A REPORT

ON

WORKING OF FINANCE WITH REFERENCE TO CAPITAL

BUDGETING

BHILAI STEEL PLANT

ACKNOWLEDGEMENT

1

We express our sincere thanks & regards to Bhilai Steel Plant, for giving us the

opportunity to study on the topic “Working of finance with reference to capital

budgeting”.

First and foremost we express our hearty thanks to our co-ordinator Mr.

S.S.Kshatriya (Manager, Finance Expansion) for his guidance. We also express our

sincere thanks to all the heads of concerned sections of finance department, Mr.G.V.Rao,

Mr.N.Tamilarasan and Mr.A.Kashipati Rao for their kind cooperation in this project

work.

We are also thankful to all the staff of Bhilai Training Institute & HR department

for their kind cooperation to complete this project work successfully.

......

2

CERTIFICATE

This is to certify that Muktesh Kanhe students of FORTUNE INSTITITE OF

INTERNATIONAL BUSINESS, NEW DELHI has completed their field work report

at BHILAI STEEL PLANT on the topic REPORT ON WORKING OF FINANCE

WITH REFERENCE TO CAPITAL BUDGETING and has submitted the field work

report in partial fulfillment the requirement of 2 Year Full Time Post Graduate Diploma

in Management (PGDM) for academic year 2008-10. They have worked under our

guidance and direction. The said report is based on bonafied information.

I wish them best of luck for their future.

S.S.Kshatriya

MANAGER (Finance Expansion)

BHILAI STEEL PLANT

3

Index

1. INTRODUCTION………………………………………………………………… 6

2. STEEL AUTHORITY OF INDIA LIMITED (SAIL)…………………………... 8

3. BHILAI STEEL PLANT (BSP)…………………………………………………... 23

4. STATEMENT OF OBJECTIVE…………………………………………………. 32

5. FINANCE AND ACCOUNTS DEPARTMENT OF BSP………………………. 33

6. PROJECT FINANCE AND ACCOUNTS………………………………………. 35

7. CAPITAL BUDGETING………………………………………………………….. 48

8. CONCLUSION……………………………………………………………………. 63

9. BIBLIOGRAPHY ………………………………………………………………… 64

4

INTRODUCTION

There’s a little bit of SAIL in everybody’s life….

“STEEL is the basic framework which has built nations, and it is on this strength that

nation stand apart. This manmade metal has an extraordinary quality of contributing to

every aspect of life. While it keeps the wheels of industry turning. It also lends ever-

lasting quality to all kinds of structure and infrastructure.”

‘SARDAR VALLABBHAI PATEL’

This project has been undertaken to study the procedures and practices followed in

Project finance and accounts which included the capital budgeting, project concurrence,

zonal accounts and work completion and Import section from time to time. Bhilai Steel

Plant exports its products to various countries around the world and also imports items

like Coking Coal, Minor Raw Materials, Stores & Spares and Capital Plant &

Equipments from around the globe. This report is prepared on the basis of the extensive

study carried out at Finance & Accounts Department of SAIL, Bhilai Steel Plant.

Changes are inevitable with the passage of time. So is the case with the functions

of Finance & Accounts Department of any organization. This department is gradually

assuming advisory role to management apart from its basic function of financial

management and book keeping. The F & A Department of Bhilai Steel Plant is divided

into various sections and each section specializes in different activities. In project

Finance and Accounts Import Accounts Section deals with the entire activities relating to

import of goods and services , involving transaction in foreign currency.

5

HISTORY

During struggle for independence, Pt. Jawaharlal Nehru, our first Prime Minister, had a

very clear vision about the role of steel in the development of our country. Although

TATA Iron and Steel Company (TISCO) have been established in 1907 marking the

beginning of Indian Steel Industry followed by Indian Steel Company (1918), they were

too small to meet the development requirements of a big country like, India. Therefore, in

the 1st industrial policy resolution of Government. Soon after independence, Govt.

decided to establish steel plants in public sector only. However, work could be started at

fasted pace only in 1954 when Hindustan Steel Ltd., was formed and three steel plants of

1MT capacity each were established with provision of further expansion at Bhilai,

Rourkela and Durgapur with assistance from U.S.S.R, West Germany and U.K.

respectively.

To improve the functioning of Steel Industry, Govt. decided to form a holding company

during 1972, which was named as Steel Authority of India Limited (SAIL) and was

incorporated on January 24, 1973 with an authorized capital of Rs.2000 crores.

SAIL was formed by the registration of a company under the companies Act and not by

the Act of Parliament, Govt., decided to abandon the holding company concept in 1978

and a bill was presented to Lok Sabha. Accordingly, SAIL was again recognized in the

following manner.

Hindustan Steel Ltd., Bokaro Steel Ltd., Salem Steel Ltd., SAIL international Ltd., Bhilai

Ispat Ltd., Rorkela Ispat Ltd., Durgapur Mishra Ispat Ltd., wholly owned subsidiaries of

SAIL merged into it and started functioning as units of SAIL.

6

MECON, HSCL and NMDC became independent under companies Act and started

functioning under Dept. of steel. However, Kiriburu and Meghatuburu Iron Ore Mines

were attached with BSL as their Captive Mines.

Bharat Refactories Ltd., also became

independent under the Dept. of steel and

refactory units also came under them.

Steel Authority of India Limited (SAIL)

Steel Authority of India Limited (SAIL) is the leading steel-making company in India. It

is a fully integrated iron and steel maker, producing both basic and special steels for

domestic construction, engineering, power, railway, automotive and defense industries

and for sale in export markets.

Ranked amongst the top ten public sector companies in India in terms of turnover, SAIL

manufactures and sells a broad range of steel products, including hot and cold rolled

sheets and coils, galvanized sheets, electrical sheets, structural’s, railway products, plates,

bars and rods, stainless steel and other alloy steels. SAIL produces iron and steel at five

integrated plants and three special steel plants, located principally in the eastern and

central regions of India and situated close to domestic sources of raw materials, including

the Company's iron ore, limestone and dolomite mines. The company has the distinction

of being India’s largest producer of iron ore and of having the country’s second largest

mines network.

7

SAIL's wide range of long and flat steel products is much in demand in the domestic as

well as the international market. This vital responsibility is carried out by SAIL's own

Central Marketing Organization (CMO) and the International Trade Division.

With technical and managerial expertise and know-how in steel making gained over four

decades, SAIL's Consultancy Division (SAILCON) at New Delhi offers services and

consultancy to clients world-wide.

SAIL has a well-equipped Research and Development Centre for Iron and Steel (RDCIS)

at Ranchi which helps to produce quality steel and develop new technologies for the steel

Industry. Besides, SAIL has its own in-house Centre for Engineering and Technology

(CET), Management Training Institute (MTI) and Safety Organization at Ranchi. Our

captive mines are under the control of the Raw Materials Division in Kolkata. Almost all

the plants and major units are ISO Certified.

VISION: TO BE A RESPECTED WORLD CLASS CORPORATION AND THE

LEADER IN THE INDIAN STEEL BUSINESS IN QUALITY, PRODUCTIVITY,

PROFITABILITY AND CUSTOMER SATISFACTION.

8

ORGANISATION STRUCTURE OF SAIL

9

DIRECTOR (TECH)

DIRECTOR (PERSONNEL)

DIRECTOR (FINANCE)

CHIEF VIGILANCE

EXE. DIR (OPRAN)

EXE. DIR (IA)

ED (TECH & LEGAL SERVICE)

EXE. DIR (PROJECTS)

EXE. DIR (CMMG)

EXE. DIR. (CIG)

EXE. DIR. (CP)

CHAIRMAN

MANAGING DIRECTOR, BSP)

MANAGING DIRECTOR, BSL

MANAGING DIRECTOR, RSP

MANAGING DIRECTOR, DSP

EXE. DIRECTOR VISL

EXE. DIRECTOR SSP

EXE. DIRECTOR ASP

SAIL Today

SAIL today is one of the largest industrial entities in India. Its strength has been the

diversified range of quality steel products catering to the domestic, as well as the export

markets and a large pool of technical and professional expertise.

Today, the accent in SAIL is to continuously adapt to the competitive business

environment and excel as a business organization, both within and outside India.

Major Units

Integrated Steel Plants

† Bhilai Steel Plant (BSP) in Chhattisgarh

† Durgapur Steel Plant (DSP) in West Bengal

† Rourkela Steel Plant (RSP) in Orissa

† Bokaro Steel Plant (BSL) in Jharkhand

† IISCO Steel Plant (ISP) in West Bengal

Special Steel Plants

† Alloy Steels Plants (ASP) in West Bengal

† Salem Steel Plant (SSP) in Tamil Nadu

† Visvesvaraya Iron and Steel Plant (VISL) in Karnataka

Subsidiary

† Maharashtra Elektrosmelt Limited (MEL) in Maharashtra

† Joint Ventures

SAIL has promoted joint ventures in different areas ranging from power plants to e-

commerce.

NTPC SAIL Power Company Pvt. Ltd: A 50:50 joint venture between Steel Authority

of India Ltd. (SAIL) and National Thermal Power Corporation Ltd. (NTPC Ltd.), it

10

manages the captive power plants at Rourkela, Durgapur and Bhilai with a combined

capacity of 314 megawatts (MW).

Bokaro Power Supply Company Pvt. Limited: This 50:50 joint venture between SAIL

and the Damodar Valley Corporation formed in January 2002 is managing the 302-MW

power generation and 1880 tonnes per hour steam generation facilities at Bokaro Steel

Plant.

Mjunction Services Limited: A joint venture between SAIL and Tata Steel on 50:50

basis, this company promotes e-commerce activities in steel and related areas.

SAIL – Bansal Service Centre Limited: SAIL has formed a joint venture with BMW

industries Ltd. on 40:60 basis to promote a service centre at Bokaro with the objective of

adding value to steel.

Bhilai JP Cement Limited: SAIL has also incorporated a joint venture company with

M/s Jaiprakash Associates Ltd to set up a 2.2 MT cement plant at Bhilai.

SAIL has signed an MOU with Manganese Ore India Ltd (MOIL) to set up a joint

venture company to produce Ferro-manganese and silica-manganese at Bhilai.

SAIL into the Future

Much has happened ever since SAIL’s Corporate Plan was announced in 2004.

Investment plans for the three specialty steel plants have been firmed up. Company has

grown in size with the amalgamation of IISCO (now renamed as IISCO Steel Plant).

Production targets have been revised from 19 million tones (MT) of steel to about 24 MT.

Estimated investments has increased from Rs 25,000 crore to around Rs 40,000 crore.

And the time period has been squeezed by two years, bringing the targeted year of

completion of major projects from 2012 to 2010.

11

Saleable Steel Production Capacity

SAIL’s Growth Plan 2010

Much has happened ever since SAIL’s Corporate Plan was announced in 2004.

Investment plans for the three specialty steel plants have been firmed up. Company has

grown in size with the amalgamation of IISCO (now renamed as IISCO Steel Plant).

Production targets have been revised from 19 million tones (MT) of steel to about 24 MT.

Estimated investments has increased from Rs 25,000 crore to around Rs 40,000 crore.

And the time period has been squeezed by two years, bringing the targeted year of

completion of major projects from 2012 to 2010.

12

Saleable Steel Capacities (MT)

PLANT 2010

Bhilai Steel Plant 6.21

Durgapur Steel Plant 2.85

Rourkela Steel Plant 2.90

Bokaro Steel Plant 6.50

IISCO Steel Plant 2.37

Alloy Steels plant 0.43

Salem Steel Plant 0.36

Visvesvaraya Iron & Steel Plant 0.22

Dynamic Adjustments

SAIL’s Growth Plan is essentially a directional document. With the changing market

scenario and technological advancements the company shall continue to fine-tune our

growth plans keeping in mind the steel plants’ operational requirements.

As such, the company’s growth plan is in tune with the boom being experienced by the

global steel industry and the high rates of growth being established by the Indian

economy and the major steel-consuming sectors. The Endeavour is not only in tandem

with India’s National Steel Policy of achieving a production level of 110 MT of crude

steel by the year 2020, but also amply reflects the company’s Vision of achieving market

leadership. The target of 110 mt of steel has been worked out on the basis of a

compounded annual growth rate of 7.3% per annum.

13

Enhancing Competitiveness

The objective, however, remains the same. Beside capacity enhancement, the growth plan

addresses the need of the SAIL plants and other units towards eliminating technological

gaps in the production process, improving productivity levels for all stages right from raw

materials to rolling mills, bringing in technologies for energy savings, yield

improvement, pollution control and automation. The long term plan is to build

sustainable competencies.

MECON, a leading consultant in the field of metallurgical industry, has been assigned the

task of preparing composite project feasibility reports (CPFRs) for Bhilai, Durgapur,

Rourkela and Bokaro Steel Plants of SAIL, indicating various schemes required to be

implemented along with all requisite auxiliary services, essential utilities logistics and

infrastructure support necessary to achieve the enhanced production.

The key technological up-gradations undertaken during the growth period is expected to

achieve the following:

1. 100% production of steel through BOF route

2. 100% processing of steel through continuous cast route

3.gradual implementation of alternative fuel injection methods like coal dust/tar

injection in all the blast furnaces

4. state-of-the-art process control computerisation / automation

5. state-of-the-art online testing and quality control facilities

6. Gradual implementation of Enterprise Resource Planning (ERP) across its plants.

The focus is on producing wider product-mix with emphasis on value added products and

improved product quality. Some of the new products that are in the pipeline are SAW line

pipes for the fast-growing oil and gas sector, CRGO steels - a product in severe short

supply globally, wide flange beams for the construction sector and color coated sheets.

The IT initiatives like ERP are also being integrated with the existing business systems.

14

SAIL’s growth plan 2011-12 also entails modernization of three of its special steel plants

– Alloy Steels Plant (ASP) at Durgapur, Visvesvaraya Iron & Steel Plant (VISL) at

Bhadravati and Salem Steel Plant (SSP) at Salem. This will ensure increase in the

production of saleable steel from SAIL’s special steel plants from a level of 0.379 MT in

2004-05 to 0.993 MT by 2010.

Ensuring Raw Materials

The iron ore production has been estimated to go up to the level of 35 MT per annum.

The plan includes developing two major mechanised iron ore mines – at Rowghat in the

western region and Chiria in the east. Both the mines will be developed with latest

technology to ensure assured supply of required quantity of quality iron ore to SAIL

plants. Under its corporate plan SAIL aims at setting up of pellet plants (one at Bhilai and

another near Manoharpur), which would enable utilization of huge iron ore fines

generated during the mining operations, apart from reducing cost of hot metal production.

SAIL has adopted the following four pronged strategy to meet the enhanced requirement

of iron ore:

1. Developing new blocks/mines

2. Maximizing production from existing mines

3. Improving the quality of iron ore by suitable beneficiation, and

4. Achieving operating efficiencies by economic scale of operations

Renewal of existing iron ore mining leases and grant of some of the new leases are

essential for making investment for development of new mines and expansion of some of

the mines. This is critical for fulfillment of SAIL’s Corporate Plan.

The total coking coal requirement is likely to increase from the current level of 15 MT to

around 28 MT by 2010. Plans are on the anvil to enter into strategic investments/ tie-ups

15

for coking coal blocks in India and abroad to ensure assured supply of Coking coal.

SAIL’s corporate plan envisages investment in collieries at Tasra, Ramnagore, Chasnalla

and Jitpur.

Prevailing Scenario

True, SAIL is looking into future and the journey has begun. As of now, projects worth

around Rs 28,000 crore are in various stages of implementation. This includes ongoing

28 numbers of projects worth more than Rs 2,800 crore spread over six production units

across the country. The tendering for rest of the approved projects worth around Rs

25,000 crore is presently under progress. And, more importantly, three new production

facilities have recently been commissioned at a total cost of Rs 187 crore at Bhilai Steel

Plant (BSP).

In a significant development, the company now obtains consolidated approval for the

major projects instead of piece meal approvals. For instance, the SAIL board has in the

last one year granted ‘in-principle’ approval for the entire package of Rs 1,553 crore of

projects for Sales Steel Plant (SSP), Rs 9,592 crore for IISCO Steel Plant (ISP) and Rs

9,265 crore for Bokaro Steel Plant (BSL).

Some of the important ongoing projects include Installation of Slab Caster at Bhilai Steel

Plant, Installation of Bloom Caster at Durgapur Steel Plant, Installation of Pipe Coating

Plant at Rourkela Steel Plant, Rebuilding of Coke Oven Battery No. 5 and Up gradation

of Automation System of Tandem Mill in CRM Complex at Bokaro Steel Plant and

Installation of Argon Oxygen Decarburization (AOD) and High Powered Electric Arc

Furnace (EAF) at Alloy Steels Plant.

Unique Features

16

As per the Growth Plan, BSL is likely to become the first steel plant in SAIL to have a

state-of-the-art thin slab caster. With this, Bokaro plant will acquire capability to process

100% of steel through continuous casting process. ISP for the first time will boast of

having sinter making facilities with the installation of two new sinter plants and

continuous casting facilities with the installation of continuous billet and beam blank/

bloom casters. The steel plant at Burnpur will also be added with a new wire & rod mill

of 1.2 MT capacity. With the installation of a new Bar & Rod Mill (1.4 million tones) and

a new Structural Mill (0.4 million tones), the production of semis will come down from

current level of 56% to 7% at Durgapur Steel Plant. Similarly, Salem Steel Plant for the

first time will have steel making facilities along with continuous slab caster. Presently,

SSP is entirely dependent on external sources for supply of stainless steel slabs.

