India - Eleventh Railway Project

RESTRICTED gg; g gPqr Report No. P-99Z This report is for official use only by the Bank Group and specifically authorized organizations or persons. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report. INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE GOVERNMENT OF INDIA FOR A RAILWAY PROJECT December 28, 1971  INTERNATIONAL DEVELOPMENT ASSOCIATION REFORT AND RECOMMENDATION OF THE PRESIDENT TO IHE EXECUTIVE DIRECTORS ON A FROPOSED CREDIT TO THE GOVERNMENT OF INDIA FOR A RAILWAY PROJECT 1. I submit the following report and recommendation on a proposed credit to India in an amount equivalent to US$75.0 million on standard IDA terms for a railway project. PART I - INTRODUCTION 2. Since 1949, the Bank has made 40 loans amounting to US$1,111 million and the Association 36 development credits amounting to US$1,571 million (both net of cancellations) to India. Of these amounts, US$498 million has been repaid and US$559 million is still undisbursed. Two further credits for agricultural credit in Mysore (US$40 million) and Gorakhpur fertilizer expansion (US$10 million) have been approved by the Executive Directors on December 21, 1971 but have not been signed. The share of agricultural projects in Bank/IDA operations has increased substantially in the last two years, reflecting the high priority which the Government accords to agriculture in the current Fourth Five-Year Plan (1969-74), and agricultural lending is expected to account for a large share of future Bank Group assistance, although finance of invest- ments in industry, transport and public utilities will continue to be important. Support to education and family planning is also planned, but here the scope for lending is limited. During the remainder of this fiscal year, I expect to be ready to present for your consider- ation three agricultural projects, four industrial projects, another transport project, a power project and a family planning project. 3. The Bank and the Association have made six loans and four credits to the Indian Railways (IR) amounting to US$631 million (net of cancellations) of which about US$125 million has been repaid. The last credit to IR (US$55 million) was approved in 1969 and has been fully disbursed. Other Bank Group lending for transportation in India comprises three loans and one credit for the ports of Calcutta, Madras and Bombay (US$82 million), one credit for roads (US$60 million) and one loan for civil aviation (US$5.6 million). In addition, through the six indastrial imports credits approved between 1964 and 1970, a total of about US$130 million has been provided to assist local production of commercial vehicles. A shipping project and a second highways project are currently under consideration. 4. A summary statement of loans and credits as of November 30, 1971, is in Annex I. Comments on the status of disbursements of effective loans and credits were given in my recent Report and Recom- mendation on a Proposed Loan to the Industrial Credit and Investment Corporation of India Limited (P-988, dated October 13, 1971). There have been no significant changes since that report.  5. Since 1957, IFC has made 13 commitments in India totalling US$42.3 million, of which US$3.3 million has been repaid, US$5.9 million sold and US$6.3 million cancelled. Of the balance of US$26.8 million, US$18.6 million represents loans and US$8.2 million equity. The largest commitment to date has been US$18.9 million to Zuari Agro-Chemical for a fertilizer plant in Goa. A summary statement of IFC loans as of November 30, 1971 is in Annex I. 6. The proposed project was appraised in March/April 1971 and negotiations took place in Washington, D.C. in November. The Borrower was represented at the negotiations by Mr. B. S. D. Baliga, Chairman of the IR Board, Mr. K. S. Sundara Rajan, Financial Commissioner, Indian Railways, Mr. A. Choudhury, Director of Planning, Indian Railways and Mr. S. Guhan, Special Assistant to the Planning Minister. PART II - THE ECONTOYY 7. An economic report entitled "Economic Situation and Prospects of India" (SA-25a), dated May 11, 1971, was distributed to the Executive Directors on May 24, 1971. A memorandum entitled "India: Major Economic Issues" (R71-249, dated November 9, 1971) was distributed to the Executive Directors on November 9, 1971. A country data sheet is attached as Annex II. 8. In the period following the recession of 1966-68, the Indian economy has grown at an annual rate of about 5 percent, largely reflect- ing the encouraging progress of agriculture. Foodgrain production in the last crop year reached 108 million tons, which is 8.5 percent above the level of the preceding year. This is due in part to substantial investment in irrigation and also to the increased and more effective use of current inputs, such as improved seeds, fertilizer and pesticides. But weather remains an important factor both in agriculture and - because agriculture contributes nearly half of India's GNP - determining overall economic growth. 