China - Fertilizer Rationalization Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 15851 PERFORMANCE AUDIT REPORT CHINA FERTILIZER RATIONALIZATION PROJECT (LOAN 2838-CHA) June 28, 1996 Operations Evaluation Department This document has a restricted distribution and may be used by recipients only in the perfornance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Currency Equivalents (annual averages) 1988 US$1.00= Y3.72 1989 US$1.00= Y3.76 1990 US$1.00= Y4.78 1991 US$1.00= V5.32 1992 US$1.00= Y5.51 1993 US$1.00= -5.76 1994 US$1.00= V8.62 Abbreviations and Acronyms ABC - Ammonium Bicarbonate AMPC - Agricultural Means of Production Corporation BCEC - Beijing Chemical Experimental Company BICEM - Beijing Institute of Chemical Engineering and Management CNCCC - China National Chemical Construction Company CMP - Calcium Magnesium Phosphate CO2 - Carbon Dioxide DAP - Diamonium Phosphate GOC - Government of China K20 - Potassium Oxide Kwh - Kilowatt hour LCFC - Luoyang Chemical Fertilizer Company MAAF - Ministry of Agriculture, Animal Husbandry and Fishery MCI - Ministry of Chemical Industry MIS - Management Information System MOF - Ministry of Finance Mwh - Megawatt hour Mtpy - Million tons per year Mtpyn - Million tons per year nutrients NCICI - Nanjing Chemical Industry Company N - Nitrogen Content Fertilizers NPK - Complex Fertilizers of N, P, & K Nm' - normal cubic meters OED - Operations Evaluation Department P205 - Phosphorous Pentoxide SAA - State Audit Administration SEC - State Economic Commission SINOCHEM - China Chemical Export and Import Corporation SINOPEC - China Petrochemical Corporation SPB - State Pricing Bureau SPC - State Planning Commission SSP - Single Superphosphate Tpd - Tons per day Tpy - Tons per year Tpyn - Tons per year of nutrients XCFC - Xuan hua Chemical Fertilizer Coompany YCFC - Yuanping Chemical Fertilizer Company YYCFC - Yunnan Yufeng Chemical Fertilizer Company Fiscal Year January I to December 31 FOR OFFICIAL USE ONLY The World Bank Washington, D.C. 20433 U.S.A. Office of the Director-General Operations Evaluation June 28, 1996 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Performance Audit Report on the China Fertilizer Rationalization Project (Loan 2838-CHA) Attached is the Performance Audit Report (PAR) on the China Fertilizer Rationalization Project (Loan 283 8-CHA approved in FY87) prepared by the Operations Evaluation Department. Facing a widening gap between the indigenous supply and demand for chemical fertilizers and being aware of the technical inefficiency in its fertilizer plants, the Government of China adopted a strategy that called for: (i) increasing high-grade fertilizer production by rationalizing the existing low-grade fertilizer facilities and building new capacity; (ii) reducing the nutrient imbalance by the rapid expansion of phosphatic fertilizer capacity; and (iii) increasing production efficiency and competitiveness through technical upgrading and improvements in operational and financial management. This strategy received the support of the Bank and led to the formulation of four projects which were approved between FY85 and FY89. This project, the second in the series, aimed at rationalizing and expanding the nitrogenous fertilizer capacity through the construction of an urea plant at each of the four existing fertilizer producing units, expanding the phosphatic fertilizer production through the construction of a new diammonium phosphate/compound fertilizer (DAP/NPK) plant and improving the institutional capacity of the fertilizer companies. The four nitrogenous fertilizer plants began commercial production with delays ranging from 12 to 22 months while the commercial operation of the phosphatic fertilizer unit was delayed by nearly three years. Combined with a high level of inflation throughout the implementation period, these delays led to substantial increases in the local currency costs of the project. While the initial starting problems have been resolved in all plants, their technical performance remains below the design parameters. Moreover, the price controls and quota allocations have seriously impaired the financial viability of the urea plants, all of which are currently either loss-making or barely breaking even. The higher costs, lower than expected technical performance, and lower world prices for fertilizers also reduced the economic profitability of the project. The economic rate of return has been reestimated in this PAR at about 8 percent. The project has substantially achieved its physical and environmental objectives. However, given the inferior technical performance of the plants, the low reestimated economic rate of return and the continuation of price controls, the outcome of this project is rated as marginally satisfactory. Although the companies have already suffered financially from price controls and quota allocations and have missed out on the market buoyancy during 1994 and 1995, the sustainability of the project has been rated as likely because the Government has recently increased the ex-factory price of urea to levels approaching international prices, thereby making it possible for the urea producing companies to meet their financial 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. 2 obligations. The institutional development impact of the project in attempting to introduce modem systems and technologies in financial and operational management is rated as modest. The Bank performance is rated as satisfactory. Major lessons from this project include: (i) the need to pursue organizational and management restructuring until reforms are put into practice and internalized: (ii) covenants should include clauses that obligate the loan beneficiaries to take all steps to reach full technical efficiency; and (iii) vigorous supervision is essential, especially where restructuring and management reforms are to be achieved. Attachment Contents FOR OFFICIAL USE ONLY Preface .............................................................. 3 Basic Data Sheet........................................................ 5 Evaluation Summary..................................................... 9 1. Introduction ....................................................... 15 Project Background ......................... ......................... 15 The Project......................................................... 16 2. Implementation Experience........................ ..................... 16 Delays in Implementation and Cost Overrun................................... 17 Technical Assistance ................................ ................. 18 3. Project Results ...................................................... 19 Capacity Utilization and Technical Performance ............................... 19 Manpower and Training................................................ 21 Institutional Development and Studies....................................... 22 Environmental Protection and Safety.............. ......................... 23 4. Overall Assessment and Issues ........................................... 23 Technical Efficiency .................................................. 23 Institutional Development and Management ................................. 24 Cost Structure and Profitability....................... ................... 25 Economic Rate of Return............................................ 28 Outcome and Sustainabilty .......................... ................... 29 Bank/Borrower Performance..................................... ....... 30 5. Conclusions and Recommendations .................. .................... 30 This report was prepared by Farrokh Najmabadi (Task Manager) and A.M. Mirfakhrai (Consultant) who audited the project in November 1995. Eneshi Irene K. Davis provided administrative assistance. The report was issued by the Country Policy, Industry and Finance Division, Manuel Pefialver. Chief, of the Operations Evaluation Department, Francisco Aguirre- Sacasa, Director. 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 widiout World Bank authorization. 2 Tables Ammonia Plants - Capacity Utilization..................... ................ 19 Urea Plants - Capacity Utilization........................................ 19 Ammonia Consumption per ton of Urea............................... ...... 20 Steam Consumption (Ton) per ton of Urea ................................... 20 Electricity Consumption (Kwh) per ton of Urea............................... 20 Performance Indicators - YYCFC Plant................................. ... 21 Cost of Basic Products ............................................... 25 Price of anthracite/coal/coke and other raw materials............ .............. 26 Costs of Inputs and products ..................................... ...... 26 Profitability of Fertilizer Companies (Net Profit) ............................... 28 Reestimated ERR...... ... 28 Annexes I. China - Fertilizer Consumption and Grain Production ...................... 33 II. World and Regional Fertilizer Supply/Demand Balances - Nitrogenous Fertilizers......................................... ....... 34 Phosphatic Fertilizers ..................... ..................... 35 Potash Fertilizers............................................. 36 III. China's Production & Consumption of All Fertilizers ................ ....... 37 IV. Key Indicators of Project Implementation............................. 38 V. Project Results ........................ ...................... 39 VI. Project Costs................................................ 40 VII. Project Financing ............................................. 41 VIII. Xuanhua Chemical Fertilizer Company (XCFC .......................... 42 IX. Luoyang Chemical Fertilizer Company (LCFC)........................... 51 X. Yuangping Chemical Fertilizer Company (YCFC)........................ 59 XI. Beijing Chemical Engineering Experimental Company (BCEC) ................. 67 XII. Yunnan Yunfeng Chemical Fertilizer Company (YYCFC) .......... ........ 75 XIII. Trend in Fertilizer Prices ..................... ................... 85 XIV. 1994 Fertilizer Inputs and Unit Prices.......... .............. ...... 86 XIV. Assumptions used in ERR Reestimation. ........................ ....... 87 3 Preface 1. This is the Performance Audit Report (PAR) for a Fertilizer Rationalization Project in China for which the Board approved a US$97.4 million loan in June 1987. The last disbursement took place in November 1994, at which time a balance of US$0.344 million was cancelled. 2. The PAR was prepared by the Operations Evaluation Department (OED). An OED mission visited China in November 1995 and discussed the effectiveness of the Bank's assistance with the Government of China and the five fertilizer companies. Their kind cooperation and assistance is greatly appreciated and acknowledged. 3. The ICR was prepared by the Industry and Energy Division, China and Mongolia Department. East Asia and Pacific Region. The Ministry of Chemical Industries and the five implementing agencies provided Part II. The PAR complements the ICR by providing a fuller account of the achievements, problems and further steps that are needed to ensure the sustainability of the project's benefits. 4. The draft PAR was sent to the Borrower for comments. Comments received have been incorporated.  5 Basic Data Sheet FERTILIZER RATIONALIZATION PROJECT (LOAN 2838-CHA) Key Project Data (amounts in US$ million) As of September 30, 1995 Loan Original Disbursed Cancelled Repaid Outstanding 2838-CHA 97.40 97.06 0.34 19.44 77.61 Cumulative Estimated and Actual Disbursements (US$ million) Bank Fiscal Year and Semester Estimated Actual Actual % of Estimated Cumulative Cumulative 1988 December 31, 1987 2.1 0.0 June 30, 1988 5.8 0.0 - 1989 December 31, 1988 13.9 0.618 4.4 June 30, 1989 30.9 4.657 15.1 1990 December 31, 1989 50.3 6.541 13.0 June 30,1990 69.7 23.830 34.2 1991 December 31, 1990 83.0 46.940 56.6 June 30,1991 89.1 67.888 76.2 1992 December 31, 1991 93.3 80.034 85.8 June 30, 1992 95.4 86.050 90.2 1993 December 31, 1992 97.4 87.197 89.5 June 30, 1993 97.4 91.342 93.8 1994 December 31, 1993 97.4 95.210 97.8 June 30, 1994 97.4 96.310 98.9 1995 December 31, 1994 97.4 97.055 99.6 The original closing date of the Loan was on June 30, 1993, but was extended for one year on May 10, 1993, due essentially to delay in one major component Yunnan Yufeng Chemical Fertilizer Company. The last disbursement was made on November 14, 1994, and the amount of USSO.344 million was cancelled. 6 Project Dates Original Actual Initiating Memorandum N/A N/A Identification September 1985 September 1985 Preparation August 1986 August 1986 Appraisal January 1987 January 1987 Negotiations January 12, 1987 January 4, 1987 Board Presentation June 16, 1987 June 16, 1987 Signing N/A December 28, 1987 Effectiveness September 1987 April 14, 1988 Project Completion December 1992 June 1993 Closing date June 30, 1993 June 30, 1994 Staff Inputs (staff weeks) Actual Through appraisal 138.1 Appraisal to Board 23.4 Board to Effectiveness 9.3 Supervision 74.0 Completion 10.0 Total 254.8 7 Mission Data Performance rating Date No. of Staff days Staff Skills Implementation Development Types ofproblems (month/vear) persons infield Represented Status Impact Through 01/87 3 21 Chem. Eng., n.a. n.a. n.a. Appraisal Finance Appraisal n.a. n.a. n.a. n.a. n.a. n.a. n.a. through Board Approval Board Approval n.a. n.a. n.a. n.a. n.a. n.a. n.a. through Effectiveness Supervision I 10/88 1 20 Chem. Eng. 2 1 M Supervision 11 10/89 1 12 Chem. Eng. 2 2 M/F Supervision III 11/90 2 18 Chem. Eng./ 2 2 M/F Finance Supervision IV 11/91 3 20 Chem. Eng./ 2 2 M/F Finance Supervision V 11/92 3 22 Chem. Eng./ 2 2 M/F Finance Supervision VI 11/93 4 7 Chem. Min. 2 3 Ff1' Eng./ Finance Supervision VII 05/94 1 3 Finance 2 (S) 3 (U) Ffl Completion 10/94 1 7 Chem. Eng. S S Ffl 02/95 1 5 Finance S S F/T  9 Evaluation Summary Project Background 1. With only 7 percent of the World's arable land and 22 percent of the world's population, China has had to resort to intensive farming using heavy inputs of labor, water and fertilizers. Up to the early 1950s, China's agriculture was totally dependent on organic fertilizers. Starting in 1952, the consumption of chemical fertilizers grew rapidly to around 33 million tons of nutrients by 1994. During the same period grain production increased by nearly 275 percent, from 164 to 450 million tons. 2. While supply and demand for chemical fertilizers was in reasonable balance until the end of the 1970s, a gap began to appear thereafter. By 1987, this gap had widened to nearly 3.3 million tons of nutrients, necessitating the importation of equivalent quantities, notably phosphatic and potash fertilizers. This degree of dependence on imports, the imbalance among nutrients and the paucity of domestic production of phosphatic and potash fertilizers were at the heart of the policies formulated by the Chinese Government, in the early 1980s, for the fertilizer sector. The Government's strategy for the development of the subsector called for: (i) increasing high-grade fertilizer production by rationalizing the existing low-grade fertilizer facilities and building new capacity; (ii) reducing the nutrient imbalance by the rapid expansion of producing capacity of phosphatic fertilizer based on locally available rock phosphate, while developing domestic potash resources; (iii) increasing production efficiency and competitiveness of existing fertilizer plants through technical upgrading, energy saving renovation and product quality improvement; and (iv) raising efficiency of enterprise operations through improvements in operational and financial management. This strategy received the support of the Bank and led to a series of projects which aimed at assisting China to establish an efficient fertilizer industry by improving the productivity and competitiveness of its existing plants and reducing the nutrient imbalance by constructing new phosphatic fertilizer plants. 3. This project, the second in the series, aimed at: (i) the establishment of one of the country's first major phosphatic fertilizer production facilities capable of producing annually up to 240,000 tons of di-ammonium phosphate (DAP) and other compound (NPK) fertilizers based on indigenous phosphate rock; (ii) rationalization and expansion of ammonia production in the four medium-sized nitrogenous fertilizer plants, and converting the output from low-to high-grade fertilizer through the construction of technologically modem urea plants; and (iii) improved efficiency in production, financial and marketing management of the enterprises through organizational restructuring, introduction of modem cost accounting and management information systems (MIS). In addition, the project aimed at upgrading management training and improving the Ministry of Chemical Industry's (MCI) capability in investment planning. In the course of negotiations, assurances were obtained from the Government that: "The five companies will be allowed to market directly the entire output from project supported facilities outside the state allocation plan, at market related prices" (SAR, para 2.25). This project design was, therefore, not only responsive to the strategy adopted by the Government of China in increasing the production of high grade nitrogenous and phosphatic fertilizers, but also an attempt to gradually liberalize the subsector and remove the market distortions. Implementation Experience 4. The loan became effective with a delay of seven months. MCI was responsible for the overall supervision of project implementation. It established a 'Coordination Unit for Project Implementation'. The beneficiary fertilizer companies held primary responsibility for the individual 10 components of the project. In addition to the delay in loan effectiveness, several other factors were responsible for delays, ranging from one to two years, in the completion of the plants. Lengthy procurement processing and decision-making led to delays in securing process technologies and in the preparation of bidding and contracting documents for procurement packages. Moreover, the events of 1989 brought the construction activities to a virtual stand-still for a few months, and the slow and erratic availability of counterpart funds, and sharply rising domestic costs (because of high rates of inflation), forced the companies to apply for loans from the financial institutions causing further delays. All four urea plants were mechanically completed and ready for commissioning by December 1991, a little over one year behind schedule (the ammonia producing capacity was concurrently increased). However, a major problem surfaced during commissioning as leaks developed in the stainless steel lining of the urea reactors. This and other small problems during the trial production delayed the performance test of the first plant until mid-1992 by which time the licensor's guarantee period had run out. In the case of the YYCFC plant at Xuanwei, Yunnan Province, the commissioning took a while longer because several operational problems resulted in plant shut downs and reduced loads. Of particular significance were erosion/corrosion problems in the sulfuric acid coolers which were later corrected. 