India - Maharashtra Petrochemical Project

DocMtent of The World Bank FOR OFFICIL USE ONLY Report No. 14262 PERFORMANCE AUDIT REPORT INDIA MABARASUTRA PETROCHEMICAL PROJECT (LOAN 2505-IN) APRIL 4, 1995 Operations Evaluation Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Currency Equivalents Rs/US$ 1985 - 12.37 1986 - 12.6 1987 - 12.96 1988 - 13.92 1989 - 16.23 1990 - 17.50 1991 - 22.74 1992 - 25.92 1993 - 30.49 As of June 1994 - 31.37 List of Abbreviations and Acronyms BPCL Bharat Petroleum Corporation Ltd. C2/C3 Ethane/Propane EG Ethylene Glycol EIL Engineers India Ltd. EO Ethylene Oxide ERR Economic Rate of Return FCC Fluidized Catalytic Cracking FIB Foreign Investment Board FRR Financial Rate of Return GOI Government of India HAZOP Hazards and Operability HDPE High Density Polyethylene IPCL Indian Petrochemicals Corporation Ltd. ICG Internal Cash Generation LDP Low Density Polyethylene LLDPE Linear Low Density Polyethylene LPG Liquified Petroleum Gas MGCC Maharashtra Gas Cracker MPCB Maharashtra Pollution Control Board OGL Open General License ONGC Oil and Natural Gas Commission OSBL Off Site Battery Limit PIB Public Investment Board PP Polypropylene Fiscal Year April 1 - March 31 FOR OFFICIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.SA Ofo* of Dlreolor4eneral Oprlaons Evalulion April 4, 1995 MEMORANDUM TO TELEXEUTI1VE DIRECTORS AND THE PRESIENT SUBJECT: Performance Audit Report on India - Maharashtra Petrochemical Proiect (Loan 2505-IN) Attached is the Performance Audit Report on India - Maharashtra Petrochemical Project (Loan 2505-IN) prepared by the Operations Evaluation Department. Ibis project aimed at constructing a technologically modern, energy efficient, economic-sized petrochemical complex capable of producing olefins and other derivatives for the Indian market. The project was completed well below the estimated cost, but its commissionng was delayed because of the cumbersome clearance procedures, delay in the completion of the pipelines connecting it to the sources of raw material, delay in the construction of the gas separation unit at Uran, and, finally, an explosion in the feedstock receiving section in November 1990. It took until July/August 1991 for IPCL to restart the gas cracker and to bring into commercial operation all the other downstream units (except the LLDPE/HDPE plant still under construction) by the early part of 1992. With the commissioning and debugging of the LLDPE/HDPE plant, capacity utilization has now progressed beyond 90 per cent for most units in the complex. The delay in the completion of the project prevented the company from taking advantage of the better international prices for petrochemical commodities prevailing until 1990. The commissioning of the complex coincided not only with unprecedented weakness in the international markets, but also with the start of the liberalization measures in the Indian economy. As a result the complex sustained large financial losses until the end of fiscal year 1993/94. By mid 1994, however, a turn-around in international prices, combined with a high and sustained capacity utilization had brought a reversal in the financial performance. An expansion program currently underway is expected to further enhance the competitiveness of the complex. Given the intriisic competitiveness of the plant,-the improved market outlook and an estimated economic rate of return of 11.9 percent, the outcome of this project is rated as satisfactory. Moreover, in view of IPCL's demonstrated capability in conducting its operations efficiently, the sustainability of this project is rated as likely. The institutional impact of the project has been substantial. Attachment is documae has a strd diwbution an my be ued by cipients only in h pef of their offO ucial du. hs cosams . my no odhewiss be discloed without world Bank authorization. •m. FOR OFFICIAL USE ONLY Contents PREFACE .............................................. 3 BASIC DATA SHEET............................................ 5 EVALUATION SUMMARY ........................................ 9 A. Project Background .................................... 17 B. Implementation Experience ............................... 21 B.1 Organization and Schedule ............................ 21 B.2 Delays in Project Implementation ........................ 21 B.3 Environmental Aspects and Resettlement ................... 23 B.4 Project Costs and Financing ........................... 23 C. An Overall Assessment .................................. 24 C. 1 Production Performance .................................. 24 C.2 Human Resource Development .............................. 25 C.3 Protection of Environment ............................... 26 C.4 Bank-Beneficiary Relations ............................... 27 D. Economic Rate of Return and Sustainability ..................... 27 D.1 Economic Rate of Return ................................. 27 D.2 Demand Prospects ...................................... 28 D.3 Technology, Capacity Utilization and Competitiveness ........... .... 29 D.4 Privatization 30..................................... 3 D.5 TariffsandPrices...................................... 31 E. Conclusions and Lessons Learned ........................... 31 Tables 1. Maharashtra Petrochemical Project - Financing .................. 20 2. Anticipated Versus Actual Completion and Comissioning Dates of Various Units ...................................... 21 3. Customs & Excise Duty Structure for Polymers .................. 28 This Repot was prepared by Fanakh Nojmubadi (Task Manager) am Abbas Ghali Bakiiar (Conmaat) who mudied the poje in Mach 1994. Enehi Irn K. Davis provided word prooeaing asisanWM. Tis document has a restricted distribution and may be used by recipients only in t perform=ane of tmir official dutes. its contents may not otherwise be disclosed without World Bank authorization. 2 Annexes 1. Project Costs ........................................ 35 2. Project Financing ......................................... 36 Bank Financing ...... .................................... 36 3. Pre-production Polymer Imports ............................... 37 4. Production Performance of Nagothane Petrochemical Complex ............ 38 5. Polymer Prices........................................... 39 6. Assumption Used for ERR Recalculation ....................... ..40 7. ERR Calculations - MGCC 1992-93 Prices ..................... ..41 8. Nagothane Complex - IPCL Financial Performance ................ ..42 9. Consumption Trends Since 1984-1985 ........................ 43 10. Landed Cost of Imported Polymers .......................... .44 11. Profit and Loss Account - IPCL ............................... 45 12. IPCL Share Prices Since January 1993 ........................ ..46 3 Preface 1. Ihis is the Performance Audit Report (PAR) for the Maharashtra Petrochemical Project in India for which the Board approved a US$300 million loan in March 1983. The loan was fully disbursed before the closing date and the last disbursement took place in September 1991. 2. The PAR was prepared by the Operations Evaluation Department (OED). An OED mission visited India in March and discussed the effectiveness of the Bank's assistance with the Government of India, the Maharashtra State Government and the Borrower. Their kind cooperation and assistance is gratefully acknowledged. 3. The PCR was prepared by the Industry, Trade and Finance Division of the Asia Technical Department. The Indian Petrochemicals Corporation Ltd (IPCL) provided Part H. 4. The draft PAR was sent to the Borrowers and their comments have been reflected.  5 Basic Data Sheet MAHARASHTRA PEtmoCHEMIcAL PROECT (LOAN 2505-IN) Loan Position (Amounts in US$ million) As of March 31, 1994 Loan Original Disbursed Cancelled Repaid Outstanding 2505-IN 300.00 300.00 0.00 79.80 220.20 Cumulative Estimated and Actual Disbursements Bank Fiscal Year and Semester ending (Disbursements in US Dollars Million) Estimated Actual Actual % of Esti mated 1986 December 31 - 6.3 June 30 18.9 9.9 52 1987 December 31 32.7 20.0 61 June 30 51.6 41.3 80 1988 December 31 85.4 71.8 84 June 30 134.5 147.0 109 1989 December 31 208.4 214.1 103 June 30 253.5 242.4 96 1990 December 31 274.7 245.4 89 June 30 289.1 282.4 98 1991 December 31 300.0 288.9 96 June 30 - 293.8 98 1992 September 30 300.0 100 6 Project Timetable item Date Planned Date Revised Date Actual Identification Sept./Oct. 1980 Sept.JOct.1980 Appraisal Jan.IFeb.1981 Oct./Nov.1982 Oct./Nov.1982 Post Appraisal - August 1984 Board Presentation June 1981 June 1983 March 1985 Loan Signature May 1985 Loan Effectiveness August 1985 Loan Closing Sept.30, 1990 Sept.30, 1991 Sept.30. 1991 Loan Completion Sept.13, 1991 Planned datem ae a in the Project Brief. Revised dates ee as in the Ises Paper. Delay between identification and poet appraisal wa due to time taken by government for project approval and decision on ownership. Post appraisal, among other issus, roviewed technology selection. Loan amount wa fully utilized with the lat diuanement on September 13, 1991. Project Implementation Project Components Mechanical Completion Commissioning SAR assessment: Process Plants October 1989 December 1989 Utilities Plant August 1989 End 1989 Actual Performance: Contract Actual Gas Cracker Feb. 1989 Oct 1989 July 1991 LDPE Dec 1988 Oct 1989 Sep 1991 PP Dec 1988 Mar 1989 April 1989 EO/EG Nov 1988 Oct 1989 Nov 1991 LLDPE/HDPE Feb 1990 Apr 1992 May 1992 Utilities Mid 1988 Sep 1989 Dec 1989 7 Staff Inputs (in staff weeks) Fucal Year Preappraisal Appraisal Negotiation Supervision Other Total 1980 .6 - - - - .6 1981 11.4 - - - 2.7 14.1 1982 .1 - - - .2 .3 1983 16.0 85.8 - - 4.3 106.1 1984 1.5 - - 4.0 5.5 1985 42.7 6.0 .8 18.5 67.9 1986 - 9.6 - 9.6 1987 - 19.0 - 19.0 1988 - 20.8 1.3 22.2 1989 - 14.6 - 14.6 1990 - 5.7 - 5.7 1991 - 9.7 - 9.7 1992 - 24.0 - 24.0 1993 - 5.4 - 5.4 Total 28.1 129.9 6.0 109.6 31.0 304.6 8 &age in Month/ Specialization Performance roject Cycie Year Persons Represented Rating hrough Appraisal Preparation 9/80 2 Eng, FA Appraisal 10/82 4 Eng, Eco, FA Sector Spec. Post Appraisal 7/84 4 Eng, Eco. FA Sipervision 1 3/86 1 Eng 1 2 .9/87 1 Eng 2 3 10/88 3 Eng, FA 1 4 9/90 1 Eng 2 5 5/91 3 Eng, Eco, FA 2 6 11/91 3 Eng, Eco, FA 3 Project Completion 1 4/92 1 Eng Superision Ratings (Form 590) Eusation Developmen Legal Management Amildability Year Overall Objectives Covenants Performance Funds 1985 1 1 - 1 1 1986 1 1 - 1 1 1987 2 1 - 2 1 1988 1 1 - 1 1 - 1989 1 1 1 1 1 1990 2 1 1 1 1 1991 2 2 1 1 2 1992 3 3 1 2 1 9 Evaluation Summary Project Background 1. The Maharashtra Petrochemical Project was conceived in the early 1980s to make use of the natural gas liquids, which were becoming available in increasing quantities from the Bombay High oilfield operations, for the manufacture of ethylene and propylene and their derivatives. The main objective of the project was to improve the competitiveness and productivity of India's basic petrochemical sector. This was to be achieved by constructing a world scale ethylene plant using gas liquids which are the most economic feedstocks. The project was designed to produce, as marketable products, low density polyethylene (LLDPE), linear low density polyethylene/high density polyethylene (LLDPE/HDPE), and polypropylene (PP), to be sold to the conversion industry; ethylene glycol/ethylene oxide (EG/EO) which are intermediates for synthetic fibre and detergent industries; a small amount of acetylene black, which would be sold to the tire manufacturing as well as printing and ink industries. 