India - Jharia Coking Coal Project

Document of The World Bank FOR OMCIAL USE ONLY Repet No. P-3939-1-I REPORT AND RECOHMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BALIK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN ANY AMOUNT EQUIVALENT TO USt248 MILLION TO INDIA FOR THE JHARIA COKING COAL PROJECT February 5, 1985 lTab doeument h a resticted distnbot. ad MY be md by recpiet oly in the perfrnmance Of taen .ulkil dues is .ognl mu no odewise be dicold wifth Wodd Bak atoriu i  CURRNC KODIVALENTS (As of February 4, 1985) US$1.00 Rs 12.75 Rs 1.00 US 0.78 Rs 1 million US 78,000 The US Dollar/Rupee exchange rate is subject to change. Conversions in the Staff Appraisal Report were, except as otherwise noted, made at the rate of US$1 to Rsl2. FISCAL YEAR April 1 - March 31 ABBREVIATIONS BCCL - Bharat Coking Coal Limited CCL - Central Coalfields Limited CIL - Coal India Li-ited CHPDI - Central Mine Planning and Design Institute GOI - Government of India ICB - International Competitive Bidding IISCO - Indian Iron and Steel Company ODA - Overseas Development Administration SAl!. - Steel Authority of India Limited SCL - Singareni Collieries Limited  FOR OFFICAL USE ONLY JHARIA COKING COAL PROJECT LOAN AND PROJECT SUMNARY Borrower: India, acting by its President. Beneficiary: Coal India Limited (CIL). Amount: USS248 million. Terms: Repayment over 20 years, including five years- grace at the Ba-k-s standard variable interest rate. On-lendina Terms: GOI to CIL for a period of 15 years, including five years- grace, at an effective interest rate of not less than 13.25Z per annum. CIL to Bharat Coking Coal Limited (BCCL) for a period of 15 years, including five years of grace, at an effective interest rate of not less than 13.25% per annum. Proiect DescriDtion: The objective of the project is to increase the supply of coking coal to the Indian steel sector. It will also improve the average quality of coking coal supplies and thus contribute to greater efficiency in the use of indigenous energy resources. The project consists of the develop- ment of one open-pit mine at Jharia and one under- ground mine at Pootkie-Bulliary (with design capacities of 2.5 and 3.0 million tons of raw coal per annum, respectively), two coal vasheries, and other associated facilities in the Jharia coal- field in the State of Bihar. The project will also support institutional development in the areas of underground mine design and operating practices, shaft sinking and sand transportation, as well as project management. Furtbermore, it will address the sectoral issue of coal quality and facilitate continuation of a dialogue on coal transportation and distribution, producer-consumer linkages, and investment planning. The project faces minimal technical risks and a possible financial risk is mitigated by GOI's commitment to a pricing policy which ensures the continued viability of CIL. | This document has a restricted distribution and may be used by recipients only in the performance of their official dutis Its contents may not otherwise be disclosed without World Bank authorization-  Estimated Costs: USS millions local Foreeian Total Equipment and Spares 77.3 132.8 215.5 Land and Civil Works 47.7 2.5 50.2 Washery 76.2 31.8 108.0 Engineering and Training 5.7 - 5.7 Pre-operating Expenditure 9.0 0.6 9.6 Technical Assistance - 2.0 2.0 Duties and Taxes 94.5 - 94.5 Base Cost 310.4 175.1 485.5 Physical Contingencies 24.2 10.4 34.6 Price Escalation 100.2 58.1 158.3 Working Capital 10.5 1.i 11.6 Total Project Cost 445.3 244.7 690.0 Interest During Construction 6.0 - 6.0 Front-end Fee on IBRD Loan - - Total Financing Required 451.3 244.7 696.0 =====_ Financing Plan: Equity Government of India , 215.8 - 215.8 CIL Cash Generation 132.2 - 13i.2 Total Equity 348.0 - 348.0 Long-Term Debt Government of India 85.8 - 85.8 IBRD 17.5 230.5 248.0 U.K. (ODA) - 14.2 14.2 Total Debt 103.3 244.7 348.0 Total Financing 451.3 244.7 696.0  -iii- Estimated Disbursements: USS million FY86 FY87 FY8s FY89 FY90 FY91 FY92 Annual 0.6 54.6 53.6 71.8 22.4 36.2 9.4 Cumulative 0.6 55.2 108.8 180.0 202.4 238.6 248.0 Rate of Return: About 21%. Appraisal Report: No. 5336-IN, dated February 7, 1985. -~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~-  INTERNATIONAL BANR FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO INDIA FOR THE JHARIA COKING COAL PROJECT 1. I submit the following report and recommendation for a proposed loan to India in an amount equivalent to US$248.0 million, to accelerate the expan- sion of coking coal production by developing a large scale open-pit and under- ground mines to feed steel plants. Amortization would be over 20 years, including five years of grace at the standard variable interest rate. The Government of India (GOI) would onlend the proceeds of the proposed loan to Coal India Limited (CIL) for 15 years, including five years of grace at an effective interest rate of not less than 13.25% per annum. CIL would make available the proceeds of the proposed loan to Bharat Coking Coal (BCCL) for 15 years, including five years of grace, at an effective interest rate of not less than 13.25Z per annum. GOI would bear the foreign exchange and interest rate risks. PART I - THE ECONOMY 1! 2. An economic report, "Situation and Prospects of the Indian Economy - A Medium Term Perspective" (4962-IN, dated April 16, 1984), was distributed to the Executive Directors on April 23, 1984. Country data sheets are attached as Annex I. Background 3. India is a large and diverse country with a population of about 750 mil- lion (in mid-1984) and an annual per capita income of US$260. The economy is dominated by agriculture which employs more than two-thirds of the labor force. However, the land base is not sufficient to provide an adequate livelihood to everyone engaged in agricultural activities, especially those who own little or no land. Growth of value-added in agriculture - 2.2% since 1950151 - has been slower than growth of industrial value-added (5.3% per annum). As a result, there has been a gradual decline in the share of agriculture in CDP (at factor cost) from 52% in 1950/51 to about 33% in 1981/82, while the share of industry rose from 2O% to around 26%. But industrialization has not been rapid enough to absorb the growing labor force, or to bring about a rapid economic transformation, with significantly higher productivity and income levels. As a result economic growth has been slow over the past three decades, averaging about 3.6% per annum since 1950/51. 4. Nevertheless, there has been steady progress, with per capita income _ising by about 1.4% per year in the period 1950 to 1980. Despite the large population base and its relatively rapid growth, India has been able to eliminate persistent dependence on foodgrain imports through significant improvements in agricultural production. Savings and investment have increased markedly since 1950/51: the gross national savings rate more than doubled from 10.8% of GDP (at factor cost) to 22.7% in 1983/84, while the gross domestic investment rate rose from 12.5% of GDP to 24.82 in 1983/84. Foreign savings 1/ Parts I and II of the report are similar to Parts I and II of the President's Report for the Bombay Urban Development Project (No.P-3920-IN), dated January 7, 1984.  -2- (balance of payments deficit on current account) have never financed a major portion of domestic investment: a peak of about 20Z was reached during the early 19609. Currently, foreign savings account for about 8X of investment. External assistance has been low both as a percentage of GDP and in per carita terms, never rising above 3% of GDP and averaging below 1% for the past five years. Net use of foreign savings has never risen above 3X of GDP, and presently stands at 2.1Z. 5. Before the 1970s, India placed relatively less emphasis on export promotion and more on import substitution. The volume growth of exports between 1950/51 and 1969/70 averaged only 2.2% per annum, while the volume growth of imports over the same period was 4.3%. In the early to mid-1970s, however, India's terms of trade, which had remained roughly constant during the 1960s, deteriorated sharply. In response, the Government introduced various policy measures designed to stimulate exports. As a result, the volume of India-s exports grew on average about 7.3Z per annum for the 1970s as a whole, a performance which demonstrates that sustained rapid growth is possible. While expanding world markets, particularly in the nearby Middle East, contributed to this growth, liberalized access to imported inputs and more effective export incentives played a major role. 6. Moving into the second half of the 1970s, the Indian economy was buoyed by higher levels of investment and an expanding level of foodgrain output. As a result, growth in real GDP and in agricultural and industrial value-added substantially exceeded the historical 30-year trends (paragraph 3) averaging 5.3Z, 3.3% and 8.1%, respectively, during the 1975/76 to 1978/79 period. In 1979180, however, this momentum was broken when the worst drought in recent years, combined with a doubling of international oil prices and domestic supply shortages, led to a sharp fall in foodgrain production, a decline in GDP, and the opening up of a relatively large trade deficit. Severe inflationary pres- sures also emerged after several years of virtual price stability. These setbacks coincided with the preparation of the Sixth Five-Year Plan which laid down a program of adjustment that aimed at improving the trade deficit, remov- ing infrastructural bottlenecks and ensuring price stability with an overall growth of the economy of 5.2% per annum. Recent Trends 7. Despite the effects of two severe droughts in 1979/80 and 1982/83, India's economy in the early 1980s continued to grow at the faster pace of the second half of the 1970s. Between the two droughts (from 1979/80 to 1982/83), GDP growth averaged almost 5% per annum, while between the two recovery years (from 1980/81 to 1983/84), it was 4.5Z per annum - substantially higher than India's long-term growth rate of 3.6%. Continued rapid economic growth has resulted from a development strategy which includes higher investment levels and liberalized policies on imports, industrial licensing, prices, and commer- cial borrowing. These policies, by easing constraints on the supply of infrastructure and basic commodities, were a determining factor in the improved performance of the economy and the industrial sector. This overall improvement in performance, combined with a more restrictive monetary policy in 1981182 and 1982/83, resulted in a sharp decline in the rate of inflation. The growth rate of wholesale prices declined from over 18 in 1980/81 to only 2.6% in 1982/83, but rose to over 9% in 1983/84, mainly due to the effect of the 1982/83 drought on food prices. Further improvements in the policy environment will be required to maintain these higher levels of economic growth and investment  -3- without putting undue pressure on the balance of payments or reviving infla- tionary expectations. 