India - Jharia Coking Coal Project

Document of The World Bank FOR OFFICIAL USE ONLY Repwrt No. 5336-IN STAFF APPRAISAL REPORT INDIA JHARIA COKING COAL PROJECT February 7, 1985 Industry Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its montents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Rs 1.00 = Paise 100 US$1.00 = Rs 12.0 Rs 1.00 = US$0.08 Rs I million = US$83,333 (Conversions in the Staff Appraisal Report were made at US$1.00 to Rs 12.0) FISCAL YEAR April 1 - March 31 WEIGHTS AND MEASURES 1 British thermal unit (Btu) = 0.252 kilocalories 1 kilocalorie (kcal) = 3.97 British thermal units 1 kilocalorie per kilogram = 1.805 British thermal units per (kcallkg) pound 1 cubic meter (m3) = 1.308 cubic yards 1 kilowatt (kW) = 1,000 watts 1 megawatt (MW) = 1,000 kilowatts 1 gigawatt hour (GWh) = 1,000,000 kilowatt hours 1 kilogram (kg) = 2.205 pounds 1 ton of coal equivalent (tce) = 1 ton of coal containing 7,000,000 kcal 1 ton (t) - 1,000 kilograms PRINCIPAL ABBREVIAIIONS AND ACRONYMS USED BCCL - Bharat Coking Coal Ltd. BICP - Bureau of Industrial Costs and Prices CCL - Central Coalfields Ltd. CIL - Coal India Ltd. CMPDI - Central Mine Planning and Design Institute DOC - Department of Coal DOS - Department of Steel DVC - Damovar Valley Corporation (Power Authority) ECL - Eastern Coalfields Ltd. cOI - Government of India ICB - International Competitive Bidding IISCO - Indian Iron and Steel Company JPC - Joint Plant Committee LCB - Local Competitive Bidding LIB - Limited International Bidding MCC - Medium Coking Coal NEC - North-Eastern Coalfields Ltd. ODA - Overseas Development Administration OMS - Output per Manshift PCC - Prime Coking Coal SAIL - Steel Authority of India Ltd. SCC - Semi Coking Coal SCL - Singareni Collieries Ltd. TISCO - Tata Iron and Steel Company WCL - Western Coalfields Ltd.  IN3DIA FOR OFMICL USE ONLY JHARIA COKING COAL PROJECT Table of Contents Page I. INTRODUCTION .............................................. I 11. THE COAL SECTOR .............................................. 1 A. Reserves and Production .............................. ....... 1 B. Government Development Strategy . . 3 1. Objectives .......................,,,. ... 3 2. Investment Program . . . ..... ..... , 4 3. Coal Quality Improvements . . ............................. 6 C. Role of the Bank .... 7 III. THE MARKET FOR COKING COAL ...................................... 9 A. Coking Coal Supply and Demand Prospects...... ..*. *.. 9 1. Overviewr of Indian Coal Market ...................... 9 2. Coking Coal Requirements and Supply Prospects ........... 10 B. Coking Coal Prices and Pricing Policy . ...................... 13 IV. THE BENEFICIARIES ............................................... 14 A. Coal India Ltd .............................................. 14 1. Organization and Management .. 14 2. Operations .............................................. 16 3. Financial Positior ...................................... 19 B. Bharat Coking Coal Ltd . . .................................... 20 V. THE PROJECT ............................. , ......... 21 A. Project Objectives ..21 B. Project Description ..22 1. Scope ....... 22 2. Location, Geology and Reserves . .22 3. Open Cast Block II Mining Complex . .23 4. Pootkee Bulliary Mining Complex . .25 5. Environment and Safety ..28 C. Project Execution and Implementation. . . 29 VI. CAPITAL COSTS, FINANCING AND PROCUREMENT .32 A. Capital Cost Estimate ..32 B. Financing Plan ..33 C. Procurement ar.u Disbursement .34 This report was prepared by Messrs. J. Barrientos, B. Stenberg, J. Strongman and Mesdames M. Kutcher and H. Wu of the Industry Department. This document has a resricted distribution and may be used by recipients only in the performance of their off-cial duties. Its contents may not otherwise be disclosed without World Bank authonzation.  -ii- VII. FINANCIAL ANALYSIS .......................... 36 A. Coal India Ltd. .... .o..o ........ 36 B. Bbarat Coking Coal Ltdo o . .. .....*.... 40 C. Jharia Coking Coal Project ................. .............. 42 VIII. ECONOMIC ANALYSIS ................. *o......... .......... o...... 43 A. Economic Rates of Return ..... ................................... . *. 44 B. Additional Benefits .... ............. .*....................... 45 C. Least Cost Program ................................ .......... 45 IX. AGREEMENTS REACHED AND RECOMMENDATIONS .......................... 46 ANNEXES 1 India - Steel Sector 2 India - Coal Washeries 3 India - Coal Price Schedule 4 India - Schedule of Coal Taxes and Levies in the State of Bihar 5 CIL Corporate Organization 6 Scope of Work for Technical Assistance on Design and Management of Mechanized Underground Mines 7 CIL Financial Statements 8 Scope of Work for Technical Assistance on Sand Transportation 9 Scope of Work for Study on Shaft Sinking 10 Project Management Organization 11 Implementation Schedule for Open Cast Block II Mine 12 Implementation Schedule for Pootkee-Bulliary Underground Mine 13 Project Capital Cost Estimate 14 Procurement Schedule and List of Bank-Financed Goods 15 Disbursement Schedule for Bank Loan 16 Assumptions Used in the Financial Projections 17 Pro Forma Financial Statements for Coal India Ltd. 18 Pro Forma Financial Statements for Bharat Coking Coal Ltd. 19 Financial and Economic Rates of Return - Assumptions and Calculations 20 Documents Available in the Project File CHARTS 1 Jharia Coalfield 2 Block II - Project Area 3 Pootkee-Bulliary - Project Area MAP IBRD 18594  -iii- JHARIA COKING COAL PROJECT LOAN AND PROJECT SUKMARY Borrower: India, acting by its President- Beneficiary: Coal India Ltd. (CIL) Amount: US$248 million equivalent. Terms: Payable in 20 years, including five years of grace at the Bank standard variable interest rate. On-lending Terms: GOI to CIL for a period of 15 years, including five years' grace, at an effective interest rate of not less than 13.25% per annum. CIL to Bharat Coking Coal Ltd. (BCCL) for a period of 15 years, including five years of grace, at an effective interest rate of not less than 13.25% per annum. Project Description: The objective of the project is to increase the supply of coking coal to the steel sector through the development of the Jharia Open Cast Block II and Pootkee-Bulliary mines. It will also improve the average quality of coking coal supplies contributing to a better efficiency in the use of indigenous resources. The project consists of the development of one open-pit mine and one underground mine (with design capacities of 2.5 and 3.0 million tons per annum raw coal respectively), two coal washeries and other associated facilities in the Jharia coalfield in the State of Bibar. The project will support institutional development in the areas of underground mine design and operating practices as well as project management, sand transportation and shaft sinking. It will ^lso address the sectoral issue of coal quality and fac4litate the continuation of the dialogue on coal transportation and distribution, producer-consumer linkages, and investment planning. The project faces minimal technical risks and a possible financial risk is mitigated by GOI's commitment to a pricing policy which ensures the continued viability of CIL.  -iv- Project Cost Estimate: US$ millions Local Foreign Total Equipment and Spares 77.3 138.2 215.5 Land and Civil Works 47.7 2.5 50.2 Washery 76.2 31.8 108.0 Engineering and Training 5.7 - 5.7 Pre-operating Expenditure 9.0 0.6 9.6 Technical Assistance - 2.0 2.0 Duties and Taxes 94.5 - 94.5 Base Cost 310.4 175.1 485.5 Physical Contingencies 24.2 10.4 34.6 Price Escalation 100.2 58.1 158.3 Working Capital 10.5 1.1 11.6 TOTAL PROJECT COST 445.3 244.7 690.0 Interest During Construction 6.0 - 6.0 Front-end Fee on IBRD Loan - - - Total Financing Required 451.3 244.7 696.0 Financing Plan: Equity: Government of India 215.8 - 215.8 CIL Cash Generation 132.2 132.2 Total Equity 348.0 348.0 Long-Term Debt Government of India 85.8 - 85.8 TBRD 17.5 230.5 248.0 U.K (ODA) - 14.2 14.2 Total Debt 103.3 244.7 348.0 Total Financing 451.3 244.7 696.0 = ~~~~~~~~~~~~~~~~~ _  -"- Estimated Disbursements: US$ millions FY86 FY87 FY88 FY89 FY90 FY91 FY92 Annual 0.6 54.6 53.6 71.2 22.4 36.2 9.4 Cumulative 0.6 55.2 108.8 180.0 202.4 238.6 248.0 Economic Rate of Return: About 21-22% IBRD 18594  I. INTRODUCTION 1.01 The Government of India (GOI) has requested a Bank loan of US$248 million to assist in the financing of the Jharia Coking Coal Project. The Project, which is located in the state of Bihar, has two main components: (i) the Open Cast Block II min:ng complex which comprises the development of a 2.5 million ton per year (tpy) open-pit mine and associated washery to produce 1.1 million tpy of washed prime coking coal; and (ii) the Pootkee-Bulliary mining complex which entails the development of a 3.0 million tpy underground mine and washery facilities with a capacity to produce 1.5 million tpy of washed prime coking coal. Both mining complexes will be constructed and operated by Bharat Coking Coal Ltd. (BCCL), a wholly-owned subsidiary cf Coal India Ltd. (CIL), a GOI undertaking. The Jharia Coking Coal Project forms part of the Government strategy to develop indigenous resources to meet the growing demand for coking coal and to improve the overall operating efficiency of the sector by introducing additional low cost open-pit and mechanized underground mining operations. 1.02 The financing requirements of the Project, including contingencies and escalation are estimated at US$696 million, of which about US$245 million (35%) will be in foreign exchange. The proposed Bank loan of US$248 million would cover about 94% of the foreign exchange required. The balance will be provided by Overseas Development Administration (ODA) of the United Kingdom through its bilateral program for assisting the Indian coal industry. The local component would be provided from internally generated funds of CIL, Government resources and Bank funds. 1.03 The proposed project was submitted by GOI to the Bank irn July *-2, and a pre-appraisal mission visited India in October 1982. It was a raised in March 1983 and post-appraised in May 1984. II. THE COAL SECTOR 1/ A. Reserves and Production 2.01 Coal production in India is largely in the hands of the wholly government-owned CIL which accounts for about 90% of coal production. Other coal producers are Singareni Collieries Ltd. (SCL) with about 8% of total coal production, which is owned by GOI and the State Government of Andhra Pradesh, and two captive cokirn, coal mines of the Tata Iron and Steel Company (TISCO) and the Indian Iron and Steel Company (IISCO) - about 1% each of total coal production.2/ The Department of Coal (DOC) is in charge of policymaking and it monitors and coordinates activities in the sector including approving CIL's production targets and annual investment and operating budgets. Linkages between new mines and major consumers are 1/ Fuller background details of the coal sector are provided in India Coal Sector Report, Report 3601-IN, September 1982, and Dudhichua Coal Project SAR, Report 4714-IN, February 1984. 21 In addition Neyveli Lignite Company produced 6.5 million tons (provisional estimate) lignite in 1983/84.  -2- established by an interministerial committee and sanctioned by the Planning Commission. CIL's production and investment program are also scrutinized and reviewed by the Planning Commission. 2.02 Coal is India's most abundant indigenous energy source. Total coal resources (in seams greater than 0.5 meters and at depths of up to 1,200 meters) are estimated at 112 billion tons.3/ India's coal resources are over eight times as large, in terms of calorific value, as India's hydrocarbon resources which were recently estimated at 6.5 billion tons of oil equivalent.4/ The coal resources consist of about 78% thermal coal used primarily for heat and steam generation and 22% coking (i.e., metallurgical) coal used in steel making. There is a wide variation in the quality of thermal coal reserves (with useful calorific value ranging from 1,300 kcal/kg to over 6,200 kcal/kg) and in coking coal reserves (varying in ash content from about 15% to over 35%). Reserves of high quality thermal and coking coals are limited and both are in short supply. 2.03 To date, the coking coal reserves have been relatively more extensively explored and developed than the thermal reserves. As a result, coking coal reserves account for about 47% of proven coal reserves. The coking coal reserves are specified as prime coking coal (PCC), medium coking coal (MCC) and semi coking coal (SCC) according to caking and swelling characteristics.5/ The bulk of the reserves (71%) are medium coking coal. The ash content for both PCC and MCC ranges from about 15% to 35% and for SCC from about 15% to 18%. India - Coal Reserves (million tons) Indicated and Proven Inferred Total Prime Coking Coal 3,673 1,724 5,397 Medium Coking Coal 8,139 9,611 17,750 Semi Coking Coal 567 1,323 1,890 Subtotal Coking Coal 12,379 12,658 25,037 Thermal Coal 13,952 72,889 86,841 Grand Total 26,331 85,547 111,878 Source: CIL. 3/ GOI has very recently revised this estimate to 127 billion tons based on the results of geological work undertaken in the past several years. The additional reserves are almost entirely thermal. 4/ One ton of Indian coal has on average about half the heating value of one ton of oil. 5/ This classification system is specific to India mnd not necessarily comparable to classification in other countries.  -3- 2.04 During the mid to late 19709 coal production in India was constrained and new projects delayed by a variety of difficulties including power interruptions, mine floodings, labor unrest and input shortages. These production difficulties, combined with transportation problems resulted in coal supply disruptions to thermal power plants and major shortages of both thermal and coking coal for industrial consumers. Since 1980, however, the production situation has been largely turned around due in part to improvement in external factors such as power supplies and in part to improvement in management effectiveness especially regarding new project implementation. This has led to a significant expansion of production during the last five years and preliminary figures for 1984/85 Indicate a production of 149 million tons (incltding 131 million tons from CIL) compared with 104 million tons in 1979/80 (of which 91 million tons were from CIL). B. Government Development Strategy 1. Objectives 2.05 Coal is India's most abundant indigenous energy source and presently provides over 50X of India's commercial energy