ftRETUIRNTO

-EPon'rS DESK Appendix 4 WITHIN ONEWEEK ~~~~~~~~~~~~~T.O.Zb RESTRICTED Public Disclosure Authorized This report is restricted to use within the Bank.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

REPORT ON PROJECTS Public Disclosure Authorized submitted by

THE INDIAN GOVERNMENT

for a

SECOND LOAN

Public Disclosure Authorized in connection with

THE DAMODAR VALLEY CORPORATION

January 16, 1953 Public Disclosure Authorized

Technical Operations Department CAonversion Rates for Indian Currency

U.S. $1 Rs. 4.76 R. 1 21 U.S. cents Rs. 1,000,000 U.S. $210,000 R. 1 16 annas I anna 1.31 cents 1 mil 1/10 cent I N D E X

Paragraph No.

I- Summary 1 12

II - Purpose and 6cope of this P.eport 13 - 15

III - The Unified Development Pro 6 ram for the Damodar Valley 16 - 33

IV - Pro6ress to date on the Program 34 -42

V - Description of Proposed F;rojects 43 - 50

VI - zstimated Cost of the Projects 51 - 53

VII - Construction and -xperiditure Schedules 5 - 56

VIII - The Organizationand 1sianagement of DVC 57 - 63

IX - Financial Results of the Projects 64 - 68

X - Economic Benefits fr.om the Projects 69 - 90

XI - 1{ecommendedbasis for a Loan 91 - 95

Annex I - Table: EstimatedFinancial itesultsof DVC Operations

Notes on the basis of calculationsof Annex I

Annex II - Damodar Aiver Unified Scheme of Development I. Sumnmay

1. This report summarizes progress on the loan of $18.5 million already granted for the development plan of the Damodar Valley, and covers the technical, financial, economic, organizational and managerial appraisal of three additionalprojects which form the basis for a second Bank loan. 2. Progress on the projects covered by the first Bank loan has on the whole been satisfactory. The Bokaro generating plant should be ready for service by May 1953. The Konar Dam should be completed about July 1953. The construction of the transmission system is scheduled to be fin- ished by the end of 1954.

3. The threeadditional projects are the first importantgroup in the plan relatedto flood control,irrigation, hydroelectricpower genera- tion and navigation, and complement the projects which are being partly financed from the proceeds of the first Bank loan. The new projects will provide additional generating capacity of 100,000 kw. and when the whole system is complete, enough water will be available to irrigate about 1 million acres all the year round. At the same time the dams will store enough water to prevent future floods. One of the main irrigation canals will provide for transportation of coal and other materials to and from the Calcutta market.

4. The total estimated cost of the three projects is equivalent to about 4103 million. Total foreign currency expenditures are estimated at about $26 million of which about 6.5 million had been spent before June 30, 1952.

5. The Maithon project will be used primarily for flood control, but will also make water available for irrigation and power. A dam will be con- structed on the Barakar river near its juncture with the Damodar. The res- ervoir will have a capacity of 1,104,000acre feet. An underground power station will be constructed with an installed capacity of 60,000 kw. The total estimated cost is equivalent to about $29.2 million.

6. The Panchet Hill project will also be used primarily for flood control. A dam will be constructed on the Damodar river above its juncture with the Barakar. The reservoir will have a capacity of 1,214,000 acre feet. A power plant will be constructed with an installed capacity of 40,000 kw. The estimated cost is equivalent to about $31.3 million. 7. The irrigation project, located in West Bengal, will consist of a diversion Uarrage at Durgapur on the Damodar river and canal systems on both sides of the river. The main canal on the left bank, which connects with the Hooghly river, will also be used for navigation. The cormplete irrigation system will provide water for about one million acres. The estimated cost is equivalent to about $41.9 million. 8. The three projects are technically sound. The estimated costs and the construction schedules are reasonable.

9. DVChas agreed to strengthen its organization with technical experts, and to employ the required consultants and contractors. The management appears to be competent to carry out the proposed program. - 2 - 10. Estimates of the financial results of operations of the DVC developmentprogram during the next ten years indicate that revenues may fall short of total interest requirements. ifter the first ten years this phase of the program is likely to be on a more or less self-supportingbasis. The economic benefits,which include the avoidance of losses through flood and drought and increases in agriculturaland industrialproduction, repre- sent a large increase in national income which will result in increased governmentrevenues and lower relief payments for flood and drou6ht damages. On balance the governments'financial position should be improved. In addition the increased production of food should result in savings of foreign exchange required for imports far in excess of the service of the bank's loans. It is these considerationswthich justify favorable considerationof the project for hank financing,

11. Tne projects justify considerationof a loan to cover foreign exchange requirementsafter June 30, 1952, whicn are estimated to be the equivalent of ",19,500,000.1 his does not include amounts spent before June 30, 1952, nor any allowancefor interest durin6 construction.

12. If a loan is granted, a term of twenty-fiveyears appears to be appropriate. The construction schedules indicate a period of grace of about three years on capital repayments.

II. turpose and Qcope of this Report

13. In .-pril 1950, the hank made a loan of ,18.5million to Jndia to cover the first group of projects in the comprehensive plan for the develop- ment of the Damodar Valley. The Lank was approached for a second loan to cover a part of the foreit,nexchange cost of five additionalprojects in the plan relating to flood control, electric power, irrigation,navi- gation and fisheries, During negotiationsthis request was reduced to three projects.

