India - Madhya Pradesh Fertilizer Project

Documnt of The World Bank FOR OFICIL USiE ONLY Repot No. 11995 PROJECT COMPLETION REPORT INDIA MADHYA PRADESH FERTILIZER PROJECT (LOAN 2415-IN) JUNE 15, 1993 Industry, Trade and Finance Division Technical Department South Asia Region This document has a restricted distribution and may be used bv recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY ZOUIVALENT Currency Unit = Rupees (Rs.) Rs. 1.00 = Paise 100 US$ 1.00 = Rs. 28.01 Fiscal Year April 1 - March 31 LIST OF ABBRZVIATIONS DANIDA Danish International Development Agency ERR Economic Rate of Return EIA Environmental Impact Assessment FRR Financial Rate of Return FCI Fertilizer Corporation of India FICC Fertilizer Industry Coordinator Committee GOI Government of India GAIL Gas Authority of India Limited MP Madhya Pradesh NFL National Fertilizer Limited OECF Overseas Economic Corporation Fund PDIL Projects Development India Limited tpd Ton per day tph Ton per hour MMCMD Million cubic meters per day MINAS Minimum National Discharge Standards Ncm Normal cubic meter SCF Standard conversion factor  FOR OFFICIAL USE ONLY THE WORLD BANK W"hington, D.C. 20433 U.SA Offico of Diretor-Goneral Operations Evaluation June 15, 1993 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on India Madhva Pradesh Fertilizer ProJect (Loan 2415-IN) Attached is the Project Completion Report on India - Madhya Pradesh Fertilizer Project (Loan 2415-IN) prepared by the South Asia Regional Office, with Part II contributed by the Borrower. The PCR is of high quality. It gives a clear account of implementation experience and discusses all the pertinent issues. It concludes that original objective of expanding nitrogenous fertilizer capacity, using the vast and newly developed Bombay High and South Bassein natural gas resources as feedstock, has been more than fully met; and that the problems encountered during implementation were expeditiously and professionally resolved. The result was an industrial facility that was completed on schedule and 36 percent below appraised cost. Thanks to the generous engineering design of the ammonia plant and the technical and managerial capability of National Fertlizer Limited (NFL-the Beneficiary), the plant has been operating efficiently at more than 110 percent of its nominal production capacity since commissioning. The project was deservedly awarded first prize for excellence by the Ministry of Program Implementation of the Government of India. The project, constructed at Vijaipur, had adequate environmental provisions and an impact assessment carried out four years after the plant's commissioning concluded that the Vijaipur's pollution control measures and systems are effective and all effluents are within limits specified by Minimum National Discharge Standards. In addition, NFL has developed and implemented a detailed disaster plan in Vijaipur. Although the project had highly satisfactory overall results and its sustainability is not in doubt, its actual prospects are ded to the availability of natural gas in sufficient quantities-within a context of very high demand for gas in the western regions of India. The project included a study to rehabilitate two large coal-based ammonia plants owned by the Fertilizer Corporation of India. The Bank concluded that, under the current and foreseeable market conditions, new investments in these plants were not economically jusdfied. However, there may be other options in the future for the Bank to remain a partner in expanding India's fertlizer production capacity if an agreement could be reached on fertilizer pricing and subsidies. The 30 percent increase in the controlled price of ferdlizers in July 1991, and the subsequent decontrol of the price of phosphatic and potassic fertilizers in August 1992 represent promising steps in this direction. No audit of this project is planned. Attachment This docummnt has a restricted distnbution and may be used by recipients only in the performance of their official duties. its contents may not oterwise be disclosed without World Bank authonization.   FOR OmCIAL USE ONLY PROJECT COMPLETION REPORT INIDIA MADHYA PRADESH FERTILIZER PROJECT (Loan 2415-IN} TABLE OF CONTENTS PREFACE .i EVALUATION SUMMAR . . . . . . . . . . . . . . . . . . . . . . . . PART I: PROJECT REVIEW FROM BANK'S PERSPECTIVE . . . . . . . . . .1 Project Identity .1.. . . . . . . . . . . . . . . . . . . . . . Background .1... . . . . . . . . . . . . . . . . . . . . . . . Project Objectives and Description . . . . . . . . . . . . . . . 2 Project Objectives. 2 Project Description ... . . . . . . . . . . . . . . . . 2 Project Design and Organization ... . . . . . . . . . . . . . 3 Organization and Implementation of the Rehabilitation Study . . 3 Project Implementation .... . . . . . .. 3 Implementation Schedule ... . . . . ... . . . . . . . 3 Main Problems Resolved During Implementation . . . . . . . 4 Procurement .. 5 Project Costs . . . . . . . . . . . . . . . . . . . . . . 5 Financing .... . . . . . . . .... . . . . . . . . . 6 Allocation of Bank Funds ... . . . . .. 6 Disbursement Schedule ... . . . . . ... . . . . . . . 6 Market Development and Seeding Program . . . . . . . . . . 7 Operation Preparation .. 7 Project Results . . . . . . . . . . . . . . . . . . . . . . . . 7 Project Objectives and Physical Results . . . . . . . . . 7 Market .... . . . . . . . ..S.... . . . . . . . . . a Economic rates of return ... . . . . .. 8 Financial Rate of Return ... . . . . ..9... . . . . . 9 Financial Performance . . . . . . . . . . . . . . . . . . 9 Environmental Impact .... . . . ..1.0... . . . . . . lo Disaster Management . . . . . . . . . . . . . . . . . . . 10 Project Impact .... . . . . . ..0.. ....... . lo Project Sustainability .... . . . . . ..... . . . . . . . 11 Bank Performance .... . . . . . . ...... . . . . . . . . 12 Borrower and NFL (the Beneficiary) Performance . . . . . . . . . 12 Project Relationship .... . . . . . ..... . . . . . . . . 13 Consulting Services .... . . . . . ..... . . . . . . . . 13 Project Documentation and Data ... . . . . .... . . . . . . 13 PART II: PROJECT REVIEW FROM BORROWER'S PZRSPECTIVE . . . . . . . 14 Confirmation of Information . . . . . . . . . . . . . . . . . . 14 Bank's Performance . . . . . . . . . . . . . . . . . . . . . . . 14 Borrower's Performance . . . . . . . . . . . . . . . . . . . . . 14 Project Relationship .... . . . . . ..... . . . . . . . . 14 Relationship with and Performance of Cofinanciers . . . . . . . 14 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) PART III: STATISTICAL INFORMATION . . . . . . . . . . . . . . . . 15 Bank Group Operations in the Fertilizer Sector . . . . . . . . . 15 Project Timetable. . . . . . 16 Loan Disbursements . . . . . . . . . . . . . . . . . . . . . . . 17 Project Implementation .. .18 Project Costs and Financing . ... .19 A. Project Costs (in Rs) . . 19 B. Project Costs (in USS). . . . . . . . 20 C. Capital Costs - Phasing of Expenditures . . . . . . . 21 D. Project Financing. . . . . . 22 E. Bank Financing. . ........... 23 Project Benefits . . . . . . . . . . . . . . . . . . . . . . . . 24 A. Direct Benefits . . . . . . . . . . . . . . . . . . . 24 B. Economic Impact. . . . . . . . ..25 C. Financial Impact . 27 D. Study . 28 Use of Bank Resources . . . . . . . . . . . . . . . . . . . . . 29 A. Staff Inputs . . . . . . . . . . . . . . . . . . . . . 29 B. Missions ................ 30 Status of Covenants . .. . ......... . 31 ANNEXES 1-1 India-Projected & Actual Nitrogen Supply/Demand Balance 33 1-2 Total Marketing Program & Market Share . .34 2-1 Import Parity of Urea and Economic Value of Natural Gas 35 2-2 Economic Rate of Return .. .36 2-3 Financial Rate of Return.. .... .37 2-4 Retention Price Calculation . . . . . . . . . . . . . . . 38 3 Financial Performance of NFL . . . . . . . . . . . . . . . 39 4 Environmental Aspects .. . .40 5 PCR's File . . . . . . . . . . . . . . . . . . . . . . . . 44  PROJECT COMPLETION REPORT INDIA MADHYA PRADESH FERTILIZER PROJECT (Loan 2415-IN) PREFACE This is the Project Completion Report (PCR) for the Madhya Pradesh Fertilizer Project in India, for which Loan 2415-IN, in the amount of US$203.6 million, was approved on May 17, 1984. The Loan was closed on June 30, 1992, three years behind schedule. Due to a reduction in total financing requirements, a total of US$36.5 million was canceled, reducing the Bank Loan to US$167.1 million. As of December 31, 1992, a total of US$166.2 million had been disbursed and the loan had an undisbursed balance of US$0.9 million. However, US$0.5 million out of special account has to be refunded to the Bank, which would reduce total disbursed amount to US$165.7 million and increase concellation to US$37.9 million. The PCR was jointly prepared by the Industry, Trade and Finance Division of the Asia Technical Department (Preface, Evaluation Summary, Parts I and Part III), and National Fertilizer Limited, the Beneficiary (Part II) . A copy of the PCR has been sent to the project co-financiers, the Overseas Economic Cooperative Fund (OECF), of Japan, and the Danish International Development Agency (DANIDA), of Denmark, for their information. Preparation of the PCR started during a project completion mission in India in November 1992, and is based, inter alia, on the Staff Appraisal Report; the Loan and Project Agreements; supervision reports; the Bank project files; and information prepared by NFL.   - iii - PROJECT COMPLETION REPORT INDIA MADHYA PRADESH FERTILIZER PROJECT (LOAN 2415-IN) ZVALUATION SUMMARY Obiective. 1. The main objective of the project was to expand domestic nitrogenous fertilizer capacity, in order to lessen India's dependence on imports, taking advantage of the vast and newly developed Bombay High natural gas resources as economic feedstock. The location of a large nitrogenous fertilizer plant in the state of Madhya Pradesh (MP), also aimed at stimulating fertilizer consumption in that state, whose agricultural potential was then under-utilized, by providing easier access to fertilizer. Finally, the project aimed at facilitating the rehabilitation of under-utilized plant capacity, through the preparation of rehabilitation study of two coal-based plants (para. 3.1). Iwlementation zxDerience 2. National Fertilizer Limited (NFL) has designed, organized and implemented the project professionally. Mechanical completion and start-up of the complex occurred on November 5, 1987, about two months ahead of the Bank's original appraisal schedule. Commercial production was declared on July 1, 1988, and Completion occurred slightly ahead of the Loan Agreement date of September 30, 1988. However, implementation of three additional project components, accepted by the Bank in the course of project implementation suffered substantial delays and caused the closing date to be postponed three times from June 30, 1989 to June 30, 1992. These delays were due to late final Government approvals of these investments (paras. 