India - Jharia Coking Coal Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 15852 PERFORMANCE AUDIT REPORT INDIA JHARIA COKING COAL PROJECT (LOAN 2498-IN) June 28, 1996 Operations Evaluation Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Currency Equivalents (annual averages) Currency Unit = Rupees (Rs) 1988 US$1.00 = Rs 13.9 1989 US$1.00 = Rs 16.2 1990 US$1.00 = Rs 17.5 1991 US$1.00 = Rs 22.7 1992 US$1.00 = Rs 25.9 1993 US$1.00 Rs 30.5 1994 US$1.00 = Rs 31.4 1995 US$1.00 = Rs 32.4 Abbreviations and Acronyms BCCL - Bharat Coking Coal Ltd. BFIR - Bureau of Financial and Industrial Restructuring CCL - Central Coalfields Ltd. CIL - Coal India Ltd. CMPDI - Central Mine Planning and Design Institute ECL - Eastern Coal Ltd. EIA - Environmental Impact Assessment EMP - Environmental Management Plan EMS - Earning per Man-Shift GOI - Government of India M - Cubic Meter NCL - Northern Coalfields Ltd. NHPC - National Hydro Power Corporation NTPC - National Thermal Power Corporation OBR - Overburden Removal OED - Operations Evaluation Department OMS - Output per Man-Shift PAF - Project-affected family PAP - Project-affected person PMU - Project Management Unit R & R - Rehabilitation and Resettlement SAIL - Steel Authority of India Ltd. Fiscal Year Government: April 1 - March 31 FOR OFFICIAL USE ONLY The World Bank Washington, D.C. 20433 U.S.A. Office of the Director-General Operations Evaluation June 28, 1996 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Performance Audit Report on the India Jharia Coking Coal Project (Loan 2498-IN) Attached is the Performance Audit Report (PAR) on the India Jharia Coking Coal Project (Loan 2498-IN, approved in FY95) prepared by the Operations Evaluation Department. The Jharia Coking Coal Project, which aimed at producing 5.5 million tons of coking coal per year, formed part of the master plan for the development of the Jharia Basin. It consisted of two components: (i) a 2.5 million tons per year open-cast operation at Block 2; and (ii) a 3 million tons per year underground operation using longwall technique at the Pootkee-Bulliary coal mines. The loan was for US$248 million and the total project was estimated at US$696 million. During implementation, the project was confronted with three major problems which derailed the initial expectations. The first two affected the open-cast mine; the inability of Bharat Coking Coal Ltd. (BCCL - the implementing agency) to resettle the residents of the villages situated on Block 2, combined with the detection of several mine fires in the area drastically altered the primary mining method from draglines to shovels and dumpers with significant increases in the cost of production. Because of the problems associated with land acquisition, resettlement and mine fires, the production from this mine has never exceeded 1.2 million tons. It has dropped in recent years to around .7 million tons. The third problem led to the cancellation of the underground mine component, as further exploratory and development work led to the discovery of dikes in the coal seams which complicated the efficient operations of the longwall equipment. Further analysis and a revised project for an annual production of 1.8 million tons indicated that this component was no longer economically viable. As a result, the Bank withdrew its support from this component of the project in October 1989 and US$165.3 million of the Bank loan was cancelled. The failure of this project is largely due to its flawed quality at entry. Despite its intention not to proceed with the project without confirmation that BCCL had taken possession of the land required for, at least, the first five years of operation, the Bank approved the loan before land acquisition. Subsequent events clearly demonstrated the inability of BCCL to resolve land acquisition issues or to arrange for any resettlement between 1984/85 and 1992/93. The outcome of this project is rated as unsatisfactory and its sustainability as uncertain. Despite some positive results from the studies carried out as a part of the project, the institutional development impact of the project is rated as modest. Bank performance is rated as unsatisfactory. One major lesson of this project is the need to assure the quality at entry, including adequate technical studies when project success is dependent on them. Another is the need of resolving all land acquisition and resettlement issues before the Bank proceeds with the processing of a loan. Attachment This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  FOR OFFICIAL USE ONLY Contents Preface .................................................................3 Basic Data Sheet........ ................................................5 Evaluation Summary.....................................................9 1. Introduction ........................................................17 Project Design and Scope................. . ...................... ........17 Land Acquisition ........................................................ 18 The Project ...........................................................20 2. Implementation Experience......................l...... .................21 Land Acquisition and Resettlement.......................l..... ...............21 Mine Fires .............................................22 Pootkee-Bulliary Underground Operation ............................. ..........24 Project Cost ...........................................................25 3. Results ............................................................26 Production Performance ............................................ ......26 Manpower ............................................................26 Environmental Protection ........................................ ..........27 4. Overall Assessment ............................................. ......28 Land Acquisition and Resettlement.............................................28 Cost Structure and Profitability.............................................31 Outcome..............................................................32 This report was prepared by Farrokh Najmabadi (Task Manager) who audited the project in April 1996. Eneshi Irene K. Davis provided administrative assistance. The report was issued by the Country Policy, Industry and Finance Division, Manuel Pefialver. Chief, of the Operations Evaluation Department, Francisco Aguirre-Sacasa, Director. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed wiLout World Bank authorization. 2 Sustainability ........................ 33 Institutional Development Impact............................................33 Bank/Borrower Performance ....................................... ........34 5. Conclusion and Lessons Learned.........................................34 Tables Table 1: Record of Resettlement and Rehabilitation of Families from Block 2 .......................22 Table 2: Coal Production in Block 2 - Actual versus projections ........................ 24 Annexes I. Project Costs and Financing...........................................37 II. Monthly Production - Block 2 Open-Cast .........39 III Manpower Status of Block 2 Open-Cast Project - As of April I ........... ..............40 IV. Block 2 Open-Cast Project - Educational Profile of Executives and Supervisor Staff - As of April 1,1995...........................................41 V. Air Quality Data - Block 2 Open-Cast Project .......... ...................42 Effluent Water Quality - Monthly Measurements ...................... .....43 Noise Level - Upper Limit 85 dB...................................... 43 VI. Block 2 Open-Cast Project - Cost Structure and Profitability ....................................44 VII. BCCL - Cost Structure and Profitability ................................. 45 VIII. Trend in Coal Prices - CIL Official Run of the Mine Prices for Steam and Coking Coal (Rupees/Tonne) ...............................................46 Coal Prices in Real 1984 Rupees (Deflated by Wholesale Price Index) . .............46 IX. Assumptions for FRR and ERR Calculations............... ...............47 X. Reestimated FRR - 1993/94 Prices .....................................48 XI. Reestimated ERR - 1993/94 Prices...............................49 3 Preface 1. This is the Performance Audit Report (PAR) for Jharia Coking Coal Project for which the Board approved a US$248 million loan in March 1985. Nearly 78 percent of this loan (US$192.7 million) was cancelled: this included US$165.3 million earmarked for the underground Pootkee- Bulliary component, where a further review of the geological conditions of the mine indicated that the original mine design could not be implemented and no other economically feasible option could be found; US$25 million, when land acquisition problem in the open-cast Block 2 adversely affected the mining plan and made some equipment redundant; and US$2.4 million, as a result of lower than projected cost of the reduced project. The last disbursement took place in July 1993. 2. The PAR was prepared by the Operations Evaluation Department (OED). An OED mission visited India in April 1996 and discussed the effectiveness of the Bank's assistance with the Government of India; Coal India Ltd. (CIL) and Bharat Coking Coal Ltd. (BCCL). Their kind cooperation and assistance is greatly acknowledged. 3. The PCR was prepared by the Energy Operations Division, India Country Department, South Asia Region. The Coal India Ltd. provided Part II. The PAR complements the PCR in exploring the factors that led to the failure of this project in achieving its objectives. 4. The draft PAR was sent to the Borrower for comments. No comments were received.  5 Basic Data Sheet JHARIA COKING COAL PROJECT (LOAN 2498-IN) Key Project Data (amounts in US$ million) Appraisal Actual or Actual as % of estimate current estimate appraisal estimate Total project costs 696 127.8 18.4 Loan amount 248 55.3 22.3 Cofinancing - - Cancellation - 192.7 77.7 Date physical components completed October 1990 April 1992 - Economic rate of return 28.2% 13.4% - Institutional performance Substantial Modest - Cumulative Estimated and Actual Disbursements 1986 1987 1988 1989 1990 1991 1992 1993 Appraisal Estimate(US$M) 0.6 55.2 108.8 180.0 202.4 238.6 248.0 248.0 Actual 0.0 21.4 32.6 42.8 50.8 52.4 52.6 55.3 Actual as % of Estimate 0.0 38.8 30.0 23.8 25.1 22.0 21.2 22.3 Date of Final Disbursement: April 29, 1993 6 Project Dates Date Planned Date Revised Date Actual Identification September 1982 October 1982 Preparation Appraisal January 1983 March 1983 September 1984 Loan Negotiations January 1985 January 1985 Board Approval March 1985 March 7, 1985 Loan Signing May 10, 1985 Loan Effectiveness August 8, 1985 Loan Closing Date March 31, 1992 First Extension of the Closing Date December 31, 1992 Completion April 30, 1992 COMMENTS. Almost two and a half years elapsed between the time the project had been identified and the date of approval. While this may somewhat exceed the time required for the preparation of similar projects, it has to be kept in mind that this was the Bank's first project with a new implementing agency, Bharat Coking Coal Ltd. 7 Mission Data Stage ofProject Month! Number of Days in Specialization Performance Type ofProblems Cycle Year Persons Field Represented Rating status/b Supervision 1 Oct. 85 3 11 Economist 2 Slow progress. Pootkee-Bulliary 9 Engineer months behind schedule Consultant Supervision 2 Feb. 86 3 19 Economist 2 Engineer Financial Analyst Supervision 3 Aug. 2 10 Engineers (2) 2 Slippage on sand and 86 stowing and in main shaft sinking activities Land acquisition and procurement delays Supervision 4 Dec. 86 2 12 Engineers (2) 2 Supervision 5 May 87 4 13 Economist 2 Engineer Procurement Financial Analyst Supervision 6 Oct. 87 5 21 Economist 2 Engineers (2) Financial Analyst Consultant Supervision 7 June 88 4 22 Economist 2 Engineers (2) Financial Analyst Supervision 8 Jan 89 1 14 Engineer 2 Land Acquisition delays Non compliance with financial covenants 8 Mission Data continued Month/ Number of Days in Specialization Performance Type ofProblems Year Persons Field Represented Rating status/b Supervision 9 Aug. 5 15 Economist 1 89 Engineers (2) Financial Analyst Consultant Supervision 10 Feb. 90 5 30 Economist 1 Engineers (2) Financial Analyst Project Officer Supervision 11 Aug. 3 22 Economist 1 90 Engineers (2) Supervision 12 Feb. 91 3 14 Economist 1 Engineers (2) Supervision 13 Oct. 91 4 16 Economist 1 Engineers (2) Operations Analyst Supervision 14 July 92 4 18 Economist 1 Engineers (2) Operations Analyst Supervision 15 Mar 93 3 16 Engineers (2) 1 Land acquisition Operations Equipment stoppages Analyst (erratic power supply) Spontaneous combustion of mine face COMMENTS. Overall, the scope and intensity of supervision seemed to be adequate, in particular in light of the considerable amount of technical assistance. Management at the subsidiary level and the project site were interested in the comments made by Bank supervision missions and receptive to their recommendations. 