consumption. GOI's energy plans emphasize the development of coal both as a fuel for thermal power generation and for direct use by industrial and commercial consumers. In the 1970s, when coal shortages were prevalent, GOI's main priorities were to increase production as quickly as possible with llttle regard for efficiency, cost-effectiveness, coal quality or distributional factors. Today, GOI's strategy has evolved to emphasize an adequate supply of satisfactory quality coal with economically efficient mining and transportation systems. Specifically, GOt's coal development strategy had the following major emphases: (a) development of new large-scale highly mechanized coal mines which will permit the rapid expansion of coal production with due regard to safety and environmental protection using increasingly efficient mining teclnologies and equipment; (b) rehabilitation and mechanization of certain deep underground prime coking coal operations in the Jharia Coalfield In order to increase the supply of prime coking coal as rapidly as possible and reduce the need for imports; (c) improvement in the availability and cost of coal to consumers in distant locations from existing coalfields by optimizing mineconsumer linkages, improving coal transportation systems and giving priority to exploring for and developing mines in western and southern India; and (d) introduction of measures to improve the quality of coal delivered to consumers (in terms of both absolute quality and consistency of quality) to reduce transportation requirements and improve the efficiency of thermal power units, steel plants, industrial boilers, etc.  -4- 2. Investment Program 2.06 During the five years from 1980/81 to 1984/85 incluslve, CIL has implemented an investment program of Rs 34 billion (equivalent to US$3.5 billion). For the next five years, an investment of Rs 60 billion (US$5 billion)6/ in mid 1984 . terms of which about 20% would be foreign exchange requirements, is anticipated as shown below: CIL - Investment Program (mid 1984/85 terms) 1984/85 1985/86 1986/87 1987/88 1988/89 1989/90 Rs million 8,800 10,000 11,C00 12,000 13,000 14,000 USS million 730 830 920 1,000 1,080 1,170 2.07 The above program represents an increase of about 402 in real terms compared with the previous five years. The increase represents a combination of an increase in both the number and average slze of projects in the investment program as well as an increase in the amount of development work required for each new large scale project. The sector 1i considered to be making good progress towards establishlng the necessary organizational resources and capabilities to implement the above program although continued progress is essential if the program is to be realized. In particular, CIL must make continued progress in improving its implementation capabilities (para 4.08) and, once Improvements are demonstrated, in disseminating them to other projects throughout the CIL Group. The program is also viewed as consistent with the budgetary allocation priority given by GOt to coal sector development. The program consists of approximately 23% for expenditures co reconstruct and improve operation at existing mines, 39Z for new projects presently being implemented, 21% for projects prepared and awaiting final sanction before initiating construction and 17% for non-mine projects including washeries, sand transportation and project feasibility work. Approximately 60-65X of the expenditures are for open-pit mining projects and 20-25% for underground projects - the balance being non-mine projects. A review of CIL's overall investment program indicates that with a few exceptions the investment program is basically following a least cost development path. Examples are given in para 8.10 for the expansion of cokirg coal production. 2.08 The investment program places a strong emphasis on the identification and development of new coalfields which are nearer to consumers who are in distant locations from the major coalfields in eastern India. In particular, priority is being given to meet the needs of consumers in western and southern India through exploratior. and development 6/ Preliminary figures for the Seventh Plan prepared by a GOI working group for the coal/lignite sector target an investment program of Rs 85,000 million from 1985/86 to 1989/90. This is not considered achievable. The investment estimate given in the text was prepared by Bank staff and is considered feasible if CIL continues to improve its implementation capabilities.  -5- of new coalfields in the region of Nagpur, Maharastra and in the region of Bilaspur, Madhya Pradesh (by Western Coalfields Ltd.) and in Andhra Pradesh (by Singareni Coalfields Ltd). The efforts have resulted in promising discoveries and developments in the Kusmunda and Korba coalfields in Madhya Pradesh (the Gevra deposit is located in the latter), the Wardha Valley (Maharastra) and the Godvari Valley (Andhra Pradesh). In order to improve coal transportation to consumers in remote locations, GOI is presently undertaking studies of possible improvements in coal transportation and producer/consumer linkages. Improvements in coal transportation will be aided by measures to improve coal quality (which will increase the calorific value of a given quantity of coal thus reducing amounts to be transported) as discussed in para 2.10. 2.09 While the larger part of the program is for thermal coal projects, coking coal projects are importantly emphasized in the program. Although total coking coal production Is in line with steel industry demand, PCC has been in short supply for several years while the other grades have been adequately available. During the past five years an average 0.4 million tons per year (tpy) PCC imports was required costing about US$30 million yearly and a similar level of imports is expected to be needed in 1984/85. PCC production is much more difficult to increase than production of lower grades of coking coal (MCC and SCC) or thermal coal because mining conditions in Jharia coal field are much more difficult than for coal fields in most other parts of India. Most underground mines have been in the range of 0.1-0.5 million tpy and the recovery of coal in Jharia has generally been in the order of 25-40%,7/ with an output per manshift KOMS) of about 0.5-0.6 tons. These low recovery and productivity factors considerably constrain PCC production in India. CIL has drawn up and is implementing the Jharia Reconstruction Program to improve the recovery and production of PCC. One of the most promising measures is to mine the shallower areas by open-pit mining methods; this should provide for 90% or more recovery of previously unmined areas together with recovery of coal from old workings. Another is to combine groups of small, unmechanized mines (generally 0.1-0.3 million tpy production) into larger single units (up to 3.0 million tpy each) using more efficient, mechanized production and haulage systems where geological conditions permit. Such rehabilitation projects provide for increased productivity (with an OMS of up to 2.0 for underground mines and 4.0 or higher for open-pit mines), higher output (mines of 1-5 million tpy) and higher recoveries (from 60 to 80%). The Jharia Coking Coal project encompasses both approaches: the Block II complex uses open-pit mining technology and the Pootkee-Bulliary complex is a rehabilitation undertaking which utilizes longwall mechanized mining approach. 