India - Tamilnadu Newsprint Project

Document of V K31 The World Bank FOR OFFICIAL USE ONLY Report No. 3251.-IN STAFF APPRAISAL REPORT INDIA TAMILNADU NEWSPRINT PROJECT Industrial Projects Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS US$1 = Rs 8.0 Rs 1 = US$0.125 Rs 1,000 US$125.00 WEIGHTS AND MEASURES 1 metric ton (t) = 1,000 kilograms (kg) = 2,204 pounds 1 milligram (mg) = 0.001 grams (gm) = 0.015 grain 1 liter (1) = 61.02 cubic inches = 1.057 quarts 1 kilometer (km) 0.621 mile 1 meter (m) = 1.0936 yards = 39.37 inches I cubic meter (m3) 35.31 cubic feet = 264 US gallons 1 square meter (m3) = 1.2 square yards = 10.76 square feet 1 hectare (ha) = 10,000 square meters = 2.47 Acres 1 Kilovolt (kV) = 1,000 volts 1 Megawatt - hour (Mwh) = 1,000 Kilo Watt - hours ABBREVIATIONS AND ACRONYMS USED BCE = Base Cost Estimate BOD = Biochemical Oxygen Demand FAO = Food and Agriculture Organization of the United Nations Government Government of India HPC = Hindustan Paper Corporation ICICI = Industrial Credit and Investment Corporation of India IDBI = Industrial Development Bank of India IFCI = Industrial Finance Corporation of India IPMA = Indian Paper Makers Association DAF = Development Assistance Fund LICI = Life Insurance Corporation of India MOI = Ministry of Industry m3py = Cubic meters per year NLC = Neyveli Lignite Corporation Ltd. pH = Measure of alkalinity/acidity, expressed in terms of a scale of the negative logarithm of the effective hydrogen concentration in gram equivalents per liter; 7 is neutral, less than 7, acid. SPB = Seshasayee Paper and Boards Limited (Project Consultant) TAFCORN = Tamilnadu Forest Plantations Corporation TNEB = Tamilnadu Electricity Board TNPL = Tamilnadu Newsprint and Papers Limited (Project Sponsor) tpy = Tons per year tpd Tons per day FISCAL YEAR Government and Company: April 1 - March 31  INDIA FOR OFFICIAL USE ONLY APPRAISAL OF TAMILNADU NEWSPRINT PROJECT TABLE OF CONTENTS Page No. I. INTRODUCTION 1 II. THE INDIAN PULP AND PAPER INDUSTRY 2 A. Industrial Sector ...... ................. 2 B. Background of the Paper Industry .................. 3 C. Historical Growth of the Industry ................. 4 D. Fibrous Raw Material Supply ..... .............. 5 1. Bamboo ........................................ 5 2. Wood .......................................... 7 3. Bagasse ....................................... 8 4. Other Fibers and Conclusions .... .............. 10 E. Government Sectoral Development Policies .......... 10 F. Production and Pricing Controls .......... ......... 11 G. Bank Role and Involvement of Other Lending Agencies 12 III. THE SPONSOR .13 A. Tamilnadu Newsprint and Papers Limited 13 B. Seshasayee Paper and Boards Limited .13 IV. THE MARKET .14 A. Historical Development of Supply and Demand 14 B. Printing and Writing Paper .15 C. Newsprint .17 D. Marketing and Distribution .18 E. Prices ..18 1. General Market Influences .18 2. Printing and Writing Paper .19 3. Newsprint .20 V. THE PROJECT .21 A. Project Concept and Choice of Technology 21 B. Project Description ..23 1. The Mill .23 2. Fibrous Raw Material Supplies .24 3. Coal and Lignite .26 4. Electric Power Supply .28 5. Environmental Impact and Protection 28 C. Infrastructure ..29 D. Project Implementation and Management . . 29 E. Employment and Training ............... ............ 31 This report was prepared by V. A. Bates and K. Zamani of the Industrial Projects Department and A. J. Ewing (Consultant). This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  TABLE OF CONTENTS (continued) Page No. VI. CAPITAL COSTS, FINANCING PLAN AND PROCUREMENT ........... 32 A. Capital Costs ....................................... 32 B. Financing Plan ...................................... 33 C. Procurement and Disbursement ........................ 36 VII. FINANCIAL ANALYSIS ................... .. ................. 37 A. Assumptions ......................................... 37 B. Revenues ............................................ 38 C. Production Costs .................................... 38 D. Financial Projections .............................. 40 E. Financial Rate of Return and Sensitivity Analysis ... 41 F. Financial Covenants ................................. 42 G. Auditing and Reporting Requirements .... ............. 43 VIII. ECONOMIC ANALYSIS AND RISKS ............................. 43 A. Adjusted Costs and Benefits for Economic Analysis ... 43 B. Economic Rate of Return ............................. 43 C. Other Benefits ...................................... 44 D. Risks ............................................... 45 IX. AGREEMENTS ............................................... 47 ANNEXES 6-1 Summary of Plant Capital and Base Cost Estimates 6-2 Contingency Allowances in Capital Cost Estimates 6-3 Working Capital Estimate 6-4 Projected Disbursement Schedule for Bank Loan 7-1 Assumptions Used in Financial Projections 7-2 Production Cost Estimate at Full Production 7-3 Projected Income Statement 7-4 Projected Cash-Flow Statement 7-5 Projected Balance Sheets 7-6 Cost/Benefit Streams for Financial Rate of Return 8-1 Assumptions Used in Economic Projections 8-2 Cost/Benefit Streams for Economic Rate of Return MAP IBRD India - Project Location (No. 15475R)  SELECTED DOCUMENTS AND DATA AVAILABLE IN THE PROJECT FILE A. Reports and Studies on the Sector Al. Potential for Pulp and Paper Develoment - India. Prepared for FAO by Bhargava Consulting and Design Engineers, New Delhi, 1976 (2 vols.) A2. Directory of Indian Paper Makers Association. IPMA, New Delhi, 1979. A3. Use of Bagasse for Paper-Making. (Note from Department of Industrial Development). Ministry of Industry, New Delhi, 1979. A4. Paper Industry. (Note from Department of Industrial Development). Ministry of Industry, New Delhi, 1980. A5. Bagasse for Pulp and Paper in India. Abstracted from UNDP/FAO/Government interim report on materials for paper-making. New Delhi, 1979. A6. Annual Reports of Seshasayee Paper and Boards Limited (for years 1977- 1980). Madras. B. Reports and Studies on the Project Bl. Project Report for Establishment of Bagasse-Based Newsprint/Paper Mill in Tamilnadu. Seshasayee Paper and Boards Limited, Madras, 1979. B2. Application Seeking Financial Assistance for Establishing a Bagasse- Based Newsprint/Paper Mill in Tamilnadu. Tamilnadu Newsprint and Papers Limited, Madras, 1979. B3. Tender Documents for Engineering Services and Supply of Paper-Making and Bagasse Pulping Equipment. Tamilnadu Newsprint and Papers Limited, Madras, 1980. B4. Assessment of Bagasse Newsprint Operations in Peru and Mexico. Bank Mission Report - R. Chalk (IPD) and A. Hurter (Consultant). Washington, October 7, 1980. B5. Report on Transportation and Storage of Raw Materials and Finished Products. Report of Bank Consultant A. Malhotra. B6. Contract for Consulting Services between Tamilnadu Newsprint and Papers Limited and Seshasayee Paper and Boards Limited. C. Selected Working Papers Cl. Project Brief prepared May 1, 1980. Industrial Projects Department August 1981  t  I. INTRODUCTION 1.01 The Government of India (the Government), has requested a Bank loan of US$100 million equivalent to help finance the cost of a new paper mill (the Project) to be located at Pugalur in the State of Tamilnadu, about 300 km southwest of Madras (Map IBRD 15475R). The Project will be owned and operated by Tamilnadu Newsprint and Papers Limited (TNPL), a new company, with 47.4% of its shares to be held by the Government of Tamilnadu. Two sugar companies and a paper company will be minority equity shareholders in TNPL holding a combined total of 6% of its shares. The balance of the shares will eventually be offered to the public. Initially they will be held by the Industrial Development Bank of India (IDBI) in a consortium with three other Indian financial institutions.l/ The proposed Bank loan would cover approximately 42% of the estimated total financing requirement of US$238 million, and about 87% of the total foreign exchange needs of US$115 million. The remaining foreign exchange costs together with local cost financing will be provided by the Government of Tamilnadu, the minority equity shareholders, the consortium of Indian financial institutions, and local commercial banks.2/ 1.02 The Project has evolved as a direct result of policy measures adopted by the Government aimed both at expanding the domestic production of paper (and in particular newsprint) to meet growing domestic demand, and at using bagasse as a raw material for paper manufacture.3/ The plant will use bagasse from five existing sugar mills to produce 50,000 tons per year (tpy) of newsprint and 40,000 tpy of printing and writing paper, to be marketed throughout India. The bagasse is now being used as a fuel for generating steam in the sugar mills; to obtain its release for paper production, the Project provides for the installa- tion and operation of coal-fired boiler systems at each sugar mill at the Pro- ject's expense. Bagasse has been widely used to produce printing and writing paper for many years; the technology for bagasse-based newsprint manufacture, however, is relatively new. To date, two such plants have been built (in Peru and in Mexico), and a third (in Argentina) is under construction. Although the plants have had technical difficulties in operation, these are being corrected and the Tamilnadu Project will benefit considerably from this experience. More- over, the Project design allows for the production of newsprint and printing and writing paper in variable proportions, insuring against the risk of possi- ble initial technical problems with newsprint production (paras. 5.02 and 8.07). The Project will be located in a designated "backward area". It will provide direct employment for some 2,000 persons and indirectly support some 4,000 jobs in forestry, transportation, and marketing. In addition, up to 3,000 workers will be employed during construction. 1L/ The Industrial Finance Corporation of India (IFCI); the Life Insurance Corporation of India (LICI); and the Industrial Credit and Investment Corporation of India (ICICI). 2/ Local commercial banks will finance the bulk of the working capital re- quired. 3/ The Government's particular interest in bagasse has come about as a re- sult of increasing shortages of the traditional paper-making materials in India (bamboo and wood).  2 1.03 The Project was identified and preappraised in April 1980, on the basis of a feasibility study prepared for TNPL by its Indian Project Consultants, Seshasayee Paper and Boards Limited (SPB), a company with a paper mill and a consultancy operation in Tamilnadu. The Project was appraised in November 1980, by a mission comprising representatives of the four Indian financial institutions (para. 1.01) and the Bank. The Bank mission consisted of Miss V. Bates, Messrs. S. Saukkonen and K. Zamani of the Industrial Projects Department, and Mr. A.J. Ewing, consultant. II. THE INDIAN PULP AND PAPER INDUSTRY A. Industrial Sector 2.01 In terms of its importance to the economy, India's industrial sector is second only to agriculture, with manufacturing output contributing about 17% of GDP in 1979/80. Industrial employment amounts to about 26% of the work force in the organized sector or about 2% of India's total work force. In 1950, when the First National Plan was initiated, industry was heavily oriented towards the production of consumer goods, with traditional industries such as textiles and food processing responsible for about half of industrial output. Over the next 15 years, manufacturing output expanded by 6-7% per annum, with particular emphasis being placed on the expansion of capital goods production, including industrial machinery and transport equipment, and "basic" industries, such as steel, cement and fertilizers. Since then, although growth in manufacturing output had slowed down to an average of about 5% per annum (1970-79), its growth has still exceeded that of GDP which reached only 3.5% per annum over the same period. 