Egyptian Indian Polyester Company (EIPET)

Aspet Egypt (EIPET)

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	25466
Company name	South Asian Petrochem Limited
Country	Egypt
Sector	Chemicals
Environmental category	B
Department	Oil, Gas, Mining And Chemicals
Status	Completed

Date SPI disclosed	October 5, 2007
Projected board date	November 12, 2007
Previous Events	Invested: July 17, 2008 Signed: July 17, 2008 Approved: December 10, 2007

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

Overview

Sponsor/Cost/Location

Development Impact

Contacts

Attachments

Project description

South Asian Petrochem Limited (SAPL or the sponsor), India’s second largest manufacturer of Polyethylene Terephthalate (PET), is planning to set up a joint venture with the Egyptian Petrochemical Holding Company (Echem), an agency of the Government of Egypt (GoE), to establish a 315,000 tons per annum (tpa) greenfield PET resin plant in Damietta, on Egypt’s Mediterranean coast. SAPL will have a 70% share in Egyptian Indian Polyester Co. (EIPET or the project company) whereas Echem will hold 23% and Engineering for the Petroleum & Process Industries (Enppi) will hold the balance 7%. The project has an estimated cost of approximately $135 million (including working capital requirements).

PET, which is produced from mono ethylene glycol (MEG) and terephthalic acid (PTA), is sold in small pellets and its major use is for the manufacture of lightweight plastic bottles for carbonated soft drinks and water. The project’s output is expected to be exported to Europe and the United States and also sold in Egypt, Middle East and North Africa.

The project will be the first PET plant in North Africa. Egypt has significant advantages for the location of a PET plant including:

- low logistics costs for sales to the European Union (EU) and North American markets;
- access to the fast growing and underserved African and Middle Eastern markets;
- excellent port/infrastructure facilities;
- favorable trade agreements with the EU; and
- proximity to sources of MEG feedstock.

Project sponsor and major shareholders of project company

SAPL’s founder and major shareholder (45% of shares) is the Dhunseri Group of Companies, promoted by the Dhanuka family, a reputable Indian business family which also owns tea businesses in Eastern India. SAPL is publicly listed on the Bombay Stock Exchange and has a market capitalization of approximately $80 million, as of September 15, 2007. Other investors in SAPL include its technical partner Zimmer AG (7%), institutional investors (32%) and the public (16%).

SAPL currently operates a 180,000 tpa PET plant, commissioned in 2003, at Haldia in West Bengal state (India). SAPL is the second largest PET producer in India and markets its products under its brand name “Aspet”. The company currently exports about 70% of its production to nearly 60 different countries. In FY2007, SAPL reported net revenues of about $225 million, EBITDA of about $23 million and net profit of about $10 million.

Total project cost and amount and nature of IFC's investment

The project will cost approximately $135 million (including working capital requirements) with construction costs accounting for approximately 51% of the total project cost. The project is expected to be financed through:

- $34 million equity from the project shareholders (SAPL, Echem, Enppi) contributed on a pro rata basis to their shareholding;
- $67 million senior long term debt; and
- approximately $35 million working capital facility.

The proposed IFC investment comprises a Senior Loan of up to $20 million to the project company in Egypt and an equity investment of up to $6 million in SAPL, the Indian Sponsor, which will be used to partially fund SAPL’s proposed equity in the project. The remaining senior debt and the working capital facility for the project will be provided by domestic Egyptian banks.

Location of project and description of site

The proposed project with associated utilities and facilities will be located within an established industrial zone in Damietta Port, on Egypt’s Mediterranean coast. The Damietta Port is a modern deep water port, which started operations in 1986, covering nearly 12 million square kilometers and focusing on transit container services and bulk and dry cargo.

Anticipated development impact of the project

- Create employment opportunities:

The project is expected to create approximately 450 permanent jobs and 800-1,000 jobs during construction, the large majority of which will be local hires. In addition, the project will provide indirect employment through use of Damietta port facilities, transport to domestic consumers, and procurement of local supplies.

- Diversification of Export Earnings:

The vast majority of Egypt’s foreign revenues currently come from the oil and gas and tourism sectors. Given the historical volatility of these two sources, the GoE’s stated goal is to diversify its export base over the coming decade to provide a more stable foreign revenue base. The project will contribute to this objective by generating over $500 million in net export revenues (after deducting the cost of imported raw material) over the first 10 years of the project’s life, as a result of both direct exports as well as import substitution.

- Demonstration Effect:

The project will be the first PET project in Egypt and North Africa as a whole, a region which has significant potential to become a world-class player in this industry. By operating a successful operation in Egypt, the project is expected to encourage other players to establish production facilities in the region. Also, the training of local employees will improve the quality of workers with experience in the PET industry.

