Transcript of two hundred fortieth special meeting of Executive Directors, held on Thursday, December 21, 1961 : India - Third Indian Iron and Steel Company Project

STRICTLY CONFIDENTIAL McDonald INTERNATIONAL BANK FOR 89707 RECONSTRUCTION AND DEVELOPMENT 240TH SPECIAL MEETING of EXECUTIVE DIRECTORS I 11 11 11 Board Room International Bank Blilding 11 Washington, D. c. Thursday, December 21, 1961 II The meeting was convened at 10:35 o'clock a.m., 11 Ii., Mr. Eugene R. Black, President, presiding. I I  2 STRICTLY CONFIDENTIAL Agenda Item Pr oposed Loan -I ndia 3  3 STRICTLY CONFIDENTIAL - - - - - - - ..... - - P R 0 CE E DI NGS - THE CHAIRMAN: The first meeting is a Bank meeting, and the first item of business is the proposed loan to the Indian Iron and Steel Compan7. I would like to call on Mr. Ma.eon. MR. MASON: Mr. Chairman, gentlemen, steel was produced in India before World War I by Tata Iron and Steel Company, and soon after it the Indian Iron and Steel Company works came into production. Since that time production at both these privately owned companies has risen steadily. Since the Second World War two extensive moderniza- tion and expansion schemes have been put into effect at both Tata Iron and Steel and Indian Iron and Steel. In each case they have been aided by loans from the Bank. The two loans to Tata add up to $107.5 million, and those to Indian Iron and Steel total $51-5 million. The present capacity of finished steel for the two companies is now 2.3 million tons per annum -- 1.5 million tons at Tata and 800,000 tons at Indian Iro~ and Steel. Until recently this accounted for practically all of Indiats steel production. During the Second Five-Year Plan -- that is, from April 1956 until April 1961 -- the Government undertook the construction of three steel mills in the public sector which toget~er would also have a capacity of 2.3 million tons. The  ll 4 STRICTLY CONFIDENTIAL doubling or finished steel capacity in such a short time is an ambitious task for any country, and the pace of this development, superimposed on the simultaneous growth of other heavy industries, has so increased the demand for nigh-quality coal that the insufficiency of its supply had threatened to become an obstacle to the achievement of the target set in the Third Plan. As you are aware, the Bank has already made a loan of $35 million to the Government for the import of equipment needed for the expansion of the private coal eector, and with this help we believe the private coal mining sector will be able to reach its planned expansion of 17 million tons of coal by the end of the Plan, of which 6 million tons ts to be cokin coal. Nevertheless, the private collieries will be ha.rd pressed by the demands of industry, particularly for this good quality coal. In the meantime the Government has given priority to the movement or coal to the steel mills, but ha.a not been able to assure its quality and uniformity, in large part due to the delay in building coal washer1es. Thi~ had adversely affected Indian Iron and Steel Companyrs production of steel. It is thus fortunate that the company has coal mines of good quality coal which can be developed near enough I I to make it economical to bring 1t by ropeway directly from I the mine to the works. Hence, when this project is completed  r 5 STRICTLY CONFIDENTIAL Indian Iron and Steel will be able to supply its coke ovene with a uniform quality or high-grade coal which will not only reduce the amount of coking coal required but enable Indian Iron and Steel to maintain production of steel at a high level. This would be the Bank's fourth loan to India fer projects in the first two years of the Third Five-Year Plan. It will bring the total to $125.5 million out of the total or I $200 million in loans which the President indicated he would i jpreeent to you. Bank loans in toto to India now amount to about $800 million. The five credite approved by the Inter- national De·:elopment Association amount to $88.5 million. The provisions of the Loan anc Guarantee Agreements follow cloeely the pattern set in the previous two loans to Indian Iron and Steel. Apart from the eections which are mentioned in the Presidentta report, you will note that this loan will be secured by a first fixed mortgage and a f1ret floating charge upon all the properties of the company. You will also see that one of the conditions of effectiveness -- that is in Section 8.0l{c) ·- is that the Bank ah.all be satisfied that the Borrower will be able to acquire all land, interests in land, properties, adequate electric power supply, and all such rights, priv:tlege! and franchises as shall be necessary to carry out the project. The company has already taken action in all these matters, and we believe that their completion, thougn dependent  6 STRICTLY CONFIDENTIAL in many cases on other parties, should not unduly delay the Bank in making this loan effective. THE CHAIRMAN: Thank you, sir. Mr. Wright. MR. WRIGHT: Mr. Chairman, gentlemen, as you will recall, India t:s Second Five-Year Plan ended last March, and she is now nearly three quarters of the way through the first year of her Third Plan. Changes in Indiate national income still depend primarily on the course of agricultural production. The last year of the Second Plan saw a record food grains harveet, and preliminary indications are that the present year will aleo be a good one for agriculture. Rainfall during the summer monsoon was abundant and fairly well distributed over 1 the country. 