Turkey - Erdemir Steel Project - Stage Two

Document of The World Bank FOR OFFCIAL USE ONLY Report No. 9720 PROJECT PERFORMANCE AUDIT REPORT TURKEY ERDEMIR STAGE II STEEL PROJECT (LOAN 1606-TU) JUNE 28, 1991 Operations Evaluation Department 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 disclosed without World Bank authorization. CURRENCY EQUIVALENTS Currency Unit = Turkish Lira (TL) Year Value of US$ 1976 * TL 16.05 1977 TL 18.00 1978 TL 24.28 1979 TL 31.08 1980 January TL 70.00 1981 January TL 91.00 1982 January TL 139.60 1983 January TL 191.15 1984 January TL 309.20 1985 January TL 451.40 1986 January TL 586.40 1987 January TL 752.83 1988 February TL 1160.00 * Annual averages through 1979 ABBREVIATIONS AND ACRONYMS BOF - Basic Oxygen Furnace CIM - Capacity Improvement & Modernization Project EFC - Erdemir's Foreign Consultants Erdemir - Eregli Demir ve Celik Fabrikalari, T.A.S. ERR - Economic Rate of Return FOSC - Foreign Operating Steel Company IRR - Internal Rate of Return NPBT - Net Profit Before Taxes PIP - Productivity Improvement Project PPAR - Project Performance Audit Report SEE - State Economic Enterprise TDICI - Turkish Iron and Steel Company FOR OFFICIAL USE ONLY THE WORLD ANK WaNnglon D.C. 20433 U.SA 0fi* of DirectorGweneral OPeraon Evsaon June 28. 1991 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Performance Audit Report on Turkey Erdemir Stage II Steel Project (Loan 1606-TU) Attached, for information, is a copy of a report entitled *Project Performance Audit Report on Turkey - Erdemir Stage II Steel Project (Loan 1606-TU)m prepared by the Operations Evaluation Department. Attachment Is document has a restried dilibulln a may be uwed by reclpiln only h fe pfrdomance of their oMcWal dules. He contente may not o0eeae be disceoed wMiut Wold Bank autoekaton. FOR OFFICIAL USE ONLY PROJECT PERFORMANCE AUDIT REPORT TURKEY ERDEMIR STAGE II STEEL PROJECT (LOAN 1606-TU) TABLE OF CONTENTS Page No. Preface ..................................................... Basic Data Sheet ............................................1 1 Evaluation Summary .......................................... v I. BACKGROUND .........*.............................. 1 Country Macroeconomic and Sector Setting ........... 1 The Turkish Iron and Steel Industry .............. 4 Market Prospects ........... ..... ............... . 6 Government Policies in the Steel Sector .......... 7 II. PROJECT DESIGN ........... ............... ................ 8 Project Description, Objectives and Rationale for Bank Support .............00....................... 8 III. PROJECT IMPLEMENTATION ..................... * ...... 11 Project Cost Analysis ............................ 11 Implementation Schedule .................... 11 Role of Consultants and Effectiveness of Project Management ... ........................ 11 Procurement ....... ................................. 13 Environment ......................... o............... 13 Training ...... .. ................................ 13 Bank Supervision ............................ ..... 14 Compliance with Covenants 0........................ 14 IV. PROJECT OUTCOME ................... ............... * 14 Production ............................ . . . ...... 14 Competitiveness .................................... 16 Financial Performance .............................. 17 Erdemir's Future Development Plans ................. 17 Re-estimated Financial and Economic Returns ........ 19 Future Expansion Plans ............................. 19 Sustainability .... o........ . . . .................. 20 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 disclosed without World Bank authorization. TABLE OF CONTENTS (Cont'd.) Page No. V. FINDINGS AND CONCLUSIONS .......... ................... 20 Overall Assessment of the Project .................. 20 Conclusions ....... ............. .............. . 21 ANNEXES 1 - Production Performance .......... o. ................... 25 2 - CRC Actual Costs of Production, 1982-1990 ............. 26 3 - Energy Consumptions of Last Five Years ................ 28 ANNEX TABLE 1 - Iron and Steel Statistics ............................. 29 APPENDICES A - Environmental Pollution and Noise Control in Erdemir... 30 B1 - Current Training and an Industrial Training Center Project .................. **********************.. 37 B2 - Erdemir Steel Production Performance ..................... 39 B3 - Financial Data .......... .............................. 81 B4 - Comments Received from Borrower ....................... 85 PROJECT PERFORMANCE AUDIT REPORT TURKEY ERDEMIR STAGE II STEEL PROJECT (LOAN 1606-TU) PREFACE This is a Project Performance Audit Report (PPAR) on Turkey Erdemir Stage II Steel Project, involving an IBRD Loan in the amount of US$95 million to Eregli Demir ve Celik Fabrikalari, T.A.S. (Erdemir). The loan was approved on June 29, 1978, and became effective on July 30, 1979. The Closing Date of June 30, 1983 was extended to May 31, 1987. Final disbursement was made on May 19, 1987. The PPAR is based on the Project Completion Report (PCR) of the project prepared by Erdemir and supplemented by Bank Staff in the Europe, Middle East and North Africa Regional Office and issued in 1989,1/ the Staff Appraisal Report; the Loan, Guarantee, and Project Agreements; supervision reports; correspondence between the Bank and the Borrower, and internal Bank memoranda. An OED mission visited Turkey in June 1990 and discussed the effectiveness of the Bank's assistance with the management and staff of Erdemir. Their kind cooperation and valuable assistance in the prepration of this report is gratefully acknowledged. The PCR provides a satisfactory account and assessment of the project experience, and discusses the performance of the Bank and the project executing agencies. The PPAR elaborates on particular aspects such as changes in the project design and implementation, production performance and international cost competitiveness of the project, factors contributing to this result and lessons relevant to future Bank lending to the steel sector in developing countries.. The draft PPAR was sent to the Borrower for comments. The comments received from Eregli Iron and Steel Works, Inc. are reproduced as an Appendix to the PPAR. 1/ Project Completion Report, Turkey - Erdemir Stage II Steel Project (Loan 1606-TU), Report No. 7905, dated June 26, 1989. PROJECT PERFORMANCE AUDIT REPORT TURIEY ERDEMIR STAGE II STEEL PROJECT (LOAN 1606-TU) BASIC DATA SHEET (Amounts in US$m) LOAN POSITION As of 1131/91 Original Disbursed Cancelled Repaid Outstanding Loan No. 1606-TU 95 95 0.0 62.13 32.87 CUMULATIVE LOAN DISBURSEMENT FY79 FY80 FY81 FY82 FY83 FY84 FY85 FY86 FY87 (1) Planned 4.52 40.1 87.5 99.6 100* 100 100 100 100 (ii) Actual 2.9 30.2 51.1 59.7 55.5 74.6 92.1 100 (iii) (ii) as Z of (1) 7.2 34.5 51.3 59.7 55.5 74.6 92.1 100 * First Quarter STAFF INUT (manweeks) 2977 1978 1979 1980 1981 1982 198 1984 1985 1988 1987 1988 TOTAL Preappralsal 9.8 4.7 - - - - - * - - - - 14.6 Appraisal - 62.8 . - - - - - - - - - 62.8 Negotiation - 27.0 - - - - - - - - * - 27.0 Supervision - - 14.9 16.0 18.8 26.1 25.6 17.8 18.2 4.5 11.7 11.5 158.0 TOTAL 9.8 94.0 14.9 15.0 18.6 25.1 25.5 17.8 18.2 4.5 11.7 11.5 256.8 - iv - MISSION DATA No. of No. of Date of Honth/Year Weeks Persons Manweeks Report Appraisal 02/78 3.6 2 7.2 05/78 Supervision I 09/78 3.6 2 7.2 10/78 Supervision II 05/79 2 2 4 08/79 Supervision III 10/79 2.8 2 5.6 12/79 Supervision IV 04/80 3.2 2 6.4 05/80 Supervision V 03181 2.8 2 5.6 - Supervision VI 06/81 2.8 2 5.6 07/81 Supervision VII 06/82 8 4 32 07/82 Supervision VIII 01/83 3.2 2 6.4 02/83 Supervision IX 11/83 2.8 2 5.6 01/84 Supervision X 07/84 2.8 2 5.6 08/84 Supervision XI 02/85 2.4 2 4.8 03/85 Supervision XII 01/87 5.2 2 10.4 02/87 PCR Mission 04/88 4.2 2 8.4 06/88 Total Staff Input 114.8 OTHER PROJECT DATA Original Loan Actual or Date Reestimated Board Approval -- 06/29/78 Loan Agreement -- 06/30/78 Effectiveness -- 07/31/79 Loan Closing 06/30/83 05/31/87 Borrower Rep. of Turkey Executing Agency Erdemir Fiscal Year of Borrower Jan. 1 - Dec. 31 -v - PROJECT PERFORMANCE AUDIT REPORT TURKEY ERDEMIR STAGE II STEEL PROJECT (LOAN 1606-TU) EVALUATION SUMMARY 1. The project was implemented with private investment which has during the 1980s, a p-Tiod of pro- been stagnant. These investments found and radical change in Turkey's are likely to increase domestic economic policies and strategy. The demand for high quality steel new government that assumed charge products. in 1980 believed that a market- oriented economy with a strong 3. In 1989 Turkey produced 7.9 export orientation was the key to million tons (mt) of crude steel or the revival of economic growth. The about 12 of total world production new Government embarked on a major (783.5 mt). At 132 kg per capita program of economic reforms in the steel consumption, Turkey's market areas of exchange rate, trade liber- still has considerable potential to alization, export incentives, posi- grow (by comparison Japan was 620 kg tive interest rates, tax reforms, and Spain 221 kg per capita). There regulations of public enterprises, are three integrated steel plants in rationalization of public investment Turkey - Karabuk and Isdemir both in programs and control of inflation. public sector and Erdemir (joint This reform program has been reason- sector), which together accounted ably successful except for the for about 481 of the total crude inflation which remains high and steel production capacity in 1989. volatile. The Bank supported this The balance was accounted for by economic reform program with struc- twenty-two private electric arc fur- tural adjustment loans and sectoral nace based steel plants. Capacity adjustment loans in agriculture, utilization has shown a steady energy and the financial sector. improvement increasing from 581 in 1980 to 89.2Z in 1988. 2. The manufacturing sector has been the sector most profoundly 4. The compounded annual growth changed by the structural adjustment rate of total crude steel consump- reforms. Output growth increased at tion between 1980-89 has avtr-,d an average annual rate of 72 during slightly less than 9Z, but grovith the 1980s with the sector accounting has been highly uneven. Turkey has for 251 of GDP and 13.2Z of sector emerged as a fairly large exporter employment in 1989. Exports of steel products with net exports increased from 6% of manufacturing of finished products exceeding 2.5 output in 1977 to 501 in 1989. The mt in 1988. The domestic market for biggest increase was in intermediate flat products has more than doubled goods (including iron and steel between 1980-89 and is approaching products). Foreign investments have 2.5 mtpy. with cold rolled producte been increasing rapidly in contrast accounting for about 461 of the flat - vi - market and exhibiting the highest 1976 and benefitted from the good growth rate be.ween 1986-89 (14.62). relationship existing between the Imports have decreased from about company and the Bank. and the Bank's 352 of total consumption of flat intimate knowledge A the company's products in 1980 to about 28Z in past performance in finance, 1989. Based on conservative operation and project management. assumptions, the domestic market for Key issues were clearly identified all flats is estimated to reach 3.5 and covenants, appropriately million tons in 1994 and 5.9 million formuletad, were included to ensure tons in 2000. Half of this market the success of the project. is expected to be cold rolled However, it would have been more products for which Erdemir has efficient to have finalized the launched its Capacity Improvement project scope on the basis of the and Modernization Project (CIM) to actual performance of Stage I meet a part of it. facilities which started up in late 1978; appraisa . for Stage II was 5. Until the early 1980s the completed one year earlier. The Government played an active role in resulting shortcomings, i.e. failure the areas of investments to address some bottlenecks, were (development of the three integrated corrected in the PIP (para. 11). steel plants), and setting prices of key inputs and outputs, import 9. Based on lessons learned from tariffs, export incentives, etc. the Stage I experience whose imple- The industry was highly protected mentation suffered substantial and controlled, but has become much delays and cost overruns, emphasis less protected and subject to was given to strengthening Erdemir's greater competition with the gradual management capability in both imrle- liberalization of the economy during menting and operating the project. the past decade. Covenants (i) required Erdemir to engage an experienced engineering 6. Erdemir is the largest of company; (ii) re-emphasized the Turkey's integrated steel plant with importance of maintaining the pri- a crude steel capacity and vate status of the company, and the production of 2 mtpy of liquid autonomy and continuity of top man- steel. Erdemir was established as a agement; (iii) restricted the level semi-private company operating as a of growth of the workforce; (iv) private joint stock company subject limited dividend payouts and re- to the coimercial code. quired observance of certain fixan- cial ratios and (v) committed the 7. The major objective of the Government to allow Erdemir access project was to raise the output to foreign exchange for imports of level of liquid steel from 1.5 to high grade coal and iron ore. 2.0 mtpy by 'rounding out' the Stage I expansion program. The proiect 10. Total project financing also aimed at reduction of energy required was estimated at US$341.8 consumption, operating costs and million whereas the actual expendi- improvement of ecological conditions ture was US$251.8 million resulting at the plant site. in a substantial saving of US$90.0 million. Major factors influencing 8. Project preparaion was based this saving were: i overestima- on a feasibility study prepared in tion of inflation projections; (ii) - vii - very favorable market conditions for Instead of applying a 152 preference procurement and (III) the TL went margin when local value added through a real devaluation during exceeded a certain percentage (20?) the implementation period (PPAR, of the tota value of equipment, a para. 3.01). sliding scale from OX to 15Z ,Yas used based on the actual level of 11. The project was implemented local value added. This alternative in two parts. The original (as system has proved effective and appraised) Stage II investment pack- could be corisidered for large and age was implemented between 1878-85 complex industrial projects. with a 12-ronth delay, but at a sub- stantial cost saving ($90 million). 14. Effective measures to improve With Bank approval, Erdemir invested environmental conditions have been the unutilized loan proceeds in a taken by Erdemir and about US$10.0 supplementary equipment package million was spent for the installa- the Productivity Improvement Project tion of environmental equipment. (PIP) - aimed at increasing the ca- However, there !s room for further pacity of certain bottleneck equip- improvement. The project was very ment in order to ensure attainment closely monitored and potential of the Stage II liquid steel produc- problems were identified early on tion target of 2.0 mtpy on a consis- and corrective actions were always tent basis (PPAR, para. 2.03). The initiated, enabling the project to PIP was implemented between 1985-87 be completed close to the original with about a six-month delay. The targets. The long association of original loan closing date was thus Erdemir with the Bank contributed to extended by about four years for the very effective commications implementation of PIP. Overall, because of good understanding of given the experience gained in Stage Bank requirements. Covenants were I, the estimated implementation abided by both the Government and schedule was slightly optimistic. the Company. All covenants proved to be vital to the good performance 12. Foreign engineering consul- of the project (see PPM, para. tants have played a vital role in 3.10). Erdemir development since its incep- tion. A foreign joint venture part- 15. Erdemir has given a lot of ner (Koppers) helped to construct emphasis to the training of techni- and initially operate the original cal and managerial staff over the facilities. After the partner sold years with the assistance of its its shares, Erdemir relied on a foreign consultant in particular. A foreign consultant, hired on a long- large part of its success can be term basis to upgrade its operating attributed to the gradual build up practices, train its staff and of competence of its staff (see prepare its development programs PP, para. 3.08). (Stage I, II, CI1). 