India - Tenth Railway Project

RESTRICTED Report No. P-738 FILE COPY This report was prepared, for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO INDIA FOR THE TENTH RAILWAY PROJECT September 11, 1969.  REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO INDIA FOR THE TENTH RAIIWAY PROJECT 1. I submit the following report and recommendation on a proposed credit to India for an amount equivalent in various currencies to US $55 million. PART I - HISTORICAL 2. Since 1949, the Bank has made six loans and IDA has made three credits to Indian Railways for a gross total of US $576.5 million equiva- lent, of which US $92.6 million equivalent has been repaid. After deduction for cancellation of US $1.2 million equivalent, the remaining US $482.7 million equivalent represents the largest investment by the Bank Group in any single enterprise. 3. The first loan, made in 1949, was for the post-war rehabilitation of the Railways. Succeeding Bank Group projects, largely undertaken during the period of India's Second and Third Five-Year Plans (1956-66), were primarily for increasing capacity. The last lending operation (Credit No, 88-IN) was made in 1966 for US $68 million equivalent. The Govern- ment of India has asked for additional Bank Group assistance to provide part of the foreign exchange required for the Railways' investments during the first two years of the Fourth Five-Year Plan period (1969-74). 4. The project was appraised in February/March 1969, and negotia- tions for the proposed credit were completed in Washington on September 9, 1969. The Borrower was represented by Messrs. G.D. Khandelwal, Chairman, Railway Board (Leader); K. S. Sundara Rajan, Financial Commissioner, Railways; A. Choudhury, Director, Railway Planning; S. N. Bhat, Joint Director (Finance); and G. C. Baveja, Joint Secretary, Planning Commission. 5. The Bank has made 38 loans in India, including 30 which are fully disbursed. The Association has made 23 credits to India, including 18 which are fully disbursed. The status of Bank loans and IDA credits in India as of August 31, 1969, is summarized as follows:  -2- Active Loans/Credits Amount (US $ Million) Number Year Borrower Purpose Bank IDA Undisbursed 307 1961 IISCO Coal Mining 19.5 5.9 19 1962 India Durgapur Power 16.8 .6 2h 1962 India Koyna Power II 17.5 3.7 27 1962 India Bombay Port 16.2 2.8 h14 1965 ICICI Industry VI 50.0 22.9 416 1965 India Power Transmission 58.0 25.1 417 1965 India Kothagudem Power II 14.0 1.8 89 1966 India Beas Equipment 23.0 12.5 456 1966 IISCO Balancing Scheme 30.0 28.5 515 1967 ICICI Industry VII 25.0 25.0 614 1969 India Tarai Seeds *13.0 13.0 615 1969 India Telecomm. III 27.5 27.5 153 1969 India Telecomm. III 27.5 27.3 Loans/Credits fully disbursed 810.7 936.6 Total (less cancellations) 1,047.7 of which has been repaid to Bank 397.3 and others Total now outstanding 650.4 Amount sold 109.7 of which has been repaid 104.7 5.0 Total now held by Bank and IDA 7U3Ti T 1,037 6 Total undisbursed 149.7 .96. "Not Yet Effective 6. Delays in disbursement of certain loans and credits have continued. Considerable delay has occurred in the implementation of two projects of the Indian Iron and Steel Company (Loan Nos. 307-IN and 456-IN) and a further mission to review the situation is due to go to India later this month. While the rate of disbursement by ICICI (Loan Nos. 414-IN and 515-IN) has not greatly increased in recent months, there has been a very substantial increase in the rate of commitment of the two loans. So far as the Power Transmission Project (Loan No. 416-IN) is concerned, all orders have been placed and it is expected that the loan will be fully disbursed by the revised closing date of December 31, 1970 (R69-48). 7. IFC has made twelve commitments in India totalling $33.5 million, of which $24.6 million represent loans and $8.9 million equity. As of August 31, 1969 $14.4 million had been disbursed. The largest commitment is a total of $15.9 million to Zuari Agrochemicals for a fertilizer plant in Goa. A number of other industrial schemes are currently under con- sideration, with particular emphasis on new fertilizerprojects.  - 3 - 8. The proposed credit represents the first lending operation by the Bank Group in India for the current fiscal year. With regard to further operations, both the Kadana irrigation project and the Gujarat agricultural credit project have been appraised and negotiations are expected to take place within the next few months. Other projects at various stages of preparation include a second highways proposal, Mormugao port, fertilizer manufacturing plants a further agricultural credit project and a further industrial imports credit. 9. PART II - DESCRIPTION OF THE PROPOSED CREDIT BORRTJER: India, acting by its President. PURPOSE: To provide part of the foreign exchange cost of the Indian Railways' investments for the years 1969/70 and 1970/71. AMOUNT: US $55 million equivalent. AMORTIZATION: In 50 years, including a ten-year period of grace, through semi-annual installments of 1/2 of i% from November 1, 1979 through May 1, 1989 and of 1-1/2% from Nover.ber 1, 1989 through May 1, 2019. SERVICE CHARGE: 3/ of 1% per annum on the principal amount dis- bursed and outstanding. PART III - THE PROJECT 10. An appraisal report on the proposed project, entitled "Appraisal of Tenth Railway Project India" (PTR-29a), dated September 9, 1969, is attached. 