Turkey - First and Second Fertilizer Rationalization and Energy Saving Projects

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 1 PERFORMANCE AUDIT REPORT TURKEY FIRST AND SECOND FERTILIZER RATIONALIZATION AND ENERGY SAVING PROJECTS (LOANS 1985-TU AND 2131-TU) JUNE 30, 1994 Operations Evaluation Department This document has a restricted distribution and may be used by recipients only in the performance sf their official duties. Its contents may not otherwise be disclosed without World Bank autborizatioi. CURRENCY EOUIVALENT'S Average Annual Rate (TIJUSS 1.0) 1982 - 162.6TL 1983 - 225.5 1984 - 366.7 1985 - 522.0 1986 - 674.5 1987 - 857.2 1988 - 1422.3 1989 - 2121.7 1990 - 2608.6 1991 - 4171.8 1992 - 6872.4 1993 - 10983.3 ABBREVIATIONS AND ACRONYMS AKGUBRE - Akdenlz Gubre Sanayll A.S. AZOT - Azot Sanayii T.A.S. AN - Ammonium Nitrate AS - Ammonlum Sulfate CAN - Calcium Ammonium Nitrate DAP - Di-Ammonlum Phosphate DONATIM - Turkiye SIral Donatim Kurumu EGE - Ege Gubre Sanayll A.S. GUBRETAS - Gubre Fabrikalar T.A.S. IGSAS - Instanbul Gubre Sanayll A.S. KBI - Karadeniz Bakir Isletmeleri N - Nitrogen Content in Fertilizer NP - Nitrogen/Phosphorus compound NPK - Nitrogen/Phosphorus/Ptassium compound P(P2O) - Phosphorous Nutrient Content In Fertilizer SEKER - Turkish Sugar Compnay SPO - State Planning Organization SSP - Single Super Phosphate TKI - Turkish Coal Authorities TPAO - Turkish Petroleum Corporation tpd - tons per day tpy - tons per year TSP - Triple Super Phosphate TUGSAS - Turkiye Gubre Sanayli A.S. FISCAL YEAR January 1 - December 31 FOR OFFICIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A. Office of Director-General Operations Evaluation June 30, 1994 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Performance Audit Report on Turkey - First and Second Fertilizer Rationalization and Energy Saving Projects (Loans 1985-TU & 2131-TU) Attached is the Performance Audit Report on Turkey - First and Second Fertilizer Rationalization and Energy Saving Projects (Loans 1985-TU and 2131-TU) prepared by the Operations Evaluation Department. The two projects aimed at rehabilitating, modernizing, rationalizing and balancing six fertilizer plants so that their combined capacity utilization would increase from around 50 to 85-90 per cent. Moreover, the projects included the rehabilitation of a copper smelter to supply additional quantities of sulfuric acid to the neighbouring fertilizer plant. It was anticipated that by the end of the 1980s, the Turkish fertilizer industry would substantially meet the demand for all types of products. The projects were prepared after the first oil price explosion and the commodity price boom of the early 1970s, and in the midst of another oil price increase with corresponding increases in the price of fertilizers. A combination of factors including the choice of high cost technology for the production of ammonia from lignite, the misreading of the consumption trend for a major fertilizer product (TSP), liberalization of the fertilizer imports, sharp decline in world prices, continuing subsidies at the farmgate and its attendant distortions, and the lack of serious institutional reform in the major public sector fertilizer producing enterprise (TUGSAS), eventually led to a poor project outcome. Out of an increase in the total nutrient consumption of 762 thousand tons between 1980 and 1992, the projects provided around 40 per cent. The projects' outcome is rated as unsatisfactory, their sustainability as uncertain and the institutional development impact as modest. Three crucial lessons of experience were drawn from the projects: (i) the existence of a sound management is a must for successful rehabilitation; (ii) the Bank and the Borrowers should pay close attention to significant reversals of trends to avoid making unrewarding investments; and (iii) during the process of economic reforms and liberalization, productive enterprises must be offered assistance and predictability to tide them over difficult times. Robert Picciotto by H. Eberhard K6pp Attachment 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 PERFORMANCE AUDIT REPORT TURKEY FIRST AND SECOND FERTILIZER RATIONALIZATIONAND ENERGY SAVING PROJECTS (LOANS 1985-TU AND 2131-TM) TABLE OF CONTENTS Page No. PREFACE .. ............................................ i BASIC DATA SHEETS ...................................... EVALUATION SUMMARY ................................... vi I Introduction ........................................... 1 II Project Background. ...................................... 1 III First and Second Rehabilitation Projects (Loans 1985-TU and 2131-TU) Project Design and Objectives - First Project .................... 3 Project Design and Objectives - Second Project ................... 4 IV Project Implementation ................................... 4 Project costs and Financing ............................... 6 V Project Results ....... ..................................... . 7 TUGSAS Kutahya 11........ ..................................... . 7 Samsun ........ ....................................... . 8 KBI................................................... 9 Gubretas.............................................. 10 Igsas ....... ......................................... 10 Akgubre............................................... 11 EGE Gubre ............................................ 11 Human Resource Development ............................. 12 Energy Savings - Specific Consumptions ....................... 12 Environmental Protection ................................ 12 Compliance With Covenants .............................. 13 VI Overall Assessment ...................................... 13 Consumption Forecast .................................. 14 Rehabilitation of Kutahya II Ammonia Plant ..................... 15 This Report was prepared by Farrokh Najmabadi (Task Manager) and Abbas Gholi Bakhtiar (Consultant) who audited the projects in October 1993. Eneshi Davis provided word processing assistance. Tlii.,t -*-:nt 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. Institutional Development ................................ 16 Sectoral Reforms ..................................... 16 Pricing and Subsidies ................................... 16 Projects Outcome ..................................... 18 Sustainability ........................................ 18 VII Lessons Learned and Recommendations ........................ 19 ANNEXE,J 1 Turkey - Capacity Utilization by Fertilizer Companies 1976-1980 ..... 21 2 Production, Imports and Consumption of Fertilizers - 1977-1979 ..... 22 3 Forecast of Capacity Utilization After Rehabilitation ............. ..23 4 Project Costs......... ............................. 24 5 Project Financing (Loan 1985-TU) ............................. 25 Allocation of Bank Loan (Loan 1985-TU) .................... ..25 6 Project Financing (Loan 2131-TU) ............................. 26 Allocation of Bank Loan (Loan 2131-TU) .................... ..26 7 List of Loan Beneficiaries................................. 27 8 Kutahya - Fertilizer Production and Sales .................... ..28 9 Cost Structure of Ammonia Produced at Kutahya II .............. ..... 29 10 Kutahya - Income Statement ................................ 30 11 Samsun - Production Performance of Various Plants ............. ..31 12 Samsun - Production Costs for Various Fertilizer Products ......... .... 32 13 Samsun - Income Statement ...... ........................... 33 14 KBI - Production Performance ..... .......................... 34 Cost Structure of Sulfuric Acid Produced at KBI ............... ..34 15 GUBRETAS: Yarimca - Fertilizer Production ................. ..35 Raw Material Inputs ..................................... 35 16 GUBRETAS: Yarimca - Income Statement ................... ..36 17 IGSAS: Izmit - Annual Production of Ammonia and Urea (1980-1992) and Capacity Utilization ................................. 37 18 IGSAS: Izmit - Cost Structure and Income Statement ............ 38 19 AKGUBRE: Mersin - Annual Production of Calcium Ammonia Nitrate (CAN) Di-ammonium Phosphate (DAP) and NPK Capacity Utilization ...... 39 20 Trend in World Fertilizer Prices ......................... 40 21 AKGUBRE: Mersin - Income Statement .................... 41 22 Energy and Material Savings ........................... 42 23 Environmental Protection Performance ..................... 43 24 Turkey - Fertilizer Production and Consumption ............... 44 25 Domestic (ex-factory) Prices v. International Prices ............. 45 26 Domestic Fertilizer Prices and Subsidies - August 1993 ........... 46 27 Incremental Annual Production from Rehabilitated Units .......... 47 28 TUGSAS - Income Statement ........................... 48 29 Economic Prices For Fertilizer in Turkey - Used for ERR Calculations 49 30 Comments from one of the beneficiary companies (TUGSAS) . 50 PERFORMANCE AUDIT REPORT TURKEY FIRST AND SECOND FERTILIZER RATIONALIZATION AND ENERGY SAVING PROJECTS (LOANS 1985-TU AND 2131-TU) PREFACE 1. This is the Performance Audit Report (PAR) for the First and Second Fertilizer Rationalization and Energy Saving Projects in Turkey for which the Board approved a total of US$154.1 million in 1981 and 1982. The Bank disbursed a total of US$125.15 million and the remaining US$28.95 million was cancelled. 2. The PAR was prepared by the Operations Evaluation Department (OED). An OED mission visited Turkey in October 1993 and discussed the effectiveness of the Bank's assistance with the borrowers and the Government of Turkey. Their kind cooperation and assistance is gratefully acknowledged. 3. The PCR was prepared by the former EMENA Technical Department (on behalf of the Industry, Trade and Finance Operations Division of the EMENA Country Department I). The PAR provides a more elaborate assessment of the reasons behind the unsatisfactory outcome of these projects, drawing on more up-to-date operating and financial data. This rating differs from that based on the PCR which had been recorded as satisfactory. The sustainability rating has also changed from likely to uncertain. 4. The draft PAR was sent to the Borrower for comments. Those received from one of the beneficiary companies (TUGSAS) is appended to this report as Annex 30.  - ii - PERFORMANCE AUDIT REPOR TURKEY FIRST AND SECOND FERTILIZER RATIONALIZATION AND ENERGY SAVING PROJECTS (LOANS 1985-TU AND 2131-TU) BASIC DATA SHEET LOAN POSITION (amounts in US$ million) As of February 28. 1994 La Original Disbursed Cancelled RMaid Outstanding 1985-TU 110.00 98.18 11.82 65.74 32.44 2131-TU 44.10 26.96 17.14 17.04 9.92 CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS Loan 1985-TU EM1 EM2 EM EKH EML EDH EM2 EDI E02 EMS Original Plan 6.60 48.00 89.00 99.00 110.00 - - - - Actual 0.01 5.01 14.40 34.32 56.66 71.50 83.08 93.53 97.85 98.19 Loan 2131-I EM2 EM E EEMI EYM EMZ Original Plan 3.70 14.30 30.10 38.90 44.10 - Actual - 0.68 2.83 7.61 25.07 26.96 - iii - Pro*ect Dateu 1985-TU 2131-TU 1985-TU 23-U 1985-TU 21-T kkanimcation 08/30/80 08/30/80 - - 06/30/80 06/30/80 Apprial 02/02/81 05/15/81 - - 12/21/80 07/07/81 Bourd Approval 07/15/81 06/30/81 - - 05/07/81 04/27/82 Signing 08/15/81 07/30/81 - - 05/15/81 05/13/82 Eff~tivenes 09/15/81 08/30/81 -- 08/28181 04/13/83 Clouing Dab. 12/31/86 06/30/87 12/31/88 - 12/31/89 06/30/87 12131/88 12131/89 STAFPFINP (in Staff Weks) 1995-TU 2131-TU 1985-TU 2131-TU App - - 108 92 Pom Apprial - 23 21 Supervision - - 55 42 Pre Appraal- - 63 47 Total - - 249 202 - iv - MISSION DATA Month r No. of Pmrons Staff Week in Field Appraisal 12/80 3 2.3 Supervision I 07/81 3 0.5 Supervision 11 04/82 3 0.6 Supervision IH 10182 1 0.9 Supervision IV 05/84 3 0.9 Supervision V 08/85 1 1.5 Supervision VI 03/86 1 1.6 Supervision Vi 11/86 1 1.0 Supervision VI] 11/87 1 1.3 Supervision IX 05/88 2 1.3 Supervision X 04/89 2 0.9 Supervision XI 11/89 2 2.0 Supervision XII 04/90 1 1.6 Supervision XIU 10/90 1 1.0 - V - SUPERVISION RATINGS (Form 590) Loan 1985-TU Development Management Availability EvaluationYeQ Obiectives Lzal Covants Perforan EWga 1982 2 1 - 2 1 1983 2 1 - 2 1 1984 2 1 - 2 1 1985 2 1 - 2 1 1986 2 2 - 2 1 1987 2 2 - 2 1 1988 2 2 - 2 1 1989 2 2 3 2 1 1990 2 2 3 2 1 Loan 2131-TU Development Management Availability Evaluation Yearall Oliectiv Legal Covenant Perfomance EWn& 1982 1 1983 2 1 - 1 1 1984 2 1 - 1 1 1985 2 1 - 1 1 1986 2 2 - 2 1 1987 2 2 - 2 1 1988 2 2 - 2 1 - vi - PERFORMANCE AUDIT REPORT TURKEY FIRST AND SECOND FERTILIZER RATIONALIZATION AND ENERGY SAVING PROJECTS (LOANS 1985-TU AND 2131-TU) EVALUATION SUMMARY Introduction Project Design and Obiectives 1. In the early 1980s, despite the existence 3. The first project attempted to rehabilitate of eighteen fertilizer plants in Turkey with an four plants as follows: (i) the 340 thousand per annual rated capacity of 4.7 million tons year lignite based ammonia unit to feed the [equivalent to nearly one million tons of calcium anmonium nitrate (CAN) fertilizer plant Nitrogen (N) and 850 thousand tons of at Kutahya I (TUGSAS); (ii) the 220 thousand phosphorus (P) as nutrients], amply sufficient to tons per year triple super phosphate (ISP) and meet the consumption of the country for a range 230 thousand tons per year di-ammonium of nitrogenous and phosphoric fertilizers in phosphate (DAP) fertilizer complex at Samsun 1980, the average gross output was only 53% of (TUGSAS); (iii) the 511 thousand tons per rated capacity for nitrogen and 45% for year urea plant at Izmit (IGSAS) to replace its phosphorus. As a result, Turkey was spending feedstock from naphtha to refinery platformer large amounts of foreign exchange for the gas; and (iv) the 200 thousand tons per year import of fertilizers at a time when it was facing TSP and 200 thousand tons per year compound an economic crisis. fertilizer (NPK) units at Yarimca (GUBRETAS) and the construction of a new 250 thousand tons 2. During a Bank mission in September of per year sulfuric acid plant at that facility. 