Effective Implementation

The mere statistics may not tell the real story. The logistics, the tonnages, the number of

executing agencies, the procedures, the contract labourers, the finance, so on and so forth

– the sheer scale of operations and the range of activities are staggering. Needless to

mention, the key to success lies in meticulous planning, continuous monitoring and

effective finishing. The task becomes all the more daunting due to the additional

challenge of simultaneous management of ongoing operations in steel plants.

On its part, the company firms up concrete plans to pull out all the stops. Integrated

Project Management, Delegation of Power to Project Managers, Prequalification of

Conference with Prospective Bidders, MoUs with Vendors for Regular Jobs and

Performance Evaluation of Contracting Agencies are some of the new initiatives in this

regard. SAIL has also simplified its purchase and contract procedures that will surely go

a long way in facilitating timely completion of the projects on such a large scale.

Human Resource

17

Thrust on human resource development continues with a renewed focus on inculcating a

greater value orientation across the company. A series of initiatives are being taken to

improve the competence level of the employees in tune with changing technologies,

customer demands and market dynamics. Accordingly, training modules have been

redesigned with a clear focus on competence mapping, skill gap analysis, multi-skilling

and multi-tasking apart from imparting training on new technologies of steel making.

Efforts are also on to put a system in place to institutionalize the sharing of knowledge

among the employees.

Ensuring competitiveness

Achieving cost competitiveness remains a prime target of SAIL’s future plans. Today in

SAIL, the focus of the sustained cost control exercise is on shortening cycle time,

reducing specific usage of inputs, eliminating wastages and improving yields. The work

has begun in right earnest. The challenge before SAIL is to ensure that the projects are

implemented without time and cost overruns. Today, the accent in SAIL is to

continuously adapt to the competitive business environment and excel as a business

organization, both within and outside India.

SWOT Analysis of SAIL

STRENGTH

Largest player in the Indian Steel industry.

Strong backward integration like iron ore and power.

Very aggressive expansion plans.

The single largest rail manufacturer in the world.

Merger with IISCO would boost its profitability, as SAIL would have access to

IISCO’s underutilized iron ore and coalmines.

All its plants are a profit centers.

SAIL is a virtually Debt-Free Company.

18

The approved acquisitions and merger of NINL, NISCO and MEL would result in

synergy benefits, operating efficiencies, cost savings and thus higher profit.

WEAKNESS

Concern in obtaining new mining leases and renewal of old leases.

Low liquidity in Stock Exchange (85.82% shares is held by GOI itself).

Heavily dependent on import of raw materials (coking coal).

It has high operation cost when compared to its peers like Tata Steel, JSW Steel.

OPPORTUNITIES

Strong Economy growth (second fastest growing economy after China).

Booming infrastructure sector (Roads, Ports, Airports, SEZs, Power).

Strong demand in automobile sector, consumer durables sector and engineering goods

sector. Robust demand in construction and retail industry.

Low per capita steel consumption offers a higher growth.

Rich Geological Resource base.

Large consumer base, low labor cost and high productivity.

THREAT

Steel prices may remain stumpy on account of over supply from China.

Bureaucratic nature of Government - Socio-Political interventions (in leasing mines).

Rising interest rates could affect expansion programmed (High cost of Finance).

High cost of energy.

Big ticket investment by POSCO and Mittal could swallow the market (specifically

export). Cyclical nature of Steel Industry.

Deficit infrastructure.

High ash coal.

19

Product Mix of SAIL

Plant Wise Product Mix

Bhilai Steel Plant

Blooms, Billets and Slabs

Beams

Channels, Angles

Crain Rails

Plates

Rails

Pig Iron, Chemicals and Fertilizers

Bokaro Steel Plant

HR Coils and Sheets

Plates

CR Coils and Sheets

GP Sheets and Coils / GC Sheets

Pig Iron, Chemicals and Fertilizers

Durgapur Steel Plant

Blooms, Billets and Slabs

Joists, Channels, Angles

Bars, Rods and Rebar’s

Skelp

Wheels, Axles, Wheel Sets

Pig Iron, Chemicals and Fertilizers

Rourkela Steel Plant HR Coils

Plates

CR Coils and Sheets

GP Sheets / GC Sheets

Tinplates

Electrical Steel

20

Pipes

Pig Iron, Chemicals and Fertilizers

Product Wise Product Mix

Semis Blooms, Billets and Slabs

Long Products

Structurals

Crane Rails

Bars, Rods and Rebars

Wire Rods

Flat Products

HR Coils, Sheets and Skelp

Plates

CR Coils and Sheets

GC Sheets / GP Sheets and Coils

Tinplates

Electrical Steel

Tubular Products Pipes

Railway Products

Rails

Wheels, Axels and Wheel Sets

21

BHILAI STEEL PLANT (BSP)

Bhilai Steel Plant, a unit of Steel Authority of India Limited - a public sector undertaking

was conceived under aegis of Indo - USSR Treaty in the 2nd

Five year plan. This was in accordance with erstwhile government policy for

strengthening economy and self reliance through development of core sector.

Seven - time winner of Prime Minister’s Trophy for best Integrated Steel Plant in the

country, Bhilai Steel Plant (BSP) is India’s sole producer of rails and heavy steel plates

and major producer of structural. The plant is the sole supplier of the country's longest

rail tracks of 260 meters. With an annual production capacity of 4.5 MT of saleable steel,

the plant also specializes in other products such as wire rods and merchant products.

Since BSP is accredited with ISO 9001:2000 Quality Management System Standard, all

saleable products of Bhilai Steel Plant come under the ISO umbrella.

Living up to the demand of the growing economy of the country, the plant produces wide

range of products. This includes Rails, Wire Rods, Plates and Merchant products.

Commitment to quality and customer satisfaction has resulted in consistent R & D efforts

culminating in development and commercialization of distinctive new grades like

SAILMA, UTS - 90 etc.

PROCESS CHART OF BHILAI STEEL PLANT

22

About BSP

Coal

Coal Preparation Plant

Coke Oven Batteries

Raw Materials

Coke Oven Gas

Bye Product Plant

Blast Furnaces

Tar Products, Benzol ProductsAmmonium Sulphate

Rajhara Mines (90 KM) Dalli Mines (96 KM)

Hirri Mines (150 KM)

Nandini Mines (25 KM)

Iron

Ore

lu

mp

s

Dolomite

Lim

esto

ne

SP-1, 2 & 3

Ore Fines

BF

Co

ke

Slag Granulation PlantGranulated Slag

Pig Casting Machine

Cold Pig Iron

Twin Hearth Furnaces

Steel Melting Shop - 1

Steel Melting Shop - 2Oxygen Blown Converters

Blast Furnaces

Rail&Structural Mill

Blooming & Billet mill

Merchant Mill

Wire Rod Mill

Slab Casters

Continuous Casting M/c

Bloom Casters

CC Blooms

To Rail & Structural Mill

Semis for Sale

Foundry

BloomsBillets

Plate Mill

Slabs

Plates

23

Bhilai Steel Plant is a flag ship unit of Steel Authority of India Limited. SAIL, a fully

integrated iron and steel maker, produces both basic and special steels for domestic

construction, engineering, power, railway, automotive and defense industries and for sale

in export markets. In terms of annual production SAIL is the 18th largest steel producer

in the world.

Living up to the description by Jawaharlal Nehru as significant symbol of a new age in

India, Bhilai Steel Plant has been performing consistently despite many odds and has

achieved profits for the 18th consecutive year. It broke its own record of highest ever

profit of Rs 1932 crore by any steel plant in 2003-04 and registered a profit of Rs 4042

crores in 2004-05. In the year 2005-06 also it earned a handsome profit of Rs. 2781

Crores despite input price escalation. The true testimony to BSP’s status of a world class

steel plant is that BSP’s EBITDA margin of 33% is quiet comparable to many

International steel players like POSCO (30%), NIPPON (19%), MITTAL STEEL (16%0,

ARCELOR (16%), etc. Its Gross Margin to average capital employed at 182% is a Global

Benchmark. Maintaining the track record, BSP continued to operate above the rated

capacity in production of the three main items viz. Hot Metal, Crude Steel and Saleable

Steel. BSP is the first steel plant in India to have crossed the annual production of 5MT

crude steel in the year 2005-06.

