India - Maharashtra Petrochemical Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 4467-IN STAFF APPRAISAL REPORT INDIA MAHARASHTRA PETROCHEMICAL PROJECT February 15, 1985 Industry Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS US$1 = Rupees (Rs) 12.0 Rupee (Rs) 1 US$0.833 WEIGHTS AND MEASURES 1 Metric ton (t) = 1,000 Kilograms (kg) Methane = 21,502 BTU per lb 1 Metric ton (t) = 2,204 Pounds (lb) Ethane = 20,416 BTU per lb 1 Kilometer (km) = 0.62 Miles Propane = 19,929 BTU per lb 1 Hectare (ha) = 2.47 Acres Fuel Oil = 17,900 BTU per lb I Cubic Meter (m3) = 35.32 Cubic Feet (cf) GLOSSARY OF ABBREVIATIONS B-H - Bombay-High BTU - British Thermal Unit CIF - Cost, Insurance, and Freight C2/C3 - Ethane/Propane GDP - Gross Domestic Product EG - Ethylene Glycol EIL - Engineers India Limited EO - Ethylene Oxide FOB - Free on Board GOI - Government of India HDPE - High-Density Polyethylene IPCL - Indian Petrochemicals Corporation Ltd. LDPE - Low-Density Polyethylene LLDPE - Linear Low-Density Polyethylene LPG - Liquefied Petroleum Gas MSG - Maharashtra State Government MW - Megawatt ONGC - Oil and Natural Gas Commission p.a. - Per Annum PAC - Product Applications Center PP - Polypropylene PS - Polystyrene PTF - Project Task Force PVC - Polyvinyl Chloride S-B - South-Bassein tpy - Metric ton per year GOVERNMENT OF INDIA FISCAL YEAR April 1 to March 31 Industry Department February 1985  FOR OFFICIAL USE ONLY TABLE OF CONTENTS Page No. I. INTRODUCTION ............................................ 1 II. THE PETROCHEMICAL INDUSTRY .............................. 2 A. General Background on Petrochemicals ............... 2 B. Feedstock Characteristics and Ethylene Production Costs ............................................ 3 C. The World Polyolefins Market ............... 4 1. Historical and Projected World Consumption of Polyolefins ................................ 4 2. Historical and Projected World Capacity of Polyolefins .6......... 6 (a) Historical World Capacity of Polyolefins.. 6 (b) Projected World Capacity of Polyolefins ... 6 3. Historical and Projected World Demand-Supply Balance of Polyolefins ................ 8 D. Prices of Major Polyolefins .... .................... 10 III. PETROCHEMICAL INDUSTRY IN INDIA ......................... 12 A. Historical Developments ..... ....................... 12 B. Strategy for the Future Development of the Indian Petrochemical Sector ............ .. ............... 13 1. Subsector Priority ............ .. .............. 13 2. Private and Public Sector Roles .............. . 14 IV. THE PETROCHEMICAL MARKET IN INDIA ....................... 14 A. Historical and Projected Petrochemical Demand in in India ......... ................................ 14 1. Past Consumption .............................. 14 2. Future Demand ................................. 15 B. Historical and Projected End-Use Pattern .... ....... 16 C. Projected Petrochemical Demand and Supply Balance .. 17 D. The Plastics Conversion Industry .... ............... 17 V. MARKETING ..... .......................................... 18 A. Pricing in the Indian Petrochemical Sector ... ...... 18 B. Market Development Prior to Project Commissioning .. 19 C. Marketing Strategy ................................. 20 D. Merchant Sales of Excess Ethylene .... .............. 20 E. Export Potential for Final Plastics Products ....... 21 This report was prepared by Messrs. H. Aomatsu, S. El Daher and N.C. Krishnamurthy of the Industry Department, and Mr. J. Ramesh (consultant). Mesdames E. George, A. Johnson and M. Greaves provided Word Processing assistance in the preparation of the report. 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.   - ii - TABLE OF CONTENTS (Continued) Page No. VI. THE PROJECT SPONSOR .... ................................ 21 A. Establishment, Ownership and Objectives ..... ....... 21 B. Board of Directors and Management ........ .......... 21 C. Organization ... .. ... ......................... ........... 22 D. Staff and Training .............. .. ................. 22 E. Operations and Growth .. ............................ 22 VII. THE PROJECT ..., ......................................... 23 A. Project Objective and Bank Group Role ....... ....... 23 B. Project Scope ... . . . ................. 24 C. Project Location ......... ............ 24 D. Feedstock and Supply Arrangements ........ .......... 25 E. Utilities and Infrastructure Facilities ............ 27 1. Water ......................................... 27 2. Power . ................... ........ ... 27 3. Roads and Railways.wy .................... 27 VIII. PROJECT IMPLEMENTATION ARRANGEMENTS ..................... 28 A. General Arrangements ..** ......... . ..... ... ... .......... * . 28 B. Project Management ... .......... ........................... 28 1. IPCL Organization ...... ....................... 28 2. General Contractor (EIL)'s Organization ....... 29 3. Selection of Technologies ..................... 29 C. Staffing and Training .............................. 30 D. Environmental Considerations .............. ......... 30 E. Safety Considerations .............................. 31 F. Project Execution Schedule ......................... 31 IX. CAPITAL COST, FINANCING PLAN, PROCUREMENT AND DISBURSEMENT ........................................ 32 A. Project Capital Cost .. ............................. 32 B. Financing Plan ......... ............................ 34 C. Procurement and Disbursement ....................... 35 X. FINANCIAL ANALYSIS .............................. ............ 37 A. Revenues and Operating Costs ..... .................. 37 B. Financial Projections .......... .. .................. 38 1. Project Financial Projections .......... 39 2. IPCL Financial Projections ............. 41 C. Financial Rate of Return and Sensitivity Analysis .. 42 D. Financial Covenants and Reporting Requirements ..... 44 E. Major Risks ........ . .. . .............. ... ..... ...... ..... * 44   - iii - TABLE OF CONTENTS (Continued)) XI. ECONOMIC ANALYSIS ... ................ ................... . 45 A. Economic Costs and Benefits ........................ 45 B. Economic Rate of Return ..... ....................... 46 C. Other Benefits and Sectoral Policy Contribution XII. AGREEMENTS .................. .................... ......... 48 ANNEXES 2-1 Energy Requirements for Production of Selected Products 2-2 World Polyolefins Consumption and Growth Rates, By Resin Type, 1970-83 2-3 Historical World Consumption of Polyolefins by Region, 1974-83 2-4 World Polyolefins Nameplate Capacities (Year-End) by Region, 1970-83 2-5 World Polyolefins Capacity Utilization in Selected Years, 1970-83 2-6 International Price of Polymers 2-7 Price Setters' Production Economics of Polyolefins 4-1 Production, Consumption and Surplus (Deficit) of Major Thermoplastics, Ethylene Glycol and Ethylene in India, 1965/66-1983/84 4-2 Demand for Polyolefins, PVC, Polystyrene and Ethylene Glycol in India, 1983/84-1995/96 4-3 Projected Demand. Supply, and Demand-Supply Balance for Thermoplastics, Ethylene Glycol and Ethylene in India 5 Organization of Marketing Department of IPCL 6-1 IPCL: Investment Program 6-2 IPCL: Income Statement and Balance Sheet 7-1 Summary of Project Facilities 7-2 Raw Gas Production From B-H Fields, and Production of Gas Fractions at Uran terminal, 1988-2000 8-1 General Organization Structure of Existing IPCL, Future IPCL, and During Project Implementation 8-2 Technology Selection 8-3 Tolerance Limits for Industrial Effluents Discharged Into Inland Surface Waters, IS-2490 8-4 Safety Measures of the Project 8-5 Project Implementation Schedule  I  - iv - 9-1 Project Cost Estimates 9-2 Estimated Disbursement Schedule for the Bank Loan 10-1 Assumptions Used in the Financial Analysis of the Project 10-2 Product Prices, Production Data, and Revenues 10-3 Projected Financial Statements of the Project 10-4 Projected Financial Statements of IPCL 10-5 Project's Impact on the Government Finances 10-6 Cost and Benefit Streams for Financial Rate of Return 11-1 Assumption Used in the Economic Analysis of the Project 11-2 Cost and Benefit Streams for Economic Rate of Return MAPS IBRD 16882R IBRD 18523 DOCUMENTS AVAILABLE IN THE PROJECT FILE Reference Title, Date and Authors A Feasibility Study for the Project, Maharashtra Gas Cracker Complex, April 1982, prepared by the Oil Industry Development Board, Government of India B Information Given to the World Bank Appraisal Mission on the Maharashtra Gas Cracker Complex, Volume I, November 1982, prepared by the Oil Industry Development Board, Government of India C Consultants Report 1. World Capacity, Production and Consumption for Petrochemicals, 1974-87 (Computer Printout for the World Bank), Stanford Research Institute, January 1983 2. Natural Gas Valuation in Industrial Applications: A Study for the World Bank, Chem. Systems, Inc., September 1982 3. Global Outlook for Polyolefins and Ethylene Glycol (for the World Bank), Chem. Systems, Inc., October 1984   - V - 4. Projections for Future Capacities in the Petrochemical Industry (for the World Bank), SEMA, Strategie Industrielle, May 1983 D Market for Petrochemical Products in India, December 1982, prepared for the Bank by J. Ramesh (Consultant) E A Description of IPCL's Organization and Structure Given to the World Bank Post-Appraisal Mission by IPCL, August 1984 F A