Zambia - Fertilizer Industry Restructuring Project

Docment of The World Bank FOR OFFICIAL USE ONLY Report No. 11904 PROJECT COMPLETION REPORT ZAMBIA FERTILIZER INDUSTRY RESTRUCTURING PROJECT (CREDIT 1662-ZA) MAY 24,1993 Industry & Energy Operations Division Southern Africa Department Africa 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 1 Million Zambia Kwacha (ZKW) - $170,000 US$ (January 1986, Appraisal) 1 Million Zambia Kwacha (ZKW) - $ 17,000 US$ (May 1991, Project Closure) 1 Million Zambia Kwacha (ZKW) - $ 7,000 US$ (April 1992) ABBREVIATIONS KfW - Kredinstalt fur Wiederaufbau MT - Metric Tons NCZ - Nitrogen Chemicals of Zambia Limited OECF - Overseas Economic Cooperation Fund of Japan OMF - Operations Management Firm PCR - Project Completion Report ZCF - Zambia Cooperative Federation FISCAL YEAR Government - January to December NCZ - April to March  FOR OFFICIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A. Office of Director-General Operatlons Evaluation May 24, 1993 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESTDENT SUBJECT: Project Completion Report on Zambia Fertilizer Industry Restructurine Project (Credit 1662-ZA) Attached is a copy of the report entitled "Project Completion Report on Zambia - Fertilizer Industry Restructuring Project (Credit 1662-ZA)" prepared by the Africa Regional Office, with Part II contributed by the Borrower. The objective of the project was to restore the technical integrity and the financial viability of Nitrogen Chernicals of Zambia (NCZ). This objective was not achieved. The scale of the effort required was underestimated. At completion, the plants were still not operating properly and the company was incurring heavy losses. The Bank contribution to the project was to finance technical assistance, training and rehabilitation of some plant facilities. Training, management and environmental/safety aspects were enhanced as a result of the project. However, the overall performance of the consultants hired to carry out this component was well below expectation. Two bilateral donor agencies also participated in the project, OECF from Japan and KfW from Germany. The scope of the works changed significantly when delays in the KfW financed component led to further deterioration of the plant. Since then, rehabilitation has been running behind requirements. The project is rated as unsatisfactory and its sustainability as uncertain. Although some data are missing, the PCR provides a frank and informative account of project outcomes. An audit is underway. Attachment This docurnent has a resricted distribution and may be used by recipients only in the perfornance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  I  FOR OFFICIAL USE ONLY PROJECT COMPLETION REPORT ZAMBIA FERTILIZER INDUSTRY RESTRUCTURING PROJECT (CREDIT 1662-ZA) TABLE OF CONTENTS PAGE NO. Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . .i Evaluation Summary ........... . . iii PART I. PROJECT REVIEW FROM BANK'S PERSPECTIVE . . . . . . . .1 A. Project Identity . . . . . . . . . . . . . . . . . . .1 B. Background .... . . . . . . . . . . . ... . 1 C. Project Objectives and Description . . . . . . . . . . 2 D. Project Design and Organization . . . . . . . . . . . 2 E. Project Implementation . . . . . . . . . . . . . . . . 3 F. Project Results . . . . . . . . . . . . . . . . . . . 5 G. Project Sustainability . . . . . . . . . . . . . . . . 6 H. Bank Performance .... . . . . . . . . . . . .... 7 I. Borrower Performance .... . . . . . . . . . .... 8 J. Bank/Borrower Relationship . . . . . . . . . . . . . . 8 K. Consulting Services . . . . . . . . . . . . . . . . . 9 L. Project Documentation and Data . . . . . . . . . . . . 10 PART II. PROJECT REVIEW FROM BORROWER'S PERSPECTIVE . . . . . . 11-24 PART III. STATISTICAL INFORMATION . . . . . . . . . . . . . . . 25 1. Related Bank Loans and/or Credits . . . . . . . . . . 25 2. Project Timetable . . . . . . . . . . . . . . . . . . 26 3. Loan Disbursement .... . . . . . . . ...... . 27 4. Project Implementation . . . . . . . . . . . . . . . . 28 5. Project Costs and Financing . . . . . . . . . . . . . 31 6. Project Results . . . . . . . . . . . . . . . . . . . 33 7. Status of Covenants .... . . . . . . . . . . . . . 35 8. Use of Bank Resources .... . . . . . ... ... . 38 Staff Input . . . . . . . . . . . . . . . . . . . . 38 Mission .... . . . . . . . . . . . .... . . . 39 ANNEX 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 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.   - i - PROJECT COMPLETION REPORT ZAMBIA FERTILIZER INDUSTRY RESTRUCTURING PROJECT (CREDIT 1662-ZA) PREFACE This is the Project Completion Report for the Fertilizer Industry Restructuring Project in Zambia. The Bank's financing consisted of a credit (Credit No. 1662-ZA) denominated in SDRs and equivalent at the time to US$10 million which was signed on April 9, 1986 and became effective on September 25, 1986. The credit closing date, originally December 31, 1990, was extended subsequently to December 31, 1991. The accounts were closed with the credit being fully disbursed on May 10, 1991. The PCR was prepared jointly by the Industry and Energy Division of the Europe, Middle East and North Africa Regions shared services and the Industry and Energy Division of the Southern Africa Department, Africa Region (Preface, Evaluation Summary, Part I and Part III and by the Borrower (Part II). Preparation of this PCR was initiated during the Bank's final supervision mission of the project in August 1991 and is based, inter alia, on the Staff Appraisal Report and Report and Recommendation of the President, the Memorandum of Understanding and the Credit Agreements, Supervision Reports, correspondence between the Bank, the co-financiers, the Borrower and the chief beneficiary of the credit, internal Bank memoranda and data.   - iii - PROJECT COMPLETION REPORT ZAMBIA FERTILIZER INDUSTRY RESTRUCTURING PROJECT (CREDIT 1662-ZA) EVALUATION SUMMARY 1. Obiectives. The key objective of the project was to assist the new Zambian development strategy introduced in 1983, whose most important elements were: the transformation of the agricultural sector into the leading source of economic growth; and the restructuring of the industrial sector to increase efficiency and exports. 2. The project was to restore the technical integrity and the financial viability of Nitrogen Chemicals of Zambia Ltd (NCZ) in order to ensure timely delivery of fertilizer to Zambian farmers and explosives to the mines at internationally competitive prices and at minimum foreign exchange outflow. 3. Implementation Experience. At the request of the Zambian Government, the Bank decided in January 1985 to participate in the project with two bilateral donor agencies - OECF of Japan and KfW of Germany. The latter would be responsible for the physical rehabilitation of the two main production lines at a total estimated cost of about US$54 million. The Bank's contribution to the project was to finance technical assistance, training of NCZ's staff and rehabilitation of some off-battery facilities for a total estimated cost of US$10 million. 4. The Japanese rehabilitation component for the NCZ I production line was completed in August 86, only one month behind schedule and within budget. However, the German component was very delayed. The turnkey contract for rehabilitation of the NCZ II production line only became effective in early 87 - one year later than the appraisal estimates. The suspension of disbursements to Zambia by the Bank in 87 and by RFW in 88 led to further delays. As a result, the German contract was completed only at the end of 89. 5. The implementation of the NCZ II plant rehabilitation was disappointing. Performance of all consulting groups was below expectation. The scope of works changed significantly when delays led to further deteriora- tion of the plant. Plant rehabilitation could not be completed without additional financing of an unknown magnitude. Due to the donors' reluctance to close the large but undefined financing gap, the work was terminated when the funds were used up. Efforts were made by NCZ to reduce the scope of works and thereby the funds required to get the NCZ II plant "up and running". But the rehabilitation remained incomplete right up to the Credit Closing in December 1991.  - iv - 6. As a result, NCZ fertilizer production has not even reached 50% of the appraisal estimate. This has caused severe financial problems, which have been exacerbated by unexpectedly high production costs, customers who have defaulted on payments and the inability of the government to pay fertilizer subsidies brought on by earlier price controls. 7. Prolect Results. The project did not meet its key objective of increasing the domestic supply of fertilizer. Less than 20% of the country's fertilizer needs are supplied from the high cost NCZ operation. The rest of the supply is still imported in various forms from ammonia to finished products. It is difficult to assess whether the ongoinR efforts to complete the NCZ II plant and bring it on-stream will succeed. Indications are the if the fertilizer complex can operate at typical capacity, it will be financially and economically viable - on the basis that the costs incurred at the date of this report are treated as a sunk cost. It is therefore worthwhile for NCZ to continue its efforts to complete the rehabilitation, provided that this can be achieved at a reasonable cost. 8. Proiect Sustainability. The NCZ operation is not sustainable until the plant rehabilitation is complete. Sustainability can only be attained when sufficient operating profits are generated to pay for the necessary investments in preventive maintenance, overhauls and replacements. The following steps are needed: (1) Financially restructure NCZ to regain a strong balance sheet. The main requirement will be for the present government to fulfill the obligations of the previous government to pay off the inordinately high accounts receivable; (2) complete the rehabilitation of NCZ II; (3) elevate plant capacity utilization to the levels foreseen at appraisal; (4) ensure availability of foreign exchange for plant operation and maintenance and import of raw materials; and, (5) ensure a reliable supply of good quality coal. With effort, these steps can be achieved. 