for the Industrial Clusters in Maharashtra Province, the Republic of India

Transcription

1 Study on Economic Partnership Projects in Developing Countries in FY2013 Study on the Water Recycling and Sludge Reduction Project for the Industrial Clusters in Maharashtra Province, the Republic of India Final Report SUMMARY February 2014 Prepared for: The Ministry of Economy, Trade and Industry Ernst & Young ShinNihon LLC Japan External Trade Organization Prepared by: Fuji Electric Co.,Ltd. The Japan Research Institute, Limited

2 (1) The background and necessity etc. of the project As its economy grows, India is promoting industrial development and accordingly, industrial parks are being increasingly extended / expanded. The state of Maharashtra, in particular, receives one of the largest FDIs (foreign direct investments) in India, thanks to the success of its tireless efforts to attract foreign investment under the state s industrial development policy, leading the economic growth of entire India. On the other hand, India suffers from insufficient water resources, such as surface stream water and underground water, and the facilities to provide them, risking the possibility of discouraging foreign companies from entering the Indian market and therefore affecting the growth of the Indian economy. To this end, Japanese and other foreign companies have, in the past made various attempts to disseminate the water-recycling technology in India with limited success. This is because the enormous capital investment to introduce water-recycling technology was passed on to the price of recycled water. In other words, the high cost is posing a big problem for companies which use this technology. On top of inadequate water resources, an unsatisfactory investment environment in the state of Maharashtra, such as insufficient electricity output and price hikes of electricity, are preventing foreign companies from entering the Indian market, slowing down the economic growth in the state as a result (the electricity supply of the Maharashtra state in FY2012: shortage of 16.7 % throughout the FY2012 and 22.1% at peak times). The state government has been trying to upgrade and develop Treatment, Storage and Disposal Facilities (TSDFs) within the state. However, TSDFs with sufficient capacity and capability are yet to be implemented due to the cost of construction, acquisition of land and environmental and social considerations to the local residents. As a result, illegal dumping of toxic waste is causing environmental pollution. In addition, bringing down the high cost of sludge treatment is posing another challenge; sludge discharged from Common Effluent Treatment Plants (CETPs) and Effluent Treatment Plants (ETPs) during treatment process is collected at TSDFs and disposed. In this environment, it is necessary to provide solutions for various issues which could prevent Japanese corporations from entering or further expanding their business in the Indian market. It is also of no small significance to carry out this project in the state of Maharashtra considering the state s importance in the Indian economy. Furthermore, making such a progressive efforts in the state of Maharashtra will pave the way for extending the project to many other states facing similar challenges. For these reasons, a literature research and field studies including interviews of local concerned parties and visits have been conducted to examine the feasibility of implementing improvement measures. These measures involve utilizing recycled water as a new source of water and reducing the consumption of electricity at a CETP and ETPs in an industrial park in the suburb of Pune in the state of Maharashtra.

3 (2) Principle policies determining the details of the project This project s implementer will take the form of a special purpose vehicle (SPV). This SPV project s objective is to sell recycled water and an energy-saving system for ETPs to corporations located within the industrial park. In addition, the project also carries out energy-saving measures for the industrial park s CETP to reduce the running cost of the SPV and improve its profitability. The same energy-saving technology will be used for both the CETP and ETPs. Form of business: SPV Clients of the SPV: corporations located in the industrial park The SPV s source of income (products): recycled water and an energy-saving system The SPV s profit improving measures (reduction of running cost): energy saving at the CETP Figure 1 shows the overview of this project. Figure 1 The overview of the project The details of the project shown in Figure 1 are determined based on the principle policies 1) and 2) below. 1) Cooperation with the implementation policies of the state and concerned organizations <Recycled water> The state of Maharashtra has its own water policy in which the utilization of recycled water is mentioned. The Maharashtra Industrial Development Corporation (MIDC) is considering making it compulsory to use recycled water in industrial parks within the state where a sharp rise in demand for water is expected in the future. The state

