India - Port of Calcutta Rehabilitation Project

l~ I53 RESTRICTE D R e p o r t No. P-154 FILE COPY 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 a PROPOSED LOAN to the COMMISSIONERS for the PORT OF CALCUTTA in INDIA April 7, 1958   I\TERNATION-AL BANK FOR RECONSTRUJCTION _i DTWELOPRIVENT REPORT AMD RECOPMIENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIl-ECTORS ON A PROPCGED LOAN TO THE COIMu&IISSIQHERS FOR THE FORT OF CALCUTTA 1. I submit herewith the following report and recommendations on a proposed loan in an amount in various currencies equivalent to $29 million to the Commissioners for the Port of Calcutta to assist in financing a program of rehabilitation and improvement of the Port. PART I - HISTORICAL 2. The modernization and expansion of the transport system are an essential element in India's Seccnd Five-Year Plan of economic development. The main 2rograms in this sector of the economy, especially the railway program and the improvement of facilities at the major ports, form part of the "core of the Plan", to which the highest priority has been given in the allocation of foreign exchange. 3. In the Summer of 1957 the Government of India asked the Bank to consider making loans for port development. A Bank mission visited India in the Autumn of that year and reported that the pro- jects at Calcutta and Madras would be suitable for Bank financing and were sufficiently well defined for immediate consideration. The mission also reported that the project for the development of Bombay might be suitable, but that the nature and scope of the necessary improvements to the port could not be determined until certain tech- nical experiments had been completed. 4. Nlegotiations on the proposed loan with the Chairman of the Port Commissioners, the Chief Engineer of the Port and representa- tives of the Government were carried on in 'Washington during NMarch 1958.  5. If the proposed loan were made, as well as the loan to The Trustees of the Port of MvJadras which I-am also recommending, the total amournt of Bank loans to India would be equivalent to $399 million, net of cancellations. The previous loans to India are as follows: Amount (net of cancellations) 1949 Railway Rehabilitation (Locomotives) $ 32,800,000 Agricultural iMlachinery (Kans Grass) 7,203,813 1950 Electric Power Development (DVC) 16,720,500 1952 Iron and Steel Project (IISCO) 30,020,000 1953 Electric Power Development (DVC) 10,500,000 1954 Electric Power Development (Trombay) 16,200,000 1Q;5 Industrial Credit and Investment (ICICI) 10,000,000 1956 Iron and Steel Project (TISCO) 75,000,000 Iron and Steel Project (IISCO) 20,000,000 1957 Jet Aircraft (Air-India) 5,600,000 Electric Power Development (Trombay) 9,800,000 Railway Improvements 90,010,000 Iron and Steel Project (TISCO) 32,500.000 _ 356.354.313 As of March 31, 1958, $26 million had been repaid and $111 million remained undisbursed. The amount disbursed and outstanding was $219 million, of which $29 million was due on maturities sold. PART II - DESCRIPTION OF THE PROPOSED LOAN Purpose 6. The loan, if made, would finance the foreign exchange cost of a program of rehabilitation and improvement of the Port of Calcutta, involving a total expenditure equivalent to about t59 million. The main items in the program are the improvement of berthing capacity and of railway facilities, the replacement of floating craft, and dredging and training works in the River Hooghly.  7. The loan would have the following characteristics: Borrown'r: The Commissioners for the Port of Calcutta, a public authority created by the Calcutta Port Act, 1890. Guarantor: India Amount: An amount in various currencies equivalent to $29 million. Amortization: In 31 semi-annual instalments, beginning on April 15, 1963 and ending on April 15, 1978. Interest Rate: 5-1/2% per annum, including 1% commission. Commitment Charge: 3/4 of 1% per annum. Disbursements: Relating to foreign exchange ex- penditure on the Project from April 1, 1957. PART III - LEGAL INETRUIAENTS AID LFGhL AUTHORITY 8. A draft Loan Agreement between the Commissioners for the Port of Calcutta and the Bank (No. 1) and a draft Guarantee Agreement be- tween India and the Bank (No. 2) are attached. The Loan and Guarantee Agreements are in the standard form with the exception of Section 5.03 which creates a first charge on the Borrower's assets and income in favor of the Bank. Under the Calcutta Port Act all loans made under the authority of the Act are automatically secured by a first charge on the Commissioners' assets and income. As a result of a pending amendment of the Act, providing for loans from the Bank, automatic security would not apply to Bank loans. However, the Commissioners will have authority to grant such security to the Bank. Therefore, Section 5.03 has been included making the security provisions of the Act specifically applicable to the Bank loan and giving the Bank equal and ratable ranking with the Commissioners' present and future credi- tors. In consequence, the usual negative pledge contained in the Loan Agreement (Section 5.04) has been changed to provide that, if security is created for other loans, express provision vwill have to be made for equal and ratable security of the Bank's loan only when such security does not exist by operation of law.  - 4 - 9. The Calcutta Port Act requires agreements such as the Loan Agree- ment to be signed by the Chairman and two Commissioners and to be sealed with the Borrower's seal. Therefore if the loan is approved, and after the Act has been amended, the Loan Agreement will be sent to Calcutta for execution by the Borrower and then returned to Wlashington for execution by the Bank. The Guarantee Agreement will be executed in Wgashington by the parties to it at the time the Loan Agreement is executed by the Bank. The Ambassador of India to the United States has been authorized to sign the Guarantee Agreement. 