India - Tamilnadu Newsprint Project

D.nst of The World Bank FOR OMCuL USE ONLY Report No. 6517 PROJECT COMPLETION REPORT INDIA - TAMILNADU NEWSPRINT PROJECT (LOAN 2050-IN) December 1, 1986 Industry Department This document has a restricted distribution and may be used by recipients only in the performance of their official dudes. Its contents may not otherwise be disclosed without World Bank authorizadon.  ABBREVIATIONS AND ACRONYMS BCE - Base Cost Estimate Government - Government of India IDBI - Industrial Development Bank of India IDC - Interest During Construction IFI - Industrial Financial Institutions DAF - Development Assistance Fund SPB - Seshasayee Paper and Boards Limited (Project Consultant) TNPL - Tamilnadu Newsprint and Papers Limited (Project Sponsor) tpy - Tons per year tpd - Tons per day WEIGHTS AND MEASURES 1 metric ton (t) = 1,000 kilograms (kg) 2,204 pounds 1 kilometer (km) - 0.621 mile 1 meter (m) = 1.0936 yards = 39.37 inches i cubic meter (m-) = 35.31 cubic feet = 264 US gallons 1 hectare (ha) = 10,000 square meters - 2.47 acres 1 kilovolt (kV) 3 1,000 volts 1 megawatt - hour (MWh) - 1,000 kilowatt hours CURRENCY EQUIVALENTS Currency Unit - Indian Rupees Appraisal Year US$1.0 = Rs 8.0 Investment Period US$1.0 = Rs 8.0-12.6 Completion Year US$1.0 - Rs 12.3 GOVERNMENT OF INDIA FISCAL YEAR April 1 - March 31  THE WORLD 5ANK Washington, D.C. 20433 U.S.A. ONt ni DvfttlwAW?h Opuatmm fVwAtuw December 1, 1986 MIMORABDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report: India - Tamilnadu Newsprint Project (Loan 2050-IN) Attached, for information, is a copy of a report entitled "Project Completion Report: India - Tamilnadu Newsprint Project (Loan 2050-IN)" prepared by the Industry Department. Under the modified system for project performance auditing further evaluation of this project by the Operations Evaluation Department has not been made. Attachment This document has a restricted distribution and may be used by recipients only in the performance of their omcial duties. Its contents may not otherwise be disclsed without World Bank authorization.  FOR OMCIAL USE ONLY PROJECT COMPLETION REPORT INDIA - TAMILNADU NEWSPRINT PROJECT (LOAN 2050-IN) TABLE OF CONTENTS Page No. PREFACE ................... , BASIC DATA ........ ..... a a * .......................... e @ a0 a0 0 a a il HIGHLIGHTS *e ..e.....0 0 0 .e..o.....e......,..ee.......,ea....,. iv I. INTRODUCTION .........I...., ,,..,.. . 1 Il. PROJECT BACKGROUND *..,.....,...e.....eeeo.eoe 2 A. Project Preparation, Appraisal and Loan Approval 2 Be Project Description and Objectives ............... 3 III. PROJECT IMPLEMENTATION AND MANAOEMENT 4.......... 4 A. Achievement of Objectives ........................... ,, 4 B. Project Scope Changes .......................o****** ..** * 4 C. Project Management *.,....***.....*****.************* 4 D. Employment and Training .................. 5 E. Use and Performance of Consultants 5 F. Procurement .....................5................... 5 G. Implementation Schedule . . ................. 6 He Ecology ................................ 7 I. Capital Costs, Financing and Loan Disbursement ..*****.... 7 IV. OPERATING PERFORMANCE . ............................ .. 10 As Production Buildup ...,.............. * 10 B. Market Developments .. ......*** 11 V. FINANCIAL PERFORMANCE o...e...e.,..eee.e.,e...,o.ooeoe. 12 A, Basis of Projection. s ....................*O........... .o. 12 S. Financial Analysis ............................ ...e 14 VI. ECONOMIC PERFORMANCE ........,..,,.eoeoee.a0Seeee0e.ee 14 VII. BANK ROLE AND LESSONS LEARNED *.,,,,,,,,...,,....,,..,,,,, 15 dhis document has a restricted distribution and may be used by recipients only in the performance of their offlcil dutia. Its contents may not otherwise be discled without World Bank authorization.  TABLE OF CONTENTS (co:.t'd) ANNEXES Pafe No. 1-1 Development of TNPL Technology ........................... 17 3-1 Actual Monthly Newsprint Production and Its Pulp Furnish .. 20 3-2 Procurement of Bank-Financed Goods and Services by Country of Origin ................................... 21 3-3 Implementation Schedule ........... 22 3-4 Summary Expenditure Profile in Current Terms .............. 23 3-5 A. Capital Costs and Financing Required (US$) ............. 24 B. Capital Costs and Financing Required (Rs) .............. 25 3-6 Estimated and Actual Disbursement Schedule ................ 26 4-1 Actual Monthly Newsprint & Printing & Writing Paper Production ............... . ........................ 27 5-1 Comparison of Appraisal Estimate & Actual Production Cost . 28 5-2 Comparative Estimate of Unit Prices - Appraisal vs. Actual, March/86 .............. 29 5-3 Comparison of Appraised and Revised Cost Structure ........* 30 5-4 A. Projected Income Statement for: Case I/Base Case ...... 31 B. Projected Income Statement for: Case 11/15% Imported Long Fiber to be Used During Life of Project ......... 32 C. Projected Income Statement for: Case III/Part of Printing & Writing to be Sold at Levy Price . 33 D. Projected Income Statement for: Case IV/Only Newsprint Is Produced and 15% Long Fiber To Be Used During Life of the Projez:t ................................. 34 5-5 A. Cost/Benefit Streams for Case I - Financial Rate of Return ............................. 35 B. Cost/Benefit Streams - Financial Rate of Return with 10% Real Price Increase *............................ 36 C. Cost/Benefit Streams for Case II - Financial Rate of Return .................. ............................. 37 D. Cost/Benefit Streams for Case III - Financial Rate of Return ............................................... 38 E. Cost/Benefit Streams for Case IV - Financial Rate of Return ............................................ 39 6-1 A. Assumptions Used in Economic Analysis .................. 40 B. Worksheet for ERR Capital Cost Adjustment...............e 41 C. Worksheet for Production Cost Adjustment for ERR Calculation ........ , ., , . 42 6-2 Cost/Benefit Streams for Economic Rate of Return .......... 43 6-3 Cost/Benefit Streams for Economic Rate of Return for the Case of 10% Real Price Increase .................. 44 7-1 Profile of Estimated and Actual Disbursement Schedule ...., 45  - i - PROJECT COMPLETION REPORT INDIA - TAMILNADU NEWSPRINT PROJECT (LOAN 2050-IN) PREFACE Loan 2050-IN for che Tamilnadu Newsprint Project for US$100.0 million was signed on September 23, 1981, and was closed on August 31, 1985. The full amount of the loan has been disbursed. The main objective of the loan was to finance the establishment of an integrated pulp and paper mill with a capacity to produce about 100,000 tons per year of newsprint or about 80,000 tons per year of printing and writing paper, or any combination thereof, using bagasse (about 80X overall) as fibrous raw materials. The Project uses bagasse from five existing sugar mills in the vicinity of the Project. Bagasse is a residue of sugar cane crushed to produce sugar, and is commonly used as a fuel for generating steam in the sugar mills. In addition to an increase in productior )f newsprint and other grades of paper to substitute and reduce dependency on import and hence foreign exchange savings the Project provides for India: (a) an option for better use of fiber resource by an economic repl1cement of bagasse by coal as a source of energy; (b) an increase in fiber production by releasing bagasse without any addition to land under cultivation, since bagasse is based on an annual crop generated on land already dedicated to sugar production; and (c) a possibility to participate in development and export of indigenous technology for production of newsprint from bagasse. The Project Completion Report has been prepared by the Industry Department based on a draft prepared by the Borrower, and the findings of an Industry Department mission in February 1986. No further comments were received from the Borrower. This project has not been audited by the Operations Evaluation Department.  - ii - PROJECT COMPLETION REPORT INDIA - TAMILNADU NEWSPRINT PROJECT (LOAN 2050-IN) BASIC DATA Original Disbursed Cancelled Repaid Outstanding Loan amount (US$ M) 100.0 100.0 - _ 100.0 Cumulative Loan Disbursement 1981 1982 1983 1984 1985 1986 Planned 15.0 49.0 84.0 100.0 - - Actual - 18.7 52.9 88.1 98.3 100.0 % of Planned - 38.0 63.0 88.1 98.3 100.0 Appraisal Estimate Actual Start of Implementation 06/81 09/81 Appraisal Date - 11/80 Board Approval - 09/81 Loan Signing - 09/81 Effectiveness 07/81 03/82 Loan Closing 08/85 08/85 Date of Physical Completion Completion Time (in months) a/ 42 45-54 Time Overrun (in months) b/ - 3-12 Date of Start-up of Operations: Papermill with Purchased Pulp 06/84 09/84 Hardwood Pulping Line 06/84 02/85 Chemical Bagasse ?ulping Line 06/84 04/85 Mechanical Bagasse Pulping Line 06/84 07/85 Cost Underrun (in US$ million) - 2.8 Cost Overrun (in Rs million) - 600.0 Total Financing Required (US$ million) 237.5 234.7 Total Financing Required (Rs million) 1,900.0 2,500.0 Installed Cost (US$ million) c/ 189.8 190.8 Financial Rate of Return (%) d/ 12.4 11.1 Economic Rate of Return (Z) 18.7. 13e4 a! Paper was produced using imported pulp after 45 months. The 54 months refers to completion of mechanical pulp line. b/ Paper mill, hardwood pulp line, chemical bagase pulp line and mechanical bagasse pulp line had 3, 8, 10, and 13 months time overrun. c/ Excluding working capital and interest during construction. d/ After tax.  - iii - PROJECT COMPLETION REPORT INDIA - TAMILNADU NEWSPRINT PROJECT (LOAN 2050-IN) MISSION DATA No. of Mission Month/Year No. of Days Staff Report Date Appraisal 11/80 12 3 12/01/80 Post Appraisal 03/81 17 3 03/20/81 Supervision I 03/82 7 2 04/09/82 Supervision 11 02/83 6 3 03/25/83 Supervision III 01/84 6 2 02/07/84 Supervision IV 05/85 10 2 07/12/85 Supervision V 02/86 7 2 03/03/86  - iv - PROJECT COMPLETION REPORT INDIA - TAMILNADU NEWSPRINT PROJECT (LOAN 2050-IN) HIGHLIGHTS The project was conceived specifically to meet the Government's twin objectives of expanding production of both newsprint and printing and writing paper and utilizing bagasse as a fibrous raw material. Bagasse is a residue of sugar cane crushed to produce sugar-(para. 1.01). Bagasse has been widely used to produce printing and writing paper both in India and elsewhere, but its use as a raw material for newspriat is fairly new. In recent years there have been major developments in this field and many pilot plant tests were successful. The Project concept is based on these developments, and an Anglo-American consortium that has been active in these developments assumed a prime respondibility for supplying process know-how, project engineering and main equipment packages. However, to minimize technological risks of newsprint production the Project was designed with the capability also to produce printing and writing paper for which the process is well proven. This approach increased the project cost by about 4%(paras. 1.02,1.03,2.09,2.10). The project is considered to have been well prepared and efficiently implemented by the Project sponsors. The Project was completed with a slight cost underrun ir US$ terms (1%), but with a cost overrun in Indian Rupees (31.5%). The paper mill was commissioned in 44 months, a time overrun of three months. The pulp mill was commissioned in stages. Hardwood pulp line and chemical bagasse lines were commissioned in 50 and 52 months, a time overrun of 8 and 10 months, respectively. Finally the mechanical bagasse line was commissioned in October 1985, a 13-month time overrun(paras. 3.01-3.04, 3.11, 3.14-3.19). Although on a short run basis (one or two days) TNPL has succeeded in producing newsprint of good quality using 100% indigenous raw material including 50% mechanical bagasse pulp, and 25% chemical bagasse pulp, continuous production has not yet been achieved for extended periods. TNPL started production of newsprint using imported pulp in September 1984, and as of October 1985, with the commissioning of the mill-produced pulp lines, domestic pulp has gradually replaced the imported pulp. In January 1986, the mill-produced pulp amounted to 58% of the pulp used to produce newsprint, of which bagasse pulp was 34%. The company is making good progress in this technological breakthrough and it is expected that within six months the blend will reach the appraisal target.(paras. 4.01-4.03).  At the time of appraisal the challenge of producing newsprint from bagasse and the associated technical risk was fully realized. To minimize this risk, a fall back position to produce printing and writing paper was planned. TNPL has fully tested this fall-back position and has successfully produced on a continuous basis good quality printing and writing paper using on average about 95% mill-produced pulp, with bagasse amounting to about 80%, as envisaged at the time of appraisal (para 2.10). In the first full year of operation, 1985, paper production was 16% higher than anticipated at appraisal and in the latest three months has reached an average of 90% of design capacity. It was not expected to reach this level until the third full year of operation (para 4.03). Manufacturing costs are approximately 13% higher in real terms then estimated at appraisal due primarily to higher requirements for chemicals brought about by a change in process technology during imp'lementation which was necessary to achieve newsprint quality and runability targets (para. 3.14). The financial internal rate of return (FIRR) before and after taxes for the project is 12.3% and 11%, respectively, compared to 15.4% and 12.4% estimated at the time of appraisal. The lower FIRR is mainly due to higher capital cost. The economic rate of return (ERR) for the Project is 13.4% compared to 18.7% estimated at the time of appraisal. 