MANILA, PHILIPPINES – The Asian Development Bank (ADB) has approved a $71 million supplementary loan for an urban water supply project in India’s Madhya Pradesh state.

The project aims to improve the water supply services, sewerage and sanitation services, storm-water drainage, and solid waste management in the largest cities of Madhya Pradesh – Bhopal, Gwalior, Indore, and Jabalpur. The cities are trade, commerce, and tourism hubs, whose growth potentials are constrained by poor water and sewerage infrastructure systems.

ADB and India signed a $181 million loan agreement in March 2005 to support the project. However, progress was hampered by slow awarding of contracts, which eventually led to a huge cost overrun due to the rupee appreciation and price increases since the project appraisal in 2003.

The recent steep appreciation of the rupee against the US dollar reduced the initial value of the loan in rupee terms by about Rs2.0 billion or $50.6 million equivalent. High demand for construction materials in the booming Indian economy and a worldwide increase in oil prices have driven up the cost of construction materials by an estimated Rs12 billion or $31 million equivalent.

“Without the additional funding, the project in its original scope cannot be completed, and the integrity of the urban infrastructure system for water supply, sewerage, and waste disposal will be severely undermined,” warned Hiroyuki Ikemoto, an Urban Economist at ADB’s South Asia Department.

Furthermore, most of the supposed beneficiaries would be connected to an incomplete system, as about 30 contracts would have to be abandoned due to lack of financial resources.

The ADB loan is payable in 20 years with interest rate determined in accordance with ADB’s London Interbank Offered Rate (LIBOR)-based lending facility.

The government of Madhya Pradesh and the municipal corporations will invest an additional $37 million in the project, while UN-Habitat will co-finance a $500,000 grant through its Water for Asian Cities Program.