1979, the outlines of a rehabilitation project took shape and were discussed with the Government of Turkey. Of the 18 fertilizer plants, seven were initially identified by the Government and 4. Less than a year later, Phase H of the the Bank as high priority. Based upon the Fertilizer Rehabilitation and Energy Saving preliminary cost and economic analysis, the Project was approved. This project aimed at Bank suggested that since the total cost of rehabilitating the following plants: (i) the 200 rehabilitation, modernization, rationalization or thousand tons per year DAP and 594 thousand balancing was likely to substantially exceed the tons per year CAN complex at Mersin funds available from the Bank and the (AKGUBRE); (ii) the 306 thousand tons per Government, the investments should be made in year compound fertilizer (NPK) plant at Foca phases. As a result of additional technical (EGE Gubre); and (iii) the 40 thousand tons per studies four subprojects were proposed for the year copper smelter at Sansun (KBI) to supply first phase with the remaining left for the additional quantities of sulfuric acid to the second. neighbouring fertilizer plant. It was proposed - vii - that a new 600 tons per day ammonium sulfate companies, however, affected their ability to plant be also constructed at Mersin. finance their part from the internal cash generation. A combination of declining ex- 5. In addition to the rehabilitation and factory prices, heavy interest payments and energy saving components, the projects also erratic production at some plants forced many called for: financing of a training center at companies to seek new infusions of capital and Kutahya, expansion of training facilities and apply for long-term borrowing from the training programs; a Management Improvement domestic market. In the end, a total of nearly Study to address the organizational and $29 million were cancelled from the combined managerial problems of TUGSAS; a Fertilizer loan of $154 million, since the funds could not Marketing and Pricing Study; and a Fertilizer be utilized. Raw Materials Resource Study. All in all, the projects were expected to increase finished fertilizer production annually by about 1.23 million tons, while production of blister copper 9. Despite some notable successful at KBI's Samsun plant would also increase by outcomes, the project results have been generally around 10 thousand tons. disappointing. The rehabilitation of the Ammonia unit at Kutahya was finished in Project Implementation September 1985. Although it reached a high level of capacity utilization shortly after 6. Soon after effectiveness of the loans, recommissioning, the performance of the plant GUBRETAS decided to cancel the component as deteriorated with the passage of time and it was designed and instead construct a new greenfield finally shut down in February 1993. By then NPK plant. As for the urea plant of IGSAS at the production cost had escalated to around $500 Izmit, since it was expected that natural gas per ton against an FOB international price of from the former Soviet Union would reach $126 per ton. In 1992, the Kutahya complex Turkey in the mid-1980s, the engineering was had a loss of nearly US$75 million equivalent. done on the basis of first receiving refinery gas as feedstock and, later, switching to natural gas. 10. The performance at Samsun was not In view of the declining trend of prices for much different. Again, after a heady start ammonium sulfate, AKGUBRE, too, decided not immediately after rehabilitation in 1987, the to construct that unit at Mersin. All the other production of TSP began to decline because of physical subprojects were implemented. the high production cost, the drop in international prices and the inexorable decline in 7. Several factors led to serious delays in the Turkish domestic consumption. This plant, implementation which ranged from two to five too, discontinued TSP production in 1992 and, years. Among the most important: first, the instead, started producing NPK and DAP, albeit, engineering companies insisted to carry out a at a low capacity utilization. The losses of this detailed inspection of the plants before preparing plant also reached around US$75 million in their bids; second, there were revisions in the 1992. Moreover, the neighbouring copper scope of subprojects, and third, the Government smelter is not capable of supplying the designed required that the companies minimize the quantity of sulfuric acid because the smelter has interruption in their production. to be shut down for nearly 2 hours everyday to remove blockages to the waste heat boiler. 8. There were no serious overruns except in the rehabilitation of the Samsun Copper 11. The plant at Yarimca has been working Smelter where costs have nearly trebled. The at a moderately high level of capacity utilization financial problems encountered by many (around 73% in 1992), since it came into - viii - production in 1989. The rapid increase in the protection record. The others do not meet the consumption of compound fertilizers has created stack emission or effluent water discharge a ready market for the production of this plant standards. While AKGUBRE is currently providing it with a margin of profit. The urea installing an NO2 abatement system to reduce the plant at Izmit has performed at record levels emission of this pollutant, GUBRETAS is taking since it was rehabilitated in 1986. Once the steps to rectify the situation at its Yarinca plant. conversion to natural gas was completed in The air and water quality degradation caused by 1988, the ammonia plant capacity increased these fertilizers plants has been the subject of further to 380 thousand tons per year. This serious complaints from the nearby communities. plant enjoys a low production cost which makes it competitive at international prices. OVERALL ASSESSMEN 12. After rehabilitation, the Mersin complex of AKGUBRE faced a year of shut down in External Factors and Demand 1989 because of a labor strife. It was subsequently privatized when the TOROS Group 15. These projects were prepared at a time bought the shares of the foreign shareholders. when the world had gone through the roller Under the new management, production of CAN coaster of oil price explosion and the commodity and DAP increased until 1992. DAP production price boom of the early 1970s. I fact the world was discontinued in mid-1993 due to very low was in the midst of another oil price increase priced imports and the plant increased its NPK that had brought with it another fertilizer price production. Since the plant receives its raw increase. Moreover, this period also coincided materials from and delivers its products to the with intense activity in the research and parent company, its financial status cannot be development of synfuels industry and coal easily evaluated. But it clearly reacts very gasification was considered to have merits in the quickly to the market signals. As for EGE production of nitrogenous fertilizer, especially in Gubre, even though the relatively modest countries with large reserves of solid fuels and investment removed some of the bottlenecks, little petroleum or natural gas. capacity utilization has remained around 60 per cent. 16. The projects, however, poorly misjudged two trends: one was the growth of consumption Human Resource Development of nutrients which increased at a much slower rate than anticipated (consumption of phosphatic 13. Although the new liberalized economic fertilizers remained almost static); the second environment forced the fertilizer complexes to was the declining trend in the consumption of shed labor and reduce costs, there was little use TSP and, conversely, the increasing trend for of the funds that had been earmarked for NPK. This misreading of the trends resulted in training in both projects. In fact the training some heavy investments at Samsun and KBI subcomponent in the second loan was hardly which might have been largely avoided. The touched. This lack of interest in carrying out change of scope at Yarimca helped GUBRETAS the training programs will have its effects on the to avoid a highly uneconomic investment. operation of the plants, some of which have already fallen into disrepair. Lignite-based ammonia plant Environmental Protection 17. Even though the operation of the 14. Among all the fertilizer complexes the Kutahya H ammonia plant had previously proven Izmit plant of IGSAS has the best environmental very difficult, its rehabilitation was undertaken -x - on the assumption that the plant would be well problems, their level has been allowed to rise in maintained with timely repairs and preventative the last two years. The Government's policy of maintenance. This proved unrealistic and the providing subsidy to the farmers through the plant was eventually shut down when capacity domestic producers and importers has not only utilization had dropped to below 30 per cent. kept the price distortions in the agricultural sector, but it has also created opportunities for windfall profits for importers. Thus while some Sectoral f producers have been forced to reduce or discontinue the production of some fertilizers, 18. One of the important covenants of the e.g. TSP at Samsun and DAP at Mersin, the project was for the Government of Turkey to competition is heating up at the farmgate level furnish the Bank a detailed plan for carrying out where importers of cheap fertilizers have begun the Fertilizer Pricing and Marketing Study's offering discounts (they still collect the recommendations and, thereafter, to carry out Government stipulated amount of subsidy). the recommendations in consultation with the Because of the granting of subsidies, on the one Bank. The results of this study were accepted hand, and the liberalized imports of fertilizers, by the Government and were made a part of the on the other, the producers are facing a very reforms envisaged in the Agricultural Sector uncertain situation which can only be remedied Adjustment Loan approved in 1986 (Loan 2585- by the phasing out of the subsidies and the TU). These reforms led to the further removal of ex-factory prices. liberalization of the fertilizer marketing as well as the domestic pricing systems. As a result of the marketing reform, DONATIM and SEKER, (two state-run marketers) lost their marketing 21. Despite a total investment of around monopoly and all fertilizer companies were $321 million, the projects provided for only 41 allowed not only to distribute their own per cent of the increase in the total nutrient production, but also to engage in import/export consumption (314 thousand tons out of 762 activities. thousand tons increase). Because of inefficient management, especially at TUGSAS, misreading Pricing and Subsidies of the fertilizer consumption trends and consequently misplaced investments, 19. Since the early 1980 when the unavailability of some domestically produced Government of Turkey reformed its pricing raw materials with the right quality, long delays system, the ex-factory prices have been allowed in implementing the projects, and in certain to reflect international prices. In recent years cases, large overruns, the project fell far short the ex-factory prices have been fixed of realizing its objectives. Except for the Izmit substantially in line with imported prices for complex of IGSAS, the reestimated ERRs in urea and NPK fertilizers, while TSP and DAP most cases were well below acceptable levels. apparently enjoy a higher level of production. The project outcome is, therefore, rated as unsatisfactory. 20. When the Agricultural Sector Adjustment Loan was being discussed, the Institutional Development Government suggested that in order to help the farmers located in remote low income area, the 22. While the projects provided for intensive remaining subsidies be phased out by the end of training of the technical and managerial 1988. Despite this declared policy, these personnel, the subject never received the subsidies have not yet been eliminated. In fact attention it deserved. Moreover, there was only because of the continuing socio-economic -x- partial implementation of the recommendations Compliance With Covenants presented in the Management Improvement Study by TUGSAS. In practice, TUGSAS never 25. Apart from implementing the Marketing really owned the project nor was ready for the and Pricing Study's recommendations (as a part reforms. It is not clear that a management that of the Agricultural Sector Adjustment Loan) and had overseen a continuously deteriorating substantially liberalizing the fertilizer market, operation during the 1970s, when capacity the Government has only partially complied with utilization had declined to around 35%, was the many other covenants such as providing right group of people to be entrusted with TUGSAS with additional funds in a timely management reforms. manner or the streamlining of the payment procedures to the fertilizer companies. The payment of subsidies to the fertilizer producers Sustainability is almost always in arrears and this plays havoc with the finances of many companies as it forces 23. Of the three plants in the private sector, them to borrow their working capital at very one is producing at high capacity utilization high interest rates (inflation rate in the last few (Yarimca) and is profitable under the current years, as measured by the wholesale price index, competitive conditions. The two plants of has remained well above 50%). The borrowers AKGUBRE at Mersin and EGE Gubre at Foca have only partly complied with covenants are also likely to continue their operations regarding reporting and auditing of accounts. because they essentially manufacture products Compliance with covenants in respect of that are not widely traded internationally such as environmental standards has been very poor. CAN and NPK and where domestic prices are Tagsas did not carry through with close to international prices. recommendations of its consultants and introduced only few reforms in its financial 24. As for the state owned enterprises, the management. ammonia/urea plant at Izmit (IGSAS) is obviously the most successful and highly profitable company. Because of its good Lessons Learned and Recommendations management and efficient operation its sustainability is assured. The Government is, 26. The PCR draws many useful lessons however, saddled with the highly loss-making regarding the need for risk assessment when and inefficient operations of Kutahya and rehabilitating old plants, flexibility in project Samsun plants, and accordingly TUGSAS. scope changes, use of bonus/penalty clauses in Under the current and foreseeable conditions, contracts and the organization of project both the ammonia plant at Kutahya II and TSP management teams. It recommends that the plant at Samsun will remain closed because they approach to the Bank's forecasting of fertilizer have fallen into disrepair and the operations are prices needs review. It further concludes that uneconomic. Both plants need serious possible changes in the pattern of demand for managerial, organizational and financial specific products have to be taken into account restructuring if they are to remain as state owned in determining the project scope. In line with enterprises. It is, however, believed that such a the Bank's policy stance in recent years, it also course of action is beyond the capabilities of the concludes that while financing rehabilitation existing TUGSAS management. Given the projects, agreement should be sought on a conditions of TUGSAS plants, the sustainability schedule for privatization. of the projects is uncertain. - xi - 27. Though the factors enumerated above will avoid unnecessary delays in implementation have adversely affected the outcome, it is and inordinate cost overruns. doubtful that any agreement on eventual privatization would have, in any way, changed 30. The Government's clear policy in the results. The crucial lesson learned from this supporting the domestic manufacturers during a project is that a lame and inefficient management period of sustained economic reform was a with an undistinguished track record should not contributing factor to the relative success of be entrusted with rehabilitation. In other words, IGSAS and GUBRETAS. As enunciated in its the existence of a sound management is a must policy statement before the approval for successful rehabilitation. In the absence of oftheAgricultural Sector Adjustment Loan, the efficient management, a project of this nature Government intended to provide the opportunity should not be undertaken until and unless a and incentives to domestic manufactures and for management overhaul has taken place and the this, it improved the ex-factory pricing formula Bank is satisfied that the borrowers truly assume to assist indigenous producers. This is a lesson ownership of the project. that needs to permeate the thinking of all concerned. During the process of economic 28. The Bank and the Borrowers should be reforms and liberalization, productive enterprises on the look out for any serious reversal of trends must be afforded assistance and predictability to and take all necessary measures to avoid making tide them over difficult times. It is only in this unrewarding investments. In these projects, the way that reasonably smooth adjustments can take trend in TSP consumption was badly misjudged place. and even GUBRETAS' change of scope apparently did not affect the investments at 31. In this project the most and the least Samsun. If this trend had been more carefully successful companies are state owned. The followed ( by 1985 and before rehabilitation at difference lies in governance and the quality of Samsun got underway, consumption of TSP has management. What