India - Third Indian Iron and Steel Company Project

Document of The World Bank FOR OFFICIAL USE ONLY FILE COPY Report No. 2100 PROJECT PERFORMANCE AUDIT REPORT INDIA - INDIAN IRON AND STEEL COMPANY, LTD. COAL-MINING PROJECT (LOAN 307-IN) June 20, 1978 Operations Evaluation Department This document has a restricted distribution and may be used by recipients only In the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. FOR OFFICIAL USE ONLY PROJECT PERFORMANCE AUDIT REPORT INDIA - INDIAN IRON AND STEEL COMPANY, LTD. COAL-MINING PROJECT (LOAN 307-IN) TABLE OE CONTENTS Page No. Preface Basic Data Sheet Highlights Summary i - iii PROJECT PERFORMANCE AUDIT REPORT I. Introduction 1 II. Background 1 - 2 III. The Project and Its Financing 3 Project Cost and Financing 3 - 5 Loan Appraisal and Loan Agreement 5 - 6 Developments Prior to Loan Effectiveness 6 - 7 IV. Changes in Design and Scope and Project Implementation 7 Project Design 7 - 8 Project Implementation 9 V. Project Cost and Financing - Actual 10 - 11 VI. Management of the Project 11 - 12 VII. Project Expectations and Their Realization 13 - 14 VIII. Role of the Bank 14 - 15 IX. Findings from the Project Experience 15 - 19 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Loan 307-IN - 2 - Page No. Annexes: I. Evolution of IISCO's Coal-mining Proposal Prior to Bank Loan 1 3 II. Outline of the Project 1 III. Project Cost - Appraisal Estimate 1 IV. Changes in Design and Scope of the Project 1 - 4 V. Project Implementation and Status 1 - 5 VI. Chronology of Events 1- 4 PROJECT PERFORMANCE AUDIT REPORT INDIA - INDIAN IRON AND STEEL 'COMPANY; LTD. COAL-MINING PROJECT (LOAN 307-IN) PREFACE This report represents an audit of the experience under the coal-mining Project of the Indian Iron and Steel Company, Ltd., for which Loan 307-IN of December 1961 in the amount of US$19.5 million was made. The loan was finally closed in February 1974. The audit has been based on a Completion Report prepared by the Industrial Projects Department, on material from loan and report files, as well as information and views collected during a brief mission to India. Discussions with Bank staff and former and present IISCO management contributed importantly to the report. The Government had no comments on the report, and the borrower did not send any comments. PROJECT PERFORMANCE AUDIT REPORT INDIA - INDIAN IRON AND STEEL COMPANY, LTD. COAL-MINING PROJECT (LOAN 307-IN) BASIC DATA SHEET As of 4/30/78 Original Disbursed Cancelled Repaid Outstanding Loan 307-IN- 19.5 18.57 .93 18.57 - Project Data Original Plan 'Actual Board Approval 12/21/61 Loan Agreement 12/21/61 Effectiveness 3/31/61 9/17/63 Loan Closing 4/31/67 2/01/74 Mission Data Month, No. of No. of Year Weeks Persons Manweeks Date of Report Appraisal I 2/61 5 weeks 4 12/14/61 Appraisal II 7/61 2 weeks 3 Appraisal III 8/61 2 weeks 3 Supervision I 5/62 3 2 6 Supervision II 11/62 3 2 6 Supervision III 2-7/63 several w/visitors Supervision IV 4/64 6 5 30 Supervision V 4/66 1 3 + cons. 6 Supervision VI 4/67 4 2 + cons. 12 Supervision VII 6/68 3 4 + short stop-over 12.5 Supervision VIII 11/68 1 2 2 Supervision IX 3/69 1 2 2 Supervision X 12/70 1 3 + cons. 4 Supervision XI 8/71 .8 consultant .8 Supervision XII 3/72 .6 1 + cons. 1.2 Supervision XIII 11/72 1 2 2 Supervision XIV 1/75 1 1 1 PCR mission Follow-on Project Loan 456-IN of US$30 million, signed July 1966 for Steel Plant Balancing Project; amount disbursed US$1.7 million; balance amount cancelled in October, 1970 Exchange Rates (Indian Rupee) Prior to June 6, 1966: US$1.oo = Rs. 4.7619 - Rs. 1.oo - US$0.21 From June 6, 1966 to mid-December 1971: US$l.oo - Rs. 7.50 - Rs. l.oo = US$0.133 From mid-December 1971 to end-June 1972 US$l.oo - Rs. 7.27927 - Rs. 1.oo = US$0.1374 After end--June 1972: - Floating Rate Current rate (December 15, 1977): US$1.oo - Rs. 8.56 - Rs. 1.oo - US$0.1168 PROJECT PERFORMANCE AUDIT REPORT INDIA - INDIAN IRON AND STEEL COMPANY, LTD. COAL-MINING PROJECT (LOAN 307-IN) HIGHLIGHTS The project, one of the Bank's early (1961) mining projects, had not been completed by the time the loan was fully repaid to the Bank. It was poorly prepared and its complexities and risks were seriously underestimated at appraisal. Other noteworthy points are: - Design changes in the project (paras. 2.05-2.06, 4.02- 4.04, 9.06, Annex I (paras. 6-11) and Annex IV); - delays in making the loan effective (paras. 3.12-3.14); - inadequacy of the financial plan (paras. 5.03-5.05); - ineffectiveness in following through consultants' recom- mendations (paras. 2.05-2.06, 5.06 and 6.03-6.05); and - uneven supervision over the project implementation period (paras. 6.04-6.05, 8.02 and 9.10). PROJECT PERFORMANCE AUDIT REPORT INDIA - INDIAN IRON AND STEEL COMPANY, LTD. COAL-MINING PROJECT (LOAN 307-IN) SUMMARY 1. Loan 307-IN to Indian Iron and Steel Co. Ltd. (IISCO), at the time one of the two private basic steel producers in India, for US$19.5 million was signed in December 1961 and closed on February 1, 1974. US$18.57 million was also repaid by that date; the remaining US$.93 million of the loan was cancelled. The loan was intended to finance the foreign exchange costs of coal mines at three coal fields belonging to IISCO, as well as the construction of a coal washery, a ropeway linking the coal mines to the IISCO steel plant, and sand-gathering and sand- stowing facilities for the mines. The objective of the project was to make IISCO self-sufficient in coking coal. 2. This loan was the Bank's third to the Indian Iron and Steel Co. In 1952, IISCO had borrowed US$31.5 million (Loan 71-IN) and in 1956, US$20 million (Loan 159-IN), from the Bank. These loans financed the foreign exchange cost of an increase in IISCO's capacity from 350,000 tons of finished steel to 800,000 tons per annum. Subsequently, in'1966 a fourth loan of US$30 million (Loan 456-IN) was made to finance a further expansion to one million tons of finished steel a year. This loan was cancelled in 1970 after small disbursements. The proposed expansion was never carried out. 3. The project was originally scheduled for completion in January 1967 but, because of delays in implementation, the loan's closing date was extended to June 1970 and then to June 1974. The loan was closed in February 1974, but the project was never completed as planned. The original cost of the project was estimated to be Rs. 191.5 million (US$40.2 million at the rate of exchange then prevailing). In June 1975, the estimate was raised to Rs. 420.9 million (US$59.1 million at the rate of exchange current then). The main component of the project, the deep coal mine at Chasnalla, had not been completed to its planned capacity at that time. 4. The coal mining project was first proposed informally during Bank supervision of IISCO's steel expansion loans in 1958. Both IISCO and the Bank had become concerned that IISCO's increasing difficulty in obtaining reliable deliveries of good quality coking coal would inhibit plans for further expansion of steel capacity. - ii - 5. Preliminary proposals were first submitted to the Bank by IISCO in 1959. On the basis of these proposals, a project appraisal was conducted in February 1961. The loan was made on the basis of a project proposal that was not fully worked out. In the course of implementation, the project was changed several times. 6. The loan became effective in September 1963, nearly two years after signing. The main reason for the delay was the company's reluctance to implement the project after several major assumptions of the financial plan were invalidated. Major design modifications made during the period brought into open the significant risk, complexity and cost of the under- taking. The company finally took the steps necessary to commence implemen- tation at the strong urging of the Bank. 7. The project went through substantial problems during the imple- mentation phase. Additional exploratory work had to be done after the Loan became effective, and-led to further changes in the design and scope of the project. Implementation, despite Bank suggestion, was not unified under one authority. Contractors charged with implementation lacked expertise and experience relevant to the task involved in the project. The pace of work picked up only after the mid-sixties, and the project was substantially completed by the end of 1973. 8. The project was quite sophisticated in its design for a sponsor with little experience in deep coal mining. and its execution encountered major technical and management problems from the start. The geology of the site made the operation very difficult. The technology required for the project was incompletely defined and to some extent experimental. Cost were significantly underestimated, and the project's financial plan over-estimated the funds available for its financing and under-estimated IISCO's other financial requirements. 9. The implementation of the project placed a severe financial strain on the company, which affected its operations. Its steel plant, much of it quite old, was not maintained to the required standards. The company's difficulties were compounded by severe labor troubles which plagued West Bengal in the late 1960s and early 1970s. Steel production fell and in 1972 was less than that in 1962. In July 1972, the Government of India, concerned with the failure of steel production to recover, took over the management of the company. The company's generally weak finan- cial condition was also a factor in the take-over. 10. The deterioration of IISCO's steel production, in part related to the financial strain of the project on the company, largely negated the benefits which had been obtained from two earlier Bank loans to increase IISCO's steel production. In July 1972, IISCO's steel output was, at an annual rate, only 77% of its output before the first Bank loan in 1953. 11. In December 1975, one and a half years after the Bank's loan had been repaid, the Chasnalla mine flooded, causing a loss of over 350 lives. Following the disaster, the deep mine was abandoned and work has continued only in the open-cast mine. - iii - 12. In the late 50s and early 60s there was no mining expertise available in the Bank and the Bank did not see the complexities and potential pitfalls that involvement in such a project meant. Bank super- vision efforts became more intense after 1965 as delays and problems in implementation became pronounced. As the Bank gained insight into the problems of implementation, partly with the help of consultants, it was able to bring about changes in the organization and pace of implementation of the project. PROJECT PERFORMANCE AUDIT REPORT INDIA - INDIAN IRON AND STEEL COMPANY, LTD. COAL-MINING PROJECT (LOAN 307-IN) I. INTRODUCTION 1.01 Loan 307-IN, approved on December 21, 1961 for an amount of US$19.5 million to Indian Iron and Steel Col. Ltd. (IISCO), the smaller of the then two private steel producers in India, was essentially a suc- cessor and complementary loan to two earlier loans (Loan 71-IN for US$31.5 million in December 1952 and Loan 159-IN for US$20 million in December 1956) by the Bank to the same borrower to expand its steel capacity, in two stages, to 800,000 tons/year finished steel. It was intended to enable IISCO to meet its coking coal requirements for its expanded steel capacity (brought about with the earlier two Bank loans), and was, in a sense, a precursor to a fourth loan (Loan 456-IN for US$30 million approved in July 1966), intended to expand the steel capacity further to 1 million tons/year finished steel, but which, after a dis- bursement of only US$1.7 million, was cancelled in October 1970. II. BACKGROUND 2.01 IISCO, the second largest private steel producer in India, with partial financing from the Bank loans in the fifties, expanded its capacity from 350,000 tons/year finished steel to 800,000 tons/year finished steel. This increased its coking coal requirements which, with the proposed expansion of the steel plant to 1 million tons/year finished steel, was expected to amount to about 1.7 million tons ilean coal per annum. 2.02 IISCO had three collieries, Jitpur, Ramnagore and Chasnalla, of which the first two were being operated in the fifties. These supplied a part of the coal requirements of IISCO. IISCO obtained the balance of its requirements, increased largely by the expansion of its steel capacity, from Government and private collieries. 