Zambia - Fertilizer Industry Restructuring Project

Document of The World Bank FOR OFFICIAL USE ONLY Repst No. 12614 PERFORMANCE AUDIT REPORT ZAMBIA FERTILIZER INDUSTRY RESTRUCTURING PROJECT (CREDIT 1662-ZA) DECEMBER 20, 1993 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: Kwacha (K) (period average) 1986 US$ 1 - K 7.30 1991 US$ 1 - K 61.7 1992 US$ 1 - K 171.00 ABBREVIATIONS AND ACRONYMS BTO - Back to Office Report CBA - Cost Benefit Analysis ERR - Economic Rate of Return FRR - Financial Rate of Return CRZ - Government of the Republic of Zambia IDA - International Development Agency INDECO - Industrial Development Corporation Ltd. KfW - Kreditanstalt fur Wiederaufbau L/C - Letter of Credit MOF - Ministry of Finance NAMBOARD - National Agriculture Marketing Board NCDP - National Commission for Development Planning NCZ - Nitrogen Chemicals of Zambia Limited NCZ I - NCZ First Production Line NCZ II - NCZ Second Production Line NH, - Ammonia NOX - Nitrogen Oxide OECF - Overseas Economic Cooperation Fund of Japan OED - Operations Evaluation Department OMF - Operations Management Firm PAR - Performance Audit Report PCR - Project Completion Report PPF - Project Preparation Facility TA - Technical Assistance TC - Technical Coordinator VP - Vice President ZIMCO - Zambia Industrial and Mining Corporation Ltd. FISCAL YEAR Government - January 1 to December 31 NCZ - April 1 to March 31 FOR OFFICIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A. Office of Director-General Operations Evaluation December 20, 1993 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Performance Audit Report on Zambia Fertilizer Industry Restructuring Project (Credit 1662-ZA) Attached is the Performance Audit Report on Zambia - Fertilizer Industry Restructuring Project (Credit 1662-ZA) prepared by the Operations Evaluation Department. No comments were received from the Borrower, the Beneficiary, or the Cofinancing Agencies. The objective of the project was to restore the technical integrity and the financial viability of Nitrogen Chemicals of Zambia (NCZ). This objective was not achieved. The scale of the effort required was underestimated. At completion, the plants were still not operating properly and the company was incurring losses. The Bank contribution to the project was to finance technical assistance, training and rehabilitation of some plant facilities. Training, management and environmental/safety aspects were enhanced as a result of the project. However, the overall performance of this component was well below expectations. Two bilateral donor agencies also participated in the project, OECF from Japan and KfW from Germany. The scope of the works changed significantly when delays in the rehabilitation led to further deterioration of the plant. Since then, rehabilitation has been running behind requirements. The project is rated as unsatisfactory, its sustainability as uncertain and the institutional development as partial. The Audit confirms the assessment of the PCR on the overall outcome of the project. The PCR relies mainly on operational and technical factors to explain project outcomes. The Audit suggests additional factors: protected market environment, and insufficient diversification of NCZ ownership. The Audit suggests that any additional funding may not ensure success in complete rehabilitation, unless (i) NCZ diversifies its equity with participation from technology partners involved in current and future rehabilitation, and (ii) the fertilizer market remains fully opened to import competition. Attachment 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.  FOR OFFICIAL USE ONLY PERFORMANCE AUDIT REPORT ZAMBIA FERTILIZER INDUSTRY RESTRUCTURING PROJECT (CREDIT 1662-ZA) TABLE OF CONTENTS PAGE NO. PREFACE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .i BASIC DATA SHEET . . . . . . . . . . . . . . . . . . . . . . . . . . EVALUATION SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . vii I. INTRODUCTION................ ..... . . . . 1 II. BACKGROUND................. ..... . . . . 1 III. PROJECT OBJECTIVES AND DESIGN. . ............ . . 2 Project Objectives . . . . . . . . . . . . . . . . . . . . . . 2 Project Design . . . . . . . . . . . . . . . . . . . . . . . . 4 Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 IV. IMPLEMENTATION EXPERIENCE............. .... . . 6 Overall Performance............ ...... . . . . 6 NCZ I Component . . . . . . . . . . . . . . . . . . . . . . . . 7 NCZ II Component . . . . . . . . . . . . . . . . . . . . . . . 8 IDA Component . . . . . . . . . . . . . . . . . . . . . . . . . 10 V. BORROWER AND BANK PERFORMANCE.......... .... . .13 Government and NCZ Performance......... ...... . . . 13 IDA Performance........... ...... . . . . . . .14 VI. PROJECT RESULTS AND SUSTAINABILITY. . ......... . . . 15 VII. CONCLUSIONS AND LESSONS LEARNED . . . . . . . . . . . . . . . . 15 Next Steps . . . . . . . . . . . . . . . . . . . . . . . . . . 16 ANNEXES 1. Chronology................ ..... . . . . ..18 2. Conditions for Negotiation and Effectiveness... . . . . . .24 3. Form 590 Supervision Ratings . ......... . . . . . .25 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. 4. Ex-Post Cost-Benefit Analysis...... ..... . . . . . . 26 Table 1. Investment Costs in millions . . . . . . . . . . . 26 Table 2. Investment Costs in US $ equivalent . . . . . . . 27 Table 3. Weighted Average Sales Price . . . . . . . . . . . 28 Table 4. Sales Revenues at Constant 1984 Prices . . . . . . 29 Table 5. Production Costs (K million) . . . . . . . . . . . 30 Table 6. Distribution Costs . . . . . . . . . . . . . . . . 30 Table 7. Local and Import Product Prices . . . . . . . . . 31 Table 8. Raw Material Price Levels . . . . . . . . . . . . 31 Table 9. Raw Material Price Indexes . . . . . . . 32 Table 10. Production Costs at Constant Value.. . . . . . . 32 Table 11. Summary Input Data . . . . . . . . . . . . . . . . 33 Table 12. Financial Internal Rate of Return . . . . . . . . 34 12A. Ex-post Financial Rate of Return . . . . . . . . . 34 12B. Ex-Ante Financial Rate of Return . . . . . . . . . 35 Table 13. Conversion Factors . . . . . . . . . . . . . . . . 36 Table 14. Economic Internal Rate of Return . . . . . . . . . 37 14A. Ex-post Economic Rate of Return . . . . . . . . . 37 14B. Ex-Ante Economic Rate of Return . . . . . . . . . 38 PERFORMANCE AUDIT REPORT ZAMBIA FERTILIZER INDUSTRY RESTRUCTURING PROJECT (CREDIT 1662-ZA) PREFACE 1. This is the Performance Audit Report (PAR) on the Fertilizer Industry Restructuring Project in Zambia. The Bank's financing consisted of a credit (Credit No. 1662-ZA) denominated in SDRs and equivalent at the time to US$10 million which was signed on April 9, 1986 and became effective on September 25, 1986. The credit closing date, originally December 31, 1990, was extended subsequently to December 31, 1991. The accounts were closed with the credit being fully disbursed on May 10, 1991. 2. This PAR was prepared by the Operations Evaluation Department (OED). It is based on discussions with World Bank staff, the Staff Appraisal Report, the Credit Agreement, the Project Completion Report and the official files of the project. In addition, an OED mission visited Zambia in January 1993 and discussed the effectiveness of Bank assistance with NCZ, Government officials and with representatives of the cofinancier's governments. Their kind cooperation and invaluable assistance during the mission is gratefully acknowledged. 3. The PCR was prepared jointly by the Industry and Energy Division of the Europe, Middle East and North Africa Regions shared services and the Industry and Energy Division of the Southern Africa Department, Africa Region, with Part II contributed by the Borrower. The PCR provides a frank assessment of the project experience. The PCR concluded that the project was not successful and that NCZ operations were not sustainable without further rehabilitation work. The PAR extends the investigation beyond the technical and operational aspects of the project and considers the implication of the ownership structure and of the market environment. 4. The report was sent to the Borrower, the Beneficiary, the Cofinancing Agencies and the Operation Management Firm which implemented the technical assistance component. However, no comments were received.  -iii- PERFORMANCE AUDIT REPORT ZAMBIA FERTILIZER INDUSTRY RESTRUCTURING PROJECT (CREDIT 1662-ZA) BASIC DATA SHEET CREDIT POSITION (Amounts in US$ Million) As of April 30, 1993 Credit Original Disbursed /a Canceled Repaid Outstanding/a 1662-ZA 10.0 12.9 0.0 0.0 13.7 CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS FY86 FY87 FY88 FY89 FY90 FY91 Appraisal Estimate (US$M) 1.0 3.1 5.5 8.0 10.0 - Actual (US$M) 0.7 2.0 3.5 6.0 8.0 12.9 Actual as of Z of Appraisal (Z) 66.0 64.0 62.0 75.0 80.0 100.0 Date of Final Disbursement: May 10, 1991 PROJECT DATES Original Actual Identification n/a 08/83 Appraisal n/a 11/84 Negotiation n/a 08/85 Board Approval n/a 02/86 Credit Signature n/a 04/86 Credit Effectiveness 07/86 09/86 Credit Completion 06/91 06/92 Credit Closing 12/90 12/91 /a Disbursed and outstanding totals differ from the original amount of the credit in terms of US$ because of changes in the US$/SDR exchange rate. -iv- STAFF INPUTS (staffweeks) Stage of Proiect Cycle FY81 FY82 FY84 FY85 FY86 FY87 FY88 FY89 FY90 FY91 FY92 'ITAL Preappraisal 3.9 7.6 6.9 18.4 Appraisal 2.3 41.7 44.0 Negotiations 15.8 15.8 Supervision 2.6 13.1 5.6 6.3 24.6 10.0 9.8 72.0 Other .8 2.7 2.9 6.4 Total 3.9 9.9 7.7 44.4 21.3 13.1 5.6 6.3 24.6 10.0 9.8 156.7 MISSION DATA No. of No. of Staff Month/Year Weeks Persons Weeks Through Appraisal Project Pre-appraisal 04/84 12.8 4 51.2 Project Appraisal 11/84 n.a 4 - Appraisal through Board Approval Post-appraisal 1 04/85 0.8 1 0.8 Post-appraisal 2 08-09/85 1.6 1 1.6 Board Approval through Effectiveness Follow-up/Supervision 09/86 3.6 3 10.8 Supervision Supervision 1 03/87 0.8 1 0.8 Supervision II 02/88 n.a. I - Supervision III 07/88 1.6 1 1.6 Supervision IV 11/88 0.8 1 0.8 Supervision V 01/89 2.0 1 2.0 Supervision VI 08/89 0.8 2 1.6 Supervision VII 11/89 2.0 1 2.0 Supervision VIII 02/90 2.0 2 4.0 Supervision IX 05/90 3.0 1 3.0 Supervision X 07/90 1.2 1 1.2 Partial Supervision 10/90 0.5 2 1.0 Supervision XI 04/91 0.6 1 0.6 Supervision XII 06/91 0.6 1 0.6 Supervision 08/91 1.0 1 1.0 -v- OTHER PROJECT DATA Related Loans Project: Economic Recovery Credit Credit No.: 1720-ZA Amount: US$50.0 million Approval Date: 06/26/86 Project: 2nd Technical Assistance Credit No.: 1679-ZA Amount: US$8.0 million Approval Date: 04/01/86  -vii- PERFORMANCE AUDIT REPORT ZAMBIA FERTILIZER INDUSTRY RESTRUCTURING PROJECT (CREDIT 1662-ZA) EVALUATION SUMMARY 1. This is the Performance Audit management, organization, staffing and Report (PAR) of the Zambian Fertilizer finances; introducing modern Restructuring Project (Credit 1662-ZA) management techniques for plant intended to assist Nitrogen Chemicals operation; upgrading the skills of NCZ of Zambia Ltd (NCZ). The overall staff; ensuring integrated and project financing was for US$ 83.75 efficient rehabilitation of the million to be cofinanced between OECF physical facilities; and, improving of Japan, KfW of the Federal Republic raw material acquisition as well as of Germany, Nitrogen Chemicals of product offtake logistics. Zambia and IDA. IDA's financing was US$ 10 million or 12 percent of the 3. In order to achieve these total funds, of which $US 4.2 million objectives, the project was divided was intended to be used for equipment into two components: the policy and and materials, $US 5.3 million was to institutional improvement component be used for technical assistance, and and the physical support component. US$ 0.5 million was to be used for The policy and institutional training. The PAR confirms the improvement component consisted of unsatisfactory outcome rating of the hiring an operations management firm Project Completion Report (PCR). (OMF) to develop and implement a plan Whereas the PCR focused on operational for reaching the project and technical issues, the PAR organizational and financial goals set considers broader issues such as the out above. The physical support market incentives for efficient component consisted of the technical production and the role of the rehabilitation of the initial ownership structure. production line (NCZ I) financed by OECF, the subsequent production line Oblectives & Design (NCZ II) financed by KfW, and the off- site infrastructure and environmental 2. The rationale for the project facilities financed by NCZY was to improve NCZ's production efficiency to import-competitive levels and to reduce the country's reliance on imported fertilizer. The NCZ was established in 1967 to precise objective was to help the operate a coal based ammonium nitrate Zambian Government in the physical plant (NCZ I). In 1975, a second plant rehabilitation of NCZ facilities and (NCZ II) was added to produce compound the improvement of NCZ operation. fertilizers and to increase the This involved restructuring of NCZ's production of ammonium nitrate. -viii- 4. Project design was demanding. complaints about poor supervision Success of the project depended upon (pre-1989) are justified. IDA should all components being completed in a have insisted on detailed plans for timely fashion. Delays in one implementation for OMF's work and been component would prevent the success of more thorough in assessing the quality the entire rehabilitation. Contract of OMF's team. The suspension of design for the rehabilitation of the Zambia's IDA drawing rights was an NCZ II line was based on an assessment important factor in NCZ's inability to of the plant in 1983 without provision meet its commitments. for the additional rehabilitation requirements which emerged in the Results & Sustainability course of project execution. Success of the project would have been more 6. NCZ is neither fully likely if the contractor had been rehabilitated nor is it operating given responsibility for the full efficiently. While the appraisal rehabilitation of the plant and the report presented an estimated off-site areas. There was a lack of financial rate of return (FRR) of 22.3 clarity over the OMF's percent and economic rate of return responsibilities with respect to the (ERR) of 26.8 percent, the ex post FR NCZ rehabilitation component and the and ERR are -23.6 percent and -19.7 OMF terms of reference clearly percent respectively (see Annex 4, underestimated the manpower that would Tables 12 and 14). The project has not be required. Finally, design factors helped NCZ increase its capacity led to the emergence of a dual utilization nor has NCZ become a major management structure--one derived from producer of fertilizer. It appears the Managing Director and backed by that at the end of the project, NCZ the Board and ZIMCO; the other derived faces similar problems to those it from the General Manager backed by the faced before the project began. There OMF. While measures were put in to has been only one key qualitative place to address the risks associated achievement in that all key management with the project, they were not positions in the company are now held effective. by Zambians. Implementation Experience 7 Sustainability of the operation is uncertain. On the positive side, 5. Overall project implementation substantial financial restructuring was unsatisfactory. While the NCZ I has taken place and the higher-level rehabilitation was successfully staff is more experienced and implemented and the cofinanciers motivated. The pressure of external performed satisfactorily, the competition is starting and NCZ is rehabilitation of the off-site continuing to make efforts to reduce component and NCZ II faced long delays its costs. On the negative side, the and experienced substantial cost over- conditions for good technology runs. OMF's performance was management are not yet in place. Good disappointing. Government supported technology management of such a the project but was unable to live up complex operation is facilitated when to the commitments set out in the all parties directly involved in the Credit Agreement, particularly with technology process are acting as respect to the provision of foreign owners. Owners look to the long-run exchange and financing necessary to profitability of the operation and act keep the project on track. IDA accordingly. owners also share in the performance was mixed. Borrower benefits of the enterprise. The - ix- current situation, for the NCZ II (b) With a project of this nature line, is that those who have provided all parties need to be committed to the technology do not have an total rehabilitation. The most ownership stake. While NCZ may have effective way to achieve such begun to sort its internal problems commitment would be for participants out, they lack access to suitable to have shares in the capital of the technology for the NCZ II line that is company. Even with a small (symbolic) committed to the long-term shareholding, the Japanese firm acted profitability of the company. as co-owner. The firm felt it had Additional external borrowing to complete responsibility for its achieve the remaining rehabilitation component of the rehabilitation and would not solve this problem. A more was fully committed to getting the NCZ diversified ownership involving the I plant up and running. By contrast, owners of the technologies used in the in the mid-seventies INDECO rejected production process would offer a the option of giving the German firm better chance of successful full responsibility for the rehabilitation and plant operation. construction of NCZ II and thus during the rehabilitation they were committed to only a part of the rehabilitation. Lessons Learned (c) Finally, in a project of this 8. The PAR supports the lessons complexity, a thorough evaluation of identified in the PCR: (i) the the management team and a detailed rehabilitation of technically complex plan for monitoring implementation are installations requires realistic vital. If problems arise they should financing contingencies and one donor be addressed early on. If the Bank had to be recognized as leader; and (ii) thoroughly vetted the OMF team, some putting price as a major factor in the of the difficulties and delays that evaluation of the consulting contracts arose might have been prevented. can lead the winning consultant to Complaints raised early on in the economize on the quality of staff. In project were not effectively addressed addition, the PAR draws lessons on and contributed to mounting some other issues: difficulties as time passed. Although the Bank was contributing a relatively (a) A project of such complexity small part of the overall loan (12 and scope will not be successful percent) it should have been more without proper incentives. The Board active in supervising the OMF in the and Managers of NCZ lack a true crucial running in the period of the incentive to make costs as low as project. possible until the company faces competition and runs the risk of going out of business. While NCZ is now Next Steps facing competition from imports at low prices, it is clear that because 9. Looking in the future, the audit fertilizer is viewed as a "strategic mission suggests the following: industry", the Government will not let NCZ go out of business. As owner, (a) The Bank may want to review manager, regulator, financier and the current economical, technical and supplier of a "strategic" product the financial position of NCZ in the Government may have conflicting context of its dialogue with the objectives that do not always lead to Government and its future operations. efficient production. -x- (b) If the additional shareholding structure of NCZ, in rehabilitation is found to be which technical partners in future profitable, the Bank may want to rehabilitation would also be discuss with NCZ the potential costs shareholders. and benefits of a more diversified PERFORMANCE AUDIT REPORT ZAMBIA FERTILIZER INDUSTRY RESTRUCTURING PROJECT (CREDIT 1662-ZA) I. INTRODUCTION 1. This is the Performance Audit Report of the Zambian Fertilizer Restructuring Project (Credit 1662-ZA) intended to assist Nitrogen Chemicals of Zambia Ltd. The overall project financing was for US$ 83.75 million to be cofinanced between OECF of Japan, KfW of the Federal Republic of Germany, Nitrogen Chemicals of Zambia and IDA. IDA's financing was US$ 10 million or 12 percent of the total funds, of which $US 4.2 million was intended to be used for equipment and materials, $US 5.3 million for technical assistance, and US$ 0.5 million for training. The loan was identified in August 1983, appraised in June 1984 and again in November 1984. It was negotiated in August 1985, received Board approval in February 1986, was signed in April 1986 and finally became effective in September 1986. The credit was not tranched, but it was affected by the suspension in relations between Zambia and the World Bank in May 1991. The credit closed in December 1991, one year late. The PCR provides a frank assessment and acknowledges that it was not successful. This PAR agrees with this judgment and focuses on some additional factors. The overall assessment of the operation is that its outcome is unsatisfactory, its sustainability uncertain, and its institutional impact partial. II. BACKGROUND 2. Nitrogen Chemicals of Zambia Ltd. was established in 1967 as a producer of ammonium nitrate explosives for copper mining and is now the second largest of Zambia's state-owned enterprises. The Zambian Government's strategy was to utilize domestic coal resources for explosives and fertilizer through the use of a highly complex coal-based gasification process.- The construction of the original plant (NCZ I) was undertaken on a turn-key basis by the Japanese and was completed by 197011. The plant also produced ammonium nitrate fertilizers and 11 The technology involved in such a plant is particularly sophisticated and the Staff Appraisal Report made the following observation: " Only a limited number of coal-based ammonia plants are successfully in operation in the world today. In most cases, capacity utilization of these plants is still low, due to several factors, which include poor operational practices, inadequate maintenance skills, lack of carefully planned preventive maintenance, improper selection of materials and equipment, and inadequate use/ replacement of chemicals and spare parts. In many of these plants abnormal requirement of spare parts often does not derive from technical short-comings but rather results from the above problems... Experience has also shown that rehabilitation work for such plants is complex and there is need for further tuning up to varying extents when rehabilitation work is completed." (Report No. 5658, p. 26.) 1i See Annex 1 for the chronology of events leading up to and during this project. -2- operated at high capacity levels through the seventies. In the mid-seventies the Government increased its emphasis on promoting agriculture and thus chose to expand NCZ in order to increase the domestic production of fertilizer and thus pave the way for greater agricultural production.!' 3. In May 1975, construction of the second NCZ plant (NCZ II) began under an arrangement in which a German contractor was responsible for on-site construction and NCZ was responsible for off-site work (e.g., infrastructure necessary for the plant, piping, etc.). By May 1978, the contractor had completed construction of the on-site works, but completion of the off-site works by NCZ was off-schedule and final commissioning of the plant did not take place until November 1981. When the plant was finally started up, it became clear that there were problems due to design factors and poor maintenance of the NCZ II line in the three years prior to start-up. In the early eighties, the capacity utilization of the NCZ I line also deteriorated significantly and it was recognized that some rehabilitation was needed. Thus in March of 1982, the Government requested technical assistance from the Bank and in April the Bank agreed to review the situation. 4. In August 1983 a Fertilizer Technical Assistance Project was proposed by the Bank. By February 1984, the project had been altered to include the participation of OECF and KfW and to limit the IDA commitment to US$ 10 million. On the basis of the initial project appraisal, the IDA decided not to go ahead with the project because of the high risks involved. This put a halt to KFW's consideration of the project. After visits to the Regional Vice President from the Zambian Minister of Agriculture and the Minister of Finance, who pointed out some incorrect assumptions in the analysis, the IDA revised its economic analysis and agreed to participate in the project. III. PROJECT OBJECTIVES AND DESIGN Project Objectives 5. The fundamental concept behind the project was to improve NCZ's production efficiency to import-competitive levels, to reduce the country's reliance on imported fertilizer and thus to save foreign exchange. The project was intended to play a role in diversifying Zambia's economy by stimulating the agricultural sector. Finally the project also played a part in Zambia's industrial strategy- , paying greater attention to the linkages of industry and agriculture and to the necessity of improving the performance of large-scale, capital- intensive public investments. 