World Bank Document · should be avoided. Attachment. Contents ... out some pitfalls that should be avoided for the satisfactory completion of industrial projects. 4. The PAR was

Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 16814

PERFORMANCE AUDIT REPORT

INDIA

CEMENT INDUSTRY PROJECT(LOANS 2660-IN AND 2661-IN)

June 27, 1997

Operations Evaluation Department

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed without

World Bank authorization.

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Currency Equivalents (annual averages)

Currency Unit: Rupee

1987 US$1.00 12.96 Rupees1988 US$1.00 13.92 Rupees1989 US$1.00 16.23 Rupees1990 US$1.00 17.50 Rupees1991 US$1.00 22.74 Rupees1992 US$1.00 25.92 Rupees1993 US$1.00 30.49 Rupees1994 US$1.00 31.37 Rupees1995 US$1.00 32.43 Rupees1996 US$1.00 35.43 Rupees

Abbreviations and Acronyms

ACC - Associated Cement CompaniesBirla - Birla Jute and Industries Ltd.CCI - Cement Corporation of IndiaCMA - Cement Manufacturers' AssociationCRI - Cement Research Institute of IndiaDEA - Department of Economic Affairs, Ministry of FinanceGDP - Gross Domestic ProductGNP - Gross National ProductGOI - Government of IndiaICB - International Competitive BiddingICICI - Industrial Credit and Investment Corporation of IndiaICL - India Cement Ltd.IDBI - Industrial Development Bank of IndiaKCL - Kalyanpur Cements Ltd.KCP - KCP Marcherla CementMOI - Ministry of IndustryMP - Madhya PradeshNPC - National Productivity CouncilOED - Operations Evaluation DepartmentOPC - Ordinary Portland CementPPC - Pozzolana Portland CementPSC - Portland Slag CementSDC - Shree Digvijay Cement Co. Ltd.STC - State Trading CorporationTPD - Tonnes per DayTPY - Tonnes per Year

Fiscal Year : April 1 - March 31

Director-General, Operations Evaluation : Mr. Robert PicciottoDirector, Operations Evaluation Department: Mr. Roger Slade for Ms. Elizabeth McAllisterActing Division Chief : Mr. Rene VandendriesTask Manager Mr. Farrokh Najmabadi

FOR OFFICIAL USE ONLY

The World BankWa1nfln,n c G 20433

U.S.A.

Office of the Director-GeneralOperations Evaluation

June 27, 1997

MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT

SUBJECT: Performance Audit Report on the India Cement Industry Project(Loans 2660-IN and 2661-IN)

Attached is the Performance Audit Report (PAR) on the India Cement Industry Project(Loans 2660-IN and 2661-IN) prepared by the Operations Evaluations Department. The loans in theamount of US$200 million were approved in FY86 and closed in FY94 with two years delay. Thelast disbursement took place in November 1994, at which time a balance of US$3.5 million wascanceled.

Facing a stagnating cement subsector characterized by shortages, rationing, price control,outdated technology and paucity of investment by the private sector, the Government of Indiaadopted a strategy, recommended by the Bank in the early 1980s, to gradually deregulate andliberalize the subsector. Building on the satisfactory start of this strategy, discussions were heldbetween the Bank, the Government of India and the cement industry representatives which resultedin the formulation of this project. The project had three objectives: (i) to assist the cement industryin improving operating efficiency by converting the older wet process cement plants to dry process,thereby bringing about considerate energy saving; (ii) to effect other improvements in operatingefficiency, environmental protection, product quality and labor productivity; and (iii) to assist theindustry as a whole in upgrading plant operator skills.

Out of the initial seven subprojects for conversion from wet to dry process (Loan 2660-IN),three were dropped and replaced by five new subprojects. Among the replaced subprojects only twowere for conversion, with the others earmarked for balancing/modernizing/retrofitting andmodernization of extraction techniques in limestone quarries. The proceeds of the line of credit(Loan 2661-IN) were used in 18 small subprojects in four areas: balancing and debottlenecking;energy conservation; process improvement; and transfer of technology.

This PAR substantially confirms the ratings of the ICR review. The project has substantiallyachieved its physical, technical efficiency, environmental, product quality and labor productivityobjectives. The technical problems at two large plants (Kalyanpur Cement and IDCOL) haveprogressively been resolved. Given the reestimated combined rate of return of 11 percent for the sixconversion projects, the outcome of this project is rated as satisfactory. Since the industry is nowoperating profitably within a liberalized, deregulated and buoyant market with market pricesapproaching international levels, the sustainability of the project is rated as likely. The institutionaldevelopment impact of the project has been substantial. Through an extensive training program andthe introduction of new technology combined with attention to quality control, environmental

This document has a restricted distribution and may be used by recipients only in the

performance of their official duties. Its contents may not otherwise be disclosed without

World Bank authorization.

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concerns and preventive maintenance, the cement companies are operating efficiently within a highlycompetitive environment. Both the Bank and the Borrower have performed satisfactorily.

Major lessons of this project include: (i) a deregulated and liberalized setting is essential forthe success of industrial restructuring projects; (ii) quick access to know-how and technologyincluding engineering, consultancy and equipment manufacturing, provide the critical support forhigh performance of industrial plants; (iii) successful project execution needs an experienced teamand a suitable organization; and (iv) the introduction of unproven technology in industrial projectsshould be avoided.

Attachment

Contents

Ratings and Responsibilities. ............................................... 3

Preface ............................................................... 5

Evaluation Summary..................................................... 7

1. Introduction............................................................ 13

Project Background ..................................... ..... 13

The Project .................................................... 14

2. Implementation Experience ......................................... 17

Preappraised Subprojects (Loan 2660-IN) ..................... 17

Replacement Subprojects (Loan 2660-IN) ..................... 17

Line of Credit (Loan 2661-IN) .................................. 18

3. Results ............................................ ...... 21

Capacity Additions ................ .................... ..... 21

Technical Indicators ......................................... 22

Human Resource Development - Technical Assistance ................. 22

Environmental Protection ........................................ 23

4. Overall Assessment and Issues ...................................... 25

The Current Status of Indian Cement Industry....................... 25

Technical Performance of Plants................................ 28

Development of Indigenous Cement Machinery Manufacturingand Consulting Services.....................................29

Profitability and Economic Rates of Return......................... 29

Institutional Development....................................30

Sustainability .............................................. 31

Bank/Borrower Performance ....................................... 31

5. Conclusions and Lessons Learned .......................... .......... 33

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Annexes

A . ....................................................... 35

I. The Associated Cement Companies Ltd. (ACC)....................... 39

H. Birla Jute Industries Ltd.............................47

III. India Cements Ltd. ................................ ....... 53

IV. The KPC Ltd.......................................... 59

V. Kalyanpur Cement Ltd .............................. ...... 65

VI. IDCOL Cements Ltd...............................71

VII. Subprojects Financed by Loan 2661r N.........................77

VIII. Project Costs................... .................. ..... 87

IX. Geographical Distribution of Cement Producing Capacity in India................89

X. Assumption for ERR Calculations ................................ 91

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Ratings and Responsibilities

Performance RatingsLoans 2660-IN and 2661-IN

Outcome SatisfactorySustainability LikelyInstitutional Development Impact : SubstantialBank Performance SatisfactoryBorrower Performance Satisfactory

Key Project Responsibilities

Loans 2660-IN and 2661-INTask Manager Division Chief Director

Appraisal R. Venkateswaran M. Rowat A. GolanM. Fog

Completion Uruj Kirmani Luis E. Derbez Heinz Vergin

ICR Prepared by:Industry, Trade & Finance DivisionCountry Operations Department HSouth Asia Region

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Preface

1. This is the Performance Audit Report (PAR) for a Cement Industry Project in India forwhich the Board approved a US$165.0 million loan in March 1986. The last disbursement tookplace in November 1994, at which time a balance of US$3.5 million was cancelled.

2. The PAR was prepared by the Operations Evaluation Department (OED). An OEDmission visited India in November/December 1996 and discussed the effectiveness of the Bank'sassistance with the Government of India, the Industrial Development Bank of India (IDBI), theIndustrial Credit and Investment Corporation of India (ICICI) and six of the cement companiesthat utilized the financing provided by the Bank. Their kind cooperation and assistance is greatlyappreciated and acknowledged.

3. The ICR was prepared by the Industry, Trade and Finance Division, Country OperationsDepartment II, South Asia Region. Part II was provided by the financial intermediaryinstitutions, IDBI and ICICI, in collaboration with the beneficiary companies. The PARcomplements the ICR by providing a fuller account of the achievements, problems and furthersteps that are needed to ensure the sustainability of the project's benefits. The PAR has speciallydrawn lessons from the implementation experience at the Kalyanpur and IDCOL plants, pointingout some pitfalls that should be avoided for the satisfactory completion of industrial projects.

4. The PAR was sent to the Borrower for comments. No comments were received.

7

Evaluation Summary

Project Background

I. The Bank has had a long-standing relationship with India's industrial sector. In the 1950s,the Bank approved several loans supporting both publicly and privately owned steel plants. In the1960s and 1970s, loans to intermediary financial institutions and the fertilizer industry dominatedsectoral assistance. Toward the end of the 1970s, the Bank undertook a series of studies of industrialsubsectors aimed at enriching the dialogue between the Bank and the borrower. These studiesprovided the basis for an effective overall lending program to the industrial sector.

2. The first in the series was the Cement Subsector Study (Report No. 3141-IN) issued inNovember 1980. The study addressed the policy constraints facing India's cement industry.Between 1950/51 and 1971/72, the rate of growth of installed capacity had averaged around 9percent. From 1971/72 to 1978/79, it dwindled to around 2 percent. At the end of 1978/79, India'sconsumption of cement (28 kg per capita) was one of the lowest in the world. The country had 51integrated plants with 134 kilns, three grinding units, and one mini plant. There were rationing andrecurrent cement shortages. Imbalances in production/consumption across regions exacerbated theproblems in the market. Government distribution and pricing policies had given rise to abnormallylarge transportation flows among regions and a complicated pattern of cross subsidization amongproducers and consumers in different regions. Like other Indian industries, the cement industry alsosuffered from shortages of coal and power.

3. The study endorsed the government's proposed modernization plan and made a host oftechnical recommendations. It also advanced a strong argument for deregulating and liberalizing thecement industry (including prices) and dismantling the policies that complicated distribution. Whenthe study came out, the Bank and the government were already appraising a project that wouldsupport a major expansion of the public sector's cement-producing capacity. The project wasshelved when the Bank and borrower could not agree on the timing of reforms. In 1982, thegovernment began a gradual process of reform in the cement industry, removing distortions thataffected production, distribution, and consumption, and providing incentives (in the form of anappropriate price structure) for expanding capacity and modernizing plants. These developments,plus relaxed controls and reduced levy quotas, were enough for the Bank to resume its dialogue withthe government and cement industry representatives. These discussions resulted in a decision tosupport existing private and public sector plants by introducing measures aimed at conservingenergy, protecting the environment, and reducing costs.

4. The Cement Industry project, (Loans 2660-IM and 2661 -IN for US$200 million equivalent)had three components, each with a specific objective. The first was to help the cement industryimprove its operating efficiency by converting seven older wet process cement plants to dry process,a shift that would save considerable energy. The second would support subprojects the wouldimprove operating efficiency, environmental protection, product quality and labor productivity. Thethird component would provide technical assistance and training to upgrade plant operator skillsthroughout the industry.

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Implementation Experience

5. Three of the seven subprojects originally preappraised and earmarked for financing under thefirst component (Loan 2660-IN) were dropped in 1987 and 1988 because the cement companieswithdrew. By 1989, five new projects had replaced the initial three. Two of these would convert wetprocess plants to dry process, two would provide balancing, modernization, and retrofitting (BMR),and the other aimed to modernize and implement energy conservation measures in mines. Theborrower's slow approval process and the private sector's lack of knowledge of Bank proceduresdelayed implementation. By 1990, however, the four preappraised subprojects (ACC's Madukkarai,Birla's Stna, Indian Cement's Sankarnagar and KCP's Macherla) were all completed. Annexes I-IVdescribe these projects.

6. The first of the five additional subprojects (the Kalyanpur cement plant) was located atBanjari in Bihar. The plant had been performing poorly because of its outdated technology.Although implementation began shortly after approval, it was delayed almost two years by thecompany's lack of managerial experience, the failure of machinery and equipment suppliers todeliver on schedule, and the suppliers' poor technical performance. The other conversion subprojectwas carried out at the Industrial Development Corporation of Orissa Ltd. (IDCOL) plant at Bargarhin Orissa. This "expansion" project actually involved installing what was basically a new plant at thesite. Although the new plant was to be commissioned by July 1994, a series of problems postponedthe full commissioning until much later. The problems resulted from delays in equipment supplies,mismatches in machinery parts, the relative weakness and inexperience of the projectimplementation team (which had never carried out a project of this magnitude), and several changesin top management. The other three replacement subprojects-the BMR schemes by AssociatedCement Companies (ACC) and Birla Jute and Industries Ltd. (Birla) and the ACC's mineimprovement subproject-were completed on time and without any problems.

7. The Bank provided a line of credit (Loan 2661 -IN) to the Industrial Credit and InvestmentCorporation of India (ICICI) that was used to finance 18 subprojects. The ICICI developed a set ofcriteria for modernization subprojects in four areas: balancing and reducing bottlenecks; energysavings; process improvement; and technology transfer. In most subprojects involving processimprovement, balancing, and reducing bottlenecks, financing from the credit line was only a smallpart of the total cost. In five out of the six subprojects aimed at process improvement, it was used toinstall or modernize preheater/precalciner equipment for converting from wet to dry process and toexpand capacity. Of the six subprojects designed to effect energy savings, two installed verticalroller mills, three financed pollution controls and closed circuiting of mills in the cement plants, andone supported coal beneficiation and cooler table modification. All projects achieved theirobjectives. These investments have generally helped reduce environmental damage around theplants.

Project Results

8. Of the six plants converted from wet to the dry process, four-ACC Madukkarai, Birla JuteSatna, KCP Macherla, and Indian Cements Ltd. (ICL) Sankarnagar-have been stabilized and arecurrently producing at above nominal capacity (between 105 and 160 percent). The two BMRsubprojects (ACC Gagal and Birla Jute Chittor) have also been producing above capacity for the lastthree years. Total annual production at these six plants rose from 3.65 million tons before

9

conversion and modernization to 5.78 million tons in 1995/96. The other two-the Kalyanpur andIDCOL plants-still face difficulties, though many of the problems with malfunctioning equipmenthave been resolved. The conversion subprojects have resulted in substantial energy savings of from610K cal/kg of clinker at the India Cement Sankarangar plant to 870K cal/kg of clinker at the KCPplant at Macherla. These savings are generally better than what was anticipated at appraisal andcompare favorably with best practice around the world.

9. These successful achievements were the result not only of new and more efficienttechnology but also of the attention the various companies gave to developing their human resources.The government of India used the funds under the technical assistance subcomponent to conduct acomprehensive study of the industry's skill and manpower requirements. This timely study formedthe basis for a training strategy. Because the industry's need for skilled workers was acute, the studyrecommended setting up regional training centers (RTCs). The government and the DanishInternational Development Agency (DANIDA) supported the establishment of four RTCs. Thesetraining centers were to serve groups of cement plants (clusters) in different parts of the country andwould be located at the lead plants of the following companies: the ACC for Madhya Pradesh andEastern India, J. K. Synthetics for Rajasthan, Gujarat Ambuja Cement for Gujarat, and DalmiaCement for Tamil Nadu and South India. This demand-driven, in-plant training came at a time whenIndia's cement industry was experiencing rapid growth and technological change. The RTCs have sofar played an important role in helping to upgrade the essential skills of staff at nearly all thecountry's cement plants. Qualified professional staff using systematic training needs assessmentshave designed suitable training packages and offered training courses in regional dialects.

Environmental Protection

10. Because traditional cement plants emit large quantities of dust from several sources, one ofthe project's major objectives was to control pollution and thus to protect the environment. Virtuallyall the conversion and BMR subprojects under Loan 2660-IN were accompanied by majorinvestments in pollution control equipment. Electrostatic precipitators and bag filters were placed atvarious parts of the plants to suppress dust emissions (the most dangerous of the pollutants),especially before hot gases were led to stacks or where raw or clinkerized materials were transferredfrom one process stage to another. In installing the equipment and keeping it in good workingcondition, the companies have improved the environment within the plant and the ambient air qualityaround it. Special teams using up-to-date equipment carry out regular monitoring. In line with therequirements of the respective State Pollution Control Boards, the companies submit periodicenvironmental audit reports. In some plants, the pollution control performance is in the ISO 9002(International Standards Organization) monitoring and certification process.