2.03 At the same time as IISCO was expanding its capacity, the Govern- ment of India was setting up, in the public sector, three steel plants, each with a one million tons/year finished steel capacity. The completion of these steel plants, almost simultaneously around 1960/1961, increased - 2 - substantially the demand for coking coal. The Government reserved the output from its collieries for the public sector steel plants, thus requir- ing IISCO to make alternative arrangements for its needs of coking coal. 2.04 Foreseeing the situation, IISCO had already commenced, in the late fifties, planning for alternative sources of coking coal supplies. The major element in its strategy was to restart mining at Chasnalla which had been closed down in 1947. It appointed Powell-Duffryn, a British mining consulting firm, to report on the feasibility of taking up mining operations again at Chasnalla and design a project for the purpose. 2.05 Powell-Duffryn recommended the development of a deep mine at Chasnalla, using horizon mining techniques, and, in the interim, open-cast mining for the initial period. Not satisfied with its report, IISCO resorted to International Construction Company Ltd. (ICC) of the U.K. for help to develop all the three collieries - Jitpur, Ramnagore and.Chasnalla. ICC had advised IISCO on steel plant engineering and construction for several years, but had no experience of coal mining development. It turned to a retired Inspector of Mines in India (RCIM) to develop new proposals for expanding Jitpur and Ramnagore collieries and developing Chasnalla. 2.06 ICC's first proposal, made in 1959, involved a relatively simple design for mines to produce one million tons of coal per annum. Later ICC developed a more elaborate proposal, involving the development of four small underground mines and one open-cast mine at Chasnalla, deepening of the shafts at Jitpur and expansion of the mine at Ramnagore. The project was expected to produce, at completion, 2.25 million tons of coal per annum, and involved setting up ancillary ropeway and bunkering facilities. The cost of mining development was estimated at Rs. 66.6 million (US$14 million at the rate of exchange then prevailing), and of the ancillary facilities Rs. 35.8 million (US$7.5 million), making a total cost of Rs. 102.4 million (US$32.5 million). Additional costs were to be incurred for land rights, dwellings and financial charges. A brief description of the evolution of IISCO's mining development program, relevant to the sub- sequent development of the project, is given as Annex I. 2.07 The Bank, in the course of its supervision of the earlier two loans, was aware of IISCO's colliery development proposals, and had tacitly encouraged it In its planning efforts. It was already familiar with the- broad outline of the program when the company approached it for a loan to finance the colliery development project, based on ICC's proposals. - 3 - III. THE PROJECT AND ITS FINANCING 3.01 The project, as initially presented to the Bank, was designed to produce about 1.7 million tons of clean coal (2.2 million tons of raw coal) annually (i) by developing the coal properties in Chasnalla and modernizing and improving Jitpur and Ramnagore collieries. The project also included (ii) a coal washery at Chasnalla, (iii) installation of facilities for gathering sand and its transportation by ropeway to the mines for stowing, (iv) two ropeways, one connecting Jitpur and Chasnalla mines, and another connecting Chasnalla and the steel works at Burnpur, and (v) coal handling and storage facilities at Burnpur. The whole project revolved around the development of Chasnalla mines, which, when fully operational, was expected to produce almost three-fourths of the projected additional output of coal. 3.02 The ICC proposals formed the basis for the Bank's analysis of the project. The Bank sent a mission to India in February 1961 to appraise the project. For its technical analysis of the project, the mission depended upon representatives of Pierce Associates, an American mining engineering consulting firm which specialized in open-cast mining development but had no prior experience in South Asia. On Pierce's recommendations, the number of deep mines at Chasnalla was reduced from four to two; and the open-cast mine development was expanded and mechanized. Projected outputs from the individual mines were increased, raising the total output from the three fields marginally from 2.25 million tons to 2.40 million tons per annum. Annex II describes the final outline of the project as approved by the Bank. Project Cost and Financing 3.03 Pierce increased the capital cost of the project to allow an additional Rs. 13.7 million for mining costs, primarily for the expanded open-cast mine.. Start-up expenditure was added and the total contingency allowance was increased. After extended discussion in which IISCO insisted that Pierce had overestimated several costs, the total costs upon which all parties finally agreed were set at Rs. 174.8 million, of which Rs. 76.2 million represented foreign exchange. The company also requested capitalization of interest during construction. 3.04 The appraisal contained a total cost estimate of the coal mining project, including the ancillary installations, escalation and contingencies, at Rs. 174.8 million (or Rs. 175.3 million, including land); with interest during construction calculated at Rs. 16.7 million, the total financing needed for the project was set at Rs. 191.5 million, as detailed in Annex III. 3.05 In addition, IISCO also needed funds for its replacement needs, increase in working capital and amortization of long-term loans. Includ- ing these requirements, the total financing needs of IISCO were estimated at Rs. 668.4 million (US$140.3 million), as shown-below: -4- IISCO's Financing Requirements - Appraisal Report Rs $ Million Million 'Equivalent Investments in fixed assets - Coal mining project /a 175.3 36.8 - Other/b 109.9 23.1 Investment (spun pipe company) 20.0 4.2 Interest and commitment charge 72.4 15.2 Increase in working capital 48.7 10.2 Increase in stores and spare parts 6.3 1.3 Amortization of long-term loans/c 235.8 49.5 668.4 140.3 a/ Includes land at Rs. 0.5 million. b/ Includes replacements and renewals, remainder of 1955 extensions, and proposed construction of steel rolling facilities (Rs. 15 million). c/ Includes repayment of Rs. 1.7 million of overdrafts. "Other" costs, relating mainly to replacement needs, were estimated on the basis of the company's past practices. 3.06 Discussions between IISCO and the Bank on how these requirements were to be financed were protracted and, for the Bank, unrewarding in terms of its influence on the final financial plan. IISCO's proposals involved a predominant reliance on retained earnings to finance its requirements of funds. There was control on the price of steel and IISCO was allowed a retention price (higher than that for the other steel producer) based on its cost; in making its proposals, IISCO had taken into account a rise in the retention price of steel. The Government had, on the other hand, expressed its reluctance to raise steel retention price in 1960-61, and, in relation to IISCO, informed the Bank accordingly. The Bank's suggestion that IISCO should raise additional equity to meet its financing needs was not acceptable to IISCO, mainly on the grounds that the cost of equity was high and that the colliery project was being undertaken by it only to meet its coal deficit caused by the diversion of coking coal from the Government collieries to the public sector steel plants; IISCO's opposition to raising - 5 - equity was also based on the unstated logic that it would dilute the managing agents' control over the Company, and, perhaps it wanted the proposal for additional equity as a reserve to meet the company's financ- ing needs when the steel expansion program (to 1 million tons finished steel) was taken up. 3.07 The financing plan, arising out of these discussions and agreed upon between IISCO and the Bank, is given below: IISCO's Financing Plan - Appraisal Report Rs $ Million Million Equivalent Internally generated cash a/ 518.6 108.9 Sale of investments 36.1 7.6 IBRD Loan 159-IN 11.9 2.5 Proposed IBRD Loan b/ 92.9 19.5 New share issue c/ 35.0 7.4 694.5 145.9 a/ Net income after taxes plus interest and depreciation less dividends of Rs. 138.4 million (US$29.1 million equivalent) estimated to be paid on the preferred and common stock during the construction period. b/ Including an amount of Rs. 16.7 million (US$3.5 million equivalent) for interest and other charges during construction. c/ Intended for the spun pipe project. The main feature of the financing plan was that it was based predominantly on internal generation. of cash - and, therefore, dependent upon efficient operation of the plant and increase in retention prices. Loan Appraisal and Loan Agreement 3.08 No technical issues were raised during negotiations; Pierce Associates had, however, suggested that the Bank "should maintain a close check on IISCO's consultants (ICC) to see that proper mining plans are made and followed". Based on the Bank's satisfactory experience with IISCO of the first two loans and the company's standing as a highly -6- efficient and profitable steel producer, the appraisal itself had disposed of the management issue in these words: "The company and managing agents have a long-standing tradition of financial integrity and sound business practices". Apart from providing assured supplies, it was expected that the coal mining project would improve IISCO's profitability by reducing coal processing and acquisition costs, thus leading, as a by-product, to an improvement in the company's liquidity position which had deteriorated sharply during the 1955-60 period. 3.09 According to the Appraisal Report, the full development of the coal properties and the auxiliary installations should have been completed by 1969. The details of the completion dates estimated in the Appraisal Report are as follows: Production Targets Completion (Tons per Day) Date Mines: Chasnalla: Opencast 2,200 1964 No. 2 West underground mine 1,500 1967 No. 4 East underground mine 2,000 1969 Jitpur 1,500 1967 Ramnagore 1,000 1964 Other Facilities Ropeways 1966 Coal-washing plant 1966 Sand-gathering plant 1966 Coal handling and storage facilities at Burnpur 1966 3.10 The Loan Agreement contained clauses.placing a limit of US$10 million on new ventures outside those contained in the financial plan, and referring to the right of the company to invoke a 1953 agreement with the Government to obtain working capital assistance when needed. There was no "good management" clause included in the agreement. The Loan Agreement was signed on December 31, 1961. Developments Prior to Loan Effectiveness 3.11 For the loan to be effective, the Loan Agreement specified three conditions which had to be fulfilled within 90 days of the signing of the agreement: - 7 - - Acquisition of land rights required for the open-cast mine, sand gathering and refuse disposal. - Acquisition of sand gathering rights from the Coal Controller. - Long-term contracts to be obtained for power supply. 3.12 Various forces intervened to delay the loan being made effective. In particular, by early 1962, it appeared that substantial and unexpected delays would be encountered in the acquisition of land for the open-cast mine. 3.13 In the meantime, other changes took place, which affected the project design, the project cost and the financial plan: (i) Increases in import duties in the 1962 budget and receipt of actual bids indicated that the project cost would be higher than estimated in the appraisal.. (ii) In May 1962, ICC produced a new mining plan which proposed an indefinite post- ponement of the open-cast mine and, to compensate for the loss of output, increase in the depth of the mine at Chasnalla, and some minor changes in the other components of the project. (iii) In 1962 a Rs. 45 per ton provisional element in the retention price for steel was withdrawn by the Government, producing a substantial gap in the financing available for the project. 