In order to meet the challenges of Corporate Plan 2012 and to maintain the leadership

position of BSP in Indian steel industry, the leadership has taken bold steps to make

significant investments for breakthrough improvements in efficiency, resource

management, knowledge and skill by deploying world class tools. This year is a

milestone in BSP journey when new tools have been introduced viz. ERP, Knowledge

Management, Six Sigma, Multi-skilling etc.

Building Future Capabilities

BSP is on its way to equip itself with assets required by 21st century. New state of the art

technologies for improvement in productivity, yield, quality and operational costs have

been planned under Corporate Plan 2012. The plant capacity will be 7 MT of hot metal

by 2012. The key goals of CP-2012 are capacity enhancement, 100% Comcast

production, reduction in semis, achieving international benchmarks in eight selected

parameters, higher percentage of value added products and essentially to become a true

24

world class steel plant. Apart form investing in plant, technology and machinery, BSP has

taken bold steps to make significant investments to leverage its most precious and

differentiating resource, the human resource by deploying ERP, Knowledge

Management, Six Sigma, and Multi-skilling and other performance enhancing tools.

Existing Technology and Future Roadmap

There have been rapid advancements in all areas of iron and steel technology in the

world. BSP has a mix of old and new technologies. Its 55% production is through

outdated twin hearth furnace route. Initially priority was given to modernization of other

steel plants and later due to resource crunch faced by SAIL; modernization of the BSP

had to be deferred. A new Sinter Plant, secondary refining technology in steel making,

long rail technology for rolling and finishing and installation of optical fiber network

(ATM) throughout the plant are some of the new technologies embraced by the plant in

recent past. Now that resources for modernization have been committed to BSP under

Corporate Plan 2012, BSP is set to embrace new state of the art technologies for

improvement in productivity, yield and quality and for reducing operational costs. Plans

have been drawn where BSP is destined to be a 7 MT hot metal plant by 2012. Along

with capacity enhancement, 100% Comcast production, reduction in semis to 9%,

achieving international benchmarks in eight selected parameters, several other schemes

are being planned to produce higher percentage of value added products through state of

the art technology.

Technologies that are being considered are for state of the art coke oven batteries with

dry quenching, improving sinter & Blast Furnace productivity and reducing coke

consumption - through hot metal desulphurization outside blast furnace, oxygen

enrichment, coal dust injection/tar injection, higher hot blast temperature through stove

modernization. Technologies are also being considered for improving BOF productivity

while reducing energy/refractory consumption, for secondary refining of steel for higher

proportion of value added products, for achieving energy consumption benchmarks and

for state of the art rolling for high strength, zero tolerances, improved surface finish and

25

improved yield. The key new technologies envisaged are continuous thin strip casting,

large diameter pipe manufacture and state of the art bar & rod mill. As regards

Information Technology, Enterprise Resource Planning and Manufacturing Execution

System are under implementation.

Products of National Importance

BSP has made immense contribution to the national economy by continuously upgrading

the quality of its products to meet the requirements. It is the single supplier to Indian

Railways, the largest network of rails under one umbrella and supplied rails whose length

is many times the periphery of the earth. It is a case of classic partnership and

collaboration to contribute to the development of the nation. The nation moves on Bhilai

Rails.

Long Rail Project for supplying 260 meter Rail Panel to Indian Railways

In order to meet the changing requirements of its long term partner ‘Indian Railways’,

BSP has set up state of art technology for manufacture of Long Rails which includes

most modern equipment for Inspection, testing and handling of longer rails. The facilities

and equipments include Walking Beam Cooling Bed with Pre-Cambering facilities from

M/s VAI, Pomini, Austria, Bi-planar Rail Straightening Machine with Manipulator from

M/s SMS, Germany, On-line Laser based Straightness Measurement System, Eddy

Current Testing Equipment (for surface defect detection) and Ultrasonic Testing Unit (for

checking internal soundness) from M/s NDT-Canada, 4-directional Hydraulic Press with

Laser based straightness measurement (for ensuring end-straightness) from M/s Berner,

Germany, Synchronized PLC controlled long rail handling facilities from M/s VAI,

Pomini, Austria. For welding of 65 meter long rails into panels of 260 meter long rails,

Bhilai Steel Plant has installed state of art welding, measuring, pressing, grinding and

handling systems from M/s Geismer, France and others. Introduction of such modern

technology has propelled Bhilai Steel Plant into the select group of rail manufacturers

who have the capability to produce and handle longer rails of 130 meter and above,

thereby reinforcing the status of Bhilai Steel Plant as one of the leading rail

manufacturers of the world.

26

Plates for aircraft carrier for Indian Navy

In the recent times BSP has collaborated with Indian Navy with the development of

DMR-249A (ABA) grade Naval application for its strategic applications, which were

hitherto being imported. The primary quality characteristics of this group of steel are their

high strength and enhanced impact toughness at sub-zero temperatures. BSP along with

Defence Metallurgical Research Laboratory and Indian Navy, has embarked upon

developing ABA grade of steel plates through Thermo-Mechanical Controlled Processing

(TMCP) Technology, instead of Quenching and Tempering (Q&T) route being followed

in case of steel procured from imported source. Consequent upon this development, the

plant has started servicing regular commercial orders from Indian Navy. BSP is also

making steel for manufacture of Submarine.

Existing Technology and Future Road Map

There have been rapid advancements in all areas of iron and steel technology in the

world. BSP has a mix of old and new technologies. It’s 55% production is through

outdated twin hearth furnace route. Initially priority was given to modernization of other

steel plants and later due to resource crunch faced by SAIL, modernization of the BSP

had to be deferred. A new Sinter Plant, secondary refining technology in steel making,

long rail technology for rolling and finishing and installation of optical fiber network

(ATM) throughout the plant are some of the new technologies embraced by the plant in

recent past. Now that resources for modernization have been committed to BSP under

Corporate Plan 2012, BSP is set to embrace new state of the art technologies for

improvement in productivity, yield and quality and for reducing operational costs. Plans

have been drawn where BSP is destined to be a 7 MT hot metal plant by 2012. Along

with capacity enhancement, 100% Concast production, reduction in semis to 9%,

achieving international benchmarks in eight selected parameters, several other schemes

are being planned to produce higher percentage of value added products through state of

the art technology.

Technologies that are being considered are for state of the art coke oven batteries with

dry quenching, improving sinter & Blast Furnace productivity and reducing coke

consumption - through hot metal desulphurisation outside blast furnace, oxygen

enrichment, coal dust injection/tar injection, higher hot blast temperature through stove

27

modernization. Technologies are also being considered for improving BOF productivity

while reducing energy/refractory consumption, for secondary refining of steel for higher

proportion of value added products, for achieving energy consumption benchmarks and

for state of the art rolling for high strength, zero tolerances, improved surface finish and

improved yield. The key new technologies envisaged are continuous thin strip casting,

large diameter pipe manufacture and state of the art bar & rod mill. As regards

Information Technology, Enterprise Resource Planning and Manufacturing Execution

System are under implementation.

The principal products and key customers of Bhilai Steel Plant along with key segments,

key competitors and market share in that segment are given as per the format specified in

Table.

Table: Main Products and Market Share (2006-07)

Main Products Key Segment Market Size (MT) Market Share

Rails Railway Track 0.72 100%

Plates

Heavy M/c.

Boiler & PV

Line-pipe –water

Line Pipe- Crude & Gas

Construction/Fabrication

Export-Europe, FE

3.8 24%

Bars, Rods & Structurals

Wire Rods Electrode Qlty

Wire drawers Construction

TMT bars Structurals

17.0 4.8%

SemisRe-rolling Industry

Export –Neighboring countries13.7 6%

28

A glimpse of product portfolio and targeted market share after proposed implementation

of unit perspective Plan 2012 is given in Table.

Table: Main Products & Expected Market Share 2011-12

Main Products Current Market ShareExpected Domestic

Market Share

Rails 100% 100%

Plates 24% 30%

Bars, Rods & Structurals. 4.8% 10%

HR Coils / Sheets Nil 6%

Pipes Nil 6%

Quality Policy of BSP

† Attaining market leadership through enhancing customer satisfaction.

† Achieving continual improvement in productivity, quality and saleability of the products.

† Active improvement of all the employees in achieving organisation goals, objectives and

products.

† Adherence to a quality management system, based on ISO: 9001:2000 and its periodic

review for continued effectiveness.

Objectives of BSP

To enhance customer satisfaction through

† Improvements in productivity and product quality.

† Skill enhancement of the employees by competence and commitment.

† Production as per customer requirement.

BHILAI STEEL PLANT-At a glance

Captive Mines

29

Iron-Ore - Dalli-Rajhara Iron Ore Complex, 80 kms from Bhilai

Limestone - Nandini, 23 kms from Bhilai

Dolomite - Hirri, 150 kms from Bhilai

Facilities Available in Bhilai Steel Plant

Sr.

