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Report No. 8422-IN

STAFF APPRAISAL REPORT

INDIA

CEMENT INDUSTRY RESTRUCTURING PROJECT

APRIL 10, 1990

Industry and Finance DivisionAsia IV Country Department

This document has a restricted disttibution and may be used by ecipients only in the performance oftheir oflicial dudes. Its contents may not othenwise be disdosed without Wodd Bank auhOt

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CURRENCY EQUIVALENTSRs 1 - US$ 0.059Rs 17 - US$ 1.00

FISCAL YEARSGovernment of India - April 1 - March 31IDBI - April 1 - March 31ICICI - April 1 - March 31

WEIGHTS ANID MEASURESMetric System

ABBREVIATIONS AND ACRONYMS

ACC - Associated Cement Companies, Ltd.AICD - Assam Industrial Development CorporationATI - Advanced Training InstituteBIFR - Board for Industrial and Financial RestructuringCCI - Cement Corporation of IndiaCMA - Cement Manufacturers AssociationCTI - Century Textile and Industries, Ltd.DANIDA - Danish International Development AgencyDCCI - Development Commissioner for Cement IndustryDFI - Development Finance InstitutionEIA - Environmental Impact AssessmentFOR - free on railGOI - Government of IndiaHED - Human Resource Development (Component)ICB - International Competitive BiddingICICI - Industrial Credit and Investment Corporation of IndiaIDBI - Industrial Development Bank of IndiaIMR - Industry Modernization and Restructuring (Component)JIL - Jaiprakash Industries, Ltd.MRTP - Monopolies and Restrictive Trade Practices ActNDC - Northeast Development Councilnm3 - Norm Cub'a MetersNVTS - National Vocational Training SystemOPC - Ordinary Portland CementPBCT - Pilot Bulk Cement Transport (Component)PC - Program CoordinatorPPC - Pozzolana Portland CementPSC - Portland Slag CementRBI - Reserve Bank of IndiaRITES - Rail India Techno-Economic ServiceRTC - Regional Training CenterSAIL - Steel Authority of India, Ltd.SC - Steering CommitteeSFC - State Financial CorporationSIDC - State Industrial Development CorporationSOE - Statement of ExpenditureSPCB - State Pollution Control BoardTA - Technical Assistance (Component)TISCO - Tata Iron and Steel Companytpd - ton per daytpy - ton per year

FOR OMCIL USE ONLYINDIA


Lsoan and Prolect Summary

Borrower: India, acting by its President

BenefiLiaries: Industrial Development Bank of India (IDBI); theIndustrial Credit and Invastment Corporation of IndiaLimited (ICICI) and Office of Development Commissionerfor Cement Industry (DCCI).

Loan Amount: $300 million equivalent.

Terms: The loan would be made at the Bank's standard variableinterest rate and would be repaid over 20 yearsincluding 5 years of grace.

Relending Terms: The Government of India (GOI) would utilize theproceeds of the loan as follows:

Part A: GOI would relend $298 million equivalent ofthe Bank loan in rupees to IDBI and ICICI in equalproportions to finance part of the Industry Moderniza-tion and Restructuring component and the Pilot BulkCement Transport component. The relending rate fromGOI to IDBI and ICICI would be 12 percent p.a. Theon-lending rate to subborrowers from IDBI and ICICIwould be development finance institutions' (DFI) termlending rate, currently 14 percent p.a. GOI wouldbear the foreign exchange and interest rate risks.

?axrt : GOI would provide $1.6 million equivalent ofthe Bank loan as budgetary allocations through DCCI tofinance part of the Human Resource Developmentcomponent.

Zart C: GOI would provide $400,000 equivalent of theBank loan as budgetary allocations to DCCI to financepart of the Technical Assistance component.

Irotect Description: The proposed project is designed to support cementindustry restructuring following the complete decon-trol of pricing and elimination of freight equaliza-tion for cement, implemented 1:, the Government inMarch 1989. The project has the following components-(a) the Industry Modernization and Restructuringcomponent, which would finance capacity expansion incement-deficit regions and modernization andrestructuring of existing cement companies throughoutIndia, and assist the industry in adjusting to a

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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competitive environment; (b) the Pilot Bulk CementTransort component, which would help establish andfinance a pilot bulk cement transport system includingloading facilities at participating cement plants,special bulk cement rail wagons, and unloading anddistribution systems at Kalamboli Railway Terminalnear Bombay; (c) the Human Resource Developmentcomponent, which would assist and finance a demand-driven, in-plant training system at selected regionaltraining centers (RTC) to be established, at respect-ive lead plants, for groups of cement plants havinggeographic proximity; and (d) the Technical Assistancecomponent, which would assist DCCI in studying policyoptions for the mini-cement sector, coal washery anduse of lignite for the cement industry, environmentalprotection and pollution control measures for theindustry, and future bulk cement transport andapplications.

Benefits and Risks: The project would improve the regional productionstructure by adding about 5 million tpy productioncapacity in the cement-deficit regions, bringslgnificant savings in cement transport and reduce thecost of this vital commodity in some of the poorestregions of the country. The project would supportmodernization and restructuring of existing cementcompanies, thereby reducing energy and other produc-tion costs and improving the economic efficiency ofoperations. The project would finance installation ofpollution control equipment, ensure better environ-mental assessments, and encourage productive use ofslag, a waste product from steel plants which must bedisposed of in an ecologically acceptable ma-ner.Financing the pilot bulk cement transport componentwould pave the way for significant efficiency improve-ment in the cement distribution system and produc-tivity increase in the construction industry. Theproject would also finance training programs foroperating personnel and environmental professionals inmuch-needed skill categories for both new plants andexisting plants under modernization. No unusual riskshave been identified in subprojects in the proposedpipeline under the Modernization and Restructuringcomponent. Introducing a bulk cement transport systemrequires the development of a new marketing anddistribution systems and involves many players withsubstantial investment: it is therefore inherentlyrisky. Measures designed to minimize risk are theprovision of limited bagging facilities at theunloading terminal, phased implementation of theproject, and the provision of further technicalassistance for market development of bulk cement. Im-plementation of the Human Resource Development com-ponent is likely to be slow due to the innovativenature of the approach and the necessity of having

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groups of cement plants joining in a common effort.Memoranda of Understanding signed between DCCI andeach RTC's lead plant company would provide assuran-ces: (a) that the lead plants will commit financialand managerial resources for training and (b) that theRTCs would offer training services to other plants forappropriate fees. The Danish InternationalDevelopment Agency (DANIDA) has agreed to financeconsultants to assist in project implementation forthis component.

Estimated Cost:J&cal Foreign Total-...---- (M'llion $)-------

Modernization and Restructuring 585.0 90.0 675.0Pilot Bulk Cement Transport 37.5 12.5 50.0Human Resource Development 3.5 6.5 10.0Technical Assistance 0.2 1.0 1.2

Total 626.2 110.0 736.2

Financing Plan:

Bank 195.8 104.1 300.0DANIDA 0.0 5.6 5.8Industry 253.5 0.0 253.5Other 176.9 0.0 176.9

Total 62672 110.0 736.2

EstimatedDisbussement:

IBRD FY91 92 93 94 95 96----------- (Million $) ------------

Annual 25 105 90 40 30 10cumulative 25 130 220 260 290 300

Economic Rate of Minimum 12 percent for subprojects financed by theReturn: DFIs.

INDo



Table of Contents

I. INTRODUCTION ................................................... 1

II. INpIAN CEMENT MANUFACTURING INDUSTRY ....... ...................... 2

A. Present Structure of the Industry ......... ............... 2B. Past Policy Environment and Its Impact ...... ............. 4C. Policy Reforms and Industry Responses ...... .............. 5D. Economic Considerations .................................. 7E. Demind and Supply Projections .......... .................. 9

1II. RESTRUCTURING OF THE CEMENT INDUSTRY AND ROLE OF THE BAK ........ 14

A. Cement Industry Restructuring Strategy ..... ............. 14B. Bank Lending to Industry ................................ 19

IV. THE PROWECT AND THE PROPOSED LOAN .I.............................. 22

A. Project Objectives ...................................... 22B. Project Description ..................................... 22C. Environmental Aspects of the Project ..... ............... 27D. Project Cost and Financing Plan ......................... 30E. The Loan ............ .................................... 31F. Procurement ........... .................................. 32G. Disbursement .......... .................................. 34H. Reporting and Audits .................................... 34

This report is based on the findings of a World Bank appraisal mission whichvisited India January 8-29, 1990. Mission members were Messrs. S. Wu(Financial Analyst), M. Fog (Senior Cement Industry Specialist), M. Pherwani(Senior Industrial Specialist), W. Futur (Senior Economist), J. Segerstrom(Technical Education Specialist), T. Loomis (Environmental Consultant),0. P. Hansen (Senior Advisor, DANIDA), M. Bregnbak (Technical Adviser,DANIDA) and A. Austen (Consultant). Mr. G. Thomas (Consultant) also joinedthe mission as a resource person. The report was prepared by Messrs. S. Wu,M. Fog, M. Pherwani, W. Futur and J. Segerstrom.

V. IMPLEKEKTATION AR GME S. PARTICIPATING ORGANIZATIONS.AND PROJECT BENEFITS AND RISKS . .................................. 36

A. Development Commissioner for Cement Industry ..... ............. 36B. Participating Financial Institutions .......................... 36C. Organizational Arrangements for Human Resource Development

Component ..................................................... 41D. Project Benefits and Risks ......... ........................... 42

VI. AGREEMENTS. UNDERSTANDINGS AND RECOMMENAIO ..... ............... 44

A. Agreements and Understandings ................................. 44B. Conditions of Effectiveness and Disbursement ...... ............. 45C. Recommendation . ............................................... 45

ANNEXES

Annex 1 Input Costs Increases ............. ............................ 46Annex 2 Shadow Prices and Conversion Factors .......................... 47Annex 3 Projection of Cement Production ............................... 50Annex 4 Technical Assistance Component ................................ 52Annex 5 Guidelines fc. Preparing Environmental Impact Assessments for

Major Cement Subprojects ........... ........................... 54Annex 6 Disbursement Schedule and Projection .......................... 58


IzD


I. IN!RODUCTION

1.01 Policy reform in the cement sector in the 1980s comprised phaseddecontrol of cement pricing and distribution and relaxation in industrial re-gulatory controls. These reforms have resulted in impressive growth andsubstantial modernization of the industry. Cement production grew from18 million tons in 1980 to about 43 million tons in 1988. Cement supply insevere shortage only ten years ago, has now caught up with demand and createda competitive cement market. India now produces cement at a cost below thelanded import price and has begun to export a limited amount of cement toneighboring countries. The current per capita consumption of cement ir. Indiais about 47 kg, low in comparison with other developing countries of similarincome. There is immense scope for cement consumption growth, as the cement-consuming sectors (irrigation, power and housing) continue to expand. Thesituation presents an excellent opportunity for the development of a modern andefficient cement industry in India.

1.02 In its 1989 budget, the Government of India (GOI) announced the com-plete removal of price and distribution controls for cement. This policy deci-sion has eliminated all subsidies to cement users in the public sector and allcross-subsidies relating to freight equalization and differences in levy quotasamong cement manufacturers, and it has provided an environment that is conduciveto rational investment and increased efficiency in cement production anddistribution. The sustainability of liberalization and further improvement ofeconomic efficiency in this sector will depend on the industry's ability to ad-just, through industrial restructuring, to the new and more competitiveenvironment. To support the adjustment process in this recently liberalizedsubsector, GOI requested the Bank and the Danish International Development Agency(DANIDA) to prepare the Cement Industry Restructuring Project.

1.03 The proposed project would finance production capacity expansionsin the cement-deficit regions and modernization and restructuring of the existingcement companies throughout India. The project would help to establish andfinance demand-driven, in-plant training programs to support human resourcedevelopment compatible with the substantial technological and structuraltransformation in the industry. The project would also help develop and financea pilot scheme for transporting cement in bulk from a number of plants toKalamboli Railway Terminal near Bombay. Successful implementation of this pilotscheme would introduce bulk movement of cement across the country, and potentialproductivity improvement for the construction industry. Finally, the projectwould assist DCCI in studying policy options for the mini-cement sector, coaiwasheries and use of lignite for the cement industry, environmental protectionand pollution control measures for the industry, and future bulk cement transportand consumption. Overall, the proposed project is expected to enhance theindustry's economic efficiency and pave the way for sustained growth to meetincreasing demand in the 1990s.

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II. ITDIAN CEMENT MANUFACTURING INDUSTRY

A. Present Structure of the Industrv

2.01 Production Structure. The Indian cement industry has achievedconsiderable success in establishing adequate production capacity. As of March1988, this industry consisted of 94 large and medium-size plants, 5 white cementplants and 135 mini-cement plants (i.e., clinker capacity less than 200 tpd).The large and medium-size plants produced 37 million tons of cement in 1987,95 percent of the total cement production in the country. The mini-cementplants, although large in number, produced less than 2 million tons (less than5 percent of total production) in the same year. About 25 million tons ofenergy-efficient, dry-process production capacity was added during theunprecedented growth which followed partial decontrol in 1982. As a result,the share of installed capacity based on the dry process increased from53 percent in FY83 to 72 percent in FY88. With the expected further expansionin dry-process capacity and completion of a number of major wet-to-dry conversionprojects in 1989 and 1990, about 80 percent of the country's cement productioncapacity will be based on the dry process. By 1988, around 26 percent of theinstalled production capacity was in plants of one million ton per year, a scalethat is considered optimal based on today's technology. All new plants will beof this scale in the coming years. Conversion of the remaining wet-processplants to dry process, and expansion and modernization of old plants to reachoptimal economies of scale and production technology will continue as theindustry adjusts to the increasingly competitive market created by decontrol ofcement pricing and distribution.

2.02 Regional Distribution of Capacity. India's installed cementproduction capacity is concentrated in the western and southern regions, wherelimestone deposits are abundant and adequate supporting infrastructure (such asrail and road network) is available. In 1988, about 85 percent of cement wasproduced in the states of Madhya Pradesh (26.0 percent), Andhra Pradesh(13.8 percent), Rajasthan (11.3 percent), Tamil Nadu (9.3 percent), Gujarat(8.7 percent), Karnataka (8.9 percent) and Maharashtra (7.2 percent). Between1982 and 1988, the share of cement production in the western and southern regionsincreased from 68.8 percent to 74.8 percent. Conversely, not only did theproduction share of eastern states decrease from 13.6 percent to 6.9 percent,but also their production in absolute terms also decreased from 3.1 million tonsper year to 2.8 million tons, due to suspension of production of two plants inBihar. The regional cement production-consumption pattern for 1988 is presentedin Table 2.1. The regi-nal imbalance of production capacity and demandcontribute to high transpurt costs for the distribution of cement, which amountto an estimate of Rs. 8 billion per year.

2.03 Ownership Structure. The industry has been developed primarily bythe private sector. Private firms accounted for 84 percent of installed capacityand 87 percent of total cement production at tL. end of FY88. The publicsector's entry into the cement industry goes back several decades (the first suchplant was built in 1938), but significant capacity was not added until the late1960s and 1970s. At present, the public sector produces about 13 percent of

India's cement output (down from 14 percent in FY85), the Cement Corporation ofIndia (CCI) accounts for 5.7 percent, and 7 state government-owned companiesproduce the remaining 7.3 percent. Moreover, GOI has moved away from itsprevious policy of supporting large capacity expansions in the public sector;i.e., the Government has abandoned its previous objective of reaching 25 percentpublic ownership of total installed capacity by the end of Seventh Plan. Thedistribution of capacity and production of cement by type of ownership duringFY88 are summarized in Table 2.2.

Table 2.1

9eaional Production and Conwumption, Jj8

Production Consumplo Surnlus/(Deficit)

North 7.44 11.89 (4.45)East 2.81 7.10 (4.29)West 17.06 10.53 6.53South 1341 10.86 2.55Total 40.72 40.38 0.34

Source: Cement Manufacturers' Association (C_A) Cement Statistics 1988.

Regions are de ined as: West GuJarat, Maharashtra, Madhya Pradesh and Goa;'South: Andhr-. Pradesh, Karnataka, Tamil Nadu and Kerala; East: Bihar, Orissa,West Bengal and Northeastern states; North: Rajasthan, Uttar Pradesh and othernorthern states.

Table 2.2

Distribution of Canacity and Production

According to Ownership. 1987/88(In million tons)

Caoacitv gercent Production percentPublic SectorCCI 3.75 6.8 2.23 5.7State-owned 4.98 9_Q 2j.9 7.3Total 8.73 15.8 5.12 13.0

Private SectorACC 8.83 16.1 7.62 19.3Others A/ 37.38 6..1 26L68 67.7

Total 46.21 84.2 34.30 87.0TOTAL 54.94 100.0 39.42 100.0a/ Including mini and white cement plant but excluding Rohtas,

Sonevalley and Sewree which were closed down.

Source: CMA, Performance of Cement Industry, 1987/88.

