India - Sindri Fertilizer Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 3759 PROJECT PERFORMANCE AUDIT REPORT INDIA--SINDRI FERTILIZER PROJECT (CREDIT 520-IN) December 31, 1981 Operations Evaluation Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. COUNTRY EXCHANGE RATES Name of Currency Rupee (Rs) Appraisal Year Average US$1 = Rs 7.50 Intervening Years Average US$1 = Rs 8.9 Completion Year Average US$1 = Rs 8.2 PRINCIPAL ABBREVIATIONS AND ACRONYMS USED BHEL Bharat Heavy Electricals Ltd. BHPV Bharat Heavy Plates and Vessels Ltd. CO Carbon Monoxide CO2 Carbon Dioxide FACT Fertilizers and Chemicals, Travancore Ltd. FCI Fertilizer Corporation of India Ltd. FEDO FACT Engineering Design Organizational GOI Government of India H2S Hydrogen Sulfide ICB International Competitive Bidding IDC Interest During Construction IDF Industrial Development and Finance IOC Indian Oil Corporation IR Indian Railways KL Kiloliters LSHS Low Sulfur Heavy Stock (A petroleum residue formed in refining petroleum crudes having a low sulfur content). Mscft Thousand Standard Cubic Feet P and D FCI-s Plananing and Development Division PCR Project Completion Report tpd Tons Per Day tpy Tons Per Year TSP Triple Superphosphate UNICO UNICO International Corporation WC Working Capital FOR OFFICIAL USE ONLY PROJECT PERFORMANCE AUDIT REPORT INDIA--SINDRI FERTILIZER PROJECT (CREDIT 520-IN) TABLE OF CONTENTS Page No. Preface ................................................................. i Basic Data Sheet ...................................................... ii Highlights ............................................................ iii PROJECT PERFORMANCE AUDIT MEMORANDUM The Project .......................................... ....... 1 Project Implementation ............................................ 3 Project Operations ................................................. 6 Works Transformations and Environmental Study ................. 10 Conclusions ........................................ ........ 12 Annex 1: Production, Capacity, and Unit Costs of Production ....... 14 ATTACHMENT A: COMMENTS RECEIVED FROM BORROWER ..................... 15 ATTACHMENT B: PROJECT COMPLETION REPORT I. INTRODUCTION ......................... 18 A. Context of the Project in the Economy ............... 18 B. Context of the Project in the Bank's Lending Program ........... .................... 19 II. PROJECT BACKGROUND ....................................... 19 A. Identification . .... .................... 19 B. Appraisal ....................................... 20 C. Negotiations .......................... ............ 21 D. Project Description and Objectives ............... 22 III. PROJECT IMPLEMENTATION AND MANAGEMENT .................... 22 A. Achievement of Project Objectives ................... 22 B. Project Scope .......................................... 24 C. Project Management ...................................... 24 D. Training ............................................... 25 E. Staffing ............................................ 25 F. Use and Performance of Consultants .................. 26 G. Implementation Schedule ................................ 27 H. Procurement and Performance of Suppliers and Contractors .......... ....................... 28 I. Project Cost and Disbursement ............. ........ 29 J. Financing Plan and Cost Overrun Financing ........... 31 K. Commissioning and Start-up ............... ......... 32 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- TABLE OF CONTENTS (continued) Page No. IV. OPERATING PERFORMANCE AND EVALUATION ..................... 34 A. FCI's Financial Performance .. ..................... 34. B. Sindri's Financial Performance ..................... 37 C. Covenants ................ ................. 38 D. Financial Rate of Return .......................... 38 E. Market Development and Performance .................. 39 V. ECONOMIC BENEFITS OF THE PROJECT ........................... 40 A. Economic Rate of Return .......... .. 40 B. Transfer of Technology .............................. 42 C. Social Impact -........................................ 42 D. Foreign Exchange Savings ........................... 42 VI. INSTITUTIONAL PERFORMANCE ............. ....... 43 A. Organizational Impact .............. 43 B. Role and Performance of Government ................... 43 C. Improvement in Project Management and Environmental Protection ...... ................ 44 VII. IDA EXPERIENCE .......... o .................. 44 A. Overall Performance and Relationship with Borrower ..................... ................ 44 B. Performance in Project Preparation, Formulation and Implementation ................................45 C. Covenants .......................................... 45 VIII. CONCLUSIONS ................................................. 46 A. Overall ................................................ 46 B. Lessons for the Borrower and IDA ...................... 47 Annexes 1. Staff Training Schedule .................................. 49 2. Implementation Summary ................................... 50 3. Project Implementation Schedule--Appraisal vs. Actual 53 4. Sources of Procurement. ...................................54 5. Permanent Working Capital .................... 55 6. Disbursement Schedule IDA Credit ........................ 56 7. Chronology of Major Plant Commissioning Events........... 57 8. FCI Financial Statements ............. ..... 58 9. Sindri Unit--Financial Statements ......................... 60 10. Production Costs at 90% Capacity Utilization ............. 62 11. Cash Flow Streams for Financial Analysis................. 63 12. Nitrogen Consumption and Urea Distribution for Main Marketing Areas ................................... 64 13. Assumptions Used in Economic Analysis .......................67 14. Cost and Benefit Streams for Economic Analysis .....68 - 1 - PROJECT PERFORMANCE AUDIT REPORT INDIA--SINDRI FERTILIZER PROJECT (CREDIT 520-IN) PREFACE This report presents a performance audit of the Sindri Fertilizer Project in India for which Credit 520-IN was approved in November 1974 to the Government of India for the Fertilizer Corporation of India (FCI). The project was part of a larger effort undertaken by FCI to modernize and expand the works it was operating at Sindri in the State of Bihar. The credit, in an amount of US$91 million, was fully disbursed in March 1980, 18 months after the original closing date. The present report consists of (a) a Project Performance Audit Memorandum (PPAM) prepared by OED following a visit to the country in February 1981; and (b) a Project Completion Report (PCR) prepared by the Bank's Indus- trial Projects Department on the basis of data and information gathered by the Borrower. This report, which presents a factual review of project implementa- tion, is attached. The audit memorandum is based on a review of project files, the PCR and credit documents as well as on discussions with World Bank staff and Government and project officials. It reviews how the modern- ization of the Sindri Works was effected, the role of the project in this effort, and the constraints faced by the plant during its two first years of operation. The audit memorandum also deals with the discussions between the Bank, FCI and the Government regarding the procurement of domestic equipment. Comments received from the Borrower have been taken into account in finalizing the report and are reproduced as Attachment A to the Audit Memorandum. -―【·1&--(1·’-1&&-’결 - ii - PROJECT PERFORMANCE AUDIT REPORT INDIA--SINDRI FERTILIZER PROJECT (CREDIT 520-IN) BASIC DATA SHEET Amounts (in US$ Million) As of 08/31/81 Original Disbursed Cancelled Repaid Outstanding Credit 520-IN 91.0 91.0 91.0 Cumulative Credit Disbrusement FY75 FY76 FY77 FY78 FY79 FY80 M Planned 2.5 51.7 90.4 91.0 91.0 91.0 (ii) Actual 1.9 13.2 61.4 79.8 84.3 9.0.0 (iii) (ii) as % of W 76 25 67 87 92 99 PROJECT DATA Original Credit Actual or Date(s) Re-estimated Board Approval 11/74 11/26/74 Credit Agreement 12/74 12/18/74 Effectiveness 02/28/75 02/27/75 Credit Closing 09/30/78 03/80 Date of Physical Completion 09/77 12/78 Completion Time (in months) 41 56 Time Overrun (%) - 36% Total Project Cost (US$M) 174.5 187.8 Cost Overrun (%) - 7% Economic Rate of Return 16% 5% MISSION DATA Month,- No. of No. of Man- Date of Year Weeks Persons weeks Report Identification 09/73 1 1 1 - Preappraisal 01/74 3 1 3 02/13/74 Appraisal 05/74 3 2 6 11/11/74 Subtotal 7 Y-0 Supervision 1 10/75 1 1 1 11/14/75 Supervision 11 12/76 1 1 1 01/19/77 Supervision 111 03/78 1 1 1 04/12/79 Supervision IV 02/79 1 1 1 03/27/79 Supervision V 08/79 2 1 2 08/30/79 Subtotal 6 6  - iii - PROJECT PERFORMANCE AUDIT REPORT INDIA--SINDRI FERTILIZER PROJECT (CREDIT 520-IN) HIGHLIGHTS The project represented a major expansion of the fertilizer plant operated by the Fertilizer Corporation of India (FCI) at Sindri in the State of Bihar. It involved the erection of a fuel-oil based ammonia/urea complex with capacities of 900 tpd of ammonia and 1,000 tpd of urea, one-third of the ammonia to be used to meet the needs of existing units. The project was physically completed in December 1978, fifteen months behind schedule due to delays in the delivery of equipment. Project management was satisfactory, the creation of a project manager position being particularly helpful in insulating project implementation from the daily .operations of the plant (PPAM, para. 8; PCR, paras. 3.06, 3.07, 3.15 to 3.17 and 3.21). Commercial production was delayed by a few months due to technical difficulties related to locally procured equipment. Total project cost amounted to US$188 million, 8% above the appraisal estimate. Project operations have been very severely impaired by the erratic supply of feedstock. Due to shortages of heavy fuel oil, the plant had to be shut down for about 10 months in 1980 (PPAM, paras. 14 to 18). As a result, the project has suffered considerable losses. During 1981, major constraints were alleviated and capacity utilization improved (PPAM, para. 19). But very low levels of production during the first two years of operation have also eroded the project's economic efficiency: the economic rate of return is now reestimated at 5%. The principal lessons from this experience for future projects are: (a) the need for the Bank when it considers requests for procurement of locally produced equipment, assuming there is a sufficient technological base and the requisite technical assistance can be provided, to assess the trade-off between the presumed benefits of technology transfer from a foreign licensor to a local manufacturer of equipment and the potential cost in terms of longer delivery periods in supplying such equipment indigenously; and (b) the Bank should examine more thoroughly the procurement capability and needs in technical support of the borrower, in order to enable him to ensure that orders are not placed with suppliers with poor delivery records. Other points of interest are: - the difference of views between IDA and the bor-ower on local procurement of equipment which resulted in the Bank's refusal to finance particular items (PPAM, paras. 9 to 13, and 28; PCR, paras. 3.08 and 8.04); - iv - - the beneficial impact of the consultants' recommendations on improving maintenance procedures and pollution control (PPAM, paras. 22, 23 and 25). - the adverse effect on project operation of the persistent irregularities in the supply of raw materials and fuel and the lack of alternative sources of supply (PPAM, paras. 14 to 18). PROJECT PERFORMANCE AUDIT MEMORANDUM INDIA--SINDRI FERTILIZER PROJECT (CREDIT 520-IN) The Project 1. The project under review represented a major expansion of the fertilizer plant operated by the Fertilizer Corporation of India (FCI) at Sindri in the State of Bihar. It involved the erection of an ammonia/urea plant and was submitted for financing to the Bank by the Government of India in November 1973. A credit, for US$91 million, was approved a year later in November 1974. 2. The Sindri plant was the first major enterprise of the Government of India for the production of chemical fertilizers; it was also FCI's first operating plant since it was incorporated in 1961 following the merger of two public sector companies -- Sindri Fertilizer and Chemicals and Hindustan Chemicals and Fertilizer Ltd. which operated in the State of Punjab. Con- struction of the plant, which started in 1948, proceeded through a number of successive expansion phases. By the early 1970's, the plant consisted of a large number of individual units, most of them of uneconomic scale and based on obsolete process technology. Production facilities included a battery of coke ovens; two ammonia plants, one based on coke gasification and the other on coke oven gas; a urea plant; a sulfuric acid plant; an ammonium sulfate plant; and a double salt (ammonium sulfate nitrate) plant, ammonium sulfate being produced partly on the basis of purchased gypsum and partly on the basis of sulfuric acid. With the exception of the ammonium sulfate plant, most of these units had never reached planned output and old age further inhibited their attainable capacity. 3. When the project was appraised, FCI had already started to modernize the works by undertaking an expansion program known as Rationalization Scheme, which involved the setting up of a 880 tons per day (tpd) sulfuric acid plant, a 360 tpd phosphoric acid plant and a 326,000 tons per year (tpy) triple superphosphate (TSP) plant. A major benefit expected to result from this scheme (and which gave it its name) was that by-product calcium sulfate from the production of phosphoric acid was to defray the costs associated with the mining and transporation of natural gypsum, necessary to operate the ammomium sulfate plant, from FCI's mines in Rajasthan. 4. The Bank-financed Modernization Scheme consisted of a single-train 900 tpd ammonia plant and a single-train 1,000 tpd urea plant; about 600 tpd of ammonia was to be used in the urea plant, with excess ammonia production being used to meet the needs of the existing ammonium sulfate plant. Once both the Rationalization Project and the Modernization Project had been com- pleted, FCI intended to close down its old ammonia units (with their ancillary coke ovens) as well as its old urea, sulfuric acid and double salt plants. - 2 - Thus there would remain a well integrated set of six major plants grouped in two sections: (i) a sulfuric acid/phosphoric acid/TSP complex, and (ii) an ammonia/urea/ammonium sulfate complex (ammonium sulfate production being based on by-product calcium sulfate from the phosphoric acid plant). The Rationali- zation Project and the Modernization Project were largely interdependent since about one-third of the ammonia to be produced by the latter project was to be used in the ammonium sulfate plant, which was itself dependent on the phospho- oric acid production under the former project as a source of calcium sulfate. Concurrently with the implementation of the two schemes, FCI undertook a renovation program under which the existing units that were to be kept in production, in particular the power plant, the ammonium sulfate unit and a number of other utilities and service installations forming a necessary part of the modernized works, were to be completely overhauled and necessary replacements effected. 5. The new sulfuric acid plant was to be based on a pyrites oxidation process-V and the ammonia plant on the gasification of heavy fuel oil. The plant's main raw materials were thus to include pyrites (mined in Bihar in Northern India), imported phosphate rock, and heavy fuel oil (to be freighted by rail from the Barauni refinery some 200 km north of Sindri). Coal required for steam and power generation was to be obtained from nearby state-owned coal mines (Sindri had its own captive power source and three additional steam generation plants were to be installed under the project). 6. The project was to be essentially a duplicate of FCI's Nangal ammonia/urea project for which an IDA credit had been approved in January 1973, and the designs and specifications of which FCI intended to use for the Sindri expansion. Appropriate arrangements with the engineering firms who had participated in the Nangal project were made, although negotiations lagged for about six months because of continuing dissatisfaction on the part of FCI with the scale of fees submitted (PCR, para. 3.12). The project was appraised in the aftermath of the oil crisis, at a time when the international market for equipment was tightening rapidly. In the interest of saving time so as to minimize the risks involved (in terms of higher than anticipated price in- creases and lengthened delivery periods), the Bank agreed to prequalify for the project the bidders' lists on the Nangal project. 7. Implementation arrangements for the project were to be the same as those agreed, after long discussions, by FCI and the Bank for the Nangal project. FCI's Planning and Development Division (P&D) was to be directly responsible for the detailed engineering of the project and procurement of equipment; in carrying out those activities, it was to be assisted by the same foreign engineering companies who had been participating in the Nangal proj- ect. Foreign firms were to provide the basic engineering package for both the 1/ Pyrites consist of iron disulfide which by burning give sulfur dioxide and sulfuric acid. - 3 - ammonia plant (inclusive of the oil gasification and gas purification sec- tions) and the urea plant. Finally, FCI agreed to appoint a project manager directly responsible to FCI's head office for coordination of construction and other activities on site. Project Implementation 8. The project was physically completed in December 1978, fifteen months behind schedule. Design work, which was limited to some modifications to the design drawings and specifications prepared for Nangal, proceeded satisfactorily. Project management was also satisfactory, the creation of a project manager position being particularly helpful in insulating project implementation from the daily operations of the plant (PCR, paras. 3.06 and 3.07). The project, however, suffered from the late delivery of equipment by domestic as well as foreign suppliers (PCR, paras. 3.15, 3.16, 3.17 and 3.21). Delays also took place with the commissioning of equipment (PCR, paras. 3.25 to 3.29), most of the difficulties occurring in connection with locally procured equipment, in particular the steam generator plants and the nitrogen and synthesis gas (syngas) compressors. The plant was declared to be in commercial production in October 1979 -- 10 months after the project had been physically completed (as against six months as expected). Total project cost amounted to Rsl,671.8 (US$187.8 million), which represents a cost overrun over the appraisal estimate of 28 percent in rupee terms, and 8 percent in dollar terms (PCR, paras. 3.22 to 3.24). 