Infrastructure & Project Finance

Assignment – 10

Name: Anukshan Ghosh

Roll No: 18BM60016

#Q.1
A consultant has been hired to recommend whether or not to construct a
new manufacturing plant for a state-owned cement manufacturing
company in Africa. The company currently has an old facility that requires
more workers per unit of output and much more energy than would be
required in the more modern facilities used in Europe and Japan. The
production process also produces a lot of pollution, but that is not
perceived as a problem as the plant is located far from the wealthier
neighbourhoods of the city. As a state-owned enterprise, the company is
required to provide employment for people who would otherwise be
unable to find a job; about 10% of the workforce currently consists of
poorly paid people who sweep the halls, serve coffee, greet visitors, and
work on landscaping for the factory. Although the facility uses a lot of
energy, that is not a problem; the country produces oil and makes fuel
available to government-owned enterprises at a price that covers the cost
of production, but that is less than half the world price for oil. It is clear
that a company in a developed country would upgrade the plant, but
company management so far has been reluctant to invest in what they
perceive to be a very expensive project. How should the consultant deal
with the issues related to low labour productivity, the “make-work” work
force, the pollution, and energy consumption? Which of these factors, if
any, might tilt the recommendation toward building a more modern plant?
Prepare a case.
#A.1

Biomass, Waste Natural

Oil Coal Units
& renewables gas
2014 0.2 0.3 0.5 2.5 GJ/t
2017 0.2 0.3 0.6 2.4 GJ/t
2030 0.6 0.4 0.5 1.8 GJ/t

At 2017 levels 0.6 GJ/t of Cement is the thermal energy consumption or energy
intensity, produced from Oil. The standards are world average and vary country to
country depending on the level of technology or state of the plant. For our calculations
since the plant is old, we have assumed 1 GJ/t of cement is the energy intensity for
clinker production as the machines are inefficient and ageing and would require more
Ton Oil Equivalent (TOE). Hence for a factory facility with 1 Mtpa production capacity
the oil consumption would be 23,885 TOE, or 170600 barrels oil equivalent (BOE).

Since the point of reference is 2017, the oil prices per barrel were $50.84/ barrel, hence
for 170600 barrels the total cost for sourcing from international markets should stand at
$8,700,600. But since the country is oil rich and the oil is sourced from a government
owned enterprise at less than half the price the loss in revenue to the government
would be at least $4,350,300.

The company currently has an old facility that requires more workers per unit of output
than would be required in the more modern facilities as in Europe and Japan. Hence if
we consider a modern facility in India, the total manpower required together in clinker
and the cement manufacturing plant of 1 Mtpa capacity would be 1000, considering a
margin or 1.75, the factory should have near about 1750 employees of which, 10% are
the lowest in the strata and supported by the government and hence 175 people.
Considering the minimum support income in 2017 Africa which was $50, for 175
employees that stands at $8,750. The livelihood support hence is a social benefit
extended by the facility which will be rolled back if the management plans to go for a
modern facility that reduces workers and leaves them vulnerable and open to fend for
themselves.

Environmental Impacts of Actions to Reduce Pollution

Action Effect on Plant Pollution Environmental Impact
Improve kilns; install Dramatic reduction in Workers' and residents'
ESPs; improve oil shale dust emissions health; tree and plant
and cement grinding, growth and livestock
bagging and transport health productivity;
operations soiling of buildings,
streets and households;
town image; real estate
values; tourism; factory
operating costs
Energy saving in slurry Lower SO 2 /NO, Health; corrosion; plant
preparation emissions and tree growth; soiling

Environmental impacts were classified, with respect to economic valuation, into

quantifiable and non-quantifiable. Among the former are: health; forestry; agriculture;
soiling; real estate value and operating costs. Non-quantifiable impacts, for the
purposes of this study, are those for which value judgments would be required, e.g.
regarding factory’s image, or for which data is unavailable or their economic
significance is minor or are practically the same in both scenarios.

The plant's operating costs would be affected by the environmental investments in

several ways. It would be possible to return about 2/3 of the dust collected from ESPs
to the production process, thus saving limestone raw material. However, remaining
dust would be disposed in the new industrial waste dump at an annual cost of $69,470
at full capacity. The change in benefits and costs associated with ESPs. At full
production of 1 Mtpa, net benefits from ESPs on operating costs would be $173,000.

Impact of ESP Operation on Operating Costs

Savings USD/Yr
Raw material saving 642,450
Cost
ESP Operating costs 400,350
Dust removal 69,470
Net savings 173,000
Soiling and Material Effects

Soiling of the town from the thousands of tons of cement dust that have been falling
on the town impose a dual burden. Most studies of the impact of air pollution on
buildings and materials have been concerned with acid pollutants like SO2 & NO, and
acid corrosion. The main pollutant is alkaline cement dust, not known to cause
corrosion but, in combination with moisture, is damaging to painted surfaces. The cost
of surface cleaning and painting was estimated at about $577,000.

