Document of The World Bank Public Disclosure Authorized Report No. 16473-IN STAFF APPRAISAL REPORT Public Disclosure Authorized INDIA COAL SECTOR REHABILITATION PROJECT Public Disclosure Authorized July 31, 1997 Public Disclosure Authorized Energy Sector Unit South Asia Region CURRENCY EQUIVALENTS (As of June 30, 1997) Currency units = Rupees (Rs) One Rupee = US$ 0.03 (approx.) One US Dollar (US$) = Rs35.8 One US Dollar (US$) = SDR 0.72 MEASURES AND EQUIVALENTS 1 metric ton of (Indian) coal 0.46 metric tons of oil 1.9 metric tons of lignite 570 cubic meters of natural gas 1.0 metric ton of firewood 2.0 metric tons of animal dung ABBREVIATIONS AND ACRONYMS BCCL - Bharat Coking Coal Limited CCL - Central Coalfields Limited CIL - Coal India Limited CMPDI - Central Mine Planning and Design Institute CPRA - Coal Price Regulation Account CSRP - Coal Sector Rehabilitation Project ECL - Eastern Coalfields Limited ESMP - Environmental and Social Mitigation Project GOI - Government of India MCL - Mahanadi Coalfields Limited Mt. - Million tons MW - Megawatt NCL - Northern Coalfields Limited PAPs - Project-affected people SAIL - Steel Authority of India Limited SEB - State Electricity Board SECL - South Eastern Coalfields Limited tce - tons of coal equivalent (6,000 kcal/kg) toe - tons of oil equivalent WCL - Western Coalfields Limited FISCAL YEAR April 1 through March 31 Vice President: Mieko Nishimizu Country Director: Edwin Lim Sector Unit Manager: Alastair McKechnie Task Manager: Hiroaki Suzuki INDIA COAL SECTOR REHABILITATION PROJECT LOAN /CREDIT ANDPROJECT SUMMARY Borrower: India, acting by its President (IDA Credit) and Coal India Ltd. (IBRD Loan) Implementing Agencies: Government of India (The Ministry of Coal), Coal India Ltd., Central Coalfields Ltd., Mahanadi Coalfields Ltd., Northern Coalfields Ltd., South Eastern Coalfields Ltd., and Western Coalfields Ltd. Beneficiaries: Government of India, Coal India Ltd., Central Coalfields Ltd., Mahanadi Coalfields Ltd., Northern Coalfields Ltd., South Eastern Coalfields Ltd., Western Coalfields Ltd. and coal consumers. Poverty: Not Applicable Env. Category: A Amount: US$530 million IBRD loan and SDRl.5 million (US$2.0 million equivalent) IDA credit Terms: IBRD Loan: Repayment over a 20-year period, including five years of grace. Standard interest rate for LIBOR-based US$ single currency loans. IDA Credit: Standard with 35 years maturity Onlending terms: Coal India to its subsidiaries at same terms as above for the IBRD loan. Commitment Fee: IBRD Loan: 0.75 percent on undisbursed loan balances beginning 60 days after signing, less any waiver. IDA Credit: 0.50 percent on undisbursed credit balances beginning 60 days after signing, less any waiver. Financing plan: See para 4.15 Net Present Value: The economic net present value is estimated at US$1,634 million and the corresponding financial net present value is estimated at US$945 million. A discount rate of 16% was used for the calculations of both net present values. Project ID: IN-PE-9979 TABLE OF CONTENTS 1. INDIA'S ENERGY SECTOR.................................................................................. 1 INDIA'S ENERGY POLICY-HISTORICAL PERSPECTIVE ....................................................................... 1 Public Sector Dominance .................................................................................. 1 Recent Developments ................................................................................. 2 INDIA'S COAL-BASED ENERGY STRATEGY ................................................................................. 2 Resource Base and Energy Markets ................................................................................. 2 Rationale for India's Coal Based Energy Strategy ........................ ..................................... 4 CHALLENGES: MITIGATING ENVIRONMENTAL AND SOCIAL IMPACTS OF COAL-BASED ENERGY STRATEGY ................................................................................. 5 Environmental Impact at the Project Level and the Regional Level .................................. 5 Social Impact at the Project Level and the Regional Level ................................................ 5 Mitigation Activities at the Global Level ........................................................................... 6 Diversification of Energy Supply Mix ............................................................................... 6 Energy Efficiency Improvement Through Demand Side Management (DSM) ................. 6 Electricity Provision to Rural Consumers . ......................................................................... 7 2. INDIA'S COAL SECTOR ................................................................................. 