Mexico - Fertilizer Project

Document of The World Bank FOR OMCIAL USE ONLY Report No. 5382 PROJECT COMPLETION REPORT MEXICO FERTILIZER I PROJECT (LOAN NO. 1112-ME) December 28, 1084 Industrv Department This dxament has a restricted distribution and may be used by recipients only in tde performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. |  FOR OMCIALL USE ONLY PROJECT COMPLETION REPORT IKEXICO - FERTILIZER I PROJECT (LOAN 1112-ME) TABLE OF CONTENTS Page No. Preface.i Basic Data Sheet ............................................ ii Highlights .......... ........................................ iv I. INTRODUCTION ........................................... 1 II. PROJECT BACKGROUND ....... - . .................. 2 A. Project Preparation, Appraisal, Loan Approval and Effectiveness ................................... 2 B. Project Description and Objective. 2 tII. PROJECT IMPLEMENTATION AND MANAGEMENT. 3 A. Achievement of Project Objectives ................. 3 B. Project Scope Changes. 3 C. Froject Management. 4 D. Employment and Training. 4 E. Use and Performance of Engineering Firms and Consultants. 5 F. Procurement and Performance of Suppliers 5 G. Performance of Erection and Civil Work Contractors. 6 H. Implementation Schedule. 7 I. Capital Cost, Financing and Loan Disbursement 9 IV. OPERATING PERFORMANCE .................................. 12 A. Commissioning and Start-up .12 B. Normalization and Build-up of Production .13 C. Market Growth ..................................... 14 V. FINANCIAL PERFORUMANCE ...... 15 A. Volume and Value of Sales .15 B. Financial Rate of Return ..... ..................... 15 VI. ECONOMIC PERFORMAN-CE ........ ........................... 15 A. Economic Rate of Return ........................... 15 B. Foreign Exchange Savings .16 C. Transfer of Technology .. 16 BA'NK ROLE, CONCLUSIONS AND LESSONS LEARNED . 16 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  TABLE OF CONTENTS (continued) LIST OF ANNEXES Annex 1-1 FERTINEX Units in Operation or Under Construction Annex 1-2 Fertilizer Capacity by Product and Nutrient Annex 3-1 Bank-financed Procurement of Supplies and Services by Country of Origin Annex 3-2 Estimated and Actual Implementation Schadule Annex 3-3 Estimated and Actual Capital Costs Annex 3-4 Estimated and Actual Disbursement Schedule Annex 4-1 Initial Monthly Production Annex 4-2 Apparent Nitrogenous Fertilizer Consumption Annex 5-1 Urea Prices in Mexico Annex 5-2 Revenues and Production Cost Annex 5-3 Cost and Benefit Streas- for Financial Rate of Return Calculation Annex 5-4 FERTIMEX Balance Sheet and Income Statement Annex 6-1 Assumptions for Economic Analysis Annex 6-2 Economic Costs and Benefits Annex 6-3 Cost and Benefit Streams for Economic Rate of Return Annex 7 Comments from the Borrower. Translation of Telex dated October 23, 1984  PROJECT COMPLETION REPORT MEXICO - FERTILIZER I PROJECT (LOAXN 1112-ME) PREFACE 1. This is the Project Completion Report (PCR) on the Mexico- Fertilizer I Project for which a Bank loan in the amount of USS50.0 million was approved on May 22, 1975 to Nacional Financiera S.A. (NAFINSA) and Guanos y Fertilizantes de Mexico S.A. (GUANOMEX). Later on in January 1978, Fertilizantes Mexicanos S.A. (FERTIMEX) was formed through a merger of GUANOMEX and another fertilizer company Fertilizantes Fusfatados Mexicanos. 2. Following the closing of the loan in June 30, 1982, IND staff visited Mexico for preparation of the PCR and had discussions with the Government, NAFINSA and FERTIMEX, the company responsible for project implementation. The report reflects findings of this mission as well as a review of project files and related documents. An English translation of Government comments on the dr3ft PCR is attached as Annex 7. 3. This project has not been audited by the Operations Evaluation Department.  