Description of Technology Selection Procedures for the Project, Prepared by the Bank Mission Based on the Information Obtained During the Post Appraisal Mission, September 1984   INDIA - MAHARASHTRA PETROCHEMICAL PROJECT 1. INTRODUCTION 1.01 The Government of India (GOI, the Government) has requested a Bank loan for the Maharashtra Petrochemical Project (the Project), to be owned and operated by the Indian Petrochemical Corporation Limited (IPCL), a well established petrochemicals manufacturing company. The Project will be India's first petrochemical complex based on natural gas--the most economical feedstock. The feedstock ethane/propane fraction will be separated out of the gas from the West Coast offshore oil and gas fields near Bombay. The Project will have an initial capacity of 300,000 tons per year (tpy) of ethylene and 63,000 tpy of propylene. About 50,000 tpy of ethylene will be sold to private sector petrochemical producers in the Bombay area. The remainder will be processed within the Project to produce 80,000 tpy of low-density polyethylene (LDPE), 135,000 tpy of linear low- density polyethylene (LLDPE) and high-density polyethylene (HDPE), and 60,000 tpy of polypropylene (PP), as well as 5,000 tpy of ethylene oxide (EO) and 50,000 tpy of ethylene glycol (EG). These intermediate products will be sold to the polymer conversion industry, entirely in the private sector and to the synthetic fiber industry mostly in the private sector. 1.02 The Project is an important part of India's plans to develop and diversify the use of its gas resources, and is in line with the Govern- ment's strategy for producing petrochemical products in world economic sized plants at competitive costs to substitute scarce, costly and often imported traditional materials, and to support expansion of the labor- intensive, largely private downstream processing industry. The economic value of the products from the Project, entirely to be marketed domestical- ly, is estimated at US$430 million per year at full capacity (in 1984 US dollar terms). The total Project financing, including contingencies, work- ing capital and interest during construction, but excluding preproduction imports of plastics for market development, is estimated at US$1,697 million, with US$651 million in foreign exchange. In addition about US$450 million equivalent of foreign exchange will be required to import plastics for domestic market development commencing 1985-86 through 1988-89, and will be recovered in equivalent rupees through sales of such imports. The proposed Bank loan of US$300 million includes US$210 million to finance about 32% of the Project foreign exchange requirements, as well as TJS$90 million to finance pre-production polyolefins imports needed for market development. 1.03 Based on discussions of a Bank Identification/Preparation mission in September 1980, with the GOI on possible alternative product slates and technology, the Project was prepared and presented to the Bank in September 1982 (Feasibility Study Project File, Reference A). Additional information on the Project, provided by the Government, is given in Project File, Reference B. The Project was appraised in November 1982 by Messrs. J-F. Rischard, S. K. Agarwal, H. Aomatsu and N.C. Krishnamurthy of the Industry Department, and Mr. J. Ramesh (consultant). It was post-appraised in August 1984, by Messrs. H. Aomatsu, S. El Daher and N. C. Krishnamurthy of the Industry Department, and Mr. K. Phan of the Country Programs Department.  - 2 - II. THE PETROCHEMICAL INDUSTRY A. General Background on Petrochemicals 2.01 Prior to 1945, chemicals production in the world was based predominantly on coal, calcium carbide, ethyl alcohol and waste streams from petroleum refinery operations. Since then, availability of low cost oil and gas and technological developments have triggered a major switch to petroleum as the main raw material. The term 'petrochemicals' covers a spectrum of petroleum-based synthetic materials which include polymers, detergents and synthetic fibers, generally cheaper and often superior substitutes for traditional materials. In general, the value added to a barrel of crude, or its equivalent in gas, is several times larger when used as a petrochemical feedstock than as a fuel product. 2.02 The major petrochemical building blocks consist of three olefins (ethylene, propylene and butadiene) and three aromatics (benzene, toluene and xylenes). Ethylene is the most important of them and is now used to produce about one third of all petrochemicals. Olefins are generally produced through cracking of naphtha, gas oil or natural gas. Aromatics are derived from light liquid petroleum fractions usually as part of refinery operations. Both are transformed into second generation products such as polymers, synthetic rubber, intermediates for synthetic fibers, and other organic chemicals. Polymers are the main ethylene derivatives. The five major polymers are low-density polyethylene (LDPE)/linear low-density polyethylene (LLDPE), high-density polyethylene (HDPE), polyvinyl chloride (PVC), polypropylene (PP) and polystyrene (PS). LDPE/LLDPE, HDPE and PP are classified as polyolefins. 2.03 Polymers, in the form of granules, are transformed by the plastics conversion industry into end-use products for clothing, shelter, water supply, transportation, industry, packaging, storage and conservation. Production up to the second generation products is vertically integrated and capital-intensive, while the conversion industry is decentralized and provides opportunities for small-scale operations. In their range of applications, polymers substitute for traditional materials including: (i) metals, in home construction, appliances, mass transit equipment, and components for machinery and furniture; (ii) timber, natural rubber, cork, paper and other wood derivatives, in home construction, low-temperature and electrical insulation, packaging of bulk commodities (fertilizers, cement) and foodstuffs; (iii) glass, in a variety of packaging and containers applications; and (iv) leather and fabrics, in upholstery, footwear, furniture and luggage. Polymers have also found new applications in agriculture (mulching and seedling nursery bags) and water management (storage ponds, canal lining, and piping and trickle irrigation systems). 2.04 Plastics substitution has been favored by better performance characteristics and lower economic costs compared with traditional materials. In particular, plastic products require significantly less energy than competing products as shown in Annex 2--l. For example, when polypropylene substitutes for cellulose, the plastic use results in energy saving of 29%; polyethylene substitutes for paper with energy saving  -3- of 33%, and for galvanized steel with energy saving of 76%; and PVC substitutes for glass with energy saving of 58%, and for cast iron with energy saving of 82%. In addition, when a significant percentage of used plastic products are reprocessed and recycled, as in some countries like India, use of plastics is even more energy efficient and economical. B. Feedstock Characteristics and Ethylene Production Costs 2.05 The US, with about 36% of world ethylene capacity in 1980, uses abundantly available low cost refinery gas and natural gas fractions as the predominant feedstocks. In contrast, Japan and West Europe, which are deficient in natural gas resources, use almost exclusively more costly naphtha and gas oil, which results in the production of a wide range of co-products, frequently in excess of market requirements and requiring complex and expensive separation and purification facilities. Since the oil price increases of 1973 and 1979, the use of refinery liquid products has become even less economical compared to that of natural gas fractions. While naphtha is currently priced at around US$240/ton or US$5.5/million BTU, gas prices range from US$5.4/million BTU in West Europe to US$2.5/million BTU in the US, and US$1-1.5/million BTU in the Middle East. The combination of higher capital cost and increased feedstock prices has made naphtha-based ethylene costlier than natural-gas based ethylene by about 33% in West Europe,- and 50% in Canada and in some low gas price developing countries. Ethylene capacity by feedstock type in various regions is shown in table TI-1. Table II-1. Ethylene Capacity by Region and Feedstock Type, 1980 Regional Capacity Feedstock (in %) as % of World Natural Gas and Naphtha and Nameplate Capacity Refinery Gas Gas Oil uS 36 60 40 Canada 3 40 60 Japan 11 0 100 West Europe 32 1 99 Middle East 1 57 43 Asia and Oceania 5 15 85 East Europe and USSR 9 8 92 Latin America 3 22 7_ World 100 26 74 2.06 The industry is characterised by significant economies of scale. Production cost per unit of ethylene declines by about 15% when capacity increases by 50%; but beyond 300,000 tpy capacity there is no significant advantage with larger capacities. In developing countries, higher project and infrastructure investment costs and possible lower production levels could raise ethylene production costs by 10-15% relative to developed country locations.  - 4- C. The World Polyolefins Market 1. Historical and Projected World Consumption of Polyolefins 2.07 Over the past decade, consumption of petrochemicals in general enjoyed a reasonable growth in spite of large energy price increases, highlighting the general health of the demand for the products and reflecting the benefits compared to traditional materials. World consumption of polyolefins (LDPE/LLDPE, HDPE and PP) increased at a fast pace from 8.5 million tons in 1970 to 25.3 million tons in 1983, at an average rate of 8.8% p.a. The energy price increases of 1973 and 1979, resulted in a consumption slump during 1974-75 and further stagnation during 1979-81. Yet, during the relatively normal periods 1970-73, 1976-79 and 1982-83, polyolefins consumption grew at 16.7%, 13.0% and 12.8% p.a. respectively. LDPE, which has been longer in use, accounted for about 65% of total polyolefins consumption in 1970. However, consumption of HDPE and PP has grown faster than LDPE, owing to newer applications in bulk packaging, industrial components, consumer durables and pipes. As a result, the shares of LDPE, HDPE/LLDPE and PP in 1983 total polyolefins consumption were 44%, 31% and 25%, respectively. World polyolefins consumption and growth rates by resin type from 1970) to 1983 are given in Annex 2-2. Regional consumptions and shares of world consumption are given in Annex 2-3. Average consumption growth rates in selected periods for developing and developed regions are given below. Average World Consumption Growth Rates in Selected Periods (% p.a.) Developing Total Developed Regions Regions World 1976-79 12.5 15.1 13.0 1979-83 1.3 13.2 4.3 1974-83 4.7 13.9 6.8 Over the past 10 years (1974-83), consumption grew aLt a higher rate in developing (13.9% p.a.) than in developed (4.7% p.a..) regions, because of the lower initial base in the former. The share of the developed regions in world consumption has thus declined, but was still about 69% in the 1983 world total, with the US (27.8%), West Europe (28.7%) and Japan (9.9%) having large shares. 2.08 In order to make realistic projections of future world demand and supply for individual polyolefins, the Bank commissioned three major consulting firms, Stanford Research Institute (US), Chem System (UK), and SEMA (France), to study and assess country-by-country projections of polyolefins demand/supply situation (Project File, Reference C). These projections were complemented by private industry studies and by regression studies carried out by the Bank. The Bank's projections of future world demand for polyolefins are shown in table II-2.  - 5 - Table I-2. D]n-d for blRowlefir by Fe#im, 1983-95 (in thosl tons) Total Fblyoledins -1983 (actual)- -1990 (projected)- -1995 (projecte1-)- C&-owth Rate FE a/ pp Total PE PP Total FE PP Total 1983-9% 1990-95 tUiited States 5,370 1,660 7,030 7,525 2,460 9,985 8,050 2,709 10,750 5.1 1.5 iWst Euape 5,610 1,640 7,250 6,000 2,100 8,100 6,500 2,300 8,800 1.6 1.7 Japan 1,533 974 2,507 1,8D5 1,205 3,010 2,005 1,400 3,405 2.7 2.5 Cairda 572 105 677 865 165 1,0390 1,075 195 1,270 6.8 4.3 Stltotal 13,085 4,379 17,464 16,195 5,930 22,125 17,630 6,595 24,225 3.4 1.8 latn Anzrica 1,411 313 1,724 2,549 562 3,111 3,287 710 3,997 8.8 5.1 East axope 1,655 329 1,975 2,500 500 3,000 3,150 600 3,750 6.2 4.6 Midle East 334 60 394 607 82 699 750 105 855 8.3 4.4 Africa 488 121 609 746 186 932 938 225 1,163 6.3 4.5 india 176 37 213 325 90 415 495 145 640 10.0 9.1 Other Asia/ beania 1,929 977 2,906 2,998 1,535 4,533 3,760 1,790 5,550 6.6 4.1 Sutotal 5,993 1,828 7,821 9,725 2,955 12,680 12,380 3,575 15,955 7.2 4.7 okrld 'Ital 19,078 6,207 25,285 25,920 8,885 34,8)5 30,010 10,170 40,180 4.7 2.9 Saxres: An Systes ard Bark Estinates. a/ PE: Plyethyleres irluirg IE, UJFE and HlE. With the world economic recovery from the recent recession, plastics consumption is expected to resume growth, although at a lower rate than in the past. World demand for polyolefins is projected to grow from 25.3 million tons in 1983 to 34.8 million tons in 1990 and 40.2 million tons in 1995, at an expected average growth rate of 4.7% p.a. during 1983-90, and 2.9% p.a. during 1990-95. These are relatively conservative estimates compared to the 6.8% p.a. rate in world consumption experienced in the last decade. Growth in developed regions is estimated at 3.4% p.a. up to 1990 and 1.8% p.a. thereafter. For developing countries, consumption growth is estimated at 7.2% up to 1990 and 4.7% thereafter. Among the developed regions, the growth rate in the US is expected to be higher than in West Europe and Japan because of greater development efforts in new areas of substitution as well as in industrial applications. Demand growth is expected to be higher than world average in East Europe and developing regions where present consumption levels are low. Demand for RDPE/LLDPE and PP will continue to grow faster than for LDPE, increasing their share from 55.4% in 1983 to 67.3% in 1990 and 71.7% in 1995.  - 6 - 2. Historical and Projected World Capacity of Polyolefins (a) Historical World Capacity of Polyolefins 2.09 World nameplate capacity of total polyolefins has grown from 12.4 million tons in 1970 to 31.7 million tons in 1983, at a rate of 7.5% p.a. on average. Developed regions accounted for 90% and 79% of total world capacities in 1970 and 1983, respectively. As demand grew, the industry expanded at an over-optimistic pace, with world capacity more than doubling between 1970 and 1977. Between 1978 and 1983, net capacity additions were relatively small as very little additional capacity came on stream and there were capacity closures as part of industry restructuring programs in the US, Japan and West Europe. In 1983, of the total world capacity of 31.7 million tons, West Europe accounted for 34%, the US for 30%, Japan for 12%, East Europe for 9%, Latin America for 4%, Canada for 3% and the Middle East for 1%. Annex 2-4 shows the capacities by region of individual polyolefins for the period 1970-1983. 2.10 Capacity Utilization. Available capacity utilization informa- tion tends to be unreliable because of lack of consistency, differences between design grade-mix and actual production grade-mix, number of opera- tion days per year and the effect of capacity buildup in new facilities. After correcting for these inconsistencies, the estimated historical average capacity utilization rates by product and region is shown in Annex 2-5. Capacity additions and market constraints have kept average capacity utilization at about 74% during 1970-83. In 1983, the last year for which data is available, capacity utilization reached 83%. The higher capacity utilization during relatively normal years (1974, 1979 and 1983), indicates that the facilities can potentially operate at 80-85% of their nameplate capacities. Since several plants will be closed in the next few years and existing facilities will be debottlenecked, the industry average capacity utilization is expected to reach 90% by the late 1980s. 2.11 Restructuring of the World Polyolefins Industry. Currently, the extent of overcapacity in the industry is not excessive, as the 1983 polyolefins production of 25.3 million tons represents 83% of nameplate capacity, compared to the 1970-83 average of 74% and a potential of 90%. The early 1980s witnessed rationalization and consolidation of plants, particularly in Japan and West Europe, when large, export-oriented polyolefins capacities were planned and set up in Canada and Saudi Arabia based on low-priced natural gas. In addition, the sLowdown of demand in the developed regions because of market saturation in several application areas, led many manufacturers to move away from bulk chemicals into more profitable specialty products. The restructuring of the early 1980s included closures of older, small, uneconomic plants, and ownership rearrangements, often promoted by governments. Natural gas price deregulation in the US may increase feedstock prices and induce additional plant closures. Given the current market situation, new petrochemicals production could only be economic in countries with such advantages as large domestic markets and abundant gas resources. (b) Projected World Capacity of Polyolefins 2.12 The projections of future polyolefins nameplate capacities are summarized in table 11-3.  Table II-3. World Nameplate Capacities of Polyolefins a/ (in thousand tons) 1983 (Acx1l) 1985 (Projeted) 1990 (Prjected) 1995 (Projcted) Total lbtal Ibtal Thtal PP Pololefir FE PP Pblefirs E PP RPOYlefi PE PP Pblyolefins Daevoed Regc USA, 7,005 2,425 9,430 7,83) 2,645 10,445 7,803 2,645 10,445 7,8f 2,645 10,445 Wet E 8,470 2,325 10,795 8,780 2,460 11,240 8,78) 2,460 11,240 8,783 2,460 11,240 Japan 2,523 1,330 3,850 2,252 1,330 3,582 2,252 1,330 3,582 2,252 1,33) 3,582 CaVda 773 136 939 1,0C7 136 1,223 1,214 136 1,350 1,214 136 1,350 Subtotal 18,768 6,216 24,984 19,919 6,571 26,490 20,046 6,571 26,617 20,046 6,571 26,617 latin Ahrica 1,235 155 1,39) 1,510 205 1,715 1,510 205 1,715 1,510 205 1,715 Elast ampe 2,271 483 2,751 3,526 68) 4,206 3,666 680 4,346 3,666 680 4,346 MidlM East 260 - 260 1,130 60 1,190 1,365 60 1,425 1,365 60 1,425 Africa 318 38 356 318 57 375 473 160 633 473 160 633 Tkia 147 30 177 147 30 177 362 90 452 362 90 452 (r Asia/ Ociea 1,179 579 1,758 1,522 779 2,301 1,657 779 2,436 1,657 779 2,436 Sbotal 5,410 1,282 6,692 8,153 1,811 9,964 9,033 1,974 11,0)7 9,033 1,974 12,007 Tcta1 rkld 24,178 7,49B 31,676 28,072 8,382 36,454 29,079 8,545 37,624 29,079 8,545 37,624 =_.= .