3.14 In the light of these developments, IISCO refused to take action necessary to make the loan effective, insisting that it could not afford the project unless the Bank could help it obtain an increase in steel retention prices. The Bank was convinced that a coking coal shortage was imminent and that the company's survival depended upon the project. With this in mind, the President of the Bank wrote to the IISCO Chairman in 1963 to take up the project, saying: "it is clear to me that in the best interest of the future operation of the existing plant, to say nothing of the broad interests of India, you should accept whatever risks may be in- volved in assuring adequate and good coal for the plant and hope for the best with regard to other matters affecting the steel industry in India". Under this advice from the Bank, IISCO finally agreed to take the required action, and the loan became effective in September 1963. IV. CHANGES IN DESIGN AND SCOPE AND PROJECT IMPLEMENTATION Project Design 4.01 As mentioned earlier, Chasnalla was the centerpiece of the coal mining development program; it was also the most difficult element in the project design. By the time the project was approved by the Bank, only a broad strategy for developing the mines had been established. This left the details of the development program still to be worked out, leaving scope for tremendoos flexibility in project design. - 8 - 4.02 Changes in the design of the Chasnalla mining project commenced soon after the Bank approved the loan and even before the loan became effective. At the instance of IISCO, development of the East underground mine, accounting for 2,000 TPD coal, was postponed as the output was required after the steel expansion program was completed. In 1962, ICC proposed postponing the open-cast mining program, compensating for the loss of output by increasing the depth of shafts for the deep mines. In mid-1963, ICC suggested a further change in design, replacing the two double-shaft mines by a single central mine, changing thereby the location of the mine shafts. These changes were approved by the Bank in December 1963, three months after the loan became effective. 4.03 On a detailed working out of these changes, IISCO decided in 1965 to sink only one downcast shaft for the deep mine, increasing its depth, so as to raise the output from 3,500 TPD coal to 4,800 TPD from the deep mine. In the course of implementation, the immensity of the physical and geological problems became apparent. By 1966 and 1967 the question arose whether development of Chasnalla should not be given up. However, given the fact that the washery, the ropeway and the coal-handling facil- ities had been designed around Chasnalla coal, it was found that it would not be feasible to abandon Chasnalla. The Bank appointed Wardell and Partners of the U.K. as consultants to review the feasibility study prepared by ICC and the mining plans of IISCO. Drilling of additional boreholes indicated that the available reserves were lower than originally assumed. As a consequence, the final design adopted involved resorting to open-cast mining and a reduction in total output to be obtained from Chasnalla from 4,800 TPD coal (revised) to 3,800 TPD. 4.04 Jitpur and Ramnagore proposals also underwent changes, though the mines presented no major problem in mining concept and development. In view of its extractable reserves proving to be higher than originally estimated and to utilize equipment fully at Jitpur and partly to compensate for the lower output at Chasnalla, the output target at Jitpur was raised from 1,500 TPD coal to 3,000 TPD. At Ramnagore, on the other hand, with the sealing off of one seam, the target output was fixed at 500 TPD coal against the original 1,000 TPD. A note on design changes at the three mines is given as Annex IV. 4.05 With regard to other facilities included in the project, there were no major scope changes. A summary of major changes in the production targets is given below: Raw Coal Output Targets Original Appraisal Report Revised in 1968 (TPD) (million TPY) (TPD) (million TPY) Chasnalla 4,700 1.41 3,800 1.14 Jitpur 1,500 0.45 3,000 0.90 Rannagore 1,000 0.30 500 0.15 Total 7,200 2.16 7,300 2.19 -9- Project Implementation 4.06 Project implementation was influenced considerably by the design uncertainties at Chasnalla and the financial difficulties of IISCO. The stage of implementation on the various components of the project is described below. 4.07 Chasnalla Mines: Shaft-sinking at Chasnalla encountered serious technical problems due to underground water and hard strata. Shaft-sinking was ended in mid-1970 at horizon II, and the company proceeded with under- ground development. Surface installations were completed by 1969-70. The west mines started production in 1972. Since there were delays in the development works, IISCO started development of open-cast mining at Chasnalla (which idea had been earlier given up); the open-cast quarry started production in 1973. In December 1975, there was a major mishap at the Chasnalla mines, leading to a loss of more than 350 lives. As a con- sequence, the deep-mining project was abandoned, and production was continued only at the open-cast mines, 4.08 Jitpur and Ramnagore Mines: Jitpur and Ramnagore were operating mines, and presented few problems in the modernization and expansion work undertaken under the development program. Attention was concentrated on the Chasnalla mine to the neglect of Jitpur. Jitpur, however, was an easier mine to develop and is responsible for a substantial part of the additional output achieved. At Jitpur, the project development work to extract coal at the rate of 3,000 TPD was completed by 1970. Output at Jitpur was increasing steadily until an explosion in 1972, due to poor ventilation, caused a loss of 48 lives. This caused a cutabck in production; in 1974-75, the mine was producing at the rate of 1,500 TPD coal, and by mid-1976 it was expected to reach full capacity production. Output from the Ramnagore mine is expected to stabilize at the rate of 500 TPD coal, as against 1,000 TPD originally planned. 4.09 Other Installations: The coal washery at Chasnalla was completed in 1968 with a delay of 2 years from the appraisal schedule. While the washery has a capacity to handle 6,800 TPD raw coal, it was operating in 1974-75 at two-thirds of capacity owing to non-availability of coal. The feeder ropeway connecting the Jitpur mine and the Chasnalla washery and the main ropoway between Chasnalla and the steel works at Burnpur were completed and commenced operation in 1969. In the mid-seventies, the main ropeway was having technical problems due to defective clamping devices, and its operation was affected by power shortages. The improvement of Ramnagore sand gathering system was completed in 1964 and that at Jitpur in 1970; the implementation of the Chasnalla sand gathering plant, delayed purposely to keep in line with progress on the mine development program, was completed in 1971. Coal handling and transport facilities at Burnpur were completed in 1969. 4.10 Summing up, a major portion (about 75%) of the work on the project was completed by September'1975, the major exception being the Chasnalla underground mine development. As a result of the flooding of the Chasnalla mine on December 27, 1975, this part of the project was abandoned. Annex V describes in detail the implementation of the project and its status in 1975. - 10 - V. PROJECT COST AND FINANCING - ACTUAL 5.01 The project cost, set at Rs. 191.5 million at the time of appraisal, needed to be revised as the project got delayed and changed in design and scope. The first revision in cost, made soon after the loan became effective at the end of 1963 and after a Bank mission in early 1964, placed the cost at Rs. 237.5 million. In 1965-66, at the time of the fourth Bank loan to IISCO, the total cost of the collieries project was estimated to exceed Rs. 300 million by 1972 when it was expected to be completed. Substantial changes in this estimate were needed sub- sequently, to take account of the devaluation of the rupee in 1966 and more exact definition of the Chasnalla mining design. The final revision in cost, made in 1970, found the cost, at Rs. 413.3 million, more than doubled, in relation to the appraisal estimate. Most of the expenditure, amounting to Rs. 388.5 million, had been incurred on the project by the end of 1974. Annex VI details the three cost estimates and actual expen- diture incurred on the project. 5.02 Any meaningful comparison of original cost estimates and actual expenditure is rather difficult. The main difficulties are: (i) major scope changes were made in the original project; (ii) the project was not completed at the end of 1974, and some development costs were being charged to operations; (iii) devaluations and revaluations of various currencies occurred during the past fourteen years, including the devaluation of the rupee from US$1 - Rs. 4.76 to US$1 = 7.5 in June 1966; (iv) certain items originally earmarked for international competitive bidding were transferred to local procurement without competition; and (v) accounting procedures followed by IISCO did not always isolate project expenditure. Nevertheless, it is apparent from the above figures that there were tremendous cost over- runs due to various factors, particularly due to considerable delays in the project, difficulties encountered in the development of the mines and scope changes. 5.03 Under the original plan, the cost of the coal-mining project constituted only one-third of the total financial requirements of IISCO during the period of implementation of the coal-mining project. A major source of finance for meeting these needs was to be retained profits, based on (assumed) adjustment of retention prices for IISCO's output and efficient and normal capacity working of the steel plant. 5,04 The Government withdrew in 1962 the provisional element of Rs. 45 per ton allowed in the steel retention price. In February 1964, however, it increased the retention price by Rs. 90 per ton. However, this still left a large deficit in the financial plan, made good only partly by the Bank allowing IISCO a higher borrowing limit (in effect, a lower current ratio) on its working capital account. Forecasts made at the time of the fourth Bank loan to IISCO in 1966 assumed that if the company sustained production at 90% of capacity and if plant maintenance expenditure remained at the same level as in earlier years, the company would have adequate resources from operations and short-term funds to finance the coal mining project at the cost (about Rs. 300 million) then estimated. - 11 - 5.05 The company's financial performance matched forecasts in 1965-66 and 1966-67, but there was a short-fall of Rs. 34 million from operations in 1967-68. In 1968 IISCO requested a Bank financial mission to help it develop its arguments for an increase in retention prices. The mission found that the increase in average retention price at 16% had not kept pace with the rise in production costs at 42% during the period 1964-68. Moreover, the company's operations had declined, being only 77% of capacity in 1967-68. Projections, prepared at the time, indicated a tight financial position for the company developing as early as 1968-69. 5.06 Significantly, in the course of its work, the team found serious deficiencies in the management of IISCO. The team recommended that the Bank, after consultation with the Government of India (which, through the financial institutions, was the largest shareholder in IISCO, holding 26.3% of the equity), take immediate action to improve IISCO's management. The company rejected most of the Bank's proposals to improve management practices, including the hiring of internal consultants or management advisors. 5.07 IISCO's operations declined further in subsequent years due to labor unrest, inadequate plant maintenance and financial stringency. In 1972, the Government took over the management of the company. Subsequently funds were provided for the rehabilitation of the company's plant and comple- tion of its development schemes. 