China - Hubei Phosphate Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No.: 18124 IMPLEMENTATION COMPLETION REPORT CHINA HUBEI PHG)SPHATE PROJECT (LOAN 3066-CHA) June 26, 1998 Private Sector Development Unit East Asia and Pacific Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. ][ts contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Name: Renminbi Currency Unit: Yuan (Y) Y 1.00 = US$0.120 Y 8.30 -US$1.00 FISCAL YEAR January 1 - December 31 WEIGHTS AND MEASURES I cubic meter (m3) - 1.308 cubic yards 1 metric ton (t) = 1,000 kilograms or 2,204.6 pounds 1 kilometer (km) = 0.62 miles ABBREVIATIONS AND ACRONYMS CNCC - China National Chemical Construction Corporation DAP - Di-Ammonium Phosphate (Fertilizer) ERR - Economic Rate of Return FRR - Financial Rate of Return GOC - Government of China HAZOP - Hazard and Operability HPCC - Huangmailing Phosphate Chemical Company ICB - International Competitive Bidding ICR - Implementation Completion Report JPCC - Jingxiang Phosphate Chemical Company MAP - Mono-Ammonium Phosphate (Fertilizer) MCI - Ministry of Chemical Industries NPV - Net Present Value tpy - Tons per year SAR - Staff Appraisal Report TSP - Triple Superphosphate (Fertilizer) Vice President : Jean-Michel Severino. EAPVP Sector Manager : Hoon Mok Chung, EASPS Country Director: Yukon Huang, EACCF Task Manager : Roger Heath, Principal Chemical Engineer, IENIM  FOR OFFICIAL USE ONLY CONTENTS PREFACE .......................................................iii EVALUATION SUMMARY .......................................................v PART I: PROJECT I1PLEMENTATION ASSESSMENT ...............................................1 A. Project Objectives and Description .......................................................1 B. Achievement of Project Objectives .......................................................2 C. Implementation Record and Major Factors Affecting the Project ...........................6 D. Project Sustainability .......................................................7 E. Bank Performance .......................................................7 F. Borrower Performance .......................................................8 G. Assessment of Outcome .......................................................8 H. Future Operation .......................................................8 I. Key Lessons Learned .......................................................9 PART H: STATISTICAL TABLES ......................... 10 Table 1: Summary of Assessments .10 Table 2: Related Bank Loans .11 Table 3: Project Timetable .1 Table 4: Loan/Credit Disbursements: Cumulative Estimated and Actual .12 Table 5: Key Indicators for Project: Implementation .12 Table 6: Key Indicators for Projecl: Operation .12 Table 7: Studies included in Project .12 Table 8a: Project Costs .1 Table 8b: Project Financing .14 Table 9a: Economic Costs and Benefits-Dayukou .15 Table 9b: Economic Costs and Benefits-Huangmailing .16 Table 9c: Economic Costs and Benefits-Underlying Assumptions .17 Table 9d: Financial Costs and Benefits-Dayukou .18 Table 9e: Financial Costs and Benefits-Huangmailing .19 Table 9f: Financial Costs and Benefits-Underlying Assumptions .20 Table 9g: Sensitivity Tests-JPCC and HPCC ................................................ . 20 Table 10: Status of Legal Covenants ................................................ 21 Table 11: Compliance with Operal:ional Manual Statements ........................... .......... 22 Table 12: Bank Resources: Staff Inputs ................................................ 22 Table 13: Bank Resources: Missions ................................................ 22 ANNEX 1: ICR MISSION AIDE MEMOIRE ................................................ . 23 ANNEX 2: OPERATION PLANS FOR THE JPCC AND HPCC .................................... 26 ANNEX 3: BORROWER'S CONTRIBlJTION TO THE ICR ......................................... 35 This document has a restricted distribltion 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.  - iii - IMPLEMENTAll[ON COMPLETION REPORT CHINA HUBEI PH[OSPHATE PROJECT (LOAN 3066-CHA) PREFACE This is the Implementation Completion Report (ICR) for the Hubei Phosphate Project in China, for which Loan 3066-CHA in the amount of $137 million was approved on May 23, 1989, and made effective on January 12, 1990. The loan was closed on March 31, 1997, following one eighteen month and one six month extensions to the original loan closing date. of March 31, 1995. Final disbursement took place on July 7, 1997, following provision of a four-month grace period. The ICR was prepared by Roger Heath, Industry and Mining Division, Industry and Energy Department, Finance and Private Sector Development and reviewed by Zafar Khan, Private Sector Development Unit, East Asia and Pacific Regional Office. The Borrower provided inputs to the ICR that are included as Annexes. Preparation of this report began during the Bank's ICR