Turkey - First and Second Fertilizer Rationalization and Energy Saving Projects

,cument of The World Bank FOR OFFICIAL USE ONLY Report No. 10760 PROJECT COMPLETION REPORT TURKEY FIRST AND SECOND FERTILIZER RATIONALIZATION AND ENERGY SAVING PROJECT (LOANS 1985-TU AND 2131-TU) JUNE 19, 1992 MrCrtOFICHE COpY Report No. 1.07630-TU Type: (PCF) MASON-ANDE/ X31676 / T911l/ CEDD)l Industry and Energy Division Technical Department Europe, Middle East and North Africa Regions 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 Average Annual Rate (TL/USS 1.0) 1980 76 1981 110 1982 161 1983 224 1984 367 1985 522 1986 675 1987 857 1988 1,422 1989 2,122 1990 2,609 ABBREVIATIONS AND ACRONYMS USED ARGUBRE Akdeniz Gubre Sanayii A.S. AS Ammonium Sulfate CAN Calcium Ammonium Nitrate DAP Diammcnium Phosphate DONATIM, TZDK Turkiye Zirai Donatim Kurumu EGE Ege Gubre Sanayii A.S. GUBRE Gubre Fabrikalari T.A.S. GOT Government of Turkey IGSAS Istanbul Gubre Sanayii A.S. KBI Karadeniz Bakir Isletmeleri A.S. N Nitrogen Content in Fertilizer NPK Nitrogen-Phospahte Potash Complex Fertilizer P(P205) Phosphorous Nutrient Content in Fertilizer PPF Project Preparation Facility SPC State Planning Organization TAN Technical Ammonium Nitrate TSP Triple Superphosphate TUGSAS Turkiye Gubre Sanayii A.S. FISCAL YEAR January 1 - December 31  THE WORLD BANK FOR OMCIL4 USE ONLY Washington. D.C. 20433 U.S.A. of Directw-General Wtirns Evaluation June 19, 1992 MEMORANDUM TO THE EXECUTIVE DTRECTO013 AND THE PRESIDENT SUBJECT: Project Completion Report on Turkey First and Second Fertilizer Rationalization and Energy Saving Prolects (Loans 1985-TU and 2131-TU) Attached, for information, is a copy of a report entitled "Project Completion Report on Turkey - First and Second Fertilizer Rationalization and Energy Saving Projects (Loans 1985-TU and 2131-TU" prepared by the Industry and Energy Division, Technical Department of the Europe, Middle East and North Africa Regional Office, with Part II contributed by the Borrower. No audit of this project has been made by the Operations Evaluation Department at this t4me. Attachment 2 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.  FOR OFFICIAL USE ONLY PROJECT COMPLETION REPORT TURKEY FIRST AND SECOND FERTILIZER RATIONALIZATION AND ENERGY SAVING PROJECTS (LOANS 1985-TU AND 2131-TU) TABLE OF CONTENTS PAGE NO. PREFACE . . ..... . . ..... ...... .... i EVALUATION SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . PART I PROJECT REVIEW FROM BANK'S PERSPECTIVE . . . . . . . . . . . 1. Project Identity . . . . . . . . . . . . . . . . . . . . . . 1 2. Background . . . . . . . . . . . . . . . . . . . . . . . . . 1 3. Project Objectives and Lescription . . . . . . . . . . . . . 2 4. Project Design and Organizat4on . . . . . . . . . . . . . . 4 5. Project Implementatior. . . . . . . . . . . . . . . . . . . . 6 6. Project Results . . . . . . . . . . . . . . . . . . . . . . 11 7. Compliance with Covenants .... . . . . . . ..... . . 15 8. Project Sustainability . . . . . . . . . . . . . . . . . . . 15 9. Bank Performance .... . . . . . . . . . . . . . . . . . . *.6 10. Borrower's Performance . . . . . . . . . . . . . . . . . . 17 11. Consulting Services .......... . -. 17 12. Lessons . . . . . . . . . . . . . . . . 18 PART IT PROJECT REVIEW FROM BORROWER'S PERSPECTIVE . . . . . . . . . 19 PART III STATISTICAL INFORMATION . . ............... . 29 1. Related Bank Loans . . . . . . . . . . . . . . . . . . . . . 29 2. Project Timetable . . . . . . . . . . . . . . . . . . . . . . 29 3. Loan Disbursements . . . . . . . . . . . . . . . 30 Table 1. Loan Disbursement Schedule (Loan 1985-TU) . . . 30 Table 2. Loan Disbursement (L.oan 2131-TU) . . . . . . . 31 4, Implementation Schedule .. ... . 32 Table 3. Project Completion Schedule . . . . . . . . . 32 5. List of Subprojects Financed Under Loans 1985-TU and 2131-TU . . . . . . . . . . . . . . . . . . . . . . 33 Table 4. List of Loan Beneficiaries . . . . . . . . . . 33 6. Project Cost . . . . . . 34 Table 5. Project Costs . . . . .34 7. Project Financing . . . . . . . . . . . . . 35 Table 6. Project Financing (Loan 1985-TU) . . . . . . . 35 Table 7. Allocation of Bank (Loan 1985-TU) . . . . . . . 35 Table 8. Project Financing (Loan 2131-TU) . . . . . . . 36 Table 9. Allocation of Bank Loan (Loan 2131-TU) . . . . 36 8. Project Results . . . . . . . . . . 37 Table 10. Capacity Utilization of Plants Before and After Rehabilitation . . . . . . . . . . 37 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  Table of Contents (Cont'd) lable 11. Economic Impact . . . . . . . . . . . . . . . . 38 Table 12. Financial Impact . ..... . . . . . . . . 38 Table 13. Studies . . . . . .. . . ..... . . . . . 39 9. Fertilizer Production and Consumption (1986-91) . . . . . . . 40 Table 14. Fertilize- Production and Consumption (1986-91) . . . . . . . . . . . . . . . . . 40 10. Import Duties on Fertilizer . . . . . . . . . . . . . . . 41 Table 15. Import Duties . . . . . . . . . . . . . . . . . 41 11. Fertilizer Prices and Subsidy . . . . . . . . . . . . . . . . 42 Table 16. Fertilizer Prices and Subsidy . . . . . . . . . 42 12. Company Financial Statements . . . . . . . .... . . .. . 43 Table 17. IGSAS: Income Statement (1986-90) . . . . . . 44 Table 18. IGSAS: Balance Sheet (1986-90) . . . . . . . . 45 Table 19. TUGSAS: Income Statement (1986-90) . . . . . . 46 Table 20. TUGSAS: Balance Sheet (1986-90) . . . . . . . 47 Table 21. GUBRE FABRIKALARI: Income Statement . . . . . 48 Table 22. GUBRE FABRIKALARI: Balance Sheet (1986-90) . . 49 Table 23. AKENDIZ GUBRE: Income Statement (1989-91) . . 50 Table 24. AKENDIZ GUBRE: Balance Sheet (1989-91) . . . . 51 Table 25. EGE GUBRE A.S.: Income Statement (1986-91) . . 52 Table 26. EGE GUBRE: Balance Sheet (1986-91) . . . . . . 53 Table 27. KBI: Financial Highlights (1986-90) . . . . . 54 Table 28. KBI: Balance Sheet (1986-90) . . . . . . . . 55 13. Use of Bank Resources . . . . . .. . . ......... 56 A. Staff Input . . . . . . . . . . . . . . . . . . . . . 56 B. Missions . . . . . . . . . . . . . . . . . . . . . . . 57  PROJECT COMPLETION REPORT TURKEY FIRST AND SECOND FERTILIZER RATIONALIZATION AND ENERGY SAVING PROJECTS (LOANS 1985 AND 2131-TU) PREFACE This is the combined Project Completion Report (PCR) for the First and Second Fertilizer Rationalization and Energy Saving Projects, for which Loan 1985-TU (US$110 million) and Loan 2131-TU (US$ 44.1 million) were approved on May 7, 1981 and April 27, 1982, respectively. The first loan was closed on December 31, 1989, and the second loan, on December 31, 1987. From the first loan, an undisbursed amount of US$ 11.81 million was cancelled and, from the second loan, an undisbursed amount of US$ .7.14 million was cancelled. The PCR was prepared by the EMENA Technical Department (on behalf of the Industry, Trade and Finance Operations Division of the EMENA Country Department I) and the main comments of some loan beneficiaries in their project completion reports are summarized in Part II. Preparation of this PCR was started during the Bank's final supervision missions of the projects in 1990 and is based, inter alia, on the Staff Appraisal Reports, the Loan Agreements, the Project Agreements, supervision reports, and financial reports of the companies.  - iii - PROJECT COMPLETION REPORT TURKEY FIRST AND SECO!1 FERTILIZER RATIONALIZATION AND ENERGY SAVING PROJECTS (LOANS 1985 AND 2131-TU) EVALUATION SUNMARY Obiectives The objectives of the Projects were to: (i) rehabilitate and modernize six major fertilizer plants and one copper smelter (which produces sulfuric acid as a byproduct for fertilizer production) with particular attention to eu:.gy saving and pollution control, and help raise capacity utilization in the fertilizer sector from low levels; (ii) expand training programs; and (ii) carry out three studies (i.e. the Financial Management Improvement Study for TUGSAS, the Fertilizer Marketing and Pricing btudy, and the Fertilizer Raw Material Resource Study) to facilitate institutional and policy reforms as well as future planning of the fertilizer industry. The objectives of the Projects have been largely met. Im2lementation Experience The implementation of both the Projects took significantly more time than envisaged at the time of appraisal partly be;cause of project scope changes following detailed inspection by engineerirng firms as well as by the changing pattern of demand for particular type of fertilizers. However, the main reason for the implementation delays was the change in the approach to the rehabilitation work. At the time of the appraisal, it was envisaged that the plants would be closed for the duration of the implementation, and the rehabilitation work would be carried in one step. However, the companies decided subsequently at the suggestion of the Government to carry out the rehabilitation work with minimum dislocation to annual production as the country was experiencing foreign exchange shortages to allow adequate import of fertilizers. Therefore, the actual rehabilitation work was carried out mostly during the emergency plant shutdowns and annual plant turn-arounds. In spite of project delays, there was no cost increase in the first Project. However, in the second Project, there was significant cost increase mainly because the detailed inspection by engineering firms showed that the copper smelter/sulfuric complex of KBI at Samsun required substantially more investment than estimated during appraisal based on a consultant study. Even though the internal cash generation of companies fell short of the appraisal estimate to finance the Projects, the companies were able to make up the deficit through additional capital increases and/or domestic borrowing.  - iv - Results The design of the Projects were well-suited to rhe needs of Turkey's fertilizer industry, considering that a large part of the production facilities were old and inefficient, and the capacity utilization in the fertilizer r3ctor was as Low as 40X in 1979, when the Bank started evaluation of the Projects. The Bank-financed Projects have helped increase the average capacity utilization in the fertilizer sector to 75X in spite of the cutback of production in some plants because of imports at artificially low prices due to fertilizer oversupply in the world. As this oversupply situation is not expected to last long, the domestic plants are expected to increase capacity utilization in the near future when the world prices rise toward their long-term equilibrium levels. Technical problems of the plants have been overcome and the plant management is now giving mo-e attention to both preven.:ive and normal maintenance. Companies have introduced computerized accounting and financial management systems but some have problems in retaining trained people because of low salary scales. Local training of operating and maintenance personnel were carried out as expected but the overseas training of middle level management staff was curtailed because of the Government's reluctance to use Bank funds for overseas training. Technical advisors were not used effectively by all the beneficiary companies. Some of them (i.e. AKDENIZ, GUBRE and KBI) used technical advisors only during the initial part of the project implementation. The three studies undertaken as part of the Projects had a major impact on pol.cy reforms and sector development. The Fertilizer Marketing and Pricing Study helped in the process of fertilizer marketing and pricing reforms carried ou't in mid- 1986. The Fertilizer Raw Material Resource Study helped in the planning of the fertilizer sector development. The Management Improvement Study for TUGSAS was carried out as Phase I of the overall Management Improvement Program. The recommendations of the Study were impleme.sted as part of Phase II of the Program. The objectives of this program were not fully realized because of lack of adequate capable middle level managers. Further, the consultant services ended before they had trained adequate TUGSAS personnel for the computerized accounting and financial management systems. SustainabiU&It In spite of project delays, all plants rehabilitated under the two Projects are economically viable. The rehabilitation work has made the six companies more attractive to privatization. One company, AKDENIZ, has already been privatized and Its performance has improved remarkably since privatization in January 1990. Another company, GUBRE, is going through the procedures for privatization. Its operation became profitable in 1990 after losses during the previous three years partly due to competition from fertilizer imports at depressed world prices. The public sector bank, Ziraat Bankasi, is trying to sell its 49Z stake in the company. EGE, a private sector company, experienced losses during the last two years because of import competition at depressed prices and also due to labor strikes. However, the company is expected to show regain profitability this year. IGSAS, a public sector company, is operating above capacity and  v has attained int-rnational competitiveness. Its financial profitability has improved significantly since 1986, making it attractive for privatization. The financial situation of the other two loan beneficiaries, TUGSAS and KBI--two fully-owned state enterprises --is deteriorating, with losses increasing partly due to ineffective management and lack of adequate trained personnel, and partly due to delays in receiving compensation payments and authorized share capital increases in a timely manner. Those companies should be given priority in the proposed Government program for privatization of state economic enterprises. The operation of these companies are potentially viable following rehabilitation and this potential is expected to be realized with effective management after privatization. Lessons Learned The main lessons learned in the Projects, as discussed at the end of Part I, are: (i) the rehabilitation of old plants of different vintage is a complex task and this complexity has to br- taken into account more fully in determining the project implementation schedule; (ii) project scope changes are to be expected in rehabilitation projects following detailed inspection by engineering firms and the bank should be receptive to these changes when appropriate and react quickly to requests for realloeqtion and/or cancellations; (iii) possible changes in demand for specific products would necessitate changesi in project scope; (iv) full- time project teams are necessary for project success; (v) details of the training program should be worked out more clearly at the project preparation stage; (vi) more attention to be given to improving accounting and financial management systems of companies; and (vii) the Bank should exercise the remedies under the loan agreement in case the agreed covenants are not complied with.  PROJECT COMPLETION REPORT TURKEY FIRST AND SECOND FERTILIZER RATIONALIZATION AND ENERGY SAVING PROJECTS (LCANS 1985 I.ND 2131-TU) PART 1. PROJECT REVIEW FROM THE BANK'S PERSPECTIVE 1. PROJECT IDENTITY Name : First & Second Fertilizer Rationalization and Energy Saving Projects Loan Numbers: 1985 & 2131-TU RVP Unit EMENA Region Country Turkey Sector : Industry (Fertilizer) 2. BACKGROUND 2.1 The Bank's involvement in Turkey's fertilizer industry began with a loan for the IGSAS ammonia/urea fer,Lilizer project in 1972, when the country's consumption of nutrients amounted to 375,000 tons of nitrogen (N), 246,000 tons of phosphate (P) and 27,000 tons of potash (K). The domestic production of fertilizers, however, was not sufficient to meet the demand and large quantities were imported -- 345,000 tons of N, 136,000 tons of P and all of the potash (which Turkey does not produce). From 1972 until the end of the decade, the average annual growth rates in the consumption of nutrients were 11% for N, 15Z for P and 5% for K. Turkey's fertilizer consumption reached 779,000 tons of N, 660,000 tons of P and 38,000 tons of K in 1979 when the Bank started evaluating the First Fertilizer Rationalization and Energy Saving Project for financing. Between 1972-79, a considerable quantity of fertilizer production capacity had been added, amounting to 610,500 tpy N and 278,800 tpy P. In 1979, the total nutrient production capacity in Turkey stood at 728,400 tpy N and 578,300 tpy P. However, it was still necessary to import a large part of the nutrient requirements amounting to 437,000 tons e-? N and 298,000 tons of P in 1979. Fertilizer imports cost Turkey US$3177 million in 1979 and about US$500 million in 1980. In addition, Turkey had to rely on imported fertilizer raw materials and intermediates such as phosphate rock, phosphoric acid and sulfuric acid. Also, the domestic production of ammonia was largely derived from petroleum products (e.g., naphtha) derived from imported ^rude oil. 2.2 Fertilizer production failed to keep pace with Turkey's needs predominantly due to the industry's inability to maintain an adequate production efficiency from the installed fertilizer plants. The average capacity utilization in the fertilizer industry was only 46% for N and 37Z for P in 1979. Low capacity utilization was mainly due to: (i) technical  -2- bottlenecks arising from design deficiencies and poor maintenance; (ii) inadequate imports of raw materials, intermediates and spare parts; (iii) deficierncie3 in the supply of local raw materials end utilities, e.g. poor/uneven quality and unreliable supply of lignite, pyrites and rock phosphate, and shortages of pcwer and water; (iv) working cap4tal problems; (v) organization and management deficiencies, and (vi) lack of trained manpower. 2.3 The Government and a Bank preappraisal mission in March 1980 identified seven fertilizer and intermediate product plsnt. as a high priority for Bank financial/technical aesistance to eliminate technni"al bottlenecks, improve capacity utilization, and achieve energy savings and pollution control. Project Preparation Facility (PPF) funds of 'JS$600,000 were made av.ilable for foreign engineering consultants to complete ;;reparation for the rehabilitation of the plants. It was agreed to implement the Project in two phases since the task was complex and the required foreign exchange funds exceeded the amount that the Bank was prepsred to make available at the time. At the time of appTaisal in December 1980, for the first Project, there were six companies in Turkey exclusively producing fertilizers from 15 product plants. In the public sector, two companies operated seven plants -- TUGSAS (6) and IGSAS (1). In the joint sector, five plants were operated by GUBRE (3) and AKGUBRE (2), and in the private secLor two companies operated three plants -- EGE (1) and BAGFAS (2). Except for GUBRE's NPK unit and the private sector plants of EGE and BAGFAS, which came on-stream in 1978 and 1980 respectively, the other plants had been commissioned over the period from 1961 to 1974. In addition, three plants were producing ammonium sulphate fertilizer as a by-product from the public sector operations of one petrochemical and two steel complexes. 