9. Relations between the Bank and FCI in the course of project imple- mentation were good, except for differences with regard to the procurement of three crucial components of the plant, namely the synthesis gas (syngas), CO2 and nitrogen turbo-compressors. In the case of the Nangal project, an Indian company, Bharat Heavy Electricals Ltd. (BREL), had been selected under international competitive bidding to supply these items by means of assembling each of the three turbo-compressors, with their major components, i.e., the centrifugal compressors and the turbines, being imported from companies with which BHEL had licensing arrangements. Following the decision to shortlist for the project those companies whose bids had been retained under the Nangal project, BHEL was automatically prequalified for supplying Sindri's turbo- compressors. It once again won the tender, but this time expressed its intention to manufacture itself each of the three turbo-compressors, including the compressor and turbine components which had been imported under the Nangal project.1/ 10. Having noted BHEL's experience for some years in the manufacture of turbines of comparable size for power generating equipment, the Bank was ready to agree that BHEL manufacture the turbines of the turbo-compressors under the supervision of its licensor. The Bank, however, resisted BHEL's 1/ A few critical components were still to be imported. decision to manufacture also the compressors, doubting that the company had the capability to manufacture such sophisticated equipment to exact specifica- tions within a reasonable time since it had never manufactured such units before.l/ As BHEL refused to change its position (which the Government supported), the Bank indicated to FCI that it would not be prepared to finance any of the three turbo-compressor sets in the event that both compressors and turbines were manufactured in BHEL's own works. After discussions and exchange of correspondence, FCI decided to place the order with BHEL and continued to seek Bank financing for the Rs46.7 million order (US$6.0 million equivalent). The Bank eventually decided not to finance the order but did not cancel a like amount from the credit.2/ 11. In financing the project, the Bank's over-riding concern, which it conveyed to the Government, was to increase the production of fertilizer and not to use the project as an instrument to promote the development of the domestic capital foods industry at the cost of potentially less effective project implementation. Since the turbo-compressors were critical to the timely completion and successful operation of the plant, the Bank's view was that awarding the contract to BHEL involved a significant risk factor which should be avoided. Yet, the position taken by the Bank, namely to refuse the contract for the turbo-compressors but to refrain from cancelling an equiva- lent amount of the credit, suggests that the Bank implicitly went along with the Government's decision to have the turbo-compressors manufactured locally. But once the Bank took this stance, it could have ascertained BHEL's capabil- ity and limitations to deliver the equipment on schedule and in accordance with specifications, although this would have meant a greater involvement on the part of the Bank in monitoring a procurement contract than is normally the case. Thus, the Bank's approach amounted to simply underlining its concern over the possible risks involved in the Government's decision. In fact, BHEL did experience a number of difficulties in manufacturing the turbo- compressors, and they were commissioned with delays ranging from 8 to 16 1/ In February, when FCI recommended awarding the order for the turbo- compressors to BHEL, BHEL was in the process of manufacturing a syngas compressor for another ammonia/urea project (FCI's Haldia project, now managed by Hindustan Fertilizers Corporation Ltd. [HFCL]). 2/ There was a legal aspect to this issue. The Bank's right to refuse financing BHEL's contract rested on the argument that BHEL's prequalifi- cation was conditional, being based on its assumed usage of imported compressors and turbines for each turbo-compressor set. While this was never formally recorded, the Bank staff insisted it had an understanding with FCI that this was actually the case. As a result of this incident, the Bank's practice has since been to simply register suppliers (as opposed to prequalifying them) so as to be in a position to approve tender awards on the basis of the technical merits of offers submitted (PCR, para. 3.20). - 5 - months. While BBEL completed the manufacture of the rotating machinery only a few months behind schedule, there was a serious lack of planning and coordina- tion in assembling the equipment together with their ancillaries, which was part of its overall contractual responsibility. Eventually, late in 1978, the Sindri project management brought a supervisor from BREL's licensor to assume responsibility for completing the work. Delays in commissioning the compres- sors turned out to be a major factor behind the overall slippage in project implementation, although substantial delays occurred also in the delivery of the air compressor for the oxygen plant (supplied by a foreign firm) and the erection of the three steam generation plants (also supplied by BREL). 12. Two factors lay behind BHEL's difficulties in manufacturing the turbo-compressors: (i) its inability to deal satisfactorily with problems of system coordination and to design adequate control systems, which suggests it should have resorted more extensively to technical assistance from its licensor for support in these areas; and (ii) the excessive workload it had assigned to itself. When FCI proposed awarding BHEL the contract for the three units needed for Sindri, BHEL was in the process of manufacturing similar equipment for FCI's Haldia project. Later (but before FCI's contract with BHEL for the project had been signed), BHEL was contracted by National Fertilizers Ltd. (NFL) to manufacture turbo-compressors for its Bhatinda and Panipat ammonia/ urea projects. Given that it had no previous experience with the manufacture of such equipment, this work load proved excessive, not so much at the manufacturing stage as at the testing and commissioning stages, where BHEL was clearly unable to cope with the tasks at hand and meet the deadlines it had set for itself. 13. Given the vast expansion program India was considering for its fertilizer industry, the development of a domestic manufacturing capacity for compressors was an understandable objective to set for itself and one well within the capability of its equipment industry. The Bank's assessment of BHEL's capability was not based on the company's lack either of the proper tooling or sufficient general technical expertisel/, but on its not having previous experience with the manufacture of this particular type of equip- ment.2/ In the light of BHEL's difficulties in meeting delivery schedules, 1/ In answer to the Bank's queries, both the licensors for the compressors and the turbines indicated they considered BHEL capable of producing the equipment according to stated specifications. 2/ Reflecting the Bank's Articles of Agreement, the Bank's procurement procedures are intended to ensure that loan proceeds are used with due attention to economy and efficiency, giving all member countries an opportunity to compete and encouraging the development of local contrac- tors and manufacturers in borrowing countries. In the case under review, the two objectives of insuring efficient project implementation and encouraging the development of local capital goods industry were in conflict. On this issue, the Bank staff comments that to reconcile both objectives would have called for a much greater Bank involvement in expediting procurement contracts, which would have been beyond its normal duty. -6- as noted above, the Bank was probably correct in its general assessment of BREL's capability. However, since it was apparent that GOI was determined to have BHEL develop the capacity to manufacture compressors and take advantage of tightening foreign markets and the expected increase in domestic demand, a better approach for the Bank would have been to impress on BHEL the need for a more gradual phasiny of orders and a greater reliance on technical assistance from its licensor.1 Project Operations 14. The operating record of Sindri's new facilities has been very severely impaired at the beginning by the irregular and later by the entirely interrupted supply of raw materials. During the first year following the commissioning of the ammonia/urea plant in April 1979, the supply of feedstock was very erratic and indeed inadequate to keep the plant operating for any reasonable length of time. This resulted from the inability of suppliers to deliver due to power cuts and other technical problems, and the lack of capacity by the railway system to move the quantities of LSHS (low sulfur heavy stock) required by the plant. In addition, the number of steam-heated tank wagons needed to move LSHS from Barauni to Sindri was grossly inadequate. As a result, LSHS supplies from Barauni were supplemented by fuel oil from Haldia, which the ammonia plant has the flexibility to process indifferently, although frequent changes in operating conditions caused by the alternating use of different petroleum fractions are not conducive to high efficiency. In 1980, labor problems in Assam, where the oil fields supplying the Barauni refinery are located, led to prolonged interruptions in LSHS deliveries. This caused the plant to shut down for about 10 months and then to undergo what amounted to (in terms of cost and time) a second commissioning. Availability of tank wagons is no longer a constraint on the supply of feedstock, and capacity utilization was improved considerably during the second half of 1981 (see table in para. 19).2 15. During the period, the Bank formally raised with the Government the issue of feedstock availability (which the Government was committed to ensure under the credit agreement), suggesting that the possibility of importing fuel oil to compensate for domestic shortfalls be explored; the Bank, however, was not successful in having the situation corrected. Although the lack of feedstock was detrimental to the project, the issue should be viewed within the political context prevailing at the time. During the years 1979 and 1980 India suffered from a serious drought which made it necessary for the Govern- ment to interrupt the normal operations of the railway system in order to move large amounts of foodgrain across the country with a view to alleviating local 1/ The Bank did require (and received) monthly reports on the status of manufacture and installation of turbo-compressors, to which it responded regularly with suggestions. 2/ See also Attachment A. - 7 - shortages. Moreover, the Government, recently in office, expected it would be able to resolve the labor problems in Assam within a short period of time and thus could avoid resorting to import of fuel oil. The Government also resisted importing fuel oil to meet the plant's requirements on the grounds that prevailing spot prices would make this an uneconomic propositionl. Production has resumed recently, but LSHS/fuel oil deliveries have so far remained much below requirements. No Bank full supervision mission has visited the plant after the completion mission in August 1979; this is probably explained by the prolonged shut-down of the plant. However, as the plant is now undergoing what amounts to a recommissioning, an in-depth follow- up mission would appear necessary. 16. The plant has also suffered from poor quality coal supplies for use in the steam generating plants. Higher than normal ash content has caused repeated boiler failures as a result of excessive abrading, making frequent repairs necessary_.2 The coal mining companies have discussed the possi- bility of setting up washeries to palliate the declining quality of domestic coal; production objectives, however, seem to have so far taken precedence over quality requirements. 17. A similar issue applies to the delivery of pyrites for the sulfuric acid plant set up under the Rationalization Scheme. Pyrite supplies have 1/ This, however, does not appear to be entirely correct. Nangal production cost figures for 1979/80 (the plants in Nangal and Sindri are identical) suggest that unit production cost of urea would be $183/MT (1979/80), if the plant was operated at 90 percent capacity; this is based on an average price of heavy fuel oil of about $100/MT equivalent, which reflects the low cost of crude oil production in India. Spot prices in 1980 fluctuated around $180/MT; on this basis, unit costs of production of urea at 90 percent capacity would be projected to be $232/MT, margin- ally below the CIF value of urea. 2/ The three boilers set up under the project were designed for coal with ash content between 28 percent and 35 percent. Since 1979, however, actual ash content of coal deliveries has almost systematically exceeded the upper limit despite formal agreement from the coal mines to deliver adequate coal supplies. In this connection, FCI maintains that the higher than normal ash content has not affected capacity utilization since three service boilers were available as against the two that would normally be required. According to FCI, a more serious constraint has been the proprietary CO2 converter where catalyst activity deteriorates very fast and exchanger leaks and other factors cause frequent shut- downs. A study to improve the performance of these converters has been commissioned with Messrs. Lurgi (see Attachment A). - 8 - consisted of non- or insufficiently-beneficiated rock with unsuitable sulfur content (30-35 percent against 43 percent as expected) and silicium content (18-22 percent against 8 percent as expected) to meet production parameters. Even though no sulfuric acid plant can operate with non-beneficiated pyrites, FCI has been unable to ensure that the proper type of aw materials be made available to it by the responsible state-owned company.1- 18. In all three cases - LSHS/fuel oil, coal and pyrites - FCI has been dependent on other public sector companies for its supplies. In each case, FCI was unable to ensure for itself adequate deliveries of raw materials in terms of quantity or quality. The Bank had received assurances from the Government that adequate supplies of heavy fuel oil and coal would be made available to the plant2/. As is now apparent, the covenant in the credit agreement (Section 4.02) by which the Government agreed to "make arrangements for the supply of all materials in such quantities as shall be adequate to operate the Sindri Unit up to full capacity" was not effective in meeting its purpose. 19. Since commercial operations started in October 1979, the project operated for 8 months3/ at an average of 31 percent of capacity for ammon,a and 35 percent for urea, and was closed down for 10 consecutive months1' . Performance of the Rationalization Project, which commenced operations two years behind schedule due in large part to late delivery of equipment by Indian manufacturers, was initially hardly any better, but some improvement has occurred recently as shown in the table below: 1/ FCI advises that one of the two streams in the new sulfuric acid plants under the Rationalization Scheme has been converted to run exclusively on sulfuric feedstock and this has improved the plant's performance. More- over, FCI has been able to persuade PPC Ltd., its suppliers of pyrites, to see that only pyrites with 38% sulfur content are shipped to Sindri (see Attachment A). 2/ As the declining quality of domestic coal did not come under notice until later years, this issue was not touched at appraisal. 3/ Oct. 79-Jan. 80 and Dec. 80-Feb. 81. 4/ Feb.-Nov. 1980. - 9 - Capacity Utilization (Percent) 1979/80 1980/81 April-Aug. 81 Sep. 1981 Oct. 1981 Bank-financed project Ammonia 13 13 30 74 75 Urea 14 14 54 84 92 Rationalization Project Sulfuric AcidjIa 11 18 13 23 24 Phosphoric Acid 6 14 12 17 20 TSP 5 10 9 13 16 Old Plant Ammonium Sulfate 2 2 5 n.a. n.a. /a The new 800 tpd sulfuric acid plant was supposed to supplement the output of the existing 400 tpd unit completed in 1970. The latter was closed down for renovation in 1977; the capacity utilization rates shown in the table are based on the capacity of the new plant only. 20. The difficulties with the phosphoric acid plant stem from the fact that the licensor was unable to develop the dihydrate/hemihydrate process FCI expected to set up at Sindri. As a result, the hemihydrate portion of the process is now being by-passed and the capacity of the plant has been reduced by about one-third from the original figure. A consequence of this is that by-product calcium sulfate (obtained in dihydrate form rather than hemihydrate form as natural gypsum) does not have the purity (in terms of low residual phosphoric acid content) that was expected; this in turn suggests that by- product calcium carbonate from ammonium sulfate production might be more difficult to sell to cement factories than originally anticipated. However, this question has not arisen yet: in line with the Government's policy to encourage urea consumption at the expense of ammonium sulfate, the price of ammonium sulfate has been decontrolled; this implies that its production is considerably less profitable than that of urea, which the Government supports via financial transfers to producers. In response to relative prices, FCI has preferred to convert all of its ammonia into urea rather than partly into ammonium sulfate. For the same reason, the poor performance of the Rationali- zation Project has so far not handicapped production in the ammonia/urea plant. However, as feedstock availability and capacity utilization in the ammonia plant improves, constraints on phosphoric acid production may become an increasingly relevant factorl/. 1/ The ammonia requirements of the urea plant represent two-thirds the capacity of the ammonia plant. In this regard, FCI informs that it has engaged the consultants on the phosphoric acid process to study the problems and to suggest ways to improve performance. The consultants are now preparing their recommendations (see Attachment A). - 10 - 21. The project has accumulated large losses since commercial operations started. Fixed costs associated with the ammonia/urea plant (not including financial charges) amounted to about US$30 million annually over the two-year period 1979-80; of this amount, revenues contributed but a small portion . Assuming production will build up over the next two years, the financial rate of return (FRR) of the project is re-evaluated at 10 percent and the economic rate of return (ERR) at 5 percent as compared to appraisal estimates of 16 percent for both the FRR and ERR2/. Four factors explain the lower ERR: (i) the increase in capital costs following the oil crisis of 1973/74; (ii) delays in commissioning the plant; (iii) insignificant output during the first two years of operation; and (iv) faster growth in input costs compared to output prices, which confirms natural gas as now the more economical feedstoqk for the production of nitrogen fertilizers (PCR, paras. 5.01 to 5.04).1 Works Transformation and Environmental Study 22. The Bank's appraisal had underlined two major deficiencies in the Sindri Works: the chronic overstaffing of the plant and the apparent lack of concern for pollution control at the time of the setting up of the existing facilities. There were, at appraisal, some 8,000 persons employed on the site, of whom about 4,400 had directly productive functions, a work force far in excess of standard requirements. It was expected that no additional per- sonnel would be appointed to man the project and that staff attached to the existing units that were to be closed down would be redeployed with an eye to efficiency. With regards to ecological aspects, the project was to permit the retirement of many of the existing obsolete units which were causing consid- erable pollution to the environment. Furthermore, while there were no Indian statutory regulations relating to atmospheric emissions, the project was 1/ Because of numerous production stoppages, LSHS consumption (per ton of ammonia) has been very high; it averaged 1.26 ton in January 1981 (as against a norm of .88 or less). 2/ Projections assume the following capacity build-up: 50% and 75% each for FY82 and FY83, and 90% thereafter. 3/ The Bank staff notes that the economic return is sensitive to the basis (CIF import or FOB export) used to calculate the economic cost of fuel oil feedstock and the assumed economic life of the plant. The above calculation conservatively assumes the project life as 13 years and the fuel oil value as equivalent to the import cost of the fuel oil imported from Europe. However most fertilizer plants have an economic life of 15 to 20 years, and India is currently planning installation of cracking facilities at 7 of its refineries to convert fuel oil, which otherwise will become surplus in the 1980s, to middle distillates. In case the fuel oil is valued at its FOB export value and project life is assumed at 16 years, the economic rate of return increases to 10 percent. - 11 - designed so as to meet European and U.S. ecological standards. Furthermore, pollution control equipment was to be installed on the old units that were to be kept in production. 23. The Bank insisted that FCI commission a "Works Transformation and Environmental Study" with a firm of consultants to cover four main areas: pollution control; manning, systems and safety; works replanning; and labor utilization. The first section was (i) to survey, and suggest ways to deal with, the emissions and waste streams from existing units, and (ii) review the means to handle the effluents discharged from the new facilities set up under the rationalization and modernization schemes!