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B. Past Policy Environment and Its Impact

2.04 The industry grew ralatively slowly during most of the 1970s.Between FY70 and FY74 (the Fourth Plan), annual growth rates of capacity andproduction were 5.7 percent, and 3.7 percent, respectively. During the FifthPlan, capacity growth fell to 2.6 percent p.a. As a result, between 1978 and1983 the country experienced considerable shortage of cement (10-25 percent ofannual consumption) and had to import 1-3 million tons of cement per year. Theslow expansion of capacity and associated chronic shortages of cement experiencedduring the 1970s were caused by restrictive sectoral policies includingcontrolled prices, rigid capacity licensing and freight equalization fordistribution.

2.05 Price Control and Canacitv Licensing. For 40 years (1942-82),Indian cement prices had been were controlled by the Government, except for 1966and 1967. The pricing policy over this period fixed the retention price (theex-factory price of bulk cement) and the free on rail (FOR) destination priceof bagged cement. Freight cost, packaging and incidental charges, and exciseduties and sales taxes were then added to arrive at the retail price to theconsumer. These pricing policies had a serious adverse impact on the profitabi-lity of investment in the cement industry. The decline in the expansion ofcement production capacity during the Fourth and Fifth Plan periods was causedby the low return on investments because of controlled prices and to some extentthe restrictive capacity licensing policies toward large industrial houses (MRTPcompanies). In the 1970s, particularly during 1970-77, retention prices failedto provide an adequate return on investment in the sector, which resulted inconsiderable slowing of expansion capacity during the Fifth Plan p.riod. Thecombined impact of all these, together with low capacity utilization attributedto power and coal shortages, resulted in chronic shortages of cement throughoutthe 1970s.

2.06 Freight Egualization and Remional Distribution of Capacities. Thefreight equalization scheme was introduced in 1956 to ensure uniform cementprices throughout the country. A pooled average freight charge was built intothe free-on-rail (FOR) destination price of cement. Actual freight chargesincurred were notional in that they only helped to define the average freightcharge from all production locations. Under this system, cement transport froma given plant to the market was subsidized (or taxed) to the extent that actualfreight charges exceeded (or fell short of) the notional average freight chargesper ton of cement transported from all plants. Because of this policy, planningof cement production capacities gave little importance to location of markets.The cost of moving large volumes of cement to the eastern and northeastern states(cement-deficit regions) and coal in the opposite direction were not adequatelytaken into account when plant location decisions were made. This situation ledto unwarranted concentration of production of capacities in the western andsouthern regions where limestone deposits are abundant and better basicinfrastructure is more readily available (para. 2.02). The consequences of thisregional production pattern are painfully evident today following the decontrolof cement prices and the elimination of the freight equalization scheme. As

would be expected, cement prices in the deficit regions have risen sharply. Onthe other hand, given the sizable excess capacity, cement prices in the surplusregions are very depressed. This situation constrains the financial performanceof many cement producers in the surplus regions and cement users in the deficitregions.

C. Policv Reforms a#d ndustry Res2onses

2.07 Recent Reforms. Efforts to reform restrictive cement sector policiescommenced in 1976. Measures adopted in 1977 attempted to improve return oninvestment and stimulate creation of production capacities to meet growingdemand. Towards this objective, a decision was made to change the basis forfixing cement prices from the 14 percent pre-tax return on total capital employedto a 12 percent post-tax return on net worth. The higher expected return oninvestments associated with this new pricing principle was sufficient tostimulate investments in the cement secror in the late 1970s. In the meantime,the Government imported cement to cover the shortage and to keep competition andprice of cement in check. Subsequently, GOI took an important step to open thesector by allowing new entry and expansion of existing capacities by MRTPcompanies in the cement industry. As a result, by the end of 1981 about12 million tons of capacity expansion was under implementation for commissioningduring the early and mid-1980s. This major expansion, and the resulting easingof supply constraints, encouraged the Government to continue to liberalize itscement pricing and distribution policies leading to complete decontrol in March1989.

2.08 The timing of these policy reforms for the cement sector coincidedwith, and formed an integral part of, the general industrial policy liberaliza-tion in the country. Of all the measures taken, the most important for thecement industry were relaxation of investment licensing, permission for entryof MRTP companies, the gradual reduction and elimination ef the requirements oflevy cement, and elimination of the freight equalization scheme. These reformsallowed the industry to modernize and expand more easily in response to changingmarket conditions. Another important area of policy reform was the relaxationof foreign technology transfer and collaboration, which helped enhance thecompetitiveness of the domestic cement machinery manufacturing industry.

2.09 Industry Response. The cement industry responded well to thesepolicy reforms (Table 2.3). Installed capacity and production of cement haveexpanded by about 11 percent p.a. since 1982; the share of the energy-efficient,dry-process units increased from 53 percent to 72 percent, due to bothconversions from wet to dry process and installation of new capacities; acompetitive cement market has emerged, as seen in Table 2.3: the free market(non-levy) cement price remained practically constant below Rs. 70 per bag duringthe last 6 years. The intensity of market competition was reflected in thedeclining market share of pozzolana portland cement (PPC) from 57 percent in FY83to about 25 percent in FY88, as the consumers began to take advantage of thebuyer's market situation to demand higher-quality ordinary portland cement (OPC)at a price very close to that of PPC.

Table 2,3

Industry's Response to Recent Policy

Reform Policy Parameters

Policy Parameters 82/83 83/84 8I485 85Z86 87/88

Levy Quota ( percent)pre-1982 plants 67 65 60 40 30post-1982 plants 67 45 40 30 15Levy Price (Rs./ton)(ex-factory) 335 375 375 400 435

Industry ResRonse

Capacity (MT) 34.4 37.0 41.2 44.3 57.0Production (MT) 23.3 27.0 30.1 33.1 39.4Utilization (percent) 68 73 73 79 70

Nonlevy cement 68 64 70 67 70price (Rs/bag) a/

Dry-Process Capaci. 53 56 60 65 72as percent of total

PPC as percent of total 57.1 58.5 55.1 45.1 25cement output

Operating Profit 15.8 13.5 11.1 9.3 8.0Margin b/

a/ In 50 kg bag, including excise tax, sales tax, bagging costs, transport anddealers profit margin.

hi Based on ICICI financed sample plants.

Source: CMA, ICICI and staff estimates.

2.10 The industry fared less well in capacity utilization, partly becauseof power shortages caused by drought in 1985-87, initial technical difficultieswith some of the new plants, and market constraints for plants in surplusregions. An analysis of ICICI-assisted cement companies shows that the combinedimpact of low capacity utilization, competitive pressure and the significantincreases in the cost of inputs (Annex 1) have reduced the profitability of thecement industry. Many cement producers are experiencing serious financialdistress, and there have been only a few capacity expansion projects since 1986.Unless investments are undertaken now for commissioning between 1992 and 1995,India may experience cement shortage as demand expands and exceeds supplycapabilities (para. 2.21).

D. Economic Considerations

2.11 Although cement manufacturing is both capital- and energy-intensiveand India is a net importer of both, it is economic and efficient by interna-tional standardF India's comparative advantage is attributable to itsrelatively abundant limestone and coal resources, established labor force withtechnical and managerial experience, and a well-established and competent cementmachinery manufacturing industry with long-standing foreign technologycollaboration.

2.12 Production Cost. A sample financial and economic production coststructure of both wet-process and dry-process plants is shown in Table 2.4. Thefinancial costs are estimated on the basis of the average of the FY88 productioncosts of six cement plants (three dry and three wet plants). The economic costis derived from financial cost data using conversion factors estimated by theappraisal staff (Annex 2). In economic terms, the average production cost ofthe wet-process plants (excluding capital charges) is Rs. 567 per ton of cementcompared to Rs. 427 per ton for new, dry-process units. The full production costof new dry-process plants (including provisions for capital charges) is aboutRs. 580 per ton. These cost parameters are below the CIF value of importedcement estimated to be about Rs. 730 per ton ($50 at exchange rate of in FY88).This is a broad indication that domestic production of cement is economicallyefficient for meeting domestic demand.

Table 2.4: Financial & Economic Cost of Production(.Rs. per ton cement)

get Process Drv Process

Financial Economic Financial Economic

Raw Material 91.4 64.0 93.0 65.1Packing Materials 102.2 71.5 100.0 70.0Coal 189.6 166.8 110.5 97.2Power 107.2 128.7 98.5 118.2Store & Spares 38.1 28.9 34.5 26.2Labor 90.8 72.7 39.0 31.2Factory Overhead 43.4 339 23.5 18.8Operating Cost 661.7 566.5 499.0 426.8Capital Cost 64.4 A/ 134.5 A/ 152.8 /Total Cost 726.1 633.5 579.5

a/ Book value of depreciation and financial charges.k/ Replacement cost based on shadow price, Annex 2.

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2.13 Imoorted Cement. Cement is imported only by government agencies(canalized). During the years of 1978-1984, when the cement shortage was mostacute, 001 allowed Imported cement at a low (15 percent) tariff rate to cover'he expected shortage and stabilize cement prices. Since 1985, the Governmentnas not imported cement (except special oil-well cement). Domestic productionis meeting demand, and domestic competition has kept the domestic price belowthe landed cost of imports, even in coastal cities like Bombay and Calcutta.The recent manufacturer's realizations (ex-factory price plus transport excludingexcise tax, sales tax and dealers margin) at Bombay and Calcutta were Rs. 750and Rs. 900 per ton, respectively. These prices ar. competitive with theprobable price of imported cement at port of Rs. 900/ton at today's exchange rate($50 CIF plus at least Rs. 50/ton port handling and distribution). Moreover,the Indian ports now are congested and lack bulk handling facilities. Therefore,expansion of domestic cement production capacity is the lowest-cost option formeeting domestic demand.

2.14 Capital Cost. Production of cement is an energy- and capital-intensive proce3s. As shown in Table 2.4, capital charges are the second largestcost item in the production cost of cement. India has acquired a comparativeadvantage in the manufacture of modern cement machinery and therefore has anadvantage in the construction of cement plants at international standards. Theaverage investment cost per annual ton of cement capacity installed in India isestimated to be within the range of $100-130, compared to $150-200 in developedcountries. This cost advantage is attributed to the existence of aninternationally competitive cement machinery manufacturing industry with reputedforeign technology collaborators. Competition among these manufacturers is sostrong that their foreign collaborators continue to transfer their latesttechnology to maintain and improve the market position of their local partners.Due to the combined effects of domestic competition and strong support fromforeign technology collaborators, the Indian cement machinery industry has amplecapability to supply turnkey cement plants with critical equipment imported fromtheir collaborators.

2.15 Raw Material. Limestone is the principal raw material in themanufacture of cement. The relative abundance of cement-grade limestone depositsin different parts of the country permitted development and rapid expansion ofthe Indian cement industry. At present, India's limestone reserves are estimatedat about 60 billion tons, of which 13 billion are proven, 4 billion are indicatedana 43.2 billion are inferred. India's limestone deposits are, however, highlyconcentrated within the states of Andhra Pradesh, Karnataka, Gujarat and MadhyaPradesh, which together account for over 80 percent of known reserves. Thisconcentration of deposits was originally responsible for the concentration ofcement production capacities in the western and southern regions of the country.But the freight equalization system intensified the regional supply-demandimbalance to an unwarranted degree (paras. 2.02 and 2.06).

2.16 EnergI Inputs. Energy is the most important input in the manufactureof cement in India. Although India is a net energy-importing country, it hasample coal reserves to meet the requirements of the cement industry for theforeseeable future. Indian coal is, however, low quality and must be transportedlong distances to cement plants in the western and southern states. The ashcontent of Indian coal is high and is expected to increase in view of thedeclining quality of known coal deposits and production methods being used.

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Even though the cost of domestic coal per unit of energy contained is close tothat of imported coal, it has a negative impact on the quality of cement producedand the productivity of the cement industry. To overcome this problem, theindustry and GOI are exploring options to reduce the ash content of coal for thecement industry (para. 3.15). Power has been a major constraint on the cementindustry for years. However, the magnitude of the problem has been graduallyreduced over the last few years by the installation of captive power plants whichnow supply about 15 percent of the industry's total power requirement. Whilesupply of power still remains a binding constraint for sustained capacityutilization of many cement plants, it is not expected to be as critical as inthe past.

2.17 Transport Cost. Given the imbalance in the location of limestonereserves, coal mines and major cement markets and past sectoral policies,development of the cement industry has been plagued by high transport cost(paras. 2.02, 2.06 and 2.15). Cement produced in India has to travel an averageof 650 km to the final user, at an average freight cost of more than Rs. 250/ton.For the northeastern states, cement has to be transported around 1,000 km fromMadhya Pradesh at an estimated cost of Rs. 400/ton. Transport cost addssignificantly to the total delivered cost of cement. In fact, freight cost, andexcise and sales taxes make the delivered cost of cement twice the ex-factoryprice. Transport cost is largely responsible for the price differentialsobserved in different parts of the country. In the present free-marketenvironrment, individual plant viability will largely depend on the distancebetween the plant's location and the market it serves.

E. Demand and SUDD1 Proiections

2.18 'Consumtion. Apparent annual cement consumption in India increasedfrom 14.5 million tons in FY75 to about 42 million tons in FY89, correspondingto a compound annual growth rate of 7.3 percent. The current 47 kg per capitaannual consumption of cement in India is still low compared to other countries,as shown in Table 2.5. The long-standing price and distribution controls, thelack of incentive to market cement in rural areas, the failure to promotepotential markets in areas such as concrete roads, and the lack of financing forhousing development have all contributed to India's low per capita consumptionof cement. As these constraints ease and the GNP grows, there is immense scopefor cement consumption growth.

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hible 2.5: Cement Per Caoita Consumption. 1987

GNP per Capita Industrial VA Per capita cement(8 eauivalent) A/ as percent of GDP h/ consumption (kg) Q/

Turkey 1200 36 454Egypt 670 25 335Mexico 1820 34 230Brazil 2020 38 182China 290 49 167Zimbabwe 590 43 81Pakistan 350 28 66India 300 30 47Kenya 330 19 39

Source: a/ World Table 1988-89k/ World Development Report, 1989Al World Statistical Review, CemBureau, 1989

2.19 Demand Projectioa. Four major studies on cement demand projection,by Mangesh International Service, by Tata Economic Consultancy, by ICICI and byIDBI were made available to the Bank. Their projections up to FY95 arepresented, along with the appraisal staff's estimate, in Table 2.6:

Table 2.6: Cement Demand Prolection(million tons)

Mangesh Studs Tata Study4.1% GNP 5.1% GNP Econo- End-User ICICI IDBI Staff EstimateGrowth matric Nethod Study Sig&y Case I Case II

1989-90 44.5 45.5 43.1 46.0 45.9 45.6 46.6 45.81990-91 47.3 49.1 47.4 50.0 49.8 49.7 50.2 48.81991-92 50.3 53.1 52.3 54.4 54.0 53.9 54.3 51.91992-93 53.6 57.4 58.0 60.4 58.6 58.7 58.7 55.91993-94 57.1 62.0 64.4 64.3 63.6 63.9 63.5 58.91994-95 58.6 67.1 72.5 69.9 69.0 69.5 68.6 62.7

Source: Mangesh International Services, March 1987Tata Economic Consultancy Services, February, 1989ICICI, December 1989; IDBI, September, 1989.

2.20 To relate historical cement consumption with general economicvariables, the Mangesh study chose GNP and the effect of the Green Revolution(between FY76 to FY86) and the price index, which might have had an impact onprivate consumption of cement. The Tata study chose gross domestic fixed capitalformation, which correlated most closely with the cement consumption. The Tatastudy also tried to project the cement demand in major end-user sectors. In both

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analyses, the historical elasticity of cement consumption to GNP was estimatedat about 1.5. The difference in the projected demand scenarios is primarily dueto assumptions about the future GNP growth rate. As indicated by the Tata Study,the major end-users of cement in India are private housing (45 percent),irrigation and power (19 percent), public works including roads (6 percent) andpublic housing (5 percent). These sectors are expected to grow rapidly. TheICICI and IDBI studies have analyzed cement demand by regions and projected thatcement growth would be faster in the northern and eastern regions. These studiesalso analyzed interregional movement of cement and identified the regionaldemand/supply pattern. Both ICICI and IDBI studies have indicated that thegrowth of cement in the next five years is likely to remain high, as in the pastsix years after partial decontrol, for a number of reasons: (a) with the settingup of the National Housing Bank and the emphasis on housing by GOI, the housingsector is expected to grow at a higher rate. The entry of some commercial banksinto housing finance is also expected to give an additional resource for housingsector growth; (b) concrete roads are now being built for the first time inIndia. Such new applications of cement, even on a small scale, would have asignificant impact on growth in cement demand; and (c) the anticipated devolutionof financial power to local governments would spur development activities in therural areas. This would likely increase conatruction and cause an increase incement demand in rural areas. To indicate a likely range of future demand, theappraisal staff made its estimates in Table 2.6 based on the followingassumptions:

(a) GNP growth rate of 5.4 percent for the next 5 years. This growthrate is below the official GOI projection six percent and reflectsthe Bank assessment in the most recent Country Economic Memorandum;and

(b) elasticity of cement consumption vs GNP:

Case I: 1.5 representing historical statistics in India;

Case I1: 1.2 representing an average of countries at similardevelopment stage.

