India - Coal Mining and Coal Quality Improvement Project

Document of The World Bank FOR OFFICIAL USE ONLY Repot No. 5843-IN STAFF APPRAISAL REPORT INDIA COAL MINING AND COAL QUALITY IMPROVEMENT PROJECT March 25, 1987 Industry Department This dwoment has a restricted distribution and may be used by recipients only in the performance of their official duties. Its eontents may not otberwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Rs 1.00 - Paise 100 US$1.00 = Rs 13.0 Rs 1.00 - US$0.08 Rs 1 million - US$76,923 (Conversions in the Staff Appraisal Report were made at US$1.00 to Rs 13.0) FISCAL YEAR April 1 - March 31 WEIGHTS AND MEASURES 1 British thermal unit (Btu) - 0.252 kilocalories 1 kilocalorie (kcal) m 3.97 British thermal units 1 gigacalorie (gigacal) - 1,000,000 kcal I kilocalorie per kilogram - 1.805 British thermal uaits per (kcal/kg) pound 1 cubic meter (m3) = 1.308 cubic yards 1 kilowatt (kW) - 1,000 watts 1 megawatt (W) m 1,000 kilowatts 1 gigawatt hour (GWh) J 1,000,000 kilowatt hours 1 kilogram (kg) 2.205 pounds I ton of coal equivalent (tce) - 1 ton of coal containing 7,000,000 kcal 1 ton (t) = 1,000 kilograms PRINCIPAL ABBREVIATIONS AND ACRONYHS USED BCCL - Bbarat Coking Coal Ltd. IISCO - Indian Iron and Steel Company BICP - Bureau of Industrial Costs and LCB - local Competitive Bidding Prices LIB - Limited International Bidding CCL - Central Coalfields Ltd. NCL - Northern Coalfields Ltd. CHP - Coal Handling Plant NEC - North-Eastern Coalfields Ltd. CIL - Coal India Ltd. NTPC - National Thermal Power Corporation CMPDI - Central Mine Planning and Design CM - Output per Manshift Institute SAIL - Steel Authority of India Ltd. CPRA - Coal Price Retention Account SCL - Singareni Collieries Ltd. DOC - Department of Coal SECL - South Eastern Coalfields Ltd. ECL - Eastern Coalfields Ltd. TISCO - Tata Iron and Steel Company GOI - Government of India WCL - Western Coalfields Ltd. ICB - International Competitive Bidding  FO OR 0CIAL USE ONLY INDIA COAL MINING AND COAL QUALITY IMPROVEMENT PROJECT TABLE OF CONTENTS Page I. INTRODUCTION ..........I.............. ........... 1 II* THE SCTOR I II.THESECO ................................................ 1 A. Energy Resources ...................................... 1 B. The Coal Sub-sector ................................... 2 C. Coal Development Prospects ............................ D. Coal Sector Productivity and Efficiency ............... 5 E. Coal Marketing and Distribution ....................... 7 F. Coal Quality Improvement Measures ..................... 7 G. Coal Pricing .......................................... 10 H. Role of the Bank ..................................... 11 TII. THE BENEFICIARIES ............... .......................... 13 A. The Coal India Group ........................O.. 13 1. Organization and Management ....................... 13 2. Operations . *................* * ................. 15 3. Manpower and Training *.............. ........ 16 4. Financial Position ... ............................. 17 B. South Eastern Coalfields Ltd .......................... 19 C. Eastern Coalfields Ltd ................ ........ 20 IV. THE PROJECT o............................................... 21 A. Project Objectives *................................... 21 B. Project Description .u*................................. 22 1. Gevra Mining Complex ... . .......................... 22 2. Sonepur-Bazari Mining Complex ..................... 25 3. Environmental Protection, Safety and Resettlement.. 29 4. Coking Coal Imports o.................. ...........o 30 C. Project Execution and Implementation ...o ........... . 31 V. CAPITAL COSTS, FINANCING AND PROCUREMENT ... ............... 33 A. Capital Cost Estimates . ............ ................ 33 B. Financing Plan . ....................................... 35 C. Procurement and Disbursement . .......................... 37 This report has been prepared by Messrs. J. E. Strongman, L. Maraboli, A. Covindassamy, and Mmes. H. Wu and M. Kutcher of the Industry Department. Word processing services were provided by Mrs. N. Nguyen. This document has a rstrcted distribution and may be used by recipients only in the performance of their officid duties Its contents may not otherwise be disclosed without World Bank authorization.  Page VI. FINANCIAL ANALYSIS ....................................... 40 A. Coal India Ltd ...................*.....*............ 40 B. South Eastern Coalfields Ltd ........ ................... 44 C. Eastern Coalfields Ltd ......... .........**...... 45 D. Gevra and Sonepur-Bazari Projects ...... ................ 46 VII. ECONOMIC ANALYSIS ................. ....................... 48 A. Economic Rates of Return ............................... 48 B. Resource Mobilization ............ see ................... 49 Co Otber Benefits ..................... 50 D. Least Cost Development Program ......................... 51 E. Project Risks .......................................... 52 VIII. AGREEMENT ...................... 52 1. Energy Sector Owerview 2. Coal Demand and Supply 1984/85 - 1989/90 3. ECL and SECL Investment Portfolio 4. Fazal Coumittee Report-Summary of Recommendations 5. Measures to Lmprove Coal Quality 6. Coal Price Schecdule 7. Scope of Work for Assistance on Workshop Design 8. Scope of Work for Assistance on Manpower Planning and Training 9. CIL Financial Statements 1980/81-1985/86 10. Scope of Work for Assistance on Training Institute Design and Development 11. Resettlement Arrangements 12. Project Management Organization 13. Implementation Schedules 14. Equipment Cost Estimates 15. Procurement Schedule and List of Bank Financed Goods 16. Disbursement Schedule for Bank Loan 17. Assumptions Usel in the Financial Projections 18. Pro Forma Financial Statements for CIL 1986/87-1993/94 19. Medium Term Efficiency Improvement Program and Performance Targets (1986-1990) 20. Pro Forma Income Statements for CIL Subsidiaries 1986/87 to 1993/94 21. Financial and Economic Rates of Return - Assumptions and Calculations 22. Documents Available in the Project File CHARTS I Gevra Mining Complex 2 Sonepur-Bazari Mining Complex MAP IBIRD No. 19279R  -iii- INDIA COAL HINING AND COAL QUALITY IDPROVEMENT PROJECT Loan and Project Summary Borrower: India, acting by its President Beneficiary: Coal India Ltd. (CIL) Amount: US$340 million equivalent Terms: Payable in 20 years, including 5 years of grace at the Bank 2tandard variable interest rate. On-Lending Terms: US$180 million equivalent from GOI to CIL for a period of 15 years, including 5 years grace, at an effective interest rate of not less than 13.75Z per annum. CIL to Eastern Coalfields Ltd. (ECL) and to South Eastern Coalfields Ltd. (SECL) for a period of 15 years, including 5 years of grace, at an effective interest rate of not less than 13.75% per annum. Project Description: The main objectives of the project are to increase the supply of thermal coal (to the power and industrial sectors) and coking coal (to the steel sector) and to improve the quality of coal available to consumers. The project is also designed to support CIL in its efforts to develop and implement efficiency improvements and, thereby, improve its financial performance. The project will support the institutional development of CIL by strengthening its manpower planning and organization, by improving training, and by improving the maintenance of equipment through modernization of workshops. The project consists of the development of (i) the second phase of the Gevra mining complex to reach an output of 10 million tons per year (tpy) of low grade thermal coal to feed the Korba power plant; (ii) the construction of the Sonepur-Bazari mining complex to produce 3 million tpy of intermediate and superior grade thermal coal; and (iii) the importation of about 3.0 million tons of coking coal. By developing large-scale open-pit mines, India is pursuing a strategy of increasing coal supplies at least-cost while promoting diversification of mining technologies and improvements in productivity in the coal sector. By importing coking coal India is making-up for a shortfall in domestic supplies as well as improving the average quality of coking coal by blending low-ash imports with higher ash domestic  -iv- coals. The project faces minimal technical and marketing risks. Any possible financial risks are mitigated by (a) CIL's efforts to improve its efficiency and financial performance, (b) GOI's commitment to preparing a program that would assure CIL's future financial viability and (c) the high priority GOI places on developing India's coal resources in a timely and efficient manner. Project Cost Estimate: (US$ mllion) -- Local Foreign Total (a) Mining Component Equipment & Spares 82.6 113.0 195.6 Coal Handling Plant 34.8 3.7 38.5 Land & Civil Works 63.3 - 63.3 Engineering 1.7 - 1.7 Pre-Operating Expenditure 10.1 0.9 11.0 Technical Assistance - 3.0 3.0 Duties and Taxes 65.6 - 65.6 Base Cost 258.1 120.6 378.7 Physical Contingencies 14.3 6.3 20.6 Price Escalation 36.9 26.6 63.5 Working Capital 14.0 0.7 14.7 Total Project Cost 323.3 154.2 477.5 Interest During Construction 1.4 4.3 5.7 (b) Coking Coal Imports Component - 160.0 160.0 Total Financing Required 324.7 318.5 643.2 Financing Plan: (a) Mining Component Equity Government of India 188.6 - 188.5 CIL Cash Generation 53.1 - 53.1 Total Equity 241.6 - 241.6 Long-Term Debt Government of India 61.6 - 61.6 IBRD 21.5 158.5 180.0 Total Debt 83.1 158.5 241.6 Sub-total 324.7 158.5 483.2 (b) Coking Coal Imports Component Long-Term Debt IBRD - 160.0 160.0 Total Financing Required 324.7 318.5 