China - Hubei Phosphate Project

Document of The World Bank FOR OFFICIAL USE ONLY A/M 306v Report No. 7417-CHA STAFF APPRAISAL REPORT CHINA HUBEI PHOSPHATE PROJECT APRIL 25, 1989 Industry, Trade and Finance Operations Division Country Department III Asia Regional Office 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.  CURRENCY EQUIVALENTS (As of February 5, 1989) Currency name Renminbi (RMB) Currency unit - Yuan (Y) = 100 Fen Y lQon US$0.27 US$1.00 - Y 3.72 WEIGHTS AND MEASURES 1 hectare (ha) 2.47 acres 1 metric tcn (ton) 1,000 kilograms (kg) 1 kilometer (km) 0.621 miles 1 cuibic meter (m3) 35.3147 cubic feet (cf) 1 kilocalories (kcal) 3,968 British thermal units (BTU) 1 kilowatt (kW) 1,000 watts 1 megawatt (MW) 1,000 kilowatts (kW) FISCAL YEAR January 1 - December 31 GLOSSARY OF ABBREVIATIONS AND ACRONYMS ABC - Ammonium Bicarbon'tte K20 - Potassium Oxide AMPC - Agricultural Means of Production kWh - Kilowatt Hour Corporation MA" - Ministry of Agriculture, Animal BICEM - Beijing Institute of Chemical Husbandry and Fishery Engineering and Management MgO - Magnesium Oxide CIB - China Investment Bank MAP Monoammonium Phosphate CIF - Cost, Insurance and Freight MCI - Ministry of Chemical Industry CNCCC - China National Chemical MOC - Ministry of Commerce Construction Corporation Mtpy - Million Tons per Year CMP - Calcium Magnesium Phosphate MWh - Megawatt Hour CMPDI - Chinese Chemical Mines Planning N - Nitrogen Content in Fertilizer and Design Institute NCDI - Nanjing Chemical Design CMRDI - Chinese Chemical Mines Research Institute and Dasign Institute NPK - Complex Fertilizers of N.P205 CPI - Chemical Planning Institute and K20 DAP - Diammonium Phosphate p.a. - Per Annum FOB - Free on Board PA - Phosphoric Acid FAO - Food and Agricultural PCBC - People's Construction Bank of Organization of the United China Nations P205 - Phosphorous Pentoxide FY - Fiscal Year ppm - Parts per Million GDP - Gross Domestic Product PRS - Production Responsibility System GOC - Government of Cnilna ROM Run of Mine ha - Hectare SAM State Audit Administration HAZOP - Hazard and Operability SINOCHEM - China Chemical Export and Import HMC - Huangmailing Mining Company Corporation HPCC - Huangmailing Phosphate Chemical SPB - State Pricing Bureau Company SPC - State Planning Commission HPG - Hubei Provincial Government SSP - Single Superphosphate ICB - International Competitive Bidding TSP - Triple Superphosphate ICBC - Industrial and Commercial Bank of tpd - Tons per Day China tpyn - Tons per Year of Nutrients IDC - Interest During Construction UNIDO - United Nations Industrial IFC - International Finance Corporat.on Development Organization JPCC - Jinxiang Phosphate Chemical WCEDI - Wuhan Chemical Engineering Company Design Institute  FOR OFFICIAL USE3 ONLY CHINA HUBEI PHOSPHATE PROJECT Table of Contents Page No. LOAN AND PROJECT SUMKARY ..................................... i-iii I. INTRODUCTION ................................................. 1 II. AN OVERIIEW OF THE CHINESE INDUSTRY .......................... 2 A. General Industry Background ............................. 2 B. Government Objectives and Strategy for Industrial Development ........................................... 3 C. Bank Support for Industry ............................... 3 III. THE FERTILIZER SECTOR ........................................ 5 A. Agricultural Background ................................. 5 B. Fertilizer Use in Agriculture ........................... 6 C. Fertilizer Demand and Supply ............................ 6 D. Structure of the Fertilizer Industry .................... 9 E. Fertilizer Marketing and Distribution ................... 9 F. Fertilizer Pricing ...................................... 10 G. Goveranent Strategy in the Fertilizer Sector ............ 13 IV. THE PHOSPHATE SUBSECTOR ...................................... 14 A. World Phosphate Market .---------------------------- 14 B. The Chinese Phosphate Industry ......................... 15 C. Supply of Raw Materials ................................ 16 D. The Phosphate Subsector Study-.......................... 17 E. lnvestment Program for the Phosphate Subsector .18 F. Bank Role and Project Justification .18 V. PROJECT INSTITUTIONS .........................................-19 A. Background ........................ 20 B. The Jinxiang Phospb te Chemical Company (JPCC) .......... 21 C. The Huangmailing ehosphate Chemical Company (HPCC) .......2 D. The Ministry of Chemical Industry (MCI) ................. 23 This report has been prepared by Messrs. K. Song (AS3IF), K. Constant (ASTIF), H. Hendriks (ASTEG), and D. Lilaoonwala (CTRMI). Messrs. W. Sheldrick (Consultant) and B. Stone (Consultant) contributed to the fertilizer sector and phosphate subsector chapters. Ms. G. Mohadjer-Niederreiter and Mr. K. Hur (AS3IF) contributed to the financial and economic analysis chapters. Ms. D. Christmas provided secretarial support in the preparation of this report. This document has a restricted distribution and may be used by recipients only in the ptrformance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii - Page No. VI. THE PROJECT ......... ... 23 A. Objectivesb.. .. ................... 23 B. Dayukou Phosphate Mine and Fertilizer Development Component ... . ....... 24 C. Huangmailing Phosphate Mine and Fertilizer Development Component ...24 D. Technical Assistance Component . . 24 VII. PROJECT MANAGEMENT AND ENVIRONMENTAL PROTECTION... 25 A. Engineering Arrangements..... 25 B. Project Management..... 26 C. Implementation Schedule..... 26 D. Training. .. 27 E. Environmental Aspects. . ...... 27 VIII. CAPITAL COSTS, FINANCING PLAN, PROCUREMENT AND DISBURSEMENT.. 28 A. Capital Cost Estimates ......... 28 B. Financing Plan ......... 29 C. Procurement ......... 31 D. Allocation and Disbursement of the Bank Loan . ...... 32 IX. FINANCIAL ANNALJSIYSIS .........35 A. Financial Management Practices in China. . 35 B. Financial Performance and Projections . . .36 C. Financial Rate of Return and Sensitivity Analysis 38 D. Financial Covenants. 39 E. Auditing and Reporting Requirements .. .39 X. ECONOMIC ANALYSIS .40 A. Economic Costs and Benefits .40 B. Economic Rate of Return and Sensitivity Analyss .40 C. Other Benefits .41 D. Project Risks .42 XI. AGREEMENTS REACHED DURING LOAN NEGOTIATIONS AND RECOMMENDATION .42 ANNkXES 3.1 Fertilizer Application Rates for Various Countries, 1985 3.2 Consumption, Production and Imports of Chemical Fertilizers, 1972-87 3.3 Comparison of Domestic and international Prices of Fertilizers, Main Energy Inputs, and Main Agricultural Products, December 1988  - iii - 4.i Trends in Domest.ic Iroduction of Phosphate Fertilizers, by Product, 1970-86 4.2 Domestic Production of Phosphate Fertilizers by Produict and Province, 1985 4.3 Consumption of Chemical Fertilizers by Province, 1985 4.4 Major Phosphate Deposits in China 4.5 Major Pyrite Eieposits and Mines in China 4.6 An Outline of the Phosphate Subsector Investment Optimization Model 4.7 Planned Phosphate Investment Projects to the lear 2000 5.1 Production Performance of JPCC and HPCC 5.2 Organization Chart of JPCC 5.3 Organization Chart of HPCC 6.1 Summary of the Dayukou Mine and Fertilizer Development Component 6.2 Summary of the Huangmailing Mine and Fertilizer Development Component 6.3 Summary of the Terms of Reference for Consulting Services to Support Project Implementation Under the Technical Assistance Componient 6.4 Outline for Training on Hazard and Operability (HAZOP) Analysis 7.1 Organizat' _hart of MCI's Project Coordination Unit 7.2 Organization Chart of Project Management Teams for JPCC and HPCC 7.3 Project Implementation Schedule and Key Milestones 7.4 Environmental Protectiun and Standards 8.1 Capital Cost Estimates 8.2 Estimated Disbursement Schedule for Bank Loan 9.1 Assumptions Underlying the Financial Analysis 9.2 JFCC - Summary of Historical and Projected Financial Statements 9.3 HPCC - Summary of Historical and Projected Financial Statements 9.4 Incremental Cost and Revenue Streams for FRR Calculations 10.1 Assumptions Underlying the Economic Analysis 10.2 Incremental Cost and Benefit Streams for ERR Calculations 10.3 Net Savings of Foreign Exchange over Project Life MAP IBRD 20919R: China - Phosphate Reserves and Production Facilities IBRD 20504R: Dayukou Phosphate Mine and Fertilizer Development Component IBRD 20505R: Huangmailing Phosphate Mine and Fertilizer Development Component DOCUMENTS AVAILABLE IN PROJECT FILES Reference 1. Feasibility Studies for the Two Development Components 2. Terms of Reference for Consulting Services to Support Project Implementation 3. A Blackbook Explaining the Economic and Financial Analyses  - i - CHINA HUBEI PHOSPHATE PROJECT Loan and Project Summary Borrower: The People's Republic of China Beneficiaries: Jinxiang Phosphate Chemical Company (JPCC, Hubei Province); Huangmailing Phosphate Chemical Company (HPCC, Hubei Prov- ince); Ministry of Chemical Industry (MCI) Loan Amount: US$137.0 million equivalent Terms of Loan: 20-year repayment, including 5 years of grace, at the stan- dard variable interest rate On-lending Terms: The Government will on-lend the loan proceeds, through the Hubei provincial government, to the two Project companies at an on-lending rate equal to 105% of the IBRD variable rate, with a repayment period of 20 years, including 5 years of grace. The commitment charge and foreign exchange risks will be passed on to the companies. Project Objectives: The Project will assist China in achieving its priority for the fertilizer sector under the Seventh and Eighth Five- Year Plans (1986-95), which is to reduce the nutrient imbalance in fertilizer use by expanding the production capacity for phosphate fertilizers, particularly high-grade products such as monoammonium phosphate (MAP) and triple superphosphate (TSP), based on domestic phosphate resources. More specifically, the Project will help GOC to: (a) implement the integrated development of two major phosphate mines and their downstream high-grade fertilizer complexes, the first such operations in China in terms of size and configuration; and (b) strengthen MCI's project management capabilities and the capacity cf Chinese design institutes to identify and analyze potential safety hazards and plant operability in chemical plant design and opera- tions. The major investments to be implemrnted under the Project are consistent with the overall dLvelopment strate- gies worked out through the Phosphate Subsector Study (the Study), which was carried out during project preparation jointly by the Bank and MCI and which resulted in a phos- phate subsector investment program to the year 2000. The project investments which comprise the integrated develop- ment of domestic phosphate deposits and fertilizers using modern mining, beneficiation and fertilizer production technologies, are also expected to serve as models for the future development of the fertilizer sector. The Project  - ii - will increase China's local supply of phosphate fertilizers by about 25Z. Project Descriptiont The Project has three componentst (a) Dayukou mine and fertilizer developmernt - initiation of a new open-pit mine of 1.5 Mtpy ROM rock capacity, construiction of a bereficia- tion plant, and establishment of a 560,000 t-py TSP ferti- lizer complex; (b) Huang&ailin& mine and fertilizer devel- opment - expansion of the capacity of an existing opern-pit mine from 0.3 Mtpy ROM rock to J.0 Mtpy, constrlictiozn of a beneficiation plant, rehabilita:ion of a small low-grade nitrogenous fertilizer plant to supply ammoinla as feedstock for MAP production, and establishment of a l0,O000 tpy MAP plant near the mine site; and (c) technical assistance - consulting services for project implementation, technology selection, production start-up and mine workshop mainte- nance and for training on modern methodologies for Hazard and Operability (HAZOP) analysis. Project Benefits The Project will generate indirectly significant economic and Risks: benefits in agriculture by reducing the nutrient imbalance and increasing the synergism of fertilizer application. No extraordinary commercial risk are foreseen, given the general shortage of phosphate fertilizers and the apparently buoyant Chinese fertilizer market. The main technical risks relate to the need for coordinated imple- mentation and commissioning of high-grade phosphate ferti- lizer plants and associated mines. In the past, the lack of proper coordination has been a persistent problem in implementing integrated mine and fertilizer investments, executed by separate entities under separate budgets. This risk will be mitigated by implementing both mine develop- ment and fertilizer plant construction under the same project management team and from the same budget, as well as by assurances of diligent monitoring and coordination from the Government. The risk will be further mitigated by involving internationally experienced consultants under the technical assistance component; they will assist MCI's project coordination team and the project companies with project implementation and production start-up. In addi- tion, the project coripanies will undertake comprehensive staff recruitment and training .rograms for core opera- tional and maintenance personnel during Project implementa- tion.  - iii - Project Costt Local Foreign Total ----- (US$ million) ----- Dayukou mine and fertilizer development 160.2 73.4 233.6 Huangmailing mine and fertilizer development 75.5 35.1 110.6 Technical assistance - 0.4 0.4 Base cost (January 1989 prices) 235.7 108.9 344.6 Physical contingencies 23.6 10.9 34.5 Price contingencies 37.4 19.6 57.0 Installed cost 296.7 139.4 436.1 Incremental working capital 27.2 - 27.2 Interest during construction 24.4 22.9 47.3 Total Financing Required /a 348.3 162.3 510.6 Financing Plan: Local Foreign Total ----- (US$ million) ----- IBRD loan - 137.0 137.0 GOC loan 240.7 - 240.7 Provincial government loan 80.4 25.2 105.6 Industrial and Commercial Bank loans 8.3 - 8.3 Companies' internal funds 18.9 - 18.9 Bilateral aid - 0.1 0.1 Total Financing 348.3 162.3 510.6 Estimated Disbursements: IBRD PY 1990 1991 1992 1993 1994 1995 -------------- (US$ million) ---------------- Annual 4.1 23.3 48.0 48.3 20.6 2.7 Cumulative 4.1 27.4 75.4 113.7 134.3 137.0 Economic Rate of Return: 172 La The total cost net of sales taxes on locally purchased equipment and mate- rials (US$6.0 million) is US$504.6 million.  CHINA HUBEI PHOSPHATE PROJECT I. INTRODUCTION 1.1 The Government of the People's Republic of China (the Government, GOC) has requested a Bank loan of US$137.0 million equivalent to finance a Hubei Phosphate Project for (the ProJect). The Project embodies an evolution of the Bank's fertilizer operations in China, geared toward broadening the impact of Bank support for developing and improving the efficiency of the entire fertilizer sector. The Fertilizer Rehabilitation and Energy Saving Project (Loan 2541-CHA, FY85), the first Ba fertilizer operation, supports the rehabilitation of four large and one medium-sized nitrogenous fertilizer plants. The subsequent Fertilizer Rationalization Project (Loan 2838-CHA, FY87) aims to demonstrate alternatives for improving production efficiency at medium-size nitrogenous fertilizer plants, which currently produce low-grade fertilizers, by converting products from five such plants into high-grade fertilizers. It also aims to strengthen sector-wide institutional efficiency by introducing improved management systems at the enterprise level. The Phosphate Development Project (Loan 2958-CHA, FY88), the third Bank-supported operation in the fertilizer sector in China (which was prepared and appraised concurrently with the Project), broadens the Bank's involvement beyond the nitrogenous fertilizer subsector. It supports the development of a large- scale, modern phosphate mine in Guizhou Province which would provide high- quality phosphate concentrates to several downstream fertilizer plants. Through the Phosphate Sector Study carried out during the preparation of the third project and this project (prepared concurrently), a subsectoral approach to Bank assistance was initiated, with the Bank providing financial and tech- nical support to the Ministry of Chemical Industry (MCI) for the design of subsector-wide strategies. That effort resulted in the preparation of an optimal investment program that would allow China to meet its rapidly growing demand for phosphate fertilizers in the least-cost manner. 1.2 Consistent with the overall development strategies and investment program worked out under the above Study, the Project will support: (a) inte- grated development of two pnosphate mines in Hubei Province and their down- stream high-grade phosphate fertilizer (MAP and TSP) plants at the mine sites; and (b) provision of consultant services to MCI's project coordination team and the project companies for project implementation, technology selection, production start-up, and mine workshop maintenance. 1.3 The Project investments were initially identified in 1985, and were prepared and appraised by the Bank's project team as part of the Phosphate Development Project in December 1987. However, GOC wished to delay the loan processing for these investments and prepare a separate project on a different schedule as its own internal review of them was getting delayed. Considering the urgency of developing the Guizhou mine in time for the commissioning of downstream fertilizer plants currently under construction, the remaining por- tion of the Phosphate Development Project was processed according to the ori-  - 2 ginal schedule, and presented to the Board in June 1988. Key parameters of the Project were updated during postappraisal in February 1989. The earlier Phosphate Subsector Study was carried out during 1986-88. 1.4 This report recommends a Bank loan of US$137.0 million equivalent, which would cover 26.82 of the total financing required and 84.5Z of the total foreign exchange financing tequired (equivalent to 98.3% of the foreign com- ponent of the installed cost). II. AN OVERVIEW OF THE CHINESE INDUSTRY A. General Industry Background 2.1 Industry is China's largest productive sector, accounting for nearly 47X of its Gross Domestic Product (GDP) and employing 18% of the total labor force. About 97,600 state enterprises generate 62X of total industrial out- put, the remainder being produced by more than a million non-state enterprises, mainly urban and rural collectives. While state enterprises produce mainly important raw materials, capital goods and strategic commodities such as fertilizers, and light industrial and consumer goods, most non-state enterprises are involved in the production of downstream consumer products. Gross industrial output amouinted to Y 1,381 billion (US$371 billion) in 1987. The chemical industry, which produces mainly fertilizers, petrochemicals and pharmaceuticals, accounted for 10% of the total industrial output. 2.2 The grois value of industrial production has grown rapidly !etween 1978 and 1987, at a rate of over 10.8X in real terms per year. This growth reflects in large part the high rate of capital accumulation in industry. Until the late 1970s, when the Government began to view external trade as an important element of economic development, Chinese industry was oriented mainly toward the domestic market. Since then, Chinese manufactured exports have grown rapidly from around US$9 billion equivalent in 1980 to about US$26 billion equivalent in 1987. The share of exports in industrial output was 7.4Z in 1987. 2.3 China's industrial development has been constrained by several struc- tural deficiencies which stemmed mainly from rigid economic planning and the past industrial strategies oriented towards self-sufficiency at the national and regional levels. Major deficiencies include outdated technologies, institutional rigidities stemming in part from quota and price controls, a distorted structure of prices, inadequate infrastructure, and an under- developed financial sector. Reflecting these problems, labor productivity and the efficiency of resource use for Chinese plants are low. Nearly 80% of the current capital stock is obsolete and needs replacement or technical renova- tion. The industry structure is biased toward basic, heavy industry. An over-emphasis on self-sufficiency at the regional level has also led to a fragmented national market, reduced domestic competition, and the suboptimal use of scarce skills and resources. Consequently, potential gains from econ- omies of scale are often missed. Institutional inflexibility, compounded by inadequate market integration, has provided little incentives for industrial  enterprises to improve managerial efficiency and product quality. The low prices of energy and basic intermediates for industrial production also con- tribute to the inefficient use of inputu. nvestments in infrastructure, particularly for transportation and telecomriunication, have lagged behind those in industry. This in turn has posed a major constraint to industrial development. The financial markets, which are in their infancy, have until recently only provided limited intermediation services for enterprises. B. Government Objectives and Strategy for Industrial Development 2.4 Since 1979, the Chinese Government has shifted the focus of indus- trial development towards light industry and introduced incentives and market forces as a means of improving economic efficiency under ongoing economic reforms. The development strategy has emphasized modernization of existing equipment, development of manufactured exports and more efficient light industry, and material and energy conservation in industry. Price reforms, which the Government views as one of the most important elements of the on- going economic reforms, are designed to gradually reduce distortions to enhance allocative economic efficiency, particularly by allowing market forces to play a greater role in price determination. Since the start of economic reforms, the prices of major industrial inputs, including energy, have been raised significantly qo that effect. Recently the worries relating to the inflationary implications of these reforms have resulted in a cautious approach, and the reform process has been temporarily slowed at present. However, price reforms remain a critical item on the Government's reform agenda. Reforms adopted in 1984 aim to decentralize economic decision-making toward the provinces and enterprises, and make greater use of market signals to provide production incentives. State enterprise reforms, which include irT'roduction of the contract management responsibility system and, uniform profit tax rates (55Z) and wage incentives, have provided greater autonomy and more appropriate incentives for enterprise management. However, significant distortions in relative prices still remain, and the objective of replacing the traditionally "soft" enterprise budget constraint has yet to be achieved. Reforms in the financial sector have focused on reducing the role of central planning in the economy by increasing competition among existing and new financial institutions and the introduction of new types of financial instru- ments. The reforms are being implemented at different paces among the regions and subsectors. Because of the nature and structure of the fertilizer sector, the process of decentralization has already progressed to a greater degree than in some other industrial sectors. C. Bank Support for Industry 2.5 The Bank Group's industrial lending operations in China began in December 1982 with the approval of a loan of US$70.6 million to finance the First China Investment Bank Project (Loan/Credit 2226/1313-CHA, FY83). Three additional loans/credits of US$575 million to the China Investment Bank (CIB) (Loan/Credit 2434/1491-CHA in FY84; Loan/Credit 2659/1594-CHA in FY86; and Loan/Credit 2783/1763-CHA in FY87) have been approved subsequently. The main purpose of the CIB operations has been to develop CIB as the premier financial intermediary providing term financing for small- and medium-sized enterprises. CIB operations to date have supported a wide range of subsectors, including: textile, light industry, electronics, food processing, pharmaceuticals, pack-  - 4 - aging materials, machinery and spare parts, building materials, chemicals and metallurgical, and other, in a number of provinces. Disbursementl of the CIB loans and cred..