8 DEMAND AND SUPPLY ................................................................................. 8 Demand, Supply and Shortfalls .................................................................................. 8 THE LEGACY OF GOVERNMENT CONTROL ................................................................................. 9 COAL INDIA ................................................................................. 9 Financial Flows Between Coal India and Its Subsidiaries ............................................... 10 3. COAL SECTOR REFORM AND RESTRUCTURING OF COAL INDIA .......................................... 12 COAL SECTOR REFORM ................................................................................. 12 Reduction of Import Tariffs on Coal ................................................................................ 12 Deregulation of Coal Prices and Distribution ................................................................... 12 Opening the Coal Sector to Private Investors ................................................................... 13 Improving the Regulatory Framework ............................................................................. 13 RESTRUCTURING OF COAL INDIA ................................................................................. 14 Financial Restructuring of Coal India and its Subsidiaries .............................................. 14 Corporatization of Coal India and its Subsidiaries ...................... ..................................... 15 Productivity Improvement and Safe Mining Practices ................. .................................... 16 Contractual Arrangements with Major Coal Consumers ................................................. 17 RoAD To FURTHER REFORM ................................................................................. 17 IMPACT OF COAL SECTOR REFORM AND COAL INDIA'S RESTRUCTURING ON ENVIRONMENTALAND SOCIALISSUES ....................................................................... 18 4. THE COAL SECTOR REHABILITATION PROJECT ....................................................................... 20 PROJECTOBJECTIVES ....................................................................... 20 RATIONALEFOR BANK INVOLVEMENTAND LINK TO COUNTRYASSISTANCE STRATEGY ........... 20 PROJECTDESIGN ....................................................................... 21 PROJECTCOMPONENTS .................................................................. 21 Investment Component .................................................................. 21 Technical Assistance and Training Component ............................................................... 22 COAL SECTORENVIRONMENTAL AND SOCIALMITIGATION PROJECT .......................................... 22 LESSONs LEARNEDFROM PAST BANK PROJECTS.................................................................. 23 ALTERNATIVEDESIGNS .................................................................. 23 PROJECT COSTS AND FINANCING .................................................................. 24 5. PROJECT IMPLEMENTATION .................................................................. 26 IMPLEMENTATION ORGANIZATION .................................................................. 26 Implementing Agencies .................................................................. 26 Coal India's World Bank Projects Division .................................................................. 26 Implementation Plan .................................................................. 26 Monitoring and Evaluation .................................................................. 27 BANK'S SUPERVISION STRATEGY .................................................................. 27 PROCUREMENT .................................................................. 27 DISBURSEMENTS .................................................................. 29 AUDIT .................................................................. 30 6. PROJECT JUSTIFICATION .................................................................. 31 MACRO-ECONOMIC CONSIDERATIONS ................................................. 31 CORPORATE FINANCIAL ANALYSIS ................................................. 31 Financial Projections ................................................. 31 Foreign Exchange Risk ................................................. 33 FINANCIAL AND ECONOMIC ANALYSIS ................................................. 33 Introduction ................................................. 33 Factors Favoring the Project ................................................. 33 Methodology and Results ................................................. 34 Risk Analysis ................................................. 37 FISCAL IMPACTS