ICRR 10228
                                                                                              Report Number : ICRR10228
                    ICR Review
                    Operations Evaluation Department




1. Project Data :
             OEDID :
             OEDID:     L3258
         Project ID :   P009885
      Project Name :    Second Petrochemical Development Project
            Country :   India
             Sector :   Fertilizer & Other Chemicals
       L/C Number :     L3258/L3259
  Partners involved :   None
       Prepared by :    Farrokh Najmabadi, OEDCR
      Reviewed by : Alice Galenson, OEDCR
    Group Manager : Ruben Lamdany
       Date Posted : 11/06/1998

2. Project Objectives, Financing, Costs and Components :
The major objectives of the project were to : a) expand capacity at the Indian Petrochemical Corporation Ltd (IPCL)'s
two petrochemical complexes, through investments in new plants, revamping and modernization; b ) import polymers
for market seeding in anticipation of domestic production; and, c ) improve efficiency and quality of downstream
plastic products through strengthening the institutional capacity of the Central Institute of Plastic Engineering and
Technology (CIPET) to respond effectively to the needs of small and medium size private plastic processors in India .
In addition, the project aimed at improving the incentive framework of the petrochemical sector through agreements
on adequate pricing of C2/C3 (Ethane and Propane- the gas feedstocks), periodic reviews of sector investment
programs and minimum economic scale criteria for granting capacity licenses, and a study of the synthetic fiber
industry. Two loans totaling US$ 245 million were approved for this project in FY 91. At closing, an aggregated
amount of US$87.7 million had been canceled in four tranches . The actual project cost was US$ 235.7 million or only
around 40% of the US$587 million estimated at appraisal. This large difference is attributable to the exclusion of two
smaller plants, revamping of an existing plant to increase capacity instead of installing a new unit, lower duties on
imported capital goods, lower polymer import and lower working capital requirements .

3. Achievement of Relevant Objectives :
The implementation of the project coincided with the introduction of far reaching economic reforms starting in June
1991. The petrochemical sector, therefore, benefited from the new economic framework which aimed at significantly
opening up the economy to foreign trade and investment, rationalizing the tax regime, and increasing competition by
removing administrative bottlenecks to entry and capacity increases . The major investments planned by IPCL were
implemented, although important changes occurred in design and the cost of the project . The project's completion
was delayed on account of late government approvals and the belated start of expansion work at Nagothane where
the construction of the first gas - cracker was still in progress . The market seeding program introduced new polymers
to the Indian market. CIPET was successful in upgrading its capabilities and responding to the rapidly growing needs
of the small and medium size private plastic processors for manpower training, design, testing, quality control and
advisory services. The project was less successful in achieving its sector policy objectives, though the economic
reforms, such as the removal of administrative bottlenecks, made some of them moot . The Synthetic Fiber Industry
study exposed the inefficiency of the domestic fiber industry and its inability to compete internationally . This helped
the GOI in its efforts to rationalize the sub -sector. The environmental objectives of the project have also been
substantially met, though more attention needs to be given to bringing the wastewater quality at the acrylonitrile plant
at Vadodara to the standard level .

4. Significant Achievements :
The project achieved its physical objectives by expanding capacity for the production of basic and intermediate
petrochemical products, at both IPCL complexes, at a substantially lower cost than anticipated at appraisal . The
institutional performance at CIPET shows very positive developments which exceed the expectations at appraisal .
CIPET is currently 60-65% self-sufficient in its budgeting, hoping to become completely self -supporting in four to five
years

5. Significant Shortcomings :
Despite the general improvement in India's economic framework in recent years and its salutary effects on the
petrochemical sector, the only serious policy objective of maintaining the price of C 2/C3 feedstock in relation to its
opportunity cost was not realized . By keeping the nominal price of C2/C3 at around that agreed at appraisal, the GOI
failed to correct it in the face of inflation and substantial devaluation of the Rupee . As a result, the real price of C2/C3
fell steadily to an estimated 50-60% by 1998.


6. Ratings :               ICR                      OED Review                 Reason for Disagreement /Comments
              Outcome :    Satisfactory             Satisfactory
    Institutional Dev .:   Substantial              Substantial
        Sustainability :   Likely                   Likely
   Bank Performance :      Satisfactory             Satisfactory
      Borrower Perf .:     Satisfactory             Satisfactory
       Quality of ICR :                             Satisfactory


7. Lessons of Broad Applicability :
The major lessons are: a) subsector reforms are more likely to succeed when distortions of the economy are
corrected; b) pricing covenants should always state the principles on which they are based and should provide for
formal periodic reviews; c) all government approvals should become a condition for Board presentation; d )
expansion investments should not be approved until the production in the existing plant has started; and, e ) for
expansion projects, direct contracting or possibly limited international bidding (LIB) procurement could be considered
to accommodate the process licensors' recommendations and specific needs for standardization .

8. Audit Recommended?            Yes      No

9. Comments on Quality of ICR :
The ICR provides a candid and detailed account of the achievements of this project, all supported by relevant data
and tables. Though the ICR is devoid of an Aide -Memoire, the borrower's contribution is comprehensive and
informative. The ICR documents well its assumptions for the ex -post cost benefit analysis . It also contains two very
useful annexes: one dealing with the environmental achievements and the remaining issues, and the other, with the
unresolved policy issues in the subsector that need attention