14. This report describes the progress made on the projects finarced under the first loan and analyzes the projects proposed for financing under a second loan. The techincal and financial aspects of the projects, and the economic benefits to be expected are described. Lecommendations concernin, the basis for a possible loan on these projects are included.

15. The report is based on field observations, data provided by the 'Lamodar Valley Corporation and supplementary puLlished statistics. The information available is reasonably complete and in many casessupersedes comparable informationpresented in Loan lteport *o. 83 dated ,,arch 16, 1950 in connection with the first loan. III. The Unified Development Program for the tamodar Valley

The Damodar 'alley (see map Annex II)

16. The Damodar river originates at an altitude of about 2,000 feet in the hills of Chota Nagpur northwest of (Calcuttaand flows eastward through the State of bihar where it receives the bokaro and honar rivers. Just before leaving Lihar, about 180 miles from the source, it is joined ba the barakar river from the north. Lntering the btate of est Bengal it continues in a southeasterlydirection to 'urdwan where it chan6es its course abruptly to a southerly directionand joins the Hooghly river some 30 miles below Calcutta. The river has a total drainage area of 8,5C0 square miles of which 6,960 square miles lie above its confluencewith the barakar. In its upper reaches in Bihar, it flows very rapidly through rugged country, eroding land and collecting silt. As it enters 6est Len6al its tendency is to deposit the silt and flow slu 6 ishly over its delta.

17. The Lamodar Valley is 80 miles wide at its widest point. However, the area which is known as the DVC operationalarea extends 125 miles north and 100 miles south of the river. This area has the richest mineral deposits and is the most hi6hly developed industriUlregion in India. ±t.mong the many natural resources of the area are 15,500 million tons of workable coal (75% to 956 of all India's proven reserves), 8,000 million tons of high grade iron ore ard substantialworkable deposits of mica, bauxite, copper ore and many other valuable minerals.

18. Industriesin the area include coal mines, steel mills, foundries, locomotiveworks, machine and steel fabricatingshops, paper mills, chemical plants (includinEthe largest fertilizerplant in India at 6indri), lime and cement mills, sand pits, ceramic glass and refractoryworks, textile mills, shoe factories, sugar mills, aluminum plants and cycle factories. The principal means of transportation in the area are railways ard highways.

19. In the upper valley the land is not suitable for agricultureand needs afforestation,while the lower valley below the Larakar river junction consists of fertile alluvial soil and is suitable for intensive agricultural productionprovided ample water is made available. In the State of '-est tengal there exists an irrigation system covering about 185,000 acres supplied with water diverted from the tamodar river by the Arderson bieir, which was constructed in 1933, However, because of lack of upstream storage this area cannot be irrigated during the dry winter season when the river flow is practically negligible. Lven during the rainy season irrigation is unreliable because of inadequate regulation.

The Unifi#o Development Program

20. In the past floods have caused extensive losses in terms of crops, cattle, property and damages to first-class at ricultural land, in ad'ition to losses resulting from the dislocation in communication and business activities. - 4 -

21. The unified development scheme covers the area shown in Annex II and was initiated shortly after a disastrousflood in 1963. Its primary aim was to prevent the recurrenceof such a catastrophe. Preliminary studies showed that it would be necessary to build large reservoirs in the upper valley in order to control the vast amount of water flowing during the monsoon season. It was also found advisable to utilize the water im- pounded in such reservoirsfor generation of hydroelectricpower and for irrigation. Accordingly,the general plan for the development of the valley envisages constructionof multi-purposereservoirs wnicn will eventually control floods with a peak flow of one and one half times that of the largest flood on record, and limit the regulated flow to the existing river capacity. As tthereservoirs have been designed primarily for flood control and irri- gation, which are seasonal operations,the uniformity of power supply depends on sup lemental thermal power generation.

22. In ,4archof 19h8,8 the Indian Legislature,under ect1Io. XIV, establishedthe Damodar Valley Corporation,which formally came into existence on July 7, 1948. It is entrustedwith the execution of a program of unified developmentin the ±uamodarriver watershed. ihe governments participating in the development scheme are the Central Governmentof India and the Provincial Governments of Bihar and Uest Bengal.

23. In the beginning,the "orporationused the engineering staff of the Central Technical Power Board of the (zovernmentof India. This group, under the guidance of a well-known hydraulic engineer,was responsible for the original concept of the scheme and for the preliminary engineerin&. The scheme adopted consisted of:

(a) Light flood control stora-e dams with hydroelectricplants having a total installed capacity of 182,000 kilowatts (honar I, Lonar III, Aiyar, hilaiya, Panchet Hilly Ealpahari, illaithonand bokaro);

(b) two additionalhydroelectric plants without storage, having an installed capacity of 16,750 kil(watts, (Konar II and Eermo);

(c) a thermal power plant at Lokaro of 200,000 kalowatts ultimate capacity;

(d) approximately600 miles of transmissionlines to serve the Eamodar Valley and adjacent areas;

(e) an irrigation canal about 80 miles long from Lurgapur to the Hooghly river, which can also be used for navigation; and

(f) an irrigation barraLe at Jurgapur on the lower part of the Lamodar river to divert water into a network of main line and branch line canals, to provide perennial irrigation for approximately l,000,000 acres including the 185,000 acres now irri-ated from the existing canals only during the monsoon season, - 5 -