2. The availability of natural gas liquids from the Bombay High oilfield operation provided India, for the first time, with a comparative advantage in the production of olefins (ethylene, propylene and butadiene) as the raw material for a range of plastics, synthetic fibers and other petrochemical products. Such products, if produced efficiently and at competitive prices, would substitute for increasingly scarce and expensive traditional materials such as natural fibers, wood, metal, cork, leather, natural rubber and glass. In addition to requiring less energy in their manufacture, the plastic substitutes, for example, tend to be stronger, more resistant to corrosion, more easily fabricated and less costly than similar items made from natural materials. 3. The high demand for petrochemical products in India is buttressed by their ability to provide low cost domestic storage, footwear, houseware and minimal shelter to a large group of people. There is also a tremendous market for agricultural applications of plastics in canal linings, silo and reservoir linings, open air storage of grain, packaging of foods at village level, pipes for irrigations and wells, etc. In addition, the fact that India is virtually a 100% recycle economy for plastics and that recycling is a very cost efficient process made the economics of plastic usage very attractive. 4. Since the project had been prepared in 1980, the Bank planned to present it to the Board by June 1981 and the GOI was targetting to commission the complex by the end of 1984. A number of factors intervened to delay the Board approval date to early 1985. The GOI had initially contemplated to create a new government owned entity to implement the project, but later changed its mind and assigned it to IPCL. Important changes relating to product mix postponed the appraisal date to October/November 1982. Upon completion of appraisal, the 001 proposed an enlargement of the project which was resisted by the Bank because it necessitated a complete reappraisal. It also took the Government a long time to select the technologies. It was not until August 1984 that the GOI gave its final approval for the project in its appraised scope and decided that the project would be implemented, owned and operated by IPCL. 5. Ie total financing required for the project, including physical and price contingencies, working capital and interest during construction, was estimated at US$1697 million equivalent, of which US$651 million equivalent was in foreign exchange. The Bank was to provide US$210 (32.3% of 10 foreign exchange expenditure or 12.7% of total investment) while the rest of the foreign exchange resources were to be provided by the GOI and cofinancing. A novel feature of this project was the provision for pre-production marketing arrangements whereby large quantities of polymers would be imported by IPCL prior to the commissioning of the Complex at Nagothane. The objective of these imports were to: (a) develop markets for new applications; (b) seed the market for LLDPE, a polymer that would be manufactured and used in the country for the first time; (c) induce the downstream conversion industry to undertake the new investments; and (d) enhance an already operational producers' marketing system consistent with the anticipated large output from the Maharashtra Complex. In view of the reluctance on the part of the existing plastic producers, other than IPCL, to involve themselves in expensive programs of general market promotion, IPCL was delegated the function of importing, seeding and providing technical assistance for market development. The bulk of the funds required for the pre- production imports (US$90 million) were to be provided by the Bank. Implementation Experience 6. IPCL appointed Engineers India Ltd (IEL) for project engineering, planning and implementation management. While IEL was responsible for the basic and detailed engineering and construction management of all non-licensed sections of the complex (such as offsite facilities and utilities), it also undertook to prepare the detailed engineering of the basic engineering packages supplied by process licensors or contractors. Two units were, however, contracted on a turnkey basis: the gas based captive power and the LLDPEIHDPE plants. 7. Whilst most production units comprising the gas cracker, LDPE, PP, EO/EG plants, the captive power plant and other utilities were completed by the end of 1989, several factors, some outside the control of IPCL and EIL, conspired to delay the implementation of the LLDPE/HDPE plant and commissioning of this project (initially scheduled for the end of 1989). The LLDPE/HDPE plant was completed with a delay of more than two years from the contracted date. The construction of this plant encountered a series of unforeseen circumstances such as the change in the process licensor, problems with procurement necessitating a retendering of the construction contract (including the proposal by the Borrower not to grant the contract to the prequalified lowest bidder on the grounds that it did not have a track record in India), slow start by the contractor and a growing misunderstanding and mistrust between the expatriate contractor and its Indian subcontractor. 8. Another serious cause of delay in commissioning of the complex was the unavailability of gas liquids from Uran and the Bharat Refinery on account of the delay in the construction of the separation facilities at Uran and the feedstock pipelines. The construction of the feedstock pipelines from Uran and the Bharat Refinery at Bombay to Nagothane ran into difficulties because of the litigationtassociated with the securing of the right of way. It was nbt until February/Mar-& of 1990 that these two pipelines and the cryogenic tanks for the storage of gas liquids at Nagothane became operational. 9. Prior to the completion of the gas separation facility at Uran, IPCL received permission from the Government and began commissioning the cracker in July 1990 using liquified petroleum gas (LPG-usually a mixture of propane and butane primarily used in cooking stoves). Once the Uran gas separation facility was completed and gas liquids could be transferred to Nagothane, the cracker was recommissioned at the end of October 1990, using gas liquids (C2/C fractions) from Uran. An explosion at the Gas Chilling and Storage Section of the gas cracker offsite battery limit facilities (OSBL) on November 5, 1990, brought to a stop all commissioning activities. This accident, apparently caused by the failure of a flange, most unfortunately claimed the lives of 33 persons and caused considerable 11 collateral damage. It took until July/August 1991 for IPCL to restart the cracker and to bring into commercial operation all the other downstream units (except the LLDPE/HDPE plant under construction) by the early part of 1992. With most plants completed and brought on stream towards the end of 1991 and the early part of 1992, commercial production started in earnest in the first quarter of 1992 without the availability of the LLDPE/HDPE plant. Project Costs and FInancing 10. Despite the long delays in the construction of some downstream plants and the costs associated with the repair and replacement of the equipment destroyed during the explosion (estimated at US$19.2 million), the actual cost of the project excluding interest during construction and working capital was around Rs 12,144 million equivalent to US$809 million based on the annual exchange rates prevailing during the implementation period. In rupee terms, this was nearly 20 per cent lower than the appraised estimate at Rs 15,444 million (US$1,287 million). The project was helped by a decline in the cost of equipments worldwide and lower inflation trend. Contrary to the financing plan at appraisal, which called for a large subscription of capital by the Government of India (Rs 6,001 million), the project was financed entirely by loans and internal cash generation by IPCL. The actual disbursement profile closely followed the estimates at appraisal. A total of 92,789 tons of polymers were imported during the six years (1985 to 1990) for a cost of nearly S$90.7 million. Overal Assessment Production Performance 11. While most upstream and downstream units were brought into production with relative ease, the LLDPE/HDPE plant proved troublesome. It took two years to May 1994 before this plant could be debugged and brought into sustained production. With these operational problems resolved, the capacity utilization is likely to increase to levels in excess of 90% for practically all the units. In fact, during the period June to September 1994, the gas cracker produced ethylene and propylene at 88% and 110% of its nameplate capacity, respectively. As a result polypropylene production has been running at nearly 112% of capacity, while utilization rates for the LLDPE/HDPE plants reached 87%. More significantly, the cracker yield-output of ethylene and propylene against input of C2C3 and propane/propylene mixture from the Bharat Refinery-improved from 64% in 1992/93 to 67% in 1993/94. Demand Prospects 12. Despite the apparently rapid increase in consumption which was assisted by the pre-production imports and the market seeding operations, the annual per capita consumption of commodity polymers-including polyvinyl chloride (PVC) and polystyrene (PS)-has only recently passed the one kilogram mark, still one of the lowest levels in the world. Estimates by various sources (World Bank Staff, IPCL and an Indian Expert Group on Petrochemicals) indicate that demand for commodity polymers is likely to continue its growth at a rate of between 12-14% p.a. in the foreseeable future (at least until the turn of the century) especially because of the recent trade liberalization measures and relatively moderate prices. Therefore, the market for MGCC's products is virtually assured. 12 Human Resources and Technology 13. During the implementation phase, the construction management team consisted of experienced staff seconded or transferred from the headquarters at Baroda. Much on the job training took place alongside the contractors' personnel and in conjunction with EIL's implementation management activities, while other training courses were conducted for newly recruited personnel. As of the beginning of 1994, the complex was manned by a total of 2422 persons of which 597 (around 25%) were supervisory staff. Practically all the supervisory staff were college graduates (118 or 20 per cent of all supervisory personnel had received post-graduate eduction). The skill profile of the non-supervisory personnel at Nagothane shows that even in this group some 69% are classified as skilled which is a very high percentage by any standard. 