11. Since the beginning of India's first Five-Year Plan in 1951, Indian Railways have greatly expanded both passenger and freight services; over the 18 years since then, passengers carried have increased from 1t28 to 2.23 billion annually, and originating tonnage of freight has gone up from 93 to 205 million tons per year. The expansion of services required large outlays on the Railwayst plant and equipment, and the Bank Group has made a major contribution to this process. As a result of the recession in India, freight traffic remained essentially the same over the past three years, and the Railways have therefore scaled down their investments. The slow-down in investment also resulted in a correspond- ing delay in disbursing Credit No. 88-IN for the last Indian Railway project. With the recent economic recovery, the Railways are once again planning investments to meet the expected growth in traffic. The current plans put less stress than in the past on new line construction and place increased emphasis on the acquisition of additional notive power and rolling stock as well as on track and line maintenance.  - 4 - 12. The planned investments during the two-year project period, April 1, 1969 to March 31, 1971, will aggregate the equivalent of US $709 million; about 44% of the total will be for rolling stock and about 16% will represent line capacity work such as double tracking and gauge conversion. The foreign exchange component will be about US $95 million equivalent, and represents the cost of imported equip- ment and of imported components for equipment manufactured in the Railways workshops. 13. The local currency cost of the project will be financed by the Railways and from the central government budget. Apart from the proceeds of the proposed credit, foreign exchange requirements are to be obtained bilaterally (about US $35 million equivalent), and from India's own resources (about US $5 million equivalent). The import of components and materials for rolling stock comprise the largest single category under the proposed credit (69%); other important items will be for the import of electrical equipment and for signaling and telecommuni- cations. 14. As the Railways' investments comprise a large number and wide variety of works in various stages of completion, the appraisal report does not attempt to calculate cost benefit ratios. Instead, an assess- ment is made of the project analysis techniques employed by the Railways for the screening of investment proposals and project analysis. The report shows that detailed financial studies are made before major new installations are authorized, but that several improvements in method- ology would be desirable; a committee of senior Railway officers which has had this matter under study for some time, issued a report in June of this year recommending changes which would, in considerable measure, meet the questions raised during appraisal. The Railways are implement- ing recommendations of the committee, and the Association will follow up on progress in this matter. The report also examines the investment plans for appropriate balance among principal components and suggests that relativ relatively more money should be spent on passenger traffic, particularly commuter services. The Railways are now reviewing this matter. 15. The Indian Railways are one of the largest rail systems in the world, with almost 60,000 route kilometers, and indeed one of the largest operating organizations of any kind with almost 1.4 million regular staff. Accordingly, management problems received careful consideration during appraisal. W^hile management and staff appeared generally competent, several aspects of operations could be improved. During negotiations, the Railways explained their programs for staffing and for improved utilization of rolling stock and were able to show that they would be adequate for the immediate future.  16. During the past three fiscal years, for the first time in eighteen years, Indian Railways have not been able to meet in full from earnings dividend payments on capital-at-charge. With respect to the Railways' earnings capacity, a covenant (Section 4.05 of the Draft Development Credit Agreement) provides for (a) the maintenance of an operating ratio at not more than 80 percent and (b) total operating revenues at a level to cover all operating expenses plus dividend on the Government's invest- ment in the Railways and contributions to capital expenditure. The Rail- ways also are studying their depreciation policy, in particular, the continued appropriateness of charging depreciation on the basis of an estimate of short-term expenditures on replacements rather than on the basis of the useful life of the assets. 17. For some time the Bank Group has urged the Government of India to implement the basic recommendation of both Indian and foreign experts that roads and road transportation should be developed and expanded. Limited progress has been registered in some areas and the recently issued draft Fourth Five-Year Plan shows a relatively larger portion of transport investments than heretofore will be devoted to roads. In addition, the licensing of trucking has been liberalized to sane extent and the central roads organization has been strengthened. The appraisal report proposes that emphasis should be placed on two aspects of this matter: limitation on further increases in taxes by the Central Government on the road transport industry and a reduction of highway octrois and checkposts. Taxes on the road industry are now substantially higher than expenditure for road construction and maintenance. The multiplicity of octrois and checkposts creates transport bottlenecks which add measurably to trans- portation costs. During negotiations the Government explained that taxation on diesel, which fuels about three-fourths of India's trucks, had remained at existing levels for several years. The Central and State Gov- ernments were examining concrete measures for replacing octrois by other suitable sources of revenue for the local bodies and reducing the number of checkposts. 