India - Hazira Fertilizer Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 6853 PROJECT COMPLETION REPORT INDIA HAZIRA FERTILIZER PROJECT (CREDIT 1125-IN) June 30, 1987 Industry 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.  TH WORLD BANK FOR OficIALU ONLY WaUshngton. DC 2043) USA June 30, 1987 MEMORANUDUM TO THE EXECUTIVE DIRECTORS AND THE PREIDENT SUBJECT: Project Completion Report on India - Nazira Fertilizer Project (Credit 1125-IN) Attached, for information, is a copy of a report entitled "Project Completion Report on India - Hazira Fertilizer Project (Credit 1125-IN)" prepared by the industry Department. Under the modified system for project performance auditing, further evaluation of this project by the Operations Evaluation Department has not been made. Attachment ThS doument ha a mstkied distbutn and may be usd by Isepgnts only i e #pefrmance of theit .lcAk duti. u coeones msy so otherwife be disclosed without Wor Bank authoritio.  FOR OMCIL US ONLY PROJECT COMPLETION REPORT INDIA - HAZIRA FERTILIZER PROJECT (CIREDIT 1125-IN) TABLE OF CONTENTS Page No. PREFACE **eeo.e**oeeooe**eee.oeeeoo o 0oe oeee 1 BASIC DATA SHEET *e00e.o0o000.00..00..0e**00.0 *o0o00o0 *e*o.*.00 .i HIGHLIGHTS ..o.o..oo.oo0.00.. 00.0.........*.0*0.* ..0000 00 * 00.0 iv I* INTRODUCTION *o.ooeoesoo.oo**toooooo9o@90*eo4000e*O0***O0 1 II. PROJECT BACKGROUND *.--....... s...-,-.o..,.....e.. 2 A. Project Identification, Preparation, Appraisal, .^ proval and Credit Effectiveness ................. 2 B. Project Description and Objectives ........oo...*,.o 3 III. PROJECT IMPLEMENTATION AND MANAGEMENT .... ............... 3 A. Achievement of Project Objectives ..................* 3 B. Project Scope ...................................... 3 c. Project Management and Execution ..........*........ 4 D. Manpower Development and Training .................. 4 E. Performance of Engineering Contractors .............6 5 F. Procurement and Performance of Suppliers ........... 5 G. Project Implementation Schedule e-ooeo ooovoo***ov 5 H. Capital Costs, Financing and Disbursements ......... 6 IV. OPERATING PERFORMANCE ....00.00.00.......00.00.0..000.000 8 Ao Commissioning and Start-us ....o......o..o.o..o..... 8 B. Build-up of Production oo..........o...o......,e..o. 8 C. Marketing ......oo.....oo.oooo..oo..o oo. oooooo.o.o 9 V. FINANCIAL PERFORMANC ............................*.*..... 10 A, Pricing Policy ........ ...,... . .............. 10 B. Financial Rate of Return ........................... 10 C, Financial Results .......o...oo.....o*...o o*o........... 11 VI. ECONOMIC PERFORMANCE .....0 00.. 0 0000 00.0.0....... ....... 11 A. Economic Rate of Return oooo...........*..o*...*...* 11 B. Foreign Exchange Savings .....o.......ooo...ooo..... 12 C. Technology Transfer ......e........ .............0.... 12 Do Environmental Aspects .....006..... .....*...*....,. 12 This document has a restricted distribution and may be used by recipients only in the perfome of their oMcial duties. Its contents may not otherwise be disclosed without World Dank authorizaion.  TABLE OF CONTENTS (Cont.'d) Page No. VII. IDA ROLE *e**4o ee s*eeooeOo.o.*oe..eeo.,.,e 12 VIII. CONCLUSIONS AND LESSONS LEARNED ......................... 13 ANNEXES 1 Consumption, Production and Imports of Fertilizers ...... 15 3-1 KRIBHCO Organization Chart .............................. 16 3-2 IDA-Financed Procurement of Goods and Services .......... 17 3-3 IDA Credit Disbursement Schedule ...................... 18 4 Operating Performance *************,** ** * * * * * * * * * * * * * * * * * 19 5-1 Retention Price Formula . ............ 20 5-2 Retention Price Calculations Schedule ................... 21 5-3 Assumptions for Econ. & Finan. Rate of Ret' n Jlculations . 22 5-4 Cost and Benefit Streams for Financial Rate of Return ... 24 5-5 Projected Balance Sheet .......,.**.*. . . . . . * * * * * * * ............. . 25 5-6 Projected Funds Flow Statement ......... ...... *.....* 26 5-7 Projected Income Statement ............................. 27 6-1 Cost and Benefit Streams for Economic Rate of Return .... 28 6-2 Foreign Exchange Savings Schedule ....................... 29 ATTACHMENT Comments Received from the Borrower ............................. 30  - i - PROJECT COMPLETION REPORT INDIA - HAZIRA FERTILIZER PROJECT (CREDIT 11.25-IN PREFACE 1. On March 31, 1981, IDA approved, at the request of the Government of India (GOI), a credit (Cr. 1125-IN) of SDR 321.5 million (US$400 million equivalent) to assist in the financing of the Hazira Fertilizer Froject in the state of Gujarat. The project, originally sponsored by the Indian Farmers Fertilizer Cooperative Ltd. (IFFCO), is owned and operated by Krishak Bharati Cooperative Ltd. (KRIBIICO), a cooperative society established in April 1980. The IDA credit covers approximately 44X of the project capital costs. 2. The project was appraised by an IDA ,ission which visited India in October/November 1979. Re-appraiPal was carried out in November 1980 following delays in the Project's in;-tiation. Board approval was granted on March 31, 1981. The Development Credit Agreement was signed on October 28, 1981 and became effective on January 21, 1982. 3. Work on the project started on March 31, 1981. The plant was commissioned in November 1985 and commercial operations started in March 1986. After the start of commercial operations, IND staff visited India in September 1986 for the preparation of the Project Completion Report (PCR) and had discussions with KRIBHCO, in June 1987 IND staff received comments on an earlier draft of the report from the GOI, through its Department of Economic Affairs. This report is based on the draft PCR prepared by KRIBHCO, the findings of the mission,comments received and the project files and related documents. This project has not been audited by the Operations Evaluation Department.  - ii - BASIC DATA SHEET Key ProJect Data (US$ milliony- -- as of June 30, 1987- -- --- Cro No. Original Amended Cancelled Disbursed lepaid Outstanding 1125-IN 400 392.la/ 0.86 314.0 - 314,0 A. Cumulative Loan Disbursements 1981 1982 1983 1984 1985 1986 1987 (i) Appraisal Estimate 13.0 9.T1 T194. 313.6 392T 400, (ii) Actual - 37.0 135.1 219.6 279.4 304.9 314.0 (iii) (li) as X of (i) - 39.7 69.3 70.0 71.3 76.2 78.5 B. Project Schedule Appraisal Estimate Actual Board Approval 03/31/81 Signing Date 10/28/81 Effective Date 01/21/82 Zero Date 04/01/81 03/31/81 Date of Mechanical Completion 06/01/85 09/01/85 Completion Time (months) 48 51 Time overrun (months) - 3 C. Project Cost (US$ million) Appraisal Estimate NCtual Variation , Total Installed Cosc 998.6 751.5 -2', Working Capital 160.5 71.7 -55 Interest During Construction 117.8 48.1 -59 Total Financing Required b/ 1,276.9 836.2 -35 Financial Rate of Return T) 9.1 14.3 +57 Economic Rate of Return (X) 16.6 15.7 -5 a/ The difference between the original and amended figures is due to US$/SDR rate fluctuations. b/ According to GOI estimates, the reduction in capital cost estimate is from Rs 10,215 million to Rs 9,000 million resulting in a saving of only 12%. The differences arise from the exchange rates used on the date of the estimates and of fluctuations in exchange rates during the Project period.  - iii- D. Project Scope (tons per day) Ammonia plant 2,700 Urea plant 4,400 MISSION DATA Month No. of No. of Year Weeks Persons Report Date Appraisal 11/79 3 4 11/26/79 Re-appraisal 11/80 2 3 03/06/81 Supervision 07/82 1 1 07/22/82 Supervision 02/83 3 1 03/07/83 Supervision 02/84 2 1 04/02/84 Supervision 07/84 2 2 09/10/84 Supervision 04/85 2 1 04/10/85 Supervision 11/85 4 1 01/13/86 completion 09/86 2 2 12/10/86 OTHER DATA Currency Unit Indian Rupee Appraisal Year US$1.0 - Rs 8.0 Investment Period US$1.0 - Rs 8.0 - 12.6 Completion Year (1986) US$1.0 = Re 12.5 Weights and Measures 1 metric ton (t) - 1,000 Kilograms (kg) 1 metric ton (t) 2,204.6 Pounds (lb) 1 kilometer (km) - 0.62 miles 1 hectare (ha) - 2.47 acres I cubic meter (Ncm) 35.32 cubic feet (cf) Fiscal Year Government of India: April 1 to March 31 KRIBHCO: July 1 to June 30 Borrower: Government of India Beneficiary: KRIBHCO  - iv - PROJECT COMIPTION EEPOFI INDIA - HAZIRA FERTILIZER P' ,jCT (CREDIT 1125-IN) HIGHLIGHTS 1. The project forms part of GOI's overall plan to use gas from the Bombay High and North and South Bassein offshore oil and gas fields. The project also meets the government's agricultural policy objective of developing the fertilizer sector to help increase agricultural o'itput (para 2.03). 