PROJECT COMPLETION REPORT MEXICO - FERTILIZER I PROJECT (LOAN 1112-ME) BASIC DATA SHEET KEY PROJECT DATA (US$ Million) As of September 30, 1984 Original Amended Disbursed Cancelled Repaid Outstanding Loan No. 11i2-ME 50.0 50.0 50.0 - 23.2 21.i CUMULATIVE LOAN DISBURSEMENT FY76 FY77 FY78 FY79 FY80 FY81 FY82 (i) Planned 8.3 24.0 45.0 50.0 50.0 50.0 50.0 (ii) A.mended - - - - - - - (iii) Actual 1.4 13.6 23.5 39.2 43.3 44.8 50.0 (iv) (iii) as Z of Ci) 17 57 52 78 87 90 100 pROGRAM/PROJECT DATA Original Loan/ Actual or Credit Date(s) Loan Agreements Board Approval May 22, 1975 Loan Agreement May 22, 1975 Effective Date July 30, 1975 Loan Closing December 31, 1978 June 30, 1982 Date of Physical Completion May 1979 June 1982 * Completion Time (in months) 54 91 Time Overrun (Z) - range - 682 - 37 Date of Start-up of Operations June 79 July 82 Total Project Cost (US$ Million) 150.2 318.8 Cost Overrun (Z) - 112 Financial Rate of Return (Z) 14.5 6.8 Economic Rate of Return (Z) 24.0 16.0 al After minus USS5.7 million foreign exchange adjustment  - iii - MISSION DATA No. No. of of Man Report Month/Year Weeks Persons Weeks Date Pre-Appraisal 7/74 1.4 3 4.2 06/19/74 Appraisal 9/74 2.6 3 7.8 05105/75 Supervision 12/75 1.0 1 1.0 12/23/75 Supervision 5/76 0.4 1 0.4 05/05/76 Supervision 9/76 0.7 2 1.4 10/13/76 Supervision 3/77 1.6 3 4.8 03/28/77 Supervision 8/78 0.7 3 2.1 12/21/78 Supervision 6/79 0.4 2 0.8 07/05/79 Supervision 2/80 0.3 4 1.2 03/11/80 Supervision 9/80 0.3 2 0.6 09/25/80 Supervision 7;81 0.4 2 M.I 07/16/81 Supervision 7/82 0.4 2 0.8 08/02/82 Completion 11/82 2.0 1 2.0 05/30/83 OTHER DATA Original Plan Actual Borrower NAFINSA/GUANOMEX NAFINSA/FERTIMEX Executing Agency GUANOMEX FERTTMEX CURRENCY EQUIVALENTS At appraisal US$1 = 12.5 Pesos October 1976 to January 1982 US$1 = 22.5 - 27.0 Pesos Time of Mechanical Completion (June 1982) US$1 = 50.0 Pesos Time of Completion Report (May 1983) US$1 = 150.0 Pesos December 1984 US$1 = 206.0 Pesos WEIGHTS AND MEASURES 1 metric ton = 1,000 kilogram 1 pound = 0.454 kilograms ABBREVIATIONS FERTIMEX - Fertilizantes Mexicanos S.A. GUANOMEX - Guanos y Fertilizantes de Mexicos S.A. NAFINSA - Nacional Financiera S.A. PEMEX - Petroleos Mexicanos S.A. FISCAL YEAR July 1 to June 30  - iv - PROJECT COMPLETION REPORT MEXICO - FERTILIZER I PROJECT (LOAN 1112-ME) HIGHLIGHTS 1. Mexico has promoted agriculture production through better irrigation, research and extension work and by making agricultural credits and modern inputs including fertilizers available to farmers. In this context the Government has encouraged domestic production of fertilizers to ensure reliable (and at reasonable price) supply of fertilizer to farmers. (para 1.01) 2. In pursuit of this policy GUANOMEX, a state owned company, was formed in 1942, to handle fertilizer production and distribution. In 1978 GUANOMEX was later merged with other fertilizer company to form FERTIMEX which today operates 13 fertilizer plants in Mexico and owns all of Mexico's fertilizer capacity except for ammonia which is produced by PEMEX, another state corporation. The Fertilizer I Project was appraised in September 1974 following a request from NAFINSA, a state development finance institution. The Board approved a loan of US$50 million to NAFINSA and GUANOMEX (later FERTIMEX) guaranteed by the Government at an interest rate of 8.5% p.a. with a maturity of 14 years, including a grace period of 3.5 years. NAFINSA charges FERTIMEX a 3.5% p.a. fee on the outstanding amount. The loan became effective on July 30, 1975. (para 1.02) 3. The project comprises the following three sub-projects: (para 2.04) (i) The Bajio sub-project 330,000 ton per year (tpy) urea plant at Bajio; (ii) The Istmo sub-project of 495,000 tpy urea plant at Pajaritos; and (iii) The Salamanca sub-project of a 2,500 tpy expansion and modernization of an existing 7,500 tpy parathion insecticide plant at Salamanca. 4. Project facilities were mechanically completed and started-up in June 1982, 37 months behind schedule. Commissioning and start-up of the sub-projects w!ere carried out smoothly, although the Istmo plant has not undergone a formal acceptance test. However, since the Istmo plant has operated for more than 30 days at a capacity above 80%, it can be considered as completed. All plants have demonstrated their ability to reach and sustain production at design capacity. The main change in Project scope resulted from FERTIMEX decision to build a twin 1,500 tpd urea plant at the Istmo site which in turn required modification of off-site arrangements causing delay in project completion. Frequent management and organization changes in FERTIMEX also caused unnecessary delays in project implementation. Bank advice to form a "Project task force" was not followed due to variou axternal and internal reasons. (paras 3.01 - 3.04 and 4.01)  -v- 5. The Project