/. The three other sections were to cover the manning requirements of the new facilities and propose ways to redeploy the plant workforce. The study was also to assess the suitability of existing maintenance practices to the servicing of the modernized works. 24. Although a good piece of work, the study was only marginally effec- tive in solving the chronic overstaffing problem which has further deterio- rated with the retirement of a number of obsolete units. Although over- staffing is a means of effecting social transfers, there is no doubt that when it reaches such dimensions, it is detrimental to the technical efficiency and financial viability of the plant. The plant's operating staff increased from 4,424 in 1974/75 to 4,968 by February 1981 (compared to the study's recommen- dation of 2,750), as unions pressed for additional employment to man the facilities set up under the rationalization scheme. Total employment reached 8,200 by the end of 1978; it has since slowly decreased by attrition (to 7,569 by the end of 1980), partially as a result of the introduction by the manage- ment of a special voluntary retirement scheme. In the circumstances, the study's recommendations on manning, while cogent and rational, proved unwork- able and were largely ignored. The Bank attempted, with a measure of success, to insulate the ammonia/urea plant from the effect of social pressures by insisting on ceilings on the manpower allocated to it (PCR, para. 3.10). Such approach, however appears to have had little impact on the performance of the plant as a whole.- 25. Recommendations made in the study on maintenance procedures and pollution control proved in comparison much more beneficial. The centraliza- tion of maintenance services suggested by the consultants was effected despite some resistance on the part of the maintenance staff. The study also set forth a number of basic maintenance concepts; while the company's management approved the principles, it has had to postpone introducing them because of 1/ While equipment for the control of atmospheric emissions were to be included in each unit, a solution to the problem of effluent had to be designed on a plant-wide basis. 2/ FCI admits that full implementation of the study's recommendations would be difficult under the circumstances (see Attachment A). - 12 - the forced shut-down of the plant. As regards pollution control, the study led to the undertaking of a program of modifications to the old power plant and the ammonium sulfate, phosphoric acid and nitric acid units. A second program is now being considered. These two programs will cover most of the recommendations arising from the study, albeit with two exceptions: while the old sulfuric acid plant was considered to have a very severe dust emission problem (from its pyrite crushing section) and a number of recommendations were made to deal with it, nothing has been done so far; the plant has been shutdown for renovation since December 1977 and its status is unclear, the company focusing its effort on stabilizing production in the new sulfuric acid plant which is sufficient to meet the reduced capacity of the phosphoric acid plant. So far as the problem of effluents is concerned, the study recommended that effluents from the ammonium sulfate unit (which contain ammonia) be subjected to biological treatment. As against this the company has preferred to first develop a pond to combine the effluents from all units and decide then on the best method to deal with them. Overall, much has been achieved to sensitize the company's management to the need of addressing the works' ecological problems seriously, although much remains to be done to up-grade the plant to modern standards of pollution control. Conclusions 26. The experience with the project, which has been managed efficiently, has proved less than satisfactory, to a large extent due to problems beyond the control of the management. Depending on an the overtaxed railway system for feedstock supplies, the project suffered heavily from the disturbances that resulted from the combined effect of lack of steam-heated tank wagons and large foodgrain movements across the country during its two first years of operations. As improvement of the railway system will take time, there is a need to minimize the transport requirements of fertilizer projects, which reinforces the case (otherwise based on feedstock pricing) for gas-based (nitrogenous fertilizer) projects fed by pipelines and for locating projects based on petroleum derivatives at refinery sites. 27. Notwithstanding the above, the project was technically well-con- ceived. The State of Bihar may not have been the best region in which to locate a fertilizer project: growth in fertilizer demand was stronger in other States than in Bihar or adjacent Uttar Pradesh and West Bengal where almost all Sindri's production has in the past been marketed; yet, the large work force available at Sindri (which FCI could not dispose of) and the avail- ability of operating administrative and utility systems provided a strong rationale for undertaking the renovation and modernization schemes. Both projects seem to have been satisfactorily implemented, although the ability of the renovated and new units to maintain full production during sustained periods of time still remains to be demonstrated. In comparison, the ration- alization scheme (which was not financed by the Bank) does not appear to have been based on judicious judgment: relying partly on unproven technology and poor quality of raw materials, it now suffers from severe problems and the capacity of the phosphoric acid plant has been reduced by about one third - 13 - from the original figure.!/ This implies that part of the calcium sulfate requirements of the ammonium sulfate plant will have to be met through pur- chases of mined gypsum, which will further reduce the financial incentive of transforming (eventually one-third of) the ammonia produced in the project into ammonium sulfate. 28. The PCR highlights the experience arising from the project as regards local procurement of equipment (paras. 8.03 and 8.04). Specifically, the PCR suggests that, in the case of the syngas compressor, the Bank should have expressed its viewpoint more forcefully by cancelling an amount of IDA financing equal to the contract with which it was taking exception. The audit takes note of the accuracy of the Bank's assessment regarding the supplier's inadequate technical capability to discharge his contractual obligations, but suggests that, since the Government had made clear its intention to support the contract as part of its policy of developing the indigenous capital goods industry, and since the Bank was not prepared to cancel the entire credit, the Bank could have paid greater attention in ensuring that the supplier obtain the requisite technical assistance to strengthen his capacity for delivery. 1/ Irrespective of these major shortcomings, it is now widely recognized as uneconomic to produce phosphoric acid at a distance from sources of both rock phosphate and sulfur. - 14 - ANNEX 1 PROJECT PERFORMANCE AUDIT MEMORANDUM INDIA: SINDRI FERTILIZER PROJECT (CREDIT 520-IN) PRODUCTION, CAPACITY AND UNIT COSTS OF PRODUCTION Ammonium Sulfuricla Phosphoric Production Ammonia_1 Urea_/ Sulfate Acid Acid TSP ('000 tons) 1973/74 -- -- 194.4 -- -- -- 1974/75 -- -- 198.3 -- - -- 1975/76 -- -- 177.3 -- - -- 1976/77 -- -- 103.3 8.4 0.1 -- 1977/78 -- -- 43.0 13.6 2.2 6.0 1978/79 -- -- -- 10.3 2.4 5.4 1979/80 39.5 45.0 7.5 27.5 7.6 18.3 April 80 - Feb. 22, 81 19.2 24.0 - 38.8 11.6 29.9 Capacity ('000 tons) 297.0 330.0 355.0 240.0 115.0 346.0 Unit Costs of Production (Rs/MT in Jan. 81) Variable Cost 1,267 1,007 -- 669 5,285 2,709 Fixed Cost 2,652 2,210 - 1,286 14,794 3,780 Total 3,919 3,217 -- 1,956 19,979 6,509 /a Production of the new plants only. - 15 - ATTACHMENT A CO101ENTS RECEIVED FROM BORROWER COMMNTS ON PROJBCT PER0MMANCE AGEIT REPORT ON SLNDRIL MODERNISATION UNIT (CRDI 520-N) Para 3t Changes made Capacity figures stated for sulphuric acid and TSP bave to be correotedo as appropriate.Sulphurio acid plant is of 880 tonnes per day capacity. The TSP plant is rated for an output of 326.000 tonnes per year of product. Paras 10 to 121 Comments on these are reserved for the present, pending receipt of views from Deptt. of Heavy industry. Para 141 Ir is admitted that there was a problem on aranging supplies of feedstook for the Sindri ammonia plant in 1980 due to certain force majeure circumstances. The action to procure 1346 TOH tank wagons had been taken well in advance. The deliveries were, however, delayed principally due to power outs and other problems whiob arose in the suppliers workshop. Incorporated in substance Availability of TOE wagons is no longer a constraint on supplies. There in PPAM, was genuine difficulty in axragging for alternate supplies to Sindri beaouse para. 14. of an unprecedented drought combined with an up-set in the transportation Rrrangements for products due to out off of supplies from Assrm, priority for white product movement to salvage agricultural production by emergy irrigation, etc. The actual interreption in operations at Sindri therefore stretched from January 1980 to November 1980. it may, however, be added that inputs are no longer a constraint on oapacity utilisation as far as Sindri amonia/urea plants are concerned. This could no better be illustrated than by the following figures for capacity utilisation which were fegistered in September and October 1981, to supplement the table given in para 19s Percentage capacity utilisation Product Sept. 1981 October 1981 Ammonia 74.28 74.56 Urea 84.28 91.51 Para 161 Incorporated Although coal supplies had an ash content some what h higher than in PPAM, para. 16, what was initially designed for, this factor by itself had not stood in footnote 2. the way of fulloapacity utilisation, since three service boiler units were avail-ble, as against two which would be required normally and all the three could be run as and when needed in addition to supporting coal - 1b - fi.ring with fuel oil whenever needed. The FC1 suthorities, however, feel that a more serious constreint has been the proprietary CO converter which has been supplied by X/s Lurgi where catalyst activity seems to deteriorate ve37 fast and exohanger leaks and other faozors bring about frequent shut- - downs. A study on improved performance on these converters has been taken up by FCL with /S Lurgi. Para 17t Incorporated Since the-date on which the review of operations which form the basis of in PPAMY' para. 17, this report was completed, one of the two streams in the new sulphario acid footnote 1. plants under the Rationalisation Soheme has been converted to run on exclusively sulphur feedstook. This has improved performance of the plent. Koreover, 7 - P0I has been able to persuade the suppliers of pyrites M/e PPC Ltd to see that only pyrites with 38% sulphur content are hand-picked and sent over to Sindri for processing. Pam 19: MI1 has sent supplementary figtres for September - October 1981 for capcoity utilisation to show considerable improvement over the figures v-whoib have been quoted in the Table under this para. The figures may be seen belows Capao;ty utilisation (%) Sept- 1901 October 1981 Bank-finanoed project kamonia 74.28 74.56 Urea 84.28 91.5 Rationalisation Project Sulphuric acid 22.87 23.6 Phosphoio acid 17.0 20.36 T.S.P. 12.8 15.63 Para 20s Incorporated Mi have been in touch with 'the phos acid p2noess consultants to atudy in PPAN, para. 20, the plant problems and suggest the essential steps fox improving performance. footnote 1. An expert from the consultants visited Sindri in Sept. 1981 and is famng his recommendations. Para 23s Mentioned A number of suggestions made in the UNICO international report on in PPAM, pollution control measures have been put into effect, although not all para. 25. of them could be taken up or oompleted. - 17 - Par& 24 Incorporated it is tne that the problem of over staffing at Sindi has not In substance voluntary retirement beneftaq in been solved. Some of the sobemes, suh asv para. 24, h ae not yielded the expeoted resalts. It would appear that full implementat6c footnote 2. ion of the UNIO suggestions in this respeot would be difficult to ensure under the circumstances. - 18 -ATTACHMENT B PROJECT COMPLETION REPORT INDIA SINDRI FERTILIZER PROJECT I. INTRODUCTION A. Context of the Project in the Economy 1.01 In its fourth five-year plan (1968-1973) the Government of India (GOI) had set as one of its main objectives an increase of about 5% per annum in production of foodgrains over the following decade, which would have increased annual production from 98 million tons in 1968 to 129 million in 1973. To achieve this target, the fourth plan had relied on high-yielding varieties programs and the increased use of agricultural inputs, especially fertilizer. Total fertilizer nutrient consumption (1.8 million tons in 1969) was targeted to reach 5.5 million tons by 1973. However, the actual consump- tion achieved was only 3 million by 1973. One of the major reasons for failure to achieve target was a shortfall in indigenous production. 1.02 In the GOI's fifth five-year plan (1974-79), emphasis was again placed on increased foodgrain production with a targeted average annual growth rate over the period of about 4.4%. To achieve this the Government planned to increase the area under cultivation by 11 million hectares, which was estimated to contribute 1.2% of the crop production growth rate; but the remaining 3.2% were expected to come from a growth in productivity. Of the planned increased use of agricultural inputs necessary to achieve this target, fertilizer was of prime importance with consumption targeted to increase from 3 million to 8 million tons nutrients by 1979. The largest increase planned was in the consumption of nitrogen, which was expected to rise over the period from 2.0 million to 5.2 million tons per year. 1.03 Based on the programs it had already approved in the public and private sectors, the Government expected that the indigenous fertilizer industry would reach a total installed capacity of 4.1 million tons nitrogen and 1.2 million tons P2 0 by the early years of the fifth plan. In addition, however, the plan provided for the establishment of five new fertilizer projects in the public sector to contribute an additional capacity of 1.3 million tons nitrogen and 0.6 million tons P 0 as well as an additional 0.6 million tons per annum total nutrient capacity5to be established by the private sector. Advance action was also planned on projects for completion in the early years of the sixth five-year plan which were to have an additional capacity of 1.0 million tons per year nitrogen. Consequently, a target of 7.0 million tons/year nitrogen and 1.7 million tons/ year P2 0 indigenous manufac- turing capacity formed a basic component in the Governmen 's fifth development plan. The plan noted, however, that many existing plant units had been operating at reduced capacity due to the use of obsolete or unsuitable equip- ment and that modernization of these units utilizing only proven process schemes and equipment in every part of the project was a prime requirement. It was with this background that the Government in 1973 sought an IDA credit to finance a new ammonia/urea manufacturing unit to be constructed at one of its longest established fertilizer works located at Sindri, in the state of Bihar. - 19 - B. Context of the Project in the Bank's Lending Program 1.04 Recognizing that the performance of the agricultural sector which accounted for 45% of domestic output would largely determine India's rate of economic development, Bank lending in support of agricultural development had significantly increased over the five years prior to 1973 mainly at the expense of lending for infrastructure programs. By 1972 agriculture was scheduled to receive around 40% of IDA funds available for India compared to the next largest recipient, industry and IDF, at around 30%. At that time the Bank considered that while a heavier concentration of lending to industry would tend to increase its impact on overall economic growth, it would on the other hand contribute less directly to employment generation. The Bank's activities up till that time with lending to agriculture, however, had encountered many bottlenecks and delays; and attempts to diversify lending into other fields of agriculture and agro-industries had met with limited success. In the industrial sector, assistance to the fertilizer industry had been a field of concentration in the previous two years and had been focused on projects involving the rationalization and expansion of existing plants. The first of these credits for a fertilizer plant at Cochin was proceeding only slowly with unresolved management problems and delays, but two subsequent projects, Gorakhpur and Nangal, were proceeding well, and a fourth at Trombay was due for appraisal. 1.05 The Bank had just previously reviewed the Government's recently formulated fertilizer industry program involving the implementation of a number of new projects during the fifth plan period, and in pursuance of the strategy already adopted, anticipated including at least two of these projects in its lending program during 1974-1976. It was agreed that the Sindri project had very high priority and should be pushed ahead on the same basis as the Nangal project, already being financed by IDA, and whose design was to be duplicated. Accordingly, the GOI applied in November 1973 for an IDA credit to help implement the project. II. PROJECT BACKGROUND A. Identification 2.01 A number of discussions were held with the Government to review its overall plans for expanding fertilizer production capacity in the context of future demand projections, existing capacity utilization and constraints imposed by available financial resources and implementation capability. At that time India had an installed capacity of about 2.5 million nutrient tons of fertilizers with an average capacity utilization of 67%, which only con- tributed slightly over half of the annual consumption even at the depressed - 20 - levels then prevailing. Following this review an overall plan emerged to increase the country's installed capacity to 4.9 million tons nitrogen and 1.2 million tons P 0 by 1978/79 involving the construction of some 20 new plants. This was eieved to be the maximum realistic target given the above restraints. 