Report No. 18406 Public Disclosure Authorized - World...

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FOR OFFICIAL USE ONLY

Report No. 18406

IMPLEMENTATION COMPLETION REPORT

INDIA

SECOND PETROCHEMICALS DEVELOPMENT PROJECT(Loans 3258-IN and 3259-IN)

2 September 1998

Environment Sector Unit (SASEN)South Asia Region

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed withoutWorld Bank authorization.

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CURRENCY EQUIVALENTS

Currency Unit = Rupee (Rs.)US$1 = Rs. 39 (as of April 1998)

FISCAL YEAR

1 April - 31 March

WEIGHTS AND MEASURES

Metric System

ABBREVATIONS AND ACRONYMS

ACN Acrylonitrile NOCIL National Organic Chemicals Industries Ltd.ASF Acrylic Staple Fiber ONGC Oil and Natural Gas CorporationCIF Cost, Insurance and Freight OSBL Outside Battery LimitCIPET Central Institute of Plastic Engineering and OSHA Occupational Safety and Health

Technology Administration (USA)DCS Distributed Control System PBR Polybutadiene RubberDMT Dimethyl Terephthalate PFY Polyester Filament YarnEIA Environmental Impact Assessment PIB Public Investment BoardEIL Engineers India Ltd. PP PolypropyleneEPC Engineering, Procurement and Construction PS PolystyreneFOB Free on Board PSF Polyester Staple FiberGAIL Gas Authority of India Ltd. PTA Purified Terephthalic AcidGOI Government of India PVC Polyvinyl ChlorideGPCB Gujarat Pollution Control Board QRA Quantitative Risk AssessmentHAZOP Hazard and Operability Study R&D Research and DevelopmentHDPE High Density Polyethylene SCF Standard Conversion FactorHSE Health, Safety and Environment SO2 Sulfur DioxideICB International Competitive Bidding UL United LaboratoriesIPCL Indian Petrochemicals Corporation Ltd. UNIDO United Nations Industrial DevelopmentLAB Linear Alkyl Benzene OrganizationLDPE Low Density Polyethylene U.S. United StatesLIB Limited International Bidding VCM Vinyl Chloride MonomerLLDPE Linear Low Density Polyethylene $ United States DollarsLNG Liquefied Natural GasLPG Liquefied Petroleum GasLSHS Low-Sulfur Heavy StockMEG Mono-ethylene GlycolMES Minimum Economic SizeMGCC Maharashtra Gas Cracker ComplexMINAS Minimum National StandardsMODVAT Modified Value Added TaxMPCB Maharashtra Pollution Control BoardNFY Nylon Filament Yam

Vice President Mieko NishimizuCountry Director Edwin LimSector Manager Richard AckermannStaff Member Naimeh Hadjitarkhani

FOR OFFICIAL USE ONLY

IMPLEMENTATION COMPLETION REPORTINDIA

SECOND PETROCHEMICALS DEVELOPMENT PROJECT(LOANS 3258-IN AND 3259-IN) Page

PrefaceTABLE OF CONTENTS

Evaluation Summary i

Part I Project Implementation Assessment 1

Project Objectives IAchievement of Project Objectives 2Main Factors Affecting the Project 14Project Sustainability 16Bank Performance 18Borrower Performance 19Assessment of Outcome 20Future Operation 20Key Lessons Learned 21

Part II Statistical Tables 23

Table 1: Summary of Assessments 23Table 2: Related Bank Loans/Credits 24Table 3: Project Timetable 25Table 4: Loan Disbursements: Cumulative Estimated and Actual 26Table 5: Key Indicators for Project Implementation 27Table 6: Key Indicators for Project Operation 31Table 7: Studies Included in Project 39Table 8A: Project Costs 41Table 88: IPCL's Actual Project Costs 42Table 8C: IPCL Plant Investments - Actual versus Appraisal Cost 43

EstimatesTable 8D: Project Financing 44Table 9: Economic Costs and Benefits 46Table 10: Status of Legal Covenants 52Table 11: Compliance with Operational Manual Statements 55Table 12: Bank Resources: Staff Inputs 56Table 13: Bank Resources: Missions 57

Annexes 59

Annex 1 Borrower Contribution to ICR 59Annex 2 The Policy Framework 71Annex 3 Environment and Safety Considerations 83Annex 4 Cost-Benefit Analysis 95

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not. otherwise be disclosed withoutWorld Bank authorization.

IMPLEMENTATION COMPLETION REPORT

INDIA

SECOND PETROCHEMICALS DEVELOPMENT PROJECT(LOANS 3258-IN AND 3259-IN)

Preface

This is the Implementation Completion Report (ICR) for the Second PetrochemicalsDevelopment Project in India, for which Loan 3258-IN, in the amount of US$12 million equivalent, andLoan 3259-IN, in the amount of US$233 million equivalent, were approved on 13 September 1990 andmade effective on 18 December 1990.

Loan 3258-IN and and Loan 3259-IN were closed on 30 September 1997 and 31 March 1998,respectively, approximately seven years after the Board approval and two closing date extensions. Anaggregated amount of US$87.6 million equivalent was cancelled from Loan 3259-IN on 1 June 1994, 31October 1995 and 31 August 1998. An amount of US$135,731 from Loan 3258-IN was cancelled at LoanClosing.

The ICR was prepared by Charles Dahan, Dominique Babelon, consultants, and Masami Kojima(EMTOG), under the supervision of Naimeh Hadjitarkhani (task manager),1 from the Environment Unit(SASEN) of the South Asia Region. The ICR was reviewed by Richard Ackermann (Manager, SASEN).The borrower provided comments that are presented in Annex 1 of the ICR.

Preparation of this ICR was begun in March 1998. It is based on material and ex-post evaluationreports prepared by the Borrower; materials in the Bank project files; and discussions with projectmanagement and Bank staff involved in the project.

This project was managed and supervised by Walter Vergara, Principal Chemical Engineer (LCSES) until January1998.

IMPLEMENTATION COMPLETION REPORTINDIA- SECOND PETROCHEMICALS DEVELOPMENT PROJECT

(Loans 3258-IN and 3259-IN)Evaluation Summary

Project Objectives

1. The main objectives of the project were to (a) expand capacity to produce basic petrochemicalseconomically; and (b) improve efficiency and quality of downstream plastic products. More specifically, theproject aimed at (i) optimizing operations and enhancing the economic returns of the Nagothane andVadodara petrochemical complexes of publicly-owned Indian Petrochemicals Corporation Limited (IPCL);and (ii) strengthening the institutional capacity of the Central Institute of Plastic Engineering andTechnology (CIPET). The project also aimed at improving the incentive framework of the petrochemicalsector through agreements on adequate pricing of C2 /C3 (the gas feedstock), periodic reviews of sectorinvestment programs and minimum economic scale criteria for granting capacity licenses, and a study of thesynthetic fiber industry.

2. At the time of preparation, the project was justified on the basis of policy changes that had takenplace between 1986 and 1989 in the plastic polymers sub-sector. While these changes were significant, thepolicy framework still remained heavily distorted. Yet, the project, which was originally designed as ahybrid project with policy conditions, was transformed into an investment project by the time of appraisal,with some modest policy conditions bearing directly on the viability of the project. In retrospect, except forthe small CIPET component, the rationale for Bank support was unclear.

Achievement of Objectives

3. Achievement ofproject policy objectives was limited (Part I, paras. 16-21). The most importantobjective-maintaining the price of C2/C3 at its opportunity cost-was not achieved. The objective ofensuring efficient investment in the sector was probably met, given the policy changes which took place inIndia during the project implementation. Major macro-economic policy changes were announced in June1991 and they were carried out in the following years. Particularly relevant to the petrochemical sector are(i) several rounds of trade reforms which lifted all licensing restrictions on imports and reduced maximumtariffs on nonconsumer goods to 40% and capital goods to 20%; (ii) a major reform of central excise taxes;and (iii) the lifting of all requirements for capacity licensing (except on environmental and safety grounds).However, changes to energy pricing policies came only in 1997/98, when natural gas pricing was modified(linking prices to increasing percentages of international fuel oil prices), and when the prices of a number ofpetroleum products were deregulated.

4. The institutional objectives of the project have been substantially achieved (Part I, paras. 22-25). Allindicators of CIPET's institutional performance show positive developments which exceed the expectationsat Appraisal.

5. Major physical objectives were accomplished (Part I, paras. 26-28). Most major investmnents plannedby IPCL under the project were implemented, although important changes did occur in the design and thecost of the project. The actual project costs were Rs. 7,941 million, or 89% of the original estimates. In U.S.Dollars, the project costs were $235.7 million, or only 40% of the $587.0 million estimated at Appraisal.This large difference is attributed to the exclusion of two plants and part of the minor revamping schemes;lower duties on imported capital goods; depreciation of the real exchange rate during the implementation

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period; technological changes; and a reduction in working capital and polymer import requirements. Out ofthe total loan amount of $245.0 million equivalent, $87.7 million was canceled.

6. The financial objectives with respect to both IPCL and CIPET have been reached overall (Part I,paras. 33-39). The overall economic rate of return of the project was re-estimated at 21% versus the 37%estimated at Appraisal. The overall financial rate of return is currently estimated at 27%. The lower projeclteconomic rate of return is principally due to significantly lower estimates of international prices of outputs inthe medium and long term. IPCL's financial position has remained satisfactory, as all three covenantedfinancial ratios, while lower than planned at Appraisal, have been at generally acceptable levels. CIPET'sprogress towards self-sufficiency has exceeded the expectations set at Appraisal.

7. The environmental objectives of the project have been substantially met (Part I, paras. 40-59). Atboth Nagothane and Vadodara, the Environmental Impact Assessment (EIA) prepared for the projectconcluded that the project would have a minor overall negative impact on the environment. Mitigationmeasures were implemented as recommended by the EIAs. Monitoring results of the operations at thecomplexes show that both meet applicable standards except for cyanide levels in treated effluents atVadodara. IPCL has since carried out a number of safety audits, risk analysis, safety construction audits andHAZOP studies (for the entire complex as well as project investments) and implemented theirrecommendations. IPCL has further reinforced its safety system at both sites, instituted many safetyprograms, and developed disaster management plans.

8. IPCL is addressing environmental issues remaining at Vadodara. Cyanide levels in the wastewater ofthe acrylonitrile (ACN) plant have already been reduced but remain above the current standard. IPCL is inthe process of introducing a new technology which should enable them to meet the new standards whenimplemented. To improve hazardous solid waste management, IPCL has installed a hazardous waste multi-purpose incinerator which has been in operation since March 1998, is developing a safe solid wastemanagement and handling system, and is working on a comprehensive plan to close down the existing wastedisposal site.

Main Factors Affecting the Project

9. The loan was closed on 31 March 1998, 18 months beyond the original closing date. The majorreasons for the delay were (i) delays in obtaining final Government approvals (16 months); (ii) delays in thecompletion, start-up and stabilization of the cracker and downstream linear low density polyethylene(LLDPE)/high density polyethylene (HDPE) plant at Nagothane financed under Loan 2505-IN (26 months);and (iii) IPCL's decision to change the scope of the components at Nagothane to optimize the use of theadditional ethylene, deal with possible shortages of gas feedstocks and with rapid technological changes inthe manufacture of HDPE (18 months). However, once the above changes in scope and procurementarrangements were made, IPCL's experienced project team was able to implement the project in about twoyears. The loan to Government of India (GOI) for the CIPET component was closed on 30 September 1997,12 months after the original closing date due to a long delay in the signing of the grant agreement betweenGOI and CIPET. Subsequently, implementation proceeded satisfactorily (Part I, paras. 60-67).

Project Sustainability

10. Project Investments. Project investments at Nagothane remain viable under any of the hypothesestested, even if all distortions associated with current gas pricing and tariff duties are eliminated andinternational prices fall further. Project investments at Vadodara, however, are more vulnerable due to highinternal transfer costs of raw materials from Vadodara's small and old naphtha cracker. IPCL is aware of

these limitations and is implementing a restructuring program, which includes the replacement of thiscracker with a larger unit and increased imports of naphtha. These measures would ensure the long-termsustainability of project investments (Part I, paras. 68-69).

11. Financial and Economic Sustainability of IPCL. Overall, the financial sustainability of IPCL is ratedas likely. In the past eight years, IPCL has shown an ability to adjust to a changing policy environment andfinance a large expansion program while maintaining its profitability and a sound financial structure.However, the current distortions in feedstock prices are expected to be eliminated in time and tariffprotection will decrease further while competition from the private sector will increase. The large facilitiesunder construction for importing naphtha and substantial restructuring of the entire Vadodara complex willhelp IPCL to maintain its profitability and competitiveness. Another uncertainty faced by IPCL is the ",reported shortage of natural gas to support the Gandhar complex. The Government has indicated that optionswere being reviewed and it was confident of resolving this issue shortly (Part I, paras. 70-73).

12. Environmental Sustainability of IPCL. The level of environmental and safety awareness at bothIPCL sites is already very high, and will be enhanced further at Nagothane if management proceeds with itsplans to establish environmental management systems according to ISO 14001 norms. At Vadodara, IPCLhas been working on resolving the two remaining issues of solid waste disposal and cyanide levels. Becauseof these factors, the environmental sustainability of the project investments and of IPCL's facilities as awhole is rated as likely (Part I, para. 74).

13. Sustainability of CIPET. CIPET has managed to steadily improve its financial self-reliance and itsprospects for reaching full self-sufficiency in a period of four to five years. The sustainability of the CIPETcomponent and of CIPET itself is therefore rated as likely (Part I, para. 75).

Bank Performance

14. The overall performance of the Bank in the financial, technical, institutional and environmentalaspects of the project was satisfactory (Part I, paras. 76-81). The Bank regularly followed up on theseaspects and showed substantial flexibility in modifying the project design to respond to changingtechnological and market conditions, and in adapting its procurement rules. In the area of policy, however,Bank performance was deficient. Although Bank identification and preparation teams properly identifiedmajor policy issues, the Bank proceeded with the project as an investment operation, even though therationale for Bank involvement was no longer clear. During Negotiations, the Bank also agreed to eliminatefrom the pricing covenant the statement of principles on which C2/C3 pricing was based. Finally, the follow-up and discussion on C2 /C3 pricing in relation to its opportunity cost was not recorded in supervisionmission reports, and the issue of the former's progressive relative decline was not raised.

Borrower Performance

15. IPCL's performance in project preparation was satisfactory overall, despite a failure to obtain thenecessary Government clearances in time (Part I, paras. 82-83). The parallel implementation of the Gandharcomplex strained the implementation capacity and financial position of IPCL. However, IPCL demonstrateda strong capacity to implement the project quickly and efficiently once decisions to proceed were taken.There were no problems of counterpart funding, and IPCL complied with all other covenants with respect toenvironment, procurement, reporting, accounting and auditing, and (except for a short time) its financialstructure.

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16. The performance of CIPET was highly satisfactory (Part I, para. 84). There was an initial delayowing to CIPET's lack of familiarity with required procedures for obtaining Government approval. Once t-heapproval was obtained, the project was implemented exactly as planned and on a relatively timely basis.CIPET has complied with all its obligations with respect to the yearly submission of its training program,procurement, and project accounting and auditing.

Assessment of Outcome

17. The project achieved most of its major objectives and is expected to achieve its intended financialand economic, institutional and environmental results, and is therefore rated as satisfactory. The policyobjective of the project was not achieved but the policy framework in which the project operates hasimproved markedly since the project was approved (Part I, para. 85).

Future Operation

18. In 1997/98, the project plants completed their first full year of operation at Vadodara. The projectplants at Nagothane started on June 19, 1998, and are expected to run at capacity. With respect to CIPET, theequipment procured under the project is being utilized and maintenance is not likely to be a problem. Nofollow-up operation has been financed by the Bank. The type of support provided to IPCL no longer fits intoBank strategy for India and elsewhere. Finally, it is suggested that the Bank should follow up on C2/C3pricing with the Government in the broader context of energy sector operations (Part I, paras. 86-90).

Key Lessons Learned

19. The major lessons which emerge from the implementation of the project are the following: (a) sub-sector approaches are not effective ways of addressing distortions in a sub-sector when these samedistortions prevail throughout the economy; (b) pricing covenants should always state the principles onwhich prices are to be calculated and should provide for periodic formal reviews; (c) upgrading thetechnological basis of institutions such as CIPET merits Bank support when the institution has close tieswith its clientele and incentives to optimize the financial return of the project; (d) expansion investmentsshould not be approved until production of existing plants has stabilized, or at least started; (e) requirementsfor well prepared timely EIAs and safety studies are effective in strengthening and modernizingenvironmental and safety systems in firms; (f) all government approvals required should be conditions forBoard presentation; (g) decentralization of procurement review and perhaps other project supervisionfunctions to field offices is effective in speeding up the process and flagging potential issues; and (h) forexpansion projects, direct contracting or possibly limited international bidding (LIB) procurementprocedures could be considered under special circumstances to accommodate the increased requirements ofequipment recommended by process licensers and specific needs for standardization.

PROJECT IMPLEMENTATION REPORTINDIA - SECOND PETROCHEMICALS DEVELOPMENT PROJECT

(Loans 3258-IN and 3259-IN)

PART 1: PROJECT IMPLEMENTATION ASSESSMENT

A. Project Objectives

Original Objectives and Changes During Implementation

1. The main objectives of the project were to (i) expand capacity to produce basic petrochemicalseconomically; and (ii) improve efficiency and quality of downstream plastic products. In addition, theproject would support the Government of India (GOI) in its efforts to improve further the incentiveframework for the sizable investments being considered for the petrochemical sector. The project's mainobjectives were to be achieved as follows:

(a) optimizing operations and enhancing the economic returns of the Nagothane and Vadodarapetrochemical complexes of IPCL, the Government-owned petrochemicals company, throughinvestments in expansions, new plants, and modernization at both sites;

(b) ensuring early absorption by plastic processors of new grades of polymers that would be produced forthe first time in India by IPCL under the project by financing the import of these special grades ofcommodity polymers for market seeding purposes; and

(c) strengthening the institutional capacity of CIPET to upgrade its capabilities to respond effectively to themanpower and product design quality needs of small and medium size private plastic processors inIndia.

2. Furthermore, improvements in the incentive framework would be pursued through severalcovenants in the Guarantee Agreement requiring the Government to inform and consult with the Bank withrespect to (i) changes in the price of C2/C3 , the gas fractions used in the cracking process; (ii) biennialreviews of the progress and economic viability of major investments in the sector; and (iii) periodic reviewsof minimum economic scale criteria imposed by the Government as a condition for granting capacitylicenses. In addition, although not a covenant but a commitment recorded in the Minutes of Negotiationswas a study to be commissioned by the Government of the synthetic fiber industry with a view to proposinga phased modernization program for the industry to achieve international competitiveness.

3. Except for changes to the design and composition of IPCL's physical investments, which are furtherdetailed in Section B, there were no major changes in project objectives during implementation.

Evaluation of Project Objectives

4. The Bank's country assistance strategy in the industrial sector at the time called for:

"sub-sector projects which will provide policy, technical and financial support for economicinvestments in areas where improved efficiency will have implications for the growth of the wholeindustrial sector (e.g., petrochemicals, electronics, and capital goods). In these areas, the basiccriterion that determines the decision to go ahead with a loan is whether the policy environment isconducive to efficient investments in the area or sub-sector that is being supported. Thus, the

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lending strategy involves supporting investments in areas where policy improvements have alreadybeen undertaken, consistent with the conclusions of the previous sector work." 1.

5. The project was justified at the time of preparation by policy changes which had taken placebetween 1986 and 1989 in the plastic polymers sub-sector-a lowering of the level of protection by morethan half, the liberalization of imports, and permitting private sector participation.

6. While these changes were significant in the Indian industrial context at the time, the policyframework remained heavily distorted, with protection levels which were still high (50% to 75%), highexcise taxes (in particular on fibers and their intermediates), high raw material prices (naphtha), and a largesegment of the sector (rubbers and fibers) still subject to quantitative restrictions on imports. For thesereasons, the project was designed up to Appraisal as a hybrid project with policy conditions associated withfurther improvements in the trade and tax policies, feedstock pricing, increased private sector participation,and rationalization of major investments in the sector. For reasons further detailed in Section E (BankPerformance), the project was eventually transformed into an investment project with only modest policyconditions, principally those bearing directly on the viability of the project.

7. In retrospect, the rationale for Bank involvement in the sector was unclear. First, addressing policyissues in isolation from the broader questions of countrywide trade and tax reform, industry deregulation,and energy pricing as originally envisaged (as part of the sub-sector approach prevailing at the time) mayhave been misguided because it could have led to cross-sector distortions. Second, except for the smallCIPET component for which the rationale for Bank support was clear, Bank investment lending in thesector was not necessary to secure its development and steady growth. This has clearly been demonstratedby IPCL's ability to raise commercial lending and equity funds for its Gandhar complex in parallel withproject implementation, and by the concurrent massive entry of the private sector (Reliance Industries).

B. Achievement of Objectives

Sector Policy Objectives

(a) Background on Policy Changes During Implementation

8. Changes in the policy framework as it affected the sector during the period 1990-98 are described inAnnex 2. These changes have occurred within the overall context of significant changes in the generaleconomic policy framework which has taken place since 1991. In June 1991, major policy changes wereannounced, aiming at significantly opening up the economy to foreign trade and investment, rationalizingthe tax regime, and increasing competition by removing administrative bottlenecks to entry and capacityincreases. This new set of policies was accompanied by a sharp depreciation of the real exchange rate.

9. Particularly relevant were: (i) several rounds of trade reforms which have lifted all licensingrestrictions on imports of intermediate and capital goods and reduced maximum tariffs for non consumergoods to 40% and for capital goods to 20%; (ii) a major reform of central excise taxes which shifted mostexcise rates from specific to ad valorem, reduced the number of rates, and made the tax system resemble avalue-added tax system more closely; (iii) the lifting of all requirements for capacity licensing of domesticinvestments (except on environmental and safety grounds); and (iv) the establishment of a foreigninvestment regime considered more investor-friendly than previously.

Paragraphs 2.24 through 2.26 of the Staff Appraisal Report; italics this report's authors.

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10. Changes in the policy framework for the petrochemical sector followed this general policy. TheGovernment began to reduce import tariffs on plastic polymers in 1986, but tariffs were still at 500/o-60% in1988/89. After a three-year stabilization period, during which some of the rates even increased, the tariffson plastic polymers were lowered further to 30%/40% in 1996/97. The most drastic changes took placewith respect to synthetic fibers where tariffs were reduced from the equivalent of between 130% to 220% in1988-89 to a uniform 30% in 1996/97. For building blocks and intermediates, there has also been asignificant reduction and harmonization of rates since 1988/89, to between 0% and 30% in 1996-97. Theoverall reduction in tariffs on capital goods from 85% to 20% (excluding surcharges) also had large impactson the sector. These changes are significant, despite a partial reversal in 1996/97, 1997/98 and 1998/99,when 2%, 3% and 8% across-the-board import surcharges were introduced, respectively.

11. The structure of excise taxes (and corresponding countervailing duties on imports) has beenchanged to reduce product-to-product variation considerably. While excise tax rates for building blocks,intermediates and polymers have changed little since Appraisal, they have been reduced markedly forsynthetic fibers. The combination of lower sales taxes and lower tariff duties has reportedly encouragedconsumption (synthetic fibers were previously a "rich man fiber" in India) while forcing restructuring in anindustry characterized by product-to-product tax variation, small scale and high costs.

12. Changes to energy pricing and consequently petrochemical feedstock prices were slower to come.The price of natural gas steadily declined to about half of its opportunity cost despite a serious shortage ofgas. Natural gas pricing was finally modified in September 1997. For 1997, 1998 and 1999, the price ofnatural gas was to be set at 55%, 65%, and 75%, respectively, of the international (FOB) price equivalent ofa basket of fuel oils, with floor limits as well as upper ceilings, except in the northeastern states where thesepercentages are lower. In 1999/2000, the Government will decide if and when to move to 100% of thereference value (still below the opportunity cost, since it should actually be based on the CIF value of fueloil). The price of C2 /C3 has not yet changed, pending a formal decision of the Gas Linkage Committee-agovernment committee made up exclusively of representatives of government ministries and public sectorcompanies and chaired by the Minister of Petroleum-but is expected to be adjusted to reflect the price ofnatural gas plus a separation charge (and pipeline transport costs when applicable).

13. The administrative price of domestic naphtha continued to remain above the import parity value(although substantially less than in 1990, when it was 55% above import parity), even though naphthaimports were liberalized. However, a major change occurred in early 1998 in the pricing policy ofpetroleum products. Effective April 1988, all prices (including naphtha) were deregulated, except for thoseof kerosene, high speed diesel, LPG (liquefied petroleum gas) and aviation fuel, which are still administeredbut are expected to be deregulated after a four year transition period. Refineries are now free to set theirown prices, and it is expected that these will be progressively aligned with the price of imported productsand that the freight equalization scheme will disappear. However, the question of local sales taxation-which still substantially penalizes users of domestic naphtha over users of imports for those who do notbenefit from local tax incentive packages-remains to be addressed; otherwise petrochemical producers willshift towards imports for most of their requirements.

14. Changes are also taking place to improve access to feedstock. As already mentioned, imports ofnaphtha are deregulated and domestic supplies are now negotiated directly with refineries. Some naphthausers are building their own port facilities, and increasing competition from imported naphtha is likely toforce a realignment of domestic naphtha prices. The supply of natural gas, however, remains entirely in thepublic sector. The allocation of gas to users is determined by the Gas Linkage Committee. In thepetrochemical sector, C2/C3 gas fractions from the fields on the west coast of India have so far beenallocated only to two public sector companies, IPCL and the Gas Authority of India (GAIL). However, in

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order to increase exploration activities in the 20 (out of 26) unexplored basins, the Govermment has recent][yannounced a new exploration licensing policy permitting public bidding for oil rights from public andprivate sectors, and domestic and foreign bidders alike. It also provides for a system of applicable royaltiesand tax incentives. A separate regulatory body has been established in the Directorate of Hydrocarbons toadminister and regulate this new system. These steps are a major departure from the past, leveling theplaying field and increasing transparency.

1 5 Although the current policy framework is much more favorable than at Appraisal, a number ofissues remain which are still obstacles to better efficiency: (a) with tariffs in the range of 40%-50% forpolymers and fibers and 20%-40% for intermediates, the level of protection is still high by world standards;(b) large differences in local sales tax rates (not recoverable under modified value added tax, MODVAT)depending on the state, product, and the eligibility of investors for state tax incentive packages, potentiallycreate serious distortions in the selection of the plant location, raw materials and product mix, and in thecompetitive position of new versus established enterprises. Harmonization of tax rates and investmentincentives across states and their transformation into value added taxation systems would help prevent suchdistortions (a package of measures designed to harmonize state sales tax systems was accepted in principleat the end of 1995 by State and Union Finance Ministers but has not yet been implemented); (c) prices ofnatural gas and its C2/C3 fractions need to increase further to their full opportunity costs; and (d) with thelikely entry of private gas producers, the Government will need to establish a regulatory framework andbody for gas transportation and distribution.

(b) Achievement of the Project's Sector Policy Objectives

16. As indicated in Section A, the project had limited policy objectives, designed at the time tocompensate for the negative effects of a less than optimum sector policy environment. They were expressedin Covenants in the Guarantee Agreement and in the Minutes of Negotiations.

17. C2/C3 Pricing. Section 3.03 of the Loan Agreement specified that "The Guarantor shall maintainan appropriate price established by it for ethane/propane which constitute the feedstock for the productionof petrochemicals and shall inform the Bank of any proposed change therein and afford the Bank anopportunity to comment on the proposed change." The principle on which the original "appropriate" pricewas based was the opportunity cost of gas (based on the fuel oil equivalent value, plus a reasonableseparation charge). The Government did not change the price of C2/C3 between 1990 and 1997, despiteinflation and substantial devaluation of the Rupee, and the price has fallen steadily in relation to itsopportunity cost, to an estimated 50%-60% by 1998 (see Annex 2, Table A2.6 for detailed calculations).The project therefore failed to achieve its objective; the Bank should not have agreed at Negotiations toeliminate from the pricing covenant the statement of principles on which C2/C3 pricing was based.2

18. Sector Investment Review. The Guarantee Agreement specified that the Government would, everysecond year starting 1991, review the progress of investments in olefins and aromatics complexes to assesstheir economic viability, and discuss the results of these reviews with the Bank. The objective was to ensureefficient investments and avoid over-capacity in a still highly protected environment. In July 1991,however, the Government eliminated licensing requirements on new capacity as part of its liberalizationprogram, rendering this review both useless and impossible with respect to private sector investments, andlimited itself to the already mandatory review of large-scale investments by public sector enterprises (i.e.,

2 The original wording proposed at Negotiations was "the Guarantor shall, no later than December 31, 1989, set theethane/propane price at a level consistent with its opportunity cost (as a substitute for fuel oil) plus reasonableseparation costs". This wording was rejected by GOI and changed to the actual wording during Negotiations.

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IPCL and presumably, more recently, GAIL). Since no analysis of the competitiveness of major newinvestments in the sector has been performed since Appraisal, it is difficult to assess whether the originalobjectives were met, but the combination of deregulation with trade liberalization and lowering ofprotection, which took place in parallel, have probably contributed towards that aim (the size, location,technological choice and feedstock choice of the major olefin projects implemented since appear to confirmthis hypothesis).

19. Minimum Economic Size Criteria. To complement the above investment reviews, the Governmentwas to periodically review the minimum economic size criteria established for licensing capacity to takeinto account ongoing technological developments. The objective of this covenant was the same as for theperiodic investment reviews, i.e., providing "second-best" instruments to ensure efficient investments in ahighly protected environment. As requirements for capacity licensing were eliminated, minimum scalerequirements became redundant, except as guidelines to financial institutions. An ex-post review of capacityconstructed since 1990 shows that, for cracking, intermediates and plastic and rubber polymers, newcapacity or expansions were of competitive size internationally and have therefore met these criteria. In thesynthetic fiber industry, however, the study carried out in 1991 showed that the minimum economic sizepolicy was not being strictly enforced, and was inefficient in ensuring that licensed investors actuallyconstructed their plants to match the licensed capacity. It has been reported that, since then, the substantiallowering of protection to the industry is leading to extensive restructuring through a combination ofcapacity expansions in existing plants to reach an economic scale, very large new capacity additions(Reliance), and likely closures.

20. Synthetic Fiber Industry Study. At Negotiations, it was agreed that the Government would completea study of the synthetic fiber industry by 31 March 1991 to review its present status, with reference to sizesof production units, the type of technology being used and cost of production, and to suggest an appropriatephased modernization program to upgrade the sizes and technology base of the industry with the primaryobjective of achieving international competitiveness. The study was completed in March 1992. The studyexposed the inefficiency of the domestic fiber industry and its inability to compete internationally (see Table7). It recommended a phased strategy of cost and price reduction to the benefit of consumers through (a)modernization programs favoring expansion of existing plants to minimum economic scales; and (b) aphased reduction in both tariffs and excise taxes (although with no quantitative targets). The study wasreleased after GOI's critical decision to liberalize trade, lower protection and reform the excise tax systemthroughout the economy, but probably contributed to the fast pace at which these reforms were applied inthe sub-sector, and thus is likely to have met its objective.

21. In summary, achievement of project policy objectives has been limited: the most importantobjective, that of ensuring that the price of C2/C3 feedstock be maintained at its opportunity cost, was notachieved, and the remedial policy actions adopted by the Government for natural gas, if applied to C2/C3fractions, will still be insufficient to reach the original objective. The objective of ensuring efficientinvestment in the sector was probably met, given the important policy changes which took place in Indiaduring project implementation. The synthetic fiber industry study met its objectives.

Institutional Objectives

22. The major institutional objective of the project was to strengthen the ability of CIPET to upgrade itscapabilities to respond effectively to the rapidly growing need of the small and medium size private plasticprocessors for manpower training, design, testing, quality control, and advisory services. The project hasallowed the technological updating of CIPET. The study tours, consultants and faculty training abroad haveexposed CIPET to the latest technological trends in the plastic processing industry worldwide and allowed

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them to forge links with prestigious institutions abroad (collaborative research and faculty exchangeprograms). The acquisition under the project of state-of-the-art computer-aided machines for tooling,processing, design and testing has allowed considerable upgrading in the relevance of training as well assubstantially increasing the scope for research and development (R&D) and technical assistance servicecontracts with the industry (for testing and certification, design and quality control), and promoted the useof sophisticated techniques by small-scale plastic processors.

23. The institutional objectives of the project have been substantially achieved. All indicators ofCIPET's institutional performance since Appraisal show positive developments (see Table 6B), exceedingexpectations at Appraisal. Since Appraisal, CIPET has increased its geographical coverage from fiveextension centers to eleven. The number of its long-term training programs (one- to three-year graduateprograms aimed at training the industry's middle management and technicians) has increased from six toeight; enrollment in these long-term programs has increased from 340 in 1988/89, to close to 2,500 in1997/98, a seven-fold increase, and enrollment in short term courses has increased in similar proportions. Inreal terms, resources have increased by about 20% since 1988/89, despite a drastic (close to half) reductionin government budgetary allocation in 1990/91, which have not recovered in constant terms since. CIPEThas managed to double its total resources, thanks to its efforts to raise its own funds-which have increasedfrom 10% of total resources in 1988/89 to 27% in 1990/91, and to 57% in 1997/98-through sales ofservices to industry, increased fees for long-term training, and charging the full cost of short-term training(the Staff Appraisal Report projected about 40% by 1991/92). CIPET expects to be 65% self-sufficient in1998/99 and to become totally self-supporting in four to five years.

24. CIPET's success in reaching its intended clientele is evidenced by the source of its own funding,between 80% and 90% of which is paid by small and medium-scale firms, and by the employment record ofthe alumni of its graduate programs, 85% of whom are employed in industry (almost all in small andmedium-scale firms). Another 12% have established their own firms.

25. Industry participates in management decisions through the participation of four industrialists inCIPET's fifteen-member Governing Council. Furthermore, there are regular consultations with industry onthe scope of the training programs, and curricular reviews which are organized every three years.Representatives of small plastic processing firms, small industry associations and the alumni associationinterviewed during the last supervision/completion mission were very supportive of CIPET. Based on thequality of faculty and the stock of high technology equipment now at its disposal, they viewed CIPET asuniquely qualified to provide the specialized training needed by industry as well as a broad range of otherservices, and saw considerable scope for the further commercialization of CIPET. In their view, CIPETshould now stress R&D by offering comprehensive one- to three-year R&D packages integrating all stagesof production, from design through prototype manufacturing and testing (CIPET was still too"compartmentalized" in the provision of various services). They also saw a larger role for CIPET in testingfor compliance with standards (CIPET is accredited by the Indian Standards Institute, and could becomeaccredited to deliver certification for meeting United Laboratories, UL, and other types of internationalstandards). Finally, they stressed the need for more decentralization through the establishment of regionalcouncils to orient the work of the extension centers more towards the needs of the local industry.

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Physical Objectives

(a) IPCL 's Investments in Plant Capacity

26. Most of IPCL 's investments planned under the project were implemented, although importantchanges did occur in the design and the cost of the project. A detailed summary of changes is presented inTable 5. At Nagothane, implementation was as follows:

* The 100,000 tons per year (tpy) expansion of the gas-based cracker was implemented as planned.

* For the downstream plant, however, the project originally contemplated the addition of a new75,000 tpy train to the existing LLDPE/ HDPE swing plant. Instead, one of the trains of the existingplant was debottlenecked and upgraded to increase its capacity by 60,000 tpy at a much lower costusing a new process. This change in project design and the need to contract the revamping under anEngineering, Procurement and Construction (EPC) contract procured using LIB proceduresrequired an amendment to the Loan Agreement and Board approval. Overall, these changes haveresulted in much lower project costs.

* The increased capacity of downstream units required an additional nitrogen /oxygen separation unit,which was added under the project.

* A propane cracking unit was also added to the project during implementation, to complementC2/C3 supplied by the Oil and Natural Gas Corporation (ONGC).

* The 12,500 tpy additional unit to the Wires and Cables Compounding Plant was canceled, as theadditional demand for wires and cables did not materialize (and imports already covered all of thedemand for lower grades at more competitive prices).

27. At Vadodara, implementation was as follows:

* A new polypropylene (PP) unit was constructed, with a capacity of 75,000 tpy instead of 60,000 tpyoriginally planned (the increase was to match an increase in GOI's minimum economic sizes).

* The existing butadiene extraction plant was rehabilitated as planned, and its capacity expanded by15,500 tpy to a total capacity of 37,760 tpy.

* A new 30,000 tpy polybutadiene rubber (PBR) plant was constructed to expand production from20,000 tpy to 50,000 tpy, as planned.

* The 7,500 tpy engineering plastics plant was removed from the scope of the project-it wasimplemented under a joint venture with GE Plastics and financed out of IPCL's own resources.

* Minor debottlenecking schemes have been implemented partially (distributed control system, DCS,replacing the Vadodara cracker instrumentation).

28. As a result of these changes in design and cancellations, total financing required for IPCL capitalinvestments was $178.8 million instead of $499.0 million planned at Appraisal, or only 36% of the originalestimate. In current Rupees, total financing required amounted to about Rs. 6,425 million, versus the Rs.7,679 million estimated at Appraisal, or about 84% of the original estimate. These calculations are presentedin Table 8.