5.08 By 1974-end, most of the expenditure on the coal mining project had been incurred and, therefore, financed. The coal mining project was only one element in the total financing plan envisaged at the time of the appraisal, and it is difficult to disentangle the sources of financing it from other capital expenditure and payments made by the company during the fifteen years over which the project was implemented. VI. MANAGEMENT OF THE PROJECT 6.01 ICC had done preliminary work on the project, and was in charge of implementing it. The retired Chief Inspector of Mines who had assisted ICC at the planning stage, though a mining engineer, had for many years worked in the Mines Inspectorate in India and had virtually no experience in mine planning, particularly in horizon mining which was to be adopted at Chasnalla. The Dutch engineer whom ICC had engaged in the initial phase died while the Chasnalla mine was still in its early planning stages, and was not replaced by a mining engineer of comparable knowledge and experience. The project was looked after by the Project Manager for ICC, who had considerable experience in colliery surface equipment and planning but who was not a mining engineer. IISCO's chief mining engineer looked after it on behalf of IISCO; he was an experienced coal mining engineer in India, but had little experience in planning a coal mining operation of the magnitude and complexity envisaged under the project, and was wholly with- out experience in horizon mining and the coal face operations systems proposed to be used at Chasnalla. The line of communication was from project management at site to ICC in London to IISCO management in Calcutta; IISCO engineers on site had no management authority. - 12 - 6.02 The appraisal report on the loan had referred to the need to "retain the services of qualified coal mining consultants during the construction period and starting up of mining operations", and the loan agreement had envisaged the replacement of the ICC representative by an experienced mining engineer. All that ICC did was to send the members of its project team to pay a brief visit to mining operations in the Saar coalfields in Germany to familiarize them with horizon mining operations. In effect, therefore, after the demise of the Dutch engineer who was never replaced by a person with comparable knowledge and experience, the continuing conceptualization and the detailed planning and progressing of the project was in the hands of people relatively inexperienced in the mine planning functions and in the detailed system planning at Chasnalla. 6.03 A Bank mission in late 1963 had suggested the replacement of the ICC representative at site by an experienced mining engineer, but, after improvement in ICC's performance, the suggestion was dropped in February 1964. In 1966, another Bank mission, alarmed by the increasing delays in the project, strongly criticized ICC's performance in project management. 6.04 The most intensive period of Bank supervision was the period 1965 to 1968. It was during these years that the Bank identified the problems in implementing the project as designed and the weakness in the implementation organization. From 1967 through 1972, the Bank carried out further missions, partly to assist in some of the decisions on project changes and partly to update progress. One of the Bank recommendations was that IISCO should set up a formal mine planning organization, as also establish formal physical planning and progress systems with appropriate reporting and critical path scheduling. IISCO followed up on some of these recommendations, appointing a Chief Planning Engineer. It also appointed during 1969-72 an engineer from Saarberwerke of the Federal Republic of Germany to assist the management of the project; however, his experience was in mining production and not development, and mainly at the middle management level; he, therefore, had little impact on project management. In 1970, at the Bank's suggestion, the General Manager of IISCO was given supervisory responsibilities over the collieries. 6.05 The Government takeover of IISCO management in 1972 did not involve major organizational changes within IISCO. ICC's contract was terminated in December 1973. A study, completed for IISCO by the head of the public coking coal authority in August 1975, stressed the continued need for a strong organization. He was appointed on the Board of IISCO, and IISCO achieved some success in recruiting additional qualified staff for its mining operations. - 13 - VII. PROJECT EXPECTATIONS AND THEIR REALIZATION 7.01 The project was undertaken to raise the coal mining capacity of IISCO by modernizing and expanding two working mines and establishing a new mine in areas belonging to the company, and to set up ancilnry facili- ties needed to handle and improve the output. The main expectation from the project was that it would provide to IISCO assured coal supply for its then existing (800,000 tons finished steel per annum) capacity and for the proposed expansion later to 1 million tons finished steel per annum. It was also expected that the coal so obtained would be better (lower ash content), and lower in cost, than that purchased by IISCO. These benefits were not quantified and a rate of return on the project was not calculated. 7.02 Overall output of all the IISCO collieries in 1974/1975 was about 45% of the target output. A comparison of original targets, revised targets and 1974/1975 output is given below. Comparison of Target and Output (TPD of Raw coal) % of Output Revised 1974/751/ to Revised Original Targets Targets Output- Target (Appraisal Report) (1968) Chasnalla 4,700 3,800 1,300 35% Jitpur 1,500 3,000 1,500 50% Ramnagore 1,000 500 500 100% 7,200 7,300 3,300 45% 1/ Based on January 1975 production figures. 7.03 Chasnalla was originally expected to produce, on completion, 4,700 TPD coal; the target was revised downwards in 1968 to 3,800 TPD; its actual production in early 1975 was 1,280 TPD (820 TPD from open-cast mines and 460 TPD from underground mines). With the mishap in the deep mine, no output is expected from that source; with the life of the open- cast mine placed at a maximum of 10 years (para. 32, Appraisal Report), it is not a long-term source of coal. Jitpur was producing at the rate of 1,500 TPD coal in early 1975 (against an original target of 1,500 TPD and 1968 revised target of 3,000 TDP). Ramnagore never produced, and is not expected to produce, more than 500 TPD (against the original target of 1,000 TPD and 1968 revised target of 500 TPD). Thus, against an additional output of 6,230 TPD coal and revised estimate of 6,330 TPD, actual addi- tional output was 2,330 TPD, and likely long-term output (eliminating Chasnalla open-cast output and assuming Jitpur to reach 3,000 TPD) 2,430 TPD or about 40% of the original and revised target. - 14 - 7.04 In terms of time, the delay on Chasnalla, in relation to original schedule, was 8 to 10 years, on Jitpur 10 years and on Ramnagore 3 years (both for the revised targets). Of the ancillary facilities, the handling and storage facilities were completed more or less on schedule. The coal washery was delayed 2 years, the ropeways 3 years and the sand gathering plants 2 to 5 years; these delays followed delays in the colliery projects, and in no way hindered the operation of, or output from, the collieries. 7.05 For the source-mix of coal obtained from the three collieries, it was estimated in early 1975 that the IISCO steel plant's cost of coal would be about 20% lower than that of purchased coal. The ash content of IISCO's coal was about 10% lower than that of purchased coal, leading to a saving in coal consumption. These advantages would apply to the output of coal raised under the project. 7.06 It was expected at the time of appraisal of this project that, upon completion of the 1953 and 1955 expansions, IISCO's steel plant would have a capacity of 1 million TPY of raw steel (800,000 TPY finished product). However, IISCO never reached this production capacity and, due to the run- down condition of the plant caused by lack of proper maintenance and disturbed industrial relations, the capacity utilization of the steel plant was decreasing--from about 65% capacity utilization in 1970 to about 45% in 1974. The coking rate was about 2,400 lbs. per ton of pig iron, as compared to the expected 2,000 lbs. (Appraisal Report). At that level of production of the steel plant, the coal output from IISCO mines would account for about 60% of the coking coal requirements of the Company. 7.07 The lower output of coal from the project and the delay in obtain- ing it did not in any way lead to a shortage of coal for IISCO's steel plant operations. The expansion program (to 1 million tons of finished steel per annum) was formally given up in 1969. Production before and after was much lower than the rated capacity (800,000 tons of finished steel per annum), being 709,000 tons in 1966-67, 568,000 tons in 1969-70, 500,000 tons in 1971-72 and declining to a low of 347,000 tons in 1972-73; in the subsequent two years (after Government take-over), it rose to 415,000 tons. The fall in output to 1972-73 was mainly due to poor plant maintenance and management, and not the shortage of coal. The steel plant's coal requirements in 1973-74 were about half of those in 1961-62 when the Bank loan was approved, and the project was not needed to satisfy them. VIII. ROLE OF THE BANK 8.01 The Bank played an elaborate, but an ineffective, role in the development, appraisal and supervision of the project. IISCO's efforts to increase its coal output had the active support and encouragement of the Bank which had become aware of these efforts in the course of supervision of its earlier two steel expansion loans. The Bank relied heavily on the colliery project as presented to it and on IISCO management's capacity to implement it, in giving its approval to the loan for the project. - 15 - 8.02 The Bank's supervision efforts, after loan approval, took diverse forms: (i) The Bank sought to advise IISCO on the various changes in the design and scope of the project, sometimes on the basis of reports from specialized consultants. (ii) The Bank helped IISCO in defining its financial needs and in making representations to the Government for allow- ing it higher retention prices. (iii) The numerous supervision missions identified the weaknesses of project and IISCO management, and sought to bring about changes in management practices to expedite the implementation of the project. 8.03 Summing up, starting at a low level, Bank's supervision efforts developed momentum, particularly after 1966, so as to become deeply involved in the implementation of the project and concerned about the manggement of the company. These intense efforts had little impact on the pace of implementation of the project, on correcting its weaknesses, or on the quality of management of IISCO. IX. FINDINGS FROM THE PROJECT EXPERIENCE 9.01 IISCO's coal mining project was one of the early mining projects undertaken by the Bank. The loan was closed in February 1974 when almost the whole amount under the loan had been repaid. A chronological sequence of events concerning the project is given as Annex VI. It helps bring out various features, detailed below, relating to the preparation, implementa- tion and performance of the project. 9.02 IISCO had been introduced to the Bank in the early fifties by the First Boston Corporation and the Bank had provided to IISCO in the fifties two loans to expand its production capacity from 350,000 tons finished steel per annum to 800,000 tons. The expansion program had been completed efficiently and IISCO's production in 1960-61 had already reached 722,000 tons (90% capacity). 9.03 The Bank's experience with the implementation of the steel expan- sion program by IISCO seemed to indicate that IISCO had a highly efficient management capable of executing and managing large projects. The experience also indicated that the company's operations were highly sensitive to the availability of coal for purchase. In the Indian environment of that time, this was of particular importance since, with the completion of the public sector steel projects and diversion of coking coal supplies from public sector collieries to them, the availability of coal to IISCO from accustomed sources could not be assured. 