24. The economicbenefits anticipated were: (a) the preventionof lossesresultin6 from floods;

(b) an increasein food productionby makin6available year- round irrigationfor an area of about 1,000,000acres;

(c) the provision of abouit 300,000 kilowatts of firm power for mining,industrial and domesticuse; (d) the supplyof water for industrialuse and the reliefof shortageof drinking water durin,the dry season;

(e) an additionalmeans of transportation by the 80-mile navigationcanal connectin6the Damodarwith the Hoothly river about 30 miles above Galcutta;and

(f) the cultivation of fish in the reservoirs to add to the food supply,

(;han6 es in the OriginalScheme 25. Some changeshave been made in the originalscheme, which are describedin the follovin6 paragraphs.They have no effecton the projects alreadyfinanced by the bank.

26. In the originalplan it was intendedthat all the eight storage dams would be operated for the tnree purposes of flood control, irrigation and power. After furtherstudy, however, DVC revisedthe original plan so as to concentratethe flood controlstorage entirely in the two lower reservoirs,1iaithon and kanchetHill, and to use the upstream reservoirs only for irrigationand power. This chanLewas made in order to achieve more effectivecontrol of floods,and eliminatethe conflictbetween power and flood controlin the operationof t.heupstream reservoirs. The power potentialof the schemewas thus appreciablyincreased, as a greaterquantity of water could be storedin the upstreamreservoirs lying behind the Tilaiya and 1onar dams, and could be releasedas required. This water could generate additionalpower at the successivelower generatingplants. 27. Furtherstudies revealed that one dam and powLr plant could be constructedinstead of three in the Lonar river valieythus increasin- the power potentialand decreasingthe cost of constructionconsiderably. The eliminationof these two projects('onar II and III) reducedto seven the numberof dams and hydroelectricgenerating plants with storagereser- voirs, and left only one dam and hydroelectric >enerating plant without a storage reservoir. further study of the power market by .VC showed the need for extendingthe transmissionsystem. The phases of the ConstructionProgram

28. DVC decided that work should be divided into two phases. The first part of the first phase of tihedevelopment consists of the following projects:

(1) Bokaro thermal electric generatingplant of 200,000 kilo- watts capacity,of which 150,000 kilowatts were to be installed initially;

(2) 490 miles of transmissionlines and 29 substationsand receiving stations;

(3) Konar Dam;

(4) Tilaiya ',amand hydroelectricgenerating plant of 6,000 kilowatts, of which 4,000 kilowatts were to be installed irLitially.

The bank loan of t.pril1950, covered part of the foreig,nexchange cost of the first three of these projects, The fourth project is entirely financed by DVC.

29. The second part of the first phase consists of the following projects:

(1) 'laithonDam and hydroelectricgenerating plant of 60,000 kilowatts capacity;

(2) Panchet hill barnand hydroelectric generating plant of o0o,000kilowatts capacity;

(3) Durgapur Earrage and 1,550 miles of irrigation and drainage canals and 80 miles of irritation and navigation canals.

30. The bank has been approached for a second loan to cover part of the foreign exchange cost of these projects.

31. The third part of the first phase will consist of

(1) honar hydroelectricgenerating plant of ho,000 kilowatts capacity;

(2) Additional transmission lines and substationsr

32. The total investment in the first phase of the development scheme is estimated at the equivalentof approximately$200 million.

33. The second phase of the developmentwas to include the balance of the projects covered by the ori6inal scheme (Berno, Aiyar, balpahari, and Eokaro hydroelectricstations, the fourtn 50,000 kw-unit at the bokamo thermal plant and extensions to the irrigation system) and such other projects as mi-ht be studied and prove beneficial to the overall valley developmentscheme. -7-

IV. Progress to date on the Program

34. The most important orojects under constructionare those financed under the first Bank loan, i.e. the Bokaro generating nlant, the Konar dam and the transmission system.

35. The Bokaro generatingplant is being built by contract and supervisedby DVC engineers. Good progress has been made. The first of the three 50,000 kilowatt units is due to be tested in January 1953, and the other two units in TMarchand May 1953. All three units should be ready for service by May 1953. There were delays in obtaining the lease of a coal seam, and arrangementsto mine the coal and transport it to the plant have still to be finalized. If DVC mines the coal w^xithits own forces, coal mining equipmentmay be needed. However, temporary arrangementsare being made so as to ensure an adequate supply until the permanent arrange- ments are worked out.

36. Konar dam is also being constructedunder contract ard supervised by DVC engineers. Some delay has occurred,because the original plans had to be revised, but by December 1952 the dam was high enough to store the condensing water required for the operation of the first unit of the Bokaro plant. The dam should be completed about July 19553

37. The transmissionsystem is being constructedby DVC, and is making good progress. About 50 miles of line are in operation, and five wholesale customers are being supplied with about 17,000 kilow^ratts draiwn from the power- house of the Sindri fertilizer plant. This power is made available by the Sindri plant under contract with the DVC. There are delays in the delivery of large transformers and switchgear. DVC is doing everythingpossible to overcome these delays or to bridge the gap by borrowringequipment from other government agencies. According to oresent schedules, the work should be finished by the end of 1954, in time to meet the growth in demand on the system.