2.02 Economic performance in 1979/80 deteriorated sharply; GNP fell by about 3%, agricultural production declined and industrial production stagnated despite strong demand and underutilized capacity. Industry was plagued by labor unrest and a vicious circle of supply bottlenecks. Persistent power and transport shortages aggravated short supply conditions in key industries. During 1980/81 public infrastructure and the supply of certain basic commodities continued to be a constraint to industrial production. Railway transport was perhaps the most severe bottleneck. These constraints can be largely attributed to past cutbacks in investment in transport facilities and basic industries, in favor of irrigation and other agricultural infrastructure. Although there could be some improvemeits in capacity utilization in these industries, this in itself will be insufficient to provide the additional output required to meet India's needs. Several other measures are necessary in order to accommodate India's current circumstances. First, the industrial sector must adapt itself to higher energy prices by improving the energy efficiency of existing and new plants. Second, efforts are needed to expand export and import-substituting industries where domestic resources are best used. Finally, many industries, including the paper industry, require modern- ization and substantial new investment to overcome supply shortages.  - 3- 2.03 The Sixth Plan (1980/81 to 1984/85) gives high priority to the cre- ation of additional capacity in such basic industries as steel, non-ferrous metals, capital goods, fertilizers and petrochemicals. The public sector will continue its major role in the expansion of these industries. The private, joint and cooperative sectors are expected to contribute significantly in ce- ment, paper, textiles, chemicals, pesticides, drugs and pharmaceuticals. Pro- duction of natural gas, petroleum and coal, and rapid growth of industries based on these resources (particularly fertilizers) are expected to lead to structural shifts in the pattern of industrial output in the 1980s. Rapid growth is also expected, in many cases from small bases, in plastics, synthe- tic fibers, synthetic rubber and other petrochemicals. A major expansion in the electronic industry to profit from the comparative advantage of a large pool of technically qualified personnel is also envisaged. While the expan- sion in metal and engineering industries will continue, the chemical and elec- tronic industries are expected to assume the leading role in industrial in- vestment and lroduction. 2.04 Bank Group direct investment in India's industrial sector over the past 12 years has to date been limited to the fertilizer industry where con- tributions totalling US$882 million have been made to eleven projects.l/ Al- though some of the earlier projects suffered completion delays of up to two years, and cost overruns of 34-45%, the more recent Trombay project (completed in 1977) and the Sindri project (completed in February 1981) were completed within a few months of schedule, and at costs close to appraisal estimates. These projects have added substantially to India's domestic nitrogen fertiliz- er production capacity but growth in demand has continued apace and imports still account for about 40% of fertilizer consumption. B. Background of the Paper Industry 2.05 Within the constraint imposed by shortages of suitable raw materials, India's pulp and paper industry has been relatively successful in achieving one of its principal objectives: that of efficiently and economically maintain- ing a high level of self-sufficiency in domestic paper production. In 1979, there were approximately 100 plants in operation, producing a total of 1.1 million tons of paper and paperboard or 80% of total paper consumption. Domes- tic production accounted for some 98% of India's requirements of printing and writing paper, and 96% of industrial paper and board. Imports of those grades were limited to specialty products. Substantial imports of newsprint are still required however, and in 1979, domestic production accounted for only about 15% of the total consumption of 300,000 tons. 2.06 With total output currently valued at some Rs 6.0 billion annually, the pulp and paper industry contributes about 2% of industrial outpit in India and employs about 100,000 people. In addition, at least twice that number are engaged in peripheral activities such as the collection of fibrous raw materi- als. With real output having increased at an annual average rate of more than 6% over the past 20 years, the rate qf growth of the industry has exceeded that of the economy as a whole, reflecting rising literacy rates, expanded educa- tional programs and increasing use of paper for packaging of food and other commodities. Nevertheless, India's average per-capita consumption of paper, at less than 2 kg per annum, is among the lowest in the world. 1/ The most recent operation was an IDA Credit of US$400 million for the Hazira fertilizer project which was approved in March 1981 (Report No. 2852-IN).  - 4- C. Historical Growth of the Industry 2.07 The paper and paperboard industry in India was started by missionaries in the nineteenth century. By 1913, seven mills were in operation, producing about 25,000 tons of paper annually. Raw materials in use at that time were grass, hemp, rags, jute and imported pulp. The first mill to use bamboo commenced operation in 1918. Further encouragement to the expansion of domestic production capacity, based on bamboo, was provided by the Bamboo Paper Industry (Protection) Acts of 1925 and 1932, which levied duties on imported papers. By 1940, total annual production was approaching 90,000 tons, and imports of most grades of paper and paper board had been reduced to negligible levels. The industry continued to expand at a modest rate through 4 the 1940s, with production reaching 110,000 tons by 1950. In the ensuing three decades domestic production of paper and paperboard, based almost exclusively on bamboo and indigenous hardwoods, expanded to over 1 million tons annually. 2.08 The following table illustrates the pattern of growth in the Indian pulp and paper industry since 1950. India - Growth Characteristics of the Pulp and Paper Industry Number of Installed Capacity Year a/ Plants Capacity Production Utilization ('000 tpy) ('000 tpy) % 1950 - - 109 1960 - - 345 1970 58 810 796 98 1975 74 1,070 881 82 1976 74 1,100 933 85 1977 75 1,140 996 87 1978 87 1,260 1,062 84 1979 101 1,380 1,095 79 1980 107 1,570 1,160 74 a/ Financial years, ending March 31. Source: Ministry of Industry. 2.09 As the above table shows, the period 1977-1979 saw a rather rapid increase in the number of small plants, with 26 new plants coming on stream of an average annual capacity of less than 10,000 tons per unit. As further discussed below (paras. 2.24-2.27), these developments were the- direct  - 5 - outcome of Government policies designed specifically to stimulate expansion of the industry, that were biased in favor of small-scale producers. The table also shows a decline in capacity utilization over the past two years. Although a number of the newly installed mills are suffering from shortages of raw materials, this trend is also a reflection of the rapid expansion of capacity and the fact that many of the new mills are still in their start-up phase. As further discussed in para. 2.24, almost all of the existing capacity is in the private sector, whereas most of the new capacity which will come on stream in the next 2-3 years will be in the public sector. D. Fibrous Raw Material Supply 2.10 The development of India's pulp and paper industry has largely been governed by the nature and location of the rather limited domestic supplies of fibrous raw materials which are available for paper-making. Government policies for the development of the sector have been shaped by these considerations. For an assessment of the sector, it is therefore important to understand the fibrous raw material supply situation. 2.11 The pulp and paper industry consumes about 2.5 million tons of fibrous raw materials annually, in approximately the following proportions: India - Fibrous Raw Materials for Paper-Making (1979-80) Fiber % Bamboo 65 Indigenous Hardwoods 20 Grass 6 Bagasse 3 Coniferous Woods 1 Other 5 Total 100 1. Bamboo 2.12 As noted above (para. 2.07), bamboo provided the basic raw material for the expansion of India's pulp and paper industry in the past and it is still by far the most important fiber used by the industry today. Bamboo contains a unique combination of short and long fibers, and is thus well suited for the manufacture of a wide range of paper and paperboard grades.  -6- 2.13 Bamboo grows as an understory in India's natural forests, where it covers some 10 million hectares (ha), mostly in the states of Madhya Pradesh, Assam, Andhra Pradesh, Orissa, Karnataka and Maharashtra. Almost all of the bamboo is owned by the various State Governments who control its allocation to users. Actual production is about 3.0 million tpy, of which some 50% is utilized by the paper industry; potential production is estimated at 5.5 million tpy. Although there would therefore appear to be ample unutilized bamboo, which could support further expansion of the pulp and paper industry, the further use of bamboo is inhibited by a number of factors including: (i) Accessibility. About two thirds of the unutilized bamboo is in the relatively remote areas of Assam and Tripura, where the costs of establishing new mills are high. Nevertheless, the Government is establishing two mills in Assam which will utilize about 0.4 million tpy of bamboo; (ii) Competing Uses. In Indian villages, bamboo is widely used in house construction for reinforcing inside walls, for roofing, for partitions, and for door and window frames. The State Governments give priority to these uses, and this has tended to restrict the supply of bamboo available to paper mills in some areas. Bamboo is also used in urban areas, on construction sites for scaffolding and for other temporary structures. Given the high price of substitutes (hardwoods, steel), users of bamboo for this purpose can readily attract supplies away from the paper producers; and (iii) Gregarious Flowering. The bamboo plant of any given species flowers on an unpredictable schedule (10-40 years) and then dies. Subsequently, for 5-6 years, until the bamboo re-establishes itself, a paper mill may be without any fiber.l/ There is clearly reluctance to make major investments in new large plants where there is a risk of bamboo flowering. 2.14 Although, as noted, the Government is establishing new paper mills in remote areas where bamboo is still available in excess of current requirements, opportunities for any major expansion of the industry using this raw material are limited. Most new developments are, therefore, likely to be based on other types of fiber such as plantation wood, or bagasse, as further discussed below. 