Asian Journal of Management Cases http://ajc.sagepub.

com/

Klauch International*
T.R. Madan Mohan and Shantanu Dutta Asian Journal of Management Cases 2006 3: 51 DOI: 10.1177/097282010500300105 The online version of this article can be found at: http://ajc.sagepub.com/content/3/1/51

Published by:
http://www.sagepublications.com

Additional services and information for Asian Journal of Management Cases can be found at: Email Alerts: http://ajc.sagepub.com/cgi/alerts Subscriptions: http://ajc.sagepub.com/subscriptions Reprints: http://www.sagepub.com/journalsReprints.nav Permissions: http://www.sagepub.com/journalsPermissions.nav Citations: http://ajc.sagepub.com/content/3/1/51.refs.html

Downloaded from ajc.sagepub.com at V I T UNIVERSITY on July 6, 2011

ASIAN JOURNAL OF MANAGEMENT CASES, 3(1), 2006 SAGE PUBLICATIONS NEW DELHI/THOUSAND OAKS/LONDON DOI: 10.1177/097282010500300105

KLAUCH INTERNATIONAL*
T.R. Madan Mohan Shantanu Dutta
The case deals with entry and location decisions and project attractiveness evaluation of Klauch International into the Bangladesh Cement industry. While demand for cement is on the rise in Bangladesh, the resource constraints bring unique challenges to the project, such as creations of subsidiaries across borders to signal and buy legitimacy of the project from different stakeholders. Klauch is evaluating the financial, market and political risks involved. Keywords: Bangladesh cement industry, Project evaluation, Capital budgeting

On a late Friday afternoon in September 1999, Mike Appel, Vice President, Strategy and International Operations, Klauch International; the third largest conglomerate based in Germany; sat back in his chair and stared out over the vast Hilton International in Dhaka, Bangladesh. He had just finished reading the International Divisions options of setting up a large cement company, and sighed as he pondered over the recommendations that he was going to make to the CEO, next week at Frankfurt. Despite his concerns about the investment climate and the political stability of the country, he was optimistic because, since his last visit to Bangladesh, he had seen more commitment for economic development and Foreign Direct Investment (FDI) from the democratically elected government. The growth prospects for the dusty grey product in a country of 130 million people with a gross domestic product (GDP) growth rate of 45 per cent per year and committed government infrastructure projects were quite promising.

THE ECONOMY OF BANGLADESH

Bangladesh became an independent country in 1971. With a total land area of 147,570 sq km and a population of 130 million, it was one of the most heavily populated countries in
*This case was written by Associate Professor T.R. Madan Mohan and Assistant Professor Shantanu Dutta to serve as a basis for class discussion rather than to illustrate either effective or ineffective handling of a business situation.
Downloaded from ajc.sagepub.com at V I T UNIVERSITY on July 6, 2011

the world. Despite its huge population and poverty, Bangladesh managed to make gradual progress in the health, education, agricultural and industrial sectors since attaining independence. Since 1990, the economy had achieved significant macroeconomic stability with an average growth rate of 5 per cent in GDP. The landmark elections of 1990, which brought the Pro-democratic party to power, led to a period of economic growth that was continued by successive governments. Adoption of economic liberalization policies and foreign direct investment (FDI) incentives helped. (See Exhibit 1). However, despite persistent efforts from the government authorities and a culture of hospitality to foreigners, the actual FDI records in the country, in comparison with the officially registered projects with the Board of Investment (BOI), were not encouraging. During 19961998, 365 FDI projects were registered with the Board of Investment (BOI), from which only seventytwo projects had entered the production phase by the end of 1999 and twenty-seven were in the process of implementation (Rahman). Excessive bureaucratic interference, lack of coordination among government departments, frequent policy changes with respect to FDI incentives and taxation, and lack of transparency in processing project papers were some of the reasons that restricted the FDIs success in Bangladesh. However, despite various limitations, the Government in recent years had been trying to overcome the problems restricting FDI potential in the country. As a result, the total FDI in the country rose in the 1990s. In parallel, the Government also undertook various major infrastructure projects that were likely to attract FDI and boost the construction sector of the country. Given the potential of the market, a number of international players had begun to show an interest in setting up cement plants in Bangladesh. In order to realize larger projects, investors had to traditionally rely on foreign investment. The money market and the capital market in Bangladesh were in its transitional stage. The market of Asset Backed Securities (ABS) was yet to be explored. The various constituent parts of it were in the process of formation, while continuous efforts were being made to develop appropriate and adequate instruments to be traded in the market. Some key economic indicators of Bangladesh are presented in Exhibit 2.