Overall Assessment and Issues

11. The Indian cement industry has undergone a truly remarkable transformation since the early1980s. It has changed from an industry plagued with government intervention and chronically inneed of investments to a vibrant, technologically up-to-date, and largely profitable subsector. It notonly satisfies domestic demand for cement but also exports to neighboring countries and regionalmarkets. This transformation is the direct result of the government's decision to deregulate theindustry and liberalize prices. This new policy, which was instituted between 1982 and 1989,

10

prepared the industry for heavy private sector investment. Between 1982/83 and 1995/96, thecapacity of large cement plants increased from 33.5 million tons per annum to 88.2 million tons.While the location of large limestone reserves still dictates the site of new plants, the geographicaldistribution of cement producing capacity has also improved substantially. Many states have bothlarge and small cement plants, helping reduce pressure on the country's already overburdenedtransportation system (especially the railways). At present, the public sector accounts for only about10 percent of India's cement-producing capacity and actual production, down from around 18percent in fiscal 1984/85. More significantly, however, the dry process kilns now account for 87percent of clinker-producing capacity, compared with 58 percent in fiscal 1984/85. This new andmore efficient technology has allowed the cement industry to withstand dramatic increases in thecost of inputs and still remain profitable.

12. Power shortages, problems with the quality and availability of Indian coal, and difficultieswith the transportation system still handicap the industry, however. Power cuts and restrictions haveforced the industry to invest heavily in captive power stations to meet its own demand. Because thequality of India's coal continues to deteriorate and shortages persist, the industry has taken remedialaction. Coal washeries are being introduced in many plants, with reasonably good results. Thegovernment of India has been moving in the direction of permitting cement producers to lease andoperate captive coal mines. The unreliable transportation system, especially the railways, makesmoving coal from linkage mines to plants difficult. In response, cement companies are consideringinvesting in the wagons or dedicated closed circuit movement. And the government has reducedimport duties on coal, allowing cement plants located far from the coal belts but near major ports toexperiment with imported coal.

13. Notwithstanding these efforts, the cement distribution system in India remains primitive andinefficient. At present, the bulk movement of cement (which is around 70-80 percent in manycountries) is negligible in India. Encouraged by the Bank and assisted by the government, theindustry recently decided to implement a pilot project in the Mumbai area. This pilot project becamea subcomponent of the second cement industry loan the Bank approved for India (Loan No. 3196-IN).

Ratings and Economic Rates of Return

Project Outcome

14 Project outcome is rated as satisfactory. India's cement market has been buoyant in recentyears, and most plants benefiting from this project (except Kalyanpur and IDCOL) have beenoperating profitably. To remain profitable, the companies must become more efficient, reducingproduction time by improving repair and maintenance and providing captive power to counteract thefrequent power cuts and shortages. Plant availability is now more than 330 days per year, indicatingthe effectiveness of the steps plant managers have taken. Assuming that India's economic policyremains on track and that the economy continues to grow at the levels of the last few years, cementconsumption in India should continue to expand, and market prices may approach internationallevels. Despite the poor results at the Kalyanpur and IDCOL plants, the reestimated combinedeconomic rate of return (ERR) for the six conversion subprojects is around 11 per cent.

11

Institutional Development

15. This project has resulted in substantial institutional development. It has introduced anextensive training program and new technology, improved quality control and preventativemaintenance, and heightened environmental awareness. As a result, the firms benefiting from Bankfinancing have become efficient enterprises capable of running their businesses profitably in a highlycompetitive environment. New plants can now be constructed quickly and soon begin operating atfull capacity. Technical expertise allows many plants to operate at above nameplate capacity. Theachievement of ISO 9002 certification at practically all the beneficiary firms testifies to theimprovements in the technical management of the Indian cement industry.

Sustainability

16. Project sustainability is rated as likely. Cement production in India is an efficient economicactivity based on the availability of high-quality limestone and other additives such as gypsum,laterite, and bauxite. Most plants use the most modem clinkerization and milling technologies, andmost now have pollution control devices. The industry is also operating profitably within aliberalized, deregulated, and competitive environment that rewards initiative and punishesinefficiency. The financial future of the four stabilized plants (Madukkarai, Satna, Macherla, andSankamagar) is assured. But the Kalyanpur and IDCOL plants need financial restructuring, even iftheir technical problems are quickly resolved.

Bank/Borrower Performance

17. Both Bank and borrower performance are rated as satisfactory. The Bank has played a majorrole in helping India's cement industry become more competitive and self-sufficient. By insistingthat the government institute deregulation measures before receiving financial assistance, the Bankwas instrumental in improving India's once stifling and distorted economic environment. Policyreforms have eliminated the chronic shortages, rationing, price controls, investment licensing andcontrols, and unworkable transportation schemes. What has emerged is a liberalized subsectorframework conducive to the rapid development of the cement industry. The private sector takes thelead in increasing capacity and eliminating market shortages. In many respects, the Bank's fundswere not essential in increasing production capability, because the banking system could also haveprovided financing. But the focus, attention, and leverage the project generated, as well as itsdemonstration effects, made it highly effective.

18. Although the project was well prepared, the withdrawal of three of the initial subprojectscreated pressure to identify and appraise other plants for wet-to-dry conversion quickly. The twoplants chosen-Kalyanpur and IDCOL-did not possess strong and experienced project managementteams. And the choice of some equipment, especially the vertical roller mill for slag grinding, wasill-advised. However, their problems do not diminish the project's achievements, both direct andindirect. The success of this project owes much to the close collaboration among the Bank, theGovernment of India, the financial intermediaries and the sub-project entities. In addition, theborrower and executing agencies complied with the loan covenants in all material respects.

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Conclusions and Lessons Learned

19. The major lesson of this project reaffirms the notion that successful restructuring cannot beachieved in a highly distorted economic and sector setting. The minimum requirements are domesticcompetition and a liberalized investment environment. Over the last 15 years, the Bank and Indianauthorities have developed a constructive dialogue about the industrial sector. In particular, they areconsidering how to introduce further reforms that will enhance competitiveness and encourageprivate sector investment. The successful liberalization and deregulation of the cement industryoffer a clear example of what can be achieved in other industrial subsectors.

20. A second important lesson is that the competitiveness and long-term sustainability of anyindustry in a developing country depends on quick access to know-how and modem technology. Thedevelopment of consultancy and engineering capabilities, along with high-quality equipmentmanufacturing, has provided the support for India's cement industry needs. The industry can nowcomplete a new cement project in less than 30 months.

21. This project also reemphasizes four well-established lessons:

* Project implementation often fails when the project executing team is inexperienced anddisorganized.

* Projects should not introduce unproved technology, even if the gains may initially appear to belarge. Developing countries should not become testing grounds for new technology unlessequipment manufacturers are prepared to shoulder all contingent losses.

* Liberalizing other sectors can lead to important countrywide benefits and externalities. Forexample, liberalizing the importation of coal and revamping the Indian railways are essential tothe efficient development of other sectors.

* Beneficiary ownership ofproject concepts and institutions is necessary for projects to succeed.The beneficiaries of this project quickly saw the benefits of the training facilities that were set upwith their close involvement and participation.

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1. Introduction

Project Background

1.1 In 1979, the Bank embarked on a series of studies of specific Indian industrial sectors.These studies were designed to: (a) improve the bank's understanding of the industrial sector inIndia; (b) serve as a foundation for a policy dialogue with the Indian Government on issuesfacing the sector; and (c) contribute to the design of an effective lending program in theindustrial sector. The first in the series was the Cement Subsector Study (Report No. 3141 -IN)issued in November 1980.

1.2 The study addressed a variety of serious policy constraints facing the cement industry inIndia. During the eight years immediately preceding the issuance of the study, the rate of growthof installed capacity had dwindled to around 2 percent from an average of about 9 percentbetween 1950/51 and 1971/72. As a result, the installed annual capacity was only 22.6 milliontons at the end of 1978/79, consisting of 51 integrated plants with 134 kilns, three grinding unitsand one mini plant. At this time about 65 percent of the total capacity was based on the wetprocess and capacity utilization ranged from 40 percent to over 100 percent among the operatingplants; the average for the whole industry being 80 percent. There were recurrent cementshortages and cement was rationed administratively through a three tiered system. Public sectorusers had first priority, users earmarked by the Government had second priority and theremainder (around 20 percent of total production) was allocated to the States for sale in the openmarket at controlled prices. The problems in the cement market were exacerbated by regionalproduction consumption imbalances that had emerged as a result of a freight equalization schemeand the uniform pricing policies. These distribution and pricing policies had caused the industryto grow near known sources of raw materials without sufficient regard to the location of potentialmarkets. They had also given rise to abnormally large transportation flows among regions and acomplicated pattern of cross subsidization among producers and consumers in different regions.Not unlike many other industries in India, the cement industry also suffered from coal and powershortages.

1.3 Against this background, the Study made a host of recommendations which were mostlyof a technical nature. While endorsing the proposed modernization plan by the GOI(Government of India),1 the study's recommendations ranged from the need to explore for andprove more limestone reserves and other additive materials, especially in deficit states, toimprovement in coal availability and quality, development of facilities for bulk cementdistribution, expansion of railway facilities, improvement in cement quality, establishment of

This modernization plan consisted of: improvement in quarry operations; transportation systems; material handling;storage facilities; sizing of limestone and coal before feeding to mills; introduction of closed circuit mills;improvement in the heat recovery systems; and installation of electrostatic precipitators in kiln and cement mills.

14

standards and specifications, conversion from wet to dry process, energy conservation andenhanced training, research and development. Moreover, the study made a strong argument forthe deregulation and liberalization of industry-including prices-and the dismantling of theFreight Equalization system.

1.4 Before the issuance of the Cement Sector Study, the Bank and the Government of Indiawere already engaged in a dialogue and the appraisal of a project comprising a major expansionof the public sector cement producing capacity. The processing of this project was discontinuedwhen agreement could not be reached with the government on the timing of the implementationof pricing policy reforms. In 1982, however, the Government of India began a gradual processof reform in the cement industry. Initially, it instituted a dual pricing policy whereby the cementplants (other than the mini plants) were required to sell only a specified portion of their output ata fixed (levy) price, with the remainder free to be sold at the open market price. Simultaneously,the GOI declared its strategy for the development of the subsector which consisted of removingdistortions to production, distribution and consumption, and providing incentives, through anappropriate price structure and levels, for capacity expansion and plant modernization. Thesedevelopments together with the relaxation of controls and gradual reduction of the levy quotaprepared the ground for the resumption of the dialogue between the Bank, the Government ofIndia and the cement industry representatives. These discussions resulted in a decision to shelvethe concept of expanding capacity in the public sector and to move to one of supporting thealready established plants in the private and public sectors by introducing measures aimed atenergy conservation, environmental protection and cost reduction.

The Project

1.5 The project had three objectives: (i) to assist the cement industry in improvingoperating efficiency by converting the older wet process cement plants to dry process, therebybringing about considerable energy conservation; (ii) to effect other improvements in operatingefficiency, environmental protection, product quality and labor productivity; and (iii) to assistthe cement industry as a whole in upgrading plant operator skills (by organizing regular trainingschemes and obtaining know how in specific areas such as plant start-up procedures,computerized controls and other aspects of modem cement plant operations). The project, thus,consisted of three parts, with Part A, the main component, providing the financing for conversionfrom wet to dry process in seven plants; Part B, financing for smaller scale efficiencyimprovement subprojects; and Part C, financing for technical assistance and training.

1.6 Out of the seven cement plants earmarked for conversion, only one was in the publicsector. In preappraising the subprojects, all options for conversion were identified and analyzedin order to find the most cost effective approach. These seven subprojects entailed a totalproduction increase of 1.82 million TPY, corresponding to 46 percent of their prevailing cementproducing capacity. The average fuel efficiency improvement was expected to be in excess of 40percent. The financing for this subcomponent, which covered technical assistance and training atthe company level, amounted to US$163.5 million. These funds would be onlent by theGovernment of India to the Industrial Development Bank of India (IDBI) and Industrial Creditand Investment Corporation of India (ICICI) as intermediary institutions in equal proportions.

15

1.7 The Part B subcomponent provided a line of credit of US$35 million covering theestimated foreign exchange financing requirements for smaller scale modernization,rehabilitation, energy conservation, environmental control and balancing schemes that wereexpected to be carried out at a number of other existing plants. This subcomponent was aimed atassisting such units to acquire advanced technology and modern operational know-how and toimprove productivity, fuel efficiency and environmental protection in their plants. Thissubcomponent was also earmarked for financing technical assistance to improve operations andmanagement. The line of credit was to be managed by ICICI which had already receivedrequests for modernization programs from various companies.

1.8 The Part C subcomponent (US$1.5 million) provided financing for technical assistanceand training. These funds would be transferred as a non-reimbursable grant to ICICI in order tocarry out the subsector level technical assistance and training. ICICI would, in turn, provideassistance to the Cement Manufacturers' Association (CMA) to employ consultants in order toprepare a development strategy for the cement industry covering manpower needs, trainingrequirements and the strategic plan for medium- and long-term manpower development. Theconsultants would also evaluate the feasibility of jointly owned and operated training centers forthe industry as a whole.

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2. Implementation Experience

Preappraised Subprojects (Loan 2660-IN)

2.1 The project received Board approval in May 1986 and the loan became effective inOctober 1986. Of the subprojects originally preappraised and earmarked for financing in Part A,three were gradually dropped during 1987 and 1988 as the respective cement companiesexpressed their unwillingness to proceed with the investment. In one instance (Shahabad) theowners decided to sell the plant. In the course of 1988 and 1989, these three subprojects weresubstituted by five new ones, two of which consisted of wet to dry process conversions, two werefor balancing/modernization/retrofitting (BMR) purposes and one was for mines modernizingand energy saving. Despite the delays caused by the slow processing of approvals of theconversion and expansion subprojects by the GOI and the unfamiliarity of the private sectorenterprises with the Bank's ICB procedures, the four preappraised projects under implementation(ACC's Madukkarai, Birla's Satna, Indian Cement's Sankarnagar and KCP's Macherla - SeeAnnexes I, II, III & IV) were all commissioned during 1989 and the early part of 1990. By thesecond half of 1990 all four plants were in commercial operations, moving toward full capacityutilization.

Replacement Subprojects (Loan 2660-IN)

2.2 Of the five replacement subprojects, two were designed to convert the plants from wet todry process. The first located at Banjari in the State of Bihar, (the Kalyanpur cement plant) hadbeen in operation since 1946. After several expansions the plant's capacity had been raised to400 thousand TPY by the early 1980s. but because of the outdated technology the company wasperforming poorly. In 1989, a decision was made to modernize and expand the capacity toaround 800 thousand TPY. While the subproject was approved in 1990 and construction startedshortly thereafter, implementation encountered serious problems that resulted in a delay ofnearly two years before the plant could be commissioned in September of 1994. The delay wasdue partly to the weakness and the lack of experience in the company's project managementteam, and partly the failure of the machinery and equipment suppliers in meeting theirobligations of both delivery and technical performance. Despite having a well knowninternational cement consulting group as shareholder, such problems during projectimplementation and the operational phase continued with debilitating results for the company.(See Annex V).

2.3 The other conversion subproject was carried out at the IDCOL's (IndustrialDevelopment Corporation of Orissa Ltd.) plant located at Bargarh, Orissa. This plant, which wastaken over by IDCOL in the latter part of the 1980s, had a capacity of 400 thousand TPY.Facing competition from new and more efficient dry process plants, the new managementdecided to implement a modernization/expansion project, thereby increasing the capacity to 960thousand TPY of slag cement. The expansion project constituted, in reality, the installation of a

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practically new plant at the site. Although the new plant was to be commissioned by July 1994,a series of problems postponed the full commissioning until much later. In the case of this planttoo, most problems were associated with the relative weakness and inexperience of the projectimplementation team which had never carried out a project of this magnitude and several topmanagement changes. These problems were compounded by delays in main equipment supply,mismatch in machinery parts necessitating reassembly and replacement and faulty specificationsof some machinery (Annex VI).

2.4 Of the other three replacement subprojects two were in the nature ofbalancing/modernization/retrofitting (BMR) at the ACC's plant in Gagal, Himachal Pradesh, andBirla Jute's plant at Chittorgarh, Rajasthan. Given the long and extensive experience of bothcompanies in plant erection, commissioning and operation, these BMR subprojects werecompleted on time and went into production immediately without any difficulty. The lastsubproject was implemented by ACC and was designed to improve the productivity of variouslimestone mines as well as installing energy saving equipment at a number of ACC plants. Allthree replacement subprojects were satisfactorily completed achieving their objectives ofexpanding capacity, balancing mines production with expanded output, reducing energyconsumption and introducing modern technology.