3. PROJECT OBJECTIVES AND DESCRIPTION 3.1 Prolect Obiectives. The two Projects, financed under two separate loans (1985-TU and 2131-TU), aim at increasing production, productivity and energy efficiency in selected fertilizer facilities in Turkey through energy saving, rehabilitation and rationalization investments supported by appropriate technical assistance, institutional improvements and training. The main benefit to be gained from the Projects was an increase in annual fertilizer production of about '25 million tons. The Projects were also to help substantially increase '.e output of intermediate products for fertilizer production and annually release large quantities of naphtha and fuel oil for outside use as a result of substitution with refinery platformer and off-gases as feedstock and fuel for ammonia production. In addition, reductions in the specific material consumption per ton of nroduct was to yield significant savings in the consumption of sulfuric acid, phosphate rock, ammonia, energy, etc. and help reduce unit production costs. 3.2 Prolect DescriDtion. The first Project (Ln 1985-TU) covers three companies -- TUGSAS, IGSAS and GUBRE -- and four plants: the Kutahya II and  -3- Samsun complexes of TUGSAS, the Izmit plant of IGSAS and the Yarimca plant of GUBRE. The second Project (Ln 2131-TU) involvqs three companies 1/ -- AKOUBRE, EGE and KBI -- and three plants: the Mersin complex of AKGUBRE, the EGE facilities at Foca and the Samsun plant of KBI (which produces sulfuric acid au a byproduct of its blister copper operation, for the fertilizer industry). 3.3 The design of the Projects consists of five main components: A. Rehabilitation and Ene:!a Saving Comgoneat: To rehabilitate existing plants and remove capacity-limiting bottlenecks in machinery and equipment and to improve the plant economics through energy and feedstock-saving measures, as well as process revamping and, in some cases, expansion of plar.t capacity. The first Project configuration included: (i) the rehabilitation of TUGSAS's 340,000 tons per year (tpy) lignite-based Kutahya II calcium ammonium nitrate (CAN) fer.ilizer plant; (ii) modernization and rehabilitation of TUGSAS's 220,000 tpy triple super- pbosphate (TSP) and 230,000 tpy di-ammonium phosphate (DAP) fertilizer complex at Samsun; (iii) modifications and conversion to use lower cost refinery gases to replace naphtha feedstock and fuel oil for the IGSAS 511,500 tpy urea fertilizer plant; (iv) rehabilitation and modernization of GUBRE's Yarimca 200,000 tpy T3P and 200,000 tpy complex fertilizer (NPK) plants, and the construction of a new 250,000 sulfuric acid plant at thLs facility to balance production. The second Project configuration included: (i) basic and detniled engineering for investments in rationalization and modernization of the Iskenderun plant and off-site facilities of GUBRE, conversion from 200,000 tpy TSP production to DAP and rehabilitation of the sulfuric and phosphoric acid plants; (ii) rationalization and energy saving modifications of AKGUBRE's 594,000 tpy CAN and 148,000 tpy DAP plants at Mersin and addition of a new 600 ton per day (tpd) ammonium sulphate (AS) fertilizer unit based on scrubbing waste sulfur dioxide (S02) gases with ammonia; (iii) rationalization of EGE's 306,000 tpy complex fertilizer (NP) plant at Foca to enable production of additional fertilizer grades; and (iv) modernization and rationalization of KBI's blister copper complex at Samsun and the pyrites-based 350,000 tpy sulfuric acid plant for supply of the acid as feedstock to the adjacent TUGSAS phosphoric acid plant. Each of the above sub-components included in' -cment3 on 'ollution control measures. B. Training Component: To provide financing to supplemer.t the training activity and facilities under development for TUGSAS an(d IGSAS and to extend them to other fertilizer companies, which had no such facilities, for the purpose of: (i) implementing training programs; (ii) tr'ining of trainers; (iii) supplying training aids and equipment; and (iv) creating l/ After the cancellation of the Iskenderun subproject of GUBRE goon after loan approval. GUBRE cancelled the subproject as the demand for TSP and DAP began to declire in Turkey.  -4- training centers. In addition, training in critical areas (i.e., preventive and operaticnal maintenance) would involve the use of foreign experts and the foreign training of selected personnel from the companies who woi.ld be sent abroad for specialization. C. Management Improvement Component: 1/ To address the organizational and managerial problems of TUGSAR. covering its six plants loceted in different parts of the country, and fo.lasing on operational and financial management strategies with respect to: (i) admisetment of the organization for increased operational efficiency; (ii) delegation of authority to plant level management; (iii) improvement in maintenance, inventory control, and energy management; (iv) compensation policy improvements to minimize turnover of professional,; and (v) introduction of mode n accounting financial management techniques. D. Fertilizer Marketing and Pricint Study Component: 2/ For rationalizing the fertilizer transportation, storage and distribution sys.ems and the fertilizer pricing mechanism. E. Fertilizer Raw Material Resource Study Component: 3J For review of fertilizer raw material resources in Turkey for development of the industry based on local resources. 4. PROJECT DESIGN AND ORGANIZATION 4.1 The design of the Projects was technically well fitted to the needs of Turkey's fertilizer industry, considering that a large part of its production capacity was aging, inefficient and unable to respond to the country's demand for fertilizers at the time of project identification. The need for the rehabilitation and energy saving measures was clear to the individual companies, which initially identified the problems in their plants, and also to the authorities. 4.2 Nevertheless, due to changes that subsequently took place in the relative prices of imported inputs, such as rock phosphate, sulfur, phosphoric acid, etc., and the changes in the demand pattern (i.e., the declining demand for TsP and the rising demand for NPK), the scope of the GUBRE sub-component under the first loan was revised. Rehabilitation of the TSP complex, including a revamp of the phosphoric acid plaut and construction of a new sulfuric acid plant was cancelled. Instead, it was decided to 1/ Included under Loan 1985-TU. 2/ Included under Loan 2131-TU. 3/ Included under Loan 2131-TU  - 5 - expand NPK production capacity at Yarimca by establishing a new NPK plant (NPK II) to meet the increasing domestic demand for the product. Further, when gas became available in Turkey from the Soviet Union with the construction of the gas pipeline, the scope of the IGSAS subproject was modified to use natural gas, the most efficient feedstock for nitrogenous fertilizer production. 4.3 Under the second loan, GUBRE decided with the agreement of the Bank not to pursue the basic design and engineering for rehabilitation and conversion of the old Iskenderun TSP complex to DAP; production of DAP at Iskenderun was deemed unattractive as the demand for it was showing less than expected increase in Turkey. The Company, therefore, decided to phaseout the operation at Iskenderun. Furthermore, AKGUBRE decided not to construct a new 600 tpd AS fertilizer unit at Mersin as proposed originally, due to the lack of growth in local demand for that product. EGE also modified the scope of its subproject for additional investment on its raw material and product handling facilities. 4.4 As it later became evident, the importance of a strong institutional capability for project management was underrated by the companies in view of the projects' extensive technical scope and the companies' need for organizing effective project teams at the companies' head offices and plants. As a result, some companies such as TUGSAS, AKDENIZ and KBI, were not able to make the most efficient use of technical advisors/consulting firms. 4.5 Each company formed a project team responsible for implementing the sub-projects by using their senior engineers experienced in the plant technologies involved. In the case of TUGSAS and GUBRE, the services of technical advisors for project management and the provision of technical assistance and training for its team was recognized to be essential, as they had limited in-house expertise in executing new process plant projects and in improving plant operations. The other companies' project teams were judged to be adequate to supervise and expedite the implementation work to be carried out with the assistance of the foreign engineering firms. Upon loan effectiveness, Scientific Design (UK) was selected as technical advisor (TA) to TUGSAS and GUBRE following Bank guidelines for consultants. While TUGSAS continued with TA until project completion, GUBRE used TA only during the initial part of project implementation. Some other companies utilized the services of project management advisors during part of the project implementation period -- Haldor Topsoe for EGE, Cremer & Warner (UK) for ARGUBRE, and Boliden Contech (Sweden) for KBI. In general, the project management capability of the companies was inadequate. More extensive technical supervision by consultants would have contributed to reducing the long implementation period. 