THE CEMENT INDUSTRY OF BANGLADESH IN 1999

Historically, Bangladesh did not significantly depend upon cement for construction purposes. The base materials traditionally used in house building and other construction required little cement. Moreover, the country did not have enough natural resources for manufacturing cement. However, increasing urbanization led to the gradual substitution of traditional building structures and patterns with modern high-rises. Until 1951, Bangladesh was almost completely a rural-agrarian country, and the level of urbanization was extremely low with 95.67 per cent of the population living in rural areas and only 4.33 per cent in urban areas. It gradually increased to 5.19 per cent in 1961 and
52 T.R. MADAN MOHAN
AND

SHANTANU DUTTA

Downloaded from ajc.sagepub.com at V I T UNIVERSITY on July 6, 2011

then very rapidly to 8.78 per cent in 1974, 15.54 per cent in 1981, 20.15 per cent in 1991, and 21.9 per cent in 1999 (Bangladesh National Report 1999). The production and demand for cement in Bangladesh is presented in Exhibit 3. In 1999, Bangladeshs per capita cement consumption was 38 kg, fairly low compared to other countries in the region: India 89 kg, Indonesia 127 kg, Malaysia 582 kg and Thailand 642 kg. With the implementation of large infrastructure projects by successive governments, an increased pace of urbanization and the rapid construction of apartment buildings, demand for cement was expected to grow. For over a decade and a half, the average annual growth rate of cement consumption in Bangladesh was 9 per cent (13.5 per cent during the last five years). It was expected to grow at a rate of 7 per cent for the next five years to reach about 6 million tons in 2003, equivalent to 40 kg/habitat. Until 1995, there were no multinational cement players operating in Bangladesh. However, in 1996, Hyundaia Korean Multinationalestablished a clinker-grinding unit in Bangladesh to ensure quality cement supply for its major construction projects. Cement was not the core business of Hyundai, and there were rumours in the local business press that they were in the process of divesting from this business. The Asian economic meltdown had been a blessing in disguise for the multinational companies. None of the local companies commanded more than 5 per cent of the market share; several players felt threatened and were desperate to get out of the business. Cement consumption in 1998 was hovering at around about 3.45 million metric tons. The Dhaka area accounted for 30 per cent of the total cement consumption and the Khulna area about 20 per cent. Other main markets were Chittagong, Sylhet and Rajshahi. Although there were five cement plants operating in the country, only the Chhatak Cement Plant was producing cement from basic raw materials with a capacity of 270,000 tons per annum. The other four cement plants were primarily grinding and bagging imported cement clinker from India and neighbouring countries. In 1999, private enterprises dominated the production and import of cement to the north-eastern market. All of this demand was consumed internally. Local raw material based cement production depended upon limestone deposits found on the St Martin Island, Joypurhat and Sylhet areas. It was planned that four new grinding plants would begin production by 2002, adding 1.5 million tons per year (m tons/yr)1 of capacity. Scancem planned to form a joint venture with Sumitomo Corporation of Japan to set up a $ 90 million grinding plant. The Commonwealth Development Corporation of the United Kingdom also pledged $ 30 million for a new 1.2 million tons per year (m tons/yr) grinding plant (International Cement Review 1998: 64). The deposits in Sylhet supported the production of Chhatak and Ayeenpur cement factories. These plants were able to meet their needs for gas and clay from deposits close by. This was an added advantage. The mills that produced cement from imported clinker
1

m tons = million tons

KLAUCH INTERNATIONAL 53
Downloaded from ajc.sagepub.com at V I T UNIVERSITY on July 6, 2011