~s have, apart from some delays in the first operation, pro- ceeded satisfactorily. Altiuough CIB's manoower and system require further strengthening, the basis of a sound development bank in China has been estab- lished. 2.6 Besides the four CIB operations, Bank involvement in the industrial sector comprisess (a) three fertilizer loans, totaling US$257.3 million (para. 1.1); (b) a loan of US$100 million for the Shanghai Machine Tool Project (Loan 2784-CHA, FY87), involving rehabilitation and modernization of the machine tool sector in Shanghai; (c) a loan of US$128 million for the Pharmaceuticals Project (Loan 2943-CHA, FY88), to expand pharmaceutical production using modern technologies and improve manufacturing practices; (d) a regional development project for Gansu Province (Loan 2812-CHA, and Credit 1793-CHA, FY87), including an industrial development component of US$20 million, to be used for diversification and modernization of the predominantly rural indus- trial base in the province; and (e) a loan of US$154 million for the Tianjin Light Industry Project (Loan 3022-CHA, FY89) to support the restructuring of three important subsectors (textile dyeing and finishing, pulp and paper, and packaging) of the light industry in Tianjin Municipality. Physical implemen- tation of the three fertilizer projects is proceeding generally on schedule. A Planning Support and Special Studies Project, which includes components for supporting long-term planning activities in selected subsectors including petrochemicals, was approved in June 1987. No Project Completion Reports (PCRs) have been prepared on any of the above projects. The International Financial Corporation (IFC) has provided support of US$44.3 million equivalent (equity participation of US$4.3 million and loans of US$40.0 million) since its first operation in 1985, through the following five investments: Guangzhou and Peugeot Automobile Co., Ltd. (Investment No. 813, FY85), China Investment Co., Ltd. (Investment No. 974, FY87), Shenzhen China Bicycles Co., Ltd. (Investment No. 1020, PY87), Shenzhen Crown Electronics Co., Ltd. (Investment No. 1066, FY88), and Shenzhen Chronar Solar Energy Co., Ltd. (Investment No. 1119, FY89). 2.7 The Bank's overall objectives in support of China's industrial development are to assist the Government in: (a) improving the policy frame- work for the industrial sector as a whole; (b) building sound institutions and practices for financial intermediation, subsector planning, project approval and implementation; (c) promoting and implementing technology upgrading, plant restructuring and rehabilitation, and energy and material conservation in selected sectors at the national and provincial levels; and (d) carrying out the reforms needed in the financial system. 2.8 Specific plans include further support for both CIB and other finan- cial intermediaries and industrial enterprises in the overall sector reform now under way, assistance to selected major subsectors at the national and provincial levels: fertilizers, pharmaceuticals and machine tools, and the development of broad-based industrial lending operations at the provincial level, involving restructuring of major subsectors. The increasing devolution of planning and implementation responsibility to the provinces has the poten- tial to have a significant impact on industrial development provided that the provincial authorities can effectively formulate and carry out their new role. The anticipated series of provincial operations is designed to help selected  - 5 - provinces articulate and implement their new responsibilities. The Bank's program for economic and sectcr work in industry and finance has prov,ded the basis for an active dialogue with the Government. Major studies completed so far include those on the state enterprise management system, finance and investment, external trade and capital, and phosphate subsector planning. Further work is being carried out and is planned in such areas as tax reform, enterprise and financial reforms, and several subsector studies at the national and provincial levels. This work is increasingly being carried out jointly with Chinese agencies. 2.9 The various reform measures introduced in recent years have expanded significantly the scope for non-state enterprises, mainly urban and rural collectives. The environment for foreign investment in China has also improved significantly since the promulgation of the joint venture law in 1979. Bank operations designed to assist the rapidly growing non-state sector are contemplated. For example, assistance to the rural industrial sector is expected through support for the Government's SPARK program, and CIB, hitherto the major beneficiary of Bank support for financial intermediation, is expected to gradually expand its financing of non-state enterprises and joint ventures. IFC support for the Chinese industrial sector has hitherto been limited to export-oriented joint ventures. With minor exceptions only, joint ventures are required to earn their own foreign exchange to service foreign obligations, which in turn has tended to make it difficult for IFC to support import substituting joint ventures; most potential joint venture partners in China are interested in the domestic market. As part of the ongoing economic and sector dialogue, both the Bank and IFC have proposed major changes in the foreigni exchange allocation and management system designed to alleviate these difficulties. The growing importance and role of the foreign exchange cen- ters, which were established recently in important trading cities and prov- inces, have the potential for alleviating this constraint. III. THE FERTILIZER SECTOR A. Agricultural Background 3.1 The agriculture sector in China employs some 190 million farm families and accounts for about 34X of the country's GDP. Although it has a shortage of cultivatable land--only 102 of China's 960 million hectares (ha) is cultivated, compared with 75Z in India--China has achieved self-sufficiency in its basic food requirements. That accomplishment is all the more remark- able given that China has 22% of the world's population but only 8% of its cultivated area. The reasor. for this success is intensive cultivation prac- tices, with relatively heavy inputs of labor, chemical and organic ferti- lizers, and water per unit of land. Foodgrains occupy about 70Z of the total cultivated area. Cotton is the most important industrial crop. 3.2 The agricultural sector has performed exceptionally well since 1979, when the Government introduced a new agricultural incentive program, the "production responisibility system (PRS).n Reflecting these initiatives, the gross value of agricultural production increased by 10% p.a. over the period 1980-86, compared to an average of 3% p.a. in the preceding 20 years. Major changes that have taken Dlace under the PRS include: (a) a larger role for  -6- farm households, which now function as the fundamental units of agricultural production and management; (b) replacement of the mandatory procurement quota with voluntary contracts, which gives farmers more flexibility in determining what to grow and where to sell; (c) price increases for major farm products; and (d) the introduction of some flexibility in prices for deliveries of cer- tain products by collectives and individual producers in excess of contracted targets. B. Fertilizer Use in Agriculture 3.3 While China is the third largest user of chemical fertilizers and the largest consumer of nitrogen in the world, the level of fertilizer use in 1985--167 kg of nutrients per hectare of culti"zated land--was still only about a third of that in neighboring countries such as Japan and Korea (see Annex 3.1 for a comparison with other countries). The implication is that the potential for increased fertilizer use is large. Since expansion of the cul- tivated area is not feasible, increasing and more balanced fertilizer use will remain central to China's strategy for increased agricultural output. 3.4 At present, there is an imbalance in the use of nitrogen (N), phos- phate (P205) and potash (K20) fertilizers. China's low application of phos- phate and potash (para. 3.6) reduces the synergistic benefits that could derive from the relatively high level of nitrogen application. This imbalance is a major constraint to increasing the application of nitrogenous fertilizers. Compared with the application rates in the other countries given in Annex 3.1, China's level of application of phosphate and potash fertilizers is quite low. According to results from surveys by the Ministry of Agricul- ture, Animal Husbandry and Fishery (MAAF) during 1981-83, the soil throughout 73.4X of the cultivated area was deficient in phosphate, and 39.8X of it was seriously deficient. C. Fertilizer Demand and Supply 3.5 Table 3.A summarize the consumption, producti(n and importation of chemical fertilizers from 1974 to 1986 and presents projections of these acti- vities for 1990 and 1995 (greater detail can be found in Annex 3.2).  TIb ..LA: O4INA - Q4EICAL tERTILIZER CONSUMPTION, PRODUCTION AND ISPOR, PAST AND PROJECtED L ('000 tons of nutrient) Nitrooan Pho8shntbm 445).... PqoQsos h Total nutrient. Cone.La Prod. Imp. Cono.zaa Prod. Imp. Cons.LN Prod. Imp. Con&./a Prod. Imp. 1072 3,168 2,444 1,342 1.038 1,249 11 12 8 2 4,219 3,701 1,S5S 1Q81 10,36S 9,868 1,641 2,785 2,508 499 281 24 2E0 13,349 12,390 2,290 1984 18,878 12,211 2,828 8,686 2,389 1.342 804 31 788 17,868 14,601 4,928 1988 18,477 11,438 2,052 3,531 1,760 960 920 24 364 17.898 18,222 3,866 1986 18,728 11,888 1,700 4,802 2,826 648 1,078 25 600 19,306 18,987 2,045 1990 (proj.)g 14.860 18,160 2,899 S,880 3,000 8,880 1,768 10 1,786 22,505 16.800 8.005 1995 (proj.)/d 16,400 lS,160 2,562 8,200 4,900 3,956 3,280 160 8,S92 27,880 20,200 9,910 _veran Annug (trowth Rate (O) 1972-41 14.1 16.8 11.4 8.1 40.2 18.0 18.7 19.1 1972-6 11.0 11.8 11.0 - - - ll.8 9.9 1981-86 8.8 8.8 10.5 (1.4) 47.7 0.8 7.7 2.4 16 8.6 1.8 12.4 38.0 (2.8) 4.2 8.7 5.6 1986-95 2.0 8.5 6.9 10.7 18.2 22.0 4.2 - L The consumption figures (sales to farmers) do not equal production plus imports because of distribution losses, stock changes and some unrecorded imports. L Actual phosphate fertilizer consumption figures include phosphate rock. directly applied without processing. , Actual potash consumption figures appear to be overestimated because of atstieticsl Inconsistency. Ld The projected Imports for the yesr4 1990, 1995 snd 2000 were darived from supply Caps between domestic production and consumption, takino into account an S8 fertilizer lo"s in transit, storage and distribution. Sources: Consumption data--Chins Agricultural Handbooks 1981-86, Agricultural Yearbook of China 1988 and KMAF; production dats--MCI. and Food and Agriculture Organization (FAO); and trade data--General Administration of Custom and FAD. 3.6 Fertilizer Demand. The consumption of all fertilizers increased from 4.2 million tons per year of nutrients (tpyn) in 1975 to 19.3 million tpyn in 1986, representing an average annual growth rate of 14.1Z. Growth in nitrogen consumption, which increased at an average annual rate of 14.1Z during 1972-81, has slowed in recent years, mainly because the level of nitrogen application is relatively high, especially compared to the use of phosphate and potash fertilizers, whose supplies are limited. The consumption of phosphate and potash showed average growth rates of 11.0? and 37.91 respectively,l/ during 1972-86; this coincides with the Government's continued emphasis on increasing their application to improve the overall nutrient balance. 1/ Potash consumption has grown very quickiy from its low base in the early 1970s, but it is still very low.  3.7 China also has a long history of using organic fertilizer. This will continue to be a valuable source of nutrients and will complement further increases in the use of chemical fertilizer. Total nutrients supplied by organic fertilizers in 1986 are estimated at about 15 million tons. 3.8 Based on its agricultural targets, the Government has projected that the demand for chemical fertilizer will reach 27.9 million tpyn in 1995, with implied average annual growth rates of about 2.0X for nitrogen (N) 6.9% for phosphorous (P205) and 13.2X for potassium (K20). These projections appear to be somewhat conservative, based on the limited supplies of phosphate and potash fertilizers. According to MAAF, ths desirable long-term target for the ratio of these nutrients is 100:50:20, compared with a current ratio of 100:33:8. GOC plans to achieve the target by 1995 by rapidly expanding the consumption of phosphate and potash fertilizers. However, it may be difficult to satisfy these requirements owing to domestic raw material constraints for potash and limited financial resources for investments and imports. 3.9 Fertilizer Supply. China has about 1,900 operating fertilizer plants of varying types and sizes and is the world's third largest producer of chem- ical fertilizers after the USSR and the US. Chemical fertilizer production increased from 3.7 million tpyn in 1972 to 14.6 million tpyn in 1984, and then fell to 13.2 million tpyn in 1985. In 1986, production reached 14.0 million tpyn. Juring 1972-86, phosphate fertilizer production increased at a modest rate of 4.6%, while nitrogenous fertilizer production increased at the much faster rate of 11.82 p.a. For potash the figure was 8.5Z. 3.10 The decline in domestic production of both nitrogenous and phosphate fertilizers in 1985 was mainly due to the Government's decision to close some 200 of the small, inefficient plants. These plants produced low quality, low nutrient fertilizers such as ammonium bicarbonate (ABC), single superphosphate (SSP), and calcium magnesium phosphate (CMP). The Government took this step in response to diminishing demand for these fertilizers. Despite the aggres- sive buildup of capacity for high-grade fertilizers in recent years, a signi- ficant portion of the fertilizer production in China still is low grade: in 1985, only 30% of nitrogen production and 2X of phosphate production involved high-grade products such as urea (46% N), MAP (522 P205) and TSP (46% P205). 3.11 China plans to continue expanding its production capacity for chem- ical fertilizer, particularly high-grade phosphate fertilizer, during the Seventh and Eighth Five-Year Plan periods (1986-95). It also intends to rationalize existing low-grade fertilizer production facilities, by converting their products to high-grade fertilizers. New large- ard medium-scale fertilizer plants to be completed during the Seventh Five-Year Plan period 2/ are expected to increase China's high-grade fertilizer production capacity by approximately 1.2 Mtpy of N, 0.6 Mtpy of P205, and 0.1 Mtpy of K20. Projects under the Eighth Five-Year Plan, which is currently being formulated, are expected to include further expansion in capacity for chemical fertilizers of 2/ Two 1,740 tpd urea plants, three 800 tpd DAP plants, a 400 tpd DAP plant, a 2,970 tpd nitrophosphate plant, a 500 tpd nitrophosphate plant, an 1,800 tpd NPK plant, a 500 tpd NPK plant, and 200,000 tpy potassium-chloride plant.  2.0 Mtpy of N and 1.9 Mtpy of P205.3/ During 1986-95, all medium-size plants currently producing low-grade fertilizer will be converted to high-grade pro- duction. 3.12 Fertilizer Demand and Supply Balance. Despite the impressive build- up in production capacity during the last decade, and continued expeditious expansion of capacity planned under the Seventh and Eighth Five-Year Plans, China will need to continue importing fertilizers to meet expected domestic demand. In 1986, about 16% of China's apparent total consumption (domestic production plus net imports) of chemical fertilizers was met by imports (122 for nitrogen, 24% for phosphate and 96Z for potash), at a value of over US$1.1 billion p.a., making China the world's largest net importer of fertilizers. As Table 3.A shows, the overall fertilizer deficit is projected to increase from 2.9 million tons of nutrients in 1986 to 8.0 million tons in 1990 and 9.9 million tons in 1995. If the foreign exchange situation permics, this deficit will be met by imports. D. Structure of the Fertilizer Industry 3.13 Production. Except for 16 large-size urea plants (about 280,000 tpy of ammonia each), most of China's approximately 1,900 fertilizer plants (about 1,200 producing nitrogenous and 700 phosphate nutrients) are using outdated technology and do not conform to current irternational production norms. This is because most of China's fertilizer plants were built using indigenous design, technology and equipment reflecting the industry's early policy of relying on local technology and available raw materials as much as possible. Because of the outdated technology at the majority of these plants, the level of energy consumption of fertilizer production has been high. 3.14 The reliance on local technology was modifiec, in the early 1970s. During that decade and the early 1980s, China built 15 large nitrogenous fer- tilizer plants using imported technology and equipment. Almost all plants currently under construction are based on internationally proven imported technologies. 3.15 Feedstock. China uses a variety of locally available feedstocks for fertilizer production. The large-size nitrogenous fertilizer plants use natural gas, naphtha and fuel oil as feedstocks for ammonia production, while the small- and medium-size plants mainly use coal. The small-size phosphatic fertilizer plants use low-grade phosphate rock to produce SSP and CMP. The large- and medium-size high-grade phosphatic fertilizer plants under construc- tion or consideration will be based on both domestic phosphate rock and imported phosphoric acid. E. Fertilizer Marketing and Distribution 3.16 Fertilizer Allocation. In May 1985, the Government changed its approach to fertilizer allocation by introducing a new contract system for the procurement of farm output (see para. 3.2). In the past, it allocated ferti- lizer according to a state allocation plan in exchange for agricultural 3/ Ten high-grade phosphate fertilizer plants with a capacity of 240,000-480,000 tpy DAP or 400,000-800,000 tpy TSP, and five large-size urea plants.  - 10 - products acquired through the state procurement system. The current contract system gives both farmers and the Government more flexibility in allocating fertilizer by reducing the quantities covered by the state allocation plan. Fertilizer producers thus are able to sell an increasing portion of their production outside the state plan, sometimes directly to farmers and across provincial boundaries. However, the state procurement system still accounts for about 60? of total fertilizer consumption and about 85Z of the high-grade fertilizers, including urea and DAP. 3.17 Fertilizer Marketing. About 90? of chemical fertilizer is marketed through the Agricultural Means of Production Corporation (AMPC), a state-owned company under the Ministry of Commerce (MOC). AMPC handles all fertilizer under the state allocation quota and a significant portion of the above-quota production. Producers sell the balance directly to farmers. AMPC procures fertilizer from the domestic plants and China Chemical Export and Import Cor- poration (SINOCHEM)--the agency responsible for all imports of chemical ferti- lizers under the Ministry of Foreign Economic Relations and Trade. AMPC has some 2,500 offices at the national (accounting for about 202 of AKPC's total purchases), provincial (282), and county (52Z) levels. The county-level offices sell fertilizers to farmers through: (a) about 64,000 retail coopera- tive shops (about 50? of AMPC's total sales); (b) some 110,000 retail shops (32Z); and (c) direct sales (18Z). 