6.1 and 6.2) 3. Several problems were encountered during implementation. All were detected on time and efficiently resolved by the project team of NFL without any significant impact on the overall project schedule, and within budget. These included: (a) delays in the supply by the Gas Authority of India Ltd (GAIL) of gas for power and steam generation; (b) delays in the supply of water from the Ruthiai Dam; (c) unexpected rocky subsoil on site; (d) error in the detailed engineering drawing for the concrete of the synthesis gas compressor, detected after its construction; and (e) inadequate road infrastructure for transport from the Kandla port to site (1,265 kms) of the 410 tons ammonia converter (para. 6.4). 4. Procurement was carried out efficiently and without delays, using competitive bidding procedures for both international and local procurement. Actual financing requirements were 15% below appraisal estimates in Rupees and amounted to Rs. 5,370 million versus Rs. 6,304 million at appraisal (US$397.5 million versus US$618.0 million). The main reasons for these underruns were important reductions of import duties and interest during construction, and in fact, excluding taxes and duties, the actual total installed cost of the project as originally designed was only 3% below appraisal estimates (paras. 6.6 and 6.7). Due to this large reduction in the project total financing requirements, a total of US$36.5 million was canceled, reducing the Bank Loan to US$167.1 million (para. 6.11). 5. Also, it appears that total funds relent by GOI to NFL from the Bank loan and other cofinancing sources were substantially below appraisal estimates. Furthermore, a large portion of the loan proceeds, though transferred to the Government, was not relent to NFL, and may thus be considered as having been  - iv - used to finance GOI equity contribution to the project (which was transferred to NFL in the originally planned amounts)'. Main reasons for this deviation are the substantial reduction in project costs, and a substantial increase in NFL's contribution to the project from its own resources (para. 6.8). Prolect Results 6. Overall, the project objectives were more than fully met. The plant was completed on schedule and below cost, and has since been operated efficiently at more than 110% of its nominal production capacity. NFL started its commercial operation on time, and has developed adequate markets for the Vijaipur plant, and, through a seeding and education program, has expanded the fertilizer use in the state of Madhya Pradesh to more than the level that was expected. It is estimated that the plants are, during their entire economic life, capable of maintaining a sustained 110% capacity utilization (para. 7.1). 7. The project economic rate of return (ERR) is now estimated at 31% and is substantially higher than the base case of 18.6% estimated at appraisal. The difference is mainly due to a substantially higher economic value of natural gas estimated at appraisal. For reasons given below, the project financial rate of return (FRR) is estimated at 15.6%, slightly lower than the appraisal estimates of 16.6% (paras. 7.6 and 7.7). 8. The Vijaipur urea plant is taxed by the retention price scheme and by the gas pricing system: the project could reach a FRR of more than 21% if the fertilizer sector was deregulated -- the urea retention price of Rs. 3,733 per ton for the pricing period 1991/93 is much lower than its international import parity of Rs. 5,727 per ton in 1991/92 and Rs. 4,841 per ton in 1992/93; and the price paid for natural gas of Rs. 2,739 per thousand Ncm since January 1992 is significantly above its equivalent economic value of Rs. 2,014 per thousand Ncm (para. 7.9). 9. The project also included a study to rehabilitate two large coal-based ammonia plants at Ramagundam and Talcher, owned by the Fertilizer Corporation of India (FCI). The study was carried out by Krupp-Koppers, of Germany at a cost of US$2.7 million. The Bank, after review of the consultant's study, concluded that these investments were not economically viable and advised GOI to consider closing down these plants, at least until international urea prices improve (para. 5.1). The Government has yet to take a definitive action on the matter - - these two plants continue to operate at very low rate of capacity utilization (23% and 32% in 1989/90 respectively for Ramagundam and Talcher). Invironmental Aspects 10. Adequate effluent treatment and discharge facilities were constructed in accordance with Indian environmental standards, which are comparable to standards applied for such installations in industrialized countries and/or other environmental standards acceptable to the Bank. Furthermore, to overcome the risk of water shortage and problem of liquid effluent disposal during the dry season the plants were designed for maximum recovery and reuse of liquid effluents and are equipped with sophisticated water treatment installations (Annex 4-para. 5). 11. In addition to the compulsory initial environment assessment on the basis of which the project was designed, a comprehensive environment impact assessment (EIA) of the plant was prepared in 1987/88 by the National Environment I The Bank has referred to GOI on this subject and is awaiting its clarification.  v Engineering Research Institute (NEERI). The study was prepared on the basis of data collected before and after commissioning of the plant. NFL implemented most of the recommendations of the NEERI's EIA, including: (i) the plantation of a green belt of about 100,000 trees which has been developed using treated liquid effluent; and (ii) the replacement, of chromate inhibitor for the treatment of cooling water by a more expensive phosphate-based inhibitor. Also, NFL implemented additional investments: (i) an additional 5,000 tons double wall ammonia storage for increased safety; (ii) a purge gas system to reduce energy consumption and emission of carbon dioxide (CO2) in the atmosphere; and (iii) a reverse osmosis plant for the treatment of cooling water blowdown (para. 7.13). 12. A new EIA study, carried out by NERRI during 1992 after four years of operation, concluded that the Vijaipur's pollution control measures and systems are effective and all effluents are within limits specified by Minimun National Discharge Standards (MINAS) (paras. 7.12 to 7.14 and Annex 4) -- its main conclusions are: (i) overall air quality within and around the fertilizer complex is well within the limits specified by MINAS; (ii) the quality of treated effluent is well within the limit of MINAS, and all effluents are used for irrigation of green belt and in-plant horticulture; and (iii) the noise level is also well below the limit of MINAS. Disaster Manaaement 13. NFL has developed and implemented a detailed disaster plan in Vijaipur, which includes an emergency plan, an evacuation plan and an emergency pollution control plan. Also, as part of the 1992 EIA, NFL is undertaking a risk assessment study leading to the review of the current disaster management plan (para. 7.15) Prolect Sustainabilitv 14. If, in line with the present trend for economic policy reform, GOI decided to deregulate the fertilizer sector, at projected import parity prices, the NFL's Vijaipur plant would be able to withstand competition from imports even in the absence of protective tariffs, and while paying natural gas at its fuel oil equivalent economic value (para. 7.10). The major risk still faced by the project is that, in order to reduce the financial burden of the fertilizer subsidy, GOI may decide to revise urea retention price norms further downwards - - the project would have an FRR of only 6% if the retention price of urea for Vijaipur were to be reduced by 20W. However, the implementation of NFL's investment program, and/or the duplication of the Vijaipur plant if economically viable and if adequate and sufficient gas supply is made available, would further improve the project's sustainability (para. 8.1). 15. In the long term, sustainable operation of the plant is also a function of adequate supplies of natural gas feedstock and efficient operation of the HBJ pipeline. The project utilizes a maximum of 1.72 million cubic meters per day (MMCMD) of natural gas out of 18 MMCMD of gas currently transported by the HBJ pipeline, the capacity of which can be further increased to 33 MMCMD. There is in the western region an excess demand of natural gas (potential total supply is estimated at 61-75 MMCMD and potential demand at 91 MMCMD), the bulk of which is used by the fertilizer and the power sectors, where the demand is mainly generated by investment decisions taken by the Government. Furthermore, this does not pose any risk for Vijaipur's operation as a long term supply contract was signed between NFL and the Gas Authority of India Limited (GAIL) on October 9, 1991 (para. 8.2). 16. Also, the project has been implemented and is operated in an environmentally sound manner. The company is aware of the risks of such plants and has taken the necessary safety measures, therefore, the risks of problems with local communities are small.  - vi - Findings and Lessons Learned 17. The NFL project was awarded first prize for excellence in project implementation by the Minister of Program Implementation in 1989, and was highlighted by GOI as an example of a well implemented and operated industrial complex in the fertilizer sector (para. 4.2). The success of this project illustrates the importance, in the implementation of any large public or private sector project, of a number of key factors, which include (paras. 