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Document of V K31 The World Bank FOR OFFICIAL USE ONLY Public Disclosure Authorized Report No. 3251.-IN STAFF APPRAISAL REPORT Public Disclosure Authorized INDIA TAMILNADU NEWSPRINT PROJECT Public Disclosure Authorized Public Disclosure Authorized Industrial Projects 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 US$1 = Rs 8.0 Rs 1 = US$0.125 Rs 1,000 US$125.00 WEIGHTS AND MEASURES 1 metric ton (t) = 1,000 kilograms (kg) = 2,204 pounds 1 milligram (mg) = 0.001 grams (gm) = 0.015 grain 1 liter (1) = 61.02 cubic inches = 1.057 quarts 1 kilometer (km) 0.621 mile 1 meter (m) = 1.0936 yards = 39.37 inches I cubic meter (m3) 35.31 cubic feet = 264 US gallons 1 square meter (m3) = 1.2 square yards = 10.76 square feet 1 hectare (ha) = 10,000 square meters = 2.47 Acres 1 Kilovolt (kV) = 1,000 volts 1 Megawatt - hour (Mwh) = 1,000 Kilo Watt - hours ABBREVIATIONS AND ACRONYMS USED BCE = Base Cost Estimate BOD = Biochemical Oxygen Demand FAO = Food and Agriculture Organization of the United Nations Government Government of India HPC = Hindustan Paper Corporation ICICI = Industrial Credit and Investment Corporation of India IDBI = Industrial Development Bank of India IFCI = Industrial Finance Corporation of India IPMA = Indian Paper Makers Association DAF = Development Assistance Fund LICI = Life Insurance Corporation of India MOI = Ministry of Industry m3py = Cubic meters per year NLC = Neyveli Lignite Corporation Ltd. pH = Measure of alkalinity/acidity, expressed in terms of a scale of the negative logarithm of the effective hydrogen concentration in gram equivalents per liter; 7 is neutral, less than 7, acid. SPB = Seshasayee Paper and Boards Limited (Project Consultant) TAFCORN = Tamilnadu Forest Plantations Corporation TNEB = Tamilnadu Electricity Board TNPL = Tamilnadu Newsprint and Papers Limited (Project Sponsor) tpy = Tons per year tpd Tons per day FISCAL YEAR Government and Company: April 1 - March 31 INDIA FOR OFFICIAL USE ONLY APPRAISAL OF TAMILNADUNEWSPRINT PROJECT TABLE OF CONTENTS Page No. I. INTRODUCTION 1 II. THE INDIAN PULP AND PAPER INDUSTRY 2 A. Industrial Sector ...... ................. 2 B. Background of the Paper Industry .................. 3 C. Historical Growth of the Industry ................. 4 D. Fibrous Raw Material Supply ..... .............. 5 1. Bamboo ........................................ 5 2. Wood .......................................... 7 3. Bagasse ....................................... 8 4. Other Fibers and Conclusions .... .............. 10 E. Government Sectoral Development Policies .......... 10 F. Production and Pricing Controls ................... 11 G. Bank Role and Involvement of Other Lending Agencies 12 III. THE SPONSOR.13 A. Tamilnadu Newsprint and Papers Limited 13 B. Seshasayee Paper and Boards Limited .13 IV. THE MARKET .14 A. Historical Development of Supply and Demand 14 B. Printing and Writing Paper .15 C. Newsprint .17 D. Marketing and Distribution .18 E. Prices .. 18 1. General Market Influences .18 2. Printing and Writing Paper .19 3. Newsprint .20 V. THE PROJECT .21 A. Project Concept and Choice of Technology 21 B. Project Description .. 23 1. The Mill .23 2. Fibrous Raw Material Supplies .24 3. Coal and Lignite .26 4. Electric Power Supply .28 5. Environmental Impact and Protection 28 C. Infrastructure .. 29 D. Project Implementation and Management . 29 E. Employment and Training ........................... 31 This report was prepared by V. A. Bates and K. Zamani of the Industrial Projects Department and A. J. Ewing (Consultant). This document has a restricteddistribution and may be used by recipients only in the performance of their officialduties. Its contents may not otherwise be disclosed without World Bank authorization. TABLE OF CONTENTS (continued) Page No. VI. CAPITAL COSTS, FINANCING PLAN AND PROCUREMENT ........... 32 A. Capital Costs ....................................... 32 B. Financing Plan ...................................... 33 C. Procurement and Disbursement ........................ 36 VII. FINANCIAL ANALYSIS ..................... ................. 37 A. Assumptions ......................................... 37 B. Revenues ............................................ 38 C. Production Costs .................................... 38 D. Financial Projections .............................. 40 E. Financial Rate of Return and Sensitivity Analysis ... 41 F. Financial Covenants ................................. 42 G. Auditing and Reporting Requirements .... ............. 43 VIII. ECONOMIC ANALYSIS AND RISKS ............................. 43 A. Adjusted Costs and Benefits for Economic Analysis ... 43 B. Economic Rate of Return ............................. 