PROJECT COSTS, FINANCING AND IMPLEMENTATION
A. COST ESTIMATES 3.1 Summary of Costs. The total cost of the project, including duties and taxes, is estimated at about Rs. 11,941.4 million or US$310.5 million equivalent. The net of tax cost of the project would be US$300.5 million. The breakdown of costs of the proposed project by component and categories of expenditure for the project is summarized in Tables 3.1 and 3.2 below.
Table 3.1 - Cost by Component
(Rupee Million) ($US Million) % % Total
Foreign Base
Component Local Foreign Total Local Foreign Total Exchange Costs
Build National Institutional Capacity 570.0 86.9 656.9 17.8 2.7 20.5 13% 8%
Build State Institutional Capacity 761.7 30.2 791.9 23.8 0.9 24.7 4% 9%
Improve Quality & Access in Primary Education
Build District Institutional Capacity 383.7 15.2 398.9 12.0 0.5 12.5 4% 5%
Improve Retention 1,324.0 42.0 1,366.1 41.4 1.3 42.7 3% 16%
Increase Access 2,998.0 122.2 3,120.2 93.7 3.8 97.5 4% 36%
Improve Learning Achievements 2,251.8 65.6 2,317.4 70.4 2.0 72.4 3% 27%
Total BASELINE COSTS 8,289.2 362.2 8,651.4 259.0 11.3 270.4 4% 100%
Physical Contingencies 649.3 36.2 685.5 20.3 1.1 21.4 5% 8%
Price Contingencies 2,496.7 107.9 2,604.6 17.8 0.9 18.7 - 7%
Total PROJECT COSTS 11,435.2 506.2 11,941.4 297.1 13.4 310.5 4% 115%
3.2 Basis of Cost Estimates. Estimated costs for civil works are based on current unit costs for construction which vary from US$70 to US$90 per square meter of gross floor area of construction. These costs are reasonable for comparable IDA- assisted construction in India. Costs of professional services for design reflect the scale of fees established for similar services provided by local architectural consulting firms. Costs for supervision of construction reflect the standard establishment charges of the Public Works Department (PWD) in each of the project states. Estimated equipment, vehicles and educational materials costs are product of lists developed by GOI and the project states, and include import duties and taxes. Furniture and consumable material costs are based on GOI and the state estimates and reflect current prices. Estimated costs for the salaries of additional staff are based on basic pay scales including standard allowances for social and other benefits applicable in the project states.
3.3 Customs Duties and Taxes. All imported goods are subject to customs duties and taxes. The estimated cost of the project includes import duties and taxes estimated to cost at about US$10.0 million.
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Table 3.2 - Costs by Category of Expenditure
(Rupee Million) ($US Million) % % Total
Foreign Base
Local Foreign Total Local Foreign Total Exchange Costs
Investment Costs
Civil Works 1,578.0 156.1 1,734.0 49.3 4.9 54.2 9% 20%
Furniture 230.7 - 230.7 7.2 - 7.2 - 3%
Equipment 211.3 70.4 281.7 6.6 2.2 8.8 25% 3 %
Vehicles 30.9 10.3 41.2 1.0 0.3 1.3 25% -
Books & libraries 403.0 21.2 424.2 12.6 0.7 13.3 5% 5%
Local Consultants 504.4 - 504.4 15.8 - 15.8 - 6%
International Consultants 0.4 3.6 4.0 0.0 0.1 0.1 90% -
International Conf/Trng Fellowships 8.6 77.4 86.0 0.3 2.4 2.7 90% 1%
Sports Equipment & Amenities 41.8 - 41.8 1.3 - 1.3 - -
Training Costs (Incl TA/DA) 704.4 - 704.4 22.0 - 22.0 - 8%
Workshops & Seminars 164.2 - 164.2 5.1 - 5.1 - 2%
Awareness Campaign Expenses 88.7 - 88.7 2.8 - 2.8 - 1%
Total Investment Cost 3,966.2 339.0 4,305.2 123.9 10.6 134.5 8 % 50%
Recurrent Costs
Salaries of Additional Staff 2.650.6 - 2,650.6 82.8 - 82.8 - 31%
Consumables (office expenses, etc) 216.4 11.4 227.8 6.8 0.4 7.1 5% 3%
Teaching Materials 899.9 - 899.9 28.1 - 28.1 - 10%
Contingency at District/BRC/School level 207.6 10.9 218.5 6.5 0.3 6.8 5% 3%
Vehicle Operation and Maint 9.8 - 9.8 0.3 - 0.3 - -
Equipment Operation and Maint 16.7 0.9 17.6 0.5 0.0 0.6 5% -
