive ingredients combines with low capacity utilization to reduce theprofitability of the industry. Due to the wide range of products and processesused, common technical solutions to environmental problems are impossible toformulate. However, some common problems Include: a) the inadequacy of processand control instrumentation to deal with the release of contaminants into planteffluent, b) unsafe handling of toxic materials, c) fugitive emissions and d) thetechnical and financial inability of small scale industries to properly handletoxic sludge from the wastewater treatment plants. The industry is in areasonably good position in terms of compliance with the provisions of the Air andWater Acts, but will need to implement substantial changes in materials handlingto comply with the rules for toxic/hazardous waste disposal.

2.21 The pulp and paper industry has grown rapidly during the last 10 yearsdue to the increased demand for paper caused by higher levels of literacy and thegrowth of the work force. Installed capacity in 1989 is estimated at 3 milliontons. However, capacity utilization is at a low 65% because of the proliferationof small mills and constraints in the supply of raw materials. Less than 2% ofthe mills in India can be classified as medium or large scale. The mainenvironmental problems faced by the industry are: a) the lack of clearly definedpollution abatement goals, b) technical difficulties associated with the recoveryof process chemicals at agro-based mills, c) excessive water usage, d)diseconomies of scale that reflect on the viability of pollution control schemes,and e) the generation of toxic compounds currently being disposed in thewastewater. The large scope for water recycling is difficult to capture at thecurrent low levels of water fees or effluent cess and discharge standards thatwere until recently, concentration based. To solve this problem, the MOEF hasrecently decided to impose load based standards on this and other industries wherewater dilution has been apparent.

2.22 The sugar and distilleries industry is partially controlled by theGovernment through State ownership of a significant share of production capacity,and by price controls on sugar and alcohol. There are close to 600 sugar millsand 200 ethanol distilleries in operation with an installed capacity of 632,000tons of cane per day and 1.5 million m3 of ethanol per year respectively. Thesize of the units is small by world standards. All the distilleries are based onsugarcane molasses and all are attached to sugar mills. The main environmentalconcerns are related to the disposal of the stillage from ethanol production andliquid effluent from the manufacture of sugar. Gaseous emissions of concern areprimarily suspended particulates. Solid wastes and sludge are comparativelybenign in nature and are being disposed as soil conditioners.

2.23 The fertilizer industry has gone through an accelerated period ofexpansion during the last ten years. Large, modern and efficient, gas basedfacilities have been built, many of them with Bank assistance. Current installedcapacity in the sector is 8.2 million tons per year of nitrogen fertilizers and2.7 million tons of phosphatic fertilizers; over half of the capacity is in thepublic sector. The new plants have incorporated satisfactory environmentalprotection measures, but could still benefit from schemes to reduce water usageand cut ammonia emissions. Older units including those based on coal areassociated with serious environmental problems including the disposal of cyanide,arsenic, heavy metals and the release of ammonia. Overall, the industry has a

9

better than average record of compliance. Over 74% of nitrogen based plants and88% of phosphorous plants were in compliance with MINAS as of the end of 1989.

2.24 The petrochemical sector is a well organized industry with generallymedium to large industries which by virtue of their size and expertise exercisea responsible corporate attitude toward environmental issues. Therefore, itscompliance with environmental regulations has been satisfactory and well above theperformance of other industrial sectors. There is, however considerable scopefor improvements in particular as it relates to the emission of toxic materials.The most serious obstacle faced by the industry is the non-availability ofbaseline information from sites that were established long ago. Theru is verylittle information with the State Boards to do an evaluation of air and waterambient quality. It is very important that air and water quality information becollected in a systematic manner to enable the establishment of a basis to planimprovements. The industry has taken the lead in the setting up of air monitoringstations around their clusters (IPCL for example) but much needs to be done whichis beyond the ability of individual plants.

2.25 Large Versus Small Scale Operations. As can be seen from theparagraphs above, pollution problems affect the chemical and related industriesacross the board; however, it seems to be most pervasive among small and mediumsize enterprises in particular in industries such as pulp & paper,sugar-distilleries, leather tanneries and pesticides. While most of the largesize enterprises are believed to be capable of taking measures to reducepollution, many small and medium firms face many constraints. Large firms haveaccess to a variety of financing sources, international consultants andtechnologies. They can, therefore, take the required steps to protect theenvironment if monitoring and enforcement measures are implemented. On theother hand, considering their limited resources (including the lack of qualifiedoperators, financial resources, and information on appropriate technologies), thatmany of the small scale industries cannot easily undertake the required pollutionabatement measures. The location of many of the small industries in clusterssuggests that economies of scale for wastewater treatment can be obtained at leastpartially through the construction and operation of common treatment facilities.

2.26 The Disposal of Toxic and Hazardous Vaste. Although improvements havebeen obtained in the control of airborne and waterborne pollutants, littleprogress has so far been achieved in the control of toxic and hazardous wastegenerated by the industry. The reasons behind the poor progress in this regardare: a) the lack of reliable field surveys on generation and disposal oftoxic/hazardous residues; b) until very recently there were no official guidelinesfor its disposal; c) the heterogeneous nature of these residues; and d) the highcosts associated with the proper handling and disposal of these materials. Inorder to overcome these problems, a comprehensive survey of the status ofgeneration, handling and disposal is required with priority assigned to industrialestates located near urban centers. Also, the set up of common treatmentfacilities for disposal and destruction should be examined as a mechanism toreduce costs. Efforts are needed to start the necessary surveys for toxic andhazardous waste. Follow up activities to the project are being discussed with theGOI that will address many of the concerns related to toxic and hazardous waste.

2.27 Uaste Minimization and the Adoption of Cleaner Technologies. The

10

survey of the different sectors has also revealed the potentially large scope forwaste minimization and resource recovery. This is no doubt the cheapestalternative for solving many of the problems associated with disposal and shouldbe combined with a mandated effort to adopt clean technologies at the time of newproject appraisals. The potential for waste minimization needs to be realizedthrough a concerted effort involving: a) incentives for water and energyefficiency and water recycle; for example, by increasing further the effluent cessto a level comparable with the cost of treatment and by switching dischargestandards to a load basis; b) the examination of opportunities for waste recyclebeyond the individual units generating the waste; and c) promotion of processmodernization and environmental audits at established plants. To ensure costeffectiveness, end of pipe treatment should only be considered once theopportunities for process modification, waste minimization and resource recoveryhave been thoroughly examined.

E. Incentives for Pollution Control

2.28 India has already in place a number of incentives addressed topromote control of industrial sources of pollution. These include a) positivefiscal incentives; b) charges and fees; and c) enforcement provisions. Table 2.1summarizes some of these provisions. The fiscal incentives provide a wide rangeof grants and subsidies, in the form of low interest loans, tax rebates and otherfiscal measures, such as accelerated depreciation allowances and capital gainsexemptions. Detailed measures are presented in Anex 2.3 There are also someuser and administrative charges (such as the water cess), consent fees, otherlevies and fines and legal provisions imposed on offenders. However, the effectof these incentives has been marginal so far. The relatively low profitabilityof investments in waste treatment, and the inability of enforcement institutionsto impose substantial fines on offenders due to inadequate monitoring andenforcement capabilities (including difficulties in the courts), have renderedthese incentives inadequate for inducing firms to install treatment equipment (orif installed to operate them effectively), or invest in waste minimization andresource recovery systems.

2.29 To improve compliance, a combination of a more effective incentivespackage (a mix of positive and negative incentives) and well planned and targeteddirect state government interventions (such as directed incentives and penalties),accompanied with enhanced monitoring and enforcement. State intervention isparticularly essential if the small scale industry (SSI), which is at presentpractically outside the reach of the CPCB and SPCBs, is to be reached.

2.30 Positive Fiscal Incentives. Several positive fiscal incentives(subsidies, accelerated depreciation and tax exemptions) can be used to promotemeasures to control industrial pollution. Where enforcement of standards isvigorous and fines are high, direct subsidies for recycling, resource recovery andinstallation of pollution control equipment can be very effective. Capitalgrants, interest rate subsidies, exemptions from import duties on importedequipment (in full or part) and tax breaks (including accelerated depreciation andtax holidays on profit) are presently being offered to encourage a) implementationof pollution control measures, or b) displacement of industrial estates or heavypollutant sources away from population centers.

11

2.31 Positive fiscal incentives have a marginally negative impact on thegovernment revenues. However, an overall evaluation of their present

effectiveness in India, clearly shows that they have had a limited effect in

stimulating entrepreneurs to install pollution control equipment. Besides, being

costly to administer, it appears that these incentives are creating a desire by

entrepreneurs to maximize government subsidies and minimize individualresponsibilities. Asking taxpayers to subsidize the firms to clean-up their

operations is likely to become increasingly difficult to justify politically in

the long term.

2.32 However, as amply shown by the experience in many industrialized

countries (see Annex 2.4) and because of the low financial return from investmentson pollution abatement compared to the substantial social and economic benefits

of maintaining a clean environment, limited positive incentives in the form of tax

exemptions and capital grants have been used for existing industries in the

initial stages of pollution control programs. Capital grants and tax exemptionshave been justified for industries coping with the high cost of complying with

newly established standards while going through a structural adjustment. Taxbreaks and grants have also been justified where there are positive externalities,

such as when required to reduce the social costs of hazardous waste disposal. It

is, however, very important that positive fiscal incentives be designed and

targeted with specific objectives and administered efficiently to achieve them.

2.33 India is considering imposing gollution charges on polluting

industries. These charges could be levied on enterprises with pollution loadsthat exceed an acceptable level specified by the SPCBs. These charges may takethe form of emission charges for air pollution, effluent charges for water

pollution, and similar charges for solid/hazardous waste disposal and production.Such charges, when set at appropriate levels, will allow industry to equate themarginal cost of pollution abatement with the marginal benefits of cleaning-up the

environment. This may also enable the central and state governments to developa self-sustaining pollution control fund to finance the expansion of their

monitoring and enforcement capabilities and subsidize the cost of treatment and

disposal of pollution produced by targeted industries, specially in the small

scale sector. Properly designed charges based on pollution loads are more

effective and transparent means of reducing industrial pollution since they allowflexibility in the exercising of pollution control decisions and the choice of

pollution control technologies. If the charges are set at a level equivalent to

the treatment cost, they become an effective tool to promote compliance. The

Government has announced its intention to convert the existing water cess intoan effluent charge and increase its value to a level that is consistent with theactual cost of water treatment. Adoption of a substantial increase in the currentwater cess is expected to be approved by the legislature during the current year.

2.34 To allow for cost recovery in common wastewater treatment facilitiesor at toxic and hazardous waste treatment and disposal sites, treatment chargeswill be levied against the generators of waste. These charges are already in the

process of being implemented by the GOI. If set at reasonably high levels, theycan reflect the social and economic cost of waste treatment and disposal,discourage emissions, and provide a mechanism for cost recovery. Where

monitoring and enforcement resources are scarce, however, setting too high

treatment/disposal charges may encourage illegal ways of discharging waste.

12

Table 2.. urrent Incentivgs Provided for IndustrialPollution Control

SURSWIEP *u 1 *$o S.ha@ qt~~

...- ,,.,,.... .z .X .me ............

.0~~~~~ d

23 ......... ..m I e..... I o e o bi sac.(50% vs. 30%);~~~~.. .. .

*inat it taes to intuc l rgedand mediu mm sieirs to~ dtak orciv esrs

SSIs are generall conidre t .oa bfiancill tand1 Lte~chncll ea oaehrequied seps o met eniromentalsadrs ie hesbtnileooi

suppoted ctios, i cludnggrntfes for tewvconstucnti onanopratin f omo

introductipon.. of .....esto dli. ou.rn t

1ftQ nit ...od....... ... .... .. ....... .......... *

way to lleviate thr sitation. tom ofxp~vd the e acton (sbiines, hre n

2.36OwneTr.vship and manaemen ofi commo trweatment fclte r enwithpioritygiven for fh sateswure torop2yinkin wter ai nd , maineesoreaebein seiousy treatned To reover0 teir caia*nwprtigcss(ulor patiall), tho fors fare xpete to developt ab mehaisom for cost rcvr

. . ........ .o.. 2 . ...00 ft

2.35 Direct Government Intervention. In order to bring small scaleindustry into compliance, the GOI is considering a range of special initiatives.While effective incentives and vigorous enforcement of established norms may bewhat it takes to induce large and medium size firms to take corrective measures,SSIs are generally considered to be financially and technically weak to take therequired steps to meet environmental standards. Given the substantial economicand social costs posed by pollution from small and medium firms, governmentsupported actions, including grants for the construction and operation of commonwaste water treatment facilities (as well as for communal incinerators and theintroduction of novel techniques or processes to deal with serious environmentalproblems affecting small and medium scale industry) may be the most cost effectiveway to alleviate the situation. Some of the actions (subsidies, charges andenforcement) under consideration by the GOI are shown in table 2.2.

2.36 Ownership and management of common treatment facilities are beingarranged through cooperatives or companies made up of the participating industrieswith priority given to the estates where drinking water and marine resources arebeing seriously threatened. To recover their capital and operating costs (fullyor partially), the owners are expected to develop a mechanism for cost recoverybased preferentially on the share of the pollution load, but also taking intoaccount volumetric flows of the individual participants. Wherever a private

13

company or a producer association can be organized to build and run a commontreatment facility, preference will be given to such an entity. When consideringoptions for dealing with pollution generated by SSIs, it is essential toevaluate the economic viability of their operations. In some cases, closure ofan operation may be the least cost option of dealing with the associatedenvironmental problems associated. In regulated economies like India's, whereplant shut downs are rare due to social and political considerations, pollutionabatement assisted by the government may be the only viable and most Costeffective option from society's standpoint.

Table 2.2 Incentives Under Consideration to Promote IndustrialPollution Control Measures

-. Prtoi?aut frorSrategyr *eeooient eand~ plalmntsto

2.37 iven hesarcity of esoreadteimotne of the~ge stepsp thattneedto b takntoarretua thetmu envionmetal problemns.cue yid rasources, ~ ~ a GO asbenp epain an phoased strategy for enirnmnttgal roetinA draft policy paper ha . ofe peardbMOFwihotneteojcivs

the abintdring19n1roasheve the proosd mediu~m term forl durngth

1.04 MOE inendstncrote as th.ree pronged a.pproach:s ± t

i) With yiQ ards ton toring an enforement,ro thevariousEvromnalAt

prvsin Proritiesutfor abateaDeeoment a nd madfr lamntexansionsone

needpocbetakesn tonarrstrthe environmenftaldprobes caused bioosy indusrialsouces cOhargs, beenpeparnd phnasted storategysa for envon-cmentlprote).ctiose.

the cabnetduiongd 1991 toe achievemano the propoead medium termgoasrdrings the

14

judged to be financially and technically able to take measures to complywith standards. Thus, in the short run, top priority has been given toimproving the monitoring and enforcement capabilities of the SPCBs. Toenhance their effectiveness, efforts are being made to increase the cost ofnon compliance (through higher and tougher penalties) and to expedite courtdecisions against environmental offenders. The GOI has concentrated itsshort term efforts to achieve these goals. The proposed project wouldsupport these efforts through an institutional component (para. 4.05).

ii) Simultaneous with the efforts on enforcement, the GOI intends to Rromotethe adoption of clean technologies, waste minimization and resource recoveryprograms which frequently represent the cheapest alternative to treatmentby providing technical assistance and financing development of suitabletechnologies. The MOEF has also recently announced its decision toeventually shift all discharge standards from a concentration to a loadbasis. The GOI has agreed to keep the Bank informed and discuss the progressregarding these changes in the discharge standards which will furthercontribute to promote waste minimization. The proposed project would supportthese efforts through a technical assistance component (para. 4.14).iii) As in many other countries in the early stages industrial pollutioncontrol programs, nositive Incentives are being used to complementenforcement and promotion activities, particularly with respect to existingsmall and medium industries where enforcement is most difficult and non-compliance more pervasive. Many of these industries are facing largeinvestments with negative or low financial returns, but substantialexternalities in terms of reducing the costs of pollution to the rest ofsociety. The GOI has decided to apply specific and limited subsidies in theform of capital grants to this type of industries, provided that the economicviability of the enterprise has been clearly established. In cases whereuneconomical plants are still in operation, which are serious polluters,steps will be taken out to force closure.

2.38 India has made remarkable progress in setting up a policy frameworkfor the reduction of the conflict between industrial development and environmentalprotection. To maximize the impact of these policies, the GOI is in the processof enacting a Policy Statement on Pollution Abatement, in particular as it relatesto industrial pollution and, adopting modifications to the package of incentivesfor pollution control, including a higher water cess. The amendment of the watercess is expected during the current year.

15

III. BANR ROLE AND LWNDINg STRATLGY

A. StrateMy for Bank Assistance in EJjLronment

3.01 The main objectives of the Bank strategy on environmental issues inIndia are linked to the country strategy with emphasis on poverty alleviation andefficient resource allocation. The strategy on environment places a premium onimproved natural resource management with a focus on reforestation, prevention ofland and water degradation and control of industrial pollution. The role of theBank is to support Government efforts to achieve an improved natural resourcemanagement through the development of economic and sector work, financial supportand technical assistance.

3.02 Although the GOI recognizes the need and assigns priority toenvironmental protection, effective measures to curb pollution and reduce negativeenvironmental impacts by industrial sources are being hampered by the difficultiesin recognizing and quantifying environmental benefits, the inadequacy of theregulatory system and institutional arrangements for effective enforcement andpromotion of compliance and the need for specialized funding and technicalassistance. This is particularly true as it relates to the chemical industries,the small scale sector and the treatment and disposal of hazardous waste. Theproposed project has been designed to address these concerns.

3.03 The proposed project fits within the proposed Bank strategies in theenvironmental sector in India as described by the Environmental Action Plan nowbeing developed by the Government with Bank assistance. The proposedEnvironmental Action Plan calls for the formulation of specific action programsfor some of the most critical environmental problems confronting India. Thepriorities include: a)institutional strengthening; b) industrial pollutioncontrol; c) ensuring safe water supplies; d) reforestation; and e) energy policy.The proposed project directly deals with the first three of these priorities(paras. 4.02 and 4.03) and intends to address the technical assistance, financialneeds and policy advice required by environmental concerns in industry. As thefirst dedicated environmental loan to India, the project plays also the role ofcatalyst for further action in the environmental field and pioneers an ;.ntegratedapproach to the solution of environmental problems in industry. As discussed inchapter one, the timing offers a unique opportunity to assist in the developmentof the GOI's environmental strategy for industrial development.

3.04 This project would be the first stand alone environmental operationin India dealing with control and abatement of industrial pollution and the firstdedicated environmental operation for industry in the Asia region. It thereforeinvolves an element of role definition. However, the Bank has already beeninvolved in the Asia region on several operations with strong environmentalcomponents. These projects have sought to improve water supply and sanitation,alleviate pressures of human migration, and protect and improve the use of forestresources. By tackling induatrial pollution, the Bank intends to address one ofthe most pervasive sources of pollution and causes of land and water degradationin India. The role of the Bank will be one of support to the agencies thatmonitor and control industrial pollution and to the industries in their effortsto comply with regulations. Further, by providing technical assistance andfinancial support, the Bank will be instrumental in the setting up and development

16

of follow up actions for the solution of environmental problems in Industry. TheBank involvement is also expected to result in a speed up of the efforts alreadyunder way for adoption by the GOI of a medlum and long term strategy on the issueof industrial pollution.

B. Enironmental Protection in Industrial Sector Lending

3.05 During the last two five year plans, the Bank has approved US $229.2million in projects with major environmental components in India. However, mostof the effort so far has been concentrated on the issues of forestry and watershedmanagement. Within the industrial sector itself, the Bank's environmental effortshave included an operation in the fertilizer sector seeking to modernizetechnology of production and therefore reduce emissions of pollutants (CooperativeFertilizer Project, Ln. 2729/2730-IN) and an operation in Cement (Cement IndustryRestructuring Project, Ln. 3196-IN) that also addresses the environmental aspectsof the industry. Further actions being considered regarding environmentalprotection include the development of a study of regional environmentalimprovements involving coal mining, power generation, industry and urbandevelopment in the Singrauli region, and a Coal sector study. The successfulimplementation of the project being proposed will open the possibility ofsupporting follow up actions in industrial pollution through future Bankoperations. Future operations under planning will continue to focus onenvironmental concerns across industrial subsectors.

3.06 The implementation of most Bank financed industrial and industrialfinance projects, including thaose with significant environmental components, hasbeen satisfactory. The rate of disbursement under these projects has beenconsistent with Bank-wide averages.

17

IV. THEOJECT

A. Project Objectines

4.01 The project's overall objective is to support the Government ofIndia's efforts to prevent and alleviate environmental degradation caused byindustrial operations and assist in the successful attainment of the proposedshort and medium-term targets of its environmental policy. The project istherefore designed to assist in identifying and implementing a cost effectiveprogram for industrial pollution monitoring, control and abatement within thecontext of institutional and financial constraints present in India.

