India - Dudhichua Coal Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 4714-IN STAFF APPRAISAL REPORT INDIA DUDHICHUA COAL PROJECT February 28, 1984 Industry Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Rs 1.00 = Paise 100 US$1.00 = Rs 9.75 Rs 1.00 US$0.103 Rs 1 million = US$102,600 (Conversions in the Staff Appraisal Report were made at US$1.00 to Rs 9.75, which represents the projected exchange rate over the disbursement period) FISCAL YEAR April 1 - March 31 WEIGHTS AND MEASURES 1 British thermal unit (Btu) 0.252 kilocalories 1 cubic meter (m3) = 1.308 cubic yards 1 gigawatt hour (GWh) - 1,000,000 kilowatthours 1 kilocalorie (kcal) = 3.97 British thermal units 1 kilocalorie per kilogram = 1.805 British thermal units per (kcal/kg) pound 1 kilogram (kg) = 2.205 pounds 1 kilowatt (kW) = 1,000 watts 1 megawatt (MW) = 1,000 kilowatts 1 ton = 1,000 kilograms PRINCIPAL ABBREVIATIONS AND ACRONYMS USED BCCL - Bharat Coking Coal Ltd. BICP - Bureau of Industrial Costs and Prices BPE - Bureau of Public Enterprises CCL - Central Coalfields Ltd. CEA - Central Electricity Authority CIL - Coal India Ltd. CMO - Central Marketing Organization of CITL CMPDI - Central Mine Planning and Design Institute DOC - Department of Coal ECL - Eastern Coalfields Ltd. GOI - Government of India GSI - Geological Survey of India ICB - International Competitive Bidding IISCO - Indian Iron and Steel Company IR - Indian Railways MEC - Mineral Exploration Corporation MP - Madhya Pradesh NEC - North Eastern Coalfields NHPC - National Hydro Power Corporation NTPC - National Thermal Power Corporation OMS - Output per Manshift ONGC - Oil and Natural Gas Commission PLC - Planning Commission SCL - Singareni Collieries Ltd. SLC - Standing Linkage Commnittee SEB - State Electricity Board TISCO - Tata Iron and Steel Company UP - - Uttar Pradesh WCL - Western Coalfields Ltd. WGEP - Working Group on Energy Policy  FOR OFFICIAL USE ONLY INDIA DUDHICHUA COAL PROJECT TABLE OF CONTENTS Page I. INTRODUCTION ............................................. 1 II. THE ENERGY SECTOR ........................................ I A. Supply and Demand ................................... 1 B. Energy Sector Strategy .............................. 3 C. The Coal Sector ..................................... 3 1. Background ..................................... 3 2. Reserves ....................................... 4 3. Coal Production and Transportation .... ......... 6 III. THE MARKET FOR INDIAN COAL .............................. . 7 A. Indian Coal Supply/Demand and Prospects .... ......... 7 1. Coal Supply .................................... 8 2. Coal Demand .................................... 10 B. Coal Supply Allocation and Marketing .... ............ 13 1. Supply Allocation .............................. 13 2. Marketing ...................................... 14 C. Pricing ........... 14 1. Prices and Pricing Policy ...................... 14 2. A Rational Approach to Coal Pricing Policy for Indian Coals ............................... 17 IV. THE BENEFICIARIES ........................................ 19 A. Coal India Ltd. ..................................... 19 1. Organization and Management .................... 19 2. Operations ..................................... 21 3. Financial Position ............................. 23 4. Development Strategy and Investment Plan .... ... 24 B. Central Coalfields Ltd. ............................. 26 This report was prepared by Messrs. J. Barrientos, B. Stenberg, J. Strongman and Ms. H. Wu of the Industry Department and Mr. S. Luode (YPP). 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.  - ii. - TABLE OF CONTENTS (Cont'd) Page V. THE PROJECT . .............................................. 29 A. Project Objectives .................................. 29 B. Project Description ................................. 29 1. Location ....................................... 29 2. Reserves ....................................... 30 3. Mining ......................................... 30 4. Infrastructure ................................. 31 5. Consumers and Transportation ................... 32 6. Environment .................................... 34 C. Project Execution and Implementation ................ 34 VI. CAPITAL COSTS, FINANCING AND PROCUREMENT ...... .. ......... 38 A. Capital Cost Estimate ............................... 38 B. Financing Plan ...................................... 40 C. Procurement and Disbursement .# ...................... 42 VII. FINANCIAL ANALYSIS ................... .................... 43 A. Coal India Ltd. ..................................... 43 B. Central Coalfields Ltd. ............................. 48 C. Dudhichua Coal Project .............................. 49 VIII. ECONOMIC ANALYSIS ........................................ 51 A. Least Cost Solution ................................. 51 B. Economic Rate of Return ............................. 52 IX. AGREEMENTS ....................... ........................ 53 CHARTS 5-1 Dudhichua Project Management Organization .... ....... 35 5-2 Dudhichua Implementation Schedule ................... 37  - 112l - ANNEXES 2-1 Primary Energy Production, Trade and Consumption 2-2 Energy Consumption by Sector 2-3 Findings and Recommendations of the Working Group on Energy Policy 2-4 Note on Indian Power Sector 2-5 Note on Indian Railways 3-1 World Coal Market 3-2 CIL - Planned Coal Production by Grade, FY1982 3-3 Coal Demand by Producer, FY1989 3-4 Assumptions Used in Coal Demand Projections 3-5 Coal Price Schedule 3-6 Sales Taxes and Levies on Coal 4-1 CIL Corporate Organization 4-2 Activities and Financial Performance of CIL Subsidiaries 4-3 Scope of Work for Study on Budgetary Systems 4-4 Scope of Work for Technical Assistance on Operational Practices in Open Pit lines 4-5 CIL Financial Statements 4-6 CIL Investment Plan 4-7 CCL Corporate Organization 5-1 Railways Capacity of Selected Routes 5-2 Terms of Reference for Project Implementation Manual 6-1 Equipment Cost Estimate 6-2 Bank-Financed Goods 6-3 Procurement Schedule for Bank-Financed Goods 6-4 Disbursement Schedule for Bank Loan 7-1 Assumptions Used in the Financial Projections 7-2 Pro Forma Financial Statements for Coal India Ltd. 7-3 Pro Forma Financial Statements for Central Coalfields Ltd. 7-4 Financial and Economic Rates of Return - Assumptions and Calculations 8-1 Economic Rate of Return - Cost and Benefit Streams MAPS IBRD 17252 Principal Coalfields in India IBRD 25057 Singrauli Coalfields IBRD 25055 Dudhichua - Project Area  - iv - DOCUMENTS AVAILABLE IN THE PROJECT FILE Operational Statistics 1974-75/1979-80, Coal India Ltd. Annual Reports and Accounts, Coal India Ltd. 1975-76 to 1981-82 Annual Sales and Marketing Review, Coal India Ltd. 1981-1982 Feasibility Report for Dudhichua Coal Project, CMPDI, Ranchi, August 1982 Annual Reports, Department of Coal 1979-80 to 1981-82 Coal and Coal India, Training and Management Development Wing, Coal India Ltd. Appraisal Report on Coal India Project Management, Fluor Engineers, March 1983 Theory and Pricing for Public Sector Undertakings, A. Ghosh, Sept. 1982 Singrauli Coalfields, The Future Energy Capital, Central Coalfields Ltd., July 1982 Review and Assessment of Coal India Planned Investment Program, British Mining Consultants, March 1983 Singrauli Coalfields, A Profile of Program and Future Prospects, Central Coalfields Ltd., October 1980 Project Monitoring Report, Quarter ending September 1982, Central Coalfields Ltd.  I. INTRODUCTION 1.01 The Government of India (GOI) has requested a Bank loan to help finance the cost of the initial development of the Dudhichua open pit coal mine located in Singrauli, at the state border between Madhya Pradesh and Uttar Pradesh (Map IBRD 17252). The Dudhichua mine will have a final capacity of 10 million tons per year (tpy) which is to be developed in two phases, the first of which (5 million tpy) is included in the proposed project's scope. The project will be owned and operated by Central Coalfields Ltd. (CCL) a wholly-owned subsidiary of Coal India Ltd. (CIL), a Government undertaking. The Dudhichua mine forms part of GOI's plan to increase the utilization of indigenous energy resources. In order to meet coal demand for power generation, the Government has chosen the strategy of basing the expansion of coal production on the development of large scale, mechanized open pit mines, such as Dudhichua. 1.02 The financing requirement of the Project, including escalation, contingencies, interest during construction and working capital, are estimated at US$373 million, of which about US$128 million is in foreign exchange. The proposed Bank loan of US$151 million would cover about 40% of the financing requirements. The balance of US$222 million will be provided from internally generated funds of CIL and from Government resources. 1.03 The proposed project was submitted by GOI for the Bank's consideration in July 1982, and a pre-appraisal mission visited India in September/October 1982. It was appraised in March 1983 by a mission comprising Messrs. J. Barrientos (Chief), P. Kotschwar, B. Stenberg and J. Strongman of the Industry Department, Mr. S. Luode (YPP), and Messrs. B. Samuelson and P. Smallman (consultants). Il. THE ENERGY SECTOR A. Supply and Demand 2.01 Coal is India's most abundant indigenous energy source. Total coal resources 1/ are estimated at over 112 billion tons equivalent to about 61 billion tons of oil equivalent (toe). Of these resources, about half (30 billion toe) are considered to be technically and economically recoverable reserves given present conditions. By comparison, India's prognostic recoverable hydrocarbon reserves were recently estimated at 6.5 billion toe. Based on its abundant coal reserves, the Indian economy has developed over time with coal as the main energy source. In 1981/82, India produced 125 million tons of coal and 6 million tons of lignite which accounted for 54% and 1% respectively of commercial energy supply. Hyoroelectric and nuclear power generation provided 12% of primary energy supply and oil represented about 33% of energy supply as shown in Annex 2-1 and summarized in the table below. About 55% of petroleum products were of imported origin and the cost of imported oil represented a major burden for the balance of payments, amounting to US$6 billion in 1981/82 or over 70% of merchandise export earnings. 1/ Contained in seams greater than 0.5 metres and at depths of up to 1,200 metres.  India - Commercial Energy Supply (million tons of oil equivalent) a/ Average Annual Growth Rate (%) Fiscal Year 60/61 70/71 80/81 81/82 1960-70 1970-80 Coal & Lignite 27.8 37.1 58.2 63.5 2.9 4.6 Petroleum 7.9 19.0 34.7 38.4 9.2 6.2 Hydro & Nuclear Power 1.9 6.6 11.9 13.7 b/ 13.2 6.1 Total 37.6 62.7 104.8 115.6 5.2 5.3 a/ Based on the following conversion factors: one ton of oil equivalent (toe) is equal to 2 tons of domestic coal; 5.88 tons of lignite; 0.94 tons of refined petroleum products; 1,235 cubic meters of natural gas; 4,166 kWh of hydro and nuclear power. b/ Estimated. 