2.02 In 1973 the Country had 28 fertilizer projects under construction or at an advanced stage of planning with a total capacity of 3.6 million tons, which when completed would have resulted in 60% of installed capacity being in the public and joint sectors and the balance in the private and cooperative sectors. All public sector plants and projects (except FACT) were owned by one state-owned corporation, the Fertilizer Corporation of India (FCI). It had five nitrogenous fertilizer plants in operation, all of which were being expanded, plus a further 15 projects, including the Sindri Fertilizer Project, either under construction or in an advanced stage of planning. While all of India's operational nitrogen fertilizer plants were based on petroleum products, three of FCI's major new projects were to be based on coal, which was a major shift in feedstock policy brought about by the availability of large coal deposits and a steady increase in the cost of imported oil. I/ !he relative merits of these two alternative feedstocks for the Sindri project was therefore given careful consideration during the project preparation period. It was decided, however, to base the plant on oil, limiting the use of coal to steam production, because it appeared likely there would be continuing coal shortages in India in spite of the large available deposits, and some further time would elapse before it would be possible to euploy anticipated techno- logical improvements in the gasification of coal. The plant has, however, been engineered for easy changeover to use coal as feedstock when appropriate. Additionally, it was considered highly desirable to take advantage of the opportunity to duplicate the F angal oil-based facility to achieve an acceler- ated increase in production capacity. B. Appraisal 2.03 Appraisal of the project took place in May/June 1974, based on a feasibility study prepared by FCI staff. The mission had previously concluded that while Sindri was not the ideal location for a new fertilizer project from the viewpoint of accessibility to supplies of coal and oil, or for serving the areas of greatest fertilizer deficiency, and the existing plant site was plagued with environmental problems and many inefficient labor practices, it could be justified on the basis of utilization of the existing establishment and utilities facilities and for the added benefits to be received from the project in complementing new plant units already under construction there. It also had the advantage of being alongside the offices of the Planning and Development Division of FCI (P and D) which would play a major role in engineering, procurement and construction activities. It was 1/ Appraisal of the Sindri Fertilizer Project preceded the discovery of oil and gas in the Bombay offshore reserves. - 21 - recognized, however, that concurrent with the implementation of the project, major efforts would be needed to rehabilitate the older plant units, many of which had become obsolete and under-maintained, and additionally to substan- tially reduce pollution from the existing works with the objective of upgrading its ecological standards to those of modern plants. Implementa- tion of the Sindri project was also instrumental in persuading FCI to close the obsolete ammonia/urea unit. 2.04 Another major issue which was closely examined during appraisal was the plan for project execution proposed by FCI under which P and D would assume the role of major contractors for design and procurement, utilizing the basic designs produced by foreign contractors for the duplicate Nangal project at that time under construction. FCI also proposed that site construction of the project would be the responsibility of the Sindri Works General Manager, who, under FCI policy applicable to all its works, had sole control over all activities on the works site. The appraisal team, after careful assessment of P and D's capabilities compared to the extent of the work required, agreed to the proposal with the exception that responsibility for construction must be vested in a Project Manager independent of the Works General Manager with direct responsibility to FCI's head office Project Director. The appraisal team also stipulated that an expert project scheduler be appointed to monitor progress, prepare and issue his own independent report monthly. Both of these requirements were accepted and adopted by FCI. The appraisal team recognized that project implementation involved some risk, since P and D had never suc- cessfully implemented such a large project as project manager; but considering that the Sindri project was to be a duplicate of the ongoing Nangal project, risks were reduced to an acceptable level. 2.05 On the subject of procurement, the appraisal team agreed that there were substantial benefits to be gained from utilizing the same designs for the Sindri project as had been prepared by foreign engineering companies for the Nangal project; and accordingly, the Bank ultimately agreed to finance the costs charged by these companies for the review and reuse of these designs, as negotiated by FCI, without rebidding. Similarly, to gain the maximum advantage from the resulting design time savings, the Bank agreed to the reuse of the registered bidders list which had been adopted for the Nangal project, without the requirement that the project be readvertised and a new list of prequalified bidders be compiled. C. Negotiations 2.06 Negotiations were held in Washington in October 1974 and the Appraisal Report issued on November 11, 1974. During appraisal it had been noted that the Indian fertilizer industry had suffered from widespread material shortages, and in particular coal. The Government's five-year plan required an increase in annual production from 79 to 135 million tons to meet the needs of firmly planned industries and other consumers, a target most agreed would be impossible to meet. Accordingly, in addition to the normal covenants, the Government agreed to make satisfactory arrangements for supply of all materials needed by the project and additionally to ensure that all necessary railway wagons for the transportation of these materials to the project site be provided. The Government also agreed to make available to the PCI sufficient funds to complete the renovation of Sindri's existing works by June 30, 1977 estimated in the Appraisal Report to be Rs 84.3 million (US$11.24 million). - 22 - 2.07 The Project Agreement, in addition to the normal covenants, required that the FCI appoint a suitably qualified Project Manager for the duration of the project, to be responsible for all phases of the project including site construction. Additionally, the Corporation was obligated to complete the works renovation program by June 30, 1977, and prior to February 28, 1975 engage consultants for undertaking a "Works Transformation and Environmental Study," the terms of reference for which had been prepared during appraisal and subsequently agreed with the FCI. This study, in addition to examining methods of improving pollution levels, was also to prepare the rational plan for phasing out and retiring obsolete plant units and deploying a redundant staff on to more useful activities. Financial covenants included in the Project Agreement stipulated that separate accounts should be kept for the Sindri unit and for FCI's consolidated operations and that for the Sindri unit, debt/equity ratio should not exceed 50/50 and current ratio should not fall below 1.2 with quarterly financial statements to be supplied to the Bank. 2.08 On November 26, 1974, the Bank's Executive Directors approved an IDA Credit for US$91 million to cover the full cost of equipment awarded after ICB and all other foreign costs. The Credit became effective on February 27, 1975. D. Project Description and Objectives 2.09 The project involved the modernization and expansion of FCI's plant at Sindri in the state of Bihar by the addition of a 900 metric tons per day (tpd) ammonia unit, based on fuel oil feedstock, and a 1,000 tpd urea unit to the existing facilities, so as to bring about a net increase in output of about 136,000 tpy nitrogen, after allowing for shutdown of some obsolete units. The Sindri unit had been producing ammonium sulfate, double salt, urea, ammonium nitrate, ammonia and nitric acid; but at the time of appraisal, due to age, it was able to achieve only 50% of rated capacity for these products. FCI had already embarked upon the construction of new triple super- phosphate (TPS) unit complete with supporting sulfuric acid and phosphoric acid plants, and the new project was intended to complement these units and those existing facilities earmarked for renovation to produce 330,000 tpy urea, 346,000 tpy TSP and 320,000 tpy ammonium sulfate as major products, together with smaller annual quantities of ammonia, nitric acid and ammonium nitrate. The objective of this whole program therefore, in addition to significantly adding to the country's installed fertilizer manufacturing capacity and so minimizing costly imports, was to transform the obsolete and outdated Sindri unit into a modern integrated fertilizer works. III. PROJECT IMPLEMENTATION AND MANAGEMENT A. Achievement of Project Objectives 3.01 Mechanical completion of the project may be deemed to have occurred on 12/31/78, some 15 months behind schedule. Construction of the project had proceeded closely to schedule for the first three years of the implementation - 23 - schedule up to the end of 1977, and at that time the delay was estimated at only around four months which would have led to mechanical completion by the end of January 1978. Serious delays then began to be encountered, however, and a supervision mission in March reported that a further six weeks' work was required to complete construction; but the problems became more per- sistent, and it was not until the end of the year that this milestone was reached. The major cause of this delay lay in the inordinate time required by the Indian supplier to supply and erect the ammonia synthesis gas and CO2 turbo compressor sets (paras. 3.20, and 3.26-3.28). 3.02 The program of renovation of the existing plant units was not completed by the stipulated deadline of June 30, 1977, but was effectively completed by October 1978 (well in advance of the start-up of the new project) with a considerably widened scope over that agreed at negotiations. As a result of this program, all plant units to continue in operation as part of the integrated works scheme were upgraded to the state where they can be expected to perform reliably and consistently at high capacity utilization. 3.03 On February 4, 1975, FCI contracted an expatriate consulting firm to undertake the "Works Transformation and Environmental Study." After an extensive study of levels of emissions from each of the existing plant units, and the causes of excessive pollution, this firm submitted its final report in October 1975, which recommended a program of some 13 modifications and/or additions to plant facilities to raise environmental standards up to acceptable levels, with a total estimated cost of Rs 98 million. This program was carefully examined by the FCI in collaboration with IDA, and most of these recommendations have now been implemented with a very noticeable improvement in working conditions within the plant and to the general environment in the plant vicinity. The study team additionally reviewed the design of the ammonia/urea project to ensure that it was consistent with modern accepted standards. The consultant's report also covered the safety procedures prevail- ing on the existing works and made valuable recommendations, many of which were generally accepted and adopted by FCI management. 3.04 A threat to the achievement of project objectives stems from hitherto unsuccessful stabilization of TSP production facilities, collectively known as the Rationalization Project, 1/ and including two 400 tpd sulfuric acid plants built and financed by Techno-Export (Bulgaria), a 390 tpd (P205) phos- phoric acid plant and a 1,150 TSP plant, designed by FACT Engineering Design Organization (FEDO) and P and D respectively. The role of these plants in relation to the ammonia/urea project was (in addition to producing TSP as a final product) to provide by-product gypsum from phosphoric acid manufacture which together with ammonia produced by the new project would be used as raw materials in the manufacture of ammonium sulfate, one of Sindri's three major products. All these Rationalization plant units suffered serious delays in completion and all (except the TSP unit) encountered inadequate supplies of acceptable quality pyrites and protracted technical problems during start-up, which have still not been solved completely, but are expected to be resolved by the end of FY80. 1/ In addition to the renovation program mentioned in para. 3.02. - 24 - B. Project Scope 3.05 The size selected for the two basic plant units, 900 tpd ammonia and 1,000 tpd urea, was identical to that already chosen for the Nangal project under construction at the time, so that the Nangal designs could be reused. 1/ At that period, and still to a large extent today, a 900 tpd ammonia unit pro- vided considerable economies of scale without presenting too many construction and erection problems or the need to use inadequately proven equipment items. The choice of a 1,000 tpd urea unit was consistent with the quantities of ammonia earmarked in the complex for conversion to urea and ammonium sulfate, respectively. C. Project Management 3.06 A master plan for implementation of the project was drawn up jointly by the FCI management and the appraisal team. Under this plan FCI acted as its own engineering, procurement and construction contractor with assistance from foreign engineering firms for preparation of the basic engineering designs for the ammonia unit, oil gasification plant, gas purification unit and urea plant, respectively. Detailed design and major procurement were made the responsibility of FCI's P and D, 2/ who assigned a task force under the direction of a full-time "Project Coordinator" to handle these areas. 3.07 Financial control of the entire project and responsibility for site construction and site procurement, on the other hand, were placed under the control of a Project Manager selected by the Corporation. While the Project Manager so selected was made administratively responsible to the Sindri Works General Manager, in matters of project execution he was assigned maximum authority with responsibility directly to FCI's head office Project Director. Finally, an independent specialist Project Scheduler was appointed responsible for an impartial evaluation of project progress and potential delays, and for making appropriate independent reports monthly. This management system worked exceptionally well, and with the insulation of both the Project Coordinator's staff and the Project Management Group as far as possible from routine admin- istrative procedures, unnecessary delays and confusion were almost totally eliminated. At the height of project activities, the Project Manager's staff numbered approximately 180 persons, including approximately 28 on financial control, 7 on personnel management, 20 on materials management, 27 coordinating with P and D's task force, 93 supervising and controlling construction and 3 monitoring progress. Actual construction work was carried out by local contractors and in some areas by FCI's own labor force. 1/ Nangal PCR dated August 31, 1979. 2/ Now formed into a separate Government-owned corporation under the name of "Fertilizer (Planning and Development) India, Ltd." (FPDIL), but for purposes of this report the former name is used throughout. - 25 - D. Training 3.08 Formal training of staff in preparation for start-up of the project was given to 128 engineers and skilled workers. During the early stages of construction, six engineers from the Project Manager's construction staff were sent for training in foreign equipment manufacturers works in Japan, FRG, Holland and France. Some 16 man-weeks of such training were received, which were subsequently utilized in the installation of equipment and later in supervising the maintenance of this equipment in operation. The number was considered inadequate, however, and the matter was brought to the attention of the FCI's Chairman following a supervision mission in December 1976, in an endeavor to gain easier release of the foreign exchange necessary for such overseas visits, thereby eliminating what was believed to be the main constraint. Subsequently, 7 more engineers were sent abroad for workshop training, gaining a further 29 man-weeks of instruction in total. Additionally, eight process engineers and four maintenance engineers received training in an operating fertilizer plant in FRG during 1977. 3.09 In addition to the foreign training provided, an extensive program of training in local facilities was given to most of the 128 selected staff, including 40 process engineers, 56 process operators, 4 maintenance engineers and 15 maintenance tradesmen. The 40 process engineers received a total of 60 man-weeks of classroom training and 122 man-weeks of training at the Nangal project. Fifty process operators additionally received classroom training over periods varying between 2 and 12 weeks. This program was aided by the use of a simulated process trainer imported from the US and financed under the Credit. A total of 56 process operators received 224 man-weeks of plant training at Nangal. Training in selected Indian equipment manufacturers workshops and at the Nangal project site was also given to 4 maintenance engineers and 15 tradesmen amounting to a total of 56 man-weeks. A summary of the overall training program is shown in Annex 1. E. Staffing 3.10 The chronic overstaffing problem at the Sindri Unit has further deteriorated with retirement of a number of obsolete plant units. Throughout the implementation period for the new project, IDA continually impressed upon the Sindri management the need to prevent the inefficient labor practices prevalent in the existing works, and resulting from the overstaffing problem, from spilling over into the new project. In response to IDA's urging, the management did develop a practical staffing plan for the new project involving a total staff strength of 554 persons, including 243 on maintenance, 296 on production and 15 on chemical control. Just prior to plant start-up, however, the number was increased to 681 due to the decision to use permanent staff on bagging, loading and unloading operations rather than contract labor. The new allocation is now 421 persons in production, 238 in maintenance and 22 on chemical control. This staff strength may be compared with a total employment role of 8,172 on the entire site which gives some dimensions to the problem. The management has not been able to make any progress in its aim of reducing this overstaffing problem due to the actions of militant unions in the area; in fact, the number has been increasing steadily from 7,999 in 1977 to 8,028 in 1978 and to 8,172 in 1979. The labor unions are even pressing for the employment of a further 1,500 persons by the works, and these actions threaten the future efficient functioning of the project. - 26 - 3.11 Under the prevailing circumstances the present staffing plan for the project itself is considered realistic. The basic plan was developed after a careful study of maintenance procedures as part of the Works Transformation and Environmental Study mentioned earlier. This study recommended that a centralized maintenance system be adopted over the entire works to replace the system of having self-sufficient maintenance teams permanently assigned to each plant unit in the works. The plan could not be adopted for the existing works but was given careful consideration for the new project, with a final compromise being reached whereby all major maintenance jobs on the new project would be handled by the existing workshops and only staff to handle day-to-day maintenance would be permanently assigned to the new plant. With the exception of this maintenance servicing arrangement, it is intended to separate the operations of the new project as far as possible from those of the existing works in an endeavor to insulate it from the unsatisfactory labor practices firmly in place in the existing works. F. Use and Performance of Consultants 3.12 The same foreign engineering design firms associated with the Nangal fertilizer project were also used in the Sindri project for the: (i) Basic Design of Ammonia Synthesis Unit; (ii) Basic Design of Urea Plant; (iii) Basic Design of Shell Gasification Unit and Rectisol Desulfurization and CO2 Removal Units; and (iv) Technical Assistance during Project Implementation. In addition, FCI itself provided the basic engineering of the CO conversion unit based on its own process using an PCI-manufactured catalyst. The work of the foreign companies in providing basic design of the process units was limited to a revision only of the basic design packages they had previously prepared for the Nangal project. Revision of the detailed engineering designs prepared by these companies for the Nangal project was undertaken by P and D, but was checked by the foreign firms. At the time these contracts were negotiated, technology transfer in the process industries had not yet come into general practice (as, for example, it is now practiced in such countries as Brazil and Mexico) and the foreign firms, realizing their strong bargaining position, sought high fees for the reuse of their Nangal designs. While agreements were relatively quickly reached with the urea and gasification contractors, based on FCI's already existing arrangements with them, severe problems were encountered with the ammonia plant contractor, who at least initially insisted on a repeat of the fees they had charged for their Nangal designs even though their services on the Sindri project would be minimal. This problem delayed a start on the project by about two months before an agreement was reached, with compromise terms only reluctantly accepted by FCI. After this problem was resolved, execution of the project in association with these companies proceeded smoothly except in the case of the ammonia plant contractor, who was 16 weeks late in submitting engineering specifications which had an impact on the overall project schedule of an additional month. - 27 - 3.13 Due to relatively novel technology and experience, the foreign contractors made frequent design changes in the ammonia plant as they gained experience from the operating plant in FRG, in many cases after construction was completed, which caused further delays of about 1-2 months in project completion. The performance of P and D, which acted as prime engineering and procurement consultant, was impressive in their first major assignment on an ammonia urea project. All their tasks were executed smoothly and on schedule, and their efforts largely overcame the inefficiencies of the foreign contractors. 