1i During the same period many of the Zambian borders were closed due to conflict in neighboring states and transport costs were extremely high. The difficulties and expense of importing fertilizer at the time also contributed to the decision to expand NCZ. ± Set out in Zambia: Industrial Policy and Performance, Report No. 4436-ZA, Aug. 6, 1984. -3- 6. The precise objective of the project was to "assist the Zambian Government in physically rehabilitating the NCZ facilities and to improve the overall management and corporate performance of NCZ to provide Zambia with the much needed fertilizers at minimum foreign exchange outflow and comparable import prices."!' IDA's specific objectives were to assist in: (i) restructuring NCZ's management, organization and staffing pattern; (ii) restructuring NCZ's finances; (iii) introducing modern management techniques for plant operation; (iv) upgrading the skills of the NCZ staff; (v) ensuring an integrated and efficient technical rehabilitation of the physical facilities; and, (vi) improving the raw material acquisition and final product offtake logistics systems. 7. In order to achieve these objectives the project was divided into two major components, (i) policy and institutional improvement and (ii) physical support. (i) The Policy and Institutional Improvement Component was under the aegis of IDA and intended to include the following: (a) managerial restructuring; (b) provision of operations management services; (c) organizational restructuring; (d) staff training; (e) provision of technical coordination services; (f) development of a cost reduction program; (g) evolution of an import competitive ex-factory pricing system; (h) financial restructuring of NCZ; and (i) restructuring of the logistics system. These aspects were to be carried out through the use of an "Operations Management Firm" that was experienced in the technical aspects of such a plant. (ii) The Physical Support Component consisted of the technical rehabilitation of (a) the NCZ I plant (financed by OECF); (b) the NCZ II plant (financed by KfW) and (iii) off-site infrastructure and environmental facilities (to be financed by NCZ). 8. The estimated financing requirement of the project was US$ 83.75 million. OECF agreed to provide US$ 26.68 million (32 percent of the total) to cover the cost of the NCZ I rehabilitation in January 1984. KfW proposed a loan of US$ 27.20 million (33 percent of the total) and NCZ was to provide local and foreign currency amounts totalling US$ 19.87 million (24 percent of the total). IDA was to provide US$ 10 million (12 percent of the total). The proposed allocation of the IDA credit was US$ 4.2 million for equipment and materials, US$ 5.3 million for technical assistance, and US$ 0.5 million for training. 11 Staff Appraisal Report, No 5658-ZA. p. 24. -4- Prolect Design 9. The design of the project was based on an integrated approach. NCZ was to have primary responsibility for project management. The Japanese and the German donors would oversee and coordinate the rehabilitation of their respective production lines. NCZ was to coordinate and supervise the technical rehabilitation, through the Technical Coordinator provided by the Overseas Management Firm (OMF) with assistance from Technical Advisors appointed by OECF and KfW. The remaining engineering, procurement and installment work was to be carried out by NCZ under the supervision of the Technical Coordinator. In practice this approach did not work well. 10. The most satisfactory of the components was the rehabilitation of NCZ I. OECF had independently signed an agreement for the rehabilitation in January 1984. Therefore they began rehabilitation of NCZ I in April 1984, well before the German and IDA loans were approved. OECF has a small shareholding in NCZ. This combined with its turnkey contract had a positive impact on its rehabilitation experience. Sufficient contingency funds were available to cover unexpected expenditures on spare parts and equipment. The Japanese component was completed in August 1986, only one month behind schedule and within budget. The early start of OECF rehabilitation meant that there was little interaction between the Japanese and German contractors and therefore the integration of NCZ I rehabilitation with that of the rest of the plant did not occur. 11. The design of the NCZ II component was problematic. Although the appraisal report suggests that the contract was a turn-key arrangement, in practice it did not operate as such. It was a contract for provision of specific materials and rehabilitation, which did not include all the rehabilitation necessary to make the NCZ II line function. Essentially, the scope and design of the NCZ II rehabilitation was based on a study of the plant in 1983. Any deterioration that had occurred between 1983 and project effectiveness (September 1986) was not accounted for. This deterioration was significant because the plant was being operated without proper maintenance. In addition, the success of the NCZ II rehabilitation depended upon NCZ fulfilling its contribution to the off-site rehabilitation. The off-site rehabilitation was delayed for a number of reasons and as time passed additional rehabilitation of the NCZ II line became necessary, but was not covered by the contract. Again, the intended integration did not work. The probability of success of the project would have been improved if the contractor had been given responsibility for the full rehabilitation of its plant and its off-site area. 12. The IDA contribution to the project was geared toward carrying out the Policy and Institutional Component. The design of the OMF's role was the most important element of the IDA's component. The OMF was to assist NCZ to: (i) operate the plant efficiently, (ii) conduct a comprehensive review of NCZ's organizational structure; (iii) coordinate and supervise the technical rehabilitation; (iv) introduce modern management techniques, operational and ii The Japanese contract, however, was not amended to include performance criteria, proper documentation and the inclusion of Nitrogen Oxide (NOX) abatement facilities as specified in the conditions for negotiation (Annex 2). -5- maintenance procedures and a financial management information system; and (v) upgrade the skills of the NCZ staff through-on-the-job and formal training to enable them to operate the company efficiently after the OMF's departure. 13. An important design flaw was the lack of clarity over OMFs responsibilities with respect to the NCZ rehabilitation component. In the OMF's terms of reference, the coordination and supervision activities were directed at supervision of the consultants carrying out rehabilitation of NCZ I and NCZ II. Nothing was said with respect to NCZ's off-site rehabilitation responsibilities. In the event, when off-site rehabilitation began to lag, there was much discussion over-who was responsible for carrying out the NCZ off-site component, NCZ itself or the OMF. In its capacity of coordinator and supervisor of the rehabilitation the OMF was not responsible for actually performing the rehabilitation, but in its capacity as management of plant operations it could have been involved in implementation of the off-site rehabilitation. In the end, a side letter was added to the OMF contract, increasing OMF's role in the rehabilitation. 14. A second shortcoming was that the design of the OMF's role clearly underestimated the manpower that would be required to carry out the contract. In other words, the contract had the OMF trying to do too much and as a result it had difficulty doing things well. This was particularly the case with respect to the technical coordinator. 15. A third problem with the design of the OMF's role concerns management. The OMF was delegated full authority to manage the plant and was responsible to the NCZ Managing Director. In practice, the Managing Director and the General Manager did not agree on many aspects concerning the rehabilitation. Thus a dual structure of management developed: one derived from the Managing Director backed by the Board and ZIMCO, the other from the General Manager backed by the OMP. Although NCZ was displeased with the performance of the OMF, it did not use its right to terminate the contract.Z' Risks 16. The Staff Appraisal Report indicated that there were many risks to be addressed in undertaking the project. They included: technical risks given the complexity of the plant; project implementation risks; the risk of not attaining and maintaining a high capacity utilization; the risk of shortages of feedstocks; the risk of shortages of foreign exchange; the risk of inadequate financial performance; and, finally, the country risk. The Appraisal Report comments," The Project calls for many difficult decisions on the part of the Government. So far the GRZ has shown the willingness to face up to them. However, the success of the project would depend to a large extent on the future ability of the Government, particularly of the political authorities, to face up to reality in making those Z' This may have been a consequence of the suspension of the program in May 1987, because after the suspension no new contracts could be undertaken. It was better to receive assistance through the existing OMF, than to receive none at all. -6- difficult decisions."!/ 17. The design of the project tried to address these risks in a number of ways. A substantial number of conditions had to be met both before negotiation and before effectiveness (see Annex 2). Both negotiations and effectiveness of the IDA credit were held up for many months while these conditions were being met. The technical and implementation risks were supposedly addressed by using turn- key contracts with experienced engineering firms and adequate performance guarantees. The risk of shortage of foreign exchange was said to be addressed by the existence of the foreign exchange auction.Y The commercial risk was to be addressed through financial restructuring, a cost reduction package, and assurances on ex-factory prices. IV. IMPLEMENTATION EXPERIENCE Overall Performance 18. Overall, the implementation and performance of the Project was unsatisfactory. The project did not meet its objectives and the company is still not operating efficiently. The sustainability of the project is uncertain and the institutional impact has been partial. 19. At the start of the project, there were a number of existing conditions that made NCZ's incentive to operate in an economically efficient way questionable. First, the fertilizer market was protected. The Government purchased all the fertilizer that NCZ produced at a price below NCZ's unit cost, provided it to farmers at a subsidized price and was supposed to pay NCZ the difference between the subsidized price and NCZ unit cost in the form of a subsidy-L. In addition, high transport costs also provided NCZ with some natural protection. In 1984, NCZ did not have to compete with imported fertilizer at market prices, so there was little incentive to operate efficiently. 20. Another condition that affected the company's incentives at the start of the project was the management structure of NCZ. As a precondition to the project, NCZ became a subsidiary of the Zambia Industrial and Mining Corporation (ZIMCO) and was largely owned by the Government-L. The NCZ Board of Directors was largely composed of Government representatives, although the participation of private individuals was increased slightly as part of the project. The Managing Director was appointed by ZIMCO. In this instance the Government was 1 See Staff Appraisal Report: Zambia Fertilizer Restructuring Project, Feb. 4, 1986, Report No. 5658-ZA, p. 44. 