9 Evaluation Summary Introduction 1. The development of coal resources has been the cornerstone of India's energy policy since the early 1980s. Endowed with an estimated 112 billion tons of coal, India can depend on these resources for decades to satisfy its needs for steam and coking coal. In consultation with the Bank, the Government of India (GOI) formulated a strategy that called for the rapid development of these resources utilizing large-scale, highly mechanized open-cast mining techniques. In addition, in order to increase the production of prime quality coking coal situated in deeper seems, it was decided to introduce highly mechanized longwall technology in a few of the underground mines. This strategy received the full support of the Bank and resulted, initially, in the preparation of two projects in 1983: (i) a 5 million ton per year open-cast operation for steam coal at Dudhichua in the Singrauli Region; and (ii) a 2.5 million tons per year open-cast operation for coking coal at Block 2 in Jharia. Project Design and Implementation 2. In early 1984, the Government of India proposed another underground coking coal project, Pootkee-Bulliary, for Bank financing. Concluding that the development of Pootkee-Bulliary could be integrated with Block 2 project, the scope of the Jharia project was enlarged to include both operations with the ultimate annual coal production capacity of 5.5 million tons (2.5 million tons open-cast and 3 million tons underground). Both these mining complexes were part of the master plan to restructure the Jharia coal field which is the main source of prime coking coal for the steel industry. The project aimed at improving the quality of coking coal supplies to the steel industry through the exploitation of superior quality coking coal which, after being treated in washeries, would provide coal with an ash content of around 17 percent, instead of the then coking coal supplies containing about 20-21 percent ash. 3. An issue that received considerable attention during preparation and appraisal of the project was land acquisition. Very early in the project cycle, the bank realized that, despite the empowering legislation, this may pose problems during implementation, land acquisition, especially in the North Eastern states of India such as Bihar and West Bengal, could frequently acquire political overtones and law and order problems could not be ruled out. Thus, the Bank, in May 1983, decided to accept a three phase land acquisition arrangement for Block 2, but only proceed with the project appraisal if the results of Phase I land acquisition were deemed satisfactory and a detailed and realistic plan for Phase II (necessary for the first five years of production) was in hand. Since these conditions were not satisfied by mid-1983, the processing of the Block 2 project was temporarily stopped. 4. Subsequently, during the appraisal of the Pootkee-Bulliary underground mine in May 1984, and based on the assurances received from CIL and BCCL, it was determined that land acquisition had progressed sufficiently as to justify the re-initiation of the loan processing. A later mission to India prior to the finalization of the project and its submission to the Board in March 1985, found that the availability of land for mining Block 2 was satisfactory. As it turned out, however, this assessment was over optimistic and based on incomplete information. 10 5. During implementation, the project was confronted with three major problems which completely derailed the initial expectations. Despite all the assurances given by BCCL, CIL and ultimately the Government of India, the project came up against serious land acquisition and resettlement problems, notably in Block 2, as soon as it became effective. These problems forced a drastic revision of mine designs and equipment. 6. The resettlement statistics clearly indicate that, out of a total of 711 affected families, only 14 had been resettled before the project's approval by the Board. No further progress was achieved until 1992/93 when an additional 146 families were resettled. With the resettlement of a further 39 families during the last three years, the total number of resettled families stood at 199 at the end of March 1996. At present, the resettlement of the remaining 23 families from one of the hamlets has become the critical factor in the operation of the dragline. Unless these families are resettled immediately, the dragline is likely to remain idle for an indefinite period. 7. In addition to facing enormous difficulties with respect to land acquisition and resettlement, the operation was also affected by mine fires. In the Jharia coal field, mine fires have been known since 1916. Mine fires are not peculiar to Jharia coal fields, but are a phenomenon experienced by almost all coal fields around the world. Most fires are started by spontaneous combustion of coal left in underground mines for technical or commercial reasons. Their high level of occurrence in the Jharia coal field (some 70 fires), covering a total area of 18 square kilometers, has had a considerable impact on the mining activities and living environment in the region. Despite the existence of so many fires in the Jharia coal field, it was only during the course of opening Block 2, in April 1985, that a fire was detected in the IX and X seams of this field. This eventually prompted CIL and the Bank to seek technical assistance through the approval of the Jharia Mine Fire Technical Assistance Project (Credit 2450-IN, approved in FY93) in order to cope with the problem. 8. The original Feasibility Study for the Pootkee-Bulliary underground mines had been prepared in December 1980 by Central Mine Planning and Design Institute (CMPDI, a CIL design and engineering subsidiary) for a target production of 3 million tons. During appraisal, the Bank, while considering the mine design as satisfactory, suggested that technical assistance be sought by BCCL to improve the operational efficiency of the fully mechanized underground mines. When developing the mine by driving tunnels and galleries, the mining teams encountered not only additional faults, but also larger than anticipated burnt out areas. Furthermore, while investigating the burnt-out areas, they discovered dikes in the coal seams which were totally unexpected. This discovery brought a new and disturbing element to the mine design optimization exercise, complicating the operation of the longwall equipment. In their reports, the consultants recommended that the production target be reduced to 2 million tons. After considering several options, a subsequent revised Project Report decreased the targeted output to 1.8 million tons, but the appraisal showed that the project at this output level would not be economically viable. The Bank, therefore, decided to withdraw its support from the project in October 1989. Subsequently, US$165.3 million of the Bank loan, which was allocated to the development of the Pootkee- Bulliary coal fields, was cancelled in November 1989. Results 9. With the cancellation of the loan for the development of Pootkee-Bulliary underground mine and its associated washery, the project objective was reduced to the development of the open- cast Block 2 coal mine. The continuing inability of BCCL to resolve the land acquisition and I1 resettlement issue and the mine fires eventually led to major changes in the mine design and forced the Block 2 management into a highly costly and sub-optimal operation. The production figures indicate that at its highest level in 1989/90, the coal production approached a level of 1.215 million tons, just around 50 percent of the targeted production. Thereafter, because of deteriorating maneuverability (on account of resettlement problems), mine fires and the necessity of working the coal seam at deeper horizons, the stripping ratio suddenly increased from 4.2 cubic meter per ton of coal in 1989/90 to 5.6 cubic meter per ton of coal in 1990/91 and coal production dropped to 0.93 million tons. In the following years, production of coal fluctuated between 0.61 and 0.87 million tons with the stripping ratios reaching a high of 8.3 in 1991/92, but never falling below 4.4 cubic meter per ton of coal. Manpower 10. The regular labor force in Block 2 has declined from a peak of 1466 in March 1990 to 1144 in March 1995. The total number of persons engaged in the mine has also come down from a maximum of around 1700 persons in March 1992 to 1400 persons in March 1995. This has been achieved in line with a similar trend throughout BCCL which reduced its workforce from around 160 thousand in 1993 to just under 150 thousand in 1995. The supervisory staff and the skilled workforce in Block 2 undergo periodic training as a part of the master training program for the CIL family of companies. Through a CIL-wide network of 27 in-company and 105 other vocational training centers, CIL provides support for technical, management and skill upgrading training to its workforce. Environmental Protection 11. During appraisal, CIL and BCCL undertook that the design, construction and operation of the project would be carried out with due regard to ecological environmental and safety standards satisfactory to the Bank (SAR - paragraph 5.28). In practice, however BCCL did not establish its environmental department until 1987. Thereafter, an Environmental Impact Assessment (EIA) together with an Environmental Management Plan (EMP) for Block 2 was prepared and submitted to the concerned government agencies. These reports, with suitable modifications, were approved in July 1991, by the Government of India. The environmental protection activity at mine level is carried out by a group of trained environmental engineers supported by technicians and under the general supervision of BCCL's Environmental Department. In addition to monitoring air quality, effluent water quality and noise level at several sites (mostly by mobile equipment) the environmental group is responsible for mitigation measures. Measurements indicate that the mine is generally operating within the accepted standards. The land reclamation has only recently started in Block 2. While some 2600 hectares of subsidence sites and overburden dumps have been reclaimed in the Jharia region, the reclaimed area in Block 2 amounts to only 20 hectares. Studies 12. The project succeeded in completing three studies envisaged in the SAR. The study to determine the most economic and technically feasible mode of transporting sand to be used for stowing in Jharia coal fields resulted in a set of cost/benefit analyses based on different modes of transportation. The shaft sinking study aimed at assisting CIL and its subsidiary BCCL to improve design, engineering and implementation of shafts of about 500-600 meters deep. This was accompanied by the training of BCCL personnel in large diameter shaft sinking by expatriate 12 consultants/contractors and the preparation of documents for future reference. The Pootkee- Bulliary mine design review and management consultancy resulted in a revised mine design with a considerably reduced production capacity, ultimately leading to the withdrawal of Bank support from the development of the Pootkee-Bulliary coal mines because of unsatisfactory economics. Overall Assessment Land Acquisition and Resettlement 13. The unfortunate fate of this project may be traced to the weakness in appraisal and the quality of the project at entry. For the Block 2 open-cast component, the main weakness was the unjustified optimism with respect to land acquisition and resettlement. The project file is replete with references to land acquisition and the intention of the Bank not to process this project until and unless land acquisition problems were satisfactorily resolved. Despite the statement in the SAR that "land is currently available for carrying out mining operations up to 1989/90", it is now quite clear that no such condition existed. The inability of BCCL in resolving this issue during the preparation and appraisal of the project (despite repeated assurances by BCCL, CIL and the Government of India), was simply brushed aside and the loan was approved. This was particularly unfortunate because the Bank was aware of the sociopolitical conditions in the region and the past experience with land acquisition in the Jharia coal fields. 14. A tracer study of the resettled families found that only 132 families had moved to the three resettlement townships constructed by BCCL (the remaining families could either not be found or had moved out of the area). The surveyed families comprised 1034 members of which 232 were employed. BCCL alone had provided employment for 195 persons indicating the employment of one to two persons per family. As a result, it was found that the family income was well above the poverty level (Rupees 11,000 per family). Despite this improvement in their income and standard of living, the project affected people presented a litany of complaints, the most important of which were that: (i) the decision making process in relation to resettlement and rehabilitation is not transparent; (ii) the project affected persons have no negotiating power; and (iii) the process does not solicit the active participation of the community. 15. Recognizing the shortcomings of its environmental and social activities, especially the need to resolve the resettlement issues confronting its affiliated companies, CIL has, over the last two years issued three significant policy statements. Starting with a Resettlement and Rehabilitation Policy statement in April of 1994, CIL has issued its Corporate Environmental Policy and its Community Development Plan in July and September of 1995, respectively. These are forceful, far sighted and welcome statements that have laid the foundation for remedial work to start. The Bank's Coal Sector Environmental and Social Mitigation Project (recently approved by the Board) addresses the various environmental and social issues and proposes a series of remedial and mitigatory steps in all facets of mine management in order to bring CIL's performance in line with the best practices in the mining industry. The recommendations regarding the resettlement and rehabilitation of project affected persons will go a long way towards resolving the issues faced in the past. But a wholesale change in the mindset at all levels, particularly those close to negotiations with the project affected persons is also necessary for fruitful results. 13 Cost Structure and Profitability 16. The Block 2 open-cast operation has been making a loss since it started in 1987/88. These losses have reached around 270 million rupees for the first 11 months of the 1995/96 production year. The output per man-shift, though close to the average for BCCL (2.25 tons in 194/95), is less than half of that attained, on average, in the entire CIL operation (around 4.3 tons in 1994/95). This accounts for the very high cost and the dismal profitability of this operation. Although the Jharia Coking Coal Project was an attempt to increase the productivity of BCCL's operation and resolve its financial weakness, in practice, it has done neither. The company remains highly overmanned with relatively stagnant output per manshift (OMS), both in the underground as well as open-cast operations. After reaching a peak loss of 4.77 billion rupees for its coal operations in 1991/92, the Company's losses declined to 1.85 billion rupees in 1993/94 only to rise again to 2.84 billion rupees in 1994/95. BCCL is the second largest loss-making affiliate of CIL, after the Eastern Coal Ltd. (ECL). 