18. The goods to be financed under the proposed credit will be procured by competitive international tendering, except for certain components used in manufacturing such items as diesel engines, which are purchased under licensing agreements, and except for equipment where the Railways use sole source procurement for the sake of standardization. The total cost of the goods to be financed out of the proposed credit other than by international competitive tender will not exceed US $16 million equivalent. Such items have been included in the previous Bank Group financing for the Railways on the ground that licensing arrange- ments grew out of a commendable desire to develop domestic manufacturing capacity and were made after broad international inquiry. Cases where procurement is based on standardization needs have been carefully reviewed and are considered justified. 19. The proposed credit will be made available to the Rnilways in the form of capital-at-charge and will be used to cover foreign exchange payments to be made by the Railways from September 1, 1969, to March 31, 1971.  - 6 - PART IV - LEGAL INSTRUMENTS AND AUTHORITY 20. The draft Development Credit Agreement between India and the Association, the Recommendation of the Committee provided for in Article V, Section l(d) of the Articles of Agreement, and the text of a draft resolution approving the Credit, are being distributed to the Executive Directors separately. 21. The draft Development Credit Agreement conforms generally to the pattern of earlier credits for the Indian Railways. PART V - ECONOMIC SITUATION 22. The recent economic report, "Economic Situation and Prospects of India," which was distributed on April 28, 1969 (R69-75), analyzed the structural problems faced by the Indian economy. It pointed out that despite a decade and a half of development effort in heavy industry, transport, utilities and agriculture, the growth of the economy so far, and its capacity to generate savings, were inadequate to sustain the investment level that more rapid change would require. In the longer run improvements in efficiency, particularly through industry and trade policy, and the mobilization of investment resources from agriculture, could improve the situation, but a continuous flow of resources from abroad was still essential to give the economy the flexibility it needed. 23. This analysis still holds. In general, the course of the economy over the past three years has been such as to avoid aggravating these structural problems, and there has been some progress in certain directions. Three years of cautious financial management, in the face of uncertain supplies of food and foreign aid, have resulted in more or less stable price levels. With the help of stringent import controls, imports have been consistently lower than predicted, mainly because industrial growth was negligible in 1966 and 1967, and only about 5.6% in 1968. Public investment has been stagnant and private investment probably declined in real terms over this period. Although this meant continued underutilization of capacity in industry, it has released resources for export, and a combination of substantial incentives and lack of an alternative domestic market has resulted in a welcome spurt in non-traditional exports. Exports rose 13.5% in 1968/69 to a record height (albeit only 5.7% higher than in 1964/65 because of the decline in traditional exports other than iron ore), and 60% of the increase in 1968/69 was accounted for by engineering goods, iron and steel products, chemicals and other non-traditional items which, taken together, are now as important as tea or jute exports.  - 7 - 2h. There have been two main short-run results from these policies. Firstly, net foreign exchange reserves and food stocks have both risen very substantially from the precariously low levels of 1966. This gives the Government some more flexibility in its expenditure policy despite the usual food crop and foreign exchange uncertainties, and may permit a slight expansion of demand and thus a modest investment revival, al- though already there are conflicts between domestic and export needs for certain products. Secondly, the competition resulting from the buyers' market in most industrial products, together with greater free- dom to increase or diversify production as a result of the partial liberalization of import policy and industrial licensing in 1966/67, has helped remove a few of the production inefficiencies in industry. Similarly, in agriculture two good crop years in a row (1967/68 and 1968/69) and the probability of another record wheat crop this year has led to a relaxa- tion of food zone restrictions in the northern wheat belt. Today internal resource constraints persist as does a relatively low net aid level. In these circumstances a significant increase in the growth rate of the economy which in recent years has averaged about 3.8% per annum cannot yet be foreseen. PART VI - COMPLIANCE WITH ARTICLES OF AGREEMENT 25. I am satisfied that the proposed Credit would comply with the Articles of Agreement of the Association. PART VII - RECOC4ENDATION 26. I recommend that the Executive Directors approve the proposed Credit. Robert S. McNamara President Attachments September 11, 1969