Line of Credit (Loan 2661-IN)

2.5 This line of credit which was intermediated through ICICI was utilized in the financingof 18 subprojects with the objective of improving operating efficiency, environmental protection,labor productivity and product quality. ICICI developed a set of criteria for the consideration ofmodernization subprojects, generally in four areas: balancing and debottlenecking; energysavings; process improvement; and, transfer of technology. This line of credit providedfinancing for such subprojects as follows (Annex VII):

Balancing and Debottlenecking 4Energy Savings 6Process Improvement 6Transfer of Technology 2

2.6 Two of the beneficiaries of the financing provided by Loan 2660-IN-ACC and BirlaJute-also borrowed from this line of credit. As indicated in Annex VII, all these subprojectsachieved their objective. In most instances where process improvement or balancing anddebottlenecking was attempted, the financing from the line of credit constituted only a small partof the total cost of the subprojects. In five out of the six subprojects aimed at processimprovement-J.K. Synthetics, Chettinad Cement, Mangalam Cement, J.K. Udaipur Udyog andACC Madukkarai-the borrowing was used to install or modernize preheater/precalcinerequipment in order to convert the wet to dry process and to expand capacity.

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2.7 Out of the six subprojects designed to effect energy saving, two were for the installationof vertical roller mills, three were for pollution control and closed circuiting of mills in thecement plants and one was for coal beneficiation and cooler table modification (in mostinstances, energy saving is concomitant with closed circuiting of the raw material, coal, clinkerand cement grinding mills and collection of dust and other polluting particles throughelectrostatic precipitations or high efficiency dust separating filter bags). These investmentshave generally helped alleviate the environmental degradation around the respective plants.

2.8 Annex VIII provides data in respect of project costs and financing. Although overrunsand underruns of up to 20 percent can be seen, most projects were completed close to budget indollar terms. When converted to rupees, however, the costs escalated substantially as theconversion rate for US dollars went from around 13 rupees in 1987 to over 30 rupees in 1993.Nonetheless, the companies utilizing the proceeds of Loan 2660-IN managed to increase theirown internal cash generation from an appraised estimate of US$77 million equivalent to US$95million equivalent while reducing their call on rupee loans from IDBI and ICICI (actual US$93million equivalent compared with US$122 million estimated at appraisal). In the case of thecompanies using the proceeds of the line of credit (Loan 2661 -IN) the total cost of thesubprojects declined from US$88.8 million at appraisal to US$75.0 million at completion.

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3. Results

Capacity Additions

3.1 The project succeeded in converting six large plants to utilizing the modem andtechnologically advanced dry process. Out of the six plants, four have been stabilized for manyyears and their production has increased through fine tuning optimization exercises and theremoval of process constraints. The other two-Kalyanpur and IDCOL cement plants-still facedifficulties, though many of the earlier problems with equipment malfunctioning have beenresolved. The production performance of these converted plants and the BMR subprojects isshown in the table below.

Table 1 - Production Performance of Various Cement Plants (Thousand Tons per Year-TPY)

Production Design Capacity Actual CapacityBefore After Conversion Production Utilization

Conversion and and 1995/96 PercentageModernization Modernization

ACC - Madukkarai 440 520 830 160

ACC - Gagal 610 1020 1060 104

Birla Jute - Satna 450 750 820 109

Birla Jute - Chittor 1100 1400 1550 110

KCP - Marchela 250 425 475 111

India Cements - Sankarnagar 800 1000 1050 105

Kalyanpur - Banjari 300 1000 550 55

IDCOL -Bargarh 400 960 419 44

The above actual production figures indicate that, even without Kalyanpur and IDCOL plantsachieving high capacity utilization, the total production of the eight plants has increased bynearly 2.3 million tons in 1995/96 as compared with production before conversion andmodernization. For the first half of the 1996/97 campaign, both Kalyanpur and IDCOL cementsplants enhanced their capacity utilization.

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Technical Indicators

3.2 The major indicator of energy efficiency-heat consumption per kilogram of clinker -has improved substantially for all the plants financed by Loan 2660-IN. In many plants, theother indicator of energy efficiency - electrical energy consumption per ton of cement - has alsoimproved. Some of the subprojects utilizing the line of credit (Loan 2661 -IN) also addressedenergy conservation with satisfactory results. These results for the various plants is shown inTable 2 below.

Table 2: Technical Indicators After Conversion/ModernizationHeat consumption Electrical Energy Consumption

Kilocalorie/Kg Clinker KwH per ton of Cement

Before Aftea BforAtg

ACC - Madukkarai 1656 970 117 102Birla Jute - Satna 1535 790 120 107KCP - Macherla 1600 730 133 120India Cements - Sankarnagar 1430 820 116 119Kalyanpur - Banajari 1510 760 121 123IDCOL - Bargarh 1450 802 120 113

The energy consumption figures are generally better than what was anticipated at appraisal andfavorably compare with the best practice around the world. These savings in energyconsumption, along with high capacity utilization have helped these companies to keep their costunder reasonable control at a time of rapid increase in the cost of fuel and power and otherconsumables.

Human Resource Development - Technical Assistance

3.3 The Government of India utilized the funds under the technical assistance subcomponentto conduct a comprehensive study for skills and manpower requirements in the cement industry.This study was completed on time and formed the basis for a training strategy. Referring to theacute training needs of the industry, the study recommended the setting up of Regional TrainingCenters (RTCs). During the preparation of the second Bank loan for the restructuring of theIndian cement industry (Loan 3196-IN), the question of training centers was discussed with theGOI. As a result, it was decided to set up four regional training centers with the assistanceprovided by the Government and the Danish International Development Agency (DANIDA).These training centers were to serve groups of cement plants (clusters) in different parts of thecountry and were to be located at the lead plants of the following companies:

ACC for Madhya Pradesh and Eastern India.J.K. Synthetics for Rajasthan.Gujarat Ambuja Cement for Gujarat.Dalmia Cement for Tamil Nadu and South India.

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3.4 Many factors affected the choice and location of these RTCs. The lead plant had to bewilling to organize the training program including selection of trainers from amongstexperienced operational personnel, to make a financial commitment to the RTCs operational costand to represent a well run organization with solid performance, equipped with modemtechnology suitable for the intended training. Moreover, there had to be a sufficient number oftrainees in the cluster plants, a demand for training and a willingness, by the respectivecompanies, to pay a reasonable fee. The training programs were to focus on skill upgrading inareas such as mechanical and electrical maintenance, control room operations, quality controland laboratory equipment, electronic instrumentation, computer operations, pollution control andenvironmental protection. Such training was to be given to cement plant operators, supervisorsand line managers.

3.5 The establishment of this type of demand-driven, in-plant training came at a time ofunprecedented growth and substantial technological change in the Indian cement industry. TheRTCs have so far played a critical role in providing essential skills upgrading for the personnelof practically all cement plants in India. Through systematic Training Needs Assessment,suitable training packages have been designed. Training courses are being offered in regionallanguages by line staff who are professionally equipped to function as trainers. As indicated inAnnexes I-VII, the beneficiaries of this project have taken advantage of the RTC facilities totrain their operators and supervisory personnel. This has been in addition to whatever trainingprograms they were traditionally carrying out. The commitment to training and skills upgradingwas apparent in all the visited plants and the achievement of high capacity utilization with goodtechnical indicators is evidence of the efficacy of the training programs.

3.6 This human resource development project has had the added advantage of developingthe indigenous capability to design quality training packages in technical areas. For example,sophisticated computer based training aids have recently been developed that depict thefunctioning of various equipment in a cement plant both pictorially and dynamically.Furthermore, these training aids indicate the cause and effect linkages in equipmentmalfunctioning. These training aids have proved to be powerful tools for training purposes.With a major part of the grants already expended, the program has now reached a stage wherethe promoters have to seriously consider the long term technical, administrative and financialsustainability of the RTCs.


3.7 Pollution control and environmental protection constituted one of the major objective ofthis project. In practically all subprojects utilizing the Bank financing under Loan 2660-IN, theconversion from wet to dry process or the BMR subprojects were accompanied with largeinvestments in the installation of pollution control equipment. Dust emissions (the mostpolluting part of the cement plant) were suppressed by using electrostatic precipitators and bagfilters at various parts of the plant, especially before hot gases were led to stacks or where raw orclinkerized materials were transferred from one process stage to another. The closed circuitingin these plants which was aimed at maximizing heat recovery and energy conservation alsohelped the pollution control measures. By installing these equipments and keeping them in goodworking conditions, the companies improved the working environment in the plant and theambient air quality around it.

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3.8 In all companies, environmental protection was taken seriously. Regular monitoring wasbeing carried out by a team using up-to-date equipment. In conformity with the requirements ofthe respective State Pollution Control Boards, environmental audit reports are submittedperiodically. The Control Board inspectors regularly check the pollution control system in theplants and make their own independent measurements of various parameters especially theemission of particulates from stacks at different locations, both inside and outside the plant. Insome plants, the pollution control performance is in the ISO 9002 monitoring and certificationprocess. An inspection of stack emission and air quality records indicated that all the plantscomplied with the State's pollution control norms. Being engaged in mining quarries andoperating a potentially polluting plant, the cement companies have created green belts around theplants as well as carrying out extensive afforestations in the mined out areas. These measureshave greatly attenuated noise pollution and the propagation of dust and fugitive gases.

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4. Overall Assessment and Issues

The Current Status of Indian Cement Industry

4.1 Since the early 1980s, the Indian cement industry has undergone a truly remarkabletransformation. From being plagued with incessant government intervention and suffering fromthe paucity of investment, it has emerged as a vibrant, technologically up-to-date and largelyprofitable industry, satisfying not only the domestic demand for cement, but also exporting to theneighboring and regional markets. This transformation has been the direct result of the decisionby the Government of India to deregulate the industry and liberalize prices. This new policy ofdecontrol which was put into effect in 1982 and completed in March 1989, prepared the groundfor the private sector to begin investing heavily in the cement industry, increasing the capacitynearly threefold between 1982-83 and 1995-96. The growth of the Indian cement industry isshown in the following Table 3.

4.2 As indicated in the above table, after a period of rapid capacity increase during the firsthalf of the 1980s, the pace slowed somewhat in the late 1980s with capacity utilizationapproaching 88 percent in fiscal 1991/92. In the last few years, however, large new capacitieshave again been added with cement plants coming into operation in many states. During 1995-96 alone, seven new plants (including grinding units with a total capacity of 7.3 million tons) andsix expansion projects have been commissioned increasing the total cement producing capacityby 10.1 million tons. As a result capacity utilization for the large plants dropped from 88 percentin 1991-92 to 82 percent in 1995-96. In addition to this capacity which is related to the largeplants, the CMA estimates that the mini plants and white cement plants have a total capacity ofaround 9 million tons. It is anticipated that additions to capacity during fiscal 1996-97 will bearound 16 million TPY which includes the completion of 9 new cement and one grinding plantswith a total capacity of 13.5 million tons. These plants-Sanghi Cement at Gujarat, PhoenixCement at Satna and Prism Cement at Satna-will each have a capacity in excess of 2 millionTPY.

4.3 While the location of large limestone reserves-Satna and Bilaspur in Madhya Pradesh,Gulbarga in Karnataka, Chandrapur straddling Maharashtra and Andhra Pradesh, Nalgonda andYeranguntla in Andhra Pradesh, and Chanderia in Rajasthan-still dictate the site of the newplants, the geographical distribution of cement producing capacity has improved substantiallysince the 1980s with large and small cement plants presently existing in many States of India(Annex IX). This has helped reduce the pressure on the already over burdened transportationsystem (especially railways) in the country. In some States such as Uttar Pradesh and WestBengal with little integrated cement producing capacity and large consumption, grindingcapacities have been created.

Table 3 - Growth of the Indian Cement Industry - Capacity, Production and Consumption (Million TPY)Capacity Total

Capacity Utilization ProductionLarge Plants Production Large Plants Production Large and Apparent ExportsEnd of Year Large Plants % Small Plants Small Plants Consumption (Imports)

1982-83 33.5 23.2 69 NA NA 24.6 (1.3)1983-84 36.9 26.7 73 NA NA 29.0 (2.0)1984-85 42.6 29.6 74 1.1 30.7 30.4 NA1985-86 46.0 32.0 76 1.2 33.2 33.0 NA1986-87 52.3 34.8 80 1.3 36.1 35.9 NA1987-88 54.1 37.4 79 1.7 39.1 39.3 NA1988-89 55.0 41.7 78 2.0 43.7 43.6 NA1989-90 55.6 42.9 81 2.3 45.3 45.4 NA1990-91 57.3 45.7 84 2.5 48.2 48.3 NA1991-92 61.3 50.6 88 1.9 53.5 53.1 .36 C1992-93 64.9 50.7 85 3.4 54.1 53.2 1.181993-94 71.2 54.1 85 3.9 58.0 56.8 2.851994-95 78.1 58.3 85 4.0 62.3 60.7 3.171995-96 88.2 64.5 82 5.1 69.6 68.0 2.38

Source: SAR - Cement Manufacturers Association of India.Stock changes have not been reflected.

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4.4 At present, the public sector accounts for only around 10 percent of the capacity andproduction of cement in India. This is down from around 18 percent in fiscal 1984-85. In fact,the private sector has been responsible for creating around 53 million tons annually of newcapacity since 1984-85, while the capacity of public sector cement plants has increased by only2.3 million tons from 7.6 to 9.9 million TPY during the same period. More significantly, the dryprocess kilns now account for 87 percent of the clinker producing capacity as compared with 58percent in fiscal 1984-85. Thanks to this wholesale introduction of the new and more efficienttechnology, the cement industry has been able to withstand the dramatic input cost increases ofthe recent years and still remain, on the whole, profitable.

4.5 Despite these enormous advances, the industry is still partially handicapped because ofthe problems associated with the power shortage, the quality and availability of Indian coal andthe difficulties in the transportation system. In the face of Power cuts and restrictions which arecommon place in practically all large cement producing states, the industry has been forced toinvest heavily in captive power stations to meet the bulk of its own demand.2 These captiveunits usually consist of coal-fired thermal units or diesel generator sets. Where coal-fired turbogenerators are installed they are operated in preference to the grid power while the dieselgenerators are normally used for emergency purposes when grid power is either cut or restricted.On the whole the industry has learned not to depend heavily on the grid and is becomingincreasingly self-reliant. But unfortunately this comes at a high cost both for this industry andthe economy. The increase in the cost of power for the production of cement in the last decadecan, therefore, be attributed partly to the price hikes by the State Electricity Boards and partly, tothe relatively high cost of generating electricity through small size captive units. Nonetheless,the captive power units have, in many instances, made the difference between a reasonablycontinuous profitable operation and near paralysis.

4.6 The deteriorating quality and inadequate availability of coal continue to provide aserious challenge to the cement industry. This problem is exacerbated by the difficultiesencountered with the transportation system, especially the railways, and the movement of coalfrom linkage mines to the plants. In the last several years, despite an increase in demand for coalby the cement industry, supplies by rail have remained stagnant (around 10 million tons) andwagon movements have declined with the result that the industry has been obliged to increase itspurchases in the domestic market and imports that reached, in 1995/96, to around 2 million tonsand one million ton, respectively. In recent years, the coal supplies have also been augmented bylignite production in the State of Tamil Nadu. The lignite supplies were about 0.8 million tons,only partially satisfying the needs of the Southern Region cement plant but, nonetheless, awelcome addition. The industry is, of course, attempting to solve the problem of coal quality inso far as it can take remedial action on its own. Coal washeries are being introduced in manyplants with reasonably good results.3

2A number of cement companies utilizing the bank's financing, borrowed funds to expand their captive power

generating capacity.

A few companies utilized the World Bank financing to install coal beneficiation plants.

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4.7 However, given the rapid increase in the demand for coal by the power, steel and cementindustries and the difficulties of satisfying demand by Coal India Ltd. (CIL), it is clear that someradical actions need to be taken. Of late, the Government of India has been moving in thisgeneral direction. Having already allowed the private sector power producers to lease andoperate captive coal mines, the practice has been extended to cement companies. This is a giantstep in the right direction provided suitable reserves can be identified and leased to cementcompanies for development and extraction. Other initiatives such as cement companiesinvesting in the ownership of wagons or Dedicated Closed Circuit Movement (which allows thecement companies to own a full rake with locomotive and run it on a railway track against thepayment of a fee) have been discussed and may be implemented. Along with these activities, theGovernment of India has also reduced the import duty on coal in several steps,4 making itpossible for some cement plants that are located far from the coal belts and near the major portsto experiment with imported coal.

4.8 Notwithstanding the efforts enumerated above, the cement distribution system in Indiaremains primitive and inefficient. At present, the bulk movement of cement (around 70-80percent in many countries) in India is negligible. Encouraged by the Bank and assisted by theGovernment of India, the industry decided in recent years to implement a pilot project in theMumbai area. This pilot project became a subcomponent of the second cement industry loanapproved by the bank for India (Loan No. 3196-IN). In addition, one of the producingcompanies in Gujarat has set up a system of bulk movement by sea using specially designedships to transport bulk cement from the producing plants to a bulk terminal in Mumbai. It is stillnot very clear that the industry is seriously committed to such radical departure from itstraditional system of packing cement in 50 kilogram bags. Moreover, the Indian constructionindustry is far from adopting the current practice of using ready mixed cement which helpsassure quality standards while saving costs.