3.18 Fertilizer Transportation. So far, the transportation system has been able to move the large and growing quantity of fertilizer, about 94 million product tons in 1986. The transport of fertilizer has been given priority to ensure its availability for farmers. Fertilizer is moved, mainly in bagged form, from plants and ports directly to a network of county-level AMPC warehouses located close to the consuming areas. While high-grade ferti- lizers such as urea and DAP are hauled long distances by rail, low-grade fer- tilizer such as ABC and SSP from small plants generally located near the con- suming areas is transported mainly by road. Ab6ut one-third of the total fertilizer distributed in China moves by rail. River transportation also plays an important role. 3.19 Fertilizer Storage. Fertilizer storage capacity has not been ade- quate in recent years to meet the peak storage requirements. given the rise in consumption. The AMPC operates storage facilities for fertilizers at various levels. Total capacity at these facilities is equivalent to three months of national fertilizer consumption. AMPC warehouses at the national, provincial and county levels account for half the total storage capacity; the rest of the warehouses are located in the countryside at AMPC's retail shops. To reduce the storage burden and its carrying costs, AMPC is encouraging farmers to buy fertilizers during the off-season by offering rebates. The shortage of ware- housing capacity at periods of peak storage demand will be alleviated grad- ually as high-grade fertilizers replace low-grade ones, since the former have a lower volume. F. Fertilizer Pricing 3.20 Trends under the Price Reforms. GOC has embarked on a major effort to reform the prevailing system of prices in the country (para. 2.4). Given the Government's concern for macroeconomic management and the obvious sensiti-  - 11 - vities involved, the pace of reform inevitably will vary from sector to sector and over time. Recently the Government has taken a cautious approach to over- all price reforms due to concerns about their inflationary implications (para. 2.4). However, the overall direction of reform has been clearly set. The ongoing economic reforms involve expansion of the role of market forces in fertilizer production and allocation. In the past, the Government administered fertilizer prices strictly, as it did those of other essential commodities. The current strategy assigns a greater role to market forces in fertilizer pricing and allocation so as to improve the efficiency of produc- tion and application. As a result, a two-tier pricing system has emerged. The State Pricing Bureau (SPB) and local (province, city and county) bureaus set the prices for the production subject to the state plan quotas at both the ex-factory and farm-gate levels. Market-influenced prices negotiated within the limits of guideline retail prices set by local pricing authorities prevail for production outside the state plan quota.4/ Fertilizer producers market these products directly. 3.21 At present, about 402 of total consumption is sold at negotiated prices, although the percentage varies significantly across products and localities and with the financial situation of individual manufacturers. In general, high-grade fertilizers are subject to stricter state allocation. About S5% of these products, including urea and DAP, are being sold at con- trolled prices under the state allocation plan. 3.22 The Government views the two-tier pricing system as an intermediate step in the evolution of sectoral pricing policy, given its well-recognized limitations, including: (a) discrimination across producers and consumers; (b) administrative complexity; and (c) distortions and time lags in the adjustment of the prices of inputs and outputs. Despite these limitations, the Government expects to use this transitional system until it introduces a broader price reform package. The reason is partly the close inter- relationship between fertilizer and the agricultural sector and the potential for disruption if the allocation and pricing arrangements for fertilizers were to be liberalized in isolation. 3.23 The Government's strategy is to continue gradually reducing its administrative control of fertilizer pricing in parallel with the gradual dismantling of annual production planning and allocation, so that the economy can "grow out of the plan." Guidelines for future policy reforms are being developed by an inter-agency working group that is carrying out a compre- hensive review of the fertilizer pricing and allocation policies according to a program discussed with the Bank. Through these reforms, GOC is committed to removing the irrationalities in the price relationships between inputs, ferti- lizers and agricultural products. The working group is headed by the Director of the Department for Heavy Industry and Communication and comprises repre- sentatives from related Government agencies, including the Ministry of Finance (MOF), MCI, MOC, MAAF and China Petrochemical Corporation (SINOPEC). However, 4/ At present, there is a ceiling on the negotiated prices of all high- grade fertilizers, such as urea and MAP, at the retail level. This ceiling currently is set by the SPB, but in the future it will be set by provincial authorities following guidelines to be given by the SPB.  - 12 - specific guidelines are expected to emerge only after the agenda for further overall price reforms is firmly in place (para. 2.4). 3.24 Fertilizer Prices. The ex-factory prices of major high-grade fert- ilizers and ABC, the delivered prices of the main inputs, and farmers' prices for major grains, together with comparable international border prices in 1988, are shown in Annex 3.3. Presently, the controlled ex-factory prices of urea and DAP are below the border prices, while their negotiated prices are close to the economic prices. In December 1988, the controlled bagged urea price--Y 428 (US$115)/ton--represented about 62% of the CIF import price of US$185/ton, while the ceiling for the nei iated price quota, which differs among provinces and is set by respective provincial pricing authorities, was 95-102Z of the economic value. For DAP, the figures are, for plan quota, Y 570 (US$153)/ton, equivalent to 67% of the current import parity price of US$229, and for the negotiated price, Y 700-860 (US$188-231), or 82-101Z. At present, there is no local production of TSP and MAP, and controlled ex- factory prices therefore have not been established. The ceilings for nego- tiated prices for future TSP and MAP production are expected to be set in line with those for DAP. The Government provides subsidies to make up the differ- ence between the import and sale prices for imported fertilizers. Actual negotiated ex-factory prices have usually been equal or close to the ceiling; reflecting market conditions, these prices have frequently exceeded the ceil- ing, with approval from the pricing authorities, at least during the peak season. 3.25 An average distribution margin of about Y 140 (US$38/ton of product) is added to the ex-factory price of high-grade fertilizer at the farm-gate level to cover AMPC's transport and storage costs. 3.26 During negotiations, an assurance was obtained from the Government that the Project companies would be allowed to market their entire output (TSP and MAP) outside the state allocation plan at negotiated prices. 3.27 Prices of Fertilizer Inputs Relative to Fertilizers. The price structure of major inputs is also similar to that of fertilizers. However, there are no country-wide uniform prices for these inputs, and the controlled prices applied to individual suppliers are set by each supplier's respective supervisory pricing authority at the central, provincial and county levels. Although these prices vary to a large extent depending on the quality of product and the location and geological condition of supply sources, on the whole they are far below their border prices. The controlled price of natural gas under the state allocation quota is around 55-65% of its fuel oil equiva- lent value, based on border prices. The controlled price of coal is 65-75Z of its export value. The average ex-mine controlled price of domestic phosphate rock, the quality of which is usually too low to be tradeable in the inter- national market, is about 45% of the import parity price based on nutrient contents. Negotiated prices above the quota are generally 15-25% higher than the controlled prices; although in some cases they have, subject to approval by pricing authorities, approached border prices. The entire production of phosphate concentrate from Wengfu mine, to be developed under the Bank- supported Phosphate Development Project (Loan 2958-CHA, FY88), will be allowed to be sold outside the state allocation plan at market influenced negotiated prices.  - 13 - 3.28 Prices of Fertilizers Relative to Agricultural Products. The price structure of agcicultural products is similar to that of fertilizers. Agri- cultural products traded by the state procurement system are subject to con- trolledI prices. While some exceptions exist, the prices of these products generally are below border prices, while the market-influenced negotiated prices more closely approximate the border prices. For example, as of January 1988, thR controlled price ef rice was Y 632 (UTS$167)/ton, about 65Z of its export value of US$258/ton, whereas its negotiated price was Y 840 (US$226)/ ton (Annex 3.2). The controlled price of wheat was Y 328 (US$119)/ton, about 682 of the CIF in.port price of US$1.75, the negotiated price, Y 500 (US$161)/ ton. G. Government SLrategy in the Fertilizer Sector 3.29 In view of its importance to agriculture, the fertilizer sector has been, and will continue to be, a sector of high priority for the allocation of investment resources. In recent years, the Government rei.erated this priority on several occasions, including statements published by the State Council, respectively, in September 1987 and September 1988. 3.30 The Government's main objectives in the fertilizer sector are tc: (a) achieve the desirable nutrient balance of 100(N): 5U (P205): 20 (K20) by the end of the Eighth Five-Year Plan (1991-95) by rapidly expanding the pro- duction capacity for phosphate fertilizers based on domestic phosplhate rock and the development of domestic potash resources; and (b) move toward self- sufficiency in fertilizer production during the Ninth Five-Year Plan (1996-2000). Other priorities include the rationalization of low-grade fertilizer facilities through technical renovation, energy-saving measures and improvement in product quality, and greater efficiency in enterprise operations through improvements in management efficiency. 3.31 The Government's strategy for sectoral investment during the Seventh Five-Year Plan envisages: (a) bringing on-line the newi fertilizer production capacity currently under constraction (see para. 3.11); (b) converting medium- size low-grade fertilizer plants to high-grade fertilizer proluction; (c) intensifying the exploitation and development of d3mestic phosphate resources, including seven large new phosphate mines and the expansion of pyrite mining capacity; and (d) rationalization of many small-size low-grade fertilizer plants, including their conversion to high-grade operations using adaptive technologies. At present, the Government does not contemplate any investments in new small-size SSP or ABC plants. 3.32 During the Eigh-n and Ninth Five-Year Plans (1991-2000), Government strategy will focus on further expanding phosphate fertilizer production capa- city. With the recent decentralization of project implementation responsi- bilities, State resources will be used mainly for phosphate fertilizer; the central Government will ntot initiate ary new nitrogenous fertilizer projects and these will be implemented by the provincial authorities as necessary. This strategy is considered appropriate, given the nutrient imbalance in fert- ilizer use and China's endowment of phosphate rock.  - 14 - IV. THE PHOSPHATE SUBSECTOR A. World Phosphate Market 4.1 Consumption. World phosphate fertilizer consumption grew steadily in the 1970s and 1980s except in 1985/86, when a decline of 2.62 from Zhe pre- vious year's consumption was registered. According to statistics published bv FAO, world consumption of phosphate fertilizers rose from 19.8 million tons of P205 to 34.3 million tons during 1969/70 to 1984/85, at an annual average rate of 3.5Z. The decline in 1985/86 reflects the reduced application of ferti- lizers in several countries exporting agricultural products due to the record- low prices of grains and agricultural products in the international market. In 1986/87, world phosphate consumption rsbounded to 34.4 million tons of P205, largely due to a rapid increase in consumption in the developing coun- tries. The 1987/88 consumption is estimated at 36.4 million tons of P205, or an increase of 5.82 from the previous year's consumption. World phosphate consumption is projected by the Bank's International Economics Department to increase at anL annual average rate of 2.7Z between 1987/88 and the year 2000/2001. In 1986/87, the major consumers of phosphate fertilizers were the USSR (24.3X of the world consumption), US (10.6Z), China (8.OZ), India (5.7z), Brazil (4.9Z), and France (3.9%). 4.2 Production. World production of phosphate fertilizers also grew steadily, from 20.6 million tons of P205 in 1969/70 to 37.2 million tons in 1984/85. In response to the trends in demand for phosphate fertilizers, world phosphate production fell to 34.6 million tons in 1985/86, and rebounded to 37.0 million toDs in 1986/87. In 1987/88, the world production level reached an estimated peak of 38.3 million tons of P205. In 1986/87, the major producers of phosphate fertilizers were the USSR (22.9% of world production), US (22.0%), China (5.8%), India (4.62), Brazil (4.12), France (2.7Z), Tunisia (1.92) and Morocco (1.3Z). According to supply projections by the FAO/UNIDO/World Bank Fertilizer Working Group in May 1987, world phosphate fertilizer supply potential, which is derived from world nominal capacity in operation and under constrution and country-specific operation rates, was estimated at 36.8 million tons of P205 in 1986/87, and was expected to reach 41.8 million tons by 1991/92, representing an annual average growth rate of 2.4Z. A major increase in capacity is expected to ,take place in developing countries, particularly in Morocco, Tunisia, Jordan, China and Egypt where major raw materials are abundant. The recent worldwide trend is to locate new production facilities near phosphate rock mine sites. 4.3 International Trade and Market Prices. The international phosphate market is competitive; the two main exporting regions are North America and Northern Africa and all other regions import. Phosphate fertilizer prices in the world market, which fell sharply during the 1980-83 worldwide recession and reached a record low in 1986, have increased steadily in recent years as world demand particularly in developing countries recovered. While the world market prices of phosphate fertilizers are not expected to increase significantly in the short run given the forecast movement in the agricultural market and the industry's investment behavior, the recovery of these prices is expected to continue gradually and steadily throughout the 19909. Fertilizer  - 15 - production facilities to be established under the Project are expected to come on stream in early 1994. B. The Chinese Phosphate Industry 4.4 Although the domestic production and use of phosphate fertilizers has increased steadily over the last two decades, development of the phosphate industry in China has been less spectacular than that of the nitrogen industry. The main constraint has been technical difficulties in processing Chinese rock, which has a high magnesium content, into concentrates suitable for the production of high-grade fertilizers. Production of phosphate ferti- lizer therefore has been limited to low-grade products such as SSP and CMP at small provincial phosphate fertilizer plants. Accordingly, there was little planning or coordination of the development of the phosphate fertilizer indus- try at the state level. However, several years ago the Government shifted the priority in the fertilizer .ector from nitrogenous to phosphate fertilizers, in order to correct the large imbalance in fertilizer use. 4.5 Domestic Phosphate Fertilizer Production. Recent trends in the pro- duction of phosphate fertilizers are summarized in Table 4.A below (further details are given in Annex 4.1). As of the end of 1987, almost all phosphate fertilizer production was low-grade, with SSP comprising more than 70Z and CMP most of the balance. Domestic production of other phosphate fertilizers has been insignificant--in 1985, ammonium phosphate production was only 7,000 tons of P205, while the total capacity of the phosphoric acid plants was only about 50,000 tpy of P205. About 400,000 tons of ground phosphate rock were also being applied directly. Table 4.A: PRODUCTION OF PHOSPHATE FERTILIZEPS, 1972-86 ('000 tons of P205, Z) SS? CMP Others /a Total Year Volume I Volume Z Volume X Volume Z 1972 740 59.2 488 39.1 21 1.7 1,249 100.0 1981 1,780 71.0 692 27.6 36 1.4 2,508 100.0 1983 1,920 72.0 715 26.8 30 1.1 2,665 100.0 1984 1,683 71.3 644 27.3 32 1.4 2,359 100.0 1985 1,345 76.5 380 21.6 33 1.9 1,758 100.0 1986 1,713 73.7 558 24.0 54 2.3 2,325 100.0 Ja Ammonium phosphate productiont 3,000 tons in 1984, 7,000 tons in 1985; the 1986 figure is not available. Source: MCI 4.6 There are about 700 phosphate fertilizer plants in China, scattered among almost all the provinces (see Annex 4.2). The average output capacity  - 16 - is 15,000-30,000 tpy, except for a few SSP plants that have capacities of more than 100,000 tpy. Most of the production in each province is consumed within its boundaries (Annex 4.3). C. Supply of Raw Materials 4.7 The two main materials required for producing high-grade phosphate fertilizers are phosphate rock and sulfuric acid. 4.8 Phosphate Rock. China is well endowed with more than 3 billion tons of phosphate rock (see Annex 4.4). The physical nature of the rock is similar across deposits-- usually hard and with a high magnesium oxide (MgO) content varying from about 2.5-6.0Z. Until recently, when a new process for benefici- ating these rocks was developed in China, domestic rocks were not suitable for producing high-grade phosphate fertilizers. Now, however, the Government is planning several large new undertakings to exploit the major deposits of rock, particularly in Hubei, Guizhou and Yunnan Provinces. The Project will support several such efforts. Recent exploration also indicates large rock resources in Sichuan Province. 4.9 Relative to the large size of the phosphate rock reserves, the cur- rent level of production is low, for the reasons given above. Annual production of phosphate rock in 1986 amounted to only 15 million tons of run of mine (ROM) rock, mainly in five provinces, as shown in Table 4.B. In 1986, most of this rock was used as ROM rock; only about 5X was beneficiated before use. Table 4.B: AVERAGE ANNUAL PHOSPHATE ROCK PRODUCTION BY PROVINCE, 1986 ('000 tons rock) Yunnan Guizhou Hubei Hunan Sichuan Other Total Production 3,264 2,484 5,460 1,090 2,953 294 14,957 Source: MCI. 4.10 Because the phosphate fertilizer plants are small and scattered throughout the country, phosphate rock is transported widely o-er China. Yunnan Province, for example, sends rock to 24 provinces, Guizhou to 18, and Hubei to 19. The major importing provinces are Hubei, Liaoning, Jiangsu, Shandong and Guangxi. China imports a small quantity of rock (varying between 0.2 to 0.3 Mtpy from year to year) for some plants near the coast. It also exports a small amount of phosphate rock under counter-trading arrangements with other developing countries. 4.11 Sulfuric Acid. China's sulfuric acid consumption in 1986 was about 7.6 million tons, of which about 5.0 million tons went for phosphate fertili-  - 17 - zer production. China meets almost the entire demand for sulfuric acid domes- tically. About 1.5 million tons of acid comes from smelter gas, and almost all the remainder from pyrites; only a small amount comes from elemental sulfur. 4.12 The major deposits and mines of pyrites are located in Guangdong, Shanxi, Anhui, Liaoning, Hunan and Sichuan Provinces (Annex 4.5). The major producers of smelter acid are in Liaoning, Gansu and Hunan. China has discovered sulfur deposits in Shandong Province, but attempts to exploit them have not been successful. Little sulfur is recovered from the oil and gas industry as most gas deposits are sweet. 4.13 The shortage of sulfur could inhibit development of the phosphate industry unless new deposits of pyrites or sources of by-product sulfuric acid (e.g. phosphogypsum' are developed. GOC is avare of this possibility ancd. is establishing a pilot plant in Yunnan to develop a process to recover sulfur from phosphogypsum. D. Th? Phosphate Subsector Study 4.14 As mentioned earlier (para. 1.1 and 1.4), during Project preparation MCl and the World Bank carried out a joint Phosphate Subsector Study (the Study) to help the Government identify appropriate strategies for developing an efficient domestic phosphate fertilizer industry. The main objective of the Study was to prepare an optimal investment program up to the year 2000 that would allow China to meet its rapidly growing demand for phosphate fer- tilizers in the most economic wanner, given specified market requirements and transport constraints. 4.15 The Phosphate Model. As part of the Study, the Bank designed a computer-based mathematical programming model to facilitate review of the options, using data provided by MCI (see Annex 4.6 for the details). The model covers optimization of investment at the national level as well as at each plant in terms of location, scale of operations, and level of production in the context of the constraints associated with the transport of raw mate- rials, intermediates and final products. The selection of optimal strategies was based on a comparison of different options and scenarios. The model enabled the Government to review in a consistent and integrated manner the major issues involved in developing the fertilizer industry, such as: (a) domestic fertilizer production versus importation; (b) optimal mode of trans- porting raw materials and finished products; (c) the location of new fert- ilizer production facilities; (d) the relative economics of producing dif- ferent types of phosphate fertilizers; and (e) priorities in developing the different phosphate rock deposits. This model is being installed at MCI's Chemical Planning Institute (CPI) with technical and financial assistance from the Bank under the Phosphate Development Project (Loan 2958-CHA, FY88). It will be continuously updated to provide advice to planning and project imple- menting authorities on relevant subsector strategies. 4.16 The results of work with the model provided strong economic justifi- cation for development of China's domestic phosphate fertilizer industry, based on domestic raw materials. The analysis suggested that producing high- grade phosphate fertilizers such as TSP, DAP and MAP near the rock sources in  - 18 - Yunnan, Guizhou and Hubei Provinces can be more economic than relying on imports. Construction of small DAP plants that use adaptive technology and local raw materials also will help China meet its phosphate requirements. E. Investment Program for the Phosphate Subsector 4.17 To meet its agricultural production targets by the year 2000 with balanced use of the three main fertilizer nutrients, China will have to increase its phosphate consumption to about 9.1 million tons of P205 from its current level of 4.5 million tons. 