17. In the last twelve months, the Government of India and CIL have, at the urging of the Bank, introduced a series of far-reaching reforms in the Indian Coal industry. These reforms are aimed at unshackling CIL, while exposing it to the disciplining effects of both domestic and international competition. At the top of the list lies the deregulation of coking coal and superior grades of non-coking coal prices on April 1, 1996. This has opened a window of opportunity especially for BCCL whose operation is being closely analyzed by the Bureau of Financial and Industrial Restructuring (BFIR). A turn-around study is already underway which aims at streamlining operations and removing obstacles such as resettlement problems, cutting costs, reducing workforce, increasing equipment availability and productivity and restoring the financial health of the company. The opportunity provided by price deregulation should not be missed, but it requires decisive management, more efficient organization, labor retrenchment, a program for upgrading the technical and managerial capability at all supervisory levels, decentralization of decision making and simplification of procedures, special attention to equipment maintenance to enhance the level of availability and utilization and, above all, sound and cooperative labor relations to mobilize the assistance of unions. Outcome 18. The project failed to achieve the major benefits anticipated at appraisal. It failed to provide increased productivity, higher outputs and improved recovery of coal, and lower production cost. Practically all of its technical (e.g. OMS) and financial (e.g. unit cost of production) indicators have been worse than the average for BCCL. Throughout the last ten years, the Block 2 operation has contributed some 14 billion rupees to the total accumulated losses sustained by BCCL. At appraisal, great hopes were pinned on Block 2 and its sister underground operation at Pootkee-Bulliary to help BCCL modernize its mining operation and gradually move into profitability by utilizing similar techniques. What the project highlighted instead was the systemic and managerial problems at BCCL that condemned the Block 2 operation to failure. The outcome of this project is rated as unsatisfactory. Sustainability 19. Under the current circumstances and given the fact that the operation has a negative cash flow, its sustainability is doubtful. But it is not inconceivable that the turn around exercise at 14 BCCL and the battery of remedial activities that will be gradually introduced by CIL throughout its affiliated companies may, in fact, turn the tide and bring, at least, financial solvency to BCCL and Block 2. The Jharia Mine Fire Control Technical Assistance Project, financed partly by the Bank, should assist BCCL with its fire problem as well as the social and environmental issues. The recently approved Coal Sector Environmental and Social Mitigation Project should help further the resolution of these issues. The sustainability of this project is, therefore, rated as uncertain. Institutional Development Impact 20. Despite its failure to reach its main objectives, the project has, nonetheless, had some institutional development impact. The Pootkee-Bulliary mine design consultancy provided an opportunity for the BCCL and CMPDI engineers to revisit the mine design in conjunction with expatriate consultants and enhance their knowledge of longwall mining technique. The knowledge so acquired has helped the CIL family of companies, through CMPDI, in their mine design efforts. The large diameter shaft sinking in Pootkee-Bulliary and the on-the-job training it provided to BCCL personnel has enriched the experience of the company. The documentation of this experience will prove very useful for future operations. The sand transportation study has also helped highlight the technoeconomic feasibility of the various modes of transporting stowing sand to the mine site. At a more significant level, this project and its sister project (Dudhichua-Loan 2393-IN) helped introduce CIL to large scale open cast mining technology which has resulted in very important productivity gains. The project, however, failed to resolve the land acquisition and resettlement problem which remained an institutionally debilitating factor. Moreover, because of its financial burden, it further weakened an already financially vulnerable company. On the above basis, the institutional impact of this project is rated as modest. Bank/Borrower Performance 21. Through the implementation of a series of investment and technical assistance projects, the Bank and the Borrower have developed a very professional, amicable and healthy dialogue which is underpinned by respect on both sides. By their collaborative efforts, the two teams have gradually advanced a reform program that has completely changed the status of CIL and the future possibilities for the coal industry in India. This productive relationship should help both sides in their endeavor to turn CIL into a lean, vibrant, competitive, profitable and ready-to-be-privatized enterprise. Despite this generally exemplary relationship, the performance of the Bank in approving a project with flawed appraisal was unsatisfactory. So was also the performance of the implementing agency which presented a rosy picture of land acquisition at the beginning but failed to achieve any results until 1992/93. Except for the problems of land acquisition, the Borrower/Implementing Agencies complied in all material respects with the loan covenants. Lessons Learned 22. The single most important lesson from this project is the need to assure the quality of the project at entry. Though difficult to document, the urge to lend has often interfered with dispassionate appraisal in the Bank's lendings. In this project, it is easy to see how the early, and sound resolutions were diluted with the passage of time. In future projects, therefore, questions of land acquisition and resettlement need to be resolved before the Bank proceeds with the processing of a loan. 15 23. In the case of Pootkee-Billiary, too, the Bank relied heavily on the Borrower's assessment of the mining potential. Unexpectedly, and, somewhat fortunately, the later studies presented a totally changed picture which prevented the Bank from entering a costly and embarrassing project. Again the quality of the project at entry was substandard. 24. Both the Bank and CIL have learnt many lessons regarding the systemic problems that have obstructed the satisfactory implementation of resettlement programs. Most of the specific problems have been addressed in the Coal Sector Environmental and Social Mitigation Project. The approach adopted for community development and rehabilitation will go a long way towards reducing complaints and resolving existing problems. The implementation of the measures envisaged in the above-mentioned project should be complemented by a conscious effort on the part of CIL to organically integrate the new housing complexes with the surrounding townships and villages so that new and more developed hamlets are created, each capable of sustaining itself and providing a host of services to the mining community. Such an approach would have the advantage of employment creation outside the mining company, thereby mitigating to some extent the need to provide jobs to the resettled population. It is only through the general development of the region that the coal companies can be relieved of the employment pressure.  17 1. Introduction 1.1 In the early 1980's, both the Bank and the Government of India (GOI) concluded that India's growing demand for energy products could only be partially satisfied by the rapid development of its coal resources. These resources were estimated at around 112 billion tons (in seams greater than 0.5 meters and at depth of up to 1200 meters). In 1981-82. India produced 120 million tons per year, making it the seventh largest producer of coal in the world. Coking coal constituted some 25 percent of this production. A Coal Sector Survey (Report No. 3601-IN) completed in September 1982 formed the basis of a dialogue between the Bank and the Government of India. The survey addressed selected issues pertaining to coal supply/demand, pricing, investment and financing. 1.2 With the increasing dependence on coal as the major source of energy for India's development, the Government of India formulated its coal sector development strategy placing special emphasis on: (i) opening large-scale highly mechanized open-cast mines (both thermal and coking coals) which would permit the rapid expansion of production using modem and efficient mining technologies and equipment; (ii) rehabilitation and mechanization of deep underground coking coal operations in order to increase supply of prime coking coal, and reduce the need for imports; (iii) optimization of mine/consumer linkages, thereby improving the availability and reducing the cost of coal to distant consumers, (iv) exploring and developing mines in the western and southern States of India; and (v) introducing measures to improve the quality of coal in order to reduce transportation costs and to enhance the efficiency of thermal power plants, steel mills, industrial boilers, etc. 1.3 This strategy received the full support of the Bank. As a result, a lending program was prepared with the aim of providing assistance to Coal India Ltd. (CIL - the public sector holding company) in the implementation of its ambitious investment program, consisting primarily of highly mechanized, capital intensive, large-scale mining projects. Following the discussions held towards the end of 1982, two projects were identified for Bank financing: (i) a 5 million tons per year open-cast operation for steam coal at Dudhichua in the Singrauli Region; and (ii) a 2.5 million tons per year open-cast operation for coking coal at Block 2 in Jharia. While Dudhichua coal project (Loan 2393-IN)' received the Board's approval in March 1984, the approval of Jharia Coking Coal Project came a year later. in March 1985. By that time, the initial project had been enlarged to include, in addition to Block 2, an underground operation (see below). Project Design and Scope 1.4 In early 1984, the Government of India had proposed another project for Bank financing. This proposal consisted of the development of an underground mine (Pootkee-Bulliary) situated also in the Jharia coal fields. Concluding that the development of the Pootkee-Bulliary underground mine (using the long wall technique) could be integrated with Block 2 project, the This project was audited and a Perfonnance Audit Report was issued by OED in February 1996 (Report No. I 5215) 18 scope of the latter was enlarged to include both operations. The expanded project was to achieve an annual coal production capacity of 5.5 million tons (2.5 million tons open-cast and 3 million tons underground). Although some development work, such as shaft sinking, had already been started in the Pootkee-Bulliary coal mine, the Bank suggested that certain design modifications were necessary to improve the overall efficiency of operations. In addition the Bank recommended that technical assistance be provided to the project, at least during the initial operational phase because of the complexity of this operation. The proposed mine design implied that, for the first time, a CIL subsidiary (in this case, Bharat Coking Coal Ltd. - BCCL) would be utilizing fully mechanized long wall technique for high volume underground coal production. 1.5 The Jharia coal field covers an area of about 450 square kilometers. Mined since around 1880-1890, this field constitutes India's largest reserves of coking coal (particularly prime coking coal). The first geological mapping of the entire field was completed in 1930. In the wake of nationalization, a major exploratory drilling effort was undertaken by Central Mine Planning and Design Institute (CMPDI, a CIL design and engineering subsidiary) and the Geological Survey of India in 1977-78. As a result of these activities, the total proven and probable reserves of the Jharia coal field were estimated at about 4.0 billion tons. The mineable reserves of Block 2 and Pootkee-Bulliary sections were, in turn, estimated at 39 and 100 million tons, respectively. At the proposed mining rates, the reserves allowed for 16 years of production for Block 2 and 33 years of production for Pootkee-Bulliary. 1.6 Both these mining complexes were part of the master plan to restructure the Jharia coal field which is the main source of prime coking coal for the steel industry. The project aimed at improving the quality of coking coal supplies to the steel industry through the exploitation of superior quality coking coal which, after being treated in washeries, would provide coal with an ash content of around 17 percent, instead of the then coking coal supplies to the steel industry containing about 20-21 percent ash. Such lower ash contents would help improve considerably the operational efficiency and cost-effectiveness of the blast furnaces in the steel plants. Land Acquisition 1.7 An issue that received considerable attention during preparation and appraisal of the project was land acquisition. Very early in the project cycle, the bank realized that, despite the empowering legislations, this may pose problems during project implementation because land acquisition could become: "a lengthy and cumbersome process, which quite frequently acquired political overtones, and law and order problems could not be ruled out" .2 Land acquisition was referred to as the most critical issue in the Issues Paper which reported that out of 3000 acres of land required for the implementation of the project, around 1700 acres were private land comprising 1000 houses. At this stage, BCCL had proposed to acquire all the required land in Jharia Block 2 Coal Project - Project Brief, December 23, 1982. 