4.6 The Project was basically well prepared in terms of the project design with regard to overcoming the deficiencies prevailing in the sector. However, in view of the deterioration in the physical condition of many production units and their age, it was necessary at the time to execute the two Projects covering a wide scope, which increased the burden on the  organizations cincerned and partly caused considerable delays in project implementation. 5. PROJECT IMPLEME.ATATION 5.1 Loan Effectiveness and Prolect Commencement. Ln 1985-TUR for the first phase of the Project was approved on May 7, signed on May 15 and became effective on August 28 of 1981. Ln 2131-TUR for the second phase was approved on April 27 and signed on May 13 of 1982, but did not become effective until April 13, 1983. The 11-month delay in effectiveness was due to the drawn-out procedures in Turkey for finalizing the onlending arrangements through the financial intermediaries and negotiations between them and the beneficiary companies. 5.2 Procurement. Process licensing agreements, existing between the fertilizer companies and the design and engineering firms which built the original plants, dictated that the process units be rehabilitated/revamped by using the same firms. Therefore, the companies began contract negotiations with the original lead engineering firms, mostly requiring their detailed and time-consuming inspection of the condition of the plants. The negotiations, however, became extremely prolonged on account of: (i) refusal by Davy International (FRG) to provide guarantees on performance of the TUGSAS phosphoric acid, TSP and DAP plants at Samsun after rehabilitation. The problem with Davy was overcome by engaging SIAP2 (Tunisia), which also uses the Davy process, strengthened with some Davy engineers; (ii) the inability of TUGSAS to obtain satisfactory contract terms with Krupp-Koppers (KK) and acceptable performance guarantees for the Kutahya II facilities after the rehabilitation work. The work was thus divided into five main contracts, each awarded to the firm responsible for the original unit of the complex -- Babcock (US) for coal preparation/boilers, KK (FRG) for coal gasification, GHH (FRG) for gas compression, Linde (FRG) for air separation, and Ammonia Casale (Italy) for ammonia synthesis; and (iii) the reluctance by Uhde (FRG) to give IGSAS adequate performance guarantees for its ammonia/urea plant modifications. 5.3 Following the Yarimca project scope changes, GUBRE was able under international competitive bidding (ICB) to engage Krebs (France)/ENTES (Turkey) as the engineering contractor. AKGUBRE completed an engineering services contract with Kellogg (Holland), the original engineering contractor for the Mersin complex, but experienced long delays in negotiating the contract, including the demand by Kellogg for detailed inspection of the facility's condition. However, the engineering firm, INTECSA (Spain), was contracted for the modifications to ECE's complex fertilizer plant at Foca, close to schedule. Engineering services for the KBI sub-component were procured late under ICB, following the contractors' detailed inspection of the smelter plant (by Furukawa Ltd., Japan) and the sulfuric acid unit (by Sirychamon Impianti, Italy) at Samsun. Procurement, in general, was executed satisfactorily and in accordance with the Bank guidelines. The engineering contractors carried out the bulk of procurement for the machinery, equipment  - 7 - and materials but the companies also took part in the overall supervision of the procurement work with assistance from their technical advisors. 5.4 Implementation and Schedule. The above delays in the commencement of work by the main contractors compared to the assumptions of the Staff Appraisal Reports (SARs) were the following: (i) the effective dates of the five contracts for the Kutahaya II plant lagged behind the SAR estimate by 22 months for the KR contract and up to 28 months for the Linde contract; (ii) similarly, at Samsun, the beginning of the Lurgi contract for the sulfuric acid unit fell 16 months behiid the original schedule and the SIAPE contract lagged by 20 months; (iii) the Uhde contract with IGSAS was delayed by 3 months; (iv) the scope changes by GUBRE after prolonged study of changing market conditions and available options for the revised project configuration caused a 34-month delay; (v) the start of the Kellogg contract for Mersin was late by 17 months; (vi) INTECSA's contract with EGE at Foca was delayed by 2 months; and (vii) at Samsun, KBI's two contracts with Furukawa (for the blister copper unit) and Sirychamon Impianti (for the sulfuric acid unit) began late by 24 and 26 months, respectively. In addition, the measures required earlier for meeting the conditions to enable the Bank to declare loan effectiveness took longer than expected, especially for the second loan. 5.5 The actual periods of execution, from contract effectiveness to completion of rationalization of the facilities, became considerably extended in most cases compared to the SAR schedules. As a result, the relative overruns for the individual sub-projects, in terms of months, were the following: (i) the Kutahya II complex, on average for the five contracts -- 9 months; (ii) the Lurgi contract of Samsun (TUGSAS) -- 19 months; and for the SIAPE contract -- 51 months; (iii) the Uhde contract for IGSAS as originally conceived -- 21 months; (iv) the Krebs/ENTES contract for GUBRE's revised sub-project scope for Yarimca -- 29 months; (v) the Kellogg contract for Mersin -- 7 months; (vi) INTECSA's contract for Foca -- 2 months; and (vii) the Furukawa contract for Samsun (KBI) -- 24 months, and for the Sirychamon contract -- 22 months. It should be noted, however, that these apparent delays often were partly due to scheduling of the rehabilitation work during periods when plants were shut down, for annual maintenance and/or emergency repairs. Production of fertilizers, therefore, continued throughout project implementation at varying levels of output. This approach was followed by companies to minimize the decline in production during project implementation as the demand for fertilizers was growing fast and the Government was experiencing serious foreign exchange difficulties to allow adequate fertilizer imports. At the time of appraisal, it was assumed that the plants would be closed continuously during rehabilitation and the work would ba carried out over a shorter period. 5.6 To a certain extent, more efficient project management could have helped reduce the time taken for execution of the project. Considering the heavy workload for the TUGSAS components, the company deployed a team of about 30 staff at its headquarters but at the project sites the number of full-time team personnel was quite inadequate. For Yarimca, GUBRE had not established a project team until at least 16 months after loan effectiveness  as they were studying options for the revised project scope. Late. on, the project management capability was improved with the assistance of the project management advisors. However, these advisors' services were terminated before the project was completed. 5.7 In summary, the slow start and late completion of the rehabilitation/energy saving component of the Projects was mainly due to: (i) the engineering firms insistence on detailed inspection of the plants before preparing their bids (in addition to the available consultant reports prepared for the companies); (ii) the need for the fertilizer companies to approach the original engineering firms, which initially opposed giving satisfactory performance guarantees and quoted high prices in the absen e of competition, leading to protracted negotiations; (iii) GUBRE's revisions of the project scope of the Yarimca complex, which called for re-bidding; (iv) other companies' minor revisions to the scope of their sub-projects; and (v) the companies' requirement for minimizing decline in production of fertilizers during the project execution period. Thus intermittent installation and repair of machinery and equipment was carried out as far as possible at the time of operational shutdowns for emergency repairs and/or during annual turn-arounds. 5.8 The Management Improvement contract was awarded early in 1982 to Price Waterhouse (US) in collaboration with MUHAS, a local consulting firm. Their report recommendations were accepted and on this basis they continued until April 1984 to assist the implementation of a management program involving key reforms in TUGSAS and other state economic enterprises (SEEs), including design of a computerized management information system (MIS) and streamlining of the financial management and accounting systems. One problem faced by TUGSAS in this context was in the training of adequate personnel and the difficulty of retraining trained personnel at low salary scales. 