China - Hubei Phosphate Project

Dopmmti of The World Bank FOR OMCiAL USE ONLY Rqpi N P-4877-CR& MEMORANDUM AMD RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$137.0 MILLION TO THE PEOPLE'S REPUBLIC OF CHINA FOR A HUBEI PHOSPHATE PROJECT APRIL 25, 1989 This doument has a restricted distribudon and may be used by repipens only in the performan of teir officba duties. Its contents may not odthrwie be disclosed without World Dbnk auhrizatkL  CURRENCY AND EQUIVALENTS (As of February 5, 1989) Currency Unit . Yuan (Y) 1 Yuan 100 Fen US$1.00 - Y 3.72 Y 1.00 a US$0.27 WEIGHTS AND MEASURES 1 metric ton - 1,000 kilograms (kg) FISCAL YEAR January 1 - December 31 ABBREVIATIONS ER' - Economic Rate of Return HAZOP - Hazard and Operability HPCC - Huangmailing Phosphate Chemical Company JPCC - Jiuxiang Phosphate Chemical Company 120 - Potassium Oxide MAP - Monoaummonium Phosphate MCI - Ministry of Chemical Industry Mtpy - Million Tons per Year N - Nitrogen Content in Fertilizer P205 - Phosphorous Pentoxide ROM - Run of Mine SSP - Single Superphosphate TSP - Triple Superphosphate  FOR OFmFCIAL USE ONLY CHINA HUBEI PHOSPHATE PROJECT Loan and Pro1ect Summarv Borrowers The People's Republic of China Beneficiaries: Jinxiang Phosphate Chemical Company (JPCC, Hubei Province); Huangmailing Phosphate Chemical Company (HPCC, Hubei Province); Ministry of Chemical Industry (MCI) Loan Amount: US$137.0 million equivalent Terms of Loan: 20-year repayment, including 5 years of grace, at the standard variable interest rate On-lending Terms: The Government will on-lend t;e loan proceeds, through the Hubei provincial government, to the two Project com- panies at an on-lending rate equal to 105Z of the IBRD variable loan rate, with a repayment period of 20 years, including 5 years of grace. The commitment charge and foreign exchange risk will be passed on .,o the compa- nies. Local Foreign Total Financing Plan -------- (US$ million) ----- IBRD loan - 137.0 137.0 GOC loan 240.7 - 240.7 Provincial Government loan 80.4 25.2 105.6 Industrial and Commercial Bank loan 8.3 - 8.3 Companies' internal funds 18.9 - 18.9 Bilateral aid - 0.1 0.1 Total 348.3 162.3 510.6 Economic Rate of Return: 17Z Staff Appraisal Report: Report No. 7417-CHA dated April 25, 1989 IBRD 20919R This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be discosed without World Bank authorzation.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE PEOPLE'S REPUBLIC OF CHINA FOR A HUBEI PHOSPHATE PROJECT 1. I submit the following memorandum and recommendation on a proposed loan to the People's Republic of China for US$137.0 million equivalent to help finance a Hubei Phosphate Project. The proposed loan would have a repayment term of 20 years, including 5 years of grace, at the standard variable inter- est rate. The Government would on-lend the loan proceeds, throagh the Hubei provincial government, to the two project companies at an interest rate equal to 1052 of the Bank variable loan rate, with a repayment period of 20 years, including 5 years of grace. The commitment charges and foreign exchange risk on all on-lent proceeds would be borne by the project companies. 2. Background. China is the world's third largest producer and consumer of chemical fertilizers. Despite the impressive build-up of production capa- city during the last decade, China remains a large importer of chemical ferti- lizer due to the rapid growth of fertilizer consumption. With limited arable land available for agricultural production, China's priority in agriculture has been placed on maximizing crop production per unit of land by increasing fertilizer use for agriculture. Apart from the general shortage of fertili- zer, a major constraint to increasing agricultural productivity is the short- age of phosphate (P205) and potash (K20) fertilizers which causes an imbalance in fertilizer nutrient use. The current nutrient ratio of 100 (N)s33 (P205):8 (K20) in China compares unfavorably with the agronomically desirable ratio of 100:50:20. This nutrient imbalance reduces the benefits of the current rela- tively high level of nitrogen application. Over 70X of the cultivated area is deficient in phosphate, about 40Z seriously so. 3. The production of phosphate fertilizers in China has been low com- pared to the large potential demand. Production has been limited to low-grade products such as single superphosphate (SSP) produced by small phosphate fer- tilizer plants located in almost every province. The low production was due to technical difficulties in processing the Chinese phosphate rock, which is available in abundant supply, into concentrate that is suitable for production of high-grade fertilizers. In recent years, however, a new process for bene- ficiating domestic rocks to produce high-grade fertilizers has enabled China to look toward establishing an efficient local phosphate industry. 