16. By and large, the project has 13. Procurement was carried out enabled Erdemir to reach or exceed efficiently by Erdemir. In order to all the operational and financial provide incentives more effectively goals set at the time of appraisal. to increase local content, a non- The learning period was longer than standard approach was adopted for expected. It took seven years to the local preference margin, reach the 2.0 million tons per year - viii - of liquid steel production and three agreed limits because of the impact years to realize the PIP's impact on of TL devaluation on its MLT debt energy savings. Erdemir has now a which was mainly in foreign curren- modern and competitive plant capable cy. However, after the revaluation of producing 1.5 million tpy of good of assets in 1983 as well as large quality finished products and 1.9 increase in equity in 1984. the high million tpy with the additional debt/equity ratio declined to a rea- rolling of imported slabs. sonable levell after 1985, because of improved operational performance 17. Productivity has improved in and higher steel prices, operating recent years from 12.2 manhour per profits improved remarkably (PPAR, ton of raw steel (mh/tro) to 8.8 para. 4.10). However, profit mh/tre in 1990 (first semester). margins have come under pressure in Production performance has improved 1991 due to declining prices and continuously since the start-up of sharply higher wage settlement. Stage II and is now close to that of efficient steelmakers in the world 21. The re-estimated FRR and ERR for similar facilities (see PPAR, based on actual costs and prices and para. 4.02). output for 1987 are 20? and 25.5? respectively favorably comparing 18. On the export market, Erdemir with the appraisal forecasts of has been able to fill the niche cor- 18.1? and 17.2? respectively. How- responding to its product mix and ever, Erdemir's actual production i.vel of quality with its excess performance during 1988-89 indicates .-duction particularly when the that the incremental production of prices were at their peak in 1987 finished products from the project and 1988 (see PPAR, para. 4.03). is about 820,000 tpy compared with However, Erdemir still has to 550,000 tpy assumed in the re- improve its quality to satisfy a estimation of the PCR. This should continuously more demanding market. result in substantially higher actual values for the FRR and ERR. 19. The project has enabled Erdemir to become an internationally 22. Erdemir has currently competitive steel producer of flat embarked on a two step round out steel products. Economic and finan- production investment program - the cial costs are well below world Capacity Improvement and Moderniza- prices. Operating costs have tion Project (CIM) - which aims at decreased substantially, by 13.5Z increasing the liquid steel capacity since 1982 when expressed in US to 2.8 mtpy at a total estimated dollar terms. This reduction is cost of about US$1.5 billion. The mainly due to lower consumption of general objective of this expansion coal and other raw materials, is to allow Erdemir to participate consumables and spares, and energy fully in domestic market growth. savings. Financial expenses are The above project is very ambitious also substantially lower due to a and thus poses considerable risks. sounder financial situation (less Although Erdemir is currently well debt). managed, it will need to adjust its present organization structure and 20. Erdemir's financial perfor- management practices in order to be mance between 1980-83 was quite poor more responsive to the market and its debt/equity ratio exceeded demand. The risk introduced in the - i project by the reliance on a large its foreign consultant, technologi- volume of imported slab at uncertain cal strengths needed in both project future prices has to be analyzed management and technical operations. further, especially in light of the Erdemir also benefitted from the fact that Erdemir can produce slab sound technical decision made at at lower cost. Uncertain steel inception regarding the scale and prices compound the risk further; the layout of its facilities, and low steel prices would depress the its gradual expansion of capacity rate of return affecting the firm's allowed its management and staff to viability. Also, since Erdemir build up skills in line with expects the major part of financing increasing technological complexity to come from internally generated (see PPAR, para. 5.03-5.06). funding, low prices would adversely affect the financing plan, jeopard- 25. Finally, besides all the izing its viability. above-mentioned factors, the Stage II was successfully implemented 23. The sustainability of because ofs (i) careful design; Erdemir's operations is reasonably (ii) sound project management; (iii) assured. It has become an interna- savings permitting investment in tionally competitive producer of PIP; (iv) adherence to all cove- flat steel products and it should be nants; ) less interference by the able to maintain its competitiveness Government in the company's manage- and even enhance in the future ment; and (vi) good and cooperative through well planned and designed working relationship between all investments. Gradual privatization parties. of Erdemir's government shareholding is being considered which will ensure a reduction of government intervention in the selection of top management personnel as well as a greater market and profit orientation, both of which are critical to the company's future success. 24. The factors contributing to the success of the project are many. Some of them stem from the original decisions taken at the founding of the company, as well as the subse- quent strategy and policies adopted during Stage I Expansion, while others are related to the policies adopted during the eighties by the company and the Governmemat. Erdemir's private status has pro- vided it adequate autonomy, which coupled with top management continu- ity and accountability led to the posit' bf results mentioned above. ErdiImir has developed, assisted by PROJECT PERFORMANCE AUDIT REPORT TURKEY ERDEMIR STAGE II STEEL PROJECT (LOAN 1606-TU) I. BACKGROUND Country Macroeconomic and Sector Setting 1.01 The project was implemented during the 1980s, a period of profound and radical change in Turkey's economic policies and strategy. Towards the end of the 1970s, the Turkish economy was in the doldrums, suffering from high inflation, a large current account deficit, a heavy debt-service bur- den, and negative GDP growth. The new Government that assumed charge in 1980 believed that a market-oriented economy with a strong export orienta- tion was the key to the revival of economic growth. With this objective in mind, the Government embarked on a major program of economic reforms whose main elements were as follows: (i) adoption and subsequent maintenance of a realistic and competitive exchange rate; (ii) trade liberalization through the elimination of quantitative restrictions and tariff rationali- zation; (iii) provision of substantial export incentives to offset anti- export biases and provide a positive inducement to exports; (iv) adoption and subsequent maintenance of positive interest rates to encourage private savings mobilization and efficient resource allocation by financial insti- tutions; (v) tax reforms to improve resource mobilization and reduce dis- tortions; (vi) reform of regulations governing state economic enterprises to improve public finances and the efficiency of these firms; (vii) rationalization of public investment programs; and (viii) tight monetary policies to restrain demand and control inflation. 1.02 The Bank supported this economic reform program with five struc- tural adjustment loans between 1980-85 and subsequently with sectoral adjustment loans in agriculture, energy, and the financial sector. The reform program has been reasonably successfull in achieving its macroeco- nomic objectives particularly with regard to the attainment of a sustain- able improvement in the current account balance. Economic growth has been revived and creditworthiness significantly improved. The only major area where progress has been limited is in controlling inflation which continues to remain very high and volatile because of the Government's expansionary fiscal policies.2 1/ For a detailed review of the Bank's structural adjustment lending to Turkey, see 'Evaluation of Structural Adjustment Lending in Turkey, PPAR of the Fourth and Fifth Structural Adjustment Loans (Loans 2321-TU and 2441-TU) and Overview of SALs I-V', Report No. 7205, OED, April 13, 1988. 2/ For an update of recent development, see "Turkey, Country Economic Memorandum - Towards Sustainable Growth", Report No. 7378-TU, August 5, 1988. - 2 - 1.03 As identified in the goals of the reform program, the manufactur- ing sector has been the sector most profoundly changed by the structural adjustment refarms. Output growth, which had stagnated, revived strongly and increased at an averaged annual rate of 7? during the 1980s with the sector accounting for 25% of GDP and 13.21 of formal sector employment in 1989. The biggest change has been in the sector's outward orientation with the percentage of manufacturing output exported increasing from 6? in 1979 to 50Z in 1989; fuelled by large export incentives, manufactured exports increased at an impressive annual average rate of 282 between 1979-89 and increased their share in total exports from 212 in 1980 to 78Z in 1989. Almost all branches of manufacturing industry have participated in this export performance and all subsectors have inreased their export orienta- tion. However, the biggest increase was in intermediate goods (including iron and steel products) and the least in consumer goods although consumer goods such as textiles and leather products still had the highest exports/ output ratio.3 A major benefit of this increased export orientation has been greater efficiency through exploitation of scale economies, as well as exposure to new designs and manufacturing techniques. Labor and capital productivity in the private and public sectors have improved through higher levels of capacity utilization without much increase in employment. 1.04 The export boom of the 19809 was accommodated largely through the better utilization of existing capacity which enabled capacity utilization rates to rise significantly above the depressed capacity utilization levels of the early 1980s. Investment for new or expansion of capacity was mod- est. In fact total annual investment in manufacturing actually declined significantly, falling in real terms to 55? of its 1980 level by 1989. This decline primarily reflects the drastic cutback of public investment in manufacturing to 15? of its 1980 level by 1989, in line with the Govern- ment's intention of relinquishing its role in the productive sectors. Thus by 1989, 83? of investment in manufacturing was accounted for by the pri- vate sector, up from its share of 40? in 1980. But the rising share of the private sector in manufacturing investment does not, reflect buoyant growth of investment. Indeed apart from a period in the mid-1980s (1984-86), private investment in manufacturing either stagnated or declined, and overall growth in the 1980s averaged less than 2Z per annum. 1.05 For the decade as a whole, private investment has been affected by several opposing factors. On the one hand, investors benefitted from gen- erous investment allowances (tax rebates, accelerated depreciation allow- ances and cash grants), which provided a strong incentive for established and profitable firms to continue incremental investments for expansion and modernization. On the other, the uncertain economic environment, particu- larly the high and variable inflation rate tended to inhibit major new investment. Moreover, the high real cost and ocarcity of medium-term fi- nancing, itself a reflection of high inflation also constrained investment 3/ For a detailed analysis of the contribution of exports to output growth between 1980-85, see 'Turkey Private Manufacturing Assessment of the Impact of Past Policies and Future Adjustment Needs", Report No. 6684- TU, July 1987. -3- for those enterprises that could not generate sufficient resources intern- ally. Within this overall pattern, growth of investment in consumer and capital goods was more significant, whereas investment in intermediate goods which generally have a long pay-back period declined over the decade.4 1.06 The inability of the Government to curb inflation and keep it under control particularly after 1986, has had very undesirable conse- quences for the manufacturing sector. Growth rates of output and invest- ment have, to a large extent, been very volatile. Following annual growth rates of nearly 10% in 1986-87, output growth declined to 2Z-3Z in 1988-89; before recovering in 1990. Similarly, private investment in manufacturing declined by 8Z between 1986-89, before recovering again in 1990. It is noteworthy that while private investment in manufacturing declined, total private investment continued to increase, largely due to a rapid growth in housing investment reflecting speculative purchases by wealthy individuals as well as interest subsidies to lower income households from the Mass Housing Fund. Tourism investment has also grown very rapidly since 1984. These large investments have benefitted the construction sector and gener- ated a strong demand for construction materials including steel rebars. Although private investment in manufacturing has been relatively stagnant, foreign direct investment in the manufacturing sector has been increasing rapidly. Net overall inflow of foreign capital reached $663 million in 1989, up from $106 million in 1987 and continued to rise in early 1990. Judging from the distribution of foreign investment approvals, nearly two- thirds of the foreign capital inflow appears destined for the manufacturing sector. Recently, several major multinational corporations have announced large projected investments in sectors such as autos, chemicals, etc., generally as joint ventures with local Turkish firms. These investments are likely to increase domestic demand for high quality flat steel products. 1.07 The recent liberalization of the capital account and strengthening of the Turkish Lira suggest that borrowing in foreign exchange could become a potentially more important source of investment financing, particularly for investments generating foreign exchange. The demand for such financing would arise from the continued scarcity of medium-term financing in domes- tic currency, and the Government's intention to phase down the FERIS scheme (whereby the Central Bank assumes the foreign exchange risk associated with foreign borrowing) because of its fiscal cost. For this type of financing to gain importance, however, the final borrower must have reasonable confi- dence regarding the stability of the real exchange rate. In particular, the perception of an exchange rate that is overvalued would dampen the demand for such foreign exchange credits, thereby also reducing investment. 