7/ Most underground mining methods can only recover a certain portion of the coal reserves in any particular deposit - generally about 45-55%. In the case of Jharia, prevailing geological conditions of thick coal seams in sands;one strata result in much lower recovery factors. The coal that is left in the ground is, so far, effectively lost from the reserve base suitable for productior..  -6- 3. Coal Quality Improvements 2.10 GOI is rightly placing a high priority on improving the quality (in terms of consistency of coal quality as well as absolute coal quality) of both thermal and coking coals to consumers. GOI has appointed high level government commissions to study the problem of both thermal coal supplies (Report of the Committee on the Problem of Coal Supply to Thermal Power Stations, a.k.a. the Fazal Committee Report, October 1983) and coking coal supplies (Report of the Working Group on New Sources of Coking Coals, Hot Metal Production, and Coal Availability/Linkage to Washeries During the Seventh Plan, a.k.a. the C. S. Jha Committee Report, September 1984). For thermal coal, the Fazal Committee sade a broad range of recommendations covering various topics such as specific mine/power plant linkages, railway loading and dispatch procedures, coal preparation and deshaling, coal sampling and testing, coal stockpiling and coal quality bonus/penalty contractual arrangements. A number of measures are already being implemented. These include, 'sportantly, the introduction of contracts between the coal companies and major power utilities with joint sampling for coal quality and bonus/penalty clauses for quality differences versus agreed specifications. Another important measure which has been introduced by CIL is that satisfactory coal quality is now a criteria of mine managers' operating performance. CIL has started measurement and record keeping of the removal of rock and waste material from coal supplies, together with procedures to monitor the accuracy of the record keeping. Other useful measures are presently being considered for implementation by the Department of Coal. 2.11 The steel plants are concerned regarding (i) a steady deterioration in PCC quallty over the past several years and (ii) daily fluctuation in the quality of PCC received. The problem has been most severe and is mainly reflected in the increase of ash content in the coal. The CIL PCC washeries were designed to receive raw coal with 25% average ash content and produce washed coal with 17% average ash content. However the quality of both raw coal and washed coal has deteriorated in recent years and in 1983/84 the raw coal had 312 average ash content and the washed coal 22.5% average ash content8/ with daily fluctuation of as much as 1-2%. The decline in raw coal quality is largely due to gradual deterioration in the resource base combined with dilution due to increased use of blasting and mechanical coal cutting and inadequate supervision. Such high ash content means, on the one hand, a much higher coking coal production is required to meet a given level of hot metal production and, on the other hand, the productivity of the blast furnace is adversely affected. Improvement in the ash content of washed coking coal would therefore provide important savings in coking coal and steel imports as well as reducing steel production costs and lowering future investment needed to expand the capacity of coking coal mines and steel production facilities. 8/ By comparison most modern steel plants in other countries use washed coking coal with ash in the range of 6-10%.  -7- 2.12 During the past year the GOI and CIL have given a high priority to improving PCC quality. Specifically, CIL has (a) eliminated a number of substandard coals from the feed to the washeries and (b) initiated various repairs and improvements at some of the older washeries which were transferred from ownership of SAIL to CIL in October 1983. Largely as a result of these two measures the average ash percentage in prime coking coal was reduced to 20.6% in first quarter 1984/85. Further improvements in PCC quality are expected over the next several years when (a) supplies of washed coal with 17% ash content become available from new mine/washery complexes such as Block II and Pootkee-Bulliary, and (b) as CIL implements a program of measures to improve raw coal supplies and washery operations. Measures to improve raw coal supplies include installation of new coal handling plants at some coking coal mines, development of new mining areas with superior quality prime coking coal, testing by Central Fuel Research Institute of certain coals with disputed coking qualities and use of premium quality Assam coal for blending purposes. Measures to improve washery operations include increased capital expenditures for washery improvements, installation of rotary breakers at certain washeries, upgrading of slurry by froth flotation at Dugda I and II washeries, umdifications to Patherdih washery, trials with pre-screening jigs at Barora washery and possible establishment of a washery institute. C. Role of the Bank 2.13 The rationale for the Bank's involvement in the coal sector is to support its development so that it takes places in an efficient manner from technical and economic standpoints, including efficient resource allocation, and so that consumers are able to obtain sufficient quantities of adequate quality coal in a timely manner. The approach so far has been to (a) establish a policy dialogue to identify and address critical economic, sectoral and institutional issues that may impede the satisfactory achievement of GOI's objectives as outlined in para 2.05, and Cb) initiate a lending program focused on large scale projects aimed at assisting GO to improve its implementation and operational capabilities for highly mechanized, capital intensive mining projects. 2.14 The policy dialogue originated with a Coal Sector Survey (Report 3601-IN, September 1982) which addressed selected issues pertaining to coal supply/demand prospects, pricing, investment and financing. Energy pricing and resource mobilization were also addressed in Economic Situation of India and Resource Mobilization Issues (Report 4375-IN), April 1983. The policy dialogue, established during this sector work, was further developed with specific measures regarding coal pricing and coal transportation in the first lending operation for the Dudhichua Coal Project (Report 4714-IN, February 28, 1984) to provide thermal coal for power generation. A pricing agreement was reached with GOI in the Dudhichua project which should ensure that the GOI's pricing approach will result in prices that provide the correct signals to both consumers and producers regarding the economic value of coal. Provided pricing increases are made in a timely manner, the  -8- pricing approach should also progressively move the sector towards a sound financing footing. Additionally, improvements in the coal transportation and coal producer/consumer linkages are being studied which should lead to economic coal distribution patterns and should assist GOI in improving coal supplies to consumers in western and southern India. In the last lending operation support was also provided to institutional developments in CIL in operation of large-scale open-pit mines, project management, and budgeting and cost control. Local and foreign consultants have been retained by GOI and CIL to provide assistance on these institutional matters. 