4. In the past, the allocation and pricing of fertilizer was strictly administered by the Government. In recent years, a two-tier market system has emerged as a result of the ongoing reforms which call for expanding the role of market forces in fertilizer production and allocation. Under the two-tier system, all fertilizer plants sell their output at controlled prices for pro- duction under the state plan quota and negotiated (market-influenced) prices for that above quota. At present, about 402 of the country's total consump- tion of all fertilizers, and about 152 of high-grade fertilizers, are sold outside the state allocation plan at negotiated prices. The Government's  -2- current strategy is to continue gradually reducing its administrative control of '^.;llizer pricing, in parallel with gradually dismantling annual produc- tion planning and allocation. Guidelines for future policy reforms are being developed by an interagency working group formed within the Government. This group is reviewing fertilizer pricing and allocation policies according to a work plan discussed with the Bank. However, given that the process of overall price reform has temporarily slowed somewhat owing to government concerns that such adjustments will further exacerbate current inflationary pressures, the agenda for further changes in the fertilizer pricing and allocation system is likely to be more protracted than originally anticipated. 5. Ratiorvle for Bank Involvement. The Project would help China realize its priority in the fertilizer sector during the Seventh and Eighth Five-Year Plans (1986-95). This priority is to reduce the nutrient imbalance by rapidly expanding production capacity of high-grade phosphate fertilizers, based on economically exploitable domestic phosphate resources. The focus of Bank operations in the fertilizer sector initially was placed on rehabilitating and rationalizing ex4.sting nitrogenous fertilizer plants which had low efficencies and outdated technologies. The Phosphate Development Project (Loan 2958-C8A, FY88) which was prepared and appraised concurrently with the proposed project, expands Bank operations beyond the nitrogenous fertilizer subsector. During Project preparation, the Bank helped to articulate the Government's phosphate subsector development strategy and strengthen MCI's subsector planning capa- bility by carrying out a joint Phosphate Subsector Study. This study has helped the Government to identify priority investments, including optimal location and product mix, to the year 2000. The Chinese authorities have expressed interest in further Bank assistance in coaiducting follow-up work emanating from the study and in carrying out similar Ftudies in other subsec- tors. 6. The integrated development of phosphate mines and high-grade fertili- zer plants to be implemented under the Project would be the first of this kind in China in terms of their size and configuration. They would help China to gain the experience needed to implement further investments already identified by the study. Bank involvement during project preparation already has helped to optimize the configuration of mine and fertilizer plants, and the technical assistance to be provided under the Project would strengthen China's project management capabilities, particularly in establishing large-scale, multiple- component chemical fertilizer complexes. Consultant services also will be provided to strengthen the capacity of Chinese design institutes to identify and analyze potential safety hazards and plant operability in chemical plant design and operations. 7. Project Obiectives. Specific objectives of the Project are: (a) to support the implementation of the first phase of the Investment program devel- oped as a result of the Phosphate Subsector Study undertaken during Project preparation, and therebj provide a model for future investments in integrated developuent of phosphate mines and fertilizer plants; and (b) to strengthen MCI's project capabilities, particularly with respect to reducing technical risks associated with the integrated development of phosphate mines and ferti- lizer plants.  -3- 8. Proiect Description. The Project would consist of three components: (a) the Dayukou mine and fertilizer development component--establishing a 560,000 tpy TSP plant and a 12,000 tpy aluminum fluoride plant at Dayukou in Hubei, based on expansion of an existing mine to produce 3.5 Mtpy ROM ore, and construction of a beneficiation plant at the mine site; (b) the Huangmailing mine and fertilizer development component--establishing a 180,000 tpy MAP plant at Huangmailing in Hubei, based on expansion of an existing snine to produce 1.0 Mtpy ROM ore, construction of a modern beneficiation plant at the mine site, and rationalization of an existing low-grade nitrogenous fertilizer plant to supply ammonia for MAP production; and (c) the technical assistance component--provision of consultant services in support of project implementa- tion and mine workshop maintenance, and consultant services for training on hazard and operability (HAZOP) analysis in chemical plant design and opera- tions. A breakdown of costs and the financing plan are shown in Schedule A. Amounts and methods of procurement and of disbursements are shown in Schedule B. A timetable of key project processing events and the status of Bank group operations in China are given in Schedules C and D, respectively. A map is aluo attached. The Staff Appraisal Report, No. 7417-CHA dated April 25, 1989, is being distributed separately. 