643.2 __ _-_  Estiuated Disbursements: -(US$ million) Bank FY 1988 1989 1990 1991 1992 1993 1994 Annual 91.8 110.8 36.6 37.2 32.2 26.8 4.6 Cumulative 91.8 202.6 239.2 276.4 308.6 335.4 340.0 Economic Rate of Return: Gevra 32Z Sonepur-Bazari 19Z Map: IBRD No. 19279R  I. INTRODUCTION 1.01 The Government of India (GOI) has requested a Bank loan of US$340 million to assist in the financing of a Coal Mining and Coal Quality Improvement Project. The project has three main components: (i) the Gevra mining complex which comprises a 10 million tons per year (tpy) open-pit mine and associated infrastructure in the state of Madbya Pradesh, which will be constructed and operated by South Eastern Coalfields Ltd. (SECL); (ii) the Sonepur-Bazari mining complex, which consists of a 3.0 million tpy open-pit mine and associated infrastructure in the state of West Bengal to be operated by Eastern Coalfields Ltd (ECL); and (iii) the import of about 3.0 millicon tons of coking coal. Both SECL and ECL are subsidiaries of Coal India Ltd. (CIL), a GOI undertaking. The project fonss part of the Government strategy to ensure timely supplies of adequate quality coal for consumers in India. In particular, the project will provide for improvement in the quality of both thermal and coking coal supplies. The project will also support GOI's strategy to develop large-scale economically efficient mining operations, as well as efficiency improvements in CIL and efforts by both CIL and GOI to reestablish CIL's financial viability. The proposed project was submitted by GOI to the Bank in September 1984. It was appraised in March 1985 and post-appraised in June 1985. II. THE SECTOR A. Energy Resources 2.01 India is well endowed with coal resources and has moderate hydropower potential; hydrocarbon reserves are only modest (Annex 1). Total coal resources (excluding lignite) are estimated at over 127 billion tons, of which 60 billion tons are considered technically and economically recoverable at present. Coal production in 1985/86 was 153.0 million tons. Exploitable hydropower potential is estimated at 89,930 MW, against a 1985/86 generation from all sources of 166.6 TWh. Recoverable reserves of oil are estimated at 187 million tons on-shore and 324 million tons off-shore. Associated and non-associated gas reserves are estimated at about 478 billion cubic meters (equivalent to 397 million tons of oil). Production in 1985/86 was about 29 million tons of oil and about 7.2 million cubic meters of gas. 2.02 Energy use in India is among the lowest in the world. Per capita consumption of energy averages 210 kg (coal equivalent), compared with 680 kg in China and about 7,500 kg in industrialized countries. Over the past three decades, the composition of fuel consumption has increasingly shifted from the use of non-commercial fuels, such as vegetable and animal waste, to commercial energy resources. At present, non-commercial fuel accounts for less than 40% of total energy consumption, while coal accounts for 32Z, oil and gas about 20% and primary electricity for 8Z. 2.03 The increasing reliance on commercial fuels has stretched the capability of the energy sector to meet the energy needs of the economy and has placed a heavy burden on the balance of payment. Recognizing the  -2- importance of the energy sector to India's ongoing economic development, the Government has established three main objectives, namely: to fully develop indigenous energy resources, to improve the efficiency of energy utilization and to limit the use of oil products to end-uses in which economic substitution by other forms of energy, particularly coal, is not possible. In line with this policy the Government places particular emphasis on the development of the coal industry and the exploration for oil and gas. Through pricing policies and rationing, the Government has reduced the use of oil products, where this has been technically and economically feasible, and has encouraged the use of coal. To reduce power shortages which have been prevalent for many years and to overcome, at least in part, the transportation problem associated with the greater use of coal, the Government has also embarked upon a major construction program for coal based thermal power plants located near the mines. B. The Coal Sub-sector 1; 2.04 Coal is and will continue to be India's most abundant domestic energy resource. In 1985/86 coal production reached 153 million tons making India the 6th largest coal producer in the world. Coal presently accounts for about 60Z of all commercial energy produced in India and even allowing for good progress in new oil and gas discoveries, coal's contribution is expected to remain at more than 50% over the next decade. India's vast coal reserves will be sufficient to meet the country's needs for the next 100 to 150 years at least. 2.05 India is a low-cost coal producer. Operating costs average US$13 per ton, while capital costs for mine development are in the range US$20 to $60 per ton of annual output for new open-pit coal mines (including mine-related infrastructure but excluding other infrastructure, such as rail trunk lines). There is considerable variation in mining conditions and costs among regions. The older coalfields in Bihar and West Bengal, which contribute 55% of coal production including all of the prime coking coal, have mostly deep underground mines in difficult geological conditions and high operating costs (in the order of US$18-20 per ton). Operating costs are generally lower for newer mines in other states such as Madhya Pradesh, Orissa and Maharashtra. where mining conditions tend to be easier; operating costs are in the order of US$10-12 per ton for underground mines and as low as US$6-8 per ton for large-scale open-pit mines. Overall, only China, South Africa and Western US mines are competitive with India regarding average minehead coal production costs. 2.06 Coal accounts for more than half of commercial energy consumption in India. Roughly 70% of the annual coal production are consumed by power stations, steel, cement and fertilizer plants and the Indian Railways. The number of consuming units is small and the relationship between them and 1/ Fuller background details on the sector and on the CIL group of companies is provided in India Coal Sector Report (3601-IN, September 1982), Dudhichua Coal Project SAR (4714-IN, February 1984) and Jharia Coking Coal Project SAR (5336-IN, February 1985).  -3- the coal producers is close. The remaining 30Z of coal output are consumed by a large number of small industrial plants, such as jute mills, paper mills, textile mills and chemical plants, and countless buyers of soft coke for domestic use. 2.07 The northern, western and southern states of India account for significant share of coal consumption resulting in substantial coal transportation from coalfields in West Bengal and Bihar to consumers in Delhi, Haryana, Uttar Pradesh and Punjab and from coalfields in Madhya Pradesh and Bihar to consumers in Gujarat, Maharashtra and Rajasthan. This regional imbalance in coal production and demand places great stress on the railways. Coal makes up more than 35% of the railway's total freight traffic and more than 75Z of coal output is shipped to consumers by rail. Road transport and, to a very limited extent, coastal barges and ropeways account for the remaining 25%. Given the projected growth in supply and demand, the regional imbalance is expected to become more acute by the end of the Seventh Plan. Under the Dudhichua Coal Project (Loan 2393-IN, February 1984), a coal transportation study has been undertaken to address the capabilities of the rail system for meeting the growing transportation requirements of coal. The study addresses the issue of how to introduce state of the art rail technology for coal movement and how to improve the operational efficiency and capacity of the existing coal transportation system and the adequacy of present management and coordination policies regarding coal movement. The results of the study include specific recommendations regarding the improvement of (i) procedures and lineside facilities for loading and unloading coal railway wagons, (ii) railway motive power and rolling stock for coal movement, (iii) certain sections of railway line and marshalling yards, and (iv) coal linkage and distribution arrangements. The recommendations are now being considered by the various Ministries and organizations involved following which implementation decisions will be taken. 