2.15 GOI has requested the Bank Group financing of projects to increase production of both thermal and coking coals, proposing one coal lending operation per year for the next several years. The Jharia Coking Coal Project will be the second of these operations, and the Gevra Thermal Coal Expansion Project is under preparation for FY1986. It is intended that the lending strategy should lead to involvement with all of CIL subsidiaries, while progressively addressing one or two important sectoral/institutional issues. The next priorities are (i) to develop improvements in coal sector manpower planning and training which are considered essential if CIL's project implementation and operational capabilities are to expand in line with the proposed investment program and (ii) to ensure that the implementation of measures to improve thermal coal quality takes place in a timely manner. Subsequently, it is intended to broaden the scope of the Bank's involvement to unmechanized mining operations including improvements in mine safety. Additionally, further sector work is planned for FY1986 which would focus on a more detailed and in-depth review of CIL's approach for identifying, selecting, preparing and implementing its investment decisions, as well as a review of the operational and economic efficiency of a large number of labor intensive underground operations.  -9- III. THE MARKET FOR COKING COAL A. Coking Coal Supply and Demand Prospects 1. Overview of Indian Coal Market 3.01 Coal is essential for future industrial growth in India. At present, industrial and commercial consumption account for an estimated 48% of coal consumption in India. The largest industrial consumers are the steel sector primarily for coking coal (18%), tbe cement sector (6Z) and the fertilizer sector (3X). The balance (21%) is used largely for heat and steam generation by about 20,000 industrial units in a variety of different industrial subsectors. Besides the industrial sector, power generation accounts for 42% of coal consumption, railways (7%) and residential (3%). Demand projections for the period up to 1989/90 indicate that coal demand will be in the range of 200-240 million tons by 1989/90 (an average annual growth of 6.6-9.9% per year) depending on underlying assumptions regarding product growth and energy consumption trends in different coal consuming sectors and inter-fuel market shares. Based on this range the most likely estimate of future coal demand in 1989/90 is 220 million tons. Power sector demand for coal is expected to grow most rapidly and will account for 50% of coal consumption by that year. The share of industry will decline slightly (to about 44% in 1989/90) but steel industry consumption of coking coal will increase slightly to 19% of total consumption. The ratio of coking coal requirements to steel requirements will decline slightly because of improved average blast furnace productivity due to the expansions at Bhilai and Bokaro and the new plant at Vizag. Irdia - Goal DIeid Projectkns (millim txs raw coal) Anmml Avege Groth Rate (X per ^Mr) 1983/84 1984/85 1985186 1986187 1987/88 1988/89 1989/90 1983/84--LW/9 57 61 67 76 87 98 109 11.4 --yes 10 10 9 9 9 8 8 (3.7) Mt 8 9 10 11 12 12 13 8.4 ilize 4 5 6 6 6 6 7 9.8 30 31 36 37 39 40 42 5.8 Subntotal fl~rnr1. 109 116 128 139 153 164 179 8.6 rGwO 27 30 32 35 37 40 41 7.2 13L 146 160 1D4 190 2D4 2m3 8.3 Grand Total - - - - = - 3.02 Production projections have been prepared for CIL and the other coal companies based on the investment and development program discussed in para. 2.08. These indicate that production could be increased to meet the  -10- projected demand of 220 million tpy9/ with most of the increase being provided by CIL as shown in the table below: Izxla - 9ae Spply Proj ti%os II(mill tons raw coal) Amml Average &h Rate (Z per M2! 1983/84 L984/85 1985/86 1986/87 1987/88 198 _89 1989/90 ___3/84 to I989 CIL 121 131 142 151 163 176 190 7.8 SCL 13 14 15 17 20 22 25 11.5 TIsSID/IUSM 4 4 4 5 5 5 5 3.8 Ibtal 49 161 173 188 203 220 8.1 dng GCoal 29 31 32 35 36 39 44 7.2 Thnm Coal 109 118 129 138 152 164 176 8.3 Total 138 149 161 173 188 2D3 220 8.1 3.03 A review of the status of preparation and implementation of major projects in CIL's investment program indicates that a production increase of about 70 million tpy from 1983/84 to 1989/90 is feasible. In particular, CIL, has increased production by 30 million tpy in the past four years (from 91 million tons in 1979/80 to 121 million tons in 1983/84) and it is quite feasible that CIL's production could further increase by another 70 million tpy by 1989/90 given that several large new open-pit mines are being developed which would provide substantial production in the late 1980s. 2. Coking Coal Requirements and Supply Prospects 3.04 Coking coal is required primarily by the steel industry for making coke, which is used in the blast furnace for steel making. In addition, small quantities of coke (mostly produced from medium coking coal which is presently in excess supply in India) are used by household and industrial plants. In 1983/84, the integrated steel plants produced 9.1 million tons of hot metal. For the future, hot metal production is projected to increase to 14.7 million tons in 1989/90-as described in Annex 1 which provides a description of the steel industry and its development prospects. The supply allocation and marketing of coking coal in India takes place within a set of formalized procedures under the auspices of GOI. A basic structure of linkages between washeries and steel plants has been established and the coal controller who is appointed by GOI and based in Calcutta makes monthly and quarterly supply allocations of washed coking coal taking into account any production difficulties or closures for maintenance and repair of either the washeries or the steel plants. 9/ Coal production and demand have been targetted at 245 million tons in 1989/90 by a GOI working group. These are not considered feasible.  -1 1.