2.02 In 1980/81, the industrial sector accounted for 55% of India's commercial energy consumption, up from 43% in 1960/61 as shown in Annex 2-2 and summarized as follows: India - Sectoral Breakdown and Growth of Commercial Energy Consumption a/ (percent) Average Annual Growth Rate (%) Fiscal Year 60/61 70/71 80/81 b/ 1960-70 1970-80 Households 14.9 13.7 11.2 4.6 4.8 Agriculture 1.9 3.4 6.3 11.8 11.2 Industry 43.4 48.9 55.5 6.7 5.8 Transportation 36.9 29.8 23.4 3.2 2.0 Other 2.9 4.2 3.6 9.3 2.8 Total % 100.0 100.0 100.0 5.4 4.5 Total (in million toe) 30.9 52.4 81.6 a/ Coal, lignite and oil used for power generation are excluded from these consumption trends; electricity consumption is included but on a delivered basis to consumers. b/ Provisional. Source: Working Group on Energy Policy; Ministry of Petroleum, Chemicals and Fertilizers; and Department of Coal.  -3- B. Energy Sector Strategy 2.03 GOI's energy policy has been based on the principle of maximizing the development of indigenous resources and also, more recently, on encouraging improved efficiency of energy utilization. A comprehensive study on India's future energy supply and demand prospects undertaken by the Working Group on Energy Policy (WGEP) was published in 1979. The findings and recommendations of the WGEP are given in Annex 2-3. In line with this policy, GOI is emphasizing the development of coal and of power generation utilizing coal or hydro resources, and has substantially increased the investment in these sectors in recent years. Preliminary figures call for coal production to increase to 232 million tpy by the end of the Seventh Plan representing an annual growth rate of 8.0% and for electric power generating capacity to more than double to 74,000 MW with 59% of the incremental capacity by coal-fired units, 39% by hydro and 2% by nuclear. Based on GOI's estimates coal will continue to be the most important energy source in India in the future and its contribution to the country's energy requirements will remain at about 50% over the next decade. GOI is also making a concerted effort to accelerate oil and gas development both through national oil companies and by foreign oil companies who have been invited to submit bids for exploration and production sharing on many blocks both offshore and onshore. However, despite these advances, India will remain dependent on imported oil to meet a significant part of its primary energy requirements, in particular, for the growing demand in transport. 2.04 The Bank's role in the energy sector has been most extensive in the power sector. In the past thirty years fourteen loans totalling US$1,133 million and fifteen IDA credits totalling US$2,096 million have been made for India's power projects. A basic account of the Bank's role in the power sector is given in Annex 2-4. 2.05 More recently, the Bank has expanded its assistance into the oil and gas sector, responding to changes in the needs and priorities of the Indian energy sector over the past decade. Four loans totalling US$940 million have been made to the Oil and Natural Gas Commission (ONGC) for oil and gas exploration and development; a US$200 million loan was also made in April 1982 for the modernization of several refineries. The Bank's role in the oil and gas sector has addressed several inter-related aspects including providing policy advice on hydrocarbon exploration, development, processing and utilization and strengthening the technical capabilities and financial positions of project entities. C. The Coal Sector 1. Background 2.06 The coal industry in India originally developed with a large number of small, independent mines. In 1956, some of the producers were taken over and consolidated into one larger government-owned company (the National Coal Development Corporation). Subsequently, in the early 1970s almost the entire industry was nationalized and in 1975 the Coal India Ltd (CIL) group of companies was formed which accounted for 88% of India's coal production in 1982/83. In addition to CIL there are three other coal producers and one lignite producer. The other coal producers are Singareni Collieries Ltd. (SCL), with 10% of total coal production, which is owned by GOI and the State  - 4 - Government of Andhra Pradesh, and captive coking coal mines of the privately-owned Tata Iron and Steel Company (TISCO) and the government-owned Indian Iron and Steel Company (IISCO) - 1% each of total coal production. In addition to coal production, lignite is produced by the 100% government-owned Neyveli Lignite Corporation in the state of Tamil Nadu which produced 5.9 million tons of lignite in 1981/82. 2.07 The Department of Coal, Ministry of Energy (DOC) is in charge of policymaking in the coal sector, and it monitors and coordinates activities in the sector. This includes all matters pertaining to the production, supply, distribution and prices of coal. The DOC is responsible for the administration of various Acts relating to coal and lignite production in India, as well as for approving the annual production targets and investment and operating budgets for the government-owned coal/lignite mining companies. The Planning Commission (PLC) scrutinizes and reviews the coal sector production and investment program and sanctions linkages between new mines and major consumers. 2.08 The Bank has made one loan for a coking coal project to the Indian Iron and Steel Company in 1961 for US$35 million (Loan 290-P-IN). Activity in the sector resumed with a Sector mission in 1980, following which the India Coal Sector Report, Report 3601-IN, September 1982 was issued. That report provided a basic introduction to the sector and addressed various issues regarding coal exploration, production, investment, transportation, consumption and pricing which were considered important to the future development of the sector. In particular the report proposed a number of recommendations designed to (i) improve the efficiency of existing coal exploration and mining operations; (ii) reduce transportation bottlenecks for coal; (iii) improve project implementation capabilities and maximize production growth; and (iv) establish the industry on a sound financial basis through economic pricing policies and appropriate financing and resource mobilization strategies. Subsequently, the GOI accepted many of the recommendations and has taken steps to implement them as well as requesting Bank assistance in financing certain projects in the sector. The proposed project would support further improvements in the sector, first, by providing financing to the sector and, second, by supporting a number of important actions or studies on which subsequent action will be taken, regarding coal transportation (para. 2.16), supply/demand and linkages (para. 3.13), pricing and resource mobilization (para. 3.28), operating efficiency of open pit mines (para. 4.10), cost control and budgeting (para. 4.07) and project management (para. 5.20). The GOI has also requested Bank financing for a second project, the Jharia Block 2 Coking Coal Project, and this is being processed separately on a later timetable. 2. Reserves 2.09 India's coal reserves 1/ are estimated at 86 billion tonnes of which 78% are thermal coal, used primarily for heat and steam generation, and 22% are coking (i.e. metallurgical) coal used in steel making as shown below: 1/ Contained in seams of 1.2 metres and above and at depths of up to 600 metres.  -5 - India - Coal Reserves (million tons) Proved Indicated Inferred Total Coking Coal 9,597 7,263 1,891 18,751 Thermal Coal 15,096 29,498 22,233 66,827 Total 2 4 . 6 9 3 _ 24.124 85.578 Source: 1981-82 Annual Report, Department of Coal. 2.10 Basic geological exploration is undertaken by the Geological Survey of India (GSI) which is responsible for regional prospecting/reserves assessment. Detailed exploration including proving up reserves for mine feasibility work is undertaken by the government-owned Mineral Exploration Corporation (MEC) and by the Central Mine Planning and Design Institute (CMPDI), a subsidiary of CIL. India's coal reserves are found mainly in the eastern part of the country (MAP 17252) where extensive exploration has taken place in the past. More recently, the rapid growth of demand by consumers in western India, especially in the Bombay area and in Gujarat, has generated a need for new coal developments in central India. In order to meet this need, priorities have been adjusted to emphasize coal exploration in Maharashtra and western Madhya Pradesh. This is a sound approach. As new deposits are identified and subsequently developed in these areas over the next decade, this strategy is expected to be successful in making coal supplies more readily available without the long transportation linkage from the distant eastern coalfields. 2.11 Much of the known reserves in eastern India are located in deep deposits in Bihar and West Bengal which result in difficult mining conditions. A priority has also been given to identifying large coalfields with shallow deposits which can be developed with large scale open-pit mining technologies. This is a sound strategy which has resulted in several such deposits being identified in recent years. The largest of these are the Karanpura and Singrauli coalfields with estimated coal resources of 15 and 10 billion tons respectively. Other important areas are the Obra coalfield (4 billion tons), the Wardha valley (4 billion tons) and the Ib valley (2 billion tons). So far, of these various areas only the first three have been developed. The other two are presently being explored. 2.12 There is a wide variation in the quality of thermal coal reserves. Useful calorific value 1/ ranges from 1,300 kcal/kg to over 6,200 kcal/kg. There is also a wide variation in the quality of coking coal reserves with ash content varying from 18% to over 35%. The bulk of the thermal coal reserves are in the 3,500-4,500 kcal/kg range of useful calorific value, the bulk of coking coal reserves in the 26% to 32% range of ash content. To date, the coking coal reserves have been relatively more extensively explored and developed than the thermal reserves, and as a result, coking coal reserves account for about 39% of proven total coal reserves. Reserves of high quality thermal and coking coals are limited and both are in short supply. Most thermal coals require certain preparation before use, which generally takes 1/ Useful calorific value is derived from the gross calorific value after allowing penalties for ash and moisture content.  -6 - the form of separation of shale and rock from the coal by hand picking and some screening of material. About 90% of the coking coal needs to be washed in order to reduce the ash content to more acceptable ranges for feed to the steel mills. 