4.02 The project specific goals are: i) to promote effective and timelyenforcement of existing legislation on environmental protection regardingindustrial sources; ii) to support efforts by industry to comply with existingenvironmental regulations, including a special effort designed to reach the smallscale industry through the setting up of common treatment facilities; and, iii)to support assessments, extension services and research in waste minimization,resource recovery and pollution abatement in industry. By promoting improvedenforcement, while supporting compliance and providing technical assistance forthe identification and implementation of solutions to environmental problems, theproject seeks to act as a catalyst for improvements in the environmentalperformance of the industrial sector in India.

B. Proiect Descrigtion

4.03 The project will focus on the chemical and related industriesincluding fertilizers, leather tanning, dyes, pesticides and insecticides,pharmaceuticals, petrochemicals, pulp and paper, and sugar and distilleries, whichas a group have been identified as a major source of industrial pollution.Because of their size and importance, as well as the nature of their operations,all of these industrial subsectors have a substantial potential for pollutioncontrol and monitoring investments with sizable environmental benefits. Under theproject, efforts to monitor, control and alleviate industrial pollution will beconcentrated in the states of Gujarat, Maharashtra, Tamil Nadu and Uttar Pradesh.The first three states are the seat for the bulk of the chemical and relatedindustrial sector in India, while the fourth state is the largest and moreurbanized with a large number of small and medium size industrial plants.

4.04 The proposed project comprises three components: i) an institutionalcomponent designed to strengthen the Central and State Pollution Control Boardsin the four selected States; ii) an investment component designed to supportefforts by industry to comply with regulations, including the support for the setup of common treatment facilities; and iii) a technical assistance componentdesiened to assist the MOEF and the DFI's to channel specialized technicalassistance for the evaluation of environmental problems and the assessment oftheir solutions.

Institutional Comnent

4.05 This component is designed to strengthen the monitoring andenforceiusi;t ability of the GOI through the financing of a program of improvements

18

at the Central and the four State Pollution Control Boards in order to ensure thesuccessful development of their mandates. The component would finance: a) atraining program including consultancy services; b) acquisition of equipmentrequired to upgrade the technical capabilities of the Boards; and c) otherlaboratory facilities. This component has been tailored to meet the perceivedimmediate needs of the State Pollution Control Boards in the targeted States andtraining for the Central Board. The program of improvements is available in theproject files and is summarized below:

4.06 Training. The project will assist the Boards with the training infour major areas: i) quality assurance and quality control to enable alllaboratory activities to be accomplished by qualified analysts with appropriateeducation, experience and training; the training will include technical trainingfor performing work and quality control and assurance training; ii) maintenanceand operation training including safety issues for the proper handling of samplesand equipment; iii) specialized technical training on topics such as environmentalchemistry and data handling and processing; and, iv) supervisory training formanagement of the laboratories work and for development and implementation ofpollution control strategies. Most of the training will take place in India.Details are provided in Annx 4.1.

4.07 Equipmet. The project will assist the Boards with a program ofimprovements in analytical and monitoring equipment, designed to meet the minimumworkloads of the Boards. The support will be extended to the central laboratoriesas well as to the smaller regional laboratories. A description of the current andproposed equipment to be financed and the cost estimates for each Board isincluded in Annex 4.1.

4.08 Facilities. The project will also support the provision orrefurbishing of laboratory facilities. This will include: civil works andequipment to ensure adequate environmental control inside the laboratories(humidity, temperature, ventilation); furbishing of specialized rooms (such asfuming chambers, dust free rooms for trace level sample preparation, glove boxesfor handling of hazardous waste samples) and the provision of office andlaboratory space for the SPCB in Uttar Pradesh and Haharashtra; and utilitiesequipment including back up power facilities, voltage regulators, and dataprocessing equipment. Details are included in Annex 4^.l

Investment Component

4.09 This component would finance sub-loans and sub-grants for: a) the setup of common treatment facilities at industrial estates; b) individual projectsundertaken by enterprises in the target sectors dealing with waste minimization,resource recovery and pollution abatement; and, c) demonstration projects selectedfor targeted incentives on the basis of established eligibility criteria (para.4.25).

4.10 Common Treatment facllities. The project will finance the design andimplementation of common treatment facilities for the treatment of wastewater andsolid materials at industrial estates and other sites with a heavy concentrationof chemical and related industries, in particular of small size. The project willfinance the treatmert facilities and the studies required for their design.

19

4.11 Support will be provided for several common wastewater treatmentfacilities. A preliminary list of 20 plants being considered for financing isattached as Ajrgg 4.2. All these have been selected based on the potentialeffects of continuing pollution at the sites. The facilities are expected to beowned, operated and maintained by specially constituted companies which will befully responsible (and liable) for the operation of the units.

4.12 Individual Plant Treatment and Control Facilities. The project willalso finance the design and implementation of waste minimization, resourcerecovery and pollution abatement schemes by individual enterprises in the targetedsectors. Typically, these facilities will include: process modernization with aclear positive impact on release of pollutants; waste minimization and resourcerecovery investments; and treatment plants for the abatement of pollution loads.

4.13 Demonstration projects. These projects will be funded with the helpof direct grants for the following reasons: a) projects to be supported consistof prototype innovative units in the field of waste minimization, resourcerecovery or pollution abatement; b) involve an element of risk because of theirtechnological novelty and lack of commercial scale experience in India; c) addressthe treatment or disposal of either toxic or hazardous materials or have a largeenvironmental impact on surrounding area; d) sponsoring enterprises are currentlyefficient and economic but require a comparatively (related to their installedcapital cost) large investment for pollution control, which cannot be reasonablyfinanced on commercial terms; and e) the projects will demonstrate new approachesor techniques which are potentially widely replicable in India.

Technical-Assistance Comonent

4.14 The project will also support a package of technical assistanceinitiatives addressed to meet the needs for technical expertise, environmentalassessments, R & D efforts in environmental technology and extension services onenvironmental issues to industry. Activities under this component are: a) pre-investment studies for projects to be funded under the investment component; b)technical studies including required equipment to assess the treatability ofresidues or waste streams; c) pilot plant studies required to scale up innovativetreatment technologies; d) preparation of environmental housekeeping manuals atdifferent industries; e) an organizational study of the State Boards; and, f) atraining program on environmental issues at the DFI's. Annex 4.3 describes someof the schemes to be funded under this component.

C. Pxoiect Costs

4.15 The estimated project cost is US$ 260 million equivalent, includingphysical and price contingencies. Direct and indirect foreign exchange costsaccount for about US$ 56 million, or 22% of the total cost. The project costs areexpressed in November 1990 prices based on pre-feasibility studies and thereforesubject to revision pending detailed feasibility studies, presently underpreparation. A summary of project costs by component is presented in table 4.1.

4.16 The total cost of the Institutional Component is US$18 millior.,including physical and price contingencies, estimated based on the anticipated

20

3.4% international annual inflation and the Bank's projected domestic inflationrates for India (that slowly decrease from 6.6% in 1992, to 6% in 1999); and a 10%physical contingency appropriate for laboratory and scientific equipment. Thetotal cost of the Investment Component is US$237 million. Of this amount, US$60million corresponds to the cost of the common treatment facilities. The totalcost of the individual projects is estimated at US$167 million equivalent. Thetotal cost of the demonstration projects is estimated at US$10 million equivalent.The cost of the technical assistance component is estimated at US$5 million.

Table 4.1 Project Costs a/

.................... ........................~ .. ... . ...... ..:

_ _.

D. Project Financing

4.17 The overall financing plan for the project is presented in table 4.2.The proposed Bank loan for US$124 million and IDA credit for US$31.6 millionequivalent would finance about 60% of the project costs. The Bank loan wouldfinance all of the Bank Group contribution to the individual sub-projects and twothirds of the contribution for Common Treatment Facilities. The IDA credit wouldfinance one third of the Bank Group contribution to the Common TreatmentFacilities and all of the Bank Group support to the Institutional and TechnicalAssistance components.

4.18 Institutonal Compon=n. Financing of this component will be through

21

a US$12.6 million equivalent IDA allocation to cover all the costs of training,equipment and facilities requirements at the Boards. The GOI is expected toallocate the resources required to meet the operation and maintenance costs of thethe financed equipment and facilities.

Table 4.2 Prolect Financing Plan(in US $ million)

. o9 onven tet Comonnt ForA the V comon resmet failtis the ID

millon)amounting up to 401ftettlcot.Poetsonoswl0rvd

1* and he poject sposor 125% of0 th oa ot. Frthe Deonsrto

part cipaionof5.s

4.2 ) hiciid'al 1Qsstns Copnse 2unin 4o2.0tcnca sisA

Oumt of thes reore,ft ilo qivln ol ealctdt IDBI .

22

be managed on behalf of the Government to be used for funding of up to 60% of thecosts of pre-investment studies, with the balance being provided out of thebeneficiaries' own funds. The balance of the funds would be allocated through theGOI to the CPCB to finance all other activities unde.. this component.

E. The Proposed Loan and Credit

4.21 The Bank loan would bear the Bank's standard variable interest rateto be repaid over a period of 20 years, including 5 years of grace. The proceedsof the Bank loan would be passed on to IDBI and ICICI which will act as financingintermediaries for investments by enterprises in individual plant treatment andcontrol facilities. The credit would be made to the GOI on standard IDA terms.

Onlending Terms and Conditions

4.22 a) For the institutional component, the GOI would pass US$12.6 millionequivalent from the proceeds from the IDA credit to the MOEF, on a grantbasis. These funds would in turn be utilized to meet the requirements forupgrading the State Boards in the four States. It is expected that throughthe appropriate budgetary allocations, funds will be made available by theGOI to meet the counterpart requirements at the State level;

b) for the investment component, (including the loan financing of commontreatment facilities) the terms of relending will reflect the policies ofthe institutions involved and the following understandings: IDBI and ICICIwill be able to draw up to US$74 million and US$50 million equivalentrespectively; the DFIs are expected to onlend in Rupees at 15%, their currentcommercial long-term rate for domestic transactions, as most goods andservices will be locally procured. The GOI would onlend the proceeds ofthe Bank loan to the DFIs in Rupees at a rate 2% below their commercialrate. The GOI would thus bear the foreign exchange and interest rate risks.The subloans would have a repayment term not exceeding 15 years inclusive ofup to four years of grace. The commercial rate paid by sub-borrowers wouldbe positive in real terms. The above onlending arrangements were agreed atnegotiations and will be set out in Subsidiary Loan Agreements between theGOI and the DFI's, the signing of which will be a condition of effectivenessof the proposed loan and credit;

c) sixteen million dollars equivalent of IDA resources will be utilized forthe financing of the grant element for common treatment facilities anddemonstration projects. The IDA resources would be channeled through theGovernment which in turn would make them available to the individualinvestors through the lending agent (IDBI) which would administer the fundsas an agent to the GOI under a Letter of Understanding (LOU). The use ofIDA resources and direct grants for these projects is justified because theseinvestments have large externalities and frequently involve new concepts inIndia and because without the resulting subsidies the projects would not getunderway. Subsidies for the Common Treatment Facilities are justifiedbecause: i) these will assist small and medium scale enterprises to makeinvestments that will result in large benefits to society, including thoseassociated with cleaner water, soil and ambient air and their Impact onagriculture, health and labor productivity, all substantial but difficult to

23

quantify; ii) the indirect benefits do not accrue to the relatively smallscale entrepreneur, who in many cases will need to make a large investmentcompared to fixed assets which can not easily be financed on commercialterms; iii) the target enterprises are currently profitable and facilitieswere installed before the new emission standards were in place (para. 2.14);iv) the subsidies would be partially off-set by the anticipated higher vatercess; and v) the enforcement mechanisms alone are not expected to Improve thesituation with the urgency required. The demonstration projects aredesigned to introduce pioneering project concepts with high risks and similarexternalities which for reasons already spelled out in para. 4.13 would bedifficult to finance on a purely commercial basis. As in the case of CommonTreatment Facilities, the costs of these subsidies will be, at leastpartially, off-set by increases in pollution charges.

d) the technical assistance funds would be allocated to the IDBI (US$1.5million equivalent), under the terms of the LOU for disbursement of the fundson a grant basis and to the MOEF (US$1.5 million equivalent), throughprocedures consistent with the funding of the institutional component.During negotiations, it was agreed that the GOI shall obtain the LOU formIDBI for the channeling of the grant funds for the common treatmentfacilities and the demonstration projects as a condition of effectiveness ofthe proposed loan and credit.

4.23 The Bank is discussing in the context of the next financialintermediation loan the need for greater flexibility in setting interest rates.Accordingly, the on-lending rates under this project would be adjusted to reflectthese future changes. The arrangements agreed for under the proposed project aredesigned to promote the establishment of basic pollution abatement systems and aninstitutional framework which will encourage the additional flow of resources intopollution control investments without permanent reliance on directed subsidies.The lending and on-lending terms and conditions being considered for this projectare summarized in table 4.3.

Sub-loan elizibilitX criteria

4.24 Individual SubXrojects. All industrial projects in the targetedsectors that seek to reduce the environmental impact of their operations wouldbe eligible for financing. These projects can either consist of wasteminimization or resource recovery schemes or of pollution abatement and wastetreatment schemes. In addition, these projects will need to meet the followingconditions: a) all projects are to be appraised by the intermediary financinginstitutions and fouand to have a substantial positive effect on the environment;b) for any single sponsoring enterprise any subproject or combination of projectsshould not exceed US$ 10 million; and c) the sponsoring enterprises as a wholewould have an acceptable capital structure with a resulting debt to equity rationot exceeding 3.0. Sub-loans would have a free limit of US$3.5 million, about 25%of the individual projects are expected to be subject to prior review andapproval.

4.25 Common Treatment Facilities. The following conditions would apply tofunding proposals for common treatment facilities: a) a thorough survey of theeffluent situation at the site has been undertaken and provisions have been made

24

for adequate pretreatment or disposal of effluents not suitable for commontreatment; b) a feasibility study has been conducted, the economic and financialviability has been established and operating and maintenance costs have beenestimated; c) an adequate sponsor has been constituted or identified withinstitutional and technical capability to operate the facility; d) legal, andfinancial responsibilities have been properly defined and the facility owner isresponsible before the enforcement institutions for the quality of the commoneffluent after treatment; and e) adequate cost recovery formulae have been adoptedby the sponsoring enterprise with the associated mechanisms for cost sharing orfees structures from the beneficiary individual enterprises. All proposals forcommon treatment facilities will be subject to prior review and approval.

4.26 Demonstration Urojects. Facilities will be eligible for funding if:a) sponsor enterprises are of medium or small scale (below US$5 million equivalentin fixed assets); b) subprojects will represent pioneering uses of cleantechnologies in India, or consist of prototype units for dealing withenvironmental problems in industry and have an anticipated widespread application;c) sponsored enterprises are currently efficient and economic and require acomparatively large investment for environmental protection; and d) the financialrate of return and/or the risks involved in the required investments do not enableit to be financed on commercial terms; and e) financing of the loan of suchenterprise will not exceed US$500,000. A survey of waste minimization measureswould need to be undertaken and priority will be assigned to those projects thatwill result in the largest reduction of emissions per unit of investment. Alldemonstration projects will be subject to prior review and approval. Duringnegotiations, it was agreed that both IDBI and ICICI will ensure that the projectswill satisfy the corresponding eligibility criteria.

Table 4.3 Pronosed Lending and On-Lending Terms

COPNN AKT2 GTT ~I~ O (

25

V. PQRJECT IMPLENTATION

A. Nsnagement

5.01 The agencies that will have responsibility for implementation of theproposed project are : a) the MOEF through the CPCB; b) ICICI; and c) IDBI.Overall management of the project would rest with the MOEF and the CPCB acting onits behalf. The Central Board is located within the NOEF and is entrusted withthe responsibility of overseeing compliance with environmental regulations by thedifferent pollution sources. Through the MOEF and the CPCB the GOI would becommitted to carry out a program of activities substantially as described in thisreport as the Institutional and Technical Assistance components and cause to becarried out the activities described as the Investment component.

Institutional Component

5.02 The MOEF will have the overall responsibility for the execution ofthe institutional component. It will coordinate the activities of the beneficiaryBoards through a Central Sector Scheme (CSS). Under this arrangement, the GOIwill pass the proceeds of the IDA credit to the CPCB which will administer onbehalf of the State Boards. The HOEF has constituted an Implementation Cell tosupervise the execution of this component and directly undertake the procurementand disbursement activities required for its implementation. The MOEF willnominate one official to work on a full time basis in the coordination of theseactivities as head of the Implementation Cell. The Cell would consult andcoordinate with State Governments. Each State Board though its Chairman will haveresponsibility for timely and efficient execution of the enforcement component inits State, but will coordinate with the Implementation Cell at the Central Boardfor all activities that are common to other Boards. All training activities willalso be coordinated through the Cell. At negotiations assurances were obtainedthat the GOI would maintain the Implementation Cell for the duration of theproject and provide requisite assistance to carry out their functions properly.

5.03 In order to improve the efficiency of their operations and ensureeffective use of the investments the Control Boards need to review theirorganization. Areas that need review are: a) planning and research functions;b) need for environmental education and extension services; c) revenue collectioneffectiveness; d) interaction with other agencies involved in environmentalmanagement; and e) staffing. Annex 5.1 provides an analysis of the organizationalstructure of the Boards and the need for the adjustments noted above. Atnegotiations the GOI agreed to conduct a review of the organization and managementof the Boards, which will assess the need for modifications and makerecommendations. Completion of the study is expected by December 31, 1991. TheGOI will discuss with the Bank the results of the study and the progress in theimplementation of the recommendations.

Investment Component.

5.04 For the Common Treatment Facilities, IDBI, would be responsible forappraising the subprojects. While the MOEF does not have the authority to dictatewhat projects IDBI should encourage or approve, it is intended that an informallink be established between the two institutions for the execution of this

26

component through an Steering Committee (para. 5.07). The MOE? will furnish tothe IDBI a list of sponsors but ultimate responsibility for funding rests withIDBI. IDBI will act on behalf of the GOI in the administration of grants.

5.05 The ownership, management, operation and liability issues for commontreatment facilities have been discussed with the IDBI and the potential sponsorsidentified. Participation of the industries which would contribute effluents fortreatment would be encouraged. Operation and management responsibility will restwith the sponsor or common treatment company. The company is expected to beresponsible for the treatment of the inputs into the common treatment plant andfor the standards of the effluent. Proposed procedures for appraisal and approvalof Common Treatment Facility projects are summarized in Annx 5.2 (alternativesfor ownership and management arrangements can be found in the project files underthe title: Proposed Implementation Arrangements for Common Treatment Facilities).

5.06 For the individual subprojects, the two participating DFI's, IDBI andthe ICICI, would be responsible for identifying and appraising the subprojects.Many of the individual projects pre-identified have a potential for replicationand this potential will also be pursued by the DFI's. Likewise, for thedemonstration projects, the IDBI would be responsible for verification of theeligibility criteria, identification and appraisal. The IDBI will act as an agentof the Government in the execution of this subcomponent.

5.07 In order to secure efficient implementation procedures, the MOEF hasformed a Steering Committee to oversee the allocation of grants under the commontreatment facilities and demonstration projects scheme and the allocation of thetechnical assistance funds for the pre-investment studies (para. 5.08). TheSteering Committee is chaired by the MOEF with representatives from IDBI, and theCPCB and will review and decide on the requests for allocation of funds. Afterapproval by the Steering Committee, the IDBI will continue their appraisal of therequests as per their procedures. At negotiations, assurances were obtained thatthe GOI would maintain the Steering Committee for the duration of the project andprovide requisite assistance to it to carry out its functions properly.

Technical Assistance Comoonent

5.08 For the Technical Assistance Component funds will be passed on as abudgetary allocation to the MOEF. The MOEF in turn will delegate responsibilityto the CPCB to hire and supervise the consultants, advisors, trainers and otherprofessionals, foreign and local, who may be needed to carry out the program ofstudies, training, and promotional activities to be undertaken under the TechnicalAssistance Component. The balance will be passed on to IDBI as a grant under theterms of the Subsidiary Agreement. IDBI, after consultation with the SteeringCommittee, will act on behalf of the government to support pre-investment studiesdirectly tied to investment opportunities in the field of environmental protectionand assist in the training of DFI's personnel on environmental issues.

B. Implementation Schedule

5.09 The project is to be implemented from 1991 to 1997 inclusive.Project completion is expected by December 31, 1997 with Loan Closing by June 30,1998. The Institutional Component activities are expected to take place somewhat

27

1998. The Institutional Component activities are expected to take place somewhatconcurrent with the Fifth Eight Year Plan in a manner that recognizes the currentconstraints at the Boards. Sub-loans under the Investment Component are expectedto be committed in three years and disbursed in seven years from the date ofeffectiveness of the loan and Credit. Likewise, Technical Assistance Componentactivities will be developed concurrent with the subproject appraisal or, in thecase of general studies, developed in a phased manner through the implementationperiod. An implementation schedule is summarized in Anex $3.