3.14 No external management assistance or technical advisory services were utilized by the company in executing the project other than the consultants employed for the Works 1ransformation and Environmental Study referred to earlier. This firm performed admirably and submitted an excellent report. G. Implementation Schedule 3.15 In spite of some design delays, the project proceeded generally according to schedule during its initial phases as detailed on a master control network diagram (para 3.06), which showed commencement of commercial production by end February 1978. Execution of the project was the responsi- bility of the Project Manager and Project Coordinator, whereas monitoring and reporting of actual progress compared to the plan was the task of the indepen- dent Project Scheduler referred to in para 3.07. FCI used its own "in-house" computer facilities to print out a tabular review of each activity on the project every month and to assess the delay in these activities (if any) and the resultant impact on the overall project schedule. According to the results of the information received, the Project Manager then revised work schedules to minimize as far as possible the slippage in the scheduled project completion date. 3.16 In addition to the independent report by the Project Scheduler, a milestone chart was updated monthly for senior management showing in a graph the physical and financial progress of the project and separate charts for design, engineering, procurement, civil works, erection and testing, showing the dates when various pre-selected milestones were reached in each of these phases compared to their target dates. The physical progress graph shows the project as commencing in November 1974 and remaining on schedule until harch 1975, when an unrecoverable slippage of five weeks was suffered due to the 16 weeks late receipt of technical specifications from the ammonia contractor as referenced in Annex 2. The project then had no further slippage until February 1977 when it became clear that in spite of vigorous follow-up with the suppliers by the project management, there would be aelays of 15 weeks in supply of the air compressor for the oxygen plant by a foreign firm, and in completion of the steam generators and turbo compressor sets by an Indian supplier. In spite of continuous expediting and follow-up with the suppliers, the nitrogen unit was not commissioned until May 22, 1978, a delay of 8 months, which caused an impact of 27 weeks slippage on the project coupletion date. The CO unit was even further delayed, not being commissioned until January 15, 1979, a delay of 16 months. - 28 - 3.17 Similar delays occurred in the supply and erection of the three steam generation plants supplied by a domestic firm with commissioning of the unit being completed on October 10, 1977 compared to the target date of August 29, the second unit being commissioned on December 30, 1977 compared to target date of September 26 and the third on August 28, 1978 compared to December 26, 1977. As a result of the delays in the delivery and erection of the turbo compressor sets, the overall project schedule began to show greater slippage from the beginning of 1978, and, subsequently, during that year as erection work, especially on the synthesis gas unit, further slowed down, the overall delay became seriously extended with the result that by August 1979 it reached 18 months. A bar chart comparing appraisal against actual project implementa- tion schedule is given in Annex 3. H. Procurement and Performance of Suppliers and Contractors 3.18 Procurement proceeded smoothly throughout the project both for domestic and foreign goods (with the exceptions noted above), and the famil- iarity of FCI's project staff with IDA procedures enabled the ICB awards and IDA approvals to be completed smoothly and expeditiously in the case of IDA-financed goods. 3.19 The total number of orders placed for goods and services for the project was 1,340, of which 833 with a total value of Rs 688 million were awarded under ICB procedures. Of this total, foreign suppliers won Rs 449 million with the balance of Rs 239 million being taken up by domestic firms. Of the total of 833 ICB orders, 660 were below US$50,000 in value, 125 were between US$50,000 and US$300,000 and 48 over US$300,000. Indian firms won 152 of the 833 ICB orders, including 9 of the 48 above US$300,000 and 29 of the 125 between US$50,000 and US$300,000. FRG won the most ICB orders with 278, including 23 out of the 48 above US$300,000 in value. This confirms previous experience with similar projects where it has been found that most ICB orders are won by suppliers of the same nationality as the main plant designer. Other prominent source countries for the Sindri project were Japan (108 orders), US (97), UK (86), Italy (44) and France (23). A detailed analysis is shown in Annex 4. 3.20 A special issue arose in the procurement of the synthesis gas compressor and turbine which were competitively bid internationally by a limited number of foreign firms and Bharat Heavy Electricals Ltd (BHEL), and was eligible for IDA financing. Each of the foreign firms invited to bid had been carefully prequalified as suitable suppliers of this item which was adjudged technically critical to the success of the project. BHEL had been included in this list because it had supplied a similar machine for the Nangal project but assembled mostly from imported major components, namely, a centri- fugal compressor manufactured by Nuovo Pignone in Italy, and a steam turbine manufactured by AEG, FRG. The bid that BHEL submitted for the Sindri project, however, was based on all equipment items being manufactured in its own works under license from its foreign associates. On review of BHEL's offer, which was subsequently put forward by FCI (under instructions from the Government) as the winning bid, IDA concluded that while it would agree to BHEL manufactur- ing the turbine in its own works due to the experience it had already gained - 29 - with this type of equipment, it would not agree to a similar arrangeuent for the compressor with which BHEL had had no experience, and it claimed that BHL had been prequalified to bid only on the basis of supplying imported components as previously done in the case of the Nangal project. Both BHEL and the Government insisted, however, that FCI must award the contract to BHEL, and this was subsequently done, with IDA declining to finance any part of the order, but refraining from cancelling a corresponding part of the Credit. As a result of this particular incident, it became general practice that in future no suppliers would be prequalified for provision of equipment for industrial projects, which would give them certain legal rights in subsequent award of contracts; instead, they would be registered, which would permit a post-qualification to be held on the basis of the merits of the offers they submitted. 3.21 In addition to BHEL's late deliveries of the centrifugal compressors and turbines, the project also suffered a great many other late deliveries of equipment both from domestic and foreign sources. The project records show that on average about two-thirds of the orders were delivered late with delays of frequently more than one year: France (88% late), Italy (76%), UK (75%), India (73%), Japan (49% with relatively shorter delays) and the US (50%). The dimensions of this problem were such that the completion date became virtually dependent on the length of delays in equipment delivery dates. Possibly one year and a half could be cut from the completion time of a project such as Sindri if the prime contractor could be permitted to use established and reliable equipment suppliers over whom it has some le-verage. In general industry practice, a strong technical linkage exists between the engineering firms and their established suppliers resulting in a better understanding of the technical requirements of the equipment by the supplier and his manufacturing capabilities by the engineering firms. This understand- ing, which improves with working together on several projects, facilitates timely deliveries. Such an understanding often does not exist with suppliers who have not worked earlier with the engineering firms and so owe no particular allegiance to them. One example of the disinterest of such suppliers in the case of the Sindri project was that of one foreign supplier, who, although almost one year late on its deliveries of critical equipment, made no effort to complete the order before the annual summer vacation shutdown of the works. The Indian suppliers, over whom the GOI could be expected to have adequate leverage, were equally in default--58 weeks late with delivery of the liquid ammonia storage sphere and 62 weeks late with supply of heat exchangers. I. Project Cost and Disbursement 3.22 The cost to complete the project was Rs 1,876 million, 32.5% above the original estimate of Rs 1,416 million, as shown in the table below: - 30 - Capital Costs - Latest Estimate vs. Appraisal Estimate Summary of Project Costs (In million Rupees) Increase Appraisal Estimates Actual in Local a/ Foreign a/ Total Local Foreign Total Total Cost 1. Site Preparation 2.7 - 2.7 6.8 - 6.8 4.1 2. Process Equipment, incl. Catalysts and Chemicals 88.2 356.0 444.2 183.6 401.0 584.6 140.4 3. Services, Auxiliaries and Construction Equipment 110.5 97.6 208.1 225.5 20.0 245.5 37.4 4. Freight, Insurance, Duties and Taxes 211.3 35.6 246.9 182.2 35.1 217.3 (29.6) 5. Civil Works 46.6 - 46.6 59.2 - 59.2 12.6 6. Construction and Erection 69.8 9.6 79.4 98.0 35.3 133.3 53.9 7. Engineering Services 38.0 36.7 74.7 35.8 34.6 70.4 ( 4.3) 8. Pre-operational Expenses 30.7 0.8 31.5 157.0 1.0 158.0 126.5 9. Spare Parts 40.0 46.2 86.2 28.7 32.0 60.7 (25.5) Total Installed Cost 637.8 582.5 1,220.3 976.8 559.0 1,535.8 315.5 10. Working Capital 88.3 - 88.3 136.0 - 136.0 47.7 Total Project Cost 726.1 582.5 1,308.6 1,112.8 559.0 1,671.8 363.2 11. Interest During Construction 107.4 - 107.4 204.4 - 204.4 97.0 Total Financing Required 833.5 582.5 1,416.0 1,317.2 559.0 1,876.2 460.2 a/ Proportional allocation of contingencies to Items 1 to 9. From the table it can be seen that while there was a significant overrun in equipment cost of Rs 140 million or 30% of total cost overrun, the major cost increases occurred in pre-operational expenses and interest during construction amounting to Rs 224 million or 50% of total, both mainly attributable to the 18-month delay in project completion, and almost entirely made up of local currency. Additionally, there was a Rs 48 million or 54% increase over the appraisal estimate in working capital requirements primarily due to the heavy increases in raw material costs since the time of the original capital budget as shown in Annex 5. Inspite of the downward float of the rupee the foreign expenditures remained 4% below budget estimate as a result of shifting the - 31 - synthesis gas compressor and turbine from foreign to local suppliers. If expressed in US dollars 1/ the cost overrun amounts to only 11.7% and 6.1% for "ftotal financing required," and "total installed costs," respectively, as a result of considerable exchange rate fluctuation 2/ from the time of appraisal through project completion. 3.23 The actual disbursement schedule for the IDA Credit compared to the anticipated schedule of the Appraisal Report is shown in Annex 6. Actual disbursements lagged considerably behind the estimates, i.e., at the end of 1975 only US$8 million had been disbursed compared to the appraisal estimate of US$20.7 million, at end 1976 some US$40.0 million had been disbursed com- pared to the estimate of US$83.7 million and at end 1977 actual disbursement was US$69.2 million as against US$91.0 million estimated. In general, through- out this period, actual disbursements were about one year behind the estimated levels. The reasons for the lag can be apportioned between late equipment deliveries, and an inadequate allowance for the time required for processing invoices from the time of preparation by suppliers through final disbursement by the Bank. 3/ The disbursement lag caused three extensions in the loan closing date, totalling 18 months, to March 1980. J. Financing Plan and Cost Overrun Financing 3.24 A comparison of appraisal estimate and actual financing of the Project is shown below: Sindri Fertilizer Project -- Financing Plan (in Rs million) Appraisal Estimate Actual Amount % Amount % Equity Government of India 661.5 47 896.0 48 Loans IDA 682.5 48 797.5 a/ 43 Government of India 97.7 5 Short-term Loan 72.0 5 85.0 4 Sub-total 754.5 53 980.2 52 Total Financing 1,416.0 100 1,876.2 100 a/ Increase of IDA Credit of US$91 million expressed in Indian Rupees is due to exchange rate variations. Average exchange rate for IDA credits is US$1 = Rs 8.76. For the conversion of all other funds an exchange rate of US$1 = Rs 9.00 was used. 1/ At rates prevailing at the time of expenditure. 2/ Bptween US$1=Rs 7.5 and US$1=Rs 9.17. 3/ Partly due to the requirement of routing them through government agencies. - 32 - To a large degree the cost overrun of Rs 460 million was financed with Government funds, e.g., 51% through equity and about 24% through loans. The remaining balance of 25%, or Rs 115 million, was covered by the appreciated IDA credit when expressed in rupee due to exchange rate variations during the period of project execution. The structural changes of the financing plan between the time of appraisal and of completion were marginal. K. Commissioning and Start-Up 3.25 A chronological list of major plant commissioning events is given in Annex 7. Commissioning of the utilities and services units for the project officially commenced in mid-1977, with the energizing of the main electric substation. This was followed soon after with trial running of the instrument air systems and the boiler feed water treatment plant, and late in the year the first steam generation plant was tested and put into service. In January 1978, the Air Separation Unit was successfully tested. In February, preheating of the Shell Gasifiers was commenced and the gas purification train prepared for trial running. The second of the three steam generator plants was commis- sioned on March 20, but frequent trips of both boilers were experienced resulting in an unsteady supply of steam to the air separation plant. The third steam generator was not ready for firing until December 1978, and commissioning was not completed until January 15, 1979, about 10 1/2 months behind schedule. 3.26 Although nitrogen and oxygen were available from the air separation unit in February, the nitrogen compressor could not be run until the latter part of May, a delay of eight months in the planned schedule. Additionally, there were problems of oil and steam leakages to be overcome after commission- ing of this equipment. The oxygen compressor was commissioned immediately after the nitrogen compressor without problems but could not be run in stable operation due to continuing unstable boiler operation. With oxygen and steam available, the gasifiers were ready for operation in June but could not be started due to continuing problems with the nitrogen compressor and failure of the "Return Water Transfer Pumps." These pumps, which were supplied more than one year late, could not be successfully operated even under the supervision of an expert from the manufacturers works, and it was not until they were replaced by substitute pumps secured from an Indian manufacturer that the first gasifier was able to be started on July 28, 1978. By end September, the entire gasification and carbon recovery sections had been successfully commis- sioned and was in trouble-free operation with excellent quality carbon pellets being produced for use as fuel in Sindri's power plant. 3.27 By the end of 1978, in spite of continuing industrial unrest at Sindri which caused a one-month delay in the work schedule, the H 2S removal, CO conversion, CO2 removal and the liquid nitrogen wash units had all been commissioned, but due to the unavailability of the ammonia synthesis gas compressor, the synthesis gas had to be flared. To utilize this gas while awaiting the syngas compressor, the management installed a gas line across to the ammonia plant in the old works and enabled it to produce some 180 tons/day ammonia by this means. Subsequently, on February 25, using liquid ammonia accumulated for the purpose, the urea unit was started and prilled urea of good quality was produced during its initial trial run. - 33 - 3.28 While the initial spin and overspeed tests on the syngas compressor and its high- and low-pressure steamturbine drivers had been successfully conducted by November 1978, an attempt in December to run the two turbines coupled together resulted in overheated bearings and contact between the rotor and casing. This problem was diagnosed as due to movement of the turbine casing during operation caused by strains induced in the high-pressured steam piping. It was necessary therefore to dismantle the pipework and to remove the damaged rotor, which subsequently had to have its perimeter ground in Sindri's maintenance shops and sent out for rebalancing by an Indian company. Modifications to the steam piping were concurrently undertaken to prevent a recurrence of the problem, following which the syngas compressor was run on synthesis gas at the end of March and the first ammonia produced. 3.29 In March 1979 all units which had been previously involved in the start-up procedures were operating relatively trouble-free with the exception of the syngas turbine and the syngas compressor. The protracted process of rectifying their mechanical malfunctioning delayed the start of commissioning of the entire plant until August 1979. However, commissioning might have been achieved earlier had it not been for the retarding impact of the following problem areas: (i) Boiler Electrostatic Precipitator The electrostatic precipitators supplied with the steam generation units did not perform satisfactorily and were unable to achieve the specified level of dust removal from the flue gases. The rectifier/transformer components of these units had to be returned to the sub-supplier for modifications. (ii) Coal Quality Due to the higher than specification ash content of the coal being supplied to Sindri (up to 41%), there has been consider- able wear and tear on the bowl mills, exhausters and induced draft fans requiring frequent parts replacement. Additionally, possibly also due to poor quality coal, it has been found necessary to burn 15% oil (on thermal basis) to prevent boiler "flame-outs." (iii) Fuel Oil Supply and Transportation Sindri was unable to obtain its requirements of 10,000 KL/month oil from the Indian Oil Company Ltd. (IOC) and instead was only receiving about 3,500 KL/month, with the result that its fuel oil storage capacity of 28,000 KL, which should desirably have been full at start-up of the ammonia plant, was most of the time below 4,000 KL. As a result, the commissioning could not proceed and the plants remained shut for long intervals. IOC reportedly claimed that the problem was due to a shortage of rail tank cars equipped to move the heavier LSHS (low sulfur heavy stock). After several meetings between IDA missions and Government representatives during 1979, the Government and Indian Railways (IR) agreed finally to - 34 - supply Sindri with feedstock quantities sufficent to permit plant operation at about 50% of the rated capacity 1/ from October 1979- onward and to increase shipments as soon as shortage of tank wagons with steam-heating coil eases during the coming months. Full solution would not be available, however, until the required tank car fleet has been built -- possibly by mid-1981. IV. OPERATING PERFORMANCE AND EVALUATION A. FCI's Financial Performance 4.01 FCI has been restructured as of April 1, 1978. The objective of the restructuring was to improve the overall efficiency of a centralized multi-unit company whose various works were spread over a large territory making effective communication difficult. Thus FCI was regrouped into four companies according to geographical considerations, which permitted more direct control and shorter intervals of reaction by management. FCI's P and D was also spun off into an independent company under the name of Fertilizer (Planning and Development) India Limited (FPDIL). The residual FCI comprises the works at Sindri, including the project, and at Gorakhpur. 