Civil Works Maint 30.0 - 30.0 0.9 - 0.9 - -
Honorarium 292.0 - 292.0 9.1 - 9.1 - 3%
Total Recurrent Cost 4,323.0 23.2 4,346.2 135.1 0.7 135.8 1% 50%
Total BASELINE COSTS 8,289.2 362.2 8,651.4 259.0 11.3 270.4 4% 100%
Physical Contingencies 649.3 36.2 685.5 20.3 1.1 21.4 5% 8%
Price Contingencies 2,496.7 107.9 2,604.6 17.8 0.9 18.7 - 7%
Total PROJECT COSTS 11,435.2 506.2 11,941.4 297.1 13.4 310.5 4% 115%
3.4 Contingency Allowances. Estimated project costs include physical contingencies (US$21.4 million) estimated at 10 percent of all physical components and at 5 percent for technical assistance, salaries, and operation and maintenance costs. The estimated costs of the project also include price contingencies (US$18.7 million) to cover expected price escalation for civil works, goods, salaries, technical assistance, and operation and maintenance at the following rates: (a) foreign costs: 2.2 percent in FY94 through FY2002; (b) local costs: 9.5 percent in FY94, 8 percent in FY95, 7 percent in FY96, and 6 percent in FY97 through FY2002.
3.5 Foreign exchange component. The estimated foreign exchange component of US$13.4 million is calculated on the basis of estimated foreign exchange proportions as follows: (a) civil works 9 percent; (b) equipment 25 percent; (c) vehicles 25 percent; (d) international fellowships, study tours, conference attendance and international consultants 90 percent; (e) books and library materials, consumables, operation and maintenance costs 5 percent.
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B. FINANCING PLAN 3.6 The estimated total project cost of US$310.5 million would be financed by an IDA credit of US$260.3 million equivalent, which would cover 86.6% of costs net of taxes. The GOI and states would finance the remaining costs of US$40.2 million and all taxes.
C. STATE INVESTMENT CAPACITY, ADDITIONALITY AND
RECURRENT COST IMPLICATIONS 3.7 The credit for the project will be made to GOI to finance national sub- projects directly and to be passed in grant form to the states. GOI already currently funds specific activities in primary education through its Centrally Sponsored Schemes. The conditionalities for the Social Safety Net Adjustment Program include the maintenance in real terms of central plan outlays on primary education during the Eighth Five Year Plan. This should guarantee that all external resources derived specifically for the DPEP will be additional to at least a constant real level of resources made available by GOI In 1992, an incremental outlay of Rs. 1950 million (equivalent to US$650 million) was added by the Planning Commission for the three remaining years of the Eighth Plan. In turn, the DPEP Guidelines set three financial criteria for states' involvement in the program: (a) states would be required to contribute around 15 percent of the total cost, (b) program resources would be a net addition to normal growth of state plan allocations for education as a whole and primary education in particular, and (c) the annual recurrent costs of the investment would be shown to be sustainable on state non- plan budgets at the end of the project (Annex 15 - Public Finances and Education Expenditures in the Six IDA DPEP States).
INVESTMENT CAPACITY 3.8 The ease with which these conditions will be met differs between the six states. Of the three conditions, the requirement for states to fund 15 percent of the total cost is the least likely to cause a problem. As a percentage of 1993/94 state plan (non- recurring) outlays on elementary education, average annual state project expenditures would be: Assam 3.6 percent, Haryana 17.3 percent, Karnataka 1.9 percent, Kerala 71.9 percent, Maharashtra 10.6 percent, and Tamil Nadu 6.5 percent. All states would continue to incur plan outlays for elementary education that would not be financed through DPEP.