C. Procurement

5.10 Contracts for equipment under the institutional and technicalassistance components will be procured under ICB procedures, subject to a minimumthreshold of US$200,000. Below this amount, contracts will be procured underestablished competitive bidding following local procedures (LCB) which areacceptable to the Bank up to an aggregate value of US$4.5 million. Contractsbelow US$50,000, up to an aggregate value of US$1.8 million, may be procured underlocal or international shopping by requesting quotations from at least threequalified suppliers. All civil works under this component are small and will beprocured under local competitive practices. The responsibility for procurementunder these components is with the Implementation Cell and the IDBI. Under theinvestment component, for goods and works contracts exceeding US$ 8 million, thefinancial institutions will require that project sponsors follow ICB proceduresin accordance with Bank guidelines. All ICB contracts under both components wouldbe subject to prior review by the Bank. Contracts costing US$8 million or lesseach, would be awarded following the DFI's procedures which have been used in anumber of Bank projects and found acceptable to the Bank. These proceduresreflect IDBI and ICICI internal practices and require that subproject sponsorssolicit at least three competitive and responsive quotations. Both DFI's wouldmaintain records of the method of procurement, summarizing offers and awards. Forall contracts under the project, where ICB for equipment is required, a 15%preference on the cif price of imported goods, or the cost of custom duties andimport taxes, whichever is less, will be given to local suppliers. A 7.5%preference will be granted to local contractors competing under ICB. The Bankwould periodically review a sample of these records during supervision.Employment of consultants will follow the "Guidelines for the Use of Consultantsby World Bank borrowers". Table 5.1 summarizes the expected breakdown byprocurement methods of the project.

D. Disbursements

5.11 The proposed project is the first free standing environmental projectin the industrial sector in the Asia region. Based on the experience ofdevelopment finance projects it is expected that all of the funds would becommitted in three years and disbursed in seven years, consistent with thedisbursement performance of previous Bank-financed industrial projects in India.Disbursements will be made on the basis of the percentages shown in Table 5.2.

5.12 Under the Institutional Component, disbursements will be made againstfull documentation for expenditures on equipment, civil works, consultantsservices and training under contracts valued more than US$200,000. Under theInvestment Component, disbursements for expenditures under subloans and subgrants

28

for contracts valued more than US$1 million will be made against fulldocumentation. Under the Technical Assistance Component, disbursements will bemade against full documentation for expenditures on equipment, consultant servicesand training under contracts valued more than US$200,000. All other disbursementswould be made on the basis of Statement of Expenditures (SOE). Documentationunder the SOE's would be retained by the implementing agencies and be subject toreview by Bank supervision missions, and to annual audit by auditors acceptableto the Bank.

Table 5.1 AnticiDated Procurement Methods

5.13 The project does not include any retroactive financing. To facilitatetimely payment of project expenditures, a Dollar-denominated Special Accounts(SA) for the loan and credit amounting to US$6.0 and US$2.0 million, respectively

29

(calculated as the IBRD/IDA share of the estimated four month average ofexpenditures), would be established in the Reserve Bank of India, in interestearning accounts. The Bank would replenish the SAs whenever the resources fallbelow 50% of the initial amount or quarterly whichever occurs first.

E. Monitoring and Evaluation

5.14 Given the novelty of the project both for the G0I and for the Bank,it will be most important to obtain early evaluation and feedback of criticalaspects of the project in order to adJust implementation and assist subsequentoperations. Areas of concern are : a) improvements in performance of themonitoring and planning functions of the State Boards; b) progress in themanagement arrangements for the common treatment facilities under implementation;and c) the success of the demonstration projects. To address these issues,quarterly reports will be prepared by the CPCB and the DFI's to the NOEF withcopies to the Bank which show progress achieved in implementation. The projectpipeline would also be kept under review. Compliance with eligibility criteriawill be responsibility of the DFI's and the Bank will on a routine basis, duringthe course of supervision activities, review the application of criteria. TheDPI's will submit to the Bank audited financial statements in conformity with theBank's8 requirements within nine months of the close of each financial year. Auditof SOE's and the special accounts would be submitted nine months after close ofeach financial year. After closing of the proJect, the DFI's and the CPCB wouldsubmit an overall operational report of the ProJect's experiences and results.

Zable .2 Allocation and Disbursement of the Loan and Credit

.~~~~~~~~~~~~~aa~

I atA(ntttoa opnrt

30

VI. IPLMENTIN AOENCIE8

A. The Central and State Pollution Control Boards

6.01 The Central and State Boards are responsible for pollution assessmentfrom new and established sources, identification and implementation of control andabatement measures and the enforcement of environmental regulations. Activitiesof the CPCB at the State level are delegated to the SPCBs. At a State level theBoards are required to: i) act as advisers to the Central Government onsuitability of specific locations for the set up of industries; ii) stipulate theState standards for treatment of effluents; iii) promote and assist in thedevelopment of viable techniques for the treatment of effluents; iv) identify airand water pollution control areas; and, v) under the provision of the EnvironmentAct (1986), undertake a continuous program for identification, and inventory ofhazardous waste disposal sites. The Boards are also expected to participate inthe development of environmental standards.

6.02 Staffing. The CPCB consists of seventeen members nominated by thecentral government. The Board has a full time chairman, and officers nominatedto represent the central government, the SPCBs, representatives from industry,agriculture, trade and fisheries, and the public sector. The Chairman hasresponsibility over operation of the Board. The Central Board is authorized bythe government to employ 464 people. The salary levels at all the Boards are lowwhich makes it difficult to retain qualified personnel.

6.03 Financial Situation. The Boards depend mostly on budgetaryallocations for their budget. For example, a total of Rs 32.6 million wassanctioned under the plan for CPCB activities in 1989. Additional funds amountingto Rs 14.0 million were sanctioned by the government outside the plan framework.Consent and other fees and fines generated only 0.4 million, equivalent to lessthan 1% of the total budget. This level of funding is inadequate to deal with theenforcement and coordination mandate of the Boards. The same is true at the SPCBlevel. As a result of the reorganization study (para. 6.10), the GOI expects toproduce a budget plan for the Boards that is consistent with the mandate andrequirements for effective enforcement and a goal of increasing budgctary self-reliance (revenues from fees and charges).

6.04 Current environmental legislation and supporting rules define a rangeof parameters for pollution control at industrial sources. The Boards must beequipped with the capability to measure each of these parameters on a routinebasis. This capability currently does not exist.

6.05 Several problems are faced by the State Boards that prevent efficientexecution of their mandate. First, the large number of sources and the wide areasto be covered are not compatible with the level of funding and the limitedgeographical reach of the Boards. Funding should be increased to provide for amore thorough coverage and mobile stations should be created to increase thecoverage in areas with a lower density of sources. Second, the analyticalcapability of the Boards is deficient and not commensurate with the requirementsmandated by the legislation. Under these conditions, non-compliance cannot beaddressed. Third, the actual staffing and skills mix at the Boards needs to beadjusted to reflect the sp'.cific needs of the States, the requirements for quality

31

control and an understanding of environmental processes. Finally, budgetarysupport from the States is below the level required for efficient operation andthe management structure is vulnerable to political pressures, and therefore,efforts should be done to improve the self reliance of the Boards through the useof a greater share of fees and penalties to finance their operations.

6.06 Geograuhical coverage. Unlike the situation in developed nations,where samples can be shipped and received in hours, cargo transportation in Indiais restricted. The collection and sampling turnovers in India frequently exceedone week. This limits the validity of the results and increases the vulnerabilityof the sample to alterations. The only feasible alternative for the Boards isto provide for regional laboratories that can be placed closer to the mainconcentrations of waste generators. Furthermore, mobile field stations canprovide a cost effective capability to analyze samples at field locations withinhours of collection. Thus each Board should strengthen the capability andcoverage of the regional laboratories and complement these with the flexibilityprovided by mobile units. Strengthening the capability and coverage of the Boardsis one of the objectives of the Institutional component (para. 4.05).

6.07 AnalXtical capability. Most of the work of the Boards is nowrestricted to the analysis of a few common pollution indicators, not on the harderto measure and some times more noxious organic and inorganic pollutants. Indeveloped countries it has become obvious that common pollutants provide littleinsight into the long term, significant environmental problems associated to toxicmaterials. There is evidence that complex organic compounds are already beingdischarged in India with very little control even if regulated. The longer termpersistent toxicity effects caused by these compounds must be controlled. Thefirst step to achieve this reduction is to monitor its discharge. Therefore theBoards ought to be equipped with the capability to detect at least some of themost toxic chemicals in industrial emissions. Improving and complementing theanalytical, sampling and monitoring capabilities of the Boards is one of theobjectives of the Institutional Component (paras. 4.07 and 4.08).

6.08 Scientific Training. Sampling and monitoring planning andImplementation requires a level of knowledge of regulatory issues that is notapparent at the Boards. Formal training is also required in laboratory and fieldmethods, primarily to ensure safety and prevent sample contamination. Accurateand defensible analytical results need to be based on a thorough training programfor all staff involved. Finally, it is very important that a level ofenvironmental science be introduced into the sampling and analysis process.Training of scientific, technical and managerial staff at the Boards is one of theobjectives of the Institutional Component (para. 4.06).

6.09 Financing of Board Activities. The funding of the Boards needs to bestrengthened; most of the funding comes from state and central governmentbudgetary allocations. A larger part of the funding requirements should beprovided out of increases in the level of fees and emission charges at the Centraland State levels, such as the water cess. This will allow an improved level ofoperation at the Boards without taxing the States' budgets and at the same timewill increase the cost of non-compliance.

6.10 Organizational Structure of the oards. While the function and

32

mandates of all the State Boards are identical, their organization varies fromState to State (Annex 5.1. fg4ures 1 to 4). Clearly, differences are needed torespond to local conditions. However, in some cases, important functions areinadequately represented. Some of the problems related to the structure of theBoards are: a) most SPCBs do not have a structure that promotes the coherentassembly of ambient and point source monitoring data and their subsequent analysisand use in the planning of future activities. Each Board should form orstrengthen a planning unit to provide for this function; b) apart from the TamilNadu Board, the Boards do not identify an environmental education function. Thisfunction should be established to provide information to the public, media andvoluntary environmental organizations; c) the Boards are currently heavilydependent from the budgetary allocations from the State and Central Governments.To promote their efficiency and financial independence, the revenue collectionfunction should be improved and given more prominence; d) there is a generalproblem of inadequate levels of staffing which Is particularly acute in theregional offices where the functions of factory inspection and monitoring arebeing carried out. The inspections should be carried out by trained personnelwith experience on the operation of the industries under inspection. Thisapproach allows for accurate sampling, immediate feedback for better practices,faster identification of non-compliances and can forestall unnecessary legalproceedings; and e) in order to evaluate ambient air and water quality, the Boardsshould be allowed to monitor municipal and other non-point sources and advise onremedial measures. The GOI has agreed to conduct and implement a study of theorganizational structure and management of the Boards to address the issues above.The study has already been commissioned and terms of reference have been drafted,during negotiations, the GOI agreed to revise the terms of reference taking intoaccount the Bank's comments and also to discuss with the Bank the results of thestudy and progress in the implementation of its recommendations.

B. Particlatinal inancina Institutions

6.11 The development finance institutions (DFI's) which would serve asintermediaries for the term lending component of the project are the IDBI andthe ICICI. These DFIs currently account for almost 60% of annual terms loans toindustry and have participated in all the industrial sectors being targeted by:this project. The combined client base of the two DFIs numbers in excess of10,000 and represents total outstandings as of March 1990 of Rs. 130 billion. Inaddition, both Banks have recently constituted task forces to deal withenvironmental concerns in industry or to incorporate environmental considerationsin project appraisal. The IDBI will have responsibility to assess theeligibility of the projects to be included according to criteria established underthe project (paras. 4.24, 4.25 and 4.26).

6.12 The Bank has a long-standing relationship with the two DFIs, havingmade more than 20 loans to the two institutions. Most loans have been generallines of credit, the Bank has pursued a sector lending strategy which calls forspecialized lines of credit. Such lines include among others, the Second CementIndustry Loan, approved by the Board in May 1990, the Technology Development Loanapproved in September 1989 and the Electronics Industry Loan approved in June1989. The Bank continues to play a significant role in the borrowing strategiesof these institutions. Borrowings from the Bank are small in relation to theirtotal borrowings, but are helpful in mobilizing foreign currency resources, in

33

maintaining credit standing in international markets, in improving institutionalperformance and in lengthening the average maturities on their foreign borrowings.

Industrial Credit and Xnvestment Corporation of India.

6.13 Organization. ICICI was established in 1955 as a private financialinstitution with government support, since then it has developed into one of themajor financial institutions and it is the main provider of foreign currencyloans to the industrial sector. ICICI offers a range of financial services andrecently has diversified into merchant banking, leasing, venture capital andcredit rating services. ICICI also advises the GOI on industrial issues andcarries out sector studies. ICICI is well managed and operates effectively undera chairman and managing director, who are responsible to a 15 member boardrepresenting the interests of public and private industry and the government. Theboard meets periodically to set out and review ICICI's policies, and to decide onmajor project proposals in which exposure would exceed US$35 million.

6.14 ICICI is organized into the following groups: operations, planning,finance, special operations, and administration. The proposed project would beimplemented by the operations group, which is responsible for lending, appraisingof new projects, supervising and monitoring of ongoing loans and collections.

6.15 Operations. ICICI's growth and financial performance have beenimpressive. During the last five fiscal years (ending March 1990) its assets grewat an annual compound rate of 26% to Rs. 56 billion. During the same period theportfolio tripled to Rs. 33 billion and profits tripled to Rs. 1 billion. Returnon equity averaged 20% p.a. These impressive figures will be difficult to sustainin the future unless problems involving increasing borrowing costs, deterioratingcollections and narrowing spreads are properly addressed. Gradual deregulationhas meant increased competition and higher risk to financial institutions. Netspreads (before administrative exopenses) on the rupee loan portfolio have fallenfrom 3.5% in 1986 to 1.6% in 1989-1990 due to increased borrowing costs in thedomestic market and fixed lending rates. In recognition of these problems, ICICIhas adopted a strategy that involves: i) more emphasis of new funding sources; ii)increasing non-funded assets and fee income activities; iii) improved collectionof arrears; and iv) diversification to maintain overall profitability. ICICI'saudited financial statement and other financial data are summarized in mnex 6.1.

Industrial DevelooMent Bank of India (IDBI)

6.16 0rganixation. The IDBI was estiblished in Bombay as a wholly ownedsubsidiary of the Reserve Bank of India in 1964. It is now fully owned by the GOIand is the leading financing institution for the Industrial sector. It operatesas a direct lender and refinance institution for other national level DFIs and theterm lending activities of the Life Insurance Corporation, the General InsuranceCorporation, and the Unit Trust of India. It accounts for about 38% of allindustrial sector lending in India. Its promotional role covers a wide range ofactivities aiming at the development of both sound industrial development andfinancial practices and includes surveys of entrepreneurship development programs,consultancy and advisory services and development banking training programs.

6.17 IDBI's 22 member Board represents a cross-section of Government

34

officials, industrialists and commercial and development bank executives. TheBoard is responsible for the internal policies of the Bank and reviews overalloperations and relations with the industrial sector. Full powers are delegatedto a 10-person executive committee, headed by the Chairman of the Board. The IDBIhas its head office in Bombay and is served by 5 regional and 21 branch offices.The IDBI organizational structure comprises 8 units. The Project FinanceOperations group is responsible for business development and appraisal,disbursement, supervision, collection and recovery of lending operations. Theproject will be implemented by this group.

6.18 Operations. The IDBI's financial assistance to the industrialsector is provided through the following types of operations: a) direct financeassistance; b) refinanced loans to State level financing institutions such as theIndustrial Investments Corporations; c) rediscounted bills covering the sales ofmachinery financed by Banks on a deferred payment basis. Direct finance isavailable on projects valued at over Rs. 50 million, and accounts for 45% ofIDBI's portfolio. The IDBI raised during the last year Rupee resources totalingRs. 6.4 billion. IDBI has had a history of satisfactory profit performance andits overall financial condition is sound, with a consistent high level ofliquidity. Its assets more than doubled during the last five fiscal years (endingMarch of 1990) to Rs. 194 billion, while revenue grew at an average annual rateof 21% to Rs. 18 billion. Return on average net worth was 18.9% during FY 1990.

6.19 IDBI's continued satisfactory profit performance is threatened in themedium term by decreasing margins, as the cost of funds has been increasing, whilelending rates have remained fixed. The effect of the squeeze on margins has yetto show in the profit statements as the greater portion of IDBI's portfolio isstill supported by earlier bonds issues and RBI borrowings. In August 1990, theRBI set the long term domestic commercial rate at 15%, and proposed to set thisas a floor, rather than fixed rate, with the institutions free to vary ratesdepending on risks. This will ease the squeeze on margins. Increased competitiondue to policy liberalization poses a threat to IDBI's portfolio, and to collectionrates. IDBI will therefore have to move aggresively to minimize collectionproblems, through a combination of stricter enforcement coupled with selectiveassistance to enterprises in carrying out restructuring measures. Details ofrecent audited financial statements are provided in Annex 6.1.

6.20 Capabilities of ICICI and IDBI in the Environmental Field. ICICI hasidentified pollution control as one of the priority areas, which also include:export development, technology finance, financing services, infrastructure, andenergy conservation. A policy statement, under preparation, would essentiallytarget these six areas for future business strategy. Accordingly, the ICICI hasconstituted a group of professionals charged with the responsibility of advancingthe involvement of the institution in the environmental field. Likewise, the IDBIhas formed a task force under the direction of a Manager to oversee the activitiesof the institution in the environmental field. These groups include expertise infinancing, engineering and pollution control and represents experience gained fromthe normal appraisal mechanisms in India, which currently require an EnvironmentalImpact Statement for all new investments. To complement the DFIs in-housecapabilities, under the Technical Assistance Component, the project will fund atraining program for ICICI and IDBI officers on all aspects of environmentalassessment of industrial projects.

35

VII. EMKITS AND RISKS

A. Prolect Benefits

7.01 The main benefits of the project are associated with the reduction lnenvironmental degradation, caused by industrial sources, to be obtained from theimplementation of the activities described in the report. The institutionalcomponent is expected to yield, in the short term, improvements in theeffectiveness and coverage of the Boards for their monitoring and enforcementmandates. This is a precondition for substantial improvements in theenvironmental Impact of industrial operations. With stronger Boards, the GOI willbe able to promote stricter compliance with the environmental acts.

7.02 The sponsoring of the common treatment facilities is a pioneeringeffort very replicable across India (and in other Asian countries as well).Successful implementation of the proposed facilities should result in asubstantial impact in the environmental performance of the small and medium scaleindustry which so far have proved resistant to change. The support of thesecommon treatment facilities is also expected to result in the first field datasurveys for toxic and hazardous waste and therefore be the first step toward acomprehensive solution of the problems created by these residues from the chemicaland related industries.

7.03 By providing technical and financial support for individual effortsin waste minimization and resource recsvery, the project is expected to contributesubstantially to a reduction of waste generation in the chemical and relatedindustries. The recent MOEF decision to shift standards from a concentration toa load basis will further encourage waste minimization efforts and control waterdilution of pollutants. Furthermore, the projects sponsored through the creditline are expected to be highly replicable among many of the plants in operation.Therefore, the impact of the project will go beyond the scope of the specificprojects being funded. The technical assistance (feasibility studies, wastecharacterization and replicability studies) will contribute to the identificationand implementation of solutions to environmental problems in industry.

7.04 Further, Bank support to the GOI's environmental policies is expectedto assist in their prompt implementation. Future activities in the environmentalfield in India are also expected to benefit from this dialogue. Bankparticipation also highlights the urgency of the problems being tackled. Theinvolvement of DFI's under the Bank sponsored project will be instrumental in theacquisition of skills for environmental analysis and the internalization ofenvironmental concerns in the appraisal of industrial projects.

B. Proloct Risks

7.05 As with all new types of lending operations, the proposed projectcarries the risk associated with innovation. This project will be the first Bank-financed dedicated environmental project in industry in the Asia region. Room foradjustment and improvement remains in the proposed operation but the urgency ofthe problems requires a prompt response from the Bank.

7.06 Specific project risks are associated with the response of industry

36

to the need to improve the environmental aspects of their operations; in theabsence of positive financial incentives, the enforcement of the law and thenegative incentives in place will determine the demand for the individual projectcredit line. Although the project places priority on the strengthening of themonitoring and enforcement institutions and supports the endorsement of thepolluter pays principle, in the final analysis it is the ability to convey theseconcerns to the individual manufacturer that will determine the success of theoperation. To reduce this risk the project pipeline under the investmentcomponent was carefully reviewed and the size of this component adjusted toreflect the anticipated demand.

7.07 Although common treatment facilities are thought to offer the mostcost effective and efficient approach to the problem of pollution from smallindustrial sources they require institutional and technical coordination of alarge number of small processors. Careful analysis, design of the proposedfacilities and detailed structure of the enterprise including its legal liabilityand cost recovery arrangements is required and will need to be done for severalclusters. To minimize the risks involved, the project preparation activitiesincluded the feasibility studies of four common wastewater treatment plants, theanalysis of ownership, cost recovery, operation and maintenance issues.