4.2 and 9.2): (a) a dedicated high-quality project team, established from the start, headed by a project manager, with autonomy and authority, in charge of project preparation, management, coordination and supervision. Furthermore, whenever possible, the same team should organize and take the responsibility for plant operation later-on; (b) a professionally competent planning and monitoring group, and a quality control group, all supported by a well designed project management system based on a detailed project execution plan; (c) a strong procurement management system, based on competitive bidding; (d) organizational arrangements in place at the early stage of the project to prepare the future operation of the plant, and develop the market for project output early during the implementation phase; (e) an effective financial incentive scheme contributing to the commitment of all levels of management at the project; and (f) availability of sufficient and timely funds. 18. Nevertheless, while the project was successful in meeting its objectives, it could, in an adequate economic environment, have been implemented without the help of the Bank. The Bank's major objective in this project was to support GOI strategy to increase domestic production of fertilizer, however, the important fertilizer sector issues in India were not addressed under this project, except for obtaining a vague commitment from GOI, during the project preparation stages, to reduce total fertilizer subsidies. The Bank could have adopted a broader sectoral approach at the early stages of project appraisal. In fact, this project was one of the last two Bank operations in the sector. The reform measures proposed by the Bank were considered too radical by GOI, and the policy dialogue in the fertilizer sector between GOI and the Bank ceased around 1987. Now that GOI has recognized the need to address sectorial issues, it may be the time for GOI and the Bank to renew a fruitful dialogue. GOI could benefit from recent and on-going Bank experiences in helping other countries in restructuring their fertilizer sector (para. 9.2). 19. Another lesson was that substantial cost savings could have been achieved by dividing the rehabilitation study of the two coal-based plants into two phases, each preferably implemented by separate consultants, in order to avoid possible conflicts of interest. The first phase could have consisted of a pre- feasibility study and the second phase of final design and feasibility study if justified by the results of the first phase (para. 5.1).  PROJECT COMPLETION REPORT INDIA MADHYA PRADESH FERTILIZER PROJECT (LOAN 2415-IN) PART I: PROJECT REVIEW FROM BANK'S PERSPECTIVE 1. Proiect Identity Name: Madhya Pradesh Fertilizer Project Loan Number: 2415-IN RVP Unit: South Asia Region Country: India Sector: Industry 2. Background 2.1 The agricultural policy of the Government of India (GOI) aims at ensuring increased food production, towards self-sufficiency. The objective of further expanding fertilizer use, which has grown from 70,000 tons per year of nutrients in 1950/51 to more than 12.5 million tons in 1990/91, is an important part of GOI strategy to increase agricultural output. Eight development plans have given priority to the development of the fertilizer industry to ensure a sustained supply of fertilizers, substitute for imports, and expedite the achievement of agricultural self-sufficiency. As a result, the bulk of nitrogenous fertilizer consumed in India is domestically produced (87% for 1990/91) and large amounts of phosphate fertilizers are also produced by the domestic industry, largely from imported inputs (67% of total supply in 1990/91); however, the entire national consumption of potassic fertilizer is imported. 2.2 The policy framework of the fertilizer sector is one of the most complex in India -- with tight Government control of feedstock and most output pricing, of market allocations, and of fertilizer distribution. Government policies also limit the choice of technology, feedstock, plant location, project execution arrangements and financing, and allocation of production licenses between the public, joint, cooperative, and private sectors. The fertilizer pricing policy is characterized by: (i) low and uniform farmgate prices (Rs. 2,760 per ton of urea since July 1992); (ii) producer prices set ex-factory for each plant's output (retention prices) to cover almost all production costs on the basis of a combination of actual and normative costs and to provide a post- tax return of 12% of total equity; and (iii) a budgetary subsidy to bridge the gap between the price paid by the farmer and the price paid to the producers. Retention prices for urea plants currently in operation range between Rs. 2,250 and Rs. 6,147 per ton, and averaged about Rs. 3,560 per ton in 1991 (Rs. 3,733 per ton for the Madhya Pradesh Project for the three year pricing period ending FY 1992/93) -- most of the Indian urea producers presently receive ex-factory prices that are within the range of landed prices of imported urea (about US$180 per ton of bagged urea in November 1992, or Rs. 5040 at an exchange rate of Rs. 28 per US$). 2.3 This policy has permitted India to develop a large domestic fertilizer production -- India is today the fourth largest fertilizer producer in the world -- and positively contributed to reaching the country's targeted large increases in foodgrain production. However this policy has also resulted in the growth of the fertilizer subsidy to an unsustainable level (Rs. 44 billion in 1992/93); and in the survival of a few uneconomical fertilizer operations. GOI has recently recognized the need to address sectorial issues, but until now limited its action to the implementation of some timid and somewhat conflicting recommendations of a Joint Parliamentary Committee on Fertilizer Pricing: (i) full decontrol of pricing and distribution of phosphatic and potassic fertilizer;  (ii) a 10% reduction in the controlled farmgate price of urea; and (iii) reimposition of price and distribution controls on lower analysis nitrogenous fertilizer which had been decontrolled since July 1991. These measures may in fact ac-entuate the already existing distortions in relative consumption of nitrogenous, phosphatic and potassic fertilizer. Furthermore, more recently (and probably under the pressure of the farming community), GOI has granted a direct subsidy of Rs. 1000 per ton of phosphatic and potassic fertilizer. The only positive consequence of these measures is an increased transparency of the subsidy paid for phosphatic and potassic fertilizer. 2.4 The Madhya Pradesh Fertilizer project is an integral part of GOI's plans to utilize associated and non-associated gas from the Bombay High and South Bassein offshore oil and gas fields, for use as feedstock for petrochemical and fertilizer plants in the states of Maharashtra, Gujarat, Madhya Pradesh, Rajasthan and Uttar Pradesh. The project is one of six large, modern ammonia- urea plants planned by GOI since 1979, which were to be constructed in a phased manner, based on the lean gas portion of these gas resources during the sixth Five-Year plan, in addition to two other plants, Hazira and Thal, which were already under construction in 1984. These six plants were to be constructed along the planned Hazira-Bijaipur-Jagdishpur (HBJ) pipeline. Three plants out of six are already in operation (the project plant in Vijaipur, the IFFCO plant in Aonla, and the private sector Indo Gulf plant in Jagdishpur), and the remaining three are under implementation by the private sector (the RCFL plant in Trombay, the Bindal Agro Chemical plant in Shahjahanpur and the Tata Chemicals plant in Babrala). Furthermore, the duplication of the Vijaipur and Aonla plants are now under consideration. 3. Prolect Obiectives and Description 3.1 Project Oblectives: The main objective of the project was to expand domestic nitrogenous fertilizer capacity, in order to lessen India's dependence on imports, taking advantage of the vast and newly developed Bombay High natural gas resources as economic feedstock. The location of a large nitrogenous fertilizer plant in the state of Madhya Pradesh (MP), also aimed at stimulating fertilizer consumption in that state, whose agricultural potential was then under-utilized, by providing easier access to fertilizer. Finally, the project aimed at facilitating the rehabilitation of under-utilized plant capacity, through the preparation of rehabilitation study of two coal-based plants. 3.2 Prolect Description: The project consisted of: (a) the construction at Vijaipur of a green-field nitrogen fertilizer complex including: (i) a single train 1,350 tons per day (tpd) ammonia unit; (ii) two 1,100 tpd urea units; (iii) integrated power and steam generation facilities, including a gas turbine generator, exhaust heat recovery unit and two boilers of 180 tons per hour (tph); (iv) raw water storage and treatment facilities, and demineralized water plant and cooling water systems; (v) storage for 10,000 tons of refrigerated ammonia and 50,000 tons of bulk urea and facilities for bagging urea; (vi) other related offsites, including maintenance workshops, warehousing, administration building, laboratory, transport facilities and effluent treatment; and (vii) infrastructure, including a township with 1,015 housing units and social facilities, road and rail links, and transmission lines for power supply from the grid; and (b) a study to rehabilitate two large-coal based ammonia plants at Ramagundam and Talcher owned by the Fertilizer Corporation of India (FCI), a state- owned company. These plants, which were commissioned in 1980, were operating at 331 or less of their capacity, mainly due to technical problems associated with the use of a new and difficult coal gasification  technology for ammonia production and interruptions in power supply. This study was to prepare an investment phase for which GOI had requested Bank assistance. 4. Prolect Desian and Organization 4.1 The project was designed, organized and implemented by the state-owned National Fertilizer Limited (NFL), with the assistance of: (i) Harold Topsoe, of Denmark, in association with Projects Development India Limited (PDIL), a state- owned engineering firm, for the construction of the ammonia plant; (ii) Snam Progetti, of Italy, in association with PDIL for the construction of the urea plants; and (iii) PDIL for all the offsites. The scope of consultants' assistance included supply of licenses, basic design, detailed engineering, procurement services, construction supervision, and technical supervision of commissioning. 