4/ The high cost of funds undoubtedly inhibited companies from investing in low return projects; in the case of Erdemir the hign borrowing cost ensured a high degree of financial discipline in the management of investment funds preventing the leakage of funds into non-priority activities (paras. 4.08-4.11). Finally. the willingness of foreign creditors to extend the maturity of their lending to Turkish investors will also be contingent on their percep- tion of long-run macroeconomic stability. The Turkish Iron and Steel Industry 1.08 In 1989, Turkey produced 7.9 million tons (mt) of crude steel, accounting for nearly 1Z of total world production (783.5 mt) and ranked twenty-first amongst the world's steel producing countries.5 It accounted for almost 8% of total developing country production (100.9 mt). At 132 kgs per capita steel consumption, Turkey's market still has considerable potential to grow (by comparison, per capita consumption in Japan was 620 kgs, Spain 221 kgs). 1.09 There are three integrated steel plants in Turkey - Karabuk and Isdemir, both in the public sector and Erdemir (joint-sector), which to- gether accounted for about 48% of the total crude steel production capacity of 9.7 mt in 1989 (Table 1.1). The balance was accounted for by twenty-two private electric arc based steel plants. Of these, ten accounted for over 90Z of electric arc furnace output. In terms of nominal crude steel capac- ity, Isdemir is the largest (2.2 mtpy), followed by Erdemir (1.9 mtpy); Karabuk (0.6 mtpy) produces steel using the antiquated Siemens-Martin process. Between 1980-89, total crude steel capacity increased from 4.4 mtpy to 9.7 mtpy of which 3.8 mtpy was from electric arc plants and 1.5 mtpy from integrated producers. Capacity utilization has shown a steady improvement, increasing from 582 in 1980 to 89.2% in 1988 with a drop in 1989 due to a strike in the public plants. However, capacity utilization rates vary considerably by product group. In 1989, flat products had the highest capacity utilization rate (92?), followed by long products (68Z) and pipes (58Z). Table 1.1: Crude Steel Capacity (millon ton) Type 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 BOF 2,5 2,5 2,5 2,7 2,7 4,0 4,0 4,0 4,0 4,0 Siemens-Martin 0,6 0,6 0,6 0,6 0,6 0,6 0,6 0,6 0,6 0,6 Electric Arc 1,3 1,3 116 1 1,6 1,9 2,8 4,3 4,3 5,1 TOTAL 4,4 4,4 4,7 4,9 4,9 6,5 7,4 8,9 8,9 9,7 Capacity Utilization 58,0 59,0 67,0 77,0 88,0 75,0 80,0 78,6 89,2 81,0 Source: S.P.O. 5/ Source: International Iron and Steel Institute. - 5 - 1.10 The evolution of production, imports, exports and consumption between 1980-1988 in terms of crude steel is shown in Table 1.2. The com- pounded annual growth rate of total crude steel consumption between 1980-89 has averaged slightly less than 8, but growth has been highly uneven. It fell sharply during 1985-86 but rebounded in 1987 due to the strong growth of domestic demand arising from expansionary macroeconomic policies. Turkey has emerged as a fairly large exporter of steel products with net exports of finished products exceeding 2.5 mtpy in 1988. Table 1.2: Aprent Crude St**l Consumption (billion ton) APPARENT CONSUMPTION PER CAPITA CAPACITY YEAR PRODUCTION IMPORTS EXPORTS CONSUMPTION GROWTH CONSUMPTION UTILIZATION 1980 2.880 908 48 8.248 1.8 78 68.0 1981 2.614 1.192 168 8.640 12.2 80 59.0 1982 8.182 1.195 1.188 8.248 -10.9 69 67.0 1988 8.940 1.779 1.886 4.884 88.6 91 77.0 1964 4.882 2.858 2.210 4.975 14.8 101 88.0 1965 4.924 8.889 8.582 5.281 6.1 104 76.0 1986 5.924 2.786 8.871 6.288 1.1 108 80.0 1987 7.044 4.875 8.680 7.790 47.8 147 70.6 18 7.982 8.178 6.209 5.948 -28.7 110 89.2 1969 7.852 - - - - - 81.0 Source: S.P.O. 1.11 The growth of the domestic market in terms of finished products is shown in Table 1.3. Flat products (plate, hot rolled and cold rolled sheets) accounted for 42Z of the total market in 1989 and grew at a lower rate than long products. In industrialized countries, flat products account for a substantially larger share of total steel consumption because of their use in consumer durables industries (EEC - 60?, USA - 60.5%, Japan - 58.1%) and the growth rate of consumption of flat products is higher than for long products. In Turkey, the reverse has been true. Nevertheless, the market for flat products should continue to grow as economic activity accelerates and higher per capita GDP levels are reached. Table 1.8: Domestic Market for Carbon Steel Products (in millions of product tons) 1980 1981 1982 1988 1984 1985 1988 1967 1988 1989 CAOR (19R0-1989) (19M-1989) Long Products 1.5 1.4 1.8 1.8 2.2 2.5 2.7 8.4 8.8 8.2 8.8 6.811 Flat Products 1.1 1.2 1.8 1.6 1.8 1.9 2.0 2.6 2.8 2.8 8.5% 4.85 TOTAL " .l T 4 T74 T7 35 i i. eas 5.8s Flats as Percent 42 48 50 60 45 48 42 48 41 42 - 6 - 1.12 The domestic market for flat products has more than doubled be- tween 1980-89 (Table 1.4) and is approaching 2.5 ntpy. Cold rolled prod- ucts account for about 46? of the flats market and exhibited the highest growth rate between 1986-89 (14.6%). Growth of imports of cold rolled products have been particularly high to compensate for Erdemir's limited or lack of supply capability both in terms of capacity as well as specifica- tions, e.g. automobile manufacturers require deep drawing quality (grades 1113, 6114) and surface quality (1405); office equipment manufacturers require thinner gauge (0.2 to 1.5 m) cold roll and electro-galvanized material. Users of other flat products, e.g. shipbuilders using plates have also to rely on imports to overcome some quality and dimensional deficiencies in the domestic supply. Table 1.41 Domestic Market for Flat Products (cooiet) 1980 1988 1989 Erdemr Totel Erdemr rts Total Erdealr I TotaI Erdemir Imports Share X Plate 200 161 80 812 277 86 288 255 88 89.0 HR 414 807 107 951 741 221 984 840 144 85.0 CR 498 252 241 706 421 254 1062 588 479 55.0 Total 1Iff7N W! lugi im5 TOU Iup imi _6R Growth Rate (U) 1980-99 1986-89 Plate 4.1 (2.6) HR 10.1 1.1 CR 8.9 14.6 Overall Market Prospects 1.13 The Sixth Five-year Plan (1989-94) projects the total domestic demand for iron and steel products to reach 11.175 mtpy in 1994 with the share of flat products at 5.0 mtpy. These projections are viewed as over- optimistic. Erdemir has prepared forecasts of the growth of the domestic market for flat products, based on various assumptions of economic growth and percentage share of flats as well as on the growth of demand of spe- cific end user segments up to the year 2000. Based on conservative assump- tions,6 the domestic market for all flats is estimated to reach 3.5 million Of Based on past growth trends of per capita steel consumption and longs/flats ratio applicable to developing countries. - 7 - tons in 1994 and 5.9 million tons in 2000. Cold rolled produces are expected to account for almost half of the domestic flats market primarily because of strong demand from automobiles and appliance manufacturers. Erdemir has launched its Capacity Improvement and Modernization (CIM) Project (PPAR, paras.4.12-4.14) to meet a part of this market. The CIM project aims at enabling Erdemir to supply over 2.0 million tons of flats (56Z of the domestic market) in 1994 and over 2.8 million tons (472 of the domestic market) in 2000. These are ambitious targets but should be achievable provided Turkey's economy maintains its growth momentum and Erdemir gears itself to managing complex tasks involved in implementing the expansion programs. Government Policies in the Steel Sector 1.14 Until the early 1980s, the Government played an active role in shaping the development of the steel sector both as the owner of the three integrated steel plants in Turkey as well as being responsible for setting: prices of key inputs and outputs, import tariffs, export incentives, investment incentives, etc. The industry was highly protected and con- trolled. The Turkish Iron and Steel Company (TDICI), the state economic enterprise (SEE), which owns and operates lademir and Karabuk, was subject to a myriad of regulations which seriously curbed its managerial and operating autonomy. 1.15 With the gradual liberalization of the economy during the past decade and the introduction of regulatory reforms, the steel industry has become much less protected and subject to greater competition. Since 1985, domestic steel prices have been set by market forces with domestic prices being slightly lower than import prices, particularly for flat products.7 Currently, steel products are not protected by customs duties but are sub- ject to varying import leviesi for flat products, the levy is $6 per ton whereas for long products it is $40 per ton. The levy on long products is viewed as an anti-dumping duty to prevent the exploitation of the domestic market until such time as local producers recover from the 1989 strike. However, the domestic steel market has become more protected in 1991 due to an increase in the levy on flat steel products. Also the Government has imposed minimum quality specifications on steel imports in order to reduce cheap steel imports from Eastern Europe. To encourage exports, long products benefit from a maximum subsidy of 20Z of the FOB value of exports (currently $40/ton); flat products do not benefit from export subsidies as they are perceived to be competitive in export markets. 1.16 The loosening of internal regulations has led to greater competi- tion and entry into the industry, particularly for long products, as evidenced by the expansion of capacity of private sector arc furnace producers. This has resulted in excess capacity for long products. The Government has been actively encouraging the entry of private sector firms in the steel industry--two new projects for flat products are poised to enter the market and have received government approval. Moreover, no new major investments are planned in the two public sector plants of TDICI ./ This may be due to quality or grade differentials. - 8 - except for investments for debottlenecking, energy conservation and quality improvement. In fact, the Government is planning to convert TDICI into a joint-stock company with a view to its eventual privatization. This may prove difficult because of the obsolete technology employed. 1.17 The Bank's role in influencing changes in steel sector policies has occurred indirectly through support for the Government's structural adjustment programs in the eighties, that have led to widespread liberali- zation in such areas as investment controls, price controls, import protec- tion, technology imports, public sector regulations, etc. These reforms have generated a conducive policy environment for the development of effi- cient firms, particularly if Turkey is able to overcome the macroeconomic problems it currently faces. II. PROJECT DESIGN 2.01 The Company. ERDEMIR, effectively the largest of Turkey's inte- grated steel plants, went into operation in 1965, initially with a crude steel production capacity of 470,000 tons per year which has been increased successively to 0.8 million tons per year (mtpy) in 1972, 1.5 mtpy in 1978 (Stage I expansion) and 2.0 mtpy in 1989 (Stage II expansion). Stage I and II were financed partially by the Bank. 2.02 Erdemir was established as a semi-private company under a special law which guaranteed that irrespective of the level of state ownership, the company would be operated as a private joint stock company subject to the commercial code. It was designed and constructed with foreign private partners holding about 20Z of the shares. This association helped to establish a sound management and organizational structure and a good plant layout with provision for future expansion. These basic features played an important role in the success of subsequent projects. Project Description, Objectives and Rationale for Bank Support 2.03 The major objective of the project was to raise the output level of liquid steel from 1.5 to 2.0 mtpy (finished products from 1.1 mtpy to 1.5 mtpy) by rounding out the Stage I expansion program which had been fi- nanced by the Bank (Loan 817-TU) through utilizing the iron and steelmaking and hot rolling facilities installed in Stage I more effectively. The project also aimed at reduction of energy consumption, operating costs and improvement of ecological conditions at the plant site (see PCR, para. 1.04). After the implementation of the original Stage II investment pack- age, due to substantial savings in project costs, some additional invest- ments were undertaken with Bank approval to ensure that the above produc- tion levels could be achieved consistently. This supplementary investment package, referred to in the PCR as the Productivity Improvement Project (PIP), aimed at increasing the capacity of certain bottleneck facilities, further decreasing costs of production and improving the quality and value of the product mix. The PIP project also included additional efforts to - 9 - strengthen operating and management practices with the continued assistance of a foreign vperating steel company (FOSC) which had been involved earlier in the preparation of the Stage I and II projects. Bank involvement in the Stage II project was justified on the grounds that the investment would enable Erdemir to improve productivity and efficiency and bring its produc- tion costs below world prices. This was reflected in the financial and economic rates of return of about 18Z; and finally the project fitted well in the overall industrial development program of the Turkish Government. 2.04 Quality of Preparation Work. Project preparation was based on a feasibility study prepared in 1976 by Erdemir's foreign consultants--(EFC) (SAR para. 4.02). Project preparation benefitted from the good relation- ship which existed between the Company and the Bank, and the Bank's inti- mate knowledge of the Company's past performance in finance, operation and project management which allowed it to clearly identify the key issues involved in implementing the project efficiently and to formulate appropri- ate covenants to ensure the success of the project (see PCR page 5-7 on project covenants). However, given the nature of the project which was aimed at rounding out the on-going Stage I investment program, it would have been more efficient to finalize the project scope on the basis of actual performance of Stage I facilities and an updated feasibility study. The appraisal completed in late 1977 could not take into account the actual performance of the Stage I expansion which was completed only in late 1978. Erdemir's financial situation in 1977 was not particularly good with a rather high debtlequity ratio. It appears that the Bank tried to limit the size of the round out investment by restricting the loan size as a result of which some additional investments which were required to attain the production target on a consistent basis were not included in the original project scope. These were included in the subsequent PIP project (see below). 