required about 480 staff of which 171 was trained by FERTIMEX the remaining transferred from other plants. FERTIMEX staff had overall responsibility for general design and supervision of the Project. however, because of organizational inadequacy, the project lacked effective control of scheduling and costing. With some exceptions, performance of fore;gn firms which were associated with local engineering firms, was ge.;erally satisfactory. The local firm, which provided engineeriug services for the Istmo sub-project faced serious problems. (paras 3.05 - 3.08) 6. In procurement FERTIMEX followed generally acceptable procedures for construction, equipment, erection and civil works. Equipment and materials were mostly procured through International Competitive Bidding (ICB) in accordance with Bank guidelines. Some problems encountered in procurement were due to overall country conditions. (paras 3.09 - 3.11) 7. Total cost of the project at appraisal was US$150.2 million. At project completion the actual cost was US$318.8 million representing a 112% cost over-run mainly due to: (i) project implementation delays, (ii) changes in project scope, (iii) underestimated civil works in the Istmo sub-project, and (iv) currency realignments. Total financing required of US$318.8 million was met with equity provided by the Government through NAFINSA (46%), Bank loan (16%) and other long-term borrowings (38%). (para 3.20) 8. FERTIMEX projects an annual urea capacity of about 0.8 million ton of nitrogen by 1985 which will be adequate to satisfy domestic demand. Anv excess urea as a result of high capacity usage could be easily exported to neighboring countries. The financial rate of return for the project is calculated at 6.8% compared to the appraisal estimate of 14.5%. FERTIMEX has satisfactory debt/equity ratio at 40/60, but the current ratio of 0.7 and debt service coverage ratio of 1.0 were below the requirements of agreed financial convenants. The economic rate of return is computed at 16%' compared to the appraisal estimate of 24%. The ERR is still at an acceptable level despite substantial cost over-run and completion delays since the Project converts excess ammonia to urea which substitutes imports. T:he net annual foreign exchange savings from the Project are estimated to be about USs70 million. In addition, the Project has resulted in substantial technology transfer for Mexican firms. (paras 4.10 - 6.04) 9. Durina early phases of the Project the Bank played a significant role in helping FERTIMEX improve project scope, implementation arrangements, cost accounting system, etc. However, weakness in organizational m;i management arrangements of FERTIMEX persisted during project implementation and the Bark was unsuccessful in its efforts to induce FERTIMEX to carry out institutional improvements aimed at more effective project management and coordination during the planning and execution stages. Conseqtuently, critical managerial lapses have siznificantly reduced the Project's returns. (paras 7.01 - 7.04)  PROJECT COMPLETION REPORT MEXICO - FERTILIZER I PROJ Er (LOAN 1112-ME) 1. INTRODUCTION 1.01 An important feature of the long-term policies of the Government of Mexico has been to promote agricultural production through the development of irrigation projects, agricultural research and extension work, and by making agricultural credits and fertilizers available to farmers under favorable conditions. In particular, the Government has sought to maximize local production of fertilizers, protect farmers from price fluctuations, incurred often on the international market, and promote agricultural production through controlled fertilizer prices. 1.02 In pursuit of this policy, a Government-owned company, Guanos y Fertilizantes de Mexico S.A. (GUANOMEX), was formed in 1943 to exploit guano deposits. The Company's functions were enlarged in 1948 to include production and distribution of all fertilizers. In 1965-67, GUANOMEX absorbed three private companies in compliance with a Government decision to consolidate the responsibility for the fertilizer supply into one public-sector enterprise to streamline the planning and execution of additional fertilizer capacity. In addition, GUANOMEX took over the national supply of insecticides and the exclusive responsibility for domestic distribution of fertilizers. On January 1, 1978, Fertilizantes Mexicanos S.A. (FERTIMEX) was formed through a merger of GUANOMEX and Fertilizantes Fosfatados Mexicanos (FFM). The latter was the only producer of phosphoric actd in the country of which it exported large quantities. As of 1978, FERTIMEX1/ owned all of Mexico's fertilizer capacity except for ammonia, which is produced by Petroleos Mexicanos S.A. (PEMEX) and ammonium sulfate produced as a by-product of Caprolactam in the private sector. At present FERTIMEX operates 13 fertilizer plants in Mexico and one in Guatemala (Annexes 1-1 and 1-2). 