2.21 Projected and Demand/Supply Balance. First, cement production fromexisting capacity and capacity expansions already under implementation isprojected as a baseline case and compared with estimated demand (Table 2.7).The domestic cement market is likely to be in modest surplus in the next two orthree years because of the enormous capacity commissioned during the last threeyears. Investors anticipated this surplus, and investment in this sector hasdecreased significantly since 1986, resulting in a small number of expansionprojects which would add less than seven million tons of capacity up to 1992.Production from existing capacity and capacity presently under construction willbe limited to about 56 million tons, even as the average capacity utilizationrate approaches a somewhat optimistic 84 percent (Annex 3) by 1992/93. Sinceconstruction of a cement plant takes about three years from the time itsfinancing plan is finalized, and it is also common to take an additional twoyears to achieve an acceptable utilization rate, a potential cement deficit of6.9 - 12.8 million tons is likely by 1994/95. The detailed assumptions for

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projecting cement production are presented in Annex 3. It is also important tonote that the production projection used has not taken into account any possibleclosures. In fact, the competitive market in surplus regions may force asignificant amount of inefficient capacity to suspend production or close.Implementation of the modernization and expansion projects currently beingprepared is needed to meet the growing demand in the 1990s.

Table 2.7: DemandZSupplX Balance Based Existing Capacity(million tons)

Projected Capacity Demand/Supply Demand/Supplyand Production A/ (Case I) L k/ (Case II) C/

Surplus SurplusCapacity Production Demand (Deficit) Demand (Deficit)

1988-89 59.0 44.0 43.0 1.0 43.0 1.01989-90 61.4 47.8 46.5 1.3 45.8 2.01990-91 64.7 51.7 50.2 1.5 48.8 2.91991-92 66.7 54.9 54.3 0.6 51.9 3.01992-93 66.7 55.8 58.7 (2.9) 55.3 0.51993-94 66.7 55.8 63.5 (7.7) 58.9 (3.1)1994-95 66.7 55.8 68.6 (12.8) 62.7 (6.9)

a/ Based on existing installed capacity and capacity expansioncurrently under implementation (Annex 3).Demand projection is based on Case I in Table 2.6

e/ Demand projection is based on Case II in Table 2.6.

2.22 The investors have anticipated the projected shortage of cement, andthe financial institutions have received project proposals and loan applicationsfor modernization, expansion and greenfield cement projects. The list ofproposed projects and assumptions for projecting production from them are alsopresented in Annex 3. These proposed projects, if materialized, would addapproximately 10 million tpy production capacity by FY95. This capacityinstallation, plus the 7 million tpy already under implementation, could increasetotal production capacity to about 74 million tpy by FY95, producing about 62million tons of cement at an estimated average utilization rate of 83 percent.Total production including new projects is projected and compared with estimateddemand in Table 2.8.

2.23 Most of the proposed capacity expansion would be in or close tocement-deficit regions, in response to the price differentials already developedafter elimination of freight equalization. If all investments materialize, theregional demand/supply situation would improve as estimated by the appraisal

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staff in Table 2.9. A large portion of the surplus shown in the western regionis produced in northern Madhya Pradesh, supplying cement to the close-by UttarPradesh market.

Table 2.8: Demand/Supply Balance Based Existing and Prolosed New Cavacitv(million tons)

Projected Capacity Demand/Supply Demand/Supplyand Production (Ca / , (Case II) £/

Surplus SurplusCa2acitx Production Demand (Peficit) Demand IDefleft.

1988-89 59.0 44.0 43.0 1.0 43.0 1.01989-90 61.4 47.8 46.5 1.3 45.8 2.01990-91 64.7 51.7 50.2 1.5 48.8 2.91991-92 66.7 54.9 54.3 0.6 51.9 3.01992-93 67.7 55.8 58.7 (2.9) 55.3 0.51993-94 72.2 59.4 63.5 (4.1) 58.9 0.51994-95 74.7 62.3 68.6 (6.3) 62.7 (0.4)

L/ Based on existing installed capacity and all capacity expansionscurrently under implementation and preparation (Annex 3).

h/ Demand projection is based on Case I in Table 2.6./ Demand projection is based on Case II in Table 2.6.

TABLE 2.9: Retional Demand/SuDlv Pro1ection(million tons, 1994/95)

Demand Case I Demand Case II

Surplus/ SurplusCapac. Prod. Demand Al (Defic.) Demand A/ (Defic.)

North 14.9 12.5 22.1 (9.6) 20.2 (7.7)East 11.2 9.4 11.5 (2.1) 10.5 (1.2)West 26.4 22.6 16.0 6.6 14.6 8.0South 22.3 1 19.0 (1.2) 17.4 0.5

Total 74.7 62.3 68. (6.3) 6Z (0.4)

a/ The regional demand projections are based on the ICICI estimates whichare proportionally adjusted to be consistent with the country projec-tions made by the appraisal staff.

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III. RESTRUCTURING OF THE CEMENT INDUSTRY AND ROLE OF THE BANR

A. CEMENT INDUSTRY RESTRUCTURING STRATEGY

Actions Already Under Implementation

3.01 The competitive domestic cement market created by the decontrol ofcement pricing and the elimination of the freight equalization scheme, and thecurrent excess capacity and regional demand-supply imbalances, are forcing theindustry to rationalize and balance its operations, reduce waste and allocateresources more efficiently. To improve their long-term market position andensure financial viability, many companies are considering or have alreadyimplemented measures to modernize and expand their productions facilities, tointroduce product differential and quality, and to explore new markets andmarketing techniques.

3.02 The important changes already under way include (a) Expansion andModernization, i.e., conversion of existing wet-process cement production unitsto the more efficient dry process, accompanied by significant capacity expansionand energy and other operating cost savings; (b) Corporate Restructuring andPlant Closure. A number of companies have consolidated operations by sellingplants, to reduce cash losses and refocus resources on more profitable parts ofthe operations, closing financially troubled and uneconomic units with laborsettlements approved by the state governments, the courts and/or the Board ofIndustrial and Financial Restructuring (BIFR), or suspending production pendinglegal approval; (c) Improvement in Labor Productivity by providing earlyretirement and voluntary separation packages; and (d) Aggressive Marketing giventhe competitive market pressure and current regional demand-supply imbalances,Indian cement producers are resorting to increased advertising, quality and branddifferentiation, and improvement of distribution networks.

Planned Restructuring Measures

3.03 The policy environment is conducive for operational and corporaterestructuring, and firms are now more willing to take steps to improve theirlong-term position than before decontrol. Moreover, to encourage domestic cementproducers to undertake additional steps to adjust to the competitive environ-ment, DCCI is developing a modernization and restructuring strategy for theindustry. Implementation of this strategy would provide a mix of incentives andpenalties to induce companies to ensure their financial viability and supply theIndian cement market more economically. The major elements of this strategy arediscussed below.

3.04 Nodernization Scheme for Wet-Process Plants. A working group wasestablished by the Ministry of Industry under the chairmanship of DCCI to developa modernization plan for wet-process cement plants. The working group completedits final report in December 1989 with the following major findings andrecommendations: (a) as of January 1988, there were 33 wet-process cementplants. Seven are already implementing vet-to-dry conversion schemes withassistance from the first World Bank loan. Seven cannot be convertedeconomically because of limitations in technology and limestone reserves. The

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remaining plants can be converted to modern dry-process plants; (b) to encouragemodernization of these plants, incentives were recommended for substantial moder-nization projects at the same level as for greenfield plants (including salestax holidays and power supply priority). Consultation and coordination withstate governments would be needed in this regard; (c) to complement positiveincentives, penalties were also recommended. One such proposal was to provideallocated coal to cement plants according to energy efficiency norms (specificamount of coal per ton of cement produced). Inefficient plants would have topurchase their additional coal requirements on the retail market, presumably athigher prices; (d) to ensure production costs of the modernized plants are com-petitive with the new plants, labor restructuring with fair compensation, suchas early retirement and/or separation packages, would have to be implemented;and (e) it was recommended that plants identified with inherent limitationsshould be allowed to close. These measures, if implemented, would form thebasic framework for further modernization of this segment of the industry.However, most wet-process plants are operating unprofitably, and their financialposition is weak. Modernization of these plants would usually require corporaterestructuring and prudent case-by-case appraisal.

3.05 Regional Production Camacitv. To minimize the average transportcost of cement, the industry will need to rationalize the distribution of pro-duction capacities and their utilization in response to the actual marketdemands. Elimination of the freight-equalization scheme, and the resultingregional cement price differential, is already inducing the industry to considerinvestments to establish new production facilities in the projected deficitareas. Capacity expansions currently under consideration in Assam, Bihar,Himachal Pradesh and northern Madhya Pradesh are consistent with this trend.To encourage investments to the backward northeastern states, the Government ofIndia, through the Northeast Development Council (NDC) and the state governmentsis planning to provide basic infrastructure (power, rail connections and roads)and training.

3.06 Human Resource Development. With the rapid growth of the cementindustry over the last decade, the demand for trained personnel has increasedconsiderably, and shortages of skilled operators and middle-level techniciansare increasing. Many cement producers are experiencing high turnover at theoperational and technical level due to strong competition among companies forskilled personnel. Unless steps are taken now to develop a large pool of skilledoperators and managerial cadres capable of handling the growing demand of energyconservation, pollution control, development of new products and marketing tech-niques, the growth and efficiency improvement of the industry might fall shortof expectations.

3.07 The cement industry is now revising its human resource developmentapproach to put more emphasis on sector-specific and plant operational trainingwhile relying on established institutions for training of a more general nature.The strategy to develop trained manpower for the sector rapidly and efficientlyrequires a flexible, demand-driven training system such as the system proposedby a consultant studyl} financed by the First Cement Project (Ln. 2660-IN). Thestudy proposed that RTCs be established around modern cement plants to providedemand-driven, in-plant training for 'clusters" or groups of plants with geogra-

I/ Manpower Development Study by Holdenbank Consultant.

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phic proximity and common languages. The proposal has won wide support fromcement manufacturers and its implementation has been made part of this project(para. 4.12). The proposed sector-specific training would complement and buildon the general technical training provided by the advanced training institutes(ATI). These institutes are also being supported under the Bank-financed Voca-tional Training Project (Cr. 2008/Ln. 3045-IN), with a particular focus onimproving linkages with industry.

3.08 DevelopMent of Bulk Cement Transport. Considering the divergencebetween the location of limestone reserves, coal mines and the major cementmarkets (paras. 2.14 and 2.17), the Indian cement industry is today charac-terized by high transport cost and will probably remain so. A study by RailIndia Techno-Economic Service (RITES) concluded that transport of cement overdistances above 220 km is cheapest by rail. Due to lack of rolling stock andlimitations of track capacity, the railways cannot meet the demand for wagonsfrom the cement industry. During the 1980s, 4)-50 percent of cement was movedby trucks. Truck transport is high cost, wastes scarce energy resources andoverloads India's road system. Nonavailability of railway wagons has at timesforced cement manufacturers to curtail production. In view of the anticipatedincrease in cement consumption in the 1990s, if 70 percent of cement were to bemoved by rail, the railways would need to increase the availability of wagonsdedicated to cement by almost 200 percent.

3.09 With a view to achieving economies of scale during the 1980s, theIndian cement industry preferred to build large plants with capacities at asingle location of 1-2 million tons per year, an output of 3,000-6,000 tons perday. Most cement in India is distributed in 50-kg bags, and the output of asingle location can require semi-manual loading and unloading of 60,000 to120,000 bags per day. The operation is time consuming, ties up scarce railwayrolling stock, and results in seepage and environmental pollution. Rail movementof bulk cement through the introduction of high-capacity, dedicated, speciallydesigned wagons will be essential in order to achieve economy in the transportof cement and to avoid serious bottlenecks.

3.10 Achieving economies in transport costs is not the only driving factorfor introduction of bulk cement in India. Delivery of cement in bulk form isa prerequisite for improving the productivity of the construction industry. Withthe exception of a few very large projects, the Indian construction industrycontinues to use manual methods of mixing cement, sand and aggregates at theproject site. The quality of the concrete therefore varies with the skill andintegrity of the workers. This method of construction also has a significantimpact on the time required for completion of the civil works and, consequently,has a major impact on overall project completion schedules and costs. It istherefore imperative for the country to adopt modern methods of constructionincluding rapid delivery of ready-mixed concrete. The ready-mixed concreteindustry depends on the availability of bulk cement. Experience from indus-trialized countries shows that 35-90 percent of cement produced is shipped inbulk, and 60 percent of bulk cement is sold to the ready-mixed concrete industry,and th'.e balance to buildi-.g product manufacturers and large job-site projects.The marketing of bulk cement in India would be likely to follow a similarpattern. A broad compariscn of cement movement in bulk and bagged form inselected countries is given in Table 3.1.

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Table 3.1 Movement and Distribution of Cement (19851

Percentages

S. No. Country In b?ulk In Basa

1. U.S.A. 90 102. Sweden 80 203. Japan 70 304. U.K. 68 325. West Germany 54 466. France 46 547. Algeria 40 608. Italy 34 669. India 1 99

Source: Cement Data Book by CMA.Staff estimate.

3.11 Bulk movement of cement in India is economically desirable. It isrecognized that the present system of movrement of cement in bags would createsevere system constraints and strain both rail and road transport in light ofthe anticipated increase in cement production from 42 million tons to about 80million tons by 2000. A pilot scheme to develop bulk cement transport has beenprepared by GOI with DANIDA assistance and is included in the proposed project(para. 4.09).

3.12 Pollution Contr,ol. With the tightening of environmental standardsand enforcement by GOI since the early 1980s and the substantial modernizationof the industry during this period, most cement plants have installed environ-mental protection equipment and have therefore greatly improved their prospectsfor meeting Indian environmental standards. According to a task force appointedby the Central Pollution Control Board in 1988, out of 94 cement plants, 58 hadadequate pollution control equipment for their kilns and were maintaining theexhaust dust content within the Indian emission standards. A further 25 unitshave already submitted time-bound programs to meet pollution control standards.Of the remaining 11 plants, 5 have already been closed due to uneconomic opera-tion, and 2 have been closed through legal actions based on environmental viola-tions. For the remaining four plants that had not submitted time-bound programsfor pollution control, efforts were being made by the respective state pollutioncontrol boards under the direction of the Central Pollution Control Board toforce these units to implement required actions. Since 1984, GOI has also madeenvironmental clearance a condition of project approval in many industries in-cluding cement, thereby ensuring that new capacity meets the country's environ-mental protection standards.

3.13 Despite the impressive progress made by the industry and the commit-ment of the Government, particulate emission remains a serious problem for manycement plants. Installed pollution control equipment may not operatecontinuously because of power cuts and other technical and operational problems;the technical design of some old plants and mini-plants makes it impossible toinstall adequate pollution control equipment without major alterations of theplants; technical and financial constraints may also delay the promised pollu-tlon control programs (para. 3.12); and monitoring systems in most plants are

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inadequate. GOI invited a team of Danish environmental specialists financed byDANIDA to India in September 1989 to identify environmental and occupationalhealth problems in the cement industry. It was agreed that a comprehensive study(para. 4.14) would be carried out as part of the proposed project to analyze theenvironmental problems in the industry and recommend options for theirresolution.

3.14 Coal Beneficiation. The low quality (i.e., high ash content) of In-dian coal raises specific concerns for the cement industry. The high asn con-tent, frequently 40-45 percent, affects the industry by (a) reducing the economiclife of limestone deposits, since only higher grades of limestone can be usedwith high-ash coal; (b) lowering cement quality because of high ash content andalso because of the inherent variations in ash affecting the chemical compositionof the raw mix; and (c) reducing process efficiency and increasing cost. Giventhe impact of the increasing ash content of Indian coal on the economics of thecement industry, the need for coal beneficiation to supply the industry withbetter-quality coal of higher calorific value and reduced ash content is becomingcritical. However, the economics would depend on the cost of coal beneficiationitself and the benefits that can be derived from improvements in the specificways cited above.

3.15 Two options are to be explored by the Government and the industryindependently in the next few years:

(a) Associated Cement .'ompanies Ltd. (ACC) and Birla-Jute and IndustriesLtd. are installing captive coal washeries based on two differenttechnologies. Both combine the washery with a captive thermal powerplant, which allows optimal thermal efficiency. ACC and Birla-Jute'sexperience will provide valuable technical information for the designof future large-scale applications.

