India - Industrial Finance and Technical Assistance Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 16069 IMPLEMENTATION COMPLETION REPORT INDIA INDUSTRIAL FINANCE AND TECHNICAL ASSISTANCE PROJECT (LOAN 2928-IN) October 20, 1996 Country Operations, Industry & Finance Division Country Department II South Asia Region |This document has a restricted distribution and may be used by recipients only in the performance of hi offilcial duties. Its contents may not otherwise be disclosed without World Bank authorization.l  CURRENCY EQUIVALENTS (Annual Average) Currency Unit = Indian Rupees (Rs.) 1989 $1.00 = Rs. 16.2 Official Rate 1990 $1.00 = Rs. 17.5 Official Rate 1991 $1.00 Rs. 22.7 Official Rate 1992 $1.00 = Rs. 26.0 Market Rate 1993 $1.00 = Rs. 30.5 Market Rate 1994 $1.00 = Rs. 31.4 Unified Rate 1995 $1.00 = Rs. 32.4 Unified Rate 1996 (as of March 31, 1996) $1.00 = Rs.34.4 Unified Rate FISCAL YEAR Government of India: April 1 - March 31 ICICI: January 1 - December 31 IDBI: July 1 - June 30 SAIL: April 1 - March 31 ABBREVIATIONS AND ACRONYMS USED BIFR: Board for Industrial and Financial Reconstruction CEM: Country Economic Memorandum DFI: Development Finance Institution ERAS: Exchange Risk Administration Scheme ERR: Economic Rate of Return FRR: Financial Rate of Return GOI: Government of India ICICI: Industrial Credit and Investment Corporation of India Ltd. ICR: Implementation Completion Report IDBI: Industrial Development Bank of India IEP: Industrial Export Project - Engineering Products PCB: Participating Commercial Bank SAIL: Steel Authority of India Limited  FOR OFFICLkL USE ONLY IMPLEMENTATION COMPLETION REPORT INDIA INDUSTRIAL FINANCE AND TECHNICAL ASSISTANCE PROJECT (LOAN 2928-IN) TABLE OF CONTENTS Preface ..................i Evaluation Summary ............... ii Part I: Project Review From Bank's Perspective ...............................................l 1 A. Background ...............................................1 B. Project Objectives and Description ...............................................4 C. Achievement of Project Objectives ...............................................7 D. Implementation Record and Major Factors Affecting the Project ........................9 E. Project Sustainability ............................................... 12 F. Bank Performance ............................................... 12 G. Borrower Performance .............................................. 13 H. Assessment of Outcome .............................................. 13 I. Future Operations .............................................. 13 J. Key Lessons Learned ............................................... 14 Statistical Annexes ............. 15 Annexes: I: Mission's Aide-m6moire II: Characteristics of ICICI sub-loans III: Characteristics of IDBI sub-loans Part II: Borrower contribution to the ICR T.s document has a restricted distibution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed wiLhout World Bank authorization.   i IMPLEMENTATION COMPLETION REPORT INDIA INDUSTRIAL FINANCE AND TECHNICAL ASSISTANCE PROJECT (LOAN 2928-IN) PREFACE 1. This is the Implementation Completion Report (ICR) for the Industrial Finance and Technical Assistance Project in India, for which Loan 2928-IN in the amount of US$360 million was approved on March 11, 1988. This was divided into a US$3 10 million loan to the Government (No. 2928-0) and a US$50 million to the Steel Authority of India (No. 2928-1). Both loans became effective on August 9, 1988. The loan was closed on December 31, 1995, two years after the original closing date, and final disbursement took place on December 12, 1995, when a US$31.6 million balance was canceled. 2. The ICR was prepared by the Country Operations, Industry and Finance Division, Country Department II, South Asia Region, with individual contributions by the three beneficiaries of the Loan (the Industrial Development Bank of India--IDBI, the Industrial Credit and Investment Corporation of India Limited--ICICI, and the Steel Authority of India--SAIL). The IDBI and SAIL provided comments that are included as appendices to the ICR. The ICR was prepared by Herman Nissenbaum (consultant) under the supervision of Paul Beckerman (SA2CI) and the SAIL component of the ICR was prepared by Paulo de Sa (IENIM). The ICR was reviewed by Luis Emesto Derbez, Chief, Country Operations, Industry and Finance Division and Kazuko Uchimura, Project Advisor, Country Department II, South Asia Region. 3. The preparation of this ICR was started during the Bank's final supervision mission of the project component related to SAIL in April 1995, with the work on the ICICI and the IDBI component accomplished during a special mission in April 1996. It is based on material obtained during these missions and contained in the project file. The borrowers contributed to the preparation of the ICR by contributing views that are reflected in the mission's aide-memoires, by preparing an evaluation of the project's execution and initial preparation, and by commenting on the draft ICR.  ii IMPLEMENTATION COMPLETION REPORT INDIA INDUSTRIAL FINANCE AND TECHNICAL ASSISTANCE PROJECT (LOAN 2928-IN) EVALUATION SUMMARY 1. In the mid-1980s, the Government of India recognized that poor industrial performance figured significantly in the country's disappointing low growth rate. Accordingly, it decided to reform the long standing restrictive industrial regulatory policies and inward-looking trade regime. The actions to put these new directions into effect led to a series of supportive Bank loans, one of which was the Industrial Finance and Technical Assistance Project. 2. In reviewing the latter's experience, it should be noted that its implementation spanned two periods of distinctly different economic policy environments: (a) Before 1991. The initial post-1985 liberalization measures did not materially alter India's development model. The Government still monopolized and tightly controlled investments in the most important sectors, with the financial system among the most regulated. The dominant state-owned banks served mainly to finance Government-selected activities determined by non- market socio-economic criteria, with relatively little discretion. Prudential regulations were inadequate and the true quality of banks' portfolios and effectiveness was not rigorously tested. (b) After 1991. After a bout of serious economic deterioration, the new 1991 Government instituted bold measures to overcome a balance of payments crisis and other severe imbalances. A comprehensive stabilization program and major transformation of India's development strategy saw trade and international payment regimes significantly liberalized. Quantitative controls and licensing of imports and exports were substantially reduced. Prior government approval of decisions concerning expansion, diversification etc. was eliminated, as were controls on prices and goods distribution. Capital and money markets were also liberalized and interest rates partially deregulated. Cumbersome credit norms were eased and priority sector lending requirements reduced. 3. By 1986-87, Indian manufacturing exports were improving but the authorities saw that more needed to be done to increase the competitiveness of Indian industry. The Government therefore set out to stimulate industrial enterprises' achievement of greater efficiencies of scale, modernization and adoption of new technology. It recognized however that the promotion of greater domestic competition would create adjustment difficulties for enterprises accustomed to a more protected environment, like the Steel Authority of India (SAIL), which had eroded its past comparative advantage.  iii 4 The Project's main objective was to foster more rapid industrial growth by helping industrial companies adjust to the significant reforms in the regulatory environment that had already occurred (and others anticipated). The chief operational target was to channel US$750 million term financing for investment projects through credit lines of the Industrial Development Bank (IDBI) and Industrial Credit and Investment Corporation of India (ICICI). An associated target was helping SAIL in enhancing its operating and maintenance practices, installing environmental management and pollution control systems, upgrading training, marketing and distribution, and restoring the competitiveness of its Alloy plant. There was also technical assistance to enable the two development finance institutions (DFIs) to upgrade project appraisals and portfolio management. 5. The design of the credit component was affected by the contemporaneous revision of the onlending arrangements under the Industrial Exports Project. The use of the IBRD variable currency pool and interest rate in the largest credit lines had proved unworkable because of sub- borrowers' mounting resistance to foreign currency subloans, as well as their unfamiliarity with the currency pool. The Industrial Finance project terms therefore relieved borrowers of the foreign exchange risk on the Bank loan (which the Government undertook). They were provided rupee- denominated loans and a fixed interest rate, set at the prescribed local rate for non-concessional DFI lending, with the understanding that it would be periodically reviewed and adjusted as necessary. 6. In addition, the Bank was then concerned about ICICI's and IDBI's deteriorating portfolios, earnings squeeze and resource constraints, blemishing their overall favorable status. However, the project design did not broadly tackle sector issues. The loan involved only a few provisions intended to improve the banks per se. The financial performance covenants covered only debt service and debt/equity ratios, and were relatively modest. But these should not be interpreted as manifesting Bank laxness. 7. The project designers appreciated that the DFIs were unlikely to meet more demanding goals while coping with an increasingly more competitive environment and scarcer domestic resources. In addition, the Bank's leverage was limited by the fact that the loan was estimated to contribute less than 1% of IDBI's total resources and about 7% of its foreign exchange requirements. Moreover, IBRD-Government agreements then focused mainly on onlending interest rates, exchange rate risks, credit line performance etc. Accordingly, the Bank decided to tackle financial sector issues through parallel track Government-Bank discussions. Among others, at least nine IBRD papers were disseminated on financial system issues in 1989, following three such documents in 1988. All these contributed to the 1991 systemic changes while the Project was being executed. 8. The Bank involvement with SAIL also dates back to the preparation of a Steel Sector Strategy Study presented to the Government and SAIL in 1987. This work was the background for Bank dialogue and much of the opening of the sector until now. The report identified several constraints on the performance of the steel industry and advocated policy reform to ensure that incentives are in place to maintain competitiveness.  iv 9. Implementation. The loan was approved in March 1988 and becamne effective the following August. There was a fast start on credit commitments and the line was fully committed by the December 1991 target. Later though, there were subloan cancellations and underdisbursements that delayed expenditures on up to seven percent of the Bank funds, which were partly recommitted but ultimately not fully used. This was also true for the TA component. But these apart, the project was smoothly executed. 10. The IDBI credit line led to 98 subloans, aggregating total investments of US$1,810 million. These entailed a wide array of output, with considerable representation of relatively advanced industrialization. Most of these subprojects were relatively small and almost half were for new "greenfield" activities. Analysis of their results showed that 68% of the economic rates of return obtained (on the 86 subprojects on which mixed information was available) exceeded 32%. About three fourths of the financial rates of return fell in the 15-20% range. 11. The ICICI credit line enabled 87 companies to undertake investments of US$571.8 million. The average sized project was US$6.57 million, of which the Bank loan financed some 17%. (As with IDBI, this was substantially below the 40% foreseen in the project financing plan.) Borrowers reported having generated 10,284 jobs in the process. ICICI's figures on the results showed that these subprojects' financial rates of return at appraisal were in the 15.4-4.5% range, averaging 19.3%. They ended up falling to the 11.6-22.4% range, averaging 17.5%, and 15% of the subloans were canceled. 12. TA Component. SAIL's technical assistance activities included three components. The first dealt with studies and consultancy services on five areas: (i) productivity improvements and planning; (ii) establishing the environmental management division at corporate level and raising environmental safeguards; (iii) restoring the competitiveness of the Alloy plant; (iv) streamlining SAIL's marketing and distribution; (v) upgrading its human resource management. The second component was focused on upgrading of the company's internal training capabilities and in obtaining greater involvement of line managers in training, while the third involved the purchase of technical assistance related equipment in the two areas mentioned above. 