2.08 The coal industry is intensifying its exploration efforts in southern and western areas, where reserves are explored in response to the rapid growth of demand by consumers in western India, particularly in the Bombay area, and in Gujarat. To meet the need for new coal developments in adjacent locations, coal exploration priorities have been shifted to the states of Maharashtra and western Madhya Pradesh. This is a sound approach because it is expected to make more readily available, in the coming decade, coal supplies for western markets without the long transportation linkages from the distant eastern coalfields. However, the quality of coal reserves varies widely and both reserves and supplies of high quality thermal and coking coals are limited and tend to be concentrated in eastern India. For the most part, therefore, new coalfields will tend to be of lower grade coal. 2.09 Over 90% of coal production in India is in the hands of Coal India Ltd. (CIL), which is wholly owned by GOI. CIL has seven subsidiaries, of which six are producing companies, Eastern Coalfields Ltd. (ECL), Bharat Coking Coal Ltd. (BCCL), Central Coalfields Ltd. (CCL), Western Coalfields Ltd. (WCL), Northern Coalfields Ltd. (NCL), South Eastern Coalfields Ltd. (SECL), and one is a mine planning concern--Central Mine Planning and Design Institute (CMPDI). Four of these subsidiaries  -4- (namely ECL, BCCL, CCL and WCL) were established in 1975. The other two (SECL and NCL) were established in 1986 (see para. 3.05). Coal production also takes place at North Eastern Coalfields (NEC) in Assam which is an operating division of the CIL holding company. In addition to CIL, there are three other coal producers and one major lignite producer. The coal producers are Singareni Collieries Company Ltd. (SCL) which is jointly owned by the Central Government and the State Government of Andhra Pradesh, and captive coking coal mines of the privately-owned Tata Iron and Steel Company (TISCO) and the Government-owned Indian Iron and Steel Company (IISCO). Lignite production in India is in the hands of the Government-owned Neyveli Lignite Corporation (which produced nearly 7 million Lons in 1985/86), and lignite production has recently started by a state-owned company in Gujarat. The Department of Coal (DOC), Ministry of Energy, is in charge of policy making in the coal and lignite sector and of monitoring and coordinating production, distribution and prices of coal, including the production targets, annual investment and operating budgets of the Government-owned coal companies. The Planning Commission reviews the various production and consumption targets and investment programs. It also approves linkages between new mines and major consumers. C. Coal Development Prospects 2.10 GOI's coal development strategy emphasizes the need to ensure timely and adequate supply of satisfactory quality coal with economically efficient mining and transportation systems. Specifically, GOI is now concentrating on a multi-track coal development strategy: (i) rapid expansion of lot-cost thermal coal production through developing large coal fields with shallow deposits, using increasingly efficient surface mining technologies and equipment while paying due regard to coal quality, safety and environmental protection; (ii) increasing the supply of coking coal (and thereby reducing the need for imports) through rehabilitating and mechanizing deep underground prime coking coal collieries and, where possible, developing mechanized, open-pit coking coal mines; (ii-) lowering production cost and improving the productivity of underground mining operations by new initiatives to improve labor productivity and reduce surplus employment in older, labor- intensive underground mines; by accelerating the introduction of mechanized mining approaches, where appropriate; and by debottlenecking efforts including improving mine transport systems to match increased production capacities; (iv) improving coal quality to consme-rs by establishing stricter quality controls, of more coal handling plants (for thermal coals), improved washery operations (for coking coals), as well ae improved adherence to mine-consumer linkages;  -5- (v) improving the supply of coal from existing coalfields (as well as reducing its cost) to distant consumers through rationalizing mine-consumer linkages, streamlining coal transportation systems and emphasizing coal exploration and development in western and southern India to reduce the average hauling distance and introducing mechanization, where appropriate; and (vi) refining the current methods used in assessing the coal requirements of both major and minor coal users to reduce the costly build-up of pithead stocks. 2.11 Coal supply and demand are projected to increase at an annual growth rate of about 9Z during the Seventh Plan (compared with 5.6Z per year during the Sixth Plan2/) which will result in a total production and consumption of about 225 million tons and 232 million tons respectively in 1989/90 (Annex 2). The gap between supply and demand will be provided by coking coal imports (3-4 million tons of imported coking coal with 10 ash being approximately equivalent to 5-7 million tons of domestic coking coal with 21X ash). During the period of the Seventh Plan (1985/86 to 1989/90), CIL expects to implement an investment program of about Rs 53 billion (US$4.0 billion) in 1986/87 terms, of which about 20% would be foreign exchange requirements. This represents an expansion, in real terms, of 30% over investment expenditures in the Sixth Plan and is due to increases in the numbers and scale of projects ana in their implementation costs. The program is very ambitious but can be achieved provided CIL continues improving its project implementation procedures and, once improvements are demonstrated, ensures their dissemination throughout the CIL Group. The program consistent with GOI's budgetary allocations for the sector. An earlier review of CIL's overall investment program revealed that with a few exceptions, the investment program is following the least cost development path. That finding has been verified by a detailed review of the investment portfolios of the project executing agencies, ECL and SECL (Annex 3). D. Coal Sector Productivity and Efficiency 2.12 At the time of nationalization CIL inherited a very large labor force, with low productivity. CIL's original strategy had been to improve its efficiency through (a) the extensive reconstruction of the old underground operations including the introduction of highly mechanized mining techniques and (b) the selective development, wherever possible, of large-scale open-pit mines. CIL is presently undertaking a program to rationalize its underground production through the reorganization of small mines into larger units including the introduction of some degree of mechanization for both coal extraction and transportation. This program is a sound strategy and is expected to contribute to reducing unit production costs, as well as providing increases in production. There are presently 24 such reorganization/mechanization projects in different stages of implementation throughout the CIL Group. Underground production from mechanized mines is expected to increase to about 35% in the early 1990s 2/ By comparison GDP growth was almost 5% per year.  -6- from 5Z at present. A program to improve the design, management and operating procedures of highly mechanized underground mines is being undertaken by BCCL urder the Jharia Coking Coal project. 2.13 While the program to improve efficiency by mechanizing underground operations offers much promise for the future, a more immediate problem is that labor productivity as measured by output per manshift (OMS) in existing underground mines has been declining (from 0.57 in 1978/79 to 0.5_ in 1985/86 for CIL) partly due to a lack of efforts to improve efficiency in the unmechanized underground mines. In order to rectify this situation, CIL has implemented a number of initiatives including (i) a hiring freeze for existing underground operations, (ii) disciplinary measures (including firing workers) to reduce absenteeism among key workers such as loaders, (iii) no longer providing jobs to near relatives of retirees, (iv) debottlenecking investments to increase production in a particular colliery from the same workforce, (v) reduced hiring of resettled land owners, (vi) transfer of underutilized labor from old mines to new projects, and (vii) training and upgrading of skills. A program of measures to improve the performance of loss-making mines for ECL hE been agreed with the Bank (para. 3.18) and a Medium Term Efficiency Improvement Program was prepared in December 1986 and is just starting to be implemented by CIL (para. 6.10). In addition, new measures to improve work practices and encourage voluntary retirement of workers are also under preparation and other measures are recommended in a recent report by the Committee on Eastern Coalfields (see para. 3.18). 2.14 CIL also has a number of initiatives to improve the efficiency of it6 open-pit mining operations. CIL has progressively moved to larger equipment sizes and is now using 85-ton dump trucks and 10 yd3 shovels in many operations and is introducing 120-ton and 170-ton dump trucks and 20 yd3 shovels at selected projects. For large-scale open-pit mines, output per manshift is not a meaningful measure of productivity because it can vary widely from mine to mine depending on many factors including, importantly, the stripping ratio (i.e. the amount of overburden to be removed to produce one ton of coal) and the distance from the point of excavation to where the overburden is dumped or the coal unloaded. Instead, efficiency is generally measured in terms of the availability and utilization of equipment. Equipment availability reflects the amount of out-of-service time due to repair and maintenance. Equipment utilization reflects the amount of time that available equipment" is not in use due to shift changes, safety checks, queueing for fuel, tea-breaks etc. In the past few years CIL has taken several steps to improve its open-pit efficiency. Even so, CIL's equipment availability and utilization are presently still below international standards due to poor maintenance procedures, spare part shortages, inadequate workshop facilities and ineffective work practices. CIL is giving high priority to improving its open-pit efficiency including using foreign technical assistance to improve maintenance and operating procedures (which is financed under the Dudhichua project), introducing -hot seat' changes for major equipment and using