5. As noted above, a combination of factors including delays and the high rate of inflation led to a substantial overrun in the project cost. During the implementation of the project, the yuan depreciated from 3.7 to one dollar in 1988 to around 8.6 at project closing in 1994. As a result, while the dollar costs of imported equipment was even marginally below the foreign costs anticipated at appraisal (US$105.8 million instead of the estimated US$110.1 million), the local costs had exploded from Yuan 326.5 million at appraisal to Yuan 943.3 million at completion. This enormous increase in project costs-230 percent-affected all the companies whose individual cost hikes ranged from 220 percent to 235 percent. 6. A consulting services contract for the study of managerial efficiency of the Chinese medium-sized chemical fertilizer companies was implemented in two phases: (i) analysis and recommendations; and (ii) pilot implementation. Phase I of the study which was carried out through the end of 1989, addressed the following issues: (a) organizational structure of enterprises; (b) management information systems; (c) cost accounting; and (d) training. The pilot implementation (Phase II), based on an agreed upon course of action among the consultants, the MCI and the beneficiary companies, was carried out at two companies: Beijing Chemical Experimental Company (BCEC) and Yunnan Yufeng Chemical Fertilizer Company (YYCFC). Project Results 7. The project achieved its objective of increasing the production of high grade nitrogenous and phosphatic fertilizers. Towards the end of 1995, capacity utilization at two of the urea plants (XCFC and YCFC) stood at 95 percent, while reaching 81 percent at LCFC. At BCEC, capacity utilization of the urea plant was lower because some of the upstream products were being diverted for the production of methanol and formaldehyde. Capacity utilization at the YYCFC was also approaching 74 percent in the second year of commercial operation. 8. While the increasing capacity utilization in all plants has been accompanied by increased technical efficiency, in all cases technical efficiency indicators remain below those in the technical design of the plants and given as guaranteed performance by the licenseholders. The anticipated energy consumption savings in the ammonia plants, however, have not been realized. At between 14 and 16 million kilocalories per ton of ammonia, these plants are some 20-30 percent less efficient than more technologically advanced units, seriously undermining the economics of nitrogenous fertilizer production in China. 9. In spite of using existing staff for the new plants, all five companies remain heavily overstaffed, given their size and level of production. While the urea plants are manned with 110- 11 120 persons, the YYCFC plant has a total workforce of 904 persons out of which 76 are administrative jobs and the remaining 828 occupy technical and operational positions. The major part of the training for the urea plant operators was performed at other chemical fertilizer factories in China. At YYCFC, the in-country and on-the-job training was supplemented by training overseas. 10. The recommendations for improving the managerial efficiency of the fertilizer companies were pilot-tested in two plants. While implementation work proceeded with considerable difficulty, some modest results were achieved. At the BCEC, e.g., a few organizational changes were made to bring the structure more in line with the principles of unity of command, reasonable span of control, functional disciplines and clear definition of duties and responsibilities. At YYCFC, the effort partly succeeded to put in place a new MIS system which provided the management with timely information. When Phase II was completed, the MCI issued four operational manuals for use by the fertilizer industry dealing with: (i) responsibility accounting including cost accounting, budgetary control, management information format and financial analysis; (ii) major financial statements; (iii) a five year rolling plan; and (iv) accounting computerization. 11. In addition to recommending that the two track fertilizer pricing be discontinued, and in order to establish a highly efficient sales and distribution system, the Fertilizer Pricing and Distribution Study proposed that: (i) the Agricultural Means of Production Corporation be transformed into a joint stock company with enhanced autonomy to facilitate its commercial operation; (ii) the fertilizer producing companies be encouraged to set up their own sales and distribution network in the market; (iii) the compound fertilizer plants be rehabilitated and revamped, endowing them with better capability of distributing their products in the market and providing extension services; (iv) an environment be created for the establishment of privately- owned distribution companies; and (v) quality standards and suitable labeling be developed and enforced. Technical Assessment 12. The project has successfully achieved two of its major objectives, namely: (i) an increase in high grade fertilizer production by replacing the production of 800,000 tons of ammonium bicarbonate with 450,000 tons of urea, thus supplying nearly 100,00 tons per year more nitrogen to the agricultural sector; and (ii) a reduction in the nutrient imbalance by making available of 80,000 tons of P205 when the YYCFC plant reaches full capacity operation. The project has, however, fallen short of realizing its other two objectives: reducing energy consumption and improving managerial capability. The nitrogenous fertilizer plants are still far from operating efficiently. In all plants energy consumption for ammonia production remains at a very high level and, even though the efficiency of conversion to urea has gradually improved over the years, there is still room for 5-14 percent improvement in the efficiency of input use in order to reach the design standards. The phosphatic fertilizer plant, too, operates below its designed technical efficiency, though performing somewhat better than the urea plants. Typically, these fertilizer companies do not possess an experienced team of process engineers and use the services provided by MCI affiliates. But there remains a reluctance to use the consulting services from abroad, even those customarily offered by the process licenseholders or equipment manufacturers. Efforts to improve the operational efficiency of these plants should receive urgent attention by all fertilizer companies, if the plants are to achieve financial and economic viability. Cost of Production and Profitability 13. In all plants, costs of production have risen sharply, despite increasing capacity utilization over the years. This has been due to the steep rise in the price of raw materials, combined with increases in labor cost, the incidence of high depreciation and financial charges. The increasing 12 cost of imports, the persistence of price control and the lingering technical inefficiency in the plants have resulted in a serious erosion of profitability in all the companies. Out of the five companies, two (XCFC and LCFC) have suffered net losses in the last three years (though at declining levels); two (YCFC and BCEC) have broken almost even; and one (YYCFC) has returned a reasonable net profit. The lackluster performance of all urea plants has not only brought financial distress, but it has created large arrears in the repayment of their borrowings. 14. Despite a clear undertaking by the Government to allow all beneficiary companies to sell their entire production outside the state allocation plan, at market related prices, the Government never officially lifted price and quota controls. While international prices remained depressed in 1992 and 1993 and, as a result, the urea producers could not sell their products even at fixed government prices, the price controls adversely affected these companies when market prices revived in early 1994 and the Government failed to raise fertilizer prices in line with the imported costs. As noted above, this has been partially responsible for the weakening financial health of the urea producing companies. There is, however, no price control over the output of the phophatic fertilizer producing plants. Economic Rate of Return 15. Based on the assumptions made in this report, and summarized in Annex XV, the reestimated rate of return for the whole project is around 8 percent, which is well below both the estimates in the SAR and in the ICR. Two factors account for these results. First, the investment costs have been considerably above the original estimates on account of high domestic inflation. Second, and more significant, world fertilizer prices have been dramatically lower than those projected in the SAR (the collapse of oil prices in 1986 and the consistently lower prices thereafter have dramatically reduced the cost of producing, especially, nitrogenous fertilizers). While the SAR anticipated a urea price of US$193 per ton (in 1987 constant dollars) for 1991, the actual price was only US$150 per ton. A similar percentage difference has actually come about in the price of DAP. Institutional Development 16. The project has only had a modest institutional development impact. The Management Efficiency Study and the pilot implementation in two of the plants do not seem to have led to substantial and lasting improvement in the plant management. Although the "Contract Responsibility System (CRS)"is supposed to have been established in public enterprises, there is little indication that the concept has been fully appreciated or assimilated. The public enterprise is still considered a place of employment for the surrounding community, the workers' children and other dependants. All plants, especially the repair workshops, are highly overmanned. The efforts in improving management by training and exposure to modem management have not, so far, produced the expected results. Nonetheless, isolated improvements can be discerned in certain activities, such as cost accounting and computerization at YYCFC. Outcome and Sustainability 17. As discussed earlier, this project has had a mixed outcome. On the one hand, it succeeded, though with some delay and considerable cost overrun, in putting in place new, higher grade, nitrogenous and phosphatic fertilizer producing capabilities in five provinces and contributing to a better nutrient balance in the country. On the other hand, it was far less successful in bringing about the much needed increased technical efficiency and change in management culture. Moreover, the reestimated economic rates of return are low and the project did not succeed in bringing about a decontrol of fertilizer prices which was to be implemented by the Government, at 13 least, for the project beneficiaries. Based on the above consideration, the outcome of the project is rated as marginally satisfactory. 18. Since the beginning of 1996, the Government appears to have increased the urea prices to levels approaching international prices (e.g. V1900-2100 per ton ex-factory XCFC and 2100- 2140 per ton ex-factory BCEC). This might presage the eventual decontrol of urea prices. This is likely to help the urea producing companies which have been facing financial plight due to their large accumulated losses and their inability to service their loans. Assuming that raw material prices stop their unabated increase (at V373 per ton, the coal price to XCFC is now above the international FOB price of Australian coal at US$39.3 per ton) and the fertilizer companies take the necessary steps to improve the technical efficiency of the plants, the sustainability of this project is rated as likely. Bank/Borrower Performance 19. The Bank has had a major role in steering China's fertilizer industry towards more competitiveness and self sufficiency. Through a series of successive projects, and in close collaboration with the Government of China, it has addressed major issues facing the fertilizer subsector and has designed model projects that can be emulated by other fertilizer enterprises for achieving productivity, efficiency and competitiveness. The introduction of modem management principles and system has been a welcome attempt, even if the results are as yet meager and patchy. On their part, the Ministry of Chemical Industries and the implementing agencies have had a mixed performance. The project was well prepared and implemented with few difficulties. Although the inflationary pressures stretched the financial resources of the implementing companies, and forced them to repeatedly request more loans in the domestic market, the funds were eventually made available for the project to reach completion. But the companies have serious difficulties in resolving technical problems and fine-tuning the plants to reach performance guarantees. The Borrower also failed to comply with the covenant on product pricing and the weak financial performance of the companies precluded them from fully meeting some other financial covenants. Conclusions and Lessons Learned 20. Over the last decade, the Bank and the Chinese authorities have developed a constructive and amicable dialogue, addressing the issues in the industrial sector, particularly the manner in which further reforms can be introduced in the economy in order to enhance the competitiveness of the SOEs. While such reforms and the further enhancement of the factor markets are necessary to create the suitable environment for the efficient development of the industrial sector and, more specifically, of the state owned enterprises, the Bank projects should find ways in which the micro level capabilities are realized and sustained. Without developing such capabilities, it is doubtful that the policy reforms would, alone lead to the desired results. This project attempted to enhance both the technical and managerial capabilities at the company (plant) level. But the design of the project was such that the Bank could not easily follow up on these issues, nor were they made the subject of an operational plan which could be monitored. In this respect two major lessons stand out: (i) that management and organizational restructuring should be pursued, through technical assistance or other means, until such time as the consultants and the Government are satisfied that the reforms have been put into practice and internalized; and (ii) that project covenants should include a clause whereby the government undertakes to cause the SOEs to use every possible means including the 14 assistance of the licenseholders and/or other domestic or international consultancy services to reach full technical efficiency. 21. As a corollary to the above. it is important that all the subcomponent of the project be properly supervised. Seven supervision missions in six years for a project of this complexity was patently not sufficient. During some missions only one or two plants were visited. Given the scattered location of the five fertilizer plants, the supervision program should have ensured an annual visit, especially to those enterprises that were in the pilot implementation program. Where restructuring and reform of management practices is an objective, vigorous supervision is essential for satisfactory results. 22. While pricing efficiency is a legitimate policy issue, experience shows that in many countries, the pricing of fertilizer is often influenced by social and political considerations. Such being the case, the second best option is to insist that the subsidy be made transparent and be included in the government's accounts as an expenditure. At the same time the enterprises should be allowed to face market prices, to ensure that they operate in a less distorted environment. 15 1. Introduction 1.1 With 22 percent of the world's population (1.2 billion) and only 7 percent of the world's arable land (97 million hectares out of the total of around 1.45 billion hectares), China has had to resort to intensive farming in order to achieve a reasonable level of self-sufficiency in its staple food production. This has meant that the Chinese agriculture employs heavy inputs of labor, water (supported by a relatively well developed irrigation system) and chemical and organic fertilizers. 1.2 Up to the early 1950s, practically no chemical fertilizer was used in China. Starting in 1952, the consumption of fertilizer grew rapidly to around 9 million tons of nutrients by 1978. During the same period grain production increased by nearly 86 percent, from 164 to 305 million tons (Annex I). Following the 1978 reforms, which transformed the agricultural sector from the dictates of central planning to a market-driven system, the sector grew at an average annual rate of 5.5 percent until 1994 compared with an average annual growth rate of 2.6 percent during the 1970s; and grain production exceeded 450 million tons in 1992. This rapid growth in agricultural production has been partly based on a sharp increase in the consumption of fertilizers which reached 33 million tons of nutrients by 1994, implying an average annual growth rate of 8.6 percent. 1.3 China is presently the world's largest consumer and the second largest producer of chemical fertilizers (Annex II). At an average of 340 kilograms of nutrients per hectare, China's specific ferilizer consumption is much higher than the world average of around 100 kilogram of nutrients per hectare, but lower than that of Japan and Korea which is in excess of 400 kilogram of nutrients per hectare. China is also, by far, the largest importer of chemical fertilizers in the world. From a position of relative self sufficiency in 1980 (in aggregate and not in all nutrients - Annex III), China now produces only two thirds of its demand for chemical fertilizers. Of the total nutrients production of 21.87 million tons in 1994, nitrogen formed 76 percent, phosphates 23 percent and potash nearly 1 percent. Nearly all potash, and significant quantities of phosphoric fertilizers are imported. The country also imports around 10 percent of its nutrient nitrogen. This degree of dependence on imports, the imbalance among nutrients and the paucity of domestic production of phosphatic and potash fertilizers were at the heart of the policies that were formulated by the Chinese Government, in early 1980s, for the development of the fertilizer sector. Project Background 1.4 Up to the beginning of the 1970s, the development of the Chinese chemical fertilizer industry was predominantly based on indigenous design, technology and equipment, reflecting the Government's policy of technological self-reliance. Prompted by increasing energy prices in the early 1970s, the Government decided to construct 15 large nitrogenous fertilizer plants utilizing the significantly more energy efficient imported technology and machinery. However, by the time the Government and the Bank began their dialogue about the subsector in 1983, even the plants constructed in the 1970s had been superseded by the more efficient state of the art technology. Against this background, the Government's strategy for the development of the subsector was to: (i) increase high grade fertilizer production by rationalizing the existing low-grade fertilizer facilities and building new capacities; (ii) reduce the nutrient imbalance by the rapid expansion of producing capacity of the phosphatic fertilizer based on the locally available rock phosphate, while developing domestic potash resources; (iii) increase production efficiency and competitiveness of existing fertilizer plants through technical upgrading, energy saving renovation and product quality improvement; and (iv) raise efficiency of enterprise operations through improvements in operational and financial management. 