9.04 Possibly influenced by this experience, the appraisal of IISCO's coal mining project was in retrospect not as rigorous as it should have been and both technical and financial aspects became major issues during project implementation. Given the urgency of producing coal, the Bank accepted, as the basis for its appraisal and approval of the loan, proposals - 16 - for a coal development program which were sketchy, needed further work to be moulded into a project, and were-prepared by consultants lacking relevant expertise and experience. The work on the initial set of boreholes required was not completed when the loan was approved, and later additional borings had to.be undertaken. Secondly, the Bank accepted a financial plan which, apart from the Bank loan, envisaged raising minimal funds on a long- term basis and relied almost exclusively on retained profits to provide the company's financial requirements. Apart from the fact that this implied continuous efficient operation of the plant (which, in fact, did happen at least until 1966-67 by which time, incidentally, a major part of the project was expected to be completed), it was also implicitly based on the assump- tion that steel prices, being the subject of Government control in India, would be adjusted to keep pace with changing costs and the financial needs of the company. The Bank did not have, at the time of appraisal, a detailed, fully worked-out coal mining project and an adequate assurance of adjustment in steel prices to base its loan decision on. But, concerned about the urgency of raising coal output and relying upon the integrity and competence of the management, the Bank proceeded to approve the loan. 9.05 During the period between the approval of the loan and its being made effective, difficulties inherent in the project began to unfold and evidence of some new problems developed. Changes in the design and scope of the project (mainly and throughout relating to the Chasnalla mine component of the project) were being introduced in the project soon after loan approval so as to cast doubt on the original work, on the basis of which the loan had been approved. Secondly, a Government decision on the retention price allowed to IISCO, brought about a deficiency in the resources available to finance the company's requirements, and showed up the vulnera- bility of the project to external factors governing its funding. For the first time, and as it turned out later not the last time in the life of the project, the Bank was asked to*help IISCO in its.representations to the Government on the steel retention price to safeguard the financing of the project. 9.06 . To the weaknesses inherent in the project at the appraisal stage, developments during the interval between loan approval and loan effective- ness added two other problems: the design changes, being made in the project, were not an evolution of the initial design on the basis of which the project was approved or determined by development of new project data, but were dictated by IISCO's financial stringency - the need to keep the project cost low and to avoid resort to long-term sources for financing the project. IISCO had insisted upon revisions in both the Powell-Duffryn proposals before loan appraisal and in the ICC proposals after loan approval, mainly on the ground of their cost and not their technical adequacy. The project design was thus being affected by the financial strategy of IISCO's management. Further, during the protracted delay in making the loan effective, indications were available that the Bank had a more intense commitment to the project than had IISCO's management. While the Bank considered the coal mining project to be central to the future operation and expansion of the company, IISCO's management considered coal mining - 17 - peripheral to its main steel operations, foisted on it by the diversion of its normal coal supplies to the new public sector plants. It therefore appeared reluctant to put its full financial and managerial strength into implementing the coal mining program. 9.07 The real problems facing the project and the inadequacies inherent in the project planning and preparation phase began to emerge during the early part of the project implementation phase. A thorough assessment of the physical and geological data - and the constraints it might impose upon implementation and production programming - was never made. This was needed to arrive at an optimal development program which should have governed mine development and production planning. Neither IISCO nor ICC staff came to grips with the real nature and complexity of the problems involved in developing the project. Work program schedules were optimistic and there was apparent reluctance to base forward programming on actual experience and realistic assumptions regarding geological factors. 9.08 This early phase of implementation thus brought into open two more weaknesses in the project. ICC and IISCO lacked the kind of expertise and experience needed to deal with the specific geological structure at Chasnalla to prepare a plan for its exploitation and to implement such a plan. It is understood that this kind of terrain and techniques needed to develop mining in such conditions are to be found in Europe, and reliance on a consultant with experience in such conditions would have led to better planning and efficient implementation of the project. Unfortunately, after the death of the Dutch engineer initially employed by ICC, the project, except sporadically and often under considerable Bank pressure, never had the requisite technical expertise to help in its planning and implementation. Further, although both the appraisal report and the loan agreement had referred to the need to have adequate and unified project management, in fact, the project never had such management until the late sixties. Plann- ing and decision-making were divided between project site managers, ICC and IISCO, and the final decisions were apparently governed more by the finan- cial constraints of IISCO than by the needs of efficient technical planning and implementation of the project. 9.09 Retrospectively, the use of ICC in the essential planning of the mines, in contrast to surface installations, did not work out to be satis- factory. ICC relied upon, rather than supplemented, the available IISCO experience in mining engineering. By the time additional and more experienced mine planning staff became available, many irreversible deci- sions had already been taken, affecting adversely the mine development program. On the other hand, it is interesting to observe that, where the experience available was relevant, planning and programming tasks were carried out competently. Thus, the ropeways, sand-gathering installations, shaft-winding installations at the mine, washery plant, surface conveyor system and general surface facilities at Chasnalla were on the whole well executed. 9.10 These shortcomings in the project, evolving over a period of time, might possibly have been identified early and corrected. It appears that in the case of IISCO, the Bank system for appraisal and supervision did not - 18 - function as effectively as it usually does. Changes in the project were made without detailed examination. Two main factors can be adduced towards an explanation of this situation. Given the Bank's lack of expertise in the assessment of mining projects and its knowledge of the earlier differ- ences between the proposals of Powell-Duffryn and ICC on the technical composition of the mining development program at Chasnalla, the Bank might well have resorted to a more thorough technical assessment of the program through its consultants than it actually did. In its satisfaction with the performance of IISCO on the steel expansion program, the Bank did not assess clearly the capacity, managerial and financial, of IISCO to undertake and implement a mining development program of the complexity involved in Chasnalla under conditions of financial pressure. 9.11 It was not the experience of the mining project implementation, poor as it was, but the Bank's appraisal of IISCO's steel expansion program (to 1 million tons finished steel) for its fourth loan to IISCO, which brought out the deficiencies of IISCO. In 1964, for the first time after the early fifties when the Bank had appraised IISCO for its first two loans, the Bank, with the assistance of management experts, A. T. Kearny and Co. of Chicago, undertook a comprehensive assessment of IISCO's management capa- bilities. The consultants found that IISCO's middle management needed to be strengthened; its operations control, maintenance and cost control systems required improvement; and production control needed greater flexibility. They also recommended among other things, the establishment of a project engineering group at IISCO. It thus became evident that IISCO's management was overly centralized and decision-making on important questions was being done in an unorganized manner, influencing adversely, among other things, the pace of the mining development program. 9.12 In July 1966, the Bank approved the fourth loan to IISCO (Loan 456-IN) for US$30 million for its expansion program. IISCO's produc- tion, after having reached a peak of 810,000 tons of saleable steel in 1963-64, had been declining steadily, reaching 709,000 tons in 1966-67. It had also begun to become apparent that plant maintenance at IISCO was inadequate, maintenance expenditure being estimated at about 30% of require- ments. Then, as a result of industrial recession in India, IISCO's produc- tion declined sharply to 613,000 tons in 1967-68. After a small disburse- ment, the Bank suspended disbursement under the fourth loan in 1969 and cancelled the undisbursed amount in 1970. In 1972, the Government of India took over the management of the company. 9.13 The coal mining project made progress on its various components as the project design got defined and project management got built up and unified. Much of this was due to the fact that the Bank's assessment of IISCO, after the fourth loan, had become more realistic and its supervision missions more frequent and more analytically critical in their assessment of progress. 9.14 This project is an old one. Practice has changed and the require- ments for appraisal are now more exact. This particular experience is unlikely to be repeated. Still, while preparation may be less casual today, - 19 - the outcome of many of the newer types of projects is more difficult to measure; in this case, the objective was clear and easily quantifiable. As the measure of outcome was clear, so is the verdict on the failure of the project. It.was a technically complex project intended to fulfill a very specific need. A concern with the need, a captive supply of coking coal, and the strong desire by the Bank to act to assist the borrower, an old client, appeared to have led to an under-estimation of the complexity of the problems involved and the risks inherent in the course taken. Operations Evaluation Department June 20, 1978 PROJECT PERFORMANCE AUDIT REPORT INDIA - IISCO COAL-MINING PROJECT (LOAN 307-IN) ANNEX I: EVOLUTION OF IISCO'S COAL-MINING PROPOSAL PRIOR TO BANK LOAN 1. IISCO's coal properties consisted of the Chasnalla and Jitpur fields in the Jharia range of Bihar State and of Ramnagore field near the steel plant in Burnpur. The Chasnalla field had been purchased in 1938. Although Chasnalla was acknowledged to possess very rich coking coal reserves even at that time, it was considered a very difficult mine development problem. The coal deposits are contained in steeply dipping seams, very thick and partly burned, with igneous intrusions; moreover, the area is adjacent to and beneath the Damodar River. The area had always been plagued by flood problems. 2. The company had had a small quarry and a deep mine to 450 feet at the Chasnalla site, but these mines had been abandoned in 1947 when continued flooding and water seepage made further mining uneconomical. The Jitpur and Ramnagore fields were both being mined by the company in the late fifties. Jitpur produced good quality coking coal; Ramnagore produced blendable coal. Increased production in these fields merely required deepening and expansion of the existing works, and presented no major geological problems. 3. Most of the coal reserves in the Chasnalla field are found fairly deeply underground. Open-cast or quarry mining of this field could produce sufficient coal to meet IISCO's specified coal requirements of 2,000 tons per day for only, perhaps, four to five years, which was the approximate period required for construction of a deep mine. Deep mines would eventually have to be developed to sustain a high level of production from this field for a long period. The development of a deep mine in the Chasnalla terrain would have been an extremely difficult problem for the most experienced mine developers. 