mission in April 1997. It is based on material in the project file. The Borrower contributed to the preparation of the ICR by exchanging views on the project preparation, procurement, implementation and initial operations' experience and related issues; by preparing its own set of evaluations on the project's preparation and execution; and by commenting on the draft ICR.   v - CHINA HUBEI PHOSPHATE PROJECT (LOAN 3066-CHA) EVALUATION SUMMARY Introduction 1. The Hubei Phosphate Project was one of four fertilizer projects financed by the Bank in China to assist in implementing the three top priorities that the Government had set for the sector, which the Bank agrezd with, namely: (a) expansion, rehabilitation and energy saving in nitrogen production; (b) rapid expansion of phosphate fertilizer capacity using locally available phosphate rock; and (c) development of domestic potash resources. The first project-the Fertilizer Rehabilitation and Energy Saving Project (Loan 2541-CHA) dealt with five large- and medium-size ammonia/urea plants. The second project was the Fertilizer Rationalization Project (Loan 2838-CHA), which was to improve efficiencies at five plants, expand phosphate production at one of them, and improve institutional capacities through the introduction of modem financial and operational management. The third and fourth projects were the Phosphate Development Project (Loan 2958-CHA) and the Hubei Phosphate Project (Loan 3066-CHA)--the subject of this ICR-both of which were to expand phosphate fertilizer supplies and serve as demonstration projects for further development of the country's phosphate resources. Project Objectives 2. The project was to assist China in achieving its priority goals for the fertilizer sector, especially in reducing the nutrient imbalance in fertilizer use by rapidly expanding cost-effective and economic production of high-grade phosphate fertilizers from domestic phosphate resources. Specifically the project was to finance one large- and one medium- scale integrated phosphate mine amd phosphate fertilizer production projects, implemented, respectively, by JingxiarLg Phosphate Chemical Company (JPCC) located at Dayukou, and Huangmailing Phosphate Chemical Company (HPCC) located at Huangmailing. These projects had been identified as a result of a Phosphate Subsector Study carried out jointly by the Ministry of Chemical Industries (MCI) and the Bank during project preparation, which developed a computer-based model to define an optimal investment program to develop local phosphate deposits. Consultancy services were also included to strengthen the project management capabilities of MCI. Implementation Experience and Resuilts 3. Project implementation was initially delayed due to counterpart funding problems and then suffered serious implementation delays and local currency cost overruns. Trial  - vi - production commenced at Huangmailing in June 1996 and June 1997 at Dayukou- respectively, 26 and 38 months later than appraisal estimates-but neither of the projects attained projected capacity utilization rates in the first year of operation and both are experiencing excessive mechanical problems. Due to the implementation delays, cost overruns and poor initial production performance, the financial and economic prospects for the projects fall far short of appraisal estimates. Financial rates of return are 3.0 percent for Dayukou and 2.5 percent for Huangmailing compared to respective appraisal values of 14.2 and 13.1; the economic rate of return (ERR) is acceptable for Dayukou at 11.4 percent but unacceptable for Huangmailing at 4.2 percent; respective appraisal values were 17.9 and 14.0 percent. The combined economic net present value for the project is negative at -US$28 million for a discount rate of 10 percent compared with the appraisal estimate of US$119 million. However, both projects are likely to generate a flow of benefits large enough to exceed the expected marginal costs of operation and be able in time to produce the design quantities of high-grade phosphate fertilizers. On this basis, the project is considered sustainable. Financial restructuring to relieve debt and maintain adequate liquidity levels is required for both projects. 4. The technical assistance component focused mainly on strengthening the project entities as the role of MCI had changed to setting sector policy rather than direct participation at the project level. The training in hazard and operability studies (HAZOP) that MCI was to have carried out did not take place due to lack of bilateral funding. This had no impact on other project components. 