(b) IPCL 's Market Seeding Program

29. The market seeding program partially met its objectives. It was originally conceived to allow IPCLto prepare the market to absorb new grades of polymers produced under the project (special grades ofLLDPE, PP, PBR, and HDPE). After the explosion at the Maharashtra Gas Cracker Complex (MGCC) in

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November 1990, IPCL requested the Bank to use part of these funds to import common grades of LDPE(low density polyethylene), LLDPE, HDPE and PP to meet the shortfall in supply arising from the delay incommissioning the cracker. IPCL also requested authorization to import engineering plastics and wire andcable compounds from its partners in production on a single source basis. The Bank agreed to both requests.Despite this flexibility, IPCL used up only $44.7 million, instead of the $75.0 million planned at Appraisal.About one third of these imports were LDPE, a standard commodity polymer. Other imports were mostlyLLDPE (49%) and engineering plastics (10%). Market seeding programs were limited to engineeringplastics and the new plant's PP (580 tons of Valtec spheripol grade). After May 1992, the pace of importsby IPCL slowed down substantially due to a combination of lower international prices and increasedcompetition from importers. In October 1993, IPCL requested the cancellation of the balance of $30.3million.

(c) TechnicalAssistance for CIPET

30. All activities for training and study tours abroad, foreign technical assistance, and equipmentpurchases were carried out by CIPET in the same scope and amounts as planned at Appraisal (Table 5).Total actual costs of this component were $12.3 million, versus the $13.0 million planned at Appraisal.

(d) Total Costs and Financing

31. Actual project costs were Rs. 7,941 million, versus the Rs. 8,954 million estimated at Appraisal, or89% of the original estimates. In U.S. Dollars, the actual costs are significantly lower than expected,calculated to be $235.7 million compared to the $587.0 million at Appraisal, or only 40% of the Appraisalestimate. This large difference is attributed to:

- a $250 million decrease in IPCL investments in plant capacity attributed to (i) the exclusion of twoplants and part of the minor revamping schemes; (ii) lower duties on imported capital goods (fallingfrom 85% at Appraisal to 24% in 1997/98); (iii) a 25% depreciation of the real exchange rate duringthe implementation period; and (iv) changes in design and other factors. The share of each factor inthe cost difference is estimated as follows:

IPCL Plant Investments (Installed Cost3) US$ Million

Appraisal Estimate 429.9Less: Engineering Plastics Plant -50.5Less: Wires and Cables Plant -22.4Less: Impact of Real Exchange Rate Depreciation -41.2Less: Lowering of Import Duties on Equipment 4 -85.9Less: Modernization Schemes -55.6Changes in Design and Other Factors and Possible Errors 5 -10.2

Actual Cost 164.1

* a reduction of $43.1 million in working capital requirements, as these were not accounted for byIPCL as part of the project;

Excluding incremental working capital and interest during construction.Import duties on imported capital goods were estimated at $112.3 million at Appraisal. As these were

progressively reduced to an average of 24% in 1997/98, based on the estimated phasing of project expenditures,total actual duties are estimated at $26.4 million.

Since these calculations were based on average exchange rates for annual or semestrial expenditures, it is possiblethat distortions occurred in conversions into US$.

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* a $30.3 million in the polymer import component; and

* smaller differences, totaling $12.0 million in interest during construction ($11.3 million) and CIPETcomponent ($0.7 million).

32. Out of the total loan amount of $245.0 million equivalent, the Bank disbursed only $157.3 million.An aggregated amount of $87.7 million was canceled from Loan 3259-1N-US$ 30.3 million on 1 June1994, US$40 million on 31 October 1995 and US$17.3 million after the last disbursement was made on 31August 1998. An amount of US$135,731 was canceled for Loan 3258-IN. The Bank's share of projectfinancing is estimated at 67% of the total project costs versus the 42% planned at Appraisal. In Rupeesequivalent, Bank financing accounted for 62% of the total costs. Despite these differences, major physicalobjectives were reached. Achievement of physical objectives is therefore considered substantial,

Financial Objectives

33. The project had two kinds of financial objectives: (a) economic and financial rates of return of eachmajor investment and of the project as a whole; and (b) financial covenants on IPCL.

(a) Economic and Financial Rates of Return

34. Re-estimated financial and economic rates of return, compared with the Appraisal estimates, arepresented and discussed in Table 9, detailed in Annex 4, and are summarized below:

Financial Rate of Return (%) Economic Rate of Return (%)Appraisal Current Appraisal Current

Component Estimate Estimate Estimate Estimate

1. Gas Cracker Expansion and HDPE Plant 40 56 49 48at Nagothane

2. New Polypropylene Plant at Vadodara 29 20 22 9

3. Butadiene and Polybutadiene Rubber 16 16 22 10Plant Expansion at Vadodara

4. Wire/Cable Compounds Plant 25 - 32

5. Engineering Plastics Plant 36 - 41

Overall Project - 27 37 21

Overall Project, excluding 4 and 5 31 27 36 21

35. As projected at Appraisal, the project's justification clearly remains import substitution (Annex 2,Attachment 1 shows current supply/demand balances) based on domestic feedstock. The main differencesbetween the Appraisal estimates and current estimates may be explained as follows:

* For investments at Vadodara, while Appraisal and revised estimates of financial rates of return aregenerally comparable, revised economic rates of retum are significantly below the Appraisalestimates. This is principally due to significantly lower estimates of international prices for PP andPBR, which are 35% to 50% below the Appraisal estimates, while investment costs remaincomparable to the Appraisal estimates. The rate of return of these plants would increase if thetransfer cost of butadiene and propylene was lower, as the current cost reflects the high costs of theold, small Vadodara naphtha cracker.

* For investments at Nagothane, however, the economic rate of return as currently estimated is muchcloser to the Appraisal estimate, while the re-estimated financial rate of return is significantly

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above. This is because, although HDPE international prices, similar to international prices of othercommodity polymers, were also about 40% below those originally estimated, investment costs inthe cracker and HDPE plant were only about half of the Appraisal estimates. While investments inthe cracker expansion were in line with the Appraisal estimates, investments in the HDPE plantwere only about 40% of those originally planned, due to the change in design from a new train tothe revamping of the existing plant.

36. The overall economic rate of return of the project was re-estimated at 21 % versus the 37%estimated at Appraisal. The overall financial rate of return was re-estimated at 27%. These estimates arebased on the aggregate of all of IPCL's project investnents in plant capacity, accounting for 77% of totalproject costs.

(b) Financial Condition of IPCL and CIPET

37. IPCL's financial position has remained satisfactory. In 1992, the Bank expressed concern that thelong-term debt/equity ratio was slightly above the covenanted level of 60/40 and the current ratio, althoughstill above 1.0, was below the agreed ratio of 1.3. IPCL at the time was in a tight financial position due todelays in commissioning MGCC after the explosion, and the Bank was concerned that the decision toproceed with the implementation of the Gandhar complex in parallel with this project would furtherconstrain IPCL's finances. However, IPCL managed to raise substantial equity funding for Gandhar byselling shares on the stock market and keeping a high self-financing ratio. All three covenanted ratios, whilelower than planned at Appraisal, returned to generally acceptable levels. Changes in the past financialperformance of IPCL, as compared with the Appraisal estimates, and IPCL's projections for the period1998/99 to 2001/02 are presented in Table 6A.

38. Until 1993/94, the profitability of IPCL was significantly below the Appraisal estimates, asmeasured by the ratio of income to net sales, and the return on capital employed. IPCL's profitability thenimproved as projected until 1997/98, when capacity utilization of MGCC was quickly increased to above100%. Profitability in 1997/98 declined, due to a substantial drop in international prices at the end of 1997and the beginning of 1998 which followed the outbreak of the Asian crisis. IPCL management expectsprofitability to return to previous levels after the MGCC expansion reaches full capacity and production atGandhar picks up.

39. As already discussed above, the financial condition of CIPET has improved beyond what wasexpected and CIPET is marching towards self-sufficiency within the next four to five years. Overall, theproject has therefore substantially achieved its financial objectives for both IPCL and CIPET.

Environmental Objectives

Background

40. Environment Policy in India. Indian Laws require the preparation of a comprehensive EIA toidentify potential environmental impacts of large industrial projects and establish baseline data.Furthermore, the Environment Act of 1986 specifies standards and monitoring procedures for emission and,discharge and Minimum National Standards (MINAS) for specific industries. The Environmental ImpactEvaluation issued on 30 June 1994 by the Operation Evaluation Department of the Bank for theMaharashtra Petrochemical Project (the first phase of Nagothane complex) found that these standards were,in general, similar to those adopted in industrialized countries.

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41. Environment Tradition at IPCL. IPCL's policy requires strict compliance by its various units withall environmental regulations during design, construction, and operation of all its facilities. IPCL hascontinued to maintain its excellent environmental credentials through high environmental protection, andplant safety standards and emergency response awareness systems. As a result, IPCL has won manyenvironmental and safety awards.

42. Project Environmental Objectives. The main environmental objectives of the project were to (i)design and operate project facilities to meet the relevant Indian and local discharge standards for liquid,gaseous and solid wastes; (ii) monitor plant operation, effluent streams and ambient environment to test ifthey comply with standards and to take corrective measures; (iii) design and operate facilities to meet therelevant Indian national and local health and safety standards; (iv) conduct thorough safety-risk assessmentsand incorporate their recommendations in the design of projects; and (v) prepare detailed safety manuals forall project components. The environmental and safety performance of how these objectives were met arediscussed in detail in Annex 3 and summarized below.

The Nagothane Complex

43. The Environmental Impact Assessment. At GOI's and Bank's request, IPCL completed acomprehensive EIA for the project in 1989, which also provided comprehensive baseline data for bothphases of the complex. The EIA concluded that (i) no land acquisition and no additional housing wereneeded, and the additional requirements in power and water would be supplied by the existing systems; (ii)activities during construction would have only transitory impacts; and (iii) the main environmental impactswould occur during operation. The main impacts identified were (a) increased emissions of airbornepollutants; (b) increased fugitive and volatile emissions due to increased transportation of feedstock; (c)increased wastewater discharge; and (c4) increased spent catalyst disposal. The EIA also stated that (iv) theNagothane complex already included a complete wastewater treatment system with enough capacity to treatthe increased volume of effluents; (v) the emissions would, after expansion, remain within the MPCB(Maharashtra Pollution Control Board) limits for sulfur dioxide (SO2 ), oxides of nitrogen (NOx),hydrocarbons, and particulate matter; and (vi) the spent catalyst would return to the manufacturer. The EIAconcluded that overall the project would have a minor negative impact on the environment, which could bemitigated by proper measures.

44. Environmental Mitigation Measures. The main mitigation measures incorporated in the design andimplementation of the first phase included the adoption of (i) efficient emissions control systems; (ii) acomprehensive liquid effluent control and treatment system; (iii) solid waste management, includingrecording and labeling of all hazardous waste produced; (iv) noise and odor control; (v) an environmentalmonitoring and reporting system; (vi) environmental training and environmental awareness programs; (vii)implementation of a large reforestation program and development of a green belt; and (viii) socialdevelopment programs. In addition, the C2/C3 feedstock and the natural gas preferably used in the powerplant contain negligible sulfur levels.

45. Environment Monitoring Results. Monitoring results show that (i) the Nagothane complex meetsMPCB gaseous effluent standards and, except for particulate patter, they also meet Bank guidelines for thepetrochemical industry; (ii) ambient air quality largely meets the standards and pollutant levels havechanged little from before the start-up of the complex; (iii) treated effluents meet in all respects not onlyMPCB standards but also the more demanding Bank guidelines, and furthermore, the effluent rejected in theAmba river has lower pollutant levels than the raw water pumped from the same river; and (iv) the impactof the wastewater discharge into the Amba river estuary has been negligible and water and sediment quality

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is comparable to the 1990 baseline.

46. Safety Measures. For the first phase of the complex, IPCL took safety measures, based on a Hazardand Operability study (HAZOP) and risk analysis. Nevertheless, a failure in the Outside Battery Limit(OSBL) area led to a serious accident6 in 1990 with a number of fatalities. IPCL has further reinforced itssafety system and efforts since and instituted many programs aimed at increasing safety consciousnessamong personnel. The safety audit and risk analysis study which had been agreed upon at Appraisal wasbeing carried out in 1990, when it was disrupted by the accident, and it remained limited to the insidebattery limits of the complex. However, after the accident, a number of additional studies were carried oul:in 1991 and 1992, mostly prepared or reviewed by foreign consultants. They included (i) a detailed safetyaudit of the entire complex; (ii) a HAZOP and a risk analysis study for the OSBL area; (iii) an inspectionreport of gas storage and off sites; (iv) a report on safety systems, including in the design and procedures fiorthe OSBL facilities; and (v) a HAZOP study for all process plants. Most of the recommendations of thesestudies regarding design changes, operating procedures, and safety and preventive measures wereincorporated in the design and operation of the first phase of the complex and of the project components. Inaddition, GOI completed a special review in July 1992 (by the so-called Mashelkar commission) of thecauses, effects and remedial actions taken in relation to the accident, and all critical recommendations ofthis audit were implemented.

47. For the expansion sub-projects, a number of additional studies were also carried out and theirrecommendations implemented. They included: (i) a disaster management plan completed in October 19911;(ii) Safety Construction Audits, completed in April 1996 to audit the planning for the erection of the crackerand HDPE expansions projects; (iii) HAZOP studies for the cracker and HDPE expansions completed inJanuary 1998. In addition, a risk analysis study is being carried out by M/S. Entec, UK and the final reportis expected by end October 1998. Finally, the on-site Disaster Management Plan which is being applied inmock drills is being revised and its second edition is expected by July 1998.

48. Safety System. A separate "Safety Manual" defines the safety rules, standards, procedures andcodes to be used at Nagothane. The safety system, described in Annex 3, includes safety committees,auditing and inspection programs; training and awareness development programs; monitoring of equipmentand installations; work procedures; investigation, reporting and recording of accidents; and safety awards.This safety system was found effective by all the consultants who carried out the above studies. IPCLefforts have had results: except in 1995, the severity rate of accidents-number of days lost per million manhours worked-fell from 663 in 1992 to 32 in 1994, 46 in 1996 and 19 in 1997.

49. Environmental and Safety Organization. Environmental protection and safety activities atNagothane are the responsibility of two separate divisions of the Health, Safety and Environment (HSE)Department headed a Deputy General Manager reporting directly to the Executive Director of the wholecomplex. In May 1998, management was in the process of contracting a consultant to assist in theimplementation of an Environmental Management System at Nagothane in accordance with ISO 14001norms aiming at obtaining certification. If implemented, this system will further improve environment andsafety in the complex.

The Vadodara Complex

50. The Environmental Impact Assessment. At GOI's and Bank's request, IPCL completed a

6 This accident is fully documented in the Environmental Impact Evaluation and Project Completion Report of theMaharashta Petrochemical Project (Loan 2505 IN) and in Bank files.

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comprehensive EIA in February 1990. Some of the conclusions of the EIA were similar to those forNagothane-(i), (ii), (a), (b), (c) together with increased solid wastes, (iv), (v) with the reference standardsbeing those of the GPCB (Gujarat Pollution Control Board), and (vi) in paragraph 43. The operation of thesub-projects was expected to have minor or positive impacts, as they reduce the overall pollution load of thecomplex by replacing or modernizing existing old plants. Additional volumes of solid waste would beminimal and could be used for land filling or incinerated.

51. Environmental Mitigation Measures. Main mitigation measures adopted were similar to thosedescribed in paragraph 44. In addition, preferential use of low sulfur natural gas, adequate stack height, andfour flare systems help IPCL maintain emissions and ambient air within standards.

52. With respect to the cyanide emissions from the ACN plant, IPCL has installed a hot alkali digesterand a specially designed incinerator to reduce airborne cyanides. The cyanide level in the resultingwastewater was reduced from 15-20 ppm to about 10 ppm, but remains higher than the current standard of0.2 ppm. IPCL's R&D department at Vadodara has developed its own technology for cyanide biomassdigestion. IPCL is in the process of introducing this technology in its facilities and expects to meet the newstandards.

53. The effluent treatment facilities were further revamped in parallel with project implementation toincrease their capacity and improve their efficiency. They were designed according to internationalstandards and, except for cyanide, the effluent stream meets the GPCB standards before being rejectedthrough the 55-kilometer joint venture Vadodara effluent channel.

54. To improve hazardous solid management and comply with regulations and conditions of the lastoperation authorization obtained from GPCB, IPCL has taken the following steps: (i) a hazardous wastemulti-purpose incinerator was installed and has been operating since March 1998; (ii) a safe solid wastemanagement and handling system is being developed, including a scientifically designed hazardous solidwaste deposit. By May 1998, ten acres of land had been acquired, a feasibility study had been completed,and the National Productivity Council was hired to prepare the design of the system. Furthermore, acomprehensive program to close down the existing waste disposal site has been initiated in consultationwith GPCB.

55. In 1984, IPCL built 163 houses and infrastructure (including schools, electricity and water supply)on 6 hectares of cattle grazing land in Koyali village to resettle the nearby Danhora village, deemed to posesecurity risk due to its proximity to the Baroda complex. The project environmental impact assessment,carried out in 1990, reported that the affected population, estimated at 300 families by then, never acceptedto move to the new village. As of 1998, still no solution had been found. According to IPCL, the affectedpopulation insists on employment of all youths in Danhora by the company as a condition to moving, andthe new village, unoccupied for many years, has now deteriorated and would need more investments for itsrecovery. IPCL and the local authorities should seek ways to resume negotiations with the villagers andresolve this outstanding issue.

56. Environment Monitoring Results. Monitoring results show that: (i) except for particulate matter,ambient air quality as measured in 1988/89 for the EIA and in 1997/98 met the standards; (ii) Airborneemissions of the complex as measured in 1988/89 and in 1997/98 met the standards, and, except forparticulate matter, they also met Bank guidelines for the petrochemical industry; (iii) current treatedeffluents from the complex's central wastewater treatment not only meet all GPCB standards but also themore demanding Bank guidelines and considerable improvement occurred as a result of revamping whichtook place in parallel with project implementation; and (iv) noise level within the complex area was, during

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the May 1998 external environmental audit, in line with the OSHA (U.S. Occupational Safety and HealthAdministration) guidelines.

57. Safety Measures. Since the start of the Vadodara complex, strong safety and emergency systemsand programs have been implemented by IPCL to minimize risks of accident, and these were also furtherreinforced after the accident at Nagothane. However, the detailed safety audit, which was to be carried outunder the project before 30 September 1990, was delayed. In August 1995, an overall health and safetyaudit was performed for the entire complex and updated/amended for each new plant. Detailed HAZOPstudies were carried out and a Disaster Management Plan was developed. For the sub-projects, HAZOPstudies were carried out during the period 1993-1995 and, following their review by the respective processlicensers, their recommendations were incorporated in plant designs. In addition, a Quantitative RiskAssessment (QRA) was completed in November 1997 for the overall complex including the projectcomponents which were also included in the existing emergency plan.

58. Safety System. The safety system at Vadodara is similar to that at Nagothane and is described inAnnex 3.

59. Environmental and Safety Organization. Environmental protection and safety activities are theresponsibility of two separate divisions which are headed respectively by the Environment and EcologySenior Manager and the Safety Chief Manager, both under the General Manager Operation who reportsdirectly to the Operation Director of the Vadodara complex.

C. Main Factors Affecting the Project

60. The project was implemented with long delays. It was appraised on 6 February 1989, negotiatednine months later on 1 1 December 1989, approved by the Board 18 months after Appraisal on 13 September1990, signed on 7 November 1990, and became effective on 18 December 1990. Negotiations were initiallyplanned for May 1989, but took place only in December 1989 when GOI was able to take decisionsacceptable to the Bank on the price of C2 /C3 for the Nagothane Complex. It then took more than eightmonths to reach an agreement on the conditions for the Board presentation. They included (i) a letter fromGOI spelling out the feedstock C2/C3 supply arrangements, which could not be submitted before ONGCobtained an environmental clearance from the Ministry of Environment and Forestry for debottlenecking itsgas separation unit in Uran (July 1990); and (ii) the submission of EIA reports acceptable to the Bank.

Delays in Implementation of the IPCL Component

61. During implementation, the closing date was postponed twice for a total of 18 months for Loan3259 to allow completion of works for the cracker and HDPE expansions at Nagothane. The final closingdate for IPCL's component was 31 March 1998. The major reasons for the delay were (i) delays inobtaining final Government approvals for both IPCL and CIPET components; (ii) delays in the completion,start-up and stabilization of the cracker and downstream LLDPE/HDPE plant at Nagothane, financed underLoan 2505-IN (the first phase of the complex); and (iii) IPCL's decision to change the scope of thecomponents at Nagothane to optimize the use of the additional ethylene and deal with rapid technologicalchanges in the manufacture of HDPE. In addition, the decision to implement the Gandhar complex inparallel, which was not financed by the Bank, created some constraints on IPCL's financial and manpowercapacity.

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62. Commencement of project implementation was seriously hampered by problems in obtaining GOIfinal approvals, which resulted in a delay of more than 16 months.7 The clearances from the environmentalauthorities, approval of the Public Investments Board (PIB) and final approval of the Cabinet were obtainedfor IPCL components only during the first quarter of 1992. This problem became so critical that the Bankwas ready in January 1992 to suspend disbursements for the import component, which was justified on thebasis of the need to seed the market in preparation for production at the new plants. This problem could hadbeen avoided, had the PIB and cabinet final approvals been a condition for Board presentation.

63. Long delays occurred in the completion of the first phase of the Nagothane complex, due to theNovember 1990 explosion in the OSBL facilities, technical problems in the LLDPE/HDPE plant, andsubsequent disagreement between the process licenser and IPCL. Only in mid- 1994 did the operation of theLLDPE/HDPE plant financed under the first phase improve and stabilize, following the implementation ofan audit and of the action plan finally agreed to between the licenser and IPCL. The Nagothane componentscould not start, waiting about 26 months for full implementation of the first phase. Furthermore, the IPCL'sproject team at Nagothane was probably very busy containing the damage and expediting the repairsassociated with the November 1990 accident. In contrast, implementation of the Vadodara componentsstarted immediately after GOI's approval was obtained in March 1992, and proceeded without major delaysand were commissioned in September 1996, before the Loan Agreement closing date.

64. Another 18-month delay was caused mainly by uncertainty about sufficient availability of C2 /C3from ONGC for MGCC expansion and about the optimum use of the increased production of ethylene fromthe cracker expansion. Due to increased consumption of ethylene at the existing plants after theirstabilization subsequent to operation optimization, it appeared that there would not be sufficient ethyleneavailable from the projected cracker expansion for a new 75,000 tpy broad range molecular weight HDPEtrain. Therefore, IPCL started studying the possibility of debottlenecking one of the existing LLDPE/HDPEplants instead. Only by end 1995 was IPCL in a position to make a final decision on the HDPE plantexpansion, resulting in a change in the original scope. IPCL also decided to include a propane cracking unitunder the project to complement C2 /C3 available from ONGC.

65. This reassessment allowed IPCL to take advantage of recent developments in technology for themanufacture of broad range HDPE (energy efficient super condensation technology, known as the pentane-based process), enabling a considerable expansion in manufacturing capacity (60,000 tpy) through theintroduction of process modifications with considerable savings in capital and operating costs. However,this change had implications on procurement procedures, which implied: (i) use of LIB rather than ICB(international competitive bidding) as originally planned, due to confidentiality arrangements imposed bythe process licenser; (ii) procurement of the debottlenecking investments through an EPC contract tocompensate for delays; and (iii) detailed agreements with potential contractors, prolonging the selection ofthe successful bidder. These changes in scope of services and procurement methods was approved by theBoard in February 1996, and required extension of the closing date.

66. Overall, implementation of the Nagothane component was delayed by about 60 months, of which16 months was subject to GOI control, 18 months was subject to IPCL control, and 26 months was due tothe November 1990 explosion and to the technical problems faced in stabilizing the LLDPE/HDPE plantfinanced under the first phase. However, once the above changes in scope and procurement arrangementswere made, IPCL's experienced project team was able to implement the sub-projects in about two years.

' The delay stemmed in part from frequent changes in government during this period.

16

Delays in Implementation of the CIPET Technical Assistance Component

67. The closing date for the CIPET Technical Assistance component (Loan 3258-IN) was postponed for12 months. The final closing date was 30 September 1997. Although the project became effective on 18December 1990, there was a significant delay initially due to CIPET's lack of familiarity with requiredprocedures for obtaining Government clearance, and GOI formally passed on the $12 million as a grant toCIPET only in November 1993. Until then, procurement activities and effectiveness of the United NationsIndustrial Development Organization (UNIDO) assistance contract were halted, resulting in a delay ofapproximately three years. However, subsequently, implementation proceeded satisfactorily and CIPETcompleted the project before the revised closing date.

D. Project Sustainability

Sustainability of Project Investments

68. The sensitivity analysis presented in Table 9 shows that the cracker and HDPE expansion atNagothane remains viable under any of the hypotheses tested. The investments remain very attractive evenif all distortions associated with current gas pricing and tariff duties are eliminated and international pricesfall further. The robustness of the project economics will help ensure the sustainability of the MGCCcracker even if shortages of C2/C3 develop (even if the cracker was operated using only 50% of itsadditional capacity and the ethylene shortfall was imported for the HDPE plant, the economic rate of returnwould still be about 30%).

69. The project investments at Vadodara, however, would be much more vulnerable should tariffprotection be eliminated. While still viable under base case assumptions, their rate of return would be closeto zero if international prices fell by 20%. This is because internal transfer costs of raw materials from theVadodara naphtha cracker are high, due to its small size and old age, and the high price of domesticnaphtha. IPCL is aware of these limitations and is planning to replace the existing cracker with a 300,000tpy new naphtha-based cracker, phase out the old downstream units, and increase imports of naphtha. Ifimplemented, these steps would help ensure the long-term sustainability of project investments.

Financial and Economic Sustainability of IPCL

70. In the past eight years, IPCL has shown an ability to adjust to a changing policy environment andfinance a large expansion program while maintaining its profitability and a sound financial structure. It hasdone so without depending in any way on Government budget resources. IPCL is one of the "nine gems"among public enterprises which have gained substantial autonomy in management because of their goodfinancial performance, contribution to the exchequer and complete financial self-reliance. The challengesIPCL will face in the future, however, are large. It should expect that the current distortions in feedstockprices will eventually be eliminated and that tariff protection will further decrease to levels more in line withinternational practice. These changes would have significant impacts, as shown below based on actualfinancial results in 1997/98 and those projected by IPCL for the year 2001/02:

17

Net Income of IPCL (Million Rupees)

1997/98 (Actual) 2001/02 (Projected)

Current or Projected Net Income 2,437 7,626Eliminating Distortions in Feedstock Prices 8 - 912 - 2,292Reducing Tariffs to 10% on Average - 5,966 - 9,838Net Income - 4,441 - 4,504

71. Concurrently with these likely changes and risks, IPCL has to face considerable competition fromthe private sector, which is also planning major expansions. IPCL is aware of these challenges and isactively planning the replacement of its outdated cracker at Vadodara and, in time, replacements, upgradingor closure of other old, small downstream units. Substantial restructuring of the entire Vadodara site islikely to be required for IPCL to maintain its profitability and competitiveness. Finally, IPCL is constructingfacilities for importing naphtha to lower its cost.

72. Another uncertainty faced by IPCL is the reported shortage of natural gas in the fields supplyingC2/C3 to the Gandhar complex. It now appears that these fields will not be able to support the crackeroperating at full capacity, although the extent of the shortage is not clear. This uncertainty could be a majorthreat to IPCL's sustainability, particularly since no long-term contract has been signed with the gas supplier(GAIL). The Government has indicated that options were being reviewed and its was confident of resolvingthis issue shortly.

73. Overall, (i) because the policy environment has progressively become more conducive toefficiency, including the procurement and pricing of naphtha; (ii) because IPCL now has two world- classgas-based complexes; (iii) and because IPCL has modernization plans for Vadodara, there is no reason whyIPCL should not be able to continue to compete effectively on the domestic market (it is not likely to havecompetitive advantages for exports) provided the Gandhar gas issue is satisfactorily resolved. For theforegoing reasons, the sustainabilty of IPCL is rated as likely. Maintaining sustainability, however, wouldbe considerably facilitated if IPCL was under private ownership, which would help IPCL to proceed fasterwith restructuring and major investment decisions and avoid losing ground to newcomers. ConsideringIPCL's good financial record, it is difficult to see the rationale for IPCL remaining a public sector company.It is likely that GOI, which has already privatized 40% of IPCL's share capital, will consider selling off itsmajority control.

Environmental Sustainability of IPCL

74. There is a very high level of environmental and safety consciousness at IPCL, particularly atNagothane. Although accidents like Bhopal and the explosion at the MGCC cracker site have certainlycontributed to it, the level of awareness was already high before the explosion. At Vadodara, IPCL has beenworking on resolving two remaining issues: the implementation of the solid waste deposit (for which a sitehas now been found and a feasibility study has been completed), and implementing measures to lowercyanide levels in wastewater's from the ACN plant, to comply with today's more stringent Indian standards.Environmental sustainability will be further enhanced at Nagothane if management proceeds with its plansto establish environmental management systems according to ISO 14001 norms, and if Vadodara takes thesame decision. Because of these efforts on the part of IPCL, the environmental sustainability of the projectinvestments and of IPCL as a whole is rated as likely.

8 See Annex 2, Table A2.6. These estimates assume that the C2/C3 "subsidy" for Gandhar would be equal in amountto that for Nagothane, since both crackers have the same capacity.

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Sustainability of CIPET

75. Section C has already discussed how CIPET has managed to steadily improve its financial self-reliance and its prospects for reaching full self-sufficiency in a period of four to five years. It has alsodescribed how CIPET is now poised to move into new areas as a result of its past efforts and of the project.In order to move further into these areas, CIPET may need to develop a more commercial approach toR&D, including a contractual policy and mechanisms for sharing into the results of research. While CIPEThas incorporated in its software purchase contract provisions for the upgrading of software, it also needs todevelop a policy and financing mechanisms for the replacement of equipment and machinery which tend tobecome obsolete quickly. To reinforce its commercial orientation, it would be useful for CIPET to increaserepresentation of the industry in the Governing Council and in management. It is expected that thesechanges will occur as CIPET reaches self-sufficiency. The sustainability of the CIPET component and ofCIPET itself are therefore rated as likely.

E. Bank Performance

76. During Identification and Preparation, Bank teams properly identified all major policy issuesaffecting the sector, and the project design as originally conceived (a hybrid operation with a policy-basedlending component and an investment component) corresponded well to the Bank strategy of sub-sectorlending at the time (Section A). As GOI was reluctant to formnally commit itself to policy changes, the scopeof the policy package was progressively reduced. The project team recognized the political constraints ofcarrying out even hybrid operations which were akin to adjustment lending, as adjustment lending wouldrequire the Bank to reach an understanding with GOI on key macro-economic parameters (in addition tosub-sector specific policy objectives). Reaching such an agreement was considered impossible in anelection year, and Bank management decided to proceed with the project as an investment operation, withpolicy conditions restricted to those critical for the economic viability of the project. At that point, there isno evidence that the Bank ever considered removing the project from the lending program, or delaying itsprocessing until after the election, even though the rationale for Bank support was no longer clear (thisrationale was seriously questioned by some Bank Executive Directors at the time of Board approval).

77. Appraisal and Negotiations proceeded on that basis. Within its limited policy mandate, the variousBank teams attempted to deal with a less than optimum policy framework. When GOI raised tariffs onplastic polymers in January 1990, Bank management informed the Government that the project would notproceed to the Board presentation stage unless tariffs were rolled back substantially (this was done,although not back to previous levels). Also, discussions during Appraisal probably contributed to theincreases in minimum economic sizes which were announced shortly before Negotiations. The Bank,however, erred during Negotiations by accepting to change the wording of the C2/C3 pricing covenant (themost important policy covenant) by eliminating from it the statement of principles on which this pricingshould be based, and accepting instead GOI's commitment to maintain this price at an appropriate level(agreed upon in absolute value) and consult the Bank in case of change. As already discussed (Section B),the negotiated wording allowed prices of C2/C3 to slip to levels much below the opportunity cost, while theGovernment remained technically in compliance with its commitment.

78. On all other grounds (technical, financial and environmental), the Bank performed satisfactorily,even though the appraisal of the project may have been premature on technical grounds for the MGCCexpansion. The Board presentation was substantially delayed until all environmental issues were resolved(satisfactory EIAs for Nagothane and Vadodara, environmental clearance of the upstream ONGC gasseparation plant). However, final Government clearances had not been obtained, and this subsequently

19

caused significant delays in project implementation which would have justified requesting these clearancesas the condition of Board approval.

79. During implementation, Bank teams regularly followed up on the technical, financial, andenvironmental aspects of the project, taking up implementation issues with IPCL and the Government. Thequality and continuity of Bank staff and consultants was good. Involvement of the Bank Delhi office inprocurement was a success, as it provided timely guidance to IPCL on Bank procedures and support andspeeded up the procurement process. Throughout implementation, the Bank closely monitored the financialperformance of IPCL. It also reviewed on a regular basis IPCL's efforts to carry out a series of safety andrisk assessments and to implement their recommendations, and insisted on the resolution of outstandingenvironmental issues at Vadodara. The institutional perforrnance of CIPET was also regularly reviewed.The Bank showed substantial flexibility in modifying the project design to match changing technologicaland market conditions, and in adapting its procurement rules. With respect to the HDPE expansioninvestment, a major change was required in design and procurement methods, more adapted to newtechnologies with large requirements of special equipment, and confidentiality. This involved allowing avery large EPC contract to be procured under LIB, an unusual procedure for the Bank, which wasnevertheless quickly processed through the Board.

80. With respect to policy, until early 1994, Bank missions continued to raise the matter of high levelsof protection, but this concern disappeared subsequently as levels of protection decreased across the board.Concerns about high naphtha prices were voiced throughout implementation because they directly affectedthe financial performance of IPCL. These issues, together with recommendations to decrease theGovernment's share in IPCL capital to below 50%, were formally raised several times with visitingGovernment officials and with IPCL management. Beyond June 1991, there is no record of Bank teamshaving reviewed minimum economic sizes or the sector investment program, but again such reviews hadbecome redundant or ineffective in light of the industrial sector deregulation. With respect to pricing ofC2/C3 , except during the last supervision mission in April 1998, there is no record of Bank teams havingreviewed the price of C2/C3 in relation to its opportunity cost and of having raised the issue of itsprogressive relative decline. Even if the Bank had no legal means of obtaining a price realignment, becausethis was the most important of the (modest) policy objectives of the project, the Bank could have raised thisissue in the framework of its general policy dialogue with the Government.

81. The overall performance of the Bank in the financial, technical, institutional and environmentalaspects of the project was satisfactory. In the area of policy, however, it was deficient.

F. Borrower Performance

IPCL

82. IPCL's performance in project preparation was satisfactory overall, as it demonstrated a strongcommitment to the project and met in a timely manner all necessary technical, financial, environmental andinstitutional requirements from the Bank for the project to proceed as planned. It failed, however, to obtainthe necessary Government clearances and to alert the Bank of bottlenecks which these clearances couldcreate subsequently. Also, the MGCC expansion component was probably premature: the new cracker andits downstream units had not started at the time, with resulting uncertainties in feedstock availability, in theoptimum allocation of ethylene to downstream units, and in the technology to be adopted for the newdownstream HDPE plant. At Nagothane, these uncertainties and the delays which occurred in the start-upand stabilization of the downstream plants of the first phase of MGCC resulted in long delays in projectimplementation.

20

83. A tendency to be overly optimistic in planning also led to the parallel implementation of theGandhar complex, which for a while strained the implementation capacity and financial position of IPCL.Once these problems were resolved, however, IPCL demonstrated a strong capacity to imp,lement theproject quickly and efficiently. There were no problems of counterpart funding. IPCL complied with allother covenants with respect to procurement, reporting, accounting and auditing, and (except sporadicallyand for a short time) its financial structure. IPCL's performance in the area of environment and safety atboth Vadodara and Nagothane is strong. The accident at Nagothane has further heightened IPCL'senvironmental and safety consciousness, which was already high before the accident. The remaining issue'sat Vadodara (solid waste deposit and cyanide level in effluents) are being addressed satisfactorily. Overall,therefore, the performance of IPCL was satisfactory.

CIPET

84. The performance of CIPET was highly satisfactory. After the necessary Government approvalswere finally obtained, the project was implemented exactly as planned and within the original time-frame,,CIPET created effective links with UNIDO to assist in the implementation of the training components of theproject. CIPET also made very good use of the ICB procedures, which it claims have resulted in savings ofup to 50% over list prices. CIPET has complied with all its obligations with respect to the yearly submissionof its training program, procurement, and project accounting and auditing. The institutional performance ofCIPET meanwhile has been excellent.

G. Assessment of Outcome

85. The project achieved most of its major objectives and is expected to achieve its intended financialand economic, institutional and environmental results. The project is likely to be sustainable. For thesereasons, the project outcome is rated as satisfactory. The (modest) policy objective of the project was onemajor objective which was not achieved. However, since the policy framework in which the projectoperates has, independently from the project, substantially improved since the project was approved, andcontinued improvements are planned, the effect of this failure is less than it would have been otherwise. Theexception to this is the pricing of C2/C3 , which is very specific to the petrochemical sector.

H. Future Operation

86. In 1997/98, the project plants at Vadodara were only in their first or second year of operation, butwith results, in terms of capacity utilization, consistent with the Appraisal estimates for similar periods ofoperation. These results are shown in Table 6A. At Nagothane, operations started on June 19, 1998, andexpectations are that IPCL will be able to run project plants at 100% of capacity, as planned at Appraisal, asdemonstrated by the production record of the plants which are being expanded (Table 6A). IPCL is a leaderin the production of plastic polymers, and with the addition of the Gandhar complex and its strongnationwide distribution network, is expected to maintain its market share for these products. Limitations ongas supplies at Nagothane will not permit further expansion of gas-based ethylene production capacity at thesite. As already explained in Section D, the installation of the project plants is part of a comprehensiverestructuring of the complex at Vadodara.

87. With respect to CIPET, Section B has already discussed how the project has contributed to theinstitutional improvement and updating of CIPET, and its ability to increase self-sufficiency. According toCIPET, the equipment procured under the project is being utilized already at between 80% and 90% of itscapacity, and this use will increase as CIPET personnel becomes fully conversant with this sophisticated

21

equipment. Maintenance is not likely to be a problem, as a nucleus of staff has been trained abroad in theoperation and maintenance of the equipment, and these are now providing training to their subordinates andstudents. CIPET, however, will need to develop a mechanism to deal with eventual obsolescence of thiskind of sophisticated equipment, even though the pace may be slower in India than in developed countriesunder current policy conditions.

88. Performance indicators did not appear as a separate annex in the Staff Appraisal Report, but theycan be extracted from the text and the cost/benefit analysis in the report and other preparation reportsprepared by IPCL and CIPET. The most relevant performance indicators for project operation which shouldbe followed in the future are presented in Table 6 for both IPCL (Table 6A) and CIPET (Table 6B).Adequate monitoring systems exist in both institutions to permit their review.

89. No follow-up operation has been financed by the Bank. The type of support provided to IPCL nolonger fits into Bank strategy for India and elsewhere. Continued support to CIPET could not justify anoperation by itself, due to its small amount, but would be worthwhile if it could be included in anotheroperation providing support to R&D and training institutions (possibly a science and technology project).

90. It is suggested that the Bank follow up on the issue of C2 /C3 pricing with GOI in the broadercontext of energy sector operations, as this was one of the major objectives of the project which were notachieved. Even though the Government has been moving towards natural gas prices more in line withopportunity cost, its current objective in that respect does not go quite far enough. For C2 /C3, there is nojustification to maintain an implicit subsidy detrimental to IPCL's competitors. Other issues of taxation andtariff protection are not specific to the petrochemical sector and need to be addressed in a broad macro-economic context.

I. Key Lessons Learned

91. The major lessons which emerge from implementation of the project are the following:

* Sub-sector approaches supported by hybrid operations (combined policy-based and investmentlending) are not effective ways of addressing distortions in a sub-sector when these same distortionsprevail throughout the economy. It is not possible, nor recommended, to treat the trade regime of aspecific sub-sector in isolation from other sub-sectors, nor is it possible to treat natural gas pricingfor the petrochemical sector in isolation from natural gas pricing in general and more generallyenergy pricing, without creating additional distortions in the long term. The Bank has recognizedthis problem since and has focused its strategy more towards supporting wide trade reform andenergy sector reform.

* Pricing covenants should always state the principles on which prices are to be calculated and shouldprovide for periodic formal reviews.

* Support to upgrade the technological basis of institutions such as CIPET is valuable and worthy ofBank support when the institution at the same time has close ties with its clientele and incentives tooptimize the financial return from the equipment and technical assistance financed under theproject.

* Expansion investments should not be approved until production of existing plants has stabilized, orat least started, permitting an optimization of project design based on experience with the existingplants, and avoiding possible delays and design changes.

* Requirements for timely EIAs and safety studies, well prepared by internationally recognized firmswith state-of-the-art knowledge in the area, are effective in strengthening and modernizingenvironmental and safety systems in fin-ns.

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* All government approvals in India, including PIB, Cabinet, and environmental licenses, should berequired as the condition for Board presentation.

* Decentralization of procurement review to field offices is effective in speeding up the process andproviding timely guidance to the borrower. Field offices could also perhaps provide more support tovisiting teams in other areas, such as monitoring policies in areas relevant to the project (forinstance, here, energy pricing) and flag potential issues.

* For expansion projects, direct contracting or possibly LIB procurement procedures could beconsidered under special circumstances to accommodate the increased requirements of equipmentrecommended by process licensers and specific needs for standardization.

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PART II: Statistical Tables

Table 1: Summary of Assessments

A. Achievement of Objectives Substantial Partial Negligible Notapplicable

Macro policies xSector Policies xFinancial Objectives xInstitutional Development xPhysical Objectives xPoverty Reduction xGender Issues xOther Social Objectives xEnvironmental Objectives xPublic Sector Management xPrivate Sector Development x

Likely Unlikely Uncertain

B. Project Sustainability x

C. Bank Performance satisfactory Satisfactory Deficient

Identification xPreparation Assistance xAppraisal xSupervision xi

HighlyD. Borrower Performance Satisfactory Satisfactory Deficient

Preparation xImplementation:

Provision of counterpart funds xProject Coordination Units x

Covenant Compliance x

E - Beneficiary Performance (CIPET) x

H44jy Highlysatisfactory Satisfactory Unsatisfactory unsatisfactory

F. Assessment of Outcome x

Except for policy aspects

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Table 2 -Related Bank LosTns/Creditsl

Brazi Purpose Year of Status Loan inLoan Credl ER LTpp2 Millions of

lus$

Ln 2505-IN Maharashtra Petrochemical March Closed: 09/30/1991 300.0Project 1985 PCR 1 604 dated

01/29/1993

Ln 2729/2730 111 Cooperative Fertizer Industry July 1986 Closed: 06/30/1993 256.9Project PCR 14007 dated

0>3/1/1995

Ln 241 5 IN Madya Pradesh Fertilizer Mav 1984 Closed: 06/30/1992 167.1Project PCR 11995 dated

06/l5/1993

Cr I 125 IN lazira Fertilizer Project May 1981 Closed: 06/30/1988 400.0PCR 6853 dated06/30/1987

Ln224 IN l Sou,th Basseln Offshore Gs Februa' Closed 12/31/1988 222.3Development Project 1983 PCR 9392 dated

03/04/1991

Ln 3344-IN Petoleu'mi Transport Project April 1989 Closed 06/30/1995; 340.0PCR 9986 dated03/17/1997

Ln 29 04= DN Westem rGas Development February Closed 06/30/94 295.0Project 1988 PCR 9896 dated

04/30/1995

Ln 1925 IN Second Bombay High December Closed 03/31/1984 400.0Offshore Development 1980 PCR 6237 datedProject 12/i 1/1985

Ln 2785-`N Oil India Petroleum Project March Closed 09/30/94 140.01987 PCR 9952 dated

09/20/95

Ln 2403- IN Cambay Basin Petroleum March Closed 10/31/1992 242.5Project 1984 PCR 13683 dated

06/20/1994

Petrochem ical projects (5including gas-based ammonia and ammonia-based fertilizer production), and projects for thedeveloprnent or transportation of petrochemical inputs (natural gas, petroleum products)

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Table 3: Project Timetable

Steps in project cycle Date planned! Date actual/latest

estimate

Identiflcation 2 October 16, 1987

Preparation March23, 1988

Pre-appraisal October 10, 1988

Appraisal May 1989 February 6, 1989

Negotiations December 11, 1989

Board Presentation March 1990 September 13, 1990

Signing November 7, 1990

Effectiveness February 5, 1991 December 18, 1990

Midterm Review June 19943 April 23, 1996

Project Completion

- Loan 3258 IN

* Nagotane Complex Sub-projects March 31, 1996 Expected for June 19984

* Baroda Complex Sub-projects March 31, 1996 September 19965

-Loan 3259 IN March 31, 1996 November 1997

Loan Closing

- Loan 3258 - IN6 September 30, 1996 March 31, 1998

- Loan 3259 -IN7 September 30, 1996 September 30, 1997

Planned dates for Appraisal and Board presentation are as in Project brief.2 This project is a follow-up to the Maharashta Petrochemical Project (Loan 2505 - IN), completed andclosed in September 1991.'No mid-term review was required under the Loan Agreement. However, in view of changes in theeconomic environment and technical problems faced by the Nagothane HDPE/LLDPE existing plant, IPCLand the Bank decided to carry out a mid-term review mission by mid- 1994. This mission was later-ondelayed, pending resolution of the following two issues: (i) poor operation of the existing HDPE/LLDPEplant at Nagothane; and (ii) pending decision on technology for the new plantI The Nagothane Ethylene and HDPE/LLDPE expansions were not yet completed as of the end of May1998. They were expected to be completed and hooked-up in May 1998 and commissioned in June 1998.1 Commercial operation started in January 1997.6 On September 6, 1996, the closing date of Loan 3258 was extended to September 30, 1997.7 For IPCL component (Loan 3259), the Loan Agreement was amended twice to extend the Closing date:(i) in January 1996, it was extended to September 30, 1997; and (ii) in September 4, 1997, it was extendedto March 31, 1998.

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Table 4- Loan Disbursements: Cumulative Estimated and Actual(US$ million)

Bank FY Cumulative Loan Disbursementand Semester Appraisal Actual Actual as

Endinq Estimate Ln 3258 - CIPET Ln 3259 - IPCL Total % of Estimate

1991 Jun. 1991 29.00 1.00 20.16 21.16 73.01992 Dec. 1991 58.00 1.00 42.31 43.31 74.7

Jun. 1992 87.00 1.00 70.48 71.48 82.21993 Dec. 1992 127.00 1.00 73.37 74.37 58.6

Jun. 1993 167.00 1.00 76.26 77.26 46.31994 Dec. 1993 191.50 1.00 83.94 84.94 44.4

Jun. 1994 216.00 1.00 87.21 88.21 40.81995 Dec. 1994 226.50 1.76 90.74 92.50 40.8

Jun. 1995 237.00 2.69 101.46 104.15 43.91996 Dec. 1995 240.00 2.69 108.38 111.07 46.3

Jun. 1996 244.00 3.20 121.59 124.79 51.11997 Dec. 1996 244.50 7.07 127.01 134.08 54.8

Jun. 1997 245.00 10.12 131.93 142.05 58.01998 Dec.1997 11.34 136.04 147.38 60.2

Jun. 1998 11.86 140.01 151.87 62.01999 Aug. 1998 11.86 145.40 157.26 64.2

Date of Final Disbursement: Feb. 28, 1998 for Ln 3258 and Aug. 31, 1998 for Ln 3259

300.00

250.00

200.00

E150.00

100.00

50.00

0.00 g l | :|1991 1992 1993 1994 1995 1996 1997 1998

Bank FY-O- Estimate --- Ln 3259- IPCL A Ln 3258 - CIPET X Total

Notes:

Loan 3258 - IN.About US$ 135,731 remained undisbursed at loan closing and were canceled.

Loan 3259 - INThe following cancellations took place: (i) US$ 30.3 million as of June 1, 1994, from the seedingprogram component (materials under part B of the project); (ii) US$40 million as of October 31, 1995,of which US$19 million from the unallocated Categories and US21 million from Category 3; and(iii) at loan closing, US$17.3 remained undisbursed an were cancelled.

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Table 5: Key Indicators for Project Implementation

A - IPCL

Key implementation Estimated Actualindicators

Nagothane Complex

Ethylene . Expansion of existing ethylene cracker . 100,000 tpy increase to 400,000 tpy ethylene production.Cracker from 300,000 tpy to 400,000 tpyExpansion . Process Technology: idem license was already provided in the earlier

. Process Technology: Stone & Webster agreement with Stone and Webster.technology (USA) as in the basicconfiguration. . Detailed Engineering and project implementation, monitoring and control

by EIL.. Detailed Engineering and project support

by Engineers India Ltd (EIL. .As of March 31, 1998, the tie-in with the main plant was scheduled at theend of April 1998 during a 45 days shut down and commissioning was

. Plant start-up expected before end of expected by end of June 1998.June1993

* LLDPEIHDPE . Expansion of the LLDPEIHDPE plant Capacity expansion of the existing LLDPE/HDPE plant from 160,000 tpyExpansion (consisting of two swing trains with a capacity to 220,000 tpy. The incremental 60,000 tpy of broad range molecular weight

of 80,000 tpy LLDPE or 55,000 tpy HDPE HDPE will be obtained through the de-bottlenecking and upgrading of one ofeach), to include a new 75,000 tpy broad the existing two trains using a newly commercially available technologyrange molecular weight HDPE train. (pentane based process), resulting in substantial savings in capital and

operating costs. This change in project objectives and the need forcontracting the revamping using LIB procedures needed an amendment to theloan agreement and its approval by the World Bank Board.

. Process Technology: idem BP Chemicals licensed also the new unit.

Process Technology: from BP Chemicals The revamping was implemented by Samsung (South Korea) under an(UK), which is the original licenser of the Engineering, Procurement and Construction contract (EPC).LLDPE/HDPE, Overall project implementation monitoring and control was provided by EIL.

Process Information package preparation and enginieering design wereDetailed Engineering and project provided by Technip (France).

implementation, monitoring and control byEUL. .As of March 31, 1998, the tie-in with the main plant was scheduled at the

end of April 1998 during a 45 days shut down and commissioning wasexpected by end of June 1998.

. Plant start-up expected before end ofJune1993

* Wires and . Setting up a second 12,500 tpy unit, . IPCL opted to cancel the development of additional capacity of wire andCables doubling the capacity of the plant to 25,000 cables production because: (a) the market for high grades of wire materialsPolyethylene tpy. did not materialized to the extend originally envisaged; (b) importedCompounding materials had already covered the limited demand at prices well below thosePlant originally considered; and (c) the technical specifications of the products

required in the domestic market had not yet justified additional investmentsin higher grades.

* Additional Was not considered in the project at appraisal. . During project implementation it appears that an additional N2/02

Nitrogen/Oxyge separation unit will be required for the additional capacity of HDPE. It wasn (N 2/0 2 ) therefore decided to include under the project the construction of a third trainSeparation Third (4,OOONM3/hr N2 and 2,000 NM3/hr 02.

ChainIt was provided by Air Liquide Engg. India Ltd. under an EPC contract

signed in mid-December 1996.

Project implementation monitoring and control was provided by MECON.

As of mid-April 1998, construction of this train was practically completed.

28

Key implementation indicators Estimated Actual

Yadodara Comlex

* Polypropylene Plant . Setting up a new 60,000 tpy polypropylene new 75,000 tpy polypropylene unit. The decision tounit. increase the capacity was a consequence of GOI's

decision to increase the minimum economic size forpolypropylene plants.

. Process technology: Hymont (UK). . Process technology: idem, improved Himont spheripoltechnology from TCM/Montell..

. Detailed Engineering and project .Detailed engineering and project implementation supportimplementation, monitoring and control by by Technimont India Pvt Ltd. Under a contract signed byEIL or through tumkey arrangements. mid-1992.

. Start-up: expected before the end of . Commissioning took during September 1996 andDecember 1993. commercial production in January 97.

* Extraction of Butadiene Extraction . Rehabilitation of the existing butadiene . Rehabilitation of existing butadiene plant to increase itsextraction plant capacity by 15,500 tpy, up to a total of 37,760 tpy

. Process technology: was not yet specified . BASF/LUMMUS

. Detailed Engineering and project . Detailed engineering and project support contract withimplementation, monitoring and control by Intemational Development and Engineering AssociateEIL or through turnkey arrangements. Ltd. (IDEA) signed early in April 1992.

. Start-up: expected before the end of Commissioning was started in September 1996 andDecember 1993 commercial production in November 96.

* Polybutadiene Rubber Plant . Expansion of the existing Polybutadiene . idem through the construction of an additional 30,000complex from 20,000 tpy to 50,000 tpy to tpy PBR plantusing increased production of butadienethrough the rehabilitation of the existingbutadiene plant financed under the project andNagotane production.

. Process technology: Japan Syntectic . Idem, Japan Syntectic Rubber (Japan).Rubber (Japan).

. Detailed Engineering and project . Detailed engineering and project support by Toyoimplementation, monitoring and control by Engineering India Ltd. (TEIL) under contract signed byEIL or through tumkey arrangements. mid-1992.

. Start-up: expected before March 1994 . Commissioning took place in September 1996and commercial production in January 97

* Engineering Plastics Unit Setting up a new 7,500 tpy unit at Vadodara . Funding of this plant under the project was cancelecl atfor the manufacture of blends and composites IPCL's request. This unit was implemented under a jointof polycarbonate and polyethylene oxide. venture with GE Plastics and financed with their ownTechnology and engineering arrangements resources.were secured through ajoint venturearrangement with General Electric Plastics(GE).

Minor Schemes of De-botileneckink

* Energy Conservation Measures at Heat recovery from the xylene plant andVadodara replacement of a steam turbine.

* Incinerators in ACN and installation of an incinerator at the VCM/PVC An incinerator was installed in the ACN unit. (****It isPVC/VCM plants plant and replacement of the existing not yet clear if this incinerator was implemented under the

incinerator at the ACN plant by a high project).performance with heat recovery unit.

* Revamp of Naphta Craker at Revamping of the pyrolysis furnacesVadodara

29

Key implementation indicators Estimated Actual

* Modemization of Plant Control Replace obsolete instruments by modem The instrument control system of the naphta cracker wasSystems computerized control system to improve replaced by modem DCS system and gas chromatographs

efficiency and reduce operating costs. and analysers. The project was successfully implementedwith the plant operating without affecting the production.with EIL was consultant in project implementation. Theproject is completed and operate successfully.

* Modemization of the Ammonia install satellite ammonia refrigeration systemsRefrigeration System to meet the new and expanded plants.

Safety Risk Assessments

Conduct a thorough risk assessment andincorporate recommendations in thedesign of the expansions.

* Expansions in Nagothane . Report to be ready by December 1990 . Safety audit of Nagothane was done in time, but inview of the November 1990 accident, GOI and the Bankrequired a more detailed audit This second audit was alsocompleted by *** and its recommendations implemented.

The safety audit for Vadodara was delayed. During the* Expansions in Vadodara . Report to be ready by September 1991 May 1994 mission, the Bank considered that the risk

assessment and hazard evaluation prepared respectivelyby CISR and Cramer, and recently sent to the Bank, werepredated to LA and were not in compliance with it.During 1994 an overall safety audit was performed foreach complex and amended for each new plant.Furthermore, detailed HAZOP studies took place andDisaster Management plans developed.

Market Development

Import of special grades of LLDPE, PP,PBR and HDPE for IPCL's seedingprogram

tons* Quantities of Polymers LLDPE 35,000

HDPE 20,000PP 10,000PBR 8,000

* Total Cost USS75,000

30

B- Tecnnical Assistance for CIPET

Key implementation indicators Estimated 1/ Actual

1. Overseas Training

* Fellowships for CIPET faculty for 56 man-months- cost: US$600,000 43 staff trained in latest developments in areas of design,training in latest developments in the tooling, processing and testing; and 58 inareas of design, tooling, processing operation/maintenance of equipment purchased under theand testing. project (56 still in CIPET)- Actual cost: USS570,000.

* study tours for CIPETstaff to identify 4 study tours- cost: US$40,000 6 study tours- cost:US$70,000institutions and potential forpartemship.

* Foreign consultants and visiting Foreign consultants and visiting experts to 4 visiting experts; and foreign participants to plasticexperts to provide training to CIPET provide training to CIPET staff. recycling and waste management seminar. Cost:staff. US$170,000.

2. Equipment

* Acquisition of High Tec. Computer -21 pieces of equipment (with 96 pieces purchased (with accompanying software),Aided Design (CAD) machines and accompanying software) for Madras Hdqrs, grouped into 18 ICB packages. Cost: USSI 1.054 million.software, Computerized Numerically and 77 for 4 new extension centers, totallingControlled (CNC) and other 98 pieces. Cost: US$11.34 million.machinery for tooling, processing,testing and design at CIPET'sheadquarters in Madras and itsextension centers.

3. Building Improvements.

* Construction of new facility in Madrasto house CAD/CAM center, minor Cost: US$0.6 million Cost: US$0.4 million.supporting facilities for, and erectionof, newly acquired equipment.

1/ Estimated targets are those presented in CIPETs final submission to the Bank ("Modernization of CIPET Facilities- A Project Profile", dated December1989).

31

Table 6A - Key Indicators for Project Operation - IPCL Component

(a) - Production Capacity and Actual versus Estimated Production of Project Investments

90/91 91/92 92/93 93/94 94/9S 95/96 96/97 97/98 98/99 99/00 00/01 01/02

Vadodara Complex Incremental and After

Capacit

Polypropylene

Estimated at Appraisal 60,000 36,000 48,000 60,000 60,000 60,000 60,000 60,000 60,000

Actual/projected 75,000 2,900 55,000 65,000 70,000 75,000 75,000

Butadiene Extraction


Actual/projected 15,500 8,000 14,000 15,000 15,500 15,500

Polybutadiene Rubber


Actual/projected 30,000 2,100 14,000 25,000 28,500 30,000 30,000

Na!othane Complex

Ethylene Cracker Expansion

- EthyleneProduction

Estimated at Appraisal 100,000 60,000 80,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000

Actual/projected 100,000 20,000 80,000 90,000 100,000

- PropyleneProduction

Estimated at Appraisal 20,600 12,360 16,480 20,600 20,600 20,600 20,600 20,600 20,600 20,600


HDPE



32


(b) - IPCL's Production Capacity and Historical Production

Capacity FY88/89 FY89/90 FY90/91 FY91/92 FY92/93 FY93/94 FY94/95 FY95/96 FY96/97 FY97/98

Vadodara Complex tons/year

Para-Xylene 48,600 13,016 7,142 19,714 32,687 29,972 21,099 27,905 41,250 14,874 33,288

Ortho-Xylene 45,400 22,780 11,946 15,575 28,328 27,164 11,512 20,255 25,731 9,109

DMT 30,000 30,031 28,014 26,466 30,278 27,141 27,550 28,352 29,629 25,130 25,900

Ethylene 130,000 120,929 116,353 121,806 125,007 124,174 124,156 128,048 123,769 127,319 133,598

Propylene (PG) 38,000 37,982 36,660 35,006 33,522 39,346 33,470 33,259 35,560 30,962 35,723

Propylene (CG) 44,300 30,785 31,598 34,643 35,535 34,526 36,148 37,009 38,908 43,940 38,175

Butadiene 37,600 14,793 15,189 15,336 17,471 17,704 14,021 19,206 21,098 11,565 23,995

Benzene 23,600 29,261 30,018 31,656 33,378 29,873 27,254 28,506 31,325 28,404 30,907

Propylene (FPU) 26,160 9,486 19,916 25,344 23,721 30,744 28,893 30,357 30,759 28,454 31,741

Acrylonitrile 30,000 20,317 25,211 26,100 26,210 26,625 26,012 26,508 26,598 27,467 27,601

PBR (old plant) 20,000 15,637 15,123 15,277 17,366 17,377 14,728 19,319 21,446 13,861 33,460

PBR (new plant) 30,000

LAB 43,500 31,719 16,226 38,006 42,483 44,088 50,231 51,031 55,058 52,197 51,741

PP (old plant) 30,000 29,090 27,979 24,153 23,630 26,678 24,631 22,872 24,713 19,558 28,777

PP (new plant) 75:000 55,058

Ethylene Glycol 20,000 10,268 9,879 9,193 8,950 8,671 8,552 10,014 7,569 7,434 11,038

Ethylene Oxide 10,000 6,771 8,361 7,977 8,579 7,217 8,218 7,959 6,583 8,175 8,423

LDPE 80,000 82,621 76,219 81,921 80,202 82,155 80,701 83,121 78,335 80,131 80,003

Acrylate 10,000 2,923 3,720 5,021 6,264 5,965 6,811 8,758 8,695 9,332 9,402

PVC 55,000 43,241 40,557 44,240 45,569 50,870 50,711 52,757 54,254 53,010 51,319

VCM 57,300 44,050 41,253 45,047 46,206 51,531 50,669 54,115 55,122 55,155 55,158

Petroleum Resin 5,000 3,400 4,338 4,501 4,129 3,551 2,659 2,326 3,924 2,058 0

Acrylic Fiber 12,000 12,437 12,389 11,472 11,761 11,404 9,820 10,829 11,702 10,784 10,638

DSAF 12,000 1,837 5,161 6,247 6,621 6,919 8,434 8,637 7,566 7,610 8,132

PPCP 25,000 9,608 16,591 22,209 20,240 27,141 24,594 26,244 28,275 25,790 28,777

Nagothane Complex

Ethylene 300,000 34,352 137,119 165,497 256,471 302,640 303,009 331,770

Propylene 63,000 20,851 46,411 37,876 57,268 62,921 67,194 68,317

PP 60,000 711 24,283 38,702 40,804 53,954 57,979 60,661 62,258

LDPE 80,000 12,421 60,963 65,154 74,354 87,813 83,932 88,098

LLDPE 85,000 2,397 22,598 49,092 51,742 44,212 68,664

HDPE 50,000 20 15,216 27,809 58,492 78,773 94,468 93,987

Ethylene Glycol 50,000 1,606 18,638 25,024 44,233 45,612 46,211 48,202

Ethylene Oxide 5,000 671 3,325 4,326 4,638 8,423

Buthene -1 15,000 155 783 3,019 5,915 6,049 5,458 n.a

Wire & Cables 12,500 1,271 788 2,838 8,460 10,530 n.a

Gandhar Complex

PVC 150,000 10,731 102,431

VCM 170,000 25 90,827

Caustic Soda 130,000 73,689

62,914


(c) - Summary of Financial Performance Actual Compared to Appraisal Forecast

Covenant FY89/90 FY90191 FY91/92 FY92/93 FY93/94 FY94/95

Forecast Actual Forecast Actual Forecast Actual Forecast Actual Forecast Actual Forecast Actual

Total Sales (thousand tons) 403.6 452.3 562.9 454.2 697.2 531.3 745.8 583.4 840.4 625.7 928.7 773.6

Net Sales Revenues 8,400 10,062 13,532 11,079 17,401 16,053 19,867 17,153 23,928 16,945 28,688 25,460

Income Before Tax 1,659 958 1,256 465 3,086 518 3,762 1,311 5,477 892 7,715 6,044

Net Mncome 1,410 812 1,068 572 2,623 550 3,197 1,318 3,547 892 3,831 5,623

Depreciation 656 638 2,091 918 2,204 1,689 2,279 2,229 2,531 1,080 2,962 1,214

Internal Cash Generation 2,067 1,450 3,159 1,490 4,827 2,239 5,477 3,547 6,078 1,972 6,793 6,837

Invesment 3,694 3,428 1,919 2,539 3,160 4,090 2,591 2,854 1,719 3,427 533 5,072

Current Assets 4,660 4,429 6,972 6,065 8,962 7,866 11,925 10,840 14,695 13,334 19,617 15,606

Net Fixed Assets 15,189 8,292 14,618 8,374 13,562 15,897 11,840 15,771 14,898 19,785 13,515 19,637

Total Assets 20,384 20,827 22,524 24,124 25,469 28,441 28,744 32,171 30,702 37,204 33,195 43,679

Current Liabilities 2,737 2,519 3,169 4,300 3,291 4,071 3,188 4,436 3,646 4,906 4,081 5,537

Short Term Loan Funds 1/ 0 1,217 500 1,529 300 2,384 0 2,598 0 4,262 0 1,643

Net Equity 7,103 6,505 7,985 6,966 10,471 7,297 13,338 9,677 16,508 12,859 19,938 19,912

Total Liabilities and Equity 20,384 20,827 22,524 24,124 25,469 28,440 28,395 32,231 29,330 37,263 33,195 43,739

Long Term Debt 10,544 10,586 10,870 11,329 11,407 14,688 11,869 15,520 9,176 15,236 9,176 16,647

Interest on Long Term Debt 145 1,116 1,268 1,235 1,284 1,557 1,265 1,726 1,359 1,710 1,242 1,969

Long Term Debt Repayment 20.0 645 20 -14 230 319 350 1,719 1,777 1,916 1,423 3,497

Income Before Tax/Net Sales (%) 19.8 9.5 9.3 4.2 17.7 3.2 18.9 7.6 22.9 5.3 26.9 23.7

Return on Capital Employed (%) 14.7 12.3 6.7 4.6 15.6 3.3 17.6 5.9 22.4 3.4 25.9 20.3

Wb~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~NSelf Financing Ratio (%) 48 7 82 55 76 55 69 100 73 52 90 100

Contribution to the Exchequer 2,328 2,264 3,753 2,588 4,929 3,266 5,507 5,307 8,431 4,598 11,734 6,888

Source: SAR and IPCL

1/ Excluding current portion of long-term debt.


(d) - Summary of Financial Performance and Projections

Covenant FY89/90 FY90/91 FIY9I FY92/93 FY93/L4 PY94/95 FY95IP6 FY96/7 FY97/9[ FY98/99 FY99100 FYOO/IO1 FYO1l/

Actua Projected

Total Sales (thousand tons) 452.3 454.2 531.3 583.4 625.7 773.6 843.8 814.5 1,002.2 1154.8 1437.1 1471.8 1477.8

Net Sales Revenues 10,062 11,079 16,053 17.153 16,945 25,460 31,028 27,854 29,829 36,898 47,213 48,874 49,189

Income Before Tax 958 465 518 1,311 892 6,044 9,701 5,931 2,724 6,065 9,071 11,013 11,206

Net Income 812 572 550 1,318 892 5,623 6,037 5,102 2,437 5,428 7,431 8,012 7,626

Depreciation 638 918 1,689 2,229 1,080 1,214 1,225 1,522 2,373 2,549 3,408 3,408 3,408

Internal Cash Generation 1,450 1,490 2,239 3,547 1,972 6,837 7,262 6,624 4,810 7,977 10,839 11,420 11,034

Invesment 3,428 2,539 4,090 2,854 3,427 5,072 8,742 10,456 12,062 9,250 1,010 1,170 1,160

Current Assets 4,429 6,065 7,866 10,840 13,334 15,606 18,972 26,333 30,674 20942 27696 31374 37427

Net Fixed Assets 8,292 8,374 15,897 15,771 19,785 19,637 19,631 38,095 38,673 60781 59383 57145 54897

Total Assets 20,827 24,124 28,441 32,171 37,204 43,679 54,615 71,312 87,727 84360 88716 90156 93961

Current Liabilities 2,519 4,300 4,071 4,436 4,906 5,537 9,245 9,450 14,069 9850 10050 10250 10450 w

Short Term Loan Funds 1/ 1,217 1,529 2,384 2,598 4,262 1,643 4,664 5,621 6,010 0 0 0 0

Net Equity 6,505 6,966 7,297 9,677 12,859 19,912 24,971 28,993 30,768 35811 41756 48165 54266

Total Liabilifies and Equity 20,827 24,124 28,440 32,231 37,263 43,739 54,676 71,372 87,727 84,359 88,715 90,154 93,960

Long Term Debt 10,586 11,329 14,688 15,520 15,236 16,647 15,796 27,308 36,880 38,698 36,909 31,739 29,244

Interest on Long Term Debt 1,116 1,235 1,557 1,726 1,710 1,969 1,901 2,126 3,194 2,396 3,614 3,170 2,924

Long Term Debt Repayment 645 -14 319 1,719 1,916 3,497 5,791 1,454 2,781 1,799 5,170 2,495 8,980

Income Before Tax/Net Sales (%) 9.5 4.2 3.2 7.6 5.3 23.7 31.3 21.3 9.1 16.4 19.2 22.5 22.8

Return on Capital Employed (%) 12.3 4.6 3.3 5.9 3.4 20.3 33.0 13.0 5.0 10.0 11.7 13.9 13.5

Self Financing Ratio (%) 7 55 55 100 52 100 83 63 40 86 100 100 100

Contribution to the Exchequer 2,264 2,588 3,266 5,307 4,598 6,888 10,673 7,271 7,690 8016 11082 12776 13418

Source: IPCL

1/ Excluding current portion of long term debt.

35

Table 6A- Key Indicators for Project Operation- IPCL Component

(e)- Supply, Demand and Markets

1. Changes in supply and demand of major petrochemicals products since 1990/91 arepresented on the attached table. Growth in demand for commodity polymers has been aboveBank appraisal estimates, as shown below (in thousand of metric tons):

Actual Bank Projections ActualProduct 1988-89 1990-91 1993-94 2000-01 1993-94 1996-97

LLDPE/LDPE 139 229 250 370 281 387HDPE 130 178 260 410 335 477PP 56 72 145 270 259 433PVC 190 233 325 460 416 559PS 41 38 80 120 72 96

Total 556 750 1,060 1,630 1,364 1,952

2. As projected at appraisal, project output is in substitution for imports. Although the shareof imports has declined since 1990/91, it remains substantial, 33% of demand on average forcoomodity polymers in 1996/97, and 43% for PBR. The following table shows the relationshipbetween the planned project output at full capacity and imports in 1996/97:

Product Project Output Imports(Thousand mtons)

HDPE 60 209PP 75 235PBR 30 24

3. Thus, except for PBR, for which the project will substitute all imports, for other products,it will only replace about 30% of current imports.

4. IPCL estimates its market shares in 1998/99 as follows:

LLDPE 55%LDPE 85%HDPE 20%PP 12%PBR 83%

36

(a)- Participants in CIPET Training Courses

Enrollment In Courses

1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98

Long-termn Training Courses 548 755 1,038 1,274 1,371 1,743 1,908 2,483

Short-term Training Courses 583 805 917 1,123 1,308 1,709 1,868

Employment Record of Alumni (1969-97)

Number Percent

Total Number of Alumni 11187

of which: Contacted 10027 100.0%

Employed in Industries: 8487 84.6%

Small scale 3950 39.4%Medium-scale 4382 43.7%Public Sector 30 0.3%Government 25 0.2%

R&D 100 1.0%

Established Own Industry 1200 12.0%

Small scale 480 4.8%Medium scale 120 1.2%

Tiny 600 6.0%

Employed Overseas 360 3.6%

37

Table 6B- Key Indicators for Project Operation- CIPET Component

(b)- CIPET- Structure of Resources and Expenditures

1U5-94 1U54-95 iM 15 -U

Expenditures of CIPET

Million Rupees

Training 35,444 39,332 48,117 69,550Technical Assistance 1,091 1,325 1,504 3,172R&D 1,284 1,268 1,467 1,392

Total 37,819 41,925 51,088 74,114

Percentage

Training 94% 94% 94% 94%Technical Assistance 3% 3% 3% 4%R&D 3% 3% 3% 2%

Total 100% 100% 100% 100%

Origin of CIPErs Resources by type of Activities

Million Rupees

Grants Received 30,000 30,000 40,000 44,000Own Resources 20,674 28,202 38,930 53,902

of which:from Training 7,115 10,654 14,858 27,992from Technical Assistance 7,473 10,037 13,058 14,909from R&D 6,086 7,511 11,014 11,001

Total Resources 50,674 58,202 78,930 97,902

Percentage

Grants Received 59% 52% 51% 45%Own Resources 41% 48% 49% 55%

of which:from Training 14% 18% 19% 29%from Technical Assistance 15% 17% 17% 15%from R&D 12% 13% 14% 11%

Total Resources 100% 100% 100% 100%

Origin of CIPErs Resources by type of Clients

Percent of Own Resources Collected from: Percent

Tiny Industry 10 to 20

Small Industry 40 to 50

Medium-scale Industy 20 to 30

Large Industry 5 to 10

R&D and Universities 10 to 20

Source: CIPET Project Completion Report

38

(c)- CIPET- Growth in Budget- Actual, versus Originally Projected

1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98

Actual

In Current Terms- Million Rupees

Grants Received 35,100 n.a 21,900 25,000 30,000 30,000 30,000 40,000 44,000 44,000

Intemal Resources 4,040 3,820 7,910 10,411 15,340 20,674 28,200 38,930 53,903 58,600

Total Resources 39,140 n.a 29,810 35,411 45,340 50,674 58,200 78,930 97,903 102,600

In Constant 1997/98 Terms- Million Rupees

Indian Inflation

1997/98=100 46.4 54.9 62.5 68.8 74.5 82.6 88.7 94.5 100.0

Grants Received 75,647 39,891 40,000 43,605 40,268 36,320 45,096 46,561 44,000

Intemal Resources 8,707 14,408 16,658 22,297 27,750 34,140 43,890 57,040 58,600

Total Resources 84,353 54,299 56,658 65,901 68,019 70,460 88,985 103,601 102,600

Percentage

Grants Received 90% 73% 71% 66% 59% 52% 51% 45% 43°A

Intemal Resources 10% 27% 29% 34% 41% 48% 49% 55% 57%

CIPET Budget as Prolected at ADpraisal 1J

Million Rupees 94/95 data

in 97/98 Rs.

Grants Received

from GOI 34,700 38,000 39,300 43,600 44,700 43,700 53,400 64,614

from State Gov. 29,100 24,000 26,000 26,000 27,500 26,000 26,000 31,460

total grants 63,800 62,000 65,300 69,600 72,200 69,700 79,400 96,074

Intemal Resources

with project 4,040 3,820 5,500 7,000 11,500 20,300 21,700 26,257

without project 5,900 6,400 6,700 6,900 8,349

Total Resources

with project 67,840 65,820 70,800 76,600 83,700 90,000 101,100 122,331

without project 63,800 62,000 65,300 75,500 78,600 76,400 86,300 104,423

Percentage

Grants (with Project) 94% 94% 92% 91% 86% 77% 79%

Intemal Resources 6% 6% 8% 9% 14% 23% 21%

1/ Source: CIPET- "Modemization of CIPET Facilities- A Project Profile Submitted to World Bank (Dec. 1989)"

Table 7: Technical Assistance and Studies Included in Project

Study J Purpose as defined at appraisal/redefined Status Impact of StudyStudies to be Carried out by the Government of IndiaSynthetic Fiber Review status of the synthetic fiber industry with The study was commissioned by the Department of Chemicals and The study was issued nineIndustry Studyl particular reference to sizes of production units, Petrochemicals and prepared by S.P. Goel & Associates and INTEC months after the

the type of technology being used and cost of Consultants PVT.LTD. The study was completed in March 1992. Government announced aproduction, and to suggest an appropriate phased set of new economicmodernization program to upgrade the sizes and The study exposed the inefficiency of the domestic fiber industry and policies aiming at industrytechnology base of the industry with the primary inability to compete internationally, with investment costs 50% de-regulation and theobjective of achieving international higher than elsewhere in the world and production costs twice as liberalization of trade,competitiveness. The synthetic fiber industry is high. Domestic prices were 2 to 3 times international equivalents. foreign investment, anddefined to consist of polyester staple fibre(PSF), High costs and prices had resulted from a combination of policies technology imports. It ispolyester filament yarn (PFY), nylon filament favoring excessively small scales of production (licensing policy likely that, in subsequentyarn (NFY) and acrylic staple fibre (ASF). The aimed at favoring wide dispersal of plants in the country at the anuual budget discussions,study would be commissioned by April 1990 expense of economies of scale); high import tariffs on equipment; a it contributed to the fastand completed by March 31, 1991. It would be highly protected trade regime; and very high excise duties. pace of tariff and exciseundertaken by consultants and a team of experts reductions which took placefrom industry and government under the On the other hand, the study showed that demand of synthetic fiber in subsequently (significantlycoordination of the Department of Chemicals India was highly elastic to prices, making it very unlikely that larger than for otherand Petrochemicals of the Ministry of Petroleum moderate price decreases would result in lower tax revenues (from petrochemicals).and Chemicals. excise) for the Government. The study also showed that the the

Minimum Scale Criteria policy was not being strictly enforced andwas inefficient in ensuring that licensed investors actuallyconstructed their plants to match the licensed capacity.

The study recommended a phased strategy of cost and price reductionto the benefit of consumers, through (a) modernization programsfavoring expansion of existing plants to minimum economic scales;and (b) a phased reduction in both tariffs and excises (although withno quantitative targets).

'Although not a covenant of the Guarantee Agreement, and not financed under the project, an agreement to undertake this study by March 31, 1991 wasrecorded in the Minutes of Negotiations.

Studies to be carried-out by IPCL

Safety Audit for Before December 1990, a detailed safety audit It was being carried out by EIL, when it was disrupted by the Most of theNagothane by qualified consultants to assess the risks to the accident in OSBL, and remained limited to the inside battery limits of recommendations of these

project area and the surrounding communities, the complex. However, after the accident, the following studies were studies on design changes,and IPCL would incorporate their also carried out in 1991 and 1992 for the entire complex: (i) a operating procedures, andrecommendations in the design of projects detailed safety audit of the overall complex by EIL critically safety and preventive

reviewed and identified areas of weakness requiring further study to measures, wereimprove safety; (ii) a Hazard and Operability Study for OSBL areas, incorporated in the designcarried out by EIL and reviewed by Cremer and Warner in March and operation of the1992; (iii) an inspection report of gas storage and off sites by complex and in theTechnical Liaison Associates (of Texas); (iv) a report on safety construction of thesystems including design and procedures for the OSBL facilities expansion project,carried out by Cremer and Warner; and (v) a HAZOP study carriedout for all process plants..During implementation of the expansion sub-projects, a number ofadditional studies were also carried out. They included: (i) a disastermanagement plan completed in October 1991; (ii) SafetyConstruction Audits, completed in April 1996, to audit the planningfor the erection of the Cracker and HDPE expansions projects; (iii)HAZOP studies for the cracker and HDPE expansions completed inJanuary 1998. Also, in mid-May 1998, a risk analysis study wasbeing completed. The final report was expected by mid-June, before ocommissioning of the expansions.

Safety Audit for Before September 30, 1991, a detailed safety It was delayed. The Bank considered that the risk assessment and Most of theVadodara audit would be conducted by qualified hazard evaluation prepared by CISR and Cremer and Warner recommendations of these

consultants to assess the -risks to the project area respectively, which had been sent to the Bank, were predated to the studies were incorporated inand the surrounding communities and Loan Agreement and were not in compliance with it. In August the design, construction andincorporate their recommendations in the design 1995, an overall health and safety audit was performed by the British operation of the expansionof projects Safety Council (BSC) for the entire complex and extended to each projects.

new plant. Furthermore, detailed HAZOP studies were carried out Also, recommendations ofand Disaster Management Plans were developed. the HAZOP studies wereDuring implementation of the sub-projects, the following HAZOP reviewed by the respectivestudies were also carried out: (i) for the polypropylene plant, by process licensers andTechnimont India Limited in March 1994; (ii) for the Butadiene incorporated in plantExtraction plant revamping, by IPCL's central safety department in designs, and the new plantsDecember 1993; and (iii) for the polybutadiene plant, by Toyo were incorporated in theEngineering Company in May 1995. Finally, a Quantitative Risk existing emergency plan.Assessment (QRA) was carried out by KLG-TNO Ltd. in November1997 for the overall complex, including the new plants.

41

Table 8A - Project Costs

Appraisal Estimate Actual/Latest Estimate Appraisal Estimate ActuaULatest Estimate

Project Component Local Foreign Total Local Foreign Total Local Foreign Total Local Foreign Total

(Rs. Million) (Rs. Million) (Million USS) (MlYlionUS$)

I - IPCL Investments

Equipment& Materials 2382.1 997.0 3379.1 1596.8 1461.4 3058.2 164.3 68.8 233.1 46.5 42.6 89.1

Land 21.8 21.8 1.5 1.5

Civil Works 301.1 301.1 372.6 372.6 20.8 20.8 10.4 10.4

Erection, Insulatio/Painting 339.5 339.5 290.0 290.0 23.4 23.4 8.3 8.3

License Fee, Ba3ic Eng. 144.4 468.0 612.4 146.6 725.6 872.2 10.0 32.3 42.3 4.5 21.3 25.8

Detailed Eng. & Services 193.9 193.9 180.1 108.8 288.9 13.4 13.4 5.3 2.9 8.2

Pre-Operabing Costs Expenditures 114.3 27.8 142.1 337.4 9.4 346.9 7.7 1.9 9.6 9.6 0.3 9.9

Acvities/Payments not Completed 122.4 507.7 630.1 3.0 8.0 11.0

(as of 31 May 1998)

Base Cost Estimate 3497.1 1492.8 4989.9 3045.9 2813.0 5858.9 241.1 103.0 344.1 87.7 75.1 162.7

Physical Contingencies 413.4 177.6 591.0 19.2 34.4 53.5 28.0 12.8 40.8 0.6 0.8 1.4

Price Contingencies 762.0 333.6 1095.6 31.0 14.0 45.0

Installed Cost 4672.5 2004.0 6678.5 3065.1 2847.4 5912.5 300.1 129.8 429.9 88.2 75.9 164.1

Working Capital 465.0 160.0 625.0 32.1 11.0 43.1

Interest during Construction 377.0 377.0 255.6 256.8 512.4 26.0 26.0 7.0 7.7 14.7

Financing Required 5137.5 2541.0 7678.5 3320.7 3104.2 6424.8 332.2 166.8 499.0 95.2 83.6 178.8

11 - ClPETComponent

Fellowship & Training 8.7 8.7 28.2 0.6 0.6 0.8

Equipment&Materials 8.5 124.0 132.5 415.5 0.6 8.6 9.2 11.4

Base Cost Estimate 8.5 1327 141.2 74.9 3689 443.7 0.6 9.2 9.8 2.0 10.2 12.3

Physical Contingencies 1.3 19.9 21.2 0.1 1.4 1.5

Price Contingencies 4.1 21.0 25.1 0.3 1.4 1.7

Financing Required 13.9 173.6 187.5 74.9 368.9 443.7 1.0 12.0 13.0 2.0 10.2 12.3

III - Import of Polymers 1087.5 1087.5 1072.4 1072.4 75.0 75.0 44.7 44.7

Overall Financing Required 5151.4 3802.1 8953.5 3395.5 4545.5 7941.0 333.2 253.8 587.0 97.3 138.5 235.7

Notes:

(i) The cost of imports of polymers assumes an average exchange rate of of Rs.24 per US$

(ii) Actuial total investment costs of IPCL includes about 50% of direct foreign exchange (US$92.2 million) compared with 33% estimated at appraisal.

This increase reflects the sharp decrease in tariffs on imported goods which fell from about 85% to less than 25%, and to increase in the exchange

rate from Rs. 17 per US$ at appraisal, to Rs. 39 as of end-May 1998.

(iii) Total actual project costs amounts to million Rs.7,941 only, equivalent to 88.7% of appraisal estimates, and reflects: (a) the cancellation of the wires

and cables polyethylene unit: (b) the exdusion from the project of the engineering plastics unit; (c) the declsion to debottleneck one of the existing

LLDPEIHDPE unit at Nagothane instead of implementing a new unit; and (d) an important reduction in polymers imports for the seeding program,

which were limited to US$44million compared with US$75 estmated at appraisal. In US$ equivalent, total actual project costs amounted only to

about 41% of appraisal estimates, also reflecting the above mentonned increase of the exchange rate.

(iv) Project costs in US$ were calculated using the actual six monthly phasing of local expenditures in Rupees and average semestrial exchange rates.

(v) Project costs in Rs. were calculated using the exchange rate at the date of payment of foreign expanditures.

Table 8B - IPCL's Project Actual Costs

In million Rs

Nagotllane Projects Vadodara Projects

Gas Cracker HDPEILLDPE Total Nagothane Project Butadiene Revamp Polybutadlene Rubber Polypropylene Total Vadodara Projec Total IPCL Prolects

Project Component Local Foreign Total Local Foreign Total Local Foreign Total Local Forgn Total Local Foreign Total Local Foreign Total Local Foreign Total Local. Foreign Total(Rs. Million) (Rs. Million) (Rs. Million) (Rs. Million) (Rs. Million) (Rs. Million) (Rs. Million) (Rs. Million)


Equipment& Materials 245.0 314.1 559.1 136.0 373.5 511.5 383.0 687.6 1070.6 140.0 75.0 215.0 501.5 360.2 861.7 572.3 338.6 910.9 1213.8 773.8 1987.6 1596.8 1461.4 3058.2LandCivil Works 1.9 1.9 35.1 35.1 37.0 37.0 13.6 13.6 154.1 154.1 167.9 167.9 335.6 335.6 372.6 372.6

Erecion, lnsulatio/Painting 65.1 65.1 65.1 65.1 71.6 71.6 74.3 74.3 79.0 79.0 224.9 224.9 290.0 290.0

LicenseFee,BasicEng. 1.5 13.6 15.1 262.3 262.3 1.5 275.9 277.4 13.0 48.7 61.7 38.7 119.3 158.0 93.4 281.7 375.1 145.1 449.7 594.8 146.6 725.6 872.2

Detailed Eng. & Services 47.2 47.2 23.0 106.6 131.8 70.2 108.8 179.0 27.4 27.4 40.9 40.9 41.6 41.6 109.9 109.9 180.1 108.8 288.9

Pre.Operafing Costs Expenditures 11.8 11.8 33.4 33.4 45.1 45.1 27.0 0.6 27.6 109.3 3.3 112.6 156.0 5.5 161.5 292.3 9.4 301.7 337.4 9.4 346.9

Activibes/PaymentsnotYetComplete 79.5 50.0 129.5 42.9 457.7 500.6 122.4 507.7 630.1 122.4 507.7 630.1

Base Cost Estimate 452.0 377.7 829.7 272.4 1202.3 1474.7 724.3 1580.1 2304.4 292.6 124.3 416.9 918.8 482.8 1401.6 1110.2 625.8 1736.0 2321.6 1232.9 3554.5 3045.9 2813.0 5858.9

Physical Contngences 12.3 15.7 28.0 6.9 18.7 25.6 19.2 34.4 53.5 19.2 34.4 53.5Price Contngencies

Installed Cost 464.2 393.6 857.7 279.3 1221.0 1500.3 743.5 1614.4 2357.9 292.6 124.3 416.9 918.8 482.8 1401.6 1110.2 625.8 1736.0 2321.6 1232.9 3554.5 3085.1 2847.4 5912.5

Working CapitalInterest durng Construction 88.1 88.1 167.5 157.5 255.6 255.6 23.9 23.9 90.5 90.5 142.4 142.4 256.8 256.8 255.6 256.8 512.4

Finanelng Required 562.3 393.5 945.8 446.8 1221.0 1667.8 999.1 1614.4 2613.5 292.6 148.2 440.8 91.8 573.3 1492.1 1110.2 768.2 1878.4 2321.6 1489.7 3811.3 3320.7 3104.2 6424.8

In Million USS

Nagothane Projects Vadodara Projects

Gas Cracker HDPEILLDPE Total Nagothane Project Butadlene Revamp Polybutadlene Rubber Polypropylene Total Vadodara Projecb Total IPCL Pro ects

Project Component Local Foreign Total Local Foreign Total Local Foreign Total Local Foreign Total Local Foreign Total Local Foreign Total Local Foreign Total Local Foreign Total(US$. Million) (US$. Million) (US$. Million) (US$. Million) (US$. Million) (US$. Million) (US$. Million) (US$. Million)


Equipment& Materials 6.6 9.5 15.2 3.7 10.0 13.7 10.4 18.6 28.9 4.3 2.3 6.6 14.9 11.3 26.2 17.0 10.4 27.4 36.2 24.0 60.2 46.5 42.6 89.1

LandCivil Works 0.1 0.1 0.9 0.9 1.0 1.0 0.4 0.4 4.3 4.3 4.7 4.7 9.4 9.4 10.4 10.4

Erection, lnsulabolPainting 1.8 1.8 1.8 1.8 2.1 2.1 2.1 2.1 2.3 2.3 6.5 6.5 8.3 8.3

Ucense Fee, Basic Eng. 0.0 0.4 0.4 7.4 7.4 0.0 7.8 7.8 0.4 1.5 1.9 1.2 3.7 4.9 2.9 8.3 11.2 4.5 13.5 18.0 4.5 21.3 25.8

Detailed Eng. & Services 1.3 1.3 0.6 2.9 3.6 1.9 2.9 4.9 0.8 0.8 1.2 1.2 1.3 1.3 3.3 3.3 5.3 2.9 8.2

Pre.Operating Costs Expenditures 0.3 0.3 0.9 0.9 1.2 1.2 0.8 0.8 3.1 0.1 3.2 4.5 0.2 4.7 8.4 0.3 8.7 9.6 0.3 9.9

Actisfees/Payments not Yet Complete 2.0 1.2 3.2 1.1 6.7 7.8 3.0 8.0 11.0 3.0 8.0 11.0

Base CostEstimate 12.1 10.2 22.2 7.2 27.1 34.4 19.3 37.3 56.8 8.8 3,8 12.6 26.8 15.1 41.9 32.7 18.9 51.8 68.3 37.8 108.1 87.7 75.1 162.7

Physical Contingencies 0.3 0.4 0.7 0.3 0.4 0.7 0.6 0.8 1.4 0.6 0.8 1.4

Price Conlingencies

Installed Cost 12.4 10.5 22.9 7.5 27,5 35.0 19.9 38.1 58.0 8.8 3.8 12.6 26.8 15.1 41.9 32.7 18.9 51.6 68.3 37.8 106.1 88.2 75.9 164.1

Working CapitalIntrest during Constiruclion 24 2.4 4.6 4.6 7.0 7.0 0.7 0.7 2.7 2.7 4.3 4.3 7.7 7.7 7.0 7.7 14.7

FinancingRequiredl 14.8 10.8 254 1Z1 27.5 39.6 26.9 38.1 68.0 8.8 4.5 13.3 28.8 17.8 44.6 32.7 23.2 S5.9 68.3 45.5 113.8 95.2 83.6 178.8

43

Table 8C - IPCL Plant Investments: Actual versus Appraisal Cost Estimates

Current of which: Constant Oct. 88 of which: US$ Million 3/Installed Cost 1/ Rupees (Million) Taxes Rupees (Million) 2/ Taxes

Gas CrackerAppraisal 1,027.1 321.8 865.5 271.2 66.4Actual 857.7 22.9

HOPE

Appraisal 1,000.6 271.0 843.5 228.5 64.7Actual 1,500.3 35.0

Modemization SchemesAppraisal 861.0 229.4 711.6 189.6 55.6Actual

Wires and Cables

Appraisal 354.8 116.7 283.8 93.3 22.4Actual

Engineering Plastics

Appraisal 768.7 241.7 674.4 212.0 50.5Actual

Butadiene ExtractionAppraisal 308.9 58.2 257.3 48.4 19.8Actual 416.9 12.7

Polybutadiene RubberAppraisal 1,054.2 250.2 875.7 207.8 67.7Actual 1,401.6 41.9

Polypropylene

Appraisal 1,125.7 206.5 943.8 173.1 72.5Actuai 1,736.0 51.6

Total Plant InvestmentsAppraisal 6,501.0 1,695.5 5,455.6 1,423.9 419.6

Actual 5,912.5 164.1

1/ Installed cost excludes incremental working capital and interest during construction.2/ Base cost, plus physical contingencies.3/ Including contingencies.

44

Table 8D - Project Financing

In US$ million

Appraisal Estimates Actual EstimatesOf which to

Source Local Cost Foreign Cost Total Local Cost Foreign Cost Total be Completed

(US$ million) (USS million)

Loan 3259 In

World Bank Loan 233.0 233.0 20.1 125.3 145.4IPCL 332.2 8.8 341.0 75.1 3.0 78.1 11.0Sub-total IPCL's Project 332.2 241.8 574.0 95.2 128.3 223.5 11.0

Loan 3258 In

World Bank Loan 12.0 12.0 1.7 10.2 11.9Govemment of India 1.0 1.0 0.4 0.4ub-total ClPET's Project 1.0 12.0 13.0 2.0 10.2 12.3

Total Project

Workd Bank Loans 245.0 245.0 21.8 135.5 157.3IPCL 332.2 8.8 341.0 75.1 3.0 78.1GOI 1.0 1.0 0.4 , 0.4

Total Financing 333.2 253.8 587.0 97.2 138.5 235.8

Total Spent as of May31,1998 86.2 138.5 215.7

Notes:(i) At closing date, US$135,731 remained undisbursed from the loan 32581N and was canceled.(ii) As of 31 March 1998, the closing date, US$ 70.3 million had been cancelled from Loan 32591N. In addition, on 31 August

1998, US$17.3 million remained undisbursed from the loan and was canceled.(iii) As of 31 March 1998, total expenditures required to complete the project, including activities and payments not

completed and related contingencies, were estimated at about US$11 million.

45

Table 8D - Project Financing

In Rs$ million

Appraisal Estimates Actual EstimatesOf which to

Source Local Cost Foreign Cost Total Local Cost Foreign Cost Total be Completed

(Rs. million) (Rs. million)

Loan 3259 In

World Bank Loan 3496.4 3496.4 818.2 3668.9 4487.1IPCL 5137.4 132.0 5269.4 2502.5 507.7 3010.1 630.1Sub-total IPCL's Project 5137.4 3628.4 8765.8 3320.7 4176.6 7497.2 630.1

Loan 3258 In

World Bank Loan 173.6 173.6 59.6 368.9 428.5Government of India 13.9 13.9 15.3 15.3ub-total ClPET's Project 13.9 173.6 187.5 74.9 368.8 443.7

Total Project

Workd Bank Loans 3670.0 3670.0 877.8 4037.8 4915.6IPCL 5137.4 132.0 5269.4 2502.5 507.7 3010.1GOI 13.9 13.9 15.3 15.3

Total Financing 5151.3 3802.0 8953.3 3395.6 4545.5 7941.0

Total Spent as of 31 May1998 3273.2 4037.8 7310.9

Notes:

(a) The Rs. equivalent of loan disbursements was calculated using the semestrial amounts disbursed and thecorresponding semestial average exchange rates.

46

Table 9 - Economic Costs and Benefits

1I Financial and economic rates of return for the project were re-estimated for the project and itsvarious components. Results for the base case and sensitivity analyses are presented in the annexed tablesand summarized below.

Major Assumptions

2. All costs and benefits were valued in constant 1997/98 terms (corresponding to India Fiscal Year 1April to 31 March), using India's wholesale price index as deflator to arrive to constant Rupees, and theMIUV index as deflator to arrive to constant US Dollars.

3. International prices of petrochemical inputs and outputs were assumed to recover their average five-year 1993-1997 levels (in constant 1997 US$ terms) by year 2000, after a substantial decline in 1998following the Asian crisis.

4. Prices of outputs are ex-factory, excluding transport and other distribution costs to IPCL's 109regional distribution points. For past years, financial prices correspond to actual realization prices, excludingdiscounts and sales taxes. For future years, they were assumed to equal the landed cost of imports inMumbai, plus customs duties. Customs duties were assumed to progressively decrease from their currentlevels to 10% by year 2005 and remain at that level subsequently. Economic prices are based on the landedcost of imports, excluding customs duties.

5. Financial and economic prices of olefins used as input to project plants (ethylene, propylene andbutadiene) depend on origin: when the origin is an upstream IPCL cracker (Vadodara naphtha-based,Nagothane gas-based, or Gandhar gas-toased crackers), olefins were valued at their actual unit cost fromthese crackers, plus transport and storage cost when relevant. When imported, prices were based on theestimated or actual CIF Mumbai value (plus relevant landing, storage and transport cost), plus, for financialprices, customs duties, which were projected to decline to 0% by year 2000. As it is usually uneconomical toproduce plastic and rubber polymers from imported olefins, the largest volumes are valued at internaltransfer costs, with only marginal requirements being imported (competitiveness in this industry is based onvertical integration of crackers with downstream units, and therefore on size of crackers and downstreamplants, costs of cracker feedstocks, and size of the domestic market). Surplus ethylene from the Nagothanecracker expansion was valued at its merchant price in India (projected to be consistent with average long-term contract prices in the US and Western Europe).

6. Financial and economic prices of C2/C3 fractions used as feedstock in the Nagothane crackerexpansion was calculated as presented in the table on page 49. Projected changes in the financial price ofC2/C3 are based on the announced Government policy of increasing natural gas prices to 75% of theinternational FOB price of a basket of fuel oils by 1999/2000, plus a separation charge, taxes and royalties. ][twas assumed that this share of the fob price would increase to 100% over the subsequent two years. Theeconomic price of C2 /C3 was based on the landed cost of imported fuel oil, plus the separation cost.

Results

7. Re-estimated financial and economic rates of return, compared with Appraisal estimates aresummarized below:

47

Financial Rate of Return (%) Economic Rate of Return (%)

Appraisal Current Appraisal CurrentComponent Estimate Estimate Estimate Estimate

1. Gas Cracker Expansion and HDPE 40 56 49 48Plant at Nagothane

2. New Polypropylene Plant at 29 20 22 9Vadodara

3. Butadiene and PBR Plant 16 16 22 10Expansion at Vadodara

4. Wire/Cable Compounds Plant 25 32

5. Engineering Plastics Plant 36 41

Overall Project 27 37 21

Overall Project, excluding 4 and 5 31 27 36 21

8. The main differences between appraisal estimates and current estimates may be explained asfollows:

(a) for investments at Vadodara, while financial rates of return are generally comparable, economicrates of return are significantly below current estimates. This is principally due to significantly lowerestimates of international prices for polypropylene (PP) and polybutadiene rubber (PBR). The table on page49 shows changes in CIF India West Coast prices since 1993, on which revised estimates were based.International prices of PP in constant 1997 terms were 35% to 40% lower than those projected at appraisal,and those of PBR 40% to 50% lower. In constant 1997/98 Rupees, however, investment costs were generallyin line with appraisal estimates (for the PP plant) or lower (about 75% of appraisal estimates for theButadiene/PBR plants), as shown in the table on the next page.

(b) for investments at Nagothane, however, the economic rate of return as currently estimated is inline with the appraisal estimate, while the re-estimated financial rate of return is significantly above. This isbecause, although HDPE international prices, similar to international prices of other commodity polymers,were also about 40% below those originally estimated, investment costs in the cracker and HDPE plant wereonly about half appraisal estimates. While investments in the cracker expansion were in line with appraisalestimates, investments in the HDPE plant were only about 40% of those originally planned, due to thechange in design from a new train to the revamping of the existing plant.

48

Capital Cost Estimates

Appraisal Estimate Current EstimatesConstant end-1988 Constant 1997/98 Constant 1997/98

Component Rupees Rupees Rupees(Million Rupees)

Cracker and HDPE Expansion 2,108.9 4,544.7 2,213.9of which:Cracker 1/ 323.0 694.0 713.0HDPE 1,785.9 3,839.7 1,500.8

Butadiene Expansion and PBR 1,257.9 2,710.8 2,114.6of which:Butadiene Expansion 257.2 554.3 498.8PBR 1,000.7 2,156.5 1,615.8

Polypropylene 943.8 2,033.9 2,065.3

1/ including investments in storage/handling and OSBL and pyrolysis gasoline units.

9. A sensitivity analysis was carried out for each investment to examine changes in the most criticalassumptions. The results are summarized on pages 50 and 51.

49

CIF Prices West Coast India (US$ per ton)

Average1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 93-2000

International price index, 100 99.3 104.9 107.2 111.7 111.5 115.5 125.0 119.5 114.11988=1001997=100 87.6 87.0 91.9 93.9 97.9 97.7 101.3 109.5 104.7 100

HDPE

Appraisal- Dec.88 cst terms 1180 1153 1127 1101 1075 1049 1023 995 1007 1019 1031 1043 1055Current terms 1180 1145 1182 1180 1201 1169 1182 1243 1203 1163Constant1997terms 1346 1316 1286 1256 1227 1197 1167 1135 1149 1163 1176 1190 1204 1173

Estimated/ActualCurrent terms 517 694 693 795 768Constant 1997 terms 529 685 633 759 768 670 680 713 680

Polypropylene

Appraisal- Dec.88 cstterms 1209 1176 1143 1109 1076 1043 1009 971 981 990 1000 1009 1019Current terms 1209 1168 1199 1188 1202 1163 1166 1213 1172 1130Constant 1997 terms 1379 1342 1304 1265 1228 1190 1151 1108 1119 1130 1141 1151 1163 1144

Estimated/ActualCurrent terms 620 767 976 812 714Constant 1997 terms 635 757 891 775 714 530 643 755 713

Polybutadiene Rubber

Appraisal-Dec.88cstterms 1375 1365 1355 1350 1345 1340 1335 1330 1335 1345 1355 1365 1375Current terms 1375 1355 1421 1447 1502 1494 1542 1662 1595 1535Constant 1997 terms 1569 1557 1546 1540 1535 1529 1523 1518 1523 1535 1546 1557 1569 1537

Estimated/ActualCurrent terms 1300 1000 850Constant 1997 terms 1187 955 850 740 880 990 700

50

Sensitivity Analysis- Summary- Vadodara

A- Butadiene Extraction Plant, Polybutadiene Rubber Plant, and Both Integrated

Butadiene Extraction Polybutadiene Rubber Integrated PBRIBUTFRR ERR FRR ERR FRR ERR

(Percentage)Base case (Butadiene valued 10 12 17 9 16 10at

(intemal transfer cost)

Butadiene @ Importprice equivalent 23 24 4 -4 14 5

Excluding duties oninputs & Outputs 10 12 6 8 7 10

International prices 1/:minus 10% 11 3 11 5minus 20% 3 -5 5 -1plus 10% 22 14 20 13plus 20% 27 18 24 17

Capacity Utilization95% 9 11 16 8 14 890% 7 9 14 6 12 6

SCF=1 10 8 8

1 / Without change in internal transfer price of butadiene.

B- Polypropylene Plant FRR ERR

Base Case (propylene at internal 20 9

transfer cost of Vadodara)

Transfer Price of Propylene

Financial, excluding import duties (Base Case) 9

As above, assuming new cracker at Baroda 1/ 11

At Import equivalent 11

Without Import Duties on inputs and outputs 9

International Prices 2/

minus 10% 11 5

minus 20% -3 1

plus 10% 27 12

plus 20% 33 14

Capacity Utilization- 95% 17 7

SCF=1 7

1/ starting production in 2003/04, assuming same transfer price as Gandhar's.

2/ expected to affect input and output prices equally

51

Sensitivity Analysis- Summary- Nagothane - Cracker and HDPE Expansion

Cracker HDPE CombinedFRR ERR FRR ERR FRR ERR

(Percentage)

Base Case 53 54 56 44 56 48(Ethylene valued at MGCC costof about US$258 per ton andcracker surplus at merchantprice of about US$500/ton)

C2/C3 at Opportunity Cost 49

Ethylene valued at:

Merchant price of US$500/ton 95 95 35 18

CIF price 103 97 17 Neg.

Base case, but with internal 35 41 55 42 50 43transfer price to HDPE plantequal cost plus 20% RORon cracker expansion investment.

Capacity Utilization

95% 52 57 51 41 51 4885% 48 53 51 37 49 43

Cracker expansion @62% 371Cracker expansion @50% 32

HDPE Plant Output: 70,000 tpy I/ 62 49 60 51

HDPE Intemational Prices

-10% 49 36 49 44-20% 31 29 44 40+10% 61 47 58 52+20% 67 52 63 55

Standard Conversion Factor

1 56 42 48

1/ While the license fee was paid to the licenser on the basis of 60,000 tpy incremental HDPE capacity, IPCLclaims that the plant was revamped for an incremental capacity of 70,000 tpy.

l Assuming that missing ethylene to feed the HDPE plant would be imported @ US$700 per ton.

Table 10: Status of Legal Covenants

OriginalAgreement Section Covenant Type Present Fulfillment Date Description of Covenant Comments

Status

Loan 3258 2.02 (b) Disbursement Borrowers to open and maintain a special& Loan 3259 Condition C account in US$ in the Reserve Bank of India

Loan 3258 & 3.02 Procurement C Procurement of goods according to scheduleLoan 3259 4 of Loan Agreement

Loan 3258 3.03 Project CIPETs overseas training to be arranged UNIDO was engaged by CIPET as executing agency to implementImplementation C with overseas institutions satisfactory to the the overseas training component.Arrangements Bank.

Loan 3258 3.04(a) Institutional C August 1991 CIPET to implement its annual training andextension programs for FY 1990/93

Loan 3258 3.04(b) Institutional C June 30 of each CIPET to submit its rolling annual trainingyear starting 1991 plan to the Bank.

Loan 3258 4.01 Accounts/Audit C not later than six CIPET to furnish to the Bank audited projectmonths after the accounts and special account of each fiscalend of each year year.

Loan 3259 3.03 Project C IPCL to implement its market development From the US$75 million included in the loan for the financing ofImplementation plan IPCI,'s market development program. US$30.3 million wereArrangements canceled in June 1. 1994. After the 1990 accident in MGCC, the

Bank agreed to use part of the seeding funds to import commongrades of polymers to meet the resulting shortfall in supply.Finally. the seeding program was limited to engineering plasticsalso authorized by the Bank and to 580 tons of Valtec spheripolgrade Polypropylene.

OriginalAgreement Section Covenant Type Present Fulfillment Date Description of Covenant Comments

StatusLoan 3259 3.04(a) Environment C build and operate the facilities in The facilities at Nagotahane and Vadodara wvere built in accordance

accordance with environmental standards with the Indian environmental standards which were consideredsatisfactory to the Bank. comparable to those of most industrial countries and acceptable to

the Bank. Annex 3 shows that the Nagothane complex not onlycomplied with the agreed State standards but also with Bankstandards. In Vadodara, the two issues of hazardous solid wastemanagement and CN waste water treatment are being addressed.IPCL should expedite their implementation to be fully incompliance with the provisions under the hazardous wastemanagement rules.

Loan 3259 3.04 (b) Safety C Dec. 31, 1990 for IPCL to carry out detailed Safety Audits The Safety audit and risk analysis study for Nagothane was beingNagotane prior to the commissioning of the facilities carried out by EIL in 1990, when it was disrupted by the accidentSept.30, 1990 for to assess the impact of risks to the project in OSBL, and it remained limited to the inside battery limit of theBaroda areas of influence comples. However, after the accident, at GOI and the Bank

request, a number of additional studies were carried out in 1991and 1992 and their recommendations were implemented. Theyincluded a more detailed audit of the entire complex and HAZOPstudies for OSBL facilities and process plants.The safety audit for Vadodara was delayed. During the May 1994mission, the Bank considered that the risk assessment and hazardevaluation respectively carried out by CISR and Cremer & Warner,were predated to LA and were not in compliance with it.However, in August 1995 an overall health and safety audit wasperforned for the entire complex and it was later updated/amendedfor each new plant. Finally, detailed HAZOP studies were carriedout and Disaster Management plans developed.

Loan 3259 5.01 Accounts/Audit C not later than six IPCL to furnish to the Bank audited project AsofAugust31, 1998. audited accounts for FY 1997/98 wvere notmonths after the accounts and special account of each fiscal yet due.end of each year year.

Agreement Section Covenant Type Present Original Description of Covenant CommentsStatus Fulfillment Date

Loan 3259 5.02 (a) Financial C on going over IPCL to maintain: During the period 1991-1997:project life n a Debt/ equity ratio lowver than 1.5 n except for 1991/92 and 1992/93 when it was slightly higher

(equivalent to 60/40) (70/30 and 65/35 respe ctively), the debt equity ratioremained lowver than the agreed 60/40;

n the current ratio was maintained between 1.9 and 2.8n a current ratio not less than 1.3 n the debt service coverage ratio remained higher than the

agreed 1.5, except in 1993/94 and 1995/96 when itn a debt service coverage of at least 1.5. decreased to 0.96 and 1.2 respectively .

Guarantee 3.01 Sector/Policy C in 1991 and every GOI shall assess economic viability of Assessments were made for new public sector plants: Following2 years thereafter investments in olefins and aromatics in light elimination of licensing requirements, this became not necessary

of progress in investments. for private sector plants.

Guarantee 3.02 Sector/Policy C periodically GOI shall review the minimum size criteria Since July 1991, capacity licensing is no more required by GOI. Inestablished for petrochemicals products. addition the trade regime was liberalized and tariffs were reduced.

Consequently, the economic size is now decided by the market.The criteria of minimum size was not officially removed, butbecame redundant.

Guarantee 3.03 Sector/Policy C GOI to maintain an appropriate price for As of August 31, 1998, the nominal price agreed with the Bank 4sethane/propane feedstock before Board presentation, (Rs. 3300 per ton of C2/C3, in line with

its opportunity cost at that time), was still prevailing, even thoughit had fallen well below its opportunity cost.

Guarantee 3.04 Sector/Policy C GOI to arrange for the timely supply of Delays occurred in completion of ONGC's Uran gas separationadequate quantities of feedstock for the facilities due to delays in: (a) securing environmental clearancepurpose of the project. from the Maharashta Pollution Control Board; and (b)

implementation problems.The Uran gas separation facilities became operational bySeptember 1990 Nvlheo this project was presented to the Board, andallowed commissioninig of the Nagothane cracker financed (underloan 2505-IN) by the end of October 1990.According to ONGC. the production capacity of this dedicatedseparation plant and field is nowv 600,000 tpy, enough for itscommitments under this project during 20 years. However, thiscapacity would not be able to feed a future duplication project inNagothane.

Definitions

C = covenant complied with; CD complied with after delay; CP complied with partially; NC = not complied with

55

Table 11: Compliance with Operational Manual Statements

There was no significant lack of compliance with applicable Operational Manual Statements. The most relevantare: Operational Directive 4.00; Operational Directive 4.30 (Involuntary Resettlement); and Operational Directive 11.00(Procurement).

56

Table 12: Bank Resources: Staff Inputs

Stage of project cycle Planned Actual

Weeks US$ Weeks US$'000 '000

Preparation to Appraisal 45.01 n.a 104.5 216.0Appraisal 30.02 n.a 18.4 40.2Negotiations through Bd. approval n.a n.a 24.9 58.5Supervision 91.03 n.a l44.34 354.0'Mid-term Review 6 n.a n.a n.aCompletion 8.07 n.a 6.88 16.5TOTAL 174.0 n.a 298.9 685.2

n.a: not available.

At the end of Feb. 19892 At the end of Feb. 1989

Supervision Plan prepared December 13, 1991.4Including mid-tern review . Last supervision mission was also completion mission. Supervision time for FY98 is total

planned for year.Including mid-term review. Supervision cost for FY98 is total planned for year.

