Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 4467-IN

STAFF APPRAISAL REPORT

INDIA

MAHARASHTRA PETROCHEMICAL PROJECT

February 15, 1985

Industry Department

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

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CURRENCY EQUIVALENTS

US$1 = Rupees (Rs) 12.0

Rupee (Rs) 1 US$0.833

WEIGHTS AND MEASURES

1 Metric ton (t) = 1,000 Kilograms (kg) Methane = 21,502 BTU per lb1 Metric ton (t) = 2,204 Pounds (lb) Ethane = 20,416 BTU per lb

1 Kilometer (km) = 0.62 Miles Propane = 19,929 BTU per lb1 Hectare (ha) = 2.47 Acres Fuel Oil = 17,900 BTU per lbI Cubic Meter (m3) = 35.32 Cubic Feet (cf)

GLOSSARY OF ABBREVIATIONS

B-H - Bombay-High

BTU - British Thermal Unit

CIF - Cost, Insurance, and FreightC2/C3 - Ethane/PropaneGDP - Gross Domestic Product

EG - Ethylene GlycolEIL - Engineers India Limited

EO - Ethylene Oxide

FOB - Free on Board

GOI - Government of IndiaHDPE - High-Density PolyethyleneIPCL - Indian Petrochemicals Corporation Ltd.LDPE - Low-Density PolyethyleneLLDPE - Linear Low-Density PolyethyleneLPG - Liquefied Petroleum GasMSG - Maharashtra State GovernmentMW - Megawatt

ONGC - Oil and Natural Gas Commissionp.a. - Per Annum

PAC - Product Applications CenterPP - Polypropylene

PS - PolystyrenePTF - Project Task Force

PVC - Polyvinyl Chloride

S-B - South-Bassein

tpy - Metric ton per year

GOVERNMENT OF INDIAFISCAL YEAR

April 1 to March 31

Industry DepartmentFebruary 1985

FOR OFFICIAL USE ONLY

TABLE OF CONTENTS

Page No.

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

II. THE PETROCHEMICAL INDUSTRY .............................. 2

A. General Background on Petrochemicals ............... 2B. Feedstock Characteristics and Ethylene Production

Costs ............................................ 3C. The World Polyolefins Market ............... 4

1. Historical and Projected World Consumptionof Polyolefins ................................ 4

2. Historical and Projected World Capacity ofPolyolefins .6......... 6(a) Historical World Capacity of Polyolefins.. 6(b) Projected World Capacity of Polyolefins ... 6

3. Historical and Projected World Demand-SupplyBalance of Polyolefins ................ 8

D. Prices of Major Polyolefins .... .................... 10

III. PETROCHEMICAL INDUSTRY IN INDIA ......................... 12

A. Historical Developments ..... ....................... 12B. Strategy for the Future Development of the Indian

Petrochemical Sector ............ .. ............... 131. Subsector Priority ............ .. .............. 132. Private and Public Sector Roles .............. . 14

IV. THE PETROCHEMICAL MARKET IN INDIA ....................... 14

A. Historical and Projected Petrochemical Demand inin India ......... ................................ 14

1. Past Consumption .............................. 142. Future Demand ................................. 15

B. Historical and Projected End-Use Pattern .... ....... 16C. Projected Petrochemical Demand and Supply Balance .. 17D. The Plastics Conversion Industry .... ............... 17

V. MARKETING ..... .......................................... 18

A. Pricing in the Indian Petrochemical Sector ... ...... 18B. Market Development Prior to Project Commissioning .. 19C. Marketing Strategy ................................. 20D. Merchant Sales of Excess Ethylene .... .............. 20E. Export Potential for Final Plastics Products ....... 21

This report was prepared by Messrs. H. Aomatsu, S. El Daher and N.C.Krishnamurthy of the Industry Department, and Mr. J. Ramesh (consultant).Mesdames E. George, A. Johnson and M. Greaves provided Word Processingassistance in the preparation of the report.

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

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TABLE OF CONTENTS (Continued)

Page No.

VI. THE PROJECT SPONSOR .... ................................ 21

A. Establishment, Ownership and Objectives ..... ....... 21B. Board of Directors and Management ........ .......... 21C. Organization ... .. ... ......................... ........... 22D. Staff and Training .............. .. ................. 22E. Operations and Growth .. ............................ 22

VII. THE PROJECT ..., ......................................... 23

A. Project Objective and Bank Group Role ....... ....... 23B. Project Scope ... . . . ................. 24C. Project Location ......... ............ 24D. Feedstock and Supply Arrangements ........ .......... 25E. Utilities and Infrastructure Facilities ............ 27

1. Water ......................................... 272. Power . ................... ........ ... 273. Roads and Railways.wy .................... 27

VIII. PROJECT IMPLEMENTATION ARRANGEMENTS ..................... 28

A. General Arrangements .. ** ......... . ..... ... ... .......... * . 28B. Project Management ... .......... ........................... 28

1. IPCL Organization ...... ....................... 282. General Contractor (EIL)'s Organization ....... 293. Selection of Technologies ..................... 29

C. Staffing and Training .............................. 30D. Environmental Considerations .............. ......... 30E. Safety Considerations .............................. 31F. Project Execution Schedule ......................... 31

IX. CAPITAL COST, FINANCING PLAN, PROCUREMENTAND DISBURSEMENT ........................................ 32

A. Project Capital Cost .. ............................. 32B. Financing Plan ......... ............................ 34C. Procurement and Disbursement ....................... 35

X. FINANCIAL ANALYSIS .............................. ............ 37

A. Revenues and Operating Costs ..... .................. 37B. Financial Projections .......... .. .................. 38

1. Project Financial Projections .......... 392. IPCL Financial Projections ............. 41

C. Financial Rate of Return and Sensitivity Analysis .. 42D. Financial Covenants and Reporting Requirements ..... 44E. Major Risks ........ . .. . .............. ... ..... ...... ..... * 44

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TABLE OF CONTENTS (Continued))

XI. ECONOMIC ANALYSIS ... ................ ................... . 45

A. Economic Costs and Benefits ........................ 45B. Economic Rate of Return ..... ....................... 46

C. Other Benefits and Sectoral Policy Contribution

XII. AGREEMENTS .................. .................... ......... 48

ANNEXES

2-1 Energy Requirements for Production of Selected Products2-2 World Polyolefins Consumption and Growth Rates, By Resin Type,

1970-832-3 Historical World Consumption of Polyolefins by Region, 1974-832-4 World Polyolefins Nameplate Capacities (Year-End) by Region,

1970-832-5 World Polyolefins Capacity Utilization in Selected Years, 1970-832-6 International Price of Polymers2-7 Price Setters' Production Economics of Polyolefins

4-1 Production, Consumption and Surplus (Deficit) of MajorThermoplastics, Ethylene Glycol and Ethylene in India,1965/66-1983/84

4-2 Demand for Polyolefins, PVC, Polystyrene and Ethylene Glycol inIndia, 1983/84-1995/96

4-3 Projected Demand. Supply, and Demand-Supply Balance forThermoplastics, Ethylene Glycol and Ethylene in India

5 Organization of Marketing Department of IPCL

6-1 IPCL: Investment Program6-2 IPCL: Income Statement and Balance Sheet

7-1 Summary of Project Facilities7-2 Raw Gas Production From B-H Fields, and Production of Gas Fractions

at Uran terminal, 1988-2000

8-1 General Organization Structure of Existing IPCL, Future IPCL, andDuring Project Implementation

8-2 Technology Selection8-3 Tolerance Limits for Industrial Effluents Discharged Into Inland

Surface Waters, IS-24908-4 Safety Measures of the Project8-5 Project Implementation Schedule

I

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9-1 Project Cost Estimates9-2 Estimated Disbursement Schedule for the Bank Loan

10-1 Assumptions Used in the Financial Analysis of the Project10-2 Product Prices, Production Data, and Revenues10-3 Projected Financial Statements of the Project10-4 Projected Financial Statements of IPCL10-5 Project's Impact on the Government Finances10-6 Cost and Benefit Streams for Financial Rate of Return

11-1 Assumption Used in the Economic Analysis of the Project11-2 Cost and Benefit Streams for Economic Rate of Return

MAPS

IBRD 16882RIBRD 18523

DOCUMENTS AVAILABLE IN THE PROJECT FILE

Reference Title, Date and Authors

A Feasibility Study for the Project, Maharashtra GasCracker Complex, April 1982, prepared by the OilIndustry Development Board, Government of India

B Information Given to the World Bank Appraisal Mission onthe Maharashtra Gas Cracker Complex, Volume I, November1982, prepared by the Oil Industry Development Board,Government of India

C Consultants Report

1. World Capacity, Production and Consumption forPetrochemicals, 1974-87 (Computer Printout for theWorld Bank), Stanford Research Institute, January1983

2. Natural Gas Valuation in Industrial Applications: AStudy for the World Bank, Chem. Systems, Inc.,September 1982

3. Global Outlook for Polyolefins and Ethylene Glycol(for the World Bank), Chem. Systems, Inc., October1984

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4. Projections for Future Capacities in thePetrochemical Industry (for the World Bank), SEMA,Strategie Industrielle, May 1983

D Market for Petrochemical Products in India, December1982, prepared for the Bank by J. Ramesh (Consultant)

E A Description of IPCL's Organization and Structure Givento the World Bank Post-Appraisal Mission by IPCL, August1984

F A Description of Technology Selection Procedures for theProject, Prepared by the Bank Mission Based on theInformation Obtained During the Post Appraisal Mission,September 1984

INDIA - MAHARASHTRA PETROCHEMICAL PROJECT

1. INTRODUCTION

1.01 The Government of India (GOI, the Government) has requested aBank loan for the Maharashtra Petrochemical Project (the Project), to beowned and operated by the Indian Petrochemical Corporation Limited (IPCL),a well established petrochemicals manufacturing company. The Project willbe India's first petrochemical complex based on natural gas--the mosteconomical feedstock. The feedstock ethane/propane fraction will beseparated out of the gas from the West Coast offshore oil and gas fieldsnear Bombay. The Project will have an initial capacity of 300,000 tons peryear (tpy) of ethylene and 63,000 tpy of propylene. About 50,000 tpy ofethylene will be sold to private sector petrochemical producers in theBombay area. The remainder will be processed within the Project to produce80,000 tpy of low-density polyethylene (LDPE), 135,000 tpy of linear low-density polyethylene (LLDPE) and high-density polyethylene (HDPE), and60,000 tpy of polypropylene (PP), as well as 5,000 tpy of ethylene oxide(EO) and 50,000 tpy of ethylene glycol (EG). These intermediate productswill be sold to the polymer conversion industry, entirely in the privatesector and to the synthetic fiber industry mostly in the private sector.

1.02 The Project is an important part of India's plans to develop anddiversify the use of its gas resources, and is in line with the Govern-ment's strategy for producing petrochemical products in world economicsized plants at competitive costs to substitute scarce, costly and oftenimported traditional materials, and to support expansion of the labor-intensive, largely private downstream processing industry. The economicvalue of the products from the Project, entirely to be marketed domestical-ly, is estimated at US$430 million per year at full capacity (in 1984 USdollar terms). The total Project financing, including contingencies, work-ing capital and interest during construction, but excluding preproductionimports of plastics for market development, is estimated at US$1,697million, with US$651 million in foreign exchange. In addition about US$450million equivalent of foreign exchange will be required to import plasticsfor domestic market development commencing 1985-86 through 1988-89, andwill be recovered in equivalent rupees through sales of such imports. Theproposed Bank loan of US$300 million includes US$210 million to financeabout 32% of the Project foreign exchange requirements, as well as TJS$90million to finance pre-production polyolefins imports needed for marketdevelopment.

1.03 Based on discussions of a Bank Identification/Preparation missionin September 1980, with the GOI on possible alternative product slates andtechnology, the Project was prepared and presented to the Bank in September1982 (Feasibility Study Project File, Reference A). Additional informationon the Project, provided by the Government, is given in Project File,Reference B. The Project was appraised in November 1982 by Messrs. J-F.Rischard, S. K. Agarwal, H. Aomatsu and N.C. Krishnamurthy of the IndustryDepartment, and Mr. J. Ramesh (consultant). It was post-appraised inAugust 1984, by Messrs. H. Aomatsu, S. El Daher and N. C. Krishnamurthy ofthe Industry Department, and Mr. K. Phan of the Country ProgramsDepartment.

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II. THE PETROCHEMICAL INDUSTRY

A. General Background on Petrochemicals

2.01 Prior to 1945, chemicals production in the world was basedpredominantly on coal, calcium carbide, ethyl alcohol and waste streamsfrom petroleum refinery operations. Since then, availability of low costoil and gas and technological developments have triggered a major switch topetroleum as the main raw material. The term 'petrochemicals' covers aspectrum of petroleum-based synthetic materials which include polymers,detergents and synthetic fibers, generally cheaper and often superiorsubstitutes for traditional materials. In general, the value added to abarrel of crude, or its equivalent in gas, is several times larger whenused as a petrochemical feedstock than as a fuel product.

2.02 The major petrochemical building blocks consist of three olefins(ethylene, propylene and butadiene) and three aromatics (benzene, tolueneand xylenes). Ethylene is the most important of them and is now used toproduce about one third of all petrochemicals. Olefins are generallyproduced through cracking of naphtha, gas oil or natural gas. Aromaticsare derived from light liquid petroleum fractions usually as part ofrefinery operations. Both are transformed into second generation productssuch as polymers, synthetic rubber, intermediates for synthetic fibers, andother organic chemicals. Polymers are the main ethylene derivatives. Thefive major polymers are low-density polyethylene (LDPE)/linear low-densitypolyethylene (LLDPE), high-density polyethylene (HDPE), polyvinyl chloride(PVC), polypropylene (PP) and polystyrene (PS). LDPE/LLDPE, HDPE and PPare classified as polyolefins.

2.03 Polymers, in the form of granules, are transformed by theplastics conversion industry into end-use products for clothing, shelter,water supply, transportation, industry, packaging, storage andconservation. Production up to the second generation products isvertically integrated and capital-intensive, while the conversion industryis decentralized and provides opportunities for small-scale operations. Intheir range of applications, polymers substitute for traditional materialsincluding: (i) metals, in home construction, appliances, mass transitequipment, and components for machinery and furniture; (ii) timber, naturalrubber, cork, paper and other wood derivatives, in home construction,low-temperature and electrical insulation, packaging of bulk commodities(fertilizers, cement) and foodstuffs; (iii) glass, in a variety ofpackaging and containers applications; and (iv) leather and fabrics, inupholstery, footwear, furniture and luggage. Polymers have also found newapplications in agriculture (mulching and seedling nursery bags) and watermanagement (storage ponds, canal lining, and piping and trickle irrigationsystems).

2.04 Plastics substitution has been favored by better performancecharacteristics and lower economic costs compared with traditionalmaterials. In particular, plastic products require significantly lessenergy than competing products as shown in Annex 2--l. For example,when polypropylene substitutes for cellulose, the plastic use results inenergy saving of 29%; polyethylene substitutes for paper with energy saving

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of 33%, and for galvanized steel with energy saving of 76%; and PVCsubstitutes for glass with energy saving of 58%, and for cast iron withenergy saving of 82%. In addition, when a significant percentage of usedplastic products are reprocessed and recycled, as in some countries likeIndia, use of plastics is even more energy efficient and economical.

B. Feedstock Characteristics and Ethylene Production Costs

2.05 The US, with about 36% of world ethylene capacity in 1980, usesabundantly available low cost refinery gas and natural gas fractions as thepredominant feedstocks. In contrast, Japan and West Europe, which aredeficient in natural gas resources, use almost exclusively more costlynaphtha and gas oil, which results in the production of a wide range ofco-products, frequently in excess of market requirements and requiringcomplex and expensive separation and purification facilities. Since theoil price increases of 1973 and 1979, the use of refinery liquid productshas become even less economical compared to that of natural gas fractions.While naphtha is currently priced at around US$240/ton or US$5.5/millionBTU, gas prices range from US$5.4/million BTU in West Europe toUS$2.5/million BTU in the US, and US$1-1.5/million BTU in the Middle East.The combination of higher capital cost and increased feedstock prices hasmade naphtha-based ethylene costlier than natural-gas based ethylene byabout 33% in West Europe,- and 50% in Canada and in some low gas pricedeveloping countries. Ethylene capacity by feedstock type in variousregions is shown in table TI-1.

Table II-1. Ethylene Capacity by Region and Feedstock Type, 1980

Regional Capacity Feedstock (in %)as % of World Natural Gas and Naphtha and

Nameplate Capacity Refinery Gas Gas Oil

uS 36 60 40Canada 3 40 60Japan 11 0 100West Europe 32 1 99Middle East 1 57 43Asia and Oceania 5 15 85East Europe and USSR 9 8 92Latin America 3 22 7_

World 100 26 74

2.06 The industry is characterised by significant economies of scale.Production cost per unit of ethylene declines by about 15% when capacityincreases by 50%; but beyond 300,000 tpy capacity there is no significantadvantage with larger capacities. In developing countries, higher projectand infrastructure investment costs and possible lower production levelscould raise ethylene production costs by 10-15% relative to developedcountry locations.

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C. The World Polyolefins Market

1. Historical and Projected World Consumption of Polyolefins

2.07 Over the past decade, consumption of petrochemicals in generalenjoyed a reasonable growth in spite of large energy price increases,highlighting the general health of the demand for the products andreflecting the benefits compared to traditional materials. Worldconsumption of polyolefins (LDPE/LLDPE, HDPE and PP) increased at a fastpace from 8.5 million tons in 1970 to 25.3 million tons in 1983, at anaverage rate of 8.8% p.a. The energy price increases of 1973 and 1979,resulted in a consumption slump during 1974-75 and further stagnationduring 1979-81. Yet, during the relatively normal periods 1970-73, 1976-79and 1982-83, polyolefins consumption grew at 16.7%, 13.0% and 12.8% p.a.respectively. LDPE, which has been longer in use, accounted for about 65%of total polyolefins consumption in 1970. However, consumption of HDPE andPP has grown faster than LDPE, owing to newer applications in bulkpackaging, industrial components, consumer durables and pipes. As aresult, the shares of LDPE, HDPE/LLDPE and PP in 1983 total polyolefinsconsumption were 44%, 31% and 25%, respectively. World polyolefinsconsumption and growth rates by resin type from 1970) to 1983 are given inAnnex 2-2. Regional consumptions and shares of world consumption are givenin Annex 2-3. Average consumption growth rates in selected periods fordeveloping and developed regions are given below.

Average World Consumption Growth Rates in Selected Periods(% p.a.)

Developing TotalDeveloped Regions Regions World

1976-79 12.5 15.1 13.01979-83 1.3 13.2 4.31974-83 4.7 13.9 6.8

Over the past 10 years (1974-83), consumption grew aLt a higher rate indeveloping (13.9% p.a.) than in developed (4.7% p.a..) regions, because ofthe lower initial base in the former. The share of the developed regionsin world consumption has thus declined, but was still about 69% in the 1983world total, with the US (27.8%), West Europe (28.7%) and Japan (9.9%)having large shares.

2.08 In order to make realistic projections of future world demand andsupply for individual polyolefins, the Bank commissioned three majorconsulting firms, Stanford Research Institute (US), Chem System (UK), andSEMA (France), to study and assess country-by-country projections ofpolyolefins demand/supply situation (Project File, Reference C). Theseprojections were complemented by private industry studies and by regressionstudies carried out by the Bank. The Bank's projections of future worlddemand for polyolefins are shown in table II-2.

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Table I-2. D]n-d for blRowlefir by Fe#im, 1983-95(in thosl tons)

Total Fblyoledins-1983 (actual)- -1990 (projected)- -1995 (projecte1-)- C&-owth Rate

FE a/ pp Total PE PP Total FE PP Total 1983-9% 1990-95

tUiited States 5,370 1,660 7,030 7,525 2,460 9,985 8,050 2,709 10,750 5.1 1.5iWst Euape 5,610 1,640 7,250 6,000 2,100 8,100 6,500 2,300 8,800 1.6 1.7Japan 1,533 974 2,507 1,8D5 1,205 3,010 2,005 1,400 3,405 2.7 2.5Cairda 572 105 677 865 165 1,0390 1,075 195 1,270 6.8 4.3

Stltotal 13,085 4,379 17,464 16,195 5,930 22,125 17,630 6,595 24,225 3.4 1.8

latn Anzrica 1,411 313 1,724 2,549 562 3,111 3,287 710 3,997 8.8 5.1East axope 1,655 329 1,975 2,500 500 3,000 3,150 600 3,750 6.2 4.6Midle East 334 60 394 607 82 699 750 105 855 8.3 4.4Africa 488 121 609 746 186 932 938 225 1,163 6.3 4.5india 176 37 213 325 90 415 495 145 640 10.0 9.1Other Asia/

beania 1,929 977 2,906 2,998 1,535 4,533 3,760 1,790 5,550 6.6 4.1

Sutotal 5,993 1,828 7,821 9,725 2,955 12,680 12,380 3,575 15,955 7.2 4.7

okrld 'Ital 19,078 6,207 25,285 25,920 8,885 34,8)5 30,010 10,170 40,180 4.7 2.9

Saxres: An Systes ard Bark Estinates.

a/ PE: Plyethyleres irluirg IE, UJFE and HlE.

With the world economic recovery from the recent recession, plasticsconsumption is expected to resume growth, although at a lower rate than inthe past. World demand for polyolefins is projected to grow from 25.3million tons in 1983 to 34.8 million tons in 1990 and 40.2 million tons in1995, at an expected average growth rate of 4.7% p.a. during 1983-90, and2.9% p.a. during 1990-95. These are relatively conservative estimatescompared to the 6.8% p.a. rate in world consumption experienced in the lastdecade. Growth in developed regions is estimated at 3.4% p.a. up to 1990and 1.8% p.a. thereafter. For developing countries, consumption growth isestimated at 7.2% up to 1990 and 4.7% thereafter. Among the developedregions, the growth rate in the US is expected to be higher than in WestEurope and Japan because of greater development efforts in new areas ofsubstitution as well as in industrial applications. Demand growth isexpected to be higher than world average in East Europe and developingregions where present consumption levels are low. Demand for RDPE/LLDPEand PP will continue to grow faster than for LDPE, increasing their sharefrom 55.4% in 1983 to 67.3% in 1990 and 71.7% in 1995.

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2. Historical and Projected World Capacity of Polyolefins

(a) Historical World Capacity of Polyolefins

2.09 World nameplate capacity of total polyolefins has grown from 12.4million tons in 1970 to 31.7 million tons in 1983, at a rate of 7.5% p.a.on average. Developed regions accounted for 90% and 79% of total worldcapacities in 1970 and 1983, respectively. As demand grew, the industryexpanded at an over-optimistic pace, with world capacity more than doublingbetween 1970 and 1977. Between 1978 and 1983, net capacity additions wererelatively small as very little additional capacity came on stream andthere were capacity closures as part of industry restructuring programs inthe US, Japan and West Europe. In 1983, of the total world capacity of31.7 million tons, West Europe accounted for 34%, the US for 30%, Japan for12%, East Europe for 9%, Latin America for 4%, Canada for 3% and the MiddleEast for 1%. Annex 2-4 shows the capacities by region of individualpolyolefins for the period 1970-1983.

2.10 Capacity Utilization. Available capacity utilization informa-tion tends to be unreliable because of lack of consistency, differencesbetween design grade-mix and actual production grade-mix, number of opera-tion days per year and the effect of capacity buildup in new facilities.After correcting for these inconsistencies, the estimated historicalaverage capacity utilization rates by product and region is shown in Annex2-5. Capacity additions and market constraints have kept average capacityutilization at about 74% during 1970-83. In 1983, the last year for whichdata is available, capacity utilization reached 83%. The higher capacityutilization during relatively normal years (1974, 1979 and 1983), indicatesthat the facilities can potentially operate at 80-85% of their nameplatecapacities. Since several plants will be closed in the next few years andexisting facilities will be debottlenecked, the industry average capacityutilization is expected to reach 90% by the late 1980s.

2.11 Restructuring of the World Polyolefins Industry. Currently, theextent of overcapacity in the industry is not excessive, as the 1983polyolefins production of 25.3 million tons represents 83% of nameplatecapacity, compared to the 1970-83 average of 74% and a potential of 90%.The early 1980s witnessed rationalization and consolidation of plants,particularly in Japan and West Europe, when large, export-orientedpolyolefins capacities were planned and set up in Canada and Saudi Arabiabased on low-priced natural gas. In addition, the sLowdown of demand inthe developed regions because of market saturation in several applicationareas, led many manufacturers to move away from bulk chemicals into moreprofitable specialty products. The restructuring of the early 1980sincluded closures of older, small, uneconomic plants, and ownershiprearrangements, often promoted by governments. Natural gas pricederegulation in the US may increase feedstock prices and induce additionalplant closures. Given the current market situation, new petrochemicalsproduction could only be economic in countries with such advantages aslarge domestic markets and abundant gas resources.

(b) Projected World Capacity of Polyolefins

2.12 The projections of future polyolefins nameplate capacities aresummarized in table 11-3.

Table II-3. World Nameplate Capacities of Polyolefins a/(in thousand tons)

1983 (Acx1l) 1985 (Projeted) 1990 (Prjected) 1995 (Projcted)

Total lbtal Ibtal ThtalPP Pololefir FE PP Pblefirs E PP RPOYlefi PE PP Pblyolefins

Daevoed Regc

USA, 7,005 2,425 9,430 7,83) 2,645 10,445 7,803 2,645 10,445 7,8f 2,645 10,445Wet E 8,470 2,325 10,795 8,780 2,460 11,240 8,78) 2,460 11,240 8,783 2,460 11,240Japan 2,523 1,330 3,850 2,252 1,330 3,582 2,252 1,330 3,582 2,252 1,33) 3,582CaVda 773 136 939 1,0C7 136 1,223 1,214 136 1,350 1,214 136 1,350

Subtotal 18,768 6,216 24,984 19,919 6,571 26,490 20,046 6,571 26,617 20,046 6,571 26,617

latin Ahrica 1,235 155 1,39) 1,510 205 1,715 1,510 205 1,715 1,510 205 1,715Elast ampe 2,271 483 2,751 3,526 68) 4,206 3,666 680 4,346 3,666 680 4,346MidlM East 260 - 260 1,130 60 1,190 1,365 60 1,425 1,365 60 1,425Africa 318 38 356 318 57 375 473 160 633 473 160 633Tkia 147 30 177 147 30 177 362 90 452 362 90 452

(r Asia/Ociea 1,179 579 1,758 1,522 779 2,301 1,657 779 2,436 1,657 779 2,436

Sbotal 5,410 1,282 6,692 8,153 1,811 9,964 9,033 1,974 11,0)7 9,033 1,974 12,007

Tcta1 rkld 24,178 7,49B 31,676 28,072 8,382 36,454 29,079 8,545 37,624 29,079 8,545 37,624=_.= .==

Sans: CSystems and Bak Estinntes.

a/ Irs1ixie capaties in plae, and finnly armmd additions and cloas as of mid-1984. Ecclues ary nEW speculativecaiazity akitifxs.