(b) DCCI proposes to undertake a study to determine the economic viabi-lity and organizational arrangements for setting up pit-head coalwasheries that can be linked to a number of operating cement plants.This option has the advantage of scale and lower transport cost andcould potentially benefit a large number of plants. However, inorder for the scheme to be viable, a pithead thermal power plant withfluidized bed combustion has to be included in the scheme. Thisstudy is proposed as part of the project (para. 4.14)

3.16 The cement industry restructuring strategy being developed by DCCI(paras. 3.4-3.15) would guide the industry through the next five years ofadjustment following total decontrol. In the long run, provided the currentsectoral policy environment is maintained, competitive market forces are expectedto ensure efficient allocation of resources in the settor, gradually reducingregional imbalances and eliminating suboptimal operations. One critical issuethat may pose difficulties to the desired adjustment process for the cementindustry concerns plant closure when an operation is proven unsustainable in acomretitive market. Plant closure in a timely manner is constrained by laborlegislation and the courts' interpretation thereof. However, there is increasingrecognition by Indian policy makers and the public of the economic costsassociated with these constraints. The Government's decision not to take overmore "sick units" and the establishment of BIFR have provided a framework tobegin dealing with closure problems. In the cement industry, where 85 percent

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is in the private sector, market forces have, in the absence of direct subsidyand government bailout, resulted in a number of closures with the approval ofstate governments. There are indications that a plant can be closed with lesssocial difficulty when satisfactory labor settlements are worked out. Laborrestructuring including early retirement schemes has become a common practicein many cement companies. The Bank will continue to discuss the plant closureissue with the Government in the context of implementation of this project andmore general dialogue on industrial policy in India.

B Bank-Leadin_ to the Industrv

3.17 The Bank has made 23 development finance loans totaling $1.8 billionthrough financial intermediaries (mainly ICICI and IDBI) for on-lending toprivate and joint-sector firms. Two loans have been specifically for export de-velopment, and one for technology development, in part through the provision ofventure capital. The Bank's experience with ICICI in implementing past projectshas been discussed in several Project Completion Reports (PRCs). The most recentPCR, dated April 1989, for the Fourteenth Industrial Credit and InvestmentProject (Ln. 2051-IN, signed on October 8, 1981), indicated that, while the 14loans were successful in supporting ICICI's institutional development, they didnot seriously address the policy environment within which its lending took place.This is no longer the case. Major policy reform has taken place in the cementsector, and a satisfactory lending environme.-t has been created in preparationfor this proposal.

3.18 The Bank has also provided $3.4 billion for projects in thefertilizer, cement, petrochemicals and electronics sub.sectors where opportunitiesexisted for the bank to support policy reforms at the subsector level and fin-ance economic investments using modern technology. Implementation of theseprojects has been generally satisfactory. All projects currently under imple-mentation are expected to have satisfactory rates of economic return and, des-pite some initial delays, most are expected to be completed on time. Loansthrough financia'L intermediaries are also being implemented well, and the Bankis working closely with them to improve their project appraisal capabilities,foreign asset/liability management and portfolio quality.

3.19 Lessons from the Cement Sector Experience. In the cement sector,the Bank's involvement began in 1980 with a cement subsector study (India: CementSubsector Study, Report No. 3141-IN), which became the basis for a.n active policydialogue between the Bank and GOI. This dialogue contributed to GOI's policydecision of partial decontrol of cement pricing and distribution in 1982. TheBank approved $200 million loans (Cement Industry Project - Lns. 2660-IN/2661-IN), which became effective in November 10, 1986, to support modernization ofthe cement industry. This project has been successful in achieving its basicobjectives. First, the project-supported policy environment continued toimprove, and the complete decontrol has been implemented. Second, the projecthas financed the modernization projects that converted wet-process plants with1.8 million tpy total capacity to the more energy-efficient dry process. Third,energy conservation and pollution control objectives are being realized as theproject is significantly reducing coal consumption and improving the pollutioncontrol standards of the supported cement plants. Fourth, the technical assist-ance has resulted in formulation of a manpower development strategy and a HumanResource Development component to be included in this proposed project. Fifth,

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the project has increased the industry's awareness of deterioration of coalquality and its impact on energy efficiency and productivity of cement produc-tion and the economic life of limestone deposits. As a result, two pilot coalwasheries are being set up by private cement companies with Bank financing. DCCIhas also proposed a study for setting up mine-mouth washeries for the cementindustry.

3.20 Implementation of the project is proceeding reasonably well. As ofApril 1990, $160 million of the total loan had already been committed, anddisbursements amounted to about $75 million. The loans are expected to be fullycommitted by September 1990 when thie proposed proJect would become effective.Overall, this operation has enabled the Bank to maintain active policy dialoguein the cement sector and to finance priority projects that supported the reformprocess. Lessons learned from the first cement project have been incorporatedinto the design of this proposed project. First, the proposed project would,as did the first project, support continued policy reform and resultingadjustments. Second, as in the first project, the Bank has been working closelywith IDBI and ICICI in subproject identification and preparation. IDBI and ICICIhave demonstrated their appraisal capability during independent appraisals forall subprojects and would take full responsibility of subproject appraisal forthe proposed project. The Bank would not appraise individual subprojects, asit did for the first project, but would provide support in special areas suchas environmental assessment.

3.21 Future Lending. The Bank has had an active industrial sector workprogram and has prepared a number of sector reports on such subjects as indu-strial regulation, technology policy, export promotion, public enterprisemanagement and credit and capital markets, as well as a number of subsectorreports including cement, electronics, automotive products, steel, capital goodsand fertilizer. The 1987 CEM, India: An Industrializing Economy in Transition(Report No. 6633-IN, March 23, 1987) focused on the development of the industrialsector and supplied the broad outlines of a reform program. Many of the issuesin these reports will continue to be discussed with the Government in the contextof future operations.

3.22 The Bank's future lending program for industry is based primarilyon sector work and will be designed to support the Indian Government's policyreforms of promoting competition and operational efficiency. The Bank's medium-term industrial lending program includes:

(a) industrial finance projects which will serve as a focal point forevaluating and discussing with GOI overall progress on industrial andfinancial policy reform as well as addressing issues in the financialinstitutions;

(b) technology, industrial pollution control and energy conservationprojects which will serve as a focal point for evaluating and dis-cussing with GOI overall progress and improve the policy, financialand institutional suipport for activities in these key areas; and

(c) subsector projects which will provide policy, technical and financialsupport for economic investments in areas where improved

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efficiency will have implications for the growth of the wholeindustrial sector and economy (e.g., petrochemicals, cement andcapital goods).

3.23 In all of these areas, loans are linked to policy reforms that arebeing undertaken either in designated policy areas such as t chnology, or in thepolicies that affect a specific subsector such as in cement. The basic criterionthat determines the decision to go ahead with a loan is whether or not the policyenvironment is conducive to efficient investment in the sector or subsector beingsupported. That is, the lending strategy involves supporting investments inareas where policy improvements have already been undertaken, consistent withthe conclusions of the previous sector and subsector work. In the cement sec-tor, the most important sector-specific issues (rigid capacity licensing schemeand cement pricing and distribution) that were identified in the 1980 CementSubsector Report have now been largely resolved. The rationale for Bank supportfor the proposed project, therefore, is to continue support for the moderniza-tion and adjustment efforts which started with the first project (Ln. 2660-IN)by further assisting cement companies to undertake needed restructuring measures.The subsector restructuring strategy is at a formative stage, and the Bank canprovide substantive assistance based on experience in other countries inindustrial restructuring of wet-process plants and the mini-cement sector,industrial training, and bulk cement transport.

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IV. THE PROJECT AND THE PROPOSED LOAN

A. Erolect Objectives

4.01 The proposed project is designed to support GOI's recent policydecision for complete elimination of cement pricing and distribution controlsand would assist the industry in adjusting to a more competitive environment inthe following ways. First, the project would finance investment projects whichare important for the modernization and restructuring of the industry. Second,the project would help establish and finance a pilot bulk cement transport systemto transport bulk cement to the greater Bombay area. Stuccessful implementationof this pilot scheme would pave the way to introduce bulk cement transportsystems in India. Third, the project would help establish and finance demand-driven training systems and programs to support human resource developmentcompatible with the significant technological transformation of the industry.Fourth, the project would assist DCCI in studying policy and strategic optionsfor mini-cement sector, coal washing, use of lignite, pollution control andenvironmental protection for the cement industry, and further tevelopment of bulkcement transport and applications.

B. Proiect Descrigtion

4.02 The proposed project comprises four components: an IndustryModernization and Restructuring component, a Pilot Bulk Cement Transportcomponent, a Human Resource Development component and a Technical Assistancecomponent.

Industry Modernization and Restructuring (IHR)

4.03 This component would finance (a) capacity expansion in the cement-deficit regions to alleviate regional demand/supply imbalance, reduce excessivetransport of cement and lower the cost of this basic commodity in some of thepoorest regions of the country; and (b) modernization and restructuring projectswith existing cement companies throughout India to reduce energy cost, enhanceutilization and operating efficiency and improve pollution control stancdards.Included in the component are four large subprojects which constitute about80 percent of the proposed Bank loan. These four subprojects would not onlyreduce regional demand/supply imbalance, but they would also improve marketcompetition: two of the subprojects represent new entries to the cement sector,and the market share of Associated Cement Companies (ACC), the largest in India,would be reduced due to restructuring. Descriptions of these four subprojectsare available in the project files and are summarized below.

4.04 ACC Corporate Restructuring. ACC is privately owned and the largestcement company in India; many of its plants utilize outdated, wet-processtechnology. Because of increasing competition from new plants, ACC's financialperformance has deteriorated over the last few years resulted in a lack ofresources to undertake much-needed modernization. The project would support acorporate restructuring plan developed over the last two years. The plan

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includes (a) selling 4 operating plants (Kistna, Khalari, Shahabad and Porbandarhave already been sold) to reduce the company's operating plants from 14 to 10in order to concentrate the company's limited financial resources; (b) expansionof Gagal plant, which was responsible for half of the company's profit in FY89,to support ACC's growth strategy in cement-deficit regions; (c) implementationof pollution control programs and smaller high-return projects for selectedmining operations, pilot coal beneficiation and energy conservation; (d) majormodernization of potentially viable existing plants of Kymore, Wadi, Jamul andMancherial, if resources permit; (e) reorganization of ACC's Technical ServiceDepartment to make it outward looking and profit oriented; and (f) cot'tinuationof revised trainitig programs and early retirement schemes to restructure thelabor force. The corporate restructuriag plan was discussed and agreed with theappraisal mission, and its implementation has already begun.

4.05 The restructuring plan includes a major investment in ACC's modernGagal plant, which presently has a capacity of 560,000 tpy. The Gagal plant isfavorably located in Himachal Pradesh and serves a fast-growing market regionin Punjab, Haryana, Delhi and part of Uttar Pradesh. The forecasts of thesupply/demand balance in this region indicates a deficit of 3.5 million tons in1994-95, according to the recent ICICI study. This major market advantage plusthe availability of the existing infrastructure and well-developed limestonequarry to support the proposed expansion will offset the high delivered cost ofcoal and give the Gagal expansion a definite cost advantage. The projectincludes two parts. Part one consists of a new, modern, dry-process productionline with a capacity of 1 million tpy. The estimated cost is $90 million, ofwhich the Bank would finance $50 million. Part two comprises upgrading andmodification of the existing plant to increase its capacity to 1 million tpy (anincrease of 440,000 tpy) and substantially improve pollution control. The costof the second part is being estimated and will be presented to IDBI and ICICIshortly. The new production line will be located on an open area immediatelynext to the exiting production unit, and construction of this component will beundertaken first in order to avoid loss of production during construction.Gagal is located in an environmentally sensitive area, and measures will be takento ensure that the environmental impact will be minimal and acceptable accordingto both Indian and international standards. The present limestone deposit willsupport the resulting 2 million-tpy plant's capacity for more than 20 years, andno new mining lease will be required in connection with the project.

4.06 Tata Iron and Steel Company (TISCO0 Slau Cement Project. Withsurplus slag from its present steel operation and a major blast furnace expansionunder way, it is natural, from both economic and environmental poi.ats of view,for TISCO to build a slag cement plant. The proposed project consists of (a) a1 million-tpy clinkerization unit along with a 300,000-tpy OPC grinding unit atSonadih, Madhya Pradesh; and (b) a 1.4 million-tpy Portland slag cement (PSC)grinding unit (based on clinker from Sonadih) near the TISCO steel complex atJamshepur, Bihar. The bulk of the output of this project is targeted for themajor Bihar-West Bengal cement-deficit regions, including Calcutta. Currently,cement is being transported to this region at a considerable cost. Inacccordance with the split-location design of this project, the clinker, whichmakes up 50 percent of the slag cement produced, is transported from MadhyaPradesh to Bihar to be ground with slag and other additives at the more favorablemarket location. The project puts blast furnace slag, a waste material and

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potential pollutant, to productive use, and produces significant economic andsocial benefits. The estimated project cost is about $147 million, of whichabout $70 million would be financed by the proposed loan.

4.07 Jaygee Assam Project. The Assam Industrial Development Corporation(AIDC) and the Jaiprakash Industries Ltd. (JIL) have signed an agreement ofincorporation to establish a joint-sector company, Jaypee Assam Ltd., forinstallation and operation of a 1 million-tpy cement plant at Umrangshu, Assam.Although AIDC plays an important promotion role in this project, it has confirmedthat it would steadily divest its shareltolding (initially 26 percent) once theproduction of the plant stabilizes and that the day-to-day managemeDt of thecompany would be with the private partner, JIL, a progressive firm with goodrecord in operating modern cement plants. During negotiations, IDBI/ICICI agreedto seek formal assurance from AIDC on the above understandings duxing theirapproval of this project. The cement produced by this plant will replace cementshipped from central India. The resulting savings in transport costs areanticipated to be Rs. 250 million per year, 12 percent of total project cost.An estimated reserve of 65 million tons of cement-grade limestone, which wouldsustain the plant over 45 years, has been indicated. The nearest coal field,Bapung, is only 40 km from the plant and produces high calorific value coal(5,200 Kcal/kg compared to less than 4,000 Kcal/kg as all-India average). Powersupply is also assured, since the region has a power surplus. The governmentof Assam has decided to repair 60 km of road from the nearest rail station tothe plant site and the road leading to Meghalaya. The Northeastern DevelopmentCouncil, a central government agency for regional development, is also reviewingpossible infrastructure support and financing of training of manpower. The totalproject cost is estimated at about $115 million, and about $50 million isproposed for financing by the Bank loan.

4.08 Maihar Cement Plant Modernization and Expansion. This projectincludes the installation of a new, one million-tpy production line at the Maiharplant, which is part of Century Textile and Industries Ltd. (CTI), in northernMadhya Pradesh. The plant's present capacity is 800,000 tpy, and an ongoingproject will increase the capacity to 1 million tpy. The plant is well locatedto serve the deficit regions of Uttar Pradesh and part of the Bihar market. Thenew production line will be located adjacent to the present unit, and thereserves in the existing limestone quarry are adequate for the future 2 million-tpy capacity. Included in the project is the installation of a 5 km long-beltconveyor taking crushed limestone from the quarry to the plant to reduce trafficin and around the plant. The existing plant has been continuously updated tomaintain environmental compliance. The new production unit will also utilizethe most up-to-date technology including pollution control. The estimatedproject capital cost is about $106 million, which includes about $53 million ofBank financing.

Pilot Bulk Cement Transport Component (PBCT)

4.09 This component will finance a pilot bulk cement transport systembetween a proposed bulk cement rail terminal located at Kalamboli Rail Terminaloutside Bombay and the cement plants at Wadi and Awarpur. Introduction of a bulkcement transport system in India is an important part of the long-termdevelopment strategy to rationalize and improve cement distribution and theproductivity of construction in India (para. 3.08). The Bombay area was selected

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because it has the best potential for large construction projects to utilizemodern construction methods, including bulk cement and ready-mix concrete.Implementation of this pilot scheme will provide useful experience for potentialfollow-up projects in the rest of the country. The proposed system is designedto handle 1.2 million tons of cement. Phased implementation over 4 years willallow development of the market for bulk cement consumption. The detailed marketanalysis, project description, cost and implementation arrangements of thiscomponent are available in the project file. The principle elements include:

(a) I&A Ing Eacilit-i . Bulk train-loading facilities at cement plantsin Wadi and Awarpur to supply cement to Bombay by rail. ACC, Larsen& Toubro. Rajashree and Cement Corporation of India (CCI) (Tandur)would be included in this pilot scheme;

(b) Special Bulk Cement Wagons. Each rake (train of wagons) comprises55-60 closed silo wagons with a total loading capacity of ap-proximately 3,300 tons. The system would begin with two rakesoperation and reach five rakes design capacity of the system by thefifth year of operation; and

(c) Unloadine Facilities. Train unloading facility, intermediate storagesilos and distribution systems at a plot in the Kalamboli RailwayTerminal in the New Bombay area, where 70 percent of cementconsumption in the greater Bombay area is expected.