7-te lower ERR is mainly due to higher capital costs and lower output prices (paras 5.06 and 6.02). Although one of the Project's objectives, to produce newsprint of acceptable quality, at high speed, on a continuous basis using at least 75% bagasse furnish, has not been yet fully realized, significant technological progress has been made towards the production of newsprint using bagasse as fibrous raw material (paras 3.01-3.02). The Company and the Bank are confident of full technological success. This progress has been made possible primarily because of the Bank's and the Government of India's willingness to take risks and to participate actively in development and eventually export of indigenous technology for production of newsprint from bagasse. In addition to providing financing, the Bank provided advice and assistance to TNPL in various aspects of project implementation. Of particular importance, the Bank insisted that the individual contracts with each member of the Consortium be supplemented with a single responsibility contract to ensure continuity in the event of default on the part of any member of the Consortium (paras 3.09 and 7.02). As with many other projects in various parts of the world, the Bank was too optimistic on the international price prospects, resulting in a higher estimated economic rate of return for the Project than is now expected (paras 6.02-7.05). The Bank's appraisal should concentrate more on price issues and develop more realistic price assumptions.  - vi - Actual disbursement profile was similar to the forecast except for a lag of about 9 months, mainly due to an 8-month delay in loan effectiveness compared with the appraisal estimate (para. 3.18). This Project explored and introduced new technology to India. The successful start-up and continued good operational results at TNPL demonstrate that in certain circumstances, and with suitable training and technical support, introduction of new technology to developing coantries can be successful.(para. 7.07),  PROJECT COMPLETION REPORT INDIA - TAMILNADU NEWSPRINT PROJECT (LOAN 2050-IN) I. INTRODUCTION 1.01 Over the last 25 years India's pulp and paper industry has progressed tc the point where it now supplies virtually all of India's requirement of printing and writing paper. But India is short of long fiber coniferous wood resources that are traditionally used to produce newsprint and it still imports about 50% of its newsprint requirement. 1.02 Bagasse has been widely used to produce printing and writing paper both in India and elsewhere, but its use as raw material for newsprint is fairly new. In recent years there have been major developments in this field and many pilot plant tests were successful. 1.03 The Project concept is based on these developments, and an Anglo-American consortium that has been active in these developments assumed a prime responsibility for supplying process know-how, project engineering and the main equipment packages. However, to minimize technological risks of newsprint production the Project was designed with Lhe capability also to produce printing and writing paper for which the process is well proven (Annex 1-1). This approach increased the project cost by about 4%. 1.04 India is one of the world's largest sugar cane producers. If all the cane produced in India were crushed and the bagasse made available for paper production, this fiber could support an output of about eight million tons of paper or about six times India's present domestic consumption. With such an immense potential, it is natural for India to be a leader in bagasse-based technological development. Currently, most of the bagasse which is produced in sugar mills is inefficiently used internally as fuel for generating process steam. 1.05 The major paper-producing industrial countries have sufficient wood-based long fiber resources to produce newsprint and hence, have little incentive to undertake the full development and risk associated with bagasse-based technology. Accordingly, some development risk has fallen on several developing countries which have abundant supplies of bagasse. Among developing countries, India was well placed to test this technology. It has the bagasse, plenty of relatively cheap coal to replace the bagasse as a fuel, a large enough market to absorb both printing and writing and newsprint and the engineering and paper production experience required. The Project was conceived to meet specifically the Indian Government's twin objectives of expanding production of newsprint and utilizing bagasse as a fibrous raw material.  - 2 - II. PROJECT BACKGROUND A. Project Preparation, Appraisal and Loan Approval 2.01 The Project preparation and promotion started in mid-1970 by Seshasayee Paper and Boards Limited (SPB), which owns and operates a successful paper mill in India, at Erode, in Tamilnadu. SPB was one of the first Indian paper mills to use bagasse, although only for printing and writing paper and only intermittently in small quantities. 