1/ The situation is often mitigated when a mill is using more than one species of bamboo, as different species flower on different cycles. Otherwise the mill would have to look for other types of fiber, import pulp, or shut down.  7 2. Wood 2.15 In India, wood represents the second most important raw material for paper making, and for many grades of paper, a mixture of bamboo and hardwoods provides an optimum quality product. Although forests (largely State-Government controlled) cover some 70 million ha, or about 20% of the land area of the country, only about half of this area is classified as "productive" forest. Most regions of the country are desperately short of wood for fuel (for cooking, and in some areas, for heating), for construction purposes, and for pulp and paper production. About one quarter of the total forest land is in Madhya Pradesh; other states with significant forests are Orissa, Maharashtra and Andhra Pradesh (each with about 9% of the national total), Arunachal Pradesh (7%), and Uttar Pradesh (6%). The area of forest land is shrink ng due to overcutting, conversion to agriculture, inundation through the implementation of irrigation schemes, and the construction of roads, power lines, towns and factories. 2.16 Total wood consumption, representing both recorded and unrecorded removals, is estimated at 215 million cubic meters per year (m3py), of which less than half of 1% is used by the paper industry. Reliable production and consumption statistics are scarce but an approximate balance is as follows: India - Production and Consumption of Wood (million m3py) Production Consumption Indigenous hardwoods 213.0 Fuel 200.0 Coniferous woods 2.0 Sawnwood 10.0 Posts and poles 4.0 Pulpwood 0.7 Panels 0.3 Totals (rounded) 215.0 215.0 2.17 The use of indigenous hardwoods for paper manufacture is relatively new in India. A considerable amount of work has been undertaken which demonstrates that most of the 600 species of hardwood found in India can be used, in mixtures with bamboo, to make good quality paper. However, except in relatively sparsely populated areas (such as the Bastar region of Madhya Pradesh), the pressure of demand for other uses, particularly fuel, will continue to place serious constraints on the availability of hardwoods for paper manufacture. Coniferous woods are by far the best and most  - 8 - versatile raw material for papermaking, particularly for newsprint, and for grades of paper where strength is a primary requirement, such as kraft paper for cement sacks. In India, however, most coniferous forests are found in the remote areas of Jammu and Kashmir and Uttar Pradesh, where substan- tial investment in infrastructure would be required to increase extraction. Moreover, the coniferous species are so valuable as a raw material for sawnwood production, that only poor quality logs together with logging and sawmill residues, should be used as a raw material for paper-making. Expanded use of indigenous coniferous wood for the paper industry can, therefore, only be considered as an adjunct to expanded logging and sawmilling operations. 2.18 It is apparent that opportunities to expand wood-based production of paper in India are limited by the availability of forests, by the cost of access to those forests which are at present underutilized and, most importantly, by competition from other end-uses. Some progress in expanding wood supplies for paper-making has been made by State-sponsored plantation schemes, and by companies which are encouraging small landholders to plant fast-growing species, such as eucalyptus, in areas adjacent to their mills.l/ However, such schemes have relatively long gestation periods, and are possible only where suitable land is available. The opportunities for expanding wood-based paper production, at least for the short term, are limited. 3. Bagasse 2.19 India is one of the world's largest sugarcane producers. If all of the cane produced were crushed, and the bagasse made available for paper production, this fiber could support an output of about 7 million tons of paper annually, or almost six times present domestic consumption. In fact, only about one third of the available sugarcane is delivered to organized sugar mills, the balance being processed in small village crushing units. Moreover, most of the bagasse which is produced in sugar mills is used internally as fuel for generating process steam. Although about five paper mills have been constructed in India with the intention of using bagasse for at least part of their fibrous raw material, only one is using bagasse on a large scale today.2/ Apart from the bias in favor of small-scale printing and writing paper production inherent in existing regulations (paras. 2.24 and 2.26), the principal reasons for this lack of widespread use are: 1/ In Tamilnadu, for example, the Tamilnadu Forest Plantations Corporation (TAFCORN) supplies plantation eucalyptus to the Project Consultant's (SPB) paper mill, and will supply the Project with eucalyptus to complement the bagasse fiber. In addition, SPB operates its own nurseries, provides seedlings to local landholders, and undertakes to buy the resulting pulpwood. 2/ The Mandya National Paper Mills Ltd. in Karnataka produces about 11,000 tpy of printing and writing paper from 95% bagasse pulp. At one time SPB was supplying oil to a sugar mill, in order to release bagasse for its paper mill operations, but the high cost of oil (the boiler could not burn alternative fuels) forced an end to this exchange. SPB continues to use a small quantity of surplus bags3se.  -9- (i) Sugar mills in India are generally small. A mill, or concentration of mills, crushing approximately 12,000 tons of cane per day would be required to support a paper mill of 80,000 tons annual capacity. This constellation rarely exists; (ii) The sugar mill owners are concerned about giving up a fuel (bagasse) over which they have direct control for another fuel (coal) where they must rely on others, such as mining and transportation agencies, to ensure supplies; and (iii) The private sector, which until recently has implemented almost all of the expansion in the pulp and paper industry in India, has been reluctant to take responsibility for the investments and coordination which a bagasse-based project requires. 2.20 Nonetheless, the Government is determined to stimulate the expansion of bagasse-based paper manufacture for the following reasons: (i) As noted above (paras. 2.12-2.18) supplies of bamboo and wood for paper-making from natural forests are becoming increasingly tight, and opportunities for significant expansion of capacity in the short and medium term, based on these traditional raw materials, are limited; (ii) Bagasse is an annual crop generated on land already dedicated to sugar production. Unlike forest plantations, no new areas of land need be set aside for fiber production; (iii) As demonstrated in Mexico, Peru, the Philippines and elsewhere, bagasse is well suited for the production of a wide range of paper grades; and (iv) Coal, which can be used in the sugar mills to economically replace bagasse as fuel, is available in India, although supply and delivery problems cannot be ignored as further discussed in paras. 5.17-5.19. 2.21 To conclude, despite the impediments listed above (para. 2.19), it is clear that if India is to remain largely and economically self-sufficient in paper production, bagasse is one of the few domestic fibers of suitable quality and quantity to support the necessary expansions.  - 10 - 4. Other Fibers and Conrclusions 2.22 Other fibers now used in India for paper manufacture include grass, straw, jute, cotton linters and waste paper. Although in certain locations, and under certain circumstances, expansions based on these materials will be possible, none is capable of producing paper in the quantities and of the quality required for India's growing domestic market. 2.23 From the foregoing it is apparent that future expansion of the industry is likely to be based on indigenous wood and bamboo in the few areas where such resources are still available, on plantation wood in areas where suitable land can be allocated for this purpose, and on bagasse, provided that the economics of fuel replacement can be sustained. E. Government Sectoral Development Policies 2.24 In the early 1970s there was a worldwide shortage of paper, and India faced extreme difficulties in importing newsprint, and even the marginal requirements of printing and writing paper, to supplement its domestic production. Private investment in the pulp and paper industry was lagging as a result of rising costs, shortages of accessible fiber, and Government controls on prices and production which had led to serious financial problems in the industry. Concerned that shortages of paper would constrain the country's educational and commercial development, the Government initi- ated a number of important actions aimed at stimulating the sector's growth. Speci- fically: (i) The wholly Government-owned Hindustan Paper Corporation Limited (HPC) was created with the objective of establishing new pulp and paper mills in the country. HPC has taken over (and is now expand- ing) one ailing mill from the private sector, and is implementing four other large (average capacity 80,000 tpy) projects, which will be coming on stream in the next 1-2 years. Of the 500,000 tpy of new capacity coming on stream in the next two years, HPC accounts for 320,000 tons or 64%; by 1983 HPC will be the largest single producer in the country;l/ (ii) In order to stimulate private sector development of mills using raw materials other than bamboo and wood, such mills have been exempted from between 33.3% and 75% (depending on the mill size, with the larger exemptions going to smaller mills) of the excise duties which would otherwise be levied on their production. Small mills are also relieved of the requirement to sell part of their printing and writ- ing paper production at concessional prices (para. 2.26); 1/ Implementation of these large projects by HPC has not been problem-free; cost overruns and delays are apparent in all four'projects. The Government is not considering further expansion of HPC's role until those projects now being implemented are in operation.  - 11 - (iii) In order to stimulate developments based on bagasse, a mill pro- ducing paper containing at least 75% bagasse will, for an initial period of three years beginning in December 1981, receive excise duty exemptions, and exemption from production and sales controls; and (iv) Mills designed to produce newsprint have been declared priority investments and hence allowed to import equipment at a concessional rate of duty. Furthermore, a 15% import duty (5% in the case of small newspapers) has been levied on imported newsprint. 2.25 These measures have resulted in a rapid expansion in the sector, as illustrated both by the substantial additions to capacity experienced in the past 2-3 years, and by those projected for the next several years. F. Production and Pricing Controls 2.26 In order to ensure availability of certain educational grades of paper, the Government has instituted some mandatory production requirements which affect most mills:l/ (i) Although the domestic price of most grades of paper is not now controlled by the Government and in fact is close to international prices (paras. 