China - Fertilizer Rationalization Project

 Fertilizer rationalization project Report No: ; Type: Report/Evaluation Memorandum ; Country: China; Region: East Asia And Pacific; Sector: Fertilizer & Other Chemicals; Major Sector: Industry; ProjectID: P003469 December 29, 1995 China: Fertilizer Rationalization Project (Loan 2838-CHA) The Implementation Completion Report (ICR) for the China Fertilizer Rationalization project (supported by Loan 2838-CHA in the amount of US$97.4 million and approved in FY87) was prepared by the East Asia and Pacific Regional Office with Part II contributed by the Borrower and the executing agencies. Since the mid-1980s, the Bank has assisted the Government of China in its efforts to expand and rehabilitate its existing fertilizer manufacturing capacity through the financing of four projects. The first, Fertilizer Rehabilitation and Energy Saving project (Loan 2541-CHA), was approved in FY85 and completed in FY91. This project constitutes the second in this series. Its specific objectives were to: (a) rationalize and expand the nitrogenous fertilizer capacity through the construction of an urea plant in each of the four existing nitrogenous fertilizer units; (b) expand phosphatic fertilizer production through the construction of a new diammonium phosphate/combined fertilizer (DAPNPK) plant; and (c) improve the institutional capacity through the introduction of modern systems and techniques in financial and operational management. The four nitrogenous fertilizer units began commercial productions with delays ranging from 12 to 22 months while the commercial operations of the phosphate fertilizer unit was delayed by nearly three years. The delays resulted in substantial increases in the local currency costs of the project because of high inflation experienced throughout the implementation period. Although all five plants were in commercial operation by the end of 1993, technical problems prevented most plants from achieving the designed input/output efficiencies while other factors (such as the lack of electric power) limited their capacity utilization levels. The reimposition of fertilizer price controls in September 1994 (with deregulated input prices) jeopardized the financial health of all the units, three of which registered losses during 1993 and 1994, with a fourth kept profitable through input and tax subsidies. The reestimated economic rate of return (ERR) and financial rate of return (FRR) are reported at 22% and 4.9%, respectively. While the physical and environmental objectives of the project have been satisfactorily achieved, OED rates its outcome as "marginally satisfactory"—as opposed to satisfactory in the ICR—because the fertilizer units now operate under a distorted price regime. Moreover, in the absence of clear and convincing evidence that the technical and financial problems will be promptly resolved, OED rates the sustainability of this project as uncertain (instead of “likely'', as rated in the ICR). Institutional development is rated as modest and Bank performance is rated as satisfactory. A notable lesson of this project is that technical assistance should be built in the project design to facilitate quick start-up of projects employing sophisticated new technology. The ICR's quality is rated as satisfactory, though it does not provide information as to how the ongoing problems may be resolved, nor does it contain sufficient information and data on production performance, costs and prices to assess the reliability of ex-post ERR and FRR calculations. An audit is planned.