'f most of the presently known economic deposits are fully developed by that time, China could increase domestic pro- duction from the 1986 level of 2.3 million tons of P205 to 9.0 million tons. This development would necessitate an increase in phosphate rock production from about 11 to 35 million tpy of rock and in sulfuric acid from about 8 to more than 20 million tons. Total related investment costs for the production facilities are estimated at about US$8-10 billion in 1988 prices, excluding the large Investment required to upgrade the infrastructure to transport raw materials to the processing units and to distribute the final products to the marketplace. 4.18 During the Seventh Five-Year Plan, five large new phosphate rock mines and many small local mines are to be developed (the Wengfu mine in Guizhou, one mine in Yunnan, and three mines in Hubei). Output at the large pyrites mines in Guangdong, Meimonggol, Hunan and Anhui will be greatly increased to meet the demand for sulfuric acid. These local raw materials will feed the new high-grade phosphate fertilizer plants to be implemented during the Seventh and Eighth Five-Year Plan periods. Three DAP plants will be implemented based on imported phosphoric acid. About 50 small SSP plants will be revamped to produce DAP using adaptive technology, a move that will allow them to utilize relatively low-grade phosphate rock. During the Eighth and Ninth Five-Year Plans (1991-2000), the Government intends to fully expioit the domestic phosphate resources to produce a total of 35 Mtpy of phosphate rock (30Z P205 basis) and 9.0 Mtpy of phosphate fertilizers (10O P205) by the year 2000. Details of specific investments in the phosphate subsector up to the year 2000, estimated on the above basis, are given in Annex 4.7. F. Bank Role and Project Justification 4.19 In support of the Government's efforts to implement its stracegies in the fertilizer sector (paras. 3.28-3.31), the Bank's main role is to provide technical and financial assistance in: (a) strengthening GOC's capability for investment planning based on modern planning techniques, in order to optimize investments in the sector, especially those for phosphate and potash fertili- zer; (b) assessing specific projects using suitable methodologies, including the selection of appropriate technologies; (c) building new fertilizer produc- tion capacity, as well as renovating existing facilities, particularly for phosphate and potash fertilizers; (d) enterprise-level restructuring and upgrading the efficiency of fertilizer distribution so as to reduce fertilizer losses during distribution; and (e) improving the managerial efficiency of sector companies through the introduction of modern enterprise-level manage- ment systems.  - 19 - 4.20 The two previous Bank-assisted nitrogenous fertilizer projects supported China's priority objective during the early part of the Seventh Five-Year Plan (1986-90), which has been given to improving the technical and managerial efficiency of existing fertilizer plants. Most of the existing large- and medium-size fertilizer plants, including the large ones built with internationally proven technologies in the 1970s, do not use up-to-date tech- nologies and require major investments to improve energy and production effi- ciencies. The first project (Fertilizer Rehabilitation and Energy Saving Project, Loan 2541-CHA, FY85), which was physically completed on schedule by the end of 1988, provided financial assistance for improvements in efficiency at one medium-size and four large nitrogenous fertilizer plants. The second project (Fertilizer Rationalizaton Project, Loan 2838-CHA, FY87) provides financial assistance both to upgrade the operations of five medium-size nitro- genous fertilizer plants, including conversion of their products to high-grade ones, and to introduce modern enterprise-level management systems in the fer- tilizer industry overall. Implementation of th.a project is proceeding well and on schedule. An IDA-financed technical credit also was provided to support project preparation, including tests of the phosphate rock and feasi- bility studies for the Project. 4.21 The Project, together with the third fertilizer project (the Phos- phate Development Project, Loan 2958-CHA, FY88), supports China's priority in the fertilizer sector during tine Seventh and Eighth Five-Year Plans (1986-95), which is to reduce the nutrient imbalance in fertilizer use by rapidly expand- ing the production capacity for high-grade phosphate products. At the same time, the process of project preparation has provided an opportunity to intro- duce modern subsector planning techniques and methodologies to the phosphate industry and to help GOC articulate an optimal strategy for developing the subsector. MCI's involvement in the joint phosphate subsector study has strengthened its subsector planning capability. The experience and metho- dologies learned from the Study also can be applied to other subsectors, a process in which the Chinese Government has already expressed an interest. A further innovation of this Project is the integrated development of phosphate mines and high-grade fertilizer complexes, the largest and most complex of such operations in China to date. This effort will provide China with the experience needed to implement similar other investments, which already have been identified in the Study. The technical assistance component is designed to ensure successful Project implementation. V. PROJECT INSTITUTIONS 5.1 The Hubei Phosphate Project involves: (a) Jinxiang Phosphate Chemi- cal Company (JPCC), Hubei Province, which will carry out the Dayukou mine and fertilizer development component (paras. 6.3-6.4, 6.6); (b) Huangmailing Phos- phate Chemical Company (HPCC), Hubei Province, which will carry out the Huang- mailing mine and fertilizer development component (paras. 6.5-6.6); and (c) MCI, which will coordinate Project execution by the Project companies and implement the technical assistance component (paras. 6.7-6.10). The opera- tional, managerial and organizational aspects of these institutions are reviewed in this chapter, while the financial aspects are reviewed in Chapter IX.  - 20 - A. Background 5.2 Chinese chemical fertilizer companies and phosphate mines are state- onmed but operate as financially and administratively independent entities. In the past, the administrative, production, ma:ketiDg and financial opera- tions of these companies were under the direct supervision of the provincial governments. However, their autonomy in th'eir business decisions has been expanding, and is expected to continue doiag so, under the ongoing economic reforms. Large-size companies already enjoy wide autonomy in almost all aspects of their operations. The project companies have been registered with their respective provincial authorities to provide them with the status of legal entities. Charters of the project companies describe the scope of their activities, responsibilities and authority in the conduct of business. 5.3 Organization and Management. The organization and management prac- tices of Chinese state-owned industrial enterprises reveal strong similar- ities. Their organization is basically flat--there are numerous unit work- shops and departments with their own management layers, all at the same organ- izational level. A general manager, appointed by the supervisory government, heads each company. Under the general manager are the second-layer managers, twho share functional responsibilities related to procurement and sales, administration, production, maintenance and construction. A chief engineer, also second-layer, is charged with all technical matters, including develop- ment and renovation. A chief accountant has a similar position in the area of financial matters. 5.4 This structure has not promoted contemporary standards of organiza- tional and managerial efficiency, such as adequate scope of control, functional distribution of responsibilities among line managers, and adequate managerial and financial autonomy. The Government (SPC, MCI and the local Governments) has been setting annual production targets, allocating inputs, distributing output, and allocating funds from budgets. Some managers, parti- cularly those responsible for production, have been overloaded with super- visory responsibilities. Horizontal coordination among various departments and workshops is not satisfactory. Because of insufficient autonomy, good management information and cost management systems do not exist. 5.5 Recent Management Reforms. Under the recent economic reforms, Chinese fertilizer companies have received increasing management autonomy. One result, however, is that there is now a two-tier planning and management system. The state plan mandates a basic minimum level of activity, but beyond that level each company is free to operate in response to market forces under its own flexible plan. Companies can make their own decisions regarding pro- duction levels, procurement of raw materials, sales of products above the quota, and utilization of funds generated by those sales, within the context of the flexible plan. Although state planning for the fertilizer sector is expected to continue in the near future, the scope for flexible planning and management is to expand further, providing greater autonomy to management. 5.6 MCI recognizes the strong need to restructure the organization and management of the chemical fertilizer companies so that they can effectively carry out their mandates for organizational change. This reatructuring can be  - 21 - done tiirough the introduction of modern enterprise-level management systems for infomnation and costs, as well as investment and financial planning. MCI, with Bank assistance under the Fertilizer Rationalization Project (Loan 2838-CHA, FY87), is sponsoring a management efficiency study, using internationally experienced consultants. The aim of the study is to raise managerial efficiency in fertilizer companies in the context of the changing business environment. The study is expected to be completed by the end of 1989. It also will provide practical recommendations for introducing suitable modern systems. MCI plans to introduce these systems gradually in the entire chemical industry, including the project companies, following successful introduction of them at several companies on a pilot basis. The Beijing Institute of Chemical Engineering and Management (BICEM), MCI's management training arm for engineers and managers of chemical enterprises as well as MCI's own staff, is currently implementing a comprehensive program to upgrade its management training capabilities with Bank assistance under the same project. B. The Jinxiang Phosphate Chemic'l Company (JPCC) 5.7 Background. JPCC is the new name of the JinxiRng Mining Bureau (JMB), which has been operating since 1958 at Huji City, about 400 km north- west of Wuhan, the capital of Hubei Province. Presently, JPCC operates three phosphate rock mines: (a) the Dayukou open-pit mine, with a capacity of 0.4 million tpy; (b) the Liuchong underground mine, with a capacity of 0.6 million tpy; and (c) the Wangji underground mine, the first phase of which was com- pleted in 1985 and which is currently being expanded to its final capacity of 1.5 million tpy. The rock of Dayukou and Liuchong is currently being sold as feedstock without beneficiation to low-grade phosphate fertilizer plants, mainly in Hubei Province. The total output of the Wangji mine will be bene- ficiated at the company's Wangji beneficiation plant, which was completed in 1986. Phosphate rock concentrate from Wangji will be sold to the Lucheng nitrophosphate plant in Shanxi Province. 5.8 Production Performance. Except in 1987, when they were faced with difficulties in marketing low-grade rock, Dayukou and Liuchong mines have operated at relatively high levels of capacity utilizaton (around 92-99%) (see Annex 5.1 for details). The new Wangji mine and beneficiation plant, the physical construction of which was completed in mid-1987, started up only in mid-1988 because of delays in completing the downstream Lucheng fertilizer plant. The existing Dayukou mine has suffered from defective design, mainly in terms of undersized and poorly adapted main mining equipment. Expansion of the Dayukou mine under the Project is intended to eliminate the above defects through the selection of well-adapted equipment. 5.9 Organization and Management. JPCC is headed by a general manager who is appointed by the Hubei provincial government. The general manager is assisted by six second-layer managers: (a) the chief engineer; (b) the director for production; (c) the director for administration: (d) the chief economist; (e) the chief accountant; and (f) the legal advisor. No major changes in JPCC's organizational structure are currently envisaged after project completion, except as a result of the expansion of the Dayukou mine and fertilizer complex (see Annex 5.2). Management already has gained valu- able experience in constructing a large-scale mine and a beneficiation plant from the new and complex Wangji iacility. However, the addition of the new  - 22 - large mine and a modern complex fertilizer production operation will require managerial strengthening, including the recruitment of qualified second- and third-layer managers. 5.10 Staffing and Training. JPCC's staff presently number 10,170, of whom 3,220 have higher educations and 690 are engineers and managers. After completion of the Project, JPCC will have 12,670 staff, including 1,100 engi- neers. In addition to strengthening managerial capability, recruiting addi- tional experienced technical staff also is required. During loan negotia- tions, an assurance was obtained that JPCC would prepare, and furnish to the Bank for comment by December 31, 1990, a comprehensive program to strengthen management, recruit qualified staff, and provide training, and thereafter will carry out the agreed program. JPCC will obtain assistance from internation- ally experienced consultants and local design institutes in preparing the program. C. The Huangmailing Phosphate Chemical Company (HPCC) 5.11 Background. HPCC will be created by merging two companies- -Huangmailing Mining Company (HMC) located at Huangmailing, about 160 km north of Wluhan, the capital of Hubei Province, and the Dawu ABC plant, located 15 km from the Huangmailing mine. This merger is intended to facilitate the con- struction and operation of the TSP complex to be established under the Project by putting the core facilities of the complex under one management. HMC, founded in 1973, currently operates an open-pit mine with a design capacity of 300,000 tpy of ROM ore, an adjacent rock beneficiation plant of the same capa- city, and an SSP plant of 40,000 tpy capacity, together with a small pyrites- based sulfuric acid plant of 15,000 tpy capacity and a recently added small (10,000 tpy) bulk blending facility that produces N-P-K fertilizers. The Dawu ABC plant, with a capacity of 15,000 tpy of ammonia and 51,000 tpy of ABC, was established in the early 1970s. 5.12 Production Performance. HMC's output of beneficiated rock has been substantially below design capacity in recent years (see Annex 5.1), mainly because of a delay in the construction of downstream high-grade fetilizer plants. The small scale low-grade phosphate fertilizer plants have been operating at relatively high capacities because of the general shortage of phosphate fertilizers in the locality despite the gradual shift toward high- grade phosphate fertilizers. Integration of the new mine and the proposed Huangmailing MAP plant will help HPCC solve the problem of timing mismatch of upstream and downstream facilities, since all the rock concentrate produced by the existing beneficiation plant will be consumed by the MAP plant. 5.13 Organization and Management. HPCC will be headed by a general manager, assisted by four directors responsible for: (a) operations; (b) production; (c) personnel; and (d) administraticn. Some streamlining of HPCC's organizational structure after project completion is being considered to accommodate the major expansion of operations under the Project (see Annex 5.3 for details). As HPCC's existing operations are of simple design, its managers have not been exposed to the requirements of modern, complex facili- ties. Significant reinforcement of HPCC's management will be required to ensure successful implementation and completion of the Project.  - 23 - 5.14 Staffing and Training. HPCC staff presently number 905, of whom 60 are engineers and managers. After completion of the Project, total staff are expected to increase to 1,750 and engineers to 120. Considering the inexper- ience of management and the low level of technical skills within the company, considerable external recruitment and intensive training will be required. During loan negotiations, HPCC provided the same commitment as that obtained from JPCC with respect to management strengthening, and staff recruitment and training (para. 5.10). D. The Ministry of Chemical Industry (MCI) 5.15 Background. The Ministry of Chemical Induetry (MCI) has national supervisory responsibility for the chemical fertilizer sector, including phos- phate mining, and a number of refineries, rubber plants and several other chemical industries. MCI prepares the five-year plans for these subsectors, works out annual production targets, coordinates the supply of raw materials and sales of output, and monitors the activities of the chemical industry at the provincial and county levels in coordination with the Chemical Industry Bureaus of local governments. MCI also coordinates the implementation of large-scale investment projects in the chemical sector which are supported financially and managed by the national government agencies under the national investment plans. 5.16 Organization and Management. MCI is headed by a minister, who is assisted by four deputy ministers responsible for respectivelys (a) finance and foreign affairs; (b) production; (c) construction projects; and (d) educa- tion and research. MCI maintains a task force known as the "World Bank Project Implementation Coordination Group" to coordinate with the Bank. It is headed by the deputy minister for finance and foreign affairs. The World Bank Loan Office, an executive arrr of the group headed by a director-level official, maintains project coordination groups for Bank-supported projects, including this Project. VI. THE PROJECT A. Objectives 6.1 The specific objectives of the Project are to: (a) provide financial and technical assistance in implementing some of the first major projects of the investment program developed from the Phosphate Subsector Study undertaken during Project preparation (paras. 1.1, 1.4 and 4.14)--these projects would provide models for integrated development of phosphate mines and fertilizer plants; and (b) strengthen MCI's project management capabilities, particularly with respect to reducing technical risks associated with the integrated devel- opment of large-scale phosphate mines and high-grade fertilizer complexes. 6.2 To achieve the objectives, the Project comprises three major com- ponents: (a) Dayukou phosphate mine and fertilizer pruduction development component; (b) Huangmailing phosphate mine and fertilizer production develop- ment component; and (c) technical assistance component.  - 24 - B. Dayukou Phosphate Mine and Fertilizer Development Component 6.3 This component, which will be carried out by JPCC, involves estab- lishment of: (a) a new open-pit mine of 1.5 million tpy ROM rock capacity, to replace the existing ineffLcient Dayukou mine; (b) a beneficiation plant, to produce 0.65 million tp, of phosphate rock concentrate (33Z P205); (c) a 560,000 tpy TSP plant, together with a pyrites-based sulfuric acid plant of 560,000 tpy capacity and a phosphoric acid plant of 200,000 tpy P205 capacity; (d) a 12,000 tpy aluminum fluoride plant; and (e) related infrastructure (see Annex 6.1 for details). After commissioning the new Dayukou mine and benefi- ciation plant, the existing Dayukou and Liuchong mines will be phased out. The mine and beneficiation plant have been designed by the China Chemical Mines Research and Design Institute (CMRDI), with assistance from Jacobs Engineering, a US company, and the fertilizer plant by Nanjing Chemical Design Institute (NUDI), with guidance from Chemsystems, also a US company. 6.4 Because Dayukou rock alone is not suitable for the production of TSP, mainly due to its high magnesium content, about 220,000 tpy of phosphate con- centrate with good reactivity will be supplied from Yunnan Province by rail. During loan negotiations, an assurance was obtained from JPCC that it would prepare supply and transport arrangements satisfactory to the Bank for the required quantity of this concentrate by December 31, 1991. C. Huangmailing Phosphate Mine and Fertilizer Development Component 6.5 This component, which will be carried out by HPCC, involves the establishment of: (a) a new open-pit mine of 1.0 million tpy ROM rock capa- city, to replace the existing mine; fb) a beneficiation plant to produce 240,000 tpy of phosphate rock concentrate (332 P205); (c) an MAP plant of 180,000 tpy capacity, together with a pyrites-based sulfuric acid plant of 280,000 tpy capacity and a phosphoric acid plant of 93,000 tpy P205 capacity; and (d) rehabilitation of a small coal-based ABC plant at Dawu, about 15 km from the project site, to produce 30,000 tpy of ammonia as feedstock for MAP production (see Annex 6.2 for details). After commissioning the new complex, HPCC's existing small SSP and NPK facilities will be phased out, and the existing beneficiation plant will be operated to complement the new benefici- ation plant. Raw materials and products will be transported by truck between Huangmailing and a new railway siding to be built at Guangshui, about 40 km from the Project site. The mine and the beneficiation plant were designed by the China Chemical Mines Planning and Design Institute (CMPDI), the fertilizer plant by lWuhan Chemical Engineering Design Institute (WCEDI). 