8. Economic growth in the early 1980s has not been steady, mainly because of the effect of uneven rainfall on agricultural production during the period. In 1980/81 and 1981182, the economy substantially recovered from the 1979 drought, with real GDP groving by 7.6% and 5.3%, respectively. While industrial output expanded by 4% in 1980/81 and 8.6% in 1981/82, recovery was particularly robust in agriculture where normal weather helped output to rise by more than 15Z and 5.5%, respectively. The supply of power, coal, and rail transport, already improved in 1980/81, was further expanded in 1981/82, recording growth rates of about 10Z, 9.6Z and 12.5Z, respectively. This over- all improvement in the Indian economy was halted in 1982/83 by a severe drought in mid-1982 which reduced agricultural production by 4Z, brought down the GDP grovth rate to 1.8%, aud put further strains on the already difficult balance of payments and domestic resource situation. The timely implementation of various economic policies relating to foodgrain imports, procurement and distribution, and the allocation of power to irrigation pumps mitigated the othervise very distressing effects of the poor monsoon. The economy recovered in 1983/84, led by a robust agricultural sector - GDP grew by about 6.5Z to 7% with agricultural production growth in the 92-10: range and industrial growth of 4.5%. The major factors contributing to the good economic performance during 1983/84 were the excellent monsoon, combined with adequate agricultural policies and programs, and satisfactory performance of the coal and transport sectors. The power sector, however, emerged again as a constraint on higher growth, especially in industry. 9. Agricultural production rebounded strongly in 1983/84 in response to the monsoon, improved use of inputs ard continued expansion of irrigation. Overall foodgrain production rose by 1OZ-12Z over the previous year, reaching a new record of 142-144 million tons, a substantial increase over the previous peak of 133 million tons in 1981/82. Corrected for weather variations, foodgrain production continues to grow at a trend of 2.6Z per annum--sufficient to maintain a broad balance between supply and steadily increasing domestic demand. Nonetheless, the balance remains delicate, and the need for foodgrain imports to maintain consumer supplies or adequate buffer stocks could arise from time to time. Thus, adequate management of foodgrain stocks and programs to expand irrigation, strengthen extension and encourage the efficient use of other agricultural inputs continue to receive high priority. 10. Basic infrastructure services bad a mixed performance in 1983/84, partially because of sluggish demand from industry during the first half of the year but also due to a failure to maintain the productivity gains of 1980-82. Electricity generation grew only by about 3.7% due to low reservoir water levels during the first half of the year, delays in the comissioning of new capacity, and a deterioration of capacity utilization in thermal plants. As a result, power generation was about 11.5% below requirements and con- stituted a major bottleneck in the economy. Key industries which were adver- sely affected by power constraints included steel, fertilizers, cement, and coal. To improxe performance in the power sector, the Government recently increased incentives for higher labor and management productivity in thermal plants. Railway freight traffic, measured in ton-kms, grew by only 0.5% in 1983/84, reflecting sluggisb demand. Coal production increased by about 6.5% in 1983/84 reaching 139 million tons. When combined witb stocks already avail- able this level of production was sufficient to meet the relatively slow demand  -4- growth. Infrastructural constraints would have emerged much more sharply had the pace of industrial growth and demand been more rapid. It is therefore critically important that Irlia maintain the pace of investment in these key sectors, mobilize sufficient resources to do so, and implement programs to enhance productivity. 11. The Indian economy has reverted from a situation of resource surplus in the late 1970s to an aggregate resource deficit. The gap between gross invest- ment and national savings increased from negligible levels during the late 1970s to an average equivalent to 2.1% of GDP in 1980-84. India's gross national savings rate, which averaged 22.6Z of GDP in the last four years, is high by any standard, particularly considering India's low income and the large proportion of its population below the poverty line. The scope for a substan- tial increase in the savings rate is therefore quite limited. If India is to maintain investment at about 25Z of GDP, a major effort will be required to raise additional domestic resources particularly in the public sector. Future increases in savings will depend heavily upon the enhanced profitability of public sector enterprises vhich would require better utilization of capacity, more efficient operations and adequate pricing policies. This would also allow a marginal decline in the use of foreign savings from the recent 2.1Z-2.3Z of GDP to 1.5%-1.8X, to ensure a sustainable external debt service burdan. 12. India's external resource position has changed notably since the late 1970s. The current account balance, which recorded surpluses trom 1976/77 to 1978/79, reverted to deficits averaging US$3.5 billion and 2.1% of GDP during 1980/81 to 1983/84. Several developments contributed to these relatively larger current account deficits. First, the terms of trade deteriorated sharply in 1979/80 due to the second round of oil price increases and continued to move against India during the first three years of the 1980s. Second, a more liberal import policy towards industrial inputs was pursued. Third, net invisibles declined as travel receipts fell off, workers' remittances stagnated (reflecting slower development activity in the Middle East), and payment of interest on higher levels of foreign debt increased. Faced with severe infrastructural constraints and a deterioration in its balance of payments, India initiated an adjustment program in 1980/81 designed to raise the growth rate from its historical level of 3.6% to 5.2% while adjusting the country's external balance to the adverse price developments in the world markets. The main elements of this strategy, which is being successfully implemented, are export promotion, import substitution where economically justifiable, implemen- tation of a coherent energy policy designed to meet the energy needs of the economy while curbing the growth of oil imports, and continued movement toward a more liberal import policy aimed at providing producers with access to inputs for higher capacity utilization, greater efficiency, improved technology and capacity expansion. 13. A positive development in India's balance of payments is the reduction in the trade deficit from US$7.7 billion in 1980/81 to US$5.9 billion in 1963/84 despite unfavorable world market conditions and import liberalization. Export volume growth and import substitution of oil and petroleum products, metals and fertilizers more than offset the substantial increase in "other" imports. These "other" imports consist mainly of industrial imports and capi- tal goods which historically have been in chronic short supply and which are of critical importance to capacity utilization, product quality, and plant modern- ization and expansion. A major factor in the decline of the trade deficit was the lover net import bill for petrcleum, whicb dropped from US$6.7 billion in  -5- 1980/81 to US$3.4 billion in 1983/84 in response to a successful oil develop- ment program that reduced import needs and allowed crude oil exports, which totalled about US$1.5 billion in 1983/84. These structural changes in the balance of payments are to a significant degree the result of India's develop- ment and adjustment efforts over the past three years. It is expected that the balance of payments will continue to be under strain for the next several years, since the adjustment strategy will continue to require high levels of imports. 14. Even assuming a favorable export performance, India will need external capital flows to augment its own resources for the foreseeable future, given the low per capita income level in the country, the already high savings rate, and the structural adjustment process. Faced with a growing need for external capital inflows and stagnation in the availability of concessional assistance, India decided at the start of the Sixth Plan to increase borrowings from the International Monetary Fund (INF) and commercial banks to substantial levels. In the period covering the fiscal years 1981/82 to 1983/84, India drew SDR 3.9 billion from the Extended Fund Facility of the IMF. In addition, India bor- rowed significant amounts on commercial terms from the Euro-dollar market and increased the use of suppliers' and export credits. In the period 1980-84, India contracted commercial loans totalling over US$6,000 million and suppliers' credits of over US$1,000 million. The bulk of this borrowing has been used for specific development projects in the public and private sector (mostly for petroleum exploration and development, steel, power, aluminum and shipping). India's favorable debt service position and the nature of its borrowings, for project-related purposes instead of direct balance of payments support, enabled it to tap commercial capital markets at favorable spreads. This laiger commercial borrowing and transfer of funds under the arrangement with the IMF has stemmed the use of foreign exchange reserves which had fallen to less than four months of import coverage in 1981/82. Development Prospects 15. The experience of recent years illustrates that India has the capacity to grow and develop at a more rapid pace. Although the industrial sector is small compared to the size of the economy, it nevertheless is large in absolute terms and has a highly diversified structure, capable of manufacturing a wide variety of consumer and capital goods. Basic infrastructure -- irrigation, railways, telecommunications, power, roads and ports -- is extensive compared to many countries, although there is considerable need for additional capacity as well as improvement in the utilization of existing capacity. India also has a wide range of institutions capable of fostering development and is well- endowed with human resources. Finally, India has an extensive natural resource base in terms of land, water, and minerals (primarily coal and ferrous ores, but also gas and oil). With good economic policies and reasonable access to foreign savings, India has the capability for managing these considerable resources to accelerate its long-term growth. 