10. The report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement of the Bank is attached (No. 3). PART IV - APPRAISAL OF THE PROPOSED LOAN Justification of the Project 11. A technical report on the project is attached (No. 4). 12. The Port of Calcutta serves a large and rapidly developing area, including the industrially important Damodar valley. This area contains a high proportion of India's reserves of coal and iron ore, the fuller ex- ploitation of which is one of the main objectives of the five-year plans. At the same time it remains an important agricultural region, producing all of India's jute, most of its tea, ano more than half of its rice, lac and oilseeds. In value terms the Port now handles about 45% of India's general cargo, both exports and imports. 13. Oaing largely to overworking in the war period, and to inadequate maintenance during and since that time, the facilities of the Port gener- ally have been in poor condition for a number of years. Many of the in- stallations and much of the equipment are over-age. Consequently, the change in the pattern of traffic, with growing quantities of difficult and heavy cargo such as machinery, iron ore and steel, has brought about a state of chronic congestion, involving serious delays to ships using the Port and demurrage charges on government imports alone estimated at some $5 million a year. Although the congestion has been relieved son:e- what in recent months, at least as far as ships are concerned, by care- ful planning on the part of the port officials, the situation on the quays and in the sheds has not improved. 14. The works included in the project will materially improve the Port's facilities and will permit a modest incease in capacity. Cargo-handling will become more efficient and a faster turn-round of ships will be possible. Without this investment, a steady deterioration in the Port's ability to deal with the traffic offered could not be avoided. Even so, the carrying out of these works will go only part of the way to meet the eventual needs of the area served by Calcutta. Situated as it is on a difficult river some 120 miles from the Bay of Bengal, the Port is not accessible to large modern  - 5 - ships, and even ships of medium draft are only able to reach the Port fully laden on about half the days of the year. The river training works to be carried out at Fulta Point will increase the depth and improve the flow conditions in the most difficult stretch of the river, and should permit ships of 26 feet draft to reach Calcutta on most days of the year. However, the long-term development of the region demands a more radical solution, such as the building of a new port accessible to ships of 36-40 feet draft. The Commissioners, at the Bank's suggestion and with the ap- proval and assistance of the Government of India, are proposing to have a thorough-going study made of this problem. The results of the study will not affect the present project. Prospects of Fulfillment of Obligations 15. The operations of the Port of Calcutta are managed by the Commis- sioners, subject to the approval on important matters of the central MAinis- try of Transport. The Commissioners have the power to make their own finan- cial arrangements, including the setting of port charges and the planning of the annual budget, referring their proposals for final approval to the Miinistry. Thus, although the Central Government has fairly strict powers of control, the Commissioners in practice enjoy considerable freedom in day-to-day matters. They have a capable and experienced staff, and for several decades have retained the services of an experienced firm of for- eign consultants. 16. Earnings of the Port since the war have not always been good, but there has been a marked improvement in the last two years. The financial situation of the Port is now sound. Borrowings from Government and the pri- vate market together are about equal to the value of the Port's equity capi- tal, and this ratio should be achieved again by 1963 when reoayment of the proposed loan is due to begin. On the basis of the expected growth of traf- fic, and assuming some increase of efficiency as the result of the new pro- ject, net operating income in 1963/64--before interest and depreciation-- should cover total debt service aporoximately 1-1/2 times. This is without allowing for any change in port charges, which are reasonable and could be increased if necessary. On the other hand, the provision for depreciation has been meagre in the past and more adequate provision needs to be made in future. The Commissioners, with the approval of the Central Government, have agreed that a study be undertaken of their accounting procedures with this object in mind. They will consult with the Bank before implementing such recommendations as may emerge from the study. IViethods of Procurement 17. Iilain items of equipment and material to be financed from the Bank loan will be purchased on the basis of international bidding.  -6- Economic Situation 18. A report on recent economic developments in India is being circula- ted under separate cover (R 58-37). The economic report deals only with the immediate situation and makes no attempt to appraise the longer-term outlook. It is intended that a further report should be prepared during the Summer after an on-the-spot study by members of the Bank's staff. 