2. Originally, the project was sponsored by IFFCOe It is now owned and operated by KRIBHCO. The latter is a cooperative society established in April 1980 with shareholders including GOI (66%), IFFCO (28%) and several local cooperative societies (6%) (para 3.05). 3. The project was designed to produce 2,700 tons per day (tpd) of ammonia and 4,400 tpd of urea. It consists of two gas-based ammonia units with a capacity of 1,350 tpd each and four urea units of 1,100 tpd each, as well as all the necessary auxiliary and off-site facilities, including three steam generation plants of 275 tons per hour each; two power units of 15 Mr ach; ammonia storage for 20,000 tons; product handling and storage facilities for 90,000 tons,-workshops, warehousing, gas terminal and water treatment plants. A total of 1,320 people are currently employed by the project. This includes 297 executives/officers and 1,023 others (paras 2.04, 3.02, 3.05). 4. KRIBHCO followed acceptable procurement procedures for construction, equipment, erection and civil works using international competitive bidding (ICB) in accordance with IDA guidelines. There were delays in the scheduled deliveries of both locally manufactured and imported equipment, but the 21-month delay in the supply of gas for firing the reformer offset all the other delays (paras 3.07-3.09). 5. Total project cost at appraisal was estimated at US$1,276.9 million. At project completion the actual cost was US$836.2 million, representing a 35% underrun due to (a) generally lower international prices for capital equipment, (b) exchange rate movements, (c) successful use of ICB for local procurement, and (d) savings in the financing charges and higher production during the trial period than originally envisaged (paras 3.10-3.11). 6. Between November 1986 and August 1986, 439,694 tons of ammonia and 713,850 tons of urea were produced. The average capacity utilization during this period was around 65%, a normal situation in the first year of operation. The highest rate of capacity utilization achieved on a single day per stream (up to October 31, 1986) was 106% for the ammonia units and 130% for urea. The plant is now performing satisfactorily and should have no problems achieving a sustained 95% rate of capacity utiLization (para 4e03).  - v - 7. The financial rate of return (FRR) for the project is now 14.3% compared to the appraisal estimate of 9.1%. The increase in the FRR is mainly due to the lower capital costs of tkh project. A 15 reduction in the present retention price will reduce the FRR to about 11% (para 5,04). The economic rate of return (ERR) is now estimated at 15.7%, only slightly lower ttan the appraisal estimate of 16.6%. The average annual foreign exchange saving from the project is estimated to be about US$220 million in constant 1986 dollars, 8% higher than the appraisal estimate. In addition, the project has resulted in substantial technology transfer to India (para 5.03). 8. Since the initiation of the project, KRIBHCO has had 5 Managing Directors. A new Managing Director assumed his duties in November 1986. At appraisal, the agreement was that IFFCO w.uld handle the marketing arrangements for KRIBHCO's urea. However, it was later decided, with IDA's conditional approval, that logistically KRIBHCO would be better placed to market its own urea. The necessary organizational arrangements have generally been slow and are still incomplete (paras 3.04 and 4.04). 9. KRIBHCO succeeded in overcoming problems encountered during project implementation. Significant savings in project costs were achieved and the plant is operating at satisfactory levels since commissioning. KRIBHCO's performance both during project implementation and operation is commendable (para 3.04). 10. From the initial stages all through the implementation period of the project, IDA played a significant role in helping KRIBHCO to arrange project financing, continuously improve project management, organization and procedures, notably in procurement, and constantly monitor the project to identify weak points. Apart from minor infrastructural facilities, the project has been successfully implemented meeting its main objectives of converting a natural resource to a strategic, hitherto imported commodity, ensuring its economical and timely supply to farmers, and improving the region's economic structure (para 7.01). 11. Overall, the project was successful. At the time of its appraisal, however, IDA had not yet developed a broader approach to sectoral lending and to that extent the project did not deal with sectoral issues. In retrospect, such an approach would have been desirable (para 8.05).  PROJECT COMPLETION REPORT INDIA - HAZIRA FERTILIZER PROJECT (CREDIT 1125-IN) I. INTRODUCTION 1.01 Agriculture employs over 67% of India's total work force and accounts for about 40% of the country's GDP. The Government of India's (GOI) agricultural policy aims to ensure increased production. Due to the limited scope of expanding the area under cultivation, more intensive use of land with continually updated inputs and the improvement of farming practices are of paramount importance in India's agricultural development. The objective of further expanding fertilizer use, which has grown at a compound annual rate of 10% since the early 1970s, reaching 8.7 million tons of nutrient in 1985/86, is an integral part of GOI's agricultural development strategy. Five consecutive development plans have given priority to the development of an efficient fertilizer industry to ensure a sustained supply of fertilizers to consumers and to expedite the achievement of agricultural self-sufficiency. 1.02 In 1985/86 India had a total production of 5.7 million tons per year of nutrient (tyn), of which 4.3 million tyn was in the form of nitrogen, making it the fourth largest producer after the Soviet Union, the United States and China. In spite of its large production, India's supply gap in 1985/86 amounted to 32% of its fertilizer requirements, or some 2.7 million tyn, requiring foreign exchange of some US$650 million (on FOB basis). The outflow of foreign exchange on account of fertilizer imports over the years has had a considerable negative impact on India's balance of payments. GOI has therefore given priority to the installation of additional production facilities while increasing the level of capacity utilization at existing plants to increase overall domestic production. The Bank Group has so far participated in the financing of thirteen fertilizer projects in India, making a total contribution of about US$1.4 billion towards the substantial capital and infrastructural investment requirements associated with these projects. 1.03 Annex 1 shows the pattern of India's production and consumption of fertilizer since 1952/53. Consumption of all fertilizers in India increased at an annual growth rate of 14% from 294,000 tyn in 1960/61 to 8.7 million tyn in 1985/86. Nitrogenous fertilizers constitute two-thirds of total fertilizer used. Consumption of the latter increased at a rate of about 15% per annum (p.a.) from 212,000 tyn in 1960/61 to 5.8 million tyn in 1985/86. The growth of fertilizer consumption is expected to continue due to (i) GOI's policy to increase agricultural output; and (ii) the wide disparities in fertilizer use among states, providing opportunities for broadening the fertilizer demand base.1/ Furthermore, consumption of 1/ The three States of Uttar Pradesh, Punjab and Haryana account for over 40% of the total fertilizer consumption in India.  -2- fertilizer per hectare of arable land in India (42 kg/ha in 1985/86) is still significantly less than in other developing countries (e.g., China, 123 kg/ha and Mexico, 67 kg/ha). GOI has projected fertilizer consumption to increase at an average of about 7% p.a. or from 8.7 million tyn in 1985/86 to 16.6 million tyn by 1994/95. This projected growth, however, appears to be optimistic; a growth rate of about 4% p.a. may be more realistic. 1.04 Throughout its rapid growth, India's domestic fertilizer industry encountered problems which included low capacity utilization, poor technology, managerial and administrative inefficiencies, high capital costs, relatively long project implementation periods, disruption of feedstock and utilities supplies, distribution and transport bottlenecks and a restrictive regulatory framework. Government policies implemented to generate the industry's rapid growth protected it from competitive incencives for cost minimization -4d efficiency gains. As a result, the sector is not internationally competitive. Average domestic production costs exceed the landed cost cf imports, and inadequate investment in distribution facilities has led to bottlenecks which in turn reduce capacity utilization in existing production facilities. 1.05 From time to time GOI has taken steps to effect changes in the fertilizer sector, However, the broader sectoral issues of subsidy, production efficiency, pricing, public enterprise management and distribution need further actions. There is a need to reform the present pricing policy to bring producer and user prices closer to corresponding economic values. Relaxation of regulatory controls on investment, exit and distribution is also needed to increase the sector's efficiency, achieve growth at reasonable cost and reduce the central Government's budgetary subsidy for fertilizer which stood at US$1.6 billion in 1985/86. These reforms will, however, necessarily be gradual taking into account sectoral links in the rest of the economy and the rationalization of existing facilities and capability, mainly in the public sector. II. PROJECT BACKGROUND A. Project Identification, Preparation, Appraisal, Approval and Credit Effectiveness 2.01 Following a request by GOI for IDA financing of the Hazira Fertilizer Project to be located at Hazira, about 15 km west of Surat City in the State of Gujarat, an IDA mission visited India in October/November 1979. The appraisal mission was joined by the representatives of the Overseas Economic Cooperation Fund (Japan) (OECF), Overseas Development Administration (U.K.) (ODA) and Industrial Development Bank of India (IDBI), the prospective co-lenders to the project. Because of the delays in the initiation of the project due to delays in the appointment of engineering firms, the project was re-appraised in November 1980 by another IDA mission.  - 3 - 2.02 On March 31, 1981 IDA approved a credit of SDR 321.5 million equivalent (US$400 million) to be made directly to the Government. The onlending terms were for (a) GOI to relend IDA funds to KRIBHCO at an interest rate of 11,75% p.a. with a repayment over 15 years including 5 years of grace, and (b) GOI to bear the foreign exchange risk. The Dev2lopment Credit Agreement was signed on October 28, 1981 and became effective on January 21, 1982. B. Project Description and Objectives 2.03 The project is part of GOI's overall plan to make economic use of the off-shore natural gas deposits discovered in 1974. A major aim of the project was to produce urea and ammonia by converting a domestic natural resource. This contributes towards GOI's goal of increasing agricultural productivity and output towards the eventual attainment of agricultural self-sufficiency. 2.04 The project. based on steam reforming of non-associated natural gas, was designed for 1.45 million tons per year (tpy) of urea for sale principally to farmers in Northern and Western India, and a marginal surplus of 17,820 tpy of ammonia. The complex comprises two single-train ammonia units each with a capacity of 1,350 tpd of ammonia, four urea units each of 1,100 tpd capacity. In addition, there are the related utilities and offsite facilities including three steam generation plants of 275 tons per hour each; two power units of 15 Mw each; ammonia storage for 20,000 tons; urea bagging facilities and silos for 90,000 tons of bulk storage; a township with 960 housing units; and a water treatment plant. III. PROJECT IMPLEMENTATION AND MANAGEMENT A. Achievement of Project Objectives 3.01 The project has been completed successfully. Reserves of natural gas are being used to produce fertilizer which is in turn supplied to farmers, enhancing GOI's objective of increasing productivity towards the intended goal of self-sufficiency in agriculture. The facilities were mechanically completed in November 1985, 51 months from the pro4ect zero date of April 1, 1981; the total installed cost was 35% lower than estimated. Overall delay in project completion was 3 months. The plant reached commercial production within 4 months of mechanical completion. B. Project Scope 3.02 There was one significant modification in the project scope with IDA's approval. This involved a changeover from coal-fired boilers to gas-fired boilers as it became evident that sufficient gas would be available to enable KRIBHCO to replace coal with gas in firing the boilers. Although the project was conceived on the basis of South Bassein gas, it is operating on associated gas from the Bombay High field. These modifications had no significant impact on the efficiency or safety of the plant.  -4- C, Project Management and Execution 3.03 At the time of implementation, the project owner, KRIBHCO, had only been recently formed. IFFCO and GOI agreed that the former would assume responsibility for project preparation and for ensuring that KRIBHCO is suitably staffed and organized for the project implementation period. Accordingly, IFFCO transferred to KRWBHCO about 50 professional staff constituting the major part of the project team that worked on the Phulpur, Kalol, and Kandla orojects. T.,e selected team thus had considerable experience in project implementation and operation. The Executive Director and Project Manager of KRIBHCO worked in those capacities on the Kalol and Phulpur projects where they performed well. 3.04 KRIBHCO however experienced a high turnover of top-level management due to ill health, retirement and incompatibility problems. In the six years since its inception, KRIBHCO has had five Managing Directors. A ner Managing Director has recently been confirmed and assumed his duties in November 1986. Management problems were also experienced on the marketing side. In 1983, KRIBHCO decided to market its own urea thus changing the original arrangement whereby IFFCO would be responsible for marketing KRIBHCO's urea in addition to its own urea (para 4.04). However, IDA requested further strengthening of marketing arrangements by the appointment of a Marketing Director and Transport Advisor. These positions are still vacant. A General Manager (Marketing) was appointed in 1984 and most of the middle-level positions at Head Office and many of the field positions have been filled. Several IDA missions urged KRIBHCO and GOI to recruit and expedite the appointment of personnel to fill these vacant positions as these are crucial to KRIBHCO's successful operation. Although KRIBHCO responded to IDA's recommendations, progress on this issue, particularly top level appointments, has been generally slow partly due to the slow, cumbersome and inefficient government employment procedures that have to be followed. D. Manpower Development and Training 3.05 KRIBHCG's organizational chart is shown in Annex 3-1. At appraisal, the project was expected to employ about 5,000 persons during construction and 1,400 persons permanently at full operation. Having employed up to 3,800 people at the peak of construction activity, the project now has a staff complement of 1,320 comprising 297 executives/officers and 1,023 others. Most of the senior managers and other key operations personnel were assigned by IFFCO, while trainees were recruited by KRIBHCO. The trainees were recruited mostly from the project execution areas of IFFCO's operating plants. This ensured that skilled operators and maintenance technicians with at least 12 months' training were made available for the project. By June 1982, KRIBHCO had developed a good training and tecruitment plan for its operating staff, with training for semi-skilled and unskilled staff provided at the project site before project completion. A Graduate Engineer/Commercial Trainee program was established in 1984. This program prepares candidates for junior engineer and middle-level management positions.  