16. The Government is currently preparing the Seventh Plan which will lay down the development strategy for 1985/86-1989/90. This strategy is expected to continue the emphasis of the Sixth Plan on agriculture, energy development, export promotion, domestic import substitution where economically justifiable and the removal of infrastructural bottlenecks. Overall Sixth Plan performance has been encouraging, with aggregate real investment projected to be about 30% higher than in the period 1975-80--a creditable performance indeed. The Sixth  -6- Plan expenditure targets, however, vill not be fulfilled as resource mobi- lization by the public sector will fall shor' of the financing requirements of planned public investment. Actual aggregate real investment is projected to be about 7% below the original target for the period 1980-85, private investment being 5% to 10% higher and public investment about 20X lower in real terms than actually projected. In terms of meeting Plan expenditure targets, the perfor- mance of the Central Government is considerably better than that of the State Governments. The Central Government's Plan outlays are likely to reach about 80% to 902 of the original Plan allocation in real terms, while the States' will probably achieve only about 50% of their targets, due principally to shortfalls in resource generation. Bottlenecks in key sectors such as power, transport and irrigation are likely to persist as a consequence of real invest- ment shortfalls relative to original Plan allocations. 17. Although Sixth Plan expenditure targets will not be met, India's capi- tal formation ratee have increased from 22.6% in 1975-80 to 24.7% of GDP in 1980-84. Recent higher capital formation rates are encouraging for future income growth, but returns to investment have so far been relatively low. Much of this phenomenon relates to India's stage of development, in which a large and growing proportion of investment has been needed to build up basic infrastructure services which have inherently high capital-output ratios. However, there is scope to reduce capital-output ratios through improvements in efficiency. As discussed in greater detail in our recent economic reports, performance in the basic service sectors can be improved through better plan- ning and management, thus leading to higher productivity and capacity utiliza- tion throughout the economy. At the same time, programs to expand domestic capacity are vital. In the case of tradeable commodities like coal, steel and cement, this is justified on the grounds of comparative advantage. For sectors such as irrigation, power and transportation, expansion of planned capacity in accordance with the requirements of the rest of the economy will be vital for sustained growth. 18. Under the Sixtb Plan, India has an ambitious oil development program backed by substantial financial commitment. Performance under the program has been excellent with real investment and oil production levels running well ahead of Plan Targets. In 1981, and again in early 1983, resources for exploration and development were raised by successive price increases for domestic crude and products. While the gap between domestic consumption of petroleum and production remains large, India's dependence on oil imports dropped from 63% of consumption in 1979/80 to about 41% in 1983/84 and is expected to decrease to about 33% of consumption by 1984/85. The rapidly expanding level of exploration activity, combined with the possibilities for accelerated offLake from known fields, offers much encouragement for India's longer-term energy prospects. At the same time, the increases in domestic petroleum prices have helped encourage conser-ation and slow demand growth. 19. India's development prospects over the next few years will hinge on the extent to which the economy can be brought into both internal and external balance, while at the same time achieving more rapid growth than in the past. This will require the continuation of the current development strategy which assigns high priority to export promotion, public finance discipline, improve- mene of economic efficiency, and investment in infrastructure, supported by adequate flows of external borrowing and aid. In the short term, a relatively large level of external borrowing, including an increased emphasis on commer- cial borrowing, will be necessary to cope with the balance of payments conse-  -7- quences of such a growth strategy. However, an important element in providing India with the capacity to adjust flexibly will be adequate flows of conces- sional assistance since India is still a very poor country with a large rural sector and enormous investment requirements for human development and basic infrastructure. Although India is currently in a position to increase borrow- ing on commercial terms from the very low levels of the past, there are, of course, limits beyond which India will choose to sacrifice growth objectives rether than accept debt on unfavorable or unmanageable terms. Nevertheless, with a more open trade policy and expanded efforts to remove constraints on the growth of productive capacity, supported by adequate mobilization of both foreign and domestic savings, India is demonstrating that it can sustain a rate of growth closer to 5.0X per annum than to the long-run trend of 3.6% per annum. If the rate of population growth can be brought to below 2.0X per annum, a 5.0% growth rate would mean E doubling of the trend rate of growth of per capita income of 1.4% per annum. Success in these efforts would make a significant difference to the prospects of easing poverty in India. 20. A large and growing population and severe poverty underline the need to accelerate India's development efforts. The 1981 Census indicated there was no decline in the rate of population growth, which remained about 2.2X per annum in the 1970s despite a measurable decline in fertility rates. The population growth rate failed to decline in the past decade due to a reduction in the infant mortality rate and an increase in life expectancy, reflecting larger availability of food and health services. While this is a welcome development, it implies a greater strain on the economy and re-emphasizes the need for continuing efforts to strengthen the health and family planning programs in a broad range of activities and services. These efforts are given high priority in the Sixth Plan, which aims at a rise in the proportion of protected couples in the reproductive age group from its estimated 1979/80 level of about 23% to over 35Z by 1984/85. The Government is reviewing its population policy for the Seventh Plan, with indications of a determination to retain the emphasis on the implementation of family planning, health, education and literacy programs aimed at reducing fertility rates. 21. Reduction of poverty remains the central goal of Indian economic and social policy. More than one-third of the world's poor live in India, and more than 80% of the Indian poor belong to the rural households of landless laborers and small farmers. About 51% of the rural population and 40% of the urban population subsist below the poverty line. Significant reductions in poverty will depend primarily on an acceleration of economic growth, particularly in agriculture, combined with effective implementation of poverty alleviation programs. India's poverty alleviation strategy appropriately recognizes that production-oriented programs, which aim at accelerating the overall pace of economic growth, and poverty alleviation programs, targetted at those least able to participate in the general growth of the economy, can be mutually reinforcing rather than substituting for each other. Major poverty programs operating on a nationwide basis at present include: the Minimum Needs Program (MNP), the Integrated Rural D_,velopment Program (IRDP), and the National Rural Employment Program (NREP). The IRDP and NREP are targeted programs aimed at increasing the incomes of the poor rapidly, either through the transfer of productive assets or direct employment. The MNP, aims at broadening the provi- sion of social infrastructure and basic services which enhance the human capi- tal of the poor and improve living standards. These programs represent a vitally important commitment of the Government to address the needs of the poorest. The scale of the poverty problem in India, combined with the inherent  -8- difficulties in implementing poverty progrmas in any country, imply the need for continued efforts to enhance the effectiveness of these programs. PART II - BANK GROUP OPERATIONS IN INDIA 22. Since 1949, the Bank Group has made 82 loans and 165 development credits to India totalling US$6,526 million and US$12,268 million (both net of cancellation), respectively. Of these amounts, US$1,524 million has been repaid, and USS6,207 million was still undisbursed as of September, 30, 1984. Bank Group disbursements to India in the current fiscal year through September 30, 1984 totalled USS171 million, representing a decrease of about 40 percent over the same period last year. Annex II contains a summary state- ment of disbursements as of September 30, 1984. 23. Since 1959, ItFC has made 29 commitments in India totalling US$223 million, of which USS34 million has been repaid, US$56 million sold and US$34 million cancelled. Of the balance of US$98 million, US$91 million repre- sents loans and US$7 million equity. A sumary statement of IFC disbursements as of September 30, 1984, is also included in Annex II (page 4). 