9. Manufacturing now contributes about 20 percent of GNP. India's current Five-Year Plan (1969-74) aims at an overall annual growth of 5.5 percent, and an increase in manufacturing output by about 8 to 10 percent a year in both the organized and the small-scale industrial sectors. Medium and large-scale industrial production rose by about 7 percent in both 1968 and 1969 and by just over 5 percent in 1970. The main reasons for this setback appear to have been shortages of raw materials, especially steel and cotton, and low public investment caused by restrictive budget policies. In contrast, small-scale firms seem to have benefited directly from the advance of agriculture and have made considerable gains. 10. The Government has followed strict budgetary and monetary policies in recent years and net foreign exchange reserves are now just over one billion dollars. During 1967-71, imports (especially of food)  - 3 - came down sharply, and in 1970.-71, exports increased by over 8 percent. As a result, India's trade deficit has decreased from US$1.3 billion equivalent in FY 1967 to US$130 million equivalent in FY 1971. 11. A major cause of concern, and an important constraint for the future, has been the low rate of investment. Net investment was 12 percent of national income in FY 1970 against nearly 15 percent in FY 1966. Public sector investment is being held back by lack of funds, for, although sub- stantial amounts were raised through higher taxation, public savings did not increase sufficiently to maintain the investment rate in the face of the sharp decline in net aid receipts, from US$800 million in 1966/67 to about US$300 million in 1970/71. 12. Early this year the basis was being laid for substantial expansion of investment activity, but evonta intervened bafore economic d:vevlop- ment could benefit from these efforts. From the beginning oI the fiscal year (April), large numbers of refugees started coming across Indiats Eastern borders. By November, the budgetary cost of caring for the refugees this year was estimated at US$700 million. Toward these costs, the international community had by early December committed about US$250 million in aid. From December 3 to 16, there was open conflict in the subcontinent. The direct and indirect implications of this conflict for economic development in India cannot yet be assessed definitively. Present indications are, however, that the development process is continuing without untoward disruptions, and funds allocated in the budget for development purposes are being provided on schedule. 13. The transport sector plays an important role in the Indian economy. While it accounts for only some 4 percent of GNP, it absorbs about 30 percent of total national investment. Transport subsidies form part of the Government's policy of stimulating growth in relatively un- developed regions, and taxes on petroleum products (which are largely used in the transport sector) amount to about one-quarter of Central Government tax revenues. Indian Railways have provided the dominant mode of transport in past years, carrying about one-half of all passenger and two-thirds of total goods traffic. The importance of the railways can be seen from the following statistics: they account for about 1.5 percent of GNP; they employ some 8 percent of the total labor force in enterprises with more than 25 employees; they consume about 30 percent of steel, 20 percent of coal, and 10 percent of high speed diesel fuel used in the entire economy; in addition to being the most important traffic carrier, they operate large manufacturing facilities with a total annual output of over Rs. 500 million; and in the period 1965/69, they accounted for about 50 percent of total investment in the transport sector. 14. The pattern of transportation has, however, begun to shift in recent years, mainly due to an accelerated expansion of the road transport system. Road traffic has grown fastest in fields such as the movement of high value general goods, in which railways are at a comparative disadvantage. These trends may well continue, for in the Fourth Plan the Government has decreased the share of railways investment to about one-third of the total allocation for transport. However, the railways will continue to exercise a near monopoly over other major types of transport service, particularly heavy freight and bulk goods, and the overall rate of growth of railway traffic is likely to be of the order of 3 percent per annum for the fore- seeable future.  - 4 - PART III - THE PROJECT 15. A report entitled "Appraisal of an Eleventh Railway Project, India" (PTR-96a), dated November 30, 1971, is circulated separately. A Credit and Project Surmary is contained in Annex III. 16. The project consists of new and on-going works in IR's invest- ment program for the three years beginning April 1, 1971 (which complete IR's Fourth Five-Year Plan), and is a continuation of the previous IDA financed railway project, which covered the first two years of the Plan. It will enable IR to meet projected increases in freight and passenger traffic and to continue nodernizing the system and also to reduce operating costs. 17. Investments during the three-year period will total Rs. 8.133 billion (Us$i.o84 billion). Of the total investment during the period, 40 percent will cover diesel and electric locomotives and rolling stock, 42 percent in track renewal and line capacity works, 6 percent in line electrification and the balance in various other works. Almost half of the funds required (US$522 million equivalent) would be provided from internally generated funds of the railways. The Government would con- tribute US$473 million equivalent as capital-at-charge, including the proceeds of the proposed credit and other foreign borrowing. A small balance ould be covered by temporary loans from the Government. 18. The foreign exchange component of the investment program is estimated at US$170 million equivalent (16 percent of total project costs), consisting primarily of raw materials and components required for the manufacture of locemotives and rolling stock. Available bilateral loans and credits amount to US$28.3 million and a further US$30 million is in prospect. Including drawings of US$25 million under the tenth railway credit (162-IN) during April to August 1971, IDA's total contributlon to the program would be US$100 million, or 59 percent of total foreign exchange requirements. A balance of US$11.7 million equivalent would come from the Government's foreign exchange resources. 19. The proposed credit would be disbursed against imports of components and materials for the manufacture of locomotives and rolling stock (US$56 million), imports of equipment and materials for route improvement works (US$15 million), and miscellaneous workshop and main- tenance equipment (US$4 million). Imports financed by the IDA credit will be procured through international competitive bidding except for a limited amount for imported components for the assembly of railway equip- ment under licences and certain items which the railways intend to procure from particular sources in the interest of essential standardi- zation. The total amount for these standardized items is estimated at US$17 million which would remain the upper limit for this component of the credit, even if funds were to be reallocated among the agrecd categories of items to be financed out of the credit.  20. At the time when the project was first scheduled, it was envisaged that disbursements of the proposed credit would follow immediately on the previous railway credit, which covered expenditures made by IR through August 1971. Howqever, there has been some delay in completion of the appraisal so that some expenditures on items included under the proposed credit have already been incurred. In the circum- stances, I propose that expenditures incurred on and after September 1, 1971, up to US$5.5 million equivalent be covered by the proposed credit. 21. A detailed economic evaluation of the project as a whole has not been possible because of the large number of sub-projects involved and the difficulty of quantifying in a meaningful way the costs and benefits associated with numerous small items. Evaluation of five large sub-projects shows rates of return of about 20 percent for the dieseli- zation program and track doubling of an important railway line, 1.1 per- cent for a typical example of signalling improvement, and 10 percent for the modernization of an important marshalling yard. The electrification of a section of main line, which is part of an on-going program, is estimated to yield a 6 percent rate of return, but it was not possible to evaluate satisfactorily a number of important benefits which might have been included in the analysis. 