4 provides a subsidy for the introduction of facilities for zero liquid discharge of waste water from CETPs. Water-recycling measures are confirmed to qualify as zero liquid discharge. For these reasons, this project s water-recycling scheme can be said to fit with the water policies of the state of Maharashtra, where this project is located, and of the MIDC. <Energy saving in effluent treatment> The state of Maharashtra is suffering from a chronicle shortage of electricity which was at 16.7% as of the end of March To tackle this problem, the state has launched a program to reduce the consumption of industrial energy. For these reasons, this project s energy-saving scheme for a CETP and ETPs can be said to fit the policy of the state. 2) Effect on the host country Insufficient infrastructure, such as water and electricity in industrial parks is a serious problem for those areas, such as India and the state of Maharashtra, which are eager to attract foreign investment. The schemes of recycled water and energy-saving could help solve the shortage of water resource and electricity, making contributions to the industry clusters in India and the state and therefore to their economic growth. (3) The overview of the project 1) Project s site The following industrial park has been selected from some candidate locations in the state of Maharashtra as the site to carry out this project. Table 1 Project s site Name ROHA / Roha Industrial Park Name of the CETP Roha RIA CETP Co-op. Society Ltd. Area in the industrial park (ha) Industrial area: Commercial, residential and other area: Main industries Chemical, pharmaceutical and others Number of occupants 38 Amount of water flow from the 10 MLD CETP Unit purchase price of INR9/kWh electricity 2) The business range of the project The business of this project includes:

5 a) Sale of recycled water to the corporations in the industrial park Recycled water is to be sold to the corporations located within the industrial park. The corporations are to pay the SPV. Waste water treated at the existing CETP is recycled at a plant, which is to be newly built by the SPV, and supplied as industrial water. b) Sale of an energy-saving system for the ETPs of the corporations in the industrial park An energy-saving system is to be sold to the corporations located within the industrial park. The corporations are to pay the SPV. The SPV is to undertake engineering work, procurement and setup on the location of the energy-saving system. 3) The total cost of the project The costs of the water-recycling plant for recycled water business targeted at the corporations in the industrial park and the energy-saving business are shown below. The calculation was made based on the following conditions: As it is difficult to predict the price changes of machinery and construction, the current market prices are used for the calculation without taking future price rise into consideration. Analysis is conducted considering only import taxes for equipment but not other expenses. a) Water-recycling plant During the second field research, the MIDC mentioned that it would bear the costs of laying pipes from the water-recycling plant to each corporation and of pipe maintenance. However, taking into account the risk that MIDC becomes unable to bear these costs, these costs have been separated from engineering and construction costs so that two separate calculations could be made and examined; one with these costs and the other without. The total cost of this project consists of the construction cost of a water-recycling plant and operation and maintenance cost of the plant.

6 i. Construction cost of the water-recycling plant Table 2 Construction cost of the water-recycling plant (excluding the costs of laying pipes) Items Cost Total cost Cost arising in India Cost of engineering INR30,000,000 INR82,400,000 ( local currency) and construction 137,608,000 Cost of implementing INR52,400,000 $1,336,000 electric machinery Cost arising outside of Cost of machinery and 31,230,000 31,230,000 India (foreign currencies) materials $303,204 Total 168,838,000 $1,639,204 *Exchange rates: INR1= 1.67, INR1=$0.02, $1= 103 Table 3 Construction cost of the water-recycling plant (including the cost of laying pipes) Items Cost Total cost Cost arising in India (local currency) Cost arising outside of India (foreign currencies) Cost of engineering and construction Cost of implementing INR30,000,000 INR52,400,000 INR132,400, ,108,000 $2,146,680 electric machinery Costs of laying pipes INR50,000,000 Cost of machinery and 31,230,000 31,230,000 materials $303,204 Total 252,838,000 $2,449,883 *Exchange rates: INR1= 1.67, INR1=$0.02, $1= 103 ii. Running and maintenance cost of the water-recycling plant The table 4 shows the running and maintenance cost. This cost does not include a rise in labor cost or emergency cost arising from unexpected events, such as accidents, presupposing that proper maintenance would be carried out. This cost does not include large repair works except for the planned 16 th year large-scale facility replacement work.