24. The thrust of Bank Group assistance to India has been consistent with the country-s development objectives in its support of agriculture, energy and infrastructure. Of particular importance have been investments in irrigation, extension and on-farm development designed to increase agricultural productivity, and efforts to improve the availability of basic agricultural inputs to farmers through credit, fertilizer, marketing, storage, and seed projects. Major elements of the lending program have also been directed at helping to meet the energy needs of the economy while curbing the growth of oil imports, and to ease the infrastructu-re bottlenecks which have hampered economic growth in India, particularly through power generation and distribution, and railways and telecommunications projects. The Bank Grcup has also provided financing fcr a broad range of medium- and small-scale industrial enterprises, primarily in the private sector, through its support of develop- ment finance institutions. Recognizing the importance of improving the ability to satisfy the essential needs of urban and rural populations, the Bank Group has supported nutrition and family planning programs, a rural roads project, as well as water supply and sewerage and other urban infrastructure projects. 25. This pattern of assistance remains highly relevant and consonant with Government priorities as reflected in the Sixth Plan. Continuation of the Bank's Group current prior-.ties can be strongly justified on the basis of the approach that is being taken by GOI in the preparation of the Seventh Plan. First, continued support of GOI's agricultural program is warranted. While India has made significant progress in agriculture, productivity growth will have to be sustained to improve the balance between food demand and supply and to contribute to poverty alleviation and employment. Thus, we will continue our support to irrigation, fertilizer production and d:stribution, and agricul- tural extensioa and credit. Second, the review of performance under the Sixth Plan confirms the high priority that should continue to be given to the expan- sion and more efficient use of basic infrastructure capacity and to the development of India's indigenous hydrocarbon resources. Accordingly, the Bank will continue to support the development of the energy, transport and telecom- munications sectors to alleviate critical shortages which constrain output in both agricultural and industrial sectors. Third, support of urban development and other GOI basic social services programs for the poor must also continue in  -9- light of the grovth in population which, despite successes in lowering birth and death rates, still increases by about 16 million each year. Finally, the major departure from ou_ previous st-ategr vii1 be a substantial increase in the Bank's assistance to India-s industrial development substantially aimed at supporting GOI-s efforts in promoting greater efficiency and faster development of the industrial sector. 26. The need for a substantial net transfer of external resources in support of the development of India's economy has been a recurrent theme of Bank economic reports and of the discussions within the India Consortium. Thanks in part to the response of the aid comunity, Inlis successfully adjusted to the changed world price situation of the mid-1970s. However, India continues to require a substantial level of foreign assistance both to offset the overall deterioration in the world trade environment, and to sustain the relatively higher investment and growth rates achieved during the rirst four years of the Sixth Plan. As in the past, Bank Group assistance for projects in India should aim to include the financing of local expenditures. India imports relatively few capital goods because of the capacity and competitiveness of the domestic capital goods industry. Consequently, the foreign exchange component tends to be small in most projects. This is particularly the case in such high-priority sectors as agriculture and irrigation. 27. India's poverty and needs are such that whenever possible, external capital requirements should be provided on concessional terms. Accordingly, the bulk of the Bank Group assistance to India in the past vas provided from IDA. However, IDA lending to India is declining from a peak of US$1.6 billion in FY82, mostly due to funding constraints related to IDA. The amount of IDA funds available to India is likely to remain small in relation to India's needs for external support. Thus, this requirement for additional assistance will have to be met, in part, through larger Bank lending. Given its development prospects and policies, India is judged creditworthy for Bank lending to sup- plement IDA assistance. A continuation of efforts already underway to achieve growth in pro -ctive capacity, trade expansion, higher levels of savings. f-odgrains self-sufficiency and a reduction in the rate of population growth should result in continued economic grovth and improvement in the balance of payments. Despite recent setbacks, India-s external payments position is stiji manageable. The ratio of India-s debt service to the level of its total cur- rent account was about 12.9% in 1983184. Orer the next several years this ratio is projected to rise to around 20% and remain around that level through 1995/96. As of September 30, 1984, outstanding loans to India held by the Bank totalled US$5,176 million, of which US$2,713 million remain to be disbursed, leaving a net amount outstanding of US$2,463 million. 28. Of the external assistance received by India, the proportion con- tributed by the Bank Group has grown significantly. In 1969/70, the Bank Group accounted for 34% of total commitmeLts, 13% of gross disbursements, and 12% of net disbursements as compared with 622, 33% and 37Z, respectively, in 1983/84. On March 31, 1984, India's outstanding and disbursed external public debt was estimated to be about US$26.9 billion, of which the Bank Group's share was US$9.6 billion or 36% (IDA-s US$7.8 billion and IBRD's US$1.8 billion). In 1983/84, about 19.0Z of India-s total debt service payments were to the Bank Grour.  -10- PART III - THE COAL SECTOR Background 29. Coal is the most important source of commercial energy in India. Total resources are estimated at 127 billion tons, of which about 80% are thermal coals used primarily for heat and steam generation. The remaining resources are coking coals which are used in the Indian steel industry. Although the quality of India's reserves of both thermal and coking coals varies wideLy, reserves ox better grades are limited and are in short supply. Coking coal reserves account for nearly half (12 billion tons) of the proven coal reserves, which total about 26 billion tons. 30. Coal production reached 139 million tons in 1983/84, of which 79Z was thermal coal and the balance (29 million tons) coking coal. Production stagnated during the mid- to late- 1970s. For the last five years, coal production has risen at an average amnual rate of nearly 7Z. This has been due to more effective management, particularly with respect to project implementation, as well as to improved power supplies. Most important, the first larger-scale open-pit mines (2-10 million tons per year) started production during this period, which helped increase the contribution of open-pit mines from 35Z in 1979/80 to nearly 50% in recent months. The shorter construction period of open-pit mines (normally 4-6 years) compared with underground mines (5-10 years) and their larger capacities have contributed to the expansion of the coal industry. 31. In 1975, India completed the nationalization of most of its coal mines and consolidated operations under a holding company, Coal India Limited (CIL), which presently accounts for close to 90% of India's coal production. The other producers are Singareni Collieries Limited (SCL), which is owned by the Central Government and the Government of Andhra Pradesh, and captive coking coal mines of the privately-owned Tata Iron and Steel Company and the Government-owned Indian Iron and Steel Company (IISCO). In addition, the Government-owned Neyveli Lignite Corporation Limited operates lignite mines in Tamil Nadu. The Market for Coking Coal 32. Coal is a key commodity for the future economic and industrial growth of India. The industrial sector consumes about 48% of domestic production, of which the steel industry consumes 18%. Coal-fired power generation represents a further 42% of coal use in India. Total coal consumption is projected to grow at 8.3% per annum, to about 220 million tons ver year (tpy) by 1989/90. It is predicted that power sector demand for coal will grow most rapidly, and that it will account for 50% of total consumption by that year. The share of industry will decline rlightly (to  -11- about 44%), but steel industry consumption of coking coals will reach nearly 20Z of total consumption. The Government's investment strategy calls for most of the requirements to be met from increases in domestic coal production, in particular from CIL. A review of the status of preparation and implementation of major projects in CIL's investment program indicates that the production increase of about 70 million tpy between 1983(84 and 1989/90 is feasible, providing CIL continues to improve its implementation capabilities. 33. The demand for coking coal is determined by the production of hot metal in the steel industry. In 1983/84, steel plants produced 9.1 million tons of hot metal, and production is expected to increase to 14.7 million tons in 1989/90. Before coking coal extracted from mines can be used by the the steel industry, however, it needs to be washed in order to reduce the ash content and to remove other impurities so that the steel mills will have a product of consistent and acceptable quality. According to the projected production of hot metal, the total demand for washed coking coal is expected to increase from the present level of 15.2 million tpy to about 24.0 million tpy by 1989/90. 