14. Since the early years of Its existence, IPCL created a Research Center, initially for the absorption, assimilation, adaptation and the upgrading of imported technologies. In recent years, the Research Center has undertaken technology development activities which have resulted in several new products and processes (some of which have been successfully commercialized). All in all, the Research Center is rendering a valuable service to IPCL, enhancing its capability to continue the efficient production of petrochemical products. Capacity Utilzation and Competitiveness 15. As earlier stated, the MGCC is a modern world scale plant using energy and material efficient technologies. It is being operated by a group of skilled and knowledgeable employees who are kept abreast of the advances in technology. IPCL is a well managed and dynamic company operating in a competitive environment where the private sector is playing an increasingly more important role. Although not a very old company, it has been at the core of the petrochemical industry development in India and a source of trained personnel for the private sector to tap. Given the high quality of management and the skill of its personnel, especially its operating practices and preventative maintenance programs as well as its eagerness to adapt to new technologies, it is anticipated that the Complex will be operated at high capacity, thus ensuring its competitiveness. The expansion program at Nagothane (Loan No. 3258-IN) which aims at increasing the cracker capacity to 400,000 tpy, expanding the LLDPE/HDPE plant to include production of 75,000 tpy broad range molecular weight HDPE, will further enhance the economics of this plant. Tariffs and Prices 16. Since 1985, tariffs, countervailing duties and excise taxes on imports of polymers have fluctuated, but generally in a descending trend. This trend has gathered momentum since the new liberalization policies were put in place starting in mid-1991. But the system, especially the transfer prices from the refineries to petrochemical plants for naphtha, propane and propylene and other intermediate products, still suffers from inconsistencies which are apparently related to fiscal policies. Protection of Environment 17. IPCL is a company with excellent environmental credentials. Its health, safety and environmental policies are both comprehensive and demanding in that they require that its various units comply with all environmental regulation during design, construction and operation of all facilities of the corporation. The mindset, the commitment and the rational planning at IPCL have all been responsible 13 for the remarkable environmental achievements. The corporation has a serious and businesslike attitude to this important aspect of its activities and is not willing to cut corners. Since the accident in the Gas Cracker offsite battery limit, IPCL has further reinforced its safety efforts and instituted many programs aimed at a heightened safety consciousness among the employees. In addition to regular monitoring, inspection and safety auditing, IPCL has a comprehensive emergency program in case of accidents. These efforts appear to have considerably improved the situation and reduced the severity rate of accidents (Environmental Impact Evaluation - Report No. 13260). Economic Rate of Return 18. The ERR has been recalculated on the basis of actual results until FY93-94 and assumptions regarding the costs and benefit streams thereafter. On the benefit side, it has been assumed that, given the recent production performance of the various downstream plants, especially the stabilization of operations in the LLDPE/HDPE plant, the whole complex can be expected to reach 90% capacity utilization during fiscal year 1995/96 and, thereafter, capacity utilization will be sustained at 95% from FY1996/97. As to the forecast of polymer prices, even though the prices have been generally on the upward trend since early 1993 (Annex 5), it is assumed that, in real terms, imported prices into India will remain around the 1993 level for the remaining life of the project (Year 2010). These assumptions (considered highly conservative), including the working capital requirements are given in Annex 6. On the basis of these assumptions, the project's ERR is recalculated at a satisfactory level of 11.9%. Conclusions and Lessons learned 19. A slow approval process by the GOI and the delays in implementation proved costly to the Indian economy. On the one hand, the flaring of precious gas liquids continued and, on the other, the imports of polymers placed a sizeable burden on the fragile foreign exchange situation of the country. In the event, the project came into production when the market was weak and this caused serious financial losses at the beginning. However, given the intrinsic competitiveness of the plant, the turn around in the market outlook and the estimated Economic Rate of Return, the -outm of this project is rated as satisfactory. 20. The Indian petrochemical industry has flourished behind protective walls and has so far been shielded from international competitioi. However, by allowing the entry of the private sector into the production of the basic building blocks and intermediate products, upgrading the scale of production, introducing modernenergy and material efficient technology, utilizing the most economical feedstocks and, above all, efficiently operating the plants, this industry is now competitive in the international market with an assured future. In-recent years, especially since the new liberalization policies were put in place in mid-1991, protection of petrochemical products has been on a descending trend. The competitiveness will be further enhanced as tariffs are reduced and the domestic industry is increasingly exposed to the competition from other producers. The industry may have to face predatory or dumping prices in the future, especially from oil exporting developing countries, but the foundations of this industry in India are solid enough to withstand such onslaughts. 21. The development of this industry in India is inextricably tied to the availability of raw materials-either natural gas liquids or refinery products such as Naphtha-in the coming years. While expanded refinery capacity will make more products available for the petrochemical industry, it is 14 doubtful that a great deal more natural gas liquids would be made available from the current and foreseeable operations in the Bombay High and South Bassein regions, unless larger reserves of oil and gas are discovered in India. It is, however, to be expected that similar to the developments in the South East Asia Region, the Indian petrochemical industry would also utilize feedstock imports for its further development. 22. Given the low per capita consumption and the potential demand in India, the major challenge facing the decision makers is how to promote private investment in the sector. This, in turn, requires attention to the issues of manpower development, technology, the investment climate, the pricing of raw materials and intermediates and the reform of the tariff and excise tax structure. The latter is very important because unless a rational scheme is introduced, it is likely to have a deterrent effect on private investment under a liberalizing environment. As shown in Table 3, the GOI has already taken steps in this direction, but more remains to be done as the fiscal imperative permit. 23. This project once again demonstrates the crucial issue of management capability and institutional development as the guarantors of success in industrial projects. In cyclical industries, it is a matter of luck for investments to materialize on the price upswing. Very often events intervene to upset the best plans. What is important is the inherent viability of the investment and the ability to reach full capacity operation in as short a time as possible. Many Bank projects have had unsatisfactory results because of serious deficiencies in management capabilities and institutional development. 24. Such capabilities extend to the development of indigenous technology, both in terms of consulting and engineering services as well as the in-house technological efforts to operate the plants efficiently. In the last decade, the Bank financed projects engineered and managed by EIL have been implemented without overruns and on schedule. To be sure, the expeditious decision-making by the owners and the delegation of authority from the Government departments have helped the process. But the familiarity of the Engineers India Limited with the local manufacturing capabilities and their realistic scheduling, monitoring and expediting have made it possible to procure a large quantity of equipment from the domestic industries without running into unnecessary delays. The problem-solving capability of IPCL and its technological development efforts, too, have kept it abreast of new developments, enhancing Its competitiveness. In view of IPCL's demonstrated capability in conducting its operations efficiently, the sustainability of this project is rated as lJkl. Its institutional imp has also been subsantial. 25. Adherence to the BaTfk's procurement guidelines is a matter that can not be lightly compromised. The integrity of the system is based on its transparency and fairness. The guidelines include a prequalification procedure that is meant to screen out those applicants that do not meet the overall conditions of bidding. If having a track record in the country is considered to be of great importance, then it should be made a condition of prequalification. Otherwise, the door to serious irregularities might be opened. 26. The choice of location and the construction of a company town still poses a dilemma. This is a model that is being repeated over and over again in the developing countries. A relic of the past when expatriates exploited natural resources in remote locations, the idea of a company town has many drawbacks, including the absence of a supportive social and cultural life. It is preferable to locate industries near existing towns where any investment in housing may be left to the private sector, or, if the company's assistance is needed, it comes in a form which leads to the integrated development of the township and the local community. This is how real regional development takes place and employment 15 is created for a large population. Moreover, assuming that salary rates are competitive, integration with the local community is likely to reduce the rate of employee turnover. 27. It is still a matter of serious concern that despite several requests by the Bank, the GOI has not yet released a copy of the report of the Mashelker Committee on the explosion at MGCC to the Bank. This should receive the urgent attention of the Government. amm m. emma - 17 - A. Project Background 1. The Maharashtra Petrochemical Project was conceived in the early 1980s to make use of the natural gas liquids, which were becoming available in increasing quantities from the Bombay High oilfield operations, for the manufacture of ethylene and propylene and their derivatives. The main objective of the project was to improve the competitiveness and productivity of India's basic petrochemical sector. This was to be achieved by constructing a world scale ethylene plant using gas liquids which are the most economic feedstocks. The project was designed to produce, as marketable products, low density polyethylene (LDPE), linear low density polyethylene/high density polyethylene (LLDPE/HDPE), and polypropylene (PP), to be sold to the conversion industry; ethylene glycol/ethylene oxide (EGIEO) which are intermediates for synthetic fibre and detergent industries; a small amount of acetylene black, which would be sold to the tire manufacturing as well as printing and ink industries. 2. At the time of project preparation and appraisal, the Indian economy was still grappling with the consequences of one of its worst droughts in 1979/80, the sharp increase in international oil prices and domestic supply shortages. The drought had led to a precipitous fall in foodgrain production, widening trade deficit and severe inflationary pressures amid a decline in the GDP. These setbacks coincided with the preparation of the Sixth Five-Year Plan which laid down a program of adjustment that aimed at improving the trade deficit, removing the infrastructural bottlenecks and ensuring price stability. Despite another severe drought in 1982/83, India's economy in the early 1980s continued to grow at an average annual rate of between 4 and 5 per cent because of the adjustment strategy adopted in 1980/81. The main elements of this strategy were export promotion, efficient import substitution, implementation of a coherent energy policy designed to meet the energy needs of the economy while curbing the growth of oil imports, and a gradual liberalization of imports with the objective of providing the productive sectors access to inputs and technology for greater productivity and efficiency, capacity expansion and higher capacity utilization. 