1 Industrial production has continued to rise at the rate of around 10 percent a year. The latest official data relate to the month of July, and in the three months from ' May to July this year the over-all index was 8 percent higher than in the corresponding months of 1960. This increase was achieved in spite of a decline in textile production, which accounts for nearly half the total weight of the index of production. Thus, the production increases in the newer industries, particularly engineering and chemicals, have been much greater than the average.  7 STRICTLY CONFIDENTIAL Industrial production would have risen faster but for the continued shortages of fuel and power and transport. ·The railways rem~in under heavy pre~sure. Shortage of power · has been a tbreat and remains one of the most serious obstacles to industrial expansion during the Third Plan. The raw material position is rather difficult to asseseo Clearly, some industries are being held back by shortages of imported materials, and this is one factor making for under-utilization of existing industrial capacity. But there is no conclusive evidence to show that the situation has gotten worFe during the past year. Imports as a whole during the current year -- that is, the Indian fiscal year 1961-1962 are expected to be coniiderably smaller than forecast a year ago. Such increases as have occurred appear to be mainly in capital goods, and the level of maintenance imports ie hardly any higher than in 1960-61. Exports have done a little better this year. In the five months April to September 1961, receipts were about $70 million. That is 10 percent higher than in the sa~e period of 1960. Country-wise the largest increases have been in exports to the United States and Japan. Commo~ity-wise the ~ain increases have been in jute textiles, raw cotton, and sugar. In so far as the increase ln the value of jute export  '1 8 STRICTLY CONFIDENTIAL is attributable entirely to the higher cost of raw jute, 1 1 the picture is not altogether encouraging. Iron ore exports ' have increased less than they should, mainly because of I I shortage of rail transport, and the trends of exports of l vegetable oils and cotton textiles have both been disappointing. The figures of foreign exchange reserves on November 24 have been given in the President's Report. Betwee~ that date and December 9 there was a very small increase, bringing the total reserve bank's holdings, by a remarkable coincidence, to $555.555 million. In spite of a net addition of $122.5 million to India's resources, resulting from transactions with the i'' Monetary Fund during the summer, no significant increase in foreign exchange holding~ can be expected during the curren year, and there could be a slight fall. The present year has seen a welcome pause in the persistent upward trend of pricea. At the end of November tbe official index of wholesale prices was 1-1/2 percent lower tha at the same time a year ago. The increase in money supply during the past 12 months, a little over 5 percent, haf: been moarate in relation to the growth of production. The favorable agricultural out-turn and the marked reduction in deficit financing by the Government have both contributed to greater internal financial stability.  9 STRICTLY CONFIDENTIAL The investment programs in the Third Plan are now getting under way, but progress is uneven. It can be expected that the execution of the Plan will fall eome way behind the original timetable. Nevertheless, solid progres~ is being made, and although periodical checks must be expected the proepect le for continued expansion. THE CHAIRMAN: Thank you, ~ir. I: Mr. de Alba. MR. DE ALBA: Mr. Chairman, gentlemen, as described Ii II by Mr. Mason, the general development of the Indian economy II and particularly the substantial increase in production of I l1ron and steel by the public and private sectors of India in I I lthe la£t few years have created a serious shortage of basic I :raw material~ for the $teel industry. C<hking coal especially is in very short supply, and despite the efforts being made by the pI'ivate coal sector to increase production of coking coal by at least 6 millton tons during the Third Five-Year Plan, there is a good poas1b111ty lthat total requirements may be increased to about 8 million I itons, and that there may be a shortage of coking coal of 2 i lmil lion tons by the end. of 1965. 1 . 1111. The loan made by the Bank 1n Auguet of thi2 year to !provide I the foreign exchange required by the private coal sector expansion program excluded the coal mining project of !the Indian Iron Company. i ! . I I l 11  10 STRICTLY CONFIDENTIAL Contributing to the problem of supply of coking coal to the industry has been the delay in the installation of coal washeries by the Government, which were supposed to provide coal or uniform quti.lity and.; by removing the excess ash and "ty ! I, !providing central loading points, facilitate the traneportation ,, " liof coal to the steel mills. 