== Sans: CSystems and Bak Estinntes. a/ Irs1ixie capaties in plae, and finnly armmd additions and cloas as of mid-1984. Ecclues ary nEW speculative caiazity akitifxs. The projections, based on data from consulting firms (SRI, SEMA and Chem Systems), include capacities under implementation and those firmly announced, and take into account firmly slated capacity closures. Given the current severe under-utilization of capacity, no significant additions are expected beyond those firmly announced until the projected 1990 installed capacity is fully utilized. On the above basis, the world polyolefins nameplate capacity is expected to increase from 31.7 million tons in 1983 to 37.6 million tons in 1990. Additions to capacities that will come into operation after 1990, are expected to be more carefully and selectively planned in the context of the industry's recent experience of overcapacity and impact on prices. Such additions most likely would take into account domestic, and internatinal supply/demand situations, and would be predominantly for production of LLDPE/HDPE, and PP, while LDPE will be confined to existing capacity. In estimating the evolution of future demand/supply balances, and prices it is assumed that once the current  -8- rationalization is completed, future capacity additions would maintain a reasonable balance between demand and supply with optimum capacity utilization. 3. Historical and Projected World Supply-Demand Balance of Polyolefins 2.13 Historical and projected demand and supply for LDPE/LLDPE/HDPE and PP are given in charts II-A and II-B on the following page. For purposes of estimating future supply gaps, product availability has been estimated based on capacity utilization rates higher than the historical average--85% in 1985, with further increase to 90% for developed regions by 1990. The above scenario indicates that demand for LLDPE/LDPE/HDPE will outstrip supply by 1990. PP's estimated demand will exceed supply by 1986. 2.14 The demand and supply analysis groups the polyethylene polymers (LDPE, LLDPE and HDPE) together because of their intersubstitutability in several applications. LLDPE, which is a newer product, has increasingly proved to be a versatile polyolefin with application areas many of which bridge those of conventional LDPE and HDPE. The largest area of application for LDPE has been in films for packaging followed by injection- moulding applications, whereas for HDPE it has been iLn blow-moulding followed by injection moulding applications and piping. Because of better stretch properties, LLDPE competes with LDPE in the film applications and has better performance to cost ratios. Similarly, LLDPE competes favorably with HDPE in sheets, tubulars and injection moulding applications. Injection moulding and film applications areas also provide considerable potential for inter-product substitution of LDPE and HDPE. The potential market for LLDPE, including demand for applications where it can substitute LDPE and HDPE, is significantly higher than the likely availability of LLDPE from the 1990 worldwide capacity. It is, therefore, appropriate to group the three products for purposes of evaluating the supply and demand balance. With regard to PP, its applications and those of HDPE overlap in the areas of the blow moulding, consumer durables, engineering parts and piping. PP is, however, preferred over HDPE in several applications, and has in addition unique applications in fiber and electroplatable consumer durables.  CHART II-A WORL CAPACITY, PRODUICTZON /OJAN FOR LDPE. LJDPE & HoPe. 1B70-io1s rtr Dwuo n 7 4,_ ~ ~ ~ CHR II- ~~~~. mO P.17010 N2 I _ c fea"o_ M S.. CHART II-B UCALO CAPACITY PqaoucroN /OEMANO FoOR RP, 1g7F995gg __ '4 ..oX N .1.,,,,,,,*.I 0 l@ ,7 "  - 10 - 2.15 Regional Supply/Demand Balances. On the basis of the above global supply demand estimates, the regional supply/demand balances in 1983, and those projected for 1990 and 1995 are given in table II-4. Table II-4. Current and Projected Surplus (DefiLcits) for Polyolefins by Region, 1983-95 (in thousand tons) Actual Projected 1983 1990 1995 PE PP PE PP PE PP USA 1,328 363 (505) (79) (1,030) (319) West Europe 830 400 1,902 1L4 1,402 (86) Japan 213 88 222 (8) 22 (203) Canada 113 15 228 (43) 18 (73) Latin America (408) (161) (1,266) (388) (2,003) (536) East Europe 215 (20) 616 78 (34) (22) Middle East (159) (60) 553 (31) 410 (54) Africa (293) (87) (344) (50) (536) (89) India (61) (17) (17) (13) (187) (68) Other Asia/Oceania (1,036) (469) (1,590) (873) (2,352) (1,128) Net World Total 742 52 (201) (1,293) (4,291) (2,578) 2.16 The current surplus of polyolefins in the U.S. is expected to turn to substantial deficit by 1990 because of only limited further capacity additions. Japan is expected to become a net importer of polyolefins in the 1990s. West Europe will continue to have surplus, meeting the increasing consumption with better util:Lzation of already available capacity. Canada and the Middle East wil:L emerge as significant exporters after 1985 owing to new capacity installations. Deficits in remaining regions of the world, particularly Latin America and other Asia/Oceania regions are expected to increase substantially since little additional capacity is foreseen. The surplus capac:Lty in West Europe could result in further closures of old plants, and the equilibrium year for LDPE/HDPE/LLDPE could correspondingly occur sooner than is shown in chart II-A. The large aggregate deficits expected by 1990 will have to be *et with annual production capacities to be planned in 'Late 1980's and coming into production by early 1990s, as new facilities w:Lll require 3 to 4 years in a developed country and 4 to 6 years in a developing country between investment decisions and production. D. Prices of Major Polyolefins 2.17 Polyolefin prices have shown considerable short-term fluctuations in the past, mainly as a result of market conditions. Reflecting the stagnation in demand for petrochemicals in 1979-82 following the recent world economic recession and the substantial capacity additions during the 1970s, prices of polyolefins, especially LDPE, have declined in the last few years and continue to remain depressed. The 1973 energy price increases along with short-term speculative demand resulted in unusually  CHART II-C EXCM3 CAPCIT Y OVM CONSUMPTON/tE0MAN a/ MIWUON MON 4 2- 0- LDP",WnDPED -' P~~~~~~~~~~~~~~~pp 1970 1972 t974 17 1978 1980 1982 19 6 18 1990 1992 a/ Excess capacity is defined as 85% of the world nameplate capacities minus (historical) consumption, or (projected) demand. high price increase in 1974, with polyolefin prices reaching near US$1,300 per ton (in 1984 prices). Thereafter, prices declined to about USS600 per ton in 1975-78 coinciding with large capacity additions and, as a result, excess supply. Following the energy price increases of 1979, polyolefin prices rose again in 1979 and 1980, but declined again in 1981-1982, when large capacities came on stream principally in East Europe, the UJSA and Latin America, in the midst the economic recession. The US export prices of LDPE and HDPE resins have recovered by late 1983 - early 1984 to US$892 and US$794 per ton respectively. Prices of LLDPE - a relatively new product, enjoys a 5-7% premium over LDPE. Historically PP has enjoyed a 10-15% premium over HDPE due to its unique applications as reflected by the current (first quarter of 1984) US price of US$905 per ton. The historical evolution of polymer prices is given in Annex 2-6. 2.18 Polvolefin prices are projected to increase gradually as demand catches up with available capacity. Because of the substantial inter-product substitutability among the polyethylenes (para 2.14), until supply and demand reaches equilibrium, the prices of the different polyethylenes will become interdependent and will be set predominantly by the aggregate polyethylene supply and demand balance as shown in Chart II-C. Until demand and supply balance is reached around 1990, some of the application areas of LLDPE/HDPE will be met by LDPE, given the latter's continued oversupply. It is anticipated that up to 1990, HDPE prices will remain closer to the present LDPE prices. By 1990, the product prices are expected to rise and reach the respective long-term equilibrium levels discussed in the paragraph below. While the demand and supply balance of PP is projected to be reached before 1990, PP prices may reach its equilibrium level only by 1990 as a result of inter-product substitutability with HDPE.  - 12 - 2.19 Long-term equilibrium prices are forecast on the basis of long-term marginal cost of efficient suppliers. The basic proposition is that by 1990, when polyolefins world demand exceeds supply capacity, new investments will need to be induced into the industry. For these new investments to come into the market, polyolefin prices will need to reach a level that will enable the most efficient marginal suppliers to cover their cost and earn a reasonable rate of return on invested capital. If prices were not to reach these realization price levels, and efficient suppliers were not to come into the market, then demand will continue to exceed supply and polyolefin prices will rise very sharply. Long-term marginal cost of efficient suppliers (i.e. realization prices), therefore may be expected to be the floor prices that will exist when the current excess supply vanishes. Based on consultant studies (SRI and SEMA) and the Bank estimates on the production economics of new efficient polyolefin plants in the various regions of the world (Middle East, West Europe, USA and Canada), the 1990 realization prices of individual p)roducts are estimated in constant 1984 US dollars at US$1,100/ton for LDPE, LLDPE, and HDPE, and at US$1,250/ton for PP (Annex 2-7). The equilibrium prices for 1990 so derived, in constant terms, represent annual increases of 4.6% over the prices of LLDPE/LDPE/ HDPE prevailing in 1984, and 5.5% p.a. increases over the 1984 price of PP. In view of present depressed prices, these increases are reasonable and achievable. The sensitivity and economic analysis carried out in Chapter XI-shows that even if product prices were to remain at 1984 levels, the proposed Project will still be economically viable with an ERR of 10%. III. PETROCHEMICAL INDUSTRY IN -[NDIA A. Historical Developments 3.01 India has a diversified industrial structure for consumer and capital goods manufacturing. The manufacturing sector accounted for 16.3% of GOP in 1982/83. On the eve of independence (1947), traditional light industries accounted for about one-half of manufacturing output. Since then, however, structural transformation has taken place with production of basic industrial inputs such as steel, cement, fertilizers and machinery growing at a significantly higher rate than industry as a whole. Between 1970 and 1982, industrial output of basic and capital goods industries increased at a real rate of 5.8% p.a., compared with 3.4% p.a. for intermediate goods industries, and only 3.7% p.a. for non-durable consumer goods. Within the intermediate goods subsector, the chemical industry has grown at a much faster rate of 6.7% p.a., increasing its share of manufacturing output from 13.4% in 1970, to 17.9% in 1982. 3.02 Production of basic petrochemicals began :Ln 1966 with the establishment of a small 20,000 tpy naphtha-based ethylene cracker, followed in 1968 by a 60,000 tpy naphtha cracker, both in the Bombay area. These plants are in the private sector with foreign equity holding. Prior to 1966, small quantities of LDPE, PVC and organic chemical intermediates were produced on the basis of fermentation alcohol, coal tar intermediates and calcium carbide. In the late 1960s, small faci:Lities for production of synthetic fibers based on imported raw materials were also established.  - 13 - Recognizing the importance of petrochemicals in national development, the GOI moved in the late 1960s toward larger scale manufacture. A major addition to the production of primary petrochemicals was made in 1973 when an aromatics plant began production in Gujarat State, and which was owned and operated by the public sector Indian Petrochemicals Corporation Ltd (IPCL). This was followed in 1978 by an integrated naphtha-based olefins complex with an ethylene capacity of 130,000 tpy and including a number of downstream plants, also owned and operated by IPCL. Present petrochemical production capacity and new capacity under implementation are summarized in table III-1. Table III-1. India - Present Petrochemical Production Capacity (in thousand metric tons) Additional Capacity Present Capacity Under Implementation Ethylene 260 - Propylene 119 - Butadiene 54 - Benzene 131 - Toluene 25 - Xylenes 40 91 Five Major Polymersa! 308 80 Synthetic Fibers Intermediates 67 61 a/ LDPE, HDPE, PP, PS, and PVC B. Strategy for the Future Development of the Indian Petrochemical Sector 1. Subsector Priority 3.03 The Sixth Five-Year Plan (1980-85) put increased emphasis on promotion of the petrochemicals industry. With the availability of associated and free gas from the Bombay High and South Bassein fields, India now has a preferred feedstock for the manufacture of ethylene-based petrochemicals in plants of international size. Utilization of gas for petrochemicals is among GOI's highest priorities though the major portion of planned gas production will go for fertilizer production. The GOI is also planning to establish facilities for recovery of aromatics. The Government recognizes the merit of promoting plastics in light of: (i) their lower energy content vis-a-vis competing products; (ii) their role in providing widespread low-cost shelter, storage, footwear and housewares; (iii) the relative scarcity and higher economic cost of competing raw materials like steel, cement, wood and glass, often imported at the margin; (iv) the potential development of a labor-intensive small-scale downstream processing industry in the private sector; and (v) the added economic advantages of reprocessed and recycled plastics usage, which is common in India.  - 14 - 2. Private and Public Sector Roles 3.04 Government policy in the sector encourages both private and public sector ownership in all phases of petrochemicals manufacture. The proposed Project will be established in the public sector, but will require substantial private sector investment for the related downstream plants and for plastic conversion facilities. In addition to the US$1,697 million to be invested in the Project itself, about US$100 million will be invested by existing private sector manufacturers for plants expansion to convert 50,000 tpy ethylene supplied from the Project, and about US$300 million in the private, small and medium scale sector for plastics conversion. The decision on Project ownership was based both on the need for speedy establishment to achieve optimum utilization of the country's natural gas resources, and the restricted availability of private sector resources in the context of India's capital market. Also relevant was the institutional capacity of IPCL as efficient petrochemical manufacturing company with considerable experience in project implementation, operation and marketing. The above decision thus reflects pragmatic considerations in the context of developing the subsector in which both the public and private sectors play complementary roles, and is justified. In planning for future petrochemical investments, the Government intends to keep in view enlarged private sector participation both exclusively and in joint ownership in the core and second generation plants. IV. THE PETROCHEMICAL MARKET IN INDIA A. Historical and Projected Petrochemical Demand in India 1. Past Consumption 4.01 Imports of polymers in India over the past five years (1980-1984) have averaged 103,000 tpy, representing about one-third of domestic consumption, but an insignificant portion of the world trade of polymers. Consumption of polymers has grown at a quick pace of 14% annually during 1966-1984, in spite of high domestic prices, limited domestic production and restrictions in allocation of foreign exchange for imports. These factors are reflected in an uneven year-to-vear consumption growth. When product availability was restricted, consumption has slackened, as between 1974 and 1977. The energy price increases of 1973 and 1979, which led to a sharp rise in international polymer prices, caused a reduction in consumption in the following years. Conversely, when new domestic capacity came on stream, as in 1966 and 1978 for LDPE, in 1968 for HDPE and in 1978 for PP, or when imports were relaxed as in 1977, consumption recovered considerably. The average annual growth rate for polymers consumption during 1977-1982 was correspondingly higher, at 17%. Among the factors that contributed to the increase in demand were reductions in prices especially for LDPE with large additions in domestic capacity, increased marketing efforts by producers, and the rationalization of excise taxes on polymers (now comparable with materials like paper, steel and glass, which plastics will partly substitute). Per capita consumption of polymers in India remains nonetheless among the lowest in the world, although it doubled to about 0.45 kg from 0.22 kg in 1973/74,  - 15 - (e.g. Brazil 7.7 kg, Korea 19.2 kg, Portugal 17.4 kg all in 1979). Annex 4-1 provides historical data from 1965 to 1983 on the Indian market for the five major polymers (LDPE, HDPE, PP, PVC and PS) and EG, as regards production/consumption. 2. Future Demand 4.02 The base case demand forecast used in the present analysis has been prepared following the review of the Government/IPCL estimates. These have been prepared based on a product-by-product analysis of the end-use markets and their growth prospects, economic comparisons between plastics and traditional materials, and assessment of the reprocessing of used plastics, as well as field interviews with plastics producers and convertors (Project File, Reference D). The demand forecast is based on the present relative prices of polymers and traditional materials and the choice of polymer primarily based on performance characteristics. Such relative financial prices are consistent with the economic cost of the relevant products. The Government subsector development strategy aims at improving or at least maintaining the competitive position of plastics through appropriate pricing policies and adjustment of relative fiscal levies. Any drop in plastics prices in absolute terms or relative to other materials, will lead to faster demand growth. The base case demand forecasts are detailed in Annex 4-2, and summarized in table IV-1. Table IV-1. India - Demand for Polymers and EG 1983/84-1992/93 (in thousand tons) Base Case Forecast __ot Total LDPE LLDPE HDPE pp PVC PS Polymers EG Actual: 1965/66 15 - 2 - 13 6 36 - 1973/74 33 - 29 0.8 49 14 126 10 1983/84 121 - 75 30 137 17 359 22 Forecast: 1987/88 184 - 91 84 177 18 554 54 1988/89 209 - 95 104 197 20 625 67 1989/90 155 54 100 128 217 22 676 76 1992/93 227 79 115 237 288 28 974 104 Average Annual Growth Rates (%) 1983/84-1992/93 7 NA 5 25 9 7 11 19 11 (combined with LLT)PE)  - 16 - The base case annual demand growth rate for the five major polymers is estimated at 11% p.a. during 1983/84-1992/93 against 15% as projected by the Indian authorities and IPCL, and is regarded as conservative. Moreover, a "worst case" forecast (7% p.a. growth in consumption during 1983/84-1992/93) was developed based on pessimistic assumptions regarding penetration levels of polymers in end-use markets and availability of plastics during the intervening period through end-1989. Even under the "worst case" scenario, the timing of the proposed Project remains acceptable, as highlighted in the supply/demand balance (para 4.06). 