India - Air India Jet Project

-R E S T R I C T E D FILE C PY -R e p o r t N o. P-127 This report was prepared for use within the Bank. In making it available to others, the Bank assumes no responsibility to them for the accuracy or completeness of the information. contained herein. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS of the PRESIDENT to the EXECUTIVE DIRECTORS on the PROPOSED LOAN to AIR-INDIA INTERNATIONAL CORPORATION February 20, 1957  INTERNATIONAL BANK FOR RECONVSTRUCTION AND DEVELOPMFNT REPORT AND RECOAZE ?hATIONS OF THE PRESIDENT TO T.E EXECTZE7T DWXyCTqRS ON A PROPOSED LOAN TO AIR-INDIA INT)RI'.TICONAL CORPORATION 1. I submit the following report and recommendations on a oroposed loan in various currencies equivalent to $`5.6 million, as a particioation in the financing of a project costing :r22.1 million in foreign exchange for the acquisition of three Boeing jet aircraft with spare engines, spare parts and ancillary equiPment by Air-India International Corpora- tion (hereafter called Air-India). PART I - HISTORICAL 2. In the summer of 1956, the Government of India approached the Bank about the possibilities of financing three aircraft for Air-India, the amounts required being $16.8 million in dollars, and E 1.9 million (equi- valent to $5.4 million) in sterling to cover the purchase of Rolls-Royce engines. The Government was informed that if two-thirds of the dollar costs could be raised in the market, the Bank would consider participa- tion to the extent of the remaining one-third. Towards the end of 1956, The First Boston Corporation was authorized to act as Air-India's agent in arranging the necessary financing in the U.S. market and on January 31, 1957, a Credit Agreement, which is attached (No. 1), was signed with five U.S. commercial banks to provide 11,200,000 as follows: The First National City Bank of New York $ 2,500,000 Bank of America N.T. and S.A. 2,500,000 The Chase Manhattan Bank 2,500,000 Irving Trust Company 2,500,000 The First National Bank of Boston 1,200.000 $11,200,000 The financing of the sterling portion of E 1.9 million has not yet been finalized. 3. If the proposed loan were made, it would increase the aggregate amount of loans made for projects in India to $225,524,313, net of cancel- lations. The loans already made are as follows: Year Amount (net of cancellations) 1949 Railway Rehabilitation (Locomotives) $ 32,800,000 1949 Agricultural Machinery (Kans Grass) 7,203,813 1950 Electric Power Development (DVC) 16,7202500 1952 Iron and Steel Project (IISCO) 31,500,000 1953 Electric Power Development (DVC) 10,500,000 1954 Electric Power Development (Trombay) 16,200,000 1955 Industrial Credit and Investment (ICICI) 10,000,000 1956 Iron and Steel Project (TISCO) 75,000,000 1956 Iron and Steel Project (IISCO) 20.000.000 $219,924,313  As of January 31, 1957, $21,591,684 had been repaid and $122,032,338 remained undisbursed. The amount outstanding, including the amount due on maturities sold, was $76,300,291. PART II - DESCRIPTION OF TI-F PROPOSED FINAiECING 4. The Credit Agreement signed with the commercial banks is conditional, among other things, upon IBRD making a loan, on a first-in and last-out basis, to finance the remaining one-third of the dollar cost of the project; upon Air-India making appropriate arrangements to raise the necessary sterling for the project; and upon the Government of India entering into a guarantee agree- ment satisfactory in form and substance to the commercial banks. The credit carries an interest rate of 5% per annum and a commitment fee from the date of the agreement of 3/4% per annum. The credit is available to Air-India from July 1, 1959 until September 30, 1961. Amortization payments will begin six months after final delivery of the aircraft, but not later than March 31, 1962. (Deliveries are presently scheduled for completion by March 31, 1960). Repayments will be made in seven semi-annual installments, so that the latest date by which repayment will be completed is March 31, 1965. 