19 three phases, and complete the process by late 1985. Aware of the potential for social unrest if project implementation was to proceed in the absence of satisfactory arrangements for land acquisition, the Bank, in May 1983, decided to await the report of phase I land acquisition before proceeding with project preparation and to accept a dated covenant for future acquisition if the results up to then were deemed as satisfactory.4 1.8 Once the report from the Government of India came to hand, it was clear that all the phase I land acquisition had not been completed and that the material did not provide the required "detailed and realistic" plan for phase II. In a subsequent letter from the Government of India , the land acquisition for phase I was promised for the end of 1983 and the Government of India indicated its confidence that the acquisition of land would not carry any problem and that it would be possible to mount the implementation of phase I as scheduled. Based on the decision taken in the Decision Memorandum the project remained dormant pending the resolution of the land acquisition problem. 1.9 Shortly after the Pootkee-Bulliary underground mine was proposed for Bank financing and possible integration with Block 2 development, a post-appraisal Mission visited India (in May 1984). In its report, the Mission stated that: "The mission found that progress has been made in the pit area. Of the total land needed in the pit for the first five years of production (320 acres), only about 9 acres (3 percent) are still in the process of being acquired. This is expected to be completed by mid-July. In the 1000 acres required for mining ancillary installations (workshops, warehouse, material handling and offices) most lands are already in the company's possession or in the process of transfer from the Government in its final phase, except for about 70 acres (including 8 houses), strategically located in the site selected for the coal washery."6 The mission, thus, recommended that, assuming that the availability of land in the pit needed for the first five years of Issues Paper dated April 20, 1983. Paragraph 4: "BCCL has opted to undertake this process in three phases. The first phase (850 acres) comprises the land and houses required for ancillary installations (washery, workshops, etc.) and opening up of the mine (box-cut). This first phase is well underway and BCCL expects to take possession of these lands and houses by May 1983. The second phase entails the acquisition of about 330 acres required for the first five years of production (presently planned to begin by June 1985), and BCCL envisages to take possession of this land by the end of 1984. The third phase comprising the balance of the land required for the rest of the useful life of the mine, is planned to be completed in late 1985". 4 Paragraph 3, Decision Memorandum, June 3, 1983: "In the light of these concerns, the meeting agreed to await the submission, expected by June 1, 1983, of a report on the progress achieved thus far in taking possession of the land for the first year of operation. As a minimum, the meeting agreed that the progress report would have to demonstrate clearly that BCCL had taken possession of all 850 acres of land required for the first phase, that this had been accomplished smoothly and in the absence of substantial protest or disruption, and that a detailed and realistic plan for the second phase of land acquisition had been proposed. If this progress report was satisfactory, we would be prepared to recommend acceptance of a dated covenant for future acquisition. If not, a meeting would be convened to consider droPing the sub-project". This shows particular sensitivity to the peaceful resolution of the land acquisition issues with the Project Affected Persons (PAPs). Letter dated September 3, 1983, from the Governunent of India states: "We recognize the importance of land acquisition for this project. Considerable progress has been made in regard to acquisition of Block 2 open-cast project. BCCL already owns 1200 acres of land. Additional requirement for phase I is 768.09 acres. Of this 4.67 acres of private land belong to local inhabitants who have small hutments (20 in number) in the area. BCCL has already entered into an agreement and possession would be transferred by September 1983. Of the remaining 763.42 acres, the acquisition proceedings are at various stages and the proceedings would be completed by December 1983. We are confident that the acquisition of land will not pose any problem and it would be possible to mount the implementation of phase I as scheduled". 6 BTOR dated June 7, 1984. 20 production was confirmed by July 31, 1984, (as it appeared likely) and that a suitable solution would be found for washing the coal, the processing of the loan be re-initiated in line with the Decision Memorandum of June 1983. By July 25, 1984, on the basis of assurances received in respect of land acquisition the Bank decided to proceed with the loan. A later mission to India (prior to the finalization of the project and its presentation to the Board in March 1985), found that the availability of land for mining in Block 2 was satisfactory.7 Based on the aforementioned background, the SAR stated that: "At Block 2 mine site, land is currently available for carrying out mining operations up to 1989/90. BCCL agreed to take possession of the balance of the land required for the rest of the mine life (i.e. until 2001/2) before September 30, 1988. This is considered realistic in the light of progress during the past eighteen months as land acquisition". (SAR, paragraph 5.34). As it turned out, however, this assessment was overoptimistic and based on incomplete information (see paragraphs 2.4 and 2.5 below). The Project 1.10 The project consisted of the construction and start up of facilities for the annual production of 5.5 million tons of coking coal at Jharia. It had the following two major components: (a) Block 2, designed for open-cast operation, would have a stripping ratio of 4.1 cubic meter of overburden per ton of coal, a final depth of 220 meters and a life of nearly 17 years. The extracted coal of washery grade IV quality with an ash content of about 30 percent was earmarked to be treated in a dedicated washery to be built on a nearby site at Mudhuband (no financial assistance was provided by the Bank for this washery) where its ash content would be reduced to 17 percent; and (b) An underground operation in the Pootkee-Bulliary mines (Blocks 4 and 5 of the Jharia Coal field) which, when ultimately developed by 1995/96 to 3 million tons per year output, would constitute the largest single underground mechanized mine in India. The mines would be producing half of their output by fully mechanized retreating longwall technique, with the balance being produced by the conventional retreating longwall technique combined with stowing to prevent surface subsidence. The coal would be of washery grade II quality with an ash content of 18-21 percent (after washing the ash content would be reduced to around 17 percent). At full production 6 fully mechanized and 12 conventional faces would be in operation. 1.11 In addition to supporting facilities such as warehouse, maintenance and repair shops and other services, the project included the construction of around 1200 houses for the workforce operating the mines and the washery. The project also included funds for technical and institutional development assistance in the following three areas: (i) underground mine operating practices including a review of the mine design with the aim of finalizing optimal face and panel length; (ii) improved efficiency of shaft sinking through better organization and more modem equipment; and (iii) optimum transportation of stowing material (through a study of alternative modes of transportation). BTOR dated October 5, 1984. 21 2. Implementation Experience 2.1 The project components were implemented by BCCL under the direction of two Project General Managers who, in turn, reported to the Project Director of BCCL. Each Project Management Unit (PMU) consisted of staff from BCCL and CMPDI. They were responsible for all activities related to detailed engineering, procurement of local goods (excluding mining equipment) and services, equipment erection and commissioning, construction and mine development. Procurement of mining equipment and other imported items was carried out by the CIL. 2.2 Overburden removal for Block 2 had already started in 1982 with temporarily assigned equipment, long before the project was approved in March 1985. During 1983/84, about 400,000 cubic meters of overburden had been removed and 19,000 tons of coal produced. At the Pootkee- Bulliary mine, shaft sinking operations for the two new 7.5 meter diameter shafts had started in mid-1983 and the two shafts were respectively about 32 percent and 18 percent complete in September 1984. The mine design was such that Block 2 would reach full production by 1987/88, while the achievement of full production at Pootkee-Bulliary would take place much later, by 1995/96. During implementation, however, the project was confronted with three major problems which completely derailed the initial expectations. Land Acquisition and Resettlement 2.3 Despite all the assurances given by BCCL, CIL and ultimately the Government of India (paragraphs 1.7, 1.8 and 1.9 above), the project came up against serious land acquisition problems, notably in Block 2, as soon as it became effective. In the first supervision report (dated August 14, 1985), it is mentioned that for Block 2, "relocation is not vet complete for some villagers living near the area where the open-pit mine is being developed". During the second supervision mission carried out in October 1985, it is observed that: "there are several patches of land required both for ancillary installations (especially workshops) and for the first five years of mining (excluding overburden dumps) for which BCCL does not yet have possession.8 Thereafter, land acquisition remained a critical concern and at the core of the repeated postponement of full capacity production achievement. By August 1986, the supervision report states that: "In addition to about 184 acres required for mining over the next five years, a further 863 acres are still needed for subsequent operations during the 17 years of planned project life.9 At this time, the availability of the washery site was also becoming critical as the resettlement of two villages located on that site was falling seriously behind schedule. 2.4 By the end of 1986, it became abundantly clear that land acquisition problems at Block 2 had seriously jeopardized project progress and the achievement of this component's objectives. It had forced a drastic revision of mine designs and equipment fleet, and had delayed indefinitely the purchase of a second dragline and supporting drilling equipment.10 One and half years later, the supervision report speaks of a revised mining plan in Block 2 which had resulted in an increased stripping ratio. At this stage, the Bank had accepted the notion that full production might be 8 Supervision Report's Aide-Memoire, para 11, dated November 15, 1985. Supervision Report dated August 15, 1986. 10 Supervision Report dated December 14, 1986. At this time it was also observed that long delays were occurring in the erection of the first dragline. 22 reached in three to four years, i.e., in 1991/92 (instead of 1987/88 as anticipated in the SAR).n With the passage of time, the date of achieving full production receded as the primary mining method in Block 2 changed from draglines to shovels and trucks with significant increases in the cost of production. Even though the dragline was commissioned in July 1989, it was not deployed in the mine until mid-January 1990, partially due to delays experienced in procuring the blast hole drills. 2.5 The progress of land acquisition and resettlement is indicated in Table 1. As shown, after resettlement of the first 14 families during 1984/85 (before the project's approval by the Board), no further progress was achieved until 1992/93 when a further 146 families were resettled from the other six locations (villages). By April 1993, all families in the Nudkhurkee III locations had also been resettled, while the majority of the families on Nudkhurkee II location were still occupying their dwellings and refusing to move. During 1992/93 significant resettlements also took place from Sidpokee and Benedih villages. By March 1996, all Benedih residents had been resettled. Table 1: Record of Resettlement and Rehabilitation of Families from Block 2 Completed Resettlement Name of Total No. Location of Families 84/85 92/93 93/94 94/95 95/96 Total Nudkhurkee I 14 14 - - - - 14 Nudkhurkee II 51 - 11 - - - 11 Nudkhurkee III 27 - 27 - - - 27 Sidpokee 68 - 38 7 - - 45 Benedih 102 - 70 8 21 3 102 Kessurgarh 300 - - - - - - Sudariadih 150 - - - - - - Total* 712 14 146 15 21 3 199 *The total in includes one school. While the resettlement of the initial 14 families from Nudkhurkee I location allowed the first box- cut operations to be started, the resettlement of families from Nudkhurkee III location and the Benedih village made it possible for the operation to continue with shovel and dumper in new box cuts as well as with the dragline. At present, the resettlement of the remaining 23 families from the Sidpokee location has become the critical factor in the operation of the dragline. Unless these families are resettled immediately, the dragline is likely to remain idle for an indefinite period. Next on the critical path is the resettlement of Nudkhurkee II and Kessurgarh villagers. Mine Fires 2.6 In addition to facing enormous difficulties with respect to land acquisition and resettlement. the operation was also seriously affected by mine fires. In the Jharia coal field, mine 11 Supervision Report dated July 27, 1988. 23 fires have been known since 1916. Currently, some 70 fires are known in this coal field. Most fires are started by spontaneous combustion of coal left in underground mines for technical or commercial reasons. While mine fires are not peculiar to Jharia coal fields, and are a phenomenon experienced by almost all coal fields around the world; their high level of occurrence in the Jharia coal field, covering a total area of 18 square kilometers, has had a considerable impact on the mining activities and living environment in the region. 