E. Performance of Engineering Contractors 3.06 Project execution was supervised by KRIBHCO's Director of Operations who was responsible for the project budget and implementation schedule. He was assisted by Consultants specializing in ammonia, urea and power unit installations, and project engineers -ho were responsible for day-to-day coordination of implementation. Cne engineering firm from the United States and another from Italy took the responsibilities of providing licenses, basic engineering, erection, pre-operatton and start-up supervision for the ammonia and urea units, respectively. Three Indian engineering companies undertook the execution of detailed engineering of the ammonia and urea units and ancillary facilities, under the supervision of the respective process licensors. KRIBHCO was satisfied with the services provided by the contractors. Quick remedial action was taken whenever problems occurred during implementation. F. Procurement and Performance of Suppliers 3.07 KRIBRCO observed acceptable contracting and procurement procedures in implementing the project. International competitive bidding (ICB) procedures were used in accordance with IDA guidelines for procuring foreign equipment and materials with IDA credit. Among foreign suppliers, the largest share of contracts financed by IDA (16%) was won by Japan, with Italy and the United States in second place (101 each) (Annex 3-2). Locally supplied equipment and services amounted to 54% of the total share of contracts financed by IDA. 3.08 During appraisal, it was estimated that 40% of the IDA credit would be used to finance imported equipment, 481 for local equipment procured by ICB and the rest for foreign and local engineering and other services. The actual results are close to the estimates at 54% local through ICB and 46% foreign. Although the performance of the suppliers was in general satisfactory, there were delays in deliveries by both foreign and local suppliers. However, KRIBHCO took measures to shorten delays by air freighting some of the equipment and organizing local manufacturers to complete final welds at site. No problems were fa~ed in obtaining suppliers' cooperation and assistance in carrying out the required repairs/modifications related to the problems encountered during commissioning and initial operation. G. Project Implementation Schedule 3.09 The mechanical completion and commissioning dates of the units are given below:  - 6- Appraisal Estimate Actual Facilit:y Completion Date Completion Date Start-up Date Ammonia/Urea Units (phase 1) July 1984 July 1985 November 1985 Ammonia/Urea Units (phase 2) July 1985 September 1985 December 1985 Utilities July 1984 January 1985 October 1985 The entire project was mechanically completed in September 1985, 3 months behind the appraisal schedule. The delay was mainly due to the delay in the availability of gas. Other factors included delays In the (i) delivery of equipment, (ii) completion of engineering work by the prime contractors, (iii) placement of orders resulting from the delay in approvals by statutory authorities, and (iv) certification of import lists. The project management team successfully overlapped the testing and commissioning with the final stages of the construction activities to reduce delays. Minor infrastructural facilities are still under implementation and IDA is still committing expenditure under the credit (para 3.11). H. Capital Costs, Financing and Disbursements 3.10 The project's capital costs are summarized in the table below.  - 7 - Hazira - mr of koect CaCtal o (US$ M)IWS Apprasal Estimate Actual local arei Total Local F* T al Equipunt & spares 125.8 276e9 402.7 38.1 308.4 346.5 - 14 Freight, duties & taxw 104.4 23.8 128.2 104,9 19.9 124*8 - 3 ineerizv6 srvices 35.5 35.7 71.2 1.6 42.0 43.6 - 39 Project m1awemet & imwrarsce 20.4 0.9 21.3 33.7 - 33.7 + 58 Erectimi & lnstallatinn 26.1 1.9 28.0 0.4 38,3 38,7 + 38 Civil works & land 56.4 3.5 59.9 34.5 55,7 90.2 + 51 cmuuissicxiig adurges 5,6 - 5.6 28.0 - 28.0 +400 oimship 9.8 0.6 10.4 17.4 - 17.4 + 67 Rail spur 20.0 1.3 21.3 26.3 - 26.3 + 23 Base Cost Estimte WU 34.66 78 2 4 3 .9T - Physical c*xtiilendas 40.4 34.5 74.9 - - - Price escalatim 104.8 70.3 175.1 - 2.3 2.3 Total InstsllPt Cost 54W.2 449.4 998.6 -. 9 WX IMIX - 25 Working capital 136.6 23.9 160.5 36.6 35.1 71.7 - 55 Interest during zccmtr4ction 115.4 2.4 117.8 48.1 - 48.1 - 59 Total Finaniwng RequIred 801.2 4Y5Mi7 i1276.9b W 6 FM 7T3 WN - 35 a/ Averae US$/Ras exclung rates 1980-1986. 1980/81 - 7.89 1983/84 - 10.31 1981/82 - 8.92 1984/85 - 11.88 1982/83 - 9.62 1985/86 - 12.55 b/ Other finang ws provided by the Coenment of India, MM(, otwr coopeative societes, UKW and other financial institutins. Total actual project cost was US$836.2 million, 35% lower than thet appraisal estimate of US$1,276.9 million. The decrease in capital cost was mainly due to (i) use of ICB for local procurement; (ii) lower international prices for capital equipment due to 8 rplus market conditions; (iii) exchange rate movements resulting in lower local dollar costs; and (iv) savings in the financing charges and higher production during the trial run period than originally envisags4. 3.11 IDA credit has financed about 441 of the project's total financing needs. The cofinancing arrangements under the project were successful. Of the total IDA credit of SDR 321.5 million (US$400 million), the actual utilization as of June 30, 1987 was US$314.0 million. (The amended credit amount as of June 30, 1987 was US$392.1 million due to SDR/US$ rate fluctuation.) Credit worth US$0.86 million was cancelled due to disagreement between IDA and KRIBHCO over procurement procedures. The cumulative disbursement pattern for the IDA credit as estimated at the time ofhappraisal and the actual pattern is given in Annex 3-3 and is summarized below:  - 8 - Cumulative IDA Credit Disbursement (US$ million) 1981 1982 1983 1984 1985 1986 1987 Appraisal Estimate 13.0 93.1 194.9 313.6 392.1 400.0 Actual - 37.0 135.1 219.6 279.4 304.4a/ 314.0 Actual as X of Estimate - 39.7 69.3 70,0 71.3 76.2 78.5 a/ June 30, 1986 KRIBHCO hopes it will have utilized the remaining balAnce (SDR 23e9 million or about US$31 million) by June 30, 1988, the new closing date of the credit. The remaining credit will be used mainly for lnfrastructural facilities which are not directly related to production, like the development of an alternate source of water supply. Approximately US$17 million has been earmarked to these facilities. However, it is possible that KRIBHCO may be unable to use the entire balance of credit, necessitating cancellation of unused credit of about US$4 million. IV. OPERATING PERFORMANCE A. Commissioning and Start-up 4.01 As mentioned earlier (para 3.09) the supply of gas to the project delayed the plant start-up. Initially, the gas was expected to be supplied in January 1984 when pre-commissioning was to start. However, low pressure gas for the boilers was made available only in August 1984 and high pressure gas for feedstock was available in September 1985 for Phase 1, and in November 1985 for Phase 2. After the cutting in of feedstock, ammonia production was realized on November 14, 1985 for Phase 1 and November 30, 1985 for Phase 2. The first urea was realized on November 26, 1985. By mid-December 1985, all four urea streams were running. 4.02 The production levels and rates of capacity utilization achieved during 1985-86 are given in Annex 4. The overall capacity utilization during the commissioning period averaged 52Z. Between March and August of 1986, the average capacity utilization increased to 65% as forecast at appraisal. The plants have since achieved 100% utilization rates. The highest rate of capacity utilization achieved on a single day per stream has been 106% for the ammonia units and 130% for urea. B. Build-up of Production 4.03 It is estimated that the plants will produce 773,000 tons of ammonia and 1.2 million tons of urea in the year 1986/87. This corresponds  - 9 - to 87% and 82% capacity utilization respectively. Thereafter, the plants are capable of mairtaining a sustained 95% capacity utilization. Planned Production ('000 tons) 1985/86a/ 1986/87 1987/88 1988/89 1989/90 Amount Amount % Amount % Amount % Amount % Ammonia 316 61 773 87 802 90 802 90 802 90 Urea 497 60 1,197 82 1,307 90 3,307 90 1,307 90 a/ Actual. C. Marketing 4.04 At inception of the project, it was envisaged that IFFCO would assume all marketing responsibilities for urea on behalf of KRIBHCO. By 1985 however, KRIBHCO decided to market its own urea. This decision was made because it was felt that for logistic reasons, KRIBHCO would be better placed to market its own urea thaa IFFCO, since the latter would also be marketing large volumes of its own urea and other products. IDA agreed to this arrangemeat but required that KRIBHCO take steps to strengthen their marketing organization and prepare a well defined marketing plan before assuming full responsibility for the marketing of urea. KRIBHCO undertook to appoint a Marketing Director and a Transport Advisor. A General Manager (Marketing) has been appointed, and most of the middle-level positions at Head Office have been filled. The positions of Marketing Director and Transport Advisor are still vacant however, as are some of the field positions. Progress in this regard has been slow (para 3.04). This aspect needs further strengthening as it is critical to KRIBHCO's operations.2/ 4.05 KRIBHCO expects to market a major portion of its urea in the States of Punjab, Uttar Pradesh, Haryana and Gujarat. In this regard, more sale points are being established, and regional offices strengthened to give momentum to the marketing effort. However, KRIBHCO, like other cooperative manufacturers, are constrained by regulations specifying marketing channels for individual producers, specified distribution areas and fixed retail margins. The utilization of a multi-channel approach by cooperatives to fertilizer distribution, as is the case for both private and public sector plants, is necessary to enhance competition, while the establishment of nodal points and bulk handling facilities is necessary to enhance distribution efficiency. 