5. In sumnary, the Bank's participation would take the form of a loan with the following characteristics. Borrower: Air-India International Corporation. Guarantor: India. Amount: In various currencies equivalent to $5.6 million. Amortization: 4 semi-annual installments, April 1, 1965, October 1, 1965, April 1, 1966 and October 1, 1966; this schedule will be moved forward, if the loans under the Credit Agreement are repaid before March 31, 1965. Interest Rate: 5-1/2% per annum including 1% commission. Commitment Charge: 3/4% per annum. The Bank loan would be used for down payments made by Air-India subsequent to September 1, 1956, and for future progress payments. 6. On the assumption that the first repayment to the U.S. banks takes place on March 31, 1962, amortization payments on the total dollar financing would be: (Millions $)  -3- Date due IBI-D U.S. ba:2ks Total fViarch 31, 1962 - 1.68 1.68 September 30, 1962 - 1.68 1.68 March 31, 1963 - 1.68 1.68 September 30, 1963 - 1.68 1.68 March 31, 1964 - 1.68 1.68 September 30, 1964 - 1.68 1.68 iMarch 31, 1965) - 1.12 1.68) April 1, 1965 ) 0.56 - October 1, 1965 1.68 1.68 April 1, 1966 1.68 1.68 October 1, 1966 1.68 1068 5.60 11.20 16.80 PART III - APPRAISAL OF THE TROPOSED LOAN The Project 7. A report, entitled "Descriptive 10emorandum on Air India Jet Project", No. T.O. 127a,dated February 19, 1957, is attached (No. 2). The project consists of the acquisition by Air-India of three fully equipped Boeing long-range jet aircraft (Model 707-420), with four Rolls-Royce "Conway" engines each, nine spare engines, a flight simu- lator, ancillary equipment, including overhaul facilities and a test cell, and initial spare parts and stores. The total capital cost of the project is about $23.0 million equivalent, of which about $22.1 million is in foreign exchange. 8. India entered the field of long-range international air transport in June 1948, when a Tata enterprise known as Air-India International Ltd. started operations, and inaugurated a Bombay-London service. In 1952, the Government of India decided to nationalize all scheduled air services of the country, including international services. Two statu- tory corporations were formed under the Air Corporations Act, 1953, one of them being Air-India International Corporation, which took over the assets and business of Air-India International Ltd. Under the Act, the shareholders of the old company were paid compensation of $5.9 million equivalent, payable 10% in cash and 90% in 3-1/2% Bonds. The capitali- zation of the Corporation on March 31, 1956, expressed in U.S. dollars equivalent, was as follows: 3-1/2% Bonds due 1958 $5,292,886 4-3/4% Unsecured Housing Notes due 1957/71 625,000 4/ Debentures due 1959 188.333 Total Debt 6,106,219 Capital Fw-4s 15,414,583 Free Reserves and Surplus 636,667 Total Capital and Surplus 16051.25O Total Capitalization $22.157.L46  The 3-1/2% Bonds mature on July 31, 1958 and the Gover.- 't has undertaken to provide Air-India with the necessary funds. The 4% Debentures are now being discharged by Air-India, and it has the necessary funds to do so. The capital funds represent the Government's advances to Air-India. Justification of the Loan 9. Air-India needs additional aircraft to cope with growing traffic. In order to remain competitive with other airlines serving India, it needs to equip itself with jet aircraft, for ahich foreign exchange is required. The Bank's Qarticipation is a necessary step to enable Air-India to raise an important loan in the New York market. Methcd of Procurement 10. The Boeing aircraft, and the Rolls-Royce engines, to be purchased by Air-India were selected on the basis of specification, price and uelivery dates. Another consideration nas that BOAC, which also operates on the Bombay-London route, has ordered the sare aircraft and engines, thereby miking it possible to share repair and overhaul facilities. The choice of engines was also influenced by the need for limiting dollar expenditure. Prospects for Repayment of the Loan 11. Air-India's operations have grown steadily from a single weekly flight between Bombay and London in 1