6 A mid-term review was not planned as part of the Loan Agreement.Excluding mission (included in last supervision mission, planned for 7 Staff-Weeks)Planned for FY99

Table 13: Bank Resources: Missions

Performance ratingStage of Mionth/vear Number Days Specialized staff Implementation Development Types of problems

project cycle of in skills status objectivespersons field r epresented

Through appraisal

Identification March 1988 4 12 Chem. Engineers.Economists

Pre-appraisal September 5 12 Chem.1988 Engineers,

Economist,FinancialAnalysts

Appraisal February 5 Economist (TM),1989 Chem. Engineers,

Fin. Analysts

Negotiations through Board Approval

No mission

Supervision J

1. May 1991 3 12 Chem. Engineer, 2 2 Delays in Govemment clearancesEconomist, Fin.Analyst

2. November 4 16 Chem. Engineer, 2 2 Delays in Govemment clearances; time for1991 Economist. Fin. repairs after MGCC explosion; high tariff

Analysts protection; cash flow risks. associated withsimultaneously implementing project andGandhar

3. May 1992 3 17 Economist. Fin. 2 2 Lack of progress in implementation ofAnalyst. Chemn. subprojects at Nagothanie due to MGCC pre-Engineer commissioning problems and lack of adequate

staffing: high tariff protection: temporary non-compliance with Debt/Equity Ratio covenanit.

Performance ratingStage of Nlonth/vear Number Days Specialized staff Implementation Development Types of problems

project cycle of in skills status objectivespersons field represented

4. March 1993 2 2 Chem. Engineer. 2 2 Delays in final clearance from Cabinet. and. forOp. Officer CIPET. from Expenditure Finance Committee;

HDPE expansion subproject delayed due todisagreement xvith process licensor. delays inrelease of committee report on MGCCexplosion; shortfalls in Market Developmentcomponent9 concerns about IPCL's mediumterm financial position.

5. January 1994 3 10 Op. Officers- 2 2 Technical problems in operation of NagothaneIndustrial LLDPE/HDPE line, cancellation of balance ofEngineer funds for market development program and of

funds for Wire/Cable subproject, high tariffprotection and naphthta prices; need to increaseprivate sector participation in IPCL; delays insigning GOI/CIPET grant agreement

6. July 1994 1 4 Industrial S HS Contents of Risk Assessment and SafetyEngineer Audits, overdue Committee report on

explosion; high naphtha prices. Ul

7. April 1995 2 8 Chem. Engineer. S IIS Extension of closing date required toOp. Officer implement revised HDPE project.

8. April 1996 3 12 Chem. Engineer. S S Extension of closing date;(Mid-term Industrial solid waste management at Baroda:review) Engineer, appointment of environmenital adviser:.

Financial Analyst increased use of LIB.

9. Mav 1997 2 9 Chemii. Engineer: S S Hlazardous waste maniagemiienit and release ofOp. Officer airbonme polluterits at Baroda: appointmenit of

ienvironimenital adviser: closing date extensioln:long -term sustainabilitv of Baroda complex:.

t0. Mstarch 1998' 4 10 Op. Officer. S S Hazar dous \waste maniag-emiet and airborneChemil. Enginieers. pollutents at Baroda: feedstock pricingEconomist (naphtlha and natural gas): gas supply to

Gandhar; preparation of completionl report

I Combined supervision and completion mission.

59. Annex 1, Page 1 of ll

Na. 34027/lO/87wPC.III (Vol.IV)Govereiaent of India

?inisery of Chemicals & FertilizersDepartment of ChbmIcals & Petrochemieala

New Delhl, the 2TId September 1998

Mr Richard Ackeermann e%Seccor ?fanager 3C -South Asia Environment Unit -THE WORLD BANK GROOU?1818 H Street. NWWASHINGTON, DC 20433. tISL.

Sub:- Second Petroebomicals Development Project (Lne.3258/3259-ru).Draft Imp2eemeneation Completlon Report(ICR).

Sir,

Please refer to your letter dated 27th July 1998addressed to Shri D. CCh4cerjee, Secretary to theGovernment of India i1:. the Departzenta of Chemicals &Pecrochemicals, New Dqlhi. forwarding therewith a copy ofthe drafc implementation completion report.

2... We have gone throgh the draftc ICR and we observethat che report is complete and crue presentation of theposition. We elso :uUderatand that both IndianPetrochemicals Corporation Limited and the CentralInstitute of PlaotLic Engineer1ng & Technology, hasicalready sent their comentLs directly to you. we have nospecific comments to offer on the draft ICR ac the otage.

Yours faithfully.

N.S. SAMANT )DEPUTY SECRETARY TO THF GOVT. OF INDIA

60 Annex 1, page 2 of 11

O4fq- 0f S> * ,Mnr frft *a Indian Petrochemicals Corporation Limiteod(qr wR wM) (A Governent of India Unrdertakng)

W f wf 1 : 4 i ars.1% CORPORATE OFFICE: P.O. Petrochemicals Township,*M : - 391345. JW(Tm - tR Dist. Vadodara- 391345 Gujarat-India

Phones: (0265)372043,372091,372721* Gram: IPCL HO. * Telex: 0175-6364 & 6239* AB CODE: IPCLO Fax: (0265) 372090,37'3164

FA/BGT/WB 04.09.1998

To,OPERATIONS OFFICERDIV. SASENROOM No. MC10-755THE WORLD BANK GROUPHEAD QUARTERES: WASHINGTON D. C.1818 H STREET, N W, 20433 U.S.A.FAX No. (202) 522 1664KIND ATTN.: Ms. NAIMEHHADJITA RKANI

Dear Madam,

SUB:- LOAN 3259-IN. COMMENTS ON IMPLEMENTATIONCOMPLETION.

Attached is a two page project review from borrower's perspective on second

petrochemical project.

Regards.

C. Srinivasan(Chief Financial Controller)

Encl. as above.


September 04, 1998

PROJECT REVIEW FROM BORROWER'S PERSPECTIVE- SECOND PETROCHEMICAL PROJECT-LOAN NO.3259 IN

BANK'S PERFORMANCE

Bank has been consistent in providing sustained and continuous guidance and

support whenever called upon. It has also given fast clearance to our

procurement proposals as well as disbursement against replenishment claim.

In case of Nagothane complex, the bank has been kind enough to extend the

time limit for utilisation of World Bank loan from September 1997 to March

1998. This in particular helped the borrower (IPCL) for utilising the loan to

the maximum possible extent.

While detemmiing the loan amount, an estimate is made on single tender,

limited tender and open tender basis of procurement. However, in the course

of implementation of project, due to exigency, it is possible that certain items

which originally planned under open tender may get covered under single

tender, as a result of which the quantum earmarked for single tender may

proved to be inadequate. The borrower feels that there should be scope in the

loan agreement to provide for mid-term revision of the quantum of single

tender, limited tender and open tender but within the overall limit of the loan.

This would facilitate (a) faster implementation of the project and (b) full

utilisation of the loan. The borrower still feels that even though it may amount


to a marginal modification of the tender procedures, after opening all the

tenders, the borrower must be permitted to negotiate with LI as long as no

change is made in the tender parameters. This would bring down the cost of

the project.

BORROWER'S PERFORMANCE

Despite the delay in getting all approvals including from Goveniment of

India, expansions in Nagohane complex was completed by the borrower after

complying with all the procurement rules of World Bank, within two years,

once the changes in scope and procurement arrangement were made.

PROJECT RELATIONSHIP

Relationship between borrower and the Bank had been very cordial. There

was ample trust and understanding in the matter of evaluations and obtning

clearances to procurement proposals and replenishment against

disbursements.

C g RjNgve-5vN'.

63 Annex 1, Page 5of I1

26th August, 1998

Shri N.S. SamantDeputy Secretary to Govt. of IndiaDepartment of Chemicals &PetrochemicalsShastry BhavanNew Delh1i 1 1O 001

Dear Sir,

Sub : Implementation Completion Report (ICR) on World Bank LoanNo.3259 IN.

This has reference to your letter No.34027/lO/87-PC.III(Vol.lV) dated17th August. 1998 regarding our comments on the draft ImplementationCompletion Report (ICR). We enclose our comments as desired by you. Acopy of this is being sent to World Bank as per their request.

Thanking you,

Yotolll faitlhfully,

handar)Director (Finance)

Encl: as above.

Copy to:Shri Rohit Modi [With reference to your letter No.5/16/Deputy Secretary to Govt. of India 87-FB.VI dated 7th August, 1998]Ministry of FinanceDepartment of Economic AffairsNew Delhi 1 1O 00 rVl,5. AU,ImEH H,Az41rAa I JR i A ; / OPE AThAc' CFF 'cErI

, / 5 s i0oor,m NJo MC - lo - 75•,

.Js Ko - o o l Zon 5;n 1664

tR~~~~~~~P MAAtP,R Ac£RS XC,,O mrS

64Annex 1, Page 6 of 11

COMMENTS ON THE DRAFT IMPLEMENTATION COMPLETION REPORT (ICR)SECOND PETROCHEMICALS PROJECT (LOAN NO.3259 IN)

The World Bank had observed that level of protection at 40% for Polymers

and 2040% for intermediates, is still high by world standards. Large

difference in local sales tax is not recoverable under value added tax system

which creates serious distortions in selection of plant location, raw material

and product mix. World Bank has recommended harmonious action of sales

tax system and investment incentives and their transformation to value added

tax system to prevent such distortion. A package of measures for

hannonisation was accepted by State and Union Finance Minister in 1995

but not yet irplemented.

World Bank had called for C2/C3 pricing of gas based on opportunity cost

i.e. substitute for fuel oil and reasonable cost of conversion. BICP has

completed the study and submitted report to Ministry of Petroleum and

Natural Gas which needs to be implemented.

World Bank had pointed out that main objective of IPCL was to increase

production volume, by expansion which has been achieved.

Main factors affecting proiect.

World Bank has commented on delay in implementation. Appraised in

February 1989 loan agreement was signed in November '90. Further delays

occurred in Government approval and later in completion of LLDPE/HDPE at

65Annex 1, Page 7 Of 11

Nagothane. The delay in Government approval accounted for 16 months,

accident in Nagothane pushed the implementation by 26 months. But once

the change in scope was finalised the IPCL could implement the project in 2

years.

Bank's assessment indicate that 'the viability of Nagothane expansions are

sustainable. But at Vadodara, the IRR could be close to zero if the

intemational price drops by 20%. This is mainly due to high cost of feed

stock (Naphtha) and local taxes leading to higher intemal transfer price of

propylene.

The Bank's assessment is that overall financial stability of IPCL as "sound";

and resilient. Bank however perceives enornous challenges ahead;

particularly when tariffs are dropped further.

IPCL's future plans to combat competition by upgrading, modemising and

expanding the Vadodara Naphtha Cracker and setting up larger port facilities

for import of naphtha at intemnational price has been fully endorsed as right

move by World Bank also. Another threat identified is inadequacy of Gas

availability at Gandhar and lack of a long term supply contract with Gas

suppliers. World Bank has also expressed views that IPCL could achieve

above restructuring faster and becomes more competitive in domestic miarket

if it were under private ownership.

66

Annex 1, Page 8 of 11

Overall evaluation of the project, World Bank has indicated on borrowers

performance as follows:

a) Project preparation was overall satisfactory.

b) Demonstrated a strong conmnitment to project and met in timely

manner all necessary technical, financial and environmental and

institutional requirements from bank for project to proceed as per plan.

c) Failed to obtain necessary clearance and to alert Bank about the

bottlenecks which their clearance could create. In this connection

company has taken all possible measures in submitting information to

Govenmuent for approval. However the Government machinery moves

too slow through the system in clearing. These are felt even today for

clearances of projects (ACN) submitted to Government; and there is

nothing Company could do in the matter. World Bank having funded

earlier Nagothane Complex through 210 million $ loan was also aware

that Company has to get Govemrnment clearance formally before it

could proceed with project implementation.

d) World Bank feels that Nagothane expansion was commenced

prematurely when original plant had not gone on stream. It may be

true only on the hindsight as nobody could have perceived about the

accident in Nagothane in 1990, but for which most of the plan could

have proceeded more smoothly.

67

Annex 1, Page 9 of 11

e) World Bank feels that borrower was overly optimistic in

simultaneously planning Gandhar also. The matter should be perceived

from borrowers view point also.

The availability of gas was realised and proposals for large private

investment in the sector was also heard of. The borrower couldn't have

remained inactive in the circumstances. It was an imperative to set up

natching capacities to meet growing demand and maintain market

share. But the IPCL had shown tremendous sagacity and prudence in

proceeding with Gandhar implementation in 2 phases with a view to

achieve the objective at the same time not over burden the company

simultaneously. Today Phase-I of Gandhar is in full operation's and

Phase-II is ready to complete by end of the year with full funds

requirements already tied up.

f) Bank has concluded that investments in expansion should not be

approved until production of existing plants stabilises. From the

borrowers point of view, it should be an ongoing process for project

identification, formulation of plans to increase/sustain the market share.

All Govemment approvals in India including environmental licenses

should be obtained before presenting proposals to Banks' Board for

funding. Altematively, if a financial institution has done detailed

evaluation and loan agreement has been signed, Government may not

68 Annex 1, Page 10 of 11

delay approval - Except environmental clearances, rest shouldn't be

insisted on.

g) Decentralisation of procurement review to field offices expedites

project activities and timely guidance to borrower. Our experience has

also been same. The thresholds for LIB should be higher in case of

expansion schemes compared to green field projects.

From the point of view of borrower the World Bank lending was extremely

helpfil because of the long maturity period of the loan for projects

implementation. It was particularly so in case of IPCL as it had restniction on

raising equity capital which was partly offset by the long maturity loan from

World Bank. The project objectives have been achieved with completion of

Baroda based projects in 1996 and Nagothane expansion in 1998.

~~ t~~~~f~~~ ~CENTR-AL INSTITUTE OFPLSC;:3 : , <r6- 'r ^ d!-.;

(Ministry of C1uicasls & FwfflzUTS ';,67Im "W T I~~~EGIERIG hcNCOV

*---. <lee -. T; u _ .eo ol.H -Guindy. Ch.ennW'm.-6O.. - C .:7n 4 aiT~ XwoPhonn: 2:34Z3774 aGw

- W: 9 z23o7720 & 2348622 FaXj No.:* 9144-2iM720 &23486

Annex 1, PagF 11 of j

Fax No:001-202-522-1664 August 18, 1998.,

To: Mr Richard Adkermann, Sector Manager Environment South Asia Region,-- Worid Bank, USA . -. ;

-CearMrR!chard,

irr contnuaton of our fax mesage- di,ted August 3, 1998, we have gone throught-he repcrt and found- that the infc-mation pertaining to CPET have been--- .covered f0ily and depicts the correc= positon. As such, we do not have anycommens to offer cn the draft

We wish to take this opporitnity to *n.ank for your kind co-operation and we are :sure t.at the; objectives envisagec in the programme nill be successfUllyimpleimented in the coming years. We would cherish to have contintL-dasscciatcn with World Bank in our f are endeavour and to raise the statls!of*PET to- .ternatcnal-level.

- .1t , Ld: . :

.(K AR SUBR ANIYAN)Dy Director (Cwrpora-

Cc::Mr Naimeh Hajtarkhani - for ;in- informiaton please

1. W

Cenrep.4hneabd. tnitar Bopl. Bhl~shar Ga,Hyeraad Hwrh.lrtp -L y~- .* S- .1.

.,AI~mda~a, AnisrShal.Bibihw Ga, Hyeaa. ,orh .mha iuiiw Ms ,Paln --? ,f

*~~ ~ * i .... .s"-..r.


Annex 2: The Policy Framework

General Context

1. Changes in the policy framework for the petrochemical sector since 1990 have to be placedwithin the overall context of the significant changes in the general economic policy framework which hastaken place since 1991. In June 1991, major policy changes were announced, which have since beencarried out. The policy changes aimed at significantly opening up the economy to foreign trade andinvestment, rationalizing the tax regime, and increasing competition by removing administrativebottlenecks to entry and capacity increases. This new set of policies was accompanied by a sharpdepreciation of the real exchange rate. Over that period, the sector has grown substantially, as both supplyand demand have increased at rates between 10% and 20% per year. Changes in supply and demand overthe period 1990/91 and 1996/97 are summarized in Table 7.

2. The following developments were particularly relevant:

(a) several rounds of trade reforms have lifted all licensing restrictions on imports ofintermediate and capital goods and reduced maximum tariffs for nonconsumer goods to 40% andfor capital goods to 20% .As a result, the import-weighted average import tariff decreased verysignificantly between 1991/92 and 1996/97: from 97.1% to 24% for capital goods, from 77.1% to17.6% for intermediate goods, and from 92.3% to 24% for manufacturing. There has been,however, a partial reversal since 1996/97, when a 2% general surcharge on imports wasintroduced, followed by an additional 3% in 1997/98 (cumulative surcharges thus totaling 5% in1997/98), then followed by an additional 4% special surcharge in 1998/99 (cumulativesurcharges thus totaling 9% in 1998/99).

(b) a major reform of central excise taxes was implemented to (i) shift most excise rates fromspecific to ad-valorem; (ii) reduce the number of rates towards a four-rate structure; (iii) make itmore closely resemble a value-added tax system by allowing their recovery during the productionprocess; (iv) simplify the administrative system; and (v) extend the coverage of the ModifiedValue-Added tax system (MODVAT).

(c) the investment regime was liberalized. Requirements for capacity licensing of domesticinvestments were eliminated in July 1991 (except for environmental and safety aspects), and theforeign investment regime is now considered as "investor-friendly" as in east Asian countries.

3. Changes in the policy framework for the petrochemical sector followed the general policy. Thefollowing paragraphs summarize these changes as well as to other important policies more specific to thesector.

Trade Policy

4. At the time of appraisal, the level of protection was very high and highly skewed, even within thesame product category, demonstrating a case-by-case approach to protection. Changes in the structure oftariffs over the period April 1987 to 1998/99 are presented in Table A2.1.


Table A2.1 Changes in Rates of Import Duties between April 1987 and 1998/99

Percentage

Product Apr. Feb.1987 1988/89 1990 1993/94 1994/95 1995/96 1996/97a 1997/9 8b 1998/99C

Feedstocks

Naphtha 2 0 8

LPG 12 15 23

Propane 15 12 15 23

Building Blocks

Ethylene 365 15 10 12 15 23

Propylene 450 15 10 12 15 23

Butadiene 400 15 10 12 15 23

Benzene 0 15 10 12 15 23

Xylenes 100 30 10 32 35 43

Intermediates

Styrene 30 12 15 23

Paraxylene 120 30 12 15 23

MEG 155 70 60 35 27 30 38

DMT/PTA 230 70 60 35 27 30 38

ACN 115 60 20 12 15 23

Caprolactam 75 60 45 32 35 43

LAB 75 85 65 40 32 25 33

Polymers

LDPE/LLDPE 115 60 65 65 65 40 32 35 43

HDPE 100 60 65 65 65 40 32 35 43

Polypropylene 103 50 75 75 65 40 32 35 43

PVC 97 49 65 45 45 40 32 35 43

Polystyrene 178 50 50 55 40 32 35 43

PBR 60 85 65 50 52 45 53

Fibers

PSF 220 65 45 32 35 43

PFY 205 65 45 32 35 43

ASF 185 85 65 45 32 35 43

NFY 130 65 45 32 35 43

Note: some of the rates in 1988/89 included specific duties per kilo. These were converted into percentage applied to actual orestimated CIF prices prevailing at the time; a including the 2% surcharges on all imports; b inclusive of import surcharges (2%and 3%); c inclusive of import surcharges (2%, 3% and 4%).

5. The most drastic changes took place with respect to synthetic fibers where tariffs were curtailedfrom the equivalent of between 130% and 220% in 1988-89 to a uniform 30% in 1996/97 (prior to the 2%surcharge which was introduced later during the year, and the additional 3% and 4% surchargesintroduced in 1997/98 and 1998/99, respectively) . For building blocks and intermediates, there has alsobeen a significant reduction and harmonization of rates since 1988/89, to between 0% and 30% in 1996-


97. The overall reduction in tariffs on capital goods from 85% to 20% (excluding surcharges) also hadsignificant impacts on the sector.

6. For plastic polymers, the trend towards reducing protection was initiated back in early 1987.Between 1986/87 and 1988/89, tariffs had already been reduced from 100% and above to 50%-60%.After a three-year stabilization period, during which some of the rates even increased by some 5 to 15points, there came another significant reduction in rates for plastic polymers, down to 30%-40% in1996/97.

7. While these changes are very significant, the level of protection remains rather high, particularlyafter 2%, 3% and 4% across-the-board import surcharges were introduced in 1996/97, 1997/98 and1998/99, respectively, which brought the level of duties on plastic polymers back to their 1995/96 levels.

8. A comparison of IPCL product prices exclusive of equalized freight cost, and CIF prices inSoutheast Asia is given in Table A2.2 for several representative products. The effect of lowering importtariffs from 65% to 32% by 1996/97 (35% in 1997/98 and 43% in 1998/99) has been to decreasedomestic prices slightly relative to the sum of import-parity prices and all import duties. The change hasnot been significant because, when import tariffs were higher, domestic producers did not take fulladvantage of the tariff protection-doing so would have priced plastics much above what purchaserswould have been prepared to pay, reducing demand. The product benefiting least from import tariffprotection is PVC, for which there exists excess capacity in India at present.

Table A2.2 Comparison of IPCL Product Prices with CIF Prices in Southeast Asia

Financial year 1993/94 1994/95 1995/96 1996/97

Percentage of CIF prices

LDPE 140%(65%) 134%(65%) 138% (40%) 131% (32%)

LLDPE 139% (65%) 145% (65%) 134% (40%) 132% (32%)

HDPE 137% (65%) 151% (65%) 147% (40% ) 129% (32%)

PP 131%(75%) 152%(75%) 131%(40%) 133%(32%)

PVC 132% (45%) 133% (450/%) 120%(40%) 119% (32%)

Percentage of CIF prices + all import-related duties

LDPE 85% 81% 98% 99%

LLDPE 84% 88% 96% 100%

HDPE 83% 91% 105% 97%

PP 75% 92% 94% 101%

PVC 91% 92% 86% 90%

Notes: Total import-related duties in parentheses. Calculations are based on annual average prices with estimatedadjustments made for the calendar versus financial year. Equalized freight is estimated as Rs. 1,200/t except where thedata were available from IPCL.

9. Per capita consumption of plastics in India, about 0.7 kg per annum, is among the lowest in theworld, and is four-fold lower than that in China. The effects of protection provided by import tariffs maybe mixed, since high prices can deter consumption growth, which is highly elastic with respect to prices.For example, domestic polypropylene prices fell by 28% between April 1997 and March 1998 due to thecollapse of international prices. Lower prices in turn led to booming demand, increasing domesticpolypropylene consumption by 38% to 595,000 tons in 1997-98. Domestic polyethylene prices fell to alesser extent during the same period, by 12%, and the increase in demand was 9%.


10. The principal strategy adopted by the major players in the field is vertical integration and import-parity based pricing. The revenues of both IPCL and Reliance, its chief private sector competitor, arederived mainly from domestic sales. Therefore, reductions in import tariffs are playing a significant rolein fostering competition and increasing efficiency in the sector. Another strategy used by IPCL to fosterconsumption has been pan-territorial pricing of its products. Reliance has followed the same strategy inorder to be able to penetrate these same market areas. However, by not reflecting the varying costs oftransport and distribution in prices, pan-territorial pricing gives a subsidy to all end-users in remoteregions, encouraging people and firms to inefficiently alter their consumption and investment patterns.It is expected that, as domestic and import competition grow, pan-territorial pricing will beprogressively phased out. Lower levels of protection would also accelerate this phase-out by leavingimporters and producers much less room for costly cross-subsidies.

Sales and Excise Taxes

11. As already mentioned, the structure of excise taxes (and corresponding countervailing duties onimports) has been changed to considerably reduce their dispersion, as shown in Table A2.3. While thelevel of taxes for building blocks, intermediates and polymers has changed little since appraisal, it hasbeen considerably reduced for synthetic fibers. The combination of lower sales taxes and lower tariffduties has reportedly encouraged consumption (synthetic fibers were previously a "rich man fiber" inIndia) while forcing restructuring in an industry characterized by excessive dispersion, small scale andhigh costs.

12. In addition to the above central excise taxes and countervailing duties (which are recoverableunder MODVAT), sales across states are subject to a 4% central sales tax (non-recoverable) and localsales taxes (also non-recoverable). Local sales taxes vary from state to state, from product to product,according to origin, and according to the location of investors: (a) they vary from state to state and fromproduct to product: for example, in the state of Gujarat, local sales taxes vary from 4% for PVC andLDPE/LLDPE/HDPE to 12% for PP, 6% for fiber intermediates and 2% for acrylic fibers; on rawmaterials (naphtha, LPG, fuel oil), the rates vary from 8-10% in Maharashtra, to 9% to 14% in TamilNadu, and 15% to 22% in Gujarat; (b) raw material imports such as naphtha, on the other hand, are notsubject to local sales taxes, while domestic production is; (c) sales tax exemptions on both domestic rawmaterials and products are granted by states to new industries locating themselves in their territory: forexample, IPCL's Vadodara cracker pays a 20% sales tax on naphtha produced locally, while itscompetitor Reliance pays none in the same state because it has been granted tax exemption applicable toprivate sector firms investing in "backward areas". While presently the domestic raw material taxexemption does not advantage Reliance (since it imports all its naphtha requirements), the taxexemption on products sold within the state of Gujurat constitute a more significant advantage.

13. These large differences in taxation rates and systems have the potential of creating seriousdistortions in locational and raw material and product mix decisions, and in the competitive position ofnew versus established enterprises which have to compete on the same markets. Harmonization of taxrates and investment incentives across states and their transformation into value added taxation systemswould help prevent such distortions, which are damaging in a highly capital intensive industry whosecompetitiveness is determined by large economies of scale, the cost of raw materials, and the locationrelative to markets. A package of measures designed to harmonize state sales tax systems was acceptedin principle at the end of 1995 by State and Union Finance Ministers. Implementation of therecommended measures would help create a more level playing field.


Table A2.3 Changes in Rates of Excise Taxes and Countervailing Dutiesbetween 1988189 and 1997198

Percentage

Product 1988/89 1993/94 1994/95 1995/96 1996/97 1997/98

FeedstocksNaphtha - - - - - 15

LPG - -10

Propane - - - - - 15

Building BlocksEthylene 20 - 20 20 20 18

Propylene 20 - 20 20 20 18Butadiene 20 - 20 20 20 18Benzene 5-10 - 20 20 20 18Xylenes 0 - 20 20 20 18

IntermediatesStyrene 15 - - - - 18

Paraxylene 0 - - - - 18

MEG 0-15 15 20 20 20 18DMT/PTA 0 15 20 20 20 18ACN 0 - 20 20 20 18

Caprolactam 15 - 20 20 20 18LAB 15 15 20 20 20 18PolymersLDPEILLDPE 30 35 30 25 25 25HDPE 30 35 30 25 25 25Polypropylene 30 35 30 25 25 25PVC 40 35 30 25 25 25Polystyrene 30 - 30 25 25 25PBR 15 15 20 20 20 18FibersPSF 87 - 23 23 23 20.7

PFY 134 - 69 57.5 46 34.5ASF 32 - 23 23 23 20.7

NFY 69 - 34.5 34.5 34.5 34.5

Note: - data not available.

Feedstock Pricing

14. Feedstock pricing was considered one of the key policy issues in this project. At the time ofappraisal, the price of domestic naphtha was administered by the government and set considerably aboveinternational levels, making Indian naphtha crackers less competitive on the global market. The price ofnatural gas was also somewhat above its opportunity cost, and no pricing system had been established forthe C2/C3 fractions used by the petrochemical industry. An attempt was made to address the issue ofpetrochemicals feedstock pricing in isolation from the overall pricing system for petroleum products, butin the end this approach failed, as discussed below.

(a) Natural Gas and C21C3 Pricing Policy

15. At the time of appraisal, no pricing mechanisms had been established for the C2/C3 fractions ofnatural gas used by gas-based petrochemical crackers (the first one, MGCC, was still under construction).During project preparation discussions, while linking the price of C2 /C3 to its economic opportunity cost


was considered essential to ensure efficiency, debates centered around how to deal with resultingdistortions in the relative C2/C3/naphtha prices. Several policy options were proposed: (a) bringing downthe price of domestic naphtha to the import-parity level while pricing C2/C3 at its opportunity cost; (b)pricing C2 /C3 above its economic opportunity cost at the beginning, and bringing down the prices ofC2/C3 and domestic naphtha together so as not to give a cost-advantage to one over the other; and (c)pricing C2 /C3 at its economic opportunity cost from the outset, and subsequently working towardsbringing down the price of domestic naphtha. Because of the difficulty of dealing with the broader issueof petroleum product pricing under the project, the last option was eventually selected.

16. The Bank advocated basing the price of C2 /C3 on the import-parity price of fuel oil, adjusted forcalorific value and adding a reasonable separation cost. Based on a CIF price of $95 per metric ton forfuel oil, a value of US$235 per '000 m3 of C2 /C3, or approximately US$160 per ton of C2/C3 (assuminga 4-to- I ratio of ethane to propane) was considered reasonable, including a separation cost per ton ofapproximately US$50 per ton. The figure eventually proposed prior to the Board presentation by GOI ofRs. 3,300 per ton of C2 /C3, corresponded to these principles. Unfortunately, no explicit provision wasagreed under the Loan Agreement to adjust for fluctuations in the exchange rate or the international priceof fuel oil on a regular basis, and the price of C2/C3 has remained fixed at that level since, despite thetwo-fold decline in the Indian rupees during the last eight years.

17. Table A2.4 below compares actual prices and the estimated opportunity cost of C2/C3 over theperiod from 1994/95 to 1997/98. The opportunity cost estimate is based on the FOB price of high sulfurfuel oil in Singapore, plus US$10 per ton for shipping and port charges, adjusting for the difference incalorific values between fuel oil (9,700 kcal/kg) and C2/C3 (11,200 kcal/kg), and adding the currentseparation cost of Rs. 1,350 per ton. The price of C2 /C3 relative to its economic opportunity cost hasdeclined steadily, except in the last financial year in which the world crude price fell significantly duringthe first quarter of 1998.

Table A2.4 Estimated Economic Opportunity Cost of C21C3 Based on High Sulfur Fuel Oil

Financial year ending on 31 March 1995 1996 1997 1998

Fuel oil price in US$/ton, FOB Singapore 94 99 107 91

Fuel oil price in US$/ton, CIF India 104 109 117 101

Exchange Rate- Rs/US$ 31.4 33.67 35.48 37.13

Rs/ton of C2/C3, landfall price equivalent 3,759 4,241 4,788 4,351

US$/ton of C2/C3, landfall price equivalent 120 126 135 117

Separation Cost, Rs/ton of C2/C3 1,350 1,350 1,350 1,350

Separation cost, US$/ton of C2 /C3 43 40 38 36

C2/C3 price in Rs/ton, IPCL plant gate 5,109 5,591 6,138 5,701

C2/C3 price in US$/ton, IPCL plant gate 163 166 173 154

Actual C2 /C3 price charged, exclusive of tax 3,300 3,300 3,300 3,300

% of Economic Opportunity Cost 65 59 54 58

18. Furthermore, during preparation and appraisal, some argued that additional corrections should bemade to account for the following: (a) the alternative use for natural gas is most likely base-load powergeneration where conventional rather than combined-cycle boilers are used; and (b) fuel efficiency inconventional boilers is about 35%, whereas that in combined cycle gas plants is 42% or higher. Taking


account of this difference in fuel efficiency would mean that the price of C2/C3 would need to beincreased by a factor of 1.2 over and above adjusting for calorific values. This would result in a higheropportunity cost of C2/C3 and reduce the percentage of financial versus economic price of C2 /C3 to56%, 51%, 47% and 50%, respectively, for the four financial years presented in Table A2.4.

19. C2/C3 pricing falls within the ambit of natural gas pricing, and this decline in price relative toopportunity cost is linked to the overall natural gas and oil product pricing policy. Similar to otherpetroleum products, until October 1997, the price of natural gas was set administratively to cover costs ofproduction of ONGC plus a 12% return on equity (the so-called "retention pricing" formula). This pricewas to be reviewed every two-to-five years, based on changes in costs submitted by ONGC, but no suchchange occurred between 1990 and 19971. Yet, available natural gas was being committed quickly, to thepoint where not only is it entirely committed today, but there is such a shortage that several LNG projectsare being considered for power generation. The price of gas from LNG will be more than double thecurrent domestic price of natural gas. Some power plants even burn naphtha, a feedstock considerablymore expensive than gas.

20. Natural gas pricing in India was finally modified in September 1997. It is currently based on theinternational price of a basket of fuel oils and is reviewed every quarter. For 1997, 1998 and 1999, theprice of natural gas was to be set at 55%, 65%, and 75% of the international (FOB) price equivalent of abasket of fuel oils, with floor limits as well as upper ceilings, except in the northeastern states where thesepercentages are 30%, 40% and 50%, respectively. In 1999/2000, the Government will then decide if andwhen to move to 100% of the reference value (still below the opportunity cost, however, since it shouldactually be based at least on the CIF value of fuel oil). The price of C2/C3 has not yet changed, pending aformal decision of the Gas Linkage Committee, but it is expected that it will be adjusted to reflect theprice of natural gas plus a separation charge (and pipeline transport costs when applicable).

(b) Petroleum Product and Naphtha Pricing

21. Throughout the implementation of this loan, the price of domestic naphtha remained controlledby the government, as other petroleum products. Prices of petroleum products were based on the sameretention pricing formula as mentioned above for natural gas, to guarantee refineries a fixed return overtheir production costs. In addition, prices of petroleum products were uniform throughout the country,substantially penalizing naphtha users located near refineries by charging them a freight equalization fee.As a result of this pricing mechanism and of high local sales taxes (in Gujarat particularly, where itreached an effective tax rate of 22-24%), the price of domestic naphtha has been costing more thanimported naphtha most of the time. This was further aggravated by the fact that no sales taxes were leviedon imported naphtha. For companies not benefiting from tax exemptions, there is therefore a considerableincentive to import naphtha rather than purchase it on the domestic market. The only limiting factor so farhas been the shortage of port facilities, but both IPCL and Reliance have been constructing their own.

22. Table A2.5 compares imported and domestic naphtha prices. Import parity prices are based onannual average FOB Singapore prices of naphtha, and shipping and port handling charges of $35/ton

'Failure to adjust retention prices for petroleum products over that period may have been due to the impact on fiscal subsidies toconsumers that this would have had: since many consumer prices were well below their opportunity cost, raising retentionprices would have meant increasing the burden of these subsidies on the budget, despite a complicated system of cross-subsidies between products (on of the penalized products being naphtha). Another reason for failure to adjust is the largeshare of non-tradable costs in natural gas production, which did not necessarily increase in line with changes in exchangerates.


historically paid by IPCL. Domestic prices are actual annual average prices of domestic naphtha paid byIPCL during the period April 1994 to March 1998. Purchasers of domestic naphtha paid on average 15%more than naphtha importers. National Organic Chemicals Industries Ltd. (NOCIL) and IPCL areprincipal users of domestic naphtha for cracking, whereas Reliance imports essentially all of its naphtharequirement.

Table A2.5 Comparison of Imported and Domestic Naphtha Prices


Naphtha price in US$ per ton, FOB Singapore 155 153 193 175

Naphtha price in US$ per ton, CIF India 190 188 228 210

Exchange Rate (Rs/US$) 31.4 33.67 35.48 37.13

Domestic naphtha in Rs/tona 7424 7424 7970 8918

Domestic naphtha in US$/ton 236 220 225 240

% of import-parity price 125 117 98 115

a Exclusive of MODVAT (modified VAT, refundable to the purchaser), inclusive of local sales taxes and surcharges.

23. A major change occurred in early 1998 in the pricing policy of petroleum products. EffectiveApril 1998, all prices were deregulated, except for those of kerosene, high-speed diesel oil, LPG andaviation fuel, which are still administered but are expected to be deregulated after a four year transitionperiod. Refineries are now free to set their own prices, and it is expected that domestic naphtha prices willbe progressively aligned with the price of imported naphtha, and that freight equalization will disappear.The question of local sales taxation, however, which still substantially penalize domestic production overimports for producers who do not benefit from local tax incentive packages, remain to be addressed;otherwise petrochemical producers will shift towards imports for most of their requirements.

(c) Impact of C2 /C3 and Naphtha Pricing on IPCL

24. IPCL has a naphtha cracker at Vadodara, for which it has relied primarily on domestic naphtha asthe feedstock, and a gas cracker at Nagothane (the Gandhar cracker is not yet in operation and is notincluded in the following calculations). The overall financial impact on IPCL of paying more for naphthaand less for C2/C3 relative to their economic opportunity costs is given in Table A2.6. The figures in thetable represent only order-of-magnitude estimates, since they are based on annual averages. Overall,IPCL seems to have benefited from the distortions in feedstock pricing.

Access to Feedstock

25. As already mentioned, imports of naphtha are deregulated and domestic supplies are negotiateddirectly with refineries. As the industry is building its own port facilities to import naphtha, competitionof imported naphtha with domestic supplies will enhance competition in supply. The supply of naturalgas, however, remains entirely in the public sector. ONGC accounts for 90% of gas production and OilIndia for the remaining 10%. Except for small quantities accounting for less than 10% of total supply,since 1992, all gas is purchased by the Gas Authority of India (GAIL), which manages the HBJ pipelinenetwork.

26. The allocation of gas to users is determined by the Gas Linkage Committee, chaired by theMinister of Petroleum and comprising representatives of the Ministries of Petroleum, Finance and Power,and of GAIL and ONGC. Gas is allocated based on availability and end-user facilities. In the


petrochemical sector, gas from the west coast of India has so far been allocated only to two public sectorcompanies, IPCL and GAIL itself (for its future cracker in Oraya).