2.7 The President's Report on the Jharia Mine Fire Control Technical Assistance Project12 (Credit 2450-IN approved in FY93), notes that the coal mine fires have several impact such as: (i) affecting the living conditions of around 150,000 people including their constant exposure to noxious fumes and the possible collapse of buildings, (ii) the enormous costs involved should it become necessary to relocate the population: (iii) the danger to the infrastructural facilities such as railway lines, roads, high voltage transmission lines and water supply pipelines; (iv) contribution to higher air pollution in an already polluted area; (v) disturbing the subsoil water regime; (vi) consuming annually about nine million tons of coal and, because of safety considerations, blocking more than 1.8 billion tons of coal from being extracted; and (vii) reducing BCCL's coal production capability (mostly coking coal). These detrimental impacts and the possibility of the fires spreading to new areas were the reasons for the formulation of the Technical Assistance Project which aimed at a two phase study: first, a comprehensive fire fighting program; and, second, the preparation of an environmental management plan. 2.8 Despite the existence of so many fires in the Jharia coal field, it was only during the course of opening Block 2, in April 1985, that a fire was detected in the IX and X seams of this coal field. The existence of this fire added a new complication to an already difficult situation on account of the problems being encountered with land acquisition and resettlement. The later detection of other fires and the continuing inability of BCCL to resolve the land acquisition issue eventually led to major changes in the original mine design and forced the Block 2 production management into a highly costly and sub-optimal operation. The following Table 2 shows to what extent the actual production from Block 2 fell below the expected quantities at appraisal. 12 Jharia Mine Fire Control Technical Assistance Project, Report P5932-IN. 24 Table 2: Coal Production in Block 2 Actual versus projections Overburden Coal Production Million Cubic Meters Million Tons Year SAR Target Actual SAR Target Actual 1983-84 - .246 - .100 1984-85 1.400 .509 0.200 .048 1985-86 1.400 .825 0.400 .142 1986-87 2.850 1.902 1.500 .435 1987-88 5.950 2.950 2.500 .799 1988-89 9.500 4.869 2.500 1.017 1989-90 9.500 5.100 2.500 1.215 1990-91 9.500 5.229 2.500 .928 1991-92 9.500 5.043 2.500 .613 1992-93 9.500 5.443 2.500 .661 1993-94 9.500 5.146 2.500 .869 1994-95 9.500 4.052 2.500 .871 1995-96 9.500 3.180 2.500 .718 Pootkee-Bulliary Underground Operation 2.9 The original Feasibility Study for the Pootkee-Bulliary underground mines had been prepared in December 1980 by CMPDI for a target production of 3 million tons. This target was programmed to be attained in 1993-94 through the working of seams XV to IX principally on longwall system in two horizons. During appraisal, the Bank, while considering the mine design as satisfactory, suggested that technical assistance be sought by BCCL to improve the operational efficiency of the fully mechanized underground mines. The consultants were expected to assist in (i) the methodology for optimization of face and panel layouts and face equipment for mines as well as coal haulage and transport systems; and (ii) establishing an effective management system during construction and operation. This would involve a thorough review of proposed mine design in all its technical and managerial aspects. At appraisal, the target date of achieving 3 million tons of production was also postponed to 1995/96. 2.10 The contract for this technical assistance was concluded in February 1987 and the report for mine design optimization was submitted in December 1988. In the intervening period exploratory drilling continued in the Pootkee-Bulliarxy mines reaching a total of 110 boreholes by June 1988 (against 58 drilled boreholes indicated in SAR, paragraph 5.07). When developing the mine by driving tunnels and galleries, the mining teams encountered not only additional faults, but also larger than anticipated burnt out areas (the location of these burnt-out areas had already been indicated through the borehole drillings). Furthermore, while investigating the burnt-out areas, 13 Fourteen of these boreholes were drilled at the request of the mine design consultants. 25 they discovered dikes in the XV coal seam which were totally unexpected. This discovery brought a new and disturbing element in the mine design optimization exercise, complicating the operation of the longwall equipments. The consultants' reports indicated the following problems: (a) complex geology of the area, including the existence of dikes; (b) smaller than expected geographical area: (c) the novelty of the proposed mining techniques, particularly the fully mechanized longwall in India: (d) the difficulty of producing at a rate of 3000 tons per day by a single lift fully mechanized longwall with pillarless system of mining; The consultants also discussed the risks associated with the production of 3 million tons of coal in Pootkee-Bulliarv and recommended that the production target be reduced to 2 million tons. 2.11 Upon further consideration of the consultantfs report by the Government of India, and a further reduction of the target production to 1.6 million tons per year, a revised Project Report was prepared by CMPDI and BCCL and sent to the Bank for review. In its response, the Bank showed concern about the multiplicity of the technologies used in extraction and the viability of the revised project. A subsequent revised Project Report increased the targeted output to 1.8 million tons, but again the appraisal showed that at 85 percent level of operation, the project would end up with a FRR of -6.5 percent, while the ERR would only reach 8.4 percent. These returns were considered low by the Bank and. given the already weak financial situation of BCCL. the Bank decided it could not support a project with a rate of return of below CIL's cost of borrowing. Subsequently, the Bank withdrew its support from the project in October 1989,14 and US$165.3 million of the Bank loan, which was allocated to the development of the Pootkee-Bulliary coal fields, was cancelled in November 1989. Project Cost 2.12 Despite their familiarity with the Bank's procurement guidelines (as practiced for the procurement of equipment for Dudhichua Project), this project had several procurement difficulties mostly emanating from the difference between CIL's Tendering Invitation procedure and that of the Bank. Problems were often encountered because of the imprecision in the technical specification of the equipment. On the whole, because of the cancellation of two draglines, made redundant by problems with land acquisition and resettlement. US$25 million was cancelled from the Block 2 open-cast operation. Thus, with a total cancellation of US$190.3 million, the remaining loan was reduced from US$248 million to US$57.7 million. At loan closing, a further US$2.4 million was cancelled. 2.13 The project financing went very much along the lines anticipated at appraisal. Though considerably lower than even the revised estimates of US$196.1 million (this projection was made 14 After much discussions between BCCL. CLL, the Ministry of Coal and other Governmental bodies, a final revised project report for a target production of I 0 million tons was approved by the BCCL Board in August 1992. This revised project is still under consideration. BCCL continues to develop the mine and produce coal at considerably reduced rates. 26 in 1989 when US$190.3 million of the Bank loan was cancelled), the actual project cost came to US$127.8 million and was financed half by an increase in equity and half by long term debt from the Bank, the Government of India and ODA (Annex I). Lower equipment prices were partly responsible for lower project costs, but BCCL also refrained from ordering expensive pieces of equipment such as the two walking draglines because of the change in its mining design and the land acquisition problems. 3. Results Production Performance 3.1 With the cancellation of the loan for the development of Pootkee-Bulliarv underground mine and its associated washery, the project objective was reduced to the development of the open- cast Block 2 coal mine. The production performance of Block 2 is shown in Table 1 on page 12 above. The figures indicate that at its highest level in 1989/90, the coal production approached a level of 1.215 million tons, just around 50 percent of the targeted production. Thereafter, because of deteriorating maneuverability (on account of resettlement problems), mine fires and the necessity of working the coal seam at deeper horizons, the stripping ratio suddenly increased from 4.2 cubic meter per ton of coal in 1989/90 to 5.6 cubic meter per ton of coal in 1990/90 at the same time that the total coal production dropped to 0.93 million tons. In the following years, production of coal fluctuated between 0.61 and 0.87 million tons with the stripping ratios reaching a high of 8.3 in 1991/92, but never falling below 4.4 cubic meter per ton of coal. 3.2 In addition to the constraints listed above (it should be recalled that the second wave of resettlement did not start until 1992/93-see Table 2 on page 10) and seasonal fluctuations, the recent drop in overburden removal and the corresponding drop in coal production (Annex II) is, to a considerable extent, due to the unavailability of the mining equipment, notably the dumpers. Any improvement in this otherwise highly inefficient and costly operation depends not only on the resolution of maintenance problems, but also on the immediate resettlement of the remaining families residing in Sidpoki and Nudkhurkee II locations, so that the dragline can become productive. Manpower 3.3 The manpower status and the educational profile of the Block 2 workforce is shown in Annexes III and IV. The regular labor force in Block 2 has declined from a peak of 1466 in March 1990 to 1144 in March 1995. The total number of persons engaged in the mine has also come down from a maximum of around 1700 persons in March 1992 to 1400 persons in March 1995. This has been achieved in line with a similar trend throughout BCCL which reduced its workforce 15 At the time of the PAR Mission visit, only 22 out of a total fleet of 42-85 ton dumpers were operationally available (54 percent availability). The remaining were down awaiting receipt of a major spare parts (transmission) each of which was estimated to cost 6 million rupees (US$180 thousand). BCCL had ordered them through Bharat Earth Moving Ltd. (BEML, a public sector enterprise) which is the sole representative of the Japanese manufacturers. While BEMIL had quoted an unusually long delivery date, a contact with the original Japanese manufacturers had brought no relief, because BCCL was advised to contact BEML. The average availability of shovels (4-10 M3, 1-5.5 M3 and 1-3.2 M3) has been around 78 percent during last year with utilization at only 52 percent. 27 from around 160 thousand persons in 1993 to just under 150 thousand in 1995. As indicated in Annex IV some one third of the workforce have formal education in technical and other subjects at various levels. In addition, they undergo periodic training as a part of the master training program for the CIL family of companies. Through a CIL wide network of 27 in-company and 105 other vocational training centers, CIL provides support for technical, management and skills upgrading training to its workforce. A comparison of the educational profile of the officers and supervisory staff at Jharia Block 2 with those at Dudhichua shows a considerably higher number of persons with higher academic background at Dudhichua. Moreover, Dudhichua has a much higher number of highly skilled workers amongst its workforce than Block 2. Environmental Protection 3.4 During appraisal, CIL and BCCL undertook that the design, construction and operation of the project would be carried out with due regard to ecological environmental and safety standards satisfactory to the Bank (SAR - paragraph 5.28). In practice, however BCCL did not establish its environmental department until 1987. Thereafter, an Environmental Impact Assessment (EIA) together with an Environmental Management Plan (EMP) for Block 2 was prepared and submitted to the concerned government agencies. These reports, with suitable modifications, were approved in July 1991, by the Government of India with the following major conditions that: (i) air quality (suspended particle, S02, NOX levels) be monitored quarterly and reported to the Ministry of Environment and Forests; (ii) soft coke-making be stopped; (iii) quality of effluent water from the mines to conform to standards for discharge into rivers; (iv) slopes of overburden dumps to remain below 280 and all dumps to be biologically reclaimed; (v) quarries to be partially filled and the rest left as lagoons to be developed as picnic spots (pisciculture would also be developed in the lake), (vi) green belts to be developed; and (vii) rehabilitation packages to be in line with Government guidelines. 