4.2 To implement the project efficiently, timely and within the budget (Para. 6.1), from the start, NFL created project organization arrangements including: (i) a dedicated high quality project team with autonomy and authority, in charge of project management, coordination and supervision -- the team included a planning and monitoring group and a quality control group supported by a well designed project management system; and (ii) the introduction of a scheme of financial incentives tied to the achievement of physical progress targets, timely completion of milestones, actual costs congruent with budgeted costs, and attendance of employees -- this system contributed to a strong commitment and determination at all levels of management to implement the project without delays and cost increases, and to develop the necessary systems and techniques for project planning, implementation, monitoring and control -- in 1989, NFL was awarded first prize for excellence in project implementation by the Ministry of Program Implementation. 4.3 Another key factor in the successful implementation of the project was the timely availability of sufficient funds. Actual project costs were well below appraisal costs estimates (Para. 6.6 and 6.7) . Equity funds from GOI allocations and the company's internal cash generation were abundant and available on time. In addition to the Bank loan, NFL also obtained financing from the Overseas Economic Corporation Fund (OECF) of Japan and the Danish International Development Agency (DANIDA) of Denmark (para. 6.9 and Part III para. 5D). 5. Organization and ImDlementation of the Rehabilitation Studv 5.1 The rehabilitation study of the two coal-based ammonia plants was carried out by Krupp-Koppers, of Germany, at a cost of about US$2.7 million. While the consultant recommended the implementation of investments proposed and already well defined in their study, the Bank concluded from its review that these investments were not economically viable and advised GOI to consider closing-down these plants, at least until international urea prices improve. Substantial cost savings could have been achieved by dividing the study into two phases, each preferably carried out by different consultants in order to avoid possible conflicts of interest. The first phase could have consisted of a pre- feasibility study, and the second phase of final design and feasibility study if justified by the result of the first phase. 6. Prol-ct Implementation 6.1 Imvlementation Schedule: Mechanical completion and start-up of the complex occurred on November 5, 1987, about two months ahead of the Bank's conservative estimate. Production of urea started on December 1, 1987.  Commercial production was formally declared on July 1, 1988, three months behind the Bank appraisal estimate, however, by that time, the plant was already operating normally at more than 90% of its capacity and had already produced about 175,000 tons of urea. Completion as defined in Loan Agreement (as operation for not less than 60 consecutive days, at an average production rate per day of at least 80% of daily capacity), occurred about one month ahead of schedule on September 30, 1988. A detailed comparative schedule is presented in Part III. 6.2 Early in 1988, NFL requested to use part of the project cost savings to include three additional investments under the project: (i) an additional 5,000 tons ammonia atmospheric double-wall storage, for increased safety and flexibility; and (ii) a purge gas recovery system which would reduce energy consumption and increase capacity by 75 tpd of ammonia; and (iii) a 150 tpd carbon dioxide (CO2) recovery system. The Bank accepted this request as these components were within the project scope and objectives and could reduce the environmental impact of the project while improving its efficiency. However, their implementation suffered substantial delays and caused the closing date to be postponed three times from June 30, 1989 to June 30, 1992. These delays are due to the late final GOI approvals of these investments. The ammonia storage became operational in November 1991, and the Purge gas recovery unit was being commissioned in December 1992. The CO2 recovery system is scheduled to be ordered by the end of FY1992/93, and therefore has been excluded from Loan financing. 6.3 The rehabilitation study for the two coal-based plants was contracted to Krupp-Koppers of Germany, on July 11, 1985 and was completed in March 1986. 6.4 Main Problems Resolved Durina Immlementation: Several problems were encountered during implementation. All were detected on time and efficiently resolved by NFL's project team without significant impact on the overall project schedule and within the budget. These included: (a) delays in the supply of gas for power and steam generation-- gas was due to be delivered by the Gas Authority of India Ltd (GAIL) before March 1987 for power and steam generation (October 1, 1986 according to the Loan Agreement) and June 1987 for feedstock, however, gas supply only started on August 19, 1987. To avoid delay in pre-commissioning, the project team quickly decided to adapt the power and steam generation plant to use light distillates and to install the necessary facilities. The steam and power plants were commissioned, respectively, in March and May 1987, allowing pre-commissioning to proceed on time and avoiding about four months delay - - they were switched over to gas when it became available; (b) Delays in the supply of water from the Ruthiai Dam-- the project team assessed early that important delays of about two years would occur in the completion of the dam and immediately implemented a contingent water supply system from the Parvati river; (c) unexpected rocky subsoil on site-- this required conceptual changes in the design of levelling and grading works for the plants and the water reservoir; (d) error in the detailed engineering drawing for the concrete base of the synthesis gas compressor, detected after its construction-- an innovative solution was found which avoided considerable delays, it consisted in the drilling of 30 millimeters diameter holes and epoxy grouting of the reinforcement bars, while the proposed initial solution involved the excavation of eight holes of one square meter through the two meter thick concrete base; and  (e) inadequate road infrastructure for transport from the Kandla port to site (1,265 kms) of the 410 tons ammonia converter-- the project team planned this transport efficiently (which lasted about 5 months), carrying out the necessary modifications to roads and bridges. 6.5 Procurement: Very early, NFL prepared model bidding documents for Bank review and subsequently strictly adhered to Bank procedures. NFL's project management claims that adoption of International Competitive Bidding (ICB) procedures resulted in time and cost savings. In fact, NFL used equivalent procedures for local procurement. Procurement was carried out efficiently and without delays. This success was due to: (i) extensive reliance on consultants; (ii) the formation of a procurement task force including personnel from NFL, PDIL, and Topsoe, in charge of monitoring of inspections and expediting consultants' reporting; and (iii) the formation of a special committee of NFL Directors, which met frequently to expedite clearance of procurement recommendations. 6.6 Proiect Costs: Actual financing requirements amounted to Rs. 5,370 million versus Rs. 6,304 million at appraisal, equivalent to US$397.5 million against US$618.0 million (excluding Rs. 210 million, equivalent to US$20.6 million, considered at appraisal as short term debt financing to cover about 65% of working capital requirements). The main deviations from original estimates are summarized in table 1 below. Table I Appraisal Estimates Actual Costs % Variation US$ Rs US$ Rs Million Million Million Million US$ Rs Original NFL Project: - Total Installed Cost excluding Taxes 460.8 4,700 336.2 4,546 -27 -3 and Duties - Taxes and Duties 82.9 846 11.7 158 -86 -81 - Working Capital 11.1 113 10.2 138 -8 22 - Interest During Construction and 60.2 614 15.4 206 -74 -66 Front-end fee Total Financing 615.0 6,273 373.5 5,048 -39 -20 New Components - - 21.3 288 - - FCI Rehabilitation Study 3.0 31 2.7 34 -10 10 Tota Financina Required 618.0 6,304 397.5 5,370 -36 -15 6.7 Actual total financing requirements are substantially below appraisal estimates, about 15% in local currency and 36% in US Dollars. The differences in cost underrun between local currency and US Dollars are due to the devaluation of the rupee which took place over the period. In Rupees, the actual total installed cost of the project net of taxes and duties and excluding the additional components, is in fact only 3% below appraisal estimates. However, significant savings occurred in: (a) taxes and duties-- the project was exempted from custom duties on direct imports and excise taxes on indirect imports; and (b) interest during construction -- due to lower and later loan financing of the project (paras. 6.8 and 6.13); they permitted an important reduction in total financing requirements.  6.8 Financing: Total funds relent by GOI to NFL from the Bank loan and other cofinancing sources were substantially below appraisal estimates. Furthermore, a large portion of the loan proceeds, though disbursed for project purposes, was not relent to NFL, and may thus be considered as having been used to finance GOI's equity contribution to the project (which was transferred to NFL in the originally planned amounts). In strict legal terms, this would appear to be inconsistent with Section 3.01 (b) of the Loan Agreement which required the Borrower to relend the loan proceeds to NFL, rather than to pass them on in the form of equity, as seems to have been the case for some part of the loan proceeds. However this in no way jeopardized the successful implementation of the project, and would seem to have been a reasonable response to the substantial savings in project costs (para. 6.7) which occurred, enabling NFL and the Government to seize the opportunity to strengthen the company's balance sheet. The Bank has requested a clarification from GOI to set the record straight, and will take appropriate action once this is received including, if necessary, appropriate revision of the above provision of the Loan Agreement. 