16 1.5 This strategy received the support of the Bank and led to the formulation of a series of projects which aimed at assisting China to establish an efficient fertilizer industry by improving the productivity and international competitiveness of its existing plants and reducing the nutrient imbalance by constructing new phosphatic fertilizer plants. The first project in this series, the Fertilizer Rehabilitation and Energy Saving Project (Loan 2541 -CHA) approved in FY85 and completed in 1991, encompassed five fertilizer unites and resulted in increasing the urea production capacity by nearly 200,000 tons per year while reducing energy consumption. This first project was followed in FY87 by the Fertilizer Rationalization Project (Loan 2838-CHA) which is the subject of this audit. Subsequent projects were the Phosphate Development Project in FY88 (Loan 2958-CHA) for the establishment of a large size phosphate mine and beneficiation plant for high grade phosphates; and the Hubei Phosphate Project (Loan 3066-CHA) in FY89 for the setting up of demonstration models for large and medium size integrated phosphate mining and fertilizer manufacture. The first of the last two has been completed and the second is expected to come on stream in 1996. The Project 1.6 While the first project of the series comprised essentially rehabilitation and energy conservation in nitrogenous fertilizer plants at five locations, the second project (being evaluated under this PAR) aimed at increasing production capacity for higher grade nitrogenous fertilizers as well as creating a new plant for the production of phosphatic and compound fertilizers, thereby enhancing the balance in nutrient production'. Thus the project called for: (i) the establishment of one of the country's first major phosphatic fertilizer production facilities capable of producing annually up to 240,000 tons of di-ammonium phosphate (DAP) and other compound (NPK) fertilizers based on indigenous phosphate rock; (ii) rationalization and expansion of ammonia production in the four medium-sized nitrogenous fertilizer plants, and converting the output from low to high grade fertilizer through the construction of technologically modem urea plants; and (iii) improved efficiency in production, financial and marketing management of the enterprises through organizational restructuring, introduction of modem cost accounting and management information systems (MIS). In addition, the project aimed at upgrading management training and improving the Ministry of Chemical Industry's (MCI) capability in investment planning. In the course of negotiations, assurances were obtained from the Government that: "The five companies will be allowed to market directly the entire output from project supported facilities outside the state allocation plan, at market related prices" (SAR, para 2.25). 1.7 This project design was, therefore, not only responsive to the strategy adopted by the Government of China in increasing the production of high grade nitrogenous and phosphatic fertilizers, but also an attempt to gradually liberalize the subsector and remove the market distortions. 2. Implementation Experience 2.1 The loan became effective seven months behind schedule (in April 1988 instead of September 1987) because of late compliance with the effectiveness clause regarding the subsidiary loan agreements between the Chinese Government and the five fertilizer plants. MCI was responsible for the overall supervision of project implementation. It established a 'Coordination By mid 1980s, a significant part of fertilizer production in China was in low grade products. Nitrogen production, in 1985, consisted of about 55 percent ammonium bicarbonate (ABC - 17 percent N), 36 percent urea (46 percent N) and the rest largely ammonium sulfate (21 percent N), ammonium chloride (25 percent N) and ammonium nitrate (35 percent N). In addition, nearly 77 percent of the phosphatic fertilizer production was single super phosphate (18 percent P205) and 22 percent calcium magnesium phosphate (18 percent P205). 17 Unit for Project Implementation' under an office dedicated to the management of the World Bank Loan. The beneficiary fertilizer companies held primary responsibility for the individual components of the project. At the company level, the projects were implemented by a team under the leadership of a project manager-in all cases one of the most senior technical persons with the rank of Deputy General Manager or Chief Engineer. By mid-1988, all engineering contracts, except one for the DAP/NPK plant at Xuanwei (Yunnan Yufeng Chemical Fertilizer Company - YYCFC), had been awarded and the basic engineering work was in progress. Building on the experience with the previous project, MCI and its subordinate organizations had already become familiar with the Bank's procurement guidelines. Delays in Implementation and Cost Overrun 2.2 In addition to the delay in loan effectiveness, several other factors were responsible for the delays, ranging from one to two years, in the completion of the plants (Annex IV). Lengthy procurement processing and decision making led to delays in securing process technologies and in the preparation of bidding and contracting documents for procurement packages. Moreover, the events of 1989 brought the construction activities to a virtual stand still for a few months, and the slow and erratic availability of counterpart funds and sharply rising domestic costs (because of high rates of inflation) forced the companies to repeatedly apply for loans from the financial institutions causing further delays. In the end these domestic loans amounted to nearly 82 percent of the total counterpart cost of Yuan 943 million (US$250 million at the rate of exchange prevailing in 1988). 2.3 All four urea plants were mechanically completed and ready for commissioning by December 1991, a little over one year behind schedule compared with the SAR estimates (the ammonia producing capacity was concurrently increased). However, a major problem surfaced during commissioning as leaks developed in the stainless steel lining of the urea reactors2. This and other small problems during the trial production delayed the performance test of the first plant until mid-1992 by which time the licensor's guarantee period had run out. Consequently, although the licensor's representatives were present at the first performance test carried out at the Xuanhua plant (Xuanhua Chemical Fertilizer Company-XCFC-located at Xuanhua in Hebei Province) in the last week of June 1992, they carried no liabilities nor did they have any obligation in respect of the plant's efficiency indicators and process guarantees. During the 72 hour performance test, which was witnessed by technical representatives from other plants, this plant produced at 106 percent of capacity and came very close to the process guarantees (Annex V). 2.4 The performance tests were later carried out in the other three plants (Yuangping Chemical Fertilizer Plant-YCFC-located at Yuangping in the Shanxi Province; Beijing Chemical Experimental Company-BCEC-located in the Beijing Municipality; and, Luoyang Chemical Fertilizer Company-LCFC-located at Luoyang in the Henan Province) during 1992 by each plant's employees without the presence of the licensor's representatives. Although they were not as close to the process guarantees as in the case of Xuanhua, the efficiency indicators were not far from an acceptable range indicating the capability of the urea plants to produce with reasonable efficiency (Annex V). In the case of the YYCFC plant at Xuanwei, Yunnan Province, the commissioning took a while longer because several operational problems resulted in plant shut downs and reduced loads. Of particular significance were erosion/corrosion problems in the sulfuric acid coolers which were later corrected. The phosphoric acid plant was also initially producing acid with 41 percent P2 05 instead of 46 percent P2 0s in accordance with the design specifications. During the test run, most process guarantees were substantially met and the plant was in commercial production during 1994. 2 All four were supplied by a domestic machinery manufacturer. 18 2.5 As noted above, a combination of factors including delays and the high rate of inflation led to a substantial overrun in the project cost. During the implementation of the project, the yuan depreciated from 3.7 to one dollar in 1988 to around 8.6 at project closing in 1994. As a result, while the dollar costs of imported equipment was even marginally below the foreign costs anticipated at appraisal (US$105.8 million instead of the estimated US$110.1 million), the local costs had exploded from Yuan 326.5 million at appraisal to Yuan 943.3 million at completion (Annex VI). This enormous increase in project costs-230 percent-affected all the companies whose individual cost hikes ranged from 220 percent to 235 percent. As shown in Annex VII, the companies were obliged to borrow heavily from the domestic financial institutions as their weak financial situation did not permit them to draw heavily on their own internal funds. Technical Assistance 2.6 In May 1989, a consulting services contract was signed for the Study on Managerial Efficiency of the Chinese Medium-Sized Chemical Fertilizer Companies. This contract was to be implemented in two phases: (i) analysis and recommendations; and (ii) pilot implementation. Phase one of the Study, which was carried out through the end of 1989, addressed the following issues: (a) organizational structure of the enterprises; (b) management information systems; (c) cost accounting; and, (d) training. To carry out this phase of the study, a combined team of consultants and Chinese specialists visited the various plants and collected the necessary data. Once the reports and the recommendations were submitted, a meeting was held at the Washington Headquarters of the World Bank in June 1990 at which, after discussing the various recommendations, a course of action was charted. 2.7 Before embarking on the pilot implementation, a Factory Managers Seminar was held at Beijing. At this Seminar several issues were discussed: (i) how to strengthen leadership in enterprises; (ii) how to improve the factory manager's management and technical knowledge; (iii) how to improve organizational structure; (iv) how to improve cost accounting; and (v) how to improve the existing MIS to bring it in line with the proposals of the Consultants. The Seminar agreed to improve the cost accounting system and submit proposals for approval by the Ministry of Finance in four areas: (a) implementing the responsibility accounting; (b) strengthening the budget control; (c) improving the quality of financial reports; and (d) carrying out the computerization of the general ledger. 2.8 The pilot implementation (Phase II) was carried out at two companies: Beijing Chemical Experimental Company (BCEC) and Yunnan Yufeng Chemical Fertilizer Company (YYCFC). The consulting team visited the BCEC six times and YYCFC twice. At each visit the team reviewed the progress and gave advice and instructions to the plant management. Upon each visit, an implementation progress report was prepared and submitted by the consultants. These activities were pursued by the Ministry of Chemical Industries but the progress was slow and somewhat disappointing because reforms needed considerable preparatory work, the factory managers were unable to focus attention on reforms (given their preoccupation with the physical implementation), and, at times, government approval was delayed. The work of the consultant for Phase II was finished in February 1991. 19 3. Project Results Capacity Utilization and Technical Performance 3.1 The intended increase in ammonia production capacity was successfully achieved at all four nitrogenous fertilizer plants3 and capacity utilization steadily increased to around 88-96 percent by the first ten months of 1995 as shown below: Ammonia Plants - Capacity Utilization 1992 1993 1994 1995 XCFC 67 94 92 96 LCFC 67 55 92 88 YCFC 35 71 85 92 The anticipated energy consumption savmgs in the ammonia plants, however, have not been realized. At BCEC, the energy consumption per ton of produced ammonia remains at around 15 million kilocalories, not materially different from consumption figures in 1991. In the case of XCFC unit energy consumption figures have actually increased, from 13 million kilocalories per ton in 1991 to 14 million kilocalories per ton in 1992. At YCFC, 1992 represents a year of low capacity utilization (35 percent) and a very high energy consumption per ton of produced ammonia (25 million kilocalories). By 1995, this had come down to 15.8 million kilocalories which is still a very high level. At LCFC, energy use is at a similar level but a slowly downward trend is noticeable (Annexes VIII, IX, X and XI). 3.2 The capacity utilization in the ammonia plants has been the major determinants of urea production since these plants went into commercial production. Except for the major leaks developing in the stainless steel lining of the urea reactors and some other minor equipment problem at certain plants, the urea units have operated at capacities determined by the availability of ammonia as shown below: Urea Plants - Capacity Utilization (percent) 1992 1993 1994 1995 XCFC 74 85 88 95 LCFC 49 39 81 81 YCFC 23 66 84 94 BCEC 56 63 56 60 As noted above, BCEC's urea production is determined by the company's practice of optimizing its production between urea and formaldehyde production for maximum profitability. 3.3 In all plants, the increasing capacity utilization has been accompanied with increased technical efficiency of converting ammonia into urea. However, in all cases the efficiency indicators remain well below those used in the technical design of the plants and given as At BCEC, the output from the coal gasifiers can be converted to both ammonia and methanol. The companys production program is geared to optimizing revenue on the basis of market prices for methanol, urea and formaldehyde. 20 guaranteed performance by the licenseholder. As shown in the following chart such deficiencies range from 5 percent to YCFC to 11 percent at BCEC. Ammonia consumption (kilogram per ton of Urea) Guaranteed Value 1992 1993 1994 1995 XCFC 568 682 650 630 620 LCFC 568 771 687 639 610 YCFC 568 893 650 617 610 BCEC 568 669 643 649 633 3.4 A similar improving trend is noticeable in the consumption of the other major inputs, namely steam and power. But again, the actual values for 1995 are still well above those used in the technical design of the plants as shown below: Steam Consumption (kilogram per ton of Urea) Guaranteed Value 1992 1993 1994 1995 XCFC 685 807 817 768 780 LCFC 685 1494 1043 948 922 YCFC 685 1664 1034 772 715 BCEC 685 1167 1044 1090 1050 Electricity Consumption (Kwh per ton of Urea) Guaranteed Value 1992 1993 1994 1995 XCFC 113 167 170 164 167 LCFC 113 261 279 217 216 YCFC 113 345 214 179 144 BCEC 113 282 253 291 226 During 1995, the best performance was given by the YCFC plant which consumed 713 kilograms of steam (4 percent above guaranteed value) and 144 kilowatt hours of electricity (27 percent above guaranteed value) per ton of produced urea. 3.5 So far, the performance of the phosphatic fertilizer plant at Xuanwei (YYCFC) has remained on track. In its second year of commercial operation (1995), the plant has achieved a capacity utilization level of nearly 74 percent in the DAP/NPK plant. The capacity utilization in the sulphuric acid and phosphoric acid plants has also reached 71 percent and 63 percent, respectively (Annex XII page 3). As for technical indicators, the trend shows continuous improvement with higher capacity utilization. But the actual performance lags behind not only the anticipated engineering design values, but also the results achieved during the test run of the plant in 1993. 21 Performance Indicators - YYCFC Plant Guaranteed 1993 1994 1995 First Value Ten Months Sulphuric Acid Pyrite Consumption Ton/Ton 0.86 0.953 0.881 0.877 Phosphoric Acid Phosphate Rock Ton/Ton 3.3 4.14 4.19 4.41 Sulphuric Acid Ton/Ton 2.63 2.82 2.73 2.81 Steam Ton/Ton 2.04 2.92 3.67 2.04 Electricity Kwh/Ton 132.6 389 238 241 DAP P205 (100%) TonrTon 0.467 0.510 0.517 0.492 Ammonia (99.9%) Ton/Ton 0.224 0.282 0.247 0.245 Steam Ton/Ton 0.148 0.265 0.368 0.149 Electricity Kwh/Ton 45 136 79 76 Manpower and Training 3.6 When the project was being prepared, there was an implicit understanding that, given the high level of employment at the various plants, the manpower required to operate the new plants at all five locations would be wholly or mainly selected from the existing pool of manpower. This was done in practice, except that in the case of YYCFC there was need to recruit new personnel on account of the size and the complexity of the new phosphoric fertilizer plant. While the urea plants are manned with 110-120 persons, the YYCFC plant has a total workforce of 904 persons out of which 76 are in administrative jobs and the remaining 828 occupy technical and operational positions. 3.7 The major part of the training for the urea plant operators was performed at other chemical fertilizer factories in China. At YYCFC, a comprehensive training program was prepared by the company and was reviewed by the Bank. Once implemented, this program produced the core group of operators and technicians who assisted at the commissioning and later operation of the new plant. The program included training for operators of the sulphuric acid and DAP plants at Nanjing Chemical Industry Company. Training for the phosphoric acid plant was carried out at another phosphoric fertilizer plant in the Yunnan Province. This in-country and on-the-job training was supplemented by training overseas-all plants sent a few individuals abroad to acquire specialized and up-to-date skills. 3.8 In spite of using existing staff for the new plants, all five companies remain heavily overstaffed, given their size and level of production. As of the end of third quarter 1995, the total number of persons employed at various plants was: (i) XCFC, 2964; (ii) LCFC, 2970; (iii) YCFC, 2640; (iv) BCEC, 3417; and (v) YYCFC, 3500 (904 in the phosphoric fertilizer plant alone). While the educational profile of the manpower does not follow a uniform pattern at the different plants, some (e.g. XCFC and YCFC) have a much higher university/college and high school graduates (about one third of the workforce) than others such as YYCFC-only one seventh. Aware of the need for skills upgrading, YYCFC has perhaps the most elaborate program consisting of in-house and on-the-job training, in-country training at other plants and at academic 22 and higher learning institutions. In the urea plants, training programs are being implemented with varvng intensities, but there is need for more focus in this area. Institutional Development and Studies 3.9 The consultants submitted their report and recommendations for improving the managerial efficiency of the fertilizer companies in time, and the proposals were pilot tested in two plants, but the implementation work proceeded with considerable difficulty. Early in the process, it had been realized that the implementation of the proposals might take much longer that anticipated. At times, implementation needed the approval of government authorities which required a long waiting period. In other cases, the changes required detailed preparatory work which could not be done on a tight schedule. The proposals were, therefore, divided in several categories in relation to their feasibility. Although they were not, on the whole, up to expectation, some results were achieved. At the BCEC, e.g., some organizational changes were made to bring the structure more in line with the principles of unity of command, reasonable span of control, functional disciplines and clear definitions of duties and responsibilities. At YYCFC, in addition to accepting a new organization based on the new production capability, the consultants partly succeeded to put in place a new MIS system which would provide the management with the daily production results, product quality reports, financial information and an integrated analytical technical and economic report showing the most up-to-date status of the company's performance. The consultants also helped the creation of daily and monthly activity reports encompassing all major production units and workshops. 