7.08 The geographical coverage of the project and the existinginstitutional structure for the Pollution Boards require a certain degree ofparticipation from several State Governments. This complicates the managementstructure of the project and introduces the risk of some State Governments notbeing ready to implement the project in a timely fashion. To reduce this risk theDEA and the Bank have proposed that project management and allocation of resourcesbe done in centralized manner (through central sector schemes and theidentification of a single financing intermediary for the management andchanneling of the funds for common treatment facilities).

7.09 The weaknesses of the State Boards, among these, the currentinadequacies in training and infrastructure represent an implementation risk, inparticular as it refers to the resolve to address the issue of non-compliance.However, the GOI commitment to review and address the organizational andstructural issues of the Boards through a comprehensive study will contribute toimprove the performance of the Boards. Also, the proposed training, equipmentand facilities to be financed under the project will greatly assist in improvingthe effectiveness of the Boards. The fulfillment of these requirements willgreatly reduce the risks associated to the current inadequacies of the Boards.

7.10 Success of the activities promoted by the project, will in the longrun depend on political will and commitment from the GOI to enforce theenvironmental regulations and increase the costs of non-compliance. This is arisk difficult to evaluate. However, the current leadership at the MOEF isstrongly committed to the objectives of the GOI policy statement on theenvironment and to assist in the reduction of the conflict between industrialdevelopment and environmental protection.

37

VIII. AGREEMENTS REACHED AND RECOMMENDATION

8.01 During negotiations the following agreements were reached with theGOI: the GOI will a) maintain the Implementation Cell and Steering Committee andprovide requisite assistance to them to carry out their functions properly (paras.5.02 and 5.07); b) by December 31, 1991, undertake and complete a study, based onterms of reference developed in consultation with the Bank, on the organizationand management of the SPCBs. The GOI will upon completion of the study, discussthe results of the study and the progress in the implementation of therecommendations (paras. 5.03 and 6.10); and c) upon request, discuss the progressregarding changes in discharge standards for industrial sources of pollution froma concentration to a load basis (para 2.37);

8.02 During negotiations, the following agreements were reached with IDBIand ICICI : a) the DFIs will onlend their loan proceeds to sub-borrowers on termsconsistent with the long term domestic lending rate currently at 15%. The loansto sub-borrowers will be extended up to 15 years for repayment, inclusive of fouryears of grace (para. 4.22-b); and b) both institutions will ensure that theprojects will satisfy the corresponding eligibility criteria as described inparas. 4.24, 4.25 and 4.26.

8.03 During negotiations, agreement was reached with GOI on the inclusionof the following conditions of effectiveness for the proposed project: a) the LOUhas been obtained by the borrower from IDBI for the channeling of the grant fundsfor the common treatment facilities and demonstration projects under theinvestment component and for the pre-investment studies under the technicalassistance component (para. 4.22-d); and b) Subsidiary Loan Agreements have beenexecuted on behalf of the borrower and IDBI and the borrower and ICICI,respectively, stipulating that i) IDBI and ICICI will be able to draw up to US$74 million and US$50 million equivalent respectively; ii) on-lending will be inRupees at a rate 2% below their long term domestic commercial rate, with theforeign exchange risk being borne by the GOI; iii) repayment of the loan will beover a period of 20 years, inclusive of five years of grace (paras. 4.21 and 4.22-b).

Recommendation

8.04 On the basis of the above agreements, the proposed project constitutesa suitable basis for a Bank Loan of US$124 million equivalent to India for 20years, including five years of grace, at the Bank's standard variable interestrate and an IDA credit for SDR 23.4 million (US$31.6 million equivalent) to Indiaon standard IDA terms with 35 years maturity.

ANNEX 2.138 Pg l of 8

INDIA

INDUSTRIAL POLLUTION CONTROL PROJECT

Miniml National Standard. for Discharems Into Water (MINAS

In Selected Industries

MINAS for Some Industrios

MINAS/Parometero ofIndustry Number of Fac ilties Concern Monitoring Requir ments

Complex Fertilizors 19 (including those - pH (6 6- *.u.) In guard pond automaticIndustry under Installation) - emoniacal monitoring for flow, pH,

nitrogen (60 mg/1) ammoniocal nitrogen, nitrate- total Kl-ldahl nitrogen (wher nitric acid

nitrogen (TKN) Ic produed and used In(100 mg/1) fertilizer prodution), and

- nitrate nitrogen hoxavelent chromium (where(10 MG/i) chromium-baosd Inhibitors

- cyanide (0.2 mg/1) arm used). Fluoride should- vnoadium be continuously monitored(0.2 mg/i) where phosphoric acid is

- arsenic (0.2 mg/i) producd. Until automatic- chroi um (2.0 mg/l monitoring In installed-grabtotal and 0 1 g/1 sampling every four hours tohexv- lent) required.

- fluoride (10 mg/1)- phosphate (5 mg/1)_ oil and grease(10 m9/1)

- TSS (100 mg/)

Straight Nitrogenous 82 straight nitrogenous - pH (6.6-6 s.u) Monitoring requirementsFertilizer Industry fertilizer - ammonlcal similor to those established

28 ammonia and ureo nitrogen (60 mg/1) for complex fertilizers9 ammonium salt plants - free amoniscal Industry

nitrogen (4 mg/1)- total Kieldahl

nitrogen (TKM)(100 mg/1)

- nitrate nitrogen(10 mg/1)

- cyanide (0.2 mg/1)- rsenic (0.2 mg/i)

- chromium (2.0 mg/itotal and 0.1

- mg/i hexavlent)_ oil and grease

(10 mg/1)- TSS (100 mg/1)

Sugar Industry 191 small - pH (6.6-8 o.u.)88 medium - 800 (100 mg/i)20 largo - TSS (100 mg/1)

39ANNEX 2.1

MINAS/Parameters ofIndustry Number of Faeiltles Concern Monitoring Requirements

Oil Refining 8 small (1-8K tons/day) - oil and grease Daily monitoring of finalIndustry S medium (4-1OK (10 mg/l, 7 kg) effluent recomnended for *11

tons/day) - phenol (1 mg/1, pollutants2 large (1 1-20K 0.7 kg)tons/day) - sulfide (0. -/1,

0.86 kg)- 800 (156 m/1,10.5 kg)

- TSS (20 mg/I,14 kg)

- pH (6-8.6 *.u.)All mass limits arekg/1,000 tons

Crude Produced:

Pesticide 818 - temperature (<6 C Composite sampling over 24Manufacturing and 101 (manufacturing above receiving hoursFormulating Industry only) water) 10 Pereent dilution for

- pH (6.5-8.5 s.u.) bioassay- fat, oil andgrease (10 mg/1)

- oxygen absorption(60 Mg/i

- nonposticidalsuspended solids(30 Mg/i)

- organic solventsand compounds'(80 ug/1)

- raw material andproc"eIntermediate*%(not presnt)lmits for

toxicity (.50Xsurvival)

Optional

- hoavy metals- Inorganic andorganic chemicals

- COD and TOCeffluent limitsshould beestablished basedon specific streamCharacteristics

Man-made Fibers 29 - temperature (no No specific monitoringIndustry (Synthetic limits) frequencies and protocolsand Semi-Synthetic - pH (6.5-9 s.u.) establishedFibers) - TSS (100 mg/1)

- TDS (no limits)- 800 (80 mg/1)- COD (no limits)- oil and grease (no

limits)- zinc (1 mg/isemi -syntheticindustry only)

4nANNEX 2.1Peg 8 of a

MINAS/Parametre otIndustry Number of Facilltles Concern Monitoring Requirements

Fermentation 11 maltries - 800 (80 mg/1 Orob samples should beIndustry (maltry, 26 breweries maltry/brewery collected and analyzed overbrewery, distillery) 120 dlotillerie. 8 000 mg/1 a 24 hour period, and a

distillery) composite ot the grab- TSS (100 mg/i :amples should *loo bemaltry and brewery onalyzedonly)

Pulp Section Outlet:

Small Pulp and Paper 179 - pH (6-9 e.u.) Once per month, 24 hour179 - 800 (60 mg/1) composite*

- suspended solids(100 m/i)

-COD, linin (nolimits)sodium (no limits)

41

ANNEX 2.2Page 1 of 3

INDIA

INDUSTRIAL POLLUTION CONTROL PROJECT

The Environmental Clearance Procedure

1. There are three environmental clearance systems. One is a permittingprocedure involving the issuance of a "notice of consent to establish" a plant.The second is the environmental impact assessment (EIA) process involvingapprovals to proceed with new projects. The third requires obtaining a 'noticeof consent to operate" a plant.

A. Consent to Establish

2. The Consent to Establish process is basically the same in all states.The basic procedure is as follows:

Mi) Obtain a Letter of Intent from the Central government includingpermission to make investments in the sector of interest, toborrow funds from the financial institutions and to obtain anduse foreign exchange if imports are needed.

(ii) Obtain approval from the local government for the planned use of theland. If rural land is involved, state government approval is alsorequired. In the State of Gujarat, the PCB is to be notified forpurposes of obtaining their approval for the site.

(iii) Obtain a Consent to Establish or a No Objection Certificate from theSPCB. In the application for Consent to Establish, the firm informsthe SPCBs of the products to be manufactured, the production process,the input materials, the output materials, discharges and effluents,the effluent treatment measures and the location of the proposed unitas given by the regulations in the various environmental acts. In all4 states, the PCBs have issued detailed application forms and/orquestionnaires to be used by industry.

3. In special cases, the application for Consent to Establish has to besent to the Central Government for approval. According to the regulations in theEnvironment Act, the Ministry of the Environment (MOE) has set guidelinesdefining which projects that need to be approved by the Central Government andwhich projects need to be approved by the State PCBs or the Department of theEnvironment in the States. In some cases approval from both is necessary. Thecountry is divided into sensitive areas and nonsensitive areas. Sensitive areasinclude areas containing archeological sites, national parks, and wildlifesanctuaries. Industries are divided into red (highly polluting), orange(moderately polluting) and green (non polluting). Approval agencies for each typeof area and type of industry are defined by the Environmental Act and are givenbelow in Table 1.

42

ANNEX 2.2Page 2 of 3

Table 1Responsible Authorities for Consents to Establish

Area Type

Indus=r 6*nsitSe Non-Sensltlv

Red MOE SPCB+MOKOrange MOE+SPCB SPCBGreen SPCB (MOE) SPCB

In addition there are other conditions affecting applications forconsents to establish:

(i) No highly polluting industry (red) may be established insensitive areas.

(ii) All projects in the public sector must request clearancefrom the HOE.

(iii) All projects with an investment cost more than Rs 500million require clearance from the MOE.

B. Environmental ImRact Assessments

4. An environmental impact assessment (EIA) is required depending on thearea in which a source of pollution such as an industrial unit is to be locatedand on the size of the investment. An EIA is mandatory for all projects referredto the Central Government, that is, all red projects, all projects in the publicsector and all projects with an investment more than Rs 500 million. An EIA isnot mandatory for other projects. However the SPCB may require an EIA for largerindustries.

5. In the four target states, the PCBs have somewhat differentrequirements of when to make an EIA and who should do it. In Tamil Nadu, 9 outof 10 projects that are put forward to the Board have an EIA. Also the Tamil NaduPCB may choose to conduct an EIA on smaller projects. In the other states, largeor public projects require an EIA but in the case of other projects the need foran EIA is decided on a case by case basis.

6. In the rules accompanying the Environment Act there is a list of thefactors to be included in the EIA. Included are:

- Regional carrying capacity of the site- Volume and quality of expected effluent- Impact on soil, water and air quality- Socioeconomic impacts- Impact on flora and fauna

43

ANNEX 2.2Page 3 of 3

C. Consent to ORerate

7. Once the Consent to Establish has been obtained, and, where required,an EIA has been performed, the industry can then proceed with building andcommissioning the plant. Once this has been accomplished, a Consent to Operateis required from the State PCB before production can start. This consent is givenfor a period of 1 to 2 years depending on the type of industry. As part of thisprocess, monitoring and inspection requirements are also set. The Consent toOperate may be conditional for an initial period of time until the pollutioncontrol design specifications are met.

44

ANNEX 2.8Prage 1 of 2

INDIA

INDUSTRIAL POLLUTION CONTROL PROJECT

Current Incentives provided for Industrial Pollution Control

Subsidie

1. (a) Excise oxemptions reducing oxcise taxe from 16 to 6 percent for certain pollution controlequipment.

(b) An depreciation allowance that Is set at SOX rather than 80X for certain pollution controlequipment.

(c) Reduction of the maximum customs duty on pollution control equipment to 40X from 86X.

(d) Income tax exemption for private contributions to onvironmental organizations.

(f) Soft loan *nd grant schoeme for financing pollution control equlpment and for upgradingprocess used including:

(i) IDBI/ICICI/IFCI technology upgrade loan progrom whose selection criteria include costsof process upgrades and pollution measures. Loans are up to ReS50 illilon and aro ata rate of 11.5.

(ii) PACT: Some of the R and D costs of innovative now products/process technologioes arefunded. Tho project cost cannot excod USS 1.0 million, and up to S0X of the costwill be funded under PACT.

(ili) TDICL: Risk finance at subsidized rates for comercial R and D/or implementation of anew technology up to a total project cost of R.20 million.

(Iv) IFCI subsidizek tho cost of consultants hired for pollution control projects invillage and the small scale sector by providing a subsidy of B0X of the fees orR6SOO, for consultoncy only and Ro.7600 or 75X of the fes for consultancy andImplementation, whichover is los.

(v) Gujarat subsidizes small scale sector project by giving a soft loan of Ro.40000 orBOX of the project cost, whichever Is less.

(vi) Tamil Nadu subsidize the Installation of effluent treatment plants by providinggrants of up to Re. 26,000 for the necessary civil works, grants of up to Rs.25,000for the equlpment required, and Re.160/head/month as a grant for 2 persons formaintenance or Ro.20,000, whichever Is loss.

(vii) Tamil Nadu subsidizes the cost of ETPS for leather tannertes through SIPCOT byproviding a soft loan of up to 10K of the volue of assets of the industry or Re. 1.6million, whichever Is less.

(Ix) A proposed schome would finance comon treatmnt plants on 26:26:40:10: basis wherethe proportions are as follows: contral govt grant: State govt grant: Commercialloan: Equity of participating Industries.

Cheaw:

2. (a) User charge for CETPo are levied on participating Industries.

(b) Effluent charges (cosn) Is levied on the consumption of water for various activities at arate of betwen 8/4 and 2.5 paise per kiloliter for water for Industrial use.

(c) Administrative charges for obtaining consents. For example In Uaharashtra charge ofbetwen Re. 200 and Ro.10,000 depending on the size of the industry are levied.

(d) Product charges on liquor bottles and *park plugs.

45

AMEX 2 aPF- 9' -of 2

Intor.smt Ine nties:

8. e() For tailure to comply with the Water (prevention and control of pollution) Act, fines upto amaxlum of Ro.6000 or lmprisonmnt for up to three months or both may be imposod. Afterconviction, continued violation con result In a fine of Re. 1000 per day for each day ofviolation.

(b) For failure to comply with the Air (prevention and control of pollution) Act, fineo up to amaximum of Ros600 or lmprisonmnt for up to thre months or both may be lposod. Afterconvictlon, continued violation can result tn a fine of Rn.1000 per day for each day ofviolation.

(c) For failure to comply with the Environment prevention and control of pollution) Act, finesupto a maximum of Re. 100,000 or lmprisonmont for upto five yearo or both may be lmposd.After conviction, continued violation can reult In a fine of Re. 6000 per day for eachday of violation.

(d) For failure to comply with the Water Ce.. Act, fines of upto Re. 1000 or Imprisonment for upto sIx months may be imposed. Any arrears are ooassd at 12X inter*at per year.

46 ANNEX 2.4Page 1 of 7

INDUSTRIAL POLLUTION CONTROL PROJECT

The Experience of Some Developed Countries in theControl of Industrial Pollution by Using Economic Instrumenta.

DgnmarkSubsLdies

1. Denmark has only a few available subsidies for industrial pollutioncontrol. These are available through a program to promote and develop cleanertechnology and recycling.

Charges and User Fees

2. For each ton of waste delivered for incineration or deposition, acharge (equivalent to about US$ 20) must be paid to the state. User charges arelevied on domestic and industrial effluents discharged into the municipal sewagesystem or for solid waste generated at the plant. The user charges cover allcosts of the treatment and disposal systems. User charges are levied onhazardous and chemical wastes to be treated in special incinerators and cover allassociated costs.

3. A charge of $4.50/kg is levied on the consumption ofchlorofluorocarbons (CFCs). The charge is paid by importers of CFCs and byimporters of products containing CFCs. Administrative charges are paid for someadministrative services like the approval of pesticides. The waste charge andthe CFC charge are considered to be effective and raise substantial revenues.The revenue raising aspect has become increasingly important in financing ofDanish environmental programs. In total, the various charges generate revenuesaccounting for 95X of all public costs for environmental protection.

Enforcement Incentives

4. An increasing number of firms charged with violating standards arebeing brought to court and given fines. However, the fines do not always matchthe economic consequences of the violation in terms of the costs to society orthe profits made by violating standards.

The Netherlandsgubsidies

5. Subsidies are provided in order to encourage compliance withregulations and in order to promote research on and implementation of pollutioncontrol and clean technologies.

Charges and User Fees

6. The Netherlands has water pollution charges that are imposed onregional water authorities, households and firms. The charge levels are high andhave been effective in abating water pollution levels. In addition, a chargesystem covering chemical waste, noise and air pollution was in place until April1988, when it was replaced by a general fuel charge. The revenues from the fuel

47

ANNEX 2.4Page 2 of 7

charge are used to help fund Ministry of Environment programs.

Sweden

Subsidies

7. The only financial assistance program available to industry in Swedenis the Fuel Environment Fund, consisting of revenues from one of the charges onoil. Revenues are directed at underwriting flue gas desulfurization withparticular emphasis on new technologies. Sweden formerly provided financialassistance in the form of grants to existing industries investing in pollutioncontrol equipment. Also transitional subsidies were provided for installingsewage treatment facilities.

Charges and User Fees

8. Industries discharging effluent into municipal drainage and treatmentfacilities have to pay the full cost of collection and treatment. Industriesalso pay for the collection and disposal of solid wastes. Two charges on oil arelevied. Revenues from one charge are directed toward financing environmental andnon-environmental programs. A smaller charge is directed to pay for liming oflakes to neutralize the effects of acid rain. A charge is levied on nitrogen andphosphorous according to the amount of active substances in pesticides. Therevenue is used for research and development. A charge is levied on some typesof containers. The amount depends on the type. Sweden has severaladministrative charges, primarily used to raise revenue and to pay for servicessuch as licensing. Likewise, charges must be paid when firms get waivers forsome specific rules and standards.

Market Creation Systems

9. There exists an obligatory environmental damage insurance system,with the aim of raising funds to cover costs for clean ups; if it provesimpossible to identify the liable firm or firms in connection with pollution andpolluting accidents.

Enforcement Incentives

10. An environment protection charge designed to increase environmentalcompliance is levied. The charge is set at a level that results inneutralization of profits that accrue due to non-compliance. The problem withthis system is that the authorities must prove the polluter actually made aprofit by not complying and must calculate that profit. In addition theauthorities can administratively impose a noncompliance fee on ships fordischarging oil into coastal water. In general, the different charges are toosmall to give incentives to firms and consumers to change their behavior. On theother hand, some of the charges raise considerable revenues to be used forenvironmental protection. They are therefore evaluated to have an indirectenvironmental effect. Sweden sees the existing economic instruments assupplements to direct regulation, not as alternatives to direct regulation. Theinsurance system is expected to solve some of the problems that occur when a

48

ANNEX 2.4Page 3 of 7

liable party can not be identified or is unable to pay for the damages.

Franc,eSubsidies

11. Subsidies in the areas of air, water, and noise pollution as well as

in the area of waste disposal are provided utilizing the charges levied oneffluents through an environmental fund.

Charges and User Fees

12. Since 1985 there is a charge on air pollution emissions with the

purpose of raising revenue for the financing of air pollution control equipmentand for research by the Air Quality Agency. The charge system was the result of

negotiation between environmental groups and the Ministry on the one hand and

industry on the other and as a result bears the characteristics of compromise inthat the charge level is too low to have any incentive impact and the charge base

is too restricted. In the case of effluent charges for polluted water, thecharge system is purely a device for the raising of revenue to finance agenciesresponsible for water quality and resource problems. The incentive impact of the

charge system is limited by the charges being set too low and by the primary

purpose of the system being the financing of envir.onmental agencies. A productcharge on lubricants was introduced in 1981 and renewed in 1986 for the purposeof the elimination of waste oil. Its effectiveness is emphasized by the fact

that over seventy percent of used oil is collected and recycled.

Subsidies

13. Financial aid is given at federal, state, and municipal levels and

by financial institutions. A variety of subsidy schemes exist. Financialassistance (e.g. grants and soft loans), is used to assist small firms which

could experience cashflow problems and to speed up the implementation of

environmental programs. Soft loans are dominant and usually tied to specialprograms and demonstration projects. Some observers find that these subsidies

only give rise to "windfall profits", others state that they are only effective

in promoting demonstration projects.

Charges and User Fees

14. Since 1981 all discharges to open water are subject to a charge. The

charge is calculated on the basis of the amount of pollution in the effluent for

a number of different pollutants. The parameters include settling organicsubstances, oxidizing substances, and a variety of heavy metals and toxic

substances. Over time more pollutants have been added to the calculation basis.