were mostly located around Dhaka, Chittagong and Mongla. There were sixty-two registered cement factories in the country in 1999, but only thirteen of them were in production. The total installed production capacity of these factories was about 3.8 m tons/yr. Their actual production, however, was much lower. As Bangladesh did not have an economically viable source of limestone within its territory, it was rather difficult to set up an integrated cement plant in Bangladesh. The sole integrated cement plant in Bangladesh was the government owned Chhatak Cement Company Limited (CCCL) (0.20 m tons capacity), which sourced its limestone from the neighbouring Indian state of Meghalaya for its cement production. Another difficulty lay in the relative cost of setting up different types of cement plants. While setting up a grinding unit in Bangladesh would cost around 70 USD per ton of capacity, an integrated cement plant would cost about 200 USD per ton of capacity. The price of cement in the market was a major factor favouring the entry of Bangladesh into the cement production sector. The price of cement was highly dependent on the transport and handling costs, so much so that the cost of cement in Bangladesh was 60 to 70 per cent higher than the world market price. While the average selling price per ton in neighbouring India, Indonesia, Thailand and Philippines was $40 per ton, it was almost double the amount in Bangladesh. Several major cement companies were seriously considering entering the Bangladesh market.

KLAUCH INTERNATIONAL AND ENTRY INTO BANGLADESH

Klauch was a multi-industry conglomerate with interests in steel and construction materials like cement, automobiles and cable networks. It was driven by Gavin Klasff, a second world war veteran and a successful businessman who transformed Klauch from a small factory in Munich into a transnational corporation. It had five divisions: Steel, Cement, Automobile, Cable Networks, and Erection and Project management. A Managing Director managed each division. Mike Appel and three other senior staff members supported the Board of Klauch International2 in overall strategy formulation. Klauch Cements, the world leader in construction materials, held top-ranking positions in each of its five divisions: Cement, Aggregates and Concrete, Roofing, Gypsum and Specialty Products. Founded in early 1900 in Germany, the Klauch cement division alone operated in more than seventy countries and had more than ninety cement plants worldwide. Turnover in

2 Klauchs Board consisted of thirteen members. Out of the thirteen members, seven were considered independent (that is, free of corporate management influence).

54 T.R. MADAN MOHAN

AND

SHANTANU DUTTA

Downloaded from ajc.sagepub.com at V I T UNIVERSITY on July 6, 2011

the cement division rose by 10.6 per cent to Euro 3,635 million, compared to a 7.4 per cent increase to Euro 10,528 million for the group as a whole over 19971998, increasing the portion of sales revenue coming from cement from 33.5 per cent to 34.5 per cent. Growth and value maximization were priorities for Klauch and it was not new to exploring international markets. It had definite rules for entering a regional market. First, the entry should offer unique strategic advantages such as first-mover advantage or market share. Second, the returns had to start accruing in short periods. As a corporation, it discouraged projects that required corporate guarantees and had long gestation periods. During the 1990s, European and North American construction industry markets were maturing and Asian economies were witnessing impressive gains. Multinationals like Holderbank, Lafarge, Scancem and Cemex were investing in Asian markets and Klauch did not want to miss this opportunity. Appel and his team had been scrutinizing the international markets, identifying gaps and competition. Klauch zeroed in on Bangladesh for its growth potential and likely high returns. Bangladesh, with a population of 130 million people had reasonable per capita cement consumption (30 kg per capita). This consumption was expected to grow as the newly elected government was taking up major infrastructure projects including ports and roads. In 1995, Bangladesh Construction Co. (BCC), an associate of one of the largest conglomerates of BangladeshBengal Group which had an annual turnover of approximately 100 million USDapplied for a bank loan to establish a dry process cement factory near Chhatak, Sunamgonj to produce 0.6 million tons of grey portland cement per year. Bengal Group, headed by Hamid Ali, was involved in different streams of businesses, including construction, textile, sugar mills, shipping and export-import. However, it had no prior experience of managing a large integrated cement factory. Ali was a successful entrepreneur and resourceful chairperson, educated in the United States, with a vast experience of negotiating and managing successful strategic alliances. BCC had several technical and financial collaborations with leading firms from Europe and the USA. It was the flagship company for the group, accounting for approximately 20 per cent of the groups revenue last year. Though the core business of BCC was not cement, they enjoyed very good ties with government officials that not only helped them bag large projects but also kept them up-to-date with the business conditions of the region and helped them in establishing connections with influential people.