- Promotion of Downstream Industry:

The water and CSD bottling industries in Egypt, which comprises several small players, currently lack domestic sources of PET resin, which are imported from China or Korea. Small players cannot hold large inventories and therefore are unable to import economical lot sizes. This project is expected to help the small players improve the efficiency of their operations through savings in logistics costs. This is also expected to promote the production of new PET based specialty products with higher value-add, such as film, packaging, etc.
The key development indicators that are proposed to be monitored during the life of the IFC investment are:

- Number of permanent jobs created;
- Annual net foreign exchange generated from the project’s exports; and
- Amount of PET sourced domestically by Egyptian PET converters.

IFC's expected development contribution

- Fit with World Bank Group Strategy:

In the current World Bank Group Country Assistance Strategy (CAS) for Egypt (submitted to the Board on May 20, 2005), the World Bank Group proposes to help the GoE achieve its goal of high and sustainable Gross Domestic Product (GDP) growth along with poverty alleviation by aligning its support over the four year period of FY06-09 to three key strategic objectives:

- facilitating private sector development;
- enhancing the provision of public services; and
- promoting equity.

More specifically, IFC's strategy for Egypt focuses on:

- encouraging private investments in infrastructure, mining and hydrocarbon sector;
- supporting export-oriented manufacturing and services;
- supporting financial sector activities; and
- providing investment and advisory services for SME development and the business enabling environment.

The World Bank Group CAS for India (CAS FY05-FY08) supports India’s tenth Five Year plan, which aims to strengthen the enabling environment for private sector-led growth and support critical interventions of special benefit to the poor and disadvantaged. As part of this strategy, IFC will:

- invest in labor-intensive, knowledge-based, export-oriented, globally competitive, second-tier industrial companies;
- focus on companies achieving international competitiveness in growth sectors such as chemicals; and
- promote South-South investments by taking Indian companies abroad, and financing their international expansion.

The proposed project therefore meets IFC’s strategic objectives as follows:

- Facilitating private sector development:

The project will support foreign private investment in the development of Egypt’s petrochemical sector, which will be key to the growth of the local economy.

- Supporting export-oriented manufacturing and services:

The project will generate substantial export earnings for Egypt through local industrial value addition and help it to diversify its foreign revenue base away from natural resources and the tourist sector.

- South-South Investments:

This project is a clear fit with the strategic priority for the IFC to help South Asia integrate into the global economy by bringing foreign investors to South Asia and taking South Asian companies to other markets.

- IFC Role:

The key roles played by IFC in this transaction include:

- Technical and strategic guidance for first overseas venture:

This is the first time SAPL makes an investment outside India and IFC will share its experience and expertise in implementing similar chemical/petrochemical projects in Egypt and the rest of the Middle East.

- Facilitate long term financing for an emerging market sponsor:

Local banks have no experience in the PET industry and will not be using an independent technical consultant given that they will take comfort from IFC’s due diligence process. The availability of long-term financing from local banks, while available for larger projects and better known sponsors, may have been more unlikely without IFC’s presence in the transaction. Financing with long tenors is critical to the viability of the proposed project, as it enhances the project’s ability to withstand the inherent cyclicality in PET conversion margins.

- Environmental, health, safety and social standards:

IFC will assist SAPL in achieving internationally accepted environmental and social standards at the plant. The company has agreed to: establish an independent EHS department; set up a formal community grievance mechanism at the Indian site; prepare a labor camp management plan to minimize the social, cultural, and environmental risks during the construction phase in Egypt; and carry out an additional public consultation at the Egypt site.

- IFC Additionality:

IFC’s presence in the transaction can help mitigate some of the political risks inherent in a large investment in a foreign country. IFC is also expected to play and important role as “neutral broker” between the Sponsor and the other investors in EIPET. IFC’s credentials as a neutral party will be unique given its affiliation with the GoE, as IFC shareholder, and IFC’s future shareholding in SAPL. IFC’s equity investment in SAPL is also viewed by SAPL’s management as providing a validation of their overseas expansion strategy to Indian equity investors. This is particularly important given the size of the new venture, which will more than double SAPL’s capacity.

Environmental and social issues - Category B

This is a Category B project according to IFC’s Environmental and Social Review procedures because a limited number of specific environmental and social impacts may result which can be avoided or mitigated by adhering to generally recognized performance standards, guidelines or design criteria. Mitigation measures for the potential environmental and social impacts are identified and incorporated in the Environmental and Social Action Plan (ESAP).

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