Technical Performance of Plants

4.9 The introduction of new technology and computerized process control along with wellequipped laboratories and testing devices has greatly improved the quality of Indian cement.The industry is now capable of fine tuning and optimizing the process with highly satisfactoryresults. In most plants the energy consumption figures (as given in para 3.2 for the subprojects)are near or better than the designed specifications. More significantly, the new testing deviceshave made it possible for the plants to control the quality-even particle sizes and their mix-atdifferent stages in the process with the result that most cement plants have been approved forISO 9002 certification. This is no small achievement for an industry that only a dozen years agowas still facing serious imponderables and still produced 40 percent of its cement using the wetprocess. The industry's environmental record in reducing dust and other pollution has also beenimpressive. By using electrostatic precipitators and filter bags, the industry has substantiallycleaned the atmosphere around the cement plants. In most instances the recovered cement hasmore than paid for the investment made in installing anti-pollution equipment.

4 Duties have dropped from 85 percent in 1993-94 to 35 percent in 1994-95 and later to 20 percent in 1995-96.

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Development of Indigenous Cement Machinery Manufacturing and Consulting Services

4.10 During the last decade the consulting services and domestic manufacturing of cementplant machinery and equipment have greatly developed in India. Because of the deregulatedenvironment and the abolition of industrial licensing for cement plants by the GOI (other stateand local permits related to environmental protection, zoning and other issues are, of course,required), implementation periods for even large plants (about 1-1.2 million TPY capacity) havedeclined to around 24 to 30 months.5 The capability of Indian engineering firms and machinerymanufacturers (in many instances in technical association or joint venture partnership with firmsfrom industrial countries) have made it possible for the industry to rely on a dependable andaccessible source of technical know-how and after sales service. This development accountsboth for the relatively low and stable investment costs (the equivalent of US$80-100 per annualton of capacity installed) and the rapid run-up to full capacity utilization (in some cases, wellabove the name plate capacity).

Profitability and Economic Rates of Return

4.11 Except for the two plants still not completely stabilized (Kalyanpur and IDCOL), theother subprojects are currently operating at near or above capacity without any technicalproblems. The growth in the demand and the market conditions have been such that the cementcompany have had little trouble absorbing the increasing costs of fuel (coal), power and otherimported spare parts and supplies. To achieve and sustain profitability, the companies have beenchallenged to become operationally more efficient by cutting down time through better repairand maintenance and the provision of captive power to counteract frequent power cuts andshortages. The plant availability has gradually crept above 330 days in recent years indicatingthe effectiveness of the steps taken by the plant's management. The profitability of the variouscompanies utilizing the World Bank financing is given in Table 4 below.

Table 4 - Trend in Profitability of Plant Utilizing Bank Financing (million rupees)

1990-91 1991-92 1992-93 1993-94 1994-95 1995-96

ACC Madukkarai 81.7 134.0 136.4 256.2 375.7 508.1ACC Gagal 347.0 568.4 350.3 228.3 231.1 215.8Birla: Satna 208.4 342.3 11.4 (20.7) 104.6 297.2Birla: Chittor 61.3 406.7 58.8 (72.7) 183.8 453.9India Cement: Sankarnagar 85.2 124.8 205.1 187.0 349.4 484.8KCP: Macherla (63.6) (34.7) (60.7) (36.3) 7.1 156.5Kalyanpur : Banjari 0.2 10.4 (55.0) (42.7) (52.5) (231.6)IDCOL: Bargarh 23.9 105.3 261.2 6.4 (49.1) (261.1)Chettinad: Karur 65.1 123.9 125.8 101.0 200.1 313.1Indian Rayon: Mulkhed 295.3 322.4 256.9 355.4 609.0 1282.9

5The third unit at Rajashree cement at Mulkhed with a capacity of 1.2 million TPY was commissioned 25 months afterground breaking.

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4.12 It is anticipated that the profitability of these plants will be somewhat reduced duringfiscal 1996-97 because of a relative down turn in the construction activities in the summer andautumn months of 1996. Assuming that the Indian economic policy remains on track and theeconomy grows at levels already achieved during the last few years (6-7 percent per annum),there is an enormous potential for the growth of cement consumption in India which, at nearly 75kilograms per capita, remains amongst the lowest in the developing countries. Market prices forcement have not only responded to the supply and demand situation, but have now graduallyapproached international levels. In fact, the export prices for Indian cement are very close to ex-works realization prices for the exporting companies. On the cost side, it appears that the recentrapid increases in the price of fuel and power are now over and a period of relative stability is athand (fuel and power prices are also very close to international levels).

4.13 The ERR for each major subproject has been recalculated on the basis of generalassumptions given in Annex X and specific assumptions for the production trend in each plant.These results are shown in Table 5 below:

Table 5 - ERR Reestimation for Conversion Subprojects

ACC: Madukkarai 14.8%Birla: Satna 15.8%Indian Cement: Sankarnagan 13.2%KCP: Macherla 11.5%Kalyanpur: Banjari 7.4%IDCOL: Bargarh 5.3%Combined Weighted 11.0%

It should be noted that due to implementation delays and the decline in international price ofcement in real terms,6 the reestimated ERRs are lower than those anticipated at appraisal.Moreover, the Kalyanpur and IDCOL plants have both suffered not only from large costoverruns and delays in commissioning, but also their inability to quickly reach high productionlevels. Despite the poor results at these two plants, the outcome of the project is rated assatisfactory given that the reestimated combined weighted ERR for the six subprojects is ataround 11 percent.

Institutional Development

4.14 This project has resulted in substantial institutional development. Through an extensivetraining program and the introduction of new technology combined with attention to qualitycontrol, preventative maintenance and environmental concerns, the entities benefiting from theBank's financing have become efficient enterprises capable of running their business profitablyin a highly competitive environment. An important aspect of this development is the speed withwhich new plants can now be constructed in India and brought to full capacity operation.

6International prices of cement have remained around US$50-54 per ton in nominal terms over the last 10 years.

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Another is the technical expertise that has allowed many plants to operate at above nameplatecapacity. The achievement of ISO 9002 certification at practically all the entities is a testimonyto a quantum jump in the technical management of the Indian cement industry.

Sustainability

4.15 Cement production in India is an efficient economic activity. It is based on theavailability of large and good quality limestone resources and other additives such as gypsum,laterite, bauxite, etc. For many decades, the Indian market has been familiar with PozzolanaPortland cement and Slag Portland cement that permit the mixing of fly ash (available from coalburning power stations) and blast furnace slag with limestone clinker (around 10-15 percent).7

The industry is currently utilizing the most modem clinkerization and milling technologies inmost of its plants. Through modem maintenance practices and the use of electronic monitoringand control devices, the energy consumption in most modem plants has approached levelsobtaining in the more efficient plants around the world. The industry has used the opportunity ofthe capacity growth to install pollution control devices that have cleaned the environment aroundthe plants and brought the atmospheric dust content down to acceptable levels. All in all, this isa picture of a healthy industry.

4.16 The industry is also operating within a liberalized, deregulated and competitiveenvironment that rewards initiative and punishes inefficiency. With no government interferencesor undue protection in recent years, the industry has managed to resolve some of its problems onits own (e.g. the power shortage) and is making headways in resolving others. Given theanticipated rapid increase in consumption and the prospects for a balance between supply anddemand, the subproject plants are expected to flourish in the liberalized environment. While thefinancial future of at least the four stabilized plants (Madukkarai, Satna, Macherla andSankamagar) may be assured, both Kalyanpur and IDCOL plants would need to undergofinancial restructuring, even if their technical problems are quickly resolved. Against thisbackground the sustainability of the proJect is rated as likely.

Bank/Borrower Performance

4.17 The Bank has had a major role in steering India's cement industry towards morecompetitiveness and self-sufficiency. By steadfastly arguing for a deregulated environment andstaying the course before giving assistance and support, the Bank helped bring about anenvironment which was conducive to the rapid development of the industry, especially byallowing the private sector to take the lead in increasing capacity and eliminating the shortagesfor cement in the market. Once a meeting of the minds was reached, the GOI and theintermediary financial institutions played a very positive role in supporting the project andguiding it to its successful completion.

7This practice allows a larger output from a plant limited by its clinker producing capacity.

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4.18 Although the project was well prepared (practically all large subprojects had been preappraised), the mid-course abandonment of the three subprojects (ACC's Shahabad, CCI'sMandhar and SDC's Sikka) created a pressure for speedy identification and appraisal of otherplants for conversion from wet to dry process. It is now clear that both plants-Kalyanput andIDCOL-did not possess strong and experienced project management teams and the choice ofsome equipment, especially the vertical roller mill for slag grinding was ill-advised.8 Moreover,the financial intermediary institutions should probably have become more involved in resolvingthe problems that arose between the suppliers of equipment and the cement companies.

4.19 However, this does not diminish the major direct and indirect achievements of theproject, especially the complete deregulation of the cement industry by the GOI and thecontinued introduction of the most up-to-date technology as well as training facilities. Thesuccess of this project owes much to the close collaboration among the Bank, the Government ofIndia, the financial intermediaries and the sub-project entities. Given the above background, theperformance of the Bank and the Borrower is rated as satisfactory. The Borrower/executingagencies complied with the loan covenants in all material respects.

This piece of equipment, though highly effective for grinding the raw feed, coal and clinker, had not had much trackrecord in grinding blast furnace slag.

33

5. Conclusions and Lessons Learned

5.1 Since the Bank started the study of various industrial sectors in India, it has supported avariety of projects not only in the cement subsector, but also in the electronics, petrochemicaland steel subsectors as well as industrial pollution control and technology development. Overthe last one and a half decades, the Bank and the Indian authorities have developed aconstructive dialogue, addressing the issues in the industrial sector, particularly the manner inwhich further reforms can be introduced in the economy in order to enhance competitiveness andprovide inducement for investment by the private sector. While a financial and foreign exchangecrisis provided the catalyst for a change of policy and introduction of reforms in the early 1990s,the success of the cement industry liberalization and deregulation efforts also provided a clearexample of what can be achieved in other sectors. The major lesson of this project is areaffirmation of the notion that successful restructuring cannot be achieved in a highly distortedeconomic and sector setting. What is required, at the very least, is the establishment of domesticcompetition under a liberalized investment environment.

5.2 In addition to the policy and reform issues, the competitiveness and long-termsustainability of any industry in the developing countries depend of the quick access to know-how and modem technology to solve operational problems and to reduce down time. In thisregard, the rapid development of the consultancy and engineering capability along with highquality equipment manufacturing has provided the critical support needed by the cementindustry. It is not merely happenstance that the industry can now complete a new cement projectin less than thirty months.

5.3 While the Kalyanpur and IDCOL plants are on their way to resolving their technicalproblems, they will need financial restructuring through the injection of funds (Kalyanpur)and/or privatization (IDCOL). In both cases, efforts should be primarily focussed on stabilizingthe plants at the nominal capacity and then optimizing performance. At the national level,however, steps need to be taken to remove the operational constraints facing the industry.Although the cement industry has proved to be imaginative and resourceful in partiallyovercoming the problems associated with the power shortage, the quality and availability ofIndian coal and the difficulties in the transportation system, a more radical and long-lastingsolution to these problems is urgent. For this to happen, the onus falls both on the Governmentand the private sector.

5.4 This said, this project also reemphasizes four well established lessons that:

a) project implementation often comes to grief when the project executing team isinexperienced and disorganized. The unsatisfacatory results at the Kalyanpur andIDCOL plants can be directly traced to the wakness in project management; and,

b) the introduction of unproven technology with little track record should be avoided,even though the gains may initially appear to be large. For instance, there wererecurrent problems with the vertical press slag grinders at all plants using this piece

34

of machinery (Kalyanpur, IDCOL and Chettinad). The rectification of theseproblems was both costly and time consuming. This also means that the developingcountries should not become the testing grounds unless the equipment manufacturersare prepared to shoulder all contingent losses;

c) liberalization of other sectors can lead to important benefits and externalitiescountry-wide. For example, liberalizing the importation of coal and changingsystems and methods in the Indian Railways would be critical for the efficientdevelopment of other sectors;

d) beneficiary ownership of project concepts and institutions is crucial for success. Thebeneficiaries in this project quickly saw the benefits of the training facilities whichwere set up with their close involvement and participation.

35

Annex A

Basic Data Sheet

CEMENT INDUSTRY PROJECT (LOANS 2660-IN AND 2661-IN)

Key Project Data (amounts in US$ million)

As ofMarch 18, 1997Original Disbursed Cancelled Repaid Outstanding

2660-IN 165.0 161.53 3.47 59.87 101.662661-IN 35.0 34.96 0.04 12.8 22.1

Cumulative Estimated and Actual Disbursements

FY86 FY87 FY88 FY89 FY90 FY91 FY92 FY93 FY94 FY95

Appraisal Estimate 6.5 53.2 127.8 175.6 193.1 198.8 200.0 200.0 200.0 200.0Actual 0 2.6 22.1 71.5 81.5 90.5 112.5 157.9 183.6 196.5Actual as % ofestimate 0 4.9 17.3 40.7 42.2 45.5 56.3 79.0 91.8 98.2

Date of final disbursement: November 16, 1994

36Annex A

Project Dates

Original Actual

Identification December, 1982 December, 1982Preparation April, 1983 April, 1983Appraisal I Sept. -Oct., 1983 Nov. -Dec., 1983Post Appraisal - March 1-12, 1984Reappraisal 9 May-June, 1985Negotiations November, 1985 December, 1985Board Presentation December 15, 1985 March 20, 1986Signing - July 7, 1986Effectiveness - October 11, 1986Project Completion June 30, 1992 March 31, 1995Loan Closing June 30, 1992 June 30, 1994

Staff Inputs (staff weeks)

Planned Weeks Revised Weeks Actual Weeks

Through Appraisal 100 206.1

Appraisal - Board 30 11.7

Board - Effectiveness 5 - 4.5

Supervision 56 82.6 151.0

Completion 72 14 16.0

Total 203 - 389.3

9Project processing halted because of unresolved issues with the Government of India. Project reappraised after the

Government agreed to grant decontrol of cement prices and a revised tariff on imported equipment making ICBacceptable to subproject borrowers.

Annex A

Supervision Mission DataDate No. of Staff days in Specializations Implementation Development

(month/year) persons field represented Status Objectives Types of Problems

11/86 3 7 ECN, EGR, FNA 1 110/87 3 17 ECN, EGR, FNA 1 1

03/88 2 6 FNA, ECN 1 1

10/88 2 16 FNA, EGR 1 1

04/89 2 20 FNA, EGR, 1 1

07/89 3 15 FNA, EGR,TRG 1 1

01/90 2 15 FNA, EGR 1 1

08/90 3 25 FNA, EGR, ECN 1 1

03/91 2 7 FNA, TGR 1 1

11/91 2 18 EGR, TRG 1 1

02/92 2 13 EGR, ECN 2 2 Delay inimplementationdue to local costfinancing issues inIDCOL project;and procurementdelays in

Kalyanpur project.01/93 2 25 EGR 2 2 -do-

07/93 2 25 EGR 2 1 -do-

01/94 2 29 EGR 2 1 -do-

07/94 3 32 EGR, CON 2 1 IDCOL: ProjectCompletiondelayed to March

1995; KalyanpurFinancialRestructuring tobe done.

Other Project DataFOLLOW-ON OPERATIONS

Borrower/Executing Agency: Government of India/IDBI and ICICI

Amount

Operation Loan No. (US$ million) Board dateIndia Cement Industry Restructuring Project 3196-IN 300 May 1990

39

Annex I

The Associated Cement Companies Ltd. (ACC)

A Profile

The Associated Cement Companies Ltd. is one of the oldest and a leading Indiancement manufacturer with 12 manufacturing plants scattered throughout India. Its first plant atLakheri (Rajasthan) came into production in 1917. With a total capacity of around 11 millionTPY, ACC is capable of manufacturing a wide variety of ordinary and specialty products suchas: Portland Pozzolana, Slag, blended. low alkali, sulfate resisting and oilwell cements. ACCwas the first company in India to convert one of its wet process plants at Madukkarai to semi-wettechnology. ACC has been continuously expanding and modernizing its facilities and hasrecently developed two franchisee grinding units at Goa and Cochin where clinker is convertedto cement and marketed under ACC brand name. ACC has its own research and consultancysubsidiaries and has, in recent years, entered many other manufacturing fields such asrefractories, glass, electroceramics and high quality alloy steel castings. As of the end ofOctober 1996, out of a total of 14845 employees, 1924 were management staff, 3375 were non-management staff and the remaining 8546 were skilled, semi-skilled and unskilled operators.

Production Performance and Income Statement

The production performance and income statement of ACC is shown in the following table.