EURO-BANGLA PROJECT
As cement production was resource intensive, the choice of technology was crucial from both the administrative and technical criterion. There were two basic types of cement

KLAUCH INTERNATIONAL 55
Downloaded from ajc.sagepub.com at V I T UNIVERSITY on July 6, 2011

manufacturing processes, the wet and dry processes. Exhibit 4 presents the advantages and disadvantages of both technological options. The cement operations required continuous supply of raw material and it was apparent that any large operation in Bangladesh had to depend upon the raw material flow from neighbouring countries. A resourceful local partner was required to manage the local bureaucracy, customs and labour. Based on his previous experience of managing in Asia, Appel recognized that the best approach for entering the emerging markets was to have a resourceful local partner. Accordingly, Appel contemplated establishing an integrated cement plant in the form of a joint venture with BCC called the Euro-Bangla Cement Company (EBCC).

SITE SELECTION
Greg Schmidt, the technical head reporting to Appel, had identified Sylhet, in the northeastern region of Bangladesh, as the appropriate site to establish the cement factory. The choice was not only driven by raw material considerations, but also by the total cost of transportation. Bangladesh lacked quality lime ores and, hence, it was crucial to place the plant as close to the Indian border as possible. Sylhet was linked with the rest of the country by roads, a railway and the Surma River. The project site was navigable throughout the year, and even during the summer months, barges carrying up to 800 tons of cargo could navigate the river. Although the Roads and Highways Authority of Bangladesh normally did not allow a truck to carry more than eight tons on most roads and bridges in the area, a number of industries had sprung up in Sylhet due to its proximity to energy and raw material sources and access to almost all the major urban centers via the Surma River. Greg Schmidt estimated that the cost per ton of cement to Chittagong, located 250 km away, through road was 6000 Taka3 per ton (Tk/ton) while through barges it was 2700 Tk/ton. Being an integrated cement manufacturer, EBCC had a distinct cost advantage over other cement plants, which were only grinding units. Moreover, the location at Sylhet was expected to allow EBCC to tap the north-eastern cement market in Bangladesh as there were no other competitors in that area, barring the state owned Chhatak Cement Company Limited (CCCL) which produced only 0.20 million tons of cement per year. Finally, BCC had already taken up a number of big projects in the north-eastern region of Bangladesh and possessed an understanding of conducting business in that part of the country. The plant site was farmed by, approximately, seventy-five people, and there were an additional 110 people living in five dwellings in the proposed jetty area. The farmers were willing to sell their lands at market rates and accept semi-permanent jobs of loading and unloading at the jetty.
3

Taka (Tk) is the local currency of Bangladesh.

56 T.R. MADAN MOHAN

AND

SHANTANU DUTTA

Downloaded from ajc.sagepub.com at V I T UNIVERSITY on July 6, 2011

OPERATIONAL ISSUES
After initial investigation, Appel arrived at the decision of setting up an integrated cement plant of 1.2 m tons/yr capacity at the Sylhet division, in the north-eastern part of Bangladesh. The total cost of the project was $ 240 million. To produce 1.2 m tons/yr of cement, 1.5 m tons of limestone, 280,000 tons of clay and 140,000 tons of sandstone were needed. When the Indian subcontinent was partitioned, Bangladesh was carved from the delta and the Himalayan foothills. The country had no commercial limestone and sandstone deposits, although large deposits were present just across the Indian border. The limestone and sandstone would be purchased from Meghalaya, India, approximately 20 km away from the project site. The Meghalaya limestone deposit was estimated at 2,166 m tons and had an unconfirmed reserve of another 180 m tons. Clay was to be obtained from the nearby northern boundary of the plant site. Gypsum, a waste material in the manufacture of phosphoric acid fertilizer, was easily available from the Chittagong Fertilizer Factory. One option was to transport limestone and sandstone by a 17 km long aerial ropeway from MeghalayaBangladesh border to the plant site and 3 km by road from the mine site. The other option was to directly haul the limestone by road or river. The second option meant that the lead time depended on the throughputs of the checkposts across the borders and such uncertainty was not desirable. Schmidt estimated the price of limestone and sandstone to be 10 to 15 per cent higher if these materials were quarried by road. Moreover, a dedicated ropeway-line passing across the river and quarry region was perceived to be more manageable across borders by the respective defence ministries as they could post a team at the loading and unloading points to control international border movements. Schmidt expected the crushed limestone and stone to be transported inside closed buckets to prevent any loss of material, dust and spillage. The enclosure was important as crushed limestone and sandstone falling down from the ropeway could pose a hazard to persons working underneath. There were no scenic areas or areas of historical interest along the ropeway route whose value could be affected by the ropeway pillars and rope. The buckets would be sprayed with water to control fine dust particles prior to the unloading of the content into the storage area. The storage area contained sufficient crushed limestone and sandstone for at least fifteen days of the plant operation. The crushed limestone and sandstone stockpile were sprayed with water to control the dust. Lam Mawshun Minerals Private Ltd of India, one of the major mines in Meghalaya and potential limestone and sandstone supplier to the Project, had guaranteed a longterm limestone supply. It had also submitted a copy of the No Objection Certification of their mining operation issued by the Ministry of Environment and Forest of India on 15 January 1995 providing proof that their mining operations complied with all safety
KLAUCH INTERNATIONAL 57
Downloaded from ajc.sagepub.com at V I T UNIVERSITY on July 6, 2011