has made IGSAS stand out dropped to around 300 thousand tons from 610 is the fact that it enjoys a fair degree of thousand tons in 1978), Samsun may have autonomy and has been able to attract capable entered the production of compound fertilizers at employees an account of its reputation as well as a much earlier stage and with a fraction of the its relatively more generous salary scale. (Being actual project cost. In fact, this would probably a subsidiary of the oil company, it enjoyed their have obviated the investment at KBI which was salary scale). While privatization would, in intended to increase the availability of sulfuric theory, lead to more discipline and better acid for transfer to Samsun plant. management, this is by no means guaranteed. Though the change of ownership (privatization) 29. Since the rehabilitation of process plants should not be considered as a panacea, in the needs to be carried out with the cooperation of case of Turkey, however, with so much of the the process licensor/engineering contractors, it is industry in the public sector and mostly loss important that all preliminary studies, including making, the privatization/liquidation option for inspection of the plant, are carried out before the fertilizer plants should be seriously considered, project preparation and appraisal is final. This even if achieved at a considerable financial loss. PERFORMANCE AUDIT REPORT TURKEY FIRST AND SECOND FERTILIZER RATIONALIZATION AND ENERGY SAVING PROJECTS (LOANS 1985-TU AND 213 1-TU) I. INTRODUCTION 1. Turkey's policy of pursuing vigorous economic growth in the first half of the 1970s through a high level of external borrowing eventually led to an economic crisis in mid-1977. Following attempts to stabilize the economy in the subsequent two years, the Government in 1979 began discussions with the Bank which resulted in the preparation of a structural adjustment program. This program called for: (a) greater reliance on market mechanisms and forces by both the public and the private sectors; (b) policies to encourage the public and private sectors to become efficient and internationally competitive; (c) the implementation of rational exchange rate policy and of measures encouraging exports; (d) controlling inflation; (e) improved management of the balance of payments and external debts; (f) increased efforts for domestic resource mobilization including the reform of the state controlled prices; (g) an investment policy aimed at fuller utilization of existing productive capacity and completion of ongoing projects requiring modest inputs; and (h) measures to stimulate foreign investments in oil, industry and agriculture sectors. H. PROJECT BACKGROUND 2. Despite the existence of eighteen fertilizer plants in Turkey with an annual rated capacity of 4.7 million tons [equivalent to nearly one million tons of nitrogen (N) and 850 thousand tons of phosphorus (P) as nutrients], amply sufficient to meet the consumption of the country for a range of nitrogenous and phosphatic fertilizers in 1980, the average gross output was only 53% of rated capacity for nitrogen and 45% for phosphorus (Annex 1). As a result, Turkey was spending large amounts of foreign exchange for the import of fertilizers at a time when it was facing the economic crisis and attention was, therefore, focussed on this industry in order to determine whether the plants could be rehabilitated. At the time, construction was progressing on three new facilities: (a) a plant for the production of 330 thousand tons/year of Nitrogen/phosphorus/potassium (NPK) fertilizers at Ceyhan by a private sector company; (b) expansion of capacity for nitrogenous and phosphatic fertilizers by BAGFAS, another private company; and (c) a 1000 tons/day ammonia plant (based on naphtha as raw material) by Government at Gemlik in Western Anatolia.' 1 Since the production of calcium Ammonium Nitrate (CAN) production at Gemlik was based on imported ammonia, the Government had purchased the plant with financing from France and the UK. Though 90%of the bulk equipment had arrived on site by 1979, the construction of the plant was halted because the Turkish Government was unable to pay the down payment, and doubts had been raised about the economics of the project as the price of naphtha was on the rise. -2- 3. In addition to the plants under construction, the Government of Turkey had included in its Five-Year Plan the development of a lignite-based ammonia/urea project at Soma in Southeastern Turkey. This project was to have a capacity of 1000 tons per day of ammonia and 1550 tons per day of urea and its development would be supported by increasing the output from the Soma lignite deposits. At the time, the Government was giving high priority to the use of lignite for fertilizer production after meeting the lignite needs for power generation and home heating. A major objective of the Government policy was the optimum utilization of local energy sources to restrain the growing dependence on imported oil (whose price, following the Iranian Revolution, had begun a second steep increase during 1979). 4. Upon the request of the Government of Turkey, a Bank mission visited Turkey in September 1979 in order to review the feasibility study of the lignite-based Soma Fertilizer Project and the proposed Fertilizer Sector Rehabilitation Project. In view of the fact that obtaining better results from the existing fertilizer capacity was the most logical approach, the Bank was more sympathetic to a rehabilitation project rather than a new greenfield plant with an estimated cost of around $580 million, even though the latter was ostensibly based on domestic raw material (lignite). The reasons for the gap between output and rated capacity were identified as: "(a) technical bottlenecks arising from design deficiencies and poor maintenance; (b) inadequate availability of imported raw materials, intermediate products and spare parts;' (c) deficiencies in the supply of local raw materials and utilities (poor and uneven quality and unreliable supply of lignite, pyrites, rock phosphates, etc., and power and water shortages; (d) working capital problems; (e) organization and management deficiencies; and (f) lack of trained manpower".' 5. Of the 18 fertilizer plants, seven were initially identified by the Government and the Bank as high priority. Based upon the preliminary cost and economic analysis, the Bank suggested that since the total cost of rehabilitation, modernization, rationalization or balancing was likely to substantially exceed the funds available from the Bank and the Government, the investments should be made in phases. According to the Bank, there were four subprojects which appeared to have the highest return and they, therefore, were proposed for the first phase. Since all proposed investments required some additional technical preparation, and a number of critical areas had to be looked into by specialist firms familiar with processes (especially those that previously designed or engineered the plants in order to determine the root causes of operational problems, proposing remedial solutions and investments), the Bank provided US$600,000 from the Project Preparation Facility to the Government of Turkey. As a result of these additional studies, four subprojects were selected for inclusion under phase I, based on their priority in terms of local resource use, energy savings and other economic priorities. These were Kutahya II and Samsun plants of TUGSAS', Izmit plant of IGSASI, and Yarimca plant of GUBRETAS' 2 Because of inefficiency and other problems of the fertilizer industry and its inability to engender confidence in meeting its programs, the Government was willing to make the scarce foreign exchange available only for fertilizer imports rather than provide it to industry to import the needed raw materials, intermediate products and spare parts. This may also have been prompted by the easier access to suppliers' credit for fertilizer imports. During 1978 and 1979, Turkey imported $673 million worth of fertilizers while importing only about $138 million worth of fertilizer raw materials (BTOR dated April 28, 1980, para. 40). 1 SAR for Loan 1985-TU, para. 2.09. 4 This company Turkiye Gubre Sanayii S.A. (TUGSAS) is the 100 per cent publicly owned successor to Azot Sanayii T.A.S. -3- (a joint sector entity). The other three subprojects to be implemented at Mersin, Iskenderun and Foca were left for phase II. 6. The basic objective of these recommended subprojects was to maximize production of fertilizer from existing facilities, while minimizing import of fertilizers and raw materials. This objective was to be achieved by a combination of balancing investments in the production of key imported intermediates like sulfuric acid together with the rehabilitation and upgrading of selected production facilities, notably those using domestically produced raw materials like lignite, to fully exploit their rated production capacity. m. FIRST AND SECOND REHABILITATION PROJECT (LOANS 1985-TU AND 2131-TU) Project Design and Objectives - First project. 7. As indicated earlier, the existing plants had been operating well below rated capacity during the latter part of the 1970s (Annex 1), barely reaching 50% in 1980. Prior to 1980, Turkey's imports of fertilizers (in tonnage terms) had reached as high as nearly 2.3 million tons, equivalent to 60% of consumption in 1978 (Annex 2). Even though new capacity for the production of urea at Izmit (ISGAS) and compound fertilizer at the Yarimea plant of GUBRETAS and Foca plant of EGE Gubre had come on stream in 1978, there still existed a shortfall of large quantities of various fertilizers which was supplied by imports (nearly two million tons in 1980). From the import figures, it was very clear that Ammonium Sulfate, Calcium Ammonium Nitrate, Diammonium phosphate and compound fertilizers (NPK), were in short supply, though the capacity created by 1980 was ostensibly sufficient to cover the consumption requirements for all fertilizer products except potassium sulfate. 8. The first project, therefore, attempted to rehabilitate four plants as follows: (i) the 340 thousand ton per year lignite based ammonia unit to feed the calcium ammonium nitrate (CAN) fertilizer plant of Kutahya II; (ii) the 220 thousand tons per year triple super phosphate (TSP) and 230 thousand tons per year di-ammonium phosphate (DAP) fertilizer complex at Samsun; (iii) the 511 thousand tons per year urea plant of IGSAS, to replace its feedstock from naphtha to lower cost refinery gas; and (iv) the 200 thousand tons per year TSP and 200 thousand tons per year compound fertilizer (NPK) units of GUBRETAS' Yarimca plant and the construction of a new 250 thousand tons per year sulfuric acid plant at that facility. The project was expected to increase annual fertilizer production by around 550 thousand tons. In addition to savings in specific material and energy use, the rehabilitation in this plant consisted of converting the feedstock from naphtha to refinery platformer gas and the utilization of refinery off gas in the plant burners (gases supplied from nearby refinery). 9. The first project also provided for three other subcomponents. First, a training subcomponent to assist the training center at Kutahya, a facility previously financed by UNDP. Provisions were made in the project for $2 million mainly for the development of a training program, training of trainees, additional equipment and training aids and expansion of physical facilities. This component was expected to help vitalize and modernize the training efforts and facilities of TUGSAS and S Istanbul Gubre Sanayii A.S., a subsidiary of the Turkish National Petroleum Corporation (TPAO). * Gubre Fabrikalari T.A.S. -4- IGSAS, with the long range aim of serving all the fertilizer plants in Turkey. Second, since the management and organizational problems were particularly serious at TUGSAS, a subcomponent called for a comprehensive study of these issues by a competent firm which would subsequently help TUGSAS to implement the recommendations. Third, a study would be commissioned to analyse the fertilizer pricing system and to examine and recommend the necessary measures to improve the efficiency of the fertilizer transportation, storage and distribution system. Project Design and Objectives - Second proiect 10. Less than a year later, phase II of the Fertilizer Rehabilitation Project was approved in March 1982. The project had six subcomponents: (a) rehabilitation and energy saving investments at the Mersin plant of AKGUBRE (Akdeniz Gubre Sanayii A.S. - a joint sector company) to remove bottlenecks to full capacity utilization - 148 thousand tons per year of DAP and 594 thousand tons per year of CAN; (b) basic and detailed engineering for investments in rationalization and modernization of the Iskenderun plant of GUBRETAS, conversion from 200 thousand tons per year of TSP production to DAP and rehabilitation of the sulfuric and phosphoric acid plants; (c) rationalization and energy saving investments at the Foca plant of EGE (Ege Gubre Sanayii A.S.) with a capacity of 306 thousand tons per year of compound fertilizer (NPK); (d) rehabilitation and modernization investments at the Samsun Copper Smelter plant of KBI (Karadeniz Bakir Isletmeleri A.S.) to supply additional quantities of sulfuric acid to the neighbouring Samsun fertilizer plant (to be rehabilitated under phase I); (e) expansion of the training facilities at the four companies; and (f) the preparation of the Fertilizer Raw Material Resource Study. In addition to removing bottlenecks from the existing operations, this project aimed at creating a new facility for the production of ammonium sulfate at Mersin and providing flexibility at Foca to produce a range of compound fertilizers. The project was expected to increase finished fertilizer production annually by about 680 thousand tons, while production of blister copper at the KBI's Samsun plant would also increase by around 10 thousand tons. 11. With the two projects, the new investments in the fertilizer sector were expected to remove the bottlenecks and enable the various plants to approach full capacity utilization by 1985/86 as indicated in Annex 3. It was expected that Turkey's fertilizer sector would increase its capacity utilization from 40% in 1980 to around 90% by 1985/86 (with an incremental increase of 1.23 million tons of final products) and generate net foreign exchange savings of around $200 million towards the end of the 1980s. IV. PROJECT IMPLEMENTATION 12. Earlier on in the implementation cycle, the subcomponent for the rehabilitation of the TSP complex at the Yarimca plant of GUBRETAS was substantially modified. Given the declining demand for TSP and the rising demand for compound fertilizers (NPK), GUBRETAS decided to cancel the construction of a greenfield sulfuric acid and the revamping of the phosphoric acid plants. Instead it decided to expand the NPK production capacity by constructing a second NPK plant based on imports of raw materials. In addition, GUBRETAS decided not to invest in the engineering work for the conversion of its Iskenderum complex. As for the urea plant of IGSAS at Izmit, since it was expected that natural gas from the former Soviet Union would reach Turkey in the mid-1980s, the engineering was done on the basis of first receiving refinery gas as feedstock and, later, switching to natural gas. In view of the declining trend of prices for ammonium sulfate, AKGUBRE, too, decided not to implement the 600 ton per day unit at Mersin. All the other physical subcomponents were implemented. -5- 13. There were some delays, initially, in the effectiveness date of the phase II project because of the drawn-out procedures for on-lending to the final beneficiary companies through financial intermediaries. Several other factors resulted in serious delays in implementation at different sites. The most important factor was the insistence of the engineering firms to carry out a detailed inspection of the plants before preparing their bids, especially because they had been asked to provide performance guarantees. Other causes were GUBRETAS' substantial revision of its project scope, other subproject scope changes and the government's requirement that the companies minimize the interruption in their production (this, in practice, meant that rehabilitation work could only be scheduled for the annual maintenance and turn-arounds as well as other emergency shutdowns). As a result of all this, there were considerable delays in project implementations as shown in Table 1 below: Table 1 Proiect Completion Dates v. Orizinal Schedule Original Schedule Actual Dates First Rationalization and Energy Saving Project TUGSAS Kutahya II 12/83 09/85 Samsun I & II 06/84 12/89 IGAS Izmit 12/83 12/850 GUBRETAS Yarimca 09/84 01/90 Second Rationalization & Energy Saving Proiect AKDENIZ GUBRE Mersin 09/85 08/87 EGE GUBRE Foca 02/85 08/86Y KMI Samsun 07/85 08/89 Modification for the use of natural gas was completed in December 1989. W Additional modification to produce compound fertilizers completed in June 1988. -6- 14. The Management Improvement Contract was awarded in 1982 to a group of Turkish and expatriate consultants who were retained to assist in the implementation of their recommendations until April 1984. TUGSAS set up a management information system (MIS) and introduced a new financial management and accounting system. But problems such as the lack of management autonomy and leadership, government interference and inadequate salary scale never allowed TUGSAS to take advantage of these recommendations and implement the reforms. With mounting losses and turmoil in its management, TUGSAS employees were left with few incentives. 