1; ,, " The management of the Indian Iron and Steel Company, i,!: 'I ~s well as members of the Bank etaff, have fnllowed very cloeely I ~uring the last two years the problems created by the scarcity ~f coking coal, ~.nd the problems that have already affected the i rteel production of the company both in quantity and quality of roduct. About two years ago Indian Iron .'liscuseed a tentative i lan for modernization and expansion at their mines at Jitpur nd Ramnagore. The scale of this project was too small to trolve the coal problem of the company, and the project was re- , ' ised to include the opening of mines at the Chasnalla propert1Js, I i rhere large reeerVQS of coking coal are available. After more I I i \than one year of close study by the company, Bank staff and our\ bonsultante, we have arrived at the project now being con- I l 1 , I I 1Sidered. I When this project is completed, we expect Indian Iron 1 i , I jto be self sufficient in the pr0duction or its coking coal I 1 I IJrequiremente. It will also include coal preparation fac111tles1 I~ coal waehing plant, to provide coal of uniform ash content i I i I ror the production of good quality coke, Which Will permit the 1! I i !  11 STRICTLY CONFIDENTIAL operation of the blast furnacee ~t or above their rated capacity. Finally, 85 percent of the coal production will be carried by a 32-mile double ropeway at lower transportation coet than by railway. After this project is completed in 1966, Indian Iron 1will have a totally integrated structure which will permit the I I l1most efficient operation of the steel mill expansions financed l by the Bank. I t will have helped in relieving not onl1 the 1 !production or coking coal but also eheaper transportation of lcoal to the plant. j Therefore, the project now presented we feel forms a l~uitable 11 basis for a Bank loan. 1· THE CHAIRMAN: Thank you, sir. I Any questions? I I I Mr. Chairman, I would like to indicate I MR. HUDON: I I !my full support for this loan. It seems to be a very efficient 'firm in a very competitive industry. I must say that I was a little bit surprised wnen I i isaw the term~) that is to say, 12 years with 5 year:s of grace. lir assume that in arriving at these 12 years one of the con- ! I lsiderations was projected earning power or the firm, and. I !certainly wouldn•t want to change in an1 wa1 the commercial /c:na.racter of this loan in so far a.s the firm is concerned nor I !suggest that the financial discipline that ie implicit in this I  12 STRICTLY CONFIDENTIAL arrangement should be changed. On the other hand, the terms which might be suitable for a firm might not necesearlly be suitable for a country, or the country in which the project is located. As I understand the situation, India has a very heavy external debt burden. I have heard it said that it is . past the danger point. I am wondering, therefore, whether con- ':sideration had been given to making arrangements whereby as ,far as the firm is concerned these terms would be maintained, 1 11 1~ut as far as India the country ls concerned it would be some- 1~hat more liberal. I I I or course, I am thinking of the type of arrangements , I rhich have been made in the case of IDA credits. ' I It may be that part of the anser is the five-year I period of grace, and I would like some information on this. l ~llre is a five-year period of grace, and it may be that the I I peak of the external debt burden will have been passed and i Indiants foreign exchange will have increased substantially. I am wondering if this type of consideration entered ' ' iinto your recommendation that the loan should be for 12 years l~nd include f1 ve years of grace. I THE CHAIRMAN: Well, I would say that the points you ring up are very import~nt and are things that we very care- ! rully considered, and they have a very important bearing on our I I I rI ecision to make India a country available for IDA credits. Bu~ I  13 STRICTLY CONFIDENTIAL we think we ought to keep the two separate. We feel in a project that the Bank finances the amortization schedule should be geared to the project. Now, if a country has serious balance of payments problems and very heavy debt problems, that means they would be eligible for IDA, or very likely be eligible for IDA. But ·1 11 !i we think it would be a rather dangerous precedent to start 11 11 in gearing all your Bank loans to the needs of the country and l Ii not gear them to the project. 