3.10 When Phase II of the contract for managerial efficiency improvement was concluded in February 1991, the consultants submitted their final report together with organization, accounting and MIS manuals. At the appraisal meeting organized by MCI in April 1991, the experience with the pilot implementation was thoroughly reviewed and it was decided that the Ministry would issue four operational manuals for use by the fertilizer industry dealing with: (i) responsibility accounting including cost accounting, budgetary control, management information format and financial analysis; (ii) major financial statements, namely, the balance sheet, profit and loss account and a cash flow statement; (iii) a five year rolling plan; and (iv) accounting computerization. These manuals were subsequently prepared and issued to the chemical industry enterprises. Many of the general accounting and auditing principles that were laid out in the consultant's recommendations such as accelerated depreciation, inventory and work in progress valuation were later accepted by the Government of China and included in the new accounting system which came into effect from July 1, 1993. 3.11 The Fertilizer Pricing and Distribution Study retraced the history of fertilizer pricing in China and the reforms that had taken place since the early 1980s. The study team, after studying the market pricing in the USA and the administered formula pricing in Brazil and India and their concomitant allocation systems, recommended that the current two track (a lower price for Government agencies and a higher, albeit with a ceiling, for sales to the market), be eliminated and prices gradually freed along with the liberalization in the prices of the other agricultural inputs and crops. The report further suggested that, once agricultural inputs and outputs were liberalized, the Government's agricultural support program for strategic crops such as grains and cotton be implemented by means other than subsidization of fertilizer and other input prices. In order to establish a highly efficient sales and distribution system, the study recommended that: (i) the Agricultural Means of Production Corporation be transformed into a joint stock company with enhanced autonomy to facilitate its commercial operation; (ii) the fertilizer producing companies be encouraged to set up their own sales and distribution network in the market; (iii) the compound fertilizer plants be rehabilitated and revamped, endowing them with better capability of distributing their products in the market and providing extension services; (iv) an environment be created for the establishment of privately-owned distribution companies; and (v) quality standards and suitable labeling be developed and enforced. 23 Environmental Protection and Safety 3.12 The measurement of environmental parameters for air and water quality and noise pollution, as recorded at the plant locations and reproduced in Annexes VIII to XII, indicate that both the urea and the phosphatic fertilizer plants have generally been operating satisfactorily and within the specified limits and national standards. In one case, (the Xuanhua plant), because of the proximity of an iron and steel plant in a neighbouring location, the air quality is seriously affected by the exhaust fumes and other pollutants from the coking batteries, blast furnaces and converter shops. At the BCEC plant in Beijing the effluent water, after preliminary treatment, is transferred to a collection site where effluents from several other plants are treated before discharge to the niver. 3.13 Each plant has an environmental division entrusted with the responsibility of monitoring environmental parameters within the plant and at its boundaries. Practically all measurements are done with mobile equipment and at regular but somewhat infrequent intervals (e.g. at Yuangping air quality is measured only four times a year). Despite a satisfactory level of housekeeping at all newly constructed urea plants, the conditions in other parts of the plant, (notably the gasifier shops), are very poor and, sometimes, unsafe. In none of the plants are helmets or safety shoes worn by the operational personnel (nor are they ever offered to visitors). In the maintenance workshops, machine operators do not wear goggles. Despite these conditions, the plants invariably reported very few accidents. 4. Overall Assessment and Issues 4.1 The project has successfully achieved two of its major objectives, namely: (i) an increase in high grade fertilizer production; and (ii) a reduction in the nutrient imbalance. It has, however, fallen short of realizing its other two objectives: reducing energy consumption and improving the managerial capability. The four urea plants have replaced the production of 800,000 tons per year of ammonium bicarbonate (17 percent N) to 450,000 tons per year of urea (46 percent N), thus, supplying nearly 70,000 tons per year more nitrogen to the agricultural sector in the form of higher grade fertilizer. Once full capacity utilization is achieved this increment will approach 100,00 tons of nitrogen. The phosphoric fertilizer plant has also increased the phosphoric acid (P205) availability by 50,000 tons per year and is well on its way to reach full capacity production at 80,000 tons per year. But these achievements are not matched by a corresponding high level of technical efficiency and energy conservation. Technical Efficiency 4.2 As discussed in paragraphs 3.1 to 3.4 above, the nitrogenous fertilizer plants are still far from operating efficiently. To begin with, in all plants, energy consumption per ton of produced ammonia remains at a very high level. There even appears to be a deterioration in some plants where energy consumption has actually risen since the project was implemented (e.g. XCFC and BCEC). As for the urea plants, improvements have followed better capacity utilization. But even the most efficient urea plant still falls considerably short of the target specified in the design of the units. Calculations show that if the urea plants were to operate at the designed efficiency level, their savings in the consumption of major inputs (valued at 1995 prices) would be as follows: 24 Saving Equivalent Yuan per ton of output4 XCFC 10.5 percent 79 LCFC 10.6 percent 102 YCFC 5.3 percent 47 BCEC 14.0 percent 106 4.3 While it is not unusual for chemical plants to take a few years to reach full efficiency- often on account of equipment performance, bottlenecks or the learning curve-the magnitude of these losses and the seeming inability of the management to correct the situation is a cause for serious concern. Typically, these fertilizer companies do not possess an experienced team of process engineers and utilize the services of research institutes and engineering companies associated with the Ministry of Chemical Industries. But there remains a reluctance to use consulting services from abroad, even those customarily offered by the licenseholders or equipment manufacturers. To explain this reluctance, the plant management often argues the unavailability of foreign exchange and the difficulty of securing the Ministry's approval of the request for the services of overseas experts. Similar arguments were advanced with respect to important spare parts such as control room measuring instruments. 4.4 The phosphatic fertilizer plant appears to be stabilizing on a better technical efficiency level than the urea plants. Some technical indicators such as pyrite consumption in the sulphuric acid plant and, steam consumption in the phosphoric acid and DAP plants are at, or very close to, the designed values. Despite these results, many technical indicators in this plant, notably the consumption of phosphate rock in the production of phosphoric acid still remain outside of the guaranteed values and need to be improved. Not unlike the urea plants, there also appears to be a reluctance to seek the assistance of overseas consultants and experts to solve technical problems. An entire pyrite drying plant stays unutilized because of caking in the drying kiln which was manufactured in China. This is not a problem that should have been left uncorrected after the passage of two years. Institutional Development and Management 4.5 This project has only had a modest institutional development impact, even though institutional development constituted an important objective of the project. The Management Efficiency Study and the pilot implementation in two of the plants (YYCFC and BCEC) do not seem to have left a lasting effect on the fertilizer companies. While a new cost accounting system is being gradually introduced in all enterprises and a rudimentary MIS system is in place, the organizational structures still remain substantially untouched. Moreover, the computerization of 4 Savings/losses are valued at costs which vary amongst plants. Consequently, similar percentage savings do not correspond to the same value in yuans per ton of output. 5 While all urea plants have installed the up-to-date Distributed Control System (DCS) for the efficient control of the plant, in many instances output measuring instruments had been out of service since almost the beginning of commercial operation, in 1992, without repair. In one of the plants, the control room printer was not working and its condition indicated that it had been out of service for sometime. While expensive control equipment have been put in place, there is little evidence that it is being used for continuous monitoring and careful analysis in the interest of improved plant operation. Instead of keeping the DCS control room in the best working condition, the plants often depend on the bagging shop to provide the feedback for the operators to correct any malfunctioning of the plant. 25 accounts and the Management Information System is far from being realized (except, perhaps, at YYCFC) and, in many plants, the training of personnel is not given sufficient focus or priority. 4.6 Although the "Contract Responsibility System (CRS)" is supposed to have been established in public enterprises, there is little indication that the concept has been fully appreciated or assimilated. At all plants, a discussion of overstaffing with the management led to a strong defense of the existing situation on social grounds. The public enterprise is still considered a place of employment for the surrounding community, the workers' children and other dependants. In most plants, the repair workshop, for example, was highly overmanned and underutilized. It was often reported that in the last few years, the workshops are also serving the neighbouring communities for some repairs. But this never amounted to much. At all plants between 30 and 35 percent of the employees were engaged in maintenance and Machine Shop work. At Luoyang, e.g., this number was 1047 persons out of a total workforce of 2970. This legacy of the past is strongly entrenched throughout the group. In recent years, some enterprises have farmed out a few functions as separate division (e.g. the canteen) to allow them to generate income and cover a part of their costs from providing service to the community. While such spin offs have ostensibly reduced the total number of employees (e.g. at BCEC), they are still quite dependant on the company for their budget. All in all, the efforts in providing incentives through the contract responsibility system or improving management by training and exposure to modem management techniques have not, so far, produced the expected results. Nonetheless, isolated improvements can be discerned in certain activities, such as cost accounting and computerization at YYCFC. Cost Structure and Profitability 4.7 The cost structure of the Urea and the phosphatic fertilizer plants is shown in Annexes VIII to XII and summarized below: Cost of Basic Products (Wton) 1992 1993 1994 1995 First Ten Months Urea XCFC 877 913 1207 1390 LCFC6 979 1178 1210 1560 YCFC 774 890 1182 1275 BCEC 898 1006 1104 1312 YYCFC Sulphuric Acid 361 427 465 Phosphoric Acid 1738 2001 2298 As indicated above, despite the increasing capacity utilization, the production costs have been rising fairly rapidly in all the plants since they went into commercial operation. This can be traced 6 Because of inventory build up, this plant was shut down for 3 months during 1993. 26 back to the increasing price of all raw materials notably the price of anthracite/coal/coke as shown below7. Price of anthracite/coal/coke and other raw materials (Wton) 1991 1992 1993 1994 1995 XCFC (Standard coal) 240 284 280 347 373 LCFC (Anthracite) 123 132 212 210 260 YCFC (Anthracite) 159 162 181 246 322 BCEC (Coke) 204 197 214 214 214 YYCFC Pyrite 260 266 259 253 Phosphate Rock 80 79 59 91 Potassium Sulphate 1100 1260 1500 1591 Coke 139 N/A N/A 181 In addition to the steep rise in the price of raw materials, the increase in the cost of fertilizer products is also due to increasing labor costs, the incidence of higher depreciation charges, and financial charges that have rapidly grown because of the inability of the companies to service their loans, given their precarious financial situation. 4.8 In dollar terms, however, the picture is radically different. While urea costs have only marginally increased for three plants, they have declined, by around 3 percent, in the case of BCEC. As for YYCFC, all costs including raw material inputs and intermediate products have been lower in 1995, as compared with 1992. Costs of Inputs and products ($/ton) 1992 1995 XCFC Standard Coal 51 45 Urea 159 167 LCFC Anthracite 24 31 Urea 177 188 YCFC Anthracite 29 39 Urea 140 154 BCEC Coke 36 26 Urea 163 158 YYCFC Pyrite 47 30 Phosphate Rock 15 11 Coke 25 22 Sulphuric Acid (1993) 63 56 Phosphoric Acid (1993) 302 277 4.9 On output prices, however, the situation is worrisome. At no time during the last several years has the government relinquished its control over the price of most nitrogenous fertilizers, whether produced in large or medium-size plants. Although the pricing study shows that the very tight initial control has been relaxed in the 1980s through devolution to the provinces and It should also be noted that: (1) because of the changes in cost accounting systems, the figures for different years may not be totally comparable, and (2) there is little uniformity in the way different companies have accounted for depreciation and financial charges. Apparently, the rules require that depreciation is taken once the new plants are finally accepted by the Ministry of Chemical Industries. Some plants were in the process of final acceptance. 27 municipalities, they have been required to set prices in a two track pricing system that fixes maximum prices for two types of sale: (i) to the government distribution system; and (ii) to the market (normally with a higher ceiling). The system also sets quotas for sales to the government and the market. In the first two years of commercial operation of the urea plants, both prices were maintained at yuan 1000 per ton for all the companies participating in the project. During these two years, since imported urea was being offered in the market at below V1000 per ton, the companies could not sell their production even at the fixed government prices. With the rising trend in international price, starting in the early months of 1994, the ex-factory prices were also allowed to increase in steps to the following averages : Wton 1992 1993 1994 1995 Xuanhua Price ceiling for sales to Govt. 1000 1000 1202 1425 Price ceiling for sales to market 1000 1000 1266 1680 Average realized price 944 929 1095 1500 LCFC Price ceiling for sales to Govt. 1000 1000 1060 1408 Price ceiling for sales to market 1000 1000 1110 1470 Average realized price 966 940 1026 1420 YCFC Price ceiling for sales to Govt. 1000 1000 1050 1226 Price ceiling for sales to market 1000 1000 1136 1593 Average realized price 912 912 1124 1463 BCEC Price ceiling for sales to Govt. 1000 1000 1234 1435 Price ceiling for sales to market 1000 1000 1283 1490 Average realized price 965 956 1278 1451 4.10 The above movement of prices show: first, that each province administers its own pricing formula; second, that some provinces have brought the ceilings for sales to government and market very close to each other; and, third, that even the price ceiling for sales to the market are well below the CIF prices for urea if the published international prices are taken as the base (Annex XIII) 1994 1995 International FOB price of urea $/ton 148 207 CIF equivalent of above in Y/ton 1491 1926 Actual CIF Mton' 1103 N/A XCFC ceiling for market price Y/ton 1266 1680 LCFC ceiling for market price /ton 1110 1470 YCFC ceiling for market price /ton 1136 1593 BCEC ceiling for market price V/ton 1283 1490 During 1994 and 1995 government reinstated quotas for sales to government and market. It should be noted, however, that because of availability of urea at discounted prices from the countries of Eastern Europe and the Former Soviet Union (usually on the grounds of lower quality standards), China has been able to import its fertilizer need at much lower prices (e.g., $128/ton CIF in 1994) than the published FOB prices for US Gulf or Western Europe (Annex XIV). 