and environmental regulations, laws and standards required by the relevant Government authorities in India. Though Bangladesh and India had significant cross-border trade, political differences and skirmishes along the borders were occasional irritants between the two neighbours. CCCL, the sole government owned integrated cement plant in Bangladesh, was sourcing its limestone from a mine in Meghalaya, a state in India. Although the mine was not owned by CCCL, it had never encountered any major problems.

INCENTIVES OFFERED BY BANGLADESH GOVERNMENT FOR THE EURO-BANGLA PROJECT

The Government of Bangladesh agreed to a seven-year tax holiday and lower import duty on limestone (7.5 per cent) as compared to clinker import duty (15 per cent) or cement import duty (25 per cent). There were no federal restrictions on dividend repatriation. Moreover, if the said company was listed on the Dhaka or Chittagong Stock Exchange, Klauch would not be bound by any lock-in period.

APPELS APPROACH
Appels plan was to set up two companies, EBCC in Bangladesh to produce and market cement in Bangladesh, and the Euro Mining Private Limited (EMPL) in Meghalaya, India, which would carry out mining operations (for limestone and shalemain raw materials for cement) and export limestone and shale to the plant at Sylhet (EBBC). EMPL would be a 100 per cent subsidiary of EBCC. Setting up of two separate firms was preferable because of local registration requirements with government officials and for the smoother transfer of raw material across the border. The planned investment of US $20 million in Meghalaya was significant for that small Indian state and would enable it to add value to a bountiful natural resource that otherwise had little economic value due to the states own tiny market and remoteness from the rest of India. Appel estimated that EBCC would create 282 permanent jobs in Bangladesh and Meghalaya. Initially, seven expatriates would be permanently based in Bangladesh. He estimated that it would take three years to build the plant and production roll out was expected in mid 2002. Based on tentative discussions with the multilateral agencies, Appel arrived at a tentative financial plan which is shown in Exhibit 5. EBCC was expected to sell its entire products in Bangladesh in the local currency while its debt was in foreign currency. In 1999, no financial institutions in Bangladesh offered any long-term hedging instruments. Moreover, Bangladeshi Taka was being devalued vis--vis US Dollar continuously. Federal bank had limited devaluation to around 56 per cent per annum and