1/ In August 1986, however, the Government began to interfere in the auction and by Jan. 1987 the auction had collapsed. Because of the importance of fertilizer to the economy, the Government was also willing to cover NCZ's financial losses. " The Japanese contractor had and continues to hold a small share in NCZ. -7- involved in all sides of the operation; it was owner, regulator, manager, and consumer (NAMBOARD). This structure had a substantial negative influence on the system of incentives for successful completion of the rehabilitation. The Government in its multiple roles had conflicting objectives which diminished its commitment to the success of the project. 21. The project got off to a shaky start from which it never fully recovered. Because of concerns over the high risks involved, it took over three years from project identification to effectiveness, with many delays along the way. The initial experiences with the OMF were not satisfactory and NCZ had difficulty maintaining the plant and providing the off-site rehabilitation necessary for the German contractor to begin its work. Implementation was further impeded when IDA disbursements to Zambia were suspended-L'. As a result of this suspension, only payments on the existing OMF contract could be made, none of the equipment and spares for NCZ's component could be purchased. This delayed implementation even further and as a result rehabilitation costs were much higher than expected. 22. Although implementation was in general unsatisfactory, the implementation experience of the separate components of the project varied. The NCZ I component was implemented successfully and was completed only a month behind schedule. Implementation of the NCZ II component was continuously delayed. Implementation of the IDA component also faced delays. 23. The failure of the project can be attributed in part to the fact that the project was not properly managed by the Government (the owner) and the company's Board, who did not appear to have a clear strategy for NCZ's rehabilitation and development. NCZ (the manager) experienced great difficulties in managing the project because of differences of approach and management style between the managing director (appointed by the Board/Government), who was continually involved in day-to-day affairs, and the management put into place by the OMF. In addition, the project was poorly supervised by IDA in the initial years of the project. NCZ I Component 24. According to the appraisal report the Japanese contractor was hired to: (i) design and engineer; (ii) procure, inspect and deliver new equipment and materials; (iii) replace, repair and overhaul existing equipment as needed; and (iv) supervise start-up operations of the NCZ I plant. After rehabilitation, the plant was expected to achieve production levels of 83 tons per day of ammonia L In mid-1986 the Government's adjustment program began to unravel. Prompted by rapid depreciation of the kwacha, the Government began to interfere in the auction market, thus undermining confidence in the auction and leading to its collapse. The Government was also experiencing strong political opposition to the removal of maize subsidies. In December 1986, riots occurred and the subsidies were restored. By May 1987, the Government was unable to meet its debt payments and announced a series of policies that reversed many of the policies implemented during the adjustment program. On May 1st, the Bank program with Zambia was suspended. -8- (about 21,000 tons per year). The contract included revamping of the fertilizer complex water treatment plant. The appraisal report also states that a pollution abatement system would be installed by Dec.31, 1987. 25. Implementation of the NCZ I component went relatively smoothly and was completed only one month behind schedule. NCZ I work was also kept within the total foreign exchange financing provided by the OECF, although as a result of unexpected financing needs, the amount originally allotted for the purchase of spare parts was reduced from 216 million yen to 20 million yen. Output from the rehabilitated NCZ I line peaked in 1988 at 16,222 tons (about 78 percent of the objective), but in following years output fell, reaching only 8,504 tons in 1992 (41 percent of the objective). Delays in the implementation of NCZ II put increasing stress on NCZ I and machinery has been wearing out more quickly than anticipated. The water treatment plant was not revamped as part of the Japanese component. In 1990, a supervision mission found that the waste water system was inoperative due to lack of maintenance of mechanical parts. In addition, the pollution abatement equipment was never installed; it was argued that improvements in the production process due to the rehabilitation reduced the emissions of nitrogen oxide to levels below the accepted limits. 26. The success of the NCZ I rehabilitation relative to the other components can be attributed to a number of factors. First, the design of the NCZ I plant was simpler and therefore the plant was easier to keep running and to maintain. Second was the contract type. The turn-key nature of the Japanese component meant that the Japanese were responsible for all aspects that affected the start-up and running of the NCZ I line. They did not have to depend on any other contractor for their rehabilitation to work. Finally, and most important, the Japanese firm had a share in the company. Although the share was quantitatively negligible, qualitatively the arrangement gave to the Japanese partner a concrete interest in the success of the rehabilitation. Their commitment to the project was thus very strong. NCZ II Component 27. The NCZ II rehabilitation, carried out by a German contractor and financed by KfW, was intended to restore the original design capacity through the replacement or revamping of many of the components of the plant, based on an assessment of the factory that occurred in 1983. It also included the incorporation of pollution control equipment in order to reduce nitrogen oxide emissions. The signing of a satisfactory contract for the rehabilitation of NCZ II was a condition of credit effectiveness. 28. In the appraisal report, the NCZ II rehabilitation was expected to start in March 1986 and to be 100 percent completed by December 1987. In practice, the contract between the German contractor and NCZ was not signed until July 1986, the rehabilitation work did not begin until January 1987 and KfW pulled out in November, 1990 with 60 percent of the rehabilitation completed. The investment costs incurred as of March 31st 1992, were US$28.0 in local currency costs (compared to the appraisal report's estimate of US$ 1.5) and US$ 79.2 million in foreign currency costs (estimated at US$ 25.86 at appraisal). As of February 1993, the NCZ II line was still not up and running. -9- 29. There are multiple reasons for the extremely poor implementation record and high costs overruns of the NCZ II plant. The suspension of disbursements to Zambia by the Bank in May 1987 delayed the implementation of the off-site component of the project, which was a pre-condition to the completion of the NCZ II rehabilitation. In March of 1988, the Germans suspended disbursement on the NCZ project because of the Government's inaction on fertilizer price increases which was a violation of the credit's covenants. The suspension of foreign funding made it very difficult for NCZ to finance both maintenance and rehabilitation. As a result, the condition of the plant deteriorated at a faster pace than could be rehabilitated. Hence, rehabilitation needs and costs continued to increase. The Government, which pressed hard for the project, did not live up to the agreements it had made in the negotiations. Its policy reversal and inability to pay arrears was the reason for the suspensions. It was reluctant to support the policy changes that it had agreed to as part of the loan agreement and was unable to provide the foreign exchange that it had committed to NCZ as part of the agreement. 30. In addition, the rehabilitation of the NCZ II line was affected a great deal by management problems. As discussed above, there was lack of clarity in the design of the project about the extent to which the OMF should be involved in the rehabilitation of the off-site component. The German co-financiers saw off-site rehabilitation as part of the OMF's role. The OMF saw its role as supervisory. Given the lack of progress on this front and the dependence of the NCZ II rehabilitation on successful rehabilitation of the off-site area, a degree of animosity developed between the German contractor and the OMF. 31. Finally, implementation was poor because of the nature of the KfW and German firm's contract and its consequent commitment to NCZ. The German donor and contractor were pressured into taking part in the rehabilitation because of the problems that had existed with the plant at start-up. L Because NCZ wanted to reduce costs and involve local contractors, the contract was narrowly and specifically defined as the rehabilitation deemed necessary in the German contractor's 1983 assessment of the firm. It was not a commitment to get the plant running no matter what that might require. The German firm was not invited to participate in the project as a joint venture partner, but just as a contractor. Therefore, its relationship to the company was one that focused on the completion of a specified task, rather than that of a co-owner. Had the Germans firm participated as a co-owner, the incentive to pursue successfully the rehabilitation would probably have been much higher. This lack of "ownership" was quite detrimental to the project. L Recall that the NCZ II line had been built based on a split contract. The German contractor finished its component on schedule, the Zambians were unable to finish their component for many years and as a result guarantees on the NCZ II line's construction no longer held. Had the construction and start-up of the plant of the plant occurred as scheduled, any problems would have been covered by these guarantees. -10- IDA Component 32. IDA was responsible for the Policy and Institutional component that was described in paragraph 7. We consider each aspect of this component in turn. (i) Managerial Restructuring. While there were some delays, the required managerial restructuring was carried out as a condition of effectiveness. NCZ was made a direct subsidiary of ZIMCO, who appointed an experienced expatriate as Managing Director. The General Manager was appointed as part of the OMF team. Moreover, stronger private sector participation was included on the Board, and corporate responsibilities were delineated so that the NCZ Board was responsible for policy-making, the Managing Director for overall management of the company and the General Manager for day-to-day operations-. As the project progressed this restructuring did not hold. First, the Board did not really fulfill its long-term strategy and policy-making function. When the suspension of World Bank funding took place, an assessment of the current strategy should have occurred. The Board should also have laid out a plan for NCZ's rehabilitation responsibilities and monitored it closely, lobbying the Government (the ultimate owner) when necessary. In practice, the Board consisted largely of Government members and therefore was subjected to conflicting objectives: those of the owner, those of the regulator and those of the supplier of a "strategic" product. Once the credit was approved, the Board did not play the active role that it should have, it acted as if the donors and contractors were the only ones responsible for the rehabilitation. Second, the delineation of roles between the Managing Director and the General Manager was not clear. There was a great deal of friction between the two and a confusion of responsibilities. The Managing Director was continually involved with the day-to-day running of the firm rather than focussing on overall management of the company. The lines of responsibility were blurred and this had a deleterious effect on the functioning of the plant. (ii) Operations Management Services. The OMF was hired to carry out the services that were described in paragraph 12. Overall, the performance of the OMF was disappointing. The reasons for this poor performance are numerous. Some members of the team sent by the OMF lacked the expertise to run the plant, much less to improve on efficiency. Some members could not speak English and therefore had difficulty