No

Department Unit Capacity

1 Coke Oven 8 Batteries of 65 Ovens and 4.3 M

High

2 Batteries of 67 Ovens and 7.0 M

High

3.3 million ton

of BF Coke

2 Sinter Plants 3 Machines of 50 sq. M Hearth Area

3 Machines of 75 sq. M and 1

Machine of 80 sq. M Hearth Area

1 Machines of 320 sq. M Hearth Area

8.3 million ton

of Sinter

3 Blast Furnace 3 Furnaces of 1033 Cum

3 Furnaces of 1719 Cum

1 Furnace of 2000 Cum

4.71 million

ton of Hot

Metal

4 Steel Melting Shop -1 4 Twin Hearth Furnaces 2.5 million ton

of Steel

5 Steel Melting Shop – 2 3 BOF of 100 / 130 T Capacity 1.425 million

ton of Steel

6 Concast 3 Single Strand and 1 Combi Caster 1.425 million

ton of Steel

7 Blooming & Billet

Mill

1150 mm Blooming Mill

1000 / 700 / 500 mm continuous Billet

Mill

2.15 million

ton of Bloom

8 Rail & Structural Mill 950 / 800 2 High Reversing Mill 0.75 million

ton of Product

9 Merch. Mill 350 mm Cross Country Mill 0.5 million ton

30

of Product

10 Wide Rod Mill 4 Strand Continuous Mill 0.4 million ton

of Product

11 Plate Mill 3600 mm 4 High Reversing Mill 0.95 million

ton of Product

STATEMENT OF OBJECTIVE

The project report on “Capital budgeting” is a humble attempt to:

To study the need and importance of Capital budgeting.

To study the relevancy of Capital budgeting in financial department of an

organization

To see how the day-to-day operation of an organization take place

To see whether the company is prepared with enough Capital budgeting

To asses how much investment shall be done in the plant for next financial year

2008-2009

To study what measures should be taken for maintaining expenses on Capital

budgeting

To study the method adopted by the organization in making decisions of Capital

budgeting

31

FINANCE AND ACCOUNTS DEPARTMENT

OF

BHILAI STEEL PLANT

Introduction

Finance and accounts department of Bhilai steel plant is one of the key departments in the

total organization. It has two main functions that are finance and accounts. These

functions are carried out by various sections of finance and accounts department. The

objectives of finance and accounts department is always to meet the requirement of line

department while doing its own line functions such as accounts maintaining, meeting

statutory requirements,budgetery control and advising on financial matters etc.

This training report is an attempt to consolidate various functions of finance and accounts

department of Bhilai steel plant. This report is based on the latest practices and system

being followed and would be very useful to every one functioning finance and accounts

executives and for others as well. This will throw light on functions and importance of

finance and accounts department in total organization.

This report is prepared with the contribution of all managers of finance and accounts

department

The sections of finance and accounts department covered are as follows

Mines coordination

Stores and raw material section

Freight and claims

Purchase and contract concurrence section

Project finance accounts

Costing and budgeting section

Operation account section

Wages section

Cash section

Sales invoicing and accounting section

Excise and sales tax section

32

Central accounts and assets

ORGANISATIONAL STRUCTURE OF

FINANCE AND ACCOUNT DEPARTMENT OF BHILAI

STEEL PLANT

33

D.G.M. (F&A)D.G.M. (F&A)

CFM CFM CFMCFM

CASH, WAGES-IWAGES-III A, INCENTIVE CELL,STORES, FIN.ESTABLISHMENTADMINISATION & COORDINATION

CENTRAL A/CS, MANAGEMENTA/CS, ASSETS A/CS,OPERATION BUDGET, COST A/CS,ENERGY CELL,OPERATION A/CS, PC, CC.

MINES, ZONALWAGES, WAGES COORDINATION

RAW MATERIALS A/C, FREIGHT & CLAMS, STOCKVERIFICATION,TOWNSHIPSERVICES,HOSPITAL A/CS

PROJECT FINANCE,CAPITAL BUDGET,WORKS FINANCEZONAL A/CS & WORKS COMPILATION

SALES, EXCISE,SALES TAX, FRT.OUTWARD

GM(F&A)

PROJECT FINANCE & ACCOUNT

At the time of the country’s independence in 1947, it was confronted with

various economic and social problems that require to be tackled in a planned and

systematic manner. India was primarily an agrarian economy; it had a very weak

industrial base, low level of savings/investments and lacked infrastructural facilities. A

vast percentage of the population was extremely poor .Their existed considerable

inequalities in income and regional imbalances in economic attainments. Under such

circumstances, a bag effort was required from the government s the private sector had

neither the necessary resources in terms of funds, nor the will to assume risks involved in

long neither the necessary resources in terms of funds, nor the will to assume risks

involved in long generation investment projects. Moreover, the financial returns on such

projects were too low to attract private sector enterprises investment. Give the type and

range of problems faced by the country on its economic, social and strategic fronts and

the various imperatives such as the necessity on the part of government to use the public

sector as an instrument for self-reliant economic growth so as to develop a sound

agricultural and industrial base, diversify the public economy and overcome the

economic backwardness.

In view of the above expectations for continued large investment in PSU,

there has been a significant growth, both in number and investments, in such enterprises

over the years, their declining role in the recent years notwithstanding. For instance, from

a modest investment of Rs. 29 crore in 5 PSU as on April 1, 1951, investments grew to

Rs 3, 24,632 crore in 240 such enterprises by march 31, 2002.

The predominant considerations for continued large investments in PSU

were

34

(i) To accelerate the growth of core and strategically important sectors like railways,

telecommunications, defense, etc;

(ii) To invest in the consumer oriented industries such as drugs and food industries, with a

view to ensure easier availability of vital articles of mass consumption at economic and

reasonable prices;

(iii) To take over sick units from private sector enterprises in order to sustain production and

protect employment.

The project finance & accounts section of BSP is broadly covered under the following

five headings:

1. Capital Budget

2. Project Concurrence

3. Zonal Accounts

4. Works Compilation

5. Import Account

1. CAPITAL BUDGET SECTION

A) Initiation and submission of investment proposal.

Capital investment proposals are initiated by various shops/departments.

These shops/departments submit their investment proposal in the prescribed format to the

project planning & Engineering Department (PP&E). PP&E is the nodal agency for

submission, processing and decision of all investment proposals. PP&E makes a

preliminary scrutiny and sends the investment proposals for finance capital budget

section, industrial engineering department, O&M and BEDB.

These proposals are studies in capital budget section and checked with respect to

following points:-

35

1. Whether any techno-economic/feasibility report for the proposal has been

prepared or not. If any techno-economics has been prepared, the pay-back period, NPV,

IRR, ROI & Sensitivity analysis of the investment proposal is checked.

2. If the proposal is for replacement of the asset, whether write-off sanction

of assets being replaced has been obtained by the shop.

3. Whether the cost estimate prepared by the shop/consultant is correct.

4. Proposal is studies with respect to need, the process, benefits, and

technical/legal/financial implications.

These proposals are then discussed in investment planning units (IPU) meetings.

The in-charge of PP&E is chairman of the IPU committee. Officers of the capital budget

section attend the IPU meeting as member of the committee. Other members of the IPU

committee are:

1. Representatives from industrial Engineering Department

2. Representatives of the Organizations & Methods Department

3. Consultant (BEDB, CET or other)

4. Proposing Department

5. Material Management Department

6. Executing Agency

7. Specialized agencies/Consultant

The IPU committee thoroughly examines the investment proposal under the

following aspects:

a) Technical feasibility

b) Economic viability

c) Commercial aspects

d) Financial aspects

e) Others

36

Depending on the merits of the proposal, the IPU committee either recommends it or may

reject it or may suggest modifications for further consideration.

B) Approval of the investment proposal

Proposals recommended by IPU are put up for Management’s approval by PP&E Deptt.

These proposals are received in the capital budget section before management approval

for final scrutiny of the proposal.

Scheme sanctioning Authorities are as under:

Project cost limit Sanctioning Authority

1. Up to Rs. 10 Cr. MDs of Integrated plant

Director (commercial)

ED , ASP/SSP/VISL

2. Rs 10 Crore to Rs. 25 Crores Chairman, SAIL

3. Above Rs. 25 Crore SAIL Board

C) Budget Certification

All contractual agencies (incl. contract cell, Turnkey cell and Material management

department) before issuing award letter/placement of final purchase order/Letter of

intent/for procurement/work to be done under any capital scheme are required to obtain

budget certification from capital budget section. While certifying budget section has to

verify the availability of budget and has to see that whether the material being procured

or work order/contract being awarded is as envisaged at the time of approval.