15. The training subcomponent also had a similar fate. These activities were overshadowed by the difficulties encountered in the early stages and the delays in implementation which diverted the attention of plant managements. The training program was eventually reduced to some on the job training by the contractors' personnel and the use of video tapes. Few plant personnel were sent overseas for training and the center at Kutahya gradually became disfunctional. In practice, there was only modest achievement of the objectives of this subcomponent and, at the end, the fertilizer industry did not succeed in creating a training center which could help the various companies in upgrading the skills of its technical, operational and other personnel. 16. The Fertilizer Raw Material Resource Study was submitted by the consultants in March 1984. The findings were in line with the Bank's conclusions and helped the government to form a clear picture of the extent to which the Turkish fertilizer industry could rely on domestically available raw materials. The more topical Fertilizer Marketing and Pricing Study formed the basis of the recommendations contained in the Agricultural Sector Adjustment Loan of 1985 (Loan 2585-TU). Project Costs and Financing 17. Annexes 4, 5, 6 and 7 provide an account of the actual project cost as compared with the SAR estimates and the contributions made by the Bank loans. There are no serious overruns except in the rehabilitation of the Samsun Copper Smelter where costs have nearly trebled (actual US$47.22 million versus US$15.12 at appraisal). This came about because detailed inspection by engineering contractors revealed a much larger need for replacement of equipment than was originally anticipated. In fact such inspections were the main reason for most overruns, despite the fact that the depressed market for chemical industry capital goods in the early to mid-1980s kept down the cost of the subprojects. Another contributing factor was, of course, the changes that were introduced in the scope of some subprojects and cancellations as referred to earlier in para. 12 above. Given these factors, a comparison of the total actual costs of the first and second Fertilizer Rehabilitation and Energy Saving Projects with the SAR estimates would not be very meaningful. 18. The financial problems encountered by many companies (public, joint sector and private), however, affected their ability to finance their part from the internal cash generation. A combination of declining international fertilizer prices (determining ex-factory prices for the Turkish producers), heavy interest payments (occasioned by the need for borrowing working capital from local banks because of the -7- long delay in receiving the Government subsidy to farmers) and erratic production at some plants forced many companies to seek new infusions of capital from the shareholders and apply for long-term borrowing from the domestic market. As a result, the debt/equity ratios anticipated in the SAR could not be achieved. In the end a total of nearly US$29 million (US$11.8 million from the first and US$17.1 million from the second loans) were cancelled from the combined loan of US$154 million, since the funds could not be utilized, even though the Bank had agreed to some additional modifications, e.g. at the Foca plant of EGE Gubre. V. PROJECT RESULTS 19. Despite some notable successful outcomes, the project results have been generally disappointing. It is particularly significant that the performance of many units had deteriorated in recent years and a few have been shut down. To tell the whole story, it is necessary to go over the performance of each plant individually and then look at its financial situation. TUGSAS Kutahya II 20. Before rehabilitation, this plant had been running without adequate preventative maintenance and major overhaul since it was built in 1969. The inspection of the plant by the original engineer/contractor indicated that many parts of the plant were operating completely outside of the design criteria, thus resulting in poor performance. Furthermore, practically all parts of the plant were in serious need of overhaul or replacement. The rehabilitation of this unit was completed in September 1985 and the commissioning of the various units were achieved in 1986. Although the rehabilitated plant initially reached a high level of capacity utilization (82% in 1987), with the onset of the same kind of problems that bedeviled the unrehabilitated plant in the late 1970s and early 1980s, capacity utilization again fell to 26% in 1992 (Annex 8), and the management of Kutahya eventually decided to shut down the plant in February 1993. 21. Looking at the cost structure of ammonia produced in Kutahya II (Annex 9), it is clear that many of the cost components (except utilities) have fluctuated and generally crept up over the years. Initially lignite prices were lowered by the government to $47/ton in 1989, but then it was allowed to reach $116/ton in 1992. In addition to amortization (resulting from the new investments), unit labor costs have increased with declining production and capacity utilization. A comparison with international prices of ammonia indicates to what extent the cost of producing ammonia at Kutahya II has been out of line not only with international prices but also with the cost of producing ammonia at Gemlik. The serious deterioration appears to have begun in 1990 when the plant started to experience new technical problems which curtailed its ability to run continuously and was repeatedly shut down for repair. 22. Despite this deteriorating performance of Kutahya II ammonia plant, the fertilizer producing sections of Kutahya complex (ammonium sulfate, nitric acid and calcium ammonium nitrate plants) continued their operation in the early years at a fairly high level of capacity utilization by buying ammonia from the outside. But as can be seen in Annex 7, capacity utilization in these plants has also materially dropped since 1989 (when it reached a high of 88 per cent). -8- 23. These disappointing results are reflected in Kutahya's Income Statements following the commissioning of the ammonia plant (Annex 10). After making a small profit in 1986, the operation had a loss of $8.7 million equivalent in 1987, increasing very fast to around $75 million equivalent in 1992. The only dip in loss came in 1989 when production and capacity utilization was at its peak. Calculations for the ammonia plant alone and for the whole Kutahya complex indicate that there was no positive cash flow except in the earlier years just after rehabilitation when the ammonia plant and other parts of the complex achieved a fairly high level of capacity utilization. The reestimated ERR for the ammonia plant is -58 per cent, calculated for the period up to early 1993 when the plant was closed. Samsan 24. The Samsun complex consists of two production trains: one for the production of TSP and the other for the production of DAP. Historically, the plant consisted of only a TSP producing line until 1973. The DAP line started producing in 1974 and at the time of project preparation the plant rated capacities were as follows: Table 2 - Annual Production Capacity at Samsun - 1980 (Tons) Plants Products Annual Capacity Sulfuric Acid Sulfuric Acid (98%) 214,500 SamsunI Phosphoric Acid Phosphoric Acid (28%P) 71,700 TSP TSP (55% P205) 220,00 Samsun I Phosphoric Acid Phosphoric Acid (54%P) 108,800 DAP DAP (18-46-0) 227,200 Annex 11 shows the production performance of various plants since 1977. Because of the serious decline in the sulfuric acid production in the late 1970s, the project aimed at the physical rehabilitation of this plant as well as the sulfuric acid unit at the neighbouring copper smelter of KBI in order to provide the required inputs to the phosphoric acid plants. 25. The performance of the various plants after rehabilitation has been very erratic. After reaching a peak of 71.5%, capacity utilization at the sulfuric acid plant has declined again to below 40%. The phosphoric acid plants have not fared better with the result that the complex has had to import large quantities of sulfuric and phosphoric acids in recent years. The plant has decided to discontinue producing TSP, the consumption of which has been on the decline in recent years, and switch over to compound fertilizers. Even capacity utilization at the DAP plant is around 60-70 per cent, well below the level anticipated at the time of appraisal. The complex has started producing compound fertilizer since 1990 and this activity seems to be growing. But, here again production has only reached one third of the capacity. The problems arise from machinery and equipment failure in various production units necessitating frequent shut downs for maintenance and replacement. The plant also faces a problem of disposing of the gypsum that is a by product of phosphoric acid production. All in all, the plant is in poor maintenance and there is considerable room in improving the housekeeping. -9- 26. The production cost figures shown in Annex 12 provide a clue to the economic viability of this complex. The low capacity utilization in the TSP and DAP producing sections have resulted in costs that are generally well above international prices. With the collapse of prices in recent years the difference between the production cost at Samsun and the international prices has widened considerably. The only activity in which Samsun plant may eventually cover its cost is in the production of compound fertilizer. In this section, unit costs of production have progressively declined as both production has increased and costs of imported raw materials, such as Urea, have dropped. 27. This complex has been permitted by the holding company, TUGSAS, to import fertilizers for distribution in the domestic market. Though this does not constitute a large operation, it allows the unit to realize small profits from such activities. As can be noted in Annex 13, the plant has had operating profit only during two years - 1988 and 1989 - since 1986. With enormous losses accruing mainly from financial charges in repayment of loans as well as the high interests on working capital, the losses in this plant have reached a staggering figure of US$75 million equivalent in 1992. In the same year, TUGSAS, the mother company showed a loss of US$234 million (up from US$181 million in 1991) from its total operation. Because of the highly loss-making nature of Samsun's operation, there has been no positive cash flow since the rehabilitation project was finished; and, given the state of disrepair, there is no possibility that the plant can get back to profitability. KI 28. The rehabilitation of the copper smelter was intended to increase the throughput of the plant and, thus, the production of its by product, sulfuric acid, for shipment to the neighbouring Samsun fertilizer complex. Prior to the implementation of the project, the sulfuric acid plant was operating at very low capacity utilization as shown below: Table 3 KBI's Capacity Utilization 1000 Tons/Year 1977 1978 2979 190 1981 ca@ch cas.chy cNpWW capacqy Cpady PsA&WdM Udl1iadm Pro&utkm Utizd PrOdma Utlizeado Produadu UtilUakm P2in106 Udiel Ashe 40.3 13.6 33% 13.6 33 11.5 2 10.8 26 2 45 V&AWic 330 42 13 M.1 is 40.1 is 25.J 100.1 30 Acid The project aimed at increasing capacity utilization of the sulfuric acid plant to around 85%, thereby producing 280 thousand tons of sulfuric acid to supplement the production at Samsun fertilizer complex. If this could be achieved, it would be sufficient to meet the requirements of phosphoric acid plants and no imports of sulfuric acid would then be needed. 29. In practice, despite a long delay (nearly 4 years) in implementation and an enormous cost overrun (US$47.2 million compared with US$15.1 estimated at appraisal) the plant is still running at only 60% capacity because of the need to shut down the smelter for two hours everyday in order to clean the section connecting the furnace to the waste heat boiler. This, in turn, affects the steam rising capacity of the waste heat boiler which provides steam to drive the pumps and blowers in the acid plant. This latter problem is likely to be overcome by installation of electrically driven pumps and blowers, but the - 10 - removal of the bottleneck in the smelter requires more investment and a larger shut down of the plant. The plant also faces the shortage of domestically produced copper concentrates which is likely to deteriorate with time as some of the ore deposits are situated very close to urban areas and there are environmental constraints placed on their activities. As a result, the plant has begun in recent years to carry out work on a toll basis. The tolling activity reached a high of nearly 37% of total blister production in 1990. Annex 14 shows the production performances of the plant since 1986 (the last year before the start of physical rehabilitation). 30. The cost structure of the sulfuric acid plant clearly indicates the preponderance of the fixed costs and the potential for lowering the average cost with higher capacity utilization. Because the transfer price to the Samsun fertilizer complex has been agreed at $20/ton since the restart of production in 1989 (after rehabilitation) KBI incurs a sizeable loss on account of this operation. It should be noted that the CIF price of sulfuric acid has declined sharply in recent years and reached nearly $15/ton in the last quarter of 1993. GUBRETAS 31. As noted earlier, because the production of DAP was thought to be uneconomical at Iskenderun, GUBRETAS decided not to pursue the basic design and engineering for rehabilitation and conversion of the old Iskenderun TSP complex to DAP. The plan for the construction of a sulfuric acid plant at Yarimca was also scrapped once it became clear that the demand for TSP had considerably weakened and, accordingly, the anticipated requirement for phosphoric acid would not materialize. Instead, the company decided to construct a new compound fertilizer unit at Yarimca based on imported raw material and limit its output to various grades of NPK compound fertilizer and TSP. This was a smart move, especially in contrast to the decision of Samsun complex to make investment in the TSP plant and later phase out production completely. 