9. Findinxs and Lessons Learned. Overall, the project failed to meet its major objectives. It did little to establish a reliable and cost effective supply of fertilizers to the Zambian farmers. The successful outcome of the project pivoted around the total technical rehabilitation of the plant. When this failed, the TA, training and other software inputs also lost most of their impact. 10. The two most important lessons learned are: Firstly, rehabilitation of technically complex installations requires large financing contingencies, and one donor to be recognized as leader and to have the authority and influence to achieve results. In this project, the Bank was a minor lender and could not persuade the lead donor to see the project through to completion. Secondly, putting price as a major factor in the evaluation of consulting contracts leads the winning consultant to economize on the quality of staff. In turn, this leads to performance not meeting expectations.  PROJECT COMPLETION REPORT ZAMBIA FERTILIZER INDUSTRY RESTRUCTURING PROJECT (CREDIT 1662-ZA) PART I. PROJECT REVIEW FROM BANK'S PERSPECTIVE A. Project Identitv Project Name : Fertilizer Industry Restructuring Project Credit No. : 1662-ZA RVP Unit : Africa Regional Office Country : Zambia Sector : Industry B. Background 1.01 In 1983 the government asked the Bank to assist in the rehabilitation of the fertilizer and explosives manufacturing plants located in Kafue and owned and operated by the state company Nitrogen Chemicals of Zambia Ltd (NCZ). The first plant (NCZ I), delivered and installed by a Japanese contractor and financed by a bilateral loan from the Overseas Economic Cooperation Fund (OECF) of Japan, was commissioned in 1970. In order to expand and diversify production capacity of NCZ to meet a larger part of the country's fertilizer requirements, the construction of a second production line (NCZ II) was started in 1975 with a consortium of West German and French contractors responsible for the whole of the works except utilities and infrastructures and financed by commercial loans. Following several delays and cost overruns this plant went on stream in 1982. 1.02 In 1983 plant utilization was still below 35%. NCZ faced financial problems caused by the low capacity utilization, high production costs due to inefficient operations, and a heavy debt burden resulting from implementation of the NCZ II plant. Studies indicated economic merit in undertaking the full rehabilitation of both plants, and both OECF and KfW offered financial support. The government, therefore, changed its request and asked the Bank to participate in the full rehabilitation of both plants including training and measures to improve management, organization, operation and maintenance of NCZ. 1.03 The proposed project would help meet the two important new strategic goals. First, it would improve the supply of an essential input for increasing crop production at prices comparable with imports. Therefore it supported the transformation of agriculture into a leading agent of economic growth, a development the Bank encouraged strongly. Second, it would rehabilitate an important industrial enterprise within the framework of the new industrial strategy, also strongly encouraged and supported by the Bank.  - 2- C. Prolect Obiectives and Description 1.04 Obiectives. The main objective was to assist the government to physically rehabilitate the NCZ facilities and improve its management and corporate performance. 1.05 The specific objectives of the Credit were to assist in: restructuring NCZ's management, organization, staffing and finances; introducing modern management techniques for plant operation and maintenance; upgrading the skills of the NCZ staff; ensuring an integrated and efficient technical rehabilitation of NCZ's physical facilities; and, improving the raw material acquisition and final product off-take logistics system. 1.06 Proiect Description. The project consisted of two major components, namely: Policy and Institutional Improvement Component consisting of provision of operating management services, staff training, and technical coordination services for the physical rehabilitation of the NCZ plant. Physical Support and Financing consisting of technical rehabilitation of the NCZ I and II plants, off-sites, infrastructure and environmental facilities. 