2/ In addition, FCI has two 1,500 tpd urea plants based on coal as feedstock at Talcher and Ramagundam which, however, started commercial production only in January 1980. FCI's headquarters is still located in Delhi and consists of a few top corpo- rate officers supported by a small staff primarily responsible for coordinating tasks. 4.02 Although most of FCI's former units have demonstrated a fairly impressive operating performance in the past, FCI's overall financial per- formance has been deteriorating since appraisal in 1974. To a large degree, the disappointing results must be seen as a consequence of the fertilizer price policy pursued by the Government which was more focused on the avail- ability of basic agricultural inputs at costs attractive to farmers than on ex-factory prices that permitted an adequate remuneration to the efficient fertilizer producer. This unsatisfactory condition, which was only changed in November 1977 by adopting a more realistic pricing policy, was even amplified by the operational problems FCI began to experience in its Durgapur and Sindri units. The table below shows selected financial key data from income and balance sheet statements given in Annex 8: I/ In the initial year of operation the retention price is Rs 2,722/ton and Rs 3,200/ton of urea and ammonia, respectively. 2/ A naphtha-based 1,000 tpd urea plant operating commercially since January 1969. - 35 - FCI - Selected Financial Data (In million Rupees) 1974/75 1975/76 1976/77 1977/78 1978/79 a/ unaudited Production ('000 tons nutrients) 389 429 612 463 88 Net Sales 1,515.7 1,589.0 2,211.0 2,632.2 800.4 Net Profit 12.8 (222.8) (332.5) (504.0) (218.3) Depreciation 155.0 164.1 236.0 314.9 51.8 Interest 26.7 50.1 118.6 172.0 121.6 Cash Flow b. Int. 194.5 (8.6) 22.1 (17.1) (44.9) Current Assets 799.1 1,065.5 1,485.3 1,449.6 515.2 Current Liabilities 984.9 916.8 1,229.3 1,097.9 850.5 Long-Term Debt 1,491.7 2,720.4 4,065.5 5,479.8 3,178.5 Equity 4,287.5 5,296.7 6,065.6 6,279.0 2,429.7 Current Ratio 0.8:1.0 1.2:1 1.2:1 1.3:1 0.6:1 Debt/Equity Ratio 26:74 34:66 40:60 47:53 57:43 a/ Note that the data of FY78/79 reflect FCI's accounts after the reorgani- zation and are not directly comparable with the ones shown for previous years. 4.03 FY74/75, in which most of the appraisal work was done, was the last time FCI generated a modest profit. During the following three years--before the Government decided to break the company up into smaller units--FCI accumulated losses of about Rs 1,060 million which is about equal to 25% of its original share capital. Internally generated cash flow averaged out to about zero over the 3-year period. During the same period the Govern- ment supported new investments in the order of Rs 5,440 million and provided about 40% of this amount in the form of equity. Considering, however, that about one-third of the share capital contribution was used to compensate for experienced losses, capital expenditures were actually financed at a debt/equity ratio of about 70/30. Consequently, FCI's capital structure deteriorated from an average debt/equity ratio of 26/74 in 1974/75 to 47/53 in 1977/78, just slightly above the minimum ratio of 50/50 as agreed in the Project agreement. The current ratio requirement of 1.2:1 was met with the exception of FY74/75. 4.04 FCI's disappointing financial performance was caused by a wide range of reasons; however, most of the damage could be attributed to three principal factors: (i) Ex-factory prices which did not permit an adequate return on investment (ROI), particularly since the pricing system did not provide for a sufficiently flexible mechanism to compensate for sky-rocketing raw material costs without undue delay; - 36 - ,ii) Extensive delays in project execution, commissioning and stabilization of commercial production; 1/ and (iii) Capacity utilization at Sindri and Durgapur plants was con- sistently below the stream factors achieved at PCI's six other plants. 4.05 The latter point is shown in the table below giving the average rates of capacity utilization per plant: FCI - Comparison of Rates of Capacity Utilization in Percent 1974/75 1975/76 1976/77 1977/78 Sindri 77 67 47 10 2/ Gorakhpur 91 72 85 68 Nangal 51 97 101 69 Trombay 84 98 126 105 Namrup 91 102 104 100 Durgapur 10 24 30 34 Barauni - - 15 25 Namrup Expansion - - 31 36 Trombay (P205 100 100 100 106 Average N 52 58 51 43 Average P205 100 100 100 106 The trend of Sindri's decreasing production level--it was only above average in FY74/75--indicated clearly the need to undertake a renovation program, a rationalization project and the IDA-financed Modernization Project, the latter replacing the obsolete ammonia/urea facilities. 3/ During the years from 1976 through 1978 Sindri works accounted for 50% to 60% of the FCI's total losses. This situation became even more unbalanced after the reor- ganization of FCI took effect in April 1978, leaving the new FCI only with one unit at Gorakhpur operating commercially, and with four projects in the early commissioning phase. While the works at Gorakhpur averaged a capacity utili- zation of 69% in FY78/79, Sindri was left with some minimal production result- ing from various trial runs. Consequently, the Sindri operation accounted for 92% of FCI's total operating loss. In other words, the improvement of FCI's overall financial performance will depend largely on how soon (i) the ammonia/ urea plants at Talcher and Ramagundam will reach target levels of production, 1/ In the case of Sindri's rationalization project, and the two coal-based projects at Talcher and Ramagundam, the total delay is more than four years. 2/ The impact of the renovation program completion would be felt only when the Modernization Project facilities are in stabilized operation--from FY80 onwards. 3/ The economic success of all three projects is linked together, since the "surplus" ammonia of the IDA-financed Project is designed for use in ammonium sulfate production of the renovation project, which in turn is only economical if gypsum can be internally provided as a by-product of the phosphoric acid production of the rationalization project. - 37 - and (ii) Sindri can improve its operating results. With the planned start-up of commercial production of both the rationalization and the modernization projects in Sept./Oct. 1979, the prerequisites to reaching the turning point in FY79/80 are given. When, however, real improvement will occur depends largely on how soon production can be stabilized. The hope that a quick turn-around situation will materialize is somewhat impaired by the immense problems of raw material supply in terms of quality and quantity FCI is facing at both Sindri and Gorakhpur plant sites. For instance, during the first 5 months of FY79/80, Gorakhpur operated only at 46% of rated capacity compared with 69% of the previous year. About 60% of the below target performance was a direct result of difficulties in coal supply and power fluctuations and only 30% was caused by breakdowns due to aged equipment. Although Sindri success- fully started up the ammonia and urea plants in August 1979, it was forced to shut down both plants at the end of the same month due to shortages of fuel oil and LSHS. To some degree the problems experienced with regard to feed- stock supply eased during recent months and Sindri was able to stabilize its area production close to 50% capacity utilization - the target level for the first operating year. B. Sindri's Financial Performance 4.06 The difficulties Sindri has been encountering in the past are reflected in Sindri's income and balance sheet statements given in Annex 9 and summarized below: Sindri Unit - Selected Financial Data (In Million Rupees) 1974/75 1975/76 1976/77 1977/78 1978/79 Net Sales 237.3 227.2 151.1 110.0 100.7 Net Profit (89.3) (147.8) (178.5) (224.4) (183.5) Depreciation 18.5 18.2 18.7 25.5 20.8 Interest 0.2 1.1 17.8 42.0 94.6 Cash Flow b. Interest (70.6) (128.5) (142.0) (156.9) (68.1) Current Assets 145.9 155.3 248.2 166.9 181.6 Current Liabilities 126.0 100.6 121.6 181.4 145.3 Long-term Debt 326.4 541.8 1,205.5 1,770.2 2,080.5 Equity 171.2 231.5 454.9 237.4 316.6 Current Ratio 1.2:1 1.5:1 2.0:1 0.9:1 1.3:1 Debt/Equity Ratio 66:34 70:30 73:27 88:12 87:13 Ninety percent of its cumulative share capital increases were used up by the cumulative losses over the reviewed period, thus having a devastating effect on Sindri's equity base, leaving it with only about 13% equity of its long-term financing needs. Only due to an excessive inventory, up to 16 months of sales, the current ratio appears reasonable. The more relevant test of a quick ratio (neutralizing distortions caused by too large inventories) was most of the time between 0.2:1 and 0.4:1, which was far below - 38 - industry average and would expose an independently operated unit to a consider- able risk of illiquidity. However, since Sindri is operated in the form of a profit center constituting an integral part of FCI, the implication is more of operative nature than an indication of unsound financial practices. Any shortages in cash or long-term financing were covered through FCI headquarters. A low quick ratio per unit can be purposely pursued by headquarter management to minimize the company's overall cash requirements. Nevertheless, it would be desirable for the Government to provide Sindri with a structure of capital resources comparable to that of independent entities to alert unit management to the importance of financial costs, e.g., carrying charges of an ample inventory, and to encourage financial responsibility. C. Covenants 4.07 The Project Agreement cites three important financial covenants. They are a 50:50 debt/equity ratio for FCI as well as the Sindri unit and a current ratio of 1.2:1 to be maintained by FCI. While the debt/equity ratio required for Sindri was never met during the project implementation, the two covenants concerning the consolidated FCI were defaulted only in FY78/79, the year after its reorganization. Though FCI's defaults weigh heavier than Sindri's, they do not actually imperil the project's success. The Govern- ment is aware of the situation, caused to a large degree by the company's restructuring--as described in para 4.05--and in particular by the decision not to apportion the total accumulated losses over the past to all successor companies but to allot them to the residual FCI. Presently, Government authorities are contemplating means to consolidate PCI's financial position. Though no concrete measures are yet indicated, assurance has been given to the supervision mission that remedial steps will be taken before the end of the current fiscal year. 4.08 A covenant bearing considerably more relevance to the project success is the supply and transportation of raw material (Credit Agreement--Section 4.02). However, this covenant of critical importance has not been met and consequently the project suffered due to a protracted start-up and commission- ing phase (para 3.29, iii). Another default concerning the same covenant is the higher than specification ash content of coal (para 3.29, ii). In addi- tion, deliveries of pyrite for the rationalization project--also covered by the above-mentioned covenant--are below requirements and thus affect the project's success indirectly. D. Financial Rate of Return (FROR) 4.09 The main inputs for calculating the financial rate of return (FROR) are shown in Annexes 10 and 11. The FROR for the project in 1979 terms is 15.5% which is satisfactory and close to the appraisal estimate of 16%. The FROR depends primarily on three critical assumptions: (i) production build up from 50% to 90% capacity utilization during the first 4 operating years; - 39 - (ii) retention price calculation is based on a 29.36% return on net worth before taxes 1/; and (iii) retention price calculation is used also as transfer price for ammonia consumed internally for production of ammonium sulfate. In the event final capacity utilization should only reach 80% the FROR would be 13.6%. E. Market Development and Performance 4.10 The Government's projections of nitrogen consumption over the period of the fifth five-year plan rising from 2.0 million tons in 1973/74 to 5.2 million tons in 1978/79 were not achieved. Actual consumption in the base year was only 1.83 million tons, and this only rose to about 3.4 million tons in 1978/79, with the overall result being in large part due to falls in consumption in both years 1973/74 and 74/75 from the preceding years due to a sudden and severe rise in the price of imported fertilizers, abnormal weather conditions and tight credit policy. Nevertheless, for the four years from 1975/76 through 78/79, the average annual increase in nitrogen consumption was 18.0%, and with a continuation of this trend consumption by 1983/84 would reach 5.89 million tons per year. Indigenous production of nitrogen rose from 1.05 million tons in 1973/74 to 2.17 million tons in 1978/79 and is forecasted to rise to 5.0 million tons by 1983/84, leaving a considerable shortfall throughout the entire period, which must continue to be filled by imports over the next four to five years. The project will fill a very important role there- fore in building up domestic output to narrow this gap. 4.11 The bulk of Sindri's urea will be sold in the states of Bihar, Uttar Pradesh and West Bengal, with some additional quantities finding their way to Assam, Orissa, Madya Pradesh and Maharashtra. Ammonium sulfate produced at Sindri (from the project's surplus ammonia) will be distributed to the states of Bihar, Uttar Pradesh and Andhra Pradesh only. The consumption of nitro- genous fertilizers in Sindri's main marketing areas of Bihar, Uttar Pradesh and West Bengal has been increasing substantially, and these three states together will consume more than 80% of the project's production. Actual increase in nitrogen consumption in each of these three states from 1973/74 through 1978/79 and projected consumption from 1979/80 through 1983/84 are shown in Annex 12, page 1. It can be seen that the Appraisal Report correctly forecasted the consumption of nitrogen in the main consumer state of Uttar Pradesh for FY78 but overestimated the growth rates in Bihar and West Bengal by 95% and 51%, respectively, up till that year. In total for the three states, however, the Appraisal Report estimated a consumption in 1977/78 of 1.06 million tons compared to an actual of 0.90 million tons, an over- estimation of just 18%. Future growth rates are now much more conservatively estimated in Bihar and West Bengal than in the Appraisal Report, but in the case of Uttar Pradesh a much more optimistic view is taken. On balance, 1/ In the initial year of operation the retention price is Rs 2,722/ton and Rs 3,200/ton of urea and ammonia, respectively. - 40 - therefore, taking the new estimates as a basis, consumption in the three states in 1979/80 is expected to be only 17% less than that forecast by the Appraisal Report. It would appear therefore at this stage that the objectives of the project in satisfying a growing market in its neighboring states will be met. 4.12 The FCI head office marketing department has performed a computer- based analysis on the optimum statewise distribution of fertilizers from the Sindri project and other fertilizer manufacturing units in the area so as to minimize manufacturing and distribution costs while at the same time satisfy- ing the needs of the marketing districts. The statewise distribution of Sindri's urea which emerged from the study is shown in Annex 12, page 2, for FY80 (when output is targeted at 96,000 tons urea) and FY82 and 84 (when full output of 297,000 tons is expected). In FY80 Sindri's urea output will be entirely sold in its main marketing area. In FY82 and FY84 this will slightly change when about 11% and 7% of its output, respectively, will be marketed in neighboring states. In the case of ammonium sulfate, which represents about one-third of Sindri's nitrogen output, the distribution pattern will be based on other factors, particularly those of supply to the traditional consuming. areas and the need to satisfy special agronomic requirements. As a result, it is expected that by FY84 Sindri will market its ammonium sulfate as follows: Bihar - 150,000 tons (30,700 tons N), Uttar Pradesh - 100,000 tons (20,500 tons N) and Andhra Pradesh - 38,000 tons (7,800 tons N). Based on these distribution patterns for its urea and ammonium sulfate, Sindri's share of the future market for fertilizer nitrogen in its main marketing areas and surrounding state is shown in Annex 12, page 3 for fiscal years 1980, 82 and 84. This shows that while over 90% of the project's output goes to the states of Bihar, West Bengal and Utter Pradesh, it only provides around 25%, 20% and 3% of those states' expected nitrogen requirements in 1984, respectively, demonstrating the absorptive capacity of these neighboring areas for the project's output. V. ECONOMIC BENEFITS OF THE PROJECT A. Economic Rate of Return (EROR) 5.01 The assumptions used for the calculation of the EROR are given in Annexes 10, 13 and 14. The project's EROR is now estimated at 7% which is disappointingly low when compared with the appraisal estimate of 16% and 11.5% of the recently re-evaluated Nangal Project. The decline of the EROR can be attributed to the following factors: (i) faster growth of input costs compared to output prices; (ii) increase in capital cost (33%); (iii) delay in commercial production (18 months); (iv) slower production build-up. - 41 - 5.02 Nangal's capital costs are about 45% lower than Sindri's primarily as a result of skyrocketing equipment cost following the oil crisis of 1973/74. While Nangal's procurement started in mid-1973 before the impact of energy cost increase was fully recognized, Sindri began procurement only in early 1975 after equipment suppliers were able to pass on their escalating manufac- turing costs. Since international equipment prices rose faster than Indian prices, there was a substantial shift to Indian supplies, even though the Indian equipment prices were also on the rise due to their high import contents. The decision to order the compressors of BHEL also increased significantly the share of Indian supplies. Assuming Sindri could have been built at the same cost as Nangal, its EROR would have been only slightly lower at 10.7% to 11%. 5.03 As compared to Sindri's appraisal estimate, the decline of its EROR was caused--about in equal parts--by difficulties experienced during commis- sioning combined with cost increases, and by changed economic parameters to an extent not foreseen at the appraisal. Fuel-oil and even more so naphtha- based fertilizer plants have under present conditions the inherent disadvantage that they are more sensitive to crude oil price rises than plants based on natural gas. While fuel oil and naphtha follow crude oil prices with a very short lead time prices for natural gas tend to follow not to the same extent and with longer time lag. 1/ Since about 85% of world-wide ammonia/urea capacity is based on natural gas, the international price for ammonia and urea is dominated by producers who can in many cases use associated gas as feedstock. This, combined with higher capital cost of fuel-oil based plants, makes them suffer on economic grounds particularly under conditions of over- supply of fertilizer. 5.04 Although the project's primary feedstock was switched from fuel oil to less expensive LSHS, the per unit costs still increased by about 60% in constant terms; and so did the cost of coal and other variable costs increase at even slightly higher rate. By comparison, the economic urea prices for the Sindri market area is expected to rise by only 35% in constant terms until 1985, when equilibrium prices are anticipated to be reached on the world market. 