11 Do :rou have anything to add about the Five-Year I thing? I MR. KNAPP: No, I don't think so, but I think it has i j! to be looked at in a broader perspective. This is just one I l part of the whole pattern of Bank-IDA financing for India. ' ': It is true you would have to distort this case from our normal project s·tandarde to meet the Indian creditworthinese picture, but we just didn't think we ought to do it. THE CHAIRMAN: I think what you are talking about, i Mr. I Hudon, is that we would have to review the whole policy of ) the Bank and just disregard the project approach as far as the l' I schedule of payments is concerned, but I think it is important I when a country has a heavy volume of payments to make that I is when you start thinking about IDA. Tb.at is what IDA is I for. But you would have to change the whole procedure and policy of the Bank if you are going to just fit each loan to  14 STRICTLY CONFIDENTIAL the countryts repayment p:::"oblems. MR. ~IEFTINCK: Mr. Chairman, may I ask a question in connection therewith. I am fully satisfied by your answer. I do think ,, ' ;: that the Bankts financing ehould be on the basis of the Ii Ii features of the project and not so much be connected to the Ii 1: I position of the country. But ~aving said this I would be i grateful fo~ some explanation why in this case with this project the term ie 12 years, including 5 years of grace, I ' while the loan we made also to the private coal mining industry 1n August of this year, a loan of $35 million, was on a 15-year term. I think there should be some explanation why this project differs from the preceding one. I THE CHAIRMAN: Before this question is answered, I 1! I! want to assure Mr. Hudon that we never take an eye off the I I i payments the country owes and that we keep that very I constantl~ I I 1 in mind. l 1 II' MR. HUDON: Just to give further explanation, I was I I 1 thinking in terms of differentiating the project from the I Ii country. ,1 ! I am quite satisfied that as far as this firm is I ! concerned 12 yeare is quite reasonable, and I wouldntt want I I to change that. I I I haven't analyzed it in the detail that you have, I ! !but I I feel that this is probably related to the earning ca.pac!~J I I I I  15 STRICTLY CONFIDENTIAL of the firm, and this is reasonable-· in those terms, and I think that that financial discipline should be maintained at all times. I was just wondering whether any consideration whatsoever had been given to differentiating between the project itself and the country. THE CHAIRMAN: Well, that is one of the reasons for J the creation of IDA. That's one of the real reasons for that. 1' But if you started gearing your amortization schedule to the i country and not to the project you would have to change the II whole operation of the Bank completely. II II I MR. MASON: I think the difference between the two is that this was one way of considering the one we are considering now, Iron and Steel, for a specific project in which we were easily able to calculate whether it could pay off.In the case of the coal loan, as you know, it was a very1! I canplicated loan in a way. It was made to the Government I l I because it was impossible for us to make it to -- I think ther~ ' I , i j were over 800 collieries involved, and not only was it a great! I number of collieries but also as you know there were a great I I many different categories of goods that ranged from spare I t I parts to the digging of new mines. I think we just had to mak~ I I I up our minds to take a rounded sum between the usefulness I I and the numbe' of collieries and that kindof thing. I THE CHAIRMAN: I woull · 11ke to ask a question. Why I i 1!  16 STRICTLY CONFIDENTIAL was the postponement for five years or six years? MR. MASON: Well, it was really to help them over the Plan, in a way. It was also as I say because there lere new mines that wouldn't come into operation until that time. THE CHAIRMAN: But it was partly because of the , Indian Plan? j! I i! MR. MASON: Yes. I i 'I " ii THE CHAIRMAN: Any other questions? Ii ii !1 I ,1 MR. GOLDMAN: Mr. Chairman, I, too, think that this 1! Ii is a very excellent project. In fact, fran its technical 11 I point of view it seems to be one of the best that I personally l , have seen for several months. ! 1 \ i! I just wondered in reading the detailed report whethtr 1: I 1: any estimate had been made or the expected return on the ! I' capital investment in this project. I mean we do get some j :very fine reports on highway projects, when elaborate schedules I i I . are made about expected returns, despite the technical and i conceptual difficulties of that kind of thing, and here is I something that is obviously much more straightforward and I i I l l conventional, and one might almost say an industrial investmen~. [It would be interesting to see whether any calculations or thi~ kind could or have been made, particularly since this is a loa~ 1to a private concern, with obvious implications of the return I I to the private shareholders on this investment. i I i On the whole, as I say, judging fran the technical I 1!  