58 T.R. MADAN MOHAN

AND

SHANTANU DUTTA

Downloaded from ajc.sagepub.com at V I T UNIVERSITY on July 6, 2011

even during the recent Asian crisis, Bangladeshi Taka did not experience any free fall unlike Indonesian (Rupiah), Malaysian (Ringit) or Thai (Baht) currency. At the end of 1998, the buy/sell margin was approximately 0.6 per cent. It had been a major concern for Klauch to arrange $ 240 million for the project. Although it had much larger plants with higher investments, the goings had been tough given the investors concern on the risks associated with Bangladesh. The financial projection of the EBCC project is shown in Exhibit 6. The recent financial crisis in South-east Asia had made investors more cautious in terms of investing in the region. The multilateral funding agency indicated their interest in projects with an eight-year maturity period. After reviewing all the facts and figures, Appel knew that the Board would probe him on the overall strengths and weaknesses of the EBCC project and its associated risks. Given that the corporate weighted average cost of capital (WACC) was 10 per cent, was the EBCC project attractive and the investments strategic in nature? Appel knew that his MBA skills from Wharton would be put to test when he made his presentation the next week. Please address all correspondence to T.R. Madan Mohan, Director Consulting, ICT Practice, Frost and Sullivan, 101, 1st Floor, Prestige Loka, 7/1, Brunton Road, Bangalore 560 025 and Shantanu Dutta, Assistant Professor, Department of Business Administration, Schwartz School of Business and Information Systems, St Francis Xavier University. E-mail addresses: mmohan@frost.com, sdutta@stfx.ca
Exhibit 1 Incentives Offered by the Bangladesh Government to Attract FDI Items Corporate tax Tax holidays Policies 35% for publicly traded companies, 40% for non-listed companies For industrial enterprises in the Dhaka and Chittagong Divisions (excluding Hill Tract districts of Chittagong Division): 5 years For enterprises in the Khulna, Sylhet, Barisal and Rajshahi divisions, and the 3 Chittagong hill districts: 7 years Allowed a) on royalties, technical know-how fees received by any foreign collaborator, firm, company, and expert, b) on income tax for up to 3 years for foreign technicians employed in the industries specified in the relevant schedule of the income tax ordinance, and c) on capital gains from the transfer of shares of public limited companies listed with a stock exchange 5% ad valorem, payable on capital machinery and spares imported for initial installation. Value added tax was not payable for imported capital machinery and spares No limitation pertaining to foreign equity participation. Non-resident institutional or individual investors could make portfolio investments in stock exchanges in Bangladesh (Exhibit 1 contd )

Tax exemptions

Import duty Foreign equity

KLAUCH INTERNATIONAL 59
Downloaded from ajc.sagepub.com at V I T UNIVERSITY on July 6, 2011

(Exhibit 1 contd ) Remittances abroad No prior approval of the Bangladesh Bank required for remittance of profits to their head offices by foreign firms and companies operating in Bangladesh, issuance of shares to non-residents against investment for setting up industries in Bangladesh, and remittances of dividends on such shares to the non-resident investors.

Source: IMF country database. Exhibit 2 Some Economic Indicators of Bangladesh 1990 GDP Growth rate Inflation (consumer prices, annual %) Market Rate (Taka/US $) Official Rate (Taka/US $) Bank lending rate-primary rate Bank lendingworking capital 5.1 4.1 36.4 35.1 9.75 11.0 1991 5.3 4.1 38.66 37.88 9.5 11.0 1992 5.2 6.5 39.9 39.4 9.5 10.75 1993 5.4 5.3 40.25 40.2 9.7 10.25 1994 5.2 4.7 41.2 41.1 5.2 8.0 1995 4.4 4.3 41.5 41.4 5.5 8.5 1996 5.4 4.1 41.8 40.0 12.2 14.0 1997 5.7 5.2 43.9 43.6 7.8 14.1 1998 5.6 8.3 46.8 46.7 8.3 15.5 1999 5.7 6.2 49.1 49.1 9.1 15.8

Source: Statistical Yearbook of Bangladesh, IMF country indicators database, Asian Development Bank. Exhibit 3 Bangladesh Cement Market: Production, Consumption and Import 1992 Construction as a percentage of GDP Local Production (m tons) Import (m tons) Import value in US $ Avg Import price/50 kg bag in Taka Selling Price/50 kg Bag in Taka 5.87 1993 1994 1995 1996 1997 1998 1999 2000E 2001E 2002E 2003E 2004E 5.9 5.87 5.6 5.8 6.2 5.9 5.95 6.9 7.8 9.1 9.2 9.4

0.88 1.22 .56 .60

0.98 1.96 .62 .67

1.01 2.03 .67 .61

0.86 1.65 .55 .67

0.98 1.12 1.29 1.99 2.78 2.05 .62 .67 .73 .61 .71 .87

1.71 2.93 .80 .89

2.65 2.29 120 101

3.51 1.80 156 109

4.43 1.26 199 112

5.04 1.04 234 120

5.66 0.85 276 130

100

.96

.94

.93

.92

.99

131

145

160

180

190

200

208

Source: Bangladesh Bureau of Statistics, UNIDO.