2/ In the long term this price projection appears to be on the low 1/ For instance, the average price for gas was about US$2/Mscft until recently, while the value based on calorific equivalent of fuel oil is more like US$3.50/Mscft. This type of price distortion is in many cases even more true for LDC's due to the following reasons: (i) natural gas is generally sold under long-term contracts; (ii) many ammonia plants are supplied by state-owned energy suppliers; and most importantly, (iii) part of the natural gas is based on associated gas which may have little or no other alternative use. 2/ Although the fertilizer market has recovered from an extremely depressed period, prices have not yet reached equilibrium levels, i.e., the levels required to provide the necessary incentives for new investments necessary to meet future demand. A sensitivity test using for the project's entire operating life the economic long-term price at market area of US$234, based on the international equilibrium price level forecasted for 1985, indicates an EROR of 9.1%. - 42 - side, since eventually urea prices will also reflect a higher value for natural gas than the presently averaging US$2.0/Mscft. Assuming natural gas will be priced at a more realistic economic value of US$3.50/Mscft in 1985 the economic price of urea will increase by about 15% from US$234 to US$270-1/ and improve the project's EROR to 11.3%. Although the project has lost some of its immediate attractiveness, the present re-evaluation of the EROR is on the conservative side and leaves some leeway for upward potential. B. Transfer of Technology 5.05 Sindri and Nangal were the first large-scale projects for which FPDIL has acted as a prime contractor with full responsibility for design and construction and as such initiated transfer of technology. FPDIL's exposure to modern design and engineering techniques and the gained experience in project management were important steps to becoming a competent and profes- sionally recognized engineering firm. As part of the project supply, BHEL, a Government-owned company, manufactured boilers, compressors and turbines in India under technology-transfer arrangements; while delays in their deliveries delayed project completion, the BHEL technicians gained skills in their manufacture. C. Social Impact 5.06 Historically, Sindri fertilizer works, set up over 30 years ago, occupy an important place in the development of India's fertilizer industry. In parallel with the extension of production facilities, a large industrial community grew up around the works supplying a total work force of about 8,200 people in 1979. Sindri constitutes one of the few large scale industrial employers in the entire area and provides in addition indirect work opportun- ities for a substantial number of people such as craftsmen, mechanics and merchants. 5.07 Due to the limited employment opportunities around Sindri, the plant had been consistently faced with the problem of overstaffing. The situation was aggravated by labor unrest aiming at even higher employment causing antagonistic relations between labor unions and Government agencies and a rather low working morale on the plant site. A shutdown of a vital part of the works without replacement would have certainly added further tension to the already strained labor relation. Subsequently, necessary severe cutbacks in operations and work force would have dealt the entire area an economic blow from which it would have been next to impossible to recover, since this would also have affected employment in secondary and tertiary sectors, such as transport, distribution, retailing and agricultural extension services. D. Foreign Exchange Savings 5.08 The savings of foreign exchange expressed in constant 1979 dollars is estimated to amount to US$56 million per year at target production level in 1983. These savings will even rise somewhat to about US$64 million by 1985, when international fertilizer prices are expected to have stabilized 1/ An internal discussion paper of January 1980 recommending the revision of commodity projections already reflects this position. - 43 - in constant terms. As a result of a long repayment period (40 years) and low service charge (0.75%) these savings are only marginally affected by the foreign exchange debt service. 1/ The Project's total foreign exchange cost of US$68 million (30% of total financing required) would thus be offset by the foreign exchange savings in less than two years of initial operation. VI. INSTITUTIONAL PERFORMANCE A. Organizational Impact 6.01 FCI, the executing authority, was already well established at the commencement of the project. At that time it had 5 manufacturing units in operation and a further 11 projects in various stages of construction or com- missioning. FCI therefore had considerable experience in the implementation of similar projects which enabled it to delegate a considerable amount of authority to its Project Manager and P & D for implementation of the project, and the project was consequently not materially affected by delays in obtaining decisions on major actions. Only a few minor delays were encountered due to the FCI's board delaying approval of award of contracts to other than the lowest priced bidders, but these were quickly resolved when the Bank indicated its support for the proposed actions. 6.02 The project did, however, promote the development of P and D's capabilities in project implementation by providing the opportunity for this group to act as prime contractor on a major fertilizer project. While execution of the project required P and D to handle the tasks involved in design and construction, including procurement and expediting, the risks were minimized due to the project being almost an exact duplicate of FCI's Nangal project. As P and D has now been formed into a separate company (FPDIL) following the major reorganization of the FCI, this experience is considered to be invaluable as a means of enabling FPDIL to gain recognition as a com- petent engineering firm into the domestic and international fields. B. Role and Performance of Government 6.03 Just as FCI had considerable experience of implementation of similar projects, the Government had gained considerable experience in working with the IDA on four previous fertilizer projects, namely, Cochin II (Credit 264-IN of 1971 for US$20.0 million), Gorakhpur Expansion (Credit 279-IN of 1972 for US$10.0 million), Nangal Expansion (Credit 357-IN of 1973 for US$58.0 million) and Trombay IV (Credit 481-IN of 1978 for US$50 million). As men- tioned in para 1.04, experience with the first of these projects was poor with many delays occurring due to inadequate management and bottlenecks in the Government's bureaucracy. With time, however, these problems were gradually overcome and with the Government reorganizing management of FCI and eliminating problem spots within its own control system, implementation of succeeding projects improved greatly. In the case of the Sindri project, it may be said that the Government's control procedures and statutory requirements had no measurable adverse effect on progress. 1/ About US$3 million per year when principal repayment starts in 1985. - 44 - C. Improvements in Project Management and Environmental Protection 6.04 The project basically changed the traditional FCI system of having all capital works on existing plant sites carried out under the authority of the Works General Manager. This system was strongly supported by the Works General Managers in order to preserve their sole authority at the various manufacturing centers. However, it created circumstances whereby full allocation of resources and priorities to the best possible implementation of major new projects could not always be assured with the potential result of costly delays. Realizing the importance of its heavy capital works program, FCI had previously appointed a new Projects Director, who was expected to later join the Board, and with the cooperation of this official and continual urging from the Bank, the system was changed to give full autonomy to the project management group for execution of the works. It is expected this procedure will be adopted by FCI in all its future major projects on existing works sites. 6.05 The project also provided the vehicle for a very significant upgrading of manufacturing, safety and environmental standards at the Sindri Works which would not otherwise have been achieved. VII. IDA EXPERIENCE A. Overall Performance and Relationship with the Borrower 7.01 An identification mission dispatched by the Bank in September 1973 first identified the Sindri project as one of a number of fertilizer projects in India which appeared to have high priority and to be possibly suitable for financing. Pursuant to this mission, the Government in November 1973 formally requested the Bank to appraise the project, and the Bank responded by dispatching a pre-appraisal mission in January 1974. Appraisal followed in May 1974, and Board approval of the Credit was granted in November 1974, one year after the Government made its formal request. This program closely followed the planned loan processing schedule and was consistent with the Government's schedule for implementing the project and may be said therefore to have been responsive to the borrower's needs. In order to expedite the implementation of the project, IDA agreed to the selection of engineering firms previously appointed for the Nangal project and to finance their fees without further competitive bidding. IDA also approved the reuse of the Nangal prequalified bidders list, without publishing a separate general procurement notice. This was a particularly helpful step for the borrower as it enabled valuable time to be saved at a period when equipment costs were rapidly escalating and resulted in substantial cost savings over the course of the project. The other major issues addressed during appraisal were the need to upgrade the existing works units and their impact on the environment as a condition for IDA's support of the project. Rapid agreement was reached with the project authorities and the Government on all these matters so that no delay in the implementation schedule in the loan processing program was incurred. IDA's relationship with FCI throughout the appraisal period was excellent and was greatly aided by the provision by FCI of an adequate team of competent professionals to carry out the studies and prepare the data and information needed by the IDA. - 45 - B. Performance in Project Preparation, Formulation and Implementation 7.02 During preparation and formulation of the project for financing, IDA made contributions in several areas. Terms of reference defining the scope of work for the "Works Transformation and Environmental Study" to be carried out by independent consultants were prepared by the appraisal mission and agreed with the borrower. The progress of the work subsequently carried out by the selected consultants was carefully monitored by IDA, and a program of work to be carried out pursuant to their recommendations was subsequently agreed with the project authorities. The progress of this work was then reviewed at regular intervals by IDA missions throughout the project imple- mentation period. 7.03 The IDA appraisal mission also gave guidance to the project authorities at a time when they were considering the alternatives of coal and fuel oil for use as feedstock for the project. IDA advised against the use of coal but recommended that the project authorities study the possibility of including provision in the plant design for later conversion to coal if necessary. This recommendation was duly adopted by the project authorities who after completing their work released a technical paper on the subject for general publication. They found that, provided initial provisions were made, such a conversion could be effected later at only modest cost, and appropriate account of this was taken in the final project design. IDA's contribution in setting up procedures for the continuous independent monitor- ing of project progress and for establishing an autonomous project management group has already been noted. C. Covenants 7.04 Some covenants that were particularly useful during implementation and start up of the project were as follows: (a) Project Agreement - Section 2.Q3, requiring FCI to appoint a suitably qualified Project Manager and to consult with the IDA before making any change in this position. It is believed that, because of this clause, FCI gave specially careful consideration to this appointment and extended full cooperation and support to the Project Manager throughout the project. (b) Project Agreement - Section 2.07, requiring FCI to carry out the project in accordance with a designated critical path network and implementation plan. The use of these planning instruments which had been extensively discussed with the project authorities prior to credit negotiations, provided specific standards for the project management to follow during project implementation and a yardstick for measuring the per- formance achieved. Consequently, the project management group was able to respond quickly and on time when faced with equip- ment delivery delays and others, enabling them to minimize the impact on project completion. - 46 - (c) Project Agreement - Section 2.08, requiring FCI to complete the Works Renovation Program prior to June 30, 1977 and prior to February 28, 1975 to engage consultants for the Works Transformation and Environmental Study. The inclusion of cut-off dates in these covenants was very helpful in pro- viding the necessary motivation to the project authorities and in enabling IDA supervision missions to evaluate whether progress on the works was in accordance with the intent of the Agreement. (d) Project Agreement - Section 4.03, requiring FCI to maintain a debt/equity ratio of no greater than 50:50 and a current ratio of at least 1.2:1 for the consolidated company and a debt/equity ratio of 50:50 for the Sindri unit. Although the debt/equity requirement for the Sindri unit does not appear to have had particular relevance for the project's success, the covenants regarding the consolidated FCI, however, were a useful clause to oblige the company to practice financial discipline. The present default of PCI's financial covenants is a direct consequence of the way in which the Government has reorganized the former ECI. Currently, the Government is working on a plan to consoli- date the capital structure of the newly emerged FCI, thus enabling it to comply with the ratio requirements of the financial covenants. (e) Development Credit Agreement - Section 4.02, requiring the Government to make satisfactory arrangements for the supply of all materials and adequate railway wagons for the operations of the project. As the experience has proved, this covenant is extremely important--though often only partly effective--since right from the commencement of operations the project has suffered shortages of fuel oil and coal, which although believed to be due to real short- ages, have at least in part been caused by bottlenecks in the railway transportation system. Although PCI had entered supply contracts with IOC and IR, they did not shield the project against circumstances similar to the one under force majeure. However, the covenant provided IDA with enough leverage to demand earliest possible remedies (para 3.29, iii). VIII. CONCLUSIONS A. Overall Assessment 8.01 The Sindri Fertilizer Project was well managed with close attention to time schedule and cost, as well as to preparations for start-up. It was only towards the very end of the project that a serious delay was incurred during the erection of the turbo compressor machinery by an Indian supplier, - 47 - which prevented timely commencement of operation and caused loss of revenue. As a result, the additional pre-operational expenses and interest during construction accounted substantially for project cost overruns. 8.02 The project, however, was built on a very old works site, where many inefficient labor practices and working methods had become accepted as normal and thus proved very difficult to change. Additionally, deep-seated personnel problems of long standing are present and all these factors are likely to have a bearing on the future success of the project. It will remain to be seen therefore whether the decision to build the project at Sindri and rehabil- itate the works and the economy of the surrounding district was the right one, or whether the inherent problems mentioned will prove too great an obstacle to overcome, and the benefits to be derived from the project will partially be lost. B. Lessons for the Borrower and IDA 8.03 The principal lessons arising in the particular case of the Sindri Project concern procurement. The Project was seriously penalized by the decision to force FCI to purchase the syngas compressor from a manufacturer in India without adequate experience, against the recommendations of IDA and (it is believed) the private wishes of the executing authorities. This action can be singled out as that which contributed most to the delay in completing the project and a substantial local currency cost overrun, which had to be absorbed by the Government itself. More importantly, however, this action has had the effect of causing serious interference with the Government's targeted increase in fertilizer production. The trade-off between the presumed bene- fits of technology transfer from the foreign licensor to the Indian manu- facturer, the indigenous supply of equipment and the costs involved could have been more clearly and directly assessed. The cancellation of the equivalent amount of IDA financing in the case of "misprocurement" might have obliged such a review. In the event the syngas compressor was not financed by IDA, but neither was a cancellation of the equivalent amount of the credit enforced. The compromise may thus have worked to the detriment of the project. 8.04 IDA should try to preempt inordinate delays in delivery of equipment by looking more thoroughly at the procurement capabilities of contractors that have a questionable track record or are proposing to make a piece of equipment for the first time. As stated, it is believed that the extent of delays occurring after award of contracts was far in excess of that prevailing on contracts awarded following general industry practice. The delays were partly the result of the decision by the project authority to carry out procurement with minimum use of the engineering consultant firm's services. Even though the extent of such assistance was later increased, the delivery delays could no longer be avoided. To achieve the project objectives with minimum comple- tion delays and technical problems, it is important that the procurement and expediting functions are carried out by agencies who are by experience and - 48 - organization equipped to carry out the functions effectively. For this pur- pose, increased attention has to be given to the nature of the implementation arrangements while reviewing engineering consultancy agreements. In addition, to the extent too rigidly applied ICB procurement might cause undue delays, the engineering firms should be encouraged to either (i) adopt modified pro- curement procedures consistent with industry practices in large-scale projects for at least all the process and time critical items, or (ii) select the sup- pliers for the above items based on a better defined points system of evalua- tion allowing for quality, supplier reputation and past performance. These aspects are being taken into account in a review of appropriate procurement practices now in progress. Industrial Projects Department February 1980 - 49 - ANNEX 1 SINDRI FERTILIZER PROJECT STAFF TRAINING SCHEDULE No. of Man-Weeks Persons 1976 1977 1978 1979 A. Process Engineers 1. Foreign Process Training 8 16 2. Foreign Plant Training 8 32 3. Indian Plant Training 31 20 102 4. Indian Classroom Training 40 60 Total 87 - 68 162 - B. Process Operators 1. Indian Plant Training 56 224 2. Indian Process Training 60 3. Indian Classroom Training 50 120 Total 106 - - 404 - C. Maintenance Engineers 1. Foreign Process Training 4 8 2. Foreign Plant Training 4 16 3. Foreign Workshop Training 13 31 8 6 4. Indian Workshop Training 4 8 4 Total 25 31 32 14 4 D. Maintenance Tradesmen 1. Indian Plant Training 6 24 2. Indian Workshop Training 9 20 Total 15 - - 44 Industrial Projects Department February 1980 - 50 - ANNEX 2 Page 1 SINDRI FERTILIZER PROJECT IMPLEMENTATION SUMMARY Delay Description of Activities Sch. Date Actual Date (Weeks) A. Design and Engineering Contracts with Foreign Eng. Firms Effective - 10-29-74 - Plot Plan Finalized 11-11-74 11-21-74 1 Prep. Specn. & Place Reqsn. for Tall Towers 11-15-74 10-14-74 - Prep. Specn. & Place Reqsn. for ASW/LNWh Units 12-10-74 11-08-74 Prep. Detailed Specification.; & Place Reqsn. for Compressors (02, N2, Air & Syn. Gas Compressors) 12-17-74 11-14-74 - Data Sheet for Equipment Received from UHDE 03-31-75 05-26-75 8 Process Data Sheets for Inst. & Inst. Lists Received from UHDE 03-31-75 07-21-75 16 Data Sheets for DM Water Plant Received from UHDE 03-31-75 07-21-75 16 Single Line Diag. for Overall Pouer Distribution Finalized 05-03-75 07-21-75 11 Structural Drgs. (1st Take Off) for Ammonia Plant Completed 05-13-75 06-30-75 3 Equipment Layout Finalized (Ammonia) 06-10-75 07-13-75 4 Control Panels Specn. Finalized and Reqsn. Placed 08-25-75 12-29-75 18 Piping Layout Finalized 11-25-75 12-22-75 4 B. Procurement Order for ICB Vendor Items (Urea Plant) Placed 03-18-75 07-07-75 16 Order for Compressors Placed. 