3. Coal Production and Transportation 2.13 Coal production was 130.6 million tons in 1982/83, of which about 60% was from underground mines and the balance from open-pit. Total employment in the coal sector in India in December 1982 was about 723,000 employees of which about 50% were in clerical or unskilled manual grades. The degree of mechanization in Indian underground mines is low compared to the major underground coal producing countries in the world. About 96% of underground coal mining in India is by manual methods and only 4% by mechanized operations. All of the mechanized underground mining has been introduced by CIL since its formation and is still under implementation and has not reached full production. Output per manshift (OMS) averages 0.55 tons in underground mines compared with 1.5-3.0 tons in the deep older mines in Europe and 8-12 tons in the new, shallower, highly mechanized underground mines in Australia, South Africa and North America. Given the relative shortage of capital and surplus of labor in the Indian economy, it is not economically justified for Indian underground mines to try and reach a similar degree of mechanization as the capital intensive mines in industrialized countries since the relative values of capital and labor are different. The Indian industry is nevertheless targeting a 10-20% improvement in average underground OMS by the end of the decade. This is considered appropriate and achievable based on relatively simple measures to increase mechanization of coal extraction, handling and loading and on improved training of the work force and upgrading of unskilled to semi-skilled capabilities. 2.14 Most Indian open-pit coal mines are presently small to medium size (1-3 million tpy) compared with the world coal industry. Consequently, Indian equipment (35-85 ton trucks, 4-10 m3 shovels and 10 m3 bucket/50 m boom draglines) are presently somewhat smaller than can be found in large open-pit coal mines worldwide (120-200 ton trucks, 15-20 m3 shovel and 30-40 m3 bucket/90-120m boom draglines). The Indian coal industry is progressively moving towards larger mines and equipment. This is a desirable policy since larger operations offer economies of scale and lower unit production costs. Progress has been cautious since the use of very large equipment brings with it an inherent risk that the breakdown of a single piece of equipment will cause a much greater production loss than the failure of a small item of equipment. The move to larger equipment has also been impeded by a lack of foreign exchange since the largest equipment must, for the most part, be imported. Further, in the case of dump trucks, moving to sizes above 120 tons capacity involves a shift in technology from mechanical to electrical drive and, therefore, requires the acquisition of new skills and maintenance procedures which are now being developed in CIL. Some of the new open-pit mines presently under construction will have ultimate capacities of 5-10 million tpy (para. 4.17) as in the case of Dudhichua (para. 5.06) and larger equipment is already being introduced in some of these mines. 2.15 Coal is transported primarily by rail (70%) followed by roadways (25%) and, to a very limited extent, by coastal barges and ropeways. In 1981/82 the average haulage distance for coal was 566 km. About half of the coal is carried over short to medium distances of up to 500 km since many  industrial consumers, most steel plants and a large number of power houses are located in the eastern area, near to the major coalfields. One third is transported to consumers located 500-1,000 km from the mines and the remainder over 1,000 km to consumers in northern, western, and southern India. These distant consumers are located in four main geographical areas. One is a group of northern states around Delhi, i.e., Punjab, Haryana and northern Uttar Pradesh. A second is the emerging industrial belt in Gujarat. The third is the western portion of Maharashtra, including Bombay, and the fourth is the southern tip of India in Tamil Nadu especially along the eastern sea coast. 2.16 The performance of Indian Railways (IR) in carrying coal and other bulk goods deteriorated sharply from 1976/77 to 1980/81 when originating traffic declined from 239 million tons to 220 million tons. An account of the operational difficulties which contributed to this declining performance together with the efforts of GOI and IR and assistance from the Bank to overcome them is provided in Annex 2-5. While the measures taken to improve IR's performance are espected to result in future improvements in coal haulage, no systematic analysis has been undertaken which would indicate how well the railways will be able to deal with the anticipated coal haulage requirements by the end of the decade. Recognizing the major difficulties facing the railways, there is an urgent need for an overall system study of how the railway system can be best utilized for carrying coal in view of the importance of coal transportation for coal consumption by consumers in northern and western India. Such a study would (a) define improvements in systems for handling and transporting coal including fixed loading and unloading facilities, wagon design and wagon utilization; (b) establish an optimal investment program based on reviews of investment priorities and payoffs; and (c) identify what alternative modes of transportation will be necessary to make up any shortfall in railway carrying capacity for coal. GOI has agreed to initiate the necessary studies, before April 30, 1984 after exchanging views with the Bank on the terms of reference. These studies are expected to be completed in December 1985, and the Bank will be given an opportunity to comment on the results prior to the implementation of the recommendations. III. THE MARKET FOR INDIAN COAL A. Indian Coal Supply/Demand Situation and Prospects 3.01 India is the world's seventh largest producer and fifth largest consumer in terms of tonnages of hard coal. However, India's participation in the international trade has been minor. It has occasionally exported small quantities of thermal coal (0.1-0.7 million tpy) to neighboring countries and more recently, has become a minor importer of coking coal (1.0-1.5 million tpy). In both cases, India's contribution is less than 1% of world trade. For the future, similar levels of coking coal imports are expected to be required because steel production growth is expected to stay ahead of new coking coal mine development (para. 3.11). With regard to thermal coal, given that there will be little surplus coal production compared with domestic requirements in the next five to ten years (para. 3.11) and that coal transportation infrastructure is highly constrained (Annex 2-5) it is unlikely that India will develop significant coal exports. Even with a concerted  effort, India's exports might not be expected to exceed 2 to 3% of production within the next decade. For reference, an introduction to the world coal market and future supply, demand and price trends is given in Annex 3-1. 1. Coal supply 3.02 Coal production in India has increased from 56 million tons in 1960/61 to about 130 million tons in 1982/83 an average annual growth rate of 4.0%. Thermal coals comprise 77% of production, up from 71% in 1960/61 as shown below: India - Annual Coal Production 1960/61 to 1982/83 (million tons) Fiscal Year Thermal Coal Coking Coal Total 1960/61 39.69 15.98 55.67 1965/66 50.77 16.96 67.73 1970/71 55.13 17.82 72.95 1976/77 77.39 23.65 101.04 1977/78 77.66 23.31 100.97 1978/79 79.43 22.52 101.95 1979/80 80.45 23.50 103.95 1980/81 89.60 24.41 114.01 1981/82 98.44 26.47 124.91 1982/83 100.21 30.40 130.61 Source: DOC. 3.03 Coal production takes place predominantly in the Bihar/West Bengal coalbelt (Map 17252). However, coal production is increasing in other states, and Madhya Pradesh has recently overtaken West Bengal as the second largest coal producing state as shown below:  - 9 - India - Coal Production by State 1971/72 to 1982/83 (million tons) Fiscal Year 71/72 % 77/78 % 82/83 _ Bihar 32.6 45 42.1 42 54.1 42 West Bengal 17.3 24 23.0 23 19.0 15 Subtotal 49.9 69 65.1 65 73.2 57 Madhya Pradesh n.a. n.a. 20.3 20 30.7 24 Andhra Pradesh n.a. n.a. 8.0 8 12.3 9 Maharashtra n.a. n.a. 3.8 4 7.8 6 Orissa n.a. n.a. 2.2 2 3.5 3 Uttar Pradesh n.a. n.a. 0.9 1 2.4 2 Assam n.a. n.a. 0.6 1 0.7 1 Subtotal 22.5 31 35.8 36 57.4 45 Grand Total 72.4 100 100.9 101 a/ 130.6 102 a/ a/ Does not add to 100 due to rounding. Source: DOC and CIL. 3.04 Since its inception in 1975, the CIL group has accounted for about 90% of Indian coal production, the balance coming from SCL (which produces only thermal coal) and TISCO/IISCO (which produce only coking coal). SCL with new operations in Andhra Pradesh has grown most rapidly while production has increased only slightly at TISCO/IISCO which operate old, deep mines in the Jharia coalfield. India - Coal Production by Company, 1975/76 to 1982/83 (million tons) Annual Average Growth Rate (x) Fiscal Year 75/76 80/81 81/82 82/83 75/76 to 82/83 CIL 88.99 100.95 109.60 114.81 3.7 SCL 7.34 10.10 12.74 12.34 7.7 TISCO/IISCO 3.34 2.95 2.57 3.46 0.1 Total 99.67 114.00 124.91 130.61 3.9 Source: DOC 3.05 The bulk of Indian coals are relatively poor quality by international standards with an average useful heating value of about 4,000 kcal/kg for thermal coal and an average ash content of about 29% for run-of-mine coking coal. Grade definition and CIL's planned production by grade for 1982/83 is shown in Annex 3-2.  - 10 - 3.06 The Sixth Plan (1980/81 to 1984/85) originally included a target production of 165 million tons for 1984/85, (representing an average annual growth of 7.7% from the production level of 1980/81). However, based on the production trends to date, a target of 153 million tons is considered a more realistic assumption. A set of longer-term supply projections to the end of the Seventh Plan have recently been prepared by the Central Mine Planning and Design Institute (CMPDI), the engineering and planning subsidary of CIL (see para. 4.04). These projections indicate a total coal production of 232 million tons by 1989/90, including 200 million tons from CIL. Although this estimate already incorporates a cut-back of about 15% from previous figures, it still appears optimistic. An examination of the status of formulation and implementation of CIL's projects indicates that in some cases the production build-up of some of the new open pit mines is optimistic. Given the early stages of preparation in particular for six projects to be included in the plan, a production of about 193 million tons by 1989/90 is considered a more realistic production projection for CIL. This translates in a supply projection of 224 million tons for all India, as shown below: India - Coal Supply Projection 1984/85 and 1989/90 (million tons) Annual Average Growth Rate (%) 89/90 82/83 to 89/90 Fiscal Year 82/83 84/85 CMPDI Revised CMPDI Revised CIL 114.8 132.0 200.0 193.0 8.3 7.7 SCL 12.3 16.0 26.0 26.0 11.3 11.3 TISCO/IISCO 3.5 5.0 5.8 5.0 7.5 5.2 130.6 153.0 231.8 224.0 8.6 8.0 Coking Coal 30.4 31.0 48.2 42.4 6.8 4.9 Thermal Coal 100.2 122.0 183.6 181.6 9.0 8.9 130.6 153.0 231.8 224.0 8.6 8.0 2. Coal Demand 3.07 The most important consuming sector is the power sector which accounted for 34% of coal consumption in 1981/82 up from 23% in 1974/75. This includes not only state and central government-owned power houses but also non-utility captive power houses for major industrial consumers (such as steel mills and aluminum plants) which accounted for about 3 million tons (7% of power sector) coal consumption. Other important consuming sectors are steel (for coking coal) whose share of consumption has remained constant at 21%, and other miscellaneous industries and small users whose share has declined from 35% in 1974/75 to 26% in 1981/82 as shown below:  - 11 - India - Coal Consumption by Sector (million tons) Annual Average Fiscal Year 74/75 % 81/82 % Growth Rate (%) Steel 18.5 21.2 26.5 21.7 5.3 Power 20.0 23.0 41.5 34.0 11.0 Railways 13.3 15.3 12.5 10.3 (0.9) Cement 3.7 4.2 6.0 4.9 7.1 Fertilizer 1.5 1.7 4.0 3.3 15.0 Other a/ 30.1 34.6 31.5 25.8 0.7 Total Coal 87.1 100.0 122.0 100.0 4.9 a/ Includes brick, paper, textile and other industries, households, colliery consumption and exports. 