India - Coal Sector Rehabilitation Project

Report No. PID724 Project Name India-Coal Sector Rehabilitation Project (@# Region South Asia Sector Energy Project ID INPE9979 Borrower Coal India Ltd. 10 Netaji Subhas Road Calcutta, West Bengal, 700 001 Contact: Mr. P. K. Sengupta, Chairman Telephone: (91 33) 220-6063 Fax: (91 33) 248-3373 Date Initial PID Prepared March 8, 1994 Date This PID Prepared September 23, 1997 Appraisal Date March 11, 1997 Board Date September 9, 1997 1. BACKGROUND. Coal is India's most important source of commercial energy, providing two-thirds of India's energy needs. Faced with a rapidly growing energy demand, demand-side management programs which are just beginning, relatively small reserves of hydrocarbons and steeply rising costs for the development of hydroelectric resources, India relies heavily on its abundant coal reserves. About 60% of India's coal output is used to generate electricity, about 15% to produce steel, and about 25% to fuel boilers in industrial plants (cement, fertilizer, etc.). Coal India Ltd. (Coal India) produces about 909 of India's coal output. Indigenous coal supplies are likely to dominate commercial energy production in the years ahead since infrastructure bottlenecks will constrain large-scale coal imports in the short and medium term. Coal India's financial performance will critically affect its ability to meet the country's energy demand over the next few years. As such, Coal India's ability to meet the country's coal demand will critically affect the success of India's reform efforts. 2. PROJECT OBJECTIVES. Over the past three years, the Government of India and Coal India have implemented a number of reforms aimed at making the coal industry commercially viable and financially self-sustaining. The primary objective of the proposed loan is to support this reform agenda and Coal India's transformation into a commercial company whose operations are financially and economically sustainable. 3. In order for the project to achieve the desired long-term financial impact, the project would: -- support investments in 24 opencast mining operations that are projected to yield the highest economic returns; and -- provide technical assistance in support of the project. The success of future coal sector development is predicated on continued reforms by the Government of India regarding pricing and  distribution of coal, private investment, the financial restructuring of Coal India and the phasing out of subsidies to loss-making coal companies, as well as support for Coal India's efficiency and productivity drive. 4. PROJECT DESCRIPTION. The bulk of the proposed loan would finance the purchase of mining equipment for 24 opencast mining operations in Madhya Pradesh, Maharashtra, Uttar Pradesh, Bihar and Orissa. The loan would also provide technical assistance for redrafting the regulatory framework that governs operations in the coal industry. The aim is to enhance competitiveness and efficiency in the coal industry. 5. COST AND FINANCING ARRANGEMENTS OF THE PROPOSED PROJECT. The total cost of the proposed project is estimated at US$1.7 billion. The estimated foreign exchange requirements are US$1.1 billion. Coal India has requested a World Bank loan of US$530 million, which would finance part of the required mining equipment and technical assistance. Coal India has indicated that it would be able to finance about US$500 million of the estimated cost from internally generated resources and about US$82 million from borrowings in local capital markets and supplier's credits. The remaining US$530 million is expected to be raised through cofinancing arrangements. In addition, IDA credit of US$ 2 million will be provided to GOI to finance the study of the regulations governing the coal industry. 6. PROJECT IMPLEMENTATION. The design of the project, which involved the identification of the highest-yielding investments (subprojects), included agreement with Coal India on (sub) project- specific implementation arrangements. In addition, the proposed loan is supported by the Coal Sector Environmental and Social Mitigation Project (Cr. 2862-IN). This credit has provided the Bank with an opportunity to assist Coal India in strengthening its policies with regard to resettlement and rehabilitation and community development and the environmental sustainability of its mining operations. 7. Coal India has set up a Project Implementation Division at its headquarters to monitor the implementation of the project as regards procurement, deployment of equipment and environmental and social concerns, and the overall commercial performance of the project. In addition, the subsidiary coal companies that will receive financial support under the proposed loan are strengthening their capacities (at their headquarters and the mine level) to deal with environmental and social issues through the Coal Sector Environmental and Social Mitigation Project. 8. PROJECT SUSTAINABILITY. As indicated in para. 2 above, the proposed project supports Coal India's efforts to ensure that its operations are commercially viable. To ensure Coal India's financial viability beyond the period in which the project is being implemented, financial support under the project will be limited to mines that yield the highest economic return while minimizing adverse social and environmental impacts. - 2-  9. LESSONS LEARNED FROM PREVIOUS BANK OPERATIONS. The Bank has made three loans to the Indian coal industry: in 1984, a loan of US$151 million for the development of the Dudhichua coal mine in Singrauli; in 1985, a loan of US$248 million for the development of an opencast mine (Block II) and an underground mine (Pootkee- Bulliary) in the Jharia coalfield; and in 1987, a loan of US$ 340 million for the expansion of an opencast mine (Gevra) in the Korba coalfield, Madhya Pradesh, the construction of an opencast mine (Sonepur-Bazari) in Ranigunj coalfield, West Bengal, and imports of coking coal. In 1992, the Board approved a credit of US$12 million for a technical assistance program to deal with mine fires in the Jharia coalfield. The loan for the Jharia Coking Coal project was closed on December 31, 1992 and the loan for the Dudhichua Coal project was closed on March 31, 1993. 