The projections, based on data from consulting firms (SRI, SEMA and ChemSystems), include capacities under implementation and those firmlyannounced, and take into account firmly slated capacity closures. Giventhe current severe under-utilization of capacity, no significant additionsare expected beyond those firmly announced until the projected 1990installed capacity is fully utilized. On the above basis, the worldpolyolefins nameplate capacity is expected to increase from 31.7 milliontons in 1983 to 37.6 million tons in 1990. Additions to capacities thatwill come into operation after 1990, are expected to be more carefully andselectively planned in the context of the industry's recent experience ofovercapacity and impact on prices. Such additions most likely would takeinto account domestic, and internatinal supply/demand situations, and wouldbe predominantly for production of LLDPE/HDPE, and PP, while LDPE will beconfined to existing capacity. In estimating the evolution of futuredemand/supply balances, and prices it is assumed that once the current

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rationalization is completed, future capacity additions would maintain areasonable balance between demand and supply with optimum capacityutilization.

3. Historical and Projected World Supply-Demand Balanceof Polyolefins

2.13 Historical and projected demand and supply for LDPE/LLDPE/HDPEand PP are given in charts II-A and II-B on the following page. Forpurposes of estimating future supply gaps, product availability has beenestimated based on capacity utilization rates higher than the historicalaverage--85% in 1985, with further increase to 90% for developed regions by1990. The above scenario indicates that demand for LLDPE/LDPE/HDPE willoutstrip supply by 1990. PP's estimated demand will exceed supply by 1986.

2.14 The demand and supply analysis groups the polyethylene polymers(LDPE, LLDPE and HDPE) together because of their intersubstitutability inseveral applications. LLDPE, which is a newer product, has increasinglyproved to be a versatile polyolefin with application areas many of whichbridge those of conventional LDPE and HDPE. The largest area ofapplication for LDPE has been in films for packaging followed by injection-moulding applications, whereas for HDPE it has been iLn blow-mouldingfollowed by injection moulding applications and piping. Because of betterstretch properties, LLDPE competes with LDPE in the film applications andhas better performance to cost ratios. Similarly, LLDPE competes favorablywith HDPE in sheets, tubulars and injection moulding applications.Injection moulding and film applications areas also provide considerablepotential for inter-product substitution of LDPE and HDPE. The potentialmarket for LLDPE, including demand for applications where it can substituteLDPE and HDPE, is significantly higher than the likely availability ofLLDPE from the 1990 worldwide capacity. It is, therefore, appropriate togroup the three products for purposes of evaluating the supply and demandbalance. With regard to PP, its applications and those of HDPE overlap inthe areas of the blow moulding, consumer durables, engineering parts andpiping. PP is, however, preferred over HDPE in several applications, andhas in addition unique applications in fiber and electroplatable consumerdurables.

CHART II-A

WORL CAPACITY, PRODUICTZON /OJANFOR LDPE. LJDPE & HoPe. 1B70-io1s

rtr Dwuo n 7

4,_ ~ ~ ~ CHR II-

~~~~. mO P.17010

N2 I _ cfea"o_

M

S..

CHART II-B

UCALO CAPACITY PqaoucroN /OEMANOFoOR RP, 1g7F995gg

__

'4 .. oX

N .1.,,,,,,,*.I0 l@ ,7 "

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2.15 Regional Supply/Demand Balances. On the basis of the aboveglobal supply demand estimates, the regional supply/demand balances in1983, and those projected for 1990 and 1995 are given in table II-4.

Table II-4. Current and Projected Surplus (DefiLcits) for Polyolefinsby Region, 1983-95(in thousand tons)

Actual Projected1983 1990 1995

PE PP PE PP PE PP

USA 1,328 363 (505) (79) (1,030) (319)West Europe 830 400 1,902 1L4 1,402 (86)Japan 213 88 222 (8) 22 (203)Canada 113 15 228 (43) 18 (73)Latin America (408) (161) (1,266) (388) (2,003) (536)East Europe 215 (20) 616 78 (34) (22)Middle East (159) (60) 553 (31) 410 (54)Africa (293) (87) (344) (50) (536) (89)India (61) (17) (17) (13) (187) (68)Other Asia/Oceania (1,036) (469) (1,590) (873) (2,352) (1,128)

Net World Total 742 52 (201) (1,293) (4,291) (2,578)

2.16 The current surplus of polyolefins in the U.S. is expected toturn to substantial deficit by 1990 because of only limited furthercapacity additions. Japan is expected to become a net importer ofpolyolefins in the 1990s. West Europe will continue to have surplus,meeting the increasing consumption with better util:Lzation of alreadyavailable capacity. Canada and the Middle East wil:L emerge as significantexporters after 1985 owing to new capacity installations. Deficits inremaining regions of the world, particularly Latin America and otherAsia/Oceania regions are expected to increase substantially since littleadditional capacity is foreseen. The surplus capac:Lty in West Europe couldresult in further closures of old plants, and the equilibrium year forLDPE/HDPE/LLDPE could correspondingly occur sooner than is shown in chartII-A. The large aggregate deficits expected by 1990 will have to be *etwith annual production capacities to be planned in 'Late 1980's and cominginto production by early 1990s, as new facilities w:Lll require 3 to 4 yearsin a developed country and 4 to 6 years in a developing country betweeninvestment decisions and production.

D. Prices of Major Polyolefins

2.17 Polyolefin prices have shown considerable short-term fluctuationsin the past, mainly as a result of market conditions. Reflecting thestagnation in demand for petrochemicals in 1979-82 following the recentworld economic recession and the substantial capacity additions during the1970s, prices of polyolefins, especially LDPE, have declined in the lastfew years and continue to remain depressed. The 1973 energy priceincreases along with short-term speculative demand resulted in unusually

CHART II-C

EXCM3 CAPCIT Y OVM CONSUMPTON/tE0MAN a/MIWUON MON

4

2-

0-

LDP",WnDPED

-' P~~~~~~~~~~~~~~~pp

1970 1972 t974 17 1978 1980 1982 19 6 18 1990 1992

a/ Excess capacity is defined as 85% of the world nameplate capacitiesminus (historical) consumption, or (projected) demand.

high price increase in 1974, with polyolefin prices reaching near US$1,300per ton (in 1984 prices). Thereafter, prices declined to about USS600 perton in 1975-78 coinciding with large capacity additions and, as a result,excess supply. Following the energy price increases of 1979, polyolefinprices rose again in 1979 and 1980, but declined again in 1981-1982, whenlarge capacities came on stream principally in East Europe, the UJSA andLatin America, in the midst the economic recession. The US export pricesof LDPE and HDPE resins have recovered by late 1983 - early 1984 to US$892and US$794 per ton respectively. Prices of LLDPE - a relatively newproduct, enjoys a 5-7% premium over LDPE. Historically PP has enjoyed a10-15% premium over HDPE due to its unique applications as reflected by thecurrent (first quarter of 1984) US price of US$905 per ton. The historicalevolution of polymer prices is given in Annex 2-6.

2.18 Polvolefin prices are projected to increase gradually as demandcatches up with available capacity. Because of the substantialinter-product substitutability among the polyethylenes (para 2.14), untilsupply and demand reaches equilibrium, the prices of the differentpolyethylenes will become interdependent and will be set predominantly bythe aggregate polyethylene supply and demand balance as shown in ChartII-C. Until demand and supply balance is reached around 1990, some of theapplication areas of LLDPE/HDPE will be met by LDPE, given the latter'scontinued oversupply. It is anticipated that up to 1990, HDPE prices willremain closer to the present LDPE prices. By 1990, the product prices areexpected to rise and reach the respective long-term equilibrium levelsdiscussed in the paragraph below. While the demand and supply balance ofPP is projected to be reached before 1990, PP prices may reach itsequilibrium level only by 1990 as a result of inter-productsubstitutability with HDPE.

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2.19 Long-term equilibrium prices are forecast on the basis oflong-term marginal cost of efficient suppliers. The basic proposition isthat by 1990, when polyolefins world demand exceeds supply capacity, newinvestments will need to be induced into the industry. For these newinvestments to come into the market, polyolefin prices will need to reach alevel that will enable the most efficient marginal suppliers to cover theircost and earn a reasonable rate of return on invested capital. If priceswere not to reach these realization price levels, and efficient supplierswere not to come into the market, then demand will continue to exceedsupply and polyolefin prices will rise very sharply. Long-term marginalcost of efficient suppliers (i.e. realization prices), therefore may beexpected to be the floor prices that will exist when the current excesssupply vanishes. Based on consultant studies (SRI and SEMA) and the Bankestimates on the production economics of new efficient polyolefin plants inthe various regions of the world (Middle East, West Europe, USA andCanada), the 1990 realization prices of individual p)roducts are estimatedin constant 1984 US dollars at US$1,100/ton for LDPE, LLDPE, and HDPE, andat US$1,250/ton for PP (Annex 2-7). The equilibrium prices for 1990 soderived, in constant terms, represent annual increases of 4.6% over theprices of LLDPE/LDPE/ HDPE prevailing in 1984, and 5.5% p.a. increases overthe 1984 price of PP. In view of present depressed prices, these increasesare reasonable and achievable. The sensitivity and economic analysiscarried out in Chapter XI-shows that even if product prices were to remainat 1984 levels, the proposed Project will still be economically viable withan ERR of 10%.

III. PETROCHEMICAL INDUSTRY IN -[NDIA

A. Historical Developments

3.01 India has a diversified industrial structure for consumer andcapital goods manufacturing. The manufacturing sector accounted for 16.3%of GOP in 1982/83. On the eve of independence (1947), traditional lightindustries accounted for about one-half of manufacturing output. Sincethen, however, structural transformation has taken place with production ofbasic industrial inputs such as steel, cement, fertilizers and machinerygrowing at a significantly higher rate than industry as a whole. Between1970 and 1982, industrial output of basic and capital goods industriesincreased at a real rate of 5.8% p.a., compared with 3.4% p.a. forintermediate goods industries, and only 3.7% p.a. for non-durable consumergoods. Within the intermediate goods subsector, the chemical industry hasgrown at a much faster rate of 6.7% p.a., increasing its share ofmanufacturing output from 13.4% in 1970, to 17.9% in 1982.

3.02 Production of basic petrochemicals began :Ln 1966 with theestablishment of a small 20,000 tpy naphtha-based ethylene cracker,followed in 1968 by a 60,000 tpy naphtha cracker, both in the Bombay area.These plants are in the private sector with foreign equity holding. Priorto 1966, small quantities of LDPE, PVC and organic chemical intermediateswere produced on the basis of fermentation alcohol, coal tar intermediatesand calcium carbide. In the late 1960s, small faci:Lities for production ofsynthetic fibers based on imported raw materials were also established.

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Recognizing the importance of petrochemicals in national development, theGOI moved in the late 1960s toward larger scale manufacture. A majoraddition to the production of primary petrochemicals was made in 1973 whenan aromatics plant began production in Gujarat State, and which was ownedand operated by the public sector Indian Petrochemicals Corporation Ltd(IPCL). This was followed in 1978 by an integrated naphtha-based olefinscomplex with an ethylene capacity of 130,000 tpy and including a number ofdownstream plants, also owned and operated by IPCL. Present petrochemicalproduction capacity and new capacity under implementation are summarized intable III-1.

Table III-1. India - Present Petrochemical Production Capacity(in thousand metric tons)

Additional CapacityPresent Capacity Under Implementation

Ethylene 260 -Propylene 119 -Butadiene 54 -Benzene 131 -Toluene 25 -Xylenes 40 91

Five Major Polymersa! 308 80

Synthetic Fibers Intermediates 67 61

a/ LDPE, HDPE, PP, PS, and PVC

B. Strategy for the Future Development of the Indian Petrochemical Sector

1. Subsector Priority

3.03 The Sixth Five-Year Plan (1980-85) put increased emphasis onpromotion of the petrochemicals industry. With the availability ofassociated and free gas from the Bombay High and South Bassein fields,India now has a preferred feedstock for the manufacture of ethylene-basedpetrochemicals in plants of international size. Utilization of gas forpetrochemicals is among GOI's highest priorities though the major portionof planned gas production will go for fertilizer production. The GOI isalso planning to establish facilities for recovery of aromatics. TheGovernment recognizes the merit of promoting plastics in light of: (i)their lower energy content vis-a-vis competing products; (ii) their rolein providing widespread low-cost shelter, storage, footwear and housewares;(iii) the relative scarcity and higher economic cost of competing rawmaterials like steel, cement, wood and glass, often imported at the margin;(iv) the potential development of a labor-intensive small-scale downstreamprocessing industry in the private sector; and (v) the added economicadvantages of reprocessed and recycled plastics usage, which is common inIndia.

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2. Private and Public Sector Roles

3.04 Government policy in the sector encourages both private andpublic sector ownership in all phases of petrochemicals manufacture. Theproposed Project will be established in the public sector, but will requiresubstantial private sector investment for the related downstream plants andfor plastic conversion facilities. In addition to the US$1,697 million tobe invested in the Project itself, about US$100 million will be invested byexisting private sector manufacturers for plants expansion to convert50,000 tpy ethylene supplied from the Project, and about US$300 million inthe private, small and medium scale sector for plastics conversion. Thedecision on Project ownership was based both on the need for speedyestablishment to achieve optimum utilization of the country's natural gasresources, and the restricted availability of private sector resources inthe context of India's capital market. Also relevant was the institutionalcapacity of IPCL as efficient petrochemical manufacturing company withconsiderable experience in project implementation, operation andmarketing. The above decision thus reflects pragmatic considerations inthe context of developing the subsector in which both the public andprivate sectors play complementary roles, and is justified. In planningfor future petrochemical investments, the Government intends to keep inview enlarged private sector participation both exclusively and in jointownership in the core and second generation plants.

IV. THE PETROCHEMICAL MARKET IN INDIA

A. Historical and Projected Petrochemical Demand in India

1. Past Consumption

4.01 Imports of polymers in India over the past five years(1980-1984) have averaged 103,000 tpy, representing about one-third ofdomestic consumption, but an insignificant portion of the world trade ofpolymers. Consumption of polymers has grown at a quick pace of 14%annually during 1966-1984, in spite of high domestic prices, limiteddomestic production and restrictions in allocation of foreign exchange forimports. These factors are reflected in an uneven year-to-vear consumptiongrowth. When product availability was restricted, consumption hasslackened, as between 1974 and 1977. The energy price increases of 1973and 1979, which led to a sharp rise in international polymer prices, causeda reduction in consumption in the following years. Conversely, when newdomestic capacity came on stream, as in 1966 and 1978 for LDPE, in 1968 forHDPE and in 1978 for PP, or when imports were relaxed as in 1977,consumption recovered considerably. The average annual growth rate forpolymers consumption during 1977-1982 was correspondingly higher, at 17%.Among the factors that contributed to the increase in demand werereductions in prices especially for LDPE with large additions in domesticcapacity, increased marketing efforts by producers, and the rationalizationof excise taxes on polymers (now comparable with materials like paper,steel and glass, which plastics will partly substitute). Per capitaconsumption of polymers in India remains nonetheless among the lowest inthe world, although it doubled to about 0.45 kg from 0.22 kg in 1973/74,

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(e.g. Brazil 7.7 kg, Korea 19.2 kg, Portugal 17.4 kg all in 1979). Annex4-1 provides historical data from 1965 to 1983 on the Indian market for thefive major polymers (LDPE, HDPE, PP, PVC and PS) and EG, as regardsproduction/consumption.

2. Future Demand

4.02 The base case demand forecast used in the present analysis hasbeen prepared following the review of the Government/IPCL estimates. Thesehave been prepared based on a product-by-product analysis of the end-usemarkets and their growth prospects, economic comparisons between plasticsand traditional materials, and assessment of the reprocessing of usedplastics, as well as field interviews with plastics producers andconvertors (Project File, Reference D). The demand forecast is based onthe present relative prices of polymers and traditional materials and thechoice of polymer primarily based on performance characteristics. Suchrelative financial prices are consistent with the economic cost of therelevant products. The Government subsector development strategy aims atimproving or at least maintaining the competitive position of plasticsthrough appropriate pricing policies and adjustment of relative fiscallevies. Any drop in plastics prices in absolute terms or relative to othermaterials, will lead to faster demand growth. The base case demandforecasts are detailed in Annex 4-2, and summarized in table IV-1.

Table IV-1. India - Demand for Polymers and EG 1983/84-1992/93(in thousand tons)

Base Case Forecast __ot

TotalLDPE LLDPE HDPE pp PVC PS Polymers EG

Actual:

1965/66 15 - 2 - 13 6 36 -1973/74 33 - 29 0.8 49 14 126 101983/84 121 - 75 30 137 17 359 22

Forecast:

1987/88 184 - 91 84 177 18 554 541988/89 209 - 95 104 197 20 625 671989/90 155 54 100 128 217 22 676 761992/93 227 79 115 237 288 28 974 104

Average Annual Growth Rates (%)

1983/84-1992/93 7 NA 5 25 9 7 11 1911 (combined

with LLT)PE)

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The base case annual demand growth rate for the five major polymers isestimated at 11% p.a. during 1983/84-1992/93 against 15% as projected bythe Indian authorities and IPCL, and is regarded as conservative.Moreover, a "worst case" forecast (7% p.a. growth in consumption during1983/84-1992/93) was developed based on pessimistic assumptions regardingpenetration levels of polymers in end-use markets and availability ofplastics during the intervening period through end-1989. Even under the"worst case" scenario, the timing of the proposed Project remainsacceptable, as highlighted in the supply/demand balance (para 4.06).

4.03 With regard to individual polymers, PP conSumption is expected tohave the highest growth because of superior performance characteristics,with 25% p.a. growth, against only 5% p.a. for HDPE. Most increase in HDPEconsumption will be for water pipes, packaging films and householdproducts. LDPE and LLDPE combined will be the second fastest growingpolymer (11% p.a.) mostly for use in irrigation and agriculture, storage,packaging and cables. LLDPE, new to the Indian market, will initially bemostly blended with LDPE (particularly in films) to achieve downgaugingthrough its superior performance. PVC will grow at 9% p.a. through1992/93, and will be increasingly used in pipes for rural watersupply/irrigation, construction, containers, cables and footwear.Consumption of EG has increased in the past years (1973/74-1983/84) at 8%p.a. in line with the production of synthetic fibers, its main use.Polyester synthetic fibers production is being encouraged in a limited wayfrom the early 1970s in view of the declining per capita availability ofcotton. Based on present and projected capacity of synthetic fibers, EGdemand is expected to grow at 19% p.a.

B. Historical and Projected End-Use Pattern

4.04 Packaging applications (fertilizer, chemicals, food, milk,textiles and general purpose packaging) accounted for the largest share(38%) of recent (1981/82) thermoplastics consumption and these applicationsare expected to maintain their share in 1988/89. The direct use of virginplastics, however, does not fully reflect the growth in packagingapplications, as a unique feature of the Indian marke!t is the reprocessingor recycling of used plastics. About 30% of the plastics is reprocessedgiven the present price levels and availability of virgin plastics, and theefficiency of collection of plastic scrap material. Actual totalapplication of plastics in packing, therefore, will be somewhat larger thanthe 38% share based on virgin plastics.

4.05 In the future, plastics consumption is expected to developrapidly (15% annually) for vital applications in agriculture, irrigationand water management - increasing the share in total plastics consumptionfrom 18% in 1981/82 to 23% in 1988/89. Somewhat below average growth isforecast for applications in wires and cables insulation, industrial parts(textiles, electrical and automotive uses) and household applications(housewares, appliances and luggage). The share of PP in total plasticsconsumption is forecast to increase from 8% in 1984/82 to 17% in 1988/89,and that of LDPE from 30% to 33%. On the otner hand, the shares of otherplastics -- HDPE, PVC and PS--are expected to decline.

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C. Projected Petrochemical Demand and Supply Balance

4.06 The projected demand/supply situation in India for each polymerand EG takes into account (i) the production of existing facilitiesoperating at 90% capacity for polyolefins and EG, and at 60% forPVC; (ii) planned expansions operating at 90% capacity; and (iii) theproduction build-up from the proposed Project reaching 95% capacity as of1992/93. The results are summarized in table IV-2, based on the twoassumption regarding future demand growth indicated in paragraph 4.02,i.e. (i) base case with demand growth at 11% p.a. and (ii) worst casescenario with demand growing at 7% p.a. Details are provided in Annex 4-3.

Table IV-2. India - Projected Surplus (Deficit) for Polymers and EG(in thousand tons)

Base Case Scenario Worst Case Scenario1989/90 1991/92 1992/93 1995/96 1989/90 1991/92 1992/93 1995/96

LDPE (47) (42) (59) (165) (14) 10 6 (48)LLDPE (43) (11) (13) (50) (34) 4 5 (15)HDPE (50) (16) (8) (27) (40) (2) 5 (4)PP (67) (91) (130) (333) (24) (14) (29) (112)PVC (50) (92) (118) (214) (13) (38) (53) (109)PS (1) (5) (7) (16) 5 3 2 (2)EG (47) (31) (36) (68) (31) (6) (6) (20)

Under the base case forecast, demand exceeds supply for the Projectproducts (LDPE, LLDPE, HDPE, PP and EG). However, in the "worst case"scenario, small surpluses of LDPE, LLDPE, and HDPE would emerge in thefirst four years. This temporary very marginal surplus, which woulddisappear after 1992/93, is unlikely to pose difficulties for the Project.For EG and PP, even under the "worst case" scenario, no surplus woulddevelop.,

D. The Plastics Conversion Industry

4.07 It is necessary for the plastics conversion industry (whichconverts raw polyolefins into final consumption products) to develop inline with the projected polyolefin production capacity and consumptionlevels. In early 1982, there were about 7,250 processing units (with acapacity of 1 million tpy) against only 1,400 units in 1970. The capacityis predominantly (about 95%) in small-scale privately owned establishmentsowing to the low investment requirements and liberal and simpleregistration procedures for setting up new units. The industry at presentemploys about 100,000 people, an average of about 14 employees per unit.About 0.75 million tpy of additional nominal processing capacity will beneeded by 1990, to process the Project's output, after allowing forimprovements in the efficiency of existing units and in machinery quality.This expansion would promote about US$300 million of private investment.Since the subsector is fairly well-established and is profitable, this sizeof expansion is considered feasible. The Project and the conversionindustry expansion would result in creation of about 60,000 new jobs, a

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part of it by displacement of the jobs in those sectors whose products willbe substituted by the products from the Project.

4.08 India's conversion machine building industry, which is mainly inthe private sector, has demonstrated entrepreneurship and capability toevolve designs of plastic conversion equipment suited for local conditionsat well below international prices. More recently, it has also becomeincreasingly conscious of quality needs, and expects to improve the localdesigns further. This effort will be supported by the present liberalpolicies which encourage imports of prototype machines and post-extrusionsystem components, when needed to achieve quality requirements.

4.09 Organization support to provide technical assistance to theplastic processing industry is available through institutions such as theCentral Institute of Plastics Engineering and Technology (CIPET), thePlastics and Rubber Institute, the National Small Scale IndustriesCorporation (NSSIC), the Small Industries Service Institute, the IndianInstitute of Packaging and various industrial training institutes, as wellas the plastics manufacturers themselves. CIPET is establishing anextension center in in Ahmedabad (Gujarat), while NSSIC intends to set upshortly a center for prototypes development and training. In recognitionof the need for national coordination in developing the skilled manpowerfor plastics processing through disseminating technical literature andresources among the States, training institutes and the processingindustry, the Government has agreed to set up a training and technicalassistance unit by April 1, 1986 which will review cnd update the curriculafor training methods of tool making and conversion machinery operatives, aswell as develop methods and channels for providing technical assistance tothe conversion machinery industry.

V. MARKETING

A. Pricing in the Petrochemical Sector

5.01 At present, each petrochemicals plant in India sets its ownex-factory prices for its own production. Prices of major polymersincreased sharply in 1980 following major increases in petroleum prices in1979. Since then, ex-factory prices are showing a downward trend owing tothe commissioning and efficient operation of IPCL's production facilitiescompleted in late 1978. For example, ex-factory prices of LDPE, HDPE, andPP, in constant 1984 prices, declined from US$2,000, 1,850, and 1,700 perton in 1980 to US$1,200, 1,400, and 1,450 per ton in 1984. While thecurrent ex-factory prices are still higher than CIF prices by 20% for LDPE,60% for HDPE, and 50% for PP, the ratios of ex-factory to CIF prices areexpected to move toward 1, as the current international prices will recoverto equilibrium levels (para 2.19) and as the ex-factory prices could befurther reduced by IPCL's efficient operation particularly after thisenergy-efficient Project comes on stream.

5.02 On ex-factory prices, excise taxes are levied which now rangebetween 16% and 37% depending on the types of polymers involved (comparedwith a uniform rate of 56% in 1974). Ex-factory prices and excise taxesthen form the prices that plastic convertors actually pay. The level of

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tax liability is in line with those charged on competing products (10% to50% for glass, paper, wood, aluminum and steel). Thermoplastics importsare subject to import duties generally set at levels which would makelanded prices of imports equal to ex-factory prices plus excise taxes.However, in view of the recent highly fluctuating international prices,tariffs have remained high to protect local producers against dumping. Asinternational and domestic prices reach equilibrium levels by early 1990's,the tariff level can be expected to decline and match excise taxes ondomestic production.

5.03 The Project is a major effort by the Government to producepetrochemicals--especially thermoplastics--and to use them to substitutethe more energy intensive and scarce traditional materials. To facilitatesuch substitution in an efficient manner, it is necessary that pricing andfiscal policies reflect the relative economics of the alternatives. TheGovernment has asked the Bureau of Industrial Costs and Prices (BICP) toconduct a study on the pricing, fiscal, and trade policies forpetrochemicals with emphasis on the enhanced development of domesticpetrochemichals market in the context of the Project. The Study will, inparticular: (i) estimate the impact of relative prices on demand forthermoplastics; (ii) assess the impact of technology, and productdevelopment on final demand of downstream.derived products; (iii) examinethe tariff, and pricing policy requirements relating to the absorption ofdownstream products in the economy; (iv) assess the methods to integratethe pricing, and tariff policy analyses with India's Plan objectives,relating to the Project, the petrochemicals sector, and inter-relatedsectors; and (v) to highlight any non-tariff, and non-pricing policieswhich are critical to the achievement of the above-mentioned aspects. TheBICP study is expected to be completed by March 1986. The Bank can provideits views to GOB while the study is underway. GOI is committed toensuring that, prior to the commissioning of the Project, the domesticpolyolefins industry is efficient and competitive and, to this end, willconsider the Study findings and implement appropriate recommendations in anadequate time-frame, and the Bank can provide its views on the details tobe considered while the study is underway. This approach is acceptable tothe Bank.

B. Market Development Prior to Project Commissioning

5.04 The Project's output will approximately double domesticavailability of polymers. Even the conservative consumption forecast (para4.02) levels used in the base case, can be realized only with active marketpromotion to develop end-use applications supported by adequateavailability of polymers until the commissioning of the Project. In viewof the limited domestic polymers production, such market developmentefforts will require significant imports to provide assured long-term rawmaterial availability and to reasonably ensure that the required conversionand machinery capacities are developed in time. The annual imports ofpolymers through Project commissioning needed for this purpose areestimated to be about 40,000 tons in 1985/86, 70,000 tons in 1986/87,110,000 tons in 1987/88, and 150,000 tons in 1988/89, representing totalimports of about US$350 million in constant 1984 prices, or US$450 millionin current terms. These estimated levels of imports will be reviewedannually between GOI, IPCL, and the Bank in the light of market response,

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and performance of the conversion industry. Disbursements out of the US$90million Bank Loan component will cover an agreed portion of the annualrequirements jointly specified under the import plan.

5.05 At present, only the actual users--plastics convertors--arepermitted to directly import the polymers. While this system willcontinue, GOI has agreed to give import clearances to permit IPCL to importLDPE, LLDPE, HDPE and PP, starting in 1985/86, in such quantities (para5.04) as are necessary for gradual market expansion. The US$90 millioncomponent will be able to cover up to about 75% of the total LLDPE importrequirements, or up to about 20% of the total incrermental imports ofLDPE/LLDPE, HDPE and PP required.

5.06 The Bank has obtained assurances that GOI will refrain fromtaking any action that would unduly inhibit the marlcet growth in plasticsfrom developing to a level consistent with the need for production underthe Project to market locally all of its output prornptly aftercommissioning the Project.

C. Marketing Strategy

5.07 IPCL already has an effective nationwide rmarketing network of 48distribution points developed during the past five years (para 6.04). Theorganization of the Marketing Department of IPCL is given in Annex 5.IPCL's marketing efforts are supported by its Product Applications Center(PAC) at Baroda, a very large facility providing after sale technicalservices to the processing industry and thus contributing to its growth.For example, during 1977/78-1979/80 PAC's efforts led to the establishmentof 300 new units for processing PP - a new polymer at that time in India.

5.08 IPCL's programs for marketing the outputs of the Project andof IPCL's other expansion schemes include proposals for: (i) establishingnew distribution points; (ii) expanding PAC's activities in setting up aproduct design unit to identify new applications ancd preparing prototypemachinery designs; (iii) training its own marketing staff and that of theprocessors; and (iv) creating a new product applications center under theproposed Project. This program is satisfactory and would particularlyemphasize the use of plastics in agriculture and water management accordingto the findings of a high level national committee which has been recentlyset up. Based on a detailed review, the arrangements proposed for marketdevelopment and marketing of the Project outputs are consideredsatisfactory.

D. Merchant Sales of Excess Ethylene

5.09 The Project will offer as merchant sales about 50,000 tpy ofethylene to existing and some new private sector petrochemicals producersin the Bombay area, primarily for expansion of their facilities, a measurewhich will promote private investment to improve the economics of presentoperations. Six private firms have already offered to purchase a total ofabout 62,000 tpy of merchant ethylene to manufacture products includingHDPE, PVC and styrene. GOI expects to give necessary licenses to theprivate sector investors in a timely manner so that such new facilities arecompleted well before the Project is commissioned.

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E. Export Potential for Final Plastics Products

5.10 India's exports of manufactured plastic products for consumer andindustrial uses, have so far been modest (US$27 million in 1976/77increasing to US$61 million in 1980/81). Products exported in recent yearsincluded spectacle frames, molded and extruded goods, records and videocassettes, electrical accessories and pipes. The USSR is India's majormarket (with one-fourth of the export sales) followed by Saudi Arabia, HongKong, the UK, the UAE, Nigeria, Kuwait and Bangladesh. The exportperformance has been only modest so far mainly due to inadequateinstitutional support to the processing industry, which is largely in theunorganized small-scale sector. While exporters have access to incentivessuch as the cash compensatory support for reimbursement of indirect taxesand duty drawback system for excise and customs duties on plastics used,these are often received by them only after considerable delays.

5.11 India has a comparative advantage in converted product exportsespecially where value added is high, owing to low labor costs, favorablegeographical location and availability of technical skills. To capture theincreased potential for export of converted products, GOI has agreed tocarry out by December 31, 1985, a study of the export market potential forselected finished products under the terms of reference agreed upon betweenthe Bank and GOI, and to consult with the Bank on the implementation of thefindings under the Study.

VI. THE PROJECT SPONSOR

A. Establishment, Ownership and Objectives

6.01 The proposed Maharashtra Complex will be owned and operated bythe Indian Petrochemicals Corporation Limited (IPCL). IPCL is a corporateentity registered under the Indian Companies Act and fully owned by theGovernment of India. The Company already owns and operates a largeintegrated petrochemical complex near Baroda in Gujarat State.

B. Board of Directors and Management

6.02 The Company's Board of Directors has adequate Dowers to providepolicy directions to the Company executives including authorization ofoperating and capital budgets and guidance on employment and compensationpolicies. Approval of the GOI is required only in case IPCL needs toborrow for capital requirements. The Company's day-to-day operations aremanaged by a Managing Director--Chief Executive Officer who is the Chairmanof the Board. The twelve Board members include five (the ManagingDirector, and the Finance, Marketing, Operations and Administration/Personnel managers) professional Senior full-time managers of the Company.The present IPCL Chairman/Managing Director joined the company in 1982after holding important positions in the Indian private sector chemicalindustry.

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C. Organization

6.03 IPCL is a well managed company organized along functional linesinto six departments--Projects, Operations, Finance, Administration/Personnel, Research and Development (R&D) and Marketing. The departmentsare headed by full-time functional directors. The Projects Department isresponsible for IPCL's new projects and a major program of plant revampingand modernization is underway (para 6.06). The Department is responsiblefor project planning (feasibility study and selection of technologies) andimplementation (selection of contractors, works supervision and training ofpersonnel) and has been responsible for planning the Project. TheOperations Department (entrusted with plant production and maintenance),the Finance, and Administration/Personnel Departments discharge thestandard functions pertaining to their fields. IPCL's Research andDevelopment (R&D) Department with about forty scientists, undertakesapplied research to improve process parameters and economics, and developprocesses for by-product utilization. The Company's financial andoperations planning are well organized and adequately monitored through anExecutive Committee of senior managers, following techniques which includestandard costing and variance analysis.

6.04 The Marketing Department carries out its product promotion andsales responsibilities through a network of regional offices in Baroda,Bombay, Bangalore, New Delhi and Calcutta. Actual sales to IPCL's 7,000customers are conducted through 48 distributors who are located within 100km radius from the consumers. The products are sold at all distributionpoints at uniform price. The Department's Product Application Center (PAC)is responsible for customer training, product testing and new applications,and communications.

D. Staff and Training

6.05 IPCL's total staff as of July 31, 1984 numbered 6,550 including1,820 professionals and qualified technicians. Because of its highprofessional reputation, and competitive compensation package, IPCL hasbeen able to attract competent staff at all levels, and retain them. IPCLhas extensive in-house training facilities which plan and run programs fortraining technical and other staff often with the assistance of specializedconsulting firms. Project and operating staff are generally trained beforestarting up of plants entailing new technologies. IPCL therefore has afully trained work force competent to operate and maintain largepetrochemical facilities.

E. Operations and Growth

6.06 IPCL's first petrochemical plant--an aromatic complex--startedcommercial production in 1973. Several units have since come on stream inthe Baroda complex which now includes eleven operating plants foraromatics, olefins, ethylene oxide/glycol, LAB, LUPE, PP, PBR, ACN, acrylicfiber, acrylics and PVC. Capacity utilization has steadily increased to80-100% in 1982/83. Besides the proposed Project, IPCL plans to expandVC/PVC, DMT, acrylic fiber, xylene, and LAB units as well as install acaptive power plant and implement energy-saving schemes. The detail ofIPCL's on-going investment program, which totals Rs 7,180 million, is given

- 23 -

in Annex 6-1. These other projects have met all GOI's investment criteria,and the projects for expansion are basically market-pulled with relativelycertain market prospects. IPCL is India's major petrochemical producerengaged in the production of a wide range of products involving differenttechnologies. It holds a share of about 71% of LDPE, 63% of ethyleneglycol, and 35% of PVC total production capacity in India. IPCL'sfinancial statements for 1979/80-1982/83 are provided in Annex 6-2 andsummarized in table VI-1. A description of IPCL's organization andstructure is available in the Project File, Reference E.

6.07 Table VI-i shows that IPCL has enjoyed a healthy financialsituation in the past years. During 1979/80 and 1982/83, total assets grewfrom Rs 3.9 billion to Rs 4.8 billion, while revenues increased from RS 1.8billion to Rs 4.5 billion, and profit before tax from Rs 46 million to Rs513 million. Equity increased from Rs 2.1 billion to Rs 3.5 billion with adebt/equity ratio of 15/85 in 1982/83. The liquidity position also hasbeen satisfactory with the minimum current ratio of 1.9 in 1980/81.

Table VI-1. IPCL - Summary of Financial Statements(in millions of current Rupees)

1979/80 1980/81 1981/82 1982/83

Revenues 1,750 2,838 4,105 4,487Profit Before Tax 46 339 551 513Total Assets 3,850 4,330 4,220 4,840Total Equity 2,080 2,420 2,980 3,490Long-term Debt 1,260 960 640 640Current Assets 1,280 1,820 1,850 2,210Current Liabilities 510 950 600 710

Profit Before Tax/(Total Revenues -Excise Duties) 3.1% 13.9% 15.5% 13.6%Current Ratio 2.5 1.9 3.1 3.1Debt Equity Ratio 38/62 28/72 18/82 15/85

VII. THE PROJECT

A. Project Objective and Bank Group Role

7.01 The Maharashtra Petrochemical Project, the first in India to bebased on domestic natural gas, the most economic feedstock, will contributeto the optimal use of India's gas resources. The output from the Projectwill be marketed entirely in India. Though doubling present domesticcapacity, the Project will add only insignificantly - about 1%, to worldcapacity. The Project is based on internationally competitive-size plantand will therefore substitute economically the scarce more energy intensivetraditional materials of which India is a net importer. At full capacitythe economic value of the products will be about US$430 million per year.A part of the Project's ethylene output would be marketed to existing

- 24 -

private sector petrochemical plants in the Bombay area enabling them toexpand and improve their operations. The Project has an attractiveeconomic rate of return and will lead to transfer of modern technology andknow-how to India.

7.02 The Bank Group has already been involved in the development ofIndia's gas resources and in the use of natural gas for fertilizerproduction. The Project will be the Bank's first involvement in thepetrochemical sector which would contribute further to optimal gas use.The current Project scope reflects the Bank's suggestions for the inclusionof LLDPE in the Product slate, and for diversion of a part of the ethyleneproduction for expansion of private sector petrochemicals manufacturingunits in the Bombay area. Through this project, the Bank will work withGOI to define an improved sector development strategy in terms of: (a)faster market growth through increased polymers imports; (b) evolution of amore rational product pricing system and fiscal policies; (c) promotion ofexports of plastic products; and (d) creation of an organized system fortechnical assistance to, and training in, the conversion industry. TheBank's participation will also contribute to efficient and coordinatedimplementation of the project.

B. Project Scope

7.03 The Project will produce, as marketable products, low-densitypolyethylene (LDPE), linear low-density polyethylene/high densitypolyethylene (LLDPE/HDPE) and polypropylene (PP), which are polyolefinplastics to be sold to the conversion industry ; ethvlene glycol/ethyleneoxide (EG/EO), which are intermediates for synthetic fiber and syntheticdetergent industries; a small amount of acetylene black, which will be soldto the existing tire manufacturing, and printing and ink industries. Aportion of ethylene produced from its core cracker unit will be sold toexisting and new petrochemicals downstream conversion industries in thearea. Specific project facilities are described in Annex 7-1. The Projectwill utilize ethane/propane (C2/C3) fraction, separated from B-H offshoregases as the primary feedstock, supplemented by propane/propylene separatedfrom the offgases from the two refineries in the Bombay area. The linkagesbetween the core unit, second generation downstream conversion units, andthe tertiary plastics conversion sector outside the Project is shown inchart VII-A.

C. Project Location

7.04 The Project will be located at a site about 2 km from theNagothane village in Raigarh district (Maharashtra State), about 120 kmsouth of Bombay city. The site, about 50 km from the Uran gas processingterminal, was selected after investigation of six alternative sites andpresents the advantages of: (i) reasonable proximity to the main rawmaterials sources; (ii) relatively sparsely populated area involvingminimum adverse social, environmental and safety impact on existingvillages; (iii) conformity with MSG's plans to promote industrialdevelopment in the backward areas of the State; and (iv) availability ofutilities and infrastructure. In view of the nature of the terrain, thesite will need extensive grading and development. The Project's landrequirement of about 567 ha is being purchased from a region notified as

- 25 -

MAHARASHTRA PETROCHEMICAL PROJECTInterrelationship Between the Core Unit and the Second and

Third Generation Plants and Thelr Principal Products

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Vakshe and Ambeghary unde theapidldevelopenStte Gofvtelrnmen lawshoeoi.nCompfeldsation araneBments with tBHe owner Sofuthe lasendta (S-B takeas ovnerI94have been completed canth sttep Governmcn niasdpnentce Maaasta Physical

- 26 -

energy. The Bank has assisted in the development of the B-H resources(Loans 1473-IN of 1977, and 1925-IN of 1980) and in the production of theS-B offshore free gas (Credit 2241-IN of 1983).

7.06 Feedstock gas for the Project will be obtained principally fromthe offshore B-H associated gases after separation from crude oil at theproduction platforms, as well as free gas piped through an existing marinepipeline to ONGC's existing gas treatment and LPG separation station atUran on the Bombay coast. ONGC will set up additional facilities at theUran site before the completion of the Project, to separate from the gas,the ethane/propane (C2C3) fraction--the main feedstock for the Project. A,50-km pipeline will be built by ONGC at the cost of the Project, totransport the gas from Uran to the Project site.

7.07 Recoverable quantities of gases from reserves consist of:(i) solution gas from the two currently producing crude oil zones (L-II andL-III horizons); and (ii) free gas in S-1 horizon, lying between the L-IIand L-III horizons. These reserves total about 139 billion cubicmeters--102 billion m3 from L-11 and L-III, and 37 billion m3 from the yetto be developed S-1 horizon. About 30 billion m3 of associated gas fromL-III has already been recovered since the start of production of crude oilfrom this horizon. Allowing for further depletion of L-II and L-III gasreserve during the next 5 years of project implementation, there wouldstill be adequate gas for over 22 years of project operation at its fullcapacity. In addition to the above proven reserves., associated and cap gaswill also be available from Panna and other smaller fields now beingdeveloped. Basal sands of the L-III horizon are also expected to containsignificant gas reserves but their recoverable quantities have not yet beendetermined. The proven and potential reserves are therefore more thanadequate to meet the gas needs of the project for its economic operatinglife.

7.08 ONGC at present intends to supply about 8 million m3 Per day ofraw gases to the Uran terminal, matching the estimated lean gasrequirements in the Bombay area. As crude oil production declines in thecoming years, the reduced associated gas supply wil:L be supplemented asnecessary by free gas from the S-1 horizon. AccordiLng to presentestimates, S-1 gas production will need to commence by 1992-93. Cap gasDroduction from L-III is expected to commence by 2003 when crude oilproduction from this horizon would have ended. Because of the lower C2/C3content of S-1 gas relative to L-III associated and cap gas, it will benecessary to produce increasingly larger quantities of the S-1 gas,commencing 1995/96 reaching up to 1.5 million m3 per day by 2002, whenL-III cap gas will become available. Annex 7-2 shows the current ONGC gasproduction and supply plan, as well as the Bank's estimates of additionalS-1 gas, or gas from other satellite fields, required as supplements toensure adequate feedstock to the Project. To ensure that the physicalarrangements required to produce the gas and deliver it to the Project areplanned and implemented in time, assurances have been obtained from GOIthat it will take adequate measures to ensure that the offshore gasdevelopment plans are carried out in a time-frame consistent with therequirements of associated and free gas to the Project and that physicalfacilities for feedstock separation and supply to the Project shall beestablished. From IPCL, assurances have been obtained that it will enter

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into a long-term agreement with ONGC for feedstock gas, and fuel gas supplyby June 1988.

E. Utilities and Infrastructure Facilities

1. Water

7.09 Water supply to the Project, estimated at 15 million gallons perday, will be drawn from the existing water-intake headworks situated about4 km south of the site on the Amba river and transported by a pipeline tothe site. The new facilities including a pipeline from the headworks tothe site and additional pumps at the existing headworks will be built atthe cost of the Project by MIDC. The flow in the Amba river will beaugmented by diversion through a link canal (a State Government project)from the Kundalika river, which derives its primary flow from the tail-raceof the Bhira hydroelectric plant. This diversion will ensure reliable andsustained water supply to industrial users in the area including theProject. The Project water supply arrangements are satisfactory.

2. Power

7.10 At full capacity, the Project will require about 64 MW of power.The Project includes captive power supply arrangements entailing 73 MW ofthermal generation (based on lean gas) through the installation of three(including a standby) gas turbinie generators of 20 MW each, and a 13 MWsteam turbine driven generator. In addition, the Maharashtra StateElectricity Board (MSEB), has agreed to supply 20 MW of power, through theKondalgaon station, to meet the emergency requirements and to ensureuninterrupted power supply even if for any reason two out of the fourgenerators are under maintenance. Availability of adequate quantities ofdependable power is crucial to the uninterrupted and safe operation of theProject. The arrangements for practical self-sufficiency in power supply,with back-up from the State grid are most appropriate, and will eliminaterisks.

3. Roads and Railways

7.11 The Bombay-Goa highway passes about 4 km east of the Project siteon the right bank of the Amba river. A new road from the site to thehighway including a bridge across the Amba river will be constructed.Small roads in the Project area will be widened and new roads will beconstructed to provide an alternate approach to the highway and to Bombaycity. A broad-gauge line to be completed in end-1984 will pass throughNagothane village providing a railway link to Bombav. A spur line (about 3km long) will connect the Project site to the Nagothane railway station totransport equipment and materials to, and products from, the Project or inthe alternative, the existing Nagothane railway station will be enlarged toinclude a marshalling yard eliminating the need for the spur line. Adeep-water jetty was constructed in early 1983, about 50 km from theProject site, for use by the projects in the area to receive heavyconsignments. MSG will upgrade the road link from the jetty to the site toenable the transport of heavy loads. With the completion of thesetransport links, the Project will be well connected to its markets in therest of the country.

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VIII. PROJECT IMPLEMENTATION ARRANGEMENTS

A. General Arrangements

8.01 The Project, to be owned by Indian Petrochemicals CorporationLimited (IPCL), will be implemented and operated by a separate division ofIPCL. IPCL will implement the Project with Engineers India Limited (EIL)--a large Indian engineering company-- as its general contractor responsiblefor basic engineering of non-licensed sections, detailed engineering,procurement services, construction contractors selection, and constructionsupervision for all project components. IPCL will obtain frominternational license and engineering firms and provide EIL with theproprietary knowhow, process license and basic engineering for the threepolyolefins, and EO/EG and acetylene black technologies. The technologylicensing agreements will provide for licensor specialists to review EIL'sdetailed engineering, to supervise construction and plants start-up. IPCLwill be assisted (i) by the Maharashtra State Government (MSG) in theacquisition of the Project site as well as for right-of-way for thepipelines; (ii) through MSG's executive development agencies-- MaharashtraIndustrial Development Corporation (MIDC), and State Industrial InvestmentCorporation of Maharashtra (SICOM)--in the implementation on behalf ofIPCL, of the water supply arrangements (headworks and pipeline), andapproach roads; and (iii) through Maharashtra State Electricity Board(MSEB), in constructing the power transmission line, and for long-termsupply of standby electric power from the State Gridl. IPCL, as mentionedbefore (para 7.08), will enter into a long-term agreement with ONGC forfeedstock gas and fuel gas supply. ONGC will also construct the C2/C3separation facilities at Uran at its own cost, and the gas transmissionlines from Uran terminal to the site on behalf of and to the cost of IPCL.IPCL will enter into a long-term supply contract with Bombay refineries forsupply of propane/propylene refinery offgas to the Project. The IndianRailways will lay the railway spur lines from Nagothane railway station tothe site, or enlarge Nagothane railway station facilities at the cost ofthe Project. As part of their ongoing industrial promotion activities inthe State. MIDC and SICOM will promote establishment of industrial estatesfor small-scale private industries for development of plastics conversionindustry, and ancillary industries for providing inputs to the Project. AProject Coordination Committee consisting of representatives of IPCL andthe agencies with responsibility for implemen;ing the various infrastruc-ture facilities, has been formed to monitor progress, provide coordinationand ensure timely availability of all the facilities. IPCL will makearrangements satisfactory to the Bank with appropriate agencies andauthorities for provision of adequate and timely supply of water and powerand adequate transport infrastructure facilities for the Project. Thearrangements for provision of infrastructure facilities in a timely mannerare satisfactory.

B. Project Management

1. IPCL Organization

8.02 The Project will be headed by an Executive Director (Project)[ED(P)] who will be a member of IPCL Board and will coordinate with the

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Chairman and Managing Director of IPCL. He will be assisted by a GeneralManager (Project) and a Chief Financial Controller (Project) and all threewill be delegated adequate decision making and financial authority tominimize delays. The Project team of about 75 persons at the peak ofconstruction activities, will manage all activities up to commissioning andwill be grouped into project implementation groups each headed by a projectcoordinator and responsible for specific areas of the facilities. IPCL'scurrent organization structure including the indication for the futureextension, particularly for the Project implementation period, is given inAnnex 8-1. The overall organizational set-up for the Project execution issatisfactory. The ED(P) and General Manager (Project) have beenappointed. The appointment of the Chief Financial Controller is underway. Should a vacancy occur during project implementation in any of thesepositions, IPCL will furnish to the Bank the details of qualifications andexperience of the proposed nominees.

2. General Contractor's (EIL) Organization

8.03 Engineers India Ltd. (EIL), a public sector engineering companywith capabilities and proven experience in implementing petrochemical andrefinery projects, will be the General Contractor. EIL has acquired overthe last 20 years an intimate knowledge of project implementationconditions and procedures in India, and has considerable experience inengineering, procurement, and general project management of largerefineries, fertilizer plants, gas processing and chemicals manufacturingplants both in India and the Middle East. EIL will implement itsresponsibilities through a full-time project task team headed by anexperienced Senior Project Manager. The task team will include areaproject managers and services coordinators. The project managers andservices coordinators will liaise with EIL's corporate departments forspecialist services. A resident Construction Manager reporting to theSenior Project Manager will head the site construction team supervising andmanaging construction subcontracts. The project management arrangementsare similar to those successfully used by IPCL in its Baroda complex and byIndian refineries in implementing and commissioning large projects usingEIL as the general contractor, and the proposed arrangements are thereforesatisfactory.

3. Selection of Technologies

8.04 The technologies for the cracker and the various process unitshave been selected after appropriate evaluation of internationallywell-known alternative available proven processes. The procedures adoptedconsist of: (a) preparing a list of internationally known processtechnology licensors for each unit; (b) inviting techno-commercialassistance during detailed engineering, construction and start-up, andtraining of personnel; (c) evaluating the techno-commercial bids in respectof the required product range, characteristics and technology provenness,supplemented wherever required by visits to plants using such technologies;(d) discussing with the short-listed licensors, the technical andcommercial terms of their offers (excluding prices) to bring bids to acomparable basis; and (e) opening all price bids for each technology on afixed date, and evaluating the offers for selection. A brief descriptionof selection procedures for each plant unit is contained in Annex 8-2 and

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the details are in Project File, Reference F. Technologies selected forthe gas cracker, LDPE, PP, EO/EG have already been approved. The selectedLLDPE technology is expected to be given approval in March 1985.Technology selection for acetylene black still in progress will notadversely affect the overall project schedule. Appropriate technologiesfor the various process units have been obtained internationally followingthe procedures, criteria and methodologies in conformity with the Bank'sguidelines.

C. Staffing and Training

8.05 Under full operation, the Project will directly employ about3,000 persons including 1,025 supervisory staff. During commercialoperations, the organizations will be headed by a Managing Director/Director-in-charge assisted by three General Managers in charge ofoperations, engineering services and Personnel, and two other SeniorManagers--Chief Financial Controller and Chief Technical Manager. Keymanagerial and supervisory staff will primarily come from IPCL's existingpool of experienced personnel and further trained as required in productionmanagement areas. Operations and semi-skilled personnel will be recruitedgenerally from the Indian hydrocarbon processing industry, and trained inIPCL training center, its production plants, as well as at otherhydrocarbon processing units nearby. Unskilled labor will be recruitedmainly from areas near the Project, including persons from displacedvillages.

D. Environmental Considerations