5. The project was completed at a cost of US$649.1 million, compared to the appraisal estimate of US$5 10.2 million (Part II, Table 8a). Financing arrangements were essentially as planned (Part II, Table 8b) with central and provincial governments covering the part of the financing not covered by the Bank loan. The project construction was completed at Dayukou in April 1997, Huangmailing was completed one year earlier, and the commissioning of the Dayukou facilities was finished in June 1997. This compares to the planned construction completion date for both Dayukou and Huangmailing of September 1993, a delay of 44 months. 6. Project commencement was delayed due to constraints on funding availability. Throughout the periods of major project construction there was very high local inflation and delays arose as the annual funding allocations would be found to be insufficient due to rising costs. Construction activities would be delayed until additional funds could be allocated. During the initial procurement phases there were delays in finalizing the engineering design arrangements and subsequent delays in finalizing technical specifications for equipment and plant items to be procured by international competitive bidding (ICB). Adequate project monitoring and control systems for cost and schedule were lacking. Efforts midway in the project to remedy the situation were not effective and this lack was a contributing factor to project delays and cost overruns. Procurement was generally handled well, but coordination for ICB was complex and there were instances of delays in Bank approval of procurement actions that contributed to project delays.  - vii - Summary of Findings, Future Operations, and Key Lessons Learned 7. The estimated financial and economic benefits for the project are much lower than the appraisal estimates and, with exception of the estimated ERR for Dayukou, are unsatisfactory. Nevertheless, it is likely that with debt relief, Dayukou and Huangmailing can become successful fertilizer producers. Considerable training for all levels was successfully carried out during the project and both companies are well placed to overcome the present teething problems and become viable commercial entities. 8. The technical issues of project preparation were handled well by all parties and no changes in project scope were found to be necessary during implementation. Issues of project organization and management, however, were not adequately dealt with during project preparation and there was no consensus on the scope of specialized project management assistance required. The technical assistance provided was useful and appreciated by the implementing agencies but was insufficient to deal with the problems that arose. Efforts to improve project monitoring and control once implementation is underway are likely to be only effective where there is already a basically sound system in place and the necessary improvements are only incremental. 9. Key lessons learned include: * The efficient implementation of such fertilizer projects requires special skills and management systems that are quite different from those needed for efficient production operation. At the time of project preparation, arrangements should be agreed for the necessary specialist assistance during the construction period so that the operating company is not burdened with these responsibilities, which then detract from the efforts that the companies should be making to ensure good design and construction quality control, and to prepare for the startup and operating phase. In the case of the project, where the companies had no prior experience of operating such complex facilities, it is even more important that management energies are free to concentrate on the operating phase and that adequate technical assistance resources are provided within the project for these purposes. Measures during implementation to improve project management monitoring and controls are likely to succeed only where these are incremental to an already familiar and well established project management system. * Project components, such as the HAZOP training, should have a direct relevance to the project and external funding should either be assured at appraisal or provisions made for funding from the loan proceeds.  CHINA PHOSPHATE DEVELOPMENT PROJECT (LOAN 3066-CHA) PART I: PROJECT IMPLEMENTATION ASSESSMENT A. PROJECT OBJECTIVES AND DESCRIPTION 1. The project, together with the P:hosphate Development Project, Loan 2958-CHA (see ICR No. 16244, January 14, 1997), was to assist China in achieving one of the priority goals set for the fertilizer sector under the Seventh and Eighth Five-Year Plans: reduction of the nutrient imbalance in fertilizer use by rapidly expanding the production capacity for high-grade phosphate fertilizer products through cost-effective economic utilization of domestic phosphate resources. An important part of this assistance was the Phosphate Subsector Study carried out jointly by the Ministry of Chemical Industries (MCI) and the Bank during project preparation to define an investment program to the year 2000 to develop local phosphate deposits. 2. Specifically, the objectives of the project were to: