India - Seventh Railways Project

RESTRICTED FILE lCOPY Report No. P-313 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE GOVERNMENT OF INDIA FOR THE INDIAN RAILWAYS March 13, 1963  Il1TERNATIONAL DEVEL0OPMENT ASS(CIATION ]EPORT AND RECrPEZl\NDATI-DNS -F TLBHE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PRf'_`)SED DEVELOPHENIT CREDIT TO THE GOVERNMENT flF INDIA 1e I submit herewith the following report and recommendations on the proposed development credit to India in an amount in various currencies equivalent to t67.5 million to assist in financing the Indian Railways' program in India's Third Five-Year Plan. PART I - HISTORICAL 2. The Association has already made eleven credits to India, as follows: Credit No. Purpose Amount ($ million) 3-IN National Highways 60,0 8-IN Tubewell irrigation 6.0 13-IN Shetrunji irrigation 4.5 14-IN Salandi iirigation 8.0 15-IN Punjab drainage & flood 10.0 protection 19-I-1 Fourth DVC 13.5 21-IN Sone irrigation 15.0 23-IN Purna irrigation 13.0 24-IN Second Koy-na Power 17.5 27-IN Bombay Port 18.0 28-IN Telecommunications 42.0 212.5 1/ 1/ 416.14 m-illion has been disbursed as of February 28, 1963. The proposed credit would thus increase the total amount of IDA credits to India to $280 million, leaving available for commitment only p20 million of the $300 million which the management has indicated to the Government of India that it would be prepared to consider in the twenty-seven month period ending June 30, 1963. The Bank has now made 30 loans in India, including $378 million to the Railways which are thus the largest beneficiary of Bank loans. The  -2- status of Bank loans to India on rebruLry 28,1963 was as follows: (C million) Total loans, net of cancellations 1/ 817.4 of which has been repaid lla.5 Total now outstanding 693b9 Amount sold 70.9 of which has been repaid 53.0 17.9 Net amount held by the Bank 68-1.0 1/ Including $19.5 million not yet effective and -$134.8 million not yet disbursed. PART II - DESCRIP'rION OF THE PROPnSED CREDIT 3. The main features of the proposed credit are as follows: I'urpose: To help finance the foreign exchange requirements, mainly in 1963, for the Railways' program in the Third Five- Year Plan. Borrower: India, acting by its President. Amount: The equivalent in various currencies of J67.5 million. Term of amortization: The term of the credit would be 50 years with a grace period of ten years. One- half of 1% of the principal amount would be repayable semi-annually for ten years beginning May 1, 1973, and 11/1> of such principal amount would be repayable semi- annually commencing May 1, 1983 and ending November 1, 2012. Payment dates: Mlay 1 and November 1.  - 3 - PAiT III - APPRAISAL ,F THE PROPO)SED CR-EDIT The Project 4. A detailed appraisal of the project (Report No. T0353b) is attached (No. 1). 5. The experience of the past decade of Indian economic development has emphasized the key role of transport and particularly of the Rail- ways. Indeed, the demand for transoort has risen at a much faster rate than has the national income or the output of any major sector of the economy. Wlhile national income increased 20% during the Second Plan, the increase in ton-miles of traffic carried by the Railways amounted to 47%. The Third Plan calls for a 30;, increase in national income and an 80% increase in railway traffic. Consequently the investment in expanding the facilities of the Railways has taken a large share of the total planned investment. Total ftailways1 investment during the Second Plan amounted to Rs. 11,200 million (`2,352 million) or about one-fifth of the public sector outlay. They are to receive about the same share of the greater Third Plan outlay for the public sector. The Third Plan now calls for an investment of Rs. 14,700 million ('3,087 million) in the Hailways and the possibility is under consideration of a further increase to Rts. 15,170 million (<3,186 million). 6. The foreign exchange requirements of the now approved program are estimated at Hs. 2,490 million (0523 million). The foreign exchange costs during the first two years have been almost completely covered by assistance from the Bank and supplier countries. The proposed credit would finance most of the foreign exchange payments falling due in 1963 which could not be met with assistance from supplier countries. A large part of the credit would be used to buy components and materials used in the manufacture of locomotives and rolling stock in India. It would also finance equipment for the electrification program, track and other materials and equipment. 7. The Railways will continue to place orders for imported equipment on the basis of international competitive bidding. 8. During the first two years of the Plan considerable progress has been made in converting to electric and diesel operations, in increasing line capacity and in the manufacture in India of wagons, coaches, loco- motives and other equipment. Operating efficiency has increased. 9. By and large the Railways have managed to keep pace with the in- crease in industrial and agricultural production. The greatest demands are placed uoon them by the coal and steel industries which account for a considerable part of the remarkable increase in traffic which has taken place. As measured by ton-miles carried, coal accounted for 39` of total traffic in 1961/62. Shipments to and from the steel plants accounted for 17% of the total tonnage of originating traftfic in 1961/62  - 4 - and are expected to account for about 21? by the end of the Plan. Coal, steel and raw materials other than coal for the steel plants are expected to make up over half of the originating tonnage of traffic by the end of the Plan. Recognizing the importance of this traffic to the further development of the Indian economy, the Bankc and the Government of India agreed recently to finance an independent study of the transport of coal. A preliminary report of this study should be ready in mid-1963 and the final report early in 1964. 10. During the past two years depreciation and other reserves were in- creased despite higher payments to the General Revenues. During the Third Plan period the Railways are expected to maintain an average annual return on investment, calculated on an accounting basis comparable with commercial railways of about 6%. 11. The proceeds of the credit wjill be made available to the Railways as capital-at-charge on which they will pay an annual dividend to the General Revenues. The rate recently set for the final three years of the Plan is 4-L%-. During the first two years it was set at 4%. 12. The Railways have consistently followed a policy that revenues should at all times be sufficient to meet operating costs, depreciation and financial charges and yield an adequate surplus for investment. The Failways provided froml their own resources some h44 of their investment under the Second Plan and are expected to provide about 35'0 of their larger investment to be made under the Third Plen. The Economy 13. Attached is a memorandum on the econorric situation (No.2). A mission is now in India preparing a full report on the economy which will be cir- culated to the Executive Directors in due course. In describing the external financial situation the memorandum refcrs to the continuing heavy pressure on the balance of payments. An important element in this is the payment falling due on the externally held public debt, now amounting to about $3,00 million. Debt service during the Fourth Plan is likely to increase to a level representing perhaps one-fifth of India's current account receipts at that time. Clearly, therefore, a very large proportion of further aid should be made available in a form which does not impose a substantial burden on India's balance of payments. PART IV - LEGAL INSTRUIENTS AND LEGAL AUTHORITY l1. Attached is a draft Development Credit Agreement between India and the Association (lo. 3). Except for those specifically related to the proposed transaction being an IDA credit, the provisions are substantially the same as those applicable to the recent Bank loans for the Indian Rail- ways. The recommendation of the Cormittee provided for in Article V, Section 1 (d) of the Articles of Agreement of the Association is attached. (Ho. L4)  PART V - COP-IPLIANCE HITII ARTICLES CF AGR=IT 15. I am satisfied that the proposed development credit would comply with the Articles of Agreement of the Association. PART VI - ECOIHENDATIO .S 16. I recommend that the Association make available a development credit to India in an amount in various currencies eciuivalent to $67.5 milLion for a total term of 50 years Eith a serviice charge of three-fourths of one percent per annum and on such other terms as are specified in the draft Development Credit Agreement, and that the Executive Directors adopt a resolution to that effect in fonr attached (1Ho. 5). George D. IHoods President -Washington, D.C. M1,arch 13, 1963