India - Trombay Thermal Power Station Expansion Project

R E ST R I C-T E D R Report No. P- 130. This report was prepared for use within the- Bank. In making it available to others, the Bank assumes no responsibility to them for the accuracy or completeness of the information contained herein. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS CONCERNING A PROPOSED LOAN TO THE TATA HYDRO-ELECTRIC POWER SUPPLY COMPANY, LIMITED, THE ANDHRA VALLEY SUPPLY COMPANY, LIMITED AND THE TATA POWER COMPANY, LIMITED. May 21, 1957  REPORT AND RECO alENDATIONE OF TIE PRESIDENT TO THE EXECUTIVE DIRECTORS CONCERNING A PROPOSED LOAN TO THE TATA HYDRO-ELECTRIC POWER SU?PLY COIV0PANY, LIP.ITED, THE ANDHRA VALLEY SUPPLY CO!V!PANY, LIMVITED AND THE TATA POWER COH:1PAKY LIKIITED 1. I submit the following report and recommendations on a proposed loan in an amount in various currencies equivalent to $9.8 million to The Tata Hydro-Electric Power Supply Company, Limited, The Andhra Valley Power Supply Company, Limited and The Tata Power Company, Limited (here- after called the Borrowers) to help finance a project for the expansion of the Companies' thermal station at Trombay. PART I - HISTORICAL 2. On November 19, 1954, the Bank made a loan of i16.2 million equiva- lent to the Borrowers, who are a privately owned group of power companies engaged in providing wholesale power service in the Bombay region. The loan financed the foreign exchange cost of the construction of a thermal power station near Bombay, having a total maximum capacity of 125,000 kw, consisting of two identical units, together with transmission facilities and receiving substation. This power station is now approaching completion, the first unit having gone into operation in December 1956, and the second unit being scheduled to begin operation in June 1957. 3. In November 1956, the Companies approached the Bank for a second loan to finance the foreign exchange cost of a third unit of 62,500 kw, similar in characteristics to the two units previously installed. How- ever, the third unit will operate with coal, whereas the previous tvwo units are currently operating with waste products from the neighboring oil refineries. 4. If the proposed loan were made, it would increase the aggregate amount of loans made for projects in India to $233,844,313, net of can- cellations. The loans already made are as follows: -____ Amount (net of cancellations) 1949 Railway Rehabilitation (Locomotives) $ 32,800,000 1949 Agricultural 10achinery (Kans Grass) 7,203,813 1950 Electric Power Development (DVC) 16,720,500 1952 Iron and Steel Project (IISCO) 30,020,000 1953 Electric Power Development (DVC) 10,500,000 1954 Electric Power Development (Trombay) 16,200,000 1955 Industrial Credit and Investment (ICICI) 10,000,000 1956 Iron and Steel Project (TISCO) 75,000,000 1956 Iron and Steel Project (IISCO)1,/ 20,000,000 1957 Jet Aircraft (Air-India)l/ 5.600.000 $ 224,044,313 1/ Not yet eff,ective.  - 2 - As of April 30, 1957, W23,111,660 had been repaid, and $85,872,005 re- mained undisbursed. The amount outstanding was $89,460,648, of which $9,429,048 was due on maturities sold without recourse. PART II - DESCRIPTION OF TI-I PROPOSED LOAN Borrowers: The Tata Hydro-Electric Power Supply Company, Limited, The AndhraValley Power Supply Company, Limited and The Tata Power Company, Limited, who would be jointly and severally liable. Guarantor: India. Amount: In various currencies equivalent to $9.8 million. Amortization: 31 semi-annual installments, April 15, 1960 to April 15, 1975. (Installments on the first loan run from October 15, 1958 to October 15, 1974). Interest Rate: 5-5/8% per annum including 1% commission. Commitment Charge: 3/4% per annum. PART III - LEGAL INSTRTEiNTS AND AUTHORITY 5. Attached is a draft of the Loan Agreement (No. 1) and the Guarantee Agreement (No. 2). Also attached is the Report of the Committee, provided for in Article III, Section 4(iii) of the Articles of Agreement of the Bank (No. 3). 6. In addition, there will be an agreement between the Government and the Borrowers. This agreement will be substantially the same as the one entered into at the time of the first loan. One of its provisions is that for the term of its guarantee, the Government of India shall have the right to appoint a Director to the Board of each of the Borrowers. 7. The license issued to the Borrowers in respect of the Trombay under- taking is being amended to cover the proposed third unit. 8. The first loan and the bonds ussuable thereunder are secured by a first specific mortgage and a first floating charge in respect of the pro- perties for which the first loan was made and any additions thereto and by an assignment by way of mortgage of the Trombay license. This security was constituted by a Trust Deed, dated November 4, 1955, in favor of Baring Brothers & Co., Limited, as trustees, and ranks in priority to existing mortgages and charges.  - 3 - 9. The 1955 Trust Deed would be modified and extended so as to secure in addition to the first loan and the bonds issuable thereunder the proposed Loan and the Bonds, all of which would rank pari passu inter se in respect of the security. As in the case of the first loan the holders of existing mortgage debentures would have to vary their securities so as to allow the Bank's security to rank first in respect of this Loan as well as the first loan. 10. The Loan Agreement conforms generally to the normal pattern of the Bank's loan agreements providing for a trust deed. Attention is drawn to the following provisions: (a) The arrangements for the security to be received by the Bank are set forth in Section 5.04. (b) Until the security arrangements have been completed not more than $3 million equivalent may be withdrawn from the Loan Account (Section 2.02). 11. The Guarantee Agreement is similar to previous Indian guarantee agreements. Since the Borrowers are privately-owned companies, the guarantee would extend only to the payment of principal, interest and other charges. PART IV - APPRAISAL OF TiE PROPOSED LOAN 12. An appraisal of the project, "Expansion of Trombay Power Station", No. T.O. 128b, dated May 13, 1957, is attached (No. 4). The Project 13. The project consists of a third thermal generating unit having a rated maximum capacity of 62,500 kw. The plant will be equipped with coal crushing and handling equipment and will primarily use domestic coal from Central India. It will also be equipped to burn fuel oil and by-products from an adjacent oil refinery. The Bank's loan would be used to finance the imported cost of a boiler plant, turbine generator and condensing equip- ment, accessory electrical equipment and transmission extension, coal hand- ling, coal crushing, and ash disposal equipment, engineering fees, contin- gencies and interest during construction. The total cost of the project is the equivalent of U.S. $ 14.0 million, of which $9.8 million is in foreign exchange. The Companies will find the local currency needed from their own resources, mainly by way of a Development Reserve, which they are obliged to create under the Electricity (Supply) Amendment Act of 1956, and which is to be used for investment purposes.  - 4- Justification of the Project 14. At the time the first Bank loan Was made, a forecast made by the Bank for power demand showed that, even after completion of the first two units of the Trombay plant, some restrictions on power use in the Bombay area would have to be enforced, pending completion of the Koyna hydro- electric project, which was to be constructed by the Bombay State Govern- ment. This forecast is still valid, with the exception that the antici- pated shortage is likely to be more severe. Even with the addition of a proposed third unit at Trombay, which is expected to come into operation in early 1960, there will be a continuing shortage of power in the region until the first unit of the Koyna project can come into operation in about September 1962. Besides the ability of a third Trombay unit to produce power at an earlier date than could be obtained from any alternative source, its addition will provide a desirable hydro-thermal balance on the Tata sys- tem. Economic Situation2/ 15. During the first year of the Second Five-Year Plan a 25% increase in public development expenditures has been accompanied by an unexpected boom in private industrial investment, defense expenditures have been stepped up, and it can be assumed that there has been some increase in personal consumption vwith the higher incomes generated by development. Industrial production has risen sharply, but there has been no correspond- ing expansion in agriculture, and real output as a whole has not grown fast enough to keep pace with the overall rise in demand. Payments for increased imports, particularly of development goods for both the public and private sectors, were met by heavy drawings on foreign exchange re- serves. During the year ending iviarch 31, 1957, the foreign exchange hold- ings of the Reserve Bank of India fell by Rs. 2.19 billion ($460 million), and on top of this India made use of credits from the IDEF amounting to Rs. 0.61 billion ($127.5 million). Foreign exchange reserves fell by a further Rs. 0.22 billion ($46 million) during April. 16. The large import surplus has mitigated the inflationary pressures resulting from increased deficit financing, and the expansion of money vol- ume during the past twelve months appears to have been no greater than the growth of real resources. However, the cost of living in the major cities has risen by about 10%, primarily as a result of the monetary hang-over from the previous year. On the capital market money has been extremely tight during the past six months, and interest rates have risen. 17. Towards the end of 1956 the Government took action to check the drain on foreign exchange reserves. Commercial imports were sharply re- stricted from the beginning of 1957; a six-months development holiday was declared for all new projects, except where special arrangements can be made for external financing; and possible future commitments for both pub- lic and private sectors are being thoroughly screened. Monetary policy has been directed towards discouraging speculative hoarding of stocks, and 1/ See report "Current Economic Position and Prospects of India", reference SEC .iA 57-76, d.ited L'ay 10, 1957.  - 5 - the Reserve Bank has raised its charges for loans to the commercial banks. Taxes were raised substantially in the latter part of 1956, and further large tax increases have been proposed in this year's budget of the Cen- tral Government, which was deferred until May because of the general elec- tions held in M.arch. All these measures will help to restrain d emand for consumption and investment and they must inevitably result in time in some slowing down of the pace of development. But it will be several months before their full impact is felt on the balance of payments because of heavy foreign exchange commitments previously incurred. 18. The Planning Commission is at present engaged in rephasing the Second Five-Year Plan, but this task will take several months, and it is not yet possible to say exactly where the cuts in planned development ex- penditures will fall. Even, however, when due allowance has been made for the maximum practicable cuts in expenditure and for higher receipts from foreign assistance which is already assured, there will still be a considerable "inflationary gap" during the coming year. Under these cir- cumstances some further price inflation seems inevitable, particularly since India cannot afford to go on drawing on her reserves to pay for additional imports at the same rate as during the past year. However, so long as this year's harvest is reasonably good, it should be possible to keep the rise in internal prices within tolerable limits. 19. On the other hand, India has made real progress with development over the past twelve months, and few of her resources have been frittered away on inessentials. Some rise in consumption was inevitable, but it ap- pears to have been kept within moderate limits. In the public sector in- vestment in agriculture, irrigation and power has been maintained at a high level, there has been a badly needed increase in expenditure on rail- way development, and a start has been made with the construction of three new steel plants; and there is an impressive list of new industrial pro- jects under way or recently completed in the private sector. These invest- ments provide a sound basis for further expansion in industry and agricul- ture, and it should still be possible to expand output at the rate of 4-5% a year, even if new investment has to be temporarily slowed dovun. 20. It has never been expected that any very large increase could be achieved in India's exports over the next few years, and the Second Five- Year Plan puts the main emphasis on import-saving. Already significant savings have been secured in imports of sugar, and investment under way in the iron and steel, engineering, paper, fertilizer, chemicals and cement industries should yield considerable additional savings, particularly from 1959 onwards, when the TISCO and IISCO steel expansion programs should be completed and the first of the three Government plants is due to begin operation. 21. India's total external public debt now amounts to the equivalent of about $620 million, excluding suppliers' credits, U.S. Government loans re- payable in rupees, and the further Soviet credit tentatively arranged. The servicing of this debt will reach a peak in the period 1960-1968, when pay- ments will probably average the equivalent of around $55 million a year, or  - 6 - rather under 5% of India's current annual earnings from merchandise exports. The additional service on the loan now under consideration during the period in question would be about $1 million a year. It should be well within India's capacity to service this clebt, as well as the further Soviet credit and a reasonable amount of suppliers? credits. IvMeth1od of Procurement 22. Except for the boilers, imported equipnent is being procured on the basis of international bidding. The Bank agreed to waive the requirement of international bidding for the boilers because the Borrowers, by placing orders with the German firm that furnished the boilers for the first two units, vwas able to avoid delay in starting construction and to save a sub- stantial sum on engineering expenses for foundation drawings and on the variety and quantity of spares to be carried. The price negotiated for the boilers is in line with current market quotations. Prospect of Fulfillment of Cbligations 23. The financial position of the Borrowers is sound and the undertakings are capably managed. The Bank, in calculating the consolidated cash flow., felt that for a few years after the completion of the project the Bcrrowers were likely., in view of a continuing investment program, to have rather a thin margin of cash available, and accepted the Borrowers' request to increase the proposed loan from $9.0 million to $9.8 million to cover interest during construction. The expected earnings of the Borrowers should make it possible to retire the entire loan by 1975. PART V - CaIPLIANCE 11ITH ARTICLES CF AGREENUENT 24. I am satisfied that the proposed loan complies ivith the requirements of the Articles of Agreement of the Bank. PART VI - REC0M;ENDATIONS 25. I recommend that the Bank make a loan to the three Companies in various currencies equivalent to $9.8 million for a term of 18 years with interest (including commission) at 5-5/8% with the guarantee of india, and on such other terms and conditions as are specified in the draft Loan and Guarantee Agreements attached and that the Executive Directors adopt a Resolution to that effect in the forn attached (No. 5). Davidson Sommers Attachments Washington, D.C. May 21, 1957