3.08 About 40% of thermal coal production consists of better quality coals (grades A, B and C) 1/ which are supplied on a priority basis to the railways (35%), certain older power plants mainly in eastern India (20%), cement kilns (15%) and selected small industrial users and fertilizer plants (30%). The bulk (about 55%) of the lower grade thermal coal (grades D-G) is supplied to the power sector and the remainder to miscellaneous industries and certain fertilizer plants. 3.09 Unlike production, where 58% is concentrated in Bihar and West Bengal, coal consumption is more widely spread throughout India as shown in the table below: India - Coal Consumption by Region, 1981/82 million tons % Northern States Delhi, Punjab, Rajasthan, Uttar Pradesh 23.0 19 Eastern States Bihar, West Bengal, Assam, 67.0 55 Madhya Pradesh, Orissa Western States Gujarat, Maharashtra, Rajasthan 19.0 16 Southern States Tamil Nadu, Andhra Pradesh, Karnataka 13.0 11 122.0 101 a! a/ Does not add to 100 due to rounding 1/ For a definition of various coal grades see Annex 3-2.  - 12 - Consumption in the northern states is provided largely from mines in the Bihar and West Bengal with most transportation by rail. Consumers in Maharashtra and Gujarat are supplied as much as possible from mines in Maharashtra and south western Madhya Pradesh with balancing supplies being provided from mines in eastern Madhya Pradesh, including the Singrauli coalfield. Consumers in the southern states receive their coal from SCL and from the CIL coalfields in West Bengal by coastal shipping through the port of Haldia at Calcutta. 3.10 Based on recent trends in the power and steel sectors, the coal demand projection for the end of the Sixth Plan (1984/85) has been assessed at 153-158 million tons, a reduction by 10-15 million tons from the original target in the Sixth Plan of 168 million tons. By 1984/85, therefore, thermal coal supply and demand are expected to be broadly in balance although some shortages may occur. But 1.0-2.0 million tpy coking coal imports are likely to be required. With regard to longer term projections, CMPDI 's most recent coal demand projections indicate a demand of 232 million tons for 1989/90, i.e. by the end of the Seventh Plan. CMPDI's projections for 1989/90 by main consumption sectors are shown below: India - Coal Demand Projection 1989/90 (million tons) Annual Average Fiscal Year 81/82 89/90 Growth Rate (x) Steel 26.5 48.2 7.8 Power 41.5 107.4 12.6 Railways 12.5 9.8 (3.0) Cement 6.0 11.5 8.5 Fertilizer 4.0 8.5 9.9 Other 31.5 46.4 5.0 Total Demand 122.0 231.8 8.4 Source: CMPDI. A further breakdown of projected coal demand in 1989/90 by sector and by producer is given in Annex 3-3. 3.11 The CMPDI estimates are based on latest information regarding the development plans of the various consuming sectors for the Seventh Plan period. These are based on an underlying GDP growth rate of 5-5.5% per year. The compatibility of these estimates with projections for the rest of the economy has not been closely checked and it is to be expected that they will be modified as the preparation of the Seventh Plan progresses. Fuller details of the specific assumptions for each sector are provided in Annex 3-4. While the CMPDI demand projections do not seem unreasonable, they may be somewhat over optimistic given the substantial expansion called for in the various consuming sectors. Past experience with previous coal sector projections indicates a tendency to overestimate future supply and demand. The relatively high growth rates projected by CMPDI may also be an indication of a continued tendency towards over-estimation. While there is insufficient information on which to make a specific adjustment, future demand estimates could well be overestimated by anywhere from 5 to 15 million tons in 1989/90. Given that the preparation of the Seventh Plan is still in a preliminary stage  - 13 - and that there are inherent uncertainties associated with future economic growth predictions, the margin of uncertainty would appear greater than the difference between the 1989/90 supply projection and demand projection. On the basis of present knowledge it is concluded that thermal coal supply and demand can be expected to be broadly in balance from now until 1989/90, although occasional surpluses and shortages may arise in particular years. For coking coal, it appears that shortages in the order of 1-2 million tpy will persist, although the exact size of the gap will depend on the timing of future increases in steel production vis-a-vis coking coal expansion. A more detailed treatment of coking coal supply and demand is to be undertaken as part of the Jharia Block II Coking Coal Project which is presently under preparation. B. Coal Supply Allocation and Marketing 1. Supply Allocation 3.12 The supply allocation and marketing of coal in India takes place within a set of formalized procedures whereby supply allocations and long-term linkages are administered by GOI rather than by the producers. With regard to the allocation of coal supplies to major consumers, such as steel mills, power houses and cement plants, monthly and quarterly interministerial operational meetings are held to establish allocation priorities and match available supplies with requirements. Allocation of coal to small consumers is undertaken by the producers in accordance with priorities set by GOI. With regard to long-term linkages between coalfields and major consumers, it is GOI's practice to establish them through a formalized set of planning procedures. Preliminary linkages for new mines and/or coalfields are proposed by the project sponsor to the DOC at the time of feasibility preparation. Subsequently, linkages between new mines and major consumers such as new power, steel or cement plants are finalized by an interministerial Standing Linkage Committee (SLC). The SLC, which is chaired by the DOC, meets four times a year. Linkage proposals are submitted by representatives of the various ministries responsible for the new projects requiring coal and supplies are allocated by the SLC from available sources based on least-cost criteria taking into account available transportation facilites. 3.13 While the linkages proposed by the SLC provide an optimal solution to match new coal consumers with new large-scale mines on an incremental basis, only limited cross checks are made to see if linkages need to be revised. Furthermore, because of the size of the system, no cross check is available to ensure that the totality of linkages satisfies optimality criteria. In order to establish the least-cost solution for the entire system, an analytical tool such as a computerized mathematical model is required to manipulate the data and generate a solution. Such analytical tools exist but have not yet been applied to the Indian coal production/transportation/utilization network. GOI has agreed to initiate the necessary studies to develop such a model, as soon as terms of reference are prepared and discussed with the Bank. These studies will be completed before December 31, 1985, by which time the findings will be reviewed with the Bank.  - 14 - 2. Marketing 3.14 Given that supply allocations, linkages and pricing (para. 3.17) are administered by GOI, the main marketing functions undertaken by the coal producers relate to the booking of orders, dispatch of coal, invoice for orders, receipt of payment, monitoring coal quality and ensuring that grade and delivery specifications are satisfied. In some cases penalities for sub-grade deliveries are agreed with consumers. These functions are undertaken by each of the CIL subsidiaries for their own production and by SCL. The CIL subsidiaries also operate coal stockyards in different parts of the country to satisfy the needs of small consumers. For the CIL group, there is a Central Marketing Organization (CMO), located in the CIL headquarters which is responsible for establishing marketing policies and procedures and for coordinating and overseeing the operations of the marketing departments of the subsidiary companies. CMO also assists with formulating national fuel policy, assessing the demand for coal, undertaking long-term sales planning and marketing research and promotion. 3.15 Traditionally, the coal producers have provided coal to consumers without specific market contracts. In recent years CIL has been attempting to introduce contracts with major customers which will specify volumes and premiums and penalties with regard to variations in coal quality within existing grade ranges. So far, the only user to enter such an arrangement with CIL has been the State Electricity Board in Gujarat. The more widespread use of such a contract is desirable in that it can provide incentives for the producers to improve the quality of coal being provided to consumers within a particular grade. 3.16 The major issue within coal marketing is that major consumers report that there has been a growing incidence of poor quality feed to power plants and other consumers of thermal coals. The main reason appears to be that insufficient concern has been given to coal screening, deshaling, stockpiling and dispatch methods. Also the economics of washing thermal coals has not been sufficiently studied. Poor coal quality can result in operational inefficiencies and increased transportation costs for consumers because of having to ship extra quantities of coal to make up for lower qualities. In July 1982, GOI set up a committee (the Fazal Committee) to carry out a study on coal quality basically focussing on these issues and their incidence on the power sector. The study was completed in late 1983 and is currently under review by GOI. Some of the main recommendations emphasize the need for reviewing linkages periodically, improving loading and transportation facilities, making more extensive use of coal preparation plants, improving sampling arrangements and introducing quality related bonus and penalties on supply contracts. All these are very positive steps to improve coal quality supplied to the power sector. GOT expects to complete its review of the Fazal's report in May 1984, at which time it would be made available to the Bank for comment. C. Pricing 1. Prices and Pricing Policy 3.17 Coal prices were placed under GOI control in 1944 under the Colliery Control Act and have been directly or indirectly administered by GOI ever  - 15 - since. From 1944 to 1975 average prices were generally sufficient for most producers to generate small profits. In July 1975, in an attempt to keep the price of coal low to the consumer thereby encouraging the substitution of coal for oil, and to put pressure on the newly formed CIL to be cost efficient, a new price schedule was issued by GOI which only covered cash operating costs. No provision for depreciation charges was made. The government's policy was to provide investment funds from central sources and the government did not appear to be concerned about the financial viability of the producers. During the next four years prices were kept unchanged. Over this period, CIL's average production cost increased by 36% from Rs 69 per ton to Rs 94 per ton. As a result in 1978/79, CIL incurred losses of Rs 2.4 billion on sales of Rs 5.4 billion (para. 4.14) and unplanned government loans were required to cover CIL's cash losses in addition to the funds provided for investment requirements. 