1.07 Proiect Costs and Financing. Project costs were estimated at US$ 69.25 million, of which the IDA credit was to finance US$10 million. (corresponding to about 12Z of the overall financing required), an OECF loan US$26.28 million, a KFW loan US$27.2 million, and NCZ the remaining US$5.37 million. D. Proiect Design and Organization 1.08 In retrospect it is evident that the design of the overall package, and of the Bank-supported components, were inappropriate. The idea was to integrate all project components into a single rehabilitation project under the Bank's overall control and supervision. The Japanese and German bilateral components were strictly kept within the battery limits of each plant while the TA component financed by the Bank ensured their coordination. Environmental and safety aspects were included in the TA component. Further, the Bank supported the rehabilitation of utilities and off-sites not covered by the two bilateral aid components. 1.09 A Bank financed operations management firm (OMF) was to restruc- ture and streamline NCZ's organization and management and train its staff. The credit and project agreements were designed to support and maintain the desired changes and improvements in NCZ performance and to provide the Bank with proper means for surveying the process. 1.10 NCZ had the primary responsibility for project management and implementation. It entered into turnkey agreements with the same contractors that originally had been responsible for plant design and installation - Kobe Steel of Japan and Klockner of Germany. Each rehabilitation project was monitored by a technical advisor appointed by the respective bilateral financing agency. Overall technical coordination and supervision of the total work, including improvement of the off-sites, utilities and environmental systems was performed by a technical coordinator provided by the OMF. The OMF  was also responsible for plant operation and management, training of NCZ staff, and development and introduction of new financial and management information systems, and suitable procedures for production optimization and cost control. A Project Steering Committee (PSC) was established by NCZ, its parent - Zimco - and Ministry of Finance to facilitate processing of policy and finance related measures. 1.11 All these arrangements should have ensured a major improvement of the management and corporate performance of NCZ, and the successful completion of the project. As explained below, things did not turn out as well as expected and the project is still not complete. E. Prolect Implementation 1.12 Implementation of the project has not been satisfactory. Only part of the objectives were met and the hoped-for positive impact on agriculture has been very limited. A general cause is that most of the parties to the project under-estimated the scale of effort required. There was also not a strong commitment to the project on the part of the government, especially with regard to foreign exchange allocations and setting of NCZ ex factory prices. The suspension of credit and aid disbursements to Zambia by the main donor agencies contributed significantly to the poor project outcome. 1.13 Prolect Preparation and Credit Effectiveness. The project was identified in August 1983 but the Credit only became effective on September 1986. It took more than one year of concerted effort by Bank staff to reach a first decision not to participate in the project. When this decision was sub- sequently reversed as a result of reevaluation of project risks and viability, it took another year for Board approval. 1.14 Strong measures had to be devised to reduce these risks to a manageable level. The efforts centered on integrating the various components into a single rehabilitation project, and persuading the government, Zimco and NCZ to completely restructure the firm. These activities directly related to NCZ were fairly successful albeit with some delay. But the efforts to coordinate the Japanese and German inputs met with only limited success. In spite of the Bank's recommendations that the NCZ I and NCZ II plants should function in tandem to achieve maximum operational efficiency the Japanese and West German companies proceeded with their technical design without mutual consultation and coordination. 