Table A2.6 Estimating the Financial Impact of Naphtha and C2C 3 Pricing on IPCL Expenditures


Price of C2 /C3 per ton paid by IPCL in Rs./ton 3,663 3,702 3,754 3,772

Price based on economic opportunity cost in Rs/tona 5,671 6,272 6,983 6,478

Difference in Rs./ton 2,008 2,570 3,229 2,706

Tons of C2 /C3 purchased (for Nagothane) 423,000 491,000 507,000 559,000

Net gain to IPCL, million Rs. 850 1,260 1,640 1,510

Price of domestic naphtha paid by IPCL in Rs./tona 7424 7424 7970 8918

Import-parity price of naphtha in Rs./ton (no tax) 5,955 6,332 8,105 7,781

Difference in Rs. per ton 1,469 1,092 -135 1137

Tons of domestic naphtha purchased (for Vadodara) 346,000 343,000 415,000 415,000b

Net gain to IPCL, million Rs. -509 -375 56 -472

Overall gain to IPCL, million Rs. 341 887 1,690 1,040

Exchange Rate 31.4 33.67 35.48 37.13

Overall gain in US$ million 11 26 48 24

a Inclusive of taxes; b Estimated

27. The contractual relationship between the gas supplier and IPCL is rather loose. Investments in thepetrochemical industry are initiated on the expectation that gas will be available, but there are no firmtake-or-pay contracts providing for penalties on either side or clear risk-sharing arrangements. InNagothane, IPCL's contract for the supply of gas is directly with ONGC, since it was signed before thegas purchase monopoly was given to GAIL. ONGC invested in a separation plant to supply at first up to450,000 tpy of C2/C3 to the MGCC cracker, then expanded it to 570,000 tpy by 1997/98 to feed thecracker expansion. So far, however, IPCL's uptake has been below the contracted levels, resulting inhigher costs to ONGC from lower capacity utilization of its plant, without corresponding increases inseparation charges. On the other hand, for the Gandhar cracker, IPCL will purchase its supply fromGAIL, but as of April 1998 they had not signed a formal contract. GAIL in turn also does not have a longterm supply contract with ONGC, the gas producer. It now appears that the fields supplying Gandhar maynot have sufficient gas, but there are no clear pre-established contractual mechanisms allocatingresponsibilities and risks among the parties in this case.

28. The Government has recently announced a new exploration licensing policy which shouldsignificantly increase investment in oil and gas exploration and production by introducing a level- playingfield and increasing transparency. This policy introduces a system of public bidding for oil rights inwhich there will be no discrimination between public and private and between foreign and domesticbidders. It also provides for a system of applicable royalties and tax incentives. A separate regulatorybody has been established in the Directorate of Hydrocarbons to administer and regulate this new system.These steps are a major departure from the past and are aimed at substantially increasing explorationactivities in the 20 (out of 26) basins which have yet to be explored in India.

29. With the likely entry of private gas producers, the Government will next need to focus onestablishing a regulatory framework for gas transportation and distribution, ensuring open access to thetransport pipeline network by gas producers, who should be able to negotiate supply contracts directly


with large users. Pipeline transport tariffs will also need to be regulated, as well as the extent to which thetransporter is allowed to enter upstream and downstream activities (for instance, GAIL, as a provider ofgas, a monopoly transporter, and the owner of a cracker may be inclined to pre-empt future supplies ofC2/C3 ). Regulating gas transportation and distribution activities will also require an independentregulatory body.

Capacity Licensing and Minimum Economic Sizes

30. To offset perverse incentives provided by a highly protective environment, the Ministry ofChemicals and Petrochemicals had established minimum economic size criteria for the granting ofcapacity licenses. With the deregulation of the industrial sector and the lowering of protection whichstarted in 1991, capacity licensing requirements were eliminated in July 1991 and these criteria becameredundant, except as guidelines to the financial sector.

31. An ex-post review of capacity constructed since 1990 shows that, for cracking and themanufacture of intermediates and plastic and rubber polymers, new capacity or expansions were ofinternationally competitive size and have therefore met these criteria. In the synthetic fiber industry,however, the study carried out in 1991 (Table 7 of the ICR) showed that the minimum economic sizepolicy was not being strictly enforced, and was inefficient in ensuring that licensed investors actuallyconstructed their plants to match the licensed capacity. It has been reported that, since then, thesubstantial lowering of protection to the industry is leading to extensive restructuring through acombination of capacity expansions in existing plants to reach an economic scale, very large newcapacity additions (Reliance), and likely closures.

Private Sector Participation

32. By appraisal, the Government had already aimed at increasing the participation of the privatesector in the industry by granting a capacity license to Reliance Industries for the construction of acracker. As a result, since 1990, the private sector has entered the sector on a massive scale, with theconstruction of a very large cracker by Reliance Industries in Hazira (Gujarat). Even though IPCL hasalso meanwhile increased its own capacity more than six-fold, the private sector now accounts for half oftotal olefin production capacity, as shown Table A2.7.

33. Table A2.7 also lists announced projects expected to start production by year 2000/012. If theseinvestments proceed as planned, by year 2000/01, the public and joint-ownership sectors will stillcontinue to account for about 40% of total capacity. The entrance of the private sector appears to havedisplaced imports and introduced substantial price competition in areas so far dominated by IPCL (forplastic polymers) and an inefficient synthetic fiber industry.

34. With respect to foreign ownership, although still requiring approval of a Government Committee,in practice there has been no limitation to the equity participation of foreigners (some recent examplesinclude a specialty chemicals enterprise 1 00%-owned by Dow Chemicals, and a PTA plant 95%-ownedby Mitsubishi).

2This list excludes other announced investments planned to start production later-on, which include a 300,000 tpy cracker ofAssam Industrial Development Corporation (joint sector); three 300,000 tpy crackers of Karnataka State IndustrialDevelopment Corporation, Madya Pradesh State Industrial Development Corporation and Punjab State IndustrialDevelopment Corporation; a 350,00 tpy cracker of Tamil Nadu Industrial Development Corporation; and another 750,000tpy cracker of Reliance in Maharashtra.


35. Consumers of polymer plastics indicated to the World Bank team that the entry of RelianceIndustries several years ago led to significant price competition as well as an increase in domestic supply.This has resulted in displacement of imported products by domestic products, benefiting consumers whono longer have had to carry a minimum of thirty days' worth of inventory, since domestic products areavailable at 24-hour notice. The trend towards increasing competition and domestic supply is expected tocontinue.

Table A2.7 Olefin Production Capacity (cracker capacity in tons of ethylene)

Cracker Feedstock Type 1990 1998 Planned

Public Sector

IPCL:

Vadodara Naphtha 130,000 130,000 300,000 a

Nagothane Gas 400,000

Gandhar Gas 300,000

Total IPCL 130,000 830,000

GAIL Auraiya Gas 300,000

Total Public Sector 130,000 830,000 600,000

Private SectorReliance Industries (Hazira) Naphtha 750,000 1,100,000 b

NOCIL (Bombay) Naphtha 75,000 75,000 375,000

Total Private Sector 75,000 825,000 1,475,000

Joint Sector

Haldia (Joint Venture Priv. Sector/State Gov.) Naphtha 420,000

Total Capacity 205,000 1,655,000 2,495,000

a Replacement for the existing cracker; b 800,000 tpy at Jamnagar and 300,000 tpy at Assam.

Public Ownership of IPCL

36. In 1989, IPCL was fully owned by the Government of India. It has since opened up its capital tothe public by floating shares on the stock market to finance its large investment program. In 1998, theGovernment's share had decreased to 59.9% of share capital. This share could further decrease to 51% byyear 2002 if bondholders of a 1994 issue choose to exercise their option to convert their bonds intoshares. As a profitable enterprise totally independent from the Government's budget, IPCL is consideredone of "the nine gems" among public companies. A specially appointed commission in charge ofreviewing the justification for maintaining these companies in the public sector has recommended theprivatization of IPCL, with the Government retaining a minority share only (around 25%). No decisionhas been taken so far on the future privatization of IPCL.


Annex 3: Environmental and Safety Considerations

A - Background

Environment Policy in India

1. During the last two decades, India has made considerable progress in the establishment of anenvironmental policy and regulatory framework. Since 1974, the key laws concerning environmentprotection were enacted. They include: (i) the Water Act of 1974; (ii) the Air Act of 1981; and (iii) theEnvironment Act of 1986. These Acts resulted in the establishment of the Central Board, for theprevention and control of water pollution, and of State Boards, as key agencies for the prevention andcontrol of water and air pollution, (including monitoring and enforcement of pollution regulations) andenvironmental screening and licensing of large industrial projects. In 1981, the Department ofEnvironment and Forest was created within the Central Government to promote environmentalconservation.

2. In 1985, at the initiative of the Ministry of Environment and Forest (MOEF), a comprehensive setof environmental guidelines for the siting of industries was issued. These guidelines include: (i) the areasto be avoided; (ii) siting criteria; (iii) the need for the preparation of a comprehensive EnvironmentalImpact Assessment to identify the potential environmental impacts of large industrial projects; and (iv)the establishment of a base line data through the EIA so that actual environmental impacts of executedprojects can be compared with such data. In addition, the guidelines set up procedures for licensing of anumber of environmentally sensitive industries, including chemical and petrochemical industries.According to these procedures, a project would only be licensed after: (i) the site has been approved fromthe environmental point of view by the competent state authority; (ii) the project proponent commits toinstall appropriate equipment and implement prescribed measures for the prevention and control ofpollution; and (iii) The State Pollution Control Board (CPCB) has certified that the proposal meets allenvironmental requirements and that the proposed equipment is adequate for that purpose.

3. The Environment Act of 1986 confirms the responsibilities of the Central Pollution ControlBoard (CPCB)and SPCBs and specifies standards and monitoring procedures for emission and discharge.It also specifies Minimum National Standards (MINAS) for Specific industries, including the chemicaland petrochemical industry. The Environmental Impact Evaluation prepared in 30 June 1994, by theOperation Evaluation Department of the Bank, for the Maharashtra Petrochemical Project (the firstpetrochemical project in Nagothane), found that these standards were, in general, similar to those adoptedin industrialized countries.

Environmental Tradition at IPCL

4. In its health, safety and environmental policy, IPCL commits to protect health, safety, andenvironment inside and outside its industrial sites. IPCL's policy also includes strict compliance by itsvarious units with all environmental regulations during the design, construction, and operation of all itsfacilities. The environmental consciousness of IPCL dates back to the early days of constructing theVadodara petrochemical complex in Gujarat, where efficient environmental and safety control andmanagement systems were implemented. Since, IPCL has continued to maintain its excellentenvironmental credentials through high level environment protection, plant safety and emergencyresponse awareness. Main environmental achievements include: (a) constructing the Nagothanepetrochemical complex in Maharashtra with very high environmental protection standards, which, witheffective control, monitoring and management, has permitted operation fully in compliance with the


Maharashtra Pollution Control Board (MPCB) standards; (b) the development and implementation of asuccessful reforestation program at Nagothane; (c) the improvement and modernization of existingeffluent treatment systems in Vadodara; (d) environmental and safety training and development ofenvironmental awareness at all levels; and (e) development of social programs in both Vadodara andNagothane involving the local communities. As a result, IPCL has been the winner of manyenvironmental and safety awards.

B - The Nagothane Complex

(a) The Project

5. In Nagothane, the Project included: (i)the expansion of the existing cracker (financed underWorld Bank Loan 2505 IN) from 300,000 tpy to 400,000 tpy, mainly through the addition of a fifthfurnace; and (ii) the expansion of one of the existing two trains of LLDPE/HDPE to allow an incrementalproduction of 60,000 tpy of HDPE. The expansion of the wire and cable plant considered in the StaffAppraisal Report was canceled during project implementation. As stated in the main text of this report,commissioning of the above expansions took place on June 1998. No land acquisition and no additionalhousing were required, and the additional requirements for power and water are being supplied by theexisting systems.

(b) Project Location

6. The Nagothane complex is located about 120 kilometers south of Bombay. Water resources arerelatively abundant, and are already used by other industries. The Amba river is the main source of waterfor the project. The area was already relatively deforested, except for some small clusters of forest, andfor an area near the plant which is being exploited for timber. Wildlife is scarce and is present only in theareas under forest cover.

(c) The Environmental Impact Assessment

7. At GOI's and Bank's request, IPCL prepared a comprehensive EIA for this project. Itspreparation was entrusted to Engineers India Limited (EIL). It was completed in 1989, before thecommissioning of the first phase of the Nagothane complex. It provides a comprehensive base line datafor both phases of the complex including: physical and biological conditions; ambient air quality at plantsite and in a radius of 10 kilometers from the plant; water quality at four locations in the Amba river, inaddition to a hydrographic study of the river which supplies process and domestic water to the complex;biological characteristics of the estuary section of the Amba river where the plant discharges its effluents(at a point selected after an hydrographic and oceanic study completed by the National Oceanic Institute);and a population census of the affected area in a radius of 2 kilometers (13,539),and between 2 and 5kilometers (6,481), of which about 2,150 people were resettled satisfactorily under the first project.

8. While activities during construction were expected to have some transitory impacts, the moreimportant and permanent impacts were expected during operation. The main environmental impacts ofthe overall complex, as indicated by the EIA's severity assessment matrix, included in decreasing orderof severity: (i) air quality; (ii) environmental hazards; (iii) services; (iv) noise and odor; (v) infrastructure;and (iv) water quality.

9. For the expansion proposed under the project, the EIA indicated that the proposed plantexpansion would result in: (i) increased emissions of airborne pollutants from the additional furnace, and


increase in power consumption; (ii) increased fugitive emissions and volatile emissions, due to increasedtransportation of feedstocks; (iii) increased waste water discharge, due to increased production capacity;and (iv) increased spent catalyst for disposal. However, it is also stated that: (a) the Nagothane complexalready included a complete wastewater treatment system with enough capacity to treat the increasedindustrial and domestic effluents while meeting the MPCB standards; (b) the fifth furnace was similar tothose already installed and it was expected that after expansion emissions would remain within MPCB'slimit for sulfur dioxide (SO2), NOx, Hydrocarbons and particulate matter; (c) no significant noise andodor impacts were expected from the expansion; and (d) MOEF required, IPCL to return the spentcatalyst to the manufacturer. Finally, the EIA concluded that the project had a minor negative impact onenvironment overall which could be mitigated by proper measures.

(d) Environmental Mitigation Measures

10. The main mitigation measures implemented included: emissions control, effluent control andtreatment, solid waste management, noise and odor control, environmental monitoring system,environmental training and development of environmental awareness, reforestation program, and socialdevelopment program.

11. As already indicated, the plants gaseous waste can contain SO2, NOx, Hydrocarbons andparticulate mater. Since the feedstock C2/C3 used in the cracker and the natural gas preferably used in thepower plant contain negligible sulfur, emissions of S02 in the flue gas are very low. Process technologiesand equipment installed were selected to minimize fugitive and particulate matter emissions. In addition,the stack of the power plant is 100-meter high, to allow use of Low Sulfur Heavy Stock (LSHS) up to amaximum of 10% of annual requirements and only when natural gas availability is low.

12. To the extent possible, all measures were taken in the design of the plants to prevent leakage,minimize production of wastes, recycle the wastes, and separate the streams of pollutants. After insidebattery limit primary treatment, resulting streams of industrial, storm and domestic liquid effluents aretreated in the general liquid effluent treatment system, which includes: an equalization tank, oilseparators, chemical and biological effluent treatment, treated effluent clarification, guard ponds fromwhich treated effluent is pumped to the estuary after a final control. If the treated effluent quality is notfound suitable for disposal, it is returned to the system for further treatment.

13. The sludge from the effluent treatment system is dried in drying beds after further aeration andthickening. Domestic waste is collected and disposed of in a suitable dumping area. Also, in the processcontracts, IPCL included an obligation for the licenser to retrieve and properly dispose of spent catalysts.Finally, IPCL maintains a detailed record and labeling of all hazardous waste produced, treated, or sold toauthorized contractors, as per MPCB's guidelines.

14. Adequate measures were taken in the design to reduce noise in accordance with levels prescribedby the Occupational Safety and Health Administration (OSHA) of the USA. When necessary, noise isfurther reduced at the production source, using enclosures, silencers, sound absorbers, and mufflers. Thegreen belt planted around the plant also helps contain noise.

15. Nagothane has established a comprehensive environmental monitoring system which includes:

- For water and liquid effluent:(i) raw water and liquid effluent monitoring at the complex battery limit,and at unit level to control efficiency of each unit; (ii) monitoring of water quality in storm drains; and(iii) monitoring twice a year by the GOI R&D laboratory, of the Amba estuary, where liquid effluents are


rejected through a 26 kilometer-long pipeline.

- For air pollution: (i) monitoring of stack emissions by a laboratory recognized by the MOEF; (ii)continuous monitoring of ambient air by two fixed, and cne mobile, automatic analyzer stations; and (iii)CCTV to monitor flare.

- For noise: noise is monitored regularly by day and night to ensure compliance with OSHA standards.The noise level was maintained within the complex at 52 and 54 dB, respectively in 1995/96 and1996/97.

- Yearly and monthly reporting of environment parameters, energy consumption and possible anomalies,to management and to the official environmental agencies for consent renewal.

16. IPCL's Environmental Department has been implementing a large training program which coversa wide range of subjects. All levels of personnel, including managers, are attending these courses.Environmental awareness programs are also implemented within the company for employees andmanagers and outside the company for the surrounding community, through a number of activities,including contests, seminars, and special programs for villagers.

17. IPCL has carried out an important reforestation program in the nearby area to the complex,including the development of a green belt around the complex as a buffer zone for air and noise pollution..More than 1.6 million saplings were planted, with a good survival rate of about 63% (1 million). Inaddition, IPCL is using treated waste water for irrigation of the green belt and of the township lawns, toreduce water consumption.

18. IPCL is also engaged in a number of social development activities, including the planting oforchards with the assistance of Bharati Agro Industries Foundation (BAIF) development Research center.They include: (i) introduction of fruit species ; (ii) training of villagers; (iii) dairy cattle developmentthrough insemination; (iv) extension services; (v) environmental awareness program; (vi) training fornon-farm skill development of youth; and (vi) home safety in using LPG, and energy conservationprograms.

(e) Environment Monitoring Results

19. Airborne Emissions - Plant emissions meets pollution effluent standards as shown in the tablebelow. Except for Particulate Matter (PM), they also meet Bank guidelines for the petrochemicalindustry:

S0 2 NOx HC PM(ppm) (ppm) (ppm) (mg/m3)

MPCB Standards 87.5 - - 150(for Power Plant) (3.5 ton/day)Design Values 90 (147 kg/hr) 70 (84 kg/hr) 0.024 (7.14 75

kg/hr)Bank Guidelinesfor Petrochemical 500 mg/Nm3 300 mg/Nm3 10 mg/Nm3 20Industry (1997)Actual in 97/98 18-27 34-56 - 40-90


20. Ambient Air Quality - The table below shows the range of main pollutants released during theperiod 1995-98 compared with CPCB standards, with the base line measured in 1986/87 as part of theEIA and with the levels measured before pre-commissioning and after commissioning. It shows that theactual ambient air largely meets the standards and that little has changed since measurements madebefore plant start-up.

S02 NOx CO PM(,g/rm3) (g/rm3) (pg/m3) (jig /m3)

CPCB Standards 120 120 5000 500Base Level (86/87) 4 4-14 - -

Pre-Commissioning level - Jan 91 6-8 8-17After Commissioning level - Apr 92 6 4-10 - -

Actual level for the period 1995/98 5-28 4-29 150-1800 70-100

21. Liquid Effluent - Main effluents streams at Nagothane include 150 m3 of process effluents, 150m3 of contaminated rain water, 110 m3 of sanitary effluent, 150 m3 of cooling towers blow down, andabout 3 m3 of spent caustic waste. Raw water from the Amba river and treated effluent levels for theperiod 1995-98 are compared in the table below to MPCB standards and to Bank guidelines. It shows thattreated effluents from IPCL's Nagothane complex meet in all respects not only all MPCB standards butalso the more demanding Bank guidelines. Furthermore, it shows that effluent rejected in the Amba riverhas better parameters than the raw water pumped from the same river.

Parameters MPCB Bank Raw EffluentStandards Guidelines Water 1995/98

1995/98pH 5.5-9 6-9 6-8.5 7-8.5BOD (ppm) 100 30 50-500 7-26COD (ppm) 250 150 200-1000 4-80TSS (ppm) 100 30 10-100 16-31Phenolic Com. (ppm) 5 0.5 nil nilSulfides (ppm 2 1 0.2-6 0-1Cyanides (ppm) 0.2 - - -

Oil and Grease (ppm) 10 10 5-20 0-2TDS (ppm) 2100 - 500-600 250-425Bio Essay (%) 90 - - 100

22. Since October 1990, the Amba river estuary and the areas surrounding IPCL's effluent disposalpoint, have been monitored by the National Institute of Oceanography. They concluded that the impact ofthe waste water discharge into the Amba river estuary has been negligible: the water and sediment qualitywere comparable to the baseline; the ecosystem remained healthy with moderate to high diversity; thefish catch and composition remained comparable to earlier studies; and the bio-essays on fish revealedthat the treated effluent was non-toxic.


(/) Safety Measures

23. In the design, construction and operation of the first phase of the complex IPCL took necessarymeasures, including Hazard and Operability study (HAZOP) and risk analysis, to avoid and eventuallydetect hazards early. Notwithstanding, a failure in the Outside Battery Limit (OSBL)area led to a seriousaccident1 in 1990 with a number of fatalities. Since this accident, IPCL has further reinforced its safetysystem and efforts and instituted many programs aimed at increased safety consciousness amongpersonnel.

24. A safety audit and risk analysis study agreed at appraisal, to assess the risks to the project areaand the surrounding community before commencement of production operation of the first phase of thecomplex. It was due by December 1990, and was being carried out by EIL, when it was disrupted by theaccident, and it remained limited to the inside battery limit of the complex. However, after the accident,the following studies were also carried out: (i) a detailed safety audit of the overall complex wascompleted by EIL in April 1991 which critically reviewed and identified areas of weakness requiringfurther study to improve safety; (ii) as part of the engineering activities for the rehabilitation of the OSBLfacilities, a Hazard and Operability Study for OSBL areas was completed by EIL in July 1991, addressingthe safety of the process system of the OSBL facilities and included a risk analysis to assess whether theOSBL facilities presented significant risks to other facilities2 ; (iii) an inspection of gas storage and offsites was completed in July 1991 by Technical Liaison Associates (of Texas); (iv) a report on safetysystems for the OSBL facilities was financed under the loan and completed by Cremer and Warner inMarch 1992; and (v) a HAZOP study was carried out for all process plants. Most of the recommendationsof these studies on design changes, operating procedures, and safety and preventive measures, wereincorporated in the design and operation of the complex and in the construction of the expansion project.,In addition, in July 1992 GOI completed a special review (by the so-called) Mashelkar Commission, ofthe actual causes, effects and remedial actions in relation to the accident. All critical recommendations ofthis audit were also implemented.

25. During implementation of the expansion projects a number of studies were also carried out andtheir recommendations incorporated. They include: (i) a disaster management plan for the plants and off-site cross-country pipelines, which was completed in October 1991, to address and respond to emergencyevents associated with the industrial operation in case of fire or explosion; (ii) Safety ConstructionAudits, which were completed in April 1996 by Entec (UK), to audit planning for the erection of theCracker and HDPE expansion projects; (iii) HAZOP studies for the cracker and HDPE expansions, whichwere completed, respectively, by Entec and Samsung (Korea) in January 1998, to examine the design,identify opportunities for improvements and potential sources of problems, as regards safety, operabilityand engineering. In addition, a risk analysis study is being completed by Entec and its final report isexpected by end October. Finally, the on-site Disaster Management Plan was being tested in mock drills.It is being revised and its second edition was expected by July 1998.

26. The Safety System - A separate "Safety Manual" defines the safety rules, regulations, proceduresand codes to be used in the Nagothane complex. The Nagothane safety system includes: (i) specificproduction unit safety committees, headed by plant managers; (ii) an Apex Safety Committee chaired bythe executive director, which meets quarterly; (iii) a program of external audits and periodic inspections;

' This accident is fully documented in the Environmental Impact Evaluation and Project Completion Report of theMaharashtra Petrochemical Project (Loan 2505 IN) and in Bank files.2 The HAZOP and Risk Analysis prepared by EIL were reviewed for comments by Cremer and V/amer in March1992.


(iii) training and awareness development programs; (iv) distribution and monitoring of safety equipment;(v) implementation of safety requirements of ISO 9000; (v) monitoring of the safety condition andrequirements of equipment and installation, including external pipelines; (vi) organization of quarterlymock drills for on-site emergency management plan; (vi) preparation of risk analysis and HAZOPstudies, by third parties for all expansion projects, and in house for modifications in existing plants; (vii) asystem of safety work permits; (viii) investigation and reporting of all accidents; and (ix) the granting ofsafety awards as incentives at plant and department levels to follow safety procedures.

27. The Nagothane safety system was found effective by the consultants which carried out the abovestudies. IPCL efforts have shown results: except in 1995, the severity rate of accidents - number of dayslost per million man-hours worked - has dropped from 663 in 1992 to 32 in 94, 46 in 1996 and 19 in1997. In 1995, it reached 837 due to a road accident. This result is more than satisfactory in operating apetrochemical plant where expansion works are taking place.

The Environmental and Safety Organization

28. At Nagothane environmental protection and safety activities are overseen by the Health, Safetyand Environment (HSE) Department, headed a Deputy General Manager, and reporting directly to theExecutive Director of the whole Nagothane complex. The environmental and Safety activities are theresponsibility of two separate divisions of the Department. The Department also has functional links withother divisions under other lines of management, which supply environmental data to HSE. Thesedivisions include the effluent treatment plant, the air monitoring stations, and the laboratory. Finally,Nagothane' s management has awarded a consultancy contract to National Productivity Council, to assistin the implementation of an Environmental Management System to seek certification in accordance with14001 norms. If implemented, this system will further improve environment and safety.

C - The Vadodara Complex

(a) The Project

29. In Vadodara, the Project included: (i) the construction of a new 75,000 tpy polypropylene plant;(ii) the rehabilitation of the existing butadiene extraction plant to allow an incremental production of15,500 tpy; and (iii) the construction of a new 30,000 tpy polybutadiene rubber plant. The construction ofa new 7,500 tpy engineering plastics unit, considered in the Staff Appraisal Report, was canceled duringproject implementation. As stated in the main report, commissioning of the above components took placein September 1996, and commercial production started before the end of January 1997. They areoperating at their design capacity. On 31 March 1998, these plants completed their first entire year ofproduction when they reached, respectively, a yearly production of 73%, 65% and 47% of their designcapacity. Production of butadiene and polybutadiene was limited by availability of butene. No landacquisition and no additional housing were needed for project implementation, and the additionalrequirements of power and water are being supplied by the existing systems.

(b) Project Location

30. The Vadodara complex is located north west of Vadodara city in the State of Gujarat, Waterresources are relatively abundant, and are already used by other industries. The area is one of the leadingindustrial areas in India, in terms of production and number of employees. The main industries in the areainclude petroleum refineries, petrochemical industries, fertilizer industries, and a large number of smalland medium scale down-stream industries that utilize feedstocks and raw materials produced by the large


complexes. The Mahi River, its effluent the Meni River and other three smaller rivers, discharge into thegulf of Cambay. There is also a large lake at about 24 kilometer from Vadodara. The region has beenseriously deforested (only about 9% of area remained covered) and remaining Wildlife is very scarce.

(b) The Environmental Impact Assessment

31. At GOI's and Bank's request, IPCL prepared a comprehensive EIA for the purpose of thisproject. Its preparation was completed in February 1990. In addition to assessing the impact of the projectcomponents, it provided a comprehensive description and assessment of the existing environmentalfacilities and systems in the Vadodara complex and base line data including: physical and biologicalconditions of the region; existing infrastructure in the area; ambient air quality at plant site; raw waterintake and waste water volumes and quality; and quality of water in the Vadodara joint venture effluentchannel and in the Cambay river; and existing noise levels.

32. Activities during construction were expected to have only some transitory impacts. Theexpansion projects, were expected to only have minor impacts, reducing the overall pollution load whenthe old polypropylene plant would be closed and the butadiene extraction plant would be modernized.The main environmental impacts of the overall complex, as indicated by the EIA, are in the followingareas: (i) emission of air pollutants; (ii) liquid effluent discharge; (iii) solid waste generation; (iv) landuse; (v) noise; and (iv) safety and pollution risks for the nearby population of Dahnora village where, atthe time of the environmental assessment, about 300 families were refusing to move to the new housingand infrastructure constructed and completed by IPCL three years ago. The EIA also concluded that themitigation measures to be implemented were effective and that IPCL met in all respects the GujaratPollution Control Board (GPCB) requirements. The existing mitigation measures included water, air,solid waste, noise and odor pollution management systems, safety systems, green belt development, andsocial development.

33. For the expansion proposed under the project, the EIA indicated that the proposed plantsexpansion would result in: (i) increased emissions of airborne pollutants from the additional plants; (ii)increased waste water discharge; and (iv) increased solid wastes . However, it also stated that: (a) theVadodara complex already includes a complete wastewater treatment system with enough capacity totreat the increased industrial and domestic effluents and meet GPCB's standards before they are rejectedin the effluent channel; (b) the air quality will remain well below GPCB's limits for sulfur dioxide (SO2 ),NOx, Hydrocarbons and particulate matter because the new units would be equipped with adequate airpollution control measures and connected to the existing flare system; (c) no significant noise impact wasexpected from the expansion and noise level would remain below the limit of 80 dB; and (d) solid wastecan be used in land fills or incinerated. In addition, MOEF required IPCL to return the spent catalyst tothe manufacturer.

Environmental Mitigation Measures

34. The main mitigation measures adopted include: emissions control, effluent control and treatment,solid waste management, noise and odor control, environmental monitoring system, environmentaltraining and development of environmental awareness, a reforestation program, and a social developmentprogram.

35. Process technologies and equipment installed in the various plants were selected to minimizefugitive and particulate matter emissions. The use of low sulfur natural gas (LSHS is used only in absenceof natural gas) and adequate stack height helps IPCL maintain its emissions and ambient air within


standards. In addition, hydrocarbon emissions from process plants are all connected to four flare systemswith a height ranging between 65 and 120 meters. With respect to the cyanide emissions from theacrylonitrile plant IPCL has installed a hot alkali digestor and a specially designed incinerator to reduceairborne cyanides. For cyanide level in the resulting waste water, it has been reduced from 15-20 ppm toabout 10 ppm, but remains higher than the 0.2 ppm current standard. IPCL's R&D department atVadodara has developed its own technology for cyanide biomass digestion and IPCL is in the process ofadopting this technology in its facilities and expects to meet the new standards.

36. To the extent possible, all measures were taken in the design of the plants to prevent leakage,minimize production of wastes, and separate streams of pollutants to allow their primary treatment insidebattery limit. After inside battery limit primary treatment, the resulting streams of industrial, storm anddomestic liquid effluents, are combined and treated in a liquid effluent central treatment system, whichincludes: an equalization tank, oil separators, chemical and biological effluent treatment, treated effluentclarification, extended aeration, and guard ponds, from which the treated effluent is discharged in theVadodara effluent channel after a final control. This 55 kilometer-long joint venture channel, gravitydischarges the effluents of some 13 companies in the estuary of the Mahi river, which in turn dischargesin the gulf of Cambay, its investment costs were shared among the participants, who also share operatingcosts. As expected at appraisal, the above effluent treatment facilities were further revamped in parallelwith project implementation to increase their capacity and improve their efficiency. They were designedaccording to international standards and, except for cyanide (para 36), comply with GPCB's effluentstandards.

37. Adequate design measures were taken to reduce noise to permissible levels. However, noise froma few machines remains somewhat high. Operators are provided with sound proof cabins and personalprotecting devices such as ear plugs. Also, the green belts planted around the plants and the entirecomplex help contain noise.

38. The Vadodara complex generates about 11,150 tpy of solid waste, of which 5,500 tpy are sold,1,670 tpy are incinerated, and about 4,000 tpy are disposed at a waste disposal site started when thecomplex was started. IPCL maintains a detailed record and labeling of all hazardous waste produced,treated, or sold to authorized contractors, as per GPCB's guidelines. To improve its hazardous solidmanagement and comply with regulations and conditions of the last operation authorization obtainedfrom GPCB, under the Hazardous Wastes Rules of 1989, IPCL has taken the following actions: (i) ahazardous waste multi-purpose incinerator was installed and has been operating since March 1998; (ii)development of a safe management and handling of solid waste system, including a scientificallydesigned hazardous solid waste landfill. To that effect 10 acres of land at Nandesari have been acquiredand a feasibility study (by Bhagwati Design Pvt Limited) has been completed. As of May 1998, IPCL hadalso engaged the National Productivity Council to prepare the design of this hazardous wastemanagement system. Finally, IPCL has initiated the scientific closure of the existing waste disposal site inconsultation with GPCB. For the new plants constructed under the project, IPCL included the obligationfor the licenser to retrieve and properly dispose of spent catalysts in the process contracts.

39. Vadodara has established a comprehensive environmental monitoring system, including:

- for water and liquid effluent: (i) raw water and liquid effluent monitoring at sources in each unit leveland after on-site primary treatment, to control efficiency of each unit; (ii) monitoring of water quality instorm drains; (iii) monitoring before and after the central treatment system and (iv) monitoring of finaleffluent before it is sent to the Vadodara channel.


- for air pollution monitoring: (i) monitoring of stack emissions; and (ii) continuous monitoring ofambient air, carried out by four remote sensing monitoring stations inside the premises, and one mobileautomatic analyzer station. In addition, GPCB's monitors stack emissions and ambient air qualityperiodically;

- periodic medical monitoring;

- yearly and monthly reporting of environment parameters, energy consumption and possible anomalies,to management and to official environmental agencies for consent renewal;

- environmental audits by GPCB's-approved external auditor are carried out every four months, as perhigh court order to all industries in the State. The last audit was carried out in May 1998.

40. Since the beginning of operations at Vadodara complex, IPCL has developed a green belt aroundthe complex and the township as a buffer zone for air and noise pollution. More than 200,000 trees wereplanted. Also, a homogenous forest of eucalyptus was established on about 50 acres near the complex,and treated waste water is successfully used for its irrigation. Finally, since 1985, IPCL created a "LivingMuseum of Trees" on 32 hectares, where some 70,000 trees of 70 species of the region were planted.

41. For the outstanding resettlement issue of about 300 families from the nearby Danhora village, nofurther progress has been made primarily as a result of disagreement over whether or not all youths fromthe Danhora village should be employed at IPCL. The 163 dwelling units and associated infrastructure setup in 1984 have been deteriorating for lack of use, and are in need of additional investment. The numberof families had grown to about 300 by 1990.

(e) Environmental Monitoring Results

42. Airborne Emissions - The complex meets the pollution effluent standards as it is shown in thetable below. They also meet Bank guidelines for the petrochemical industry.

S0 2 NOx HC PM(ppm) (ppm) (ppm) (mg/m3)

GPCB Standards 50 25- for Power Plant 100 250- for Process 50 125Bank Guidelines forPetrochemical 500 mg/Nm3 300 mg/Nm3 10 mg/Nm3 20Industry (1997)Actual in 1990 EIA- for Power Plant 0.3-5 0.5-15 n.a 4-17- for Process 3-43 0.01-16 - 23-81

Expected afterexpansion at <100 <50 <25 <250AppraisalActual for 97/98

43. Ambient Air Quality - The table below shows the range of the main pollutants during the period1988/89, compared with GPCB's standards for ambient air agreed, It shows that ambient air largely


meets the standards.

S02 NOx Hydrocarbon PM(JLg/m3) (pg/rm3) (Lg/m3) (pg/m3 )

GPCB Standards prescribed withinthe Vadodara complex 80 80 160 200Actual for 1988/89 in 1990 EIA <67 (ave. 3) <64 (ave. 8) n.a <346 (ave. 170)Actual for 1997/98

44. Liquid Effluents - Actual main pollutant levels in treated effluents, are compared to GPCBstandards and to Bank guidelines in the table below. It shows that treated effluents from the complexcentral waste water treatment system meet not only all GPCB standards, but also the more demandingBank guidelines. Furthermore, it shows that a substantial improvement took place since the 1990environmental impact assessment as a result of the revamping which took place in parallel with projectimplementation (as expected at appraisal).

Parameters GPCB Bank Effluent in EffluentStandards Guidelines 1990 EIA As per IPCL

pH 6.5-8.5 6-9 7-8.6 7.5-8.0BOD (ppm) 50 30 20-30 <15COD (ppm) 250 150 70-90 <55TSS (ppm) 100 30 40 <15Phenolic Com. (ppm) 1 0.5Sulfides (ppm 2 1 0.6-2.6Cyanides (ppm) 0.2 0.06Fluorides (ppm) 1.5 1.6-5.5 0.7Oil and Grease (ppm) 10 10TDS (ppm) 2100Bio Essay( %) May 1998 audit

indicates that resultsare satisfactory .

45. Noise Level - Overall noise levels within the complex area, as indicated in the May 1998 externalenvironmental audit, are between 55 and 85 dB, in line with OSHA recommendations.