Production Revenue Million Expenses Profit MillionMillion Tons Rupees Million Rupees Rupees

1981-82 6.2 3560 3240 3201982-83 6.5 5020 4620 4001983-84 7.2 6080 5870 2101984-85 7.4 7090 6960 1301985-86 7.9 7530 7440 901986-87 7.9 7600 7600 ---1987-88 7.8 7980 7910 701988-89 (8 Months) 5.3 5540 5510 301989-90 7.4 9910 9680 2301990-91 7.4 11760 10550 12101991-92 7.7 14510 13150 13601992-93 7.5 15630 14930 7001993-94 7.7 16840 16270 5701994-95 8.5 21220 19780 14401995-96 8.9 24140 22010 2130

40Annex I

It can be seen from the above table that ACC's profitability has been greatly enhanced since1989-90 when the cement industry was finally liberalized by the Government of India.Production of cement also increased appreciably in the wake of conversion and expansionprograms.

Utilization of the World Bank's financing

Originally, two ACC plants at Madukkarai and Shahabad were preappraised for wet todry process conversion. Soon after effectiveness of the loan, ACC began to change the scope ofthe Shahabad project and while the appraisal of the modified project was in progress, it decidedto sell the plant. Instead of the Shahabad subprojects ACC proposed two subprojects forconsideration: (a) a Balancing/Modernization/Retrofitting (BMR) subproject at Gagal Cementplant in Himachal Pradesh; and (b) a Mines Modernization and Energy Savings subproject foroperational improvement including reduction of manpower and at various cement plants ownedby ACC as enumerated below.

Loan 2660-IN Disbursed Amount

ACC Madukkarai 12.57ACC Gagal BMR 7.48Mines Modernization and Energy Saving 7.24

Results

At Madukkarai, the company controls two limestone deposits which are difficult to mineand produce a considerable quantity of rejects. The bulk of the sorted limestone still needsbenefication to produce kiln quality feed containing 83 percent limestone and 17 percent silica.The project employed a novel process of dewatering the kiln feed (vacuum filteration) to allowutilization of a preheater/procalciner kiln. The new semi-dry process aimed at increasing theannual capacity of the plant from 380,000 to 700,000 TPY. The actual performance of the plantincluding the technical indicators is given in the following tables.

In recent years the ACC Madukkarai Plant has satisfied part of its coal requirementsfrom imports. Its experience with both the Australian and South African coal has beensatisfactory. With ash content at below 15 percent, these coal supplies have not proven undulyexpensive, even though the cost of imported coal plus import duty and freight from the portamounts to around Rupees 2700 per ton, considerably above the price of indigenous coaldelivered at Madukkarai.

Production Performance - ACC MadukkaraiClinker Portland Cement Portland Pozzalana Total Cement Heat Electric Energy

Production Production Cement Production Consumption Consumption

Year Thousand Tons Thousand Tons Thousand Tons Thousand Tons Kcal/kgclinker KwH/Ton Cement

1986-87 377 70 363 433 NA NA

1987-88 380 63 384 447 NA NA

1988-89 260 40 257 297 NA NA

1989-90 466 193 357 550 NA NA

1990-91 466 151 386 537 1069 116

1991-92 525 174 443 617 987 108

1992-93 545 152 472 624 966 103

1993-94 590 227 490 717 964 103

1994-95 634 209 578 787 971 102 I

1995-96 661 152 678 830 NA NA

Annex I 42

Production Performance - ACC Gagal

Year Total Cement Production Thousand Tons

1986-87 6651987-88 6991988-89 4991989-90 7661990-91 7471991-92 9161992-93 8721993-94 8551994-95 8681995-96 663

At Gagal Plant, the BMR subproject was completed in March 1993. As a result of thisinvestment clinker production capacity has increased from 1850 to 2700 tons per day and cementgrinding capacity rose to 180 from 130 tons per hour. Fuel consumption also dropped from 905to 850 kilocalories per kilogram of clinker.


At both Gagal and Madukkarai plants, the closed circuiting including the existence ofbag filters and electrostatic separators ensure that the source emissions remain below thestandard hitherto applied by the State Pollution Control Board (SPCB)-1 50 milligrams ofparticulates per normal cubic meter. Recently the Himachal Pradesh SPCB has revised thestandard downward to 100 milligrams per normal cubic meter. To achieve the revised sourceemission, the bag filters and electrostatic precipitators have been modified and upgraded.

Profitability and Economic Rate of Return

The following tables show the income statement for the ACC Madukkarai and GagalPlants.

Income Statement: ACC Madukkarai (Million Rupees)87-88 89-90 90-91 91-92 92-93 93-94 94-95 95-96

Sales (Thousand Tons) 446.2 549.7 529.3 614.3 609.3 725.2 798.6 829.3Revenue 458.1 634.2 746.5 950.3 1076.6 1343.6 1659.1 1982.1

CostsVariable 341.8 444.1 457.6 575.5 673.5 823.7 997.3 1151.1Fixed 44.3 62.8 67.6 82.3 100.7 96.5 111.6 126.4Administration Expenses 3.8 6.3 7.0 8.9 11.0 9.2 10.0 16.0Selling and Other Expenses 8.5 21.9 5.3 16.7 18.1 38.3 49.9 64.9Depreciation 9.1 56.3 59.5 62.5 65.0 43.7 46.0 48.7Financial Changes 10.2 68.7 67.9 70.2 71.1 75.9 67.6 66.8

Total Costs 417.5 660.1 664.8 816.3 940.2 1087.4 1283.4 1474.0Profit 40.6 (25.9) 81.7 134.0 136.4 256.2 375.7 508.1

Income Statement: ACC Gagal (Million Rupees)87-88 89-90 90-91 91-92 92-93 93-94 94-95 95-96

Revenue 746.4 961.0 1086.6 1536.6 1492.4 1418.9 1472.9 1299.2

CostsVariable 436.2 526.0 567.6 749.5 869.2 890.0 943.9 807.6Fixed 36.0 46.3 42.4 64.5 85.8 87.7 85.9 105.0

Administration Expenses 5.6 7.0 7.7 9.7 12.0 16.6 19.5 20.6Selling and Other Expenses 6.7 12.4 3.9 7.3 9.6 11.6 5.1 4.5Depreciation 68.5 73.9 72.1 73.8 75.2 61.7 59.0 59.0Financial Changes 53.6 61.4 45.8 63.4 90.3 122.5 128.4 86.6

Total Costs 606.7 727.0 739.8 968.2 1142.1 1190.2 1241.8 1083.4

Profit 139.7 234.0 347.0 568.4 350.3 228.7 231.1 215.8

ACC Madukkarai - ERR CalculationCapital Cost Production Wet Production Dry Incremental Incremental Net Benefit

Million Rupees Process Thousand Process Thousand Production Cost Revenue Million Million RupeesTons Tons Million Rupees Rupees

1986-87 214 -2141987-88 476 -4761988-89 209 440 -2091989-90 440 550 306 182 -1241990-91 440 537 220 274 541991-92 440 617 316 323 71992-93 440 624 356 440 841993-94 440 717 482 667 1851994-95 440 787 574 857 2831995-96 440 830 645 1024 3791996-97 440 830 645 1024 3791997-98 440 830 645 1024 3791998-99 440 830 645 1024 3791999-2000 440 830 645 1024 3792000-01 440 830 645 1024 3792001-02 440 830 645 1024 3792002-03 440 830 645 1024 3792003-04 440 830 645 1024 3792004-05 440 830 645 1024 379

ERR=14.8 Percent

47

Annex H

Birla Jute Industries Ltd.

A Profile

The Birla Group is the largest cement producer in India commanding a capacity of some23.65 million tons in 1995-96 or 26.8 percent of the total cement producing capacity of 88.25million tons for the entire India. There are several independent companies in the Group of whichBirla Jute Industries is one. From originally processing jute, Birla Jute Industries has diversifiedinto manufacturing polyester and viscose blended yawn, cement, calcium carbide, oxygen andacetylene gases and steel castings.

Utilization of World bank Financing

The company borrowed twice from the Loan 2660-IN. The first borrowing was for oneof the preappraised subprojects: the Satna Cement Works located in Madhya Pradesh. At thetime of the preappraisal, this company had limestone reserves sufficient for 26 years ofproduction at the expanded capacity of 870 thousand TPY-up from 580,000 TPY existing in1986. The project called for some quarry equipment, dry process raw mill and a new dry kilnwith high efficiency collecting and packaging machines. The total cost of this subproject wasUS$39.4 million, some 20 percent below the estimated cost at appraisal. The subproject utilizedUS$20.06 million from the financing provided through Loan 2660-IN.

When three of the initial preappraised projects were dropped during 1987 and 1988, theBirla Jute and Industries Ltd. applied for a second loan for its Birla and Chittor Cement Works atChittorgarh (Rajasthan). These plants were to be modernized by upgrading all two stage to fivestage preheaters/ precalciners. The modernization scheme also included the replacement andinstallation of new equipment in order to increase production and reduce energy consumption.This subproject which utilized US$19.4 million from the Loan 2660-IN was completed underappraisal estimates (US$29.8 million against US$34.1 million).

Results

The wet to dry conversion at Satna was completed by early 1990-91 and the plantgradually approached capacity utilization in the following years. The modification andmodernization subprojects at Birla and Chittor Cement Works (both located at Chittorgarh) werealso completed during 1991-92 and 1992-93 respectively. The production performance of theseplants is shown in the following table.

(1000 Tons)

Satna Cement Complex Chittor Cement Complex

Satna Cement Works Birla Vikas Cement Birla Cement Works Chittor Cement Works F

Clinker Cement Clinker Cement Clinker Cement Clinker Cement

1986-87 523 506 783 7771987-88 474 411 810 7701988-89 460 426 786 7471989-90 314 432 789 7441990-91 649 631 757 7501991-92 709 625 732 687 226 432 7701992-93 778 598 722 655 487 461 724 6201993-94 836 798 758 792 490 500 823 8211994-95 801 792 803 709 518 526 853 8611995-96 820 760 795 765 581 614 818 943

I I I I II 100

49 Annex II

Human Resource Development

As of the end of Fiscal 95-96, the Satna and Chittorgarh cement producing complexeswere manned by 2261 and 2050 persons, respectively, as shown below.

Satna Complex Chittorgarh Complex

Officers and Staff 496 600Skilled and Semi-Skilled Operators 1429 1000Unskilled Workers 336 450Total 2261 2050

The company has been running extensive training programs at all its plants not only forits plant operators, but also for its senior and middle level executives. The training courses havefocused on quality control, optimum use of machinery and plant, pollution control and energysaving. Quality control has been receiving continuous and increased attention, not only becauseof the company's quest to receive ISO 9000 certification, but also because of the generalimprovement in quality from other cement manufacturers and the pressures from theconstruction industry and the market.


At Birla Satna and Vikas cement works some 13 electrostatic precipitators, 45 bag filtersand 50 pocket filters are installed in various parts of the plant (stocks, transfer points in packingplants and storage silos) in order to control the stack and other fugitive particle emissions. Thekiln and cooler electrostatic separators are equipped with modem electronic instruments andopacity meters for the monitoring and control of dust emissions. A separate environmentaldepartment has been established for monitoring and supervision of all environmental activities.Extensive reforestation and tree planting have been carried out around the factory, the housingarea and the limestone quarries. Environmental audit reports are regularly submitted to the Stateand Central Control Boards, while the plant's pollution control system is periodically checked byControl Board inspectors. The activities of the environmental department is included in ISO9002 monitoring and certification. Over the last three years, the source emissions have beenconsistently lower than the state standard at 150 milligram per normal cubic meter.

A similar system is operational at Chittor cement plant. In this complex, a total of 11electrostatic precipitators, 52 bag dust collectors and 11 pocket filters are installed in the twocement plants and the thermal power plant. Regular ambient air and stack monitoring is carriedout in line with the company practice and as a requirement of the SPCB. The ambient air qualityis monitored at 3 locations inside the plant and one location in the surrounding housing area. Atotal of 16 stacks are monitored for their particulate emissions. Records indicate that theemissions remain within the specified norms of 150 milligram per normal cubic meter for thestack emission and 200 microgram per normal cubic meter for the housing area. Again a greenbelt development program in and around the plant, ensures that propagation fugitive gas andnoise pollution is attenuated while the scenic and aesthetic aspects are strengthened.

Annex II 50

Profitability and ERR

The income statement of the two cement complexes are given in the following tables.

Income Statement - Satna Complex (Million Rupees)1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96

Revenue 2078.5 2467.7 2314.0 2675.3 2862.8 3438.5ExpensesRaw Material 56.8 61.0 59.8 88.1 91.6 98.8Manufacturing Expenses 786.7 955.6 1035.4 1157.0 1274.9 1370.1Wages and Salaries 92.1 112.4 139.9 152.0 160.2 189.7Other Expenses 657.9 696.4 816.8 1036.2 1021.9 1243.6Financial Charges 109.5 99.6 112.1 124.1 121.6 130.7Depreciation 164.3 195.8 133.3 127.9 80.9 99.9Total Expenditure 1870 2125.4 2302.6 2695.9 2758.1 3141.3Profit 208.4 342.3 11.4 (20.7) 104.6 297.2

Income Statement - Chittor Complex (Million Rupees)

1990-91 1991-92 1992-93 1993-94 1994-95 1995-96

Revenue 1049.6 1973.9 1976.1 2308.8 2661.9 3516.2ExpensesRaw Materials 9.3 25.7 22.9 44.7 35.5 46.0Manufacturing Expenses 454.6 696.4 830.7 946.8 1064.5 1260.3Wages and Salaries 56.4 72.2 85.4 96.5 103.7 127.5Other Expenses 319.9 586.6 694.6 862.7 1005.2 1366.2Financial Charges 51.6 58.3 102.1 152.1 174.8 159.4Depreciation 96.5 127.9 181.5 278.5 94.3 102.9Total Expenditure 988.3 1567.2 1917.3 2381.5 2478.1 3062.3Profit 61.3 406.7 58.8 (72.7) 183.8 453.9

ERR Calculation - Birla Satna - (Constant 1995-96 Rupees)Production Wet Production Dry Incremental

Capital Cost Process Thousand Process Thousand Incremental Cost Revenue Million Net BenefitMillion Rupees Tons Tons Million Rupees Rupees Million Rupees

1987-88 210 -2101988-89 756 -7561989-90 213 430 -2131990-91 430 631 334 712 3781991-92 430 625 327 870 5431992-93 430 698 336 288 -481993-94 430 798 624 496 -1281994-95 430 792 448 429 19 kn

1995-96 430 780 560 721 1611996-97 430 800 600 952 3521997-98 430 800 640 984 3441998-99 430 800 640 984 3441999-2000 430 800 640 984 3442000-01 430 800 640 984 3442001-02 430 800 640 984 3442002-03 430 800 640 984 3442003-04 430 800 640 984 3442004-05 430 800 720 984 344

ERR = 15.8 per cent

M

53

Annex III

India Cements Ltd.

A Profile

This is one of the larger producers of cement in India with plants in Tamil Nadu andAndhra Pradesh with a total capacity of 3.15 million tons as follows.

Plant Capacity

Chilamkur (Andhra Pradesh) 1 million tonsTalaiyuthu (Tamil Nadu) 1.1 million tonsSankamagar (Tamil Nadu) 1.05 million tons

The company came sixth among the Indian cement producers in 1995-96 with a production of2.59 million tons (some 10 percent above the 1994-95 production). The Sankamagar plant of theIndia Cements Ltd. is one of the oldest cement plants in Tamil Nadu, commencing production in1948 with a licensed capacity of 400 thousand tons per annum and steadily increasing thecapacity to 700 thousand tons using the wet process technology. After converting theSankarnagar plant from the wet to dry process, all the company's plant now utilize modem dryprocess technology.

Utilization of World Bank Financing

One of the preappraised project, this plant consisted of 5 wet process clinker kilns with atotal capacity of around 2200 tons per day corresponding to nearly 726,000 TPY. Though notone of the least energy efficient plants in India, the coal consumption per ton of clinker,nevertheless, amounted to 338 kilogram (1430 kilocalories per kilogram of clinker). The projectconsisted of the complete dismantling of the wet raw mills, slurry storage and kilns including theclinker coolers and dust collection equipment and four of the six coal mills and replacing themwith new equipment comprising primary limestone crusher, limestone and coal preblending,storage and reclamation system, raw grinding and drying system, 3000 tons per day preheater-precalciner kiln and clinker cooler, electrostatic precipitator for cleaning kiln and raw millexhaust gases, a 35-40 ton per hour coal mill with electrostatic dust collectors, one rotary cementpacking machine and a diesel generator. To carry out this conversion/expansion project, whichnearly constituted the installation of a complete one million ton plant, the company borrowedUS$35.24 million from the Bank's financing.

Annex III 54

Results

The conversion project that started in 1986-87 was completed within 4 years in August1990. There was a delay of some 21 months in the commissioning of the plant (from October1988 to July 1990) due generally to delayed procurement and receipt of equipment. Once thedry kiln went into commercial operation, the capacity utilization picked up rapidly as indicatedin the following table.