60 T.R. MADAN MOHAN

AND

SHANTANU DUTTA

Downloaded from ajc.sagepub.com at V I T UNIVERSITY on July 6, 2011

Exhibit 4 Cement Production Process Cement production involves the grinding of the limestone, sandstone and clay to the required size and consistency. To minimize the energy requirement, the raw materials are preheated. The mixture is then fired in the kiln calciner where the limestone, clay and sandstone form a clinker. The clinker is ground, and gypsum is added to control the hardening period of the cement. The ground clinker and gypsum mixture is now ready for marketing as portland cement. Portland cement is bagged and stored in the warehouse. Each ton of cement requires about 1.7 ton of limestone, gypsum and silica. By volume, limestone accounts for about 80 per cent and clay 19 per cent of the intermediate product, that is, clinker. Gypsum is later added to clinker in the ratio of 4 : 96 to obtain cement. There are two basic types of cement manufacturing processes, the wet process and the dry process. In recent years, many of the primary lenders, including Asian Development Bank, have been supporting industrial projects with low environmental degradation. The key differences are summarized below. Characteristics Process Wet Process The raw material is blended with water to produce a slurry, which is pumped directly into the cold end of the kiln. The slurrying process helps homogenize the material High because the water must be evaporated out of the slurry mixture 165 kg of furnace oil to produce one ton of clinker Produces dust from grinding and mixing of raw material, dust from clinker grinding and bagging; and requires more wastewater Dry Process Involves mixing a smaller amount of water with the raw material, which is then exposed to the exit gases from the kiln prior to entering the kiln chamber Less energy intensive

Energy intensity

Furnace oil consumption Environmental costs

85 kg of furnace oil to produce one ton of clinker Produces less dust from grinding and mixing of raw material, less dust from clinker grinding and bagging; and requires less wastewater used for bearing cooling, and sewage discharge from staff housing and offices Low disposal of solid wastes and dislocation of farmers (along the area of projects)

Social costs

Significant disposal of solid wastes and dislocation of farmers (along the area of projects)

Sources: 1. Portland Cement Association Website: www.cement.org/basics/howmade.asp 2. Cement Industry Federation Website: www.cement.org.au On an average, 40 per cent of total cost of cement production. Note:

KLAUCH INTERNATIONAL 61
Downloaded from ajc.sagepub.com at V I T UNIVERSITY on July 6, 2011

Exhibit 5 Tentative Financial Plan of EBCC Project (Agreed upon with Major Investors) (in Million US$) Equity Klauch BCC Total sponsors ADB IFC IFC - B Loan DEG EIB CDC Local Equity Private Placement Total external funding Total 54.5 4.0 58.5 10.0 10.0 2.0 % Equity1 56.8% 4.2% 61.0% 10.4% 10.4% 2.1% Debt % Debt2 Total 55.5 4.0 59.5 50.0 45.0 15.0 12.0 30.0 12.0 6.5 10.0 180.5 240.0

40.0 35.0 10.0 10.0 29.0 20.0

27.8% 24.3% 6.9% 6.9% 20.1% 13.9%

5.5 10.0 37.5 96.0

5.7% 10.4% 39.0% 100.0%

144.0 144.0

100.0% 100.0%

Source: Project Information Memorandum prepared by IFC. Notes: 1. Percentage of Total Equity 2. Percentage of Total Debt ADB: Asian Development Bank IFC: International Finance Corporation (World Bank) DEG: Deutsche Entwicklungs-Gesellschaft (German Investment & Development Company) EIB: European Investment Bank CDC: Commonwealth Development Corporation