9. Agreed Actions. The Government has agreed on the following major actions: (a) to allow the two project companies (JPCC and HPCC) to market their entire output outside the state allocation plan at negotiated prices; and (b) to cover any cash flow deficits of the two project companies during the initial three years of start-up, provided such deficits are not the result of inefficient managemenw and operation. In addition, if th' wvernment adopts a new funding policy to allow for equity-type fundink ..cr new invest- ments of state-owned enterprises, it plans to allow the two project companies to convert a portion of local loans to the companies' own funds so that they can achieve a long-term debt/equity ratio of 75:25 or better. The two compa- nies will: (a) prepare and furnish to the Bank for comments by December 31, 1990 comprehensive programs for management strengthening, and staff recruit- ment and training, and thereafter carry out the agreed programst (b) maintain respective project management teams during Project implementation; (c) build and operate the project mines and plants with due regard to safety, ecological and environmental factors and in accordance with environmental standards satisfactory to the Bank; (d) maintain debt service coverage ratios of at least 1.2 once that ratio is reached; (e) maintain long-term debt to equity ratios of 75:25 or better once that ratio is achieved; (f) maintain current ratios of at least 1.2 once that ratio is achieved; and (g) prepare and submit five-year rolling financial plans for each year from 1990 to 1998. JPCC will prepare the supply and transport arrangements satisfactory to the Bank for the amount of outside phosphate concentrate required for TSP production by Decem- ber 31, 1991. Conditions of loan effectiveness ares (a) signing of subsidi- ary loan agreements between the Government and HPG, and HPG and each of the companies on terms and conditions satisfactory to the Bank; and (b) approval of the loan agreement by China's State Council. 10. Benefits. The quantifiable benefits of the Project derive from: (a) phosphate fertilizer (TSP and MAP) production utilizing phosphate rock from the mines to be developed under the Project and other local raw materials such as pyrites; and (b) improved economic efficiency of production through the restructuring of existing inefficient operations, including the conversion of  -4- production from low to high economic value fertilizers. The ERR for the Proj- ect is estimated at 172. Although the economic benefits from the Phosphate Subsector Study undertaken during F.-rject preparation are unquantifiable, they will be lazge and affect the entire sector. Indirectly, the Project will generate significant economic benefits in agriculture by reducing the nutrient imbalance and increasing the synergism of fertilizer application. 11. Risk. The main technical risks relate to the need for coordinated implementation and commissioning of high-grade fertilizer plants and associa- ted mines. In the past, the lack of proper coordination has been a persistent problem in implementing integrated mine and fertilizer investments, which have been executed by separate entities under separate budgets. This risk will be mitigated by implementing both mine development and fertilizer plant construc- tion under the same project management team and from the same budget, as well as by assurances from the Government on diligent monitoring and coordination. It will be further mitigated by the technical assistance subcomponent, which will involve internationally experienced consultants in project implementation and production start-up. Rigorous development and implementation of detailed staff recruitment and training programs, with assistance from internationally experienced consultants and local design institutes, would also help reduce the risk. 12. Recommendation. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank and recommend that the Executive Directors approve the proposed loan. Barber B. Conable President Attachments Washington, D.C. April 25, 1989  Schedule A CHINA HUBEI PHOSPHATE PROJECT Estimated Costs and Financins Plan Estimated Costs La /b Local Foreign Total