4.16 and 4.18), mills with a capacity in excess of 10,000 tpy of printing and writing paper, must make 30% of their production as white printing paper, to Government specifications, and deliver it to specified consumers of educational paper at a fixed price. This price is currently Rs 3,500/ton (US$438) which is about 50% of the free market price net of excise duty for similar grades; and (ii) These same mills must produce five other specified grades of print- ing and writing paper to the extent of an additional 33% of produc- tion, although this production can be sold freely on the open mar- ket. 2.27 Apart from white printing paper, paper prices are free to float with sup- ply and demand. Imports are strictly controlled, but the prices (including excise duty) prevailing in the Indian domestic market are about the same as the notional duty-free import parity prices (paras. 4.16 and 4.18). Excise duties are applied to domestic production at rates which generally range from 20-40% depending on the type of paper. However, no excise duty is applied to newsprint and, as noted in para. 2.24, certain small mills and mills using primarily bagasse as their fibrous raw material are exempt from some or all excise duty on printing and writing papers, as well as the mandatory production requirements noted above. 1/ These provisions do not apply to mills using "unconventional" raw materials (including bagasse) for at least 75% of their fibrous raw material, nor to new mills, for at least the first five years of operation.  - 12 - G. Bank Role and Involvement of Other Lending Agencies 2.28 To date the Bank has not financed any projects in India's pulp and paper sector. However, in addition to the Tamilnadu Project being considered here, the Bank has been actively involved in the preparation of a project in the Bastar region of Madhya Pradesh, and has helped to finance a detailed feasibility study for that project, through the Madhya Pradesh Forestry Technical Assistance Project (Credit 609-IN). Although the study has been completed, and further consideration by the Bank is planned, certain outstanding issues (in particular those related to the project's environmental and social impact) have yet to be resolved. The Bank is also proposing to undertake an overall review of the pulp and paper sub-sector in India, beginning early in 1982. 2.29 Given the growing shortage of traditional fibers for local paper manufac- ture, and the widening gap between demand and supply of major paper categories an- ticipated in the second half of the decade and thereafter (paras. 4.06 and 4.09), the proposed Project will provide a model for the successful transfer of bagasse from energy generation in sugar mills, to a more economic use in the production of paper, in line with Government objectives (paras. 1.02 and 2.24). Furthermore, if the process to produce newsprint is successful (paras. 5.02-5.08), it will provide a prototype for bagasse-based newsprint production, not only for India, but for the developing world in general. Thus, indirectly, it will both promote India's abili- ty to offer technical assistance, and the Bank's ability to assist other developing countries to develop bagasse-based newsprint manufacturing capacity. 2.30 Swedish bilateral assistance is helping in the modernization of India's sole newsprint mill, the HPC owned Nepa Mill in Madhya Pradesh (para. 4.08). The Canadian International Development Agency is identifying suitable areas for invest- ment. In addition, the UNDP and FAO are assisting the Government in the preparation of a detailed study of various fibrous raw materials for paper-making. III. THE SPONSOR A. Tamilnadu Newsprint and Papers Limited 3.01 The Project sponsor is Tamilnadu Newsprint and Papers Limited (TNPL) which is a Public Limited Company, promoted by the Government of Tamilnadu. TNPL was incorporated on April 16, 1979. The shareholders of TNPL will be the Govern- ment of Tamilnadu (47.4%), a consortium of Indian financial institutions (46.6%) (para. 1.01), two cooperative sugar mills who will be supplying bagasse to the Project (3.7%), and SPB (2.3%). The affairs of the Company are currently managed by a Board of five Directors, appointed by the Tamilnadu State Government, includ- ing the Managing Director of SPB who is Chairman of the Board of TNPL. The Board will be expanded by the addition of four Directors to be appointed by the Indian Financial Institutions, and two non-official individuals to be appointed by TNPL. The Executive Director is the Commissioner and Secretary of the Tamilnadu Govern- ment in the Department of Industry, and is also on the boards of a number of State industrial enterprises.  - 13 - 3.02 Efficient management of the new enterprise is clearly essential for successful project implementation and operation. The Government of Tamilnadu and IDBI have agreed that as principal shareholders of TNPL, they will take or cause to be taken all such action as may be appropriate to maintain the pro- fessional character of the management of TNPL. In this regard, both the Gov- ernment of Tamilnadu and IDBI have agreed that their respective equity share- holdings in TNPL will be maintained at less than 50%. The Chairman, the Ex- ecutive Director and the Project Manager have already been appointed (paras. 3.01 and 5.25), and are all experienced individuals of high professional stand- ing. Other professionals capable of fulfilling day-to-day management functions have been identified. Assurances have been received from the Government of Tamilnadu and IDBI that in addition to these organizational undertakings, they will assist TNPL in meeting its obligations with respect to the Project. B. Seshasayee Paper & Boards Limited 3.03 As previously noted (para. 1.03), most of the planning for the Project, as well as the feasibility study, was carried out for TNPL by Seshasayee Paper & Boards Ltd. (SPB). SPB operates successfully a 55,000 tpy paper mill at Erode in Tamilnadu. This company, which was established in 1960, is owned 30% by the Government of Tamilnadu through the Tamilnadu Industrial Investment Corporation, 20% by Indian financial institutions and the remaining 50% by over 12,000 private shareholders. SPB has been retained as Project Consultant to TNPL and, as noted above, the Managing Director of SPB has been appointed to the position of Chairman of the Board of TNPL. SPB will continue to be retained as Project Consultant to TNPL, and will act on its behalf through the implementation and the first five years of operation of the Project. A detailed description of the proposed arrangements for project implementation, including the roles of SPB and TNPL, is contained in Chapter V. 3.04 SPB established the first integrated paper mill in Tamilnadu, pulp- ing a mixture of bamboo, bagasse and mixed hardwoods. The plant has been ex- panded twice from its original capacity of 20,000 tpy and is now one of the most profitable pulp and paper companies in India. The most recent expansion was planned and implemented by a team of technical and financial executives, who now form the nucleus of the TNPL Project team. The expansion was complet- ed ahead of schedule in 1979, at slightly less than the budget estimate of some Rs 180 million (US$22 million equivalent). SPB has both the capability and the staff to provide adequate support to TNPL during implementation and operation of the proposed Project.  - 14 - IV. THE MARKET A. Historical Development of Supply and Demand 4.01 Domestic production of paper and paperboard over the past decade, by major grade groupings, is summarized in the following table: India - Annual Production of Paper and Paperboard ('000 tons) Printing & Wrapping & Paper- Specialty Year a/ Newsprint Writing Packing boards Papers Total 1970 37 445 162 128 24 796 1971 40 464 163 126 28 821 1972 42 444 198 133 28 845 1973 44 440 196 131 30 841 1974 55 482 185 140 30 892 1975 52 504 158 121 46 881 1976 53 526 199 137 18 933 1977 58 560 200 148 30 996 1978 56 610 210 156 30 1,062 1979 45 630 220 170 30 1,095 1980 b/ 48 640 230 180 30 1,128 Average annual rate of growth (%) 2.6 3.7 3.6 3.5 2.3 3.5 a/ Financial years ending March 31. b/ Estimate Source: Ministry of Industry. 4.02 From 1970 to 1975 production increased at an average annual rate of only about 2% (as shown in para. 2.08, only 16 small mills were constructed during this period). However, since 1975, as a result of the Government's programs to stimulate new capacity, production has been increasing at an average annual rate of 5.6%. As more new mills come on stream over the next three years, domestic production is expected to expand by about 10% a year.  - 15 - 4733 Apparent consumption (derived as production plus imports, less -xports), for 1974-1979 is shown in the following table: India - Apparent Consumpticn of Paper and Paperboard ('000 tons) Apparent Year a, :-oduction Iinports b/ Exports Consumption 1974 892 132 17 1,007 1975 881 149 12 1,018 1976 933 154 4 1,083 1977 996 152 2 1,146 1978 1,062 B9O - 1,252 1979 1,095 280 - 1,375 Average annual rate of growth (%) 4.2 16.2 6.4 a! Financial years ending March 31. b/ Newsprint represents about 90% of all imports. 4.04 This data shows the steady increase in paper consumption over the period (averaging 6.4% annually); the effect of the Government's ban on exports to try to ease the domestic supply situation; and the rapidly increasing level of imports (primarily newsprint) required to supply growing domestic demand. B. Printa-ig a tiriting Paper 4.05 Printing and writing papers represent about 45% of all paper consump- tion in India and 57% of domestic production. The Government considers this grade the most strategically important. Regulations require compulsory produc- tion of certain grades (para. 2.26), and the Government has, from time to time, imposed price con:rols as well as temporary restrictions on the use of paper for such non-essen.ial purposes as calendars, diaries, etc. At the present time, shortages of printing and writing grades are occurring, and the Government has been forced to make arrangements, through the State Trading Corporation, for im- ports. The imported paper is being distributed, through the marketing network of the Hindustan Paper Corporation, at a fixed price which is essentially the same as the free malrket price for domestically produced grades. 4.06 Actual growth in consumption during the period 1974-1979, was 5.5% per annum implying a demand elasticity with respect to GNP of about 1.7. This rate of growth was close to the official Government projections for the period. The offi- cial projections contained in the sixth Five-Year Plan, 1979-84, indicate an aver- age anriual increase in demand of 6.5% through 1984, falling to 5.8% in each of the  - 16 - subsequent five years (through 1989). These projections have been reviewed by Bank staff, and are realistic. Using them, and taking into account known capacity additions (including the Tamilnadu Project being considered here), the supply gap which will have to be met from either imports or other new projects, is shown below: India - Projected Supply Gap for Printing and Writing Papers ('000 tons) Effective Supply Year Demand a/ Capacity b/ Gap 1979 (actual) 640 630 10 1980 680 640 40 1981 730 690 40 1982 770 770 - 1983 820 800 20 1984 880 830 50 1985 930 845 85 1986 980 850 130 a/ Projected at 6.5% average annual growth through 1984 and 5.8% thereafter. b/ Including the Project. Calculated assuming projected start-up dates and normal production build-up to 90% of rated capacity (55% in the first year, 70% in the second year, 80% in the third year and 90% thererafter) for new projects now under construc- tion or in advanced stages of planning. 