62 T.R. MADAN MOHAN

AND

SHANTANU DUTTA

Downloaded from ajc.sagepub.com at V I T UNIVERSITY on July 6, 2011

Exhibit 6 Cash Flow Projection and Profitability Study for EBCC Project

Fiscal Year Ending December 31: 2000 17,009 73,976 1,254 5,453 1,181 5,135 400 1,741 1,481 6,440 740 3,220 428 1,710 1,050 4,200 6,533 27,899 10,475 46,077 1,001 4,352 1,082 4,327 350 1,400 4,015 16,058 60,395 5,550 4,327 1,400 16,108 65,771 6,000 4,327 1,400 16,258 65,771 6,000 4,327 1,400 16,458 65,771 6,000 4,327 1,400 15,484 2,220 8,214 4,107 1,710 4,200 33,955 2,400 8,880 4,440 1,710 4,200 36,229 2,400 8,880 4,440 1,710 4,200 36,229 2,400 8,880 4,440 1,710 4,200 36,229 2,400 8,880 4,440 1,710 4,200 36,229 65,771 6,000 4,327 1,400 12,062 94,350 102,000 102,000 6,955 7,519 7,519 6,549 7,080 7,080 2001 2002 2003 2004 2005 2006 2007 2008 2009

1999

2010

2011

2012

2013

102,000 102,000 102,000 102,000 102,000 102,000 102,000 7,519 7,519 7,519 7,519 7,519 7,519 7,519 7,080 7,080 7,080 7,080 7,080 7,080 7,080 2,400 8,880 4,440 1,710 4,200 36,229 65,771 6,000 4,327 1,400 12,362 2,400 8,880 4,440 1,710 4,200 36,229 65,771 6,000 4,327 1,400 12,662 2,400 8,880 4,440 1,710 4,200 36,229 65,771 6,000 4,327 1,400 12,962 2,400 2,400 8,880 8,880 4,440 4,440 1,710 1,710 4,200 4,200 36,229 36,229 65,771 65,771 6,000 6,000 4,327 4,327 1,400 1,400 11,179 4,930

KLAUCH INTERNATIONAL 63

Downloaded from ajc.sagepub.com at V I T UNIVERSITY on July 6, 2011

Sales Revenue Raw Materials Packaging Materials Consumables Fuel Power Local Staff Maintenance Cost of Goods Sold Gross Profit Transport SG&A Expatriates Depreciation (Straight Line)

(Exhibit 6 contd )

(Exhibit 6 contd )

Fiscal Year Ending December 31: 2000 6,447 26,137 4,029 19,940 2,908 14,358 1,120 5,582 27,385 33,010 13,322 19,687 27,985 37,786 11,333 26,452 28,185 37,586 9,344 28,241 27,211 38,560 7,356 31,204 23,789 41,982 5,367 36,615 24,089 41,682 3,419 38,262 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 24,389 41,382 1,556 39,826

1999

2011 24,689 41,082 483 40,598

2012

2013 22,906 16,657 42,865 49,114 161 0 42,704 49,114

64 T.R. MADAN MOHAN

56 1,064 0 1,064 89063 0 5,303 30921 0 18,703 29018 0 25,130 20938 0 26,829 15344 279 5,303 984 18,703 1,323 25,130 1,412 26,829 1,560 29,644 0 29,644 11578 1,831 34,784 12,873 21,911 8855 1,913 36,349 16,610 19,739 7186

1,991 37,835 17,827 20,008 5930

2,030 38,569 18,592 19,977 5051

2,135 2,456 40,568 46,658 19,082 19,556 21,486 27,102 4042 2698

AND

Downloaded from ajc.sagepub.com at V I T UNIVERSITY on July 6, 2011

Operating Costs Operating Profit Interest Expenses PBT & Workers Profit Participation (WPP) WPP 5% Profit Before Tax (PBT) Income Tax 40% Net Profit Tax Depreciation (Declining Bal.) Terminal Value of the Project can be considered as 75% of initial investment

Source: Project Information Memorandum prepared by IFC.

SHANTANU DUTTA

REFERENCE
http://banglapedia.search.com.bd/HT/F_0150.htm International Cement Review. 1998. Bangladesh, in Global Cement Report (3rd ed.), p. 64. Dorking, Surrey: Tradeship Publications Ltd. Rahman, S.M. Mahfuzur, http://banglapedia.search.com.bd/HT/F_0150.htm World Bank Publications. 1999. Bangladesh National Report, 1999.

KLAUCH INTERNATIONAL 65
Downloaded from ajc.sagepub.com at V I T UNIVERSITY on July 6, 2011