6.9 In addition to the Bank loan, GOI also received the following other cofinancing funds for the project: (i) 7.6 million Yen from OECF (Japan); and (ii) DKR 167 million from DANIDA (Denmark). These funds also were not relent to NFL. 6.10 Allocation of Bank Funds: In mid 1987, while construction was over 90% completed, GOI submitted a request to the Bank to reallocate the undisbursed balance of the loan, evaluated at more than US$70 million, to finance civil works as well as equipment already procured under LCB but financed by the company. Extensive discussions took place with respect to: (i) the form -- equity or debt- in which the surplus funds -- which could be substituting for GOI contribution to the project equity -- would be passed on from GOI to NFL; and (ii) the possible financing of equipment for which reserved procurement may have been used. The Bank initially refused (September 1987) to make an exception to its policy of canceling savings accruing as a result of lower than projected project costs. However, at the insistence of GOI, and in recognition of the inordinate delays in responding to this request, the Bank reconsidered its decision and agreed to finance civil works and erection contracts, but not equipment procured under LCB. Accordingly, the Loan and Project Agreements were amended on May 13, 1988, to permit the financing of civil works and erection contracts procured under LCB of less than US$10 million each and up to an aggregate amount of US$50 million. In fact, contracts totalling US$34.81 million qualified and were approved. 6.11 Disbursement Schedule: Due to the large reduction in project total financing requirements, a total of US$36.5 million was canceled, reducing the Bank loan to US$167.1 million. As of December 31, 1992, a total of US$166.2 million had been disbursed and the loan had an undisbursed balance of US$0.9 million. However, US$0.5 million out of special account has to be refunded to the Bank, which would reduce total disbursed amount to US$165.7 million and increase cancellation to US$37.9 million. 6.12 The project closing date of June 30, 1989 was extended three times to June 30, 1992 to allow the financing of civil works and of additional components (para. 6.2) . However, by the original closing date, disbursements already amounted to US$158.3 million, or 95% of the loan amount (net of cancellation), and the project was already in commercial operation. During the three-year extension, additional disbursements totalled less than US$8 million. These extensions permitted the implementation of new components within the project scope and objectives and resulting in increased safety, flexibility and capacity, and in substantial energy savings. Furthermore, they provided the Bank with an opportunity: (a) to accompany the first years of operation of a project efficiently implemented by a public sector company; and (b) to continue to follow developments in the fertilizer sector, at a time when policy dialogue on sectorial issues between the Bank and the Government had stopped (this project was among the last two Bank fertilizer projects in India).  - 7 - 6.13 Compared to appraisal estimates, substantial disbursement delays occurred at the beginning of the project. Appraisal estimates may have been over-optimistic because foreign consultants contracts had not yet been signed by negotiations -- this can explain delays in equipment procurement, which had to await completion of basic engineering. However, this did not have a significant impact on overall implementation of the project (para. 6.1). The pace of actual disbursements remained lower than appraisal estimates, but above the Bank profile. It was also slower than that of total project expenditures (para. 3 of Part III) -- this was normal however, given the differences in types of expenditures financed from the Bank loan and other resources. 6.14 Market Development and Seedina Proaram: It was essential for NFL to develop higher fertilizer demand in the new target market areas (Madhya Pradesh, Rajasthan, and Uttar Pradesh) where consumption was low before the plant came on- stream. As expected at appraisal, the company developed a fertilizer seeding program aimed at gradually increasing fertilizer sales in these states and building-up NFL's marketing organization and dealer network. To implement this program, NFL was awarded about Rs. 3.7 million from the EEC as part of the INDO- EEC Fertilizer Education Project. Phase 1 of this project was executed by NFL in the states of Madhya Pradesh, Rajasthan, and Uttar Pradesh between 1985 and 1988. Phase 2 of this project has been under execution in ten districts of Madhya Pradesh since October 1988, and will be completed in March 1993. The objectives of this education project are to increase consumption of fertilizers, efficiency of fertilizer use, and develop an integrated input supply system. It is especially aimed at small and marginal farmers. 6.15 Operation Preparation: A separate team headed by a general manager was formed early-on to implement the project, organize future operations ahead of time, and assume the responsibility for plant operation at a later stage. This project team was strengthened as needed during project implementation, from 83 members in july 1984 to about 800 in 1988, wheft the plant started commercial operations. Operation preparation activities took place during project implementation and, inter-alia, included human resources training, preparation of management information systems, and of safety, environmental and operation norms. 7. Prolect Results 7.1 Prolect Oblectives and Physical Results: Overall, the project objectives were more than fully met. The Vijaipur plant production levels and rates of capacity utilization since start-up are presented in Part III, para. 6A. The rate of capacity utilization during the first year of operation 1988/89 was over 94% and increased steadily to 118% and 123% for the ammonia and urea plants respectively in 1991/92. During 1992/93, plant operations stopped three weeks for programmed maintenance, however it is expected that capacity utilization of both plants will be maintained at 100% of their nominal capacity. These high rates of capacity utilization partly reflect: (a) GOI's decision to select Harold Topsoe, as process licensor, who designed the ammonia plant less conservatively than usual in the industry; and (ii) the use of high calorific value natural gas since start-up. It is estimated that the plants are capable during their entire economic life of maintaining a sustained 110 capacity utilization, which is substantially higher than the 95% maximum capacity utilization assumed at appraisal to be achieved in the third year of operation. This is equivalent to 798,000 tpy of urea and about 27,000 tpy of excess ammonia (from a total ammonia production of about 491,000 tpy).  - 8 - 7.2 MXrket: In 1991/92, actual demand for nitrogenous fertilizer in India was in line with appraisal estimates, increasing from 4.2 million tons of nutrients per year in 1982/83 to about 8 million tons in 1991/92 (Annex 1-1). Supply increased even more than the most optimistic appraisal projection, from 3.4 million tons of nitrogen in 1982/83 to 7.3 million ton in 1991/92, despite the fact that only three new ammonia plants based on Bombay-High gas started operations in addition to this project, instead of the five originally expected. Higher supply is mainly due to a larger than expected average capacity utilization of nitrogen plants in India, which reached 89% in 1991/92. In 1991/92, the 118% capacity utilization achieved by the project was higher than the average capacity utilization of nitrogen plants in both public sector (69%), and private sector plants (97%), and was about in line with capacity utilization of cooperative sector plants (113%). 7.3 In spite of lower sales during project implementation compared to appraisal estimates, and some inventory build-up during the first two years of operations, NFL developed its market much better than expected -- in the targeted market areas of Madhya Pradesh, Rajashtan and Uttar Pradesh states, NFL built-up its sales continuously from 65,400 tpy of nitrogen in 1984/85 to 360,000 tpy in 1990/91 and 408,000 tpy in 1991/92, compared with 315,000 tpy estimated at appraisal. Although, sales during the project implementation period were significantly lower than estimated at appraisal, they increased rapidly when the Vijaipur plant started. As a result of the seeding and education programs, sales from the Vijaipur plant started at a level of 197,000 tpy of nitrogen in 1988/89 and increased to 367,800 tpy in 1991/92. NFL's total marketing program and market share in the Vijaipur project market are presented in Annex 1-2. NFL's total country-wide sales of about 1.08 million tons of nitrogen in 1990/91 were also higher than appraisal estimates of 0.88 million tons at the same date. 7.4 Due to faster than envigased increase in production and higher capacity utilization of the Vijaipur plant, some inventory build-up occurred during the first two years of operation, until the time that market fully developed. In order to reduce these inventories, in 1990/91 and 1991/92, NFL respectively delivered about 30* and 22% of total sales from vijaipur out of the originally targeted area. The average transport distance for sales from vijaipur was about 790 km in 1991/1992 compared to about 600 km estimated at appraisal. It is expected, however, that this average will rapidly decrease as accumulated inventories decrease to acceptable levels. 7.5 In the State of Madhya Pradesh, the seeding and education program had a major impact as the consumption of nitrogenous fertilizer reached 477,000 tons of nutrients in 1990/91 versus 279,000 tons estimated at appraisal. Increase in consumption since 1987/88 in Madhya Pradesh corresponds to NFL's sales in this state from Vijaipur (184,000 tons of nitrogen in 1990/91). In the states of Rajasthan and Uttar Pradesh, NFL sales were developed as planned at appraisal. 