communicating with the NCZ staff. The OMF appears to have had difficulty in co-ordinating and supervising the rehabilitation. While a technical co-ordinator was appointed, it soon became clear that the job was too big for one person. The management techniques introduced by the OMF were not always suitable to the Zambian environment, for example cutting lead times on input orders did not take into account the length of time it often takes to receive goods in Zambia. Efforts at a management information system and computerization were begun, but not completed. Finally, skill upgrading of NCZ staff did eventually take place, although there was some delay in setting up OMF staff with Zambian counterparts. (iii) Organizational Restructuring. The OMF started out on a bad foot by making organizational changes without clearly communicating their intent to L' An internal auditor was also appointed at the same time. -11- either the NCZ Managing Director nor IDA-L. In August 1987, the OMF submitted an organizational review, but it did not incorporate an action plan for implementing organizational changes. In general, both IDA and NCZ viewed this review as unsatisfactory, but the revised versions still did not include plans for implementation. (iv) Staff Training. The project was to include a comprehensive training program for NCZ staff to equip them with the necessary skills to run the plant effectively. The training program was supposed to be derived from the organizational review, but IDA's comments on the report state that the training program was insufficiently developed-'. The training program was developed further in October 1986, but got off to a late start and the suspension of World Bank funding in May 1987, greatly constrained the program. It appears that the OMF did not have a good understanding of the knowledge already acquired by NCZ staff. NCZ staff felt that much of training program was too basic to address their needs. (v) Technical Coordination Services. The OMF team was to hire a Technical Coordinator (TC), beginning in June 1985, to supervise and coordinate implementation of the overall rehabilitation work. Two NCZ engineers were assigned to work with the TC. The TC's role was immediately circumscribed because the rehabilitation of the NCZ I was well along the way when the TC was hired. The TC therefore had a minimal (if any) role in the Japanese rehabilitation. Almost as soon as the implementation of NCZ II rehabilitation began, it became clear that TC's terms of reference encompassed far more than he would be able to carry out. The TC was not successful in coordinating the different aspects of the rehabilitation. The off-site component was seriously delayed, thus delaying the German contractor's work on the NCZ II line. (vi) Cost Reduction Program. While some cost reduction measures were implemented (staff reductions, for example), the major part of cost reduction was to come from the technical rehabilitation of the facilities allowing them to work at much higher levels of capacity and reduced rates of input consumption. Because the technical rehabilitation remains to be completed, these cost reductions have yet to occur. (vii) Internationally Competitive Ex-Factory Pricing System. As part of the loan agreement, the GRZ agreed to give NCZ autonomy in setting ex-factory fertilizer prices. However, it did not follow through on this agreement, prompting KfW to suspend negotiations and the IDA to inform the OMF that they should prepare for termination of their services. Shortly after these actions (in May 1988), the Government implemented a pricing mechanism whereby NCZ would receive the import parity price equivalent plus fifteen percent. (viii) Financial Restructuring. NCZ's finances were to be restructured as a condition for the negotiation of the credit. A financial restructuring was agreed upon, but did cause some delays. The point of the financial restructuring L Note that all such changes were to be approved by the Bank. Li Back to Office Report, Sept. 26, 1986. -12- was to put NCZ on a financially viable basis, so that it was able to cover all its expenses, service its debt and earn a reasonable return on its capital. In the early years of project implementation, the financial restructuring was not successful because NCZ had difficulty obtaining payment from the fertilizer distributors. In addition, the foreign donors suspended disbursement in 1987 (IDA) and 1988 (KfW) and the Government failed to provide the foreign exchange that NCZ required, all of which undermined NCZ's financial viability. NCZ failed to meet the financial covenants in the loan agreement. In December of 1992, however, its finances were again restructured to place the company on a financially sound footing. (iv) Restructuring of the Logistics System. The Inter-Agency Coordination Committee was established in Dec. 1984 to ensure operational coordination between the collieries, the railway, NCZ and Namboard, to ensure timely delivery of coal. The Committee helped to improve things somewhat, but the mines continued to have some mechanical difficulty in extracting coal and transportation problems from the mine to the plant have not been completely resolved. At the time of the evaluation mission, NCZ was trucking its coal from the colliery, because the train track was broken. Electricity shortages also proved to be a substantial problem. 33. The IDA component was clearly not successfully implemented. Policy objectives were subject to the Government's wishes. Institutional objectives were addressed through the OMF and were overambitious. The OMF's resources were spread too thin and it consequently had difficulty being effective. In addition, the OMF had to work under difficult circumstances and with a management that it did not get along with.-" Part of the IDA component was to provide equipment and spares. but this never materialized because of the suspension of funding to Zambia in May 1987. The training component was also greatly affected by the suspension, overseas training could no longer take place and it became difficult to acquire the books and equipment needed. L NCZ had the option to terminate the OMF's contract, and it is surprising that it did not chose to do so, given the complaints expressed about the OMF. Such an important decision was the NCZ Board's responsibility. It shows the extent to which the Board has been passive during the rehabilitation period (see para. 32, part (i)). There was a constraint to terminating the OMF, however. The suspension of Zambia's drawing rights on May 1st, 1987, meant that no new contracts could be financed with IDA money. Had NCZ decided to terminate the OMF, IDA would not finance a contract with a new firm. Thus a decision to terminate the OMF's contract would have left NCZ with no technical assistance at all. -13- V. BORROWER AND IDA PERFORMANCE Government and NCZ Performance 34. The GRZ's commitment to the program appeared in the first instance to be very strong. Both the Minister of Finance and of Agriculture visited the Bank in Washington to stress how important the project was to Zambia, after the first evaluation indicated that the project was too risky and should not be undertaken. As discussed above, the Government had agreed to give NCZ autonomy over ex- factory prices, but did not do so until mid-1988. The Government's commitment to the project included taking all actions necessary to enable NCZ to perform in accordance with the provisions of the project agreement, including the provision of funds, facilities, services and other resources. The Government was unable to live up to these commitments. Most particularly it was unable to provide the financing and foreign exchange that NCZ needed to keep up with the increasing maintenance and rehabilitation costs of the project. 35. As a result of weak Government support and a poor incentives framework, NCZ's performance turned out to be very weak. NCZ proved unable to organize and implement its part of the rehabilitation. It had difficulties in maintaining the plant. While factors out of NCZ's control affected its ability to carry out the rehabilitation and to maintain the plant, they are not the sole explanation of why NCZ was ineffective. First, NCZ had difficulty playing the usual role of an owner that contracts out work because the Board of NCZ was not assuming its full responsibilities (see para 32 part (i)). In addition, because the institutions involved were large international companies or agencies and because NCZ badly needed the financing, NCZ tended to act as a subordinate. While in theory, the organizations involved in the project should have "served" NCZ, in practice, NCZ "served" these organizations- . Second, there was confusion over exactly what the role of the OMF should be with respect to NCZ's management in terms of setting out a strategy for off-site rehabilitation. In the terms of reference for the OMF, they were supposed to supervise the coordination of the different components. Given that they had taken over the day-to-day management of the firm, however, they could also be seen as being responsible for day-to-day implementation of the rehabilitation. The Board and NCZ should have detailed a strategy for the implementation of the NCZ component and clearly communicated this to the OMF. Third, both the Managing Director and the Board did not perform their functions appropriately. Conflict between the Managing Director and the General Manager had a substantial impact on the functioning of the firm. The Board should have addressed this situation early on, and was requested to do so by IDA. They did little to resolve the situation and matters continued to deteriorate. Li The only time that this was not the case was during discussions with a Norwegian firm in 1990. This firm was to be brought in to replace the existing OMF, but insisted that all management positions, including the Financial Manager and the Managing Director, be replaced with Company staff. When the Board of NCZ would not agree to this, the arrangement fell though as did Norwegian and German funding for complete rehabilitation of the plant. -14- IDA Performance 36. IDA performance on the project was relatively weak. IDA was clearly reluctant to undertake the project and the PCR comments, "It therefore seems fairly obvious that the Bank should have stuck to its original decision not to participate." IDA's subsequent arguments to justify the project were not based on a realistic assessment of the situation. ERR and FRR calculations were based on over-optimistic assumptions, given the risks involved. Also the scope of the OMF work was too large and too diffused. IDA should have done more to make detailed plans for implementation of the OMF's work and should have been more thorough in assessing the team proposed by the OMF. 37. The Bank received several complaints from KfW and NCZ about supervision. The PCR comments on the large number of supervision missions, 14 formal missions and many more informal ones, but says nothing about the distribution or the quality of the supervision. The official files provide seven Form 590s with supervision ratings (see Annex 3). The Form 590 for September 14th, 1987 was a duplicate of the previous one and the official files indicate that between February 1987 and July 1988 there were no supervision missions to Zambia.L1 Given the importance and complexity of the OMF's work, combined with the fact that there were complaints about the OMF early on, the complaints about supervision appear to be justified. In addition, there was a distinct downward shift in ratings when a new task manager is brought on board. Research for this evaluation gave the impression that through 1988, staff working on the project considered the project's problems as small matters that needed to work themselves out, rather than the fundamental problems that they were.- After 1989, supervision improved considerably. 