13. However, SAIL failed to carry out the planned "productivity study" which was intended to set in place the central systems and procedures considered necessary for the Authority's improved management. At the end of the project, the Authority and the Bank concurred that little harm had been done since the essential purpose of this study was met by the incorporation of its components in other studies. Nonetheless, the Bank agreed in January 1994 to reinstate loan financing for a "restructuring study" of similar objectives and scope. SAIL then awarded the contract on a sole source basis, to a firm not included in the original shortlist--an arrangement which the Bank rejected in 1989. It was selected on the grounds that it was the only public sector steel company to have successfully done what SAIL wished to accomplish, plus its extensive knowledge of the Authority. Regrettably, the firm selected subsequently withdrew from the contract on conflict of interest grounds. 14. In the case of the ICICI/IDBI components, the uses of the TA funds differed substantially from the plans outlined in the appraisal report, to a limited extent because of differences over  v procurement. Clearly though, the TA program was too loosely defined. Unfortunately too, despite constant prodding, supervision missions were unable to persuade the DFIs to undertake a precise program to meet the goals of strengthening portfolio management and project appraisal. Subsequently, it was unclear that these institutions made particularly great strides in improving subproject preparation, assessment and supervision. However, these banks were then heavily engaged in extensive turnaround efforts triggered by the 1991 (and even earlier) policy reforms. Moreover, their management were busily diversifying into non-lending operations. 15. Results. It is impossible to segregate the Project's effects from the more fundamental consequences of the 1991 macroeconomic and financial sector reforms. With that qualification, the project appears to have achieved its objectives. When the 1991 economic liberalization began, SAIL especially was ready to take advantage of the changes because of the project-supported modernization. In addition, the project's resource transfer was helpful, especially during the earlier macroeconomic instability and credit rationing, in maintaining industrial activity. Over the full project term, the generation of some US$2.38 billion of new investment (more than three times the predicted effect) provided a boost to the economy. This contributed to the rise in gross domestic investment/GDP, which averaged 23.4 in 1989-1995 compared to 22.8 in 1986-88. In addition, interviews with a sample of subborrowers revealed encouraging instances of "new exports" by firms which had previously almost exclusively catered to the domestic market or only ventured to neighboring countries. 16. Institutionally, the three implementing agencies upgraded their policies, adjusted to new market conditions and built up better trained staffs. Each succeeded in other notable respects as well: (a) IDBI and ICI by the end of the project were transforming into much more self- sustaining and versatile banks, no longer reliant on raising government funds at below privileged rates. Instead, they successfully began to tap international and local markets on the strength of improved credit standings. Their range of services multiplied progressively. (b) IDBI's 1994-95 statements reported that its internal funds generation had been increasing to cover 64% of its resource requirements (compared to 43% in 1991). Also, its 1994-95 return on average net worth was almost 23%, average return on assets 11.25%. IDBI's debt/equity ratios over 1990-95 averaged 9.54 and exceeded 10.0 in only one fiscal year. Its debt service coverage ratio during that period averaged 1.6. (c) ICICI's financial growth and profitability were also positive. From 1988 to 1993, total assets increased from Rs 36 billion to Rs 123 billion. Return on equity averaged about 20% before taxes over this period, and 18% after taxes. Its debt/equity ratio, which hovered just below 10% through 1992, fell to 6.6% in 1992-93. Its spread between average cost of funds and lending rate increased from about 3% in FY 88-91 to some 4% in FY 92-93. (d) ICICI's collection ratio rose to 82% by FY 93, although arrears constituted 5% of the portfolio (up from 3% in 1990). IDBI's collection ratio steadily improved from 72.3% in FY 89-90 to 83.6% by FY 93-94 but then slipped to over 82% in the following year. These signified the  vi satisfactory accomplishment of the project target of progressive increases over the 67.1% ratio at appraisal. IDBI's arrears declined from 6.6% of all loans in FY 89-90 to 6.1% through FY 93-94 but exceeded 7.4% the following year. (e) SAIL's annual earnings kept increasing for over a decade. Salable steel output rose to new records and the 1995-96 figures showed unprecedented production of 9.2 million tons, with net profits rising to about US$380 million. Energy consumption systematically decreased to 8.7 G. Cal/t of crude steel; productivity rose to 92 tones of crude steel per man-year. Several mills' pollution loads fell substantially. 17. Sustainability. India's real GDP growth recovered from 2 percent in 1991-92 to 6.3 percent p.a. during 1994-95. There was also success in reducing the central government's fiscal deficit, as well as a turnaround in the overall balance of payments. These achievements would have been impossible without the significant exchange rate adjustments for external balance, the restoration of financial discipline and monetary stability. In tandem, there has been considerable institutional change in the interests of a more market-oriented economy. 18. Clearly, the long-run sustainability of these improvements hinge on continuation of these policies, as well as the strength of the private sector. These and the financial system reforms mattered much more to the recent success than the Industrial Finance Project. But the latter did make a contribution, as indicated above. By the same token, there are reasonable chances that the Project's own results will also be sustained. In addition, the high 1994 and later industrial growth figures appear to indicate that this expansion was broad based. They likewise demonstrate good prospects for continuation of the favorable investment trends that have sharply reversed the negative conditions which the Industrial Finance project sought to ameliorate. 19. Overall assessment. The Project was well focused for achieving the objectives of the loan. The strong commitment of the executing agencies to these objectives figured importantly in the project's achievements. The Bank played a positive role in advancing the institutional development of the three participants at the same time that it provided valuable investment resources. The overall rating of the Project is "satisfactory," particularly as it achieved almost all its objectives in a timely manner. The SAIL component experience was especially rewarding. It reflected an accurate diagnosis of what was ailing the industry and what corrective measures were required. The Authority's dedication to the project goals was of a high order, as were the results on the ground. The enterprise is now able to finance internally the continuation of several programs initiated under the loan. 20. Lessons. This experience illustrated the value of an early beginning and continuing policy dialogue on sector problems and their possible solutions, as part of a sustained Bank-government working relationship. This, along with extensive Bank economic analysis, contributed to substantial agreements on sweeping policy and institutional changes. The Project per se illustrated that there can be merit in judicious separate investment lending untied to but supporting these dialogues. In so doing, it provided a useful mechanism to monitor and discuss important sector changes.  IMPIEMENTATION COMPLETION REPORT MDIA INDUSTRIAL FINANCE AND TECHNICAL ASSISTANT PROJECT (LOAN 2928-I PART I: PROJECT REVIEW FROM BANK'S PERSPECTIVE A. BACKGROUND 1. In the mid-1980s, the Government of India recognized the need for substantially improved industrial performance. The sector had successfully attained the post-independence goal of self-sufficiency. The industrial base was diversified with widespread production capability. However, industrial expansion, substantially less than in many other industrializing nations, had been disappointing. This figured significantly in the surprisingly low growth rate in a country saving and investing over one-fifth of its GDP. 2. Manufacturing's share of GDP had remained unchanged (at around 16%) for several years. In 1981-85, industrial output grew at an average annual rate of 4.9% and total exports only 4.5%. Manufacturing gross value added growth in the same period averaged 4.3% p.a. and manufactured exports increased only 3.3 %. Moreover, Indian industry was considered high cost and sub-par in technology, scale and efficiency. 3. Accordingly, the Seventh Plan (1984/85-1989/90) and similar documents forecast reforms of the restrictive industrial regulatory policies and inward-looking trade regime which had long been in place. Several post-1985 actions successively began to put these new directions into effect. These ultimately produced a series of significant industrial improvements, complemented by some liberalization of the financial system. These measures formed the setting for a series of IBRD loans intended to support and further advance these policy initiatives, keyed on assisting Indian industries to expand output and exports. 4. In reviewing the Industrial Finance and Technical Assistance Project (IFTAP) experience, it should be noted that its implementation spanned two periods of distinctly different economic policy environments, discussed below. This had consequences for the industrial activity on which the project centered. There were sharp changes in related Bank policy during the project period as well. 5. Before 1991. The initial post-1985 liberalization measures did not materially alter India's "dirigiste" development model. While private enterprise was important in most economic areas, the public sector still monopolized and tightly controlled investments in the most important segments. The trade regime meanwhile remained highly protective with high tariffs, many quantitative restrictions and discretionary import licenses.  2 6. Also, India's relatively large, sophisticated financial sector was then still among the most controlled economic functions. The dominant state-owned banks served mainly to finance Government-selected activities determined by non-market socio-economic criteria, under which they had relatively little discretion. They were also weakened by state policies perpetuating loss-making operations and considerably concessional lending. Under the state's protection, the banks' credit evaluations were lax. Prudential regulations were inadequate and the true quality of banks' portfolios and effectiveness was not rigorously tested. Consequently, the banks were uncompetitive and among the least profitable in the world (e.g., return on assets in the late 1980s averaged about 0.15%). 7. After 1991. After a bout of serious economic deterioration, the new 1991 Government instituted bold measures to overcome the unprecedented balance of payments crisis and other severe imbalances. A comprehensive stabilization program and major transformation of India's development strategy saw trade and payment regimes significantly liberalized. Quantitative controls and licensing of imports and exports were substantially reduced. Prior government approval of decisions concerning expansion, diversification, mergers and acquisitions was eliminated, as were controls on prices and distribution of key commodities. The environment for private sector development was much improved, and foreign investment significantly liberalized. 8. There were similarly sharp financial system reforms. Capital and money markets were liberalized and interest rates partially deregulated. Cumbersome credit norms were likewise eased and priority sector lending requirements reduced. Barriers to private sector entry into the banking system were removed. Competition in financial services was also invigorated through the lowering of various barriers to term lending and opening capital markets to foreign investment. Thus, industrial companies became less dependent for their funding on the banks, who gained greater lending discretion. They were subjected meanwhile to more stringent capital adequacy standards and supervision. 9. Seeing the IFTAP in its context also warrants recalling that it was created at the time of a now outdated IBRD financial sector paradigm. The Bank then mostly sought to strengthen DFIs and improve their efficiency, increase local resource mobilization and expand disadvantaged groups' access to credit. This approach was then considerably altered in 1991. The new norms called for broader sector policy undertakings aimed at improvement of the financial system as a whole and more commercial operations. 