3.18 A new direction in energy pricing was introduced in the 1980 Sixth Plan document which states, "in the past the pricing of energy has not always reflected either the true cost to the economy or helped to ensure the financial viability of the energy industries. This cannot be allowed to continue for long." Starting in July 1979, and continuing in February 1981, May 1982 and January 1984 the GOI authorized four price increases which provided a net price increase of 55% in real terms compared with the price levels prevailing during 1978/79 and which enabled CIL to become profitable in 1981/82 and 1982/83 (para. 4.14) after five successive years of losses. 3.19 The Government's basic pricing policy for public enterprises is to ensure financial viability and to provide for a reasonable rate of return on capital employed under conditions of efficient operation. In the case of the coal sector, consideration has been to bring CIL and SCL to an acceptable financial position, generating sufficient funds to cover their respective financial needs, including servicing of long-term debt and mobilizing funds for future investments. Accordingly, the May 1982 price adjustment was based upon the principle of recovering the full cost of production, subject to satisfactory operating norms, and allowing for a 10% return on assets. 1/ 3.20 In order to more fully examine the implications of its pricing policies for the coal industry, to define mechanisms to implement those policies and to see if any alternative policies warrant consideration, in early 1982, the GOI commissioned the Bureau of Industrial Costs and Prices (BICP) to undertake a detailed study of coal pricing. BICP's basic tasks included examining the efficiency of various coal mining operations to derive production cost standards, and reviewing alternative principles and procedures for setting minehead coal prices and producer retention prices. BICP's 1/ This approach was fully in line with pricing policies proposed for Government enterprises by the Bureau of Public Enterprises (BPE), which recommended to provide a fair rate of return which has generally ranged from 10-14% post tax on net worth depending on factors such as risk, priority, growth prospects, etc. For coal and certain other basic commodities, BPE further recommends that prices must be regulated to prevent a cascading effect on prices in general.  - 16 - approach included consideration of basing coal prices on long run marginal cost of production as well as on the BPE's pricing policy of return on capital employed as described above. Based on preliminary findings, BICP officials recognize the need for coal prices to continue to increase in real terms in order to further improve CIL's financial position and resource mobilization in the sector, and to reflect more adequately the cost of coal to the economy. BICP also favors a gradual adjustment of prices to minimize the inflationary impact on the rest of the economy. A draft report was submitted to DOC in July 1983 but more specific details will not be available until the report has been reviewed, finalized and released by GOI. After initial consideration of the BICP Report, the Government prepared and issued a new price schedule in January 1984. Since consideration of the BICP Report has not yet been finalized, the January 1984 price increase was not based on an announced pricing criteria. In practice, however, the new price schedule can be expected to provide a reasonable rate of return and resource mobilization for the sector. GOI has also indicated that a further review of prices will take place by March 1985. 3.21 The present coal price schedule is basically for seven grades of thermal coal and eight grades of coking coal. Coking coal prices are given a premium over thermal coal which takes account of the relative scarcity and higher costs of production for coking coal as compared with thermal coal. Coal prices (at minehead) for the different grades of thermal coals range from Rs 61 to Rs 284 per ton and are based on useful heating value. For coking coal the range varies from Rs 175 to Rs 450 per ton, depending on ash content. 1/ The differentials for higher grades of both coking and thermal coal have been substantially increased compared with lower grades of coal in the latest price increase. This is considered an important improvement to bring the relatively scarce better grades of coal more in line with its opportunity cost. A separate schedule is also provided for high grade thermal coals from the coalfields of ECL reflecting the more difficult geological mining conditions generally found in ECL mines compared with thermal coal mines of the other producers. 3.22 Prices are set on a minehead basis with consumers paying freight costs from the mine to the point of consumption. In addition to the basic price, consumers also pay certain sales taxes and levies (Annex 3-6) to the central and state governments which on average amount to about 14% of the minehead price. About 15% of these are subsequently returned to the producers as subsidies for stowing operations, mine workers' housing and medical facilities. 3.23 GOI is also concerned that the individual CIL subsidiaries (see para. 4.01) should be able to operate as viable entities. In the past some subsidiaries have made 'Large losses (Annex 4-2) due in part to difficulties relating to mining conditions, infrastructure and other factors generally beyond their direct control. In order to normalize differences in mining costs due to such factors, GOI has extended its coal pricing policy to include the individual CIL subsidiaries by introducing in March 1983 a retention pricing system for the CIL group. 2/ Under this system, each CIL subsidiary 1/ The present price schedule is presented in Annex 3-5. 2/ This pricing change was in line with the recommendation in the Coal Sector Report (13601-IN), September 1982.  - 17 - is annually assigned an internal accounting price based on estimated production costs and efficiency standards for that subsidiary. These production and cost standards will be revised each year and improvements in operating performance will be required if they are to be achieved. They are, therefore, expected to induce more cost efficient operations. Each of the subsidiaries should, thus, be able to operate in a viable manner. 2. A Rational Approach to Coal Pricing Policy for Indian Coals 1/ 3.24 A rational coal pricing policy requires that prices be set in a manner that satisfies basic economic criteria. The basic economic principle for pricing energy products--or any product--is that its price should reflect its opportunity cost to the country. For tradeable commodities, and for non-tradeable commodities that are substitutable for tradeables, the international or border price of the tradeable (or substitute) is considered to be the economically efficient price. For non-tradeables where no such substitution opportunities exist, long run marginal cost is the efficient pricing principle. 3.25 In principle, all Indian coal is tradeable and therefore should be priced at opportunity cost. With regard to thermal coal, however, the bulk (about 75%) of thermal coal production is of lower grade thermal coal which is not expected to be economically tradeable under any condition because of its low quality. Although technically these coals could be considered a substitute for tradeable fuels (mainly higher grades of thermal coals), the net-back export parity is lower than the long run marginal cost, after adjustments for quality differences and transportation costs. That is not to say these low quality coals should not be produced. Such coals are economic compared with other possible sources of energy for the Indian economy such as imported coal or oil, i.e., the estimated import parity price is above long run marginal cost. In these circumstances, in view of the abundant reserves of this low quality coal, the economic efficiency price becomes the long run marginal cost (measured in border prices) which will have a value somewhere between the export parity and import parity price levels. 3.26 With regard to coking coal, however, border prices do represent efficiency pricing because domestic coking coal (about 20% of Indian production) can be directly substituted for imported coking coal (para. 3.01). The present price schedule of coking coals has incorporated increased grade-wise differences by adding a substantial premium to higher grades. The implementation of this formula has reduced considerably the gap with net-back border prices, and it is also expected to act as an incentive for improving quality control at the mines. 3.27 Estimates of possible future coal prices have been prepared on the basis that prices approximate long run marginal costs. Following this approach, it has been calculated that the average (minehead) coal price would be Rs. 197 per ton (in 1984/85 terms) based on an incremental analysis of CIL's investment program and production costs that derive from it. This would imply by 1989/90 an increase of 7.6% above the present average price of Rs. 183 per ton. For the purposes of comparison, price estimates were also 1/ Energy pricing including coal is also addressed in Economic Situation of India and Resource Mobilization Issues (Report 4375-IN), April 1983.  - 18 - prepared on the basis that CIL would achieve a 10% return on net worth according to the pricing policy as advocated by BPE (para. 3.19). In this second case, it was found that coal prices would average Rs. 193 per ton in 1989/90, an increase of 5.5% above present price levels. These analyses indicate that both approaches would result in similar price increases by 1989/90 in the range of 5.5-7.6% above present levels. Further analysis based on preliminary data for projects presently under formulation, indicates that the long run marginal cost approach would result in additional real price increases in the 1990s due to the next generation of new coal projects being more costly than those presently under construction or awaiting implementation. 