4.10 The cement plants participating in the PBCT together with DCCI wouldform a joint stock company to implement the project. The estimated project costis about $50 million and includes estimated Bank financing of $25 million. Thisinvestment includes two sets of financial outlays. The participating cementcompanies will accept responsibility for investments In the loading facilitiesat their respective cement plants, for the company-designated silos at theKalamboli unloading terminal, and the equipment including vehicles involved inthe distribution of bulk cement. These investments will be financed throughinternally generated resources and loans that the individual companies wouldborrow from IDBI and ICICI. The proposed joint-stock company will invest in thespecial bulk cement wagon rakes, the common facilities for unloading of cementfrom the wagons, and equipment for weighing and conveying to the point ofdelivery to the individual company silos. The company will also own and operatethe common bag-packing facility at the terminal. The company will generate reve-nues by levying a service charge to each participating cement company per tonof cement unloaded at the terminal on their behalf. These revenues should beadequate to bear all operating expenses, including provisions for replacementof assets, and meet the company's debt-service obligations. The participatingcompanies will be in a position to pay this service charge from savings inunloading expenses associated with cement packed in bags and from the railwayfreight rebate.

4.11 In order to prepare this component to be ready for IDBI and ICICIappraisal, the following understandings were reached: (a) DCCI and participatingcompanies have agreed, to establish a joint stock company to own and operatespecial wagons and common facilities of the Kalamboli Terminal. DCCI has

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confirmed that subject to formal approval of the Government, financial assistancewould be made available to the company as equity contributions or soft loans;(b) DCCI would follow up with the participating cement companies which haveagreed to invest in the loading end of their own plants, silos and distributionsystems at the Kalamboli Terminal and share-holding in the new company; (c) TheIndian Railway Board has in principle agreed to support this project. DCCI andthe participating cement companies would submit a formal request to the IndianRailways with respect to rebate of freight and assurance of point-to-point tur-naround time for movement of special bulk cement wagons; (d) the Ministry ofIndustry has indicated that this component would be exempt from the requirementof packing in jute bags, normally covering 65 percent of production; and(e) ICICI and IDBI would assist in further development of this pilot scheme and,when it is ready, appraise it in accordance with terms and conditions agreed withthe Bank (para. 4.25).

Human Resource Development Component (HRD)

4.12 This component will assist the cement industry to meet demand forskilled manpower caused by recent unprecedented growth and substantial structuraland technological changes. Four companies, ACC Kymore Engineering Center (forMadhya Pradesh and Eastern India), J-K Synthetics (for Rajasthan), Gujarat AmbujaCement (for Gujarat) and Dalmia Cement (for Tamil Nadu and south India), havebeen selected to establish RTCs for carrying out training programs for "clusters"or groups of cement plants having geographic proximity. The RTCs would beestablished and operated at the respective lead plants of the above-mentionedcompanies. The appraisal mission selected these four companies out of sevencandidates based on the following criteria: (a) the lead plants demonstratedgood performance and are equipped with modern technology suitable for theintended training, (b) a sufficient number of prospective trainees in the clusterplants, 9) the lead plant's management and financial commitment to the RTCconcept and its operational cost, (d) indication of commitment from other clusterplants demanding relevant training and willingness to pay a reasonable fee, and(e) the lead plant's willingness to organize the training programs, includingselection of trainers from experienced operational personnel to ensure high-quality output in a demand-driven system. The training programs offered willfocus on skill areas such as computer operations, control-room operations,quality inspection, mechanical and electrical maintenance, electronic instrumen-tation, pollution control, and environmental protection. Programs wouldtypically be short term, varying from a few weeks to about six months, andcapacity would be 20-30 trainees at each center. Staff would include part-timeinstructors drawn from line positions in the plant, and short-term specializedconsultants. To provide professional support to all RTCs, a Program Coordinator(PC) (para. 5.18) would be appointed to assist in training needs analysis,program preparation and implementation, instructor training, development ofinstruction methods, preparation of training equipment and learning packages,design of evaluation models in relation to job performance, etc. As part of thetraining program, about 40 trainers would be selected from the lead plants toreceive training abroad during the first year of project implementation.

4.13 The lead plants of the selected RTCs have adequate buildings,including classroom and resident facilities, which need only minor modificationswith their own resources. J-K Synthetic has made a commitment to construct a

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new building for training purposes with its own resources. Project financingwould be provided for training equipment, learning packages, instructor trainingin India and abroad, technical assistance for preparation of training programs,courses and syllabi, and additional specialists from qualified domestic andinternational sources. The detailed description of this component is presentedin the Project Files. The total cost of this component is estimated at about$10 million, and its organizational and implementation arrangements are discussedin Section V (paras. 5.16-5.20).

technical A pistance Component (TA)

4.14 This component includes the following studies and technical assistanceprograms: (a) Study of the General Environmental Status and Pollution Control.Measures for the Cement Industry; (b) Technical Assistance to the Pilot BulkCement Transport Component; (c) Feasibility Study for Bulk Cement Transport byCoastal Shipping; (d) Study for Mini-Cement Development Strategy; (e) FeasibilityStudy for Setting Up Coal Washery for the Cement Industry; and (f) FeasibilityStudy for Use of Lignite for the Cement Industry. The specific objectives, scopeand descriptions of the studies and programs are present in Annex 4. Draft TORshave been discussed with DCCI and are included in the project file. DCCI hasagreed to carry out the studies in accordance with TOR acceptable to the Bankand will discuss the results and follow-up actions of the studies with the Bankduring project implementation.

C. Environmental Aspects of the Prolect

4.15 Environmental concern has been important in the formulation of theproject. Several components provide significant environmental benefits, suchas (a) the TISCO cement plant project, which will turn large quantities of slag,a waste product, into slag cement, thereby alleviating a serious solid-wastedisposal problem at the TISCO steel complex. A similar project concept has beendiscussed with the Steel Authority of India regarding their Bokaro slag cementplant project, which is under preparation; (b) the bulk-cement transportationcomponent, which would significantly reduce air pollution associated withbagging at loading sites, seepage of cement, bags broken during handling andtransportation of cement bags, improve working conditions for cement loaders,and improve traffic conditions in Bombay; (c) a comprehensive Study for GeneralEnvironmental Status and Pollution Control Measures for the Cement Industry,which would provide sectorwide environmental data as inputs for DCCI and othergovernment authorities in the formulation of the cement industry developmentstrategy; and (d) training of environmental professionals and operators ofpollution control equipment, as a part of the human resource development programsunder the project-financed RTCs.

4.16 The Indian cement industry was classified as a polluting industryby the 1985 Environmental Guidelines for Siting of Industry. Standardized reviewand clearance procedures have to be followed in accordance with the EnvironmentalClearance of Industry License (1984). Progress in the environmental performanceof the industry (para. 3.12) has demonstrated GOI's commitment to environmentalissues. For cement-plant projects, environmental clearance by the stategovernment is required before GOI issues a Letter of Intent for IndustrialLicense. The state government, while giving environment clearance, stipulatesenvironmental protection requirements and requires, if necessary, that a

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comprehensive environmental impact assessment (EIA) be completed before projectimplementation. Additional safeguards take effect when the Letter of Intent isconverted into an Industrial License. The state's pollution control board mustcertify that the installed equipment is appropriate and adequate and that thecement plant will meet environmental protection requirements. For projectsinvolving opening new quarries within forest resserves, approval by appropriatecentral government departments is required. The four major subprojects underthe IMR component have already obtained Letters of Intent. No major adverseenvironmental impact has been identified, but a comprehensive EIA is beingcarried out for each to identify potential negative environmental impact.

4.17 The principal form of pollution from cement plants is nonhazardousparticulates entreined in combwstion and ventilation gases. The source emissionsare kiln-gas discharge, cooling-air discharge from the clinker cooler, gasdischarge from slag driers, and discharge of mill vent air. This type ofpollution is abated through the use of electrostatic precipitators and filterbaghouses. Another type of particulate emission is fugitive dust, i.e., airbornedust from material handling, storage, and reclaiming, and from road traffic.That type of pollution is abated by baghouses at material transfer points, byenclosing conveyors and storage areas, and by wetting down roads. Otheremissions are S02 and NO, gases from combustion. Only minor amounts of thesegases are emitted, and all subprojects would comply with internationallyacceptable practices. There are no liquid emissions from a cement plant exceptsewage from residential areas. Water runoff from plant and quarry sites willbe contained by proper design. Standard environmental precautions for miningoperations will be applied at the quarry, and extensive tree planting is beingplanned by subproject sponsors in connection with reclamation. Cement plantsalso emit noise, particularly from grinding mills, compressors, etc. Disse-mination to the outside of such noise will be prevented by enclosing the noisyprocess units, and by mufflers. The planned tree plantings will provideadditional noise shielding. Operating personnel will be provided with protectivedevices. Two of the four major cement plant subprojects include the installationof an additional production line to existing plants, with existing quarriesmeeting projected future demand. There will be no change in use of land adjacentto the sites. The other two major cement plant subprojects are new plants, butnone of the plants or quarries will be located in sensitive areas such as forestsor valuable agricultural land. One subproject (JP-ASSAI), will be in an areaof dense vegetation, thick scrub, scattered trees and no agriculture (only sevencottages in the immediate neighborhood). Tne other (TISCO's Sonadi) will belocated in a sparsely populated rural area used for seasonal paddy crops andgrazing. The site for the bulk cement component is in an industrial area, andthe processing equipment will be provided with dust collection equipment meetinginternational emission standards. India has environmental protection standardsthat are in general less stringent than those of developed countries, but arein line with or more stringent than those of most of the developing countries.Since emissions of particulates is the dominant pollutant from cement plants,applying more stringent standards for particulate source emission to some majorBank financed subprojects would provie application of advanced technology anddemonstrative benefits. However, subprojects to upgrade existing cement plantsto meet Indian particulate emission standards should also be encouraged. Forother minor emissions pollutants, meeting Indian standards would generally beconsistent with internationally accepted practices in cement industry.

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4.18 Major Subproiects. Four major subprojects, TISCO, ACC, CenturyMaihar and JP-Assam, constitute about 80 percent of the proposed loan. Theappraisal mission met with subproject sponsors and their consultants anddiscussed options and measures to minimize potential environmental impacts ofthe projects. The following understandings were reached: (a) the abovesubproject sponsors agreed to design electrostatic precipitators for a sourceemission standard of 100 mg/norm cubic meter (nm3) or less for particulates andfor all filter baghouses of 60 mg/nm3 and to include in the design standardprecautions for prevention of fugitive dust. The source emission agreed is Inline with that of the developed countries and more stringent than the currentIndian Emission Standards of 150 mg/J3 for protec.ted areas and 250 mg/nm3 forother areas where most of the cement plants are locared; (b) the above subprojectsponsors agreed to prepare a comprehensive EIA report in the scope agreed withthe appraisal mission (Annex 5). To facilitate monitoring of the environmentalassessment of each subproject, a preliminary EIA would be submitted to the Bank;and, (c) all subproject sponsors also agreed to take whatever actions arerequired to assure environmental compliance according to the EIA reports.

4.19 Role of IDBI and ICICI. The proposed Bank financing of the IMR andPBCT components will be through a line of credit to IDBI and ICICI (para. 4.23),and IDBI and ICICI will be responsible for appraising all subprojects includingenvironmental impacts. The following agreements were reached with IDBI andICICI: IDBI and ICICI (a) would seek formal assurance from the four majorsubproject sponsors to implement the environmental protection measures promised(para. 4.18); (b) would ensure during subproject appraisal that design andequipment specifications of all subprojects will meet Indian environmentalprotection standards; (c) would use external consultants for reviewingenvironment impact assessment if expertise is not available in-house, and(d) stipulate adequate subloan covenants to ensure remedy measures identifiedby EIAs.

4.20 Bank Reviev. Since the loan is primarily a line of credit operation,and subprojects are at different stages of preparation, the following review andfollow-up procedure is set up to ensure adequate EIA for the project:

(a) The appraisal staff have received and reviewed preliminary EIAreports for the four largest subprojects (which account for80 percent of the loan). The review confirmed that the preliminaryEIA reports are of good quality and identified no major adverseimpact that had not been remedied with planned actions. Thesepreliminary EIA reports and the review by appraisal staff areavailable in the project file.

(b) Any subprojects above $20 million will be subject to Bank reviewprior to subloan approval (para. 4.25), and the EIA submitted alongwith IDBI/ICICI appraisal report must be acceptable to the Bankbefore the Bank formally commits its financing to a subproject. Thescope of the ETA has been outlined in Annex 5.

(c) During supervision, the Bank would follow up the agreed understandingand actions for environmental protection to ensure actual implementa-tion.

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D. oilcet Cost and Financing Plan

4.21 The total cost of the project is estimated t.o be about $736 million,of which about $110 million is foreign exchange. The project cost estimate ispresented in Table 4.1, and the financing plan is presented in Table 4.2. Nocontingencies have been calculated for the IMR and PBCT components because theyform part of the line of credit facility (para. 4.23). In the event of escala-tion in the average cost of subprojects, the number of additional subprojectswould be reduced.

Table 4.1: Project Cost Estimate

Local Foreign total Local Foreign Total........ Rs. million ......... $ million.

Industry Hodernization 9945 1530 11475 585.0 °0.0 675.0and Restructuring

Pilot Bulk Cement Transp. 637 213 850 37.5 12.5 50.0Human Resource Development 60 110 170 3.5 6.5 10.0Technical Assistance 3 17 20 0.2 1.0 1.2

Total 10645 180 12515 626.2 110.0 736i.2

Table 4.2 ProJect_FinancinL Plan

hank DANIDA Industry thers Total................ .$ million.

Industry Modernization 273.0 0.0 235.0 167.0 a/ 675.0and RestructuringPilot Bulk Cement Transp. 25.0 0.0 16.0 9.0 v 50.0Human Resource Development 1.6 5.0 2.5 0.9 £/ 10.0Technical Assistance 0.4 0.8 0.0 0.0 1Q2

Total 30.0 5. 253.5 176.9 736.2…------------.--..-_- -.-.-...-.---..-.-...--- .-.....-----------..--------

A/ Loan from IDBI, ICICI and other financial institutions, and debenture issues.hv GOI contribution to the component.S/ GOI grant for cement industry training financed by the first Cement

Industry Project (ln. 2660-IN),

4.22 The proposed Bank loan of $300 million would finance about 41 percentof the total project cost. DANID& would be the major source of financing forthe HRD and TA components and would provide a grant of $5.8 million equivalentto finance about 52 percent of project cost for the HDR and TA components. Forthe DNR component, the Bank loan of $273 million would finance about 40 percentof the cost of subprojects; the balance would be provided by equity and internalcash generation (35 percent), loans from the DFIs and debenture issues

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(25 percent). For the PBCT component, the Bank would finance the special bulkcement wagons and other equipment, estimated at about $25 million (50 percent),the participating cement companies would finance $16 million (32 percent), andGOI would finance $9 million as share capital to the joint stock company or assoft loans. The HDR component would be financed as follows: $5.0 million fromDANIDA as a bilateral grant; $1.6 million from the proposed Bank loan, $900,000from the remaining balance of the GOT grant for manpower training financed bythe first Cement Industry Project (Ln. 2660-IN), and $2.5 million by the par-ticipating lead plants which would also provide all recurrent cos.t of the RTCs.For the TA component, the Bank loan of $400,000, combined with the DANIDA grantof $800,000 would finance the entire component cost of $1.2 million.

E. The Pro_osed Loan

4.23 The Bank loan of $300 million would be made to GOI at the Bank'sstandard variable interest rate repayable on standard country terms of 20 yearsincluding 5 years of grace. GOI would pass on the proceeds of the loan asfollows:

Part A: GOI would relend $298 million of the loan proceeds as a line ofcredit to IDBI and ICICI in equal proportions, to finance partof the IhR and PBCT components.

Part B: GOI would provide $1.6 million of the loan proceeds as budgetallocations through DCCI to finance part of the IIRD component.

Part C: GOI would provide $400,000 of the loan proceeds as budgetaryallocations to DCCI to finance part of the TA component.

4.24 Part . The $298 million line of credit from GOI to IDBI and ICICIwould be lent in rupees with an interest rate of 12 percent p.a. and withrepayment over 20 years including a grace period of 5 years. This interest rateis in line with the cost of alternative sources of rupee funds to the financialinstitutions. Since IDBI and ICICI would share financing for major subprojectsin a 1:1 ratio, as they did in the First Cement Industry project, they wouldreceive the Bank loan proceeds in equal proportions. Based on the experienceof the First Cement Project, a large portion of the contracts under thiscomponent would be won by domestic suppliers following international competitivebidding (ICB) procedures. GOI wou'ld bear the foreign exchange and interestrisks. IDBI and ICICI would on-lend the proceeds of the loan to subborrowers atthe DFIs term lending rate, presently 14 percent. This rate is highly positive,given the present and projected inflation rate of 8-9 percent, and is consistentwith the overall interest rate structure in India. The Government would reviewthe relending rates of the DFIs from time to time in relation to inflation andother domestic and international market conditions and adjust the relending ratesas necessary to ensure that the rates on new subloans remain positive in realterms, reflect market conditions and provide a reasonable spread to the DFIs.A Bank report on the financial sector was sent to the GOI in March 1990 and willprovide the basis for future discussion of financial-sector issues including

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interest rates (para 5.06). Since the interest rates under this project areconsistent with the DFIs' overall term lending structure, and the Bank loan wouldfinance only a portion of the DFI's much larger lending to the cement industry,the proposed Bank loan to this subsector would not create any distortionaryresource flows. The project would, however, improve the overall subsectorenvironment within which lending to the cement industry is taking place throughcontinued improvements in policy and technical support provided to the financialinstitutions and the cement companies. Signing of subsidiary loan agreementsacceptable to the Bank between GOI and IDBI and ICICI would be a condition ofeffectiveness of the proposed Bank loan.