43 C. Other Benefits ...................................... 44 D. Risks ............................................... 45 IX. AGREEMENTS ............................................... 47 ANNEXES 6-1 Summary of Plant Capital and Base Cost Estimates 6-2 Contingency Allowances in Capital Cost Estimates 6-3 Working Capital Estimate 6-4 Projected Disbursement Schedule for Bank Loan 7-1 Assumptions Used in Financial Projections 7-2 Production Cost Estimate at Full Production 7-3 Projected Income Statement 7-4 Projected Cash-Flow Statement 7-5 Projected Balance Sheets 7-6 Cost/Benefit Streams for Financial Rate of Return 8-1 Assumptions Used in Economic Projections 8-2 Cost/Benefit Streams for Economic Rate of Return MAP IBRD India - Project Location (No. 15475R) SELECTED DOCUMENTS AND DATA AVAILABLE IN THE PROJECT FILE A. Reports and Studies on the Sector Al. Potential for Pulp and Paper Develoment - India. Prepared for FAO by Bhargava Consulting and Design Engineers, New Delhi, 1976 (2 vols.) A2. Directory of Indian Paper Makers Association. IPMA, New Delhi, 1979. A3. Use of Bagasse for Paper-Making. (Note from Department of Industrial Development). Ministry of Industry, New Delhi, 1979. A4. Paper Industry. (Note from Department of Industrial Development). Ministry of Industry, New Delhi, 1980. A5. Bagasse for Pulp and Paper in India. Abstracted from UNDP/FAO/Government interim report on materials for paper-making. New Delhi, 1979. A6. Annual Reports of Seshasayee Paper and Boards Limited (for years 1977- 1980). Madras. B. Reports and Studies on the Project Bl. Project Report for Establishment of Bagasse-Based Newsprint/Paper Mill in Tamilnadu. Seshasayee Paper and Boards Limited, Madras, 1979. B2. Application Seeking Financial Assistance for Establishing a Bagasse- Based Newsprint/Paper Mill in Tamilnadu. Tamilnadu Newsprint and Papers Limited, Madras, 1979. B3. Tender Documents for Engineering Services and Supply of Paper-Making and Bagasse Pulping Equipment. Tamilnadu Newsprint and Papers Limited, Madras, 1980. B4. Assessment of Bagasse Newsprint Operations in Peru and Mexico. Bank Mission Report - R. Chalk (IPD) and A. Hurter (Consultant). Washington, October 7, 1980. B5. Report on Transportation and Storage of Raw Materials and Finished Products. Report of Bank Consultant A. Malhotra. B6. Contract for Consulting Services between Tamilnadu Newsprint and Papers Limited and Seshasayee Paper and Boards Limited. C. Selected Working Papers Cl. Project Brief prepared May 1, 1980. Industrial Projects Department August 1981 t I. INTRODUCTION 1.01 The Government of India (the Government), has requested a Bank loan of US$100 million equivalent to help finance the cost of a new paper mill (the Project) to be located at Pugalur in the State of Tamilnadu, about 300 km southwest of Madras (Map IBRD 15475R). The Project will be owned and operated by Tamilnadu Newsprint and Papers Limited (TNPL), a new company, with 47.4% of its shares to be held by the Government of Tamilnadu. Two sugar companies and a paper company will be minority equity shareholders in TNPL holding a combined total of 6% of its shares. The balance of the shares will eventually be offered to the public. Initially they will be held by the Industrial Development Bank of India (IDBI) in a consortium with three other Indian financial institutions.l/ The proposed Bank loan would cover approximately 42% of the estimated total financing requirement of US$238 million, and about 87% of the total foreign exchange needs of US$115 million. The remaining foreign exchange costs together with local cost financing will be provided by the Government of Tamilnadu, the minority equity shareholders, the consortium of Indian financial institutions, and local commercial banks.2/ 1.02 The Project has evolved as a direct result of policy measures adopted by the Government aimed both at expanding the domestic production of paper (and in particular newsprint) to meet growing domestic demand, and at using bagasse as a raw material for paper manufacture.3/ The plant will use bagasse from five existing sugar mills to produce 50,000 tons per year (tpy) of newsprint and 40,000 tpy of printing and writing paper, to be marketed throughout India. The bagasse is now being used as a fuel for generating steam in the sugar mills; to obtain its release for paper production, the Project provides for the installa- tion and operation of coal-fired boiler systems at each sugar mill at the Pro- ject's expense. Bagasse has been widely used to produce printing and writing paper for many years; the technology for bagasse-based newsprint manufacture, however, is relatively new. To date, two such plants have been built