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Document of The World Bank FOR OFFICIAL USE ONLY Public Disclosure Authorized Report No. 4714-IN Public Disclosure Authorized STAFF APPRAISAL REPORT INDIA DUDHICHUA COAL PROJECT Public Disclosure Authorized February 28, 1984 Public Disclosure Authorized Industry 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 Rs 1.00 = Paise 100 US$1.00 = Rs 9.75 Rs 1.00 US$0.103 Rs 1 million = US$102,600 (Conversions in the Staff Appraisal Report were made at US$1.00 to Rs 9.75, which represents the projected exchange rate over the disbursement period) FISCAL YEAR April 1 - March 31 WEIGHTS AND MEASURES 1 British thermal unit (Btu) 0.252 kilocalories 1 cubic meter (m 3 ) = 1.308 cubic yards 1 gigawatt hour (GWh) - 1,000,000 kilowatthours 1 kilocalorie (kcal) = 3.97 British thermal units 1 kilocalorie per kilogram = 1.805 British thermal units per (kcal/kg) pound 1 kilogram (kg) = 2.205 pounds 1 kilowatt (kW) = 1,000 watts 1 megawatt (MW) = 1,000 kilowatts 1 ton = 1,000 kilograms PRINCIPAL ABBREVIATIONS AND ACRONYMS USED BCCL - Bharat Coking Coal Ltd. BICP - Bureau of Industrial Costs and Prices BPE - Bureau of Public Enterprises CCL - Central Coalfields Ltd. CEA - Central Electricity Authority CIL - Coal India Ltd. CMO - Central Marketing Organization of CITL CMPDI - Central Mine Planning and Design Institute DOC - Department of Coal ECL - Eastern Coalfields Ltd. GOI - Government of India GSI - Geological Survey of India ICB - International Competitive Bidding IISCO - Indian Iron and Steel Company IR - Indian Railways MEC - Mineral Exploration Corporation MP - Madhya Pradesh NEC - North Eastern Coalfields NHPC - National Hydro Power Corporation NTPC - National Thermal Power Corporation OMS - Output per Manshift ONGC - Oil and Natural Gas Commission PLC - Planning Commission SCL - Singareni Collieries Ltd. SLC - Standing Linkage Commnittee SEB - State Electricity Board TISCO - Tata Iron and Steel Company UP - - Uttar Pradesh WCL - Western Coalfields Ltd. WGEP - Working Group on Energy Policy FOR OFFICIAL USE ONLY INDIA DUDHICHUA COAL PROJECT TABLE OF CONTENTS Page I. INTRODUCTION ............................................. 1 II. THE ENERGY SECTOR ........................................ I A. Supply and Demand ................................... 1 B. Energy Sector Strategy .............................. 3 C. The Coal Sector ..................................... 3 1. Background ..................................... 3 2. Reserves ....................................... 4 3. Coal Production and Transportation .... ......... 6 III. THE MARKETFOR INDIAN COAL .............................. 7 A. Indian Coal Supply/Demand and Prospects .... ......... 7 1. Coal Supply .................................... 8 2. Coal Demand .................................... 10 B. Coal Supply Allocation and Marketing .... ............13 1. Supply Allocation .............................. 13 2. Marketing ...................................... 14 C. Pricing ........... 14 1. Prices and Pricing Policy ...................... 14 2. A Rational Approach to Coal Pricing Policy for Indian Coals ............................... 17 IV. THE BENEFICIARIES ........................................ 19 A. Coal India Ltd. ..................................... 19 1. Organization and Management .................... 19 2. Operations ..................................... 21 3. Financial Position ............................. 23 4. Development Strategy and Investment Plan .... ... 24 B. Central Coalfields Ltd. ............................. 26 This report was prepared by Messrs. J. Barrientos, B. Stenberg, J. Strongman and Ms. H. Wu of the Industry Department and Mr. S. Luode (YPP). 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. - ii. - TABLE OF CONTENTS (Cont'd) Page V. THE PROJECT . .............................................. 29 A. Project Objectives .................................. 29 B. Project Description ................................. 29 1. Location ....................................... 29 2. Reserves ....................................... 30 3. Mining ......................................... 30 4. Infrastructure ................................. 31 5. Consumers and Transportation ................... 32 6. Environment .................................... 34 C. Project Execution and Implementation ................ 34 VI. CAPITAL COSTS, FINANCING AND PROCUREMENT ...... .. ......... 38 A. Capital Cost Estimate ............................... 38 B. Financing Plan ...................................... 40 C. Procurement and Disbursement .