10. The Bank had historically provided numerous lines of credit to Indian financial intermediaries for firms in industry (as well as agriculture and other sectors). Both the ICICI and IDBI had long been IBRD clients (14 previous operations with the former and three with the latter before the subject loan). Other project loans supplied investment resources to enterprises in cement, fertilizers, petrochemicals etc. There were no loans for the financial sector as a whole (until 1995) though.  3 11. Immediately prior to the Industrial Finance and Technical Assistance Project, the Bank approved the Industrial Export Project (Lns. 2629/30, reviewed and audited in PCR No. 12612), which differed from the previous DFC-type loans in targeting engineering and export ventures. In the event though, less than half of the funds went to engineering firms because of changing conditions during the project period. It became necessary to broaden the use of these funds to permit investments in the gamut of export projects. The economic impact of the Loan, mainly in terms of incremental investment in export industries, was considered positive (although the project's own part was uncertain). By 1986-87, export performance was improving with manufactured exports rising first by 9.3 % and then 11.8% (around three times more than in 1981-85). This Loan was followed by another operation with essentially similar goals: the FY89 Export Development Projects, largely executed by the same development finance institutions (DFIs) involved in the IFTAP, during substantially overlapping periods with somewhat common experiences. 12. Despite these advances however, the authorities concluded in the late 1980s that more needed to be done in order to increase the competitiveness of Indian industry. The mid-decade changes in export policy (especially in the exchange rate regime) had generated little improvement in several important subsectors. The Government therefore set out to place greater reliance on price signals and market forces to stimulate industrial enterprises' achievement of greater efficiencies of scale, modernization and adoption of new technology. To this end, they decided to further rely on India's key DFIs as the catalyst, as well as the resource channel, for stimulating such improvements. In addition, the Government recognized that its promotion of greater domestic competition would create adjustment difficulties for enterprises, like SAIL, accustomed to operate in a more regulated and protected environment. 13. The Bank involvement with SAIL started in the mid-eighties, when a Steel Sector Strategy Study was prepared and presented to the Government and SAIL in 1987. This work was the background for Bank dialogue and much of the opening of the sector until now. The report identified several constraints on the performance of the steel industry that had arisen in a policy environment characterized, among others, by the following features: (i) insulation of the industry from import competition through high tariffs and quantity controls on imports; (ii) limited domestic competition due to a system of administered pricing; (iii) public sector reservation for integrated steel mills, with the exception of TISCO; (iv) regulation of private sector mini-mills and rerollers through a system of capacity licensing; (v) regulation of the distribution system, with about 60% of steel production earmarked for designated priority sectors; (vi) limited autonomy for SAIL, with day-to-day supervision of operations and formal control by the Central Ministry over investment decisions, product-mix, employment policy and prices; (vii) surcharge on the producer price to finance the Steel Development Fund (SDF), administered by the Central Ministry; and (vii) equalization of freight rates to all destinations throughout India through the mechanism of a Freight Equalization Fund (FEF). 14. The Bank's steel sector report advocated that policy reform should be instituted to ensure that incentives are in place to maintain competitiveness. This required: (i) increasing the level of autonomy for SAIL, that should function as a commercial enterprise (before the signature of the loan this point was accepted by the Government which entered into a  4 Memorandum of Understanding with SAIL which delegates more autonomy to the company in both operational and investment decision-making); (ii) increasing competition, through the relaxation of import controls, the elimination of capacity licensing restrictions for new entrants, and the abolition of the system of pricing and distribution controls; and (iii) ensuring incentives parity between minimills and integrated plants, through abolition of the FEF and SDF schemes. B. PROJECT OBJECTIVES 15. The primary objective of the project was to foster more rapid industrial growth by advancing Indian companies' adjustments to the significant reforms in the regulatory environment that had already occurred (and others which were anticipated). These were perceived to affect the direction of industrial investment and the means of financing business operations. The Government was becoming less involved in determining the capacity and other parameters of Indian industry. In turn, the financial system, especially the DFIs, would be assuming greater responsibility for selecting projects and helping manage them. The project's operational targets were set at providing term financing for sound industrial investment projects. Allied objectives focused on upgrading ICICI's and IDBI's practices. 16. The main objective of the technical assistance component was to assist in developing a more competitive, better managed enterprise within SAIL, so that the state-owned company could respond to the liberalization of the controls which inhibited the growth of the steel sector in India. The Government needed to be reassured about the ability of SAIL (India's biggest steel producer about 65% of the market) to improve its technical and financial performance in order to survive on a more competitive market structure. This called for a complete shift in the corporate culture of the enterprise in selected key areas like business planning, marketing and distribution, human resources development and environment. It was assumed that increases in SAIL's autonomy vis-a-vis the Government could go hand-in-hand with the progressive deregulation of the sector and the decrease in entry barriers. 17. The Loan consisted of the following: (a) Credit component: a credit line of US$300 million to the two largest DFIs (IDBI, US$200 million; ICICI, US$100 million) for an estimated 80 industrial subprojects; (b) ICICI/IDBI technical assistance: US$5 million each to ICICI and IDBI for technical assistance aimed at strengthening their capacities to appraise projects, overcome portfolio problems and mobilize resources more effectively (which together comprised Loan 2928-0); and (c) SAIL technical assistance: US$50 million for three components. The first dealt with studies and consultancy services on five areas: (i) productivity improvements and planning; (ii) establishing the environmental management division at corporate level and raising environmental safeguards; (iii) restoring the competitiveness of the Alloy plant; (iv) streamlining SAIL' s marketing and distribution; and (v) upgrading its human resource  5 management. The second component was focused on upgrading of the company's internal training capabilities and in obtaining greater involvement of line managers in training, while the third involved the purchase of technical assistance related equipment in the two areas mentioned above (Loan 2928-1). 18. The US$868 million financing plan for the projected 7-year activity anticipated substantial contributions from other sources: (i) US$225 million from industrial credit borrowers; (ii) US$150 million from other credit institutions and participating commercial banks; (iii) US$91 million from ICICI and IDBI; (iv) US$51 million from SAIL; and (v) a Japanese grant of Y450 million given to SAIL exclusively for consultancy studies. The Bank loan would cover 99% of the project's estimated foreign exchange component and over half of technical assistance activities. 19. A prominent feature of the design of the credit component was the adjustment of the onlending arrangements which had been created for the then still active Industrial Exports Project. Most of the latter's credit line had been denominated using the IBRD variable currency pool and interest rate (plus a 2% spread). But this proved unworkable because of sub-borrowers' mounting resistance to foreign currency subloans, as well as their unfamiliarity with the currency pool. One main reason was the real depreciation of the Indian rupee of about 25% in 1985-87; another was the increased volatility in global foreign exchange markets. Further, Indians had been permitted to borrow in rupees and buy foreign exchange when needed at spot rates. On these accounts, the DFIs' "foreign currency sanctions" fell 34 percent in 1987 and credit commitments under the several IBRD loans geared to such on- lending conditions lagged considerably. 20. The Industrial Finance project terms therefore relieved borrowers of the foreign exchange risk on the Bank loan (which the Government undertook). They were provided rupee-denominated loans and a fixed interest rate. The latter was set at 14%, the prescribed local rate for non-concessional DFI lending, with the understanding that the Government would periodically review and, as necessary, adjust the rate to keep it positive in real terms. 21. These terms deviated from the prevailing general IBRD view that sub-borrowers should bear the ultimate foreign exchange risk. Obviously, the Bank would have preferred a situation in which this risk was not an issue, i.e, where there were no foreign exchange controls and interest rates were market-determined. However, it was recognized that India will still a long way from that condition. Thus, given the growing demand for term finance, the authorities contended that the imperatives of modernizing and expanding industry justified their assumption of the foreign exchange risk (which actually was in line with several ongoing IBRD-assisted projects in India). The Bank concurred, mainly fearing that the failure to take this course would jeopardize the planned new commitments. 22. It did so, however, only after determining that no subsidy was entailed, supplemented by the Bank's satisfaction with overall Indian interest rates. This judgment drew on the Financial Intermediation Policy Paper, dated July 9, 1985, which sanctioned on-lending in domestic currency provided there was a realistic foreign exchange risk fee. The Government's  6 proposed relending rate on examination was calculated to be similar to those in other Asian countries. Those governments received an exchange risk fee equivalent to the difference between the interest rate on the Bank loan and the final rate to sub-borrowers aligned to the domestic market term lending rate (less the DFI's spread). 23. Another feature was the elimination from the list of possible executing agencies of the commercial banks and Export-Import Bank, despite their presence in the Industrial Export Project. The IBRD staff sought to retain these institutions, partly to involve the small and medium-sized firms in their clientele. However, the Government felt that these commercial banks' problems (e.g., too many non-performing loans) would raise issues in the content of the loan which they preferred avoiding. It was accordingly agreed to concentrate instead on the two main DFCs (which provided over half of all term investment financing to industry). 24. In this connection, the Bank staff was mindful of the banking system's considerable difficulties, especially concerns about ICICI's and IDBI's deteriorating portfolios, earnings squeeze and resource constraints (which blemished their overall favorable standing). The project design however did not broadly tackle sector issues, and the loan only involved only a modicum of provisions directed at the two banks' improvements. The financial performance covenants only covered debt service and debt/equity ratios, which were relatively soft (minimum 1.2:1 and maximum 12:1 respectively). Also, at the authorities' request, the "understanding" regarding periodic Government interest rate reviews and required adjustments was deleted from the legal documents, and relegated to the minutes of negotiations. Further, the funds earmarked for assisting the DFIs' institutional advancement were only generally defined. 25. These should not be interpreted though as demonstrating Bank laxness. It was fully appreciated that the DFIs were unlikely to meet more demanding goals while coping with an increasingly more competitive environment and scarcer domestic resources (which the Bank's project appraisal accurately foresaw). In addition, the Bank's leverage was restrained by the fact that the loan was estimated to contribute less than 1 % of IDBI's total resources and about 7% of its foreign exchange requirements. Moreover, IBRD-Government agreements then focused mainly on onlending interest rates, exchange rate risks, credit line performance and overall institutional conditions. Accordingly, the project designers decided that it would be best to tackle financial (as well as industrial) sector issues through parallel track Government- Bank discussions. 