The charge is differentiated so that reductions on the charge are given as a

function of the level of compliance with effluent standards. For instance if thedischarge is less than half of the minimum effluent standard a 100l discount of

the charge is granted. Thus the charge is not a pure economic incentive sinceit is tied to effluent standards imposed through regulation. Administrativeefficiency is not great since half the revenues go toward administration of the

49

ANNUE 2. 4Page 4 of 7

charge. Savings of one third in the cost of pollution control have beenestimated as a result of the charge compared to equivalent reductions inpollution through a uniform standards. A user charge is levied on domestic andindustrial sewage discharged into municipal sewage systems. It is based on thewastewater volume and covers the collection and treatment costs. Since 1969, acharge has been levied on lubricant oil which, in combination with directregulation, has been very effective in increased recycling of oil. In 1989 thecharge was approximately $100/ton of "new" lubricant oil. The water charge hashad some effect in reducing pollution, but not as large as that due to directregulation. Pollution abatement efforts are estimated to have benefitted from thecharge.

Degosit Refund Systems

15. Certain industrial containers are subject to a deposit-refund system.

Market Creation System

16. Some transferability of air pollution emission rights is possible.The system is comparable to the offset system in the U.S. According to the"'Plant Renewal Clause," establishment of new plants in areas where ambient airstandards have been exceeded is not allowed. However, licenses can be given ifa new plant replaces an old plant of the same kind and is established in the samearea and reduces emissions substantially. Likewise renovation of existing plantsresulting in emission reductions might yield "emission rights" to be used for newsources. The German "offset" system is evaluated to have been economicallyefficient.

ItalvSubsidies

17. A subsidy scheme was initiated in 1987 to provide for the financingof solid waste recycling and recuperation as well as energy source recuperation.Until recently there was a program to provide subsidies for water pollutionabatement schemes.

Charges and User Fees

18. Italy imposed a water effluent charge linked to direct regulations.The charge system has two components; a user charge to finance sewer constructionand an effluent charge that is an incentive to polluters to achieve compliancewith the standards set by the Law. It has had ambiguous success as an incentive.A product charge on lubricants has been in effect since 1985 for the purpose ofeliminating waste oil.

United States of AmericaSubsidies

19. A federal construction grant program became a significant source offunds for local governments after 1972 for the construction of wastewater

50

ANNEX 2.4Page 5 of 7

treatment plants. EPA contributions ranged from 30X to 751 of the investmentcost. After 1984 the grants were reduced. Phased elimination of federal grantswas authorized in 1987 for completion in 1990 in favor of state revolving funds.Until 1984 grants were available only to publicly owned treatment works. Sincethen industry has been allowed to benefit, unless the plants were designed fortreatment of industrial effluents only. State revolving funds are beingestablished for purposes of financing future sewage treatment facilities.Started in 1988, all states are expected to have funds established by the end of1990. States are expected to contribute matching funds equivalent to 20X of thefederal grant. These funds plus any additional resources dedicated to the fundwill be provided to communities in the form of loans and other non-grantassistance. Various federal grants are provided to advance technologies formonitoring and reducing environmental pollution.

Market Creation Systems

20. Emissions trading is allowed under EPA rules. A facility withmultiple emission sources may be treated as a single source for purposes of airpollution control. Under traditional technology-oriented regulations individualsources are not permitted to fall below emission standards and are not recognizedfor performing above the standards. Under a bubble approach, the facility mayselect a mixture of pollution control technologies that allows the facility intotal to meet the emission limitations. This optimization strategy can be veryeffective in reducing the overall costs of compliance. Bubbles are not permittedfor interpollutant trading and are restricted to existing sources only. Anexisting source within a facility that undergoes a major modification ormodernization may be excused from stringent new source performance standards.The net result of the modification must be that smissions do not increase. Thiscan be achieved by controlling other sources in the facility while falling shortof applying the best available control technology as would be required under thenew source performance standards for the modified source. Bubbles apply to thosewithout and netting to those with modernization activity. Both bubbles andnetting allow substantial savings for individual facilities in the costs ofcompliance. In some areas, all sources may be in compliance but the air qualitystandards are not being met. Rather than restrict economic development byprohibiting location of new sources in that area, offsets may be taken by thefacility. In such non-attainment areas, a new source may proceed withconstruction if (1) best available control technology is applied and (2) emissionreductions are secured from other facilities to more than offset the newemissions. A source may save or bank emission reductions in excess of regulatoryrequirements. Called emission reduction credits, these may be held for later usesuch as facility expansion or modernization. They may also be sold to anotherfacility depending upon location. Emission reduction credits therefore becomethe currency for emission trades involving bubbles, netting and offsets.

Charess and User Fees

21. The South Coast Air Quality Management District in the State ofCalifornia sets fees based on tonnage of emissions from each permitted facility.Various parameters are employed in setting the fees including methylene chloride,carbon monoxide, nitrogen dioxide, sulfur dioxide, particulates and organic gases

51

ANNEX 2.4Page 6 of 7

other than those mentioned. For 1988, fees ranged from $167/ton for nitrogendioxide to $327/ton for organic gases. The marginal control cost for organicgases may range from $2,000 to $5,000 per ton. Wastewater treatment plants mustestablish pretreatment charges when federal grants are used to assist infinancing the project. The charges are imposed on industrial sources whichcontribute waste to municipal sewage treatment systems. The U.S. EnvironmentalProtection Agency (EPA) requires that charges be based on such factors asstrength, volume and delivery flow characteristics. A feedstock charge is leviedon petroleum based chemicals and chemical derivatives. The charges wereimplemented in response the Comprehensive Environmental Response, Compensationand Liability Act, commonly known as the Superfund Act. Revenues are directedtoward the cleanup of inactive or abandoned hazardous waste sites. Fees arelevied on individual sources of pollution in many jurisdictions as part of thepermitting process. This occurs for both air and water quality permits. Fees mayvary by type of industry, nature of process used within a plant and the size ofthe source. Fees are set at such a level that part or all of the cost ofadministering the permit system is defrayed and may be adjusted annually in somejurisdictions. Water permit fee are levied in many states. A good example isthe State of Colorado. The annual fee ranges from a low of $80 for anagricultural facility of less than 5,000 animal units to $4,330 for a petroleumrefinery or power plant using over 5 million gallons of process water per day to$11,000 for a sewage treatment plant processing over 100 million gallons per day.The average fee is about $900/year. The $800,000 in annual revenues accounts forabout two-thirds of the cost of administering the permit program or about onefifth of the $4 million annual budget for the state water pollution controlagency. Air permit fees are also levied in many jurisdictions. An example ofair permit fees may be found in South Coast Air Quality Management District inthe State of California. Facilities in this region, which includes Los Angeles,must pay both permit evaluation fees and an annual operating fee. Fee schedulesmay be adjusted annually and set by the board of the district to not exceed thecosts of planning, inspection and monitoring related to the permit system. Thefees are based on types and size of equipment. Equipment categories used includehorsepower, fuel burning, electrical energy, incinerators and gasoline fuelingequipment. Federal grants have been provided for the construction of municipalsewage treatment plants.

Enforcement Incentives

22. Environmental enforcement in the U.S. relies primarily onadministrative actions. Administrative actions generally are quicker, lessexpensive, and less resource intensive than judicial actions. The courts haveauthority to impose fines, imprisonment or both as a result of noncompliance.Penalties are applied for two general types of violations. These are violationsof the standards set under the law and violations for not reporting or providingfalse information. False reporting is a particularly important violation becauseunder U.S. environmental law significant responsibility is placed on facilitiesfor monitoring pollution and filing reports that are accurate and timely. Underthe U.S. Clean Air Act violations of emission standards and new sourceperformance standards are subject to permanent or temporary injunction, a penaltyof up $25,000 per day of violation, or both. Any person who knowingly violatesthe standards faces criminal penalties of fines up to $25,000 per day of

52

ANNEX 2.4Page 7 of 7

violation, or by imprisonment of more than one year, or both. If the knowingviolation is the second conviction the penalties double to fines of up to $50,000per day and up to two years imprisonment, or both. Under the Clean Water Act,violations of standards are subject to fines of up to $25,000 per day. Criminalviolations which are found to be negligent violations are subject to penaltiesincluding fines of at least $2,500 and up to $25,000 per day of violation, orimprisonment for not more than one year, or both. For knowing violations, thepenalties are double those for negligent violations. These penalties includedischarges into sewers and publicly owned treatment works. Where the knowingviolation places another person in imminent danger of death or serious bodilyinjury, the penalties include fines of up to $250,000 or imprisonment of not morethan 15 years or both. In this latter case if an organization is at fault, thefine may reach $1 million. Where any of these are second convictions, thepenalties are doubled. Under the Solid Waste Disposal Act, which regulateshazardous waste generation, storage, transportation, disposal, and export,violations are subject to penalties of up to $50,000 per day in fines, or up totwo years in prison, or both. Second convictions can double the penalties.Knowing violations that place another person in imminent danger of death orserious bodily injury, shall be, on conviction, subject to a fine of not morethan $250,000 or imprisonment of not more than 15 years, or both. If thedefendant is an organization, the fine may reach $ 1 million. Any person whoknowingly makes any false statement, representation, or certification in anyapplication, record, report, plan or other document filed or required by the act,or who falsifies, tampers with, or renders inaccurate any monitoring device orrecord may be subject to fines of up to $10,000. In addition imprisonment maybe imposed of up to six months in the case of the air act and two years in thecase of the water act. A second conviction doubles the penalty. Fines aresought on the basis of the economic value to the source in delaying compliance.This may include capital costs, debt service, cost of operations and maintenance,and any additional economic value which may have accrued to the source as aresult of delay. The amount may be reduced by the amount spent by the sourceduring the period of violation to comply where that was not otherwise taken intoaccount in calculating the fine.

23. The use of economic incentives in the U.S. has been quite marginalcompared to the regulatory approach of command and control. The one majorexception has been the EPA construction grants program for municipal sewagetreatment systems. The U.S. has led use of market creation systems. Inparticular the use of emissions trading has grown over the years with refinementsinvolving bubbles, netting, and offsets. In general the U.S. has relied heavilyon financial enforcement incentives.

ANNEX 4.1S 3 Page 1 of 13

INDIA

INDUSTRIAL POLLUTION CONTROL PROJECT

Institutional ComponentCost of Improvements for the Control Board Laboratories

1. The program of improvements at the State Boards has been designed toaddress the needs related to four areas of concern. These includes (a) theanalytical capability of the Boards to undertake the mandate for monitoringand enforcement of the rules in the environmental legislations (b) theeffective geographical coverage in India and the problems related to thedispersal of industrial sources and the difficulties in transportation andcommunication;(c) the skills available at the Boards to effectively executetheir mandate; and (d) the financing situation of the Boards.

2. To address the need for a modern and efficient analyticalcapability, the project will support the development of a modern and efficientinstrumentation infrastructure. An ideal central and an ideal local laboratoryhas been designed that addresses most of the short and medium terminstrumentation requirements for sampling, analysis and monitoring. Theinstrumentation requirements are described in tables one and two.

3. To address the issue of geographical coverage the project willsupport the set up of regional laboratories, integrated to a central locationbut capable of performing most of the monitoring and sampling requirements atfield locations. The set up of regional laboratories will be complemented withthe set of monbile monitoring and sampling vans, therefore extending theeffective coverage of the regional laboratories. With this proposal, theproject will increase effective coverage of the Boards in all four States. Thetypical instrumentation for the regional laboratories and the mobile vans aredescribed in tables two and three.

4. The project will also support a training program that includes fourareas of expertise. These programs were designed to meet the needs and solvethe gaps in specific skills required for the effective execution of themandate at the Boards, The training programs are described in table fourbelow.

5. The specific recommendations as applied to each State Board aredescribed in Tables five to eight. The support provided represents asubstantial financial assistance to the Boards and is expected to becomplemented with resources in staffing and operational and maintenance costsprovided by the State governments.

54ANNEX 4.1Page 2 of 13

Table 1

Configuration and Costs of Equipment of a Central State Laboratory designed tomeet the minimum monitoring and enforcement needs.

Item Unit cost RequLred Cost

MA, Graphite furnace/flame 75,000 1 75,000TOC analyzer 30,000 1 30,000GC with ECD 30,000 1 30,000HPLC 25,000 1 25,000Vehicle 11,700 2 23,400MilliQ system with reverse osmosiss 22,000 1 22,000Fume hoods 6,000 3 18,000Xerox 8,800 2 17,600Clean benches 8,000 2 16,000Computer 3,000 4 12,000Side loading balance 5,900 2 11,800UV-VIS double beam spectro (with returnsipper) 10,000 1 10,000Voltage regulator 700 10 7,000Noise level monitor 6,000 1 6,000Glove box 3,000 2 6,000Specific ion electrode meter 5,500 1 5,500Top loading electronic balance 2,350 2 4,700Dissolved oxygen meter 2,200 2 4,400Spectronic 20D 2,000 2 4,000Laminar flow bench 3,500 1 3,500Refrigerator 700 5 3,500Auxiliary power generator 3,000 1 3,000Bioassay tank 75 40 3,000Continuous extractors 500 6 3,000Bacterial incubator 1,200 2 2,400Fax/Telex/Radiotelephone 2,350 1 2,350Muffle furnace 1,000 2 2,000Specific ion electrodes 175 10 1,750Hot air oven 700 2 1,400Continuous sampler kit 650 2 1,300Refrigerated centrifuge 1,200 1 1,200Freezer 600 2 1,200Kjeldahl apparatus 1,170 1 1,170Flow meter 500 2 1,000Air compressor 950 1 950pH meter 425 2 850Evaporators 125 6 750Autoclave 700 1 700COD 600 1 600Vacuum pump 250 2 500Micro digesters 80 6 480Van Dorn bottle 150 3 450Sonicator 400 1 400Glass distillation apparatus 400 1 400Radiation monitors 350 1 350Conductivity meter 300 1 300Color meter 300 1 300Turbidity meter 300 1 300Reference thermometer 120 2 240Ekman dredge 200 1 200

55 ANNEX 4.1Page 3 of 13

Colony counter 120 1 120

Subtotal: 444,060

Table 2

Configuration and costs of Equipment for a Regional State Laboratory designedto complement the geographical reach of the State Board.

Item Unit Cost Reguired Cost

Flame AA with hydride emission 40,000 1 40,000GC with FID/ECD 35,000 1 35,000Vehicle 11,700 2 23,400MilliQ system with reverse osmosis 22,000 1 22,000Xerox 8,800 1 8,800Clean bench 8,000 1 8,000Noise level monitor 6,000 1 6,000Fume hood 6,000 1 6,000Computer 3,000 2 6,000Air conditioner 600 10 6,000Side loading balance 5,900 1 5,900DO meter 2,200 2 4,400Laminar flow bench 3,500 1 3,500Glove box 3,000 1 3,000Furniture 3,000 1 3,000Auxiliary power generator 3,000 1 3,000Plumbing 3,000 1 3,000Wiring 3,000 1 3,000Voltage regulator 700 4 2,800Bacterial incubator 1,200 2 2,400Top loading electronic balance 2,350 1 2,350Fax/Telex/Radiotelephones 2,350 1 2,350Spectronic 20D 2,000 1 2,000Refrigerator 700 2 1,400Continuous sampling system 650 2 1,300Kjeldahl apparatus 1,200 1 1,200Muffle furnace 1,000 1 1,000

Regional Laboratory (continued)

Item Unit Cost Required Cost

Air compressor 950 1 950Hot air oven 700 1 700Autoclave 700 1 700Freezer 600 1 600COD 600 1 600Vacuum pump 250 2 500VanDorn bottle 150 3 450pH meter 400 1 400Glass distillation apparatus 400 1 400Radiation meter 325 1 325Conductivity meter 300 1 300Turbidity meter 300 1 300Ekman dredge 175 1 175Telephone 30 5 150Reference thermometer 120 1 120

56 ANNEX 4.1

Page 4 of 13

Colony counter 120 1 120

Subtotals 213,590

Table 3

Configuration and Costs of a Mobile LaboratoryItem Unlt Cost Required Cost

Air monitoring equipment 37,000 1 37,000Body fabrication 36,000 1 36,000Misc equipment 32,000 1 32,000Van 17,000 1 17,000Water monitoring equipment 16,000 1 16,000Furniture 6,000 1 6.000

Subtotal: 144,000

Table 4Configuration and Costs of Air and Water Monitoring Stations.

Air Continuous Monitoring Station, each (two to be provided to each state)

Item Unit Cost Required CostAnalyzers and recorders 135,000 1 135,000Meterological station 2,200 1 2,200

Subtotal: 137,200

Water Continuous Monitoring Station, each (five to be provided to each state)

Item Unit Cost Required Cost

Analyzers and recorders 6,000 1 6,000Data logger/computer 5,000 1 5,000Subtotal: 11,000

57 ANNEX 4.1Page 5 of 13

Institutional ComponentTraining Needs at the Control Boards

Suggested Outlines of Courses and Costs

1. The training needs for the SPCB cover four different areass

(a) quality assurance and quality control, to enable all laboratoryactivities to be accomplished by qualified analysts with the appropriateexperience and training, the training will deal with the principles of qualityassurance, procedures for handling, measuring and reporting and audits. Thesuggested outline of the course is attached below;

(b) instrument use and maintenance, including safety issues, this trainingwill deal with the general principles of operation of the equipment,maintenance and routine operation and trouble shooting. The suggested outlineis attached;

(c) environmental science, which is expected to deal with the understandingof the fate of pollutants in the environment, air and water pollution andissues related to environmental models, prediction, pollutants effects onhealth and environment and techniques for statistical analysis;

5d) management training, which is expected to deal with project management,laboratory management, reporting and planning. The suggested outline isattached.

58 ANNEX 4.1Page 6 of 13

Managem ent Training ProgramuuRRested Out ne

1. PROJECT MANAGEMENT

1.1 Definlng projects

1.1.1 Unified work areas1.1.2 Objectives/outputs1.1.3 Work activities/tasks1.1.4 Required resources (staff, budget, equipment)1.1.5 Milestones/schedules

1.2 Project implementation

1.2.1 Project manager/management1.2.2 Project admlnistration/tracking progress and resources

used1.2.3 Review/correctlve action

1.3 Project closure

1.3.1 Final report1.3.2 Review of objectives achieved/resources used

2. LABORATORY MANAGEMENT

2.1 Defining work areas

2.1.1 Projects2.1.2 Maintenance (overhead)2.1.3 Training/development (overhead)2.1.4 QA/QC

2.2 Staff

2.2.1 Determining staff requirements2.2.2 Tracking staff performance2.2.3 Evaluating performance2.2.4 Motivating/developing staff

2.3 Equipment

2.3.1 Determining equipment needs2.3.2 Tracking equipment usage2.3.3 Evaluating maintenance programs

2.4 Procedure management and recording

2.4.1 Estimating future workloads

59 ANNEX 4.1Page 7 of 13

2.4.2 Sample logging and tracking2.4.3 Monitoring/assuring quality

2.5 Health and Safety

2.5.1 Health and safety hazards in laboratories2.5.2 Health precautions2.5.3 Safety precautions2.5.4 Accidents/first aid

60 ANNEX 4.1Page 8 of 13

Environmental Science ProgramSuggested Training Outline

1.SIGNIFICANCE OF POLLUTANTS IN THE ENVIRONMENT

1.1 Ecological effects

1.1.1 Habitat modification1.1.2 Eutrophication1.1.3 Toxicity (acute and chronic)1.1.4 Bioconcentration and bioaccumulation

1.2 Human health effects

1.2.1 Water-borne diseases1.2.2 Toxicity (metals, PCBs, others)1*2.3 Carcinogenicity, teratogenicity, mutagenicity

2.AIR POLLUTION

2.1 Sources

2.1.1 Volatile emissions (volatilization)2.1.2 Roadway-associated emissions2.1.3 Fire-related emissions2.1.4 Point sources/stack emissions

2.2 Pollutants And Effects

2.2.1 Particulates2.2.2 S02, NOx, HC, photochemical smog, acid rain2.2.3 Toxics

2.3 Pollutant Behavior And Models

2.3.1 Gaussian plume2.3.2 Diffuse sources, line sources, point sources2.3.3 Predicting ground-level concentrations

2.4 Variability And Statistical Analysis

2.4.1 Emission variability2.4.2 Meterological (transport) variability2.4.3 Methods of analysis of measured concentrations

2.4.3.1 Trend analysis2.4.3.2 Spatial analysis2.4.3.3 Relative contributions analysis

ANNEX 4.161 Page 9 of 13

2.5 Selection of Sampling Locations/Frequency of Sampling

2.5.1 Ambient monitoring stations2.5.2 Emissions monitoring stations2.5.3 Network design

3.WATER POLLUTION

3.1 Sources

3.1.1 Surface discharges3.1.2 Subsurface (diffuser) discharges3.1.3 Groundwater-mediated releases

3.2 Pollutants And Effects

3.2.1 BOD and COD3.2.2 Suspended solids3.2.3 Nutrients (including nitrification)3.2.4 Toxics (metals, pesticides, organics)3.2.5 Toxicity (irrespective of causative agent)