04-04-75 08-18-75 N2, C02 and Syn. Gas Compressors) L.H. (04-29-75) 2 Order for C02 Compressor (Urea) Placed 04-15-75 05-08-75 3 Order for Cooling Water Pumps Placed 04-28-75 08-04-75 13 Order for ASUI/LNW Unit Placed 05-06-75 07-28-75 7 Order for Steam Generation Plant Placed 05-06-75 05-17-75 1 Order for Tall Towers Placed 05-13-75 05-05-75 - Cooling Tower Contract Awarded 06-16-75 09-15-75 15 C02 Compressor with Drive (Urea Plant) Delivered at Site 09-27-76 09-27-76 - Delivery of Bulk ICB Piping Materials Completed 10-19-76 10-18-76 - Ammonia Converter (D-1801) Dispatched to Site 11-19-76 12-27-76 5 02 Compressor Delivered at Site 01-24-77 02-14-77 6 - 51 - ANNEX 2 Page 2 Description of Activities Sch. Date Actual Date (Weeks) Shift Converter Delivered at Site 02-21-77 04-11-77 7 Air Compressor Delivered at Site 03-28-77 07-11-77 15 N2 Compressor Erected & Commissioned 10-01-77 05-22-78 34 at Site (as amended) C02 Compressor Erected & Commissioned 10-01-77 01-15-79 69 at Site (as amended) Syn. Gas Compressor Erected & 10-01-77 Commissioned at Site (as amended) 08-20-79 98 C. Civil Works Contract for Civil Works Awarded 05-26-75 05-26-75 - Civil Construction for Ammonia Plant Start 06-24-75 06-23-75 - Foundation for Ammonia Plant Complete 12-09-75 12-01-75 - Erection of Structures in Gasification & Carbon Recovery 03-09-76 12-19-75 - Ammonia Compressor House Complete 11-22-76 11-08-76 - Prilling Tower Construction Start. 03-13-75 03-20-75 1 Constructicn of Foundation for Prilling Tower Complete 07-27-75 06-23-75 - Prilling Tower Construction Complete 06-15-76 11-22-76 27 Construction of Foundation for lard Piping Trestles Complete 08-10-76 10-11-76 9 Bagging Plant Civil Work Complete 07-31-76 11-29-76 17 Silo Construction Start 03-31-75 03-31-75 - Silo Construction Complete 08-03-76 12-28-76 21 D. Plant Erection Gasification Reactor with WHB Erected 02-14-77 03-30-77 6 Piping Erection Start in Gasification 12-27-76 10-04-76 - Piping Erection Complete in Gasification 07-25-77 12-26-77 22 Eqpt. Erection Start in Rectisol & CO- Convn. 10-11-76 09-06-76 - Piping in Rectisol Secn. Complete 09-26-77 0.1-30-78 18 Rectisol Unit Ready for Commissioning 11-29-77 05-29-78 25 Eqpt. Erection in ASU/LNW Start 11-29-76 11-01-76 - Final Test of Plant ASU Complete 10-24-77 01-09-78 11 Erection of N2 Compressor Complete 10-01-77 01-30-78 17 Erection & Commissioning of Synthesis Gas Compressor Complete 10-01-77 08-20-79 98 Ammonia Converter Internals Erected 05-30-77 01-23-78 34 Central Control Panel Ready for Urea Plant 08-22-77 11-07-78 63 Light up Boiler No. 1 08-29-77 10-10-77 6 Erection of Urea Reactor Start 02-28-77 07-04-77 18 Erection of Urea C02 Compressor Commissioning 02-28-77 03-28-77 4 - 52 - ANNEX 2 Page 3 Delay Description of Activities Sch. Date Actual Date (eeks (Weeks) Erection of Ammn. & Carbamate Pumps Start 05-02-77 05-23-77 3 Major Yard Piping Erection Complete 04-04-77 11-31-76 - Eqpt. Erection in Absorption Refrigeration Start 01-31-77 01-15-77 - C02 Compressor Erection & Commissioning Complete 10-01-77 01-15-79 67 Light up of Boiler No. II 09-26-77 12-30-77 14 Light up of Boiler No. III 12-26-77 08-28-78 39 Industrial Projects Department February 1980 INDIA SINDRI FERTILIZER PROJECT IMPLEMENTATION SCHEDULE - APPRAISAL VS ACTUAL 1974 1975 1976 1977 1978 1979 Quarters 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1. Award Basic Engineering Contracts 2. Approval Basic Engineering Contracts 3 International Procurement Advert 4. Basic Engineering 5. Prqparation Procurement Procedure 6. Approval Procurement Procedure 7. Detailed Engineering 8. Ordering Critical Items 9. Ordering Major items 10. Ordering Bulk Items 11. Equipment Deliveries 12. Material Deliveries 13. Site Preparation 14. Civil Works 15 Plant Erection o 1 - 16. Training 17. Plant Testing 18. Commissioning ---Appraisal -Actual. World Bank - 21079 Industrial Projects Department February 1980 - 54 - ANNEX 4 INDIA - SINDRI FERTILIZER PROJECT SOURCES OF PROCUREMENT No. of Orders No. of Orders No. of Orders Total Value/i % of Credit Country up to $50 M $50 M - $300 M above $300 M US$ Million Amount Austria 10 1 1 1.77 2 Belgium 5 1 0 0.19 - France 16 5 2 1.53 2 Japan 79 23 6 9.99 11 Holland 14 5 1 4.21 4 India 114 29 9 29.21 31 Italy 29 11 4 3.76 4 Sweden 2 2 0 0.17 - Switzerland 3 0 0 0.01 - UK 82 3 1 1.46 2 USA 92 4 1 1.29 1 FRG 214 41 23 40.21 43 660 125 48 93.80/2 100 /1 Exchange rates used in compiling this table were 1 US Dollar = Austria 13.83, Belgium 29.80, France 4.33, Japan 215, Holland 2.03, India 8.15, Italy 841, Sweden 4.38, Switzerland 1.71, UK 0.48, FRG 1.88. /2 This total slightly exceeds the IDA Credit due to exchange rate differences during course of project. Industrial Projects Department February 1980 - 55 - ANNEX 5 INDIA - SINDRI FERTILIZER PROJECT PERMANENT WORKING CAPITAL Revised Appraisal Estimate Estimate A. Accounts Receivable Million Rs Urea (30 days output): 25,000 Tons at Rs 2,828 70.7 45.4 B. Finished Goods Inventory Urea (30 days output): 25,000 Tons at Rs 1,181 29.3 24.0 Ammonia (20 days output): 5,000 Tons at Rs 1,387 6.9 6.8 Sub-Total 36.2 30.8 C. Raw Materials Inventory Steam Coal (15 days output): 16,000 Tons at Rs 137 2.2 1.3 LSHS (30 days output): 25,000 Tons at Rs 810 20.3 11.8 Chemicals and Consumables (3 months) 3.3 1.3 Bags (1 month) 2.5 4.0 Sub-Total 28.3 18.4 D. Semi-Finished Goods 1.8 1.3 E. Minimum Cash 10.0 - F. Accounts Payable Raw Materials 11.0 7.6 Utilities ) Short-Term Loans a) 50% of A 35.3 ) b) 75% of B, C and D 49.7 ) Sub-Total 96.0 79.6 G. Net Working Capital 51.0 16.3 Plus Short-Term Borrowing 85.0 72.0 H. Working Capital Financing Requirements 136.0 88.3 Industrial Projects Department February 1980 - 56 - ANNEX 6 INDIA - SINDRI FERTILIZER PROJECT DISBURSEMENT SCHEDULE IDA CREDIT (US$ millions) Calendar Year Appraisal Estimate Actual and Quarter Disbursement Amt. Outstanding Disbursement Amt. Outstanding 1974 IV 0.0 0.0 0.0 0.0 1975 I 9.4 9.4 1.0 1.0 II 2.5 11.9 1.9 2.9 III 3.6 15.5 0.9 3.8 IV 5.2 20.7 4.2 8.0 1976 I 8.7 29.4 n.a. n.a. II 22.3 51.7 n.a. n.a. III 19.1 70.8 n.a. n.a. IV 12.9 83.7 n.a. 40.0 1977 I 6.3 90.0 13.5 53.5 II 0.4 90.4 7.9 61.4 III 0.3 90.7 1.6 63.0 IV 0.3 91.0 6.2 69.2 1978 I - - 3.5 72.7 II - - 7.1 79.8 III - - 1.4 81.2 IV - - 2.2 83.4 1979 I - - 0.5 83.9 II - - 0.4 84.3 III - - 3.3 87.6 IV - - 0.1 87.7 1980 I /a 3.3 91.0 /a Estimated. Industrial Projects Department February 1980 - 57 - ANNEX 7 SINDRI FERTILIZER PROJECT CHRONOLOGY OF MAJOR PLANT COMMISSIONING EVENTS Appraisal Actual Description Estimate Date 1. Instrument Air Supply System Commissioned 05-30-77 06-03-77 2. B.F.W. Plant Commissioned 07-04-77 08-30-77 3. Boiler No. 1 Commissioned 09-26-77 12-26-77 4. Air Compressor Commissioned 09-26-77 12-26-77 5. A.S.U. Plant Commissioned 11-29-77 02-17-78 6. Nitrogen Compressor Commissioned 11-14-77 05-22-78 7. Boiler No. 2 Commissioned 11-28-77 03-20-78 8. Oxygen Compressor Commissioned 12-05-77 05-29-78 9. Trial Run of Reactor 1 Complete 12-19-77 07-30-78 10. H 2S Removal Section 01-02-78 11-13-78 11. CO2 Removal and Co-Shift Conversion Section Commissioned 01-23-78 12-12-78 12. L.N.W. Commissioned 01-30-78 12-17-78 13. CO2 Compressor Commissioned 02-06-78 01-15-79 14. Boiler No. 3 Commissioned 02-28-78 01-15-79 15. Synthesis Gas Compressor Commissioned 02-06-78 08-20-79 16. Ammonia Synthesis Section Commissioned 02-14-78 08-20-79 17. Urea Plant Commissioned 02-28-78 08-27-79 Industrial Projects Department February 1980 INDIA - SINDRI FERTILIZER PROJECT FCI FINANCIAL STATEMENTS 1 HISTORICAL INCOME STATEMENTS (In Million Rupees) FY ending March 31 1975 1976 1977 1978 1979 unaudited Sales Revenue (Net) 1,515.7 1,589.0 2,211.0 2,632.2 800.4 Purchased Finished Goods 208.9 58.8 181.9 470.4 302.0 Materials Consumed 587.0 754.5 832.2 815.7 176.2 Repairs and Maintenance 103.3 148.8 198.1 218.5 61.3 Salaries, Wages and Bonus 211.8 252.5 273.5 360.3 113.3 Power and Fuel 190.1 268.5 399.8 411.5 145.7 Freight and Handling 32.5 51.3 80.0 81.0 14.6 Excise Duty 92.3 150.4 191.1 206.9 36.6 Other Expenses (10.6) (30.0) 29.4 49.9 (22.0) Depreciation 155.0 164.1 236.0 314.9 51.8 1 Fin. Goods Inventory Increase (Decrease) (94.1) (57.2) 3.0 35.1 17.6 or oo Cost of Goods Sold 1,476.2 1,761.7 2,425.0 2,964.2 897.1 1 Operating Profit (Loss) 39.5 (172.7) (213.9) (332.0) (96.7) Interest (Net) (26.7) (50.1) (118.6) (172.0) (121.6) Net Profit (Loss) 12.8 (222.8) (332.5) (504.0) (218.3) /1 FY1979 reflects FCI's accounts after its reorganization effective from April 1, 1978 and includes the plants at Sindri and Gorakhpur. M 4 - 59 - ANNEX 8 Page 2 INDIA - SINDRI FERTILIZER PROJECT HISTORICAL BALANCE SHFETS / (In Million Rupees) FY ending March 31 1975 1976 1977 1978 1979 unaudited Assets Cash and Banks 22.6 27.4 142.3 46.9 16.0 Accounts Receivable 133.7 154.8 248.3 251.4 78.2 Inventory 526.1 731.7 942.3 1,031.3 364.4 Loans and Advances 116.7 151.6 152.4 120.0 56.6 Total: Current Assets 799.1 1,065.5 1,485.3 1,449.6 515.2 Gross Fixed Assets 3,599.8 3,958.8 4,951.9 5,183.8 1,590.5 Less Accumulated Depreciation 1,520.8 1,704.9 1,951.6 2,280.9 907.7 Net Fixed Assets 2,079.0 2,253.9 3,000.3 2,902.9 682.8 Work in Progress 3,096.7 4,238.9 5,390.9 6,478.5 4,054.8 Advance Payments 571.2 978.7 972.9 937.9 49.1 Expenditures during Construction/2 217.4 396.2 510.3 1,087.2 1,156.8 Investments .7 .7 .7 .6 - T o t a 1 A s s e t s 6,764.1 8,933.9 11,360.4 12,856.7 6,458.7 Liabilities Accounts Payable 95.3 69.3 67.5 71.7 16.0 Advance Receivables 51.0 71.5 90.4 116.2 29.1 Other Current Liabilities 584.6 485.1 636.3 598.9 559.9 Provisions - - - 233.2 4.9 Current Portion of Long-Term Debt 254.0 290.9 435.1 77.9 240.6 Total Current Liabilities 984.9 916.8 1,229.3 1,097.9 850.5 01 1,234.7 2,355.7 4,212.6 5,286.2 3,261.1 State Bank of India 5.9 269.2 - 57.5 47.2 USAID 36.2 14.3 - - - Others 468.9 372.1 288.0 214.0 110.8 Total Long-Term Debt 1,745.7 3,011.3 4,500.6 5,557.7 3,419.1 Less Current Portion 254.0 290.9 435.1 77.9 240.6 Long-Term Debt (Net) 1,491.7 2,720.4 4,065.5 5,479.8 3,178.5 Share Capital 4,126.4 5,287.5 6,055.8 6,269.2 2,420.9ks Reserves 161.1 9.2 9.8 9.8 8.8 Total Equity 4,287.5 5,296.7 6,065.6 6,279.0 2,429.7 T o t a 1 L i a b. & E q u i t y 6,764.1 8,933.9 11,360.4 12,856.7 6,458.7 /1 FY1979 reflects FCI's accounts after its reorganization effective from April 1, 1978 and includes the plants at Sindri and Gorakhpur. /2 Pending allocation. /3 All the accumulated loss as on March 31, 1978 has been retained with the residual FCI and netted against share capital. Industrial Projects Department February 1980 INDIA - SINDRI FERTILIZER PROJECT SINDRI UNIT - FINANCIAL STATEMENTS HISTORICAL INCOME STATEMENTS (In Million Rupees) FY ending March 31 1975 1976 1977 1978 1979 unaudited Sales Revenue (Net) 237.3 227.2 151.1 110.0 100.7 Purchased Finished Goods - 10.2 4.5 6.1 1.5 Materials Consumed 161.2 183.5 140.3 104.7 56.7 Repairs and Maintenance 35.1 43.7 46.9 36.0 32.4 Salaries, Wages and Bonus 55.0 55.7 52.0 75.0 65.3 Power and Fuel 34.5 44.0 41.0 36.5 43.4 Freight and Handling 10.6 10.9 7.7 4.9 0.8 Excise Duty 22.3 22.0 11.7 5.0 1.9 Other Expenses (Net) (9.0) (16.6) (13.7) (4.3) (37.5) Depreciation 18.5 18.2 18.7 25.5 20.8 Fin. Goods Inventory Increase (Decrease) (1.8) 2.3 2.7 3.0 4.3 Cost of Goods Sold 326.4 373.9 311.8 292.4 189.6 Operating Profit (Loss) (89.1) (146.7) (160.7) (182.4) (88.9) Interest (Net) (0.2) (1.1) (17.8) (42.0) (94.6) Net Profit (Loss) (89.3) (147.8) (178.5) (224.4) (183.5) OQ INDIA - SINDRI FERTILIZER PROJECT HISTORICAL BALANCE SHEETS (In Million Rupees) FY ending March 31 1975 1976 1977 1978 1979 unaudited Assets Accounts Receivable 11.5 17.2 19.5 12.0 26.1 Operating Cash 12.2 4.6 70.5 6.4 11.0 Inventory 113.6 125.9 141.0 136.5 130.0 Advances 8.6 7.6 17.2 12.0 14.5 Total Current Assets 145.9 155.3 248.2 166.9 181.6 Gross Fixed Assets 596.6 615.1 648.2 677.6 720.9 Less Accumulated Depreciation 444.3 457.8 477.3 495.4 507.7 Net Fixed Assets /1 152.3 157.3 170.9 182.2 213.2 Work in Progress - 325.4 561.3 1,362.9 1,839.9 2,147.6 T o t a 1 A s s e t s 623.6 873.9 1,782.0 2,189.0 2,542.4 F- Liabilities Current Liabilities 126.0 100.6 121.6 181.4 145.3 Long-Term Loans 24.9 27.6 26.3 1,091.6 1,820.5, Remittances from FCI 301.5 514.2 1,179.2 678.6 260.0 Total Long-Term Debt 326.4 541.8 1,205.5 1,770.2 2,080.5 Share Capital 371.4 587.2 994.0 1,076.9 1,290.4 Reserve Fund 1.0 0.9 0.8 1.7 1.7 Accumulated Loss (201.2) (356.6) (539.9) (841.2) (975.5) Total Equity . 171.2 231.5 454.9 237.4 316.6 T o t a 1 L i a b. & E q u i t y 623.6 873.9 1,782.0 2,189.0 2,542.4 /1 Includes expenditures during construction pending allocation. Industrial Projects Department February 1980 - 62 - ANNFX 1IU INDIA -- STNDhRI FERTTLIZER PROJECT PRODUCTTON COSTS AT %0% CAPACITY UTILIZATION a -------------- - --------1979 Rupees------------------- Financial Financial Financial Economic Economic Economic Unit/Tons Cost/Ton Cost/Year Cost/Ton Cost/Year of Product Price/Unit of Product in NM Rs Price/Unit of Product in MM Rs A. AMMONIA 1. Variable Costs LSHS (tons) 0.875 810 708.8 189.4 832.3 728.3 194.7 Coal (tons) ) for steam 0.819 137 112.2 30.0 132.0 108.1 28.9 Fuel Oil (tons) ) generation 0.068 1,385 94.2 25.2 918.4 62.5 16.7 Power - Int. Gen. (MWH) 0.416 255 106.1 28.4 241.0 100.3 26.8 Chemicals & Others - - 107.2 28.7 - 96.5 25.8 Sub-Total 1,128.5 301.7 1,095.7 292.9 2. Fixed Costs Depreciation - - 585.0 139.0 - - Labor & Overheads - - 75.8 18.0 - 75.8 18.0 Maintenance Materials - - 183.5 43.6 - 165.2 39.2 Sub-Total 844.3 200.6 241.0 57.2 3. Total Ammonia Costs 1 972.8 502.3 1,336.7 350.1 3. UREA 1. Variable Costs Ammonia (tons) 0.58 1,129 654.8 194.4 1,095.7 635.5 188.7 Coal (tons) ) fo- steam 0.184 137 25.2 7.5 132.0 24.3 7.2 Fuel Oil (tons) ) generation 0.015 1,385 20.i 6.2 918.4 13.8 4.1 Power - Int. Gen. (MWH) 0.178 255 45.4 13.5 241.0 42.9 12.7 Chemicals - - 24.1 7.2 - 21.7 .6.4 Bags 20.0 5 100.0 29.7 4.8 96.0 28.5 Sub-Total 870.3 258.5 834.2 247.6 2. Fixed Costs Depreciation - Urea - - 135.8 35.9 - - - Depreciation - Ammonia - 339.3 89.6 - - - Other F. C. - Ammonia - - 150.4 39.7 - 139.8 36.9 Labor & Overheads - - 118.2 31.2 - 118.2 31.2 Maintenance Materials - - 42.1 11.1 - 37.9 10.0 Sub-Total 785.8 207.5 295.9 78.1 3. Total Urea Costs 1,656.1 466.0 i i 325.7 C..AMMONIA/UREA Total Productions Costs 644.5 449.8 Total Variable Costs 365.7 351.4 Total Fixed Costs 278.8 98.4 /a Annual Capacity: Ammonia 297,000 tons: Urea 330,000 tons. Capacity build-up is assumed as follows: 50%, 75%, 80% each for a period of 12 months of operation, and 90% ther?after. Industrial Projects Department February 1980 INDIA - SINDRI FERTILIZER PROJECT CASH FLOW STREAMS FOR FINANCIAL ANALYSIS (in millions of constant 1979 Rupees) Capital Working Variable Fixed Net Expenditures Net Fiscal Year Costs Capital Operating Costs Costs Dur. Commissioning Revenues Benefit 1975 37.5 - - - - ( 37.5) 1976 212.1 -- - - (212.1) 1977 760.3 - - - - (760.3) 1978 326.3 - - - - (326.3) 1979 146.2 35.0 - - 55.9 - (237.1) 1980 101.0 33.3 118.5 60.6 53.1 361.0 (5.5) 1981 - 40.9 262.4 103.9 - 776.4 369.2 1982 - 18.1 316.6 103.9 - 909.7 471.1 1983 - - 342.1 103.9 - 972.4 526.4 1984 - - 365.7 103.9 - 989.0 519.4 1985 - - 365.7 103.9 - 958.3 488.7 1986 - - 365.7 103.9 - 927.4 457.8 1987 - - 365.7 103.9 - 896.5 426.9 1988 - - 365.7 103.9 - 865.8 396.2 1989 - - 365.7 103.9 - 834.9 365.3 1990 - - 365.7 103.9 - 802.9 333.3 1991 - - 365.7 103.9 - 802.9 333.3 1992 (158.3) (127.3) 152.4 43.3 - 334.6 424.5 Financial Rate of Return = 15.5 Industrial Projects Department February 1980 - 64 - ANNEX 12 Page 1 INDIA - SINDRI FERTILIZER PROJECT NITROGEN CONSUMPTION AND UREA DISTRIBUTION FOR MAIN MARKETING AREAS ACTUAL AND PROJECTED NITROGEN CONSUMPTION IN THE PROJECT'S MAIN MARKETING AREAS ('000 tons) Bihar West Bengal Utta Pradesh fa /b /a /b /a /b 1973/74 70.1 - 54.0 - 328.6 - 74/75 89.0 - 85.7 - 329.2 - 75/76 113.3 - 86.0 - 410.9 - 76/77 128.3 - 101.6 - 572.2 - 77/78 137.7 268 113.9 172 647.6 620 78/79 155.0 330 146.4 214 772.1 690 79/80 199 410 159 264 878 770 81/82 253 - 208 - 1,138 - 83/84 315 - 264 - 1,432 Source: Fertilizer Association of India. /a Actual through 1978/79, thereafter revised forecast. /b Appraisal Report forecast. Industrial Projects Department February 1980 - 65 - ANNEX 12 Page 2 INDIA - SINDRI FERTILIZER PROJECT NITROGEN CONSUMPTION AND UREA DISTRIBUTION FOR MAIN MARKETING AREAS ESTIMATED STATEWISE DISTRIBUTION OF SINDRI'S UREA 1979/80-1983/84 ('000 tons) 1979/80 1981/82 1983/84 State Urea N Urea N Urea N Bihar 28.0 12.9 50 23.0 106.6 49.0 Uttar Pradesh 32.0 14.7 110 50.6 58.1 26.7 West Bengal 36.3 16.7 70 32.2 111.8 51.4 Madhya Pradesh - - 27 12.4 9.5 4.4 Assam - - - 0.4 0.2 Orissa - - - - 10.6 4.9 Total 96.3 44.3 257.0 118.2 297.0 136.6 - 66 - ANNEX 12 Page 3 INDIA - SINDRI FERTILIZER PROJECT NITROGEN CONSUMPTION AND UREA DISTRIBUTION FOR MAIN MARKETING AREAS .SINDRI PROJECT'S SHARE OF TOTAL NITROGEN CONSUMPTION IN MARKETING AREAS ('000 tons of nutrients) 1979/80 1981/82 1983/84 State Supplied Supplied Supplied Total by Total by Total by Consumption Sindri % Consumption Sindri % Consumption Sindri 7 Bihar 199 23 12 253 50 20 315 79.9 25 West Bengal 159 10 6 208 30 14 264 51.4 20 Uttar Pradesh 878 20 2 1,138 70 6 1,432 47.3 3 Madhya Pradesh 169 - - 224 15 7 289 4.4 2 Assam 6 - - 7 - - 8 0.2 3 Orissa 63 - - 79 - - 98 4.9 5 Andhra Pradesh 400 - - 470 - - 546 7.8 1 Total 53 165 195.9 Industrial Projects Department February 1980 INDIA - SINDRI FERTILIZER PROJECT ASSUMPTIONS USED IN ECONOMIC ANALYSIS (in constant 1979 US dollars per ton) PRODUCTS 1979 1980 1981 1982 1983 1984 1985 & After Urea FOB Price 1979 (bulk) 145 140 140 145 160 170 180 Ocean Freight & Insurance 30 30 30 30 30 30 30 CIF Price 175 170 170 175 190 200 210 Port Handling, Storage, etc. 5 5 5 5 5 5 5 Inland Freight Differential 4 4 4 4 4 4 4 Bagging Cost 15 15 15 15 15 15 15 Economic Urea Price 199 194 194 199 214 224 234 Ammonia FOB Price 125 130 140 145 160 170 180 Ocean Freight & Insurance 35 35 35 35 35 35.. 35 CIF Price 160 165 175 180 195 205 215 Port Handling, Storage, etc. 5 5 5 5 5 5 5 Inland Freight Differential 8 8 8 8 8 8 8 Economic Ammonia Price 173 178 188 193 208 218 228 RAW MATERIALS LSHS Fuel Oil FOB Price 81.5 /1 92.0 Ocean Freight & Insurance _120 12.0 CIF Price 93.5 104.0 Port Handling, Storage, etc. 3.0 3.0 Inland Freight Differential 5.0 5.0 Economic Cost 101.5 112.0 /1 FOB Rotterdam US$75 and US$85 for LSHS and fuel oil, respectively, in constant 1978 dollars adjusted by the factor of 1.086 reflecting the projected price increase of Saudi Arabian crude according to Commodity Price Forecast May 1979. Industrial Projects Department February 1980 INDIA - SINDRI FERTILIZER PROJECT COST AND BENEFIT STREAMS FOR ECONOMIC ANALYSIS (in millions of constant 1979 Rupees) Capital Working Variable Fixed Net Expenditures, Eco. Value Net Fiscal Year Costs Capital Operating Costs Costs During Commissioning of Output Benefit 1975 44 - - -- ( 44) 1976 185 - - - - (185) 1977 677 - - - - (677) 1978 300 - - - - - (300) 1979 127 35 - -56 - (218) 1980 89 33 114 57 53 201 (145) 1981 - 41 252 98 - 439 48 1982 - 18 304 98 - 536 116 1983 - - 334 98 - 606 174 1984 - - 351 98 - 683 234 1985 - - 351 98 - 715 266 1986 - - 351 98 - 748 299 1987 - - 351 98 - 748 299 0 1988 - - 351 98 - 748 299 1 1989 - - 351 98 - 748 299 1990 - - 351 98 - 748 299 1991 - - 351 98 - 748 299 1992 (142) (127) 146 41 - 312 394 Economic Rate of Return= 7.0% Industrial Projects Department February 1980