8.06 The Project facilities will treat contaminants in the effluentsto applicable stringent standards for disposal at a safe point in the seaand control air pollution levels to minimize any adverse impact onenvironment. Liquid effluents will be primary-treated within the unitbattery limits to partially neutralize and remove some of the chemicalcontaminants. The effluents will then be sent to a central secondary wastewater treatment facility designed according to licensors' data on effluentsquantities and pollutant levels for process units, and the applicablerigorous State standards (Annex 8-3). Physical treated effluents willconform to standards applicable for discharge into inland waters. Sludgefrom the biological treatment unit and other solid wastes from processunits will be used as land fill. The treated liquid effluents will befinally transported in a 41 km long pipeline and discharged into the sea ina manner to be determined in due course after a survey taking into accountthe dilution levels required and tidal effects. Control of ambient airquality will follow the standards prescribed by GOI's Central Board forPrevention and Control of Water Pollution under the Air Prevention andPollution Act 1981. For Industrial and Mixed UJse areas, as in the case ofthe Project, the ground-level concentration of suspended particulatematter, sulfur dioxide, carbon monoxide, and nitrogen oxides shall notexceed respectively 100, 30, 1,000 and 30 micrograms per cubic meters ofair, monitored at least once a week over 8 continuous hours. The Projectwill use primarily gaseous fuels, and coupled with 90-100 meter-high stacksin the high-heat release furnace and flare, will ensure completeconformance to the air quality standards. IPCL will monitor, duringProject implementation, the meteorological data colliection and the model

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studies on site-specific weather conditions, and ensure that appropriatemodifications to air pollution control systems are incorporated. TheProject will be built and operated to effluent and air quality standardsmentioned above which are acceptable to the Bank.

E. Safety Considerations

8.07 Plant and personnel safety is proposed to be ensured in theProject through measures to be adopted during (a) project design andconstruction and (b) during plant operation--especially in handlingpotential hazards from toxic, explosive, carcinogenic and noisy workenvironment. The facilities will be designed, constructed and operated inconformity with applicable local legislative requirements or internation-ally accepted codes and standards. The process licensors who are providingthe major technologies for the Project have considerable experience withsimilar facilities in other countries, and will provide overall safetyguidelines and review the engineering from safety considerations. Thedesign and engineering will also be reviewed by the EIL and IPCL SafetySpecialists who have experience with petrochemical facilities engineered,constructed and operated in India.

8.08 The Project includes facilities for the production ofpolyolefins,. ethylene oxide/glycol and acetylene black, and the safetyhazards will arise primarily through risks of explosion. In addition, therelatively small tonnages of processing chemicals with carcinogenicpotential will need to be stored and handled in accordance withinternationally accepted practices. Potentially hazardous areas will beisolated and fugitive emissions reduced and controlled.

8.09 Both during construction and its later operation, the Projectwill have an adequate safety department staffed with competent andexperienced professionals mainly drawn from the present operating IPCLfacilities in Baroda. This department will review and set safety norms andpractices in consultation with the process licensors and in conformity withlocal legislative requirements and internationally accepted practices. TheSafety Department will train the operating and maintenance personnel tomaintain their awareness of potential hazards, safety practices andemergency procedures. To ensure high level recognition of the safetyneeds, the Safety Department will report and work directly under the WorksManager. The elements of the safety aspects, and the manner in which theseaspects will be taken into account are summarized in Annex 8-4. TheProject is located in a sparsely populated area and the few hamlets in theimmediate vicinity of the Project site will be relocated to maintain anadequate unpopulated Safety belt around the Project site. Assurances havebeen obtained that IPCL will carry out a detailed safety audit by qualifiedconsultants prior to commissioning of the Project to assess the impact ofthe risks of the Project area, and to the surrounding community. IPCL andthe Bank will exchange views on the TOR for the study and in theimplementation of the findings of the study.

F. Project Execution Schedule

8.10 The major technology selection process has been completed anddiscussions with the main process licensors will be completed by end

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December 1984. The basic engineering work for the major processunits--especially the time critical gas cracker unit--will start in January1985. The land acquisition for the Project is in progress and access tothe land for initial site surveys and later for construction will beavailable in time. The Project will take about 58 months from zero date tomechanical completion, followed by 2 months for precommissioning systemstesting. The project completion date, corresponding to feedstock cut-in,is therefore expected to be December 1989. Basic engineering work isexpected to be substantially completed by October 1985 for the cracker, andJanuary 1988 for downstream units. Major ordering for equipment andmaterials will commence by December 1985, and construction activities byNovember 1985 for civil works in the offsite area and by September 1986 forthe process units. Major equipment will start arriving at the site byJanuary 1987 and will be fully delivered by about December 1988. OtherProject components will be scheduled for completion matching the completionof the gas cracker, except for the utilities systems which will be readyabout 3-6 months earlier to facilitate pre-testing and commissioning. TheProject implementation schedule is shown in Annex 8-5 in the form of a barchart. The Project scheduling has been prepared in adequate detail andreflects realistic time and resource allocations for all the importantactivities.

IX. CAPITAL COST, FINANCING PLAN, PROCUREMENT AND DISBURSEMENT

A. Project Capital Cost

9.01 The total financing required for the Project, including physicaland price contingencies, working capital, and interest during construction,is estimated at US$1,697 million equivalent, of which US$651 millionequivalent will be in foreign exchange. In addition, US$90 million of theBank loan to GOI will be used for financing part of preproduction importsof polyolefins. The capital cost breakdown by project component is givenin Annex 9-1 and summarized in Table IX-1 on the following page.

9.02 The project cost estimates are derived from the Projectfeasibility study which has been extensively discussed by the Bank withIPCL and EIL and appropriately adjusted. The base cost estimate (BCE), inconstant 1984 prices, is derived: (i) for process plants, from suppliers'quotations for key equipment, and EIL's data and licensors' information;(ii) for utilities, offsites and infrastructure, from suppliers' quotationsand EIL's data; and (ii) for piping, electricals, instrumentation, erectionand civil works, from appropriate parameters as a proportion of equipmentand materials costs, based on data from IPCL and licensors. The costestimates include provisions that would enable expansion of the naphthacracker from its initial nominal capacity of 300,000 tpy to a futurecapacity of 400,000 tpy through addition of furnaces. Physicalcontingencies are calculated at 10% of BCE and are appropriate in the lightof the cost estimating basis adopted. Price contingencies are based onannual escalation rates of 3.5% in 1984/85, 8.0% in ]L985/86, 9.0% in1986/87, 9% in 1987/88, 9.0% in 1988/89 and 7.5% in 1989/90 appropriate forindustrial projects in India.

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Table IX -1. Maharashtra Petrochemical Project - Capital Cost Estimates

Rs million US$ million a/Foreign Local Foreign Local

Cost b/ Cost Total Cost b/ Cos Total

1. Equipment, Materials, & Spares

Gas Cracker 726 1,010 1,736 60.5 84.2 144.7E/F1 185 250 435 15.4 20.8 36.2UDPE 243 267 510 20.3 22.2 42.5LLDPE 210 299 509 17.5 24.9 42.4PP 161 214 375 13.4 17.8 31.2Propylene Recovery 26 63 89 2.2 5.2 7.4Acetylene Black 14 29 43 1.2 2.4 3.6Utilities and Offsites 808 1,580 2,388 67.3 131.8 199.1General Facilities 50 271 321 4.2 22.5 26.7Spare Parts 147 49 196 12.3 4.1 16.3Ocean Freight & Insurance c/ 280 - 280 23.3 - 23.3

Subtotal 2,850 4,032 6,882 237.5 335.9 573.4

2. License, Basic Fngg., & Expatriate Assistance 570 144 714 47.5 12.0 59.53. Detailed Engg., & Project Services 12 408 420 1.0 34.0 35.04. Land, Civil Works, and Buildings 38 781 819 3.2 65.1 68.35. Erection d/ 33 482 515 2.6 40.2 42.96. Start-up and Commissioning - 200 200 - 16.7 16.77. Township 10 394 404 0.8 32.8 33.68. Temporary Facilities 33 109 142 2.8 9.1 11.99. Mamgment and Training 12 99 111 1.0 8.3 9.310. Infrastructure Facilities 126 729 855 10.5 60.7 71.2

Basic Cost Estimate (BCE) 3,684 7,378 11,062 307.0 614.8 921.8

Physical Contingencies (PHC) 368 738 1,106 30.7 61.5 92.2Price Contingencies (26.9% of BCE + PHC) 1,078 2,198 3,276 89.8 183.2 273.0

Total Installed Cost 5,130 10,314 15,444 427.5 859.5 1,287.0

Working Capital 716 1,078 1,794 59.7 89.8 149.5Interest During Construction _1961 1,166 3,127 163.4 97.2 260.6

Project Financing Required 7,807 12,558 20,375 650.6 1,046.5 1,697.1

Pre-production Import of Polyolefins e/ 1,080 - 1,080 90.0 - 90.0

Overall Financing Required e/ 8,887 12,558 21,455 740.6 1,046.5 1,787.1

Note: (1) Base Cost Estimate includes duties and taxes totalling US$208.0 million;(2) Column and row totals may differ becalse of rounding-off.

a/ Exchange rate: Rs 12.0 = US$ 1.0.b/ Includes estimated foreign exchange required for imports of raw materials, and oomponents by domesstic

fabricators, and construction contractors.c/ Freight plus insurance and 10% on imports. Includes also (F+1) on inports for general facitities

temporary facilities, and township.d/ Includes construction & storage insurance. At 0.9% on installed cost of installed facilities.e/ Does not include additional short-term financing required, about US$360 million in current terms,

to supplemnit Bank's loan oomponent of US$90 million for preproduction imports of plastics.

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B. Financing Plan

9.03 The financing plan for the Project is given in Table IX-2.

Table IX-2. Maharashtra Petrochemical Project - Financing Plan(in million UJS$)

Sources Local Foreign Total %

Long-Term Debt

World Bank - 210.0 210.0 12.6GOI/Cofinancing 201.2 440.6 641.8 37.8

Total 201.2 650.6 851.8 50.2

Equity

GOI 500.1 - 500.1 29.5IPCL 200.0 - 200.0 11.8Internal CashGeneration of the Project 145.2 - 145.2 8.5

Total 845.3 - 845.3 49.8

Total IPCL Project Financing 1,046.5 650.6 1,697.1 100.0

Pre-production Import(Bank-financed) - 9 0.0a/ 90.0a/

Total 1,046.5 740.6 1,787.1

a/ Excludes additional foreign exchange to be provi'ded by GOI.

9.04 In addition to the proposed Bank loan, a total of US$641.8million equivalent in debt financing for both local and foreignexpenditures will be provided through (i) Government: loans supplemented asnecessary by loans from domestic financial institutions; and (ii) foreignloans from official development agencies. The balance would come throughsupplier's credit, for which arrangements would be finalized during theprocurement cycle. The debt financing will thus amount to US$852 millionequivalent or 50% of the total IPCL financing requirements excludingpreproduction imports. The equity financing, equivalent to US$845 millionor 50% of total financing requirements excluding preproduction imports,will be provided by the GOI (US$500 million), IPCL (US$200 million) and theProject's internal cash generation (US$145 million). The GOI's equitycontribution of US$500 million will come from its development budget(US$252 million), duties on equipment for the Project (US$208 million) andinterest during construction (US$40 million). IPCL's equity contributionof US$200 million will come from the cash balance generated in its existing

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operations after meeting its financial commitments including fundingrequirements for on-going projects (para 10.08). The Project's normalworking capital requirement of US$149.5 million will be reached by thefourth year of operation and will be mainly financed by the Project'sinternal cash generation (profit after tax, plus depreciation) of US$145million during the same period.

9.05 The Bank loan of US$300 million equivalent will be made to theGovernment and will: (i) cover, under the US$210 million component, 12% oftotal Project costs, or 32% of foreign exchange costs; and (ii) provideUS$90 million equivalent for pre-production imports of plastics for marketdevelopment. The Bank loan will be made to the GOI at the Bank's standardinterest terms for 20 years including 5 years of grace. The GOI willonlend the US$210.0 million component to IPCL at an interest rate of notless than 13.25% (a positive real rate given projections for domesticinflation, and in line with the present lending rates to public sectorenterprises) with a repayment period of 15 years including 6 years ofgrace. The repayment term including 6 years of grace is justified ongrounds of (i) the long-gestation period of the Project, with disbursementsunder the loan extending over 5-1/2 years; and (ii) the Project's cashposition and debt servicing capacity in the first year of operation(1989/90). Anounts disbursed out of the US$90 million component forpreproduction of imports will be purchased by IPCL from GOI against paymentin Rupees at the prevailing exchange rates. The foreign exchange risk onthe Bank loan, including the US$ 90 million import component, will be borneby the GOI. Ratification of the Subsidiary Loan Agreement between the GOIand IPCL on terms and conditions satisfactory to the Bank for theon-lending of the US$210 million component will be a condition of loaneffectiveness.

C. Procurement and Disbursement

9.06 Equipment and materials financed by the Bank loan will beprocured through international competitive bidding (ICB), except forequipment proprietary to the process design, items the supply of which iscritical to efficient and timely project execution, and small packagesestimated to cost less than US$200,000 each, which may be procured throughlimited international tendering from at least three qualified suppliersfrom Bank member countries, according to lists of goods agreed upon withthe Bank. IPCL will need sufficient flexibility for efficient and quickprocurement during project implementation as the number of purchase orderswould range between 350 and 400. Aggregate contracts for the procurementof proprietary, critical and small items under the Bank loan will notexceed US$31.5 million equivalent. For purposes of bid evaluation underICB, qualified local suppliers will enjoy a margin of preference of 15% orthe applicable duty, whichever is lower. The likely allocation ofprocurement categories to be followed during project execution is given inTable IX-3 on the following page.

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Table IX-3. Proposed Procurement Methods(US$ million equivalent:)

ICB LIT LCB Othersa/ Total

1. Equipment, Materials & Spares 287.6 44.0 468.9 - 800.5(158.5) (31.5)

2. License & Basic Engineering - 83.1 - - 83.1(20.0) (20.0)

3. Detailed Engg., & ProjectServices - 48.9 - - 48.9

4. Land, Civil Works, & Buildings - - 95.3 - 95.35. Infrastructures, Temporary

Facilities and Township - - 163.0 - 163.06. Erection - - 59.9 - 59.97. Management & Training - 1 3.0 b,, - - 13.08. Startup & Commissioning - 23.3b/' - - 23.3

Subtotal Installed Cost 158.5 51.5 787.1 - 1,287.0(158.5) (51.5)

9. Preproduction Imports 90.0 - - - 90.0(90.0) _ (90.0)

377.6 212.3 787.1 - 1,377.0Total (248.5) (51.5) 300.0

a/ A part of procurement of equipment, materials, and spares shown underICB column, may be procured and financed through bi:Lateral, and supplierscredits using corresponding applicable procedures.

b/ Part of training, startup, and commissioning will be carried out byprocess licensors already selected using LIT procedures.

Notes: (1) Figures in parentheses indicate amounts financed by the Bankloan.

(2) Amounts include duties and taxes, and cont.ingencies, butexcludes interest during construction and working capital.Also excludes additional amounts for short-term financing ofpreproduction imports.

9.07 The Bank loan will also be used to finance a portion of thelicense and engineering costs. Pre-production imports of plastics formarket development to be financed by the Bank loan will be procured by IPCLin economic shipping lots according to procedures reviewed by the Bank andconsidered appropriate for procurement of commodities subject to price

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volatility. The disbursements of the loan for pre-production imports willbe phased over the period up to September 1989. The Bank loan is expectedto be fully disbursed by September 1990, as per disbursement schedule givenin Annex 9-2, which is consistent with the disbursement profile ofBank-financed chemical industry projects including those in India. Fundsfrom co-financing sources will be utilized to finance parts of theequipment and foreign engineering costs in accordance with their respectiveprocurement procedures. IPCL's equity and GOI's loan will finance thebalance of the equipment, engineering, civil works and erection services,which will be procured under competitive bidding procedures normallyadopted for such projects in India and acceptable to the Bank. Theproposed allocation of funds from the Bank loan is summarized in TableIX-4.

Table IX-4. Allocation of Bank Loan

US$ MillionEquivalent Disbursement

Equipment, Materials andSpares 180.0 100% of foreign expendi-

tures and 100% of localexpenditures (ex-factory)

License and Engineering 100% of foreign expendituresServices 20.0 and 100% of local expendi-

turesPre-production Polyolefins 90.0 100% of foreign expenditures

ImportsUnallocated 10.0 Amounts due

Total 300.0

X. FINANCIAL ANALYSIS

A. Revenues and Operating Costs

10.01 The financial projections are carried out in current rupees, ona fiscal year (April-March) basis. The financial rate of return is howevercalculated on constant 1984 price basis. Key assumptions used in thefinancial analysis are given in Annex 10-1. It is assumed that the Projectwill start commercial production in January 1990, 58 months after thecommencement of the basic engineering. The Project would reach 65%capacity utilization rate in the first twelve month operating period, 80%in the second period and 95% thereafter, an achievable rate with theproject configuration involved, the performance of IPCL and theavailability within the Project of captive power supply (power shortagefrom the national grid being a major impediment in India). A project lifeof 15 years is assumed, with no residual value except for working capitalrecovery.

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10.02 In light of the expected efficiency of the gas-based complex,using up-to-date technology on an economic scale, it is assumed that theProject will be able to charge prices close to equilibrium internationalprice levels, which are, in real terms, 20% below India's presentex-factory prices. Ex-factory prices of LDPE, LLDPE, HDPE, PP and merchantethylene, which together account for 85% of total revenues of the Projectare given in table X-1. Detailed product prices and revenues data for theProject are shown in Annex 10-2.

Table X-1. Ex-Factory Prices in 1992/93 a,(in 1984 constant prices)

ProjectedFOB Prices In The

Ex-Factory Price International MarketRs/ton US$/ton US$/ton

Merchant ethylene 7,705 642 767b/LDPE 12,236 1,020 1,146LLDPE 13,985 1,165 1,146c/HDPE 13,815 1,151 1,146PP-Homopolymer 14,824 1,235 1,302PP-Copolymer 16,288 1,357 1,502

a/ First year of full capacity utilization.

b/ Ethylene as such is not traded in the international market. The priceof US$767/ton is ex-factory, Western Europe, from a 450,000 tpyethylene plant.

c/ LLDPE price is assumed to be the same as of LDPE.

10.03 The production cost structure of the Project is summarized inTable X-2 in the following page.

10.04 The ethane/propane feedstock represents 35% of total productioncosts. Ethane/propane, in constant 1984 terms, is estimated at US$206/ton(Rs 2,466/ton), equivalent to 65% of the naphtha price, in 1992/93, thefirst year of full capacity operation; and at US$177/ton (Rs 2,120/ton) in1984, close to the fuel oil equivalent value of US$189/ton. Theseassumptions are in line with the GOI's system for pricing petrochemicalfeedstock. Depreciation, computed on a 12-year straight line method,accounts for a sizeable share (28%) of total production costs, whichreflects the capital intensity of the Project.

B. Financial Projections

10.05 Projected income statement, balance sheet, and funds flowstatement are given in Annex 10-3 for the Project, and in Annex 10-4 forIPCL, without and with the Project.

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Table X-2. Maharashtra Petrochemical Project - Operating Costs Suimary at 95%Capacity Utilization in 1992/93

(in 1984 constant prices)

Quantity Price Annual Cost(tons) Rs/ton US$/ton Rs million US$ million x

Variable CostsEthane/propane gas 427,500 2,466 206 1,054 87.8 34.8LP( 29,992 3,502 292 105 8.8 3.5Butene-1 8,451 15,808 1,317 134 11.2 4.4other raw materials - - - 6 0.5 0.2Catalysts & chemicals - - - 228 19.0 7.5Utilities (Methane) 78,280 2,096 175 164 13.7 5.4Utilities (Water) 9 0.8 0.3

Sub-total 1,700 141.7 56.1

Fixed CostsDepreciation 849 70.8 28.0Labor & supervision 59 4.9 1.9Taxes & insurance 174 14.5 5.7Maintenance & repairs 190 15.8 6.3Factory overhead 59 4.9 1.9

Sub-total 1,331 110.9 43.9

Total Production Cost 3,031 252.6 100.0

1. Project Financial Projections

10.06 The Project financial performance data are summarized in TableX-3.

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Table X-3. Sumnry of Project Financial Perforurnce(in millions of current rupees, unless otherwise noted)

1989/ 1990/ 1991/ 1992/ 1993/ 1994/

9 0 a/ 91 92 93 94 95

Capacity Utilizationb/ 65.0 68.8 83.8 95.0 95.0 95.0

Sales revenies 1,172 5,251 6,774 8,151 8,638 9,156Variable production cost 387 1,769 2,325 2,844 3,063 3,294Fixed production cost 560 2,287 2,334 2,383 2,434 2,490Depreciation 380 1,520 1,520 1,520 1,520 1,520

Operatirg profit 178 985 1,844 2,598 2,795 3,006Interest 326 1,297 1,258 1,152 1,005 858Incone before tax (IBT) (148) (312) 598 1,594 2,096 2,677Incomn after tax (IAT) (148) (312) 598 1,594 2,0% 2,187

Internal cash generation 232 1,208 2,118 3,114 3,616 3,707Net fixed assets 18,191 16,671 15,151 13,631 12,111 10,591Total equity 8,253 7,941 8,539 10,133 12,229 13,322lnng-termn debt 10,094 9,622 8,490 7,358 6,226 5,094Debt service 326 1,423 1,730 2,284 2,137 1,990

Ratios

IBT/sales (x) (12.6) (5.9) 8.8 19.6 24.3 29.2TAT/sales (%) (12.6) (5.9) 8.8 19.6 24.3 23.9Profit break-even (x) 78.4 75.3 71.5 64.6 56.9 48.7Cash break-even (%) 44.8 46.0 50.5 57.2 49.9 42.0Debt service coverage ratio 1.7 1.8 1.9 1.8 2.0 2.3Current ratio 2.11 2.44 1.33 1.54 1.62 1.70Debt/equity ratio 55/45 55/45 50/50 42/58 34/66 28/72

a/ Three rmnths only._/ Adjusted on a fiscal year basis (April-March).

10.07 Sales would increase from Rs 5,251 million in 1990/91 to Rs 8,151million in 1992/93, when 95% capacity utilization would be reached. Duringthe period, as operating profit increases from Rs 985 million to Rs 2,598million, the initial loss of Rs 312 million in 1990/91 would turn intoprofit in the next year and reach Rs 1,594 millions in 1992/93. TheProject will benefit from unabsorbed depreciation carry-over allowancebased on the declining balance depreciation method (used only for thecalculation of taxable income) and investment credits. As a result, taxliabilities would be postponed until 1994/95. The resulting large amountsof initial internal cash generation will cover most of the incrementalworking capital requirements during the capacity build-up. The break-evenpoint will improve in 1994/95 to 49% for profit (income before tax), and to42% for cash. The debt service coverage ratio would remain above 1.7 andthe current ratio above 1.3, while the debt/equity ratio would decrease to28/72 in 1994/95. The Project would thus maintain a satisfactory financial

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structure and liquidity position through its life and should be able to paysubstantial dividends.

2. IPCL Financial Projections

10.08 Tables X-4 and X-5 summarize key financial indicators of IPCL,with and without the Project. In addition to the proposed Project, IPCL'sinvestment program through 1989/90, includes expansion schemes for VC/PVC,DMT, acrylic fiber, xylene, and LAB, the installation of a captive powerplant and energy saving projects (para 6.06). These other projects are allapproved by GOI, having met all economic and financial criteria set byGOI. Capital expenditures of the projects are spread over the comingyears, and the Project will be completed in different years before1990/91. Thus, the projects will lead to a steady increase in IPCL'srevenues and assets base. Between 1984/85 and 1989/90, IPCL's estimatedinternal cash generation of Rs 8,926 million would exceed the capitalexpenditure requirements of Rs 6,411 million under these other projects.IPCL should have no difficulty in providing up to the balance of Rs 2,400million (US$200 million equivalent) for the Maharashtra Project.

Table X-4. IPCL Financial Projections, Without Project(in millions of current rupees, except for ratios)

1984/ 1985/ 1986/ 1987/ 1988/ 1989/ 1990/ 1991/ 1992/85 86 87 88 89 90 91 92 93

Sales revemnes 4,968 5,246 6,331 7,065 8,853 10,139 16,530 18,474 22,255Tncaim after tax 650 562 626 572 1,271 1,398 2,367 2,566 3,184Internal cash generation 1,129 1,156 1,175 1,689 1,840 1,937 3,007 3,196 3,784Capital expenditures 652 1,655 1,861 1,376 421 446 - - -Surplus cash (flow) 377 (377) - 1,000 1,000 400 - - 1,450Net fixed assets 2,933 3,994 5,306 5,505 5,357 5,264 4,624 3,994 3,394Total equity 4,462 5,022 5,648 6,160 7,431 8,829 11,1% 13,762 16,946IDng-telm debt 390 582 1,338 1,695 1,615 1,443 1,300 1,012 724

Ratios

Debt service coverage ratio 4.0 2.6 4.2 2.2 2.2 2.6 8.1 2.3 11.8Current Ratio 2.2 2.2 1.9 1.5 1.5 1.9 2.6 6.1 7.3Iebt equity ratio 8/92 10/90 19/81 22/78 18/82 14/86 10/90 7/93 4/96

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Table X-5. IPCL Financial Projections, With Project(in millions of current rupees, except for ratios)

1984/ 1985/ 1986/ 1987/ 1988/ 1989/ 1990/ 1991/ 1992/85 86 87 88 89 90 91 92 93

Sales revenues 4,968 5,246 6,331 7,065 8,853 11,311 21,781 25,248 30,406:of which the Project - - - - - 1,172 5,251 6,774 8,151

Incae after tax 650 562 626 572 1,271 1,250 2,055 3,164 4,778Internal cash generation 1,129 1,156 1,175 1,689 1,840 2,169 4,215 5,314 6,890Capital expenditures 1,581 2,890 6,159 9,041 3,643 1,668 - - -

:of which the Project 929 1,235 4,298 7,665 3,222 1,222 - -

Surplus cash (flow) 377 (377) - - - - 122 1,358 3,168Net fixed assets 3,862 6,158 11,768 19,632 22,706 23,455 21,295 19,145 17,025Total equity 5,152 6,534 9,686 10,867 12,560 14,682 16,737 19,901 24,671long-term debt 629 1,234 3,762 10,115 11,835 11,537 10,922 9,502 8,082

Ratios

Debt service coverage ratio 4.0 2.6 4.2 2.2 2.2 2.2 3.2 1.8 3.6Current Ratio 2.2 2.2 1.9 1.5 1.5 1.9 2.6 4.1 4.8Debt equity ratio 11/89 16/84 28/72 48/52 49/51 44/56 39/61 32/78 25/75

10.09 IPCL's consolidated financial projections indicate that at fullcapacity, Project's sales would represent 27% of IPCL's revenues. IPCL'sequity and debt bases will be significantly expanded, while IPCL capitalstructure (maximum debt/equity ratio of 49/51 in 1988/89) and liquidityposition (minimum current ratio of 1.5 in 1987/88 and 1988/89) will remainsound during the Project implementation period as well as through itsoperating life.

10.10 The impact of the Project on the Government's budget is expectedto be satisfactory (Annex 10-5), as the Government's equity investment willbe fully recovered by 1995/96. The 1984 present value of net resourceflows to the Government during the Project's economic life, at a 12%discount rate, will be about Rs 5.2 billion.

C. Financial Rate of Return and Sensitivity Analysis

10.11 Detailed financial cost and benefit streams for the financialrate of return (FRR) calculation are given in Annex 10-6. Results ofsensitivity tests are summarized in Table X-6 on the following page.

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Table X-6. Financial Rate of Return (FRR)(in constant terms, before tax)

Base Case 11.4%

Sensitivity Test

Ex-Factory Prices at Present Levels (25% over base case levels) 16.9%Gas Prices Up 10% 10.6Gas Prices Down 10% 12.1Capital Costs Up 10% 10.2Capital Costs Down 10% 12.7Capacity Utilization Down 10% 9.8

Switching Value Analysis a/

Variables Switching Value in 1992/93 (in 1984 prices)Base Case FRR FRR FRR

11.4% 10% 0%

Ex-Factory Prices (Rs/ton):

Merchant Ethylene 7,705 7,320 5,104LDPE 12,236 11,624 8,105LLDPE 13,985 13,286 9,264HDPE 13,815 13,125 9,151PP-Homopolymer 14,824 14,084 9,820PP-Copolymer 16,288 15,474 10,790INDEX 100 95 66

Gas Prices (Rs/ton):

Ethane/Propane 2,466 2,885 5,166LPG 3,502 4,097 7,336Methane 2,096 2,452 4,391INDEX 100 117 209

Capital Costs (Rs million):