26. To this end, at least nine IBRD papers were disseminated on Indian financial system issues in 1989, following three such documents in 1988. Thus, when the Government requested the Bank's assistance in 1990 for basic system reforms and modernization of the banking sector, it was ready with a substantial body of analyses. (So too were India's Reserve Bank and Planning and Securities and Exchange Commissions.) The results of these labors flowered in the dramatic 1991 changes (summarized in para. 9) while the Industrial Finance project was being executed.  7 C. ACHIEVEMENT OF PROJECT OBJECTIVES 27. This review does not attempt to segregate the results of the Industrial Finance and Technical Assistance Project from the broader, more fundamental consequences of the momentous 1991 macroeconomic and financial sector reforms. It would be misleading to ignore the latter's influence in advancing the country's now more efficient market-oriented economy. With that qualification, the project distinctly achieved its objectives. 28. The rapid development of the Indian steel industry since the project appraisal has proven that the chosen strategy and objectives have produced the desired results. Many of the industrial regulatory, fiscal and export policy initiatives adopted since 1992 represent marked departures from past practice in India. There has been significant progress in industrial delicensing, easing controls regulations on private investment. Price and distribution controls have been scrapped, and the FEF and SDF schemes have been abolished. Deregulation resulted in an investment boom in the steel sector, while import tariffs continue to go down (higher rates came down from 56% in 1992 to 40% in 1994, to a targeted goal of 25% in the near future). When the 1991 economic liberalization began, SAIL was ready to take advantage of the changes because of the project-supported modernization effort. GOI has in the meantime sold 11% of SAIL's equity in the stock market and is planning to reduce its share to 51 % in the near future. 29. The project's resource transfer was helpful, especially during the earlier macroeconomic instability and credit rationing. This was particularly timely then in helping maintain industrial activity. Over the full project term, the generation of some US$2.38 billion of new investment (more than three times the predicted effect) provided a boost to the economy. Its extent was probably too small to have a major impact on the macroeconomic statistics. Nonetheless, the project contributed to the rise in gross domestic investment/GDP, which averaged 23.4 in 1989-1995 compared to 22.8 in 1986-88. 30. The project usefully stimulated greater activity at the smaller end of the industrial size spectrum. Perhaps somewhat on that account, the subprojects financed were also beneficial in employment generation. The data indicates that the two DFIs' lending led to 21,100 new jobs. This is short of the 28,000 total which was expected but the sum is substantial (and ICICI's data may not be complete). 31. In addition, interviews with a sample of ICICI and IDBI subborrowers revealed encouraging instances of incremental exports. Their case stories reflected a substantial incidence of "new exports" by firms which had previously almost exclusively catered to the domestic market or only ventured to neighboring countries. Numerous businessmen cited undertaking innovations in technology and products as well. 32. Institutionally, the two DFIs upgraded their policies, adjusted to new market conditions and built up better trained staffs. Each succeeded in other notable respects as well:  8 (a) IDBI and ICICI both profited by the 1991 deregulation of interest rates and capital gains on asset sales. By the end of the project, they were transforming into much more durable, self-sustaining and versatile banks. They were no longer reliant on raising funds from governmental sources at below market rates. Instead, they successfully begun to tap international and local markets on the strength of improved credit standings. Their range of services multiplied progressively--foreign exchange service, venture capital, merchant banking, mutual funds, etc.--in order to become more competitive. These efforts have been useful, especially with the phasing out of their access to assured sources of long term funds (the Investment Deposit Account and Capital Bonds Scheme; to a lesser extent, the National Industrial Credit). (b) IDBI's 1994-95 financial statements reported that its internal generation had been increasing to cover 64% of its total fund requirements (compared to 43% in 1991). Also, its 1994-95 return on average net worth was almost 23%, average return on assetV 11.25%. At the same time, IDBI's debt-equity ratios over 1990-95 averaged 9.54 and exceeded 10.0 in only one fiscal year. Its debt service coverage ratio over the five year period averaged 1.6. Both handily met the Bank loan covenants (as did ICICI). (c) ICICI's financial growth and profitability were also impressive. From 1988 to 1993, total assets increased from Rs 36 billion to Rs 123 billion. Return on equity averaged about 20% before taxes over this period, and 18% after taxes. Its debt:equity ratio, which hovered just below 10% through 1992, fell to 6.6% in 1992-93. Its spread between average cost of funds and lending rate increased from about 3 % in FY88-91 to some 4 % in FY92-93. (d) Both also made some impressive strides in improving collection performance. (i) ICICI's record at the time of project appraisal was increasingly unfavorable. The collection ratio before rescheduling dropped from 75% in 1983 to 72% in 1986, at whose end there was a substantial hard core of difficult cases. Under the project accordingly, ICICI pledged to apply stricter appraisal criteria, tighten monitoring, enforce stricter legal recovery, etc. Its measures were fruitful. The collection ratio rose to 82% by FY93, when arrears however constituted 5% of the portfolio (up from 3 % in 1990). (ii) IDBI's ratio (also before rescheduling) steadily improved from 72.3 % in FY89-90 to 83.6% by FY93-94 but then slipped to over 82% in the following year. Despite that setback, this record signified the satisfactory accomplishment of the project target of progressive hikes from the time of IBRD appraisal, when the ratio was 67.1%. IDBI readily surpassed the particular FY90 goal of 70%. Also, its arrears declined from 6.6% of all loans in FY89-90 to 6.1% through FY93-94 but exceeded 7.4% the following year. 33. SAIL's annual results evolved from a situation of recurrent losses in the mid-1980s to ten successive years of profits, reflecting substantial improvements in its technical performance. Crude and salable steel output rose to new records and the Authority's 1995-96  9 figures showed unprecedented production of 9.2 million tons. Its energy consumption systematically decreased to 8.7 G. Cal/t of crude steel. Manpower productivity rose to 92 crude steel tons per manyear (a commendable increase although still low by world standards.) The Alloy plant regained global competitiveness. The sharper environmental concerns kindled significant cuts in pollution loads in several mills. Human Resource Development today is among the thrust areas in SAIL, and the company was able to direct its efforts to obtaining ISO 9000 quality certificates in most of its plants. D. IMPLEMENTATION RECORD AND MAJOR FACTORS AFFECTING THE PROJECT 34. Economic Environment. Some two years after the loan became effective, the country's internal and external imbalances reached critical proportions. GDP growth fell to one percent in 1991-92. Balance of payments pressures rose, capital outflows accelerated and the Government compressed imports drastically. Foreign exchange reserves declined to two weeks of imports in mid-1991 and the current account deficit was 3.7 percent of GDP in 1990- 91. The fiscal deficit, if uncorrected, would have exceeded 10 percent of GDP. Fortunately, the situation improved after the mid-1991 reform program, although progressively, e.g., the capital goods sector experienced negative growth rates in 1991-92. By 1994 though, national growth reached 5.4 percent, fastest in the industrial sector, where manufacturing expanded by 9 percent. 35. Overview, The loan was approved on October 1987 and became effective the following August. There was a fast start on credit commitments and the line was fully committed by the December 1991 target of the loan. Later though, there were subloan cancellations and underdisbursements that delayed expenditures on up to seven percent of the Bank funds, which ultimately were not fully used. This was also true for the TA component, as discussed below. But despite these, the project was smoothly executed. 36. IDBI's on-lending figures (ref. Annex III) show that the project led to 97 subloans, combining into a total investment volume of US$1,810 million. These entailed a wide array of output, with considerable representation of relatively advanced industrialization, e.g, diesel engines, circuit breakers, computer and oil drilling equipment, polypropylenes, special steel, ball bearings, intravenous fluids, teleprinters, etc. Most of these subprojects were relatively small (e.g., half of the Bank loan commitments were for less than US$1 million, almost one fourth were for less than US$500,000). The DFI's May 1996 figures indicated that these investments generated 10,816 jobs, compared to the 7,965 forecast at appraisal. 37. IDBI and its collaborating banks (under the new, more informal system of loan syndication) furnished half of total investment costs on average, while project sponsors provided 40%. The IBRD loan provided the remaining ten percent (a fraction of the 40% predicted in the Project's financing plan), mainly for foreign expenditures. 38. A sample of 86 IDBI sub-projects' results economic rates of return over 32% (well above the Bank loan requirement of minimum 12% ERRs). The financial rates of return were in the 15-20% range.  10 39. There were cost overruns in an estimated 55% of these sub-projects. These were largely attributed to slow implementation (e.g., because of capital goods licensing delays), exchange rate fluctuations and underestimated land and equipment purchase prices. The smaller financial returns were caused by reduced capacity utilization and sales because of more costly raw materials and stiffer than expected local and foreign competition, etc. Nevertheless, repayment performance has been satisfactory on the whole. As of April 1996, IDBI reported that there were arrears of 7.8% on the IBRD credit line (principal), over half of which were overdue for less than a year. 40. ICICI On-lending. The ICICI credit line enabled 87 companies to mount investments of US$571.8 million. The average sized project was US$6.57 million, of which the Bank loan financed some 17%. (As with IDBI, this was substantially below the 40% of subproject costs foreseen in the Bank project financing plan.) Borrowers reported having generated 10,284 jobs in the process. ICICI's figures on the results showed that these subprojects' financial rates of return at appraisal were in the 15.4-24.5% range, averaging 19.3% (ref. Annex II). They ended up falling to the 11.6-22.4% range, averaging 17.5%. At the same time, there were a sprinkling of negative results, e.g., 15% of the subloans were canceled. 41. SAIL Component. SAIL's technical assistance activities followed the project scheme most closely. Its consultants carried out most of the major studies planned. More than 600 SAIL officers were trained in the process. However, in June 1994 SAIL requested an obtained cancellation for part of the loan, reducing the total amount of the Project financed by the Bank to US$46.1 million. SAIL ultimately used US$39.04 million of the original loan allocation. This was the consequence of the reduced demand for consulting services (with the cancellation of the "productivity study" discussed below), the availability of bilateral funds for some services initially set to be covered under the Loan, equipment cost savings and rupee devaluations, resulting in the reduction of the local currency component expressed in Dollar terms. Part of the "savings" were used to purchase the pollution control equipment needed to carry out several important recommendations of the environmental study. 42. The planned "productivity study" was intended to set in place the central systems and procedures needed for the Authority's improved management. Almost six years after the terms of reference and consultants' shortlist were cleared the study had not yet been launched. Ultimately over the course of the project period, the Authority and the Bank concurred that the essential purposes of the study were met through the incorporation of its components into other studies, and the productivity study was deleted from the project. 43. However, in January 1994, the Bank agreed to reinstate loan financing for a "restructuring study" of similar objectives and scope, based on signs that the way was now finally clear. SAIL, with the Bank's assent, awarded the contract on a sole source basis, to a firm which was not included in the original shortlist--an arrangement which the Bank had rejected in 1989. SAIL championed this firm on the grounds that it was the only public sector steel company to have successfully done what SAIL wished to accomplish, plus its extensive  11 knowledge of the company. Regrettably, the firm selected subsequently withdrew from the contract on conflict of interest grounds. 