4.07 These projections indicate that as HPC's large new projects are brought on stream through 1982, supply and demand will remain more or less in balance. However, by 1984 (when the proposed Tamilnadu Project will be starting up), shortages will begin to recur, and capacity additions of at least 40,000 tpy will be required in each year after 1984, to keep domestic production capacity in line with demand. Because of the relatively long lead time required to establish a pulp and paper plant, new projects would now have to be in the advanced planning stage if they are to help close the supply gap projected for the mid-1980s. Apart from the Tamilnadu Project, the only substantial capacity addition planned is that of the Madhya Pradesh Pulp and Paper Project, which could add 50,000 tpy to printing and writing paper capacity in 1985 or 1986. Even if this timing is achieved (and assuming the Tamilnadu Project comes. on stream in 1984) no problem is foreseen in finding a domestic market for the 40,000 tpy of printing and writing paper to be produced by the Project. In the unlikely event that the market does not develop as quickly as envisaged, India is in a good position to resume exporting small quantities of surplus paper to neighboring countries.  - 17 - C. Newsprint 4.08 The present annual newsprint consumption in India is about 300,000 tons, while the effective capacity of the only operating newsprint mill in the country (the Nepa mill in Madhya Pradesh) is about 60,000 tpy. This mill is over 20 years old, and is currently able to produce only about 45,000 tpy, as paper and pulping capacities are unbalanced, and the power and steam supply is inadequate. A modernization program assisted by SIDA (para. 2.30) has almost been completed and production should expand to about 60,000 tpy by 1981. 4.09 Two newsprint mills (based on wood) are presently under construction. HPC's Kerala newsprint mill has a projected output of 80,000 tpy, and is ex- pected to start up in late 1981; Mysore Paper Mills, a public sector company of the Government of the State of Karnataka, is constructing a 65,000 tpy news- print mill which is also scheduled to come on stream towards the end of 1981. No official forecasts of newsprint demand have been prepared and the best es- timate of future growth is probably the 8% annual rate experienced over the past decade. However, even if a much more conservative growth rate of 5% is assumed, a substantial domestic supply gap will develop, as illustrated below: India - Projected Supply Gap for Newsprint ('000 tons) Effective Capacity b/ Supply Year Demand a/ Nepa Kerala Mysore TNPL Total Gap 1979 (actual) 301 45 - - - 45 256 1980 315 50 - - - 50 265 1981 330 60 10 10 - 80 250 1982 350 60 50 45 - 155 195 1983 365 60 70 60 - 190 175 1984 380 60 80 65 10 215 165 1985 400 60 80 65 25 230 170 a/ Projected from 1979 consumption at 5% annually. b/ Including the Project. Calculated assuming projected start-up dates and normal production build-up for the Kerala, Mysore and TNPL projects. 4.10 The new newsprint mills coming on stream will reduce imports required to meet domestic demand, but as the above table indicates there should be little difficulty in marketing the 50,000 tpy of newsprint from the TNPL Project, particularly as there is every indication that its quality will be superior to that from any of the other Indian producers.  - 18 - D. Marketing and Distribution 4.11 TNPL's printing and writing paper will be marketed through a network of agents, covering the entire country. This system is similar to that used by SPB to market the 55,000 tons of paper produced each year by its Erode Mill. Price lists are established on an ex-factory basis. Typically, the agent receives the order and passes it to the mill, where arrangements are made for direct shipment to the customer, who must pay the freight costs. Depending on the financial standing of the customer, immediate payment for the order in advance of shipment may be required, or credit for 30-45 days may be extended. The agent takes the risk of late payment or nonpayment in cases where credit is extended. Agents' commissions normally range from 3-1/2 to 10% of the ex-factory price. In the estimates prepared for this Project, a 5% commission on sales of printing and writing paper has been allowed. 4.12 The marketing of newsprint in India is controlled by the Government through the Registrar of Newspapers, which allocates Nepa's production and imports to newspapers, periodicals and magazines, in an attempt to distribute the various qualities equitably. Once the allocation has been made (generally annually), consumers must deal directly with the producer. Because of these arrangements, selling expenses for newsprint are minimal. A nominal allowance of Rs 50 per ton has been included in the estimates prepared for the Project. Most shipments will be made by rail, although trucking is envisaged to customers close to the mill. E. Prices 1. General Market Influences 4.13 About 75% of the world's pulp and paper is produced and consumed in Western Europe and North America, hence international prices are largely determined by supply and demand balances within and between these regions. Although prices have in general kept pace with inflation through the past decade, there is considerable fluctuation around the longer term trend caused by short-term imbalances. Frequently, the magnitude of price variations is greater for exports to developing countries; these markets are less significant from the Western European and North American pro- ducers' point of view and in times of even modest shortage, prices can rise by as much as 50%. Conversely, in periods of oversupply, producers may lower prices for developing country markets while simultaneously trying to hold price levels in their principal markets. In comparing domestic prices with import parity prices under these circumstances, it is important to determine whether the prices of imported paper at any given point in time are above, below or at the long-term trend levels. 4.14 The current situation in the market for printing and writing paper reflects a number of structural changes which are taking place in the industry. Many Scandina- vian producers of pulp have decided to increase the value added to their scarce wood resources by making paper rather than just pulp. Consequently, they are integrating downstream and building new paper mills at an unprecedented rate. Thus, while in 1979 the industry enjoyed one of its best years, by mid-1980 the first signs of an  - 19 - oversupply situation were in evidence, and the first 2-3 months of 1981 saw prices for printing and writing grades in European markets dropping by as much as 20%. The European CIF price for wood-free printing paper, for example, dropped from over US$800 in June 1980 to as little as US$700 in March 1981 although it has subsequently recovered substantially. The long-term trend price (in 1981 prices), and the price which also yields customary returns on investment, is of the order of US$800 per ton, which equates to a landed cost in India of US$950 (Rs 7,600) per ton. The North American market is virtually self-sufficient and the price for similar grades has not declined in parallel with that of the European market. The current deiivered price for printing paper in the US is about US$830 per ton, which is close to the long-term trend. 4.15 For newsprint, the situation is somewhat different. The long-term trend price and that necessary to cover costs and yield customary returns on investment is about US$550. However, current delivered prices in both the USA and Europe are only of the order of US$520. These prices are holding firm, despite the general downward movement in prices of some other grades. However, a number of new mills are under construction in the USA, and demand forecasts suggest a considerable excess of supply over demand in North America in the next few years. This will lead to more aggressive marketing of Canadian newsprint in foreign markets. Under these circumstances, the current price, which is about 5% less than the long-term trend price, is likely to continue to hold (in real terms) for the next several years. This price (US$520 per ton) equates to an import parity price in India of some US$700 (Rs 5,600) per ton. 2. Printing and Writing Paper 4.16 In India, the prices of most grades of printing and writing paper are freely set by the leading producers on an informal basis, at levels which cover costs and allow for nominal dividends of approximately 12%. The current list price for a standard creamwove grade is Rs 6,100 (US$760) per ton, which, with a 20% excise duty, gives an ex-factory price to the consumer of Rs 7,320 (US$915) per ton. This price (and the price for other grades of printing and writing paper) is close to the landed (duty-free) cost of equivalent imported grades (para. 4.14). For the proposed Project, TNPL has prepared a projected grade mix, which includes sheets cut to size as well as specialized grades of printing and writing paper. The ex-factor prices of these grades vary from about Rs 7,000-8,750 per ton, giving a weighted average price for the projected product mix, after deducting a 5% sales com- mission, of Rs 8,040 (US$1,005) per ton. These prices are based on paper produced from a normal (in India) fiber mix of wood and bamboo. Paper pro- duced from bagasse is likely to be of somewhat higher quality but no price differential on this account could probably be sustained and none has been assumed.  - 20 - 4.17 As noted previously (para. 2.26), the larger mills producing printing and writing paper must sell 30% of their production to designated (primarily educational) customers, at a concessional price of Rs 3,500 (US$438) per ton. However, as an incentive to use bagasse, any mill producing paper containing more than 75% bagasse is exempt from this requirement. More importantly, the incentives announced by the Government to encourage the establishment of bagasse-based projects also include exemptions from excise duty.l/ With these exemptions, paper from mills using bagasse as their primary fibrous raw material is sold at prices competitive with those of other mills, where a 20% excise duty is included, but some or all of the excise duty is not paid. The concessions are of benefit to all mills using bagasse as well as to the Project, the price of paper from these mills to the consumers is the same as from other types of mills, and close to the duty-free import parity price. The concessions thus amount to the removal of artificial price distortions rather than creation of protection. The weighted average net price for the proposed product mix (Rs 8,040 per ton - para. 4.16) is, therefore, used for both the financial and economic analyses of the project. 