38. The Tilaiya project has been designed and is being constructed by DVC. The project is now 757 complete, and the reservoir is being filled. The project should be finished early in 1953.

39. In addition,work has been done on subsidiaryoperations which cover land reclamation,the resettlementof farmers, and the constructionof work- shops.

4o. Each of the farmers displacedby the filling of the Tilaiya reservoir has been resettled on a new farm, with a farmhouse, on land reclaimed by DVC. For this purpose, DVC has so far transformedmore than 3,600 acres of waste land into paddy land.

41. Some work has been initiated on the second part of the first phase. Earth has been placed on the Maithon Dam. Some irrigation canals have been constructed and a considerable amount of equipment purchased. - 8-

42. Is far as the financin6 of these projects is concerned, there is no indication that progress has been delayed by any shortage of local or forei,n currency.

V. bescription of Propoeed Projects

43, The projects involved in the second part of the first phase, which are proposedas a basis for a secoznd loan, are as follows:

YiaithonLam

44. The "aithon £,)amand hydroelectricgeneratin% plant is located on the Earakar river eiiht miles above its confluence with the 'damodar river. The dam will be a combination of earth and concrete gravity construction rising about 165 feet above the river bed, and designed primarilyfor flood control, though it will also be used for irrigation and power. The power plant will be underground and its generating capacity will be 60,000 kilo- watts, The engineering and design for the dam has been practically completed by DVC under the supervisionof the harza LngineeringCompany. The prelim- inary designs for the power plant have been completed. DVC has started the construction of the dam with its own organizationand a corntractorhas completed a diversion tunnel, which will later serve as the power plant tailrace tunnel. Proposals on the powerhouse equipment have been received and are bein6 studied. Practically all necessary construction equipment is at the site. This equipment has been purchased out of Indian resources.

Panchet Hill

45. The ranchet Hill Lam and hydroelectric generating plant is located on the Lamodar river approximately 13 miles above its junction with the Barakar river. The dam will be a combination of an earth and concrete gravity dai.construction rising about 130 feet above the river bed, Like viaithon, the dam is of multi-purposedesign, its primary purpose being flood control. The power plant (6eneratingcapacity 40,000 kw) will be of the conventionalabove ground desi6n. Preliminarydesigns have been completed and detailed designs are being prepared by IVC under the supervisionof the Harza Engineering "ompany. The camp site has been prepared and most of the constructionequipment (purchasedwith Indian funds) is at the site. DVC has decided to construct the pm ject with its own personnel.

9hmgapur barrage and Irrigation bystem

46. The -burgapur Earrage will be constructed at Durgaplur on the lower Damodar river, about nine miles upstream from the Anderson 1,eir, and will be of the floating raft type constructed over three lines of sheet pilin 6 . The structure will include 34 gates for releasing water, a lock for navigation, fish ladders and a roadway. The length of the concrete section of the barrage will be 2,305 feet. The right bank regulator is designed to pass 2,130 cubic feet per second and the left bank, 9,400. The main irrigation and navigation canal 80 miles lon6 conaects the Damodar and hooghly rivers, and will average 60 feet in width with a minimum depth of 9 feet. On the left bank besides the main canal there will be 800 miles of branch canals and - 9 -

ditches,398 miles of drainagechannels and 50 miles of old canalswhich will be rehabilitated.The right bank systemwill consistof 850 miles of main canalsand ditches. The rest of the projectwill consistof lower locksat the Kunti river,regulators, falls and bridges. The barragedesign and engineering is well-underway. Surveying for the canalsand ditchesis in progressand constructionmachinery is availableat the barragesite. The only work carriedout so far has been on the lower canals. This has been done by contract. The largestpart of the work will be carriedout by DVJCfs own forces.

47. The foreignexchange requirements for these proiectswill consist mainlyof constructionand earthmovingequipment, turbines and generators, and engineeringservices.

48. The originalrequest for a loan includedtwo furtherprojects; The Konar hydroelectricstation and a large expansionof the transmission system. The Indiannegotiators withdrew the transmissionproject, and since It appeared that in this case the capacityadded by the Konar stationwould not be neededbefore 1958/9, it was agreedthat this stationshould not be includedamong the projectsto be financedout of the proceedsof the proposed loan.

49. The hydrologicaldata for the designof the projects consideredwere obtainedfrom recordson the Damodarat AndersonWeir since 1932,and eight other gaugingstations established in the Upper Damodarriver after 1943. DVC publishes a "Water Year Book for the Damodar Basin". The last one was issued in 1952 and contains all previous records available. 50. The existingdata are consideredby the Bank to be adequatefor designpurposes and the projectshave been designedaccordingly. VI. EstimatedCost of the Projects

51. The estimatedcost of the projectsis as follows:

in millions Foreign Local Cost Exchange in U.S.$ in U.S.$ Project Equivalent Equivalent Total 1. Maithon Dam and hydro- electric station $18.55 (Rs. 88.3) $10.64 $29.19

2. Panchet Hill Dam and hydroelectric station 20.90 (Rs.99.5) 10.35 31.25 3. Durgapur Barrage and Irrigation System 37.25 (Rs. 177.4) 4.66 41.91 4. General construction equip- ment spare parts .53 .53

5. Engineering Services .21 .21 Totals $76.70 (Rs. 365.2) $26.39 10 .09 - 10 -

52. The above figures are compiled from estimates made by DVC in July 1952, using then existing costs of constructionand equipment. Lach item contains a contingencyallowance of at least lOo. In addition,5,6 has been calculated for engineering,supervision of construction,and general overhead. An allowance of 6% on the whole cost, to cover interest during construction,has been included in the estimates.