17 STRICTLY CONFIDENTIAL report it certainly looks like an extremely good investment, good from the private point of view and good from the public point of view, too. But if in fact some calculations have been made about the expected return or some idea has been obtained of what this might yield, and if as I rather suspect this return is quite a significant one, again judging from the technical advantages of this scheme -- whether there has been any consideration given to the possibility of raising private finance for it. I know there have been previous loans I; made in similar circumstances, but as I say I think this is a 1 1 I' Ii point that did occur to me in reading this, and -- this is Iiii the opposite of the suggestion raised by Mr. Hudon -- whether I IFC had been thought of at all in this context. I am asking a lot of questions more for elucidation, and as I say I think this sounds on the whole as presented to us an excellent project which will benefit the company and also India very greatly. THE CHAIRMAN: Well, I will answer the last two questions myself. First cf all, I don't think the time is yet ripe to ' be able to float a loan like this in the private market. We I:, are constantly thinking about that and checking with the private market, but I don't think the time is quite ready yet for that. As far as IFC is concerned, this is just too big.  18 STRICTLY CONFIDENTIAL This is $19 million. I think if it was a smaller project it would certainly be a very attractive one for IFC. I think that some day -- it may not be too far off -- that a company like the India Iron and Steel Company, which is an extremely well managed company -- it would be possible to float a loan in the private market, and this is something that we talk about. As a matter of fact, I think it might be possible if you had a company like this, the Indian Iron and Steel or Tata Steel, to float a loan in the private market either here or abroad if it would be possible I 1, to make it a convertible issue. In other words, if you had I: Ji some kick to it, either that the bonds that were to be offered: 11 had a conversion of the stock or you had an option to buy 1: stock or something of that kind. 1! I can assure you we are thinking about this all the Ii time, and the minute we feel that the market wou-ld take this 11 I kind of an offering we will certainly go into it. It may be I ' that sometime 1n the future the Indian Iron and Steel Company l l I ' I in connection with other financing or possible expansion, if i I they need to raise some additional equity money -- I think ' this might be something that the IFC could take a look at, i I but as far as making a loan this would just be too big for thel IFC. I ! Will you answer the other question? 1 I i MR. DE ALBA: First of all, we have to keep in mind i I I  19 STRICTLY CONFIDENTIAL that this is a captive production which is going to provide coal for their coking operations, and the aim of the Indian Iron and Steel Company is to produce steel. Now, it is extremely difficult to follow through the whole thing and find out how many rupees per ton it is going to cost to pro- duce the coal. Nevertheless, we did have some ideas about how much the coal was going to cost. These estimatesl'ere a little bit difficult to make because most of the operation, which has extremely difficult mining conditions, and we don*t Ii really know what we are going to find until we open up this ~ mine. But at the same time an estimate is made quite con- ~ i servatively. We found that Chasnalla coal could be produced I I at about 15 rupees per ton, as against the price they are paying now of about 20 reupees per ton. Now, it looks too much on the optimistic side. There are so many unknowns i I when we open up this field that we didn't want to make any i I I specific mention about the cost of production from this mine, 1 I I but de£1nitely I can tell you that there is no reason why the~ ! should not have a much lower cost from Chasnalla than they I I are paying now to the foreign suppliers. MR. GOLDMAN: I was sure thiswas so. I too didn't think it was quite clear on the evidence it also was a big improvement in the whole technical operation of the company. I It was more for the impact of this on its finances specif1cal*1 ! and the relationship between the new investment and the return I I  20 STRICTLY CONFIDENTIAL on that that I was interested in. I do see that there are great difficulties in making calculations of this kind. MR. KNAPP: Mr. Chairman, I think it is pertinent to recall that the steel industry in India is a heavily regu- lated industry, including severe regulation through the system of prices, and although the Indian Government has not formulated, as I understand it, its policy on retention prices 11 for the future I think it is under consideration. I have I! II 11 heard a lot of talk at least about a discriminatory policy [\ \lilich would relate prices to costs, and in this sense there II is also a close profit regulation in India's steel industry. I! i So if Mr. Goldman is worried we might all be worried I I about conferring some bonanza here upon the private companies. I don't think there is too much grounds for that. THE CHAIRMAN: I don 1 t either. Dr. Donner. MR. DONNER: Mr. Chairman, I do not have any dif- , ficulty in going along with this project. The investment takes place in a field with regard to which the Bank in its assessment last summer, 1960, of the Third Plan had expressed grave concern and has repeated it today that indeed the production of coal