5.9 The local consultants, TUMAS, cooperated with a Danish consulting firm, DARUDEC, in carrying out the Fertilizer Marketing and Pricing Study beginning early 1982, under the supervision of a governmental steering committee and a follow-up unit of the State Planning Organization. Upon its timely completion and acceptance by the authorities, the study recommendations were implemented under the Bank Agriculture Sector Loan of 1984. The Fertilizer Raw Material Resource Study contract, awarded to SEMA (France), was carried out satisfactorily, from early 1983 to March 1984, and the findings were taken into account in the Government's planning for future development of Turkey's fertilizer industry. 5.10 The objectives of the Training Component were not adequately achieved in view of: (i) the concentration on contractual difficulties experienced during early stages of the Project; (ii) the companies' focus on minimizing decline in fertilizer production; (iii) the Projects' extensive scope and heavy workload of the staff; and (iv) difficulties in getting permission by the Government to send personnel for training abroad. The activities were generally limited to on-site training by the contractors' specialists and the use of video training programs on plant operation,  -9- maintenance, instrumentation and control. In the case of GUBRE, they sent a small team to the contractor's office and to fertilizer plants in France for a relatively short period. 5.11 Proiect Costs and Financing. Although prolonged delays were experienced in the implementation of both the first and second fertilizer rationalization projects for reasons already noted, the plant rehabilitation costs of the first project were lower than the appraisal estimate by US$22.2 million (9.4%), partly due to the changes by GUBRE in the scope of rationalizat'.on for its Yarimca complex. However, the main reason was that during 1983-85, when awards for the major engineering contracts and the bulk of the machinery and equipment procurement took place, the world market for the supply of capital goods to the chemical process industry was depressed and very competitive prices were available; and the appreciation of the US dollar over the same period also had a favorable impact. The saving in the overall cost of the first project was achieved in spite of the fact that the TUGSAS subproject at Samsun experienced an overrun of US$14.8 million due to the cost of additional modification/rationalization agreed subsequent to the loan approval, which was financed out of loan surpluses from other subprojects. 5.12 The second Project, undertaken one year later than the first, also benefited from the depressed market for equipment, competitive prices and dollar appreciation during 1983-85. Further, the GUBRE subproject for the rehabilitation of the Iskenderun plant was cancelled (for which there was a loan allocation of 6.1 million) by the company management because of the declining demand for TSP and less than anticipated growth rate in the demand for DAP. In spite of the above factors, there was a cost increase of US$30.4 million equivalent (39%) because of a large increase (by TIS$32 million equivalent) in the total cost of the KBI subproject at Samsun, partly due to the extended execution period, but mostly because the detailed inspection of the complex by the engineering contractors revealed that the extent of rehabilitation required was much greater than originally estimated by KBI with the help of foreign consultants. As for the overall total costs of the two Projects, there was a net saving of US$7.2 million (2.3%) against the appraisal estimates . 5.13 As shown in Table 5 of Part III, the actual total financing required for the two projects was US$321.1 million of which US$192.1 million was in foreign exchange. The Bank loans (net of cancellations) financed 65Z of the total financing required. A problem was experienced in finding internal cash generation to finance the Projects to the extent anticipated at the time of appraisal, especially in the case of TUGSAS, GUBRE, AKDENIZ and KBI. The shortfall in cash generation (due to low world fertilizer prices which determine the domestic ex-factory prices in Turkey to a large extent since mid-1986) and heavy interest rate burden (because of the high cost of borrowing from local banks for working capital when the receivables of compensation payment from the Government to cover farmer fertilizer subsidy took more than three months for settlement). The shortfall in cash generation for project financing was made up partly by the infusion of new  - 10 - capital by shareholders (the Government and/or private) and partly by domestic borrowing. The first project was financed on a debt/equity ratio of 50/50 (against the appraisal estimate of 47/53) and the second Project was financed on 60/40 debt/equity ratio (against the appraisal estimate of 52/48). 5.14 Disbursements. Estimated vs. actual disbursements are given in Table 1 of Part III. Disbursements of the Bank loans were delayed by: (i) the slow initial implementation period caused by the drawn-out process of engaging the main engineering contractors, following detailed plant investigations and protracted negotiation of contracts; (ii) changes in scope of some sutbprojects; and (iii) execution of the rehabilitation work mainly during emergency repairs and the annual shut-down of plants (for maintenance) to minimize disruption of production. As a result, the Bank granted three extensions for Ln 1985-TU, each of one year, extending up to December 31, 1989. The Closing Date for Ln 2131-TU remained unchanged at June 30, 1987. 5.15 Loan Allocations. The original and revised allocations and final disbursements by beneficiaries are shown in Table 4 of Part III. A considerable degree of revision to the original allocations took place for reasons Previously mentioned, mainly attributable to lower than expected prices for machinery and equipment and also the changes in scope of some subprojects. Taking into account the changes in the project scope and the cost savings in foreign exchange, there have been cancellations from both the loans as shown below. Taking into account the cost savings and based on requests received by the beneficiaries through the Government (the Borrower), part of the loans were cancelled from time to time as shown below:  - 11 Loan 1985-TU Loan 2131-TU I. Original Loans US$110 US$44.1 II. (a) Cancellations (Ln 1985-TU): - April 23, 1986 6.000 - January 1, 1989 3.000 - August 7, 1989 0.066 - December 20, 1989 0.379 - March 14, 1990 2.381 - Sub-Total 11.8?6 II. (b) Cancellations (Ln 2131-TU): - April 10, 1983 6.100 - July 24, 1986 8.200 - December 7, 1987 2.842 - Sub-Total 17.142 III. Net Disbursement 98.18 26.958 6. PROJECT RESULTS 6.1 Proiect Obiectives. The Projects have generally met technical objective to improve the operational performances of fertilizer plants in Turkey selected by their need for rehabilitation/modernization. This has necessarily been achieved, however, with significant changes in the scope of certain subprojects in order to adjust to the changing fertilizer consumption patterns in the country and to take advantage of and/or react to changes which took place in the raw materials and intermediate feedstock situations, in terms of pricing and availability, during the implementation period lasting through the 1980s. For example, the Yarimca TSP subproject was restructured to supply the increasing demand for NPK fertilizers; IGSAS ultimately changed its ammonia production base from expensive naphtha to cheaper and more efficient natural gas feedstock; and other firms de- emphasized phosphoric acid production in favor of low-cost importation of the intermediate. The declining demand for TSP led to the cancellation of the Iskenderun subproject; and AKGUBRE cancelled its plan to produce low-nutrient ammonium sulphate fertilizer because of import competition at depressed prices. Such changes, however, were all consistent with the overall cbjectives of the Projects to modernize and upgrade performance of Turkey's fertilizer industry and economically meet the country's fertilizer requirements. As a result of the two Projects, it is to be noted that the average capacity utilization in the fertilizer sector in Turkey has increased from about 40 percent in 1979 to about 75 percent in 1990. The production of N and P increased during the last decade by 1162 to nearly 1.8 million nutrient tons in 1990 (Table 15 of Part III).  - 12 - 6.2 Technical Performance. The Projects succeeded in the attainment of much improved and satisfactory fertilizer production rates, on a sustainable basis, from the rehabilitated facilities; while the overall investment costs in doing so have remained generally in line with the initial estimates, despite the prolonged implementation period and taking into account the scope of changes and cancellations that became necessary. The Projects have succeeded in achieving better efficiency in material consumption and attaining considerable (10-15 percent) energy saving in different plants. Training under the Projects which was mostly organized locally, has helped improved efficiency especially in operation and maintenance. 