3.3 Pollutant Behavior And Modelling

3.3.1 Dilution and dispersion3.3.2 Decay, precipitation, transformation, volatilization3.3.3 Streeter/Phelps DO sag3.3.4 1-D, 2-D, and 3-D models

3.4 Variability And Statistical Analysis

3.4.1 Discharge variability3.4.2 Receiving water variability3.4.3 Methods of analysis

3.4.3.1 Trend analysis3.4.3.2 Spatial analysis3.4.3.3 Relative contributions analysis

3.5 Selection of Sampling Locations/Frequency of Samples

3.5.1 Ambient monitoring stations3.5.2 Discharge monitoring stations3.5.3 Stream profiles/lake profiles

62 ANNEX 4.1Page 10 of 13

4.SOLID/IHAZARDOUS WASTE

4.1 Sources

4.1.1 Landfills/land spreading/waste piles4.1.2 Spillslaccidents4.1.3 Uncontrolled dumping4.1.4 Septic fields

4.2 Pollutants And Effects

4.2.1 Volatile compounds (hydrocarbons)4.2.2 Non-soluble toxic compounds (me4als, pesticides)4.2.3 Water-soluble toxics (nitrates, some forms of metals,

some organics)4.2.4 Pathogens

4.3 Pollutant Behavior And Models

4.3.1 Diffuse sourceslair transport4.3.2 Leaching to ground water/ground water transport

4.4 Variability And Statistical Analysis

4.4.1 Areal variation in concentration and sensitive receptors4.4.2 Methods of analysis of measured concentrations

4.4.2.1 Trend analysis4.4.2.2 Spatial analysis

63 ANNEX 4.1Page 11 of 13

Quality Control and Quality Assurance ProgramSuggested Training Outline

1. GENERAL PRINCIPLES OF QUALITY CONTROL AND QUALITY ASSURANCE

1.1 Data Quality Objectives

1.1.1 Use of data1.1.2 Accuracy and precision1.1.3 Sources of error1.1.4 Relative analytical error1.1.5 Chain of custody

1.2 Data for Assessing Data Quality

1.2.1 Blanks

1.2.1.1 Field blanks1.2.1.2 Trip blanks1.2.1.3 Reagent blanks1.2.1.4 Lab blanks

1.2.2 Spiked samples/matrix effects

1.2.3 Duplicate samples

1.2.3.1 Field duplicates1.2.3.2 Field splits1.2.3.3 Lab splits/subsamples

1.2.4 Data validation

2.QA/QC PROCEDURES

2.1 Sample Handling, Preservation, and Holding Times

2.1.1 Defining Standard Operating Procedures (SOPs)2.1.2 Taking, storing, and shipping samples2.1.3 Preservation methods2.1.4 Holding times/holding time exceedances2.1.5 Chain of custody/holding conditions

2.2 Instrument Standardization and Calibration

2.2.1 Standard Operating Procedures2.2.2 Routine maintenance2.2.3 Standards/spiked blanks2.2.4 Standard curves/calibration curves

64 ANNEX 4.1

Page 12 of 13

2.3 Measurement and Reporting

2.3.1 Blanks and spiked samples2.3.2 Duplicate samples2.3.3 Round robins

2.4 Reviewing Results/QA

2.4.1 Standard reporting formats2.4.2 Peer reviews2.4.3 QA reviews2.4.4 Data validation2.4.5 QA documentation

3. QA Audits

3.1 Determining Quality of Quality Control

3.1.1 Spot checks of analytical results and QC data/QA reports3.1.2 Evaluating instrument usage records3.1.3 Evaluating instrument standardization and calibration records3.1.4 Evaluating staff operating instruments3.1.5 Evaluating sample processing/preservation/holding times

3.2 Corrective Action

3.2.1 Staff training3.2.2 Revisions to SOPs (sampling, analysis, or reporting)3.2.3 Recommendations to laboratory management

65 ANNEX 4.1Page 13 of 13

Instrument Use and MaintenanceSuggested Outline Program

1. GENERAL PRINCIPLES OF OPERATION

1.1 Chemical/substances detected1.2 Chemical forms detected/chemistry of reactions1.3 Method of detection (light absorbance, voltage generation, etc)1.4 Operational parameters (voltage, wavelength, temperature)

2. GENERAL CARD AND MAINTENANCE

2.1 Power requirements2.2 Tolerances (temperature, humidity, vibration, dust)2.3 Interferences (sample matrix, laboratory environment)2.4 Calibration/standardization

3. USE

3.1 Sample preparation

3.1.1 Preservatives3.1.2 Holding times and conditions3.1.3 Reagents3.1.4 Concentration/dilution of samples

3.2 Sample measurement

3.2.1 Typical machine response3.2. Reading/recording results

3.2.3 Calculating concentration

3.3 QC

3.3.1 Field, sample, reagent blanks3.3.2 Duplicate samples3.3.3 Detection limit calculation

4. REPORTING OF EXCEPTIONS

4.1 Non-detects4.2 Less than/greater than4.3 Result notes

66

AE.2Page 1

INDIA

IND'USTRIA1, POLLUTION CONTROL PROJECT

Common Effluent Treatment Plants

Preliminary Lint of ProDosals

STATE LOCATION NO. OF SSI EFFLUENT COST aLUNITS FLOW

(CM/DAY) (Hill.Rs.) (US$ Mill.)

Gujarat Vapi 1600 50000 150 8.3

Gujarat Ankleshwar 1000 50000 200 11.1.P Raipur 39 400 25 1.4

UP Unnav 9 1000 10 0.6IN Pammal 59 4000 50 2.8IN Erode 56 4000 50 2.8

IN Karur 128 7000 50 2.8

IN Cuddalore 50 5000 30 1.7

PUNJAB Ludhiana(a) Rohan Rd 9 1000 10 0.6(b) Gushala Rd 24 250 5 0.3(c) Textile Colony 10 645 10 0.6(d) Gill Road 20 150 5 0.3

AP Jeddimetlia 68 1000 30 1.7

AP Boolaram 16 250 25 1.4

AP Pattancheru - 9500 50 2.8M Tarapur 250 5000 80 4.4

M Jaisingpur 57 500 10 0.6

M Dombivili 100 16000 100 5.5

H Thane Belapur 1200 8000 100 5.6

TOTAL 990 55.0

A/ Estimated capital costs by NEERI/WB team for full cost of collection andconveyance, treatment and disposal, but excluding cost of land.

S1LL Small scale unitsMP: Madhya Pradesh UP: Uttar Pradesh TN: Tamil NaduAP: Andhra Pradesh M: Maharashtra

INDIA

ISTRIAL POLLUTION CONTROL PROECT

Sumary/Description of Some Technical Assistance Schemes

.S n ter ; Prj"et. Cost. . ... . s~~~~~~~~~~~~~~~~~~~~USS million)

AlA teo; s.caL assietce :: .. : .: gommsnt a ell at th is W 0.20.st%0 .te..t of Ii' 00

to be osasatned tottii PO tt roAl 0eigaSna . :.s . ..ure s: tudy of t4e Sta~rwre Pllto Control. ......................... . 0.40

Reseach ind Oeli;_ o<pa fo theb recovery of ka1uabe .0.91>opeft. .from th .:t. liquor of the caprolactsis plat,. . :>apmen>t of.* revee 'osmoils 4eialins:ion pleat.. and

onth :ueof- phosphouysm and Calcite carbonate a cons,

.. '. i : : 7 R. :, ..... ~.......... 0 h,U*o Wezt

:esticides . . ..... the dep t Iteaafi of technology for mte 1.00.f .;.feoti an. Effiient effluent treatmet systems.

Ps1 Pea.ibililt stuy -for a comn iwineratot at Bard asd ovi0.the petroemifcals -e:ples, the rfainery and ether organicch"emcAl industries.o

.ulp en Pa p ;: Prepratioin of a comprehens i eaviroental strategy for 0.05tho sector and mended polluton control regulations.

iPp is# Pap er Preparatin of a technical proces sianual and training pro 0.12:g:,:'r for use;in aohieving increased process fficiency.

Plp: and. Paper ........Preparation of a desigo study of the Lim t t bad 0.06color remoal proces.

:Plp and Pi.. r Preparatio of study of th feaIbilitY of pulpg cbhmical 0.25recove,:r at aro based mills.

Plp and: Paper. preparation of.a feesbil-tt* study of liquor recovery system 0.25.. .; . : ... at:baass basdi mlls.

&'Su tt Ulens. e:i n d sec atonAnA for s plantsr published by 0.15

.O inii.C1 order to iclude edequat -onsideration of Oem ns, control: .'e : ire." e. onts An efes.abMrj' pollution ehatent t eqipmet.

inning Researh and densiopent of sludgedisposal alteraatives.- 0.09

Pilot" stw6w!p6 of chro 4and sulide rovry.- 0.10] 23 - t . _ . " . , ozB j~~~~~~~~~~~~~~.0 0

'-

68

ANNEX 5.1Page 1 of 10

INDIA

INDUSTRIAL POLLUTION CONTROL PROJECT

Organization and Staffing at the State Pollutipn Control Boards

Background

1. The State Pollution Control Boards (SPCBs) were established in

response to the Water Act enacted in 1974 which deals with industrialpollution control. Over the years, the SPCBs have been delegated theresponsibilities of other environmental related Acts namely the Air Act(1981)

and the Enviromental Act(1986). The mandates of the various Acts could be

further desegregated into about 100 distinct activities.

2. In 1981, the Central Pollution Control Board defined functions andmodel organizational structure for the State Pollution Control Boards. It wassuggested that each Board would be composed of functional cells for technical

services, scientific services, planning services, administrative services,legal services and regional services. Further subdivisions under the mainservices can occur in varying degrees because of differences of managementphilosophy or simply due to historical reasons. (Diagram 1: Organization of

the SPCBs - Maharashtra, Gujarat and Tamil Nadu)

3. The Central and the State Pollution Control Boards have planningand research functions. However, in the last decade or so the SPCBs have

placed primary emphasis in stipulating enforcement regulations and measures in

order to bring compliance of the polluting industries. In fact, verysignificant achievements have been made by the SPCBs in bringing pollutingindustries into legal compliance through registration, water cess collection,environmental impact assessment, consent requirement, the No Objectioncertification process, and the NA Opinion issue for non-agriculturalactivities. A fairly substantial proportion of the human resources in theSPCBs were made available for this purpose.

Organization of the State Boards

4. While the function of the State Boards are identical, as mandatedby the central government, their actual organizational structure is quitediverse (see attached Boards' organizations). Clearly, differences are neededto respond to the different conditions in each State. However in most Boards,

important functions are either inadequately represented or are completelyabsent. There appear to be at least seven issues of organization which need

examination, six of which relate to the internal structure and one to thelegal form of the Boards.

69

AMEX S.1IPage 2 of 10

5. Internal Structure Given the enormous problem of generalized airand water pollution, their associated danger to public health and economicefficiency and productivity, yet the scarce resources with which the SPCBsmust work, a strong capability to identify key problem areas, prioritizedactions and implement practical pollution control strategies is essential.Most SPCBs do not have a structure which will allow the coherent assembly ofambient and point source monitoring data followed by its analysis and use toprepare a pollution control strategy in conjunction with other relevantorganizations such as the land use and infrastructure planning agencies. Sucha strategy would cover air, water and soil media and develop least-costoptions for action by decision-makers in industry and non-governmentorganizations. It is recommended that each SPCB should form or strengthen aplanning and research unit which could provide this function, possiblyattached as a staff function to the Chairman's office.

6. Better environmental quality cannot be achieved only throughregulation and enforcement but must be accompanied by mobilizing support fromthe public at large and from interested pressure groups. Apart from the TamilNadu Board, the SPCBs do not identify or emphasize an environmental educationfunction. It is recommended that each SPCB establish or strengthen a functiondealing with environmental education. This could provide information to thepublic and the communications media, and offer focussed activities for schoolsand higher education centers, private voluntary organizations and industry andmunicipal associations.

7. As noted below, to improve their efficiency it will be importantfor the Boards to become more independent from the budget of the StateGovernments. To build this financial independence more effort will be neededto collect revenues and charges, and possibly institute new incentives such asa bounty system for verified reports on illegal discharges. It is thereforerecommended that the revenue collection function of the SPCBs be improved andgiven more prominence in the organization as is the case in the Gujarat SPCBwhich has the best record for revenue collection. The rate of levy andschedule of phased increases should be studied for each Board separately.

8. There is a universal problem of inadequate numbers of trainedstaff in the SPCBs and this is especially critical in their regional offices,where the main work of factory inspection and monitoring is carried out(unless the central office carries out substantial inspection and monitoringfunctions - a task which is not well-suited to a central location, given theneed for frequent visits and rapid feedback of sample analysis from and adviceto industry operations). Staff strengthening is discussed in more detailbelow. Two issues of organization, however, deserve attention in thiscontext. One is the need for mobile laboratories, especially in areas whereregional offices cover large geographic and low density areas, and the dangerof deterioration of samples due to slow cargo transportation in India. Theother is the need to have the monitoring visits performed by trainedinspectors with experience in the operation of the industries they areinspecting so they can examine the factory floor management, process practicesand the waste treatment facilities, provide useful advice to factory managersand collect samples at relevant locations. This face to face approach, which

70

NNLEX 5.1Page 3 of 10

is the practice in several countries, allows for more accurate samples, offersimmediate feedback for better factory practices, identify the level ofemissions charges to be imposed, and forestalls unnecessary legal proceedings.To provide these linkages, in some SPCBs the organization of theinspectorate. samRle collection. and analysis function would need review andadjustment. Subsequently a training program for each Board's staff needs tobe preoared and implemented.

9. The SPCBs at present are restricted to monitoring and enforcementof factory emissions, but, more recently have been given authority to monitorand evaluate ambient water and air quality. The latter are stronglyinfluenced by human and municipal wastes, which constitute the major portionof BOD, COD and sediment in the water bodies. For effective pollutionmanagement it is important that the Boards are authorized to extend theirmandate to the municipalities. While enforcement of sewerage and solid wastedisposal facilities may not be feasible at this time, it is important for theBoards to be able to monitor municipal discharges and advise mninciRalities onremedial measures and ioin in the planning of these measures.

10. In the SPCBs of Maharashtra and Uttar Pradesh, the office quartersare so poor and badly maintained that efficient work is virtually impossible,and there is a danger that new equipment such as computers will be damaged bydirt, dust and fumes. It is essential that these State Governments relocatethe SPCBs to clean, more soacious and preferably air conditionedaccommodations before disbursements for_ office eauioent are made.

11. Lezal form of SPCBs. At present, efficient management andenforcement of pollution control is severely hampered by a number of factors.One is the inadequate level of remuneration and lack of career opportunitiesto attract qualified and experienced professionals into the regulatory side ofpollution control. Another is the difficulty for the SPCBs to reward ordismiss staff based on performance. A third is the difficulty of obtainingsufficient budgetary allocation from the State to purchase equipment andsupport facilities such as transport or minimal funds for operation andmaintenance. And last, but not least, the status of the SPCBs within theState bureaucracy is too low to allow them to interact effectively with theland-use and economic planning authorities, and the municipalities. Most ofthese problems stem from the locus of the SPCBs as bureaus within the civilservice. These problems must be addressed if the SPCBs and their associatedlaboratories are to improve their performance to a significant extent. Onepossible approach is to recognize that the SPCBs are a potential source ofrevenue generation through fees and charges, especially if there is enactmentof significant pollution taxes in the form of discharge or emission charges,as proposed under the project. These would bring the SPCBs into a similarcategory as water supply or electricity authorities, able to pay for their ownoperations through self-generated revenues, thus, in turn, reducing theirburden on the State's budget. The legal form of a public corporation could beappropriate for this function, allowing the SPCBs much greater flexibility intheir staffing policies and operation and, by relying on revenues frompolluters, providing both an in-built incentive to the Authority for bettermonitoring and revenue collection and an incentive to private enterprises to

71

ANNEX 5.1Page 4 of 10

reduce their pollution due to the increased charges they are required to pay.This model is operating effectively in China and Europe.

12. It is recommended that, during negotiations, MOEF and the StateGovernments agree to implement an organizational restructuring covering boththe internal organization and legal structure of the four State Boards basedon review carried out by them and the Bank of a study to analyze each Board'sneeds and propose appropriate modifications. The study would also proposeappropriate increases in the level of water cess for each Board as well asidentify other revenue sources and incentives for better enforcement, anddesign a training program for the staff of each Board appropriate for therevised structure.

Generally speaking, the Boards are under-staffed to properlyundertake their current mandates including the upcoming toxic and hazardousactivities, developing pollution control strategies and action plans, and theresearch and study projects. The following issues need attention:

13. Staffing for monitoring. Monitoring, which is under theScientific Service Cell, represents about half of the enforcement program. Theeffectiveness of bringing compliance largely depends on the efforts made bymonitoring and was universally recognized by the SPCBs. In terms of workload, monitoring is perhaps the heaviest. The following outlines the requiredwork load vs. human resource needed for monitoring in the SPCBs.

Monitoring is required for those industries which have obtainedConsent to operate. The Consent broadly defines the types of industries interms of their pollution severity and categorizes them into Red, Orange andGreen. Daily monitoring work rests with the industries; however, the SPCB isrequired to send spot check teams to the field at the frequency prescribed bylaw; that is once every three months for industries in the Red class, onceevery six months for Orange, and once every year for Green. Because of thevery large number of industries under the Consent, a typical monitoring groupcomprises about 50 staff, as each individual is estimated to be capable ofmaking 40-50 field visits a year. On this basis, the present staff couldfulfill about 20% of the work load at best. This is the most important areawhere staffing needs improvement. As noted above, special attention needs tobe paid to attracting capable inspectors.

14. Staffing for new Rrograms. Staff increases were achieved over theyears in each of the SPCBs in response to the demand of the new environmentalActs that came after the establishment of the SPCBs. It is expected that inthe early 90s most states will adopt the legal provisions of the hazardouswaste management under the Environmental Act. A very different managementapproach and skills will be required in this field compared to the previousair and water programs which at present require the laboratory scientists andengineers to equip themselves with the ability of dealing with both airpollution and water pollution problems on the field since the responsibilityis primarily assigned on a territorial basis. More specialized skills andtrainings are required for monitoring of hazardous wastes and knowledgeconcerning treatment methods and planning for improvements.

72

AtNNEX 5.,1Page 5 of 10

15. Staffing for new research and Rlannina projects. In the past, theCentral Pollution Control Board was the one taking a lead role in study andresearch. The SPCBs were only participating. Examples of national projectsare:

1. Control of urban pollution series (CUPS)2. Monitoring of Indian national water aquatic resources (MINAR)3. Program objective series (PROBES)4. Assessment and development study of river basin

series (ADSORBS)

16. With the strengthening of SPCBs in terms of staffing and program,the SPCBs are preparing to set up their own planning, research and studyprogram. Some of the examples are:

- identification of new industrial sites- identification of hazardous waste disposal sites- survey of heavy metal base line in the state for air,water, and soil

- monitoring of coastal water- bio-monitoring of surface water- delineating of surface and ground water qualityprofile

- bio-monitoring and toxicity test- pesticide survey- waste minimization, low waste and no waste technology

Staff will need to be strengthened to undertake these areas ofwork and a focus provided through a stronger planning and research functionnoted above.

17. Staffing in the State laboratories. The introduction of newlaboratory facilities, especially the more sophisticated analyticalinstruments are most relevant for the new research activities and theresponsibilities for toxic and hazardous waste. Partly due to the lack ofresearch projects, even the existing analytical instruments are not in fulluse. In some cases, only 20% utilized. New knowledge should be infused intothe present establishment either through training or recruiting new personnel.

18. Staffing for regional offices and laboratories within the state.In terms of environmental enforcement, most of the works are at the regionallevel. It is logical to assume that the total staff at the regions of eachstate should be at least equal or no less than the total at the State office.In fact this was not the case. Most regional offices are very thin.Strengthening the regional office and laboratory was high on the priority listof the SPCBs.

19. Staff training. Other than increasing the number of staff,improving the quality of staff through training or continuing education shouldbe high on the agenda. The various SPCBs indicated little emphasis in

73

ANNIEX 5.1 Page 6 of 10

organization and staffing in environmental planning, environmental modeling.use of management computer softwares and industrial processes.

20. It is difficult to come up wlth an exact figure of addLtLonalstaff needed. But the Bank concurs with the estimates of the four state pCB.that about 100 to 150 scientists and en_ineers are requLred. It is foreseenthat new staff will be brought into the present establishment according to theurgency of the need.

Organization of GPCBChVrman

Member Secretary

It~~~~~~~~'Headquarters Central Laboratory General Field Offices

EnvironmentalIt Of fice

Cess Administration Consents/N.O.C.