India Cement Ltd. - Production Performance (thousand tons)Ordinary Portland Pozzalana Portland Total Cement

Cement Cement Production

1986-87 36 712 7481987-88 18 624 6421988-89 26 571 5971989-90 19 562 5811990-91 38 688 7271991-92 141 683 8241992-93 222 788 10101993-94 230 798 10281994-95 251 809 10601995-96 166 895 1061


As of the end of fiscal 1995-96, the workforce profile at this plant was as follows.

Factory Mines Total(persons) (persons) (persons)

Managerial 73 27 100Clerical 118 28 146Supervisory/Technical 95 39 134Skilled Operators 317 224 541Semi-Skilled Operators 249 I11 368Unskilled 397 93 498Total 1249 522 1771

The company has consistently reduced its workforce bringing it down from 2098 persons in1989-90 to 1771 persons in 1995-96.

The company had conducted an extensive training program, especially since the newconversion project was commenced. In 1995-96 alone the following training programs werecompleted.

55 Annex III

External Training ersn

Managers 53Operators 44

In-Home TrainingManagers 98Operators 501

Disciplines and Topics Covered - Number of CoursesProcess 24Engineering 34Mining 27Safety 12Security 5

Others 37

The company has made ample use of the RTCs for its training purposes and has had satisfactoryexperience.


The company has introduced extensive measures to reduce dust pollution and to protectenvironment. In addition to afforestation in the quarries and around the plant, the limestonecrusher is equipped with water spray and dust extractor with wet scrubber. In the limestonestacking and reclaiming area, 9 insertable dust filters with fans reduce particle emission. Thereare four bag filters and one electrostatic precipitator in the raw material grinding plant. Twosuction filters are installed over the blending storage and the kiln feed sections. Over the kilngrate cooler area, high efficiency air-to-air heat exchangers dust collecting hoppers and a largebag house are installed. These six bag filters installed at every transfer point in the clinkertransportation system.

In the coal handling area, there is one dust collector at Raw Coal Bunker and anelectrostatic precipitator. In addition, four multicyclones and cyclone separators reduce dustemissions from the coal handling plant. In the cement grinding section the company hasinstalled one electrostatic precipitator and three bag filters in the new mill (all the old cementmills are maintained as stand by and are equipped with bag filters and two electrostaticseparators). In the packing plant there are three bag filters for the three Mechamical RotaryPackers.

The company utilizes its own monitoring equipment to measure air quality at variouslocations in the plant. The Tamil Nadu Pollution Control Board inspectors make periodic visitsto the plant to check on the condition of the bag filters and ESPs and to make measurement ofthe stack emission gases as well as the air quality in the plant. These regular measurementsindicate that the dust emissions in various parts of the plant are well within the norms establishedby the Pollution Control Board (150 milligrams per normal cubic meter). The averagesuspended particle content in the air within a radius of one kilometer from the plant is shown inthe following table.

Annex III 56

Air Quality Measurement -suspended dust particlesStandard - 200 microgram/normal cubic meter

North West South East0.8 Km 0. 7 Km 0. 75 Km 2.7 Km

June 91 88 21 90 88December 91 28 107 102 53February 93 129 192 94 68September 93 106 82 66 189March 94 117 140 180 104October 94 182 111 105 70February 95 100 192 95 64December 95 51 192 96 132June 96 168 61 134 84

Profitability and Economic Rate of Return

The income statement of the Sankamagar plant is shown in the following table.

Income Statement - India Cements Ltd., Sankarnagar (Million Rupees)

1990-91 1991-92 1992-93 1993-94 1994-95 1995-96

Revenue 974.6 1221.3 1551.9 1690.1 2019.5 2268.4

ExpenditureVariableFuel & Power 336.2 362.2 417.4 500.4 561.7 661.9Other 223.5 286.9 415.1 497.3 580.3 580.1Fixed 147.3 181.8 224.3 259.4 293.3 326.5Interest 103.7 160.1 188.2 189.7 179.6 155.0Depreciation 78.7 105.5 101.8 56.3 55.2 60.2

Total Cost 889.4 1096.5 1346.8 1503.1 1670.1 1783.6

Profit 85.2 124.8 205.1 187.0 349.4 484.8

ERR Calculation - Sankarnagar Plant (Constant 1995-96 Rupees)Capital Production Wet Production Dry Incremental Cost Incremental Net Benefit

Investment Process Thousand Process Thousand Million Rupees Revenue Million Million RupeesMillion Rupees Tons Tons Rupees

1986-87 0.3 -0.31987-88 229.3 -229.31988-89 873.1 -873.11989-90 673.4 581 -673.41990-91 9.7 581 727 302.0 417 105.31991-92 2.0 581 824 428.0 584 154.01992-93 0.5 581 1010 583.0 824 240.51993-94 3.6 581 1028 651.5 853 197.91994-95 0.5 581 1060 661.0 1018 356.51995-96 581 1061 617.6 1077 459.41996-97 581 1060 617.6 1077 459.41997-98 581 1060 617.6 1077 459.41998-99 581 1060 617.6 1077 459.41999-2000 581 1060 617.6 1077 459.42000-01 581 1060 617.6 1077 459.42001-02 581 1060 617.6 1077 459.42002-03 581 1060 617.6 1077 459.42003-04 581 1060 617.6 1077 459.42004-05 581 1060 677.6 1077 459.4

ERR=13.2 Percent.

M

59

Annex IV

The KCP Ltd.

A Profile

KCP was initially an engineering and machinery manufacturing company specializing incement plants. In the early 1980s, the company began expanding into other activities such assugar refinery (2 units since 1987-88) and distillery operation. In collaboration with reputableforeign machinery manufacturers, the company continues to manufacture cement, sugar andother equipment both for the Indian market as well as exports. Recently KCP, along with itstechnical collaborators, has decided to exit from contracting work, concentrating more on thesupply of equipment to the cement and other industry. The cement plant, situated in AndhraPradesh, is close to two quarries each with around 9 million tons of reserves sufficient for thirtyyears of operation. The mining is open-cast with the run of the mine at around 83 percentlimestone. Currently low grade limestone (below 69 percent) is rejected into dumps that areprogressively reforested. Ore grades between 69 percent and 80 percent, are dumped andcollected in special areas for possible future use, should new technologies be developed to permittheir use. The output of the quarry is transported to crushers and a loading station where cablecars, each with a capacity of 1.2 tons, are loaded for a 2 1/2 kilometer journey to the plant.


This was one of the preappraised subprojects which was designed to convert the plantfrom using wet to dry process. In addition to the steps taken to reduce costs, enhancecompetitiveness, introduce new operating technology and maintain a high level of capacityutilization, the subproject also aimed at reducing the dust level and improving the environmentalperformance of the plant. The subproject utilized US$6.3 million from loan 2660-IN for a totalinvestment cost of US$25.8 million. The plant which consisted of two kilns, one wet and onedry, had a capacity of 250 thousand tons of clinker per year. Through a complete conversion toone dry kiln using vertical roller mills for both limestone and coal grinding with blending andstorage silo, the design called for a capacity increase to 400,000 tons of clinker per year (around425,000 tons of cement). The kiln was to be equipped with a five stage preheater/precalciner andthe raw material delivery system from the mine was also to be upgraded to match the increasedquantity of limestone inputs.

Results

The project was commissioned in December 1989 and the plant stabilized over thefollowing two years. However, it was not until three years later that the plant reached capacityproduction during 1994-95. This was partly because of the market conditions and partly due tothe slow fine-tuning of various equipment in the production chain. While the two older kilns arebeing dismantled and removed (the old dry kiln was the first introduced in India) efforts arebeing concentrated to further reduce the dust pollution and to balance the plant. The productionperformance of the plant is given in the following table.

Annex IV 60

KCP Macherla Plant. Productuion Performance and Energy Consumption IndicatorsCeenCal PoweT Lb=

ConsumptionProduction Consumption Consumption Kilocalories/KilogrThousand ton/ton KwH/ton am Clinker

tons cement cement

1983-84 277.5 0.36 126.0 NA1984-85 262.5 0.40 132.0 NA1985-86 257.8 0.41 139.0 NA1986-87 247.8 0.36 128.0 NA1987-88 192.9 0.40 131.0 NA1988-89 137.7 0.39 142.0 NA1989-90 144.3 0.31 152.0 NA1990-91 209.9 0.25 147.0 NA1991-92 324.1 0.24 133.0 NA1992-93 330.3 0.25 126.0 NA1993-94 375.3 0.22 124.0 8321994-95 433.4 0.20 117.0 7531995-96 474.9 0.21 120.0 7591996-97(First 8 months) 284.0 0.20 110.0 747

As the above figures indicate the plant's technical indicators have improved dramatically sincethe modification project. Despite this apparent saving in fuel and power consumption the ratioof these costs to total variable cost has increased from 47 percent in 1983-84 to 64 percent in1995-96. While the fuel and power cost constituted 37 percent of the total cost of production in1983-84, this ratio had moved to 46 percent by 1995-96, highlighting the significance of theseitems in the total cost structure and the justification for the modification projects.

Human Resource Development and Quality Control

The company has a comprehensive human resource development plan that strives toupgrade skills and increase labor productivity. It has been fairly successful in its drive to operatethe quarry and the plant with a decreasing level of employment, thereby effecting considerablesavings. Over the last ten years, the number of permanent employees for the whole operation hasdeclined by nearly 25 percent as shown in the table below:

61 Annex IV

Date Number of EmployeesYear End (Fiscal)

1987 6191988 5861989 5791990 5751991 5441992 5241993 5051994 4801995 5021996 480

Dec. 1996 464

The company also uses around 200 persons as contract labor for cement loading to trucks,coal/raw material unloading, cement loading to wagons, security and the dismantling of oldplants. During December 1996, workforce consisted of 60 officers, 87 staff and 317 workmanfor a total of 464. Officers of the company are mostly holders of degrees or diplomas with manyyears of experience. The skilled workmen had graduated from industrial training schools orequivalent centers of learning. Among the total permanent employees, there were some 50unskilled workers. Through training and the use of equipped laboratories and on line controls,the company has been able to increase the plant's productivity and capacity utilization. Unlikemany other plants, KCP only produces ordinary Portland Cement. Other companies usuallyenjoy a leverage from their clinker production by adding significant percentage of slag or fly ashto produce Slag Portland Cement or Pozzolano Portland Cement.


Along with capacity expansion and energy saving through process conversion, anotherprimary objective of this subproject was to reduce the dust level in the plant, thereby enhancingworking environment. This was achieved by making the necessary investment in installing bagfilters and electrostatic precipitators in all dust generating location and process circuits with theresult that emission levels have dropped significantly and are now below the levels prescribed bythe State Pollution Control Board. During a 30 months period between April 1994 andNovember 1996, the stack dust emissions were below 115 milligrams per normal cubic meter (in75 percent of measurements, the records show only a maximum of 100 milligram/cubic meter).In the residential areas around the plant, the air quality has met the SPCB standard of remainingbelow 200 micrograms per normal cubic meter. These measurements are made once a week inthree locations.


The income statement of the plant is given in the following table.

KCP Machala Plant - Income Statement (Million Rupees)

1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96

Revenue 220.0 180.6 118.6 147.9 245.9 420.9 473.1 515.0 722.4 876.6

ExpensesRaw Material 18.3 17.6 11.6 13.4 17.0 25.2 36.1 43.2 67.2 65.0Power & Fuel 71.1 67.8 48.1 158.8 106.9 149.9 176.7 203.2 301.6 267.0Wages & Salaries 14.4 14.5 11.5 17.5 18.6 20.5 28.6 28.7 34.5 41.7Other Expenses 104.2 75.7 46.6 76.3 75.8 164.4 197.3 213.1 253.2 289.6Depreciation 9.8 3.9 5.4 24.1 45.8 45.7 45.7 23.2 24.3 24.4Financial Changes .8 .7 2.2 10.0 45.5 49.9 49.4 39.8 34.5 32.4

Total Expenses 218.6 180.2 125.4 200.1 309.6 455.6 533.8 551.2 715.3 720.1Profit 1.4 .4 (6.8) (52.2) (63.6) (34.7) (60.7) (36.3) 7.1 156.5

ERR Calculation - KCP MacherlaConstant 1995-96 Rupees

Production Production Incremental Incremental Net BenefitWet Process Dry Process Production Cost Revenue Million

Capital Cost Million Thousand Thousand Million Rupees Million Rupees RupeesRupees Tons Tons

1986-87 104 -1041987-88 416 -4161988-89 166 -1661989-90 77 144 -771990-91 18 144 210 118.8 139.8 31991-92 144 324 279.3 345.8 66.51992-93 144 330 317.4 348.5 31.11993-94 144 375 321.9 356.7 34.81994-95 144 433 439.5 524.4 84.91995-96 144 475 379.2 610.6 231.41996-97 144 475 379.2 610.6 231.41997-98 144 475 379.2 610.6 231.41998-99 144 475 379.2 610.6 231.41999-2000 144 475 379.2 610.6 231.42000-01 144 475 379.2 610.6 231.42001-02 144 475 379.2 610.6 231.42002-03 144 475 379.2 610.6 231.42003-04 144 475 379.2 610.6 231.42004-05 144 475 379.2 610.6 231.4

ERR = 11.5 Percent

x

65

Annex V

Kalyanpur Cement Ltd.

A Profile

Located at Banjari in the State of Bihar, Kalyanpur cement plant commenced operationin 1946 with a capacity of 40 thousand tons per annum. The capacity was expanded in severalstages to reach 400 thousand TPY by 1980. The company remained profitable until 1971 whenthe Government's pricing policy along with the fall in capacity utilization triggered a period oflosses accumulating to a total of Rps 75.8 million by the end of 1981. While the partialdecontrol of prices helped the company until 1986-87, the company remained severelyhandicapped by its size and old technology (wet process) vis-a-vis the new large and much moreefficient plants that were being constructed. With capacity utilization again falling due totechnical and maintenance problems, the company began to make losses in the latter part of the1980s despite the relative buoyancy of the cement market. The main reason was the company'shigh cost of production, given its small capacity and low capacity utilization.

Utilization of Financing from the World Bank Loan

Against the above background, the company decided to implement a modernization andexpansion project in 1989, converting the plant from the wet to the dry process. Given the factthat three of the original preappraisal subprojects had been cancelled, IDBI appraised this projectfor inclusion in the World Bank financing thought Loan 2660-IN. Through thismodernization/expansion project the company aimed at increasing the capacity from 400thousand to one million TPY. The cost of the project was US$69.3 for which the companyborrowed US$26 million from the World Bank financing.

Results

This project encountered serious implementation problems that resulted in a delay ofnearly 2 years in the commissioning of the plant. On the one hand, the financial weakness of thecompany, and, on the other, the failure of the machinery and equipment supplies marred theprogress of implementation. Even after commissioning in September 1994, capacity utilizationremained low for more than a year, due to continued technical problems. At times majormodifications, involving complete replacement of some equipment, had to be made to sections ofthe plant to correct the capacity constraints. For example, the original cement packaging planthad to be completely replaced by another plant of a different make and design while the slagvertical roller mill has yet to reach capacity. The plant's performance is shown in the followingtable.

Annex V 66

ElectricProduction Energy Energy

Capacity of Cement Capacity Consumption ConsumptionThousand Thousand Utilizatio Kilocalories/kg KwH/Ton

Tons Tons n % Clinker Cement

1986-87 400 340 85 1450 132.51987-88 400 320 80 1558 130.51988-89 400 281 70 1460 128.31989-90 400 251 63 1450 131.71990-91 400 242 60 1350 134.41991-92 (9 Months) 300 169 56 1380 152.71992-93 400 241 60 1427 136.21993-94 400 233 58 1480 125.7April-August 1994 167 119 71 1382 (1994-95)Sept. 1994-Oct. 1995 1167 537 46Nov. 1995-Mar. 1996 415 283 68 764 (1995-96)April-Sept. 1996 500 300 60

The plant's performance, though erratic, has been gradually improving since it was stabilized inOctober of 1995. The clinker section has performed reasonably well achieving a capacityutilization of around 87 percent for the period between November of 1995 and September 1996.The cement production has, however, lagged because of the problems with the slag vertical millas well as the conditions in the market and the slow movement of cement dispatches from theplant. As a result, the cement capacity utilization has only reached around 64 percent during thesame 11 months (November 1995 to September 1996). Of late, the new packaging plant hasbeen operating satisfactorily and its capacity will be expanded to 140 tons per hour. But the slagvertical grinding mill has yet to reach its capacity of 60 tons per hour. There are other minorproblems with the elevator chutes and some other auxiliaries that should have, by now, beenresolved. As shown in the above table, the energy consumption per kilogram of clinker hasdropped significantly to around 764 kilocalories, a performance that is better than thespecification demanded from the cement kiln designers and manufacturers (860 kilocalories perkilogram of clinker). It should also be noted that before conversion to dry process, energyconsumption in this plant was somewhat above the Indian cement plant norms.