3.28 As well as satisfying basic economic criteria, a rational pricing policy, should enable producers to operate in a sound financial manner and should provide an adequate level of resource mobilization in the sector. A gradual increase of coal prices reaching by 1989/90 a level 5.5% higher in real terms than present prices would imply that CIL would be in a sound financial position during the period (para 7.10). Also, the resource mobilization in the sector would increase from 45-50% of investment requirements at present to about 70% by 1989/90, as shown below. CIL - Past and Projected Resource Mobilization (Rs million - current terms) Fiscal Year 80/81 81/82 82/83(e) 84/85 89/90 Internal Resource Generation (IRG) 401 1,276 1,565 3,007 11,498 Central/State Gov't. Revenues 1,046 1,705 1,968 2,678 5,674 Total Resource Generation (TRG) 1,447 2,981 3,533 5,685 17,172 Investment 3,412 5,809 7,800 12,136 24,807 IRG/Investment % 11.8 22.0 20.1 24.8 46.4 TRG/Investment % 42.4 51.3 45.3 46.8 69.2 3.29 In conclusion, GOI's pricing policy, whether it be based on return on net worth or long run marginal cost, effectively meets basic economic criteria and provides for the financial viability of the coal producers as well as generating adequate resource mobilization in the sector. GOI has agreed to review coal prices periodically in order to ensure, under conditions of efficient operation, the financial viability of CIL and also to progressively increase the level of resource mobilization in the sector. IV. THE BENEFICIARIES A. Coal India Ltd. 1. Organization and Management 4.01 The CIL group of companies was organized by GOI in September 1975, following a restructuring of the coal companies which were nationalized in the  - 19 - early 1970s. The group was established as a holding company (CIL) and five wholly-owned subsidiaries, 1/ Bharat Coking Coal Ltd. (BCCL), Central Coalfields Ltd. (CCL), Eastern Coalfields Ltd. (ECL), Western Coalfields Ltd (WCL), and the Central Mine Planning and Design Institute (CMPDI), and its activities are regulated under the framework of the Companies Act of 1956. CIL operates semi-autonomously under the direction of an eleven-member Board of Directors, headed by its Chairman appointed by the President of India. The Chairman also acts as Managing Director, responsible for the day-to-day direction of the Group. The Board of Directors also include the chairmen of CIL's subsidiaries, and government representatives. The Board has also appointed a Technical Committee, responsible for reviewing and recommending development projects and bid awards for imported equipment. 4.02 According to its articles of incorporation, CIL is required to seek GOI's approval, inter-alia, for specific investments of Rs 50 million or more, five-year and annual plans of development and capital budget, and its operating budget. Otherwise, CIL operates with autonomy for carrying out its operations, including the implementation of new projects. CIL is functionally organized with managers for production and safety, engineering and supplies, corporate planning and project monitoring, coal marketing, personnel and finance. The Technical Director and Finance Director are also Board members. An organization chart is shown in Annex 4-1. 4.03 CIL's subsidiaries also operate under the direction of a Board of Directors, headed by a chairman, who also acts as Managing Director, appointed by the President of India. Four of the subsidiaries namely BCCL, ECL, CCL and WCL are coal producing units organized functionally with managers responsible for production, corporate planning and projects, finance, marketing and personnel. For each company, mining activities are organized into small regional areas, each under the supervision of an area manager. Presently, these subsidiaries operate 384 mines, grouped in 51 areas with an average production of about 2 million tpy per area. A more detailed description of CCL is provided in paras. 4.22 to 4.31 and for BCCL, ECL and WCL is shown in Annex 4-2. 4.04 CMPDI is the planning and engineering arm of the CIL group of companies. It also provides consulting services to outside groups. CMPDI was originally established in the mid 1950s and was incorporated into the CIL group in 1975. CMPDI has its headquarters in Ranchi (Bihar) and four regional institutes attached to each operating subsidiary. Its scope of activities include detailed exploration for mine planning, reserve evaluation, conceptual and detailed planning and design of open pit and underground mines, design of coal handling and beneficiation facilities, corporate planning activities (including assessment of coal demand and perspective production plans), and advisory services in mining technology. CMPDI presently employs a staff of about 1,800 persons, of which about 30% are university graduates and 45% field staff for exploration activities. It is a well managed and competent organization. In fact, during the late 1970s, CMPDI has been instrumental in strengthening project preparation activities and creating a pipeline of coal projects, which are well prepared according to international standards. 1/ CIL also has one other small subsidiary, North-Eastern Coalfields Ltd. (NEC), which is organized as an operating division directly under CIL headquarters.  - 20 - 4.05 In addition to setting general policies for its subsidiaries and retaining authority regarding the typical managerial functions of a holding company, CIL directly manages the financial resources of the Group. All contributions from the Government (about US$800 million in 1982/83) in the form of new equity and long-term loans to fund the expansion programs are channeled through CIL, which decides on the allocation to the subsidiary companies depending on priorities and their cash position. Under this scheme CIL is the borrower of all long-term loans (which currently are coming only from GOI), and as such it has ultimate responsibility for servicing the long-term debt. In practice, this is done through the cash management function, determining the allocation of debt service which corresponds to each subsidiary, and effecting the appropriate transfer of funds. Since CIL is responsible for decision-making on financial and administrative matters, and is the borrower of all long-term loans, it has been considered as the primary beneficiary of the proposed Bank loan. 4.06 The CIL group is a very large and complex organization. Since its inception in 1975, and particularly during the last five years, CIL has made progress in terms of consolidating the organization, implementing accounting and other operational control systems, expanding production, improving the operational efficiency (particularly labor productivity), and strengthening its capability for project preparation and implementation. During this period, steps have been taken to decentralize the operations giving more autonomy to subsidiaries and its operating arms, mainly regarding operational, marketing and personnel matters. These efforts have resulted in steady improvements in CIL's functioning and CIL is now able to play a major role in decentralizing from the Government the coordinating function for the implementation of sectoral policies. The question has been raised as to whether or not it would further strengthen CIL to decentralize the group and create several autonomous companies. Such a move would not per se provide any substantial improvement in CIL's operations at least at the present time and could retard the progress already made. It would also mean that the coordinating function for the sector would have to be absorbed through strengthening and expanding the bureaucracy of the central government. There is, however, further room for improvement in CIL's organization. A more effective approach would be to assist CIL in making further progress in strengthening its operations under the present organizational structure. To this end, three specific operational and managerial issues are addressed under the proposed project. These relate to budgetary and cost control systems (para. 4.07), the operational efficiency in open pit mines (para. 4.10), and project management (para. 5.20). 4.07 CIL introduced a cost control system for its operation three years ago, which is generating standardized cost information at the mine level. However, by and large the system is not being used as a managerial tool. Production managers' attention is mainly oriented towards meeting production targets, and tend to view the cost control system as an accounting exercise. To address this problem, CIL has agreed to undertake a study to review the systems and procedures for formulating and controlling the operational budget at all levels of the group, and to recommend a plan of actions to implement improvements. The scope of work for such study is described in Annex 4-3. The study will be carried out by CMPDI and local consultants and it will be completed before June 30, 1985. CIL has also agreed to exchange views with the Bank on the findings of the study before implementing the recommendations arising from the study.  - 21 - 2. Operations 4.08 During 1982/83 CIL produced 114.8 million tons of coal, of which 87.8 million tons were thermal coal (77%), and the balance, 27.0 million tons (23%), coking coals. The contribution of each subsidiary to CIL production was shown overleaf. CIL - Coal Production by Subsidiary, 1982/83 (million tons) Thermal Coking Total Bharat Coking Coal Ltd. (BCCL) 8.8 15.2 24.0 Central Coalfields Ltd. (CCL) 22.6 10.5 33.1 Eastern Coalfields Ltd. (ECL) 22.0 0.7 22.7 Western Coalfields Ltd. (WCL) 33.7 0.6 34.3 North Eastern Coalfields Ltd. (NEC) 0.7 - 0.7 Total 87.8 27.0 114.8 4.09 Underground mining accounted for 53% of CIL production in 1982/83. CIL is undertaking a program to rationalize its underground production, basically aimed at reorganizing several small mines into larger units and introducing mechanization both in coal extraction and transportation. This program is a sound strategy which is expected to contribute to reducing unit production cost as well as providing some increases in production. At present, 17 reorganization/mechanization projects are at different stages of implementation, and some other 20 projects under preparation. These would imply both the mechanization of the room and pillar method and the use of long-wall technology. It is expected that the share of underground production that will come from mechanized mines will increase from about 5% to 35%, when these mechanization projects are implemented, by the early 1990s. 4.10 Open pit mining accounted for 47% of CIL production during 1982/83. In open pit mines, operating efficiency of major equipment is below international standards, particularly with respect to dump trucks. The reasons for this low efficiency appear to be inadequate field supervision, and poor service scheduling in relation to shift schedules. Other areas for improvement are blasting techniques, haul road construction and maintenance, truck dispatching, preventive maintenance routines and equipment general overhaul schedules. In order to improve the operational efficiency of open pit mines, CIL has agreed to retain technical assistance to undertake several studies of its operational practices, with the aim of defining specific measures to address the issues outlined above. It has been agreed with CCL that this technical assistance will be financed with the proposed loan. The terms of reference have been agreed following the scope of work for this technical assistance presented in Annex 4-4. The overall coordination will be the responsibility of CMPDI, under the direction of a steering committee. About 48 man-months of foreign consultants will be retained according to procedures acceptable to the Bank, to address the operational practices and maintenance of mining equipment. Additionally local consultants will be retained to assist in organizational aspects and railroad construction. The studies will be completed before June 30, 1985.  - 22 - 4.11 Coal beneficiation operations of CIL, include twelve washeries, 1/ eleven of which process coking coals for the steel industry, reducing the ash content from an average of 29% to about 20%. About 14.5 million tons of run-of-mine (ROM) coking coals are beneficiated annually in these washeries, yielding 9.0 million tons of clean coal. 4.12 In 1981/82, CIL provided employment to 631,000 personnel. The composition of the staff is as follows: CIL - Staffing 1981/82 Category Staff % Managerial and High Technical Staff 11,400 1.8 Supervisors 43,700 6.9 Qualified/Specialized Staff 70,800 11.2 Skilled Workers 186,700 29.6 Non-Qualified Staff/Manual Workers 318,500 50.5 Total 631,100 100.0 4.13 CIL directly operates seven training centers specialized in management, open pit and underground technologies and coal beneficiation. In addition, the subsidiary companies operate sixteen training centers covering managerial, technical and vocational training activities. During 1981/82, the training program in these centers comprised about 4,500 courses given to 96,700 participants, of which about 85% were workers, and the rest managerial and supervisory staff. 3. Financial Position 4.14 The financial performance of CIL over the last five-year period is summarized below and given in fuller detail in Annex 4-5. 1/ All of these are operated by CIL but only two are owned by CIL, the remainder being owned by steel companies.  - 23 - CIL - Summary of Financial Performance 1978/79 to 1982/83 (Rs million) 78/79 79/80 80/81 81/82 82/83 a/ Coal Sales (million tons) 83 85 94 102 109 Net Revenues 5,420 8,552 11,300 14,209 16,405 Operating Expenses 6,637 8,411 10,273 12,138 13,710 Depreciation 496 601 738 951 1,464 Interest 667 422 626 778 1,131 Net Income (Loss) (2,380) (882) (337) 342 100 Internal Cash Generation (1,884) (281) 401 1,276 1,565 Capital Expenditures 2,028 2,615 3,412 5,809 7,800 Long-term Debt 8,583 10,442 12,557 13,196 16,376 Accumulated Losses (7,242) (8,124) (8,461) (8,119) (8,019) Net Equity 666 957 2,385 5,483 9,483 Net Income (Loss)/Revenues % (43.9) (10.3) (3.0) 2.3 0.6 Current Ratio 1.2 1.1 1.1 1.3 1.4 LT Debt/Equity Ratio 93:7 92:8 84:16 71:29 63:37 LT Debt Service Coverage neg. 0.4 0.9 1.4 1.5 a/ Estimated results based on actual figures for 10 months. 4.15 Up to 1980/81, CIL had been in a loss situation, which derived from the low level of coal prices (para. 3.17), an emphasis on increasing coal production without due regard to cost effectiveness and high production costs for BCCL and ECL due to difficult mining conditions in Bihar and West Bengal (Annex 4-2). In the five-years from 1976/77 to 1980/81, the Government had to provide Rs 4.6 billion as non-plan support to cover cash deficiencies originated by this situation. Following the improvement of CIL's financial position in 1981/82, the Government agreed for these non-plan loans to be repaid over seven years starting in 1984/85 with interest payments waived. During the last two years, CIL's financial position has improved considerably following the February 1981 and May 1982 price increases. The internal cash generation has recovered to acceptable levels, showing a long-term debt service coverage ratio of 1.4 in both years. Also, new equity contributions, as part of the financing of the expansion program, have improved the long-term debt to equity ratio to acceptable levels. 4.16 The accounts of CIL, as well as its subsidiaries, are audited annually by statutory auditors (a partnership of independent chartered accountants) appointed by the Government of India in consultation with the Comptroller and Auditor General of India. These arrangements are satisfactory. Statutory auditors are appointed for a period of three years at the end of which they must be changed. At the completion of their audit, the statutory auditors express their opinion on the fairness of the financial statements, which is included in the Company's annual report. The auditing standards and procedures followed are those laid down by the Indian Institute of Chartered Accountants. An additional audit is conducted by the Audit Board of the Office of the Comptroller and Auditor General of India. This is both a  - 24 - financial and a management audit and the comments of the Audit Board are also published with the financial statements of CIL. 4. Development Strategy and Investment Plan 4.17 As discussed earlier (para. 3.06), CIL's coal production is expected to increase from 115 million tpy in 1982/83, to 193 million tpy by the end of the Seventh Plan (1989/90), representing an average annual growth rate of 7.6%. In order to achieve this substantial expansion of production, CIL has adopted the strategy of basing the expansion program on opening and expanding some 35 open pit mines, which are planned to add about 60 million tons to its productive capacity by 1989/90. The remainder (about 18 million tons) would be covered by the expansion (including reconstruction and mechanization) of its underground mining capacity, and production increases from existing mines. Details on the main projects under formulation and implementation in CIL's investment program, together with their expected contribution to total production by 1989/90 is presented in Annex 4-6. The contribution of open pit mines to CIL's production would increase therefore from 53.7 million tpy at present (47%) to about 107 million tpy by 1989/90 (55%). 4.18 Basing the expansion program on open pit mines provides a sound strategy for a rapid expansion of the sector. Firstly, the time required for bringing new open pit mines into production is considerably shorter than for underground mines. Secondly, open pit mines can be designed with much larger capacities than underground mines -- most of the open pit mines in the expansion have final capacities in the 2-10 million tpy range. Because of the resultant economies of scale, large open pit mines, although capital intensive, have substantially lower production costs than new underground mines, leading to higher rates of return. For underground projects included in the investment plan the aim is to increase total output and reduce production costs by reconstructing and reorganizing small mines into larger units and introducing mechanized methods for coal extraction and transportation. 4.19 Project selection is basically sound. As soon as geological information becomes available from the exploration efforts, preliminary development plans for specific mines are drawn and basic project parameters are estimated to assess the technical and economical viability. After this, a decision of whether to pursue projects any further is made, first at the subsidiary level and then at CIL's Technical Committee. This process of project selection has led to the implementation of projects in an adequate sequence. An analysis of the capital and operating costs of projects in CIL's investment program (Annex 4-6) indicates that CIL's sequence of mines preparation and development has generally followed the least-cost solution in terms of the economic cost of production. 4.20 The total investment during the period 1983/84 to 1989/90, associated with the expansion plan and for replacement of existing assets, has been estimated by CIL at Rs 96 billion (US$9.9 billion) in 1982/83 terms. This investment program is a major undertaking by any standards and will only be achieveable if (i) CIL is able to continue making satisfactory progress in improving its management practices, especially regarding open-pit operations (para. 4.10) and project management (para. 5.19-5.20); and (ii) CIL can obtain the necessary financing. The Government is planning to finance these investments with 50% in the form of long-term debt from GOI to CIL (15 years maturity, 12.75% interest rate), and the balance with equity contributions and  - 25 - internally generated resources. Based on the analysis of GOI's coal pricing policy and its implications for resource mobilization (para. 3.27) it is expected that internally generated funds would increase from about 20% of the investment program at present to 46% in 1989/90 (para. 3.28). Thus, providing the GOI's pricing policy is implemented in a timely fashion, CIL's investment requirements should not be an undue drain on central Government finance. 4.21 CIL's seven-year investment program includes an estimated foreign exchange requirement of about Rs 18 billion (US$1.9 billion) which are required mainly for large-scale open pit mining equipment and mechanized underground mining equipment that are not available from domestic manufaturers in India. Since CIL does not generate any foreign exchange, the foreign exchange required for the investment program must be obtained from other sources. GOI's policy for foreign financing is, on the one hand, to associate specific projects with individual financing sources on a one to one basis, for example, Amlori has British financing, 1/ Kusmunda has Russian financing and Dudhichua is proposed for Bank financing; and on the other hand, to group requirements for particular types of equipment in large packages to be financed by a single source. CIL and the GOI are discussing equipment financing for different coal projects from several bi-lateral sources as well as from the Bank. Since the international market for mining equipment is presently very slack and is likely to remain so, suppliers are ready to assist in arranging financing in order to improve their competitiveness. There are good prospects, therefore, that such funds will be available for CIL's investment program. To the extent that GOI is willing to make use of available financing sources, the CIL investment program should not be a major drain on Government foreign exchange sources. B. Central Coalfields Ltd. (CCL) 4.22 CCL is the subsidiary of CIL that is responsible for the development and operation of the Dudhichua project. CCL has effectively been in existence over twenty five years. CCL's origins are found in the National Coal Development Corporation which was formed in 1956 as a public sector coal mining company with eleven collieries and a production of 2.9 million tons per year. Subsequently, in 1974, NCDC became the Central Division of the Coal Mine Authority Ltd. and in 1975 was incorporated into the CIL organization with the formation of CCL. CCL's organization is shown in Annex 4-7. 