2/ Subsequent to the preparation of the completion report, KRIBHCO has taken steps to strengthen the marketing organization in the field as well as at Headquarters with regard to marketing staff.  - 10 - V. FINANCIAL PERFORMANCE A. Pricing Policy 5.01 Ex-factory and farmgate prices of fertilizers are set by the Government. Prices to the farmer are uniform throughout India, but the ex-factory prices are set on a plant-by-plant Jasis using a "retention price formula" and are administered by the Fertilizer Industry Coordination Committee (FICC). The retention price formula is given in Annex 5-1 and retention prices for the Hazira project are given in Annex 5-2. The retention price formula, introduced in 1977, ensures the general financial viability of producers by allowing an individual unit, when operating efficiently at 80% capacity and at certain agreed input consumption norms, a 24% pre-tax rate of return. The formula does not encourage inter-plant competition and is not linked with economic efficiency and therefore disregards the opportunity cost of importing fertilizer. The formula fails to discourage investmenL in high-cost new plants which would have guaranteed profitability as long as they achieve 80% capacity utilization irrespective of their economic viability. Furthermore, the retention price formula, as it now operates, provides exit signals only for financial inefficiency and not for economic or technological inefficiency. 5.02 GOI's review of the retention price system now underway is part of a broader program instituted in recognition of the need for reforms, The reform program should be designed to stimulate internal competition and efficiency, induce long-term international competitiveness and help reduce the fertilizer subsidy. This program should include pricing reforms, rehabilitation, closure of some plants, management and organizational changes, and regulatory reforms on new investment and distribution. IDA's present dialogue with GOI is focusing on these issues. B. Financial Rate of Return (FRR) 5.03 The assumptions used in the calculation of the FRR and ERR are given in Annex 5-3, The financial rate of return has been calculated using prices adjusted to July 1986 constant dollars. The operating costs and revenues are given in Annex 5-4. The FRR for the project is now estimated at 14.3%, compared to the appraisal estimate of 9.1%. The difference is due mainly to lower capital costs for the project (para 3.10). The FRR is based on the present retention price formula which may be changed. 504 One of the policy options for fertilizer pricing being considered is the adjustment of the retention prices for capacity utilization norm, debt-equity ratio and return on net worth, starting in March 1987. In addition, an import parity price linked ceiling may be put on the maximum retention price. After 1990/91, a single uniform price equal to tariff adjusted import parity price for all plants is being considered. If this were implemented, the FRR for Hazira project would drop to about 11% for urea price of US$140/ton FOB.  - 11 - C. Financial Results 5.05 Income statements, balance sheets, and funds flow statements for the project are presented in Annexes 5-5, 5-6 and 5-7. KRIBHCO is in comr- pliance with IDA's financial covenants. Increases in production costs due to inflation tend to increase the retention price. The formula provides the company a large cash flow during the initial years of operations, a8 is illustrated by the pattern of current assets on the schedule of selected financial data for Hazira presented below. Hazira: Selected Financial Data (Rupees - million) 1985/86 a/ 1986/87 1987/88 1988/89 1989/90 Net Sales 1,120.4 4,295.8 4,858.2 5,264.9 5,264.9 Net Income 141.6 552.2 736,2 1,166.3 1,240.7 Depreciation 214.5 790.0 790.0 795.0 800.0 Internal Cash Generation 1,170.0 1,342.2 1,526.2 1,961,3 1,688.1 Current Assets 1,237.0 2,777.4 4,159.7 5,122.1 6,041.3 Total Assets 10,941.3 10,908.6 11,819.1 12,255.2 12,621.3 Current Liabilities 582.2 771.3 1,094.7 1,313.4 1,510.3 Long-Term Debt 5,717.0 4,443.3 4,294.4 4,115.5 3,846.6 Equity 4,500.0 4,500.0 4,500.0 4,500.0 4,500.0 'Debt/Equity 56:44 50:50 49:51 48:52 46:54 Current Ratio 2.4 3.6 3,8 3.9 4.0 Debt Service Coverage Ratio 0.7 1.7 2.5 2.9 3.0 a/ Actual. VI. ECONOMIC PERFORMANCE A. Economic Rate of Return 6.01 For economic analysis, tradeable items have been priced on the basis of projected international prices allowing for transportation and handling charges. Prices for non-tradeable items have been assumed to be the same as domestic financial prices adjusted to reflect the economic prices of their internationally traded components. The economic price of non-associated natural gas has been calculated on the basis of its calo- rific value equivalent of fuel oil. Economic prices of urea were based on projected international prices of urea. The price of urea is expected to rise from the 1986 level of US$102/ton to US$116/ton in 1988, US$182/ton in 1990 and US$167/ton in 1995--all in constant 1985 dollars,  - 12 - 6.02 Project costs and benefit streams for ERR are shown in Aanex 6-1, The ERR is estimated at 15.7%, slightly lower than the appraisal estimate of 16.6%. The difference is due mainly to lower urea prices than projected at appraisal, which more than offset the gain from lower energy and capital costs. B. Foreign Exchange Savings 6.03 The net foreign exchange savings over 15 years, after deduction of principal and interest payments on the foreign loans and deducting foreign exchange components of operating costs in constant 1986 dollars, are estimated at around US$220 million p.a., and in 1996/97, the cumulative savings amount to US$3,740 million, about 8% more than the appraisal esti- mate, Most of the materials including feedstock, fuel and services used in the project are obtained locally. Annex 6-2 shows the foreign exchange savings over a 15 year period. C. Technology Transfer 6.04 The project was implemented with a substantial involvement of Indian firms. About 54% of the equipment for the project was supplied by local manufacturers, thus creating significant backward linkages with the industrial sector. Using know-how and basic design obtained from process licensors, the detailed engineering and civil contracts were executed by local firms. The engineering firms and project staff absorbed the technol- ogy thus transferred and now possess significant capabilities in carrying out similar projects. D. Environmental Aspects 6.05 The project facilities were designed to conform with environmen- tal regulations and norms agreed to at appraisal. The urea plants contain a hydrolyser section where urea is decomposed and recycled. A separate treatment section was set up for urea upset conditions. Effluents from the water treatment plant, cooling towers and other waste streams are treated and neutralized in treatment ponds prior to discharge. This conforms with State and local water pollution standards. A water scrubbing system to dedust urea from air leaving the prill tower was installed in conformance with World realth Authority and United States air pollution standards. VII. IDA ROLE 7.01 IDA's major objectives in this and other projects until recently in this subsector in India have been to support GOI's strategy for increas- ing domestic production of fertilizers. Emphasis was therefore placed on improving project organization and efficiency, selection of projects, expanding production facilities and improving capacity utilization. More recently however, IDA has recognized that achievement of project objectives alone is not enough to ensure an economically efficient fertilizer sector-- policy changes are also needed. As a result, IDA's focus has recently  - 13 - moved to include policy dialogue or. broader sectoral issues. The objective is to improve efficiency of the sector through reform of pricing policies, relaxation of regulatory environment, improvements in rationalization/ restructuring or closure of existing inefficient plants. Although the project was successful in meeting its objectives, IDA should have adopted a broader sectoral approach and considered pricing issues, economic efficiency of the sector, multichannel approach to marketing and the restrictive regulatory framework at the early stages of project appraisal. VIII. CONCLUSIONS AND LESSONS LEARNED 8.01 Apart from the 3-month delay in project completion, the project was successful in: (i) keeping the Project costs under control; (ii) achieving a short commissioning and start-up period; (lii) achieving the design figures of individual units in guarantee test runs; and (iv) obtaining a satisfactory level of operating performance for the period since start up. Once the initial delays in the supply of equipment and natural gas were overcome, the responsible team implemented the Project efficiently. 