7.6 Economic rates of return: The project economic rate of return (ERR) is now estimated at 31% and is substantially higher than the base case rate of 18.6% estimated at appraisal. The difference is primary due to the substantially higher economic value of natural gas assumed at appraisal. The assumptions used in estimating the revised ERR are summarized in para. 6B-2 of Part III. Para.6B of Part III also gives a comparison of appraisal and actual projections of the economic and financial value of gas. At the projected economic values used at appraisal for natural gas (1984 constant US$152 for 1990/91, US$204 for 1995/96 and US$237 for 1999/00), the project's ERR would be highly negative, despite the high plant capacity utilization achieved (in the appraisal estimates, the high value of natural gas was compensated for by substantially high projected economic prices of urea). However, the ERR remains at an acceptable 17% even if the economic value of natural gas were to double. The project remains economically viable under any reasonable scenario and is mainly sensitive to the gas price. The ERRs and the sensitivity analyses are presented in para. 6B-1 of Part III. Calculations for import parity of urea price and projected economic value of gas  - 9 - are also presented in Annex 2-1. Also, economic cost and benefit streams for the base case, which were calculated using prices in 1991/92 constant Rupees, are presented in Annex 2-2. 7.7 Financial Rate of R-turn: The project financial rate of return (FRR) is estimated at 15.6% slightly lower than the appraisal estimate of 16.6%. Although, urea retention prices are much lower than those projected at appraisal, their impact is compensated by: (i) the higher achieved rate of capacity utilization -- more than 110% compared with 95% estimated at appraisal; and (ii) the lower capital costs of the project. The assumptions used for estimating the FRR and the results of actual sensitivity analysis and those of appraisal estimates are presented in para. 6C of Part III. The financial cost and benefit streams for the base case, which were calculated using prices in 1991/92 constant Rupees, are presented in Annex 2-3. 7.8 Revenues are based on projected retention vrices. These were estimated on the basis of actual retention prices for FY1992/93; actual project operating costs (FY1990/91 and 1991/92); and the present retention price formula (Part III, para. 6C-2). Since April 1988, the retention price formula assumes a capacity utilization for natural gas based plants of 80% the first year of operation, 90% from the 2nd to the 10th year (85% for fuel oil-based plants) and 85* from the 11th year onwards (80% for fuel oil-based plants). Appraisal estimates were based on a plant capacity utilization of 80%, which was the norm then. Retention price calculations and projections, compared with appraisal estimates, are presented in Annex 2-4. 7.9 Since January 1992, prices paid for gas, Rs. 2,739 per thousand Ncm (Rs. 2,597 in 1991/92 terms) was significantly above its economic value of Rs. 2,014. It was conservatively assumed that gas prices would remain in constant terms at its 1992 level. Also, urea retention prices (Rs. 3,733 per ton over the three years pricing period 1990-93, projected Rs. 4,052 per ton for the three years pricing period 1993-96,) are much lower than their international import parity (Rs. 5,727 in 1991/92, Rs. 4,841 in 1992/93, projected at Rs. 5,023 in 1993/94). The Vijaipur urea plant then, is taxed by the retention price scheme and the gas pricing system. 7.10 The project is financially sensitive to both gas and urea prices. The FRR would increase to more than 21% if the fertilizer sector was deregulated, i.e. staring in 1993/94, NFL could buy natural gas at its fuel oil equivalent value and sell urea at its import parity. Urea retention prices and natural gas prices are compared with their respective economic value in Annex 2-1. 7.11 Financial Performanc-: Selected financial data and performance ratios are presented in Annex 3. Since Loan Approval in May 1984, NFL has been in compliance with Bank financial covenants. However, the company's return on equity (not subject to a covenant) decreased from 11.1% in FY 1987/88 to 1.3% in FY 1988/89, due to an important reduction in retention prices of all NFL's plants in April 1988, when they were revised for the 5th pricing period-- in its effort to reduce the burden of fertilizer subsidies, GOI revised downward the norms for depreciation (the depreciation period increased from 15 to 20 years) and capacity utilization (para 7.8), applicable to the retention price formula. In addition, retention prices of NFL's existing plants of Nangal, Bhatinda and Panipat were decreased, due to the full depreciation of these plants assets. Nevetheless, NFL's return on equity increased again to 6.1% in FY1990/91 and is expected to improve substantially after 1991/92 -- in 1989, GOI decided to reverse its 1988 decision regarding the depreciation norm, and this resulted in some increase in the retention price for Vijaipur. In addition, some improvement in retention prices was also obtained in 1991 for Bhatinda and Panipat on account of the installation of captive power plants.  - 10 - 7.12 Environmental Impact: The project is located in a generally barren and scarcely populated area. Nevertheless, adequate pollution control measures have been adopted: adequate effluent treatment and discharge facilities were constrncted in accordance with Indian environmental standards, which are comparable to standards applied for such installations in industrialized countries and/or other environmental standards acceptable to the Bank. Major effluents from the plant include: (i) liquid effluents from the ammonia and urea plants and from the water treatment plant; (ii) dust emissions from the urea plant prilling tower; and (iii) sludge from the water treatment plant. In Vijaipur, NFL confronted a situation of limited water availability with risks of water shortage, and a serious problem of liquid effluent disposal during the dry season, when the Chopin and Parbati rivers are without flow. To overcome these risks, the plants were designed for complete recovery and reuse of process and steam condensates, maximum reuse of treated liquid effluent and recycle of ammonia (Annex 4-para. 5). 7.13 In addition to the compulsory initial environment assessment on the basis of which the project was designed, a comprehensive environment impact assessment (EIA) of the plant, sponsored by the Environmental Planning and Coordination Organization of Bhopal (Madhya Padesh), was prepared in 1987/88 by the National Environment Engineering Research Institute (NEERI). The study was prepared on the basis of data collected before and after commissioning of the plant. NFL implemented most of the recommendations of the NEERI's EIA, including the plantation of a green belt of about 100,000 trees which has been developed using treated liquid effluent. Furthermore, in order to avoid any water pollution by chromium, NFL decided in July 1991 to stop using chromate inhibitor for the treatment of cooling water and started using a more expensive phosphate-based inhibitor. Finally, NFL implemented additional investments: Ci) an additional 5,000 tons double wall ammonia storage for increased safety; (ii) a purge gas system to reduce energy consumption and emission of carbon dioxide (CO2) in the atmosphere; and (iii) a reverse osmosis plant for the treatment of cooling water blowdown. 7.14 During 1992, after more than four year of operation of the Vijaipur plant, NEERI carried out a new EIA to assess the actual impact of the project and estimate the potential environmental impact of the plant expansion project. A draft report has already been submitted to NFL. Its overall conclusion is that the Vijaipur's pollution control measures and systems are effective and all effluents are within limits specified by MINAS-- its main conclusions are: (i) overall air quality within and around the fertilizer complex is well within the limits specified by MINAS; (ii) the quality of treated effluent is well within the limit of MINAS, and all effluents are used for irrigation of green belt and in-plant horticulture; and (iii) the noise level is well below the limit of MINAS. The Vijaipur environmental control facilities; the environmental impact assessment carried out at the time of commissioning; and of the recent assessment carried out after four years of operation are summarized in Annex 4. 7.15 Disaster Manaaement: NFL has developed and implemented a detailed disaster plan in Vijaipur, which includes: (i) an inventory of potential disasters and precautions to be taken; (ii) an emergency plan; (iii) an evacuation plan; (iv) emergency pollution control in the event of disaster; and (v) a disaster plan control chart. Finally, NFL as part of the 1992's EIA study has undertaken a risk assessment study leading to the review of the current disaster management plan, and a draft report is expected from NERRI in early 1993. 7.16 Prolect Impact: In addition to the expected impacts of such a large project in a remote agricultural area (direct and indirect employment, increased trade, company town, educational, medical and sanitary facilities, and infrastructure etc...), the project had a significant impact in: (i) contributing to expand the domestic fertilizer supply at economically sustainable level; (ii) expanding fertilizer use in the state of Madhya Pradesh-- fertilizer consumption  - 11 - in the state increased much more than expected owing to fertilizer availability from shorter distances and to the seeding and education program (para. 7.5); (iii) facilitating transfer of technology to indian firms-- the project was implemented with a major involvement of indian firms, which, by working in association with international process licensors, could gain valuable know-how and experience and further improve their capabilities in carrying out similar projects; and (iv) development of human resources through training inside and outside the institution; 8. Prolect Sustainability 8.1 It is estimated that, during its economic life, the plant is capable of maintaining a sustained 110 plant capacity utilization. If, in line with the present trend for economic policy reform, GOI decides to deregulate the fertilizer sector, at projected import parity prices the NFL's Vijaipur plant would be able to withstand competition from imports, even in the absence of protective tariffs, while paying natural gas at its fuel oil equivalent value. In fact, such decision would improve the project's FRR from the actual estimated 15.6% to 21% (para. 7.10). In addition, if NFL implements its investment program for CO2 recovery and energy conservation, the project sustainability will become even greater. The major risk, still faced by the project is that in order to reduce the financial burden of the fertilizer