44. DFI's TA. In the case of the ICICI/IDBI components, the uses of the TA funds differed substantially from the plans outlined in the appraisal report, e.g. 95% of IDBI's allocation went for computerization improvements. The scheme for consultant services to IDBI for promotion of non-credit activities was not implemented. Similarly, the funds were not applied for the "new IDBI training institute in Hyderabad." However, IDBI did establish the envisaged new training institution on its own account, and it is functioning today. The DFIs (especially ICICI), and SAIL to a lesser extent, apparently found it difficult to develop these training components, all of which disbursed slowly. One of the few exceptions appeared to be the banks' use of these funds to refine their asset and liability management. In the main though, trainees were sent to numerous foreign institutions without, it appeared, a clear, overriding objective. Many attended general business management courses. In addition, the computerization improvements badly lagged behind the project schedule. 45. Clearly, the TA program for ICICI/IDBI was too loosely defined. Nor did the supervision missions insist that the DFIs develop a precise monitorable program defined to meet the goals of strengthening portfolio management and pr3ject appraisal. Instead, the supervision reports showed far less prominent attention to the banks' institutional development requirements than their loan collections. 46. In this connection, it was unclear that these institutions made particularly great strides in improving subproject preparation, assessment and supervision. Questioning of their staffs and sub-borrowers failed to produce evidence of notable improvements in upgrading appraisal techniques, for example. Although already of reasonable quality, the DFIs' evaluations seem to have remained more fixed mainly on their sponsors' creditworthiness than the economic merits of the proposed investments. Borrowers reported considerable bank concern, however, about their products' market prospects. 47. To be sure though, these criticisms need to be tempered by the appreciation that the banks were then heavily engaged in turnaround efforts involving every level of their organizations, triggered by the 1991 policy reforms (and the earlier one to a lesser extent). They were also still operating then under "consortium lending" practices, which continued to mute critical judgments about project approvals. Moreover, their managements were then somewhat preoccupied with diversifying into leasing, merchant banking and other non-lending operations. 48. Another deterrent at the time to the introduction of more rigorous practices was the Government's tardiness in implementing the new Bank for Industrial and Financial Reconstruction (BIRF). The latter was intended to hasten the closure of moribund debtors, and its prompt implementation might have helped spur sharper portfolio management. But there were protracted delays in getting it operational, notwithstanding the Bank's attempts to persuade the Government to accelerate this action.  12 D. PROJECT SUSTAINABILITY 49. India's GDP recovered from 2 percent in 1991-92 to 6.3 percent p.a. during 1994-95. Early estimates for 1995-96 put GDP growth at around 5.8 percent. There was also success in reducing the central government's 8.4 percent of GDP fiscal deficit at the outset of the 1991 reform program to 5.7 percent in 1992-93. And there was a turnaround in the overall balance of payments. These achievements would have been impossible without the significant exchange rate adjustments for external balance, the restoration of financial discipline and monetary stability. In tandem, there has been considerable institutional change in the interests of a more market-oriented economy. 50. Clearly, the long-run sustainability of these improvements hinge on continuation of these policies, as well as the strength of the private sector. These and the financial system reforms were much more key factors in the recent success than the Industrial Finance and Technical Assistance Project. But the latter did make a contribution, as indicated above. By the same token, alongside of the favorable prospects for maintenance of the healthier macro policy framework, there are reasonable chances that the Project's own results will also be sustained. In addition, the high 1994 and later industrial growth figures appear to indicate that this expansion was broad based. They likewise demonstrate good prospects for continuation of the favorable investment trends that have sharply reversed the negative conditions which the Industrial Finance project sought to ameliorate. 51. Other indications of good possibilities of the sustainability of these industrial sector advances relate to their employment effects. Statistics indicate that under the 1960-86 policies providing high effective protection for capital-intensive manufacturing sectors, there was a four-fold decrease in labor intensity of manufacturing. Conversely, following the substantial policy changes, there was accelerated employment creation. The 1994-95 Economic Survey indicated that jobs increased twice as fast between 1992 and 1994 than during 1985-92, at a rate of 6 million new jobs a year. Employment growth was approximately 7.8 million in 1994-95. 52. SAIL's performance has improved substantially, both from the technical and financial point of view. As a result of the project, SAIL has adopted environment management as one of the thrust areas of its operations and created an Environment Management Division at corporate level, supported by Environment Management Departments at each plant. The Human Resources Division has been strengthened and improvements in the handling and distribution of steel products have become a benchmark for the industry. The enterprise is now able to finance internally the continuation of several programs initiated under the loan. Moreover, SAIL is now selling its technical expertise under the form of consultancy services, through the recently created Consultancy Division. F. BANK PERFORMANCE 53. The Bank performance was "satisfactory" in identification, preparation, appraisal and supervision. The project was identified during the course of Bank's active industrial sector  13 work program and allied financial system analyses. The 1987 CEM "India: An Industrializing Economy in Transition" also explored overall industrial development while several subsector reports examined individual fields in detail. At the preparation stage, the Bank correctly diagnosed what was ailing the industry and identified in conjunction with GOI and SAIL the correct solutions for the prevailing situation. Appraisal has identified project goals and established concise project objectives consistent with the overall economic strategy for the country, as well as the sector strategy for steel. Supervision missions visited India regularly. Additionally, the Bank maintained a lively dialogue with GOI on economic and policy reform and with SAIL on business strategies. G. BORROWER PERFORMANCE 54. The three implementing agencies top-management was fully committed to successful implementation of the project and their performance was highly satisfactory. In spite of the procurement incident in SAIL's TA component, Bank's procurement policies were totally understood and have inspired new procedures in the company. Consultants were generally competent and their contribution highly appreciated by the enterprise. H. ASSESSMENT OF OUTCOME 55. Overall assessment, The Industrial Finance and Technical Assistance Project was well focused, with terms and conditions appropriately designed for achieving the objectives of the loan. The strong commitment of the executing agencies to its objectives figured important in the project's achievements. The Bank played a positive role in advancing the institutional development of the three participants at the same time that it provided valuable investment resources. 56. The overall rating of the project is satisfactory. It achieved almost all its objectives in a timely manner. The SAIL component experience was especially rewarding. It reflected an accurate diagnosis of what was ailing the industry and what corrective measures were required. The Authority's commitment to the project goals was of a high order, as were the results on the ground. H. FUTURE OPERATIONS 57. Financial sector operations in India were recast since this loan to concentrate on the overall policy framework. These have placed special emphasis on minimizing credit distortions, ensuring effective accounting and supervision, and supporting autonomous institutions and competition within the system as a whole. The previous pattern of credit lines through a few selected intermediaries has been discarded. Further, the opening of the economy and liberalization of financial markets have improved the environment for more IFC activity.  14 H. KEY LESSONS LEARNED 58. This experience illustrated the value of an early beginning and continuing policy dialogue on sector problems and their possible solutions, as part of a sustained Bank- government working relationship. This along with extensive Bank economic analysis contributed to substantial agreements on sweeping policy and institutional changes. The Project per se illustrated that there can be merit in judicious sparate investment lending untied to but supporting these dialogues (so long as the environment is suitable for effective investment). In so doing, it provided a mechanism to monitor and discuss important sector changes.  15 INDIA INDUSTRIAL FINANCE AND TECHIICAL ASSISTANCE PROJECT (LOAN 2928-IN) Table 1: Summary of Assessments A. Achievement of Objectives Substantial Partial Negligible Not Applicabk Macroeconomic policies V Sector policies V Financial objectives V Institutional development V Physical objectives V Poverty reduction V Gender concems V Other social objectives V Environmental objectives V Public sector management V Private sector development V Other (specify) K. Project sustainability Likely Unlikely Uncertain C. Bank p2erformanc satisfactor Satisfactor Deficien Identification V Preparation assistance V Appraisal V Supervision V D. BorTower performnance satisfactorv Satisfactor Deficient Preparation V Implementation V Covenant compliance V Operation (if applicable) V H. Aih HSa E. Assessment of outcome sI~a.tisf Sa tair Unsatisfactorv Unsatisfactorv  16 Table 2: Related Bank Loans/Credits Loan/credit title Purpose Year of Status approval Preceding operations 1. Industrial Export Project- Support trade policy reform and 1986 Closed in 1992; ICR in 1993; Engineering Products (Loans increase the supply of investment OED audit in 1996. 2629-IN and 2630-1N) funding for export oriented projects and export promotional activities 2. Foiowing operations 1. Financial Sector Greater market orientation, 1995 Undisbursed $ 544 million Development allocative efficiency, technical (Lns.3856/57/58-IN) competence and competition in financial system 2. Etc. Table 3: Project Timetable Date actual/ Steps in project cycle latest estimate Identification 05/08/87 Preparation 05/27/87 Appraisal 10/05/87 Negotiations 02/10/88 Letter of development policy (if applicable) Board presentation 03/31/88 Signing 05/21/88 Effectiveness 08/09/88 First tranche release (if applicable) Midterm review (if applicable) Second (and third) tranche release (if applicable) _ Project completion Loan closing 12/31/95  17 Table 4: Loan/Credit Disbursements: Cumulative Estimated and Actual (US$ million) FY89 FY90 FY91 FY92 FY93 FY94 FY95 Appraisal Estimate 31.82 112.82 214.82 324.82 344.82 359.82 359.82 Actual 59.2 144.37 235.86 296.28 312.22 323.85 328.85 Actual as%of estimate 186 128 110 91 91 90 91 Date of final disbursement 4/96 Table 5: Studies Included in Project Study Purpose Status Impact of study 1. Upgrading of Human Upgrade and revamp SAIL's Completed 66% of the workforce Resources Division (HRD) training facilities and programs. retrained. 200 Plan and implement massive engineers trained retraining. abroad. 2. Marketing and Distribution Improvement of distribution Completed Revamping of channels and infrastructure. marketing organization reduced cost of moving steel to consumers and improved customer satisfaction 3. Environment Management Survey of SAIL's plants to Completed Creation of and Pollution Control assess the equipment Environment requirements for monitoring Management Division; and measuring the levels of air, setting up of pollution water, thermal, and noise monitoring schemes pollution; design and and environmental implementation of a laboratories; pollution comprehensive system of levels brought in environmental management. compliance with Indian standards. 4. Productivity improvement Increase organizational Canceled; and planning at SAIL effectiveness; develop and Incoporated improve management systems within other and procedures; improve stuides strategic and operational planning. 5. Technological Upgrading of Survey of the plant; preparation Completed Produced Alloy Plant. and implementation of recommendations for recommendations for achieving international improvement. provisions. Plant competitiveness restored.  