particularly is a very severe bottleneck. This project will help if continued to open up and widen somewhat this bottleneck. It is a favorable project, and the  21 STRICTLY CONFIDENTIAL production of this coal will be cheaper for the firm than the prices it would have to pay if it buys coal from other places. The quality of the coal will be better, and with the realiza- tion of the project the railway system, which is heavily over-. loaded as we lcnow will not be further burdened. Last and not least, the execution of the pro.ject is,: as you yourself, Mr. Chairman, have just said once more, in the hands of an excellent firm. So far as I can see on all points this project qualifies for Bank financing. Thank you. THE CHAIRMAN: Thanks. ' ! i Mr. Lieftinck. I MR. LIEFTINCK: Mr. Chairman, like the preceding ! i speakers I am very pleased to give my support to this project,! I I which I think is a very useful one. I ! I As Mr. Donner has already recalled, in the summer ofi I I I this year we had a report before us called the Appraisal j I Report on the Indian Coal Industry. It pointed out ver~,- I clearly that in order to achieve the goals of the Third I 1 Five-.Year Plan coal would have to be devel ed to u very I I considerable extent and the private sector would have to ma 11 a very substantial contribution to that. I Now, here we have a proposal to make an additional I I loan to the private sector, private coal sector, and I I  22 STRICTLY CONFIDENTIAL certainly feel that it is a very good investment. I have a few technical questions to ask. I have cc:mpared some of the figures given with respect to this project with some general figures presented to us in the appraisal report of the Indian Coal Industry, to which I referred already. In the present report on page 9, paragraph 36, we have the figure of c ital investment per annum, part of the 29.7 rupees for this project in the three collieries involved. In the general report of last summe1", R 61-'(8, on page 24, paragraph Yl, we find that the capital cost of new mines has been estimated at 50 rupees per ton of annual out- put. This particular project, being a joint project for the sand gathering and for the opening of new mines, I was , interested in comparing, if we take the average of the figures, ' '' j the 50 rupees per ton and the 19 rupees per ton in the lI general report, it would come to about 35 rupees, and here we 1,· have a figure of 29.7, which looks favorable. 1 II On the other hand, if we consider which investment ! I i I ' expenditures have been taken as the basis for this calculatio~ I i I l resulting in 29.7 rupees per ton we find on page 15, paragraph! ! 61 of the technical report, that in that figure are only included the expenditures directly related to the mining as ! I: such, and that for instance the sand gathering stations and I. 1,  23 STRICTLY CONFIDENTIAL the ropeways are excluded, and also the coal washing plant is excluded; also administration and engineering and contin- gencies are not included in the figure, which is basic for the 29.7. I wonder whether if we compare the specific figure ' of this project with the general figures in the preceding report we would not come to a much higher figure from a realistic basis of this particular project. Perhaps in the general report these costs, which I think should be added, namely, for the sand gathering and administration and contin- gencies, and so on, were also excluded, but I have some doubts whether this figure of 29.7 rupees per ton investment cost is a realistic one, if we take into consideration that at least the sand gathering and part of the administration and contingencies expenditures figures should be added to come to •:a reasonable investment figure. In this connection, I wonder whether a certain per- cent for contingencies is a realistic figure. We find in the technical report that the estimates of local currency expenditures in the preceding projects have in certain cases been almost double the estimated ones, and I would feel safer if in this case, too, a higher figure for contingencies would have been taken into consideration. Now, my second question is: What is the estimate of the cost of production per ton of this company, compared with  24 STRICTLY CONFIDENTIAL the so-called normal costs which are basic for the price policies? The costs were fully discussed in the preceding paper, R 61-78, and they came to about 17.90 rupees per ton. Mr. de Alba has already given a tentative figure of 14 to 15 rupees per ton for this particulariroject in reply to Mr. Goldman's question. I am interested to know how this relatively low figure can be achieved, in view of the fact that the report points out very clearly that the mines in question are very difficult ones to operate, the seams are rather steep and water danger is very imminent, and measures have to be taken to protect the mines from water and floods. Labor costs certainly are low. That would explain a low cost figure, but for the normal cost calculations in general these low labor costs also constitute an element. So I would like to inquire how it is to be explained