Capital Cost ExcludingWorking Capital 12,169 13,629 34,195INDEX 100 112 281

a/ Switching values of ex-factory prices, gas prices, and capital costswith respect to different FRRs were derived independent of each other,and are not additive for each FRR.

10.12 The Project's financial rate of return in constant 1984 terms,and before tax is estimated at 11.4%. Sensitivity tests show that the FRRis most sensitive to changes in capacity utilization rates and capitalcosts, and relatively less sensitive to gas prices. The relatively lowFRR, which as indicated by the switching value analysis would break below

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10%, were ex-factory prices to decline by 5% relative to the Base Case, isto a large extent, attributable to the heavy penalty imposed upon theinvestment of the Project by duties and taxes amounting to US$ 200 millionor 20% of the Project base cost estimate. Should the constraint of dutiesand taxes be relaxed, the FRR would markedly improve as evidenced by thevalue of the economic rate of return (17.9%) where the duties distortion isremoved (para 11.04). The likelihood of low capacity utilization of theProject through its operating life is not high in light of IPCL's excellentcapacity utilization performance (e.g. 98% of ethylene, 104% for LDPE, and94% for PP in recent months), as well as the favorable market prospects.

D. Financial Covenants and Reporting Requirements

10.13 Agreements have been obtained that GOI wiLl provide IPCL withadequate financing for timely completion of the Project covering also, ifneed be, shortfalls from cofinancing sources and/or cost overruns. GOIhas provided assurances that no action would be taken or allowed to betaken which would prevent IPCL from covering its costs under the Project,servicing its debt and earning a reasonable return on investment from theProject, under efficient operations. Agreements has been obtained fromIPCL that it will follow prudent financial practices, and will: (i)maintain at all times a long-term debt/equity ratio not exceeding 60/40;(ii) after completion of the Project, maintain at all times a current ratioof at least 1.3; (iii) not incur additional debt over the level necessaryfor the Project and other projects approved by GOI before August 1984, ifby so doing, the projected debt service coverage ratio would fall below1.3; and (iv) not prepay debt, if it would result in the current ratiofalling below 1.5. IPCL will submit its annual audited financial reports,including separate statements for the Project, within six months from theend of its fiscal year in a form satisfactory to the Bank. In addition,IPCL will: (i) submit quarterly construction progress reports during thefirst 18 months of Project construction and monthly thereafter throughcommissioning; and (ii) submit, not later than 30 days after the end ofeach quarter, quarterly financial statements for the Project (statements ofincome, expenses, cash flow, and projections). Finally, IPCL will prepareand submit to the Bank within four months after the start of commercialoperation of the Project, a completion report on the Project, dealing withits experience during implementation and initial operation, and theexpected costs and benefits of the Project.

E. Major Risks

10.14 The Project is not expected to face any critical technical risksas the technologies used are commercially proven and supplied byinternationally known firms. The risk of delays in the commercial start-upof the plant is also reduced given IPCL's experience in the erection andstart-up of similar projects, in particular, the Baroda naphtha-basedplant.

10.15 Timely availability of adequate gas supply by ONGC to the Projectfrom Bombay-High and other gas fields, represents a potential risk to theProject. While the gas production estimates based on ONGC's latestdevelopment plans are adequate, it is necessary that ONGC's plans andfacilities are implemented in a timely manner. This risk is, however,

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reduced given the arrangements that IPCL and ONGC will conclude concerninggas supply including development of production, transport and separationfacilities, as well as finalization of a long-term gas supply-offtakecontract.

10.16 IPCL's investments between 1984/85 and 1989/90, other than forthe proposed Project account for 28% of the company's total capitalexpenditures, against 72% for the Project. Significant cost overrun ordelay of start-up in these projects, though unlikely given IPCL's projectexecution capabilities, might cause funding problems, since IPCL's fundprovision to the Project (Rs 2,400 million) partly depends on thesuccessful implementation and operation of these other projects. However,IPCL's debt capacity is sufficiently high as indicated by its low(favorable) debt/equity ratio-- from 15/85 in 1983/84 to 49/51 on aconsolidated basis (including the Project) in 1988/89. Even if projectedcapital expenditures for these other projects were doubled every year andwere financed by long-term borrowings, IPCL's consolidated debt/equityratio still would not exceed a 55/45 level. Thus, the funding risk of theProject will remain manageable.

10.17 Finally, the market risk of the Project is limited given thelarge growth potential for plastics use in India and assurances obtainedfrom GOI with respect to market development and pricing policies. Sincethe projection for domestic demand growth is based on present high pricelevels in India, any reduction in future prices, which is projected at 20%once the Project comes on stream, will lead to faster growth of domesticplastics market. This risk is further reduced because of IPCL'swell-established marketing network and planned marketing expansionschemes. The marketing risks are therefore acceptable.

XI. ECONOMIC ANALYSIS

A. Economic Costs and Benefits

11.01 Economic costs and benefits for tradeable items have been valuedat international border prices. For non-tradeable items, appropriatedomestic prices have been used. All prices are in constant 1984 US dollarterms. The detail of assumptions used is given in Annex 11-1. Theeconomic capital cost of the Project was derived by deducting from thefinancial cost import duties and taxes on equipment and licenses fees. Forlocal currency costs, a standard conversion factor of 0.8 was used, with a25% premium (for US dollar) applied for the shadow exchange rate.Infrastructure (township, power, pipelines, roadlink to main highway) andthe investment in the Uran gas separation facilities have also beenincluded in the economic capital cost of the Project.

11.02 Revenues were derived from the long-term equilibrium pricesbased on the demand/supply analysis as described in paras 2.16-2.23. Sincethe Project's products will substitute for imports, border prices (CIF'Bombay) were obtained by adding insurance, freight and handling

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charges--US$70/ton for polyolefins, and US$40/ton for EO and EG, to the FOBequilibrium prices.

11.03 The opportunity cost of ethane/propane feedstock is deemed to beits fuel oil equivalent value based on calorific content. It results in aprice of US$246/ton in 1989 (US$5.7/MBTU) and US$254/ton in 1990, subse-quently increasing at a real rate of 4% p.a. through 1995, and remainingconstant thereafter in line with fuel oil price projections. The price oflean gas (methane) at US$262/ton (US$6.1/MBTU) in 1989 is also calculatedat fuel oil equivalent value, as is the price of propane-rich off-gas fromthe Bombay refineries (at US$243/ton).

B. Economic Rate of Return

11.04 The base case economic rate of return (ERR) has been calculatedat 17.9%. The cash flows for the economic rate of return are given inAnnex 11-2. Results of the sensitivity analysis are summarized in TableXI-1 on the following page.

11.05 While the economic rate of return is not very sensitive to energycost, capacity utilization rate and delay of operation start-up, it is mostsensitive to international polyolefin prices. In the Base Case analysis,it is assumed that the demand and supply of LPDE, LLDPE, HDPE, and PP wouldbe in balance around 1990, when equilibrium prices of respective productswould start to prevail. The sensitivity test shows that if the balance ofdemand and supply were achieved 5 years later, in 1995, the ERR woulddecline from the Base Case value of 17.9% to 13.0%, which is stilladequate. The switching value analysis also indicates that even if thecurrent below-equilibrium prices of polyolefins in the range ofUS$800-900/ton (para 2.17) were to prevail during the life of the Project,the EER would still remain at about 10%. The ERR is estimated at 11.8% iftwo events occur simultaneously, namely, the delayed materialization ofequilibrium prices of the polyolefins and the increase by 10% in energycosts. The ERR will fall to 10.6% if, in addition, the capital cost wereto increase by 10%. Even if the combination of such unfavorable eventswere to happen, the downside economic risk remains within a bearable range.

C. Other Benefits and Sectoral Policy Contribution

11.06 Besides the general economic and social desirability of theProject -- satisfactory utilization of indigenous feedstock resources,energy conservation through substitution by polymers of moreenergy-intensive and scarce traditional materials, high benefit/cost ratiosof plastics use in many applications, particularly in agriculture andirrigation, -- the Project during its life will save foreign exchange in anamount estimated at US$3.5 billion in 1984 dollars.

11.07 The local engineering firms involved in project implementationwill gain valuable know-how and experience through arrangements fortechno-logy transfer. Direct employment created by the Project will be3,000 permanent jobs. At the peak of construction activities, the Projectwill employ about 6,000 persons. Furthermore, the employment associated

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Table XI-1. Economic Rate of Return (ERR)

Base Case 17.9%

Sensitivity Test

Equilibrium Prices of Polyolefins Materialize in1995, 5 Years Later Than in the Base Case 13.0%

All Product Prices Down 20% 11.6%Gas Prices Up 20% 16.0%Gas Prices Down 20% 19.6%Capital Costs Up 20% 15.3%Capital Costs Down 20% 21.3%Capacity Utilization Down 20% 14.3%Delay of Operation Start-up by 2 Year 12.7%

Switching Value Analysis a/

Variables Switching values in 1992/93 (in 1984 prices)

Base Case ERR ERR ERR17.9% 10% 0%

FOB CIFb/ FOB CIFb/ FOB CIFb/

Product Prices (US$/ton):

Merchant Ethylene 767 NAc/ 582 NAC/ 438 NAc/LDPE 1,146 1,241 847 942 614 709LLDPE 1,146 1,241 847 942 614 709HDPE 1,146 1,216 853 923 624 694PP-Homopolymer 1,302 1,372 971 1,041 733 783PP-Copolymer 1,502 1,572 1,123 1,193 828 898INDEX 100 74-76 54-57

Gas Prices (US$/ton):

Ethane/Propane 272 464 616LPG 268 457 608Methane 289 493 655INDEX 100 171 226

Capital Cost (US$ million):

Capital Cost ExcludingWorking Capital 805.4 1,449.7 3,624.3INDEX 100 180 450

a/ Switching values of product border prices, gas prices, and capitalcosts with respect to different ERRs were derived independent of eachother, and are not additive for each ERR.

b/ CIF prices are used as economic prices and are calculated from FOBprices by adding freight, insurance, handling, and grade adjustmentfactors.

c/ Not Applicable.

- 48 -

with the Project through forward linkages is estimated at 43,000 jobs inthe small- and medium-scale private conversion industry. The Project willalso have backward linkages with the domestic industry, as part of theequipment for the Project is expected to be supplied. by localmanufacturers, thus creating additional employment a[nd investments.Finally, the Project will lead to investments of abcut US$400 million, bythe private petrochemical producers in the Bombay area using excessmerchant ethylene from the Project and by the plastics conversion industry.

XII. AGREEMENTS

12.01 The following assurances and agreements have been obtained fromGOI and IPCL during negotiations:

A. From the Government that it will:

(a) Establish, by April 1986, and thereafter maintain, atraining and technical assistance unit for the purpose ofdisseminating information on technical developments, andtraining and technical assistance to meet the needs ofskilled personnel in the plastics processing industry inIndia (para 4.09);

(b) carry out, by March 1986, a study of the future alternativesfor pricing, and trade policies for the Project productsunder terms of reference acceptable to the Bank. GOI willaccept Bank's views on the details during the study period.The Government has confirmed its commitment to ensuringthat, prior to commissioning of the Project, the domesticindustry is efficient and competitive and to this end willconsider the study findings and implement appropriaterecommendations in an adequate time-frame (para 5.03);

(c) give necessary clearances to permit IPCL to import LDPE,LLDPE, HDPE and PP, commencing 1985/86 for quantities thatwill be jointly reviewed and decided between GOT, IPCL andthe Bank, each year up to 1988-89 (para 5.05);

(d) refrain from taking any action that would unduly inhibit theplastics market from developing to a level consistent withthe need for production under the Project to market locallyall of its output promptly after commissioning of theProject (para 5.06);

(e) carry out by December 1985, a study of the export marketpotential for selected finished products under terms ofreference agreed upon between GOI and the Bank and consultwith the Bank on the implementation cf the findings underthe study (para 5.11);

- 49 -

(f) take adequate measures to ensure that the offshoredevelopment plans are carried out on a time-frame consistentwith the requirements of the supply of associated and freegas to the Project, and that physical facilities forfeedstock separation and supply to the Project will beestablished (para 7.08);

(g) relend the proceeds of US$210 million of the Bank loan toIPCL in rupees with an interest rate of not less than 13.25%p.a., and repayment period of 15 years, including 6 years ofgrace. For amounts disbursed out of US$90 million forpreproduction plastics imports, IPCL will purchase foreignexchange from GOI on payment of equivalent amount of rupees(para 9.05);

(h) provide IPCL with adequate financing for timely completionof the Project covering also, if need be, shortfalls fromcofinancing sources and/or cost overruns (para 10.13); and

(i) not take any measures, or permit to be taken any action,which would prevent IPCL from covering its costs, servicingits debt, and earning a reasonable return on investmentunder efficient operations (para 10.13).

B. From IPCL that it will:

(a) furnish to the Bank by January each year its annual marketdevelopment plan for the following fiscal year, and shallimplement said program as shall be agreed upon between theBank and IPCL (para 5.04);

(b) enter into a long-term supply contract satisfactory to theBank for feedstock and fuel gases for the Project by June1988 (para 7.08);

(c) make arrangements satisfactory to the Bank with appropriateagencies for the adequate and timely supply of water andpower, and adequate transport infrastructure facilities forthe Project (para 8.01);

(d) in the event of vacancy, furnish to the Bank the details ofqualifications and experience of proposed nominees tothe positions of Executive Director (Project), GeneralManager (Project) and Chief Financial Controller (Project)(para 8.02);

(e) build and operate the Project in accordance with environ-ment standards satisfactory to the Bank (para 8.06);

(f) engineer, construct, and operate the Project facilitiesfollowing prudent safety practices in conformity with locallegislative requirements and internationally accepted

- 50 -

standards; and will carry out a detailed safety audit byqualified consultants, prior to commissioning of theProject, to assess the impact of risks to the Project areaand the surrounding community. IPCL and the Bank willexchange views on the TOR for the study, and in theimplementation of the findings of the study (para 8.09);

(g) follow prudent financial practices and comply with thefinancial covenants described in para 10.13; and

(h) furnish its fully audited financial statements, includingthe separate statements for the Project, to the Bank notlater than six months after the end of each year, as well assuch information as the Bank may request from time to time(para 10.13).

12.02 On the basis of the above assurances and agreements reached withGOI and IPCL, the Project is suitable for a Bank loan of US$300 million tothe OI at the Bank's standard terms, entailing a 20-year maturityincluding 5 years of grace. The Government will onlend US$210 million outof the loan proceeds to IPCL with an interest rate of not less than 13.25%p.a. and a repayment period of 15 years, including 6 years of grace. Foramounts disbursed out of US$90 million for financing of imports of plasticsfor market development, IPCL will pay in rupees to the GOI in theequivalent amounts, immediately upon such disbursements. The signing of aSubsidiary Loan Agreement between GOI and the IPCL under terms and condi-tions satisfactory to the Bank will be a condition of Bank loan effective-ness (para 9.05).

Industry DepartmentFebruary 1985

- 51 -

ANNEX 2-1

INDIA - MAHARASHTRA PETROCHEMICAL PROJECT

ENERGY REQUIREMENTS FOR PRODUCTION OF SELECTED PRODUCTS(in tons of oil equivalent, toe)

Petrochemical Product Competing Productbuantity of Energy for Energy for % EnergyProduct Product Production Product Production Saving

----(toe)---- ----(toe)---

1 million square PP 110 Cellulose 155 29meters of packagingfilm

1 million fertilizer Polyethylene 470 Paper 700 33packaging sacks

100 km of 1-inch Polyethylene 120 Galvanized 500 76diameter pipe steel

1 million 1-liter PVC 97 Glass 230 58bottles

100 km of 4-inch PVC 360 Cast iron 1,970 82drainage pipe withfittings

Industry DepartmentFebruary 1985

- 52 -

ANNtE 2-2INDIA - MAHRASH] PA PETRJQ4CAL PRC

woEc[D POLY0LEFINS M4NSUMPlON AND GK CIH RAlES, BY RESIN TYPE, 1970-83

(msuntion

-1970- -1974- -1976 -1979-- -1982- - 1983-'000 '000 '000 '000 '000 '000tons % tons % tons % taos % tons % tons %

LIpE a/ 5,500 64.9 8,274 59.2 8,293 56.1 11,241 52.7 10,843 48.4 11,282 44.6BDPE/LIDPE 1,770 20.9 3,071 22.0 3,470 23.5 5,281 24.7 6,393 28.5 7,796 30.8PP 1,200 14.2 2,633 18.8 3,018 20.4 4,825 22.6 5,177 23.1 6,207 24.6

Total 8,470 100.0 13,978 100.0 14,781 100.0 21,347 100.0 22,413 100.0 25,285 100.0= = = = - = - - -

Growth Rates, % p.a.

1970-73 1973-76 1976-79 1979-82 1982-83 1979-83

LDPE 14.2 0.4 10.7 (-) 1.2 4.1 0.1HDPE/LLEPE a/ 16.5 7.4 15.0 6.6 22.0 10.2PP 27.2 6.9 -16.9 2.4 19.9 6.5Total Polyolefins 16.7 3.1 13.0 1-.6 12.8 4.3

a/ GCnsumption of LLDPE conminced only around 1980.

Sources: SRI, Hoechst, Chem Systens and Bark estimates.

Industry DepartmentFebruary 1985

- 53 -

ANNEX 2-3

INDIA - MAHARASH{RA PETRCa1CAL P PJECT

HISTORICAL WD (1SWlON OF POLYOLEFINS BY REGION, 1974-83(thcsn toms)

Share as % of World Cstumptioi1974 1976 1979 1982 1983 1974 1976 1979 1982 1983

Developed RgionsUnited States 4,548 4,602 6,523 6,090 7,030 32.5 31.1 30.6 27.2 27.8Western Europe 4,747 5,195 6,909 6,513 7,250 34.1 35.1 32.3 29.0 28.7Japan 1,877 1,456 2,557 2,344 2,507 13.4 9.9 12.0 10.5 9.9CanaIa 382 406 602 567 677 2.7 2.8 2.8 2.5 2.7

Subtotal 11,554 11,659 16,591 15,514 17,464 82.7 78.9 77.7 69.2 69.1

Developing RegLxnsLatin Anerica 661 765 1,127 1,527 1,724 4.7 5.2 5.3 6.8 6.8East Europe 840 1,125 1,515 1,850 1,975 6.1 7.6 7.1 8.3 7.8Middle East 61 137 153 339 394 0.4 0.9 0.7 1.5 1.6Africa 103 145 238 566 609 0.7 1.0 1.1 2.5 2.4India 57 73 132 197 213 0.4 0.5 0.6 0.9 0.8Other Asia/Oceania 702 877 1,591 2,420 2,906 5.0 5.9 7.5 10.8 11.5

Subtotal 2,424 3,122 4,756 6,899 7,821 17.3 21.1 22.3 30.8 30.9

Total World 13,978 14,781 21,347 22,413 25,285 100.0 100.0 100.0 100.0 100.0

Saorces: SRI for 1974-79 and Chem System for 1982-83.

Industry DepartmentFebruary 1985

INDIA - MAHARASHTRA PETROCHEMICAL PROJECT

WORLD POLYOLEFINS NAMEPLATE CAPACITIES (YEAR-END) BY REGION, 1970-83

(in thousand tons per year)

1970 1974 1976 1979 __ 1983

LLDPE/ LLDPE/ LLDPE/ LLDPE/ LLDPE/LDPE HDPE PP TOTAL LDPE HDPE PP TOTAL LDPE HDPE PP TOTAL LDPE HDPE PP TOTAL LDPE HDPE PP TOTAL

us 2,329 1,398 949 4,676 2,887 1,478 1,255 5,620 3,210 1,904 1,466 6,580 3,991 2,650 2,421 9,062 2,845 4,160 2,425 9,430

West Europe 2,589 772 437 3,798 4,507 1,566 906 6,979 4,855 1,976 1,368 8,199 6,169 2.382 2,166 10,717 5,645 2 825 2,325 10,795

Japan 1,187 615 646 2,448 1,262 738 976 2,976 1,262 808 1,976 3,046 1,612 907 1,144 3,663 1,470 1,050 1,330 3,850Canada 198 55 - 253 169 92 - 261 214 92 - 306 336 336 140 804 312 461 136 909

Latin America 419 10 - 429 329 30 - 359 392 55 - 447 572 225 100 897 885 350 155 1,390East Europe 421 94 73 588 679 127 120 926 822 257 200 1,259 1,369 287 300 1,956 1,523 748 480 2,751Middle East 12 - - 12 61 - - 61 61 - - 61 127 - - 127 260 - - 260

Africa 45 - - 45 83 60 38 181 83 60 38 181 83 60 38 181 123 195 38 356

Other Asia/Oceaniaa/ 104 - 20 124 375 100 158 633 375 135 298 718 809 238 480 1,527 809 370 579 1,758India 21 30 - 51 21 30 - 51 21 30 - 51 112 30 30 172 112 35 30 177

World Total 7,325 2,974 2,125 12,424 10,373 4,221 3,453 18,047 11,295 5,297 4,256 20,848 15,180 7,115 6,819 29,114 13,984 10,194 7,498 31,676

a/ Excludes Japan and India.

Source: SEMA, Chem Systems, SRI and Bank estimates.

Industry Department

February 1985

- 55 -

ANNEX 2-5

INDIA - MAHARASHTRA PETROCHEMICAL PROJECT

WORLD POLYOLEFINS CAPACITY UTILIZATION IN SELECTED YEARS, 1970-83(in percent of nameplate, end of the year capacities)

1970 1974 1976 1979 1981 1983

LDPE - Developed Regionsa/ 80.4 89.0 79.8 80.4 71.8 85.6- Other Regions 42.5 80.3 81.2 66.1 67.0 80.1

HDPE/LLDPE - Developed Region 56.5 84.9 70.4 80.7 61.7 85.5- Other Regions 123.0 66.3 73.3 64.4 57.7 78.5

PP - Developed Regions 55.6 82.7 74.6 74.5 74.1 84.4- Other Regions 75.0 58.9 77.4 64.2 59.5 79.4

a/ Includes US, Canada, West Europe and Japan.

Industry DepartmentFebruary 1985

ANNEX 2-6

INDIA - MAHARASHTRA PETROCHEMICAL PROJECT

INTERNATIONAL PRICES OF POLYMERS

(US$/ton)

1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 /

LDPE (US, fob)

in current prices 296 301 265 369 748 583 610 595 571 841 980 875 700 678 892in 1984 prices 885 828 665 775 1,257 857 885 797 651 858 931 866 700 698 892

LDPE (FRG, fob)in current prices 316 302 261 357 736 551 598 479 561 950 1,153 NA 760 776 906in 1984 prices 945 831 655 750 1,236 810 867 642 640 969 1,095 NA 760 799 906

HDPE (US, fob)in current prices 297 283 270 353 764 544 564 601 582 774 956 880 821 794 794in 1984 prices 888 778 678 741 1,284 800 825 805 663 789 908 871 821 818 794

HDPE (FRG, fob)

in current prices 320 323 336 404 787 690 684 689 703 1,093 1,249 NA 958 858 811in 1984 prices 957 888 843 848 1,322 1,014 992 923 801 1,115 1,187 NA 958 884 811

PP (US, domestic)in current prices 441 397 353 375 529 551 617 617 595 681 739 843 840 761 904in 1984 prices 1,069 925 790 791 1,031 979 1,046 989 885 934 929 972 907 791 904

a! First quarter of 1984.

Industry Department

February 1985

-57 -

ANNEX 2-7

INDIA - MAHARASHTRA PETROCHEMICAL PROJECT

PRICE SETTERS' PRODUCTION ECONOMICS OF POLYOLEFINS(in 1984 prices)

LDPE HDPEW. Europe US M. East W. Europe US M. East

Capacity (000' tpy) 200 200 200 150 150 150Production (000' tons) 200 200 200 150 150 150

Investment (US$ million)

Fixed 225 242 413 195 185 316Working Capital, etc. 24 24 24 17 17 17Total Investment 279 266 437 212 202 333

Unit Costs (US$ /ton)

Feedstock a/ 567 567 340 561 561 337Other Variable Costs 132 132 64 111 111 71Fixed Costs 110 109 158 119 119 161Depreciation b/ 85 81 138 87 83 140Gen. Ad. & Sales 50 50 100 50 50 100Profit (15% ROI) d/ 209 200 328 212 202 333FOB Plant Gate 1,153 1,139 1,128 1,140 1,126 1,142Inland Freight & Handling 15 15 15 15 15 15Export Price (FOB Ship) 1,168 1,154 1,143 1,155 1,141 1,157

EQUILIBRIUM PRICE ASSUMEDFOR THE PROJECT 1,100 1,100

LLDPE ppW. Europe M. East Canada W. Europe US M. East

Capacity (000' tpy) 130 130 130 120 120 120Production (000' tons) 130 130 130 120 120 120

Investment (US$ million)

Fixed 90 154 90 165 157 267Working Capital, etc. 22 22 22 10 10 10Total Investment 112 176 112 175 167 277

Unit Costs (US$/ton

Feedstock a/ 564 338 564 493 493 296Other Variable Costs 78 60 70 i99 199 96Fixed Costs 79 101 79 124 119 168Depreciation b/ 46 79 46 92 87 148Gen. Ad. & Sales 130 c/ 180 c/ 130 c/ 50 50 100Profit (20% ROl) . 172 271 172 292 278 462FOB Plant Gate 1,069 1,029 1,061 1,250 1,226 1,270Inland Freight & Handling 15 15 15 15 15 15Export Price (FOB Ship) 1,084 1,044 1,076 1,265 1,241 1,285

EQUILIBRIUM PRICEASSUMED FOR THE PROJECT 1,100 e/ 1,250

a/ Ethylene prices (for LDPE, HDPE, and LLDPE) assumed are US$550/ton for the West European, US, and Canadianmarkets, and US$330/ton for the Middle East market. Propylene price (for PP) is assumed to be 80% ofethylene price.

b/ 15 year straight line.

c/ LLDPE is assumed to require more marketing and R&D expenses owing to its mewness in the market.

d/ Return in total investment. A higher ROI is assumed for LLDPE and PP because of market preference forboth products as well as the nature of new product introduction for LLDPE which requires a higherrate than for the established products.

e/ Although the equilibirum price assumed for LLDPE is slightly higher than the estimated FOB export price,the latter price will be actually higher than shown here as the capacity utilization will be less than100%.

Industry DepartmentFebruary 1985

INDIA - MAhARASHTRA PETROCHEMICAL PROJECT

PRODUCTION, CONSUMPTION AND SURPLUS (DEFICIT) OF MAJOR THERMOPLASTICS, .THYLENE GLYCOLAND ETHYLENE IN INDIA 1965/66 - _1983/84

(in thousand metric toss)

Five MajorLDPE HDPE PP PVC PS Ther-oplistics EG Ethylene

Surplus Surplus Surplus Surplus Surplus Surplus Surplus Surplus

Prod. Cous. (Deficit) Prod. Cons. (Deficit) Prod. Cons. (Deficit) Prod. Co.s. (Deficit) Prod. Casn. (Deficit) Prud. Coss. (Deficit) Prod. Cuss. a/ (Deficit) Prod. Coss. b/ (Deficit)

1965/66 14 16 (2) - 2 (2) - - - 12 IJ I 6 6 0 32 35 (3) - - n.s. 26 n.s.

1970/71 24 23 1 21 14 7 _ _ _ 41 41 0 9 15 (6) 95 93 2 4 5 (1) 59 69 (10)

1973/74 28 33 (5) 22 29 (7) - 0.8 (0.8) 44 50 (6) 9 15 (6) 103 128 (25) 7 10 (3) 71 104 (33)

1974/75 27 28 (1) 24 27 (3) - 0.3 (0.3) 41 48 (1) 8 8 0 106 111 (5) 8 8 0 68!/ 92 (24)

1975/76 28 35 (7) 20 22 (2) - 0.5 (0.5) 44 44 0 9 to (1) 101 112 (11) 7 8 (1) 64 92 (28)

1976/77 26 34 (8) 25 33 (8) - 0.6 (0.6) 48 48 0 13 14 (1) 112 130 (18) 6 10 (4) 72 108 (36)

1977/78 18 54 (36) 26 49 (23) - 3 (3) 59 67 (8) 14 14 0 117 187 (70) 6 6 0 70 152 (82)

1978/79 56 71 (15) 28 54 (26) 7 4 3 63 69 (6) 14 16 (2) 168 214 (46) 9 12 (3) 116 181 (65)

1979/80 71 71 0 25 63 (38) 13 12 1 45 82 (37) 12 12 0 166 240 (74) 12 19 (7) 127 202 (75)

1980/81 87 72 15 24 60 (36) 17 18 (1) 42 106 (64) 10 11 (1) 180 267 (87) 12 14 (2) 140 209 (69)

1981/82 94 86 8 32 68 (36) 20 24 (4) 37 101 (64) 8 11 (3) 191 290 (99) 16 16 0 148 230 (82) .,

1982/83 106 105 1 33 72 (39) 24 27 (3) 42 111 (69) 13 16 (3) 218 331 (113) 17 20 (3) - - -

1083/84 100 121 (21) 36 75 (39) 24 32 (8) 64 137 (73) 15 17 (2) 239 382 (143) 18 22 (4) _ _ _

Average AnnualGro.th of Consumption (%)

1965/66-1973/74 9 40 - 21 12 18 26e/ 19

1973/74-1976/77 1 4 -9c/ -I -2 1 0 1

1976/77-1983/84 20 12 52d/ 16 3 17 12 16

a/ Derived consumption in terso of ethylene glycol contest of synthetic fibers (polyester staple fiber and polyester filunent yaro) and Small explosives requiresents for coal production.

1l Derived consumption in termo of ethylene content of selected ethylene-based prod-cts (LDPE, HDPE, PVC, PS und EG). Ethylene as such is not traded in any significant amount.

c/ This groth rate for PP during 1973/74 - 1976/77 is sot relevaut because of the aiited market seeding pr-gram in this period.For 1977/78 to 1983/84 period.

e/ For 1970/71 to 1973/74 period.ti Estimate.

Indwtry DepartmentFebrsary 1985

INDIA - MAHARASHTRA PETROCHEMICAL PROJECT

DEMAND FOR POLYOLEFINS, PVC, POLYSTYRENE AND ETHYLENE GLYCOL IN INDIA, 1983/84-1995/96(in thousand metric tons)

Ethylene GlycolIndian Forecast (IPCL) a_/ Bank's Base Case Forecast b/ Bank's Worst Case Forecast b/_ Bank's Most b/ Bank's Worst b/

Year LDPE/LLDPE c/ dDPE/PP PVC PS d/ Total LOPE LLDPE HDPE PP PVC PS Total LDPE LLDPE HDPE PP PVC PS Total lPCL Likely Forecast Case Forecast

1983/84 (actual) 121 107 137 15 382 121 75 32 137 15 382 121 75 32 137 15 382 22 221984/85 (Est.) 139 132 145 14 430 126 79 45 133 14 397 115 75 39 125 13 367 29 271985/86 160 152 167 16 495 143 83 55 146 16 443 127 78 45 135 13 398 36 321986/87 184 175 192 17 568 162 87 68 161 17 495 139 81 53 145 14 432 44 391987/88 211 201 221 18 651 184 91 84 177 18 554 153 84 62 156 15 470 83 54 461988/89 243 231 254 20 748 209 95 104 197 20 625 168 86 72 167 15 508 67 551989/90 279 266 293 22 860 1 5 5 e/ 54 100 128 217 22 676 122e/ 45 90 85 180 16 538 76 601990/91 321 306 336 24 987 176 62 105 157 238 24 762 134 50 93 99 194 17 587 85 641991/92 369 352 387 26 1,134 199 70 110 193 262 26 860 147 55 96 116 208 18 640 94 691992/93 424 405 446 28 1,303 225 79 115 237 288 28 972 161 61 103 136 223 19 703 104 741995/96 f/±l/ 331 116 134 440 384 37 1,442 214 81 111 219 279 23 927 136 88

Average Annual Growth Rate (Z)

1983/84-1992/93 15 16 14 7 15 7 n.a. 5 25 9 7 11 3 n.a. 4 17 ts 3 7 19 141992/93-1995/96 14 14 5 23 10 10 14 10 10 3 17 8 7 10 9 6