53. Of the estimated foreign exchange expenditurethe equivalent of about '16.74 million will probably be in U.6. and Canadian dollars. The remainder of about '9.65 million equivalent will be in various 6uropean currencies.

VII. Construction and xxpenditures ichedules

54. The Maithon project is scheduled for completion before July 1955. The other projects are all scheduled for completion before the first quarter of 1956.

55. The estimatedschedule of expendituresis as follows (in millions of dollar equivalent):

Prior to i4arch31, 1952 ^ 10, 1952/53 12.61 1953/54 29.66 195h/55 32.31 1955/56 12.68 97.26 Interest during construction 5.83 Total '103.09

VIII. The Organizationand lVlanagementof DVC

56. In accordancewith the act establishingthe DVC, the Central Governmentin consultationwith the Governmentsof bihar and ltestbengal, appoints a Chairman, two other board members, a financial adviser and a secretary. These are all full-time employees, appointedfor a term of five years and eligible for re-appointment.

57. Under this management,the DVC is organized functionallyinto five administrativeand four operationaldepartments.

58. The 4 sorporation's budget proposal is submitted to the participating governmentsfor submission to the Central and irovincial Legislatures. Since the necessary capital is contributedby tne particiAin 6 governmentson an agreed formula, the budget proposals show how much eac., government will be required to provide. The DVC is not required to make any repaymdent of capital to the governments, but has to pay interest at prevailing rates. -uring the first fifteen years of its existence, if the Corporation runs in deficit, interest charbes and all other expenditures are added to the capital cost, and all receipts are taken in reductionof the capital cost. - 11 -

59. On the whole, DVC's management has worked well. The morale of the organization aprears to be high and the management and staff are devoted to their work. There was a considerabledelay in the appointment of a Chief Engineer, but in the meantime the Corporationwas able to benefit from the advice of a Board of Consultants consisting of four internationallyrecognized engineers, two Indian and two American. This Board meets on the average of twice a year. Although a Chief Engineer was appointed in December 1950, he has not been given full responsibilityfor all design and construction. Both he and the Chief ElectricalEngineer report directly to the Chairman. The responsibilitiesof these two posts appear to overlap, and internal difficultieshave arisen in consequence. This will be eliminated when the organizationagreed upon during negotiationsis put into effect. The existing contract with Harza EngineeringCo., consulting engineers of Chicago, has been extended to cover the design and the supervisionof the constructionof the Maithon and Panchet Hill projects.

60. Even with this assistance from consultingfirms, DVC's technical staff needs strengthening. Accordingly,the Technical CooperationAdministra- tion of the United States Government has been asked to provide:

a) A Chief Constructionengineer. b) Four master mechanics. c) One mining adviser. d) One hydraulic engineer, e) Four shift engineers for the BokcaroPower Station. f) One expert in power rates and contracts. g) One system planning engineer. h) One switchingand protection engineer, i) One expert in malaria control. J) One expert in small scale industries.

61. To date TCA has provided the services of the Harza Engineering Company and the experts referred to in (c), (i), and (J).

62. The Bank has been assured oy DVC and the Central government that if TCA is not able to secure the required persornelwithin a reasonable time, DVC will try themselves to recruit the personnel from the U.S.A. and other foreign countries.

63. The participatinggovernments have punctually fulfilled their obligationsto provide the capital necessary to carry out the work in hand.

IX. FinancialResults

64. Annex I shows in tabular form the estimated financial results of DVCts operations for the ten years 1952/53 through 1961/62, together with notes explaining thiebasis on which the calculationshave been made.

65. The table shows that DVC's net revenues from the first phase of the developmentscheme fall short of the amounts required to pay interest on the total capital by the followingamounts: " 12 -

1952/53 t 2.53 millionequivalent 1953/54j 4.215 n 1954;/55 * n4n 1955/56 h.So n 1956/57 5.l14 1957/58 4*26 n 1958/59 3*70 1959/60 2.66 " 1960/61 1.11 nn 1961/62 .84

Sales of power and water develop steadily throughout the pen ods reaching their final levels for this phase of the program in the last year. However, interest has to be provided on the large sums invested from the beginning of the period.

66. The amounts by which net revenues fail to cover interest require- ments will be capitalized during this period. This will reduce the parti- cipating governments'receipts by way of interest on their contributions, but will of course increase the capital amount on which they will receive interest in later years. The capital contributionsdurin6 the years in question may, on the other hand, be reduced by the amounts set aside out of revenues for depreciation.

67. The Central Government will have to find the sums required to amortize the two Eank loans, The total service payments will amount to approximately W22.5 million (in foreign exchange) for the ten-year period.

68. The case for a loan, however, rests not on the direct financial results, but on the general economic benefits and the indirect financial results. These factors are assessed in the following section.

X. EconomicEenefits from the Projects

69. The following remarks refer to the projects covered by the existing loan and the proposed second loan.

70. The Damodar projects will serve the most densely populated and most highly developed i,adustrial region in India, with a population (in Bihar and West Eengal) of 65 million.