32. The plant at Yarimca has been working at a moderately high level of capacity utilization since it came into production (Annex 15). The rapid increase in the consumption of compound fertilizers has created a ready market for the production of this plant, providing it with a margin of profit (Annex 16). Although domestic prices have declined in recent years (in line with international prices) the plant continues to increase its profit with higher capacity utilization and efficient operation. This complex imports all of its raw materials except ammonia and urea which it buys from the Igsas plant located nearby. The reestimated ERR for this investment, based on 90% capacity utilization as from 1995 and with prices as given in Annex 29, is around 5.0%. 33. The rehabilitation in this plant consisted of converting the feedstock from naphtha to refinery gas. In addition, it was decided to utilize the refinery off gas in the plant burners and, thus, economize on the use of fuel oil. By removing some of the bottlenecks in the plant and rehabilitating troublesome equipments, it was anticipated that the plant's capacity would increase by 10 per cent. Once a further conversion to the use of natural gas was achieved in 1988, the ammonia plant capacity was increased a further 5% - from 363 thousand tons to 380 thousand tons/year. Though somewhat behind schedule, the first rehabilitation was achieved in 1986. As can be seen in Annex 17, capacity utilization dropped in 1985 and 1986 as the plants were shut down for rehabilitation. Thereafter, the capacity utilization for the Urea plant picked up reaching between 98% and 103% in recent years. This complex is well maintained, clean and runs very efficiently. - 11 - 34. The cost structure of the plant speaks well of its competitiveness at international prices (in fact the domestic price of Urea has very closely followed international FOB prices from major suppliers, though spot cargoes at cheaper prices may have been shipped to Turkey). The plant has consistently been profitable since 1987 and the reestimated ERR is around 14.5%. IGSAS continues to engage in profit-making trading operations (Annex 18). AKGUBRE 35. AKDENIZ Gubre was formed in 1968 as a joint venture with Kuwaiti shareholders. The Mersin complex was completed in 1972 for the production of calcium ammonium nitrate and di- ammonium phosphate. Before rehabilitation, capacity utilization was low because of serious technical problems, especially in the acid producing plants. The rehabilitation project aimed at substantially improving the productivity of all units in the complex so that capacity utilization would approach 80-90%. Upon completion of the project in August 1987, the plant began producing at higher capacity levels in 1988. Unfortunately, there was a prolonged strike at the plant during 1989 which resulted in the virtual shutdown of the production. The company was privatized at the beginning of 1990 and under the new management production picked up again. However, because of market conditions, production remained low at the DAP plant. By 1992, the CAN and DAP plants were producing at 83% and 77% capacity utilization, respectively (Annex 18). In the middle of 1993 the company's management decided to shut down the DAP as well as the phosphoric acid plants because they could not cover even their cash costs at the prevailing international prices (Annex 20)'. 36. Since its transfer to TOROS Group (a private sector company), the plant has been operating as a division of the new owners on a toll basis. In practice, this means that the production is planned by TOROS, and that they supply the raw materials and take delivery of the fertilizer for eventual sales. The plant is not a fully autonomous unit and the accounts submitted by the plant are, therefore, partial and not indicative of the cost structure. For example, the accounts show a large profit in the year when the plant was virtually closed as a result of the strike in 1989 and its total sales were less than its indicated profit (Annex 21). The figures under "other income" appear to be accounting measures employed to leave the plant with a nominal profit, especially since 1991 when the plant progressively became a tolling division of TOROS. No reestimation of the ERR is attempted due to the unavailability of data, but the closure of the plant in 1989 and the discontinuation of DAP production in 1993 would naturally cloud the economic outcome of this unit. EGE Gubre 37. The rehabilitation project was designed to improve capacity utilization of the plant at Foca from 60 to 90 per cent. This would be achieved by debottlenecking of some units, addition of more bulk storage facilities and a mechanical modification to allow operational flexibility in order to produce a substitute to DAP (a compound fertilizer containing 15%N and 45%P) which was demanded by the market. This modification was finished by August 1986 and the Bank agreed to additional work (expanded storage, a new bagging line and expansion of fertilizers blending) which was completed in mid- 1988. The net profit of this plant declined from US$3.8 million equivalent in 1986 to US$0.6 million in 1988, while capacity utilization remained below the prerehabilitation level (supervision report, July ' Average FOB price for DAP in 1993 was $129 per ton. Daily calculations at Yarimca indicate that the cost of raw materials alone in the production of DAP in October 1993 amounted to $140 per ton (not including fuels, energy and other consumables). Because of large over supply, all fertilizer prices declined sharply in 1993. - 12 - 11, 1989). In 1989 capacity utilization dropped further to 52% and the company just broke even. Capacity utilization recovered somewhat in 1990 to 62% and has remained at around this level ever since. Human Resource Development 38. In para 15 above, a short discussion of the training subcomponent of the first project was presented. This subcomponent which aimed at creating an effective training center never received the attention it deserved and the training program became completely disfunctional. Out of $3.4 million earmarked in the first project for this purpose, only $0.4 million was disbursed and the remaining was cancelled. As far as the training subcomponent of the second loan is concerned, the companies did not utilize any of the funds. Although the nature of the rehabilitation project and its demand on the technical personnel of the various units, especially their heavy workload may have affected the training program, but this lack of interest has its root in the attitude of the various companies to the need to upgrade the technical and managerial capabilities of their personnel. In practice, many plants fell very quickly in disrepair with serious consequences for capacity utilization. 39. By and large, all the companies succeeded in reducing their work force. At Kutahya the total work force fell from 2587 persons in 1986 to 1841 in 1992. At the Mersin plant of AKGUBRE, the total number of personnel declined from 727 in 1989 to around 270 in 1993. Out of the latter number, around 10% are college/university graduates. The total employees of GUBRETAS number 876, of which 418 are working at Yarimca. There is no in-house training in this complex and technical personnel are sent to outside courses and seminars. In certain instances, Turkish research organizations are called upon for assistance. As for IGSAS, its work force at Izmit has also dropped marginally from 730 in 1986 to around 680 in 1992. Of this total, 17% are university graduates and another 40% hold high school diplomas. In 1992, a total of 193 persons received training both in-house and outside the plant. Energy Savings - Specific Consumptions 40. In practically all the plants, the rehabilitation has been accompanied with some energy and material savings (Annex 22). At Kutahya, both the unit consumption of lignite and electrical energy has dropped. The rehabilitation at Samsun has resulted in the reduction of specific consumption in all plants. Electrical energy consumption per ton of sulfuric acid has declined from 103 kwhs in 1983 to 84 kwhs in 1992; so has the quantity of pyrites required to produce a ton of sulfuric acid. The same goes for phosphoric acid production. At the Mersin plant of AKGUBRE, the improved operation of the waste heat boilers has made it possible to generate more electricity in the plant, thus reducing the need for purchased electricity from 96% in 1985 to around 53% in 1992. This has resulted in considerable savings. At the Izmit Ammonia/Urea plant of IGSAS, the energy and material savings have been considerable. Already by 1988, the consumption of naphtha per ton of Ammonia had dropped to 0.677 tons from 0.772 tons in 1983. Since receiving natural gas from the pipeline network, unit consumption of gas has declined and is stabilizing around 79 cubic meters per ton of urea. Environmental Protection 41. Among all the fertilizer complexes, the Izmit plant of IGSAS has the best environmental protection record. At Yarimca (GUBRETAS), the NPK II plant financed by the project does not meet the Turkish emission standards. The process is designed to wash the stack gases with a mixture of - 13 - sulfuric acid and water, but the level of stack emissions is high. In addition, the design stipulated that there would be no liquid discharge into the sea, but owing to the various process problems this cannot be avoided. The plant is searching for a consultant to solve these problems. 42. At the Mersin plant of AKGUBRE, an NO abatement system is being installed in the nitric acid plant in order to reduce the NO content of the flue gas from around 1500 to below 200 ppm (which is the current Turkis emission standard). This investment is expected to cost nearly $1.3 million. The environmental protection record at both Kutahya and Samsun is, unfortunately, very inadequate. At Samsun the S02 emissions from the stacks is well above accepted levels (easily noticeable through inhalation in the general plant area). Reportedly, this affects the neighbouring agricultural production and the plant receives complaints on a regular basis. At Kutahya, in addition to high N% emission levels from the stacks, the pollution level in the effluent water is considerably above the standard. Since their effluent is discharged into the nearby river, the water supply to the downstream city of Eskeshehir is of poor quality. Protests are also being received regularly from the residents of this city (Annex 23). Compliance With Covenants 43. Apart from implementing the Marketing and Pricing Study's recommendations (as a part of the Agricultural Sector Adjustment Loan) and substantially liberalizing the fertilizer market, the Government has only partially complied with many other covenants such as providing TUGSAS with additional funds in a timely manner or the streamlining of the payment procedures to the fertilizer companies. The payment of subsidies to the fertilizer producers is almost always in arrears and this plays havoc with the finances of many companies as it forces them to borrow their working capital at very high interest rates (inflation rate in the last few years, as measured by the wholesale price index, has remained well above 50%). The borrowers have only partly complied with covenants regarding reporting and auditing of accounts. Compliance with covenants in respect of environmental standards has been very poor. Tagsas did not carry through with recommendations of its consultants and introduced only few reforms in its financial management. VI. OVERALL ASSESSMENT 44. This project was prepared at a time when the world had gone through the roller coaster of oil price explosion and the commodity price boom of the early 1970s. In fact the world was in the midst of another oil price increase that had brought with it another fertilizer price increase. In line with the conventional wisdom, the Bank price projections called for measurable increases in the real prices of fertilizers resulting in the near tripling of the prices during the following decade in current dollars.' Under these circumstances, most projects had a built in justification because the price of the finished goods was expected to increase continuously at a moderate rate in real terms. 45. This period also coincided with intense technological activity in the research and development of synfuels industry. Coal gasification technologies, along with the development of tar sands, shale oils, heavy oils, etc., were being presented and tested by many engineering, coal and oil producing companies. There was a belief that the world needed to quickly reduce its dependence on petroleum (at the time considered a fast depleting exhaustible resource) and shift over to the use of coal, albeit, through gasification in order to reduce the environmental impact of burning sulfurous coal. It is ' Report 84/80, page 216. - 14 - important to keep this background in mind when judging the justification for this project. That said, there are still many factors that resulted in the unsatisfactory outcome of the projects. Consumption Forecas 46. The first project was presented to the Board in April 1981 at a time when the price increases of 1980 (see SAR of Loan 1985, page 25) had already slashed demand in that year by nearly 18% and 27% for nitrogen and phosphates, respectively. Though this fact was recognized in the SARs and extensive discussions were made regarding the effect of price on consumption, both SARs came to the conclusion that, despite the slow increase in the consumption of fertilizer products since 1976 and the sharp drop in consumption in 1980, demand would again pick up and increase at a rate of 9.6% between 1982 and 1987 (see SAR of Loan 2131, page 24). This forecast proved to be too optimistic, especially because it did not seem to take into account the commitment by the Government of Turkey to gradually phase out the subsidy and increase fertilizer prices at the formagate. The actual consumption of nutrients (nitrogen N and phosphorus P) in comparison with estimates is shown in the chart below: 1, ao 'nuu I t0 Nitrogen Nltrog*n 0 197 8 751so C1 8 83 04 ast 08 8 a a cts meIB) 9 2am 0 F Ph-sPat" 1400 (act,.M 1) 8200 1077 76 73 IIIIIC 61 32 93 04 55 " 87 88 M3 1330 31 112 3 Years It is important to note that the consumption of phosphoric fertilizers, has hardly increased since the early 1980s (Annex 24). 47. Apart from being too optimistic, the trend in the consumption of various fertilizers was not truly captured by the SARs. Even though the SAR of the first rehabilitation and energy savings project (Annex 4 -2) shows an unmistakable declining trend for SSP and TSP against an upward direction for NPK (chart below), there is little recognition of this phenomenon with the result that emphasis was placed on the rehabilitation of the TSP units in the Samsun and Yarimca plants. - 15 - C 0 1. 