3. During the early 1980s the thrust of the Bank Group assistance to India was to support the agriculture, energy and infrastructure sectors. Thus the Bank lending was heavily concentrated in irrigation, extension and on-farm development projects, investments to help meet the energy needs of the economy while curbing the growth of imports and in removing the infrastructural bottlenecks particularly through power generation and distribution, railways and telecommunications projects. The Bank Group had also provided financing, through its support of development finance institutions, for a broad range of private sector medium and small scale industrial enterprises. In addition, it had supported nutrition and family planning programs, rural road and urban infrastructural projects in order to help satisfy the essential needs of urban and rural population. This pattern of assistance was highly relevant to the Government of India's priorities as reflected in the Sixth Development Plan. In a radical departure from its previous strategy, the Bank, at this juncture, decided to substantially increase its assistance to India's efforts in promoting greater efficiency and faster development of the industrial sector. 4. It was, therefore, against the above background that the Maharashtra Petrochemical Project was prepared and approved. The availability of natural gas liquids from the Bombay High oilfield operation provided India, for the first time, with a comparative advantage in the production of olefins (ethylene, propylene and butadiene) as the raw material for a range of plastics, synthetic fibers and other petrochemical products. Such products, if produced efficiently and at competitive prices, would substitute for increasingly scarce and expensive traditional materials such as natural fibers, wood, metal, cork, leather, natural rubber and glass. In addition to requiring less energy in their manufacture, the plastic - 18 - substitutes, for example, tend to be stronger, more resistant to corrosion, more easily fabricated and less costly than similar items made from natural materials. 5. Before the availability of natural gas liquids from the offshore Bombay High field, the petrochemical industry in India was based, primarily, on Naphtha. The latest investment for a naphtha cracker with a capacity of 130,000 tons per year had been commissioned at the Baroda plant of the Indian Petrochemicals Corporation Ltd, in 1978. Following the commissioning of this plant and the downstream facilities, the consumption of plastics and synthetic fibers, which had been held back because of restricted availability, increased rapidly indicating the pent up demand for these products. The high demand for petrochemical products in India is buttressed by their ability to provide low cost domestic storage, footwear, houseware and minimal shelter to a large group of people. There is also a tremendous market for agricultural applications of plastics in canal linings, silo and reservoir linings, open air storage of grain, packaging of foods at village level, pipes for irrigations and wells, etc. In addition, the fact that India is virtually a 100% recycle economy for plastics and that recycling is a very cost efficient process made the economics of plastic usage very attractive. 6. There was a strong rationale for the Bank's involvement in this project. By being able to supply a considerable amount of foreign exchange funding, the Bank would expedite the government decision-making process and contribute to a quicker realization of this economical and high priority project (based on associated gas, hitherto largely flared). In addition to encouraging cofinancing, the Bank's involvement would ensure that a well coordinated program for construction of the complex (the cracker and other downstream polyolefin production units) be prepared and implemented. The Bank would also assist in technology transfer arrangements and the optimal use and development of local engineering capabilities in the field of petrochemical processes. More importantly, the Bank would use its dialogue with the Government of India and its involvement in this project as a vehicle for helping the authorities evolve an effective sponsorship and financing scheme for the remainder of the petrochemical sector development plan. Since the project had been prepared in 1980, the Bank planned to present it to the Board by June 1981 and the Government of India was targeting to commission the complex by the end of 1984. 7. A number of factors intervened to delay the approval date. To begin with, it was initially contemplated that the project would be implemented by a newly created government owned enterprise under the control of the Ministry of Petroleum and Chemicals. This matter had to receive the Cabinet approval before the project could be submitted to the Public Investment Board (PIB). It took some time before the Cabinet decision in favor of setting up a new organization was announced. Then during 1981 and 1982 imp6rtant changes relating to the product mix, the technology, the utility arrangements and the marketing plan were introduced which while improving the project characteristics postponed the appraisal date to October/November of 1982. Upon completion of appraisal of the project in its modified configuration', the GOI enlarged the scope of the project by upgrading the capacity of the cracker to 400,000 ton per year as well as proposing additional downstream production units to utilize the incremental 100,000 tons per year of ethylene. The Bank informed the GOI that such a change necessitated a reappraisal of the project. By September of 1983, neither the investment plan had been '300,000 tpy ethylene, 63,000 tpy propylene, 80,000 tpy low density polyethylene (LDPE), 135,000 tpy linear low density polyethylene (LLDPE)/high density polyethylene (HDPE), 60,000 tpy polypropylene (PP), 5,000 tpy ethylene oxide (EO)/50,000 tpy ethylene glycol (EG), 1740 tpy acetylene black and 46,250 tpy merchant ethylene for Bombay users. - 19 - approved by the PIB, nor had the new implementing company been incorporated. Moreover, the Foreign Investment Board (FIB) needed to approve the selected technologies before further progress could be made.2 8. It took another year before all these issues were resolved and the project took its final form. In August 1984, the GOI gave its final approval for the project in its appraised scope and decided that the project would be implemented, owned and operated by IPCL. Engineers India Ltd (EIL) were selected as the prime contractor for the process engineering of offsites and infrastructure facilities, detailed engineering of all facilities, procurement services, construction and general project management for the project. By this time, the site for the complex had been selected and preliminary work started for the resettlement of the villagers to the neighboring areas. With all the outstanding issues resolved the project was submitted to the Board and approved in March 1985 (some three and half years behind the original schedule). 9. As approved, the project consisted of a petrochemical complex for the production of basic building blocks (ethylene and propylene) and a range of thermo plastics and other second generation downstream conversion units, based on natural gas liquids. By using natural gas liquids (the most economic feedstock) in world scale producing facilities, the project would not only contribute to the optimal use of India's gas resources, but would also ensure the availability of thermoplastic materials at internationally competitive prices to the Indian market. The project would, thus, utilize ethane/propane (C2/Cz) fraction, separated from Bombay High offshore gases as primary feedstock, supplemented by propane/propylene separated from the off gases from the Bharat Petroleum's Refinery located in the Bombay Area. The project also provided for the importation and sale, by IPCL, of large quantities of polymers during the implementation period for the seeding and development of the market. 10. The total financing required for the project, including physical and price contingencies, working capital and interest during construction, was estimated at US$1697 million equivalent, of which US$651 million equivalent was in foreign exchange. The project was to be financed in the manner given in Table 1 below. The Bank was to provide US$210 (32.3% of foreign exchange expenditure or 12.7% of total investment) while the rest of the foreign exchange resources were to be provided by the GOI and cofinancing. The bulk of the funds required for the pre-production imports (US$90 million) were to be provided by the Bank. 2 Memo to Chief INND2 dated September 6, 1983. -20- Table 1: Maharashtra Petrochemical Project - Financing Plan (in million USS) Sources Local Foreign Total % World Bank - 210.0 210.0 12.6 GOI/Cofinancing 44L fiu LU Total 201.2 650.6 851.8 50.2 GOI 500.1 - 500.1 29.5 IPCL 200.0 - 200.0 11.8 Internal Cash Generation of the Project 14=. - 14.1 .U Total 845.3 - 845.3 49.8 Total IPCL Project Financing 1,046.5 650.6 1,697.1 100.0 Pre-production Import (Bank-financed) -Q Total 1,046.5 740.6 1,787.1 Excludes additional foreign exchange to be provided by GOI. 11. A novel feature of this project was the provision for pre-production marketing arrangements whereby large quantities of polymers would be imported by IPCL prior to the commissioning of the Complex at Nagothane. The objective of these imports were to: (a) develop markets for new applications particularly in agriculture, irrigation, packaging and storage, water supply and industry; (b) seed the market of LLDPE, a polymer that would be manufactured and used in the country for the first time; (c) induce the downstream conversion industry to undertake the new investments required to handle the substantial increase in products supply expected from the project; and (d) enhance an already operational producers' marketing system consistent with the anticipated large output from the Maharashtra Complex. To make this possible and because the prevailing Government of India's import policy for thermoplastics allowed only the-actual users-plastic conversion industry-to import polymers directly, it was essential that the primary plastic manufacturers be permitted to import polymers. In view of the reluctance on the part of the existing plastic producers, other than IPCL, to involve themselves in expensive programs of general market promotion, IPCL was delegated the function of importing, seeding and providing technical assistance for market development. -21- B. Implementation Experience B.1 Organization and Schedule 12. IPCL appointed Engineers India Ltd (IEL) for project engineering, planning and implementation management. While IEL was responsible for the basic and detailed engineering and construction management of all non-licensed sections of the complex (such as offsite facilities and utilities), it also undertook to prepare the detailed engineering of the basic engineering packages supplied by process licensors or contractors. Two units were, however, contracted on a turnkey basis: the gas based captive power and the LLDPEIHDPE plants. 