2.05 The Bank attempted to deal with the gaps arising from the dated feasibility study by requiring Erdemir to appoint a consulting engineering firm (FOSC) to re-examine the scope of the project in light of technologi- cal and market developments. FOSC suggested some significant modifications to the project scope (PCR, p. 21) while preparing the technical specifica- tions which resulted in the cancellation of some equipment items, e.g. the third down coiler of the hot strip mill and a fourth hot stove. Implemen- tation of this revised project was completed in 1985 at a substantial cost saving (para. 3.01). By this time, however, experience with the operation of the Stage I facilities indicated several bottlenecks and other problems which required resolution if consistent production at the 2.0 million tpa level were to be achieved. The combination of substantial savings in proj- ect cost and the evidence of bottlenecks and other shortcomings in produc- tion prompted Erdemir to define an additional investment program (PIP) with the help of EFC experts which was financed with the unutilized part of the Bank loan. The PIP project proved to be a vital complement to the original project scope since it made it possible to utilize all of the installed equipment at their maximum capacity, enabling the plant to operate at 100% of its nominal capacity of 2.0 million tons of liquid steel with signifi- cant energy savings. - 10 - 2.06 Project Implementation Arrangements. Based on lessons learned from the Stage I experiencev whose implementation suffered substantial delays and costs overruns,9 emphasis was given to strengthening Erdemir's management capability in both implementing and operating the project. The most important covenant was that Erdemir engage an experienced engineering company specialized in steel operations and projects to review the scope of the Stage II project prepared by EFC under an ongoing contract, and to supervise the implementation of the project. The Bank also re-emphasized the importance of maintaining the private status of the Company and of strengthening the autonomy and continuity ci top management. Consultations with the Bank before any changes of the three top executives of the company was part of the agreement. A covenant also restricted the level and growth of the workforce in order to prevent overstaffing pressures. Besides cove- nants limiting dividend payouts and requiring observance of certain finan- cial ratios (debt-equity, current ratios), the Bank obtained the Govern- ment's commitment to allow Erdemir access to foreign exchange for imports of high grade coal and iron ore to run its plant efficiently. The effec- tiveness of the Bank loan was subject to Erdemir obtaining foreign loans totaling US$29.0 million. As mentioned in the PCR para. 5.07, page 9, this condition most likely resulted in an increase in the financing costs of the project and a delay of about one year in loan effectiveness. In retro- spect, this condition of effectiveness does not appear to have been justi- fied. All the potential issues linked to company's operations and project management identified in the preparation of the project were addressed by well designed covenants allowed the Bank to monitor the project and the Company's performance more closely and to trigger corrective actions as needed. 81 The major lessons from the Stage I implementation are (1) even experienced steel companies need the help of technical advisors to implement a major project because of the extremely complex nature of teaks involved in managing both the normal operations as well as the prLiect; (2) in a technical assistance contract between a company and a consultant, it is very impertant to define the functional responsibilities of each party in specific terms, paying attention to the proper blend of consultant/company responsibilities taking account local attitudes and pride; (3) continuity of top management is critical to ensuring adequate leadership and accountability; (4) where stability of top management cannot be guaranteed, the engineering consultant/contractor should be given more responsibility for implementation; and (5) access to the knowledge and capability of an experienced operating steel company is critical to addressing issues concerning design changes and operating practices that can be expected to occur during project implementation. Other findings concern the importance of covenants in steel prices, financial ratios, private status of the company, reporting and supervision, evaluation of local contractors are summarized in para. 4.13-4.19 of the PCR (Loan 817-TU). 9/ Delays 41 months; cost overruns US$189.8 million (without IDC and WC) or 78Z. * 11 - III. PROJECT IMPLEHENTATION Project Cost Analysis 3.01 Total project financing required was estimated at US$341.8 million whereas the actual expenditure we US$251.8 million, resulting in a sub- stantial cost underrun of US$90.0 million. Most of the savings was due to the overestimation of the cost of the equipment, materials and spares com- ponent at appraisal. The PCR, tables p31 and p33, provide an analysis of the cost differences by component. In addition to the analysis presented in the PCR, the following factor. reduced the actual dollar cost of the project compared to the appraisal estimates (i) inflation projections in US dollars was overestimated significantly during the implementation period (7.52 for 1978-79 and 72 for 1980-82) which led to a huge provision of US$101.3 million for price contingencies;10 (ii) the international market for capital goods was severely depressed in the early eighties when the equipment, materials and spares were procured, and (iii) the TL vent through a real devaluation during the period of 1980-85 which reduced the local currency expenditures in dollar terms. The original financing plan for the project called for foreign loans to finance 422 and Erdemir's own funds from operations to finance the remainder (582). The actual outcome was slightly different with foreign loans providing 47Z and Erdemir's own funds 532. Suppliers' credit were not utilized. Implementation Schedule 3.02 The project was implemented in two parts: (i) the original project (1978-85) and (ii) the Productivity Improvement Project (1985-87). The completion of the first part was delayed by about 12 months for the production related components and by about 24 months for the utilities and environmental components. Taking into account that the project scope was revised and effectiveness of the loan was delayed, it is a reasonable achievement. The PIP was well designed and carefully planned before start- ing implementation; as a result it was implemented with only about six months delay which was mainly due to interference between normal operations and construction work which restricted construction work to periods of planned shutdowns of production facilities. Overall, given the experience gained during Stage I, the original implementation schedule was slightly optimistic. Role of Consultants and Effectiveness of Project Management 3.03 Foreign engineering consultants have played a vital role in Erdemir development since its inception. A foreign joint venture partner (Koppers) helped co construct and initially operate the original facili- ties. When Koppers sold its share, Erdemir decided to obtain technical assistance from EFC to fill the vacuum left by Koppers. This collaboration is still continuing. The feasibility studies for Erdemir's long-term 10/ Comparing total financing without price contingencies would give an overrun of only US$11.3 million or 4.72. - 12 - expansion were all prepared by EFC and is the basis for both the Stage I and II projects. Erdemir has relied heavily on EFC to upgrade its operating practices and train its staff. Moreover, when shortcomings were detected in the operations of some of Stage I and II facilities, EFC carried out a review leading to the preparation of the PIP project. 3.04 To avoid a potential conflict of interest in the finalization of the Stage II project, FOSC was contracted to review and finalize the scope of Stage II and assist in its implementation. Although FOSC's contribution was very fruitful (see para. 2.05), it did not participate in the imple- mentation of the subsequent PIP project since Erdemir had acquired suffi- cient project management capability. However, EFC assisted Erdemir in procuring the new equipment under PIP. In retrospect, it appears to have been a good decision given the nature of the PIP project. In general, there are some benefits (time and cost savings, continuity, etc.) in giving the responsibility to the same consultant to carry out the project prepara- tion work leading to a feasibility study and subsequently to assist in project implementation and start-up. 3.05 Effectiveness of Project Management. Based on the experience gained in Stage I, the Bank gave special attention to ensure sound and systematic project management. Erdemir agreed to recruit a consultant (FOSC)ll to assist it in all the major project implementation tasks, in particular, procurement, project time scheduling and cost control, construction management, and start-up. The project organization setup for Stage II gave greater responsibilities to the consultant compared to the consultants assisting Stage I. FOSC initially provided a team of 26 engineers which increased to 36 engineers at the peak of assistance. Erdemir had a team of 120 engineers and 100 other professionals working in the project management unit with FOSC's consultants. FOSC's engineers worked on a one-to-one basis with Erdemir's engineers in assessing the need for specific equipment and developing their specifications. They also collaborated closely in implementing the project management systems and procedures. The transfer of technology and project management know-how went extremely smoothly and by the end of thirty months most of the foreign consultants were able to hand over their responsibilities over to their local counterparts. FOSC, which had developed an established reputation in steel manufacturing, contributed a lot to updating and finalizing the project scope particularly with regard to introducing new technologies, designs and operating practices. FOSC's association also helped to instill in Erdemir's technical managers the importance of continually upgrading operating practices by studying the latest technologies and developments in iron and steel making. Following completion of the original Stage II, Erdemir commissioned a study carried out by EFC which led to the PIP project enabling the optimization of the benefits of the entire investment of Stage II (See above para. 2.03). The implementation of the PIP was entirely managed by ERDEMIR, with only limited technical assistance from EFC in procuriment. 11/ FOSC was contracted after an international competitive bidding. - 13 - Procurement 3.06 Procurement was carried out efficiently by Erdemir. An interest- Ing feature of this project was that a non-standard approach to local pref- erence margin was adopted. Instead of applying a 15% preference margin when local value added exceeded a certain percentage (20%) of the total value of equipment, a sliding scale from OX to 152 was used based on the actual level of local value added. The total preference of 15% applied only when local content was 1002 (see Bank comments on PCR, section F, page 9). This alternative to current preference could be considered for large and complex industrial projects, since it would give greater incentive to increase the local content beyond the current threshold of 20Z. It is nevertheless interesting to observe that the local content of the invest- ment has increased steadily over the years as shown below, attesting to the growing technological capability of local machinery manufacturers: Proiect Local Content (Z) Original 0 Stage I 35 Stage II (a) 45 Stage II (PIP) 65 Environment 3.07 Effective measures to improve environmental conditions have been taken and about US$10.0 million was spent for the installation of special facilities such as coke plant phenol treatment plant, ammonia absorption and recovery unit, sinter plant dust collecting system. All liquid efflu- ents are now brought to an acceptable level before being discharged into the Black Sea. Noise levels are at an acceptable limit but satisfactory air pollution control has not been achieved as yet. The Company has included air pollution equipment in its future investment plans (see also Appendix A, Environmental Pollution and Noise Control in Erdemir). Training 3.08 Erdemir management has given a lot of emphasis to the training of technical and managerial staff over the years with the assistance of EFC. In addition to training provided by the equipment suppliers, Erdemir's engineers received extensive training in EFC's own plants. EFC also assisted in developing a long term (LT) training program comprisingt on- the-job training, and formal training courses inside the plant. Erdemir has developed a competent training department to maintain and improve the various skills that it needs for its successful operations (see also Appendix Bl, Current Training and Industrial Training Center Project). It has also made extensive use of training programs within and without the country to supplement its in-house programs. A large part of its success can be attributed to the gradual build-up of competence of its technical and managerial staff. - 14 - Bank Supervision 3.09 The project was very closely monitored through regular reports from Erdemir, biannual supervision missions, and visits from the Borrower's top management to Washington for extensive exchange of information. Poten- tial problems were identified early on, mainly in the areas of financing and management, and corrective actions were always initiated. There was also a continuous and close contact between the Bank and the Company's con- sultants (FOSC and EFC) and the Government of Turkey throughout the period of project implementation. This led to the identification of potential problems and appropriate solutions which enabled the project to be com- pleted close to the original targets. As stresed in the PCR (para. 3.04) the long association of Erdemir with the Bank contributed to very effective communications because of a good understanding of Bank requirements. Compliance with Covenants 3.10 Both the Government and the Company have abided by all the cove- nants. The covenants on freedom to import coal and iron ore were particu- larly important to Erdemir in a situation of scarce foreign exchange avail- ability. The covenant on debt-equity ratio was also extremely important in achieving a much needed capital increase in 1984. Finally, the covenant limiting total employment levels was a key factor in fending off pressures to increase staff. Although, Erdemir feels that the covenant prevented it from building up a larger team of qualified engineers whose skills would have been extremely valuable in its present expansion program. Thus all of the covenants pro-ed to be vital to the good performance of the project (see PCR III-A, Project Covenants). IV. PROJECT OUTCOME Productior 4.01 By and large, the project hus enabled Erdemir to reach or exceed all the operational ,ad financial goals set at the time of appraisal. It is mainly due to the e,ntinuous efforts of its 'op and middle management to adopt modern operatinS practices in all areas of activities; namely produc- tion, sales, finance, personnel and administration. The table below gives data on production performance between 1982-90. It shows the impact of Stage II (first part completed in 1983 and PIP in 1986) on liquid steel output, energy consumption and productivity. The lesson to be learnt is that the learning perioi is often longer than expected (seven years to reach the 2.0 million tpy of liquid steel, three years to show the PIP impact on energy savings). - 15 - Production Performance Summary 1982 1986 1988 1987 1988 1989 1990 Finished Products (000 tons) SAR 1200 1480 1460 1460 1460 1460 1480 without Imported slabs 888 1271 1267.5 1284.8 1482.6 1616.k 156.1 with Imported slabs 678 1684 1689 1858 1816 1920 1900 Liquid Steel (000 tons) 1106 1518 1514 1578 1815 2018 1895 Energy Consumption tcal/tre 6.4 7.8 7.5 7.6 7.4 6.9 7.1 Productivity (mh/trs) 11.80 9.22 8.99 8.86 7.58 6.68 6.49 4.02 With the completion of the Stage II expansion and PIP programs, Erdemir now has a modern and competitive plant capable of producing 1.5 million tpy of good quality finished products (without imported slabs) and 1.9 million tpy of the same with the additional rolling of imported slabs. Production performance is given in Annex 1 which shows that the level of output achieved equals 100% of nominal capacity as compared to 95Z foreseen in the SAR. Although productivity has improved in recent years from 11.30 manhours per ton of raw steel (mh/trs) to 6.49 mh/trs in 1990 (first semester) there is still considerable overmanning.12 Production performance of Erdemir's iron and steelmaking facilities has improved continuously since the start up of Stage II in 1984 and is now very close to that of efficient steelmakers in the world for similar facilities. The BF productivfty is about 2.4 t/m3 (the best is about 2.6 t/m3), the fuel rate is about 530 kg/ton, including 30 kg/ton of injected fuel oil, compared to about 430 kg/ton for an efficient Japanese BF. The 2 x 80 ton plus one 95 ton vessels in the BOF shop produced 2 million tons of liquid steel in 1989 or about 22,200 heats compared to an average of the best of about 25,000- 26,000 heats per year.13 The continuous casting shop has a record of 38 heats continuously cast with an average of about five. The overall yield 12/ This compares with about six mh/trs in USA, Japan and West Germany, 8.0 in South Korea and 13.5 in Brazil. 13/ The BOF shop had three convertors in 1978 and produced 1.2 million tons/year of liquid steel. By 1989, output had increased to 2.0 million tons/year of liquid steel without additional capacity. This improvement in productivity which Erdemir ascribes to continuous efforts by its engineers resulted from small changes such as (i) use of dolomitic limestone and calcined lime which increased the effective number of convertors used on average from 2.0 to 2.6; (ii) improvements in periodic maintenance of BOF and crane; (iii) improvement in the oxygen blowing system; (iv) improvements in the gas cleaning system; (v) improved hot metal quality, e.g. silicone reduced from 1.2 to 0.6; and (vi) increase in the campaign life of BOF refractory through the use of better quality convertor lining. In Erdemir, one ton of liquid steel is produced from 0.67 cubic meters of 80F capacity which is 50Z higher than the normal 80F productivity. - 16 - of finished products to raw steel (slabs) is about 0.88 which is an excellent performance when considering the product mix of Erdemir. 4.03 On the export market, Erdemir has been able to fill the niche corresponding to its product mix and level of quality. Exports have been opportunistic, used to dispose of excess production particularly when prices were at their peak in 1987, 1988 (see Annex 1). It is Erdemir's policy to maintain a level of exports of around 10Z-15% to be able to remain competitive, cost and quality-wise. However, exports have declined in 1991 due to the fall in world prices. 4.04 However, Erdemir still has to improve its quality to satisfy a continuously more demanding market. Currently, the upper quality range of cold rolled products is being processed from imported slabs from Brazil, South Africa and Holland (tin plate 100Z, CRS 442, CRC 45Z). The percent- age of second quality products is in the range of 52 of total output in volume, with an improving trend (4.5% in 1990). The on-going modernization program (paras. 4.08-4.10) which includes a desulphurization plant, and modernization of the Steckel and semi-continuous hot mills should give Erdemir the necessary facilities to meet market requirements, quality-wise. A complete description of the production performance for all facilities is given in Appendix B2. Competitiveness 4.05 The project has enabled Erdemir to become an internationally com- petitive producer of flat steel products. Economic and financial costs are well below world prices and Erdemir has been exporting a part of its output in order to establish its presence in the international market. Annex 2 shows the evolution of production costs between 1982 and 1990 and border prices prevailing at that time. Expressed in US dollar terms, operating costs (excluding depreciation and financial charges) have decreased sub- stantially, by 13.5%, since 1982. The table below shows that most of the savings have been in coal consumption (average cost per ton of coal 1982 - US$86, 1990: US$80), with some savings in other areas (consumables, spares, etc.). Energy consumption has been reduced substantially, decreasing from 8.4 Mcal/trs in 1982 to about 6.95 Mcal/trs in 1989 (see Annex 3). It compares well with similar facilities in other countries, although the most efficient steel producers consume about 4.5 to 5 Mcal/trs. Direct Operating Costs (US$/ton current) 1982 1990 (a)-(b Raw materials 51.1 47.2 (3.9) Coal 109.5 61.5 (48.0) Energy 73.6 92.2 18.6 Labor 63.6 71.4 7.8 Others 56.5 34.2 (22.3) Total 353.3 306.5 (47.8) - 17 - 4.06 As shown in Annex 1, financial expenses are also substantially lower due to a sounder financial situation (less debt). The cash cost per ton of cold rolled products was US$446.7 in 1982 and US$336.4 in the first semester of 1990. Erdemir's cold rolled products were not competitive in 1982 when compared to imported products at border prices of about US$400. However, they have now become competitive on two accounts, an increase in international prices and lower production costs; cold rolled products are now selling on the export market at about US$500 (FOB Japan) or US$465 (FOB Antwerp)14 4.07 As an illustration, a comparison of Erdemir's direct production costs excluding SGA, depreciation and financial expenses with other countries in 1989 is presented below for cold rolled products. ITON US 435 Japan 375 West Germany 370 South Korea 315 Erdemir 306 Brazil 260 Financial Per:ormance Erdemir's Future Development Plans 4.08 Erdemir's historical financial statements are given in Appendix B -3; Chapter V of the PCR reviews the financial performance of the firm over the period 1978-87. Given the very high inflation levels that have prevailed in Turkey in the 1980s, comparison of financial statements without inflation adjustment can yield misleading results. Until 1983 asset revaluation was not permitted except to match the change in the TL value of outstanding foreign debt. The table below provides key financial ratios for the years 1978-1990 (first quarter). 141 In the first semester of 1991, declining world steel prices, and a sharp increase in labor costs have substantially eroded the large differential between world prices and production cost that was enjoyed by Erdemir. But, it still remains a competitive producer. - 18 - Current Net Long- Profit Assets/ Current Assets Profit/ Term Debts/ Debt- Before Tax/ Current (Except Inventory)/ Shareholders Shareholders Service Net Shipment Liabilities Current Liabilitle Equity Equity Ratio 1978 7.6 1.1 0.4 89.0 82:18 1.6 1979 7.8 1.0 0.4 46.5 88:17 1.6 1980 10.6 0.9 0.4 106.2 88:14 1.9 1961 1.7 1.0 0.4 20.4 91:09 2.0 1982 6.4 1.1 0.8 80.4 90:10 1.8 1988 6.S 1.4 0.6 16.8 57:48 2.6 1984 8.7 1.8 0.4 21.7 42:58 2.0 1985 10.4 1.7 0.6 28.2 38:67 1.6 1988 12.8 1.8 0.6 26.8 81:89 2.0 1987 22.9 2.1 0.9 51.6 80:70 8.4 1988 44.1 2.1 1.2 78.1 18:82 7.0 1989 89.8 2.8 1.0 68.9 10:90 8.0 1990* 29.4 2.8 1.8 - 10:90 - * First Quarter 4.09 Erdemir's financial performance between 1980-83 was quite poor as can be observed in the low values of profits before tax/net shipment and the current ratio which was below the covenanted limit of 1.3. The debt/ equity ratio remained high (well over the 60:40 minimum) because most of Erdemir's debt was in foreign currency whose value increased in nominal terms due to TL devaluation. After the introduction of asset revaluation in 1983, as well as a large increase in equity in 1984 (paid in capital was increased from TL600 million to TL34.3 billion),15 this ratio declined to a reasonable level. Thus the financial restructuring of Erdemir, one of the objectives of the project took somewhat longer than anticipated. Erdemir's relatively unsatisfactory performance during this period stems from the slow pace in reaching the nominal production capacity of 1.5 mtpy of liquid steel (reached only in 1984) as well as the deterioration in domestic steel prices which reflected the decline in world steel prices (PCR Annex 4-2). 4.10 Since 1985, with the completion of Stage II and the gradual build- up of internal production as well as processing of imported slab, Erdemir's financial performance has improved remarkably. Profits before tax/net shipments which was depressed in 1986-87 compared to appraisal forecasts (PCR Chapter 5) reached almost 40% in 1989. Liquidity was excellent and with the substantial decline in long-term debt, both the debt-service cov- erage and debt-equity ratios were excellent. Return on equity was 38.7Z. In 1989 Erdemir was the largest taxpayer in Turkey. As of the end of the first quarter of 1990, Erdemir had a balance of cash and marketable securi- ties of about TL814 billion ($337 million) of which $166 million represents proceeds received from a rights sale of equity. 15/ All but TL9.6 billion of this amount represents a transfer from the revaluation fund; of this amount of capital increase, TL5.1 billion was capitalized against tax liabilities. Thus, only TL4.5 billion or US$22.2 million was actually provided to Erdemir. - 19 - Re-estimated Financial and Economic Returns 4.11 The PCR (para. 5.07) re-estimated the FRR and ERR based on actual costs and prices and output for 1987 which were used for the future projec- tions. The re-estimated FRR before taxes is 20% compared to the appraisal estimate of 18.12. The re-estimated ERR is 25.5Z compared to 17.2Z esti- mated at appraisal. The main factor improving the FRR and ERR estimates is the lower investment cost of the project in spite of the delay in reaching targeted production levels. The ERR estimate is higher than the FRR be- cause the weighted border price of output is 12.52 higher than the domestic price. The PCR ascribes the reasons for the differential between the new and earlier estimates of the ERR of 8Z compared to the differential of the FRR of 2Z to the higher world prices of flat steel products prevailing in early 1987. However, Erdemir's actual production performance during 1988- 89 indicates that the incremental production of finished products from the project is about 820,000 mtpy compared to 550,000 mtpy assumed in the PCR which should result in substantially higher actual values for the FU and ERR. Future Expansion Plans 4.12 Erdemir has currently embarked on a two-step round-out production investment program - the Capacity Improvement and Modernization Project (CIM) - which aims at increasing the liquid steel capacity to 2.8 million tpy, at a total estimated cost of about US$1.5 billion (Step It US$0.6 billion, Step II: US$0.9 billion). The general objective of this expan- sion is to allow Erdemir to participate fully in domestic market growth which it cannot currently satisfy because of limitations in its capacity and product quality. Without the above project, in spite of Stage II expansion, Erdemir will see its market share decrease in the future. 4.13 The above project is very ambitious in terms of scope and cost and although Erdemir is currently well managed, it will need to adjust is present organization structure and management practices in order to be more responsive to the domestic market, which in the future will be much more demanding and competitive. Functions like marketing and sales, quality control, production planning and inventory controls, maintenance planning and control, although well suited to the current business environment will need to be improved to satisfy new and more demanding business conditions. A thorough study aimed at identifying Erdemir's future needs in the areas of organizational strengthening and training of managers appears to be needed to complement the physical investment program. 4.14 The C1I project seems to address adequately the future market challenges faced by Erdemir with regard tot volume of output, product mix, quality and cost competitiveness. 1 However, there is one factor which introduces a clear business risk in the project; i.e. the reliance on a large volume of imported slabs to feed the expanded and upgraded rolling mills. The future behavior of international steel prices, including slabs 16/ This PPAR has not appraised the CIH project. - 20 - is highly uncertain. Since Erdemir plans to finance a substantial part of the investment from internally generated funds, the uncertainty of steel prices will affect its cash flow which introduces a high level of financing risk. Moreover, technological changes, particularly involving the intro- duction of thin wall slab casting may affect the viability of conventional technologies and thus of the CIM as designed at present. Both these risks combined with the fact that Erdemir produces slabs at a lower cost than imported slabs suggest that there may exist less risky but probably less ambitious alternatives. Erdemir should explore these alternatives. The two-step approach mentioned above provide ample time to carry out the necessary analysis. Sustainability 4.15 The sustainability of Erdemir's operations is reasonably assured. It has become an internationally competitive producer of flat steel products and it should be able to maintain its competitiveness and even en- hance it through a properly designed and implemented expansion/balancing project (The CIM project may need to be modified to ensure an adequate return with lower risk.). Erdemir management and engineers are constantly striving to upgrade production performance and product quality which should enable Erdemir to compete in a more competitive and demanding domestic and world market. The private status of its operations and the greater freedom being provided to the private sector through the liberalization of Turkey's economy bodes well for Erdemir's future growth. Steel prices are more likely to reflect world price movements given the liberalization of trade policies thus providing appropriate investment signals to producers and consumers. Gradual privatization of Erdemir's government shareholding is being considered which will ensure a reduction of Government intervention in the selection of top management personnel as well as a greater market and profit orientation, both of which are critical to the company's future success. V. FINDINGS AND CONCLUSIONS Overall Assessment of the Project 5.01 The Stage II expansion project, including PIP, has turned out to be a notable success. The Company has now fully achieved and even sur- passed some of the original project goals. The project has been implement- ed in two steps with some delays but at a substantial savings (US$90.0). The actual investment cost was about US$500.0 per ton of liquid steel as compared to US$750.0 for the first stage, a substantial savings. The level of output achieved corresponds to 10O% of the nominal capacity instead of 95Z foreseen as an attainable target and the processing of purchased slabs has increased the volume of saleable products by about 20?. Operating costs after the expansion have been reduced substantially due to signifi- cant energy savings, productivity gains and low financial expenses. They are lower than border prices, making Erdemir an internationally competitive producer of flat products. - 21 - 5.02 It took ten years between Stage I start-up (early 1979) and Stage II facilities to reach their full nominal capacity (1989) which is a com- mendable achievement for a steel firm in a developing country. During this period Erdemir faced numerous challenges, including shortages of foreign exchange, good quality raw materials, and frequent changes of its presi- dent, etc. These challenges were tackled resolutely by Erdemir's senior management who were able, with sustained efforts, to master the complex and demanding tasks of operating a steel plant efficiently in a changing and tough economic environment. Erdemir is now faced with a new challenge to expand again in order to cope with the more competitive and demanding domestic market. Conclusions 5.03 The factors contributing to the success of the project which has transformed Erdemir into an internationally competitive producer of flat steel products are many; some of these stem from the original decisions taken at the founding of the Company as well as the subsequent strategy and policies adopted during Stage I expansion while others are related to the policies adopted during the eighties. Some of these factors stem from internal decisions within the company while others are linked to policy decisions of the Government. The Bank has played a key role in assisting Erdemir in reaching its present level of production capability and competi- tiveness through its long association with Erdemir's growth, stretching over a period of almost two decades. Bank staff were able to acquire an intimate knowledge of the company's workings and appreciate its strengths and weaknesses in both the technical and management areas. The company's performance, both technical and financial, was under constant and dispas- sionate review by Bank staff who were able to relate performance lapses either to internal management failures or external causes and suggest appropriate remedial actions. Thus the factors contributing to the rela- tively less than satisfactory performance record of the Stage I expansion, provided the Bank with the insight into the measures necessary to ensure a higher probability of success in Stage II. 5.04 Although a majority government-owned company, Erdemir's private status under its establishment law has provided it adequate autonomy in all the critical areas--salaries, wages, staffing levels, hiring and firing, financial policies, marketing and pricing, procurement, contracting, etc. This has enabled the company to attract and retain capable management and staff and reward good performance. Nevertheless, Government interference in the day-to-day operation of the company through the Board and through frequent changes of the President during part of the seventies and eighties caused problems during the Stage I expansion, prompting the Bank to inter- vene in decisions on management selection. This has led to positive results. The experience of the last few years has demonstrated the impor- tance of top management continuity to corporate performance particularly when it is coupled with ap,ropriate autonomy and accountability. 5.05 The roots of Erdemir's technological strengths can be traced to its establishment, when its foreign partner provided it with the necessary know-how in both project management and technical operations. Later Erdemir entered into a long-term technical assistance contract with EFC - 22 - which continues even today. EFC provided valuable operational and manage- ment know-how including training for engineers and managers which enabled the gradual build-up of technological capability. Technical assistance from FOSC during Stage II was also extremely valuable enabling Erdemir's engineers to learn to evaluate technical issues involving acquisition of capital goods in an objective manner, as well as to apply modern project management tools to the i1plementation of a complex project. The experi- ence of other developing countries in establishing and operating integrated BF/BOF steel plants shows that developing technical and management skills to operate such plants efficiently takes a long time and is difficult. Failure rates are high. Continued technical support from an operating steel company although expensive, proved extremely important in developing capability. 5.06 Erdemir also benefitted from the sound technical decisions made at inception regarding the scale and the layout of its physical facilities. This took into account the future needs of expansion. Erdemir's gradual expansion of capacity from the initial (1968) 470,000 mtpy to 800,000 mtpy in 1972, 1,500,000 mtpy in 1979 and to 2,000,000 tons in 1987 allowed its management and staff to build up their management and technical skills in line with the increasing technological complexity and sophistication required in operating a large modern steel plant. Moreover, the experience indicates that actually achieving a high level of operating efficiency and product quality requires many fine tuning investments and acquisition of specific operating skills (para. 4.02). Thus, it is very important for the firm to have properly trained engineers who can continuously analyze oper- ating practices and suggest modification or revamp existing equipment to improve efficiency. Investing in properly staffed engineering department with appropriate R&D equipment is essential for this purpose. This experi- ence may also be instructive for the acquisition of technological capabili- ty. Finally access to high quality coal and iron ore are critical to pro- ducing steel competitively as demonstrated by Erdemir and many East Asian producers. Some developing countries have required theiv steel plants to use domestic coal or ore inputs, even if low grade, resulting in loss of quality and cost competitiveness. A stable supply of uniform quality raw materials is technically extremely important for producing quality steel on a consistent basis. 5.07 Besides the above-mentioned factors, the Stage II project was suc- cessfully implemented because of (i) careful design with sufficient flexi- bility to allow modifications to the project's original scope as suggested by a world class experienced engineering firm; (ii) sound project manage- ment arrangements with sufficient responsibility given to the consultant engineer in preparing equipment specifications and managing the project; (iii) savings from the Stage II investment which allowed the company to undertake the additional PIP investments to ensure sustained production performance and the 2.0 mtpy level; (iv) sincere efforts to observe all the covenants by both the company and the government; in particular, as mentioned in the PCR, Erdemir's management willingness to observn the discipline imposed by the Bank's procedures, reporting requirements and covenants; (v) reduced interference by the Government in the company's - 23 - management and the appointment of a highly capable and qualified business oriented engineer to head Erdemir's operations for the last several years; and (vi) good and cooperative working relationship between all parties which led to the effective exchange of project performance information and a positive approach by the Bank in such matters as allowing the use of project savings for the PIP investment. - 25 - ANNEX 1 TURKEY ERDEMIR STAGE II PROJECT Production Performance (Finished Products '000 tons) Actual Without With YEAR SAR Imported Slabs Imported Slabs Exports 1982 1200 838.5 873.3 n.a. 1983 1320 1125.2 1253.4 n.a. 1984 1400 1261.4 1546.2 n.a. 1985 1460 1271.0 1584.7 190.9 1986 1460 1257.5 1669.5 207.4 1987 1460 1264.3 1853.8 371.3 1988 1460 1432.6 1816.7 322.9 1989 1460 1516.2 1920.3 256.5 1990 (forecast) 1460 1556.1 1900.0 77.6 (a) (a) 5 months Product Mix Comparison, SAR vs. 1989 Plate 203 268.8 271.6 Hot rolled products 575 1000.9 1026.6 Cold rolled products 590 246.5 521.6 Tin plate 92 ----- 100.5 TOTAL 1460 1516.2 1920.3 - 26 - ANNEX 2 Page 1 of 2 ERDEMIR STAGE II PROJECT CRC ACTUAL COSTS OF PRODUCTION, 1982-1990 (TL/ton and US$/ton) 1982 1990 (1st Sem.) Inputs TL Us z TL US$ z Iron Ore 11,855 72.9 20.6 160,415 68.3 22.3 Coal 17,808 109.5 30.9 144,528 61.5 20.0 Others 10,269 63.2 17.8 148,034 63.0 20.5 Sub-Total 39,932 245.6 69.3 452,977 192.8 62.8 Credits (13,831) (85.1) (24.0) (197,415) (84.0) 27.3 Sub-Total 26,101 160.5 45.3 255,562 108.8 35.5 Labor 10,343 63.6 18.0 167,705 71.4 23.3 Energy 11,964 73.6 20.8 216,746 92.2 30.1 Others 9,189 56.5 15.9 80,295 34.2 11.1 Sub-Total 57,597 354.2 100.0 720,308 306.6 100.0 Depreciation 9,155 56.3 15.9 106,334 45.2 14.7 Financial Expenses 15,040 92.5 26.1 70,167 29.8 9.7 TOTAL 81,792 503.0 142.0 896,809 381.6 124.48 Exchange rates 162.55 2350 Export FOB Japan 368.0 500.0 * 27 - ANNEX 2 Page 2 of 2 ERDEMIR STAGE II PROJECT CRC ECONOMIC COSTS OF PRODUCTION, 1982-1990 (current TL/ton and US$/ton) 1982 1990 (1st Sem.) Inpute TL s TL s z Iron Ore 10,318 63.5 21.0 165,331 70.3 23.6 Coal 12,802 78.8 26.0 124.683 53.0 17.8 Others 9,322 57.4 19.0 142,996 60.9 20.5 Sub-Total 32,442 199.7 66.0 433,010 184.2 61.9 Credits (15,367) (94.5) 31.2 (183,595) (78.1) (26.2) Sub-Total 17,075 105.2 34.8 249,415 106.1 35.7 Labor 10,343 63.6 21.0 167,705 71.4 24.0 Energy 12,527 77.0 25.5 200,690 85.4 28.8 Others 9,189 56.5 18.7 80,295 34.2 11.5 Sub-Total 49,134 302.3 100.0 698,105 297.1 100.0 Depreciation 9,155 56.3 18.6 106,334 45.2 15.2 Financial Expenses 15,040 92.5 30.6 70,167 29.8 10.0 TOTAL 73,329 451.1 149.2 874,606 372.1 125.2 Exchange rates 162.55 2350 Export FOB Japan 368.0 500.0 - 28 - ANNEX 3 TURKEY ERDEMIR STAGE II PROJECT Energy Consumptions of Last Five Years 1982 1985 1986 1987 1988 1989 Coal (kg/tcs) n.a. 785,7 787,2 797.9 796,8 777,8 Fuel Oil (kg/tcs) n.a. 108,1 121,1 121,0 114,7 117,4 Electricity (kwh/tcs) n.a. 394,3 391,5 400,6 376,8 356,9 Total (mcal/tcs) 8.3774 7.5898 7.6658 7.5720 7.4490 6.9537 tcs = ton of crude steel mcal = mega calories - 29 - ANNEX TABLE 1 TURKEY ERDEMIR STAGE II STEEL PROJECT IRON AND STEEL STATISTICS 1988 1989 A. Capacity Liquid Steel 5.677 5.677 Longs 2.500 2.500 Flats 1.200 1.200 B. Production Pig Iron 453 398 Liquid Steel 7.983 7.902 Longs 4.507 3.866 Flats 2.157 2.300 Pipes 661 695 C. Domestic Sales Pig Iron 252 220 Longs 2.639 3.794 Flats 1.635 2.314 Pipes 422 388 D. Imports Dry Iron 150 192 Scrap 3.037 4.397 Bloom 336 363 Slab 532 642 Longs 361 856 Flats 1.041 898 Pipes 87 80 E. Exports Pig Iron 102 32 Blooms 1.279 1.113 Slabs Longs 1.831 1.427 Flats 672 479 Pipes 239 307 F. Consumption Pig Iron 447 471 Liquid Steel 7.572 7.793 Longs 3.049 3.221 Flats 2.730 2.734 Pipes 509 468 - 30 - APPENDIX A Page 1 of 7 Environmental Pollution and Noise Control in Erdemir 1. Summary An integrated steel plant like Erdemir is susceptible to polluting the environment. It needs a series of expensive measures, careful operation of related units and close periodical control to satisfy healthy environment conditions. When Erdemir was established (in 1960s), pollution control measures were not so strict in the world. Consequently in 1965, Erdemir started up lacking many of pollution control units which are essential today. From then on, parallel to the main investments, environmental control measures were taken step by step. Especially in the period starting from 1978 up-to-date, a series of pollution control investments have been carried out with a total investment cost of over 45 million, credited by international institutions like the World Bank. As a result of successful treatment, today Erdemir has an official certificate which permits all liquid discharges including treated sewerage to be discharged into Black Sea. Noise control is at an acceptable level today as a result of measures like silencers, insulation, etc. Only power plant blowers make noise over the permitted limit. There, operators are protected by wearing earpieces. Even though water and soil pollution and noise were successfully brought well below the permitted limits by above mentioned measures, satisfactory air pollution control could not be achieved yet. No need to mention that all the future investments bring about their own solution to pollution control. Finally, Erdemir management plans to overcome the air pollution problem by successive investments parallel to CIM and become a model company in Turkey in environmental pollution control. 2. Present Case The present case of Erdemir's related pollution control and noise is as followst 2.1 Coke Batteries 2.1.1 Recovery of by products Tarr in water, naphtalene and light oil in flushing oil, Ammonia in COG (as crystalline Ammonium Sulphate) residuals of Benzene, toluene, solvent naphtha, etc. (as fuel), Hydrogen Sulphide gas (as burner gas) and finally flushing oil in water are recovered. - 31 - APPENDIX A Page 2 of 7 2.1.2 Bio-oxidation treatment of waste water All the by-products settled in waste water are treated by micro-organisms with a method called "activated sludge method'. Dried inactive harmless sludge is taken to special areas and cleaned waste water is discharged into the Black Sea. Discharge material is officially certified to be harmless achieving full compliance with Turkish environmental regulations (See Official Gazetta, dated 4.9.1988, No. 19919). 2.1.3 Air pollution control There is no control of gas leakage during pushing and charging of ovens and, some gas leakage exists from the frames of some doors. Erdemir management has already started an internal project to solve both problems. 2.2 Sinter Plant Sinter Plant has a bag filter type dust collection system which sucks the gas from the ore end and sinter end of the plant. Dust in the chimney is (30 mg/Nm3) well below 150 mg/Nm3 environmental regulation limit (Official Gazetta, dated 2.11.1986, No. 11269). However, 20 times high CO volume as the result of sintering technology, compared to the regulations of CO emission, needs clarification. Erdemir has sent a technical team to see the application in other countries. The Environmental Protection Consultancy of the government has stated that they are open to discuss the regulation limits of sinter plants. Erdemir hopes that the case will be cleared out soon. 2.3 Lime Plants No. 3 lime plant (Maerz) has a sufficient 5 stage bag filter. But No. 1 and No. 2 plants lack such filtering. Erdemir managemAent is now discussing either to invest filtering plant, or to stop lime production and supply it through neighboring lime producers. 2.4 Blast Furnaces No. 1 and No. 2 BF exhaust gas passes through a water spraying and electrostatic dust collectors and leaves solid particles in water and in electrostatic dust collectors. Clean BF gas is used as a fuel. Solid material collected is dried and used .- a raw material for sinter plant. No. 1 bast furnace has a bag filter type dust collection system over the charging line. However, No. 2 BF doesn't have such a system but it is planned to invest similar system parallel to CIM investments. - 32 - APPENDIX A Page 3 of 7 2.5 Steelmaking Shop BOF's have wet dust collection systems similar to BF's in principle. But they are not satisfactory, especially during blows. Dust and CO emissions are higher than the permitted limits from time to time. Together with capacity increase investment, OG system (suppressed combustion) and OG gas holders will be invested. Hence BOF gas will be utilized as fuel and collected dust will be used as a raw material for sinter plant. Thus pollution problems will disappear in the steelmaking shop. 2.6 Casters + Hot Strip Mills Open circuit (direct) surface cooling and scale breaking water is collected and treated in waste water circulation system. Oil is skimmed, and solid particles are settled there. Cleaned waste water is recirculated. Oil is sent to power plant as fuel and scale is sent to sinter plant as raw material. 2.7 Tandem Cold Rolling Mill, Picking Line, Electrolytic Cleaning Line, Electrolytic Tinning Line Open circuit waste water discharged from the above units contains a mixture of various acids, alkalines, detergent, oil and iron chips. The chemical treatment plant renders them all harmless with various chemical reagents. Cleaned waste water is discharged to the Black Sea, skimmed oil is used as a fuel, sludge is dried and sent to a special area as harmless solid disposal. 2.8 Biological Sanitary Sewerage Treatment After treatment with micro-organisms and certain chemical reagents, cleaned waste water is discharged to the sea and dried sludge is used as fertilizer. 2.9 Noise Control After a long cooperation with Middle East Technical University, noise control is succeeded with silencers and insulation at certain noisy parts of the plant. However, still Power Plant Blowers make noise about 90 DB (permitted limit). Operators are protected by earpieces. This application is acceptable according to the Environmental Control Regulations for Noise (See Official Gazetta, dated 11.12.1986, No. 19308). 3. Conclusion As it can be seen from the information above, still there are certain measures to be taken by Erdemir in order to be called a successful company in Environmental pollution control. But it is understood that - 33 - APPENDIX A Page 4 of 7 the planning is already done, and, in fact for some of them the contracts are signed. It means that no pollution problem vill arise from Erdemir within a few years. Finally, it is worth mentioning that pollution control regulations are getting more and more severe every year in the world. Therefore, any plant susceptible to polluting the environment must improve itself day by day as the pollution control regulations improve. - 34- APPENDIX A Page 5 of 7 DISCHARGE ANALYSIS CREEK NORTH SOUTH VILLAGE KISLA ANALYSIS UNIT LIMIT DISCHARGE DISCHARGE DISCHARGE DISCHARGE Oil & Grease Mg/L 600 184.0 144.0 596.0 24.0 Heavy Particles Mg/L 20 2.75 1.00 0.50 1.00 Lead Mg/L 0,8 Eser 0.30 0.20 0.55 Iron Mg/L 2 Zinc Mg/L 20 7.0 Eser 10.0 Eser Ph Mg/L 5 Suspended Parts Mg/L 6-9 8.9 7.7 7.3 8.4 Amonium Nitrogen Mg/L 125 66.25 56.1 82.95 113.2 Nitrit Nitrogen Mg/L 100 26.8 52.7 9.8 6.4 Active Chlorine Mg/L 10 0.0 0.020 0.020 0.020 Sulphur Mg/L 0,5 0.0 0.0 0.0 0.0 Total Cromium Mg/L 2 1.37 4.28 0.0 0.0 Cromium Mg/L 0,5 0.0 0.0 0.0 0.0 Total CN Mg/L 0.5 0.0 0.0 0.0 0.0 Aluminum Mg/L 3 2.3 Eser Eser Eser Copper Mg/L 3 0.0 0.0 0.0 0.0 Nickel Mg/L 3 Fish Bio Mg/L 10 - 3- APPENDIX A Page 6 of 7 ERDEHIR FLUE GAS ANALYSIS 1989 Type of Fuel Limitation Max Actual Coke Gas 200 128,9 Sinter Solid 2000 196 Power House 502 Liquid 880 175,4 501 Gas B. Furnaces Solid 1000 254,8 B.0.F. . - 27,3 No. 1 Hot Kills and Soaking Pit Gas 200 90,S Slab Furnace No. 1 Gas 2 131 Slab Furnace No. 2 812 Liquid 1415 443 Normalizing Furnace 19% Gas 200 54 Cold Hill Acid Cleaning No. 1 . - Trace Cold Hill Acid Cleaning No. 2 . - Trace Lime Plant Gas 200 56,3 Coke Gas 100 250 Sinter Solid 250 750 Power House 50% Liquid 138 Trace B. Furnaces Solid 250 Trace B.O.F. 250 2500 No. 1 Hot Mills and Soaking Pit Gas 100 500 Slab Furnace No. 1 Gas 100 1000 Slab Furnace No. 2 811 Liquid 161 Trace 191 Gas Normalizing Furnace Gas 100 240 Cold Hill Acid Cleaning No. 1 - Cold Mill Acid Cleaning No. 2 - Lime Plant Gas 100 Trace - 36 - APPENDIX A Page 7 of 7 ERDEMIR FLUE GAS ANALYSIS 1989 Type of Fuel Limitation Max Actual Rust Content Coke Gas 200 151,4 Sinter Solid 250 155,5 Power House 50% Liquid 185 105,3 502 Gas B. Furnaces Solid 75 38,9 B.0.F. 200 24 No. 1 Hot Mills and Soaking Pit Gas 200 72,4 Slab Furnace No. 1 Gas 200 164,6 Slab Furnace No. 2 81% Liquid Gas 200 177 19% Gas Normalizing Furnace Gas 200 3 Cold Mill Acid Cleaning No. 1 200 5 Cold Mill Acid Cleaning No. 2 200 11,6 Lime Plant Gas 200 210,5 - 37 - APPENDIX B1 CURRENT TRAINING AND AN INDUSTRIAL TRAINING CENTER PROJECT Current Training Activities The Erdemir training department has been organizing training pro- grams in a number of areas and at different levels for its own staff. The training staff are operating as planners and organizers of courses except for induction, promotion, supervisory, English language and computer soft- ware courses for which formalized and structured programs are being imple- mented. The newcomers in almost all categories, after induction and promo- tion courses, are coached by their superiors. They usually lean on and work alongside experienced colleagues before being left on their own. Personnel from all categories attend the training courses in the Training Department on vast range of topics (Hydraulics, Ultrasonic Testing, Super- vision, Management, Family Planning, First-aid, etc.) implemented with instructors, lecturers hired from the plants, professional institutions, firms and universities. Personnel from all categories also attend many courses, conferences and seminars being held outside Erdemir on topics ranging from accounting to electronics. The study visits/training programs in other steel companies abroad are being conducted depending on occasions when a need arises. Some training services are bought as part of the pur- chase order for equipments or plants. Erdemir sponsors university graduates for BS degree in Turkey and electronics, metallurgy, economics. Erdemir provides on-the-job training seats for the secondary school students and summer practice seats for uni- versity undergraduates. Furthermore, Erdemir has implemented in-plant group training pro- grams every year for the staff of various developing countries in coopera- tion with UNIDO since 1984. Industrial Training Center Project Erdemir has now embarked on a plan for modernization and invest- ment to increase both production capacities and productivity. To achieve the above, however, qualified personnel, which can only be provided through appropriate performance-oriented training, are required. The systematic training activities, on the other hand, require training capacity and cap- ability, employing modern training techniques and methodology. Therefore, the goal of the project is to establish a Training Center with the physical facilities of, first, main building (with offices, lecture rooms, laborato- ries, conference and seminar rooms) and secondly training workshops includ- ing mechanical, fabrication, electrical, auto sections and operator train- ing area. Main building is presently under construction as the first stage of the project and completion is expected in December 1990. The construc- tion of the training workshops near the main building, as the second stage of the project, is to commence in 1991. The Training Center, thus with a manager, section chiefs, training officers, instructors and administrative personnel, will have an integrated, performance-oriented and progressive training program/system and curriculum for all newcomers and personnel employed. Through this project, Erdemir will provide its own training service to bridge the gap between schools and industry, no doubt, in coop- eration with other educational/training institutions. * 39 * APPENDIX 82 EREGLI Iron and Steel Works Erdemir Steel Production Performance June 19, 1990 APPENDIX B2 -41 - Page 1 of 39 PRODUCTION VICE PRESIDENCE 1. RESPONSIBILITIES ERDEMIR is the unigue integrated iron and steel works producing flat products in Turkey ERDEMIR's main products are the followings ; -Tin plate -Cold rolled sheets and coil -Hot rolled sheet and coil -Heavy plate Beside these main products, we also produce partialy or totally such as metallurgical coke, Oxygen, water vapor, electricity, service air, service and drinking water, lime, etc. Planning and programming of production, revising of production due to market and sales conditions, making daily chemical analysis and testings, unloading of all raw and semifinished materials arriving to the plant, material hand- ling, doing all maintainance practices, production of spare materials and steel constructions can be listed as the responsibilities of production vice presidenc6. II. ORGANIZATION We have 4 manager and 3 department manager responsible directly to the production Vice Presidence. There are also 11 department managers and 31 assistant department managers responsible to the managers. 1. STEEL PRODUCTION MANAGER -Dept. Manager of coke plant -Dept. Manager of Blast Furnaces and Sinter plant. -Dept. Manager of Steel Shop and Continous Casters. APPENDIX B2 F8age2 of 39' - 42 - 2. ROLLING MANAGER -Dept. Manager of Hot Rolling -Dept. Manager of Cold Rolling and Finishing Facilities -Dept. Manager of Roll Shops 3. AUXILARY FACILITIES MANAGER -Dept. Manager of Refractories -Dept. Manager of Water plant and Auxilary Facilities Maintenance -Dept. Manager of Power Plant, Oxygen Plant and Gas Distribution 4. MAINTENANCE MANAGER -Dept. Manager of Mechanical and Auxilary Work Shops Maintenance -Dept. Manager of Electronics and System Maintenance 5. Dept. Manager of Harbour and Transportation. 6. Dept. Manager of Production Planning 7. Dept. Manager of Laboratories. 111. FACILITIES 1. HARBOUR AND TRANSPORTATION : Transportation of products to the stock yards, harbour and guide services, transportation in the plant, construction of new railways and maintenance are the responsibilities of this department. ERDEMIR has a harbour where up to 60 thousand ton vessels can be loaded and unloaded. The depth of water in the harbour is 11.5 meters and three tugboats are available to guide the incoming ships. The ore and coal coming by sea are received on the 408 m. long unloading dock where two unloading cranes (1000 and 1400 ton/hour capacity) are used to unload the raw material which in turn is transported to the stockyards through a system of belt conveyors. Three semi-mobile cranes with lifting capacity of 15 tons each are available on the 272 m. long loading dock used for product shipments. APPENDIX B2 Page 3 of 39 - 43 - 2. COKE PLANTS : The metallurgical coke reguired by the blast furnace prosess is produced in coke plant. By means of a conveyor system, coal is transferred from stockyard to the mixing bins. After this, coal is crushed and charged to the batteries. There are 3 batteries having 159 coke ovens. Maximum number of pushes is daily 219. After coking, metallurgical coke is crushed, sized and transferred to the blast furnaces. The coke oven gas coming from the batteries is cooled, filtered and pumped into different section. During the processing of coke oven gas, tar, light oils, ammonia -and other products are obtained as by-products. Annual capacity of coke plants is 1.100.000 tons/year. 3. BLAST FURNACES AND SINTER PLANT : Undersize and fine raw materials which can nut be directly charged to the blast furnaces are agglomerated in the sinter plant. Yearly production capacity of sinter plant is 1.6 million tons. Iron ore, sinter, pellet and metalurgical coke are charged to the blast furnaces by specified proportions. By blowing hot air through tuyeres metal- lurgical coke is burned and so all the iron-based materials charged are melted. By certain periods, hot metal is poured into the torpidos. The No.1 Blast Furnace (AY5E) has a hearth diameter of 8.99 m., 20 tuyeres and has a daily capacity of 3.000 tons/day. The No.2 Blabt Furnace (ZUBEYDE) has a hearth diameter of 9.7 m., 22 tuyeres and has a daily capacity of 4.000 tons/day. Annual capacities of the blast furnaces are 1.050.000 tons/year and 1.400.000 tons/year respectively. 4. STELL SHOP AND CONTINOUS CASTERS: For steel production, hot metal from blast furnaces, steel scrap and flux are used. APPENDIX B2 Page 4 of 39 - 44- First, the specified percentage of scrap and hot metal are charged into the convertors. Then pure oxygen is blown into the mixture through a lance. During the blowing fluxes such as lime, scale, colamanite are added. So different steel qualities are produced. Ladle refining methods can be performed in the steel shop. Ther are 3 canverters having 80 tons capacity of each and yearly capacity is 2.000.000 tons/year. After making steel, approximately 35 % of the steel is casted into ingot molds and transferred to the soaking pits, 65 % of the steel is cnntinously casted. We have two caster each having 550.000 tons/year annual capacity. 5. HOT ROLLING MILLS Ingots coming from the steel shop and slabs from two continous caster are first heated in soaking pits and slab reheating furnaces up to rolling temperatures and rolled to predetermined thicknesses. There are two hot strip mill, No.1 and No.2, having 500.000 tons/year and 1.660.000 tons/year annual capacity, respectively, In addition, combination mill has heavy plate production capacity of 95.000 tons/year. Then, hot rolled coils are transferred to the coil stocking areas according to type of products. 6. COLD MILL AND FINISHING FACILITIES Coils coming from stocking areas follow two different ways according to type of product. COLD ROLLED PRODUCTS Hot rolled coils are first pickled. There are two pickling lines having 300.000 and 500.000 tons/year capacity, Then, pickled coils are cold .olled in 5-Stand tandem mill. Tandem mill has capacity of 750.000 tons/year. Tin plates and light gauge sheets are passed throuh alcaline cleaning line to clean the surfaces. APPENDIX 82 Page 5 of 39 - 45 - After this, coils are batch annealed to recover their crystal structures. Capacity of annealing line is 700.000 tons/year. To obtain good surface and modify the physical characteristics of the annealed coils, the coils is next passed through temper mills. There are tco temper mills having capacity of 500.000 and 300.000 tons/year respect- ively. After temper mill, cold rolled coils follow the following ways according to the type of product. 1. It goes to the electrolytic tinning line and tin-coated by electrolysis to the desired thicknesses, oiled and sheared to required size, then automatically classified and packed. Annual capacity is 100.000 tons. 2. Cold rolled and tempered coils are first side trimmed to we desired width and cut into pre-determined sheet lengths, and then levelled and oiled. There are two cold shearing lines with annual capacities of 150.000 tons each. 3. Coils are packed after temper mill as it is. HOT ROLLED PRODUCTS 1. In the 42" hot rolled slitting and recoiling line, they are paid out, silitted into a pre-deternimed number of stands and recoiled. Capacity is 180.000 tons/year. 2. In the 60" hot rolled side trimming and shearing lines, they are side trimmed to the desired width, cut in pre-determined sheet lengths and oiled. Annual capacity of the old and new hot shears are 130.000 tons and 350.000 tons, respectively. 3. Coils are checked and packed as they are hot rolled. APPENDIX B2 Page 6 of 39 - 46 - 7. ROLL SHOPS Rolls from various units are ground, turned and maintained in these shops. There are 3 shops; one is in cold rolling area and others are in hot rolling area. 8. AUXILARY UNITS Power plant is supplying of blast furnace hot air, salt water pumping as cooling water, compressed air distribution, blast furnace gas, coke oven gas and fuel oil distribution. Steam producing capacity is 560 tons per hour and the capacity of power plant is 50 MW. 3 oxygen plants, having capacity of 580 tons/day, produce pure oxygen for steel making and other purposes. One of the important factor in steel production is the refractory bricks. In all facilities, refractory reparing and relining is performed by refrac- tory lining department. 9. MAINTENANCE SHOPS Repair of the ERDEMIR'S mechanical equipments, manufacturing of some spares, manufacturing and assembling of steel constructions of plants, maintenance and repair of overhead cranes, motor vehicles, locomotives, railroad cars, electrical motors, electronic and computerized control systems, micro- processors are performed in various maintenance shops. 10. PRODUCTION PLANNING Preperation of annual production plans, determination of daily plans and programs in order to realized most profitable usage of facilities, deter- mination of production level required to achieve planned targets are performed by production planning department. 11. LABORATORIES In all steps of production, necessary chemical analysis are made by this department. Also, preparation of technical spesifications necessary, is the responsibility of laboratories department. APPENDIX B2 Page 7 of 39 - 47 - IV. ACTIVITIES OF OPERATIONS In Erdemir, target is always passing previous year production. We can see this situation if we look productions of last years (Table. 1). The comparison of the years 1988 and 1989 is given Table. 2. As shown, total production of 1989 passed 103.664 tons of 1988. In 1989, first time we produced over 2 milyon tons of liquid steel and 1,5 milyon tons of flat products from home steel. The comparison of the years 1989 and 1990 at the end of May is given Table. 