34. An adequate suppLy of steel is essential to the future develop- ment of many basic sectors in the economy such as construction, engineering, mining, manufacturing and transportation. Steel production in India is provided by six integrated steel plants, five of which are government-owned and operated, and by over 100 mini-mills. Throughout most of the 1970s, the Indian steel industry was able to supply the domes- tic market at internationally competitive prices and, with the exception of a few specific products, India was self-sufficient in steel production. Toward the end of the decade, however, the industry experienced a variety of operating difficulties ccmpounded by bottlenecks in the supply of critical inputs, especially power and coking coal, and production stagnated. In the 1980s, production difficulties persisted, with the steel sector suffering losses and domestic steel consumption has exceeded production so that today India is a net steel importer. With the objec- tive of placing the steel sector on a sound financial footing, prices of medium- and high-carbon steels and most special quality steel products were decontrolled in 1983 and are now set by market forces. Indian prices are substantially higher, at present, than international prices for most steel products. 35. According to data on mine production and available washery capacity, supplies of washed coking coals should now be more or less in line with overall demand. Some imbalances are projected, however, for certain grades. While the supply of medium-coking coal would be ade- quateLy covered, shortfalls are expected for the other two categories, particularly for prime coking coal. Substitution between grades is Limited due to technical factors and imports of prime coking coal have been required for the past several years. Despite plans for the increase in domestic production of prime coking coal, imports will continue to be required, and could eventually increase from about 0.5 million tons in 1983/84 to 1-1.5 million tons by the late 1980s.  -12- 36. The Government of India (COI) is appropriately placing a high priority on improving the average quality of both thermal and coking coal delivered to consumers. In the case of coking coals, the steel plants have faced a steady deterioration of the quality of prime coking coal, as well as daily fluctuations. The principal problem is the increased ash content, which seriously affects the efficiency of blast furnaces in the steel mills. Steel-making facilities have been designed to use coal with an average ash content of 17Z, and washeries have been designed accordingly. Over time, the average ash content of the coal fed to washeries and of washed coal has increased. In 1983/84, washed prime- coking coal sent to steel plants had an average ash content of 22.5Z, with daily fluctuations of 1-2%. The decline in the quaLity of coal is largely due to the gradual deterioration of the resource base combined with dilution, due to the increased use of blasting and mechanical coal cutting and inadequate quality control. As a result of studies recently conducted by GOI, several measures have been introduced to improve the quality of prime-coking coal, including the elimination of substandard coals fed to washeries, repairs and improvements at the older washeries, and greater emphasis on the quality of coal delivered as a criterion of each mine manager's operating performance. The proposed project will contribute to an improvement in overall coal qualities by installing facilities which will supply coal with 17% ash content of uniform quality. Coking Coal Prices and Pricing Policy 37. Coal prices are set by GOI on an administered basis. In the 1970s, prices were allowed to lag behind costs, with the result that the industry experienced large financial losses during that period. Over the past five years, however, GOI has increased prices on four separate occasions, so that overall price has increased 88Z. In 1982/83, GOI also authorized CIL to introduce an internal retention price system whereby internal accounting prices established for each subsidiary take account of cost differences between the subsidiaries due to geological conditions, location, and other factors outside the control of the subsidiary. This change was recommended in the India Coal Sector Report (No. 3601-IN). As a resuLt of the most recent coal price revision (January 1984), prices are close to economically efficient levels, in that on average, they approximate long-run marginal costs for thermal coals, and net-back import parity for coking coals. Another important aspect of the 1984 price increase was that the largest adjustments were made in the price of the higher grades of coal so that the differentials between the grades of coal would provide producers greater incentives to mine higher quality coals whose prices would better reflect their value to the users. 38. GOI's approach is to set coal prices at the mine head so that they will provide a return of about OZ on net worth (assuming certain production, productivity, and cost-efficiency standards), so as to ensure the maintenance of the financial viability of producers and lead to an adequate level of resource mobilization for future investment in the sector. The need for periodic revision of coal prices to reflect these  -13- objoctives was agreed upon under the Dudhichua Coal Project. Coking c3al pricing is complicated, however, because the basic product that steel mills feed into coke ovens is washed coking coal rather than the raw coal produced by the mines. Since November 1983, coking coal has been sold on a washed coal basis, with CIL being responsible for processirg coking coal for the steel industry. CIL and the Steel Authority of India Limited (SAIL) introduced contracts for the sale of washed coking coal, which are much like contractual arrangements in other countries whereby a price for washed coal is negotiated, and bonus and penalty clauses relating to quality are included in the contract. This pricing approach is considered satisfactory, since it means prices are close to net-back import parity, after adjustments have been made for quality differentials. Ex-washery prices for coking coal with 20% ash content are Rs 560 per ton (US$46.7 per ton), including sales taxes and levies, compared to US$50 per ton for coals imported from Australia (10% ash) after adjustments for port handling, inland freight and quality differentials. Project Sponsors 39. The CIL group of companies was established in September 1975, as a holding company with five wholly-owned subsidiaries. CIL operates semi-autonomously under the direction of an 11-member board of directors, which is headed by a chairman-cum-managing director appoinced by the President of India. In addition to setting general policies for its subsidiaries and retaining authority over the typical managerial functions of a holding company, CIL directly manages the financial resources of the group, overseeing the investment program and arranging for all Long-term financing. For these reasons, CIL was considered as the primary beneficiary of the Bank loan for Dudhichua, and the same arrangement is being recommended for the proposed project. 40. The CIL group is a very large and complex organization. Since its inception, CIL has made progress in strengthening its managerial capabilities, with the result that its operational efficiency has improved and production has expanded significantly. CIL is now able to play a major role in formulating development plans and in coordinating the implementation of sectoral policies. Specific operational and managerial issues relating to budgetary and cost control systems, the operational efficiency of open-pit mines, and project managemeztt organization and practices were addressed under the Dudhichua Coal Project. The Dudhichua project, including the studies being conducted in connection with it, is proceeding satisfactorily. 41. Underground mining accounted for 51% of CIL production in 1983184. CIL has begun a program to rationalize its underground production, the principal aim of which is co reorganize groups of small mines into larger units and to introduce mechanization, both in coal extraction and transportation. This strategy is sound and is expected to help to reduce unit production costs, as well as increase production. At present, 24 reorganization/mechanization projects are at different stages of implementation throughout the CIL group, 9 of which are for coking coal  -14- mines. These schemes emphasize the mechanization of operations. Underground production of the mechanized mines is expected to increase to about 35% (from the present 5) in the early 1990s when these mechaniza- tion projects are fully operational. A technical assistance program would be required to improve the design, management, and operating procedures of the highly mechanized underground mines. Such assistance would be provided by consultants selected according to qualifications, experience, and under selection procedures satisfactory to the Bank (Section 2.03, Project Agreement). 42. Prior to 1980/81, CIL's financial position was weak. Financial losses derived from a low level of coal prices ar1 an emphasis on increas- ing production without due regard to cost effectiveness. This trend was reversed in 1981/82 and for the first time CIL achieved an acceptable income level with adequate internal cash generation and long-term debt service coverage. Its financial position improved further during 1982/83. In 1983/84, however, CIL showed a loss of Rs 2,464 million and the main financial indicators deteriorated owing to the back-dating of a national wage and salary settlement associated with a new four-year collective bargaining contract. The wage settlement was finalized in December 1983 but back-dated to January 1983. A price increase averaging 25Z was made in January 1984. However, financing the back-t!ated wage award resulted in a loss for CIL which was financed by deLaying debt repayment to GOI. This resulted in a temporary fall in its debt service ratio. Indications are that the current financial year (1984/85) envisages a return to a finan- cial position more in line with that of 1982/83. 