8.02 The delays due to unavailability of gas emphasize that important consideration should be given to the availability of downstream supply. The Project however was completed successfully due to the appropriate training and experience of KRIBHCO's project team which executed the work with enthusiasm and dedication. The project team made use of expatriate expertise to enhance their own operation and ensure an effective transfer of technology. KRIBHCO's performance has been commendable. 8.03 The shortcomings in marketing procedures highlight the need for firm action by IDA in putting in place the requisite organizational arrangements. Furthermore, such arrangements should be in place at the early stages of project implementation. 8.04 The financial performance of the project is slightly above the appraisal estimates due to substantially lower project capital costs as a result of lower prices for equipment, exchange rate movements and use of ICB. The low financial rate of return compared to the economic rate of return is due to retention price formula under which the urea ex-factory price decreases over time. The project however makes a significant contribution to India's economy given its economic rate of return of 15.62. The project contributes to the development of the Gujarat State and converts economically a natural resource into a such needed fertilizer and saves India foreign exchange. 8.05 Overall, the project has met its main objectives. The project illustrates that capable, experienced and dedicated project management and the involvement of an operating company with experienced staff during the initial stages of operation, can have a significant impact on the success of project implementation. The issue of management emphasizes the need for timely action throughout all stages of a project's implementation. Policy  - 14 - and subsectoral issues should be given an important place in developing a fruitful dialogue with GO! on the further development of this subsector. Industry Department December 1986 Revised June 1987 I  HAZIRA FERtTILIZER PROJECT (CR. 1125-iN) PROJECT COMPLETION REPORT Consumption, Productiou and imports of Fertilizers. 1952-1985 a/ (in '000 tons of nutrient) Nitrogen Phosphate potash All Nutrients Year CoDsuMption Production Imports Consumption Production lmports Consumption lmports Consu=ption Production Imports 1952/53 58 53 44 5 7 - 3 - 3 66 60 47 1953/54 89 53 19 8 14 - 8 7 105 67 26 1954/55 95 68 20 15 14 - 11 11 t21 82 31 1955156 107 77 53 13 12 - 10 10 131 89 63 1956/57 123 79 57 16 17 - 15 15 154 106 72 1957/58 149 81 110 22 26 - 13 13 184 107 123 1958/59 172 81 97 29 31 - 22 22 224 112 119 1959/60 229 84 142 54 51 4 21 33 305 135 179 1960/61 212 112 399 53 54 - 29 20 294 166 419 1961/62 250 154 307 60 65 _ 28 75 338 219 382 1962/63 333 194 244 83 88 10 36 41 452 282 295 1963/64 377 219 228 116 108 13 50 40 544 327 281 1964/65 555 243 232 149 131 12 69 57 773 374 301 1965/66 575 238 *26 132 119 14 77 73 785 357 413 t 1966167 738 309 632 248 146 148 114 118 1,101 455 898 F 1967/68 1,034 402 867 335 207 349 170 270 1,539 609 1,486 \n 1968/69 1,209 563 844 382 213 138 170 213 1,761 776 1,195 1 1969/70 1,356 730 667 416 224 94 210 120 1,982 954 d81 1970/71 1,479 832 477 541 228 32 236 120 2,256 1,060 629 1971/72 1,798 949 481 558 290 248 300 268 2,657 1,239 997 1972/73 1,839 1,054 665 582 330 204 347 325 2,768 1,384 1,194 1973/74 1,829 1,050 659 650 324 213 360 370 2.839 1,374 1,242 1974/75 1,766 1,186 884 471 331 286 336 437 2,573 1,517 1,607 1975/76 2,149 1,535 996 467 320 361 278 278 2,894 1.855 1,635 1976/77 2,457 1,857 750 635 478 23 319 278 3,411 2,335 1,051 1977!78 2,913 2.000 758 867 670 164 506 599 4,286 2,670 1,521 1978/79 3,419 2,169 1,228 1,106 776 243 592 517 5,117 2,945 1,988 1979W80 3,498 2,226 1,295 1,151 763 237 606 473 5.255 2,989 2,005 1980/81 3,678 2,164 1,510 1,214 842 452 624 797 5,516 3.006 2.759 1981/82 4,069 3,143 1,055 1,322 950 343 676 644 6,067 4,093 2,042 1982/83 4,263 3,434 425 1,420 984 65 735 644 6,418 4,418 1,133 1983/84 5.236 3,487 656 1,757 1,057 143 799 556 7,792 4.544 1,355 1984/85 5,486 3,917 3,799 1,886 1,318 1,620 839 1,457 8,211 5,235 3,000 1985/86 5,800 4,323 n.a 2,063 n.a. u.a. 847 n.a. 8.700 5.753 2,700 a/ Statistical consumption years run from February I to January 31. Statistical production years run from April I to March 31. Figures represent offtake from plants and importers. Source: The Fertilizer Association of India. I industry Department October 1986  -16- ANNEX 3-1 ZIRU FELRTLIZER PROJCT (CR. 1123-Il) PROJC Ca LEION REPORT KEIBLCO ORGNIAION CUAT AND BOARD OF DIRECTORS [MANAGING DIRECTOR T FINAIICIS ( AREING) ADVISOR DIRECTOR (VACANT) (VACANT) (OPERATIONS) GENER GENERAL GENERAL GENERAL GENeRL GENEAL MANAGER MNAGER MANAER ANlAGER MANAE MANAGER (PMA) (TECHNICAL) (MARKETING) (CONSTRUCTION) (TECHNICAL) (PRODUCTION) (H*Q. ) ~~~~~~~~~(SITe) 1SEN. GR(1) -ONAL MR1* -.EN. MGR. --SEN. NOR. (2) -1R. (PROD.) (2) i | J ~~~~~~~~~~~~(MATERIALS) GENERAL1 | | GENERAL E 2N. NOR (2) NOR. (ADMIN.) _SUFTD. IMeANAGER M I I -ANAGERA8T. UPTD. LSUPDT. (FINANCE) (FINANce) AST. SUPt DEP. NGOR (6) -SR. OFFICERS (UUI (HQ) (SITE) -SENIOR EG4) (UQI.) IENIOR ENG AS. NOR. (OPFSITES) I ~~~~~(4) -RA A8ST. (POIMR) r AR@EASAS.T ZUBLICITY ENG. OFFICERS _A8. E 0 80O IF.M.I IP.M.I FP.M.| HP | ACC. | MT R . | IN.| DeP.Xca.|DP. 141. EP Q. NOR. .J. MOR. | .w01. |. MGR. ASS. MNR* ASS. OR. ASS. NMR. Total Staff: 1,320 Adustry Depattsent ctober 1986  - 17 - ANNEX 3-2 HAZIRA FERTILIZER PROJECT (CR. 1125-IN) PROJECT COMPLETION REPORT IDA Financed Procurement of Goods and Servicis Amount (Re million) (5$ i,llion) Percentmge Equipment, material, Spares Eninering & Other Services 3,379 346 100X India 1,827 206 542 Japan 556 49 16% Italy 345 31 102 United States 316 28 102 West Germany 104 9 32 U.K* 98 9 32 France 48 4 12 Others 85 10 32 Industry Department October 1986  INDIA - HAZIRA FERTILIZER PROJECT (CR. 1125IN) PROJECT COMPLETION REPORT IDA Credit Disbursement Schedule Year Calendar Appraisal Standard Actual/ Actual/ SAR Est./ Arctual/ No. Year Quarter Estimate Profile Actual Profile Credit Z Credit % SAR Est. z 1 1981 3 5.0 4.0 0.0 0.0 0.0 1.3 0.0 4 13.0 8.0 0.0 0.0 0.0 3.3 0.0 1982 1 27.0 22.0 10.9 49.6 2.7 6.8 40.4 2 47.0 36.0 16.7 46.3 4.2 11.8 35.5 2 3 69.9 56.0 28.3 50.5 7.1 17.5 40.5 4 93.1 76.0 33.7 44.3 8.4 23.3 36.1 1983 1 116.5 100.0 51.2 51.2 12.8 29.1 44.0 a 2 140.2 124.0 79.7 64.3 19.9 35.1 56*9 3 3 165.2 152.0 109.8 72.2 27.-. 