6.6 When the above two components are completed, the production of phos- phate fertilizer in Hubei Province will reach 450,000 tpy of P205, of which 350,000 tpy, or about 782, are expected to be consumed within Hubei. The balance will be marketed in adjoining provinces, which are generally short of phosphate fertilizers, particularly high-grade products. D. Technical Assistance Component 6.7 The technical assistance component, to be carried out by MCI, has two components: (a) the services of internationally experienced consultants for MCI's project coordination team to support project implementation, process and  - 25 - technology selection, production start-up, and the maintenance of mine equip- ment; and (b) the services of internationally experienced consultants for local training in hazard and operability (HAZOP) analysis with respect to chemical plant design and operations. 6.8 Consultant Services for Project Implementation. The Project involves risks associated with the coordinated implementation and commissioning of high-grade phosphate fertilizer plants and associated mines. As mentioned in paras. 5.8 and 5.12, JPCC's new Wangji mine and I)eneficiation plant remained idle for one year after their physical completion, and HPCC's mines have been underutilized mai-:ly due to delays in the completion of downstream fertilizer plants. 6.9 To mitigate these technical risks, this technical assistance compo- nent will provide internationally experienced consultants for MCI's project coordination team, who will help the team and the project companies withs (a) selection and procurement of appropriate technologies and equipment; (b) timely identification and resolution of problems with project implementation; (c) training of project management team staff; (d) preparation of staff recruitment and training programs; and (e) implementation of a preventive mine workshop maintenance system. The scope of their work was discussed during project preparation, and the terms of reference (see Annex 6.3 for summary) will be finalized during loan negotiations. 6.10 Training in Hazard and OperabilitZ Analysis. To strengthen the capa- city of Chinese design institutes to identify and analyze potential safety hazards in chemical plant design and operations and plant operability, MCI will sponsor a workshop on modern methodologies for Hazard and Operability (HAZOP) analysis, with assistance from internationally experienced consultants (see Annex 6.4 for details). VII. PROJECT MANAGEMENT AND ENVIRONMENTAL PROTECTION A. Engineering Arrangements 7.1 Local design institutes will handle most of the basic and detailed engineering for the Project. The two local design institutes that prepared the feasibility studies, CMRDI for Dayukou and CMPDI for Huangmailing, will carry out the detailed engineering for the mines, beneficiation plants, and infrastructure. These two design institutes have extensive experience in the design, engineeLing, construction and start-up of comparable mines and benefi- ciation plants. Overall responsibility for the basic and detailed engineering for the fertilizer plants also will lie with local design institutes--NCDI for the TSP complex at Dayukou, and WCEDI for the MAP complex at Huangmailing. 7.2 However, these institutes will not handle any facilities for which they do not have sufficient experience and capability, namely, the sulfuric acid, phosphoric acid, and granulation plants. Internationally experienced engineering firms will be invited to provide the design and know-how for those plants. Although NCDI has had considerable experience in designing of Sul- furic acid, phosphoric acid and DAP plants, including a DAP plant in Yunnan  - 26 - supported under the ongoing Bank-financed Fertilizer Rationalization Project (Loan 2838-CRA, FY87), it has not been involved with plants of a size compar- able to the Dayukou project. The services to be obtained from the interna- tionally experienced engineering firms will include assistance in the procure- ment of critical equipment to ensure efficient selection and adequate quality control during manufacturing and prior to shipment. These firms will use technologies that are commercially proven and acceptable in terms of invest- ment, operating costs, efficiency, safety and environmental aspects, and will provide process guarantees. They will involve local design institutes as much as possible feasible for technology transfer. 7.3 Local input in the design of the fertilizer plant at Huangmailing is expected to be larger than that for Dayukou, as the scope of the former is compatible with locally available and commercially proven experience. The local design institutes will conduct hazard and operability studies on all critical processes, in collaboration with specialists. The respective local design institutes will also provide guarantees on processes designed locally. B. Project Management 7.4 The arrangements for overall Project coordination are similar to those under the three ongoing Bank-financed fertilizer projects, where they have proven satisfactory. MCI will have primary responsibility for supervis- ing implementation of all Project components and for coordinating the con- struction work with raw materials supply and downstream plants. The project coordination group set up within MCI (Annex 7.1) will regularly review prog- ress on project implementation and procurement and coordinate efforts to remove any constraints. The coordination group also will maintain liaison with the companies and the Bank, submitting to the latter quarterly financial and technical progress reports. During negotiations, an assurance was obtained from the Government that the group would be maintained during project implementation. 7.5 Each of the two project companies has already set up its own project management team (Annex 7.2) charged with implementing its respective compo- nent. The key staff responsible for specific aspects of project implementa- tion have been appointed. JPCC, which has just completed the major Wangji mine and infrastructure project, is well prepared to carry out the Dayukou component. Because HPCC has limited experience in managing projects of com- parable magnitude, its project management team will receive substantial support from CMRDI, which has experience in large mine and chemical projects in China. Internationally experienced consultants to be hired by MCI under the technical assistance component will also provide assistance (see para 6.9). During negotiations, assurances were obtained from the companies that they would maintain their project management teams during project implementa- tion. C. Implementation Schedule 7.6 Implementation of the Project is expected to take 54 months from the start of the selection process, which is scheduled to take place in the fourth quarter of 1989. Construction under the two development components is expected to be complete by March 1994. The mines and the beneficiation plants  - 27 - will be finished before the fertilizer plants so that they can build up the necessary intermediate stocks. The overall project is scheduled for comple- tion by September 30, 1994. The project implementation schedule, along with key milestones for project implementation, is shown in Annex 7.3. In light of experience with previous Bank-financed fertilizer projects, the project sche- dule is reasonable. D. Trainina 7.7 Substantial training is required for the companies to ensure success- ful project implementation. JPCC has some experience in implementing and running large mine operations, as noted. HPCC has experience with smaller mines and fertilizer plants. However, their skills and experience still do not conform to what is required to ensure smooth start-up and operations. 7.8 MCI and the project companies are well aware of the need for training. Each company will prepare a comprehensive recruitment and training program, with assistance from internationally experienced consultants and local design institutes, and will implement it (paras. 5.10 and 5.14). The training program will include early assignment of managers and key technical staff to their positions during project implementation but prior to start-up so that they can learn from the consultants, licensors and engineering firms. The program also allows for overseas training in new technologies for open-pit mining, beneficiation, medium/large capacity sulfuric acid production, and phosphoric acid/MAP/TSP manufacture. On-the-job training in the operation of high-grade fertilizer plants will be provided at existing Chinese sulfuric acid plants and new phosphoric acid and DAP plants under construction. Over the next two years, the design institutes will focus on training for key tech- nical staff and company trainers. MCI plans to make arrangements for inten- sive training of key managers of both companies at BICEM (see para. 5.6) before the production start-up. E. Environmental Aspects 7.9 All the mines and chemical plants under the Project will be designed and constructed to meet locally and internationally acceptable environmental standards. The internationally experienced consultants involved in Project preparation have paid particular attention to appropriate emission levels at the two phosphate fertilizer plants to ensure satisfactory process controls. The s4tes and configurations of the open-pit mines, beneficiation plants and fertilizer plants were selected to ensure the least environmental impact. For example, all mining operations are concentrated in one large open pit at each Project site; beneficiation tailing ponds and phosphogypsum storage areas will be designed to avoid any groundwater pollution; and water treatment plants will be installed to process all liquid effluent from the beneficiation and fertilizer plants prior to discharge into public waters (the majority of liquid effluents and process water from the processing units will be treated and recirculated into the processes). Air pollution will be kept within international standards. The expected emission levels from each plant are compared to local and international standards in Annex 7.4. 7.10 Assurances have been obtained from the two companies that they will build and operate the Project mines and plants with due regard to safety and  - 28 - ecological and environmental factors and will comply with environmental stan- dards satisfactory to the Bank. VIII. CAPITAL COSTS, FINANCING PLAN, PROCUREMENT AND DISBURSEMENT A. Capital Cost Estimates 8.1 The total financing required for the Project, including interest during construction (IDC) and incremental working capital, ic estimated at US$510.6 million equivalent, of which US$162.3 million, or 31.8%, is in foreign exchange. The estimate includes all off-site facilities necessary for the Project, such as water and power supply, facilities for transport, storage and handling of raw materials, intermediates and products, and social infra- structure. The capital cost estimates (detailed in Annex 8.1) are summarized in Table 8.A. Table 8.A: PROJECT CAPITAL COSTS U of Local Foreign Total Local Foreign Total Total ---- (Y mIllIons) ----- ----(US$ millions)--- Dayukou mine and ferti- lizer component 596.9 278.0 868.9 180.2 78.4 238.6 67.8 Huangmailing mine and fertilizer component 280.9 130.6 411.5 76.6 36.1 110.6 32.1 Technical assistance - 1.5 1.6 - 0.4 0.4 0.1 Base Cost is 876.8 406.1 1!281.9 236.7 108.9 344.6 100.0 (January 1989 prices) Physical contingencios 87.7 40.6 128.2 23.8 10.9 84.6 10.0 Price contingencies 861.0 182.2 633.6 37.4 19.6 67.0 16.6 Installed cost 1.315.6 627.9 1,943.3 298.7 139.4 436.1 Incremental working capital 188.7 0.0 183.7 27.2 0.0 27.2 Interest during construction lb 111.6 104.7 218.2 24.4 22.9 47.8 Total FinancinQ Required 1,660.7 732.6 2.293.8 348.8 162.8 610.6 La Local costs Include sales tax on locally purchased equipmont and matorials amounting to USS8.0 milIIon. Lb Based on an assumption of an onlonding rate oqual to 1065 of the Bank loan rate.  - 29 - 8.2 The base cost estimates, expressed in January 1989 prices, were derived from estimates prepared by the Project authorities and MCI in collab- oration with the domestic design institutes, after checking with internation- ally experienced engineering firms. Physical contingencies are calculated at 1OZ of the base cost estimates. In calculating the base cost and physical contingencies, the prevailing exchange rate of Y 3.72 to US$1 was used. The price escalation for foreign costs was calculated on the basis of anticipated annual international price movements of 5.32 for 1989-90 and 4.1 thereafter. Price escalation for costs expressed in local currency was calculated based on projected annual local inflation rates of 15.OZ for 1989, 10.0% for 1990-91 and 8.0% thereafter. Equipment and materials imported for the Project are exempt from import duties. The local companies will pay sales tax on locally procured equipment and materials. B. Financing Plan 8.3 The proposed Bank loan of US$137.0 million will meet 84.5% of the total foreign exchange and 26.8% of the total financing required. The remain- ing financing will be met mainly by loans arranged by GOC (47.2%), loans arranged by the Hubei provincial -.overnment (HPG) (20.7Z), internal funds of the companies (3.7?), loans from the Industrial and Commercial Bank of China (ICBC) (1.6%), and bilateral aid (0.1%). The proposed financing plan for the Project is summarized in Table 8.B.  - 30 - Table 8.B: FINANCING PLAN Local Foreign Total Local Foreign Total Z (Y millions) - - ($ million) ---- A. Dayukou Mine and Fertilizer Component (JPCC) IBRD loan - 425.7 425.7 - 94.0 94.0 26.9 GOC loans La 710.1 - 710.1 159.6 - 159.6 45.7 HPG loans /a 260.3 69.1 329.4 58.6 15.4 74.0 21.2 ICBC /b loans 28.7 - 28.7 5.8 - 5.8 1.7 Internal funds 78.5 - 78.5 16.0 - 16.0 4.6 Subtotal 1,077.6 494.8 1,572.4 240.0 109.4 349.4 100.0 B. P.uangmailing Mine and Fertilizer Component (HPCC) IBRD loan - 200.9 200.9 - 42.7 42.7 26.6 GOC loans /a 359.9 - 359.9 81.1 - 81.1 50.5 HPG loans 96.7 35.4 132.1 21.8 9.8 31.6 19.5 ICBC /b loans 12.5 - 12.5 2.5 - 2.5 1.6 Internal funds 14.0 - 14.0 2.9 - 2.9 1.8 Subtotal 483.1 236.3 719.4 108.3 52.5 160.8 100.0 C. Technical Assistance IBRD loan - 1.1 1.1 - 0.3 0.3 75.0 Bilateral aid /b - 0.4 0.4 - 0.1 0.1 25.0 Subtotal - 1.5 1.5 - 0.4 0.4 100.0 D. Total Project IBRD loan - 627.1 627.1 - 137.0 137.0 26.9 GOC loans /a 1,070.0 - 1,070.0 240.7 - 240.7 42.2 HPG loans /a 357.0 105.1 462.1 80.4 25.2 105.6 20.7 ICBC loans 41.2 - 41.2 8.3 - 8.3 1.6 Internal funds 92.5 - 92.5 18.9 - 18.9 3.7 Bilateral aid /b - 0.4 0.4 - 0.1 0.1 0.1 Total 1,560.7 732.6 2,292.6 348.3 162.3 510.6 100.0 /a GOC/HPG loans are channeled through the People's Construction Bank of China (PCBC) and its Hubei branch. Lb During negotiations, an understanding was reached that GOC would cover the HAZOP workshop from its own funds if bilateral aid will not be available in time.  - 31 - 8.4 IBRD Loan Financing. The proposed Bank loan will be made available to GOC at the Bank's standard rate of interest for 20 years, including 5 years of grace, with a commitment charge of 0.75Z. The total amount of the loan will be on-lent by GOC, through HPG, to the two companies at an on-lending rate equal to 1052 of the Bank variable loan rate, with a commitment charge of 0.752 and a repayment period of 20 years, including 5 years of grace as follows: (a) JPCC, US$94.15 million; and (b) HPCC, US$42.85 million. An amount of US$300,000 to cover consultant services for project implementation to be provided under the technical assistance component will be equally shared by the two companies, and the loan amount for each company includes one half of this amount. The foreign exchange risk will be passed on to the companies. During negotiations, assurances were obtained from the Government that subsi- diary loan agreements would be signed by GOC and HPG, and HPG and the companies on terms and conditions satisfactory to the Bank as a condition of loan effectiveness. HPG will provide a foreign exchange denominated loan of US$2.3 million to cover some minor imported items, and the terms of the loan will be the same as the on-lending terms of the Bank loan. An additional foreign exchange requirement of US$22.9 million equivalent to cover interest during construction (IDC) on the Bank loan will be covered by a local currency loan to be arranged by HPG, and the required foreign exchange will be made available from GOC's and HPG's own foreign exchange reserves. 8.5 Local Financing. GOC, through the People's Construction Bank of China (PCBC), will provide construction loans to cover 69Z of the local financing requirements for fixed assets at its prevailing rate for similar investments (currently 3.6Z p.a.), with a maturity of 15 years, including a grace period equal to the construction period as follows: (a) JPCC, Y 710.1 million (US$159.6 million); and (b) HPCC, Y 359.9 million (US$81.1 million). HPG, through the provincial branch of PCBC, will provide the balance of the local financing requirements for fixed assets on the same terms; (a) JPCC, Y 322.2 million (US$72.7 million) and (b) HPCC, Y 128.1 million (US$30.6 mil- lion). Portions of the loans arranged by HPG will be used to cover IDC on the proposed Bank loan (para 8.4). Interest payments on these loans w'.ll be deferred during the construction period and repaid in installments after completion of the Project. The remaining local financing needs, including incremental working capital, will be met either by internal funds or short term loans from local banks. Financial projections indicate that both project companies will need short-term loans from local banks to cover a portion of their incremental working capital requirements. During negotiations, confir- mation was obtained from the Government on all necessary arrangements for providing local funds to finance the local costs of the Project. C. Procurement 8.6 The procurement arrangements are summarized in Table 8.C:  - 32 - Table 8.C: PROCUREMENT ARRANGEMENTS /a (US$ million) Procurement method Total Project element ICB LIB Other cost Equipment and materials 83.6 22.0 119.9 225.5 (83.6) (22.0) (5.7) (111.3) License, engineering and consultancy services 30.4 30.4 (18.2) (18.2) Project management and commissioning 44.2 44.2 (5.7) (5.7) Land, civil works and construction 129.4 129.4 (0.0) (0.0) Training 3.0 3.0 (1.8) (1.8) Other La 78.1 78.1 (0.0) (0.0) Total Financing 83.6 22.0 405.0 510.6 (83.6) (22.0) (31.4) (137.0) Ta Including incremental working capital and interest during construction. Note: Figures in parentheses are the amounts to be financed by the Bank. 8.7 A major portion of the equipment and materials (752 of those financed by the Bank loan) will be procured through international competitive bidding (ICB) in accordance with Bank guidelines. Standard bidding documents to be applied to all Chinese projects are currently being prepared to improve pro- curement efficiency in ICB. In ICB, domestic manufacturers will be given a margin of 152 or the prevailing customs duty, whichever is lower, for purposes of bid evaluation. International engineering and technical assistance services will be selected according to Bank guidelines for the use of consult- ants. 8.8 Specialized items with only a limited number of suppliers, such as agitators for the phosphoric acid reactor and gypsum filters, will be procured through limited international bidding (LIB). Items for LIB are expected not to exceed US$22.0 million in aggregate. All qualified bidders would be invited under LIB. 8.9 Orders for small or miscellaneous items with an estimated value of up to US$200,000 each will be procured through international shopping from at least three qualified and eligible suppliers, up to an aggregate amount of US$5.7 million. No procurement through direct contracting is envisaged.  - 33 - 8.10 Packages with an estimated value of US$1.0 million or more, expected to number about 20, would be subject to prior Bank review; packages below US$1.0 million each would be subject to post-review by the Bank. Contracts with consultants will be subject to Bank approval prior to signature. Inter- national procurement will be executed by the China National Chemical Con- struction Corporation (CNCCC),5/ in cooperation with MCI's Project coordination group. To avoid delays in Project execution, the Bank loan will retroactively finance up to US$2.0 million of eligible expenditures for downpayments for engineering contracts and technical services and international travel, incurred between February 5, 1989 and the date of loan signing. 8.11 Procurewent Arrangements for Local Financing. Local procurement will be carried out by the respective operating companies with assistance from the design institutes. Since SPC identifies the Project as a key national project, the supply of major local construction materials, plant and equipment (about 90% of the total items required) is regulated by an allocation system administered by central and provincial government agencies. Applications for annual requirements have to be made in advance to SPC and the State Materials Supply Bureau. However, under recent provisions, buyers and suppliers of equipment have seme scope for negotiation as to the type of equipment, delivery and price. 8.12 Most of the civil works, construction, a major part of the engineering work, and some equipment and materials will be procured locally. Contracts for civil works and ccnstruction will be awarded through assignment to specialized construction bureaus or companies under negotiated contracts that specify unit costs, terms of payment and incentives/penalties for early/late completion or delivery. The capabilities of local contractors proposed for the Project are satisfactory for timely and efficient execution of the proposed work. D. Allocation and Disbursement of the Bank Loan 8.13 The proposed allocation of the Bank loan is summarized in Table 8.D. 5/ CNCCC is responsible for international procurement of the three on- going Bank-supported fertilizer projects.  - 34 - Table 8.D: BANK LOAN ALLOCATION (US$ million equivalent) JPCC HPCC MCI Total Bank loan financing Equipment, materials 78.0 33.3 - 111.3 100X of foreign expendi- and spares tures, 100? of local expenditures (ex-factory), and 75? of local expendi- tures for items procured locally. Engineering, licenses 11.4 6.8 - 18.2 100? of expenditures and technical services Training 1.1 0.7 - 1.8 100o Project management 3.5 1.9 0.3/a 5.7 1002 Total 94.0 42.7 0.3 137.0 La Consultant fees for the technical assistance component will 1ie shared equally by JPCC and HPCC. The proposed Bank loan will cover: (a) 1002 of the foreign expenditures for directly imported goods, 100? of local expenditures (ex-factory) for domestic- ally manufactured goods, and 75? of local expenditures for items procured locally; (b) 100? of the expenditures for licenses, engineering and technical services for Project management; and (c) 100? of the cost for overseas travel b7 local staff for engineering, procurement and tzaining. To facilitate the disbursement of funds, a special account will be established in US dollars at a commercial bank acceptable to the Bank, with an authorized allocation of US$10.0 million. Disbursement will be against full documentation except for training, overseas travel and contracts valued at less than US$200,000 equiva- lent each, which would be against statements of expenditure. Documentation of statements of expenditure will be maintained by MCI's project coordination group, to be audited annually by independent auditors acceptable to the Bank, and to be made available for review by the Bank during Project supervision. 8.14 The Project completion date would be September 30, 1994; the closing date is expected to be March 31, 1995. An estimated disbursement schedule for the Project has been prepared based on Bank experience with previous com- parable projects in China; it is generally in line with the Bank's recommended standard disbursement profile for industrial projects in Asia Region. It is given in Annex 8.2.  - 35 - IX. FINANCIAL ANALYSIS A. Financial Management Practices in China 9.1 Financial Autonomy. In the past, the Government made all major fin- ancial decisions, including approval of new investments. Enterprises remitted almost all internally generated funds to the Government, and funds for new investments were, in turn, provided as grants through budget allocations. Recent reforms have resulted in greater financial autonomy and accountability for the managers of individual enterprises. Major changes include: (a) enterprises can retain 100Z of their depreciation allowances; (b) enterprises can retain an increasing portion of their profits (this provision varies across companies and provinces); (c) new funding requirements, including those for investments, are to be met out of a company's internally retained funds or interest-bearing loans (long-term capital construction loans for fixed invest- ments and short-term borrowing for working capital); and (d) enterprises may utilize an increasing portion of internally retained funds without prior gov- eranent approval. Given the increasing financial autonomy and accountability of companies, there is a growing need and opportunity for these enterprises to engage in longer term financial planning and to improve on the traditional concentration on one-year financial targets. 9.2 Financing of New Projects. The recent economic reforms have also changed dramatically the Government's policy on financing new investments. In the past, all new investments were, as noted, financed through budget alloca- tions in the form of grants. Recently, the Government introduced the concept of interest-bearing loans as an incentive for industrial enterprises to econo- mize on the use of funds. While this was, in principle, a positive step, it has been carried to the point that new government-financed investments for state-owned enterprises must now be financed entirely through debt. As a result, newly formed companies are entirely debt-based, a financial structure that conflicts with the basic norm for prudent financial management and accountability. In particular, many companies have been facing cash flow difficulties during the initial years of operations because of their excessive debt service burden, and they have had to enter into negotiations with respect to financing and bail-outs on a case-by-case basis. While the companies' existence has not been threatened because of the country's structure of state ownership, this situation undermines the autonomy of the enterprises and con- flicts with the basic thrust of China's economic reform, which is designed to place greater responsibility on enterprise management. 9.3 The Government recognizes the need to allow for equity-type funding and is currently moving toward the creation of instruments for such financing. However, it will take time for the new instruments of financing to develop sufficiently to allow for large-scale equity financing, particularly in light of the current ambiguities relating to enterprise ownership. 9.4 Financial Accounting and Audits. The Chinese accounting system is governed by several regulations issued by central and local governments. Special features of the system include: (a) maintenance of two separate accounts--one for production operations, the other for construction projects-- that are not consolidated; (b) the inclusion of interest charges in the production costs, so that operating income reflects the company's financial  - 36 - structure; and (c) the matching of funding sources with specific types of assets--fixed assets with fixed funds, current assets with current funds, and special assets with special funds.6/ The financial statements of Chinese enterpr'ses are subject to external audits by the State Audit Administration (SAM), which was established in 1983 to ensure efficient and prudent financial management bv enterprises. The Bank has been supporting the Government's efforts t3 improve its audit capability through training under a Technical Cooperation Credit (Cr. 1412-CHA). B. Financial Performance and Prolections 9.5 The financial projections for Project entities were carried out using current yuan. It was conservatively assumed (the key assumptions are detailed in Annex 9.1) that their output prices would be lower by 10-20Z than their projected CIF import prices. Their actual prices are expected to be deter- mined at levels close to import parity, since GOC would allow the entire out- put of the project companies to be sold at negotiated prices (para. 3.26); the current ceiling for negotiated prices of high-grade phosphate fertilizers (DAP) is 98Z of its import parity price (para. 3.24). The real prices of inputs and outputs (i.e., after allowing for inflation) were assumed to remain unchanged at their January 1988 levels over the life of the Project. Detailed historical and projected financial data, prepared in accordance with conven- tional accounting concepts adjusted for the Chinese accounting system, are given in Anrexes 9.2-9.3. The salient features of financial performan ' and the projected future finances of the companies are shown in Table 9.A. 6/ Strict application of earmarking, or non-fungibility, is gradually being relaxed, as enterprises retain greater portions of their internally generated funds as special funds.  - 37 - Tjble. .A: SIMMARY OF SiFELTED HISTORICAL AM PROJECTED FINANCIAL DATA (millions af current yuan unla" otherwise stated) Proiacted Ao.tul - PrElim. Construction After sjlrtuo Year ending December 31 1Q88 1987 1Q88 1989 1993 1994 1996 1998 1997 1998 Financial StatementM: Gross sales revenue 28.0 21.S 62.0 83.1 133.0 S92.4 747.6 9O9.8 1,014.6 1,095.8 Not profit /A 10.3 2.2 9.7 1.S 17.9 64.2 165.5 284.7 309.1 880.7 Internal caeh generation 8.2 12.1 22.2 17.0 34.0 227.6 314.8 418.8 436.6 469.1 Debt service payments14 - - - - - 189.8 181.0 162.0 162.5 162.3 Current as*ta 18.2 13.8 43.8 46.2 71.4 162.7 248.6 524.3 77.0 933.0 Current liabilities1r 11.5 9.1 19.6 26.1 128.1 128.0 147.9 171.0 177.3 183.5 Long-term debt - - - 88.8 1,140.0 1,828.4 1,284.8 117.8 1,098.8 1,018.0 Equity 1d 402.3 428.7 470.7 478.9 497.3 610.8 761.0 995.8 1,283.8 1,868.0 Not profit/groa &alee (S) 39.8 10.2 18.6 2.8 14.6 10.8 22.1 30.8 30.8 32.0 Debt service coverage (times) - - - - - 1.4 2.0 2.6 2.7 2.9 Currant ratio (times) 1.4 1.8 2.2 2.2 0.6 1.3 2.0 3.1 4.2 6.1 Long-term debt/equity 100:0 100:0 IOO:O 8:92 74:26 69:31 63:37 84:46 47:53 89:61 Financial Stttements: Oros" sales ravanuo 3.8 4.0 4.7 14.4 12.8 168.0 224.0 290.3 313.8 898.8 Net profit & 0.3 0.2 0.3 2.2 1.3 28.8 61.S 103.4 118.0 134.1 Internal cash generation 0.6 1.4 1.4 3.3 2.5 90.7 127.4 189.6 183.0 197.7 eobt service payments L - - - - - 74.6 78.1 78.4 78.6 75.4 Current eaosts 3.6 3.8 8.3 11.3 22.0 66.8 128.3 233.3 348.1 472.0 Current (labiliti;e Lg 1.7 0.8 0.6 3.1 44.0 89.4 68.1 77.4 79.9 82.7 Long-toerm debt - - - 16.4 663.8 630.3 S8S.7 860.0 622.8 484.0 Equity L4 19.1 18.8 19.6 21.8 16.3 47.4 103.2 201.S 314.7 444.4 Net profit/gross ssl .e (3) 9.9 8.6 8.6 14.9 10.1 1.2 27.8 36.2 38.3 40.2 Debt service coverage (times) - - - - - 1.2 1.7 2.6 2.8 3.0 Current ratio (times) 2.2 8.0 0.4 3.6 0.5 1.1 1.9 4.0 6.0 8.0 Long-term debt/equity 100:0 100:0 100:0 38:82 e2:8 86:24 80:20 69:31 69:41 49:61 LI Net profit before loan amortization end taxes. Lb Repayment of long-term debt plua interest paymento for both long-term end short-term debts. 14 Including the current portion of long-term debto, and short-term working capital loane. L4 Including etate fixed funds, state circulating funds, enterprise fixed funds, and special fund reserves. 9.6 Financial Performance. JPCC and HPCC have virtually no debt as a result of the Government's earlier policy of financing state-owned enterprises by providing investment and working capital as grants through budget alloca- tions. Both companies remained relatively stable in terms of production and finances over the past five years, despite the general decline in demand in China for low-grade phosphate rocks and fertilizers, because their local markets were less affected by imported high-grade fertilizers. While JPCC's sales revenue and net profits dropped significantly in 1987, this was mainly because of the low utilization of the new Wangji mine and the delayed start-up of the Wangji beneficiation plant. Since the commissioning of the Wangji plant in mid 1988, JPCC's financial performance improved in 1988, and is expected to improve further as the plant achieves its full capacity from 1989 onwards. HPCC, which operates outdated, inefficient facilities, has  - 38 - experienced low and declining profit margins, again mainly because of the declining demand and prices for low-grade fertilizer (paras. 5.8 and 5.12). 9.7 Financial Projections. Both companies are expected to achieve satis- factory profits, and their net profit margins on sales revenue will remain relatively high at over 252--once their operations reach full capacity. In 1994, the first year of operations, JPCC and HPCC are expected to achieve only marginal net profits because of low capacity utilization, a normal experience for new mines and fertilizer plants. With the build-up of capacity, the combined net profits of the two companies are expected to increase from Y 89.5 million in 1994, to Y 227.0 million in 1995, and Y 388.1 million in 1996. 9.8 The two companies nre not expected to have any serious cash flow difficulties, and will generate sufficient cash internally to cover cash expenditures. However, HPCC will not show a comfortable debt service ratio in its first year of operations. Because of the Government's current funding policy (para. 9.2), HPCC, which does not have a significant capital base, will also have high financial leverage until it accumulates retained earnings from operations. Given this background, the Government intends to take action to allow the companies to achieve sound financial positions rapidly in the event that it changes the funding policy, and a specific financial covenant has been designed to ensure that the companies will be able to cope with potential cashflow difficulties during their start-up years (para. 9.10). C. Financial Rate of Return and Sensitivity Analysis 9.9 The cost and revenue streams for the incremental financial rate of return (FRR), expressed in January 1989 yuan, are presented in Annex 9.4. The estimated base case FRRs (before taxes) for the companies are: 14.2Z for the Dayukou component, and 13.1Z for the Huangmailing component. The FRRs for the companies are lower than their respective economic rates of return (ERRs), mainly because the assumed financial prices for fertilizers are below their economic value. The results of the sensitivity tests are shown in Table 9.B. Table 9.B: SENSITIVITY TEST ON FINANCIAL RATES OF RETURN (BEFORE TAX) (in percentage) Dayukou Huangmailing (JPCC) (HPCC) Base case 14.2 13.1 Capital cost up 202 12.0 10.8 Capital cost down 20Z 17.2 15.0 Sales revenue up 20Z 19.1 16.9 Sales revenue down 20Z 8.2 8.8 Variable cost up 202 12.7 11.9 Variable cost down 20Z 15.8 14.3 2-year delay in completion 11.4 10.6  - 39 - The FRRs for the Project are sensitive to changes in, in descending order, sales revenue, capital cost, and variable costs (input prices). Given that adverse changes in the variables by a margin of 202 are not likely, satisfac- tory levels of FRR are likely to be realized. D. Financial Covenants 9.10 During negotiations, agreement was reached that the companies would: (a) maintain a debt service coverage ratio of at least 1.2 and not incur any long-term debt unless their projected internal cash retention for each fiscal year during the term of the debt exceeds 1.2 times their projected debt ser- vice requirements in that year; (b) maintain a long-term debt/equity ratio of 75:25 or better; and (c) maintain a current ratio of 1.2 or better, once such covenanted ratios are reached. Because of the current government financing practice with respect to new investments (para. 9.2), HPCC will not be able to achieve these covenanted ratios in the initial years of operations, particu- larly the debt/equity ratio, until it builds up capacity utilization and retained earnings. The timeframe for achieving these ratios is as follows: debt service coverage ratio--1994 for JPCC and HPCC; long-term debt to equity ratio--1994 for JPCC, and 1996 for HPCC; current ratio--1994 for JPCC, and 1995 for HPCC. Therefore, an additional assurance has been obtained from the Government that it will cover any cash flow deficits, provided such deficits are not the result of inefficient management and operation of the project companies, during the initial three years of operations. Efficiency criteria were agreed at negotiations. Moreover, if the Government adopts an alterna- tive funding policy to allow for equity-type funding (para. 9.3), it plans to allow the companies to convert a portion of local loans to the companies' own funds so that they can achieve a long-term debt/equxity ratio of 75:25 or better. An assurance has been obtained from the companies that they will pre- pare and furnish to the Bank for review. by October 31 of each year from 1990 to 1998, their rolling five-year financial plans, including production, mar- keting and investment plans, in the form of projected financial statements. Such plans will be supported by: (a) a detailed analysis of production cost trends; (b) analysis of operational and financial budget variances for the current fiscal year; and (c) financing arrangements for the investments proposed over the five-year period. E. Auditing and Reporting Requirements 9.11 An assurance has been obtained that the companies will have their annual financial statements and project accounts audited by independent auditors acceptable to the Bank. They will also submit the audit report for both the production and capital construction accounts to the Bank within six months after the close of each fiscal year. Based on project progress and the financial reports submitted by the project companies, MCI will provide the Bank a quarterly summary of the project progress and procurement status, and a semi-annual summary of the companies' financial statements, within 45 days after the end of each period. An assurance was obtained that the Government will have MCI's Project accounts for the technical assistance component, and the accounts for the Special Account, audited by independent auditors acceptable to the Bank. It will submit the audit report to the Bank within six months after the end of each fiscal year. Within six months after the closing date for the project, the companies and MCI will prepare and provide  - 40 - te the Bank a completion report for their respective components of the project, to cover project implementation, initial operation, actual project costs and projected costs and benefits. X. ECONOMIC ANALYSIS 10.1 Calculations of the economic rates of return (ERR) for the investment components were made on an incremental basis. The key assumptions in the economic analysis of the Project are detailed in Annex 10.1. A. Economic Costs and Benefits 10.2 Economic Benefits. The quantifiable economic benefits of the Project, expressed in 1989 US dollars, come from two major sources: (a) phos- phate fertilizer (TSP and MAP) production utilizing phosphate rock from the mines to be developed under the Project and other local raw materials such as pyrites, ammonia and high-quality rocks from Yunnan Province (Dayukou and Huangmailing); and (b) improved economic efficiency of production through the restructuring of existing inefficient operations, including the conversion of production from low economic value fertilizers (ABC) into high economic value fertilizers (MAP) (Huangmailing). 10.3 The economic prices of fertilizer products were derived from their projected international prices. The economic ex-factory prices of MAP and TSP were derived from their CIF import prices by adding unloading, port handling, bagging and mixing charges, and inland freight from ports to the plant sites. 10.4 Economic Costs. The economic value of tradeable inputs was based on their estimated FOB export prices. The economic value of pyrites at each plant was derived from their estimated long-term marginal production cost. Non-tradeable inputs were converted to their economic value by applying their respective specific conversion factors. B. Economic Rate of Return and Sensitivity Analysis 10.5 The base-case ERRs in constant terms are 17.9% for the Dayukou com- ponent (JPCC) and 14.02 for the Huangmailing component (HPCC). The ERR for the entire Project is 16.72. The streams of economic costs and benefits for the ERR calculations are given in Annex 10.2. 10.6 The results of the sensitivity and switching-value analyses are sum- marized in Table 10.A.  - 41 - Table 10.As SENSITIVITY ANALYSIS OF ERR (Z) Dayukou Huangmailing Project as (JPCC) (HPCC) Whole Cases Base case 17.9 14.0 16.7 Capital cost up 20% 15.5 11.8 14.4 Capital cost down 202 21.2 17.0 19.8 Sales benefits up 202 22.8 17.6 21.2 Sales benefits down 202 12.1 9.7 11.5 Variable cost up 202 16.5 12.9 15.4 Variable cost down 202 19.3 15.1 19.0 2-year delay in completion 14.3 11.3 13.4 - Switching values of selected variables (Z) /a Variables Capital cost +99.5 +42.0 Sales benefits -27.7 -18.8 Variable cost +120.0 +68.0 /a A 102 discount rate is used. The results of sensitivity tests indicate that the ERRs for the Project are sensitive to changes in, in descending order, sales benefits (which are closely related to the international border prices of phosphate fertilizers and production volume), project capital costs, and variable costs. Even assuming a 202 reduction in sales benefits, the Project would obtain a satis- factory ERR of 11.5Z. The switching-value analysis of the major variables indicates that the Project would remain economically viable under various conceivable adverse conditions, and confirms that the price of fertilizers is the most critical variable determining the economic viability of the Project. C. Other Benefits 10.7 Once full operating capacity is reached, the Project will lead to net import substitution of high-grade phosphate fertilizers of 320,000 tpy of P205 that will result in gross foreign exchange savings of about US$196 million equivalent p.a. in 1989 prices. After netting out the annual service of the foreign debt (both principal repayment and interest payments), the net annual foreign exchange savings, as of 1996, are estimated at about US$180 million equivalent (see Annex 10.3 for details).  - 42 - D. Project Risks 10.8 No extraordinary commercial risks are foreseen, given the general shortage of phosphate fertilizers, particularly high-grade products, and the apparently buoyant Chinese fertilizer market. The main technical risks lie in coordinating the implementation and commissioning of the high-grade fertilizer plants and associated mines. As observed in the cases of JPCC's new Wangji mine and HPCC's mines (paras. 5.8 and 5.12), poor coordination in implementing integrated mine and fertilizer plant investments, executed by separate entities under separate budgets, has been a common cause of underutilization of new mines in China, resulting in a significant loss of economic benefits. In order to reduce this risk, both mine development and fertilizer plant con- struction of the Dayukou and Huangmailing components will be implemented under the same project management and budget. This risk will be further mitigated by involving internationally experienced consultants in the technical assistaace component. They will help MCI and the project companies with project implementation and staff training. AI. AGREEMENTS REACHED DURING LOAN NEGOTIATIONS AND RECOMMENDATION 11.1 During negotiations, confirmation was obtained from the Government that: (a) all necessary Arrangements for the provision of local funds will be made to finance the local costs of the Project (para. 8.5); and (b) if the Government adopts an alternative policy to allow for equity- type funding i'jr new investments of state-owned enterprises, it plans to allow the two project companies to convert a portion of local loans to the companies' own funds so that they can achieve a long- term debt/equity ratio of 75:25 or better (para. 9.10). 11.2 During negotiations, assurances were obtained that the Government would: (a) allow the project companies to market their entire output outside the state allocation plan at negotiated prices (para. 3.26); (b) maintain MCI's project coordination team during project implementa- tion (para. 7.4); (c) on-lend the proceeds of the Bank loan to JPCC (US$94.15 million) and HPCC (US$42.85 million) under subsidiary loan agreements that will specify terms and conditions acceptable to the Bank, including an on- lending rate equal to 105% of the Bank variable loan rate, with a commitment charge of 0.75Z p.a. and repayment over 20 years, includ- ing 5 years of grace (para. 8.4);  - 43 - (d) cover any cash flow deficits of the project companies during the initial three years of operations, provided such deficits are not the result of inefficient management and operation of the companies (para. 9.10); and (e) meet the auditing and reporting requirements (para. 9.11). 