subsidy, GOI may decide to revise the urea retention price norms further downwards -- if the retention price of urea for Vijaipur decrease by 20% below its present level (Rs. 3,733 in 1992/93), the project would become less attractive, and its FRR would decrease to about 6%. Finally, GOI and NFL are currently considering the production capacity duplication of the Vijaipur plant. If, as NFL's recent market study states, enough product can be sold at viable distances, the doubling of capacity would further improve the project's sustainability by reducing fixed cost per ton of urea provided adequate gas supply would be made available for the expansion by GAIL. 8.2 In the long term, sustainable operation of the plant is also a function of adequate supplies of natural gas feedstock and efficient operation of the HBJ pipeline. The project utilizes a maximum of 1.72 million cubic meters per day (MMCMD) of natural gas (1.38 MMCMD if gas for steam and power generation is excluded) out of 18 MMCMD of gas currently transported by the HBJ pipeline, the capacity of which can be further increased to 33 MMCMD. In 1990, the Department of Petroleum and Natural Gas estimated the natural gas potential supply from the western region's fields and potential demand of gas from these fields as follows in MMCMD: Supply: 75.0 3 Demand: - Fertilizer 28.0 - Power 40.0 - LPG and Petrochemicals 7.0 - Sponge Iron 6.0 - Other 10.0 Total Demand 91.0 Therefore, in the western region, there is an excess demand of natural gas, the bulk of which is used by the fertilizer and the power sectors, where demand 3 The Staff Appraisal Report of the Gas Flaring Project (Loan 3364-IN) indicates a total supply of 61 MMCMD of natural gas for the Country's western region.  - 12 - is mainly generated by investment decisions taken by the Government. In fact, a long term supply contract was signed between NFL and GAIL on October 9, 1991 (Part III - para. 8). However, in accordance with this contract, GAIL has already notified NFL that, starting April 1, 1993 it will supply gas to NFL's Vijaipur plant only as feedstock, but not for power and steam generation. This shift is not expected to have an impact on the project viability and furthermore the Vijaipur's steam and power generation plant is already equipped with the necessary facilities to operate with light distillates (para. 6.4). 8.3 The project has been implemented and is operated in an environmentally sound manner. The company is aware of the risks of the plants and has adopted the necessary safety measures. Therefore, the risks of problems with local communities are small. 9. Bank Performance 9.1 Bank performance during project identification, preparation, and appraisal was satisfactory and procurement supervision was good. As, the project was problem-free, the supervision missions averaged one mission per year and except for two missions, they consisted of one person during the implementation phase (Part III - para. 7B). However, more frequent and comprehensive missions could have been helpful in maintaining sectoral dialogue with the Borrower. 9.2 The Bank's major objective in this as well as prior projects in the sector was to support GOI's strategy for increasing domestic production of fertilizer. The main emphasis was on improving project implementation and efficiency; on a rational selection of projects; and on expanding production facilities and improving capacity utilization rates. The important sectoral issues were not addressed in this project, except for obtaining a commitment from GOI during the project preparation stages, to reduce total fertilizer subsidies by improving operation and management of existing public sector plants. Although the project was very successful in meeting its objectives, the Bank could have adopted a broader sectoral approach at the early stages of project appraisal. However, this project was one of the last two Bank operations in the sector, together with the Cooperative Fertilizer Sector Project (Loan 2729/2730), approved in June 1986. The reform measures proposed by the Bank being considered too radical by GOI, and the policy dialogue in the fertilizer sector between GOI and the Bank ceased around 1987. 10. Borrower and NFL (the Beneficiary) Performance 10.1 Except for implementation of the additional investments, the project was professionally designed, organized and implemented. The plant was completed on schedule and within cost, and is being operated efficiently at more than 110% of its nominal production capacity. NFL was also able to prepare commercial operations in a timely manner and develop adequate markets. NFL has been in compliance with Bank financial covenants since loan approval3. As already indicated, the Vijaipur project was so efficiently implemented that it was awarded first prize for excellence in project implementation, by the Ministry of Program Implementation in 1989 (para. 4.2). 10.2 This success can be attributed to several strengths of NFL, which may constitute useful lessons for the implementation of any large public or private sector project: 3 Although GOI provided sufficient funds to NFL to facilitate successful and timely project implementation, it appears that GOI appears to have passed on funds to NFL as equity rather than as a loan as required under onlending agreements reached between the Bank and GOI (para 6.8).  - 13 - (i) from the start, NFL provided the project with a dedicated high quality project team, headed by a general manager, with autonomy and authority, in charge of project preparation, management, coordination and supervision. Furthermore, the same team organized and took the responsibility for plant operations at a later stage. This project team included a professionally competent planning and monitoring group and a quality control group, supported by a well designed project management system based on a detailed project execution plan; (ii) NFL established an effective financial incentive scheme for project execution, which contributed to commitment to the project at all levels of management; (iii) the project was provided with sufficient and timely funds; (iv) through extensive reliance on consultants and on competitive bidding, and a strong procurement management system, NFL could carry out international and domestic procurement efficiently and without delays; and (vi) NFL timely provided on-site housing facilities and services essential for efficient implementation in such a remote area. 11. Prolect Relationship 11.1 The success of the Vijaipur project is in part a result of the high level of professionalism of all parties involved and their good relationship; the Borrower reliance on, and constructive relationship with, the Consultants; and the amiable working relationships between the Bank and the Borrower. 12. Consulting Services 12.1 The project obtained process technologies, and procurement, engineering and construction management services from well known international firms, in association with a state owned engineering firm (para. 4.1). All consultants performed well and they provided valuable assistance to NFL for the successful implementation of the project. NFL also benefitted from the experience acquired by the consultants during the earlier construction of the Thal plant, which included two identical ammonia units. 13. Prolect Documentation and Data 13.1 The legal documents of the project were adequate for achieving the project objectives. The Staff Appraisal Report and the documentation in the Project File provided adequate background for the review of project implementation. A few weeks ahead of the Bank completion mission in November 1992, the Bank requested NFL to prepare the project-related information and data needed for the preparation of the PCR. All the requested information, was provided and discussed during the mission. 13.2 The preparation of statistical data needed for Part III of the PCR is time-consuming. An effort should be made by the supervision missions to obtain this information in the form requested in the PCR guidelines, early from the start of project implementation, and maintain it up-to-date.  - 14 - PART II: PROJECT REVIEW FROM BORROWER'S PERSPECTIVZ Following are the verbatim comments of NFL, responding on the Borrower's behalf: Confirmation of Information The factual information furnished in Part I-III of the PCR, is found to be substantially adequate. The statistical information, financial analysis and presentation of the various aspects covered in the Report are found to be precise and accurate. Review of the Project from Bank's perspective as contained in Part I of PCR is found to be quite comprehensive and meaningful. Bank's Performance The Project has immensely benefited by the indepth involvement of the Bank in all stages right from project appraisal through procurement and contracting, right upto the plant going into commercial production and subsequently in implementation of additional schemes covered in the Loan. Adherence to procedures prescribed by the Bank and the periodic follow-up by Bank officials during various phases helped the project implementation within approved cost and time schedule. Borrower's Performance NFL Project team comprised of officials conversant with the World Bank procedures from the previous projects. This helped in establishing effective coordination between project authorities and the Bank. Lessons learnt during project implementation are: (i) Adequate attention is needed for timely development of housing, hygiene and health facilities for the construction workers to avoid manday loss due to sickness; and (ii) It is necessary to establish extensive fire fighting facilities and safety measures for meeting exigencies during construction period. Prolect Relationship Right from the inception, cordial and objective relationship developed between the Project team and the Bank officials. This resulted in considerable saving in time for obtaining speedy clarifications and approvals from the Bank required during implementation of the project especially in procurement phase. Relationship with and Performanc, of Cofinanciers NFL's relationship with the cofinanciers was cordial and objective. As such, no difficulty was experienced in obtaining approvals and loan disbursement.  - 15 - PART III: STATISTICAL INFORMATION 1. Bank GrouD ODerationo in the Fertilizer Sector Loan/Credit Proiect Name Year of Approval Status Loan in Million USU Credit 264-IN Fertilizer Cochin July 1, 1971 Closed: June 30. 