a/ Most recent forecast made by IPCL. More details on this forecast can be found in reference E of the Project File.b/ Demand forecast based on Bank consultant's review (Project File, Reference D).c/ LLDPE is a new thermoplastic in India, to be produced by the Project. IPCL's forecast is for equivalent amount of LDPE.d/ Since no projections were made by IPCL for PS, the Bank's most likely scenario has been used. This is considered conservative as the estimated demand for 1983/84 by IPCL is higher.e/ There is a break in the demand build-up for LDPE in year 1989/90 because of the introduction of LLDPE from the Project. LLDPE has better properties including higher strength and it can therefore be

downgauged significantly; for film applications, which account for about 70Z of the LDPE use in India, one ton of LDPE and LLOPE mix (0.8 ton of LDPE and 0.2 ton of LLOPE) is conservativelyequivalent to about 1.2 ton of LDPE, because of downgauging.

f/ IPCL's demand forecasts are only up to 1992/93./ The Bank's field review covers the period 1981/82 to 1989/90 and projections for 1995/96 assume the continuation of the growth rate projected for that period. However, after commissioning of the

Project in 1988/89, average prices of plastics would drop as local production replaces penalized imports and also because the Project would be the most efficient plastics producing plant in IndIa; asa result, demand is expected to grow faster than in the preceding period.

Industry DepartmentFebruary 1985

INDIA - MAHARASHTRA PETROCHEMICAL PROJECT

PROJECTED DEMAND (D), SUPPLY (S), AND DEMAND-SUPPLY BALANCES FOR THERMOPLASTICS, ETHYLENE GLYCOL AND ETHYLENE IN INDIA

(in thousand metric tons)

LDPE LLDPE a/ HDPE PP PVC PS EG EthyleneSurplus Surplus Surplus Surplus Surplus Surplus Surplus Surplus

D s (Deficit) D S (Deficit) D S (Deficit) U S (Deficit) D S (Deficit) D S (Deficit) D s (Deficit) D S (Deficit)

Dank'. Base Case Scenario

1983/B4 Act. 121 100 21 75 36 (39) 32 24 (8) 137 64 (73) 17 15 (2) 22 18 (4) 281 207 (74)1984/85 126 101 (25) 79 35 (44) 45 27 (18) 133 98 (35) 14 21 7 29 21 (8) 311 225 (86)1985/86 143 101 (42) 83 35 (48) 55 27 (28) 146 106 (40) 16 21 5 36 21 (is) 346 229 (117)

1986/87 162 101 (61) 87 35 (52) 68 42 (26) 161 115 (46) 17 21 4 44 21 (23) 384 234 (150)1987/88 184 101 (83) 91 35 (56) 84 47 (37) 177 137 (40) 18 21 3 54 21 (33) 427 234 (193)1988/89 209 101 (108) 95 35 (60) 104 50 (54) 197 154 (43) 20 21 1 67 21 (46) 448 368 (80)1989/90 155b/ 108 (47) 54 ll/ (43) 100 50/ (50) 128 61 (67) 217 167 (50) 22 21 (1) 76 29 (47) 496 451 (45)1990/91 176 145 (31) 62 48 (14) 105 84 (21) 157 93 (64) 238 170 (68) 24 21 (3) 85 55 (30) 551 496 (55)1991/92 199 157 (42) 70 59 (11) 110 94 (16) 193 102 (91) 262 170 (92) 26 21 (5) 94 63 (31) 606 507 (99)1992/93 225 166 (59) 79 66 (13) 115 107 (8) 237 107 (130) 288 170 (118) 28 21 (7) 104 68 (36) 666 507 (159)1995/84 331 166 (165) 116 66 (50) 134 107 (27) 440 107 (333) 384 170 (214) 37 21 (16) 136 68 (68) 991 507 (484)

Bank's Worst Case Scenario

1983/84 Act. 121 100 21 75 36 (39) 32 24 (8) 137 64 (73) 17 15 (2) 22 18 (4) 281 207 (74)1984/85 115 101 (14) 75 35 (40) 39 27 (12) 125 98 (27) 13 21 8 27 21 (6) 289 225 (64)1985/86 127 101 (26) 78 35 (43) 45 27 (18) 135 106 (29) 13 21 8 32 21 (11) 314 229 (85)1986/87 139 101 (38) 81 35 (46) 53 42 (11) 145 115 (30) 14 21 7 39 21 (18) 340 234 (106)1987/88 153 101 (52) 84 35 (49) 62 47 (15) 156 137 (19) 1 21 6 46 21 (25) 369 234 (135)1988/89 168 101 (67) 86 35 (51) 72 50 (22) 167 154 (13) 15 21 6 55 21 (34) 397 368 (29)1989/90 122b/ 108 (14) 45 II-/ (34) 90 50c/ (40) 85 61 (24) 180 167 (13) 16 21 5 60 29 (31) 453 451 (2)1990/91 134 145 11 50 48 (2) 93 84 (9) 99 93 (6) 194 170 (24) 17 21 4 64 55 (9) 499 496 (3)1991/92 147 157 10 55 59 4 96 94 (2) 116 102 (14) 208 170 (38) 18 21 3 69 63 (6) 514 507 (7)1992/93 161 166 6 61 66 5 103 107 5 136 107 (29) 223 170 (53) 19 21 2 74 68 (6) 529 507 (22)1995/96 214 166 (48) 81 66 (15) li1 107 (4) 219 107 (112) 279 170 (109) 23 21 (2) 88 68 (20) 637 507 (130)

a/ LLUPE is a nev thermoplastic in India, to be pToduced by the Project beginning amd-1988.

h/ There is a break in the demand build up for LDPE in year 1988/89 because of the Introduction of LLDPE from the Project. LLDPE has better properties including higher strength and it can therefore he

downgauged signiflcantly; for fils applications., hich account for about 702 of the LOPE use in India, one ton of LDPE and LLOPE mix (0.8 ton of LDPE and 0.2 ton of LLOPE) is conservativelyequivalent to about 1.2 tons of LDPE, because of doungauging.

c/ Based on a product mix of 70,000 tons of LLDPE and 65,000 tons of HDPE from the 135,000 tons LLDPE plant of the Project.

Industry DepartuntFebruary 1985

INDIA - MAHARASHTRA PETROCHEMICAL PROJECT

ORGANIZATION OF MARKETING DEPARTMENT OF IPCL

|Executive Director

Senior Manager Senior ManagerMarket and Product ---------------------------------------------- Sales and

Development Distribution

Regional Offices

Product Manager Product ManagerChemicals and Polymers Group Regional Regional Regional Regional Regional H

Fibers Group Manager Manager Manager Manager Engineer IBombay Delhi Bangalore Calcutta Baroda

Product Applications Maharashtra Delhi Andhra Pradesh West Bengal GujaratCenter (Plastics) Punjab Karnataka Orissa Rajasthan

Haryana Tamilnadu Bihar Madhya PradeshHimachal Pradesh Kerala Assam.Uttar Pradesh Goa

Applications Customer Jammu and KashmirDevelopment Service

Cell Cell

Industry Department zFebruary 1985

I.J1

INDIA - MAHARASHTRA PETROCHEMICAL PROJECT

IPCL: INVESTMENT PROGRAM

Projects Investment Cost (Rs million) Start-up CommentsDisbursed

Total to 1983/84 Remaining

- VC/PVC 760 730 30 1984/85 Market seeding activities for PVC commenced(55,000 MT/yr.) with import of the product. The Product

Applications Center for plastics is expandedwith facilities for developing newapplications for PVC and renderingafter-sales technical service to customers.

- DMT Expansion 200 0 200 1985/86 (I) DMT production has been near at fullI & II 1986/87 (II) capacity, and the expansion is meant for

(from 30,000 to meeting further potential demand.40,000 MT/yr.)

- PP Copolymer 782 0 782 1987/88 The expansion is meant for meeting different(25,000 MT/yr.) kinds of resins and applications.

- Acrylic Fiber 1,112 0 1,112 1987/88 Acrylic fiber production has been at full(12,000 MT/yr.) capacity, and the expansion is meant for

further potential demand.

- Xylene Expansion 792 0 792 1988/89 Production of ortho and mixed xylenes has(from 40,000 to been near at full capacity, and the expansion96,000 MT/yr.) is meant for meeting increasiung demand.

- LAB 223 0 223 1986/87 The expansion is partly for replacing(43,500 MT/yr.) imported alkylates used in detergent

production.

Petroleum Resin 60 40 20 1984/85 The pro4ect is to meet specialty petroleum(5,000 MT/yr.) resin demand identified.

Debottlenecking and 713 0 713 1987/88 The project is to improve capacityEnergy Saving complete utilization to further extent and make the

overall production operation more energyefficient.

Renewal and 1,237 0 1,237 NA Recurring investments

Replacement

Captive Power 1,302 0 1,302 1987/88 The installation of a captive power plant

7,181 770 6,411Total Investment Costs - - >

Industry DepartmentFebruary 1985

- 63 -

ANNEX 6-2Page 1 of 2

INDIA - MAHARASHTRA PETROCHEMICAL PROJECT

IPCL: INCOME STATEMENT(in millions of rupees)

1979/80 1980/81 1981/82 1982/83

Sales 1,726 2,807 4,062 4,427: of which Excise Duties 281 396 550 704

Other Income 24 31 43 60

Total Revenues 1,750 2,838 4,105 4,487

Raw Materials Consumed 645 989 1,221 1,417Inventory Adjustments (261) (268) 207 (74)Purchase for Resale 0 63 0 28Employees' Renumeration and Benefits 90 112 137 166Manufacture, Administration, and

Selling Expenses 822 1,188 1,562 2,029: of which Power and Fuel 277 414 577 692- of which Cost for Excise Duties 271 402 536 716

Interest 142 170 162 124Depreciation 275 265 269 292Transfer Adjustments (10) (18) (3) (8)

Total Cost 1,704 2,499 3,554 3,974

Profit Balance 46 339 551 513Less/(Add) Prior Period Adjustments 11 2 4 (4)Profit Before Tax 57 341 555 509Taxationa/ 0 0Investment Allowance Reserve 225 305Profit After Tax 57 341Profit After Investment Allowance

Reserve 330 204

Profitability (%)

Profit Balance 3.1 13.9 15.5 13.6Total Revenues - Excise Duties

a/ Because of investment credits provided for the naphtha-based ethylenecomplex, little tax was paid in the years shown.

- 64 -

ANNEX 6-2Page 2 of 2

INDIA - MAHARASRTRA PETROCHEMICAL PROJECT

IPCL: BALANCE SHEET a/(in millions of rupees5 /

1979/80 1980/81 1981/82 1982/83

Current AssetsCash 40 80 30 40Accounts Receivable 320 570 780 980Inventories

Raw Materials 410 390 460 530Work in Process 100 120 60 90Finished Goods 410 660 520 570

Total Inventories 920 1,170 1,040 1,190

Total Current Assets 1,280 1,820 1,850 2,210

Fixed AssetsGross Fixed Assets 3,290 3,490 3,620 4,170Acc. Depreciation 720 980 1,250 1,540Net Fixed Assets 2,570 2,510 2,370 2,630

TOTAL ASSETS 3,850 4,330 4,220 4,840

Current LiabilitiesAccounts Payable 170 270 260 310Short-Term Debt 70 200 80 180Current Portion of LongTerm Debt 270 480 260 220

Total Current Liabilities 510 950 600 710

Long-Term Debt 1,260 960 640 640

EquityShare Capital 1,860 1,860 1,860 1,860Reserves and Surplus 220 560 1,120 1,630Total Equity 2,080 2,420 2,980 3,490

TOTAL LIABILITIESAND EQUITY 3,850 4,330 4,220 4,840

RatioDebt/Equity Ratio 38/62 28/72 18/82 15/85Current Ratio 2.5 1.9 3.1 3.1

a/ Reclassified from the audited reports into the format shown.b/ Translated from crores (ten million) into million rupees.

Industry DepartmentFebruary 1985

- 65 -

ANNEK 7-1

INDIA - MAHARASHTRA PEGCCHEICAL PR0JECr

Sumnary of Project Facilities

1. Process Plants Gapacity 2. Utilities Generation Capacity(tpy)

- Steam boilers :(3 x 60 tph)+(4 x 35 tph)- Gas Cracker :300,000 ethylenea/ - Captive power plant : (1 x 13 MW) steam turbine

+ (4 x 20 NW) gas turbine26,000 propylene - Cooling water system: 21,800 m3ph2,200 acetylene - Process and boiler

- Propylene Recovery 37,000 propylene feed water system : As required- LDPE : 80,000 - Raw water system :16 million gallons per day- LU)PE and HDPE :135,000 - Gonpressed air :18,400 m3ph- EO/EG : 5,000/50,000 - Air separation plant: (2 x 3.6) tph oygen- PP : 60,000- Acetylene Black : 1,750

3. Offsites and general facilities

- Raw materials, process chemicals, and products storages.- Fuel gas, fire water, flare, and security systems.- Plant and central liquid effluent treatment systems.- Laboratories, railway siding, rail and truck loading systens.- Fployee housing with social amenities.

4. infrastructure

- Ethane/propane (C2/C3 ) feedstock pipeline (10" x 50 km).- IPG feedstock pipeline (4" x 70 km).- Merchant sales ethylene pipeline (8" x 91 km).- Central liquid effluents disposal pipeline (20" x 41 km).- Paer transmissiLn line (20 km long).- Realignment of existing water pipeline along western boundary.- New link road and bridge across Anba river frun site to Boabay-Goa highway.- Fuel gas pipeline (8 x 40 kIn).

d/ Separation train for 400,000 tpy ethylene capacity.

Indus try DepartmentFebruary 1985

INDIA - MAHARASHTRA PETROCHEMICALS PROJECT

RAW GAS PRODUCTION FROM B-H FIELDS, AND PRODUCTION OF GAS FRACTIONS AT URAN TERMINAL, 1988-2000

(Figures in million normal cubic meters per day, except otherwise mentioned)

B-H AssociatedGas S-I Gas Production Total Gas to Uran

Production Production Platform Net Gas Terminal Production of Fractions at Uran Terminal Ethylene c/

Well-head Well-head Consumption Ex-platforma/ B-H Gas S-I Gas Lean GasO/ C. C Cj LPG CO NGL Potential

…_______---…(in 000 tons)-------------- ('000 tons)

1988-89 11.20 - 2.01 9.19 8.00 - 7.08 - - - 326.0 - 60.3 -

1989-90 11.10 - 1.99 9.11 8.00 - 6.49 293.1 180.8 13.7 326.0 139.7 60.3 327.6

1990-91 11.00 - 1.98 9.02 8.00 - 6.49 293.1 180.8 13.7 326.0 139.7 60.3 327.6

1991-92 9.70 - 1.70 8.00 8.00 - 6.49 293.1 180.8 13.7 326.0 139.7 60.3 327.6

1992-93 8.60 1.20 1.80 8.00 8.00 - 6.49 293.1 180.8 13.7 326.0 139.7 60.3 327.6

1993-94 7.70 2.10 1.80 8.00 7.70 0.30 6.52 288.4 175.8 13.6 321.8 136.6 60.6 321.4

1994-95 6.80 3.00 1.80 8.00 6.80 1.20 6.60 274.2 160.9 13.2 309.3 127.5 61.5 302.7

1995-96 5.90 3.90 1.80 8.00 5.90 2.10 6.68 260.0 146.0 12.8 296.9 118.3 62.4 284.1

1996-97 5.30 4.50 1.80 8.00 5.30 2.70 6.73 250.6 136.0 12.5 288.6 112.2 63.0 271.7

1997-98 4.70 5.10 1.80 8.00 4.70 3.30 6.79 241.1 126.1 12.2 280.3 106.1 63.6 259.3

1998-99 4.22 5.58 1.80 8.00 4.22 3.78 6.83 233.5 118.1 12.0 273.6 101.2 64.1 249.3

1999-2000 3.82 5.98 1.80 8.00 3.82 4.18 6.86 227.2 111.5 11.8 268.1 97.1 64.5 241.0

a/ Net gas in excess of 8 MCMD piped to Uran, will be linked to South Bassein fields or flared.

Lean gas demand in Bombay area totals about 6.11 MCMD including: (i) Thal Fertilizer Plant: 3.00 MCMD; (ii) RCF plant: 1.80 MCMD; (iii) Deepak

Fertilizers plant: 0.30 MCMD; (iv) Hindustan Organics & Bharat Electronics plants: 0.26 MCMD; (v) Other users: 0.15 MCMD; and (vi) Maharashtra

Petrochemicals Project: 0.40 MCMD in 1989-90 increasing to 0.60 MCMD in 1991-92. Marginal surplus availability will be used by stand-by users MSEB

and/or Tata power generation plants whose total potential demand is approximately 6.60 MCMD. Quantities shown include small amounts of inerts.

c/ At 84% of C2, and 45% of C3 converted to ethylene. Excludes the 15,000 tpy ethylene production from cracking of propane fraction feedstock from

Bombay refineries.

Note: 1. Production of gas fraction during 1989-90 to 1991-92 will depend upon capacity build-up of the Proiect.

2. Production of fractions at Uran terminal is based on the following gas composition and volume shrinkages.

Composition of Raw Gases Yield of Gas Fractions After Separation

(vol %) (vol %)

Associated AssociatedGases S-1 Gas Gases S-1 Gas

Methane 78.91 84.05 NGL 0.53 0.62

Ethane 8.85 5.01 LPG 5.01 3.31

Propane 6.05 2.74 Ethane 7.52 4.26-

Butanes 2.35 1.55 Propane 3.14 0.84

Pentanes 0.47 0.62 Butanes 0.19 0.12Hexanes + 0.06 - CO2 2.43 1.00

CO2 2.43 1.00 Lean Gas 81.18 89.85

N2/02 0.88 5.13Total 100.00 100.00

Total 100.00 100.00

Source: Department of Petroleum, EIL, and Bank estimates.

Industry DepartmentFebruary 1985

INDIA - MAHARASHTRA PETROCHEMICALS PROJECT

GENERAL ORGANIZATION STRUCTURE OF EXISTING IPCL, FUTURE IPCL, AND DURING PROJECT IMPLEMENTATiON

Board f Dir-tor

Chairman and

Managing Director

Existing Future Addition

O.S.D. Director Director Directo Executive Director Managing Director(R & D) | (Operariona) (Finance) (Marketing) (Project) Maharashtra Complex

P.,~~~~~~~~~~~~~: tT Ii T~-1

i at Fnac (Project) General General Manager dni ation C nan

na| (P roJect) ||(ProJect) |l 1C Manager Ge n _nera anager n

Pro . t Pr. ePojc iplmetaio PastOl

l~~~~~~~~~~~~~~~~~ -- -- - -^ - -aae - - - - - -

Procureent| r Project Egnering Project Proje ct |Project Coordinator S eyChem istCoordiatorl Monitrn Kanager Coordinator Coordinator |(Utilities, Offsices, Egne

IConst . Co ordinacor (Syste.es) (Ole fins, EO-/EC (Polymers) |Infrastructure)

Project hnplementation Phase Only

Industry Department

February 1985

- 68 -ANNEX 8-2

INDIA - MAHARASHTRA PETROCHEMICAL PROJECT

TECHNOLOGY SELECTION

1. Bid invitation for the gas cracker was issued in September 1981to 7 firms (two each from the US and FRG, and one each from the UK, Franceand Japan). Five firms submitted initial proposals in November 1981 andrevised final offers in April 1982 following discussions on technicalmatters with the Project Task Force (PTF). Price bids were opened in April1982 and, following further discussions in May/June 1982, the PTF submitedits recommendations to the Government in mid-August 1982. Bid invitationsfor ethylene oxide/ethylene glycol (EO/EG) technology were issued inSeptember 1981 to 4 firms (One each from Japan, the US; the UK and Italy).Initial proposals were received from all four firms, out of which 2licensors were shortlisted. One additional bidder from the US, who hadexpressed his interest in submitting an offer, was invited to do so inearly June 1982, and price bids of the 3 bidders were opened in mid-June1982. Further discussions on commercial and price bids were held inJune/July 1982, followed by plant visits in July. Recommendations weresubmitted to GOI in August 1982. Bid invitations for polypropylene (PP)technology and low density polyethylene/linear low density polyethylene(LDPE/LLDPE) technologies were issued in November 1981 to 16 firms a/ and14 firms D/, respectively. For LDPE/LLDPE, prospective bidders were giventhe option of quoting for LDPE or LLDPE or both technologies. Six firmssubmitted offers for PP, 6 for LDPE, 3 for LLDPE and I for both LDPE andLLDPE. Considering the rapid developments in polymer technologies,especially for LLDPE, a team drawn from the PTF, IP'CL, EIL, and NationalChemical Laboratory visited several petrochemical plants based on thebidders' technologies, in April/May 1982, to verify the merits oftechnologies offered and to obtain additional techno-commercial data. Onthe basis of these plant visits and discussions wit'h bidders in April/May1982, a short list for each technology was prepared and approved by GOI.Price bids were opened in June 1982 followed by further discussions withshort-listed licensors in July/August 1982. Recommendations for polymerplants technology selection were submitted to GOI in August 1982.

2. Since the technology bids validities expired before the GOI'sbasic investment approvals were given, the PTF asked the technology biddersin March 1983 to update their bids, submitted again in twoparts--technocommerical and price parts. The bids iwere evaluated and finalrecommendations for technologies were approved by GOI in early October1984.

a/ 6 from the US, 4 from Japan, 2 each from the UK and the FRG, and 1 eachfrom Italy and Belgium.

bt 6 from the US, 2 each from the FRG and France, and 1 each from Canada,the UK, Japan, and Italy.

Industry DepartmentFebruary 1985

- 69 -

ANNEX 8-3

INDIA - MAHARASHTRA PETROCHEMICAL PROJECT

TOLERANCE LIMITS FOR INDUSTRIAL EFFLUENTS DISCHARGEDINTO INLAND SURFACE WATERS

IS-2490

ToleranceCharacteristics Unit Limits

1. Temperature °C 402. Total Suspended Solids mg/i (max) 1003. pH pH value 5.5-9.04. Oil and grease mg/i (max) 105. B.O.D5 mg/i (max) 306. C.O.D. mg/i (max) 2507. Free ammonia mg/I (max) 5.08. Ammoniacal Nitrogen mg/i (max) as N 509. Arsenic mg/i (max) 0.210. Phenolic compounds mg/i (max) 111. Residual chlorine mg/i (max) 1.012. Cyanides mg/i (max) 0.213. Sulfides mg/i (max) 2.014. Fluorides mg/i (max) 2.015. Cadmium mg/i (max) 2.016. Chromium (hexavalent) mg/I (max) 0.117. Copper mg/I (max) 3.018. Lead mg/l (max) 0.119. Mercury mg/i (max) 0.0120. Nickel mg/i (max) 3.021. Selenium mg/i (max) 0.0522. Zinc mg/i (max) 523. Chlorides mg/i (max) 1000

Industry DepartmentFebruary 1985

- 70 -

ANNEX 8-4Page 1 of 2

INDIA - MAHARASHTRA PETROCHEMICAL PROJECT

SAFETY MEASURES OF THE PROJECT

The aspects of prevention and management of safety hazards aretaken into account in design, construction and operations of the plantsthrough measures, the elements of which are summarized below.

Process Design Stage

- Analysis of potential safety risk factors inherent in theprocess and technology;

- Evolution of plant design philosophy to eliminate or containrisks which have a relatively higher probability ofoccurrence;

- Ensure that the design philosophy is fully reflected in thebasic engineering of individual equipment, and componentsystems through appropriate sizing, orientation, choice ofmaterials of construction, measurement and control systems,back-up or fail-safe systems as required in the event ofabnormal situations, and emergency warning systems;

- Ensure that the design philosophy is fully reflected inoperations, and maintenance manuals to be used for personneltraining;

- Review of safety considerations included in the process designand basic engineering among licensor, engineer, and owner toensure conformance to legislated or internationally recognizedstandards governing work place, environment and worker safety.

Detailed Engineering, Procurement, and Construction Stages

- Selection and adoption of appropriate internationallyrecognized engineering codes and standards for equipment andmaterials and systems designs;

- Ensure that the layout of the physical facilities is inconformance to local and internationally recognized standardsand codes for safe distances, as well as isolation andcontainment of potentially hazardous areas;

- Inspection of equipment and materials dLuring fabrication byauthorized inspection agencies;

- 71 -

ANNEX 8-4Page 2 of 2

- Prequalification of construction workmen engaged in criticalactivities like welding, and periodic testing;

- Supervision of all construction works to ensure conformance toconstruction standards, safe work practices, especially withreference to technological requirements;

- Testing of installed systems to ensure mechanical integrity inconformance to applicable codes and standards;

- Incorporation of appropriate systems communication within theplants, and with authorities, medical facilities, andcommunities outside the plant.

Operations Stage

- Training of operational, maintenance, and supervisorypersonnel through the relevant manuals, operations simulators,and seminars on safety risks, methods of prevention, andmanagement in the event of abnormal occurrences beforecommencement of operations;

- Retraining of personnel periodically on safety risks, systemsprovided, safe work and maintenance practices, and the do'sand dont's, at all times;

- Carry out a continuing safety awareness campaign in the workplace, through simple, prominent safety posters and slogans aswell as through non-material recognition of safetyachievements by workers;

- Institute systems for periodic medical checkup to detect andtreat occupational health impacts on plant personnel, as wellas on personnel in the communities nearby;

- Evolve, and institute systems for early warning and formanagement of catastrophic occurrences, through evaluation andtreatment of affected personnel, in cooperation with civic,and medical authorities in the surrounding community.

Industry DepartmentFebruary 1985

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INDIA - MAHARASHTRA PETg8CtHICAlli PROJECT

PROJECT COST ESTINATES

(tigarna In Rapaca million)

P- e PI.'ts, Offtate, WastePro ess Plantt W.aer Treatment Plants -nneral Facilitie Inftras-rctte F-acilities Temporary FPnittliea Toemahip

Item Direct Indieect Dirt Indirect Direct tedired n Direct indirect Dteat IndIr ct Dieatst edireetwN. Ite- Total P.t. P.E. L.C. tonal F.E. F.e. L.C. Total F.E. F.E. L.C. Total F.e. F.E. L.C. Total F.R. F.E. L.C. Total P.R. F.E. L.C.

I eqgtipnt & -terials (FOB/En-rkm) 2,258.1 1,458.0 106.2 693.9 1,548.8 t60.6 147.2 741.02 Space parts 134.8 103.9 2.7 28.2 61.7 37.9 2.8 21.0

S.btotal 2,392.9 1,561.9 108.9 722.1 1,610.5 698.5 150.0 762.0 232.R 47.6 2.0 183.2

3 ErectIon 235.7 - 6.3 229.4 127.2 - 3.3 123.94 Isa.lation and painting 50.7 21.9 0.8 25.0 12.8 - 0.0 17.4

Civil moks 186.5 - 15.3 169.2 233.8 - 20.R 213.0 98.6 - 2.5 96.1

Snbtotal (1-5) 2,861.6 1,583.8 131.3 1,106.5 1,989.3 698.5 174.5 1,116.3 331.4 47.6 4.5 279.3 767.1 126.1 - 641.0 11h.2 31.0 2.2 85.0 385.0 - 10.0 375.0

6 Ocean freight and -rine Inna.rnce 171.6 158.4 13.2 - 87.4 69.9 17.5 - 5.2 4.8 0.4 12.6 12.6 - 3.3 3.1 0.2 - 1.0 - 1.0 -7 0s-o- datle- 1,141.5 - - 171. 608 -602. 8 38 30.8 81.5 8 .5 22.0 - 27.0 9.0 - 9.08 Snitnd te 5 126.h - - 126.8 75.8 -_ 75.8 13.0 - - 13.0 6.3 _ _ 6.5 (negl.) - inegO.) (si.) -3 (negl.)9 Dales tan S incERe d.tins 169.0 - - 169.0 156.7 - _ 156.7 39.7 39.7 - - 2.0 - 2.0 10.0 - - 10.0

10 Storage and nosa..ctiton iesarance 42.9 - 42.9 27.1 - - 27.1 4.0 4.0 7.0 - 7.0 1.0 - 1.0 3.6 - 3.6

II K.o-ho and basIc englteerin8

572.0 583.7 - 8.3 6.5 6.1 0 ------------0I…ncludd-d------- ------------ Incldedd------------ ------------- Inldd d------------ ---------- Incldd ----------12 Tames . amd Ie 11 134.7 - - 134.7 1.0 - - 1.0 d-------------Wddd-ed_…---nd ----------- Ind …ud …------------- ------------- …-.d…d------------ ----------- I..ldedd----------13 Detailed dnginel eig & Project Mg.t. 222.8 - 6.4 216.4 170.2 - 4.4 165.8 26.9 - 0.9 26.0 Inclodnd Included Included14 Startap atd c-m -nonieg I60.0 - - 160.0 40.2 - - 40.2 - -

Total 6 2,305.9 1i0.9 3,146.1 3,162.0 774.5 196.4 2,191.1 455.0 52.4 5 h396.8 874.5 138.7 - 735.8 146.5 36.1 2.4 110.0 408.6 - 11.0 397.6

Total

Total F.R. P.E. L.C.

I tqlpmen6_t6 t-rials (FO/Et-Wrl2 Spar parta

Sabtotol 4,236.2 2,308.0 260.9 1,667.3 I Note:I Ll,- totals in- Pro.en

3 ErectIon 362.9 - 9.6 353.3 1 PlonIn, PP/0/WWTPI, med4 nnoulation and peiti.n 66.3 21.9 1.2 43.2 ] ..necat F.a"lItiem only5 Civil -arks 516.9 - 38.0 478.3 1

Sibtntal (1-5) 6,452.5 2,486.9 322.5 3,643.1

6 0ce.n f-rmght and marine In.rm.c. 281.0 248.7 32.3 -7 C.sto- dncimn 1,896.6 - - 1,896.68 StOned frelgbt 221.9 - - 221.99 Salem can 0 incise dnsiRt 377.4 - - 377.4

10 storage and conmtraci8n insarance 85.6 - - 85.6II kon-h- and basIc -nginn-clnn 578.5 569.8 - 8.712 T.nr. end itn. it 135.7 - - 135.713 Detailed enginering and Project

Management 419.9 - 11.7 408.214 starteard.commlomloning 200.2 - 200.2

Total 10,649.3 3,305.4 366.5 6,977.4

I5 Land Dev-lop-nnt 301.8 - - 301.8

16 Banagment and Training 111.2 12.2 - 99.0'7 Bae Comt (DCe). 11,062.3 3,317.6 366.5 7,370.2

AprlI 198418 Phyaical Conetng-oci-s 1,106.2 331.8 36.7 737.819 bCe 6 PhylIcal Conttngencies 12,168.5 3,649.4 403.2 8,116.0

Ipadntey Departmet

Febrnnry 1985

- 74 -

ANNEX 9-2INDIA - MAHARASHTRA PETROCHEMICAL PROJECT

ESTIMATED DISBURSEMENT SCHEDULE FOR BANK LOAN(US $ million)

EstimatedA. Goods and Services (US$ 210.0 million) Disbursement Cumulative

Bank Fiscal Year and Semester during period Disbursement

FY 1985April-June 9.9 9.9

FY 1986July-December 4.8 14.7January-June 9.9 24.6

FY 1987July-December 24.8 49.4January-June 40.1 89.5

FY 1988July-December 64.9 154.4January-June 36.1 190.5

FY 1989

July-December 12.2 202.7January-June 5.4 208.1

FY 1990

July-December 1.9 210.0

B. Preproduction Imports of Polyolefins (US$ 90 million)

-FY 1985

April-June 9.0 9.0

FY 1986 18.0 27.0

FY 1987 18.0 45.0

FY 1988 18.0 63.0

FY 1989 18.0 81.0

FY 1990 9.0 90.0

Industry DepartmentFebruary 1985

- 75 - ANNEX 10-1Page 1 of 3

INDIA - MAHARASHTRA PETROCHEMICAL PROJECT

Assumptions Used in the Financial Analysis of the Project

1. The financial projections of the Project, are provided in currentrupees, and are presented according to the fiscal year from April 1 - March31. The financial rate of return assumes a project operating life of 15years, and is calculated in constant 1984 rupees. Domestic andinternational inflation rates, both projected by the Bank at the samelevel, are given below:

Domestic and InternationalYear Inflation Rates

1984/85 3.51985/86 8.01986/87 9.01987/88 9.01988/89 9.01989/90 7.51990/91 and thereafter 6.0

a. Financing Plan and Debt Service

2. The financing plan of the Project is detailed in Chapter VIII ofthe Report. The following assumptions have been used to compute the debtservice: (i) part of the Bank loan for the Project (US$210.0 million) willbe on-lent by the Government to IPCL at 13.25% per annum with a repaymentperiod of 15 years, including 6 years of grace; and (ii) the totalGOI/cofinancing loans of US$642 million will be lent through the GOI toIPCL also at 13.25% per annum with a repayment period of 15 years,including 6 years of grace.

b. Capacity Build-up

3. It is assumed that the Project will start commercial productionin August 1989, 58 months after start-up of basic engineering for the gascracker. The Project would reach 65% capacity utilization in the firstyear of operation, 80% in the second year and 95% thereafter.

c. Revenues

4. Projected product prices, production volume, and revenues areshown in Annex 9-2. All revenues are valued at ex-factory prices. Asexplained in the main text of this Report (para 9.02 and 9.16), andpending the review of the country's petrochemical pricing policy, it isassumed that the Project ex-factory prices would be in line with the

- 76 -

ANNEX 10-1Page 2 of 3

equilibrium prices, which is equivalent to 80% of the 1984 petrochemicalsex-factory prices in India. The prices are escalated by the domesticinflation rates. The ex-factory product prices in l992/93, the first yearof full operation, in 1984 rupees are summarized below:

Financial Product Prices in 1992/93(in 1984 rupees/ton)

Product Price

Ethylene 7,705LDPE 12,236LLDPEa/ 13,985HDPE 13,815EG 12,143EO 15,079PP-Homopolymer 14,824PP-Copolymer 16,288Acetylene Black 26,798

a/ Price of LLDPE for financial analysis is assumed to bethe same as for HDPE because of its performanceproperties which are superior t:o those of LDPE andclose to those of HDPE.

d. Operating Costs and Working Capital