3. Newsprint 4.18 The current price of newsprint in India is not controlled, and fluctuates with international prices as described above (para. 4.13). A 15% customs duty was placed on newsprint imports in March 1981. The current average CIF price (before duty) of imported newsprint is Rs 5,030 (US$630) per ton. This price is based on imports from a variety of sources, includ- ing the USSR and Bangladesh, and relates to a lower overall blend of quali- ties than is found in European and North American markets. Because of this quality differential, the average duty-free price is about 10% lower than the current import parity price of Rs 5,600 (US$700) per ton (para. 4.15). The newsprint produced by the Project should be of higher quality than the newsprint imported from Bangladesh and the Soviet Union and could substitute for newsprint imported at Rs 5,600 per ton. Accordingly a duty free price of Rs 5,600 has been used in the economic analysis. In the financial analy- sis however, to be conservative, and since it is not clear to what extent the market is willing to pay for quality improvement, the prevailing duty free import price of Rs 5,030 has been used as a basis for calculating financial prices. After adding 15% duty and deducting Rs 50 per ton selling expenses (para. 4.12), the net ex-factory price of newsprint is Rs 5,740 per ton. 1/ The exemption currently amounts to 100% of excise duty up to December 1983, and is likely to be extended beyond that date. If there is no extension, the exemption would drop to 33.3% of excise duty. The financial implications of these policies are examined in the sensitivity analysis (para 7.08).  - 21 - V. THE PROJECT 5.01 The-Project consists of the establishment of an integrated pulp and paper mill, which, operating at 90% of design capacity, could produce 100,000 tpy of news- print or 80,000 tpy of printing and writing paper, or any intermediate combination of the two, using bagasse (about 80% overall) and eucalyptus (20%) as fibrous raw materials. Facilities to be provided include: bagasse depithing equipment and a chemical pulp mill for bagasse, chipping equipment and a chemical pulp mill for wood, full chemical recovery facilities, a bleach plant, a dual-purpose paper machine and associated stock preparation equipment, pollution abatement facilities, and some supporting infrastructure. In addition, coal handling equipment and coal-fired boilers will be installed and operated at five sugar mills, to release bagasse for use in the paper mill. At full production, a product mix of 50,000 tpy of newsprint and 40,000 tpy of printing and writing paper is envisaged. This mix is arbitrary, and can be adjusted to meet technical and market requirements.l/ The mill will be located near the town of Pugalur, in central Tamilnadu State, about 300 km southwest of Madras (IBRD Map 15475R). The site has good road and rail links with the rest of the country. A. Project Concept and Choice of Technology 5.02 The Project was conceived specifically to meet the Government's twin objectives of expanding production of both newsprint and printing and writing paper, and of utilizing bagasse as a fibrous raw material. Bagasse has been widely used to produce printing and writing paper in other parts of the world, and to some extent in India, but its use for the production of newsprint is relatively novel. The additional investment required to permit such production, is however only about US$8 million equivalent, or about 3% of the Project's total financing requirement. Further, such investment is concentrated in ancillary pulping equipment which is bypassed during the production of printing and writing paper, such that were it to fail, the Company could readily switch to printing and writing paper production. The process of switching from one grade to another takes only a few hours. Furthermore if the mill was totally unsuccessful in producing newsprint, this would be at the cost of only minor lost investment. The plant could concentrate on the production of printing and writing paper (80,000 tpy) for which a ready market exists (para. 4.06), and under which circumstances the projected financial and economic performance would be entirely satisfactory (paras. 7.08 and 8.03). Notwithstanding the existence of this secure fall-back position, particular attention was devoted to the technological aspects of bagasse based newsprint production, throughout Project preparation. 5.03 There is a long history of efforts to produce newsprint from bagasse. Experimental tests in the USA, France and the Caribbean, date back to the nineteenth century, but they generally involved full chemical cooks on bagasse from which the pith (the nonfibrous component) had not been removed and the results were less than satisfactory. Then, in the 1950s, trials of four processes using bagasse for newsprint production were initiated in the USA. All four processes involved chemical pulping 1/ However, these tonnages are contained in the Industrial Licence issued by the Government of India to TNPL and cannot be changed without prior approval of the Government.  - 22 - of bagasse, (from which little or none of the pith had been removed) and the addition of clay filler and titanium dioxide to the sheet, to improve opacity and to reduce printing show-through from one side of the sheet to the other. Although the results of these trials were mixed, they led to the construction of two commercial bagasse-based newsprint mills in the 1950s. A 100 tpd mill in Cuba, which depithed much of the bagasse and used large amounts of clay and other fillers, proved too expensive to operate and soon switched to the production of printing and writing paper. A second, 60 tpd mill in Louisiana, tried to operate without depithing but results were not encouraging. Subsequently, full depithing was added, and the mill switched to the production of printing and writing papers. Other trials for the production of newsprint from bagasse were carried out in Peru, Sweden, the USA, Germany and India. In most cases full chemical pulping was used but the products were less than satisfactory, usually because of high cost, low opacity and poor printability. 5.04 In the early 1960s, a new process was developed by Dr. D.S. Cusi of Mexico, which essentially involves the pre-impregnation and partial cooking of bagasse, andthe separation, by screening, of the pulp into two fractions. One fraction comprises fibers which have been chemically separated as a result of the cook, while the other consists of screen rejects which can be refined to provide the mechanical proportion of the pulp fed to the paper machine. The two components are recombined, chemical woodpulp (up to 20%) is added to improve strength, and small amounts of filler and mineral are added to increase opacity. Successful experimental runs were conduct- ed using this process, and two new newsprint mills, each of 100,000 tpy capacity (Sociedad Paramonga Ltda. at Trupal, Peru, and Mexicana de Papel Periodico near Vera Cruz, Mexico) have recently commenced operations. 5.05 In 1979, the mills in Peru and Mexico were visited by TNPL and SPB. The mill in Peru was found to be producing a satisfactory grade of paper for use as newsprint, using 85% bagasse pulp and 15% kraft pulp. However, because of equipment problems, neither the impregnation nor the fractionation--essential components of the Cusi process--were being properly utilized. The bagasse pulp was thus essentially a full chemical pulp, and so production costs were high. Equipment modifications are, however, in progress, which should enable the plant to operate according to its ori- ginal design parameters, and to produce a high-yield bagasse pulp at lower production costs. The Mexican mill is similar to the mill in Peru, but started up only in August 1979, and was not in full operation at the time of the TNPL Project team's visit. Nevertheless, it was apparent that the Mexican mill was encountering some of the same problems as the Peruvian mill in the impregnation and fractionation stages. In view of these problems, the mill is, for the moment, producing printing and writing paper alone, to meet a large order from the Mexican Government. Plans to overcome equip- ment deficiencies are under way. 5.06 The TNPL team held detailed discussions with mill personnel in Peru and Mexico, with the designer of the process, Dr. Cusi, and with engineers and equipment suppliers in the USA and Europe. As a result of such discussions TNPL concluded that in principle, the Cusi process is suitable for the production of newsprint and that most of the problems in both Peru and Mexico stemmed from lack of coordination among the various suppliers of know-how, basic engineering and equipment. Moreover, in  - 23 - discussions with one supplier it was postulated that one important modification to the Cusi process, separation by screening of the bagasse into two fiber components prior to any chemical treatment, would likely lead to reduction in process problems while still achieving the objective of a high-yield low-cost bagasse pulp. Subse- quent pilot scale trials carried out in the USA have demonstrated that this modifi- cation is effective, and gives important side benefits in the chemical recovery pro- cess. Trials are continuing with a view to further refining the design of the neces- sary equipment but the basic decision to proceed with this process has been taken. 5.07 The Bank has made an independent assessment of the technology, beginning with a review of the operation of the mills in Peru and Mexico. In September 1980, a technical team consisting of a Bank consultant, and Bank staff visited both coun- tries. The team's report (Project File, Item B4) concluded that on the basis of experience to date, it is technically feasible to make newsprint using a substantial proportion of bagasse pulp, that becau-se of equipment problems neither mill had yet produced a satisfactory high-yield bagasse pulp, and that under these circumstances newsprint production in both mills was not economic. In subsequent discussions, the Bank's technical staff has reviewed TNPL's proposals in detail, and particular- ly the changes proposed to overcome the problems experienced in the Peruvian and Mexican mills. Visits were made to Dalton, Massachusetts and Beloit, Wisconsin to monitor pilot-scale pulping and paper-making trials specific to the Project and carried out by the Beloit Corporation. These trials were considered successful and newsprint with good strength characteristics was produced. Opacity was slightly lower than international standards but was not significantly deficient and was ful- ly acceptable for the Indian market.l/ Although the newsprint ran well on the experimental paper machine at a speed equal to that proposed for the Project ma- chine, it is recognized that the bagasse pulp furnish has an inherently low wet web strength and this shortcoming could contribute to more paper breaks than nor- mal during commercial production.f The addition of 15% eucalyptus chemical pulp is proposed to improve wet web strength, but if this addition proves inadequate, the use of approximately 10% imported long fiber pulp would overcome the wet strength problem. 5.08 Nevertheless, as noted in para. 5.02 if problems persist, and satisfac- tory newsprint cannot be produced, the mill has been designed (and the market is available) so that production could be 100% printing and writing paper.2/ The justification for taking such risks as do remain is that if the technological problems can be successfully overcome, the potential benefits to be obtained by India and other developing countries with bagasse resources, are substantial. B. Project Description 1. The Mill 5.09 It is planned that the mill will produce: (i) 50,000 tpy of newsprint from 85% high-yield bagasse pulp and 15% hardwood chemical pulp; and (ii) 40,000 tpy of printing and writing paper from 75% bagasse chemical pulp and 25% hardwood chemical pulp. Bagasse chemical pulp an'U hardwood chemical pulp will be produced using the conventional sulphate process. High-yield bagasse pulp for newsprint production will be manufactured according to the prjcess described in para. 5.11. 1/ If considered essential, opacity could be substantially improved by using about 10% mechanical wood pulp. 2/ The financial implications of this technological fall-back position are examined in Chapter VII.  - 24 - 5.10 A suitable mill site has been acquired on the Cauvery River, near Pugalur, at distances ranging from 5 to 140 km from five sugar mills, whose combined crushing capacity is adequate to meet the bagasse requirements of the Project (paras. 5.12 - 5.15).l/ The minimum flow in the Cauvery is of the order of 15 cubic meters per second, some 15-20 times the mill process water requirements, and the Tamilnadu Government has confirmed that the Company will be permitted to draw water from the river to meet the full requirement of the Project and its housing colony. The mill's requirement for purchased power will be obtained from the 110 kilovolt (kV) substation at Pugalur. The population in Pugalur, and other towns in the area, will provide a stable work force for the mill, although certain categories of skilled and experienced workers will have to be recruited from other regions. Staff housing and other social infra- structure will be provided by the Project as further detailed in para. 5.23. 5.11 A detailed technical description of the plant is contained in the feasibility study prepared by SPB (Project File, Item B1). Briefly, bagasse will be depithed through a combination of moist and wet techniques to achieve maximum depithing efficiency, and subsequently washed, prior to storing. From storage piles, bagasse will be cleaned, compressed to a high consistency, partially refined, and separated into a coarse fraction (about 65%) and a fine fraction. The coarse fraction will then be cooked, washed and bleached following normal bagasse pulping and bleaching procedures. The fine fraction will be brightened, but not otherwise treated, and the two fractions will then be recombined. Wood pulp will be produced in batch digesters, bleached, and blended with the bagasse pulp in the stock preparation system ahead of the paper machine. The paper machine will be a dual-purpose, twin-wire unit, capable of producing either 300 tpd of newsprint or 240 tpd of printing and writing paper. Services within the mill will include water and effluent treatment plants, process steam and power supply systems, and maintenance and technical support services. All of the specialized bagasse pulping equipment, together with the paper machine and basic engineering services for the entire Project will be provided by a consortium of engineers and equipment suppliers. This package is central to the success of the Project, and thus the Project sponsors, with their consultants and advisors, have gone to great lengths in preparing the specifications for tender documents. Arrangements for the pro- curement of this package are detailed in para. 6.08. 2. Fibrous Raw Material Supplies 5.12 Bagasse will be obtained from five sugar mills located in the vici- nity of the paper mill site. Information on the location and capacity of these mills is shown on the following page: 1/ Three of the sugar mills are privately owned, the other two are coopera- tives under the control of the State Government.  -- 25 - TNPL - Location and Operations of Sugar Mills for Bagasse Supply Operations (1970-79) Location and Distance Cane Crushing Av. Annual Cane Crushed Company from Mill Site Capacity Period Av. Produc. (tpd) (days) (tpy) Salem Cooperative Mohanur (35 km) 2,500 193 310,000 Dharmapuri District Cooperative Palacode (140 km) 1,250 145 175,000 Sakthi Sugars Appakoodal (80 km) 4,000 254 610,000 Deccan Sugar and Abkhar Pugalur (5 km) 2,000 219 330,000 Parambalur Sugars Parambalur (120 km) 1,250 183 185,000 Total 11,000 1,610,000 5.13 On average, sugarcane yields about 30% bagasse and thus these five mills generate a total of some 485,000 tons of bagasse annually. The owners of the Sakthi mill wish to reserve 60,000 tons of bagasse annually for a small paper mill which they are planning to construct, but the balance of 425,000 tons annually, which is more than sufficient to meet the Project's requirements of 420,000 tons at full production, has been contracted for by TNPL. Although there is little apparent safety margin in the proposed bagasse supply, there are at least five more mills within a 150 km radius of the plant site, from which additional bagasse could be obtained if required. To assure this additional supply, TNPL has already entered into an agreement with a sixth sugar mill (Arigna Anna Sugar Mills Ltd.) for about 50,000 tpy of bagasse. It has no immediate plans to install the necessary boiler at this mill as for the first several years of operation TNPL will be operating at less than full production and the demand for bagasse will be correspond- ingly reduced. Hence, during this period, both the supply of bagasse and the mill's requirements will be closely monitored and, if necessary, arrangements made to take deliveries of bagasse from the sixth sugar mill or others. 5.14 TNPL has agreed to use its best endeavors to secure and maintain the necessary bagasse supplies. Agreements have been signed with each of the sugar mills for the supply of all of their bagasse 1/ to the Project provided that TNPL: (i) Installs the necessary new coal-fired boilers and associated equipment; (ii) Accepts the responsibility for procuring and delivering coal to these boilers, for operating the boilers, and thereby, for sup- plying steam to the sugar mills, as and when required; and (iii) Accepts the responsibility for handling bagasse at the sugar mills and transporting it to the paper mill. 1/ With the exception of 60,000 tpy from Sakthi (para. 5.13).  - 26 - The incentive for the sugar mills to go along with those arrangements is the prospect of a steady and reliable steam supply at less cost.l/ Crucial to the success of these arrangements is the ability of TNPL to ensure coal deliveries, discussed in paras. 5.17 to 5.19. Assurances that TNPL can continue operating in the event of a shortfall in bagasse, for whatever reason, are discussed in para. 5.19. 5.15 A Bank consultant has undertaken a detailed study of arrangements for the transportation of bagasse (Project File, Item B5). His study con- cluded that although rail transportation would be feasible for shipping bagasse from two of the sugar mills, the additional handling involved, and the potential for delay and disruption of deliveries, would cause excessive and unnecessary problems. The road network in Tamilnadu is well developed, and there is adequate local trucking capacity to handle the volume of bagasse envisaged. It has therefore, been decided that all bagasse will be delivered by road, using contracted carriers. 5.16 The wood required by the Project will be supplied from the existing plantations of the Tamilnadu Forest Plantations Corporation (TAFCORN) centered about 150 km from Pugalur. TAFCORN is a State Government corporation with some 32,000 ha currently planted with a eucalyptus hybrid. Eucalyptus pulpwood is grown on a seven-year cycle, and by 1986, annual production will have stabilized at a sustained yield of about 120,000 tons annually. The Project will require about 60,000 tons of pulpwood a year at full capacity, while SPB is currently consuming about 42,000 tons a year, from the same plantation. The Tamilnadu Government has directed that these two operations shall have first call on the resources of TAFCORN plantations. Bank staff have reviewed the supply capability of TAFCORN's plantations, and concluded that the margin of safety in the wood supply is adequate, especially since the State Forest Department has an additional 30,000 ha of land under productive eucalyptus plantations. The State Forests and Fisheries Department has issued an order allotting 60,000 tpy of eucalyptus hybrid wood to the Project, for 15 years beginning in the last quarter of 1983. The Government of Tamilnadu has undertaken to ensure that adequate pulpwood is supplied to the Project. 3. Coal and Lignite 5.17 At normal operating rates, the Project will consume some 150,000 tons of coal annually for its own purposes, and be responsible for delivering an addi- tional 20,000 tpy to contracted lime suppliers in the vicinity of the plant, and 160,000 tpy to the five sugar mills. In view of the chronic problems with the supply and transportation of coal in India, this aspect of the Project has been very carefully scrutinized by both the sponsors and the Bank. The delivery of coal in India is planned so that supplies to given consumption centers are made from designated sources. For consumers in southern India, the assigned source of supply is the Singareni group of collieries, located in Andhra Pradesh, about 1/ At present, although the bagasse is "free", the sugar mills must pay for the boiler maintenance and operation required to obtain steam.  - 27 - 1,000 km from Pugalur. However, production from this source is insufficient to meet all demands in the designated supply area, so deliveries have to be augment- ed with shipments from the coalfields of Coal India Limited in Bengal and Bihar, which are between 1,750 km and 2,200 km from the proposed mill site. 5.18 In 1979, TNPL approached Singareni Collieries with a view to securing the entire coal requirement of 330,000 tons annually from that source. In September 1980, after a number of discussions, Singareni confirmed that it would be able to supply coal to the Project, but only to the extent of 150,000 tpy. A letter of commitment has been signed for this amount. The Department of Coal in the Ministry of Steel, Mines and Coal has decided that Coal India Limited should supply the balance from one or more of the Talcher, Korba, Pench or Chanda coalfields, and the contract has now been signed with Coal India for the supply of 190,000 tpy from 1983 onwards. Nonetheless, in view of the fact that some industries are not receiving all of their contracted supplies of coal, TNPL has considered it prudent to make arrangments for an alternative fuel--lignite--to cover a part of the total fuel requirements, and the paper mill boilers are being designed to burn briquetted lignite as well as coal. Lignite is available in substantial quantities from a mine owned and operated by the Neyveli Lignite Corporation Ltd. (NLC) which is a Government-owned company. This mine is currently being expanded, and its capacity is expected to increase from 3.6 to 6.5 million tons of lignite per year by the end of 1982. This Company has briquetting and carbonization facilities within the mining complex with a capacity of 327,000 tons per year. The briquetting facilities were commissioned in 1965 and have sufficient spare capacity to meet a significant part of the Project's requirement. The plant is approximately 200 km from Pugalur (located in the State of Tamilnadu), and TNPL has obtained a letter from NLC for the supply of 60,000 tons of lignite annually, equivalent in terms of heating value, to almost one third of the total fuel requirements of the Project. The price of briquetted lignite is presently under review by NLC, but it is expected that it will be about 40% more expensive than coal (on an equivalent calorific basis). In view of the fact that its use may be unavoidable in times of coal shortage, the production cost estimates included in this appraisal report have been prepared under the assumption that 27% of the total fuel requirements would be supplied by lignite. 