India - Nhava Sheva Port Project

Document of The World Bank FOR OFFICIAL USE ONLY I71LE W'CY Report No. P-3724-IN REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$250.0 MILLION TO INDIA FOR THE NHAVA SHEVA PORT PROJECT February 17, 1984 g This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  (i) CURRENCY EQUIVALENTS (As of January 30, 1984) tJS$l.00 = Rs 10.775249 Rs 1.00 = US$0.09280528 Rs 1 million = US$92,805 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 Rs 9.75, which represents the projected exchange rate over the disbursement period. FISCAL YEAR April 1 - March 31 ABBREVIATIONS BPT - Bombay Port Trust dwt - Dead weight tons GOI - Government of India grt - Gross (Registered) tons HIPL - Howe (India) Private Limited ICB - International Competitive Bidding LCB - Local Competitive Bidding m - Meter MOST - Ministry of Shipping and Transport NSPT - Nhava Sheva Port Trust PIU - Project Implementation Unit POL - Petroleum, Oil and Lubricants SLA - Subsidiary Loan Agreement Ton-kml - Ton-kilometers .i  (ii) FOR OFFICIAL USE ONLY INDIA NHAVA SHEVA PORT PROJECT LOAN AND PROJECT SUMMARY Borrower: India, acting by its President. Beneficiary: The Nhava Sheva Port Trust (NSPT) Amount: US$250.0 million, including the capitalized front-end fee. Terms: Repayment over 20 years, including five years' grace at the applicable rate of interest; front-end fee of 0.25% of base loan amount. Re-lending Terms: From the Government of India (GOI) to NSPT, with repayment over 25 years, including five years grace at an interest rate of 11.5% per annum. GOI would bear the interest rate and foreign exchange risks. Project Description: The purpose of the project is to ensure that the Bombay area can accommodate the expected growth in marine freight through that area by the year 1993. The project would construct a new container and bulk freight port with associated dredging of access channels at the Nhava Sheva site, about 20 kms distance from the existing, overcrowded Bombay port. Also included is the necessary mechanical equipment, linkages to the Indian Railway (IR) network, land acquisition, staff housing, and training in port operations. The new port is expected to move an annual volume of 250,000 containers and 3.7 million tons of bulk cargo (foodgrain and fertilizers) by 1993. The project return is sensitive to traffic forecasts and delays in completion of the construction and commissioning of the port. Traffic forecasts have been conservatively estimated, however, and ade- quate provision for additional financing of the NSPT's operations in the critical early years has been arranged. The risks are therefore considered to be adequately covered and are acceptable. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  (iii) Estimated Cost: (US$ millions) Item Local Foreign Total Land Acquisition 20.5 -- 20.5 Civil Works 154.7 62.6 217.3 Dredging 6.0 24.3 30.3 Plant and Equipment 44.0 70.7 114.7 CDntainer Freight Station 4.3 1.3 5.6 BUlk Storage Facilities 13.8 13.4 27.2 Utilities and Services 36.6 6.0 42.6 Residential Colony 24.6 -- 24.6 Technical Assistance and Engineering Services 10.9 5.1 16.0 Base Cost Estimate 315.4 183.4 498.8 Physical Contingencies 13.8 10.6 24.4 Pi-ice Contingencies 52.4 30.4 82.8 TOTAL PROJECT COST 1/ 381.6 1/ 225.4 606.0 Interest During Construction 115.4 -- 115.4 Front-end Fee on Bank Loan -- 0.6 0.6 Total Financing Required 497.0 225.0 722.0 Financing Plan: IBRD 50.0 200.0 250.0 Bombay Port Trust 205.0 -- 205.0 GOI and Cofinancing 242.0 25.0 267.0 Total 497.0 225.0 722.0 1/ Including an estimated US$76.0 million in taxes and duties.  (iv) Estimated Disbursements: (US$ millions) FY85 FY86 FY87 FY88 FY89 * Annual 30.0 1/ 90.0 85.0 30.0 15.0 Cumulative 30.0 1/ 120.0 205.0 235.0 250.0 Rate of Return: About 20% Appraisal Report: No. 4826-IN, dated February 16, 1984. 1/ Including payment of Front-end fee of about US$0.6 million.   INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO INDIA FOR THE NHAVA SHEVA PORT PROJECT 1. I submit the following report and recommendation on a proposed loan to India for an amount equivalent to US$250.0 million on standard terms to help finance the construction and commissioning of a new container and bulk freight port at Nhava Sheva, near Bombay, and associated equipment and infrastructural items. The proceeds of the loan will be onlent by the Government to the newly formed Nhava Sheva Port Trust at 11.5% per annum interest for 25 years includ- ing 5 years' grace. The exchange and interest rate risks will be borne by the Government of India. PART I - THE ECONOMY 1/ 2. An economic report, "Economic Situation of India and Resource Mobilization Issues" (4395-IN, dated April 11, 1983), was distributed to the Executive Directors on April 19, 1983. Country data sheets are attached as Annex I. Background 3. India is a large and diverse country with a population of about 700 mil- lion (in mid-1982) and an annual per capita income of US$250. 