13. Whilst most production units comprising the gas cracker, LDPE, PP, EO/EG plants, the captive power plant and other utilities were completed by the end of 1989, several factors, some outside the control of IPCL and EL, conspired to delay the implementation of LLDPE/HDPE plant and commissioning of this project (initially scheduled for the end of 1989). At the beginning of implementation phase, much procurement difficulty was experienced because of the unfamiliarity of IPCL and EIL with the Bank's procurement requirements. After some efforts by all parties, the adherence to the Bank's procurement procedures improved, resulting in the speeding up of the construction phase. As a result most plants enumerated above were mechanically completed by the end of 1989 (Table 2), with the exception of LLDPE/HDPE plant which encountered a long delay. Table 2: Anticipated Versus Actual Completion and Commissioning Dates of Various Units Project Component Mechanical Completion Commissioning Anticipated at Appraisal Process Plants October 1989 December 1989 Utilities August 1989 September to end 1989 Anal PP March 1989 April 1989 Gas Cracker October 1989 July 1991 LDPE October 1989 September 1991 EO/EG - October 1989 - November 1991 LLDPE/HDPE April 1992 May 1992 Utilities September 1989 December 1989 B.2 Delays in Project Implementation 14. The LLDPE/HDPE plant was completed with a delay of more than two years from the contracted date. le construction of this plant encountered a series of unforeseen circumstances right from the beginning. While the process licensor had originally been selected along with those of the other -22- downstream plants, the accident at Bhopal intervened to necessitate a change in the choice of the process licensor.' Once the new process licensor was selected in April 1986, IPCL decided to construct this plant on a turnkey basis to catch up for the lost time. This was important because this plant was a large consumer of the output from the gas cracker. After putting out the contract to tender, and receiving bids, a technicality in the bidding procedure (the lowest bidder introducing an unprequalified joint venture partner) led to the need for the contract to be retendered. This second tendering brought its own dilemma when quotations offered by the lowest bidder differed only 0.5% from that of the next bidder and the IPCL preferred not to award the contract to the lowest bidder on the grounds that it lacked experience and a track record in India. In the event, the contract was awarded to the lowest bidder calling for the construction to be completed by February 1990. In practice, the slow start by the contractor, compounded with changes suggested during construction by the process licensors (based on the latest developments in the technology) and a growing misunderstanding and mistrust between the contractor and its Indian subcontractor, led to a long delay in implementation. In the end, rupee financing of the subcontractor by IPCL and intervention by the Bank succeeded in breaking the deadlock and expediting the completion of this downstream unit. 15. Another serious cause of delay in commissioning of the complex was the unavailability of gas liquids from Uran and the Bharat Refinery on account of the delay in the construction of the separation facilities at Uran and the feedstock pipelines. In the first place, the construction of the feedstock pipelines from Uran and the Bharat Refinery at Bombay to Nagothane ran into difficulties because of the litigations associated with the securing of the right of way. It was not until February/March of 1990 that these two pipelines and the cryogenic tanks for the storage of gas liquids at Nagothane became operational. The gas cracker and other downstream production units could not, however, be commissioned because the completion of the Uran gas separation facilities (implemented by ONGC) was not achieved until September 1990. This delay was, in turn, due to the problems encountered by the contractor and the difficulties of obtaining environmental clearance by ONGC for the Uran facility. 16. Prior to the completion of the gas separation facility at Uran, IPCL received permission from the Government and began commissioning the cracker in July 1990 using liquified petroleum gas (LPG-usually a mixture of propane and butane primarily used in cooking stoves). The use of LPG had to be discontinued shortly thereafter because of the shortage of LPG in the domestic market. Once the Uran gas separation facility was completed and gas liquids could be transferred to Nagothane, the cracker was recommissioned at the end of October 1990, using gas liquids (C2/C3 fractions) from Uran. An explosion at the Gas Chilling and Storage Section of the gas cracker offsite battery limit facilities (OSBL) on November 5, 1990, brought to a stop all commissioning activities. This accident, apparently caused by the failure of a flange, most unfortunately claimed the lives of 33 persons and caused considerable collateral damage. It took until July/August 1991 for IPCL to restart the cracker and to bring into commercial operation allthe other downstream units (except the LLDPE/HDPE plant under construction) by the early part of 1992. 1 The accident at Bhopal in December 1984 which released toxic fumes in the atmosphere and resulted in more than two thousand fatalities brought much complications between the foreign company and the GOI. Although the aid company had initially been selected by IPCL to provide the license for the LLDPE/HDPE plant, the Foreign Investment Board decided not to submit this firm for the 00I's approval. Instead, IPCL was requested by FIB in April 1985 to carry out a reevaluation of the available technologies. (Memos dated June 27, 1986 and September 19, 1986 in the Project File). -23- 17. With most plants completed and brought on stream towards the end of 1991 and the early part of 1992, commercial production started in earnest in the first quarter of 1992 without the availability of the LLDPE/HDPE plant. It took another two years to May 1994 before the LLDPE/HDPE plants could be debugged and brought into sustained production. B.3 Environmental Aspects and Resettlement 18. IPCL has successfully implemented its resettlement and environmental protection plans at Nagothane. It put in place air quality monitoring stations, situated at specific locations, that automatically measure various air quality parameters and transfer the results to a central station for collection, averaging, conversion and reporting. The effluent water quality is also regularly measured and analysed in water quality reports. Such reports are regularly submitted to the State pollution control authorities as evidence of compliance with the stipulated norms and standards. These effluent water quality measurements are supplemented by studies carried out by the National Oceanographic Institute at six stations over a distance of 30 kilometers in the Amba river estuary where the effluent water is discharged. 19. IPCL has carried out a most impressive afforestation program at Nagothane. More than sixty species of fast growing and resistant plants have been planted. The total afforested area approaches 300 hectares, which is around 95% of the available land area. With the assistance of BAIF Development Research Center, IPCL is also engaged in other community development activities such as training villagers in first aid treatment, soap and detergent powder making, mango graft preparations, pre-primary educational methods of teaching, handicraft preparation, masonry and carpentry skills, use of plastic mulching, kitchen garden promotion, non-farm skills for the youth such as mechanical and electrical repairs, water resource development, self help group formation, dairy cattle development through insemination (nearly 2300 cases achieved), environmental awareness programs, extension services and, even, sports competition amongst neighboring village schools. This program appears to have already had some positive results in that the average annual income from dairying has risen by 84% and 76% of the resettled families are now engaged in the sale of milk.' B.4 Project Costs and Financing 20. Despite the long delays in the construction of some downstream plants and the costs associated with the repair and replacement of the equipment destroyed during the explosion (estimated at US$19.2 million), the actual cost of the project excluding interest during construction and working capital was around Rs 12,144 million equivalent to US$809 million based on the annual exchange rates prevailing during the implementation period. In rupee terms, this was nearly 20 per cent lower than the appraised estimate at Rs 15,444 million (US$1,287 million). The project was helped by a decline in the cost of equipments worldwide and lower inflation (Annex 1). Contrary to the financing plan at appraisal, which called for a large subscription of capital by the Government of India (Rs 6,001 million), the project was financed entirely by loans and internal cash generation by IPCL (Annex 2). The actual disbursement profile closely followed the estimates at appraisal. A total of 92,789 tons of polymers were imported during the six years (1985 to 1990) for a cost of nearly S$90.7 million (Annex 3). 4Environmental Impact Evaluation of Maharashtra Petrochemical Project - Report No. 13260. -24- C. An Overall Assessment C1 Producion Performance 21. Despite the delay and the explosion at the site, the project has substantially achieved its physical objectives. The Maharashtra Gas Cracker Complex is a modern, large scale, energy efficient unit which employs cleaner technology. If the plant is operated efficiently, these attributes guarantee competitiveness and longevity of economic life. The delays in commissioning and sustained commercial operation, however, reduced the anticipated high rates of return of this investment. Because of these delays the plant missed the peak of the price cycle and had, in fact, to face a glut. The problems with the LLDPEIHDPE plant affected the capacity utilization of the gas cracker which, in turn, resulted in lower capacity utilization of all the downstream units. These factors resulted in serious financial losses for IPCL, especially in FYs 1991/92 and 1992/93. 22. The production performance of the plant is given in Annex 4 and capacity utilization is shown on the chart below: Capacity Utilization la 70 40 EapaePeple LAn PP i0ILOPEMoi m IM4e C e A 1As4-e. 0 The above chart indicates the dramatic increase in capacity utilization throughout the period and, especially, during the first 6 months of 1994. With the operatioril problems of the LLDP/HDPE units resolved, the capacity utilization is likely to be increased to levels in excess of 90% for practically all the units. In fact, during the period June to September 1994, the gas cracker produced ethylene and propylene at 88% and 110% of its nameplate capacity, respectively. As a result polypropylene production has been running at nearly 112% of capacity, while utilization rates for the LLDPE/HDPE plants reached 87%. More significantly, the cracker yield-output of ethylene and propylene against input of C2 C, and propane/propylene mixture from the Bharat Refinery-improved from 64% in 1992/93 to 67% in 1993/94. -25- C.2 Human Resource Development 23. The project's creditable performance owes much to the quality of IPCL's management, its human resource development program and the preoccupation with assimilating, mastering and adapting technology. During the implementation phase, the construction management team consisted of experienced staff seconded or transferred from the headquarters at Baroda. Much on the job training took place alongside the contractors' personnel and in conjunction with EIL's implementation management activities, while other training courses were conducted for newly recruited personnel. As of the beginning of 1994, the complex was manned by a total of 2422 persons of which 597 (around 25%) were supervisory staff. Practically all the supervisory staff were college graduates (118 or 20 per cent of all supervisory personnel had received post-graduate eduction). The skill profile of the non-supervisory personnel at Nagothane shows that even in this group some 69% are classified as skilled which is a very high percentage by any standard. Skill Profile of Non-Supervisory Personnel at Nagothane Complex - Beginning 1994 /-Unaklled (22.