11.3 During negotiations, assurances were obtained from JPCC and HPCC that each would: (a) prepare and furnish to the Bank for comments by December 30, 1990, a comprehensive program to strengthen management, recruit qualified staff and provide training, and thereafter carry out the agreed pro- gram (paras. 5.10 and 5.14); (b) maintain their respective project management teams during pro4ect implementation (para. 7.5); (c) build and operate the project mines and plants with due regard to safety, ecological and environmental factors and in accordance with environmental standards satisfactory to the Bank (para. 7.10); (d) maintain a debt service coverage ratio of at least 1.2 once that ratio is reached, but no later than December 31, 1994. The companies will not incur any long-term debt unless their projected internal cash retention for each fiscal year during the term of the debt to be incurred will exceed 1.2 times their pxojected debt service require- ments in that year (para. 9.10); (e) maintain a long-term debt to equity ratio of 75:25 or better once that ratio is achieved, but no later than December 31, 1994 for JPCC, and December 31, 1996 for HPCC (para. 9.10); (f) maintain a current ratio of at least 1.2 once such a ratio is achieved, but no later than December 31, 1994 for JPCC, and December 31, 1995 for HPCC (para. 9.30); (g) prepare and furnish to the Bank for review, by October 31 of each year from 1990 to 1998, their rolling five-year financial plans, to cover production, marketing and investment plans, to be presented in the form of projected financial statements (para. 9.10); and (h) comply with the auditing and reporting requirements (para. 9.11). 11.4 During negotiations, an assurance was obtained from JPCC that it would prepare supply and transport arrangements satisfactory to the Bank for the required quantity of Yunnan phosphate concentrate adequate for TSP produc- tion by December 31, 1991 (para. 6.4). 11.5 Conditions for loan effectiveness are:  - 44 - (a) signing of subsidiary loan agreements between the Government and HPG, and HPG and JPCC and HPCC under terms and conditions satisfactory to the Bank (para. 8.4); and (b) approval of the loan agreement by China's State Council. 11.6 With the above assurances and arrangements, the Project is suitable for a Bank loan of US$137.0 million equivalent to the People's Republic of China at the Bank's standard variable rate for 20 years, including 5 years of grace.  ANNEX 3.1 - 45 - CHINA HUBEI PHOSPHATE PROJECT Fertilizer Application Rates for Various Countries, 1985 /a (kg per hectare of arable land) Country Nitrogen Phosphate Potash Total Ratio Japan 145.9 155.7 128.8 430.4 100:107:81 Korea 198.7 91.9 101.7 392.4 100:46:5l France 127.2 77.5 95.2 300.9 100:61:76 China /b 135.6 27.4 4.4 167.4 100 20:9 USSR 47.2 32.8 29.4 109.4 100:69:6Z Indonesia 62.2 23.9 8.5 94.6 100:37s13 US 49.9 19.9 24.0 93.3 100:40s48 India 33.7 11.5 5.1 50.3 100:35:15 Morocco 16.2 13.1 6.3 35.6 100:81:39 Brazil 11.2 17.3 14.0 42.5 100:154:125 /a Rates are based on apparent consumption figures obtained by adding net imports of fertilizers to domestic consumption. Lb FAO'S apparent consumption figures are not consistent with the acutal con- sumption statistics published by MAAF text (Table 3.A) due to a difference in statisitical methods and bases. Source: FAO Fertilizer Yearbook, 1986, Vol. 36. China Department March 1989  CHINA HUBEI PHOSPHATE PROJECT Consumption, Production and Imports of Chemical Fortilizers. 1972-86 /a ('000 tons of nutrient) Nitro gn Phosphate Potash All nutrients Year Consumption Production Imports Consumption Produection Import. Consumption Production I1port. Consumption Production Imports 1972 3,108 2,444 1,842 1,038 1,249 11 12 8 2 4,219 3,701 1,356 1978 8,048 2,996 1,230 4,468 1,689 72 1S 7 1S 6,864 4,692 1,317 1974 3,490 2,827 928 1,890 1,390 82 57 6 57 4,916 4,222 1,067 1975 4,020 3,709 964 1,531 1,531 34 40 7 39 5,407 5,247 1,037 1976 4,468 3,816 928 1,360 1,418 20 18 11 6 5,844 6,244 954 1977 6,065 6,609 1,147 1,416 1,708 161 a3 21 23 8,513 7,238 1,321 1978 7,728 7,639 1,227 1,114 1,033 248 46 21 31 8,885 8,693 1,.04 1979 8,997 8,820 1,461 1,768 1,817 190 108 1S 108 10,8683 10,653 1,749 1980 10,180 9,993 1,637 2,368 2,307 395 128 20 126 12,670 12,320 2,058 1981 10,363 9,858 1,541 2,736 2,508 499 251 24 250 13,349 12,390 2,290 1982 10,433 10,219 1,808 8,448 2,637 631 s58 25 489 14,449 12,781 2,928 1983 11,923 11,094 2,365 3,945 2,666 1,028 728 29 684 16,696 13,789 4,027 1984 18,378 12,211 2,828 3,S66 2,359 1,342 804 31 765 17,868 14,601 4,925 1s8s 18,477 11,438 2,052 3,631 1,760 950 920 24 364 17,898 13,222 3,36 1986 18,728 11,592 1,700 4,602 2,340 645 1,075 26 600 19,305 13,957 2,946 is Nutrient composition of compound fertiliz r Is assumd to be 2:3:1 (nitrogWn, phosphate and potash). Sources: Ministry of Chemical Industry; Ministry of Agriculturo, Animl Husbandry and Fishery; General Administration of Customs; and State Statistical Bureau. China Departmsnt March 1989 Ia  ANNEX 3.3 - 47 - CHINA HUBEI PHOSPHATE PROJECT Comparison of Domestic and International Prices of Fertilizers, Main Energy Inputs, and Main Agricultural Products, December 1988 (US$/ton /a unless otherwise stated) Domestic ex-factory prices FOB inter- Ceiling for national Economic Domestic price as Controlled Negotiated price lb price /c Z of economic price (A) (B) (C) (D) A/D B/D Products Urea Ld 115 175-188 155 185 62.2 94.6-101.6 DAP 153 188-231 196 229 66.8 82.1-100.9 Inputs Coal Le 22 25 38 30 73.3 83.3 Natural gas (per mln Btu) 1.7-2.OjL 1.9-4.1/f - 3.11& 54.8-64.5 61.3-132.3 Phosphate rock 25/h n.a. 36 56 44.6 n.a. Agricultural Products Rice 167 226 258 258 64.7 87.6 Wheat 119 161 141 175 68.0 92.0 /a US$1 = Y 3.72. /b Annual averages of January-December 1988. /c For imported products, CIF China prices, and for exportable inputs, netback value from exports. /d Ba&ged urea. /e Based on average anthracite price for medium-size fertilizer plants. /f Average natural gas price for large-size urea plants under MCI. /& Fuel oil equivalent economic value (netback from exports) in calorific terms. /h Based on the low-quality rock after adjustments only in term3 of nutrients. China Department March 1989  ANNEX 4.1 - 48 - CHINA HUBEI PHOSPHATE PROJECT Trends in Domestic Production of Phosphate Fertilizers, by Product, 1970-86 ('000 tons of P205) Single Calcium magnesium superphosphate phosphate Other Total 1970 567 339 1 907 1971 646 416 16 1,078 1972 740 488 21 1,249 1973 1,020 560 9 1,589 1974 940 430 20 1,390 1975 1,029 476 26 1,531 1976 996 376 46 1,418 1977 1,140 470 98 1,708 1978 478 524 24 1,033 1979 1,243 518 44/a 1,817 1980 1,646 615 33/a 2,308 1981 1,780 692 28 2,508 1982 1,799 701 29 2,537 1983 1,920 715 23 2,665 1984 1,683 644 27lb 2,359 1985 1,345 380 24/ 1,758 1986 1,713 558 54 2,325 La Monoammonium phosphate production was 12,000 tons in 1979 and 13,000 tons in 1980. lb Diammonium phosphate production was 5,000 tons in 1984 and 7,000 tons in 1985. Triple superphosphate production was 1,000 tons in 1985. Sources: Data provided by the Shanghai Chemical Research Institute, MCI, STIRI; China Chemical Industry: World Chemical Industry Yearbook, 1985-87. China Department March 1989  ANNEX 4.2 - 49 - CHINA HUBEI PHOSPHATE PROJECT Domestic Production of Phosphate Fertilizers, by Product and Province, 1985 ('000 tons P205) Single Calcium magnesium Province superphosphate phosphates Other Subtotal North Beljing 1.1 - - 1.1 Tianjin 3.6 - - 3.6 Hebel 29.7 - - 29.7 Shanxi 18.9 - - 18.9 Neimonggol 1.1 - - 1.1 Northeast Ta-tonIn9 m g14.0 - - 14.0 Jilin 4.6 - - 4.6 Heilong iang 7.2 - - 7.2 Shanghai 24.3 - - 24.3 Jiangsu 190.6 12.5 4.5 207.6 Zhejiang 47.1 20.4 0.2 67.7 Anhui 119.1 - 7.7 126.8 Fujian 36.8 2.0 0.3 39.1 East J'angxi 13.7 40.4 - 54.1 Shandong 35.6 7.8 0.1 43.5 Henan 26.7 45.9 - 72.6 Hubei 161.4 13.8 - 175.2 South Central nunan 117.0 51.9 - 168.9 Guangdong 143.2 - - 143.2 Guangxi 55.8 26.3 0.1 82.2 Southwest bicnuan 150.1 32.7 4.3 187.1 Guizhou 19.1 24.5 - 43.6 Yunnan 61.0 102.0 15.6 178.6 Tibet - - - - Northwest SnaanxV. 26.8 - 0.1 26.9 Gansu 28.4 - - 28.4 Qinghai 2.9 - - 2.9 5in$xia 5.0 - - 5.0 Xinjiang 1.3 - - 1.3 Total 1,346.1 380.2 32.9 1,759.2 Source: MCI. China Department March 1989  ANNEX 4.3 - 50 - CHINA HUBEI PHOSPHATE PROJECT Consumption of Chemical Fertilizers by Province, 1985 ('000 tons nutrient) Nitrogen Phosphate Potash Total (N) (P205) (K20) nutrients North ze Ting 67 15 0 82 Tian;in 37 5 1 43 Hebei 838 236 30 1,104 Shanxi 302 81 15 398 Neimonggol 143 31 6 199 Northeast iLaon-ng 551 144 14 709 Jilin 425 77 19 521 Heilongjiang 293 106 22 421 Shanghai 107 18 1 126 Jian su 1,214 326 40 1,579 Zhejtang 586 103 22 711 Anhui 810 289 37 1,136 Fujian 323 93 75 491 East JIanaxi 326 124 90 539 Shandong 1,484 319 54 1,857 Henan 1,044 351 42 1,436 Hubei 672 194 51 917 South Central iuunan 618 167 112 897 Guangdong 783 174 147 1,104 Guangxi 339 114 68 521 Southwest stchuar. 1,115 211 21 1,347 Guizhou 208 61 11 280 Yunnan 277 112 15 404 Tibet 6 2 0 8 Northwest SfaanHxl 369 50 10 429 Gansu 165 40 6 210 Qinghai 156 9 4 168 Ningxia 46 8 0 55 Xingjiang 143 51 9 203 Total 13,447 3,531 920 17,898 Source: Agricultural Yearbook of China, 1985. China Department March 1989  - 51 - ANNEX 4.4 CHINA HUBEI PHOSPHATE PROJECT Major Phosphate Deposits in China Resirves ore Ratio (orel Province Deposit (million tons) concentrate) Hubei Dayukou 162 2.14 Wangji 90 2.14 Fanmasheng n.a. n.a. Lungwaisheng n.a. n.a. Yichang 1,068 3.33 Huangmailing 110 3.33 Guizhou Kaiyang 320 n.a. Wangjayuan 50 n.a. Chuanyondong 280 n.a. Datang 160 n.a. Yuhua n.a. n.a. Xingiao n.a. n.a. Xiaoba 104 n.a. Yingping 110 1.50 Wofang 70 1.57 Dazhai n.a. n.a. Jiangsu Jingping 29 4.00 Sichuan Jinhe n.a. n.a. Shaanxi Han Zhong n.a. n.a. Jiangxi Cao Yang n.a. n.a. Yunnan Haikou 152 n.a. Kunyang 105 n.a. Jinning 281 n.a. Anning n.a. n.a. Chengjaing n.a. n.a. Longshan n.a. n.a. Hebei Fanshan 91 n.a. Hunan Liyaing n.a. n.a. Sources Various international handbooks. China Department March 1989  ANNEX 4.5 - 52 - CHINA HUBEI PHOSPHATE PROJECT Major Pyrite Deposits and Mines in China /a (million tons) Sulfur Province Mine name Reserves content (Z) Guangdong Yunfu 206 32.1 Yingde 37 23.2 Neimonggol Tanyaokou 72 23.3 Jiangsu Yuntaishan 9 22.8 Hunan Qibaoshan 6 39.6 Liaoning Zhangjiagon 5 22.2 Anhui Xingjiao 36 29.3 Xiangsham 129 14.8 Sichuan Chuan Nan n.a. n.a. Zhejiang Langyou 5 24.0 Shaanxi Yangguan 71 19.0-24.0 Other provinces /a n.a. n.a. n.a. /a There are additional small pyrite mines in several provinces, usually associated with coal mining. Source: Various international handbooks. China Department March 1989  ANNEX 4.6 Page 1 of 2 - 53 - CHINA HUBEI PHOSPHATE PROJECT An Outline of the Phosphate Subsector Investment Optimization Model A. The Transport Model 1. Objective. The objective is to optimize the transport of raw materi- als, intermediates and final products in meeting the demand for phosphate fertilizers. 2. A Mathematical Programming Formulation. To find the "cheapest" route between sets of origins and sets of destinations, a linear-programming model was developed, with four major networks--rail, river, ocean and road--repre- senting the transport system. 3. Results. The cheapest mode of transportation is derived from simul- taneous determination of the location size, timing and process of future fer- tilizer plants and importing ports, and distribution patterns. B. The Industry Model 4. Objective. The objective is to assess alternative locations, sizes, products and distribution patterns associated with investment projects in the st.bsector. 5. A Mathematical Programming Model Formulation. A mixed-integer pro- gramminig model was designed to minimize the total costs of investments, pro- duction, transportation, and imports such that: (a) demand for P205 is satisfied in each province through small-scale production (for SSP, DAP and CMP), production in the modern sector or imports; (b) mine and plant production at each location is limited by existing capacity but can be expanded by new investments; (c) phosphate rock and pyrites production in each region is limited by available domestic reserves; (d) policies limit the percentage of P205 demand in each province that can be satisfied by certain products; and (e) transport out of certain regions is severely constrained. 6. Results. The desired result is a national optimization giving at each location:  ANNEX 4.6 Page 2 of 2 - 54 - (a) the production levels of raw materials, intermediates and final fer- tilizer products and the processes employed; (b) the scale of the mines and production plants; (c) the investments in the sector under economies of scale; (d) the shipment patterns of raw materials to plants, of intermediate materials between plants, and of final products to markets; (e) the domestic purchase of raw materials, intermediates, labor and miscellaneous inputs; (f) the export of products to export regions; and (g) the import of intermediates to plants and final products to markets. China Department March 1989  ANNEX 4.7 - 55 - Page 1 of 3 CHINA HUBEI PHOSPHATE PROJECT Planned Phosphate Investment Projects to the Year 2000 I. During the Seventh Five-Year Plan (1986-90) A. Fertilizer Plants Planned '000 tpy of year of Project Province Product product (QO5 L completion Jinchan Gansu SSP 400 (60) Completed Lucheng Sharni NP 900 (120) Completed (26:13:0) Kaifeng Henan NP 150 (20) Completed (26:13:0) Jinan Shandong NP 150 (20) 1988 (26:13:0) Yicheng Hubei NPK 160 (30) 1992 (15:20:15) Guixi Jiangxi DAP 240 (110) 1990 Tonglin Anhui DAP 120 (55) Completed Qin.huangdao Hebei NPK 600 (110)/a 1991 (15:20:15) Dalian Liaoning DAP 240 (110)/a 1989 Nanjing Jiangsu DAP 240 (110)/a 1989 Xuanwel Yunnan DAP 120 (55) 1992 Huangmalling Hubei MAP 180 (93) 1993 Hanghezhou Yunnan DAP 120 (55) - Zhanjiang Guangdong DAP 60 (28) 1991 Huaxian Shaanxi DAP 60 (28) - Small-sized MAP/ Various MAP/DAP 1,500 (650) - DAP plants (50) provinces Dayukou Hubei TSP 560 (300) 1993 Wengfu Hubei TSP 800 (368) 1994 Total (2,322)/b /a Based on imported phosphoric acid. Tb Exclusive of imported phosphoric acid.  ANNEX 4.7 Page 2 of 3 - 56 - B. Phosphate Mines Estimated Planned Production reserves Mining Rock quality year of ('000 tons/year) Province Name of mine (mln tons) method P!OS Mg2 R203 completion ROM Concentrate Yunnan Jining 110 Open 32 0.4 5.6 n.a. 700 700 pit Guizhou Wengfu 110 Open 29 3.7 1.13 1993 2.500 1,850 pit Hubei Yichang 1,060 Under- 21 2.6 3.6 n.a. 3,000 1,500 ground Dayukou 90 Open 19 3.9 2.6 1993 1,500 650 pit Huangmailing 110 Open 11 2.3 4.9 1993 1,000 300 pit C. Pyrite Mines Proposed production ('000 tons) Province Mine name Mining method ROM Concentrate Guangdong Yunfu Open pit 3,000 2,400 Neimonggol /a Tanyaokou Underground 450 190 Hunnan Qibaoshan Underground 250 200 Neimonggol Lb Tanyaokou Underground 1,050 410 /a Expansion. lb New mine.  ANNEX 4.7 Page 3 of 3 - 57 - II. Durin. the Eighth and Ninth Five-Year Plans (1991-2000) A. Fertilizer Plants Phosphate fertilizer production Type of fertilizer product (million tpy of P205) Nitrophosphate (NP) 0.5 Triple superphosphate (TSP) 2.8 Ammonium phosphate (DAP/MAP) 1.7 Total 4.5 B. Phosphate Mines New capacity Total output la (million tpy) (million tpy) Province ROH ore/Product ROM ore/product Yunnan 8.1/6.9 12.4110.8 Guizhou 11.3/9.5 10.8/9.4 Hubei 13.9/8.8 15.6/9.6 Hunan 0.5/0.3 13./0.8 Sichuan 1.5/1.3 3.4/2.9 Jiangsu 0.21/0.1 1.0/0.3 Hebei 0.41/0.1 1.6/0.5 Other provinces -I- 1.5/0.4 Total 35.8/29.0 47.4/34.5 C. Pyrite Mines New capacity (million tpy) Estimated production Province crude ore/352 sulfur (million tpy) Hebei 0.710.3 0.42 Shanxi 2.0/1.0 2.07 Neimonggol 4.8/2.1 2.45 Anhui 4.4/2.0 3.12 Guangdong 2.0/1.7 4.54 Sichuan 5.0/1.8 2.38 Other provinces 2.0/1.0 6.62 Total 20.9/9.9 21.60 /a Including output from existing mines after taking into account depleted mines. China Department March 1989  ANNEX 5.1 - 58 - CHINA HUBEI PHOSPHATE PROJECT Production Performance of JPCC and HPCC A. Design Capacity and Production ('000 tpy) Design Company and product capacity 1983 1984 1985 1986 1987 1988/a JPCC Liuchong 600 420 500 550 570 484 490 Dayukou 400 280 340 370 380 331 394 Wangji 1,000 - - - - - 500 Total 2,000 700 840 920 950 815 1,384 HPCC Concentrate 100 44 64 - 20 51 60 SSP 40 32 25 6 19 40 50 NPK 10 - - 1 2 6 10 Ammonia (Dawn) 15 14 16 14 12 14 15 ABC (Dawn) 60 55 63 54 48 58 55 B. Capacity Utilization (Z of design capacity) Company and product 1983 1984 1985 1986 1987 1988/a JPCC Liuchong 70 83 92 95 81 82 Dayukou 70 85 93 95 83 99 Wangji - - - - - 50 HPCC Concentrate 44 64 0 20 51 60 SSP 80 63 15 48 100 125 NPK - - 13 15 60 100 Ammonia 93 107 93 80 93 100 ABC 92 105 90 80 97 100 /a Extrapolated based on actual production from January to September 1988. China Department March 1989  59 ANNEX 5.2 CHINA - HUBEI PHOSPHATE PROJECT Organization Chart of JPCC A. Existing LiuchoPgdaucton Adngli &rItnnon UUC Dayukou wangB & Statistics ae | Production i "~~Proucton mine Mw|e Mae | Control Finc Maintenance Maintenance oflto uc" Por8orWnBI Plant I I GenwW Genera atnrce&Srie services Services Services B. After Project Completion |Cliat Econonst| General Manager r t ClUt EgMee r Corporatlor Offlc s hAdiior Productlon |Administration Fortzer Conix WanaP M < C cAd lnt MaFtenWnee . w I~~~~~~~~~~e413o _ cdPantfi5Wbe .  - 60 - MNEX 5.3 CHINA - HUBEI PHOSPHATE PROJECT Organization Chart of HPCC A. Existing Deneral Manager ChEof Enginoer -.- put eraaung enecatlon Planning & Flnarce Union RGlatlona Operatin ProAfterPo jetCmnto _ Planning _ Mlno | l Education X Purchasing BenefilGateon enerallMnaer I Chif EninSP & NPK rEIfZ] 4 Plant l H WLlta . Mainteanance .ti PrtonPrel B. After Prolect Completion MAP Plant~00f ccmtn -E _ewncpt WSorag Mai nutw nac Cld Peot i C-MAoPer Supp |~~ ~~~~~~~~~~~~~~~~~~~~e~ 1 2c|  ANNEX 6.1 - 61 - Page 1 of 3 CHINA HUBEI PHOSPHATE PROJECT Summary of the Dayukou Mine and Fertilizer Development Component A. Geology Rock reserves: 90 Mt at Dayukou, of which 28 Mt recoverable by open pit, 4.5 t/t average ratio overburden/rock; JPCC holds additional underground reserves at Liuchong and Wangji Rock quality: 19.0? P205, 3.9Z MgO average analysis of primary rock B. Mining Capacity: 1.5 Mtpy of ore and 6.8 Mtpy of overburden in 3 shifts/day, 6 days/week operation Mine layout: One single open pit, equipped with rotary drills, hydraulic excavators and trucks, primary crushing at mine site C. Beneficiation Capacity: 1.5 Mtpy ore feed, 0.65 Mtpy concentrate output Product specificationd: Concentrate, 332 P2C5, 1.8? MgO Process: Flotation, with heated pulp D. Sulfuric Acid Plant Capacity: 540,000 tpy (approximately 1,600 tpd), probably in 2 parallel trains Storage capacity for pyrites: 42,000 t (30 days) Storage capacity for product acid: 10,000 t (6 days) Product specification: 932/982 H2S04 Process: Pyrites drying; fluidized bed pyrites roasting; double contact/double absorption acid production with cogeneration of electricity; scrubbing of off-gases to achieve SO2 emission levels below 450 ppm, typi- cally 300-350 ppm; plant design will be based on foreign technology  ANNEX 6.1 Page 2 of 3 - 62 - Pyrites supply: 535,000 tpy (38X S on dry basis) from Yunfu mine, Guangdong Province; supply and transportation confirmed Cinder disposal: By conveyor, total storage capacity 3 years, can be expanded if cinder cannot be processed elsewhere E. Phosphoric Acid Plant Capacity: 200,000 tpy P205 (approximately 650 tpd) Storage capacity for product acid: 4,500 t (7 days) Product specificationt 502 or lower P205 H3P04; the concentration and composition must be suitable for manufacturing TSP from Yunnan secondary phosphate rock Process: Single-stage, dihydrate process with wet scrubbing and concentration of dilute acid; process will be reliable and flexible and allow possible future adap- tation for recycling of sulfur from phosphogypsum Gypsum disposal: Slurry pipeline or conveyor (2.5 km) to disposal area, whichever more feasible; total storage capacity 12.9 million t (18-20 years); capacities and tech- niques for gypsum dumping cleared by environmental pollution control authorities F. Aluminum Fluoride Plant Capacity: 12,000 tpy of AlF3 (dry basis) Product specification: Minimum 96% AlF3; product must be suitable as make-up for aluminum smelters Process: Foreign technology proven for same application; con- version of Al(OH)3 with fluosilicic acid, H2SiF6, purification, drying and bagging Supply of Al(OH3): 13,000 tpy of aluminum hydroxide from Zheng-Zhou, Henan .ovince G. Triple Superphosphate Plant Capacity: 560,000 tpy (approximately 1,900 tpd) of bagged cured granular product Storage capacity for fulls curing--minimum 4 weeks (53,000 t) Storage capacity for secondary rock--minimum 14,000 t (20 days) Storage capacity for final product--minimum 57,000 t (30 days' production)  ANNEX 6.1 Page 3 of 3 - 63 - Product specification: Bagged granular TSP, 462 available P205, free H3PO4 maximum 42 expressed as P205, H20 below 32, minimum 95? within 1-4 mm Process: Probably den-process with 3-4 weeks' curing, followed by drum granulation, intermediate final product stor- age (1-2 days) and bagging; technology still to be verified by pilot-scale tests; design will be carried out in cooperation with f"reign consultant Supply of secondary rocks Jining mine, Yunnan Province, 34.1? P205, 222,000 tpy, supply and transportation have been confirmed H. Infrastructure Mine site: Workshop, store, equipment service facilities, office Plant site: Workshops, stores, effluent treatment plant, labora- tories, offices Power supply: 110 kV transmission line connecting with existing substation Social infrastructure: Expansion of existing housing, dormitories and wel- fare facilities. China Department March 1989  ANNEX 6.2 Page 1 of 3 - 64 - CHINA HUBEI PHOSPHATE PROJECT Summary of the Huangmailing Mine and Fertilizer Development Component A. Geology Rock reserves: 110 Mt, of which 26 Mt recoverable by open pit, 2.9 t/t average ratio overburden/ore Rock quality: 11.6Z P205, 2.32 MgO and 2.9% S (recoverable) average analysis of primary ore B. Mining Capacity: 1.0 Mtpy of ore and 3.0 Mtpy of overburden in 3 shifts/day, 6 days/week operation Mine layout: One single open pit equipped with rotary drills, hydraulic excavators and trucks; primary crushing at mine site C. Beneficiation Capacity: 0.8 Mtpy ore feed for new plant and 0.2 Mtpy for existing plant; 240,000 tpy concentrate