38. The suspension of IDA disbursements to Zambia was an important factor in NCZ's inability to meet its rehabilitation commitments and brought criticism from other donors. However, the Bank's policy with respect to build-up of arrears is clear, and the Government (as policy-maker and owner) should have been aware of the impact that the suspension would have on the project and should have acted accordingly. Li The Bank did participate in a meeting of all parties involved in the project on February 12th, 1988 in Germany. The aim of the meeting was to review the present stage of project implementation including NCZ's operational and financial status as well as to highlight the main shortfalls and to agree on a common action plan for their removal. Lt Note also that after the Bank reorganization in 1987, the task manager of the project was working in another Regional Department, although he still remained task manager of the project. -15- VI. PROJECT RESULTS AND SUSTAINABILITY 39. Overall, the project results have been negligible: NCZ is still not completely rehabilitated nor is it operating efficiently. Overall, the quantitative impact of the project is presently negative as is indicated by ex post FRR and ERR -23.6% and -19.7% respectively (Annex 4, Tables 12 and 14).Li The project has not helped NCZ increase it's capacity utilization substantially. Nor has NCZ become a major producer of fertilizer. It appears at the end of the project that NCZ is faced with similar problems as it was before the project. There were, however, some qualitative benefits. For example, the project has assisted the Zambianization of NCZ. All key management positions are now held by Zambians. 40. In the current circumstances, the sustainability of the operation is uncertain. On the positive side, substantial financial restructuring has occurred and the higher-level staff is more experienced, motivated and aware of the constraints of the Zambian environment. The pressure of external competition is starting and NCZ is continuing to make efforts to reduce its costs. On the negative side, the conditions for good technology management are not yet in place, as the current situation would require. Good technology management of such a complex operation implies that all the parties directly involved in the technology process are acting as owners, not contractors or subcontractors. Owners will look at the long-run profitability of the operation and act accordingly. Owners will also share the benefits of the enterprise. The current situation, for the NCZ II line, is that those who have provided the technology do not have an ownership stake. While NCZ may have begun to sort its internal problems out, this is not sufficient. They are missing a provider of technology for the NCZ II line that is committed to the long-term profitability of the company. Additional external borrowing to achieve the remaining rehabilitation may not solve the problem. Rather ownership is the issue. A more diversified ownership involving the owners of the technologies used in the production process may offer better chances for successful rehabilitation and plant operation. VII. CONCLUSIONS AND LESSONS LEARNED 41. Overall, the outcome of the project was unsatisfactory. The Project did not achieve its objectives of rehabilitating the NCZ facilities, improving the management and corporate performance of NCZ, and of providing the country with the bulk of its fertilizer. The NCZ I component was successful, whereas the NCZ II component and the institutional and policy component were not successful. However, the project was of the "all or nothing" character. In order for the project to be successful, total technical rehabilitation of the plant was required. The PAR supports the lessons identified in the PCR that: 1) the rehabilitation of technically complex installations requires large financing contingencies and one donor to be recognized as leader and to have the authority and influence to achieve results, and 2) that putting price as a major factor in the evaluation of the consulting contracts leads the winning consultant to 11 This compares with an estimated financial rate of return of 22.3% and economic rate of return of 26.8% as calculated in the Staff Appraisal Report. -16- economize on the quality of staff. 42. In addition, the PAR draws lessons on some broader issues. First, a project of such complexity and scope will not be successful without the proper external incentives. The Board and Managers of NCZ are unlikely to have a true incentive to make costs as low as possible until the company faces some competition and runs the risk of going out of business. While NCZ is now facing much competition from imports at low prices, it is clear that because fertilizer is viewed as a key industry, the Government will not let NCZ go out of business. As owner, manager, regulator, financier and supplier of a "strategic" product, the Government may have conflicting objectives that do not always lead to efficient production. 43. Second, with a project of this nature all parties need to be committed to total rehabilitation. The most effective way to achieve this is for participants to have a stake in the long-term profitability of the company, that is, to have shares in the capital of the company. The contrast between the rehabilitation of the NCZ I line and the NCZ II line help to make this point. Even with a small (symbolic) shareholding, the Japanese firm acted as co-owners. The firm felt it had complete responsibility for its component of the rehabilitation and was fully committed to getting the NCZ I plant up and running. In the mid-seventies INDECO rejected the option of giving the German firm full responsibility for the construction of NCZ II and thus during the rehabilitation they were committed to only a part of the rehabilitation necessary. ZIMCO never invited the provider of technologies to participate in the rehabilitation as joint venture members. This would have increased the probability of success considerably, because the joint venture partners would have been interested in the long-run profitability of the NCZ. In addition, the Government, despite its promises, was not fully committed to the rehabilitation; it was unable to provide the support required. The design of the project addressed a number of factors that were necessary, but not sufficient, conditions for the rehabilitation of the plant. The missing condition was the long-term commitment that comes through having a stake in the enterprise. 44. Finally, in a project of this complexity, a thorough evaluation of the OMF team and a detailed plan for monitoring implementation are vital. In addition, if problems arise they should be addressed early on. If the Bank had thoroughly vetted the OMF team, some of the difficulties and delays that arose might have been prevented. Complaints raised early on in the project were not effectively addressed and contributed to mounting difficulties as time passed. Although the Bank was contributing a relatively small part of the overall loan (12 percent) it should have been more active in supervising the OMF in the early years of the project. Next Steps 45. Looking into the future, the audit mission suggests the following: (a) The Government program for industrial development in Zambia includes restructuring and privatization of public enterprises. The Bank is engaged in a continuous dialogue with the Government of Zambia on these issues and supports specific policy and institutional measures -17- in this area through its lending program. The Bank may want to review the current economical, technical and financial situation of NCZ in the context of its dialogue with the Government and its future operations. (b) The Bank and NCZ may want to update the financial requirements to complete the rehabilitation and reassess the profitability of the operation in light of these new requirements. If the additional rehabilitation is found to be profitable, the Bank may want to discuss with NCZ the potential costs and benefits of a more diversified shareholding structure of NCZ, in which technical partners in future rehabilitation would also be shareholders. -18- ANNEX 1 PERFORMANCE AUDIT REPORT ZAMBIA FERTILIZER INDUSTRY RESTRUCTURING PROJECT (CREDIT 1662-ZA) CHRONOLOGY 1967, September Nitrogen Chemicals of Zambia LTD. (NCZ) established. 1968, early Construction of NCZ I plant begins under turnkey arrangement. 1970, May NCZ I commissioned. 1975 Construction of NCZ II plant begins. 1978, May Completion of NCZ II on-site works by German contractor. 1980 INDECO transfers to NCZ responsibility for completion of NCZ II plant and startup. 1981, November Commissioning of NCZ II. 1981, June GRZ requests technical assistance for NCZ from UNDP. 1982, March GRZ requests technical assistance for NCZ from World Bank. 1982, April World Bank agrees to review NCZ situation and advise GRZ. 1983 Italian contractor undertakes study of NCZ at NCZ's request, upon completion of study submits offer to NCZ for personnel and training services. 1983, July German contractor undertakes study of NCZ upgrading. 1983, August Bank mission to evaluate NCZ and identify project. Proposed Fertilizer Industry Technical Assistance Project for US$ 16 million. 1984, Jan. Bilateral letter of agreement signed by OECF and Zambians for rehabilitation of the NCZ I line. 1984, Feb Initial brief introduces participation of OECF and KfW for rehabilitation of respective lines; limited IDA commitment to US$ 10 million. 1984, April World Bank preappraisal mission in Lusaka, joined by KfW team. 1984, May Meeting of donors and INDECO in Washington to discuss NCZ rehabilitation. 1984, June Preappraisal BTO finds rehab. project technically and economically justified. 1984, July Critique of project appraisal. World Bank decides not to go ahead with project because of high risks associated with the project. Puts halt to KfW consideration. 1984, August Regional VP meets with Zambian Minister of Agriculture to discuss reconsideration of NCZ project. 1984, September Zambian Minister of Finance urges Regional VP to reconsider at Annual meetings and VP agrees to do so. 1984, October World Bank revises economic analysis and agrees to participate on the second stage of appraisal. -19- 1984, November World Bank/KfW appraisal mission. Conditions of negotiation and effectiveness set out. 1985, January Decision memorandum confirms Banks participation in the project. 1985, January Project Steering Committee and Inter-Agency Committees formed. 1985, February Bids opened for OMF: 2 responses. 1985, March NCZ request for advance of $250,000 from Project Preparation Facility. 1985, March Meeting in D.C. with Zambian and KfW officials. No news on progress regarding restructuring of Board and on financial restructuring package. 1985, April Post-appraisal mission. OMF selected. INDECO approved transfer of NCZ to ZIMCO. 1985, May Meeting Between Bank, NCZ, and OMF to discuss draft contract. 1985, May Request for US$ advance approved. 1985, August Negotiations. 1985, September Post appraisal mission. Internal Auditor chosen. Cost reduction plan underway. Financial restructuring underway. Contracts signed with colliery and expected to be signed with railways and NAMBOARD. 1985, November Meetings in Washington with World Bank, OMF and NCZ to discuss final draft of NCZ/OMF contract. 1985, December KfW agrees to cofinance NCZ project (condition for Board presentation.) 1986, January ZIMCO approves agreement between NCZ and OMF. Two-day follow-up mission (no BTO). Request of extension for PPF advance refinancing date. 1986, February Board presentation. Credit approved. 1986, April Credit Agreement signed. 1986, May Supervision mission (no BTO.) 1986, June Conditions for effectiveness restated. 1986, July NCZ contract with German contractor signed. Terminal date for effectiveness of Credit extended to October 9, 1986. Concerns raised by World Bank over delays in completing organizational study and in the preparation of the training program. Also telex to Ministry of Finance expressing concern over meeting conditions for effectiveness. 1986, August Study on organizational restructuring submitted to the Bank. 1986, September Supervision mission (4 days). BTO (9/18) mentioned four explosions (8 Jan, 1982; 25 Aug, 1984; June 85 and Aug. 85). Credit becomes effective 9/25. BTO 9/26 documenting staff changes made without Bank approval. Communication problems with OMF. Draft organizational study not satisfactory. 1986, October Revised organizational study: structure and content unchanged. Agreement on findings and recommendations of Safety and Environmental studies. 1987, January Report on Computerization of NCZ received. Request for US$ 13 m in Italian aid for raw materials, TA & training. 1987, February Review mission. Aide memoire highlights shortfalls in production, emergency plan to achieve 50 % capacity. 