%) SkI*d (a8.7%) The training programs for both the supervisory and non-supervisory personnel have continued at a commendable pace since the plants were commissioned as shown in the Chart. -26- Employee Training at Nagothane 140 0 190-1 t -Me 18-83 1983 4 Yew 24. The MGCC has been facing a high turnover rate amongst both the supervisory and non- supervisory personnel at Nagothane. It appears that the rates peaked at 7.4% and 3.45%, respectively, in 1991 and have since dropped sharply to around 2.5% as the availability of housing and other amenities improved. This turnover is even more noticeable among the trainees. Nearly 47% of the trainees for supervisory positions left the Complex's training program during FY93/94. Part of this is probably due to the availability of job opportunities in the rapidly expanding Indian private sector petrochemical industry. There are also employment opportunities in the thriving petrochemical industry in the Persian Gulf region. While these competitions have to be faced, IPCL has little choice other than pressing with the training of a larger number, even if it loses some of its trainees and trained personnel to the employment market. With privatization in progress, it is expected that such problems will be gradually resolved. The experience at Nagothane, however, once again highlights the non-viability of company towns which are artificially created in remote regions and far from existing cities and other centers of population. C.3 Protection of Environment 25. IPCL is a company with excellent environmental credentials. Its health, safety and environmental policies are both comprehensive and demanding in that they require that its various units comply with all environmental regulation during design, construction and operation of all facilities of the corporation. The mindset, the commitment and the rational planning at IPCL have all been responsible for the remarkable environmental achievements. The corporation has a serious and businesslike attitude to this important aspect of its activities and is not willing to cut corners. Since the accident in the Gas Cracker offsite battery limit (para. 16 above), IPCL has further reinforced its safety efforts and instituted many programs aimed at a heightened safety consciousness among the employees. In addition to regular monitoring, inspection and safety auditing, IPCL has a comprehensive emergency program in case of accidents. These efforts appear to have considerably improved the situation and reduced the severity rate of accidents. -27 - 26. Notwithstanding the measures taken by the Maharashtra State Government in terms of compensation, provision of alternate land, etc., and the rural development activities by IPCL including all the confidence building measures and interaction with the surrounding communities, some two years ago, the resettled villagers staged a three day lock-in of the plant managers and operating personnel, demanding employment. After tense negotiations and the intervention of the State Government, the two sides came to an agreement, whereby some 600 villagers (one member from each resettled family) entered the plant's employment. In a densely populated country where title to the land (even if it is rocky and of not much use for agriculture as in the Nagothane area) is very precious and the Government has historically been the largest provider of employment for people, incidents of this nature are not rare. In the event, the matter was amicably resolved and relations have gradually improved with the surrounding community. C.4 Bank-Benefidary Relations 27. The Bank has had very cooperative relations with IPCL throughout the project implementation period. This has extended into the implementation of the Second Petrochemical Development Project (Loan No. 3258-IN) which was approved in August 1990. Initially, the unfamiliarity of IPCL and its consultants (EIL) with the Bank's procurement guidelines and the dearth of supervision missions (one each in 1986, 1987 and 1988 and none in 1989) for this very large and relatively complicated project led to some procurement problems. But subsequent efforts on both sides resolved the issues and the procurement of equipments and services proceeded smoothly after 1988. An issue that proved costly is the time it took to select the turnkey contractor for the LLDPE/HDPE plant. Despite IPCL's obvious implementation capability and the competence of a knowledgeable consulting and construction management firm (EIL), the Bank should have maintained its supervision efforts in the earlier years. D. Economic Rate of Return and Sustainability D.1 Economic Rate of Return 28. The ERR has been recalculated on the basis of actual results until FY93-94 and assumptions regarding the costs and benefit streams thereafter. On the benefit side, it has been assumed that, given the recent production performance of the various downstream plants, especially the stabilization of operations in the LLDPE/HDPE plant, the whole complex can be expected to reach 190% capacity utilization during fiscal year 1995/96 and, thereafter, capacity utilization will be sustained at 95% from FY1996/97. As to the forecast of polymer prices, even though the prices have been generally on the upward trend since early 1993 (Annex 5), it is assumed that, in real terms, imported prices into India will - remain around the 1993 level for the remaining life of the project (Year 2010).s Iese assumptions (considered highly conservative), including the working capital requirements are given in Annex 6. s While it had been expected that the petrochemical industry would begin its slow recovery in 1994, accidents in the large naphtha cracking plants in the US and Italy, scaled back operations (because of severe droughts) in Japan and maintenance shut-down in other countries in the early part of this year have already put upward pressures on the price of various intermediates, especially ethylene. In September 1994, ethylene, LLDPE and PP prices reached US$600,900 and 830 per ton, respectively (European Chemical News and PetrAemical Pricing News). -28- 29. With the assumptions indicated above and summarized in Annex 6, the project's ERR is recalculated at a satisfacr level of 11.9% (Annex 7). The delays in commissioning of the complex and the depressed prices in the earlier years of the plant's operation have reduced the ERR as compared with that anticipated at appraisal. Despite a considerable savings in the capital cost of the project, the polymer price movements have been totally at odds with the forecast in 1985 (SAR - Annex 11-1). The collapse of oil prices in 1986 certainly affected the price forecasts but the weakness of polymer prices in recent years has been due to the commissioning of large cracker capacities and downstream plants especially in the Far East and the Middle East. With the supply/demand more in balance and demand picking up rapidly as a result of the turn around in the global economy, price prospects have brightened considerably for the next two or three years. These prospects notwithstanding, the ERR is still very sensitive to the decline in international prices. A 10% decline in prices will lower the ERR to 9.0%, conversely a 10% increase will result in an ERR of 13.5%. 30. Due to the low capacity utilization in the early years after commissioning and low imported prices, the complex experienced large losses in FYs 1992, 1993 and 1994 at 2.38, 1.51 and 0.95 billion rupees, respectively (Annex 8). Having turned the corner in terms of capacity utilization and with international prices on the upswing, the complex will most likely provide IPCL with considerable profit, especially because the import duties still remain at a high level as shown in Table 3 below. Table 3 - Customs & Excise Duty Structure for Polymers 1984-85 to 1993-94 April 1985 1988-89 1990-91 1993-94 1994-95 LDPE/LLDPE 226.6% 104.4% 116.6% 122.8% 114.5% HDPE 155.6% 160.0% 117.8% 122.8% 114.5% PP 156.7% 95.0% 130.2% 136.3% 114.5% Source: IPCL, D.2 Demand Prospects 31. Consumption trends since 1985 indicate that demaiid for the four polymers and other intermediate products produced at MGCC grew at a rate of around 14% (13% for commodity polymers, i.e. very close to the rate anticipated in the SAR).' Although the annual apparent consumption figures for the commodity polymers are somewhat erratic (Annex 9), it is quite clear that the growth of demand for HDPE was far higher than the level anticipated at appraisal. * SAR anticipated the following demand growth rates until 1992/93: LDPE/LLDPE 11%, HDPE 5%, PP 25%, total 4 polymers, 12.6% (para 4.02). -29- S**-****------* *f--r 19445 19547 19N0U 1 4101 192-0 104 198-9 1987-8 1908/200 - LLDPE -** EO/EG -*- LDPE -* HDPE - PP Despite the apparently rapid increase in consumption which was assisted by the pre-production imports and the market seeding operations, the annual per capita consumption of commodity polymers-including polyvinyl chloride (PVC) and polystyrene (PS)-has only recently passed the one kilogram mark, still one of the lowest levels in the world'. Estimates by various sources (the World Bank Staff, IPCL and an Indian Expert Group on Petrochemicals) indicate that demand for commodity polymers is likely to continue its growth at a rate of between 12-14% in the foreseeable future (at least until the turn of the century) especially because of the recent trade liberalization measures and relatively moderate prices. It is, therefore, clear that the market for MGCC's products is virtually assured. D.3 Technology, Capacity Utilization and Competitiveness 32. As earlier stated, the MGCC is a modern world scale plant using energy and material efficient technologies. It is being operated by a group of skilled and knowledgeable employees who are kept abreast of the advances in technology. IPCL is a well managed and dynamic company operatin& in- a competitive environment where the private sector is playing an increasingly more importanf role. Although not a very old- company, it has been at the core of the petrochemical industry development in India and a source of trained personnel for the private sector to tap. Given the high quality of management and the skill of its personnel, especially its operating practices and preventative maintenance programs as well as its eagerness to adapt to new technologies, it is anticipated that the Complex will be operated at high capacity, thus ensuring its competitiveness. The expansion program at Nagothane (Loan no. 3258-IN) which aims at increasing the cracker capacity to 400,000, expanding the LLDPE/HDPE 7 It should be noted that a thriving plastic recycling industry exists in India. The amount of recycled plastic is estimated at around 700,000 tons in 1993-94. -30- plant to include production of 75,000 tpy broad range molecular weight HDPE will further enhance the economics of this plant. Calculations show that under the assumptions utilized in the ERR calculations, the economic breakeven and cash break-even points, for the existing plant, are at 43% and 32% capacity utilization, respectively. 