Regional Offices (4)

Sub Regional Offices (2)

.

o s

Organization of MPCBChairman

Member Secretary

Headquarters Laboratories Field Offices

Water pollution Air Pollution Adminstrative Water Pollution Air PollutionControl Wing Control Wing Services Control Lab Control Lab

Water Pollution Air PollutionC ntro) Cotrol

Region Offices (6) Regional ,fflces (6)

Sub Regional Offices (16) Sub Regional Offices (16)

OD

o41

0

Organization of TNPCB

Ch lrman .fScientilic Adviser

Membe4 Secretary

Headqrarters Inspection and Technical Field Officesr_ v Pla nIng Services

Approval Administration Environmental Central LaboratoryEducation

Regional Offices (4)

CDistrict Offices (17)

0 !U*;E

vo'it

'-aFb

Organization of UPPCBChairman

Member 8.crotary8 cr --ar

Headq arters Central Laboratory Field Officesr - v v - t IConsent/ N.O.C Cese Hazards Training Administration

Regional Offices Regional Offices (0)(With Laboraorles to be Added)(8)

o*

78 AWM 5-2Page 1 of 2

INDUSTRIAL POLLUTION CONTROL PROJECTCommon Effluent Treatment Plants

Guideline for Evaluating InstLtutional and Technical Proposals

1. Articles of Association, or Company Charter of thecompany that will own and manage the CETP to be drawn up andregistered.

2. Nanagement and organizational arrangements including the staffingfunctions and level of staffing to be drawn up for this company.

3. Legal obligations and responsibilities of the individual membersand the CETP operating company for pollution control to beformulated.

4. Financial obligations and responsibilities of the individualmembers and the CETP operating company, regarding: cost: recoveryformula and mechanisms; payment defaults; plant closures; newmembers; equity, etc. to be defined and agreed.

5. Copy of letter of contract between the CETP operating company andthe individual members to be provided.

6. List of members that have signed and paid their equitycontribution. Total amount of equity collected.

7. Agreement on the equity contribution of any medium scale industriesto be included in the project.

8. Carry out inventory of industries discharging to the CETP,including; type of industry and classification of effluentdischarge (ie, category A, B, C, D)

9. Describe the basis on which the industries" flow and effluentcharacteristics have been made and the justification.

10. Describe the basis of the pretreatment standards that will apply.11. Describe the basis on which the CETP design parameters have

been chosen and provide the results of treatability tests. If suchtests have been carried out, describe the reasons.

12. For new collection and conveyance systems describe the design basisand the justification for this selection. For existing systemsdescribe the current status and the modifications required, if any.

13. For industries with effluent discharges in categories C and Didentify the means proposed to control pollution through;(a) in plant source control; (b) segregation; and/or (c)pretreatment.

14. Carry out a prefeasibility study which includes the following:(a) assessment of different technologies for CETP;(b) considers reuse, recycling and resource recovery andbenefits where applicable (c) disposal options for treated effluentand sludges, as well as disposal standards that will apply to thetreated effluent. From this analysis select optimum scheme andjustify the selection.

15. Preliminary estimate of the capital and operating costs for theCETP including collection, treatment and disposal, but excludingcost of land.

16. Identification of a suitable plot of land and a firm commitmentfor the acquisition of this land for the CETP.

17. Schedule for the design, engineering and the implementation ofthe project.

79ANNEX 5.2Page 2 of 2

Common Effluent Treatment Plant

Proposed Processing Sequence for CETP Project Aoproval

1. Proponent prepares submission (with or without Consultant assistancefor CETP in accordance with NEERI/MOEF/WB guidelines;

2. Proponent submits proposal to relevant SPCB. Following discussionand approval of SPCB;

3. SPCB submits proposal to NEERI with copy to MOEF4. NEERI reviews proposal on behalf of HIOEF in accordance with

NEERI/MOEF/WB guidelines. NEERI discusses the findings of theirreview with the proponent and when satisfied that the proposal isacceptable;

5. NEERI advises MOEF of their review findings;6. MOEF advises proponent of preliminary approval, and sends copy

of approval to IDBI and SPCB;7. Proponent makes submission to IDBI for project financing and,

if required, requests TA funds for consultants to preparedetailed engineering design;

8. Proponent selects engineering design consultant according toIDBI approved procedures;

9. Following completion of detailed engineering design andpreparation of the bid packages according to IDBI procedures;

IO. Review of detailed engineering package by NEERI, as required;11. Proponent submits packages for competitive bidding and

selects successful tenderers in accordance with IDBI procedures;12. IDBI appraises the proposal and sanctions the project financing

plan;13. IDBI advises proponent, MOEF, and SPCB of acceptance of the

proposal and the final cost of the project;14. Central and state grant funds are released by the IDBI to

proponent in accordance with financing plan, as well asloan funds for project implementation;

15. Start up and commissioning of facility by proponents;16. Assistance in commissioning, trouble shooting and training

by NEERI, as required.

80

INDIA ANNEX 5.3

INDUSTRIAL POLLUTION CONTROL PROJECT

Implementation Schedule

Component

Institutional

lmpl. Cell f

Procuremen t !

Implement.

Org. Study

Investments

Steer. Com. i

Appraisal

Implement.

Technical .

Appraisal

Implement. , , - __

92 93 94 95 96 97 98 99

Fiscal Year

INDUSTRIAL POLLUTION CONTROL PROJECT

ANTICIPATED DISBURSEMENTS(By Component)

Fiscal Year9091 7

92 ~ _93 - - 4 I

94 - g7: 9- ___-rn262, -9 5I 0615 c

96 - __129

97 _ _ 144

98 - _ __ __ __ 106.G_ ____

98 iin15.6

0 20 40 60 80 100 120 140 160 180US $ Million

Institutional Technical Assistance

Investments

(In million dollars)

ANNEX 6.2.

82 Page 1 of 13

INDIA

INDUSTRIAL POLLUTION CONTROL PROJECT

PARTICIPATING FINANCING INSTITUTIONS

A. INDUSTRIAL DEVELOPMENT BANK OF INDIA

Background

1. The Industrial Development Bank of India (IDBI), which was establishedin 1964 as a wholly owned subsidiary of the Reserve Bank of India (RBI), and isnow fully owned by the Government. It has been set up as the principal financialinstitution of the country not only to provide financial assistance to industrybut also to coordinate the activities of other DFIs in the country and toundertake promotional activities directed towards reducing regional imbalances.It also provides specialist advice on all important policy matters concerningindustrial finance and related matters. As the lead institution for industrialinvestment finance, IDBI operates as a direct lender and as an apex refinanceinstitution or the state financial institutions and the commercial banks in theirlending operations. It also acts as the central coordinating agency for theoperations of the other All-India DFIs (ICCI and IFCI) and the term lendingactivities of the Life Insurance Corporation (LIC), the General InsuranceCorporation (GIC) and the Unit Trust of India (UTI). Its importance as a directlender is demonstrated by the fact that its lending accounted for over 40? oftotal industrial investment lending by the All-India and the state levelfinancial institutions during the period 1985-90. Its promotional role coversa wide range of activities at the national level and, through specializedinstitutions, on the local level. These activities aim at the development ofboth sound industrial investments and financial practices, and include industrialpotential surveys, entrepreneur development programs, consultancy and advisoryservices, and expanded development banking training programs.

Management and Staff

2. IDBI's 22 member Board, of which 21 are appointed by the Government and1 by IBR, represents a cross section of officials of RBI, commercial banks,financial institutions and the Government. While the Board is responsible forinternal policies and reviews the overall operations of IDBI and its interactionwith the public and private industrial sectors, full powers have been delegatedto a 10-person Executive Committee. The management is headed by Mr. S. S.Nadkarni as Chairman and Managing Director, an experienced and internationallyrecognized development banker. Since October 1985, when he assumed his position,Mr. Nadkarni has sought to make IDBI a more commercially oriented institution.

3. IDBI's organizational structure comprises eight functional units, oneor more of which is under the charge of an executive director/advisor. TheProject Finance Operations Group is responsible for business development andappraisal, disbursement, supervision, billing, collection and recovery of all

ANNEX 6.183 Page 2 of 13

direct lending operations. It also conducts product market research to supportappraisal assumptions. The Rehabilitation Finance Operations Group draws uprehabilitation packages for ailing units and supervises their implementation.The Development Finance Operations Group is in charge of refinance and billsrediscounting operations for the state financial institutions and commercialbanks, and the supervision of these activities. The Corporate Finance Grouphandles the secretariat, accounting and resource raising functions. TheTechnical Department assists appraisal with technical reviews of projectproposals. It includes a new venture capital operation directed at specializedtechnology projects. The Planning Department carries out research and corporateplanning activities. The Legal Department acts in an advisory capacity to theBoard and management and in an operational capacity in dealing with legalmatters. Personnel and Administration Departments handle all matters related topersonnel and administration. IDBI operates on a decentralized basis through anation-wide network of branches, one in each state.

4. IDBI's professional staff, numbering 1299, is well qualified andexperienced. IDBI is able to recruit top university graduates because itssalaries are competitive with other private and public sector institutions andcareer prospects within the institution are attractive. The turnover of staffis minimal. The Corporation has been successful in limiting staff increases toabout 152 over the last five years although loan sanctions and assets have morethan doubled. Another noteworthy feature is that IDBI has improved the staff mixof non-professionals to professionals from 1.7 to 1.2:1 over the same period.The aim is to reach a ratio of 1:1.

Operations

S. IDBI's financial assistance to the industrial sector is effectedthrough three basic areas of operations: (a) Direct Finance, which is availableto projects costing at least Rs. 50 million (approximately US$3 million),accounts for 43Z of IDBI's portfolio. Direct Finance takes the form of loans,underwriting, direct capital subscriptions or guarantees. Directly financedprojects are generally co-financed with other All-India term lendinginstitutions; (b) Refinanced loans accoutit for 23Z of the portfolio. These areoriginated as loans to small and medium-sized businesses by state-levelinstitutions and banks which bear the risk on these operations; (c) BillsFinance, constituting 33Z of the portfolio, cover the sale of machinery, financedby banks or IDBI on a deferred payment basis.

Resource and Onlending Terms

6. IDBI's resources include equity contributions by the Government, RBIborrowings, bond issues, internal generation through collections and earnings andforeign currency borrowings. Internal generations account for over 502 ofresources. Rupee bonds and debentures constitute the largest source of externalfunds, around 452 of all external resources. The rate on these bonds has beengradually raised to 11.52 close to market rate. RBI loans, the other importantsource of external funds, at around 202 of external resources mobilized, arepresently available at 82 p.a. The weighted average cost of funds for IDBI hasincreased from 6.82 p.a. in 1963 to 7.73Z p.a. in 1988, and further to 8.32 in

84 ANNEX 6.1Page 3 of 13

1990. Foreign borrowings constitute only 132 of IDBI's total external resources,although they have been growing rapidly in recent years.

7. Interest rates on domestic currency loans range from 11.52 to 15Z

depending on the type of loan. Since the basic lending rate for industrial term

financing remained unchanged for a long time at 142, IDBI's gross operationalspread has diminished in recent years as the cost of funds has increased. Thefull effect of the squeeze on operating margins has yet to show in the profitstatements as the greater portion of IDBI's portfolio is still supported by

earlier bond issues and RBI borrowings, some at rates as low as 72 p.a. In

August, 1990, RBI announced a change in interest rates whereby the

non-concessional rate for rupee term loans was raised to 15Z. This will ease the

squeeze on operating margins.

8. Interest rates on foreign currency loans are fixed through the

provisions of the Exchange Risk Adjustment Scheme (ERAS).i/ Essentially, ERASpermits foreign currency borrowers who find it difficult to hedge againstexchange risk to have their foreign currency loans rupee-tied through the

provisions of ERAS, against payment of an exchange risk premium. The ERAS rateis a variable rate adjusted quarterly, and is currently 1752 with a cap of 201

and a floor of 15Z. Although the cap and floor are also varied quarterly, the

cap and floor for any given loan are fixed for that loan at the rates prevailingat the time that loan was made. Borrowers have the option of assuming the

exchange risk, in which case the rate charged is the weighted average cost of the

ERAS pool, thus intermediation spread of 32.

Policies

9. IDBI has adopted a general Policy Statement which outlines itsinstitutional objectives and provides guidelines for its areas of operations.The Policy Statement identifies stimulation of desired investment, geographicaldispersal of industry, promotion of small-scale industries, promotion of newfinancial activities and development of entrepreneurs as key areas of IDBI's

activity. It also provides guidelines on risk management. It emphasizes the

~/ In summary, ERAS provides that: foreign currency borrowings of tho DFI. go Into a pool,for which a weighted avorago borrowing cost Is calculated. The DFIc, having regard to theability of a cliont to hedge against exchange risk may offer a client (but are required todo so) the exchange risk cover afforded by the following main arrangements: (1) to theweighted average interest cost of foreign borrowings Is added a spread for tho DFIx and anexchange risk premium; (il) clients offered access to ERAS then have the choice of havingtheir loan donominated In for-ign curroncy (in which coas the intero4t rate charged Is netof the exchange risk premium calculated under (i) abovo) or having their loan *upee tied atthe exchange rates prevailing at the tim of disbursement, in which ¢ce their rupeeobligation becomes repayable at the rate calculated under (1) above; (lii) the DFI. colloctrepayments, keeping for themselves the Interest portion and the spread, while the exchangerisk premium portion goes to the Exchange Risk Administration Fund (ERAF); (iv) DFPI claimfrom ERAF the difference between repayments made to thoir londers and repayment. made tothem by thoir client.; (v) the Government extends support to ERAF when It is In deficit,and recoups from It whon It Is in surplus; (vi) the rate calculated under (t) above isrevisod quarterly; (vii) associated with the rate io a floor and a cap; (viii) whonevorERAS is availed of as under (11) above, the currently prevailing rate applies along withthe currently prevaillng floor and cap--these rates are then fixed for the life of theloan, but have no bering on any previous ERAS loans, for which the then prevaillng ratesapply.

ANNEX 6.1Page 4 of 13

soundness of its financial condition as a main policy objective to be achievedthrough high portfolio quality, adequate operating spreads, sound provisions formoderating losses, tight expenditure control, continued reinvestment of profitsand build up of equity. The preservation of the environment and ecologicalbalances receive adequate treatment in the Statement, which clearly states thatIDBI will not finance projects that may adversely affect the environment and willactively encourage existing industries to adopt pollution-free processes andcarryout investments in environment-protection equipment.

Procedures and Standards

10. The quality of appraisal reports is good and there is adequate staffingto handle project appraisal work. Indicators such as internal economic rates ofreturn and financial rates of return are standard features of appraisal reports.In accordance with the priority of the Government's industrial reform policies,IDBI is increasingly giving attention to appropriate economic scale ofinvestment, adoption of competitive technology and investments which createproduction that approaches world price and quality standards.

11. IDBI's total commitments grew at a high rate of 20Z p.a. during FY85-FY90, attaining a level of Rs. 81.5 billion in FY90. Cumulative disbursementssince 1964, total Rs. 302 billion. Though government owned, IDBI principallylends to the private sector. In its direct finance operations, 812 of loans wereto private industrial enterprises, 172 to public sector corporations and 2Z tocooperative ventures. About 602 of its assistance is to medium and largeenterprises and about 332 is for loans to small scale enterprises channelledthrough the commercial banks and state-level institutions and 72 is accounted forby investments in shares and bonds of other financial institutions. Sector-vise,its operations are fairly evenly distributed, with the services sector accountingfor 18X, textiles 12Z, chemicals and power generation each 12Z and electronicproducts and metal products 52 each. New projects account for 322 of all IDBIfinancing, modernization and rehabilitation operations 262, and expansion anddiversification projects 422.

Loan Collections and Arrears

12. IDBI's overall collection performance is relatively satisfactory.Principal and interest collected on total dues have averaged 932 during the lastfive years, and accounts in arrears are equivalent to 4Z of total portfolio asof FY90. However, under these global figures there are signs of emergingcollection and arrears problems which merit close attention. The collectionperformance of refinanced loans and discounted bills payable has been 1002, asstate financial institutions and commercial banks have always met their guaranteeliability on these operations. However, the average collection ratio of thestate level institutions themselves was only 43Z in FY88, requiring capitalinfusions by the state governments to enable many of these entities to servicetheir debt obligations. To correct this situation, IDBI is reinforcing itsprogram for assistance to the state-level financial institutions to improve loanrecoveries and profitability. A program has been adopted that places emphasis onconsolidation of these lending operations and provides technical assistance to

86 ANNEX 6.1Page 5 of 13

the SFCs in improving collection performance. The Asian Development Bank isselectively supporting IDBI in this effort through an ongoing project.

13. The collection performance in IDBI's direct lending presents moreconcrete difficulties, but has gradually improved in recent years from 57Z inFY83 to 73Z in FY90 (before rescheduling). Many of IDBI's earlier investmentstook place under a policy regime which was not conducive to creation of efficientand modern facilities, which would be viable in today's increasingly competitiveenvironment. Under a highly protected environment, and because of pressures fromthe labor sector, it has been difficult for IDBI and other DFIs to take concertedcorrective action opportunely and/or to press creditor claims successfully.Consequently, a hard core of problem projects developed for the DFIs, and whilefor IDBI this constitutes less than 1 of its total loan portfolio, it needs tobe resolved. The Government has recognized this problem and created a neworganization, the Board for Industrial and Financial Reconstruction, to assistthe DFIs' ability to either restructure still viable companies or to forecloseon enterprises which cannot be salvaged.

Financial Results and Conditions

14. IDBI has had a history of satisfactory profit performance, with aconsistently high level of liquidity and debt servicing capacity. Assets havemore than doubled over the last five years to Rs. 194 billion as of FY90, whilerevenue has grown at an average rate of over 212 to Rs. 18.0 billion in FY90.Net income over the five-year period ending FY90 grew at an average rate of 272per annum. The growth of income has been accompanied by control over general andadministrative expense, kept at a commendably low 0.2Z of total average assetsin FY90. The net final result for operations in FY90 was an 18.92 return onaverage net worth, up from 172 in FY87 and a return on average assets of 1.52compared with 1.42 in FY87. The debt to equity ratio (including contingentliabilities) which was around 9.5 in FY85, has risen marginally and has beenaround 10.42 in subsequent years. The debt service coverage ratios have beenstrong, averaging 2.7 over the past five years. IDBI has also maintained a highlevel of liquidity with the current ratio averaging about 3.0 in the recent past.Current assets represented almost 30Z of total resources at the end of FY90indicative of IDBI's liquidity level. The corporation's financial results aregiven in tables 1 and 2.

15. With the setting up of Small Industries Development Bank of India(SIDBI), as a fully owned subsidiary of IDBI, almost 252 of IDBI's loan portfolioalong with 162 of its staff have been transferred to the new institution. As amajor part of business transferred to SIDBI is concessional refinance with a lowspread, IDBI will transfer a part of its low cost funds to SIDEI. On balance,IDBI expects its financial condition to remain strong with return on assetsmaintained at 1.52 or over and a healthy debt: equity ratio of around 10.0. Thecorporation is conscious of the likely impact of falling interest spreads due tohigher costs of local borrowings and is taking steps to improve its profitabilityto meet this contingency. These include improved money management, control ofadministrative costs and improved collection rates. It is also gearing up fora more vigorous drive to improve its direct lending business. As a forwardlooking public institution, IDBI makes constant efforts to remain relevant to

ANNEX 6.1Page 6 of 13

emerging scenarios to which a national institution must address itself. Adoptingan innovative approach to meet specific but varied demands from time to time, andwith emphasis on building a dedicated team of professionals, IDBI has over theyears emerged as a multi-dimensional institution whose experience is speciallyrelevant to the developing world.

88 8%i

Table 11 tFt B'ALANCE SHEEl6 ACTUAL ND FROJETED, 1988 TO 1994(As et fisclLyars ending March 81)

It.. 1W8 1W87 A 1989La -9-- -99- 19 d 14

Cash and 1l. a.sts 4,0s0.6o 8,46.60 7,118.00 14,686.46 22,68e.40 21,o00.00 20 ,08.00 19, Os.00 17 068.00Current portion loans 14,718.00 17,758.17 20,622.48 23,004.70 26,864.78 19,915.86 28,860.42 82,678.48 89s448.16Other current aaats 8,288.70 8,910.70 4,880.00 68e00.10 7,486.80 7,204.87 7,64.s8 7 942.8 8,89.98Total 22,779.80 27,180.47 82,268.48 4 8,41.26 86,514.48 48,208.22 81,818.01 89,709.80 64,871.11

Loans A Investmnts 84,664.60 85,001.20 80,878.0 94,186.60 114,782.80 189,498.1 184,988.7 211,948.8 249,948.8

Bzil. redis. & disc. 14,407.00 16,602.82 18,710.17 20,088.92 21,620.94 21,298.99 28,947.94 26,674.98 29,885.03

Other a-ot. 849.80 480.42 482.00 518.72 688.78 719.10 791.01 870.11 9S7.18

TOTAL ASSETS 92,400.00 109,984.63 1,630.71 156W,50.70 19,3521.90 223,140.3 252,786.1 288,861.4 881,767

Current tortion debts 2,888.80 2,687.00 4,692.00 8 ,06.20 10 076.0o 8,689.90 12 902.00 8,682.70 12 006 80Advnce ncome 8,486.80 4,022.40 4,852.00 4698.40 5,288.20 8,222.10 8,868.70 6s,8 18 7,289.68Other current liabilities 2,166.00 2,879.21 8,107.08 8,169.48 6,681.06 8,288.26 8,491.82 9,188.85 9,900.8

Total 8,181.40 9,288.61 12,881.08 17,948.06 22,148.06 28,699.88 88,781.62 88,012.28 42,712.15

Long term liabilities 78,770.20 90,962.00 107,980.00 127,806.10 18,4997.91 180,451.80 201,816.09 287,824.41 271,900.87

Paid up capital 4,480.00 4,780.00 4,980.00 8,400.00 6,870.00 7,080.00 , 8o0.o00 6,080.00 9,080.0Free reservea 8,426.80 4,287.80 5,70s.80 69,98.28 8 909.24 12,270.99 14,l6.82 17,201.6 19,668.74Ear-marked reerves 872.00 748.40 678.80 989s.28 1,101.78 1 269.78 1,446.13 1,681.8s 1,628 .8Total equity 8,448.80 9,784.00 11,829.60 18,294.81 16,880.97 20,870.72 28,687.s9 26,888.24 80,719.57

TOTAL LIBILITIES ' 92,400.40 109,984.60 181,80.07 1865,8.70 19,521.90 22S,140.3 252,786.1 26e5881.4 881,766.7

Contingent Liabilities 2,999.00 5,080.00 8,827.20 2,484.00 4,264.60 4,776.85 8,849.51 5,991.46 6,710.48

RATIOS

Debt-equity 10.00 10.48 10.48 10.82 10.42 9.60 9.88 9.64 9.64Net income to equity O.1S 0.17 0.18 0.19 0.19 0.19 0.17 0.18 0.14Debt sarvice coverage 2.72 2.88 2.35 2.07 1.98 1.39 1.87 1.45 1.84

Li Nine months.