1987, March BTO, form 590. Results achieved so far encouraging. Interaction of different cultures not without friction. Conflicts between Managing Director and Gen. Manager. Difficulty getting forex due to collapse of forex auction. 1987, April Letter to MOF on Italian grant request noting that OMF's services may have to be extensively modified to take care of changed scope of plant rehabilitation. 1987, May Suspension of Zambia's drawing rights. Bank Funds can only be used to pay -20- OMF contract, not for new contracts or the purchase of equipment. Escalation of Managing Director/General Manager conflict. Letter to NCDP on new TA man months requirements.(5/27) "[OMF] has realized that the scope of the work embodied in the agreement is totally inadequate to achieve the above principal objectives satisfactorily, for reasons beyond their control. The environment within which [OMF] has to operate the plant is drastically different than the one envisaged in the service agreement." 1987, June Request for training expenses to be treated as part of consultancy services. 1987, July Report that NOX levels acceptable and therefore no expense on abatement equipment needed. Letter from Managing Director to task manager: More work to be done than expected. Original concept of World Bank loan should be changed to reflect different situation. 1987, August Bank concern over lack of adjustment of ex-factory prices. NCZ's evaluation of OMF services. Rates overall performance as satisfactory, but very critical in the detailed comments. 1987, September Form 590 (identical to previous w/only date changed). KfW supervision mission. Concerns about: delays on NCZ components; fertilizer prices, power supply situation, 50 working days lost due to power failure. KfW letter to Bank Director: OMF has failed so far to cope with adequate preparation and initiation of the investment package. Must be prepared for German contractor's performance guarantees to hold. 1987, October NCZ change in reporting arrangements without consulting Bank (circumventing General Manager in purchasing.). 1987, November Task manager moves to another Regional Department as part of reorganization. 1987, December Memo documenting strong NCZ & KfW complaint about lack of Bank supervision. Bank letter to KfW acknowledging concerns; Meeting set for January 27th in Germany. 1988, January Project steering committee meeting (not the donors): Training behind by 1 year due to suspension. 1988, February Letter from KfW summarizing conclusion of January meeting. Deterioration of plant much greater than assessed in previous years. NCZ preparation about 4 months behind the contractor. NCZ to submit to Bank revised plan for additional man-months required. Both Bank and KfW considered inaction on price increase a violation of loan covenants. Action required before April 1st 1988. 1988, March Letter from German Government to Regional VP asking for funds to be disbursed. Managing Director leaves NCZ because unhappy with contract offered. KfW suspends disbursement. 1988, April Bank Director to NCZ: NCZ should make plans to terminate OMF role. 1988, May OMF to NCZ: might be able to obtain Italian bridging loan. OMF begins to implement program for withdrawing its personnel. Government implements 15 percent factory price increase over and above import parity price equivalent. 1988, June New NCZ Managing Director appointed. 1988, July Mission to assess NCZ situation. Form 590. 1988, August BTO - Rehabilitation 21 months behind schedule. Letter from MOF to Bank Director confirming NCZ's high priority and -21- reassurance that ex-factory pricing will hold. 1988, September Appointment of new General Manager. On-going negotiations over financial restructuring. 1988, November Letter from Managing Director expressing dis-satisfaction with OMF's performance. BTO stating financial restructuring condition fulfilled. 1988, December KfW letter expressing concern about setbacks in NCZ scope of works. This is now jeopardizing NCZ II start-up. 1989, February Side letter to NCZ contract drafted. NCZ scope under great pressure. Bank mission prompted by KfW request. Problems exist in NCZ making deadlines for start-up of NCZ II. Performance of OMF: ZIMCO suggests that if it were not for the delay it would involve, OMF would be replaced. Both ZIMCO and NCZ feel that closer supervision by the Bank is needed. 1989, March Side letter signed extending OMF contract to Dec. 31, 1989. Specifies changes to technical agreement. Sales, Finance and Personnel Managers to report to Managing Director rather than General Manager. Letter from Bank Director to OMF concerning poor performance. 1989, June KfW expresses grave concerns about project. Regional VP meeting with KfW on project. Final version of the Safety Audit Report. 1989, July Letter from KfW to Bank Director outlining issues to be discussed in August meeting. Due to delays project will be delayed by 8 months to May 1990. Short -term financing needed for cost overruns. 1989, August Mission (supervision)/meeting of donors, contractors, NCZ. New financing considered by Italian Government US$ 8 million. OMF letter discussing situation in Zambia. Difficult because OMF has no contract or financing, not reimbursed for local costs. Negative press reports about OMF. OMF forced to start phasing out team. 1989, September NCZ asked to prepare economic/financial rehabilitation study and contingency plans. If studies show that continued support justified, we would recommend that the IDA credit be used to fund enhanced OMF rehabilitation team. 1989, October Supervision Report, Form 590 (dramatic change in 590 ratings) suggests possibility of using new OMF for operational support from Jan, 1990. stanklard. KfW willing to participate in new CBA. OMF Report on NCZ complex (from June study). 1989, November Consultants chosen to carry out the new CBA. Bank mission to initiate re-evaluation. 1989, December BTO Report: preliminary results from evaluation suggest that a full rehabilitation is justified and is better than closing the plant or leaving the rehab. at its present incomplete state. Arrival of a new OMF team tentatively planned for mid-late 1990. Bank telex to MOF, ZIMCO, NCZ: suggests that decisions on rehabilitation be put on hold and that existing OMF contract be extended for 6 months to allow for thorough assessment by all interested parties. 1990, January OMF contract extended to June 1990. NCZ takes over responsibility for marketing & distribution of fertilizer. 1990, February Reiteration of Bank's stance: essential that a contractor takes total responsibility for the rehabilitation at firm price and arrangements made for plant to be operated -22- more efficiently and more professionally than it has done in the past by hiring experienced fertilizer operator. Given above actions Bank supports inclusion of project in PIP. Problems with non-payment for fertilizer distributed on credit. 1990, March Meeting to discuss possible participation of new OMF. BTO Report: no donors expect to supply funding in short-term. If discussions with new OMF satisfactory funding for complete rehabilitation will be made available. IDA still constrained by suspension. NCZ allocated DMI1.5 by Gov't.. KNCZ II line deteriorating rapidly and soon must be put into preservation condition to prevent irreversible damage. Any immediate funds needed by NCZ will have to come from Zambian sources. NCZ send letter to BoZ detailing its financial needs for 1990-91. 1990, April Government instructs all banks to open L/Cs for NCZ to import fertilizer. 1990, May Issue of environment problem raised. Total Rehabilitation split into Phase IIA (using Zambian Funds) and Phase IIB. 1990, June Supervision Mission (form 590). Assessment of compliance with covenants and performance of consultants. Continuing failure of NCZ to abide by some of the covenants. Three principal financial covenants not being met (current ratio, debt- service ratio, debt-equity ratio). Arrangement for further environmental study. Major stumbling block in negotiations with new OMF. 1990, July Supervision Mission (5 days) NCZ letter citing improvement in OMF performance. Asks for extension of current OMF contract through 1990. Meeting to discuss phase IIA. 1990, August BTO-discusses only environmental situation. Waste water system inoperative due to lack of maintenance of mechanical parts and pumps. Consultant put to work on report. 1990 September NCZ and new OMF close to agreement. NCZ prepared to submit to KfW NCZ II contractor's lump-sum proposal. Not able to get draft to Bank for approval. 1990, October OMF requests Bank to check some invoices. Complaints about length of delay between submitting invoices and payment. Negotiations between NCZ and and new OMF break down. KfW decides not to fund lump-sum proposal. Managing Director leaves NCZ. 1990, November Acting Managing Director agrees to using some of NCZ money to help refinancing to pay off arrears and to reactivate program. Asks that similar amount be made available through one of new loans. KfW pulls out. Kambobe accepted as MD. 1990 December BTO - Partial Supervision (from Oct 22-Nov. 29) Scope of project frozen to fit available funding (Phase IIA). Environmental study completed. An extension of closing date needed. Preparation of budget needs to be completed for extension of OMF contract. Audited accounts also overdue. Bank agrees to extension of OMF contract for three months with bare minimum of staff. 1991, January Money in TA (1679-ZA) earmarked for NCZ. Request to update TA costs. 1991, March Italian grant contract signed. Has two more steps before money can be disbursed. Letter to OMF concerning delays in start-up. Not clear what will happen at end- -23- March when extension expires. 1991, April BTO - partial supervision. Remaining work on Phase IIA should be complete by April 92. Italian grant held up by fall of Italian Government. 1991, May Resumption Zambia's drawing rights. 1991, June Main NCZ environmental report by Consultant finalized and submitted. Bank telex informing NCZ that funds now available can only be used for TA, some equipment & parts. 1991, July Italian grant becomes available. OMF requests settlement of outstanding invoices. 1991, August Supervision Mission (3 days). 1991, December NCZ audit report still outstanding due to inability to collect accounts receivable and uncertainty over how to account for these. Credit formally closed. 1992, February Final Supervision Report (Form 590). 1992, April Draft PCR submitted. 1992, December Agreement on financial restructuring. -24- ANNEX2 PERFORMANCE AUDIT REPORT ZAMBIA FERTILIZER INDUSTRY RESTRUCTURING PROJECT (CREDIT 1662-ZA) Conditions of Negotiation: (to be accomplished before March 31st 1985 unless otherwise specified) 1) Obtaining amendment to Kobe steel contract regarding: performance criteria, pollution control equipment and proper documentation; 2) Appointment of a Technical Coordinator; 3) Selection of the Operations Management Firm; 4) Appointment of an Internal Auditor by NCZ; 5) Establishment of a Project Steering Committee by Feb 28, 1985; 6) Establishment of an Inter-Agency Fertilizer Production Committee by Feb 28th 1985; 7) Establishment of satisfactory arrangements for coordinating NCZ's input and output logistics including a proper guarantee and penalty system, and quality-linked price system for coal; 8) Satisfactory performance on the Emergency Action Plan to reduce costs; 9) Appointment of a full-time Managing Director; 10) Clear definition of the responsibilities and authorities of ZIMCO, NCZ Board, Managing Director; and General Manager; 11) Selection of the final package for financial restructuring of NCZ. Conditions for Effectiveness: 1) Successful negotiations with Kloeckner including proper performance guarantees for the entire plant, pollution control measures, and documentation requirements; 2) Completion of technical actions/ measures by NCZ needed prior to technical rehabilitation of the plant by Sept 1, 1985; 3) Appointment of the Operations Management Firm by Sept. 1, 1985; 4) NCZ to become a direct independent subsidiary of ZIMCO. -25- ANNEX 3 PERFORMANCE AUDIT REPORT ZAMBIA FERTILIZER INDUSTRY RESTRUCTURING PROJECT (CREDIT 1662-ZA) FORM 590 SUPERVISION RATINGS 10/7/86 3/05/87 9/14/87* 7/29/88 Overall 2 2 2 2 Dev't. Objectives 1 1 1 1 Project Management 1 1 1 1 Availability of Funds 1 1 1 2 Compliance v/Legal. NA NA NA NA 8/23/89 7/03/90 2/24/92 Overall 3 3 2 Dev't. Objectives 3 3 2 Project Management 2 2 1 Availability of Funds 3 3 2 Compliance v/Legal. 