1.04 Mexico's overall fertilizer consumption increased very rapidly at an average annual rate of 16% between 1953 and 1973. Thereafter, growth slowed down somewhat, but consumption continued to grow at a healthy annual rate of about 11% through today2/. 1.05 The Fertilizer I Project (the Project) is part of the Government's and FERTIMEX's effort to maximize local production of fertilizers and other agrochemicals by: (a) taking advantage of low-cost 1/ The name 'FERTIMEX or the Company will be used in this report as being also applicable to GUANOMEX. 2/ According to the Government the Project Completion Report does not reflect adequately the impact of the economic environment that prevailed in Mexico during project implementation and the constraints imposed by the situation. While the Bank recognises the impact of the economic situation in Mexico during the project implementation period, it is the Bank's view that this factor has been adequately taken into account in preparing the report.  -2- ammonia produced by PEMEX; (b) rationalizing the geographical distribution of production units in Mexico, ,nd (c) coordinating and expediting fertilizer imports. II. PROJECT BACKGROUND A. Project Preparation, Appraisal, Loan Approval and Effectiveness. 2.01 Following a request from Nacional Financiera S.A. (NAFINSA), a Bank mission reviewed Mexico's fertilizer sector in June 1974 and identified three sub-projects as being suitable for Bank financing.3/ These sub-projects were based on studies carried out by FERTIMEX in late 1973 and early 1974. FERTIMEX had competent technical staff who designed the project scope and prepared the feasibility report which was subsequently approved by the Company's Board of Directors. 2.02 The Project was appraised in September 1974 based on preparatory work carried out by FERTIMEX. The process technology, engineering features and procurement procedures were, however, extensively and frequently discussed with the Bank during and after appraisal. The appraisal mission also discussed with various Government agencies and FERTIMEX the need to prepare detailed fertilizer demand projections and studies on fertilizer distribution, transportation and inventory control. 2.03 On May 22, 1975, the Bank Board approved a loan of US$50 million to NAFINSA and GUANOMEX (later FERTIMEX) at an interest rate of 8-1/2% p.a. and a maturity of 14 years, including a grace period of 3-1/2 years. The Government guaranteed the loan and agreed that NAFINSA would charge FERTIMEX a 3-1/2% p.a. fee on the borrowed amount in order to raise the effective interest rate to 12% p.a., reflecting the then prevailing cost of borrowing from commercial sources. The loan became effective on July 30, 1975. B. Project Description 2.04 The FERTIMEX I Project comprises the following sub-projects: (a) The Bajio sub-project is a 1,000 tons per day (tpd) or 330,000 tons per year (tpy) urea plant located next to an existing 56,000 tpy FERTIMEX urea unit at Bajio in the State of Guanajuato. Ammonia and carbon dioxide are supplied from the second of two nearby PEMEX plants with capacities of 250 and 900 tpd of ammonia commissioned in 1967 and 1977, respectively. The process technology selected for this sub-project is Stamicarbon's total recycle and carbon dioxide stripping process. 3/ The Bank's Fertilizer I Project (the Project) consists of these 3 sub-proJects (para 2.04).  -3- b) The Istmo sub-project consists of a 1,500 tpd (495,000 tpy) urea plant at Pajaritas in the State of Veracruz. The plant is designed to use ammonia and carbon dioxide piped from the nearby PEMEX Cosoleacaque plants. The technology used is the Snamprogetti ammonia stripping process. The sub-project also includes compressors and pipelines for ammonia and carbon dioxide, water and power supplies, materials handling, port installations, and administrative facilities. c) The Salamanca sub-project consists of a 2,500 tpy expansion and modernization of an existing 7,500 tpy parathion insecticide plant located at Salamanca, State of Guanajuato, based on the Stauffer Chemical Co. (USA) technology. The sub-project was designed to substitute for DDT production. III. PROJECT IMPLEMENTATION AND MANAGEMENT A. Achievement of Project Objectives 3.01 The Project was mechanically completed by June 1982, 37 months behind schedule. Preliminary production figures for 1982, the first year in which all the Project components operated, are as follows: Fertilizer I Project - 1982 Production Tons % Capacity Utilization Urea - Bajio sub-project 238,000 72 Urea - Istmo sub-project 232,000 70 4/ Parathion - Salamanca sub-project 1,300 13 Actual capacity utilization of the Bajio and Istmo plants in 1982 is consistent with the 70% figure anticipated in the Appraisal Report for the first year of operation. Capacity utilization was limited by supply interruptions of ammonia and mechanical failures in auxiliary equipment (paras 4.05 and 4.07). In the case of the insecticide plant, low capacity utilization was due to market constraints (para 4.09). While operating performance has suffered partly due to reasons beyond the control of the project entity, the plants have demonstrated their ability to reach and sustain production at design capacity. B. Project Scope Changes 3.02 The main change in Project scope resulted from a later FERTIMEX decision to build a twin 1,500 tpd urea plant at the Istmo sub-project site. The decision to double urea capacity at Istmo was made on the basis 4/ Based on period after stz -up.  -4- of the availability of low-cost ammonia from the multiple production units being built by PEMEX at Cosoleacaque (which have reached total annual capaciEy of 2.44 million tons by 1983) and to export a product with a higher value-added than ammonia. This decision in turn required modification of off-site arrangements: (a) larger pumps and compressors capacities to ensure sufficient supply of ammonia and carbon dioxide; (b) enlarged solid handling and storage facilities; and (c) an increased electric po.er supply. In addition, a formaldehyde spraying system was included in the Project to coat the urea prills, to avoid agglomeration. On the other hand, the bag manufacturing plant, originally envisaged to supply not only the Istmo plant but other FERTIMEX plants, was deleted from the Project scope. The evolving changes in auxiliary services and offsite facilities naturally caused considerable delay in project completion. C. Project Management 3.03 The Project implementation responsibility rested entirely with FERTIMEX. Until 1977, FERTIMEX projects were prepared and executed under the responsibility of FERTIMEX's General Manager of Development, who was assisted by an Assistant General Manager for supervision and construction and an Assistant General Manager for project coordination. Project units or task forces reporting to the latter were formed for each sub-project. Each project unit was headed by a project manager and comprised a construction engineer, a chief design engineer, several procurement officers, other engineering and technical specialists, and administrative oersonneL. 3.04, Execution of the Bajio sub-project was initiated under the project unit svstem described above. However, following a change in senior management in December 1976 when a new team took over, the organiza- tion -went through several phases of restructuring. Under this svstem, statf ascigned to perform specific project tasks did not report to a pr.jeztL manager but to the head of their respective division and did not permit an effective functioning of a planning and monitoring system for the sub-proiects. In other words, the "project manager" did not have anv direct amthoritv over the divisional staff working on the Project. --t:t ther r; requent management changes of the departments caused inni. :r-: dielays during project implementation. During supervision -~nss' .ns 'he 3ank advised FERTIMEX of the need to form a project task 1,rce _rlew -hich the sub-project managers would have full authoritv in Pro ' z mp Lementation and control. However, this recommendation - ; r.