1.15 The only real results of the Bank's technical coordination effort was the inclusion of a pollution reduction element in both projects. The bank had been keen for the adoption of a set of performance guarantees in the German contract, but these were negated when the plant was not completed. The modest outcome was partly due to late intervention by the Bank and reluctance by the bilateral agencies to support the modifications in the contracts suggested by the Bank. 1.16 Implementation Schedule. The physical rehabilitation component was originally scheduled for completion in December 1987. The provision of services by the OMF was to end in December 1989. With the delay of Credit  effectiveness to September 1986 things got out of sequence as the rehabilitation of the NCZ I plant had already been completed by August 1986, only one month behind schedule. 1.17 The scope of rehabilitation of the NCZ II plant proposed by the German contractor was reviewed and updated by NCZ in February 1986 and the turn-key contract was signed in June 1986. However, there were difficulties in fulfilling cross effectiveness conditions between the WB Credit and the KFW loan and the Klochner contract was delayed almost a year. Expected completion was revised to March 1989 instead of December 1987 as originally anticipated. The suspension of loan and credit disbursements to Zambia by the Bank in May 1987 and by KFW in March 1988 led to further delays in the NCZ II plant rehabilitation. 1.18 To make things worse it had become evident that the stage of deterioration of the NCZ II plant was much more advanced than anticipated. Additional rehabilitation would be outside the Klockner contract. The rehabilitation could not be completed within the rehabilitation budget and would require major additional financing. The Klockner contract was terminated uncompleted at the end of 1989. 1.19 No donor assistance could be found to complete the work due to lack of confidence in NCZ's capability to ensure project viability, and continued problems with aid disbursements to Zambia. Continued rehabilitation of the NCZ II plant was therefore done on basis of funding that could be provided by NCZ itself, with support from Zimco and the government. Due to the scarcity of these funds, the remaining rehabilitation work was divided into two stages: Phase IIA intended to get the NCZ II plant "up and running" and phase IIB to get the NCZ II plant up to higher performance. At the Credit closing date the phase IIA works were not yet completed and the NCZ II plant had not become operational. 1.20 In 1989 the OMF contract closing date was extended in stages for 15 months to extend the provision of OMF services to cover the delay in plant rehabilitation. 1.21 Credit Suspension. Due to Zambia's failure to service its bank loans and credits the Bank and IDA suspended disbursements to the country with effect from May 1, 1987, except for disbursement on ongoing consultancy contracts and some overseas training. The suspension was not lifted until mid-1989. The suspension prevented the purchase of spare parts and materials needed for plant maintenance and rehabilitation. The result was further plant deterioration and delays. 1.22 Proiect Costs. The estimated cost of the project at appraisal was about US$69.3 million. At the time of this PCR, NCZ estimated the total cost of completing phases IIA and IIB of the NCZ II rehabilitation and showed that the total project cost for the whole rehabilitation project was of the order of US$108 million for foreign costs and ZKW 770 million for local costs. The 70 x increase in the foreign costs is mainly due to the increase in rehabilitation works for the NCZ II plant that was seriously under-estimated at the start of the project.  - 5 - 1.23 Disbursements. At appraisal it was projected that the credit would be fully disbursed by December 1990. However, the penultimate disbursement was made in March 1991, when a large amount of approximately US$2.3 million was used to retroactively finance some purchases of spare parts. This became part of the foreign exchange supply to the country and so assisted in the macro-financial restructuring. In May 1991, the final disbursement of US$14,000 was made. 1.24 Risk Identification. Early in the process the Bank recognized that it would face many risks in the rehabilitation of a marginal, small size fertilizer plant. The risks were correctly identified: projected increases in world fertilizer prices would not materialize; delays in project implementation; capital costs higher than expected; and, lower than anticipated capacity utilization levels (NCZ I 80%, NCZ II 75%) due to poor management, technical problems, and the lack of foreign exchange. The project design attempted to accommodate these risks (part 4). Project implementation indicates that the Bank's first evaluation that these risks were too high to allow it to participate was correct. It was exactly the underestimate of the scope of the work which led to higher than expected capital costs. 1.25 Safety and Environment. The rehabilitation included plant modifications to reduce NOx emissions to an acceptable level. Comprehensive environmental and safety studies were carried out by the OMF and the Bank during implementation. They have been constructively acted upon by NCZ. F. Proiect Results 1.26 Proiect Obiectives. The project did not meet its chief objective of improving domestic production of fertilizers for development of Zambia's agriculture at minimum foreign exchange outflow. Despite the immense investments and efforts by the government and NCZ, the plants are still not operating properly. The resources needed to complete the project must be considered carefully. On the one hand, they are a drain on the energy and finances of the country, but on the other, the return on the incremental investment to get the NCZ II plant "up and running" is very attractive. 1.27 Physical Results. The rehabilitation of the NCZ I plant was completed almost on schedule. In spite of the scope of work done by the contractor being increased during implementation, the additional costs were within the contingency of the OEFC loan. 1.28 At the time of this PCR, the NCZ II plant had not been fully rehabilitated or brought into operation. NCZ is still short of a few million dollars to do the additional work identified during the execution of the Klockner turnkey contract. 1.29 Strenatheninf of NCZ Manazement and Organization. The Policy and Institutional Improvement Component which constituted the Bank's main direct input has been fairly successful in spite of the shortfalls in the OMF performance. The component was implemented partly by the Bank itself during project preparation and partly by the OMF.  - 6 - 1.30 The plant operation and rehabilitation projects are now managed completely by the Zambian personnel, following the termination of the OMF contract and the withdrawal of the expatriate contractors. The senior and operating managers are showing much initiative in relation to both completing the project and improving operations. In this sense, the efforts of the Bank and the OMF have been successful. 1.31 Financial Performance. At the Credit closing date NCZ was again in dire need of financial reconstructuring. It had not been in compliance with the financial covenants for 2 years. Because NCZ has been unable to submit recent audited accounts detailed scrutiny of the company's financial status at closing is not possible. There is little doubt that the actual NCZ financial performance is not comparable with the appraisal estimates since the company has been operated with heavy losses the last 3-4 years. 1.32 Prolect Impact. The project's training component has undoubtedly had a positive impact on the capability and performance of the NCZ management and staff. Today they represent a vast resource of fertilizer and process industry expertise - a sound asset for the country. The environmental effects of the fertilizer production in Kafue have been reduced to an acceptable level and the safety aspects of plant operation have been significantly improved. Further, the project has had a positive impact on the fertilizer pricing policies and it has led to improved autonomy of one of the major parastatals, as a possible step towards future privatization. G. Prolect Sustainabilitv 1.33 The present low capacity utilization makes the NCZ operation unsustainable today. NCZ needs to function at a level where the generation of operational profit will allow it to invest enough in preventative maintenance to sustain operations. Sustainable operation requires the Kobe and the Klockner plants to operate at a high capacity utilization level. This requires the presently inactive NCZ II plant to be brought on-stream. The estimated cost of completing Phase IIA to get the plant "up and running" has been reduced by NCZ to about US$4 million from the originally estimated US$15- 20 million. Some US$1.3 million was obtained from Zimco and the balance is being sought from commercial banks as NCZ improves its financial standing. Part of the funds for Phase IIB have been obtained in the form of a US$8 million grant from the Italian Government. 1.34 NCZ is financially devastated and has been so since it was asked by the government to take over the fertilizer marketing and distribution activities of Namboard and ZCF more than 2 years ago. It did so but was not given enough working capital, nor has it been paid fully for past sales. The government directed NCZ to supply fertilizer to customers reluctant or unable to pay for it and has not acknowledged its liability to recompense, nor has it paid NCZ the subsidy element for the period when prices were controlled. 1.35 The company needs a capital injection of some KW 4.5 billion to get it back on a sound financial footing. A major financial restructuring of NCZ will thus be required to improve the company's credit rating if it is to obtaining commercial funding for rehabilitation purposes.  -7- H. Bank Performance 1.36 The Bank made major efforts to minimize and control the many risks associated with the project. Project preparation and implementation were closely controlled and monitored. There were detailed identification, pre- appraisal, appraisal and two post-appraisal missions. During the 63 months between the credit effectiveness and closing, there were 14 formal - and many more informal - supervision missions, including two major project reviews (schedule B, section 8, part III). 1.37 The Bank's performance, including the technical staffing of the various missions, can generally be described as satisfactory. 1.38 The financial contribution of the Bank was only 12Z of the total funding, but yet the Bank took on the responsibility for the integration of the project components into one single rehabilitation project and for the coordinating, optimizing and integrating the two bilateral components. This was a major undertaking which in the end failed to achieve its goals. 1.39 Though the Bank generally made a positive contribution to the intended improvement of NCZ's technical integrity and economic and financial viability, in retrospect, the following lessons may be learnt from the experience in the Project: (a) The immense investment in the NCZ plant in Kafue is still non- performing. Huge resources are required to bring the plant on stream in a sustainable manner. It therefore seems fairly obvious that the Bank should have stuck to its original decision not to participate. Instead, it should have helped Zambia develop an efficient nationwide fertilizer import and distribution system to ensure timely availability of fertilizers at a reasonable price. (b) Due to the suspension of disbursements the provision of the OMF- component became the Bank's sole direct contribution to the project. The Bank ought therefore to have reacted more promptly to the shortcomings and failing performance of the ONF. (c) The placing of expatriate consultants in line management functions was a very delicate matter that did not turn out well. More attention should have been given to this aspect of the OMF-NCZ agreement. There should have been more critical scrutinizing of the professional and personal profiles of the appointed candidates. (d) Stronger technical coordination of the Bank financed components and those of the bilateral agencies was needed. The required characteristics of the Bank and bilateral components need to be sufficiently defined so that all the donors are acting together. (e) The rehabilitation of complex technical installations requires the inclusion of very generously sized contingencies in the financing plan.  - 8 - (f) When the major donor chose to decide against the Bank's recommendations not to complete the project this inevitably led to physical failure of the project. An important lesson is the risk accepted by the Bank when relying on other donors in complex projects, and the potential for better success if a donor takes total responsibility for providing external assistance for a project. (g) The blame for the project failure is a contentious issue. The bilateral agency blames Government, NCZ and the OMF. It also blames the Bank for inadequate efforts in supervising coordination of rehabilitation. The Bank never accepted responsibility for more than provision of one individual as coordinator. Eventually, though, the Bank took steps when the suspension situation permitted and when it became evident that no other donor would fill the gap to add to this effort through refocussing the role of the OMP. The style and tone of bilateral communications did not help to promote a supportive donor relationship. I. Borrower Performance 1.40 Government compliance with the covenants has generally been unsatisfactory especially the provision of the necessary financial support to NCZ during project implementation. To a significant extent the government has been instrumental in getting NCZ into its present serious financial jeopardy. 1.41 The technical management provided by NCZ during project implementation can be considered satisfactory except for the lack of effort in the maintenance and preservation of equipment and materials during the long periods without rehabilitation activities. There is some excuse for this in the lack of foreign exchange to obtain needed supplies, and the unclear split of responsibilities between the OMF and NCZ. 1.42 The financial performance of NCZ has not been satisfactory. NCZ is out of compliance with the covenants concerning the submittal of audited accounts for FY 90/91, which has not been received by the Bank. 1.43 In retrospect, the main lessons that can be learned by the borrower and the beneficiary from the project experience are: (a) The rehabilitation of technically complex installations cannot proceed without proper financing, including adequate provisions for contingencies. (b) It is vital to establish proper responsibilities, performance criteria and baseline when