4.03 With regard to individual polymers, PP conSumption is expected to have the highest growth because of superior performance characteristics, with 25% p.a. growth, against only 5% p.a. for HDPE. Most increase in HDPE consumption will be for water pipes, packaging films and household products. LDPE and LLDPE combined will be the second fastest growing polymer (11% p.a.) mostly for use in irrigation and agriculture, storage, packaging and cables. LLDPE, new to the Indian market, will initially be mostly blended with LDPE (particularly in films) to achieve downgauging through its superior performance. PVC will grow at 9% p.a. through 1992/93, and will be increasingly used in pipes for rural water supply/irrigation, construction, containers, cables and footwear. Consumption of EG has increased in the past years (1973/74-1983/84) at 8% p.a. in line with the production of synthetic fibers, its main use. Polyester synthetic fibers production is being encouraged in a limited way from the early 1970s in view of the declining per capita availability of cotton. Based on present and projected capacity of synthetic fibers, EG demand is expected to grow at 19% p.a. B. Historical and Projected End-Use Pattern 4.04 Packaging applications (fertilizer, chemicals, food, milk, textiles and general purpose packaging) accounted for the largest share (38%) of recent (1981/82) thermoplastics consumption and these applications are expected to maintain their share in 1988/89. The direct use of virgin plastics, however, does not fully reflect the growth in packaging applications, as a unique feature of the Indian marke!t is the reprocessing or recycling of used plastics. About 30% of the plastics is reprocessed given the present price levels and availability of virgin plastics, and the efficiency of collection of plastic scrap material. Actual total application of plastics in packing, therefore, will be somewhat larger than the 38% share based on virgin plastics. 4.05 In the future, plastics consumption is expected to develop rapidly (15% annually) for vital applications in agriculture, irrigation and water management - increasing the share in total plastics consumption from 18% in 1981/82 to 23% in 1988/89. Somewhat below average growth is forecast for applications in wires and cables insulation, industrial parts (textiles, electrical and automotive uses) and household applications (housewares, appliances and luggage). The share of PP in total plastics consumption is forecast to increase from 8% in 1984/82 to 17% in 1988/89, and that of LDPE from 30% to 33%. On the otner hand, the shares of other plastics -- HDPE, PVC and PS--are expected to decline.  - 17 - C. Projected Petrochemical Demand and Supply Balance 4.06 The projected demand/supply situation in India for each polymer and EG takes into account (i) the production of existing facilities operating at 90% capacity for polyolefins and EG, and at 60% for PVC; (ii) planned expansions operating at 90% capacity; and (iii) the production build-up from the proposed Project reaching 95% capacity as of 1992/93. The results are summarized in table IV-2, based on the two assumption regarding future demand growth indicated in paragraph 4.02, i.e. (i) base case with demand growth at 11% p.a. and (ii) worst case scenario with demand growing at 7% p.a. Details are provided in Annex 4-3. Table IV-2. India - Projected Surplus (Deficit) for Polymers and EG (in thousand tons) Base Case Scenario Worst Case Scenario 1989/90 1991/92 1992/93 1995/96 1989/90 1991/92 1992/93 1995/96 LDPE (47) (42) (59) (165) (14) 10 6 (48) LLDPE (43) (11) (13) (50) (34) 4 5 (15) HDPE (50) (16) (8) (27) (40) (2) 5 (4) PP (67) (91) (130) (333) (24) (14) (29) (112) PVC (50) (92) (118) (214) (13) (38) (53) (109) PS (1) (5) (7) (16) 5 3 2 (2) EG (47) (31) (36) (68) (31) (6) (6) (20) Under the base case forecast, demand exceeds supply for the Project products (LDPE, LLDPE, HDPE, PP and EG). However, in the "worst case" scenario, small surpluses of LDPE, LLDPE, and HDPE would emerge in the first four years. This temporary very marginal surplus, which would disappear after 1992/93, is unlikely to pose difficulties for the Project. For EG and PP, even under the "worst case" scenario, no surplus would develop., D. The Plastics Conversion Industry 4.07 It is necessary for the plastics conversion industry (which converts raw polyolefins into final consumption products) to develop in line with the projected polyolefin production capacity and consumption levels. In early 1982, there were about 7,250 processing units (with a capacity of 1 million tpy) against only 1,400 units in 1970. The capacity is predominantly (about 95%) in small-scale privately owned establishments owing to the low investment requirements and liberal and simple registration procedures for setting up new units. The industry at present employs about 100,000 people, an average of about 14 employees per unit. About 0.75 million tpy of additional nominal processing capacity will be needed by 1990, to process the Project's output, after allowing for improvements in the efficiency of existing units and in machinery quality. This expansion would promote about US$300 million of private investment. Since the subsector is fairly well-established and is profitable, this size of expansion is considered feasible. The Project and the conversion industry expansion would result in creation of about 60,000 new jobs, a  - 18 - part of it by displacement of the jobs in those sectors whose products will be substituted by the products from the Project. 4.08 India's conversion machine building industry, which is mainly in the private sector, has demonstrated entrepreneurship and capability to evolve designs of plastic conversion equipment suited for local conditions at well below international prices. More recently, it has also become increasingly conscious of quality needs, and expects to improve the local designs further. This effort will be supported by the present liberal policies which encourage imports of prototype machines and post-extrusion system components, when needed to achieve quality requirements. 4.09 Organization support to provide technical assistance to the plastic processing industry is available through institutions such as the Central Institute of Plastics Engineering and Technology (CIPET), the Plastics and Rubber Institute, the National Small Scale Industries Corporation (NSSIC), the Small Industries Service Institute, the Indian Institute of Packaging and various industrial training institutes, as well as the plastics manufacturers themselves. CIPET is establishing an extension center in in Ahmedabad (Gujarat), while NSSIC intends to set up shortly a center for prototypes development and training. In recognition of the need for national coordination in developing the skilled manpower for plastics processing through disseminating technical literature and resources among the States, training institutes and the processing industry, the Government has agreed to set up a training and technical assistance unit by April 1, 1986 which will review cnd update the curricula for training methods of tool making and conversion machinery operatives, as well as develop methods and channels for providing technical assistance to the conversion machinery industry. V. MARKETING A. Pricing in the Petrochemical Sector 5.01 At present, each petrochemicals plant in India sets its own ex-factory prices for its own production. Prices of major polymers increased sharply in 1980 following major increases in petroleum prices in 1979. Since then, ex-factory prices are showing a downward trend owing to the commissioning and efficient operation of IPCL's production facilities completed in late 1978. For example, ex-factory prices of LDPE, HDPE, and PP, in constant 1984 prices, declined from US$2,000, 1,850, and 1,700 per ton in 1980 to US$1,200, 1,400, and 1,450 per ton in 1984. While the current ex-factory prices are still higher than CIF prices by 20% for LDPE, 60% for HDPE, and 50% for PP, the ratios of ex-factory to CIF prices are expected to move toward 1, as the current international prices will recover to equilibrium levels (para 2.19) and as the ex-factory prices could be further reduced by IPCL's efficient operation particularly after this energy-efficient Project comes on stream. 