37

D) Monthly Expenditure Report

A monthly report of capital expenditure incurred on various project is compiled at the

month end and is sent to corporate office (project Directorate and Finance Directorate).

Copies of the report are also too sent to project planning & Engg. Deptt. (PP&E) and

project Monitoring cell (PMC). A summarized monthly report of capital expenditure is

also sent to MD, ED (F&A), ED (Proj), ED (Works), ED (MM), GM (F&A), GM (Proj),

GM (PP&E & BEDB).

For the purpose of the monthly report information from various sections of finance

department has to be obtained. These sections are:

1. Zonal Accounts sections of project finance

2. Store Bills Section

3. Project Accounts section

4. Operation Accounts Section

5. Township Accounts Section

E) POST COMPLETION AUDITS:

All major schemes are reviewed by the post completion Audit (PCA) committee after one

year of commissioning of the scheme.

Committee for PCA:

a) Head of department where the project was executed is the chairman of the

committee.

b) Representative of concerned department

c) Project co-coordinator/Officer

d) Representative of Finance (capital budget section)

e) Representative of PP&E

38

f) Representative of executive agency

g) The consultant

h) Representative from IED & O&M as the case may be. Chairman of each post

completion audit committee convenes the post completion audit meeting and coordinates

preparation of the “post completion Audit Report”. The post completion report is

prepared in the format issued by project directorate of SAIL. The report is submitted to

the Sanctioning Authority.

The capital budget section is required to compile following information for preparation of

post completion Audit report:

a) Activity-wise Actual completion cost of the project vs. sanctioned cost

b) Cost over-run analysis:

Physical factors

Fiscal factors

c) Time over-run Analysis

d) Phasing of Expenditure

F) Budget Provision & Annual Budget Preparation

During each financial year in the month of June-July, finance department prepares the

Revised Budget estimate (RE) & Budget estimate (BE) for capital expenditure against all

running/ recently completed and forthcoming AMR schemes.

2. PROJECT CONCURRENCE

Project concurrence section (also known as project/work finance) handles all the

contracts executing most of the works of capital nature, also executes work of revenue

nature off-loaded by works departments to project department and also, executes all the

works of revenue nature pertaining to project department itself like civil, repair and

maintenance jobs in Expansion building, site offices, TPL workshop, CEZ etc.

39

All the works of capital nature are cleared through IPU committee before

administrative approval of competent authority. Under schemes where the executing

agency is project department all activities like estimate, tender, award, operating,

contract closure etc for all contracts to be placed under the scheme are carried out by

project department through concurrence of project-finance (PF).

The contracts placed for execution of schemes can be broadly classified as

Turn-key and non-turn-key. For dealing with these two different types of contracts

separate contract cells have been formed under the project department viz, .Turn-key cell

(TKC) and project-contract-cell (PCC).Under a turn-key contract total scope of work and

entire responsibility of successful commissioning of the package is entrusted to the

contactor.

Various Stages of Concurrence by Project Finance:

1. Tendering and tender documents:-

Before calling of tender approval of management with the concurrence of finance is

obtained with respect to

a) Mode of tendering

b) tender schedule

c) Block estimate

d) Notice Inviting Tender (NIT)

e) Special terms of the contract

f) Payment terms and

g) Eligibility criteria

Each proposal is examined with respect to above mentioned points and concurred

keeping in view the guidelines given in various documents like project/contract

management manual, Rate contract with private party, Rate contract with HSCL,

40

Delegation of powers (DOP), Purchase/contract procedure 2000 and standard bidding

document.

2. Receipts and Opening of Tenders:

Tenders are to be opened on due date of tender opening. However, before opening it is

ensured that three or more offers have received, earnest money as required is given by the

tenders. In case of less than three offers are received, it is ensured that three attempts

were made and competent authority’s approval is obtained to open the offers.

3. Tender Evaluation, Negotiation, Approval and Award:

Comparative statement along with complete offer of each party is checked in finance. In

case of non-turnkey contract, no commercial deviations to BSP’s terms and conditions

are normally allowed. Prices are compared taking into account any rebate/discount

offered by the bidder. In case the L1 offer is within the approved range of the estimate the

work is awarded. Otherwise negotiations are held with the L1 bidder only. If the prices

are found acceptable and workable, the work is awarded to L1 bidder after the approval

of competent authority subject to budget availability.

In case of a turnkey contract bidders normally give their deviations to our terms and

conditions of SBD (Standard Bidding Document). These deviations are examined and

discussed in the commercial committee before it is discussed with individual bidders.

Before price opening all the bidders are made commercially at par by either loading their

prices for acceptable deviations or intimating to other bidders about these deviations.

Deviations by the bidders on vital provisions of the SBD are asked to withdraw with or

without withdrawal price. Bids with unacceptable deviations are treated as non-

responsive and rejected. Before price opening it is also ensured that the bids are

technically acceptable.

41

4. Contract (Document) Finalization :

Contract is finalized based on the SBD, Technical specifications and subsequent

clarifications/confirmations on agreed terms and conditions in commercial discussions

with the successful bidder.

5. Execution of contract:

During execution of the contracts that are vetted if finance include bank Guarantees,

Insurance policies, EPF clearance, sales tax and income tax clearance certificates, labour

licenses etc. it is also ensured that payments are made as per the terms and conditions of

the contract. Amendments to the contract are normally not accepted. In exceptional cases

they are examined and are incorporated after the approval of competent authority. Extra

claims and recoveries are settled as per the terms and conditions of the contract. Rates for

extra items are concurred in finance based on existing rates available or the market rates

whichever is lower.

6. Contract Closure:

In case of turnkey contracts a formal closure of the contract is done with the approval of

management. Issues like delay analysis and LD for delay, pending recoveries and claims

for extra work by contractors are discussed and finalized in closure committee. The

recommendations of the committee are processed for the approval of management and

contract is closed. In case of non-turnkey contracts final deviation statement is processed

for management’s approval before the contract is closed. Reasons for deviation are

analyzed and rates for extra items, if any, are concurred in finance.

3. ZONAL ACCOUNTS

Activity of Zonal accounts section starts after award of contracts (TK)/ Works

contract/work order to the contractors by project (TK Cell)/Contract cell for execution of

42

a project/work/job. This contract is operated until final payments are released based on

closure of contract/Final Deviation. During this period following activities are controlled.

1. Accounting and control of materials issued to projects

a) For Issue of Material: Indents are floated by operating Engineers to collect materials

from store. Zonal Accounts verifies following details as per provision in the tender

schedule for items and quantities.

1) Reference of contract no. and date, name of work, party’s name.

2) Demanded quantities

3) Responsibility code, expense code and scheme no.

4) Material Description as per tender schedule/billing schedule

5) Mode of issue i.e. free of cost or cost recovery basis.

After ensuring above details, indents are registered and handed over to operating

department for collection of materials from store.

b) Accounting of Materials: After receiving debt from the a/c section for material issued

to contractors, the debit related to issue on cost recovery basis is transferred to

intermediary suspense account and issue of materials on free of cost basis is transferred to

the expense code. As regards recovery towards cost of materials through bills is

transferred to the expense code.

c) Control of Material A/C: After passing above journal entries contractor wise material

A/c is maintained till completion of work and this accounts is verified with party’s

material statement submitted with final deviation statement/ proposal for closure of

contract.

2. For payment to the contractor: Bills/invoices are processed by operating Engineers along

with measurement book duly certified and signed by them indicating following details.

43

a) For all contracts.

1) Reference of contract no. and date, name of work, contractor’s name

2) Contractor’s bill/invoice no. and date

3) Period of execution till date and measurement till date

4) Item wise execute, Rate and amount.

5) Deduction if any towards security deposit, Taxes and duties and issue for material on cost

recovery basis.

6) Labour License/ ESP clearance certificate

7) Registration of PAN NO. CGCT and CST NO.

4. WORKS COMPILATION

Accounting of capital expenditure incurred by Bsp

maintenance of wip account for all running schemes

monitoring of running schemes to identify and book to wip a/c any shortfall with

reference to actual execution

identifying schemes with little or no progress for appraising management

Capitalization of assets procured under all sanctioned schemes as and when

declared completed.

identification of in-house expenditure resulting in a fixed asset, for capitalization

(after obtaining approval of management)

ensuring capitalization with correct amount, date, location, asset code

ensuring compliance of accounting policies and accounting standards

ACCOUNTING OF CAPITAL EXPENDITURE

1. Payments to contractors under A/Ts, work orders & TK contracts

Project finance & Accounts- Zonal A/cs

a) under turnkey contracts:

b) under Non-turnkey contracts

44

c) Import A/cs

d) Store bills

e) Operation A/cs

f) Township A/cs

2. Consultancy charges:

Scheme wise debits for consultancy charges are received from CET, Ranchi every quarter

through IUCA. These debits are allocated to various running scheme and investment

proposals under consideration and booked to WIP by WC. In case any debit is received

against a completed scheme or an investment proposal, which is not going to be

considered for approval by management, the same is charged off to revenue by WC.

d) Expenditure during construction (EDC):

Accounting of EDC including interest during construction is dealt by central A/c section

based on inputs given by WC w.r.t. major schemes being executed by project dept. EDC

arises out of salaries and wages paid to the employees of project dept, the power

consumed by project dept etc. IDC is allocated by corporate office based on funding

pattern for BSP.