200 0 'n 0 0 (0 go 1C 8 20q 1975 76 77 78 79 1990 81 92 63 64 B5 Na 87 AA A9 1990 91 92 93 Years It is to the credit of GUBRETAS' management that they realized this trend in time and changed the scope of their project. By building a new NPK plant instead of constructing a brand new sulfuric acid plant and by dropping the rehabilitation of the TSP unit, they avoided a highly uneconomic investment (in recent years sulfuric acid prices have continued their decline to as low as $15/ton in September 1993). Rehabilitation of Kutahya H Ammonia Plant 48. Despite the prevailing environment in the early 1980s (discussed in paragraphs 44 and 45 above), there was altogether too much faith in the technical feasibility of operating large ammonia units using very poor quality lignite. In a telling passage about the choice of technology for the then proposed Soma project,' the BTOR states: "The first generation coal-gasification technologies based on Lurgi, Koppers-Totzek and Winkler processes are commercially proven and have been in use for many years. The Lurgi Slagging Gasification Process of BGC is also sufficiently proven (in one large-scale plant) but BGC is reportedly rather reluctant to allow the next coal gasification plant based on this process to be built in a developing country........ There is widespread international interest in coal/lignite gasification following the 1973 oil crisis. Efforts have been intensified to develop better second generation technology which could cut costs....... Because of its unsatisfactory experience in trying the first generation technology for a large-scale plant (Kutahya II), Turkey is reluctant to be one of the first to try the second generation coal technologies which, except for the Lurgi Slagging Gasification Process, are still at an experimental stage. It would like to establish the Soma project based on the commercially proven first generation technology in which Turkey has extensive experience". Thus, despite extensive ' Memo dated October 31, 1979 on Fertilizer Sector Rehabilitation Follow-up and Soma Fertilizer Project Review mission - BTOR. - 16 - experience, large scale Kutahya II had proven difficult to operate, even though it was originally designed to accept run of the mill lignite with 35% ash content and 40% moisture. Institutional Development 49. When the plants were inspected by the original engineering consultants, they invariably pointed to the lack or inadequacy of preventative maintenance, annual inspection, monitoring of operations and, most important of all, shortage of well trained operating and maintenance personnel. The project, therefore, envisaged the establishment of a training center at Kutahya to initially serve that plant, and later the fertilizer industry. In addition, it provided for a Management Improvement component focussing on adjustment of the organization for increased operational efficiency; delegation of authority to plant level management; improvement in maintenance, inventory control and energy management; improvement in compensation policy to minimize turn over of professionals; and introduction of modern accounting financial management techniques at TUGSAS. 50. To be sure, these are the tools that any management requires for efficient operations. But it is not clear that a management that had overseen a continuously deteriorating operation during the 1970s (capacity utilization had declined to around 35%) was the right group of people to be entrusted with management reforms. The blame was, therefore, too easily placed on external factors (e.g. shortage of foreign exchange, pricing etc) to explain the poor state of this company. In practice, TUGSAS never really owned the project and was not ready for the reforms. This was eventually proven when the management did not carry through with many of the important recommendations of the study, opting instead for only a few cosmetics. Such problems with the management of existing enterprises (especially the state-owned) are the major reasons why so many of the Bank rehabilitation/restructuring projects have come to grief. Time and again, it has been shown that the managerial restructuring is a 'condition sine qua non' of getting the enterprise resuscitated. Sectoral Reforms 51. One of the important covenants of the project was for the Government of Turkey to furnish the Bank a detailed plan for carrying out the Fertilizer Pricing and Marketing Study's recommendations and, thereafter, to carry out the recommendations in consultation with the Bank. The results of this study were accepted by the Government and were made a part of the reforms envisaged in the Agricultural Sector Adjustment Loan approved in 1986 (Loan 2585-TU). These reforms led to the further liberalization of the fertilizer marketing as well as the domestic pricing systems. As a result of the marketing reform, DONATIM and SEKER, (two state run marketers) lost their marketing monopoly and all fertilizer companies were allowed not only to distribute their own production, but also to engage in import/export activities. Pricing and Subsidies 52. Since the price increases of 1980-81, the Government had been following a policy of gradually reducing the retail fertilizer subsidy. But the Government has also been concerned that too abrupt changes in fertilizer pricing policies would disrupt agricultural production. When the Agricultural Sector Adjustment Loan was being discussed, the Government suggested that in order to help the farmers - 17 - located in remote low income areas, the remaining subsidies be phased out by the end of 1988. In addition, by providing a degree of protection - albeit at a low level of between 10 and 20 per cent on the landed price - the Government decided not to expose the domestic producers to disruptive competition until the rehabilitated projects were completed. In their Statement of Agricultural Sector Policy', the Government stated: "Our goal is to provide the domestic manufactures with clear signals on policy reference prices by bringing ex-factory prices to levels of import prices of comparable products. At the same time we intend to provide manufactures with the opportunity and incentives to improve their product to meet the demand of farmers. As part of this process, in August 1984 we announced a substantial improvement in the basic ex-factory pricing formula. Ex-factory prices are now linked to a dollar price adopted semiannually for each product, with monthly adjustment for exchange rate fluctuations (Annex 25)." As indicated in Annex 25, the ex-factory prices have in recent years been fixed substantially in line with international prices for urea and NPK fertilizers, while TSP and DAP apparently enjoy a higher level of protection. In fact, these higher ex-factory prices have not helped the producers, as will be discussed later. 53. Despite the Government's declared policy in 1985, the subsidy to the farmers has not been phased out, but progressively reduced as shown in the following Table 5. In the last two years, because of continuing socio-economic problems, the level of subsidies has been allowed to rise. Ex-factory prices, subsidies and prices to distributors in August 1993 are given in Annex 26. Table 5 - Weighted Average Net Fertilizer Subsidy Per Cent 1983 54 1984 50 1985 36 1987 35 1988 26 1989 January - March 24 1989 April 43.5 1990 March 35 1990 October 25 1991 20 Source: Report No. 10025 - PCR for Agriculture Sector Adjustment Loan. 54. Under the current system, producers often have to wait a long time (as long as 6 months) to receive the subsidy from the Government (through Donatim). This places a heavy burden on financially weak companies such as TUGSAS and its subsidiaries: Samsun and Kutahya plants. These plants find it very difficult to by-pass DONATIM because of their financial situation. Conversely, profit making entities such as IGSAS and GUBRETAS have increasingly marketed their products through final distributors who usually settle their accounts within two weeks. They have also engaged in profitable 1o Letter dated may 21, 1985, from the Government of Turkey to the Bank. - 18 - importing operations (see e.g. IGSAS' income statement, Annex 18), especially in phosphoric fertilizers for which landed prices are much lower than the stipulated ex-factory prices and the subsidies are relatively high. In reality, the Government's policy of providing subsidy to the farmers through the domestic producers and importers has not only kept the price distortions in the agricultural sector, but it has also created opportunities for windfall profits for importers. Thus, while some producers have been forced to reduce or discontinue the production of some fertilizers, e.g. TSP at Samsun and DAP at Mersin, the competition is heating up at the farmgate level where importers of cheap fertilizers have begun offering discounts (they still collect the government stipulated amount of subsidy). Because of the granting of subsidies, on the one hand, and the liberalized imports of fertilizers , on the other, the producers are facing a very uncertain situation which can only be remedied by the phasing out of the subsidies and the removal of ex-factory prices. Proiect Outcome 55. Despite a total investment of around $321 million, the outcome of these two projects has, on the whole, been disappointing. Because of inefficient management, especially at TUGSAS, misreading of fertilizer consumption trends and consequently misplaced investments, unavailability of some domestically produced raw materials with the right quality, long delays in implementing the projects and, in certain cases, large overruns, the project fell far short of realizing its objectives. Nonetheless, where the plants were well managed (e.g. state owned IGSAS), the project had a successful outcome. 56. The projects did not make a sizeable contribution to meeting the demand for fertilizer products in Turkey. Out of an increase in the total nutrient consumption of 762 thousand tons between 1980 and 1992 (Annex 24), the project provided for only 314 thousand tons or around 41% (Annex 27)." The shortfall was much more pronounced in the production of TSP which lost ground in favor of compound fertilizers and DAPa. Over the years, of course, the contribution of the projects to meeting the needs of Turkey for fertilizers has varied. Usually production has been high immediately after the start up of the rehabilitated plants (even at Kutahya and Samsun - see Annexes 8 and 11), but the physical outputs from the projects never approached the original expectations. In addition, as discussed under each plant, the reestimated ERRs are in most cases well below acceptable levels. The outcome of the two projects is, therefore, rated as unsatisfactory. Sustainability 57. Of the six plants that were rehabilitated, two - Yarimca and Izmit - are sustainable, because they are producing at high capacity utilization and are profitable under the current competitive conditions. The two plants of AKGUBRE at Mersin and EGE Gubre at Foca that are run by the private sector are also likely to continue their operation because they essentially manufacture products that are not widely traded internationally such as CAN and NPK and where domestic prices are close to international prices. In the case of AKGUBRE, it could well be that Toros acquired the assets at an advantageous price and so it does not carry a large loan burden. In any case the Mersin plant of this " It should be noted that the incremental production of CAN at Kutahya is not attributable to the project because it was based on the supply of ammonia from outside and not due to the contribution of Kutahya II ammonia plant. 12 In fact the long held view that the most favourable NPK ratio for Turkey would be approximately 4:3:0.08 - - SAR for Loan 1985, paragraph 4.12 - was proven inaccurate; the rolling average ratios are more like 4:2:0.2. - 19 - company is now a part of a much larger operation and the plant could become increasingly involved in the production of compound fertilizers. 58. The Government is, however, saddled with the highly loss-making and inefficient operations of Kutahya and Samsun plants, and accordingly Tugsas. The losses by TUGSAS in 1992 alone exceeded $234 million. In the same year, the financial charges have amounted to $187 million (Annex 28). The balance sheets of both plants indicate that they have been insolvent for many years except that they continue to receive cash through TUGSAS to cover their losses. Under the current and foreseeable conditions, both the ammonia plant at Kutahya II and TSP plant at Samsun will remain closed because they have both fallen into disrepair and the operations are uneconomic. Both plants need serious managerial, organizational and financial restructuring if they are to remain as state owned enterprises. It is, however, believed that such a course of action is beyond the capabilities of the existing TUGSAS management. 59. The other possibility is to privatize Tugsas by selling its assets as a whole or by truncating each plant and disposing of it separately. Of all the Tugsas plants, Gemlik is perhaps the easiest to privatize because it is a fairly low cost producer of ammonia and nitrogenous fertilizers and the plant's operation is reasonably efficient. As for the other plants, the Government may eventually have to accept a large loss and dispose of the assets. There is, of course, the problem of the excess labor. Although the Government of Turkey is currently engaged in a serious privatization study, the worsening socio- economic problems of the country is likely to render this task intractable. All in all, given the dismal performance of the TUGSAS plant, the sustainability of these projects is still uncertain. VII. LESSONS LEARNED AND RECOMMENDATIONS 60. The PCR draws many useful lessons regarding the need for risk assessment when rehabilitating old plants, flexibility in project scope changes, use of bonus/penalty clauses in contracts and the organization of project management teams. It recommends that the approach to the Bank's forecasting of fertilizer prices needs review. It further concludes that possible changes in the pattern of demand for specific products have to be taken into account in determining the project scope. In line with the Bank's policy stance in recent years, it also concludes that while financing rehabilitation projects, agreement should be sought on a schedule for privatization. 61. Though the factors enumerated above have adversely affected the outcome, it is doubtful that any agreement on eventual privatization would have, in any way, changed the results. The crucial lesson learned from this project is that a lame and inefficient management with an undistinguished track record should not be entrusted with rehabilitation. In other words, the existence of a sound management is a must for successful rehabilitation. In the absence of efficient management, a project of this nature should not be undertaken until and unless a management overhaul has taken place and the Bank is satisfied that the borrowers truly assume ownership of the project. 62. The Bank and the Borrowers should be on the look out for any serious reversal of trends and take all necessary measures to avoid making unrewarding investments. In these projects, the trend in TSP consumption was badly misjudged and even GUBRETAS' change of scope apparently did not affect the investments at Samsun. If this trend had been more carefully followed ( by 1985 and before rehabilitation at Samsun got underway, consumption of TSP has dropped to around 300 thousand tons from 610 thousand tons in 1978), Samsun may have entered the production of compound fertilizers at a much earlier stage and with a fraction of the actual project cost. In fact, this would probably have obviated the investment at KBI which was intended to increase the availability of sulfuric acid for transfer - 20 - to Samsun plant. 63. Since the rehabilitation of process plants needs to be carried out with the cooperation of the process licensor/engineering contractors, it is important that all preliminary studies, including inspection of the plant, are carried out before the project preparation and appraisal is final. This will avoid unnecessary delays in implementation and inordinate cost overruns. 