India - Coal Production Project

R E S T R I C T E D Report No. P 259 FILE COPY This report was prepared for use within the Bank. It may not be published nor may it be quoted as representing the Bank's views. The Bank accepts no responsibility for the accuracy or completeness of the contents of the report. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO INDIA FOR A PRIVATE SECTOR COAL PRODUCTION PROJECT July 31, 1-961  INTERNATIONAL BARK FOR RECONSTRUCTICN AND DEVELOPMENT REPORT AND RECQVIl.4ENDATITONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOANI TO IIDIA FOR A PRIVATE SECTCR COAL PRODUCTION PROJECT 1. I submit herewith the following report and recommendaticns on a proposed loan to India in an amount in various currencies equivalent to U.S. $35 million to assist the private coal mining industry to expand its production through the import of equipment. PART I - HISTORICAL 2. Until 1956 the coal mining industry, with the exception of some collieries worked by the railways, was owned and operated by private interests. In 1956 the Government decided that further expansion in this field should be undertaken by the Governrment, and created an agency, the National Coal Development Board, to take over the railway collieries and develop newJ mines. The production target set for the mines of the National Coal Development Boa-rd was an annual rate of 16.5 million tons by the end of the Second Plan. However, the public sector fell far short of this target and, with the limitations imposed on the private sector, a serious coal shortage developed towards the end of the Second Plan which affected industrial production, and particularly the newly- established steel industry. The Government realized that the production target of 97 million tons for the Third Five-Year Plan could not be reached unless private industry were given incentives to maintain and expand its production by providing foreign exchange for the import of needed replacements and spare parts for mines in operation,by permitting the opening of new mines and by adopting a more flexible attitude towards price control. 3. Accordingly, the Government made several important concessJons to the industry and has promised to provide the foreign exchange for needed imports of equipment. This should give sufficient incentive to enable the private industry to step up its production to the target it has set for itself, namely an increase in the annual rate of production from the present 44 million tons to 61 million tons in the year ending 31 March 1966. In view of the shortage of foreign exchange resources available to the Government, it has asked the Bank to consider the financing of this Project. Since it is estimated that nearly all of the private collieries will be able to finance their purchases of needed equipment, the loan would be made to the Government to provide the necessary foreign exchange.  - 2 - 4. The Project was examined by a Bank Mission, together with a consultant, which visited India early this year. Negotiations for the proposed loan began on July 5, 1961 with representatives of the Indian Governnent and the coal industry and were completed on July 25, 1961. 5. The proposed loan and the loan approved for the Commissioners fbr the Port of Calcutta would increase the total of Bank loans to India to $756.6 million. The status of previous loans, including the approved loan to the Port of Calcutta, is as follows: As of July 21, 1961 ($ million) Total loans: 1/ 721.6 net of cancellations 22.3 less amount sold 61.5 83.8 637.8 Amount repaid: 69.3 less repayments to third parties 36.0 33.3 Net amount held by the Bank 604.5 1/ Including $138.1 million not yet disbursed. PART 11 - DESCRIPTION Op TIlL PROPOSED LCAN 6. The proposed loan would assist the private sector of the coal mining industry to undertake a five-year progran of expansion. Imports of equipment needed for this expansion program would cost the equivalent of about $60 million over the five-year period. The amount of the pro- posed loan would be $35 million, to cover imports of equipment as follows: $30 million for the first two years' requirements for spare parts and replacements and equipment for the expansion of the existing mines; and $5 million for equipment for new mines; disbursements in these cases will, however, extend over the period of completion of the new mines, which it is estimated may cover a period of four years. The Indian Government has undertaken to complete the five-year program, but has stated it would submit a request for a further loan of $25 million at a later date.  7. The principal features cf the proposed loan are: Borrower : India, acting by its President Amount : The equivalent in various currencies of $35 million Interest rate : 5-3/4 per cent per annum, including 1 per cent commission Commitment charge : 3/4 of 1 per cent per annum Term : 15 years, including 5 years of grace Amortization : 21 semi-annual payments commencing i'May 15, 1966 and ending -lay 15, 1976 PART III - LEGAL INSTRUMENTS AND LEGAL AUTHORITY 8. A draft Loan Agreement between India and the Bank (No.l) is attached. The following provisions of the Loan Agreement are of special interest. Since the proposed loan will not provide all of the foreign exchange required for the Project, India undertakes, in Section 5.01(b), to make available the foreign exchange necessary to complete it. W4here new mines and expansion of old mines are concerned, tlhe use of the proceeds of the loan is related to specific mining projects (Section 3.01(b)). To pass upon requests for foreign exchange, the Indian Govern- ment will establish a Screening Committee (Section 5.09). The establish- ment of the Screening Committee is a condition of effectiveness of the Loan (Section 7.01(a)). A copy of the recommendations of the Screening Committee will be sent to the Bank for approval at the time a mining project is submitted (Section 3.01(b)). To enable the Government to meet the Bankts end-use recluirements, adequate arrangements will be made with the various mining enterprises (Section 5.02(b)). These arrange- ments must have been made before the Loan becomes effective (Section 7.01(b)). In Section 5.01(c) India undertakes to provide adequate credit facilities or other financial assistance to mining enterprises. 9. With reference to Section 5.01 of the Loan Agreement, the Indian Government has set out in the attached letter (No.2) its policies on coal prices and towards private coal production, and, with reference to Section 5.04(b) of the Loan Agreement, has stated that it will give the Bank an opportunity to exchange views with the Indian Government on all matters having a bearing on coal production in the private sector. 10. The report of the ComTnittee provided for in Article III, Section 4(iii) of tlhe Articles of Agreement of the Bank is attached (No.3).  - h - PART IV - APPRAISAL OF THE PROPOSED LOAN Justification of the Project 11. An "Appraisal Report on the Indian Coal Industry "' (T.O.-287b) is attached (No.4). 12. Coal is the main natural resource on which Indian industrialization is founded. Half of India's electricity supplies are generated from coal, the railways are run almost entirely on coal, ard the expansion of the steel industry is predicated upon the existence in India of large reserves of coking coal. 13. The Governnent realized that the industrial goals set in the Third Five-Year Plan could not be met without a very substantial increase in coal production and that the private sector must be encouraged to pro- duce more. Hence, after consultation with the industry, an accord was reached on the changes necessary in Government policy to bring this about. The concessions already made are substantial. The policies to be followted by the Government in future are set out in a letter addressed to the Bank, referred to in paragraph 9 above. In this letter the Government states, inter alia, that its intentions are to make the necessary adjustments quickly in existing price levels and to review the position from time to time, say everz year, with a view to ensuring an adequate return on the capital enployed in the industry; that it does not intend to nationalize the coal industry; and that it will be the Government's policy to see that the private sector continues to play its useful role in thle produc- tion of coal. 14. In these circunstances the private coal mining industry is now of the opinion that it has sufficient incentives to go ahead with its expan- sion plans and -that it can, without difficulty, meet the expansion target set for it in the Third Five-Year Plan. The industry believes that it can raise the necessary finances estimated, in toto, at acout Rs.