-ma;n'v %due to external and internal political, administrative reasons 0" "rRTIMEX - -as ne'er Fully implemented.5/ D. E,molovment and Training .0-5 The Project's oDerating manpower requirements were estimated at avoraisa alt about 430, with a large number to be secured through transfer rrom other FERTIMEX plants. Therefore, the Bank agreed to a recruitment a-nd training program specifically tailored to meet the needs of FERTIMEX as -r,narz-eJ bei--.w: ,J According to the Government "his was because institutional policy questions regarding FERTImEX fall within the competence of the appropriate government authorities.  Project Personnel Training Program (Number of Staff Trained) Bajio Istmo Salamanca Total Professional Staff 30 32 0 62 Operators and Techniciars 12 14 4 50 Assistant Operators 17 31 8 56 Workers I - 2 3 Total 60 97 14 17L 3.06 The personnel recruited for the urea plants received training for six months; about one half of the process engineers recruited for the Bajio sub-project also received one month training at the Stamicarbon installations in Holland while the engineering and technical staff assigned to the Istmo sub-project were trained on site by Snamprogetti staff. FERTIMEX encountered some difficulties in recruiting and retaining quali- fied staff for the Istmo plant due to the large development activity in progress in the surrounding '4inatitlan and Pajaritos industrial area and the resulting limited availability of housing and other ammenities. E. Use and Performance of Engineering Firms and Consultants 3.07 FERTIMEX staff had overall responsibility for general design and supervision of the Project. However, because of the organizational in- adequacies described abo-7e (para 3.04), the Project lacked effective control of scheduling and costing (paras 3.10, 3.12 to 3.14). Licensed process technology and basic engineering were provided by reputable foreign firms which were associated wiLh local engineering firms responsible for detailed engineering and expediting deliverv of locally-made equipment. With some exceptions (para 3.10) the performance of these companies was generally satisfactory. The local firm, which provided engineering services for the Istmo sub-project on the other hand, faced serious problems, partly due to the 1978/79 boom in construction work in Mexico, which caused delays in the delivery of equipment designs and other information by the suppliers, but mainly due to lack of experience with large projects, lack of qualified personnel and frequent changes of the technical and managerial staff. Local firms were also unable to design the materials handling facilities downstream of the urea prilling tower and a USA firm was contracted in 1978 to carry out this task. 3.08 The Salamanca sub-project is based on an improvement of the Stauffer Chemical Co. (USA) process used in the original plant (para 2.04 c). The performance of the selected Mexican engineering firm was, in general, satisfactory. F. Procurement and Performance of Suppliers 3.09 FERTIMEX followed generally acceptable procedures for contracting for equipment, erection and civil works. Equipment and materials were mostly procured through international competitive bidding (ICB) procedures  -6- in accordance with Bark guidelines and equipment were therefore obtained from competent suppliers at reasonable prices. 3.10 Some problems encountered in procurement were due to overall countrr conditions (para 3.17). These difficulties were however compounded which were not closely monitored by FERTIMEX.6/ The main problems encountered in this respect were (a) frequent design changes made by local engineering firms; (b) insufficient inspection of materials and equipment prior to shipment; (c) inadequate system to expedite delivery of orders, till frequent delays in delivery of equipment forced FERTIMEX to appoint its own expediters; and (d) delays in contracting for erection and civil works because of limited response to tenders due to the 1978/79 boom in construction work in Mexico. 3.11 In the Appraisal Report, it was anricipated that 35% of the ecuipment wrould be imported and 54% of the ltcensing and engineering costs would be pavable in foreign exchange. The actual cost of the imported equipment and spares (USS4O.3 million) and of licensing and engineering (';SS9.7 million) amounted to 4i5% and 52% respectively of the total for those categories. 