64. The Government's clear policy in supporting the domestic manufacturers during a period of sustained economic reform was a contributing factor to the relative success of IGSAS and GUBRETAS. As enunciated in its policy statement before the approval of the Agricultural Sector Adjustment Loan, the Government intended to provide the opportunity and incentives to domestic manufactures and for this, it improved the ex-factory pricing formula to assist indigenous producers. This is a lesson that needs to permeate the thinking of all concerned. During the process of economic reforms and liberalization, productive enterprises must be afforded assistance and predictability to tide them over difficult times. It is only in this way that reasonably smooth adjustments can take place. 65. In this project the most and the least successful companies are state owned. The difference lies in governance and the quality of management. What has made IGSAS stand out is the fact that it enjoys a fair degree of autonomy and has been able to attract capable employees an account of its reputation as well as its relatively more generous salary scale. (Being a subsidiary of the oil company, it enjoyed their salary scale). While privatization would, in theory, lead to more discipline and better management, this is by no means guaranteed. Though the change of ownership (privatization) should not be considered as a panacea, in the case of Turkey, however, with so much of the industry in the public sector and mostly loss making, the privatization/liquidation option for fertilizer plants should be seriously considered, even if achieved at a considerable financial loss. - 21 - ANNEX 1 PERFORMANCE AUDIT REPORT TURKEY FIRST AND SECOND FERTILIZER RATIONALIZATION AND ENERGY SAVING PROJECTS (LOANS 1985-TU AND 2131-TU) Turkey - Capacity Utilization by Fertilizer Companies. 1976-1980 (in %) 1976 1977 1978 1979 1980 N P N P N P N P N P Public SectorI - TUGSAS (AZOT) 61 41 46 35 52 36 37 43 34 42 - IGSAS - - - - 43 - 54 - 84 - - Karabuk & Isdemir* 49 43 46 38 32 40 58 48 49 43 - Petkim** 2 - f - - 0 43 42 52 36 47 38 54 45 56 42 Joint Sector -GUBRETAS - 33 - 80 25 41 63 59 68 63 -AKGUBRE 42 42 4 4Q 3D 1 2 .12 12 49 38 44 60 28 24 51 38 54 51 Private Sector -BAGFAS - 106 - 83 - 38 - 24 24 39 - EGE Gubre _- . - 1Q n R -4 41 - 106 - 83 10 24 33 28 32 40 Total Sector M -O la 2 2 M R U ! Weighted average. Source: SAR for Loan 1985-TU, page 4. * Two steel companies. A state owned petrochemical company. ANNEX 2 PERFORMANCE AUDIT REPORT TURKEY FIRST AND SECOND FERTILIZER RATIONALIZATION AND ENERGY SAVING PROJECTS (LOANS 1985-TU AND 2131-TU) Production. Imports and Consumption of Fertilizers - 1977-1979 1000 Tons/Yr 1977 1978 1979 1980* Capacity Capacity Produ Import Consum Produ Import Consum Produ Import Consum Produ Import Consum 1977 1980 ction ption ction ption ction ption ction ption Ammonium Sulfate 181 381 145 276 482 136 375 593 129 650 630 173 432 517 (21%N) Calcium Ammonium 982 1576 447 572 1128 425 640 1125 523 255 1037 635 319 759 Nitrate (20.5% to 26%N) I I I I Urea (46%N) - 511 70 186 243 219 115 359 277 199 330 430 192 369 Diammonium Phosphate 376 576 131 316 501 84 561 579 99 482 680 170 469 494 (DAP, 18%N-46%P) Single Super Phosphate 242 242 42 - 94 45 91 45 - 55 26 - 27 (SSP, 17%P) Triple Super 780 780 559 42 599 347 169 610 416 80 549 480 175 419 Phosphate(TSP, 43%P) Compound (NPK) - 606 - 472 379 85 424 491 233 280 551 355 357 394 Potassium Sulphate - 10 3 - - 5 - 35 32 - 40 39 PotassiumChlorde -CM 4 4 - 1 1 - 2 2 - - Total 2561 4672 1394 1878 3432 1340 2284 3853 1722 1983 3865 2269 1984 3081 *Decline in 1980 Consumption was caused by sharp increase in the price of fertilizer in early 1980. Source: SAR, Gubre Ureticileri Dernegi (Fertilizer Producers Association of Turkey) Statistics. ANNEX 3 PERFORMANCE AUDIT REPORT TURKEY FIRST AND SECOND FERTILIZER RATIONALIZATION AND ENERGY SAVING PROJECTS (LOANS 1985-TU AND 2131-TU) Forecast of Capacity Utilization After Rehabilitation 1000 Tons/Yr KUTAHYA I SAMSUN zM1T YARIMCA MERSIN EQ MEBIi CAN DAP & TSP UREA TSP & NPK CAN & DAP NP AS Produ Capacity Capacity Capacity Capacity Capacity Capacity Capacity ction Utilization Produ Utilization Produ Utilization Produ Utilization Produ Utilization Produ Utilization Produ Utilization % ction % ction % ction % ction % ction % ction % 1980 (Before) 75 22 245 55 410 80 260 65 285 38 130 43 - - 1983 (After) 155 45 290 65 410 80 280 70 415 56 215 70 - - 1984 195 57 360 80 460 90 300 75 480 65 260 85 - - 1985 270 80 380 85 485 95 340 85 610 82 275 90 140 70 1986 290 85 405 90 485 95 360 90 640 86 275 90 170 85 1987 290 85 405 90 485 95 360 90 640 86 275 90 180 90 1988 290 85 405 90 485 95 360 90 640 86 275 90 180 90 Incremental increase 215 160 75 100 355 145 180 of final products - 24 - ANNEX PERFORMANCE AUDIT REPORT TURKEY FIRST AND SECOND FERTILIZER RATIONALIZATION AND ENERGY SAVING PROJECTS (LOANS 1985-TU AND 2131-TU) Proiect Costs (US$ million equivalent) -Appraisal Estimate- -Pevised Eamato.- Local Foreign Total Local Foreign Total I. First Rehabilitation Proioct TUoSAS - Kutahya II 30.50 50.60 81.10 27.35 45.50 72.85 - Samsun 2272 VIiM I2 Sub Total 69.70 78.00 147.70 70.09 84.18 154.27 IOSAS - Izmit 9.70 25.90 35.60 4.79 24.78 28.57W' GUBRE - Yarimca 25.90 26.70 52.60 20.10 9.75 29.85 SPO - Studies Q2 A12 2Q2A LN AA Total 105.60 131.00 236.60 95.28 119.09 214.37 I. Second Rehabilitation EGE GUBRE - Foca 2.70 3.47 6.17 1.26 2.46 3.72V AKDENIZ GUBRE - Mersin 19.10 34.08 53.18 14.33 39.62 53.95 KBI - Samsun 6.00 9.12 15.12 18.16 29.06 47.22 SPO - Studies L9 LU LU Lg LU L Total 28.80 48.50 77.3W 34.75 72.97 107.72t 'Including interest during construction and initial working capital. h' Including the cost of additional modification/rationalization agreed subsequent to the Loan approval. 9' After cancelling the GUBRE subproject at Iskenderun. - 25 - ANNEX 5 PERFORMANCE AUDIT REPORT TURKEY FIRST AND SECOND FERTILIZER RATIONALIZATION AND ENERGY SAVING PROJECTS (LOANS 1985-TU AND 2131-TU) Project Financing (Loan 1985-TU) (US$ million equivalent) Appraisal Actual Variance IBRD 110.00 98.19 (11.81) Other 2M Sub Total 110.00 107.19 2.81 (a) Internal Funds 86.60 24.50 (62.10) (b) Other 4Q.,QQ 82,68 42.68 Sub Total 126.60 107.18 (19.42) Total Financing 236.60 214.37 (22.23) Allocation of Bank (Loan 1985-TU) (US$ million equivalent) Category Loan Agreement Final Disbursement Equipment, Materials and Spares 79.00 64.86 Technical Services 13.60 21.99 Training 3.40 0.39 Refund of Project Preparation Funds 0.60 0.45 Studies 3.40 2.23 Interest During Construction I.LQQ .L27 TOTAL 110.00 98.19 - 26 - ANNEX 6 PERFORMANCE AUDIT REPORT TURKEY FIRST AND SECOND FERTILIZER RATIONALIZATION AND ENERGY SAVING PROJECTS (LOANS 1985-TU AND 2131-TU) Project Financing (Loan 2131-TU) (US$ million equivalent) Appraisal Actual Variance IBRD 44.1 26.96 (17.14) Other - a7AZ 21§ Sub Total 44.1 64.63 20.53 2. EqWty Internal Funds 40.4 20.50 (19.90) Other _- z IL2 Sub Total 40.4 42.42 + 2.02 3. Government (for study) LQ L9 - Total Financing 85.5 107.72 22.22 Allocation of Bank Loan (Loan 2131-TU) (US$ million equivalent) Category Loan Agreement Final Disbursement Equipment, Materials and Spares 30.41 22.13 Technical Services 7.82 3.72 Training 3.42 0.0 Study 1.80 0.54 Front-end Fee on Bank Loan .56 TOTAL 44.1 26.96 - 27 - ANNEX 7 PERFORMANCE AUDIT REPORT TURKEY FIRST AND SECOND FERTILIZER RATIONALIZATION AND ENERGY SAVING PROJECTS (LOANS 1985-TU AND 2131-TU) List of Loan Beneficiaries (US$ million) Bank Loan Beneficiaries Original Actual Disbursed (i) Loan 1985-TU: TUGSAS 69.00 70.90 IGSAS 20.60 19.73 GUBRETAS 20.60 7.19 GOT/SPO 0AQ 1 Total 110.00e 98.19 (ii) Loan 2131-TU: GUBRETAS 6.10 - AKGUBRE 25.28 15.57 EGE GUBRE 2.97 1.13 KBI 7.92 9.08 GOT/SPO m LQ Total 44. 10 26.96 A total of US$11,814,330.36 was cancelled from Loan 1985-TU. GUBRETAS' subproject was cancelled subsequently. A total of US$17,142,346.77 was cancelled from Loan 2131-TU. PERFORMANCE AUDIT FIRS AND SECOND FERTIIZER RATIONALIZATON AND ENERGY SAVING PROJECT (LOANS 1985-TU AND 2131-TU) Kutahva Fertilizer Production and Sales 1000 Tons/Yr Capacity 1986 1987 1988 1989 1990 1991 1992 Production Ammonia Own Production 112.2 29.1 92.3 54.3 66.5 40.7 38.2 29.3 Purchased from Outside 53.4 26.9 70.2 74.6 88.9 69.0 82.9 Total Ammonia 82.5 119.2 12.5 141.1 129.6 107.2 112.2 Capacity Utilization - Kutahya II 26% 82% 48% 59% 36% 34% 26% Fertilizer Products Ammonia Sulfate (21%N) 60.0 36.7 60.1 52.5 66.1 42.4 42.9 19.3 Calcium Ammonium Nitrate (26%N) granule 40.0 53.1 45.1 44.4 56.2 55.7 43.0 42.8 Calcium Ammonium Nitrate (26%N) prill) 133.7 182.3 197.0 218.4 225.7 173.2 200.1 Calcium Ammonium Nitrate (33%N)) 338.5 56.0 53.4 47.0 46.3 39.4 35.6 36 Total Products 438.5 279.5 340.9 340.9 387.0 363.2 294.7 298.2 Capacity Utilization 64% 78% 78% 88% 83% 67% 68% Polyethylene Sacks (millions/year) 55 20.4 22.8 39.1 37.1 34.2 45.7 26.0 Sales Ammonia 1.4 1.5 1.4 2.6 .7 .5 .6 Ammonium Sulfate (21%N) 19.3 76.6 43.6 71.4 35.5 46.2 26.7 Ammonium Nitrate (26%N) granulated 42.4 41.1 41.7 76.8 29.5 58.2 23.2 Ammonium Nitrate Prill (combined) 117.7 176.2 139.6 264.8 223.3 271.8 229.1 ANNEX 9 PERFORMANCE AUDIT REPORT TURKEY FIRST AND SECOND FERTILIZER RATIONALIZATION AND ENERGY SAVING PROJECTS (LOANS 1985-TU AND 2131-TU) Cost Structure of Ammonia Produced at Kutahya H (Per ton of Ammonia) 1986 1987 1988 1989 1990 1991 1992 TL $ TL $ TL S TL S TL $ TL $ TL S Lignite 70436 104.4 68823 80.3 82472 58.0 99904 47.1 184838 70.9 357894 85.8 797005 116 Labor 13691 20.3 6956 8.1 22564 15.9 44047 20.8 148315 56.8 347186 83.2 418328 60.9 Maintenance Material 10194 15.1 4177 4.9 19244 13.5 18405 8.7 13579 5.2 39362 9.4 51454 7.5 Personnel 787 1.2 429 0.5 682 0.5 2171 1.0 9361 1.5 14010 3.6 17313 2.5 Utilities 97150 1440 100850 117.6 172858 121.5 268457 126.5 395129 151.5 601101 144.0 1017451 148.0 Taxes 522 0.8 1079 1.3 1849 1.3 2676 1.3 4389 1.7 6419 1.5 9969 1.5 Amortization 746 1.1 41496 48.4 175708 123.5 240224 113.2 596276 228.6 987109 236.6 1035613 150.7 Total Cost 193526 286.9 222810 260.0 475377 334.2 675884 318.6 1351887 518.2 2353081 564.0 3347133 487.0 Price of Ammonia 89940 133 105458 123 231148 162 263216 124 333681 128 602954 144 991178 144 supplied from outide Internatioal Price 115 137 126 126 134 136 112 FOB Source: Cost Accounting Departmen Kutahya ANNEX 1 PERFORMANCE AUDIT REPORT TURKEY FIRST AND SECOND FERTILIZER RATIONALIZATION AND ENERGY SAVING PROJECTS (LOANS 1985-TU AND 2131-TU) Kutahya - Income Statement TL millions 1986 1987 1988 1989 1990 1991 1992 Income Gross Sales 31,788 50,771 75,407 161,935 158,185 318,154 333,622 Adjustments 2,955 5,441 8,258 15,988 15,270 39,348 22,497 Net Sales 28,833 45,330 67,149 145,946 142,914 278,806 311,125 Other Income 527 1,440 3,568 7,461 2,667 817 24,216 Expenditures Cost of Sales 22,263 40,688 57,087 123,664 130,263 291,578 340,461 General Administrative Expenses 1,460 2,999 4,971 10,307 21,542 58,507 81,125 Financial Charge 3,844 10,537 29,197 30,737 53,885 162,476 430,415 Total Expenditure 27,563 54,224 91275 164,708 205,690 512,561 852,001 Total Profit/(Loss) 1,793 (7455) (20,558) (11,300) 60,109 (232,939) (516,661) Profit/(Loss) (US$ millions) 2.66 (8.70) (14.45) (5.32) (23.04) (55.84) (75.18) ANNEX1 PERFORMANCE AUDIT REPORT TURKEY FIRST AND SECOND FERTILIZER RATIONALIZATION AND ENERGY SAVING PROJECTS (LOANS 1985-TU AND 2131-TU) Samsun - Production Performance of Various Plants 1000 Tons/Yr Pho.phoric Acid H Sulfuric Acid Phosphoric Acid I TSP NP-NPK DAP Capacity 214.5 71.7 220.0 300.0 108.8 227.0 Production Capacity Production Capacity Production Capacity Production Capacity Production Capacity Production Capacity Utilization Utilization Utilization Utilization Utilization Utilization %% % % % % 1977 109.7 51.1 29.2 40.8 105.0 47.7 46.4 42.7 70.2 30.9 1978 34.1 15.9 26.7 37.3 109.1 49.6 47.1 43.2 73.1 32.2 1979 5.2 2.4 41.9 58.5 144.0 65.5 45.1 41.4 73.1 32.2 1930 37.3 17.4 36.4 50.8 114.4 51.9 58.6 53.9 105.1 46.3 1981 50.7 23.6 49.9 68.9 131.0 59.5 62.1 57.1 122.2 53.8 1982 56.9 26.5 14.8 20.6 29.5 12.9 41.8 38.4 92.7 40.8 1983 54.7 25.5 12.1 16.8 109.6 49.8 27.1 24.9 112.8 49.6 1984 17.1 8.0 - - 137.6 62.5 44.6 41.0 161.4 71.0 1985 - - - - 120.8 54.9 35.0 32.1 151.6 66.7 1986 - - - - 132.8 60.4 39.8 36.6 121.0 53.3 1937 34.2 16.0 35.8 50.0 166.4 75.6 20.2 18.6 145.3 64.7 1988 153.4 71.5 23.1 32.2 77.9 35.4 34.9 32.1 77.1 33.9 1939 117.0 54.5 13.6 15.8 29.5 13.4 67.6 62.1 161.5 71.1 1990 122.8 57.3 21.5 25.1 25.5 11.6 10.7 3.6 54.7 50.3 146.2 64.3 1991 36.5 17.0 27.1 31.6 5.9 2.6 71.6 23.8 34.2 31.4 83.0 36.5 1992 33.0 38.7 31.5 36.7 - - 100.2 33.4 23.6 21.7 151.0 66.5 -32 - ANNEX 12 PERFORMANCE AUDIT REPORT TURKEY FIRST AND SECOND FERTILIZER RATIONALIZATION AND ENERGY SAVING PROJECTS (LOANS 1985-TU AND 2131-TU) Samsun - Production Costs for Various Fertilizer Products $/Ton TSP DAP NP NPK 1985 175 252 - - 1986 161 213 - - 1987 169 247 - - 1988 158 154 - - 1989 190 235 - - 1990 189 259 223 - 1991 193 263 199 189 1992 - 242 153 146 ANNEX"1 PERFORMANCE AUDIT REPORT TURKEY FIRS AND SECOND FERTIIZER RAITONALIZATION AND ENERGY SAVING PROJECT (LOANS 1985-TU AND 2131-TU Samsun - Income Statement TL Million 1986 1987 1988 1989 1990 1991 1992 Net Sales 31,176 50,581 53,784 117,146 127,654 237,774 369,920 Cost of Goods Sold 30,862 49,978 43,710 103,147 129,769 231,818 341,454 Gross Profit 314 602 10,074 13,999 (2,116) 5,956 28,466 Marketing Expenses 235 343 392 540 969 15,729 21,146 Administrative Expenses 1,108 2,237 3,155 7,288 14,285 31,077 62,532 Operating Profit/(Loss) (1,029) (1,978) 6,527 6,171 (17,369) (40,850) (55,212) Financial Charges 3,313 9,109 19,702 36,167 62,314 193,308 392,269 Other Expenses 1,643 2,459 8,648 4,465 17,734 58,988 111,355 Other Incomes 468 2,223 5,533 5,177 2,246 3,355 40,687 Profit/(Loss) (5,517) (11,323) (16,290) (29,284) (95,171) (289,790) (518,148) Net Profit/(Loss) in US$ million (8.18) (13.21) (11.45) (13.8) (36.5) (69.5) (75.4) ANNEX 14 PERFORMANCE AUDIT REPORT TURKEY FIRST AND SECOND FERTILZER RATIONALIZATION AND ENERGY SAVING PROJECTS (LOANS 1985-TU AND 2131-TU) KBI - Production Performance 1000 Tons/Yr 1986 1987 1989 1990 1991 1992 Capacity Capacity Capacity Capacity Capacity Capacity Produc Utilization Produ Utilization Produ Utilization Produ Utilization Produ Utilization Produc Utilization tion ction ction ction ction tion Blister Coe Domestic 24.8 60.7% 2.6 6.4% 9.1 22.3% 14.9 36.5% 28.4 69.6% 23.5 57.6% Toll - - - - 3.5 8.6% 8.5 20.8% 4.0 9.8% 6.8 16.6% Total 24.8 60.7% 2.6 6.4% 12.6 30.9% 23.4 57.3% 32.4 79.4% 30.3 74.2% Sulfuric Acid 58.1 17.6% 7.8 2.4% 73 22.1% 96.3 29.2% 128.6 39% 107.2 36.4% Cost Structure of Sulfuric Acid Produced at KBI (TL and S/ton) 1986 1987 1989 1990 1991 1992 Variable TL/ton 4746 5241 7297 6748 14406 24936 Fixed TLJton 11143 19521 75460 102538 165261 303950 Total 15889 23148 82757 109286 179667 328886 US$/ton 23.5 27.0 39.0 41.9 43.4 47.8 ANNEX 15 PERFORMANCE AUDIT REPORT TURKEY FIRST AND SECOND FERTILIZER RATIONALIZATION AND ENEROY SAVING PROJECTS (LOANS 1985-TU AND 2131-TUI) GUBRETAS Yarimca - Fertilizer Production 1000 TonulYr Capacity 1989 1990 1991 1992 Capacity Capacity Capacity Capacity Production Utilization Production Utilization Production Utilization Production Utilization TSP 185.0 57.5 31% 34.8 18.8% NPK-I 200.0 165.3 82.6% 200.1 100% 170.7 85.3% 186.5 93.2% NPK-II 300.0 102.3 34.1% 218.3 72.8% 179.4 59.8% 220.4 73.5% Raw Material Inputs 1000 Tons/Yr 1989 1990 19991 1992 Phosphoric Acid 116,554 96,845 84,037 89,666 Sulfuric Acid 79,206 55,053 65,438 83,101 Ammonia 13,751 20,699 16,405 20,130 Urea 67,119 86,593 71,225 67,858 Ammonia Sulfate 37,958 86,373 98,179 90,729 Mano Ammonia Phosphate 16,813 25,240 34,021 86,482 Potassium Chloride 16,662 16,159 9,022 23,243 - 36 - ANNEX 1 PERFORMANCE AUDIT REPORT TURKEY FIRST AND SECOND FERTILIZER RATIONALIZATION AND ENERGY SAVING PROJECTS (LOANS 1985-TU AND 213 1-TU) GUBRETAS Yarimca - Income Statement (Billion TL) 1989 1990 1991 1992 Net Sales 125.1 230.0 338.1 661.6 Cost of Sales 