3.5 The environmental protection activity at mine level is carried out by a group of trained environmental engineers supported by technicians and under the general supervision of BCCL's Environmental Department. In addition to monitoring air quality, effluent water quality and noise level at several sites (mostly by mobile equipment) the environmental group is responsible for mitigation measures. For example, to mitigate air pollution in Block 2 many techniques such as water spraying of haul roads, dust suppression at loading points, proper maintenance of heavy equipment to reduce gaseous emission and the creation of a green belt are practiced. Where necessary settling tanks are used for industrial effluent discharge to remove oil and sludge. Noise abatement measures include the proper blasthole design and use of delayed blasting, proper maintenance of roads and heavy equipment, sound proofing of cabins and the extension of green belts. Measurements shown in Annex V indicate that the mine is generally operating within the accepted standards. The land reclamation has only recently started in Block 2. While some 2600 hectares of subsidence sites and overburden dumps have been reclaimed in the Jharia region, the reclaimed area in Block 2 amounts to only 20 hectares.16 3.6 The project succeeded in completing three studies envisaged in the SAR. The study to determine the most economic and technically feasible mode of transporting sand to be used for stowing in Jharia coal fields resulted in a set of cost/benefit analyses based on different modes of 16 Existence of fires in some overburden dumps precludes any reclamation work for sometime until fires are extinguished or the contained coal is burnt out. 28 transportation. The shaft sinking study aimed at assisting CIL and its subsidiary BCCL to improve design, engineering and implementation of shafts of about 500-600 meters deep. This was accompanied by the training of BCCL personnel in large diameter shafts sinking by expatriate consultants/contractors and the preparation of documents for future reference. The Pootkee- Bulliary mine design review and management consultancy-referred to earlier in paragraph 2.9 above--resulted in a revised mine design with a considerably reduced production capacity, ultimatel leading to the wv ithdrawal of Bank support from the development of the Pootkee-Bulliary coal mines because of unsatisfactory economics. 4. Overall Assessment Land Acquisition and Resettlement 4.1 The unfortunate fate of this project may be traced to the weakness in appraisal and the quality of the project at entry. For the Block 2 open-cast component, the main weakness was the unjustified optimism with respect to land acquisition and resettlement. The project file is replete with references to land acquisition and the intention of the Bank not to process this project until and unless land acquisition problems were satisfactorily resolved. Despite the statement in paragraph 5.34 of the SAR: -At the Block 2 mine site, land is currently available for carrying out mining operations up to 1989/90". it is now quite clear that no such condition existed and there is ample documentary evidence in the supervision reports (referred to in paragraphs 2.3, 2.4 and 2.5 above) that land acquisition was a critical problem right from the beginning. The inability of BCCL in resolving this issue during the preparation and appraisal of the project (despite repeated assurances by BCCL. CIL and the Government of India). was simply brushed aside and the loan was approved. This was particularly unfortunate because the Bank was aware of the sociopolitical conditions in the region and the past experience with land acquisition in the Jharia coal fields. It was. in fact, the Bank's earlier wise and prudent posture that dictated avoiding a project of this nature unless BCCL would take physical possession of the land required for conducting many years of unfettered coal extraction. 4-2 A tracer study of the resettled families carried out in 1995 found some interesting facts. This study covered 132 families (out of a total of 199 families resettled until 1995) which had been resettled, from 3 clusters at Nudkhurkee, 2 clusters at Benedih and Sidpokee, in three resettlement townships in the vicinity of the mine (the remaining families could either not be found (38) or had moved to an area beyond a radius of 5 kilometers from the Townships (21), or could not be reached for other reasons) The surveyed families comprised 1034 members of which 541 (52.3 percent) were men and 493 (47.7 percent) were women. Most families were large, with 7 members or more. Overall 26.5 percent were illiterate (16 percent for men and 38 percent for women). A total of 38.5 percent of men and only 2.5 percent of women were employed with 51 percent of women doing only house work. Of the total. 132 (12.8 percent) were children below school age and 335 (32.4 percent) were students. More than 80 percent of the new homesteads had electricity.. 17 A \'SIal mnspecunl indwated that quite a number ofAnew homesteads had Telexision anteinas. 29 4.3 Of 232 employed persons, some 195 are working for BCCL with the remaining in other activities such as agricultural, Government service or even trade/business. With one or two persons in each resettled family working for BCCL, the family income is well above Rupees 11,000 (Rupees 2200 per person) which is considered to be the povertN level. Nonetheless, complaints abound. There is an eviction threat constantly nagging the families. compensation is not disbursed promptly, and some PAPs claim that to receive the second part of their compensation they have "to beg for the rest of the payment and await for unlimited period, go through the Unions or pay bribe'8 that even jobs that have been agreed upon do not come easily unless -the bribe money is paid out of the construction money or the compensation amounts that they received" that the facilities provided at the Townships are less than those existing in the previous villages; and that some facilities at the new sites such as tube wells were not in working conditions and BCCL was unwilling to maintain them. All in all, the tracer study found that there was a strong feeling among the PAPs of being left out in the process of rehabilitation and resettlement (R & R). The community leaders maintained that: "the decision making process in relation to R and R is not transparent enough. We hardly have any negotiating power on important issues-the resettlement should be people oriented. Without the active participation of the community this cannot be achieved". This sampling of views on certain resettlement issues provides a partial explanation as to why land acquisition has run into such resistance at Jharia. 4.4 At the practical level, the process of land acquisition and resettlement suffers from a mindset that does not learn sufficiently from experience and leads to confrontation between BCCL and the project affected persons. In addition to a long history of unhappy and often repeated resettlement of many groups, there are many inter-related factors that lead to the stand-off: (i) BCCL management often believes-mistakenly-that the compensation package is extremely generous and the project affected persons should, therefore, be very happy with it, (ii) BCCL management often considers the resettlement guidelines and the corresponding compensation as the ceiling and not the floor; (iii) the decision making process is lengthy and tortuous with the resuit that once decisions are taken to proceed, the conditions have often changed on the ground and new demands are presented; (iv) at the core of this problem lies the fear that once BCCL retreats in one negotiation, the repercussion would extend throughout its operations with extremely unpredictable and costly results. To buttress this argument, extreme examples are given which, if contemplated, would involve exorbitant costs--such as the wholesale resettlement of a city with 100,000 inhabitants with each family expecting at least 2 employments provided by the company, while in reality the resettlement involves a much smaller number of families, (711 in the case of Block 2). This fear often leads to total paralysis on the part of BCCL; 18 Tracer Study prepared by Operations Research Group, August 1995. These statements are made either by PAPs or Trade Union Leaders. 30 (v) a cost/benefit analysis of early resettlement is hardly ever conducted so that the management is always left with the dilemma explained in paragraph (iv) above.19 Even now, a realistic cost/benefit analysis may show the advisability of resolving the issue with the inhabitants of Sidpokee and Nudkhurkee II locations, even if it involved the provision of two jobs per family. In such a calculation the optimization of the mining plan would normally play a much larger role that the possibility of the exploitation of the reserves situated under the settled villages. 4.5 Over the last two years CIL has issued three significant policy statements. Starting with a Resettlement and Rehabilitation Policy statement in April of 1994, CIL has issued its Corporate Environmental Policy and its Community Development Plan in July and September of 1995, respectively. These are forceful, far sighted and welcome statements that have laid the foundation for remedial work to start. The Bank's Coal Sector Environmental and Social Mitigation Project (recently approved by the Board) addresses the various environmental and social issues and proposes a series of remedial and mitigatory steps in all facets of mine management in order to bring CIL's performance in line with the best practices in the mining industry. The recommendations regarding the resettlement and rehabilitation of project affected persons will go a long way towards resolving the issues faced in the past. But a wholesale change in the mindset at all levels, particularly those close to negotiations with the project affected persons is also necessary for fruitful results. The recommendations of this new project, when combined with those of the Jharia Fire Control Technical Assistance Project and implemented, should have a profound effect on resolving the problems faced by the mining operations at Jharia. Block 2 will most likely benefit from these efforts. 4.6 A judgment on the other two complicating factors in the project, i.e. the geology of Pootkee-Bulliary, and the mine fires, is more difficult. To its credit the Bank's appraisal team insisted that the mining plan for Pootkee-Bulliary be reviewed by experienced consultants. The subsequent events-the discovery of dikes20 and the revision of the feasibility study-prevented what could have turned out to be a highly embarrassing and costly mistake. The Bank was right to withdraw its support from the development of Pootkee-Bulliary on the basis of the findings of the consultants' reports and the subsequent revised project report. Pootkee-Bulliary remains a problematic mine, albeit, containing some of the highest quality prime coking coal in the whole of Jharia coal field. The situation with the mine fires is also somewhat puzzling. Despite the existence of so many fires in the Jharia coal field and a few located in the Block 2 area, there is neither a mention of such problems in the project file, nor in the SAR except for a reference to the risk of spontaneous combustion in the upper seams in Pootkee-Bulliary mine and the need for considering it when selecting mining method and designing the ventilation systems (SAR - paragraph 5.21). 19 At a meeting with the technical management of BCCL it was learnt that it would have been highly probable to resettle all 711 families residing on Block 2 land if they had been offered 50,000 rupees each in 1984/85 (now this one time compensation figure appears to have risen to around 250,000 rupees). Assuming that a deal had been struck in 1984.85, the cost to Block 2 would have been the equivalent of US$3 million, increasing the project cost by a mere 2-2.5 percent. The pay out period for this extra cost would have been 104 days if targeted production could be reached in 1985/86 period and sold at the prevailing price for grade IV working coking coal (US$15 per ton). 20 The Mission visited a longwall operation in the neighbouring Moonidih underground mine and was told that the existence of dikes had been known in this field for a long time. 31 Cost Structure and Profitability 4.7 The cost structure and profitability of Block 2 open-cast operation is shown in Annex VI. The output per man-shift, though close to the average for BCCL (2.25 tons in 194/95), is less than half of that attained, on average, in the entire CIL operation (around 4.3 tons in 1994/95). This accounts for the very high cost and the dismal profitability of this operation. Both the operating and the total cost per ton of coal produced in the open cast operation has increased steeply, rising from 165 and 328 rupees in 1987/89, to 411 and 886 rupees in 1995/96 respectively. In the latter year, some 44 percent of total cost is accounted for by financial charges and depreciation. During the same period, sales revenue per ton of marketed coal has increased from 220 to 453 rupees.21 The recent deregulation of coking coal prices has made it possible for the Block 2 operation to just cover its cash costs (operating cost plus financial charges) at 560 rupees per ton. But unless coal production increases to well above its current level of 0.7 million tons this operation will remain enormously loss-making. 4.8 Annex VII shows the income statement for BCCL since 1990/91. Although the Jhania Coking Coal Project was an attempt to increase the productivity of BCCL's operation and resolve its financial weakness, in practice, it has done neither. The company remains highly overmanned with relatively stagnant output per manshift (OMS), both in the underground as well as open-cast operations, over the years (average OMS has only increased from 0.77 tons in 1990/91 to 0.93 tons in 1994/95). After reaching a peak loss of 4.77 billion rupees for its coal operations in 1991/92, the Company's losses declined to 1.85 billion rupees in 1993/94 only to rise again to 2.84 billion rupees in 1994/95. Its washeries have all been loss making at rates between 260 to 650 million rupees during the last five years. Without a generous transfer of funds from the Coal Price Regulation Account (CPRA - a cross subsidizing device) of nearly 4.06 billion rupees in 1994/95, the operations of the company could not be maintained. In fact, BCCL is the second largest loss- making affiliate of CIL, after the Eastern Coal Ltd. (ECL). 4.9 In the last twelve months, the Government of India and CIL have, at the urgings of the bank, introduced a series of far-reaching reforms in the Indian Coal industry. These reforms are aimed at unshackling CIL, while exposing it to the disciplining effects of both domestic and international competition. At the top of the list lies the deregulation of coking coal and superior grades of non-coking coal prices on April 1, 1996. Other important financial reforms consist of: (i) conversion of CIL's liability to the Government (25 billion rupees) into equity; (ii) gradual phasing out of cash support to the loss-making operations with agreed performance indicators for eligibility of temporary assistance; (iii) CIL receiving permission from the Government of India to require payment by a letter of credit or advance cash from its customers in order to regularize overdue accounts and reduce very large accumulated receivables. To increase import competition, coal has been placed on the Open General List (OGL) of imports with import tariffs reduced from 85 percent to 35 percent. 