5. Operating costs are calculated in 1984 priLces, then escalated bythe inflation rates. Where appropriate, they were also corrected by theexpected real-term increase in energy prices. The price of feedstock,ethane/propane gases, at Rs 2,120/ton in 1984 prices, is equivalent to 65%of naphtha price, in line with the Government's pricing policy for the gassupplied by ONGC as petrochemical feedstock. The price of lean gas ormethane for fuel is assumed to be 85% of ethane/propane price. LPG priceis derived from the prevailing market price, which was Rs 3,010/ton in1984. The prices of other inputs, i.e., butene-1, vinyl acetate, catalystsand chemicals were based on their cif prices, plus applicable importduties. While the Project's depreciation has been calculated by the12-year straight line method, the declining-balance depreciation methodwith an average depreciation rate of 27% was used for computing taxableincome in accordance with the practice in India. Labor and supervisioncosts, as well as taxes and insurance costs for the facilities are based ondata provided by the Project Task Force. Maintenance and repair costs areassumed to be 3% of the total gross value of plants and equipment, civilworks and land, and 2% of the gross value of the township. Selling andadministrative costs, including transportation and wharehousing, have been

- -77 - ANNEX 10-1

Page 3 of 3

estimated at 4% of sales revenues. Working capital requirements arecalculated as follows:

Amounts Receivable: 45 days of sales

Inventory Levels:

Raw MaterialsEthane/propane 7 daysLPG 7 daysMethane 7 daysButene-I 90 daysVinyl Acetate 90 days

Catalysts and Chemicals 90 daysWork-in-Process 10 daysFinished Products 30 days

Operating Cash: 60 days of wages and salaries

Accounts Payable: 30 days of all variable productioncosts except for ethane/propane (forwhich no credit is available fromONGC).

e. Taxes and Dividends

6. The Project will benefit from (i) the unabsorbed depreciationcarryover allowance (the loss in initial years being carried forward as taxcredit); (ii) the use of the declining balance depreciation method fortaxable income calculation (as taxable income and thus income tax will belower in initial than later years); and (iii) the investment credit (25% ofplant and machinery, civil works, and engineering costs) which is appliedafter the unabsorbed depreciation carryover has been fully used. Incometax rate is 57.75%.

Industry DepartmentFebruary 1985

78 ANNEX 10-21-1 iji,:

JINDIA MAHARM1410 I'M ` II-I'MU1. PRCIJECT........ ........ ........ .... .

L O 1% T IIN VA", A.1711M, REVURIUK"')

I I X A'VWW 'TTV?z ITT."'IT-1,.. .............. ...... ........ .. .......... .

PR U. (RS.JM1JL, I A I I s t

[TUYLENE 7, 340 M fj' fil,63 Y t 443 I I A y !1

A14 131 I�411 I11I I Jt

IM E (UN DFNSI' P 31%. v, F n 4 44 01 1. I .0 d.6 I- Ijlp 31. I l'o j' CA 'A 0, i S91 %"T" IINS 'I"scr `3 V`o VI

LI." E Q INEAR LIZU 11M)ITY1 F'O' I Y I"s 11. I 'j t 360 'A "Ts 427 44 j &LI t.0 I I .1 k) 4 J

Aliwc IINIACJI DENSITY M YETH111 I s 3 SO 'A 4 � P, 21 "'A") I 7) I 41 Ill ) IS; 'A 071 2 I � 4`1 "I '2S)T',`3 "' O j," 1"Nvu MC, , "A ""t,-6t, % S� I I I -.NE. G1 YCOL) I I t "A'O I 2 s I -12I c', I 3 9 1,1Z I 4 s % ",8M 'A 6 s 22,0 17 t 44M " O' ) A 9,". A Oi� All", n", 'I 7E.'a %1CM1111-04., M111W) 4) 4'vo Li) 'k"A' I 6) 947 't fis MO 20) 'A 46 21 ) %I") ti 22 24),122 2S) 7TO 27) 1� INP-IMMO (I'MYSMOPYI.BF HOMKIMMO 14#140 VA 2 9 �', 'A & t 646 I gj 10 1 ? ABI 0 57.1 23 7'. 6 2 S.1161 'A' 6 0 f"o, 1,Pr.-M WMAIPRIN"Y111,1'r COM L) 'A S 0 560 a' 6 Vf S I ti t I I i 1 9 s 9 0 "' 1 J, 6 IS, 2 3 s 4 �,, 2. 2' I10,03 2 11 3.1 711 60 %9)c. Q

L VIN "1516"AALL LINE MAC & %n. Li s648 M's 'A "04 32 � S45 3'k P, IA 38i 5Q' -I0 U, 4' 3230 21 S A 4, Z IT

PRIMICTION 'UT11 MT).... .... . .. .....

Cr,IYLr r 0, '1571 4 'A 6 11 3 s i 44 404 TH 48 1 '139J.��A A I'M AA( AAA ALnurl' (L.%IW MNSITY NUITHI) ,A �'-I) 76� IA %)A .0

LIOPE Q INEAR I M; IMMITY POI v Tti. AO f Oi"", '1' 5 f NX` 6 1, 4 i 0, 'I'Soll-11"MOC 011, GAI DENS', 'T's M1.1 [Tli jIfl�-

["u MTHYLLNE CLYMM fn 4"L -11 -W III., 1, L�4$1 A 4 $ rA �., n .. ,.J JIAIJ O 0 JO%- 4 I S`v

Ei'p (ZHIMENE 01XIM) 3 ) C30 ' 4) X48 4 ) 75") 4 ) 7-SO"'P HnMD %' H".1. YPIMPY LEME I UMMIL t I 24 A

J4 t 'M, 41 ill"Fj 47 t,500 47 s ")CO

PP-C."' MOLYPRONPYLUM: 1 � 4, v 9) 500ACETYI FNE W.Ar t 1, f C a I i 762 743

.............. .. .... .... ...... .. .. ..... .. .... ... ............

T'%T A' Sk r I 62 t 2TV 2 0, o 54 83 321 s M4 'M4,20" UAs202101M. J .,-.S VOI-1,41MIL-

REWN1.1i"IS %IRS MULIA(IM)

ITIlY, I.Lur 416 V114I.M,%pE )0`4 .1 72 I f I SIBS

1. .1 I A

LIME (LINUA-m UM.' ",rr,,,;rrY roi.rrnio, 4 1 0 I'll 1 $1,7 4 1 1 t "IT

jp,p, DEV,,,ry 1:110, O J5 1), . T I',`X

EG ("IMENE UYSIUCt436 LU 927 1 s 'v

E.) (ITHYL17NE " NU 4 P -In I A� 4 11-7V'A' A k-E. I k3 �1- 1130

M-HOMM (PGLYPR0L1PY:.EN[ JjV14jI"N" 1113 11 'k s 4% I xs&� J

tN .'IliPI-'--,`0' MOLY, R31PY LIM' COP1311. '01 P, 171 C t. 265 20 1'n-i"c TYI Sf M"LACK I 2 21 O q �

1%� 4,-14 4c

.... ........ ..... ........

nAt to mll -A 4-3,

Industry Department

'February 1985

- 79 ANNEK 10-3

Page 1 of 3INDIA MAHARASHTRA PETROV1.JElIC.AL PROJECT

PROJECTED INC'OgNE STATEMENT

(IN ItILLIONs or CURRENCT RUPEu S

1984/85 1$85/86 1986,'87 19787/90 19:8/0B' 195'/90 1/ 5C/1 '1991/972 19993 1993/'43''7 145

TCTAL SALES REVENUE 1,172 ',2'. 6y,,4 S ,' 8S,78 'b

'VARIABLE CCST[THANE/PROPArNE -32 11061 1,400 1,718 ,Sl.S 1,97S9

LP'S .23 lOS t3S 17 1 1S 1971UTENE 1 - 33 153 201 247 267 288OTHIER RAU MATERIALS n- r E 1 12 '3 14

CATALYSTS I C101ICALS- - 9 26b 743 412 437 463

UTVITTES - - 'IL 232 264 30, 331

TOTAL VARIASLE COST - - 167 1,769 .,325 2444 3,063 3s294

riXED COSTDEPRECIATION 38C 1520 1520 1C,50 I I 520 1A,52'

LAB.OR I SUPE:RVISION - 22 94 100 1O6 112 1:9TAXES AND INSURANCE 65 227 2L4 311 33- SO

MAINTENANCE A REPA'R ,71 30 320 340 360 3382rACTORY OVERHEAD 2 OTHERS 22 ,4 'C0 0l, 1.; 119

TOTAL FIXED COST -SbC 2,27 ,1334 2.,383 2,4344 24S

TOTAL PRODUCTION COST- - S4 4,0'. 465S 5,227 5ts7T' 5*784

GROSS PROrIT Tg5 1,195 t'i4 3,:4 '7

SELLING I Ar.IN, 47 21C 21 3 346 3 6

OPERATINS PRROFIT A17 985 1.S44 2. 2B *5I 3,006

SHORT TERt INTERESTLONG-TER1 INTEREST 3.b I29' If 1,S I2 1005 05S

OPERATING INCOME AFTER INTEREST t148) (3142 586 1,446 1j7510 2t,48

MISCELLANEOUS NCOKE - - - 12 140 304 529

INCOCE PE0RIE rAvES - U48 131I) S9 S ? I 2,597 06 2,677

TAXES - - 490

NET INCOME AnFTER TAXES (148t 131t) 5S8 1,594 2`476 2 °"7

*-80 -ANNEX 10-3

INDIA MAIIARASHTRA PETROCHEMICAL PROJECT Page 7 of 3

PROJECTED BALANCE SHEET

(IN MILLIONS W1 CURRENT RlW¶ES)

1984/85 1886 1286/87 1987/88 1988/89 199/90 1990/91 IS791/2 1992/93 1993/94

CURRENT ASSETS

CASNH 4 16 17 1S 20ACCOUNTS RECEIVABLE 147 64 847 l101? .0SOINVENTORY

RAWJ MATERIALS - - - 31 143 1S6 225 421WORK IN PROCESS - - 20 122 140 157 165rINISHED OneS 6 UT. 424 476 500

TOTAL IIVENTORY - - 145 634 740 658 906

TOTAL CURRENT ASSETS - - 296 12306 1.614 Ise6 24006

SURPLUS CASH_- -- 122 12480 3.198 5.580

FIXED ASSETS

GROSS FIXED ASSETS 929 2.164 6.462 14)127 17P349 28,571 18.57I 18.571 2St571 18S571ACC. DEPRECIATION - - 380 1,900 3t420 4.940 6,460

NET FIXED ASSETS 927 2,164 6.462 14127 17.349 189191 16.671 I5l151 "3.631 12.1 1

TOTAL ASSETS 929 2,164 6,462 14,127 t7.349 18437 18P099 18.245 18.725 19.697=== ===3=3= ===32 == = 3===3 =3=3== ======== =3===_ == =

CURRENT LIABILITIES

ACCOUNTS PAYABLE - - 14 64 84 102 110SH4ORT TERM DEBT _CURRENT PORT. Or L-T DEBT - - - 126 472 2.132 1,132 2,132

TOTAL CURNT LIADILITIES -- 140 536 I2.16 15234 2.242

TOTAL LONW-TERNI DEBT 239 652 2.424 8420 20.220 lO.94 9.622 3.490 7.3S 6s226

TOTAL LIABILITIES 239 652 2,424 8.420 10.220 10.234 10 158 9,706 8.592 7t463

EQUITY

SHAPE CAPITAL 690 1.522 4,038 5.707 7#129 8,401 9)401 8.401 6,401 8.401RETAINED EARNIINGS - - - - (248) (460) 138 10732 3#828

TOTAL EDUITY 690 2i522 4,030 5.707 7129 8253 7'942 8,539 10,133 12.229

TOTAL LIABILITIES I E7TY. 927 2.164 6,462 14.127 17,349 IS487 18,099 318245 13,725 15U697== ===3==-== =s=--== =_=s====~ ~ == ==== ==I== -=== 3 = == …===

RAT ID S

DEBT TO (DEBT PLUS EQUITY) RATIO 0.26 0.30 0.38 0.60 0.59 0.55 0,55 0.50 0.42 0.34CURRENT RATIO(A) - 2.11 2,44 1.33 1.54 1.62CURRENT RATIO(B) 2.11 2U.6g 2.54 4.13 6.12

NOTE:(AI EXCLUDING SFPLLUS CAS51IB) INCLUDING SWULUS CAS}I

- 81 - ANNEX 10-3

INDIA IKAHARASHTRA PfltETRD31iFK,l. PROJECT Page 3 of 3

PROJ'CTED F LNDS F' OW STATE,"ENT

(IN lMILLIONS CF tAURRENT RUWPFS)

1904/85 9851W6 A1786/87 1'87P,XS8 SJ8/89 1T89/S'C 1T9/S51 .1991/V72 19?2,'13 45'93/74 1 994/95

SOURCES

NET f'RCFIT AFTER TAX '.48) (312) ST8 1.5T4 2A076 2.187DEPR.':C'.ATION '' '' '' '' ISS 115A2B 1 .5,'C t,' '9 t,S '9 _

INTERNAL CASH GENERATION 232 t1'.8 .',:tS 3)114 3,S16 3J''D7

SHARE CAPITAL 69C 822 2',56'z 1,.669 1,422 ,.2'72

LONSGTER,"E DEBT 239 1 3 1,7,2 51799 1:,00

SHORT'TERM DEBT

TOTAL DEBT. 239 413 1,7'72 5,tT996 1. SCC

TOTAL SOURCES 92? 1,235 4,2'29 73.263 , .1S 3t, 104 1,208 '1 u 1tx4 3.61I 3,C07

APPLICAT.'ONS

rIXED ASSETS 92? 1,235 4'78 7.'3',6b5 33222 4 :.222LOAN REPAYMENTSLONG.-TER11 DEBT - - 126 4, 1,132 1,13A 1,132SlHOR' TERN DEBT

TOTAL REPAYMtENTS 1 Z6 4,'2 1,:32 ::32 1:132

DIVIDEND 10094uTH, APPROPRTATIONSClA'SE IN ORKtING C.APITA.L - - 2S2 ' 60 288 264 10.2 ' .C

TG'TAL APPL ICAT.IONS?A' I.235 4.298 7,66 :.222 1,504 1,06 760 1135 27s34 b *.336.

S.RrLUSX/ DEFCIn. ¢ . 1 . 122 1 *35S 1 ^,718 2.3S'2 1 j .37.

ACC. SURPLUS I1. 1 480 3,t198 580 6 B 9,954

RATIu

DEBT SERV'. COVERAGE 1.7 .,3 1.5 1.S ;,. 2.3

Industry DepartmentFebruary 1985

INDIA - MAHARASHTRA PETROCHEMICAL PROJECT

IPCL: PROJECTED INCOME STATEMENT (WITHOUT THE PROJECT)(in millions of current rupees)

1984/85 1985/86 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95

Total Sales Revenues4,968 5,246 6,331 7,065 8,853 10,139 16,530 18,474 22,255 22,428 23,614

Variable CostFeedstocks/energy 2,296 2,217 2,613 2,927 3,949 3,861 6,430 7,361 9,061 9,313 9,766

Materials 292 277 396 410 603 595 969 1,082 1,303 1,314 1,383

Others 562 682 816 939 1,080 1,174 1,915 2,140 2,578 2,597 2,733

Total Variable Cost 3,150 3,176 3,825 4,276 5,632 5,630 9,314 10,583 12,942 13,224 13,882

Fixed CostDepreciation 479 594 549 1,177 569 539 640 630 600 580 487

Others 324 347 371 463 491 520 552 585 620 657 696

Total Fixed Cost 803 941 920 1,640 1,060 1,059 1,192 1,215 1,220 1,237 1,183

Total Operating Cost 3,953 4,117 4,745 5,916 6,692 6,689 10,506 11,798 14,162 14,461 15,065

Corporate Overhead Cost 140 150 161 172 182 193 205 217 230 244 259

Operating Income 875 979 1,425 977 1,979 3,257 5,819 6,459 7,863 7,723 8,290

Financial Expenses

L-T Debt Interest 78 68 85 170 235 223 191 171 145 109 73

S-T Debt Interest 42 123 143 235 299 449 359 402 35 - -

Total Financial Expenses 120 191 228 405 534 672 550 573 180 109 73

Other Income - - - - - - - - - 145 482

Income Before Tax 755 788 1,197 572 1,445 2,585 5,269 5,886 7,683 7,759 8,699

Corporate Tax 105 226 571 - 174 1,187 2,902 3,320 4,499 4,577 5,131

Income After Tax 650 562 626 572 1,271 1,398 2,367 2,566 3,184 3,182 3,568

Industry DepartmentFebruary l385

0'

INDIA - MAHARASHTRA PETROCHEMICAL PROJECT

IPCL: PROJECTED BALANCE SHEET (WITHOUT THE PROJECT)

(in millions of current rupees)

1984/85 1985/86 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95

Current AssetsCash 54 55 65 74 95 95 151 171 207 212 223Accounts Receivable 1,242 1,312 1,583 1,766 2,223 2,535 4,133 4,619 5,564 5,607 5,904

InventoryRaw materials 630 635 765 855 1,126 1,126 1,863 2,117 2,588 2,645 2,776Work in process 111 115 133 164 187 187 294 330 396 405 422Finished goods 745 787 950 1,060 1,334 1,521 2,480 2,771 3,338 3,364 3,542

Total Inventory 1,486 1,537 1,848 2,079 2,647 2,834 4,637 5,218 6,322 6,414 6,740

Total Current Assets 2,782 2,904 3,496 3,919 4,965 5,464 8,921 10,008 12,093 12,233 12,867

Surplus CashFor the Project 377 - - 1,000 2,000 2,400 2,400 2,400 2,400 2,400 2,400For IPCL After the Project - - - - - - - - 1,450 4,818 8,022

Total 377 - - 1,000 2,000 2,400 2,400 2,400 3,850 7,218 10,422

Fixed AssetsGross Fixed Assets 5,322 6,977 8,838 10,214 10,635 11,081 11,081 11,081 11,081 11,081 11,081Acc. Depreciation 2,389 2,983 3,532 4,709 5,278 5,817 6,457 7,087 7,687 8,267 8,754Net Fixed Assets 2,933 3,994 5,306 5,505 5,357 5,264 4,624 3,994 3,394 2,814 2,327

TOTAL ASSETS 6,092 6,898 8,802 10,424 12,322 13,128 15,945 16,402 19,337 22,265 25,616

Current LiabilitiesAccounts Payable 361 367 436 491 631 634 1,007 1,139 1,379 1,413 1,484S-T Debt 701 817 1,340 1,708 2,565 2,050 2,299 201 - - -Current Portion of L-T Debt 180 110 40 370 80 172 143 288 288 288 288

Total Current Liabilities 1,240 1,294 1,816 2,569 3,276 2,856 3,449 1,628 1,667 1,701 1,772

Total Long-Term Debt , 390 582 1,338 1,695 1,615 1,443 1,300 1,012 724 436 148

EquityShare Capital 1,860 1,860 1,860 1,860 1,860 1,860 1,860 1,860 1,860 1,860 1,860Retained Earnings 2,602 3,162 3,788 4,300 5,571 6,969 9,336 11,902 15,086 18,268 21,836Net Worth 4,462 5,022 5,648 6,160 7,431 8,829 11,196 13,762 16,946 20,128 23,696

TOTAL LIABILITIES & EQUITY 6,092 6,898 8,802 10,424 12,295 13,128 15,945 16,402 19,337 22,265 25,616

Current Ratio 2.2 2.2 1.9 1.5 1.5 1.9 2.6 6.1 7.3 7.2 7.3

Debt/Equity Ratio 8/92 10/90 19/81 22/78 18/82 14/86 10/90 7/93 4/96 2/98 1/99

Industry DepartmentFebruary 1985

INDIA - MAHARASNTRA PETROCHEMICAL PROJECT

IPCL: PROJECTED FUNDS FLOW STATEMENT (WITHOUT THE PROJECT)(in millions of current rupees)

1984/85 1985/86 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95

Sources

Profit After Tax 650 562 626 572 1,271 1,398 2,367 2,566 3,184 3,182 3,566Depreciation 479 594 549 1,117 569 539 640 630 600 580 487

Internal Cash Generation 1,129 1,156 1,175 1,689 1,840 1,937 3,007 3,196 3,784 3,762 4,055

Share Capital - - - - - - - -

Long-Term Debt - 302 796 727 - - - - - - _Short-Term Debt 461 116 523 368 857 - 249 - - - -

Total Debt 461 466 1,319 1,095 857 - 249 - - - -

TOTAL SOURCES 1,590 1,574 2,494 2,784 2,697 1,937 3,256 3,196 3,784 3,762 4,055

Applications

Capital Expendituresfor On-going Projects 652 1,655 1,861 1,376 421 446 - - - - -

Loan RepaymentsLong-Term Debt 100 180 110 40 370 80 172 143 288 288 288Short-Term Debt - - - - - 515 - 2,098 201 - -

Total Repayment 100 180 110 40 370 595 172 2,241 489 288 -88

Dividend

Increase (Decrease) inWorking Capital 461 116 523 368 906 496 3,084 955 1,845 106 563

TOTAL APPLICATIONS 1,213 1,951 2,494 1,784 1,697 1,537 3,256 3,196 2,334 394 851

Surplus (Deficit) 377 (377) - 1,000 1,000 400 - - 1,450 3,368 3,204Acc. Surplus (Deficit) 377 - - 1,000 2,000 2,400 2,400 2,400 3,850 7,218 10,422

a/ Includes Rs 670 million of depreciation allowance (1 year amortization) for the newcaptive power plant.

Industry DepartmentFebruary 1985

a'9

INDIA - MAHARASHTRA PETROCHEMICAL PROJECT

IPCL: PROJECTED INCOME STATEMENT (WITH THE PROJECT)(in millions of current rupees)

1984/85 1985/86 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95

Total Sales Revenues 4,968 5,246 6,331 7,065 8,853 11,311 21,781 25,248 30,406 31,066 32,770

Variable CostFeedstock/Energy 2,296 2,217 2,613 2,927 3,949 4,154 7,772 9,132 11,234 11,659 12,295Materials & Others 854 959 1,212 1,349 1,683 1,863 3,311 3,776 4,552 4,628

Total Variable Cost 3,150 3,176 3,825 4,276 5,632 6,017 11,083 12,908 15,786 16,287 17,176

Fixed CostDepreciation 479 594 549 1,117 569 919 2,160 2,150 2,120 2,100 2,007Others 324 347 371 463 491 700 1,319 1,571 1,666

Total Fixed Cost 803 941 920 1,640 1,060 1,619 3,479 3,549 3,603 3,671 3,673

Total Operating Cost 3,953 4,117 4,745 5,916 6,692 7,636 14,562 16,457 19,389 19,958 20,849

Corporate Overhead Cost 140 150 161 172 182 240 415 488 556 590 625

Operating Income 875 979 1,425 977 1,979 3,435 6,804 8,303 10,461 10,518 11,296

Financial ExpensesL-T Debt Interest 78 68 85 170 235 549 1,488 1,429 1,297 1,114 931S-T Debt Interest 42 123 143 235 299 449 359 402 35 1 -Total Financial Expenses 120 191 228 405 1,847 1,831 1,332 1,115 931

Other Income - - - - - - - 12 148 460 1,607

Income Before Tax 755 788 1,197 572 1,445 2,437 4,957 6,484 9,277 9,863 11,972 L4Jx

Corporate Tax 105 226 571 - 174 1,187 2,902 3,320 4,499 4,577 6,217 0

lncome After Tax 650 562 626 572 1,271 1,250 2,055 3,164 4,778 5,286 5,755 I

INDIA - MAHARASHTRA PETROCHEMICAL PROJECT

IPCL: PROJECTED BALANCE SHEET (WITH THE PROJECT)(in millions of current rupees)

1984/85 1985/86 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95

Current AssetsCash 54 55 65 74 95 99 167 188 226 232 244Accounts Receivable 1,242 1,312 1,583 1,766 2,223 2,682 4,789 5,466 6,583 6,687 7,049InventoryRaw materials 630 635 765 855 1,126 1,157 2,006 2,303 2,813 2,886 3,034Work in process 111 115 133 164 187 215 416 470 553 570 596Finished goods 745 787 950 1,060 1,334 1,607 2,849 3,195 3,814 3,864 4,068

Total Inventory 1,486 1,537 1,848 2,079 2,647 2,979 5,271 5,968 7,180 7,320 7,698

Total Current Assets 2,782 2,904 3,496 3,919 4,965 5,760 10,227 11,622 13,989 14,239 14,991

Surplus Cash 377 - - - - - 122 1,480 4,648 10,398 14,973

Fixed AssetsGross Fixed Assets 6,251 9,141 15,300 24,341 27,984 29,652 29,652 29,652 29,652 29,652 29,652Acc. Depreciation 2,389 2,983 3,53 4,709 5,278 6,197 8,357 10,507 12,627 14_727 16,734

Net Fixed Assets 3,862 6,158 11,768 19,632 22,706 23,455 21,295 19,145 17,025 14,925 12,918

TOTAL ASSETS 7,021 9,062 15,264 23,551 27,671 29,215 31,644 32,247 35,662 39,562 42,882

Current Liabilities

Accounts Payable 361 367 436 491 631 648 1,071 1,223 1,481 1,523 1,602S-T Debt 701 817 1,340 1,708 2,565 2,050 2,299 201 8 - -

Current Portion of L-T Debt 180 110 40 370 80 298 615 1,420 1,420 1,420 1,420Total Current Liabilities 1,240 1,294 1,816 2,569 3,276 2,996 3,985 2,844 2,909 2,943 3,022

Total Long-Term Debt 629 1,234 3,762 10,115 11,835 11,537 10,922 9,502 8,082 6,662 5,242

EquityShare Capital 2,550 3,372 5,898 6,567 6,989 7,861 7,861 7,861 7,861 7,861 7,861 X

Retained Earnings 2,602 3,162 3,788 4,300 5,571 6,821 8,876 12,040 16,810 22,096 26,757 ,D Net Worth 5,152 6,534 9,686 10,867 12,560 14,682 16,737 19,901 24,671 29,957 34,618 ,,,

o 0TOTAL LIABILITIES & EQUITY 7,021 9,062 15,264 23,551 27,671 29,215 31,644 32,247 35,662 39,562 42,882 M 1S

Ratio

Current Ratio 2.2 2.2 1.9 1.5 1.5 1.9 2.6 4.1 4.8 4.8 5.0Debt/Equity Ratio 11/89 16/84 28/72 48/52 49/51 44/56 39/61 32/78 25/75 18/82 13/87

INDIA - MAHARASHTRA PETROCHEMICAL PROJECT

IPCL: PROJECTED FUNDS FLOW STATEMENT (WITH THE PROJECT)(in millions of current Rupees)

1984/85 1985/86 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95

Sources

Profit After Tax 650 562 626 572 1,271 1,250 2,055 3,164 4,778 5,286 5,755Depreciation 479 594 549 1,117 569 919 2,160 2,150 .2120 2,100 2,007

Internal Cash Generation 1,129 1,156 1,175 1,689 1,840 2,169 4,215 5,314 6,890 7,386 7,762

Share Capital 690 822 2,526 669 422 872 - - - - -

Long-Term Debt 239 715 2,568 6,723 1,800 - - - - - -

Short-Term Debt 461 116 523 368 857 - 249 - - - -

Total 'ebt 700 831 3,091 7,091 2,657 - 249 - - - _

TOTAL S0URCES 2,519 2,809 6,792 9,449 4,919 3,041 S,464 5,314 6,890 7,386 7,762

Applications

Capital .xpenditures 1,581 2,890 b,159 9,041 3,643 1,668 - - - - -

Loan RepaymentsLong-Term Debt 103 18') 110 40 370 80 298 615 1,42J 1,420 1,420Short-Term Debt - - - - 515 - 2,098 193 8 -Total Repaymeit 10) 180 11;) 40 370 595 298 2,713 1,613 1,428 1,420

D)ivide ud - - - - 1,094 N

Increase (Decrease) in -tWorking Capital S61 116 523 368 906 778 4,044 1,243 2,109 208 673

TOTAL APPLICATIONS 2,142 3,186 6,792 9,449 4,919 3,)041 S,342 3,956 3,722 1,636 3,21;

Surplus (Deficits) 377 (377) - - - - 122 1,358 3,168 5,750 4,575Acc. Surplus (Deficit) 377 - - - - - 122 1,480 4,648 1',398 14,973

Industry DepartmentFebruary 1985

INDIA - MAHARASHTRA PETROCHEMICAL PROJECT

PROJECT'S IMPACT ON THE GOVERNMENT FINANCES(in millions of current rupees)

Inflow OutflowAccumulated

Fiscal Corporate Duties and Total Equity Surplus SurplusYear Income Tax Dividends Excise Taxes Revenues Investment a/ (Deficit) (Deficit)

1984/85 90 90 690 (600) (600)1985/86 147 147 822 (675) (1,275)1986/87 736 736 2,526 (1,790) (3,065)1987/88 1,174 1,174 669 505 (2,560)1988/89 256 256 422 (166) (2,726)1989/90 7 7 872 (865) (3,591)1990/91 (3,591)1991/92 (3,591)1992/93 (3,591) c1993/94 (3,591)1994/95 490 1,094 1,584 1,584 (2,007)1995/96 1,317 941 2,258 2,258 2511996/97 2,736 515 3,251 3,251 3,5021997/98 3,134 586 3,720 3,720 7,2221998/99 3,525 674 4,199 4,199 11,4211999/00 3,915 776 4,691 4,691 16,1122000/01 4,300 888 5,188 5,188 21,3002001/02 4,702 1,614 6,316 6,316 27,6162002/03 4,937 1,958 6,895 6,895 34,5112003/04 5,488 2,003 7,491 7,491 42,002

Net Present ValueDiscounted at 12% = Rs 5,228 million

a/ Equity contribution by GOI, excluding IPCL's contribution.

Industry DepartmentFebruary 1985

ANNEX 10-6INDIA - MAHARASHTRA PETROCHEMICAL PROJECT

COST AND BENEFIT STREAMS FOR FINANCIAL RATE OF RF.TURN(in millions of constant 1984 Rupees)

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996-2003 2004

Capital Resources Used:

Capital Cost (888) (1,059) (3,383) (5,269) (1,412) (158)Increase in Working Capital (511) (348) (174) (97) 1,130

Financial Value of Production:

Ethylene 161 286 350 377 385 393 401 401LDPE 398 705 863 930 949 969 988 988LLDPE 454 806 987 1,063 1,085 1,107 1,130 1,130HDPE 309 547 670 722 737 752 767 767EC 247 437 535 577 589 601 613 613 1EO 31 54 66 72 73 75 76 76 X

PP-Homopolymer 301 534 654 704 719 733 749 749 '0

PP-Copolymer 66 117 144 155 158 161 164 164Acetylene Balck 20 36 44 47 48 49 50 50By-Products 47 82 99 104 106 109 111 111

Subtotal 2,034 3,604 4,412 4,751 4,849 4,949 5,049 5,049

Financial Variable Costs:

C2/C3 (426) (767) (959) (1,054) (1,098) (1,143) (1,190) (1,190)LPG (42) (76) (96) (105) (109) (114) (119) (119).Methane (66) (119) (149) (164) (171) (178) (185) (185)Butene-I (57) (101) (124) (134) (136) (139) (142) (142)Vinyl Acetate (2) (4) (5) (6) (6) (6) (6) (6)Catalysts and Chemicals (103) (180) (216) (228) (228) (228) (228) (228)Water (4) (7) (9) (9) (9) (9) (9) (9)Selling Expenditures (81) (144) (176) (190) (194) (198) (202) (202)

Subtotal (781) (1,398) (1,734) (I,R90) (1,951) (2,013) (2,081) (2,081)

Financial Fixed Cost: (361) (482) (482) (482) (482) (482) (482) (482)

Net Financial Resource Flow: (888) (1,059) (3,383) (5,269) (1,412) 222 1,376 2,023 2,283 2,416 2,452 2,486 3,616= ~ ~~~~ . . = _ -_ = _

Return on Investment = 11.4%

Industry DepartmentFebruary 1985

- 90 -

ANNEX 11-1Page 1 of 3

INDIA - MAHARASHTRA PETROCHEMICAL PROJECT

Assumptions Used in the Economic Analysis of the Project

a. Capital Cost Estimates

1. The economic capital cost of the Project is' derived from thefinancial capital cost as follows:

In Constant 1984 Prices

(1) Local Currency Componentsof Financial Capital CostsIncluding Physical Contingencies US$ 676.3 million

(2) Minus Duties and Taxes (-) 208.0468.3

(3) Multiplied by a standard factorof 0.8 (x) 0.8

374.6

(4) Plus Foreign Components of FinancialCapital Cost Including PhysicalContingencies (+) 337.8

712.4

(5) Plus Economic Capital Cost forGas Separation Facilities (+) 93.0

Economic Capital Cost US$ 805.4 million

b. Working Capital

2. The economic working capital requirements are based on the rawmaterials and work-in-process inventories only. Finished productsinventory has been omitted, since in the case of import substitution, theinventory of products produced by the Project substitutes for that ofimported products and does not increase the country's total inventory.Accounts receivable and payable have also been omitted as they do notrepresent costs incurred by the economy, but merely instruments of"transfer of obligations."

c. Operating Costs

3. Ethane/propane for feedstock, methane for fuel, and thepropane-rich refinery off-gases (equivalent to LPG inl contents) are costedat their fuel oil equivalent value based on calorific value, as these gasesare not traded in the international market. The following is a summary of

the projected economic prices of fuel oil and gases:

- 91 -

ANNEX 11-1Page 2 of 3

Economic Prices(in 1984 US$/ton)

Average AnnualGrowth Rates (x)

1984 1985 1990 1995 1985-90 1990-95

Fuel Oil (CIF, Bombay) 189 194 224 269 2.9 3.7Ethane/Propane 213 219 253 303 2.9 3.7Methane 227 233 269 323 2.9 3.7LPG 210 216 249 299 2.9 3.7

Other raw materials, chemicals and catalysts are costed at cif prices.Economic selling and administration costs are assumed to be 1% of salesrevenues. Economic fixed costs are calculated by subtracting taxes andduties from the financial fixed costs.

d. Revenues

4. Economic prices of ptoducts from the Project are based on: (i)the detailed analysis of the global demand and supply balance as well asproduction economics of leading plants in the world, fot major products,(LDPE, LLDPE, HDPE, and PP) as described in paras 2.15 - 2.19 of thisReport; and (ii) Bank estimates for EG, EO, and acetylene black. Sinceethylene is not generally traded in the international market, the economicprice of merchant ethylene from the Project is conservatively assumed to bethe production cost plus a reasonable return on investment at arepresentative plant in Western Europe based on naphtha feedstock. Themerchant ethylene from the Project will be used by private petrochemicalproducers in Bombay areas for expansion of existing plants. The economicproduct prices used are presented on the following page.

- 92 -

ANNEX 11-1Page 3 of 3

INDIA - MAHARASHTRA PETROCHEMICAL PROJECT

ECONOMIC PRICES OF PRODUCTS(in 1984 US$/ton)

1984 1989 1990 1991 1992 1993 1994 -2003

Merchant Ethylene Price 733 725 737 752 767 783 799 815

LDPE FOB Price 892a/ 995 1,100 1,123 1,146 1,170 1,194 1,219Grade Adjustment 25 25 25 25 25 25 25 25Freight, Ins. & Handling 70 70 70 70 70 70 70 70LDPE Border Price b/ 987 1,0T9 1,195 1,218 1,241 1,265 1,289 1,314

HDPE FOB Price 794a/ 1,008 1,100 1,123 1,146 1,170 1,194 1,219Freight, Ins. & Handling 70 70 70 70 70 70 70 70HDPE Border Price 4 1,078 1,170 1,193 1,216 1,240 1,264 1,289

EG Border Price c/ 425 569 640 768 922 1,106 1,327 1,630

EO Border Price d/ 451 603 678 814 977 1,172 1,407 1,728

PP-Homopolymer FOB Price 90 4a/ 1,135 1,250 1,276 1,302 1,329 1,356 1,384Freight, Ins. & Handling 70 70 70 70 70 70 70 70PP-Homopolymer Border Price 974 1,205 1,320 1,346 1,372 1,399 1,426 1,454

PP-Copolymer FOB Price e/ 1,104 1,335 1,450 1,476 1,502 1,529 1,556 1,584Freight, Ins. & Handling 70 70 70 70 70 70 70 70PP-Copolymer Border Price 1,174 1,405 1,520 1,546 1,572 1,599 1,626 1,654

Acetylene Black Border Price 2,294 2,294 2,294 2,294 2,294 2,294 2,294 2,294

a/ The first quarter of 1984, US FOB prices.b/ The economic price of LLDPE is conservatively assumed to be the same as of LDPE.c/ International demand and supply of EG are expected to be in balance around 1995, when

EG border price is approximated by doubling then economic: price of ethylene. Till 1995,EG price is expected to improve gradually.

d/ EO border price is assumed to be 6% over the EG border price.e/ PP-Copolymer FOB price is assumed to be US$200 over the l'P-Homopolymer FOB price.

Industry DepartmentFebruary 1985

INDIA - MAHARASHTRA PETROCHEMICAL PROJECT

COST AND BENEFIT STREAMS FOR ECONOMIC RATE OF RETURN(in millions of constant 1984 dollars)

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996-2003 2004

Capital Resources Used:

Capital Cost (64.1) (92.3) (223.1) (322.6) (92.5) (10.8)Increase in Working Capital (5.5) (4.2) (2.0) (0.6) 12.3

Economic Value of Production:

Ethylene 16.t 28.5 34.9 37.5 38.3 39.1 39.9 39.9LDPE 37.5 71.7 87.7 94.3 96.1 98.0 99.9 99.9LLDPE 37.5 71.7 87.7 94.3 96.1 98.0 99.9 99.9HDPE 25.5 48.3 59.1 63.5 64.8 66.0 67.4 67.4EG 12.2 24.0 34.6 43.8 52.5 63.0 77.4 77.4EO 1.3 2.5 3.7 4.6 5.6 6.7 8.2 8.2PP-Homopolymer 25.9 49.5 60.6 65.2 66.5 67.7 69.1 69.1PP-Copolymer 6.0 11.4 13.9 14.9 15.2 15.4 15.7 15.7Acetylene Black 1.8 3.2 3.8 4.0 4.0 4.n 4.0 4.0By-Products 4.2 7.4 8.9 9.4 9.6 9.8 10.0 10.0

Subtotal 168.0 318.2 394.9 431.5 448.7 467.7 491.5 491.5

Economic Variable Costs:

C2/C3 (47.6) (85.4) (106.1) (116.3) (120.6) (124.R) (129.5) (129.5)LPG (3.3) (5.9) (7.3) (8.0) (8.3) (8.6) (9.0) (9.0)Butene-l (3.0) (5.4) (6.6) (7.1) (7.3) (7.4) (7.6) (7.6)Other Raw Materials (0.1) (0.2) (0.3) (0.3) (0.3) (0.3) (0.3) (0.3)Catalysts and Chemicals (6.2) (10.8) (13.0) (13.7) (14.0) (14.3) (14.6) (14.6)Utilities (9.3) (16.6) (20.6) (22.6) (23.5) (24.3) (25.3) (25.3)Selling Expenditures (1.7) (3.2) (3.9) (4.3) (4.5) (4.7) (4.9) (4.9)

Subtotal (71.2) (127.5) (157.8) (172.3) (178.5) (184.4-) (191.2) (191.2)

Economic Fixed Cost: (14.0) (28.0) (28.0) (28.0) (28.0) (28.0) (28.0) (28.0)

Net Economic Resource Flow (64.1) (92.3) (223.1) (322.6) (92.5) 66.5 158.5 207.1 230.6 242.2 235.3 272.3 284.6

Return on Investment = 17.9%

Industry DepartmentFebruary 1985

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Project Components: = - ( \ Industrial Area Boundary \,/ QTankProject Boundary 0P 200 400 600 80a0 100

z____ Access Roads PLANT COMPONENTS METERS

Service Roads 1 Time and Security 15 C2/C3 Receiving. ,-. . .7 Improvements to Existing Roads 2 Scooter, Cycle Parking 16 C2/C3,LPG, Ethylene, Propylene Storage ,mI,Niflp,,r,Md',MoTfeW,aNiM

Railroads 3 Trars.port Office Garage 17 Polypropylene_ Bridges 4 Adniiriistrative-Bfock, Telephone, Library, Canteen 18 Low Density Polyethylene

Diverted Water Pipeline 5 Training Center 19 Linear Low Density PolyethyleneExisting: 6 Product Application Center 20 Warehouses 'ATE

1 N D IA BAGDSWater Pipeline 7 First Aid and Fire Station 21 Loading Gantry 'Highway 8 Fire Drill Area 22 Central Store F .SVillages 9 Waste Water Treatment Plant 23 Cement WarehouseRivers 10 Central Workshop 24 Gas Cracker AI .'

11 AcetyleneBlackStorage 25 Boiler, Power Plant, Waterblock, D.M. Plant and Air Compressor SEF 4 . ( OAI

Inset Only: 12 Acetylene Black 26 M. S. E. B. Sub-station---- State Boundary 13 Ethylene Oxide Storage 27 Tank Farm

International Boundaries 14 Ethylene Oxide/Ethylene Glycol 28 Laboratory \ RILANKA

OCTOBER 1984