Corporate Front: Strategy, Will Haldia Fulfil Its Plastic Dreames?

CORPORATE FRONT: STRATEGY
Will Haldia Fulfil Its Plastic Dreams?

Although the mega-project is, finally, a reality, its viability is still in question. Still, Bengal is back in business.

By Rakhi Mazumdar

Purnendu Chatterjee In the heart of Haldia Petrochemicals' 1,200-acre complex in south Bengal is the perpetually busy project office of Toyo Engineering Corporation (TEC), the engineering, procurement, and construction (EPC) contractor for the naphtha cracker unit. On a corner table sits Hideo, a mythological figurine. But there's a big white dot at the spot where Hideo's left eye should have, naturally, been. "That eye will be painted as soon as we complete the project on schedule," explains K. Kitajima, 40, Project Control Manager, TEC, which follows this quaint ritual in all its projects, worldwide. At the end of the day, Hideo has always got back his left eye.

A couple of decades after it was conceptualised, it appears that Haldia will not disappoint Hideo. Manned by 18,000 workers, the complex is throbbing with construction activity. By April, 1999, the naphtha cracker unit is due to be pre-commissioned. Once commissioned, the mother unit will produce 4.20 lakh tonnes of ethylene in the first phase, till 2000. Soon after, the polypropylene (PP) and the high-density polyethylene (HDPE) plant at the site will be commissioned. Says Hae-Hong Lee, 35, the Construction Manager of Daelim Engineers & Constructors, the contractor for the PP and the HDPE plant: "Nearly 60 per cent of the work is complete."

So, the Great Haldia Project is finally, and truly, under way. That in itself is an achievement considering that the project has run into more than its fair share of speed-breakers, from inadequate funds to the pursuit of partners, from a long drawn-out land acquisition to numerous changes in configuration and equity structure. But, even currently, the controversy over the relationship between the promoters is overshadowed by larger problems facing the project, which question its very viability. BT examines the issues:

THE PROMOTERS. There is a power struggle on between Haldia's promoters: the West Bengal Industrial Development Corporation (WBIDC), and The Chatterjee Group (TCG), an affiliate of Soros Fund Management, both holding equal, 22 per cent stakes in the project. The third stake-holder, the Rs 36,000-crore Tata Group, controls 7 per cent of the project's equity component of Rs 1,979 crore, and is expected to sell off this stake once the project goes on-stream. The search for a CEO to run the company has exposed an on-going tussle between the 2 principal promoters, the WBIDC and TCG.

The controversy was sparked off by the appointment of Tapan Mitra, 60, as the Non-Executive chairman of Haldia. Mitra, who is the outgoing CEO of the Rs 1,612-crore Indian Aluminium, is the first senior executive from the private sector to be appointed Chairman at Haldia, where the state government nominees have been traditionally-appointed as chairmen. BT learns that the appointment of Mitra, initiated by the state government, has been perceived by TCG as an attempt to take control over the project. While the state government chose to remain silent on the matter, Swapan Bhattacharya, 45, Director, TCG, said in a fax message to BT: "Discussions between TCG and the state government are a private matter on which we do not want to make any disclosure."

But there's no doubt that TCG is resisting the appointment of Mitra by the West Bengal government. In any case, Haldia's Managing Director Ayyawamy Krishnamurthy, 62, joined from the Rs 2,484.70 crore Associated Cement Companies (ACC) in 1993, and is largely seen as a candidate of the Tatas and the state government. Moreover, Vice-Chairman Subrato Ganguly is the Managing Director of ACC. Tapan Mitra tries to downplay his appointment: "I was offered the CEO's job in Haldia by Purnendu Chatterjee, but I refused. There is no question of my assuming an active role as an executive chairman. I am, and will continue to be, the non-executive chairman of Haldia." While that implies that TCG has won this round, the issue of management control still remains wide open.