18 Table 6: Selected Indicators of Credit Line Achievements IDBI ICICI Amount of Ln.2928 Committed* ($m) 186.61 94.2 Amount of Ln.2928 Disbursed ($m) 176.97 79.8 No. of Subloans 98 87 Ave. Size Project 18.48 6.57 Ave. Size Ln. 2928 Commitments ($m) 1.89 1.10 Purposes of Project (%) -- New activities 47 29 -- Expansion/diversification 39 31 -- Modernization 14 38 -- Others - 2 Total Investments Generated ($m) 1,811 571 No. Jobs Created 10,816 10,284 * Net of cancellations  19 Table 7A: Project Costs SAIL Component Appraisal Estimate (US$M) Actual/Latest Estimate (US$M) Local Foreign Local Foreign Item Costs Costs Total Costs Costs Total Productivity Study 1.0 2.5 3.5 0.00 0.00 0.00 Environmental Study 18.8 23.6 42,4 17.82 7.02 24.84 Training 8.4 10.8 19.2 9.95 14.45 24.40 Distribution Study 7.3 10.2 17.5 5.72 5.55 11.27 Alloy Steel Plant 0.3 1.4 1.7 1.65 2.82 4.47 Survey Total 35.8 48.5 84.3 35.14 29.84 64.98 Physicai 3.6 4.9 8.5 0.00 0.00 0.00 Contingencies Price Contingencies 6.8 1.2 8.0 0.00 0.00 0.00 Total 46.2 54.6 100.8 35.14 29.84 64.98 Table 7B: Project Financing Appraisal Estimate (US$M) Actual/Latest Estimate (US$M) Local Foreign Local Foreign Source Costs Costs Total Costs Costs Total IBRD/IDA' 0.0 50.0 50.0 14.08 29.84 43.92 SAIL 46.2 4.6 50.8 21.06 0.00 21.06 Total Project Cost 46.2 54.6 100.8 35.14 29.84 64.98 including Japanese Grant  20 Table 8A: Project Costs IDBI Credit Component Appraisal Estimate (US$M) Actual/Latest Estimate (US$M) Local Foreign Local Foreign Item Costs Costs Total Costs Costs Total Credit Line 300 200 500 1,720 90 1,810 Table 8B: Project Financing Appraisal Estimate (US$M) Actual (USSM) Local Foreign Local Foreign Source Costs Costs Total Costs Costs Total IBRD 200 200 87 90 177 IDBI 50 50 240 240 Other DFIs 100 100 661 661 Project Sponsors 150 150 732 732 Total Project Cost 300 200 500 1,720 90 1,810  21 Table 9: Economic Costs and Benefits Subprojects financed by the fmancial intermediaries were required to have projected minimum economic rate of return (ERR) of 12 percent. The actual performance of sub-loans varied across sub- sectors and institutions, with fnancial rates of return ranging from 12 to 60 percent. ERR data was too sketchy to draw conclusions. Table 10: Status of Legal Covenants India Loan 2928-IN ::Original *Revised ......................... ........................ .........................;........................................................... ............ :Covenant :Present fulfillmentifulfillment iDescription of Agreement :Section ,type Status date date covenant :Comments Board 2.02 (b) I C Borrower to open Special Account for 'purposes of Part A and B. ....... ...... ........................ .. .......................................................................................... ............. 4.02 I C :Special Account to be audited and report to be furnished within six months after :end of each year/ ............ ......................... .. ......... ....................................................................................................... 4.02 (b) I C . Borrower to arrange for audit of :expenditures/withdrawals under Statements of Expenditures and furnish ; . ; , ; jireport within four months of end of each -year. Board 3 3.01 1 I i C ; . iIDBI's accounts to be audited and report ::to be fumished four months after end of :each year. ; 3 02 2 C ;;(i) IDBI's debt: equity ratio not to exceed i i ji ; ; jil~~~~~~~~~~2:1. j ;(ii) IDBI's consolidated internal cash :generation for each year to be at least 1.2:1 times its consolidated debt service; :requirement for that year. ......................... , , , .... .. ...... ..... ........... ........... ............ .. .... .. .... 3 3.01 1 I ; C ; i iICICI's accounts to be audited and report ito be fumished four months after end of :each year. ............. ........ ......................... .................................... ............................................. ................. * 3.02 . 2 * C . * (i) ICICI's debt: equity ratio not to ;exceed 12:1. ; (ii) ICICI's consolidated intemal cash :generation for each year to be at least ;1.2:1 times its consolidated debt service ;__________________________ ;_______ ;______ irequirement for that year. ; Status: C - Complied with  22 Table 11: Bank Resources: Staff Inputs State of Planned Revised Actual project cycle Weeks US$ Weeks US$ Weeks US$ Through appraisal 29.9 74.9 29.9 74.9 29.9 74.9 Appraisal--Board 39.1 101.7 39.1 101.7 39.1 101.7 Board--effectiveness Supervision 96.3 343.3 96.3 323.2 94.4 289.8 Completion 17.4 37.8 17.4 55.4 11.5 48.5 TOTAL 182.7 557.7 182.7 555.2 174.9 514.9  23 Table 12: Bank Resources: Missions Performance rating Stage of Number Days Specialized Implemen- Develop- project Month/ of in staff skills tation ment Types of cycle year persons field represented status impact problems Through 05/87 5 TM,FA appraisal 03/88 CON.E Appraisal through Board approval Supervision 09/89 2 14 TM, E 2 2 10/90 1 13 TM, E 2 2 02/91 1 TM 2 2 07/92 2 16 TM 2 2 04/93 1 13 TM 2 2 11/93 1 16 TM 2 2 . __________ 07/94 1 16 TM 1 2 Completion 04/96 3 35 Econ. Fin. S HS .- - -   Annex 1 IMPLEMENTATION COMPLETION REPORT OF: EXPORT DEVELOPMENT PROJECT (LOANS 3058/3059-IN) INDUSTRIAL FINANCE AND TECHNICAL ASSISTANCE PROJECT (LOAN 2928-IN) AIDE-MEMOIRE I. A World Bank mission consisting of Messrs. Paul Beckerman (SA2CI) (who accompanied the mission only in Bombay), Paulo de Sa (IENIM), Herman Nissenbaum (Consultant), and Ms. Lin Chin (SA2CI) visited India from March 31 to April 11 to prepare the Implementation Completion Report (ICR) of the Export Development Project (Loans 3058/3059- IN) as well as the Industrial Finance and Technical Assistance Project (Loan 2928-IN). It also met with the management of the Steel Authority of India Ltd. (SAIL) in New Delhi. The mission met with all five implementing financial institutions -- Industrial Development Bank of India (IDBI), Industrial Credit & Investment Corporation of India (ICICI), Export-Import Bank of India (EXIM), Canara Bank, and Bank of Baroda (BOB), as well as with a sample of about 30 loan recipients in Bombay, Bangalore and Delhi. This aide-memoire records the views of the Bank mission, the implementing agencies and of a sample of sub-borrowers, and discusses the implementation performance for each component. Preliminary commitment and disbursement figures based on the data provided by the administering agencies are also included. The mission would like to thank the implementing agencies for their hospitality and assistance. 2. The Export Development Project had four components: (i) a US$175 million credit line administered by ICICI (later reduced to US$76.3 million); (ii) US$100 million for term loans through three participating banks, the Export-Import Bank of India (EXIM), Canara Bank, and Bank of Baroda; (iii) US$20 million for matching grants to exporters for export promotional activities, the Export Development Fund (EDF); and (iv) a US$2.7 million Japanese Grant (No. 2727) available for technical assistance to the implementing agencies. 3. ICICI Loan Component: The ICICI component has provided US$76.3 million for sub-loans to 102 companies. Original plans were for a US$175 million loan that would be relent to sub-borrowers in foreign exchange at the Bank's standard variable interest rate plus 2% or in rupees at the prevailing exchange rate under the Exchange Rate Administration Scheme (ERAS). During implementation, however, the line of credit stalled because of the collapse of the ERAS scheme, following the 47% depreciation of the rupee between 1989-1991, and the introduction of partial convertibility of the rupee. These developments impaired the exporters' incentive to pay above-market rates on fixed loans. On the other hand, the lack of familiarity of the borrowing companies with the currency pool arrangement made them reluctant to take on exchange rate risk at a time of repeated devaluation. Borrowers also found the mechanism difficult to understand. As a result, in February 1993, the Bank and the Government of India (GOI) agreed to cancel the remaining undisbursed amounts, totaling US$98.7 million. Preliminary data provided to the mission show that the average loan size was US$748,000, and total investment costs were US$495 million, which generated 17,057 jobs. 4. Participating Banks Loan Component: This component has provided US$97.3 millions for sub-loans to 235 companies. The US$100 million loan was originally to be allocated among the participating banks as follows: Eximbank, US$40 million; Bank of Baroda, US$30 million; and Canara Bank, US$30 million. At the request of GOI, in April 1991 the Bank reallocated US$10 million from the share of each participating financial institution to create a  2 pool fund for all the banks to be made available on a first-come, first-served basis. In July 1992, at the request of GOI, the Bank reallocated the remaining uncommitted funds under this component on a first-come first-served basis. Bank of Baroda took maximum advantage of this reallocation of funds. 5. Based on the preliminary data transmitted to the mission, the disbursement status of this component is as follows: - EXIM committed US$30.1 million and disbursed about US$27 million to 43 small and medium companies. The average loan size was US$635,000 and the average financial rate of return expected at appraisal was 34 percent. There were 3 full cancellations, and 3 projects with long-term arrears. - Bank of Baroda committed US$49.85 million and disbursed US$45.5 million to 108 small and medium companies (with average sales of about US$7 million). The average loan size was US$441,000 and exports generated over the past three years exceed Rs 8.6 billion. About sixty percent of the companies are located in small towns or backward areas. There were 5 full cancellations, and 11 projects with long-term arrears. At the end of FY 1995/96, 37 units were performing below expectations, although more than two thirds of them were regular in meeting their term loan obligations. - Canara Bank committed US$24.8 million in 84 loans, of which about US$22 million were disbursed mainly to small and medium companies (with average sales of about US$6 million). The average loan size was US$262,000 and the average financial rate of return expected at appraisal was 31 percent. There were 12 full cancellations, 4 projects with long term arrears, and the number of defaults totaled 18. 9. Export Development Fund (EDF) Grant Component: The EDF component has supported marketing programs for about 450 companies. The original allocation of funds among the participating banks was as follows: ICICI, US$7 million; Eximbank, US$7 million; Bank of Baroda, US$3 million; and Canara Bank, US$3 million. Overall implementation was highly satisfactory. The average size of the grant was US$451,190. The firms assisted were small, medium and large in size. On the basis of the available data, the ratio of actual incremental export earnings to grants at the end of the FY 1995/96 had largely exceeded the target of 10-to-1 (37-to-I in the case of EXIM). 10. ICICI committed US$7.5 million and disbursed about 70 percent of this amount to more than one hundred companies. EXIM overcommitted its allocation with the agreement of the Bank US$7.4 million was committed to 118 companies, although only about 85 percent of this amount was actually disbursed. The average grant size was US$61,513. The other participating banks were slower to commit their allocations and to disburse the sanctioned amounts. Bank of Baroda has received an allocation of US$3.38 million under the EDF. As of December 1995, 94 projects had been approved but nearly US$1 million remained undisbursed because Bank of Baroda decided to only release these disbursements after proof that incremental exports amounting to ten times the grant over five years had taken place. Similarly, Canara Bank only disbursed about 60 percent of its original allocation. 11. Japanese Grant Technical Assistance Fund CE) Component: About US$2.6 million was spent on this program from an initial allocation of US$2.7 million, distributed as  3 follows: ICICI, US$1.175 million; Eximbank, US$675,000; Bank of Baroda and Canara Bank, US$425,000 each. The grant originally supported a training program for all implementing agencies to upgrade staff skills in the area of exports. After three years of virtually no disbursements, the component's scope was widened to include sector studies and establishment of two overseas service centers by EXIM (in Rome and Budapest) to collect market information for Indian companies and identify joint-venture opportunities. EXIM's final utilization of funds amounted to US$1.043 million, as authorized by the Bank. ICICI disbursed US$990,000, mainly for training under the ADL-CTP program, while Canara Bank utilized virtually the entire allocated amount for training abroad. Bank of Baroda was somewhat slow to submit final proposals to the Bank, even though it was allowed to do so irrespective of the original allocations, and utilized approximately US$150,000. 12. Overall Project Implementation: General implementation of the project proceeded without major problems, especially as the financial institutions' previous experience under the Industrial Engineering Project enabled them to disburse the term credit more rapidly. Slow initial disbursement of the two Funds was compensated by intense activity during the last year of the Loan. The most important problem during implementation was the failure of the ERAS scheme (because of macroeconomic circumstances that were not foreseen at the time the loan was prepared) and cancellation of the remaining funds. In this connection, the borrowing agencies and the financial institutions and sub-borrowers expressed their satisfaction with the Bank's timely advice on this problem. 