- 3.05 The basic product purchased by the steel mill is washed coking coal. Washing reduces the ash content of the coal and provides for consistent quality - both of which, improve blast furnace efficiency. Coking coal requirements of each steel mill are based on a certain blend of PCC, MCC and SCC. The blend ratio is fixed according to the technical parameters of each plant to provide maximum efficiency in the blast furnace. There is very little flexibility for adjusting the ratio if the requirements and supplies of different coking coals are imbalanced. The average blend for the Indian steel industry is in the order of 55/38/7 for PCC/MCC/SCC. Washed coking coal supply and demand projections have been prepared for the different types of coking coals as shown below. India - Washed Coking Coal Supply/Demand Projections a/ (million tons washed coal) 1983/84 1984/85 1985/86 1986/87 1987/88 1988/89 1989/90 PCC Supply 7.7 8.0 8.4 9.0 9.7 10.2 11.8 Demand 8.4 9.4 9.9 10.9 11.6 12.4 13.0 Balance (0.7) (1.4) (1.5) (1.9) (1.9) (2.2) (1.2) MCC supply 8.3 8.8 8.9 9.8 10.0 10.9 11.8 Demand 5.8 6.5 6.8 7.5 8.4 9.1 9.5 Balance 2.5 2.3 2.1 2.3 1.6 1.8 2.3 SCC Supply 0.8 0.8 0.8 0.8 1.0 1.2 1.5 Demand 1.0 1.1 1.2 1.3 1.3 1.4 1.5 Balance (0.2) (0.3) (0.4) (0.5) (0.3) (0.2) 0.0 TOTAL Supply 16.8 17.6 18.1 19.6 20.7 22.3 25.1 Demand 15.2 17.0 17.9 19.7 21.3 22.9 24.0 Balance 1.6 0.6 0.2 (0.1) (0.6) 1.1 ==90 a/ Includes small amounts of direct feed coal also. 3.06 These supply/demand projections are based on estimates of hot metal production, washing capacity and mine production. The washed coking coal demand has been prepared based on a hot metal production of 14.7 million tpy in 1989/90 as discussed in Annex 1. The washed coking coal supply projections have been prepared on the basis of projections of washery capacity and mine production. There are presently twelve PCC washeries plus three more planned and eight MCC washeries plus three more planned or under construction (Annex 2). 10/ The SCC does not need washing since its ash content (16-18X) is within acceptable limits for direct use at the steel plant. Mine production projections for raw coal have been IO/ One washery at Durgapur Steel Plant (DSP) is included in Annex 2 for both PCC and MCC since it has circuits for both types of coking coal.  -12- prepared based on a detailed review of CIL's coking coal mines together with an assessment of future production trends at the TISCO and IISCO mines. The projections include not only incremental production from new projects but also declines in production at many existing operations due to mine depletion. The projections have been prepared taking into account the various grades of coking coal as follows: India - Coking Coal Mine Production Prospects (million tons raw coal) 1983/84 1984/85 1985/86 1986/87 1987188 1988/89 1989/90 PCC 14.8 15.3 16.2 17.3 18.7 19.6 22.6 MCC 13.8 14.6 14.8 16.4 16.7 18.2 19.6 SCC 0.8 0.8 0.8 0.8 1.0 1.3 1.8 Total 29.4 30.7 31.8 34.5 36.4 39.1 44.0 3.07 The above projections indicate that while the coal companies should be able to supply the steel sectors requirements for MCC, shortfalls will occur for PCC and SCC. The shortfalls will be most severe for PCC. As noted previously (para 2.09) PCC imports have been required for the past several years and CIL has placed a high priority on increasing PCC supplies. The above projections indicate that notwithstanding the efforts to increase FCC production, it is to be expected that imports of PCC will continue to be required and could increase to 1-1.5 million tors in the mid-to-late 1980s. The Jharia coking coal project is an important part of the increase in PCC expected in the late 1980s and without the project coal import requirements would be much higher. SCC production takes place largely in deep underground mines in Bihar/West Bengal where production can only be expanded slowly due to difficult geological conditions. CIL is examining ways of improving SCC supplies including shipments of suitable quality coal from Assam. However, the shortages are less critical than for PCC since they are much smaller and the steel industry can more readily adjust its operations to counterbalance shortages of SCC than FCC. 3.08 The raw coal does not have uniform washing charactistics. The washing characteristics depend on which seam is being mined and which part of the coalfield the seam is located in. Th.ts, the washeries are linked to particular groups of mines based on the raw coal washing characteristics, and the washeries have different design characteristics according to the linkage specified. CIL is undertaking a construction program for new washeries linked with incremental mine production. The washed coal supply projections are based on adequate washing capacity being available to wash all of the mine production. This is expected to be the case in all years except 1987/88 when a temporary shortage of washing capacity may arise as shown below:  -13- India - Prime Coking Coal Washery Capacity and Raw Coal Production (million tons - raw coal) 1983184 1984/85 1985/86 1986/87 1987/88 1988/89 1989/90 PCC Washing Capacity 15.9 17.0 17.9 17.9 17.9 19.7 22.6 PCC Mine Production 14.8 15.3 16.2 17.3 18.7 19.6 22.5 Balance 1.1 1.7 1.7 0.6 (0.8) 0.1 0.1 3.09 Since it is very unlikely that any planned washeries can be advanced to be available in 1987/88 CIL is presently considering contingency plans to improve throughput at existing washeries such as Bhojudih and Dugda I and II in the event chat coal supplies actually exceed capacity 'La that year as projected. Also increased capacity may be available at three other washeries owned by SAIL, IISCO and the Government of West Bengal respectively. B. Coking Coal Prices and Pricing Policy 3.10 Coal prices are set by GOI on an administered basis. During the 1970s, prices were allowed to lag behind costs and the industry experienced large losses. During the past five years, however, GOI has increased prices on four separate occasions which has resulted in an overall price increase of 88%. In 1982/83, GO! also authorized CIL to introduce an internal retention price system whereby internal accounting prices were established for each subsidiary which took due account of cost differences between the subsidiaries due to geological conditions, locational factors and other influences outside of the control of the subsidiary. This change was in line with the recommendations in the India Coal Sector Report (Report 3601-IN). The most recent coal price revision (January 1984), resulted in prices basically in line with economically efficient levels. Additionally, an important aspect of the 1984 price increase was that the largest adjustments were provided for the higher grades of coal so that the differentials between the different grades of coal would better reflect the value to the users. The minehead price schedule is given in Annex 3. In addition consumers pay certain taxes and levies which amount to approximately 25% of thermal and coking coal minehead prices for Jharia coals. The levies on coal in Bihar are given in Annex 4. 3.11 GOI's coal pricing approach is to set prices at the minehead with a view to providing a satisfactory return on net worth under conditions of efficient operation, and to ensuring the financial viability of Coal India as well as progressively increasing the level of resource mobilization in the sector in order to cover an increasing portion of coal sector capital expenditures. GOI has agreed to review coal prices periodically in line with the above pricing approach and with agreements made under the Dudhichua Coal project. An inter-ministerial working group, headed by the Chairman of the Bureau of Industrial Costs and Prices (BICP), was established in early January 1985 to consider the need for a coal price increase. The group is expected to complete its review by end February 1985, following which recommendations will be submitted to the Government.  -14- 3.12 Coking coal pricing, however, presents an addititional complication because the basic product required by tite steel mills is washed coking coal for feeding into coke ovents rather than the raw coal produced by the mines. Additionally, in November 1983, the coking coal washeries owned by SAIL were handed over to CIL. Prior to this date, SAIL used to purchase raw coking coal from CIL paying a fee for washing. Following the change in ownership, all coking coal is now sold on a washed coal basis. Accordingly, CIL and SAIL introduced contracts for the sale of washed coking coal which is in line with contractual arrangements in other countries. In these contracts, the price of the washed coal is based on a formula taking into account the administered price of the raw coking coal, the operating cost of the washery, efficiency norms for the washery aud a return on capital for the washery. Most importantly, the contracts include bonus and penalty clauses relating to the quality (in particular, the ash content) of the washed coking coal supplied to the steel plants. The bonus/penalty system provides a direct incentive for CIL to improve both its mining and washery operations to ensure the best possible feed to SAIL. This pricing approach is considered satisfactory since it results in prices very close to efficiency prices after due adjustment for quality differentials. Ex-washery prices for coking coals with 20% ash content are currently at Rs 560 per ton (US$46.7), including sales taxes and levies. This is in line with the net-back parity price of imported Australian coals"1/ which is estimated at US$50 per ton ex-washery after adjustments for port handling, inland freight and quality differertials. IV. THE BENEFICIARIES A. Coal India Ltd. 121 L. 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 early 1970s. The group was established as a holding company (CIL) and five 1 / wholly-owned subsidiaries, 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). 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 Chairmanr 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 includes the chairmen of CIL's subsidiaries, and 11/ The CIF price of Australian coal is currently US$70 per ton for a medium/high volatile, low sulphur, 10% ash coking coal. 12/ Further background details on Coal India Ltd. have been recently discussed in the SAR for the Dudhichua Coal Project, Report 4714-IN, February 1984. 13/ CIL also has one other small subsidiary, North-Eastern Coalfields Ltd. (NEC), which is organized as an operating division directly under CIL headquarters.  -15- 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, project monitoring, coal marketing, personnel and finance. The Technical D)irector and Finance Director are also Board members. CIL organization chart is shown in Annex 5. 4.03 CIL's subsidiaries 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, organized in 51 areas with an average production of about 2.5 million tpy per area. A more detailed description of BCCL is provided below (paras 4.18 to 4.20). 4.04 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. CIL is responsible for overseeing the group's investment program (para. 2.07). All contributions from the GOI (about US$800 million in 1983/84) in the form of new equity and long-term loans to fund the expansion programs are channeled through CIL, who 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, and as such it has direct responsibility for servicing the long-term debt. Since CIL is responsible for decision-making on financial and administrative matters, and is the borrower of all long-term loans, it was considered as the primary beneficiary of the Bank loan for Dudhichua and is accordingly considered as the primary beneficiary of the proposed loan for Jharia. 4.05 The CIL group is a very large and complex organization. Since its inception in 1975, and particularly during the last six 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 functio;'ng and CIL is now able to  -16- 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 improve the efficiency of the sector 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. CIL has proved an effective agent in coordinating the sector's development which would otherwise need to be undertaken by the bureaucracy of the central government. There is, however, further room for improvement in CIL's organization. A more effective approach adopted has been 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 were addressed under the Dudhichua Coal Project. These relate to budgetary and cost control systems, the operational efficiency in open-pit mines and project management organization and practices. 4.06 The Indian Institute of Management (Ahmedabad) has been retained by CIL to provide technical assistance for strengthening the operational budgetary procedures of CIL and its subsidiaries. In particular, the assistance, which will be channeled through CMPDI, will focus on definition of cost and profit centers, basic procedures for budget formulation and reporting, and definition of control mechanisms and corrective actions. The design stage will be completed by mid-1985 and the Implementation will follow thereafter. 4.07 CIL has also invited proposals (through CCL) to contract the services of about 50 man-months of foreign consultants (financed under the Dudhichua Loan, 2393-IN) for improving the efficiency of open-pit operations. Six consulting firms specialtzed in operational aspects of open cast mining have been invited to submit proposals under terms of reference agreed with the Bank. Metchem, Canada, has been awarded the contract and is expected to mobolize in February 1985. Additionally, CIL has retained the Central Road Research Institute (New Delhi) to assist CMPDI and CCL in the improvement of design, construction and maintenance of haulroads in open-pit mines. 4.08 With regard to project management practices, various positive steps have been taken following the dialogue initated with the Bank during preparation, negotiations and early stages of implementation of the Dudhichua Coal Project. Firstly, project managers were in the past reporting to area general managers, who are mainly concerned with production. Recently, this has been modified and the position of project managers has been elevated so that they report to a position with responsibility for project development rather than production. In BCCL for example, a new position of Technical Director Projects has been created and the hierarchical level of project managers has been upgraded to general managers. Secondly, a project implementation manual has been prepared for Dudhichua, following terms of reference agreed with the Bank. The Bank has commented on a draft, and after some modifications the manual is expected to be implemented in early 1985. Similar manuals have been requested for both components of the Jharia Coking Coal Project (para. 5.32).  -17- 2. Operations 4.09 During 1983/84 CIL produced 121 million tons of coal of which 95 million tons were thermal coal (79%), aP4 the balance 26 million tons (21%), coking coals. The contribution of each subsidiary to CIL production is shown below. CIL - Coal Production by Subsidiary, 1983/84 (million tons of raw coal) Thermal Coking Total Bharat Coking Coal Ltd. (BCCL) 8.0 13.6 21.6 Central Coalfields Ltd. (CCL) 25.3 11.5 36.8 Eastern Coalfields Ltd. (ECL) 22.2 0.7 22.9 Western Coalfields Ltd. (WCL) 39.0 0.4 39.4 North Eastern Coalfields Ltd. (NEC) 0.7 - 0.7 Total 95.2 26.2 121.4 Source: CIL. 4.10 Underground mining accounted for 51% of CIL production in 1983/84. CIL is undertaking a program to rationalize its underground production, basically aimed at reorganizing groups of small mines into larger units and introducing mechanization both in coal extraction and transnortation. This program is a sound strategy which is expected to contribute to reducing unit production cost as well as providing increases in production. At present 24 reorganization/mechanization projects are at different stages of implementation throughout the CIL group, of which 9 are for coking coal mines predominantly in BCCL. These schemes imply both the mechanization of the room and pillar mining operations and the use of mechanized longwall technology. At present only about 5% of CIL's underground production is coming from mechanized mines but their proportion will increase to about 35% in the early 1990s when these mechanization projects are fully operational. Management of these mechanized mines, particularly those using the fully mechanized longwall technology such as Pootkee-Bulliary, needs strengthening. In order to improve the operation of these mines, BCCL has agreed to retain technical assistance to improve the design, management and operating procedures for highly mechanized underground mines, and an outline for the scope of work is presented in Annex 6. It has been agreed with BCCL that this technical assistance will be financed with the proposed loan and that it will be initiated before December 31, 1985 under terms of reference acceptable to the Bank, and that the Bank should be furnished with a copy of the studies undertaken and given opportunity to comment on the findings which should then be implemented. About seven man years of foreign consultants will be retained according to procedures acceptable to the Bank. 4.11 Open-pit mines accounted for 49% of CIL production during 1983/84. The operating efficiency of (?en-pit mines has been a matter of concern to the Bank. As noted earlier .para. 4.07), a program of technical assistance was agreed in the loan for the Dudhichua Project, and its implementation is due to start in early 1985.  -18- 4.12 Coal beneficiation operations of CIL include 15 washeries, and all of them except one process coking coals for the steel industry. The main objective of this beneficiation is to reduce the ash content of coking coals. As discussed earlier (para. 2.11) the quality of the washed coal delivered to steel plants has deteriorated in the past, and CIL has been implementing measures to change this trend, and some achievements have been made during the current fiscal year. During 1983/84 15.4 million tons of raw coking coals were beneficiated in CIL's washeries,14/ yielding 9.2 millicn tons of washed coal. 4.13 In 1983/84, CIL provided employment to 655,300 personnel. The composition of the staff is as follows: CIL - Staffing 1983/84 Category Staff X Managerial and High Technical Staff 11,000 1.7 Supervisors 92,700 14.1 Qualified/Specialized Staff 10,600 1.6 Skilled Workers 98,000 15.0 Non-Skilled Staff/Manual Workers 443,000 67.6 Total 655,300 100.0 Source: CIL. 4.14 CIL directly operates seven central training centers specialized in management, open-pit and underground technologies and coal beneficiation. In addition, the subsidiary companies operate sixteen regional training centers covering managerial, technical and vocational training activities plus about fifty area training centers for vocational and statutory safety courses. During 1983/84, the training program in these centers comprised about 5,000 courses given to 103,000 participants, of which about 88Z were workers, and the rest managerial and supervisory staff. CIL's training activities have been strengthened over the past several years through a program of foreign collaboration including, most impotldntiy.. the British coal industry. However, while training activities for certain skills or functions have been developed, there is no comprehensive overview of training needs and how they should be met. Furthermore, the overall training functions is badly understaffed. The Bank has diseo_ssed with CIL measures to improve the effectiveness of the training function, particularly in the light of the impact of the investment program on the skills of the labor force over the next five to ten years. During these discussions it became apparent that improvements in training are only a part of a much broader issue related to manpower planning at all levels of the CIL organization. CIL has acknowledged the need to improve its manpower planning and is preparing information on its present capabilities and requirements. This should be available early in 1985 and will provide the basis for assistance which could be included in the proposed Gevra Coal Expansion Project. 14/ Raw coal was also fed directly to the steel mills, was sent to coking ovens for non-steel consumers and was fed to two non-CIL washeries.  -19- 3. Financial Position 4.15 The financial performance of CIL over the last five-year period is summarized helow and given in fuller detail in Annex 7. CIL - Summary of Financial Performance 1980/81 to 1984/85 (Rs million) 1980/81 1981/82 1982/83 1983/84 a/ 1984/85 b/ Coal Sales (million tons) 94 102 109 116 124 Net Revenues 11,300 14,209 17,063 19,051 23,800 Operating Expenses 10,273 12,138 14,240 18,475 19,065 Depreciation 738 951 1,344 1,716 2,138 Interest 626 778 1,110 1,324 2,042 Net Income (Loss) (337) 342 369 (2,464) 555 Internal Cash Generation 401 1,276 1,713 (749) 2,693 Capital Expenditures 3,412 5,809 7,142 8,615 8,800 Long-Term Debt 12,557 13,196 17,461 19,273 21,753 Accumulated Losses (8,461) (8,119) (7,370) (9,758) (9,203) Net Equity 2,385 5,483 9,542 11,541 17,113 Net Income (Loss)/Revenues % (3.0) 2.3 2.2 (12.9) 2.3 Current Ratio 1.1 1.3 1.3 1.2 1.3 LT Debt/Equity Ratio 84:16 71:29 65:35 62:38 56:44 LT Debt Service Coverage 0.9 1.4 1.4 0.3 1.1 a/ Unaudited. b/ Estimate based on investment and operational budgets. 4.16 Up to 1980/81, CIL had been in a loss situation, which derived from a low level of coal prices and an emphasis on increasing production without due regard to cost effectiveness. This trend was reversed in 1981/82 when CIL showed for the first time an acceptable income statement with adequate levels of internal cash generation, long-term debt service coverage and current ratio. The financial position improved further during 1982/83. However, during 1983/84 CIL showed a financial loss and consequently a deterioration of the main financial indicators due to the back-dating of a national wage and salary settlement associated with a new four year collective bargaining contract. The wage settlement was finalized in December 1983 and an offsetting price increase was made in January 1984. However, the wage award was back-dated to January 1983 causing a large loss for CIL which was financed by delaying debt repayment to GOI. The budgeted re.sults for the current financial year (1984/85) envisage a return to a financial position similar to that of 1982/83. Preliminary results for the first quarter are positive and a profit of about Rs 555 million is expected for the full year.  -20- 4.17 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 Comptrolle-. 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 Chertered Accountants. An additional audit is conducted by the Audit Board of the Office of the Comptroller and