10. Implementation of the projects supported by these loans has been uneven. The construction of the Dudhichua coal mine and the expansion of the Gevra coal mine proceeded without major problems and ahead of schedule. At the time these projects were completed, the majority of the project-affected people had been resettled and had received compensation for their loss of assets. Under both projects, the respective subsidiary coal companies followed a policy which provided employment - one per entitled project- affected family - in an effort to restore and improve the livelihood of these families. However, the process of rehabilitating project-affected people has not been completed, and the resettlement and rehabilitation efforts under these as well as all other coal projects that have received financial support from the Bank in the past are being reviewed in the context of the Coal Sector Environmental and Social Mitigation Project. 11. The opencast mine project in the Jharia coalfield and the Sonepur-Bazari project were plagued by land acquisition problems and social issues. This not only delayed their implementation and the disbursements of the loans, it also reduced the commercial viability of these projects. People affected by these projects, demanded employment with the respective subsidiary coal companies, at a time when these companies were under financial pressure to reduce their staff. The fact that wages in the coal industry are about 8-10 times the prevailing minimum wage, made employment with the coal companies highly attractive and, at the same time, the task of identifying acceptable alternative ways to restore/improve the livelihood of affected people, more difficult. 12. One component, the Pottkee-Bulliary underground mine, was canceled after it was discovered that the coal reserves at this location would not support the original mine design and the subsidiary coal company was unable to come up with another commercial viable proposal. 13. Several lessons have been drawn from these operations and included in the design of the proposed project: Technical assistance greatly enhances the chances that a project is implemented properly and on time. The Dudhichua mine is rightly regarded as one of the most successful - 3 -  mines in the Singrauli coalfield. This is largely due to the fact that the construction of the mine had during its initial years, considerable assistance and guidance from an international mining consultant. Several technical assistance components are incorporated in the project. -- Project implementation units have been strengthened and technical assistance during implementation has been scheduled. -- Procurement has been centralized and streamlined in Coal India. All procurement is being carried out by a cell with specially trained staff and on the basis of standard bidding documents agreed upon with the Bank. Realistic periods for making procurement decisions have been agreed between the Bank and Coal India for each package. Technical specifications have been reviewed by (external) experts. -- Equipment utilization is generally poor, around 75% , for major equipment. Coal India has provided the Bank with a program that clearly identifies the steps being taken to bring equipment utilization in line with rates achieved in major industrial coal producing countries. -- Land acquisition is difficult unless project-affected people are consulted from the outset and offered an acceptable alternative that ensures that they at least regain their livelihood. Detailed programs have been prepared for the rehabilitation of PAPs and are being implemented with NGO assistance. -- Since Indian laws did not require the preparation of Environmental Management Plans (EMPs) at the time, some of these mines were approved by the Government, mining operations lacked a coherent environmental mitigation strategy. Coal India has now prepared EMPs for all mines. 14. POVERTY CATEGORY. Not applicable. 15. ENVIRONMENTAL AND SOCIAL ASPECTS. The proposed project has been classified as Category 'A.' Coal India has prepared a Sectoral Environmental Assessment. As part of this assessment, Coal India has also developed Environmental Action Plans and Rehabilitation Action Plans and Indigenous Peoples Development Plans for each of the mines. These plans are being implemented under the Coal Sector Environmental and Social Mitigation Project. 16. PROJECT OBJECTIVE CATEGORIES. The project objective categories are: sector reforms (40%), public enterprise reform (30%) and infrastructure (30%). 17. PROJECT BENEFITS. The Bank's support for the Government's reform efforts for the coal industry would have several benefits: it would significantly reduce the risk that the reform efforts lose momentum due to lack of financial resources and; through the technical assistance provided under the project, it would further - 4 -  facilitate the transformation of Coal India into a commercially viable and financial self-sustaining coal company. The project would also contribute to the environmental and social sustainability of Coal India's activities. 18. PROJECT RISKS. The proposed project faces the following major risks: (i) delays in the implementation of the environmental and social mitigation activities; and (ii) a slowdown of the pace of reforms. In spite of the commitment of Coal India to the environmental and social mitigation activities, Coal India could face the risk of delay in the implementation of some of these activities, as they are very complex and new to Coal India. The Bank is assisting Coal India in implementing the environmental and social mitigation activities under the ESMP. The actions taken up to now by the Government clearly indicates a strong resolve to proceed with the reform of the coal sector. However, the Government would temporarily slow down pace of the reforms to develop consensus among various stakeholders. However, it is expected that the reforms would be continued without major delays in medium-and long-term. The driving force behind the resolve is the cut in budget resources and high investment requirement to meet ever increasing demand for coal. Contact Point: Public Information Center The World Bank 1818 H Street N.W. Washington, D.C. 20433 Telephone No.: (202) 458-5454 Fax No.: (202) 522-1500 Note: This is information on an evolving project. Certain components may not necessarily be included in the final project. Processed by the Public Information Center week ending October 3, 1997. - 5 -