3.9 In the state where the required allocation will be highest relative to the existing outlay (Kerala), the absolute level of resources involved is the lowest - and equal to just 0.6 percent of non-plan expenditures on primary education. Probably the state with the largest potential problem is Assam where the low percentage hides a situation
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where virtually all plan expenditures are necessary for funding non-plan activities. The Planning Commission has agreed to the incorporation of the required level of resources for the states' contributions in each of the 1994/95 annual state plans.
RESOURCE ADDITIONALITY 3.10 The requirement that the state's contribution to DPEP is a net addition to plan expenditures on elementary education is central to the GOI's intention that the program leads to overall increases in resources for education. The concept of additionality adopted by the GOI reflects the one agreed between IDA and the Government of India for the Social Safety Net arrangements. That is, plan expenditure, minus the state's DPEP contribution, should be at levels which at least maintain real resources for the education sector in general and for elementary education in particular at their 1991/92 levels. On the basis of recent evidence this requirement should not be too difficult to achieve for most of the states but will require careful monitoring.
3.11 Over the period 1990/91 to 1992/93, real plan expenditures on both elementary education and general education in Tamil Nadu were lower in 1992/93 than in 1990/91. In Maharashtra, general education expenditures were slightly lower in 1992/93 than in the previous year although elementary expenditures were significantly higher. While elementary and general education expenditures fell in real terms in Kerala in 1991/92, they fully recovered the following year. In the other states, real expenditures on both elementary and general education increased each year. However, in Assam the large increases in plan expenditures do not reflect new programs but rather the necessity for ongoing programs to be funded through plan expenditures as a result of severe difficulties in the non-plan budget. In both Haryana and Karnataka, plan expenditures maintained an upward trend. Summarizing, only in Tamil Nadu were real plan expenditures in both elementary and general education not maintained between 1990/91 and 1992/93. However, plan expenditure on primary education as a share of total plan expenditure is very small and a reallocation should be relatively easily made if necessary. Tamil Nadu has shown a very high commitment to primary education over several years. The situation in Assam will require the most careful attention. It would be necessary to strictly monitor that the few resources which are being used to fund new activities are kept to the level reflected in the GOI guideline.
SUSTAINABILITY OF RECURRENT COSTS 3.12 The third issue is that of sustainability. The ability to sustain post project recurrent costs on the non-plan budget depends on a number of factors. Among these are (a) the structure of the project itself and the consequent level of recurring expenditures, (b) the outcome of the Tenth Finance Commission which will set the pattern for central transfers over the coming years, (c) the future strength of the economy and increases in state revenues and (d) the willingness and ability of governments to reorient their activities and restructure their budgets. The uncertainties of (b), (c) and (d) are so great that only the past and present can be used as a guide to the future. However, since it is the declared intention of the DOE to use DPEP to accelerate the
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development of primary education, partly through a significant increase in the level of resources, the guide must be regarded as partial. Using the existing programs and assuming a rate of real expenditure growth of 4 percent a year over the project life across each state, the recurring costs resulting from the project would roughly be equivalent to between one third and twice the normal increase allocated to primary education in the year following the end of the project.
3.13 For each of the three southern states plus Maharashtra the required increases would be below 50 percent of that normally allocated (although additional costs of incentive programs following increased enrollments would also have to be met). The increases would average around US$3.75 million compared to the average non-plan budget of around US$26.5 million. Apart from the fact that Tamil Nadu appears to be in a difficult financial situation requiring a particularly high level of borrowing, sustainability should not pose a problem to these states.
3.14 In Assam the recurring cost requirement is a little higher. Much depends on the ability of the state to restructure its public finances in the coming years and the impact of being treated as a Special Category state for which the terms of central transfers are much more favorable. The state which appears to be most out of line is Haryana where the current low level of non-plan expenditures will result in the recurring costs of the project being twice the level of normal non-plan increases. However, Haryana has the third highest per capita income across the major states. The required increases in the non-plan budget would be within the government's means if the political will exists.
3.15 Assuming that (a) the overall financial situation in Assam, and to a lesser extent in Tamil Nadu, is restructured in ways that more closely equate non-plan resources with the demands on the budget and (b) the current political will to increase the priority to primary education is maintained in Haryana, the proposed first phase of the DPEP is potentially sustainable.