43. Bharat Coking Coal Limited (BCCL) is the subsidiary of CIL that will execute and operate the Jharia Coking Coal Project. BCCL is the principal producer of coking coal in India, and at present accounts for 52Z of the total coking coal production. It operates about 100 coal mines and 9 washeries. Underground mining accounts for two-thirds of BCCL's production, which lead to relatively higher operating costs than for the other subsidiaries. Its average operating costs are 44% higher than CIL's average, whereas average revenues are only 20% above the group's average. Despite its relatively weak financial position, efforts to improve efficiency, together with the introduction of a retention pricing system, have had a beneficial effect so that BCCL is expected to generate a profit and improve its cash generation considerably during the zurrent year. Development Strategy and Investment Plan 44. Coal is India's most abundant indigenous energy source and presently provides over 50% of India's commercial energy consumption. GOI's energy plans emphasize the development of coal, as a fuel both for generating thermal power and for direct use by industrial and commercial consumers. In the 1970s, when coal shortages were prevalent, GOI's main priorities were to increase production as quickly as possible with little regard for efficiency, cost effectiveness, coal quality, or distributional factors. COI's strategy has evolved to emphasize an adequate supply of satisfactory-quality coal with economically efficient mining and transpor-  -15- tation systems. Specifically, GOI's coal development strategy centers on (i) the development of large-scale, highly mechanized coal mines (open-pit and underground) to permit a rapid expansion of production; (ii) the rehabilitation and mechanization of deep underground prime-coking coal operations to increase supplies; (iii) improvements in the distribution of coal to consumers who are far from existing coalfields; and (iv) the introduction of measures to improve the quality of coal delivered to consumers. 45. Total investments in CIL activities during the period 1985/86 to t g1989/90 are currently estimated at Rs 60 billion (US$5 billion) in 1984/85 prices, of which about 20Z is estimated to be foreign exchange. The above program is about 40% higher in real terms than investment in the previous five years and represents an increase in both the number and average size of projects, and in the development work required for each new large-scale project. The sector is considered to be making good progress toward establishing the necessary organizational resources and capabilities to implement the investment program. About 23% of expenditures will be used to reconstruct and improve operations at existing mines, 39% will be for new projects currently being implemented, 21Z for projects prepared and awaiting final approval before initiating construction, and 17% for non- mine projects, including washeries, sand transportation, and project feasibility work. A review of CIL's overall investment program indicates that with a few exceptions, the investment program is following a least cost development path. 46. The investment program places strong emphasis on the identifica- tion and developi-ent of new coalfields as close to consumers as possible, in order to relieve the burden on the railways of transporting coal over long distances. In particular, priority is being given to meet the needs of consumers in western and southern India through the exploration and development of new coalfields, and improvements in the coal transportation system and in producer-consumer linkages. 47. Although the program is predominantly for thermal coal projects, coking coal projects are also emphasized because prime-coking coal has been in short supply for several years, since its production is much more difficult to increase than is the production of lower grades. Most coking coal production comes from underground mines which range in size from 0.1 million tpy to 0.5 million tpy and whose recovery has ranged from 25% to 40% of reserves in-situ. These low recovery and productivity factors constrain prime-coking coal production in India, but CIL hopes to improve the recovery and production of prime-coking coal through the Jharia Reconstruction Program. One of the most promising measures is that the shallower areas will be mined by mechanized open-pit methods which should provide 90% or more recovery of previously unmined areas, and will allow coal to be recovered from old workings. In addition, small, unmechanized underground mines (generally 0.1 million tpy to 0.3 million tpy production) will be combined into larger single units wherever geological conditions permit. Such rehabilitation projects will provide for increased productivity, higher output, and higher recoveries. The Jharia  -16- Coking Coal project incorporates both approaches: the Block II complex uses mechanized open-pit mining technology and the Pootkee-Bulliary com- plex is a rehabilitation undertaking that employs longwall mechanized mining techniques. Role of the Bank in the Coal Sector 48. The main purpose of the Bank's involvement in the coal sector is to support the development of this sector so that it takes place effi- ciently from both a technical and economic standpoint, to ensure that resource allocation is optimal, and rhat consumers wilL be able to obtain sufficient quantities of coal of adequate quality in a timely manner. To this end, the Bank has (a) established a policy dialogue to identify and address critical economic, sectoral, and institutional issues that may impede the satisfactory achievement of GOI's objectives; and (b) initiated a lending program for large-scale projects, the goal of which is to help GOI improve its implementation and operational capabilities for highly mechanized, capital intensive mining projects. So far, the policy dialogue and lending program have resulted in (a) agreement with GOI regarding a satisfactory approach to pricing that will lead to regular reviews of pricing levels to ensure that they remain economically- efficient and result in rising levels of resource mobilization for the sector; (b) the initiation of important sector studies aimed at improving coal transportation and distribution linkages; and (c) agreement with CIL regarding various institutional and operational improvements and studies. These studies have been initiated under arrangements satisfactory to the Bank. 49. The Bank's involvement in the coal sector originated with one loan to IISCO for a coking coal project (US$35 million under Loan 290-P-IN, dated August 9, 1961), which financed equipment for various existing and new coal mines. Project execution took more than five years, which was two years longer than appraisal targets, owing to delays in obtaining import licenses and local funds. Since the loan closed well before the implementation of evaluation procedures within the Bank, no completion or audit report was prepared. Bank Group activity in the sector resumed with a sector review in 1980, following which the Coal Sector Report, No. 3601-IN, was issued in 1982. This comprehensive review addressed selected issues pertaining to supply/demand prospects for coal, pricing, investment, and financing. Most importantly, ic facilitated the pursuit of a policy dialogue with COI with respect to energy pricing and resource mobilization through the preparation of the Country Economic Report (No. 4395-IN, dated April 11, 1983). Specific measures regarding coal pricing and coal transportation were included in the lending opera- tion for the Dudhichua Coal Project (No. P-3735-IN, dated February 27, 1984). 50. GOI has requested Bank Group financing of projects at regular intervals to increase the production of both thermal and coking coals. The Jharia Coking Coal Project will be the second of these, and the Gevra Thermal Coal Expansion Project is under preparation. The lending stracegy  -17- is expected to involve all CIL subsidiaries, with each operation address- ing appropriate policy-sectoral issues, such as CIL's manpower planning, its approach to selecting, preparing and implementing investment decisions, and ways of improving the operational efficiency of a large number of labor-intensive underground operations. PART IV - THE PROJECT 51. The project was identified in July 1982. It was appraised by missions visiting India in March and May 1984. The Staff Appraisal Report (No. 5336-IN, dated February 7, 1985) is being distributed to the Executive Directors separately. Negotiatio"s took place in Washington, D.C. in January 1985. The Government of ltlia, CIL, and BCCL were repre- sented by a delegation coordinated by Mr. P. Singh, Director, Department of Economic Affairs, Ministry of Finance. Project Objectives and Description 52. The proposed project supports the Government's overall develop- ment strategy for the coal sector, outlined in paragraph 44 above. The project comprises the development of one open-pit mine and one underground mine with design capacities of 2.5 and 3.0 mty of raw coal, respectively, two coal washeries, coal handling plants, and surface infrastructure, including railway spurs, workshops, warehouses, offices, and town sites. The total annual output of washed prime coking coal for the steel industry will be 2.6 million tons when both mines are operating at full capacity. Both mining complexes form part of the master plan to restructure the Jharia coalfield, which is the main source of prime coking coal for the steel industry. The Open Cast Block II complex is the first of the medium- to large-scale open-pit mines to be developed as part of the Jharia Reconstruction Plan and by 1989/90 will account for about 11% of prime coking coal production in India. The Pootkee Bulliary complex will be the largest underground mining operation to be implemented in India. Both mines will employ highly mechanized mining systems, for which Bank assistance will be provided, and should improve the overall operating efficiency of BCCL. The project will also help to improve the overall quality of coking coal supplies to the steel industry by providing a product with significantly lower ash content (17%) than the current average supply to the steel sector (20Z-21Z). Furthermore, the project will help to reduce the need for imported coking coal. 53. The open-pit mine of the Block II complex has been designed to produce 2.5 million tons of raw coking coal a year with an ash content of about 30% and a 17-year life. Overburden will be blasted and removed by draglines, assisted by trucks and shovels. After drilling and blasting, the coal will be loaded and hauled to a crusher station, from which the raw coal will be moved to the washery by a conveyor. Coal will be released shortly after the start