Urban Water Supply and Environmental Improvement in Madhya Pradesh Project (Supplementary Loan) The  initial  loan  for  the  Urban  Water  Supply  and  Environmental Improvement in Madhya Pradesh Project was approved in December  2003.  Despite  the  initial  slow  start-up,  the  project  is progressing well. In 2007 alone, contracts worth $156 million were awarded out of the Asian Development Bank (ADB) loan proceeds of  $181  million.  The  cumulative  contract  awards  reached  $173 million,  with  a  loan  balance  of  $8  million  for  further  contract awards.  There  is,  however,  about  $82  million  worth  of  contracts  that remain to be awarded. In other words, the project faces a cost overrun. 
 
The reason for the cost overrun is an increase in the original cost estimates,  caused  mainly  by  (i)  rupee  appreciation,  and  (ii)  price increases between the initial loan appraisal in 2003 and 2007. The recent steep appreciation of the rupee resulted in the reduction of the  initial  loan  amount  in  rupee  terms  by  approximately  Rs2.0 billion ($50.6 million equivalent). The high demand for construction  materials  in  the  booming  Indian  economy  and  a worldwide  increase  in  oil  prices  have  led  to  large  cost  increases for  construction  materials—the  price  index  of  steel  increased  by 12%  per  year  on  average,  cement  increased  by  10%,  and  fuel increased  by  9%.  The  impact  of  the  price  escalation  on  the  total project cost was estimated at Rs1.2 billion ($31 million equivalent), or 9%. 
  
Without additional financing, the project in its original scope cannot be completed, and the system integrity of the urban infrastructure for water supply, sewerage, and waste disposal will be  severely  undermined.  Consequently,  not  only  will  there  be  about a 35% reduction in the number of potential beneficiaries of the project, but the beneficiaries will also be connected to incomplete  systems  of  urban  infrastructure.  Being  a  high  priority project, these pending works will eventually have to be carried out by the government of Madhya Pradesh and the municipal corporations.  However,  due  to  the  limited  availability  of  long-term  financial resources, it is uncertain when the government of Madhya  Pradesh  and  the  municipal  corporations  can  secure  the full  amount  to  complete  the  original  project  scope.  The  economic and financial analyses of the initial loan indicate that the extent of reduction  in  the  internal  rate  of  returns  is  greater  for  a  1-year  delay  in  benefit  than  for  a  10%  capital  cost  increase.  In  other  words, there is a clear indication that completion of the full scope of  the  project  is  more  financially  sustainable  and  economically  viable than leaving the project incomplete for an unknown period. 
  
There  are  about  30  contracts  under  the  proposed  supplementary  financing. Out of the 30 contracts, nine are ready to be awarded, and  are  expecting  to  receive  ADB  retroactive  financing.  Detailed  engineering  design  will  be  completed  for  eight  contracts  before  September  2008  and  for  all  remaining  contracts  before  January  2009.