Kanoria Vizag

Summary of Proposed Investment

This Summary of Proposed Investment is prepared and distributed to the public in advance of the IFC Board of Directors’ consideration of the proposed transaction. Its purpose is to enhance the transparency of IFC’s activities, and this document should not be construed as presuming the outcome of the Board decision. Board dates are estimates only.

Project number	28339
Company name	Kanoria Chemicals and Industries Ltd.
Country	India
Sector	Chemicals
Environmental category	B
Department	Oil, Gas, Mining And Chemicals
Status	Pending Signing

Date SPI disclosed	July 23, 2009
Projected board date	September 10, 2009
Date revised SPI disclosed	September 11, 2009
Previous Events	Approved: November 19, 2009

View Environmental & Social Review Summary (ESRS), click here

Overview

Sponsor/Cost/Location

Development Impact

Contacts

Attachments

Project description

Kanoria Chemicals and Industries Ltd (“KCIL” or the “Company”), was established in 1960 and is a mid-sized manufacturer of chemical intermediates in India. It is also an existing IFC client. Its products are divided into the following two categories: (i) chloro-chemicals (caustic soda, liquid chlorine, bleaching powder and other chlorine derivatives), manufactured in a plant situated at Renukoot in Uttar Pradesh, comprising about two-thirds of total sales; and (ii) industrial alcohol chemicals (pentaerythritol, formaldehyde, sodium formate, acetaldehyde, hexamine and other alcoholic derivatives), manufactured in the plant situated at Ankleshwar in the state of Gujarat, comprising about one-third of total sales.

The project consists of a long term senior corporate loan of up to INR800 million (approximately US$16 million equivalent) to finance a part of the Company’s capital expenditure plan (“the Project”) over the next two years. The Project envisages investments of about $24 million in the next two years and will (i) move the Company further along its efforts for optimization of resources and raw materials use, (ii) help to unlock new regional markets for its existing products, (iii) increase efficiencies by creating economies of scale, and (iv) provide logistical advantages from choosing a strategic location for its facilities. The Project includes a $16 million formaldehyde & hexamine production facility at a green-field location in Visakhaptanam district, Andhra Pradesh State. Another US$8 million of the Project is divided into various investments aimed at increasing operational efficiencies of the existing plants over the next two-year period, including about $2 million investments in cleaner production and safety enhancement measures such as increasing treatment of wastewater facilities by upgrade of existing facility and construction of a new one and improvement of chlorine handling.

Anticipated development impact of the project

The Project is expected to have the following development impact:

· Cleaner and safer production: IFC’s proposed investment will help the Company implement its capital expenditure plan which includes investments in water recycling facility, replacement of old membranes at the existing membrane-cell plant, and installation of various safety measures for safer chlorine handling. Implementation of the Project will result in cleaner production through water recycling, reduced energy consumption from replacement of membranes and will increase the Company’s industrial production safety. These measures are being implemented in addition to IFC’s requirement to fully phase out the more harmful, mercury based production (already reduced from 145 to 95 tons per day (“tpd”), to only 20% of total production) by 2012.

· Employment creation and preservation:

Besides temporary construction jobs during CY2009-2010, formaldehyde component of the Project is expected to create at least 40-45 permanent jobs. Since the facilities will be built at a large industrial development area, this job creation will increase the pool of required employees in the state and will become available to the local and neighboring state population. Importantly, most of the Company’s existing 950 jobs are in eastern Uttar Pradesh state, one of the economically lagging states in India, and IFC’s support in increase of the Company’s competitiveness will help to preserve those jobs.

As part of this investment, IFC expects to track (i) government revenues from the Company, (ii) employment numbers, (iii) savings in energy consumption and (v) community development spending.

IFC's expected development contribution

Advisor on implementation of best EHS practices and reducing environmental footprint: IFC’s financing will help the Company to strengthen its E&S practices, improve safety at production sites and ensure that new facilities are build according to international guidelines and practices. Furthermore, the proposed investment is expected to increase the operating efficiencies and cost competitiveness of a locally owned, medium tier business committed to follow, with IFC’s help, best practice Environment and Social guidelines.

Provider of long-term financing: KCIL is a growing Company and although in the past was able to access medium-term financing, it has become increasingly difficult to raise financing for more than 3-5 years. To grow and ensure a sustainable and environmentally responsible business, the Company needs to finance its capital expenditure plans with long-term financing given the cyclical nature of its business. This is especially important for the Company’s plans to entirely switch from mercury based production to the environmentally friendlier membrane-cell production starting from 2012. IFC’s role in supporting the Company and providing vote-of-confidence becomes important in view of IFC’s being a shareholder in the Company.

Provider of Global Knowledge: In future, the Company has plans to expand to other developing countries and therefore values its relationship with IFC which can provide not only access to stable capital in India but also financing and guidance for any future expansion plans.

Environmental and social issues - Category B

This is a Category B project according to IFC's Environmental and Social Review Procedure. The Company is required to commission an environmental and social impact assessment which will address the impacts, provide mitigations and include a detailed environmental and social management plan. Environmental, health, safety, and social issues associated with this project include air emission, wastewater treatment and discharge, solid and hazardous waste management, hazardous material management, employee health and safety, fire protection and emergency response, community safety, community relationship and development.

Applicable Performance Standards
All Performance standards except PS 6 (Biodiversity Conservation), PS 7 (Indigenous Peoples), and PS 8 (Cultural Heritage) are expected to be applicable for this investment. PSs 6,7, and 8 are not included as the project is not located in an area of sensitive biodiversity and there are no indigenous people nor cultural heritage in the project area.

Rationale for Categorization
This project has been categorized as a “B” as it will entail reversible adverse social and environmental impacts, which can be mitigated with the application of good international practices. During appraisal a detailed review of the Company’s documentation, capacity and resources will be undertaken, with a specific action plan being developed and audited through IFC involvement in the project.

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