THE FINANCES. Haldia has a lot of work to do before it can shore up its financing. In particular, it is vulnerable to exchange risks, as $600 million--which is nearly half the total project cost of Rs 5,170 crore--is the foreign exchange component. Of the equity component of Rs 1,979 crore, the 3 promoters--WBIDC, TCG, and the Tata Group--have paid up Rs 757.50 crore, which is 75 per cent of their contribution of Rs 1,010 crore. Adds Krishnamurthy: "Out of debt component of Rs 3,191 crore, the rupee borrowing target of Rs 1,470 crore has been achieved." And of the targeted foreign currency loans of $295 million, the company has tied up $250 million. "Haldia is trying to replace the remaining $45 million by rupee loans," says Gautam Hoare, 37, Senior Manager (Finance), Haldia.

However, for the equity component, Haldia clearly needs an international strategic partner, particularly as the promoters have realised that the poor state of the domestic capital markets is hampering fund-raising. The company had to shelve its proposed Rs 900-Rs 970 crore public issue, which was due to open in December, 1998. Says Vijay Krishna Chaudhury, 53, President (Commercial): "We need the funds only in 1999 and, hence, we are trying to mobilise a part of the requirement--around Rs 400-500 crore--through private placement." Which is why Haldia has been assiduously wooing Montell, a 100 per cent subsidiary of Shell, which is providing the technology for the HDPE and PP unit.

Says a Montell spokesperson: "Montell has been requested by the promoters of the Haldia project to lend support in the form of a small equity holding, but no agreement has been reached on the terms of this request. However, any participation by Montell would be minor, and limited to a financial holding. Montell has no interest in taking any further stake in the company." The implication: even if Montell picks up, for argument's sake, 5 to 10 per cent of the non-promoters' equity, it will only bring in between $27.50 million and $55 million.

Adds Abhay Shanbag, 31, Analyst, HSBC Batlivala & Karani: "It will not be very easy for Haldia to raise funds through private placement, considering the fact that it is a greenfield project." With domestic debt alone costing between 15.25 per cent (banks) and around 17 per cent (the financial institutions), Haldia will face an enormous interest burden--estimated to be Rs 450 crore in 1999-2000--which will negatively impact cash-flows. Defends Chaudhury: "The project now has a better configuration, and is thus more economical."

THE VIABILITY. While plastics consumption has grown by 14 per cent in the past one year, the Eastern region--where per capita consumption is one-third the national average of 2.40 kg per capita--has lagged behind. Warns R.S. Bali, 46, General Manager (Process), Triune Projects, an engineering and consultancy firm: "Most of the crackers are located in Gujarat, and this takes care of the central and the north Indian market. Haldia will have to concentrate on the eastern region, which has suffered due to the lack of big industrial projects in recent years, and where the purchasing power of the people has not improved."

In the polymer conversion industry, the eastern region accounts for roughly 8 per cent of the country's total share. This figure is estimated to go up to 12 per cent by 2000-01, 2 years after Haldia is commissioned. While Chaudhury affirms: "Already, we have seen demand grow from 50,000 tpa to 90,000 tpa in the last few years," the fact remains that Haldia has miles to go before it develops its primary marketplace. Counsels Bali: "Now that it is coming up, demand will be generated, and Haldia may not suffer the problem of lack of downstream units that will utilise its products."

Clearly, in the coming months, attracting viable downstream units in the vicinity of the Haldia complex, as well as proper market development will be crucial. Of late, the company has set up a business development cell, seed marketing, and an applications development research centre near Calcutta. By December, 1998, a 500-acre integrated industrial estate Haldia Polypark will come up as an exclusive plastics processing zone. Moreover, some foreign investors--like Germany's Bayer and Japan's Nichimen Corporation--have been showing interest in developing downstream projects around Haldia. But while Haldia is now no longer an abstraction, the long delays have, naturally, translated into inaction downstream. Hopefully, in a few months, Haldia will become a beacon of hope to the East.

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