that in this particular case, although the natural conditions are not too favorable, the cost estimates are so far below the' ~ normal costs in gh-e general report. Finally, I would like to inquire whether the staff and management are at present more satisfied about the coal price policies of the Indian Government than they were some I i I l time ago. We know that coal is in very short supply, and thatl I in need of the great need for coal and need for heavy invest- 1· ments in coal some incentive, reasonable incentive, should be I ' 1 I i I I  25 STRICTLY CONFIDENTIAL given by a reasonable price policy, because this is of such general importance in this sector of production. I am very much interested to know whether there have been any favorable changes in the price policies. MR. DE ALBA: Mr. Lieftinck, I will try to answer one by one your questions. The reason why we exclude from our comparison the sand gathering stations and sand ropeways is because that was done by the private coal sector also. The Indian Government I! is building a very extensive sector of sand gathering stations. and ropeways, and they are going to more or less carry the l 11 cost of sand storing or giving a premium it hasn't been I decided yet -- of 2 or 3 rupees per ton. So what we are r trying to do was to precisely make the two things comparable. 11 MR. LIEFTINCK: You mean for international compari- 1! I son these figures should be revised? i MR. DE ALBA: I am not talking about international , comparison. I am talking exclusively between the Indian Iron and Coal project and the private sector coal project. The Indian Iron and Steel project is a specific 1 project that we had a chance to go and see what we are talking I about 1 and see the actual mining operations and make studies I 1 quite sizeable and, we hope, accurate. I II In the case of the private sector you have to keep l in mind that you are going to deal with about not a hundred, las Mr. Mason mentioned, tut about 1,500 different collieries, i  26 STRICTLY CONFIDENTIAL from production of a few thousand tons to production of close to a million tons. That is the range that you have here. You have some holes in the ground where you have a couple of men using picks and shovels and about half a dozen women carrying baskets of coal on their heads to bring the coal out of these pits, and that represents about 20 to 30 percent :~ of the coal produced by the private sector. From there you I' !I havei'fo fairly mechanized mines. I haven 1 t seen a fully i II mechanized, fully modernized mine yet, but we hope to have one, 1 1 when we finish up this thing. I so you can see the comparison is impossible to make on a sound basis, so really we were just toying with making comparisons as to the sand gathering and sand transportation in our estimates here and in the private coal sector. The coal formation plant is a different proposition also not only in the private but the outside Indian Iron and Steel. The Government has installed and is installing coal washers, and thererore the cost of those washers was not included in the estimates made of theprivate coal sector. i' i These are the main two items that you mentioned, andi i as you can see are all excluded. Now, the other thing you mentioned is the contin- l gencies. We have been pretty close to our estimates in the j l I foreign exchange requirements for the two previous projects. I ! Now, the contingencies for tl:e local expenditures were a littl~ I I  27 STRICTLY CONFIDENTIAL bit off beam, I should say, and we took great pains this time with the ccmpany's executives and the consultants to make sure that they have considered adequate contingencies. Well, anything can happen. The cost of labor is subject to policies of the Indian Government, andmany other things, and it is not for us to calculate or estimate on this thing. Blt we are hopeful that this is going to be closer than the previous one. Now, on the foreign exchange I feel pretty sure we ·~ have enough there to take care of any substantial changes .. i: especially when we consider that most of the equipment will be ,, I Ii:! bought in the first two years of the project. So I don't 11 Ii think that there are going to be substantial variations from II i the price of coal in such a short period of time. I! 11 Regarding the cost of production, as I mentioned i! 11 I before this cost of production of the private sector is some- II I I thing that the Indian Government arrived at. Officials of the: I Indian Government claim it is a fairly good or was a fairly good estimate at the time it was estimated. For some other companies they say it is absolutely out of range, that it is l ! higher or lower. I have seen some fairly mechanized mines with higher cost and have seen many of these small mines extracting coal ' by hand with really much less cost than is estimated here. ! ; ; iq I , So also our estimate in this case is very approximate. That  28 STRICTLY CONFIDENTIAL why we didn't mention specific figures in our report, because the mining conditions are going to be especially difficult, and we just hope that we are going to be