The complex at Kakinada, East Godavari district, is proposed to be jointly set up by GAIL and HPCL, both central PSUs
The proposed petrochemical complex at Kakinada in Andhra Pradesh, a joint project of GAIL and HPCL, seems to have hit a roadblock with the Centre asking the state government to pay Rs 5,000 crore upfront in the form of viability gap funding (VGF).
Establishing a greenfield crude oil refinery and petrochemical complex has been mandated under Schedule XIII of the Andhra Pradesh Reorganisation Act, 2014, which paved the way for the creation of Telangana state.
The complex at Kakinada, East Godavari district, is proposed to be jointly set up by GAIL and HPCL, both central PSUs.
After a feasibility study by Engineers India Ltd, GAIL and HPCL signed a memorandum of understanding with the AP government during the Partnership Summit in January 2017 for setting up the 1.5 MMTPA petrochemical complex on a 2,000-acre site in the Kakinada Special Economic Zone.
But the Rs 30,000-crore project did not take off with the Centre and the state squabbling over the VGF, said a top official.
The proposed complex, with a cracker unit, was supposed to produce ethylene and its derivatives.
“SBI Caps did a preliminary financial appraisal and concluded that with a debt-equity ratio of 2:1, the project will yield internal rate of return of 9.8 per cent as against the hurdle rate (the minimum rate of return on a project) of 15 per cent.
“To bridge this gap, viability gap funding in the form of an interest-free loan of Rs 1,438 crore per year has been suggested for a 15 year period beginning from the Project Zero date,” the official told PTI.
Following a meeting between Chief Minister Chandrababu Naidu and GAIL authorities, it was decided that SBI Caps would “revise” the financial model pegging down the power and water supply rates, he said.
Besides, an upfront VGF payment as soft loan was also agreed to be examined taking different IRRs (internal rates of return). The detailed techno-commercial report for this project was still being prepared, he added.
“The AP government has requested the Centre to reduce the IRR to 10-12 per cent on the lines of HPCL’s Barmer refinery in Rajasthan.
“For the Barmer refinery, the VGF has been reduced from Rs 3,736 crore to Rs 1,123 crore per annum, adjusting the IRR to 12 per cent.
“But the Centre has been insisting that we chip in with a VGF of Rs 5,000 crore,” the senior official involved in the project pointed out.
Naidu, during his visit to New Delhi in January, took up the issue with Petroleum Minister Dharmendra Pradhan and expressed the state government’s inability to foot the VGF bill. He wanted the petroleum ministry to take up the burden.
“We are awaiting a response from the Centre to our plea,” the official added.
Meanwhile, the state government also suggested an alternative location for the proposed project.
“Instead of Kakinada, we proposed that the cracker unit be set up at the upcoming Machilipatnam Port, which is closer to the state capital Amaravati.
“This will help in economic development of the region. The Centre is yet to respond even to this plea,” said the official.
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