The Kalyanpur Cement Company has 2000 employees with the following profile.

Persons

Managers/Executives 56Supervisors 192

Staff/WorkmenSkilled 719Semi-Skilled and Unskilled 1033

67 Annex V

The company runs courses in induction training, cement production practice, on the jobtraining and supervisor development programs for new entrants, depending on the prioreducation and experience. The managers and supervisors are afforded in house and externalprograms on both technical and management subjects. This includes attendance at seminars andconferences in India and occasionally abroad. The managers and supervisors are periodicallysent to cement specific courses that are held at various institutes such as the cement industryRegional Training Centers. As for the staff/workmen, training programs include generalawareness programs, in house program by suppliers, skill enhancement programs and visit toother cement plants.


The conversion/expansion project has been accompanied with the sizeable investment(150 million rupees) in pollution control equipment in this plant. In addition to the existingelectrostatic precipitator at the cement grinding mill, 26 bag filters and 2 electrostatic separatorshave been installed in various parts of the plant in order to remove dust from the stack emissionsand transfer points. This has already brought down stack particulate emissions to around theprescribed limits in the State of Bihar (165 milligram per cubic meter against the norm of 150milligrams per cubic meter). To further improve the air quality around the plant and to achievethe State Pollution Control Board's requirements, the company plans to install a further 8 bagfilters in other locations for enhanced dust removal.


As noted earlier, this company has been facing serious financial problems on account ofthe delay in completing the modernization/expansion project, the technical difficultiesencountered since the new dry process plant was commissioned in September 1994 and themarket downturn since the middle part of 1996. Located some distance from the railways, thisplant is dependent on road transportation which can be erratic at times. In the last few years thecompany has focused on exports to Bangladesh and Nepal where it enjoys transportation costsavings vis-a-vis other cement producers located farther south in Madhya Pradesh and AndhraPradesh. On the whole, these exports, especially those to Nepal, have resulted in a higher.realization price for the company. The following table shows the income statement and theprofitability of the Kalyanpur Cement Plant.

Kalyanpur Cement - Income Statement (Million Rupees)

1991-92 1994-95 1995-969 Months 1992-93 15 Months 18 Months

1989-90 1990-91 July-March April-March 1993-94 April-June July-Dec.

Total Income 238.1 275.7 244.2 257.4 230.5 603.0 1485.3

Expenditure

Raw Materials 42.7 47.2 44.7 64.9 51.1 147.9 418.1Power and Fuel 99.9 98.0 82.6 102.4 120.2 192.2 385.4Wages and Salaries 23.1 25.7 22.0 30.6 14.2 40.6 88.5 0Other Expenses* 54.7 72.4 56.4 73.5 51.4 139.7 277.7Financial Charges 17.1 20.1 19.1 23.2 24.3 85.7 400.7Depreciation 10.1 12.1 9.0 17.8 12.0 49.4 146.5

Total Expenditure 247.6 275.5 233.8 312.4 273.2 655.5 1716.9

Profit (9.5) 0.2 10.4 (55.0) (42.7) (52.5) (231.6)

*Other expenses include stores, spares and repairs that have been relatively high in recent years because of the problems encountered with some machinery and equipment.

ERR Calculation - Kalyanpur CementProduction: Production: Incremental Incremental

Capital Cost Wet Process Dry Process Production Cost Revenue Net BenefitMillion Rupees Thousand Tons Thousand Tons Million Rupees Million Rupees Million Rupees

1990-91 120.2 -120.21991-92 404.9 -404.91992-93 1115.2 -1115.21993-94 484.4 -484.41994-95 327.7 389 -327.71995-96 192.9 389 551 421.5 380.8 -233.61996-97 389 750 465.0 693.0 2281997-98 389 900 580.0 928.0 3481998-99 389 1000 657.0 1085.0 4281999-2000 389 1000 657.0 1085.0 4282000-01 389 1000 657.0 1085.0 4282001-02 389 1000 657.0 1085.0 4282002-03 389 1000 657.0 1085.0 4282003-04 389 1000 657.0 1085.0 4282004-05 389 1000 657.0 1085.0 4282005-06 389 1000 657.0 1085.0 4282006-07 389 1000 657.0 1085.0 4282007-08 389 1000 657.0 1085.0 4282008-09 389 1000 657.0 1085.0 4282009-10 389 1000 657.0 1085.0 428ERR= 7.4 Percent

71

Annex VI

IDCOL Cements Ltd.

A Profile

IDCOL Cements Ltd. is a subsidiary of Industrial Development Corporation of OrissaLtd. (IDCOL). It was founded in February 1993 to operate the erstwhile Hira Cement Workswhich started producing cement in 1968 (wet process) and was taken over by IDCOL in the latterpart of the 1980s. Located at Bargarh, at a distance of 7 kilometers from the railway sidings atSambalpur, Western Orissa. The company has access to five quarries, three of which are locatedwithin 30-50 kilometers from the plant. The total reserves of the five quarries amount to nearly60 million tons. Limestone is transported to the plant by both road and a company owned railsystem, the plant had a capacity of 400 thousand TPY. With availability of slag in largequantities from the Bhilai and Visakh Steel Plants the company switched over to the productionof Portland Slag cement in 1988-89 and discontinued producing Portland Pozzolana cement.After reaching a peak production of 457 thousand tons in 1988-89, the plant's output graduallydeclined as competitors began claiming a larger market share both in Orissa and the surroundingStates. The production performance of the plant is shown in the table below.

Ordinary Portland Slag Portland Total CementPortland Cement Cement Pozzolana ProductionThousand Tons Thousand Tons Cement Thousand Tons

Thousand Tons

1983-84 88.5 - 317.9 406.41984-85 74.8 - 314.5 389.31985-86 83.9 .4 344.5 429.11986-87 104.8 18.4 295.2 418.51987-88 277.7 1.6 133.0 412.31988-89 304.5 152.8 .2 457.51989-90 212.0 198.4 - 410.41990-91 179.0 207.4 - 386.41991-92 175.7 194.9 - 370.61992-93 200.4 157.7 - 358.11993-94 163.1 185.7 - 348.81994-95 126.2 215.4 - 341.61995-96 191.4 227.8 - 419.2


In the face of competition coming from the new plants all using the dry process, and inview of the continuously rising prices for coal and electricity, the company decided to implementa modernization/expansion of the plant increasing the capacity from 400 thousand tons to 960thousand TPY of slag cement. The modernization project consisted of installing: (i) secondarycrusher and auxiliary equipment at the quarry; (ii) a new limestone grinding and storage section

Annex VI 72

with a capacity of 3400 tons per day; (iii) a clinker kiln equipped with a 5 stage preheater/precalciner with a capacity of 1800 tons per day; (iv) a new slag grinding section using highpressure vertical roller mills; (v) a new clinker grinding section using high pressure verticalroller mills; (vi) a new ground clinker and slag mixing section with a capacity of 4000 tons perday; (vii) a new coal handling and grinding section (using vertical roller mills) with a capacityof 420 tons per day; (viii) a new track loading conveyor; and (ix) a new rotary packingmachine (10 spouts twin discharge) with a capacity of 120 tons per hour. Except for utilizingsome of the existing infrastructure, this modernization constituted the installation of a practicallynew plant at the site. The cost of the project in 1990 was estimated at 1010 million rupees withfinancing coming from the Government of Orissa, ICICI, IDBI, IFCI and a loan of US$27million from the World Bank line of credit.

Results

Although the new plant was to be commissioned by July 1994, a series of problemspostponed the full commissioning until much later. Most problems were associated with thedelays in the supply of machinery and equipment by the main suppliers, mismatch in equipmentparts necessitating replacement and reassembly, wrong specification requiring modifications anddelay by civil and mechanical contractors. While the clinker producing section of the plant wasoperational by February 1995 and the clinker grinding was commissioned in December 1995, theslag grinding vertical roller mills developed several problems including metal failure of thesurface of the rollers which took a long time to resolve. In addition, the new electronicpackaging machines supplied from abroad have undergone periodic breakdowns especiallybecause of the failure of slowing bearings due to faulty design. These problems are similar to

those experienced at Kalyanpur where the management decided to scrap the new packing plantand replace it with another unit manufactured in India.

Since the new Clinker plant went into operation in February 1995, the old plant hasgradually been taken out of operation with total stoppage coming in July 1995. The performanceof the plant during the last two years is given below:

Portland TotalClinker Clinker Total Portland Slag Cement

Old Plant New Plant Clinker Cement Cement Production CapacityThousand Thousand Thousand Thousand Thousand Thousand Utilization

Tons Tons Tons Tons Tons Tons %

1995-96 65.8 272.4 338.2 N/A N/A 419.2 68April-Sept. 96 - 215.1 215.1 75.1 146.2 221.3 77

As shown above, the plant was working at a capacity of 77 percent during the first six months ofthe 1996-97 campaigns. Because of the build up of inventories and continued technicalproblems, the plant operated at 12 and 80 percent capacity utilization during October andNovember of 1996, respectively.

73 Annex VI

Human Resource Development and Technical Indicators

The plant is currently manned with 1088 persons in the following categories.

Executives 130Staff 270Operators and Others 688

In addition, the quarries employ around 1000 workers as contract labor. Since the company is inthe process of introducing increased mechanization at the quarries, this number is likely to bedrastically reduced.

Before the start up of the new dry process plant, much of the training was concentratedon this new technology. Courses were attended by all supervisors and operators at the RegionalTraining Centers as well as the training institutes of other large cement manufacturers such asACC. These training courses encompassed different subjects such as: raw mix design, kilnoperation and process control, automation and quality assurance, kiln repair and maintenance,maintenance of vertical roller mills and gear boxes and cooler operation and maintenance. Inaddition, in-plant trainings were carried out with the help of consultants. On the job training wasalso conducted especially whenever the engineers from the main machinery suppliers visited theplant.

There has already been a noticeable improvement in the energy consumption indicatorsof the plant as given below:

Heat Consumption Electrical Energy ConsumptionKilocalories/Kg Clinker KwH/Ton Cement

1988-89 1697.0 1071989-90 1505.0 108.61990-91 1548.0 106.91991-92 1537.0 113.31992-93 1500.0 113.71993-94 1482.0 111.61994-95 1478.0 112.71995-96 802.0 137.11996-97 (First six months) 738.0 113.5

Annex VI 74

As noted earlier the change over to dry process took place in 1995-96 during whichbecause of the trial runs and the teething problems, electrical energy consumption was higherthan anticipated. Coal consumption per ton of clinker has, however, dropped significantly andthe kiln performance appears to be even better than specified in the design (845 kilocalories perkilogram).

Profitability and ERR Calculation

During the early 1980s when the plant was operating at near capacity and the price offuel and power remained low, the company was profitable even under the old administered priceregime. As fuel and power costs began to escalate in mid-1980s and sharply rise in 1988-89 and1989-90, the company began to make losses which could not be covered by its increasedrealizations. For the first four years after the start of modernization/expansion program, thecompany remained profitable as prices and ex-works realizations improved considerably.Further increases in fuel and power costs combined with higher interest expenses and lowercapacity utilization resulted in the loss for the company during 1994-95 (the last year when theplant was still on the wet process). The income statement of IDCOL Cements Ltd. is shown inthe following table.

IIDCOL Cements - Income Statements (Million Rupees)

1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96

Income 323 371.6 385.3 429.6 523.3 735.6* 504.9 501.0 657.3Expenditure

Raw Materials 65.5 78.2 81.6 85.8 104.2 121.7 123.2 97.1 138.4Power and Fuels 106.4 136.1 136.1 148.6 140.3 142.7 166.9 185.1 213.1Other Expenses 129.2 147.4 154.6 157.6 153.2 182.6 190.7 213.1 259.0Depreciation 7.5 8.0 8.0 7.7 13.8 13.7 5.9 23.8 78.9Financial Charges 9.5 10.9 7.1 6.9 6.5 13.6 11.8 31.0 229.0

k.nTotal Expenditure 318.1 380.6 387.4 405.7 418.0 474.3 498.5 550.9 918.4Profit 5.2 (9.0) (2.1) 23.9 105.3 261 6.4 (49.1) (261.1)

*During 1992-93 there was a large earning from the sale of some assets. The profit from the operations in that year would be around Rp 60 million if the asset sale is netted out.

CD

M

ERR Calculation -IDCOL Plant - Contstant 1995-96 RupeesCapital Cost Production Production Incremental Incremental Net Benefit

Million Rupees Wet Process Dry Process Production Cost Revenue Million Million RupeesThousand Tons Thousand Tons Million Rupees Rupees

1991-92 110 - -1101992-93 662 - -6621993-94 862 - -8621994-95 200 - - - - -2001995-96 368 342 420 264 137 -1271996-97 342 500 334 277 -571997-98 342 650 501 539 .381998-99 342 780 643 767 1241999-2000 342 860 643 907 264

-2001 342 860 643 907 264-2002 342 860 643 907 264-2003 342 860 643 907 264-2004 342 860 643 907 264-2005 342 860 643 907 264-2006 342 860 643 907 264-2007 342 860 643 907 264-2008 342 860 643 907 264-2009 342 860 643 907 264-2010 342 860 643 907 264

ERR= 5.3 Percent

77

Annex VII

Subprojects Financed By Loan 2661-IN

This line of credit, which was intermediated through ICICI, aimed at improvingoperating efficiency, product quality, energy conservation and pollution control in the cementindustry. Targeting smaller projects, ICICI developed a set of criteria for the consideration ofmodernization subprojects, generally in four areas: balancing and debottlenecking; energysavings, process improvement; and transfer of technology. This line of credit provided financingfor 18 such subprojects as follows:

Balancing and Debottlenecking 4Energy Savings 6Process Improvement 6Transfer of Technology 2

In most subprojects, the line of credit was used for partial financing of a normally largermodernization effort and for those equipment and machinery that needed to be imported intoIndia.

A. Century Textiles and Industries Ltd.

A part of the Birla Group, Century Textiles and Industries Ltd. is a conglomerateinvolved in the manufacture of rayon, cotton yarns and textiles, minerals and chemicals, pulp andpaper and cement (at three locations). The company carried out partial modernization of itsexisting cement plants at both Maihar, Madhya Pradesh and Manikgarh, Maharashtra. AtMaihar, the company installed two electronic cement packing units, modified the electrostaticprecipitators and converted two of its cement mills to chamber mills by adding high qualityliners. In addition, the company erected a new cement silo for special cements. The companyborrowed US$3.837 million from this line of credit for the procurement of mining equipmentand machinery for its Maihar cement unit.

The expansion project was completed early in 1996 and production was approachingcapacity (1 million TPY) by October 1996 as indicated in the table below.

78Annex VII

Clinker Production Tons Cement Production Tons

March 1996 47000 41795April 1996 32965 43051May 1996 61440 48196June 1996 72080 72273July 1996 76380 71265August 1996 66250 69108September 1996 52925 62710October 1996 80970 85031

At Manikgarh, the subproject consisted of the importation and installation of equipmentto close circuit the cement mill so that the plant could grind finer particles and produce highquality portland cement. This subproject utilized US$2.29 million from the World Bank line ofcredit.

B. Indian Rayon and Industries Ltd.

Another member of the Birla Group, this company is also a conglomerate engaged in themanufacture of rayon, carbon black, flax and worsted yarn, cotton and synthetic textiles,electrical insulators, argon gas, seawater magnesia, fertilizers, petrochemicals, polyester yam,portland and white cements, as well as the generation of electric power and provision of acellular phone system. The company has one cement manufacturing plant at Malkhed inKarnataka (Rajashree Cement) consisting of three cement kilns with a total capacity of around3.15 million tons per annum. The most recent addition which was completed in August 1995(unit 3 - 1.2 million ton capacity) is a modem plant using the most up-to-date technology withthe dry process.

This plant is located next to an extremely prolific quarry, containing in excess of 480million tons of limestone. The company has currently obtained rights to a surface lease of 633acres with an estimated remaining reserves of 117 million tons (to the depth of only 30 meters),sufficient to meet the requirements of the plant for nearly 30 years. Some of the plant'sperformance indicators are shown in the following table.