of excavation, and full production should be achieved in 1987/88. Coal will be processed at the Madhuband washery, which will have a matching capacity, and should yield 1.1 million tpy of  -18- washed coal with 17% ash. Washed coal will be transported by the raiLway system to che steel plants. Most of the output has been earmarked for the neighboring Bokaro steel works about 30 km away. Marketing will not pose any difficulties to BCCL. 54. The Pootkee-Bulliary underground mine is expected to produce 3 million tpy of raw coking coal, and thus will be the largest mine of its kind in India. Production will be built up gradually, so that small amounts of coal will be produced at the start of underground work in 1985 and its fulL capacity will be reached in 1995. About 52Z of the coal will be mined by fully mechanized, retreating longwall mining techniques, and the balance by conventional retreating longwall techniques combined with stowing to prevent surface subsidence. Management of underground mines using fully mechanized longwall technology needs strengthening and techni- cal assistance will be provided under the project to improve the planning, design and management of such mines (Section 2.14, Project Agreement). Stowing material (sand, gravel, crushed rock) is in short supply in the Jharia coalfield and the medium- to long-term availability of sufficient quantities of material will depend on CIL undertaking appropriate invest- ments to provide the sand to the coalfield. Studies to examine alterna- tive transportation modes for the sand will be conducted by consultants financed under the loan (Section 2.14, Project Agreement). Two new 500-meters deep shafts for coal hoisting are presently under construction with Polish technical assistance. These shafts are part of an extensive shaft-sinking program required for the reconstruction of the Jharia coking field. GOI will initiate, by June 30, 1986, a study to improve the organization of shaft-sinking activities and to introduce more efficient equipment. The raw coal from the underground mine will be washed in a proposed new Pootkee washery also to be financed under the proposed Bank loan. The wrshery will be implemented by BCCL and totally integrated with the mine's surface instalLations. The washery comprises a plant with facilities for crushing and screening, heavy media separation, flotation, and dewatering. The capacity will be 3 million tpy of raw coal and the yield of clean coal with 17% ash content will be about 49%, or 1.47 mil- lion tpy clean coal. 55. Electric power for the project will be supplied from the Damodar Valley Corporation (DVC) main grid substation. Power is in short supply in the Jharia area itself. To alleviate possible power problems, BCCL is making arrangements with the Damodar Valley Corporation to supply power to the project through a direct line which is presently under construction. In addition, a 210 MW station planned for the early 1990s will be used to meet coal industry power requirements in the Eastern Region, including the Jharia coalfields. BCCL would make satisfactory arrangements with the Bihar Water Authority for water supplies to the project (Section 3.05, Project Agreement). About 5,000 dwellings and associated service facilities will be constructed for the work forces of both complexes, and detailed schedules for construction are being prepared (Section 2.08, Project Agreement). BCCL will prepare detailed training plans for both Block II (Madhuband and Pootkee-Bulliary) staff by July 1, 1986, and  -19- thereafter annual training reports to the Bank every July 1 addressing the previous years' training results (Section 2.09 Project Agreement). Environment and Safety 56. The planning of environmental protection measures to be under- taken will be the responsibility of BCCL and the Central Mine Planning and Design Institute (CMPDI), and they will be based mainly on the Water (Prevention and Control Pollution) Act of 1974 and the Air (Prevention and Control of Pollution) Act of 1981. Both Acts have satisfactory coverage and prescribe measures and tolerance limits acceptable in the industry. In general, water and air pollution problems are not expected to be severe. Water and air quality will be monitored regularly and dust, a major potential pollution hazard, will be controlled by ventilation and suppression/extraction equipment. The land that will be affected by the mining activities is characterized as forest land, although it is very arid. Because only very small quantities of topsoil are present, soil conservation will be undertaken whenever feasible. Erosion control and prevention measures, such es the placing of rip rap, turfing, and revegetation will be undertaken cn waste dumps and exposed slopes. This will also help to reduce surface water runoff. CIL and BCCL wouLd design, construct, and operate the project in accordance with ecological and environmental standards satisfactory to the Bank (Section 2.07, Project Agreement). 57. Mine safety and related operational practices and design criteria are laid down in the "Mines Act" of 1952 and the "Coal Mines Regulations" of 1956 supported by monthly circulars from the Director General of Mine Safety, Ministry of Energy as well as Acts regulating human health and mine rescue work. They are adequate. The responsibility to follow safety regulations rests with the safety organizations in each subsidiary. The activities of each safety organization are coordinated by a Safety Board of CIL, which meets quarterly to review safety practices and introduce corrective actions where necessary. Although the overall accident rate in CIL greatly improved from 1973 to 1983 (fatality rate down 44% and serious injuries down 63%) the rates in CIL and BCCL are relatively high when compared with other major coal producing industrial countries. This is mainly attributable to very labor intensive, multiseam mining methods with a low degree of support from modern mechanical and electrical systems in most underground mines. Further, the great number of working places and large number of workers make safety supervision and management cumbersome, particularly during periods of rapid expansions of d mining activities. The project, which involves a high degree of mechanization with modern equipment, has adequate safety conditions but, to further assist BCCL, the technical assistance to be provided in support of improved operational efficiency will strongly emphasize safety aspects from the standpoint of both design and management. In order to satisfy the Bank of the adequacy of safety measures and the incidence of occupa- tionaL diseases, BCCL would make available to the Bank for comments every six months, beginning January 1986, statistics on mine-related accidents and occupational diseases.  -20- Project Execution and Implementation 58. The project components will be implemented by BCCL under t.e direction of Project General Managers for each component reporting to the Project Director of BCCL. Each Project General Manager is supported by managers responsible for (i) mining and general engineering; (ii) cost and scheduling control; (iii) administration; and (iv) a Deputy Project General Manager, directly responsible for project implementation. Each project organization comprises about 200 positions which are fully staffed and mobilized. The Project General Manager for both project components have been appointed and both are considered adequately qualified and experienced. BCCL will ensure that the organizational structure, staffing, powers and responsibilities of each Project Management Unit are such as are considered necessary for timely and efficient implementation of the project (Section 2.10, Project Agreement). 59. Each Project Management Unit will be directly responsible for all activities related to detailed engineering, the procurement of local goods (excluding mining equipment) and services, equipment erection and commissioning, construction, and mine development. Mining equipment and other imported items wilL be procured by the CIL Central Procurement Organization, in direct collaboration with the Project General Managers. These arrangements have already worked out well in the Dudhichua project. However, in order to minimize the impact of external factors, such as import approvals and foreign exchange allocations, import licences and foreign exchange requirements will promptly be made available for imported goods. Due to land acquisition difficulties, the Madhuband washery has been relocated to nearby land that is presently in BCCL's possession. At the Block II mine site, land is currently available for carrying out mining operations up to 1989/90, and BCCL will take possession of the balance of the land required for the rest of the mine life (i.e. until 2001/2) before September 30, 1988 (Section 2.11, Project Agreement). This is considered realistic in the light of progress during the past eighteen months on land acquisition which has been closely monitored by the Bank. Although the CIL group has some experience in implementing large m4ning projects, it stiLl needs to strengthen the procedures required for project monitoring and control. Accordingly, BCCL will prepare, by December 31, 1985, a project implementation manuaL, each for Block II and for Pootkee-Bulliary, will discuss them with the Bank, and adopt them by December 31, 1985 and March 31, 1986, respectively (Section 2.12, Project Agreement). Project Cost and Financing 60. The total financing required for the Jharia Coking Coal Project, including physical contingencies, working capital, and interest during construction, is estimated at US$696 million, of which about US$245 mil- lion is in foreign exchange and about US$95 million represents taxes and duties.  -21- 61. The capital cost estimates were prepared by the Central Mine Planning and Design Institute (CMPDI), on the basis of cost information from recent orders for similar equipment and actual cost data for ongoing projects. It was last reviewed in January 1985. The cost estimate at this stage is considered to be relatively accurate, particularly in view of the degree of design and specification necessary for mining equipment. For this reason, 5% over the base costs is provided for physical contin- gencies for mining equipment and 10% is provided for other cost items. Local costs are expected to increase by 8.5% between 1984/85 and 1990/91, and 6% per annum thereafter. Foreign costs are expected to increase by 3.5% for 1984, 8.0% for 1985, 9.0% for 1986-88, 7.5% for 1989, and 6.0% for 1990 and thereafter. 