4.25 Agreement has been reached with IDBI and ICICI that all subprojectswould satisfy the following criteria: (a) they would be appraised by either IDBIor ICICI with detailed analysis to demonstrate a minimum economic rate of returnof 12 percent and a minimum financial rate of return of 15 percent, (b) thesponsoring enterprise should have an acceptable capital structure such that withthe new loan the debt:equity ratio of the enterprise would not normally exceed2.5:1, and (c) the subproject would be equipped to meet the Indian environmentalprotection standards and are acceptable to the Bank. Clearance by theappropriate state pollution control board is a condition of subproject appraisal.Completion of an environmental impact assessment report by a subborrower is acondition for the subloan disbursement. For subprojects appraised at over$20 million and/or located in forest or other environmentally sensitive areas,a comprehensive EIA as outlined in Annex 5 would be prepared and completed beforeproject implementation. The Bank's prior approval would be required forsubprojects appraised above $20 million. Five subprojects representing more than90 percent of the loan are expected to exceed this limit. On-lending terms wouldnot exceed 15 years including a maximum grace period of 5 years.

4.26 Part . GOI would pass on, ac grants, part of the proceeds of theBank loan as budgetary allocations through DCCI to finance part of the trainingprograms under the HRD component

4.27 Part C. GOI would pass on part of the proceeds of the Bank loanas budgetary allocations to DCCI to finance part of the TA component.

F. Procurement

4.28 Table 4.3 shows the estimated amounts by categories to be procuredby different methods. Procurement from the loan proceeds under Part of theloan would follow the following procedures: any procurement package forequipment and spares exceeding $8 million equivalent to be financed out of theproceeds of the loan would follow ICB procedures in accordance with guidelines.For the purpose of bid comparison under ICB, local suppliers would receive a15 percent price preference or the level of customs duties, whichever is lower.For packages less than 68 million financed by the Bank, ICB procedure would beencouraged, but commercial practices in accordance with the two financialinstitutions' procedures which have been used in previous Bank projects areacceptable to the Bank. The DFIs require their borrowers to solicit at leastthree competitive and responsive quotations for all contracts. Based on advanced

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procurement action and the experience of the First Cement Project, about$270 million (90 percent) of the Bank loan is expected to be procured under ICBprocedures. ICB packages would be determined at the subproject appraisal stageby IDBI and ICICI. Prior Bank review will be required for ICB packages above$8 million. For other ICB packages, records will be maintained by thesubborrowers and submitted for review upon Bank request. Random selection ofprojects for ex-post review will also be carried out as part of supervision.For large and complex subprojects, preparation of procurement packages requiressignificantlead time. Advanced procurement action has been initiated for threesubprojects ($180 million of the loan). All advanced procurement will followICB procedures. No advanced contracting nor retroactive financing is expected.For any service to be financed out of the Bank loan, consultant selectionprocedures under the Bank's Guidelines for use of Consultant would be followed.For civil works where Bank financing is not used, commercial practice of thesubproject sponsors would be followed.

Table 4.3 Procurement Arrangement(Million $)

CommercialNA Ia Practices kor La Tota l

Equipment & Educational 270 115 3 388Materials (Bank) (270) (27) (2) (299)

Service, Trainingand Consultants 0 0 5 5

(Bank) (0) (0) (1) (1)

Civil Works 0 343 0 343(Bank) (0) (0) (0) (0)

Total: 270 458 8 736(Bank) (270) (27) (3) (300)

/a International Competitive Bidding for goods.A> Commercial Practices of IDBI/ICICI will be followed for equipment,

commercial practices of the subborrowers will be applicable for civilworks.

/ Consultants selected according to Bank procedures, shopping from atleast three competing suppliers, and DANIDA procurement procedures forDANIDA-financed goods and services.

4.29 Procurement financed by Part B of the Bank loan would follow thefollowing procedures: (a) Equipment and Educational Materials. ICB procedureswill be followed for all contracts estimated to cost $200,000 equivalent ormore. For other contracts, procurement will follow local shopping proceduresinvolving solicitation and comparison of at least three competitive price quota-tions. (b) Consultant and Services. Selection will follow the Bank's Guidelines

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for the 'Use of Consultants. (c) Bank Review. Draft bidding documents, masterequipment lists indicating cost estimates, and bid evaluations and awards wouldbe subject to Bank review for contracts of $200,000 or more. For Part C of theLoan, the Bank's Gu'delines for Use of Consultants would bB followed.

G. Disbursoment

4.30 For Part A of the loan, upon receiving satisfactory documentation,the Bank loan would be disbursed for: (a) 100 percent of the CIF price forimported equipment and spares, (b) 100 percent of the total cost for consultantand training, (c) 100 percent of the ex-factory price of domestic equipment andspares, and (d) 80 percent of other equipment and spares procured locally. ForPart B of the loan, disbursement of funds provided by the Bank would be madeagainst the following categories of expenditures: (a) 100 percent of the costof consultant and other services; (b) 100 percent of the CIF price of importedequipment, training packages and educational materials; (c) 100 percent of theex-factory price of local equipment, training packages and educational materials;and (d) 80 percent of other equipment, training packages and educationalmaterials procured locally. For Part C of the project, the Bank loan would bedisbursed for 100 percent of consultant costs.

4.31 For Part A of the loan, disbursement for any contract for goods lessthan $3 million and any contract for consultant and training less than $200,000would use statements of expenditure (SOEs), while disbursement for othercontracts would be fully documented in accordance with the Bank's disbursementprocedures. For Part B and Part C of the loan, disbursement for any contractbelow $200,000 would use SOEs, while disbursement for other contracts would befully documented.

4.32 The proposed loan is expected to be disbursed over six years. Theproject completion date is December 31, 1995 and the closing date of the loanis June 30, 1996. The disbursement schedule and disbursement projection arepresented in Annex 6. The disbursement projection is similar to the observedperformance for Bank-financed industrial projects in India. To facilitatedisbursement, one special account will be established for an authorizedallocation of $16 million, which is the estimated average disbursement over fourmonths. After effectiveness of the loan, the borrower would request the Bankto deposit into the Special Account the stated amount as a revolving fund. TheBank would replenish the Special Account on the basis of requests for reimburse-ment on a quarterly basis or whenev-er the amount used reached 50 percent of theinitial deposit. Reimbursement for all contracts using the SOE method would bedone through the Special Account.

H. Reporting and Audits

4.33 For Part of the loan, IDBI and ICICI would submit to the Banksemiannual progress reports on sanctions, commitments, disbursement, collections,and arrears under the component, for the institution's cement portfolio and forthe institution as a whole. IDBI and ICICI would also submit financial

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statements in conformity with the Bank's standard reporting requirements,including the submission of audited financial statements, prepared by independentauditors acceptable to the Bank, within four months of the close of eachfinancial year. For subprojects above $20 million, IDBI and ICICI would requirethe subproject sponsors to prepare semiannual progress reports which would alsobe summitted to the Bank. These progress reports should include projectimplementation, schedule (planned vs. actural), procurement (including fullstatus of ICB), disbursement, updated cost estimates, updated production costand ex-factory realizations, and a smmmary of the financial status of thecompany. After full disbursement of a subproject above $20 million, the leadfinancial institution would prepare a subproject completion report, comparingactual vs. projected costs and benefits. For Part B of the loan, each selectedRTC would submit semi-annual progress reports to the Bank. Operational auditreports covering experience and results under the HRD and TA components wouldbe prepared by GOI within six months of the completion of these components.

4.34 Supporting documentation under statements of expenditure (SOEs)would be retained by GOI and would be subject to review by the Bank and toannual audit by auditors acceptable to the Bank. The audit would be submittedwithin four months after the close of each financial year.

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V. IMPLEMENTATION ARRANGEMENTS. PRTICIPATING ORGANIZATIONS.

AND PROJECT BENEITS AND RISKS

A. Office of Develoment Commissioner for Cement Industrv (DCCI)

5.01 DCCI will be the coordinating agency for the proposed project. Aspart of the Ministry of Industry (MOI), DCCI was established to replace theCement Controller's Office, whose main functioa to administer the price fixingand freight equalization was eliminated. DCCI's present functions are focusedon the development issues of the cement industry.

5.02 DCCI regards the project as an integral part of the subsectorstrategy for restructuring the cement industry. First, DCCI would, duringproject implementation, discuss with the Bank the implementation of therestructuring strategy for the cement industry, including its consideration forimplementation of the Cement Industry Modernization Plan for the Wet ProcessPlants (para. 3.04). Second, DCCI would coordinate with various centralgovernment departments, state governments and other agencies to ensure adequateinfrastructure support and input supplies, particularly for coal, power supplyand railway wagons, for the project as well as for the industry as a whole.Third, DCCI regards human resource development as a high priority for the cementindustry and would help organize and chair a Steering Committee for the HRDcomponent (para. 5.19). DCCI would be assisted by a Program Coordinator tocoordinate this component (para. 5.18). Fourth, DCCI would continue to providesupport for the development and implementation of the PBCT Component(para. 4.11). And finally, DCCI would also be responsible for implementationof the TA component. This implementation would include responsibilities forinviting, entering into contracts with, and supervising consultants to carry outvarious studies in accordance with terms of references acceptable to the Bank,and discussing the results and follow-up actions of the studies with the Bank(para. 4.14). DCCI has its own staff specialized in policy analysis and iscapable of implementing the TA component.

B. PartLiciatinj Financial Institutions

The Financial Sector "1

5.03 India has a deep and complex financial system which boasts a largenumber and variety of institutions and instruments. It ranks in the top quarteramong developing countries by most measures of financial sector size. Itsevolution in the past 20 years has been unique. At the end of June 1969, theGovernment launched "social banking," an approach that sought to use banks andother financial institutions to achieve several development objectives. Thebanks increased their branch network dramatically, and the Government set

11 The World Bank Report, India: Credit and Capital Markets StudX (No. 6661-IN,February 27, 1987) provides a comprehenslve analysis of the Indian FinancialSector.

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interest rates to attract deposits. Many of the original objectives of socialbanking have been achieved. Resource mobilization has been a notable success.National saving rates were in the 22-24 percent range in the 1980s, with averagehouseholds saving at a rate of 15-17 percent. Household savings have been risingand passing increasingly through the formal financial sector since the 1970s.In addition to bank deposits, there are substantial post-office savings and awide choice of other forms for saving including one of the largest capitalmarkets in the developing world. Maintenance of reasonable, slightly positive,real interest rates for deposits, less than double-digit inflation, and thespread of banking offices (which have grown from about 8,300 in 1969 to over55,000) have been important factors in resource mobilization. The financialsector is dominated by the banking svstem, which as of June 1988 had total assetsof over Rs. 1,420 billion, of which 91 percent was accounted for by the 20public-sector banks and the rest by the 28 private Indian banks and 30 foreignbanki.

5.04 Although Indian interest rates are, for the most part, not linkedto the international market, the distortions are not major. Both deposit andlending rates are positive in real terms, the dispersion of interest rates isnot excessive, and financial institutions are being given greater flexibilityto adjust their rates. Over the past few years, GOI has depreciated the rupeerapidly to maintain the competitiveness of exports and restrain import growth.Most interest rates in India have not yet fully adjusted to this new situation,in large part because the Indian Government has been very cautious about raisingthe already substantially positive lending rates and dampening the growth of thedomestic economy. Over time, it is reasonable to expect greater convergence ofmost domestic rates with international market rates as the rate of rupeedepreciation slows and domestic lending rates are gradually raised to reflecta more outward-looking development strategy.

5.05 The notable achievements of the Indian financial sector have beenaccompanied by some striking shortcomings. The system faces two main problems:the level of directed investments and targeted credit at subsidized interestrates is becoming unsustainable, and the profitability of commercial banks hasdeclined. Banks must place 53 percent of their deposits with RBI or ingovernment paper to comply with cash reserve and statutory liquidityrequirements. They jumt break even on these investments in spite of the higherinterest rates paid by the Government in recent years. In addition, banks arealso required to lend another 20 percent of their deposits to priority sectorsat subsidized interest rates. All of this targeted credit is cross-subsidizedby the banks' commercial lending, based on their remaining deposits. Theprofitability of the commercial banks has been adversely affected both bynarrowing average spreads and collection problems. While there is littlecompetition among these institutions, they face a growing challenge from moneyand capital markets.

5.06 The Bank has just completed a financial sector report highlightingthese findings. This report will be discussed with the Government with a viewto establishing an ongoing dialogue. Continuing policy discussions aboutfinancial policies and financial institutions will be the basis for future Bankloans to the financial sector.

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5.07 The industrial development finance system comprises national andstate development banks and financial institutions. At the national level, thepredominate financial institutions are IDBI, ICICI, and the Industrial FinanceCorporation of India (IFCI). These institutions sell financial assets directlyto the public, raise resources from banks, the domestic capital market, bilateraland multinational sources, and borrow from abroad. IDBI and ICICI have beensuccessful in maintaining stable profitability and adequate liquidity andpioneered innovations in financial products. For the cement industry, DFIs arethe major source of financing for investment projects. The Bank's subsectorlending to the financial institutions constitutes a small share of the totalresources available to them, and the relending rates for Bank funds areconsistent with overall DFI interest rates. The risk of causing an allocativedistortion through subsector lending is quite small, and it is more than balancedby the catalytic role the Bank plays in helping improve the efficiency ofspecific subsectors through the kinds of restructuring projects and measurescontained in these subsector operations.

Industrial DeveloRment Bank of India (IDBI)

5.08 IDBI was established in 1964 as a wholly owned subsidiary of RBI andis now fully owned by GOI. As the lead institution for industrial investmentfinance, IDBI operates as a direct lender and as an apex refinance institutionfor the state financial institutions and commercial banks in their investmentlending operations. Its importance as a direct lender is demonstrated by thefact that it accounted for about 39 percent of total industrial investmentlending by the all-India and state-level financial institutions in FY88. Itspromotional role covers a wide range of activities at the national level and,through specialized institutions, at the local level. These activities aim todevelop both sound industrial investments and financial practices and includeindustry potential surveys, entrepreneurship development programs, consultancyand advisory services, and expanded development banking training programs.

5.09 IDBI's financial assistance to the industrial sector, which amountsto about Rs. 50 billion ($3 billion) p.a., is carried out through three basictypes of operations. First is direct finance in the form of loans, underwriting,direct capital subscriptions or guarantees, available to projects costing atleast Rs. 50 million. Direct finance accounts for about 44 percent of IDBI'sportfolio. Second is refinanced loans (37 percent of IDBI's portfolio), whichare originated as loans to small- and medium-sized businesses by state-levelinstitutions and banks which bear the risk on these operations. Third isrediscounted bills (19 percent of portfolio) covering sale of machinery, financedby banks on a deferred payment basis and bearing corresponding bank guarantees.IDBI's assets have tripled in the last 5 years, from Rs. 64 billion in FY85 toRs. 171 billion in FY89. Net profit over assets has been maintained at asatisfactory level of 1.5 percent over this period.

5.10 IDBI mobilizes large amounts of resources from equity contributionsfrom GOI, RBI borrowings, bond issues, internal generation and foreign-exchangeborrowing. The cost of borrowing for rupee bonds, which accounted for 44 percentof external resources, has risen gradually from 7 percent in the late 1970s to11.5 percent today. The weighted average cost of domestic funds for IDBI hasconsequently increased from 6.8 percent in 1983 to 7.5 percent in 1987 and8.1 percent in 1989. In spite of the increase in cost of borrowing, the basic

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iuterest rate on term lending has remained unchanged at 14 percent, resultingin a squeeze on the interest spread. The full effect of the squeeze on operatingmargins has yet to show up in the profit statements, as the greater portion ofIDBI's portfolio is still supported by earlier bond issues and RBI borrowings.However, there is a need to give DFIs greater flexibility in setting theirlending rates, and the Government is presently considering this matter. Facinga more challenging environtment, IDBI has begun to strengthen its collectionefforts and to protect the quality of its portfolio. The collection performanceof refinanced loans and discounted bills has been good, since state financialinstitutions and commercial banks have always met their guarantee liability onthese operations. For the direct lending portfolio, where the collection ratiowas traditionally low, IDBI has begun to implement its new strategy to improveportfolio quality and to increase its collection ratio: (a) it has providedadequate provision for doubtful loans; and (b) it initiated its new collectionstrategy in 1987 in conjunction with the Industrial Finance and TechnicalAssistance project (Ln. 2928-IN) and has already achieved the targeted increasein its collection ratio. The institution's collect-.on ratio before reschedulinghas increased from 85 percent to 87 percent. IDBI has become increasinglycommercial in its project selection and appraisal, and has recently strengthenedits restructuring operations, as one of the operating agencies under BIFR, torestructure sick and potentially sick companies.