4. The available seams at Ramnagore had been exploited by room and pillar mining and a low reserve, low output operation had been set up based on mining out the remnant pillars and replacing them by sand filling. Jitpur was in a similar state except that two previously unexploited seams had been proved to exist below those already substantially mined out. ANNEX I Page 2 At Chasnalla, work in several seams had proceeded downwards from their outcrop and the major seam (seam 12/13) had encountered difficulties both with water and spontaneous combustion. The total output of coal from all the IISCO mines was insufficient to meet its own immediate and future coking coal needs, and low quality coal was being bought from other collieries at a relatively high cost. A basic objective of IISCO was, therefore, to produce coking coal in sufficient quantity, using coal from coal properties already in its ownership to satisfy its needs. Essentially, TISCO's plans were to produce 1.7 million tons of clean, cokeable coal per year. 5. A variety of projects for achieving this primary objective were considered. At Chasnalla, in order to explore and prove the reserves to a greater depth, to decide upon appropriate means of access to them and on the system of mining and methods of extraction to be used, exploratory drilling was started in 1959 and the last of 25 boreholes was completed in March 1963. During this exploratory period, various proposals for mining the coal seams at Chasnalla were made--including extensive open-pit mining. Neither Ramnagore nor Jitpur presented any particular major con- ceptual difficulty as to how their remaining reserves should, in principle, be developed. Chasnalla was the most difficult because of the steepness (gradients of 300-400 from the horizontal) of the seams, the great thick- ness of seams 12/13/14 which constituted the greater part of the potential reserve and the presence of old, waterlogged workings to the rise of the unworked coal area. Powell-Duffryn Proposal 6. In 1958, IISCO requested a British mining consulting firm, Powell-Duffryn, to develop proposals for the immediate expansion of its abandoned coal works at Chasnalla so as to produce 2,000 tons of coking coal per day. Powell-Duffryn recommended open-cast mining for an initial two and a half year period to meet immediate coal requirements while a deep mine with greater long-term production capacity was developed at the site, using horizon mining techniques. Their report discussed in detail the alternative approaches for the open-cast development and the economics of open-cast mining, but provided only very brief discussions of deep-mine development. Powell-Duffryn's report was apparently produced in great haste and with old geological data, but it stressed the seriousness of several problems which were likely to be encountered in further develop- ment of the Chasnalla field, such as water seepage and flooding, the high costs and great difficulty in shaft-sinking for a deep mine in this terrain, given the formidable geological problems, the poor data on reserves, the inadequate and unreliable power supply and potential land acquisition delays. 7. The company criticized several aspects of the Powell-Duffryn report and rejected the proposals. It then, through its consulting engineers, International Construction Company, Ltd., London, turned to ANNEX I Page 3 the retired Chief Inspector of Mines in India (RCIM) to develop a new proposal for development of all three coal fields--Chasnalla, Jitpur and Ramnagore. ICC had advised IISCO on steel plant engineering and construction for several years, but it had never before participated in a coal-mining development project. ICC's Proposals 8. In the early stages, ICC employed a Dutch mining engineer well versed in the planning and operation of horizon mines to assist them. ICC carried out a detailed feasibility study of the project and a large- scale horizon was planned for the Chasnalla property with three shafts sunk to open up three horizons and simultaneously to mine the coal seams between them. ICC's first proposal, in 1959, suggested a relatively simple design for mines which would produce one million tons of coal per annum. It also recommended construction of a ropeway from the Chasnalla mines to the steel works at Burnpur to avoid unreliable rail delivery. This proposal was sent to the Bank by IISCO, through ICC, with an urgent request for assistance. 9. By December, a more elaborate proposal, developed by the RCIM, was submitted to the Bank through IISCO's consulting engineers. This new proposal was intended to make IISCO nearly self-sufficient in coking coal within six to seven years, through more intensive development of the three fields. 10. The December proposal recommended the development of four fairly small underground mines and one open-cast mine at Chasnalla, plus deepening of the Jitpur shafts and expansion of part of the Ramnagore mine. Included in the design were a ropeway from Jitpur to Chasnalla to Burnpur, and a coal bunkering system. Also included were facilities for gathering sand for sand-stowing of the mine works to prevent subsidence after coal extrac- tion. Raw coal output, by the expected project completion date of 1965, was forecast at 2.25 million tons, the amount required for self-sufficiency at a rated steel production capacity of one million tons of finished steel, intended to be achieved under IISCO's proposed Balancing Plan by the mid- sixties. Mine development costs were estimated at Rs 66.6 million (US$14 million), and the ropeway and bunkering system costs were estimated at Rs 35.8 million, adding up to a total cost of Rs 102.4 million (US$21.5 million). Land rights, dwellings, taxes, levies and financing charges were additional. 11. The proposal did not contain any detailed geological data, mining strategy, plans or schedules for inter-related tasks, discussion of management or organization, equipment specifications, estimates of start-up costs for production, engineering costs, escalation or contingency allowances. PROJECT PERFORMANCE AUDIT REPORT INDIA - IISCO COAL-MINING PROJECT (LOAN 307-IN) ANNEX II: OUTLINE OF THE PROJECT 1. The development of the Chasnalla property included sinking two double shafts for underground mining and opening up one open-cast mine. The two deep mines were expected to produce 1,500 and 2,000 tons of coal per day (TPD). An increase in,production of coal from the Jitpur colliery from 700 TPD to 1,500 TPD was expected by deepening the present shafts to the 1,500 ft level in order to reach a new coal seam below the one then exploited. The plan was also to increase production of coal of the Ramnagore mine from 270 TPD to 1,000 TPD by sinking a new shaft to a depth of 870 ft. 2. In order to replace coal removed from the deep mines by sand- filling (stowing), new sand-gathering and transportation facilities at Chasnalla, consisting of two sand-gathering plants on pontoons on the Damodar River, separators on the river banks with three compartments and two belt conveyors with a combined capacity of 450 tons per hour, were envisaged. At Jitpur the improvement of the existing sand-gathering station and the realignment of the existing ropeway were considered sufficient for the daily production of 1,500 tons of raw coal. The improvements of the existing sand-gathering station on the Barakar River by the installation of pumps to augment the capacity of the scrapers then in use and by modifying the existing ropeway system were considered adequate for the Ramnagore mines. Two ropeway systems were planned: (i) a 200-ton per hour feeder ropeway (6 miles long) from Jitpur to Chasnalla, and (ii) a 400-ton per hour main ropeway (32 miles long) from Chasnalla to Burnpur. A coal-washing and preparation plant without any specified capacity was also included in the plan, intended apparently to wash a part of the coal produced. However, tests of coal in September 1961 demonstrated that the whole production of Chasnalla and Jitpur would have to be washed to achieve an ash content of 16%. Therefore, a 6,500- ton per day heavy media coal preparation plant was added to the design. The coal from Ramnagore, which was handpicked, was considered to be of good quality and not need washing. PROJECT PERFORMANCE AUDIT REPORT INDIA - IISCO COAL-MINING PROJECT (LOAN 307-IN) ANNEX III: PROJECT COST - APPRAISAL ESTIMATE (In Rs Million) Chasnalla mines 43.5 Jitpur mine 11.7 Ramnagore mine 0.7 Total mining 55.9 Sand gathering station and sand ropeways 7.5 Coal washing.plant 13.3 Main and feeder ropeways 42.3 Surface buildings 5.5 Ancillary services 2.5 Engineering services 14.1 Starting expenditures 6.6 147.7 Escalation 6.7 Contingencies 20.4 174.8 Interest during construction 16.7 191.5 PROJECT PERFORMANCE AUDIT REPORT INDIA - IISCO COAL-MINING PROJECT (LOAN 307-IN) ANNEX IV: CHANGES IN DESIGN AND SCOPE OF THE PROJECT 1. Chasnalla Mine: The design proposed for developing Chasnalla had to be modified soon after Bank approval. IISCO insisted that one deep mine, yielding 0.6 million tons per year, be eliminated or its development post- poned until after the proposed steel expansion had been completed. This view ignored the development time of two to four years required to make a new mine productive. The Bank and ICC acquiesced, and the second deep mine development was postponed for four years. The Government protested this reduction in the size of the collieries plan, serving notice on the company that it was expected to become self-sufficient.in coking coal as soon as possible. 2. In May 1962, the company's consultants, ICC, produced a new mining plan, with the advice of a Bank representative. This new plan proposed to postpone indefinitely the open-cast mine and to increase production from the deep mines, to compensate for the loss of the open-cast, by increasing the depths of the mine shafts from 1,200 to 1,700 feet and increasing the expected output per day. To accomplish these goals and to obtain this production at an earlier date than had been specified in the 1961 mine design, shaft- sinking rates were also increased. This May 1962 plan revived the idea of two deep mines to be developed at the same time. 3. In consultation with Bank staff, two additional modifications were made in the project design in 1962-63. A single bi-cable ropeway (from Chasnalla to Burnpur) with lower guaranteed capacity, 400 tons per hour, was substituted for the original plan of two monocable ropeways with a total capacity of 500 tons per hour. 4. In July 1963, ICC suggested changing the mine design from two double-shaft mines to one central mine connecting two shafts by a 1.7 mile underground railway--a very sophisticated engineering proposal. This proposal shifted the location of the mine shafts so that shaft-sinking would actually have to be attempted in an area in which no boreholes had been drilled and there was therefore no specific geological data--a very risky undertaking. Contract variations for these three design changes-the deep mining plan, the new ropeway design and the new mine shaft design-- were all approved by the Bank in December 1963. ANNEX IV Page 2 5. Based on the recommendations made by ICC, the company decided in 1965 to sink only one downcast shaft at the east mine and to raise coal from these mines through the west mine by hauling coal underground. The company also decided to increase the depth of all shafts and to inter- sect the available coal seams by a series of almost level tunnels driven from the shafts in the rock strata at three levels or horizons situated 100, 600, 1,100 feet below datum (500 feet vertical interval between each of the three horizons); this also included an increase in production capacity of underground mines from the originally planned 3,500 TPD to 4,800 TPD to compensate for the production decrease due to the elimination of the open-pit mine from the project. The recommendations were sub- sequently approved by the Bank. In 1967, at the request of the Chief Inspector of Mines, the interval between the horizons was decreased to 400 feet without giving any consideration to possible technical disadvan- tages and making necessary evaluations in cost terms. The proposed method of operation was a direct adaptation of the "horizon" system of mining which, although widely used in Western European countries, had not previously been used in India. 