41.3 66.4 4 194.9 180.0 125.8 69.9 31.5' 48.7 64.6 1984 1 227e9 208.0 165.8 79.7 41.4 57.0 72.7 2 259.0 236.0 192.7 81.6 48.2 64.8 74.4 4 3 286.6 262.0 202.8 77.4 50.7 71.7 70.8 4 313.6 288.0 207.0 71.9 51.7 78.4 66.0 1985 1 338.8 308.0 242.9 78.8 60.7 84.7 71.7 2 361.7 328.0 256.9 78*3 64.2 90.4 71.0 5 3 378.0 344.0 275.0 79.9 68.8 94.5 72.8 4 392.1 360.0 294.3 81.8 73.6 98.0 7541 1986 1 396.7 370.0 308.0 83.2 78.5 99.2 77.6 2 400.0 380*0 331.7 87.2 84.6 100.0 86.6 6 3 388.0 346.5 89.3 88.3 86.6 4 396.0 350.Oa/ 88.0 89.3 1987 1 398.0 360.Oa/ 91.0 91.8 2 400.0 370.0a/ 93.0 94.4 at Estimate. industry Department October 1986  - 19 - ANNEX 4 INDIA - HAZIRA FERTILIZER PROJECT (CR. 1125-IN) PROJECT COMPLETION REPORT Operating Performance Month & Capacity Capacity Year Ammonia Utilization Urea Utilization (tons) U) (to-n) (X) November 1985 6,697 2,851 December 1985 51,963 69 75,393 69 January 1986 29,450 39 52,201 42 February 1986 34,145 50 58,328 52 March 1986 60,740 80 86,736 70 April 1986 22,768 31 44,787 38 May 1986 60,822 80 91,906 75 June 1986 48,950 67 85,028 71 July 1986 57,654 76 102,396 83 August 1986 66,505 88 114,224 93 September 1986 57,725 71 97,622 74 October 1986 80,056 99 131,506 100 Highest Production in a day (Streamwise) (as of 8/30/86) Highest Daily Plant Stream Capacity Achieved Date Ammonia 1 104 5/7/86 2 107 7/25/86 Urea 1 126 8/9/86 2 *19 3/21/86 3 120 6/12/86 4 130 3/21/86 Industry Department October 198,6  - 20 - ANNEX 5-1 INDIA - HAZIRA FERTILIZER PROJECT (CR. 1125-IN) Project Completion Report Retention Price Formula 1. The urea retention price for the Hazira Fertilizer Project is calculated according to the formula provided by the Marathe Committee in 1977. The calculations are made for pricing periods of 3 years as follows: (a) Share capital used in urea production. In each successive pricing period, share capital is equal to that prevailing at the beginning of the period. (b) + Retained earnings (c) - Capital employed outside the business, and accumulated surplus cash. (d) - ;Capital employed in the business. A lower limit has been set for this capital employed and it cannot decrease below share capital. (e) x 24X return on capital employed. (f) + Variable and fixed production costs at 80% capacity utilization related to urea production, with depreciation as provided in the company balance sheet. (g) Ex-factory revenue to producer. (h) - Production volume of urea derived from entire 80% ammonia utilization. () Urea Retention Price allowed. Industry Department October 1986  DIA - ZIu ftTLIIS FIOJECT (CR- 1125-IN pWI CO"IOlt UaRO Ratention price Celculatios Schedule 1. fticqet Period 1986-89 II. Priclim Period 1990-43 Ill. priciag Period 1994-97 IV. Pricia Period 1997-2000 ~sia Urea Tatar esia ure Total atrea Total Asis Ure ota l PMDStZO Lem S sox (toss) 7,12.800 12,24,960 ,712,800 11,8u,00 ,12.800 11,8s,OOO 7.12,800 11.88.000 cmt of ODUC,"cn (13 Dili1) I. Rau Naterial (a) a" Fed 870 87.08 86713 86.13 86.13 86.13 86.13 86.13 (b) Gs f1i 32.0S 32.09 29.94 29.94 29.94 29.94 29.94 29.94 2. Utilities (a) Ga for Stem & Coptive Per 1.00 11.85 12.85 1.06 25.03 26.09 1.06 25.03 26.09 1.06 25.03 26.09 (b) Wster 0.02 0.02 0.04 0.06 0-04 0.10 0.06 0.4 0.10 0.06 0.04 0.10 (c) Parcbasd Uectrlctty 1.25 0.79 2.04 0.67 0.26 0.93 0.67 0.26 0.93 0.67 0.26 0.93 3. CSeraio Csats ts (a) Salaries _as 2.80 2.50 5.30 3.70 3.30 7.00 4.96 4.39 9.35 p (b) Cbicals Stores 3-25 2.15 5.40 3.2S 2.1S S.40 3.24 2.16 5.40 1 c) atalysts 5-30 0.20 SS.0 5.30 0.20 5.50 5.28 0.22 5.50 d) Sor & Mateasce 6.30 4.90 13.20 9.1S 5.35 14.50 12.16 7 14 19.30 (e) factory Overb_as 1.40 0.90 2.30 1.80 1.20 3.00 2.40 1.60 4.00 U) Isursee, 3.70 2.50 6.20 4.80 3.20 8.40 5.88 3.92 9.80 (5) H-0. aps. 4*33 2.90 7.23 5.10 3.40 8.50 5.55 3.70 9.25 Total Ccavertion Cost 33.26 14.74 48.00 29.03 16-00 45.03 33.10 18.60 51.90 39.47 23.13 62-60 4. Trsafer Cost (1*2+3) 154.70 43.10 197.8 146.94 56.58 203.52 150.96 59.33 210.29 157.33 63.66 220.99 S. osprecitao 42.38 35.27 71.65 43.90 35.94 79.84 44.30 36.20 80.50 45.84 37.S1 83.3S 6. Selltes Bpee*c - 6.27 6.27 - 16.99 16.99 - 16.99 16." - 16.99 16-99 7. latal Coot (4+Ss6) 197.08 84.64 281.72 190.84 109.51 300.35 195.26 112.52 307.78 203.17 118.16 321.33 Coat Per To 2,658 691 2,677 922 2.739 947 2.850 995 Sbare of Amosia 1,528 1,606 1.644 1.710 tstereet as Waroeuts 25.90 33.73 59.63 (a) Long Ters Dbbt 25.90 33.73 59.63 24.12 29.50 53.62 20.11 24.58 44.69 12.57 15.36 27.93 (b) Sbort Tore Debt - - - - - - cost per Wu 342 266 338 248 282 206 176 129 Sbare of AMaia 197 203 169 106 ctwr onoNot Wortb 61 49 109 59 49 108 59 49 108 59 49 108 Cost per Tbs 801 438 830 411 830 411 830 411 Share of Ure 460 498 498 498 Istestioa Price p&Atom 3.810 3.580 3.84S 3,890 3.850 3.875 3.855 3.850 lodustry DSpMtu'ant October 1986  - 22 - ANNEX 5-3 Page 1 of 2 INDIA - HAZIRA FERTILIZER PROJECT (CRe 1125-IN) PROJECT COMPLETION REPORT Assumptions for Economic and Financial Rate of Return Calculations 1. The economic price of natural gas is assumed to be equal to its fuel oil equivalent value based on calorific value. The fuel oil price is projected based on the projection of crude oil prices as well as the estimate of fuel oil crude oil price ratio of 0.78. 2. For shadow pricing, local components of capital cost and other inputs and services are adjusted by using standard conversion factor of 0.8 for India. 3. Local operating cost items, utilities and fixed costs are con- verted to July 1986 constant dollars, and assumed to remain constant in US$ terms. 4. It is assumed that ammonia and bulk urea prices will retain 1:1.14 relation at international market. For bagging, US$15 is added to bulk urea prices. 5. The economic working capital requirements of the Hazira Fertilizer Project are based on the raw materials and work in process inventories only. Finished products inventory has been omitted, since in the case of import substitution, the inventory of products produced by the Hazira project would substitute for that of imported products and thus does not increase the country's total inventory. Accounts receivable and pay- able have also been omitted as tIey do not represent costs incurred by the economy, but are considered instruments of 'transfer of obligation." These are the major reasons why the economic working capital requirements (US$15.8 million) are less than financial ones (US$36.6 million in 1986 prices). 6. Economic prices of urea were based on the projected international prices of urea. In summary, the FOB price of urea (bagged, Europe) is projected to change from the 1985/86 cost of US$102/ton to US$182/ton in 1990/91 and US$167/ton in 1995/96. The price proj "tion reflects future global demand and supply balance of urea as well as the projected energy situation. Added to the FOB price are sea freight and insurance to India (US$30/ton), port handling and losses (US$12/ton) and inland transportation cost (US$28/ton) to the projected market for the Rasira project's output. The economic price of urea is thus calculated at US$252/ton for 1990/91 and US$237/ton for 1995/96.  ANNEX 5-3 - 23 - Page 2 of 2 7. Based on an assumed 330 operating days per year, production is assumed to achieve 80% capacity utilization in 1986/87 and a conservative utilization rate of 90% is assumed thereafter. Industry Department October 1986  ANNEX 5-4 RAZIRA FERTILIZER PROJECT (CR. 1125-IN) PROJECT COMPLETION REPORT Cost and Benefit Streea for Financial Rate of Return (in constant 1986 Rupees Million) Year Capital Coat Operating Cost Benefits Net Benefit 1980-81 486.4 (486.4) 1981-82 913.9 (913.9) 1982-83 1,777.5 (1,777.5) 1983-84 2,019.5 (2,019.5) 1984-85 1,281.3 (1,281.3) 1985-86 1,160.8 725.6 19120.4 (766.0) 1986-87 757.6 3,019.9 4*362.1 584.6 1987-88 3,313.4 4,839.6 1,526.2 1988-89 3,231.4 5,192.7 1,961.3 1989-90 3s225.4 5,266.1 2,040.7 1990-91 3,218.8 5,263.6 2,044.8 1991-92 3,203.9 5,245.9 2,042.0 1992-93 3,190.3 5,249.6 2,059.3 1993-94 3,173.2 5,247.3 2,074.1 1994-95 3,170.9 5,218.9 2,048.0 1995-96 3,181.2 5,219.6 2,038.4 1996-97 3,195.5 5,218.8 29023.3 1997-98 3,197.8 5,217.8 2,020.0 1998-99 3,199.0 5,217.0 2,019.8 Financial Rate of Return - 14.3% Industry Department October 1986  INIA - IUIIIA EtRt_.IZ IPROCt (Clt- 1125l-lt) FJL5C!r COWLEMO IIEPORT Projected bln. Shet as of Jun 30 -~~~U R ttion)- ASSETS 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1 1996 1997 A. ROS8 FIXIED ASSM 5,258.10 7,236.20 7,236.20 8,436.20 8,436.20 8,486.20 8,536-20 8,586.20 8,686.20 8,786.20 8,886.20 8,986.20 9.086.20 Additloas during the yest m9.28 - 1.200.00 - 50.00 50.00 50.00 100.00 100.00 100.00 100.00 100.00 0.00 Totahl 6,249.38 7,236.20 8,436.20 8,436.20 8,486.20 8,436.20 8,586.20 8,686.20 8,786.20 8.886.20 8,986.20 9,086.20 9.186.20 West loprecation 21.00 214.50 1,004.50 1,794.J0 2.S89.50 3-389.50 4,194.50 S,009.00 5.833.00 6.666.50 7.509.50 8.362.00 9.186.20 Mt Visd bAsts 6,228.3l 7,021.70 7,431.70 6,641.70 5,896.70 5,146.70 4.391.70 3,677.20 2,953.20 2.219.70 1,476.70 724.00 - S. CaUNT ASSES inlabed ooede Stock 188.44 374.10 440.40 421.80 349.60 350.80 349.50 349J0 353.80 355.50 361.20 367.60 373.20 Reeivables (a) From 01-Subsidy - 136.60 207.00 224.90 275.50 275.50 275.50 273.00 "i3.00 273.00 268.90 268.90 268.90 (b) From Piedrations 151.63 190.30 402.60 477.40 477.40 477.40 477.40 477.40 477.40 477.40 477.0 477.40 477-40 Stores 4 Spares 526.30 526.30 526.30 526.30 526.30 526.30 526.30 526-30 526.30 526.30 526.30 526.30 526.30 Others - llsg- 1.45 10-00 15.00 15.50 15.50 IS.50 15.50 15.50 15.50 15.50 15.50 15.50 15.50 867.82 1,237.30 1,591.30 1,665.90 1,644.30 1,645.50 1,644.20 1,642.00 1,646.00 1,647.70 1,649.30 1,655.70 1,661.30 Cash 4 Booik 8Rales 102.00 2.682.30 1.885.60 3.511.50 4.714.20 5,829.10 6,723.60 7,575.90 8.341.90 9.162.60 9.932.60 10.768.90 11,645.70 1 Ibtel (A+M) 7,298.20 10,941.30 10,90860 11,819.10 12,25S.20 12,621.30 12,759.50 12,895-10 12,941.10 