'Mexican manufacturers supplied through international competitive bidding procedures 25% of the Bank-financed goods and ser-:ices. Among foreign suppliers the most important countries of origin -zere Italy. Federal Republic of Germany, the Netherlands, Japan and the 'S; (Annex 3-1). C. Perf ormance of Erection and Civil Work Contractors. 3.12 Construction of the Bajio sub-project was entrusted to a local .irm in 1976 w-hich subsequentlv was unable to secure the necessary technical staff and equipment. The work stopped completely during five -3onths in 1977 and early in 1978 and had to be recontracted to a new firm who narried out approximately 40% of the total construction work. Another -roblom was that the steel structure required for the above-ground positioning of the urea reactor was built before full load details and specifications had been submitted by the equipment supplier and required s,b- ccuent strengthening. Further delavs resulted from difficulties in pr: curi-g structural steel from local suppliers. 3.13 The construction of the Istmo sub-project was originallv contracted to a local flrm but several work areas had later to be reassigned to other contractors. Furthermore, the work encountered _dditional problems due to the serious concentration of construction activitv _n the area, where ?'-tEX, FERTIMEK, and other firms were carrying *,ut simultaneouslv a number of large projects. Living quarters, other in-,rastructure and amenities for the working force were lacking in the Minatitian area and taLis made it verv difficult to recruit and retain qualified DersonneL. As a result of delays in completing the materials ,/ According to the Government the Bank was aware of the lechnical caDacities of rhese firms and it therefore shares responsibility with FERTIMEX.  -7- handling system,7/ it was necessary to design and build temporary facilities and install three bagging machines at Pajaritos. 3.14 The civil works and erection contract for the Salamanca sub-project was issued in 1977 to a local contractor which, as in the case of the Bajio sub-project, could not fulfill its task due to lack of cechnical expertise ai,d staff. The new contractor was aiso unable to make adequate progress and the work was completed by a third firm. FERTIMEX had to support with additional technical staff both the local engineering firm and the civil works contractor to avoid further delays. In this and in the other sub-projects the capabilities of the firms being engaged were not fully evaluated and their shortcomings were not corrected early enough in the execution of the sub-projects.8/ H. Implementation Schedule 3.15 Estimazed and actual implementation schedules for the Project are shown in Annex 3-2 and summarized in the table on the next page. 7/ Due to the change in scope to include the requirements of a second urea plant as well as of the F-F phosphoric acid plant and a new ammonium nitrate plant. 8/ According to tl.' Government these were not the real reasons why the contractors were unable to fulfill the initial specification: properly. Presumably, the reasons should be sought in the conditions caused by the 1978/79 construction boom and the overall economic situation in Mexico during the implementation period.  -8- Fertilizer I Project Implementation Schedule Termination Appraisal Estimate Actual Delays Begins Ends Begins Ends (months) Basic Engineering Bajio /74 03/75 /74 04/75 1 Istmo 01/76 07/76 01/76 05/78 22 Salamanca - - - - - Foreign Procurement Bajio /74 12/76 /74 5/78 17 Istmo 01/76 05/78 01/76 08/81 39 Salamanca 05/76 12/76 03/76 07/78 19 Local Procurement Bajio 11175 10/77 12/75 06/80 32 Istmo 01/76 11/77 01/77 06/82 55 Salamfanca 05/76 12/76 03/76 06/80 42 Erection & Construction 7.ajio 07/76 10/78 02/77 06/80 20 Istmo 01/76 09/78 07/76 06/82 45 Salamanca 11/76 01/78 11/76 10/80 33 Start-uD Bali o 10/78 01/79 07/80 10/80 21 Ls=to 07/78 05/79 12/81 06/82 37 Salamanca 02/78 04/78 12/81 02/81 33 T-e overall delay in completion of the Project was 37 months, although two o' the sub-projects--Bajio and Salamanca--were completed earlier, 21 and 33 months behind schedule. The delays were mainly due to: (a) the changes in the organization and administrative procedures o'f FERTIMEX;90 (b) fund shortage caused b. the September 1976 devaluation of the MexS: (c) late placement of orders and advance payments on contracts; and (d) insufficient technical expertise and experience on the part of local engineering firms and erection contractors. One other reason pointed out by FERTIMEX was the excessive disaggregation of bid packages--more than one thousand tenders .or the t-o urea plants, as a result of Government regulations. 