5.02 On ex-factory prices, excise taxes are levied which now range between 16% and 37% depending on the types of polymers involved (compared with a uniform rate of 56% in 1974). Ex-factory prices and excise taxes then form the prices that plastic convertors actually pay. The level of  - 19 - tax liability is in line with those charged on competing products (10% to 50% for glass, paper, wood, aluminum and steel). Thermoplastics imports are subject to import duties generally set at levels which would make landed prices of imports equal to ex-factory prices plus excise taxes. However, in view of the recent highly fluctuating international prices, tariffs have remained high to protect local producers against dumping. As international and domestic prices reach equilibrium levels by early 1990's, the tariff level can be expected to decline and match excise taxes on domestic production. 5.03 The Project is a major effort by the Government to produce petrochemicals--especially thermoplastics--and to use them to substitute the more energy intensive and scarce traditional materials. To facilitate such substitution in an efficient manner, it is necessary that pricing and fiscal policies reflect the relative economics of the alternatives. The Government has asked the Bureau of Industrial Costs and Prices (BICP) to conduct a study on the pricing, fiscal, and trade policies for petrochemicals with emphasis on the enhanced development of domestic petrochemichals market in the context of the Project. The Study will, in particular: (i) estimate the impact of relative prices on demand for thermoplastics; (ii) assess the impact of technology, and product development on final demand of downstream.derived products; (iii) examine the tariff, and pricing policy requirements relating to the absorption of downstream products in the economy; (iv) assess the methods to integrate the pricing, and tariff policy analyses with India's Plan objectives, relating to the Project, the petrochemicals sector, and inter-related sectors; and (v) to highlight any non-tariff, and non-pricing policies which are critical to the achievement of the above-mentioned aspects. The BICP study is expected to be completed by March 1986. The Bank can provide its views to GOB while the study is underway. GOI is committed to ensuring that, prior to the commissioning of the Project, the domestic polyolefins industry is efficient and competitive and, to this end, will consider the Study findings and implement appropriate recommendations in an adequate time-frame, and the Bank can provide its views on the details to be considered while the study is underway. This approach is acceptable to the Bank. B. Market Development Prior to Project Commissioning 5.04 The Project's output will approximately double domestic availability of polymers. Even the conservative consumption forecast (para 4.02) levels used in the base case, can be realized only with active market promotion to develop end-use applications supported by adequate availability of polymers until the commissioning of the Project. In view of the limited domestic polymers production, such market development efforts will require significant imports to provide assured long-term raw material availability and to reasonably ensure that the required conversion and machinery capacities are developed in time. The annual imports of polymers through Project commissioning needed for this purpose are estimated to be about 40,000 tons in 1985/86, 70,000 tons in 1986/87, 110,000 tons in 1987/88, and 150,000 tons in 1988/89, representing total imports of about US$350 million in constant 1984 prices, or US$450 million in current terms. These estimated levels of imports will be reviewed annually between GOI, IPCL, and the Bank in the light of market response,  - 20 - and performance of the conversion industry. Disbursements out of the US$90 million Bank Loan component will cover an agreed portion of the annual requirements jointly specified under the import plan. 5.05 At present, only the actual users--plastics convertors--are permitted to directly import the polymers. While this system will continue, GOI has agreed to give import clearances to permit IPCL to import LDPE, LLDPE, HDPE and PP, starting in 1985/86, in such quantities (para 5.04) as are necessary for gradual market expansion. The US$90 million component will be able to cover up to about 75% of the total LLDPE import requirements, or up to about 20% of the total incrermental imports of LDPE/LLDPE, HDPE and PP required. 5.06 The Bank has obtained assurances that GOI will refrain from taking any action that would unduly inhibit the marlcet growth in plastics from developing to a level consistent with the need for production under the Project to market locally all of its output prornptly after commissioning the Project. C. Marketing Strategy 5.07 IPCL already has an effective nationwide rmarketing network of 48 distribution points developed during the past five years (para 6.04). The organization of the Marketing Department of IPCL is given in Annex 5. IPCL's marketing efforts are supported by its Product Applications Center (PAC) at Baroda, a very large facility providing after sale technical services to the processing industry and thus contributing to its growth. For example, during 1977/78-1979/80 PAC's efforts led to the establishment of 300 new units for processing PP - a new polymer at that time in India. 5.08 IPCL's programs for marketing the outputs of the Project and of IPCL's other expansion schemes include proposals for: (i) establishing new distribution points; (ii) expanding PAC's activities in setting up a product design unit to identify new applications ancd preparing prototype machinery designs; (iii) training its own marketing staff and that of the processors; and (iv) creating a new product applications center under the proposed Project. This program is satisfactory and would particularly emphasize the use of plastics in agriculture and water management according to the findings of a high level national committee which has been recently set up. Based on a detailed review, the arrangements proposed for market development and marketing of the Project outputs are considered satisfactory. D. Merchant Sales of Excess Ethylene 5.09 The Project will offer as merchant sales about 50,000 tpy of ethylene to existing and some new private sector petrochemicals producers in the Bombay area, primarily for expansion of their facilities, a measure which will promote private investment to improve the economics of present operations. Six private firms have already offered to purchase a total of about 62,000 tpy of merchant ethylene to manufacture products including HDPE, PVC and styrene. GOI expects to give necessary licenses to the private sector investors in a timely manner so that such new facilities are completed well before the Project is commissioned.  - 21 - E. Export Potential for Final Plastics Products 5.10 India's exports of manufactured plastic products for consumer and industrial uses, have so far been modest (US$27 million in 1976/77 increasing to US$61 million in 1980/81). Products exported in recent years included spectacle frames, molded and extruded goods, records and video cassettes, electrical accessories and pipes. The USSR is India's major market (with one-fourth of the export sales) followed by Saudi Arabia, Hong Kong, the UK, the UAE, Nigeria, Kuwait and Bangladesh. The export performance has been only modest so far mainly due to inadequate institutional support to the processing industry, which is largely in the unorganized small-scale sector. While exporters have access to incentives such as the cash compensatory support for reimbursement of indirect taxes and duty drawback system for excise and customs duties on plastics used, these are often received by them only after considerable delays. 5.11 India has a comparative advantage in converted product exports especially where value added is high, owing to low labor costs, favorable geographical location and availability of technical skills. To capture the increased potential for export of converted products, GOI has agreed to carry out by December 31, 1985, a study of the export market potential for selected finished products under the terms of reference agreed upon between the Bank and GOI, and to consult with the Bank on the implementation of the findings under the Study. VI. THE PROJECT SPONSOR A. Establishment, Ownership and Objectives 6.01 The proposed Maharashtra Complex will be owned and operated by the Indian Petrochemicals Corporation Limited (IPCL). IPCL is a corporate entity registered under the Indian Companies Act and fully owned by the Government of India. The Company already owns and operates a large integrated petrochemical complex near Baroda in Gujarat State. B. Board of Directors and Management 6.02 The Company's Board of Directors has adequate Dowers to provide policy directions to the Company executives including authorization of operating and capital budgets and guidance on employment and compensation policies. Approval of the GOI is required only in case IPCL needs to borrow for capital requirements. The Company's day-to-day operations are managed by a Managing Director--Chief Executive Officer who is the Chairman of the Board. The twelve Board members include five (the Managing Director, and the Finance, Marketing, Operations and Administration/ Personnel managers) professional Senior full-time managers of the Company. The present IPCL Chairman/Managing Director joined the company in 1982 after holding important positions in the Indian private sector chemical industry.  - 22 - C. Organization 6.03 IPCL is a well managed company organized along functional lines into six departments--Projects, Operations, Finance, Administration/ Personnel, Research and Development (R&D) and Marketing. The departments are headed by full-time functional directors. The Projects Department is responsible for IPCL's new projects and a major program of plant revamping and modernization is underway (para 6.06). The Department is responsible for project planning (feasibility study and selection of technologies) and implementation (selection of contractors, works supervision and training of personnel) and has been responsible for planning the Project. The Operations Department (entrusted with plant production and maintenance), the Finance, and Administration/Personnel Departments discharge the standard functions pertaining to their fields. IPCL's Research and Development (R&D) Department with about forty scientists, undertakes applied research to improve process parameters and economics, and develop processes for by-product utilization. The Company's financial and operations planning are well organized and adequately monitored through an Executive Committee of senior managers, following techniques which include standard costing and variance analysis. 6.04 The Marketing Department carries out its product promotion and sales responsibilities through a network of regional offices in Baroda, Bombay, Bangalore, New Delhi and Calcutta. Actual sales to IPCL's 7,000 customers are conducted through 48 distributors who are located within 100 km radius from the consumers. The products are sold at all distribution points at uniform price. The Department's Product Application Center (PAC) is responsible for customer training, product testing and new applications, and communications. D. Staff and Training 6.05 IPCL's total staff as of July 31, 1984 numbered 6,550 including 1,820 professionals and qualified technicians. Because of its high professional reputation, and competitive compensation package, IPCL has been able to attract competent staff at all levels, and retain them. IPCL has extensive in-house training facilities which plan and run programs for training technical and other staff often with the assistance of specialized consulting firms. Project and operating staff are generally trained before starting up of plants entailing new technologies. IPCL therefore has a fully trained work force competent to operate and maintain large petrochemical facilities. E. Operations and Growth 6.06 IPCL's first petrochemical plant--an aromatic complex--started commercial production in 1973. Several units have since come on stream in the Baroda complex which now includes eleven operating plants for aromatics, olefins, ethylene oxide/glycol, LAB, LUPE, PP, PBR, ACN, acrylic fiber, acrylics and PVC. Capacity utilization has steadily increased to 80-100% in 1982/83. Besides the proposed Project, IPCL plans to expand VC/PVC, DMT, acrylic fiber, xylene, and LAB units as well as install a captive power plant and implement energy-saving schemes. The detail of IPCL's on-going investment program, which totals Rs 7,180 million, is given  - 23 - in Annex 6-1. These other projects have met all GOI's investment criteria, and the projects for expansion are basically market-pulled with relatively certain market prospects. IPCL is India's major petrochemical producer engaged in the production of a wide range of products involving different technologies. It holds a share of about 71% of LDPE, 63% of ethylene glycol, and 35% of PVC total production capacity in India. IPCL's financial statements for 1979/80-1982/83 are provided in Annex 6-2 and summarized in table VI-1. A description of IPCL's organization and structure is available in the Project File, Reference E. 6.07 Table VI-i shows that IPCL has enjoyed a healthy financial situation in the past years. During 1979/80 and 1982/83, total assets grew from Rs 3.9 billion to Rs 4.8 billion, while revenues increased from RS 1.8 billion to Rs 4.5 billion, and profit before tax from Rs 46 million to Rs 513 million. Equity increased from Rs 2.1 billion to Rs 3.5 billion with a debt/equity ratio of 15/85 in 1982/83. The liquidity position also has been satisfactory with the minimum current ratio of 1.9 in 1980/81. Table VI-1. IPCL - Summary of Financial Statements (in millions of current Rupees) 1979/80 1980/81 1981/82 1982/83 Revenues 1,750 2,838 4,105 4,487 Profit Before Tax 46 339 551 513 Total Assets 3,850 4,330 4,220 4,840 Total Equity 2,080 2,420 2,980 3,490 Long-term Debt 1,260 960 640 640 Current Assets 1,280 1,820 1,850 2,210 Current Liabilities 510 950 600 710 Profit Before Tax/ (Total Revenues - Excise Duties) 3.1% 13.9% 15.5% 13.6% Current Ratio 2.5 1.9 3.1 3.1 Debt Equity Ratio 38/62 28/72 18/82 15/85 VII. THE PROJECT A. Project Objective and Bank Group Role 7.01 The Maharashtra Petrochemical Project, the first in India to be based on domestic natural gas, the most economic feedstock, will contribute to the optimal use of India's gas resources. The output from the Project will be marketed entirely in India. Though doubling present domestic capacity, the Project will add only insignificantly - about 1%, to world capacity. The Project is based on internationally competitive-size plant and will therefore substitute economically the scarce more energy intensive traditional materials of which India is a net importer. At full capacity the economic value of the products will be about US$430 million per year. A part of the Project's ethylene output would be marketed to existing  - 24 - private sector petrochemical plants in the Bombay area enabling them to expand and improve their operations. The Project has an attractive economic rate of return and will lead to transfer of modern technology and know-how to India. 7.02 The Bank Group has already been involved in the development of India's gas resources and in the use of natural gas for fertilizer production. The Project will be the Bank's first involvement in the petrochemical sector which would contribute further to optimal gas use. The current Project scope reflects the Bank's suggestions for the inclusion of LLDPE in the Product slate, and for diversion of a part of the ethylene production for expansion of private sector petrochemicals manufacturing units in the Bombay area. Through this project, the Bank will work with GOI to define an improved sector development strategy in terms of: (a) faster market growth through increased polymers imports; (b) evolution of a more rational product pricing system and fiscal policies; (c) promotion of exports of plastic products; and (d) creation of an organized system for technical assistance to, and training in, the conversion industry. The Bank's participation will also contribute to efficient and coordinated implementation of the project. B. Project Scope 7.03 The Project will produce, as marketable products, low-density polyethylene (LDPE), linear low-density polyethylene/high density polyethylene (LLDPE/HDPE) and polypropylene (PP), which are polyolefin plastics to be sold to the conversion industry ; ethvlene glycol/ethylene oxide (EG/EO), which are intermediates for synthetic fiber and synthetic detergent industries; a small amount of acetylene black, which will be sold to the existing tire manufacturing, and printing and ink industries. A portion of ethylene produced from its core cracker unit will be sold to existing and new petrochemicals downstream conversion industries in the area. Specific project facilities are described in Annex 7-1. The Project will utilize ethane/propane (C2/C3) fraction, separated from B-H offshore gases as the primary feedstock, supplemented by propane/propylene separated from the offgases from the two refineries in the Bombay area. The linkages between the core unit, second generation downstream conversion units, and the tertiary plastics conversion sector outside the Project is shown in chart VII-A. C. Project Location 7.04 The Project will be located at a site about 2 km from the Nagothane village in Raigarh district (Maharashtra State), about 120 km south of Bombay city. The site, about 50 km from the Uran gas processing terminal, was selected after investigation of six alternative sites and presents the advantages of: (i) reasonable proximity to the main raw materials sources; (ii) relatively sparsely populated area involving minimum adverse social, environmental and safety impact on existing villages; (iii) conformity with MSG's plans to promote industrial development in the backward areas of the State; and (iv) availability of utilities and infrastructure. In view of the nature of the terrain, the site will need extensive grading and development. The Project's land requirement of about 567 ha is being purchased from a region notified as  - 25 - MAHARASHTRA PETROCHEMICAL PROJECT Interrelationship Between the Core Unit and the Second and Third Generation Plants and Thelr Principal Products - \ ~~~~CABLE INSULAlKtN. F >OiV,EA, / \ TtE