overlapping shifts to improve utilization, and arranging for suppliers to  -7- open spare parts depots in major coalfields. In addition, new initiatives are being prepared to improve the availability of imported spare parts and to deal with the problem of equipuent which is out of commission due to the backlog of repairs. E. Coal Marketing and Distribution 2.15 The distribution of coal in India takes place within a set of administrati-on procedures which are set by the Government. Under these procedures, each major coal consumer (thermal power stations, cement, fertilizer and steel plants, as well as the railways) is linked to one or more collieries. These linkages, as well as the allocation of coal supplies, are then reviewed in quarterly meetings of the Special Linkage Committee and in monthly operational meetings between consumers, the railways and the coal companies. While these linkages do attempt to match new coal consumers with new mines, steadily rising pithead stocks and persistent complaints from major consumers about inadequate coal qualities or late shipments have led to growing concern within the Government about the efficiency of this system. In its review of the Sixth Five Year Plan, the Planning Commission proposed the adoption of a systems approach' in determining coal production, transport, consumption and stocks. Since the increase in pithead stocks (which reached a peak of 30 million tons in March 1985), was to a large extent due to overly optimistic demand projections for several large consuming sectors, the Planning Commission emphasized the need for irnprovements in the demand forecasting technology that is currently used. Under the Dudhichua Coal Project, the DOC has commissioned a study to review the current practice of establishing consumer-producer linkages, identify weaknesses in the current system and suggest improvements with the help of a linear programming model that would cover the entire system of existing linkages. The linkage study will use data and results from the coal transport study (para. 2.07). Data collection is now complete and various moduiles are operational. Initial runs of the complete model are being made and the identification of sub-optimal linkages and initial proposals to realign linkages are expected by May 1987. F. Coal Quality Improvement Measures 2.16 A major issue facing the coal industry is the unreliable and deteriorating quality of its coal. This leads to major additional operational and maintenance expenditures by its major consumers (the steel industry, the power sector, cement and fertilizer plants), due to increased system inefficiencies and plant downtime as well as higher transport cost (since consumers need to ship greater quantities of coal to make up for lower coal quality). For coking coal supplies, CIL is implementing a set of short and medium term measures established under the Jharia Coking Coal Project to improve the quality of prime coking coal supplies and, in particular, to lower the ash content. The short term initiatives include (i) testing of certain disputed coals by Central Fuel Research Institute; (ii) elimination of substandard coals and more intensive picking arrangements; (iii) deployment of more experienced and qualified personnel for washery operation; (iv) a technical assistance effort to improve the  -8- performance of the prime coking coal washeries; and (v) utilization of premium quality Assam coal for blending purposes. Medium term measures include (i) increased capital expenditure for washery improvements, (ii) installation of rotary breakers at certain washeries; (iii) upgrading of slurry by froth flotation at Dugda I and II; (iv) modification to Patheridih Washery; (v) trials with prescreening jigs at Barora Washery; and (vi) development of new areas of superior quality prime coking coals. 2.17 Projections prepared at the time of the Jharia Coking Coal Project indicated that coking coal imports of about 1.8 million tpy would be required to make up an expected shortfall between the availability of and requirement for prime coking coal between 1986/87 and 1989/90. As part of the efforts noted in para 2.16, certain seams of substandard coking coal have been recently excluded from feed to the washeries with the result that the shortfall is now expected to be about 3 million tpy of prime coking coal. By comparison, actual imports averaged about 1.5 million tpy in 1984 and 1985. The imported coal has an average ash content of about 10Z compared with about 21% for domestic prime coking coal, thus the imports also assist in improving the average quality of washed coal feed to the steel plants. A monitoring program is being established at each of the blast furnaces using the imported coal to quantify the benefits in order to optimize the blend. 2.18 With regard to thermal coals, the most frequent complaints refer to (i) the supply of oversized coal, (ii) the presence of extraneous material, such as shale and stone, and (iii) the increasing ash content _' both raw thermal coal and washed coking coal. While part of the deterioration of thermal coal quality is due to the development of new coalfields with low grade coal, it is also affected by (i) the shift towards open cast mining, (ii) the increased mechanization of coal mining, Ciii) the lack of coal handling plants, (iv) the comparatively poor performance of the two coal companies (ECL and BCCL)P *hich are the major suppliers of superior quality coking and non-coking coal, and (v) at times poor coordination between the mining companies, the transport companies, mainly the Indian Railways, and the power sector which results in coal shipments being diverted to unlinked users. & 2.19 In July 1982, GOI set up a high level committee (the Fazal Committee), representing the mining, railways and power sectors, to study these and related issues in the power sector. The committee submitted its report in late 1983 and its major recommendations which relate to the railway and power sectors, as well as the coal industry, have been accepted by the Government (Annex 4). GOI has agreed to provide the Bank with a detailed implementation schedule for the Fazal Committee recommendations by March 31, 1988. In the meantime, a number of the recommendations, which are directly under the control of CIL, have been implemented by CIL who is making a concerted effort to eliminate consumer dissatisfaction with the dispatch and quality of both thermal and coking coals (Annex 5). In line with the recommendations of the Fazal Committee, CEL has developed a two  -9- track product improvement program concentrating on (i) increasing quality control through greater supervision of mining operations; and (ii) increasing the proportion of coal that passes through coal handling plants3/ (CHPs), where it is screened, crushed and sized and then is subject to weighing on dispatch (through weighbridges).4/ A critical element in the quality control program is the linkage of the performance evaluation of each colliery manager to consumer complaints that are attributable to his colliery. The program also established a Quality Control Department in each subsidiary of CIL to coordinate the monitoring of coal quality of each mine under its jurisdiction, to advise mine management on how to respond to consumer complaints and to report weekly to top management on its actions. Under its CHP and weighbridge program, CIL has a staged plan and budget to eventually have all its product handled and weighed on site. Power stations complaints regarding unsatisfactory coal quality declined from an average of 50 per month in 1984/85 to 12 per month in 1985/86 but increased to 28 per month in 1986/87 (of which three per month are complaints at the loading point and 25 at the destination). CIL - Complaints Recei'ed from Power Stations Regarding Coal Quality (Average l,imber of Complaints per Month) 1984/85 1985/86 1986/87 50 11 28 Source: CIL. 2.20 Traditionally, coal producers have supplied coal to consumers without specific supply contracts. In the first half of 1985 CIL concluded bulk supply contracts with almost all State Electricity Boards (SEB) and with the National Thermal Power Corporation (NTPC). In the years ahead CIL intends to conclude such contra.ts with major buyers in other sectors. These contracts provide for (i) payments to be based on the results of joint sampling, (ii) bonuses or penalties in case the quality of the coal shipment differs from the grade stipulated in the contract, and (iii) invoicing of customers on dispatch of each consignment (with the SEBs) or on a daily basis with NTPC. The contracts provide for joint sampling of the coal (by CIL and the concerned power house) and for penalty/bonuses to apply if the coal quality moves into a different grade than that specified in the linkage. Certain improvements to these contracts are being contemplated; the most important are (i) the use of automatic joint sampling at the delivery point, considering that coal shipments are 3/ In 1985/86, 58Z of India's total coal production was processed by 50 major and 100 mini-coal handling plants operating in the subsidiaries of CIL. The Government plans to increase the share of coal being processed in CHPs to 75% by 1986/87, 85% by 1987/88 and about 90% by the end of the Seventh Plan period. 4/ CIL is currently carrying out a test program to determine the most cost-effective technology for de-shaling raw coal.  -10- frequently diverted from their originally intended destinations; (ii) the use of analytical procedures for the determination of the moisture content of coal as delivered based on its -free moisture content' rather than on its 'equilibrium moisture content-5/; (iii) the introduction of alternative formulations of the current bonus/penalty pricing structure, such as smaller quality ranges or bonuses/penalties using a sliding scale, and (iv) the provision of price incentives for beneficiation of non-coking coal. The joint sampling arrangements in the contracts have been an important element in identifying unsatisfactory coal quality and in monitoring CIL's progress in improvinig coal quality. CIL has confirmed that it will review the usefulness of the coal contracts by October 1, 1987 and will exchange views with the Bank shortly thereafter on possible improvement to the contracts. G. Coal Pricing 2.21 Coal prices are set by the Government on a pithead basis. The Government's basic pricing policy for public enterprises is to ensure financial viability and to provide for a reasonable rate of return on capital employed under conditions of efficient operation. GOI has agreed to review coal pr-ces periodically in line with the above pricing approach and with agreements made under the Dudhichua and Jharia projects to ensure the financial viability of CIL and provide increasing resource mobilization in the sector. The present coal price schedule is for seven grades of thermal coal based on useful heat value and eight grades of coking coal based on coking qualities and ash content as shown in Annex 6. Consumers also pay certain statutory levies and sales taxes, which :verage 12-30% of the pithead price (Annex 6) as well as transportation costs to the point of consumption. Coking coal prices receive a premium over thermal coal which takes account of the relative scarcity and higher costs of production for coking coal as compared with thermal coal. The differentials for higher grades of both coking and thermal coal have been substantially increased compared with lowr- grades of coal in the recent price increases. This is an important imp. ;ement as it brings the relatively scarce better grades of coal more in liae with their opportunity cost. A separate schedule is also provided for high grade thermal coals from the coalfields of ECL reflecting its better quality. 2.22 Recognizing that mining costs are relatively higher in West Bengal and Bihar (where the coalfields operated by BCCL and ECL are located) than in other regions due to difficult mirlng conditions, infrastructure constraints and other factors beyond the producer's control, in March 1983 the Government introduced a retentioq pricing system for the CIL group.6/ Under this system, each CIL subsidiary is annually assigned an internal accounting price based on estimated production costs and 5/ The -equilibrium moisture content- refers to the intrinsic moisture contained in coal and does not reflect increases in the moisture content due to careless use of water sprays to reduce coal dust or exposure to rain during stocking, loading or transport. 6/ This pricing change, which is implemented through the Coal Price Retention Account (CPRA), was 'n line with the recommendation in the Coal Sector Report (3601-IN), September 1982.  -11- efficiency standards for that subsidiary. These production and costs standards are revised each year assuming improvements in operating performance. They are, therefore, designed to induce more cost efficient operations. So far, the retention pricing system has been partially successful in stimulating the management of ECL and BCCL to improve performance and reduce losses. However, the year-to-year adjustments in retention prices appear to be made somewhat on an ad-hoc and arbitrary basis. Further work presently being undertaken by the Bureau of Industrial Costs and Prices (BICP) on the coal industry's cost structure (see para. 2.23) should provide the basis for improving the retention pricing system. 2.23 Since nationalization of the coal industry in 1975, coal prices have been revised on seven occasions including the most recent price revision, which took place in January 1986. As a result of these increases, average coal prices approach long-run marginal cost for non-coking coals and import parity for coking coals (after allowing for adjustments for port handling, inland freight and quality differentials). Therefore they seem to be at an appropriate level in terms of economic efficiency. The last two increases (in January 1984 and January 1986) were based on the recommendations of reviews carried out by the Bureau of Industrial Costs and Prices (BICP) and led to price levels broadly In line with efficiency pricing criteria. More recently the Government has again requested the BICP to undertake a detailed study of coal pricing. BICP's basic tasks included examining the efficiency of various coal mining operations to derive production cost standards, and reviewing alternative principles and procedures for setting minehead coal prices and producer retention prices. The results of this work are expected in mid 1987. In addition, the Department of Coal is considering possible improvements in the approach to prices for washed coking coal which are presently negotiated between CIL and SAIL based on raw coal prices and normalized washing costs. H. Role of the Bank 2.24 Since energy will continue to be a critical factor in India's economic development, and since coal will continue to provide about half of India's incremental commercial energy products to the year 2000 and beyond, GOI has requested the Bank to include a series of coal projects in the lending program. The strategy so far has been to concentrate on the CIL group of companies given their importance to the sector and to undertake at least one lending operation to develop a new highly mechanized mine in a major coalfield with each of CIL's coal producing subsidiaries. Such projects are considered to have high payoffs since they involve important improvements in efficiency through the transfer of state-of-the-art mining technology to CIL, as well as relatively large increases in production. In the context of these lending operations, the Bank group addresses institutional improvements in the coal industry, as well as sector-wide issues (such as coal pricing) and sector coordination issues regarding coal transport and the quality of coal, which are closely linked to the performance of other sectors (railways, power and industry) and the economy as a whole. More specifically, the Bank group's assistance in the coal sector is focused on:  -12- (a) operational efficiency-to improve the efficiency of coal mining operations through the introduction of state-of-the art technology for the development of new large-scale open-nit and underground mines, as well as upgrade existing labor-intensive underground mines through the introduction of efficient work practices and appropriate intermediate technology; (b) institution building-the aim is to strengthen the management and finances of the coal industry and ensure the long-term financial viability of CIL by the introduction of improved management and cost control practices and by greater emphasis on internal resource mobilization, appropriate pricing policies and investment allocations based on the principle of least cost development; and (c) intersectoral coordination-to achieve greater efficiency in the distribution and use of coal resources through the introduction of measures to (i) enhance coal quality, (ii) reduce the cost of coal transport, (iii) increase the reliability of coal shipments and (iv) ensure the availability of adequate coal transport capacity. 2.25 The Bank group's involvement in the coal sector began with a loan for a coking coal project to the Indian Iron and Steel Company (IISCO) for US$35 million (Loan 290-P-IN, dated August 9, 1961). The Bank group resi'ed its activity in 1980 with a review of India's coal sector (India Coal Sector Report No. 3601 IN). This review addressed issues related to coal marketing, pricing, investment and financing. It also facilitated the policy dialogue with GOI on coal pricing and resource mobilization issues, the results of which are detailed in the Country Economic Report (No. 4395-IN, dated April 11, 1983). Specific measures affecting coal pricing and coal transportation were included in the Dudhichua Coal Project (Loan 2393). This project also provides for the institutional support of CIL in the operation of large scale open cast mines, project management and budgeting and cost control. The project is being implemented on schedule. The Jharia Coking Coal Project (Loan 2498) supports a sectoral program a*med at improving the quality of domestic coking coal supplies to the steel industry, as well as for further institutional strengthening of CIL in the design, management and operating procedures of highly mechanized underground mines and in addressing specific issues in shaft sinking and stowing to prevent surface subsidences. Delays have occurred in project implementation due to slippage in land acquisition and in shaft sinking. The shaft sinking difficulties are largely resolved but land acquisition progress is slow. CIL is working with state and local officials to find ways of expediting the land acquisition. 