13. During the discussions with the financial institutions, the mission provided advice and support for the preparation of their respective portions of the ICR. 14. Project Resulti: During the visit to India, the mission was only able to obtain partial information on the final results of the project. Information was especially limited in the case of ICICI. All the financial institutions agreed to make available to the Bank the complete list of sub-borrowers, costs and financing for each project, expected financial and economic rates of return, as well as their performance in improving the banks' collection records no later than May 15. Nevertheless, the project can be considered to have achieved its main objectives, in spite of the changes in the macroeconomic environment that could not be foreseen at the time of preparation and appraisal. 15. The sub-borrowers told the mission that the EDP presented very attractive conditions. They stressed that (i) provided access to term credit enabling them to purchase of imported capital goods in a period of extreme scarcity of foreign exchange (especially in 1991); and (ii) made available rupee-denominated funds at reasonable real interest rates. The Loan contributed to the companies' modernization efforts, and helped them prepare to meet foreign competition. They said it helped several small and medium companies expand aggressively through exports, at a time when domestic growth was relatively sluggish (1990-1993). It was felt that the EDP was particularly useful for new entrepreneurs and starting exporters, as it was then the single source of funds available to them. 16. The sub-borrowers were also generally satisfied with the performance of the financial institutions in terms of timing, service quality, and lending conditions. Most noted that the banking industry in India then provided no comparable sources of finance. It should be noted, however, that the changes in the economic environment during the implementation phase adversely affected the financial performance of the first projects approved. In effect, they  4 incurred high capital costs as a result of: (i) the effect of the devaluation on the costs of imported equipment; (ii) high duties for imported equipment that were subsequently considerably reduced; and (iii) delays in obtaining of Governmental licenses, especially during the period of foreign- exchange scarcity. 17. Under the EDP, several beneficiaries were assisted both financially and with technical assistance in marketing activities that proved valuable for their export expansion. This could not otherwise have taken place because of restrictions on access to foreign exchange. The Fund also contributed to sharpening export awareness and penetration by Indian companies in world markets. It encouraged them to move away from volume-oriented activities toward a focus on quality and on client service. 18. The performance of the financial institutions and the changes observed in their internal procedures and organization -- making them more commercially-oriented, and more responsive to clients' requirements -- must be understood within the context of the evolution of India's economic environment and sector deregulation since 1991. The EDP contributed to improving their abilities to assist clients in export-oriented activities, to widening their client base, and to expanding the range of services provided. It also had a catalytic role for the sub- borrowers in enabling them to secure other sources of finance (particularly for working capital). 19. Overall, the banks feel that the EDP helped them identify the shortcomings in their appraisal techniques, and helped them improve internal operating procedures. This may help explain why sub-loans extended under this credit line had higher rates of return and better collection ratios when compared to the average performance of their portfolio. Term lending in foreign exchange, especially from export-credit agencies and other bilateral sources, is now an integral part of these financial institutions' operations. - ICICI used the grant funds to redefine its strategy in the export business. It created an export cell, now part of the Advisory Services Group, to assist companies in their export strategies. - EXIM has decided to launch a third export development program -- including term lending (in dollars) and grant funds -- financed essentially through internal funds. The bank has also created an Exporter's Club and now provides integrated services to potential borrowers at a fee. - Participating commercial banks consolidated permanent cells within their organizations to deal with financing of export projects and used the TAF to build-up their staff skills. They are now planning to expand the advisory services provided to their clients on a fee basis. 20. On return to Bank headquarters, the mission will prepare the Implementation Completion Reports for Loans 2928, 3058 and 3059, drafts of which will be sent to the GOI for review.  5 Attachment Selected Indicators of Subloan (Lns.3058/59-IN) Achievements Indicator ICICI Bank of Canara EXIM Total Baroda Bank Amount committed (US$ million) 112.8 49.9 24.8 30.1 217.6 Amount disbursed (US$ million) 76.3 45.5 22.0 27.9 171.7 Number of loans 102 113 84 47 346 Number of companies 102 113 83 46 344 Average loans (US$) 748,000 441,000 262,000 635,000 496,000 Average sales of companies (Rs. million) n.a. 228 187 1,862 Average financial rate of return (percent) n.a. n.a. 31 34 Number with long-term arrears or n.a. 11 4 2 reschedulingsa I Number of full cancellations 17 5 12 3 3 Additional jobs created 17,050 5,000 4,500 1,500 28,050 a -- long-term arrears are arrears over one year. Selected Indicators of EDF (Lns. 3058/59-IN) Achievements ICICI Bank of Canara EXIM Total Baroda Bank Amount committed (US$ million) 7.50 3.38 3.04 7.44 21.36 Amount disbursed (US$ million) 5.25 2.00 1.79 7.44 16.48 Number of loans 131 89 100 129 449 Number of companies 123 89 97 121 430 Average loans (US$) 40,100 26,900 17,900 65,500 36,700 Incremental exports n.a. n.a. 42 times 102 times  Export Development Project - Lns.3058/59-IN Industrial Finance and Technical Assistance Project - Ln.2928-IN Implementation Completion Report Mission (April 1 - 12, 1996) List of Officials Met Industrial Development Bank of India Mr. S.H. Khan Chairman and Managing Director Mr. G.P. Gupta Executive Director Mr. P.S. Subramanyam Chief General Manager Mr. K. Sivaprakasam General Manager Mr. J. John Deputy General Manager Ms. Mythili Ravi Assistant General Manager Mr. K.X.M. John Chief General Manager (Delhi Office) Mr. R. Satyamurthi General Manager (Delhi Office) Mr. Smriti Dhaon Deputy Manager The Industrial Credit and Investment Corporation of India Ltd. Ms. Lalita D. Gupte Executive Director Mr. Ambikapratap Singh Senior Vice-President Mr. Mahinder Chugh Senior Vice-President Mr. Suneet K. Maheshwari Senior Vice-President Mr. N. Sridhar Assistant Vice-President Ms. Shubha Kamalsurya Assistant Vice-President Mr. Mahesh Rao Deputy Manager Mr. T. Raghavendran Vice-President (Bombay Zonal Office) Mr. S. Ragothaman Zonal Manager (BZO) Mr. Mohit Chaturvedi Assistant Manager (BZO) Mr. N.P. Subramanian Deputy Manager (BZO) Mr. T.R. K Deputy General Manager Export-Import Bank of India Mr. T.C. Venkat Subramanian General Manager Mr. Shankarnarayan R. Rao Deputy General Manager Mr. Rajshekar Singh Manager Mr. Dipankar Basu Assistant Manager Mr. Vinod Goel Manager (Delhi Office) Mr. S. Sridhar Regional Resident Representative  Bank of Baroda Mr. G.A. Nayak General Manager (Zonal Office) Mr. V.B. Lal Seksena Assistant General Manager Mr. Arun Tiwari Senior Manager Mr. Hemant K. Parikh Chief Manager (Project Finance) Mr. M.M. Modi Senior Manager Mr. K. Kalidas Manager Canara Bank Mr. K.P. Pai General Manager Mr. M.V. Kamath General Manager Mr. A.R. Jayaprakash Senior Manager Mr. C.G. Adwalpalker General Manager Mr. K.P.Y. Rao Deputy General Manager Steel Authority of India Ltd. Mr. Arun J. Malhotra Senior Manager (Consultancy Division) Mr. S.C. Suri Executive Director (Planning) Mr. U.S. Jain Director (Finance) Mr. S.D.M. Nagpal Addl. Director (Finance & Account) Mr. R.K. Garg Senior. Manager (Vice-Chairman Secretariat)  Export Development Project - Lns.3058/59-IN Industrial Finance and Technical Assistance Project - Ln.2928-IN Implementation Completion Report Mission (April 1 - 12, 1996) List of Sub-Borrowers Interviewed Aro Granite Industries Ltd. Parasrampuria Synthetics Ltd. Ballarpur Industries Ltd. Flex Foods Ltd. CT Cotton Yarn Ltd. Kajaria Ceramics Ltd. Eicher Motors Ltd. AKG Acoustics (india) Ltd. Indo - American Hybird Seeds Namaste Exports Ltd. Shenoy Granites (P.) Ltd. Mangal Arts & Crafts Amit Spinning Industries Ltd. Keshavial Talakchand Kaytee Corporation Ltd. Patodia Eurotex Group Onida Electronics Ltd. DCL Polyesters Ltd. The Andhra Petrochemicals Ltd. Repi Engineering Ltd. Vidyut Metallics ltd. Jain Irrigation Systyms Ltd. The Zandu Pharmaceutical Works Ltd. AFM India Ltd. Protecto Engineering Ltd. Lyka Labs Ltd. Royal Cushion Vinyl Products Ltd. Foundation Software Associates P. Ltd. Inter Gold (India) Ltd. Enkay Texofood Industries Ltd. Bausch & Lomb India Ltd. Triveni Oilfield Services Ltd. Surya Roshni Ltd.  Industrial Finance and Technical A.sistance Project (Loan No: 2928 IN) IMPLEMENTATION COMPLETION REPORT Aide Memoire Introduction 1. A World Bank mission comprising Messrs. Edmund Mangan, Principal Industrial Specialist, and Paulo de Sa, Industrial Economist, visited India from April 1, through April 17, 1995 : (i) to prepare the Implementation Completion Report for the Technical Assistance portion of the Industrial Finance and Technical Assistance Project (Loan No: 2928- IN), ad (ii) to respond to the request by SAIL, Steel Authority of India Limited, the beneficiary of this portion of the loan, for assistance in the review and updating of SAIL's current Business and Strategic plans. It is agreed that this assistance would be beneficial to SAIL and would be consistent with the objectives of the project and Loan which was extended to the end of calendar year 1995 in order to complete a proposed strategic review. Mr. de Sa was responsible for the preparation of the ICR and provided assistance to the review of policy issues relating to the SAIL corporate plan. Mr. Mangan concentrated on the strategic and business planning exercise, for which a separate report was prepared. 2. In addition to detailed discussions with the Business Planning Group of SAIL, the mission had extensive interactions with the Commercial Directorate, Operations Directorate, Finance Directorate and the Personnel Directorate at the Corporate Office of SAIL at New Delhi. The primary focus of these discussions was to have an overview of the changes that have already taken place in the business environment facing SAIL since 1986 when the World Bank had prepared a Steel Sector Strategy Report for India. 3. The interactions at Delhi were followed by field visits covering Bombay, Bangalore, Calcutta, Durgapur, Bokaro and Ranchi, where the mission held discussions with: (i) SAIL's customers representing various segments and product profile; (ii) SAIL's major competitors like TISCO, Mukund, Essar, Nippon Denro, etc.; (iii) Coal India Limited, the only domestic supplier of coking coal in India; and (iv) the major beneficiaries of the Technical Assistance Loan within SAIL: the Central Marketing Organization (CMO), the Raw Material Directorate (RMD), the Environment Management Division (EMD), the Management Training Institute (MTI) at Ranchi, and SAIL's Alloy Steel Plant, at Durgapur, Durgapur Steel Plant, and Bokaro Steel Plant. 4. The mission wishes to express its gratitude for the excellent cooperation and constructive discussions held with SAIL's officials and takes this opportunity to thank all concerned staff for the assistance and hospitality extended to the mission during its stay in India.  Project Objectives S. The World Bank has been active in the steel subsector in India for some time. A Steel Sector Strategy Study was undertaken by the Bank in 1986 and a Report was prepared and presented to the government and SAIL in 1987. This work was the background for Bank dialogue and much of the opening of the sector until now. The objective of the Project was to provide technical assistance to SAIL, to enable it to complement the physical restructuring efforts on which SAIL has embarked, by improving organizational systems, technical skills, distribution arrangements, pollution control schemes, and devising plans to reduce costs and improve quality. This achievement would benefit downstream users of steel, a group which direct or indirect concerns include almost all the segments of the economy. The project would also have positive effects on the environment as it would help SAIL to comply with Government's environmental standards and to establish benchmark operational procedures in the industry. 