Total welfare loss is greater, because households experience reduced utility from
having to live in a dirty environment. Also, if repairs and maintenance are not kept up,
the result would be more costly repairs later or reduced property values.
Comprehensive studies of the cost of soiling in the US have found that the benefit of
reduced soiling from lower TSP corresponded to $350,000.

Real Estate

Property values for the purpose of determining taxes and fees for use of state-owned
land. The values were $0.9/m2 in town limits and $0.05/m2 beyond town limits. Studies
have concluded that, a 1% increase in TSP decreases property values by 0.05% to 0.14%.
Typically, this relationship is not linear, especially when pollution levels increase
substantially. Based on this information, it could conservatively be assumed that when
TSP reduction would be close to 80%, real estate values would increase by at least 5%.

The average value is $19.2/m2 for buildings in towns. The total town area of 1,001 ha, of
which about 66% is buildings and the remaining vacant lots and fields. In economic
valuation, land and unskilled labour, as non-tradable, should be shadow-priced, while
construction materials and skilled labour should be valued at the appropriate border
price. Thus the increase in economic value of buildings in from the reduction in
pollution was estimated at 1,001 ha x 0.66 x 0.005 x $192,000 = $6.3 million. The value
of undeveloped land is about 10% that of buildings and the corresponding economic
impact from reduced pollution would be 1,001 ha x 0.34 x 0.10 x 0.05 x $192,000 = $0.33
million, for a total real estate benefit of $6.6 million.

Forestry

About 46 percent of the affected area is covered by commercially exploited forest. The
total volume of the forest stands was estimated at nearly 700,000 m3, comprised of
deciduous trees (51%), pine (38%) and spruce (11%). It has been established that cement
dust from the plant retarded tree growth by obstructing photosynthesis or by
negatively affecting soil composition. The average growth deficit in the affected area
(up to 5 km west and 10 km east of the plant) compared to non-affected areas is 12%
for pine and 20% for spruce. These percentages correspond to volumes of 1,000 m3 for
pine and 420 m3 for spruce each year.

The price for pine and spruce timber averaged $50/m3. Processing and transport costs
were estimated at $15/m3, which was subtracted from the price, giving export parity
price of $35/m3. Thus, the benefits from increased timber production once the pollution
decreases were estimated at $34,790.

Agriculture

Cement dust fallout affects about 1,850 ha of agricultural land. Crops mainly consist of
barley, wheat, oats and potatoes. The impact is lower, as dust fallout decreases,
averaging a yield reduction of 10 percent over the affected area of 1,850 ha of farmland.
Crop quality is also affected by dust downfall. Handling and transport costs from
factory were added, making the farm gate value at import parity prices US$830/ha.
With the reduction of dust fallout, yields would increase by 10 percent. The impact on
quality is not quantified because of lack of data. Thus, the total agricultural benefit from
increased crop production in the affected area after pollution has been reduced, would
be 1,850 ha x 0.1 x US$830/ha = $101,000.

Health

The plant's pollution causes significant health problems, related primarily to respiratory
and dermatological illnesses. Possible impacts related to both chronic and acute
respiratory problems that could best be studied with a time-series methodology
spanning many years. The results are shown.

Town: Benefits from a 20µg/m3 Reduction in PM1O Annual Concentration

No. of Annual Avg. Morbidity Total Annual
affected Morbidity (# Cost (USD/ Morbidity
people of Incidents) Incident) Cost (USD)
Hospital Admittance 4700 1.13 6306 7126
Emergency room visits 4700 22.13 178 3939
Symptom days 4400 16104 6 96624
Restricted activity days 4400 5060 51 258060
Children's LRI 300 10.14 132 1338
Asthma incidents 235 153.22 30 4597
Total 371684
Thus the total health benefit from reduced pollution, including the cost of treatment
(medical facilities, medical personnel, medicine) as well as the cost of days lost from
work, was estimated at $372,000.

So if we add all the benefits together the figure stands at $12,567,050 or $12.5 million.
In terms of savings it has been demonstrated that the project will bring in substantial
revenues from streamlined operations and put extra savings in the government’s
pocket as well as give more social benefits and reduced social costs for the
management and the country as a whole.

For labour productivity it has been demonstrated from normal economic theory that
changes in technology are the only source of permanent increases in productivity.
Hence, for a permanent positive change in the ‘make-work’ attitude of the labourers
the factory must go for technology upgradation and improvements in the factory.

Conclusion: The management should go for new factory.

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