2.26 GOI has proposed further Bank group financing of projects to increase the production of both thermal and coking coals over the next several years. The Coal Mining and Coal Quality Improvement Project is the third of these operations which are designed to support GOI's development  -13- strategy and CIL's efforts to increase production, improve efficiency and reestablish its financial viability. This project brings the Bank's involvement to two more of CIL's operating subsidiaries (SECL and ECL) as well as to two more major coalfields (Korba and Raniganj). The project provides for sector-wide improvements in thermal coal quality and for improvement of coking coal supplies to the steel industry by blending high quality imported coking coal with lower quality domestic supplies. The project also provides for institutional development for the CIL group in training and manpower planning and to ECL regarding the introduction of highly mechanized open-pit mining (ECL presently has little mechanized open-pit mining). The project supports efficiency improvements in CIL (including, in particular, ECL's old), underground mining operations where labor productivity is extremely low with a view to improving CIL's financial performance. Future lending is expected to comprise further projects to develop large highly mechanized mines in important new coalfields (such as Talcher or Karanpura) as well as to help rehabilitate old, inefficient underground mining operations (especially in ECL and BCCL) to improve efficiency and reduce costs. It is also planned to progressively update the earlier coal sector study which may lead to sector-related lending. Lending operations, together with sector work, will strengthen the policy dialogue that has been established regarding sectoral issues such as coal pricing, transportation, distribution, and coal quality and will also support the implemen.ation of the results of studies undertaken under earlier projects to provide institutional improvements within CIL. III. THE BENEFICIARIES A. The Coal India Group 1. Organization and Management 3.01 The Coal India group was established in 1975, as a holding company (CIL) with five subsidiaries. CIL operates -:emi-autonomously under the direction of an 11-member Board of Directors which is headed by a Chairman-Managing Director appointed by the President of India. CIL's senior management is appointed by GOI. In addition to setting general policies for its subsidiaries and undertaking other managerial functions typical of a holding company, CIL directly manages the financial resources of the Group overseeing the investment program and arranging for all long-term financing. CIL handles procurement of major capital equipment for its subsidiaries as well as all foreign procurement. It is also responsible for administering the coal retention price system for the purpose of internal accounting. For these reasons, CIL was designated as a primary beneficiary of the previous two Bank loans and the same arrangement is recommended for the proposed Project. 3.02 CIL subsidaries operate under the direction of a Board of Directors, headed by a Chairman-Managing Director, appointed by the President of India. The subsidiaries' senior management down to the  -14- Director level is appointed directly by 'OI. Within the subsidiaries, mining is organized into small regional areas, each one under the supervision of an area manager. Presently the subsidiaries operate nearly 400 mines organized in about 50 areas with an average production of nearly 3.0 million tons per year (mtpy) per area. A more detailed description of SECL and ECL is provided below (paras. 3.14 to 3.18). 3.03 CIL is the largest coal company in the world, and has a vast and complex organization. Nevertheless, the coal sector is still highly centralized and highly controlled. The actual autonomy of CIL and the subsidiaries is limited by price control, investment control and staffing policy control (wages, terms of employment, appointment of senior staff) by the Government. The effect on the coal sector productivity has tended to be adverse. Recently, the Government has embarked on a cautious decentralization, with the setting of operational objectives for each of the subsidiaries, and holding the management responsible for achieving these objectives. The trend toward more managerial autonomy and decentralization is expected to be strengthened by the establishment of a new budgetary system. As part of its efforts to improve management performance, and in particular financial discipline and control, CNPDI and the Indian Institute of Management (Ahmedabad) have undertaken studies of the budgetary and cost control systems of CIL and its subsidiaries for the purpose of strengthening the accountability of senior staff to the upper management, and allowing more decentralization in decision making. The results of the studies, which address the definition of cost and profit centers, basic procedures, reporting formats, budget formulation, control mechanisms and corrective actions are now being implemented on a trial basis at selective mines. 3.04 In order to improve the delivery of its large investment and expansion program CIL has taken measures to strengthen its project management practices by upgrading the status of project managers and by establishing a project function within each subsidiary reporting to a Froject Technical Director. Since its inception, CIL has made progress in strengthening its managerial capabilities. However, there has been a continuous change in CIL senior management with a consequent effect of changing priorities and strategies. While some management changes are both necessary and desirable, there is a need to improve management continuity to ensure that past progress is maintained and that the potential benefits of initiatives presently being undertaken are fully realized. The rapid expansicei of the sector in the past decade has also stretched the availability of qualified, experienced engineers and managers. CIL is concerned that too many managers are concentrated in headquarter positions to the detriment of field operation, and is reviewing its management structure with the aim of reducing the number of managers in headquarters of each subsidiary vis-a-is the number of management positions in the field.  -15- 2. Operations 3.05 In order to meet the demand for coal, CIL has succeeded in increasing production from 101 million tons in 1980/81 to 134 million tons in 1985/86. As part of its strategy CIL has emphasized the development of new open-pit mines and the proportion of open-pit coal production has risen from 37% to 55% in the same period. Until April 1986, CIL had four coal producing subsidiaries-BCCL, ECL, CCL and WCL. Since CIL's creation in 1975, production has increased strongly in WCL and CCL which jointly accou-ted for 66% of coal production in 1985/86 and also have a predL inance of open-pit production. By comparison production has scarcely increased at all in BCCL and ECL (21 million and 24 million tons production respectively in 1985/86), both of which are still predominantly underground mining companies. The rapid growth of CCL has resulted in part from the development of the Singrauli Coalfield which is located about three hundred km west from CCL's headquarters in Ranchi (Bihar). Similarly, the rapid growth of WCL has been due in part to the development of the Korba Coalfield in the region of Bilaspur (M.P.) which is located over 200 km east from WCL's headquarters in Nagpur (Maharashtra). For several years, the Singrauli coalfield has been a separate operating area of CCL with its own Director-in-charge and Bilaspur has been a separate operating area of WCL also with its own Director-i n-charge. Recognizing that the operations at Singrauli and Bilaspur are becoming large enough for them to become independent entities and that the relative geographical isolation from their respective headquarters can be detrimental to effective management, CIL and GOI decided, effective April 1, 1986, to establish two separate new subsidiaries: Northern Coalfields (NCL), consisting of the Singrauli division of CCL, with an expected annual production of 13 million tons saleable coal in 1986/87, and South Eastern Coalfield Ltd. (SECL), consisting mainly of the Korba, Sohagpur, Jamuna-Kotwa divisions of WCL, plus the Orissa area of CCL, with an expected annual production of 35 million tons saleable coal in 1986/87. As such SECL will have the largest production of the individual CIL subsidiaries. Henceforth, CIL will have six operating subsidiaries rather than four as previously. The Bank has supported this reorganization. 3.06 Given the increasing importance of open-pit mining operations, CIL has contracted under the Dudhichua loan the services of Metchem (Canada) to provide technical assistance regarding operational efficiency and operating practices in open-pit mines. Metchem completed its field assignment and submitted a final report to CIL in 1986. CIL is proposing to extend the Metchem contract to cover implementation of their recommendation for NCL and SECL. CIL has also commissioned a study of the design, construction, maintenance of haul roads in open-pit mines for which a draft report has been submitted by the Central Road Research Institute and is presently being reviewed. In order to introduce some standardization into its open-pit operations, CIL has adopted a series of .standard' truck! shovel combinations. While most of the combinations seem sound, there may be scope for improvement and CIL is undertaking a review of the standard combinations to see if improvement is warranted.  -16- 3.07 The rapid development of open-pit mining within CIL has placed new requirements on CIL's materials management system and workshops as well as on the power system. In the past, CIL was able to establish its parts inventory requirements on the basis of experience with the equipment they were generally using. However, as new larger and more complex pieces of equipment are introduced at a rapid rate, CIL's materials management system is faced with the twin problem of both a major expansion in the amount of spare parts which must be carried plus difficulties of estimating what would be an appropriate level of spare parts for equipment with which they have relatively little experience. At present, CIL's material inventory records are maintained in the form of a cardex system at central and regional depots. While the system is reasonably accurate, it is relatively ineffective for identifying a spare part which may be in shortage at one location but available at another; furthermore, with the proliferation of spare parts, the maintenance of the recording system itself becomes an increasingly difficult task. CIL recognizes that such an outmoded system can no longer support the needs of their rapidly expanding equipment fleet. CIL has commissioned a study by consultants, for designing and implementing a computerized materials management system. In addition, given the importance of reliable power supplies for the operation of its equipment, CIL is preparing an overall plan of its power requirements on a coalfield-by-coalfield basis. This will be completed in mid-1987 and will provide the basis for CIL to plan adequate power supplies for its needs in conjunction with the power utilities. 3.08 CIL also recognizes that their equipment fleet has outgrown workshop capabilities. Presently even the most advanced workshop within CIL is not fully capable of dealing with the latest equipment. During negotiations, agreement was reached that CIL would retain technical assistance, by December 31, 1987, to help design state-of-the-art workshops to fully meet the requirements of their open-pit mining equipment. These consultants would be selected in accordance with Bank procedures and would have terms of reference, qualifications, and experience satisfactory to the Bank. An outline of the scope of work for this assistance is provided in Annex 7. 3. Manpower and Training 3.09 The efficient management and deployment of its labor force is critical to CIL's performance. CIL is the second largest employer in India, after Indian Railways. At year-end 1986, CIL provided employment to about 670,000 personnel of which nearly 2% were managers, about 16% were supervisors and specialized staff, 15% were skilled workers and 67% were unskilled/manual workers. Employment distribution among the six producing subsidiaries was as follows: ECL (28%), CCL (15X), WCL (12%), SECL (15Z), NCL (2%) and BCCL (26%). The balance (2%) is in CMPDI, NEC and CIL Headquarters. Employment was proportionately higher than production in ECL and BCCL because of the predominance of labor intensive underground mining operations. As a result, the output in tons per manshift was much lower in these two companies (0.57 and 0.64, respectively) compared with the other  -17- subsidiaries (CCL - 1.06, 1CL - 1.10, SECL - 1.50 and NCL - 7.00). As noted in para. 2.13, CIL is addressing this problem and is taking measures to control employment and increase labor productivity. With these measures and better administration, CIL manpower is expected to increase to about 690,000 personnel in 1989/90 (a 1.1% per annum increase), while production is expected to increase by 11% per annum. While manpower inventories and records are available at each mining area, CIL does not have a consolidated inventory of its manpower on an overall basis. Over the past two years, CIL has initiated a program at CIL headquarters in Calcutta of establishing a computerized manpower inventory base. While this represents a first step, CIL recognizes the information is very rudimentary and that the present process is rather slow. At negotiations, CIL agreed to retain technical assistance by December 31, 1987, to help design and Implement a manpower inventory system suited to its needs, employing consultants under terms of reference and with qualifications, experience and selection method satisfactory to the Bank. A scope of work for the manpower assistance is attached as Annex 8. 3.10 The supply of suitably trained, skilled manpower will be one of the major constraints to CIL meeting its investment program's production targets over the next five years. CIL directly operates seven central training centers specialized in management, open-pit and underground mining technologies and coal beneficiation. In addition, the subsidiary companies operate 16 regional training centers covering managerial, technical and vocational training activities plus about 50 area training centers for statutory, vocational safety courses. During 1984/85, the training programs in these centers comprised about 5,000 courses given to 110,000 participants of which about 88Z were workers and the rest managerial and supervisory staff. The rapid development of open-pit mining within CJL has stretched the limits of CIL's training capabilities, and the availability of adequate training facilities for both operations and maintenance staff is becoming ax limiting factor on the on-going development of majo- coalfields, such as Singrauli, Korba and Raniganj. Furthermore, while CIL has endeavored to strengthen its training activities over the past years through a program of foreign collaboration, especially with the British coal industry, training activities are largely undertaken on a pieceteal basis and there is no comprehensive overview of training needs or how they should be met. Further, the training function is badly understaffed and has only rudimentary facilities. In order to strengthen the organization of its training function and to develop a satisfactory training action program, CIL will retain consultants under terms of reference and with qualifications, experience and selection procedures satisfactory to the Bank. This program would complement the assistance for manpower planning (para. 3.09). The scope of work is outlined in Annex 8. 4. Financial Position 3.11 The financial performance of CIL over the last five-year period is summarized below and given in fuller detail in Annex 9.  -18- CIL - Summary of Financial Performance 1980/81 to 1985/86 (Rs million) 1980/81 1981/82 1982/83 1983/84 1984/85 1985/86 nm Sale (million tons) 94 102 109 116 126 129 Net Revenues 11,3W 14,209 17,063 18,624 23,690 24,594 Operaticg EermWs 10,273 12,138 14,240 18,480 20,668 23,540 Dcepration 738 951 1,344 1,716 2,069 2,497 interest 626 778 1,110 1,324 1,733 2,158 Net T.ncame (tos) (337) 342 369 (2,469) (780) (3,557) Internal Cash Gemeratimn 401 1,276 1,713 (753) 1,289 (1,060) Capital zeminditus 3,412 5,809 7,142 8,390 7,877 8,427 Log-Tem DEbt 12,557 13,196 17,461 19,273 21,737 25,284 Acmulated Losses (8,461) (8,119) (7,370) (9,765) (10,533) (14,422) Net Equity 2,385 5,483 9,542 11,534 15,034 15,701 Net Tne (Ioss)/Revemaes % (3.0) 2.3 2.2 (13.3) (3.3) (15.1) Oraent Ratio 1.1 1.3 1.3 1.2 1.3 1.2 LT Debt/Equity Ratio 84:16 71:29 65:35 63:37 59:41 62:38 Debt Serice Couerage 0.9 1.4 1.4 0.3 1.04 0.5 Smrce: CT. 3.12 Up to 1980/81, CIL had been increasing losses constantly as a result of a low level of coal prices and an emphasis on increasing production without due regard to cost effectiveness. This trend was reversed in 1981/82 when CIL showed for the first time a positive net income with an adequate level of internal cash generation, long-term debt service coverage and current ratio. The financial position improved further during 1982/83. However, during 1983/84 CIL showed a financial loss and a deterioration of the main financial indicators due to the back-dating of a national wage and salary settlement associated with a new four year collective bargaining contract. The wage settlement was back-dated to January 1983 and an offsetting price increase was only made in January 1984 causing a large loss for CIL which forced delaying debt repayments to GOI. CIL was able to reduce its losses to Rs 780 million in 1984/85 following the January 1984 coal price adjustment (which increased CIL's sales realization per ton by 17%). However, CIL's financial performance deteriorated again in 1985/86 and losses reached Rs 3,557 million. 3.13 The accounts of CIL, as well as its subsidiaries, are audited annually by statutory auditors (a partnership of independent chartered accountants) appointed by the Government of India in consultation with the Comptroller and Auditor General of India. These arrangements are satisfactory. Statutory auditors are appointed for a period of three years at the end of which they must be changed. At the completion of their audit, the statutory auditors express their opinion on the fairness of the financial statements, which is included in the Company's annual report.  -19- Although the auditing standards and procedures followed are those laid down by the Indian Institute of Chartered Accountants, higher standards regarding the audit of internal control procedures are advisable. An additional audit is conducted by the Audit Board of the Office of the Comptroller and Auditor General of India. This is both a financial and a management audit and the comments of the Audit Board are also published with the financial statements of CIL. B. South Eastern Coalfields Ltd. (SECL) 3.14 SECL is the subsidiary of CIL responsible for the development and implementation of the Gevra mine. As noted in para. 3.05, SECL was formed in April 1986 and is the outgrowtb of the old WCL. SECL's first year of operation will be completed on March 31, 1987. In 1985/86, WCL produced about 49 million tons of saleable coal of which about 30 million tons were from the Bilaspur region (which was split off to become SECL) and about 19 million tons from the Nagpur region (which remains under the control of WCL). SECL, has its headquarters at Bilaspur, and operates coalfields in Korba, Sohagpur, Jamuna, Kotma, Chirimini Baikuntpur, Jhagrakhand plus the Ib River coalfield in Orissa. All of SECL's production is thermal coal. 3.15 Open-pit mining comprises about 55Z of SECL's production, mainly from large-scale highly mechanized operations centered on the Korba coalfield. Underground mining accounts for 45% of SECL's production. SECL's underground mines are newer, shallower operations with much easier mining conditions than those of BCCL and ECL. The output per manshift of SECL's underground mines is about 0.80 compared with 0.45 and 0.53 for the underground mines of ECL and BCCL respectively. 3.16 SECL is in a relatively sound financial position. WCL, the forerunner of SECL, has been able to earn moderate profits since 1979/80. In 1985/86, WCL/SECL's total production costs (including depreciation and interest charges) were is 171 per ton of saleable coal, which is about 78% of the average for the CIL group (Rs 219 per ton of saleable coal). The financial position of WCL from 1982/83 to 1985/86, is summarized below: SECL and WCL - Summary of Financial Performance (Rs million) WCL WCL WCL WCL/SECL Fiscal Year 1982/83 1983/84 1984/85 1985/86 Coal Sales (million tons) 32.6 38.3 44.1 46.7 Sales Revenues 4,632 5,591 7,659 8,017 Operating Expenses 3,380 4,663 5,334 6,518 Contribution to CPRA 524 11 1,137 1,009 Net Income a/ 142 121 69 (991) Internal Cash Generation a/ 472 590 715 (20) Investment 1,965 2,779 2,759 2,847 a! axter contribution to Coal Price Retention Account (CPRA).  -20- C. Eastern Coalfields Ltd. (ECL) 3.17 ECL will be undertaking the development and future operation of the Sonepur-Bazari mine. ECL has its headquarters at Sanctoria, West Bengal and operates about 100 mines in the Raniganj coalfields in West Bengal and Mugma Rajmahal coalfields in Bihar. These are older, deep minefields which are the main source of superior quality thermal (Grades A-C) coal in India. Superior quality thermal coal is in short supply in India and is sought after by industrial consumers. ECL is therefore attempting, to the extent it can, to Increase the supply of such coal. However, the coal seams are found in very difficult, mining conditions. During 1985/86, ECL produced 24.0 million tons of saleable coal of which 23.6 million tons were thermal coals (96Z) and the balance, 0.4 million tons coking coals (2Z). Underground mining accounted for 68% of ECL's production, which is substantially higher than the average for CIL overall (45Z). 3.18 ECL has much higher production costs than the average for CIL mining operations and has incurred heavy losses in the past. Surplus labor and low labor rroductivity are the most critical elements in ECL's high production costs which derive from a number of factors some external to ECL and others under ECL's control. The factors largely outside of ECL's control include geological conditions which result in deep, difficult mining conditions; power outages which cause production interruption and cutbacks in pumping capabilities (necessary to keep the deeper mines operating during the monsoon season); and a government-sanctioned national mine-workers agreement which constrains ECL's ability to layoff surplus labor. Within ECL, however, attempts to increase production were made with little, if any, regard for cost control and for many years, there appears to have been little concerted effort by either the management or the labor force to improve ECL's performance. Some efforts have been made to improve the labor situation in the past two years including severe restrictions on new hiring and on overtime work. In 1985, the "Chari Committee' was appointed to study ECL and make recommendation on measures to establish ECL's viability within a given time period. The Committee's report which is presently under consideration by the Government containe a wide ranging set of innovative measures to improve ECL performance, several of which are already being implemented by ECL. Management has taken a number of steps in an immediate effort to improve efficiency and cost consciousness in its operations. New hiring of skilled workers needed for new projects has been strictly limited to no more than 50% of retirees and ECL expects a net reduction of 1,700 workers in 1986/87. ECL is undertaking technical audits of twenty underground mines which are incurring the largest losses which are the basis for rehabilitation plans to improve the performance of these mines. ECL will implement these rehabilitation measures under a timetable satisfactory to the Bank and will submit progress reports on a regular basis for the Bank to review. In addition, ECL will conduct technical audits of a further twenty mines with large losses. These wasures should help improve ECL's performance in future years. In 1985/86, ECL's total production costs (including depreciation and interest charges) were Rs 307 per ton of saleable coal, which is about 40% higher than the average for the CIL group (Rs 219 per ton of saleable coal).  -21- ECL - Summary of Financial Performance (Rs million) Fiscal Year 1982/83 1983/84 1984/85 1985186 Coal Sales (million tons) 21.3 21.5 21.8 22.7 Sales Revenues 3,589 4,142 5,305 5,719 Operating Expenses 4,034 5,110 5,509 6,013 Contribution from CPRA 419 334 803 553 Net Income a/ (553) (1,279) (137) (700) Internal Cash Generation a/ (244) (902) 396 141 Investment 994 1,159 1,273 1,372 a/ After contribution from Coal Price Retention Account (CPRA). IV. THE PROJECT A. Project Objectives 4.01 The main objectives of the project are to improve the quality of coal available to consumers and to increase the supply of thermal coal (to the power and industrial sectors) and coking coal (to the steel sector). The project will help meet the demand for thermal coal through the development of two large-scale open-pit mines in Gevra and Sonepur-Bazari -with an ultilmate combined capacity of 13 million tons per year. The project will help improve the quality of coking coal supplies to the steel sector by supporting the importation of low ash-coking coal (average 10O ash). The imported coal will be blended with indigenous supplies (average 21Z ash) thereby lowering the average ash of the blended mix which will contribute to improving blast furnace productivity and efficiency in the steel industry. The project is alac designed to improve sector management through the implementation of a number of coal mining, handling and transportation measures which should also contribute to improved coal quality. In addition, the project will improve the efficiency of existing coal mining operations and strengthen the managerial, commercial and financial practices of both CIL and two of its four producing subsidiaries, ECL and SECL, through the implementation of a series of efficiency improvement and institutional development measures. By including training programs and training institute design in the project and by introducing state-of-the-art mining technology, the Bank will contribute to CIL's efforts to improve the efficiency of its mining operations. The inclusion of various efficiency-related and institutional development measures are aimed particularly at containing production costs in existing labor-intensive operations as well as strengthening the supply of skilled workers and managers to meet the needs of the industry's development program. Through its involvement in the project, the Bank will support GOI's objectives of maximizing the development of indigenous energy resources; of alleviating power shortages by expanding the country's  -22- thermal power generating capacity; and of providing power plants with the required coal supplies through the accelerated development of large-scale open-pit mines. B. Project Description 1. Gevra Mining Complex a. Scope 4.02 The scope of the proposed Gevra mining component consists of implementing the second stage of development of the Gevra open-cast coal complex. This will complement components already included in the first stage: coal handling plant, train loading facilities, and a railway link to the Korba power station. The second stage will increase output to 10 mtpy of raw coal, from a designed capacity of 5 mtpy in the first stage, for which construction and actual coal production were started in 1980 and 1981 respectively. The complex will include additional mining equipment, an in-pit conveyor for coal transport and crushing, a marginal expansion of service facilities, a training center and a township as its main components. b. Location, Geology and Reserves 4.03 The Gevra open-cast mine is located in the center of the Korba coalfield, on the western bank of the Hasdeo river. This coalfield is in the Madhya Pradesh state, about 90 km east-northeast of Bilaspur (Map 19279R). The altitude of the area is about 300 m above the sea level, and the topography is fairly flat. Drainage is towards the northeast-east during the rainy season, mainly by the Ahinar and Hasdeo rivers. The infrastructure provided during the first stage is well developed, and the coalfield is situated at a distance of about 10 km from the main Bombay/Calcutta railway in a region only sparsely populated with Korba being the major town. 4.04 The climate of the Korba coalfield is tropical, with very hot summer months (March-June) during which temperatures reach 46