TL_ ble2 IDBI:CE STATBMNrS ACTUAL AND PROJETED. 1986-1994Fiscal Years dnding March 81

(Re Ml l on.)

Stzt ~ ~~ lssb ~Actual lese lOProi,gt«d ls it." 1986 1987 Acul1988 MR9L 1990 1991 P 992 1993 199

ross Income 8,842.52 10,284.40 12,678.84 11,819.28 18,124.60 21,121.44 24,400.92 28,402.09 83.887.17

Expensee s ProvisionsExpenseInterest 2,748.08 7,008. s 8,899.26 8,061.64 18,806.84 18,748.64 1SS2.u84 22,008.72 26,128.48Other fin. 60.10 77.60 92.10 100.82 171.20 188.82 207.16 227.87 280.65Administrative 208.19 228.24 278.60 289.17 872.49 268.97 807.02 888.07 406.08ProvisionsInt. Tax 45.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Net Income 1,218.70 1,829.97 1,866.70 1,727.88 2,688.67 8,821.79 s,45.es90 8,646.8 8,s80.00

APPROPRIATIONSFree resrves 728.70 878.17 1,268.89 1,068.88 1,882.87 2,887.84 2,410.88 2,820.07 2,6616.6Earmarked rosy. 498.00 210.10 110.00 110.00 160.00 168.00 176.40 186.22 194.48Orent to SEBI - - 78.00 - -Dividend 0.00 441.70 488.81 478.80 698.80 798.28 878.7 941.28 1,008.78

L Nine monthe.

89 ANNEX 6.1Page 8 of 13

B. INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA

16. Background. ICICI was established in 1955 to provide term finance toprivate sector industrial firms. Since then it has grown into one of India'sleading financial institutions and it now provides a broad range of financialservices including: term loans, equity, leasing, merchant banking, exportfinance, mutual fund investments and venture capital finance. It advisesGovernment on the promotion of industry and the financial markets and undertakesother developmental activities. ICICI operates nationwide from its head officein Bombay which is supported by three regional offices in New Delhi, Madras andCalcutta. ICICI has grown rapidly and is responsible for about 422 of allforeign currency loans made by the financial institutions to Indian companies.In keeping with its role as an important source of foreign funds, theorganization has established itself in the international financial markets. Todate, it has raised over US$2.5 billion in multicurrency foreign loans and recenttransactions have involved complex capital market techniques and instruments suchas interest and currency swaps. The Bank has made 20 loans to ICICI, the latestone being The Industrial Technology Development Project (US$200 million) of whichICICI would receive US$20 million by way of a loan from IBRD and would manage acredit from IDA of SDR 44.2 million (eq. to US$55 million) on behalf of theGovernment of India.

Ownership

17. ICICI, established in 1955 under private ownership to provide long termfinance to private industry, became 81Z publicly owned as its private owners werenationalized. Recently, however, in 1991, ICICI made a public issue of shareswhich has increased its private ownership share to 43Z.

Management and Staff

18. ICICI's day to day operations are guided by the policies laid down bya 15 member Board of Directors. One of the Board's operating functions is todecide on individual projects involving exposure of over Rs 35 million. TheChairman and Managing Director, Mr. N. Vaghul, came to the institution in 1985and has led it through a period of impressive growth and profitability. Inrecognition of the changed business climate, his current priorities involvefinding new and cheaper sources of funds, developing new projects with betterspreads, addressing portfolio quality issues and collecting overdues.

19. ICICI has a strong management team which is consistently able toattract, motivate and retain highly competent staff. As at March, 1990 totalstaff strength was about 896. The institution is divided into fiveadministrative groups: operations, planning, special operations, finance andadministration.

20. The Operations Group is responsible for the lending function includingappraising new loans, monitoring existing ones, making collections andrehabilitation and coordination with BIFR. Corporate Planning and Resources,headed by a Deputy General Manager, develops and coordinates the overall strategyand direction of the Corporation. It is also responsible for funding the

90 ANNEX 6.1Page 9 of 13

insti.ution both in domestic and foreign currencies. Special Operations, undera General Manager, has responsibility for merchant banking and leasing. Finance,Accounts, Administration and Personnel are supervised by two separate GeneralManagers.

Business Strategies

21. ICICI has continually expanded the range of financial instruments andservices it offers in response to perceived needs of the business community andGovernment's industrial development priorities. The organization's last PolicyStatement, which was drawn up against the background of the Seventh Planprojections, was adopted in 1987. It identified six priority areas for supportsmodernization and technology upgradation; export promotion; emerging industriessuch as electronics and communications; core industries; and energy conservationand pollution control equipment. A new Policy Statement, taking into account theEighth Plan projections, is in the process of completion and would essentiallytarget areas which would include export development, providing technology financefrom the point of research to the stage of commercialization, development ofinnovative strategies for financing services and infrastructure sector., energyconservation, and environmental and pollution control.

Appraisal of Projects

22. ICICI's appraisal techniques are thorough and of a high standard. Theeconomic and financial rate of return norms used are usually 12? and 15?respectively. For projects of more than Rs 25 million or for which the ICICIloan will exceed Rs 25 million, a domestic resource cost calculation is done.However, ICICI officers would benefit from training programs aimed at increasingtheir awareness of current practices and trends in the international environment.The technical assistance components of the Export Development Project,Electronics Industry Development Project, and Industrial Technology DevelopmentProject, signed last Year, would play an important part in addressing this need.

23. In addition to its basic project financing functions ICICI alsoundertakes activities to help in the overall development of Indian Industry andfinancial markets. Thus the institution takes an active part in the dialogue ontopical issues affecting industry and finance, through memoranda to policy makersand Government committees. It regularly carries out subsectoral studies andprovides training and institutional development support to national and foreignfinancial institutions. ICICI has set up a credit rating agency in conjunctionwith Unit Trust of India. Such a service will provide support for any eventualmove towards the development of a lending system based on variable interest rateswhich are determined by the level of risk. ICICI has provided since 1988 venturecapital-type financing through conditional loans. In order to improve and expandits venture capital services it recently established a venture capital company--Technology Development and Information Company of India (TDICI) which will focuson investments in high technology ventures. The new company would receivesupport from the Bank under the Industrial Technology Development Project.

91 ANNEX 6.1Page 10 of 13

Financial Performance

24. ICICI's financial performance has been impressive, as shown in Tables1 and 2. It has achieved rapid growth and rising profits over the last fiveyears. Total assets increased to Rs 56 billion at the end of March 1990 from Rs21.4 billion in 1985. This represents an annual compound growth rate of about26X. During this period the loans and investments portfolio increased to Rs 33billion from Rs 11.9 billion and net profits almost tripled to Rs 971 million.Consequently return on equity averaged 202 p.a. during this period. However,these impressive figures will be difficult to sustain in future years unlessproblems of increased borrowing costs and deteriorating collections, resultingin narrower spreads are satisfactorily resolved. Gradual deregulation has meantincreased competition in the industrial sector and higher risk to financialinstitutions. In recognition of these trends ICICI's management has alreadyembarked on a strategy that involves: (i) greater emphasis on finding newerfunding sources; (ii) increasing non-funded assets and fee income activities;(ii) pursuing new and more profitable lines of business; and (iv) vigorouslypursuing collections of arrears; and (v) maintain-ing overall profitability bydiversifying its portfolio.

Funding

25. ICICI funds its rupee assets partly through the public issue of bondsand debentures. Like the other development banks it has historically benefittedfrom access to long term funds at concessional rates. However, it has seen theaverage cost of its borrowed rupee funds rise dramatically, from 8.2? in 1985 to10.31 in 1989-90 for two main reasons. First, its lending growth rate of about252 p.a. over the last five years far outstripped the 10? official limit onincreases in annual commercial bank purchases of ICICI bonds at concessionalrates (11.5?) and the additional requirement has been funded at the prevailingnon-concessional rates of 12.5Z-13.5Z. Second, the concessional rate for issuesby the development banks increased from 9.0? to 9.75? p.a. in 1985 (for 15 yearbonds) to the present 11.5? (for 20 year bonds). ICICI's foreign fundingoperations have become increasingly sophisticated as it has taken advantage ofincreased competitiveness and innovation in financial engineering on theinternational capital markets to lower foreign funding costs. ICICI hasestablished itself in the Euro-commercial paper and interest ratelcurrency swapmarkets. However, the spread charged on all foreign currency loans is set by GOIand is currently 2? and thus the lower borrowing costs are passed on in full toIndian borrowers with only indirect benefit to the institution.

26. The Bank has been an important source of funds to ICICI and Bank loanscurrently account for 42? of all foreign currency borrowings. The Bank's fundsunder the currently ongoing projects will be an important source of added fundingfor ICICI. ICICI is one of the financial institutions participating in theExchange Risk Administration Scheme (ERAS), which has been introduced to minimizethe foreign exchange and interest rate risk of Indian firms on foreign currencyloans, obtained through the financial institutions. This will put even greaterdemands on its funding officers to skillfully manage its foreign currency

ANNEX 6.192 Page 11 of 13

liabilities and the Corporation is keen to maintain its current impressiveperformance by strengthening its skill in this important area.

Loan Portfolio

27. As at March 31, 1990, ICICI had disbursed loans and made investmentsin equities and debentures, totalling Rs 71.81 billion largely to large and

medium scale companies, outstanding loans and investments were Rs 47.65 billionand sub-sectoral distribution of loans was as follows: engineering sector,

including metal products, machinery and electrical and transport equipment (23Z);

chemical and petrochemical industries (212); textiles (102); basic metal (102);

cement (7.5Z); and pulp and paper (32). For project sizes up to Rs 70 million,ICICI would normally provide the debt finance directly. Projects greater than

Rs 70 million are funded through the inter-institutional syndicate mechanisminvolving IDBI and IFCI.

28. Portfolio quality has deteriorated in recent years as reflected in

falling collections ratios from 732 in 1985 to 712 in 1990. Total arrears stand

at 2.8Z of total loans outstanding although about 72.92 of these are accountedfor by firms in five industries: sugar, textiles, cement, pulp and paper, which

face structural problems.

Profitability

29. As a result of the interest rate squeeze and other competitivepressures, ICICI's spreads have deteriorated. ICICI has used a three-pointstrategy to preserve its financial profitability. Firstly, it has concentratedon increasing volumes in its most profitable activities such as leasing and linesof credit for equipment suppliers. Secondly, it has successfully held down

administrative costs in the face of rapid growth from 0.34Z of total assets in1985 to 0.33Z in 1989-90. Thirdly, it has placed increased emphasis on

collections, through the adoption of a comprehensive collection strategy.

Future Prospects

30. Loans are expected to grow at an average rate of 252 over the next five

years, compared to about 272 for the 1985-90 period. As the projections in Table

2 show, following five years of steadily rising profits, ICICI is expected to

experience a slowdown in profit growth. Over the next five years, with a declinein spreads, ROE is expected to decline to about 14.02 from an average of 20% in

the past five years. Profit performance will also be influenced by the extent

to which ICICI succeeds in its plans to diversify its funding sources, increasefee income and successfully launch new higher yielding products and services.The debt:equity ratio is expected to stay mostly below lOl and minimum debt

service coverage is projected to be 1.3. The key underlying assumptions behind

the projections are that: (i) there will be continued rapid growth in high profitareas and non-funded business; and (ii) the new debt collection stLategy should

improve the collection ratio, presently 71.22. The declining interest ratemargins have been engaging the attention of the Government of India and ICICI.

ANNEX 6.193 Page 12 of 13

Table 3: lbCI: ACTUAL AND PROJECTED INCOQME STATEMENTS, 165-195(Rs. Millions)

ACTUAL PROJECTED

item 1965 1966 1967J6lB 196189 196990 1990191 1991/92 1999 1M3/4

REVENUEProlect Finanoointers on rupee loan 1.1372 1,405.5 22712 2,367.1 3.2262 3,67.4 6146.7 6,609 862612intees on FC loans 701.4 909.1 1.27.4 1.1522 1,399. 1,601.8 1,7S27 2033.0 23.a1

RefinanoingOther (list)

Financial SericesLelng 43.8 63.0 2296 352.6 4937 66o.0 920.0 1.100.0 1.330oSupplleuyes crdit 1235 194.1 324.5 3W7 82Z4 946. 1,3.4 1,8172 2,4199

Aa crodit 3.6 431 1935 415.1 7268 1,1063

Merchant banking 17.0 22.6 33.2 34.8 69.0 62. 60o 100.0 125.O

Invsment Income 30.9 42.3 67.9 66.1 63 120.3 142.6 146.4 1465

Capital galns 40.4 170.1 126.0 134.7 1326 3040 120.0 120.0 120D0

Other lncom 110.0 122.1 261.0 67.1 6700 523. 217.4 2360 26M

Total Renue 22062 2.949.4 4,613&4 4,6409 6,633.6 6320.1 10,187 12.6911 1e61568

Le ExpendRure

Inte paid long tm)* Rupee loa 16. 168.0 0173 663. 909s 1,426.7 2,481 3,09*2 5,6118- F.C. lon 494.6 6664 1,09.0 1,0O.? 1,62? 11 2,1208 2,4132 2,6AM-Debentures 760.8 1,0002 1,660.1 1i64.6 1,667 2,306.7 27356 3,2064 3,7172*Short termn kbAdminstbeh expens 41.7 602 66.6 65.8 66.1 100.3 121.3 16. 1608Depreciation 33.9 110.3 177.0 167.3 274.3 375. 507.0 619.0 7400Bad debtloan 66.0 146.9 26" 2330 4968. 3048 4142 461.7 0812Bad dbnuWre t - - 4 0.4 2.Mlso wl/h and prow 1.1 0.7 Q1Other expn s 40.1 704 64. 107.0 la" 1797A 1462 163.6 215.1

Total exendi 1.647.7 2,219* 3,6e8u 3,90o ,482 ,674W 6,5431 10,97 13,96.

Prm before tax 6,567 7290 . 967.1 1,161.4 1,645. 1,044.8 1,99.0 2,02Les: tatbn 1867 117.7 160W 1800 210.0 326.4 3650 473. 8

Pro bftme tax 4000 011.0 n7. 787.1 071.4 1,3172 1,2i9X 1,450I 1,0A2

l 11 0 onthpwkodLIntere dmd not to he aoned (OWA ha ben exeubd frm 1 fe66 196M0 (aus) asW a frorn 1941 fo 19064

eolon).

94 ANNEX 6.1Page 13 of 13

! 4 10K: ACTUAL AND PR*EJe= UNOE *O 15@O 1 il49

ACUL PRO£CS=

NhM un lss 1Uq 194 1mw 101 19149 1j2j i=44

ATOCoh Ned u* IsUin 1.7A 1510 am" mu 89 21 .60 2Mo 26CUMAUsr ndW A*puom 1*6 1.W? R1 go" MS 31,70 4,420 470 SAM

weAtA Ants 841e O3.6 557 59.1 7.0.5 0 6M0 MM 06

NaPtLons Qupe) 11*271 14.110 19.41 1.1 8,5 430 am 7Ti 10014ALoan (F $041 uS 10.9 1.7J 12,773 15.56e4 16073 211940 270Oebtm am10 460 l a" 413* 1.017 2.113 $.7 .09 B5

Tolt LOW ee 1A17 136561 10MS 8 T7.1 476 51*69* oS0 104.66 137.46A4

Equity 66 8 15141 1.57 83 10 1U.60 3.074 3.631Les Atbl4 1061 349* 711 106. 107 51 217 3207 a3'7Ndt FMMd Asst 490 0. 110 167Ilya.7 1e 306 82D 3002

TOWl AZt 2,410 J 2.1332 1.064 47.65 9172 72,0t19 98,721&4 119,0109 184.4U

ULUaUES AND NEr WORTH

Peymble 1517 1o1nia 1.61.7 28063 28,40. 341 4,ax 5.101 SA4C0

Cunnd laidWe 1,67 1.231.3 1.661.? 206 2840. 3 .5 4A05 5.1010 A0

Rupee Dot 13.01102 53 18,9 240 00230792 40a5 57.05 75.704 1082Foip Cwu oy s .511 9.155 1317 174213 20617 226 24.300 =,215 34.740

Nd Lang TWm 0Od 19e77 24A252 318 41.4182 51,1 632 G1= 10509 137.322

Shaw C&4Pk 495 6702 6O04 mu 0116 1.1415 1e376 1,691.1 1*21.1Meow 1 a4 103 8,4011 U 36. 48.6 5B4l1a 7*13.1 5.6812

Tom 6Equty 1,740.8 Z47A7 3S 34W17 4.7701 54 7s337o n,032 1W36

TOTAL SllESLMBAND NET WORTH 22.41 25133*2 30A4 47.0 007* 78,151 8,7264 119.019.9 15444

Ouerantae.OuWmm 2101 374J 421.9 405* am9 809 1.210 1,510

RPA

Deequlty I04 90.5 0 Q7 e7 &1 8.1 8.1 1sRPAm an equity 204 20.0 1I1 18.6 105 11 15.7 143 13.9DebtseEvIowam (fiIo) I4 IA 1.5 IA IA 1.6 1S 1.8 1. IA

La 15mM; A,,'

95 ANNEX 7.1Page 1 of 1

INUSTRIAL POLLUTION CONTROL PROJECT

DOCUMENTS IN THE PROJECT FILES

1. Draft GOI Policy Statement on the Environment2. A Compendium of Environmental Legislation in India3. The Environmental Situation in the Chemical and Related Sectors in India4. A Summary of the Diagnosis of Environmental Problems in the Chemical and

Related Sectors in the States of Gujarat, Maharashtra, Tamil Nadu andUttar Pradesh.

5. Budgets, Annual Reports and Organization Charts of the State PollutionControl Boards of Gujarat, Maharashtra, Tamil Nadu, and Uttar Pradesh.

6. Prefeasibility Assessment of Common Effluent Treatment Plants byChemcontrol A.S.

7. Development of India State Environmental Laboratories Final Report byScience Applications International Corporation.

8. Final Report of the Appraisal Mission to the Indian State EnvironmentalLaboratories by Science Applications International Corporation

9. Sector Profile of the Dye and Dye Intermediates Sector by ParamountPollution Control.

10. Project Profiles of the Dye and Dye Intermediates Sector by ParamountPollution Control.

11. The Dye and Dye Intermediate Sector in India by Dr. D. Bannister.12. Background Report on Incentives for Pollution Control in India by

Kirloskar Inc.13. Incentives for Pollution Control in India by Barrett Consulting

Associates.14. Sector Profile of the Leather Tanning Sector by Enviro Engineers.15. Project Profiles in the Leather Tanning Sector by Dr. Thorstensen.16. Sector Profile of the Fertilizer Sector by Dr. S. Venkataraman17. Project Profiles in the Fertilizer Sector by Haskoning Royal dutch

Consultants.18. Report on the Environmental Situation in the Pesticides Sector by Dr. L.

Frost, Dr. J. Magner and Environmental Engineering Consultants.19. Petrochemicals Sector Profile by Microcon.20. Pharmaceuticals Sector and Project Profiles by AIC Inc.21. Pulp and Paper Sector and Project Profiles by Hindustan Paper Inc.22. Sugar and Distilleries Sector Profile by Envirotech Consultants.23. Project Profiles in the Sugar/Distilleries Sector by Andreoni Service de

Engheneria Inc.24. Sector and Project Profiles of the Toxic and Hazardous Waste Sector by

Gujarat State Fertilizer Corp.25. Report on Incinerators as a Method of Toxic/Hazardous Waste Disposal by

Four Nines Inc.