9! Since questions of institutional policy regarding FERTIMEX fall within the competence of the appropriate government authorities, the Government suggests that FERTIMEX's institutional and administrative policies cannot be used as an explanation for the unsatisfactory execution of the Project.  -9 - 3.16 Changes in FERTIMEX management which followed tne 1976 national elections and modifications o^ the :rTpwtrv organization for its project development and construction acc.--i-ies para 3.04) resulted in some key decision-making staff leaving the :ompany and therefore in delays until the new organizational set-up was functioning with new staff familiar with Project requirements. 3.17 The 1976 devaluation of the MexS was largely unforeseen. Mexico had enjoyed relative exchange rate stability for many years and FERTIXEX as well as many manufacturers and contractors had not taken precautions to avoid heavy exposure t. foreign exchange fluctuation risks. The 1976 devaluation restricted severely FERTIMEX's financial capabilities and held-up the placing or signing of some important orders and contracts. Since suppliers and contractors had also experienced liquidity problems, they were often unable to live up to their obligations. To face this situation, FERTIMEX formed a Procurement Control Group to expedite the re-negotiation of orders and contracts, where this was still possible, or else to invite new tenders. The changes introduced in the contracts and the subsequent approval requirements often resulted in additional delays and commissioning problems. 3.18 Some of the reasons for delays were beyond the control of FERTIMEX officials (e.g. devaluation of the MexS and senior management changes following national elections), but FERTIMEX could have reduced the delays by: (a) setting-up an adequately-staffed project cask force organization; (b) appointing fully responsible sub-project managers: (c) minimizing re-deployment of managerial staff before completion of assigned tasks; (d) evaluating more adequately experience and capabilities of local construction and erection contractors prior to awiarding contracts; I0/ and (e) strengthening system to monitor and control the progress in project implementation. I. Capital Cost, Financing and Loan Disbursement 3.19 Capital cost estimates at the time of appraisal and actual figures are shown in Annex 3-3 and summarized in the table on the following page. 10/ According to the Government this should be done in the light of a country risk model.  - 10 - Capital Cost and Financing Required (USS million) Appraisal Estimate Actual Foreign Local Foreign Local Exchange Currency Total Exchange a/ Currency Total Bajio Installed Cost 17.1 21.2 38.3 15.7 44.3 60.0 Working Capital - 6.9 6.9 - 11.1 11.1 Sub-project Cost 17.1 28.1 45.2 15.7 55.4 71.1 Istmo Installed Cost 26.0 44.8 70.8 42.7 147.0 189.7 Working Capital - 10.3 10.3 - 15.4 15.4 Sub-project Cost 26.0 55.1 81.1 42.7 162.4 205.1 Salamanca Installed Cost 3.6 2.7 6.3 1.4 7.1 8.5 Working Capital - 0.9 0.9 - 3.5 3.5 Sub-project Cost 3.6 3.6 7.2 1.4 10.6 12.0 Project Totals Installed Cost 46.7 68.7 115.4 59.8 198.4 258.2 Working Capital - 18.1 18.1 - 30.0 30.0 Project Cost 46.7 86.8 133.5 59.8 228.4 288.2 Interest d-iring Construction 6.8 9.9 16.7 20.0 10.6 30.6 Total Financing Required 53.5 96.7 150.2 79.8 239.0 318.8 a/ Largely based on estimates provided by FERTIMEX's area managers and project development and construction staff because the accounting department generaly did not separate foreign and local currency expenditures. Foreign exchange costs include indirect foreign exchange. 3.20 The overall cost overrun is 112%, and is particularly significant for civil works and erection and, among the sub-projects, for the Istmo urea plant, as shown in the table on the following page.  - 11 - Overruns of Insta]led Project Cost (As Z of Appra-sal Estimates) Site Development, Equipment Licensing & I-vil Works Sub-projects & Spares Engine!r