Benefits from Increased Power Supply

71. When all the projects covered by the existinL and proposed loans have been completed, about 1 billion Kwh can be delivered annually to customers in a w-2.de area, Compared with 1950, the power supply in bihar and part of West jengal would be more than doubled, even after the retirement of absolete generating fa ilities on which many factories mast now depend. The increasei slapply is equivalent to 24% of the total amouAt of electric power sold in lndia in 1950. - 13 - 72. A detailedsurvey of the expectedpower market in the area to be servedhas been made by the CentralTechnical Power Eoard. The re- sultsof this survey,which are regardedas realistic,show that demandshould doublein lebs than 10 years. The DVCts schedulefir the installationof new generatingcapacity corresponds with this rate of increasein demand.

73. The expected price for power from DVC, which will sell ionly at wholesale, is sli6htly below the average Indian sales price in 1950 to industries, agriculture and traction (9.25 mils or 0670 anna per kwh). The power from the DVC shouldtherefore promote the expansionof local industries.It shouldalso assistthe mechanizationof the coal mines.

74. Of course,in orderto distributethe power suppliedby DVC, investmentswill have to be made by its customersin distribution systems,to meet the needsnot only of basic industriesbut also of smaU industrial and domestic consumers.

75. It is not possible to make a quantitative estimate of the increasein nationalincome resulting from the additinnalpower supply, but there can be nn doubt that it, will make possiblea large increaseof economic activity of the area.

Benefits from Irrigati3n 76. The barrage and canal systemwill make water availablefor about l,oPo,o0o acres in both summer and winter seasons. i. more stable crop of rice with a higher yield will be pr3duced in the rainy season, and at leart 600,000 acres can bear a second crop during the winter. Eventually, it may be possible to grow three crops in part of the area.

77. The increases in the present yield of summer rice (at present some 900 lbs. of clean rice per acre) has been assessedon a very conser- vativebasis (for tax purposes) at around 5Molbs. with a value of Rs. 150 (M3l). Part of the area can be plantedas at presentin jute. Sugar cane,which occupiesthe land for a full year, can also be grownto a largerextent, In the winterseason, a greatvariety of cropscould be grown- rice, wheat,pulses, oilseeds, rotatoes, and vegetables. 78. The averagevalue of a winter crop is estimatedon a conser- vativebasis at Rs. 140 (i30)per acre. The proposedcharges for use of water (162.10per acre per crop)are smallin comparison.It shouldbe possible to chargehigher rates for very profitablecrops (sugar-cane, jute,potatoes, vegetables),

79. The farmers will gain both by doublecropping and diversification, and by avoidinglosses from droughtand floods. The peasants' and farm laborerstincome will be realizedat intervalsof six months or less, insteadof full years. Thus, the yearly seasonof semi-,starvation,of accumulating debts at high interest rates and general distress should disappear. When emergency years of famine can be avoided, foundations for real progress can be laid. - 14 -

80. All this is of particular importance in the Damodar Valley. It is one of the most densely populated rural areas in the worldy adjacent to the industrial center of Calcutta with at least five million consumers, and the traditional famine area of Bihar. In years when the monsoon fails, the valley will provide a source of food supply for non-irrigated areas,

81. At the most conservativebasis, the 1,000,000 acres to be irrigated should produce by 1961/62 an additional annual food supply equivalent in value to about 400,000 tons of rice, with an import value of US1, 50 million. Since India may bd nbligedp in years of bad harvest, to supplement non-dollar grain imports with dollar wheat, the additional production may be in part dollar-saving.

82. With an assured water supply the use of high-yielding varieties and the application of more fertilizers will become profitable. This could furtherincrease yields by 50C tt% 100%.

83., Of course, to ensure efficient distribution of the additional food supplies, the marketing and credit systems in the area must be greatly improved. Moreover, the additional supplies will not be forthcoming unless an efficient research, extension and farm credit program ir carried out,

84. To,sum up, the investment in irrigationworksp amounting to soime A60 million, should produce additional food supplies worth something like %50 million a year.

Benefits from Flood Control

85. The large amount(equivalent to t32 million) allocated to flood control reflects the origin of the scheme, primarily to guard against disastrous floods, such as occurred in 1943. The averagedamage to crops in recent years has been estimated at $1 million annualy, with a maximumo$ A,16 million in 19143.From an economic point of view, it would not pay to spend *32 million on flood control to protectexisting property only, Maintenance,interest and amortizationamount to more than the estimatedaverage damage from previousfloods. but with greatlyimproved irrigation and generally increased economic activity, floods would cause much greater damage than in the past.

tncome from Fish 86. The seven reservoirs for the storage of water will cover an area cf approximately 120,000 acres. The lakes thus created will be used for fish cultivation, An annual yield of 500 lbs. of fish per acre can easily be attained, which would mean 30,000 tons of fresh fish, with a gross value of around !12 million annually. In order to achieve this result, it will be necessary tu organize hatcheries to stock the reser9 voirs regularly with fish. This point has been discussed with the Indian negotiators.The initiativein organizinghatcheries will have to be taken by either DVCor the Government of Bihar,and the revenuewill be from the sale of fishing rights. - 15 - 87. The arable land flooded by the reservoirs will, be replaced by waste land reclaimedby DVC.