6. At this stage, it became quite clear to the Bank that the purely physical and geological problems were immensely complex and even some of the conceptual planning was inadequate, and that neither IISCO nor its consultants were capable of preparing a realistic mine plan. In 1967, the Bank appointed a consultant, K. Wardell and Partners of the U.K., to review the feasibility study prepared by ICC and the mining plans of IISCO based on this study. The project was reviewed in detail by the Bank in 1968, and it became clear that the anticipated output from Chasnalla (i) was not likely ever to be achieved, and (ii) was going to be even more significantly retarded because of the shaft-sinking problems and the insistence upon the full development of three horizons. 7. The study of the geological structure of the mine revealed that the Chasnalla area is widely affected by igneous intrusions. Certain seams, which were considered as probable reserves, appeared to be almost completely burnt. Although 25 boreholes had been drilled to a total length of 18,000 feet, a number of important questions remained unresolved. In order to elucidate the geological structure to provide additional infor- mation for detailed underground mine planning and also to facilitate the upgrading of some of the discounted nominal reserves, the Bank recommended drilling of additional boreholes. This was subsequently carried out by IISCO. The Bank calculations showed that the reserves in seams 12, 13/14 and 17 special could be regarded as proved and extractable and that the nominal reserves in the other seams were speculative and should be discounted by 50%. A comparison of original estimate of coal reserves (para. 36, Appraisal Report) and the revised estimate based on the above assumptions is given below. ANNEX IV Page 3 Original Estimate Revised Estimate (Appraisal Report) (in 1968) Proved Reserves (million tons) 12.0 20.8 Probable Reserves (million tons) 38.0 1.2 Possible Reserves (million tons) - 16.0 Total Reserves (million tons) 50.0 30.01/ 1/ "Possible" reserves are taken on a 50% basis. This assessment was generous because, generally, the feasibility of a mining project is assessed on proved and probable reserves only. 8. The reassessment of coal reserves necessitated certain major modi- fications. The coal reserves, or coal density, at 30 million tons was too low to justify, in principle, the relatively high capital development costs of horizon mining. Moreover, the unit costs of the operating factors, which are affected by changes in the horizon interval, should have been largely balanced against the unit costs of capital investment required: that is to say, at a lower level of reserves than expected, the optimum distance between horizons should be greater. This would mean that the optimum distance between horizons should have been about 800 feet for raw coal production of 5,000 tons per day. However, the horizon system of mining had already been adopted for Chasnalla, and both planning and execution were too far advanced to make any changes worthwhile. Considering the technical aspects and difficulties encountered in the mines, the Bank sug- gested reducing the output target of the mine from 4,800 TPD to 3,800 TPD of raw coal; this recommendation was accepted by IISCO. The Bank also suggested limiting shaft-sinking to the second horizon and developing the first and second horizons. Although this suggestion was not accepted by the company for some time, eventually, due to the deterioration of the shaft- sinking problems, this suggestion was adopted. The new target output of 3,800 TPD was predicated on four faces working slice and stall method and five faces working lift method. The earliest likely date of raising coal was expected to be 1972 and, for reaching the target output, 1977. 9. Jitpur mine: The Jitpur Collieries did not pose any major prob- lems with respect to mining concept and development. A study of the reserves proved that the extractable reserves were about 21 million tons of raw coal as compared to the original estimate of 14 million tons. More- over, at the originally proposed rate of production of 1,500 TPD, there appeared to be some under-utilization of most of the capital equipment since shafts, conveyor belts, ventilation fans and surface coal handling equipment were capable of dealing with a much higher rate of production. In view of the above factors, and also to compensate for the reduction of target output from Chasnalla mines, IISCO, at the suggestion of the Bank, decided to increase the target output of this mine from 1,500 TPD, as originally proposed, to 3,000 TPD. However, one major difficulty involved ANNEX IV in increasing the output from Jitpur was the provision of stowing materials. The available sand, including sand from the Jitpur sand-gathering plant, was adequate only for a daily production of 2,000 tons. Additional supplies of stowing sand from Chasnalla, carried via Jitpur/Chasnalla ropeway, was considered a possibility. The mining method to be used was a mechanical longwall retreating system on a non-cyclic progression. As a result of these modifications and taking into account shaft-sinking difficulties, the earliest probable date for beginning longwall production was predicted to be 1972. 10. Ramnagore mine: The development of this mine did not pose any major problems. However, since one coal seam started burning and had to be sealed in 1968, the production of coal from this mine did not exceed 500 TPD. IISCO subsequently reduced the target output of this mine from the original 1,000 TPD to 500 TPD. PROJECT PERFORMANCE AUDIT REPORT INDIA - IISCO COAL-MINING PROJECT (LOAN 307-IN) ANNEX V: PROJECT IMPLEMENTATION AND STATUS 1. The physical execution of the project and associated problems as well as the status of the project are discussed below. 2. Chasnalla mine: After some initial delays, the company appointed Cementation Company to carry out the shaft-sinking work. Shaft- sinking encountered serious technical problems and was delayed considerably. Major technical difficulties were underground water problems and problems due to hard strata. There were no boreholes in some of the shaft regions and the decision to sink without such information was unfortunate. The consequently long drawn-out task of shaft-sinking ended in mid-1970, when the company decided to stop sinking to horizon III and to proceed with preparation for underground development. Main surface installations for the mine shafts were completed in 1969/1970 and underground development in horizons I and II of No. 2 Upcast and Downcast shafts started in 1969. The development of this mine was carried out in two phases. Phase I was geared to achieving a production level of 1,000 TPD; all the initial development work to attain 1,000 TPD production from the underground mine was completed and coal from this mine first raised in early 1972. The rest of the development and construction work, Phase II, to achieve a target output of 3,800 TPD, was to be carried out simultaneously with the building-up of production and, therefore, all the development and construc- tion costs were being charged to operating costs. According to the company's plans, the targeted production of 3,800 TPD was expected to be achieved by mid-1977. A summary of the extent of construction and develop- ment completed to mid-1975 is given below. Horizon I Horizon II 1. Pump House Completed Completed 2. Loco Garage & Substation Completed 25% completed 3. Shaft/pit bottom layout Completed Completed 4. Main laterals/crosscuts 80% completed 40% completed 5. Tippler House Not required 30% completed 3. The main causes for the delays in the development and building-up of production from the underground mine are as follows: ANNEX V Page 2 (i) In the thin seam, 12 seam, where the lift face was opened, there were too many intrusions and very high roof falls. The seam was found to be intercepted by faults of 2 to 5 feet throw at frequent intervals, thereby delaying long- wall face advance considerably at such places, due to additional work required to tackle these faults. (ii) In thick seam areas, the longwall across the seam method of mining was adopted. Here again, the face was found to be intruded by igneous intrusions of varying thickness. These intrusions slowed down the advance of the longwall face. In addition to this, the bad roof conditions near the parting plane of 12 seam and 13/14 combined seams retarded work. At the parting planes, huge roof falls took place up to a height of 10 to 13 feet and these further aggravated the progress of the faces. 4. After nearly 18 months of serious efforts by IISCO to establish a longwall across the seam system of mining, the company was forced to dis- continue this system due to frequent occurrence of geologically disturbed areas. An alternative method of extraction, the pillar and stall system, was introduced in 1974/75. Taking into account the present technical difficulties encountered by IISCO and its weak technical capabilities to overcome some of these problems, the target output of 3,800 TPD from these mines seemed optimistic and, in the opinion of a 1975 Bank mission, it was unlikely that the production from this mine would ever exceed 2,500 TPD. 5. Since there were delays in the development works, IISCO started development of open-cast mining; the open-cast mine (quarry) started production in 1973. At a rate of production of 500 TPD, the estimated life of this quarry was about 4 years. 6. IISCO began mining from Chasnalla about 1,300 TPD, about 500 TPD from underground mines and about 800 TPD from the quarry. The details of actual production build-up during 1973-75 are summarized below. Quarry West Mines Total TPD '000 TPY TPD '000 TPY TPD '000 TPY 1972 - - 130 39.2 130 39.2 1973 300 91.0 200 59.2 500 150.2 1974 520 159.1 350 104.3 880 263.4 19751/ 820 - 460 - 1280 - 1/ Based on January 1975 production. ANNEX V Page 3 7. Jitpur mine: All essential project development work at this colliery to extract 3,000 TPD of raw coal was completed by the end of 1970. The output of this mine was increasing satisfactorily until a major mine explosion and fire, which was caused by the stoppage of the main mine ventilation. As a result of this major accident, 48 workers were killed and four mining engineers were forced to leave the company. Due to the accident, there was a huge roof stone fall, covering the full length of the gathering in the bunker dip (1st west dip). The cleaning up of the fall, the recovery of machinery and re-establishment of road- ways to advance the dip for opening out additional coal-producing areas were completed by 1974/75. 8. The shearer at L.2 longwall face was designed to create a height of 7 feet but, due to bad roof conditions in this mine, the height was being extended by another 2 to 3 feet over nearly half the length of the face. This additional heightening caused delays in all the face operations because of the extending of supports. Therefore, this dip/rise face was abandoned and, in its place, level faces were opened. The necessary development work in this connection was completed and production from these faces is expected towards end-1975. 9. For the reasons discussed above, the achievement of target out- put of 3,000 TPD was delayed. The end-1974 level of production from all the three seams, 16A, 16 and 14 seams, was about 1,500 TPD. The target output of 3,000 TPD was expected to be achieved by mid-1976. As discussed earlier (Annex IV, para. 9), full production from this colliery was planned with sand-stowing. At the request of IISCO, the Directorate- General of Mines Safety allowed the company to extract certain areas by caving. About 30% of the planned production from this colliery would be caving, thereby reducing dependence on sand. 'Therefore, the availability of sand for stowing should not pose any problems. 