(/) The Safety Measures

46. Since start of operations of the complex, strong safety and emergency systems were establishedby IPCL to minimize risks of accidents. As already commented in para 23, since the 1990 accident inNagothane, IPCL has further reinforced also in Vadodara, its safety system and efforts and institutedmany programs aimed at increased safety consciousness among personnel.

47. The detailed safety audit, which, as agreed at appraisal, was to be carried out before 30September 1990, to assess risks to the project area and the surrounding community, was delayed. In May1994, the Bank considered that the risk assessment and hazard evaluation prepared by CISR and Cramerrespectively, which had been sent to the Bank, were predated to the Loan Agreement and were not incompliance with it. In August 1995, an overall health and safety audit was performed by the BritishSafety Council (BSC) for the entire complex and extended to each new plant. Furthermore, detailed


HAZOP studies were carried out and Disaster Management plans were developed. At BSCrecommendation after the audit, IPCL was given a "five star rating".

48. During implementation of the projects, a number of studies were also carried out and theirrecommendations incorporated. They included: (i) a HAZOP study for the polypropylene plant,completed by Technimont India Limited in March 1994; (ii) a HAZOP study for the Butadiene Extractionplant revamping, completed by IPCL's central safety department in December 1993; and (iii) a HAZOPstudy for the polybutadiene plant, completed by Toyo Engineering Company in May 1995. Therecommendations of the HAZOP studies were reviewed by the respective process licensers andincorporated in the plant designs, and the new plants were incorporated in the existing emergency plan.Finally, a Quantitative Risk Assessment (QRA) was completed by KLG-TNO Ltd. in November 1997 forthe overall complex, including the new plants.

49. The Safety System - As already commented, IPCL has a documented and published Safety Policy.As part of this policy, the Vadodara safety system includes: (i) specific production units safetycommittees, headed by plant managers and meeting every two months; (ii) an Apex Safety Committeechaired by the General Manager Operation, which includes representatives from trade unions, and whichmeets quarterly; (iii) a program of safety audits and periodic inspections; (iv) in house and externaltraining and awareness development programs for all level of personnel, including senior managers; (v)distribution and monitoring of safety equipment; (vi) a safety library including safety films; (vii)monitoring of the safety conditions and requirements of equipment and installation, and their compliancewith regulations; (viii) preparation of risk analysis and HAZOP studies; (ix) safety rules and procedures,including a system of safety work permits; (x) investigation, reporting, and recording of all accidents; and(xi) safety awards as incentive to follow safety procedures at plant and department levels.

(g) The Environmental and Safety Organization

50. At Vadodara, environmental protection and safety activities are the responsibility of two separatedivisions, which are headed respectively by the Environment and Ecology Senior Manager and the SafetyChief Manager. They both report directly to the General Manager, Operation, who in turn reports directlyto the Operation Director of the whole Vadodara complex. The Environment and Safety divisions alsohave functional links with other divisions under other lines of management, which supply environmentaland safety data to them.


Annex 4: Cost-Benefit Analysis

Major Assumptions for Sub-project Financial Cost Estimates

A - New Polypropylene Plant at Vadodara

Design Capacity

* As per SAR: 60,000 tpy* Actual: 75,000 tpy spheripol grade polypropylene

Process Licenser: Improved Himont spheripol technology from TCM/Montell.

Key Project Dates

* Detailed engineering and project support contract with Technimont India signed: mid-1992* Commissioning: September 1996* Commercial Production: January 1997

Historical Productions and Projections

Indian Fiscal Year tj Comments

1996/97 2,900 Start-up1997/98 55,000 First full year1998/99 65,000 86.6%1999/00 70,000 93%2000/01 and after 75,000 100%

Investment Costss (Current Rs.)

Million Rs.

Equipment and Materials 910.9

Civil Works 167.9

Erection, Insulation and Painting 79.0

License Fees and Basic Engineering 375.1

Detailed Engineering and Services 41.6

Pre-operating Expenses 161.5

Total Installed Cost 1736.0

Phasing of Investments (Million Current Rs.)

91/92 92/93 93/94 94/95 95/96 96/97 total

114.0 154.2 68.0 238.5 720.7 440.6 1736.0


Annual Financial Operating Costs at 100% Capacity (75,000 tpy)

Requirement Price Costper ton Annual Rs./ton (Million Rs.)

Variable Costs

Propylene (ton) 1.02 76,500 17,558.0 1250.1Catalyst, Chemicals, Packing 326.4Power, Fuel and Utilities 656.2

Total Variable Costs 1641.7

Fixed Costs

Salaries and Benefits 26.4Maintenance 15.8Overheads 85.7

Total Fixed Costs 127.9

Total Operating Costs 1769.6

Incremental Working Capital

Propylene (300 tons) 5.3Catalyst and Chemicals (6 months) 163.2Work in Progress (7 days @ Variable Cost) 49.4Finished Goods (7 days @ Production Cost) 42 9

Total Working Capital 251.1

B - Rehabilitation of Existing Butadiene Extraction at Vadorada

Design Capacity

* As per SAR: rehabilitation of the existing butadiene extraction plant

* Actual: capacity increase of existing butadiene plant by 15,500 tpy to a total capacity of37,760 tpy

Process Licenser: BASF/LUMMUS

Key Project Dates

* Detailed engineering and project support contract with International Development andEngineering Associate Ltd. (IDEA) signed early in April 1992


* Commissioning: September 1996* Commercial Production: November 1996


Indian Fiscal Year Plant (tpy) Incremental Production Comments(tpy)

1996/97 6,300 Start-up1997/98 24,000 8,000 First full year - before expansion,

plant production was between17,000 tpy and 20,000 tpy

1998/99 30,000 14,000 90%1999/00 33,000 15,000 95%2000/01 and after 35,000 15,500 100%

Investment Costss (Current Rs.)Million

Rs.


Civil Works 13.6Erection, Insulation and Painting 71.6




Total Cost 416.9


91/92 92/93 93/94 94/95 95/96 96/97

12.4 30.6 63.9 79.3 124.4 106.3


IncrementalAnnual Financial Operating Costs at 100% Capacity (15,500 tpy)


Variable Costs

C4 Fractions 1.07 16585 4,910 81.4Catalyst, Chemicals, Packing 1.7Power, Fuel and Utilities 26.6


Fixed Costs



Total Incremental Operating Costs 141.0

Incremental Working CapitalUS$ Million

C4 fractions (1 month) 6.8Catalyst and Chemicals (6 months) 0.9Work in Progress (7 days @ Variable Cost) 2.3Finished Goods (7 days @ Production Cost) 3.0


C - New Polybutadiene Rubber Plant at Vadorada

Design Capacity

* As per SAR: expansion of IPCL's existing Polybutadiene complex from 20,000 tpy to 50,000tpy, using increased production of butadiene through the above rehabilitation of the existingbutadiene plant financed under the project and Nagothane complex production.

* Actual: 30,000 tpy new plant

Process Licenser: Japan Syntectic Rubber.


Key Project Dates

* Detailed engineering and project support contract with Toyo Engineering India Ltd. (TEIL)signed by mid-1992

* Commissioning: September 1996* Commercial Production: January 1997


Indian Fiscal Year tpy Comments

1996/97 2,100 Start-up1997/98 14,000 First full year, production was limited by

availability of butadiene.1998/99 25,000 83% IPCL intends to import butadiene.1999/00 28,500 95%2000/01 and after 30,000 100%

Investment costs (Current Rs.)

Million Rs.


Civil Works 154.1

Erection, Insulation and Painting 74.3




Total Installed Cost 1401.6


91/92 92/93 93/94 94/95 95/96 96/97

34.6 42.7 42.9 253.1 667.8 360.5


Annual Financial Operating Costs at 100% Capacity (30,000 tpy)

Requirement Price Costper ton Annual (tpy) Rs./ton (Million Rs.)

Variable Costs

Butadiene (MT) 1.02 30,600 14,890 455.6Catalyst, Chemicals, Packing 196.1Power, Fuel and Utilities 146.6


Fixed Costs





Butadiene (320 tons) 9.3Catalyst and Chemicals (6 months) 98.1Work in Progress (7 days @ Variable Cost) 28.2Finished Goods (7 days @ Production Cost) 30.8


C - Ethylene Cracker Expansion at Nagothane

Design Capacity

* As per SAR: expansion of IPCL's existing Ethylene cracker from 300,000 to 400,000 tpy* Actual: 100,000 tpy increase up to 400,000 tpy ethylene Production

Process Licenser: License provided in .the earlier agreement with Stone and Webster (USA) for theconstruction of the cracker. The detailed engineering and project support for the expansion were handledby Engineers India Ltd (EIL) who did the detailed engineering of the first phase of the cracker.

Key Project Dates

* Project implementation activities only started after decisions were taken in July 1995 on theuse of the additional ethylene, to be obtained through the expansion, for the manufacture of


HDPE in the existing plant after its debottlenecking and upgrading to a newly developedtechnology (pentane based process).

* as of 31 March 1998, the loan closing date, the expansion erection works were essentiallycompleted and pre-commissioning activities started.

* the tie-in with the main plant was to take place during the 45 days shut down scheduled tostart at the end of April 1998.

* Commissioning: expected by end of June 1998* Commercial Production: July 1998


Indian Fiscal Year Total Production Incremental Comments(tpy) Production (tpy)

Ethylene Propylene Ethylene Propylene

* Initial Capacities. 300,000 63,000 (a) (a) could produce up to80,000 tpy propylene if

* Capacities post 400,000 78,250 100,000 15,250 FCC C3 is added as feedExpansion stock

* Actual Production1997/98 331,775 68,3171998/99 320,000 66,050 20,000 3,050 New furnace at 60%

starting July 1998. Takeinto account plant shutdown for tight-in.

1999/00 380,000 75,00 80,000 12,200 expansion at 80%2000/01 and after 400,000 78,250 100,000 15,250 expansion at 100%

Main By-Products

* C4 fractions: 4.660 tpy* Pyrolysis gasoline: 4,625 tpy* Raw fuel: 700 tpy* Tail gas: 24,340 tpy


Investment Costss Excluding N2102 and Phasing (Millioh of Current Rs.)

Total 94/95 95/96 96/97 97/98 98/99

Equipment and Materials 417.5 0.0 0.0 46.6 370.9 0.0Civil Works 1.9 0.0 0.0 1.6 0.3 0.0Erection, Insulation and 64.8 0.0 0.0 15.3 49.5 0.0PaintingLicense Fees and Basic 13.6 0.0 4.6 4.2 4.8 0.0EngineeringDetailed Engineering and 47.2 0.0 1.4 22.8 22.9 0.0ServicesPre-operating Expenses 6.5 0.0 0.0 1.0 5.4 0.0Other Costs1 93.6 0.0 0.0 0.0 0.0 93.6

Total Cost 645.1 0.0 6.1 91.5 453.9 93.6

Incremental Annual Financial Operating Costs at 100% Capacity (100,000 Ipy of ethylene and 15,250tpy of propylene)


Variable CostsC2 /C3 1.47 147000 4075 599.0Catalyst, Chemicals 18.2Power, Fuel and Utilities 356.0Selling Expenses


Fixed CostsSalaries and Benefits 5.3Maintenance 15.8




Catalyst and Chemicals (6 months) 9.1

Work in Progress (7 days @ Variable Cost) 20.6

Finished Goods (7 days @ Production Cost) 21.2


Include 72.4 million rupees remaining to be paid


E - LLDPE/H1DPE Expansion at Nagothane

Design Capacity

I As per SAR: expansion of the LLDPE/HDPE plant (consisting of two 80,000 tpy LLDPE or55,000 tpy HDPE swing trains), to include a new 75,000 tpy broad range molecular weightHDPE train, using ethylene from the proposed 100,000 tpy expansion of the cracker.

* Actual: capacity expansion of the existing LLDPE/HDPE plant from 160,000 tpy to 220,000tpy. The incremental 60,000 tpy of broad range molecular weight HDPE will be obtainedthrough the debottlenecking and upgrading of one of the existing two trains using a newlycommercially available technology (pentane based process), resulting in substantial savingsin capital and operating costs.

Process Licenser: B.P. Chemicals of England, the process licenser of the technology, also licensed theoriginal units. The revamping was implemented by Samsung of South Korea under an Engineering,Procurement and Construction contract (EPC).

Key Project Dates

* Project activities only started after decisions were taken in July 1995, on the use of theadditional ethylene for the manufacture of HDPE in the existing plant after itsdebottlenecking.

- Agreement with BP signed on 2 November 1995 and was effective on 11 January 1996.* EPC contract signed and effective on 1 February 1997 and contractual completion date for

works is 31 May 1998.* as of 31 March 1998, the loan closing date, the expansion activities were about 91%

completed (overall progress).* the tie-in with the main plant is expected to take place during the 45 days shut down

scheduled to start at the end of April 1998.* Commissioning: expected by end of June 1998* Commercial Production: July 1998



Indian Fiscal Year Total Production Incremental Production Comments(tpy) (tpy)

HDPE LLDPE Total HDPE* Initial Capacities. 55,000 per 80,000 160,000 (a) can produce up to 80,000 tpy

(tpy) train per train propylene if FCC C3 is added asfeedstock

* Capacities post 220,000 60,000Expansion

* Actual andProjected

1995/96 58,492 49,092 107,5841996/97 78,773 51,742 130,515

1997/98 94,468 44,212 138,6801998/99 27,000 9 months at 60%

1999/00 48,000 expansion at 80%

1999/00 54,000 expansion at 90%

2000/01 57,000 expansion at 95%2001/02 and after 60,000 expansion at 100%

Investment Costss (Million of Current Rs.)

Million 94/95 95/96 96/97 97/98 98/99Rs.

Equipment and Materials 511.4 21.2 490.2Civil Works 35.1 35.1Erection, Insulation andPaintingLicense Fees and Basic 262.3 231.1 30.0 1.2 0.0EngineeringDetailed Engineering and 131.8 7.5 14.1 110.3ServicesPre-operating Expenses 33.4 0.9 3.5 29.0Other Costs 25.7 1.1 5.0 19.6

Total Cost 1500.2 239.4 69.9 670.7 520.2


IncrementalAnnual Financial Operating Costs at 100% Capacity (60,000 tpy)

Requirement Cost Cost Costper ton Annual Rs./ton Rs./ton HDPE (Million Rs.)

Variable Costs

Ethylene 1.028 61,680 8,020.0 494.67Butene -1 and Hydrogen 20.0 1.2Catalyst, Chemicals 1361.0 81.7Power, Fuel and Utilities 719.0 43.1Packing Materials 279.0 16.7


Fixed Costs

Incremental Salaries andBenefitsIncremental Maintenance (3% of additionalEquipment and materials costs) 15.3

Incremental Overheads




Raw Materials 0.0

Catalyst and Chemicals (6 months) 40.8

Work in Progress (7 days @ Variable Cost) 27.4

Finished Goods (7 days @ Production Cost) 27.7

Incremental Working Capital 95.9


Major Assumptions

India Inflation Rate-- Wholesale Price Index- Fiscal Years (March-March)

1981-82=100 1988189=100 1997-98=100

1988-89 154.3 100.0 46.41989-90 165.7 107.4 49.81990-91 182.7 118.4 54.91991-92 207.8 134.7 62.51992-93 228.7 148.2 68.81993-94 247.8 160.6 74.51994-95 274.7 178.0 82.61995-96 294.8 191.1 88.71996-97 314.3 203.7 94.51997-98 332.5 215.5 100.0

Exchange Rate(Rupees/US$) 91-92 92-93 93-94 94-95 95-96 96-97 97-98

Exchange Rate 22.7 25.9 30.5 31.4 32.4 35.4 37.297=100 61.0 69.6 82.0 84.4 87.1 95.2 100.0

Inflation-97/98=100 62.5 68.8 74.5 82.6 88.7 94.5 100.0

Source: 91-92 to 1995-96:1ndia- Sustaining Rapid Economic Growth-199796-97 and 97-98: computed from rates in E. Lim's Memo dated December 9,1997


Major Assumptions - Financial and Economic Price of C2 /C3

1997(A) 1998 1999 2000 2005 2010Financial Price

International Basket of Fuel Oils 1/:Current US$/MT 100.7 94.7 93.2 91.6 101.4 109.8International Inflation Index 2/ 100.0 102.4 105.6 108.9 124.0 127.3Constant 1997 US$/MT 100.7 92.4 88.3 84.1 81.8 86.2Constant 1997 Rupees 3/

Exchange Rate 37.2 37.2 37.2 37.2 37.2 37.2Rs/MT 3,746 3,437 3,283 3,129 3,043 3,207

Landfall Price of C2/C3:Percent of Fuel Oil Bskt 4/ 0.55 0.65 0.75 0.85 1.00 1.00Rs/MT of C2 /C3 2,060 2,234 2,462 2,659 3,043 3,207

Separation Costs (Rs/MT) 1,350 1,350 1,350 1,350 1,350 1,350Total before taxes and royalties 3,410 3,584 3,812 4,009 4,393 4,557

Actual 3,300

Royalties andNon-recoverable sales taxes 5/ 454 491 522 549 602 624

Total with taxes 3,754 4,075 4,334 4,559 4,995 5,181

Economic Price

Fuel Oil FOB Singapore (US$/MT)) 6/ 91 83 80 76 74 78Fuel Oil Landed Bombai (US$/MT) 101 93 90 86 84 88Exchange Rate 37 37 37 37 37 37Fuel Oil Landed Bombai (Rs/MT) 3,757 3,478 3,337 3,199 3,121 3,270C2/C3 (Rs/MT) 7/ 4,338 4,016 3,854 3,693 3,603 3,775Separation Cost (Rs/MT) 1,350 1,350 1,350 1,350 1,350 1,350

C21C3 price to IPCL 8/ 5,688 5,366 5,204 5,043 4,953 5,125

1/ Starting 1997/98, the landfall price of natural gas is established as a percentage of the international priceof a basket of high and low sulfur fuel oils: HSFO FOB Singapore; HSFO FOB Arab Gulf;LSFO FOB

Mediterranean; LSFO CIF NEW Basis ARA. Prices beyond 1997 based on Bank projections of crude oil prices (Nov 1997).

2/ MUV Index as projected by World Bank.

3/ Real Exchange rate assumed to remain constant.4/ Declared policy is to reach 75% on year 1999, and re-assess in year 2000 time-period for reaching 100%.

5/ Equivalent to 13.7% of basic price in 1996/97

6/ In constant 1997 terms, assuming trends projected by the Bank for international crude oil prices.

71 Assuming the following calorific values: Fuel Oil: 9,700 kcal /MT; C2C3: 11,200 kcaVMT).

8/ Exclusive of all taxes and royalties

Cost-Benefit Analysis: Major Assumptions - Economic and Financial Prices of Project Output

Linear Low density Polyethylene (LLDPE)

I Actual | Projected lEconomic Price |CY1993 CY1994 CY1995 CY1996 CY1997 Mar-98|verage|CY1998 CY1999 CY2000 CY2001 CY2002 CY2003 CY2004+1

93-97Intemational Price, C&F S.E. Asia (US$/MT) 580 674 886 795 770 630 741Intemational Price Index, 1997=100 98.7 97.8 110.7 105.8 100.0 102.0 100 100 100Int'l Price (Constant 1997 US$1MT) 588 689 800 751 770 618 720 630 700 738 738 738 738 738Insurance, 0.25%ofC&Fprice 1 2 2 2 2 2 2 2 2 2 2 2 2 2Port Charges and Landing Costs (US$ /MT) 35 35 35 35 35 35 35 35 35 35 35 35 35 35Ex-port Storage 1/Economic Price, Plant Gate (US$/MT) 624 726 837 788 807 654 756 667 737 775 775 775 775 775Exchange Rate 37.2 37.2 37.2 37.2 37.2 37.2 37.2 37.2Economic Price, Plant Gate (Rs/MT) 28,141 24,812 27,416 28,830 28,830 28,830 28,830 28,830

Actual I Projected CFinancial Price FY1994 FY1995 FY1996 FY1997 FY1998 Mar-98AverageiFY1999 FY2000 FY2001 FY2002 FY2003 FY2003 FY2004+ oo

93-97Average Realization Price 21 of IPCL (Rs/MT) 21,518 34,287 40,137 38,232Equalized Freight Charges 1,250 1,250 1,250 1,250Plant Gate Price (RsIMT) 20,268 33,037 38,887 36,982Exchange Rate 30.5 31.4 32.4 35.4 37.2 39.0Plant Gate Price (Current US$IMT) 665 1,052 1,200 1,045 990Plant Gate Price (Constant US$1MT) 673 1,076 1,084 987 955 938 982 996 960 923 886 849Percent above Economic Plant Gate 8% 48% 29% 25% 26% >

Import Duties 65% 65% 40% 30% 35% 47% 43% 35% 30% 25% 20% 15% 10% X

1/ Importers storage cost near port before delivery. Based on two month storage (equivalent to 1.5 shipment), excluding financial charges on inventory. x

2/ Net-back price to IPCL, delivered to distribution points, after discounts and excluding excise taxes. Price is for Fiscal Year March to March aand is assumed to represent prices of previous year (e.g: FY 97 price=1996 calendar year price) >

3/ Projected financial prices assume that price will set at economic price plus import duties, and that import duties 0

will steadily decline to 10% by year 2004.


High Density Polyethylene (HDPE)

Actual Projected

Economic Price CY1993 CY1994 CY1995 CY1996 CY1997 Mar-98 verage CY1998 CY1999 CY2000 CY2001 CY2002 CY2003 CY2004+93-97

International Price, C&F S.E. Asia (US$/MT) 517 694 693 795 768 660 693

Intemational Price Index, 1997=100 98.7 97.8 110.7 105.8 100.0 102.0Int'l Price (Constant 1997 US$IMT) 510 679 767 841 768 673 713 670 680 713 713 713 713 713

Insurance, 0.25% of C&F prce 1 2 2 2 2 2 2 2 2 2 2 2 2 2

Port Charges (US$IMT) 35 35 35 35 35 35 35 35 35 35 35 35 35 35

Other Landing Costs (US$/MT) 15 15 15 15 15 15 15 15 15 15 15 15 15 15

Economic Price, Plant Gate (US$IMT) 562 730 819 893 820 725 765 722 732 765 765 765 765 765

Exchange Rate 37.2 37.2 37.2 37.2 37.2 37.2 37.2 37.2

Economic Price, Plant Gate (Rs/MT) 28,451 26,853 27,226 28,453 28,452 28,451 28,452 28,452

Actual Projected

Financial Price 3 FY1994 FY1995 FY1996 FY1997 FY1998 Mar-98 Average|FY1999 FY2000|FY200I|FY2002 FY2003 FY2004 FY2005+194-97

Average Realization Price 2/ of IPCL (Rs/MT) 25,240 33,991 36,792 37,180Equalized Freight Charges 1,250 1,250 1,250 1,250Plant Gate Price (Rs/MT) 23,990 32,741 35,542 35,930Exchange Rate 30.5 31.4 32.4 35.4 36.3 39.0Plant Gate Price (Current US$IMT) 787 1,043 1,097 1,015 985Plant Gate Price (Constant US$IMT) 776 1,020 1,214 1,074 1,021 995 955 964 928 892 857 821

Constant 97 Rupees/MT 39,947 37,984 37,012 35,521 35,852 34,524 33,198 31,872 30,546

Percent above Economic Plant Gate 38% 40% 48% 20% 34% X

Import Duties 65% 65% 40% 30% 35% 43% 35% 30% 25% 20% 15% 10%

OQ

1/1Importers storage cost near port before delivery. Based on two month storage (equivalent to 1.5 shipment), exduding financial charges on inventory.

2/ Net-back price to IPCL, delivered to distribution points, after discounts and excluding excise taxes. Price is for Fiscal Year March to March Ln

and is assumed to represent prices of previous year (e.g: FY 97 price= 1996 calendar year price) 0

31 Projected financial prices assume that price will set at economic price plus import duties, and that import duties

will steadily dedine to 10% by year 2004.


Polypropylene (PP)

Actual | Projected

Economic Price CY1993 CY1994 CY1995 CY1996 CY1997 Mar-98 verageJCY1998 CY1999 CY2000 CY2001 CY2002 CY2003 CY2004+

93-97

International Price, C&F S.E. Asia (US$/MT) 620 767 976 812 714 530 778

International Price Index, 1997=100 98.7 97.8 110.7 105.8 100.0 102.0

Int'l Price (Constant 1997 US$/MT) 628 784 882 767 714 520 755 530 643 755 755 755 755 755

Insurance, 0.25%ofC&Fprice 2 2 2 2 2 1 2 2 2 2 2 2 2 2

Port Charges and Landing Costs (US$ /IMT) 35 35 35 35 35 35 35 35 35 35 35 35 35 35

Importers Ex-port Storage I/ 15 15 15 15 15 15 15 15 15 15 15 15 15 15

Economic Price, Plant Gate (US$/MT) 680 836 934 819 766 571 807 582 694 807 807 807 807 807

Exchange Rate 37.2 37.2 37.2 37.2 37.2 37.2 37.2 37.2 37.2


| Actual I Projected

Financial Price 3/ FY1994 FY1995 FY1996 FY1997 FY1998 Mar-98Average|FY1999 FY9 20 FY220I|FY2002 FY2003 FY2003 FY2004+

94-97

Average Realization Price 2/ of IPCL (Rs/MT) 28,892 41,016 43,316 39,146

Equalized Freight Charges 1,250 1,250 1,250 1,250

Plant Gate Price (Rs/MT) 27,642 39,766 42,066 37,896

Exchange Rate 30.5 31.4 32.4 35.4 37.2 37.2 37.2 37.2 37.2 37.2 37.2 37.2

Plant-gate price (Current US$/MT) 906 1,266 1,298 1,071 1,135

Plant-gate price (Constant US$/MT) 895 1,239 1,437 1,012 1,001 1,146 795 904 1,018 980 943 905 867

Plant-gate price (Contant 97-98 Rupees) 33,276 46,075 53,466 37,640 37,225 29,564 33,635 37,878 36,473 35,068 33,666 32,262 >

Percent above Economic Plant Gate 32% 48% 54% 23% 42%

Import Duties 75% 65% 40% 30% 35% 53% 43% 35% 30% 25% 20% 15% 10% X

1/ Importers storage cost near port before delivery. Based on two month storage (equivalent to 1.5 shipment), excluding financial charges on inventory.

2/ Net-back price to IPCL, delivered to distribution points, after discounts and exduding excise taxes. Price is for Fiscal Year March to March

and is assumed to represent prices of previous year (e.g: FY 97 price=1996 calendar year price) a'3/ Projected financial prices assume that price will set at economic price plus import duties, and that import duties 0



Polybutadiene Rubber (PBR)

Actual | Projected

Economic Price |CY1993 CY1994 CY1995 CY1996 CY1997 Mar-98[AveragetCY1998 CY1999 CY2000 CY2001 CY2002 CY2003 CY2004+

95-97

Intemational Price, CIF India (US$/MT) 1,300 1,000 850 740 1,050

Intemational Price Index, 1997=100 98.7 97.8 110.7 105.8 100.0 102.0

Intl Price (Constant 1997 US$/MT) 1,174 945 850 725 990 740 880 990 990 990 990 990

Insurance, 0.25% of C&F price 3 2 2 2 2 2 2 2 2 2 2 2

Port Charges and Landing Costs (US$ /MT) 35 35 35 35 35 35 35 35 35 35 35 35

Ex-port Importer's Storage Cost 15 15 15 15 15 15 15 15 15 15 15 15

Economic Price, Plant Gate (US$/MT) 1,227 998 902 777 1,041 792 932 1,042 1,042 1,042 1,042 1,042

Exchange Rate 37.2 37.2 37.2 37.2 37.2 37.2 37.2 37.2 37.2


Actual Projected

Financial Pice 3/ FY1994 FY1995 FY1996 FY1997 FY1998 Mar-98Average FY1999 FY2000|FY2001IFY2002 FY2003 FY2003 FY2004+

94-98

Average Realization Price 2/of IPCL (Rs/MT) 41,181 40,911 60,924 60,922 45,000 43,000 49,788

Equalized Freight Charges 1,250 1,250 1,250 1,250 1,250 1,250 1,250

Plant Gate Price (Rs/MT) 39,931 39,661 59,674 59,672 43,750 41,750 48,538

Exchange Rate 30.5 31.4 32.4 35.4 36.3 39.0

Plant Gate Price (Current US$/MT) 1,309 1,263 1,842 1,686 1,205 1,071 1,461

Plant Gate Price (Constant US$/MT) 1,326 1,292 1,664 1,593 1,205 1,050 1,416 1,169 1,313 1,423 1,324 1,225 1,175 1,126

Constant Rupees/MT 52,677 43,487 48,847 52,934 49,249 45,564 43,723 41,884

Percent above Economic Plant Gate 36% 60% 34% 35% 36% X

Import Duties 85% 65% 40% 50% 45% 45% 66% 53% 45% 40% 30% 20% 15% 10%

1/ Importer's storage cost near port before delivery. Based on two month storage (equivalent to 1.5 shipment), excluding financial charges on inventory.

2/ Net-back price to IPCL, delivered to distribution points, after discounts and excluding excise taxes. Price is for Fiscal Year March to March 9

and is assumed to represent prices of previous year (e.g: FY 97 price=1996 calendar year price) 0

3/ Projected financial prices assume that price will set at economic price plus import duties, and that import duties


Nagothane Gas Cracker Expansion - Financial Rate of Return (In constant 1997-98 Rupees)

Unt Rate 1992-93 1993-94 1994-95 1996-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2012-2013

Price Index, 1997-98=100 68.8 74.5 82.6 88.7 94.5 100 107

Capacity Utilization 20.0% 80.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Production-Ethylene (tons) 20000 80000 100000 100000 100000 100000 100000 100000

of which: for HDPE plant 27756 49344 55512 58596 61680 61680 61680 61680

Merchant ethylene 30656 44488 41404 38320 38320 38320 38320

-Propylene (tons) 3050 12200 13725 15250 15250 15250 15250 15250

-By-products04 Fraclions 746 3728 4660 4660 4660 4660 4660 46860

Pyrolysis gasoline 740 3700 4625 4625 4625 4625 4625 4625

Raw fuel 112 560 700 700 700 700 700 700

Tail gas 3894 19472 24340 24340 24340 24340 24340 24340

Invshtent CostsIn Cunrent Rupees (Milion) 6.1 91.5 453.9 93.6In 1997-98 Rupees (Million) 6.9 96.8 453.9 87.5

Incremental Worddng CapitalIn Current Rupees (Million) 50.8 -50.8

In 1997-98 Rupees (Million) 47.5 -47.5

Incremental Operatng Costs021C3 1.47

Rs./MT, Constant 97 temrs 3,754 3,754 4,075 4,334 4,559 4,646 4,733 4,821 4,908 5,181

Total Cost, Rupees (Million) 119.81 509.68 670.17 682.99 695.81 708.63 721.45 761.61

Catalysts, Chemicals & Packing 3.64 14.56 18.20 18.20 18.20 18.20 18.20 18.20

Power, Fuel & Utilities 71.20 284.80 356.00 356.00 356.00 356.00 356.00 356.00

Selling Expenses 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Subtotal Variable Costs 194.65 809.04 1,044.37 1,057.19 1,070.01 1,082.83 1,095.65 1,135.81

Salaries and Benefits 5.30 5.30 5.30 5.30 5.30 5.30 5.30 5.30

Maintenance 15.82 15.82 15.82 15.82 15.82 15.82 15.82 15.82 x

Overhead 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Subtotal Fixed Costs (Incremental) 21.12 21.12 21.12 21.12 21.12 21.12 21.12 21.12

Total Incremental Operating Costs 215.77 830.16 1,065.49 1,078.31 1,091.13 1,103.95 1,116.77 1,156.930

0

W.

Nagothane Gas Cracker Expansion - Financial Rate of Return (In constant 1997-98 Rupees)

Unit Rate 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2012-2013Incremental Revenues

Ethylene for HDPE PlantPrice, Constant 97-98 Rs./ton 8,020 8,020 8,020 8,020 8,020 8,020 8,020 8,020Sub-total Revenues - Ethylene 222.60 395.74 445.21 469.94 494.67 494.67 494.67 494.67

Merchant EthylenePrice, Constant 97-98 Rs./ton 22,000 22,000 22,000 22,000 22,000 22,000 22,000 22,000Sub-total Revenues - Ethylene 0.00 674.43 978.74 910.89 843.04 843.04 843.04 843.04

PropylenePrice, Constant 97-98 Rs./ton 2/ 16,241 17,540 17,614 17,614 17,614 17,614 17,614 17,614Sub-total Revenues - Propylene 49.53 213.99 241.75 268.62 268.62 268.62 268.62 268.62

By-productsC4 Fractions 3.11 15.54 19.42 19.42 19.42 19.42 19.42 19.42Pyrolysis gasoline 4.13 20.65 25.81 25.81 25.81 25.81 25.81 25.81Raw fuel 0.42 2.08 2.60 2.60 2.60 2.60 2.60 2.60Tail gas 0.46 2.32 2.90 2.90 2.90 2.90 2.90 2.90

Subtotal By-products 8.12 40.59 50.73 50.73 50.73 50.73 50.73 50.73

Total Revenues 280.25 1,324.74 1,716.43 1,700.18 1,657.06 1,657.06 1,657.06 1,657.06

Net Revenues 64.49 494.58 650.94 621.86 565.93 553.11 540.30 500.13

Incremental Net benefits -6.88 -96.83 -453.90 -70.46 494.58 650.94 621.86 565.93 553.11 540.30 547.61

Intemal Rate of Retumr 55%

By-product prices

US$ X

C4 Fractions 1/ 4168 4168 4168 4168 4168 4168 4168 4168 r

Pyrolysis gasoline 150 5580 5580 5580 5580 5580 5580 5580 5580

Raw fuel 100 3720 3720 3720 3720 3720 3720 3720 3720 Pa09

Tail gas 3.2 119 119 119 119 119 119 119 119 t

0

1/ Transported to Baroda. Price is transfer price of Baroda (US$130) less road tanker transport from Nagothane to Baroda (US$20)

2/ Assumed equal to price CIF India Li

Nagothane Gas Cracker Expansion - Economic Rate of Return (In constant 1997-98 Rupees)

Unit Rate 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2012-13

Price Index, 1997-98=100 68.8 74.5 82.6 88.7 94.5 100 107

Capacity Utilization 20% 80% 100% 100% 100% 100% 100% 100%

-Ethylene (tons) 20000 80000 100000 100000 100000 100000 100000 100000

of which: for HDPE plant 27756 49344 55512 58596 61680 61680 61680 61680

Merchant ethylene 30656 44488 41404 38320 38320 38320 38320

-Propylene (tons) 3050 12200 13725 15250 15250 15250 15250 15250

-By-productsC4 Fractions 746 3728 4660 4660 4660 4660 4660 4660

Pyrolysis gasoline 740 3700 4625 4625 4625 4625 4625 4625

Raw fuel 112 560 700 700 700 700 700 700

Tail gas 3894 19472 24340 24340 24340 24340 24340 24340

Investment CostsIn Current Rupees (Million) 6.10 91.50 453.90 93.60In 1997-98 Rupees (Million) 6.88 96.83 453.90 87.48

Taxes and Duties 1.16 11.02 36.06 13,75Total cost excluding T&D 5.72 85.81 417.84 73.73

Incremental Wotldng CapitalIn Current Rupees (Million) 50.8 -50.8

in 1997-98 Rupees (Million) 47.5 47.5

Incremental Operating CostsC2/C3 1.47

Rs/ton, Constant 97 terms 5,366 5,204 5,043 5,025 5,007 4,989 4,971 5,125

Total Cost, Rupees (Million) 157.76 611.99 741.32 738.68 736.03 733.38 730.74 753.38

Catalysts, Chemicals & Packing 3.64 14.56 18.20 18.20 18.20 18.20 18.20 18.20

Power, Fuel & Utilities 0.9 71.20 284.80 356.00 356.00 356.00 356.00 356.00 356.00

Selling Expenses 0.9 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Subtotal Variable Costs 232.60 911.35 1,115.52 1,112.88 1,110.23 1,107.58 1,104.94 1,127.58

45Salaries and Benefits 0.9 4.77 4.77 4.77 4.77 4,77 4.77 4.77 4.77 x

Maintenance 0.94 14.87 14.87 14.87 14.87 14.87 14.87 14.87 14.87

Overhead 0.9 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Subtotal Fixed Costs (Incremental) 19.64 19.64 19.64 19.64 19.64 19.64 19.64 19,64 r

SD

Total Incremental Operating Costs 252.24 930.99 1,135.16 1,132.52 1,129.87 1,127.22 1,124.58 1,147.22 m

0Lo

Nagothane Gas Cracker Expansion - Economic Rate of Return (In constant 1997-98 Rupees)

Unit Rate 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2012-13Incremental Revenues

Ethylene for HDPE PlantPrice, Constant 97-98 Rs./ton 8,020 8,020 8,020 8,020 8,020 8,020 8,020 8,020Sub-total Revenues - Ethylene 222.60 395.74 445.21 469.94 494.67 494.67 494.67 494.67

Merchant EthylenePrice, Constant 97-98 Rs./ton 22,000 22,000 22,000 22,000 22,000 22,000 22,000 22,000Subtotal Revenues - Ethylene 0.00 674.43 978.74 910.89 843.04 843.04 843.04 843.04

PropylenePrice, Constant 97-98 Rs./ton 2/ 12,648 14,880 16,740 16,740 16,740 16,740 16,740 16,740Subtotal Revenues - Propylene 49.26 289.74 407.45 407.45 407.45 407.45 407.45 407.45

By-products 8.12 40.59 50.73 50.73 50.73 50.73 50.73 50.73Total Revenues 279.98 1,400.50 1,882.13 1,839.01 1,795.90 1,795.90 1,795.90 1,795.90

Net Revenues 27.74 469.51 746.96 706.50 666.03 668.67 671.32 648.68

Incremental Net benefits -6.88 -96.83 -453.90 -107.22 469.51 746.96 706.50 666.03 668.67 671.32 696.16

Internal Rate of Retum 57%

In

1/ Import duties of 25% of imported equipment were excluded, and a Standard Conversion Factor of 0.9 was applied to non-tradable costs (all but equipment costs)2/ Assumed equivalent to CIF Bombay

(Dx

SQ

(D

01'h

Nagothane LLDPE/HDPE Plant Expansion - Financial Rate of Return (In constant 1997-98 Rupees)

Unit Rate 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2012-13Price Index, 1997-98=100 68.8 74.5 82.6 88.7 94.5 100 107Capacity Utilization 36.0% 80.0% 90.0% 95.0% 100.0% 100.0% 100.0% 100.0%Production (tons) 27000 48000 54000 57000 60000 60000 60000 60000

Investrnent CostsIn Current Rupees (Million) 239.40 69.90 670.7 520.20In 1997-98 Rupees (Million) 269.90 73.97 670.70 486.17

Incremental Wor1dng CapitalIn Current Rupees (Million) 95.90In 1997-98 Rupees (Million) 89.63 -95.90

-89.63Incremental Operating Costs

EthyleneRupees per ton 1/ 11,904 8,020 8,020 8,020 8,020 8,020 8,020 8,020Total Cost, Rupees (Million) 1.028 330.41 395.74 445.21 469.94 494.67 494.67 494.67 494.67

Butene-1 & Hydrogen 0.54 0.96 1.08 1.14 1.20 1.20 1.20 1.20Catalysts, Chemicals & Packing 36.77 65.36 73.53 77.62 81.70 81.70 81.70 81.70Packing Materials 7.52 13.36 15.03 15.87 16.70 16.70 16.70 16.70Power, Fuel & Utilities 19.40 3448 38.79 40.95 43.10 43.10 43.10 43.10 a

Subtotal Variable Costs 394.62 509.90 573.64 605.50 637.37 637.37 637.37 637.37

Salaries and Benefits 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Maintenance 15.30 15.30 15.30 15.30 15.30 15.30 15.30 15.30Overhead 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00


Total Incremental Operating Costs 409.92 525.20 588.94 620.80 652.67 652.67 652.67 652.67

Incremental RevenuesPrice, Constant 97-98 Rs./ton 37,984 37,984 37,012 35,521 35,852 34,524 33,198 31,872 30,546 30,546 XD

Total Revenues 999.33 1,705.02 1,936.01 1,967.89 1,991.86 1,912.34 1,832.79 1,832.79

Net Revenues 589.40 1,179.82 1,347.08 1,347.09 1,339.19 1,259.66 1,180.12 1,180.12

Incremental Net benefits -269.90 -73.97 -670.70 13.61 1,179.82 1,347.08 1,347.09 1,339.19 1,259.66 1,180.12 1,276.02 OQ

Internal Rate of Return 56%

1/ In 1998/99, 7,756 tons of ethylene are purchased at the merchant price of US$550 per ton (Rs.22,000 per ton).