6. Technical Assistance in the US$ 50 million component of the Industrial Finance and Technical Assistance Project (Loan No: 2928-IN) was to finance consultancy assignments, training activities and technical assistance related equipment to help SAIL to improve operational efficiency. Along with the loan the Bank also provided a Japanese grant of V 450 million (approximately US$ 3.3 million) to SAIL for the same project. a) Consultancy Studies. Under the Loan four consultancy studies were commissioned in different areas: (i) upgradation of the Human Resources Division (HRD) and training study awarded to British Steel Consultants Limited, U.K. (BSCOS); (ii) marketing and distribution studies awarded to USX Engineering and Consultants Inc., USA (UEC); (iii) environment management and pollution control study awarded to BHPE/Kinhill joint-venture, Australia; and (iv) productivity improvement and technological upgradation at the Alloy Steel Plant, Durgapur, study awarded to Voest Alpine Industrial Services, Austria (VAIS). A great number of recommendations of the consultants have already been implemented while others, of long term nature, are under implementation. b) Training. As a part of implementation of the HRD and Training Study recommendations, training was provided in different areas by BSCOS in U.K. to SAIL officers. SAIL also commissioned Institute for Resource Development, USA (IRD), for providing training in the area of Total Quality Management. This component was further expanded to include training in Austria by VAIS in the areas of operations and maintenance management. All training programs financed in the scope of this Project have been completed. c) TA Related Equipment. Under this item, the required equipment in the areas of pollution monitoring and control, training aids and material handling equipment recommended by the consultants has been purchased. Pollution monitoring laboratories at SAIL plants have been  installed and pollution control projects at different SAIL plants are under implementation. Material handling equipment has been installed at selected stockyards. Similarly, the training laboratories in the areas of electrical, electronics and hydraulic and pneumatic have been installed. 7. Project components included: (in US$ million) WB component SAIL TOTAL Productivity Study 2.5 1.7 4.2 Environment 24.5 26.2 50.7 Training 11.0 12.0 23.0 Marketing & Distribution 10.5 10.4 20.9 Alloy Plant Study 1.5 0.5 2.0 TOTAL 50.0 50.8 100.8 8. The Project was approved by the Bank Board on May 12, 1988 and was amended in January 1992 to accommodate a change in project scope and a reallocation within categories under the subject loan as shown below: Category Original Revised (Amount in USS million) Allocations Allocations Consultancy 11.1 7.7 Training 4.1 10.0 TA related Equipment 33.7 31.2 Unallocated 1.1 1.1 TOTAL 50.0 50.0 9. The changes were due in part to: (i) a lower demand for consulting services (US$ 2.5 originally allocated to the Productivity Study); (ii) the availability of Australian grant financing for a portion of the Bank's original scope of consulting work; (iii) cost savings in the equipment category related to pollution monitoring of the Environment Study, and also for the training equipment for blast furnace and power plant simulators. Part of the savings were used by SAIL to purchase pollution control as opposed to monitoring equipment to implement several key recommendations from the Environmental Study and to achieve actual pollution control results. with respect to the training program it was agreed to expand the overseas training program, in consistency with the overall project objectives.  10. The original closing date for the SAIL portion of this loan was December 31, 1993 and was extended twice in order to accommodate the replacement of the Productivity Study originally proposed by a Business Plan and Restructuring Study for Sail. However, the consultant selected for this study withdrew for internal corporate reasons and the study was not carried out as envisioned. Instead SAIL has requested direct Bank assistance in reviewing the company's objectives and plans in the emerging business environment in India. The expected closing date is now June 30, 1995. In addition, in June 1994 SAIL requested an obtained cancellation for a US$ 5 million part of the loan, reducing the total amount of the Project financed by the Bank to US$ 45 million. Implementation Experience and Results 11. Achievement of Prolect Objectives. The projects undertaken under the loan are presented in Attachment 1. All contributed favorably for the achievement of the project objectives. As mentioned earlier the Productivity Study was not commissioned due to lack of suitable proposal. To avoid delay, the relevant issues were incorporated into the remaining four studies and a training program in Total Quality Process was included instead. 12. Malor Factors Affecting the Project. a) Factors not generally subject to Government control: conflict of interests by the consultant selected to conduct the Business Planning & Strategy Study prevented the project from achieving its full objectives. b) Factors generally subject to Government control: Government has been responsive to the changes being implemented in the enterprise, giving more autonomy to its management and divesting a minority share of its capital. Additionally, the deregulation of the competitive framework accelerated the on-going changes inside SAIL. c) Factors generally subject to borrower control: top-management commitment to the operation translated into excellent implementation. Staff turnover after overseas training was not substantial, in spite of the new entrants coming into the sector, which shows a strong commitment to the changes being implemented. The very good timing of the operation must also be stressed. 13. Actual Project Cost. SAIL has prepared an updated budget for the Project (see Attachment 3) indicating that by end February US$ 41.35 million had already been withdrawn and that at that time US$ 2.2 million remained uncommitted. Delhi, April 17, 1995  Annex 2 IA IMPLEMENTATION COMPLETION REPO INDUSTRIAL FINANCE AND TECHNICAL ASSISTANCE PROJECT - LOAN 2928-IN ICICI: Financial Characteristics of Subgroeccts Financed (June 1995 Data) Project Cost IBRD Funding Financial Rate of Rs. million Rs. million Return (%) Product Appraisal Actual LC FC Appraisal Actual MIRC Electronics Ltd. CTV & VCRs 104.00 - - 10.40 18.60 Ucal Fuel Systems Ltd. Fuel pumps 120.00 7.70 21.00 Kajaria Ceramics Ltd. Ceramic tiles 92.00 322.90 9.60 21.00 Century EnkaLtd. NTY/PIY 1077.10 47.70 18.60 Shree Pre-coated Steels Ltd. Steel sheets 330.00 392.00 9.00 14.40 11.60 PSI Data Systems Ltd. Mainframes 145.50 154.40 2.94 40.10 Century Textiles & Industries Ltd. Textiles 137.50 113.60 4.90 17.10 13.80 Restile Ceramics Ltd. Vitrified tiles 90.00 160.00 5.10 14.50 Gujarat Propack Ltd. BOPP film 99.40 109.20 6.00 14.80 17.20 Sri Katragadda Electrics Ltd. Stepper motors 72.30 77.90 6.30 14.30 Dyna Lamps FTLs 435.00 518.60 45.80 15.00 Raymond Synthetics Ltd. PFY 1856.00 10.30 17.30 15.50 Synthetics & Chemicals Ltd. Latex & rubber 790.00 1534.90 90.00 16.80 VBC Industries Ltd. Ammonium nitrate & nitric acid 338.60 531.60 15.30 17.30 17.00 Arvind Mills Ltd. Cotton & Synthetic 309.10 269.90 18.10 16.70 14.60 Salvigor Labs. Ltd. Sulphuric acid 103.50 124.50 11.30 16.10 Modi Alkalies & Chemicals Ltd. Caustic soda 95.00 105.00 16.70 16.70 Laxmi Synthetics Machinary Synthetic filament 120.00 15.20 3.40 16.00 Indian Seamless Metal Tubes Ltd. Seamless carbon & alloy steel tubes 375.00 405.00 6.30 16.20 Keonics Penta Semiconductors Ltd Semi conductor 47.50 47.50 9.42 20.20 Esab India Ltd. Automatic cutting & welding equip. 110.00 12.30 14.00 Calcom Vision Ltd. Color TV 78.00 8.30 22.00 Eurotex Industries & Exports Ltd. Cotton yam 43.00 11.60 16.00 Rama Vision Ltd. B&W TVs picture tubes 180.00 219.90 18.10 25.10 20.00 Precision Electronics Ltd. Printed circuit boards 148.70 258.00 25.00 8.00 Al-kabeer Exports Ltd. Meat products 310.00 310.00 455.10 29.10 26.60 Bharat Forge Ltd. Steel forgings 675.00 972.00 35.00 14.40 14.40 Bell Ceramics Ltd. Ceramic glazed floor & wall tiles 112.00 141.80 44.00 24.00 21.00 Nijjer Agro Foods Ltd. Tomato processing 115.10 128.90 9.40 15.30 17.50 Bajaj Auto Ltd. Scooters, motor- cycles & 3 wheelers 184.30 99.60 15.60 Swiss Health Foods Pvt. Ltd. Chocolates 60.00 99.00 3.15 13.30 Titan Foods & Fashions Ltd. Fruit Pulp Leather 55.00 53.40 14.71 Polycoat Powders Ltd. Powder coating 675.00 7.94 28.00  Project Cost IBRD Funding Financial Rate of Rs. million Rs. million Return (%) Product Appraisal Actual LC FC Appraisal Actual Royal Vinyls Ltd. PVC based calendered prods. 550.00 9.52 24.70 Intech International Ltd. Microwave power amplifier 68.00 36.00 34.00 Snez Leather Ltd. Shoe Leather 85.00 85.00 22.30 Vimta Labs Ltd. Lab 62.00 62.00 25.80 R.R. Medi Pharma Ltd. Intravenous fluids 114.30 40.00 23.50 NCL Seccolor Ltd. Pre-painted steel profiles 111.00 114.50 15.80 19.00 Biax Ltd. BOPP film 312.00 480.50 42.40 16.60 Fenoplast Ltd. PVC Calendered film 86.00 129.00 25.60 15.00 Ispat Alloys Ltd. Calcium Silicide 226.00 291.20 41.30 16.10 Straw Products Ltd. Cement 105.00 105.00 24.00 23.70 Premier Instruments & Controls Ltd. UPS/SMS instrumentation 57.00 8.20 28.00 Herdillia Oxides & Electronics ltd. Electronic equipt. 185.00 225.00 15.20 2.90 17.90 20.00 Bakelite Hylam Ltd. Phedex foam wall covering material 84.00 78.20 19.70 17.00 Mahindra Ugine Ltd. Special steels 205.00 336.00 22.40 16.00 Baroda Rayon Corp. Ltd. (Phase 1) PFY 290.00 22.80 25.90 Daulat Electronics Ltd. Video magnetic tapes 76.00 105.00 8.30 18.00 20.00 Polar Marmo Agglomerates Ltd. Marole/Granite slabs 107.00 151.00 6.80 15.30 XL Telecom Ltd. Heat shrink sleeve 72.00 9.00 24.00 Triveni Pool lntairdril Ltd. Oil drilling 116.50 116.50 55.40 24.00 18.50 18.50 Tamilnadu Telecommunications Ltd. PIJF cables 233.00 286.50 8.00 10.10 16.20 14.00 TVS Whirlpool Ltd. Washing machine 284.80 210.00 20.10 17.00 Powmex Steels Ltd. High speed steel bars/rods 697.00 21.70 17.70 Polychea Ltd. ABS resins 180.00 7.80 16.10 Hindustan Magnetics Ltd. Audio/video computer tapes 135.00 215.00 21.50 28.00 Kirloskar Cummins Ltd. Diesel engines 200.00 57.60 24.00 Hardilla Unimars Ltd. Ethylene Pre- opylene Co polym. 462.00 825.00 12.00 18.60 22.40 Tosna Picture Tubes Ltd. B&W picture tubes 149.00 269.00 14.80 75.00 18.80 Pantape Electronics Ltd. Video magnetic (Indian Magnetics Ltd.) tapes 106.00 143.20 12.60 17.80 20.70  Project Cost IBRD Funding Financial Rate of Rs. million Rs. million Return (%) Product Appraisal Actual LC FC Apprasal Actual Webel TelematiK Pvt. Ltd. Electronic teleprnters 90.00 9.10 21.50 Gyan Leather Boards Pvt. Ltd. Leather boards 124.00 202.10 8.50 16.50 23.05 Champdany Industries Ltd. Jute blended carpets 57.00 68.00 5.60 26.00 24.00 Baroda Rayon Corpn. Ltd. PFY 287.00 21.50 18.10 Rajasthan Petrosynthetics Ltd. PFY 169.00 141.20 15.80 24.70 Krone Communications ltd. Telephone connectors & accessories 110.00 23.30 21.00 Ushta-te-Bio-tech Ltd. Starch products 200.00 298.00 8.10 3.40 15.00 Woolworth (India) Ltd. Worsted woolen & blended yam 169.00 210.00 10.00 17.80 Gujarat Apar Polymers Ltd. AB rubber & Latexes 268.00 383.00 4.60 5.80 15.50 Century Extrusions Ltd. Aluminium extrusions 101.00 118.00 4.90 18.00 Grasia Industries Ltd. Cement &VSF 227.00 229.70 128.00 17.00 17.00 GSFC - Caprolactum Caprolactum 3962.00 515.00 280.00 16.00 DCL Polyesters Ltd. PFY/PDY 1280.00 1652.00 201.60 18.10 17.50 Essar Gujarat Ltd. Sponge iron 3720.00 4163.00 320.00 17.00 17.60 Andhra Petrochemicals Ltd. 2 EH & butanols 1200.00 1950.00 224.00 7.00 16.00 15.32 Kesoram Industries Ltd. Tyres & tubes 2815.00 87.00 17.50 Tata Iron & Steel Co. Ltd. Cement 2650.00 3600.00 2045.02 17.00 16.30 Gujarat Fluro-chemicals Ltd. CFC refrigerant 226.00 288.80 17.10 19.50 13.30 Consolidated Petrotech Ltd. MEK 110.00 136.80 16.00 28.30 Prakash Tubes Ltd. FTLs & steel mill 136.00 136.00 17.40 20.00 15.00 Vindhya Telelinks Ltd. PIJF cables 170.00 170.00 45.70 26.00 Gujarat Alkalies & Chemicals Ltd. Caustic soda 388.00 450.00 24.80 15.10 19.55 Hindustan Sanitaryware & Industries Ceramics & glass 241.00 280.70 20.20 17.80  INEWSTRILL DEVELOFEIM BE OF IA 1DD LIE OF CRrEDIT 2921 - IN STATEMEN 1 C IP Y-WSE DEUULS 0lF ONO AUTfUSAUnUS.. UTEJSATIUIN ( WEU IC-tEI & M CEU ATIOW imm caWIcnx- NET DISUUUsK Projacti UX w co.ruv km. is Trns 1i A lADE u BkLAECI .. , . .. 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B.1.24 TVSWHlPUL 1,340D 611560 7M4D7 72M40.94 8.12S fPOWEX STEL LTD 1.65aQDa[ 51Q3W 1s5w? 159.970.39 B91.26 POLYCOEM 52RY0 5s11loo 50,3s6SD 14.3310 8.1.27 HNDUSTANtlANGNET S(ABSO B2fl 1A458.DI 1AWA30 1,4%.332QD 1,66B.0 BL2C NA.T1ONALEIGMEEN4NG 3.553U0 15918 3.35&l 3.3942.45 B1.t29 IQRLOSK*AWWNS &169.397 .1629397 VW1696.53 L47 B1.1 3C ERDLLUAUfAEPS LTD 330 330) 8(,665 (20.01D -35.00 Bl631 TOSKAPICflTUBES 104100 131.01) S0)aW 9 ao 0.132 INDIAN AUC CSLMT D(PANTAPE) B02D, 4.296 817.60 8W75n0aD B.1.33 SEhENSIEEMAIICLTD. 6s00.00 VIU3 6fl297 6Th29721 81-34 GYAN LEAT1R BOARD LTD 663.010 Es31 567,471 56A469.54 B.1.3 CH EPIDM&CnSTFOES 39BtWD 2536 3%464 3P246334 61-3C P.AAM&FETROSYNTHETIS 1.102.001 X37? 1.06"23 .0W2317 Popg 3  INDUETIL UVLOFEW or3 0 IlI UDn LIE Of CEDIT 2523 - IN STATEWE 1 E8WM W%IWKSE KTE ILS O OM AUNIIIIIUSA11IS. UTIUSATEE (DIENCV-W EJ S rhZUAT NET TM CkWcsiU- AU"HHR16 C_ uS ., I9 Pv4u*9 1131 01 ~~~~~~~~FAN! 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