6.3 Sectoral Roforms. The Fertilizer Marketing and Pricing Study carried out under Ln 1985-TU, led to the liberalization of the fertilizer marketing system as weli as to the reform of the fertilizer pricing system. As a result of the marketing reform DONATIM and SEKER do not now have the monopoly for fertilizer marketing, even though they are still active in fertilizer distribution in competition with other distributors (public and private) including fertilizer producers and importers. Imports have been liberalized and protective tariffs have been reduced to low levels (as shown in Table 15 of Part III). Under the current fertilizer pricing system, the Government does not subsidize fertilizer plants for their losses. However, the Government continues to subsidize fertilizers to farmers. The subsidies range frcm 27 percent to 52 percent, depending on the type of fertilizer (as shown in Table 16 of Part III). The total amount of fertilizer subsidy has come down in current terms from US$623 million in 1981 to about US$450 million in 1990. However, the fertilizer subsidy level is still high and it is one of the causes of the budget deficit in Turkey. 6.4 Financial Performance. The financial statement of the loan beneficiaries are shown in Tables 17-28. TUGSAS, GUBRE, AKDENIZ and KBI were not able to generate internal funds to the extent envisaged during appraisal. They relied partly on capital increase by shareholders and partly on loans from local banks to make up the shortfall in cash generation to finance the projects. 6.5 Among the beneficiary companies, IGSAS and EGE are financially sound and are able to meet the covenants agreed with the Bank with respect to liquidity, financial structure and debt service. The financial situ.ation of AKDENIZ, which had deteriorated because of the year-long labor strike in 1989, is showing improvement under the new management following privatization in early 1990. GUBRE has improved its liquidity and financial structure with the injection of additional capital by shareholders. In 1990, the company regained profitability following losses during the preceding three years. There is a continuing financial crisis in both TUGSAS and KBI (Tables 19-20 and 27-28 of Part III). They are not able to meet the financial covenants agreed with the Bank. 6.6 The problems of TUGSAS and KBI are partly due to overstaffing, poor operational, maintenance and inventory control systems, lack of use of modern accounting and financial management systems, inadequate attention to cost  - 13 - control, productivity improvement and marketing, and difficulty in attracting and retaining qualified and competent personnel. TUGSAS performance is also adversely affected by delays in receiving payment of farmgate fertilizer subsidy from the State and delays in authorized capital injections from the Government (the sole shareholder) which necessitate the Company to borrow short-term loans (which are often rolled over) from commercial banks at high annual interest rates (ranging from 60-70 percent) for working capi4tal and investment purposes. 6.7 TUGSAS is not able to make debt service payments. The Government has been making those payments on behalf of TUGSAS. The Government is charging 60 percent interest on these payments. In this context, the Bank has suggested to the Government to write-off those pryments against the Government's outstanding unpaid capital to TUGSAS. This measure is necessary as a part of the financial restructuring of TUGSAS to make its prospective privatization attractive to investors. 6.8 KBI's financial situation deteriorated sharply in 1990 (Tables of 27-28 of Part III) partly due to a 75-day labor strike and partly due to a threefold increase in wages. KBI is not able to service its debt and the EXIM Bank (formerly DYB through which the IBRD loan portion to KBI was channelled) is doing the debt servicing on behalf of KBI. KBI should get its share capital increased and pay off the outstanding payments to the EXIM Bank. These measures would improve the prospects for the privatization of KBI. 6.9 Sales Price. Under the price reforms carried out in the sector in mid-1986, fertilizer producers/distributors have the flexibility to determine the farmgate price. They, however, get a farmgate subsidy per ton of product sold from the Government (Table 16 of Part III). This subsidy which is determined by the Government on a product by product basis, changes more or less every six months. Even though price controls on the farmgate price have been removed, the Government distributing agency, DONATIM, is still the market leader in setting farmgate prices. Further, the world fertilizer prices which influence the ex-factory fertilizer Drices including the fertilizer farmer subsidy fixed by the Government, con.'nue to be depressed. As a result, fertilizer companies (except IGSAS which has a comparatively modern plant and which operates very efficiently) have not been showing much financial profitability. This situation is expected to change in the future when world fertilizer prices are projected to increase in real terms as world supply/demand situation for fertilize2. tighten because of low investment in the world on new fertilizer plants in the 1980's due to fertilizer oversupply and depressed prices. When world fertilizer prices recover and approach their long-term equilibrium levels, the local ex-factory prices would also increase in Turkey, making the operation of fertilizer plants more profitable. 6.10 Financial and Economic Rates of Return. The financial and economic performance of the Projects are shown in Tables 11-12 of Part III. The financial and economic rates of return for the subprojects are substantially  - 14 - lower than the appraisal e.'imates partly because of project delays and partly because of prolonged depression of the domestic and world fertilizer prices during the 1980s. However, taking into account the projected recovery in world fertilizer prices in the future and consequent increases in the domestic fertilizer prices in Turkey, all the subprojects show acceptable FRRs and ERRs. The FRRs range from 14.4 percent to 27.1 percent; and the ERRs range from 9.2 percent to 31.9 percent. Among the subprojects, Kutahya II (of TUGSAS) is showing the lowest economic rate of return (9.2 percent) because ammonia production in that plant base oi lignite has been curtailed since the completion of rehabilitation in 1987 because imported ammonia (due to depressed market conditions) had been available at prices lower than the ammonia production cost at Kutahya II. This situation is expected to change in the future as world ammonia prices rise to their long-term equilibrium level, inducing the Kutahya II ammonia plant to maximize capacity utilization. 6.11 ImDact of Prolects. As nored, in spite of project delays and lower than expected world fertilizer prices, all components of the two projects are still economic. The projects have helped overcome the technical problems of the selected fertilizer plants in Turkey. As a result, the overall capacity utilization in the fertilizer sector in Turkey has gone up from hardly 40 percent in 1979 to about 75 percent in 1990. The projects have also contributed significantly to energy saving (10-15 percent) and reduction in environmental pollution. Further, the three studies (i.e. the Fertilizer Marketing and Pricing, the TUGSAS Management Improvement Study and the Fertilizer Raw Material Resource Study) have contributed to significant reforms and improvements in the fertilizer sector. 6.12 Privatization. Through the physical restructuring of the plants which were operating at very low capacity because of serious technical problems, the Projects have improved the prospects for the privatization of the rehabilitated complexes. The Government has already announced its intention to privatize all state economic enterprises (SEEs) including TUGSAS and KBI. One fertilizer company, AKDENIZ, has already been privatized following rehabilitation. Fifty one percent share in that company was acquired by TOROS GUBRE, a private sector fertilizer company in Turkey. As a result, the management control of AKDENIZ has been assumed by TOROS GUBRE from January 1990. Since privatization, measures have been taken to reduce the debt of the Company in order to improve its future profitability (Tables 23-24 of Part III). Currently, the state-owned Ziraat Bankasi, which holds about 49 percent of the shares of GUBRE (a beneficiary of Ln. 1985-TU) is trying to sell them as under the new Banking Law all commercial banks are encouraged to divest their share holdings in industrial enterprises. Further, in the case of IGSAS, whose operational efficiency is comparable to modern plants in the world following modernization (under Ln 1985-TU), 1/ 1/ In the IGSAS plant, the energy consumption per ton of ammonia, for example, has declined by about 14 percent from 10.1 million kcal to 8.7 million kcal following modernization. Further, the plant is currently  - 15 - there is strong private sector interest in its privatization. EGE, another beneficiary (under Ln 2131-TU), is in the private sector. 