19. India has achieved a rapid acceleration in the pace of economic development during the past two years. Public expenditures on develop- ment have increased from an arerage of around Rs. 4 billion ($840 million) a year during the First Five-Year Plan to Rs. 6.75 billion ('`1.4 billion) in 1956/5' and an estimated Rs. 8.45 billion ($1.8 billion) in 1957/58. In 1956/57 there vias also a boom in private industrial investment, but this appears to have subsided during the past year. 20. The stepping up of development, combined with a sharp increase in defense expenditures, has resulted in a general excess of demand over domestic supplies, which has been reflected in a big increase in imports. Exports have shown little or no advance. Part of the resulting deficit in the balance of payments has been covered by foreign aid, but India has also been forced to draw down her foreign exchange reserves by nearly $1 billion since the beginning of the Second Five-Year Plan. IMfore rigorous import licensing and larger receipts of foreign aid have greatly reduced the drain on reserves in recent months. The scope for further drawing on reserves is distinctly limited. 21. Deficit financing by the Government has exerted a strongly ex- pansionary influence on money supply, but this has been largely counter- acted by the reduction in foreign assets. Internal prices have conse- quently remained fairly stable during the past year. Agricultural produc- tion attained record levels in the crop year ending June 1957, but preliminary reports indicate that the current year's harvest has been less favorable. Industrial production has gone on expanding, but the rate of increase has slowed down. 22. The problem before India is how to close the gap between overseas payments and receipts (including foreign aid) without upsetting internal price stability or creating shortages of food or other essential commodi- ties and without too heavily mortgaging overseas earnings in future years. To achieve this, total demand must be progressively brought into line vwith the resources currently available to meet it. 23. The Budget for 1958/59, which was introduced in February, con- templates a slight net reduction in tax rates and a further increase of 15%-20% in public development expenditures. In spite of this the es- timate for deficit financing is considerably reduced. However, the assumptions made about domestic savings and foreign aid receipts appear distinctly optimistic, and government transactions will probably continue to exert a strongly expansionary influence on money supply during the  - 7 - coming year. The availability of foodgrains will be a critical factor both for the balance of payments and for internal prices. If demand can be satisfied from domestic production and from imports financed under aid programs (plus normal commercial imports), serious inflationary strains should be avoided. 24. The balance of payments situation in 1958/59 will still be very difficult, even if India does not have to pay out of her ovrn resources for imports of foodgrains in excess of those to which she is committed under existing agreements with the United States and Burma. The issue of new import licenses has been cut in the last two licensing periods to well under half the levels prevailing in 1956, but large commitments are still outstanding. Considerably larger receipts of foreign aid are already assured from the United States and other countries, but it looks as if a sizeable gap will remain to be covered by further drawing on reserves and additional borrowing abroad. 25. WRhile the economic situation in India during the next twelve months will certainly not be easy, it should not be unmanageable. But the present trend of the economy poses a number of serious problems for the future. INowf that foreign exchange reserves no longer provide an ample margin of safety, larger domestic savings will have to be secured if the momentum of development is to be maintained. Alternatively, more severe restraints will have to be imposed on government expenditures and this may involve some slowTing down in the tempo of development. The food situation also demands urgent re-examination. Finally, increas- ing attention will have to be paid to the problem of maintaining and ultimately expanding export earnings. External Debt 26. India's external public debt amounted at the end of February 1958 to the equivalent of about 4q'1,060 million, including suppliers! credits to the public sector, but excluding U.S. Government loans repayable in rupees. In addition, suppliers' credits secured by the private sector with the sanction of the Government of India amounted to 095 million equivalent. Projected service payments on all these debts combined average rather over $150 million a year from 1960 to 1961h or about 8% of India's external receipts on current account in 1956/57. The annual average for 1965 to 1969 is about $'100 million and for 1970 to 1974 about $',,50 million. In the two peak years, 1961 and 1962, service pay- ments average as much as $1:200 million a year. These are also the years in which the bulk of Indials drawings of $`200 million from the Inter- national Monetary Fund fall due for repayment. It is recognized by the Government of India that some re-phasing of its debt service obligations in these years may have to be arranged.  - 8 - 27. Repayment of the proposed loan and of the other loan proposed for the Port of M1adras Will begin in April 1963 and thus nill not add to India's debt service obligations in the most difficult years. From April 1963 to April 1978, by wThich time the two loans iill be fully repaid, annual service payments will average just over `ih million. This should be vithin India's capacity to pay. PAPT IV - COMPLIANCE 1ITH ARTICLES OF ACFE-i '-,T 28. I am satisfied that the proposed loan complies v-ith the require- ments of the Articles of Agreement of the Bank. PART V - RECOiIvIENIDATIONS 29. I recormend that tlhe Bank grant to the Commissioners for the Port of Calcutta a loan in various currencies equivalent to >29 million for a term of 20 years, guaranteed by India, at thie rate of interest of 52 % and on such other terms as are specified in thie draft Loan and Guarantee Agreement attached and that the Executive DiUectors adopt a resolution to that effect in the form attached (No. 5). Eugene R. Black Attachments !Iashington, D.C. April 7, 1958