Nagothane LLDPE/HDPE Plant Expansion- Economic Rate of Return (In constant 1997-98 Rupees)

Unit Rate 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2011-12Price Index, 1997-98=100 68.8 74.5 82.6 88.7 94.5 100 107Capacity Utilization 36.0% 80.0% 90.0% 95.0% 100.0% 100.0% 100.0% 100.0%Production (tons) 27000 48000 54000 57000 60000 60000 60000 60000

Investment CostsIn Current Rupees (Million) 239.40 69.90 670.70 520.20In 1997-98 Rupees (Million) 269.90 73.97 670.70 486.17Duties and Taxes 26.99 5.15 18.05 1.83Total net of D&T 242.91 68.81 652.65 484.34

Incremental Worklng CapitalIn Current Rupees (Million) 95.90 -95.90In 1997-98 Rupees (Million) 89.63 -89.63

Incremental Operating CostsEthylene

Rupees per ton 1/ 11,904 8,204 8,204 8,204 8,204 8,204 8,204 8,204Total Cost, Rupees (Million) 1.028 330.41 404.82 455.42 480.72 506.02 506.02 506.02 506.02

Butene-1 & Hydrogen 0.54 0.96 1.08 1.14 1.20 1.20 1.20 1.20 Catalysts, Chemicals & Packing 36.77 65.36 73.53 77.62 81.70 81.70 81.70 81.70 -

Packing Materials 7.52 13.36 15.03 15.87 16.70 16.70 16.70 16.70Power, Fuel & Utilities 0.9 15.71 27.93 31.42 33.17 38.79 34.91 34.91 34.91

Subtotal Variable Costs 390.94 512.43 576.48 608.51 644.41 640.53 640.53 640.53

Salaries and Benefits 0.9 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Maintenance 0.94 14.38 14.38 14.38 14.38 14.38 14.38 14.38 14.38Overhead 0.9 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00


Total Incremental Operating Costs 405.32 526.81 590.86 622.89 658.79 654.92 654.92 654.92 P

Incremental Revenues XPrice, Constant 97-98 Rs./ton 28,451 26,853 27,226 28,453 28,452 28,451 28,452 28,452 28,452 28,452 -

Total Revenues 735.09 1,365.74 1,536.38 1,621.70 1,707.10 1,707.13 1,707.13 1,707.13

Net Revenues 0.00 0.00 329.77 838.93 945.52 998.81 1,048.31 1,052.21 1,052.21 1,052.21 oq(D

Incremental Net benefits 0.00 0.00 0.00 -269.90 -73.97 -670.70 -246.02 838.93 945.52 998.81 1,048.31 1,052.21 1,052.21 1,141.84 t,

Internal Rate of Retum 44%

1/ In 1998/99, 7,756 tons of ethylene are purchased at the merchant price of US$550 per ton (Rs.22,000 per ton). a

Nagothane - Integrated Cracker and HDPE Plant Expansions

Financial Rate of Return

1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2012-2013Net Cash Flow

Cracker Expansion -6.88 -96.83 -453.90 -70.46 494.58 650.94 621.86 565.93 553.11 540.30 547.61HDPE Expansion -269.90 -73.97 -670.70 13.61 1,179.82 1,347.08 1,347.09 1,339.19 1,259.66 1,180.12 1,276.02

Total -276.78 -170.79 -1,124.60 -56.85 1,674.41 1,998.01 1,968.95 1,905.12 1,812.78 1,720.41 1,823.63

Intemal Rate of Return 56%

Economic Rate of Return

1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2012-2013Net Cash Flow

Cracker Expansion -6.88 -96.83 -453.90 -107.22 469.51 746.96 706.50 666.03 668.67 671.32 696.16 a)HDPE Expansion -269.90 -73.97 -670.70 -246.02 838.93 945.52 998.81 1,048.31 1,052.21 1,052.21 0.00

Total -276.78 -170.79 -1,124.60 -353.24 1,308.44 1,692.48 1,705.31 1,714.34 1,720.89 1,723.53 696.16

Intemal Rate of Return 48%

CD

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Vadodara Butadiene Extraction Plant Revamping- Financial Rate of Return (In constant 1997-98 Rupees)

UnitPrioe Index, 1997-98=100 Rate 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999400 2000-01 2001-02 2002-03 200344 2004-05 2005406 2006-07 2007.08 2008.09 2009-10 2010-11 2011-12

Capacity Utilization 62 5 68.8 74.5 82 6 88,7 94.5 100Production (tons) 0.0% 51.6% 90.3% 96.8% 100.0% 100.0%/f 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

8000 14000 15000 15500 15500 15500 15500 15500 15500 15500 15500 15500 15500 15500 15500

Investment CostsIn Current Rupees (Million)In 1997-98 Rupees (Million) 12.40 30.60 63.90 79.30 124.40 106.30

19.84 44.48 85.77 96.00 140.25 112.49Incremental Working Capital

In Current Rupees (Million)In 1997-98 Rupees (Million) 13.00

13.76 -13.76

Incremental Operating CostsC4 Fractions

USS/ton (@ actual transfer price)Exchange Rate 132 132 132 132 132 132 132 132 132 132 132 132 132 132 132 132

Rupees per ton 37.2 37.2 37.2 37.2 37.2 37.2 37.2 37.2 37.2 37.2 37.2 37.2 37.2 37.2 37.2 37.2

Total Cost, Rupees (Million) 4,910 4,910 4,910 4,910 4,910 4,910 4,910 4,910 4,910 4,910 4,910 4,910 4,910 4,910 4,910 4,910

Catalysts, Chemicals & Packing 1.07 42.03 73.56 78.81 81.44 81.44 81.44 81.44 81.44 81.44 81.44 81.44 81.44 81.44 81.44 81.44

Power, Fuel & Utildties 0.89 1.55 1.66 1.72 1.72 1.72 1.72 1.72 1.72 1.72 1.72 1.72 1.72 1.72 1.72

Selling Expenses 13.73 24.03 25.74 26.60 26.60 26.60 26.60 26.60 26.60 26.60 26.60 26.60 26.60 26.60 26.60

Subtotal Variable Costs 0.00 0.00 00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.0056.65 99.14 106.22 109.76 109.76 109.76 109.76 109.76 109.76 109.76 109.76 109.76 109.76 109.76 109.76

Salaries and Benefis ,_

Maintenance 4.55 4.55 4.55 4.55 4.55 4.55 4.55 4.55 4.55 4.55 4.55 4.55 4.55 4.55 4.55 'IO

Overhead 6.90 6.90 6.90 6.90 6.90 6.90 6.90 6.90 6.90 6.90 6.90 6.90 6.90 6.90 6.90

Subtotal Fixed Costs (Incremental) 19.80 19.80 19.80 19.80 19.80 19.80 19.80 19.80 19.80 19.80 19.80 19.80 19.80 19.80 19.8031.25 31.25 31.25 31.25 31.25 31.25 31.25 31.25 31.25 31.25 31.25 31.25 31.25 31.25 31.25

Total Incremental Operating Costs87.90 130.39 137.47 141.01 141.01 141.01 141.01 141.01 141.01 141.01 141.01 141.01 141.01 141.01 141.01

Incremental RevenuesPrice, Constant 97-98 Rs./ton 1/Total Revenues 14,890 14,890 14,890 14,890 14,890 14,890 14,890 14,890 14,890 14,890 14,890 14,890 14,890 14,890 14,890 14,890

0.00 119.12 208.46 223.35 230.80 230.80 230.80 230.80 230.80 230.80 230.80 230.80 230.80 230.80 230.80 230.80

Net Revenues0.00 31.22 78.07 85.88 89.79 89.79 89.79 89.79 89.79 89.79 89.79 89.79 89.79 89.79 89.79 89.79 j>

Incremental Net benefits -19.84 -44.48 -85.77 -96.00 -140.25 -126.24 31.22 78.07 85,88 89.79 89.79 89.79 89.79 89.79 89.79 89.79 89.79 89.79 89.79 89.79 103.54 r

Internal Rate of Retum X10%

1/ Source: derived from IPCL Project Completion Report, Annexure XXVI, cost of raw materials in PBR production costs.Note: Und consumption of raw materials is net of C4 raffinate, assumed to have same price as C4 fraction.

00

0I-t

Vadodara Butadiene Extraction Plant Revamping - Economic Rate of Return (In constant 1997-98 Rupees)

Unit Rate 1991-92 1992-93 1993-94 1994-96 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-06 2006-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12Price Index, 1997-98=100 62.5 68.8 74.5 82.6 88.7 94.5 100Capacity Utilization 51.6% 90.3% 96.8% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%Production (tons) 8000 14000 15000 15500 15500 15500 15500 15500 15500 15600 15500 15500 15500 15500 15500

/nvestrnent CostsIn Current Rupees (Million) 12.40 30.60 63.90 79.30 124.40 106.30In 1997-98 Rupees (Million) 19.84 44.48 85.77 96.00 140.25 112.49Dutiesandtaxes 0.00 0.17 7.84 12.02 15.55 18.29Costs, net of taxes 19.84 44.30 77.93 83.98 124.70 94.20

Incremental Working CapitalIn Current Rupees (Million) 13.00In 1997-98 Rupees (Million) 13.76 -13.76

Incremental Operating CostsC4 Fractions

US$/ton (@ actual transfer price) 132 132 132 132 132 132 132 132 132 132 132 132 132 132 132Exchange Rate 37.2 37.2 37.2 37.2 37.2 37.2 37.2 37.2 37.2 37.2 37.2 37.2 37.2 37.2 37.2Rupees per Mton 4,910 4,910 4,910 4,910 4,910 4.910 4,910 4,910 4,910 4,910 4,910 4,910 4,910 4,910 4,910Total Cost, Rs. (Million) 1.07 42.03 73.56 78.81 81.44 81.44 81.44 81.44 81.44 81.44 81.44 81.44 81.44 81.44 81.44 81.44

Catalysts, Chemicals & Packing 0.89 1.55 1.66 1.72 1.72 1.72 1.72 1.72 1.72 1.72 1.72 1.72 1.72 1.72 1.72Power, Fuel & Utiliies 0.9 12.36 21.62 23.17 23.94 23.94 23.94 23.94 23.94 23.94 23.94 23.94 23.94 23.94 23.94 23.94

Subtotal Variable Costs 55.28 96.73 103.64 107.10 107.10 107.10 107.10 107.10 107.10 107.10 10710 107.10 107.10 107.10 107.10 t

Salaries and Benefits 0.9 4.10 4.10 4.10 4.10 4.10 4.10 4.10 4.10 4.10 4.10 4.10 4.10 4.10 4.10 4.10Maintenance 0.94 6.49 6.49 6.49 6.49 6.49 6.49 6.49 6.49 6.49 6.49 6.49 6.49 6.49 6.49 6.49Overhead 0.9 17.82 17.82 17.82 17.82 17.82 17.82 17.82 17.82 17.82 17.82 17.82 17.82 17.82 17.82 17.82

Subtotal Fixed Costs (Incremental) 28.40 28.40 28.40 28.40 28.40 28.40 28.40 28.40 28.40 28.40 28.40 28.40 28.40 28.40 28.40

Total Incremental Operating Costs 83.68 125.14 132.05 135.50 135.50 135.50 135.50 135.50 135.50 135.50 135.50 135.50 135.50 135.50 135.50

Incremental RevenuesPrice,Constant97-98Rs.Aton(transferpnce)21 14,890 14,S90 14,890 14,890 14,890 14,890 14,890 14,890 14,890 14,890 14,890 14,890 14,890 14,890 14,890Total Revenues 119.12 208.46 223.35 230.80 230.80 230.80 230.80 230.80 230.80 230.80 230.80 230.80 230.80 230.80 230.80

Net Revenues 35.44 83.32 91.30 95.30 95.30 95.30 95.30 95.30 95.30 95.30 95.30 95.30 95.30 95.30 95.30 (D

Incremental Net benefits -19.84 -44.30 -77.93 -83.98 -124.70 -107.96 35.44 83.32 91.30 95.30 95.30 95.30 95.30 95.30 95.30 95.30 95.30 95.30 95.30 95.30 109.05

Intemal Rate of Retum 12%

Note: UnRt consumption of raw materials is net of C4 raffinate, assumed to have same price as C4 fraction. 93001/ Import duties of 25% of imported equipment were excluded, and a Standard Conversion Factor of 0.9 was applied to non-tradable costs (all but equipment costs) (D

2J Source: derived from IPCL Project Completion Report, Annexure XXVI, cost of raw materials in PBR production costs.

U.)

Vadodara Polybutadiene Plant - Financial Rate of Return (In constant 1997-98 Rupees)

UnitRabt 1991-921992-931993-941994.951995-96199-97 1997-98 1998-99 199940 200041 2001-02 200243 2003-04 2004-05 2005406 2006-07 200748 2008-09 2009-10 2010-11 2011.12

Price Index, 1997-98=100 62.5 68.8 74.5 82.6 88.7 94.5 100

Capacity Utilization 7.0% 46.7% 83.3% 95.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Production (tons) 2100 14000 25000 28500 30000 30000 30000 30000 30000 30000 30000 30000 30000 30000 30000 30000

Investment CostsIn Current Rupees (Million) 34.6 42.70 42.90 253.10 667.80 360.50In 1997-98 Rupees (Million) 55.36 62.06 57.58 306.42 752.87 381.48

Incremental Working CapitalIn Current Rupees (Million) 166.30In 1997-98 Rupees (Million) 175.98 -175.98

Incremental Operating CostsButadiene

US$/ton (@ actual transfer price) 400 400 400 400 400 400 400 400 400 400 400 400 400 400 400 400

Exchange Rate 37.2 37.2 37.2 37.2 37.2 37.2 37.2 37.2 37.2 37.2 37.2 37.2 37.2 37.2 37.2 37.2

Rupees per Mton 14,890 14,890 14,890 14,890 14,890 14,890 14,890 14,890 14,890 14,890 14,890 14,890 14,890 14,890 14,890 14,890

Total Cost, Rs. (Million) 1.02 31.89 212.63 379.70 432.85 455.63 455.63 455.63 455.63 455.63 455.63 455.63 455.63 455.63 455.63 455.63 455.63


Power, Fuel & Utilities 10.26 68.41 122.17 139.27 146.60 146.60 146.60 146.60 146.60 146.60 146.60 146.60 146.60 146.60 146.60 146.60

Subtotal Variable Costs 55.88 372.56 665.28 758.42 798.33 798.33 798.33 798.33 798.33 798.33 798.33 798.33 798.33 798.33 798.33 798.33

Salaies and Benefits 22.70 22.70 22.70 22.70 22.70 22.70 22.70 22.70 22.70 22.70 22.70 22.70 22.70 22.70 22.70

Maintenance 12.00 12.00 12.00 12.00 12.00 12.00 12.00 12.00 12.00 12.00 12.00 12.00 12.00 12.00 12.00

Overhead 65.40 65.40 65.40 65.40 65.40 65.40 65.40 65.40 65.40 65.40 65.40 65.40 65.40 65.40 65.40 N)

Subtotal Fixed Costs (Incremental) 100.10 100.10 100.10 100.10 100.10 100.10 100.10 100.10 100.10 100.10 100.10 100.10 100.10 100.10 100.10

Total Incremental Operating Costs 55.88 472.66 765.38 858.52 898.43 898.43 898.43 898.43 898.43 898.43 898.43 898.43 898.43 898.43 898.43 898.43

Incremental RevenuesPBR Price, Constant 97-98 Rs./ton 52,677 43,487 48,847 52,934 49,249 45,564 43,723 41,884 41,884 41,884 41,884 41,864 41,884 41,884 41,884 41,884

PBR Sales Revenues 110.62 608.81 1,221.18 1,508.62 1,477.46 1,366.93 1,311.69 1.256.51 1,256.51 1,,256.51 1,256.51 1,256.51 1,256.51 1,256.51 1,256.51 1,256.51

By-product credits 0.24 1.58 2.83 3.22 3.39 3.39 3.39 3.39 3.39 3.39 3.39 3.39 3.39 3.39 3.39 3.39

Total Incremental Revenues 110.86 610.40 1224.00 1511.84 1480.85 1370.32 1315,08 1259.90 1259.90 1259.90 1259.90 1259.90 1259.90 1259.90 1259.90 1259.90

Net Revenues 54.97 137.74 458.63 653.32 582.41 471.89 416.65 361.47 361.47 361.47 361.47 361.47 361.47 361.47 361.47 361.47

Incremental Net benerfts -55.36 -62.06 -57.58 -306.42 -752.87 -502.49 137.74 458.63 653.32 582.41 471.89 416.65 361.47 361.47 361.47 361.47 361.47 361.47 361.47 361.47 537.45 >

IfInternal Rate of Return 17% (

'0

(D

0Frh

Vadodara Polybutadiene Plant - Economic Rate of Return (In constant 1997-98 Rupees)

UnitRate 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997T98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

Pfice Index, 1997-98=100 62.5 68.8 74.5 82.6 88.7 94.5 100Capacity Utilization 7,0% 46.7% 83.3% 95.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% IOU% 100.0% 100.0% 100.0% 100.0%

Production (tons) 2G100 14000 25000 28500 30000 30000 30000 30000 30000 30000 30000 30000 30000 30000 30000 30000

Investment CostsIn Cunrent Rupees (Million) 34.60 42.70 42.90 253.10 667.80 360.50In 1997-98 Rupees (Million) 55.36 62.06 57.58 306.42 752.87 381.48

Less Outies and Taxes 0.00 0.58 19.12 40.65 60.18 88.84Total net of taxes 55.36 61.48 38.46 265.77 692.69 292.65

/ncremental Working CapitalIn Cutrent Rupees (Million) 166.30In 1997-98 Rupees (Million) 175.98 -175.98

Incremental Operatin5g CostsButacliene

US$Aon (@ actual transfer price) 400 400 400 400 400 400 400 400 400 400 400 400 400 400 400 400

Exchange Rate 37.2 37.2 37.2 37.2 37.2 37.2 37.2 37.2 37.2 37.2 37.2 37.2 37.2 37.2 37.2 37.2

Rupees per ton 14,890 14,890 14,890 14,890 14,890 14,890 14,890 14,890 14,890 14,890 14,890 14,890 14,890 14,890 14,890 14,890

Total Cost, Rn. (Million) 1.02 31.89 212.63 379.70 432.85 455.63 455.63 455.63 455.63 455.63 455.63 455.63 455.63 455.63 455.63 455.63 455.63

Catalysts, Chemicals & Packing 13.73 91.51 163.42 186.30 196.10 196.10 196.10 196.10 196.10 196.10 196.10 196.10 196,10 196.10 196.10 196.10

Power, Fuel & Utilifies 0.9 9,24 61.57 109.95 125.34 131.94 131.94 131.94 131.94 131.94 131.94 131.94 131.94 131.94 131.94 131.94 131.94

Subtotal Variable Costs 54.86 365.71 653.06 744.49 783.67 783.67 783.67 783.67 783.67 783.67 783.67 783.67 783.67 783.67 783.67 783.67

Salares and Benefits 0.9 20.43 20.43 20.43 20.43 20.43 20.43 20.43 20.43 20.43 20.43 20.43 20.43 20.43 20.43 20.43 9

Maintenance 0.94 11.28 11.28 11.28 11.28 11.28 11.28 11.28 11.28 11.28 11.28 11.28 11.28 11.28 11.28 11.28

Overhead 0.9 586 58.86 58,86 56.86 58.8 6 58.86 58.86 58.86 58.86 58.66 58.86 58.86 58.86 58.88 58.86

Subtotal Fixed Costs (Incremental) 0.00 90.57 90.57 90.57 90.57 90.57 90.57 90.57 90.57 90.57 90.57 90.57 90.57 90.57 90.57 90.57

Total Incremental Operating Costs 54.86 456.28 743.63 835.06 874.24 874.24 874.24 874.24 674.24 874.24 874.24 874.24 874.24 874.24 874.24 874.24

Incremental RevenuesPrice, Constant 97-98 Rs./ton 38,739 29,455 34,674 38,761 38,758 38,757 38,757 38,759 38,759 38,759 38,759 38,759 38,759 38,759 38,759 38,759

Total Revenues 81.35 412.37 866.85 1,104.68 1,162.75 1,162.70 1,162.71 1,162.77 1,162.77 1,162.77 1,162.77 1,162.77 1,162.77 1,162.77 1,162.77 1,162.77

Net Revenues 26.50 -43.92 123.22 269.82 288.50 288.46 288.46 288.52 288.52 288.52 288.52 288.52 288.52 288.52 288.52 288.52

Incremental Net benefits -55.36 -82.08 -57.58 -306.42 -752.87 -530.96 -43.92 123.22 269.62 288.50 288.46 288.46 288.52 288.52 288.52 288.52 288.52 288.52 288.S2 288.52 464.50 FOID

(nternal Rate of Retum 9% X

U1Import duties of 25%h of imported equipment were excluded, and a S1andard Conversion Factor of 0.9 was applied to non-tradable costs (all but equipment costs)

n)(9

0

Vadodara Butadiene Extraction and Polybutadiene Plant

Financial Rate of Return (In constant 1997-98 Rupees)

1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

Butadiene Extraction -19.84 -44.48 -85.77 -96.00 -140.25 -126.24 31.22 78.07 85.88 89.79 89.79 89.79 89.79 89.79 89.79 89.79 89.79 89.79 89.79 89.79 103.54

PBR -55.36 -62.06 -57.58 -306.42 -752.87 -502.49 137.74 458.63 653.32 582.41 471.89 416.65 361.47 361.47 361.47 361.47 361.47 361,47 361.47 361.47 537.45

Total Net Benefits -75.20 -106.54 -143.36 -402.42 -893.12 -628.73 168.96 536.70 739.20 672.20 561.67 506.44 451.25 451.25 451.25 451.25 451.25 451.25 451.25 451.25 640.99

IRR 16%

Economic Rate of Return (In constant 1997-98 Rupees)

Butadiene Extraction -19.84 44.30 -77.93 -83.98 -124.70 -107.96 35.44 83.32 91.30 95.30 95.30 95.30 95.30 95.30 95.30 95.30 95.30 95.30 95.30 95.30 109.05

PBR -55.36 -62.06 -57.58 -306.42 -752.87 -530.96 43.92 123.22 269.62 288.50 288.46 288.46 288.52 288.52 288.52 288.52 288.52 288.52 288.52 288.52 464.50

Total Net Benefits -75.20 -106.37 -135,51 -390.40 -877.58 -638.92 -8.47 206.54 360.93 383.80 383.75 383.76 383.82 383.82 383.82 383.82 383.82 383.82 383.82 383.82 573.55 __

IRR 10%

CDD

0

CoN)


Cost-Benefit Analysis of Polypropylene Plant

Financial Price of Propylene1996-97 1997-98 1998-99 2000-01 2001-02

Propylene Requirements

Polypropylene production tons 2900 55000 65000 70000 75000

Propytene requirements 1.02/ton 2958 56100 66300 71400 76500

From Vadodara tons 2958 43000 43000 43000 43000

From Imports tons 0 13100 23300 14200

From Gandhar tons 14200 33500

Transfer Prices

Vadodara Cost of Production 18348 18348 18348 18348 18348

Import Cost 16241 17,540 17,614 0

Gandhar Cost 13764 13764

Total Cost of Propylene

From Vadodara 54.27 788.96 788.96 78898 788.96

From Imports 212.75 408.68 250.12

From Gandhar 195.45 461.09

Total Cost 54.27 1001.72 1197.64 1234.53 1250.05

US$/ton 493 480 486 465 439

Average propylene cost 1997198 Av. propylene Cost @ full capacityUSShton Rs/ton Rs Million USSlIton Rsiton Rs MitDon

Import cost 437 16241 212.75

Vadodara Cost 552 20528 882.71 552 20528 882.71

Total Cost 525 19527 1095.46 472 17566 1343.80

Gandhar Cost 370 13764 461.09

Economic Transfer Price of Propylene

1996-97 1997-98 1998-99 2000-01 2001-02

Propylene Requirements

Polypropylene production tons 2900 55000 65000 70000 75000

Propylene requirements 1.02/ton 2958 56100 66300 71400 76500

From Vadodara tons 2958 43000 43000 43000 43000

From Imports tons 13100 23300 14200

From Gandhar tons 14200 33500

Transfer Prices

Vadodara Cost of Production 20015 20015 20015 20015 20015

Import Cost 13367 15,754 17,614 17,614

Gandhar Cost 14062 14062

Total Cost of Propylene

From Vadodara 59.20 860.64 860.64 860.64 860.64

From Imports 175.11 367.07 250.12 0.00

From Gandhar 199.68 471.08

Total Cost 59.20 1035.76 1227.72 1310.45 1331.72

US$/ton 538 496 498 493 468

With SCF=0.9 on non-tradables

Average propylene cost 1997198 Av. propylene Cost @ full capacity

US$/ton Rstton Rs Million USStton Rs/ton Rs Million

Import cost 359 13367 175.11

Vadodara Cost 552 20015 882.71 538 20015 860.64

Total Cost 507 18856 1057.82 472 17566 1343.80

Gandhar Cost 378 14062 483.16

SCF = 0.975 applied to Banoda and Gandhar

Note: 9Vith commissioning of new cracker in Vadodara

Vadodara Polypropylene Plant - Financial Rate of Return (In constant 1997-98 Rupees)

UnitRate 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

Prce Index, 1997-98=100 62.5 68.8 74.5 82.6 88.7 94.5 100

Capacity Utilization 3.9% 73.3% 86.7% 93.3% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Production (tons) 1 2900 55000 65000 70000 75000 75000 75000 75000 75000 75000 75000 75000 75000 750W0 75000 75000

Investment CostsIn Current Rupees (Million) 114.00 154.20 68.00 238.50 720.70 440.60

In 1997-98 Rupees (Million) 182.40 224.13 91.28 288.74 812.51 466.24

Incremental Working CapitalIn Current Rupees (Million) 251.10


Incremental Operating CostsPropylene

Total Cost, Rs. (Million) 1.02 54.27 1,001.72 1,197.64 1,234.53 1,250.05 1,250.05 1,250.05 1,250.05 1,250.05 1,250.05 1,250.05 1,250.05 1,250.05 1,250.05 1,250.05 1,250.05


Power, Fuel & Utilities 2.52 47.81 56.51 60.85 65.20 65.20 65.20 65.20 65.20 65.20 65.20 65.20 65.20 65.20 65.20 65.20

Subtotal Variable Costs 69.42 1,288.89 1,537.03 1,600.03 1,641.65 1,641.65 1,641.65 1,641.65 1,641.65 1,641.65 1,641.65 1,641.65 1,641.65 1,641.65 1,641.65 1,641.65 U'

Salaries and Benefits 26.40 26.40 26.40 26.40 26.40 26.40 26.40 26.40 26.40 26.40 26.40 26.40 26.40 26.40 26.40

Maintenance 15.82 15.82 15.82 15.82 15.82 15.82 15.82 15.82 15.82 15.82 15.82 15.82 15.82 15.82 15.82

Overhead 85.70 85.70 85.70 85.70 85.70 85.70 85.70 85.70 85.70 85.70 85.70 85.70 85.70 85.70 85.70

Subtotal Fixed Costs (Incremental) 0.00 127.92 127.92 127.92 127.92 127.92 127.92 127.92 127.92 127.92 127.92 127.92 127.92 127.92 127.92 127.92

Total Incremental Operating Costs 69.42 1,416.81 1,664.95 1,727.95 1,769.57 1,769.57 1,769.57 1,769.57 1,769.57 1,769.57 1,769.57 1,769.57 1,769.57 1,769.57 1,769.57 1,769.57

Incremental Revenues >

Price-Constant 97-98 Rs.hon 1 37,225 37,225 29,564 33,635 37,878 36,473 35,068 33,666 32,262 32,262 32,262 32,262 32,262 32,262 32,262 32,262 C3tD

Total Revenues 107.95 2,047.40 1,921.65 2,354.48 2,840.88 2,735.47 2,630.12 2,524.98 2,419.64 2,419.64 2,419.64 2,419.64 2,419.64 2,419.64 2,419.64 2,419.64 X

Net Revenues 38.54 630.59 256.70 626.54 1,071.31 965.90 860.54 755.40 650.07 650.07 650.07 650.07 650.07 650.07 650.07 650.07 -

92Incremental Net benefits -162.40 -224.13 -91.28 -288.74 -812.51 -693.42 630.59 256.70 626.54 1,071.31 965.90 860.54 755.40 650.07 650.07 650.07 650.07 650.07 650.07 650.07 915.78 0)

ID


0

Vadodara Polypropylene Plant - Economic Rate of Return (In constant 1997-98 Rupees)

Unit

Rate 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2009-10 2010-11 2011-12

Price Index, 1997-98=100 62.5 68.8 74.5 82.6 88.7 94.5 100

Capacity Utilization 3.9% 73.3% 86.7% 93.3% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Production (tons) 1 2900 55000 65000 70000 75000 75000 75000 75000 75000 75000 75000 75000

Investment Costs 1/In Current Rupees (Million) 114.00 154.20 68.00 238.50 720.70 440.60

In 1997-98 Rupees (Million) 182.40 224.13 91.28 288.74 812.51 466.24

Less:Taxes 25.92 31.75 12.85 40.71 114.83 65.97

Total excluding taxes 156.48 192.38 78.43 248.03 697.68 400.27

Incremental Working CapitalIn Current Rupees (Million) 251.10


Incremental Operating CostsPropylene

Total Cost, Rs. (Million) 1.02 59.20 1,035.76 1,227.72 1,310.45 1,331.72 1,331.72 1,331.72 1,331.72 1,331.72 1,331.72 1,331.72 1,331.72

Catalysts, Chemicals & Packing 12.62 239.36 282.88 304.64 326.40 326.40 326.40 326.40 326.40 326.40 326.40 326.40 a'

Power, Fuel & Utilities 0.9 2.27 43.03 50.86 54.77 58.68 58.68 58.68 58.68 58.68 58.68 58.68 58.68

Subtotal Variable Costs 74.09 1,318.15 1,561.45 1,669.85 1,716.80 1,716.80 1,716.80 1,716.80 1,716.80 1,716.80 1,716.80 1,716.80

Salaries and Benefits 0.9 23.76 23.76 23.76 23.76 23.76 23.76 23.76 23.76 23.76 23.76 23,76

Maintenance 0.94 14.87 14.87 14.87 14.87 14.87 14.87 14.87 14.87 14.87 14.87 14.87

Overhead 0.9 77.13 77.13 77.13 77.13 77.13 77.13 77.13 77.13 77.13 77.13 77.13

Subtotal Fixed Costs (Incremental) 115.76 115.76 115.76 115.76 115.76 115.76 115.76 115.76 115.76 115.76 115.76

Total Incremental Operating Costs 74.09 1,433.91 1,677.21 1,785.61 1,832.56 1,832.56 1,832.56 1,832.56 1,832.56 1,832.56 1,832.56 1,832.56 (D

Incremental RevenuesPrice, Constant 97-98 Rs./to 1 30,017 30,017 21,644 25,828 30,011 30,009 30,009 30,011 30,011 30,011 30,011 30,011

Total Revenues 87.05 1,650.92 1,406.86 1,807.97 2,250.80 2,250.71 2,250.68 2,250.86 2,250.85 2,250.85 2,250.85 2,250.85 p(0

Net Revenues 12.95 217.02 -270.36 22.35 418.23 418.15 418.11 418.30 418.28 418.28 418.28 418.28

Incremental Net benefits -156.48 -192.38 -78.43 -248.03 -697.68 -653.03 217.02 -270.36 22.35 418.23 418.15 418.11 418.30 418.28 418.28 418.28 684.00 0


1/ Import duties of 25% of imported equipment were excluded, and a Standard Conversion Factor of 0.9 was applied to non-tradable costs (all but equipment costs)

Consolidated Rates of Return for the Project(Constant 1997/98 Rupees)

1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-2013

A. Financial Rate of Return

MGCC Integrated -276.78 -170.79 -1,124.60 -56.85 1,674.41 1,998.01 1,968.95 1,905.12 1,812.78 1,720.41 1,707.59 1,702.12 1,696.66 1,691.19 1,685.72 1,680.25 1,680.25 1,823.63

BUT/PBR Integrated -75.20 -106.54 -143.36 402.42 -893.12 -628.73 168.96 536.70 739.20 672.20 561.67 506.44 451.25 451.25 451.25 451.25 451.25 451.25 451.25 451.25 640.99

PP -182.40 -224.13 -91.28 -288.74 -812.51 -693.42 630.59 256.70 626.54 1,071.31 965.90 860.54 755.40 650.07 650.07 650.07 650.07 650.07 650.07 650,07 915.78

Total -257.60 -330.67 -234.63 -691.16 -1,982.41 -1,492.94 -325.05 736.54 3,040.14 3,741.52 3,496.53 3,272.10 3,019.43 2,821.73 2,808.91 2,803.44 2,797.98 2,792.51 2,787.04 2,781.57 3,237.02 1,823.63

IRR 27%

B. Economic Rate of Return

MGCC Integrated -276.78 -170.79 -1,124.60 -353.24 1,308.44 1,692.48 1,705.31 1,714.34 1,720.89 1,723.53 1,726.18 1,721.12 1,716.06 1,711.01 1,705.95 1,700.89 1,790.52 696.16

BUT/PBR Integrated -75.20 -106.37 -135.51 -390.40 -877.58 -638.92 -8.47 206.54 360.93 383.80 383.75 383.76 383.82 383.82 383.82 383.82 383.82 383.82 383.82 383.82 573.55

PP -156.48 -192.38 -78.43 -248.03 -697.68 -653.03 217.02 -270.36 22.35 418.23 418.15 418.11 418.30 418.28 418.28 418.28 418.28 418.28 418.28 418.28 684.00

Total -231.68 -298.74 -213.94 -638.43 -1,852.03 -1,462.75 -916.06 417.05 1,691.72 2,494.52 2,507.21 2,516.21 2,523.00 2,525.63 2,528.28 2,523.22 2,518.17 2,513.11 2,508.05 2,502.99 3,048.07 696.16 N)

IRR 21%

Oq

CD

WLI)

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e-h

WD

0

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