Benefits from Navigation

88. The navigationcanal will provide a cheap means of transportation for coal to the industrial centers along the Hooghly river and Calcutta. Private firms, now operating barges on the Hooghly, are expected to expand their business and transport coal through the canal, This is important becauFe limited transportation facilitiess especially by rail, at present handicapseriously the developmentof the mines, Water transportwould, of course,involve additional investment in barges. 89. The navegation canal will also make it possibleto move agri- culturalproducts from the area to the marketat low rates,and supplies of raw materialsfor localindustries and consumergoods from the Hooghly and the port of Calcu#,ta.

90. To sum up, the benefitsto the economy of the region and of the countryare of such magnitudethat the schemejustifies the high pricrity given to 't by the Indian Governmentin the economicdevelopment of the country. The amounts to be receivedby the participatinggovernments by way of increased taxation, with the amounts which they will save by way of flood and fatmne relief will be far greater than any contribution which they may have to make to meet short-falls in an initial period. The favorable effect on the balance of payments is likely greatly to exceed the service of the Bank loans.

XI. Recommended Basis for a Lsan

91. The projectssubmitted to the Bank as a basisfor a secondloan have been studied and found to be technicallysound. The managementand staff of DVC have steadily improvedin experienceand competence,and are now consideredtn be capableof executinga programof this magnitude,pro- vided that the engineering staffis strengthenedand that the Corporation is assistedby the necessaryconsulting engineers and contractors.There is at presentno reason to doubt that ad&quatelocal currencywill be made availablefor completionof the projects.

92. Estimatesof revenuesand expensesshow that over the next ten years,which includethe periodof construction,DVC may not be able to meet in full out of currentrevenue the interestpayments due to the parti- cipatinggovernments. However, the benefitsresulting from increasedagri- culturalproduction, industrial expansion, flood control and other factors, more than compensate the estimated short-fall. Moreover, taxation yields shouldincrease and flood and droughtpayments decrease. After ten years DVC may possiblybe on a more or less self-supportingbasis and by this time the favorableeffect on the balanceof paymentsshould far exceedthe service requirementsof the Bank loans. - 16 - 93. The total estimated foreign expenditures for goods and services (incurred and to be incurred) after June 30th, 1952 are .v19.5 million. 94. Based on the useful life of the installations involved, a term4 of 25 years iB reasonablefor a loan for these projects. The estimated constructionschedules indicate a three-yeargrace period on capital repayments. 95. Eeforea loan Is signed,the bank shouldobtain from DVC letters confirming that its organizationwill be modified, and that the staff will be strengthened and consultantsand contractors employeds on the lines agreed during negotiatDons.

January 14, 1953 ESTIMATED FINANCIAL RESULTS OF D.Y.C. OPERATIONS ANNEX I THROUGH 1961/62 MILLIONS O' DOLLARS EOUIVALONT

Prior to Arr.1'52 J2L5 53/4 54j 16 57/8 5Z 8/9 59/60 6011 6iL2

Revenues Power System 1.03 2.o6 3.86 5.00 5.52 6.53 7.09 7.93 9.28 9.28 IrrigationSystem & Navigation .34 .S2 .88 1.87 2.24 2.66 2.93 3.38 3.78 4.18 Total 1.37 2.58 4.74 6.87 7.76 9.19 10.02 11.31 13.06 13.46

Direct OperatirgExpenses PoarerSystem .70 1.32 1.68 2.07 2.31 2.35 2.35 2.35 2.43 2.43 IrrigationSystem & Navigation .02 .05 .15 .30 .40 .h5 .45 *50 .55 .60 Flood Control o.6 .o6 .o6 .o6 .o6 .o6 .o6 Total .72 1.37 1.83 2.43 2.77 2.86 2.86 2.91 3.04 3.09 Indirect Charges .49 .49 .50 .50 .5O .60 .70 .7N .75 .72 Total Charges 1.21 1.86 2.33 2,93 3.27 3.46 3.56 3.66 3.79 3.84

Net OperatingIncome .16 .72 2.41 3.94 4.49 5.73 6.46 7.65 9.27 9.62

DepreciationReserve .20 .98 1.48 1.58 2.07 2.22 2.22 2.22 2.22 2.22

Income after Depreciation - .04 - .26 9 .93 92.36 f2.h2 93.51 94.24 T5.43 97-05 97.40 Interest 1 4% 2.49 3.89 5.37 6.86 7.56 777 7.94 8,09 8.19 8.24 Net OperatirgResult -. __ _4.At-4 59 - i -4.26 -. 70 -2..6 -1L4 -

Construction Expenditures Covered under 1st Loan 52.15 19.89 3.31 .41 .41 Consideredunder 2nd Loan 10.00 12.61 29.66 32.31 12.68

Total InvestmentBeginning of Year 62.15 97.18 134.30 171.46 189.05 194.19 198.45 202.15 204.81 205.95

Calculationsinclude Bokaro Thermal Plant. Tilaiya HydroelectricPlant, Honar Dam, Maithon HydroelectricPlant, Panchet Hill HydroelectricPlant and Durgapur 3arrage & IrrigationWorks. Notes on the Basis of Calculationof Annex I

PowrerRevenues

The installed capacity for DVC poi-er production wrillamount to about 255,000 kw. The market wrasstudied in detail by the Central Technical Power Board of the Government of India in 1946, and estinates have been periodically revised by DVC. The current estimate of demand by the Damodar Valley on the generating facilities of DVC is as follovrs:

Estimated 52/53 53/54 54/55 55/56 56/57 57/58 58/59 59160 60/61 61/62 Demand in l,.000 k. 17 85 92 119 132 156 169 189 210 231

This forecast is consideredreasonable.