4. Issue of steel & other stores:

For all stores to scheme whether drawn by shops or project Zones, the debit for the cost

of that item is received from stores A/c section through MMIS every month.

For stores issued to project, the debit is first received in zonal A/c section where after

scrutiny the debit is passed on to WC. But in case of store issue to a contractor on cost

recovery basis, the debit is kept in a material issue suspense A/c and the recovery from

the party is credited to this A/c.

45

5. In-house fabrication:

Details of fabrication done at TPL workshop are every month by WC. Cost pertaining to

capital schemes is booked to WIP under the appropriate scheme.

For work done through various Engineering shops the total cost of work is obtained from

costing section with break-up of cost of material, labour, services, consumables, power,

machining etc. based on information given by WC. This cost is booked to WIP in WC by

crediting various revenue A/c codes. Thru ISA code 28555.88 or 28599.88.

A database is maintained by WC section for getting scheme-wise WIP and capitalization

details at any point of time. From same database account-wise WIP and capitalization can

also be obtained readily.

This sub-section of Project Finance & Accounts section is entrusted with the job of co-

coordinating with statutory, Govt. & internal audit.

46

CAPITAL BUDGETING

Formulation of investment proposals at plant

For all investment proposals, a feasibility report (FR) should be prepared. The plants may

assign preparation of FR to the in-house consultant, centre for Engineering & Technology

(CET), for before submission to the IPU. In exceptional cases, outside consultant may be

appointed with due approval of the competent authority. The consultant may involve

representative from environment control division of the plant, if required. The Consultant

shall explore all options with techno-economics to arrive at the cost-effective scheme. FR

should, inter-alia, include minimum technical solution and cut-off capital cost.

In the case of market oriented proposals, specific vetting by the central marketing

organization (CMO) on the following shall be obtained by the plant before the proposal is

put-up for approval of competent authority:

Increase in sales realization due to augmentation in production of finished

products;

Increase in sales realization on account of improvement in mechanical/chemical

properties;

Increase in sales realization on account of improvement in physical properties/

condition viz. better surface finish, removal of bends, better packaging etc.

While preparing FR, the consultant shall make a realistic assessment of input parameters,

so as to ensure proper designing of equipment and efficient operation of plant after

commissioning. The consultant shall also verify important input parameters, which are

vital for the success of the scheme.

a) FEASIBILITY REPORT

For each new project a feasibility report is prepared. The FR contents following details:

47

1. Executive Summary:

Summary of project background & history

Summary of market analysis

Raw material & Supplies

Location, site & environment

Engineering & technology

Organization & overheads cost

Human resource

Investment appraisal

Advantages

Drawbacks

2. Project background & basic idea

* Description of the project idea

* Project promoter or initiator

* Project history (Development)

* Investigations already preformed

* Cost of preparatory studies & related investigations.

Existing Facility

Need of installation of facility

Production details of five years

Annual business plan

2. Selection of alternatives.

3. Project Description

Proposal and Scope of work

Layout

48

Demand

Market analysis

Envisaged technological parameters.

Instrumentation, control & automation

Utilities & Services

Fire fighting system

Civil work

Design consideration

Technical specification

4. Structural

Dismantling

Modification

Design consideration

Specifications of steel structural work

Pollution control

Manpower requirement

4. Location, site & environment

5. Engineering & technology

6. Organization overheads

Wages and Salaries

Factory overheads

Maintenance

Rent

Insurance

Taxes

Overheads cost

7. Raw material & supplies

cost by Unit cost

Annual cost

49

Overheads cost

8. Human Resource

9. Project Implementation

Implementation schedule

Implementation strategy

Technical eligibility criteria of bidders for proposed package

Basic accounting statement

Methods of investment appraisal

10. Financial analysis

Capital cost estimates

Taxes & Duties (excise duty, custom duty, Cst@, Vat@, service tax, education

tax, Fright & insurance)

Mode of finance

Phasing of capital expenditures

Interest during construction

Cost benefit analysis

Financial analysis

Net working capital

NPV

Internal rate of return

Interpretation of the IRR

Interpretation of the payback

Simple & annual rate of return

11. Recommendations

b) Sanctioning Authority for investment proposals

Present delegation of powers for sanction of investment proposals for SAIL plant/ Units

is as follows:

50

Project cost limit Sanctioning Authority

1. Up to Rs. 10 Cr. MDs of Integrated plant

Director (commercial)

ED, ASP/SSP/VISL

2. Rs 10 Crore to Rs. 25 Crores Chairman, SAIL

3. Above Rs. 25 crore SAIL Board

c) Investment Planning Unit (IPU)

Investment planning unit shall be the nodal agency at the plant who will co-ordinate the

formulation and appraisal of capital investment proposals. The existing IPU or its

equivalent shall be strengthened with experienced executives drawn from various units/

shops of the plant and shall preferably report to the Head of project. IPU shall also make

initial prioritization of the proposals to be taken up depending upon fund availability and

the business plans of the company.

d) Project Appraisal Group (PAG)

The proposal after processing by IPU shall be considered by a high powered “Project

Appraisal Group” comprising head of works, finance, projects with head of IPU as

convener. In addition to a representative of CET and for market related proposals a

representative of CMO may be co-opted. PAG shall obtain commitment on benefits from

the project owner and also ensure final prioritization of proposals at the plant level and

“finance closure” i.e. sourcing of funds for financial concurrence and approval of the

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chief executive. The proposals beyond the delegated powers of the chief executive shall

be forwarded to the corporate office for approval.

e) Budgetary provision

To facilitate examination of all critical aspects/ operations/ project parameters, the project

to be taken up should be in conformity with the Business plan of the company. Necessary

provision should exist in the five year plan. The proposal should be taken up within the

available provisions as per the prioritized list as well as the annual budget. For proposals

which are not covered in the prioritized list but are considered urgent for implementation,

adequate justification needs to be given for taking up the proposal indicating the schemes

which may be dropped in lieu of the same.

f) Two-stage project Approval

1. Stage-I (In-principal) Approval

2. Stage-II ( formed up cost ) Approval

g) Time Schedule for Appraisal of proposals

Receipt of the proposal in project Directorate

Dispatch of proposal copies to the Appraising agencies and receipt of comments

Receipt of clarifications from the plant

Holding of meeting at project directorate for freezing of all outstanding issues, if

needed

Finalization of investment proposal on the basis of clarifications from plant

Finalization of Approval Note by the project directorate

Concurrence of proposal by finance directorate and submission for approval of

Chairman, SAIL

h) Importance of investment decisions

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Investment decisions require special attention because of the following reasons

They influence the firm’s growth in the long run.

They affect the risk of the firm.

They involve commitment of large amount of funds.

They are irreversible at substantial loss.

They are among the most difficult decisions to make.

i) Types of investment decision

There are many ways to classify investments. One classification is as follows:-

Expansion of existing business.

Expansion of new business.

Replacement and modernization.

ii) Expansion and diversification

A company may add capacity to its existing product lines to expand existing operations.

For example the Gujarat state fertilizer company (GSFC) may increase its plant capacity

to manufacture more urea. It is an expansion of new business requires investments in new

products and a new kind of production activity within the firm. There is also a kind of

unrelated diversification. Investment in existing or new products may also be called as

revenue expansion investment

iii) Replacement and modernization.

The main objective of modernization and replacement is to improve operating efficiency

and reduce costs. Cost savings will reflect in the increased profits, but the firm’s revenue

may remain uncharged. Assets become outdate and obsolete with technological changes.

The firm must decide to replace those assets with new assets that operate more

economically. Replacement decisions help to introduce more efficient and economical

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assets and therefore, are also called cost reduction investments. However replacements

decisions that involve substantial modernization and technological improvements expand

revenues as well as reduce costs.

Yet another useful way to classify investments is as follows:-

Mutually exclusive investments

Independent investments

Contingent investments

Trend of capital expenditure (Rs. in Crs.)