13,030.00 13,058.60 13,148-60 13,307.00 \fl LIAMITUS I Share Capital 4,500.00 4,500.00 4,500.OO 4,500.00 4,500.00 4,500.00 4,500.00 4,500.00 4,500.00 4,500.00 4,500.00 4,500.00 4,500.00 Reserves & Surplus - 141.60 693.80 1,430.00 2,326.30 l,?64.40 3,068.40 3,336.70 3,586.60 3,819.30 4,009.70 4,027.70 4,036.20 Tars loan 2,309.00 5,717,50 4,443.30 4,294.40 4,115.50 3,846.60 3,467.70 3,037-80 2,617.90 2,179.50 1,837.50 1.495.50 1,153.50 Short Tars Loan from Baks - - 500.00 500.00 - - - - - - - - - Current Liabilities 498.20 582.20 771.50 1.094.70 1.313.40 1.510.30 1.723.40 2,020.60 2,236.60 2,531.20 2,711.40 3,125-40 3,617.30 Totel 7,298.20 10,941.30 10,906.60 11,819.tO 12,255.20 12,621.30 12,759.50 12,895.10 12,941.10 13,030.00 13,058.60 13,148.60 13,307.00 Current RAtio (Tiues) 1.9 2.4 3.6 3.8 3.9 4.0 3.9 3.6 3.5 3.3 3.3 3.0 2.7 Oebt/tquity Ratio S1/49 56144 50/50 49151 48/52 46/54 44/56 40/60 37/63 33/67 29/71 25/75 20/20 ndustry Depert s t October 1986  INDIA - HAZIRA FERTILIZER PROJECT (CR. 1125-IN) PROJECT COMPLTON REPORT Projected Funds Flow Statemat (Rs millions) 1986 1987 1988 199 1990 1991 1992 1993 1994 1995 1996 1997 SOURCES OF FUNDS Profit After Tax 141.60 552.20 736.20 1,166.30 888.10 754.00 718.30 699.90 682.70 640.40 468.00 458.50 Deprecilation 214.50 790.00 790.00 795.00 800.00 805.00 814.50 824.00 833.50 843.00 852.50 824.20 Increase in Term Loans 3,717.30 - - - - - - - - - - - Equity Contribution 4,500.00 - - Short Tern Loan from Banks 500.00 10,573.60 1,842.20 1,526.20 1,961.30 1,688.10 1,559.00 1.532.80 1,523.90 1,516.20 1,483.40 1,320.50 1,282.70 UTILIZATION OF FUNDS Decrease in Term Loan - 1,274.20 148.90 178.90 268.90 378.90 429.90 419.90 438.40 342.00 342.00 342.00 Decrease ln Short Term Loan - - - 500.00 - - - - - - - - Capital Expenditure 7,236.20 1,200.00 - 50.00 50.00 50.00 100.00 100.00 100.00 100.00 100.00 100.00 Increase in Working Capital 3,337.40 (632.00) 1,377.30 962.40 919.20 680.10) 332.90 554.00 327.80 591.40 428.50 390.70 1 Dividend - - - 270.00 450.00 450.00 450.00 450.00 450.00 450.00 450.00 450.00 10,573.60 1,842.20 1,526.20 1,961.30 1,688.10 1,559.00 1.532.80 1,523.90 1,516-20 1,483.40 1.3--.5O 1.282.70 0% Debt Service Coverage Ratio 0.7a/ 1.7 2.5 2.9 3.0 2.9 2.7 2.8 2.0 2.5 2.6 2.5 1 al The 1985/86 ratio is based on a 5-month year. Annualized, the figure would be about 1.2. The ratio of 0.7 ts therefore not tn contravention of the covenant which requires the debt servlce coverage ratio to be above I at all times. industry Department October 1986 Ir  IND1A - RAZIRA FERTILIZER PROJECT (CR. 1125-IN) ?IOJCT CONI' ON U?OK projected Income Statement 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1. Capacity Utilisatlon (Z) 59 82 90 90 90 90 90 90 90 90 90 90 2. Produaction ('000 tons) 1) Ro3eanla ~ -1.93 7.73 8.31 8.31 8.31 8.31 8.31 8.31 8.31 8.31 8.31 8.31 11) Urea 3.08 11.97 13.07 13.07 13.07 13.07 13.07 13.07 13.07 13.07 13.07 13.07 3. sales ('000 tons) - 0.48 0.47 0.47 0.47 0.47 0.47 0.47 0.47 0.47 0.47 0.47 1) Asmona ll) Urea 1.73 11.13 13.07 13.07 13.07 13.07 13.01 13.07 13.07 13.07 13.07 13.07 4. stock VOOO tons) 1) Ute at Silte 0.43 0.34 0.34 0.34 0.34 0.34 0.34 0.34 0.34 0.34 0.34 0.34 ii) Urea at Warehouse 0.92 1.85 1.85 1.85 1.85 1.85 1.85 1.85 1.85 1.85 1.85 1.85 iLL) RDonia at U.U. 0.15 0.15 0.15 0.15 0.15 0.15 0.15 0.15 0.15 0.15 0.15 0.15 5. Product Price (Rslton) i) As2onia 3,810 3,810 3,810 3,845 3,845 3,845 3,850 3,850 3.850 1,855 3,855 3,855 Li) urea 3,580 3,580 3,S80 3,890 3,890 3,890 3,875 3,875 3,875 3,850 3,850 3,850 6. Revenue (no d lllon)I IL) A=kovxa - 182.90 179.10 180.70 180.70 180.70 181.00 181.00 181.00 181.20 181.20 181.20 11) Urea 380.60 2,446.80 2,875.40 2,875.40 2,875.40 2,.75.40 2,875.40 2,875.40 2,875.40 2,875.40 2,875.40 2,875.40 Ill) Subsidy 365.70 1,664.30 1,803.70 2,208.80 2,208.80 2,208.80 2,189.20 2,189.20 2,189.20 2,156.60 2,156.60 2,156.60 lv) lcrease/Decreae in stock 374.10 66.30 (18.60) (72.20) 1.20 (1.30) 0.30 4.00 1.70 5.70 6.40 5.60 TOTAL 1.120.40 4,362.10 4,839.60 5,192.70 5,266.10 5,263.60 5.245.90 5,249.60 5,247.30 5,218.90 5,219.60 5,218.80 - - .._ -...--w ___ Return on Equity (1) 3.0 12.3 16.4 25.9 19.7 16 16.0 15.6 15.2 14.2 10.4 10.2 Return oan Ttal Assets (S) 1.3 S.1 6.2 9.5 7.0 S.P 5.6 5.4 5.2 4.9 3.6 3.4 Industry Department October 1986  - 28 - ANNEX 6-1 HAZIRA FERTILIZER PROJECT (CR. 1125-IN) PROJECT COMPLETION REPORT Cost and Benefit Stream for Economic Rate of Return (in constant 1986 US$ Million) Year Capital Cost Operating Cost Benefit Net Benefit 1980-81 44.4 (44.2) 1981-82 88.0 (88.0) 1982-83 186.5 .(186.5) 1983-84 251.4 (251.4) 1984-85 154.9 (154.9) 1985-86 105.5 61.9 112.6 (54.8) 1986-87 68.8 188.5 212.0 (45.3) 1987-88 209.5 407.9 198.4 1988-89 204.7 459.6 254.9 1989-90 204.6 469.8 265.2 1990-91 204.6 470.4 265.8 1991-92 204.2 469.6 265.4 1992-93 203.9 471.6 267.7 1993-94 102.5 372.1 269.6 1994-95 212.7 478.9 266.2 1995-96 213.9 478.9 265.0 1996-97 213.1 476.1 263.0 1997-98 213.3 475.8 262.5 1998-99 213.2 475.2 262.0 Economic Rate of Return m 15.7Z Industry Department October 1986  INDIA - HAZA1A FERTlLIZER PROJECT (CR. 1125-IN) (in U$ million) PROJECT COMPLETION REPORT Foreign Exchange Savings (In 1986 constant USs dillion) In low, Savings Outflow F.E. Savings by F.E. Component F.E. Compoaent Producing Urea of of tebt met Cumulative Year LOans & Ahnia Total Capital Costs Operating Costs Service Total Savings Savings 1980181 26.01 - 26*01 18.53 - 18.53 7.48 7.48 1981/82 37.93 - 37*93 24.79 - 24.79 13.14 20.62 \0 1921/83 96.92 - 96.92 56.50 56.50 40.42 61 .04 1983/84 126*58 - 126.58 69.44 - 69.44 57.14 118.18 1964185 66.96 - 66.96 32.38 - 32.38 34*58 152.76 1985/86 27.96 31.14 59.10 12.57 0.79 13.36 45.74 198.50 198678 56.38 207*47 263.85 25.48 3*07 28.55 235.30 433.80 1987/88 - 242*24 242.24 - 3438 3.38 238.86 672.66 1988189 - 242.24 242.24 - 3.38 3.38 238.86 911.52 1989,90 - 371.77 371.77 - 3 #8 2.9 6.28 365.49 1,277.01 1990/91 - 371.77 371.77 - 3.72 2.9 6.62 365.15 1,642.16 1991/92 - 371*77 371.77 - 4.33 2.9 7.23 364.54 2,006.70 1992/93 - 371.77 371*77 - 4*50 2.9 7.40 364.37 2,371.07 1993/94 - 371.77 371.77 - 4.95 2.9 7.85 363.92 2,734.99 1994/95 - 347.49 347*49 - 5*43 2.9 8.33 339.16 3,074.15 1995/96 - 347*49 347.49 - 5.97 2.9 8.87 338.62 3,412.77 1996/97 - 347.49 347.49 - 6.55 14.1 20.65 326.64 3,739.61 Industry Department October 1986  ATTACHMENT -30- Page I of T COMMENTS RECEIVED FROM THE BORROWEIR COM14irNTS ON DRAFT PROJECT CCt4PLETION REPORT ON INIDIA HAZIRA FERTILIZE. PROJECT (CREDIT 1125 IN) BY INDUSflY DEPAR'DIENT OF WCRLD BAN , O GE;IERAI, CCM;11ENTS 1 Pa2e iv and 'i~e 7 Pra 3. 1 ii re ardin2 cumnul -ative loan Actual loan amount has bcon i,.dicated as disbtirsed US 1? 346.5 million as against the appraisal estimate of US $ 400/- million. It 11as also b2en indicated that the amended loan amount is US $ 392,1 million, ,nho rzevised loan amount of US $ 392.1 million has been) .;oiked out based on the rate of 1 SDR = US $ 1.22. It apj;ears that t:his rate was prevailing in September 1986 and which has been adopted for consideration of the loan amount in US $. on the basis of actual disbursement of loan by World Bank it has been found that the average rate comes to 1 SDR = US $ 1.08. In view of this the loan amount indicated in US $ as 392.1 million is very high and considering the average SR-US $ parity during the execution of the Project the loan amount should be around US $ 347/- million instead of US $ 392.1 million as indicated. On this basis the atual utilisation shown as US $ 346,5 million also appears to be high and unutilised amount will also undergo a change. 2, Page iv para C and page 6 para 3.10 regarding Project Cost and Financing : The appraisal Project Cost Estimate of US $ 1276.9 million has been compared with the actual Cost Estimate of US $ 836.2 million and has been indicated that the cost estimate has been lcwer by 35%. This statement is not correct due t'o the following reasons:  ATTlACHMENT - 31 - Page 2 of a) Comparison has been done in US $t whiclh was worked out based on tiu uxchange rate t,xv.tling at the tine of re *sbility Report viz 1 tl q a i;s.8/- However, based on the actual ex.chanje rat;es pre- vailing during the project execution viz, from 1980 to 19t6, the average exchange rate has been around 1 US $ = P4 10*76. The wide vari"ti.on in the Capital Cost Estimate is mainly on account of kxchawLje rate flucL.ations uuriraj tha 2:'oject period. In case com>,ln,;ison of the equival.nt amiaunt in rupees is made, the reduction in cap- it.!l Cost Estimate will be from zs lt,),215/- ::iilAion to is 9*ooo/- million resulting in a sav