output from new plant and 60,000 tpy from existing plant Product specifications: Concentrate, 332 P205, 1.3? MgO Process: Flotation, with heated pulp D. Sulfuric Acid Plant Capacity: 280,000 tpy (approximately 820 tpd) Storage capacity for pyrites--20,000 t (1.7 months) Storage capacity for product acid--4,900 t (6 days) Product specification: 93Z/98Z H2SO4 Process: Pyrites drying; fluidized bed pyrites roasting; double contact/double absorption acid production with cogeneration of electricity; scrubbing of off-gases to achieve SO2 emission levels below 450 ppm, typi- cally 300-350 ppm; plant wil'l be designed with assis- tance of foreign engineering firm  ANNEX 6.2 Page 2 of 3 - 65 - Pyrites supply: 145,000 tpy (38Z dry basis) from Yunfu mine, Guangdong Province; supply and transportation confirmed Cinder disposal: By conveyor, storage Capacity 1 Mt (10 years) E. Phosph3ric Acid Plant Capacityt 93,000 tpy P205 (approximately 300 tpd) Storage capacity for product acid--2,100 t (7 days) Product specification: Approximately 50X P205 H3P04; the composition and concentration must be suitable for the manufacture of MAP/DAP Process: Single-stage dihydrate process with wet scrubbing and concentration of dilute acid; the process will be reliable and flexible and allow possible future adaptation for the recycling of sulfur from phospho- gypsum Gypsum disposal: Slurry pipeline (2 km) to final storage area with capacity of 30 Mt (20 years); capacities and techniques for gypsum dumping have been cleared by the environmental pollution control authorities P. Monoammonium Phosphate Plant Capacity: 180,000 tpy (approximately 600 tpd) of bagged granu- lar product Storage capacity for final product--minimum 18,000 t (30 days' production) Product specification: Bagged granular MAP, 12Z N, 52% available P205, mois- ture content less than 3%, minimum 952 within 1-4 mm Process: Preneutralizer/pipe reactor process, also allowing production of DAP to utilize fully the ammonia output from the Dawu ammonia plant; the granulation section will be equipped with a dust extraction and scrubbing system to meet the emission standards for particu- lates, ammonia and fluorine, intermediate final product storage (capacity 1-2 days' production) and bagging units; the plant will be designed in cooperation with a foreign engineering firm  ANNEX 6.2 Page 3 of 3 - 66 - G. Dawu Ammonia Plant Capacity: The capacity of the existing coal-based ammonia/ABC plant at Dawu will be expanded from 15,000 tpy of gaseous to 30,000 tpy of anhydrous liquid NH3 Process: The Wuhan Chemical Design Institute (WCDI) has been involved in similar revamps and will employ its expe- rience with local technology to expand the ammonia plant Supply of NH3: Ammonia from the Dawu plant will be transferred to MAP plant by pipeline or road, whichever proves more feasible; it is anticipated that ammonia plant will be achieving design output rates soon after recommis- sioning; to facilitate full utilization of output, the design of the MAP plant will also allow production of DAP H. Infrastructure Mine site: Workshop, store, equipment service facilities Plant site: Workshops, stores, effluent treatment plant, labora- tories, offices Social infrastructure: Housing and welfare facilities at Dawu. China Department March 1989  ANNEX 6.3 - 67 - CHINA HUBEI PHOSPHATE PROJECT Summary of the Terms of Reference for Consulting Services to Support Project Implementation Under the Technical Assistance CoDironent A. Objective Internationally experienced consultants will provide advisory services to ensure the selection and procurement of appropriate technologies and equipment, timely identification and resolution of Project implementation problems, training of Project management team staff, and preparation of staff recruitment and training programs. B. Tasks The consultants will provide the following services: (1) for project implementation--(i) assistance in technology selection; (ii) advice on the structure of Project teams and execution of Project implementation for the coordinated commissioning of mines and fertilizer plants; and (iii) counseling on implementation issues to facilitate timely corrective actions; and (2) for maintenance of mobile mine equipment--(i) review of the design and layout of workshops; (ii) assistance in the selection and procurement of critical equipment; (iii) setting- up of a preventive maintenance system; (iv) review of the staff recruitment and training programs; and (v) monitoring of project implementation. C. Timing The consultants are expected to commence field work by May/June 1989, and complete their tasks with the commissioning of the plants. D. Estimated Budget Consulting fees US$220,000 Travel expenses 50,000 Contingencies 30,000 Total US$300,000 China Department April 1989  ANNEX 6.4 - 68 - CHINA HUBEI PHOSPHATE PROJECT Outline for Training on Hazard and Operability (HAZOP) AnalXsis Objectives 1. Main objectives of the training on hazard and operability analysis (HAZOP/HAZAN), to be carried out by the Ministry of Chemical Industry as part of the technical assistance component, are tot (i) stimulate and improve awareness for safety and operability aspects among related Chinese government agencies, research and design institutes, and enterprises involved in the chemical processing industry; and (ii) strengthen the capabilities of Chinese design institutes for identifying and analyzing potential sources of safety hazards and major production losses in chemical plant design and operation. tlork Scope 2. A consultant will be appointed tos (i) present in China a seminar on HAZOP/HAZAN techniques; and (ii) conduct workshops to practice the application of those techniques in sector-specific case studies. 3. Presentation of HAZOP/HAZAN Seminar. The seminar will cover all major areas of basic and advanced HAZOP/HAZAN techniques and highlight general aspects of other methodologies for technical risk analysis (e.g. hazard sur- veys and inventories; systems reliability/fault tree analysis; event tree analysis; risk assessment and safety audits). Major topics to be covered by the seminar are: (a) basic principles; (b) planning and timing; (c) selection of study teams; (d) study procedures; (e) evaluation of potential problems; (f) recording of the study; and (g) processing of actions. 4. Presentation of Workshops with Sector-Specific Case Studies. Follow- ing the seminar, 2-3 workshops will be conducted to promote the practical understanding and application of the HAZOP techniques explained. The number of participants in each workshop will be about 20. Appropriate industry- specific case studies including typical Chinese conditions should be presen- ted. Each of the workshops will last about 5 days. Work Plan 5. The consultant will prepare a work plan for the assignment which will be reviewed by MCI and the World Bank. MCI will, in consultation with design institutes, prepare case studies for presentation during the workshops. Timing 6. The seminar and workshops are planned to be held around April 1990. China Department April 1989  CHINA: HUBEI PHOSPHATE PROJECT Organization Chart of MCIs Project Coordinatlon Unit World Bank ProJect Imp le m ent atlo n COo o rdcnat lon Group Deputy Mnlaiter of Finance Project General Manager| Chief World Bank Loan Office Vlce General Manager Deputy Director, CNCCC Project Officer Design Technology Construction Procurement Traspration Finncig C nt Coordinator Coordfinator Coordinator Coordinao Coriao oriao 9kNw413O5D  - 70 - ANNEX 7.2 Page 1 of 2 CHINA HUBEI PHOSPHATE PROJECT Organization Chart of JPCC Project Management Team Generl Manager F PMRDRoje Manager Desdgn rInstHtMe 1Cocrdinotbon Unit Beaato PhosporicAcid ||Maintenance | FlnKw Manacger | | Manog | Monoger || Mancoger | | Maner | | Manager | | ag Manager Mo Mnager |M|oana | Manager | ong World Bank-428Stt1  ANNEX 7.2 - 71 - Page 2 of 2 CHINA HUBEI PHOSPHATE PROJECT Organization Chort of HPCC Project Management Team HPCC General Manager HPCC Project Manager CMRDI _ - MCI Pr(ect Design _r _itute Coordination Unit BsrndcWon Ptwpa c Acid | Maintenance Fir nc Manager | M| rNag | Manager | Manager ! Mlning Sulphuric Acid Map Infrastructure Planning Procurement Manager Manager Manager Manager Manager Manager World Bank42840:2  - 72 - ANNEX 7.3 Page 1 of 3 CHINA HUBEI PHOSPHATE PROJECT Project Implmentation Schedule 314 1 213 4 1 231 4 1 2 3 4 4 2 3 4 1 2 3 4 DAyUKOU MINE & FEQIIUZER DEVLOPMENT COMPONENT TSP produtctlon tests PXe#m selection _ Basic englnwdrng __ Rocuement of ma,or equipment Detalled enginsedng___________ site preparaHacvl s_______________ Equlpment IrnstallaHon_____ __ Commlnlng____ __ Reproduction ovedbren removal Raw ore stock bulidup Conoentrate stock buildup Commerclal production HUANGMALJNG MINE & FECaLIPEO DEV. T OMPONENT ProcesseWctflon Prsoc enreulnesr ln _ monItI Pobient of mninog equipm ent mainten Detolled traeinng SNe preparateon/ctr plans off-site constructions _ Ralhsay sldlng Dawu ammonio plant _T- I__ I III Eaulprnaent Installatlon T__ I Cormissloning P eprductibn ovebuwden remcvol _ Raw ore stock bufldup l lll_1 Concentrate stock buildup r L Commewclol production lECHNICAL ASS9STANCE COMPONENTWll l Procss sMectlon |e Pro,Sc executlon planning & monNorlng 46 m Moblis minlng eaulpment rnalntenance OvEaas trailnlng IIIt_ Phoshae &estor plannln _g.., _ t t  ANNEX 7.3 - 73 - Page 2 of 3 CHINA HUBEI PHOSPHATE PROJECT Key Milestones for Project Implementation Milestone Target Date A. Dayukou Mine and Fertilizer Development Component Major Process Related Activities: TSP production tests Sep. 1989 Process selection and contract awards for sulfuric acid, phosphoric acid and TSP plants Mar. 1990 Process selection and contract award for aluminum fluoride plant Jun. 1990 Commencement of local engineering Jan. 1990 Completion of local engineering Mar. 1992 Commencement of foreign engineering Apr. 1990 Completion of foreign engineering Sep. 1991 Commencement of international procurement Apr. 1990 Completion of international procurement Sep. 1992 Site Activitiest Commencement of site preparation Jan. 1989 Completion of civil work Sep. 1992 Commencement of equipment installation Apr. 1992 Mechanical completion Sep. 1993 Completion of commissioning Mar. 1994 Commencement of commercial production Apr. 1994 B. Huangmailing Mine and Fertilizer Development Component Major Process Related Activities: Process selection and contract awards for sulfuric acid, phosphuric acid and MAP plants Feb. 1990 Commencement of local engineering Jan. 1990 Completion of local engineering Feb. 1992 Commencement of foreign engineering Mar. 1990 Completion of foreign engineering Sep. 1991 Commencement of international procurement Apr. 1990 Completion of international procurement Sep. 1992 Site Activities: Commencement of site preparatior. Jan. 1990 Completion of civil work Sep. 1992 Commencement of equipment installation Apr. 1992 Mechanical completion Sep. 1993 Completion of commissioning Mar. 1994 Commencement of commercial production Apr. 1994  ANNEX 7.3 Page 3 of 3 - 74 - Off-site construction: Railway siding commencement Sep. 1992 completion Sep. 1993 Dawu ammonia plant rehabiliation commencement iApr. 1991 completion Mar. 1993 C. Technical Assistance Component Consultant Services for Project Implementation: Commencement Nov. 1989 Completion Mar. 1994 Consultant Services for Mine Engineering Selection and Maintenances Commencement Jul. 1990 Completion Mar. 1993 Hazard and Operability (HAZOP) Seminar Apr. 1990 China Department March 1989  CHINA HUBEI PHOSPHATE: PROJECT Environmental Protection and Standards Standards Project Hazard Measures taken Bank subcomponent or pollutant under project Local guidelines Open-pit mines Overburden dumps Concentrated in few Must be safe, appropri- Ireas next to mine, no ate location to be interference with other selected installations Beneficiation plants Tailings Pumped into safe ponds Same as overburden dumps on wasteland away from mine and other installa- tions Waste water (from Wengfu Treated to Chinese stan- Solids-100 mg/l 100 mg/l filter presses) dards for petroleum and BOD-60 mg/l chemical industries COD-200 mg/il Sulfuric acid plants Off-gas Wet scrubbing to maximum 500 ppm S02 220 ppm SO2 - 450 ppm S02, typically v 300 ppm Ammonia plant Waste water Treated to: -0.5 mg/l cyanogen -0.5 mg/l 0.5 mgIl -0.5 mg/l sulfide -1.0 mg/l 0.5 mg/l -30 mg71 solids -500 mg/l 50 mg/i Phosphate acid plants Off-gas Wet scrgbbing to 50 mg/ml3 F 10 mg/m3 10 mg/rn3 P Waste water Pumped into beneficia- n.a. n.a. tion tailings pond after neutralization MAP and TSP plants Off-gas Wet scrubbing to: 10 mg/rmn F 50 mg/o 3 10 mg/m3 80 mg/m3 NH3 72 mgJm3 100 mg/in particulate 170 mg/m3 100 mg/rn3 China Department March 1989 1I  - 76 - gift l4mEl PQFHATEK PROJECr Capital Cot Eatimatee bawukou iWuanmiing ICI lb Total Local Foreign total tocl Forsign Total Loal Foreign Yotal Locl IForeign Total A. In Mi1lion Lieane team 0.0 8.8 3.8 0.0 2.8 2.8 - - - 0.0 6.1 6.1 Engineering 5.7 S.0 10.7 4.1 8.1 T.2 - - - 0.8 6.1 17.9 Equipment A aterial- 61.8 82.9 104.7 26.7 24.5 61.2 - - - 78.8 77.4 168.9 Spare parts 8.0 8.8 8.0 1.6 1.7 8.8 - - - 4.8 8.8 10.1 FreiGht A insurance 8.6 4.0 9.6 1.8 1.8 8.8 - - * 7.1 5.e 12.9 Civil& erection 70.2 0.0 70.2 88.7 0.0 88.7 - - - 103.0 0.0 10.0 Project manageent 28.4 8 0 2S.4 7.8 1.2 8.7 - - - 80.9 4.2 85.1 Training 0.5 0.9 1.4 0.4 0.5 0.9 - - - 0.9 1.4 2.8 Technica! aessetanca 0.0 0.0 0.0 0.0 0.0 0.0 - 0.4 0.4 0.0 0.4 0.4 Bass Cost fJanuara 1.i3u1 160.2 114 fI. i li ILL llO.S 24 24 2; 108.0 S44. Phyaical contingencies 16.0 r.8 23.4 7.8 8.8 11.0 - - - 28.8 10.9 54.5 Price contingencies 25.5 18.6 89.0 11.9 8.1 18.0 - 8 - 87.4 19.8 87.0 Insal l Coot 201. 20. 2J 9. M44. Ii G4 Q 04 2e6.7 llW4 IILL Incemeental orting capital 21.0 0.0 21.6 5.4 0.0 8.4 - - - 27.2 0.0 27.2 Intareat during con- otruction k 16.6 15.2 01.6 7.9 7.7 15.6 - - - 24.4 22.9 47.8 Total i8nLninn R"cuired Le 2aAs 12t4 A&U 4 IQ EM 7 Q & Q ei il nuSh Am" 8. It Y MilioUn License to" 0.0 14.1 14.1 0.0 8.6 8.8 - - - 0.0 22.7 22.7 Engineerlng 21.8 18.6 89.9 15.4 11.6 27.0 - - - 86.7 80.2 68.9 Equipment A eaterials 192.7 198.8 889.5 99.2 91.0 190.2 - - - 291.9 287.8 579.7 Spare parts 11.2 14.1 25.8 5.5 6.4 11.9 - - - 16.7 20.8 87.2 Freight A insurance 2.0 14.0 8.8 5.7 6.8 12.8 - - - 28.7 21.6 48.3 Civil& A erection 261.0 0.0 281.0 12S.8 0.0 128.8 - - - S88.8 0.0 888.8 Project aneagment 88.0 11.0 97.9 28.1 4.6 82.7 - _ _ 116.0 15.6 180.6 Training 2.0 8.4 8.4 1.5 1.8 8.8 - - - 8.8 8.2 8.7 Technical aesietance 0.0 0.0 0.0 0.0 0.0 0.0 - 1.8 1.8 0.0 1.6 1.5 Bass Coot (January 19121 191.1 A 2I22 110.1 921.! 11 *11.1 LI L& 821.i 411. 1 21.9 Physical contingancle 89.6 27.8 68.9 2Z.1 18.1 41.2 - - - 87.7 40.8 128.0 Price continenles 289.8 198.4 884.7 111.7 87.0 168.7 - - - 881.0 162.4 588.4 hM;,. ".4 1 IILI 21 L1 021 2. J L214 AA LI L.1 82. LU.UL Incremntal morking capital 107.2 0.0 107.2 28.8 0.0 28.8 - - - 1s8.7 0.0 138.7 Interest during con- struction L/ 78.4 89.8 14.7 88.1 88.4 71.8 - - - 111.5 104.7 216.2 Total Finencina ReiI ed La LI7 494.1 11 24 2A 21.1 24 LI Li LII.! Z12.1 L2-2.2 Comitaent fe= ara Included. &i To cover tho technical asaistance comonent. S Excluo % 11100.000 to cor the training coat an PAM analysis to be provided under tho technical asaistanco compon. Chino Dseprtoent March 1089  ANNEX 8.2 - 77 - CHINA HUBEI PHOSPHATE PROJECT Estimated Disbursement Schedule for Bank Loan Disbursement Semester Annual Cumulative Annual Cumulative Year (FY) ending --- (US$ million)--- --- (2 of total) ---- 1990 Dec 31, 1989 1.1 1.1 0.8 0.8 Jun 30, 1990 3.0 4.1 2.2 3.0 1991 Dec 31, 1990 4.1 8.2 3.0 6.0 Jun 30, 1991 19.2 27.4 14.0 20.0 1992 Dec 31, 1991 21.9 49.3 16.0 36.0 Jun 30, 1992 26.1 75.4 19.0 55.0 1993 Dec 31, 1992 21.9 97.3 16.0 71.0 Jun 30, 1993 16.4 113.7 12.0 83.0 1994 Dec 31, 1993 15.1 128.8 11.0 94.0 Jun 30, 1994 5.5 134.3 4.0 98.0 1995 Dec 31, 1994 2.7 137.0 2.0 100.0 China Department March 1989  ANNEX 9.1 Page 1 of 2 - 78 - CHINA HUBEI PHOSPHATE PROJECT Assumptions Underlying the Financial Analysis A. General 1. The financial projections were carried out in current yuan using projected domestic inflation rates for local inputs and outputs and interna- tional inflation rates for imported inputs as followss annual domestic infla- tion rates--15.0 for 1989, 10.02 for 1990, and 8.0% thereafter; and annual international inflation rates--5.3% for 1989/90, and 4.1% thereafter. The key assumptions for financial projections were based on the actual annual perfor- mance of companies under Chinese regulations. To provide an overall view of the companies' financial performance in accordance with conventional account- ing concepts based on international accounting standards, the following adjustments were made to the Chinese accounting systems (a) the two sets of financial statements--production operations and capital construction were consolidated; (b) the accounts in the income statements and balance sheets were reclassified as necessary in accordance with conventional concepts; and (c) the sources and applications of funds statements that do aot exist under the current Chinese accounting system were prepared. For financial rate of return (FRR) calculations, cost and benefit streams in constant yuan were used. The assumed capacity utilization and production levels with and without the Project are given in Table 1 of this Annex. B. Income Statements 2. Sales Revenue. Sales prices are assumed to be maintained at levels indicated by MCI and SPB as the expected sales prices for project output as the following: Y 750/ton for TSP and Y 900/ton for MAP. Net sales revenue were calculated after deducting the product tax. During Project implementa- tion, Project companies will not pay the product taxes under special arrange- ments. The rates of the product tax are as follows: 3% for TSP and MAP, and 102 for aluminum fluoride. 3. Variable Production Costs. Annual consumption of inputs was obtained from the material balance and estimated production levels with and without the Project. Materials balances for each company with and without the Project are given in Project File Ref. No. 2. 4. Depreciation. Fixed assets were depreciated using the straight-line method at rates agreed on between the companies and their respective supervis- ory authorities as followss (a) Dayukou--over 15 years; and (b) Huangmailing --over 12 years. In addition, a mining maintevence fee of Y 7/t of ore charged by all the companies was included. 5. Maintenance Costs. In the Chinese accounting system, maintenance costs are divided into two categories--annual overhaul and other. Provisions for annual overhaul are provided as a percentage of the original acquisition  ANNEX 9.1 - 79 - Page 2 of 2 value of the fixed assets and are managed separately within the special fund account. Other maintenance costs were covered as operating expenses. The rate of provision for annual overhaul for the companies is 62. 6. Interest Expenses. Interest on foreign exchange-denominated loans were converted into local currency using projected foreign exchange rates, assumed to be adjusted to preserve the relative currency values between the two currencies. 7. Taxes. Taxable income is derived from net profits after deducting the amortization of long-term loans, and is taxed at a uniform rate of 55?. The companies will not pay income and adjustment taxes on profits during Proj- ect implementation and the repayment period of the Bank loan. C. Balance Sheets 8. Fixed Assets. Fixed assets are shown at their historical costs. 9. Equity. The following four items are considered as "equity,' given their equity "nature': (a) state fixed funds; (b) state circulating funds; *c) enterprise fixed funds allocated from internally generated funds; and (d) net special funds (special fund assets minus special loans) retained by enterprises. D. Funds Flow Statements 10. Depreciation Fund. The current Government policy allows companies to retain 1002 of the fund. 11. ExDenditures from Special Funds. Provisions for annual overhaul were used to cover annual overhaul expenses. Annually, 15? of the retained depre- ciation fund and profits are paid to the Energy Conservation Fund. The compa- nies will be exempt from this contribution during Project implementation. A portion of internally generated funds (in the special fund account) is used for: (a) production technology development; (b) improvement of workers' liv- ing condition; (c) cash bonuses; and (d) new product test fund. The balance is accumulated within the company as reserve funds. China Department March 1989  ANNEX 9.1 - 80 - Attachment 1 CHINA HUBEI PHOSPHATE PROJECT Production Levels and Capacity Utilization With and Without Project Davukou Huanamailing TSP Aluminum fluoride HUP ABC Without with Without With Without With Vithout With project project project project project project project project Production ('000 tpy) 1994 - 339 - 7 - 109 51 1995 - 424 - 9 - 137 51 1996 - 509 - 11 - 164 51 1997 - 509 - 11 - 164 51 2006 - 509 - 11 - 164 51 Capacity Uti- lization (Z) 1994 - 60 - 60 - 60 90 1995 - 75 - 75 - 75 90 1996 - 90 - 90 - 90 90 1997 - 90 - 90 - 90 90 2006 - 90 - 90 - 90 90 China Department March 1989  Pnehate D0oie."-lt Pmlrcl - Incre Stat.nt (in cUrrant M millions _____ ^,cc., I _ _ pl ; __________ ______-- ------- --- Projected - - - - - - - - - - - - - - 1985 1928 198? 19E8 198 1990 1991 192 199S 1994 1995 lC96 1997 1998 1999 2000 20OI Cro Sal_. R -eaue 27.3 28.0 21.5 62.0 83.1 97.7 99.2 12S.2 133.0 592.4 747.6 939.Z 1.04.6 1.095.8 1.1t83.5 1.278.1 1,3MO.4 Lem: Production To. 1.4 1.4 1.1 3.1 4.0 5.9 6.6 8.9 10.4 7.0 6.8 7.4 22.3 24.1 42.0 46.2 49.9 Variablo Cost 4.9 5.0 6.0 14.6 25.0 26.3 28.9 81.8 84.0 177.6 22.5 279.8 302.2 82.4 36.2.5 380.7 411.1 FiV Re Coa. 0.9 9.2 9.2 26.8 41.2 43.7 44.4 48.0 50.9 233.7 238.9 280. 263.0 276.6 291.2 307.0 324.1 Adainistrative Expense 2.4 2.5 2.5 7.3 9.4 9.9 10.8 11.8 12.S 32.7 35.3 38.2 41.2 44.6 40.1 51.9 86.1 Add: Othr ineome 2_Z O S i 4 i La . LA L. iLl ILA AJu AmJ t4.z 15. 1L7 Ai E20 Chmrat'in Im"sJ t2.6 UA. Li B m 6. 1 B 172 35.eOAlSS.O 254.7 S77.2 48006 440.t 466.0 S10.0 559. Lte.: Mon-operating expmam 1.0 1.6 1.2 2.8 3.6 4.0 4.0 4.8 6.2 15.3 18.4 21.1 22.1 23.1 24.1 25.1 26.1 Financial Ca:rges 7 07 06 1.i Lz L L L LZ ZLI ZLS 71. 67.0 4.1i 60. 573 OA 49. hIroosa D2atoe Tas 114 lO. L2 9.7 1.5 91S. 10 J VLA MA2 167.8 2f91 314.3 SaM. AS6 4S2: 48. I 03 Lm: Loan AxortiZatiw 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 86.2 68.2 90.6 93.2 96.1 9.5 103.2 107.4 Taxs A other ,waiotence 74 7.4 L2 LA 0. Qf i 9Q L