96.5 163.5 226.6 409.0 Depreciation 0.8 4.5 7.5 11.9 Gross Profit 27.8 62.0 104.0 240.7 General Administrative Sales & Marketing Exp. 9.5 24.0 19.7 59.1 Operating Profit 18.3 38.0 84.3 181.6 Finance Expense 19.8 12.3 45.6 88.8 Other Income (Expense) 7.6 (5.1) (2.5) (16.9) Profit Before Tax 6.2 20.7 36.2 75.9 Taxes 16.2 Net Profit/(Loss) 6.2 20.7 36.7 59.7 Net Profit/(Loss US million) 0.3 7.9 8.7 8.7 - 37 - ANNEX 17 PERFORMANCE AUDIT REPORT TURKEY FIRST AND SECOND FERTILIZER RATIONALIZATION AND ENERGY SAVING PROJECTS (LOANS 1985-TU AND 213 -TU) IGSAS Izmit - Annual Production of Ammonia and Urea (1980-1992) and Capacity Utilization Installed Actual Capacity Installed Actual Capacity Year Capacity Production Utilization Capacity Production Utilization Tons/Year Tons/Year Percent Tons/Year Tons/Year Percent 1980 330,000 264,705 80 511,500 429,739 80 1981 330,000 272,025 82 511,500 456,552 89 1982 330,000 247,010 75 511,500 424,653 83 1983 330,000 255,218 77 511,500 430,023 84 1984 330,000 264,958 80 511,500 467,755 91 1985 330,000 220,434 67 511,500 356,608 70 1986* 363,000 189,921 52 561,000 322,071 57 1987 363,000 308,850 85 561,000 553,800 99 1988** 363,000 289,381 80 561,000 493,818 88 1989 380,000 353,790 93 561,000 548,520 98 1990 380,000 382,759 101 561,000 563,312 100 1991 380,000 354,813 93 561,000 548,658 98 1992 380,000 375,295 99 561,000 375,742 103 *First year of liberalization; production stopped because of inventory build up. **Change over to natural gas as raw material. - 38 - ANNEX 18 PERFORMANCE AUDIT REPORT TURKEY FIRST AND SECOND FERTILIZER RATIONALIZATION AND ENERGY SAVING PROJECTS (LOANS 1985-TU AND 2131-TU) IZMIT - Cost Structure and Income Statement 1986 1987 1988 1989 1990 1991 1992 Raw Material & Enerry Prices Naphtha $/Ton 159.7 163.2 127.7 140.8 - - - Natural Ga S/100Ms - - 93.2 84.6 95.9 101.0 84.0 Fuel Oil S/Ton 139.4 115.7 108.7 127.3 176.4 125.0 114.0 Variable Costo (SMillions) Raw Material & Energy 34.7 49.3 38.6 43.5 52.3 49.5 42.8 All Other (water, elect., etc) 47.7 6.6 6.4 5.9 4.1 4.2 3.6 Sub Total 39.4 55.9 45.0 49.4 56.4 53.7 46.4 Fixed Cost (SMillions) Labor 2.5 3.0 3.5 4.4 9.2 9.1 10.6 Depreciation 12.2 2.9 2.4 3.9 4.8 4.9 4.8 General Administration 2.3 2.9 2.8 3.9 7.3 7.1 7.4 Interest 10.5 5.6 1.6 1.8 2.9 3.0 .9 All Other 2.4 2.1 3.7 3.6 4.7 5.5 4.5 Sub Total 28.9 16.5 14.0 17.6 28.9 29.6 28.2 Total Cost ($Millions) 68.3 72.4 59.0 67.0 85.3 83.3 74.6 Variable Cost/Total Cost % 58% 77% 76% 74% 66% 64% 62% Urea Production (1000 Tons) 322.1 553.8 495.8 548.5 563.3 548.7 575.7 Cost/Ton Ures ($) 212 131 119 122 151 152 130 Sales Price Urea ($/Ton) 159 118 156 146 142 177 156 Profit/(Loss) Urea (S/Ton) (53) (13) 37 24 (9) 25 26 ProfitI(Loss) from Sale of Urea (17) (7.2) 18.3 13.2 (5.1) 13.7 15.0 (SMillions) Total Profit/(Lou) SMillions (8.8) 20.8 52.6 30.8 13.0 37.8 40.8 Profits & Loss from other 8.2 28.0 34.3 17.6 18.1 24.1 25.8 activities - 39 - ANNEX 19 PERFORMANCE AUDIT REPORT TURKEY FIRST AND SECOND FERTILIZER RATIONALIZATION AND ENERGY SAVING PROJECTS (LOANS 1985-TU AND 2131-TU) AKGUBRE Mersin - Annual Production of Calcium Ammonia Nitrate (CAN) Di-ammonium Phosphate (DAP) and NPK Capacity Utilization 1000 Tons/Yr CAN DAP & NPK Capacity 594 Tons Capacity 148.5 Tons Capacity Capacity Production Utilization Production Utilization 1980 262 44% 18 12% 1981 333 56% 52 35% 1986 225 38% 69 46% 1987 211 35% 63 42% 1988 335 56% 89 60% 1989 41 7% - - 1990 567 95% 61 41% 1991 442 74% 51 34% 1992 493 83% 115 77% -40- ANNEX20 PERFORMANCE AUDIT REPORT TURKEY FIRST AND SECOND FERTILIZER RATIONALIZATION AND ENERGY SAVING PROJECTS (LOANS 1985-TU AND 2131-TU Trend in World Fertilizer Prices (FOB - Current Dollars) Phosphate Rock Ammonia Urea TSP DAP Potash 1978 29 145 98 140 56 1979 33 173 142 193 76 1980 47 222 180 222 116 1981 50 216 161 195 113 1982 42 159 138 183 82 1983 37 173 135 135 184 75 1984 38 162 171 131 189 84 1985 34 206 136 121 169 84 1986 34 179 107 121 154 69 1987 31 115 117 138 174 69 1988 36 137 155 158 197 88 1989 41 126 132 144 173 99 1990 41 134 157 132 171 98 1991 43 136 172 133 173 109 1992 42 112 140 121 145 112 1993 33 126 107 112 129 107 Source: Report 814/92, (IBRD) IFC's Green Sheets (Ammonia) - 41 - ANNEX21 PERFORMANCE AUDIT REPORT TURKEY FIRST AND SECOND FERTILIZER RATIONALIZATION AND ENERGY SAVING PROJECTS (LOANS 1985-TU AND 2131-TU) AKQUBRE Mersin - Income Statement TL millions 1989 1990 1991 1992 Net Sales 14243 88079 222243 488975 Cost of Goods Sold 9003 73146 173946 435638 Gross Profit 5240 14933 48296 53337 Marketing Expenses 381 703 863 1367 Administrative Expenses 1916 2530 5721 8823 Sub-Total 2297 3233 6584 10190 Operating Profit/(Loss) 2944 11701 41712 43147 Financial and Other Expenses 49874 6102 100,007 125871 Other incomes 61903 56810 58966 82923 Net Profit/(Loss) 14973 6409 671 199 - 42 - ANNEX 22 PERFORMANCE AUDIT REPORT TURKEY FIRST AND SECOND FERTILIZER RATIONALIZATION AND ENERGY SAVING PROJECTS (LOANS 1985-TU AND 2131-TU) Energy and Material Savings 1983 1985 1988 1990 1991 1992 Kutahva (TUGSAS) Ammonia Plant Ton of Lignite/ton of Ammonia 6.67 5.6 6.1 Energy (Kwh/ton of Ammonia) 2897 2214 2204 Process water (cubic meter/ton of Ammonia) 39 30 41 Samsun (TUGSAS) Ton of Pynite/ton of Sulfuric Acid 1.1 .83 .82 Energy (Kwh/ton of Sulfuric Acid) 103 95 84 Ton of Sulfuric Acid/ton of P20 3.4 3.0 3.0 Ton of Fuel Oil/ton of DAP .018 .017 0.011 Ton of phosphate rock/ton of Phosphoric Acid 3.74 3.6 3.37 Mervin (AKGUBRE) Electric Power Production (million kwh) 2.2 16.6 25.8 30.1 33.5 Electric Power Purchased (million kwh) 53.3 47.8 31.9 24.3 38.0 % Power Produced to power consumed 4% 25.8% 44.7% 55.3% 46.9% Inmit (IGSAS) Ton Fuel Oil/ton Urea .176 .135 .061 .064 Cubic meter Natural Gas/ton Urea - - 91 79 Ton Naphthalton Ammonia .772 .677 - - Million Kcal/ton of Ammonia 10.1 9.5 8.7 - 43 - ANNEX 23 PERFORMANCE AUDIT REPORT TURKEY FIRST AND SECOND FERTILIZER RATIONALIZATION AND ENERGY SAVING PROJECTS (LOANS 1985-TU AND 2131-TU) Environmental Protection Performance Izmit (IGSAS) Air Pollution Before After Rehabilitation Rehabilitation Amount of Ammonia in disposal (ppm) 4000-5000 100-200 Analysis of Flue Gas (milligram/cubic meter) Standard CO 250 76 SO2 1000 611 NO2 1000 451 Mersin (AKGUBRE) Air Pollution Curren After completion of investment in progress Nox emission level (ppm) 1500 200 Kutahya Water Pollution Standard IM 19 m IM Chemical Oxygen Demand (COD) - mg/liter 150 N/A N/A 52 48 Suspended Particles - mg/liter 100 178 224 256 143 Ammonia NH, - mg/liter 50 535 477 348 344 Nitrous Oxide N% - mg/liter 50 185 131 173 232 ERFORMA UM REPORT TURKE FIRST AN SECOND FERILIZE RATIONALIZATION AND ENERG SAVING PROJECTS (LOANS 1985-TU AND 213 1-TUM Turkey - Fertilizer Production and Consumption 1000 Tons/Yr % Growth 8092 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 Nitroeen (N) Production 6.4% 460 639.0 691.0 750.0 783.0 717.0 716.8 854.9 853.9 827.0 1026.2 852.8 968.8 Consumption 5.4% 638.1 776.4 847.2 990.8 998.4 920.6 951.6 1141.7 1081.6 1140.4 1199.7 1103.7 1206.2 Surplus/(Deficit) (178.1) (137.4) (156.2) (2408) (215.4) (203.6) (234.8) (286.8) (227.7) (327.4) (173.5) (250.9) (237.4) Phosphate (P,O,) Production 3.5% 348.0 554.0 433.0 590.0 634.0 611.0 605.7 627.1 652.1 481.8 537.7 386.0 527.3 Consumption 2.6% 482.8 495.3 569.6 618.0 574.7 476.0 519.7 585.4 490.2 599.7 624.8 618.2 658.1 Surplus/(Deficit) (134.8) 58.7 (136.6) (28.0) 59.3 135.0 86.0 42.7 161.9 (117.9) (87.1) (232.2) (130.8) Potash (1E0) Production - - 17.0 20.0 26.0 38.0 26.1 31.2 32.8 36.9 49.4 38.3 62.9 Consumption 3.0% 44.5 37.7 33.3 24.6 31.4 33.9 47.3 50.7 41.8 58.0 63.4 47.5 63.3 Surplus/(Deficit) (44.5) (37.7) (16.3) (4.6) (5.4) 4.1 (21.2) (19.5 (9.0) (21.1) (14.0) (9.2) (.4) Production 5.6% 808.0 1193.0 1141.0 1360.0 1443.0 1366.0 1348.6 1513.2 1538.8 1345.7 1613.3 1277.1 1559.0 Consumption 4.3% 1165.4 1309.4 1450.2 1633.3 1604.6 1430.5 1518.6 1771.8 1613.7 1798.2 1887.9 1769.4 1927.6 Surplus/(Deficit) (357.4) (116.4) (309.2) (273.3) (161.6) (74.5) (170.0) (258.6) (74.9) (452.5) (274.6) (492.3) (368.6) Source: TUGSAS, Fertilizer Production Association of Turkey. ANNEX 25 PERFORMANCE AUDIT REPORT TURKEY FIRST AND SECOND FERTILIZER RATIONALIZATION AND ENERGY SAVING PROJECTS (LOANS 1985-TU AND 213 1-TU) Domestic (ex-factory) Prices v. International Prices $/Ton Urea TSP DAP NPK International International Ex-factory International International Ex- International International Ex- International International Ex- FOB CIF + Duty FOB CIF + Duty factory FOB CIF + Duty factory FOB CIF + Duty factory ____ (5%) ________ (15%) (20%) (15%) 1986 107 123 159 121 174 191 1987 117 133 118 138 193 245 1988 155 173 156 158 216 275 205 329 1989 132 149 146 144 200 233 173 244 278 150 185 183 1990 157 175 142 132 186 206 171 241 264 148 185 179 1991 172 191 177 133 187 246 173 244 289 150 188 189 1992 140 157 156 121 174 252 145 210 313 120 160 159 ANNEX 26 PERFORMANCE AUDIT REPORT TURKEY FIRST AND SECOND FERTILIZER RATIONALIZATION AND ENERGY SAVING PROJECTS (LOANS 1985-TU AND 2131-TU) Domestic Fertilizer Prices and Subsidies August 1993 US$= 11644 TL Ex-Factory Price Subsidy Price to Distributors TL $ TL $ % TL $ DAP 3,200,000 275 1,050,000 90 33 2,150,000 185 NP (20-20-0) 2,480,000 213 850,000 73 34 1,630,000 140 NPK (15-15-15) 2,860,000 246 1,260,000 108 44 1,600,000 138 CAN (26%N) 1,930,000 166 705,000 61 37 1,225,000 105 TSP 3,000,000 257 1,700,000 146 57 1,300,000 111 UREA 2,230,000 191 780,000 67 35 1,450,000 124 AS 1,598,000 137 348,000 30 22 1,250,000 107 Source: Samsun Gubre Sanayii - 47 - ANNEX 27 PERFORMANCE AUDIT REPORT TURKEY FIRST AND SECOND FERTILIZER RATIONALIZATION AND ENERGY SAVING PROJECTS (LOANS 1985-TU AND 2131-TU Incremental Annual Production from Rehabilitated Units 1000's Tons Actual Actual Expected Production Incremental Incremental 1992 Production Production Kutahya Ammonia Plant 29 - 65 CANS 279 204 215 Samn TSP - (125) 75 DAP 151 31 85 NPK 100 100 - Gubr TSP 35 (95) 0 NPK I 187 57 50 NPK II 220 220 240 Urea 576 166 75 Akdeniz Gubre CAN 493 228 255 DAP 115 95 100 EGE NP 195 65 145 Total 2072 737 1025 Actual incremental production of nutrients: N = 228 Thousand Tons excluding Kutahya P = 29 Thousand Tons K = 57 Thousand Tons w This increased production is based on supply of Ammonia from outside the plant and not as a result of the project. TSP production picked in 1987 at 166400 tons. A new NPK plant was built instead of rehabilitating the existing NPK and TSP plants. - 48 - ANNEX 28 PERFORMANCE AUDIT REPORT TURKEY FIRST AND SECOND FERTILIZER RATIONALIZATION AND ENERGY SAVING PROJECTS (LOANS 1985-TU AND 2131-TU) TUGSAS - Income Statement TL million 1987 1991 1992 First Half 1993 Net Sales 151,142 879,095 1,169,466 1,331,484 Cost of Goods Sold 126,107 766,345 1,023,359 974,146 Gross Profit/(Loss) 25,435 112,750 149,107 357,339 Marketing Express 742 60,923 87,471 72,676 Admin. Expenses 8,153 123,504 216,834 157,611 Operating Profit/(Loss) 10,539 (71,677) (158,198) 127,051 Financial Changes 26,565 884,997 1,280,476 924,665 Other Expenses (453) 98,473 171,349 252,604 Net Profit/(Loss) (9,574) (755,417) (1,610,023) (1,050,218) Net Profit/(Loss) ($Million) (11.2) (181.1) (234.3) (123.1) -49- ANNEX 29 PERFORMANCE AUDIT REPOR TURKEY FIRST AND SECOND FERTILIZER RATIONALIZATION AND ENERGY SAVING PROJECTS (LOANS 1985-TU AND 2131-TU) Economic Prices For Fertilizer in Turkey - Used for ERR Calculations 1992 Constan $/Ton Years AS AN CAN UREA TSP DAP NP NPK 1985 113 167 138 170 198 238 188 218 1987 107 158 131 169 204 244 194 222 1988 101 149 124 203 214 254 204 224 1989 89 131 108 179 190 230 180 200 1990 97 144 119 197 177 217 67 187 1991 97 143 119 209 175 215 165 185 1992 103 152 26 170 145 180 130 150 Forecast 1993 108 160 133 180 135 170 125 145 1994 114 168 139 188 149 179 134 154 1995 114 168 140 193 154 184 139 159 1996 112 166 138 195 156 186 141 161 1997 111 165 136 199 158 188 143 163 1998 110 162 134 203 168 190 145 165 1999 108 160 133 207 165 191 146 166 2000 107 158 131 210 168 193 147 167 2001 106 156 129 203 167 192 147 167 2002 105 155 128 201 166 191 148 168 2003 104 153 127 199 165 190 149 169 2004 102 151 125 196 165 190 150 170 2005 101 149 124 194 165 190 150 170 - 50 - ANNEX 30 TUOGSAS 'rC*SAS TORKYE GOBRE SANAY11 A.S. TURKISH FERTILIZMR INDUSTRY COPPORATION GENERAL DIRUTORATE TELEFAX Acit / URGENT TOPIAM SAYFA/TOTAL PAGE (202)-522-3124 11LEFAX NO: . GtDE=!. YER/TO : WORLD BANK/USA DIMATINE/ATIN : MR. M.MANUEL PENALVER TARH-SAYI/DATE-REF :90 . ( PT-56.00.01l/'3arL Ref : Your report dated 24.5.1994 You will find, below, our comments on the subjects related to our Company stated in the Performance Audit report evaluating First and Second Fertilizer Rationalization and Energy saving Project (Loans 1985-TU and 2131-TU) prepared by OED. If we devide the project into two parts as technical and managerial components, our Company believes that the technical part of the project was executed and completed with sufficiently successful results. Under this scope KOtahya-fl and Samsun Plants were rehabilitated and below mentioned aims were achieved after the removal of technical boltienecks - Increase of capacity - Decrease of raw material and energy consumption - Decrease of environmental pollution Success achieved in this component of the project is also verified by the Project Completion Report, dated 25 June 1991, prepared by Industry and Energy Division Technical Department EMENA region of the World Bank. The shut down of Kitahya II Ammonia plant is not due to negligence of - timely repairs and preventative maintenance as indicated in your .-report but it is due to the fact that the economic analysis done showed us that to continue '; fertilizer production using import ammonia is very much cheaper than using coal d based ammonia produced in KOtabya-I plants. Konya Dev1et Karayolu No: lipodrum/06330 ANKARA-TURKEY P.K. 550 Telefax: 0 (312) 224835-2228583 Ttelc 4228 TU;--4174 GSA-TR Rue: 2121/2 (27 Lire) - 51 - At the time of shut down the plant was actually capable of running at 90% capacity and drastic fall in utilizing the capacity was due to above mentioned economical reasons. Similar facts are true for Samsun TSP Plant also. Here the problem was the availability of very cheap import fertilizers as a substitute to TSP and drastic decline faced in the demand. Here again the plant is still capable of producing TSP at full capacity. Our inspections proved us that it is no more economical to run these plants as they are so it is decided to shut down KOtahya-II Ammonia plant and sell it as a whole or as main units. Samsun TSP plant is modified such that it can produce TSP or NPK upon request. The major problem of the technical component of the project was the delays faced during the implementation. Besides the reasons mentioned in your report a major cause of delay especially in KDtahya was the design errors done by the main contractor which were found out during inspection. To correct these errors together with the subcontractors consumed a lot of time. Managerial component of the project may again be evaluated under two headings. The arguements put forward in your report for training is generally correct. We have tried our best to comply with our covenants for the local part of training, but due to the reasons which are not new to you also the foreign training was not at a satisfactory level and it hindered the success of this component of the project. Second heading under the Managerial component of the project is Management Improvement and financial management. Main reasons of not implementing the programs prepared by the Consultant Compaies - on this subject can not be attributed directly to TOGSAS. Being a wholly state owned company it was impossible for TOGSAS to materialize the offered changes before having the necessary legal arangements done by the government. Best Regards. Mchmet OZER crre Ye,Z Gene Mtdr Yard=ncisi