28 4.11 Despite the assurances given by the Government to allow all five companies to sell their entire production outside the state allocation plan, at market related prices (SAR para 2.25), the Government never officially lifted price and quota controls. As prices revived during 1994 and 1995, the price controls adversely affected the fertilizer companies' cash flow and profitability. But a more significant factor in reducing profitability was the run away costs of production at all plants. This, in turn, came about because of steeply increasing raw material costs, substandard technical efficiency and lower than anticipated capacity utilization. The situation is somewhat better at YYCFC because the phosphatic fertilizer prices are not controlled and the company has the capability of switching production between DAP and NPK depending on the market demand - 0 and prices'. Profitability of Fertilizer Companies Net Profit V Thousands 1991 1992 1993 1994 1995 First Ten Months XCFC (2080) 178 (18302) (9937) (4970) LCFC (600) (6214) (28103) (21643) (1065) YCFC 373 (1445) 160 487 650 BCEC 4394 641 0 0 0 YYCFC 7563 5877 29003 27123 Figures in () signify losses. The lackluster financial performance of all the urea plants has not only brought financial distress, but it has created large arrears in the repayment of the borrowings from the Government and the financial institutions. This situation is likely to ease somewhat since realized prices are now higher than unit costs, provided that the administered prices are not lowered substantially when urea prices begin to soften-the cycle has already started as FOB urea export prices have fallen some 12 percent between November 1995 and February 1996. Economic Rate of Return 4.12 Based on the assumptions made in Annex XV, the reestimated economic rate of return for the various sub-projects is indicated in Annexes VIII to XII and summarized below: Reestimated ERR Base Case 10% Higher SAR ICR Output Prices XCFC 7.2% 11.4% 21.3% 25.1% LCFC 5.0% 8.7% 26.2% 30.4% YCFC 13.2% 18.2% 28.3% 22.2% BCEC 3.7% 7.4% 20.4% 23.7% YYCFC 7.9% 10.7% 23.3% 16.9% 10 During 1994, YYCFC sold 40 percent of its output in the Yunnan and 30 percent in neighbouring provinces. Because of the shortage of transportation facilities to distant North Eastern Provinces, the Company entered a lucrative export contract to supply a neighbouring country by overland transportation. 29 Two major factors account for these results. Firstly, the investment costs have been considerably above the original estimates on account of the high domestic inflation. Secondly, and more significantly, the fertilizer prices have been dramatically lower than those projected in the SAR. While the SAR anticipated a urea price of US$193 per ton (in 1987 constant dollars) for 1991, the actual price was only US$150 per ton (Annex XVI). For the year 2000, current World Bank forecasts" estimate a urea price of US$119 per ton in 1987 constant dollars. The SAR assumed a price of US$197 per ton for the year 2000. As for phosphatic fertilizer prices the actual price of DAP, in constant 1987 dollars was US$151 per ton in 1991, as compared with a price forecast of US$229 per ton in the SAR. For the year 2000, similar numbers are US$135 per ton, as against the SAR projection of US$259 per ton (Annex XVI). The current projection is nearly half of that made at the time of project appraisal'2. Already, the next cycle of price weakness appears to have started as prices for urea and DAP have gradually declined from a peak of US$233.3 per ton and US$248.8 per ton in November 1995 to US$218.5 per ton and US$236.8 per ton in February 1996, respectively'. Outcome and Sustainability 4.13 As discussed earlier, this project has had a mixed outcome. On the one hand, it succeeded, though with some delay and considerable cost overrun, in putting in place new, higher grade, nitrogenous and phosphatic fertilizer producing capabilities in five provinces and contributing to a better nutrient balance in the country. On the other hand, it was far less successful in bringing about the much needed increased technical efficiency and change in management culture. Moreover, the reestimated economic rates of return are low and the project did not succeed in bringing about a decontrol of fertilizer prices which was to be implemented by the Government, at least, for the project beneficiaries. Based on the above consideration, the outcome of the project is rated as marginally satisfactory. 4.14 Since the beginning of 1996, the Government appears to have increased the urea prices to levels approaching international prices (e.g. V1900-2100 per ton ex-factory XCFC and :2100- 2140 per ton ex-factory BCEC). This might presage the eventual decontrol of urea prices.14 This is likely to help the urea producing companies which have been facing financial plight due to their large accumulated losses and their inability to service their loans. Assuming that raw material prices stop their unabated increase (at V373 per ton, the coal price to XCFC is now above the international FOB price of Australian coal at US$39.3 per ton) and the fertilizer companies take the necessary steps to improve the technical efficiency of the plants, the sustainability of this project is rated as likely. Bank/Borrower Performance 4.15 The Bank has had a major role in steering China's fertilizer industry towards more competitiveness and self sufficiency. Through a series of successive projects, and in close collaboration with the Government of China, it has addressed major issues facing the fertilizer 11 Commodity Markets, the World Bank, November 1995. 12 It should be noted that the Bank's forecasts are single point projections within a very wide range: for urea this range (in constant 1987 prices) for the year 2000 is from US$ 100 per ton to US$214 per ton and for DAP from US$113 per ton to US$244 per ton. 13 Commodity Price Date Sheet, February 1996, The World Bank Commodity Policy and Analysis Unit. 14 The Region maintains that: "Based on the Government's overall pricing refonn policy......[the] Borrower performance should be rated as marginally satisfactory". While OED is cognisant of the fertilizer pricing issue, it cannot change its rating of the Borrower performance because the removal of price control constituted one of the basic understandings behind this project. 30 subsector and has designed model projects that can be emulated by other fertilizer enterprises for achieving productivity, efficiency and competitiveness. This has been a sound approach, combining financial assistance with technical advice and the introduction of the state of the art technology. The Bank has also been conscious of the need for the development of indigenous natural resources, e.g. phosphate rock, in support of an industry with enormous security implications. The introduction of modern management principles and system has been a welcome attempt, even if the results are as yet meager and patchy. 4.16 On their part, the Ministry of Chemical Industries and the implementing agencies have given a mixed performance. The project was well prepared and implemented with few difficulties. Under the general supervision of the Ministry of Chemical Industries and its subordinate World Bank Project Office (Project Implementation Coordinating Unit), the license agreements and procurement progressed reasonably smoothly. Although the inflationary pressures stretched the financial resources of the implementing companies, and forced them to repeatedly request more loans in the domestic market, the funds were eventually made available for the project to reach completion. But the companies have serious difficulties in resolving technical problems and fine- tuning the plants to reach performance guarantees. The Ministry of Chemical Industries completed the Pricing Study on time and the technical assistance for management improvement was effectively implemented on schedule. However, the Borrower failed to comply with the covenant on product pricing and the weak financial performance of the companies precluded them from fully meeting some other financial covenants. 5. Conclusions and Lessons Learned 5.1 Since the introduction of reforms in 1978, China has followed an industrialization strategy that has combined the gradual reduction of central planning with decentralization, autonomy in economic management and exposure to market forces. In this process, the economy has been increasingly opened to domestic competition and international trade as well as foreign investment. This transformation, though still in its early years, has already produced significant results. As a consequence of the explosive increase in the number of non-state enterprises which have flourished within the new competitive environment, the share of state ownership in industrial enterprises has declined. Despite this shrinkage, the SOEs still represent around half of the value of industrial production in the country. 5.2 The exposure to market forces has already forced many SOEs to behave as commercial profit-oriented entities while thousands of unprofitable small SOEs have been closed or merged into collectives or transformed into joint ventures. The new competitive climate has helped many SOEs to become not only a force in the domestic market, but also major exporters. Although the result of these reforms have, undeniably, been positive (as exemplified by the growth of total factor productivity of around 2.5 percent per annum between 1980-1992) for SOEs, and many have been transformed into financially and economically viable operations, a sizeable number still remain dependent on the government and require substantial fiscal and quasi-fiscal public subsidies. There are two major historical causes for this situation: (i) a distorted incentive and regulatory policy regime; and (ii) an inefficient corporate structure and governance system. The fertilizer industry, unfortunately, suffers from both of these debilitating causes. 5.3 Over the last decade, the Bank and the Chinese authorities have developed a constructive and amicable dialogue, addressing the issues in the industrial sector, particularly the manner in which further reforms can be introduced in the economy in order to enhance the competitiveness of the SOEs. Through its lending operations, the Bank has attempted to tackle such issues as technological backwardness, scale of production, product lines, capital-labor mix, financial and technical management, organizational structure and the establishment of mechanisms for 31 enterprises to pass many of their social services either to Government or to other markets (e.g. housing). On the incentive and regulatory policy front, price decontrol, project financing, liberalization and reduction of import tariffs and non-tariff barriers, streamlining of regulations for foreign investment have constituted the areas of concern and focussed attention. 5.4 While such reforms and the further enhancement of the factor markets are necessary to create the suitable environment for the efficient development of the industrial sector and, more specifically, of the state owned enterprises, the Bank projects should find ways in which the micro level capabilities are realized and sustained. Without developing such capabilities, it is doubtful that the policy reforms would, alone lead to the desired results. This project attempted to enhance both the technical and managerial capabilities at the company (plant) level. But the design of the project was such that the Bank could not easily follow up on these issues, nor were they made the subject of an operational plan which could be monitored. In this respect two major lessons stand out: (i) that management and organizational restructuring should be pursued, through technical assistance or other means, until such time as the consultants and the Government are satisfied that the reforms have been put into practice and internalized; and (ii) that project covenants should include a clause whereby the government undertakes to cause the SOEs to use every possible means including the assistance of the licenseholders and/or other domestic or international consultancy services to reach full technical efficiency. 5.5 As a corollary to the above, it is important that all the subcomponent of the project be properly supervised. Seven supervision missions in six years for a project of this complexity was patently not sufficient. During some missions only one or two plants were visited. Given the scattered location of the five fertilizer plants, the supervision program should have ensured an annual visit, especially to those enterprises that were in the pilot implementation program. Where restructuring and reform of management practices is an objective, vigorous supervision is essential for satisfactory results. 5.6 While pricing efficiency is a legitimate policy issue, expenence shows that in many countries, the pricing of fertilizer is often influenced by social and political considerations. Such being the case, the second best option is to insist that the subsidy be made transparent and be included in the government's accounts as an expenditure. At the same time the enterprises should be allowed to face market prices, to ensure that they operate in a less distorted environment.  33 Annex I China - Fertilizer Consumption and Grain Production Year Fertilizer Grain Fertilizer Grain Consumption Production Consumption Production (mtpy) (mtpy) (1978=100) (1978=100) 1950 0.00 132 0 43 1952 0.08 164 1 54 1955 0.24 184 3 60 1960 0.66 144 7 47 1965 1.94 195 22 64 1970 3.51 240 40 79 1975 4.89 285 55 93 1976 5.29 286 60 94 1977 5.96 283 67 93 1978 8.84 305 100 100 1979 10.86 332 123 109 1980 12.69 321 144 105 1981 13.35 325 151 107 1982 15.13 355 171 116 1983 16.60 387 188 127 1984 17.40 407 197 134 1985 17.76 379 201 124 1986 19.31 392 218 128 1987 20.00 403 226 132 1988 21.42 394 242 129 1989 23.57 408 267 134 1990 25.90 446 293 146 1991 28.05 435 317 143 1992 29.30 443 331 145 1993 31.52 456 356 149 1994 33.17 NA 375 NA Source: China Statistical Yearbook, China Country Memorandum, October 1994, The World Bank. 34 Annex 1l World and Regional Fertilizer Supply/Demand Balances Nitrogenous Fertilizers (000 Tons N) 1991/92 1992/93 1993/94 1994/95 Africa Supply Potential 1863 2076 2241 2268 Consumption 2065 2100 2200 2250 North America Supply Potential 11681 11666 11573 11480 Consumption 11582 11400 11600 11600 Central & South America Supply Potential 4838 4901 5000 5010 Consumption 3467 3414 3500 3600 Europe Supply Potential 13906 13630 13230 13081 Consumption 12170 11075 10950 10875 Oceania Supply Potential 394 394 394 394 Consumption 547 615 620 630 Former Soviet Union SupplyPotential 14310 13011 12855 12650 Consumption 7502 5900 5900 6000 Asia Supply Potential 29967 30402 31707 33298 Consumption 37865 38200 38600 39400 Of which China Production 15100 15680 15290 16710 Consumption 18610 19100 20110 20810 World Supply Potential 76960 76081 76964 78182 Consumption 75198 72704 73370 74355 Source: The World Bank/FAO/UNIDO/Industry Fertilizer/Working Group - World Bank Technical Paper No. 206. 35 Annex l1 (continued) Phosphatic Fertilizers (000 Tons P2 05) 1991/92 1992/93 1993/94 1994/95 Africa Supply Potential 4911 4960 4968 4987 Consumption 1028 1050 1100 1150 North America Supply Potential 9827 10022 10013 10068 Consumption 4366 4350 4400 4400 Central & South America Supply Potential 1880 1820 1797 1776 Consumption 2270 2360 2430 2500 Europe Supply Potential 5260 4387 3992 4020 Consumption 4864 4405 4310 4240 Oceania Supply Potential 655 655 655 655 Consumption 873 900 950 970 Former Soviet Union Supply Potential 5999 6004 5999 5999 Consumption 6957 5100 4500 4600 Asia Supply Potential 8126 8256 8450 8730 Consumption 15094 14000 14380 14780 Of which China Production 4600 4550 4170 4970 Consumption 6350 6700 7510 8000 World Supply Potential 36658 36104 35850 36235 Consumption 35472 32165 32070 32640 Source: The World Bank/FAO/UNIDO/Industry Fertilizer/Working Group - World Bank Technical Paper No. 206. 36 Annex l1 (continued) Potash Fertilizers (000 Tons K20) 1991/92 1992/93 1993/94 1994/95 Africa Supply Potential 0 0 0 0 Consumption 499 505 520 540 North America Supply Potential 11046 11041 10966 11018 Consumption 4920 4800 4900 5000 Central & South America Supply Potential 134 139 142 227 Consumption 1787 1870 1920 2000 Europe Supply Potential 7072 6308 6198 6198 Consuiption 5279 4850 4750 4750 Oceania Supply Potential 0 0 0 0 Consumption 270 290 290 300 Former Soviet Union Supply Potential 7430 6857 7054 7225 Consumption 5033 3000 2800 3100 Asia Supply Potential 2132 2156 2170 2239 Consumption 5751 5155 5310 5620 Of which China Production 90 110 120 190 Consumption 2400 2100 2200 2300 World Supply Potential 27814 26500 26530 26907 Consumption 23539 20470 20490 21310 Source: The World Bank/FAO/UNIDO/Industry Fertilizer/Working Group - World Bank Technical Paper No. 206. 37 Annex III China's Production & Consumption of All Fertilizers (Million Tons) Year Production Consumption Relative Self Sufficiency percent 1980 12.32 12.69 97.0 1987 16.72 20.00 83.6 1988 17.40 21.42 81.2 1989 18.03 23.57 76.5 1990 18.80 25.90 72.6 1991 19.80 28.05 70.6 1992 20.38 29.30 69.6 1993 19.57 31.52 62.1 1994 21.87 33.17 65.9 Source: Ministry of Chemical Industries. 38 Annex IV Key Indicators of Project Implementation Key Implementation Indicators Estimated Actual 1. Plant Rationalization Components - Completion of four Urea Plants: LCFC Oct. 1990 Dec. 1991 XCFC Oct. 1990 Oct. 1991 YCFC Oct. 1990 Dec. 1991 BCEC Oct. 1990 Dec. 1991 - Commissioning of four Urea Plants: LCFC Dec. 1990 Jan. 1992 XCFC Dec. 1990 Dec. 1991 YCFC Dec. 1990 Jan. 1992 BCEC Dec. 1990 Jan. 1992 - Commercial Operations of four Urea Plants: LCFC Jan. 1991 Dec. 1992 XCFC Jan. 1991 Feb.. 1992 YCFC Jan. 1991 Jan.. 1992 BCEC Jan. 1991 Sept.. 1992 2. Phosphate Fertilizer Development Component (DAP/NPK): Completion of DAP/NPK Plant Sept. 1991 Dec. 1991 Commissioning of Plant Dec. 1991 Dec. 1992 Commercial Operations Jan. 1992 Dec. 1993 3. Institutional Development Component: Completion of Management Study June 1989 Feb. 1991 Overseas Training: Start Oct. 1987 Aug. 1988 Completion May 1990 May 1990 Domestic Training: Start Oct. 1987 Aug. 1988 Completion July 1990 July 1990 Computer Purchase: Delivery May 1988 Mar. 1989 Installed June 1988 Mar. 1990 39 Annex V Project Results Indicators Enterprises Guaranteed Value Actual (Test) Four Urea Plants a. Output Capacity YCFC 400 tpd urea 415.04 tpd urea LCFC 400 tpd urea 431.52 tpd urea XCFC 400 tpd urea 425.75 tpd urea BCEC 400 tpd urea 409.00 tpd urea Consumption of: b. Ammonia YCFC 568 kg/ton urea 614 kg/ton urea LCFC 568 kg/ton urea 572.9 kg/ton urea XCFC 568 kg/ton urea 573 kg/ton urea BCEC 568 kg/ton urea 579 kg/ton urea c. CO2 YCFC 735 kg/ton urea 715 kg/ton urea LCFC 735 kg/ton urea 715.3 kg/ton urea XCFC 735 kg/ton urea 733.35 kg/ton urea BCEC 735 kg/ton urea 809.5 kg/ton urea d. Steam YCFC 685 kg/ton urea 788.7 kg/ton urea LCFC 685 kg/ton urea 775.1 kg/ton urea XCFC 685 kg/ton urea 689.6 kg/ton urea BCEC 685 kg/ton urea 717.3 kg/ton urea e. Power YCFC 113 kwh/ton urea 142 kwh/ton urea LCFC 113 kwh/ton urea 136.2 kwh/ton urea XCFC 113 kwh/ton urea 122 kwh/ton urea BCEC 113 kwh/ton urea 129.3 kwh/ton urea f. Water YCFC 93 t/ton urea 87.92 t/ton urea LCFC 93 t/ton urea 86.7 t/ton urea XCFC 93 t/ton urea 61 t/ton urea BCEC 93 t/ton urea N/A Percentage of: g. Nitrogen YCFC 46.4% 46.6% LCFC 46.4% 46.25% XCFC 46.4% 46.6% BCEC 46.4% 46.4% h. Biuret YCFC 0.9% 0.84% LCFC 0.9% 0.98% XCFC 0.9% 0.88% BCEC 0.9% 0.93% i. Water YCFC 0.25% 0.43% LCFC 0.25% 0.35% XCFC 0.25% 0.49% BCEC 0.25% 0.49% j. Urea Size YCFC 95% 98.32% LCFC 95% 98.1% XCFC 95% 98.5% BCEC 95% 97.1% 40 Annex VI Project Costs Estimated Costs Actual Costs (in millions) Local Foreign Total Percent Local Foreign Total Percent (Yuan) (US$) Yuan of BCEb (Yuan) (US$) Yuan of BCEb Equiv.' Equiv.