2 2 3 * Note that this Form 590 is identical to the previous on except for the date. It is not based on a supervision mission. Also note that as of May lt, 1987, the program was suspended and availability of funds was limited to paying OMF contract. -26- ANNEX 4 ZAMBIA FERTILIZER INDUSTRY RESTRUCTURING PROJECT EX-POST COST BENEFIT ANALYSIS Table 1: Investment Costs: in mi Llions of various currency KOBE LINE IDA KLOCKNER LINE ( 1987-92) OFF-SITE (1985 to 1986) Technical ---------------------------------------- INFRAS Local Foreign Assistance Local Foreign (85-88) ZK J Yen S US ZK DM ECU SDR I Rps Equipment and Materials 5,058 73.637 15 Engineering and License 6.725 Freight and Insurance Civil Works and Erection 3.6 1,264 243 12.158 Spare Parts 0.2 8.5 Technical Assistance 9.8 27 9.7 Training Consultancy 6.5 Base Cost Estimates Physical Contingencies 3.6 Price Contingencies Total Project Cost 3.6 6,322 9.8 270 102.82 8.5 9.7 15 Working Capital Requirements Interest During Construction 201 Total Financing Required 3.6 6,322 9.8 471 102.82 8.5 9.7 15 NCZ I Plant 3.6 6,322 NCZII Plant 243 102.82 8.5 Off-site & Infrastructure 15 Technical Assis.& 9.8 27 9.7 Training Total Project Costs (toc. cur.) 3.6 6,322 9.8 270 102.82 8.5 9.7 15 -27- Table 2: Investments Costs in US S equivalent KOBE LINE IDA KLOCKNER LINE ( 1987-92) OFF-SITE TOTAL (1985 to 1986) Technical ---------------------------------------- INFRAS INVEST Local Foreign Assistance Local Foreign - (85-88) BY YEAR ZK J Yen S US ZK DM ECU SOR I Rps CurrentS Time Series (original currencies) 1985 1.8 3,161 1986 1.8 3,161 1.8 1987 2.0 90 34.27 2.8 3.2 5 1988 2.0 90 34.27 2.8 3.2 5 1989 2.0 90 34.27 2.8 3.2 5 1990 2.0 Total (orig. cur.) 3.6 6,322 9.8 270 102.82 8.5 9.7 15 Exchange Rate 1984 1.8 1985 2.7 238.54 1986 7.3 168.52 1 1987 1 8.9 1.80 0.866 0.773 13.0 1988 1 8.2 1.76 0.845 0.744 13.9 1989 1 12.9 1.88 0.907 0.780 16.2 1990 1 29.0 1991 61.7 1992 171.0 Time Series (Current US dollars) 1985 0.7 13.3 13.9 1986 0.2 18.8 1.8 20.8 1987 2 10.1 19.1 3.3 4.2 0.4 39.0 1988 2 10.9 19.5 3.4 4.3 0.4 40.5 1989 2 7.0 18.2 3.1 4.1 0.3 34.8 1990 2 2.0 Total Expenditure (S) 0.9 32.0 9.8 28.0 56.8 9.7 12.7 1.1 151.0 -28- Table 3: Weighted Average Sales Price 1984 1985 1986 1987 1988 1989 1990 1991 1992 SaLes (Quantity in MT) AN Explosives 15,604 18,874 16,989 21,148 25,022 17,666 17,433 15,444 16,621 AN Fertilizer 18,127 8,516 5,529 10,520 12,337 681 0 0 3,294 Compound Fertilizer 71,334 64,463 11,159 68,549 53,900 66,796 36,332 44,317 32,284 Nitric Acid 6,241 7,845 6,598 5,677 4,179 4,919 4,673 4,369 4,171 SuLphuric Acid 0 163 5,510 2,612 1,469 12,868 1,696 2,824 8,313 Total Sales (MT) 111,306 99,861 45,785 108,506 96,907 102,930 60,134 66,954 64,683 SaLes Quantity Index AN Explosives 0.140 0.189 0.371 0.195 0.258 0.172 0.290 0.231 0.257 AN Fertilizer 0.163 0.085 0.121 0.097 0.127 0.007 0.000 0.000 0.051 Compound Fertilizer 0.641 0.646 0.244 0.632 0.556 0.649 0.604 0.662 0.499 Nitric Acid 0.056 0.079 0.144 0.052 0.043 0.048 0.078 0.065 0.064 Sulphuric Acid 0.000 0.002 0.120 0.024 0.015 0.125 0.028 0.042 0.129 Total SaLes 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 Unit Prices - Level AN Explosives 578 663 1,009 0 2,724 3,419 7,164 20,763 45,472 AN Fertilizer 553 610 723 1,634 1,862 1,962 0 0 19,977 Compound Fertilizer 607 661 817 1,652 1,860 2,742 5,407 10,067 23,583 Nitric Acid 312 358 626 1,130 1,592 1,946 4,233 11,707 24,834 SuLphuric Acid 0 362 659 1,181 1,628 1,595 2,604 5,976 17,535 Unit Prices - Weighted AN Explosives 81 125 374 0 703 587 2,077 4,789 11,685 AN Fertilizer 90 52 87 158 237 13 0 0 1,017 Compound Fertilizer 389 427 199 1,044 1,035 1,779 3,267 6,663 11,771 Nitric Acid 17 28 90 59 69 93 329 764 1,601 Sulphuric Acid 0 1 79 28 25 199 73 252 2,254 Weighted Average 578 633 830 1290 2068 2672 5746 12469 28327 Index 1984=100 100.0 109.5 143.8 223.3 358.1 462.5 994.8 2158.7 4904.3 Index 1984=1.000 1.000 1.095 1.438 2.233 3.581 4.625 9.948 21.587 49.043 Memo Sales Revenues (K million) 65 64 39 186 202 276 336 2587 6050 Sales Deflator 584.0 640.9 851.8 1714.2 2084.5 2681.4 5587.5 38638.5 93533.1 Deflator Index 1.000 1.097 1.459 2.935 3.569 4.592 9.568 66.165 160.166 SaLes (Quantity in MT) 111,306 99,861 45,785 108,506 96,907 102,930 60,134 66,954 64,683 -29- Table 4: Sales Revenue at Constant 1984 Prices 1984 1985 1986 1987 1988 1989 1990 1991 1992 Sales (Quantity in MT) AN Explosives 15,604 18,874 16,989 21,148 25,022 17,666 17,433 15,444 16,621 AN Fertilizer 18,127 8,516 5,529 10,520 12,337 681 0 0 3,294 Compound Fertilizer 71,334 64,463 11,159 68,549 53,900 66,796 36,332 44,317 32,284 Nitric Acid 6,241 7,845 6,598 5,677 4,179 4,919 4,673 4,369 4,171 Sulphuric Acid 0 163 5,510 2,612 1,469 12,868 1,696 2,824 8,313 Total Sales (MT) 111,306 99,861 45,785 108,506 96,907 102,930 60,134 66,954 64,683 Unit Prices - Level AN Explosives 578 663 1,009 0 2,724 3,419 7,164 20,763 45,472 AN Fertilizer 553 610 723 1,634 1,862 1,962 0 0 19,977 Compound Fertilizer 607 661 817 1,652 1,860 2,742 5,407 .10,067 23,583 Nitric Acid 312 358 626 1,130 1,592 1,946 4,233 11,707 24,834 Sulphuric Acid 321 362 659 1,181 1,628 1,595 2,604 5,976 17,535 Sales Level at 1984 Prices AN Explosives 9 11 10 12 14 10 10 9 10 AN Fertilizer 10 5 3 6 7 0 0 0 2 Compound Fertilizer 43 39 7 42 33 41 22 27 20 Nitric Acid 2 2 2 2 1 2 1 1 1 Sulphuric Acid 0 0 2 1 0 4 1 1 3 Total Sales Level 64 57 23 62 56 57 34 38 35 Sales Index AN Explosives 1.000 1.210 1.089 1.355 1.604 1.132 1.117 0.990 1.065 AN Fertilizer 1.000 0.470 0.305 0.580 0.681 0.038 0.000 0.000 0.182 Compound Fertilizer 1.000 0.904 0.156 0.961 0.756 0.936 0.509 0.621 0.453 Nitric Acid 1.000 1.257 1.057 0.910 0.670 0.788 0.749 0.700 0.668 Sulphuric Acid Total Sales Index 1.000 0.890 0.365 0.968 0.868 0.884 0.531 0.593 0.544 -30- Table 5: Production Costs (K million) 1984 1985 1986 1987 1988 1989 1990 1991 1992 Variable Costs Fuel 0 0 0 0 0 00 0 0 Electricity 4 4 4 9 13 15 16 16 58 Raw Materials 37 44 29 91 111 170 159 1803 3545 (Less commercial purchases) -1330 -2683 Subtotal 41 48 33 100 124 185 175 489 920 Fixed Costs Salaries 11 12 13 15 22 33 60 142 520 Technical Assistance 0 0 0 0 0 0 0 0 0 Maintenance 3 4 4 20 20 23 31 71 142 Other Adnin. & 6 7 6 7 13 20 40 111 731 Selling Costs -2 -6 (Less commercial costs) Subtotal 20 23 23 42 55 76 131 322 1387 Total Cost of Production 61 71 56 142 179 261 306 811 2,307 Table 6: Distribution Costs (from Comercial Division) 1991 1992 (K million) Material & Freight 1,330 2,683 (K thousand) Sales 1745 4343 Other Adnin. 54 695 Financial Charges 146 623 Other Income (129) (554) Exceptional Items(Bad Debts) 247 645 (K million) Total "other Admin and Selling Costs" 2 6 -31- Table 7: Local and Inport Product Prices (in CIF Lusak USS/ton) Ammonium Nitrate NPK Compound C Year Local Imported Local/ Local Imported Local/ Fertilizer Fertlizer Imported Fertilizer Fertlizer Imported (ZKW) (US $) (US S) (ZKW) (US S) (US S) 1984 553 308 607 338 1985 610 225 661 244 1986 723 99 817 112 1987 1634 184 1652 186 1988 1862 226 1860 226 1989 1962 152 2742 213 1990 216 5407 187 310 0.602 1991 230 10067 163 332 0.491 1992 19977 117 241 0.485 23583 138 220 0.627 Table 8: Raw Material Price Levels Local - in ZK/mt Local - in US $ Equivalent Fuel Fuel Year Coal Oil Coal OiL (per Mt) (per Barrel) 1984 1985 1986 1987 1988 432 1,575 53 192 24 1989 488 2,017 38 156 20 1990 1,210 5,120 42 177 22 1991 3,236 13,991 52 227 28 1992 6,167 23,147 36 135 17 -32- Table 9: Raw Material Price Indexes LOCAL - in ZK/mt Fuel Year Coat oiL 1984 1985 1986 1987 1988 1.000 1.000 1989 1.130 1.281 1990 2.801 3.251 1991 7.491 8.883 1992 14.275 14.697 Table 10: Production Costs at Constant Value (milion 1984 ZUK) 1984 1985 1986 1987 1988 1989 1990 1991 1992 Variable Costs Subtotal (current) 41 48 33 100 124 185 175 488.836 920 Deflator 1.000 1.000 1.000 1.000 1.000 1.281 3.251 8.883 14.697 Subtotal (constant) 41 48 33 100 124 144 54 55 63 Index 1984=1.00 1.000 1.171 0.805 2.439 3.024 3.523 1.313 1.342 1.527 Fixed Costs Subtotal (current) 20 23 23 42 55 76 131 321.937 1387.248 Deflator 1.000 1.095 1.438 2.233 3.581 4.625 9.948 21.587 49.043 Subtotal (constant) 20 21 16 19 15 16 13 15 28 Index 1984=1.00 1.000 1.050 0.800 0.941 0.768 0.822 0.658 0.746 1.414 -33- Table 11: Suamary Input Data Index 1984=1.00 Capital Capital Capital Fixed Variable Sales Year Costs Costs Costs Cost Cost Revenue Current Deflator Constant Constant Constant Constant 1984 0.0 1.00 0.0 1.0 1.0 1.0 1985 13.9 1.01 13.8 1.0 1.2 0.9 1986 20.8 1.19 17.5 0.8 0.8 0.4 1987 39.0 1.31 29.9 0.9 2.4 1.0 1988 40.5 1.40 28.9 0.8 3.0 0.9 1989 34.8 1.39 25.0 0.8 3.5 0.9 1990 2.0 1.47 1.4 0.7 1.3 0.5 1991 0.7 1.3 0.6 1992 1.4 1.5 0.5 1993 0.7 0.8 0.9 1994 0.7 0.8 0.9 1995 0.7 0.8 0.9 1996 0.7 0.8 0.9 1997 0.7 0.8 0.9 1998 0.7 0.8 0.9 1999 0.7 0.8 0.9 -34- Table 12: Financial InternaL Rate of Return 12.A Ex-post Financial Rate of Return Capital Fixed Variable Total Sales Net Benefits Year Costs Costs Costs Costs Revenue Before Tax After Tax (million of 1984 US$) 1984 0.0 11.1 22.8 34.0 36.2 2.2 2.2 1985 13.8 11.7 26.8 38.5 32.3 -20.0 -20.0 1986 17.5 8.9 18.4 27.3 13.2 -31.6 -31.6 1987 29.9 10.5 55.7 66.2 35.1 -61.0 -61.0 1988 28.9 8.6 69.1 77.7 31.4 -75.2 -75.2 1989 25.0 9.2 80.5 89.7 32.0 -82.6 -82.6 1990 1.4 7.3 30.0 37.3 19.2 -19.5 -19.5 1991 8.3 30.7 39.0 21.5 -17.5 -17.5 1992 15.8 34.9 50.7 19.7 -30.9 -30.9 1993 7.8 18.3 26.1 32.6 6.5 6.5 1994 7.8 18.3 26.1 32.6 6.5 6.5 1995 7.8 18.3 26.1 32.6 6.5 6.5 1996 7.8 18.3 26.1 32.6 6.5 3.6 1997 7.8 18.3 26.1 32.6 6.5 3.6 1998 7.8 18.3 26.1 32.6 6.5 3.6 1999 -11.6 7.8 18.3 26.1 32.6 18.2 10.0 Ex-Post Rate of Return after tax= -23.6% -35- 12.8 Ex-Ante Financial Rate of Return Capital Fixed Variable Total Sales Net Benefits Year Costs Costs Costs Costs Revenue Before Tax After Tax (million of 1984 US$) 1984 6.8 12.8 16.5 29.33 31.3 -4.8 -4.8 1985 28.3 9.0 6.7 15.65 14.3 -29.7 -29.7 1986 11.2 7.5 7.4 14.9 23.3 -2.8 -2.8 1987 18.0 9.6 8.9 18.45 29.4 -7.1 -7.1 1988 8.8 12.5 26.0 38.49 57.3 10.0 10.0 1989 6.5 12.5 26.5 38.95 61.5 16.0 16.0 1990 0.7 12.5 26.7 39.21 64.1 24.2 24.2 1991 16.5 26.9 43.38 61.2 17.8 17.8 1992 12.5 27.1 39.56 61.9 22.3 14.2 1993 12.5 27.2 39.73 62.5 22.8 14.2 1994 12.5 27.4 39.89 63.1 23.2 13.7 1995 16.5 27.6 44.08 63.8 19.7 11.5 1996 12.5 27.6 40.08 63.8 23.7 13.4 1997 12.5 27.6 40.08 63.8 23.7 13.2 1998 12.5 27.3 39.75 62.6 22.8 12.6 1999 -19.4 12.5 27.3 39.75 62.6 42.2 34.6 Ex-Ante Rate of Return, after tax= 22.3% -36- TabLe 13: Conversion Factors Capital Fixed VariabLe SaLes Year Costs Costs Costs Revenue 1984 1.0 0.8 1.0 1.0 1985 1.0 0.8 1.1 0.8 1986 1.0 0.8 1.5 1.4 1987 1.0 0.8 1.5 1.6 1988 0.5 0.8 1.5 1.4 1989 0.4 0.8 1.5 1.4 1990 1.0 0.8 1.3 1.4 1991 0.8 1.3 1.2 1992 0.8 1.0 1.1 1993 0.8 1.0 1.0 1994 0.8 1.0 1.0 1995 0.8 1.0 1.0 1996 0.8 1.0 1.0 1997 0.9 1.0 1.0 1998 0.9 1.0 1.0 1999 0.6 0.9 1.0 1.0 -37- Table 14: Economic Internal Rate of Return 14.A Ex-post Economic Rate of Return Capital Fixed Variable Total Sales Met Benefits Year Costs Costs Costs Costs Revenue Before Tax (million of 1984 US$) 1984 0.0 8.9 22.8 31.8 36.2 4.5 1985 13.8 9.4 29.4 38.8 25.8 -26.8 1986 17.5 7.1 27.6 34.7 18.5 -33.7 1987 29.9 8.4 83.6 92.0 56.1 -65.7 1988 14.5 6.8 103.7 110.5 44.0 -81.0 1989 10.0 7.3 120.8 128.1 44.8 -93.3 1990 1.4 5.9 39.0 44.9 26.9 -19.3 1991 6.6 39.9 46.5 25.8 -20.8 1992 12.6 34.9 47.5 21.7 -25.8 1993 6.2 18.3 24.5 32.6 8.1 1994 6.2 18.3 24.5 32.6 8.1 1995 6.2 18.3 24.5 32.6 8.1 1996 6.2 18.3 24.5 32.6 8.1 1997 7.0 18.3 25.3 32.6 7.3 1998 7.0 18.3 25.3 32.6 7.3 1999 -7.0 7.0 18.3 25.3 32.6 14.3 Ex-Post Rate of Return = -19.7% -38- 14.9 Ex-Ante Economic Rate of Return Capital Fixed Variable Total Sates Net Benefits Year Costs Costs Costs Costs Revenue Before Tax (million of 1984 USS) 1984 6.8 9.9 16.4 26.24 28.3 -4.7 1985 27.7 6.9 7.1 13.95 12.3 -29.3 1986 11.2 6.2 11.0 17.19 21.6 -6.8 1987 18.0 7.9 13.6 21.45 29.2 -10.3 1988 4.2 9.8 26.8 36.64 56.2 15.3 1989 2.9 9.8 27.3 37.11 61.3 21.3 1990 0.7 9.8 27.5 37.3 64.0 25.9 1991 13.6 27.8 41.37 61.1 19.8 1992 9.8 28.0 37.78 61.8 24.0 1993 9.8 28.2 37.96 62.4 24.4 1994 9.8 28.4 38.15 62.9 24.8 1995 13.6 28.4 41.95 63.7 21.8 1996 9.8 28.6 38.35 63.7 25.4 1997 10.9 28.6 39.4 63.7 24.3 1998 10.9 28.2 39.07 62.5 23.4 1999 -11.67 10.9 28.2 39.07 62.5 35.1 Ex-Ante Rate of Return = 26.8%