# ......................42 VII. FINANCIAL ANALYSIS ................... .................... 43 A. Coal India Ltd. ..................................... 43 B. Central Coalfields Ltd. ............................. 48 C. Dudhichua Coal Project .............................. 49 VIII. ECONOMIC ANALYSIS ........................................ 51 A. Least Cost Solution ................................. 51 B. Economic Rate of Return ............................. 52 IX. AGREEMENTS ....................... ........................ 53 CHARTS 5-1 Dudhichua Project Management Organization .... ....... 35 5-2 Dudhichua Implementation Schedule ................... 37 - 112l - ANNEXES 2-1 Primary Energy Production, Trade and Consumption 2-2 Energy Consumption by Sector 2-3 Findings and Recommendations of the Working Group on Energy Policy 2-4 Note on Indian Power Sector 2-5 Note on Indian Railways 3-1 World Coal Market 3-2 CIL - Planned Coal Production by Grade, FY1982 3-3 Coal Demand by Producer, FY1989 3-4 Assumptions Used in Coal Demand Projections 3-5 Coal Price Schedule 3-6 Sales Taxes and Levies on Coal 4-1 CIL Corporate Organization 4-2 Activities and Financial Performance of CIL Subsidiaries 4-3 Scope of Work for Study on Budgetary Systems 4-4 Scope of Work for Technical Assistance on Operational Practices in Open Pit lines 4-5 CIL Financial Statements 4-6 CIL Investment Plan 4-7 CCL Corporate Organization 5-1 Railways Capacity of Selected Routes 5-2 Terms of Reference for Project Implementation Manual 6-1 Equipment Cost Estimate 6-2 Bank-Financed Goods 6-3 Procurement Schedule for Bank-Financed Goods 6-4 Disbursement Schedule for Bank Loan 7-1 Assumptions Used in the Financial Projections 7-2 Pro Forma Financial Statements for Coal India Ltd. 7-3 Pro Forma Financial Statements for Central Coalfields Ltd. 7-4 Financial and Economic Rates of Return - Assumptions and Calculations 8-1 Economic Rate of Return - Cost and Benefit Streams MAPS IBRD 17252 Principal Coalfields in India IBRD 25057 Singrauli Coalfields IBRD 25055 Dudhichua - Project Area - iv - DOCUMENTSAVAILABLE IN THE PROJECT FILE Operational Statistics 1974-75/1979-80,Coal India Ltd. Annual Reports and Accounts, Coal India Ltd. 1975-76 to 1981-82 Annual Sales and Marketing Review, Coal India Ltd. 1981-1982 Feasibility Report for Dudhichua Coal Project, CMPDI, Ranchi, August 1982 Annual Reports, Department of Coal 1979-80 to 1981-82 Coal and Coal India, Training and Management Development Wing, Coal India Ltd. Appraisal Report on Coal India Project Management, Fluor Engineers, March 1983 Theory and Pricing for Public Sector Undertakings, A. Ghosh, Sept. 1982 Singrauli Coalfields, The Future Energy Capital, Central Coalfields Ltd., July 1982 Review and Assessment of Coal India Planned Investment Program, British Mining Consultants, March 1983 Singrauli Coalfields, A Profile of Program and Future Prospects, Central Coalfields Ltd., October 1980 Project Monitoring Report, Quarter ending September 1982, Central Coalfields Ltd. I. INTRODUCTION 1.01 The Government of India (GOI) has requested a Bank loan to help finance the cost of the initial development of the Dudhichua open pit coal mine located in Singrauli, at the state border between Madhya Pradesh and Uttar Pradesh (Map IBRD 17252). The Dudhichua mine will have a final capacity of 10 million tons per year (tpy) which is to be developed in two phases, the first of which (5 million tpy) is included in the proposed project's scope. The project will be owned and operated by Central Coalfields Ltd. (CCL) a wholly-owned subsidiary of Coal India Ltd. (CIL), a Government undertaking. The Dudhichua mine forms part of GOI's plan to increase the utilization of indigenous energy resources. In order to meet coal demand for power generation, the Government has chosen the strategy of basing the expansion of coal production on the development of large scale, mechanized open pit mines, such as Dudhichua. 1.02 The financing requirement of the Project, including escalation, contingencies, interest during construction and working capital, are estimated at US$373 million, of which about US$128 million is in foreign exchange. The proposed Bank loan of US$151 million would cover about 40% of the financing requirements. The balance of US$222 million will be provided from internally generated funds of CIL and from Government resources. 1.03 The proposed project was submitted by GOI for the Bank's consideration in July 1982, and a pre-appraisal mission visited India in September/October 1982. It was appraised in March 1983 by a mission comprising Messrs. J. Barrientos (Chief), P. Kotschwar, B. Stenberg and J. Strongman of the Industry