10. Ramnagore mine: Output from this mine never exceeded 500 TPD in recent years. The output from this mine dropped recently because of serious pumping difficulties encountered at the quarry. With minor invest- ments, this problem could be solved in a short period of time and 500 TPD coal output could be expected from this mine. 11. Chasnalla Coal Washery: The construction of this plant was com- pleted in 1968 with a delay of two years. One reason for the delay was the insistence of the Government of India that more than the originally proposed machinery and equipment be procured from local sources. Although the Washery was ready in 1968, it started operating only in 1969 due to delays in the installation of the main ropeway. The capacity for this Washery had been set to handle 6,800 TPD of raw coal. In 1974/75, it was handling about 4,500 TPD of raw coal. The Washery itself was operating well, but there were a few constraints in achieving the rated capacity, namely, (i) non-availability of raw coal, and (ii) inadequate bunker capacity for both raw and clean coal. ANNEX V 12. The Washery produces clean coal with an ash content of 19.5 to 20%, which is one of the reasons for the high coking rate in the steel plant. With this performance, the yield of clean coal is 83 to 85%, middlings 7 to 8%, and rejects 8 to 9%. In 1974-75, about 40% of the raw coal handled by the Washery was being bought from Bharat Coking Coal Limited (BCCL)--a Government concern responsible for coking coal supply--and the ash content of clean coal can only be reduced at the expense of the yield of clean coal. However, with some additional facilities to wash 1/4" size raw coal, the performance of the Washery could be improved while reducing the ash content. The Washery was not designed to wash 1/4" size raw coal which, therefore, after screening, was being directly fed to the clean coal bunker. About 35% of the feed was 1/4" and this contained an ash percentage up to 22%. By washing these fines, the yield of clean coal would improve 5 to 6%. 13. Ropeways: The ropeway installations comprised two main parts; (i) the feeder ropeway connecting Jitpur Mine and Chasnalla Washery and (ii) main ropeway between Chasnalla and the IISCO steel works at Burnpur, The construction of both ropeways started in 1964. However, the implemen- tation of the ropeways was delayed by land acquisition problems, by diffi- culties experienced with local farmers and by obstruction from villagers. In addition, there were some temporary interruptions in the construction work caused by pilferage and damage of equipment. The main ropeway started operations in 1969 and the feeder ropeway started shortly thereafter. 14. The feeder ropeway was operating fairly satisfactorily. This rope- way transported raw coal from Jitpur to Chasnalla Washery and sand and washery rejects from Chasnalla to Jitpur for stowing purposes. The opera- tion of this ropeway is affected by power cuts and it has not been operating at capacity (200 tons per hour) because of lower than expected coal raising from Jitpur mines. 15. Although the main ropeway started operating in 1969, its operations were frequently interrupted due to various technical difficulties. Power cuts during 1972 to 1974 also affected the operation of this ropeway. Because of defective clamping devices, which had originally been fitted with the buckets, bunching of buckets occurred frequently and, consequently, large-scale damage was done to the ropeway buckets, trestles and tension driving stations. Originally, it was planned that for capacity production (400T/hr), the ropeway would need about 2,500 buckets, including about 300 spare buckets, with a capacity of 1.6 T/bucket. Prior to 1974, only 1,200 buckets were in operation since most of the others were damaged. IISCO spent a considerable amount of money to rehabilitate the ropeway and to repair the damaged buckets. In 1974-75, about 1,600 buckets were in operation and the ropeway was transporting up to 290 T/hr of clean coal. IISCO was taking steps to increase further the number of buckets from 1,600 to about 2,300 to achieve the full capacity of 400 T/hr. 16. The company was in touch with the manufacturer of the ropeway, Pohlig-Heckel-Bleichert (PHB) of Germany, for the defect with the clamping device of the buckets. Although PHB designed a new spindle for the clamping device, the problem of bucket slippage was to be sorted out because even with the new spindle, the grip still slipped occasionally. To overcome the present technical problems of this ropeway, additional expenditures were necessary. ANNEX V Page 3' 17. The project did not include any workshop facilities at the starting point (Chasnalla) of the ropeway for constant servicing and repairing of the rolling stock. The lack of a well-equipped workshop was felt from the very beginning of operations. Therefore, IISCO started to construct a workshop at the starting point at Chasnalla (Station A) for constant service and repairs required for this ropeway. 18. Sand-gathering Plant: The construction of the Chasnalla sand- gathering plant was purposely delayed since the development of the mine was behind schedule. The sand-gathering plant, including the two sand- gathering pontoons on the river Damodar, was completed in 1971 and is operating satisfactorily. The improvements of Ramnagore and Jitpur sand-gathering systems were completed in 1964 and in 1970, respectively, and both are operating without any problems. 19. Coal-handling and Transport Facilities at Burnpur: The coal- handling plant at Burnpur is capable of receiving coal from the ropeways as well as from railroad wagons. The installation of equipment and other facilities, consisting of storage facilities for 75,000 tons of coal, manually operated scrapers with a capacity of 400 T/hr, two combined stacking and bucket wheel reclaiming machines, were completed in 1969 and are presently operating without major problems. 20. Although a major portion of the project, with the exception of the Chasnalla underground mine development, had been completed by 1975, further capital expenditure was needed for smooth operations and additional safety in the mines. For example, there were no power generating sets to act as standbys at any of the mines. Power interruptions due to serious shortage of hydro/thermal power in that region, particularly during 1972-74, affected the progress of work and production. Moreover, in times of a sudden power cut, it is extremely important that workers, for their safety, are trans- ported out from the underground mines; this would require other sources of power supply. The company was considering having standby power generating sets at least for this purpose. After the accident at Jitpur mines, the. Directorate of Mines Safety directed that all gassy mines must have at least a standky main mechanical ventilation unit; all three IISCO mines--Chasnalla, Jitpur and Ramnagore--would require standby ventilation units. PROJECT PERFORMANCE AUDIT REPORT INDIA - IISCO COAL-MINING PROJECT (LOAN 307-IN) ANNEX VI: CHRONOLOGY OF EVENTS I. BACKGROUND EVENTS AND PROJECT PREPARATION 1938 IISCO purchases Chasnalla property 1947 Small open cast mine and small underground,mine (450 ft deep) at Chasnalla abandoned because of continued flooding and water seepage 1952 First Bank loan to IISCO ) to increase steel making capacity ) from 350,000 to 800,000 tons of. 1956 Second Bank loan to IISCO ) finished steel per annum 1958 IISCO requests Powell-Duffryn to prepare proposals to develop Chasnalla to produce 2,000 T/day Proposals: open cast production for 2-1/2 years Simultaneous development of deep mine Particular mining problems of site noted IISCO rejects proposals. 1959 Proposals developed by retired Chief Inspector of Mines working with International Construction Co. (ICC), IISCO's consulting engineers. 4 small underground mines ) Chasnalla 1 open cast mine ) Expansion .at Jitpur and Ramnagore mines Coal bunkering system Sand gathering and storing facilities Total output expected - 2.25 million tons/year Cost Rs 102.4 million (US$21.5 million) These provided basis for appraisal. NOTE: IISCO and Bank were becoming concerned with ensuring IISCO's future supply of coking coal. Large public sector mills were being built. Government was suggesting private companies should develop own sources of coking coal. ANNEX VI Page 2 II. APPRAISAL 1961 Bank Appraisal with Pierce Associates, U.S. mining consultants. Reduce from 4 to 2 the deep mines at Chasnalla Expand and mechanize the open-cast mine ) Increase output 2.25 - 2.4 million tons/year Add coal washing plant Two ropeways - feeder and main one Modifications at Appraisal One deep mine postponed 4 years at insistence of Chairman IISCO, Financial Planning Bank recommended IISCO raise additional equity Company argued for raising funds from expected price increase plus overdrafts Bank accepted company position. Loan signed December 31, 1961. III. FROM SIGNING TO EFFECTIVENESS Dec. 31, 1961 - Loan signed. It became effective September 17, 1963. Conditions of effectiveness: (a) Acquisition of land rights required for open-cast mine, sand-gathering, and refuse disposal; (b) Acquisition of sand-gathering rights from the Coal Controller; and (c) Long-term contracts for power supply. 1961-63 Delays in acquisition of land for open-cast mine (Chasnalla). Actual bids for equipment higher than estimated Increase in import duties by 45% Modification of Mining Plans 1962 ICC proposed to postpone open-cast mine and increase production from deep mine. (Equipment costs indicated much higher than expected mining costs from open-cast mine.) Involved two deep mines. ANNEX VI 1962/63 Changes in ropeway design. Change in proposed mine design to one central mine connecting two shafts. Shift in mine location. 1963(Dec) Bank approved contract variation to accommodate new design. Financial Problems 1962 Provisional element in retention price for steel withdrawn (Rs 45/ton) producing gap in financial plan. IISCO Chairman refused to take actions necessary to make loan effective, insisting that IISCO could not afford the project unless Bank could help him obtain an increase in steel retention prices. Price, in fact, raised by Rs 90/ton in 1964. Bank also raised short-term debt limit by Rs 50 million to Rs 200 million. 1963 Cost now estimated 24% above original estimates due to design changes and price increases. After steel price increase and cost increase, defidit of Rs 86 million still remained. IISCO concerned. Bank's President perturbed with Chairman's reluctance to proceed and urged him to do so. Concerned with coking coal shortage. Sept. 1963 - Loan became effective. IV. IMPLEMENTATION 1963 Bank requested ICC representative to be replaced by an experienced mining engineer. 1964 Request dropped - Mission noting improvement. Bank included a group of management consultants (A. T. Kearny & Co. of Chicago) in appraisal mission for IISCO's fourth loan (Loan 456-IN subsequently cancelled). Identified need to strengthen middle management and improve systems for operations, maintenance and central control. ANNEX VI Page 4 1965 Bank and IFC's top management met IISCO's Chairman to discuss identified needs. Concern with over-centralized control voiced. 1967-69 Missions requested major management changes primarily to develop a strong project engineering group headed by an experienced mine manager. 1970 General Manager of IISCO given supervising responsibilities for the collieries. 1969-72 Engineer hired from Germany to assist in project management at Bank's suggestion. 1967 on Frequent Bank requests to improve documentation of project work and plans. 1967 on Falling steel sales, rising production costs, deteriorating production capacity, labor troubles, profits fall - overdrafts increased, postponed or cancelled maintenance expenditures for lack of funds. 1968 Mission reviewed company's financial and administrative operations, identified problems - no inventory control, no cash management system, no planning process, no budget process, etc. Recommended Bank take action to improve IISCO management after consultation with GOI, largest stockholder. Company rejected most of Bank proposals to improve management practices, including hiring of internal consultants or management advisers. 1968 Sept IISCO requested five-year postponement of payments due on govern- ment loan and on Bank Loans 307-IN and 456-IN. Government proposed to convert to equity and take control. Company rejected. Bank suspended Loan 456-IN (to finance balancing plan) -- it was cancelled in 1970. Bank agreed to extend closing date of Loan 307-IN to 1974. 1972 Government of India took over management of company. Steel production 216,000 tons finished steel/year or 83% of production of 1953. Plant in poor condition. (By 1970, the company estimated it would need Rs 223 million to rehabilitate.)