33. Since the earlier years of its existence, IPCL created a Research Center, initially for the absorption, assimilation, adaptation and the upgrading of imported technologies. In recent years, the Research Center has undertaken technology development activities with impressive results. Currently, the Center is manned by around 150 staff of which more than 43% have doctorate degrees in scientific and engineering disciplines. Its fields of research and development cover Catalysts, Chemical Physics, Organic Chemistry, Polymer Material Services, Environmental Science and Applied Biology, Analysis and Analytical Spectroscopy and Chemical Engineering and Process Development. It launched major technology development programs in the areas of Thermal Cracking, Linear Alkyl Benzenes (LAB), Aromatics, Polyolefins and Ethylene Oxide/Ethylene Glycols. The Research Center constructed a demonstration gas cracker pilot unit at MGCC which is used as a research facility for generating data base on gas cracking and optimization of the main gas cracker operation. The Center has three collaboration projects with the EIL, the Indian Oil Company and the Indian Institute of Petroleum. It also has several joint projects with universities and other technical institutes. 34. While involved in finding solutions to the current production and marketing problems, the Research Center has been successful in the development of new products: (a) a monometallic reforming catalyst for benzene and toluene production; (b) a novel zoolite catalyst for the production p-diethyl benzene; (c) molecular sieve adsorbent for pressure swing adsorption; and (d) composite materials based on polycarbonate and carbon fiber. Several new processes have also been developed e.g. a process using a new zeolite catalyst for the production of ethyl benzene. IPCL successfully commercialized its monometallic reforming catalyst for the production of benzene and toluene at a domestic refinery with very satisfactory results. All in all the Research Center is rendering a very valuable service to IPCL, enhancing its capability to continue the efficient production of petrochemical products. D.4 PrHvatizaon 35. IPCL is among the first group of large Indian state owned enterprises that are earmarked for privatization. The sale of IPCL shares to the public started in FY92193 and since their appearance on the stock exchange, these shares have beenreceived with considerable enthusiasm. In February 1994, IPCL offered 25.08 million of 16% Secured Redeemable Partly Convertible Debentures of Rupees 80 each for cash at par to the equity shareholders of record. This issue was oversubscribed. As a consequence of this issue, the share capital of IPCL after conversion of the debentures will be 2318.5 million rupees. During the second half of 1993 and the first half of 1994 as earnings per share dropped- from the previous highs, share prices also declined from a high of 167.5 Rs in January 1993 to a low of 57.5 Rs in May 1994 before staging a rebound. The most important factors responsible for the sharp drop in the after tax profit in FY94 (Annex 10) were low international prices of petrochemical products especially commodity polymers (Annex 11), and the increase in the price of Naphtha (feedstock) delivered to the Baroda plant. Recently, with the international prices turning around, IPCL importing a part of its Naphtha requirement at considerably low landed costs, and the resolution of production problems at the MGCC, the profitability of the company has again improved resulting in the enhancement of its share prices (Annex 12). -31 - D.5 Tariffs and Prices 36. Under Special Measures, Schedule 4 to the Loan Agreement provided that: "The Borrower shall refrain from taking any action which would unduly inhibit the market in plastics from developing to a level consistent with the need for production under the project to market locally all of its output promptly after commissioning of the Project". The background of this covenant was the Bank's insistence that the policy environment within which the plant was to operate would be conducive to efficiency. The GOI accepted this suggestion and had already commissioned a study of the pricing, fiscal and trade policies relating to petrochemicals and their substitutes. In practice, since 1985 tariffs and other duties (including excise taxes and countervailing duties) on imports of polymers fluctuated, but generally in a descending trend, (Table 3 above). This trend has gathered momentum since the new liberalization policies were put in place starting in mid-1991. But the system, especially the transfer prices from the refineries to petrochemical plants for naphtha, propane and propylene and other intermediate products, still suffers from inconsistencies which are apparently related to fiscal policies. This has meant that, for example, the cost of naphtha delivered to Baroda as of the beginning of the current fiscal year was around Rs 7400 per metric ton as against a landed cost of nearly Rs 4100 for imported Naphtha. E. Conclusions and Lemons Learned 37. A slow approval process by the GOI and delays in implementation proved costly to the Indian economy. The decision as to whether to create a new parastatal agency or to expand an existing entity should have been made during the project identification stage. Not unlike some others in India, this project also suffered from poor coordination between agencies and the cascading delays resulting from slow implementation of interrelated government projects. This was especially costly in this project because, on the one hand, the flaring of precious gas liquids continued and, on the other, the imports of polymers placed a sizeable burden on the fragile foreign exchange situation of the country. Above all, the project was deprived of benefiting from the peak of the price cycle because it came into production when the market was weak, resulting in serious financial losses at the beginning. A better delegation of responsibility and authority to state owned enterprises will go a long way towards resolving coordination and implementation problems. 38. Despite these delays and the losses incurred during the early years, the project's fortunes are improving with the turn around in the market outlook and the strengthening of the prices. Given the intrinsic competitiveness of the plant and the reestimated Economic Rate of Return at nearly 12%, lbs outcome of this project is rated as satisfactory. 39. The Indian petrochemical industry has flourished behind protective walls and has so far been shielded from international competition. However, by allowing the entry of the private sector into the production of the basic building blocks and intermediate products, upgrading the scale of production, introducing modern energy and material efficient technology, utilizing the most economical feedstocks and, above all, efficiently operating the plants, this industry is now competitive in the international market with an assured future. The competitiveness will be enhanced as tariffs are reduced and the domestic industry is increasingly exposed to the competition from other producers. The industry may have to face predatory or dumping prices in the future, especially from oil exporting developing countries, but the foundations of this industry in India are solid enough to withstand such onslaughts. 40. The development of this industry in India is inextricably tied to the availability of raw materials-either natural gas liquids or refinery products such as Naphtha-in the coming years. While -32 - expanded refinery capacity will make more products available for the petrochemical industry, it is doubtful that a great deal more natural gas liquids would be made available from the current and foreseeable operations in the Bombay High and South Bassein regions, unless larger reserves of oil and gas are discovered in India. It is, however, to be expected that similar to the developments in the South East Asia Region, the Indian petrochemical industry would also utilize feedstock imports for its further development. 41. Given the low per capita consumption and the potential demand in India, the major challenge facing the decision makers is how to promote domestic supply. This, in turn, requires attention to the issues of manpower development, technology, the investment climate, the pricing of raw materials and intermediates and the reform of the tariff and excise tax structure. The latter is very important because unless a rational scheme is introduced, it is likely to have a deterrent effect on private investment under a liberalizing environment. As shown in Table 3 (above), the GOI has already taken steps in this direction, but more remains to be done as the fiscal imperative permit. 42. This project once again demonstrates the crucial issue of management capability and institutional development as the guarantors of success in industrial projects. In cyclical industries, it is a matter of luck for investments to materialize on the price upswing. Very often events intervene to upset the best plans. What is important is the inherent viability of the investment and the ability to reach full capacity operation in as short a time as possible. Many Bank projects have had unsatisfactory results because of serious deficiencies in management capabilities and institutional development. 43. Such capabilities extend to the development of indigenous technology, both in terms of consulting and engineering services as well as the in-house technological efforts to operate the plants efficiently. In the last decade, the Bank financed projects engineered and managed by EIL have been implemented without overruns and on schedule. This is a remarkable achievement in a country that does not have a great track record of project implementation in the public sector. To be sure, the expeditious decision-making by the owners and the delegation of authority from the Government departments have helped the process. But the familiarity of the Engineers with the local manufacturing capabilities and their realistic scheduling, monitoring and expediting have made it possible to procure a large quantity of equipment from the domestic industries without running into unnecessary delays. The problem-solving capability of IPCL and its technological development efforts, too, have kept it abreast of new developments, enhancing its competitiveness. In view of IPCL's demonstrated capability in conducting its operations efficiently, the sustainability of this project is rated as likfly. Its institutional imnat has also been susAni. 44. Adherence to the Bank's procurement guidelines is a matter that can not be lightly compromised. The integrity of the system is based on its transparency and fairness. The guidelines include a prequalification procedure that is meant to screen out those applicants that do not meet the overall conditions of bidding. If having a track record in the country is considered to be of great importance, then it should be made a condition of prequalification. Otherwise, the door to serious irregularities might be opened. 