22. The Indian Railway system is the second largest under one management in the world, exceeded in size only by the railways of the USSR. The total system covers approximately 60,000 route kilometers. The organization of the railways is complex. The system consists of nine railway zones, each under a general manager reporting directly to the Railway Board. Formal jurisdiction over the railways is vested in the Ministry of Railways of the Central Government. The management of the railway's operations is sound and the rate of equipment utilization conpares favorably with other railway systems. The need and opportuni- ties for improvement in operating efficiency and in quality of service is recognized by the Railway Board and studies are being made in a number of directions to this end. 23. Financial results are satisfactory, with a rate of return on average capital-at-charge at 4.7 percent in 1969/70 and 4.4 percent in 1970/71. Revenues from freight and passenger traffic have been rising at an average rate of 6.9 percent per annum from 1966/67 to 1970/71. However, operating expenses, especially wages, have also risen sharply in these years; they increased by as much as 9.6 percent in 1966/67 and have since gone up by about 7 percent annually on the average. Thus, the operating ratio (i.e. operating costs as a percentage of gross revenues) has risen from 79.5 percent in 1965/66 to 84.4 percent in 1970/71 and net revenues have been insufficient to cover the dividend which IR is obligated to pay to the Government. The main reasons for the increase of the operating ratio have been the unexpectedly slow growth of profitable freight traffic while passenger traffic, part of which has to be subsidized by other operations, has grown steadily. Furthermore, IR has not been able to obtain Government agreement to com- pensate fully for wage and other cost increases through corresponding rate increases.  2b. An operating ratio of 80 percent was agreed as an appropriate target figure for IR's performance under the last railway credit. On July 1, 1971, IR increased its rates and these adjustments should result in the operating ratio declining to about 80 percent by the end of IR's fiscal year 1973, provided that substantial further increases in salaries and wages, likely in 1972, are covered by further rate adjustments or economies in operation. In these circumstances, it has been agreed that the railways would be required to maintain rates and fares at a level that would generate revenues sufficient to cover, in addition to operating expenses, the dividend payable to Government on capital-at-charge. The dividend is at present 5.5 percent on capital contributions received prior to March 31, 1964 and 6 percent on capital contributions received there- after. 25. In assessing IR's financial performance, IR's role in the economy must be taken into account. IR's dividend to the Government represents about 3 percent of the Government's total current and capital receipts. IR also generates sufficient internal resources to finance about 50 percent of its capital expenditures. More importantly, the Indian Railways retain a labor force of about 1.35 million; a large number of these employees are redundant, and the number would be higher if the railways had a free hand in adopting a higher level of mechani- zation. In addition to the payroll cost of this labor, the railways have to provide social services to employees and their families (about seven million people). At the same time, the railways carry the financial burden of certain social services which are unremunerative, such as commuter lines in major cities and a large number of small branch lines. The cost of these services have been identified and are now being re- flected in the railway's annual accounts. The question of providing some degree of compensation to the railwiays for uneconomic services is expected to be referred to Parliament and some relief is likely. 26. Investment planning by the railvays has been carried out in five-year stages and has been concentrated on short-term development. The proper determination of long-term investment and investment priorities requires a longer plan horizon which could serve as a framework for the more specific five-year investment plans. The railways will embark on the preparation of a fifteen year corporate plan which would be more in line with the average life of typical railway assets and would moreover provide a basis for more effective coordination of investments among different modes of transport. Within the context of the corporate plan the railways will further refine their traffic forecasting procedures as well as the techniques employed in the appraisal of major sub-projects. 27. Related to the issue of investment planning is the question of transport coordination. This is especially pressing in a transport system the size of India's and in a situation where pricing and regulation of services are determined by wider economic goals, such as employment, generation of public savings and income re-distribution. The Government is aware of the need for effective transport coordination. A committee  - 7 - on Transport Policy and Coordination produced a comprehensive report in 1966 wihich led to a variety of measures designed to ensure continuous adjustments of pricing and planning among different modes of transport. A number of other bodies have also been appointed at various times to examine more specific issues such as the effect of taxation on road transport. However, there is no single minister or other authority expressly charged with setting policy and resolving conflicts, and as a result the recormmendations contained in these reports have not been implemented. Moreover, the fact that competition has increased TNithin the transport sector, primarily due to the greater use of road transport, has made critical the need for effective coordination and planning. The Government has decided to undertake a full review of the transport sector and the Association will contribute to this review by means of a compre- hensive sector mission. It is ex.pected that this review would take approximately eighteen months and would lead to an understanding between the Government and the Association on the basic policies to be followed in the sector as a framewzork for future Bank Group activity in India's transport sector. PART IV - LEGAL INSTRUMENT AND AUTHORITY 28. The draft Credit Agreement between the Association and the Govermnent of India, the Recommendation of the Committee provided for in Articie V, Secticn l(d) of the Articles of Agreement and the text of the Resol;otimn cczicerning the proposed credit are being distributed to the Executive Directors separately. 29. I am satisfied that the proposed developmnent credit will comply with the Articles of Agreement of the Association. PART V - RECOT114ENDATION 30. I recommiend that the Executive Directors approve the proposed credit. Robert S. McMam.ara President Attachmontr, December 28, 1971  ANNEX I Page 1 IDIA SUMMARY STATEXNT OF LOA.NS AND CREDITS As of November 30, 1971 (US $ million) Loan or Undis- Credit No. Year Borrower Purpose Bank DA bursed Loans/Credits fully disbursed 876.4 1,040.6 307-IN 1961 IISCO Coal Mining 19.5 2.6 414-IN 1965 ICICI Industry DFC VI 50.0 4.8 89-IN 1966 India Beas Equipment 23.0 8.6 515-IN 1967 ICICI Industry DFC VII 25.0 6.7 61h-IN 1969 India Tarai Seeds 13.0 10.7 615-ID 1969 India TelecommunicationsIII 27.5 21.6 153-IN 1969 India TelecommunicationsIII 27.5 4.7 176-IN 1970 India Kadana Irrigation 35.0 31.5 182-IN 1970 India Sixth Industrial Imports 75.0 12.5 683-IN 1970 ICICI Industry DFC VIII 40.0 26.9 191-IN 1970 India Gujarat Agriculture 35.0 33.6 203-IN 1970 India Punjab Agriculture 27.5 27.5 226-IN 1971 India Andhra Pradesh Agriculture 24.4 24.4 230-IN 1971 India Agro-Aviation 6.0 6.0 241-IN 1971 India Telecommunications IV 78.0 78.0 242-IN 1971 India Power Transmission II 75.0 75.0 249-IN 1971 India Haryana Agriculture 25.0 25.0 250-IN 1971 India Tamil Nadu Agriculture 35.0 35.0 264-IN 1971 India Cochin II Fertilizer 20.0 20.0 * 267-IN 1971 India Wheat Storage 5.0 5.0 * 268-IN 1971 India Pochampad Irrigation 39.0 39.0 789-IN 1971 ICICI Industry DFC IX 60.0 60.0 Total (less cancellations) 1,111.4 1,571.0 559.1 of which has been repaid 497.8 .3 Total now outstanding 613.6 1,570.7 Amount sold 110.2 of which has been repaid 108.8 1. 4- Total now held by Bank and IDA 612.2 1,570.7 Total undisbursed 73.4 425.7 559.1 * Not effective as of November 30, 1971  ANINEX I Page 2 SUMMARY STATEMENT OF IFC OIERATIO0S IN INDIA As of November 30, 1971 Amount US $ Year Company Loan Equity Total 1959 Republic Forge Compary,LTD 1,500,0O0 - 1,500.000 1959 Kirloskar Oil Engines,LTD 850,000 - 850,000 1960 Assam Sillimanite, LTD 1,365,000 - 1,365,000 1961 K. S. B. Pumps, LTD 210,000 - 210,000 1963- 1966 Precision Bearings India,LTD 651,250 378,947 1,030,197 1964 Fort Gloster Industries,LTD 812,000 399,047 1,211,047 1964 Mabindra Ugine Steel Company,LTD2,310,000 986,607 3,296,607 1964 Lakshmi Machine Works,LTD 960,000 352..434 1,312,434 1967 Jayshree Chemicals,LTD 1,050,000 104,816 1,154,816 1967 Indian Explosives,LTD 8,600,000 2,862,437 11,462,437 1969- 1970 Zuari Agro Chemicals,LTD 15,150,000 3,760,502 18,910,502 Total 33,458,250 8,844,790 42,303,040 Less sold, repaid and cancelled 14,860,631 659,720 15,520,351 Now held 18,597,619 8,185,070 26,782,689  Annex II Page 1 INDIA BASIC DATA Total2 Percent Area: in km Cultivated 3,268,580 43.0 Densitf Population: Total per k (Preliminary 1971 Census estimate) 5L.7 million 167 Annual Rate of Growth, current estimate: 2.25 percent Political Status: Republic 1/ Gross National Product at Market Prices, 1971/72 : Rs. 3h46.7 billion Rate of growth 1955/56 - 1968/69: 3.h% p.a. at constant 1965/66: -5.2% prices 1966/67: 1.3% 1967/63: 8.99% 1968/691/ 2.2% 1969/70T/ 5-5.5% 1970/71-1/ I4.5-5% Per capita, 1970/71: US &584 Gross Domestic Product at Current Prices, 1