7. Compliance with Covenants 7.1 All covenants have been complied with except: - The Government has not streamlined payment procedures to fertilizer producers and has not adopted effective administrative procedures to ensure that producers are paid in a timely manner. This has created a financial crisis in some companies in the fertilizer sector. - TUGSAS and KBI have not taken measures to get annual accounts to be prepared promptly and satisfactorily by training more accountants and using external accounting firms, if necessary, so that the High Auditing Board could finalize the audit within four months of the end of the accounting period. - TUGSAS and KBI are not meeting the current ratio covenant and the debt service coverage covenant. ADKENIZ, which is improving production performance since privatization in January 1990, is not yet able to meet the current ratio covenant. 8. Prolect Sustainabilitv 8.1 As noted, technical problems of the plants of TUGSAS, IGSAS, GUBRE, AKDENIZ, EGE and KBI have been overcome, and the plants are economic following rehabilitation/modernization. As for the individual companies, IGSAS has been meeting the financial covenants (current ratio of 1.3:1, debt/equity ratio of 60/40 and debt service coverage of 1.5 times) since 1987. GUBRE, which did not meet some financial covenants during 1986-89, was able to meet all the covenants in 1990 because of sharp increases in its crading activity and improvement in financial management. AKDENIZ, which had also problems in meeting financial covenants during 1986-89, is showing improvement in financial performance following privatization in January 1990. In 1990, it was able to have a debt service coverage ratio of over 1.5 times and a debt/equity ratio of lower than 60/40. EGE, the private sector company, showed losses during 1989 and 1990 due to strong comp:tition from imports at low prices and also due to labor strikes. It was not able to meet the debt service coverage ratio of 1.5 times during those years. However, its financial position is forecast to improve in 1991 with the rising world fertilizer prices and the resolution of the labor problem. TUGSAS and KBI, as noted, are continuing to face serious financial problems. As noted they have been showing losses during 1987-90 and have not been able to meet financial covenants. Their financial situation might get worse partly due to high short-term borrowings at high interest rates. The plants of both TUGSAS and KBI are, however, economic. (The economic viability of the Kutahya II operating at slightly above the attainable capacity.  - 16 - plant of TUGSAS could be improved with further investment for switching over from lignite to natural gas as feedstock). Bank has urged the Government to privatize TUGSAS and KBI on a priority basis consider4-g the fact that their financial losses have been increasing in spite of their potential for profitable operation. They are expected to regain profitability following proposed privatization. 9. Bank Performance 9.1 The bank helped the Government develop an overall program for rehabilitation/modernization of the fertilizer sector through a project preparation fund (PPF) advance. A consultant study subsequently provided the basis for rehabilitation/modernization of the fertilizer industry in Turkey. As the task was very complex, it was decided to carry it out in two Bank operations involving six companies and eight plants. The Bank showed flexibility in changing the project scope of some subprojects when it was justified in the light of (i) the changing demand pattern for fertilizers; (ii) the international price situation for fertilizr- intermediates and finished products; (iii) results of detailed plant inspection by engineering firms prior to bid offers; and (iv) a changing situation with respect to fertilizer feedstock supply (e.g., the arrangements for supply of Soviet natural gas to Turkey which were made following the Bank approval of the Projects). The Bank also showed flexibility in agreeing to a change in the approach to the implementation of the plant rehabilitation/implementation work. As a result, most of the work was carried out when the plants were down for annual maintenance and/or emergency repairs. This was agreed to minimize decline in fertilizer production during Project implementation. The original approach proposed at the appraisal stage was to carry out the rehabilitation/ modernization work in one step by closing the plants. As a result of the change in the approach, the Project implementation took a much longer time than originally estimated. Therefore, the time required for supervision of the two Projects was significantly more than anticipated earlier. 9.2 The Bank served as a catalyst in the privatization of one fertilizer company (AKGUBRE) in January 1990 follawing the completion of rehabilitation of its plant at Mersin. The company performance has improved remarkably since privatization. The Bank is now working with the Governrent in the privatization of other beneficiaries of the two loans in the public (i.e., TUGSAS, IGSAS and KBI) and joint sectors (i.e., GUBRE). 9.3 The Bank has also played an important role in designing the projects with particular attention to energy saving and reduction in environmental pollution. As noted, results in iese areas have been significant. 9.4 The main shortcomings in the Bank's role in the Projects were: (i) the price assumptions for financial and economic calculations proved optimistic; (ii) the change in the pattern of demand for specific products following price liberalization was not foreseen clearly at the time of appraisal; (iii) the option of project implementation over a longer period  - 17 - with a view to minimizing production declinn wae not exami ed closely; and (iv) the Bank did not put adequate pressure on the Government and the companies during annual project implementation reviews to rectify violation of financial covenants in a timely manner. 10. Borrower's Performance 10.1 The Government (the Borrower) worked closely with the Bank and provided full support to the rehabilitation of the fertilizer sector. However, it did not take prompt measures to rectify the non-compliance with financial covenants by loan beneficiary companies such as TUGSAS, KBI, GUBRE and AKDENIZ . Further, in the case of TUGSAS and KBI, in which the Government is the sole shareholder, the authorized capital increases to the companies were not paid in a timely manner, causing liquidity and debt service problems for the companies. Moreover, the Government is continuing with farmer fertilizer subsidy which costs the Treasury about US$450 million a year. As the Price Stabilization Fund from which the fertilizer subsidy is paid is often short of money, the Government is not able to provide the compensation payments to fertilizer producers in a timely manner. This situation has caused a major working capital problem for the fertilizer companies in general. With the Gcvernment payments being delayed too long (3-4 months), the companies have to resort to short-term borrowings at high interest to finance working capital. As a result, the interest burden on fertilizer companies have increased sharply in recent years. Further, the Government has been slow in proceeding with the privatization of fertilizer companies, in spite of the announced policy for privatization of state-owned enterprises in general. The fertilizer companies which have had their plants rehabilitated under the two Bank loans are ready for privatizationi and the Government should give priority to these in the privatization process. 11. Consulting Services 11.1 A number of consulting and engineering firms were involved in the execution of the subprojects under the two loans. Overall, their performance was satisfactorv. However, their performance could have improved if all the companies had full-time project teams with capable company personnel. In the case of one foreign engineering firm which had a local sub-contractor for a specific task in the GUBRE plant, the foreign firm experienced problems with the local sub-contractor as the latter refused to carry out certain modifications which the foreign firm recommended.  - 18 - 12. Lessons 12.1 The main lessons learned from the projects can be briefly summarized as follows: (a) Complexity of revamping old plants of different vintage have to be taken into account more fully in determining the project implementation schedule; and more attention is needed for risk assessment of those old plants. (b) While financing rehabilitation projects, agreements should be sought on a schedule for privatization. (c) Project scope changes are to be anticipated in rehabilitation projects as detailed plant inspection work progresses. (d) Possible changes in the pattern of demand for specific products have to be taken into account in determining the project scope. (e) It is necessary to include a bonus/penalty clause in engineering and construction contracts to expedite project completion. (f) Full-time project teams staffed with adequate experienced and capable personnel are essential for successful implementation. (g) Details of the training program, especially training of selected personnel abroad should be worked out during project preparation. (h) More attention should be given to improving accounting and financial management aystems in public sector companies. (i) The approach to Bank forecasting of fertilizer prices need review. (j) Bank should exert more pressure on the Govenment and loan beneficiaries to comply with covenants in the legal documents.  - 19 - PART II: PROJECT REVIEW FROM BORROWER'S PERSPECTIVE TfHE REPUDBILIC OF TURKEY PRIME MINISTRY TH1E UNDERSECRETARIAT OF TREASURY AND FOREIGN TRADE Ref:DFt-rV-4-!55/85 Ankara, January 6,1992 Mr.Vranco BATZELLA ENERGY DCVISION Indubtry and Enoergy Divinion CORRESMi"D4ENCE ESU, CD 1 LOG NO.: ThP. World hank DATE RE'D: httshiii gton l).C. ASSIGiNED TO A U.S1.3A. 0DAT E R ESZD -ITL- Ref: Project Completion Report of First and Second Fertilizer Rationalization and Energy Saving Projects. !'irst of all, we would like to extend our deep appreciation for your invaluable contributions and kind cooperation during the implementation peri.od of the referred projec:t and also for well preparecl Proaject. Completioll Itcport (PCR). To start with, we have some comments on the serntion concerving Dorrower'Si Performance. Concerning the TreaRury's action on belhlf of the Borrower in the PCR, it's mentioned that Treasury did not take prompt measures to rectifv the noncompliance with financial covenants by loan beneficiary companies. Even It was the fact that the Treasury had from time to time some difficulties in compensating lon )beneficiaries for duty losses and making paid-in capital increases in a timely manner due to macro economic difficulties, overall efficiency, profitability and all other financial ratios were still improving for these companies as the projects' imnpltlment81.ion were proceeding well and leading to producrtivity gfti.ns as also clearly indicated it. various Biank supervision reports in the paist, Tra this respect, paid irn capital of TUGSAA has reached to 431 billion TI. atnd TtIGSAS's receivables fr-om the Government have been fully r-ecovered. Further, all fertilizer manufacturers and distributers, including TUGSAM were paid for their receivables rrising from fertilizer subsidies out of the Price Stabilizat-ion Fund's resources a.s of 29.8.1991. It has to be also emnphasized that Lhe Government's initiative to privatize the distributio of ferti.lizer has been a major reform for the liberalization of fertilizer marketitng and pricing systemii of 'Turkey. Furthlermo?e, with the liberalization of imports and the reduction in tariff rates, this Sector has become more (;0mpctitive, as well.  - 20 - Inr order to protect the proJect beneficiaries from continuous working capital problems, whieh are causing these companies resort to short-term borrowing at high interest rates, the Treasury has been working on supplying TUGSA$ with a $ 100 million long term loan under its guarantee. Similarly, Tilrk Eximbank is in an effort to re-schedule the term structure of all loans to KB?, which are due by the and of 1990 (including also thoise of 88.7 billion TL to Eximbank itself). To this end, a J)rotocol was signied betweon KBI, Eti-bank (major shareholder of K131 by 99.9 %) and TUrk Eximbank1 on 20.12.1990. TUrk Eximbank also provided to Kbl a lIine of credit of the same anmount agai.nst this enterprise's maturing debts to itself. In addition to t}lis, the maturity of the loan (1998-TU) to KBJ bas been extended lby Turk Eximbanik until Maroh 3096. There is also a strong emphasis in thLe rcR that TUGSAS and KBt slouldl be privati2ed as soon as possible. In this respect, it is claimed that those firms will be economically viable throughl the increase in efficiency of management as a result of privatization. As It was previously explained to the Bank on several occasions, privatization of these companies will be hiiiidled within the framework of the Government's privatization plan which is already under study. However, when TUGSAS KUtabya Plant Reh:abilitation is re-considered, this Plant has been incurring significant losses eventhough its rehabilitation process was completed. This is mainly because of lignite based expernsive amoniac dependent style of fertilizer production. Hence, at this stage, it is difficult to expect that KUtahya Plant to be easily privatized. Privatization of this Plant can only be possible, if fertilizer production technics will be transformed from lignite to natural gas based processes. When we assess the current sJtuation of anme beneficiary companies ; Rlaz3g affiliate of TUGSA$ has been modified as to allow a privatization operation, by the High Planning Counicil Decision. Besides, it Is aimed for the privatization purposes t.hat the management of TUGSA$ has to be in full compliance with the sound managerial and marketing principals without waiting the st rengthening (if iLt tibrancial struc1ture. KB1, on the other hland, has bean incurring losses on its overall balance-sheet despite its protitability ont operations. The reason for these losses is interest expenses on KBI's bank loians. In this context., K1I3 is expected to suffer from a loAs of 179.9 billion TL in 1991. When international blister prices in this year are considered, in August the price level fell to $ 2015 from January's level of $ 2404. For this reason. selling prices are well below the cost and leading to an accumulation of substantial stocks. Therefore, it is hard to envisage KBJ in the near future to be an enterprise restoring its ffnancial viability and repaying its all debt. We also share your concerns about pr ivotizotion such that te shares need to be sold to employees expertized on copper production and to foreign specialised firms in this tield.  - 21 - With regard to IGSA$'s situation# t.his firm reached to a profit level of 21.3 billion Tt,. in 199(3. Furthtermore, during the first half of 1991, IGSAS made a full utilizatio0, of its urea production capacity and increased its profits-to 45 billion TL. In 1990, 1GSAS's production accounted for 81 % of total domestic urea consumptionL. Even though, after the second half of 1.988, more exponsive nattral gas was started to be used instead of naphta as a raw material in tGSA$'s Plant, a significant reduction in costs has been realized. When considered Its achievements, IGSA$ should take pri.ority in privatization well beforc TU1GSA$ Atnd KBI. As a conclu%ionary point, it could be said that the main aims of the project were realized. In general, the projects were well-suited on overcoming technical problems of public and private plaDts through increasing energy savings, preventing environmental, pollution and developing organizational structures and satisfying educational needs. As a rcsult of these, sector- wide capacity utilization increased from 40 . in 1979 to 75 % during and aft;er the implementation of both projects. As a matter of fact., capacity utilization could not he increased further, hecausso of growing importations sousrced by low internati.onot i prices. Some of the beneticiary firms, namely IGSAS, GUBRETA$ AKD)ENIZ GUWREs TUGSA$ have individual comments regarding witlh the Project Completion Report and these are also conveyed for your consideratiun, in the enclosures. liest regards Sincere y_ Yours 0tevn OZGfdN lbeputy Difecto' C,:ret?t c4 Forelion t;Vr cn }ncl5s; l(SA 's comment.s on PCR QUJRBTA$ comments on PCR AKDENIZ ;UDfRE's viuws and comments on PCR TLJUSAVS views and comments nn PCR  - 22 - IGSAS Reterring tv Article 0.2 on page 15 It must be takenin to consideration thdt taSAS as ment.ioned at the bottom lrie of page (Itl) of PCR, isn't a joint but a public sector institution. GUERETAS Referring to Article 12.1/J on page 16, the following issues may be proposed in the context of the complianice of the project implementing institutions to covenants of loan agreements Afs it's known, loani beneficiary institutions face many vommitments generated by the loan agreement. These commitments generally include important. financial covenAnts, such as to be audited by on independent audit firm and to comply with some tinarcial ratio; in the project implementation process. However, the loan beneficiaries weren't able to comply with their commitments and the World Bank hasn't exerted interventionist pressures anymore over those institutions due to Treasury guarantee. For this reason, we are of the opinion that the Treasury should implement various measures such as to control the realization of the institutional obligations and in the case of non-compliance with financial covenants to suspend the relevant part of credit.  - 23 - Sjucctj ; Vitaws a;r. ct,itner4s of A'kdtc'Lz Cil:xLe c.n th,-.-is cf thr: Px'-e.ct Wnlilc'tior 1wiX4.CIL i Rimai by th. W1ld3 HaO wtere Akd.3cniz (Xb.v. lx r.crvcd to In crntexi.. vk-; liav reviewo d c t)o. iev) Y.C.R. vr.d wuluci llike to Oonr;rat as fo1!.ows: 1. P1s mefer to Art 4.4 cn P, ' WC! would brirq to youir attAzition thal. th, ac,5iqctnL of only crhe adv1ior to the projet waa in ac r(nce with parac;raph c c)f tlf, Artic1el 2.02 of tly. )lcMlblitat jun Projtxre /,grnent sigmre1 1 y Nutibje arnd thfr Worl(d MAnk. In ampliance with the abov: wgreftir.t a*na pirvxint to Advisoi-y ServiceS kjrraYsmint r0gnel w'ith Creuwr atm1 OW +1hich .tlsc, vs approvy L y tfl 1hbrld J3!n, ori aldvisor was asSirned to AW pyubr q-r)ojc;t tn.tU. Tn t.h tviiinn j, perfolttiiiflc anid capabiAttAies of the first advi=sc7 SrOeC-eedr3 tc) tU.*' W M&qtucite1. Thribcre ury)n &.irnx=l(.1 tA ; xro lev wzs replA]crd by arc, 4uciisor. I1) scuz=nY wc )L-jieVe t;hlt dirinz4 enigineerinn r' .e of t!ht prr-jec,t, assis:t;wtx, and r-Trv'i)es cf thiL advisor te.h prcCjeCt sas Very satisfactory. Unsequetly, LitrH was mt ajy Interiptbion or epjiy cv. wXk; th&t laid )een ccarriced oit by A3qUbru1 witJhin t.ts.r