fairly below present costs because of the highly mechanized mine we are going to have there, and the fact that we are going to have a couple of openings which will give us more or less a fair balance in the cost of prod.uction. But what the cost is going to be I can tell you five years fran now fairly accurately. THE CHAIRMAN: Thanks • MR. KNAPP: I think there was a question also on price policies. MR. DE ALBA: This is again one of the things we have discussed with the coal controllers, especially now that we are working on the private coal sector, and they are : planning to revise the prices. It is a complicated thing, I II because as I mentioned before they have some premium for ,, 11 sand storing and then they also have special premium if there i I is gas. I mean the Indian Government has allowed them a I certain amount when you go down to a certain depth, am there II ,1 is an allowance. So it is such a complicated deal that the !! i i Indian's claim that this is the best way to do it. They will i i I probably be in favor of some across-the-board price and take I : care of all these things in a general way. That is the way I 1 i they want to do it, and I don't think we can do too much about) I I I ' I  29 STRICTLY CONFIDENTIAL it. MR. KNAPP: Mr. de Alba, isn't it generally true to say when we presented the loan l:ee::ll we were critical of some features of the price policy, and there have not been any significant changes since that time? MR. DE ALBA: I think it would be extremely difficult to do it because of the fact that they have their own sector of coal production, which is absolutely different from the private sector way of producing. So they are trying to provide the standards which are applicable to the public sector and large modern mines to the public sector, which has all these many complicated little mines and very steep seams and all this. It is very difficult for us to really put the pressure on them to make a reasonable price policy. We are trying to, and they said, 11 We are trying to do the best we can, 11 but we think that until we have the washers installed and all the sand ropeways installed and have a fairly good idea of what it 1s going to cost to provide these servicei5, then we can fairly cane out with a more reasonable price, probably in a couple of years or so. MR. LIEFTINCK: May I just comment on the latter part of it, Mr. Chairman. In paragraph 58, on page 15 of the previous report, I' the staff expressed the somewhat different view, which I still I I: think is the correct one. They stated that the agreement on 1: Ii Ii  30 STRICTLY CONFIDENTIAL prices is not satisfactory, that these concessions do not get the Government out of the private coal industry but are getting them in deeper, and instead of an elaborate system of price controls the price should be allowed to find its own level, and the demand from the free market would get quality coal out of the difficult mines much more efficiently than subsidies. Of course, it is not up to the Bank to dictate or even try to strongly influence the Indian authorities with respect to their price policies. That is up to them. On the l other hand, I think we are entitled to point out what in the I opinion of the Bank would I' II be perhaps the most conducive to reaching the goals which the Indian Government has set. I THE CHAIRMAN: I agree with you. Anyone else? Any other questions? If there are no other questions, may I have a motion? MR. COCKE: I so move. (Upon motion duly made and seconded, the resolution was adopted unanimously.) THE CHAIRMAN: I declare the motion carried. MR. CHEN: Mr. Chairman, I wish to be recorded as ! I i ! i having abstained from the voting on this loan. l ! I i 'l'HE CHAIRMAN: I left out participations. There arej !' ' 11 three banks that have agreed to participate in this loan to I II the extent of :?400, 000. 'l'ha t :is 2 small a1~10unt, but I I I I I I  31 STRICTLY CONFIDENTIAL tha t is because the first mc:: t urit y is 1967 . Now, one of t hese banks has a sked that their name n ot be menti oned here or anywhere e l se . We don ' t know why i t is, but we have to abide by that . The other t wo banks are the Phil ade l phia Nationa l Bank and the Fidelity Trust Compan~' of Philade l phia , who are taking $ 150 , 000, a nd t he bank whose name I cannot mention is tal<ing :p250 , ooo . MR . KRISHNA-M OORTHI : Mr . Cha irmc:: n, may I express on beha l f of t h e Gover nment of India and the Indian I ron a nd 1 Steel Company the i r tha nlcs in bringing this proposal to t h e Board and the actio;1 of the Board in approvin;?; it . This loan, has been discussed a nd negot i ated with a l most record dispatc h . ; ; The Goverlli~ent of Ind ia are very pleased to pa rticipate in t he j ; guara ntee a r r angements , because th is brings many benefits and improves the production of stee l, it improves the production of coa l , a nd i t saves on transport fa cilities . All in a ll i t is an ex ce llent bit of business , on which the Governme nt of India woul d respectfully l ike to congratul ate you . Thank you, Mr. Chairman . THE CHAIRMAN : Thank you , sir .