5.11 Up to June 1987, IDBI had assisted 231 cement projects, of which 99were direct financing to the cement industry and the rest were through refinanc-ing schemes with state-level financial institutions. In spite of the relativelysmall number, the direct financing portfolio constitutes more than 80 percentof IDBI's cement exposure because of the large size of projects. In FY89, IDBI'sannual sanctions to the cement industry were about Rs. 800 million, and cumula-tive sanctions to the industry at Rs. 15 billion formed about 5 percent ofanctions to all industries. IDBI has qualified and experienced professional

staff under a deputy general manager specialized in cement projects. They arefamiliar with the modern technology utilized in cement plants and are capableof evaluating feasibility studies by project sponsors and/or by their local andforeign consultants. Their experience in environmental assessment is recent andwill be complemented by the Bank's involvement. IDBI has a market researchdepartment and periodically analyzes cement demand and production. IDBI alsoplays an important role in advising the Government on policy for the cementindustry and is represented in the policy meetings at the Ministry of Industryfor the cement industry. IDBI, together with ICICI, has successfully implementedthe First Cement Industry Project (Lns. 2660-IN/2661-IN), and its subprojectappraisals are of good quality. In receiving Bank loan from the proposedproject, IDBI has agreed to maintain a debt: equity ratio of less than 12:1 anda debt service coverage ratio of at least 1.2:1.

Industrial Credit and Investment Corporation of India (ICICI)

5.12 ICICI, established in 1955 under private ownership to provide long-term finance to private industry, is now government controlled, with 81 percentpublic ownership. ICICI has developed into one of the country's major financialinstitutions and is the main provider of foreign-currency term loans to Indianfirms. The corporation offers a wide range of financial services, largely tothe private sector, and in recent years it has diversified into areas such asmerchant banking, leasing, instalment sales, venture capital and credit-rating

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services. In addition to its operational activities, ICICI also plays animportant developmental role. It advises the Government on industrial issues,carries out sector studies and develops new ideas and methods of improving thefinancial markets. ICICI is well managed and operates effectively under anexperienced 15-member board, with balanced representation from Government,public, and private industry. Organizationally, ICICI is divided into fiveadministrative groups: operations, planning, finance, financial services andadministration. The operations group, headed by a General Manager, isresponsible for lending including appraising new projects, supervising andmonitoring ongoing loans, and making collections. The proposed project will beimplemented by this group.

5.13 ICICI 's assistance to industry, which amounted to about Rs. 20.6 bil-lion in FY89, is through two broad areas of activity: project financing andfinancial services. In FY89, ICICI sanctioned about Rs. 16 billion for projectfinancing, with the following sectors receiving large portions of the assist-ance: fertilizer (11.2 percent), basic chemicals (8.7), other chemicals(13 percent), basic metal industry (9.6 percent), cement (7.2 percent) andtextiles (6.7 percent). Its financial service sanctions of Rs. 4.6 billioncovered deferred credit Rs. 2.7 billion, leasing Rs. 1.5 billion and installmentsales Rs. 0.4 billion. ICICI has had impressive growth during the past 5 years,and its assets increased from Rs. 17.6 billion in 1984 to Rs. 47.3 billion inFY89. Its profits increased from Rs. 300 million to Rs. 789 million, with asatisfactory return on assets of 1.6 percent.

5.14 Like IDBI, ICICI's future profitability is also likely to beaffected by the increase in the cost of borrowing. The weighted average costof ICICI's rupee borrowing is rising steadily, from 8.3 percent in FY86 to8.6 percent in and FY88 and 8.9 percent in FY89. In spite of the increase incost of borrowing, the basic interest rate on term lending has remained unchangedat 14 percent, resulting in a squeeze on interest spread. The full effect ofthe squeeze on operating margings has yet to appear in the profit statements asthe greater portion of ICICI's portfolio is still supported by earlier, lower-cost borrowings. However, there is a need to give DFIs greater flexibility insetting its lending rate. Facing a more challenging environment, ICICI has begunto strengthen its collection efforts and protect the quality of its portfolio.While its nonproject financing portfolio has an outstanding collection rate, thecollection ratio of the project portfolio has been weak, reflecting theincreasingly competitive environment in the industrial sector in a time ofliberalization. ICICI adopted a collection strategy in 1987 in conjunction withthe Industrial Finance and Technical Assistance Project and has strengthened itsportfolio management: (a) legal actions have been taken more promptly againstcompanies which have no chance to repay their loans, and adequate provisions weremade for these loans; (b) a rehabilitation program has been established for othernonperforming companies with necessary rescheduling packages. A substantialportion of these companies, which suffered losses due to the cyclical nature ofindustries has come out of the nonperforming category through the rehabilitationprogram; (c) collection efforts have been strengthened, and the collection ratioof the institution before rescheduling has been brought back from 84 percent to

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86 percent for the 12-month period ending September 1989; and (d) measures havealso been taken to tackle the "industrial sickness" as one of the operatingagencies under BIFR.

5.15 By the end of March 1989, ICICI had financed 217 cement projectswith a cumulative sanction of Rs. 6.73 billion, 8.5 percent of ICICI's totalcumulative sanction to all industries. Its annual sanction to the cementindustry increased from Rs. 648 million in FY85 to Rs. 1.1 billion in FY89.ICICI's present cement portfolio is Rs. 4.2 billion, which consists of 90 cementcompanies. Among the 90 cement companies included in its portfolio, ICICI isthe lead bank for 24. The institution has qualified and experienced professionalstaff specializing in cement projects. They are familiar with the moderntechnology utilized in cement plants and are capable of evaluating feasibilitystudies by project sponsors and/or by their local and foreign consultants.Their experience in environmental assessment is recent and will be complementedby the Bank's involvement. ICICI has a market research department andperiodically analyzes cement demand and productions. ICICI also plays animpartant role in advising the Gciernment policy for the cement industry. WithIDBI, ICICI successfully implemented the Firnt Cement Industry Project (Lns.2660/2661-IN), and its subproject appraisals are of good qtuality. In receivingBank loan from the proposed project, ICICI has agreed to maintain a debt-equityratio of less than 12:1 and a debt service coverage rati3 of at least 1.2:1.

C. Oreanizational ArranQements for the Human Resoure DeveloDment Component

5.16 A steering committee (SC) chaired by DCCI should be establishedto oversee implementation of this project component. The point of delivery oftraining is at the selected RTCs located at and managed by the respective leadplants. Although the RTCs assume full responsibility for implementationincluding procurement and training programs, a Proglram Coordinator (PC) wouldbe appointed to assist DCCI in technical support and project coordination.

5.17 Regional Training Centers (RTC). The selected RTCs (para. 4.12)would be established and operated according to the following operating guide-lines:

(a) The management responsibility of a RTC rests with the lead plant. Anexecutive committee (EC) chaired by a representative of the lead plantwould be established with the participation of major plants in the samecluster to provide guidance and consultation.

(b) The lead plant company will provide all agreed local capital cost forestablishing RTC and adequate funding to cover all recurrent costs foragreed training programs. The RTC would charge reasonable fees forproviding these programs to other participating cluster plants.

(c) RTC will guarantee a minimum number of trainees of 30 percent of theannual enrollment from other participating cluster plants, failing whichthe fee structure would be subject to review by the SC.

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(d) RTC, assisted by the PC, will prepare requests for financing ofequipment, learning packages, technical assistance and overseas trainingto be approved by SC.

(e) The lead plant company intends to continue operations of the RTC basedon cluster demand beyond the project period.

(f) each RTC will submit semiannual progress report to SC, DANIDA and theBank.

The operating guidelines have been discussed and agreed in principle with theselected RTCs and agreed with GOI during negotiations. To receive Bank funds,the lead plant's company of each RTC would enter a Memorandum of Understanding(MOU) acceptable to the Bank, with DCCI giving the assurance that the operatingguidelines will be followed.

5.18 Program Coordinator (PC). The PC would assist DCCI for coordina-tion of the component and would be hired by the Steering Committee on a full timebasis. The cost of the PC would be funded by the project. PC will help the RTCmobilize domestic and international technical resources, advise on trainingprograms and instructor training, and help with procurement when necessary. ThePC will have an informal international resources group, identified during projectpreparation, to provide consultation, training and other project inputs frominternational resources. During the negotiations, the terms of reference andqualifications of PC were agreed, and it was also agreed that the PC would beappointed by SC before December 31, 1990.

5.19 Steering Committee (SC). The SC would consist of representativesfrom Ministry of Industry, DCCI, CMA, National Vocational Training System,IDBI/ICICI, DANIDA and a senior executive from each lead plant. The SC wouldbe chaired by DCCI, and its main functions would be (a) to provide policyguidance for human resource development in the cement industry, and (b) tomonitor and oversee implementation of the training programs at RTCs. Based onthe SC's recommendation. -DCCI would enter a MOU, acceptable to the Bank, withthe lead plant's company of each RTC to ensure that the RTC receiving the Bankfunds will follow the agreed operating guidelines (para. 5.17).

5.20 The following actions by GOI would be conditions for disbursementof this component: (a) SC is established; and (b) the Financing Agreement withDANIDA for the HRD component is effective.

D. Project Benefits and Risks

5.21 Project Benefits. The project would add about 5 million tpyproduction capacity in cement-deficit regions, resulting in an improved regionalproduction structure that would bring significant savings in cement transport.Most of the savings would be passed to cement consumers as cement price reductionin the cement-deficit regions, which are among the poorest in the country. Theproject would support modernization and restructuring of existing cementcompanies, reduce energy and other production costs, and improve economic

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efficiency of operations. The project would support installation of pollutioncontrol equipment, ensure better environmental assessment of subprojects, andencourage productive use of slag, a waste product from steel plants, which mustbe disposed in an ecologically acceptable manner. The project would promote anappropriate blend of imported and domestic technology through ICB procurementand support development of an efficient domestic cement machinery manufacturingindustry. Financing the pilot bulk cement transport project would pave the wayfor significant efficiency improvement in the cement distribution system andpotential productivity increases in the construction industry resulting inimmense long-term economic benefits to the country. The project would alsofinance training programs for approximately 3,000-4,000 operating personnel inmuch-needed skill categories for both new plants and existing plants undermodernization. Finally, the project would allow the Bank to continue to playa role in policy, technical and institutional issues related to the restructuringof the industry.

5.22 Priject Risks. No unusual project risks have been identified forsubprojects in the proposed pipeline under the Industry Modernization and Restru-cturing component. Introducing a bulk cement transport system, which involvesthe development of a new marketing and distribution approach and many playerswith substantial investment, is inherently risky. Provision of limited baggingfacilities at the unloading terminal, phased implementation of the project, andthe provision of further DANIDA financed-technical assistance for market deve-lopment of bulk cement are measures that have been designed to minimize therisk. Implementation of Human Resource Development component is likely to beslow due to the innovative nature of the approach and the need to have groupsof cement plants join in a common effort. A Memorandum of Understanding signedbetween DCCI and the lead plant company of each RTC would provide assurances thatthe lead plant companies would commit their financial and managerial resourcesfor the training activities and that the RTCs would offer training services toother plants with suitable fees. DANIDA has also indicated that it would fi-nance consultants to assist implementation of this component.

44

VI. AGEUE=$. UNDERSANDINGS AND RECOMNEIDATION

A. A&reements and Understandings

6.01 During negotiations, the following agreements and understandings werereached with 001:

(a) with respect to Part A of the loan,

(i) GOI would pass $298 million of the Bank loan proceeds to IDBIand ICICI in equal proportions based on the agreed terms andconditions (para. 4.24); and

(ii) GOI would review the term lending rates of the DFIs from timeto time in relation to inflation and other domestic andinternational market conditions and adjust the rates asnecessary to ensure that the rates on new subloans will remainpositive in real terms, reflect market conditions and providea reasonable spread to the DFIs (para. 4.24).

(b) with respect to Part B of the loan,

(i) GOI would pass $1.6 million as budgetary allocations throughDCCI to finance part of HRD component (para. 4.26);

(ii) DCCI would enter into MOU acceptable to the Bank with selectedcement companies to establish RTCs (para. 4.12) and to financethe training programs in accordance with the agreed theoperational guidelines (paras. 5.17 and 5.19);

(iii) GOI would establish the Steering Committee (para. 5.19) tooversee-implementation of the HRD component; and

(iv) the Program Coordinator would be appointed by SC beforeDecember 31, 1990 to assist DCCI and RTCs in implementationand coordination (para. 5.18).

(c) with respect to Part C of the loan,

(i) GOI would pass $400,000 as budgetary allocations to DCCI tofinance part of the Technical Assistance component inaccordance with terms of reference acceptable to the Bank(para. 4.23); and

(ii) GOI would discuss results and follow-up actions of the assistedstudies with the Bank (paras. 4.14 and 5.02).

45

6.02 During negotiations, the following agreements and understandings werereached with IDBI and ICICI:

(a) financial covenants for IDBI (paras. 4.33 and 5.11) and ICICI(paras. 4.33 and 5.15);

(b) the eligibility criteria of subprojects (para. 4.25) and sponsoringcompanies (paras. 4.07 and 4.25), and subloan terms and conditions(paras. 4.24 and 4.25) to be financed out of the Bank loan proceeds;and

(c) environmental assessment requirements and review procedures(paras. 4.18, 4.19 and 4.20);

B. Conditions of Effectiveness and Disbursement

6.03 Signing of subsidiary loan agreements acceptable to the Bank betweenGOI and IDBI and ICCI! would be a condition of effectiveness of the proposedloan (para. 4.24)

6.04 The following events are conditions for disbursement for the HRDcomponent (para. 5.20):

(a) the Steering Committee (para. 5.19) is established; and

(b) Financing Agreement between GOI and DANIDA for co-financing the HRDcomponent is effective (para. 5.20 (b)).

C. Recommendatio

6.05 The proposed Cement Industry Restructuring Project constitutes asuitable basis for a Bank loan of $300 million to India at the Bank's standardvariable rate and terms of 20 years including 5 years of grace.

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Annex IPage 1

~INDIA


Input Cost Increases

March March PercentagePoscriptin m1982 1988 Increase

1. Wages at minimum level 887 1268 54(Rs/month)

2. Average price of coal 263 473 80(Rs/ton)

3 Railway freight on coal 132 251 90for average load of1,000 km. Trainloadclassification came intoeffect from 15.6.1982.(Rs/ton)

4. Power (Ps/Unit) 46 106 1305. Packing charges per 67 99 47

ton of cement(Rs/ton)

6. Central Excise on 135 215 59Cement (Rs/ton)

7. Railway freight on 90 153 70cement average leadof 500 km (Rs/ton)

Source: Cement Manufacturers Association

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Ann2x 2Page 1


Sha4aw P.-ices and Conversion Facters

1. For cement and traded inputs, import or export parity prices are usedas shadow prices; for nontraded goods, best estimates are mada to divide theminto tradeable and nontradeable components. The shadow prices for the non-tradeables are estimated by multiplying domestic prices with specificconversion factors or, in some cases, by removing indirect taxes from thedomestic sales price as an approximation. The following table summarizes theestimated conversion factors:

Table 1: Conversion Factors

AverageFinancial Economic Conversion

rice = Price Factor

Coal (Rs/ton) 800 623 0.78Power (Rs/kwh) 1.0 1.2 1.20Packing (Rs/ton of

cement) 100 70 0.70Raw Material 0.70Investment Cost 0.76Standard Conversion 0.80Labor & Overhead 0.80

2. Cement. India has been a net importer of cement in most of the 1980sbut it began to export in response to the surplus situation recently. Thecurrent FOR export price to Bangladesh is about $50/ton, which could be usedas a reference price when export option is considered. For discussion ofeconomic efficiency of domestic production vs. import option in the long run,the CIF prices of imported cement at Indian ports are still the most relevantreference value for the shadow price for cement. Based on available data ofthe CIF cement prices at Bangladesh and Sri Lanka, our best estimate for thelong-term cement import price would be about $50/ton at India's eastern coast.Transport will be adjusted to specific market to compare with specificdomestic production alternatives.

3. Cal. The average price of domestic coal delivered to the cementfactories is about Rs 800/ton including transport and handling costs ofRs 300/ton. The estimated ash content of this coal is about 35% and the netcalorific value is about 3,800 kcal/kg. The CIF price of imported coal is

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Annex 2Page 2

about $48/ton for coal with a calorific value of 6,800 kcal/kg. Assuming thetransport cost from a port to a typical cement plant is also about Rs 300/ton,the delivered cost of the imported coal would be Rs 1,116/ton. Afteradjusting the calorific value differences, the conversion factor for coal canbe estimated as 0.78.