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 with little or no land. Growth of value-added in agriculture -- 2.2% since 1950/51 -- has been slower than growth of industrial value-added (5.0% per annum). As a result, there has been a gradual decline in the share of agriculture in GDP (at factor cost) from 60% to just under 40%, while the share of industry rose from 15% to around 25%. 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 rising 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 1/ Parts I and II of the report are substantially the same as Parts I and II of the President's Report for the Karnataka Social Forestry Project (No.P-3683-IN), dated November 21, 1983.  -2- markedly since 1950/51: gross national savings more than doubled from 10.8% of GDP (at factor cost) to 22.8% in 1982/83, while gross domestic investment rose from 12.5% of GDP to 24.9% in 1982/83. Foreign savings (balance of payments deficit on current account) have never financed a major portion o4 lt)mestic investment: a peak of about 20% was reached during the early 1960s. Surpluses arose for a few years in the late 1970s, and at the present time, foreign savings are about 8% of investment. External assistance has been low both as a percentage of GDP and in per capita terms, never rising above 3% of GDP and averaging below 1% for the past five years. Net foreign savings have never risen above 3% of GDP, and presently stands at 2.1%. 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 a,veraged only 2.2% per annum, while the volume growvth 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 7.3% 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, con- tributed to this growth, liberalized access to imported inputs and more effec- tive 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 4.9%, 3.9% and 5.6%, respectively. In 1979/80, however, this momentum was broken when the worst drought in recent years, combined with a doubling of international oil prices and ldomestic supply shortages, led to a sharp fall in fooclgrain production, a decline in GDP, and the opening up of a large trade deficit. Severe inflationary pressures also emerged after several years of virtual price stability. These setbacks in 1979/80 coincided with the prepara- tiorn of the Sixth Five-Year Plan which laid down a program of adjustment that aimed at improving the trade deficit, removing infrastructural bottlenecks and ensuring price stability with an overall growth of the economy of 5.2%, 1.6 per- centage points above the trend growth of 3.6%. Recent Trends 7. In 1980/81 and 1981/82, the economy substantially recovered with real GDP growing by 7.9% and 5.2%, respectively. While industrial output expanded by 4% in 1980/31 and 8.6% in ]L981/82, recovery was particularly robust in agriculture where nornal weatlier helped output to rise by more than 15% and 5.5%, respectively. The availability of power, coal, and rail transport, already improved in 1980/81, was even better in 1981/82, recording growth rates of about 10%, 9.6% and 12.9%, respectively. The easing of constraints on the supply of infrastructure and basic commodities was a determining factor in the improved performance of the industrial sector. This overall improvement in the Indian economy, combined with a more restrictive monetary policy contributed to a sharp decline in the rate of iaflation. Wholesale prices rose by about 9% on an average annual basis in 1981/82 and by only 2.5% in 1982/83, reflecting a strong deceleration from a peak increase of 18% in 1980/81.  -3- 8. After two years of fairly solid performance, the Indian economy faced a difficult year in 1982/83 due to the drought in mid-1982 which brought down the GDP growth rate to around 2% and put further strains on the already dif- ficult balance of payments and domestic resource situation. Besides a sig- nificant decline in the range of 4.5%-6.5% in agricultural production, GDP growth was also constrained by a slowdown in industrial growth from 8.6% in 1981/82 to about 4% in 1982/83. This resulted from a combination of several factors, notably the decline in agriculture income, persistent (though lessened) power shortages, a textile strike in Bombay, as well as depressed export markets and increased competition from imports. The Government was able, however, to protect the level of savings to a large extent and keep the momentum of the investment program through largely successful public sector resource mobilization efforts. Foreign savings played a crucial role in sup- port of this effort. Similarly, the timely implementation of various economic policies mitigated the otherwise very distressing effects of a poor monsoon. Continued improvements of the infrastructure sectors, although at a slower pace than in the previous two years, also reduced the negative effects of the drought. 