* Phosphate Development 51.5 36.4 186.1 37.4% 262.6 40.9 610.2 39.6% Component Nitrogenous Fert. Rat. 139.6 46.5 311.8 62.6% 472.8 53.9 931.0 60.4% Component Base Cost 191.1 82.9 497.9 00.0% 735.4 94.8 1,541.2 100.0% Physical Contingencies 19.1 8.3 49.8 10.0% 14.5 1.5 27.3 1.8% Price 48.7 4.9 129.1 25.9% 35.5 0.0 35.5 2.3% Contingencies Installed Cost 258.9 96.1 676.8 785.4 96.3 1,604.0 Working Capital 51.1 - 51.1 29.9 0.0 29.9 Interest During Construction 16.1 12.7 70.7 127.3 8.4 198.7 Sub-Total 326.1 108.8 798.6 942.6 104.7 1,832.6 Inst. Development Component 0.4 1.3 5.2 0.55 1.06 9.6 Total Project Costs 326.5 110.1 803.8 943.3 105.8 1,842.2 ' Exchange rate: Yuan 4.30 : US$1.00 at appraisal; Yuan 8.50 : US$1.00 actuals at closing date. b BCE = Base Cost Estimate. 41 Annex VII Project Financing Estimate Actual Local Foreign Total % of Local Foreign Total % of (Yuan) (USS) Yuan Total (Yuan) (USS) Yuan Total Equiv., Equiv.' A. Phosphate Fertilizer Development YYCFC: IBRD Loan 42.3 185.5 57.4 42.3 359.6 47.3 Domestic Loans 81.7 81.7 25.2 368.5 368.5 48.5 Internal Funds 28.0 6.9 56.4 17.4 31.3 31.3 4.5 Sub-Total 109.7 49.2 323.6 100.0 399.8 42.3 759.4 100.0 B. Nitrogenous Fertilizer Ration'l & Expansion YCFC: fBRD Loan 13.8 59.2 46.5 13.8 117.3 52.9 Domestic Loans 43.9 43.9 34.5 114.3 114.3 36.2 Internal Funds 17.6 1.4 24.3 19.0 24.2 3.0 49.7 10.9 Sub-Total 61.5 15.2 127.4 100.0 138.5 16.8 281.3 100.0 LCFC: IBRD Loan 14.0 60.6 45.6 14.4 122.4 38.8 Domestic Loans 56.6 56.6 42.6 111.8 111.8 41.3 Internal Funds 8.9 1.5 15.8 11.8 42.4 3.7 73.8 19.9 Sub-Total 65.5 15.5 133.0 100.0 154.2 18.1 308.0 100.0 XCFC: IBRD Loan 13.4 58.0 50.1 13.4 113.9 44.4 Domestic Loans 28.4 28.4 24.5 100.3 100.3 39.1 Internal Funds 22.8 1.5 29.4 25.4 42.4 42.4 16.5 Sub-Total 51.2 14.9 115.8 100.0 142.7 13.4 256.6 100.0 BCEC: JBRD Loan 12.6 54.6 55.3 12.7 107.5 47.3 Domestic Loans 28.4 28.4 28.8 78.6 78.6 34.7 Internal Funds 9.7 1.4 15.7 15.9 28.9 1.4 40.8 18.0 Sub-Total 38.1 14.0 98.7 100.0 107.5 14.1 226.9 100.0 C. Institutional Development IBRD Loan (enterpr.) 0.45 1.7 32.7 0.45 3.8 39.8 IBRD Loan (MCI/BICEM) 0.85 3.1 59.6 0.61 5.2 54.5 Budget Allocation 0.4 0.4 7.7 0.55 0.55 5.7 Sub-Total 0.4 1.3 5.2 100.0 0.55 1.06 9.55 100.0 D. Total Project Financing IBRD Loan 97.4 422.7 52.6 97.05 825.2 44.8 Domestic Loans 239.0 239.0 29.7 773.5 773.5 42.0 Internal Funds 87.1 12.7 141.7 17.6 169.2 8.7 242.9 13.1 Gov't Contribution 0.4 0.4 0.1 0.55 0.55 0.1 Total 326.5 110.1 803.8 100.0 943.3 105.8 1,842.2 100.0 Exchange Rates: Yuan 4.30 : US$1.00 at appraisal Yuan 8.50 : US$1.00 actuals at closing date. 42 Annex VIII Xuanhua Chemical Fertilizer Company (XCFC) A Profile General 23. The Urea Plant was completed towards the end of 1991 and was formally commissioned on November 25, 1991. Urea was produced on December 2, 1991 and, thereafter, the plant was placed on trial production. The plant underwent performance test on June 25, 1992 in the presence of representatives from the licensing company (Snamprogetti)', the Ministry of Chemical Industries and the other three entities involved in constructing urea plants. During this test (72 hours) the following results were obtained: Average Production 425.75 tons per day Average Capacity Utilization 106.6 % Product Quality At Performance Test Guaranteed Value Actual Total Nitrogen % >46.4 46.6 Biuret % 90.9 0.88 Moisture % 0.25 0.49 Size 1-2.5 mm % ;95 98.5 Input Consumption Indicators At Performance Test Unit Guaranteed Value Actual Liquid Ammonia Ton/Ton 0.568 0.573 Steam Ton/Ton 0.685 0.689 Power Kwh/Ton 113 122 CO2 Ton/Ton 0.735 0.733 Recovery of Steam Condensate M ' fron >0.3 0.23 These results indicate that the plant, at the time of performance test, was operating at very close to the guaranteed performance indicators. 1 Because the guarantee period had already expired for all four plants on account of the delay in implementation, Snamprogetti agreed to conduct only one performance test at Xuanhua in the presence of representatives from other plants. Performance tests at other plants were carried out by the respective technical staff without the presence of Snamprogetti representatives. 43 Annex VIII (continued) Production Performance 24. This Urea plant has performed better than all the other in the project reaching 95 percent capacity utilization during the first tern months of 1995. Since the start of commercial production in 1992, it has achieved a record daily yield of 458.7 tons (compared with a design capacity of 400 tons per day), and a record average monthly production of 1235 tons (411.7 tons per day). Production History ABC Urea Capacity Utilization Production Tons Tons % Hours 1991 253569 - - - 1992 - 97437 74 7481 1993 5847 112156 85 7372 1994 6909 116067 88 7480 1995 (First ten months) 6660 104790 95 6680 The plant is handicapped by the production capability of its ammonia synthesis unit which is 28 years old, utilizing an outdated and inefficient technology. The output of this plant also substantially met the quality standards as specified by the Chinese National Standards and Snamprogetti as follows: Product Quality Snamprogetti Chinese 1992 1993 1994 1995 First Guaranteed Standard Ten Months Value % % % Nitrogen 46.4 46.0 46.59 46.60 46.60 46.59 Biuret 50.9 1.5 1.02 0.90 0.90 0.94 Moisture 0.25 51.0 0.50 0.43 0.40 0.48 Size 1-2.5mm Dia. 295 290 95.40 98.20 97.90 97.70 44 Annex VIII (continued) Technical Indicators 25. The following table shows some of the basic technical indicators of the Ammonia and Urea plants at XCFC: Basic Technical Indicators UNIT 1991 1992 1993 1994 1995 First Ten Months Ammonia Coal (Standard Coal)* Ton/Ton 1.289 1.292 1.474 1.462 1.434 Steam Ton/Ton 2.045 2.496 3.021 3. 18 2.876 Power Kwh/Ton 1206 1500 1559 1523 1510 Soft Water M 3 /Ton 12.2 8.3 4.7 3.6 2.6 Urea Snamprogetti Guarantee Ammonia Ton/Ton .568 .682 0.650 0.63 0.620 Steam Ton/Ton .685 .807 0.817 0.768 0.780 Power Kwh/Ton 113 167 170 164 167 Soft Water M3 /Ton 0.50 0.75 0.62 0.57 *Coal consumption normalized with Coal having a heat content of 7 million kilocalories/ton. As can be readily observed, not only has the energy consumption per ton of produced ammonia substantially increased between 1991 and the later years (from around 12 million kilocalories in 1991 to 14 million kilocalories/ton of ammonia in 1995), but the consumption of various inputs in the production of urea has also surpassed the design values (and those obtained during the performance test) by a wide margin. Although the plant's efficiency has increased over time, it still consumes 9 percent more ammonia, 14 percent more steam and 48 percent more electrical energy than the guaranteed figures for the production of urea. 45 Annex VIII (continued) Price of Major Raw Materials 26. The gradual price liberalization of the energy products and the high rate of inflation have resulted in sharp increases in the price of inputs to the fertilizer industry in recent years. Trend In Raw Material and Other Input Prices 1991 1992 1993 1994 1995 Standard Coal Y/ton 240 284 280 347.0 373 Steam Y/ton 22.3 27.7 33.5 35.9 37.9 Power Y/KwH 0.147 0.179 0.211 0.17 0.178 Soft Water WM 3 1.05 3.7 5.2 5.3 6.0 Cost Structure 27. The cost of producing ammonia and urea in the Xuanhua plant is given in the following table: Total Production Costs WTon 1991 1992 1993 1994 1995 First Ten Months Ammonia 674 950 1155 1189 1239 Urea 877 913 1207 1390 The rapid increase in the production cost of ammonia can be traced back to two factors: firstly, the increase in the nominal cost of major inputs; and, secondly, the deterioration in the technical efficiency of the plant. The rising cost of ammonia and the incidence of full depreciation and increasing financial charges in 1994 and 1995 account for the steep increase of the unit cost of urea, though this trend has been somewhat tempered by marginal increase in technical efficiency and capacity utilization. 46 Annex VIII (continued) Sales Prices 28. The following table shows the average realized price of urea sales during the last four years. For comparison purposes the FOB international prices of urea and the imputed CIF prices in Yuan have also been indicated. Average Realized Average FOB Average imputed Price yuan/Ton International Prices CIF Prices yuan/Ton $/Ton 1992 944 140 937 1993 929 107 789 1994 1095 148 1534 1995 First Ten Months 1500 207 1967 29. Throughout the period from the beginning of 1992 when the plant went into commercial production, price control by the Government has remained in force. During 1992 and 1993 the fixed Government prices per ton of urea remained at Y 1000. Because of the low imported prices, the company's realized price never reached the Government's fixed ceiling price. Prices remained at this level until May 1994 at which time, because of the turn around in international prices (starting in October 1993) and devaluation of the exchange rate, they were increased to Y 1230 per ton. A second increase came at the beginning of October 1994 when Government ceiling price for sales to the Government was put at Y 1425 per ton and ceiling price for the market was set at Y 1680 per ton. (These administered prices included a tax of 13 percent). Moreover, following the Government's anti-inflation policy, the practice of lifting the major part of the plant's production at fixed prices was resumed. History of Controlled Prices Y/Ton 1992 1993 1994 1995 Average Price Ceilings - Sales to Govt. 1000 1000 1202 1425 Average Price Ceilings - Sales to Market 1000 1000 1266 1680 Actual Average 944 929 1095 1500 Ceiling Price for Sales to the Government in 1994: January-April 100 May-September 1230 October-December 1425 47 Annex VIII (continued) Financial Performance 30. The income statements of the last few years indicate that the financial situation at this company has progressively deteriorated in recent years. By the time urea production started in 1992, increasing variable and fixed costs (depreciation and financial charges) coupled with low market prices for urea resulted in weak financial performance. During the last two years, however, losses have been declining as prices have been allowed to increase and the plant has operated at near full capacity. XCFC Income Statement 1990 1991 1992 1993 1994 1995 First 9 Months Revenue Sales 81120 75194 54254 122510 134430 144340 Product Tax 4750 4120 3023 557 924 990 Net Sales 76370 71074 51231 121953 133506 143450 Costs Variable Costs 50800 52295 32271 85670 81596 87610 Depreciation 3210 3443 6005 10770 13377 14370 Other Fixed Costs 11430 5942 8901 28557 26837 28810 Administrative Expenses 7000 9394 3050 13770 25551 30550 Cost of goods sold 72440 69639 50233 138767 147361 161340 Operating Revenues 3930 1435 1003 (16814) (13855) (17000) Non-Operation Income - 15 11 82 4874 13190 Non-Operation Expenses 1030 1290 835 1570 956 1160 Profit 2900 160 178 (18302) (9937) (4970) Taxes 2000 2240 - - - - Net Profit 900 (2080) 178 (18302) (9937) (4970) 31. These financial results and the existence of no reserves in the company's accounts have seriously affected its financial management. As of the end of October 1995, the company was only current with the interest payment on the locally borrowed funds. But it was in default on the payment of principal and interest on all its other loans for a total of approximately Y90 million. 48 Annex VIII (continued) Workforce and Human Resource Development 32. The total workforce at this plant has increased in the recent years 1991 1992 1993 1994 1995 End of October No. of Persons 2594 2726 2850 2882 2964 As of the end of October 1995, the educational profile of the company's workforce was as follows: Educational level Number of Persons College and University 215 Technical College Graduates 326 Senior High School Graduates 517 Technical Schools (2-3 years) 638 Junior High Schools 1082 Others (literate) 186 Total 2964 33. The company has pursued an intensive training program beginning in the period before the commissioning of the urea plant and continuing as a part of its continuous efforts to upgrade the skills of its workforce. Such trainings were carried out overseas, in China at other fertilizer plants and on the job. During 1995, for example, the company's training program consists of theoretical and practical courses in various disciplines attended by some 1880 persons as shown below: Training Program for Staff and Workers in Hebei Xuanhua Chemical Fertilizer Company in 1995 No. Item Training Content Training Number of Organizer Object Persons 1 Job training for Related teaching Management 100 Education section under management people material people Chemical Bureau, Zhangnakou City 2 Quality control Specified teaching All the staff 400 Enterprise Management material and workers Section 3 Job training for plant Self-edited Operators 400 Every Workshop operators teaching material 4 Job training for Self-edited Maintainers 300 Mechanical & Power maintenance workers teaching material Section 5 Safety education Self-choiced All the staff 300 Safety & Environmental teaching material and workers Protection Section 6 Fire control education Self-choiced All the staff 300 Public Safety Section teaching material and workers 7 Job training for Self-choiced electricians 40 Electrical Power electricians teaching material Workshop 8 Job training for Self-choiced Instrument 40 Measuring Section instrument workers teaching material workers 49 Annex VIII (continued) Environmental Protection 34. The company's environmental protection activities are directed by an Environment Division which is also in charge of air quality and effluent water discharge quality measurements. Although periodic measurements are made and recorded, there is room for improvement in the treatment of effluents before they are discharged to the exterior of the plant. Because of the existence of a highly polluting iron and steel plant neighbouring the fertilizer plant site, the air quality is seriously effected by the exhaust fumes and other pollutants from the blast furnaces and converter shops. The effluent water quality is given in the following table. Effluent Water Quality 1992 1993 1994 1995 First Ten Months COD AMMONIA CN COD AMONIA CN COD AMMONIA CN COD AMMONIA CN NH3 NH, NH3 NH3 CHINESE 100 80 0.5 100 80 0.5 100 80 0.5 100 80 0.5 STANDARD mg/lit ACTUAL mg/lit 109 132 1.05 118 35 1.05 89 29 0.56 74 35 0.35 TOTAL 633 768 6.1 614 183 5.5 455 149 2.9 240 113 1.1 QUANTITY OF POLLUTANTS DISCHARGED Tons/Year 50 Annex VIII (continued) ERR Reestimation Based on Assumption Made in Annex XV Investment Incremental Incremental Incremental Revenue Cost Benefit 1988 6.8 - - (6.8) 1989 7.0 - - (7.0) 1990 71.1 - - (71.1) 1991 137.7 - - (137.7) 1992 84.8 (28.3) (31.4) (81.7) 1993 35 57.1 71.5 (49.4) 1994 113.6 54.2 59.4 1995 162.6 82.2 80.4 1996 154.4 82.3 72.1 1997 135.0 82.2 52.8 1998 128.8 82.2 46.6 1999 123.6 82.2 40.4 2000 116.4 82.2 34.2 2001 115.0 82.2 32.8 1002 113.7 82.2 31.5 2003 112.4 82.2 30.2 2004 111.1 82.2 28.9 2005 109.8 82.2 27.6 2006 109.8 82.2 27.6 2007 109.8 82.2 27.6 ERR=7.2 percent 51 Annex IX Luoyang Chemical Fertilizer Company (LCFC) A Profile General I. In this company the project consisted of constructing a urea plant with a capacity of 132,000 tons per year, thereby phasing out the production of ammonium bicarbonate-a low analysis nitrogenous fertilizer with a nitrogen content of around 17 percent. The urea plant was physically completed in December 1991 and later commissioned in January 1992. During performance test (which was carried out in the absence of Snamprogetti representatives) the following results were obtained: Average Production 431.5 Tons/Day Average Capacity Utilization 108% Product Quality Guaranteed Value Actual Total Nitrogen 5 46.4 46.25 Biuret % 0.9 0.98 Moisture % 50.25 0.35 Size 1-2.5 mm % -95 98 Input Consumption Indicators Unit Guaranteed Value Actual Liquid Ammonia Ton/Ton 0.568 0.573 Steam Ton/Ton 0.685 0.775 Power Kwh/Ton 113 136 CO2 Tonfron 0.735 0.715 The above figures indicate that during the performance test, the plant operated reasonably well and close to the guaranteed technical indicators. 52 Annex IX (continued) Production Performance 2. The production performance of this plant is shown in the following table. Production Performance Urea Production Capacity Utilization Production Hours Tons % 1992 64628 49 4952 1993 51569 42 4223 1994 106881 81 7000 1995 (First Ten Months) 88690 82 5815 For three months during 1993, the production was suspended as the plant experienced power interruption and a slow market. The production picked up in 1994 to around 81 percent of capacity. During the first ten months of 1995, capacity utilization reached 82 percent. A serious constraint in this plant is the availability of ammonia in sufficient quantities for full capacity utilization of the urea plant. This problem is compounded by the inability of the plant to operate at the designed efficiency. The ammonia plant is currently undergoing some modifications aimed at increasing of its output. Urea Quality Snamprogetti National 1992 1993 1994 1995 Guaranteed Chinese Value Standard N % 46.4 46.0 46.27 46.35 46.57 46.59 Biuret 0.9 1.5 1.07 1.04 0.97 0.97 H20 % 50.25 51.0 0.45 0.45 0.50 0.43 Size 1-2.5 mm% 95 >90 95.05 95.35 95.60 96.15 53 Annex IX (continued) Technical Indicators 3. The following table shows some of the basic technical indicators of the urea plant: Technical Indicators for Urea Plant Snamprogetti 1992 1993 1994 1995 Guarantee Ammonia Consumption Ton/Ton .568 0.771 0.687 0.639 0.610 Steam Consumption Ton/Ton .685 1.494 1.043 0.948 0.922 Power Consumption Kwh/Ton 113 261 279 217 216 As experienced in the other urea plants, the consumption of various inputs for the production of urea have all been substantially above the design figures. During its most efficient performance period (1995) the plant has used 7.4 percent more ammonia, 91 percent more power and 34 percent more steam for the production of one ton of urea. Price of Major Raw Materials 4. The gradual price liberalization of the energy products and the high rate of inflation have resulted in sharp increases in the price of inputs to the fertilizer industry as shown below: 1991 1992 1993 1994 1995 Anthracite /Ton 123 132 212 210 260 Steam YfTon 27.95 23.88 28.76 28.35 33.65 Power YY/Kwh 0.127 0.174 0.237 0.209 0.25 Soft Water W/M' 0.55 0.55 0.55 0.91 1.01 Cost Structure 5. The cost of producing ammonia and urea at the Luoyang Fertilizer plant is given in the following table: ton 1992 1993 1994 1995 First Ten Months Ammonia 933 1369 1284 1610 Urea 979 1178 1210 1560 The above cost increases reflect the rise in raw material prices, the shifting technical indicators and the incidence of high depreciation and financial charges. 54 Annex IX (continued) Sales Price 6. The following table shows the history of controlled prices including the price ceilings for sales to the Government and the market. It should be noted that since market prices for urea were below government controlled ceiling prices during 1992 and 1993, total sales from the plant were effectively to the market. History of Controlled Prices Y/ton 1992 1993 1994 1995 Price Ceiling - Sales to Govt. 1000 1000 1060 1308 Price Ceiling - Sales to Market 1000 1000 1110 1538 Average Realized Price 966 940 1026 1420 Ceiling price for sales to Government: January-April 1995 = V 1240/Ton Ceiling price for sales to Government: May on, 1995 = V 1520rron Ceiling price for sales to Market: January-April 1995 = V1350/Ton Ceiling price for sales to Market: May on, 1995 = V 1550/Ton Financial Performance 7. The income statement of the company for the last five years is shown in the following table. Following the start of urea production in 1992, the company faced difficult production and sales conditions in 1993 resulting from power cuts and weakness in the market. The financial performance of the company was also particularly affected by the steep rise in anthracite prices (60 percent), just as financial charges and depreciation costs were on the rise. With the increase in production and prices in the last two years, the company's losses have progressively diminished and the final 1995 accounts are expected to show a small profit. 