employing an OMF. J. Bank/Borrower Relationship 1.44 The Bank's relationship with the government, NCZ and the co- financiers OECF and RFW has generally been good. Due to the disjointed timing  - 9 - of the Japanese input the actual cooperation between the Bank and OECF was rather limited. In the case of KFW it was fairly close and included coordinated pre-appraisal and appraisal, comon project reviews and cross effectiveness between the IDA credit and the KFW loans. The cooperation between KFW and the Bank ended suddenly in 1990 after both had monitored nearly 12 months of detailed negotiations between Klockner and NCZ concerning the execution of Phases IIA and IIB. While the Bank felt that the project should be brought to 'up and running', at that point, the German government withdrew its support when it saw little chance of conditions being fulfilled that it had set on project viability and management. This led to a decision by the Norwegian Government not to finance a management contract between Norsk Hydro and NCZ that likewise had been negotiated for months. K. Consulting Services 1.45 Two groups of consultants were employed to help execute the project - an Italian company and a German firm. The Italian firm was selected as the OMF under IDA rules from five international consulting groups. The German firm was selected under KfW rules from a list of German consultants to supervise Klockner's work. Neither seems to have performed with full satisfaction. Both were the subject of many complaints by NCZ management during project implementation. 1.46 The Italian firm was selected by NCZ and approved by the Bank as OMF and provider of the technical coordinator. It won the bidding over a Norwegian company, when commercial evaluation of the two bids, necessitated by an apparently very narrow difference between the technical bids, showed that the Italian offer was approximately 402 lower than the Norwegian one. This was mainly due to lower Italian manmonth rates. By international standards, the Italian firm's salaries were also quite low. This may have been the cause of complaints by NCZ about the quality of Italian personnel. Some were said to be less highly qualified than the Zambians they displaced, others to lack fluency in English and many not to possess deep experience or knowledge about parts of the technology of the NCZ plants. 1.47 An evaluation of the performance of the OMF in December 1989 indicated severe shortcomings with regard to plant maintenance, performance of studies, issuing of progress reports, training of Zambian counterparts and introduction of improved operating systems. Poor relations existed between NCZ and OMF management and staff. However, taking note of the limited choices caused by the suspension, the significant Italian grant money that had been promised and based on a reform program for the OMF, the Bank agreed that the Italian contract could be extended for 15 months to March 31, 1991 to cover a crucial period of project financing negotiations. 1.48 The selection of the German consultant to control the performance of Klockner - both German and both financed by KFW - created some problems during implementation since NCZ believed (rightly or wrongly) that the consultant was "too close" to the contractor.  - 10 - L. Proiect Documentation and Data 1.49 The Development Credit Agreement and the Project Agreement have both been found quite adequately designed for achieving the intended project objectives with regard to key operational, organizational and financial areas. 1.50 The Project Appraisal Report was very comprehensive and provided an appropriate framework for reviews, supervision missions and for the present PCR. However, a clearer definition of indicators for project implementation and project achievements and their corresponding baseline as well as the inclusion in the Agreements of the requirement for submittal of data for such indicators would have been most useful in connection with project evaluation. 1.51 Generally the project files were readily available and very comprehensive but only a few of NCZ's audited accounts could be identified in the files. There were holdups in the auditing of the accounts caused by NCZ's financial problems, but by the time of the PCR, all the accounts except those for 1990/91 had been released. The Bank's database Was not able to provide any useful Audit Covenant Reporting for this PCR.  - 11 - PROJECT COMPLETION REPORT ZAMBIA FERTILIZER INDUSTRY RESTRUCTURING PROJECT (CREDIT 1662-ZA) PART II. PROJECT REVIEW FROM BORROWER'S PERSPECTIVE  - 12 - .1 Nitrogen Chemicals of ZambTiaLtd. LL ~ 3PL-ANT SITE KAFUE INDUSTRIAL ESTATE TeiephIone: Kafue 311531/5 AJ/cozrewondencetbe ad d P.O Box 32483 Tr.lex: Z7A 70030 th Fe Gwera/ Mana5F!r LUSAKA Telegraphic Address _- .. "NITROCHEME _ P.O Box 26 KAFUE Repub.ic of Zanbc.i. Ref: HCZ/GN/Ilt