62. In keeping with current Government pricing policy, the overall financing of project costs will be in the ratio of 50% debt and 50% equity. The proposed Bank loan of US$248 million will provide about 41% of the financing requirements, net of taxes and duties; an additional US$85.8 million equivalent wilL be provided by GOI in the form of long- term debt. COI's approach to cofinancing has been to link specific projects with individual financing sources rather than have different sources participate in each of several projects. Although in the case of Jharia the Bank will provide most of the foreign financing, the Overseas Development Administration (ODA) of the United Kingdom will also provide for a dragline that is being procured in advance of the Bank loan. With respect to equity contributions, CIL would provide about US$132 million out of its internally generated funds, and the balance of about US$216 million would come from the Government. 63. The proposed loan will be made to GOI at the standard variable Bank interest rate for a period of 20 years, including 5 years of grace. GOI would onlend project funds to CIL for a period of 15 years, including 5 years of grace. The onlending rate will effectively be 13.25X per annum, the standard Government rate for lending to industrial and commer- cial enterprises in the public sector. GOI would bear the foreign exchange and interest rate risks. CIL will in turn make the funds avail- able to BCCL on the same terms and conditions as those on which GOI has extended a loan to CIL. Domestic inflation is not expected to exceed 8.5% over the project period, so that the onlending rate is projected to be positive in real terms during this time. The conclusion of a satisfactory Subsidiary Loan Agreement between GOI and CIL and a satisfactory financial arrangement between CIL and BCCL will be the conditions of effectiveness of the proposed Bank loan (Section 6.01, Loan Agreement). Procurement and Disbursement 64. Equipment and construction services financed by the Bank will be procured by international competitive bidding (ICB) in accordance with Bank Guidelines. These goods and services consist mainly of mining equip- ment grouped in 56 packages, averaging US$4.4 million each. For bid evaluation under ICB, qualified local suppliers/manufacturers will receive a margin of preference of 15% or the applicable customs duty, whichever is  -22- lower. Qualified local contractors would receive a margin of preference of 7 1/2Z in the evaluation of bids for civil works contracts for the Pootkee-Bulliary washery. It is expeected that for those itu-ms to be financed under the Bank loan, about US$31 million (about 12X of he Bank loan) will be for contracts awarded to local suppliers following ICB. The procurement arrangement proposed for the project is in Annex IV. 65. The Bank loan of US$248 million will be used to finance mining equipment (US$169.5 million), a washery (US$60.8 million), and technical assistance (US$2.0 million). In addition, US$15.7 million will be unallocated. There will be no front-end fee. Loan proceeds will be disbursed against lOOZ of foreign and 100% of (ex-factory) local expendi- tures for mining equipment, at 100% of foreign expenditures and 70Z of local expenditures on the washery, and 10OZ of expenditures on technical assistance. Disbursements are expected to be completed by Harch 31, 1992 when all Bank-financed items would have been physically delivered or completed. Projections for the project indicated that disbursements will be somewhat slower than the profile for industrial projects in India, as well as for similar projects in other countries, because of the long gestation period of the underground mine. Financial Evaluation 66. The Jharia Coking Coal Project represents only about 5% of CIL's total investment program for the period 1984185 to 1992193. By 1992/93, when the project is expected to reach a production level of 2.4 million tpy of washed coal, this will represent about 8% of CIL's total coking coal production for that year. 67. It is expected that GOI will continue to provide 50% of CIL's investment needs through long-term debt, and the remaining investment requirements will be met from CIL internally generated resources (approximately 19%) and GOI equity contributions. By 1989/90, CIL's average production cost per ton of raw coal is projected to decrease slightly (OZ) in real terms from its present level of Rs 188 per ton (US$15.7), owing to increases in labor productivity deriving from the capital intensive nature of the investments. Coal prices are expected to increase marginally in real terms (2%) during 1985186, and thereafter would generally follow local inflation. This pattern is in line with the Government's coal pricing policy and should strengthen CIL's financial position. By 1989/90, the internal generation by CIL of funds available for its investment program would rise from its current level of 1% to 30% after allowances are made for debt repayment and increases in working capital. 68. To ensure that the consolidated financial position of the CIL group of companies remains sound, COI will maintain coal prices that will ensure the financial viability of CIL and provide for the progressive internal mobilization of resources to cover an increasing proportion of capital expenditures in the sector (Section 4.01, Loan Agreement) and CIL would maintain the same financial covenants agreed under the Dudhichua  -23- project: a debt qervice coverage ratio of at least 1.3, a long-term debt-io-equity ratio not greater than 60:40, and a current ratio of at least 1.2 (Section 4.02, Project Agreement). Annual audit reports for CIL and BCCL will be submitted to the Bank within nina months of the close of CIL's fiscal year and six months for BCCL's fiscal year (Section 4.02, Project Agreement). _ 69. The financial rate of return (FRR) for the Jharia Coking Coal Project is estimated at 10%, a result of the long implementation period, particularly o' the underground mine. This is composed of a 12% FBR for the Block II compLex and 9% for the Pootkee-Bulli.-y component. The difference is due to the higher operating costs and longer implementation period of the undergrour-d mine at Pootkee-Bulliary, which are not fully offset by the t3tter quality of its coal. A 10% fall in revenues will reduce the fi,aucial rate of return to about 7%. Economic Analysis and Risks 70. The Jharia coalfield provides all the domestic prime-coking coal used by the stt. 1 industry, and '-nth components of the proposed project form part of the master plan for the reconstruction of the coalfield. Block II was selected as the first medium- to large-scale open-pit opera- tion to be developed in Jharia because of its relatively favorable geo- mining conditions which will allow production to build up rapidly and help to keep operating costs down. With regard to underground development, a first group of five mines, which are presently at various stages of implementation, meet the least cost criteria. Pootkee-Bulliary ranks as the lowest-cost option in a second group of five mines proposed for fur- ther development. 71. The economic rate of returr (ERR) for the project is 21.5%. The Block II and Pootkee-Bulli. ry components are expected to have an ERR of 28% and 17%, respectively. Even under aaverse assumptions, the overall ERR would remain at acci table levels of over 17%, and the Pootkee-Bulliary romponent would be above 14%. It would take an increase in capital costs of 55%, or of operating costs of 63Z, on a decline in revenues of 24% to reduce the ERR to 2%, the opportunity cost of capital in India. The differences between tr.e economic and financial rates of return result from the elimination of custom duties on imported equipment E (current!. averaging 74% of CIF value) in the calculation of the ERR. A substantia portio of the economic rent of the project thus accrues to the Government (through taxes), suppLiers, and to the work force (through high wages compared to alternative cccupations) rather than to CIL. Switching values for key parameters are (a) capital costs increased by 55%, (b) operating costs increased by 65%, and (c) revenues decreased by 24%, indicating the soundness of the inves.ments being proposed. 72. The project faces minimal technical risks, since coal reserves are well established and mining plans and equipment selection are based on proven technologies now being used in other open-pit and underground mines operated by CIL. With regard to coal pricing, there is some risk that  -24- GOI's commitment to an appropriate pricing policy may not be implemented in a timely manner; such an occurrence could adversely affect the finan- cial position of both the project and CIL. However, the financial risk is considered acceptable in view of the Government's policy to ensure the continued financial viability of entities in VYe energy sector and the mobilization of an adequate level of resources for coal investments from within the sector. PAERT V - LEGAL INSTRUMENTS AND AUTHORITY - 73. The draft Loan Agreement between India and the Bank, the draft Project Agreement between the Bank, CIL and BCCL, and the draft Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement are being distributed to the Executive Directors separately. 74. Special conditions of the project are listed in Section III of Annex III. The signing of a Subsidiary Loan Agreement between GOI and CIL and a Financial Arrangement between CIL and BCCL would be additional conditions of loan effectiveness (Section 6.01, Loan Agreement). 75. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 74. I recommend that the Executive Directors approve the proposed loan. A.W. Clausen President February 5, 1985  Al= I Page 1 of 5 TA3LI 3% tw1a SO- DEMS I3k r am HURT RUCE CUFS cmZD AVESnA ) I Qm:~~~~C~S 3EE ESIL3' ~~~~~~~~~~~~~~~~~~~~wc Lw ISCM K= ) AM cUmA SQ. no IOThL 3237.4 328.4 3287.6 176,X5 1730S 161..3 m Cwl CP M 4W.0 100.0 20 .0 273.4 91 1 _2 IMOM cainmow=1 In A (3110dm OU oF 01L F4URZUWE? 79.0 113x0 1510 27z.0 567.3 ADVL SVICST F0U,LA7E=.HXD-1!AR (NTS_U30) -34349.0 54754.. 716965.0 - MSAX 103ULATIM CZ OF TOMl) 16.0 19.8 24.1 Zl.7 34.7 FOIILAIES LWAR 200 OULL) 99424 - SThT1m3I tOFULMM (qLL 1707.2 FOFIIAThL