45. The choice of location and the construction of a company town still poses a dilemma. This Is a model that is being repeated over and over again in the developing countries. A relic of the past when expatriates exploited natural resources in remote locations, the idea of a company town should be resisted and industries should be located near existing towns where any investment In housing may be left to the private sector, or, if the company's assistance is needed, it comes in a form which leads to the - 33 - integrated development of the township and the local community. This is how real regional development takes place and employment is created for a large population. Moreover, assuming that salary rates are competitive, integration with the local community is likely to reduce the rate of employee turnover. 46. It is still a matter of serious concern that despite several requests by the Bank, the GOI has not yet released a copy of the report of the Mashelker Committee on the explosion at MGCC to the Bank. This should receive the urgent attention of the Government.  -35 - Annex 1 Proiect Costs (Rs. million) Category Costs Estimated Coaa Actual Costa Foreign Local Total Foreign Local Total Costs Cos Costa Costs Costs 1. Equipment, Materials & Spares Gas Cracker 726 1,010 1,736 787 1,575 2,362 BO/BO 185 250 435 IS6 365 521 IDPE 243 267 510 338 395 733 LLDPE 210 299 509 470 610 1,080 PP 161 214 375 216 226 442 Propylene Recovery 26 63 89 - - Butene - - - 13 38 51 Wire and Cable - - - 73 138 211 Acetylene Black 14 29 43 24 59 83 Utilities and Offuites 808 1,580 2,388 731 1,466 2,197 General Facilities 50 271 321 73 326 399 Spare Parts 147 49 196 - - Ocean Freight & Inumrance 280 - 280 - - - 2,850 4,032 6,882 2,881 5,198 8,079 2. Licease, Basic ngineering & Exp. 570 144 714 849 304 1,153 Ast. 12 408 420 - 363 363 3. Detailed Engineering & Proj. Services 38 781 819 - 636 636 4. Land, Civil Works and Buildings 33 482 515 10 413 423 S. Erection - 200 200 - - - 6. Start-up and Commissioning 10 394 404 - 535 535 7. Township 33 109 142 52 511 563 8. Temporary Facilities - 12 99 111 392 392 9. Management and Training 126 729 855 - - - 10. Infrastructure Facilities Basic Costs Estimate (BCE) 3,684 7,378 11,062 3,792 8,352 12,144 Physical Contingencies 368 738 1,106 Price Contingencies 1,078 2,198 3,276 - - Total Installed Cost 5,130 10,314 15,444 3,792 1,352 12,144 Working Capital 716 1,078 1,794 - 200 200 Inderest During Construction 1,078 1,166 3,127 1,265 2,741 4,006 Project Financing Required 8,887 12,558 21,455 5,057 11,293 16,350 -36- Annex 2 ject Finann (Rs. million) Sources Expected Realized Foreign Local Total Foreign Local Total lng Term Deb World Bank 2,520 - 2,520 2,729 - 2,729 GOI/Cofinancing 5,286 2,414 7,700 2,328' 4,728 7,056 Medium Term Loans - 1,420 1,420 - Total 7,806 2,414 10,220 5,057 6,148 11,205 G01 6,001 6,001 IPCL - 2,400 2,400 - - Internal Cash - 1,742 1,742 - 5,145 5,145 Total - 10.143 10.143 - 5,145 5,145 Total Project Financing 7,306 12,557 20,363 5,057 11,293 16,350 Funded out of foreign exchange loans totalling Rs.3,060 million, with the rest used for local cost financing. Bank Financing (US$ million) category sAR Estimate Actual Equipment, Materials and Spares 180.0 182.9 License, Engineering and Services 20.0 27.3 Preproduction Polyolefins 90.0 89.8 Unllocated 10.0 -37- Annex 3 Pre-production Polymer Imports &LM 1_ D ____ I TL Quantity Value Quantity Value Quantity Value Quantity Value Tons $ millions Tons $ millions Tons $ millions Tons $ millions 1985186 - 3000 2.99 3000 2.99 (import price/ton) - - - (997) 1986/7 -- 1987/88 28991 26.12 9306 8.85 - - 38297 34.97 (import price/ton) (901) (951) 1988/89 8993 11.64 11602 14.32 1800 2.33 22395 28.29 (import price/ton) (1294) (1234) (1294) 1989/90 - - 11188 10.02 - - 11188 10.02 (import price/ton) (896) 1990/91 - - 17909 14.40 - - 17909 14.40 (import price/ton) (304) Total 37984 37.76 50005 47.59 4800 5.32 92789 90.67 Source: IPCL Anex 4 Production Prformance of Nagothmne Petrochemical Complex Tons _ July 91-March 92 April 92-March 93 April 93-March 94 April 94-Sept. 94 Production Production Capacity Production Capacity Production Capacity Utilization Utilization Utilization % % % Ethylene 34352 137119 45.7 169675 56.6 125113 83.4 Propylene 20851 47502 73.3 41554 64.1 31031 95.8 Polypropylene I 24283 38701 64.5 37701 62.8 29489 98.3 LDPE 12421 60963 76.2 65006 81.2 36543 91.3 EO/EG 1870 18541 33.7 25867 47.0 25297 92.0 LLDPEHDPE - 17613 13.0 50596 37.5 51582 76.4 Butene - - - 3026 20.1 2550 34.0 Source: IPCL -39 - Annex 5 Polymer Prices ($/Ton) LDPE LLDPE HDPE PP Ethylene Propylene 1985 750 760 820 830 433 384 1986 750 765 830 760 334 272 1987 800 810 870 870 413 380 1988 1030 1040 1100 1085 561 420 1989 1040 1050 1120 1020 563 474 1990 QI 860 880 970 960 524 309 QII 890 900 955 970 523 321 QUI 830 840 930 960 506 337 QIV 980 980 1010 1030 601 440 ANNUAL AVERAGE 865 900 970 980 538 352 1991 QI 935 900 985 1020 616 442 QI 700 675 805 855 503 412 QM 645 625 730 850 425 342 QIV 690 645 705 835 445 335 ANNUAL AVERAGE 740 710 805 890 497 383 1992 QI 670 610 645 855 435 320 QII 655 615 640 830 410 304 QIII 750 685 715 840 445 324 QIV 830 750 680 820 485 304 ANNUAL AVERAGE 725 665 670 835 444 313 1993 QI 875 760 660 805 485 287 QII 900 770 660 810 465 300 QI 900 770 675 800 462 298 QIV 900 770 670 800 462 279 ANNUAL AVERAGE 895 770 665 805 468 291 1994 QI 900 770 680 800 466 264 Q1I 890 815 705 775 478 301 Source: European Chemical News -40- Annex 6 Assumption Used for ERR Recalculation Capacity Utilization Actual up to fiscal year 1993/94 Fiscal year 1994/95 LDPE plant 90% LLDPE plant 50% HDPE plant 80% EOIEG plant 75% Butane plant 37% PP plant 90% Fiscal year 1995/96 All plants 90% Fiscal year 1996/97 & thereafter All plants 95% Price forecasts for FY 1995/96 and Thereafter (S1 = 31.3 Rs) Rs/Ton $/Ton Ethylene 16,000 Propylene 14,000 LDPE 25,040 (800) LLDPE 22,536 (720) HDPE 18,780 (600) PP 20,345 (650) EO 25,000 Not traded internationally MEG 11,310 (370) Working Capita Raw Materials and Fuel 7 days Work-in-Progress 9 days Finished Goods 30 days Sundry Debtors 30 days Stoves and Spares 60 days -41- Annex 7 ERR Calculations MGCC 1992-93 Prices Million Rupees Year Capital Sales Operating Gross Cash Flow Costs Costs Margin 84-85 (80) (80) 85-86 (350) (350) 86-87 (700) (700) 87-88 (1950) (1950) 88-89 (2760) (2760) 89-90 (1500) (1500) 90-91 (960) (960) 91-92 (1120) 810 1310 (500) (1620) 92-93 (20) 3070 3030 40 20 93-94 (150) 3410 2830 580 430 94-95 (100) 6180 4080 2100 2000 95-96 6630 4430 2200 2200 96-97 6980 4600 2380 2380 97-98 6980 4600 2380 2380 98-99 6980 4600 2380 2380 99-00 6980 4600 2380 2380 00-01 6980 4600 2380 2380 01-02 6980 4600 2380 2380 02-03 6980 4600 2380 2380 03-04 6980 4600 2380 2380 04-05 6980 4600 2380 2380 05-06 6980 4600 2380 2380 06407 6980 4600 2380 2380 07-08 6980 4600 2380 - 2380 08-09 6980 4600 2380 2380 09-10 6980 4600 2380 2380 10-11 6980 4600 2380 2380 -42- Annex 8 Nagothane Complex - IPCL Financial Performance Rs Million 1991/92 1992/93 1993/94 Sales 1034.6 3651.7 5248.0 Excise 272.0 1641.8 1742.5 Other Income 23.7 53.8 132.3 Gains on Foreign Exchange A/C - 631.9 - Increase in Inventory 243.6 265.7 (135.5) Total 1573.9 6244.9 6887.3 Manufacturing Expenses 2006.7 3922.3 4047.2 Depreciation 1121.6 1662.6 892.0 Interest 1245.1 1284.2 1216.9 Excise Duty 272.1 1776.8 1698.7 Transfer and Capital A/C (692.2) (888.9) (12.9) Total 395.33 7757.0 7841.9 Profit/(L4ss) (2379.4) (1512.1) (954.6) Source: IPCL Annex 9 Consumption Trends Since 1984-85 194-85 1985-6 1986-87 1987-88 1988-89 199-90 1990-91 1991.92 1992-93 1993-94 Avrage Growth Rate 1999/2000 1984-85 to 1993-94 LDPE Producdon 107100 10100 8700 700 82600 85600 108700 142500 171600 177200 Imports 21000 43000 38700 94900 53000 66300 69500 15600 16300 7200 Appmnt Consumptio 128100 14400 126500 174500 135600 151.900 178200 228100 187900 184400 4.1% 270000 MGCC penact-m - - - - - - - 12400 61000 65000 Coftrution % , - - - - - - - 5.4 32.4 35.3 LDPE Pkodudon - - - - - - - - 9600 45000 Imports - - 3500 - 9400 31900 33200 26000 29000 15000 Appar Ce.....geon - - 3500 - 9400 31900 33200 26000 38000 60000 50% 140000 MGCC producton - - - - - - - - 9400 27800 Cu~r~uion % - - - - - - - - 6.2 -38.0 HDPE Ptoduin 38900 40000 41100 37600 39500 34400 34100 31000 70000 182200 hports 51100 75000 89000 144100 121400 110000 156500 137300 166200 10000 Appren Conumption 90000 115000 130100 181700 160900 144400 190600 168300 236200 285200 13.7% 600000 MGCC Poductm - - - - - - - - 15200 27800 Cofdruio % - - - - - - - 6.4 9.7 P Produtm~ 27100 23600 23500 25900 38300 44600 49800 70000 84500 86700 heports 3900 11000 26500 36700 50900 47200 108400 110700 96000 144000 App~rnt Coumion 36000 41600 50000 62600 89200 91800 158200 130700 13000 230700 22.9% 710000 MGCC Ptnéad~o - - - - - - - 24300 38700 37700 Cmfrtion % - - - - - - 13.4 21.4 16.3 Total 4 P~lymers Produ~ie 173100 165400 152400 143100 160400 164600 192600 243500 335700 469000 Import 81000 136000 157700 275600 234700 255400 357500 359500 317100 297000 Appat Consumpion 254100 301400 310100 418700 395100 420000 550100 60000 652800 766000 13.0% 1720000 Pr"dMIa 33800 33000 32300 32700 35000 43200 49200 7300 156300 200300 b~ports 14600 23300 33000 58300 37300 94000 103400 46000 30000 20000 Appareui ca....laa 48400 56300 70000 91000 122800 137200 152600 133300 186300 22000 18.3% 360000 s~urse: IPCL -44- Annex 10 Landed Cost of Imported Polymers 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 Exchange Ra Ro/$ 14.13 17.36 19.63 25.05 30.57 31.05 LM2E CF $/MT 1205 790 1075 740 760 620 CF Rs/MT 17027 13714 21102 18537 23233 19530 All Charge R/MT 19192 16025 26322 24108 34099 25766 Iandod Cost Rs/MT 36219 29739 47424 42645 57332 45296 CIF $/MT 1200 840 1010 670 540 540 CIF R/MT 16956 14582 19826 16784 16508 17010 All Chargs R/MT 28851 21956 24687 22237 25594 22479 Landd Cost Rs/MT 45807 36538 44513 39021 42102 39489 LLME CIF $/MT 1020 700 1000 670 690 550 CIF R/MT 14413 12152 19630 16784 21093 17325 All ChargRs/MT 16693 14532 24783 21237 31393 22891 Landod Cos Rs/MT 31106 26684 44413 39021 52486 40216 CIF $/MT 1148 733 1037 730 510 560 CIF Rs/MT 16221 12725 20356 18287 15591 17640 All Charges R/MT 16874 13299 28194 26523 27377 25726 Lamaad Cos 33095 26024 48550 44810 42968 43366 Sourco: PCL -45- Annex 11 Profit & Loss Account IPCL _illion Ru_sn Year Ending 31st March 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 Income Gross Sales 10316.6 11789.5 13298.4 19351.8 22466.8 21542.7 Other Income 20. 295. 33. 343.9 910.6 1071 Total Turnover 10522.1 12084.8 13630.0 19695.7 23377.4 22614.3 Cost of Sales 7673.7 9110.8 10564.7 15309.7 17349.1 18222.8 Interest 1172.8 1378.0 1682.4 2179.0 2522.9 2403.0 Depreciation _15.0 638.5 .6 1692 222 1079. Total Costs 9361.5 11127.3 13164.7 19177.9 22101.0 21705.6 Profit before Tax 1160.6 957.5 465.3 317.8 1276.4 908.6 Provision for Tax 265.0 145.7 (6.3) (32.4) (34.2) 16.9 Profit after Tax 895.6 811.8 471.6 550.2 1310.6 891.7 Earning per Share (Rupees) 4.82 4.36 2.54 2.96 7.05 4.38 Equity 1860 1860 1860 1860 1954.6 2034.9 Source: IPCL -46- Annex 12 IPCL Share Prices Since January 1993 Rs per share High Low January 167.50 157.50 February 157.50 143.75 March 145.00 97.50 April 105.00 86.25 May 93.00 85.50 June 91.00 86.00 July 87.00 78.50 August 105.00 86.25 September 108.75 92.50 October 106.25 100.00 November 102.50 91.25 December January 105.00 75.00 February 90.00 72.50 March 77.50 63.75 April 70.00 63.75 May 75.00 57.50 June 131.25 90.00 July 155.00 125.00 August 202.00 150.00 September 194.00 170.00