9. Agricultural production in 1982/83 received a serious setback from the drought. Foodgrain production, which had reached a record 133 million tons in 1981/82, declined to 124-127 million tons. Production of most other major crops also declined in 1982/83. Corrected for weather variations, this still represents a creditable performance. In 1979/80, with a broadly comparable monsoon, foodgrain production reached only 109 million tons. The Government was able to mitigate the effects of the 1982 drought through efficient manage- ment of foodgrain procurement and distribution, careful timing of foodgrain imports, and appropriate allocation of power to irrigation pumps. These policies helped to avoid disruptions in basic food supplies and contributed to price stability during the year. While the management of the foodgrain economy after the drought was a significant achievement, tne effect of the drought on production re-emphasized the continued importance of the monsoon in India's agriculture. The performance of the recent past and probable future trends suggest that on average foodgrain supplies will meet demand. The balance remains delicate, and the need for foodgrain imports to maintain con- sumer supplies or adequate buffer stocks could arise from time to time. Thus, programs to expand irrigation, strengthe!a extension and encourage the efficient use of other agricultural inputs continue to receive high priority. 10. Basic infrastructure services performed generally well in 1982/83, although growth of coal, power and rail transport failed to maintain the momen- tum of the marked recovery of 1981/82. Despite lower hydro generation due to the failure of the monsoon, overall power generation recorded an increase of about 7%. This was due largely to an increase in capacity utilization in thermal plants resulting from improved overall management, stabilization of most of the new large units and better availability of coal due to the combina- tion of increased coal production and improved railway performance. Nevertheless, power shortages remain the major bottleneck in the economy. Railway traffic grew by only 3.7% ia 1982/83 reflecting a slowdown from 1981/82. The lower growth was due not to a decline in the operational efficiency of the railways but rather to slack demand from core sectors like steel, iron ore, coal washeries and fertilizers. Coal production growth (4% in 1982/83), after 10% growth in the two precedtig years was creditable. There were no major shortages and there were improvements in the quality of coal. Recent easing of shortages and bottlenecks in infrastructure has come primarily from better utilization of existing capacity, but in the future most improve- ment must result from added capacity. It is therefore critically important  -4- that: India maintain the pace of investment in these key sectors and mobilize sufficient resources to do so. 11. The Indian economy has reverted from a sitiiatton of resource surplus, which had been a temporary phenomenoni of the late 1970s, to one of resource scarcity. Investment has again grown quicker than national savings, and the scope for further increases in the latter appears limited. India's gross national savings rate, which averaged 22.4% of GDP in the last three years, is high by any standard, particularly considering India's low income and the large proportion of its population living below the poverty line. Future increases in savings will depend heavily upon t:he enhanced profitability of public sector enterprises which would require better utilization of capacity, more efficient operations and adequate pricing policies. In 1981/82 there was a significant increase in public savings due to improved profitability of various public sect:or enterprises. This trend which was maintained in 1982/83 needs to be accelerated. The gap between gross investment and national savings which rose frorm 0.4% of GDP in 1979/80 to 1.8%, 2.3% and 2.1%, respectively in the first three years of the 1980s, has been financed by foreign savings. 12. India's ability to generate resources to meet its development objec- tives has become increasingly linked to the balance of payments. The current account balance which recorded surpluses between 1976/77 and 1978/79, sharply deteriorated to deficits of nearly US$2.9 billion in 1980/81 and US$3.8 billion in 1981/82 (1.8% and 2.3% of GDP, respectively). This was partly due to a sharp rise in the oil import bill as a result of both the disruption of oil production in northeast India in 1980 and significant oil price increases, and to