55 Annex IX (continued) Luoyang - Income Statement 1000 Y 1990 1991 1992 1993 1994 1995 First Ten Months Revenue Sales 55331 51704 48350 76313 110687 139170 ProductTax 2919 959 1499 1311 6 32 Net Sales 52412 50745 46851 75002 110681 139138 Costs Variable Costs 28729 34267 33995 71009 73400 80711 Depreciation 3411 3298 3125 4170 19661 22738 Other Fixed Costs 3566 9364 11104 20024 30227 30652 Administration Expenses 3298 2909 3667 6891 7025 5234 CostofGoods Sold 49004 49838 51891 102094 130313 139335 Operating Revenue 3408 907 (5040) (27092) (19632) (197) Non-Operation Income 54 54 146 156 41 Non-Operation Expenses 446 1561 1320 1167 2052 Profit 3016 (600) (6214) (28103) (21643) (1065) Taxes 587 Net Profit 2429 (600) (6214) (28103) (21643) (1065) The financial situation of the company has provided it with little cash to meet its obligations to the lenders. As a result the company has accumulated arrears of nearly Y95 million in unpaid principal and interest. Workforce and Human Resource Development 8. The company's workforce stands at 2970 persons in the following categories: Management 297 persons Production Operators 928 Maintenance and Machine Shop 1047 Others 698 56 Annex IX (continued) Out of this total, more than 15 percent are university and technical school graduates. Since 1988, a total of 1120 employees have received training abroad, on-the-job and at other chemical fertilizer factories in China. 9. The urea plant has a direct workforce of around 120 persons. The company operates an incentive scheme for this plant whereby the group gets a bonus if the technical performance of the plant is above a specified monthly standard and the cost are consequently reduced. At the time of the mission, the monthly production target was set at 10500 tons of urea (87 percent capacity utilization). The plant was also aiming at reducing the ammonia consumption per ton of produced urea to 610 kilograms. Environmental Protection 10. The company has an environmental division monitoring regularly pollution levels for noise, air and effluent discharge. The air quality is measured by mobile equipment, three times a month, at several locations as given in the following table. Air Quality Ammonia NOX SO2 Total CO NH3 Suspended Particles (TSP) Standard mg/M' 0.2 0.15 0.5 1.0 10 Housing Area (1) 1992 0.057 0.028 0.041 0.158 NIL 1993 0.062 0.046 0.038 0.210 NIL 1994 0.083 0.057 0.042 0.330 NIL Housing Area (2) 1992 0.089 0.054 0.038 0.712 NIL 1993 0.078 0.112 0.031 0.689 NIL 1994 0.084 0.108 0.039 0.57 NIL Head Office 1992 0.098 0.038 0.112 0.271 NIL 1993 0.094 0.042 0.117 0.265 NIL 1994 0.098 0.057 0.119 0.336 NIL Ammonia Unit 1992 0.198 0.118 0.35 0.798 NIL 1993 0.212 0.131 0.42 0.854 NIL 1994 0.220 0.139 0.46 0.889 NIL Urea Unit 1992 0.235 0.48 1993 0.225 0.64 1994 0.218 0.79 57 Annex IX (continued) The effluent water discharge is monitored three times a month. The effluent water enters an irrigation channel which is ultimately discharged into the Luo river. Effluent Water Quality PH Ammonia Cyanide Suspended COD Sulphides 6-9 NH3 - Solid CN Standard mg/lit 80 0.5 100 200 100 Urea Section 1992 8.5 63 1993 8.0 56 1994 8.5 70 Plant 1992 7.6 36 0.51 67 105 0.84 1993 7.5 54 0.57 73 71 0.8 1994 7.8 44 0.51 59 67 0.96 The company also monitors noise levels at various locations in the plant. These measurements that are made four times a year indicate that the noise level remains well below the required standards. Noise Level dB Standard 1992 1993 1994 Housing Area (1) 65 51 49 48 Housing Area (2) 65 49 47 50 Head Office 65 55 56 54 Ammonia Unit 85 67 71 69 Urea Unit 85 64 62 60 58 Annex IX (continued) ERR Reestimation Based on assumptions made in Annex XV. Investment Incremental Incremental Incremental Revenue Cost Benefit 1988 5.1 - - (5.1) 1989 5.6 - - (5.6) 1990 48.0 - - (48.0) 1991 187.1 - - (187.1) 1992 124.0 (6.7) 1.0 (131.7) 1993 38.7 25.9 59.2 (72.0) 1994 126.7 60.8 65.9 1995 153.1 85.3 67.8 1996 153.6 88.7 64.9 1997 143.5 92.2 51.3 1998 149.0 98.4 50.6 1999 153.2 104.2 49.0 2000 147.0 104.2 42.8 2001 145.6 104.2 41.4 2002 144.3 104.2 40.1 2003 143.0 104.2 38.8 2004 141.7 104.2 37.5 2005 140.4 104.2 36.2 2006 140.4 104.2 36.2 2007 140.4 104.2 36.2 ERR= 5.0 percent. 59 Annex X Yuangping Chemical Fertilizer Company (YCFC) A Profile General 1. This plant was also converted from producing ammonium bicarbonate to urea by constructing a urea plant with a capacity of 132,000 tons per year. The urea plant was physically completed in December 1991 and commissioned in January 1992. During performance test (which was carried out with no representatives from Snamprogetti attending) the following results were obtained: Average production 415 tons/Day Average capacity utilization 104% Product Quality Guaranteed Value Actual Total Nitrogen % 46.4 46.6 Biuret % 0.9 0.84 Moisture % 0.25 0.43 Size 1-2.5 mm % 95 98.3 Input Consumption Indicators Unit Guarantee Value Actual Liquid Ammonia Ton/Ton 0.568 0.614 Steam Ton/Ton 0.685 0.789 Power Kwh/Ton 113 142 CO2 Ton/Ton 0.735 0.715 The above data indicate that during the performance test the quality of the produced urea was close to the guaranteed technical standards, but the technical output/input efficiency of the plant was somewhat below the guaranteed values. 60 Annex X (continued) Production Performance 2. The production performance of this plant is shown in the following table: Yuangping Production Performance Urea Production Capacity Utilization Tons % 1992 30939 23 1993 87254 66 1994 110050 84 1995 (First Ten Months) 103645 94 Due to technical problems with some parts of the plant (for example, the stripper in the urea plant), the company could not produce much in 1992. The CO2 compressor continues to remain problematic because of overheating. Despite these problems, the plant has managed to approach full capacity utilization. At 94 percent this plant has one of the highest capacity utilization record among all the four companies. Urea Quality Snamprogetti National 1992 1993 1994 1995 Guarantee Chinese Standards Nitrogen % 46.4 46.0 46.5 46.6 46.6 46.4 Biuret % 0.9 1.5 1.5 1.06 0.91 0.97 Moisture % 0.25 0.5 0.39 0.46 0.46 0.52 Size 1-2.5 mm % 95 90 93 96.2 98 98.5 61 Annex X (continued) Technical Indicators 3. The following table shows some of the basic technical indicators of the ammonia and urea plants. Technical Indicators Urea Unit Snamprogetti 1992 1993 1994 1995 Guarantee Ammonia Consumption Ton/Ton 0.568 0.893 0.650 0.617 0.596 Steam Ton/Ton 0.685 1.664 1.034 0.772 0.713 Power Kwh/Ton 113 345 214 179 144 Total Coal Ton/Ton 2.06 1.65 1.50 1.32 As experienced in the other urea plants, the consumption of various inputs for the production of urea have all been substantially above the design figures. During its most efficient performance period (1995) the plant has used 5 percent more ammonia, 27 percent more power and 4 percent more steam as compared with the design parameters for the production of one ton of urea. In this plant the actual results in 1995 are better than those obtained during the performance test in 1992. Price of major raw materials 4. The price of raw materials and other inputs, especially anthracite and electricity has risen sharply over the last five years, though in real terms the increase has been much more attenuated as shown in the following table: 1991 1992 1993 1994 1995 Anthracite Y/Ton 159 162 181 246 322 Power Y/Kwh 0.065 0.089 0.155 0.18 0.18 The above price increases have been due to the gradual price liberalization of energy products and a high rate of inflation in recent years. 62 Annex X (continued) Cost Structure 5. The cost of producing ammonia and urea at the Yuangping fertilizer plant is given in the following table: Y/ton 1992 1993 1994 1995 Ammonia 987 1285 1460 Urea 774 890 1182 1275 The above cost increases reflect the rise in raw material prices, the shifting technical indicators and the incidence of high depreciation and financial charges. Sales Prices 6. The following table shows the history of controlled prices including the price ceilings for sales to the Government and the market. History of Controlled Prices Y/ton 1992 1993 1994 1995 Price Ceiling - Sales to Govt. 1000 1000 1050 1226 Price Ceiling - Sales to Market 1000 1000 1136* 1593* Average Realized Price 912 912 1124 1463 *In 1994 and 1995, the company was not facing any price ceiling for its sales to the market. The figures, therefore, reflect actual realized price for sales to the market. The state quota was put at 40 percent during 1995, based on a planned production of 100,000 tons. There was also a state quota in 1994. 63 Annex X (continued) Financial Performance 7. The income statement of the company for the last five years is shown in the following table: Yuangping Income Statement 1000 V 1991 1992 1993 1994 1995 First Ten Months Revenue Sales 57907 22529 96031 111285 134575 Product Tax - - 54 231 651 Net Sales 57907 22529 95977 111054 133924 Costs Variable Costs 36007 9223 78845 81314 100200 Depreciation 3771 3285 3754 10775 14500 Other Fixed Costs 9543 3527 2411 9278 9427 Administration Expenses 6462 6742 10747 10832 11435 Cost of Goods Sold 55783 22777 95757 112199 135562 Operating Revenue 2124 (248) 220 (1145) (1638) Non-Operating Income 343 248 1082 2890 5978 Non-Operating Expenses 1393 1445 1142 1258 1417 Profit 1074 (1445) 160 487 2923 Taxes 701 - - - Net Profit 373 (1445) 160 487 As noted earlier, the company faced serious equipment problems in 1992 and as a result it could not stabilize production which amounted to only around 31,000 tons (23 percent capacity utilization). In the succeeding years, the company's financial situation has not improved much despite the rapid increase in capacity utilization because raw material prices have risen steeply while the company has had to face high depreciation and financial charges. This situation has made it difficult for the plant to service its loans. The arrears are around V56 million at the end of 1995. 64 Annex X (continued) Workforce and Human Resource Development 8. The total workforce of the company has remained fairly stable in the last few years as shown in the following table along with their occupational categories: 1991 1992 1993 1994 Production Staff 990 1024 1041 1057 Assistants 615 617 616 647 Administrative Staff 453 448 471 484 Others 457 455 448 455 Total 2515 2544 2576 2643 The skill and educational profile of the workforce is as follows: Educational Profile 1991 1992 1993 1994 University and College Graduates 225 235 244 265 Technical Schools 221 237 247 291 Vocational Schools 145 187 232 275 High Schools 628 623 620 634 Junior Schools 1296 1262 1233 1178 Total 2515 2544 2576 2643 Since the commissioning of the urea plant in 1992, the company has trained 2288 persons: 1517 in technical areas and 771 persons in administrative subjects. The bulk of the training is carried out in house and on the job; some training has been carried out overseas and in other fertilizer complexes. 65 Annex X (continued) Environmental Protection 9. The company regularly monitors the air quality, noise level and the quality of the effluent discharge from the plant. For effluent water, measurements are made every three days at the urea plant. The plant effluent leaving the water treatment plant is tested every week. The average annual measurements were as follows: Quality of Effluent Water Discharge Chinese Urea Plant Boundary Limit Discharge from the Plant Standard 1992 1993 1994 1995 1992 1993 1994 1995 PH 6-9 9.2 9.0 8.9 8.9 9.1 8.9 8.8 8.8 Ammonia mg/lit 80 301.5 87.5 21.7 10.5 103.2 98.4 73.9 51.2 Urea mg/lit 50 35.5 18.4 7.9 6.3 NA NA NA NA Suspended Solid mg/lit 100 28.3 27.5 28.1 27.8 94.1 87.8 83.7 84.5 COD mg/lit 200 NA NA NA NA 185.3 128.7 115.8 120.3 The air quality is measured four times a year at four locations with mobile equipment. The atmospheric air quality measurements in 1994 were as follows: Air Quality Ammonia CO NOX Dust Flue Dust Standard mg/M 0.2 10 0.2 1.0 250 Office Building 0-0.4 0 0 0 - West Gate 0 0 0 0.75 - South East Area 0-0.3 3.2-8.5 0 0.4-2.3 - North West Area 0.1-3.1 2-3.4 0 0-0.4 - Boiler Chimney NA NA NA NA 241 The company measures the noise level at six locations in the plant four times a year. The results for 1995 were as follows: Noise Level dB Standard Actual Urea Plant 85 68-80 Compressor House 85 78-83 Gasifier 85 80-85 Synthesis Unit 85 78-79 Steam Boiler 85 76-79 Control Room 85 62 66 Annex X (continued) ERR Reestimation Based on assumption made in Annex XV. Investment Incremental Incremental Incremental Revenue Cost Benefit 1988 8.5 - - (8.5) 1989 32.2 - - (32.2) 1990 102.6 - - (102.6) 1991 127.0 - - (127.0) 1992 65.3 (48.0) (43.8) (69.2) 1993 41.2 42.6 44.3 (42.9) 1994 122.4 40.1 82.3 1995 180.2 69.5 78.7 1996 173.0 70.1 72.5 1997 155.4 70.5 84.9 1998 149.2 70.5 78.7 1999 143.0 70.5 72.5 2000 136.8 70.5 66.3 2001 135.5 70.5 65.0 2002 134.2 70.5 63.7 2003 132.9 70.5 62.4 2004 131.6 70.5 61.1 2005 130.2 70.5 59.7 2006 130.2 70.5 59.7 2007 130.2 70.5 59.7 ERR= 13.2 percent 67 Annex XI Beijing Chemical Engineering Experimental Company (BCEC) A Profile General 1. Historically this plant produced, in addition to ammonium bicarbonate (ABC), methanol and formaldehyde for various end uses as well as hydrogenated margarine. It has continued to produce these products even though the urea plant was completed towards the end of 1991 and placed in commercial production around December of that year. During the performance test carried out by the company itself and without the presence of representations from the licensing company (Snamprogetti), the following results were obtained. Average Productions 409 Tons/day Average Capacity Utilization 102% Product Quality Guaranteed Value Actual Total Nitrogen % 246.4 46.4 Biuret % 20.9 0.93 Moisture % 50.25 0.49 Size 1-2.5 mm % 295 97.1 Input Consumption Indicators Unit Guaranteed Value Actual Liquid Ammonia Ton/Ton 0.568 0.579 Steam TonfTon 0.685 0.717 Power Kwh/Ton 113 129 CO2 Tonfron 0.735 0.809 These results indicate that the plant performed very close to the relevant technical parameters. Production Performance 2. Since the synthesizers in this plant can produce ammonia or methanol, the production of urea has been affected by the economics of producing other products such as methanol and formaldehyde. Over the last four years, the prices of end-products have been such that the company found it more profitable to maintain its formaldehyde production at between 50 to 55 thousand tons. Now, it appears that with the new prices of urea, the balance is tipping over so that the production of urea might actually reach 80,000 tons again in 1995. 68 Annex XI (continued) Production of Urea and Other Products* Tons/Year Urea Capacity Methanol Formalde Margarine Utilization hyde 1991 1123 0.8% 45766 50373 2004 1992 73837 55.9% 41074 54197 2657 1993 82932 62.8% 42818 55408 3124 1994 73345 55.6% 45200 55570 3842 1995 (First Ten Months) 66163 60.1 % 33567 41848 5451 *Recent reports indicate that BCEC has been diverting more ammonia for urea production during the early part of 1996. Monthly urea production has reached to around 10,000 tons. The output of this plant has substantially met the Chinese National Quality Standards and Snamprogetti as follows: Urea Quality Snamprogetti National 1992 1993 1994 1995 First Ten Guarantee Chinese Months Standard Nitrogene % ;46.4 46.0 46.6 46.6 46.6 46.6 Biurret % 0.9 1.5 1.4 1.3 1.2 1.1 Moisture % :0.25 1.0 0.6 0.6 0.5 0.5 Size 1-25 mm % 295 ;90 95 95 96 96 Quality Level Achievement % 85 92 95 98 Since conducting a performance test in 1992, the plant has neither wholly run on the ammonialurea mode, nor has it been tested to ascertain its readiness for high levels of capacity utilization. 69 Annex XI (continued) Technical Indicators 3. The following table shows some of the basic technical indicators of the Ammonia and the Urea plants. Technical Indicators Unit 1990 1991 1992 1993 1994 1995 Jan-Oct. AMMONIA Gross Coke Consumption TonfTon 1.530 1.585 1.570 1.546 1.623 NA Net Coke Consumption Ton/Ton 1.308 1.344 1.336 1.305 1.368 NA Steam Consumption Ton/Ton 1.874 1.914 2.788 2.465 2.519 NA Power Consumption Kwh/Ton 1.316 1.341 1.468 1423 1510 NA UREA Snamprogetti Guarantee Ammonia Consumption Ton/Ton 0.568 .669 643 .649 .633 Steam Consumption Ton/Ton 0.685 1.167 1.044 1.090 1.050 Power Consumption Kwh/Ton 113 282 253 291 226 Water Consumption M3/Ton 0.941 1.733 1.842 1.593 As in the other plants, the energy consumption per ton of produced ammonia has deteriorated through the years (increasing from 12.4 million kilocalories in 1991 to 13.5 million kilocalories in 1994) while the consumption of various inputs for the production of urea have also been substantially above the design figures. During its most efficient performance period (1994), the plant has used 11 percent more ammonia, 100 percent more power and 53 percent more steam, as compared with the design parameters, for the production of a ton of urea. Price of Major Raw Materials 4. Since this company procures its coke from a sister company in Beijing, the price has remained fairly constant in the last few years, the price of other inputs, however, have risen in nominal terms, but have declined in real terms in the last three years. 