Indian Rayon - Rajashre Cement

Clinker Cement Limestone Coal Fuel Power Total Sales OperatingProduction Production Consumed Consumed Consumption Consumption Rp Million ProfitThousand Thousand Thousand Thousand Kcal/Kg KwH/Ton Rp Million

Tons tons Tons Tons

1986-87 554.8 598.7 831.9 121.8 NA NA 616.0 117.11987-88 431.0 458.7 641.7 96.4 NA NA 485.0 76.11988-89 480.0 521.9 716.1 105.0 NA 142.3 558.3 70.31989-90 656.1 663.1 981.9 141.9 NA 129.4 790.0 106.11990-91 985.5 865.5 1397.6 215.0 NA 136.2 1196.4 295.31991-92 1265.1 1222.3 1831.9 280.7 NA 121.0 2036.5 322.41992-93 1089.1 1100.1 1537.0 235.8 NA 114.9 1846.9 286.91993-94 1651.8 1612.3 2324.2 337.9 784 115.5 2761.3 355.41994-95 1763.8 1679.8 2518.6 396.3 788 112.5 3386.5 609.01995-96 2217.6 2361.7 3081.6 469.0 792 115.5 5235.6 1282.91996-97 (6 Months) 1359.7 1430.3 1881.9 277.9 772 NA 3366.3 831.0

'-4

Annex VII80

The company utilized the line of credit for financing four subprojects: two for balancingand debottlenecking, one for process improvement and one for energy saving as follows:

(US$ million)

Installation of wagon tippler for coal unloading 0.876Installation of wagon/truck loader, electronic packer 2.329Installation of captive thermal plant 0.953Installation of roller press for raw mill 0.906Total 5.064

C. Birla Jute and Industries Ltd.

A third member of the Birla Group, this conglomerate applied for three loans from theline of credit in the total amount of US$10.6 million as follows:

(US$ million)

Coal Beneficiation 2.000Dust Separators 6.105Mining Equipment 2.510Total 10.615

The first subproject was the procurement of a coal benefication plant at Chittorgarh inorder to upgrade high ash coal received from Coal India Ltd. and to reduce energy consumption.This subproject also aimed at modifying the clinker cooling table at Chittorgarh, Rajasthan. Thesecond subproject was intended for energy conservation by installing 15 special high efficiencyseparator units on raw and cement grinding mills at Satna, Chattorgarh as well as at DurgapurCement Works (West Bengal). With the third financing the company procured earth movingequipment and a shunting diesel locomotive for its cement units at Satna, Madhya Pradesh andChittorgarh. The mining equipment consisted of one hydraulic excavator, nine 32 ton dumpers,one blast hole drill, two hydraulic rock breakers and two heavy duty bulldozers. Theseequipment were needed to increase mine capacity and as replacement for old machinery.

D. Chettinad Cement Corporation Ltd.

A Proffle

The company received a license for the manufacturing of 400 thousand tons of cement inthe Tamil Nadu State during 1963. Two kilns each with a capacity of 600 tons per day using thewet process were commissioned in 1968 and 1970, respectively. The plant remained at thiscapacity for the next 16 years with cement production reaching 451 thousand tons in 1985-86.The modernization project started in 1986 and the new dry kiln with a daily capacity of 1700tons (3.8 meters diameter and 58 meters long) was commissioned in march 1989. The newprocess consisted of vertical roller mills (VRM) for grinding limestone, a five stagepreheater/procalciner kiln and lignite drying and grinding equipment. For environmentalprotection and dust control, 7 electrostatic precipitators and 20 bag filters were also installed.

81 Annex VII


The Chettinad Cement Corporation was the beneficiary of a small amount of financingfrom the line of credit. Depending primarily on its own resource generation for investment andrelying on the Indian market for the procurement of cement machinery and equipment, thiscompany borrowed only US$1.335 million from the line of credit (Loan 2661-IN). Its mainlenders were, however, the Industrial Finance corporation of India (IFCI) who along with IDBI,ICICI and the Unit Trust of India provided the main part of the funds for the wet to dry processconversion and other modification facilities.

Results

After the commissioning in 1989, the plant could not reach capacity production becauseof the problems with both the coal and the lignite mills. These problems arose with raw materialvertical roller mills. Even though the life of the rollers were guaranteed for 5000 hours ofservice, they would deteriorate quickly and had to be changed. Moreover, the mill would notreach its rated capacity of 170 tons per hour. After extensive discussion, the company reachedan agreement with the manufacturers of VRM for the transfer of automatic welding technologyin order for the company to repair and harden the rollers on the site. With the completion ofmodifications and repairs on all the mills, the plant reached capacity production in 1990-91 asshown in the table below.

Chettinad: Production Performance - Thousand TonsPortland

Clinker Portland PozzolanoYear Production Cement Cement Other Types Total

1985-86 390.3 28.8 407.6 14.4 450.81986-87 418.7 43.6 311.4 12.1 467.11987-88 367.9 68.2 365.5 12.4 446.11988-89 (9 months) 288.8 49.3 248.7 2.6 300.61989-90 328.6 143.1 231.9 1.1 376.11990-91 533.8 239.8 347.6 - 587.41991-92 658.5 234.7 466.0 - 700.71992-93 659.0 186.2 546.3 - 732.51993-94 643.2 180.7 534.3 - 715.01994-95 710.0 229.0 616.5 - 845.51995-96 783.0 218.3 696.2 - 914.5

Once the production of the kiln was stabilized during 1990-91, further investments weremade in the plant and the raw material rail delivery system was repaired and modified to increasethe capacity from 22 to 36 wagons per convoy. The installation of a stacker/reclaimer at theplant reduced the variation in the quality of the raw material. Currently, the plant continues itsgradual approach toward higher productivity from the existing kiln. A vertical roller mill isscheduled to come on stream during December 1997 for cement grinding. This is expected toreduce power consumption from 40 to 25 KwH per ton of cement. Simultaneously, the plant is

Annex VII 82

modifying its clinker cooling bed to controlled flow gates for better and more uniform cooling ofclinker. With these modifications, the company expects to reach a capacity of around 2700 tonsper day. Already in 1995-96, the plant produced at 152 percent of its capacity by fine tuning thevarious parts of the plant and removing bottlenecks. During the first 8 months of the 1996-97campaign, the clinker production had reached 516,000 ton, matching the previous year'sperformance.

Human Resource Development and Quality Control

The company currently employs 1095 persons: 134 are executives; 145 are staff; and,816 are regular and contract operators. Executives and staff are mostly graduates of technicaland commercial colleges and institutes. The skilled operators usually possess technicalcertificates or certificates of competence from accredited institutions. All the categories ofpersonnel undergo periodic external and internal training. Some fifty training courses have beenoffered in recent years ranging from energy audit to instrumentation, process control automation,major repair of the rotary kiln and environmental management. Next to the Control Room at theplant, the company has set up a highly equipped quality control laboratory including the latest x-ray and laser analyzers. Such quality control equipment are necessary for continuous checks onvariables and process modifications. With the high quality of its products, the company hasalready received ISO 9002 certification.

Technical Performance Indicators

With continuous fine training and upgrading of equipment, the plant's performance hasimproved every year since 1990-91. Some of the technical indicators are shown in the followingtable.

1990-91 1991-92 1992-93 1993-94 1994-95 1995-96

Roty KilnNo. of Days Running in Year 285.0 308.0 308.0 307.0 328.0 339.0Output tons per hour 78.2 87.4 89.2 87.3 90.3 96.3Operating efficiency % 95.2 117.4 117.5 114.7 126.6 139.6Fuel consumption toncoal per ton clinker 0.201 0.201 0.207 0.205 0.189 0.175

CamentCapacity Utilization% 97.9 116.8 122.1 119.2 140.9 152.4Power consumptionKwH/ton cement 122.4 113.3 114.1 118.0 111.6 102.5

Profitabilt

The following Table shows the income statement of the company since 1986-87.

Chettinad Cement - Income Statement (Rupees million)

1986-87 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96

Net Sales 328.7 437.4 861.7 1096.7 1334.8 1382.4 1789.5 2166.5Other income 2.5 4.6 4.2 10.5 5.8 8.0 11.9 121.7

Total Revenue 331.2 442.0 865.9 1107.2 1340.6 1390.4 1801.4 2288.2

Expenditures 282.4 381.5 590.3 768.5 1009.7 1106.0 1407.1 1472.1Depreciation 16.8 88.5 91.6 96.4 101.0 98.8 118.2 171.3Financial Charges 7.5 108.5 118.9 118.4 104.1 84.6 76.0 131.7

Total Expenditure 306.7 578.5 800.8 983.3 1214.8 1289.4 1601.3 1975.1

Profit 24.5 (136.5) 65.1 123.9 125.8 101.0 200.1 313.1

Annex VII 84

E J.K. Udaipur Udyog Ltd.

Originally this plant, located in Rajasthan, was owned by Bajaj Hindustan Ltd.. At that timean expansion plan was carried out increasing the capacity from 400 to 800 thousand TPY. InDecember 1993, this plant was purchased by the new owners who managed to stabilize the plant andproduce at around 67 percent of capacity in the first three months of 1994. The plant was furtherexpanded to a capacity of 900 thousand tons by the end of 1994. Ever since, the plant has beenoperating at near capacity and the company has turned the corner financially and become profitableduring 1995-96 fiscal year. The operational performance of this company and the technicalindicators of the plant are given in the following table.

Coal ElectricityCapacity Production Capacity Consumption Consumption

Thousand Thousand Utilization Total Sales Profit Rp Kg/Ton of KwH/tontons Tons % Rp Million Million Cement Cement

1993-94(3 Months) 200 134.1 67.0 212.6 (22.1) 229 118.61994-95 825 757.1 91.8 1375.1 (35.1) 222 117.31995-96 900 781.2 86.8 1680.4 57.2 231 120.1

This subproject utilized US$692 thousand from the line of credit in order to finance a portionof cost of installing a precalciner needed to increase capacity from 400 to 800 thousand tons.

F. Associated Cement Industries Ltd.

As indicated in Annex I above, the Associated Cement Companies Ltd. is the second largestproducer of cement in India, placed after the Birla Group. ACC received three loans from the WorldBank financing under Loan 2660-IN. It also presented two subprojects to ICICI and receivedfinancing as follows:

US$ Million

ACC Madukkarai 1.069ACC Research and Consultancy Directorate .860Total 1.929

At Madukkarai, the funds helped partly to defray the cost of imported equipment andmachinery associated with the conversion of wet process into filter process technology. ACC'sResearch and Consultancy Directorate has a Central Research Station located at Thane, Maharashtra.It offers a range of consultancy services including project conceptualization, engineering design,contracting and construction and eventual management of not only cement plants, but also otherprocess industries. In addition to project consultancy and turn key services, the Directorate's

85 Annex VII

research activities cover pilot plant studies in diverse fields such as development of oil well cement,refractories, molecular sieves, adsorbents and catalysts, specialty chemicals and new high puritycompounds. The Directorate has also carried out consultancy assignments abroad: environmentmanagement and energy conservation in China, mini-cement plants in Yeman and capacity increasefor Yaubu Cement Company in Saudi Arabia (ACC also had a long-lasting management contractwith this company). The funds from the line of credit was used for the purchase of new laboratoryequipment for ACC's research center.

G. J. K. Synthetics Ltd.

This company is engaged in the manufacturing of synthetic fibers (nylon filament yarn,polyester staple fiber and yam and acrylic staple fiber), nylon tire cord, portland and white cementand plastic tubes. The company's portland cement plant at Nimbahera, Rajasthan, has a capacity of1.54 million tons, but it has been operating at above capacity in recent years as shown below:

ElectricHeat Energy

Capacity Production Consumption ConsumptionThousand Thousand Capacity Kcal/Kg KwH/Ton

Tons Tons Utilization % Clinker Cement

1986-87 1140 900.0 791987-88 1140 1161.3 1021988-89 1540 1225.2 79 938 1351989-90 1540 1545.2 100 877 1321990-91 1540 1612.7 105 868 1271991-92 1540 1572.0 102 875 1231992-93 1540 1590.1 103 845 1181993-94 1540 1628.7 106 858 1211994-95 1540 1758.8 114 850 120

The company borrowed US$2.245 million from the World Bank line of credit in order toprocure and install a precalciner and other balancing equipment on one of the kilns at Nimbahera andraise the capacity of the plant from 1.14 to 1.54 million tons. This modernization and expansion wascompleted in 1987-88 and soon thereafter the plant reached capacity production in 1989-90. Eversince the plant has been consistently producing above the rated capacity with steady improvement inthe technical indicators, especially energy consumption per ton of clinker produced.

H. Mangalam Cement Ltd.

Located at Morak, Rajasthan, the company belongs to the B.K. Birla Group. It undertook theconstruction of a new cement unit in order to increase capacity from 400 thousand tons to 1.09million tons per annum. The expansion consisted of 2000 ton per day dry process kiln, a five stagepreheater and precalciner with the associated equipment. The project cost was around 1,530 millionRupees for which the company received financing in the amount of US$3.369 million from theWorld Bank line of credit. While the plant was completed during the first half of 1996, theproduction had not yet stabilized in November of 1996.

Annex VII 86

I. 3. K. Corp Ltd. (Formerly known as Shaw Products Ltd.)

In 1988, Laksmi Cement (a division of J. K. Corp Ltd.) located at Sirohi Rd., Rajasthan,undertook a balancing/modernization and energy conservation scheme at a total cost of Rs 105million for which it borrowed US$.739 million from the line of credit. By implementing thissubproject, the plant achieved around 3-5 per cent savings in energy consumption as well asenhanced productivity. The company also borrowed US$1.453 million from the line of credit todefray the cost of technical services provided by an expatriate company.

In March 1991, Laksmi Cement undertook a brand new projec to increase capacity by 0.9million tons. This latter project received financing under the Bank's second loan (3196-IN).

87

Annex VIII

A. Project Costs (Million US$ Dollars)

Loan 2660-IN

Appraisal Estimates Actual/Latest EstimatesItem Local Foreign Total Local Foreign* Total

Costs Costs Costs CostsOriginal

1. ACC Madukkarai 21.00 13.00 34.00 21.99 12.57 34.572. Birla Jute/Satna 23.90 24.70 48.60 19.31 20.06 39.373. India Cement 34.30 38.60 72.90 35.29 35.29 70.574. KCP Cement 13.80 4.70 18.50 19.50 6.30 25.80

Later Substitutions5. IDCOL Cement 37.12 26.00 63.13 26.23 27.00 53.236. Kalyanpur Cement 36.28 27.00 63.28 43.31 26.01 69.327. Birla Chittorgarh 14.27 19.85 34.12 10.41 19.43 29.848. Gagal Modernizing 8.14 7.92 16.06 5.66 7.48 13.149. Mines Modernizing

& Energy Saving 6.16 7.78 13.94 6.98 7.24 14.22Total 194.97 169.55 364.52 188.67 161.39 350.06

Loan 2661-INVarious improvements 52.30 36.50 88.80 40.00 35.00 75.0018 plantsFrom Loan 2660-IN, GOI retained $1.5 millon for training for the industry

B: Project FinancingLoan 2660-IN

Appraisal Estimates Actual/Latest EstimatesItem Local Foreign Total Local Foreign* Total

Costs Costs Costs Costs1. IBRD 165.00 165.00 161.39 161.392. IDBI/ICICI 122.40 122.4 93.25 93.453. Equity/Internal Cas 77.12 77.12 95.42 95.42Total 199.52 165.00 364.52 188.67 161.39 350.06

Loan 2661-IN1. IBRD 35.00 35.00 34.50 34.502. ICICI 18.30 18.30 20.643. Equity/Internal Cas 35.50 35.50 19.86 19.86Total 53.8 35.00 88.80 40.50 34.50 75.00*Foreign Costs strictly represent financing required for purchases under ICB.

89

Annex IX

Geographical Distribution of Cement Producing Capacity in India (Capacity million tons)

Northem RegiQn O35Union Territory of Delhi .50Haryana .58Himachal Pradesh 2.65Punjab 1.05Rajasthan 10.29Uttar Pradesh 3.09Other .20

Eastemn Region 238Bihar 4.35Orissa 1.76West Bengal .87Assam .20Meghalay .5

Southen Region 23.91Tamil Nadu 11.72Karnataka 6.77Kerala 0.42

Westem Region 386QMaharashtra 6.71Gujarat 8.28Madhya Pradesh 23.61

Total 324

91

Annex X

Assumption for ERR Calculations

1. Future production of ACC's Madukkarai, Birla's Satna, Indian Cement's Sankarnagarand KCP's Macherla plants will remain at the level aachieved in 1995/96.

2. The Kalyanpur plant will reach full capaacity production of one million tons in 1998-99as follows:

1995/96 550 Thousand Tons

1996/97 750

1997/98 900

1998/99 1000

3. IDCOL plant will need full capacity of 860 thousand tons per year by 1999-2000 in thefollowing steps:

1995/96 470 Thousand Tons

1996/97 500

1997/98 650

1998/99 780

1999/2000 860

4. There will be no further abrupt escalation of the coal and power prices. All unit variablecosts will remain at the 1995/96 level in real terms.

5. Over the next ten years the investment for capacity retention will be minimal.

6. Ex-work prices will remain at the international price level for cement (US$50 per ton).

7. Technical efficiency of the plants will remain at the levels achieved in 1995/96.

IMAGING

Report No.: 18OUType: PPAR

Documents

World Bank Document · should be avoided. Attachment. Contents ... out some pitfalls that should be avoided for the satisfactory completion of industrial projects. 4. The PAR was