1977 20.1 Completion: March 12, 1980 Credit 279-IN Fertilizer Gorakhpur Dec. 21, 1971 Closed: March 31, 1976 10.0 Completion: Sep. 9, 1976 Credit 357-IN Public Sector Fertilizer Jan. 30, 1973 Closed: March 11, 1977 58.0 Nangal Completion: August 31, 1979 Credit 520-IN Fertilizer Sindri Nov. 26, 1974 Closed: Sep. 30, 1978 91.0 Completion: Dec. 22, 1981 Credit 481-IN Fertilizer Trombay June 18, 1974 Closed: Dec. 12, 1977 50.0 Credit 598-IN Fertilizer Industry Dec. 16, 1975 Closed: Dec. 31, 1982 105.0 Credit 1125-IN Hazira Fertilizer Mar. 31, 1981 Closed: June 30, 1992 400.0 Loan 1079-IN IFFCO Fertilizer Jan. 07, 1975 Closed: Dec. 31, 1980 109.0 Completed: June 29, 1982 Loan 2415-IN Madhya Pradesh Fertilizer May 17, 1984 Closed: June 30, 1992 203.6 Loan 2729/2730-IN Cooperative Fertilizer June 26, 1986 Under implementation, expected to be 302.2 closed in June 30, 1993 EFC Indian Explosives Ltd 1967 Loan: 8.6 Equity: 2.9 IFC Zuary Agro-Chemicals Ltd 1969 Loan: 15.1 Equity: 3.8 IFC Deepak Ferdlizer and Nov. 13, 1979 Loan: 7.5 Petrochemnical Corporation Equity: 1.2 IFC Coromandel Ferdlizer Ltd 1981 Loan: 15.9 Total: 141.9 The Bank Group has been a major partner in India's effort to increase fertilizer production. Total financial contribution of the Bank Group has amounted to about US$1.4 billion. However, the Cooperative Fertilizer Loan (Loan 2729/2730), approved in June 1986, was the last operation in the fertilizer sector -- it was designed to assist GOI in (i) expanding and increasing the efficiency of fertilizer supply in India; (ii) develop and implement a system to improve management of public sector companies; and (iii) assist in defining and implementing a program of policy reform and subsidy reduction. The reform measures proposed by the Bank were considered too radical, and the policy dialogue in the fertilizer sector between GOI and the Bank largely ceased around 1987.  - 16 - 2. Prolect Timetable Date Date Date Item Planned Revised Actual - Identification Mission 02/1982 - Preparation (i) 11/82-01/83 - Appraisal Mission 02/83 02/83-03/83 - Post-appraisal Mission (ii) 01/84-02/84 - Loan Negotiations 10/83 03/84 - Board Approval 01/84 05/08/84 05/17/84 - Loan Signature 05/25/84 - Loan Effectiveness 08/24/84 - Loan Closing (iii) 06/30/89 06/30/90, 06/30/92 06/30/91, 06/30/92 - Loan Completion 09/30/88 08/88 Comments: (i) Following the identification mission, and at the request of GOI, NFL prepared a feasibility study which was received by the Bank in November 1982. (ii) The project was initially appraised in March 1983 on the assumption that M.W. Kellogg had been selected to provide technology and engineering services for the ammonia plant, as was conveyed by GOI to the Bank. However, before the contractual arrangements with Kellog were finalized, GOI revised its earlier decision and selected Harold Topsoe as the engineering contractor for the ammonia plant. A post-appraisal mission visited India in January/February 1984 to assess the impact of the change of technology and engineering arrangements for the ammonia plant on the project's implementation arrangements, its capital cost estimate and its viability. (iii) The project original closing date was extended three times to allow the financing of civil works and of additional components, which were approved by the Bank, for recovering purge gases and increasing ammonia storage capacity.  - 17 - 3. Cumulative Loan Disbursement BaLk Fiscal Year Total Actual and Semester Appraisal Revined Countr Actual as ' Prolect adlua BEstimate Estimate Profile Actual Of Estimated Excenditures 1985 - Dec, 84 9.3 0.5 2.1 0.5 5 12.0 - Jun, 85 21.1 6.9 7.1 6.9 33 35.5 1986 - Dec, 85 48.5 11.6 16.7 11.6 24 64.3 - Jun, 86 89.5 46.2 30.1 46.2 52 153.8 1987 - Dec, 86 123.2 72.2 50.1 72.2 59 232.5 - Jun, 87 152.0 112.9 70.2 112.9 74 275.5 1988 - Dec, 87 176.5 125.9 86.9 126.0 71 313.7 - Jun, 88 191.7 125.9 103.6 126.0 66 361.6 1989 - Dec, 88 199.5 150.0 117.0 150.0 75 364.9 - Jun, 89 203.6 158.3 127.0 158.3 78 368.4 1990 - Dec, 89 158.3 133.7 158.3 78 372.1 - Jun, 90 171.6 140.4 159.4 78 375.8 1991 - Dec, 90 179.6 147.1 163.6 80 377.1 - Jun, 91 184.6 150.4 164.8 81 378.4 1992 - Dec, 91 153.7 166.2 82 379.4 - Jun, 92 157.1 166.2 82 380.3 1993 - Dec, 92 160.4 166.2 82 381.8 - Jun, 93 165.4 383.4 1994 - Dec, 93 167.1 390.6 Loan Disbursements & Proj. Expenditures Estimated and Actual 450 400 - 350 300 250 200_ 100 50 0 1985 1986 1987 1988 1989 1990 1991 1992 1993 Bank FY O Appraisal Estimates DisburtL Profile A Actual Disbursement X Tot. Project Exp.M  - 18 - 4. Prolect ImDlem-ntation ADpriralsal Indicdor NFL Estimates Estimates Actual Zero Date April 1, 1984 April 1, 1984 June 1, 1984 Detailed Engineering Completed March 1986 March 1986 May 1986 Procurement of Equipment: - All Purchase Orders Placed March 1985 March 1985 October 1986 - Supply Received October 1986 October 1986 July 1987 Civil Works Completed December 1986 December 1986 May 1987 Piping: - Work Orders Placed March 1985 March 1985 January 1985 - Installation Completed April 1987 April 1987 NA Electrical: - Purchase Orders Placed January 1985 January 1985 April 1985 - Installation Completed February 1987 February 1987 March 1987 Instrumentation: - Supply Received November 1986 November 1986 September 1986 - Installation Completed April 1987 April 1987 March 1987 Insulation & Painting Completed April 1987 April 1987 July 1987 Initial Gas Supply November 1, 1986 November 1, 1986 August 19, 1987 Mechanical Completion May 1, 1987 January 1, 1988 November 5, 1987 Commercial Production October 1, 1987 April 1, 1988 July 1, 1988 Project Completion as per Schedule 2 of Loan September 30, 1988 October 1988 Agreement Additional Components AAmmonia Storage in Operation November 1991 - Commissioning of Purge Gas Recovery System December 1992 - CO2 Recovery System Not yet started\l Coal-Based Plants Rehabilitation Study July 11,1985 - Contracted March 1986 - Completed \1 C02 recovery system was expected to be ordered by December 1992.  - 19 - 5 Project Costs and Financing A. Project Costa (Rx. Million) Appraisal Estimates Actual Costs Indirect Indirect Foreign Foreign Local Foreign Foreign Local Category Exchange Exchange Costs Total Exchange Exchange Costs Total 1. Eguipment and Spares: Ammonia Plant 688 52 100 840 647 79 152 878 Urea Plant 233 60 113 406 262 62 116 440 Power & Steam Generat. 327 3 6 336 320 8 16 344 Power Distribution 10 26 51 87 9 23 46 78 Other Offaites 61 92 175 328 69 134 254 457 Spares 148 28 52 228 233 25 46 303 Construction Tools 29 15 31 75 39 2 4 45 Sub-Total 1496 276 528 2300 1579 332 634 2545 2. Ocean Freight & Insurance 165 - - 165 Included in Supplies 3. Inland Handling - 9 90 99 - 11 107 118 4. Duties & Taxes - - 846 846 - 0 158 158 Delivered Cost of Equipment: 1661 285 1464 3410 1579 343 899 2821 5. License & Engin. Services 136 - 132 268 227 0 172 399 6. Project Mngt & Insurance 6 - 116 122 - 0 214 214 7. Land & Site Development - - 89 89 - 0 162 162 S. Civil Works & Buildings - 20 337 357 - 28 471 499 9. Erection 78 22 290 390 8 15 199 222 10. Commissioning Charges 16 - 102 118 - 0 169 169 11. Township - 8 114 122 - 10 148 158 12. Power, Offaites, Cons. Facilities - 3 34 37 - 5 55 60 Base Cost Estimate (BCH) 1897 338 2678 4913 1814 401 2489 4704 Physical Contingencies 95 17 134 246 - - - - Price Escalation 120 30 237 387 - - - - Total Installed Coat 2112 385 3049 5546 1814 401 2489 4704 Working Capital \1 10 - 103 113 - 0 138 138 Total Project Cost 2122 385 3152 5659 1814 401 2627 4842 Interest during Construction 466 - 142 608 - 0 200 200 Front-End Fee 6 - - 6 6 - - 6 New Components: - Add. Ammonia Storage - - - - - 24 44 68 - Purge Gas Recovery - - - - - 18 33 50 - C02 Recovery - - - - - 60 111 170 Total NFL Financing Req'd 2594 385 3294 6273 1820 502 3014 6336 FCI Rehabilitation Study 26 - 5 31 34 - - 34 ,............................. . ............... ...... ......... ...... ......... ...... ........ ...... ................................... ... Tota Financing Required 2620 385 3299 6304 1854 502 3014 5370 \1 Excluding Rs.210 million (US$20.6 million) estimated at appraisal for short term debt financing to cover about 65% of working capital requirements.  - 20 - B. Prolect Costs (USS. Million)\1 Appraisal Estimates Actual Costs Indirect Indirect Foreign Foreign Local Foreign Foreign Local Item Exchange Exchange Costs Total Exchange Exchange Costs Total Change 1. Equipment and Spares; Ammonia Plant 67.5 5.1 9.8 82.4 47.9 5S.8 11.2 64.9 -21 Urea Plant 22.8 5.9 11.1 39.8 19.4 4.6 8.6 32.5 -18 Power & Steam Generat. 32.1 0.3 0.6 32.9 23.7 0.6 1.2 25.4 -23 Power Distribution 1.0 2.5 5.0 8.5 0.7 1.7 3.4 5.8 -32 Other Offuites 6.0 9.0 17.2 32.2 5.1 9.9 18.8 33.8 5 Spares 14.5 2.7 5.1 22.4 17.2 1.8 3.4 22.4 0 Construction Tools 2.8 1.5 3 .0 7.4 2.9 0.1 0.3 3.3 -SS Sub-Total 146.7 27.1 51.8 225.5 116.8 24.6 46.9 188.2 -17 2. Ocean Freight & Insurance 16.2 - - 16.2 Included in Supplies 3. Inland Handling 0.9 8.8 9.7 0.0 0. 8 7.9 8.7 -10 4. Duties & Taxes - - 82.9 82.9 0.0 0.0 11.7 11.7 -86 Delivered Cost of Equipment 162.8 27.9 143.5 334. 3 116.8 25.4 66.5 208.7 -38 5. License & Engin. Services 13.3 0.0 12.9 26.3 16.8 0.0 12.7 29.5 12 6. Project Mngt & Insurance 0.6 0.0 11.4 12.0 0.0 0.0 15.8 15.8 32 7. Land & Site Development 0.0 0.0 8.7 8.7 0.0 0.0 12.0 12.0 37 8. Civil Works & Buildings 0.0 2.0 33.0 35.0 0.0 2.1 34.8 36.9 5 9. Erection 7.6 2.2 28.4 38.2 0.6 1.1 14.7 16.4 -57 10 Commissioning Charges 1.6 0.0 10.0 11.6 0.0 0.0 12.5 12.5 8 11. Township 0.0 0.8 11.2 12.0 0.0 0.8 10.9 11.7 -2 12. Power, Offeites, Cons. Facilities 0.0 0.3 3.3 3.6 0.0 0.4 4.1 4.4 22 Bare Cost EetimAte (BCE) 186.0 33.1 262 5 481.7 134.2 29.7 184.1 347.9 -28 Physical Contingencies 9.3 1.7 13.1 24.1 - - - - - Price Escalation 11.8 2.9 23.2 37.9 - - - - - Total Inotalled Cost 207.1 37.7 298.9 543.7 134.2 29.7 184.1 347.9 -36 Working Capital 1.0 0.0 10.1 11.1 - 0.0 10.2 10.2 -8 Total Project Cost 208.0 37.7 309.0 554.8 134.2 29.7 194.3 358.1 -35 Interest during Construction 45.7 0.0 13.9 59.6 - 0.0 14.8 14.8 -75 Front End Fee 0.6 0.0 0.0 0.6 0.6 - - 0.6 2 New Conponents - Add. Ammonia Storage - - - - - 1.8 3.3 5.0 - - Purge Gas Recovery - - - - - 1.3 2.4 3.7 - - C02 Recovery - - - - - 4.4 8.2 12.6 - Total NFL Financing Raq'd 254.3 37.7 322.9 615.0 134.8 37.1 222.9 394.8 -36 FC1 Rehabilitation Study 2.5 0.0 0.5 3.0 2.7 0.0 0.0 2.7 -11