4. Electricity. The cost of purchased electricity is about Rs 1.0/kwh,and the long-run marginal cost of electricity from the grid is reportedlylower. However, the power shortage for the cement industry suggests that theeconomic cost of power may be much higher. The higher cost is indicated asthe industry is willing to pay Rs 2.0/kwh to produce electricity from captivegeneration facilities. Currently, the industry produces about 15% of itspower requirement from captive power plants. Therefore, a somewhat arbitraryhigher conversion factor of 1.20 is assumed for purchased electricity.

5. Packaging Materials. Per the Ministry of Textiles' Order May 29, 1987and the Jute Packaging Materials Rule 1987, the cement industry is required topack 70% of total production in jute packaging material. If compulsory use ofJute bags is removed, the packaging cost can be reduced, according toestimates from cement manufacturers, from Rs 100/ton of cement to no more thanRn 70/ton.

6. Raw Materials. Limestone is the most important raw material. Based onavailable data from four cement plants, the total cost of limestone is aboutRn 40/ton, while royalties and taxes included are about Rs 12/ton. Therefore,the conversion factor for limestone, which can be roughly estimated as ratioof delivered cost excluding taxes and royalties over the delivered cost, iscalculated as 0.7. This conversion factor is applied for all raw material asan approximation.

7. Standard Conversion Factor. The standard conversion factor of 0.8 isassumed based on the current assessment of the value of the Indian rupeeagainst freely exchanged currencies.

8. Labor and Overheads. The standard conversion factor of 0.8 isassumed as the conversion factor for labor.

9. Capital Cost. Equipment, machinery and structural steel (EMS) costsaccount for about 50% of total project costs. Based on experience in theFirst Cement Project, imports (including indirect imports) account for about30% of the EKS. For imported goods, total duties and taxes are about 50% ofthe delivered cost under normal conditions. For domestic goods (which arecompetitive, as demonstrated in ICB procurement), an estimated conversionfactor of 0.8 is used to eliminate indirect taxes. For civil works and othercosts, the standard conversion factor would be applicable. Therefore, theconversion factor for capital cost is estimated as 0.76 as a weighted averageof conversion factors of major investment project components. The calculationfor this weighted average is shown in Table 2:

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Annex 2Page 3

Table 2: Calculation of Conversion Factor for Canital Cost

Financial Conversion Economic_Cost % Factors Cost %

Equipment & MachineryImported 15% 0.50 7.5%Domestic 30% 0.80 24.0%

Other Project Cost 55% 0.80 44.0%Total 100% 75.5%

10. The annualized capital cost can be calculated assuming that theeconomic life of a typical cement plant is 20 years and the cost of capital inIndia is 12%.

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Page 1


Prosection of Cement Production

1. Table 1 summarizes projected cement production from existing productioncapacities and capacity expansions already under implementation in September1989. The following assumptions are used in the projections: (a) capacities ofcement units that are closed and permanently suspended production are excluded;(b) according to DCCI information, capacity will increase 3.5 million tons inFY90 and 2.9 million tons in FY91; (c) assumption on capacity utilization rates:(i) non-sick, pre-82 units: 85%; (ii) sick units: 60%; and (iii) post-82 units:80% in FY90, 85% in FY91 and 90% beyond FY92, after their third year ofproduction.

Table 1: Proiecti-on of Cement ProductionBased on E_istinf Cancitv

(million tons)

87/88 88/89 89/90 90/91 91/92 92/93 93/94 94/95

Capacity (Act) (Est) ......... Projected.

Sick Units 5.4 5.0 5.0 5.0 5.0 5.0 5.0 5.0Other pre-82 Units 22.3 23.3 23.3 23.3 23.3 23.3 23.3 23.3Post-82 Units 24.2 27.1 29.1 31.4 33.4 33.4 33.4 33.4Mini Cement 3.2 3.6 4.2 5.0 5.0 5.0 5.0 5.0

total 55.1 59.0 61.4 64.7 66.7 66.7 66.7 66.7Utilization

Sick Units 52.7 60 60 60 60 60 60 60Other pre-82 Units 85.6 85 85 85 85 85 85 85Post-82 Units 63.9 71 78 83 87 89 90 90Mini Cement 56.4 60 60 60 60 60 60 60

_- --- .. . ... --- -- - - -- - -

total 71.1 75 78 80 82 83 84 84Production

Sick Units 2.9 3.0 3.0 3.0 3.0 3.0 3.0 3.0Other pre-82 Units 19.1 19.8 19.8 19.8 19.8 19.8 19.8 19.8Post-82 Units 15.5 19.2 22.6 25.9 29.1 29.7 30.0 30.0Mini Cement 1.8 2.2 2.4 3.0 3.0 3.0 3.0 3.0

total 39.2 44.2 47.8 51.7 54.9 55.5 55.8 55.8

Source: Staff estimate based on information from DCCI and ACC.

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Annas 3Page 2

2. Table 2 sumarizes the potential new capacities, based on project proposalsand loan applications received at IDBI and ICICI and other indication ofinvestment. The productions from these new projects are projected as 70%, 80%and 90% of the proposed installed capacity for the first, second and third yearsof operation, respectively. The incremental capacity increase from the smallermodernization projects is assumed to be distributed evenly in four regions andwould be commissioned during FY95. Although there are other projects underpreparation such as those in Himachal Predesh by Gajarat Ambuja, and joint-sectorprojects in Meghalaya and Bihar, it is unlikely that they will be in productionby 1994/95, considering major uncertainties in limestone survey and environmentalclearance.

Table 2. Potential Future Investment Projects

Ilncremental Expected timeProject Capacity (mtnR) Location for Commissioning

1. ACC-Gagal 1.3 Himachal End of 1992Modernization& Expansion

2. TISCO Slag 1.7 Bihar (1.4 mt) End of 1992Cement M.P (0.3 mt)

3. Kalyanpur 0.5 Bihar End of 19924. Hira Cement 0.4 Orissa Mid 19935. Maihar 1.0 North MP Mid 19936. Mangalam 0.5 Rajasthan Mid 19937. JP-Assam 1.0 Assam End of 19938. J.K. Synthetics 1.0 Rajasthan 19948. Smaller moderni- 2.4

zation projects

Source: staff estimates

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Annex Page 1

CMENT IXNDUSTRY RESTRUCTURING PROJECT

Technical Assistance Component (TA)

1. This component includes the following studies and technicalassistance programs:

2. Studs for General Environmental Status and Pollution ControlNeasure for the Cement Industry. As part of project preparation, a Danishteam consisting of six environmental specialists visited 16 cement plantslocated in Madhra Predesh and Kanatika to have a preliminary investigation ofenvironmental and occupational health problems. This visit concluded that acomprehensive study will be needed and is proposed to be financed under thisproject. The study would: (a) carry out in-depth study of four or fiverepresentative plants, new, old and mini, to identify current technical andoperational problems in the cement industry in meeting the current andpossibly increasing stringent environment control requirements and willrecommend options and technical assistance for improvement; (b) identifytraining needs of environmental professional and pollution control equipmentoperators. Special training programs would be designed and carried out at theselected RTCs during project implementation period; and (c) recommend optionsand inputs to DCCI and other government authorities in their formulation ofthe development strategy of the cement industry. The cost of the study isestimated as US$ 400,000 and would be financed by DANIDA. Draft terms ofreference of the study has been discussed with DCCI.

3. Technical Assistance to the Pilot Bulk Cement Transport Component.The technical assistance programs include: (a) exposure visit by projectsponsors to bulk cement installations abroad; and (b) financing internationalconsultants for bulk cement market development, particularly development ofready-mix concrete operations. The cost of the program is estimated at aboutUS$ 200,000 and is proposed for DANIDA financing. Draft terms of reference ofthe program has been discussed with DCCI.

4. IeAsibilitv Study for Bulk Cement ransport Based on CoastalMBiuL=ng. Shipping of cement in bulk/bags from coastal plants, such as thosein Gajarat, by sea in specially designed vessels could offer an alternativemode of transporting cement with savings in freight expense and also releaseof limited rail rolling stock. The objectives of this study is to explorefeasibility of alternative schemes and identify possible project concepts forimplementation. The estimated cost of the study is about US$ 200,000 and isproposed for DANIDA financing. Draft terms of reference of the study has beendiscussed with DCCI.

5. Stdfor Mini-Cement Development Strate&X. Growth of the minicement sector in India started in the 1970s and today it constitutes a smallportion of the cement industry (5%). Although the advantage of small plant

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Annex 4Page 2

lies primarily in its ability to capture a localized market when limestonedeposits nearby could not justify a larger plant, about 50% of current minicement capacity is located in Madhya Predesh and Andhra Predesh when largeplants are producing surplus cement. The mini cements which were exempt fromlevy obligations lost that advantage after decontrol, large number of them arein financial difficulties. Many mini cement plants also run into technicaland managerial problems due to lack of well trained professional staff. Therehas never been a comprehensive study on this sector which consists of close to150 plants all over the country. This proposed study would: (a) surveycurrent status of this sector; (b) study the technology employed and cementquality produced; (c) recommend policy and location options for developmentand restructuring of this sector; and (d) identify training needs andrecommend specialized training programs to be carried out at the selected RTCsduring project implementation period. The cost of the study is estimated asUS$ 150,000 and would be financed by the Bank loan proceeds. Draft terms ofreference of the study has been discussed with DCCI.

6. Feasibility St for Setting Un Coal Vasherv Or the CementIndustrZ. The purpose and justification of the study has been discussed inthe report Section III Para. 3.14. The study would: (a) identify and, to theextend possible quantify, the impacts of coal quality to cement quality,process efficiency and economic life of limestone deposits; (b) studytechnical options and feasibility of the coal washing for cement industry; and(c) propose organizational arrangements and project proposals for setting coalwasheries for the cement industry. The estimated cost of the study is aboutUS$150,000 and is proposed to be financed from the Bank loan proceeds. Draftterms of reference for the study has been discussed with DCCI.

7. Feasibilitv Study for Use of Lignite for the Cement Industry. TheIndian cement industry relies on bituminous coal as fuel for its cement kilns.The Indian coal has high ash content which negatively affects kilnperformance, cement quality and economical life of the limestone deposits.DCCI desires to commission a study on the use of lignite as kiln fuel in thoseareas of India where lignite can be made available on economic basis. Thestudy would examine factors affecting the use of lignite, including: lignitedeposits, transportation, operational consideration in the cement industry,and financial and economic analyses. The cost of the study is estimated asUS$ 100,000 and would be financed by the Bank loan. Draft terms of referencehas been discussed with DCCI.

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,IND

CENENT INDUSTRY RESTRUCTURING PROJECT

Guideline for Preparing Environmental Imnact Assessmentfor the Malor Cement Sub=roiects

I Prolect Descriition

1. The concerns here are the elements or features of the project - cementplant, colony, mine, transportation and other infrastructure which couldreasonably be expected to have an effect on the local environment, eithernatural or human. Consideration should be given to possible emissions (airand noise), solid and liquid waste discharges, land use, land disturbance,population changes, demands on local utilities, services and infrastructure.Any secondary effects resulting from the project should also be evaluated:road improvements/additions, rails, airfields, utility lines, substations,relocations, etc. Include any reclamation, mitigation, pollution control.

2. Specific elements to be included:

* Area disturbed - plant, colony, quarry(s), transport system,utilities, any ancillary facilities, relocationdevelopments. (include map and table)

* Production - Tons per year, project life

e Materials - limestone, fuel, additives, explosives, power,Required water. (table: quantity per annum, sources)

* Equipment - mining, transportation, processing, colony(include tables and specifically identify:emission control items, and emission producingitems)

* Air emissions - from mining, transforation and processingparticulate (primary and secondary pointsources) Sulfur dioxide, nitrous oxide, carbonmonoxide, etc.

- quantify levels expected with proposed emissioncontrols operating and inoperative, estimateoutage frequency and duration.

* Waste water - quantity and quality of storm water drainagedischarge from mine, plant and colony areas; waste water

treatment discharge; any other water discharge

* Solid wastes - type and amount per year

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Anu3g 5Page 2

Noise levels - plant, quarry, road traffic

transport - quarry to plant, plant to rail or market (tabletraffic showing number of trucks or railcars per day)

Workforce - quarry, plant, transport, colony, total colonypopulation; number in-migrated

Construction - workforce, source (local or outside), timeframe;element equipment, emissions, discharges,wastes.

Workplace standards

- Emission standards

Monitoring and reporting requirements

Enforcement responsibilities

11 EnvironAmental De-scri2tion

3. The local environment should be described in sufficient specificity anddetail that the reader can picture the site. This should provide an adequatebasis for impact identification, quantification and evaluation as tosignificance. The area to be covered and the detail will vary with theimportance of the resource (and the amount or severity of impact anticipated.This should be augmented with maps, tables, photos and references.

4. Items to be included:

Land - Topography - local relief, slopes, prominent features(Naps) geomorphology.

Soils - depth, type, characterVegetation - type and density; identify anysignificant habitat.Wildlife - endemic species (resident and migratory),any significant species (of special concern - suckas protected, etc.), populations indicate status ofstable, declining or increasing); include birds,amphibians, small and large mammals, and reptiles.

Water - Surface water - drainage, quantity, quality, uses.(Map) Identify any significant wetlands, water bodies, etc.

- Groundwater - depth, quantity, quality, uses,recharge, gradient.

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Amex 5Page 3

Climatology Temperature (maximum. minimum-seasonal variations),precipitation (range average, seasonal variation),wind (force, direction, frequency), cloud cover,humidity, (charts and windroses)

. Socio-economic Local population (distribution, density, ethnic),transport network, community services and facilities(type, adequacy), local government structures,community fabric (organizations), education, economy,any special problem (health, poverty, etc.)

Land use - Land uses in area, any special classifications or(Hap) restrictions, protected lands (parks, refuges, tribal

areas), areas of special concern (wetlands, wildlifehabitat), temporary or seasonal uses.

C cultural - Archeological, historic, religious sites.resources

III Project effects

5. Based on an analysis of all project activities the environmental effectson each environmental resource or element should be identified and quantifiedto the extent possible to determine type, severity, location and significance.Some of these will be temporary (duration of project), others will bepermanent (remaining after the project). Some will be cumulative, interactiveor synergistic. Note that both beneficial and negative effects should beidentified. Effects include loss, degradation, conflicts, changes (in use ortype), increases in demands on local infrastructure.

IV. Review and FWAlow-up

6. Preliminary environmental assessments were submitted by the four majorsubproject sponsors at the end of February, 1990. All four followed the scopeand guidelines outlined above and were professionally done. Since thePreliminary EIA reports were prepared within a very short time span, a memberof measurements and data were not yet available. However, these aspects wouldbe incorporated in the updated revisions of EIA reports. Based on the presentanalysis, none of the subproject seems to have any problems in attainingenvironmental compliance. Based on the consultant's review and analysis ofthe reports a letter addressed to the financial institutions and theindividual subproject sponsors is being drafted. Apart from addressingcritical areas within the individual subproject the letter also providesguidance for preparing adequate environmental assessment in areas which ingeneral appear to be weak, such as: operation and maintenance of pollutioncontrol equipment, enforcement of occupational health and safety procedures,use of indigenous species on reclaimed land, more sophisticated analysis of

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Annex 5Page 4

storm water management in order to prevent erosion and greater input ofexperienced biologists.

7. Update EIA reports would be prepared by all major subprojects,incorprating review comments by the Bank. The update EIA report of each majorsubproject would be submitted for Bank revlew along with IDBI/ICICI appraisalreport before the Bank formally commits its financing for the subproject. Theguidelines described and review comments are expected to provide necessaryguidance for the subproject sponsors to prepare adequate update EIA reports.

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Annex 6Page 1

INDIA - CEMENT INDUSTRY RESTRUCTURING PR0ECT

Eestimated Disbursement Schedule

Board Presentation: may 15, 1990Loan Signature: June 1, 1990Effectiveness: September 1, 1990

In Qtr % in Qtr Cum % Cum

In IBRD FY & Quarter Ending:FY91

September 30, 1990 5 1.7 5 1.7December 31, 1990 5 1.7 10 3.3March 31, 1991 5 1.7 15 5.0June 30, 1991 10 3.3 25 8.3

FY92September 30, 1991 20 6.7 45 15.0December 31, 1991 25 8.3 70 23.3March 31, 1992 30 10.0 100 33.3June 30, 1992 30 10.0 130 43.3





Closing Date: June 30, 1996

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Annex 6

Disbursement Schedule

(US Dollars)PercentageExpenditures

Amounts To be Financed

Part A

Equipment and Spares 297,000,000 100% CIF, foreign100% ex-factory, local80% of local expenditures

Consultants and Training 1,000,000 100%

Part B

Equipment and Educational 1,400,000 100% CIF, foreignMaterials 100% ex-factory, local

80% of local expendituresConsultants and Training 200,000 100%

Consultants under Part C 400,000 100%

TOTAL 300,000,000

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