5.19 Coal demand at the TNPL mill itself will be uniform throughout the year; but as the working season of the sugar mills is only 7-8 months annually, the 160,000 tons of coal required by them must be made available during September to February. To facilitate coordination, TNPL has decided to schedule deliveries regularly over time, and to accumulate enough coal stocks in a dump at the paper mill site to meet the sugar mills' requirements during the crushing season. Deliveries from the coal fields to the coal dump will be by rail, and from the dump to the sugar mills, by truck. These arrangements are satisfactory. TNPL has agreed to use its best endeavors to secure and maintain the necessary supplies of coal and, in the event of any shortages, to procure lignite to cover the shortfall. The Government of Tamilnadu has agreed to expand wood deliveries to the mill to allow it to continue operating if for any reason coal supplies are disrupted  - 28 - leading to a shortfall in bagasse deliveries to the mill.l/ The Government of India has agreed to take all such actions as may be necessary to ensure that TNPL's annual demand for coal (and, if necessary, lignite) is met on schedule, and that in the event of any temporary disruption in the operation of the mill due to lack of fuel or technical problems with the furnish, TNPL is allowed to procure alternative fuel or to import pulp in order to continue operating eco- nomically. 4. Electric Power Supply 5.20 The mill turbo-generator will have a capacity of 17.5 MW, and the Project will normally generate about 75% of its anticipated 19 MW load. The balance will be purchased from the Tamilnadu Electricity Board (TNEB). Power in southern India has been in short supply in recent years, particularly during the summer, but with new capacity coming on line in the next 2-3 years, TNEB expects the region to be in balance, with even a slight surplus by 1984. In any event, the high proportion of self-generation should largely insulate the plant from upsets in the grid, and by careful control of loads, the plant should be able to operate for extended periods on its own power supply. The mill site is located about 1 km from the existing Pugalur substation, and TNEB will pro- vide a 110 kV line from this station to the mill's proposed 30 MVA transformer. Conversely with this capacity the plant will, if necessary, be able to operate entirely from the grid. 5. Environmental Impact and Protection 5.21 The Government of India has issued standards for industrial efflu- ents for discharge to inland surface waters. Insofar as effluent from a pulp and paper mill is concerned, the principal Government standards of concern are suspended solids (maximum 100 mg/1), pH (in the range of 5.5 to 9.0), 5-day BOD (maximum 30 mg/I), and sulphides (maximum 2 mg/l as sulphur). These are generally in line with international standards, and are satisfactory. Indian regulations permit some relaxation of these standards if the effluent is to be discharged to an irrigation canal. The mill will normally discharge to such canals, and the irrigation of up to 2,000 ha of dry corn land, which without irrigation is only marginally suited for agriculture, is a significant side benefit. However, to avoid any potential problems, the Project provides for full primary and secondary treatment of effluent to meet the more stringent standards for surface water discharge as detailed above. TNPL's proposals for the design of the mill's effluent treatment plant have been reviewed by Bank staff, and are satisfactory. 5.22 Air emissions in a pulp and paper mill are primarily from the di- gesting system and the chemical recovery system. In the case of the TNPL mill, there will also be potential for particulate and sulfurous emissions from the coal-burning power boiler. Process emissions are generally sulphur compounds (such as hydrogen sulfide, methyl mercaptan and others) and particulates. To 1/ Although technical considerations limit the extent to which wood can re- place bagasse, a bagasse shortfall of as much as 10% could be covered in this way, and wood supplies in Tamilnadu are adequate for this.  - 29 - reduce particulate emissions, the mill design allows for an electrostatic pre- cipitator on the recovery boiler, and multiple cyclones on the power boiler. To reduce odors, digester exhaust gases will be condensed, and the recovery boiler has been designed with an over-sized furnace. Some of the more recent advances in odor reduction technology (such as collection and incineration of noncondensible gases) have not been proposed for the TNPL mill, as the size does not warrant such treatment and the mill's relative isolation should ensure that any nuisance effects remain minimal. These arrangements are satisfactory. TNPL has agreed that the de- sign, execution and operation of the Project will be carried out with due regard to appropriate safety norms and ecological and environmental standards satisfac- tory to the Bank, and to establish and maintain adequate monitoring stations to gather information on meteorological conditions and base pollution levels. C. Infrastructure 5.23 Power, road and railway connections are required to support the Project, and provision for these items has been included in the project cost. The Govern- ment of Tamilnadu has agreed that by December 31, 1983, it will upgrade the road connection from Pugalur to the site and undertake such modification to the road as may be required to provide an efficient transport flow to the site. Further, the Government of India has agreed that it will take all necessary action to ensure that the railway spur from Pugalur to the plant site is completed by December 31, 1983. The Project will give direct employment to some 2,000 persons. TNPL in- tends to arrange housing initially for two-thirds of these workers, which, assum- ing that each household provides two workers, represents some 670 housing units of various categories. The Project will directly provide 70 houses for senior management and technical staff, together with a guest house, a hotel and recrea- tion facilities. The Project will also provide such services as water, sewage and electric power. For the remaining 600 houses, 25% of the estimated total cost of Rs 16 million (US$2 million equivalent) will be provided by the Project, and the balance arranged by the Government of Tamilnadu. The Government of Tamilnadu has agreed to make adequate arrangements in a timely manner to assist TNPL in the provision of housing for its staff which is not provided under the Project. Pro- vision has also been made in the financial projections for a continuing program of house building after the mill is in operation, to gradually expand the propor- tion of staff accomodated by the Company. D. Project Implementation and Management 5.24 An organization has been developed for project implementation which includes: (i) a project implementation group within TNPL; (ii) a foreign con- sulting engineering company with overall responsibility for basic engineering and project coordination; and (iii) an Indian consulting engineering company which will undertake detailed design engineering. 5.25 The nucleus of the TNPL project implementation group, consisting of senior SPB project engineers, is already in place and has been largely respon- sible for project preparation. A project manager (who will subsequently become General Manager of TNPL) has been appointed. As the owners' representative, this group will be responsible for the preparation of tender documents, evalua-  - 30 - tion of tenders, day to day supervision of construction, training, and start-up coordination. The group will also make recommendations to senior TNPL management concerning such matters as financial arrangements, award of contracts, and re- cruitment of personnel. The contract between SPB and TNPL which defines SPB's functions and responsibilities in the Project implementation group, has been reviewed by Bank staff,and is satisfactory. The contract reflects the close own- ership and working relationship between SPB and TNPL, in that fees, bonuses and penalties are somewhat lower than might otherwise be anticipated.l/ The contract contains a detailed description of the services to be performed, and the respon- sibilities of SPB. 5.26 In order to ensure overall coordination of process design and Project implementation, the consortium for the supply of the main package of equipment includes a consulting engineering company with international experience in the design and construction of bagasse-based paper projects. This company will be responsible for the overall basic design engineering of all aspects of the Pro- ject, supervision of detailed engineering design; and monitoring of Project scheduling and construction. Thus Project design will be entirely the respon- sibility of this consulting engineering company, and while TNPL (with SPB) will be in charge of day-to-day supervision of construction activities, overall re- sponsibility for construction and erection will lie with the engineering con- sultant. Detailed design will be undertaken by competent Indian design engi- neering firms under the supervision of the consortium's consulting company. TNPL has agreed to provide details concerning the arrangements for the contracting of this work, and to submit the contract to the Bank for review and approval prior to its signing. 5.27 TNPL and SPB have signed a contract acceptable to the Bank covering the implementation and start-up phases of the Project. During the period of Project Implementation, TNPL, with assistance from SPB will recruit experienced technical and managerial staff for the operation of the plant. TNPL has also entered into a Technical Assistance Agreement with SPB to provide the required technical and operational assistance during the first five years of production. The terms and conditions of this Agreement have been reviewed by the Bank and are satisfactory. TNPL has undertaken that this Agreement will be maintained in effect through at least the first five years of operation. 5.28 A Project implementation schedule has been prepared and is illustrated on the following page. A contract for the major package of engineering services and equipment to be procured through a consortium was executed in June 1981, and site preparation commenced in August, 1981. Retroactive financing of US$10 million equivalent is proposed (para. 6.08) in order to cover the initial down payment for the consortium package and so to enable the Project to proceed as scheduled. Preparation for procurement commenced in January 1981, and assuming that commercial production from the Project starts in July 1984, this represents a total implementation time of 42 months, which is realistic. 1/ The daily rates quoted for engineers and staff include a 25% fee element. If the Project is completed on schedule, TNPL will pay SPB a bonus of Rs 1 million for every month of early completion, subject to a maximum bonus payment of Rs 2 million.  -- 31 - INDIA - TAMILNADU NEWSPRINT PROJECT PROJECT IMPLEMENTATION SCHEDULE 1980 1981 1 782 1983 f 1984 Month O N D J F M A H J J A S n N D J F H A M J J A S 3 N D J F V A M J J A S O N DJ F- r A M J Arrarngins Financina lite Acouisition flo,errn.ent Approvals L,lccticn of Consortiuma Posic Er,einreoring - Selectio. of Detail Engitre.rs Site Frepqration Detailed Engineering ..=.=. =.. .=.== Ci\vil Construrtion Order Placement Ti e-critical Eouipment -- alar Mill Boilers - Other Major Eouipment .... MInor Enoup . ent .... .... Eao4trmfer,t Delivery - Tire-critiral Eauipment = - Suaar Mill [Uiler" - * -===:== = - Other Major Eauipment - Minor E,iment Erection' - Recovry iloiler - Turbo Generator - FaFsr Mill - Fo.er Boiler - Su5ar Mill Boilers .