4.23 CCL's headquarters are in Ranchi, in the state of Bihar. Today, CCL operates 57 coal mines, four coal washeries and two coke-ovens. Most of CCL's mines are located in Bihar in the Karanpura, Bokaro, Ramgarh and Giridih coalfields. In addition to its mines in Bihar, CCL is also responsible for the development and operation of the various mines in the Singrauli coalfield in Madhya Pradesh/Uttar Pradesh and for the operation of the Talcher coalfield in Orissa. CCL's coalfields contain an estimated 39 billion tons of coal resources (35% of India's total) of which about 70% are located in Bihar, 20% in Madhya Pradesh/Uttar Pradesh and 10% in Orissa. 4.24 Since the formation of the CIL group, CCL has achieved the best production and productivity increases of any of the CIL subsidiaries. From 1/ CIL recently signed ai65 million line of credit for Amlori open-cast mine with a British banking consortium. GOI is the guarantor of the credit.  - 26 - 1974/75 to 1981/82 CCL's production increased by 64% and output per manshift by 73% compared with 39% and 34% for the CIL group overall. During this period the share of open pit mining in CCL's production increased from 67% to 76%--compared with 42% for CIL overall in 1981/82. In 1981/82, CCL produced 33.1 million tons of coal of which 22.6 million tons (68%) were thermal coals and the balance 10.5 million tons (32%) were coking coals. 4.25 CCL has considerably lower unit production costs than the average for CIL overall. In 1982/83 CCLts total production costs were Rs 115 per ton of coal, which is about 23% below the average for CIL (Rs 150 per ton). CIL's superior operating performance compared to other subsidiaries is partly explained by CCL having easier mining conditions and a higher proportion of open pit mine production than for the other CIL subsidiaries. However, CCL's development has also benefited from a strong management team who have emphasized on the one hand cost control measures in the labor intensive underground mines and, on the other hand, rapid development of new capital intensive open pit mines. Specifically, to control labor costs in underground mines, CCL has closed four uneconomic mines and transferred 300 workers to other operations, re-trained and transferred another 5,000 surplus workers from older mines to new projects and encouraged over 3,000 female workers to take voluntary retirement following mechanization of coal loading and transporting arrangements. As a result from 1974/75 to 1981/82 CCL's employment increased by only 3% (from 110,412 to 114,173) whereas production increased by 64%. 4.26 CCL has also taken several initiatives to improve its utilization of open pit mining equipment and, in particular, to reduce spare parts shortages which affect maintenance especially for heavy earth moving equipment and to expand the availability of equipment-related training courses. In order to improve the availability of spare parts, CCL has started placing orders for requirements up to two years ahead with a phased delivery schedule, has encouraged major suppliers to open depots in Ranchi and Singrauli and has developed indigenous supply sources for several thousand item of imported spare parts partly through its own workshops and partly by assisting local, private enterprises to set up manufacturing facilities for such items. With regard to training, CIL has developed various courses to train open pit mining equipment operators and maintenance staff at the Singrauli Training Institute where a large number of operators are trained from the other subsidiaries as well as from CCL's own workforce. 4.27 Of the various CIL subsidiaries, CCL has the most experience in open pit mine operation and development as well as the largest open pit mine development program. Although slippage has occurred in project timetables, CCL has been able to avoid the long delays that have occurred for several of the projects undertaken by BCCL and ECL especially. CCL has generally good technical capabilities which would be enhanced by the project since CCL would be the major beneficiary of the technical assistance program proposed in para. 4.10. CCL is considered to be well receptive to the proposed technical assistance, and it is expected that project management and operational improvements could thus be readily transferred to other large CCL open pit projects and, subsequently, to the other CIL subsidiaries. 4.28 CCL has been profitable since 1979/80 and has made substantial profits in the past two years. It is currently in a sound financial position. Based on minehead prices, CCL was expected to make a profit of Rs  - 27 - 1.1 billion in 1982/83. However, following the introduction of the retention prices, CCL would show a small profit for 1982/83 as shown below: Central Coalfields Ltd. (CCL) Summary of Financial Position (Rs million, current terms) 82/83 (est.) Minehead Purchase Retention Fiscal Year 80/81 81/82 Price Price Coal Sales (million tons) 26.9 29.5 32.2 32.2 Average Sale Price (Rs per ton) 123.25 139.56 148.82 114.62 Net Revenues 3,321 4,114 4,799 3,695 Operating Expenses 2,006 2,313 2,887 2,887 Net Income (Loss) 834 1,215 1,113 10 Internal Cash Generation 1,082 1,543 1,615 512 Capital Expenditures 1,100 2,108 2,750 2,750 Long-Term Debt 4,511 3,929 4,643 4,643 Accumulated Profits (Losses) 781 1,397 2,510 1,407 Net Equity 2,235 3,413 5,931 4,828 Net Income (Loss)/Revenues % 25.1 29.5 23.2 0.3 Current Ratio 2.5 2.5 2.5 2.5 Long Term Debt/Equity Ratio 67:33 53:47 44:56 49.51 Long Term Debt Service Coverage 3.0 4.4 3.9 1.6 4.29 For the future, CCL is expected to almost double its production from 30.1 million tons in 1981/82 to 58 million tons in 1989/90, an annual average growth rate of 8.5%. Based on this projection, CCL will account for 33% of CIL's expected production growth from 1981/82 to 1989/90. Of the additional 28 million tons of CCL production, 24 million tons (i.e., 70%) would be open pit production. By 1989/90 CCL's production would be approaching 40 million tpy from the Bihar/Orissa coalfields and 20 million tpy from Singrauli. Given the geographical isolation of the Singrauli coalfields a separate company may be called for by then. 4.30 Basing the expansion on open pit mines provides a sound strategy for CCL (as well as for the sector as discussed in para. 4.18). For CCL, this development strategy includes the development of four open pit mines at Singrauli namely Dudhichua, Jayant and Khadia (with an ultimate capacity of 10 million tpy each) and Amlori (with an ultimate capacity of 4 million tpy) plus nine open pit mines in Bihar with final capacities of 1.0-2.5 million tpy each. By 1989/90, the Singrauli mines would have reached just under 50% of their ultimate capacity whereas the Bihar mines--which have shorter implementation periods because they are smaller--would have achieved about 70% of final production capacity. 4.31 As in the case of CIL overall (para 4.19) the analysis of CCL investment program indicates that CCL's sequence of mine development is generally following the least cost solution in terms of the economic cost of  - 28 - production. The investment required for these mines in the period 1981/82 to 1989/90 is in the order of US$1.5 billion. While this is a large program for a single company, by world standards, it is considered achievable providing CCL makes adequate progress regarding its open pit operations and project management practices (para 4.20) and providing CCL receives the necessary finance from CIL and GOI. Furthermore, although the retention pricing system has cut back CCL's profits compared to earlier years, CCL is nevertheless expected to remain in a relatively healthy financial position and to re-establish good profits during the rest of the decade. Financial projections for CCL are discussed in para. 7.14. V. THE PROJECT A. Project Objectives 5.01 The strategy adopted by GOI for responding to the required increase in thermal-power generation is to accelerate the expansion of thermal coal production by developing large scale open pit mines (para. 4.18). This strategy is justified because (i) it leads to lower cost options for feeding thermal-power plants with indigenous resources; (ii) it enables the rapid expansion of electricity supplies at low cost; (iii) it allows the diversification of technologies used in coal mining; and (iv) it increases the productivity of operations in the coal sector. 5.02 The proposed project is an integral part of this strategy of developing large scale open pit mines to feed thermal power plants. It forms part of the master plan for developing the Singrauli coalfield, which is expected to produce about 40 million tpy of thermal coal in the mid 1990s, from nine open pit mines, representing about 25% of CIL's production of thermal coal by that time. About 80% of Singrauli's output has been allocated to the power sector. In particular, the initial project output has been earmarked for the consumption of three power plants in western India: Trombay, Kota and Wanakbori (Map 17252). B. Project Description 1. Location 5.03 The Singrauli coalfield is located about 500 km west of Calcutta. There is a master plan for development which divides the coalfield into 11 blocks (Map 25057). The interstate boundary between Madhya Pradesh and Uttar Pradesh passes through the Dudhichua mining block which constitutes the project area. A new railway branch line connecting the new Jayant mine, immediately west of Dudhichua, with the Eastern Railway's network runs adjacent to the Dudhichua block which is also accessible by roads both from the south and the north. From the plains in the southwest a steep escarpment rises about 70 m, forming a plateau at an average elevation of about 390 meters above sea level. The topography of the part of the plateau which constitutes the proposed mining area is gently undulating with elevations varying from 375 meters to 400 meters above sea level with one hill reaching 450 m. The area is drained in the rainy season mainly by the south flowing Balia river.  - 29 - 5.04 The climate of the area is tropical with dry and severe summer months (March-June) with temperatures varying from 210C to 480C (700 to 1180 F). In the winter (November-February) the temperature can be as low as 40C (390F). The average annual precipitation is about 1000 mm out of which 95% falls in the rainy season (June-September). 2. Reserves 5.05 Exploration in the Singrauli area began in 1958 when the GSI carried out regional drilling. This was followed by additional drilling undertaken by Indian Bureau of Mines and GSI and a comprehensive investigation by CMPDI in 1975/76. In total, 142 bore holes totalling about 14,000 meters have been drilled in the Dudhichua block achieving a bore hole density of 16 holes per sq. km. which is adequate for coal reserve estimation. Three coal seams have been identified and will be mined under the proposed Project. Mineable reserves 1/ for the three seams are summarized below: Dudhichua - Mineable Reserves Average Mineable Thickness Reserves Seam (m) (Million tons) Turra 20 202.7 Purewa Bottom 12 91.4 Purewa Top 9 50.9 Total 345.0 The Turra seam is outcropping in the escarpment and will yield coal during box cut preparation. The seams are dipping about 2-3