4.10 Pursuant to the price deregulation decree, CIL has increased the run of the mine price of some coking coals (steel I, II and Washery I, II grades) by around 24 percent, while the price of the 21 Block 2 also produced small quantities of type D & E steam coal which are sold at prices below those of washery IV grade coking coal. 32 other two grades (washerv Ill and IV) has gone up by only 19 percent (Annex VIII).22 This has opened a window of opportunity especially for BCCL whose operation is being closely analyzed by the Bureau of Financial and Industrial Restructuring (BFIR). A turn-around study is already underway which aims at streamlining operations and removing obstacles such as resettlement problems, cutting costs. reducing workforce. Increasing equipment availability and productivity and restoring the financial health of the company The opportunity provided by price deregulation should not be missed. but it requires decisive management. more efficient organization, labor retrenchment, a program for upgrading the technical and managerial capability at all supervisory levels. decentralization of decision making and simplification of procedures, special attention to equipment maintenance to enhance the level of availability and utilization and. above all, sound and cooperative labor relations to mobilize the assistance of unions Outcome 4.11 The FRR and ERR for this project have been recalculated in this PAR, on the basis of assumptions enumerated in Annex X. For FRR calculations, it has been assumed that washery IV coking coal prices will remain, in real terms, at the level of April 1996 prices for the future. This price. though somewhat below the imputed import parity price at around Rupees 700 is considered to be reasonable if the Jharia coking coal were to compete N%ith imported coal at a steel mill on the eastern coast of India such as Visakhapatnam. Given the condition of the heavy electrical and mechanical machinery. especially the dumpers, and the possibility that the dragline may have to remain idle for an indefinite period of time. coal production in 1996/97 is not expected to surpass that of 1995/96. Even if all the problems are solved, the current combination of equipment is not likely to produce more than 1-1. 1 million tons of coal annually. It is, therefore, assumed that production of coal will increase to 1 million tons by 1999/2000 and remain at that level for the rest of the mine's life. On the basis of the above assumptions and those indicated in Annex X, the reestimated FRR and ERR of the project are -5.3 percent and 13.2 percent,23 respectively. 4.12 In addition to the dismal reestimated FRR, the project failed to achieve the major benefits anticipated at appraisal. Instead of providing increased productivity, higher outputs and improved recovery of coal. and lower production cost. the opposite has been the case. Practically all of its technical (e.g. OMS) and financial (e.g. unit cost of production) indicators have been worse than the average for BCCL. Throughout the last ten years, the Block 2 operation has contributed some 14 billion rupees to the total accumulated losses sustained by BCCL. Production of saleable coal from Jharia has not increased much in the last few years. It has actuallN dropped from 28.3 million tons in 1993/94 to 27.9 million tons in 1994/95. The underground coal production appears to be on a secular decline. To be sure, the catastrophic performance of BCCL cannot be wholly attributed to the performance of this project. But at appraisal, great hopes were pinned on Block 2 and its sister underground operation at Pootkee-Bulliary to help BCCL modernize its mining fhese erades are rel,ted to the ash content as follows Steel I -< 15 percent; Steel II, between 15 and 18 percent; Washen 1. between 18 and 21 percent; washer II, betw.Neen 21 and 24 percent; washers I, between 24 and 28 percent, and washery IV, beatkeel 25 and 35 percent 23 This seeminglr satistactorr ERR is the result of applhing an import parity price which is derived in the manner dciCussed in Annex IX Since Mudlhubaind washen, %uich ill sooi be conunissioned, has had a long gestation as well as elevated investment costs. its operating costs miay well be above those assumed in the calculations and the ERR would be correspondinglx lower. Moreoer, if the major customurs were to be located on the east coast, the added internal transportation cost would also reduce the ERR operation and gradually move into profitability by utilizing similar techniques. What the project highlighted instead was the systemic and managerial problems at BCCL that condemned the Block 2 operation to failure. The outcome of this project is rated as unsatisfactory. Sustainability 4.13 Under the current circumstances and given the fact that the operation has a negative cash flow, its sustainability is doubtful. But it is not inconceivable that the turn around exercise at BCCL and the battery of remedial activities that will be gradually introduced by CIL throughout its affiliated companies may. in fact, turn the tide and bring, at least. financial solvency to BCCL and Block 2. As indicated elsewhere. the Jharia Mine Fire Control Technical Assistance Project, financed partly by the Bank, should assist BCCL with its fire problem as well as the social and environmental issues. The recently approved Coal Sector Environmental and Social Mitigation Project should help further the resolution of these issues. The CIL is currently engaged in studying its purchasing and stores procedures including the possibility of equipment standardization with a help of a consultant. Combined with the far-reaching reforms that have been introduced by the Government, these activities will help lay a solid foundation for increased competitiveness. productivity and profitability throughout CIL's operation. It is also conceivable that once the loss- making affiliated companies have been technically and financially restructured. the Government of India may feel confident to divest of these assets. Already the private sector has been permitted to operate dedicated coal mines (linked to power stations or steel mills), with Steel Authority of India (SAIL) showing interest in taking over some mines. The ultimate privatization of SAIL with its dedicated coal mines may indeed become a profitable proposition. Another approach would be to float the shares of these companies on the stock market and sell the shares gradually (as in the case of the Indian Petrochemical Company Ltd. - IPCL). The sustainability of this project is, therefore, rated uncertain. Institutional Development Impact 4.14 Despite its failure to reach its main objectives, the project has, nonetheless, had some institutional development impact. The Pootkce-Bulhary mine design consultancy provided an opportunity for the BCCL and CMPDI engineers to revisit the mine design in conjunction with expatriate consultants and enhance their knowledge of longwall mining technique. The knowledge so acquired has helped the CIL family of companies, through CMPDI in their mine design efforts. The large diameter shaft sinking in Pootkee-Bulliary and the on-the-job training it provided to BCCL personnel has enriched the experience of the company. The documentation of this experience will prove very useful for future operations. The sand transportation study has also helped highlight the technoeconomic feasibility of the various modes of transporting stowing sand to the mine site. At a more significant level, this project and its sister project (Dudhichua-Loan 2393-IN) helped introduce CIL to large scale open cast mining technology which has resulted in very important productivity gains. Between 1986 and 1995, production from open-cast operations of CIL increased from 74 to 167 million tons while output per manshift (OMS) nearly doubled to 435 tons in 1995 from 2.24 in 1986.24 During the same period the ONIS in the underground operations remained at a low level of around 0.5 tons. The project, however, failed to resolve the land acquisition and resettlement problem which remained an institutionally debilitating factor. 24 CIL-Annual Reports and Accounts 1994/95. 34 Moreover, because of its financial burden, it further weakened an already financially vulnerable company. On the above basis, the institutional impact of this project is rated as modest. Bank/Borrower Performance 4.15 Despite the timely cancellation of the Pootkee-Bulliary underground mining component of the project and the continued and persistent efforts by the Bank to resolve the problems associated with land acquisition and resettlement, the performance of the Bank in approving a project with flawed appraisal was unsatisfactory. So was also the performance of the implementing agency which presented a rosy picture of land acquisition at the beginning but failed to achieve any results until 1992/93. These unfortunate events doomed to failure a project (at least its open-cast component) that could have proved as successful as Dudhichua. In addition, the implementing agency's record in maintaining the open-cast mining equipment in working condition is also a cause for serious concern. 4.16 That said, it is also important to underline the fact that since the early 1980s, and through the implementation of a series of investment and technical assistance projects, the Bank and the Borrower have developed a very professional, amicable and healthy dialogue which is underpinned by respect on both sides. Through their collaborative efforts, the two teams have gradually advanced a reform program that has completely changed the status of CIL and the future possibilities for the coal industry in India. This productive relationship should help both sides in their endeavor to turn CIL into a lean, vibrant, competitive, profitable and ready-to-be-privatized enterprise. Except for the problems of land acquisition, the Borrower/Implementing Agencies complied in all material respects With the loan covenants. 5. Conclusion and Lessons Learned 5.1 CIL stands, today, at the threshold of making a significant leap forward. A reforming government has instituted changes that have substantially unshackled the company. In the last few years, it has remained profitable overall. Its average manpower has declined from a high of 672 thousand in 1991/92 to 648 thousand in 1994/95. It has already started looking into the weaker areas of its operation. Apart from its labor relations which will continue to remain very delicate and sensitive, its policy pronouncements regarding resettlement and rehabilitation, environmental protection and community development, if strictly adhered to and implemented with the right attitude, should go a long way in resolving these issues and removing the obstacles in expanding its activity. The problem of equipment maintenance and availability should be tackled at its roots and there are signs that not only is CIL aware of this serious shortcoming, it is also taking steps to rectify the situation. The deregulation of prices will most definitely lead to an improvement m profitability provided the productivity is not allowed to decline. In fact, the company should become progressively capable of repaying its accumulated loans to the Government as well as shouldering a higher percentage of new capital expenditures. 5.2 Even assuming that all the above mentioned reforms are introduced by CIL, the BCCL is in dire need of serious reform. As indicated in paragraph 4.12 above, it is one of the few CIL affiliates that has not improved its operation over the years. The company suffers from lax technical and financial control (e.g. periodically the balance of coal inventories in the balance sheet have been written down). There is an undercurrent of frustration by some staff on the grounds of 35 their inability to improve the company's performance as well as their perception of discriminatory promotions. A meaningful reform may well require not only the application of a hard budget constraint and more technical and financial control by CIL, but also the injection of new blood into BCCL in the form of experienced managerial talent. It is important that this unique opportunity not be missed. 5.3 The single most important lesson from this project is the need to assure the quality of the project at entry. Though difficult to document, the urge to lend has often interfered with dispassionate appraisal in the Bank's lendings. In this project, it is easy to see how the early, and sound resolutions were diluted with the passage of time. In future projects, therefore, any question of land acquisition and resettlement needs to be resolved before the Bank proceeds with the processing of a loan. 5.4 In the case of Pootkee-Bulliary, too, the Bank relied heavily on the Borrower's assessment of the mining potential. Unexpectedly, and, somewhat fortunately, the later studies presented a totally changed picture which prevented the Bank from entering a costly and embarrassing project. Again the quality of the project at entry was substandard. 5.5 Both the Bank and CIL have learnt many lessons regarding the systemic problems that have obstructed the satisfactory implementation of resettlement programs. Most of the specific problems have been addressed in the Coal Sector Environmental and Social Mitigation Project. The approach adopted for community development and rehabilitation will go a long way towards reducing complaints and resolving existing problems. The implementation of the measures envisaged in the above-mentioned project should be complemented by a conscious effort on the part of CIL to organically integrate the new housing complexes with the surrounding townships and villages so that new and more developed hamlets are created, each capable of sustaining itself and providing a host of services to the mining community. Such an approach would have the advantage of employment creation outside the mining company, thereby mitigating to some extent the need to provide jobs to the resettled population. It is only through the general development of the region that the coal companies can be relieved of the employment pressure. 