3. As shown, total production of 1990 passed 43.379 tons of 1989. This superior succes of the production showing by operations is the result of application of new technologies. In Erdemir, there is continuously modernization studies. In 1986, Sinter Plant and I. Blast Furnace were modernized, ladle metallurgy station was installed in steel making plant and II. Hot strip Mill was modernized. In 1987, coal blending plant was improved, II. Blast Furnace and Tandem was modernized, distributed control system was installed at II. Reheating Furnace and I. and II. Boilers in Power House. In 1989, I.Reheating Furnace and III. and IV. Boilers in Power House were computerized. Now, Harbour, Steelmaking, Continous Casting, I. Hot Strip Mill, 3. Reheating Furnace, Pickling Line, Computerization of Production Planning and Control, coil Preparation Line, Oxygen Plant modernizations and enlargement studies are making. A production of 3 million tons will be realized when all these studies will be completed. The posifive results can easily be seen in the table attached. TABLE-1 (THOUSAND TONS) COMPARISON OF PRODUCTION BY YEAR 1984 1985 1986 1987 1988 1989 COKE 974 923 972 980 995 1053 SINTER 1168 1185 997 1322 1416 1637 HOT METAL 1468 1436 1478 1547 1784 1982 MOLTEN STEEL 1554 1514 1514 1578 1816 2014 INGOT 507 493 519 491 616 688- o CONCAST SLAB 998 989 958 1025 1126 1240- COIL + PLATE ROLLING 1622 1637 1747 1943 1934 2073 TINPLATE 92 93 96 86 100 100 COLD ROLLED SHEET 371 321 368 353 461 522 HOT ROLLED SHEET 820 838 899 1103 1007 1027 PLATE 227 305 279 262 248. 271 TOTAL PRODUCTION 1511 1556 1642 1804 1817 1920 SHIPPING 1410 1591 1666 1800 1794 1935 LABOR VALUE (HOUR/TON) 9.13 8.97 8.27 7.74 7.53 6,95 to COKE PRODUCTION 186 1853 C-100 TONS> 1848 1828 M 188 T} 9*3e s 974 972 96W 948 923 929 19o4 198s 1906 19oov 19na •~I 1989 04O w APPENDIX B2 50 -Page 10 of 39 2 1. - - o 1 09 E.~ HOT METAL PRODUCTION 2988 1982 C1 1888 TONS J1 lue"~- - " 1 8 178 -- T - 1688 1547 146&8 1478 81436 - * gg .-..... 2.914 1985 1986 19137 1988 • 199 1w MOLTEN STEEL PRODUCTION 2188 zU 14 Ca18u TOMS> 19883 je83 1888s T K 0 1y8 8 1 'ID 18 4 - 15-81514 1514 -- I400 -- 19134 1995 1986a 1987 1 988 * 199 N - 53.. APPElDIX B2 Pagei 13 of 39 Q. - * 4 APPENDIX B2 -54- - Page 14 of 39 T 9 - N - 0* 0 0 - 0 j 00 2 M N B 0 OE= COIL4-PLATE ROLLING PRODUCTION 2288 C-'1808 TOMS> 288 1943 1934 19086-- 1888 2747 T 0c17e8 3 16. 637 1488 - 388 saua~ 2984 2.98s 2.986 2.913 19813 • 2.9139 VE¢bHb TINPLATE PRODUCTION 93 s9e ga mål iil 70-- OF l94 igus 19OG 098-? Igau - 989 E0l に司― トd %J O h 喝J 心 ■■国園園国国■■■園国■■■園自国→→→自→→ーー→ー 一一－---－一一－－一一－一一－一一一一一一一一～-------&~~~～••．~~~~~～間•■■■■•■•■■■→ ！吵 ■－.－■－-－一：& 一―一…月ーーー国価■■国■目国■■園■■■■国 ha & . ；画‘ 日国陶国国園園園目叩ロ圏U園ーー一ーーーーー一一一ーーー一ーーー一一ー一一一ーーー－一ー―ー＿ ー…冒『飼■■昭■肋F→円→→→■ 顔ぐ ■■■■■■加■■国■園■■園■ IL APPENDIX B2 Page 23 of 39 - 63 - TABLE. 2 COMPARISON OF PRODUCTIONS 1988 AND 1989 1988 1989 DIFFERENCE Coke 995.210 1.052.801 + 57.591 Sinter 1.415.960 1.636.539 + 220.579 Not Metal 1.784.078 1.981.595 + 197.517 Liquid Steel 1.815.449 2.013.583 + 198.134 Coil+Plate Rolling 1.933.635 2.072.620 + 138.985 Cold Rolled Sheet 561.166 622.118 + 60.952 Production from Home Steel 1.432.695 1.516.137 + 83.442 Total Production 1.816.695 1.920.359 + 103.664 - 64 - APPENDIX B2 Page 24 of 39 TABLE. 3 COWARISON OF PRODUCTIONS 1989 AND 1990 AT END OF MAY (METRIC TONS) 1989 1990 DIFFERENCE COKE 422.087 411.578 - 10.509 SINTER 688.789 669.915 - 18.874 HOT METAL 805.496 829.625 + 24.129 LIQUID STEEL 825.255 825.895 + 640 COIL*PLATE ROLLING 849.937 899.431 + 49.494 COLD ROLLED SHEET 247.621 272.439 + 24.818 PROD. FROM HOME STEEL 575.255 661.949 + 86.694 TOTAL PRODUCTION 770.546 813.925 + 43.379 - 65 - APPENDIX B2 Page 25 of 39 0 00 ej0 JE 0 _ _ _ _ _=== <0 ________me 100 enumma * 0N s==.m. •••mmme i-OZQ) - 66 - APPENDIX 82 Page 26 of 39 HETALLURGIAL COKE PRODUCTION (tons) YEARS PRODUCTION 1964 56.635 1965 338.136 1966 389.808 1967 464.314 1968 497.732 1969 491.075 1970 485.653 1971 397.127 1972 420.682 1973 435.312 1974 465.368 1975 497.093 1976 502.632 1977 475.551 1978 529.200 1979 656.423 1980 607.632 1981 633.165 1982 717.719 1983 926.470 1984 973.676 1985 922.798 1986 972.418 1987 979.735 1988 995.210 1989 1.052.801 - 67 - APPENDIX B2 Page 27 of 39 HOT METAL PRODUCTION (tons) YEARS PRODUCTION 1964 - 1965 255.588 1966 339.128 1967 429.623 1968 479.514 1969 468.540 1970 555.205 1971 401.817 1972 642.505 1973 446.969 1974 678.433 1975 700.422 1976 723.684 1977 546.261 1978 673.276 1979 762.407 1980 743.965 1981 772.924 1982 983.578 1983 1.402.593 1984 1.468.315 1985 1.435.837 1986 1.478.191 1987 1.546.673 1988 1.784.078 1989 1.981.595 ーーーーーーー円月■■■■■園■ げ &1肥四 - 69 - APPENDIX B2 Page 29 of 39 DAILY HEAT AVERAGE YEARS AVERAGE (Numberslday) 1964 - 1965 4,98 1966 9167 1967 13,32 1968 16,00 1969 16,67 1970 20,60 1971 14,18 1972 23,80 1973 17,13 1974 24,08 1975 24,59 1976 24.75 1977 19,22 1978 20.30 1979 26,80 1980 26,27 1981 27.27 1982 33.48 1983 44,95 1984 47.00 1985 46,32 1986 46,56 1987 48,14 1988 55.09 1989 61,43 DAILY HEAr AVERA4E 0. 64 65 66 67 90 G19 1~ 71 72 73 74 VU VG 7 ^ 79 0m01 82 92 0-3 0- t 94 8 UV 131. 1739sa YlAR - 71 - APPENDIX B2 Page 31 of 39 LIqUID STEEL PRODUCTION (tons) YEARS PRODUCTION 1964 - 1965 157.799 1966 324.783 1967 446.370 1968 546.413 1969 568.703 1970 702.508 1971 487.585 1972 80d.008 1973 571.683 1974 815.872 1975 832.441 1976 847.272 1977 623.484 1973 679.915 197l 892.648 1980 892.629 1981 920.193 1982 1.106.487 1983 1.472.970 1984 1.543.588 1985 1.513.812 1986 1.514.427 1987 1.578.083 1988 1.815.449 1989 2.013.583 LIQUID srEEL PRCoDUCION c atenes Tole > YEARS - 73 - Arn.u rnijL.% v& Page 33 of 39 COIL+PLATE ROLLING PRODUCTION (tons) YEARS PRODUCTION 1964 - 1965 119.001 1966 247.254 1967 316.801 1968 464.965 1969 455.904 1970 565.321 1971 470.523 1972 645.482 1973 467.793 1974 620.600 1975 632.523 1976 645.934 1977 543.736 1978 564.876 1979 738.760 1980 770.029 1981 760.548 1982 919.098 1983 1.323.892 1984 1.622.150 1985 1.637.005 1986 1.746.825 1987 1.943.313 1988 1.933.635 1989 2.072.620 COIL-PLATE ROLLING PRODUCTION -8 C "e tUsts TOR> N S t. f , EMED 7aaf c94I i i loff 71 72 73 54 eg 79 30 tål t32 U. 5-4 1i -.. 17 LM t39 YEARS * 75 - APPENDIX B2 Page 35 of 39 PRODUCTION FROM HOME STEEL (tons) YEARS PRODUCTION 1964 3.275 1965 98.355 1966 210.480 1967 266.784 1968 402.507 1969 384.038 1970 503.237 1971 341.732 1972 557.681 1973 420.616 1974 545.397 1975 558.575 1976 573.881 1977 477.872 1978 514.866 1979 677.123 1980 707.797 1981 717.339 1982 838.511 1983 1.135.315 1984 1.267.572 1985 1.271.056 1986 1.257.472 1987 1.264.198 1988 1.432.695 1989 1.516.137 s2 PRODUCTION FRCIVI HOIVIE WTEEL <-1000M TOM> WiP 911 G66743 , 70 71 72 7•.3 7-1 Vl lfi77 ék 79 cma ut tr2 03: 434 M#e tt» (.7 UIJ 04J LYEAR - 77 • APPENDIX 12 Page 37 of 39 TOTAL PRODUCTION (tous) YEM PRODUCTION 1964 3.275 1965 98.355 1966 210.480 1967 266.784 1968 402.507 1969 384.038 1970 503.237 1971 471.119 1972 643.472 1973 554.219 1974 751.282 1975 568.555 1976 623.595 1977 668.426 1978 706.702 1979 718.062 1980 742.722 1981 726.045 1982 853.934 1983 1.202.694 1984 1.510.583 1985 1.555.854 1986 1.641.801 1987 1.803.738 1988 1.816.695 1989 1.920.359 ―一一一一一一一一一一－－一一－ ！卹忙 .& t 二 . ．。 . ■■■■■■口■．•細■國■細‘&．•～~~,.&.~~~~~~～→＿ APPENDIX B2 Pr Page ý,9 of 39 79 j_ i cm tog C3 lia, APPMDC AB - 61 - Page I of 4 TURIEY - ERDEMIR STEEl. STAGE II PROJEE Historical Income Statement (LT MilI3on) 1978 1979 1980 1981 1982 1988 1964 196 1gw Reesnes Sales Revenue 9,605.8 14,695.7 80,629.2 40,126.8 69,718.4 108,440.4 170,049.9 254,842.8 833,871.2 interes received 69.9 155.8 419.1 297.2 852.7 8.000.7 1.061.2 1,121.9 2,592.9 Hisceianeous income __...uf -....30..& .....H ....7lZ __.2" 41.2 .i Total Revenue 9,903.2 14,881.5 81,206.9 40,560.9 70,200.8 111,001.1 177.802.8 256,198.7 a39,975.9 Cost A Eosese Cost of good. sold 6,950.9 10,038.1 22,481.8 82,635.4 84,445.5 780,684.5 119.224.7 189,040.2 241498.1 Sales expenses 35.7 54.9 103.0 150.8 179.2 252.8 4685.2 867.8 1,109.0 Depreciation expense 356.1 89.7 17.6 21.0 65.4 9.4 17.9 55.9 4,035.7 Interest A Bank charges 830.0 1,217.8 2,201.1 4,190.7 8,080.8 7,044.8 A8,176.2 9,224.1 11,245.0 Cen. Admin. espenses 139.1 281.4 485.5 607.9 693.9 1,002.0 1,887.9 1,876.5 2,898.2 Miac. exponse& M ..2,165. 2-2Z 2.2904 .09.a 1 11 ..1 .901, 38,E Total 9,186.4 13.737.8 27,910.7 89,894.2 68,474.2 105,777.8 162,262.8 229,665.7 298,876.5 Profit before tases 748.8 1,143.7 8,298.2 688.7 8,785.6 6,028.1 15,820.0 28,581.0 41,097.4 Tas 307.0 457.5 2,884.6 - 2.124.1 1.990.4 6,827.1 8,686.8 12,118.1 Net profit after tax 439.8 688.2 913.6 686.7 1,611.5 4.032.7 S.792.9 17,844.7 27,982.8 After-tax profit as a S of revenue 4.4 4.6 2.9 1.7 2.8 8.6 5.0 7.0 8.4 After-tas profit A interest as 9 of total assete 7.0 7.8 1.8 1.0 1.7 2.9 4.4 6.5 8.1 -fl App. 1x .E4 - ffi1f ~T..ffiew~~ - 82 - n a at 4 (L7 ill Ilan) 1978 1979 190 1981 1912 198 1984 198 198 Curreni aset: Cesh 4 Bank dpolite 881.8 708.8 489.1 998.8 2,~87.@ 9.10G.0 4.919.0 14.610.2 6,88.7 Inventorica 8,780.7 #,08.2 18.648.4 8.219.1 81,112.7 46,737.8 88.14.a 107,814.7 189,14.8 Accounto Recevabl.. ims.s 1,^as.7 .160.8 9,612. 8.448.8 18.08.2 17,219.8 24.8^8.0 u,~.4 other M-ZZd - ~LUL 5 ..S.f* j ~ .816,7 .-6ML L.a 9. 7.181.s .&.Ami Subtotal .71.1 10,~02.0 25.64.2 8u,~83.1 4.78.8 71,680.4 118.s4.1 1s«,104.7 202,418.2 Fi sed seestst Croma flucd esser. 8,182.8 1,870. 2^,8.0 88,4~7.9 62,404.~ 12.779.0 1s~.7 22,73.9 ~89,^89.7 Lee accumuletod depreclet;an (8,~20.9) (,084.7) (.402.7) ((1,1.8.0) 199.8) (84.841.9) (498.1)( ~11) (17S, .0) Not fl "ed q~8sta 1,912.8 12,818.9 18.868.9 90,884.8 42,88.0 88,87.1 81,#21.4 95,289.4 18is81.7 Acquil1Iono in progrec, J.7Z ._SIEU -.5.EaI JLaLI . .-~.å^i .LMBa6 2~.9 19.^4 2.M5- Subtotet 10,194.8 14,840.1 24.17.4 ^.71.4 48,98.7 88,820.0 64.084.9 114,184.8 140,887.0 Deferred cherges eoter e_1et~ .LAI 2.4 .-.a .~-.MZ .=L 911. ..-7.4- -.~L. Total smaete AI^Z 216^4 MJA ZLo Z 2,98. 1 S a es.814.L 2.8. Liebiltiga Current iebilltioå: Accounta peykblo 849.4 842.8 1,297.8 2,18.8 8,090.7 8.179.5 8.404.4 9,114.8 5.M.6 Cuatomer advences 1,748.4 4,.,8 8.841.4 8.198.4 6,011.8 8,909.7 19.871.2 18.287.5 19,78.4 abb dua .ithin on* year 994.1 1,70.9 2,94.8 4.761.8 6,745.6 18,782.6 21,709.9 28.888.4 24.813.0 Acarued interest 177.4 887.9 U80.4 978.4 1,809.1 1,909.8 2,618.4 2,2931.4 2,108.9 shorm-er. 1.~n 1,149.2 1,218.8 8.418.8 4.748.7 G,J9.8 *.487.9 1S. 19,488.7 24,.1 Other laibillib -16I1 1~. I 10.-07.7 jE~I 16-2Z 9. A -LaiLA .GLMa 8 2.2^A Subtotal 8,00~.6 9,89.7 28,915.9 8,740.6 40.28.4 47,788.8 61.344.9 74,4. 69.740.3 edIuiter det 114.8 - 2.790.0 2.7.s 4,408.2 .162.7 1.13.3 sCa.8 Long-term det6 7.086.6 10,99.9 17,22.1 27,79.9 «.M927.8 49^,0s.8 4,^983.8 4^988.8 67248.8 Price regulsian & Subaidising fund 888.7 888.7 8.7 87 8 88.7 888.7 868.7 om.7 Investaenl ucceleration fund 1,200.0 1.200.0 1,200.0 1.200.0 1.200.0 1.200.0 1,900.0 1,900.0 1.200.0 Rcoörv~. 418.7 799.1 1.401.7 2,087.4 8,418.9 8,88.0 G,208.8 9.612.6 1,988.8 Legal roorvo. 18n.7 2.4 221.8 884.7 814.3 89.8 498.1 1,437.1 9,098.a Capitel tock 0.00.0 800.0 100.0 M10.0 0 800.0 84,8^2.1 38.400.0 38.400.0 Curraen year's pmofil 699.1 1.074.1 8.298.2 88.7 *,788.7 6,023.1 158.20.0 2,881.0 41,097.4 pest yoar'r profl 888.0 1,1s~.6 1,84.9 2.10.7 2.401.6 8,J4.3 8^.20.1 12,16.4 24,84.7 Ravaluatin @urplog fund - -~ - - ~ - ._= _ ~202.5 . a 41.8 .K9. Total 119Ml AaMZ EA m ~a ~ 7 ^7 «^ö 140.aj. 19A g.~. 1 .7. APPENDIX B3 - 83 - Page 3 of 4 ERDEMIR SUMMARIZED INCOME STATEMENT (million TL) 1989 1988 1987 Gross Sales Revenues 1,759,465 1,063,841 522,824 Deductions (-) 137 3,483 28.7 Net Sales 1,759,328 1,060,358 522,795 Cost of Goods Sold (-) 1,097,221 583,622 343,288 Gross Profit or Loss on Sales 662,107 476,735 178,239 Operational Expenses (-) 22,083 10,287 5,387 Gross Operating Profits or Losses 640,023 466,448 174,118 Net Non-Operating Income 112,585 69,978 821 Non-Operating Expenses & Losses (-) 69,954 23,005 Financial Expenses (-) 52.900 90,868 55,324 Operating Profit and Loss 699,648 435,558 119,615 Profit or Loss of the Period 699,648 435,558 119,615 Taxes & Other Legal Payments (-) 247,734 166,723 47,252 Net Profit or Loss of the Period 451,913 268,834 72,363 APPENDIX B3 - 84 - Page 4 of 4 ERDEMIR SUMMARIZED BALANCE SHEET (million TL) ASSETS 1989 1988 1987 CURRENT ASSETS 1,456,980 822,773 348,121 Cash and Banks 34,491 23,382 23,140 Marketable Securit:es 369,712 206,083 47,350 Short-Term Receivables (Net) 131,724 211,575 71,264 Inventories 758,363 361,728 193,884 Raw Material & Supplies 258,725 151,157 91,577 Semi-Finished Products, Work in Process 306,255 103,007 43,742 Finished Products 153,565 78,607 40,091 Other 39,818 28,955 18,473 Other Current Assets 162,690 20,003 12,481 NON-CURRENT A! ETS 449,570 250,360 169,406 Long-Term Receivables & Funds (Net) 3,312 2,858 1,505 Stocks Bonds & Securities - 556 556 Participations (Net) 10 10 10 Appropriations in Progress 72,482 22,576 8,139 Fixed Assets 1,144,501 671,863 410,871 (-) Accumulated Depreciation (834,509) (447,504) (251,676) Other Non-Current Assets) 63,774 - - TOTAL ASSETS 1,906,550 1,073,134 517,527 LIABILITIES CURRENT LIABILITIES 257,055 177,170 97,273 Current Maturities of Long-Term Loans 23,181 25,516 18,295 Short-Term Bank loans - 4,952 - Other Current Liabilities (Net) 233,874 116,701 78,978 TERM DEBTS 127,409 126.589 97,761 Debentures - - - Other Medium & Long -Term Liabilities (Net) 127,409 126,589 97,761 EQUITY CAPITAL 1,522.086 799,374 322,492 Increased or Outstanding Capital 38,400 38,400 38,400 Reserves 136,666 13,600 5,639 Provisions 129,569 30,306 18,758 Revaluation Surplus 347,975 193,948 97,612 Revaluation Surplus-Participations 188 - - Accumulated Profits 158,390 87,559 42,466 Current Year's Profits 699,648 435,558 119,615 Premium or Stock Sales 11,250 - - TOTAL LIABILITIES & EQUITY CAPITAL 1,906,550 1,073,134 517,527 - 8 5 - APPENDIX B4 * Page 1 of 2 Re6LI DIMIR VE INLIK FABRIKALARI T.A.f. ERE LI (EREGLI IRON STEEL WORKS, INC.) YL s CO.; KARAD1e1 180f6LI, TURKSY QIWlJdiMANA'E:384.000.OO.00 TL V.DH.No:32960007 QANKAVA-kAN COMMENTS RECEIVED FROM BORROWER MR. JOZSEI H. HUKY February 21, 1991 Acting Chief Policy-Based Lending, Induatry Plublic Utiliten & Urban Sectora Operutione Evaluation Department THE WORLD BANK 1018 14 STRCET, N.W. WASHNMuN, .C. n4i> U.S.A. Our Ref t I-j3/91-72 Subject ; Irdemir StAge II Steel Project (Loon 1606-TU)Project Performance Audit Report. Dear Mr. Buky, We hmve reviewed your draft report about the subject. In general, the renmr4 ii ref'le(!tj(icj the realities and well prepared. It w,Il support our currently conducted investinent projects and other activition positively. However, we want. to express our comments on some matters : 1- Capacity Improvement and Modcrni/ation (CIM) Project is mentioned as A very (inbit.iou project. We believe that CIM Project will enoble us to maintnin our competitivennou evon enhance it. We are continuously rOvim-rig the pro- jects and prepmriinj the cash flow diagroms. We are nluo monitoring the mfur- ket developmunta. Su, we believc tht. CJM Project is not very ambitiotts one. 2- As you mentioned in the report, implemnt.aLion of the P]P Project was onti rely mnanaged by our engirieeriir groups. A* a result or thio,local poltion of this project was very Ihigh and cost savings Rln were high. This shows iAt Erdemir iu cnpable of to manage such projects. \ElatfZ (FAJINKA) Iel !38z) 12220. leix 48523 FYEC TP, 48!75 EDQ TR. Fax: 13969. Uzun kun 7. 67330 Ro; 92E1.1 NKtAA 1MI. (I 1342/30, -vbx 42428 [fAN'. P r 470387. Atotork Buvori No. 127 Kpit 5-6 n66.'or!iklor ISrANBu; TeI V! 'ilX 0ielc 24292 L01) 1V?, Fox 14514417. Inon Cod. No: 90 Kot- 2.4 8009l - 86 - APPENDIX B4 Page 2 of 2 3- Product.ivJty figuves given in the report are not refJoeting .he veal resulta. Men-hour figureu for lquid stonl nre a1o follows i (Vico -Pr eildencry of Opermt lone personnel) 3982 IA.30 Iinh/tru 1985 9.22 1986 8.99 1987 8.86 191113 7,53 1989 6.6" 1990 6,49 4- enorgy cuinlJmptJon .fgurer Rhould changed nc follow: 19a2 0.4 M cal/tre 1985 7.3 3986 7. 1987 7.6 1980 7.4 1989 6.9 1990 7.1 We believe thet your report wil. enherice ts for future cooperation w.ith the World Bank. Thank you very much for your k.ind efförts t.n prepare this report. Yuturu Ginenroly, RCL. 01Mitt VI. ÇLLJK 'ABRIKALAI1 T.A.5. h1UnIJ N Pshumi ACAR - President Vice President Iecho.icaJ Servicuc