2004-05 2005-06 2006-07 2007-08

APRVD ACTUAL APRVD ACTUAL APRVD ACTUAL APRVD ACTUAL

Total 205.00 153.17 240.00 234.34 400.00 426.27 700.00 622.62

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INVESTMENT EVALUATION CRITERIA

Three steps are involved in the evaluation of an investment:-

Estimation of cash flows

Estimation of the required rate of return

Application of a decision rule for making the choice.

Investment decision rule

The investment decision rules may be referred to capital budgeting techniques, or

investment criteria. A sound appraisal technique may be used to measure the economic

worth of an investment project. The essential property of a sound technique is that it

should maximize the shareholders wealth. The following other characteristics should also

be possessed by a sound investment evaluation criterion:

It should consider all cash flows to determine the true profitability of the project.

It should provide for an objective and unambiguous way of separating good

project from bad projects

It should help ranking of projects according to their profitability.

It should recognize the fact that bigger cash flows are preferable to smaller ones

and early cash flows are preferable to later ones.

It should help to choose among mutually exclusive projects that projects which

maximizes the share holders wealth.

It should be a criterion which is applicable to any conceivable investment project

independent of others.

These conditions will be clarified with the features of various investment criteria.

Evaluation criteria

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A number of investment criteria are in use in practice. They may be grouped in the

following two categories:

1. Discounted cash flow (DCF) criteria

Net present value (NPV)

Internal Rate of Return (IRR)

Profitability Index (PI)

2. Non Discounted cash flow criteria

Payback period (PB)

Discounted payback period

Accounting rate of return (ARR)

Discounted payback is a variation of the payback period method. It involves discounted

cash flows, but as we shall see latter it is not a true measure of investment profitability.

As practically NPV is the most valid technique of evaluating an investment project. It is

consistent with the objective of maximizing shareholder’s wealth.

NET PRESENT VALUE METHOD

The net present value method is the classic economic method of evaluating the

investment proposals. It is a DCF technique that explicitly recognizes the time value of

money. It correctly postulates that cash flows arising at different time periods differ in

value and are comparable only when their equivalents present values are found out. The

following steps are involved in calculating NPV’s:-

Cash flow of the investment project should be forecasted based on realistic

assumptions.

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Appropriate discount rate should be identified to discount the forecasted cash

flows. The appropriate discount rate is the projects opportunity cost of capital, which is

equal to the required rate of return expected by investments of equivalent risk.

Present value of cash flows should be calculated using the opportunity cost of

capital as the discount rate.

Net present value should be found out by subtracting present value of cash

outflows from present value of cash inflows. The project should be accepted if NPV is

positive (i.e. NPV>0)

Evaluation of NPV method

NPV is the measure of an investment’s profitability. It provides the most acceptable

investment rule for the following reasons:-

Time value: It recognizes the time value of money a rupee received tomorrow.

Measure of true profitability: It uses all cash flows occurring over the entire life

of the project in calculating its worth. Hence it is a measure of the projects true

profitability. The NPV method relies on estimated cash flows and the discount rate rather

than any arbi9trary assumptions, or subjective considerations.

Value additivity: The discounting process facilitates measuring cash flows in

terms of present values; that is in terms of equivalent current rupees. There fore the

NPV’s of projects can be added. This is called value additivity principle. It implies that if

we know the NPV’s of individual projects the value of the firm will increase by the sum

of their NPV’s. We can also say that if know values of individual assets the firms value

can simply be found out by adding their values.

Shareholder value: The NPV method is always consistent with the objective of

the shareholder value maximization. This is the greatest virtue of the method.

Are there any limitations in using the NPV rule? The NPV method is a theoretically

sound method. In practice it may pose some computational problems.

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1. Cash flow estimation- the NPV method is easy to use if forecasted cash flows are

known. In practice it is quite difficult to obtain the estimates of cash flows due to

uncertainty.

2. Discount rate- it is difficult in practice to precisely measure the discount rate.

3.Mutually exclusive projects- Further caution needs to be applied in using the NPV

method when alternative projects with unequal lives or under funds constraint are

evaluated. The NPV rule may not give unambiguous results in these situations.

4. Ranking of projects- It should be noted that the ranking of investments projects as per

the NPV rule is not independent of the discount rates. The impact of the discounting

becomes more severe for the cash flow occurring later in the life of the project; the higher

is the discount rate the higher would be the discounting impact.

INTERNAL RATE OF RETURN

The internal rate of return (IRR) method is another discounted cash flow technique,

which takes account of the magnitude and timing of cash flows. Other term used to

describe the IRR method are yield on an investment, marginal efficiency of capital, rate

of return over cost, time adjusted rate of internal return and so on. The concept of IRR is

quite simple to understand in the case of a one period project.

For example that you deposit Rs. 10000 with a bank and would get back Rs. 10800 after

one year. The true rate of return on your investment id s 8%. You may observe that the

rate of return of your investment (8 percent) makes the discounted (present) value of your

cash inflow (Rs. 10800) equal to your investment (Rs. 10000)

By formula if we calculate

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R= C1-C0/C0

R= C1/C0-1

Here rate of return r depends on the project’s cash flows rather than any outside factor.

Therefore it is referred to as the IRR. The IRR is the rate that equates the investment

outlay with present value of cash inflow received after one period this also implies that

the rate of return is the discount rate which makes NPV=0. There is no satisfactory way

of defining the true rate of return of a long term assets. IRR is the best available concept.

We shall see that although it is a very frequently used concept in finance, yet at times it

can be a misleading measure of investment worth.

It can be noted that the IRR equation is the same as the one used for the NPV method. In

the NPV method the required rate of return, is known and the net present value is found,

while in the IRR method the value of r has to b determined at which the net present value

becomes zero.

Uneven cash flows: calculating IRR by Trial and Error

The accept rule of reject rule using the IRR method is to accept the project if its internal

rate of return is higher than the opportunity cost of capital (r>k). Here k is also known as

the required rate of return or cut off, or hurdle rate. The project shall be rejected if its

internal rate of return is lower than opportunity cost of capital (r<k) the decision maker

may remain indifferent if the internal rate of return is equal to the opportunity cost of

capital. Thus the IRR acceptance rules are:

* Accept the project when r > k

* Reject the project when r < k

* May accept the project when r = k

The reasoning for the acceptance rule becomes clear if we plot NPVs and discount rates

for the project.

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Evaluation of IRR method

IRR method is like the NPV method. It is a popular investment criterion since it measures

profitability as a percentage and can be easily compared with the opportunity cost of

capital. IRR method has following merits:

Time value The IRR method recognized the time value of money.

Profitability measure It considers all cash flows occurring over the entire life of

the project to calculate its rate of return.

Acceptance rule It generally gives the same acceptance rule as the NPV method.

Shareholder value It is consistent with the shareholders wealth maximization

objective. When ever a project IRR is greater than the opportunity cost of capital, the

shareholders wealth will be enhanced.

Like the NPV method the IRR method is also theoretically a sound investment evaluation

criterion. However IRR rule can give misleading and inconsistent results under certain

circumstances. Here we briefly mention the problems that IRR method may suffer from:

Multiple rates A project may have multiple rates or it may not have a unique rate

of return. As we explain later on those problems arise because of the mathematics of IRR

computation>

Mutually exclusive project It may also fail to indicate a correct choice between

mutually exclusive projects under certain situations.

Value additively Unlike in the case of the NPV method, the value additively

principle does not hold when the IRR method is used-IRR of projects does not add.

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Project life cycle

Conceptualisation

Formulation of proposal

Feasibility studies report

Investment decision

Environmental Clearance

Administrative Approval

Engagement of consultant

Detailed Project Report

Technical specification

Financial Closure

Contract Finalisation Post project Evaluation and Report

Execution of Contracts/project Completion cost and capitalisation

Monitoring and Control Closure of contracts

Completion of construction Handing over to operation

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Commissioning of project Performance guarantee test

CONCLUSION

Finance department of Bhilai steel plant follows a well designed procedure of

project financing

The department covers every aspect of project before making any decision

It undertakes proper procedure for approval of budget

It makes sufficient budget plans for forth coming years well in advance

Financial review & reports are also made by budgeting department

It also prepares a five year plan with anticipated requirement against approved

outlays

The organization follows a proper approval by Chief executive officer at

corporate office

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Bibliography

The above report has been prepared from the following sources of data and information:

1. Websites

1.1. www.sail.co.in

1.2. www.moneycontro.com

1.3. www.indiansteelalliance.org

1.4. www.ibef.org

1.5. www.wikipedia.org

1.6. www.tatasteel.com

2. Books

2.1. Financial Management, I M Pandey

2.2. Project Management And Control (2000),Narendra Singh

3. Other References

3.1. Annual Reports – BSP & SAIL

3.2. Functional Finance and Accounts Manual, F &A Department, BSP.

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