5.6 It is worth repeating the recommendation that was included in OED's Project Audit Report of the Dudhichua Coal Project (Report No. 15235): "While many subsidiaries of CIL could be worthy candidates for divestiture with enormous gains for the Government of India, the country may not, as yet, be politically ready for such a course of action. It is, however, essential that the gains realized so far, especially in the highly profitable companies such as NCL, SECL and MCL, be locked in through other mechanisms. The delegation of authority and the granting of autonomy could be combined with performance agreements with built-in meaningful rewards and penalties. While corporate control can be exercised by CIL, it is essential that a suitable system of incentives be introduced throughout the subsidiary companies in order to encourage efficiency and productivity". This recommendation is more pertinent today because the increased prices may well lead to better balance sheet results and a false sense of security, while hiding increased inefficiency.  37 Annex I Project Costs and Financing Project Cost (USS million) Estimated Cost Actual Cost Local Foreign Total Local Foreign Total Equipment and spares 77.3 138.1 215.5 71.3 34.3 105.6 Land and civil works 47.7 2.5 50.2 5.5 0.0 5.5 Engineering and Training 5.7 0.0 5.7 0.0 0.0 0.0 Pre-operating Expenses 9.0 0.7 9.7 10.2 0.0 10.2 Washery 76.2 31.8 108.0 0.0 0.0 0.0 Furniture, Vehicles, etc. 0.0 0.0 0.0 0.3 0.0 0.3 Technical assistance 0.0 2.0 2.0 0.0 1.4 1.4 Duties and taxes 94.5 0.0 94.5 0.0 0.0 0.0 Base cost 310.4 175.1 485.5 87.3 35.7 123.0 Physical contingencies 24.2 10.4 34.7 0.0 0.0 0.0 Price escalation 100.2 58.1 158.3 0.0 0.0 0.0 Installed cost 434.9 243.6 678.4 87.3 35.7 123.0 Working capital 10.4 1.2 11.6 4.8 0.0 4.8 Project cost 445.3 244.7 690.0 92.1 35.7 127.8 Interest during construction 6.0 0.0 6.0 0.0 0.0 0.0 Front-end fee Total financing required 451.3 244.7 696.0 92.1 35.7 127.8 Notes: "Actual cost" include duties, taxes and price escalation under the respective categories of expenditure. "Interest during construction" is included in "pre-operation expenditures". 38 Annex I continued Project Financing Plan (USS million) Original Revised Actual A. Equity 348.0 98.0 63.9 Government of India 215.8 N.A. N.A. CIL cash generation 132.2 N.A. N.A. B. Long-term debt 348.0 98.0 63.9 IBRD 248.0 57.7 55.3 Government of India 85.8 26.1 2.5 ODA 14.2 14.2 6.1 Total financing 696.0 196.1 127.8 Allocation of the Bank Loan (USS million) Category Original Revised Actual Amount Percent Amount Percent Amount Percent Mining Equipment 169.5 68.4 50.0 86.6 54.5 98.5 Washery 60.8 24.5 0.0 0.0 0.0 0.0 Technical assistance 2.0 0.8 2.0 3.5 0.8 1.5 Front-end fee 0.0 0.0 0.0 0.0 0.0 0.0 Unallocated 15.7 6.3 5.7 9.9 0.0 0.0 Total 248.0 100.0 57.7 100.0 55.3 100.0 Note: The revised projection was made after Coal India had decided to cancel US$190.3 million of the Bank loan. 39 Annex II Monthly Production Block 2 Open-Cast 1994/95 1995/96 Months Overburden Coal Production Overburden Coal Production Thousand A3 Thousand tons Thousand A3 Thousand tons April 568.5 48.4 316.6 50.1 May 480.0 60.0 238.0 52.1 June 309.0 32.3 198.2 48.5 July 307.3 69.6 134.3 64.4 August 212.0 78.0 213.1 44.9 September 171.9 52.9 236.3 43.1 October 263.0 50.0 317.1 39.5 November 301.5 64.2 254.2 58.0 December 273.9 67.1 359.8 69.5 January 356.3 114.0 305.2 80.9 February 308.7 112.0 286.1 72.3 March 499.9 122.5 Total 4052.0 871.0 2858.9 623.3 40 Annex III Manpower Status of Block 2 Open-Cast Project As of April 1 Year Officer Supervisor Highly Skilled Semi- Unskilled Ministerial Total Piece Apprentice Skilled skilled Rated 1989 61 153 34 534 287 311 75 1455 67 22 1990 53 154 34 526 289 337 74 1467 72 26 1991 42 137 52 397 340 193 61 1222 91 2 1992 42 140 52 402 338 192 61 1227 466 5 1993 37 135 45 364 323 207 61 1172 406 - 1994 35 130 84 329 303 238 57 1176 313 - 1995 30 127 82 310 290 251 54 1144 264 - 41 Annex IV Block 2 Open-Cast Project Educational Profile of Executives and Supervisory Staff As of April 1, 1995 A. Educational Profile of Executives: Number ofPersons Ph.D. Graduate (Engineering) 13 Diploma (Engineering) 17 Physician - MBBS 01 Graduate (Other) Master Degree 01 Matriculation - Others - Total 32 B. Educational Profile of Supervisory Staff: Post Graduate (General) 03 Graduate (General) 06 Matriculation 118 Diploma in Mech. Engg. 25 Diploma in Elect. Engg. 10 Diploma in Civil Engg. 01 Diploma in Mining with Overmanship 14 Overmanship Certificate 03 Mines Sardarship Certificate 36 Mines Surveyorship Certificate 02 I.T.I. 214 Elect. Supervisory Certificate 03 Diploma (Para-Medical) 01 Literate 846 Illiterate 94 Total* 1376 *Total includes piece-rated labor 42 Annex V Air Quality Data Block 2 Open-Cast Project Year Quarter Suspended SO2 NO. Particle Matter Standard 500 120 120 -- microgram per 1991 2nd 1033 N.A. N.A. 3rd 398 N.A. N.A. 4th 877 15.5 16.7 1992 1st 1105 12.2 11.1 2nd 971 10.3 41.2 3rd 444 29.7 30.5 4th 1305 27.8 16.7 1993 1st 829 N.A. N.A. 2nd 556 N.A. N.A. 3rd 264 N.A. N.A. 4th 416 N.A. N.A. 1994 1st 596 N.A. N.A. 2nd 460 N.A. N.A. 3rd N.A. N.A. N.A. 4th 698 4.2 3.6 1995 Ist 696 N.A. 11.6 2nd 246 4.7 19.6 3rd 115 8.6 8.1 4th 333 N.A. 12.8 Measurements are made over a 24 hour period at the Box Cut office. More frequent sprinkling has been practiced in recent times to reduce airborne dust. 43 Annex V Continued Effluent Water Quality Monthly Measurements Year Quarter Total Suspended pH Dissolved Oxygen Solid Standard 100 milligram/liter 5.5-9.0 >5 milligram/liter 1991 1st 65 7.4 6.8 1992 3rd 75 6.5 6.6 4th 85 6.8 7.6 1993 1st 85 7.3 7.7 1994 Ist 100 7.1 6.2 2nd 177 7.6 7.6 3rd 90 7.2 7.2 4th 120 5.1 7.4 1995 Ist 100 6.8 7.2 2nd 75 7.2 5.8 Noise Level Upper Limit 85 dB Location Morning (dB) Afternoon (dB) Project Office 62 49 Local Office 53 49 Dumper Maintenance Yard 56 68 Block 2 Open-Cast Project - Cost Structure and Profitability 87/88 88/89 89/90 90/91 91/92 92/93 93/94 94/95 95/96 Coal Production (Million Tons) 0.799 1.016 1.215 0.928 0.613 0.661 0.869 0.871 0.623 Output per Man-Shift (OMS) Tons 2.02 1.85 2.01 1.55 1.26 1.52 1.99 2.29 1.78 Earnings per Man-Shift (EMS) Rupees 99.6 113.8 158.6 138.7 165.0 208.5 222.7 22.1 256.3 Man-Shifts (Million) 0.396 0.556 0.605 0.598 0.489 0.434 0.437 0.381 0.351 Overburden Removal (Million M') 2.96 4.87 5.10 5.23 5.11 5.44 5.15 4.05 2.86 Manpower (Persons) 1450 1455 1467 1222 1227 1172 1176 1144 Cost of Production (Million Rupees) Salaries and Wages 39.5 62.6 57.7 83.6 81.5 90.5 97.3 84.6 89.9 Consumables 53.6 62.7 74.9 80.4 69.9 96.9 89.6 110.4 85.0 Power 5.4 5.2 10.2 6.7 6.8 11.6 14.0 9.7 13.1 Coal Transportation 4.1 4.7 9.9 16.3 6.4 10.5 20.0 25.3 17.1 Overhead 29.2 12.8 82.5 51.4 56.4 42.4 53.8 65.1 51.4 Operating Cost 131.8 148.0 235.4 238.4 221.1 251.8 274.8 295.2 256.5 Operating Cost per ton (Rupees) 165 146 195 257 361 381 316 339 411 Overburden Adjustment - - - -61.7 -96.7 -119.6 -60.7 20.3 53.1 Interest 65.7 100.2 103.2 104.9 125.8 149.2 95.4 104.8 93.2 Depreciation 64.6 100.2 113.6 135.8 145.8 151.3 154.5 153.1 149.9 Total Cost 262.1 348.4 452.0 417.4 396.0 432.7 464.0 573.3 552.6 Total Cost per ton (Rupees) 328 343 374 450 646 655 534 658 886 Sales Value 175.9 262.9 314.1 247.5 201.4 246.7 375.4 389.4 282.8 Profit/(Loss) (86.2) (85.5) (137.9) (169.9) (194.6) (186.1) (88.6) (183.9) (269.8) BCCL - Cost Structure and Profitability 1990/91 1991/92 1992/93 1993/94 1994/95 Total Salable Production (Million Tons) 25.5 25.9 27.2 28.3 27.9 Output per Man-Shift (OMS) Tons 0.77 0.78 0.84 0.9 0.93 Open-cast (OMS) Tons 2.21 2.23 2.50 2.20 2.25 Underground (OMS) Tons 0.43 0.43 0.43 0.48 0.50 Earnings per Man-Shift (EMS) Rupees 151.2 176.2 193.8 209.9 232.5 Overburden Removal (Million M3) 28.8 31.4 34.0 36.0 35.1 Cost of Production (Million Rupees) Salaries and Wages 5177 6025 6461 6760 7159 Consumables 1000 1190 1439 1747 1946 Power 650 732 828 1097 1036 CoalTransportation 267 287 382 485 404 Overhead 1374 1416 1951 2824 2626 Operating Cost 8468 9650 11061 12913 13171 Operating Cost/fon Rupees 332 373 407 456 472 Overburden Adjustment -99 -128 -193 -347 77 Interest 1111 1456 1656 1260 1343 Depreciation 932 1006 1163 1182 1275 Total Cost 10412 11984 13687 15008 15866 Total Cost/Ton Rupees 408 463 503 517 568 Sales 7263 7213 10430 13160 13029 Profi/ALoss (3149) (4771) (3257) (1848) (2837) Trend in Coal Prices CIL Official Run of the Mine Prices for Steam and Coking Coal (Rupees/Tonne) With Effect ST-I ST-fI WASH-1 WASH 1 WASH I WASH IV GRADE A GRADE B GRADE C GRADE D GRADE E GRADE F GRADE G From 07/17/79 152.5 147.5 142.5 134.5 127.5 114.5 137.5 122.5 107.5 92.5 77.5 57.5 42.5 02/14/81 193.0 187.0 181.0 174.0 166.0 154.0 168.0 158.0 141.0 123.0 102.0 78.0 51.0 05/27/82 219.0 213.0 205.0 198.0 189.0 175.0 203.0 182.0 163.0 142.0 118.0 90.0 59.0 01/08/84 460.0 380.0 325.0 267.0 200.0 185.0 274.0 247.0 213.0 187.0 135.0 105.0 71.0 01/09/86 492.0 412.0 357.0 299.0 232.0 217.0 306.0 279.0 245.0 219.0 148.5 118.5 84.5 12/23/87 583.0 488.0 423.0 353.0 274.0 256.0 361.0 330.0 290.0 232.0 186.0 151.0 110.0 01/01/89 661.0 553.0 480.0 400.0 310.0 290.0 409.0 374.0 328.0 262.0 210.0 170.0 124.0 12/28/91 852.0 712.0 618.0 514.0 398.0 372.0 526.0 481.0 421.0 336.0 269.0 217.0 157.0 02/17/93 960.0 802.0 696.0 579.0 448.0 418.0 592.0 541.0 474.0 378.0 302.0 243.0 176.0 06/18/93 1006.0 841.0 730.0 607.0 469.0 438.0 620.0 567.0 497.0 396.0 316.0 254.0 184.0 06/17/94 1058.0 885.0 768.0 638.0 493.0 460.0 652.0 596.0 523.0 417.0 332.0 267.0 193.0 12/30/95 1068.0 895.0 778.0 648.0 503.0 470.0 662.0 606.0 533.0 427.0 342.0 277.0 203.0 04/01/96 1330.0 1113.8 967.5 805.0 599.6 560.0 790.4 711.5 610.0 427.0 342.0 277.0 203.0 Coal Prices in Real 1984 Rupees (Deflated by Wholesale Price Index) With Effect ST-I ST-fl WASH-1 WASH [I WASH I WASH IV GRADE A GRADE B GRADE C GRADE D GRADE E GRADE F GRADE G From 01/08/84 460.0 380.0 325.0 267.0 200.0 185.0 274.0 247.0 213.0 187.0 135.0 105.0 71.0 01/09/86 442.1 370.2 320.8 268.7 208.5 195.0 275.0 250.7 220.2 196.8 133.4 106.5 75.9 12/23/87 458.4 383.7 332.6 277.6 215.5 201.3 283.9 259.5 228.0 182.4 146.3 118.7 86.5 01/01/89 483.7 404.7 351.3 292.7 226.9 212.2 299.3 273.7 240.0 191.7 153.7 124.4 90.7 12/28/91 462.3 386.4 335.3 278.9 216.0 201.9 285.4 261.0 228.4 182.3 146.0 117.8 85.2 02/17/93 473.4 395.5 343.2 285.5 220.9 206.1 291.9 266.8 233.7 186.4 148.9 119.8 86.8 06/18/93 450.2 376.4 326.7 271.7 209.9 196.0 277.5 253.8 222.4 177.2 141.4 113.7 82.3 06/17/94 473.0 395.6 343.3 285.2 220.4 205.6 291.5 266.4 233.8 186.4 148.4 119.4 86.3 12/30/95 433.6 363.4 315.9 263.1 204.2 190.8 268.8 246.0 216.4 173.4 138.9 112.5 82.4 04/01/96 532.0 445.5 387.0 322.0 239.8 224.0 316.2 284.6 244.0 170.8 136.8 110.8 81.2 47 Annex IX ASSUMPTIONS FOR FRR AND ERR CALCULATIONS Given the availability of mine equipment and the problems with resettlement in Block 2, coal production is assumed to be as follows: 1996/97 0.72 million tons 1997/98 0.80 million tons 1998/99 0.9 million tons 1999/2000 onward 1.0 million tons 2. Due to the condition of the mining equipment, replacements have been considered in future years in consultation with BCCL. 3. Effect of recent wage agreement has been reflected. 4. Wholesale price index has been used as deflator. 5. Working capital has been calculated on the basis of four months of operating cost. 6. Financial cost streams have been converted to economic cost streams with the following conversion factors: Capital Imported 1.00 Capital indigenous .80 Capital Composite .85 Opening expenses 1.00 7. For FRR Calculation, domestic prices of coking coal have been assumed to remain in real terms at April 1996 level. 8. For ERR Calculation, the import parity price (1993/94) is calculated as follows: FOB pricefTe Australian Coking Coal, 10% ash US$ 57.85 FreightfTe USS 14.00 CIF price/Te US$ 71.85 Quality Penalty for 17% ash content USS 19.59 Import Parity price for 17% ash coking coal USS 42.26 In rupees (1993/94 prices) Rps 1318.7 Port charges Rupees/ton Rps 263.0 Less washing cost Rps 88.0 Parity Price Ex-Washery Rps 1493.7 Washery Yield 2.12 Parity price per ton Run of Mine Rps 704.6 48 Annex X Reestimated FRR - 1993/94 Prices Production Capital Cost Operating Cost Working Capital Revenue Cash Flow Million Tons Million Rupees--------- ----- 1984/85 0.04 470.8 -470.8 1985/86 0.14 243.9 -243.9 1986/87 0.44 693.0 117.3 39.1 171.3 -678.0 1987/88 0.80 756.8 231.9 38.2 309.5 -717.4 1988/89 1.02 -99.1 242.3 3.5 430.5 283.8 1989/90 1.22 400.0 358.4 5.3 478.6 -284.7 1990/91 0.93 145.6 330.0 -9.3 342.1 -124.2 1991/92 0.61 74.8 268.7 -10.6 244.8 -88.1 1992/93 0.66 165.0 278.1 3.1 272.5 -173.7 1993/94 0.87 17.8 274.8 -1.1 375.4 83.9 1994/95 0.87 169.0 270.5 -1.4 357.4 -80.7 1995/96 0.72 170.5 235.0 -11.9 258.0 -135.6 1996/97 0.72 51.9 235.0 - 335.7 48.8 1997/98 0.80 133.5 254.0 6.3 373.0 -20.8 1998/99 0.90 28.2 272.0 6.0 461.6 155.4 1999/2000 1.00 50.0 299.0 5.7 466.3 111.6 2000/2001 1.00 40.0 299.0 - 466.3 127.3 2001/2002 1.00 -620.8 299.0 -99.7 466.3 887.8 FRR = -5.3 percent. 49 Annex XI Reestimated ERR - 1993/94 Prices Production Capital Cost Operating Cost Working Capital Revenue Cash Flow Million Tons ------------------------------------------Million Rupees----------------------- 1984/85 0.04 400.2 -400.2 1985/86 0.14 207.3 -207.3 1986/87 0.44 589.0 117.3 39.1 306.5 -439.0 1987/88 0.80 643.2 231.9 38.2 563.0 -350.3 1988/89 1.02 -84.2 242.3 3.5 718.7 557.1 1989/90 1.22 340.0 358.4 5.3 859.6 155.9 1990/91 0.93 123.7 330.0 -9.3 652.4 206.0 1991/92 0.61 63.6 268.7 10.6 431.9 110.2 1992/93 0.66 140.3 278.1 3.1 465.7 44.2 1993/94 0.87 15.1 274.8 -1.1 613.0 324.2 1994/95 0.87 135.2 270.5 -1.4 613.0 208.7 1995/96 0.72 136.4 235.0 -11.9 507.3 147.8 1996/97 0.72 41.5 235.0 - 507.3 230.8 1997/98 0.80 106.8 254.0 6.3 563.7 196.6 1998/99 0.90 22.6 272.0 6.0 634.1 333.5 1999/2000 1.00 40.0 299.0 5.7 704.6 359.9 2000/2001 1.00 32.0 299.0 - 704.6 373.5 2001/2002 1.00 -496.6 299.0 -99.7 704.6 1001.9 ERR = 13.2 percent