1991 1992 1993 1994 1995 Coke Y/Ton 204 197 214 214 214 Power Y/Kwh 0.14 0.14 0.15 0.16 0.17 Water Y/ M 2.5 4.4 9.2 8.7 9.2 Steam Y/Ton 15 44.9 51.3 46.5 50.4 70 Annex XI (continued) Cost Structure 5. The cost structure of the Beijing Chemical Engineering Experimental Plant is given in the following table: Y/ton 1992 1993 1994 1995 First Ten Months Ammonia 1096 1110 1123 1285 Urea 898 1006 1104 1312 The declining technical efficiency in the production of ammonia combined with the incidence of large increases in the fixed costs (depreciation and financial charges) have resulted in a 46 percent increase in the cost of producing a ton of urea between 1992 and 1995. Sales Prices 6. The following table shows the history of controlled prices ceilings for sales to the Government and the market and the corresponding ratios of sales to the Government and to the market. It should be noted that since market prices for urea during 1992 and 1993 were below government controlled ceiling prices, total sales from the plant were effectively to the market. History of Controlled Prices (Urea) Y/Ton 1992 1993 1994 1995 Price % age Price % age Price % age Price % age of Sales of Sales of of Sales Sales Price Ceiling-Sales to Govt. 1000 0 1000 0 1234 10.5 1435 26.5 Price Ceiling-Sales to Market 1000 100 1000 100 1283 89.5 1490 73.5 Actual Average 965 100 956 100 1278 100 1451 100 Memo: Methanol (market price) 1390.4 1450.8 2113.9 2414.4 Formaldehyde (market price) 1030.7 1110.9 1370.1 1464.4 Ceiling Price for Sales to Government in 1995: January-March 1234 V/ton April-September 1469 Y/ton October on 1690 V/ton 71 Annex XI (continued) As shown above, the relatively faster increase in the market price of methanol and formaldehyde during 1993 and 1994 has buttressed the policy of the company to direct ammonia for the production of these products, thereby starving the urea plant. During 1995, as urea prices have strengthened, the plant appears to be leading towards a mix of production that might result in a 60- 62 percent capacity utilization of the urea plant. Given the shifting relative profitability of urea and formaldehyde production, the urea plant is not likely to reach full utilization until the constraints on the production of ammonia is removed, either by expansion of the plant or purchases from other plants. Financial Performance 7. The income statements of the company for the last five years is shown in the following table. With the commissioning of the urea plant, the sales of this company increased sharply in 1992. But because of the steep increases in variable costs as well as fixed costs such as depreciation and financial charges, the profit of the company has dwindled from 10.8 percent of sales in 1990 to 0.4 percent of sales in 1994. Since the price of the major energy inputs to the plant have not appreciably increased in recent years, these weak financial results are caused by the technical inefficiency of both the ammonia and urea plants. Income Statement 1990 1991 1992 1993 1994 Revenues Sales 109436 127160 192158 208694 247855 Product Tax 10574 11349 8173 5630 660 Net Sales 98862 115811 183985 203064 247195 Costs Variable Costs 52114 69961 131052 131996 154649 Depreciation 5288 6195 7773 13698 13993 Other Fixed Costs 20807 22267 24296 50748 68017 Administrative Expenses 7863 12158 17324 7140 11099 Cost of Goods Sold 86072 110581 180445 203582 247758 Operating Revenues 12790 5230 3540 (518) (563) Non-Operation Income 1558 827 2106 743 2012 Non-Operation Expenses 2536 3128 4716 25 353 Project 11812 2929 930 200 1096 Taxes 7418 2288 930 200 1096 Net Profit 4394 641 0 0 0 Owing to the weak financial situation of the company, it has fallen behind in servicing its loans to the Government and the local banks. 72 Annex XI (continued) Workforce and Human Resource Development 8. After a gradual increase until 1991, the total direct workforce of this company has declined m recent years. 1989 1990 1991 1995 Number of persons 3391 3458 3663 3417 The apparent figure of 3417 persons in 1995 hides the fact that the company has spun out some of its service activities such as the canteen or the maintenance workshop as profit centers. 9. At start up, the urea plant had a workforce of 111 persons out of which 16 were university graduates; 39 had technical school diplomas; and 56 were high and junior high school graduates. This plant is currently run by 115 persons with similar educational profile. Before the commissioning of the plant, the operating staff of the urea plant underwent training overseas, in- plant, and at other chemical enterprises in China. During 1995 eleven persons from the urea plant (2 from the technical and 9 from the operations division) have received skill upgrading training. Environmental Protection 10. This company's environmental protection activities cover regular monitoring and mitigation measures carried out by a division consisting of one chief, five officers and seven laboratory assistants. The air quality is measured several times a year at various locations as shown in the following table. Air Quality* mg/M3 Pollutant Ammonia CO Formaldehyde NOX Dust Methanol HCL NH3 HCHO Chinese Standard 0.2 10 3.0 0.2 1.0 - - Eastern Area 0-2.5 0 0 0 0 0 0 Western Area 0-2.0 0-2.0 0-0.57 0 0-0.2 0 0 Near South Gate 0-3.0 0 0 0 0 0 0 Near North Gate 0 2 0.25-0.51 0 0 0 0 *Measurements are made four times a year. There are no fixed stations for continuous measurements. 73 Annex XI (continued) The effluent water quality is also monitored more frequently (4 to 12 times every month) at the factory outlet. According to the factory management, the plant's effluent is then mixed with effluents from other plants and subsequently further treated before final disposal. The average quality of effluent water during 1994 and 1995 is shown in the following table. Effluent Water Quality* mg/lit Pollutant PH Cyanide Sulphides COD Oil & NH3/N Suspended - Grease Solid CN S Chinese Standard 6-9 0.5 1.0 100 50 80 100 Average for 1994 8-9.5 0.47 1.10 121.9 11.8 154.2 123.2 Average for 1995 8-9.5 0.25 0.3 100.1 6.1 87.1 130.3 (First ten months) *Measurements are made by the Environmental Division. Measurement frequency - 4-12 times a month at factory outlet. The Environmental Division also monitors noise levels at various locations in the plant. Then measurements which are made twice yearly indicate that the noise level in the plant remains at or below the required standards. Noise Levels in 1995* Site Standard Measured Urea Unit 85 72-81 Synthesis Unit (Ammonia) at Compressor House 85 75-83 CO, Conversion Plant 85 73-85 Margarine Plant 85 73-84 Office Area 85 65 *Measurements are made twice a year. 74 Annex XI (continued) ERR Reestimation Based on assumptions made in Annex XV. Investment Incremental Incremental Incremental Revenue Cost Benefit 1988 3.4 - - (3.4) 1989 5.6 - - (5.6) 1990 60.2 - - (60.2) 1991 125.7 - - (125.7) 1992 78.3 85.4 86.1 (79.0) 1993 28.7 99.1 93.8 (23.4) 1994 157.9 115.2 42.7 1995 170.2 118.4 51.8 1996 159.8 114.4 45.4 1997 144.5 110.4 34.1 1998 140.8 110.4 30.4 1999 137.0 110.4 26.6 2000 133.2 110.4 22.8 2001 132.4 110.4 22.0 2002 131.6 110.4 21.2 2003 130.8 110.4 20.4 2004 130.0 110.4 19.6 2005 129.2 110.4 18.8 2006 129.2 110.4 18.8 2007 129.2 110.4 18.8 ERR= 3.7 percent 75 Annex XII Yunnan Yufeng Chemical Fertilizer Company (YYCFC) A Profile General 1. Before the rationalization project, this plant produced ammonia (60,000 T/Y capacity) and ammonium bicarbonate (240,000 tons/year capacity). The project consisted of increasing the ammonia producing capacity of the plant and adding the following units in order to produce phosphatic and compound fertilizers: Sulphuric acid 230,000 tons/year Phosphoric acid 80,000 tons/year DAP/NPK 240,000 tons/year Cryolite 8,500 tons/year The construction started in 1990 and was completed at the end of 1992. Construction activities during 1991 were seriously affected by storms and floods in the region. After undergoing performance test in 1993 (carried out by YYCFC), the plant was placed in commercial production. The performance test results were as follows: 76 Annex XII (continued) Technical Indicators Guaranteed Value Actual Sulphuric Acid Plant Capacity T/d 700 725.4 Pyrite Consumption Ton/Ton 0.86 0.852 Phosphoric Acid Capacity T/d 275 292 Phosphate Rock (31% P205) Ton/Ton 3.3 3.59 Sulphuric Acid (100%) Ton/Ton 2.63 2.65 Steam Ton/Ton 2.04 1.61 Power Ton/Ton 132.6 130.1 DAP Capacity T/d 826 879.6 P205 (100%) Ton/Ton 0.467 0.442 Ammonia (99.9%) Ton/Ton 0.224 0.217 Steam Ton/Ton 0.148 0.114 Power Kwh/Ton 45 41 NPK Capacity T/d 720 809 P205 (100%) Ton/Ton 0.152 0.174 Ammonia (99.9%) Ton/Ton 0.094 0.150 Potassium Sulphate (50% K20) Ton/Ton 0.303 0.304 Ammonium Nitrate (34% N) Ton/Ton 0.220 0.172 Sulphuric Acid (100%) Ton/Ton 0.146 0.222 Steam Ton/Ton 0.148 0.134 Power Kwh/Ton 45 45 The above performance test results indicate that the plant achieved nearly all of its technical objectives. Not only did the various plants produce at above capacity, but in some cases the technical indicators were also better than the guaranteed values. 77 Annex XII (continued) Production Performance 2. The production performance of this plant is shown in the following table. Production Performance 1000 Tons 1992 1993 1994 1995 Quantity Capacity Quantity Capacity Quantity Capacity Utilization Utilization Utilization Sulfuric Acid - 71.53 31.1% 148.14 64.4% 135.69 70.8% Phosphoric Acid - 20.76 25.9% 46.42 58.0% 41.79 62.9% DAP - 32.66 - 61.31 - 45.55 - NPK (combined fertilizer) - 10.51 - 77.91 - 101.80 - Total DAP & NPK - 43.17 17.9% 139.22 58.0% 147.35 73.5% Though somewhat slow, the build up production from the beginning of 1993 has been nearly on track. There are no major technical problems being encountered in the sulphuric and phosphoric acid plants except that the pyrite drying unit has been out of commission almost since the commissioning, necessitating the use of open air drying with its attendant inefficiency (higher moisture content of the pyrite input to the sulphuric acid plant). The production group anticipates around 90 percent capacity utilization during 1996. 78 Annex XII (continued) Technical Indicators 3. The following table shows some of the basic technical indicators of the various plants in the complex. Technical Indicators Guaranteed 1993 1994 1995 First Value Ten Months Sulphuric Acid Pyrite Consumption Ton/Ton 0.86 0.953 0.881 0.877 Phosphoric Acid Phosphate Rock Ton/Ton 3.3 4.14 4.19 4.41 Sulphuric Acid Ton/Ton 2.63 2.82 2.73 2.81 Steam Ton/Ton 2.04 2.92 3.67 2.04 Electricitv Kwh/Ton 132.6 389 238 241 DAP P205 (100%) Ton/Ton 0.467 0.510 0.517 0.492 Ammonia (99.9%) Ton/Ton 0.224 0.282 0.247 0.245 Steam Ton/Ton 0.148 0.265 0.368 0.149 Electricity Kwh/Ton 45 136 79 76 The actual performance of the plant is clearly below that achieved at the test run and the designed values. Nonetheless, a improving trend is noticeable especially in the sulphuric acid and DAP plants. 79 Annex XII (continued) Price of Major Raw Materials 4. The price of raw materials and other imports, especially coke, potassium sulfate, ammonium nitrate and the phosphate rock has increased considerably in the last few years. In real terms, however, most raw material prices have declined, in some cases by more than 40 percent as shown in the following table. 1992 1993 1994 1995 Current Current Constant Current Constant Current Constant 1992 1992 1992 Prices Prices Prices Anthracite Y/Ton 61 NA - NA - 70 54 Coke Y/Ton 139 NA - NA - 181 139 Potassium Sulfate V/Ton 1100 1260 1206 1500 1277 1591 1219 Ammonium Nitrate Y/Ton 850 887 849 806 686 1048 803 Pyrite Y/Ton 260 266 255 259 220 253 194 Phosphate Rock Y/Ton 80 79 76 59 50 91 70 Electricity Y/Kwh 0.09 0.175 .167 0.265 .225 0.249 .191 Cost Structure 5. The cost structure of this fertilizer plant is given in the following table. 1993 1994 1995 Ammonia Y/Ton 1298 1269 1395 Sulfuric Acid V/Ton 361 427 465 Phosphoric Acid Y/Ton 1738 2001 2298 The above cost increases reflect the rise in raw material prices, the shifting technical indicators and the incidence of high depreciation and financial charges in the later years. Sale Prices 6. The following table shows the history of sales prices for phosphatic fertilizers which were totally exempted from government control throughout the period. The Government, however, maintained its control on the prices of ammonium bicarbonate which was continuously produced by the plant. The company also produced and sold methanol and formaldehyde at uncontrolled pnces. 80 Annex XII (continued) Trend of Prices Y/Ton 1992 1993 1994 1995 Ammonium Bicarbonate 230 260 307 338 Government Price 220 250 300 NA Market 250 307 324 NA Methanol 1409 1705 2084 2475 Formaldehyde 1087 1301 1332 1543 DAP - 1298 1471 1640 NPK - 1490 1466 1729 As can be seen, the company has been able to take advantage of the movements in the market in line with movement of fertilizer prices in recent years. During 1994, as NPK prices remained comparatively more lucrative, the company produced large quantities of NPK a part of which was exported. The same trend continued in 1995 when the company's NPK production was further stressed. 81 Annex XII (continued) Financial Performance 7. The income statement of the company for the last five years is shown in the following table. Income Statement 1000 y 1992 1993 1994 1995 First Nine Months Revenue Sales 89287 136202 281675 290561 Product Tax 4932 2317 195 600 Net Sales 84355 133885 281480 289961 Costs Variable Costs 49775 88064 165001 170386 Depreciation 5327 5796 22374 45135 Other Fixed Costs 14067 25518 46761 40148 Administration Expenses 6387 7227 11130 5382 Cost of Goods Sold 75556 126605 245266 261051 Operating Revenue 8799 7280 36214 28910 Non-Operation Income 11 21 43 575 Non-Operating Expenses 1097 1224 7254 2362 Profit 7713 6077 29003 27123 Taxes 150 200 - Net Profit 7563 5877 29003 27123 Profit/Sales 9.1% 4.5% 10.3% 9.3% As noted earlier, in the third year of commercial operation in this plant, capacity utilization has reached around 70 percent in the sulfuric acid plant and more than 73 percent in the phosphatic fertilizer producing units. The company continued to produce large quantities of ammonium bicarbonate which still enjoys a good market in the region. In addition the company sells small quantities of methanol, formaldehyde, sulphuric acid, liquid ammonia and even effluent containing ammonia. In recent years the company's markets for phosphatic fertilizer have consisted of the Yunnan region 40 percent; other provinces 30 percent with the rest being exported to neighbour countries (e.g. Burma) because of the unavailability of transportation to other provinces of China. While the transportation problem may be resolved when a new east west railway line is completed, the company still suffers occasionally from power shortage, water shortage, unavailability of spare parts and the breakdown of equipment. These impediments notwithstanding, the management was hopeful that the trend in capacity utilization could be maintained, reaching around 90 percent in 1996. 82 Annex XII (continued) Workforce and Human Resource Development 8. Out of a total of 904 persons working in the phosphatic fertilizer complex 828 are in the technical and 76 in administrative areas. The following table shows the divisional breakdown and the educational profile of the personnel engaged in this complex. Staff Structure Item Supervisory H2SO4 H3PO5 DAP/NPK Cryolite Instrumen Total tation Administrative Staff 11 13 12 13 11 16 76 Technical and 113 201 132 180 131 71 828 Operational Staff Educational Profile Administrative Staff University Graduates 1 2 2 2 2 3 12 College Graduates 3 6 4 5 5 3 26 High School Graduates 2 1 1 1 5 Technical School 3 3 3 3 2 7 21 Graduates Secondary School 2 1 3 2 2 2 12 Graduates Technical and Operational Staff University Graduates 3 4 3 1 5 16 College Graduates 2 2 7 11 3 4 29 High School Graduates 5 11 4 4 2 14 40 Technical School 58 11 90 90 71 40 467 Graduates Secondary School 45 6 31 72 54 8 279 Graduates This structure clearly shows the enormous dependence on high and middle school graduates (nearly 82 percent of the total workforce). This, in turn, highlights the need for intensive training that has been followed by the company. In general the company provides training at three levels for the new recruits: theoretical; practical on-the-job training in other plants; and, simulation training in the plant. Courses are arranged periodically for all levels of personnel including the supervisory staff. The training program up to the foreman level is carried out in house. More advanced training e.g. in finance and taxation or economics is carried out at academic and higher learning institutions. 83 Annex XII (continued) Environmental Protection 9. The plant has an Environmental Protection Department and a Safety Department both responsible for the dissemination of best practice and the monitoring of results and indicators. In recent years the company has succeeded in maintaining an acceptable level of pollution standards in line both with the Chinese and the World Bank Guidelines. Air Quality Standard SO2 NOX Ammonia NH3 mg/M mg/M mg/M 5 0.1 5 0.15 90.2 1993 1994 1995 1993 1994 1995 1993 1994 1995 Sulphuric Acid Plant 0.13 0.08 0.08 0.02 0.02 0.03 - - - Control Room 0.02 0.003 0.01 0.03 0.03 0.02 - - - Hospital 0.01 0.01 0.01 0.03 0.01 0.02 0.14 0.13 0.103 Market 0.01 0 0.01 0.03 0 0.05 0.13 0.12 0.106 Guest House 0.01 .002 .01 0.03 0.06 0.03 0.14 0.201 0.12 Tail Gas Composition Location Pollutant Standard 1993 1994 1995 Sulphuric Acid Plant SO2 450 ppm - 150 ppm 157 ppm Phosphoric Acid Plant F 5 10 mg/M 0.925 0.527 0.838 DAP Plant NH3 5 100 mg/M3 98.1 83.6 87.3 DAP Plant F 5 10 mg/M' 1.2 1.1 1.8 Boiler Dust 5 250 mg/M 133 123 105 Effluent Water Discharge Chinese 1992 1993 1994 1995 Standard PH 6-9 8.46 8.32 7.96 8.06 Ammoniamg/lit 80 63.1 45.5 33.8 39.6 COD mg/lit 200 134.4 125.7 81.6 59.5 S mg/lit 0.84 0.48 0.88 0.82 As mg/lit - 0.12 0.08 0.02 F- mg/lit - 2.53 5.33 4.93 P mg/lit - 0.88 0.67 0.61 Cyanide CN- mg/lit - 0.32 0.26 0.19 84 Annex XII (continued) ERR Reestimation Based on the assumptions made in Annex XV, the ERR reestimation calculations are as follows: Investment Incremental Incremental Incremental Revenue Cost Benefit 1990 42.4 - (42.4) 1991 449.3 - (449.2) 1992 263.7 - - (263.7) 1993 157.5 57.4 59.6 (159.5) 1994 71.7 251.6 162.6 17.3 1995 276.6 193.4 83.2 1996 390.0 232.7 157.3 1997 421.2 270.7 150.5 1998 419.8 270.7 149.1 1999 418.4 270.7 147.7 2000 417.0 270.7 146.3 2001 413.8 270.7 143.1 2002 410.6 270.7 139.9 2003 407.4 270.7 136.7 2004 404.2 270.7 133.5 2005 401.0 270.7 130.3 2006 401.0 270.7 130.3 2007 401.0 270.7 130.3 ERR= 7.9 percent. 85 Annex XIII Trend in Fertilizer Prices FOB S/ton Urea DAP Year Current Constant 1990 Current Constant 1990 Prices Prices 1985 136 199 169 246 1986 107 132 154 191 1987 117 131 174 196 1988 155 163 197 206 1989 132 140 173 183 1990 157 157 171 171 1991 172 168 173 169 1992 140 132 145 136 1993 107 100 129 121 1994 148 134 173 157 1995 207 180 217 188 Forecast 1996 200 168 196 165 1997 180 148 186 153 2000 174 133 198 151 2005 187 128 209 143 Source: Report 814/92, The World Bank; Commodity Markets, The World Bank, November 1995 86 Annex XIV 1994 Fertilizer Imports and Unit Prices National Imported Total Value of Average CIF Published FOB Quantity 000 Imports Cost of Price S/Ton Tons S Million Imports S/Ton Urea 3642 464.85 127.6 148 Ammonium Nitrate 328 31.35 95.6 NA Ammonium Sulfate 64 1.05 164.1 NA Ammonium Chloride 23 2.39 103.9 NA DAP 2003 328.70 164.1 173 Source: Ministry of Chemical Industries 87 Annex XV Assumptions used in ERR Reestimation 1. - FOB fertilizer prices (in constant 1995 dollars), as forecast by the Bank, will be as follows: Urea DAP 1996 193 190 1997 170 176 2000 153 174 2005 147 164 2. - Technical efficiency will be increased by 2.5 percent in 1996 and 5 percent in 1997 for urea plants.. 3. - Capacity utilization: XCFC, YCFC and YYCFC - 100 percent by 1997. LCFC - 100 percent by 1999. BCEC - urea production at 80,000 tons per year throughout. 4. - International freight charges will be around $35/ton for all fertilizers. 5. - For import parity calculation, unloading charges, in land transportation and losses will be as follows: XCFC $10/ton LCFC $16/ton YCFC $15/ton BCEC $9/ton YYCFC $25/ton 6. - Production at YYCFC: 50 percent DAP/50 percent NPK. 7. - All coal prices normalized at v 325 per ton = $39 per ton to correspond to international export prices with China taken as an exporter. 88 Annex XVI Comparison of Fertilizer Price Forecasts in 1987 and Actuals S/Ton FOB Western Europe In Constant 1987 Prices Urea DAP Year SAR Actual SAR Actual 1991 193 150 229 151 1992 190 117 235 121 1993 187 89 240 108 1994 184 119 245 140 1995 181 161 250 167 2000 197 119* 259 135* Current Prices SAR Actual SAR Actual 1991 222 172 263 173 1992 228 140 282 145 1993 224 107 287 129 1994 228 148 304 173 1995 235 207 324 217 2000 291 174* 382 198* Sources: Market Outlook for Major Pricing Commodities, Report 814/92 and Commodity Markets and Developing Countries. *Current World Bank forecast. 9       IMAGING Report No: 15851 Type: PPAR