In estimating,a load factor of 55 has been used through the year 1959/60, as compared vith the DVC estimate of 605g. These figures have been taken in view of experience in similar areas where large amounts of powrer have become available over a relatively short period. The installed capacity in the DVC system should be sufficient to satisfy consumptionrequirements on the above schedule only up to 1960/61.

It is estimated that primary porer from the system will be sold at an average price equivalent to 8.7 mils/kvrh(0.66 anna). Some secondarypower may be availablebut this has not been taken into account. The estimated average price of povweris somewhat higher than previously estimated due to an increase in the cost of coal for which adjustments have been approved by the participating governments.

Irrigation Revenues

At present, approximately185,000 acres of land are under irri- gation in the Damodar Valley but received only sufficient water for summer irrigation. In estimating revenues accruing to-DVC, a gradual increase in acreage has been assumedwith a total of 1,025,000 acres utilizing water for summer crops by the year 1961/62, and 600,000 acres utilizing Ywateralso during the vwinter.

At the present time, summer irrigation wiater is nrovided at a rate equivalent to ?1.26 per acre. A new crop rate has been agreed by the participating governments amounting to $2.10 per acre for both summer and winter irrigation. This rate appears to be reasonable and has been used as the basis for estimatingrevenues from the sale of irrigationwater.

Fisheries Revenues

Revenues accruing from the production of fish in the DVC reser- voirs and canals are assumed to be derived from licenses. It is estimated that from this source DVC l-illrealize a net income of about p500$000 by 1961/62. 2.

Navigation Revenues

DVC estimates expect a movement of tV-o million tons of goods by navigation on the canal by 1960, This estimate of traffic is considered to be much too optimistic and a gradual increase in traffic has been assumed to a level of 1.25 million tons by 1961/62. With a toll charge equivalent to 31.5¢/ton, income for DVC*iill be about ehO0,000 by that time.

Flood Control

It is not contemplated that any revenues wqill accrue from the investment made in flood control wrorks by DVC.

Cost of Power and Irrigation

Direct expenses involved in DVChydro-povwer generation and trans- mission are largely operating and maintenance labor. It has been assumed that coal for the Bokaro steam staticn vTill cost 11 rupees ("2.31) a ton. This figure is based on present partly mechanical mining nethods. It may be reduced at a later date if fully mechanical mining is adopted. The possibilities in this direction are being explored. lside from coal, operating and maintenance costs have been taken as .2% of the capital investment in dams and other civil waorks; 2% of the investment in the case of hydroelectricand thermal power installations; .5% for trans- imissionsystems; and 1#5%for irrigation canals. WUhilethe calculation in terms of investment is not the most desirablepractice for estimating operating expenses, these figures are consideredto be reasonable.

Allocation of Costs of Multi-purposeProJects

DVC, on the advice of its Board of Consultants and 4iththe approval of the participatinggovernments, has allocated the cost of dams and related civil works as follows:

(a) 60% of the investment in the Tilaiya and Konar Dams and reservoirsis charged to power production and the remaining40% to irrigation;

(b) in the case of the Iaithonand Panchet Hill projects, the cost of the dam and reservoir has been allocated 17% to povrer,17% to irrigation,and 66%5to floodcontrol. The investmentin other facilitieshas been allocatedto the categories to wdhichthey are directlyrelated.

The totalinvestment in the first two parts of the development program has been allocated on this basis as follows: Powirer $ 88 millionequivalent Irrigation and navigation 60 " i Flood control 32 " "

Total $ 180 " 3.

This figure takes no account of the operating deficits and the deprec- iation reserves capitalizedin the table of calculations.

Indirect expenses have been estimatedby DVC and these have been accepted as being on a conservativebasis. In 1961/62, they amount to approximately.6% of gross revenues.

Depreciation

Depreciationrates have been establishedby DVC for civil works, buildings and powierinstallations. An average life of 100 years is used for the dams and irrigation systems and 35 years has been establishedfor hydroelectricplants. The Bokaro steam station is depreciated on the basis of a 25-year useful life. It is believed, however, that a 100-year life for irrigation systems is too optimistic and, for the purpose of these calculations,a 60-year life has been assumed. Also, a life of 30 years has been assumed for transmissionsystems, vwhereasD7C assumes a 35 year life.

Depreciationreserves have been calculated on a sinking fund basis assuming an interest rate of 3 1/2c~, which is regarded as a reasonable basis in local circumstances. On this basis, the annual depreciation reserves for dams and civil -orks amount to .12%, for hydro- electric plants to 135S%, for transmission systems to 1.9%, and for the irrigation system to *5%.

Interest

DVC is required to pay interest on all capital contributions by the participatinggovernments at the current interest rate vrhichat present amounts to about 3 3/h5', on local borrowring. It is assumed also that DVC w11 be required to pay interest on loans from the Bank at the rate applying to these loans. a .= IX

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