7 Table 4 Running and maintenance costs of the water-recycling plant Items Total cost Running and maintenance cost (local currency) Utilities Total *Exchange rates: INR1= 1.67, INR1=$0.02, $1= 103 INR3,600,000/y INR5,000,000/y INR8,600,000/y 14,362,000/y $139,437 iii. Factors determining the cost of each item Each item within the construction and the running and maintenance cost of the water-recycling plant has been determined at based on the factors below: Cost arising locally (cost of engineering and construction, electric machinery implementation and a reserve fund) derive from a quotation submitted by Hydroair in India Running and maintenance cost is also an estimate made by Hydroair in India Cost arising outside of India is the cost of the research party s (Fuji Electric) low-price membranes. It is envisaged that 250 membranes are to be used for the water-recycling plant. Fifty of these membranes are to be replaced for maintenance reasons every five years once the plant starts operating. For this report, the cost of transporting membranes is included in the price of membranes. b) Cost of energy-saving system Table 5 shows the cost of introducing the energy-saving system. This cost all arises within India (local currency). Table 5 Cost of introducing the energy-saving system Item Cost Total cost Cost arising within India (local currency) Cost of engineering, equipment, on-site setup INR572,000 INR572, ,240 $9,274 Total 955,240 $9,274 *Exchange rates: INR1= 1.67, INR1=$0.02, $1= 103 4) Overview of the results of preliminary financial/economic analysis

8 This project is an upgrading of the existing CETP to handle more advanced treatment. Therefore, the initial construction cost is expected to be eligible for a subsidy which is to cover 25% of the total cost. The rest, 75%, is borne by the business operator, likely to be met by investment/loan from IA, Fuji Electric and a third party financial institution. Figure 2 shows how the project would work. Figure 2 Implementation model of the project (supposition) a) Operation conditions on which the financial analysis is based Table 6 shows the supposed operation conditions on which the financial/economic analysis of this project is based using the project s implementation model shown in Figure 2. Effective working days Occupation area Item Table 6 Supposed conditions of the plant operation Conditions 365 d/y 200m 2 *The site is expected to be offered by the MIDC free of charge b) Different cases for financial/economic analysis For financial and economic analyses of this project, two prices were first assumed for recycled water sales: INR12/m3 and INR16/m3, and for each price, two cases were analyzed: where building expenses of water pipes to supply recycled water are included in SPV, and where the expenses are borne by MIDC, assuming the expenses are not included in SPV. That is, four cases were analyzed in total.

9 As to the sales price of recycled water, it was determined according to the request made by IA (purchaser) that the price was preferably less than half of the current mains water price. The request was made at the interview with them during the local inspection at the industrial park of Roha. Table 7 Cases for financial/economic analysis Cases Sales price of recycled Water pipe building water expenses 1 INR12/m 3 Included in SPV 2 INR12/m 3 Not included in SPV 3 INR16/m 3 Included in SPV 4 INR16/m 3 Not included in SPV c) Preconditions Table 8 Overall conditions for financial/economic analysis Construction period 1 year Business operation period 20 years Owned / borrowed capital ratio 65% / 35% Total cost 252,340,000 Total amount of borrowing 88,320,000 In the case of bearing Interest rate 8% the costs of laying Financing plan Repayment period 15 years pipes Method of repayment Equal monthly payments with interest Total cost 168,840,000 Total amount of borrowing 59,090,000 In the case of not Interest rate 8% bearing the costs of Financing plan Repayment period 10 years laying pipes Method of repayment Equal monthly payments with interest Depreciation period 15 years Depreciation Manner of depreciation Straight line method d) Overview of the financial analysis results