2.02 In April 1979 the Project sponsors, Tamilnadu Newsprint and Paper Limited (TNPL) was incorporated as a public limited company promoted and controlled by the Government of Tamilnadu. The Managing Director of SPB was appointed Chairman of TNPL, five other members of the Board were senior civil servants, and the Executive Director was the Commissioner Secretary of the Tamilnadu Department of Industry. SPB was appointcl as the Project Consultant. The SPB Project team continued preparation and a detailed feasibility study was completed by SPB in late 1979. 2.03 The Project was appraised on the basis of the feasibility study in November 1980, and post appraised in March 1981. The appraisal missions focusse.4 their work mainly on the following aspects: technological risk, coal surply and alternative sources of fuel, supply contract for the main machinery, process design and project implementation, financing plan and level of Government ownership and control in TNPL. These areas are discussed in the following paragraphs. 2.04 Technological Risk. It was noted that there is virtually no unusual technological risk associated with the production of printing and writing paper from bagasse for the Indian market. The additional cost of capital required for the production of newsprint was estimated at only US$4-5 million, so the cost associated with the relatively risky aspect of the Project is quite low, especially when compared with the potential technological benefits to be derived. Moreover the pilot tests indicated that the mechanical pulping process proposed for the Project was technically feasible and issues like paper quality and factors affecting pulp yield were expected to be resolved by the time project came on stream. 2.05 Coal Supply. It was noted that TNPL had received letters from the coal companies confirming that they would be able to supply coal to the Project. Nevertheless, it was agreed between TNPL and the Bank that while the probability of a significant shortfall in supply of coal was small, the potential shortfall needed to be secured by an array of alternative fuels. Therefore it was decided that boilers in the paper mill would be designed to burn coal, oil, pith or lignite, or a combination thereof. 2.06 Supply contract for the main machinery, and process design. It was noted that the consortium for the supply of the main equipment package and provision of process technology included three companies under independent contracts. However, to ensure accountability for the suppliers of goods and services and for coordination between process design, basic  - 3 - and detail engineering, and hardware, it was agreed that a single responsibility contract should be drawn with the consortium. 2.07 Level of Government Ownership. Originally the Government of Tamilnadu controlled 100% of TNPL. It was agreed that the Company should be professionally managed and become autonomous from the state Government in its day-to-day operations. Therefore, the composition of the Board of Director was changed, and the Government of Tamilnadu's shareholding was reduced to about 47%. The balance of the equity came from the Development Assistance Fund (DAF) of the Government of India (27%), Indian Financial Institutions (20%) and small institutional shareholders (6%). 2.08 In July 1981, negotiations between the Indian authorities and the Bank took place, and on September 15, 1981, the Bank's Executive Directors approved a loan of US$100.0 million to the Government of India on standard Bank terms. The Government agreed that the proceeds of the Bank loan of US$100.0 million equivalent would be on-lent to the Development Assistant Fund (DAF), administered by the Industrial Development Bank of India (IDBI) for a period of 15 years, including 5 years' grace, at an interest rate of 8.25%. DAF/IDBI would pass on US$77.5 million equivalent as loan on equal repayment terms (i.e., 15 years including 5 years' grace) with its then normal onlending interest rate (14.0%). The remaining US$22.5 million equivalent would be passed on to TNPL for the Project as equity. The loan became effective on March 22, 1982. B. Project Description and Objectives 2.09 The Project was conceived specifically to meet the Government's twin objectives of expanding production of both newsprint and printing and writing and of utilizing bagasse as a fibrous raw material. 2.10 The Tamilnadu Newsprint Project ComFrises: (a) an integrated pulp and paper mill, which, operating at 90% of design capacity, could produce 100,000 tpy of newsprint or 80,0C0 tpy of printing and writing paper or any combination of the two, using bagasse (about 80% overall) and eucalyptus (20%) as fibrous raw materials; and (b) coal fired boilers and fuel handling equipment installed and operated at five sugar mills to release bagasse for use in the paper mill. 2.11 The Project is located near the town of Pugular, in Central Tamilnadu State, about 300 km southwest of Madras, ser