The reduction, if approved by all partners and lenders, is expected to negate the impact of a proposed increase in the project's equity component to reduce the debt portion, as had been suggested by the lenders' consortium.

The proposal for reduction in the project cost has become essential for the local fertiliser companies as urea prices in the international market have fallen sharply to around $80-90 per tonne from its previous levels of $120-plus per tonne last year.

This is below the floor price fixed for urea to be produced by the joint venture. This affects domestic interests as the Indian partners will have to buy back the entire urea produce from Oman where the project is being setup, sources said.

When the project was first conceived in 1994-95, international urea prices were ruling at the$130-135 per tonne levels.

A high-powered delegation from the country, including a top-level government representative, will table the proposal at a crucial meeting with joint venture partner Oman Oil Company, as well as lenders and export-credit agencies, to be held in London in the second week of January.

The Oman India Fertiliser Company is a 50:50 joint venture between Oman Oil Company and the consortium comprising RCF and Kribhco. Iffco, the other fertiliser cooperative, is the third local company to have evinced interest in participating in the venture.

Sources said that Iffco, which has yet to officially announce its participation in the project, has also strongly supported the proposal for reducing the project cost.

The partners and lenders, at the London meeting, are expected to discuss various financial terms and come to a final agreement. The meet is being coordinated by Lazard Credit Capital, the financial advisors to the Indian company.

The financial closure of the project has alreadybeen delayed by a few months and any delay in negotiating the final terms is undesirable, sources said.

As per the changes proposed in the debt-equity ratio (3:1) of the project, the equity component is to go up to 33 per cent from 25 per cent. The debt portion will thus be reduced from 75 per cent to 67 per cent.

The debt portion will go down to $750 million from the earlier envisaged $840 million, while the equity will increase to $450 million from $360 million.

Thus, Oman Oil Company together with the Indian equity partners will have to bring in $90 million (around Rs 387 crore) more than the originally proposed $360 million (Rs 1,548 crore), to expand the equity base to $450 million (around Rs 1,935 crore). The increase in equity base was suggested by the lenders' consortium, and the clause to flush in more equity had been accepted by both the parties. However, it will have been rather arduous for the Indian companies to pump in more money for the revised equity.

The government, said sources, waswary of the fact that the two companies will have to pump in a higher investment if the equity component is raised. A cost reduction will provide succour to the local participants, sources said.

The project encompasses an ammonia-urea complex which will produce 3,600 tpd of ammonia and 4,400 tpd of granulated urea. It will take 33 months for the project to go onstream.

Coface may rejoin consortium

French export-credit agency, Coface, which had earlier withdrawn from its commitment of providing export guarantees to the Oman India Fertiliser project, is likely to stage a comeback.

Coface had withdrawn owing to uncertainty regarding the viability of the fertiliser project resulting in a delay in its financial closure. Sources said that the agency has now "verbally agreed" to rejoin the lenders' consortium. The other agencies involved in the project are Face of Italy and ECGD of UK. The consortium of lenders include Banque Nationale de Paris, Arab Banking Corporation and JP Morgan.

Sources saidthat Coface had earlier promised to fund around 40 per cent of the debt component for the project. The agency, however, was not convinced that India will buy back the entire produce of urea. Following the exit of Coface, the other members of the consortium had put forward a fresh set of conditions which included raising the equity component. Coface, sources said, is now convinced with the set of terms of financing closure being considered by the joint venture partners.

INSIGHT
Loans may not be recovered

The immediate gain of a $100-million reduction in Oman India Fertiliser's project cost will be that the Indian partners' equity contribution will be $16.67 million lower. However, irrespective of whether or not this is done, the local partners may together have to shell out up to $40.60 million per year as loans to the joint-venture company. The prevailing price for urea is about $85 per tonne and it is unlikely that prices will climb up over $90 per tonne in the foreseeable future as bothChina and India are unlikely to be the big importers they used to be. Besides, prices of natural gas have been touching new lows, making it cheaper to produce urea.

The joint-venture agreement stipulates that the difference between the prevailing international price and the floor price, which will be treated as a loan, will be adjusted against future purchases. What is a matter of concern is: What happens if the international prices fail to rise above the floor price of $118 per tonne of urea? The only logical answer at the moment appears to be that RCF and Kribhco will continue to advance loans to Oman India Fertiliser without any hope of recovering them ever.