10 In table 9, the overview of the analysis results for the four cases mentioned above are outlined with the following inflation rates taken into account. Based on the inflation rates forecast data between 2015 and 2018, inflation rates have been assumed as shown below (source of inflation rates: IMF WEO database) The inflation rate between 2015, when the project starts operating, and 2018 is set at 7%, the average during this period. The inflations rate after 2019 is set at 6.7% as in Table 9 Results overview of the financial analysis Cases Case conditions Price of recycled water Cost of laying pipes FIRR NPV 1 INR12 Paid by SPV 4.4% 75,238,000 2 INR12 Not paid by SPV 7.9% 34,006,000 3 INR16 Paid by SPV 9.6% 117,347,000 4 INR16 Not paid by SPV 13.5% 226,591,000 *The discount rate for the NPV (net present value) is set at 6.7% as in the inflation rate. The results of the analysis are: Price of recycled water: INR8/m 3 Although the price is affordable for the clients, the business is not viable as FIRR is as low as -0.1% when the cost of laying pipes is added. Even if this cost is not added, the initial investment cannot be recouped with the FIRR still at 7.0% and NPV being 4,136,000. Price of recycled water: INR10/m 3 Although the price is slightly higher, it is still affordable for the clients. However, even with this price, FIRR is still 5.5% if the cost of laying pipes is added, making the value of NPV negative. At this price, the business is not viable if the SPV is to bear the cost of laying pipes. Therefore, it is imperative that the cost of laying pipes is borne by the MIDC. On the other hand, if the price is set higher than this, the business would no longer be viable as the price is above what the clients can afford. 5) Environmental and social aspects This project s environmental and social impacts are assessed on the construction and operation stages. The results of assessment are divided into the following categories: (-A) a serious impact is expected; (+A) a significant improvement is expected; (-B) a slight impact is expected; (+B) a slight improvement is expected; (C) impact cannot be predicted and (N) no impact is expected. The results are shown in Chart 10.

11 It will not be necessary to move residents and there will be no impact on cultural heritage as this project is to be carried out in an existing industrial park. The construction process will have no impact on national parks and natural environment. Table 10 Assessment of environmental and social impacts Assessment Items Construction stage Operation stage Air quality -B N Water quality N +A Waste -B N Pollution Soil pollution N N Noise/vibration -B N Land subsidence N N Offensive odor N N Substratum N +A Protected areas N N Natural environment Ecosystem N N Hydrometer N +A Topography/geology N N Resettlement of residents N N Life/livelihood N N Social environment Cultural heritage N N Scenery N N Minority races/ the aborigines N N

12 (4) Implementation schedule Figure 3 shows the project implementation schedule from the examination of industrialization details, plant construction, on-site test runs to the start of the operation. Figure 3 Project implementation schedule Form the SPV Examine the industrialization details FY2013 FY2014 FY Select a basic design and consultants Assessment (environmental, social and economic points of view) Financing Bidding Engineering, procurement of equipment and production Plant construction Setup on site Test run on site Operation begins Source: Study team

13 (5) Feasibility of the project s implementation For this project, the cost of laying water pipes to supply recycled water is a key factor. 1) The case where SPV pays the cost of laying water pipes Prices affordable to corporations in the industrial park: INR12/m3, INR16/m3 In the case of INR12/m3, NPV is in negative in most variants of the rates of inflation and recycled-water-price growth, which means it is impossible to recover initial investment. Therefore, the business is not viable. In the case of INR16/m3, recovery of initial investment can only be possible if the price growth rate of recycled water exceeds the inflation rate. Again, it is difficult to make the business viable. Even if the price growth rate of recycled water is set higher than the inflation rate, the business is not worthwhile as NPV is smaller than initial investment. Prices exceeding the purchasing conditions of corporations in the industrial park: INR18/m3 The price growth rate of recycled water can be the same as the inflation rate, but NPV in this case is still on a par with initial investment. Also, this price setting will compromise economic effects for corporations in the industrial park as it surpasses the introduction cost of recycled water. Therefore, it is difficult to make the business viable. The case where SPV does not pay the cost of laying water pipes Prices affordable to corporations in the industrial park: INR12/m3, INR16/m3 In the case of INR12/m3, recovery of initial investment can only be possible if the price growth rate of recycled water exceeds the inflation rate. Again, it is difficult to make the business viable. In the case of INR16/m3, on the other hand, NPV reaches or surpasses the initial investment level even if the price growth rate of recycled water is set short of the inflation rate, and the business has feasible prospects. Prices exceeding the purchasing conditions of corporations in the industrial park: INR18/m3 It is possible to keep the price growth rate of recycled water lower than the inflation rate, and NPV exceeds initial investment by far, making the business attractive. However, as mentioned above, economical effects are low for the corporations in the industrial park with this price setting, which is slightly higher than purchasing price of recycled water. The project would be feasible when the pipeline installation cost is borne by MIDC and thus excluded from the total cost of this project, but MIDC mentioned in the occasion of the final report meeting that it is difficult for the institution to bear the cost for pipes construction. Therefore, SPV is required to incur such cost.

14 Considering these situation, this project will be feasible when the recycled water is set at INR16/m3 or above. However, if escalation rates of the recycled water price become below the inflation rate, the NPV gets smaller than the initial investment and the project will be less attractive. As described above, this project may be feasible under the conditions that MIDC bears the cost of laying water pipes and the purchasing price is set at INR16/m3. The conditions of feasible corporate structure are indicated to Table 11. Table 11 Feasible business conditions Item Condition Scale of water-recycling plant 5,000 m3/day Recycled water purchasing price INR16/m3 or over Bearer of recycled water piping cost SPV Installation location of water-recycling plant Within CETP premises The plot to be provided by MIDC free of charge Installation area of water-recycling plant 200 m2 Operational period of water-recycling plant 365 days/year Operation and maintenance of water-recycling plant Anticipating to engage operators of the existing CETP Source: Study team

15 (6) Japanese companies technological superiority 1) Recycled water (main components) a) The competitiveness of non-japanese companies The main components of the water-recycling system are RO membranes which remove salt from waste water. Although the most common type of membrane is a high-pressure RO membrane which is used for desalination of sea water, for the purpose of converting CETP-treated waste water into industrial water, a low-pressure RO membrane (applied pressure: approx. 1Mpa) is considered to be most suitable. This is because the salt level in CETP-treated waste water is only one tenth of sea water (electrical conductivity: approx. 300 to 400mS/m) Some non-japanese companies, such as The Dow Chemical Company in the US and Woongjin Chemical in South Korea, manufacture low-pressure membranes which can be used for recycling CETP-treated waste water and therefore considered to have the required technology. b) The competitiveness of Japanese companies Japanese RO membrane manufacturers, such as Nitto Denko and Toray, are considered to have the same technological standards as non-japanese companies as they also produce low-pressure RO membranes of similar specifications and performance to those made by The Dow Chemical Company. In contrast, the research party (Fuji Electric) has the membrane technology to boost recovery rate in exchange for a reduction in desalination rate. Although the desalination rate of membranes manufactured using this technology is lower than that of other Japanese and non-japanese companies mentioned above, their performance is good enough to recycle CETP-treated waste water whose salt level is low. This means that Fuji Electric s membranes are doubly effective in reducing both the initial cost (when the facilities are set up) and running cost (when membranes are replaced) as they offer a higher recovery rate and therefore fewer RO membranes are needed. 2) Energy-saving a) The competitiveness of non-japanese companies Non-Japanese inverter manufactures, such as Siemens and ABB, have good track records in the global market. Therefore, they can be considered to have the required standard of technology. b) The competitiveness Japanese manufacturers inverters perform just as well as those of non-japanese manufactures. This can be deduced examining their technological documents and a past comparison with non-japanese manufactures. Japanese manufactures are differentiating themselves by offering products that combine water-recycling and energy-saving.

16 (7) Maps showing the location of the project site Figure 4 Project location The state of Maharashtra Source: created by the Study team from the Web Wikipedia Figure 5 Project site (enlarged) Project site: Roha CETP Source: created by the Study team from the Google Map